« Previous | Contents | Next »
Listen
1. Introduction
Objective of the report
1.1 This report constitutes Deliverable One for the "Research and Advice on Risk Management in Relation to Subsidy of Ferry Services" study for The Scottish Executive Enterprise, Transport and Lifelong Learning Department (the Executive) before the tendering of the Clyde and Hebrides Lifeline Ferry Services. The study analyses how the
EU Maritime Cabotage Regulation rules are applied within the European Union (
EU), with particular regard to the way in which risks are managed.
1.2 The objective of this report is to provide a factual summary of the different approaches adopted in different
EU countries to support their domestic island ferry services and to examine how these approaches are consistent with the regulations set out by the European Commission (
EC).
Background
1.3 Caledonian MacBrayne Ltd (CalMac) currently operates a network of ferry services on the Clyde and to the Hebrides. CalMac is a nationalised company wholly owned by the Scottish Ministers. Under a formal undertaking between the Scottish Ministers and CalMac, Scottish Ministers provide a grant to the company by way of an annual subsidy for the support of approved services. This subsidy meets the operating loss incurred in operating a current network of 25 services on the Clyde and to the Hebrides (
CHFS) and the Gourock - Dunoon (G-D) Service.
1.4 In the light of the position of the
EU as initially established in Council Regulation
EEC No. 3577/92 (the Regulation) and further developed in subsequent communications, the Executive had come to the conclusion that it is necessary to put the CalMac Ferry network out to an open tender. This process had already been initiated with the publication for consultation of a Draft Invitation to Tender for the Clyde and Hebrides Lifeline Ferry Services (June 2002) which received around 440 responses from users and other interested parties. A further consultation, offering users a final opportunity to comment on the service specification, was issued in December 2004. However, during the Parliamentary debate on ferry services on 8 December 2004, the Parliament expressed concerns about the proposals for tendering the Clyde and Hebrides ferry services. At the time of writing the Scottish Executive was reviewing those proposals.
1.5 In any such tender, the Scottish Executive recognise that it will continue to be necessary to provide a public subsidy to the operator, in order to:
- Ensure the provision of a reliable standard of transport connection, in terms of quality;
- Ensure adequate frequency and capacity to island and remote peninsula communities;
- Ensure ferry fares and freight charges are not excessive.
1.6 At the same time, Ministers are seeking to ensure that the service is delivered efficiently. This implies giving the minimum possible subsidy to provide the desired service.
1.7 The
EU Maritime Cabotage Regulation concerning the award of subsidy to ferry operators under Public Service Obligations (
PSOs) or Public Service Contracts (
PSCs) is tightly defined.
The Ferry Operations and the Suggested Tender Approach
1.8 In the consultation document issued by the Scottish Executive in June 2002 the proposed structure for the tendering of the CalMac services was set out as follows:
- Routes will be tendered as a single bundle; and
- CalMac's present interests in ferries, piers and harbours and offices will be vested in a new publicly owned company, VesCo. The operator of the ferry services will be required to lease the vessels from VesCo and to carry out certain harbour management functions on behalf of VesCo.
1.9 The responsibility for ferry operations will be transferred to a second publicly owned company (OpsCo). This company will have the responsibility for operating the services until tenders are awarded. It will also have the right to bid for the services in its own right.
1.10 The revised draft service specification issued for further consultation in December 2004 maintained these proposals, with the exception of the Gourock-Dunoon route, which is being tendered separately. We believe that three key questions will continue to be of central relevance.
The tendering process
1.11
EU legislation tightly defines the tendering process for subsidised ferry services. Restrictions apply both to the process itself (bidder qualification, selection of preferred bidder, the negotiation process) and to the structure of the contract (the allocation of risk, length of contract).
The performance regime
1.12 A regime must be put in place which aligns the objectives both of the public sector (as a representative of a wide range of public stakeholders) and of the operators, through which the operator is incentivised to provide the best possible ferry service. In such a regime (and through the contracts which support it) a balance must be sought between avoiding over-complexity and prescriptiveness on the one hand while not allowing the contractor the liberty to provide a sub-standard service on the other. This has been seen on many occasions to be a difficult balance, which must take on board not only the theory of regulation and performance regimes but also the peculiarities inherent in the operation of any service.
The allocation of risk
1.13 The tender contract put in place will, if properly constructed, ensure that all of the potential risks inherent in the operation of the service are clearly allocated to the party that can better manage each risk. This will provide clear guidance on the responsibilities (both operational and financial) of the different parties in the face of the complete range of outcomes.
1.14 How these risks are allocated is clearly of central importance in inducing the operator to provide the optimal service and limiting the liability of the public sector. However, as has been said before, the priority should not be merely to transfer the highest number of risk elements away from the public sector but rather to provide the optimal allocation, where the risk lies with the party with the greatest ability to manage that risk. There are indeed many examples of administrations that are transferring too much risk to the private sector, resulting in a more expensive service to the user and therefore to society.
1.15 The Executive set out in the consultation document an initial allocation of some key risks. These risks included vehicle operations, operating costs, and demand/ revenue risk: these were to be transferred to the ferry operators. Other risks including vessel design and construction costs, and operating and capital costs of harbours would remain with the Executive (through the new publicly owned VesCo), while it was proposed that some risks should be shared between the different parties.
1.16 The primary objective of this research is to learn how these risks are allocated between the different parties for other
PSO ferry operations - both within the
EU and further afield - and to understand what the impact of this allocation might have been. Based on this data collection, we provide some evaluation of the approach to be adopted by the Executive in the tendering of the CalMac operations.
« Previous | Contents | Next »