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3. Country Summaries

3.1 Summaries of each of the surveyed countries follow. Detailed case studies can be found in the appendices of this report.

The Baltic Countries

3.2 Poland, Latvia and Lithuania do not have domestic island ferry operations. As such, no PSOs or PSCs are in place.

3.3 Estonia has four ferry services that are under a Public Service Contract. These services are currently operated by the Saarema Shipping Company. The Saarema Shipping Company operates under a concession agreement with the Ministry of Transportation and Communication (MoT). The Estonian minister for transport is currently preparing an invitation to tender the services with a view to finding a new operator for 2005.

3.4 At present in Estonia, as in many other countries, the government offers support to the residents of islands through the direct financing of a ticket concession scheme. However, the Government believes that, in order to conform with European Union law, the practice of price differentials between island residents and visitors will have to be cancelled.

3.5 We failed to contact anyone in Estonia within the study timeframe, and therefore the current study only contains partial information about ferry service in Estonia.

Cyprus

3.6 As an island state, Cyprus does not have any off-coast smaller islands. The two main ports, Limassol and Larnaca are 65-70 km apart - therefore road transport is the dominant mode. There is no cabotage for trips between the two ports, so cargo ferries can stop and offload at both if they wish to.

3.7 There are no passenger services to any destination. There used to be services (passengers and cars) to Piraeus (Greece) which have now been stopped on Greece's initiative. The only other services operating from Cypriot ports are cruises and 'roll-on roll-off' (ro-ro) cargo services to the Greek islands, Syria and other nearby countries.

3.8 Due to Cyprus' current situation regarding domestic maritime transport, we have not carried out a comprehensive case study.

Denmark

3.9 In Denmark, 24 routes to 26 islands receive public subsidies and are regarded as lifeline services. The Danish Ministry of Transport is responsible for defining the services as lifeline and for imposing Public Service Obligations.

3.10 The organisation of ferry services is complex and fragmented. Tendering and contracting of PSO/ PSC services is carried out at the local, regional, or state level. The local, regional or state administrative body that invites tenders defines the minimum PSO/ PSC requirement.

3.11 Bøjden-Fynshav, Samsø-Kalundborg and the Bornholm lines are the only PSCs run by the national government. All of these contracts are net-cost contracts, where the operators keep the ticket revenue. The government secures through the contract a reasonable fare-level, and a reasonable relationship between demand and supply (passenger numbers, tonnage and frequency).

3.12 Contracts between local administrators and operators are likely to be of a similar nature, but smaller in scale. Some of the small island lines and cross-fjord traffic are directly operated by the local governments. These contracts are more likely to be gross-cost.

3.13 The Danish State covers the loss from the operations that give the inhabitants on the 26 islands free ferry transport to and from the mainland. Free transport is available for passengers, bicycles and cars which are registered to a disabled badge holder.

3.14 On most of the small island-ferry lines the contract payment is split between state, regional and local authorities, with each paying one third. State and regional authorities pay a part of the sum to the contract holder (local authority), which pays the contract sum to the operator.

3.15 There is no barrier to entering the ferry service market and any operator is free to establish a ferry line on a commercial basis as long as it is not in a monopolised area. (Monopolised areas are concession areas where operators have exclusive rights to operate. A number of ferry lines (public service lines to the islands Ærø and Anholt) and the line Sælvig (on the island Samsø)-Hou (in Jutland) are monopolised.) PSO ferry operators receive no protection in non-monopolised areas, and the local authorities have the power to reduce fares on the ferry lines in order to attract more passengers, changing transport patterns.

3.16 The level of competition amongst domestic ferry lines in Denmark appears to be very limited. There is potentially some competition between ferries and other means of transport (cars and airplanes) on some mainland-to-mainland ferry-connections.

3.17 The EU notified the Danish Government in July 1998 that their legislation for ferries and the option to give exclusivity on certain routes for operators was against EU legislation. As a result a new law for ferries was submitted in June 1999. The new law was still not in compliance with the EU regulations and a new draft is still being worked on with heavy correspondence with the EU.

Finland

3.18 All domestic ferry services in Finland are supported by the government either through procurement or direct ownership.

3.19 There are four different types of ferry services that operate out of the Finnish ports. There are ferries that go between the mainland and the islands, ferries that connect islands in the archipelagos, international ferries that go between Finland, Sweden and Estonia, and a Public Service Obligation service between Finland and Sweden. The mainland-island services are procured by the Finnish Maritime Administration acting on behalf of the community. Since 2004, the services have been provided by a corporatised entity that is wholly owned by the Finnish Government. Prior to 2004, the services were run directly by the Finnish Maritime Administration. The creation of the corporatised entity was to improve the efficiency of service provision.

3.20 On the west coast, there are inter-island ferry services between Mariehamn and Aland, and amongst the islands in the archipelagos. These services are non-commercial and are provided by the island governments on government-owned vessels. The mainland-islands and inter-island services are essentially lifeline services as they are vital to the livelihood of the island residents. They are, however, directly funded or provided by the government and are therefore not considered to be PSOs. Funding for these services come from both the Maritime Administration and the local planning authorities. The ferries mostly belong to local government companies. Permanent residents in the archipelago ride the ferries for free, whereas tourists have to pay for the services.

3.21 The plan is to move towards open tender for all island ferry services in Finland. This is, however, likely to take at least three years. The Maritime Administration believes that local commercial operators will have the capabilities to provide the service, but the tendering and contracting process will take time to ensure maximum efficiency.

France - Corsica

3.22 It appears that subsidised island ferry contracts in France (in Corsica and along the Atlantic Coast) are awarded after tender procedures that are EU-compliant. In this study, we focus specifically on Corsica.

3.23 There is a long history of support from the French government for ferry services to and from Corsica. Services to the French mainland fall into two groups, according to the contractual regime in force: services between Corsica and Nice, and Corsica and Toulon, on the one hand; and services between Corsica and Marseille on the other.

3.24 The State pays to Corsica, as part of its general grant to the island, a grant for transport services which increases each year in line with inflation. The grant is paid to a local authority, the Collectivité Territoriale de Corse ( CTC). Subsidy is allocated in two different ways, according to the class of route:

• Open routes (Corsica-Nice, Corsica-Toulon). On open routes, there is a social aid system in operation. The principle behind 'aide sociale' (social aid) is that it is another method of subsidising passenger services, in order to improve access and linkages between Corsica and mainland France. Instead of being bid for as part of a contract, the operators receive the subsidy on the basis of passengers carried, as long as they meet certain light obligations and agree to a convention with the relevant authorities.
• Closed routes (Corsica-Marseille). This service is operated under a contract, with a much larger payment being made exclusively to the company operating the route. This service is bid for through a tender process.

3.25 An additional form of subsidy is that sea or air links between Corsica and the mainland benefit from a zero VAT rate. However, this zero rate only applies to that part of the trip which corresponds to the Mediterranean crossing.

3.26 A fairly rigorous specification is imposed on the Corsica-Marseille (closed) route, which is covered by a 5-year contract, running from 1 January 2002 to 31 December 2006. This contains details on, for example, maximum tariffs, departure times and capacities, and variation in service to account for peak periods (spring, summer, Christmas). The contract was awarded to the lowest bidder, with the amount of subsidy bid forming the contract amount. In this arrangement, the operator bears the full risk of operating cost fluctuations. There is, however, a correcting mechanism in place to adjust for revenue risks where the Corsican government provides additional payment / rebate based on the difference between actual and forecasted demand (up to 4%), and the option to cut the number of services offered.

3.27 There is free entry on the Corsica-Nice and Corsica-Toulon routes. However, there are some stipulations that must be met to receive the social aid. These stipulations are formalised in the form of a convention agreed between the operator and the Office des Transports de la Coerse (which carries out transport policies on behalf of the CTC), and include a maximum tariff level, specifications on frequency, and the requirement that ships be registered in France.

Germany

3.28 Ferry services are regulated by state (Laender) governments in Germany. The two states with island ferry services are Lower Saxony (for Ostfriesischen Inseln services) and Schleswig Holstein (for the Northern Nordfriesischen Inseln and Helgoland services), each with their own sets of laws governing ferry operations. To date, island ferry services in Germany are provided by operators that are owned either by local communes or privately.

3.29 No service is currently defined as a lifeline service in either state.

3.30 Up until 1997, operators in Lower Saxony had exclusive contracts with the government to operate ferry routes. Under these contracts, operators agreed to provide year-round services at frequencies that were deemed reasonable (the reasonable levels of service were, however, not set out in the contract). In order to comply with EU cabotage rules, the government of Lower Saxony abolished the exclusive contracts, although contracts continue to be needed for operators to operate. There is no limit on how many operators can operate on any particular route. Operators that provide year-round services, however, benefit from a discount on port duties.

3.31 In Schleswig Holstein, operators also used to have exclusive operating rights on a number of routes. A new section was added to the ferry legislation in 2003. According to this new law, a route where year-round service cannot be guaranteed is by definition a lifeline service. The main objective is to secure the provision of an annual adequate service for the people on the islands.

3.32 No lifeline service exists on any of the Nordfriesische Inseln routes. As many of the operators are owned in part by the local communes, it is in their interest to ensure an annual service for their citizens. Operators often cross-subsidise when demand is low. Operators are free to set their tariffs and the government provides neither subsidy nor protection for the island ferry services.

Greece

3.33 Greece was granted a derogation from Council Regulation EEC 3577/92 until 2004. Law 29/32 of 2001 was brought in to open up the Greek maritime market and to bring ferry services in Greece in line with the Regulation. This legislation, however, was deemed to conflict with the spirit of the Regulation. A number of disputes have emerged and been resolved with regards to the interpretation of the Regulation and its application in the Greek context.

3.34 Following the opening of the maritime cabotage market, services are open to any operator that complies with the EU requirements and provides some basic documentation confirming their capacity to provide services. No requirements are set with regards to the service provided apart from the fact that the vessel has to comply with the safety requirements of the ports they serve, and be in service for a minimum of 10 months a year. Domestic ferry services in Greece continue to be provided by domestic operators who keep serving their traditional routes, albeit in some cases also expanding to others.

3.35 Greece has a significant number of islands to which services would not be commercially viable, especially in the winter months, due to the low demand,. Currently, lifeline services operate on some 70 island routes. Lifeline services are defined as those that would not have been provided by the free market. Islands for which applications to provide free market services are not made in January of each year are those islands for which services need to be provided in a Public Service Contract framework under annual contracts.

3.36 The requirements for the provision of the PSC services are as follows:

• Frequency: determined number of crossings per week.
• Period of operation: the ferry has to be in operation for a minimum of 10 months a year.
• Back-up: A replacement ferry has to be made available for the remaining two months a year. The details of this have to be made available at the stage of submitting the bid.
• Ferry standards: passenger capacity, car parking surface, total length. A standard type of service is required ( i.e. conventional passenger-car ferry).
• Safety: The ferry has to be suitable for safe use of the port facilities and safe service provision.
• Fares: A maximum fare is set for standard/ economy class. Also discounts are imposed for concessionary travellers.
• Vehicle age: Needs to be less than 35 years (to be reduced to 30 in 2008).

3.37 The national budget supplies the funding for the lifeline services. In addition, a 3% surcharge is imposed on all other ferry services (not subsidised) in order to subsidise the thin routes.

Ireland

3.38 Since 1997, The Department of Community, Rural and Gaeltacht Affairs has been responsible for providing adequate access to transport services for islanders on the 30 inhabited off-shore islands on an all-year round basis.

3.39 The contracted services on the 14 routes are operated by domestic private shipping companies. Subsidised ferry contracts are granted to operators on the condition of compliance with the marine regulations, health and safety rules, and by-laws set by the relevant local authorities.

3.40 The operators must also meet minimum levels of service. Additional services, however, are provided according to demand. Subsidised services are subject to fare regulation. Some of the service contracts include land transport to and from the ports on the islands. Passenger and cargo charges are often capped, with further discounts for island residents. The contract is not exclusive, and the Department is at liberty to procure other services on the same routes.

3.41 Discounted fares are available for islanders on subsidised routes, with other passengers paying the full amount. The Government reimburses the operators for this difference at the end of each month. In addition, a lump sum subsidy is determined based on the net costs of the operators.

3.42 The subsidised services are not set up as PSOs. This is because none of the Irish islands generate more than 100,000 trips in a year, hence they are not bound by the European Union's public procedures. Council Regulation ( EEC) No 3577/92 interprets that "small islands", where the annual number of passengers carried by sea to and from the island is around 100,000 or fewer, are exempt from a formal tender, where the selection of a suitable operator can be achieved following a simple call for expressions of interest. The Department of Community, Rural and Gaeltacht Affairs does, however, follow the spirit of the European Commission directive in ensuring transparent, competitive and fair bidding processes for the subsidised contracts. This pre-empts any complaints that might be initiated by the European Commission or operators.

3.43 With the exception of services to the Aran Islands, each service is contracted individually. This minimises the risk of cross-subsidisation.

Italy - Sicily

3.44 A number of domestic ferry services operate within Italy. The most prominent services are those that connect the mainland with the islands of Sicily and Sardinia. Of the large number of services that operate in the Tirrenian Sea, only those that link the island of Sicily to the surrounding islands under its competency are public interest services. The routes are:

• Sicily (Trapani) to the Egadi Islands
• Sicily (Milazzo and Messina) to the Eolie Islands
• Sicily (Porto Empedocle) to the Pelagie Islands
• Sicily (Trapani) to Pantelleria

3.45 Within these routes, the services that are of public interest and are let by the public administration are those relating to fast passenger services and those relating to freight and the transportation of dangerous goods (petroleum-related products).

3.46 The national body that looks after the provision of ferry services in Italy is the Ministry of Infrastructure and Transport. However, most of the powers relating to the provision of ferry services have been passed on to the regions. In the case of the public interest services, the contracts are specified and let by the Regione Sicilia.

3.47 The requirements of the public interest services include the exact timetable that the ferries need to follow, the tariffs that need to be charged for each category of vehicle and/or passenger and the number and type of ferries that need to be used to carry out the service (the latter being specified in size, speed, capacity, age, comfort, stability, safety and ability to carry normal and dangerous goods). Fares are predetermined by the contacting authority, which establishes the tariffs in the bid documents.

3.48 The amount of financial support that is provided to the operator that wins the contract is set out in the competition documents. Each bidder is required to offer a reduction on the subsidy set out in the bid documents to win the contract. The largest reduction (along with other parameters) wins the contract. PSCs in Sicily are gross cost contracts where the regional government is obliged to meet the company's losses in each financial year.

3.49 The contracts are 5 years long. The Eolie, Edagi and Pantelleria contracts started in June 2003 and will expire in May 2008, while the Pelagie contract started in February 2004 and will last until January 2009.

3.50 An open competition was held for the tender. Each potential operator was required to submit a bid based on the maximum amount of subsidy that they needed.

Malta

3.51 The lifeline services between Malta and Gozo are subsidised by the Malta Ministry of Communications on the basis that they would not have otherwise been commercially viable. These consist of roll-on/ roll-off passenger service for foot passengers, car and car passengers as well as cargo vehicles, including hazardous cargo.

3.52 Gozo Channel Shipping Line, a wholly owned subsidiary of Malta Government Investments Limited, provides the lifeline services. It is also the only operator of roll-on roll-off services in Malta. There are plans to re-structure Gozo Channel, and privatisation is a possibility.

3.53 Fares on the Gozo ferries are regulated by the Maltese Government. Gozitan residents and their vehicles benefit from lower pricing. Gozitan residents' tariffs are subsidised and they pay one-third of the non-subsidised fare. State aid is granted to the transport of agricultural goods between Gozo and Malta.

3.54 A Public Service Obligation Contract ( PSC) was signed between Gozo Channel Ltd and the Maltese Government. The PSC granted the ferry operator exclusive rights to operate the services between Gozo and Malta. The current six-year contract came into effect in April 2004. This is a net cost contract where Gozo Channel receives the farebox revenue in addition to a subsidy from the government as stipulated in the contract. Subsidies to the operator are calculated by the Malta Maritime Authority ( MMA) and Ministry of Competitiveness and Communications based on the tariff structure and operating costs for the services. The operator, however, can ask for a revision of the tariff structure at any time during the contractual period.

3.55 The current PSO contract, the first one since Malta's accession to the European Union, was not tendered. The PSO services will be tendered openly by 2010. No preparations are currently being made for the tender. As the first contract (with Government-owned Gozo Channel) only began in 2004, the Maltese Government is going to observe the current contract and see what the problems and difficulties may be before drafting the new tender and contract.

The Netherlands

3.56 There are six domestic Dutch ferry services currently operated by private operators. Five services to and from the "Wadden" islands in the north of the country carry passengers and freight on purpose-built vessels to navigate the special sea conditions; a service between Zeeuws-Vlaanderen and Vlissingen in the south carries foot passengers and cyclists.

3.57 Services to the Waddenislands are defined as PSOs, although the obligations are very loosely defined. These operations have been established for many years and there has been no historical interest by other parties to launch similar services along these routes.

3.58 The operators in Waddenislands are free to set their fares and receive no government subsidy apart from free use of port facilities, and maintenance of the navigation channels in the Waddenzee. Two of the services, between Harlingen-Terchellin and Harlingen-Vlieland, have been covered by an agreement between the operator Doeksen and the central government and local island authorities since 1985. The agreement grants Doeksen sole access to port facilities on Vlieland and Terschelling. In return, the operator provides a year-round service irrespective of demand.

3.59 The current set-up in the Netherlands is not compliant with EU regulations. The Dutch Ministry of Transport recognises that the current arrangements are non-comprehensive and outdated.

3.60 New legislation is being prepared to put the operator of these ferry services out to tender. This is not expected to be in place for another four to five years. In the meantime, negotiations are taking place with the operators and the state to draw up improved agreements, including operators paying for the use of port facilities.

3.61 The Ministry of Transport has commissioned a study to investigate how lifeline services will be operated and structured in the future.

Portugal

3.62 The only domestic passenger ferry services in Portugal operate within the Azores and Madeira archipelagos. In Madeira, the services link the two main ports of Funchal and Porto Santo. In the Azores, passenger ferries, operated by Açorline, link the five main islands in the summer season. These services do not connect to the mainland.

3.63 The regional governments ( i.e. the Regional Government of Azores and the Regional Government of Madeira), through the local Regional Transport Secretariat, award licenses to local island ferry services. They have the autonomy to take their own decisions related to concession of contracts. The National Port Authority did not know whether there were contracts between the regional governments and operators, but in any event these local passenger services correspond to a very small percentage of the ferry services in Portugal.

3.64 Freight transport on the other hand is available between the mainland and the islands, as well as to other countries. Public Service Obligations ( PSOs) apply to freight routes between the mainland and Madeira and Azores, operating on the basis of an authorisation system. There is no contract between the public offices (state) and the prospective operators and all ferry freight services between the continent and Azores and Madeira are fully liberalised, operating on a commercial basis and without Government subsidies.

3.65 Operators on PSO routes need to ask for authorisation to run specific service routes, and are required to:

• Determine the frequency (and regularity/continuity) of the services on offer, with the minimum of weekly services for continental transport. For Azores services, the itinerary must include a fortnightly stop at at least five different islands. Operators could also be obliged to undertake a monthly stop at all islands, or provide intra-island services, if it is found that the islands are not regularly and sufficiently supplied;
• Demonstrate that they are able to run the services;
• Run services and itineraries with the scheduled regularity, for at least one year (minimum concession period);
• Charge the same pre-defined freight costs between the continent and each of the islands (for Madeira and Azores);
• Comply with EU legislation;
• Utilise exclusively crew formed by Portuguese nationals or from a European member state (provided the captain or second in charge has a reasonable mastery of the Portuguese language).

Spain

3.66 There are three Public Interest Services in Spain covering three bundles of routes: the Peninsula and Balearic Islands, the Peninsula and the Canary Islands, and the Peninsula and Ceuta and Melilla (the latter routes are explicitly included within the definition of island services in the EU communications).

3.67 While all three bundled routes are deemed Public Interest Services, only one operator has a Public Interest Service Contract for each bundle for a period of five years. Although in theory Public Interest Services can apply to foot passengers, car passengers and freight, there is currently no Contract for Public Interest Service for freight services. Freight transport to the islands is not subsidised.

3.68 All companies operating the Public Interest Services are private, with the formerly publicly owned Trasmediterranea being privatised in 2002. Trasmediterranea holds the contract for all three Public Interest Service Contract routes.

3.69 There is no minimum requirement imposed on other operators who operate on a Public Interest Service line. When submitting its business plan to the General Directorate of Merchant Navy for authorisation for operation, the operator specifies the capacity, schedule, fares, service type, ports to serve, etc. Should the General Directorate of Merchant Navy want to specify service levels, fares, etc., he has to award a Public Interest Service Contract through an open public tender process.

3.70 Operators on the Public Interest Service lines are subsidised in two ways. The Public Interest Service Contractor, in this case Trasmediterranea, is paid the price of the contract. The other authorised operators on the route receive a subsidy (bonus to tariff) for carrying passengers who are residents of the archipelagos. Although the main financial support comes from the government, the different Autonomous Communities involved could also sign other Public Interest Service Line Contracts between their Islands if they think a particular service would not be commercially viable.

3.71 These are net cost contracts. They are set up such that the operator bears the revenue risks, and the contract amounts are fixed (paid monthly by the government to the operator) as long as the operator provides the services as contracted. Demand remains the biggest risk as the operators has to forecast its revenue stream five years in advance when bidding for the contract.

3.72 The tendering of the Balearic routes generated many bids. These were mainly large operators who were already in the market. The contract eventually went to Trasmediterranea, the formerly government-owned company.

3.73 The Public Services Lines are open to competition. Once the contract has been awarded (in this case the 3 of them to Trasmediterránea) any operator can enter the market on the conditions they want and with the vessels the want. This includes fast ferry services. There are no restrictions on operators other than the core ones (crew nationality, security, etc.) and no explicit protection is available to the contracted operator.

3.74 The Merchant Navy is going to pass a new Royal Decree in 2005. We have been told that the new law is being sent to the European Commission. In this new Royal Decree, among other things, the Merchant Navy is going to make operators of the Public Interest Lines (ones operating without PSC) fulfill a minimum level of service. This PSO does not have as many requirements and standards as the PSC, but will have some. For example, operators will have to provide "no less that 1 sailing per week".

Sweden

3.75 There are three types of ferries in Sweden, most of which are provided directly by the government:

• Smaller road ferries that operate across rivers, fjords etc.;
• Fast boats operating along the coast; and
• Services to Gotland, a 3 hour journey (approximately) from the main land to Gotland;

3.76 The small road ferries are operated by Vegvesnet (Public Road Department) and are owned by the Government. The fast boats are operated and owned by the counties.

3.77 The service to Gotland is the only lifeline service and is covered by a Public Service Contract. It is at present operated by Rederi AB Gotland (private operator), under a long-term agreement with the Swedish government. Under the contract, the operator undertakes to operate services to and from Gotland with precisely regulated requirements as to safety, environmental impact, convenience, time-tabling and price. The timetable and the ticket price are set by the government.

3.78 This is a gross cost contract where the government carries the revenue risks of the operations. The remuneration is a guaranteed top up to meet losses determined on the gap between the operating costs and the revenue. An incentive system is built into the contract, and additional remuneration is paid to the operator based on volume of traffic carried. The budget is determined on a year by year basis, which can be adjusted for rising oil prices, harbour fees, and this year, extra for the purchase of new vessels.

3.79 The current set-up has turned out to be rather costly for the Swedish government and the new contract will be set up differently in the next period. In addition, the current contract duration of 10 years, with the possibility of a one-year extension, is not compliant with EU rules.

3.80 The new tender will go out in autumn 2005, and will be concluded as soon as possible, The next contract will also be of a shorter nature (five years).

UK - Scotland

3.81 There are three main types of ferry operator serving domestic Scottish routes. By far the largest, in terms of both cost and routes, are those services subsidised by the Scottish Executive. Some services are also supported by local authorities, and the remainder are provided on a commercial basis by the private sector.

3.82 The central government, the Scottish Executive, directly subsidises two bundles of services: from the Scottish mainland to the Orkney Islands and Shetland Islands (Northern Isles), and 26 services from the mainland to the Clyde and the Western Isles (Clyde and Hebrides).

3.83 The Scottish Executive sets the detailed requirements in relation to routes, timetables, fares etc.

3.84 The state-owned Caledonian MacBrayne (CalMac) currently receives subsidies, under the Highlands and Islands Shipping Services Act 1960, to operate the Clyde and Hebrides services. There is no formal contract. Instead, CalMac operates under an open-ended "Undertaking" with the Scottish Executive. Scottish Ministers provide deficit grant to the company for the support of approved services. This subsidy meets the operating loss incurred in operating a current network of 25 bundled services on the Clyde and to the Hebrides (subsidised passenger, vehicle and freight services) and the Gourock - Dunoon Service (subsidised passenger service only).

3.85 In the light of the position of the EU Commission, as initially established in Council Regulation ( EEC) No. 3577/92 and further developed in consequent communications, together with other position papers referring to the tendering of transport services, 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 Drafts of the Service Specification for the Clyde and Hebrides Lifeline Ferry Services (June 2002 and 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.

3.86 In October 2002, NorthLink (jointly owned by the Royal Bank of Scotland and CalMac) won the current five-year contract (lasting until 2007) for the provision of the Northern Isles lifeline services.

3.87 In the case of the Northern Isles contract the contract was awarded to the bidder who required the lowest financial compensation. The contract is based on net cost with the operator bearing the revenue risks although the contracts do provide for a review of the subsidy where there are significant changes in costs or revenues. For the current arrangements in the Clyde and Hebrides, around two-thirds of the total revenue comes from fares. The Scottish Executive provides the remaining one-third in the form of a deficit grant.

3.88 Fare levels for passenger and vehicle transport (and freight, where applicable) are determined by the Scottish Executive and specified in the contract. Fares on the Northern Isles services are subject to a maximum increase tied to the Retail Price Index ( RPI) and similar arrangements are in place on the Clyde & Hebrides. Fare restrictions are not applicable to services above and beyond the minimum levels.

3.89 NorthLink has found itself in financial difficulty. One reason for this is its loss of market share to non-subsidised freight operators who are not subject to any service obligations. As a result, the Scottish Executive has decided to re-tender the Northern Isles services ahead of schedule.

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