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Appendix D France (Corsica) Case Study

D1. Lifeline Services - Existence and Operation

Introduction

D1.1 There is a long history of support from the French Government for ferry services to and from Corsica, although this aid has only focused on services between Corsica and France, rather than services to Italy or Sardinia.

D1.2 In addition, regional authorities along the Atlantic Coast (Finistere, Morbihan, Loire Atlantique and Chrente Maritime) also procure ferry services to their off-shore islands. In Finistere, for example, there are four island services (one of which does not receive any government subsidies). These local authorities own their vessels and charter them to private operators. The subsidised contracts in these departments/authorities are awarded through open tender procedures that are compliant with EU rules.

D1.3 This document focuses on ferry services between Corsica and the French mainland.

Principal routes operated

D1.4 Services operate between Corsica and Sardinia, and Corsica and Italy. However, as the French Government only subsidises the routes between Corsica and France, this report focuses only on these latter services. 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.

Corsica-Nice/ Toulon
D1.5 Nice and Toulon are situated on the French mainland, and are major regional centres with respect to Corsica. These routes are freely open to competition, although a system of 'aide sociale' is in operation (discussed later).

D1.6 Two rival operators ply these routes: SNCM and Corsica Ferries.

• Corsica Ferries is a private company. It has a sister company, Sardinia Ferries, which runs services from Sardinia. It uses 12 boats. In 2003 it transported 1,693,000 passengers (including routes to Italy and Sardinia - 52% of its traffic is accounted for by routes to the French continent), and had a turnover of â'¬146 million.
• SNCM (Société Nationale Maritime Corse Méditerranée) is 100% state-owned. It has a historical association with SNCF (Société Nationale des Chemins de Fer Francais), the French state railway company. However, we understand that there is no longer any relevant link between the companies. SNCM has 11 vessels, and in 2002 transported 1,518,000 passengers and 497,000 vehicles. It also runs services between Corsica and Sardinia, and between mainland France and North Africa, and Sardinia.

Corsica-Marseille
D1.7 Marseille, also situated on France's Mediterranean coast, is the second largest city in France. As such it is the largest local centre for Corsica, although it is situated further away from Corsica than either Toulon or Nice.

D1.8 This route is not open to competition. Instead, it is operated solely by a joint venture between SNCM (see above) and CMN (Compagnie Meridionale de Navigation). CMN is 40% owned by SNCM, with the balance of the shareholding in private hands. CMN has 3 vessels, and operates 18 services per week between Corsica and France. It also offers four services per week between Sardinia and Corsica, and four services between Sardinia and Italy.

D1.9 Services run to Marseille every night. There are daily services between Ajaccio-Marseille and Bastia-Marseille. Around 3 services a week run from the other ports (Propriano, l'Ile Rousse/Calvi, Porto Vecchio).

D1.10 The Table below shows the evolution of passenger numbers for all routes between Continental France and Corsica.

Table D1 Passenger Numbers 2001-2004, Mainland France-Corsica

Source: Corsica Ferries

Figure D1 Evolution Of Passenger Numbers 2001-2004

D1.11 It can be seen that the total market has grown substantially in recent years. However, this growth has largely been achieved by Corsica Ferries. As will be discussed further below, this change in market share has been particularly pronounced given that Corsica Ferries only participates in part of the market.

D2. Ports

D2.1 Ports in Corsica are owned by the Collectivité Territoriale de Corse, the local authority. Ports are managed by the Chambre de Commerce, which represents Corsican businesses. The Chambre de Commerce fixes port tariffs.

D3. Financial and Commercial Support for Lifeline Services

Subsidy Mechanism

D3.1 Links between Corsica and the French mainland are subsidised under the principle of territorial continuity. This is the principle of trying, insofar as possible, to facilitate access between different parts of the French state, including mitigating the effects of natural barriers (in this case Corsica's island nature).

D3.2 The State pays to Corsica, as part of its general grant to the island, a separate grant for transport services. The total amount of this grant is increased each year in line with inflation. The grant is paid to a local authority, the Collectivite Territoriale de Corse. The total subsidy for maritime transport in 2004 came to â'¬108 million, with another â'¬56 million for air routes to Paris.

D3.3 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. This is a subsidy payment available to all operators provided they meet certain light obligations and agree a convention with the relevant authorities.
• Closed routes (Corsica-Marseille). This much larger payment is made only to the company operating the route, and is bid for in a tender process.

D3.4 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.

Management

D3.5 All of these subsidies are managed by the Office des Transports de la Corse ( OTC). The OTC is a public sector organisation founded in 1992 by the Collectivité Territoriale de Corse, in order to carry out the transport policies of the island.

D3.6 The OTC has an Executive Councillor, and an Administrative Council comprising 34 members, 17 elected representatives from the Corsican Assembly, and 17 drawn from other parts of civil society, including inter alia transport companies, and trade unions. Its mission is essentially twofold:

• To manage the territorial continuity grant in order to reduce the cost to the consumer of travel between Corsica and mainland France, including distribution of funds between the air and maritime sectors;
• To specify and agree contracts with transport operators.

D3.7 The Office is also effectively responsible for regulating the contracts once they are in force. This includes the corrective mechanism that is in force, discussed in the section on contracts below.

D4. Lifeline Service Contracts and Tendering Process

History

D4.1 There is a long history of aid from the French State to support 'territorial continuity'. The previous contract between the state and SNCM ran from 1976-2001. Under this contract, ferry services were subsidised such that fares were the same (on a per-kilometre basis) as an SNCF (train) journey over the equivalent distance. The shortfall was made up by subsidy. There were no other specifications on, for example, service quality or frequency.

D4.2 The table below shows the amount of subsidy received from 1984-2001, and 2002. (Prior to 2002, very small payments were made to SNCF and a cement company. However, we have excluded these payments, which in any case are no longer in operation.)

Table D2 Subsidy Received 1984-2002 (Francs)

Source: Office des Transports

D4.3 It can be seen from the figures above that there was a fall in direct subsidy to SNCM/ CMN in 2002 upon the entry into force of the new contract. However, once social aid of FF88 million is taken into account, there was in fact a small net rise in subsidy.

Tale D3 Social Aid Received 2002 (Francs/Euro)

Source: Office des Transports, SDG Euro conversion

D4.4 As it had been concluded prior to the coming into force of the relevant European legislation, this contract remained in force until its expiration in 2001. A new approach was then necessary to comply with European requirements.

Tendering process

D4.5 The Marseille-Corsica route is an exclusive route, awarded by an open tender at the European level. The contract is awarded to whoever makes the lowest bid (assuming that the necessary specifications are met).

D4.6 The contract runs for five years, from 2002-2006. In tendering for the contract, a fairly rigorous specification is imposed. The specifications include tariff levels, which are set below open-market rates, with the balance redressed through the subsidy payment. The specifications are set by the OTC, although there is some negotiation when the contracts are arranged.

D4.7 While the tender was conducted at the European level and is an open tender, only one company ( SNCM) in fact bid for the contract. No clear reason has been identified for there being only one bidder, though suggested reasons included the advantage of being the incumbent, in terms of having experience in running the business.

D4.8 Companies can only receive payments from the OTC if the relevant parts of the fleet are registered in France. The OTC has stated that this requirement is compliant with European legislation.

D4.9 There is no explicit tendering process for the routes to Nice and Toulon. However, the social aid payments made are dependent on fulfilling certain service specifications (see below), and require signing of a convention with the OTC.

Contracts

Corsica-Marseille
D4.10 In tendering for the contract, a fairly rigorous specification is imposed. This contains details on, for example, departure times and capacities, and variation in service to account for peak periods (spring, summer, Christmas). The contract is fixed for five years, from 1 January 2002-31 December 2006.

D4.11 A maximum tariff is also set. The OTC has suggested that this might be only 50% of the market-clearing tariff, although they stress that this is only an estimate.

D4.12 Finally, the amount of subsidy bid for is also a part of the contract. In 2004, SNCM was to receive â'¬66.5 million, with CMN receiving â'¬27.1 million. This covers both passengers and freight.

D4.13 Although in principle fixed, the contract does have some contingency for changes to subsidy payments should there be a fall in revenue.

• For very small (< 2%) changes in revenue over the forecast level, there is no adjustment.
• For changes between 2 and 4%, there is an additional subsidy payment/rebate, depending on the size of the difference.
• If there is a fall of more than 4%, there is an option to cut the number of services offered.

D4.14 However, fall in traffic is not seen as a significant risk, as there has in fact been strong growth recently, with traffic doubling over 8 years.

D4.15 We note that the correcting mechanism above only refers to revenue risk. There is however no adjustment mechanism for changes to operating costs, meaning that the operator must bear the full risk of such costs.

Corsica-Nice, Corsica-Toulon
D4.16 As there is free entry on the Corsica-Nice and Corsica-Toulon routes, there is no tendering procedure for a contract in the same way as the Corse-Marseille route.

D4.17 However, there are some stipulations that must be met to receive the social aid, which allows tariff competition. These stipulations are formalised in the form of a convention agreed between the operator and the OTC, and include:

• a maximum tariff level;
• specifications on frequency; and
• the requirement that ships be registered in France. (The OTC has stated that this requirement is compliant with European legislation.)

D4.18 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. However, instead of being bid for as part of a contract, this subsidy is simply received on the basis of passengers carried - an amount is paid for each passenger actually carried. This effectively increases the revenue per passenger, but is not directly linked to the level of supply provided.

D4.19 Social aid amounts to either â'¬15 or â'¬20 (depending on the route) per passenger-journey. This allows for a reduction in price from what would be â'¬30 to around â'¬15. This applies to residents (assessed by direction of ticket purchase), old people, and young students. There is a cap that only a maximum 65% of passenger-journeys can be eligible for social aid.

Performance

D4.20 In the past 2-3 years Corsica Ferries' market share has increased substantially, and it is now a serious competitor to SNCM. The OTC indicates that Corsica Ferries is profit-making and SNCM in fact makes losses, charging broadly the same tariffs.

D4.21 The table below shows the evolution of passenger numbers since 2000.

Table D4 Passenger Numbers 2000-2003

Source: Office des Transports

D4.22 We also present figures for the evolution of the Nice and Toulon markets. It can be seen that recent years have seen a great expansion of the Toulon market, and an almost complete dominance of this market by Corsica Ferries. Corsica Ferries has also greatly increased its market share of the Nice market, which itself has also grown.

Figure D5 Evolution of Corsica-Toulon Market

Figure D6 Evolution of Corsica-Nice Market

D4.23 There is a suggestion that in fact SNCM may stop serving Toulon as it is no longer profitable for the company and passenger numbers carried have declined significantly. This would lead to a monopoly by a private sector operator rather than the public sector operator monopoly that there used to be. However, there would of course be room for a new entrant to begin operating the route.

D5. EU

D5.1 European legislation on tendering procedures allowed for contracts which were already in force to remain unchanged, and only to change upon renewal. The 25 year contract expired in 2001, whereupon a tender was conducted, in line with EU processes.

D5.2 We understand that the Commission was consulted during the tendering process, and that it was happy with the process as it operated.

D5.3 In August 2002, the Commission initiated a formal investigation procedure into the proposed restructuring aid to Société Nationale Corse-Méditerranée ( SNCM). The French Government planned to recapitalise the company with an injection of â'¬76 million. However, the Commission doubted whether the restructuring plan proposed by the French Government could make the SNCM Group viable again. The Commission also had to examine the restructuring plan to check whether the aid proposed was compatible with European state-aid rules, notably to assess any distortion of competition and to ensure that the plan could restore the company to long-term health and viability.

D5.4 In the light of the information provided by the French Government and in view of the fierce competition since 1996 in passenger transport between Corsica and the French and Italian mainlands, the Commission had doubts about the efficacy of the proposed measures and their ability to return the company to viability without further government aid.

D5.5 However, on 9 July 2003, the European Commission delivered the judgement that the restructuring aid was legitimate, on the grounds that it would prevent SNCM's competitor from monopolising the market.

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