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Appendix B Norway Case Study

B1. Ferry legislation and licensing

Domestic Ferry Services

B1.1 As Norway has a long coast lined with fjords, islands and straits, ferries are considered to be a part of the national road system and have been treated as such in national transport planning.

B1.2 There are three types of ferries operating in the Norwegian domestic market:

• A large Coastal Voyage (Hurtigruten) which runs once a day from Bergen in the south to Kirkenes in the north;
• Fast ferries which operate along the coast; and
• Services across fjords and to off-shore islands without connection by bridges.

The Coastal Voyage
B1.3 The Coastal Voyage takes 11 days (round-trip). These ferries carry passengers, vehicles and freight.

B1.4 Under the Hurtigurte-agreement (2002-2004), the Norwegian central government purchased NOK 170 millions of ferry services per year. Under such a net-cost agreement, the operators bore a high financial risk.

Table A5.1 Carrying Statistics of the Norwegian Coastal Voyage

Source: Annual Report from Hurtigruten 2003

Fast ferries
B1.5 Fast ferries take passengers and light freight, but not vehicles.

Car ferries
B1.6 Car ferries that are used for shorter journeys are considered to be a part of the road network. These are used to cross fjords or give access to islands not connected to the mainland with bridges. They might also carry freight.

B1.7 The county municipalities decide on the compensation and operator for regular services on regular routes in the counties.

B1.8 The Ministry of Transport and Communications is responsible for paying compensation to operators of ferry links in the national highway system. The Ministry stipulates the type of contract and guidelines, which shall apply to the allocation of compensation.

Operators

B1.9 There are about 20 ferry operators in the market, some of which are:

• Det Stavangerske Dampskipselskap ( DSD)
• Hardanger/Sunnhordlandske Dampskipselskap ( HSD)
• Fylkesbaatane I Sogn og Fjordane ( FSF)
• More and Romsdal Fylkesbatar ( MRF)
• Fosen Traffikklag ( FTL)
• Torghatten Traffikkselskap ( TTS)
• Helgeland Traffikkselskap ( HTS)
• Namsos Traffikkselskap ( NTS)
• Troms Fylkes Dampskipselskap ( TFDS)
• Ofoten og Vesteralens Dampskipselskap ( OVOS)
• Finnmark Fylkesrederi ( FFR)

B1.10 All of the ferry operators are joint-stock companies. However, two of the companies are 100% owned by county councils, and would therefore be considered as government - owned companies. The other companies are privately owned but the county council might own some shares.

Regulation

B1.11 The services are strictly regulated by the Public Roads Administration with respect to prices, level of service etc., under a variety of contractual forms. Recently, various forms of competitive tendering processes were introduced at regional level for the car ferry contracts.

B1.12 The Norwegian Public Roads Administration is responsible for the planning, construction and operation of the national and county road networks, vehicle inspection and requirements, driver training and licensing. The Public Roads Administration is under the leadership of the Directorate of Roads, which is an autonomous agency subordinate to the Ministry of Transport and Communication. The Public Roads Administration encompasses five regional offices. The Public Roads Administration was reorganised 1 ^st January 2003.

B1.13 On matters pertaining to national roads, the Public Road Administration is under the direction of the Ministry of Transport and Communications. On those related to county roads, the Regional Director is subordinated by the county legislature. The Public Roads Administration is also authorised to grant subsidies for ferry operations through procuring services from the ferry operators.

B1.14 Ferries which are a part of the main road network are administrated directly by central government through the Public Roads Administration. The Coastal Voyage is under the regulation of the Ministry of Transport and Communication.

B1.15 The county councils are primarily responsible for regulating and operating contracts for ferries and for buying services from ferry operators. They issue licenses and enforce license conditions.

Safety

B1.16 The Norwegian Costal Administration (Kystverket) is the Norwegian national agency for costal management, marine safety and communication. The Costal Administration is responsible for the following areas:

• Piloting services;
• Vessel Traffic Services ( VTS);
• Maintaining lighthouses and buoys and issue navigational warnings;
• Improving coastal channels and construct and maintain fishing ports;
• Taking care of the State's preparedness against acute pollution;
• Managing legislation ( e.g. the Norwegian Pilotage Act, the Harbour Act and parts of the Pollution Control Act); and
• Reporting and planning (also taking part in the national planning such as the maritime sections of the National Transport Plan), as well as co-operating with other authorities responsible for safety, transport and preparedness.

Planning

B1.17 The national policy regarding ferry services is set out in the National Transport Plan ( NTP), which covers a period of 10 years (2002 to 2011). The NTP sets out the policies for all modes of transport in the period.

B1.18 The aim for the Government in the NTP (2002-2011) is to increase the frequency and standard of the services on the main roads. This means having a ferry every half hour for 18 hours of the day and then an hourly service in the remaining hours of the day.

B1.19 The NTP guides the contracts the county councils set out. In areas where it is not viable to keep the frequency stated in the NTP, the historical norm that has been followed over the years dominates. Currently, most of the contracts (non-tendered contracts) are negotiated every year, with themes that are up for discussion. The contracts specify minimum level of service and ticket price, determined by historical practices.

B2. Subsidised Car Ferry Services

B2.1 In the past few years, there has been a significant increase in people moving to the central areas around Oslo and the cities in the south. One objective of the government is to keep the population and businesses in the more remote areas of the country. To achieve this, all parts of the country ought to have good links with the central areas as well as Europe. The Government recognises that in order to achieve these goals, subsidies will have to be provided to ferry routes that are not profitable enough to attract supply in the free market.

B2.2 None of the ferry services, which are part of the road network, are formally regarded as lifeline services or with defined Public Service Obligations ( PSOs).

Minimum Service Requirement

B2.3 In order to get a license to run a service, however, the operator needs to sign a one-year contract with the county council or Public Road Administration. In the contract, the frequency of services and ticket prices are defined. This is to ensure a satisfactory level of service for people depending on it.

B2.4 The specifications for the minimum service requirements are often based on historical service levels.

Market Entry

B2.5 The ferry operators need contracts to be able to run a service, and this is granted by the local authorities/Public Road Authority. The contracts are given for specific routes and therefore there is no competition. In the new legislation that came into force this year (2005), tendering processes for the routes will be in place in lieu of the current concessions or licenses that are given to local operators.

B2.6 Historically, local/regional island ferry service markets are monopolised by local operators. These operators have often served the routes for a long time, having been granted rights and licenses to do so by the government.

B2.7 During the trial tender period (as discussed later), the contracting periods have been set at between 5 to 8 years.

Subsidies and Remuneration

B2.8 The subsidies are set out by central government in their annual spending plans. The state pays an annual block grant to cover part of the county municipalities' expenses. The grant is distributed via the local government revenue system in accordance with rules laid down by the King. Each county council is given a budget which they can spend on buying services from the ferry operators.

B2.9 The subsidies are given to an operator based on its concession area. Currently, most operators operate in concession areas with both profitable and loss-making routes. This makes it possible for an operator to transfer money from a profitable service to a loss-making service. The new tendering process precludes the possibility of cross subsidies as the contracts would be for individual routes and not areas.

B2.10 The contracts which are negotiated every year stipulates a minimum level of service and ticket prices.

B2.11 The government ensures that ticket prices are at a reasonable level. The price of the tickets are adjusted to the level of inflation, consumer index and interest rate levels.

B2.12 In the event that an operator does not fulfil its contractual obligations, it is issued with a written warning. The warning gives the operator a period of 14 days to present measures to improve the situation.

B2.13 For minor breaches that are not corrected after a written warning, the operator can incur day penalty fines until the situation improves. Day penalty fines will be equivalent to one- thousandth (0.1%) of the annual purchase sum.

B2.14 In the event of repeated breaches of a serious nature that are not improved following a written warning, the contracting authority has the right to revoke both the contract and the concession rights. The same applies if the operator no longer holds the necessary guarantees, certification or other formal approvals as specified for implementing the contract.

B2.15 The following diagram illustrates the relationships amongst the Ministry of Transport, the Public Roads Administration, Local Authorities, and Operators vis-a-vis ferry services in Norway.

Figure A5.1 Illustrated Relationships Amongst Stakeholder in the Norwegian Ferry Market

B3. Tendering of Subsidised Services Contracts

Tendering Process

B3.1 The Norwegian Public Roads Directorate ( NPRD) decided in 1990 that it would tender all the ferry services in the country. The objectives of tendering the services were to lower ferry transport subsidies and to improve service performance.

B3.2 The responsibility of tendering ferry services has fallen on subsidiary road authorities at the local and regional level. This has resulted in different designs of the tendering process and contractual arrangements. There is a combination of net-cost and gross-cost contracts currently in place in Norway.

B3.3 The first ferry services to be tendered in the Norwegian market are those that have historically required the least amounts of subsidy. These are high-traffic, relatively urban routes.

B3.4 In the period from 1996 to now, 10% to 15% of the routes have been tendered on a trial basis. From 2005 onwards, this will be permanent arrangement. Within the next 7 to 10 years the remaining 100 routes will be up for tender, when between 10 to 14 routes will be contracted each year. The tender will take place according to a schedule, so that bidding operators will know a year in advance the routes that are up for tender.

B3.5 Contracts where there is not a need for any new material will last for about 5 years; contracts requiring new material or specialist material can be as long as 10 years.

B3.6 The invitation to tender is put on the EUTED database as well as in the DUFF (Norwegian database) ⁸. Contracts are usually awarded to the lowest bidder, and tender documents are required to be in Norwegian.

B3.7 Routes that have already been tendered each generated about 3 to 5 competing bids. Some of the operators submitted several bids taking into account different scenarios. The maximum numbers of bids for a tender is set at 5.

B3.8 All of the bidding operators were Norwegian.

B3.9 Several of the successful bidders were new entrants to the routes for which they won the contracts.

Implications of Tendering

B3.10 A study by More Forsking (2004) reported the effect the tenders have had on the services, compared to those that are not tendered. One of the main concerns highlighted by the authors is that in the long run, a tendering process could facilitate collusion. Companies already operating in same areas would get together to bid for contracts and create monopolies to keep out other competitors. No measure is designed to prevent this from happening. The authors of the report estimate that the tendering process can lead to an oligopolistic ferry market with only 4 to 5 companies (grouped by smaller companies).

B3.11 A paper by Olav Hauge from Molde College suggests that tendering the contracts marginally reduces ferry subsidies and lowers transport costs for all involved partners. For the local authorities, there is a reduced administration needs and subsequently, administrative costs. The contracts give local authorities an extra parameter for controlling the ferry transport system, and put pressure on companies in negotiations over subsidies for the non-tendered services. It is believed that such pressure will improve internal efficiency of the ferry operators. Overall, tendering has resulted in:

• Lower subsidies for ferry transport;
• More efficient and better structured ferry transport organising;
• Lower operational costs and more flexible shift systems; and
• More ferry capacity with better supply quality and frequency.

B3.12 The Hauge paper also suggests that strong competition for the tendered contracts results in incumbent operators reducing bidding prices to even below the no-profit level to prevent market entry by outside operators. There may also be the need for ferry operators to cross-subsidise between the tendered and subsidised (not tendered) services. The existing contracts have a tendency to underestimate the cost of extra capacity, and restrict the operators' flexibilities with respect to ferry fleets. Overall, Hauge suggests that moving towards a tendered contracts can increase transaction costs related to contract negotiations.

Contracts

B3.13 Up until now, there are three types of tendered ferry contracts in Norway:

• Net subsidy contracts
• Minimum subsidy contracts
• Gross cost contracts. These are a mixture of cost subsidy and minimum subsidy contracts. These contracts build in an opening for revenue transfer (above expected revenue level) to the ferry company as an incentive.

B4. Subsidised Coastal Voyage

B4.1 The route between Bergen and Kirkenes, also known as "Hurtigruten" (Coastal Voyage), serves important transport and tourism functions. The sheer transport function of the route is especially pronounced in the north, and between Bodo and Lofoten.

B4.2 Some of the services, e.g. Tromso-Harstad and Rorvik - Sandnessjoen, would not be viable without government subsidies.

B4.3 Before being put out to tender in 2004, operator Coastal Express received 120 million NOK (in 2001). To purchase the services north of Tromso alone was estimated to cost around 88 million NOK.

Tendering Process

B4.4 In 2004, following the Norwegian Parliament's deliberations on a Government White Paper entitled "About transport Standards and Procurement of Transport Services for the Coastal Route between Bergen and Kirkenes", the Coastal Voyage was put out to an open tender competition for a contract with the central government.

B4.5 The route structure of the Voyage would remain unchanged, involving daily, year-round journeys.

B4.6 The contract was for regular transport services in the period 1 January 2005 to 31 December 2012. In the case of tenderers needing to procure new vessels, deferment of start-up for up to one year was considered ⁹.

B4.7 The contract allows for readjustments of the subsidy amount according to oil-price fluctuations, wage rate increases, and interest rates based on negotiations.

B4.8 The invitation to tender was advertised openly, following ESA tendering procedures. It was advertised in DOFFIN, in Norsk Lysingblad and in the Official Journal of the European Union and the European Economic Area under the reference 2004-12085. The last day to tender was March 2004 for a contract that commenced on 1 January 2005. The tender process was open to Norwegian as well as non-Norwegian operators.

B4.9 The contract was eventually awarded to Ofoten and Vesteraalens Dampskibselskab ASA ( OVDS) and Troms Fylkes Dampskipsselskap ( TFDS), which handed in a combined bid. They are the current operators of the route and were the only bidders for the tender. The new contract was signed in November 2004 and is for the period 2005-2012. The value of the contract is NOK 1.9 billion (2005 value), paid by the government.

B4.10 The new tendering procedure is fully compatible with the EFTA Surveillance Authority ( ESA), which demands an open, transparent and non-discriminatory procurement process. The EU Regulation ( EEC 3255/92) that came into force in 1992 was incorporated from that point. Norway was included in the EEA agreement.

B4.11 In 1997, four new acts were added to the EEA Agreement in the field of maritime transport during the reporting period. These were the 1997 Amending Directive to the Ship Inspection and Survey Directive (97/58/ EC), the Regulation ( EC) No 179/98 on the Safety Management of Ro-Ro Ferries and the Marine Equipment Directive (96/98/ EC) and the Maritime Cabotage Regulation ( EEC) No 3577/92.

B4.12 In 1998, The EFTA Authority sent a Pre-Article 31 letter to Norway reminding it of its obligation to incorporate the Regulation into its legal order.

B4.13 The process of deregulating the whole ferry market is a difficult process both in economic and legal terms. The most difficult process is to comply with the maritime cabotage rules set out by the EU and to interpret this into practical solutions. This lessens the degree of flexibility by the government to provide subsidies and determine fares.

B4.14 It is also difficult to control the real capital in the liberalised market, where the ferry companies own the vessels. Some areas require specially constructed vessels, such as for the Coastal Voyage, which needs to be able to run a service in all weather conditions - some of which can be very harsh. The high sunk cost of operator-owned vessels, make it harder for operators to enter new markets. In addition, if an operator does not win any contracts, it would not be able to use its vessels.

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