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CLYDE AND HEBRIDES LIFELINE FERRY SERVICES - SCOTTISH EXECUTIVE'S CONSIDERATION OF THE REQUIREMENT TO TENDER

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ANNEX A: ALTERNATIVES TO TENDERING WHICH HAVE BEEN CONSIDERED BY THE SCOTTISH EXECUTIVE

Background

1. The main purpose of the 1992 EU Maritime Cabotage Regulation 4 (the Regulation) was to liberalise shipping in EU Member States. However, the Regulation recognised that the market would not, on its own, always provide an appropriate level of service. The Regulation, therefore, provides for Member States to conclude Public Service Contracts ( PSCs) or impose Public Service Obligations ( PSOs) in order to ensure 'the adequacy of regular transport services to, from and between islands' 5.

2. The Regulation and associated guidance do not state that tendering is required in relation to PSOs and PSCs. Instead the Maritime Cabotage Regulation states, at Article 4.1 that,

"Whenever a Member State concludes public service contracts or imposes public service obligations, it shall do so on a non-discriminatory basis in respect of all Community shipowners."

3. The Regulation does not define what is meant by non-discrimination. However, the principle of non-discrimination is one of the cornerstones of EU law and, at the very least, requires that a particular opportunity is available to all EU nationals on an equal basis. The December 2003 Communication 7 from the Commission provides further guidance on the interpretation of this aspect of the Regulation at section 5.4,

"The Commission takes the view that, in general, the awarding of public service contracts risks to discriminate between operators, as normally only one operator of a given route is concerned. It therefore considers that launching an open Community-wide invitation to tender is in principle the best way to ensure non-discrimination."

4. Further, the January 2004 Guidelines 7 from the Commission, state at section 9,

"In the field of maritime cabotage, public service obligations ( PSOs) may be imposed or public service contracts ( PSCs) may be concluded for the services indicated in Article 4 of Regulation ( EEC) No. 3577/92. For those services, PSOs and PSCs as well as their compensation must fulfil the conditions of that provision and the Treaty rules and procedures governing State aid, as interpreted by the Court of Justice."

5. The terms of the Regulation and the subsequent guidance from the Commission suggest that, whilst tendering might be the best way to fulfil the requirements of the Regulation, it is not the only way. The Executive therefore considered whether there were alternatives to tendering which met the requirements of the Regulation. This section sets out the alternatives which were considered and the Executive's views:

(A) The Status Quo

(B) Altmark

(C) New scheme where subsidy is available to all Community shipowners

(D) Clyde and Hebrides service brought 'in-house' by Scottish Ministers

(E) Management Contract

(F) Professor Kay's 5 part proposal which he suggests would meet the 4 Altmark criteria

(G) Meeting Underlying Objectives of EU rules - meeting the Spirit of the Treaty. This argument was put forward by both Professor Kay and Dr Bennet.

(H) Proposal that the 1973 Undertaking between the Executive and Caledonian MacBrayne was an 'existing public service contract' as described in Article 4, paragraph 3 of the Maritime Cabotage Regulation and, therefore, pre-date the requirements of the 1992 Maritime Cabotage Regulation

(I) Effect of July 2005 Commission Decision in relation to Services of General Economic Interest ( SGEIs)

(A) The Status Quo

6. The Clyde and Hebrides ferry services provided by Caledonian MacBrayne fall within the scope of the Maritime Cabotage Regulation, and the current arrangement between the Executive and Caledonian MacBrayne is a public service contract (as defined by the Regulation). However, the current Undertaking with Caledonian MacBrayne and the subsidy which Caledonian MacBrayne receives for providing ferry services were not made available to other Community shipowners. As such, the arrangement was not concluded on a non-discriminatory basis and is, therefore, not compliant with the Regulation.

(B) Altmark

7. The Altmark judgement sets down 4 criteria (described in Annex D) to assess whether or not a measure is classified as a State aid as defined in Article 87(1) of the Treaty. Some commentators have suggested that if those criteria are met in relation to the Clyde and Hebrides ferry services then the measure is not a State aid and should, therefore, be exempt from the terms of the Regulation.

8. The Altmark judgement states that where sectoral EU rules apply ( e.g. maritime transport; road, rail and inland waterways) they cannot be avoided by an appeal to the general rules of the Treaty. The Clyde and Hebrides ferry services fall within the scope of the Maritime Cabotage Regulation and the arrangements for the services must, therefore, be considered against the requirements of that Regulation.

9. The Regulation requires that EU shipowners must be treated on a 'non-discriminatory basis'. This is a common principle of EU law and the effect of this requirement is that Member States must treat all Community shipowners in the same way. If subsidy is to be made available, that subsidy must be available to all Community ship-owners on the same basis. If the subsidy is to be made available to only one ship-owner (as in the case of the Clyde and Hebrides) then all ship-owners must be given the opportunity to qualify for this subsidy and the only feasible way of providing this opportunity is through a bidding process.

10. This is a different issue from the Altmark consideration as to whether a subsidy would confer an advantage on one operator over another. Thus, whilst it may be possible to show without tendering that the subsidy paid to Caledonian MacBrayne by the Executive did not give the company an advantage over another, this would not satisfy the non-discrimination requirement.

(C) New Scheme where subsidy is available to all Community shipowners

11. Under this option Scottish Ministers would set up a scheme whereby any operator would be entitled to apply for subsidy provided that they met some basic conditions relating to financial stability of the company, safety record and so on. Such a scheme would, in principle, meet the non-discrimination requirement of the Maritime Cabotage Regulation without the need for tendering.

12. However, Commission Communication C(2004) 43 (Community Guidelines on State aid to maritime transport), which provides guidance on the Maritime Cabotage Regulation, states that PSO and PSC arrangements must fulfil the conditions of the Regulation and the Treaty 8 rules and procedures governing State aid. It is generally accepted that subsidy payable under a tendered public service contract complies with the State aid rules. However, with the subsidy for all scheme this is not the case.

13. Article 87(1) of the Treaty is a general prohibition on State aids. Articles 87(2) and 87(3) identify certain types of aid which are or may be compatible with the common market. Only the types of aid identified in Article 87(2) are automatically exempt, those identified in Article 87(3) are subject to control by the Commission. The exception which would be relevant to the subsidy of the Clyde and Hebrides ferry services is Article 87(2)(a), namely that the aid payable is 'aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned'.

14. It would, therefore, be possible to develop a subsidy for all scheme which met the requirements of the Maritime Cabotage Regulation and Article 87(2)(a) of the Treaty. However, such a scheme would have a number of restrictions and consequences:

  • Article 87(2)(a) of the Treaty requires that the scheme could only be applied in relation to defined categories of individual consumers. Thus, it could not be used to provide support for freight services.
  • the arrangement would be a Public Service Obligation rather than a Public Service Contract. As such the operator(s) would be free to withdraw from the service at any time. This option would, therefore, not offer the certainty that a single Public Service Contract offers in terms of delivery of a set service specification.
  • where 2 or more operators were servicing the same route if one was to withdraw from the route there would, almost certainly, be no TUPE transfer of its staff. This type of approach could attract low cost operators with consequential implications for staff terms and conditions.
  • it would be impractical to offer the subsidy for all on the basis of a single network. The scheme would, therefore, have to be applied on a route by route basis which would be likely to result in the loss of an integrated set of services, since a range of operators could emerge across the network.
  • there is not significant scope to increase carryings on lifeline routes and this type of scheme would result in more operators chasing the same number of passengers. This would be likely to lead to a significant increase in the subsidy requirement as the subsidy per head would have to take account of the overhead costs of more than one operator.

15. Spain and France run similar schemes to this in parallel with Public Service Contracts. In both cases operators are required to provide discounted fares to island residents. The operators are then reimbursed by the government for the discounted portion of the fare. In both cases the discounted fare is limited to cars and passengers.

16. Scottish Ministers are of the view that the restrictions that would be placed on a subsidy for all scheme would be unacceptable. Such a scheme would not meet their commitment to protect existing levels of service.

(D) Clyde and Hebrides service brought 'in-house' by Scottish Ministers

17. Under this proposal the Clyde and Hebrides ferry services, currently operated by Caledonian MacBrayne, would be brought 'in-house' by the Scottish Ministers. This could be done (for example) by a wholesale transfer of assets and liabilities from Caledonian MacBrayne to the Scottish Ministers with Caledonian MacBrayne itself being wound up. The Scottish Ministers would then themselves directly undertake the provision of the ferry services currently provided by Caledonian MacBrayne, through a "Department of Clyde and Hebrides Ferry Services", with the vessels and all other assets currently owned by Caledonian MacBrayne being owned and operated by the Scottish Ministers and the staff currently employed by Caledonian MacBrayne being employed directly by the Scottish Ministers as civil servants.

18. However, under EU rules it is the effect of the arrangement and not the form it takes that is relevant in terms of compliance with the law. If the Clyde and Hebrides services were carried out directly by the Executive it would be deemed that Scottish Ministers had placed an obligation on their officials to provide the services. This would bring the arrangement within the scope of the Maritime Cabotage Regulation. As with Option (A) The Status Quo (paragraph 6 above) this arrangement would then fall foul of the non-discrimination requirement.

(E) Management Contract

19. This option would entail the tendering of a 'management contract' to run Caledonian MacBrayne rather than the direct tendering of a Public Service Contract. Scottish Ministers would enter into a "management contract" with a third party who would take over responsibility for running and managing Caledonian MacBrayne. Caledonian MacBrayne would, in turn, be responsible for the provision of ferry services on the Clyde and to the Hebrides. The Executive would provide the manager with the necessary funds to ensure that the services were maintained (to enable any operating deficit incurred by the company actually providing the service to be covered) as well as receiving a fee for their services. The manager would operate under broad criteria set by the Scottish Ministers.

20. However, such an arrangement would not comply with the Maritime Cabotage Regulation. This is because Caledonian MacBrayne would continue to be the operator of the services without the opportunity to provide those services having been made available on a non-discriminatory basis to other community shipowners.

(F) Professor Kay's 5 part proposal which he suggests would meet the 4 Altmark criteria9

21. As set out at (B) Altmark (paragraphs 7 to 10 above) the Altmark criteria are not applicable to ferry services which fall within the scope of the Maritime Cabotage Regulation. However, even if the Altmark criteria were applicable to the Clyde and Hebrides ferry services and arrangements were put in place to try to show that the services provided by Caledonian MacBrayne met the 4 Altmark criteria, it would not prevent another operator, at any time, challenging those arrangements. Tendering (assuming that it is carried out in line with EU rules) protects the subsidy arrangements from challenge on State aid grounds for the duration of the contract. The Altmark criteria, on the other hand, must be met at all times. Indeed, Professor Kay's paper states, "the consequence of keeping most of the network together … is recognising the possibility of opening up a route or routes to outside competition". Professor Kay suggests that this would be the case only for 'profitable' routes. However, the fourth Altmark test requires that the level of compensation be determined by comparison with a 'typical transport undertaking'. It would always be open to any competitor to argue that it could provide any of the routes for less subsidy than Caledonian MacBrayne received.

22. Professor Kay addresses this issue in his paper by reference to the Maritime Cabotage Regulation requirement that 'any compensation for public service obligations must be available to all Community shipowners'. He suggests that one way in which "the opportunity for compensation could be made available to all" would be to invite expressions of interest and the submission of technical proposals. Professor Kay does not say what would happen if this approach was taken and the alternative proposals required less subsidy than that paid to Caledonian MacBrayne. However, it is clear that the continued subsidy of Caledonian MacBrayne at the higher level would be unsustainable and the compensation would have to be awarded to the operator requiring the lowest compensation. This is, de facto, a tender process.

23. Professor Kay also suggests that the European Commission might provide a 'letter of comfort' confirming that the European Commission saw no ground for action against the arrangement. Even if the European Commission were willing to issue such a letter it would provide no protection against a future challenge. In the event that a complaint was made the European Commission would be obliged to consider that complaint on its merits and the letter of comfort would have no standing.

24. Given that there is subsidy available it could not be assumed that 'most of the network' or indeed any individual route would not be of interest to other operators. The logical conclusion of this approach is that over time the network would be tendered on a route by route basis. This is the approach envisaged in the 1997 EU Guidelines 10 and which was widely rejected in the 2000 consultation Delivering Lifeline Ferry Services. The Executive and others successfully lobbied the European Commission to take account of the circumstances in Scotland to allow for the tendering of the network as a single unit (now with the exception of the Gourock - Dunoon route) and to retain the benefits of a cohesive, integrated, single network of routes. The main benefits are:

  • the whole network approach gives the operator more flexibility for vessel deployment and crewing. It should be noted that some vessels in the Caledonian MacBrayne fleet operate on more than one route. A route by route approach would therefore require additional vessels if operators were to maintain the same level of service.
  • the availability of relief vessels (for both planned and unplanned events) is also critical to the reliability of the Clyde and Hebrides services. The uniqueness of the vessels means that replacements outside the fleet are, for most routes, unavailable. Caledonian MacBrayne's current arrangements for relief vessels usually require a series of sequential movements of vessels between routes in order to maximise capacity whilst preserving continuity. To have equivalent arrangements among a number of operators would be extremely complex and vulnerable to breakdown. It should be noted that the Maritime & Coastguard Agency ( MCA) Regional (Scotland and Northern Ireland) Office said, in responding to the 2000 consultation Delivering Lifeline Ferry Services, that,

"if individual routes are offered for the tender, the question of provision of relief vessels for maintenance periods and annual survey requirements becomes a significant problem, which should not be underestimated."

  • the whole network approach makes it easier to integrate safety, quality and environmental aspects of vessel and port operations - and to ensure that standards are applied evenly across the network. Likewise, it supports the same standards of training across the network and provides staff with the opportunity to experience a variety of vessels operating in a range of conditions.
  • the whole network approach provides the best opportunity to maintain existing integrated transport links (with road, rail and other ferries in the Caledonian MacBrayne network) and integrated ticketing facilities. Fragmentation would encourage operators to protect their own services and would diminish the likelihood of promotional fares for multi-service journeys. This would reduce convenience and quality of service and possibly mean increased fares.
  • the whole network approach allows an operator to achieve economies of scale, thus keeping subsidy to a minimum.
  • the whole network approach with a single operator is the most efficient form for the Executive to manage.

25. It has been suggested that the route by route approach outlined by Professor Kay would ensure, at least for a time, that Caledonian MacBrayne continued to be available to bid for routes and, if necessary, to act as Operator of Last Resort. Whilst this could be true, the price of that would be the loss of cohesion of the network and the likely consequences in terms of service reliability and flexibility. The Scottish Executive is of the view that this would be unacceptable.

(G) Meeting Underlying Objectives of EU rules - meeting the Spirit of the Treaty

26. Dr Bennett, Professor Kay and Ms Findlay, among others, have suggested that the application of state aid rules to essential services such as those in the Clyde and Hebrides is inappropriate and, indeed, conflicts with wider European social goals. There are 3 strands to this argument:

(a) value for money (tendering of the services would result in additional costs to the public purse);

(b) the risks associated with lifeline services being provided by a private sector operator with a focus on profit rather than by a public sector operator whose focus is on meeting social need; and

(c) the wider potential implications for the local economy in terms of employment and business.

27. These issues do not address the legal requirement of the Maritime Cabotage Regulation or the obligation on the Executive to comply with it. The Executive does, however, recognise that these issues would have to be addressed should tendering go ahead. Detailed responses on individual points raised in the academic's papers can be found in Annex B. A summary of the Executive's proposals is set out below.

(a) Value for Money/Costs. There would be some additional costs. However, those directly related to the tender process would be essential to ensure that the tender process was robust and that contract performance was monitored rigorously. The creation of a separate vessel owning company would ensure that Caledonian MacBrayne's vessels remained in public ownership ensuring their availability for subsequent contracts.

(b) Tendering Risks. The risks identified by various commentators are those which are often associated with contract/competitive tendering arrangements and are not unique to the Clyde and Hebrides ferry services. However, it should be noted that during the tender process bidders would be closely scrutinised to ensure that their proposals complied with the requirements of the service specification and that bidders had made realistic assumptions about costs and revenues. Appropriate monitoring and enforcement arrangements would be developed to ensure that the Executive had detailed information about the operation of the services (including costs). The terms of vessel leases and harbour management arrangements combined with regular inspections would ensure that vessels and other assets were well-maintained and that the operator was incentivised to appropriately maintain the assets.

(c) Employment and Business. The Executive attaches importance to the future of the Caledonian MacBrayne workforce. The Executive recognises the value of the employment Caledonian MacBrayne provides to the local economies of the Clyde and Hebrides, and the direct and indirect benefits Caledonian MacBrayne and the services it operates bring to local businesses. The Executive would do everything it could, within EU and domestic legislation, to secure the continued employment of those staff and the protection of their terms and conditions and pension rights. The Executive's detailed proposals in relation to staff, should tendering proceed, are set out at Annex C.

(H) Proposal that the 1973 Undertaking between the Executive and Caledonian MacBrayne was an 'existing public service contract' as described in Article 4, paragraph 3 of the Maritime Cabotage Regulation and, therefore, pre-dates the requirements of the 1992 Maritime Cabotage Regulation

28. The Maritime Cabotage Regulation states, at Article 4, paragraph 3, that "existing public service contracts may remain in force up to the expiry date of the relevant contract". It has been suggested that the 1995 Undertaking between the Executive and Caledonian MacBrayne could be viewed as a continuation of the previous 1973 Undertaking and would, thus, be deemed to be 'an existing public service contract'.

29. However, there are a number of key differences between the 2 Undertakings the most important of which is that they are with different companies. The 1973 Undertaking was with David MacBrayne and the 1995 Undertaking is with Caledonian MacBrayne. It is therefore quite clear that the 1995 Undertaking is a new 'contract' arrangement which was agreed after the Regulation came into force in 1992.

(I) Effect of July 2005 Commission Decision in relation to Services of General Economic Interest ( SGEIs)

30. Some commentators have suggested that the European Commission Decision on the application of Article 86(2) of the Treaty to State aid in the form of public sector compensation granted to certain undertakings entrusted with the operation of services of general economic interest, announced on 15 July 2005, exempts ferry services, below a certain threshold, from the requirements of the Maritime Cabotage Regulation. This is not the case.

31. The purpose of the Decision was to provide some certainty after the 2003 Altmark decision. The Commission has experienced a significant increase in notifications following the Altmark decision as Member States wanted to make sure that their state aids were compliant with the Treaty. In response to this the Commission has decided that aid relating to social housing and hospitals, and certain small state aids (including ferry services with average annual carryings of less than 300k passengers) given to Services of General Economic Interest ( SGEIs) would be exempt from notification to the European Commission. The Decision is, therefore, an administrative measure to provide an exemption, in certain circumstances, from notification of the State aid to the European Commission. It does not, however, exempt public authorities from any other requirements in relation to the state aid rules. Indeed, the Decision states, at Article 3, that the provisions of the Decision apply "without prejudice to the application of stricter specific provisions relating to public service obligations contained in sectoral Community legislation". This means that, in relation to the Clyde and Hebrides ferry services, the Scottish Executive is still required to comply with the terms of the Maritime State aid rules (the Maritime Cabotage Regulation) and, in particular, the requirement to act in a non-discriminatory way.

32. It should also be noted that the Decision does not seek to provide guidance on the Altmark case or the application of the Altmark decision. The Decision does refer to the Altmark case but only so as to make clear that the Decision relates only to public compensation which does not meet the Altmark criteria. This is because public compensation which does meet the Altmark criteria does not constitute State aid within the meaning of Article 87 of the EC Treaty.

33. It should be noted that the Decision does not revise the 2003 guidance on the interpretation of the Maritime Cabotage Regulation or the 100k passenger de minimus threshold mentioned in it. The guidance provides that for low volume routes (less than 100k passengers per year) "the selection of a suitable operator … could be carried out following a simple call for expressions of interest without launching a formal tendering, provided that a Community-wide announcement of the services is maintained". The purpose of this additional flexibility is to allow public authorities to avoid a full tender process for routes serving small islands where there is only one local bidder. However, if there is more than one bidder then the public authority would still be required to award the contract on a non-discriminatory basis with regard to all bidders.

34. The Commission has not indicated whether it intends to revise the guidance to bring the threshold figure in the 2003 Maritime Cabotage guidance into line with the 300k figure in the Decision on SGEIs. However, even if the Commission were to raise the threshold in the Maritime Cabotage guidance to 300k passengers, this would have no effect on the requirements in relation to the Clyde and Hebrides ferry services. The 2003 guidance also requires that, in calculating whether the threshold has been met, the carryings for all public service routes provided by an operator are aggregated. Last year Caledonian MacBrayne carried over 5 million passengers and would, therefore, significantly exceed the de minimus threshold.

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Page updated: Friday, September 9, 2005