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Options for the Future of Ferry Services Between Gourock and Dunoon
Addendum

CONTENTS

1. ADDENDUM TO THE DELOITTE & TOUCHE REPORT ON THE GOUROCK DUNOON FERRY SERVICE
1.1 Introduction
1.2 The Original Options
1.3 Option B
1.4 Introduction to the Halcrow Crouch Report.
1.5 Costs
1.6 Non-Financial Evaluation from Halcrow Crouch Report
1.7 Revised Net Present Cost of Option B Using Halcrow Crouch Data
1.8 Non-Financial Analysis
1.9 Conclusion

1. ADDENDUM TO THE DELOITTE & TOUCHE REPORT ON THE GOUROCK-DUNOON FERRY SERVICE

1.1 Introduction

This report is an addendum to a report produced by Deloitte & Touche in May 1998 on the Gourock-Dunoon ferry service. The main report produced and evaluated six separate options for the future operation of the service. At that time, Deloitte & Touche were unable to comment on the feasibility of one option in particular, that of an enhanced Gourock-Dunoon service. This was due, among other factors, to a lack of specialist technical information.

Since then, Caledonian MacBrayne (CalMac) has instructed Halcrow Crouch, civil engineers, to conduct a study into the likely costs and technical feasibility associated with this option. This addendum summarises and reviews the information contained in Halcrow Crouch's report, and uses it to revisit the option of an enhanced Gourock-Dunoon service.

1.2 The Original Options

The options previously evaluated can be summarised as follows:

A: Status Quo;

A/L Restrictions lifted from the Gourock-Dunoon operator;

B: Enhanced Gourock-Dunoon service;

C: Gourock-Dunoon service: foot passengers only;

D: Gourock-Dunoon service closed;

E: McInroy's Point-Dunoon: a theoretical, PFI-type model, whereby a new organisation takes over to provide a service between these two points, paying a premium to both existing providers for route rights;

F: Closure of the McInroy's Point- Hunter's Quay service. Again, a premium would be payable to the current operator.

The ranking of the original options is shown overleaf. It can be seen that Option B, an enhanced Gourock-Dunoon service, was ranked as providing the best value for money to the taxpayer, in purely financial terms.

Table 1: Ranking of Original Options

Source: Deloitte & Touche report

1.3 Option B

The option for providing an enhanced service between Gourock and Dunoon,

described as Option B in the main report, made the following assumptions:

• the Gourock-Dunoon service operator, currently CalMac, invests £600,000 in a slipway near Dunoon. This slipway would be used instead of Dunoon Pier, with unquantified effects on the town of Dunoon, as tourist traffic would not now disembark in the town centre;
• the operator would invest in two roll-on, roll-off vessels at an estimated cost of £3.8 million each. These vessels would have a 40-car capacity;
• the operator's overall cost structure would undergo radical change. Instead of ten crew per vessel, there would be four, and a lower level of qualification would be required. Since the vessels would be self-mooring, shore costs would also reduce to one-third of present levels. Redundancy costs required were estimated at £0.5 million;
• Argyll & Bute Council would lose some £279,000 per annum in berthing dues, but would gain an estimated £65,000 in rent for the new slipway and carpark. The Council's shore costs at the Dunoon side would also decrease;
• as a result of the lifting of current restrictions over the Gourock-Dunoon operator, and the investment in new ships, the operator was assumed to achieve a small (6%) increase in market share.

The Net Present Cost of this option was estimated to be £1.8 million¹, a saving of £6 million on the Status Quo.

1.4 Introduction to the Halcrow Crouch Report

Halcrow Crouch has presented the following two options:

• a slipway terminal, served by double-ended landing craft type vessels; and
• a roll-on, roll-off terminal at Dunoon, served by roll-on, roll-off vessels.

Each of these options is described in detail below. The vessels used under both options would have capacity for 40 cars. The report does not provide costs for the vessels.

1.4.1 The Slipway Option

Halcrow Crouch believes that the most suitable location for the slipway is the old stone pier in East Bay, to the north of the existing Dunoon terminal.

Halcrow Crouch also considers that a breakwater is required under this option, in order to reduce "downtime" (the amount of time the service cannot operate due to the sea conditions) to acceptable levels.

Under this option, dredging would be required, initially, and also on an ongoing basis, giving rise to a very large quantity of material (100,000 cubic metres in the first instance). This would either be used as infill for the proposed car parking and car marshalling area or dumped at sea, depending on the quality of the material.

The new site would need to be integrated into the existing road system. Car parking and waiting areas would need to be re-provided.

Finally, foot passengers would board and disembark using the ship's ramp, which Halcrow Crouch considers may be dangerous.

1.4.2 The Terminal Option

In order to avoid significant demolition and reconstruction to the pier, which is listed, the new linkspan would be located at the south end of the existing pier. A new berth and mooring system and strengthening works would be required. Some dredging would also be required and car parking would need to be reprovided.

1.5 Costs

The costs provided by Halcrow Crouch are shown below. The last column gives the original estimate, provided by Argyll & Bute Council, of refurbishing the existing pier terminal, which remains more expensive than the options produced by Halcrow Crouch.

The key point to note is that the original estimate of £600,000 to provide a slipway is now proven by Halcrow Crouch to be extremely optimistic. The slipway option is estimated by Halcrow Crouch to cost £3.8 million in capital works. The terminal options cost between £2.9 to £3.6 million, with the more expensive of these options offering a higher degree of protection from the elements.

Table 2: Capital Works Costs

Source: Halcrow Crouch/ Argyll & Bute Council

1.6 Non-Financial Evaluation from Halcrow Crouch Report

The table below sets out the arguments made by Halcrow Crouch for and against both the slipway and the terminal options.

Table 3: Advantages and Disadvantages of Slipway versus Terminal

Source: Halcrow Crouch

The non-financial advantages of the terminal solution as compared to the slipway outweigh the disadvantages, as shown above. However, either solution would leave all or part of the pier in a poor condition, requiring further public investment, and potentially deterring visitors to the town.

Halcrow Crouch concludes that the terminal options all cost less than the slipway option. However, Halcrow Crouch notes that other considerations, including the type of service to be provided, the cost of the service vessels and the type of terminal at the other side (i.e. Gourock) must be examined before any final recommendation regarding Dunoon can be made.

1.7 Revised Net Present Cost of Option B Using Halcrow Crouch Data

The major factor influencing the cost of Option B is not, in fact, the cost of the capital works, although these are substantially (five times) higher than originally forecast. The major factor is the cost base to be used by the Gourock-Dunoon operator. We have, therefore, conducted some sensitivity analysis on this issue, the results of which are summarised below:

Table 4: Revised Net Present Cost of Option B with Halcrow Crouch Data⁵

Source: CalMac/Halcrow Crouch/Deloitte & Touche⁶

Note 1: At present, the operator on the Gourock/ Dunoon route is restricted to an hourly service, with some additional sailings at peak times. Were the operator to run a half-hourly service, this factor by itself is assumed to result in a 3% increase in market share. However, the operator would then be required to dedicate two ships full-time to this route, rather than the present 1.2 ships, resulting in an increase in direct and indirect ship costs.

The Series A calculations shown above rank next to last in the original option. rankings (Table 1), and, therefore, represent poor value for money.

The Series B results are the most costly of all the options considered.

Of the Series C calculations, Terminal. 3 would rank fifth, after the slipway. However, the Terminal 1 and Terminal 2 options would rank first. In other words, they would represent the best possible option for the taxpayer.

However, Halcrow Crouch has stated (Table 3) that terminal options require more staffing than a slipway. This then poses the question of whether or not CalMac could deliver the reduced staff projections on a terminal model.

Table 1 shows that the next best options, after Option B as originally costed, were Options F and D. Option F excluded the premium payable to the current operator at Hunter's Quay, which would be a matter for negotiation. However, it is likely that this would be significant, and would undoubtedly exceed the difference between Option F and Option D.

We would, therefore, have to conclude that Option D, closure of the Gourock-Dunoon service, represents the best option in purely financial terms for the taxpayer.

1.8 Non-Financial Analysis

The following table summarises Option B against the next best options.

Table 5: Advantages and Disadvantages of Option B versus Options D and F

Source: Deloitte & Touche report

This table highlights the central policy issue of whether or not overcapacity on the route is to be addressed. It also questions how the market might react under the various options, and raises possible risks to the consumer, discussed further below.

Firstly, if an investment totalling £10 million for a new terminal and ships is made in CalMac, does that investment guarantee the company's financial stability on the route for the foreseeable future? The two operators would be offering the marketplace a similar offering. Either they will continue in harmony as before, or else a price war will break out, to the temporary benefit of the service users, but with potentially poor outcomes for the taxpayer. In a worst case scenario, one or other may be forced off the route altogether, i.e. Option B could turn out to have been merely a staging post on the way to Option F or D, but at an additional cost of £10 million.

Secondly, if such an investment would indeed guarantee CalMac's future, can CalMac, on this basis, be persuaded to set up a separate entity for this route, which would require no further subsidy from the taxpayer?

Thirdly, if only one operator is on the route, will it raise tariffs unreasonably? If this is deemed to be a real risk, can the user be protected by legislation? Or can it be assumed that another operator will come onto the scene to create competition and thus drive prices down?

The implementation issues around Option B as originally stated were as follows:

i. the availability of suitable vessels on the second-hand market, and whether such vessels could technically perform to the projected journey times;

ii. the likely union reaction to a perceived reduction in service standards, albeit in line with current terms and conditions for the type of vessel now envisaged;

iii. whether the proposed slipway site is feasible;

iv. the effect on the town of Dunoon if its existing pier is not used and probably not refurbished;

V. the outcome of what would effectively be a price war between two similar operators, no longer differentiated by their services;

vi. Western Ferries' contention that the revenue costs of this option, such as fuel and insurance, had been understated.

While the Halcrow Crouch report has addressed issue iii., all of the other issues remain live.

1.9 Conclusion

Halcrow Crouch has provided firm capital costs for the option of providing an enhanced Gourock-Dunoon service. Halcrow Crouch concluded that the best option in terms of lowest cost and other benefits is to provide a roll~on, roll-off terminal at the south end of the existing pier. This proposal would meet the expressed wishes of Argyll & Bute Council, which believes that any proposal to move the terminal out of the town would have detrimental effects on the town's economy. It would, however, leave the existing pier unrefurbished beyond some strengthening works.

The costs now projected by Halcrow Crouch are some five times the capital cost shown for this option in the original report. The option, therefore, fails to prove itself the best value for money for the taxpayer, unless radical assumptions are added about the future cost structure of the operation.

The question then arises as to whether or not CalMac can actually implement such a radically different cost structure. On this point, CalMac has presented no new information. Halcrow Crouch suggests, however, that the preferred option of a roll-on, roll-off terminal would require higher staffing levels than the slipway originally envisaged. This suggests that it will be even more challenging for CalMac to deliver a reduced cost base.

Our original report identified Option B (enhanced Gourock-Dunoon service) as the best value for money to the taxpayer. Based on the additional information provided by CalMac and its advisers, Halcrow Crouch, we now conclude that Option D, closure of the Gourock-Dunoon service, represents the best value for money option for the taxpayer, in purely financial terms.

A final decision requires some assumptions to be made about likely market behaviour under different circumstances. The outstanding issues for consideration are:

• whether current overcapacity on the route should be preserved by further investment;
• if the answer to the previous question is no, how users might be protected from tariff rises under a monopoly situation;
• if the answer to the question is yes, the likelihood and likely outcome of a price war;
• the effect of the various options on the town of Dunoon;
• the feasibility of CalMac's plans to re-engineer its cost base;
• the possibility that CalMac may require no further subsidy from the taxpayer if this current request for investment is met.

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Footnotes

1 6% discount rate over a 15 year timescale.

2 Slipway costs include reclaimed carparking area.

3 Projected costs for dredging assume that no rock is encountered. There will be an ongoing requirement for dredging, the cost of which is not included above.

4 Halcrow Crouch figures include an allowance for contingency.

5 In producing these figures, we have used the same assumptions as before re vessel costs

6 Additional assumptions made by Deloitte & Touche:

• the slipway is dredged every five years at a cost of 5% initial capital works cost;
• the use of reduced staff projections incurs a redundancy cost of £500,000 which the other two costs bases do not incur.

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