SCOTTISH EXECUTIVE

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Final Report: Options for the Ferry Services Between Gourock and Dunoon

8. OPTIONS FOR FUTURE SERVICE DELIVERY

8.1 Introduction

In previous sections of this report, the arrangements for current service delivery on the Gourock/Dunoon route were analysed in detail. In this section, we assess feasible options for future service delivery, by:

• setting out possible options which were identified for service delivery in a series of workshops with CalMac, Western Ferries and the Scottish Office held on June 30 and July 1 1997;

• assessing the technical requirements of each; and

• estimating the costs associated with each, both for the operators responsible for delivering the service and (where applicable) for the public sector.

8.2 The Six Feasible Options for Service Delivery

The workshops held with the study sponsors indicated six possible methods by which the demand for ferry services on the Upper Clyde could be met, as follows:

• Option A : the status quo. Under this option, CalMac and Western Ferries would carry on running their existing services broadly as at present, except that Western Ferries would invest £1.5 million in Hunter's Quay and replace one ship with another slightly larger one;
• Option All: restrictions lifted from CalMac. Under this option, CalMac would be free to run vessels as frequently as it chooses to. We have assumed CalMac dedicate two vessels to this service and offer a half-hourly service, but would not extend its working day to match Western Ferries. This option is assumed to result in an increased market share for CalMac;
• Option B : an enhanced Gourock/Dunoon service. Under this option, the service operator responsible for the Gourock/Dunoon ferry service (presently CalMac) would enhance the level of service delivery by introducing front-end loading roll on-roll off vessels. A slipway would be built near Dunoon to accommodate these vessels;
• Option C : Gourock/Dunoon service for foot passengers only. Under this option, the Gourock/Dunoon ferry service would be limited to foot passengers only, in order to meet the Secretary of State's 1983 commitment, while the McInroy Point/Hunter's Quay service would continue for car passengers;
• Option D : closure of the Gourock1Dunoon service. Under this option, the Gourock/Dunoon ferry service would be discontinued and all vehicle and passenger traffic would use the McInroy Point/Hunter's Quay route. In order to serve passengers travelling between Gourock railway station and Dunoon town centre, a regular dedicated bus service would be set up between them;
• Option E : McInroy's Point-Dunoon. Under this option, a single service would operate between McInroy's Point and Dunoon;
• Option F: Gourock-Dunoon only. Under this option, the McInroy's Point-Hunter's Quay operation ceases, leaving the Gourock-Dunoon route as the only operating service. The operator is assumed to invest in bow and stem loading ships. This option could involve CalMac, as the existing Gourock-Dunoon operator, in setting up a separate ring-fenced unsubsidised operating subsidiary, as it has previously suggested.

8.3 The Financial Assessment of Different Options

In the next section, we set out the cost implications of each of the feasible options. Our cost estimates have been drawn up on the following basis:

• the current position of the two operators is taken as the starting-point in assessing the future revenues and costs of operating ferry services in the Upper Clyde;
• no adjustment has been made for inflation. All costs are in constant (1997) prices;
• the cost model has been done on the basis that the new method of service delivery has been put into place: i.e. no account is taken of transitional effects;
• the Net Present Value (or Net Present Cost, if no revenue is expected to occur) has been calculated for each option both to an operator offering services between Gourock and Dunoon and a McInroy's Point- Hunter's Quay operator. The model assumes a 15 year lifetime for the selected method of service delivery, and applies a 6% discount rate, consistent with Treasury Green Book principles;
• as it has been established that, due to current inflation rates and to its use of internally generated capital, Western Ferries' cost of capital is comparable to CalMac's, a discount rate of 6% was applied to both operators. This also prevents any bias in the assessment resulting from the use of different rates for both operators. However, if interest rates were to increase, the private sector operator's costs would also increase, although we would expect steps to be taken to manage that risk.

8.4 The Current Position

The financial position of the two service operators in their latest financial year is summarised in Table 8.1(a), which sets out their traffic and revenue structure, and Table 8. 1 (b), which sets out their cost structure. The current position of the two operators is used as the starting-point for the analysis of the cost implications of continuing with the status quo. It may be summarised as follows:

• CalMac is currently generating annual revenues of £1.67 million from its service, of which £1.49 million is from tariff revenues and £0.19 million from non-tariff revenues. We calculate the costs associated with the route (excluding depreciation) of £2.5 million, of which £1.3 million are the direct costs of operating ships on the route, £0.4 million represents a charge made for central management charges, £0.29 million the berthing dues for docking at Dunoon, and £0.79 million the reserve fleet costs attributable to this route;
• Western Ferries is currently generating annual revenues of £2.8 million, almost all of which is from tariff revenues. Against this, the operator has cash costs of £2.1 million, of which £ 1.2m are the direct costs of operating ships on the route, £0. 1 m is its management fee, £0.24m represents shore labour costs, and £0.56m other expenses.

Table 8.1(a) Traffic and revenue structure of the two Inverelyde-Cowal ferry service operators: 1996197 Financial Year

Source: CalMac and Western Ferries management accounts

In summary, tables 8. 1 (a) and 8. 1 (b) indicate that the operator of the McInroy's Point/Hunter's Quay service generated a cash surplus of £0.7 million in its latest financial year, while the operator of the Gourock/Dunoon service generated a cash deficit of £0.85 million.

Table 8.1(b) The cost structure of the two Upper Clyde ferry service operators 1996197 Financial Year

Source: CalMac and Western Ferries management accounts

Tables 8.1 (b) also shows that the operating revenues and costs of the two services, considered jointly, results in a reduced deficit of £ 160,000 before depreciation, but with one operator making a cash surplus and another a cash deficit This reflects the fact that:

Western Ferries has low costs and greater revenue for every type of traffic except passengers;

• CalMac has a high cost base, because of the technical requirements of its operations analysed earlier;
• there is excess capacity on the route; and
• if CalMac was released from its service constraint, it could increase capacity on the route albeit with some increase in cost.

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