SCOTTISH EXECUTIVE

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

8.5 Option A: the status quo (the base case)

The status quo assumes that service delivery continues broadly as at present, with two operators providing services between Gourock and Dunoon and McInroy's Point and Hunter's Quay respectively. Non-tariff revenues and the costs of service delivery are assumed to be constant in real terms. Tariff revenues are assumed to grow as follows:

by 1% per annum. for the Gourock/Dunoon service operator throughout the 15 years of service operation; and
by 3% per annum. for the McInroy's Point/Hunter's Quay service operator for the first three years of service operation, and thereafter by 1 % per annum;

to reflect a modest growth in underlying demand levels. The more rapid growth for the McInroy's Point/Hunter's Quay service operator in the initial years of the period under consideration assumes a continuation of the historical trend, which reflects the fact that this service has the majority share of car traffic, the most rapidly growing portion of the market.

With respect to investment requirements, the status quo assumes the following:

for the Gourock/Dunoon route, the expenditure carried out this summer by Argyll & Bute Council, together with budgeted maintenance spend by the Council, will prove sufficient investment in Dunoon Pier to last the 15 year appraisal period. The 1.2 vessels currently used on the route will last for the 15 year period, but will require upgrading at a cost of Ł0.25 million per ship. For the purposes of the evaluation, the bulk of the upgrading is assumed to be carried out in Year 3 and the remainder in Year 6;
for the McInroy's Point/Hunter's Quay route, a total investment of Ł1.5 million is required in Year 1 to upgrade the linkspan and pier at Hunter's Quay. This will double the size of car-parking space at Hunter's Quay, but will, due to the layout of the space, capacity will not itself double. The smallest vessel (Sound of Scarba, with a 22-car capacity) will be replaced with a 37-car capacity vessel, at a cost of Ł1.5 million, which is incurred in Year 2. The present operator at McInroy's Point/ Hunter's Quay, Western Ferries, believes that its existing vessels can last the 15 year appraisal period, within the budgeted annual maintenance spend.

The results of the financial simulation of the status quo option are shown in the two tables which follow. In summary, they show that the position of the two operators continues broadly as at present, with the deficit of the Gourock/Dunoon operator falling slightly over

time while the surplus of the McInroy's Point/Hunter's Quay operator rises as route revenues increase over time. Over the fifteen year period under consideration, the NPV of the Gourock/Dunoon service is a negative Ł7.8 million applying a 6% discount rate, while the NPV of the McInroy's Point/Hunter's Quay service is a positive Ł7.6 million. In other words, while considered jointly the revenue of the two services just about covers their costs, one (Gourock/Dunoon) is a substantial loss maker, while the other (McInroy's Point/Hunter's Quay) is profitable.

Status Quo

	figs. Rounded from current position spreadsheet
	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15 et seq
Gourock/Dunoon Service Operator	Ł000	Ł0001	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000
Revenues	35%	=market share
Tariff revenues	1,490	1,505	1,520	1,535	1,550	1,566	1,582	1,597	1,613	1,630	1,646	1,662	1,679	1,696	1,713	1,730
Non-tariff revenues	190	190	190	190	190	190	190	190	190	190	190	190	190	190	190	190
Sub--total, operating revenues:	1,680	1,695	1,710	1,725	1,740	1,756	1,772	1,787	1,803	1,820	1,836	1,852	1,869	1,886	1,903	1,920
Costs
Direct ship costs	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340	1,340
Indirect ship costs	140	140	140	140	140	140	140	140	140	140	140	140	140	140	140	140
Direct shore costs	500	500	500	500	500	500	500	500	500	500	500	500	500	500	500	500
Indirect shore costs	550	550	550	550	550	550	550	550	550	550	550	550	550	550	550	550
Sub-total, operating costs:	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530	2,530
Operating surplus (deficit)	-850	-835	-820	-805	-790	-774	-758	-743	-727	-710	-694	-678	-661	-644	-627	-610
Investment profile
Ships
Overhaul of existing vessels				250			50
Purchase of new vessels
Decommissioning of vessels
Sale proceeds from surplus vessels
Sub-total, ships:	0	0	0	250	0	0	50	0	0	0	0	0	0	0	0	0
Piers
Gourock - Linkspans
Gourock - Terminals
Gourock - Breakwaters
Sub-total, Gourock Pier:	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Dunoon - Linkspans	0
Dunoon - Terminals
Dunoon - Breakwaters
Sub-total, Dunoon Pier:	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Total investment requirements	0	0	0	250	0	0	50	0	0	0	0	0	0	0	0	0
Total cashflow	-850	-835	-820	-1,055	-790	-774	-808	-743	-727	-710	-694	-678	-661	-644	-627	-610
Discount rate	6%
Net Present Value	(Ł7,834)

Status Quo

	figs. Rounded from current position spreadsheet
	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15 et seq
McInroy's Point/Hunter's Quay Service Operator
Revenues	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000
Tariff revenues	2,730	2811.9	2,896	2,983	3,013	3,043	3,074	3,104	3,135	3,167	3,198	3,230	3,263	3,295	3,328	3,361
Non-tariff revenues	60	60	60	60	60	60	60	60	60	60	60	60	60	60	60	60
Sub-total, operating revenues:	2,790	2,872	2,956	3,043	3,073	3,103	3,134	3,164	3,195	3,227	3,258	3,290	3,323	3,355	3,388.	3,421
costs
Direct ship costs	1,190	1,190	1,190	1,190	1,190	1,190	15190	1,190	1,190	1,190	1,190	1,190	1,190	15190	1,190	1,190
Indirect ship costs (incls. Ł1 03K mgt fee)	290	290	290	290	290	290	290	290	290	290	290	290	290	290	290	290
Direct shore costs	320	320	320	320	320	320	320	320	320	320	320	320	320	320	320	320
Indirect shore costs	305	305	305	305	305	305	305	305	305	305	305	305	305	305	305	305
Sub-total, operating costs:	2,105	2,105	2,105	2,105	2,105	2,105	2,105	-2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105
Operating surplus (deficit)	685	767	851	938	968	998	1,029	1,059	1,090	1,122	1,153	1,185	1,218	1,250	1,283	1,316
Investment Profile
Ships
Overhaul of existing vessels
Purchase of new vessels			1500
Decommissioning of vessels
Sale proceeds from surplus vessels
Sub-total, ships:	0	0	1,500	0	0	0	0	0	0	0	0	0	0	0	0	0
Piers
Hunter's Quay - Linkspans
Hunter's Quay - Terminals		1500
Hunter's Quay - Breakwaters
Sub-total, Hunter's Quay Pier:	0	1500	0	0	0	0	0	0	0	0	0	0	0	0	0	0
McInroy's Point - Linkspans
McInroy's Point - Terminals
McInroy's Point - Breakwaters
Sub-total, McInroy's Point:	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Total investment requirements	0	1,500	1,500	0	0	0	0	0	0	0	0	0	0	0	0	0
Total cashflow	685	-733	~649	938	968	998	1,029	1,059	1,090	1,122	1,153	1,185	1,218	1,250	1,283	1,316
Discount rate	6%
Net Present Value @ 6%	Ł7,614
Net Present Value @ 9%	Ł5,793
Combined market size	4,220,	4,317	4,416,	4,518,	4,5631	4,609,	4,655	4,702,	4,749,	4,796,	4,844,	4,893	4,942,	4,991,	5,041,	5,091

Option A/1 Restrictions lifted on the Gourock/ Dunoon operator

At present, the operator on the Gourock/ Dunoon route is restricted to an hourly service, with some additional sailings at peak times. This option assumes that the operator now runs a half-hourly service, using the same vessels, and without extending its overall working day. We have assumed that the factor of more frequent service by itself results in a 3% increase in market share from CalMac's present 35%. However, this option requires the operator 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. This also effects the capital costs of upgrading the vessels. Direct shore costs increase by Ł100,000, due to an increase in berthing dues, but it is assumed that shore labour costs would not increase. Indirect shore costs are also assumed non-variable with the number of ships.

The effect is that the Gourock-Dunoon operator has a NPV of minus Ł17.2 million and, owing to a 3% loss in overall market share, the McInroy's Point/ Hunter's Quay operator's NPV reduces to Ł5.2 million.

No Restrictions On Calmac

	Year
	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15 et seq
Gourock/Dunoon Service Operator	Ł000	Ł000	Ł000-	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000
Revenues
Tariff revenues	1,617	1,640	1,678	1,717	1,734	1,751	1,769	1,787	1,805	1,823	1,841	1,859	1,878	1,897	1,916	1,935
Non-tariff revenues	190	190	190	190	190	190	190	190	190	190	190	190	190	190	190	190
Sub-total, operating revenues:	1,807	1,830	1,868	1,907	1,924	1,941	1,959	1,977	1,995	2,013	2,031	2,049	2,068	2,087	2,106	2,125
Costs
Direct ship costs	2,233	2,233	2,233	2,233	2,233	2,233	2,233	2,233	2,233	2,233	2,233	2,233	2,233	2,233	-2,233	2,233
Indirect ship costs	233	233	233	233	233	233	233	233	233	233	233	233	233	233	233	233
Direct shore costs	600	600	600	600	600	600	600	600	600	600	600	600	600	600	600	600
Indirect shore costs	550	550	550	550	550	550	550	550	550	550	550	550	550	550	550	550
Sub-total, operating costs:	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617	3,617
Operating surplus (deficit)	-1,810	-1,786	-1,749	-1,710	-1,693	-1,675	-1,658	-1,640	622	-1,604	~1,586	-1,567	-1,549	-1,530	-1,511	-1,492
Investment profile
Ships
Overhaul of existing vessels				250			250
Purchase of new vessels
Decommissioning of vessels
Sale proceeds from surplus vessels
Sub-total, ships:	0	0	0	250	0	0	250	0	0	0	0	0	0	0	0	0
Piers
Gourock - Linkspans
Gourock - Terminals
Gourock - Breakwaters
Sub-total, Gourock Pier:	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Dunoon - Linkspans	0
Dunoon - Terminals
Dunoon - Breakwaters
Sub-total, Dunoon Pier:	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Total investment requirements	0	0	0	250	0	0	250	0	0	0	0	0	0	0	0	0
Total cashflow	-1,810	-1,786	-1,749	-1,960	-1,693	-1,675	-1,908	-1,640	-1,622	-1,604	-1,586	-1,567	-1,549	~1,530	-1,511	-1,492
Discount rate	6%
Net Present Value	(Ł17,152)

No Restrictions On Calmac

McInroy's Point/Hunter's Quay Service Operator
Revenues	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000	Ł000
Tariff revenues	2,603	2,676	2,738	2,801	2,829	2,858	2,886	2,915	2,944	2,974	3,003	3,033	3,064	3,094	3,125	3,157
Non-tariff revenues	60	60	60	60	60	60	60	60	60	60	60	60	60	60	60	60
Sub-total, operating revenues:	2,663	2,736	2,798	2,861	2,889	2,918	2,946	2,975	3,004	3,034	3,063	3,093	3,124	3,154	3,185	3,217
Costs
Direct ship costs	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190	1,190
Indirect ship costs	290	290	290	290	290	290	290	290	290	290	290	290	290	290	290	290
Direct shore costs	320	320	320	320	320	320	320	320	320	320	320	320	320	320	320	320
Indirect shore costs	305	305	305	305	305	305	305	305	305	305	305	305	305	305	305	305
Sub-total, operating costs:	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105	2,105
Operating surplus (deficit)	558	631	693	756	784	813	841	870	899	929	958	988	1,019	1,049	1,080	1,112
Investment Profile
Ships
Overhaul of existing vessels
Purchase of new vessels			1500				1,000
Decommissioning of vessels
Sale proceeds from surplus vessels
Sub-total, ships:	0	0	1,500	0	0	0	1,000	0	0	0	0	0	0	0	0	0
Piers
Hunter's Quay - Linkspans
Hunter's Quay - Terminals		1500
Hunter's Quay - Breakwaters
Sub-total, Hunter's Quay Pier:	0	1500	0	0	0	0	0	0	0	0	0	0	0	0	0	0
McInroy's Point - Linkspans
McInroy's Point - Terminals
McInroy's Point - Breakwaters
Sub-total, McInroy's Point:	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Total investment requirements	0	1,500	1,500	0	0	0	1,000	0	0	0	0	0	0	0	0	0
Total cashflow	558	-869	-807	756	784	813	-159	870	899	929	958	988	1,019	1,049	1,080	1,112
Discount rate	6%
Net Present Value	Ł5,152
Net Present Value @ 9%	Ł3,790
Combined market size	4,220	4,317	4,416	4,518	4,563	4,609	4,655	4,702	4,749	4,796	4,844	4,893	4,942	4,991	5,041	5,091

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