SCOTTISH EXECUTIVE

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

8.6 Option B/1: enhanced Gourock/Dunoon Service

This option, which was put forward by CalMac, makes some radical proposals and is at a very early stage of conceptual development. Accordingly, neither Western Ferries nor Deloitte & Touche are able to comment on its feasibility although Western Ferries does have strong reservations about this proposal's feasibility. However, it will be seen that the option results in significant savings to the public purse, which are worthy of further investigation and the Government have asked CalMac to prepare a more detailed analysis of costs and revenues upon which comments will be invited from those being consulted about these options.

Under this option, the Gourock/Dunoon service operator would invest in two new bow-and-stem roll-on roll-off vessels to enable quicker turnaround times for vehicles on either end of the crossing. These vessels would be second-hand, refurbished vessels, not dissimilar to those presently operated by Western Ferries. The service would also adopt a low cost structure, very different from its present one. Finally, the Dunoon Pier would not be refurbished: instead, a low-cost concrete slipway would be installed at a suitable location yet to be decided, near to the Pier.

This option varies from the status quo in the following detailed respects:

• as in Option A/1, lifting of restrictions over the Gourock-Dunoon operator is assumed from Year 0, resulting in a shift of market share of 3% as previously discussed. Costs increase by a factor of 2/1.2 as two ships are now dedicated to the route;
• £600,000 would be invested in a concrete slipway, either beside Dunoon Pier, using it as a breakwater, or at a location slightly further away, known as the Coal Pier. Both these locations would require a technical feasibility study before the capital and revenue costs likely could be established with certainty. According to CalMac, a slipway, unlike a pier, does not require the payment of berthing dues to Argyll and Bute Council, thus saving £279,000 a year. The Council may, however, request a consideration for the use of the pier as a breakwater (if this is in fact feasible), which is not presently included;
• a rent of around £65,000 per annum would be payable to Argyll & Bute Council in exchange for rental of land to serve as a slipway and car park. Shore costs to the operator would also decrease to one third of present levels, as the new ships would be self mooring. The proposal assumes one pier hand per pier per shift, plus one to cover, giving a total of five pier hands. These figures are based on the Cumbrae slip service. The Council's shore costs would also decrease;
• following the completion of the infrastructural investment, the Gourock/ Dunoon service operator would buy two new ships, or adapt its existing vessels to accommodate bow-and-stem loading, at a cost of £3.8 million per vessel, both purchased in Year 1. These vessels would have the capacity for 40 cars and a speed of 12 knots;
• £70,000 is received as scrap value for each of the two ships which are replaced;

• the number of crew per vessel would decrease from 10 to 4, and a lower level of qualification would be required of crew members, resulting in lower staff costs. There would continue to be a complement of 5 crew for two vessels, as now, to cover leave and sickness;
• there would be a redundancy cost, broadly estimated at £0.5 million;
• the service would run half-hourly from 06:30 a.m. to 19:00 p.m., then hourly until midnight;
• maintenance, insurance and fuel costs are based on "streaker" vessels and CalMac considers the projections to be prudent;
• no catering will be offered under this option, to passengers or staff.,
• reserve fleet costs of £35,000 a year are included;
• Head Office costs of £250,000 would be allocated to this route (from £400,000);
• finally, we assume a "new ship effect" which enables the Gourock/Dunoon operator to win market share from McInroy's Point/Hunter's Quay as a result of the introduction of the new vessels. We have assumed that this effect is worth 3% of the total market. In arriving at this figure, we have considered the following factors:

• a "new ship effect" is most powerful in a monopoly situation, where tourism is on an upward trend generally, where the ships being replaced are significantly unfit for purpose or where demand is constrained by available capacity. None of these factors apply here;
• the Gourock/ Dunoon operator will not extend its working day in line with that of the McInroy's Point/ Hunter's Quay operator;
• the Gourock/ Dunoon operator will offer a half-hourly service, while the McInroy's Point/ Hunter's Quay operator will continue to offer a service of two to three sailings per hour. Therefore, it would not be reasonable to expect too large a swing in favour of the former, because of the remaining difference in service frequencies.

The effect of these changes on the two service operators is shown in the tables which follow. In summary, the reduction in costs and the gain in market share turns the operating deficit of the Gourock/Dunoon service operator to a positive cash flow of £600-900,000 over the 15 year period as tariff revenues grow. However, to achieve this result5 an investment of £8 million is required on Dunoon Pier and on new vessels in the first three years of service delivery. An investment of £0.5 million in redundancy costs is also required. The Net Present Value of this option over the period to the Gourock/ Dunoon service operator, applying a 6% discount rate, is consequently reduced to £1.8 million (negative). This represents a saving of £6 million NPV on the status quo. It should, however, be stressed that this result may change if any of the assumptions fail to occur as planned. In particular:

• a technical study would be required to ascertain whether, and at what cost, a pier to one side of the existing Dunoon Pier could be constructed, the ongoing costs of such a pier, such as dredging, and whether the proposed vessels could technically perform to the projected journey times;
• there is also the question of the economic impact on the town of Dunoon if the existing pier is not used by the ferry. If not maintained, the existing pier could become an eyesore and, if the Coal Pier site is used, there may be a risk that tourists do not go into Dunoon at all;

• Western Ferries also believes that the costs of this option have been understated, for example, in areas such as fuel, insurance and back-up;

• there may be union dissatisfaction with the proposed reduction in crew numbers, although this is in line with existing terms and conditions for the proposed type of craft.
• It should also be noted that this option is suitable for a stand-alone grant-free operation, possibly as a subsidiary of CalMac. This has been put to CalMac, which has not rejected the idea.

The NPV of service delivery also falls for the McInroy's Point/Hunter's Quay service operator. It loses market share and hence revenues but, on the model assumptions, is unable to reduce its operating and investment costs compared to the status quo. Consequently, the NPV of its operation falls to £5.8 million under this option, or about £2 million less than under the status quo.

Enhanced G-D Service £3.8m Ship

Enhanced G-D Service £3.8m Ship

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