SCOTTISH EXECUTIVE

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

8.8 Option D: Gourock/Dunoon service closed

Under this option, the Gourock/Dunoon service is closed altogether, leaving the McInroy's Point/Hunter's Quay route as the only service across the Upper Clyde.

We assume that this option carries the following costs for the Gourock/Dunoon service operator:

• the operator still has to meet some unavoidable ship costs. At present, 1.2 vessels are used on the route, of which one is dedicated exclusively to it and 0.2 represents the route's share of a vessel shared with Wemyss Bay / Rothesay. The financial evaluation assumes that the dedicated vessel is sold for a price *of £0.07 million, as under Option C, but that the service operator still has to absorb the labour and overhead costs of the 0.2 of a vessel whose costs cannot be spread over two routes as at present. We estimate these unavoidable costs at £0.2 million per annum;
• the operator also has to absorb some overheads that are currently allocated to the Gourock/Dunoon service. The administrative overhead currently charged to the service is £0.4 million per annum. We assume that some of this can be saved and the remainder can be gradually reduced, but that the service operator will still have to absorb £0.4 million in Year 0, £0.3 million in Year 1 and £0.1 million throughout the period of appraisal. It should, however, be noted that CalMac considers this overhead could never be recovered, which would make the position considerably worse, but this seems unduly pessimistic;
• the service operator also has to absorb once-off closure and redundancy expenses associated with the headquarters building at Gourock, estimated at £1 million in Year 0. There are also an estimated £0. 14 million of redundancy costs at Dunoon Pier;
• finally, if Gourock remains a "port of refuge", there is an issue over ongoing maintenance costs which would be required. It seems that Gourock is the most suitable "port of refuge", but the costs of maintaining such a "port of refuge" would be met from the routes which benefit. Therefore, no ongoing allowance for "port of refuge" status has been made in this appraisal.

There are assumed to be no net costs associated with the mothballing of Dunoon Pier. The pier owner would lose berthing dues of £0.27 million a year, but this loss would be offset by reductions in pier operation and maintenance costs. We are advised that the cost of demolishing Dunoon Pier, should this become necessary, would be £5 million, which would need to be added onto the NPVs calculated here.

We make the following assumptions about the financial impact of this option on the McInroy's Point/Hunter's Quay service operator:

• as the only service provider, it gains 100% of the market, but it shrinks by 10% compared to the status quo - comprising a loss of approximately 5% each in vehicular traffic (as under Option C) and passenger traffic. This loss of market is based on the same Gourock/Dunoon ferry who would not travel at all if it was no longer available. The present operator believes that this is a conservative assumption and that there would be no impact on the market if they were sole operator. A customer survey would establish the likely behaviour of the market;
• however, the service gains the Royal Mail and freight contracts, worth approximately £70,000 per annum, increasing its non-tariff revenues to £130,000 per annum;
• the operating costs of the service increase proportionately with tariff revenues compared to the status quo;
• the investment profile of the operator is the same as under Option C - i.e. there are no incremental investment costs associated directly with the absorption of additional foot passengers11. This assumption follows from the finding that currently only 14% of the service's foot passengers capacity is currently utilised;
• the service operator also introduces a free bus service between Gourock and Dunoon, linking with the ferry service running on at least the same frequencies as the current Gourock/Dunoon ferry service. This involves purchasing two 48-seater buses at a cost of £75,000 each in Year 0, and a further bus costing £75,000 in Year 1. Operating costs per bus are assumed to be £25,000 per annum, split 50:50 between driver costs and operation and maintenance. The buses are assumed to have an eight-year lifetime. There may be a need for additional buses, depending on the final arrangements, but at this stage, the working assumption is two buses and two drivers.

The implications of the closure of the Gourock/Dunoon service on the two operators are shown in the tables which follow labelled Option D. This option has a NPV of negative £4.6 million for the Gourock/ Dunoon service operator, owing to the ongoing costs which cannot be reallocated, compared to the status quo which was minus £7.8 million.

The McInroy's Point/Hunter's Quay service increases its NPV to £9.3 million at 6%, an increase on the status quo of £1.7 million.

In principle, therefore, the McInroy's Point/Hunter's Quay service provider could be in a position to meet the closure costs of around £1 million of the Gourock/Dunoon service from the additional surplus it makes by securing exclusive rights to the route. It could also meet the costs of a dedicated bus service to meet the needs of foot passengers travelling between Gourock and Dunoon. Whether it could, in addition, offer real tariff reductions to passengers compared to the status quo is debateable, since the increased NPV of £1.7 million would, on the face of it, be inadequate. However, a private sector operator in a monopoly position might be willing and able to take steps to increase revenues.

There is an issue as to whether the service could deal with service peaks. Our analysis suggests that it could. During the period of the brief CalMac strike in July 1997, the service absorbed the additional demands made on it with no queuing delays, although CalMac takes the view that customers chose not to travel during that period. However, the capability of the service to meet rising demand, either through increased deck capacity or through increased service frequency, needs to be confirmed.

Western Ferries has confirmed that pre-determined performance standards were acceptable to it in exchange for a monopoly of the route.

Gourock Closure

Gourock Closure

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