SCOTTISH EXECUTIVE

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

8.9 Option E: McInroy's Point/Dunoon

This is a theoretical model, shown for illustration, which assumes the following:

• there is an external public benefit from ensuring that a regular ferry service continues to the town of Dunoon. This external benefit derives from the expenditure of visitors to the town, which helps support businesses and jobs within it and could be lost if there was no ferry service. The existence of this external benefit is incorporated within a service agreement which requires the ferry operator to run services to Dunoon, which it would not necessarily do if the service was run on pure commercial lines12. Having said that, it may be that the economic benefit which presently accrues to Dunoon would simply accrue to sites elsewhere in the area, making the net economic impact nil. A detailed economic study would be required to answer this question fully;
• the service provider must meet the investment costs associated with upgrading Dunoon Pier to meet the needs of a bow-and-stern roll on-roll off ferry. The service provider must also meet the investment costs of purchasing vessels to serve the route. We assume that these investment costs are the same as those accrued by the Gourock/Dunoon service provider under Option B;
• the existing service providers are prepared to vest their route rights in a new client organisation;
• the service provider must also pay a premium to the existing service providers to compensate them for the loss of their route rights. The premium paid to the Gourock/Dunoon service provider is equal to the NPV of its unavoidable costs of closure, estimated at £4.6 million under Option D. The premium paid to the McInroy's Point/Hunter's Quay service provider is equal to the NPV of their current route rights, calculated as £7.6 million (at 6%) under Option A;
• a further assumption is that the operating cost structure of the service provider is assumed to lie somewhere between that of the two existing operators, as follows:

• direct ship costs : 55% of tariff revenues;
• indirect ship costs: 10% of tariff revenues;
• direct shore costs: 15% of tariff revenues; and
• indirect shore costs: 10% of tariff revenues.

In return for these outlays, the service provider has the entire market for Upper Clyde ferry services, which is assumed to be 95% of the value of the combined market of the two operators under the status quo option. The service provider also secures £250,000 per annum in non-tariff revenues from catering and the Royal Mail, Strathclyde Passenger Transport and freight contracts. A service provider might also be able to squeeze additional value from other revenue streams - for example, releasing value from the properties it acquires at Gourock, Dunoon and Hunter's Quay, developing on-shore services for travellers, etc. To the extent it could do so, the NPV would improve.

Once these investment outlays had been made, the service provider could be expected to generate an operating surplus of approximately £0.7 million per annum over the next 15 years.

The result of the financial evaluation indicates that the net present cost of a McInroy's Point/Dunoon option, before premia are taken into account, would be an NPV of minus £627,000, or a cost of £65,000 per annum. If premia are taken into account, the NPV falls to minus £12.8 million, or £1,320 per annum.

However, the calculations of premia are probably too pessimistic, for the following reasons:

• no residual payment is assumed for the value of the service or the assets after the 15 year term has been completed;
• it assumes that the service provider would pay £7.6 million for new vessels for the route, as well as paying £7 million to buy out the rights and assets of the McInroy's Point/Hunter's Quay service provider. In practice, part of the premium paid to the existing service provider would represent the purchase cost of its vessels, and the new company could operate these vessels on the route for a number of years once Dunoon Pier had been upgraded to accommodate bow-and-stern roll-on roll-off vessels, thereby mitigating the need to invest £6 million in new ships;
• under the most generous assumptions, the concessionaire might be able to cover the cost of the premium payable to existing service operators from the value of the assets it acquires, including the vessels used in service delivery. If this is the case, then the net" present cost of the service over 15 years would be minus £6.3 million.

McInroy's Pt-Dunoon

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