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SCOTTISH FERRIES REVIEWDisclaimer: The views expressed in this report do not represent Scottish Government policy.

08/02/2010

FINAL REPORT (DRAFT) Part A – Methods of Ferry Service Delivery and Operation, Competition and Procurement and Environmental Issues

Project Partner:

Contractor:

Author(s):Reviewed by:

A. Baird; G. Wilmsmeier; Y. BoglevK. Cullinane; J. Baster

Transport Research Institute

Edinburgh Napier University, Merchiston Campus, Edinburgh EH10 5DT

E-mail: [email protected], Telephone: +44 (0) 131 455 2951Internet: http://www.tri-napier.org

http://www.tri-napier.org/

Scottish Ferries ReviewP A R T A : M E T H O D S O F F E R R Y S E R V I C E D E L I V E R Y A N D O P E R A T I O N , C O M P E T I T I O N A N D P R O C U R E M E N T , A N D E N V I R O N M E N T A L I S S U E S

Contents

1 EXECUTIVE SUMMARY...........................................................61.1 Introduction.......................................................................................61.2 Methods of Delivery and Operation...................................................61.3 Financial Incentives...........................................................................81.4 European Case Studies.....................................................................91.5 Competition and Procurement........................................................101.6 Service Specifications.....................................................................111.7 Bundling of Routes..........................................................................121.8 Environmental Impacts...................................................................131.9 Tendering Route Map......................................................................14

2 INTRODUCTION...................................................................152.1 Scottish Ferries Review (SFR)..........................................................152.2 Aim of Work Stream........................................................................152.3 Methodology...................................................................................16

3 FERRY SERVICE DELIVERY OPTIONS.....................................193.1 Regulatory background...................................................................193.2 Cabotage Regulation.......................................................................193.3 Public Service Obligations...............................................................203.4 Public Service Contracts..................................................................223.5 State Aid.........................................................................................233.6 Need for subsidy.............................................................................243.7 Delivery options considered............................................................253.8 Publicly-owned operator..................................................................263.9 Privately-owned operator................................................................273.10 Community-run operator...............................................................303.11 Role of CMAL.................................................................................313.12 Ferry Regulator.............................................................................343.13 Organisational implications and split of responsibilities................343.14 Contracting organisation options..................................................36

4 FINANCIAL INCENTIVES FOR FERRY SERVICES.......................394.1 Introduction.....................................................................................39

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Scottish Ferries Review

4.2 Public incentives for ferry services..................................................394.3 Operating subsidy...........................................................................404.4 Effectiveness of operating subsidy..................................................414.5 Operate-only, and provide-and-operate tenders.............................424.6 Vessel specification.........................................................................464.7 Hybrid Systems...............................................................................494.8 Multiple Operators...........................................................................504.9 Profit sharing...................................................................................504.10 Using tenders as incentives..........................................................514.11 Perceived disincentives to bidding for PSCs..................................52

5 EUROPEAN FERRY SERVICE CASE STUDIES............................555.1 Introduction.....................................................................................555.2 Methodology...................................................................................555.3 Denmark.........................................................................................565.4 Greece ............................................................................................695.5 Sweden...........................................................................................795.6 Norway ...........................................................................................865.7 Transferability to the Scottish context............................................91

6 COMPETITION AND PROCUREMENT.......................................976.1 Introduction.....................................................................................976.2 Pre-Procurement Considerations.....................................................976.3 Service specification and performance regime...............................986.4 Allocation of risk..............................................................................996.5 Duration of contracts....................................................................1006.6 Vessels..........................................................................................1016.7 Exclusivity.....................................................................................1026.8 Relief cover...................................................................................1026.9 Operator of last resort...................................................................1036.10 Small Islands...............................................................................1046.11 Market consultation and scoping................................................1046.12 TUPE and staffing........................................................................1056.13 Bundling of Routes......................................................................1076.14 Competition.................................................................................1086.15 Local involvement in procurement..............................................1106.16 Large bundles..............................................................................1116.17 Small bundles..............................................................................1166.18 Single route tenders....................................................................1176.19 Building environmental factors into tenders...............................1186.20 Scoring bids on environmental impacts......................................1196.21 Environmental incentive schemes..............................................1216.22 Ferry tendering route map..........................................................123

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7 CONCLUSIONS...................................................................127

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LIST OF ANNEXES

ANNEX I – Meetings & Seminars/Workshops attendedANNEXII – Workshop Questionnaire

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Annex III – Summary of European Ferry Procurement by Country

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LIST OF TABLES

Table 3-1: Contracting organisation options 38Table 4-1: Public subsidy for Scottish ferry services, 2007-8 40Table 4-2: Estimated passenger and vehicle deck utilisation-selected CHFS routes:

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Table 4-3: Car and passenger ratio for selected ‘major’ ships 49Table 4-4: Summary of financial incentives for ferry operators and users of ferry services

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Table 5-1: Timescale of procurement procedure for Bornholm ferry services

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Table 5-2: Route characteristics - Bornholm 58Table 5-3: Ferry service delivery in Denmark 60Table 5-4: Service requirements Ronne – Ystad route 62Table 5-5: Service requirements Ronne – Koge route 62Table 5-6: Timescale procurement procedure for Bornholm 63Table 5-7: Comparison previous and current contract – Bornholm route

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Table 5-8: Evolution of Selection criteria - Bornholm 65Table 5-9: Evolution of Danish ferry services tendering 67

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Table 5-10: Current operators and tendering authorities in Denmark

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Table 5-11: Market shares of passengers in Greece, by ferry operator, 2005

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Table 5-12: Annual ferry passenger traffic demand in Greece, 2002 - 2006

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Table 5-13: Greek Ferry Subsidies (2005 – 2007) 74

Table 5-14: Aid for thin lines in Greece (2002-2008) 75Table 5-15: Møre - Romsdal tender evaluation criteria 89Table 5-16: Summary on Procurement of Ferry services in Europe

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Table 6-1: Procurement procedures and requirements 113

Table 6-2: Procurement of ferry service: Main route/bundling options

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LIST OF FIGURES

Figure 1-1: Ferry tendering route map 14Figure 5-1: Danish ferry network 59Figure 5-2: Structure for ferry operation Bornholm 60Figure 5-3: Greek ferry system 70Figure 5-4: Greek ferry routes, 2007 72Figure 5-5: Total Greek ferry fleet and average vessel age, 2000-2008

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Figure 5-6: Greek subsidy system 76Figure 5-7: Yellow Ferries Network 80Figure 5-8: Routes to Gotland 81Figure 5-9: Organisation Rikstrafiken 85Figure 6-1: Ferry tendering route map 12

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1 EXECUTIVE SUMMARY1.1 Introduction1.1.1 The research and findings presented here forms part of the Scottish

Government’s (SG) Scottish Ferries Review. The work has been undertaken by a partnership led by Transport Research Institute (TRI) of Edinburgh Napier University, together with Pantrak Transportation, and supported by Biggart Baillie LLP and Independent Consultant Jeremy Baster.

1.1.2 The aim of the work was to investigate, with regard to ferry services in Scotland, methods of delivery and operation, competition and procurement, and related environmental issues. A separate report (Part B) covers freight issues.

1.2Methods of Delivery and Operation1.1.3 In terms of the split of responsibilities between the Scottish Government (SG),

Local Authorities (LAs) and Regional Transport Partnerships (RTPs), our findings suggest there is potential to decentralise some decision-making to the local level, but with SG retaining overall strategic direction of the ferry network as a whole. The rationale here is that local actors have better knowledge of the specific service requirements of the communities to be served, and this would also fit with any shift towards smaller bundles/route tenders. The organisational burden (per tender) if shared would be expected to be less than with a very large bundle, the latter being less attractive to private sector operators in particular. However, in aggregate terms, the organisational and administrative burden may increase, though within a decentralised model these activities would be spread across more agencies.

1.1.4 For routes connecting islands with mainland Scotland the role of tender manager best remains with SG but with LAs and RTPs becoming more involved in the tender process, in specification setting that meets the needs of users, and in terms of bid evaluation under any de-bundling scenario where local knowledge and involvement becomes more critical. Tenders for small routes and inter-isle services could however be managed by LAs, as is the case today, and/or in some instances by RTPs.

1.1.5 The role of CMAL as vessel supplier is predicated on its relative competitiveness to supply vessels to selected operators as per their requirements in meeting user needs and tender requirements. Essentially the decision on whether or not an operator enters into a lease or charter arrangement with CMAL is a matter for operators who succeed in winning contracts.

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1.1.6 The question of whether an operator is publicly or privately owned is less important than ensuring that the service specification for each route meets user requirements. Key issues here are – who ultimately controls the service specification and that the specification as defined meets the needs of users.

1.1.7 Where ferry routes/services are in receipt of subsidy they must be subject to Public Service Contracts (PSCs), which means they need to be put out to tender. SG considers that just because there is a PSC doesn't mean you need to put a service out to tender. In order for aid to be compatible provisions have to be put in place to ensure there is no overcompensation and this is part of the reason for following a tendering process.

1.1.8 Any concerns stakeholders and users have about private operators providing subsidised services would need to be addressed via well-defined service specifications, which meet with user requirements on a route-by-route basis, and are put in place tied to PSCs. However, there would also need to be assurances given to stakeholders and communities that there is a contingency plan in place in the event that an operator, irrespective of ownership, should encounter financial or other difficulties.

1.1.9 The public sector appears to be less able to finance new ships and this is reflected in the already high (and rising) average age of the present fleet. Public sector budgets are coming under increasing pressure and this pressure is expected to intensify in the coming years as a consequence of ongoing economic difficulties. Although CMAL is intended to be a supplier of vessels (there may be others), there may still be a need to bring in private sector investment to ensure that new (or newer) ferries serve routes in Scotland, replacing in due course the present ageing fleet.

1.1.10Thus private investment in vessels would be necessary if the public sector (via CMAL or LAs) were unable to finance new or replacement vessels. In the case of subsidised routes this means that private investment in vessels could be linked to tenders; that is, replacement tonnage is made a tender requirement, as it is in several other countries.

1.1.11Moreover, the EC advocates tenders which permit commercial operators to ‘bring their own ships’. The Commission does allow for existing ships to be used in certain circumstances; the Scottish Government successfully applied these exceptions last time CHFS was tendered. In most cases, requiring the taking over of existing ships would not be permitted, but where special conditions exist – as it has been argued they do in the west of Scotland (and the Commission accepts this) – requiring the taking over of ships is permitted.

1.1.12Forecasts of future needs suggest that Scottish ferry services will require investment of as much as £604 million in new vessels over the next 15 years. However, this depends on the level of capital investments involved, which may

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differ by operator, depending on their ship proposals and their specific financing arrangements. A significant amount of money will also be needed for investments in piers and harbours (CMAL estimate some £435m) over the same period. Altogether, therefore, approximately £1.0 billion needs to be found for large-scale capital investments in the Scottish ferry system over the next 15 years. More work would be necessary to explore options to maximise value-for-money and reduce costs.

1.1.13This is in addition to the cost of ongoing annual ferry service operating subsidies which, at current prices and subsidy levels (i.e. almost £120m/year total subsidy is paid across all Scottish ferry services inclusive of RET), may be expected to amount to a further £1.8 billion (at today’s prices) for the Scottish ferry sector over the next 15 years. Any extension or expansion of RET or other fare reduction measures to include other routes could increase this amount even more.

1.1.14Evidence of current practice in other European states in respect of tendered ferry services confirms that private operators offer the potential (for contracting authorities) to secure private investment for ships serving PSO routes via tenders. Corporate access to capital seems less problematic where the business activity concerned is based on a long-term Government contract (i.e. a PSC) to provide an essential infrastructure service, backed up by subsidy as required.

1.1.15The CMAL ship and port supplier model fits in with guidance on the interpretation of the Cabotage Regulation issued by the Commission, in circumstances where the vessels required to serve particular routes cannot be found on the open (i.e. charter) market. However, this does not necessarily preclude operators from procuring appropriate vessels themselves and which could be evaluated in any tender process. Tender conditions and other issues (e.g. vessel availability) may limit the potential for operators to bring their own vessels.

1.1.16We do not consider privatisation of DML as an attractive option given the split of assets and operations. Any such sale would be a policy decision for Ministers. However, privatisation of CMAL, in whole or in part, is an option. Proceeds from any sale/part sale of CMAL, if ring-fenced, could be used for further investment in ships and ports. This would serve to increase the net asset value of the company, making such a sale more attractive to buyers.

1.1.17CMAL’s future revenue streams accruing from ports would seem to be relatively stable given that ports (assuming they are prescribed) might be expected to remain in constant demand irrespective of who the operator is. Future revenue streams from vessels may be more difficult to gauge given that operators may have the option to procure ships from other sources. According to the SG, the option for an operator to bring their own vessels is dependent on the terms of

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the particular tender specification and may not be available if that does not allow own vessel solutions.

1.3Financial Incentives1.1.18There are a range of subsidy schemes used to assist designated ferry services

in Scotland. This includes deficit funding for contracted ferry services, with funding coming from both the Scottish Government for certain services and with local authorities also financing their own and/or concessioned operations.

1.1.19There is and has been something of an inconsistent approach to incentives for Scottish ferry services, for example: There are differences in subsidy arrangements across different areas (e.g.

between CHFS and NI, and inter-isles services) There are differences in subsidy arrangements within the same area (e.g.

some operators receive subsidy, others do not, while for some the basis of calculation differs – e.g. Lo-Lo and Ro-Ro freight); and

There has been a tendency to introduce a variety of new subsidy schemes in different areas/sectors over the last several years.

1.1.20 In contrast, other EU states tend to keep the approach relatively simple and consistent, with primarily a focus on agreed deficit subsidy levels for operators selected via tenders to serve a given route under a concession agreement (PSC). However, fuel costs constitute a major part of operating costs and given volatility in fuel costs some mechanism is needed to enable operators to manage the effects of this (i.e. either an additional subsidy payment or a fuel surcharge charged to users are possible options).

1.1.21The Scottish Government maintains that the existing CHFS and Northern Isles contracts do provide an incentive to earn profits (and to avoid the penalty of operator’s excess provisions kicking in). It may be possible to shift more of the risk onto the operator, and provide more of an incentive, by changing the clawback and additional grant arrangements (since these arrangements are complementary, any change would need to apply equally to both). For example, it may be possible to limit such arrangements to a proportion (say 50%) of excess profits or losses, thereby giving the operator more of an incentive to seek ways of increasing profit, but at the same time requiring the operator to absorb a larger proportion of any unanticipated losses. Shifting more of the risk to the operator could increase subsidy costs. Private operators, however, do not view profit clawback as attractive and this may act as a disincentive for operators to submit bids. In the case of a publicly-owned operator, all losses ultimately fall on the state. An overly prescriptive contract, combined with a severe “service quality” standards regime, might not necessarily be appropriate given issues of weather etc.

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1.1.22The Commission in its recent Decision has clarified that existing State aid granted to CalMac and NorthLink is compatible with Article 86(2) of the Treaty1.

1.4European Case Studies1.1.23Our review of experiences in procuring and delivering ferry services in EU

countries shows that: a) ferry procurement underlies continued evolutionary processes of offering and monitoring and reviewing services, and; b) that a number of key patterns are repeated across the range of countries studied.

1.1.24Results from our case-study analysis reveals that the ‘typical’ ferry tender arrangement has the following general characteristics: Privately-owned operators selected via competitive tender is generally the

norm The operators provide and finance ships The most common form of subsidy is an agreed annual operating/deficit

amount, in some cases with profit (excess) sharing agreements Tenders are based on either a single route or on a small route bundle basis

(e.g. <5/6 routes) in the same geographic area (e.g. a single island or based on local routes linked to a main hub/town)

Services are contracted either by the national administration’s specialist transport agency, or for smaller/local services by LAs/RTAs

Contracted periods typically extend to 5-6 years, with some exceptions involving longer periods (e.g. small islands, for which 12 year contracts may be allowed)

1.1.25The case studies indicate that the procurement of ferry services requires a continued government involvement and clearly established targets. Sweden, Norway and Denmark are continuously revising their procurement strategies. EU regulation in general is not seen as a barrier for development, but rather one more argument that supports the idea to implement efficient ferry services via tenders.

1.1.26All countries regulate ferry services via tenders and subsequent contract arrangements, including monitoring of performance. Procurement of ferry services is approached under the same principles as procurement of transport services in other modes, and often the same transport authority is tendering rail, ferry and sometimes bus services as well, thereby gaining from expertise across modes and helping to facilitate integration between modes.

1 http://ec.europa.eu/energy/coal/state_aid/doc/decisions/2008/2008_0016_uk_c.pdf.

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http://ec.europa.eu/energy/coal/state_aid/doc/decisions/2008/2008_0016_uk_c.pdf


1.1.27None of the case-study countries’ tenders on the basis of large bundles, as with CHFS. However, in the case of Denmark, despite the tendering of small bundles and single routes, the ferry market is becoming highly concentrated (the case of Clipper A/S and Bornholmstrafikken A/S). The large CHFS bundle is accepted as justifiable by the EC in its recently published investigation report.

1.1.28Outcomes for tendering of small scale ferry services differ, especially in Denmark where there are a number of small ferry operations, many run by local authorities. Tendering of these services has been less successful and in many instances bids were not received in the initial bidding rounds, which means the services are still maintained by local authorities. However this has not been the case with small-scale ferry services in Norway, where more or less all tenders received bids, accompanied by investments in new vessels.

1.1.29Transport authorities generally expect private operators to ‘bring their own ships’ when serving tendered routes. However, this does not necessarily mean the use of new ships, but rather the use of tonnage that complies with given requirements. Where new vessels have been introduced during the last tender, these same ships tend to be continuing in the next; that is, the same operators appear to be winning the more recent ensuing round of tenders. This appears to be a common theme across different countries (e.g. in Sweden, Norway and Denmark). It is possible that an operator bidding on the basis of new ferries may result in higher capital costs and need for higher subsidies, however, the tender competition should allow for comparisons to be made between operators who propose different vessel solutions, each of which may have different cost implications.

1.1.30 In domestic ferry markets, especially in the case of lifeline type services, the characteristics of the deployed ships are the way to control operating costs. Ferry operators are left with the choice where and how to source their ships, and how to specify the ships. If the choice of ships on a specific route is left to the operator (whether private or public), this contributes positively to a continued renewal of the fleet, which accords with customer expectations and the requirements set in the procurement procedures.

1.1.31Capital subsidies for ships are not common. Instead, some countries prefer to subsidise port development and maintenance of navigation channels (e.g. the Netherlands and Germany where no subsidies to ferry operators are paid). One principal argument for this (port subsidy) approach is it grants benefits to the wider community and not to any single operator.

1.1.32Contracts for domestic services oscillate around the preferred 5-6 years given in the EU perspective, though the Netherlands and Norway have examples of service contracts of 8 years or more. We have also found a number of examples of ‘Small Island’ 12 year contracts, which are permitted under the Cabotage

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Regulation (e.g. in Denmark and The Netherlands), and this option may be relevant to a number of routes in Scotland.

1.1.33A tendency towards the establishment of integrated transport providers winning some tenders can be observed (i.e. ferry operations run by the same firms/associate companies that are also running connecting bus and even rail services, such as Veolia and Tide).

1.5Competition and Procurement1.1.34When procuring ferry services Member States must comply with EU

requirements (Council Regulation (EEC) No 3577/92). Where a Member State seeks to secure the provision of adequate ferry services for an island or peninsular community it is permitted to interfere in the market by imposing Public Service Obligations (PSO) or entering into Public Service Contracts (PSC).

1.1.35When imposing a PSO or entering into a PSC, Member States must ensure there is no discrimination against community ship owners. Where a PSC is entered into it must be subject to a transparent and non-discriminatory tender procedure.

1.1.36The Public Service Obligation (PSO): Applies to specific designated routes/services Concerns all companies present on these routes/services

1.1.37The Public Service Contract (PSC) is a different matter. The PSC: Is shipowner-specific Is concluded between the State/Region and a specific operator on a given

route or routes1.1.38Any subsidy for ferry services must be available to all community ship owners.

All community ship owners are entitled to apply for compensation in exchange for accepting public service obligations and (given that subsidies are paid via a PSC) all community ship owners should be entitled to tender for the provision of services for which subsidies will be paid.

1.1.39The PSC option offers an opportunity for awarding bodies to secure the level of overall ferry service provision they require, within the constraint of available operating subsidy.

1.6Service Specifications1.1.40 It is vital that ferry service specifications, as far as possible, meet the needs of

communities served. The SFR Household Survey found a reasonably high level of user satisfaction with ferry services. However, the SFR consultation exercise

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revealed that not all users were satisfied, and there was scope for improvement. NorthLink’s own customer focus group research has revealed a high level of satisfaction but a marked difference between islanders and infrequent/tourist visitors with the former being much more demanding.

1.1.41The key factors that need to be considered with respect to service specifications from the user perspective, and built into future tender requirements, are: Ports/areas served Service frequency Sailing and arrival times Onboard service (catering/restaurants/shops) Service reliability Customer service Service capacity (this is not necessarily the same thing as ship capacity) Reduced sea crossing time, where appropriate (e.g. possibly via superior port

call solutions) Affordable price Hinterland connections/accessibility (road quality or connection to other

modes of (public) transport1.1.42Tenders should, where appropriate, provide sufficient flexibility to allow for the

possibility that operators may have different views on how best to meet, or exceed, the required minimum service specification on any given route, and the different impacts their preferred approach may have on required subsidy levels.

1.7Bundling of Routes1.1.43We have investigated the pros and cons, through consultation with stakeholders

as well as analysis of experience elsewhere, of the main approaches used to procure ferry services. These are: Large bundles (i.e. many routes combined in one tender) Small bundles (i.e. 2-5/6 routes combined) Route tenders (single route)

1.1.44According to the Scottish Government, the advantages of a single large bundle include administrative cost savings, user friendly marketing, multi-route ticketing, vessel refit planning, emergency relief vessel cover, minimisation of contract failure risks, and minimizing overall subsidy costs.

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1.1.45Evidence from other ferry markets suggests decisions on smaller bundles tend to be based on geography, which implies bundled routes may be in relatively close proximity to one another, routes serving particular islands/nearby areas, and/or routes based on serving the same mainland hub port perhaps also using common vessel types.

1.1.46Access to relief cover vessels is not only an option available to large bundle tenders such as CHFS. Our findings suggest that tendering small bundles and even single route tenders can be designed to include within them sufficient vessel relief cover options/safeguards to ensure service continuity.

1.1.47Smaller bundles and even single route tenders are considered potentially more attractive for private operators/investors to bid for. This could offer an opportunity to facilitate private sector investment in ships and services. Large bundles (e.g. CHFS) are not considered attractive for private operators to bid for. Continuation with a large bundle would be unlikely to result in private investment in Scottish ferry services.

1.1.48Administratively there may be additional costs involved in de-bundling routes (i.e. more tenders). However, part of any additional burden relating to tender management and coordination (of small bundles and single routes) could be devolved to or shared with LAs and RTPs (SPT, for instance, already delivers some transport services including ferry services and other RTP’s may seek additional powers to help deliver their strategies if necessary). Nevertheless, LA’s would in general prefer the SG to continue to take the lead with tenders, with some exceptions (e.g. Shetland Islands Council and SPT, in respect of local services).

1.1.49The Scottish Government, however, does not accept that lower subsidy requirements would necessarily follow de-bundling. SG makes reference to “the known inefficiencies involved”, giving the following examples: multiple operational, marketing and administrative costs, difficulties in securing relief vessels, risks that customer confusion about delivery responsibilities between different operators could reduce tourism traffic. SG considers that all these factors might increase subsidy requirements.

1.1.50Evidence from other ferry markets demonstrates that private operators are making investments in new or replacement ships as a condition of contracts to serve subsidised routes (e.g. Norway, Sweden, Denmark, The Netherlands, and Spain). Evidence also indicates that some of those operators who invested in new ships on the basis of a 6-year contract have subsequently also won the next round of tenders (e.g. in Denmark, Norway and Sweden). There is a risk that the older the vessel, then the lower the capital costs will be, leading to lower subsidy and the likelihood of winning a tender. This could prevent tonnage renewal. The way other administrations minimize the possibility of this

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happening is to ensure service quality aspects are given sufficient weighting in the evaluation criteria.

1.1.51The case studies (and operator workshop) provides examples of how some operators have been able to procure vessels more rapidly than others. Vessels offered to fulfill a contract could be either existing second hand tonnage, or newbuilds. This means the timing could vary depending on what an operator offers. This ranges from a newbuild that could take 2-3 years (after a contract is awarded), before a service can begin, to an existing vessel that potentially might be able to start earlier.

1.1.52The Scottish Government intends to clarify in future invitations to tender where responsibility lies for any revisions to terms and conditions, and their associated costs, after the TUPE transfer date. Whilst TUPE is a matter of law, operators have advised that in their view, TUPE issues act as a disincentive to bid participation. If there is political will for unbundling, a phased approach would be a realistic option. The process might therefore commence with tenders for one or two bundles of routes at a time.

1.1.53There is a preconception that a state-owned operator would not be allowed to fail whereas a private operator who fails would result in termination of a service. However a number of positive measures exist to help prevent such an outcome, for example bonds, the current ‘stop loss’ arrangement in the case of Northern Isles services, parent Co guarantees, and step-in / operators of last resort.

1.8Environmental Impacts1.1.54Through the consultation process and additional research and analysis,

numerous options have been identified for the ferry tender process to achieve minimum environmental impacts from ferry operations and to meet the SG’s emission reduction objectives. This includes: Scoring bids: a system of assigning scores to tender bids would aid the

evaluation and ranking of those bids. The details of how such a system would work would come out of a thorough needs analysis.

Minimum, desirable, and innovative environmental performance: establishing a baseline of a minimum environmental performance/standard, based on current and anticipated legal requirements. Through tendering, desirable environmental performance criteria can be defined, with their achievement resulting in a better performing bid. Innovative performance refers to the ability of the tendering process to elicit new and creative environmental undertakings by operators, i.e. processes, policies or technologies which have not been identified in the tender.

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Incentive Schemes: policies and measures which provide an economic (or other) incentive to ferry operators for undertaking environmentally friendly, or less damaging, actions.

Environmental auditing and environmental management systems (EMS): ensuring that winning bids provide for operators to implement their own auditing and EMS.

1.9Tendering Route Map1.1.55A recommended outcome of this research work is a future Ferry Tendering

Route Map (Figure 1.1). This outlines the process involved between taking decisions on bundling, through tendering, to dealing with key challenges, and thereafter monitoring of operator performance. The process will require careful evaluation of each factor prior to implementation.

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FIGURE 1-1: FERRY TENDERING ROUTE MAP

2 INTRODUCTION2.1Scottish Ferries Review (SFR)1.1.56The Scottish Government (SG) is undertaking a comprehensive review of ferry

services in Scotland. The purpose of the review is to:

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Develop a shared vision and outcomes for lifeline ferry services in Scotland, in the context of the Government’s Purpose, Economic Strategy and National Transport Strategy;

Analyse the current lifeline ferry services and network, identifying how well it meets the proposed outcomes and how it links to other modal networks;

Inform the Scottish Government’s long term strategy for lifeline ferry services in Scotland to feed into the next spending review, and influence the next round of procurement of ferry services and supporting infrastructure; and,

Identify policies to be taken forward to deliver the long term strategy, including the planned investment framework.

1.1.57A draft strategy will be prepared by the end of 2009 and then SG will carry out a public consultation exercise on the resulting Draft Ferries Strategy.

1.1.58 Initial work in the SFR comprises several work streams covering a wide range of issues. These include the following: Methods of delivery and operation, competition and procurement, and freight Fares, funding, cost and affordability Economic impacts of ferry services Vessels Piers and harbours Accessibility

1.1.59This Report (A) relates to – Methods of delivery and operation, competition and procurement. A separate report (B) has been prepared for freight.

2.2Aim of Work Stream1.1.60The Transport Research Institute (TRI), along with its partner Pantrak, supported

by Biggart Baillie and independent consultant Jeremy Baster, has been commissioned by the Scottish Government to undertake this work related to the SFR.

1.1.61The work stream contains four main elements as follows: Methods of Delivery and Operation (To consider different options for delivery

and operation of subsidised ferry services in Scotland, including the split of responsibilities between LAs/RTPs/SG/CMAL and the operator(s). To appraise a range of options. To consider other aspects including financial incentives, regulation and the potential role of a ferry regulator, and alternative delivery options that include the status quo.)

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Competition and Procurement (The bundling of routes and alternative options to bundling are to be considered. Legislation and regulation including PSOs and PSCs (The Cabotage Regulation) are to be taken into account, as well as analysis of how flexibility can be built into future contracts. Clarity is also required on the powers and structures the Scottish Government currently has for delivery of ferry services.)

Freight (To develop options for the future carriage of freight to and from Scottish islands and peninsular communities, taking into account current levels of freight and future freight needs. Environmental issues related to freight are encompassed in this report within the overall context of delivery and operation of ferry services).

Environmental impacts (To provide an outline of environmental issues that impact on the delivery of ferry services and contribute to the Government’s climate change policy to reduce greenhouse gas emissions – including a 50% reduction by 2030 and an 80% reduction by 2050, and to ensure the minimum possible impact on the local and global environment.)

1.1.62As noted we have split the work into two separate reports, A and B. This report is Part A, and covers methods of delivery and operation, competition and procurement, and environmental issues. Part B covers freight.

2.3Methodology1.1.63Primary data has been obtained via a range of interviews, public meetings,

seminars and workshops with stakeholders and users. Annex I contains a list of events and meetings attended (excluding freight).

1.1.64For freight data collection, an extensive separate list of stakeholder meetings and workshops were organised. The list of events and attendees is shown in the separate Part B Freight Report.

1.1.65Our researchers attended and presented material at 11 of the consultation seminars organised by the Scottish Government specifically for the SFR. These events were held on a number of the islands served, as well as mainland locations, as follows: 17 February Oban Seminar/Workshop/Drop-in Session 23 February Greenock Seminar/Workshop 26 February Lerwick Seminar/Drop-in Session 9 March Barra, Seminar/Workshop/Drop-in Session 10 March Benbecula Seminar/Workshop/Drop-in Session 11 March Stornoway Seminar/Workshop/Drop-in Session

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12 March Tarbert Seminar/Drop-in Session 18 March Kirkwall Seminar/Workshop/Drop-in Session 25 March Inveraray Seminar/Workshop/Drop-in Session 31 March Islay Seminar/Drop-in Session 1 April Tiree Seminar/Drop-in Session 19 May Thurso Seminar 11 June Mallaig Seminar

1.1.66Most (but not all) of the seminars involved three specific events/activities, each in their own way presenting useful opportunities for the research Team to collect data, viz: A seminar and Q&A session with presentations made covering most of the

SFR work packages A workshop covering all relevant topics was held at most of the meetings A public meeting was held at several of the events

1.1.67Separate Work Stream managers meetings have been held regularly. The aim of these meetings has been to ensure that work was kept to schedule and to highlight specific issues that needed attended to, as well as linkages between the various works being done in the Review.

1.1.68Separate meetings have been held with the Council Sub Group and the Operators Sub Group. The research team, together with the Scottish Government, organised workshops for both these sub-groups during April 2009. The aim of the workshops was to further explore specific aspects of ferry service delivery and procurement. When referring to the views of private operators (in the report) this relates both to the experience of private operators as derived from the European case studies and also the private operators who attended the SFR operators’ workshop.

1.1.69Data has been gathered, sifted and analysed in a structured way following closely the areas and issues we were tasked to explore and investigate. This in turn has helped to structure the report in its present form. Presentations of ongoing findings to key stakeholders and their feedback have helped to further develop and refine findings and conclusions.

1.1.70An extensive range of studies and other relevant information has been made available to us by SG and by other bodies. TRI’s extensive database of maritime research has also been useful, as have various industry publications and data sources. All of these sources are cited where appropriate throughout the report.

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1.1.71Data has been provided by CalMac, NorthLink and other public sector operators on ferry service costs, revenues, traffic flows and vessel utilisation. This information has assisted various parts of the work.

1.1.72Further investigation in the form of case studies has been undertaken to explore delivery and procurement issues relating to ferry service provision in other EU member states and EFTA (European Free Trade Area) countries.

1.1.73The various tasks have been undertaken by different partners and associates within the TRI-led consortium, each with the appropriate skills for the task in hand. Initial draft sections of the report were distributed between the partners and the SG for comment and suggested improvements and amendments have been built into this final draft report. Presentations of draft findings have also been made on an ongoing basis during SFR Work stream Manager Meetings and feedback from these meetings, including discussion of other findings from SFR research work, has likewise helped shape the final report.

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3 FERRY SERVICE DELIVERY OPTIONS3.1Regulatory background1.1.74Any solution for the subsidised delivery of ferry services in Scotland will need to

be compatible with Scottish, UK and EU laws. Of particular relevance to the make-up of any solution are: Council Regulation (EEC) No 3577/92 (the “Cabotage Regulation”) Public Service Obligations (PSO) Public Service Contracts (PSC) EU and national procurement law; and Limitations on the provision of state aid.

1.1.75Each of these legal and regulatory requirements and constraints must be taken into account when considering any proposed procurement strategy and the issues they raise should be addressed when deciding how ferry services should be procured.

1.1.76The formal investigation undertaken by the European Commission (EC) into the past and current subsidies given by the Scottish Ministers to CalMac and NorthLink for providing maritime transport services in Scotland has now concluded. The Commission has accepted the case for bundling of routes for CHFS and the use of CMAL-owned vessels, and has defined how the Gourock-Dunoon service should be tendered.

3.2Cabotage Regulation1.1.77The Cabotage Regulation regulates the transportation of passengers and goods

by sea between two points within Member States of the European Union (“Member States”). The Cabotage Regulation applies the principle of free movement of services to maritime transport and obliges Member States to allow community shipowners2 to operate freely in the European market.

2 Article 2(2) of the Cabotage Regulation defines community shipowners as “(a) nationals of a Member State established in a Member State in accordance with the legislation of that Member State and pursuing shipping activities; (b) shipping companies established in accordance with the legislation of a Member State and whose principal place of business is situated, and effective control exercised, in a Member State; or (c) nationals of a Member State established outside the Community or shipping companies established outside the Community and controlled by nationals of a Member State, if their ships are registered in and fly the flag of a Member State in accordance with its legislation."

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1.1.78The Cabotage Regulation recognises that maritime transport of passengers and goods is vital for the inhabitants of certain island and peninsular communities. As such, exceptions to the principle of free movement of services are allowed where, owing to special circumstances, market forces would not provide a satisfactory level of service. Recognising the need to protect such ferry services to islands and remote peninsular communities, the Cabotage Regulation allows Member States to intervene in particular markets by imposing public service obligations (PSOs) and/or providing funding to undertakings who take on public service obligations through entering into public service contracts (PSCs). Whilst a PSC is not the only way of doing things, in practice it is likely to be the most practical.

3.3Public Service Obligations 1.1.79Member States may impose public service obligations (PSOs) in order to ensure

an adequate regular ferry service to and from a given location where community shipowners, in considering their own commercial interests, would not provide an adequate level of service or under the same conditions.

1.1.80 It is for individual Member States to determine on which routes the market would otherwise fail to provide adequate ferry service and, thus, which require PSOs to ensure that the required ferry services are provided. The imposition of a PSO by a member state will, in most cases, only be subject to interference from the Commission in the case of manifest error. However, governments must ensure that they consult widely when identifying the routes where PSOs are to apply.

1.1.81When imposing public service obligations, it is important that the obligations are clearly defined. Any public service obligations must be sufficiently precise to leave no doubt as to whether a certain activity performed by an operator is intended to fall within public service obligations or not.

1.1.82The nature of public service obligations that a member state can impose are limited to the following: Requirements concerning ports to be served; Requirements in relation to regularity, continuity, frequency and capacity to

provide the service in question; Rates to be charged for the services; and The manning of vessels.

1.1.83Requirements not included in this list may not be imposed as public service obligations. When imposing public service obligations, Member States must ensure that there is no discrimination against community shipowners interested in serving a particular route. This non-discrimination requirement must be

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strictly observed at all times, from specifying the content of the public service obligations through to the selection of an operator and establishing the level of compensation (if any) to be paid for taking on the obligations.

1.1.84Public service obligations can be imposed by Member States in a variety of ways including: Entering into public service contracts with individual operators for a given

route; or Applying public service obligations to all operators for a given route by way

of a declaration regime, a licensing system or authorisation system.1.1.85 It is generally thought that the Commission would not permit any new

authorisation system introduced subsequent to the Cabotage Regulation coming into force. As such, any public service obligations will need to be imposed by way of a public service contract, declaration regime or licensing system.

1.1.86Highlands and islands air services which are subsidised have gone through a separate PSO procedure first, before tendering took place. SG is required to consult with the EC before adopting any laws, regulations or administrative provisions in implementation of the Cabotage Regulation.

1.1.87The SG considers that PSOs are implicit within PSCs, by virtue of the specified service obligations included in the contracts. Others consider the PSO to be a separate matter from PSCs, and that a PSO must first be established for each route which is considered to require intervention in some form or other in order to meet the needs of the community concerned3. The Commission has concluded in line with Altmark criteria the public service obligations were clearly defined in the Public Service Contracts for the Clyde & Hebrides and Northern Isles contracts4. A PSC can however be used to impose public service obligations - as such the obligations will be set out in the contact.

1.1.88PSOs can be funded by SG using the “subsidy for all model”. That would result in competition in the market rather than competition for the market. The “subsidy for all model” has a number of drawbacks, however, including: SG affordability; subsidy is limited to certain categories of users (e.g. island residents, disabled, children etc) but excludes other users such as tourists; and it can’t be used to support freight.

1.1.89To the extent that a subsidy is required, generally the most common approach used (in Scotland and elsewhere) to secure such public service obligations is through the award of a public service contract. Any public service contract

3 www.brocher.com/Ferries/Barrot%20answer.doc4 http://ec.europa.eu/energy/coal/state_aid/doc/decisions/2008/2008_0016_uk_c.pdf.

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http://ec.europa.eu/energy/coal/state_aid/doc/decisions/2008/2008_0016_uk_c.pdf


awarded will need to be procured in accordance with the Cabotage Regulation and EU and national procurement rules.

1.1.90Where it is considered that a subsidy is not required, albeit basic minimum service requirements must still be met (e.g. all year round operation, as stipulated through any PSO), the public service obligations can be imposed. Where public service obligations are imposed in the absence of a contract, the shipowner remains generally free to withdraw from the provision of the transport services in question. It is only if he wishes to provide those services that he must comply with the obligations imposed.

1.1.91 In a European Court Judgement it was stated that the combined provisions of Article 1 and Article 4 of Regulation No 3577/92 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage) permit the provision of regular maritime cabotage services to, from and between islands to be made subject to prior administrative authorisation only if5: a real public service need arising from the inadequacy of the regular

transport services under conditions of free competition can be demonstrated; it is also demonstrated that that prior administrative authorisation scheme is

necessary and proportionate to the aim pursued; such a scheme is based on objective, non-discriminatory criteria which are

known in advance to the undertakings concerned.1.1.92 In imposing public service obligations, Member States are restricted to

stipulating requirements concerning ports to be served, regularity, continuity, frequency, capacity to provide the service, rates to be charged and manning of the vessel6.

3.4Public Service Contracts1.1.93Public service contracts (PSCs) are the instrument generally used to impose

public service obligations where the imposition of a PSO on all ship owners would not support an area’s transport needs. A PSC will be used where compensation is payable for providing public service obligations. A public service contract can cover broader issues than those covered by public service obligations and may include a requirement to satisfy fixed standards of continuity, regularity, capacity and quality and require services to be provided at specified rates.

5 http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc=699J02056 Council Regulation (EEC) No 3577/92 of 7 December 1992 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage). http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31992R3577:EN:HTML

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1.1.94Public service contracts can be used to ensure that ferry operators provide year-round services, where the market would not otherwise provide such services. In limited circumstances, exclusivity may be appropriate (this is discussed further below); currently, public service contracts do not provide operators with exclusivity on routes in Scotland.

1.1.95The Public Service Contract: Is shipowner specific; Is concluded between the State/Region and a specific operator on a given

route or routes.1.1.96A Member State may impose public service obligations that affect some

shipping companies operating on the route(s) concerned and, at the same time, conclude public service contracts with others for the same route(s) to ensure appropriate service levels are in place for the carriage of traffic to, from or between islands. This is possible provided: A real public service need can be demonstrated; and That application of the two methods concurrently is not discriminatory and is

justified in relation to the public interest objective being pursued.1.1.97The Cabotage Regulation requires that for both imposing public service

obligations and concluding public service contracts, the Member State shall do so on a non-discriminatory basis in respect of all community shipowners. Any subsidy for ferry services must be available to all community ship owners. All community ship owners are entitled to apply for compensation in exchange for accepting public service obligations and (given that subsidies are paid via a PSC) all community ship owners should be entitled to tender for the provision of services for which subsidies will be paid.

1.1.98The Commission takes the view that any public service contract is potentially discriminatory between community shipowners. As such, the Commission considers that launching an open, community-wide procurement process is the best way to ensure non-discrimination, regardless of whether national or EU procurement law requires such an approach. The decision on the appropriate rules to follow for any procurement does, however, rest with the relevant procuring authority.

1.1.99For the purposes of this Report we have assumed that, save in some limited circumstances, ferry services in Scotland will be procured following an EU-wide procurement, in accordance with the Public Contracts (Scotland) Regulations 2006. A possible exception to the requirement to launch an open community-wide procurement process may apply where the Public Service Contract in question relates to “small islands”.

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1.1.100 In order for aid to be compatible provisions have to be put in place to ensure there is no overcompensation and this is part of the reason for following a tendering process. However, what the Maritime Cabotage Regulation Communication suggests is that putting a service out to tender is a good way to avoid any discrimination.

3.5State Aid1.1.101 Where a subsidy is being provided or state resources, such as vessels, are

made available in connection with the provision of ferry services, care must be taken to ensure this does not breach EU rules on state aid (which apply in addition to the provisions of the Cabotage Regulation and the principle of non-discrimination).

1.1.102 Where any support granted falls within the following conditions, it will constitute state aid and will need to be assessed to establish whether it is compatible with EU rules: The measure is granted by the state or through state resources; The measure confers an advantage to an “undertaking” – “undertaking”

covers any entity engaged in economic activity. The legal status of the undertaking is not important;

The measure is liable to distort competition by favouring certain undertakings – the competitive position of the undertaking being selectively targeted is improved by the giving of the aid in relation to other competitors; and

The measure must have the potential for affecting trade between Member States.

1.1.103 In general terms, state aid is unlawful where the recipient of the aid in question is given an unfair advantage over its competitors. However, there are certain circumstances in which the giving of state aid may be viewed as compatible with the common market and, therefore, is lawful.

1.1.104 Where a member state intends to give lawful state aid, it should notify the Commission and seek authorisation for the aid. Otherwise, it may be treated as unlawful unless it is deemed to be de minimus or otherwise exempt. De minimus relates to the assessment of state aid and not the cabotage regulations. Issues raised by each of the cabotage regulations procurement regulations and state aid rules need to be considered.

1.1.105 The “Altmark” decision confirmed that a State measure will not be treated as state aid where it compensates an undertaking for discharging public service obligations in a way that the undertaking does not enjoy a real financial advantage in exchange for discharging public service obligations. To fall

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outwith the definition of state aid, the following four conditions must be satisfied. The receiving undertaking must actually have public service obligations to

discharge and these must be clearly defined; The basis of compensation must be calculated in an objective and

transparent manner; Compensation cannot exceed what is necessary to cover the costs in

discharging the public service obligation - taking into account relevant receipts and a reasonable profit;

If the undertaking concerned is not chosen under a public procurement procedure, then the level of compensation needed must be determined on the basis of an analysis of costs which an efficient undertaking would have incurred.

1.1.106 If public subsidies are granted to undertakings expressly required to discharge public service obligations and the four criteria set out above are met, such subsidies do not fall within Article 87(1) and will not be treated as state aid.

1.1.107 On this basis, in establishing a procurement strategy for ferry services in Scotland, it is essential that the tender process and any public service contract entered into as a result of that process complies with the “Altmark” criteria to avoid any subsidy falling foul of EU restrictions on state aid.

1.1.108 If a subsidy does not comply with one or more of the four Altmark criteria it must be regarded as state aid. In such cases, the measure will have to be notified to and approved by the Commission before it can be implemented. In any case involving public service compensation where the measure is within Article 87(1) of the Treaty, it may nevertheless be exempt under Article 86(2) of the Treaty where the conditions of that exemption are satisfied.

3.6Need for subsidy1.1.109 Stakeholders consider that subsidy would be needed irrespective of

whether private or public operators provided services (Stornoway workshop; Oban Workshop). However, this view assumes that no lifeline ferry routes are commercially viable. Some private ferry operators disagree, and maintain that a number of routes may be viable without subsidy (Operators Workshop).

1.1.110 Indeed, some services operated by private firms are already commercially viable without subsidy (e.g. Western Ferries, Pentland Ferries). Private operators suggest that commercial viability (or not, as the case may be) depends on how a service is provided (e.g. type and number of ships, and how they are operated etc). On the basis of these examples that would appear to be the case.

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1.1.111 On the other hand, private operators may be able to operate without subsidy in some instances because they have the freedom to operate as they choose, rather than operate to a service specification based on perceived community need. If this is the case a balance needs to be struck between requiring a certain service to be provided under a PSO / PSC and allowing the market to optimise the service itself.

1.1.112 A more realistic perspective, however, may be that some routes are, or could be, commercially viable, while other, more ‘thin’ (i.e. limited traffic volume) routes, are not.

1.1.113 In reference to thin routes, there is an issue in Orkney in particular, where OIC operates three Outer Isles vessels on an 'open seas' classification - the same as the NorthLink routes – but with subsidy provided by OIC, not SG. These three vessels absorb 75% of the Orkney (inter-isles) subsidy, whilst carrying only 25% of the traffic. Clearly routes of this nature, and others with similar characteristics might never be profitable and will therefore always need support. Seasonality, however, also influences traffic flows for most if not all routes.

1.1.114 For the majority of subsidised services, vessels have been and are currently provided by the public sector or, as in the case of NorthLink, via lease arrangements. Another option which is now very common in other countries is to allow the private sector to invest in new or replacement ships, more especially: Where the state is unable or unwilling to finance ships, and/or The conditions set out in EC guidance on allowing the CMAL model to be used

cannot be met. 1.1.115 Whilst TUPE is a matter of law, operators have advised that in their view,

TUPE issues act as a disincentive to bid participation. 1.1.116 This is not to say that all ferry services will be secured by way of a PSC.

Clearly, certain existing services in Scotland such as Western Ferries and Pentland Ferries are not secured via the PSO / PSC route. However, under the Cabotage Regulation, EU states can nevertheless establish a PSO for a given route if this is deemed necessary (i.e. if the current service is not fully meeting the needs of communities concerned). A PSO offers safeguards, perhaps more especially in the event of a community being served by a single operator, as that operator must fulfil the required obligations, failing which a PSC may be necessary. However the SG cannot impose a PSO on any existing non-subsidised operator on a route. Moreover there is a danger that imposing a PSO may drive away the current (if less than perfect) operator making a need for a PSC and subsidy more pressing.

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3.7Delivery options considered1.1.117 In terms of public transport, contracts can range significantly in scope

from entire networks to a single route. In Scotland today, ferry services are already delivered in a number of ways with options based on both these polar extremes, as well as options in between (e.g. small bundles of routes, such as the Northern Isles).

1.1.118 During the consultation with stakeholders and service users7, a number of different delivery options were considered. A range of stakeholder and user views were expressed on each option. Additional data has been gathered from other sources (Operator and Council Workshops, published studies as referenced etc). A semi-structured questionnaire was used during the consultation workshops to facilitate group discussion (Annex II). The questions used allowed groups to discuss and probe into all aspects relating to the work.

1.1.119 A range of possible ferry service delivery options which could result from tenders were discussed with stakeholders/users. These are considered below.

1.1.120 Related to this is the role of different actors with respect to provision of vessels, investment, and regulation. In this respect we considered the following in more detail: Role of CMAL Possible role of Ferry Regulator, and Organisational implications

1.1.121 An important aspect of this analysis is identifying the preferred split of responsibilities between different public organisations in terms of managing the tender process for ferry service delivery and operation including vessel ownership. In this regard we have considered the role of: Scottish Government (SG) Local Authorities (LAs) Regional Transport Partnerships (RTPs)

3.8Publicly-owned operator1.1.122 Here we consider the advantages and disadvantages of public and private

ownership and the role of Central and Local Government in the delivery of ferry services.

1.1.123 Publicly-owned operators are perceived by some (users, stakeholders) to be more secure and sustainable than private operators. Some stakeholders take

7 For full reference of stakeholder meetings see Annex I.33


the view that a public ferry operator will not take a ship away from a route, whereas there is a perception that services would be less reliable with a private operator. There is also a perception that because publicly-owned operators are not required to make the same financial return on investment as a privately-owned operator this implies that, all things being equal, a lesser subsidy will be required.

1.1.124 However, where the public sector encounters difficulty finding funding (or in repaying loans) for new ships, this in turn raises questions as to the ability of publicly-owned ferry companies to raise capital for new vessels and also potentially questions the sustainability of publicly provided services. Publicly-owned operators maintain they should be able to raise capital for newbuilds at no disadvantage compared with private operators (Operators workshop). However, the fact that CFL (and some LAs) for example have been in need of new vessels for a number of years but have been unable to sufficiently procure new vessels, suggests otherwise. Inevitably Ministers need to first agree to any major capital investments to be made by state-owned ferry companies and, given the budgetary and Public Sector Borrowing Requirement (PSBR) constraints the public sector has to work under, this is not a straightforward process. The model used by NorthLink 1(i.e. vessels leased via RBS Leasing) could be replicated as a publicly owned company may be considered a better banking risk than a privately owned one. This arrangement becomes more attractive to the lender where the vessels are contracted to continue in operation during subsequent bidding rounds.

1.1.125 Conversely, private operators do not have quite the same institutional constraints to contend with, although that is not to say that the issue of the private sector raising capital in the current financial environment is not without its own challenges Nevertheless, of the 35 new ferries (excluding RoRo freight vessels) delivered worldwide in 2008, only 7 ships (20%) were for the account of publicly-owned operators8. Indeed 5 of the latter ships were for the account of Turkish operator IDO which itself is in the process of being privatised. Of the 25 ferries scheduled for delivery in 2009 only 2 are for the account of publicly-owned operators. It is therefore evident from analysis of current/recent ship orders that the vast majority of investment is being made by privately-owned operators, and the proportion of orders place by private operators is likely to increase even further in future. The main explanation for the lack of orders placed by public operators relates to the fact that many former public ferry companies have now been privatised, whilst the remaining public operators must compete for finance with other Government expenditure priorities.

1.1.126 Difficulties could arise if a private operator providing its own vessels under a PSC subsequently decided not to bid in the next round, leaving the route with

8 Tonnage supply-Deliveries in 2008, ShipPax Market-09 Statistics, ShipPax Information, Halmstad, Sweden. P. 29-31.

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no readily usable vessels. We consider this unlikely given that the ship would have been built for the route, and in light of evidence from Denmark and Sweden where the same operator has bid for and won the second round after investing in vessels in the previous round; but it is nevertheless possible. Equally, the vessel-owning operator may develop an advantage and potentially be able to exploit the position if no other operators could bid (assuming other operators do not have access to suitable vessels at that point in time).

1.1.127 As the public sector finds difficulty in financing new ships, this means increasingly outdated tonnage is being employed9, which in turn does little for economic growth prospects (as does lack of vehicular capacity at peak times), with ships also having difficulty meeting more stringent safety and environmental standards, and experiencing mechanical breakdowns10. We recognise that the SG has certain constraints, for example they are currently not able to borrow. In addition, use of PPP and PFI options are no longer considered appropriate for delivery of public services in Scotland. Given the current financial situation there is, in any event, uncertainty over the availability of funds in general.

1.1.128 Some stakeholders suggested that financially-constrained state-owned monopoly ferry service providers have limited scope or incentive to innovate and modernise (Barra workshop; Stornoway workshop). This, in turn, may hold back economic growth, including trade and tourism opportunities; in this respect users maintain that ferry services that do not meet their needs or their customers’ needs can have the effect of constraining trade and development (examples given at workshops include tourism businesses such as hotels, as well as hauliers, and fish producers).

1.1.129 Opportunities for further development appear to be rather limited for public ferry operators. Lack of finance to bring about fleet modernisation represents a major constraint. Traditional, established working practices is another constraint perceived by private operators, exacerbated by the prevailing choice of ship type and resultant high crew levels. Given SG’s Guidance on the transfer of public sector workforces to the private sector, following a TUPE transfer11 to a private operator such challenges will need to be addressed. Taking into account the need for vessel replacement, and the possibility that operators might look to do things differently, future crew requirements and working arrangements may differ from that of today.

9 Fisher Associates (2005) Strategic Sea Crossings in the Highlands & Islands: Development Opportunities (2005-2025). Final Report for Hitrans & partners.10 The last few years has seen a number of technical problems disrupting the CHFS network in particular. (see http://www.shipsofcalmac.net/fleet_news.asp)11 http://www.dwp.gov.uk/docs/guidance-on-tupe-contracting-process110609.pdf http://www.berr.gov.uk/files/file20761.pdf

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http://www.berr.gov.uk/files/file20761.pdf


3.9Privately-owned operator1.1.130 Some stakeholders and users are apprehensive about being served by a

privately-owned operator, after many years of depending on a public operator. However, any shift from a public to a private operator would be more likely to be accepted by communities if well-defined service specifications met with user requirements on a route-by-route basis. Operating under a PSC also addresses the question of security and sustainability of a service, irrespective of whether it is publicly or privately operated, notwithstanding other options in the event of operator failure such as bonds, parent Co guarantees, and step-in / operators of last resort provisions.

1.1.131 The question was posed by a number of stakeholders about what happens if a private sector ferry operator went bust. Would the service not simply cease to operate, leaving a community cut off? When NorthLink I threatened receivership in 2003-4, significant additional public funds were injected into the business to keep it going until a new operator was found. At the time, NorthLink was 50% state-owned and 50% privately owned. Clearly the state in that instance demonstrated its capacity to help maintain an essential operation (irrespective of whether public or privately owned) until such times as a new operator is found; this capability appears to exist irrespective of whether an operator is in public or private ownership.

1.1.132 Nevertheless, there is inevitably a greater burden of risk for a private operator and its shareholders, than for a state-owned operator (i.e. based on the experience that the state has in rescuing publicly-owned ‘commercial’ companies). The renationalisation of the East Coast rail service in November 2009 occurred after the operator National Express gave up the franchise due to financial problems. However the expectation is that nationalisation will only be temporary and a new private operator will be chosen in due course.

1.1.133 Private operators generally have access to capital for investment in ships whereas public operators must first secure political approval for investments, which can be very time consuming, and uncertain. This implies that the private operator may be able to acquire vessels perhaps years in advance of a public operator. Private operators also suggested that if less subsidy was needed to operate the ferry services, more would be available for capital investment.

1.1.134 Private access to capital is considered to be strengthened where the business activity is based on a long-term Government contract to provide an essential infrastructure service backed up by subsidy (Operators workshop). However, given limited public sector resources, it remains a challenge for SG to subsidise (e.g. via operating support) the necessary repayment of capital by either the public or private sector. All bidders, irrespective of ownership, must look to procure vessels at the best price possible, and with capital requirements based on an attractive financing structure. If CMAL is able to purchase vessels

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using finance secured on more attractive terms through loans from the PWLB (Public Works Loans Board) then that could be an attractive option.

1.1.135 Ideally the provision of a new (or nearly new) ship(s) should where appropriate form part of the tender process; this was not the case in the CHFS tender. The offer of subsidy (to run services) itself provides an incentive for operators to bid. And as with experience of other tenders elsewhere in Europe, private operators can be motivated to introduce ships at their expense based at least in part on the incentive to secure the subsidy award, subject to other conditions (e.g. TUPE) being acceptable.

1.1.136 There is a clear need to strike the correct balance between decisions on service specifications and ship specifications. Contracting authorities should rightly decide on the minimum service specification required, but how that specification is most optimally met (or exceeded) in terms of ship design/fleet configuration (and even in some instances in terms of port choice) are aspects best left to experienced operators/bidders, who will tend to have different views on how best to serve a given market. These different operating perspectives need to be teased out during the tender process notwithstanding that solutions have to be evaluated in an open and transparent manner. Some aspects could be subject to scoring of bids whilst more fundamental aspects could be specified as required for a compliant bid. The various quality and other aspects of each bid can be evaluated using a Likert scale approach, e.g. scoring basis of say 1-5:

Excellent Very satisfactory Satisfactory Unacceptable Definitely unacceptable

1.1.137 It is therefore important that operators are given the opportunity to bring forward in their bids, innovative and efficient lower-cost ship and route solutions in an effort to reduce costs and at the same time deliver improved services, subject to compliant bid / scoring implications. Vessels deployed on the CHFS network are generally custom designed for routes and in practice operators may be unlikely to have an existing fleet that could be deployed onto these routes. But that does not mean that bidders cannot propose new or alternative vessels in their bids. The Scottish Government notes however that the EC investigation concluded that it was reasonable for required usage of CMAL’s vessels given the uniqueness issue in the event of no other cost effective ship solutions being available. Costs already invested in ports have to be taken into account in balancing what makes best financial sense for the taxpayer.

1.1.138 A further alternative may be a mixed public-private approach with, for example, the public sector providing the ships (e.g. via CMAL) and an operator chartering the ships for the duration of the contract. Consideration is being given to raising funds through CMAL for ship investment and this is discussed further in other parts of the Review. CMAL’s role as ship supplier will ultimately

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be dependent on its competitiveness relative to other ship supply alternatives. Different operators will have different preferences and capabilities in this area, and some operators may prefer to source and supply vessels themselves. Nevertheless, the EC have confirmed that in the CHFS bundle at least SG can require operators to take CMAL vessels. A potential weakness with any compulsion to use a given ship is that as the ship represents the basis of the operating cost structure, all bids based on that ship will be more or less the same (i.e. un-differentiated), which in turn limits the benefits of tendering. A further issue will be whether or not the compulsory ship is indeed the best option available at a given point in time.

1.1.139 In the case of public sector supply of ships this means that the SG (via CMAL or LAs) will still need to finance ships up front, as well as provide operating subsidy. If the Government is unable to finance ships by itself, it would need to put in place some other form of mechanism which allows for sufficient investment capital to be raised. This issue is being addressed by other work in the Review undertaken by MVA.

1.1.140 An approach commonly used by other EU member states has been to dispose of (i.e. privatise) in full or in part former state-owned ferry companies and to also transfer to these successor companies the burden of future capital investment in ships. Some notable examples include: In 2002 the Spanish government sold outright the former loss-making state-

owned ferry operator Transmediterannea to a consortium comprising Accionia Logistics (with a share of 60%) and the shipping firm Armas, together with four other firms active in the hotel and tourism sectors in Spain;

In Denmark, Nordic Ferry Services (NFS) which was created in 2005 is a 50/50-joint venture between privately-owned shipping firm Clipper A/S and the state-owned limited company Bornholmstrafikken A/S. NFS today operates 5 separate bundles of tendered routes throughout Denmark, after successfully tendering or acquiring other operators (see case studies);

In France a majority of the shares in the former loss making state ferry company SNCM were sold in 2008 to Veolia and Butler Capital, with the French state retaining a minority interest of about 20%, and the trade unions an 8% share. Butler has since sold its shares to Veolia;

In 2007 Scandlines (formerly jointly owned by the German and Danish states) was sold outright to a consortium comprising private equity firms Allianz and 3i, and shipping company DSR;

The Italian government has announced its intention to privatise the state-owned ferry operator Tirrenia within 2009, following several years of sustained protests by private ferry companies (represented by industry

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organisation Contifarma) to the EC about unfair competition from Tirrenia’s heavily subsidised operations.

1.1.141 The state has also in large part now removed itself from ferry operations in Norway, whilst in Greece all services are provided by private operators. Apart from the rather unusual (mostly on very short lake/river crossings) ‘yellow road ferries’ that are operated free of charge by the government in Sweden, plus some small scale local authority run services in Denmark, Scotland is today rather unusual in the respect that the majority of major island ferry services here are maintained by publicly-owned shipping companies, whereas in the rest of Europe these are now predominantly provided by private operators.

1.1.142 Nevertheless some tenders could provide options whereby the choices would be: 1) requirement to take CMAL vessel; 2) no CMAL vessel available and; 3) option to bring own vessel or take CMAL vessel.

3.10 Community-run operator1.1.143 A community (e.g. on a small island) might wish to operate its own

service. This is more likely to occur where the community is dissatisfied with current service provision, or indeed if there is a lack of service provision and a new service is desired. Local enthusiasm would be expected to generate a degree of commitment. Such a service could also be more reliable, according to some stakeholders (Oban workshop).

1.1.144 There may be limited finance provided by the community, who would probably need to borrow capital for ship investment. Such a challenge may be eased somewhat if loans were based around a contract offering some security to lenders, although this would also be dependent on the makeup of the borrowing party.

1.1.145 A community-run operation may have limited organisation and managerial capabilities, though the effects of that could be minimised to some extent through commitment and enthusiasm. However a joint venture between communities and existing operators could provide the right balance of expertise and local commitment. This would require a shift to single route tenders and/or smaller bundles. A community-run operation would need to be acceptable in terms of operational safety and financial aspects. Local communities have an obvious interest in their local ferry services, but that is quite different from having the technical and other competencies required to manage and maintain a ferry service.

1.1.146 An informative example in this respect is the Sound of Mull Transport Group Ferry Service12. This was set up as a social enterprise run by volunteers to provide a passenger (and parcels) ferry service between Drimnin and

12 http://www.somtg.co.uk/39


Tobermory (also Laga on Loch Sunart). It is a company limited by guarantee and supported by Highland Council, Argyll & Bute Council and the former Scottish Executive Rural Community Transport Initiative. Residents receive a slight discount on the standard fare, and a small charge is made for carriage of bicycles and freight packages.

1.1.147 However, it is recognised that ever more regulations, especially to do with safety matters, makes it difficult for very small operators to take on the operation of vessels – with the possible exception of quite small ferries (e.g. passenger-only). It is believed this challenge could be aided somewhat if a single agency provided the vessels and piers (e.g. CMAL), ensuring they meet all the regulations, also advising the operator on safety training etc. Many small operators started by local interests are nevertheless demonstrating they have the resilience and capability to serve remote communities in a number of places (e.g. John O’Groat’s Ferry, Arisaig Marine, Foula-Atlantic Ferries13, and Clyde Marine etc). Community group operators could benefit from elected representation via Community Councils, LAs, and/or RTPs as appropriate.

1.1.148 An important issue relates to how sustainable a community-run operation would be? Forecasting the financial performance of an established ferry service tends to be fairly straightforward, notwithstanding the fluctuating cost of fuel. An established ferry service has known traffic volumes and revenue data, and most ship operating costs are fixed. If cost and revenue estimates are robust, and subsidy is available via a contract to cover the deficit, even small community-run operations could prove a feasible option in communities for which there is support for such operations. Forecasting demand for an entirely new ferry service is more difficult, with the risk that forecasts might not be achieved.

1.1.149 For a subsidised service there would be a need to tender the operation which means any community-led bid would still have to compete with bids from other operators, unless ‘small islands’ exemption applies (i.e. routes with less than 300,000 passengers).

3.11 Role of CMAL1.1.150 Given the limited ship acquisition activity of SG (currently one vessel, for

Islay, is on order, this requiring over £24.5 million in loan funding) and it’s wholly owned companies over recent years, and amidst a difficult ongoing budget position, it seems increasingly unlikely that SG itself will be able to fund new ships for ferry services from existing resources. This means there is a need to look at various other funding options (the role of other work in the Review) as an ageing fleet approaching 100 ships in Scotland needs replacing. There are also approximately 100 piers and terminals associated with ferry services and many of these are in need of investment as well.

13 http://www.atlanticferries.co.uk/index.html40


1.1.151 The role of CMAL is expected to be important in this regard. CMAL’s vision ‘is to be acknowledged by stakeholders within Scotland and the wider maritime community as the pre-eminent provider of the most cost-effective and innovative vessels and port infrastructure for the benefit of those who rely on lifeline ferry services’14.

1.1.152 CMAL provisionally estimates that there could be a need for investment of some £604 million in new ships for Scottish ferry services up to 2025. CMAL suggest a bulk buy policy could reduce this by about £95m. A significant amount of money will also be needed for investments in Scotland’s 139 piers and harbours used by ferries (CMAL estimate some £435m including inflation by 2025). Altogether, therefore, approximately £1.0 billion needs to be found for large-scale capital investments in the Scottish ferry system over the next 15 years.

1.1.153 This substantial investment requirement represents one of the most fundamental challenges faced by those tasked with delivery of ferry services in Scotland. The figure of £1.0 billion is many times greater than the amount currently budgeted by the SG for capital investment in ‘ferries and harbours’15.

1.1.154 The capital investment needs of the Scottish ferry system are in addition to the ongoing annual operating subsidies and various fare discount schemes (which have been increasing in number and amount year-on-year) inclusive of harbour grants. With these operating subsidies and grants now totalling between £120-130 million per annum (i.e. subsidies across all ferry services, including those managed by LA’s), this amounts to an additional £1.8-£2.0 billion over the next 15 years (at today’s prices) just to maintain existing ferry operations.

1.1.155 The challenge for the public sector is therefore not insignificant. In order to maintain a lifeline system of ferries throughout Scotland, this will require approximately £3.0 billion of investment over the next 15 years, in terms of combined operating subsidies and capital investment in ships and harbours.

1.1.156 CMAL could have a strategic role in this regard by potentially offering economies of scale in procuring ferries for operators to use. That is, CMAL would seek to act as a kind of central ship and harbour repository, supplying ferries and harbour facilities to operators throughout Scotland. Economies are principally assumed to centre on the potential for CMAL to ‘bulk-buy’ ships and in the process reducing the purchase price of each vessel. However, economies of scale in bulk purchasing may be dwarfed by operational costs if the vessel

14 CMAL Annual Report & Accounts to 31st March 2008.15 According to the Scottish Futures Trust, budgeted Scottish Government infrastructure spend for ferries and harbours between 2008-2018 amounts to only £132 million, and typically between £13-15 million/year. This budgeted figure seems wholly inadequate given the scale of the investment needed. (http://www.scotland.gov.uk/Publications/2008/05/19155435/10)

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design does not maximise revenue and minimise costs. Essentially, operators may take a different view on vessel design to CMAL, and ideally this needs to be tested through the tendering process.

1.1.157 A centralised ship owning company like CMAL may be able to generate substantial economies of scale by standardising ship types, uniform engine/equipment, spare parts etc. A further potential benefit of CMAL’s ownership of vessels is that this could facilitate the ongoing transfer of ships to subsequent operators at the end of each 6-year contract. Whilst on the one hand this provides some stability and assurance of ships, on the other hand it may counteract the benefit from reviewing bids being received from operators who may propose the use of different ships (i.e. if ships are fixed, for a given tender period, then the tender will not explore alternative ship, and hence alternative ship cost options, as occurred with CHFS and the last NI’s tenders).

1.1.158 Though the company believes it has the capabilities to fulfil this role, it is not yet clear if CMAL has the necessary skills to actually design and acquire ferries that fulfil future needs and anticipate changes, but if designated for this larger role it could buy skills in/build them up internally. So far, the company has ordered one vessel (for Islay), although the design for that ship had already been completed when CMAL came into being.

1.1.159 Over time it could make sense to have a single organisation that builds up these skills to a greater extent, rather than the other option of perhaps having several different organisations (e.g. CMAL, LAs, RTPs, private operators) trying to do the same thing. But operators tendering for services may prefer not to be tied to use of particular vessels which could represent a significant risk in terms of a central repository for assets and infrastructure scenario. Moreover, some operators, including LA-owned operators, believe they have the necessary expertise to procure vessels themselves, and have proven this to be the case (e.g. SIC procured 4 vessels and introduced them between 2002 and 2004).

1.1.160 The company is not averse to the idea that successful bidders may come forward with their own proposals regarding ship types. The existing fleet charter agreement is a two-way process between CMAL and CFL. However, other operators’ ships can be brought into CMAL, so it is considered to be a flexible model. But if private bidders procured and financed their own ships, then this implies less of a role for CMAL in terms of ship provision. CMAL could possibly procure and own ships, if required, on behalf of selected operators, involving the latter’s design preferences based on successful tender bids, and thereafter charter the ships back to the operator for the duration of any contract to provide a service. This would more or less turn CMAL into a ship leasing company, which raises another critical issue, that of securing finance for vessels. There may also be competition issues to consider with these approaches, in dealing with different operators assets and requirements.

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1.1.161 It seems likely that private finance in some shape or form will be necessary to undertake future investments in Scottish ferries. Securing adequate finance is imperative if CMAL is to fulfil its intended role as ship (and port) supplier for lifeline routes. CMAL is currently investigating a range of options and the whole issue of funding is considered elsewhere in the Review.

1.1.162 As it is CMAL that holds the assets now (and not DML), another option could be to sell the company either in whole or in part. Given recent experience with disposal of other former state-owned ferry companies elsewhere, an auction might offer best prospects to maximize the sale price16. This still leaves the issue of capital investment to be resolved, as well as CMAL’s position as ship supplier to contracted operators. Selling CMAL by itself does not necessarily secure capital for future capital investment needs (unless sale proceeds are ring-fenced); neither does this ensure maintenance of long-term access to a secure market for CMAL’s goods/services. There is also the issue of CMAL’s exclusivity in providing ferries. Provision of ferries may, like operations, have to be tendered.

1.1.163 Our analysis of ferry services elsewhere in the EU and EFTA, however, suggests the dominant trend is for private operators to ‘bring their own ships’ to operate PSO/PSC routes. That is, private operators bidding for PSCs propose their own ships and when successful in winning a contract, they then proceed to procure these ships themselves, which may be either newbuilds or existing vessels. The CMAL model does not appear to fit this trend. This suggests that, for some operators, CMAL may not have a role to play as ship supplier, while for others, if CMAL is offering appropriate vessels at a competitive charter rate, then the offer may be taken up (assuming specific CMAL ships are not made a condition of contract). Much of the existing fleet (CHFS, OIC etc) needs replaced or will need replaced within the next 5-10 years, so it is not as if new or nearly new vessels would be being replaced. Displaced vessels would be sold or scapped.

1.1.164 An important issue is the need to test alternative ship options and operator offers and this is a key function of the tender process. This may place an additional risk on CMAL if, for example, the company invests in a vessel which is used for an initial contract period, but in subsequent tenders it is found that offers are submitted by bidders proposing alternative lower cost ship solutions which also comply with quality requirements. The current way around this is to state that the ship is so specific that it has to be used for subsequent contract periods; that approach tends to assume no bidder is able to propose an alternative lower cost option. However, such an assumption can only realistically be proven through a tender process which allows operators to propose alternative ship solutions.

16 Baird, A. J. (2009) Private equity fund investment in the European ferry industry, Journal of European Transport, No. 42, pp. 1-20.).

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1.1.165 The Scottish Government needs to ensure that a subsequent tendering exercise will produce a different operator with its own vessels. But there is a risk that no alternative operator would have its own vessels, assuming the uniqueness of the CMAL fleet and/or lack of availability of alternatives. In such a scenario if no operator or vessel can be found then the SG would need to ensure there is a shipowner of last resort – this may be a further role for CMAL.

3.12 Ferry Regulator1.1.166 The Review is tasked with recommending whether a Ferry Regulator

should be considered in detail.1.1.167 The need for any economic regulator – who looks at matters of pricing and

competition – will generally only be required in instances where PSOs/PSCs are not used. PSO/PSC operations are already regulated in the sense that service pricing, capacity, and quality features are determined and agreed between the contracting agencies and the operator(s). Monitoring of performance to ensure compliance with contractual arrangements follows on from this.

1.1.168 It has been argued that an independent regulator is necessary: “..for the maintenance and enforcement of effective competition and competitive benchmarks, including responsibility for award of tenders.”17

1.1.169 However, we have not found that any specific Ferry Regulators exist in other PSO markets in Europe. What generally occurs is that the contracting agency effectively regulates PSO operators/services via PSCs and such arrangements are working effectively. Competition is present during tendering processes, but competition between operators serving the same PSO route(s) is relatively uncommon, as most island trades do not have sufficient traffic volumes to merit competition. In other words, and in common with many transport services in the UK and worldwide, competition is generally for the market, rather than in the market.

3.13 Organisational implications and split of responsibilities

1.1.170 A key issue relates to which entity or entities (i.e. SG, LAs, and RTPs) should be responsible for managing delivery and procurement of ferry services in Scotland. This applies to both mainland to island and inter island directly provided links.

1.1.171 SG offers strengths as a single tendering body, and low cost from an organisational perspective assuming tendering a single large bundle. However, a single large bundle does not appear to be an attractive option for potential private operators and is therefore the approach least likely to secure private

17 Transport, Infrastructure and Climate Change Committee Report (2008), 4th Report, 2008 (Session 3), Ferry Services in Scotland, Scottish Parliament.

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investment. The status quo does not represent a problem for publicly-owned operators who appear content to bid on a large bundle basis.

1.1.172 SG could also deliver another model based on smaller bundles, if this were considered to be a more attractive approach.

1.1.173 Both the SG and LAs have powers to provide and procure ferry services in Scotland. At the moment many users seem content with the current set-up, where SG is responsible for procuring ferry services on routes from the mainland, whereas LAs procure some local services within their own areas. However, some users did indicate that they would like to see a greater opportunity for LAs to provide input into any procurement process run by SG, and certain LAs and RTPs also support this view.

1.1.174 This input might include, for example, Las and RTPs helping to decide on service specifications, involvement in bid evaluation panels, and operator selection panels. Actual involvement levels may differ depending on area preferences, but panels could include a senior official from the island LA concerned, and from the RTP concerned. This would ensure local involvement in decisions being made jointly with SG.

Local Authorities (LAs)1.1.175 As statutory bodies, LA powers are limited to those given to it under

statute. In terms of the Local Government (Scotland) Act 2003 a council has power to do anything which it considers is likely to promote or improve the well-being of its area and persons within that area. This power permits LAs to spend money on ferry services where they believe this will increase the well-being of residents in their areas. In addition, LAs have specific statutory functions in relation to ferries. In summary, LAs have the following functions: A Council may operate ferry services within its own area or, with the

agreement of another council, between its own area and the area of another council.

In exercising this function councils may require, provide, maintain and operate ferries. Reference to “ferries” includes rights relating to ferries (including rights of access) and all boats, vessels, landing stages, plant and apparatus used in connection with the ferry.

1.1.176 In providing ferries, a council or councils may: Incur capital expenditure and borrow money; Lease or hire a ferry to or from another person on such conditions as the

council(s) thinks fit; Enter into arrangements with another person for the operation of a ferry by

that person on their behalf and; 45


Fix and publicise fares and charges for the use of any ferry. 1.1.177 Councils may defray any deficit incurred in relation to ferries from its

income from rates. 1.1.178 In addition to the specific functions in relation to ferries, LAs have a

general power to do anything which is calculated to facilitate or is conducive or incidental to, the discharge of any of their functions. In exercising this power a council may incur expenditure, borrow or lend money or acquire or dispose of any property or right.

1.1.179 This general subsidiary power must be treated as incidental to other legislation conferring substantive powers on local authorities to carry out their main functions. It cannot be read as conferring additional functions on local authorities or extending the scope of their existing functions.

1.1.180 Councils may set up a capital fund by making contributions from revenue. Such fund is to be used for defraying any expenditure of the capital to which capital is properly applicable or in providing money for repayment of the principal of loans.

1.1.181 Some councils have established a specific Ferries Replacement Fund (e.g. Orkney Island Council), for the purposes of acquiring vessels, though this is thought to involve limited amounts.

1.1.182 However, OIC and SIC each have significant reserves that could be used if necessary to invest in, or to support borrowing and investment in ferries and harbours serving their respective islands.

Regional Transport Partnerships (RTPs)1.1.183 Regional Transport Partnerships (“RTPs”) were established in 2005. The

purpose of RTPs is to strengthen the planning and delivery of regional transport so that it better serves the needs of people and businesses. The principal objective of each RTP is to prepare a regional transport strategy – which includes maritime transport.

1.1.184 Some RTPs are also responsible for the delivery of transport services and, in some instances, are already procuring ferry services (e.g. SPT). RTPs could therefore take on a more comprehensive responsibility for ferry service procurement if required. Their regional role and status would, in some instances, fit well with the areas served by ferries (e.g. Strathclyde, Shetland). However, the vast majority of Scottish Ferry services fall within one RTP area (i.e. Hitrans).

1.1.185 The role of RTPs could be similar to their role with regard to bus and rail – i.e. facilitation. If tendering were required then a process similar to that undertaken for bus contracts (and in SPT’s case the Gourock-Kilcreggan ferry)

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with similar guideline criteria with regards to social need etc. could be initiated. Financial powers as criteria is noted as a potential issue for constituent LAs. Should RTPs and LAs be given more comprehensive powers over ferry service procurement then such a transfer would need to ensure the correct funding arrangements are established. We note that in Italy some of the state owned ferry operations of Tirrenia have recently been transferred to LAs.

1.1.186 RTPs are able to borrow money under the Prudential Regime. The Prudential Regime means that in future public authorities will decide for themselves what is an affordable and prudent level of borrowing in their financial circumstances18, although they will need to assess the sustainability of their income streams and reach a view on what level of debt (both old and new) they can afford to service. RTPs would have to cover the costs incurred by such borrowing through budgets in future years and this is expected to fall on the constituent authorities to fund19. Constituent local authorities can also contribute resources to their RTP, including borrowing.

1.1.187 This basically means that, like LAs, RTPs have the powers (a) to procure ferry services and, where desirable/necessary (b) to borrow capital in order to make investments in ferries and harbours.

3.14 Contracting organisation options1.1.188 An alternative to more centralised organisational models (i.e. SG as

regulator/tender manager) would be for LAs and/or RTPs to be responsible for tenders affecting their particular areas (some already do this; for smaller-scale ferry services, and some LAs manage non-tendered council-operated intra-isles services). Such an arrangement may be more appropriate in the event of tenders for inter-isles services, or smaller bundles or single route tenders being initiated, although any transfer of responsibilities (for procuring ferry services) would inevitably also require transfer of financial resources too.

1.1.189 With some exceptions, there appeared to be relatively limited support for this ‘devolved’ option from the public bodies themselves (Council workshop). However, users at several of the seminars/workshops stated that local public sector bodies should have more responsibility with regard to decisions on procurement of ferry services to/from their area. Previous research into island ferry service organisation in other countries suggests that supply and demand matters are best grasped by local and not national government20, thus favouring a more decentralised option. This is because local government is closer than central government to the actual day-to-day issues and to the evolving needs of

18 http://www.scotland.gov.uk/consultations/housing/mssh-04.asp19 http://www.scotland.gov.uk/consultations/transport/rtpc-00.asp20 Baird, A. J. (2001) State Subsidy System for Remote Island Liner Services in Japan. International Journal of Maritime Economics, March, Volume 3, Number 1, Pages 102-120.

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service users. However, funding constraints could limit the possibility of more local control being taken by LAs.

1.1.190 On the question of do LAs and RTPs have the expertise to manage ferry tenders, the answer is most probably yes; several LAs and RTPs already manage tenders for other transport services such as bus routes, and some also for ferries (e.g. SPT, A&BC, SIC, HC), as well as managing a wide range of other procurement arrangements across different supply sectors. Again, perhaps this devolved approach may be more appropriate in the context of smaller bundles, inter-isles services, or in the case of single route tenders, rather than for very large bundles such as CHFS, should the latter approach be continued.

1.1.191 Analysis of the split of responsibilities between SG, LAs and RTPs suggests the possibility to decentralise some decision making to the local level, whilst retaining overall strategic direction of the national ferry network as a whole by SG. In the context of smaller bundles/route tenders, the contractual organisational burden will be less than it is with a very large bundle, and in a decentralised model tasks would be shared between the relevant actors involved. However, there is a key link between controlling the service specification and controlling the funding – whoever controls the funds is not necessarily going to let somebody else control the specification.

1.1.192 In the event of smaller bundles and for any single route tenders, LAs and RTPs might therefore be expected to have a greater role to play in helping manage tenders and in the evaluation and final selection of operators. The composition of joint tender teams, consisting of LAs, RTPs and SG, may be a possible approach depending on the specific bundles/routes selected for tender. Some LAs indicated that they may not be the best entity to manage major ferry tenders given their limited size and resources; however others consider they have the necessary expertise. In the case of RTPs only SPT currently undertakes ferry service tendering albeit on a limited scale. This would suggest that the role of tender manager may best remain with SG though with LAs and RTPs becoming more involved in the tender process, in specification setting, and in terms of bid evaluation under any de-bundling scenario where local involvement becomes more critical.

1.1.193 Table 3.1 summarises the strengths, weaknesses, risks and opportunities associated with each of these entities as potential contracting organisation.

TABLE 3-1: TENDER CONTRACTING ORGANISATION OPTIONS

Option Strengths Weaknesses Risks Opportunities

SG Single central body Funding/ Political Could de-48


resourcesDistant from markets

Single bundle not attractive to private operators

bundle

Low cost Long experience

LAs Local Some LAs have extensive experience of ferries and also tender other transport services

Funding/resourcesSome have limited knowledge of ferries

Political De-bundlingIntra-county Integration

RTPs Regional/local Some RTPs have extensive experience of ferries and also tender other transport services

Funding/resourcesSome have limited knowledge of ferries

Political De-bundlingIntra-region(s) Integration

Mixed approach

Inclusive Potential conflictsFunding

Compromises Needs one lead body

IntegrationDe-bundlingShare tasks

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1.1.194

4 FINANCIAL INCENTIVES FOR FERRY SERVICES4.1 Introduction1.1.195 Financial incentives or subsidies for ferry services in Scotland have

developed, evolved, and increased over many years, aimed at maintaining lifeline services to islands, and in some cases to remote communities on peninsulas. The process of evolution has been shaped by a number of different drivers, including principally the need to sustain island communities/populations, rising expectations in the islands, EU regulations, and financial stringency.

1.1.196 The use of the term ‘financial incentives’ implies a rather more active and purposive approach than does the more prevalent term ‘subsidies’; and in the context of the development of a long term ferries strategy for Scotland, it is appropriate to examine subsidies and subsidy systems in the light of the contribution which they can make, as incentives, to achieving the objectives of the strategy.

1.1.197 Financial incentives need to be aligned to the objectives of the strategy (which will be drafted once the objectives have been agreed); thus, different incentive/subsidy systems have to be judged against how well they serve to meet these objectives. Changes in National Objectives may make a slight difference. Crucially, however, financial incentives must comply with EU regulations and tendering requirements.

4.2Public incentives for ferry services1.1.198 There are a number of incentives provided by the state to ferry operators

(public or privately owned) in order to maintain or assist essential ferry/shipping services. The various types of incentive can be used by themselves or in different combinations. They include the following: Operating or deficit subsidy for ferry service operations/vessels Passenger subsidy Freight subsidy, to users and/or operators Profit sharing (i.e. between state and operator) State funding of pier and harbour facilities

1.1.199 The breakdown of estimated subsidy for Scottish ferries in 2007-08 is as shown in Table 4.1. This indicates that the Scottish Government provided total annual subsidy (inclusive of harbour grants) of approximately £110.7 million.

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1.1.200 Of this, £94.3m (85%) related to ferry operations and £16.4m (15%) to harbour grants and vessels. This excludes public investment by local authorities in harbours. It also excludes RET which is estimated to amount to approximately £7.5m a year during the current 3-year trial period.

1.1.201 Clyde & Hebrides (CHFS) and Northern Isles services together accounted for 81% (£74m) of ferry operating subsidy in Scotland. Orkney and Shetland inter-island services account for a further 17% (£16.1m). This means that CHFS, Northern Isles, and Orkney and Shetland services together account for about 98% of ferry operating subsidy.

1.1.202 Total revenue subsidy paid to maintain ferry services in the Clyde & Hebrides (CHFS) and Northern Isles combined has risen from £32.6 million in 1998 to £74 million in 2008 (excluding RET and local authority subsidised services). In 2009, it is likely that total ferry operating subsidy will exceed £120 million, given increased deficits suggested by Councils and operators (Orkney, Shetland) added to the introduction of RET from Autumn 2008.

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TABLE 4-5: PUBLIC SUBSIDY FOR SCOTTISH FERRY SERVICES, 2007-8

4.3Operating subsidy1.1.203 CHFS and Northern Isles contracts provide subsidy to the levels required

in the financial models that underpin the respective costed bids. Those models

Subsidy (£m)CHFS CalMac 42.0Northern Isles NorthLink 32.0Shetland Isles SIC 10.5Orkney Isles Orkney Ferries 5.6Gourock-Dunoon Cowal Ferries 2.3Gourock & Renfrew SPT 0.7Aberdeen-N. Isles Streamline 0.6Highland Highland Council (est)0.3Argyll A&BC (incl concessioned

routes)(est)0.3

Sounds’ Barra/Harris Comhairle nan Eilean Siar# 0.02Total Operating Subsidy 94.32

Harbour Facility Grants & vessels*

Scottish Government 16.4

Total 110.72

Notes: Excludes RET, which started Autumn 08, and costs £22.5m over 3 years (=£7.5m/yr average)

*Excludes expenditure on harbours by local authorities

#User subsidy for freight traffic

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include provision for profits as well as the difference between expected income and operating costs.

1.1.204 The graduated clawback, which is triggered if the deficit is £50,000 less than the Target Grant, rises to 95% if the deficit is £500,000 less than the Target Grant (the method of calculation is more complicated, but in essence the operator is left with progressively smaller amounts of any unanticipated reduction of the deficit, whether this is due to its own efforts at cost-saving and increased usage, or not). Conversely, Supplementary Grant Payment covers any excess deficit, over the Target grant, after taking account of a small Operator’s Excess

1.1.205 Orkney Ferries, which is owned by Orkney Islands Council, has a budget normally set on an incremental basis related to the previous year. Orkney Ferries operate with a Service Level Agreement (SLA) from OIC, which states (amongst other items) the approved services and the way in which tariffs are set. Orkney Ferries submits a budget, based on a zero based budgeting system, every year based on the SLA which is either approved or modified by OIC. Orkney Ferries is then expected to operate to that fixed budget. Any extenuating circumstances (i.e.: excessive increases in fuel costs) are considered as separate items by OIC – but it is not expected that the Company will exceed its budget.

4.4Effectiveness of operating subsidy1.1.206 Current funding is effective in maintaining lifeline services, as specified in

the contract between government and operator. However, it does not provide a clear incentive to the operator to operate efficiently, and to improve the quality of the service in order to maximise passenger and freight carryings, since any resulting profit over and above the base calculation will be progressively clawed back. Conversely, the operator is cushioned against loss.

1.1.207 Two formalised contracts with CHFS and NorthLink contain a Performance and Deductions Regime, a series of performance measures, for reliability, punctuality, and for livestock and a number of different service levels (passenger accommodation, freight and livestock, catering food and beverages, compliance and call centre operation). These are intended to incentivise management through a range of graduated deductions (from Average Grant Requirement per Sailing, or AGRS) for non-performance.

1.1.208 However, it does mean that much of the operational risk remains with the government body letting the contract, rather than with the operator. In the event of cost overruns or other financial difficulties, government is ultimately bound to provide additional financial support in order for the services to

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continue (e.g. as was the case with NorthLink during 2003-5, and P&OSF before that21).

1.1.209 It would be possible to shift more of the risk onto the operator, and provide more of an incentive, by changing the clawback and additional grant arrangements (since these arrangements are complementary, any change would need to apply equally to both.) For example, it would be possible to limit such arrangements to a proportion (say 50%) of excess profits or losses, thereby giving the operator more of an incentive to seek ways of increasing profit, but at the same time requiring the operator to absorb a larger proportion of any unanticipated losses. Increased profits could come through the attraction of additional traffic (e.g. through special offers etc), showing the service was meeting customer needs. They could also come from cost cutting measures, and this might need to be done through a programme agreed between the responsible authority and the operator, whilst ensuring the level of service provided was not diminished.

1.1.210 A key element of the current contracts is the mechanism that it contains to prevent the operator being tied in long term to a loss making contract and hence the contract failing. Continuity of service is a hugely important issue for lifeline services. The current funding mechanism reflects this, whereby subsidy amounts are reviewed annually on the basis of actual performance in the previous year.

1.1.211 Potential conflict can arise on a route if one operator is subsidised and another competing operator is not subsidised. The PSO and PSC approach outlined in the Cabotage Regulation is intended to help rectify this, though does not appear to do so in practice. Traffic revenues of a competing private operator may result in a £-for-£ increase in the subsidy required to balance the books of the subsidized operator. Government has to consider what it can do in such a situation. In circumstances where the unsubsidized operator secures a majority share of the market, and can adequately accommodate the needs of that entire market, then there would seem little role for a subsidized operator to continue on the same route. However, where a large part of the market needs are not being met by the unsubsidized operator (e.g. Gourock-Dunoon town centre to town centre passenger service), then it may be necessary to continue with a subsidized operation in some form.

4.5Operate-only, and provide-and-operate tenders1.1.212 Deficit funding requires a single operator to be selected to serve the

required route or routes, hence the use of periodic tenders for principal Scottish ferry services, the aim of which is to ensure value for money, transparency, and equity.

21 Scottish Affairs Committee (1997) Withdrawal of Tariff Rebate Subsidy for Northern Isles Freight, House of Commons.

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1.1.213 Neither Orkney nor Shetland LAs, which both directly operate inter-island ferry services, tender these out at present (with the exception of one route in Shetland). In the absence of competitive tenders, it might therefore be said that nobody knows for sure if the latter services could be improved, and/or if subsidy could be reduced. The view of the respective councils is that these services are best operated in-house (Council’s Workshop). However, this has not been put to the test. Shetland has tendered one route (Foula), which is operated by the privately-owned Atlantic Ferries, employing a council-owned vessel (the MV New Advance). SIC and ZetTrans maintain that the Foula ferry service was tendered for reasons of ‘sustainability and compliance’. The overall cost of delivering the network of inter island services ‘increased significantly as a result’.

1.1.214 Whilst Shetland has in the main used its own resources to invest in 4 new ships over the last 7 years, Orkney has been unwilling to modernise its fleet using own resources, practically all of which needs replacement; like SIC, OIC also has considerable reserves. Shetland has good ferry service provision but this comes at a high price to the public sector. If councils are unwilling to purchase ships using their own resources or through borrowing, and if SG (or CMAL) is unable to supply them with ships, then another option could be to tender services with the condition that bidders should replace vessels. There is inevitably a cost to be incurred either way – ships will be needed, sooner rather than later in many cases. Even if the internal ferry services were put out to tender and a private operator proposed to bring in its own vessels, the shore infrastructure would still need to be improved.

1.1.215 While there are advantages noted above of tendering lifeline ferry contracts, there are drawbacks to the process which have become evident in recent tender exercises (e.g. cost to bidders, cost to tendering authorities, administration, there may be no bids received etc). The costs to bidders of preparing a bid are very high, especially if many routes are tendered in one large bundle. On the other hand, with a large bundle, tender costs incurred may be spread across more routes. However, the high cost of tendering is considered to be a disincentive to those bidding (Operators Workshop), particularly for private operators who have to bear the cost themselves, whereas a public sector operators bid costs would ultimately be underwritten by the state if it lost the tender . Start-up costs are another factor for a private bidder, especially for a large bundle of routes tendered together as in the case with CHFS.

1.1.216 There is a need to consider the expertise of a new operator on a route and the robustness of an operator bringing its own vessel(s) to a route. A private operator could take a ship elsewhere if it were financially beneficial for them to do so, although the terms of any PSC would still need to be met. Contract terms could ensure the employment of a specific vessel or vessels as proposed by a bidder. However, the Scottish Government has concerns about whether it would

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in practice be possible to ensure completely via contract terms that an operator could not default on a PSC and take its vessels elsewhere. Furthermore, there would appear to be nothing that the Scottish Government could do to ensure that an operator providing a PSC with its own vessels would bid for a subsequent contract. In addition, there is no guarantee that a subsequent tender would attract alternative operators with the same willingness/ability to provide its own vessels. While these are valid concerns, in our case studies and review of PSC services, we have not found any instance of an operator suddenly ending PSC operations. There is evidence that new ships provided in a first round of tenders are continuing into the next subsequent round (e.g. Bornholm, Gotland).

1.1.217 Tendering raises the issue of whether the tendered contract should be for operation only of given vessels, or for provide-and-operate, i.e. bidders deciding which vessels are the best for the job, and supplying these themselves. Whereas the tender for the 2002 Northern Isles contract was for provide-and-operate, on all other occasions the Scottish experience has been of operate-only contracts, with the vessels being a given. In addition, the specification set for Northern Isles services largely determined the specifications (and quantity) of the vessels that were ultimately deployed. In the case of the CHFS tender, there was a requirement to use the existing vessels owned by the newly formed CMAL, as well as the brand. In the case of the enforced early re-tendering of Northern Isles services in 2004, there was a requirement to use the existing vessels which are owned by a leasing company, and guaranteed by the Scottish Government. Notwithstanding the reasons given to justify an operate-only approach, such a process offers limited possibility for bidders to propose options based on alternative ship solutions, which may or may not result in lower costs, and hence reduced subsidy.

1.1.218 There are inevitably a number of benefits and drawbacks involved with each of these options, as indicated below:

Operate-only subsidy - drawbacks SG (or CMAL) has to find the capital to procure vessels (assuming

government views this as necessary), and given the pressure on government finances, this is becoming increasingly difficult;

The rapid pace of technological22 and regulatory change means that the lifecycle of ships is shortening, which suggests that using the same ship for very lengthy periods on the same route or in the same market may be a sub-optimal strategy (i.e. if there is compulsion to use an existing ship);

Market growth will mean a ship eventually becomes capacity constrained over time and, if market demand changes (e.g. if pax-car ratio alters), then

22 Garrison, W. (2000) Technological Changes and Transport Developments, UCTC No. 295, University of California Transportation Centre.

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vessels used may be inappropriate, although it may be possible to modify a vessel to increase its capacity);

Bidders may be prevented from offering vessels which they consider optimal and/or preferable for a given route, instead having to accept existing vessels, which may or may not be the most efficient or suitable.

Operate-only subsidy - benefits Vessels can be written down over their economic life (e.g. 20-25 years),

rather than over the duration of the contract (6 years), although some operators have noted that they would themselves write down vessels over 20-25 years even when bidding for 6 year contracts;

There is certainty for users in that a vessel will be on the route for its economic life and will not be replaced at the end of a contract with another vessel (although there could be a new operator);

Some operators may prefer to use existing vessels.Provide-and-operate subsidy - drawbacks

Operators may have to recover capital costs over a limited contract duration (6 years), accepting the risk that the contract may be lost at the end of the period. This may lead to a higher contract price (albeit some operators say they would depreciate ships over their expected lifetime, even assuming 6 year contracts);

The specific needs of the existing ports and route infrastructure may limit options for using anything other than existing or new specifically built vessels;

The need for sufficient lead in time to provide & operate and this may yield a considerable period of uncertainty leading up to the change of operator and ships;

The costs and potential losses involved in disposing of existing vessels may be a drawback, although most of the present CHFS fleet and many LA ships do need replacing anyway;

Users may have uncertainty about which vessel will be operating when a new contract starts (albeit PSCs would ensure adequate vessels);

Bidders may not have vessels to bring to the route; Bidders may propose to use old vessels to make their bid the lowest cost.

Provide-and-operate subsidy – benefits

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Operators provide capital for vessels, making an annual charge to SG through the contract price, but freeing SG from finding the initial capital requirements;

Operators can select vessels which they consider optimal for each given route, providing in their view the most effective, efficient, and economic service, rather than accepting existing vessels specified/provided by the state or state-owned entities;

Each subsequent tender offers a potential opportunity to introduce new and improved vessels, and this may be attractive if demands on the route have changed, or if ship technology has advanced in some way;

There is however a need to build in sufficient lead time for operators to procure ships, and ships will still need to be in part funded by SG whether through capital or operating subsidy. Providing new ferries in terms of new buildings requires usually at least 2 years from order to delivery, which requires tenders to be awarded well in advance (as was the case with the change from P&OSF to NorthLink).

1.1.219 Key issues here are therefore to do with the funding of vessels, the duration of the contract, the potential benefits of giving bidders the opportunity to introduce more appropriate vessels, and compliance with EU regulations.

Funding of Vessels1.1.220 Difficulty in securing public funds for the capital costs of new vessels

tends to favour a private sector solution, although since this converts an up-front capital cost into an annual call on public funds, a move to provide-and-operate contracts does not absolve the public sector from paying for ferries. Ferry funding issues are part of the wider issue of funding public infrastructure, and are examined in greater detail elsewhere in the Review.

1.1.221 If new vessels are proposed to serve a given route then time will be needed for winning bidders to confirm orders with shipyards. Depending on type and size of vessel, and yard selected, this process can take 2-3 years.

1.1.222 Second-hand vessels are another option and with these an earlier start-up would be possible. Where newbuilds are scheduled, successful operators may initially operate a service with existing vessels for the first year or two of a new contract whilst a new ship is under construction.

Contract Duration1.1.223 The 6 year contract period is considered by some stakeholders to

represent a disincentive for private investment in ships. However, this does not appear to be the case in other subsidised ferry markets elsewhere (see European case studies). This could be because operators in other member states may be large enough to be able to deploy ships elsewhere in their fleet if

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they lose a contract at the end of 6 years. Clearly, there are risks here for an operator providing new ships for a six year contract, and this may result in a higher tender price. However, operators have said that if they depreciate new vessels over their expected useful life, this makes any subsequent bids made for the same contracts more attractive than competing bids which anticipate new vessels.

1.1.224 Another factor is the state of the market for second-hand vessels at a given point in time; if an operator has to dispose of vessels after losing a contract, this may result in a loss (or a gain) on disposal. For some tenders coming to an end that may represent a problem, or an opportunity, for the outgoing operator. For others it may also be advantageous; for example if a bidder can secure an existing ship(s) from another operator at an attractive price, for deployment on another route. The tender process should therefore be able to assess different options (e.g. new ship, second-hand ship, existing ship etc) in order to select the best possible outcome.

Issues related to Operator-Provided Vessels1.1.225 Operators may have different preferences with respect to ship type, size,

speed, capacity, on-board facilities, crew arrangements, number of ships required and daily operating hours for any given route. This implies that, in practice, operators could have quite different cost structures, as well as different traffic expansion and revenue growth potential, and hence different subsidy requirements. Thus, a positive aspect of tenders is that it permits decision makers to consider different options and to compare and evaluate them. However, whatever any bidder offers will ultimately need to meet the service specification requirements.

1.1.226 As with all ferry services there is a need for operators to consider specific harbour constraints and the effect this has on ship specifications particularly with respect to vessel length, beam, draft, and power requirements.

1.1.227 Some stakeholders considered crew costs of existing vessels to be too high, and in some instances ship passenger capacity on vessels to be too great (various workshops). Vehicle deck capacity tends to ‘max-out’ long before passenger capacity does, implying that on some routes maximum passenger capacity is seldom, if ever, used (with some exceptions, e.g. Bute, Cumbrae). Further analysis of ship capacity and actual utilisation levels (see below) suggests that passenger capacity certificates may be set too high in several instances. For the Northern Isles, limitations on cabin space and car deck space represent the main constraints in terms of overall capacity at peak travel periods, ex-Aberdeen. As this factor (i.e. passenger capacity) determines the crew level required, and as labour costs can account for 50% or more of total operating costs, the actual passenger capacity specified for ships requires very careful consideration.

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1.1.228 It may be that new operators would not, in circumstances where they sought to change ship specifications, be able to employ all the staff currently employed. This could result in redundancies. New operators would be unlikely to accept costs relating to redundancies. Private operators would look to win contracts based on the most efficient solutions possible which, in turn, will be based on their knowledge of best practice, not on existing practice. Private operators have expressed their unwillingness to bid if they are forced to take on all existing staff. This suggests if there were such a requirement it would mean that: a) only publicly-owned operators will continue to bid and; b) there is little likelihood of private investment in new or replacement vessels.

4.6Vessel specification1.1.229 Tenders should permit operators to propose optimal ship solutions which

fit the needs of the specific markets/routes in question. This requires ships to be tailored to the requirements of each route. Where Ro-Pax ships (i.e. passengers and vehicle capacity) maintain a route, these should have the correct pax-car ratio.

1.1.230 In following up stakeholder comments and the views of some operators, we have further explored vehicle and passenger utilisation for CFL major vessel operations (Table 4.2). Major vessels (including here also the somewhat smaller Bute ships) offer a capacity of between 450-1,000 passengers and 54-114 cars.

1.1.231 Based on data provided by CFL, significant differences exist between average and peak period vehicle deck utilisation and passenger capacity utilisation. On average, vehicle deck utilisation in 2008 across all major ship services was 40.1%, whereas passenger utilisation was just 12.4%. This implies that available passenger capacity is utilised at approximately one-third the level of available vehicle deck capacity, on average.

1.1.232 One conclusion to be drawn from this is that major ships used by CFL are specified with significantly greater passenger capacity relative to demand, or relative to vehicle deck demand (i.e. high pax to car ratio). As information from the various workshops suggested, during peak periods vessels tend to ‘max-out’ first on vehicle deck space well before the maximum passenger capacity is achieved (assuming, on the odd occasion, that maximum passenger capacity is ever achieved).

TABLE 4-6: ESTIMATED PASSENGER AND VEHICLE DECK UTILISATION-SELECTED CHFS ROUTES: LMAC

Vehicles PassengersAverage annual

Maximum monthly

Average annual

Maximum

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monthlyUtilisation % Utilisation % Utilisation % Utilisati

on %Wemyss Bay to Rothesay 33.0% 37.3% 14.6% 20.5%

Ardrossan to Brodick 49.4% 60.4% 16.8% 28.6%

Kennacraig to Islay 61.8% 80.2% 11.3% 24.4%

Oban to Craignure 51.5% 75.1% 13.7% 51.0%

Oban to Castlebay/Lochboisdale

25.1% 40.7% 9.5% 19.2%

Uig to Tarbert/Lochmaddy 44.4% 62.7% 12.2% 24.7%

Ullapool to Stornoway 45.1% 59.0% 12.9% 23.5%

Oban to Coll/Tiree 27.5% 36.6% 13.3% 25.2%

Oban to Colonsay 23.5% 36.6% 7.2% 18.4%

Average utilisation 40.1% 12.4%

Source: Derived from data provided by CFL

1.1.233 Available vehicle deck capacity can represent a limiting constraint for users (Oban Workshop; Stornoway Workshop; Freight meetings Islay). For several routes, average vehicle deck capacity utilisation has reached quite high levels (e.g. Oban-Mull, Stornoway, Islay, Arran and Uig). These are routes on which, in future, a better balance needs to be struck between vehicle deck and passenger capacity, but they are by no means the only routes requiring some adjustment in the passenger-car ratio.

1.1.234 Some of the smaller routes on which major vessels are used experience an even more severe mis-match, with far too much passenger and vehicle capacity provided. Oban-Coll/Tiree has an average vehicle deck utilisation of 27.5%, and just 13.3% for passengers. The maximum monthly vehicle utilisation is 36.6% and the maximum monthly passenger utilisation (both occurring in August) is 25.2%.

1.1.235 The essential issue here concerns the ratio of passengers to cars in terms of required ship capacity. CMAL/CFL ships tend to be specified with a particularly high ratio of as much as 12:1 (i.e. 12 passengers per car deck space, as on MV Isle of Mull). Yet the vessel utilisation data suggests the actual ratio in practice should be no more than about half this level (e.g. 5:1), possibly less. It is noticeable that the most recent additions to the CMAL fleet have ratios in the range 6.2 to 7.5, which reflects a better match (albeit ‘Bute’ serves a commuter route which may be expected to carry a lesser amount of car-accompanied passengers than some of the longer CHFS routes).

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1.1.236 It is not exactly clear why vessels are specified in this way. It may be a historic legacy where, at one time, the vast majority of passengers travelled to and from the ferries (and steamers before them) via public transport, notably by rail. However, over the last 30-40 years, car ownership and usage has increased dramatically, so that today the proportion of passengers using public transport access to/from ferries (i.e. foot passengers) comprises the minority of travellers on most routes.

1.1.237 Existing CFL vessel designs (with the exception of shorter pax-oriented commuter routes on the Clyde) do not appear to provide a good fit with ongoing ferry market developments and trends generally. The Ro-Pax development over the past 10-20 years (i.e. shift to greater vehicle deck capacity, but lower passenger capacity) has come about due to a combination of factors, including: An increase in the number of people travelling by car; A fall in the share of passengers using public transport to/from ferries; A rise in air travel; A growth in freight transport.

1.1.238 Combined, these factors result in increased pressure being placed on vehicle deck space and rather less on passenger capacity. Unless this issue is carefully managed, the consequence is a mis-match in terms of ship specifications, with passenger capacity being over-provided to a significant degree. This results in higher than necessary crew numbers, in turn generating higher operating costs than necessary. Aside from other factors such as Hours of Work legislation and Customer Service on board, the higher the Passenger Certificate awarded by the MCA, the larger the crew complement will be needed to safely evacuate a ship in the event of an emergency. Crew numbers can be reduced in winter but this does not alter the fact that ships have been specified to carry a certain volume of passengers at peak periods which is never achieved.

1.1.239 The ship procurement strategy of private operator Pentland Ferries is informative in the context of passenger:car ratio and, in turn, the influence this has on vessel crewing arrangements, operating costs, and capital costs.

1.1.240 Table 4.3 compares CFL’s and NorthLink’s vessels with Pentland Ferries’ new ship, Pentalina. CFL’s pax:car ratio for major vessels varies from a low of 5.7 (MV Hebrides) to a high of 12.0 (MV Isle of Mull), with NorthLink’s MV Hamnavoe at 5.5. Pentland Ferries new vessel has a pax:car ratio of just 4.0.

1.1.241 The effect of this factor on crew complement can be substantial. Ships with a higher pax:car ratio tend to have twice or more the crew levels of lower ratio ships, so incur twice the labour cost, albeit crew costs are also heavily

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impacted by the timetable and the Hours of Rest regulations which can ‘force’ an operator to carry many more crew. This also translates into higher upfront capital costs for high pax:car ratio ships due to the cost of providing extra passenger spaces, and extra onboard crew accommodation.

1.1.242 Crew costs represent a substantial part of overall costs, amounting to some 50% of total ferry operating costs for CalMac and for other publicly operated services such as Orkney Ferries23. New tenders should therefore permit operators to propose ships that are optimised for each route. By implication, imposing existing ships on bidding operators may potentially lead to sub-optimal solutions being achieved (i.e. if a ship has too much passenger capacity, this then results in higher crew requirements than necessary and hence higher operating costs and higher subsidy). There is a need to look at reducing passenger carrying limits and its effect on crew levels accordingly.

TABLE 4-7: CAR AND PASSENGER RATIO, CREW & NEWBUILD COST FOR SELECTED ‘MAJOR’ SHIPS

Operator Vessel Year Car Passenger Pax-Car Number

Capital

Built Capacity Capacity Ratio of Crew Cost (£m)

CFL Isle of Mull 1988

80 962 12.0 28 6.4

CFL Lord of the Isles 1990

56 506 9.0 28 6.9

CFL Caledonian Isles 1993

120 1000 8.3 26 11.0

CFL Isle of Lewis 1995

123 968 7.9 28 15.0

CFL Clansman 1998

90 638 7.1 24 15.0

CFL Hebrides 2001

108 612 5.7 24 15.5

NorthLink

Hamnavoe 2002

110 600 5.5 28 28.0

CFL Bute 2005

60 450 7.5 21 8.8

CFL Newbuild 2011

88 550 6.3 28 24.5

PF Pentalina 2008

88 350 4.0 14 9.0

Sources: ShipPax Finance 09; Fisher Report on Strategic Sea Crossings 2005

23 CalMac annual report 2008, and Orkney Ferries Ltd budgets.63


4.7Hybrid Systems1.1.243 Hybrid approaches mainly involve the provision of additional subsidies on

top of a deficit funded service, and examples of these in use in Scotland at the current time include: Islander Discounts, a percentage reduction on the fares chargeable to island

residents using the ferry service; RET – currently being trialled in the Western Isles, through the lifeline service

operator, involving a further reduction of fares for passengers and freight beyond the level set in the CHFS contract, to a level calculated to be the same as users would pay travelling the equivalent distance by road. This 2.5-year trial is estimated to cost £7.5m p.a., and its effectiveness, and its impacts on the economies and communities of the Western Isles, are being closely monitored;

Lo-lo subsidy – currently paid on freight using Lo-Lo services which compete with Ro-Ro lifeline operators. Following a tendering process, a contract for a Lo-Lo service to the Northern Isles was awarded to Streamline in 2006;

Air Discount Scheme – although not ferries, we can include this as another volume-related user subsidy (payable on fares paid by eligible, mainly island residents) which can be regarded as distorting trade with ferry transport – or perhaps more accurately levelling the playing field between air and sea transport, since the latter is already subsidised).

1.1.244 It is noteworthy that, leaving aside ADS, the subsidies in this category, although related to the traffic carried, are paid where a single deficit-funded operator has already been selected by tender. This avoids the issue of potentially paying subsidy to competing operators (the Lo-Lo subsidy is an exception, which was itself awarded after tender). All of these subsidies are targeted at specific categories of traffic and, although they are an effective means of meeting specific policy objectives, they can raise issues of equity of treatment between different categories of traffic.

1.1.245 Subsidies applying to freight transport are considered in the separate WP1-Part B report.

4.8Multiple Operators1.1.246 The “subsidy for all operators” type solution allows the SG to pay subsidy

to operators for carriage of some geographic definition or individual passengers. It does not allow SG to provide subsidy for freight. A volume-related subsidy does not require the selection of a single operator. Any operator carrying traffic on a life-line route, who meets eligibility criteria can obtain subsidy. The subsidy therefore achieves equity between operators, and the existence of two

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competing operators provides strong incentives to efficient operation. However, this is also a drawback, since two operators competing on the same route may obtain subsidy, and use it to intensify competition. Public funds are then used to subsidise competition. This may be beneficial to users, if the competing operators embark on a price war, but this course of action is likely to de-stabilise one or both operators. If the service level was guaranteed through a PSO/PSC then the possibility of a diminishing service package occurring would not be an issue.

1.1.247 Volume-related subsidies would not require the state to become involved in the provision of ships, since this would be undertaken by private operators, who would include capital costs in the calculation of gross fares and on which a proportionate subsidy was paid. There is, therefore, an incentive to operators to provide efficient vessels which will be attractive to the market (although in some circumstances it may result in the use of older, written-down vessels).

1.1.248 The agreed level of operating subsidy includes provision for islander discounts to be given. This requires island residents to first register with the operator.

1.1.249 Current discounts result in reduced transport costs for islanders. The passenger and car fares are already heavily subsidized and NorthLink’s experience over the last 7 years is that mainland (no-islander discounted) fares are not necessarily a serious disincentive to travel and growing the volumes of pax carried to the islands.

1.1.250 Aid of a Social Character (ASC) may be used to help further reduce transport costs for specific groups such as OAP’s, unemployed etc.

1.1.251 NorthLink has in recent years introduced an islander ‘Friends and Family’ discount. Registered island residents are permitted to nominate friends and family who can also receive fare discounts. The scheme was explained to the EC during its recent investigation and the EC found no objections to it.

1.1.252 RET has in some cases virtually halved passenger travel costs, albeit for the Hebrides routes that qualify. While RET is ostensibly intended to equalise sea transport costs with road transport costs, and it has specific aims, in practice it is an additional form of state subsidy for ferry transport.

4.9Profit sharing1.1.253There are three major risks associated with transport operation: revenue risk

(demand is below expectation, service quality is poor, etc.); operating cost risk (maintenance costs, fuel bills, and so on); and capital cost risk (purchasing and replacing assets).

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1.1.254 Operating cost risk is usually transferred to the operator whilst revenue risk may stay with the authority, so that the operator hands over all revenue to the authority, or else the revenue risk may also transfer to the operator. The former may be classified as gross cost and the latter as net cost. When a tendering authority retains both types of risk, this is referred to as a management contract. Assets (infrastructure, vessels, rolling stock, and vehicles) may either be the responsibility of the contracted operator or else the tendering authority.

1.1.255 In the case of the Northern Isles tender, there is a sharing between the SG and the Operator of any excess grant over an agreed level. This allows SG to recover any amount by which the Grant actually paid turns out to have been excessive as provided for in the draft Grant Agreement24. With a state-owned operator this arrangement seems rather superfluous, given that any surplus ends up with the state anyway at the end of the day.

1.1.256 The view of private operators is that they should receive profits from their operations, whether these are provided via a PSC or not. Any profit clawback represents a disincentive and could prevent private operators from bidding.

1.1.257PSCs can include explicit penalty and incentive regimes for operator performance, measured against targeted outputs. Almost all PSCs have penalty clauses for underperformance which is defined in various ways, including punctuality, cancellations and customer satisfaction surveys25. Relatively few contracts appear to include bonus systems, however.

4.10 Using tenders as incentives1.1.258 The ferry operators workshop organised as part of the Review

demonstrated a high degree of interest amongst transport operators in bidding for Scottish ferry services. It would be expected that well promoted tender opportunities could generate interest from transport operators not just within Scotland, but also in the rest of the UK and perhaps elsewhere in Europe.

1.1.259 Essentially, the mere commercial opportunity presented through undertaking a competitive tender process in itself offers a form of incentive. Including in the tender the prospect of subsidy payments, in return for a commercial operator to provide and maintain a desired service, generates a further potential incentive.

1.1.260 The key to achieve more offers in the tender process is to allow bidders the flexibility to develop their own ideas and concepts in terms of service provision, which complies with (or exceeds) the minimum service levels required.

24 http://www.scotland.gov.uk/Publications/2005/09/2195702/5708025 Colin Buchanan & Partners (2006) EC Contracts – Final Report for European Commission DGTREN.

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1.1.261 Proper marketing of tender opportunities is considered important by private ferry operators. In the Scottish Enterprise tender for the Scotland-Continent ferry service in 1999-2000, marketing activities included placing adverts in the international shipping press (Lloyds List, Cruise & Ferry Info), preparation of a short informative brochure, and presentations at industry conferences (e.g. Interferry).

4.11 Perceived disincentives to bidding for PSCs1.1.262 A disincentive (for bidders) may be the length of time needed to work

through the tender process and then prepare a bid covering all routes in what for CHFS is a very large ‘bundle’. Private operators favour smaller bundles.

1.1.263 Private operators must also pay their own bid costs, whereas a public sector bidder’s costs are underwritten by the state (as sole shareholder, the state is bound to cover any and all deficits of its wholly-owned companies). Start-up costs are another factor for a private bidder, more especially for a large bundle of routes tendered together as is the case with CHFS.

1.1.264 A further possible disincentive (to bidders) relates to any requirement to use existing vessels. This option may be more expensive for some bidders than their own preferred ship-sourcing strategy. In addition, bidders may not wish to use existing vessels for a variety of other reasons (e.g. efficiency, and also for operational reasons).

1.1.265 The consultation process established several routes/areas for which local business interests may be motivated to put together bids to operate ferry services themselves. These were mostly related to potentially smaller bundles and even for individual routes. This indicates that the potential for private sector investment in the provision of ferry services, including vessels, may be more likely if smaller bundles and even single route tenders were offered.

1.1.266 However, there are currently a range of factors which may provide disincentives for potential operators from formulating bids, not least bid costs, using current vessels, corporate identity (i.e. CFL), large bundle, plus crewing issues, and TUPE.

1.1.267 Table 4.4 presents the various forms of financial incentives (for operators and users) presently employed to subsidise Scottish ferry services, summarising the strengths and weaknesses of each.

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TABLE 4-8: SUMMARY OF FINANCIAL INCENTIVES FOR FERRY OPERATORS AND USERS OF FERRY SERVICES

Incentive Characteristics Strengths Weaknesses

Operating/Deficit Subsidy

Compensation for operator to

maintain non-economic service

Fixed amount of subsidy agreed with operator in

advance

Cost overruns may mean state pays more.

Little incentive for efficiency gains. Public

operator has little incentive (or need) to make surplus. Large bundle tender may conceal potential profitable routes.

‘Given’ ships prevents proper evaluation of

alternative ship offers. Islander Discount

A fare reduction given to island

residents

Lowers transport cost for islanders

Discriminates against non-islanders, tourists

and freightAid of social character (ASC)

Reduces costs for selected groups

(e.g. OAP’s, unemployed, children etc)

Lowers transport costs for selected groups. Can apply

to all operators (e.g. like ADS)

Discriminates against other travellers

‘Friends & Family’ (e.g. NorthLink)

Islanders nominate a number of friends

and family

Lowers transport costs for non

island residents. May be self financing

RET (passenger)

Additional user subsidy to bring

travel costs down to road equivalent

Reduces cost for user

Demand-led subsidy, albeit with cap.

Demands more public money.

RET (freight) Additional user subsidy to bring

travel costs down to road equivalent


Demand-led subsidy, albeit with cap. May

have limited impact on door-door cost after

previous freight discounts removed.

Demands more public

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Incentive Characteristics Strengths Weaknesses

money. Ro-Ro freight subsidy

% reduction on tariff rates


Demands more public money.

LoLo freight subsidy

Operator subsidy May reduce transport costs if

passed on to users

Cap imposed serves to reduce incentive for

traffic growth. Different to RoRo scheme.

FFG/WFG Amount based on modal shift, with max set amount

Helps with start-up costs

Limited funding level. Low take-up.

Air Discount Scheme

% reduction on tariff rates

Reduces cost for user (assuming

control over tariff increases). Easy

system to operate and understand.

Potential diversion from sea to air

transport. Potential distortions against

non-subsidised transport services.

Port capital subsidy

State grant funding for port

developments

Shifts burden of investment away

from service providers.

Port ‘authority’ may seek to exploit rents

via port charges

Equipment subsidy

e.g. Public investment in

livestock trailers and lairage

facilities

Reduces cost for users

Require more public funding

May lead to distortions

Ship capital subsidy

Grant funding for ships

Reduces cost and risk for operator

Expensive for state. Tends to lead to single ship orders, which can

be inefficient.

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5 EUROPEAN FERRY SERVICE CASE STUDIES5.1 Introduction 1.1.268 This review of experiences in procurement in other European countries

aims to contribute toward an effective public procurement system which will allow suppliers to provide services of a satisfactory quality, service and price within a timely delivery schedule in future tender rounds.

1.1.269 The main argument generally brought forward to support tendering procedures is the need for reassessment of the cost efficiency of the delivered services. Tender procedures thus aim at improving a prevalent service situation in terms of value for money for the consumer and the public purse.

1.1.270 The current work describes and evaluates the procurement strategies, results and underlying structures in different European countries. It seeks to show actual results from procurement under EU regulation and to identify any transferable aspects that might be considered for implementation in the Scottish context.

1.1.271 We have reviewed in detail ferry service procurement within Denmark, Greece, Sweden and Norway. Further information on these as well as ferry service procurement in other countries is provided in Annex III.

1.1.272 Based on what is observed and established from the case studies, we then make recommendations in regard to the delivery and procurement of ferry services in Scotland.

5.2Methodology1.1.273 The aim of the case studies is to identify and compare procurement

strategies, procedures, tender requirements and institutional structures with respect to delivery of ferry services in other European countries. This information is intended to assist SG to prepare the best tendering approach and contract with ferry operators and thereby identify under what conditions procurement strategies and consequently service contracts can contribute to the SG’s objectives. For each case study country the following structure is applied in order to assess all relevant aspects: Methods of delivery Financial incentives Competition and procurement Powers and structures

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Results1.1.274 Contact has been made with each of the respective state authorities

responsible for delivery of ferry services. Contact has also been made with the different ferry operators involved. In one instance we have visited operations (in Norway).

1.1.275 Each case study has further sought to identify and explore/analyse the following issues related to ferry service procurement and operation: Private/public company as operator If operator is an integrated transport provider Contract duration period Complex/non-complex tender (costs) Subsidy type(s) and amount paid per annum Size of the route bundle (routes per contract) How/by whom are services regulated Any exclusions (e.g. added fuel cost etc) Private/public investment in ships Who owns/invests in ports Other issues

1.1.276 Procurement of domestic ferry services in Europe has evolved differently depending on each country’s history, rules and regulations, despite the fact all EU countries have had to obey the same European Maritime Cabotage Regulation since the 1990s. Norway more or less plays by the same rules even though it is outside the EU.

1.1.277 In some states only limited documentation and research exists concerning island ferry transport. Existing documentation in many cases is only available in each country’s language. Developing case studies on domestic ferry service procurement can therefore be a laborious process. Specialised industry publications have been a useful source of information regarding notification of tenders and their outcomes over recent years and we would strongly support the use of that medium to advertise tender opportunities in Scotland in future

5.3DenmarkIntroduction

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1.1.278Denmark is an “island country” and is also referred to as “The country of ferries”. Denmark has more than 400 islands. Some of them are connected to the mainland or other islands by bridges while others are connected by ferries. Ferries have been a main facilitator of territorial cohesion over the decades. Today there are a total of 65 domestic ferry routes in Denmark and there are also approximately 20 international routes.

1.1.279 The majority of ports in Denmark are in public ownership, and the various municipalities often play a key role in the groups which own and are responsible for port activities and investments. Currently, there are only three ports that the national government is responsible for. As a starting point, the establishment of new ports or expansion of existing ports does not generally involve the state. Where there is freedom for operators to bring their own vessel solutions this may have financial implications for shore infrastructure.

1.1.280 The state’s main role is to ensure that the ports are competing on equal terms. Traditionally, there has been free access to operate ferry services in Denmark. Public authorities’ opportunities to subsidise the operation of ferry services are regulated by law and, after a tendering process, public authorities can pay private or corporate public shipping companies to operate ferry services or even allow for monopoly operation.

1.1.281 It is important to note that Denmark developed its “Island Ferry Project”26 in 1994/95 which had as its goal improved standardisation of ferries and terminals, a principal driver being the ageing fleet structure at the time. That study, however, only looked at design aspects. The main contribution was the identification of ship types (4 types) and terminals. While the project led to a substantial fleet renewal, the standardisation idea did not prove sustainable under a tender regime because operators preferred to bring in their own tonnage.

Methods of delivery1.1.282 Ferry services are either operated by private companies, by ‘corporate’

public shipping companies (i.e. limited companies owned by the public sector), or by a mix of both where one party provides the mobile assets and the other provides the operation.

1.1.283 Previously, many of the routes were both owned and run by the local authorities. Consequently, many of the ferry companies have now been split up into two: one company (often owned by the ‘state’, mostly at municipal level) which owns the ferry (or ferries) and berth facilities and one “operating”

26 Jesper Aagesen and Carl Bro (2003): The Danish Concept of Double-Ended Ferries -Review of a Project Regarding Island Ferries in Denmark. 2nd International Conference on Double-Ended Ferries, 9-12 March 2003, Radisson SAS Hotel, Ålesund, Norway

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company which runs the service. However on certain routes the operator also owns the ferries (see figure below).

Evolution of tenders in Denmark27

1.1.284 Table 5.1 provides an example of the timescale involved in the procurement procedure for the ferry services to the major island of Bornholm. Here we can see this process took a total of about 1.5 years from time of publication of contract notices to contract signing. Early contract signing gives potential planning security for the operator and sufficient time to source ships. Procurement is a continuous process.

1.1.285 There needs to be sufficient time given from the time of contract signature for the operator to procure ships. In the case of Bornholm the contract was signed in 2009, an order for an additional vessel was signed by the operator in 2009, and this ship is due for delivery in 2011 in time for the new contracted service to commence.

1.1.286 It is important to reflect here that there was then an additional 2.5 years until the contract started – so a total of 4 years lead in time. This effectively means that 1 year into a 5 year contract the tendering authority would be starting the tendering of the new contracts and that 2.5 years into a 5 year contract the existing operator might find he will no longer be the ferry operator.

TABLE 5-1: TIMESCALE OF PROCUREMENT PROCEDURE FOR BORNHOLM FERRY SERVICES

Activity Start date End datePolitical approval March 2007 March 2008Publication of contract notices September 3, 2007 Final date for requests to participate October 15, 2007End of pre qualification November 1, 2007Dispatch of contract documents and invitations to tender

April 23, 2008

Final date for tender September 15, 2008Negotiation and evaluation September 15,

2008Ultimo December 2008

Contract signing February 13, 2009Service start September 1, 2011

27 Information from http//:www.trafikstyrelsen.dk73


1.1.287 Route characteristics for the Bornholm tender are shown in Table 5.2. Here we see the main service requirements specified. This includes frequency, sailing times, and capacity (of the service) inclusive of seasonal variation in traffic demand.

TABLE 5.2: ROUTE CHARACTERISTICS - BORNHOLM

Ronne Koge Ronne -YstadDistance 91.6 nm 38.8 nmType of traffic Primarily freight + passenger Mainly passengers with cars

+ freightTime Night sailing (1130 – 0600) in

both directions1 weekly trip for dangerous cargo

High speed traffic, 2-5 sailings a day all year roundAdditional round trip with Ro-Pax per week in low season Extra sailings on key holidays with conventional car ferry

Passenger Max. ca. 200, rarely > 100 in low season, rarely > 50 with berths

Up to 7000 per day and direction Minimum ca. 3-400 per day in winter

Freight Up to 75 trailers/night in each direction

Up to 20 lorries a day/direction

Effects Introduction of high speed craft has almost doubled passenger numbers in summer

1.1.288 Until 2005, certain ferries in Denmark were also operated by the Danish state. In 2005, limited liability companies were created. The delivery of services is summarised in Table 5.3.

1.1.289 The Bornholm and Samsø services have been successfully tendered recently albeit with just one bidder in the case of Bornholm, however a number of other mostly small services are still today operated by local authorities. Table 5.3 gives an overview on the type of contract on the different routes.

1.1.290 Since 2007, the route to Bornholm has been operated by Nordic Ferry Services A/S (NFS), a 50/50 joint venture between the Danish state and the Copenhagen listed company Clipper. NFS operates a total of 4 domestic ferry services under PSCs (Samso, Bornholms, Als and Langeland Trafikken).

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1.1.291 In 2007, Scandlines sold its 30% stake in Mols-Linien A/S and 100% of Scandlines Sydfynske A/S to companies controlled by the Clipper Group. The reasons for the sale are given as strategic, because Scandlines wanted to focus on international traffic.

FIGURE 5-2: DANISH FERRY NETWORK

Source: http://www.trafikstyrelsen.dk

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FIGURE 5-3 – STRUCTURE FOR FERRY OPERATION BORNHOLM

Source: Trafikstyrelsen

TABLE 5-3: FERRY SERVICE DELIVERY IN DENMARK

Route/area PSO/PSC Duration Comments2 routes

(Rønne-Ystad and Rønne-Køge)

PSO/PSC 5 years On the same routes PSC operated by Bornholmstrafikken A/S- Remuneration: 126 million DKK/year (rising to DKK180m for next contract, albeit the operator has ordered an additional ship)

18 routes PSC/PSO On average 5 years

PSC not exclusive, with the exception of route Spodsbjerg-Tårs.

16 routes PSC - Operated by local authorities; 16 tender procedures cancelled due to lack of interest from operators.

11 routes PSC - Operated by local authorities; never submitted to tender procedures.

Source: derived from Trafikstyrelsen

Financial incentives1.1.292 Subsidies are based on net cost contracts where the shipping company

receives the income from tickets. Subsidies are paid by the Danish State in accordance with the PSC. The current level of operating subsidies for three service contracts is:

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Rønne-Køge, Rønne–Ystad (ferry service Bornholm) – About 18.4 million Euro p/a.

Samsø–Kalundborg - About 1.2 million Euro p/a. Bøjden-Fynshav - About 1 million Euro p/a.

1.1.293 Subsidies come out of the state budget. Subsidies are split in terms of running costs and investment grants (for investments in land facilities, new ferries etc.). The running cost grants are fixed sums (based on the number of inhabitants, ferry line distance, extent of agricultural land, size of running cost deficit etc.) that are divided among the islands (or, more precisely, among the local governments in the municipality where the islands are located) in a set distribution plan.

1.1.294 Any investment grants are dependent on the investments that are made by the local governments. In the case of local government’s investments in ships and land facilities, the state, the regional government and the local government each contribute 1/3 of the annual repayments. We were unable to obtain information on specific port fees.

1.1.295 There is no protection for the PSO operator as such, but the local authorities can reduce fares on, for example, cross-fjord ferry lines, in order to attract more passengers and to change transport patterns. Any operator is free to establish a ferry line on a commercial basis as long as it is not in a monopolised area. Monopolised areas are concession areas where operators have the exclusive rights to operate. A few ferry lines (public service lines to the islands Ærø and Anholt) and the line Sælvig (on the island Samsø)-Hou (in Jutland) are monopolised.

Competition and Procurement1.1.296 Since the second half of the 1990s, tenders have been realised according

to EU regulations. Tendering in the Danish context aims at benefitting users and communities and at decreasing subsidy levels. Public tendering is used as the means to ensure cost efficient transport services for citizens in all sectors of public transport in Denmark: Buses, trains, planes and ferries.

1.1.297 The first round of tenders was realised in 1997. The country is currently working on the 3rd round of tenders and also preparing the 4th round in some cases.

1.1.298 Tenders specify contract requirements on: Frequencies Regularity

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Capacity and quality Additional services Fixed rates and conditions Special conditions for certain categories of passengers Adjustment of services to actual needs

The requirements differ by contract/route and an evolution of criteria can be observed when comparing the 2nd and 3rd round of tenders. The set requirements refer to the specific characteristics of each service. One change is the length of contract in the 2003/2004 tender round contracts had periods of 5 years in the previous round. In the last round the contract period is specified as 5 years plus a one year extension option.

TABLE 5-4: SERVICE REQUIREMENTS RONNE – YSTAD ROUTE

Current contract Next contract

Capacity (max) 32 days/ year with full capacity – 8 275 passengers and 1 575 cars per day in each direction

At least 32-38 days/year with at least 10 000 passengers and 2 200 cars per day in each direction

Crossing time 2/3 with crossing time of 1 hour 15 minutes, the rest with crossing time of 2 hours 30 minutes

1 hour 20 minutes

Ship requirements 84 days with high speed and conventional car ferry

84 days with two high speed ferries

Frequency Min. 3 trips/day – 2 @ 1 hour 20 minutes and 1 @ 2 hours 30 minutes

Min. 3 trips/day @ 1 hour 20 minutes


1.1.299 Service requirements shown in Table 5.4 for the Bornholm tender specify required daily capacity, crossing time, summer high-speed service, and frequency. Table 5.5 indicates freight capacity and the requirement for an increase in capacity for the next contract.

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5-5: SERVICE REQUIREMENTS RONNE – KOGE ROUTE

Current contract Next contract

Capacity (max) Min 1235 lane meters, 400 passengers/day per direction

Min 1500 lane meters, 400 passengers/day per direction


1.1.300 The current set up leads to a situation where other bidders have to bid against a government controlled operator that is also backed in the NFS joint venture by the 2nd largest Danish shipping company (Clipper A/S).28

1.1.301 In Table 5.6 an example timeline of the procurement procedure for the ferry services of Bornholm is presented.

TABLE 5-6: TIMESCALE PROCUREMENT PROCEDURE FOR BORNHOLM

Activity Start date End date

Political approval March 2007 March 2008

Publication of contract notices September 3, 2007

Final date for requests to participate

October 15, 2007

End of pre qualification November 1, 2007

Dispatch of contract documents and invitations to tender

April 23, 2008

Final date for tender September 15, 2008

Negotiation and evaluation September 15, 2008

Ultimo December 2008

Contract signing February 13, 2009

Service start September 1, 2011


28 This is the case in tenders for services to Bornholm. 79


1.1.302 Denmark issues “net-contracts”, regulating the maximum price per ticket and average ticket prices for all tickets per ticket group. The maximum prices and maximum average prices are set by the tendering authority.

1.1.303 The requirements of the selection criteria have evolved from “lowest price” selection criteria to a selection of the “economically most advantageous application”.

1.1.304 Operators are required to ‘bring their own ships’. In case of the new Bornholm contract the new catamaran currently under construction by Austal in Australia, is entirely funded by the company. However, it needs to be taken into account that Bornholm Trafikken A/S is 50% owned by the state and 50% by the private sector. The ship is financed by Nordea Bank.

1.1.305 Applied since the third round of tenders, the economically most advantageous tender is identified by a multi-criteria approach. The criteria are: Price, quality (70%), Flexible frequency and security of supply (20%) and Ferry quality (10%).

1.1.306 Additionally, the technical and financial conditions of the bidding company are taken into account. This includes turnover in the shipping business for the last 3 years and a reference list regarding the most important shipping business service contracts for the last 3 years as well as a declaration regarding debt to the authorities.

1.1.307 Procurement procedures differ significantly by route (see examples), depending on the political focus and if the tender asks for deployment of new ferries.

TABLE 5-7: COMPARISON PREVIOUS AND CURRENT CONTRACT – BORNHOLM ROUTE

Previous contract Current contract

Signed June 7, 2004 Signed contract February 2009

Traffic start May 1, 2005 Traffic start September 1, 2011

4 qualified operators:

Mols-Linien

4 qualified operators:

Scandlines Sydfynske A/S

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Scandlines

Gotland Rederi

Bornholmstrafikken

Nordic Ferry Services A/S

Mols-Linien A/S

Rederi Gotland AB

1 application – Bornholmstrafikken Bornholmstrafikken

Contract price/year:

126 500 000 DKK (ca. £11.9 million, 2004 prices)

Annual turnover Bornholmstrafikken:

0.5 billion DKK (ca. £47 million)


1.1.308 In the latest tender round, shipping companies are to a certain extent protected against increasing prices of oil as it (the company) is allowed to partly raise the price of the tickets in accordance with rising costs of oil. That is, the service users pay any oil surcharge, not the state.

Powers and structures1.1.309 The Public Transport Authority (Trafikstyrelsen) is an agency within the

Danish Ministry of Transport and is engaged in national as well as international commitments. Its remit includes the following functions:29

One of the main tasks is to act as adviser to the Ministry of Transport on matters relating to transport policy and strategic development of the transport sector;

As the authority responsible for public transport, Trafikstyrelsen imposes compliance with the safety and interoperability regulations governing railway transport;

The Authority establishes framework conditions, regulation and co-ordination of the players within the public transport of both passengers and goods;

The Public Transport Authority administers public procurement of railway and ferry transport services through organising tenders for operating contracts in accordance with Government decisions. Subsequently, the Authority follows up on monitoring the contractors' performance;

29 Taken from http://www.trafikstyrelsen.dk81


An important part of the strategic basis of the Authority is to carry out analyses and evaluation of the development of public transport in Denmark and internationally;

The Public Transport Authority represents Danish interests in international fora and organisations concerning public transport.

1.1.310 Competition in markets takes place during tender periods. Even though no service is protected from new entrants, competition amongst domestic ferry lines seems to be very limited.

Results1.1.311 The Danish experience has shown that tenders have been successful on a

number of routes, albeit less successful on some of the small scale routes. The tender exercise is not perceived to push current operators out of the market or replace them, but to drive operation in general to higher efficiency levels. Out of 27 ferry route tender exercises undertaken in Denmark only 2 routes changed the operator. Tendering is based on small bundles of routes (as in Bornholm’s two routes) of for single route operations.

TABLE 5-8: EVOLUTION OF SELECTION CRITERIA - BORNHOLM

Previous contract Current contract

Criteria Lowest price Economically most advantageous application

Negotiation No negotiation Negotiation

Capacity Outlining of number of trips/ship, ships having demanded capacity, speed etc.

Demand of capacity/day and crossing time

Two ferries to cover traffic on Ronne – Køge

One ferry to cover traffic Ronne Køge

Daily traffic with one fast + one slow ferry

All passengers and cars on 80 minutes crossing time

Operator takes all economical risks, including consequences of rising oil prices

Possibility of adding fuel-surcharges as a consequence of rising oil prices

Duration 5 years 5 years with option for 1 year


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1.1.312 For all tendered routes, the number of bidders – when comparing the 2nd and the 3rd round – increased. Additionally, foreign bidders are now appearing in the processes. However, evidence also exists that tenders in certain environments, especially small scale routes, were unsuccessful.

1.1.313 The strategy to move towards a multi-criteria selection in order to identify the economically most advantageous bid is parallel to the developments in Norway. Nevertheless, the high weight given to price reduces the impact of quality in the selection process. For example, the tender for the Funen–Als route, where the offer with 30 year old tonnage was won against an offer of new tonnage. A question that might arise here is the long-term sustainability that can achieved with this weighting and a need to shift more emphasis towards quality aspects.

1.1.314 Discussion exists on the duration of the contract and whether the current length (5 to 6 years) allows for the deployment of new ships. Additionally, the tendering authority does not necessarily require new tonnage; Bornholmstrafikken had to invest in new ships for the public tender in 2003, but the requirements in the last tender required only a partial investment in new ships.

1.1.315 The practice whereby an operator could considerably reduce the amortisation period of a ship by basing it on the duration of the PSC (an experience brought up by Bornholm) leads to considerable costs in the calculation of the compensation paid by the public authorities, and might be perceived as abusive.30 However, such calculations should always be made against the obtained service improvement and the cost implications under public sector operation.

1.1.316 A further issue is the potential uncertainty for employees due to employment being in 5 year cycles.

30 http://www.commissiondesiles.org/pub/docs2/58_eng_-_conclusions_seminar_on_transports_western_isles.pdf

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TABLE 5-9: EVOLUTION OF DANISH FERRY SERVICES TENDERING

Bøjden - Fynshav Samsø Kalundberg – Samsø East

Saelvig-Hou – Samsø West

Service description All year

Two hour frequency

0700 – 2300

Crossing time: 40 minutes

All year

2-4 round trips/day

Crossing time: 1 hour 50 minutes

Tendered by local government

1st tender 1997 1997

2nd tender 2003 – 2008

10 million DKK/year (950 000 GBP/year, 2004 prices)

1 prequalified operator

1 application

2003 – 2008

17 million DKK/year (1.6 million GBP/year, 2004 prices)

2 prequalified operators

2 applications

Contract was higher than 1997, but higher reliability

2003 - 2008

7.6 million DKK/year

(720 000 GBP/year, 2004 prices)

3rd tender Combined tender (Samsø-Kalundberg), bidding for one/two routes optional

Selection: most economically advantageous bid

Negotiation

Combined tender (Bøjden-Fynshav), bidding for one/two routes optional

Selection: most economically advantageous bid

negotiation

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Duration: 5 +1

Operators can give price for low and high capacity

Discount possibilities if operators wins more than one

Duration: 5 +1

Operators can give price for low and high capacity

Discount possibilities if operators wins more than one

Requirement 600 cars/day between 1000 and 1800 hours

Equipment options Faster ferry, larger ferry, greater number of ferries

Challenge Change in ferry requires reconstruction of berths which needs to be included

Expectations Better supply, modern berths, reduced contract price

Results 4 applications from 5 prequalified

2 applications from 5 prequalified

3 applications from 4 prequalified (one control application)

Different solutions Scandlines Sydfynske winner:

Refitting of existing ferry, reuse of berths, same schedule

Samsø Linien A/S winner

Same ferry

Same frequency

Same berth

50% reduction in price, including new berth in Kalundborg

Bornholmstrafikken winner

Reduced contract cost

New double-ender with 110 cars, increased frequency, increased capacity

Rebuilding of harbour in Hou

Evaluation criteria 70% price

20% flexible frequency

70% price

20% flexible frequency

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10% ferry quality 10% ferry quality


TABLE 5-10: CURRENT OPERATORS AND TENDERING AUTHORITIES IN DENMARK

Island Operator Tendering authority

Bornholm Bornholmstrafikken A/S

Trafikstyrelsen

Samsø SamsøLinienA/S (until October 2008)

Partly local municipalities of Samsø and partly Trafikstyrelsen

Ærø ÆrøfærgerneA/S Local municipalities of Ærø

Als SydfynskeA/S Trafikstyrelsen

Langeland/Lolland

SydfynskeA/S Vejdirektoratetv/ Sund&Bælt

Fanø SydfynskeA/S (believed to be no subsidy on this route)

Læsø Færgeselskabet Læsø K/S

The shipping company is owned by the local municipalities on the island Læsø and partly by the local municipalities on Samsø


5.4Greece31 32

Introduction1.1.317Domestic ferries link the economies of the 114 inhabited islands in Greece to

the mainland. There are approximately 150 ports, and about a thousand ferry connections are made per day. There is significant spatial non-uniformity in the qualitative and quantitative characteristics of demand.

1.1.318The Greek ferry market is composed of 7 regions and 58 ferry operators operating 365 itineraries. These can be split into 84 routes subsidised by the Greek State, 30 short haul routes covering distances of up to 15 nautical miles, and 242 free itineraries where competitive conditions prevail (i.e. no subsidy is provided).

31 Rigas, K., Boat or airplane? Passengers’ perceptions of transport services to islands. Journal of Transport Geography (2008)Marine Policy 29 (2005) 85–92 Technical reliability of the Greek coastal passenger fleet Ernestos S. Tzannatos*32 Case studies among other sources based on Annual ferry industry reports XTRC, various years, and Greek government websites and discussions with Professor Maria Lekakou, University of the Aegean and Greek Ferry Specialist.

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1.1.319It is important to note that, in the Greek market, all ferry operators are privately owned. The state does not own or run any ferry services in Greece, and does not own any ferries.

Routes1.1.320 The routes in Greece can be categorised as follows:

Local highly profitable and competitive routes Local, remote and with limited traffic routes Local, of average profitability routes International routes

1.1.321 Local highly profitable and competitive routes carry significant tourist and local traffic, as well as commercial traffic. Examples: East Cyclades complex of islands route (Siros, Tinos, Mykonos) Expensive, modern, fast and high quality vessels are deployed Room for new entrants is restricted to the minimum and competition and

innovation effectively “drives” non-performing operators out of the market.1.1.322 Local, remote and with limited traffic routes offer reduced return for

operators. These routes are subsidised by the state. The winner of the bidding process for a given line renders services on a fixed income for a certain period, with set itineraries and destinations. Examples: The North East Aegean routes Older ferries of “lower” quality are employed and are subsidised in their

operation1.1.323 Local, of average profitability routes have as their main characteristic

limited traffic volumes. Example: The Sporades complex of islands routes

1.1.324 International routes. Example: Adriatic services between Greece and Italy Highly competitive routes with different characteristics to local ones, the

main one being lack of state regulation (i.e. no PSO/PSC)1.1.325 About 70% of the coastal passenger ships operating in Greece are

deployed in the Aegean Sea area. The Aegean network has a mono-hub

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structure based upon the Port of Piraeus. Additionally, 70% of the national passenger transport demand is served through the Aegean network.

FIGURE 5-4: GREEK FERRY SYSTEM

Ionian SeaN. Aegean

Crete

Sporades

Cyclades

Dodecanese

Source: XTRC 2008

1.1.326 Demand for all ferry services is highly seasonal and demand among the routes is highly skewed. August accounts for some 23% of total annual passengers, and February for only 2%. This disparity is caused not only by differences in tourism at the island destinations but also by differences in permanent population on the islands. Some islands have fewer than 100 residents; Crete has half a million. The largest islands have airports, which provide alternative transport for passengers and certain goods.

1.1.327 Most of the vessels operating in the Aegean are of Ro–Pax type, allowing the transport of all types of vehicles and passengers. They are mainly operational on the routes to Cyclades (40% of vessels), and 17% are non-conventional (catamaran and high speed).33 Service levels cannot be considered as homogenised across the market, as the technical characteristics of the vessels are not uniform.

33 Tzannatos (2005) (www.porteconomics.gr/index.php?option=com_docman)

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1.1.328 The market has seen strong concentration of operators in the last years. However, a fringe of smaller companies remains.

TABLE 5-11: MARKET SHARES OF PASSENGERS IN GREECE, BY FERRY OPERATOR, 2005

Minoan Hellenic Seaways

ANEK Blue Star NEL

Market share 10% 34% 15% 33% 8%Source: Lekakou 2009

FIGURE 5-5: GREEK FERRY ROUTES, 2007

Source: XTRC 2007

Modernisation1.1.329 One of the main characteristics of the Greek ferry sector over the past 10

years has been the restructuring and modernisation of the fleet. New ships represent half the fleet, are twice as fast as the ships they replaced, and often have larger capacity. Hence, it is sometimes feasible to replace two older ships with one new ship.

1.1.330 These new vessels greatly reduce travel time, e.g., Between Piraeus to Rhodes via Kos down to 10 hours from 18 hours

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Piraeus to Chania down to 5¼ hours from 10 hours 1.1.331 Since one of the costs passengers bear is the value of their time, the

reduction in travel time made possible by faster ferries significantly reduces passengers’ total cost. Figure 5.5 shows the fleet development and the average age of vessels in the period 2000-2008. It can be observed that the number of ships significantly decreased over time and is almost stable over the last 4 years. However, fleet renewal has slowed down over the past 2 years and the average age of the fleet in 2008 was 16.8 years. The figure excludes non-listed companies- if these were to be included the age structure would develop negatively (average older ships).

TABLE 5-12: ANNUAL FERRY PASSENGER TRAFFIC DEMAND IN GREECE, 2002 - 2006

Coastal lines Short Sea links

YEAR MAIN SECONDARIES TOTAL MAIN SECONDARY TOTAL

2006 33.214.268 3.861.118 37.075.386 22.497.630 2.017.922 24.515.552

2005 31.799.034 3.942.700 35.741.734 21.690.982 1.928.975 23.619.957

2004 31.450.338 2.976.562 34.426.900 29.457.164 1.776.272 31.233.436

2003 27.424.640 2.148.420 29.573.060 33.121.640 1.761.403 34.883.043

2002 24.964.046 1.145.050 26.109.096 34.194.724 1.827.404 36.022.128

Source: Lekakou 2009

1.1.332 The investment in new ships is also closely linked with the development of the Athens Stock Exchange as a source of capital. However, some route specifications, with their multiple stops, do not allow the speed advantages of catamarans to be fully exploited. But on several more direct routes fast ferries are working very effectively.

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FIGURE 5-6: TOTAL GREEK FERRY FLEET AND AVERAGE VESSEL AGE, 2000-2008

Source: XTRC 2009

1.1.333 Another development has been the introduction of high speed ships and also passenger-only catamarans. For example: In 1998 Strintzis begins service with a catamaran to the Cyclades; In mid-1999 Strintzis announces two other domestic routes, in the Cyclades

and Northern Aegean, to be served with new high-speed ships (Strintzis 1999);

Other high-speed ships start to operate in the Aegean from 2000; NEL launches the first of three fast ships capable of carrying cars and

passengers at 36 knots.1.1.334 The financing of the Greek ferry companies is made mainly via

syndication loans (72%). Listed companies on the Athens Exchange prefer syndication loans to raising loans directly by the banks, with the exception of SUPERFAST and NEL LINES, which have had close relations with KFW

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Bankengruppe and Millennium respectively. All non-listed companies prefer bilateral loans.

Methods of delivery and incentives1.1.335 Ferry services are delivered only by private operators. The state does not

own any ships. Ports are in public ownership. The companies specialise in particular routes and sea areas, often reflecting their historical roots on particular islands.

1.1.336 For example, Minoan and ANEK, both based in Crete, have all the licenses for routes to Crete from the mainland.34 Minoan Flying Dolphins has been buying the majority of smaller companies operating in the Cyclades, under the name of its Hellas Ferries subsidiary, whereas ANEK focuses on the northern Aegean and Dodecanese routes. The small Rhodes-based company DANE operates in the Dodecanese and Cyclades, and to Thessaloniki.

1.1.337 Within the social policy framework the Greek State subsidises a number of transport modes (land, sea and air) aiming at satisfying different objectives in each case. The Ministries responsible for the allocation of these resources are: the Ministry of Transport and Communications, the Ministry of Mercantile Marine, and the Ministry of the Aegean and Island Policy (MAIP)35. Within the budget the Greek state subsidises non-commercially viable routes through the Ministries of Mercantile Marine and Aegean and Island Policy. The total budget dedicated to this purpose by both Ministries is around 13% of the total subsidies budget of all transport modes. The level of subsidies in absolute terms is presented in Table 5.13.

TABLE 5-13: GREEK FERRY SUBSIDIES (2005 – 2007)

2005 2006 2007 2008

MMM € 10 600 000 € 11 500 000 € 12 000 000 € 12 360 000

MAIP € 17 000 000 € 20 000 000 € 22 000 000 € 22 700 000

TOTAL € 27 600 000 € 31 500 000 € 34 000 000 € 35 060 000

Source: Annual Greek budget reports

34 OECD (2000) (http://www.rekabet.gov.tr/word/uluslararasi/CD/OECD2008/CountryStudies/Greece-ElectricityDomesticFerriesTrucking.pdf)35 Both the Ministry of Mercantile Marine and the Ministry of the Aegean and Island Policy were merged in 2007.

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1.1.338 Table 5.14 shows the estimated development of total aid for non-commercially viable services in Greece. While the aid seems to be increasing continuously, it needs to be mentioned that not all this aid is paid by the State. Each ferry ticket sold in the major competitive sector includes a 3% surcharge which is then used to help subsidise ferry services that cannot be operated in an economically viable way. This effectively means the economically viable and profitable routes contribute to the financing of the least profitable routes.

1.1.339 The subsidy amounts reported in the State’s annual budget represent an average annual increase of +8% since 2005. The amount of public funds reached a level of over €35 million for the coverage of 84 service itineraries (2008). As the total aid amounted to €70 million, this means that about €35 million of aid (50%) was raised from the competitive, profitable operators/routes. Of the 84 routes, 31 were subsidised by MMM and 53 by MAIP. These routes were served by 40 ferry operators. The table above depicts the development of subsidised routes since 2002.

TABLE 5-14: AID FOR THIN LINES IN GREECE (2002-2008)

Period Number of thin lines Annual Budget

2002-2003 67 €36 606 552

2003-2004 72 €36 759 727

2004-2005 75 €43 783 173

2005- 2006 82 €50 000 000

2006-2007 82 €65 000 000

2007-2008 84 €70 000 000

Source: MMM

Competition and Procurement1.1.340 After 1992, with the application of EU transport policies, the Greek market

underwent a gradual process towards deregulation. Until 2002 the domestic ferry sector was highly regulated by the Ministry for Merchant Marine (MMM or YEN for its Greek acronym). Licenses specific to the vessel were granted for particular itineraries at specified, invariant frequencies. Licenses for service to islands for which service is non-profitable were often bundled together in the same itinerary with islands for which service was profitable, or were imposed on

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companies as conditions for receiving profitable routes. Licenses were granted by the MMM on the basis of non transparent criteria. Fares were set by MMM.

1.1.341 The Greek State Law 2932/2001 anticipates the protection of public services in order to encourage the principle of competition in reference to scheduling, the members of the crew, the crew list and sanitary regulations. However, it also needs to be mentioned that the Greek ferry industry has not yet completely conformed to EU regulation 3577/1992.

1.1.342 The same law came into effect in July 2005, when the ticket fares of routes departing from the ports of Rafina, Lavrio, Elefsina and Kimi were deregulated, provided that there were at least three companies operating on these routes. Since the summer of 2006, the ticket fares of the routes departing from Piraeus were deregulated, subject to the following conditions: The destination port is served by at least two ferry operators and comprises a

yearly traffic of at least 150,000 passengers The destination port has an annual traffic of at least 300,000 passengers

1.1.343 Procurement of services is a staged process. The process starts with an analysis of whether a route requires subsidies. This is identified if no operator asks for operating permission on a specific route. If no operator can operate that route profitably, competitive tenders are run that identify the bidder requesting the minimum subsidy. Government sets the maximum subsidy level for that specific route and the minimum requirements for “essential services” which are as follows: Frequency: a determined number of sailings per week; Period of operation: the ferry has to be in operation for a minimum of 10

months a year; Back-up: a replacement ferry has to be made available for the remaining two

months of the year, details of which have to be made available at the stage of submitting the bid;

Ferry standards: passenger capacity, lane meters; Safety: compliance with national standards; Fares: a maximum fare is set for standard/economy class. Discounts are

imposed for concessionary travellers; Ships: max. age is 30 years (derived from national legislation).

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FIGURE 5-7: GREEK SUBSIDY SYSTEM

Source: XRTC 2007

1.1.344 The present legislative framework established that operation of subsidised routes is given to a chosen operator that expresses interest in an open call. Operators are asked to bid for the operation of given routes. The company with the most economically advantageous bid wins the operation and is reimbursed a specific fee. In general, maximum subsidies are calculated on a route distance basis. The subsidy per nautical-mile charge is defined on the basis of past experience, given that lifeline services have historically been subsidised.

1.1.345 The fee is calculated per trip and depends on the length of the itinerary and the vessel’s age. There are three age categories based on which the evaluation is made. These are: Vessels of up to 8 years old (year of build 1/1/1999) and speed of 22 knots.

The vessels belonging in this category can sign contracts of 2 to 12 years; Vessels that do not fulfil the criteria of category one. These vessels can

achieve contracts of 30 or 21 months provided that by the end of the agreement these will be replaced with vessels that belong to category one. If this is the case then the 30 month contract is renewed for a minimum nine

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year period to a maximum 12 year period, starting from the date of the first contract. The 21 month contracts are renewed for a minimum five year period to a maximum nine year period starting from the date of the first contract;

Vessels that do not belong to any of the above categories. These vessels achieve contracts of 12 months with possible extension to 16 months.

1.1.346 The Ministry for the Merchant Marine has moved toward a focus on the satisfaction of passenger transport needs, viewing all of the constituent parts (i.e. network, ships, port infrastructure, institutional infrastructure, shipyards, and communication services) as parts of a single integrated system of domestic marine transport. This contrasts with the former focus on ships, in isolation from demand and the complementary infrastructure.

Powers and structures1.1.347 Domestic ferry services are under the responsibility of the Ministry for the

Merchant Marine (MMM). The Ministry is responsible for regulating and overseeing the whole of the sector – market entry, licensing, pricing, route scheduling, manning (hotel as well as engineering), and imposition of public service obligations, determination of and tendering for unprofitable routes, enforcement of licence terms, certification, control, vetting and inspection of ferries for navigational and environmental safety. The Minister issues inter alia licenses and decrees controlling prices.

1.1.348 The Minister is aided by an advisory body, the Coastal Transport Advisory Committee (CTAC) 4. The CTAC makes non-binding recommendations about licenses and prices which, in practice, the Minister has always followed. For inter-island routes, the Ministry of the Aegean is also involved. Before September 2000, six of the twelve members of the CTAC were government officials or appointed by the Minister. The remaining six were split among four representatives of shipping, a representative of the Piraeus Chamber of Commerce and Industry, who arguably could also be expected to support shipping interests, and the National Tourist Organisation (to represent consumers).

1.1.349 This arrangement seems to correspond more with self-regulation, and industry participants appear to have influence over the economic regulation enforced by the Ministry (discussed below). In this situation, new investors, whether Greek or foreign, would have a basis for concern that their potential competitors would be making decisions about, e.g., licenses.

1.1.350 In September 2000, membership in the CTAC was expanded to include more consumer groups, both commercial and island residents. More use of public hearings in the decision-making process also increased transparency.

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Results1.1.351 The Greek approach generates a number of interesting observations:

The Greek ferry industry was able to significantly improve the fleet structure, especially driven by the threat of external entrants and due to their sophisticated financing strategies;

However, these improvements do not seem to reach the more peripheral and less densely populated islands. The incentives given through the procurement system do not seem to stimulate service improvements; and

The system seems static and not too transparent. 1.1.352 Wherever the absence of commercial interest exists, the provision of

transport services leads to the introduction of services covered by PSOs and PSCs. The Greek view is that a PSO is not a prerequisite for a PSC, and you can have a PSO without a PSC. A PSO, however, is required as a basis for subsidies, the latter delivered through a PSC.

1.1.353 The current scheme seems to develop towards a system of increased subsidies, but without significant service improvements especially on non subsidised routes. The Greek state is obliged to continue supporting not only the ferry sector but the populations living on the islands. Under the current regime, cohesion seems only achievable via increased subsidy.

1.1.354 In parallel the situation of port infrastructure is not strategically addressed in the current framework. Many ports on the islands in particular are lacking in adequate infrastructure.

1.1.355 The level of customer satisfaction reported by the islanders in respect of thin subsidised routes/services is rather low. Among the many complains are the frequency of service, the quality of the vessels and speed.

1.1.356 The current system is characterised by the following: Strengths: Quality of management; Fleet replacement; Good relationships

with banks; improved financial results (prior to financial crisis); Restructuring of operations.

Weaknesses: Increase in the average age of the fleet; immediate taxes imposed on ticket fares; inefficient subsidy system.

Opportunities: Scope for more mergers and acquisitions; Gradual investments in port infrastructure; Need for new investments; Subsidies by the European Union and the Greek State.

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Threats: Delay in the completion of the national ferry transportation network; Lack of port infrastructure; Fuel cost; Crisis in international banking system

5.5SwedenIntroduction1.1.357 Ferries are relevant in three contexts in Sweden:

As part of the road network, facilitating accessibility and territorial cohesion across Sweden;

In providing services to the island of Gotland in the Baltic Sea; and Fast boats operating along the coast.

1.1.358 The former are referred to as “Yellow Ferries”. Vägverket Ferry Company (state owned) operates 63 yellow ferries and carries 21 million passengers and 11 million vehicles annually. The ferries run between public ‘B-roads’ on the mainland and on the islands, mostly very short sheltered routes. As the water stretch between these is regarded as an extension of the roads, the ferries are free of charge, with the running costs of the ferries being covered by taxation on cars. The company operates more or less all of the road ferry services in Sweden.

1.1.359 The island of Gotland is situated in the middle of the Baltic Sea, the distance between Gotland and the Swedish mainland is almost 100 kilometres and to the Latvian mainland almost 120 kilometres. It has over 57,000 inhabitants, or 0.7% of the population of Sweden.36

1.1.360 In the mid 1980’s increasing state costs for Gotland traffic led to a governmental review of the Gotland traffic and the shipping organizing structure. One alternative proposed was to maintain traffic with only one of the mainland ports for the most part of the year (two mainland ports are served). Deregulation at that time, in the communications field and elsewhere, also brought forward demands for more exposure to competition. Contracts for ferry services to and from Gotland came into force towards the end of the 1980s, when services were first subjected to competitive procurement procedures.

1.1.361 The current legislation (SFS 1996:19) on limiting the right to operate ferry services to Gotland is from 1996 and the government’s decree (1997:748) that specifies the regulation came out the following year. The provisions apply to

36 Excerpt from http://www.commissiondesiles.org/pub/docs2/25_gotland_maritime_transport.pdf98


anyone who carries out regular sea transport between Gotland and Swedish ports located outside Gotland.

1.1.362 Anyone who carries out regular sea transport between Gotland and the Swedish mainland must make a call at a mainland port at least five times a week year-round; this is part of the route PSO. The purpose behind these provisions is to hinder anyone from carrying traffic only during periods when there is a great demand, to the detriment of the contracted services, or in other words ‘cherry picking’. Requirements in the regulation of year-round traffic means that the procured ferry services are, in practice, carried out without competition from other ferry traffic (i.e. they have exclusivity).

1.1.363 Since the majority of travel occurs during a short period in the summer, this has so far meant that no one has started a commercial service between Gotland and the mainland, and ferry traffic between Gotland and the Swedish mainland is solely carried out within the framework of the ferry service procured by the government.

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FIGURE 5-8 – YELLOW FERRIES NETWORK (SWEDEN)

Source: http://farjerederiet.se

1.1.364 Gotland has regular ferry services on the routes Visby – Nynäshamn, 50 kilometres south of Stockholm, and Visby – Oskarshamn and also summer traffic to Öland operated by the by the same company – ‘Destination Gotland’.

1.1.365 Since 1998, Destination Gotland has maintained the ferry services. In the earlier period another company, Nordström & Thulin, carried out the service. With the change of operator most of the staff moved to the current company.

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http://farjerederiet.se/


1.1.366 Destination Gotland is a 100% subsidiary of RederiAB Gotland. The company, which is listed on the Swedish stock market, was formed to operate the public tendered ferry traffic between Visby on the island of Gotland and the ports of Nynäshamn and Oskarshamn on the Swedish mainland with RederiAB Gotland owned vessels from the commencement of the current tender period in 1998. Just like RederiAB Gotland, Destination Gotland is headquartered in Visby and employs on average about 400 persons.

1.1.367 Since 1998, the fleet has been completely renewed from two conventional car/passenger ferries built 1980 and 1981, one Ro-Ro cargo vessel built 1979 and one car/passenger catamaran to now consisting of two large high speed Ro-Pax (28-knot) vessels built 2003 and two smaller passenger/car monohull high speed (36 knot) craft built in 1999 and 2006.

FIGURE 5-9 – ROUTES TO GOTLAND

Source: Destination Gotland

1.1.368 The company is certified according to ISO 9001 and ISO 14001. All the vessels in the ferry service are operated with low sulphur fuel and are equipped

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with catalytic cleaning of exhaust gases. The environmental impact of today's Gotland’s ferry traffic in terms of total emissions of CO2 is 170,000 tonnes per year. This is equivalent to emissions of about 0.8 tonnes of CO2 per mile.

1.1.369 Destination Gotland carried 1.5m passengers, 450,000 cars and 700,000 lane meters of Ro-Ro cargo (over 50,000 trailers) in 2008. The high vehicle to pax ratio (1:3.3) implies the vessels required are RoPax offering a high vehicle deck capacity.

1.1.370 The ticket price of Destination Gotland traffic is in the range of 2.9-3.6 SEK per mile, which is estimated to be 40% lower than other similar services37. Average speed of all the ferries is 30 knots which is well above the conventional ferry average of between 15 and 20 knots. Crossing time from Nynäshamn is about 3 hours depending on the ferry used. On the Oskarshamn-Visby route crossing time is between 2 hours and 40 minutes and 3 hours. The southern route is more freight-oriented than the northern line.

Methods of delivery1.1.371 The Swedish Government has developed specific support measures for

the island with the objective of ensuring an affordable price for all types of transport. In Sweden gross contracts are the dominant contract form. The operator provides an agreed amount of transport services, with compensation then paid to the operator while all ticket income goes to the Public transport authority. The compensation is generally not linked to the number of passengers. However, certain forms of positive and/or negative incentives for reliability, punctuality, cleaning services etc. have been developed.

1.1.372 No vessels are provided by the state, these are all provided by the private operator. The operator has been rather innovative in that regard. The two large 196m long fast-conventional RoPax vessels were constructed at a very good price (US$51.7m each) in China in 200338.

Financial incentives1.1.373 State subsidies for Gotland ferry traffic have grown from a low of about 30

million SEK in the mid-80s to the present level of approximately 175 million SEK, including subsidization of passenger and freight traffic.

1.1.374 In 2006 the average subsidy per passenger journey was 164 SEK (ca. £12.30, in 2006 prices). The overall cost to the Swedish government was 400 million SEK (about £30 million, in 2006 prices).

37 McKinsey & Company, 200738 ShipPax Finance 09, Ferry Cruise & RoRo prices and rates. (Note: This was about the same price as NorthLink/RBS paid for its far smaller ships in 2002, the latter with one third the capacity of the Gotland vessels).

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1.1.375 Rikstrafiken compensation for the total term of the new contract (2009-2015) will be about 2,500 MSEK for Gotland’s two routes, Nynäshamn-Visby and Oskarshamn-Visby. The proceeds for ferry services in 2005 was approximately 688 million SEK divided 53% for passenger ticket proceeds, 9% for freight traffic proceeds and 38% for Rikstrafiken’s or in English The National Public Transport Agency’s compensation.

1.1.376 Discussion in Sweden has centred on whether lower ferry tariffs for freight have given adequate compensation for transport costs. This means that the subsidy should be equal to the incurred costs on a comparable road transport journey and eliminate the additional costs compared with a hypothetical cost of transport by truck for corresponding distance on the mainland. The big problem in this context is that detailed definitions of the road and additional costs are not established and thus have given room for very broad interpretations.

Competition and Procurement1.1.377 Design of ferry services is based on the principle that Gotland should be

served by a continuous regular service for passengers and freight transport between Gotland and a Swedish port outside Gotland. Beyond this the provision of service and its characteristics are left open to the operator.

1.1.378 Tendering procedures were started (early 1990’s) after deregulation in 1989. The tendering process that preceded the current contract for the Gotland traffic was a disappointment for Rikstrafiken. In the first round, no bids were received. In the second round, which took place in early 2006, Destination Gotland placed the only bid that was received. Destination Gotland was subsequently announced as the winner of the contract, and continued to operate on the routes that it already served.

1.1.379 Based on the outcomes of the past two tender rounds for Gotland services, the Swedish Government has brought forward a number of ideas to increase competition on the Gotland routes. Additionally, Rikstrafiken has deemed competition as almost non-existing. Therefore a number of changes will apply in the next tender round in 2015.

1.1.380 Rikstrafiken said it intended to change the bidding process. Under the new regime, there will be two separate tenders for the Gotland traffic. One will concern the supply of the vessels, the other will concern the operation of the ships on the route. 39

1.1.381 Stakeholder organisations have expressed the following standpoints for standard and minimum level of service to Gotland in any bidding process: Service to two mainland ports to continue;

39 Source: http://www.shippax.se103


Basic service encompassing two daily crossings both-ways on the Nynäshamn route and one crossing on the Oskarshamn route, three hours circa for each crossing;

As flexible a service as possible to be developed according to new prerequisites;

Competitive low “road prices” for Gotlanders as well as visitors and cargo – customer not paying more than travelling on the corresponding road section on the mainland;

Unexpected or drastic changes of traffic production costs (oil prices etc) should not be transferred to customers in an unreasonable manner;

Ships have to be safe and comfortable. The present standard is minimum level.

Transport to and from the mainland are the most crucial and vital prerequisite for development on Gotland. Transport must support and stimulate demand and development of trade and industry as well as meeting people’s needs and wish for travelling.

1.1.382 In the most recent invitation to tender from Rikstrafiken, stakeholders pointed out that there were several aspects that would result in deteriorations viewed from the Gotland standpoints mentioned above. Some basic elements are: If slower crossings are introduced this will put at risk development of tourism

and the travelling possibilities for firms and Gotlanders. Swift crossings must be of high value in the bidding process;

Present capacity is inadequate for freight, for the peak travelling season and to take into account an increase of cargo, cars and passengers. This is crucial for development of the Gotland economy and community;

Already now ferry charges are too high.1.1.383 In a surprising announcement during 2009, the Swedish Government

decided to completely change the rules for ferry traffic to and from the island of Gotland. Under the new rules, any operator will be able to offer ferry services between Gotland and mainland Sweden. There is to be no stipulated frequency, and an operator does not have to offer a year round service.

Powers and structures40

40 Taken from http://www.rikstrafiken.se104


1.1.384 Since 1999, Rikstrafiken has the responsibility for state contracts for liner shipping to and from Gotland.41 Responsibility for shipping to and from Gotland includes both freight and passengers.42 Rikstrafiken has the role to ensure socially and economically efficient and sustainable transport resources for citizens and industry throughout the country.43

1.1.385 In addition to the overall aim there are six sub-objectives that affect accessibility, transport quality, safety, environment, regional development and equality.44

1.1.386 The milestones in establishing the current system can be summarized as follows: In 1989, the public transport authorities became responsible for all local and

regional scheduled transport, i.e. public transport by bus, train and boat. The possibility for procurement via competitive tendering was established.

In June 1998 the Swedish Parliament agreed on a new transport policy, resulting in a new agency – the National Public Transport Agency, Rikstrafiken – was established with effect from 1 July 1999.

1.1.387 The objective of the transport policy is to secure a socio-economically efficient and long-term transport supply for the entire country. Rikstrafiken puts the transport policy into effect together with the rail, road, sea and aviation administrations and authorities.

1.1.388 Rikstrafiken has two main tasks: To procure public transport (air, rail, sea, bus); and To develop and coordinate public transport throughout the country

1.1.389 Rikstrafiken’s task is to work for a coordinated long-distance public transport system from the traveller’s perspective, as regards bus, boat, air, and train transport. The goal is to create an accessible high quality transport system, safe traffic, a good environment, and contribute to positive regional development. Other important tasks are working to increase accessibility for individuals with functional disabilities and to ensure that equality of opportunity is observed within the public transport sector.

41 SFS 2007:102642 Government Bill 1997/98: 56 p. 69.43 Government Bill 2005/06: 160; bet. 2005/06: TU5; rskr. 2005/06:30844 For details see also Government Bill 2005/06: 160, pp. 25-40 on milestones respective sub-targets

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FIGURE 5-10 – ORGANISATION RIKSTRAFIKEN

Source: Rikstrafiken 2009

1.1.390 Other responsibilities include mapping flaws in the long-distance public transport sector and coordinating timetables, ticket systems and information. On the State’s behalf, Rikstrafiken also procures long-distance public transport not carried out by the local transport authorities or commercial transport operators, but which are motivated by transport policy. In order to comply with these tasks Rikstrafiken employs 20 people within the following organisational structure presented in Figure 5.9.

Results1.1.391 Results in Sweden have to be viewed in the context of the different roles

of ferries and services. The case of the “Yellow Ferries” only marginally contributes to the investigations in the Scottish Ferries Review, since these principally operate only on sheltered, very short lake and river crossings with basic inland barge-type vessels, and with some change also from self-propelled ferries to cable ferries. The service is free, as are the roads, and the ferries are simply considered to be a part of the road system. They are not comparable with ferries operating across open seas, sounds and firths. Further, as these ferries are managed as part of the trunk road network, this would require a new approach from SG.

1.1.392 The case of Gotland is more interesting, because the current operator has delivered a) improvements to the service in terms of ships and service quality,

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b) was able to operate with growing passenger numbers, and c) the operator fulfilled the requirements set out in the tender. On the other hand the responsible agency, Rikstrafiken, is continuously pushing for more competition in the market and the latest move to open up the market will be interesting to observe, especially, if new entrants appear.

1.1.393 The possibility to procure a service under competition is seen as a decisive factor for positive development. Procurement has led to reduced traffic costs (e.g. in the case of bus services) but also to fulfil important public goals such as improving the environmental performance of public transport and better accessibility for the disabled. From a Swedish perspective procurement has contributed to these goals, according to Rikstrafiken.

1.1.394 Procurement, ultimately, is not a static event but a process that continues to evolve over time. The Swedish case underlines the need for procuring entities to acquire considerable knowledge on the goods and services that they are expected to purchase. It can also be recognized that the institutional set-up may facilitate that learning effect in relation to a specific mode, but also in the case of comparison between modes. In Sweden, as in Denmark, the national transport agency seems to be developing a major role in this regard.

5.6Norway45 46

Introduction1.1.395 Whilst Norway is not a member of the EU it tends to adopt a similar

approach to procurement of public services as elsewhere within the EU. In Norway ferry links are critical for the functioning of Norway’s road transport network and the country’s integration. Fjord crossings by ferries are a vital part of the Norwegian trunk road system. A multitude of ferry services along the coast also connect remote islands and peninsulas with regional towns/hubs. Ferries in the network operate very much like public transport: they provide scheduled transportation services, specifically the transportation of passengers, passenger vehicles and heavy goods vehicles across fjords. There are estimated to be some 300 ferries operating throughout Norway today, of which approximately one third are high-speed vessels (i.e. above 24 knots).

1.1.396 Most of the ferries in Norway are run by private operators. But, like almost all other forms of public transport, they operate at a loss and therefore require subsidy. The total annual subsidy is above 600 million NOK/year (approx £60

45 Minken and Killi (2000) (http://www.thredbo.itls.usyd.edu.au/downloads/thredbo7_papers/thredbo7-workshopC-Minken-Killi.pdf)46 Bråthen, S., Hervik, A., Odeck, J. & Sunde, Ø. (2004). Competitive tendering versus subsidy schemes in public transport services: comparing efficiency in the provision of ferry services. Proceedings from the European Transport Conference, Strasbourg, France, September 2004.

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million). This indicates that ferry operating subsidy in Norway is about half what it is in Scotland. However Norway has some 300 ferries compared to approx 100 in Scotland.

1.1.397 The traditional subsidies scheme provided for improvements in services (e.g. frequencies, operating hours etc.), although at an increasing cost. Since the traditional subsidy system was not considered sufficient in providing incentives for cost efficiency, tender competitions have been introduced. Tendering is planned for full implementation by 2010, with many services already now tendered.47

1.1.398 Currently, tenders for national trunk road-ferry connections have been applied on certain routes to gain a detailed understanding of their results and underlying dynamics. However, at the local level, separately from the trunk road ferry system, local municipal transport authorities have been tendering their service requirements (e.g. between outlying areas and local towns) for a number of years.

Methods of delivery1.1.399 Ferry services are maintained by private ferry companies, each operating

a monopoly franchise across typically a relatively small bundle of ferry links within a single region/area. Bundles are therefore decided on a geographic basis. Major trunk road ferry connections are tendered from the national level, whereas local ferry services typically connecting outlying areas with the main regional towns in the area are tendered by LAs/RTAs.

1.1.400 While some single routes have been tendered (e.g. out of Tromso), several tenders have involved small bundles involving between2- 5 routes linking outlying areas and islands with the main regional town/city at which essential services for health, recreation, education, business, and government are provided (e.g. Stavanger, Bergen, Bode, Trondheim etc).

Financial incentives1.1.401 Ferry companies receive an operating subsidy. Until 1990 subsidies were

paid ex post on a cost-plus basis (considered a weak incentive for cost efficiency). Since 1990 subsidies have been paid ex ante to encourage cost efficiency. Tendering has been permitted since 1994. The first four tendered routes started in 1997. Tenders were initially organised on gross-cost terms and net subsidy terms. The Norwegian experience has shown that gross-cost term contracts have higher transaction costs and lack incentives for companies to enhance demand and consequently revenue. Risk premiums for each type were equal.

47 Odeck, J. and Brathern, S. (2009): The efficiency of Norwegian ferries in providing public transport services. International Journal of Transport Economics, Vol. xxxvi, No. 1

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1.1.402 Total subsidies for tendered services increased very slightly (by 17million NOK – £1.6 million in 2009). However over recent years, trunk route ferry tenders have led to the acquisition by private operators of 8 new ferries (covering 6 routes) with an estimated capex of 740 mill NOK (ca. £70.5 million, 2009 prices) as well as additional quality improvements (improved frequency etc.). And on local/regional routes several operators have introduced new vessels after winning tenders (e.g. Velia, Tide etc).

1.1.403 It is believed that tendering has delivered substantial cost savings to the public sector in Norway48. It is further suggested that for ferry services where costs are perceived to be particularly high, or where there is a need for new vessels, tendering can prove successful as a correcting mechanism.

1.1.404 However, the sometimes low maximum level of return on the operator’s capital makes some operators use the state programme of loan guarantees for new ships.

Competition and Procurement1.1.405 Only domestic scheduled passenger transport is subject to a license

according to the Professional Transport Act (21/06/2002). Licenses are generally for a period of 10 years and the license holder has the duty to perform the transport. The PSC (Public Service Contract) can be awarded for the same period i.e. 10 years.

1.1.406 In the calls for tender (first six after 1994), six to nine bids were received for each route. Significant differences in the required subsidy levels were found in the tenders for each route. In five of six cases, the incumbent parties won the tender.

1.1.407 All tenders were multi criteria tender, with cost being only one of the criteria. Non monetary criteria included: environmental, safety, quality/functionality, capacity, ferry, and option of services. Experience in Norway indicates that if criteria other than costs are to be decisive, costs should not be valued at more than 40%. A key lesson from the realised tenders is that there needs to be sufficient “resource” to develop the tenders and that the formulated criteria meet the requirements for transparency.

Example award criteria - Møre and Romsdal County49

1.1.408 Table 5.15 provides an illustration of the bid scoring approach used in Norway based on a route in Møre - Romsdal. The contract award was for the period 1st January 2009 – 31st December 2014 – 5 years in this instance. Selection was based on the economically most advantageous offer, pursuant to

48 www.etcproceedings.org/paper/download/117549 Øyvind Sunde, Jan Husdal og Svein Bråthen (2008): ANBUD I FYLKESKOMMUNALE BÅTRUTER - Vurdering av dagens praksis og forslag til endringer. Rapport 0810. Møreforsking Molde AS

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Regulations Section Bidding. All criteria were assessed on a scale from 1 to 5 where 5 is the best score.

1.1.409 Tender documents are designed within the local area transportation departments as sufficient expertise exists from tenders in other areas (e.g. buses, airlines). Tenders are conducted in two rounds (prequalification and qualification). Evaluation is done by a group from the transport department and lawyers using a pre-specified template. The administrative management of the transport department makes the final choice. Politicians are only involved in advance in the preparation of the tender document. None of the operating companies are involved in the design of the tender or the establishing of the basic route grid etc.

1.1.410 Time tabling has been perceived as crucial in the tender processes, especially by ferry companies. Tender cost bases are assumed to vary between counties depending on the type and function of the service.

1.1.411 The Norwegian Government aims to set quality standards. This includes retaining control of maximum prices and subsidies. A frequency premium is seen as a good incentive to overcome the varying conditions (varying unit costs). A frequency premium contributes to the internalisation of open and hidden waiting costs of the traveller. Operators able to offer higher frequency should be rewarded accordingly in the evaluation.

1.1.412 A recommendation from the Norwegian tender experiences was to allow for peak load pricing counteracting seasonality.

TABLE 5-15: MØRE - ROMSDAL TENDER EVALUATION CRITERIA

Criterion Weight (%)

Basis Comment

Price 35 annual compensation and compensation by modified route production and consideration of changed hours

Price is undoubtedly a legitimate award criterion. The client can only take account of the offered price, possibly corrected for the economic importance of the reserve.

Age of vessels built

35 Age of reserve vessel also attributed

The vessels’ age is basically a legal award criterion. However, this presupposes that the age significance is sometimes specified in the requirements specification.

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Although this allocation criterion is sometimes specified to the "built" and that "the age of reserve vessels attributed minimum weight", there are some doubts with such a design.

There is no information in the competitive basis on how the contractor will emphasise the difference in age of vessels. A clarification of how the contractor will emphasise the age difference would lead to predictability and providers could thus prize this in their offerings.

It is also questionable whether it is expedient to use age as the only award criterion linked to the vessels as it does not necessarily refer to a vessel's quality and suitability.

Delivery-quality

30 Emergency procedures for the reserve of supply vessels (cleaning programme, maintenance of passenger amenities)

Award criteria "supply" is sometimes specified to the "readiness of reserve vessels", and "procedures for supply".

Questions that arise are how far this information can be set into a competitive context and how the contractor can emphasise the difference in these routines. For providers, it will therefore be difficult to price this in their offerings.

1.1.413 Experience has shown that some administrative costs to governments can be avoided by placing the requirement on operators for them to provide detailed reports on the costs and revenues and operational statistics of each link. By doing so monitoring costs from government can be reduced.

1.1.414 The duration of tendered contracts varies between 5-8 years, depending on the need for asset specific investment.50 It seems advisable to establish a clear understanding about the link between contract duration and requirements for new vessels. Such consideration can lead to significant risk reduction. In Norway, decisions on specific ferry sizes/capacity and ferry acquisitions are left to the operating company.

50 “The contract duration is not seen as a huge matter for the Operator. If a private company invests in a vessel with a lifetime of 20-30 years it should be able to use its ferry for more than one contract period (Veolia comment).

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Powers and structures1.1.415 Ferry links are considered part of the Norwegian trunk road system.

Therefore the National Public Roads Administration is responsible for supplying ferry services, regulating both prices and service parameters (e.g. operating hours, frequencies etc.). The Norwegian Public Roads Administration is divided into 5 departments based in different parts of the country (North, South, East, West and Mid). Tendering responsibilities have been devolved to local road agencies for ferry services in their areas (since 1994). These agencies act as Regional Transport Authorities (RTAs).

1.1.416 The Government aim is to set standards for ferries and ports to ensure that they can be used in as many links as possible, notwithstanding the economic necessity to introduce ships of different capacity/speed that are best matched to the needs to each route, according to the knowledge and preferences of the private operators who secure the concessions.

Results1.1.417 The Norwegian experience in procurement of ferry services shows several

interesting features: Competitive tendering of individual routes has been perceived as a means to

improve cost efficiency over the previously existing arrangements; It is a challenge to design proper measures that enhance allocative

efficiency51; Tender specifications and procurement expertise need to evolve in time and

require constant adjustments based on market development. Therefore it seems necessary to ensure the required human resources to work on continued development and monitoring of procurement.

1.1.418 The Norwegian case gives clear evidence of improvements achieved in terms of service quality through tendering, including private sector investment in new ships. It also defies the myth that subsidies increase with tendering procedures, especially if a subsidy increase is set against costs to realize comparable improvements under the previous system.

1.1.419 The Norwegian case also creates an awareness of developments that might lead to market situations that may weaken the competitive element of tendering with only a limited number of suppliers. To maintain market competition, the transport authorities must differentiate their procurement

51 Definition: Allocative efficiency occurs when there is an optimal distribution of goods and services. This involves taking into account consumer's preferences. (Source: http://www.economicshelp.org/dictionary/a/allocative-efficiency.html)

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strategy and use competitive tendering together with other public procurement approaches.52

5.7Transferability to the Scottish contextEvolving patterns of procurement 1.1.420 The review and analysis of experiences in procuring and delivering ferry

services in EU/EFTA countries shows that: Ferry procurement underlies continued evolutionary processes of offering

and monitoring and reviewing services supplied; and That a number of key patterns are repeated across the range of countries

under study. 1.1.421 The case studies show that the procurement of ferry services needs a

continued government involvement and clearly set targets. The countries Sweden, Norway and Denmark are continuously revising their procurement strategies. EU regulation is in general not seen as a barrier for development, but rather one more argument that supports the idea to implement efficient ferry services.

1.1.422 All countries considered use their regional and/or national transport authorities as ferry regulator. The procurement of ferry services is approached based on the same principles as procurement of transport services for other modes. Transport authorities at local, regional and national levels are managing ferry tenders, as well as managing tenders for local bus services, and at the national level rail services.

1.1.423 These countries have recognised that data on service and financial performances is a key element in the evaluation and development of contracts. Sweden has implemented a continuous monitoring system, whereas Greece has recognised the same need, but has not implemented such a system yet. Nevertheless, the cost of a lack of a monitoring system is acknowledged.

1.1.424 In relation to ferry operators a clear notion is that detailed knowledge of the local market structures seems essential. Internationalisation has not yet arrived in domestic ferry service. In all countries, except Norway, tendered services are operated by domestic operators. However, in the case of Denmark international bidders have appeared in the last tender rounds. Effective competition still in the main tends to be between national operators rather than between operators from different EU countries, though this may change.

52 For discussion see also: Braathen, S., A. Fuglseth, A. Hervik, O. I. Larsen, L. Lyche, J. Odeck, E. T. Sandvik and Ö. Sunde: Anbud i ferjesektoren. Erfaringer og utsikter. Report, Molde Research Institute, Norway, 2004

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1.1.425 Set tender requirements vary for each service and location but are generally based on the same key service factors (e.g. price, capacity, frequency etc). A clear interrelation between the required minimum service levels and quality and set policy goals can be observed.

1.1.426 None of the countries under study tenders large bundles. It might be mentioned though that in the case of Denmark despite small bundles the ferry market is becoming highly concentrated (the case of Clipper A/S and Bornholmstrafikken A/S), possibly due to the absence thus far of international bidders.

1.1.427 Outcomes for tendering of small scale ferry services differ, especially in Denmark where there are a number of small ferry operations, many run by local authorities. Tendering of these services has been less successful and in many instances bids were not received in the initial bidding rounds, which means the services are still maintained by local authorities. However this has not been the case with small-scale ferry services in Norway, where more or less all tenders received bids, accompanied by investments in new vessels.

1.1.428 Countries generally expect private operators to bring their own ships. However, this does not necessarily mean the use of new tonnage, but rather the use of ships that comply with the expectations and given requirements of the route(s) concerned. The ferry services to Gotland and Bornholm include some of the most advanced vessels in terms of ship technology, and now operating in their second tender period in these markets. This tends to confirm that private operators are willing to provide new ships even for 5 or 6 year service contracts, also with the intention of winning the next subsequent tender.

1.1.429 In domestic ferry markets, especially in the case of what we know in Scotland as ‘lifeline’ services53, the characteristics of the deployed ships determine operating costs, and hence subsidy required. Ferry operators are left with the choice when, where and how best to source and finance their ships. It seems that if the choice of the ships on a specific route is left to the operator, this contributes positively to a continued renewal of the fleet which goes along with customer expectations and the set requirements in the procurement procedures.

1.1.430 Capital subsidies for ships are not common, instead some countries choose to subsidise port development and maintenance of navigation channels (e.g. the Netherlands and Germany where no subsidies to ferry operators are

53 The term ‘lifeline’ implies communities are fragile, and/or in some difficulty, and is a term we have only found used in Scotland.

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paid54). One principal argument for this is that such an approach grants benefits to the wider community and not just to a single operator.

1.1.431 Contracts for domestic services oscillate around the preferred 5-6 years given in EC Guidance. However, examples of much shorter periods (annual – Greece) exist (albeit for lower grade operations), as well as longer periods in Norway and in the Netherlands.

1.1.432 Contracting authorities do not impose profit clawback mechanisms on operators in any of the examples we have investigated. Once the service arrangements are agreed, including maximum prices, there seems no need to constrain profits and hence to reduce incentives for operators to make profit through further service enhancements, new market development etc. Sharing of risk in relation to losses does not seem evident either.

1.1.433 A tendency towards the further expansion of integrated transport providers into ferry markets can be observed. However, this widens the discussion on competition and procurement procedures. A more detailed analysis of such effects seems appropriate.

1.1.434 Going through the tendering procedures in other countries raises a number of issues: Submitting a shipping operator to such a process compels it to reassess the

value for money it is providing, and the efficiency of its services, thus leading to better services - this is especially true when there is the “threat” of some effective competition, though this is not always the case;

Tendering is a continuous process which is repeated over set periods. Arguments that the process is often found to be too complex, long in duration and too expensive are related to procurement in countries with a weak or discontinued procurement strategy;

The timing of tendering procedures is decisive, since only strict timelines can provide the necessary framework for operators to prepare attractive bids, also depending if new tonnage is required the time between the signature of the contract and start of service should be long enough to allow an operator to acquisition or build the required new tonnage (via lease or full ownership), although interim charter options may be possible as a stopgap55;

54 This excludes ferry services that are part of public transport systems in cities, such as in the city of Hamburg (http://www.hvv.de/pdf/fahrplaene/produktplaene/HVV_Produktplan_Faehren.pdf)55 Veolia Transport Nord has leased 4 vessels to cover its new contracted services between Tromso and outlying areas until its new ferries are delivered in 2010 (Fast Ferry International, May 2009, p. 5).

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The number of bidders varies and on a number of occasions, there has only been one offer (the historical operator) or even none. However, review of the tender rounds in different countries also shows that the domestic ferry market is still in a transition phase and that in those countries which have undergone several tender rounds the number of bidders has increased (e.g. Denmark). The international marketing of tender opportunities likewise demands greater consideration in an effort to widen interest from potential bidders;

One argument is that tendering in some cases has led to higher levels of subsidies. This argument needs to be considered carefully. In the Norwegian case study the subsidy level increased, but the increase was completely off-set by the improvements brought to the service through new operators who are also investing in ships, as is the case elsewhere. Evidence suggested that a comparable improvement under previous pre-tender arrangements would have resulted in increased subsidy costs.

1.1.435 Though under review (see Blue Book of the future of Maritime Europe56), EU legislation does not presently compel national legislation to protect employees’ rights in the case of transfer of undertakings, although certain Member States have such provisions. However, the impact of changing operators has to be seen in a wider economic context, especially insofar as the changed operations may improve the accessibility of regions and thus provide positive incentives for economic development, trade and travel, and indeed the possibility that improvements in service provision may actually lead to increased demand for sea transport, and jobs at sea.

Transferability 1.1.436 In order to develop a successful strategy for Scottish ferries in terms of a

consensus about the quantity, quality and cost, a maximum level of transparency and objectivity of ferry services must be ensured.

1.1.437 In order to deliver the strategy, SG and the stakeholders involved have to address a number of key issues. As developed from the description and analysis of the case studies three phases in tendering need to be considered: Preparatory phase Tender and bidding phase Contract monitoring phase

56 http://www.mif-eu.org/Blue_Paper_FvH.pdf116


1.1.438 As the case studies illustrate, a different emphasis is given to each phase in different countries. However, one main conclusion drawn from the case studies is that procurement is a continuous dynamic process, which also involves a learning curve for the engaged authorities.

1.1.439 For the preparatory phase, a number of key elements notably relating to the service specification and general contract arrangements are dealt with elsewhere in this report, and summarised in the route map. It may be the case that if an authority were to tender several small bundles at the same time, then there could be a risk that operators and the tendering authority itself could possibly find such a process confusing, as well as resource demanding.

1.1.440 For the tender and bidding phase, notwithstanding that the SG has to follow the OJEU process, greater efforts could be made to simplify and where possible shorten the process in an effort to reduce bidder and administrative costs, and also to make tenders more flexible so that operators are able to introduce their preferred vessels, expertise and strategies – these factors could attract more bidders. Shorter tender processes should be possible within a debundling scenario where a reduced number of routes (and stakeholders) are involved. Tenders run by SPT and Highland Council for (admittedly small) ferry services do not differ much from bus tenders; the question may be, why should they differ? Tender evaluations need to focus more on the non-price elements.

1.1.441 In the monitoring phase the following key issues should be defined: Key performance indicators – KPI’s (operation and financial) Availability of data and requirements for data provision from service

providers Compliance analysis of service requirements Review of market contestability in preparation for next tender round

1.1.442 Ultimately the SG’s ferry strategy must ensure the long-term sustainability of services, an attribute that mandates the need for a dynamic rather than a static approach in procurement processes.

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TABLE 5-16: SUMMARY ON PROCUREMENT OF FERRY SERVICES IN EUROPE

Denmark Sweden Ireland57 Norway Greece Germany

METHODS OF DELIVERY AND OPERATION

Operator Public & private

Public & private58 Private Private Private Private59

if private domestic? yes yes yes yes yes yes

FINANCIAL INCENTIVES

Operating/deficit subsidy 60 61 no

Capital subsidy possible62

Tariff user/discount subsidy free service 63

Freight subsidy 64

Other 65 66 67

57 None of the islands generate more than 300,000 trips in a year; hence they are not bound by the European Union's procurement procedures according to EEC3577/92. As such, ferry service contracts can be awarded following simple expressions of interest, as opposed to formal tenders.58 Depends on the type of route59 Local community is shareholder60 Licensing or tender with net-cost contracts61 Max. operating subsidy calculated for each route, actual level dependent on tender outcome, but level is then fixed.62 Tender might include port or harbour facility improvement see case studies for example63 for islanders between islands and mainland64 Freight subsidy for Gotland traffic.65 No financial government subsidy free use of port facilities, and maintenance of navigation channels66 Cross subsidization 3% of all ferry fares67 Discount on port dues. State owns ports, port improvements as incentives.

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Denmark Sweden Ireland Norway Greece Germany

COMPETITION AND PROCUREMENT

Bundling68 Small & single

Small & single Single Small or single Small & single no tender 69

POWERS AND STRUCTURES

National Gov contracts services yes yes yes yes yes

L O C A L G O V C O N T R A C T S S E R V I C E S

Y E S Y E S

Type of contract net-cost, gross-cost contract

receipts and expenditure net cost

Duration (years)5-6

12 (Small Isles)

10 previously, now 5 years for Gotland

55-6 years, some 8+1(option) years, traditional licensed services 10 years

Annual 70

Ferry regulator? National Rail Authority

Rikstrafiken 71

Minister for community, Rural and Gaeltacht Affairs72

Ministry for Merchant Marine

States

Provision of ships Private Private Private Private operators Private operators Private

68 Large bundle = (>5 routes), Small bundle = (2-5 routes), Single route 69 Bundling, if necessary to avoid subsidies.70 Based on application71 (National Public Transport Agency)72 For details see http://www.pobail.ie/en/Islands/file,4647,en.pdf

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Denmark Sweden Ireland Norway Greece Germany

operators (ships may be taken over from previous service provider)

operator (Gotland)

Public (road ferries)

operators(shift to integrated transport providers)

operators

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6 COMPETITION AND PROCUREMENT6.1 Introduction1.1.443 This section considers aspects related to competition and procurement of

ferry services. We have reviewed legal aspects and procurement regulations, existing methods of procurement (the status quo), and analysed the strengths and weaknesses associated with these as well as alternative options highlighted during stakeholder consultations, and supported by other data and our assessment of ferry service procurement elsewhere.

1.1.444 Our analysis and assessment considers competition issues, scope for more local involvement in ferry service procurement, the need for some flexibility with respect to tenders, and explores related issues. This is followed by a discussion of service specification setting, which is one of the key starting points for an effective procurement process. We then appraise the different service procurement options, assessing relevant factors to do with bundling and de-bundling routes.

6.2Pre-Procurement Considerations1.1.445 The award of any public service contract must be done in a non-

discriminatory way in accordance with Public Contracts (Scotland) Regulations 2006 (the “2006 Regulations”). Depending on the route in question this will require, at the very least, competitive tendering and the application of the principles of equal treatment, non-discrimination and transparency. In most instances, the procurement of ferry services will need to be carried out in compliance with the full scope of the 2006 Regulation.

1.1.446 It is not within the scope of this Report to comment on the appropriate procedure to be followed in relation to any procurement exercise. Rather, this Report focuses on the potential make-up of the services to be tendered and examines the legal and practical issues to be taken into account when deciding on the services to be tendered.

1.1.447 Prior to embarking on a procurement exercise, the following questions need to be addressed by the SG (and/or LAs and RTPs) to establish whether PSOs require to be imposed by way of a PSC: What routes require PSOs to ensure an adequate73 ferry service? Which routes could potentially be fulfilled by the market? What obligations should be imposed by way of PSOs on such routes? Is a subsidy required? Might subsidy only be required over the winter period

on a given route?73Note – “Adequate” is not defined in the Cabotage Regulations

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What is the appropriate means of securing PSOs? Is a procurement exercise necessary to award a PSC?

1.1.448 Once these questions have been addressed, a number of issues will need to be decided upon before a procurement exercise can be launched. The 2006 Regulations and the Cabotage Regulation must be considered when setting out the strategy to be followed when tendering PSCs. Restrictions apply both to the process itself (bidder qualification, selection of preferred bidder, the negotiation/ dialogue process) and to the structure of the contract (service specification, allocation of risk and duration of contract). In addition, the outcome of the process will need to be compliant with EU requirements in relation to state aid.

1.1.449 We have identified a number of issues that should be addressed pre-procurement in order to ensure a successful procurement strategy is put in place. This includes: Service specification and performance regime; Allocation of risk; Bundling of routes; Duration; Vessels; Relief cover and operator of last resort; Small islands; Market consultation and scoping; TUPE and staffing Issues; Contracting authorities.

1.1.450 Each of these issues is considered in the context of the findings of our research, taking into account the legal and practical issues in relation to the proposed procurement exercise.

6.3Service specification and performance regime1.1.451 Based on our analysis of existing services, consultation with stakeholders

and users, and review of relevant literature, the key factors that require to be

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considered within service specifications from the user perspective are as follows: Service frequency; Sailing and arrival times; The length of the operating day for ferry services; Service reliability; Customer service (on board and on shore); Service capacity; Flexibility to carry passengers, cars, caravans/campers, freight (including

dangerous goods), coaches etc; Reduced journey time (e.g. possibly via superior port call solutions); Affordable prices for users.

1.1.452 Of these service specification criteria, the least mentioned by stakeholders and users at workshops was price. However household survey results indicate ferry fares to be one of the 4 things people are least satisfied with. There is also a need to focus on improving quality of service aspects (i.e. frequency, sailing/arrival times, reliability, hours of operation, vehicle capacity etc).

1.1.453 Some stakeholders (e.g. hauliers, hoteliers, and individual users) suggested they had never had any direct input into defining service specifications in the past; any inputs were usually led and fed into SG by councils and other agencies (enterprise, tourism, trade associations etc.). Other users also stated they had little engagement in the past (Oban workshop; Mallaig workshop). This seems rather odd considering the several hundred responses received during the previous public consultation (the CHFS spec was consulted on 3 times), and the results of the SFR Household Survey which revealed general satisfaction with services. Clearly, not everyone responds, and those who do will not always see their suggestions materialise.

1.1.454 A suitable performance regime, such as those which apply to the CHFS and Northern Isles, will need to be established to ensure that any operator awarded a PSC is incentivised to comply with the service specification. A performance regime should be developed that incentivises operators to deliver ferry services in a way that meets the requirements of stakeholders through full

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delivery of the service specification, with penalties for non compliance. Operators also need to be adequately rewarded for providing the services and managing the risks allocated to them under any PSC.

1.1.455 As with any performance regime, it is necessary to ensure that the operator provides the service whilst avoiding an over-complex and prescriptive mechanism that diverts resources into contract management rather than the delivery of the service.

6.4Allocation of risk1.1.456 Any public service contract put in place will need to deal with the

allocation of risks associated with the operation of the ferry service in question. Such risks will include: Financial Fuel Carryings/revenue Legislative risks

1.1.457 The way in which risks are allocated is fundamental in ensuring that the operator provides the services in a way that delivers the service specification and limits the liability of the public sector. In the interests of achieving value for money it is essential that risks are allocated to the party that is best placed to manage those risks.

1.1.458 In allocating risk, care must be taken to ensure that the proposed requirements do not discriminate against any Community shipowners who may be interested in tendering. As well as reducing competition, this may be viewed by the Commission as discriminatory in terms of the Cabotage Regulation.

1.1.459 The existing PSCs for the Clyde and Hebrides and the Northern Isles each have their own approach to risk allocation. It is not within the scope of this Report to revisit the risk allocation set out in each of these contracts but, in defining the scope of subsequent procurements, care must be taken to ensure that they do not restrict the potential for competition or discriminate against Community shipowners who may wish to enter the Scottish ferry market.

1.1.460 In addition, seeking to transfer too much risk to the private sector may result in a higher level of subsidy and a more expensive service, as operators will include additional risk contingencies into their bids in respect of risks they believe they cannot fully manage. If market assumptions change there is a risk

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of operator failure leading to contract failure and possible termination of a service.

6.5Duration of contracts1.1.461 The Cabotage Regulation does not set a maximum duration for PSCs but

do provide that they should be of a limited duration in order to allow regular and open competition in the market. In accordance with the principle of proportionality, all community shipowners should be regularly given the opportunity to apply for the operation of a given service. The Commission have set out that, in its view, a contract period of more than six years is unlikely to be viewed as a proportionate measure in terms of the Cabotage Regulation. An exception to this principle may apply in relation to “small islands”.

1.1.462 The duration of a contract may have an impact on the ability of operators to provide new vessels and finance them over the contract period. As discussed further below, the question of a six year maximum contract will have an impact on ferry service procurement options. However, EU case studies carried out as part of this Review suggest that this is not necessarily as significant a constraint as might be thought in terms of the provision of new ships being brought in by bidders. In Norway, Sweden and Denmark new ships have been introduced by operators as part of 6-year contracts. There is also the option of 12-year contracts for ‘small islands’ services below the 300,000 passenger threshold, with examples of these in Denmark and The Netherlands.

1.1.463 In relation to the need for operators’ to take over existing vessels (which may be discriminatory), the Commission has stated that it would be less restrictive on the freedom to provide services, for there to be a requirement that the vessel be taken over, rather than for the service to be awarded to a single shipowner with a contract that would be long enough to allow full depreciation of a purpose-built vessel. This is a clear indication that the Commission would be more likely to favour a requirement that the existing fleet transfer to the new operator, rather than extending the duration to allow for vessels to be fully written-down over the life of the contract. This option is perhaps more appropriate where the state or a state-owned entity (e.g. CMAL) owns the vessels, or makes a commitment to use specific vessels for a long time period (e.g. the case of Northern Isles ships). However, where operators themselves provide the vessels, as we have found to be the norm in our country case studies, any such requirement to transfer vessels to the next operator at the end of a contract period may not be necessary.

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6.6Vessels1.1.464 One of the key issues identified by stakeholders, and raised through other

evidence obtained, is a need for the introduction of new vessels given the ageing of the fleet. However, great care also needs to be taken to ensure the right vessels (in terms of specification) are procured for each route, as the needs of each route are different. Stakeholders and users, as well as our own analysis, has highlighted a number of examples of inappropriate ships currently in service on particular routes (see vessel specification analysis in 4.6). This may be in part a consequence of not allowing bidders to propose their own vessel solutions on a route-by-route basis, an option preferred by some operators, with such decisions building on operator experience serving different markets.

1.1.465 The vessels determine the operating costs of the service provided on any given route. If the ship does not alter (i.e. if bidders must take on the existing ships after winning a contract) then tendering becomes less attractive to private operators (Operators workshop).

1.1.466 Under the current arrangements for the Clyde and Hebrides and Gourock – Dunoon services, vessels are owned by Caledonian Maritime Assets Limited (“CMAL”) (a company wholly-owned by Scottish Ministers) and leased by the respective operators of those services. As part of the tender exercise for the Clyde and Hebrides, tenderers were required to take over the CMAL fleet insofar as it related to the provision of the Clyde and Hebrides services. Following the tender, arrangements were put in place whereby CMAL leases the vessels to CalMac Ferries Limited.

1.1.467 In relation to the Northern Isles, the current operator leases the vessels used on those routes, having obtained them from the previous operator. The vessels used by NorthLink I were made available at the tender stage on a discretionary basis, and at estimated market value, to bidders who would wish to use them in delivering the services within the framework of the future contract. Should SG wish to use alternate vessels the leases allow for early termination. Charter of vessels is another option, as NorthLink has done with mv Clare for 6 years.

1.1.468 The Commission considers a tender requirement that the successful bidder for a PSC takes over vessels and crews from the previous owner will, in most cases, be discriminatory. Such a requirement may prevent community shipowners from bidding with their own vessels, thus giving an advantage to the incumbent operator. However, whilst the Maritime Cabotage Regulation does not require an operator to take on the crew, TUPE does.

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1.1.469 An exception to the Commission’s position would be where vessels required to serve an island have a design so special that it cannot be found or sold on the market or used for another purpose. Prior to any procurement exercise, the SG should ascertain whether this is the case and whether there is in fact a market for vessels capable of serving certain routes. In such cases, the vessel could be leased under very clear conditions set out in the tender documents by successive operators from a vessel-owning company (e.g. CMAL) established for that purpose. An obligation for a new service provider to take the ship over directly from its predecessor would also be conceivable but, given the potential for discrimination, would have to be agreed with the Commission in advance of the procurement exercise.

1.1.470 However there are concerns that no potential operator is likely to have access to an existing suitable fleet, or be willing to build a new fleet that could last for 25 years or more for a PSC that cannot be for more than 6 years.

1.1.471 Where Member States own vessels or have them otherwise at their disposal (as is the case in Scotland via CMAL, and also with certain LAs) these may be placed at the disposal of all potential service providers under the same non-discriminatory terms.

1.1.472 In situations where state resources are made available to bidders, they must be leased at market rates to avoid the possibility of the use of state resources being prohibited state aid.

1.1.473 When setting out the tender requirements for any route, it is necessary to consider how the tender can be set up to incentivise the introduction of new (or nearly new) tonnage in respect of that route more especially in instances where replacement vessels are considered appropriate and timely. Where an operator procures a ship or ships is a matter for the operator.

1.1.474 Taking the Clyde and Hebrides tender as an example, the requirement to take over the existing fleet has meant that there was realistically no opportunity for the bidders to introduce new vessels; in other words, the introduction of new vessels by the winning operator was not a condition of the tender. As such, for new vessels to be introduced in relation to Clyde and Hebrides, capital investment will need to be made by the state (via CMAL) to update its fleet.

1.1.475 Having to ‘take’ the existing ships may not be that attractive to private bidders, who will generally have their own ideas on how best to serve a given route in terms of ship design and operation based on their knowledge and experience. Today’s Clyde and Hebrides fleet reflects the views, tradition and

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culture of the current state-owned incumbent; such views and tradition may not fit well with many of today’s leading ferry or transport operators.

6.7Exclusivity1.1.476 Granting an exclusive right on a public service route is a restriction on the

principle of free movement of ferry services, as provided for by the Cabotage Regulation. As such, when considering the possibility of granting exclusivity on a particular route, a balance needs to be struck between the potential cost benefit to the contracting authority in securing services on an exclusive basis and any restrictions on trade.

1.1.477 In certain situations, the Commission has accepted that exclusivity may be the only adequate instrument to meet essential transport needs, provided that they are granted for a limited period of time and on the basis of open, fair and non-discriminatory award procedure. Restrictive measures such as exclusivity may be taken to avoid other operators “cherry picking” routes or market skimming. In Scotland, to date, routes have not been awarded on an exclusive basis.

6.8Relief cover 1.1.478 Given the essential nature of ferry services in Scotland, provision has to

be made to provide relief cover to allow for ongoing vessel maintenance, or failures in services that may occur.

1.1.479 The availability of relief cover is often cited as a justification for the use of large bundles. However, as part of our consultation, some stakeholders remarked that the notion that a large bundle affords vessel relief cover (for CHFS) may be incorrect. Many users believed that it is precisely because there are so many routes served within a single bundle that competition for a relief vessel becomes intense (Barra workshop; Oban workshop).

1.1.480 A small bundle could be structured to ensure that there is adequate relief cover built-in as part of an optimised service. Our case studies show that, for example, in Greece operators are required to offer guarantees, and indicate how back-up services will be provided during scheduled maintenance periods. This requirement could be worked into any tender process where relief cover is an issue. We also note that an increasing number of routes in Scotland are served by two or more vessels. This means that cover is always available on such routes. However on high frequency short-distance commuter routes the requirements may differ, that is, access to possibly more than two vessels may

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be necessary to take account of relief cover. This requirement needs to be reflected in bids.

6.9Operator of last resort1.1.481 In a worst case scenario, contingencies have to be made for an operator

of last resort to step in if an operator was to fail due to insolvency or some other catastrophic event. Provision has to be made to cover situations where there is a catastrophic failure in the overall service.

1.1.482 With any PSC, the SG will have to ensure that it has the ability to terminate the contract where the service is consistently not being provided to a satisfactory standard. In addition, the SG will want to ensure that it can step-in and have the service delivered on its behalf where the operator is otherwise unable to deliver the services to the required standard. The most obvious way to do this is for the contracting authority to temporarily contract another operator to maintain a service until such times as a further tender process can be completed and a new operator is selected.

1.1.483 In the event of operator insolvency, the operator may have to be taken over and kept running by an Administrator. These circumstances may require additional resources from SG in order to maintain an essential service until such times as the failed operator is successfully sold on and continues trading, or alternatively a new operator is contracted. However, in such circumstances the Administrator’s primary responsibility is to the creditors of the failed operator and it cannot be assumed that the Administrator will always accept that the failed operator will continue trading as normally pending either a sale of the operator or a new tendering exercise is completed. The recent EC investigation concluded that State aid granted to enable NorthLink 1to continue operating was compatible with Article 86(2) of the Treaty74.

6.10 Small Islands 1.1.484 The Commission has acknowledged that a special case can be made for

small islands where only local operators would be interested in serving routes. In such circumstances, it is recognised that a full European-wide tender procedure may be over-complicated.

1.1.485 As such, without prejudice to the 2006 Regulation, the selection of a suitable operator to serve a small island could be carried out following a simple

74 European Commission (2009) Commission Decision of 28.10.2009 on the State aid No. C 16/2008 (ex NN 105/2005 and NN 35/2007) implemented by the United Kingdom and Great Britain and Northern Ireland, Subsidies to CalMac and NorthLink for maritime transport services in Scotland. EC, Brussels, C(2009)8117 final.

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call for expressions of interest without launching a formal tender procedure, provided that a Community-wide announcement of the service is maintained. Should more than 1 operator bid to operate the service then based on the evaluation the best offer would be selected.

1.1.486 There may not be a requirement to have full EU wide competition in terms of the cabotage regulations but there may still be a need to put contracts out to tender based on the procurement regulations where the value of the contract is in excess of 139,000GBP.

1.1.487 In addition, in relation to small islands, the Commission takes the view that a longer duration of contract of up to 12 years may be acceptable. We have found evidence of such contract durations being used in Greece, Denmark and in the Netherlands. The scope for private investment might be expected to increase for Small Island services (i.e. thin routes) based on longer 12 year contracts. This also suggests that small bundles or even single route tenders in some instances might be the best option for delivery of ferry services to some small island services.

1.1.488 In this context "small islands" is understood to mean islands where the total annual number of passengers carried by sea to and from the island is 300,000 or fewer.

1.1.489 Any decision to designate a route as serving small islands would need to be done on an objective basis and not simply to avoid the need for a community-wide tender process or to allow a longer duration of contract.

1.1.490 The simplified rules may in principle apply to the carriage under PSCs of both passengers and goods to and from a "small island". Separate goods trade should be excluded where there is a risk of unjustifiable market distortion.

1.1.491 Where the same operator serves several small islands, the total number of passengers carried by that operator in the context of the PSC is taken into account when determining whether the threshold is reached.

6.11 Market consultation and scoping1.1.492 Before launching a procedure for the award of a contract, it is possible to

undertake a market consultation exercise to assist in defining the scope of the procurement. A market consultation exercise may be carried out using a technical dialogue with providers in the market to seek advice that may be used in the preparation of specifications for the procurement. Any market consultation must be carried out in a way that ensures any advice obtained from operators does not have the effect of precluding competition and the

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principles of equality, transparency, non-discrimination and equal treatment should be applied.

1.1.493 A market consultation exercise can be used to obtain the views of the market on how the services can be delivered. To ensure that the results of the market consultation can be taken into account in the make-up of the procurement process it should be carried out prior to the notice in the Official Journal of the European Union (“OJEU notice”) being published.

1.1.494 In order to ensure that the principle of equality is observed, the potential consultees to be invited to take part in the exercise should be identified in an open and transparent manner. One way of doing this would be to issue a Prior Information Notice (PIN) which would highlight to the market that there is a potential procurement process to be carried out for ferry services. The issue of a PIN would give potential bidders notice of the procurement and those responding to the PIN could be included as part of the consultation.

1.1.495 In order to inform the consultation, the consultees will need to be provided with a certain level of information about the proposed procurement. The information provided to consultees should not go beyond what would normally be included within the OJEU notice. Any information provided to consultees should also be made available to anybody who responds to the OJEU notice when the procurement is undertaken.

1.1.496 The consultation procedure should be transparent with a full list of the consultees being kept and a note of their responses being documented, where appropriate, for the Scottish Government's audit trail.

1.1.497 The information provided as part of the consultation should not give the consultees a competitive advantage over other potential bidders. In addition, the consultation should be carried out in a way that does not preclude competition. The specification should not be scoped in a way that would favour a particular bidder or preclude potential bidders from bidding. Examples of this would be where a solution is specified that was only capable of being delivered by one or two bidders or if the project was set up in such a way that would favour a bidder with a particular solution for delivering the services.

1.1.498 The consultation should be focussed on the service specification and eventual scope of the project and should be undertaken with this end in mind. This is different from the ship specification which should ultimately be a matter for bidders, especially where the bidder is required to provide ships.

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6.12 TUPE and staffing 1.1.499 It is highly probable that the award of any route or bundle of routes to an

incoming operator will constitute a service provision change in terms of Regulation 3(b)(1) of the Transfer of Undertakings (Protection of Employment) Regulations 2006. A service provision change is a relevant transfer in terms of Regulation 4 of the TUPE Regulations and accordingly, in all probability the TUPE Regulations will apply to most if not all awards of routes or bundles of routes. However, there is an alternative opinion noted by NorthLink that without a transfer of assets (i.e. using the same ship) TUPE does not apply but to prove this point would probably require a case to be taken through the courts.

1.1.500 It should also be noted that Regulation 3(c)(4) provides that “the regulations apply to ……..the transfer of undertaking business or part of an undertaking or business (which may also be a service provision change) where persons employed in the undertaking, business or part transferred ordinarily work outside the United Kingdom. Accordingly, the fact that “off shore” employees may be involved in the award of a route or bundle of routes would not preclude the award from constituting a TUPE transfer. SG has acknowledged in the past that its view is that “offshore” employees benefit from the protection of the TUPE Regulations.

1.1.501 It is likely that the award of a route or bundle of routes would trigger application of the March 2005 Code of Practice on Workforce Matters in Public Sector Service Contracts. In broad terms the code provides for the adherence to the terms of the TUPE Regulations even in circumstances where TUPE might not apply and “gold plates” the protection of employment rights provided for in the regulations. This would have the result of putting in place certain protections relative to pensions and avoid the creation of a two-tier workforce upon the award of a route or bundle of routes.

1.1.502 Upon the award of a route or bundle of routes, any person employed by the incumbent operator and assigned to the organised grouping of officers or employees who operate the route will transfer to the successful bidder. For those employees whose entire working time is dedicated to a particular route or routes within the scope of a bundle then the task of identifying employees who will transfer is straightforward. The exercise becomes somewhat more complicated if employees have duties on routes which lie outwith the bundle that is to transfer. Those employees thought to be in scope to transfer should be identified at the earliest opportunity to facilitate consultation and resolution of any disputes as to who is in scope and who is not.

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1.1.503 The operation of the TUPE Regulations and the 2005 Code of Practice mean that any new operator will need to take on the existing employees assigned to any route on the award of any PSC for that route. The application of TUPE and the 2005 Code of Practice will mean that, even where new vessels are introduced the incoming operator will have to take into account the staffing costs of the incumbent operator which may reduce any potential efficiencies of introducing new vessels.

1.1.504 In our consultation with operators it is evident that private operators are less interested in bidding for routes where they would need to take on existing employees and costs related to same. Such a requirement makes little sense to those operators who see opportunities to better support communities using different, more efficient vessels and operating approaches (e.g. lower pax capacity ships with lower crew requirement, possibly more ships per route in some cases, different shift systems, less need for on board crew accommodation etc). Essentially the requirement to take on existing employees suggests that only publicly-owned ferry companies will be likely to bid to operate services, as happened with the last CHFS tender. The status quo also implies the potential loss of private operator investment in future vessels and raises the prospect that the public sector will have to continue to support capital investment.

1.1.505 The question of staff transfers and TUPE will be of particular interest to the unions who have stated that they are opposed to any “privatisation”. In time the entry of private operators on some routes could occur given the requirement to tender PSCs. There will however be a need to manage staff and union expectations and to allow time within any procurement procedure for the application of staff consultation and compliance with the 2005 Code of Practice.

6.13 Bundling of Routes1.1.506 Where routes are put out to competition, contracting authorities may wish

to bundle groups of public service routes into a single contract if they consider this advantageous. On the other hand, they may prefer to tender smaller bundles on a regional basis, and even in some cases single routes, in an effort to attract bidders/investors. The Cabotage Regulation requires that where any PSC for ferry services is tendered, it must be done in a way that does not discriminate against any community shipowners.

1.1.507 The Commission has stated that bundling services is not necessarily discriminatory, but that the way that services are bundled together could lead to discrimination. When considering bundling, a balance needs to be struck between the most appropriate size of bundles required to meet essential

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transport needs and the risk that such bundles could create a barrier to entry for potential bidders. Another factor is the level of attractiveness of different bundle sizes in giving incentive to operators to bid. The Commission has accepted the case made by the SG for a large single bundle in respect of CHFS.

1.1.508 Compliance with the Cabotage Regulation requires that the size and composition of bundles should not unduly or significantly restrain competition during the tender by excluding entrance into the market. It should be noted that if Member States cannot justify the approach to bundling they have taken, they may be perceived as being discriminatory.

1.1.509 In addition, the Commission may take the view that the size of the bundle in fact distorts competition and leads to a higher level of compensation being paid to the successful operator than would otherwise have been payable if each of the bundles had been procured separately.

1.1.510 In the Scottish context, the Clyde and Hebrides Ferry routes (CHFS) are currently contracted as a large bundle comprising 26 routes. This is not the norm in Europe, as we have discovered; most countries tender routes either as small bundles (i.e. maybe 3-4 routes together in the same area) or as single route tenders. Prior to the last tender exercise, it was thought that there were benefits from retaining the Clyde and Hebrides Routes (with the exception Gourock – Dunoon) as a cohesive, integrated, single network of routes. The following benefits were identified in retaining the Clyde and Hebrides services as a single bundle: Greater flexibility for vessel deployment and crewing; Availability of relief vessels - due to the ‘unique’ nature of the CalMac fleet it

was felt that relief vessels were not readily available in the market; A whole network approach made it easier to ensure integration across all

aspects of vessel and port operations; A whole network approach provided the best opportunity to maintain existing

integrated transport links (with road, rail and other ferries in the CFL network) and integrated ticketing facilities;

It allowed the operator to achieve economies of scale, thus minimising subsidies;

A single operator was seen as the most efficient form for the Scottish Executive to manage.

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1.1.511 The downside of the single large bundle approach, where the successful operator had to take on all the existing ships, was that no other bids were received aside from that of the incumbent state-owned operator.

6.14 Competition1.1.512 Transport authorities may decide that an ‘acceptable’ option (perhaps on

specific routes, though not all) could be for competition to exist between two or more operators on a route. Such a situation exists on the Pentland Firth, between Gourock-Dunoon, and in respect of freight transport between Aberdeen and the Northern Isles.

1.1.513 A taxpayer subsidy paid to a state-operated service in such circumstances cannot be justified, provided that the competing private service is meeting all the needs of the island/destination served. There is a readily-available method of testing this – the PSO, which defines and sets out the range of needs. A bidding round based on such a PSO will demonstrate which service can best meet the needs, at lowest cost to the public purse. This also means that whichever operator emerges as the sole service for that island/destination, it will be operating under a PSC which ensures that needs would continue to be met, preventing exploitation of a monopoly position.

1.1.514 A serious difficulty arises where, on the same route, one operator is subsidised and another is not subsidised; this may mean that the route does not demonstrate the need for a PSO in the first place, or any need for subsidy. It may be argued that one service operates under all the strictures and specifications of a contract with SG, whilst the other does not, but that does not seem to matter as far as the Cabotage Regulation is concerned. A further difficulty arises in instances where two competing operators are subsidised (as in the case of NorthLink and Streamline serving the freight market to Orkney), yet a third operator active in the same freight market is not subsidised (i.e. Pentland Ferries). Additional complications arise where subsidy amounts paid to operators are not assessed in quite the same way, on a like-for-like basis, including any caps imposed (e.g. NorthLink and Streamline freight subsidy calculations are not made in quite the same way).

1.1.515 The current approach to ferry subsidies in Scotland is, therefore, mixed, with a range of different schemes and arrangements in place that are also prone to change. This results in some uncertainty and disquiet particularly for private sector operators not in receipt of subsidy (Operator workshop).

1.1.516 Pentland Ferries claims its request to use (i.e. to lease or buy) the council-owned harbour at Burwick in Orkney was refused by OIC in 2006 at least in part

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on the basis that the council wished to protect (from competition) the state owned/subsidised NorthLink service between Stromness-Scrabster (Kirkwall workshop). Pentland Ferries argued they would be able to double service frequency (from 3 roundtrips/day to 6) based on a shorter crossing using Burwick instead of St. Margaret’s Hope thereby bringing benefits to Orkney. OIC’s published response to Pentland Ferries request to use the harbour rather suggested that protection (of the state subsidised operator) was one of the reasons for its actions75. There is need for some investment at Burwick though Pentland Ferries suggested it would consider assisting with that. If operators are to be allowed to innovate in order to provide for improved services (e.g. shorter trip time, higher frequency, lower costs etc) they should not be denied access to preferred port facilities, more especially those created through public funds.

1.1.517 In instances where there has been directly competing ferry and shipping services, this has historically tended to result in lower market prices, and to some extent improved services, as carriers respond to meet the challenges of greater competition.

1.1.518 A number of private operators appear to have failed in their efforts to compete against subsidised competitors in the past (e.g. Taygran between Ullapool-Stornoway76, Orcargo between Kirkwall-Invergordon77, and Norse Island Ferries between Lerwick-Aberdeen).

1.1.519 The question for the SG is if withdrawal from a route would ever be justified and if so, what assurances would the private operator be expected to offer to users, and would such assurances be an effective protection of users’ interests in such circumstances? Such a situation could occur where a non-subsidised operator is carrying the majority of the market and has the capacity or the capability to accommodate the entire market. If essential services are inadequate in some way or other the usual mechanism employed is that of a PSO/PSC to safeguard user interests. However, as long as a service is deemed to be adequate then arguably there is no need for a PSO/PSC.

1.1.520 A few private operators have nevertheless been able to survive despite competing against state owned/subsidised operators. Both Western Ferries and Pentland Ferries primarily enjoy the benefit of shorter sea routes compared with their state-owned and subsidised adversaries, sea distance being an important determinant of voyage operating costs. Western Ferries also has certain scheduling advantages due to an operating restriction imposed on the state-

75 http://www.orkney.gov.uk/nqcontent.cfm?a_id=6167&tt=orkneyv276 http://business.scotsman.com/caledonianmacbrayne/Taygran-runs-aground-after-losing.2260794.jp77 http://www.orcadian.co.uk/archive/2001/archive46.htm

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owned carrier (Cowal Ferries), and by virtue of the latter’s larger crews. The operating restrictions were imposed (in 1982) in recognition of danger of the cross-subsidisation of any vehicle service. Western Ferries claims to operate its 4 ships for the same total cost as Cowal Ferries operates a single ship on the Gourock-Dunoon route (Operator workshop).

1.1.521 Competition may also bring about innovation, for instance: Western Ferries’ 15-minute service frequency/4-ship service represents a key

competitive advantage, along with a shorter route, supported by the 1982 restriction of the Gourock-Dunoon timetable, and its lower cost ship/service solution has helped drive up demand considerably;

Pentland Ferries’ innovative new low-cost medium-speed Ro-Pax catamaran is expected to cement further its competitive advantage on the Pentland Firth, based on a shorter, more sheltered route and with potential for improved frequency (e.g. to 4 or more roundtrips/day in the peak season).78 (The Scottish Government considers that Pentland Ferries’ prospects remain to be seen, particularly the long-term reliability of its new catamaran year-round.);

NorthLink’s improved schedules for Northern Isles service and high (onboard) quality vessels have helped to expand the market, especially for services ex Aberdeen.

1.1.522 There is a need to build in some degree of flexibility to contracts. Based on industry experience/ knowledge, some operators may identify a superior way of serving a given market/route whilst still meeting (or even exceeding) passenger requirements. This may be in terms of ship type, speed, capacity, fleet mix, or hours of operation. It could even relate to the ports of call involved. Slight changes in a desired service specification may yield substantial benefits, and this needs to be explored/tested in tenders. If the set specification is too fixed then opportunities may be missed. Bidders should have the possibility to be able to propose optimised solutions, within the context of maintaining and indeed improving upon the basic minimum level of service as proposed by tendering authorities.

6.15 Local involvement in procurement1.1.523 The outcome of any procurement exercise will be to ensure ferry services

are delivered efficiently, at reasonable fares and charges, while minimising the

78 Pentland Ferries claims the weekly fuel costs of its new vessel are equivalent to one-day’s fuel costs for the state-owned subsidised NorthLink service across the Pentland Firth. (Orkney Today, 26th March 2009, p. 29.).

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level of any subsidy provided by the public sector. These aims can be delivered through the appropriate use of PSOs and PSCs.

1.1.524 Our consultation with stakeholders established that the question of whether a public or private operator delivers the service is rather less of an issue for stakeholders (at almost all workshops) so long as: An acceptable service specification is established; and The operator selected is tied to a PSO/PSC.

1.1.525 Some users with whom we have consulted would like LAs, on their behalf, to be rather more involved in helping set service specifications in respect of the tendering of mainland to island routes in line with user needs, and to also be involved in the actual selection of the operator(s), although the general view is that this process should still be led by SG (Benbecula workshop; Stornoway workshop). Some stakeholders also consider RTPs could have a much greater role.

1.1.526 In respect of the Northern Isles contract, the LAs were involved in commenting on the specification – and many comments were taken on board by SG – but involvement in the operator selection procedure itself was limited because of the argument of commercial confidentiality. Some LAs (e.g. SIC) were initially to some extent interested in submitting their own bids, possibly jointly with other actors, but eventually decided against that option. For the 2002 contract, OIC directors were allowed to look at the three tenders excluding price information. They were invited to comment on all other aspects of the bids but were forbidden to pass on any information to elected members, which put them in an awkward position. Some authorities’ have requested to be consulted by the Scottish Government to a greater extent than previously, regarding the drafting of relevant tender specifications and to also participate in the appraisal of tenders received.

1.1.527 A rather different approach was employed in the Scottish Enterprise managed tender for the Rosyth-Zeebrugge ferry service in 2000. In that instance, a Steering Group decided on bids (advised and supported by a Technical Committee which included TRI). That Steering Group consisted of representatives from Scottish Enterprise, Fife Council and Visit Scotland and was able to carry out its functions in a positive manner, including maintaining confidentiality, resulting in 42 expressions of interest and a shortlist of 4 bidders, with the eventual selection of Superfast Ferries as operator, and

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without any operating subsidy79. Although Superfast left the route in 2008 due to changes in strategy and ownership, the service had by that time proved its viability and market demand which in turn facilitated entry of a successor operator, Norfolk Line, in 2009 following a successful international promotional exercise by the SG.

1.1.528 Similarly, the NORSHUKON (Norway-Shetland-UK-Continent ferry service) tender to develop a new ferry service was managed by a consortium of LAs (Shetland Islands Council, and More Romsdal County in Norway) and regional transport partnerships (Zet-trans and SesTrans) coordinated by Shetland Development Trust (SDT), also advised by TRI80. This initiative attracted several expressions of interest and led to selection of an operator in April 2008 and submission of a grant application to the EC Marco Polo Programme.

1.1.529 For their part, a number of LAs and RTPs already tender ferry services more or less in the same way they tender to procure other transport suppliers. Shetland has tendered the Foula service, Highland Council has tendered in respect of a number of small services, SPT for Gourock-Kilcreggan/ Helensburgh and Argyll & Bute Council with respect to Jura. These organisations appear to view the tendering process as being relatively straightforward and uncomplicated (council’s workshop; Mallaig seminar). Within the context of smaller regional bundles or even in respect of single route tenders it may therefore be appropriate for an ‘operator selection group’ to comprise key decision makers from these organisations together with SG, however composition and responsibilities requires to be agreed.

1.1.530 Table 6.1 categorizes proposed tender requirements, responsibilities and related outcomes.

6.16 Large bundles1.1.531 The consultation exercise which formed an important input to this Report

has indicated that, while private operators were not interested in bidding for the large 26 route single bundle for CHFS, they would be interested in bidding for smaller bundles and/or for individual routes (Operators workshop).

1.1.532 Some operators believe economies of scale in terms of ship size are largely determined at the route level (i.e. the specific route on which the vessel is employed), so economies of scale may have little influence at the macro level, across a number of geographically separate routes forming one single

79 http://www.scottish-enterprise.com/sedotcom_home/about-us/se-whatwedo/news-se-about-us/news-se-about-us-details.htm?articleid=1473180 http://www.sdt.shetland.org/PR11Feb08.aspx

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large bundle. Procurement of repairs and maintenance may, however, lead to cost advantages for larger operators. Larger operators may have services in different regions and, indeed, in different countries (e.g. Veolia operates tendered services in a number of countries including The Netherlands, France and Norway). Multinational operators may, therefore, benefit from economies of scale in terms of management learning, procurement of supplies, IT, ship acquisition etc.

1.1.533 Tendering a large bundle such as CHFS represents a disincentive to private bidders (Operator workshop). Having to bid for over 20 routes at the same time is an expensive, complicated and time-consuming process for private operators. SG note that for CHFS, from issuing tenders to contract award to contract start took 9 months, which demonstrates that a fairly rapid process is possible (albeit there was only one bid to consider).

1.1.534 The cost (for bidders) involved in putting a bid together may be well above £1m, according to one state-owned operator. This represents a significant disincentive, more especially to private operators who are financed by private investors/shareholders.

1.1.535 A large bundle could offer potential for an operator to cross-subsidise routes, although this is only realistically possible in instances where some routes return a surplus. If a route was to make a surplus it may not qualify as a route requiring a PSC in the first place so would generally not be included in a procurement exercise. CFL claims all CHFS routes are loss-making, but private operators maintain some routes would be viable if served differently, using alternative ships and different crewing arrangements (Operator workshop).

1.1.536 The European Commission’s decision on their investigation on support for ferry services in Scotland considered the “bundling issue” with respect to CHFS. The Commission decided that “it cannot be concluded that the bundling of routes is an unnecessarily unfair condition of the public tender.” This seems at odds with the views of potential private operators, who are less likely to bid or invest on this basis. The Commission was also of the view that any unbundling would “inevitably increase the costs to the state for discharging the public service obligations.”

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TABLE 6-9: PROCUREMENT PROCEDURES AND REQUIREMENTS

Responsibilities

Responsibilities for tenders with SGLAs and RTPs should have input to tender specification and possibly also with SG to final operator selection decisions (depending on bundling and organisation of bids in future)LAs (and in a few instances RTP’s) continue to manage ‘local’ tenders

Specification Minimum specification set for each route, following PSO requirementsSpecification must meet needs of majority of users, established via consultationKey elements:

- Route (ports or route parameters)- Frequency- Price- Capacity

Flexibility Contract needs to offer flexibility to permit operators to improve services above set minimum standards whilst maintaining level of service provision that meets (or exceeds) needs and expectations of users

Tender requirements

Provision of ships by operator preferred, if this assures modernisation of fleet. Sourcing of ships is a matter for operators, some of whom will have better skills in this area than others; an important aspect to consider in bid differentiationShipping operators need proven successful track record of high quality performance, although integrated transport providers (some with limited ferry experience) could applyNeed to specify (in PSOs) the minimum level of service required (e.g. capacity,

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frequency, reliability, ports served, schedule, price)Option of 12 year PSC’s for “Small Islands” with less than 300,000 passengers/yearDebundling of CHFS routes necessary to open bidding process to more competitionDebundling options could be defined by economic area or travel relations, by ship type, also with focus on services linked to specific mainland hubs

Bidding procedures

Competitive tender (price), vessel(s) offer, quality of service, ability of service to meet community needs, and environmental impacts should be key criteria, each factor weighted in accordance with contracting authority preferences/requirements

Criteria Cost (to the public sector over the PSC period)Quality of service (including age/quality of vessels) is of high importance in bidding proceduresPotential for operators to come up with innovative concepts, including minimizing/reducing environmental impactsService scheduling and frequencyMaximum tariff level and any price rises need to be fixedShip provision must consider:

- Ship needs to allow for transportation of all current and future vehicle 142


types including dangerous goods, livestock trailers etc (if Ro-Pax ferry)- Set requirements for environmental standards- Enable expert ferry operators to propose their own preferred ship

solutions, fleet mix etc to meet overall capacity needs

Criteria for negotiation procedure

Contracting Authorities may:- Invite candidates with the purpose of awarding a public service contract,

while at the same time they may also - Discuss and negotiate with the candidates who have responded to the

invitation, the terms of the contract as specified in the relevant invitationLength of contract 6 years (unless dispensation permitted for longer period, e.g. ‘Small Islands’ type

contract)

Procurement procedures Procedures organised to allow for competitive bids, e.g. timescale for shipbuilding needs to be taken into account if operator is to provide new ships

Subsidies Maximum subsidy level per route/bundle should be defined

Risks Clear strategy for risk mitigation of oil price volatility or sharing of risk with operators should be developedFinancial failure of an operatorTUPE and transfer of staff obligation possibly serves to mitigate against the prospect of receiving bids from private operators and of securing private investment in vesselsDefinition of penalties based also on monitoring of performance

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6.17 Small bundles1.1.537 When considering the size of bundles to be put out to tender, a balance

must be struck between what is required to meet essential transport needs and the risk that such bundles could create a barrier to entry. With a small bundle involving say between two and six routes, there may be less likelihood that the bundle size would create barriers to operators participating in the tender process.

1.1.538 Our analysis of trends elsewhere suggests route bundles are predominantly based on geographic criteria as well as ship type. Proximity to other routes is important, not least for relief vessel coverage, as are linkages of communities to perhaps a single common mainland hub. On this basis some indicative examples of small bundles could include: Routes between Western Isles and the mainland Routes on Firth of Clyde Routes using Oban as hub (possibly except Barra/Lochboisdale if that is part

of WI bundle) Inter Isles in Orkney (perhaps separate bundles for North and South Isles)

1.1.539 The services currently operated by NorthLink could be classified as a small bundle (i.e. 3-4 routes). That bundle could be reduced further if the Pentland Firth route were to be tendered separately.

1.1.540 Inter-isles services run by LAs in Orkney and Shetland do not appear to comprise large bundles. As these are intra-isles services their need for integration seems more certain. Services within these areas do not involve very large bundles and also have the purpose of serving a closely inter-connected geographic area, so therefore in that sense they already constitute a well structured bundle. When looking at inter-island services in the context of an integrated approach to the planning, delivery and operation of a network of services and infrastructure then disaggregation may not in this instance represent the best option. Experience in tendering smaller scale ferry services also suggests these tend to attract less bid interest from private investors.

1.1.541 Consultation with stakeholders (Operators workshop) indicated that smaller bundles are more attractive to private operators than a very large bundle. Smaller bundles of routes could, therefore, bring about an increase in competition and greater innovation which may lead to lower levels of subsidy and service improvements. Stakeholders also indicated they believed that smaller bundles would offer operators scope for flexibility and innovation.

1.1.542 The tendering of several smaller bundles may be more challenging to manage, from the contracting authority perspective. Having multiple procurement processes may raise costs, and take more time. However, if

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responsibilities were devolved/split across LAs and RTPs, together with SG, then the challenge for any single entity may be somewhat reduced.

1.1.543 The procurement of small bundles could be staggered, with a rolling programme of procurement being carried out over time. Standardised documents could be developed with best practice and lessons learned then applied to subsequent procurements. The advantage of a rolling procurement programme would mean that, if offers were sought for smaller bundles, the requirement for intensive periods of evaluation and contract award with numerous bidders would be spread over time avoiding potential log jams in the procurement process.

1.1.544 It has been suggested that smaller bundles would reduce the potential for economies of scale/scope (Operator workshop). Economies of scale/scope can relate to many aspects of a business, e.g. recruitment, training, marketing, IT, finance, purchasing, geographic coverage etc. If we assume that tenders attracted pan-European integrated transport companies to bid (e.g. Veolia, Stagecoach etc), then such large firms may be expected to bring the benefits of their own economies of scale/scope achieved through serving multiple operations, markets and modes. This suggests that economies of scale/scope exist at the level of the organisation itself, and may be rather less influenced by the size of bundle for ferry services tendered in Scotland.

1.1.545 On the other hand, there are a number of examples of small and medium-sized, transport organisations successfully operating on a limited scale/geographic area (e.g. Wightlink, Western Ferries, Pentland Ferries, Thames Clippers, Doeksen etc). To these organisations local knowledge and a focus on costs are important. However, increasingly these smaller firms are being acquired by larger organisations (e.g. private equity fund Macquarie now owns Wightlink, Condor Ferries and the Isle of Man Steam Packet Company).

1.1.546 Assuming bidders have the option to bring in their own ships, they would then have the opportunity to alter the current operating cost structure (albeit this applies irrespective of bundle size, though according to private operators is more likely in the event of smaller bundles). New operators may also be expected to introduce new ways of working (e.g. in search of further revenue generation, improved asset utilisation etc), raising the prospect of growing traffic flows and revenues. This should, however, be considered in the light of TUPE issues identified elsewhere in the report, in particular that TUPE could potentially act as a disincentive to private operators to bid for PSCs

1.1.547 Selection panels involved in making decisions on operators bidding for small bundles and single route tenders could include representatives from the

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relevant councils and RTPs concerned, as well as SG (this would be far more challenging with a large single bundle involving several LAs and RTPs). It may also help spread the burden of administration and resources (with benefits for SG in particular), whilst at the same time ensuring local knowledge forms a key part of the decision-making process up to the point of finally awarding operating concessions.

6.18 Single route tenders1.1.548 Certain individual routes may be attractive to private bidders/investors.

Potential operators we consulted, including local business interests in some cases, stated a willingness to invest in and operate a number of routes (Oban workshop; Stornoway workshop; Kirkwall workshop).

1.1.549 Single route tenders have been used in a number of instances. In Shetland, the local authority SIC selected Atlantic Ferries Ltd to operate its ferry service to Foula in late 200681. All the ferry company employees live on Foula and were transferred to the new operating company with all their terms and conditions intact under TUPE regulations. The contract duration was for 43 months with SIC renting the ferry to the operator. A community co-operative competed with six other bidders for the Foula contract, which suggests even the ‘small islands’, limited volume, low margin routes can generate significant interest.

1.1.550 Single route tendering is not only appropriate for small islands with limited volumes and services. For example, it is believed that the Pentland Firth service could be tendered as a single route (Kirkwall workshop), and OIC considered bidding for it separately as part of the 2002 contract. Stornoway-Ullapool is another route which some consider could operate as a stand-alone service (Stornoway workshop), while Ardrossan-Brodick (Greenock workshop; Operators workshop) and Oban-Craignure (Oban workshop; Operators workshop) are others that would be likely to generate operator interest on a single route basis. Gourock-Dunoon is being tendered as a single route.

1.1.551 According to private operators, it would be possible for relief cover to be built into single route tenders and, in particular, any route that has (or could have) two regular ships operating on it would have permanent relief cover (Operator workshop). Operators also suggested they would enter into agreements with other operators to share vessels during refit and/or when unforeseen events occur. However, this is not to say that there may not be conflicting requirements in terms of operational/ commercial objectives as well

81 http://www.shetlandmarine.com/archives/2006/05%20Oil%20&%20Shipping/ink_dries_on_foula_ferry_contract.htm

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as the priorities/requirements of different communities or markets served. Ultimately the question of relief cover must be adequately addressed during the tender stage to ensure that such difficulties are avoided.

1.1.552 For single ship routes/operations, larger private operators may also be able to provide a relief ship from within their wider fleet. Single route operators have been able to develop specific arrangements with other operators nearby (e.g. Isle of Man Steam Packet has such an arrangement with other Irish Sea operators during periods of refit for its Ro-Pax ship and/or when additional ships are needed to cater for TT demands82). While dockings and special events can be predicted and therefore catered for, breakdowns and the like cannot. It is therefore essential that tenders should ensure that an operator can provide adequate cover at all times.

6.19 Building environmental factors into tenders1.1.553 Various environmental requirements could be introduced into pre-

qualification questionnaires, as well as in the form of clauses in tender contracts. Scoring of the environmental elements of bids could be introduced. Environmental contractual requirements, targets, and key performance indicators could be added. These elements should be audited as well.

1.1.554 The procurement process is viewed by Transport Scotland as offering “a significant lever for step change in environmental performance and sustainability in future operator contracts.” It is evident that the designation and protection of marine environments around Scotland is gathering momentum. It is within this framework that minimum environmental performance should be considered and applied to the tendering of ferry services.

1.1.555 The adoption of environmental management and sustainability policies, corporate social responsibility (CSR), and staff training for environmental issues should be encouraged. These can then be linked into local business contracts, e.g. for on-ferry catering, support services, and the supply of ferry terminals.

1.1.556 The introduction of new vessels into Scotland’s existing ferry network should have the immediate obvious advantage of greater levels of operational efficiency through a lower level of fuel consumption. The tender process will help to evaluate the impacts of alternative ships, new and second hand.

1.1.557 The environmental imperative will need to be embedded within procurement practice and bundle- or route-specific tendering. Public sector

82 http://www.aferry.co.uk/News/Steam_Packet_lines_up_fleet_for_TT_invasion_with_fast_craft_charters-114.htm

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bodies in particular must demonstrate leadership by specifying sustainable products and services which recognise best lifetime value, the needs of society and the environment. This applies equally to ferry fleets and operations as it does to all other goods and services.

1.1.558 Notwithstanding market-induced imperatives and ongoing interventions with respect to penalties and incentives, the SG’s emission reduction targets set out in the current Climate Change (Scotland) Bill suggest a bolder approach is necessary. To achieve the SG’s target of an 80% reduction in carbon emissions, there is a need to aim at decarbonising transport (as well as electricity and heat) by 2050, and making significant progress towards this by 2030.

1.1.559 A detailed environmental scoring methodology is outwith the scope of this report. The level of acceptable environmental performance can be established, however, as well as what constitutes desirable and innovative solutions to environmental problems. Various incentive measures to promote less environmentally damaging behaviour (by ferry operators) can be considered for their applicability to the Scottish ferry system. Finally, environmental auditing and management systems can be evaluated, as well as how these aspects can be integrated into ferry operations and tenders.

6.20 Scoring bids on environmental impacts1.1.560 In order to evaluate and rank the performance of bids for ferry tenders, it

is necessary that a value or “score” be applied to submissions. The details of how such a system would operate can only be known after a thorough needs analysis is completed. This would entail determining what is required of a particular route, ship, bundle, etc., and how the relevant attributes of these matters is valued. “Scoring”, as a term, can be used in a general sense to denote an attribute of higher or lower value, as the case may be.

1.1.561 A baseline of minimum acceptable environmental performance must be established. How these standards are determined will depend on current legislation at the Scottish, United Kingdom, and European Union level, as well as additional regulations that are lawfully applied; for example the International Maritime Organisation’s (IMO’s) International Convention for the Prevention of Pollution From Ships (MARPOL). However, the tender itself is not bound by external standards alone. It can be written to take account of local needs and the particularities of the local environment. These needs and particularities often relate to established and defined areas which have been identified, and

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are being monitored, by various state agencies, including the Joint Nature Conservation Committee.83

1.1.562 The issues of emissions to air, noise pollution, ferry wake, and other factors (such as ballast water exchange) must also form part of a minimum acceptable standard for tenders. For all of these categories, desired or superior environmental performance is, of course, also possible. What must be decided is whether “superior performance” will be defined. A clear definition would provide guidance to bidders and facilitate an easier scoring or rating process. Without such a definition, the process of scoring bids would be more difficult, as there would be no standard from which comparisons could be drawn. However, the advantage of a lack of pre-defined standard is in its spurring of innovation. Bidders would themselves be required to devise ways of demonstrating their superior environmental performance. This would allow them to use their specific experience and capacity in addressing the environmental issues as set out in the tender. The competitive nature of the tendering process itself would allow for the development of innovative solutions in which costs are absorbed by the bidder, i.e. in order to be awarded the contract.

1.1.563 The goal of controlling emissions through the tendering process would be to help reach the Scottish Government’s wider greenhouse gas emission targets. Minimum required performance in terms of CO2 output could be determined per tender (whether that be bundle- or route-based), with the opportunity for bidders to further minimise emissions – something which would attract a higher score for the bid. Other pollutants such as NOx, SOx, and particulate matter (PM) could also be controlled in this way. The IMO’s MARPOL regulations have instituted a reduction in NOx and SOx output of ships, mainly via regulation of fuel content and quality.84 The MARPOL three-tiered system (which applies different requirements based on the type and age of marine engines), along with other relevant regulation and legislation, would form the basis of a minimum standard to which further elements can be added for each tender, thus arriving at the minimum standard specific to a tender. Again, bidders would be invited to go beyond the minimum performance requirement in terms of these emissions. Going beyond minimum legislated requirements is especially prudent given the current warning by the European Commission that if it

83 Joint Nature Conservation Committee. (2007) Homepage [internet]. Available at: http://www.jncc.gov.uk/page-0 [accessed: 4th May 2009]84 MEPC (Marine Environmental Protection Committee), International Maritime Organisation. (2008) ‘Amendments to the annex of the protocol of 1997 to amend the International Convention for the Prevention of Pollution from Ships, 1973, as modified by the protocol of 1978 thereto’, [internet] (Annex 13, Resolution MEPC.176(58), Revised MARPOL Annex VI). Available at: http://www.imo.org/includes/blastData.asp/doc_id=10407/176(58).pdf [accessed: 6th May 2009]

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considers the IMO’s “results are insufficient it will consider alternative proposals for action”85 which will no doubt be more stringent.

1.1.564 There is no simple way to measure the effect or significance of ferry noise on cetaceans. Each ship produces different sounds under different conditions and operating modes. The intersection of ferry routes with identified protected areas, or wildlife breeding, migration or feeding grounds (principally those of cetaceans) would determine the relative importance of a bidder’s performance in this field. Despite the difficulties, there is still scope to deal with noise through the tendering process. Bidders should be invited to describe how they would address ship noise generally, and in sensitive locations in particular. Research has suggested that noise affects different cetaceans in different ways depending on the sound frequency to which they are most sensitive.86 Tenders for ferry routes that cross the habitat or migration grounds of specific cetaceans should encompass specific noise mitigation measures as part of the tender, e.g. asking bidders how they will attempt to limit noise at specific sound frequencies. An equivalent approach can be adopted in tenders to mitigate the negative impact of noise in ports, not only from the perspective of ship and cargo operations, but also in relation to the additional traffic burden that is imposed in and around sailing and arrival times.

1.1.565 It has been demonstrated that ferry wake can be significantly reduced by lowering a ship’s speed during its passage through critical areas.87 Areas where ferry wake has the potential to cause significant environmental damage should be identified through consultation with Scottish Natural Heritage. Implications for ferry speed when crossing these areas must then be identified, particularly for high-speed craft, and written into tenders.

85 Commission of the European Communities. (2007) ‘Commission Staff Working Document, accompanying document to: An Integrated Maritime Policy for the European Union’, [internet] (SEC(2007) 1278) Brussels: Commission of the European Communities. Available at: http://ec.europa.eu/maritimeaffairs/pdf/ActionPaper/action_plan_en.pdf [accessed: 6th May 2009] p. 1686 Participants: International Workshop on Shipping Noise and Marine Mammals. (2008) ‘Shipping Noise and Marine Mammals (background paper)’, [internet] International Workshop on Shipping Noise and Marine Mammals. Hamburg, Germany 21st – 24th April 2008. Okeanos: Darmstadt. Available at: http://www.okeanos-stiftung.org/okeanos/download.php?id=6 [accessed: 8th May 2009]87 See British Columbia Ferry Corporation. (2000) ‘Fast Ferry Program – Wake and Wash Project: Final Report (summary)’, [internet]. s.l.: British Columbia Ferry Corporation. Available at: http://www.llbc.leg.bc.ca/public/PubDocs/bcdocs/340463/pacificat_wake_study.pdf [accessed: 8th May 2009]; andVaryani, K. (2006) ‘Full scale study of the wash of high speed craft’, Ocean Engineering, 33: 705-722

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6.21 Environmental incentive schemes1.1.566 For a number of years, in many parts of the world, incentives have been

used as a means of promoting environmentally sustainable behaviour.88 1.1.567 The Chamber of Shipping is working with IMO and others on incentive

schemes. Eventually agreed schemes will be an International requirement and not just a Scottish one. Vessels are primarily governed by International legislation not purely Scottish rules and regulations. Hence it is essential that ferries conform to international standards and requirements.

1.1.568 Each unit of pollution that is emitted by the producer may have a charge levied against it. The amount of charge should be set at a level that is designed to pay for the costs of the environmental damage that the unit of pollution creates. This is not always easy to quantify. The level of charge should be based on clear evidence, with the revenue thus generated preferably going toward mitigating the said environmental damage.89

1.1.569 Operators of ferry services in Scotland could be charged (penalised) per designated unit of CO2, NOx, SOx, and/or PM, depending on government targets. The benefit of this would be twofold: (1) revenue is generated and can be used for pollution abatement purposes; and (2) operators are indirectly encouraged to invest in clean systems or operational strategies, which lower overall emissions of harmful substances. On the other hand, additional costs may result in greater subsidy requirement.

1.1.570 The age of a ship is linked directly to its environmental performance, with older ships emitting comparatively more pollution than younger ships. This is due to a combination of natural wear and tear of machinery and component parts with age, as well as the fact that younger ships tend to be built with better onboard technology and to a higher environmental specification, due to both legal requirements and technological advancements. A future Scottish Ferry Strategy could look into a combination of measures to incentivise the usage of new (or newer) ships and disincentivise the usage of older ships (forms of

88 See, for example: National Center for Environmental Economics. (2001) ‘The United States experiences with Economic Incentives for Protecting the Environment’, [internet] Washington: EPA. Available at: http://yosemite.epa.gov/ee/epa/eermfile.nsf/vwAN/EE-0216B-13.pdf/$File/EE-0216B-13.pdf [accessed: 11th May 2009]; and National Center for Environmental Economics. (2004) ‘International Experiences with Economic Incentives for Protecting the Environment’, [internet] Washington: EPA. Available at: http://yosemite.epa.gov/ee/epa/eermfile.nsf/vwAN/EE-0487-01.pdf/$File/EE-0487-01.pdf [accessed: 11th May 2009]89 Tietenberg, T. (2006) ‘Environmental and Natural Resource Economics’, 7th ed., Pearson Education

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subsidies are given below). The goal of this system would be to make it attractive for the providers of ferry services to maintain ships at peak operating performance, and to integrate new and clean technologies as they become available. The details of how such a system would operate would need to be thoroughly researched beforehand to ensure a balance between costs and benefits to both operators and the SG. The benefit of having such a scheme comes from the length of working life for an average ferry, i.e. 20 to 30 (max) years. Within this time period, there are likely to be technological advancements in ship systems and machinery which lead to better environmental performance. If these advancements can be incorporated into existing ships operating in Scottish waters in a cost-effective manner, then such a policy should be pursued.

1.1.571 In most cases, an upper limit of an acceptable pollution level will be decided upon and permits to pollute at this level granted (or sold) to existing polluters. Financial gains can then be made by reducing pollution output and selling unused permits. Problems with this system include the issue of dealing with new market entrants, the risk of high transaction costs in the trading of permits, and verifying that a reduction in pollution has actually occurred. Despite these issues, tradable permits have been used to great success in the US to deal with serious pollution problems, e.g. acid rain and local air quality.90 In Europe, success has been achieved in carbon and other emissions trading schemes across a range of different industries and exists in shipping for sulphur and nitrous oxide emissions. The workability of a tradable permit system in Scotland will depend on many factors, including the number of operators and the categorization of routes. While the complexity of the international shipping arena apparently militates against the development of such a system, an internal scheme for the Scottish ferry sector is very feasible. The option could even exist of setting different permit trading zones for different areas of the country’s coastline, as opposed to having a single permit market. The development and implementation of such an internal emissions trading scheme could, therefore, be worthy of further investigation.

1.1.572 These is also the option of monetary investments of some sort (either cash payments, cheap loans, or low taxes) that are aimed at encouraging environmentally less damaging behaviour, e.g., subsidised investment in pollution abatement technology or machinery, or preferential tax treatment for firms that engage in the clean-up and restoration of damaged sites.

90 National Center for Environmental Economics. (2001) ‘The United States experiences with Economic Incentives for Protecting the Environment’, [internet] Washington: EPA. Available at: http://yosemite.epa.gov/ee/epa/eermfile.nsf/vwAN/EE-0216B-13.pdf/$File/EE-0216B-13.pdf [accessed: 11th May 2009]

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1.1.573 Making information available to the public can induce operators to modify their polluting behaviour in order to avoid negative public perception.91 This is because such perceptions represent a cost in terms of reputation that has the potential to translate into a monetary cost if government decides to increase regulation of polluting activities.

1.1.574 With regard to Scottish ferries, government-initiated information campaigns on the environmental damage of emissions to air, or the harm done to people or wildlife through noise, could help to drive consumer behaviour and thus generate demand for a cleaner industry and state regulatory intervention. Reports and audits of a ferry operator’s environmental performance (as part of an Environmental Management Strategy) could be published and placed into the public domain, e.g. as per the UK’s Pollutant Release and Transfer92. That website states the type, amount, and toxicity of various emitted pollutants and attributes them to specific sites and owners. This system, or something similar to it, could provide a visual means of displaying ferry operators’ environmental performance and impact to the general public.

6.22 Ferry tendering route map1.1.575 Figure 6.1 outlines what we term the ‘Ferry tendering route map’, for

services that require to be tendered. The route map is considered to be a major outcome of this research work and indicates the process involved between taking decisions on bundling, through tendering, to dealing with key challenges, and thereafter monitoring of operator performance.

1.1.576 The main recommended differences between what happens today and what should happen in future are in terms of: Consideration of smaller bundles and any single route tenders; User groups and stakeholders helping to define PSOs for each route; LAs and RTPs participating, and with SG leading in operator selection panels; Dealing with challenges faced when new operators are selected, including

the issue of vessel sourcing and provision.

91 National Center for Environmental Economics. (2001) ‘The United States experiences with Economic Incentives for Protecting the Environment’, [internet] Washington: EPA. Available at: http://yosemite.epa.gov/ee/epa/eermfile.nsf/vwAN/EE-0216B-13.pdf/$File/EE-0216B-13.pdf [accessed: 11th May 2009]92 Department for Environment, Food and Rural Affairs. (2009) ‘UK Pollutant Release and Transfer Register’, [internet] Available at: http://prtr.defra.gov.uk/ [accessed: 29th April 2009]

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1.1.577 We do not consider privatising DML to be a valid option primarily because the company no longer owns any major assets, ships or harbours; these assets have been transferred to CMAL. The company’s worth is largely related to the operating contracts it holds with SG, which are temporary in nature. All other sales of former state-owned ferry companies in Europe have involved the sale of ships and in some cases also the sale of essential piers and harbours. There have been no sales of non asset owning ferry companies, or in other words firms whose income is limited in time to the duration of PSCs.

1.1.578 Operators bidding for routes have the option to use CMAL ships, where this is considered appropriate and, importantly, where this proves to be competitive with alternative options. But there is no certainty that operators will use CMAL vessels and they cannot be compelled to do so. There are exceptions where the design of a vessel is considered to be so unique that alternative vessels are not available on the open market, and the Commission has accepted this argument in respect of CHFS. In addition, operators can be compelled to use CMAL (and LA, or Trust) ports where contracts specify particular ports of call within tenders.

1.1.579 We have noted elsewhere in this report that CMAL could be privatised, in full or in part. Sale proceeds could perhaps be ring-fenced and used to invest in assets (ports and ships). This would have the effect of raising net asset value, which would be attractive for private investors. CMAL’s future revenue streams accruing from ports would seem to be relatively stable given that ports might be expected to remain in constant demand irrespective of who the operator is. Future revenue streams from vessels may be more difficult to gauge given that operators will have the option to procure ships from other sources should they so wish.

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FIGURE 6-1: FERRY TENDERING ROUTE MAP

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TABLE 6-10: PROCUREMENT OF FERRY SERVICE: MAIN ROUTE/BUNDLING OPTIONS

Strengths Weaknesses Risks Opportunities

Large Bundle

Possible economies scale/scope. Single contract.

Discourages private bidders. Expensive/cumbersome, lengthy tender process for private operators. Intense competition for ship time/relief cover over too many routes.

Is 6yr contract ok for ship investment? Is ship leasing an option?

Possible CMAL ship lease option (if competitive). Private operator could raise capital for new ships on basis of lifeline contract award.

Small Bundle

Scope for innovation as more bids might be attracted, so more competition.

May reduce economies of scale/scope, though not for larger integrated transport operators. Increases management of tenders.

Is 6yr contracts enough for ship investment? Is ship leasing an option? Relief ship cover must be guaranteed within contracts. TUPE and staff transfer potentially reduces likelihood of bids from private operators.

Opportunity for innovation and private sector investment. Bidders could bring own ships. Scope to change cost structure and improve revenue potential. Possible CMAL ship lease option (if competitive). Private operator can raise capital on basis of lifeline contract award. Could include LAs/RTPs in tender panels. Option for 12 year small isle contracts.

Single Route Tender

Some routes appear to be attractive. Relief cover can be built in to the spec for some routes needing two or more ships. May be more rapid tender

Possible reduced scope for economy of scale/scope. Increases management of tenders.

Is 6yr contracts enough for ship investment? Is ship leasing an option? Single ship route relief cover.

Opportunity for innovation and private sector investment. Bidders could bring own ships. Possible scope for local investment, consortia bids etc. Possible CMAL ship lease option (if competitive). Private

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process. operator can raise capital on basis of lifeline contract award. Could include LAs and RTPs in tender panels. Option for 12 year small isle contracts.

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7 CONCLUSIONS1.1.580 The starting point of the report is the necessity to identify routes where a

PSO may be required to secure adequate ferry services and identifying which, if any, of those routes require to be subsidised, and also to clarify the position in regard to tendering authorities. In order for aid to be compatible provisions have to be put in place to ensure there is no overcompensation and this is part of the reason for following a tendering process. However, what the Maritime Cabotage Regulation Communication suggests is that putting a service out to tender is a good way to avoid any discrimination.

1.1.581 With the obligation to tender services comes a requirement for a transparent and non-discriminatory tendering process. SG has an interest in this in any case – it needs the process to attract the widest range of shipping expertise and resources, so that it has as many options as possible to inform the delivery of the services, and to choose from. There are a range of private and public companies with such expertise and resources who are interested in bidding and investing in Scottish ferry services.

1.1.582 Allowing bidders to bring their own ships has the advantage that bidders can put forward their own ideas as to the best ships for any given route. As the type of ship employed heavily influences the operating cost structure and hence subsidy required, operators can bring their own expertise to the procurement process, and can also access capital funds themselves. Whilst evidence elsewhere suggests operators are providing ships, in the event that this did not happen for a particular route or bundle then the public sector would need to provide vessels, as is the case today. This therefore implies a role for CMAL as ship supplier.

1.1.583 But it is not only the type of ship that has a major impact on cost structure. TUPE, which applies as law, is also a major factor. If after winning a tender private operators in particular are required to take on existing staff under TUPE then they may potentially be dissuaded from bidding to operate services. Whilst TUPE is a matter of law, operators have advised that in their view, TUPE issues act as a disincentive to bid participation.

1.1.584 Nevertheless, assuming other operators were to bid, then the first time a new bidder wins a contract from an existing provider, there will be CMAL ships, or guaranteed Northern Isles ships, for SG to dispose of. SG may incur a financial loss as a result, notwithstanding that many CMAL and LA ships need replaced sooner rather than later in any event. The impact of this could be

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minimised, to an extent, by offering some of the existing fleet to bidders on a charter or purchase basis.

1.1.585 There are also some risks in this option: when and if private bidders provide ships, SG does not have the certainty of owning the vessels for the route, and it is not impossible (however unlikely) that the operator could take the vessels elsewhere, at the end of a contract. This would tend to argue in favour of SG having contracts with a number of different shipping companies, for different bundles, so that there is an active ferry providers market not dominated by any one company. However, given the requirement to tender in a transparent and non-discriminatory way, there may be little SG could do to prevent contractors becoming concentrated with one or two main providers. Experience in the train and bus tendering process over the last 10-15 years suggests that the system is reverting to just a few main players. This is relevant to the bundling argument. A further risk concerns the possibility that private operators may not bid to operate services for which TUPE applies and/or they have to take on all existing employees and their existing terms and conditions.

1.1.586 In a worst case scenario, contingencies have to be made for an operator of last resort to step in if an operator was to fail due to insolvency or some other catastrophic event. Provision has to be made to cover situations where there is a catastrophic failure in the overall service. The Commission Decision that additional State aid granted to NorthLink 1 (in the absence of a further tender) to maintain services in the event of operator failure is compatible with the Treaty, suggests that the SG would be permitted to support such temporary situations (i.e. to maintain a service provided by an insolvent operator, or to appoint another operator) until such times as a new operator is appointed via another tender.

1.1.587 The alternative to provide-and-operate is the status quo of operate-only contracts. This alternative model would involve CMAL (and/or LAs) in providing the vessels, possibly in some cases to bidders’ specification. This may (or may not) achieve savings in vessel procurement, but still leaves the capital funding problem with the state-owned company, provided the requirements of EC guidance can be satisfied.

1.1.588 Our research has shown that provide-and-operate bidding is increasingly the norm in Europe, and greater experience of this system has reduced risks inherent in it. Bidding in each country has been limited in the main to domestic companies, although there are signs that this is now changing. The tendering experience also serves to demonstrate that there is scope to secure private investment in ships, although this scope may be more limited in Scotland if the

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application of TUPE related to the need to also use particular vessels serves to dissuade operators from bidding.

1.1.589 It might be thought that bidders providing vessels for only a 6-year contract would have to fully depreciate such vessels over only 6 years resulting in higher subsidy levels. However, according to some private operators, a rational bidder with a long-term view will seek to pitch his bid low by depreciating over the lifetime of the vessel, in the hope of winning the second-round bid as well. This has been the experience elsewhere in Europe (e.g. Norway, Sweden, and Denmark) where operators investing in ships in the first round of tenders have subsequently won the next round as well. However we note that a number of small volume routes in Denmark have not been successfully tendered and many of these are still maintained by LAs.

1.1.590 Bundling is a key issue in the context of tendering. Both theory and the comments of prospective bidders point to smaller bundles, rather than a single large bundle such as CHFS, being the optimal solution, big enough to reap economies of scale in management of the service, but not so big as to make the process too complicated and/or a disincentive to bidders. Some single route bids may also be a possibility. We have indicated (in 6.17) what might be the possible composition of some bundles but the ultimate decisions on smaller bundles, if that is deemed to be a preferred approach, will need to be made by the SG together with key stakeholders (e.g. LAs, RTPs etc).

1.1.591 Stakeholders do not regard the current inter-isles ferry service arrangements within Orkney and Shetland in quite the same way. Existing services within these areas do not involve very large bundles and they also have the purpose of serving a closely inter-connected geographic area, so therefore in this sense they already constitute a well structured bundle. When looking at inter-island services in the context of an integrated approach to the planning, delivery and operation of a network of services and infrastructure then any disaggregation of delivery makes far less sense.

1.1.592 Any open tendering process must raise a question over the future place of publicly owned ferry companies – i.e. CFL, and its sister company, NorthLink Ferries, in serving PSC routes, in the event that the bids submitted by these concerns were not successful. There are options here – retain the companies to inform and provide a backstop to the bidding process, or plan for a gradual withdrawal of the state. The state’s role would thereafter be limited to setting, letting, and monitoring the PSCs for lifeline services, much in line with the approach in other countries.

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1.1.593 Where existing ferry services are not meeting all the needs of the island/destination served, there is a readily-available method of testing this – the PSO, which defines and sets out the range of needs. The question here is really one of - is there a need for a PSO on the route in question to ensure adequate services? In order to impose a PSO, the relevant authorities first need to be convinced that there is an inadequate service to justify a PSO. The imposition of a PSO must be limited to essential requirements and be non-discriminatory. A PSO does not necessarily need to be put out to tender or imposed through a PSC (unless subsidy is to be provided). The SG has preferred to deliver lifeline services via PSCs, and with the PSO set out as contractual obligations within PSCs. The Maritime Cabotage Regulation, however, sets out clearly that PSOs may stand alone.

1.1.594 There is the question of what the SG does with routes if it is decided either they do not need subsidy (i.e. if a successful tenderer does not request subsidy) or they can be removed from the bundle. If the route in question has been tendered, and an operator selected, then clearly that operator must continue to meet the agreed service levels required, even if no subsidy has been requested. Based on a PSO-designated route (the PSOs stipulated in the contract), any new operator seeking to enter the market would also need to meet the service levels required.

1.1.595 Finally there is the issue of the appropriate Government level for letting contracts. There is theoretical argument that the necessary expertise and resources for procurement activity (which are considerable) should be concentrated in one place. Against this is the argument that a single location for such expertise ignores the local knowledge which is vital to inform the process. The status quo, with SG letting most of the routes, including all the major ones, and some local authorities letting smaller, inter-isles or other routes, reflects this latter argument – albeit with some anomalies, such as the open-sea routes operated by OIC to its Outer North Isles, and some small routes on the West Coast being the responsibility of SG. Coinciding with any debundling strategy, the role of RTPs and LAs vis-à-vis the tender process and bid evaluation could become more significant, in cooperation with SG, yet with the process still led by SG. This seems to be a favoured option more especially as far as most, if not all, LAs are concerned.

1.1.596 In conclusion, what is envisaged in this report as an alternative to the status quo, is a move to open competition for smaller bundles of routes, with bidders given the option of specifying (and procuring) their own vessels, with the likelihood of a range of private bidders increasingly being drawn into the process, bringing new ideas, expertise, and investment, and at the same time

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expertise being built up on the Government side to handle this new situation. TUPE, however, and any requirement for existing staff to transfer to a new operator, represents a potential barrier to this happening. The downside (of TUPE and any compulsion to use existing vessels in all instances) is that possibly only publicly owned operators will bid, and the state (or its agents such as CMAL) will need to continue to find capital for up-front investment in replacement ships. Users might also lose out on benefits from any service innovations which private operators might bring.

1.1.597 Finally, it is important to see ferry procurement as a dynamic process (our EU case studies reflect this), changing and developing over time to meet the needs of users, whilst ensuring value for money for the taxpayer.

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ANNEX I – MEETINGS & SEMINARS/WORKSHOPS ATTENDED

Date Event/Meeting Location/VenueFebruary4 Work Package Managers

MeetingThistle House Edinburgh

9 Council Sub Group Meeting VQ Conference Room 1111 Steering Group Meeting VQ Conference Room 1116 Work Package Managers

MeetingVQ Room 2E23/24

17 Consultation Seminar in Oban Argyllshire Gathering Halls19 Operator Sub Group Meeting Europa Building Glasgow

Room G0923 Consultation Seminar in

GreenockGreenock Town Hall

26 Consultation Seminar in Lerwick

Islesburgh Centre

March2 Meeting with Ferries Division

on EC investigationVQ

4 Guy Platten, CEO CMAL Port Glasgow4 Work Package Managers

MeetingPort Glasgow (CMAL’S office)

9 Consultation Seminar in Barra Castelbay10 Consultation Seminar in

BenbeculaBenbecula

11 Consultation Seminar in Stornoway

Stornoway

12 Consultation Seminar in Tarbert Tarbert17 Work Package Managers


18 Consultation Seminar in Kirkwall

Pickaquoy Centre

25 Consultation Seminar in Inveraray

Argyll Hotel

26 WP Coordination meeting MVA, Edinburgh30 Work Package Managers


30 Data meeting with CalMac VQ Room 2E23/24 April

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8 Councils Sub Group WP1 Workshop

Thistle House, Edinburgh

14 Operators Group WP1 Workshop

Europa Building, Glasgow

30 WP Managers Meeting VQ, EdinburghMay19 Meeting with WP2 MVA, Edinburgh20 SFR Steering Group Meeting Craighouse, EdinburghJune11 Consultation Seminar in Mallaig Marine Hotel, Mallaig16 WP Managers Meeting VQ, EdinburghNote: Most of the seminars also included workshops, followed by public drop-in sessions

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ANNEX II – WORKSHOP QUESTIONNAIRE

METHODS OF FERRY SERVICE DELIVERY AND OPERATIONState-subsidised ferry services may be delivered (i.e. provided) in a number of ways, notwithstanding the EU requirement that they should be tendered. We have been asked to explore the strengths, weaknesses, risks and opportunities of various different delivery options. Delivery Option Strengths Weaknesse

sRisks Opportunities

Public Operator(s)Private Operator(s)(provide/not provide ships?)Mixed public/private (e.g. ‘state’ vessels)Community runCMAL/VescoOther?

FINANCIAL INCENTIVESWe have been asked to explore different financial incentives applying to ferry services. Please give us your views on the undernoted options.Option Strengths Weaknesses Risks OpportunitiesOperating and deficit subsidiesCapital subsidiesTariff/User subsidyRET

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Islander discountFreight subsidiesOther?

COMPETITION AND PROCUREMENTWe have been asked to consider whether the continued bundling of routes is the best way forward. Options need to take into account EU legislation/regulations, specifically the need for transparent tender arrangements where state financial support is provided for transport services.Routes Strengths Weaknesses Risks OpportunitiesLarge bundle tender (I.e. all routes in one bundle)Small bundle tender (e.g. geographic area, or by ship type etc)Tender on individual route basisCommunity tenderCompetition on routes(can be direct, or via tenders)Other?

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FLEXIBILITY IN FUTURE CONTRACTSWe have been asked to address the question of how flexibility can be built into future contracts for the benefit of communities and economies served. Currently many aspects of contracted ferry services are fixed, but we are asked to explore areas which should perhaps be made more flexible in contracts. Some examples are given below and other issues may be added as required.Issues How can it be made more flexible?Sailing & arrival times (e.g. later sailings, faster crossings)PricingSubsidyShip-specific issuesTerminal/integration specific issuesOther issues

FREIGHTThe Review will consider options for the future carriage of freight. Current levels of freight will be considered as well as future freight needs with options developed as to how these may best be met. (Note: A separate round of workshops and meetings will look specifically at freight issues in more depth).What are the main freight traffic flows/goods today?What will be the main freight flows in future?Strengths of existing freight servicesWeaknesses of existing services

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Growth prospects for freight trafficHow should freight services be improved?Risks and opportunities for freight flows?

POWERS AND STRUCTURES OF SCOTTISH GOVERNMENTClarity is required on the powers and structures the Scottish Government (including local authorities) currently has for the contracting and delivery of ferry services. Various options in this regard are illustrated below.Option Strengths Weaknesses Risks OpportunitiesScottish Government contracts servicesLocal Authority contracts servicesSome other public body contracts services?Any additional powers required by contracting bodies?Is there a need for a specific Ferry Regulator?Other powers/structures or regulatory issues?

ENVIRONMENTAL ISSUES

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We are also considering environmental factors that impact on the delivery of ferry services with regard to specific issues being explored in WP1.

Service Delivery & Operation

Competition & Procurement

Freight Other?

In what aspects could/ should emissions be reduced?- Vessels- Car travel- Freight- Terminals/piers- Other?How can this best be achieved?- Vessels- Car travel- Freight- Terminals/piers- Other?Other potential ways to reduce emissions?- technological innovation- who is best to drive innovation?

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ANNEX III – SUMMARY OF EUROPEAN FERRY PROCUREMENT BY COUNTRY

Public service obligations and contracts in Member States(Sources: 93, 94)

Country Route/area PSO/PSC Duration Comments

Denmark

2 routes (Rønne-Ystad and Rønne-

Køge)

PSO - On the same routes PSC operated by Bornholmstrafikken A/S- Remuneration: 126 million DKK/year

18 routes PSC/PSO On average 5 years

PSC not exclusive, with the exception of route Spodsbjerg-Tårs.

16 routes PSC - Operated by local authorities; 16 tender procedures cancelled due to lack of interest from operators.

11 routes PSC - Operated by local authorities; never submitted to tender procedures.

Estonia 2 routes PSO/ PSC 10 and 5 years PSC awarded following an open call for tender, no exclusivity6 routes PSC - Concluded with local authorities

Finland

South-western Islands, 14 routes between mainland

and islands

PSO 2-5 years Of the 18 public service obligations, 9 routes are operated by the Finnish State Shipping Enterprise (Finstaship) and 9 routes by private entrepreneurs, subsidised by the Government. PSC are exclusive, awarded following an open tender procedure and the duration is usually of 2-5 years with options of 1-3 years. The provision of ferry traffic service is PSO, remuneration is charter hire, per hour and only one company runs per route.

Gulf of Finland, 4 routes between

mainland and islands

PSO 2-5 years

Åland Islands, 3 routes

PSC 5 years Ferry routes, one of the routes covers only 2 months per year in summertime

France Mainland – Corsica(various routes)

PSO - Operated by SNCM-CMN. Maritime transport to 5 Corsican ports. PSC Marseilles-Corsica (operator: SNCM/CMN) & light public

93Please note that this table is entirely based on data provided by Member States.94 Taken from COM (2009)final: Implementation of Council Regulation 3577/92 applying the principle of freedom to provide services to maritime cabotage (2001-2005), State of play 2009, Brussels, 27.05.2009

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Country Route/area PSO/PSC Duration Commentsservice obligations Nice-Corsica and Toulon-Corsica.

14 routes PSO/PSC 5-7 years Regular public maritime transport of passengers and goods to French Islands organised by local authorities (Law N° 2002-276 of 27/02/2002).

GermanyNot applicable - - Cabotage services (even for islands) are not part of the public

services system. In general, island cabotage services are fostered by preferential port tariffs for regular services.

Greece

Ministry of Mercantile Marine, the Aegean and Island policy (MMMAIP)95

80 routes

PSO/PSC 1 -12 years Shipowners requested to submit to the MMMAIP a declaration of interest every year. Fares are set individually by suppliers. On routes for which there is no business interest the MMMAIP publishes tenders for PSC of 3-5 years. In case where, after the above indicated procedure, there is still no satisfactory level of interest, the concrete tenders are issued again for the conclusion of contracts up to 12 years (Law 3482/2006). After tendering procedures the contract is awarded to the lowest bidder.

On routes whose continuity and regularity is crucial for island economies and social cohesion, ferry services are obligatory for a 10 month period per year.

Italy

19 National routes11 to Sardinia

2 to Sicily2 to Sardinia & Sicily

29 Local routes to Islands

PSO/ Conventional

order

20 years Most PSO are operated by the Gruppo Tirrenia and are governed by conventions of 20-year duration, expiring on 31 December 2008 (Par. 998 of Law 296/06 provides for new agreements to expire not before 31 December 2012- ongoing infringement procedure).

Based on these conventions, the companies of the Group are required to guarantee connection lines defined by inter-ministerial decrees (Ministry of Transport, Ministry of Economics and Finance, Ministry of Economic Development). Tariffs are set

95 Before merging in 2005 the Greek competent authority consisted of Ministry of Aegean (with 39 routes) and of Ministry of Merchant Marine (with 22 routes).171


Country Route/area PSO/PSC Duration Commentsby such decrees also.

The lines are non-exclusive.

Ireland21 routes PSO/PSC 1-5

years-Approximately 20 mostly small, local operators. No restrictions in relation to cabotage. Total aggregate operating subsidy approx €3.5m per annum.

Lithuania - - - No island cabotageMalta Cirkewwa-Mgarr

(island of Gozo)PSO/PSC 6 years Infringement procedure ongoing (an exclusive contract awarded

without any public tender).The

Netherlands- - - No PSO/PSC.

Poland - - - No island cabotage.

Portugal

Mainland Portugal to Madeira and Azores

PSO At least 2 years. PSO on transport services of containers and solid general cargo only (Decree Law 7/2006). Authorisation system.

Madera Island: Funchal – Porto Santo

PSC - PSC awarded by means of open tender procedures (competence of Madeira Regional Government) and operated by Porto Santo Line, Lda. No public financial support.

Exclusivity.Slovenia - - - No island cabotage.

Spain

Balearic Islands (21 routes: Peninsula to Balearic Islands + Inter-islands connections)

Canary Islands (18 routes: Peninsula to Canary Islands + Inter-islands connections)

PSO - 19 companies operate on these routes.

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Country Route/area PSO/PSC Duration CommentsCeuta and Melilla (4 routes: Peninsula to Ceuta and Melilla)

Balearic Islands (6 routes: Valencia and Barcelona to Palma, Ibiza and Mahón)

Canary Islands (1 route: Cádiz to Santa Cruz de Tenerife and Las Palmas)

Ceuta and Melilla (3 routes: Algericas to Ceuta and Melilla to Almerñia and to Málaga)

PSO/ PSC 5 years All PSC awarded by means of open tender procedures.No exclusivity.

Sweden Mainland – Gotland2 routes:

Visby – NynäshamnVisby –

Oskarshamn

Road Ferries (multiple lake/river

crossings)

PSC

No PSC

4+2 years Operated by Destination Gotland AB.

Operated by Swedish Roads Directorate as extension of roads across lakes, rivers and swamps, and provided free of charge.

United Kingdom

Northern IrelandBallycastle –

PSC 2+ 1 years

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Country Route/area PSO/PSC Duration CommentsRathlin

Island – 1 routeNorthern isles

Mainland –Orkney/ Shetlands – 2

routes

PSC 6 years Operated by NorthLink Ferries Ltd,

Clyde and Western Isles:-28 routes

PSC 6 years Operated by state owned company CFL).

Gourock – Dunoon PSO/PSC 6 years

Iceland

6 routes PSO/PSC 3-6 years There are six routes with ferry services (PSC awarded following a public tendering).

A governmental body (Road Administration) carries those contracts out in the name of the transport authorities.

The ships are normally provided by the Government and built or bought up to a certain standard in cooperation with the municipalities receiving the services involved. Frequency and regularity is specified in each contract and vary according to the number of the inhabitants receiving the services.

Norway 36 routes West

29 routes North

30 routes Mid

2 routes South

1 route East

License / PSC

Up to 10 years

The Norwegian Public Roads Administration is divided into 5 departments based at different parts of the country (North, South, East, West and Mid).

Only domestic scheduled passenger transport is subject to a license according to the Professional Transport Act (21/06/2002). Licenses are generally for a period of 10 years and the license holder has the duty to perform the transport.

The PSC is awarded for the same period i.e. 10 years. However, where public tender is being used the license and contract

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Country Route/area PSO/PSC Duration Commentsperiod ranges from 3-8 years. In the case of new gas ferries purchased for the operation in question, the period is extended to 10 years.

Internet sources for case studieswww.rikstrafiken.se%2FArticle.aspx%3Fa%3D277%26c%3D75&anno=2http://www.rikstrafiken.se/library/documents/utredningar/gotlandgods_slutgiltig.pdfhttp://www.trafikstyrelsen.dk/DA/Databases/~/media/Files/Databaser/Publikationer/samsoelinien_oeaftale.ashxhttp://www.trafikstyrelsen.dk/EN/About%20us.aspxhttp://www.commissiondesiles.org/pub/docs/41_eybye_nielsen_-2006_1.doc.pdfhttp://www.commissiondesiles.org/pub/docs2/57_fr-_contribution_sardaigne_seminaire_western_isles.pdf

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http://www.commissiondesiles.org/pub/docs2/57_fr-_contribution_sardaigne_seminaire_western_isles.pdf

http://www.commissiondesiles.org/pub/docs/41_eybye_nielsen_-2006_1.doc.pdf

http://www.trafikstyrelsen.dk/EN/About%20us.aspx

http://www.trafikstyrelsen.dk/DA/Databases/~/media/Files/Databaser/Publikationer/samsoelinien_oeaftale.ashx

http://www.rikstrafiken.se/library/documents/utredningar/gotlandgods_slutgiltig.pdf

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