The Scottish Government runs the Transport Scotland Ports and Harbours Scheme which provides subsidy to operators of ferry services and grant funding to help offset costs to encourage investment in ports and harbour facilities.
The Clyde and Hebrides and the Northern Isles ferry contracts are subsided by the Scottish Government therefore supporting the delivery and continuation of life-line ferry services on the Scottish network.
The beneficiaries of subsidy payments provided under Section 70 of the Transport (Scotland) Act 2001 Section 70(4) is CalMac Ferries Ltd (part of Caledonian MacBrayne Ltd) and Serco Northlink who are the current operators.
Given the responsibilities of operators receiving subsidy it is up these organisations to ensure that procedures for spend are suitably robust, including due diligence to mitigate fraud for audit purposes. Due diligence in paying subsidy is also a requirement of Transport Scotland on behalf of the Scottish Government.
Subsidy Control (previously known as State Aid) is a European Commission (EC) term which refers to forms of public assistance, given to undertakings on a discretionary basis, which has the potential to distort competition and affect trade between Member States of the European Union.
The subsidy control rules are set by the EC and comprise various articles of the Treaty on the Functioning of the European Union (TFEU), Regulations, Frameworks and Guidelines - which set out what aid can be given and under which circumstances. The EC governs Member State compliance with these rules and many aid measures must be notified to the Commission for approval.
The General Block Exemption Regulation (GBER) was published in the European Commission’s official journal (OJEU L 187/1) on 26 June 2014. As of 1 January 2021 any grants considered to be a subsidy will need to be compliant with the Trade and Cooperation Agreement (TCA).
The 2021 Amendment of the GBER – revision to accompany the new Multiannual Financial Framework and to facilitate certain recovery-related aid measures (“MFF GBER”): The Commission Regulation (EU) 2021/1237 of 23 July 2021 (link below) amending Regulation (EU) No 651/2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 270, 29.7.2021, p. 39–75
For subsidy control to fall into one of the GBER categories, it must fulfil certain conditions ensuring that the aid both leads to new activities that would not otherwise have taken place, and promotes economic development without unduly distorting competition.
Funding for projects
Claims for funding are assessed by Transport Scotland following receipt of an application: for its potential to aid development against our policies for the ferries network. If financial assistance is appropriate, an assessment will then be made as to whether the assistance would constitute Subsidy Control in terms of the EU Treaty. Having made this assessment, it is then possible to ensure that any proposed assistance will comply with state aid law, so that the most correct and efficient package of assistance can be devised with the minimum risk of state aid procedures affecting the project.
Grant funding made by Transport Scotland, will be at an intervention rate, with the applicant contributing the balance. This intervention rate is based on the value of the project involved; typically 80% payable by grant and with the applicant contributing 20%. In general terms, the higher the value of the overall project, a lower the intervention rate may apply.
There are a number of mechanisms through which funding is available:
Transport Scotland, Ferries Unit will consider grant funding to assist ports and harbour owners to improve the infrastructure that will ensure the resilience of lifeline ferry services.
- Example of projects include new facilities, linkspan refurbishments (structural, ropes/cylinders); fendering & installation of Cathodic Protections systems (when required structurally on sheet or tubular piles).
- Excluded works include general harbour improvements to ‘non ferry use areas’; linkspan oil/hose changes; inspections of machinery, equipment & infrastructure; and in certain circumstances maintenance dredging.
The Scottish Public Finance Manual sets out the rules, obligations and duties associated with Grant funding.
- Grants will be used to acquire or improve capital assets.
- Grant refers to funding provided by the SG to other organisations and individuals for specific purposes provided for in legislation.
- Grants provided by the SG are subject to binding agreements that are detailed in the Grant award letter.
- Grant is not be paid in advance of need.
- TS business areas are responsible for ensuring, so far as possible, that grants are spent for the specific purposes for which they were authorised.
- The SG needs to be satisfied that grant funded assets are used for their agreed purpose.
- Conditions may be set on the ability of the recipient to generate income from a grant funded asset.
- Proposals to provide assistance to private sector organisations should be carefully appraised and the terms on which any assistance is given made absolutely clear. Government assistance to private sector organisations is constrained by EC Subsidy Control (previously known as State Aid Rules).
Aid for maritime ports shall be compatible with the internal market within the meaning of Article 107(3) of the Treaty.
The eligible costs shall be the costs, including planning and design costs, of those associated investments for the construction, replacement or upgrade of port infrastructures; at relevant intervention levels.
The level of investment funded shall not exceed the following:
- 100% of the eligible costs where total eligible costs of the project are up to EUR 20 million
- 80% of the eligible costs where total eligible costs of the project are above EUR 20 million and up to EUR 50 million
- 60% of the eligible costs where total eligible costs of the project are above EUR 50 million
Any concession or other entrustment to a third party to construct, upgrade, operate or rent aided port infrastructure shall be assigned on a competitive, transparent, non-discriminatory and unconditional basis.
The aided port infrastructure shall be made available to interested users on an equal and non-discriminatory basis on market terms.
This does not preclude small capital projects to improve or maintain lifeline ferry terminal infrastructure, at harbours being considered eligible for Grant funding; they may receive some contribution towards the costs incurred.
Funding applications can be made under the following Articles:
Aid for research and development projects - Article 25(2)(c)
Experimental Development - acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills with the aim of developing new or improved products, processes or services. This may also include, for example, activities aiming at the conceptual definition, planning and documentation of new products, processes or services; Experimental development may comprise prototyping, demonstrating, piloting, testing and validation of new or improved products, processes or services in environments representative of real life operating conditions where the primary objective is to make further technical improvements on products, processes or services that are not substantially set. This may include the development of a commercially usable prototype or pilot which is necessarily the final commercial product and which is too expensive to produce for it to be used only for demonstration and validation purposes. Experimental development does not include routine or periodic changes made to existing products, production lines, manufacturing processes, services and other operations in progress, even if those changes may represent improvements.
- The eligible costs of research and development projects shall be allocated to a specific category of research and development and shall be the following:
- personnel costs: researchers, technicians and other supporting staff to the extent employed on the project
- costs of instruments and equipment to the extent and for the period used for the project. Where such instruments and equipment are not used for their full life for the project, only the depreciation costs corresponding to the life of the project, as calculated on the basis of generally accepted accounting principles are considered as eligible
- costs for of buildings and land, to the extent and for the duration period used for the project. With regard to buildings, only the depreciation costs corresponding to the life of the project, as calculated on the basis of generally accepted accounting principles are considered as eligible. For land, costs of commercial transfer or actually incurred capital costs are eligible
- costs of contractual research, knowledge and patents bought or licensed from outside sources at arm’s length conditions, as well as costs of consultancy and equivalent services used exclusively for the project
- additional overheads and other operating expenses, including costs of materials, supplies and similar products, incurred directly as a result of the project
The eligible costs for feasibility studies shall be the costs of the study.
Social Aid - Article 51
Transport Scotland may look to provide discounted ferry fares for islanders (island residents) under the provisions contained within Article 51 of the General Block Exemption Regulation 651/2014. This discount will be a percentage based discount, similar in nature to the Air Discount Scheme (ADS) which is already in operation and provides reduced air fares for island residents.
Aid for Maritime Ports - Article 56(b)
Capital investment in the construction, replacement or upgrade of port/harbour infrastructure. A port is defined as 'an area of land and water made up of such infrastructure and equipment necessary to permit the reception of waterborne vessels, the embarkation and disembarkation of passengers and crew and the infrastructure necessary for transport operators within the port'.This means ports and harbours engaged in commercial and industrial activities where the port authority or harbour trust will gain an economic advantage from the development.
The eligible costs shall be the costs, including planning costs of:
Construction, replacement or upgrade or port infrastructure
- facilities for transport related port services e.g. berthing or mooring of ships, quay walls, jetties or floating pontoon ramps in tidal areas
- internal basins, backfills and land reclamation
- alternative fuel infrastructure (to supply vessels with electricity, hydrogen or biofuels)
Construction, replacement or upgrade of access infrastructure
- roads, railway tracks, channels and locks
- removal of sediments from the bottom of the waterway access to, or within, a port
- Costs relating to non-transport related activities will generally be considered as Ineligible costs
The project stages need to align to the Transport Scotland Guidance on the development of Business Cases.
The business case development process follows the Five Case Model:
- The Strategic Case
- The Socio-Economic Case
- The Commercial Case
- The Financial Case
- The Management Case
Each component of the business case must be met however with marine infrastructure projects associated with lifeline ferry services it is accepted that each component may not be wholly satisfied. When appointing consulting engineers to undertake any stage in a project they must deliver the business case requirements.
A summary report should be prepared at the end of each stage that provides the required engineering and business case outputs.
Funding approval and project progression will only be approved on completion of stage and business case submission that meets the established criteria.
For further details refer to the business case guidance.
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- Maritime Infrastructure projects often take between 18 months and 3 years to get from agreement of need to tendering for construction works.
- Funding will be approved on a stage-by-stage basis.
- The funding mechanism for each stage will be agreed by TS and the applicant informed.
- Funding approval will be subject to agreement of eligible costs and evidence of the appropriate procurement processes being followed.
- Management and payment of Grant funding will be through Transport Scotland.
- TS reserve the right to review applications at any stage in terms of value for money and may request 3rd parties to review on their behalf and to make recommendations to TS for alternative options in consultation with the relevant applicant.
- Unless exceptional circumstances can be demonstrated Grant funding will be on the basis of a contribution from the applicant.
- The applicant will have to satisfy TS that they have insufficient reserves to meet their contribution obligation or not as the case may be.
- If developing the project requires an increase in Harbour Dues the applicant may be required to satisfy TS of the appropriateness and reasonableness of the increase in relation to lifeline ferry infrastructure and operations and how they have been calculated.
Liaison and Reporting Requirements
The Applicant is required to have in place appropriate monitoring arrangements to ensure effective control of the project up to the point of completion.
The Applicant shall keep the Scottish Ministers fully informed of the progress of the Project in the form of quarterly update reports to Transport Scotland. Details shall include actual progress to date of the project against contractual work programmes and schedules, actual expenditure to date compared with profiled expenditure, and the reasons for any changes or delays to work programmes or expenditure profiles.
If any change to estimated expenditure for the financial year and/or the Project as a whole will affect the profile of funding then the Applicant shall submit a revised profile for approval in writing by the Scottish Ministers.
The applicant shall maintain a risk register for the project which will be shared with Transport Scotland on a quarterly basis.
The Applicant shall, on completion of the Project, submit a report to the Scottish Ministers summarising the outcomes and performance of the Project. Such a report shall include such statistical and other information relating to the impact of the Project as shall be required by the Scottish Ministers.
The Applicant shall also provide any other information at any time that the Scottish Ministers, acting reasonably, may require to satisfy themselves that the Project is consistent with the Grant Agreement. The Grantee shall provide the Scottish Ministers with prompt access to any information they reasonably require to ensure compliance with the Conditions attached to the Grant award letter.
The Applicant shall keep and maintain for a period of 10 years after the expenditure occurs, adequate and proper records and books of account recording all receipts and expenditure of monies paid to it by the Scottish Ministers by way of the Grant. The Applicant shall afford the Scottish Ministers, their representatives, the Auditor General for Scotland, his/her representatives and such other persons as the Scottish Ministers may reasonably specify from time to time, such access to those records and books of account as may be required by them at any reasonable time in response to a written request for such access from the person seeking it. The Grantee shall provide such reasonable assistance and explanation as the person carrying out the inspection may from time to time require.
Procurement of Works
The Applicant should follow the common procedures for advertising and awarding public sector contracts.
Compliance with the Law
The Applicant shall ensure that in relation to the Project, they and anyone acting on their behalf shall comply with the relevant law, for the time being in force in Scotland.
Other funding streams to Grant funding within Scottish Government.
This borrowing function is available to Local Authority (LA) ports. The loan is funded through the harbour dues revenue. Public Works Loan Board (PWLB) funding is generally a competitive interest rate lower than commercial borrowing however, each Local Authority has a different mechanism for internal borrowing and rates.
This borrowing function is available for private ports; however, rates are at commercial bank rates.