1. Prior to the introduction of the Road Equivalent Fares (RET) in October 2008, fares for commercial vehicles (CVs) were set on a route-specific basis. In October 2008 the RET pilot was introduced on routes serving the Western Isles Coll and Tiree where the fare was set around the equivalent cost of driving the same distance. This resulted in significant reductions in CV ferry fares.
2. In April 2012 RET fares for CVs were removed resulting in large annual increases in single fares, both in percentage terms (up to 50%) and absolute terms (up to £100).
3. The intention of the removal of CV RET fares was to return fares to their pre-RET level. Given, however the scale and potential impacts of the increases, transitional arrangements were put in place to limit the increases and allow the full increase to be phased in over three years.
4.The purpose of this study is to consider the impact of the removal of RET fares in April 2012 on the economies of the Western Isles, Coll and Tiree.
5. The introduction of RET for CVs made an important contribution to the initial equity objective of supporting, sustaining and developing the economies of the Western Isles, Coll and Tiree.
6. The introduction of RET had positive impacts for local businesses, including improved competitiveness, improved business performance and supporting local economic activity.
7. The removal of RET for CVs in April 2012 has had a significant negative impact on different types of hauliers. It has:
- had a negative effect on the volumes and margins of small hauliers, who play an important role in offering choice in the market;
- squeezed the margin of trader-hauliers who are key to the economies of small islands like Coll, Tiree and Barra;
- necessitated an increase in prices for network hauliers who require high volumes to ensure the sustainability of their businesses. In turn this will expose these firms to volume risk; and
- reduced the volume and economies of scale of full-service hauliers, thus increasing the long-run market rate for haulage.
8. On each route other than Oban - Castlebay / Lochboisdale, in the six months following the removal of RET carryings declined, compared to the same six-month period in the previous year. The decline ranged from 17.5% on the Oban - Coll / Tiree and Ullapool - Stornoway routes to 7.2% on the Uig - Tarbert / Lochmaddy route.
9. Over the same period revenue increased by over £380,000.
10. In most cases, hauliers used RET to offset rate rises being driven by other operating costs, particularly the significant increase in fuel witnessed in the 12 months to September 2008.
11. The evidence demonstrates that hauliers maintained transport charges at their 2008 level throughout the RET pilot despite total costs increasing at above-inflation rates. As a result of that approach transport charges to businesses remained constant over the RET pilot period but, with general inflation also rising, transport charges to businesses declined in real terms..
12. The sudden move away from RET for CVs is seen by the island communities and a number of their representatives as highly detrimental (even with the transitional arrangements) as a number of haulage firms and island customers who are tied into medium to long-term contracts and will have to absorb the cost of these rises. This issue is compounded by the short-term cash flow risks of hauliers, who are in many cases bearing the financial exposure of their whole supply chain.
13. In many cases, the removal of RET for CVs in April 2012 had been passed on in terms of higher transport charges, with 88% of businesses who participated in the survey noting that the increase in CV fares had been passed on to their business. Also, over 68% of businesses in the survey expect this increase to be in the region of £1,000 to £5,000 per annum. These increases in ferry fares have, in a number of cases, fed through to a decline in business performance across a number of sectors.
14. The removal of RET for CVs has had a negative impact on businesses that are moving or purchasing a low volume of goods; moving low value goods; or where the company is a price taker in the market. Many firms in the islands are of this type, particularly in the primary sector, with some areas' businesses in the primary sector accounting for over 35% of total businesses. The removal of RET for CVs will make these businesses less competitive in the longer-term as rates progress back to their non-RET level.
15. All areas of the Western Isles, Coll and Tiree will be affected by the removal of RET fares for CVs. Given sectoral profile, recent socio-economic trends, and business location within the haulage market, some areas will, however, be more vulnerable than others and will experience different levels of impacts.
16. Areas with a large share of enterprises in the primary sector will likely be adversely affected most. The Western Isles, Coll and Tiree as a whole have a proportionately higher share of enterprises within the primary sector. This is the case, particularly in the Uists, Benbecula, Barra, Coll and Tiree where the figure is as high as 38%. It will leave these areas more vulnerable as they already face higher than average transport charges due to the lower number of hauliers in the area and less competition in the haulage market.
17. Many of the businesses in the Western Isles, Coll and Tiree are concerned that the lack of certainty and frequent policy changes on CV fares are having a detrimental impact on business confidence and long-term investment planning. Businesses stress the need for a clearly defined longer term fares strategy by the Scottish Government.
18. While the island communities covered in the study have not witnessed high levels of unemployment by Scottish standards, the rates seen are high compared to other island areas, and the Western Isles does have a number of highly deprived areas according to the Scottish Index of Multiple Deprivation, making them very vulnerable to any downturn in activity. In addition, many of the areas concerned do not have the level of industry and capacity to absorb the downturn in activity, though, say, changes in employment resulting from the increase in ferry fares.
19. RET for CVs cost the Scottish Government around £3m per year. The total reduction in annual cost to the Scottish Government associated with removing RET is estimated to be £1.5m, with the transitional scheme costing the Scottish Government around £2m in 2013. The extent to which this impacts on the Western Isles, Coll and Tiree will depend on how much these costs can be passed on to customers out with the islands concerned. The impact on the Western Isles, Coll and Tiree will also depend on how much they can actually be absorbed by businesses. For example, if businesses cannot pay the higher charges, this may lead to loss of activity and a reduction in employment, resulting in an impact which is greater than the change in fares.
20. The short six month period since the removal of RET has meant that it has not been possible to quantify all the potential impacts. Furthermore, other factors, such as the changing market structure and the general slowdown in economic activity, has meant that it has not been straightforward to isolate these effects from the removal of RET.