10 Emerging Findings
10.1.1 This chapter sets out the key research findings, which have been discussed in previous chapters, identifying the impacts of the removal of RET for commercial vehicles on services to and from the Western Isles, Coll and Tiree. This is followed by a review of actions that could be taken to mitigate these impacts as well as an overview of the key issues that should be considered in any future CV fares policy.
10.2 Research Findings
10.2.1 The economies of the Western Isles, Coll and Tiree, similar to many areas of the country, are suffering from the general economic slowdown which is impacting on activity and individual business performance. The poor macro-economic situation coincided with the removal of RET ferry fares for commercial vehicles in April 2012. The combination of both events happening together has made it difficult to isolate the impacts of the removal of RET fares for CVs. Despite this however, based on the evidence and views gathered it is concluded that the removal of RET has had a detrimental impact on the local economies of the Western Isles, Coll and Tiree.
10.2.2 This study has considered the impact of the removal of RET for CV fares in great detail, gathering views and evidence through interviews, surveys and desk-based research. The key finding is that the introduction of RET ferry fares for CVs in October 2008 had made an important contribution to the initial equity objective of supporting, sustaining and developing the economies of the Western Isles, Coll and Tiree. Our evidence suggests that while reduced ferry fares did not lead to a reduction in transport charges, the cost savings offered by RET were, in the main, used by hauliers to stabilise transport charges between 2008 and 2012 (ie it is likely that in the absence of RET transport charges to businesses would have gone up).
10.2.3 The real-terms reduction in transport charges between 2008 and 2012 provided a number of benefits to local businesses. In many cases it enabled them to improve their competitiveness with mainland firms. It also allowed a number of companies to increase investment in their business, thereby improving performance and helping to support economic activity on the islands.
10.2.4 The evidence and views gathered during the consultation exercise suggests that when RET fares for CVs was removed in April 2012, haulage rates either increased immediately or are forecast to rise when existing contracts come to an end. Over 80% of businesses reported that hauliers had passed on the increases in ferry fares, which are expected to feed through to a decline in business performance across a number of sectors. For example, interviews and business survey findings suggest that the removal of RET has already led to withdrawal from markets by some firms, as well as a small reduction in headcount by others. It is also anticipated that future significant increases in fares will be passed on by hauliers and have further negative impacts as companies will find it difficult to pass these on to end customers.
10.2.5 The removal of RET has had a number of negative impacts for some businesses. For example, it has led to a fall in business confidence due to the uncertainty caused by the ongoing change in fares policy. The increase in transport costs has impacted on the competitiveness of island firms during a period of difficult economic conditions. It has increased transport costs for firms which have a relatively high proportion of these costs as a percentage of total business costs. It has impacted on the performance of a number of companies which are dependent on the ferry for imports (raw materials) and exports (finished goods). Perhaps of most significance, the removal of RET for CVs is impacting on the staple industries of the islands (eg agriculture, crofting, aquaculture, construction and manufacturing), characterised by small firms operating at the margin. It is also having a disproportionate effect on the smallest communities, both in terms of a direct loss of income and the subsequent multiplier impacts.
10.2.6 While RET for CVs in itself will not determine the economic future of the islands, its removal may combine with numerous other current economic pressures (eg energy costs, declining real income, wider economic situation etc) to impact on the sustainability of island firms and local industries. The potential social impacts on the islands in terms of population retention, and long-term viability could also be important.
10.3 Impact Mitigation - The Components of a Future Fares Policy
10.3.1 This section sets out the issues that should be considered in designing a future fares policy for commercial vehicles that meets the needs of island businesses and ensures the Scottish Government secures value for money, while at the same time contributes to its equity objective and supports sustainable economic growth for the island communities. It considers five potential fare options which could be applied together or separately. It is important to note that any fares scheme must comply with European State Aid legislation, which would mandate that all haulage firms have a right to free and equal access to the island markets ie the Scottish Government cannot discriminate in favour of island firms. It is also important to recognise that any fares system must be considered in light of current budget constraints and affordability issues, while also offering value for money for the taxpayer more generally.
10.3.2 We do not recommend any specific option for future policy as this is an issue that will need to be discussed further with Ministers and the local communities in question. Instead we set out the advantages and disadvantages with each fare option for consideration.
Full Non-RET Fares
10.3.3 The evidence presented in this report on the impact of the removal of RET to date suggests that any return to the full non-RET fares after the transitional scheme would have a negative impact on local businesses and the wider economy of the islands more generally. The interviews and survey data suggest that the removal of RET is already impacting on the performance of some businesses. While it is very early to understand the full future impact of the fares increase, the initial figures provided by companies suggests: costs for a number of companies have increased, profits have fallen, employment levels in some cases have fallen, albeit marginally and, a small number of firms have withdrawn from activities developed following the introduction of RET.
10.3.4 As explained above, it is also clear from the evidence gathered that the removal of RET ferry fares for CVs would impact harder on some areas than others. Those likely to be most affected will be staple employment sectors and the smaller islands / remote areas with relatively lower levels of industry and activity.
10.3.5 The full non-RET fares would offer an immediate reduction in the Scottish Government subsidy level. However, while not a task of this study, it is possible that the wider cost of maintaining the island economies in the longer-term would rise and that this cost would outweigh the savings in subsidy.
Return to RET or 'RET Lite'
10.3.6 There was strong support among the island communities for a return to an RET-based fare system for commercial vehicles. First and foremost, RET was seen as an important mechanism for reducing the competitive disadvantage suffered by island businesses through reducing the cost of sales and providing a cushion against other rising costs that the islands are particularly exposed to - fuel costs for example. A number of businesses provided evidence that the reduction in ferry fares brought about by this policy allowed for an increased level of investment in the business as well as an occasional diversification of activities.
10.3.7 The policy was also seen to support the competitiveness of businesses operating within the islands. For example, independent retailers were able to use the discount to compete with; chain stores using regional pricing; shopping trips to the mainland; and internet shopping. Many island businesses are suffering because of their lack of scale, something which RET, to some extent, helped to insulate them.
10.3.8 RET was also seen as a much fairer system that treated all operators equally, thus generating greater competition and more choice for businesses. This helped to encourage efficiency within the market. It was also seen as a much more transparent system, while many of those interviewed were also in favour of a distance-based system.
10.3.9 In the short-term, a return to the previous RET system for CVs will increase the level of subsidy required and may raise affordability issues. However, as explained in Chapter 4, a majority of hauliers accepted that in the current economic climate of low activity and budget constraints there could be a case for increasing the rate per mile to make it more affordable. This variation of RET ie RET Lite would maintain the benefits of RET in terms of being fair, transparent and distance-based, but would be based on a rate per mile above the current rate. The rate would be influenced by a combination of affordability and road equivalent cost, rather than being primarily determined by the latter.
10.3.10 It is also important for the Scottish Government and other stakeholders to draw a clear distinction between discounts designed to support the economy of the islands and discounts designed to reward haulage firms for volume. RET was introduced specifically to support the economies of the islands and there was an expectation that hauliers would pass on this benefit through the supply chain - indeed the perception that this was not happening was one of the justifications for withdrawing RET for CVs. On the other hand, volume based discounts like TRS were designed to reward hauliers that achieved the largest volumes - this is a common commercial practice across all industries and it would be unrealistic to expect any haulier to pass on their discount unless it was contractually mandated or in their interests to do so. One must therefore recognise that a return to volume based discounts alone will assist the largest hauliers but would have a neutral impact at best for other hauliers and most island businesses. It is essential that stakeholders have clarity on this issue: RET and TRS are two very different types of discount and thus are not mutually exclusive - they can be applied together or alone.
10.3.11 The issue of volume-based discounts (particularly TRS) was a highly emotive issue during the consultation, with strong advocates for and against such discounts. Many stakeholders saw the argument in terms of "RET or TRS" - however, as explained above, the issue of volume based discounts for hauliers is wholly independent of the debate on the need for RET.
10.3.12 The key rationale for re-introducing a volume-based discount is that it is a common business practice to offer reduced prices for buying in bulk - indeed, it is a practice that many of the businesses with whom we consulted are involved. A volume-based discount provides an incentive to grow the business and realise economies of scale. The key question that must be answered with regards to such discounts is the extent to which they are passed through the supply chain, generate additional business and contribute to the improved economic performance of the island economies.
10.3.13 It was clear from the interviews that the vast majority of operators were strongly against volume-based discounts as they believed they distort the market in favour of the largest firms. However, it was also clear from the large hauliers who have the majority of the market share in the islands by a significant margin that they were keen supporters of volume-based discounts and brought a number of operational benefits eg cross subsidy, which could be passed on to businesses.
10.3.14 Another potential fares scheme that could replace RET is the introduction of multi-journey tickets for commercial vehicles. This could provide one journey free for a given amount paid for by the haulier and therefore reduce the average fare paid for a given size of vehicle. The benefit of such a scheme is that, while it is non-discriminatory in State Aid terms, it is likely that the island hauliers would benefit the most as they use the ferry the most.
10.3.15 While this scheme could be attractive, it is not clear that it would be any less costly than RET or offer any other benefits over that fare system. In addition, there would be intrinsic volume based discounts with this scheme as the large hauliers purchasing the largest number of journeys will also receive the greatest number of 'free' journeys.
Targeted Island Specific Fare Schemes
10.3.16 An alternative approach to setting fares would be to move towards a series of island specific fares that take account of local considerations. This study has focused only on the impact of removing RET for CVs and thus cannot comment specifically on potential fare strategies for individual islands. However, a good example of the type of issue that could be investigated in more detail is in Coll, where consultees noted that RET for cars and passengers has brought few benefits because it offers negligible savings on the old six-journey books and the lack of tourist accommodation on the island has limited additional income from this sector. There may therefore be an option where RET for cars is withdrawn and RET for CVs is reinstated in its place.
10.3.17 It should be noted that this is not an actual proposal but an example of the types of issues that could be considered in more detailed follow-up studies. However, similarly to the Ferries Plan 2013-2022 which has suggested ferry services targeted at the needs of islanders (eg exports, tourism, commuting and personal), this would involve designing fares structures compatible with the needs and requirements of island communities.
10.3.18 The disadvantage of this system is that it could be very cumbersome, difficult to manage effectively and not straightforward. Indeed, the cost associated with designing and administrating it could outweigh any potential benefits from more effective targeting of fares to local needs.
10.3.19 While not necessarily part of fares policy, the issue of dropped trailers was raised during interviews with businesses and hauliers on a number of occasions. The inability to drop trailers on the majority of routes to and from the Western Isles, Coll and Tiree can impact on efficiencies of hauliers and, ultimately, the competitiveness of businesses. If the latter is an objective of fares policy it is a factor that could be considered as it could reduce transport costs for businesses on the islands.
Appraisal of Fares Options
10.3.20 Before finally deciding on a fares system for the islands it is recommended that an objective‑led appraisal is carried out in line with the Scottish Government's appraisal guidelines to ensure a value-for-money solution is arrived at. Transport Scotland and the island authorities must be clear about what objectives a fares system should be aiming to achieve before finally deciding on what is the preferred option to achieve these objectives. Individual options should be appraised against the agreed objectives, as well as the Scottish Government's other criteria, including value for money, to ensure the most effective fares system is chosen. Without appraising the various options in detail it will not be possible to understand which fares system is likely to most effectively deliver the needs of the Scottish Government and the local communities.