Chapter 2: How should ferries be funded and procured?
1. We stated in the Draft Ferries Plan that we would provide details of the final investment required and details of how we will ensure our funding priorities can be met over the period of the Ferries Plan, to 2022.
2. We also stated that, in order to understand clearly the level of investment required over the period of the Plan, we needed to have a clear idea of what services will be provided. This central part of the Ferries Review has now been completed and the results are set out in Chapter 3 of this document.
There is however still some work to be done in relation to the possible transfer of responsibility for Local Authority run ferry services.
3. Implementation of the Ferries Plan has to take place in the context of severe pressure on public finances, and particularly harsh cuts to capital budgets imposed by the UK Government, as set out in the previous chapter. The development of the proposals in this Ferries Plan have been predicated on the assumption that the current baseline services will be safeguarded and maintained. In 2013/14 we anticipate spending in the region of £116.3m on our baseline ferry services. This figure is expected to rise year on year with an anticipated spend of £180 m in 2018/19.
4. Despite these financial pressures, we are committed to significantly increased investment over the lifetime of the Plan in order to enhance our ferry services further.
Future investment requirements
5. Despite several years of funding pressures, we have continued to invest in vessels and shoreside infrastructure as well as providing record levels of subsidy for the continuation of the current network of ferry services and the piloting of the Road Equivalent Tariff scheme.
Examples of recent investment projects include:
- Largs pier (£4.2m)
- Rothesay redevelopment (£6.7m)
- Port Ellen pier(£5.0m)
- MV Finlaggan (£24.5m)
- 2 new hybrid ferries (£20m+)
- Kennacraig redevelopment (£9m)
6. Funding has also been provided for a new £42m ferry for the Stornoway-Ullapool route and investments are planned for the 2 harbours supporting this service. A number of major port projects are included in the investment plan including works at Oban, Brodick, Lochboisdale, Lochaline, Armadale and Tarbert (Harris).
7. Maintaining the current pattern of routes and services is likely to require increasing levels of subsidy, at least in line with inflation. The major costs to ferry operators are staff, fuel, vessel charters and harbour dues. The price of fuel in particular is volatile but has risen significantly in recent years and shows no sign of returning to anything like the levels previously enjoyed. Added to that, international and European regulations on the sulphur content of fuel will start to have a further impact on fuel costs from 2015 onwards for services to the Northern Isles; and from 2020 (subject to a review in 2018) for Clyde and Hebrides services.
8. The replacement of vessels will also require additional investment during the period of the Ferries Plan. The vessel replacement programme is provided at Appendix 1. We have identified a need for the following vessels to be replaced between 2015 and 2022:
- 4 'Loch class' vessels - probably to be replaced with further small hybrid ferries
- 2 medium sized vessels: (MV Isle of Arran and MV Hebridean Isles)
- 2 large vessels: (MV Isle of Mull and MV Lord of the Isles)
9. Our policy will be to replace vessels once they reach the end of their working lives. This is around 30 years and the replacement date of each vessel will be kept under review on a case-by-case basis by CMAL and the operator. We are open-minded about the way in which vessels might be procured and made available in the future. We will be mindful of the need to consider the number of jobs created as a direct result of the way in which we secure vessels for our services.
10. When considering and approving new investments, we will take account of the whole life costs associated with a new vessel - operating costs as well as construction costs and disposal costs. The aim is for the upfront construction costs of a new vessel to be balanced by savings in operating costs, in particular through improvements in efficiency and fuel consumption that will also contribute to reduced carbon emissions. Increases in revenues associated with a "new vessel effect" can also help off-set the initial cost.
11. Decisions will also need to be taken during the period of the Ferries Plan about vessel deployment for the services to the Northern Isles once the current agreement with Royal Bank of Scotland (RBS) expires in 2018. The vessels will only be 18 years old by then so it is feasible for them to continue on the routes for another contract period. Initial discussions with RBS are already underway.
12. Projects will be taken forward when resources are available and funding will be prioritised according to need. Details of the approach taken in our prioritisation of funding are set out in Chapter 1 (State of Finances section) of this document.
13. The costs of the delivery of the packages of routes and services enhancements detailed in this Plan are set out in Appendix 1.
Options for future funding of ferry services
14. We noted in the Draft Ferries Plan that reports commissioned as part of the Ferries Review had confirmed that the cost and affordability of Scotland's ferry services are key issues and that the main challenge for the Scottish Government is to identify funding opportunities. This remains a key challenge as the level of investment identified is higher than current funding levels for ferries.
15. The Draft Plan reiterated a number of options initially set out in our 2010 consultation paper:
- CMAL to access funds
- Make ports and harbours self-funding
- Users to provide more of the funding at point of use
- Open the market up to greater competition.
CMAL to access funds
16. In the past year, CMAL have put together funding, via an operating lease, for the new Stornoway-Ullapool vessel. This has a number of advantages. The £42m investment capital will be provided by the vessel's owners, Lloyds Banking Group, at a time when this level of investment was not affordable to CMAL or to the Scottish Government. Lease payments will be made annually, once the vessel is delivered in 2014, avoiding the challenge of finding a large sum of money during the construction period.
17. However, the cost to the Scottish Government over the long-term of this approach is higher than the conventional method of providing loans to CMAL. Our preference for the planned replacement programme is therefore to fund these replacements through capital loans from the Scottish Government to CMAL. CMAL will continue to develop alternative approaches so that, on a case by case basis, the timing and funding options for each project can be assessed and determined.
18. CMAL have also been successful in attracting some funding from sources other than the Scottish Government:
- EU funding (INTERREG IVA) for the Small Ferries Project, in conjunction with Ireland and Northern Ireland: total value £220k
- European Regional Development Fund grant for the hybrid ferries: total value £450k
- Scottish Enterprise Hydrogen Ferry Study Total Value £32k
19. CMAL are currently working with Scottish Enterprise to procure an innovative charging infrastructure for the hybrid ferries which could be designed and built in Scotland. This equates to £150k of potential support.
20. CMAL will continue to pursue opportunities such as these in order to supplement the provision of funds from the Scottish Government.
Make ports and harbours self-funding
21. In the Draft Ferries Plan we considered whether ports should be self-funding and cover the costs of improvements entirely through harbour dues rather than through grants from the Scottish Government.
22. Self-funding would require each harbour authority (whether CMAL, independent harbour trusts, local authorities or private ports) to plan their forward investment and ensure that harbour dues (for all users, not just ferry operators) were set at a level that enabled funds for planned capital works to be built up and/or for loans for such works to be paid off. The Scottish Government would phase out grants for pier and harbour projects. The cost to ferry operators of harbour dues would rise which would lead to increased subsidy payments by the Scottish Government. Harbour improvements would therefore be paid for via a more conventional series of transparent commercial transactions.
23. One drawback of self-funding is that many smaller harbour trusts have limited sources of income other than the ferry operator, limited assets and may therefore have difficulty securing the large loans that some one-off major investment projects require. The removal of grant funding would also reduce the level of influence on the size and cost of projects exercisable by the Scottish Government.
24. In the Draft Ferries Plan we said that we would revisit the future level of port and harbour dues charged by CMAL - primarily to the lifeline ferry service operator - with the intention that the level of income generated wholly covers the cost of the ongoing maintenance and repair of their piers and harbours. We intend to have a revised set of port and harbour charges agreed between CMAL and CalMac Ferries Ltd in place as part of the interim Clyde and Hebrides Ferry Services contract commencing October 2013.
25. In terms of capital grants for major pier and harbour works undertaken by CMAL and the independent harbour trusts, we will continue to work with CMAL and the trusts on projects currently identified as priorities during the current spending review period (to March 2015). Beyond that date we will consider with the relevant harbour authorities what the best method or combination of methods is for delivering the shoreside infrastructure projects set out in our investment plan.
26. The Draft Ferries Plan also stated that we would explore what would be involved if we, through CMAL, were to take responsibility for ports currently owned by local authorities. This is being taken forward in the context of discussions we are having with local authorities on the future responsibility for their ferry services, as set out in Chapter 5.
27. If any Local Authority services do transfer to Scottish Government responsibility then part of that agreement will cover the future of associated shoreside infrastructure. Local Authorities wishing to transfer responsibility must also be prepared where necessary to transfer ownership of the ports and harbour infrastructure used. Agreement would also have to be reached about the levels of capital funding that would form part of any transfer of infrastructure taking account of its current condition and future investment requirement.
Users to provide more of the funding at point of use
28. We noted in the Draft Ferries Plan that consultees wanted fares to be affordable and reasonable and showed little appetite for fares increases that would contribute to the rising costs of subsidy and investment.
29. Ministers have now announced their policy position on passenger and vehicle fares, based on the Road Equivalent Tariff (RET) principle. This is set out in more detail in Chapter 4, as is the position on commercial vehicle fares.
Open the market up to greater competition
30. The benefits of regulated competition, in the right circumstances, were seen in the outcome of the recent tendering of the Northern Isles Ferry Services contract. Four bids were submitted - more than for any previous Government ferry contract in Scotland - and the successful bidder, Serco Ltd, has entered into a contract offering a continued and enhanced quality of service at a very competitive cost to the Scottish Government; an important consideration when set against the levels of investment required.
31. We are aiming for a similarly competitive exercise - and similar financial benefits - for the Clyde and Hebrides Ferry Services contract that will commence in 2016. We did consider the possible benefits of tendering individual routes as there was an argument that smaller contracts would be more attractive to a wider range of operators. However, our contacts with the market and the experience of the Northern Isles competition indicate that there is a preference for a large 'single bundle' contract among both Scottish and international ferry companies.
32. In the Draft Ferries Plan we said that we would publish a separate policy statement on our future approach to ferries procurement. A copy of this Statement is available at Appendix 6.
How flexible should we be about what we tender for?
33. Dialogue with the market, in advance of the Northern Isles tender, made clear that operators seeking to bid for the contract wanted to see a much less prescriptive tender specification than had been the case in earlier procurements. On the other hand, other stakeholders were equally keen to know in advance of the tender process commencing what the details of the service would be in terms of the service specification - timetables, frequency of sailings, fares etc.
34. Our approach was to strike a balance between these two positions. We therefore invited bidders to submit tenders for the services within the confines of certain service parameters. For example, a minimum number of sailings on each route was specified, leaving bidders scope to propose a service at or above the minimum level. This was considered to be a reasonable compromise, allowing for some innovation in the way in which the Northern Isles ferry services could be delivered while maintaining a basic level of fixed standards which offered comfort to the communities who might have had anxieties about too much change being introduced at one time.
35. Our intention will be to adopt a similar approach, to that taken during the Northern Isles tendering, when tendering for the next Clyde and Hebrides ferry services contract.
Length of Contract period
36. We made clear in the Draft Ferries Plan that we must adhere to the current rules which involve tendering ferry services every 6 years. We also stated that we believe longer contracts could be beneficial.
37. In the past year, we have raised this matter with the European Commissioners for Transport and Competition. We believe our arguments, which are shared by other nations with subsidised ferry services, are being heard and understood. We will continue to make the case for reform with the European Commission.
The need for a tendering system in the future
38. EU rules require tendering of all subsidised ferry services. We have however raised with the Commission whether this requirement is appropriate in all cases. The Commission recognises the need for services to be subsidised and is keen to ensure that access to this subsidy - which in effect enables operators to provide viable services - remains open to any EU ferry operator on a regular basis. Whilst we believe that tendering has benefits - such as for the Northern Isles and CHFS contracts as described above - we would prefer the decision on whether or not to tender to be taken by the accountable public authority, that is the Scottish Government and, for their services, the Local Authorities.
How will we prioritise funding?
39. We have taken account of responses to the Draft Ferries Plan and have now provided more precise details about how we will prioritise each of the proposals to be taken forward. Information on how we will prioritise funding is set out in Chapter 1 of this document.
Summary of the Way Forward
40. Our Plans are summarised below:
- We will deliver the investments set out in the investment plan in Appendix 1, in line with funding availability and the priorities set out in this Plan;
- Subject to future Spending Review commitments we will provide the level of subsidy required in our investment plan to deliver the routes and services set out in Chapter 3;
- We will consider vessel deployment options for the services to the Northern Isles in advance of the current agreement in 2018;
- We will continue to work with CMAL on alternative sources of funding for vessel replacement and on accessing EU and other grant funding opportunities;
- We will replace vessels according to their life expiry and will base investment decisions on an analysis of whole-life costs and benefits with the objective of covering, as far as possible, capital costs by savings in operating costs and increases in revenue;
- We will agree with CMAL and the current operator a revised set of port and harbour charges for the interim Clyde and Hebrides Ferry Services contract that will enable CMAL to cover the cost of an agreed programme of maintenance and repair;
- We will put in place arrangements for the funding of major pier and harbour improvements at ports owned by CMAL and independent harbour trusts.;
- We will conclude discussions with local authorities about the transfer of ownership of ports from them to CMAL;
- We will encourage a strong competition for the next tendered CHFS contract seeking to achieve the required level of service at a competitive cost; and
- We will continue to make the case to the European Commission for longer ferry service contracts.