What will the European Commission decide about Scottish Ferries?
I have the above as my title because that is the way that the question is often expressed in the light of the imminent Commission judgment on possible State aid to Scottish ferry services. The real question is what have successive Scottish administrations done to protect and promote the public interest here.
What we can be sure about is that the Commission will NOT impose penalties or require actions that will lead to the withdrawal of essential ferry services, despite dire warnings to that effect by successive Scottish ministers that this would be the consequence if the Scottish Parliament did not accept their own deeply flawed versions of what passed for policy here. There was (and is) no danger of a Hebridean version of the Berlin airlift to rescue fragile island communities suddenly cut off by the cessation of lifeline ferry services ordered by the Boogieman in Brussels. That was just a scare story put forward by successive ministers being briefed by officials to manipulate public and Parliamentary opinion and force acceptance of their policies.
I provide an analyisis of the background leading up to this over the last decade in "Scottish Ferry Policy" in the Fraser Economic Commentary, February 2009.
In order to know what the Commission may decide, we need to know where the problems lie. They fall into two sets.
The first set was the failure to put into place the proper regulatory safeguards necessary to protect the public interest in any essential service subject to competitive tendering. As I have been arguing for more than nine years to successive ministers and Scottish Parliament committees, these are failures to put in place:
The arguments for these are set out extensively in the rest of this website and I do not have to justify them further, they are standard practice. They have relevance to the present Commission investigation in so far as failure to put in place properly constituted domestic regulation of essential services can spillover into raising potential State aid issues at EC level. For example, when the first Northlink operator (an RBS/CalMac joint venture) said they could not continue unless the government gave them several millions pounds of extra subsidy, then irrespective of the merits or otherwise of this claim in those circumstances the government had to pay up. Even though Northlink could be seen as breaching the original terms and conditions of its contract, the government had no alternative but to concede, unlike other essential services there was no Operator of Last Resort ready and able to take over, and the alternative to not paying up was the cessation of an essential service. The consequence is that the Commission is now investigating whether these extra payments constitute illegal State aid - domestic regulatory failures spilling over into (and potentially creating failures under) EC law.
Failures under EC law
The second set of problems was the failure to put into place the basic provisions that should be applied to such subsidised public ferry services to be compliant with EC law. As I have been arguing for more than four years to successive ministers and Scottish Parliament committees, these are failures to put in place;
The third provision here for an Independent Authority overlaps with the provision for an Independent Regulator which I had argued for earlier. The source of the public interest justification differed between domestic and European levels, but the two cases could have been dealt with by one Independent Regulator.
However, as I have documented elsewhere in these pages, following the rejection of my arguments for an Independent Regulator, the then Scottish Executive and its successor rejected my arguments that clearly designated and specified PSOs and adherence to the four criteria set out in the Altmark judgment were essential to protect any proposals put forward for essential ferry services in the Scottish network.
These rejections frankly beggar belief in the face of the clear statements that have subsequently been made by the European Commission, particularly with respect to the need to have clearly defined and specified PSOs and adherence to the four Altmark principles as integral aspects of any such proposals.
The Commission's point of view
So what is going to happen now? I genuinely have no access to any privileged information and do not know what the Commission will decide in its imminent judgment, but I can certainly point out what is likely as a consequence of this near-decade long fiasco. .
Suppose you are the Commission and you see successive Scottish administrations basically saying that what is fundamental EC law in this context (PSOs and Altmark) does not apply to them and you intend to ignore it. As a consequence, you (the Commission) suspect that breaches of EC law may have taken place and that the attitude of the past and present Scottish administrations suggests that there is a real danger that further breaches could occur in the future unless corrective action is taken.
What you as the Commission do is to correct any breaches that you can identify, and then impose conditions that will try to mitigate breaches in the future. It is that second set of actions that threatens to be the killer. It is likely to be rather like imposing an ASBO (or set of ASBOs) on a teenager that is out of control. If the teenager cannot take responsibility for his or her own actions, then restrictions and transparency must be imposed on him or her.What could happen?
What could happen? The Commission could ask for the recovery of what they regard as excessive state aid on the first Northlink contract and the CalMac network, but given the role of deficit subsidy here and the restructuring of the CalMac network into (inter alia) CMAL and CalMac ferries, it is difficult to see how this work and who would be responsible. It is reflection of the lack of coherence that successive administrations have driven us into.
But irrespective of what has happened in the past, it is the Commission equivalent of ASBOs that will really matter here for the future.
I predict that the Commission judgment will read the Riot Act in terms of failure to have clearly defined and specified PSOs on these routes, and failure to adhere to the four Altmark principles.
Then they will identify the major sources of these problems. What might these be from the Commission perspective?
An early harbinger may be in the letter published last week that the Minister responsible Stewart Stevenson wrote to Argyll and Bute MP Alan Reid saying that
There are two possibilities with this statement.
The first is that the statement is limited to the particular case of Gourock-Dunoon. That in itself is damaging enough for such a crucial public service route, if anyone comes forward at all, past experience shows they will come with vessels that are obsolete, unsuitable and/or surplus to requirements elsewhere. No one is going to build new vessels for a six-year, one-off contract - even if there was time to do so. The Scottish government has consistently failed to say what proposals it put forward to the Commission for the route, or indeed if they put forward any coherent proposals at all, so the presumption, in the absence of evidence to the contrary, has to be that they failed to make both the economic and legal case for the two vehicle-carrying vessel solution that the Deloitte Touche report showed was the best economic solution for this route. This is likely to hand Western Ferries an unregulated monopoly over vehicle-carrying on this strategically important route by default, a strategically critical route over the Clyde Estuary which carries an annual amount of traffic equal to about 2/3 of the volume carried by the rest of the CalMac network, and which in transport terms is the West Coast equivalent of the Forth Bridges.
That would be bad enough, and at the very least it is further testimony to the failure to properly set up EC-compliant systems and procedures that would protect the public interest here.
However, there is an even more malign interpretation of the minister's statement. Since the Gourock-Dunoon route is a public service route, the statement by the Scottish government that it "cannot legally require any new operator to use particular existing vessels" only really makes sense if it applies also to other public and subsidised services on the CalMac and Northern Isles networks as one outcome of the imminent Commission judgment.
If so, it would be difficult to see this statement as anything other than a cynical attempt to draw the poison on the Gourock-Dunoon issue before making a broader announcement along the same lines for the CalMac and Northern Isles networks.
If that is the case, then the Minister's statement in the context of Gourock-Dunoon that "it would therefore not make economic sense for ministers to initiate the procurement of new vessels for this service in advance of the tendering process, since any new operator may not wish to use them" extends by implication to all possible vessels for all routes on the CalMac and Northern Isles networks.
If so, then if the minister's arguments for Gourock-Dunoon are accepted, there would be no point building any new vessels for any of these public service routes since the winning operator may not wish to use them - and this when about half of CalMac fleet are overdue for replacement.
There is a further issue that could be added here if the Commission decides that the CalMac network should be broken up into a series of smaller tenders. This is a quite likely scenario - if government has failed to use PSOs and the Altmark principles to demonstrate transparency in terms of compliance with EC law, then they may be forced down the Commission preferred path of tendering by much smaller bundles. That would certainly force-feed transparency under EC law, but at a tremendous price in terms of the economic and technical coherence of the network. If so, this could be the harbinger of a process that could lead to the eventual break up of the CalMac network into a series of small tenders.
What will the Scottish ferry network look like in future?
It is worth re-emphasising that I do not have any inside track in terms of knowing what the Commission judgment on possible illegal State aid to Scottish ferry services will be. But I can make my own judgment as to what will inform their deliberations and the impact this could have on these essential services. Do not blame the Commission here, remember, the concern of the Commission is with EC law, matters of domestic regulation and associated issues of public interest are questions of subsidiarity, devolved to national and regional administrations, and as I have noted above successive Scottish administrations have failed miserably on these counts, as well as in terms of compliance with EC law. .
If the network is broken up into smaller tenders and bidders for the CalMac and Northlink public service routes and if bidders cannot be bound to use the CalMac and other public service vessels built for these purposes and now operated by CMAL, the government's State-owned company, then this is what could happen to Scottish ferry services.
The result would be the disintegration, fragmentation, destabilisation and increased obsolescence of these essential services through an unholy alliance of cherrypickers, hired consultants, carpetbagging politicians and lobbyists, all this leavened with a rich assortment of fly-by-night operators. Reputable operators would increasingly be deterred from entering these markets for fear of being caught up in State aid investigations through no fault of their own.
There is no guarantee that this will happen. That is not the point. There is no guarantee that these disasters will NOT be visited on fragile communities dependent on these essential services. That is what successive administrations have bequeathed in this context.
Were all these risks avoidable? Absolutely, if successive administrations had just followed the well-established rules book relating to regulation of essential public services and compliance with EC law in this context. As I argued to the Scottish Parliament and Scottish ministers four years ago, if properly defined PSOs and adherence to the Altmark principles had been recognized by the then Scottish Executive and set out as basic principles, arguably there would have been no need to tender the CalMac network in the first place.
Not only did the Scottish Executive make the mistake of rubbishing these arguments in the first place, they compounded these errors by arguing that tendering would be not only necessary but sufficient to ensure compliance with EC law here. It is not, as I argued years ago, you still need proper PSOs, and you still need compliance with the four Altmark crteria. That is why things are falling apart now
The future of Scottish ferry services and the interests of scores of dependent and vulnerable communities hang in the balance here. Whatever happens, what is being witnessed here is a debacle of monumental proportions whose only positive benefit is that it is likely to provide useful educational material and case studies for future students in law and economics across the world on how NOT to administer and regulate essential services. I have seen Third World countries whose regulatory regimes are incomparably better in these regards. That is how far this system has degraded.
As to who is responsible? The successive ministers holding responsibility here are the obvious scapegoats, and they can and should be held to account, but the real culprits are the permanent officials whose advice has led successive administrations into this mess.
The present government's approach to this has been to ask those who dug them into this hole to dig them out, and given the statutory relations between Scottish Government ministers and civil servants, they may not have had much choice - though there was always the option of an independent Task Force composed of recognised authorities in the fields of regulatory/EC law and economics to review options and advise ministers, something I have been urging on ministers for more than four years to no avail.
If at any point over the last few years just one official had told just one responsible minister that what was being advised on an Independent Regulator, statutory frameworks, Operator of Last Resort, PSOs, the Altmark judgment, or even the need for an Independent Authority responsible for public service contracts had validity, and that their previous advice had to be revisited, then there was a chance that a constructive dialogue could have been started.
If these officials had spent a fraction of the time in considering and supporting my arguments that they did in undermining and trying to discredit them and me, things might have been different.
And the succession of missed chances over the years means that Scottish ferry services and those dependent on them are likely to be condemned unnecessarily to an uncertain and bleak future.
What a waste.