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SCENARIOS FOR GOUROCK-DUNOON
Mr Alastair Darling MP, House of Commons debate, Hansard,
14th December 1988 While I might not describe the underlying motivation in such strong terms as the present UK Chancellor of the Exchequer, the remarkable thing is that the situation he described in 1988 survives largely intact nearly two decades later, though somewhat further degraded with the Caledonian MacBrayne car-carrying vessel (MV Jupiter) now very much past sell-by date, or totally unsuitable for the job in hand (MV Ali Cat). CalMac still is tied to one vehicle-carrying vessel an hour (Jupiter), and the other ferry (Ali Cat) is still tied up for substantial parts of the day. And Mr Darling is still MP for an Edinburgh constituency so it would be interesting if he was available to explain his description of the Gourock-Dunoon market to Jacques Barrot, the EC's Transport Commissioner, on the occasion of the Commissioner's visit to Scotland April 30th - May 1st. However, that might be thought a mischievous suggestion, especially in view of the busy diary schedule of a Chancellor. It is presumed that readers are broadly familiar with the characteristics of the Gourock-Dunoon crossings, if not the Scottish Executive's (2000) Deloitte Touche Report and/or the FSB DGFG Report I co-authored (2004) with Captain Sandy Ferguson and Mr Ronnie Smith CA gives basic background. When the Executive announced their plans for the CalMac network (including Gourock-Dunoon) in 2001, the Minister stated it was intended to help avoid "cherry picking of routes". Cherry picking (which the Commission sometimes describes as "cream skimming") is a commercial activity which the Commission, Whitehall, and Scottish authorities all recognise can have undesirable public service consequences. The Commission not only acknowledges this but recognises that governments can take measures (such as Exclusivity and "light" PSOs) to deal with unacceptable consequences of cherry-picking (see 2003 Communication), but to date no Scottish administration has adopted any such measures. Interestingly, Western Ferries has cherry picked not just once, but twice over in this market, not just a high volume route (historically, Kyle-Kyleakin, which was replaced by the Skye Bridge, and Gourock-Dunoon, were the busiest routes on the CalMac network) but a high value segment within this market (Western's strategy is targeted at the high value vehicle-carrying market, not the high cost and low revenue foot passenger market). As the Scottish Information Commissioner noted in a Decision in 2005, "cherry-picking of its routes is a threat for Caledonian MacBrayne .... A knock on effect of this may be the need for additional subsidy to be provided if the existing level of service provision is to be maintained". This subsidy consequences of Western's commercial strategy have been reinforced by public policy of successive administrations, including maintaining the frequency restriction (identified by Mr Darling above) on CalMac, and failing to permit CalMac to upgrade the public service with the modern low cost vessels that it asked for to help provide a better quality and lower subsidy public service. None of this is a criticism of Western Ferries, indeed as an economist I compliment Western for pursuing a shrewd and competent commercial strategy down the years. If there are failures here, it has been in terms of public policy, not Western's commercial strategy. Where I differ from Western is in the implications of all this in terms of fair competition Western sees
the current level of subsidy to CalMac as a cause of market distortion
in favour of CalMac. Its Managing Director Gordon Ross recently stated
(Dunoon Observer News
Archlves for 21st March 2008) "We
would welcome any (Commission) investigation into unfair subsidies in
the Gourock-Dunoon route ... Any investigation resulting from this will
have access to financial records which will show that the CalMac vehicle
service is clearly being unfairly subsidised, contrary to EU state aid
cabotage regulations.” I have consistently argued, both in public and private, that it would be in no-one's interest, including not Western's, for any representations to be made to the Commission regarding alleged illegal State aid here. The answer is instead to fashion a solution that integrates public policy and legitimate commercial interests with EC-compliance. But if a Commission investigation into State aid issues Gourock-Dunoon is launched as a consequence of Western's allegations, it can be expected that communities and interested parties will make a strong and robust argument to the Commission that, rather than being the victims of State aid here, Western are the major beneficiaries. The mistake that can be made is to think that State aid is just about subsidy, when settled EC case law has confirmed that it can be any intervention by the State which confers an advantage to a recipient on a selective basis. In this perspective, the present level of subsidies to Calmac and any associated State aid issues could be seen as a consequence of market distortion in favour of Western, such as the frequency restriction and investment policy imposed on CalMac down the years. Further, the financial records of Western Ferries are already in the public domain, and it will be interesting to see how Western will argue that its financial performance has suffered as a consequence of government intervention here. Indeed, this has been a scenario which has effectively hamstrung Western's only rival, CalMac, the presence of whom has also helped provide barriers to independent third party entry. Most firms viewing Western's situation would be likely to regard such protection as helping create a highly attractive and favourable competitive environment for the fortunate beneficiary. But if Western goes beyond this and actually wins their argument concerning alleged illegal State aid here, it will have serious public policy implications, not just for Gourock-Dunoon, but more widely for Scottish ferry policy. In the case of Gourock-Dunoon, in recent years Western have combined their allegations about illegal State aid to CalMac with discussing a possible deal with the former Executive that would end all ferry traffic on the public service town centre crossing "in exchange for a (Western) monopoly of the route", to attempts to become "sole operator" of vehicle-carrying Gourock-Dunoon (in the so-called User Charter meetings). There can be no doubt that Western's commercial strategy has very serious public service implications that could lead to the end of the town centre to town centre crossing, at best downgraded to foot passenger only, and even a complete Western monopoly over the strategically important Clyde crossings. This would have potentially adverse implications for all users of the services, with foot passengers and integrated transport (with rail and bus) being particularly affected. There would almost certainly be adverse implications for town centre developments in Gourock (some fear such an outcome will have implications for the long-delayed Transport Interchange scheme) and in Dunoon, with other knock-on effects such as on traffic congestion Gourock - McInroys Point. And given the state of Dunoon Pier and its linkspan, this might all happen by default anyway if the sideloading MV Jupiter can no longer dock at Dunoon Pier, given there is no obvious replacement vehicle-carrying vessel or vessels available to use the new linkspan facility at the breakwater. More optimistically, what I hope to argue in what follows is that it is possible to accept where we have arrived at now, and still fashion a policy for Gourock-Dunoon that is fully EC-compliant and sensitive to both commercial imperatives (including those of Western) and public policy needs. Indeed, the trick is to make sure that commercial imperatives and public policy issues all work together, and not against each other; that is what I hope to achieve with the proposals set out below. The following details some options for the Gourock-Dunoon town centre to town centre ferry route. I will start with a Preamble and a Primer on EC law here. Then I set out some of the Legal Context, before setting out the Background to the Gourock-Dunoon Market, followed by Some Background Issues. The Scenarios are then set out along with Discussion of Scenarios, and then General Discussion. We finish with a Summary and a Firm Proposal. The paper here itself has been set up as a webpage to serve two purposes. When viewed online as a webpage, it contains numerous links to documents cited in the paper. In hard copy form, it has no footnotes or bibliography and is designed to be read as easily as possible. If read in hard copy form, then for reference its web address is: http://www.brocher.com/Ferries/GDoptions.htm ...and the link to the flow chart summarising the preferred options is: http://www.brocher.com/Ferries/scenariosGD.doc Preamble I think it important to stress some aspects of EC law here before entering into detailed discussion EC law in general, and in the particular case of Gourock-Dunoon, is rational, sensible, and designed to protect and promote the public interest, including that of the users of its services. That is perhaps not a set of sentiments which have been often heard or widely broadcast in this context. But they are true nonetheless. That is not to say EC law in this context is perfect, for example there are aspects such as the 6-year time limit on public service contracts which can create particular problems. But is important to make a distinction between the intentions and principles behind the framework which EC law and guidelines provide in this context, and attempts by national governments to interpret and apply the framework. It can be tempting to blame Brussels for national or local administrative failures in responding to the law, when the real solution may be to look instead carefully at what the law here is trying to achieve, then to set out with a will to try to achieve that. With that in mind, if there is one overriding principle which must be understood here at all times, it is that compensation (subsidy) can only be awarded in cases where there there is a clearly defined and legitimate public service obligation if it not to be regarded as illegal State aid. A "public service obligation" (PSO) is an obligation which the Community shipowner in question, if he were considering his own commercial interest, would not assume or would not assume to the same extent or under the same conditions. The European Court (Analir case) made clear that PSOs could only be imposed if a real public service need could be demonstrated While compensation/subsidy may be justified for public service under EC law and guidelines here, it is not permitted for services that do not have PSO justification. It therefore can be crucial to be able to distinguish public service activities from commercial activities. More generally, subsidy from public service activities must not be used to cross-subsidise commercial activities. On the other hand, it is acknowledged that profits from commercial activities may be used to limit or reduce subsidy for public service activities (e.g. see Trasmed case) Why should this be the case? When the news regarding the possible implications of EC law for Scottish ferry services became public in 2000 there was confusion and some outrage (and to some extent there still is) as to why Brussels was getting involved - interfering, in the view of many - in the provision of what were widely regarded as essential lifeline domestic services. One way to see the logic is to switch domains and look at the implications from a Norwegian perspective. The Hurtigruten case, the latest instalment of which is here helps illustrate basic points. Even though Norway is not a member of the EC, through the EEA agreement it complies with essentially the same EC Maritime Cabotage and State aid laws as CalMac and other Scottish companies. The EFTA Surveillance Authority has been responsible for monitoring Norwegian companies compliance with the 1992 Maritime Cabotage Regulation and State aid law, and one issue which has exercised them is to what extent are some Hurtigruten services seasonal and tourist oriented (and arguably more likely to be commercial services) and which can be regarded as year round essential lifeline services (and so public services eligible for subsidy). The Authority down the years has been concerned here that subsidy supposedly earmarked for public services could leak into supporting commercial services. On the face of it, this might seem to have no obvious connection with Scottish ferries. It might be thought, if the Norwegians can support their own tourist industry that way, then good luck to them. But suppose subsidies were channeled from the public service to the commercial service? If the Norwegians and CalMac were chasing the same international tourist market, then the Norwegians might use the subsidies to unfairly undercut CalMac. Or suppose the Norwegians decided they wanted to enter the Scottish market and compete against CalMac, then if their entry was supported by subsidies channeled from the public service, it could give them an unfair advantage against CalMac. All this shows how important it is to ringfence subsidies for the public service and make every effort not just to prevent leakages from the public service into the commercial service, but to demonstrate that you have taken reasonable steps to ensure this does not happen and potentially distort intra-community trade.. Conversely, the Norwegians might argue that their commercial tourist trade could be damaged if there was a danger of subsidies for CalMac's public service activities leaking into commercial activity (given the importance of the tourist industry to CalMac, this might ring alarm bells here, but a good case could be made for CalMac that the commercial tourist trade helps reduce the subsidy that would otherwise be required for year-round essential services - essentially the same point will be made below regarding the role of commercial vehicle-carrying activity in helping to reduce subsidy required to compensate for carrying foot passengers on the Gourock-Dunoon route). The Hurtigruten case also demonstrates that making and measuring the separation between public and commercial activities can be difficult in practice, but that is where the role of expert studies can come in. On a parallel track, I recently was asked as part of a study I was commissioned to undertake whether aid to village shops could be counted as State aid. The answer was probably not, but aid to the local butcher or butter maker was more likely to be caught in the State aid net. This might seem irrational but is confirmed by official UK guidelines. The basic principle is that small family-owned village stores are unlikely to grow beyond their local market and raise intra-community trade issues. The same does not necessarily hold for even small local bus companies (which Stagecoach once was) or even small local dairy operations (which the multinational Kerry Group grew out of). So there is a genuine European Community interest in making sure that aid for socially and economically desirable services is channeled only to those services and is not used as a cover for supporting commercial operations. That is what underlies the objectives and logic of EC law here. You can subsidise public service ferry activities, but you have to be clear what these public services are and be prepared to justify them as such. An appreciation of the common sense of EC law here is a precondition for complying with it. A Primer on EC law here One of the features of EC law as applied in this context is that to understand and interpret it you have to look not just at the basic principles (e.g. the 1992 Maritime Cabotage Regulation, and State aid laws) but the cases and interpretations that have emerged out of European Court, European Commission and (as we shall see) EFTA Surveillance Authority decisions. That is where the real information and guidance here is to be found. Article 4 of the 1992 Maritime Cabotage Regulation (which set in train the issues that have dogged Scottish policymakers for about a decade) runs to a total of only 133 words. But it is not always immediately obvious how it applies in a particular context along with the law on State aid, the material, decisions and judgments that have interpreted this Regulation could fill several books. So what is needed is a good comprehensive primer on the EC law here as it refers to ferries. The problem is, if such a primer exists, I have not found it. So here is my primer. If you want to see how, where and why EC law could and should be applied and interpreted here, there is no substitute for looking at actual cases and precedents. For anyone who wishes to familiarise themselves with these issues, I would start with the Norwegian case. As noted above, the Norwegians have to comply with the same EC Maritime Cabotage and State aid laws as Scottish firms through EEA agreements, and the Hurtigruten case contains very valuable lessons. The first stop could be a useful short Description of Hurtigruten. Hurtigruten has some obvious differences with Scottish ferry services including CalMac, but there are also some useful parallels. Then I would look at the 2001 Hurtigruten Decision and then move on to the 2004 Hurtigruten Decision, noting the discussion of the role of expert studies, PSOs and how commercial activities may legitimately subsidise PSO activities. The 2001 Decision also gives a pre-Altmark perspective and the 2004 Decision gives a post-Altmark interpretation, but both give useful perspectives here. If you want to find out more about developments and later consequences of these cases, see EFTA Surveillance Authority Register. I would follow with the Trasmed case (the 2000
European Commission Decision) which like Hurtigruten also recognised
the roles of expert studies in justifying compensation/subsidy for PSOs,
and also that profitable activities could be used to reduce compensation
required for public service activities. After that, the Analir case
(the 2001 European
Court Decision) recognises how PSCs and PSOs could be complementary
tools, applied at the same time and on the same routes. On State aid, the Commission Decision 2005 is basic reference. The Scottish Government's own State aid unit gives a very good and succinct Overview of the law on State aid here, though I may disagree about their view on the need to always tender post-Altmark. There is also a useful Scots-based practitioners (2004) Analysis of Altmark. And this Consultant's analysis shows how costs and revenues attributable to those services eligible for subsidy under PSOs can be separated out from costs and revenues from non-PSO activities. I have also put together a set of Answers from the Commission and the European Court that give significant or indicative statements here. And that set of references gives as good a Primer on the issues here as I can identify. Legal context I think it is important to first establish some point of difference between myself and previous administrations as far as the rule and role of EC law is concerned here, for several reasons. First, I base my arguments for the scenarios below very much on my understanding of EC law, including the case law which sets out much of what is both possible and not possible in this context. Second, there have often been strong differences between my interpretation and understanding of EC law in this context and the interpretation and understanding of previous administrations. Third, where there has been a resolution of these differences, e.g. though subsequent statements by the Commission, the result has tended to be to support my interpretation, and not that of the administration in question. That being the case, it is important to emphasise that while my arguments may appear to be based on a different understanding of EC law from that put forward by successive administrations over the past eight years, that should in no way be seen as invalidating the arguments here. On the contrary, I make every effort to carefully justify each step in each of the scenarios I develop, using precedents and reference to EC law as appropriate. I have collated some of the most important extracts from the Commission and European Court of relevance to the issues discussed here, they can be found under Answers There are several points that can be made as far as the legal background to these issues are concerned. I argued in submission to the Scottish Parliament Inquiry in 2001 that in order to guard the public interest an independent regulator was needed. I also argued that a dedicated statutory framework and pre-designated Operator of Last Resort would be needed to protect the public interest. While these latter aspects were not essential under EC law, they are standard good practice as evidenced by their general adoption at UK level whenever essential services have been put out to competitive tender. My strong arguments in 2001 that an independent regulator was needed in this context was given support by the Commission in their 2003 Communication on Maritime Cabotage where they said that for the award of tenders; "In principle, an independent authority should be responsible for the whole procedure. However, the Commission recognises that, in some cases, it might be sufficient for only the final part of the procedure (evaluation of the bids and adoption of the final decision) to be entrusted to an independent body". While the previous Executive may have been prepared to argue that they
had erected Chinese Walls within the Executive to deal with this issue,
it can be an argument that is more difficult to sustain when it may be
judged to be less clear as to what constuites an "independent authority"
here. I also argued in my submitted evidence to Parliament and the Executive in 2005 that PSOs were needed if you wanted to subsidise Scottish ferry services such as all the CalMac routes. In June 2006, Jim Mather MSP followed up my arguments with a question to the Executive who responded; "Public Service Obligations (PSOs) would not provide that certainty and security of service nor deliver on the Executive's key policy objectives. Consequently there is no need to consider, nor do we intend to consider, issues arising in relation to PSOs". When the Commission was then asked "Can the European Commission state whether defined public service obligations are required in order to subsidise EC ferry services", the Commissioner Jacques Barrot said on behalf of the Commission in October 2006, "The imposition of public service obligations is … a precondition for any compensation being given", essentially confirming my argument. Another issue is that the previous Executive consistently regarded PSCs (public service contracts) and PSOs as substitutes rather than complements, an unduly narrow interpretation and which we discuss further below. The role of PSCs and PSOs as complements is central to the analysis which follows here. I mention these to make the basic point that in these cases where my arguments were different from those put forward by, or based on, the Executive's legal advice, my perspective has tended to be supported. These do not exhaust the differences of interpretation between my understanding of EC law and that of previous administrations. For example, the previous Executive apparently made a distinction between public service obligations (with small capitals) and Public Service Obligations (with large capitals)- See QandA - a distinction which is unhelpful and for which I cannot find justification for in EC law. I also mention these because unless it is recognised that there are difficulties with previous official interpretation of EC law here, and that policymaking has to be re-oriented using the frames of reference set out below, then there is absolutely no point in what follows. Background to the Gourock-Dunoon Market The absence of an independent Regulator, lack of pre-designated and qualified operator of last resort, the previous Executive's rejection of the essential role of Altmark, the neglect of PSOs, and the established dominance of Western Ferries in this market (created in part through previous governmental policies), have created difficulties which together constitute particular problems in finding workable solutions to Gourock-Dunoon. These are all remediable in the longer term, even Western's dominance which might represent barriers to entry. Western market dominance happened in the space of a couple of years where it increased its frequency and CalMac was forced to reduce theirs. Frequency is the key competitive weapon in this market, and to the extent the frequency imbalance can at least be partly corrected, it should ease the competitive imbalance in the market. For general background, see the FSB Report which I co-authored for FSB (Federation of Small Businesses) with Captain Sandy Ferguson and Mr Ronnie Smith CA. It is still largely relevant today, though there are several further aspects which are worth emphasising. (1) Availability of vessels. If we were dealing with bus services, we would not expect availability of buses to be a serious issue in formulating and implementing public policy. If a tender is offered for a bus contract, we would not normally expect to see it fail just because there were no suitable vehicles available. However, in the case of ferries, availability may be an issue, both for newbuild and second hand. The Asian-driven surge in demand for new ships has created world-wide capacity shortages in many cases, including provision for new engines. The problem of availability of newbuild is exacerbated if operators are expected to build an asset with a life span of 25 years or more for a tender that might not be won, and if won, might not be renewed after 6 years. The availability of second hand vessels is also potentially a problem. While you might first build vehicles and then wait to see if a buyer comes along, that is generally not possible with ferries, the buyer typically comes before the build, as in the case of most of the CalMac ferries which were generally custom-designed by CalMac. Consequently, those ferries which are available on the second hand market are generally surplus to requirements elsewhere, and in many cases old and even obsolete for the purposes of this market. In short, availability of vessels is an issue which may have an impact here. (2) No incumbent. The evidence from Europe is that tenders under EC rules are predominantly won by incumbents, which can itself be regarded as, at least in part, a consequence of limited availability of alternative vessels to those already deployed by incumbents on PSO routes. But an extra element to be added to this issue is that for all practical intents and purposes there is no incumbent - or at least no real advantage from incumbency - on this route. That is because CalMac's vehicle-carrying vessels use the side-loading linkspan at Dunoon Pier, an obsolete and costly arrangement inferior to that which would be possible with the new (still unused) linkspan at Dunoon breakwater, for which CalMac's sideloading vessels are not designed. Since there is no obvious incumbent's legacy on this route, it creates extra potential issues when this is combined with possible problems of availability of vessels. This point of no incumbency advantages is reinforced by statements made by the present CalMac Chairman Peter Timms (Herald February 3rd), which were widely seen as indicating that CalMac would be unwilling or unable to compete in the vehicle-carrying market here, even if the present restrictions on its frequency of operation were to be removed. (3) The role of the UK (Whitehall) authorities One of the points I made last year in a PowerPoint summary of the problems of ferry policy is the role that UK (Whitehall) authorities play here. Ultimately their support for, or rejection of, any specific Scottish ferry policy may be crucial, they are the final authority in a UK context. However, given that there is no significant experience of, or likely sympathy for, the notion of subsidised ferry services south of the border, this may have been, and could remain, a major stumbling block, though this has to be caveated as pure speculation. See summary slide 7 (4) Lack of sound precedents. In principle, the Scottish Executive's own survey of EC ferry services in 2005 should have given benchmarks and examples of good practice by which to judge what is, and is not, permissible here under EC guidelines. In practice, many of the countries looked at by the consultants in their studies were not yet compliant and/or were in the process of adjusting their practices to make them compliant with EC guidelines, so there is only limited information to be gleaned from this work in these respects. (5) Estuary service. The Gourock-Dunoon case is unusual in terms of being an estuary service, while the EC's provision for subsidised public ferry services is explicitly designed for island services (enshrined in the 1992 Regulation) though the EC's 2003 Communication does make provision for applying PSOs to such services if they fulfil certain criteria (which Gourock-Dunoon does). In many respects it is closer in public service and transport characteristics to the bridge crossings over the Forth than it is to island ferry crossings, this makes the task of finding comparators and precedents even more difficult. For example, timetable and frequency characteristics have different emphases here for many categories of users such as commuters and regular travellers across the estuary than they would for a ferry service for an isolated island. Some terminology used in the following
Some Background Issues There are a number of issues which are relevant to the subsequent discussion: (1) Frequency restriction. As Quoted by the Scottish Information Commissioner "Caledonian MacBrayne’s approved service between Gourock and Dunoon (i.e. the service operated under the auspices of the Undertaking) is restricted to avoid the subsidised service undermining the privately operated Western Ferries service between two points on the outskirts of the respective towns. The service approved within the Undertaking (i.e. for which subsidy is available) is restricted to passengers only, and subject to timetable restrictions". In fact, as has been well documented by myself and others, the frequency restriction itself has proven a source of severe distortion in this market. None of the scenarios described below retain the frequency restriction. (2) Gourock-Dunoon a special case? It has been argued in the past that Gourock-Dunoon is a special case and that is true to the extent that it is (now) set up as a separate route from the rest of the CalMac network and that there is a private operator (Western) on a neighbouring route. However, it is subject to the same maritime cabotage and State aid rules as other ferry routes in Scotland, and while there are elements here that may be seen as specific to the Gourock-Dunoon case, nonetheless the general approach may be taken as indicative as to how public policy towards ferry policy in Scotland should be formulated and implemented. . (3) To tender or not to tender? Much of the debate surrounding ferry policy in Scotland in recent years has revolved around whether or not these routes (including Gourock-Dunoon) have to be tendered to comply with EC law. Much of this debate is based on misunderstandings of what the law here implies or requires. Tendering such routes is neither necessary nor sufficient to comply with EC law. There is nothing in either the Maritime Cabotage Regulation 1992 or State aid law which says that such services have to be tendered, even if they are to be subsidised (and the Altmark case confirms this). It is true that tendering is often treated as the obvious default way to demonstrate as far as possible that the law here has been complied with, but as I have also argued (see above), tendering itself may not be sufficient to demonstrate this. What the scenarios here do is to: (a) build on existing EC law, including case law, as far as possible; (b) use tendering (PSC) when the outcome would put a firm in a potentially advantageous position over other firms; (c) make compensation available to all eligible firms on a route wherever possible. That way it is hoped to achieve efficiency, fairness and demonstrate compliance with both the spirit and the letter of EC law here. (4) Identification of routes. What constitutes and defines individual routes is a crucial issue here. The assumption that previous governments have been operating under is that the town centre to town centre crossing and the Hunters Quay to McInroys Point crossing are effectively part of a single route and should be treated as such for the purposes of the Maritime Cabotage Regulation 1992. However, in September last year, The Commission replied to a series of questions from Alyn Smith MEP, and part of their reply reads as follows; "for the purpose of applying Council Regulation 3577/92, the crossings between Gourock and Dunoon town centres and between McInroy's Point and Hunter's Quay can be considered as two separate routes and thus treated separately. In particular, the local authorities can impose public service obligations for the carriage of pedestrians on only one of these routes" (see Answers Extract 7 for further details). This clarifies one point - PSOs can be imposed (and compensation/subsidies provided to support them) for foot passengers on the town centre to town centre route without their being any onus on the part of authorities to impose any parallel obligations, nor provide any compensation/subsidy, for foot passengers on the Western service. The first sentence in the Commission's reply would seem to make clear that for the purposes of the 1992 Maritime Cabotage Regulation, the two routes are to be treated separately, in which case that would seem to undermine any case that Western would care to make that its commercial interests are adversely affected by what may or may not be going on in the town centre to town centre route. But if that is the case, then it also means that what has been traditionally (pre-reorganisation) the CalMac route can in principle be treatable in much the same way as other CalMac routes such as the neighbouring Wemyss Bay Rothesay route. There are some points that can be made if this is the case. First, the 2003 Communication from the Commission indicated that estuary or peninsular routes with the characteristics of Gourock-Dunoon could be regarded as island routes (just like Wemyss Bay Rothesay) for the purposes of applying the 1992 Regulation (see Answers Extract 6). Second, on the Wemyss Bay Rothesay route, other users (such as cars and passengers as well as foot passengers) are subsidised on that route as on other CalMac routes (in this case the route and the subsidy are bundled together in the tender for the network as a whole). Third, vessels are specially built for CalMac (now Caledonian Maritime Assets) then leased out to CalMac for the duration of the tender. However, the second sentence in the Commission's reply raises the possibility that the Commission's interpretation is specific to the carriage of foot passengers, leaving open the prospect that the two crossings could still be regarded as a single route under the 1992 Maritime Cabotage Regulation for the purposes of vehicular traffic (or at least that the crossings cannot be treated independently of each other). Whether the crossings are to be treated as separate routes or a single route (or interdependent routes) for the purposes of vehicular traffic under the 1992 Maritime Cabotage Regulation has implications for the details of the formulation and application of policy and this is noted where appropriate in the case of the scenarios discussed below. However, since the scenarios below all are based on PSOs and compensation for foot passengers only, they are in principle all applicable whether or not we have two routes or a single route here. (5) Subsidy only for foot passengers. While the issue of whether the two crossings can be treated as separate routes on one route for some passengers is left open here, all the scenarios below are predicated on the assumption that PSOs (e.g. fares, frequency and timetable) will only be applied for foot passengers and that subsidy will only be provided to help compensate for operator cost of such a PSO or PSOs. (6) "Fares PSO" on a per capita carried basis. The principle of per capita reimbursement in the form of compensation/subsidy from national or local (council) authorities to operators for carrying specified categories of users at capped fares (for justified economic and social objectives) on various modes of transport (including ferries, air and bus services) is already well established in various contexts in Scotland, UK and Europe. In many respects, direct per capita compensation may be regarded as enabling authorities to move closer to the spirit as well as the letter of EC PSO legislation since it ensures that only those users who are targeted are subsidised, inhibiting subsidy leakage to non-supported categories of user. (7) Role of expert study. Expert studies can perform a variety of roles in justifying PSOs and compensation under EC law and guidelines. One way would be using an Option C-type scenario as a stand-alone passenger-only service which could be used to benchmark what levels of compensation might be reasonable to induce operators to offer such a service. For example, Deloitte Touche estimated that an Option C-type service would make an operating loss of over £600,000 a year to transport about 300,000 foot passengers. Suppose making allowances for capital or leasing costs and "reasonable profit" doubled the figure required to compensate operators for offering such a service to £1,200,000 a year, in that case the implied subsidy required per passenger would be about £4 per head. Such figures would have to be refined and updated in the light of current circumstances and inflation-adjusted. Obviously some times (e.g. peak period) would make a surplus for the operator, and some would make a loss. In practice, the more any operator is obligated to run out off peak and/or out of season services, the higher the subsidy required per passenger, which is why the PSO would desirably have two elements, the "Times PSO" and the "Fares PSO". There would be an element of skill and judgment in making these estimates, but these complications are generally accepted as a normal and unavoidable feature of such studies, hence the adjective "expert" applied to the noun "studies". Since there is only one route involved here, the task of an expert study in the Gourock-Dunoon context is much easier and straighforward than for some other route-bundled cases where expert studies have been applied to justify subsidy under EC law. The expert study also has a role to play in justifying what kind of service to deploy, which is exactly what the Deloitte Touche expert study did when it concluded that Option B could be a lower cost (lower implied subsidy) means of delivering a frequent foot passenger service than would Option C. (8) Distinguishing foot passengers from vehicular passengers. Since we are assuming for the purposes of this exercise that it is only the foot passengers which are to be subsidised, there will be a need for an accurate head count of foot passengers each journey (especially if the per capita method of subsidy discussed below is adopted), which becomes difficult or impossible once they are all on board. This is not a problem at the moment on this route because foot passengers and vehicular passengers have separate entrances and exits, and pay the same ticket price (even though it is just the foot passengers for which the operator gets paid subsidy, albeit on a block basis). This would be likely to become a possible problem if the operator introduced differential ticket pricing with a lower price for the foot passenger sufficient to induce passengers in vehicles to use the foot passenger entrances and exits and misrepresent themselves as foot passengers. The solution here is to put the onus on the operator to demonstrate they have taken reasonable steps to remove incentives for vehicular passengers to misrepresent themselves as foot passengers; the simplest way to do this would be by avoiding differential pricing across vehicular and foot passenger types. A more cumbersome way would be limits or barriers on pier access between the foot passenger ramp at Gourock and those waiting in vehicles. The alternative route between waiting vehicles and the foot passenger ramp via the main road in Gourock involves a substantial detour by foot. There would be some complications using this method (eg making provision for those who park their cars at the Gourock CalMac car park facility and go onwards to Dunoon or come back from Dunoon as foot passengers), but the basic point is that the problem of distinguishing foot passengers can be dealt with if the operator is given incentives to do so. Again, the simplest solution would be for the operator to avoid differential ticket pricing for different categories of passengers. (9) Minimum vessel specifications. If it is decided to leave open the issue of vessel choice to the operator, at the very least there should be minimum specifications to avoid totally unsuitable vessels such as Ali Cat which is designed for summer trips round the bay and is not allowed to sail in waves of greater than 18" for safety reasons. (10) No PSC without competitive tender. Altmark notwithstanding, no PSC in any of the scenarios below would be awarded without being put out to competitive tender. If any PSO is not subject to delivery through a PSC (in whole or part), any compensation for such a PSO is open to all EC shipowners. This approach will help signal intention to comply with the spirit as well as the letter of EC law, as fully as possible. Scenarios I will use the term "scenarios" below so as to not confuse the possible solutions with the Deloitte Touche "options". All scenarios relate solely to the Gourock-Dunoon town centre to town centre route. They are all based around two knowns (1) It is taken as given that the provision of a PSO or PSOs for foot passengers and associated compensation/subsidy is seen as uncontroversial, desirable and permissible. (2) There is strong local community support for the proposal that the town centre to town centre route should at a minimum be served by a frequent combined vehicle and passenger service, along the lines of Option B in the Deloitte Touche Report. Scenario 1: Government authorises Caledonian Maritime Assets (VesCo) to build (or buy) two vessels along lines of DT option B, then they are leased at commercial rates for Gourock-Dunoon under PSC (through least subsidy competitive tender) with a Combined PSO on fares, frequency and timetabling (permitting compensation/subsidy) for foot passengers. This is based on (a) justifying PSO for foot passengers (b) reference to the fact that the Commission has raised no objection (in principle) to this build and lease solution for other routes on the CalMac network (c) the fact that Commissioner Barrot has stated (see above) that "for the purpose of applying Council Regulation 3577/92, the crossings between Gourock and Dunoon town centres and between McInroy's Point and Hunter's Quay can be considered as two separate routes and thus treated separately" (see Answers Extract 7, also Extract 8) (d) Option B type construction justified by expert study showing this least cost method of satisfying PSO (this justified using Trasmed and Hurtigruten expert study precedents and also application of Altmark principles). . This is essentially Option B from the Deloitte Touche (Scottish Executive) Report with added elements of PSC and explicit PSO. A variant of this scenario is that the government invites bids for a PSC with a combined PSO on fares, frequency and timetabling (permitting compensation/subsidy) for foot passengers, but that the bidders are required to supply their own vessels. Scenario 2: Government authorises Caledonian Maritime Assets (VesCo) to build (or buy) two vessels along lines of DT option B, then they are leased at commercial rates for Gourock-Dunoon under PSC. As with Scenario 1, Option B type construction justified by Commissioner Barrot's statements in Answers Extracts 7 and 8, and Trasmed and Hurtigruten expert study precedents and also application of Altmark principles. Government instructs build of two new vessels. The winning operator is awarded fixed sum subsidy based on least cost bid for PSC and the "Times PSO"; operator subsidy for "Fares PSO" element depends on how many foot passengers subsequently carried. Scenario 3: Invite tenders for PSC with PSOs. As with Scenario 2, the winning operator is awarded fixed sum subsidy based on least cost bid for PSC and the "Times PSO"; operator subsidy for "Fares PSO" element depends on how many foot passengers subsequently carried. No automatic supply of vessels by VesCo, this subject to availability and suitability. Scenario 4: Fares PSO only, applicable to all operators on route, with appropriate compensation (subsidy) available to all operators who wish to operate on the route, no PSC. Scenario 5: Combine Scenarios 2 and 4, Government authorises Caledonian Maritime Assets (VesCo) to build (or buy) two vessels along lines of DT option B, then they are leased at commercial rates for Gourock-Dunoon under PSC with "Times PSO" and associated fixed-sum compensation for winning bidder. The build or buy route for combined vehicle and passenger vessels can be justified as in Scenerio 1 by reference to expert study (again, Trasmed and Hurtigruten precedents and also application of Altmark principles) and the statements by Commissioner Barrot (Answers Extracts 7 and 8) that vehicle carrying may be permitted for the purposes of delivering the foot passenger PSO on this route as long as this does not increase subsidy (also Trasmed precedent here). The PSC is essentially a delivery mechanism for the "Times PSO". The "Fares PSO" is applicable to all operators who wish to enter the route, not just the PSC operator, with appropriate compensation (subsidy) for that element depending on how many foot passengers are carried by the operator in question. This implies that a PSC or tender in a market could be separated from, and could be applied concurrently in the same market as, a PSO (here the "Fares PSO"). This principle is acknowledged by both the European Court and the Commission. As the European Court recognised in the Analir case in 2001 (Answers Extract 5), "even after public service obligations have been imposed on the shipowners, is not regarded as adequate or where there are still specific gaps, complementary services could be provided by concluding a public service contract... Article 4(1) of Regulation No 3577/92 is to be interpreted as permitting a Member State to impose public service obligations on some shipping companies and, at the same time, to conclude public service contracts within the meaning of Article 2(3) of the regulation with others for the same line or route in order to ensure the same regular traffic to, from or between islands, provided that a real public service need can be demonstrated and in so far as that application of the two methods concurrently is on a non-discriminatory basis and is justified in relation to the public-interest objective pursued". This principle is also acknowledged by the Commission in their 2003 Communication (section 5.5.1) where they say "The Commission considers that light public service obligations may be imposed on all operators of the same route in parallel to a public service contract concluded with one operator". The example the Commission gives of a "light PSO" is of an obligation for all operators on a route to operate all year round. Here our case is of a PSO for all operators on the route to set their foot passenger fares at the maximum set by the Fares PSO, with a level playing field maintained by making compensation for this PSO available to all operators on the route on an equal basis, compensation to each being made on the basis of number of foot passengers carried. However, if it was felt that extending eligibility for the "Fares PSO" to all potential entrants in this market could be problematic, it could be restricted to the PSC operator. This might be administratively simpler, though it would make the system more rigid and less flexible than would be economically and socially desirable. Scenario 6: Combine Scenarios 3 and 4. Government invites tenders for PSC with "Times PSO". As with Scenario 3, the winning operator is awarded fixed sum under PSC with "Times PSO" and associated fixed-sum compensation for winning bidder. The "Fares PSO" is applicable to all operators who wish to enter the route, not just the PSC operator, with appropriate compensation (subsidy) for that element depending on how many foot passengers are carried by the operator in question. No automatic supply of vessels by VesCo, this subject to availability and suitability. Justification for separating a PSO from the PSC as in Scenario 5. As with Scenario 5, if it was felt that extending eligibility for the "Fares PSO" to all potential entrants in this market could be problematic, it could be restricted to the PSC operator, thought it is felt here this would less economically and socially desirable for the reasons discussed above. Discussion of Scenarios It would be useful to do a full coverage of each Scenario with associated advantages and disadvantages, but in the first instance it might be helpful to briefly sketch some major considerations. Scenario 1 is the most straightforward and direct, build the two combined vehicle and passenger vessels and then lease them out with compensation for PSOs awarded on the basis of least subsidy. It would deliver what has been the consistently expressed wish of the dependent communities for years, with the expert study (comparing Option B and C in the Deloittte Touche Report) demonstrating that this Option B-type method would reduce compensation compared to an Option C-type solution deploying passenger only vessels. The Commissioner Jacques Barrot has confirmed that in the case of this route; "Operators may use their vessels for the "pedestrian service" as well as for the "vehicle service", however any undue distortion of competition, particularly through cross subsidies between the public service activity and other activities should be avoided. As such, any subsidy for the public service activity cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of the public service obligation, taking into account the relevant receipts and a reasonable profit for discharging those obligations". Answers Extract 7 answer to Alyn Smith MEP see also Extract 8 answer to Alan Reid MP here. In short, Barrots answer combined with expert study and the Altmark principles may be regarded as giving the justification necessary for this scenario, since this scenario would reduce the overall subsidy needed to compensate for foot passenger traffic compared to a passenger only scenario. This scenario has many advantages of simplicity. A couple of points could be made. First, even though this scenario could make provision for controlling fares of vehicles using a PSO, and the Government has the power to impose PSOs on vehicles since this is recognised to be a route eligible for PSOs in general, at the moment this is not something that is being generally pushed for on this route, and it is difficult to argue that there is a generally perceived need for this. Clearly this could change in future, especially if one operator obtained a monopoly of vehicular traffic across the Clyde. In short, if the Combined PSO for foot passengers is provided through a PSC, this might be sufficient for present purposes, extending the PSO coverage to vehicles may be unnecessary and even redundant. Scenario 2 increases the transparency and accountability of compensation for foot passengers by making this directly dependent on numbers of foot passengers carried.. Scenarios 1 and 2 have the merit that they would guarantee the appropriate vessels would be built - eventually. However that last word is also a potential problem, estimates vary as to how long it would take new build boats to be deployed, but the most pessimistic estimates it could be some years especially in view of capacity constraints. Allowing here for a "buy" as well as a "build" option might increase the options and reduce the potential lags. Scenario 3 increases the potential source of vessels by allowing operators to bring their own vessels in, but the price to be paid here is guarantee - there is no guarantee that suitable vessels are available anywhere. Scenarios 1 and 2 and 3 have advantages but one disadvantage is that they limit the "Fares PSO" and compensation to just the PSC operator, if another operator came on the route they would not be entitled to any compensation for carrying foot passengers even if they were running a parallel, even identical, service to the subsidised PSC operator, albeit at different times. At the very least this could be regarded as potentially unfair, if not potentially discriminatory, and also leading to an underprovision of foot passenger service compared to what would be the case if compensation was available to all. That is a problem that Scenario 4 would deal with by making all operators who carry foot passengers eligible for appropriate compensation, subject to the "Fares PSO". If the market was effective, here then a well designed PSO would have no problem attracting operators who would deliver the socially and economically desirable foot passenger service. In practice, there would be no guarantees this would happen, which is why adding a PSC tender plus "Times PSO" would still be a likely back stop in the public interest. Being a measure open to all EC operators would also help facilitate its acceptance under EC State aid rules. This last point leads us to Scenarios 5 and 6. The "Fares PSO" has simple and attractive features as discussed above, but it alone might not be enough to guarantee delivery and maintenance of the socially and economically desirable level of service. The PSC to help deliver the "Times PSO" would help complement the "Fares PSO". In both Scenarios 5 and 6, the PSC operator would be bound to deliver a frequent half hourly service from early morning into late evenings, with timetabling reflecting public transport connections. The PSC would be awarded on a least compensation basis after open tendering. Both the PSC operator and other operators on the route would be entitled to compensation on a per capita basis for carrying foot passengers at capped fares. In principle, this precisely targets assistance at fares level (maximum fares) for the category of user for which the "Fares PSO" is designed, while ensuring protection of issues of regularity and frequency (minimum times) for that same category of user with a "Times PSC" delivered with the help of a PSC tender. Based on precedents cited above, a case can be made that these scenarios could, in principle, all satisfy economic, technical, social, political and legal objectives and constraints. This leaves the issue of comparing these two scenarios, which we turn to in the next section. General Discussion These scenarios pursue: (1) the ends - what the public want, which is frequent, affordable ferry service for vehicles and passengers between the two town centres, then (2) the means justifiable under EC law to achieve these ends, which means using PSCs and PSOs, and then (3) the scenarios which might deliver these ends using the means available. There is a fundamental principle underlying all these scenarios which can be simply expressed. Foot passenger provision (especially at levels of fares and service which are deemed socially and economically desirable), typically deliver little revenue and can be very costly (particularly in terms of crewing levels for safety reasons). Consequently, if you wish to achieve levels of foot passenger provision that are deemed socially and economically desirable, it will typically require significant levels of subsidy if delivered as a stand-alone activity (in a passenger-only service, as in Option C in the Deloitte Touche Report). On the other hand, vehicle-carrying provision can be high revenue and relatively low cost, and in turn highly profitable, especially if conducted with little or no regard for foot passenger provision, as Western's service on the neighbouring route amply demonstrates. The simple principle this leads to is this; if you want to deliver socially and economically desirable level of provision for foot passengers (as specified in Option C in the Deloitte Touche Report), then it will be generally significantly cheaper in terms of overall subsidy required if this provision is done through a combined vehicle and passenger service (as in Option B in the Deloitte Touche Report). The overall compensation required as a consequence of foot passenger provision will be at least partly offset and reduced by adding a vehicle-carrying facility to the service. Not only is this economic, commercial and common sense, the logic of such a strategy is acknowledged and recognised by the Commission as we noted above. We can demonstrate this simple principle by asking what it would mean if it did not hold - that is, what would we expect to observe if it was generally cheaper (and, if subsidised, costing less subsidy) to transport foot passenger in dedicated passenger-only vessels. In that case, we would expect to see flotillas of passenger-only vessels running parallel to vehicle carrying services, not just on the CalMac network, but across Europe. While there are special cases where it does happen (eg where there a substantial numbers of foot passenger holidaymakers / backpackers going to islands, and circumstances where fast passenger ferries may be an - expensive - option), the fact that operators generally make commercial decisions consistent with the principle that it is cheaper to transport foot passengers in combined vehicle and passenger carrying vessels may be taken as general support for this principle. The fact that Option B in the Deloitte Touche Report (which just adds vehicle carrying to the foot passenger provision of Option C) would require millions less in subsidy than would the passenger-only option, is merely a demonstration of this basic principle in the particular context of Gourock-Dunoon. While there may be adjustments and modifications that could be made in any update to the numbers that were used in Option B and C comparisons in Deloitte Touche (and for just such an update, see FSB Report), the differences between the two estimates of necessary subsidy in Options B and C options are so wide that is not really credible that the gap could be closed (and Option B-type solutions shown to require more subsidy) by any subsequent study, particularly since the subsidy gap is simply what we would expect to find from the principle we have just set out. In short, it will be cheaper (in terms of subsidy) to use combined vehicle and passenger carrying vessels to serve the PSO options for foot passengers than it would to do so using passenger-only vessels. That finding (in Deloitte Touche specific to Gourock-Dunoon but reflection of a general principle) is sufficiently robust that it puts the onus on those who would argue that it would be cheaper (in terms of subsidy) to deliver PSOs for foot passengers on the route using dedicated passenger-only vessels rather than in combined vehicle and passenger carrying vessels. Why should Gourock-Dunoon be any different in these respects from typical cases elsewhere, especially in light of the Deloitte Touche findings? A corollary is that if the government commissioned the build of dedicated passenger-only vessels to be deployed on the route, it would not only almost certainly be a considerable waste of public money, it would almost certainly trigger action from local interested parties, not just from the point of view of use of public funds, but also finishing the job of creating a Western monopoly of vehicle-carrying cross-Clyde. There is also a fundamental issue underlying all these scenarios - to Build, Buy, or Bring-your-own in terms of vessel provision. Should the government build or buy vessels, or should it be left for the potential operators to decide which (if any) vessels they would wish to deploy on the route - the Bring-your-own option? There are arguments for and against each of these cases. My preference is Build whenever that is an option since it guarantees both suitability and availability of vessels - eventually. The Buy or Bring-your-own options are more ad hoc and dependent on availability. At the same time, a Bring-your-own approach might widen scope and availability of vessels and be deliverable more quickly, certainly compared to Build options. Also, if better and/or more suitable vessels become available on the market over time, they may be introduced on to the route as appropriate, My provisional conclusion on Bring-your-own as an approach is that it could be worth trying as long as it does not preclude reverting to a Build option (if Bring-your-own hits the availability issue), should that prove necessary. I would retain Build as default option and would see Bring-your-own as only something that should be done on a trial basis, to be shelved if it does not produce suitable vessels. On the assumption that each of them may be justified in terms of EC law, that leaves one major issue to deal with. Which, if any, of these scenarios offer the best chance of delivering the desired ends? The obvious answer is Scenario 1 since that was the one which Deloitte Touche concluded in the Scottish Executive 2000 Report - on the basis of the figures presented to them - would least subsidy in terms of delivering a desired minimum level of service for foot passengers. However, I think that Scenarios 5 and 6 could be given serious consideration and they may turn out to be even more attractive in delivering policy objectives than Scenario 1. As noted above, they may have attractive features in so far as they precisely target assistance at fares level (maximum fares) for foot passengers, while ensuring protection of issues of regularity and frequency (minimum times) for these same users. That could make them attractive in terms of not just delivering on these economic and social objectives but also in terms of compliance with EC law. As with the other scenarios, the scenarios bear in mind (and leave opportunities for) application of the basic principle discussed above, that the PSO or PSOs would be best served by combined vehicle and passenger carrying vessels. But the final crucial issue is the likelihood or otherwise that operators could be willing to offer services under this scenario, assuming the availabilty of vessel issues can be sorted. The "willingness" issue is one that lies beyond technical, legal and policy issues, it relates to strategic considerations facing the potential operators. If we take the issue of the PSC first, the bidders would frame their bid for the subsidy for PSC (and "Times PSO") knowing that this would be augmented by farebox revenue from various users, as well as foot passenger subsidy from the "Fares PSO". We assume that the PSC is delivered by a combined vehicle and passenger service. The fact that other non-PSC firms could enter the route and potentially dilute the foot passenger market with the help of the "Fares PSO" and the compensation they would be entitled to, might seem to be a potential cost to potential PSC bidders, and they would certainly take this into account. However, there are reasons to argue that the existence of the "Fares PSO" and compensation open to all could actually be attractive, not just from the point of view of the public interest, but to potential bidders for the PSC. Firstly, the winning PSC operator could itself decide to run extra services under the "Fares PSO" scheme, taking (legitimate) advantage of being able to exploit economies from running several vessels on the route. Also since (as argued above) frequency is a major competitive weapon on the cross-Clyde crossings as far as vehicle-carrying is concerned, this could attract many more users and have demand side benefits as well as cost benefits. Secondly, one of the deterrent effects of a time-limited 6-year PSC contract is that when it is up, the operator could lose the bid for the subsequent tender, creating a disincentive to bringing in / modifying vessels particularly for the route in the first place, and/or investing in building up the market (or to bid for it in the first place). For example, this is an issue that may affect the Campbeltown-Ballycastle route adversely. At least if there is still a "Fares PSO" option available, there could still be opportunities for the former PSC operator to continue on the route (off-PSC, at different times), potentially reducing the downside risk of entering the market in the first place. Thirdly, even if another operator or operator were to offer services under "Fares PSO" on this route, that would not necessarily be a bad outcome for the PSC operator. If, say, another operator was to offer a two-vessel (combined vehicle and passenger) half-hourly service outside the times run by the PSC operator, then there should be significant increase in demand from vehicular traffic for this route, who could now treat it as a "turn up and go" shuttle service. The basic strategy here for operators if there were two or more on the route is that would be that it would be in their interests to encourage users to be able to express their preferences for the route (frequent service town centre to town centre, bypassing congested parts of Gourock) rather than for a specific operator who might only have one part of the market on that route. That has implications for ticketing and ability of users to switch easily and at minimal cost and inconvenience from one operator to another depending whose was the next vessel to arrive. If a benchmark of how not to achieve this is desired, CalMac's current ticketing system could hardly be bettered, it is a model of how to actively discourage potential users from using the service. One other aspect seen from operators who might be interested in the "Fares PSO" side, "Fares PSO" will encourage and facilitate market entry and could assist on the issue of availability . For example, suppose in the middle of the PSC contract period, a vessel comes on the market that would be ideal for this route. In principle it might be deployable onto the route almost immediately and benefit from the "Fares PSO" scheme, adding an element of flexibility that the PSC might lack. Indeed, such upgrading of the service might be possible for the PSC operator itself if better and more appropriate vessel(s) became available during the contract. All of this is subject to the caveat that there will be capacity limits for the linkspans at both ends of the route, with the possible problem of congestion at the ports, exacerbated by possibly different operators, if this is very successful. It must be said that if it comes to these problems, these are problems the community would be very happy to have to deal with. And we note in passing that Western often faces problems of severe congestion at its two ports, and it does not seem to have problems of sorting vehicles into "next ferry" and "next ferry but one" queues. As far as Western is concerned, policy here has been frozen for years by fears, real or imagined that they will complain to the EC about breaches, real or imagined, of EC law. There should be no grounds for believing that would be the case under these scenarios. First, they are designed to be robust and compliant with EC law. Second, the Commission has said in the past that Western should have equal opportunity to bid for any PSC (and by implication and extension would be eligible for "Fares PSO" on the route). I personally do not think that they should have such privileges, and indeed there are precedents from other essential services in the UK for firms being excluded from tendering for certain market segments if there was perceived to be a threat of them monopolising essential services (as there would be here if Western were allowed to monopolise the vehicular crossings across the Clyde). It could be argued that this might be the down side of this route being regarded by the Commission as a separate route from the Hunters Quay - McInroys Point route run by Western. This raises the issue we looked at earlier of whether the Commission regards the two crossings as fully separate routes, or merely separate routes for the purposes of foot passenger traffic. If they are to be regarded as fully separate routes for vehicular as well as foot passenger traffic, then this makes it easer for Western to argue that they should have equal access to the town centre to town centre route to other operators. This could threaten a monopoly of vehicle-carrying across the Clyde, in which case the government could deploy the card it has at its disposal in the event of market failure and the absence of competitive pressures - price controls and minimum standards (frequency/timetable for the vehicle carrying market). Clearly, the best solution would be the pursuit and encouragement of choice and competition in vehicle-carrying as far as the Clyde crossings and operators are concerned, and ultimately it may well turn out to be in Western's interests as well as the public interest that this is recognised and practiced. Indeed, as noted above, if the two crossings are to be treated as fully separate routes for the purposes of the 1992 Regulation, then it is difficult to see on what specific grounds Western could claim its particular commercial interests are threatened here by any alleged state aid to the town centre to town centre crossing. On the other hand, if the two crossings are to be regarded as a single
route for the purposes of vehicular traffic (but not foot passenger traffic),
then there are actually legal mechanisms at EC and UK level that can be
deployed by third parties to prevent Western monopolising the route and
blocking third party entry, such as the Essential Facilities doctrine
which could come into play if Western and another operator were competing
for access at the same time to the public linkspans for the town centre
routes (an Essential Facility has been defined by the European Commission
as: "a facility or The general point is that there are mechanisms available under EC law to impede or prevent the market failure consequences that might be contingent on a Western monopoly, or threat of monopoly, of the Clyde crossings. At the end of the day, both the Gourock-Dunoon routes - or crossings - are classifiable as public service island routes and thus can be subject to PSOs, and should be treatable as such. Had governments borne this in mind down the years (especially since the Commission confirmed this status for such estuary services in 2003) the problems faced now would have been less likely to have arisen. Summary Over the past few years, policymaking here has tended to regard PSCs (public service contracts) and PSOs (public service obligations) as substitute or alternative instruments for the pursuit of public interest objectives here. This was exemplified when in response to a question from Jim Mather MSP (13th June 2006) a previous Transport Minister stated that in this connection; "Public Service Obligations (PSOs) would not provide that certainty and security of service nor deliver on the Executive's key policy objectives. Consequently there is no need to consider, nor do we intend to consider, issues arising in relation to PSOs". Also, the same minister commented in 9th November 2006, "public service obligations and public service contracts are alternatives". See QandA Leaving aside the point made above that well-defined PSOs are actually essential if you want to compensate/subsidise ferry services in the pursuit of key policy objectives, such treatment of PSCs and PSOs as substitute or alternative instruments is only true in the limited way that knifes and forks can be regarded as substitute tools - you can use both for spearing and for cutting, but a fork is generally more appropriate for spearing and a knife for cutting. You can use both independently of each other, or both together in complementary fashion, depending on the objectives and the task in hand. Similarly, you can use PSCs and PSOs independently of each other, PSC is more appropriate if you want to guarantee outcomes, and a PSO is not only more appropriate but essential if you want to compensate operators. But as the Commission and the European Court has made clear (see above), they can also be used in complementary fashion to pursue policy objectives. For example, the "Fares PSO" element in Scenarios 5 and 6 offer flexibility and openness in pursuing the public interest and in providing compensation to operators that would otherwise be regarded as State aid, the PSC element is intended to offer guarantees that the public interest will be served. They are designed to serve different purposes, though the general public interest is common to both. That is really what the policy and law makers at Commission and European Court level had in mind when they designed these tools or made judgments on how they could be applied. The way to serve the public interest here is not to fight or reject these tools, but to see how they could be deployed in the public interest. Which means here that instead of just using a fork or knife, we must have a fork and knife approach, very much in the spirit as well as the letter of EC law and guidelines. There is no ideal solution for the reasons discussed above, we should not be starting from here, but given that we are, it is felt that Scenarios 5 and 6 may give the best opportunity to pursue the public interest in this context, always subject to the availability of vessels issue. A proposal The Government could prepare proposals for a Scenario 5 "Build or Buy" solution to this long standing problem, providing that a "Fares PSO" could be separated from a "Times PSO" (if not, Scenario 1 becomes the default option). In the course of doing so, they would publish basic parameters and conditions such as vessel minimum specifications and likely level of "Fares PSO" as they became available. Scenario 5 would be the default, but Scenario 6 could be deployed if convincing evidence emerged during the course of this exercise that this might achieve the economic and social objectives underlying Scenario 5 as effectively and more quickly (in particular, that the availability question as far as vessels and operators could be satisfied). A flowchart for the analyses is set out here Scenario 5 would be pursued if Scenario 6 fails to deliver suitable vessels or operators.
Neil Kay, version 2nd April, 2008 |