Western Ferries and possible unfair competition / illegal State aid

This is a note that may add further information about the above issue that is not generally known.

Western Ferries issued a press release today complaining about unfair competition against them in the Gourock-Dunoon market and threatening to complain to Audit Scotland.

For some years, the company have threatened at various times to complain to Brussels about unfair competition and illegal State aid on the Gourock-Dunoon route, but as far as is known they have never done so. If they believe that there has been such unfair competition, the route they should follow leads to Brussels, not to Audit Scotland which is not really the appropriate body to deal with alleged breaches of competition policy. Indeed, if Audit Scotland receives the threatened complaint of unfair competition from Western, it might be advised to recommend the issue be referred to Brussels.

However, government measures in this market since the early-Eighties have had the effect of helping protect Western Ferries market. Western may be seen to have benefitted from (a) government restrictions of frequency of CalMac vehicle carrying services in the market to just one-an-hour (b) failure by the government to allow CalMac to invest in the modern low costs vessels they asked for in the 2000 Deloitte Touche report and needed to be able to compete on equal terms with Western and (c) the economic and technical barriers to third party entry in this market posed by the presence of the restricted competitor CalMac.

Western's considerable profits and the level of subsidy to CalMac may be argued to be a consequence of government intervention and protection in this market and the lack of a level playing field. Western's profits are widely believed to be significantly higher than could be expected for a ferry company facing competition under normal trading conditions. Indeed, it is widely reported to be one of the most profitable companies for a firm of its size in Scotland

The position in EC law, confirmed by Commission decision and European Court judgments, is that if the Commission were to investigate accusations of State aid in a market, they would look not just at who might have benefitted directly from any government intervention, but third parties who had indirectly benefitted from such intervention. There does not need to be any monetary transfers from the government to the indirect beneficiaries for the Commission to establish there has been iIlegal state aid to these third parties. Indeed, there need not be any monetary transfer at all from the government to any party for a measure to constitute illegal State aid. The Commission focuses on the effects of government intervention as far as possible distortion of competition in a market under EC law is concerned.

The Commission would normally calculate the illegal state aid to those indirect beneficiaries as gains that may have accrued to them over the period in question, over and above that which could have been expected in normal trading conditions in the absence of the government measure or measures.

The real losers in the Gourock-Dunoon market are the users, the taxpayers, the dependent communities and any third party operator who might argue that they have not been able to enter and compete on a level playing field in this market due to government intervention. Indeed, the losers from the government measures here might also be argued to include CalMac, since, while it could be argued that they have had the "benefit" of substantial subsidy, it is a strange benefit that weakened the company's competitive position and was not sought it, CalMac wanted instead to move towards eliminating subsidy on the route by deploying its preferred option B/1 as set out in the Deloitte Touche report.

The only clear beneficiary from government intervention in this market is Western Ferries.

And of course, if on investigation the Commission was to see matters in this light as well, it would pose serious problems for Western Ferries

Further, any government measure or support for a passenger-only service on the Calmac route, whether conventional or fast service, as opposed to any conventional vehicle-carrying service, could be argued by interested parties to constitute State aid. The Deloitte Touche report shows that a combined, modern bow-and-stern loading service could operate with significantly less subsidy than a passenger-only service,

There is no demonstrated public need or desire for a fast passenger service on the route as opposed to the alternative of a conventional vehicle-carrying service, and the additional cost and subsidy would be substantial. This point was emphatically reinforced by the public response to the suggestion of a fast passenger service when the possibility was raised at the meeting on the issue of the ferries at the Queens Hall Dunoon in December, the meeting attended by several hundred members of the public. There is little to be gained in spending millions on a fast passenger service to shave a few minutes off a passenger's ferry journey if that journey is a small part of a longer journey that may then include spending the time saved having to wait for a bus to go to shopping to Tescos, or much longer sitting in a train to Glasgow Central.

Further, the indirect beneficaries in State aid terms could again be argued by interested parties to be Western Ferries, since any government measure facilitating and supporting the creation of any highly subsidised passenger-only service, whether conventional or fast, would have the indirect effect of creating a lucrative Western vehicle-carrying monopoly in this market.

The points noted above may help explain why, even though Western has repeatedly threatened to complain to the competition authorities in Brussels, there is no evidence they have ever done so. These considerations may also be felt likely to have a bearing on the likelhood and/or the wisdom of Western Ferries complaining to Brussels about illegal state aid and unfair competition in this market, whether now or at any point in the future.

There are a number of Commission / European Court cases which confirm the principle of State aid to indirect beneficiaries in cases as varied as aid to Irish hospitals and Mediterranean tour operators. For a case detailing how such state aid to indirect beneficaries can be calculated, and what action should be taken with respect to such aid if it is established, see here

The Commission decision in this particular case was subsequently supported by the European Court.

Neil Kay 30th January 2007