Western Ferries and possible unfair competition / illegal
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
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,
The Commission decision in this particular case was subsequently supported
by the European Court.
Neil Kay 30th January 2007