"Neil Kay and Cameron Smith's … dogmatic pronouncements on what is possible under European law have never been matched by actual advice or information from Brussels" (Jim Mather Argyll and Bute Constituency MSP in Dunoon Observer 4th February 2011)

"Professor Kay is not an expert in European law, he is an economist" (Mike Russell SNP candidate for Argyll and Bute Scottish Parliament elections on Brian Taylor's Big Debate, BBC Radio, 1st April 2011)

"It is fact that resources cannot legally be provided to provide new boats on a route on which there is commercial competition. Should any government try to do so it would be subject to legal action from other operators and very expensive infraction proceedings from the European Union. These are also facts. None of them were clear in 2007 but they are now -alas - incontrovertible" (Jim Mather Argyll and Bute Constituency MSP in Dunoon Observer 4th February 2011)

"I do not believe the 1992 Regulation or any other aspect of EU law prohibits or prevents the use of any vessels (whether old or new) carrying vehicles on any route in which there is a PSO and compensation for a pedestrian service (such as Gourock-Dunoon), and where there is an unsubsidised competing vehicle service, as long as appropriate accounting procedures are adopted to both prevent and demonstrate that there has been no leakage of compensation from the public service obligation to any unsubsidised and commercial vehicle-carrying aspect". (Neil Kay letter of query to European Commission 4th March 2011)

"there is no prohibition to use (old or new) vessels provided by the State on a route where a Public Service Obligation (PSO) is imposed on passenger transport, whereas vehicle transport is also provided on commercial terms by the same service provider… separate accounting and appropriate cost allocation between the passenger and vehicle transport should be ensured". (Answer from the European Commission Competition Policy Directorate to Neil Kay's letter of query 11th April 2011)

Comments from Neil Kay

For some years I have been involved in policy issues relating to ferry issues in general and sometimes Gourock-Dunoon in particular under EC law, often in the form of invited evidence to the Scottish Parliament. My advice has frequently differed from the Government's own advisers and I have documented some of this in a petition currently before Parliament, details of this can be found here:

For the purposes of the present discussion, the petition records that in any case of differences between me and successive governments' own very expensive salaried advisers, I was invariably right and they were wrong

I say that not to promote my own competence in these areas but to point out the disgrace that even when the official advice to the government has been (frequently) proven not competent (as in the case of the crucial importance of Altmark), nothing changes, no action is taken, no-one is held accountable, no corrections or apologies are made, things carry on just as before.

But where matters have really reached their nadir is in the case of Gourock-Dunoon where it is difficult to separate out the actions, inactions and intentions of officials from that of politicians. As I noted in http://www.brocher.com/Ferries/petition.htm the Government claimed that they were in active discussions with the European Commission over the tender, then they said the European Commission was delaying the tender, then they even claimed the problem was the European Commission would not let the Government delay the tender any longer. The Government also claimed that there were suitable second-hand vehicle-carrying ferries available for the route and also that a community-based enterprise could make a difference to the outcome of the tender process despite the fact it was underway and the shortlist had been decided about a year ago.

None of this was true, but if it had not been for Freedom of Information the Government would have been able to conceal much of the truth from the public.

The point under discussion here is the Government also claimed that EC law prevented them building the two new vessels needed for Gourock-Dunoon, yet whenever they were challenged they were unable to say exactly which part of which law prevented this. But I and others have produced documented statements from the European Commission in the past which made it quite clear that it would have been possible to build the two new vessels needed for Gourock-Dunoon and be compliant with EU law, as long as care was taken to prevent leakage of subsidy from the subsidized part to the non-subsidised vehicular and freight traffic.

And yet we still get the statements like the three at the top of this page.

So after I saw the letter from Jim Mather in the Dunoon Observer, I sent an e-mail to the part of the European Commission currently dealing with Gourock-Dunoon with a detailed query together with a JPG of the whole of Jim Mather's article in the Dunoon Observer 4th February (for the information of the Commission).

The reply from the Commission is quite clear - there was nothing to stop the government building two new vehicle-passenger boats for Dunoon-Gourock as long as accounting measures were put in place to make sure there was no leakage of public subsidy (what the EC calls compensation) to the unsubsidised freight and vehicular traffic. The current tender documents (and the Commission) say that any operator is free to bring its own boats, but as we have seen and confirmed for years, there is not even one suitable, modern, 12-knot, 40-car bow-and-stern loading ferry on the second-hand market, let alone the two that would be needed to operate the route and run a frequent service. You have to build them specially - as is done for every other CalMac route. In fact, some of the same measures that are in place in the present tender are designed explicitly for the purpose of preventing cross-subsidy leaking to vehicular traffic, except they will not be needed because there will be no suitable vehicle-carrying vessels available. There are none on the second-hand market and no new ones, because the government has not built them, despite its 2007 election promise.

And the truth as to what happened in 2007? As was recently made public by the MD of Western Ferries, the government offered that company what would have been effectively a monopoly of vehicle-carrying on Gourock-Dunoon soon after the 2007 election, the election where they had won on a promise to build the two new vehicle-passenger ferries for the route. See here

Why they made that offer to Western Ferries should be the matter for serious inquiry. As soon as the government made that offer to Western Ferries in 2007 it would have been clear to that company (and anyone else who knew about that secret offer) that the government had no intention of building new vehicle-passenger ferries for Gourock-Dunoon. But a Western monopoly of vehicular traffic would still have left the need for a passenger-only service between the town centres and the government at this point may well have envisaged a "symbiotic" outcome of the type I set out in the blog "truth"

Brian Souter withdrew his interest in the Gourock-Dunoon tender a few days after that blog, the reason given by his company was that there were more promising opportunities elsewhere, but it would also be surprising if he had not lost patience with the shambles that was the government's handling of Gourock-Dunoon

What has certainly been happening over the last four years has been an attempt to conceal the truth from the public and pathetic efforts to blame just about everybody for this debacle except for those actually directly responsible - the government.

What this also means is that this government has almost certainly condemned users, communities and the taxpayer to a private unregulated monopoly of vehicle-carrying on the Western route and (at best) a very expensive high-subsidy inefficient foot passenger only service on the CalMac route.

Given that the evidence is that a frequent vehicular service with two new boats on the CalMac route would effectively have eliminated subsidy and helped develop competition in the vehicular market, the economic and social costs of this to users, communities and the taxpayer will be massive and likely incurred on a continuing and almost certainly permanent basis.

That is this government's legacy of their four years here.

For information I enclose my letter of query to the Commission below and then their reply. Where it says "other specific conditions apply to the Gourock-Dunoon route", that essentially refers to the earlier Commission decision that the route should be tendered by June this year.

E-mail to Mr Mihail Milev, State aid Transport Brussels from Neil Kay 4th March 2011
cc. Mr Neil Mitchison EC Office Edinburgh

Dear Mr Milev

Gourock-Dunoon ferry service and State aid

I am writing in relation to matters connected with the Gourock-Dunoon ferry service which as you know has been a subject of interest to the European Commission. I will not recite the background to this which I am sure you will be familiar with, but I would be happy to provide further information on request.

I would be grateful for clarification on issues raised by the local constituency MSP Mr Jim Mather in the Dunoon Observer (Friday 4th February) in which he states

"It is a fact that it would be impossible to cross-subsidise a vehicle service and it is fact that resources cannot legally be provided to provide new boats on a route on which there is commercial competition. Should any government try to do so it would be subject to legal action from other operators and very expensive infraction proceedings from the European Union. These are also facts. None of them were clear in 2007 but they are now -alas - incontrovertible"

My understanding is that contingent on the Maritime Cabotage Regulation (1992) is that it would indeed raise State aid issues if a vehicle service was cross-subsidised from compensation arising from a PSO for a pedestrian service where there is commercial competition from an unsubsidised operator of vehicle services, and in that specific respect and context any statement that it is "impossible to subsidise a vessel service" would be correct. However, I would just note that I do not know of any serious argument that such cross-subsidy should be made or would be justified in this context.

I believe instead that the requirements of the 1992 Regulation in this context were made clear in a reply from the Commission to Alyn Smith MEP September 2007 which stated:
.
"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. Compensation may be provided for the public service obligations, subject to compliance with Community rules, in particular to the principle of non-discrimination laid down by Regulation 3577/92. 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".

In short, I do not believe the 1992 Regulation or any other aspect of EU law prohibits or prevents the use of any vessels (whether old or new) carrying vehicles on any route in which there is a PSO and compensation for a pedestrian service (such as Gourock-Dunoon), and where there is an unsubsidised competing vehicle service, as long as appropriate accounting procedures are adopted to both prevent and demonstrate that there has been no leakage of compensation from the public service obligation to any unsubsidised and commercial vehicle-carrying aspect.

In view of the possible confusion which the constituency MSPs comments may cause and associated public interest issues, I would be grateful if you could confirm whether or not my reading of EC law as it pertains here (including the 1992 Regulation) is consistent with the Commission's interpretation,

I am copying this to Mr Neil Michison in the EC's Office in Edinburgh for information and also for information I enclose a JPEG of Mr Mather's letter.

Yours Sincerely

Professor Neil Kay

E-mail to Neil Kay from Mr Mihail Milev, State aid Transport Brussels 11th April 2011
Dear Professor Kay,

Thank you for your e-mail. I can clarify that according to Council Regulation No 3577/92 of 7 December 1992 applying the principle of freedom to provide sevices to maritime transport within Member States (maritime cabotage), (OJ L 364 , 12/12/1992, p.7.) there is no prohibition to use (old or new) vessels provided by the State on a route where a Public Service Obligation (PSO) is imposed on passenger transport, whereas vehicle transport is also provided on commercial terms by the same service provider. However, the fact that State owned vessels may be given at the disposal of the company should be known by all bidders at the time the public tender is organised. In addition, bidders should also have the possibility to bring their own vessels instead.

Should new boats be provided by the State for the passenger transport, the PSO compensation for passenger transport should be reduced accordingly. If such vessels can also be used for freight, part of their price should be proportionally allocated to freight transport and reimbursed by the PSO provider either immediately or should be deducted together with interest from the compensation it receives for the carrying out of passenger transport. Finally, separate accounting and appropriate cost allocation between the passenger and vehicle transport should be ensured.

Please note that other specific conditions apply to the Gourock-Dunoon route which are contained in Commission Decision of 28.10.2009 on the State aid No C 16/2008 (ex NN 105/2005 and NN 35/2007) implemented by the United Kingdom of Great Britain and Northern Ireland Subsidies to CalMac and NorthLink for maritime transport services in Scotland, OJ L 45, 18.2.2011, p.33.

I hope this is clear.

Kind regards,

Mihail Milev
Directorate General for Competition ( DG COMP)
Unit F2 - State aid Transport