Operator of Last Resort - some further issues

I have been contacted by an experienced former sea captain and senior manager of a ferry company who is very familiar with CalMac and the technical issues surrounding Operator of Last Resort. He endorses and says that I am exactly right in my judgment of the issues I set out in my posting yesterday. He says it took a company like CalMac several months to gain the certification to run RoRo ferries and the Government itself could not obtain the certification to be Operator of Last Resort.

But he also makes an extra point that raises further important public interest issues here. I noted yesterday the moral hazard that the absence of a pre-arranged Operator of Last Resort could lead to. A private operator would have an incentive to undercut and replace CalMac on its network knowing that the absence of a pre-arranged Operator of Last Resort meant that once it was the incumbent it could renegotiate the contract to its advantage (and the taxpayers likely disadvantage). Even though there was no evidence of moral hazard in the Northlink case, it did show how the government had no choice but to pay up if the operator threatened to withdraw.

My contact suggests that moral hazard associated with incumbency is already happening in the CalMac case. It is a matter of fact that there has been a significant increase in numbers of CalMac employees in the last few years. Ship-based crewing numbers are set by MCA regulations and since the regulations and number and type of ships have been largely stable over the past few years it follows that the increase in numbers must be largely shore-based employees.
In the view of this former sea captain and senior manager, much of this increase is unnecessary and reflects moral hazard where the incumbent (here CalMac) knows that if they say they need more managers the government has no alternative but to pay up and just increase the deficit subsidy to compensate.

Such actions are well known in economics as principal-agent problem - more managers means a bigger empire, and (usually) for senior managers a larger salary.

If this is the case, there is the obvious public interest issue of unnecessary cost to the taxpayer. But there is a further public interest issue here. If there has indeed been major padding of shore-based costs in recent years, it will make it all the easier for a private operator to undercut CalMac in its next bid for its network, get rid of excess staff, and then we have the scenario in which we have an operator who can focus fully on exploiting the situation to its advantage with no pre-arranged Operator of Last Resort as I explained in yesterday's post.

I do not know if CalMac is heavily overstaffed but I do trust my contacts knowledge and experience and I do know that that there would be little in the way of external constraints on such short term and myopic behaviour if senior managers decided to go for it - especially if and when the due date for the tender or tender renewal was some years away .

At the very least this is a useful corrective to the abuse I have received from some as a "CalMac lover". My concern here has always been with the fact that the public interest (for users, dependent communities and the tax payer) have been put at risk needlessly in recent years by government failures to put in place the normal safeguards for an industry providing essential services and subject to competitive tendering.

And as I noted in yesterdays post, the first points to resolve here is: has critical information on the issue of Operator of Last Resort been deliberately withheld from Parliament and the Public? And what plans are there to deal with actual or threatened operator withdrawal or default?

Neil Kay 18th July 2010