FAO of the Minister Tavish Scott

I would be grateful if, as before, this is forwarded to the Minister's office, Neil Kay

cc Mr Fergus Ewing MSP
Ms Annabel Goldie MSP
Mr George Lyon MSP
Ms Maureen Macmillan MSP
Mr Des McNulty MSP
Mr Jim Mather MSP
Mr David Petrie MSP

11th September 2006

Dear Mr Scott

Northern Isles and other lifeline ferry tenders

You were quoted in the Herald Saturday (page 11) "We have an extremely robust tendering process. V ships did not win the Northern Isles ferry contract because their bid would have cost the taxpayer tens of millions of pounds more than the winning bid."

In fact, I predict that the Calmac bid will turn out to be gross underestimate of the necessary subsidy once the contract is up and running, just as it was in the case of the first Northern Isles tender which collapsed and in which CalMac was a partner. It may even turn out to be more expensive in the end than the losing V Ships bid. Why? Because the penalties from underestimating the risks and necessary subsidy in the case of a Calmac bid can simply be passed on to the (poorly informed) taxpayer in the end of the day (as the collapse of the first tender shows), while the costs and underestimating of risks and necessary subsidy in the case of a bid from V Ships would likely first of all be borne by V Ships shareholders who would then wreak vengeance directly on the management who they would see as responsible.

In the absence of an independent regulator assessing bids, there is no more reason to place faith in Scottish Executive's treatment of these bids than there was the first time around when Northern Isles was first tendered - and about which I warned in evidence to the Scottish Parliament in 2001. I also wrote to the Executive when the first tender collapsed pointing out what could be done to mitigate costs and risks in the retendering and my advice was again ignored.

In contrast to the risks to management of the underestimation of risks and costs made by, say, V Ships, there is no evidence of any serious penalties to CalMac management from any such underestimation of risks and costs. On the contrary, you have only just recently appointed as Chairman of Calmac a former director of the first failed Northlink company (in which Calmac was a partner). While I note that there is no evidence of the extent to which this individual should be held responsible for the initial Northlink failure, if at all, equally there is no evidence that I know of that those responsible for the debacle, inside the Executive or the former Northlink venture, will be held duly and sufficiently accountable and responsible.

The Auditor General's report on the Northlink fiasco had narrowly prescribed terms of reference which was not designed to fully identify these problems.

I warned about the first Northern Isles tender process in 2001 to parliamentary committee and last year I warned in local press that there was little chance of your obtaining a bidder for Campbeltown Ballycastle tender, despite your optimistic comments to the contrary. I was proved right on both counts, just as I will be proved right in my comments in local press when you announced the shortlist for Gourock-Dunoon when I said that there is no chance of obtaining a bidder from that process. It is designed from the start to prevent any bidder coming out of the process, one example being the requirement for bidders to demonstrate by the end of next month that they have concluded several contingent contracts with an entity that does not exist (VesCo). The Procurement Division responsible have been unable to give satisfactory responses as to how to deal with to this simple basic issue, and there are many other problems with this tender proposal.

As for what could go wrong with the Calmac tender? I have been arguing to the Executive for six years that it is fundamentally flawed and contrary to basic principles of how to put an essential service out to tender. I wrote to you in detail last year why all four tenders are flawed, and what could be done to right this. I do not feel that the response to my letter properly acknowledged these issues. The Executive's response to my criticism of the CalMac tender by the then minister in 2001 to parliamentary committee encapsulates the problem.

"Most recently we had the experience of the Northern Isles services tender. It was a useful exercise for the Executive to run through that process. The difference between the Northern Isles and the CalMac services is that there are an awful lot more CalMac services. We are well aware that the CalMac tender will be a more complex exercise.”

Which means if Northlink could go so badly wrong, then so much more can go wrong with the CalMac tender. I have not received genuine recognition of the issues I have raised in this context with you and your predecessors over the past six years, but I felt it necessary to put my comments on the record given your comments in the Herald last week. They represent just one more example of how the Executive are failing to face reality in these serious lifeline services and is ignoring issues and solutions that are well establised in most other developed countries. I hope some of these issues could be raised further with you by members of the Parliament.

Yours Sincerely,

Professor Neil Kay