The Curious Disappearance of PSOs

I have been struggling for some time to make sense of the fact that Scottish ferry policy since 2003 has been based on the argument that PSOs (public service obligations) are simply not needed here. Since the substantial majority of ferries in Scotland are subsidised, and since the Commission and the European Court have made clear that clearly defined and justified PSOs are essential if you want to subsidise these services (see Answers), such a stance seems irrational at best.

My comments on this are set out in various documents on this website, see especially the right hand panel on my ferries webpage. One element which I thought could be of relevance was the influence of UK authorities.

The recent re-emergence of Campbeltown-Ballycastle led me to look at background issues here. What I found I consider quite remarkable in the context of this crucial issue and period in the formulation and implementation of Scottish ferry policy, particularly as far as the role of UK authorities is concerned .

The Notes to Editors in a news release on the 2001 Campbeltown-Ballycastle tendering process read;

"EU Council regulation 3577/92 on maritime cabotage and Community Guidelines 97/C/205/5 on state aids to maritime transport set out the legal position for public subsidy of ferry services. A Public Service Order allows subsidy to be paid on grounds of serving peripheral regions of the community or thinly served routes vital to economic development that would not otherwise ensure sufficient service levels. There is no formal mechanism for approval of a PSO. Informal discussions were held with officials from the Transport Directorate General of the Commission and on the basis of the evidence presented to them they have not raised any objections to the necessity of declaring a PSO for the Ballycastle to Campbeltown route".

I had to read this several times to make sure I had not misread it. The Scotland Office appeared to think that a PSO under EC law meant "Public Service Order". Presumably by "Order" they were thinking of a discrete legal action like a Directive, Regulation or a Decision, such as in this Canadian example of a Public Service Order delineating the boundaries of public service, or Wisconsin's Public Service Order for utility rates. This interpretation seems reinforced by the news release's reference to "declaring a PSO". But there is no such thing as "Public Service Order" in EC law, certainly not the law referred to in the 2001 news release

In fact, PSO under the EC law referred to in the news release means "public service obligation". It is an obligation, not an order, and as the EU Council regulation 3577/92 referred to in the news release states, "'public service obligations' shall mean obligations which the Community shipowner in question, if he were considering his own commercial interest, would not assume or would not assume to the same extent or under the same conditions".

So what, if any significance is there is this? The significance is that "PSO" in EC law does not directly infer anything about the legal means by which it will be delivered (whether by "Order" or other means), national governments and their devolved authorities have to decide how best to deliver PSOs. This is the principle of subsidiarity in action. It helps explain the statement in the news release that "there is no formal mechanism for approval of a PSO". Since there may be an indefinite number of ways a PSO could be implemented (and justified) by national governments and their devolved authorities, .it could be difficult or impossible to design a formal mechanism for their approval that would be sensitive to all these possible variants.

But if you think that a PSO is a Public Service Order, then you clearly have in mind (mistakenly) a particular legal device.

A Public Service Contract (PSC) is certainly a legal device in EU Council regulation 3577/92 referred to above.

So if you are thinking in terms of Public Service Contracts and Public Service Orders from this perspective, you are thinking of terms of two legal devices. Presumably you also know the EC says a PSC may be imposed on one operator while a PSO may be imposed on all operators on a route.

Where you go from there is pure speculation because with this mindset you are heading into deep trouble. But if you are thinking of PSC and PSO ("Contract" and "Order") as two alternative legal instruments then you might think if you have one (a PSC) then we do not need the other (a PSO).

Or you might think that an Invitation to Tender is in fact a form of PSO (a Public Service Order in this interpretation).

We do not know what the Scotland Office was thinking at this point. What can be said is that the informal discussions involving the Scotland Office and the Commission referred to in the news release must have been confused affairs. If the Scotland Office had referred to "declaring a Public Service Order" and PSO in these discussions, they probably would have thought they were talking about the same thing, while the Commission would have assumed that the former was one possible device for delivering the latter.

The news release described above was dated May 2001. As far as I can make out, the first description of PSO as Public Service Order was by Scotland Office in 2001 where it was stated; "If the EC agrees that a Public Service Order is appropriate this would allow for subsidy to be paid. PSOs can be justified solely in respect of scheduled services in peripheral regions of the Community" (2000 news release)

The description of PSO as Public Service Order was carried through in Scotland Office news releases into January 2002.

Ironically, the first news release described above was by the Northern Ireland office, but in the preamble to it, a Northern Ireland Minister described the process as; "both Departments will consider whether or not to proceed to tender under the terms of the Public Service Obligation.", in other words correctly distinguishing between PSO (the obligation) and the tender (a device to deliver the PSO). But it is in the "Notes to Editors" that the description of PSO as Public Service Order appears again, and these same Notes make clear that the Ferry Action Group set up here in July 2000 was led by the Scotland Office. The Group included, inter alia, representatives "from government, the Scottish Executive (and) Northern Ireland Executive", chaired by the then Minister of State in the Scotland Office.

Also ironically, there was an "Order" involved in the case of the Campbeltown-Ballycastle tender in 2002. In reaching the conclusion to put the route out to tender, it was agreed that an "Order" under Section 63 of the Scotland Act 1998 should be sought to devolve relevant powers to Scottish Executive Ministers.. The details of this are set out in the 2002 Invitation to Tender. It is not clear whether this led to the misinterpretation of PSO as "Public Service Order" by the Scotland Office.

However, and, it has to be said, to its credit, once the Scottish Executive took over the process, PSO tended to be defined and described correctly as "public service obligation", as in the Invitation to Tender.

The period over which this all took place (2000-02) was a critical one for the formulation of Scottish ferry policy because it coincided with the first Session of the new Scottish Parliament (1999-2003) and the (failed) Campbeltown-Ballycastle tender set the context for subsequent tenders that the Scottish Executive/Government were to be responsible for (Northern Isles retender, Gourock-Dunoon, CalMac network).

What is interesting is that both Northern Ireland and Scottish Executives seemed to have a clear grasp of what a PSO was over this period. For example, while I had reservations about how the Executive were implementing ferry policy, there was no indication that Scottish Executive Ministers were doing anything other than interpreting EC law here correctly, such as PSOs as public service obligations. The confusion that arose appears to have emanated solely from the Scotland Office and was perpetuated by it over 2000-02.

So did this matter later on, and does it still matter today? The deep involvement of the Scotland Office in these early stages reflected the fact the Campbeltown-Ballycastle process involved (as it does now) two devolved authorities within UK jurisdiction. But apart from that special case, the Scottish Executive/Government had (and has) the devolved authority over these processes.

In fact, web searches confirm that the Scotland Office misinterpretation of PSO as "Public Service Order" had a major role in misdirecting and confusing subsequent debate, from Scottish Parliamentary questions and committees, to councils and HIE, all raising the issue (and in some cases, pressing the case) of whether the Scottish Executive would be prepared to impose a "Public Service Order" under EC law on other ferry services as well as Campbeltown-Ballycastle.

It is impossible not to feel some sympathy for the Scottish Executive officials that had to brief ministers at this point. They could have told Scottish Executive ministers to answer that there was no such thing in EC law as a "Public Service Order", they could have said that if the questioners were referring to a PSO they presumably meant a public service obligation which could be applied by a variety of means, including (but not necessarily) PSC or tender.

But if they had gone down that route, it would have caused an uproar and a public re-evaluation of the Campbeltown-Ballycastle process, with questions regarding why the Executive apparently signed up to the supposedly consensual communiques by the Scotland Office on the matter.

This guddle is further complicated by the fact that even though the Scottish Executive was the recognised devolved authority for ferry services within Scottish waters, Whitehall still could have both a formal and informal role to play in these matters.

For example, there had been parallel cases made for PSOs for Scottish Highlands and Island air services which were unexpectedly and (to many) inexplicably sidelined by what many regarded as an inferior residents discounts scheme. Indeed, there had been a Scottish Executive team working on PSOs for air services in 2004, as a press release from Tavish Scott MSP confirms, and the MSP himself was exploring the PSO issue prior to becoming Transport Minister. We do not know what involvement, if any, the UK authorities had in all this, but when the EC approved the residents discount scheme for Scottish Highlands and Island air services in 2006, the Minister that the Commission addressed their decision to was not Scottish Executive Transport Minister Tavish Scott, but UK Foreign Office Minister Margaret Beckett.

The notion of PSOs for air and ferry services generally is also not one which has been widely welcomed in the past by Whitehall, the emphasis down there has been to treat such services as commercial rather than public services. It is unlikely that Whitehall would have been well disposed to (or even well informed about) proposals for PSOs (and subsidy) in a Scottish context. There was a known concern that it could led to pressure down south for like treatment for other regional services within the UK.

In short, while we do not know the full nature and extent of UK authorities and ministries influence in this context, the net effect is unlikely to have been benign.

Whatever the full story, it would almost certainly have been the case that whenever Scottish Executive officials and ministers raised issues of PSOs with their UK counterparts 2000-03, they would have met with confusion and resistance.

The fact of the matter is that PSOs disappeared off the Scottish Executive "to do" list for ferries in the Spring of 2003 with a new Session of Parliament and new ministers responsible for Scottish transport, including ferry services. They have never returned, instead since the Spring of 2003, successive Scottish administrations have insisted that there is no need for PSOs for Scottish ferry services.

As I note in Gourock-Dunoon options, since 2003 Scottish policymaking here has tended to regard PSCs and PSOs as substitute or alternative instruments for the pursuit of public interest objectives. Ministers have stated "there is no need to consider, nor do we intend to consider, issues arising in relation to PSOs" and "public service obligations and public service contracts are alternatives".

But as I also noted Gourock-Dunoon options, such treatment of PSCs and PSOs as substitute or alternative instruments is only true in the limited way that knifes and forks can be regarded as substitute tools - you can use both for spearing and for cutting, but a fork is generally more appropriate for spearing and a knife for cutting. You can use both independently of each other, or both together in complementary fashion, depending on the objectives and the task in hand. Crucially a PSO is not only more appropriate but essential if you want to compensate (subsidise) operators. But as the Commission and the European Court has made clear (see Answers), they can also be used in complementary fashion to pursue policy objectives.

So why have successive Scottish administrations apparently gone off on the wrong track since 2003? In both air and ferry cases, the Scottish Executive certainly started off on the right track, but at later stages in these cases the UK authorities had involvement (whether formal or informal or both) and the Scottish authorities finished up moving away from (indeed, effectively negating) their early interest in, or commitment to, PSOs for such services.

.In such cases it is best first to look for the simplest explanation that fits the facts.

And the simplest possible explanation is that, after initially identifying desirability and need for PSOs in these different contexts, the Scottish authorities were persuaded to adopt the UK authorities mindset that PSOs for Scottish regional transport services were unnecessary, undesirable, or both.

There may be other reasons for what has happened, but I am hard pressed to find any alternative explanations - any others, gratefully received. It of course still raises questions as to why the Scottish policy makers adopted the UK mindset, indeed whether they were even given a real choice in the matter.

It may be helpful to know that the last chair of the Campbeltown-Ballycastle Ferry Action Group is now an MSP in the Scottish Parliament, so presumably he may be able to shed some light to fellow parliamentarians on the issues discussed above.

But it still does not remove the pressing issue that the European Commission will expect to find compensation (subsidy) for Scottish ferry services justified in terms of defined PSOs (public service obligations). This is not optional, it must be done to comply with Maritime Cabotage and State aid issues here.

I think that can be done retrospectively, if the PSOs are regarded as implicit and embedded in the tenders in such cases, and dug out and identified where appropriate.

But it will mean relearning a language and approach that the Scottish Executive knew well 1999-2003, but then discarded over the last five years. At the very least, what an unnecessary guddle, and how dangerous it has been if it helps encourage State aid interest on the part of the Commission.

Neil Kay, 9th April 2008.