20th August 2006

Operator of Last Resort

The Executive's tendering plans for Northern Isles, Calmac, Campbeltown-Ballycastle, and Gourock-Dunoon routes are almost certainly the most incompetent tendering processes ever undertaken by any statutory body in the UK, and quite possibly in Europe. I have documented the problems they have unnecessarily caused for users, the taxpayer and dependent communities and the expert advice they have ignored over the last six years. It is fully docomented elsewere on this website.

Just one more issue was highlighted by events of this week. One issue which I raised in 2001 with Captain Sandy Ferguson, ex senior management Calmac, was the issue of Operator of Last Resort. The issues were summarised in an Appendix to my submission on the consultation over the proposed CalMac tender, see here

Why is a clearly designated Operator of Last Resort essential in advance of tendering? The issues were spelt out in stark detail 20th August 2006 in the context of rail when GNER moved to renegotiate the terms of the deal it had with the government on its rail franchise.

An industry source said: "Allowing GNER to renegotiate would bring the whole franchising process into disrepute. You are going to get a situation where train operating companies will bid stupid amounts and then ask the DfT for money back when they can't meet their targets".

The tough stance taken by GNER's rivals puts Transport Secretary Douglas Alexander in an almost impossible position. If he refuses to renegotiate GNER's franchise, the crisis-hit operator may simply walk away. In that case, the Department for Transport would have to step in and run the railway while tenders were sought again, a process which would take years and lead to a loss of hundreds of millions of pounds for the Treasury. (See Scotland on Sunday)

If this seems bad news in the case of UK Rail it is even worse in the case of Scottish Ferries. In rail, the government is Operator of Last Resort. There is no mechanism for clearly designated Operator of Last Resort in the case of tendering ferries such as the CalMac tender. Unlike the case of rail, the government cannot just step in and run them themselves - they would not be qualified to do so. And if CalMac goes, there would be no-one else in Scottish jurisdiction qualified to run such a network. The MCA restrictions on who can operate ferry services is very restrictive, understandably so given the various ferry disasters around Europe in recent years.

Following the intervention by Captain Ferguson and me in 2001, this restriction belatedly dawned on the Executive - which is why they have left Vesco to solve the conumdrum. But that is just trying to avoid the question. If the Executive cannot solve the problem of Operator of Last Resort, how can a leasing company?

All a company has to do is to knock Calmac out of contention with an unrealistically low bid, CalMac will be wound up, or skilled staff leave, then the winning tenderer can do a GNER - or indeed do a Northlink when it sucessfully renegotiated the Northern Isles contract by threatening to walk away.

There are solutions to the Operator of Last Resort problem but the Executive does not see the need for them - I told the Executive how it could be solved during the Northern Isles retendering and they simply rejected my prposal.

What this means it is that it is even worse than rail where "operating companies will bid stupid amounts and then ask the (the government) for money ... when they can't meet their targets". At least in rail the government can take over the franchise. In the case of ferries there will be no realistic fall back. There is no choice but to pay up, because there is no substitute operator lined up. That is why, as I have argued many times before, renegotiation to the companies advantage is not a risk of such contracts, it is a certainty. In economics it is a well known problem called the "hold-up problem" with well established solutions such as the Operator of Last Resort to prevent being held to ransome by an operator who threatens stoppage. The Executive (or rather, users, the taxpayer and the dependent communities who the Execuive is supposed to be protecting) are wide open to be held hostage by the winning company to such tenders.

Thsi is incompetence of the highest order, because not only is it a serious neglect of public duty, it is being undertaken despite repeated warnings by me over several years that this is dangerous and indeed irresponsible process that flies in the face of accepted practice and extensive experience in the UK and indeed the world over in recent years.

Neil Kay