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
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
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.