Is the Governments ferries policy "economically illiterate"?

In the Herald this week in an article by David Ross, David Wood, owner of the Stornoway haulage company Woody's Express said: "This (RET) proposal from the SNP Government is economically illiterate and will have a devastating impact on the islands."

The Herald noted "The Scottish Government said last month it was going to roll out RET, which bases fares on the cost of travelling the same distance by road, to the rest of the CalMac network after it delivered up to 50% cuts in ferry fares to the Outer Isles, Coll and Tiree in a pilot scheme. At the same time it said it would no longer apply to commercial vehicles".

The proposal has led to more than 40 companies in the Western Isles forming a lobby group to campaign against the Government's decision which they claim will mean up to 175% increases in ferry fares for commercial vehicles (CVs).

There is a strong case for lower fares to promote economic growth and development in peripheral and vulnerable areas. I, along with others, made that case years ago, see here:

But RET is not that case. In October 2010 I wrote about "The Folly and Waste of RET"

So is this policy "economically illiterate"? Let's take this step by step.

In 2010 I said

"As long as (RET) is believed to be a short term trial, whether extended or not, people will frame their actions around these expectations. If the crises of recent years have taught even those who are generally ignorant of economics anything, it is that economics is fundamentally about expectations.
Not one person will move residence to the Western Isles on the basis of a temporary low price trial whose expiration is expected to be a few months away.
Not one business will relocate to the Western Isles on the basis of short term low costs that are programmed to end in the near future.
Not one business in the Western Isles will borrow to make a long term expansion investment if the pilot is expected to expire in the short term and leave them back where they started but just saddled with more debt." .
In short, the RET trial will tell us absolutely nothing about the long term effects and potential impact on economic growth. This trial is a self-negating folly which has wasted tens of millions of pounds already on a project that simply cannot meet the objectives set for it".


Point 1: By just abandoning RET on CVs, the Government has made my point about the RET trial being a self-negating folly which has already wasted millions "if the pilot is expected to expire in the short term and leave them back where they started" - as indeed it has, for CVs.

Point 2: Even if people had been deluded into thinking the RET trial would represent permanent fare price decreases, it would not have been long enough for the long term effects of relocation and investment decisions to factor in. It did not measure what it claimed to measure because it did not last long enough.

Now we come to the decision to keep RET on private vehicles and users but not commercial vehicles.

Point 3: Significantly adding transport costs on commercial traffic will in turn be likely passed on in the form of higher input prices and push up business costs in the islands. This will in turn push up prices on the final consumer and may threaten survival of some businesses selling to island consumers

Point 4: Island businesses depending on exporting outside their island will find their transport costs pushed up and could also threaten their survival in some cases, especially those operating in competitive markets.

Point 5: Lower prices all round are generally a good idea for economic and social reasons on the islands, as I have argued if it is properly used it can be a very efficient use of subsidy to stimulate long term economic growth and development. But to have very low fares for island residents and very high fares for CVs is the worst possible combination. The knock-on effect of high island prices and cheap fares for residents mean that that the island resident will have every incentive to head for the mainland and stock up themselves and their cars with mainland goods and services, diverting consumer spending from the islands (and its businesses) to the mainland.

Point 6: It might be thought that low fares from tourism would be a great boost to the island economies. Not really, the tourists that will not be deterred by the high costs of island living created by this "No RET on CVs" policy will make a point of stocking up themselves and their transport with their own goods and services before coming to the islands as self-sufficient as possible, and in turn minimise their own spending and economic input into the islands when they are there.

Point 7: Finally, if you have the level of pricing which it looks like CVs will have to bear, the unregulated nature of the market which this government has promoted opens up the whole market to entry by cherrypickers. Cherrypicking was tried before in this market in the Outer Isles, it has been done in the Northern Isles, and vehicle-carrying has also been cherrypicked in the case of Gourock-Dunoon. What looks at first like the benign introduction of competition by cherrypickers tends to have one outcome as in Gourock-Dunoon, the creation of an overpriced private monopoly with the eventual loss of the low cost / high revenue traffic for the public service, in turn pushing up the subsidy that is needed for what remains of the public service.

So yes, Mr David Wood is right, this is indeed "economically illiterate".

As for his comments that it "will have a devastating impact on the islands", what I can say is that the massive amounts of subsidy which will be ploughed into this policy will fail to meet its growth and development objectives for reasons that I have outlined above. If it has any positive effects they will be weak, and indeed the net effects could turn out to be negative in some cases.

Whether it will turn out to be "devastating" we shall have to wait and see, but the fact that it is not ridiculous to be able to actually talk in such terms signals what a travesty of a policy this is coming from a government staffed with professionally trained economists, and indeed led by one.

What is the point of offering a shop assistant in Stronoway cheap fares to the mainland if she cannot afford even those fares because the business she worked for has just gone bust? You do not need an economist to answer that question, not even a shop assistant, just common sense.

No self-respecting economist would support RET as a device to get fares down in the first place, which is quite possibly why it looks like no economist was consulted over this new policy turn - or if they were, they must have been ignored.

But it is not just the Outer Isles and Coll and Tiree that will be affected by this incoherent and frankly incompetent policy if it is rolled out around other Scottish regions such as Argyll and Bute. In my 2010 piece I described the RET policy as "economically naïve and illiterate". I did not think it could be made much worse than that - but it just has. If it were a first year students economic essay, it would fail miserably.

I do not think the Transport Minister Keith Brown should have to be made to account for this economically illiterate policy. I think the economist in Alex Salmond should prompt his alter ego First Minister Alex Salmond to spare a few minutes from grappling with his referendum question to deal with much more immediate economic questions here that affect the future of whole regions whose interests he was elected to protect and promote.

And if he still does not understand why the policy is economically illiterate, then it is not just these regions that are in trouble, it is the whole of Scotland.

Neil Kay 25th January 2012