Scottish Ferry Services: Draft Plan for consultation

Chapter 2: How should ferries be funded and procured?

Introduction

1. Since we began the Scottish Ferries Review in 2008 we have remained committed to changing and improving ferry services so that they can continue to contribute to the economic development of our fragile island and remote rural communities.

2. This Draft Ferries Plan has been prepared within the context of a dramatic reduction in public spending imposed on Scotland by the UK Government.  Over the period of the UK Government's Spending Review to 2014-15, the Scottish budget is being cut by 12.3 per cent in real terms. The Scottish Government’s capital budget will bear the harshest reduction, with a real terms cut of 36.7 per cent; this has a direct impact on our ability to fund new vessels and major harbour projects.

How ferries are currently funded

3. The majority of Scotland’s internal ferry services and vessels are funded through the Scottish Government and local authority subsidy. There are a few exceptions to this, e.g. the Kererra ferry which receives no public funding. There are also a number of services that are provided on a purely commercial basis, e.g. the service provided by Pentland Ferries across the Pentland Firth and the Western Ferries service between Gourock and Dunoon.

4. For ports and harbours, the current position is that they are owned and therefore funded through a variety of sources.  Harbour dues are charged for the use of harbours, and for subsidised services these harbour dues are paid by the public purse as part of the subsidy requirement. For ports owned by Caledonian Maritime Assets Ltd (CMAL) these harbour dues are then reinvested in the development and maintenance of harbours. However, for the ports owned by Local Authorities, they decide what they do with the harbour dues received.

5. Independent Trust ports and CMAL ports use a combination of harbour dues and grants from us to fund maintenance and development of their ports.  CMAL discuss with the Scottish Government what funding is available to them before reaching final decisions about maintenance and development of their ports. Some private operators own the ports that they use and are therefore responsible for their funding.

6. The vessels used to provide ferry services provided by CalMac are chartered from CMAL. CMAL own a fleet of vessels funded by the Scottish Government.  The Scottish Government fund the capital cost of vessels through voted loans to CMAL and also through an ongoing operational cost for charter within the subsidy currently paid to CalMac. CalMac pay CMAL for the lease of the vessel and that money is used by CMAL to repay the loans to the Scottish Government.

7. The three passenger vessels used by NorthLink are chartered from Lombard (Royal Bank of Scotland) and therefore the cost of the vessels on the routes is funded through the operational subsidy paid to NorthLink. In addition, the two freight vessels are time chartered directly by NorthLink.

8. Orkney Islands Council and Shetland Islands Council who are responsible for providing all of their ferry services to their outlying islands, provide funding for vessels via their capital programme. Highland Council and Argyll & Bute Council also provide ferry services, either directly or via tender, and are responsible for providing vessels for these services.

Future investment requirements

9. In the 2010 consultation document we indicated that significant investment is required for vessels and ports and harbours over the period of the Ferries Review.  This position has not changed and as noted earlier we are operating in an environment where public expenditure is under sustained pressure and real term reductions are expected for some years.

10. Despite the shortfall in future funding, the level of investment made available by the Scottish Government and CMAL’s contribution in the last few years has allowed for substantial works to be taken forward. Examples include: approximately £4.2m on Largs, £6.7m on Rothesay Pier, £4.7m on the development works at Port Ellen, Islay and £5m for Kennacraig Phase 1 works.  We have also invested £24.5m in the new MV Finlaggan vessel serving Islay.  Further details of investment made available in the last few years is provided in Chapter 4 of this document.  CMAL should over the next 3 years be in a position to start to take forward the construction of the next generation of 2 small hybrid vessels costing over £20m to serve 2 routes Sconser to Raasay and either Tayinloan to Ghiga or Tarbert to Portavadie.  Funding has also been allocated for new vessel solution options for the Stornoway to Ullapool route, the details of which will be announced shortly.  In addition, major investment plans are also in place for essential piers and harbour works at Brodick Pier and Oban. 

11. It is worth noting that previous estimates on the level of investment required are based on all of the existing services continuing, and continuing to be operated with vessels which are procured and owned by CMAL and are leased to the operator of the Clyde & Hebrides ferry services.

12. To allow us to gain a clear understanding of the level of investment required over the period of the Ferries Plan, we need to have a clear idea of what services will be provided.  Consultees’ views are being sought in Chapter 4 of this document on a number of routes and services options for each community.  A Scottish Transport Appraisal Guidance (STAG) type appraisal of each of the routes and services options will also be carried out before the final Ferries Plan is published.  Consultees’ views and the results of the STAG type appraisal will allow us to determine what routes and services each community should receive, and what vessels and ports and harbours are required to provide these services. It will only be then that we can have a full understanding of the level of investment required.  The Final Ferries Plan will provide details of the final investment required and details of how we will ensure our funding priorities can be met over the period of the Ferries Plan, to 2022.

Options for future funding of ferry services

13. As noted above we have concluded that we are not yet in a position to determine the actual level of funding required over the period of the Ferries Plan.  However, in the 2010 consultation document we asked for views on a number of options for future funding of ferry services and these options have been considered further.

14. A ‘Cost and Affordability’ and a ‘Funding’ report, prepared by external consultants, was published at the same time as the 2010 consultation.  These reports confirmed that the cost and affordability of Scotland’s ferry services are key issues, and that the main challenge for the Scottish Government is to identify funding opportunities.

15. These reports highlight the rising costs associated with the operation of ferry services, and the vessels and ports and harbour infrastructure required to provide the services. The reports also highlight opportunities for potential cost savings to be made.  Many of these savings can be achieved as part of the tendering process, e.g. we can be less prescriptive when tendering, allowing tenderers to be innovative with the potential to reduce costs.  In relation to vessels and ports and harbours we can work with CMAL to investigate a range of potential strategies for funding.  The opportunities for potential cost savings highlighted in the reports are consistent with the options for future funding presented in the 2010 consultation document.

16. Those responding to the 2010 consultation supported the idea that change in the way we currently fund and procure ferry services is necessary, in the interest of ‘improving consistency in provision’ and to ‘secure funding for the future’ of ferry services.

17. In the 2010 consultation document we presented a number of possible ways of securing additional funding:

• CMAL to access funds
• Make ports and harbours self-funding
• Users to provide more of the funding at point of use
• Open the market up to greater competition

CMAL to access funds

18. The 2010 consultation document explained that with its present status as a public corporation, CMAL is only allowed to borrow from the Scottish Government.  As, under current rules, the Scottish Government does not itself have borrowing powers, the Scottish Government is restricted in the amount it can lend to CMAL.

19. Our intention is to continue to work with CMAL to consider alternative financing options.  We will consider potential alternatives for short, medium and longer term investment opportunities.  In doing this we will be mindful of the potential risks involved in not being in a position to meet investment priorities.

20. Once we fully understand the level of investment required we will reach final decisions about how CMAL might access funds. This information will be made available in the Final Ferries Plan.

Make ports and harbours self-funding

21. The 2010 consultation asked for views on whether harbours should move to a new regime of self-funding through harbour dues, or whether the current system of grant-based funding should be retained.

22. The ‘Cost and Affordability’ report discusses the current system for charging harbour dues at ports owned by CMAL.  CMAL currently offers a discount to the operator of the CHFS services.  To ensure consistency in terms of access to CMAL’s harbour facilities this discount is extended to other operators using the ports.  These discounts limit the ability for CMAL to be self funding and mean that they require a piers and harbours subsidy from the Scottish Government to allow them to develop and maintain their harbours.

23. Moving forward, CMAL are currently considering the future level of pier and harbour dues, and discounts, at their facilities.  CMAL’s intention is to make sure that the level of income generated wholly covers the cost of the ongoing maintenance and repair of their piers and harbours. This is something that will be addressed by CMAL and the Scottish Government in future operating contract(s) for the Clyde and Hebrides ferry services.

24. We are also keen to explore what would be involved if we, through CMAL, were to take responsibility for all ports used for the provision of subsidised ferry services currently owned by Local Authorities.  It is envisaged that ports would transfer to CMAL who would then maintain and develop them and would receive the harbour dues associated with these ports in order to do so. This would ensure harbour dues for these facilities were being reinvested in the development and maintenance of ports and harbours. This approach was welcomed by some Local Authorities and we will in parallel take forward discussions with them and with CMAL about if and how this might happen. We will make clear in the Final Ferries Plan which ports will transfer to become the responsibility of the Scottish Government.

Users to provide more of the funding at point of use

25. Consultees were asked for their views on how funding for ferries should be split between private user and public subsidy. Most consultees understood the need to make some contribution, but stressed that it had to adhere to what is affordable and reasonable. There was also strong support for the continuation of public subsidy to support services that would not exist otherwise.

26. It is fair to say that there is a lack of appetite for increasing fares for any users of ferry services.  There is however some support for allowing operators to manage demand on busier sailings.  This issue is covered in more detail in Chapter 3 of this document.

Open the market up to greater competition

27. In the consultation document we undertook to consider how ferry services are tendered in the future. The Scottish Government is engaged in a reform programme for public sector procurement which is intended to enhance economic impact and value for money as well as diversify sources of procurement such as social enterprise. Within this context we will publish a separate policy statement on our future approach to ferries procurement.

How flexible should we be about what we tender for?

28. Greater dialogue with the market before tendering and a less prescriptive specification at the tender stage can result in ferry operators being more willing to bid to run the services. This approach will allow operators the flexibility to innovate and reduce costs where possible.  Consultees agreed with this approach. 

29. We have followed this approach with the Northern Isles ferry services tender and are currently in competitive dialogue with bidders. We will learn from this experience and consider whether a similar approach when tendering the Clyde and Hebrides ferry services would be appropriate.

The need for a tendering system in the future

30. The ‘Funding’ report discussed concerns over the European Commission’s preferred maximum six-year contract period. The report highlighted the advantages to operators of a longer contract period, allowing them to make an acceptable return on their investment.  Although we must adhere to the current rules which involve tendering subsidised services every 6 years, we believe longer contracts could be beneficial and we will continue to explore this possibility with the European Commission.

How we will prioritise funding?

31. Chapter 4 of this document sets out details of how we will prioritise funding.  We have made clear that options for routes and services within each community are being presented as proposals only and that communities have been invited to respond to the consultation. We also make clear that the timing and funding of any changes is yet to be agreed.  In the Final Ferries Plan we will provide more precise details about how we will prioritise each of the proposals to be taken forward.

Summary of way forward

32. The way forward is summarised below:

• We need to consider what services will be provided in the future to allow us to understand better the level of spending required over the period to 2022.  The Final Ferries Plan will provide details of the final investment required.
• We will continue to work with CMAL to consider alternative financing options.
• We will revisit through CMAL the future level of pier and harbour dues with the intention that the level of income generated wholly covers the cost of the ongoing maintenance and repair of their piers and harbours.
• We will explore what would be involved if we, through CMAL, were to take responsibility for ports currently owned by Local Authorities. 
• The service specifications for the next Northern Isles and CHFS tenders will be less specific, only specifying what is deemed to be a minimum requirement. The final contracts will fully specify details of the agreed proposal.