Scottish Ferries Review

1. Scottish Ferries Review Work Package I Draft Final Report September 2009

2. Areas of the Review in WP1

3. Rationale • What are the challenges in the current structure? • How can it be improved? • What do potential solutions look like? • What are the challenges to be addressed? The main argument generally brought forward to support tendering procedures is the need for reassessment of the cost efficiency of the delivered services. Tender procedures thus aim at improving a prevalent service situation in terms of value for money for the consumer and the public purse.

4. Towards a tendering route map • Starting point: user needs and requirements • Adequacy of fleet reflecting evolution of: • travel characteristics • freight transport operation • technological change • Standardisation of infrastructure where appropriate but also • Government potential to respond to user needs and requirements • Government goals (e.g. environmental, social etc.) Subsidised routes require a tender and Public Service Contract (PSC)

5. Key aspects Tender specifications and tender route map

6. Service Type of operation Bundling Service specification Responsibilities Regulatory issues: Competition and procurement • Procurement must comply with EU requirements • (Council Regulation (EEC) No 3577/92) • State may interfere in the market via Public Service Obligations (PSO) or Public Service Contracts (PSC) • PSC must be subject to a transparent and non-discriminatory tender procedure • PSC offers opportunity for communities to secure the level of overall ferry service provision they require, within the constraint of available operating subsidy  First step: Identification and definition of PSO/PSC routes

7. Service Type of operation Bundling Service specification Responsibilities Service providers

8. Service Type of operation Bundling Service specification Responsibilities Tendering process • Transparent and non-discriminatory • Aim: Attract the widest range of shipping expertise and resources • Rationale: A significant number of options (offers) for the delivery of service to choose from that comply with the set tender requirements • Current challenge: limited evolution and streamlining of tender procedures Result: • High cost of tender procedures to bidders • High administrative costs • Very limited or no competition in bids • State elects responsibility to provide vessels

9. Type of operation Service Bundling Service specification Responsibilities Operation Operate only • Ships provided by CMAL/State • Advantages • Known ship types • Economies of scale in ship purchasing • Certainty of owning ships and ship availability • Issues • Financing ships • Procurement of ships • Lead time to acquisition replacement tonnage (CMAL) Provide and operate • Ship provided by operators • Advantages • Bidders can present own ideas, including the ship type for a specified route(s) • No requirement for government to own or procure ships • Risk reduction for government in terms of ‘ship management’ • Allows differentiation of bids through different management and operating strategies • Issues • Application of TUPE • Lead time to acquisition replacement tonnage (operator)

10. Type of operation Service Bundling Service specification Responsibilities Operation • Best practice depends on route characteristics and selected type of operation (via tender) • Evidence • Operators decide on most appropriate ship type for route based on: • Economics of operation • Given service level requirements • Nature of route and infrastructure • Operator knowledge and expertise • e.g. Norway, Sweden, Denmark, Ireland etc. • Operator can source ships via charter, ownership, lease, etc. • Recommendation: Leave decisions within key knowledge areas for most relevant actor

11. Bundling Service Type of operation Service specification Responsibilities Bundling • Status quo: Big bundle, smaller bundle, and single route tenders • Perceived advantages of big bundle • Greater flexibility for vessel deployment and crewing • Relief coverage, if ships can be interchanged between routes • Allows for network approach in ticketing (if required) • Allows for economies of scale/scope • Less administrative burden in contract handling • Current challenges • Lack of competition in tenders • Potentially discriminatory against competitors • Review of bundling • Take account of traffic flows • Definition of common areas of influence (e.g. geographic, economic) • Complementarity of freight and passenger transport

12. Bundling Service Type of operation Service specification Responsibilities Bundling

13. Bundling Service Type of operation Service specification Responsibilities How to define routes/bundles • Potential and evidence for debundling: • International comparison small bundles or individual routes • E.g.: Denmark, Norway, Sweden, etc. Tenders based on a single route or on a small route bundle basis (e.g. <5/6 routes in same area) • Reduction of entry barrier to small and private operators  potential for higher level of competition in tenders • Involvement of RTP’s and LA’s as contract authorities • Operator investment in ships • Challenges and solutions • Mitigation of higher administrative costs through standardisation of tendering processes (e.g. Denmark) • Shift towards simpler and faster tenders • Contingency plans within tender requirement (i.e. relief vessels)

14. Service specification Service Type of operation Bundling Responsibilities Service Specifications • Ports (or route) served • Capacity: • Service frequency • Sailing and arrival times • Service capacity (this is not necessarily the same thing as ship capacity) • Crossing time (e.g. max crossing time) • Performance • Service reliability • Customer service • Cost: • Max price cap • Fuel (usually a surcharge allowed) • Service specification does not mean ship specification

15. Service specification Service Type of operation Bundling Responsibilities Environmental Impacts • Meet the SG’s and EU emission reduction objectives • Incentives for environmental performance in tenders: • System of assigning scores to tenders • Baseline minimum environmental performance/ standard, based on legal requirements • Environmental auditing and environmental management systems (EMS) • Implications of ongoing regulatory changes

16. Responsibilities Service Type of operation Bundling Service specification Tendering responsibilities • Status quo • SG and LA’s have power to provide and procure ferry services. • SG procures ferries from the Mainland/LA’s and RTP’s in some local areas • CMAL and LA’s provide ships (private sector also provide ships) • Evidence from other countries • Services contracted by national transport agency, or by LAs/RTAs • Contracted periods typically extend to 5-6 years • ‘Small Islands’ are allowed 12 year contract duration • Recommendation • Strategic direction and template for tender strategy rests with SG • LA’s and RTP’s could take on responsibilities to run tenders, especially under a de-bundling scenario • Reasoning • LAs/RTPs already experienced in transport tendering • LAs/RTPs have better grasp of local requirements

17. Responsibilities Service Type of operation Bundling Service specification Tendering responsibilities

18. Tendering Route Map Process Recommendations Several bundles and single routes Bundle decisions Develop minimum service specification via consultation Users and stakeholder groups – define PSO’s Keep it non-prescriptive, but simple/flexible, allow innovation to attract bids Specification must deal with risks PIN Notice, legal procurement considerations, ITT etc Tender process Involve LA’s & RTP’s in selection panels Evaluate bids against specified criteria Timetable Select operator/ Award of contract Outcomes Sign contract with one operator who gets all or most of bundles/single routes Sign contracts with several operators for each bundle and/or single routes Bidders depreciate new/nearly new vessels over life to ensure low initial bid and in expectation they will win in round 2 Likely outcomes Old vessels to be disposed of/sold if new operator brings in own vessels Dealing with challenges TUPE – Crews transfer if new company wins Monitoring, KPI’s etc Other issues, e.g. marketing, joint-ticketing, integration etc

19. Summary • Ferry procurement underlies continued evolutionary processes of offering and monitoring and reviewing services supplied • Subsidised ferry routes require a transparent non-discriminatory tender • EU regulation is in general not a barrier for development, but rather one more argument that supports the need to implement efficient ferry services • Smaller bundles/route tenders allow for a higher level of competitive bids • Provide (ships) and Operate is today the norm with positive results in terms of service efficiency • Potential implications for: • CMAL • State-owned ferry companies • Employees , if not competitive under competitive market conditions • Risks – same as for any transport tender • Stronger role in tenders for LAs and RTPs within de-bundling scenario • ‘Tender route map’– aim to simplify, speed up and reduce/share the administrative burden

20. Areas of the review

21. Structure • Current structure • Key challenges • Subsidies and grants • Future needs and options • Recommendations

22. Current structure • Services • Unsubsidised commercial ferry services (Western Ferries / Pentland Ferries) • Publicly subsidised ‘lifeline’ ferry services (CalMac Ferries Ltd / NorthLink Ferries Ltd) • Unsubsidised commercial bulk shipping • Publicly subsidised unit load (container) services (Streamline) • Cargoes • Regional differences • Traffic imbalances • Key products: • Consumer goods for island communities • Products for specific industries (e.g. barley, whisky, seafood, livestock etc.) • Fuel • Timber • Waste • Construction material – impact of capital projects

23. Key challenges • Flexibility of operation and adequacy of services • Flexibility, predictability, flexibility and frequency of services • Handling of drop trailers • Booking and ticketing, communication, terms and conditions • Complementarity of traffic (passenger and freight)? • Responsiveness and evolution of infrastructure • Ships • Dimensions of freight equipment • Open decks for dangerous cargoes (i.e. fuel, hay) • Standardisation • Ports and harbours • Minimum specification and road connectivity • Modernisation of berths (RoRo and bulk) • Areas for freight traffic • Diversity and grants • Data availability and integrity

24. Subsidies and grants • Current schemes • RET • Agricultural discount • TRS • LoLo Grant (Northern Isles only) • Inter-Island Business Development scheme • Others including FFG, WFG etc. • Challenges • Complementarity of schemes • Target groups • Freight generator • Freight operator • Vessel operator • Creation of level playing fields • Continuity of schemes

25. Future trends • Regional diversity in future freight development depending on islands’ industrial structures • Specialized industries (e.g. salmon, whisky, livestock etc.) • Tourism • Local needs • Key issues • Provision of fuel • Time-tables and schedules

26. Future needs and options • By type of action • Modernisation of ship fleet in accordance to evolution in freight transport (i.e. open decks, max. dimensions) • Targeted Demand Management Grant • Specific freight services i.e. West Coast RoRo • Priorities by level of impacts based on evaluation of benefits and dis-benefits • Large impact level e.g.: • connectivity to Troon • replacement of freight vessel on Stornoway Ullapool route, • prioritization of bulk shipping with Government support • open deck vessel for Arran route • Important impact level e.g.: • Service enhancement with night time sailing between Orkney and Inverness • Additional night time freight sailings to Islay or West Coast RoRo • Long term improvement e.g.: • Focus on freight capabilities on core routes • RoRo on route Northern Isles to Rosyth • General structural improvements • Restructuring of grants from operator specific to freight specific • Complementarity and continuity of schemes (i.e. development of regional schemes) • Potential tenders for freight services i.e. bulk and freight RoRo

27. West Coast RoRo Map

28. Northern Isles freight options

29. North Uist, Benbecula, South Uist & Barra freight options

30. Example: Benefits and dis-benefits WC-RoRo [1] 1 = Very Significant, 2 = Significant, 3 = Slight

31. Thank you