There is yet further new information to be considered now on this issue.
The past week’s release by the Scottish Government, of the results of its one-to-one engagement with six potential operators of ferry services between Gourock rail head and Dunoon town centre, needs to be read alongside another document, equally unostentatiously accessible on the Transport Scotland website: This is a lay out and analysis of the options open to the Scottish Government in any vessel procurement they might deploy in respect of this route.
The paper identifies three options open to the government in future tenders for this service:
- that the tender would oblige the successful bidder to lease and use vessels owned by the Scottish Government through CMAL [the state-owned Caledonian Maritime Assets Limited];
- that the tender would offer a choice to the successful bidder: to lease state owned vessels available through CMAL – or to bring their own vessels to the route, bought or chartered for the purpose;
- that the tender would oblige the successful bidder to bring their own vessels to the route, bought or chartered.
The paper makes clear that the EC will not permit either of the first two of these options to be offered on contracts for more than 6 years – which cannot satisfy the needs of operators of any vehicle service offered at commercial risk.
Under either of these two options, it will not sanction the state provision of vehicle and passenger carrying vessels for the route, even if these were to be used for a passenger service only.
It will permit only the third option to be offered for a contract of up to 10 years. The small size of the market and the certainty of competitive action from Western Ferries makes this longer contract a questionable advantage to bidders offering an unsubsidised vehicle service with a subsidised passenger one.
The paper’s analysis of each of these options identifies the limitations on what each offers to the Scottish Government and to what it can offer potential bidders. The main issues here are:
- duration of contract and residual value in the vessels;
- impact on passenger subsidy cost and on price of unsubsidised vehicle transport;
- market size and the impact of competitive action – arising from the one-to-one engagement of Transport Scotland with potential operators.
Together, exploration of the two papers indicates only one realistic outcome with two possible forms of delivery: a continuing provision only of a state subsidised passenger service on this route; with a decision to be made on whether the service would be provided through six year contracts obliging bidders to lease state-owned tonnage; or through obliging them to bring their own tonnage to a ten year contract.
The combination of this paper on the government’s vessel procurement options and the published results of the engagement with potential operators of a vehicle and passenger service puts an end to any credible continuation of the long running campaign by the Dunoon Gourock Ferry Action Group.
Despite the wilfully deluded response from the the group [published by the Dunoon Observer on 18th July] on the results of Transport Scotland’s discussions with the ferry operators, the door to any vehicle service on the town centres route is now firmly closed for commercial and European regulatory reasons.
The evidence from the vessel procurement options paper supporting this analysis is given further below.
The question now is what Dunoon does next?
Dunoon’s options
The town of Dunoon has been led up the long garden path of a vanity project which gave the leaders of a group of local activists something to do. The leaders have been well aware of the lack of any commercial likelihood of getting the service for which they have persistently campaigned. The group’s supporters have been naive, underinformed and unquestioning.
This campaign has been a damaging decoy, preventing Dunoon from campaigning for what it manifestly does need – a first class passenger service from the town centre to the Gourock rail-head, with attractive and civilised shore-based facilities.
This campaign has distracted Dunoon from refusing to accept the shockingly third world mess they have been ‘given’ in the Dunoon terminal and its ‘facilities’.
The campaign has blindsided the town to the fact that this action group, on behalf of the town, rejected the offer of pontoon berthing for the Argyll Ferries boats at each terminal. This would have made using the current passenger service much safer and more civilised. It would equally have served new boats brought to a specialist passenger service of genuine use to the town and to Cowal folk.
The group rejected this offer because, regardless of the fact that it was very much in the interests of the ferry users, it ran counter to their own vested interest.
Anything that would have improved the passenger service and made it more accessible and attractive was seen as detrimental to their own campaign for a second vehicle and passenger service – for which there is absolutely no justification in what For Argyll has shown to be the town’s already heavily over-resourced ferry provision.
Dunoon therefore does not now have this berthing facility. Any new vessels coming to serve this route will first have to have this infrastructure put in place to support them. This could have been there and in use today.
It is for Dunoon to say – because no one else can know – whether the Dunoon-Gourock Ferry Action Group speaks for the town.
It is for Dunoon to decide if the group’s assumption that it is speaking for the town should be confirmed.
Alternatively, it is for Dunoon to judge whether, tainted by the deceptions and the loss of advantage they have inflicted on a town whose support they have sought over their long campaign, it is time to put together an entirely fresh group which would speak for the town today.
This group would:
- negotiate with Transport Scotland for the best option for Dunoon - and the only achievable one – new tonnage and pontoon berthing at Gourock;
- and negotiate with Argyll and Bute Council for pontoon berthing and good shoreside facilities at the Dunoon terminal; and for the physical revision of that area of the town’s waterfront.
The group has no credibility with the ferry industry, where the operators [who do know] have made clear what the group deny – that there is no business case for a town centres vehicle ferry service delivered at commercial risk in competition with Western Ferries.
This is a group whose leaders told a public meeting that they did not believe there would be any increased fuel usage by the vehicle and passenger service running the town centres route, as compared with the usage on the Western Ferries route. They made this statement straightfaced, despite the fact that a vessel on the town centres route matching Western’s passage time, would have to travel twice as far and twice as fast.
The group also has no credibility with Transport Scotland, who know more than they can say about the obstructions the group placed on the release to the public of factual information from processes in which they had been involved – to protect the credibility of their own public campaign, on which the information would have cast serious doubt.
The credibility of Dunoon itself is now on the line in deciding quite how it goes forward now that a definitive line has been drawn below the long manoeuverings of the ferry action group for an unnecessary second vehicle service.
Will the town carry on with its self mutilating pursuit of the unnecessary and unachieveable; or will it identify where its interests really lie and make a new move to secure a well resourced passenger service that, with its ancillary infrastructure, can make a genuine difference to the town?
Who knows. Dunoon is Dunoon.
The basis for the position we describe at the start of this article is now given below.
Duration of contract and residual value in the vessels
Until relatively recently, the maximum EC permitted duration of such a service contract as the Gourock-Dunoon ferry service was 6 years. Under this restriction, operators considering bringing a vessel to a route had to factor in to their business plan the risk in the residual value [RV] in the vessels at the end of the contract. With so short a period for return on investment, it was likely that operators would have employed a pricing strategy to allow their service to return as strongly as possible over the contract period.
Today, the EC is prepared to consider, on a case-by-case basis, the tendering of 10 year contracts – a period more attractive to operators in the greater opportunity offered to return on an investment in tonnage.
The EC appear, though, to be prepared to consider 10 year contracts only if such contracts are for operators bringing their own vessels to the route. This is an entirely logical condition, since the extended period would be aimed at making it more commercially attractive to bidders to bring in their own vessels, where governments are seeking to divest themselves of the responsibility and costs of such provision.
The EC have indicated to the Scottish Government that, if a robust case were to be made, they would be prepared to consider permitting the government to require the use of vessels provided through CMAL. At first sight, this would then allow the Scottish Government to provide vessels for the Gourock-Dunoon route on continuing 6-year contract periods.
BUT, the EC also made it clear to the Scottish Government that they ‘…would find it very difficult to agree to operators being required to use a vehicle-carrying vessel as this is not needed for the delivery of the specified public service on the route, which they have defined in their 2009 Decision as the passenger service’.
This rules out the possibility of the Scottish Government taking the weight of the investment in new tonnage for a vehicle and passenger service on the Gourock-Dunoon route in supplying such vessels for the route – in the hope that exposure ‘only’ to higher leasing charges and uncompetitive operating costs on the longer route – as opposed to the additional investment and residual value risk - might have rebalanced the commercial risk in offering a vehicle service. The level of risk in the business case for this is so high that such a minor incentive would be unlikely to bear – but the EC position now rules out that possible device anyway.
Taking these EC rulings into consideration, the Scottish Government’s conclusion in this Transport Scotland paper is that requiring the use of Government tonnage would only be available for passenger-only vessels; and that, even then, such a stipulation would be subject to detailed negotiation with the EC.
Impact on passenger subsidy cost and on price of unsubsidised vehicle transport
As noted above, any requirement to operators to use vehicle and passenger carrying vessels from CMAL on the Gourock-Dunoon route, whether or not the operator intended to offer a vehicle carrying service at commercial risk, would involve the Scottish Government in paying substantially higher than necessary vessel procurement costs and passenger subsidies to the operator.
These would be matters which would have to attract the attention of Audit Scotland. Such an arrangement could not be claimed to represent best value for the use of public money.
The EC has made it clear that it would only consider permitting even the choice to potential operators of either using state provided vessels or bringing in their own – within the terms of a contract limited to six years. It is therefore unlikely that an operator, even with deep pockets, would take the stratospherically high commercial risk of running such a service on a six year contract – necessarily bringing their own vessels to the service.
If an operator were to have a go at this, the imperative to attack the risk as best they could would necessitate charging much higher vehicle fares than are available on Western Ferries, even before any competitive response from Western – or taking a massive immediate hit in heavily discounted fares to try to see Western off.
Either way – through necessarily higher fares or through heavy discounts on actual cost – such action would usher in early commercial failure and potential retiral from the contract. This would threaten the uninterrupted provision of the passenger service from Dunoon town centre direct to the Gourock rail head.
Market size and the impact of competitive action
Transport Scotland asked each of four of the six operators with whom it engaged individually on the ins and outs of potential tenders for services on this route, to identify ‘factors deterring from providing vehicle and passenger service’.
Three of the four identified as such a deterrent the prospect of competitive action from Western Ferries, the successful sitting provider of a vehicle and passenger service on the shorter route between the outskirts of the two towns concerned.
Two said that an incoming operator was ‘unlikely to get necessary market share as no room for two vehicle 2 service operators in the market’. Another said: ‘Size of market overall small so not worth risk’ – which is the same perspective.
The fact that Argyll Ferries has had to have its current contract price for the passenger service varied upwards by 50% because the passenger carryings on which their bid was calculated had not materialised, is proof of the limitation and fragility of this market.
Putting these two issues together underlines the virtual impossibility of any operator even attempting to set up in competition to Western in providing a vehicle and passenger service on the Gourock rail-head route.
The focus on the size of the potential market also clarifies the lack of incentive for any gung-ho operator with deep pockets to take a punt on seeing Western off. The market isn’t there.
The level of risk in taking on Western cannot be justified by the modest returns eventually achievable from such a market – and there is nothing in the depressed condition of Dunoon to suggest an economic revival of the sort that would magically grow that market.
This would mean that the 10 year contract the EC would permit only if the operator brought in their own boats could never offer a sufficiently encouraging glimpse of returning on investment. Western have made it clear to the MVA consultants who carried out the ‘feasibility study’ on a second vehicle and passenger service for the Scottish Government, that it would take whatever competitive action was necessary to protect its interests. And it would.
MVA’s conclusions were that such a service ‘could‘ be feasible, only if Western took no competitive action whatsoever. And MVA’s definition of ‘feasibility’ was break even, with no consideration of profitability. One potential operator mentioned this best possible scenario of marginally achievable modest ambition as a deterrent to bidding.
Supposing Western went down?
Supposing a particularly deep-pocketed entrepreneur who would see breaking even as a serious commercial lure – and yes, of course this is ridiculous – but supposing there were to be such a competitive battle for the route?
The cost of this would hurt badly both this operator and Western Ferries.
If the challenger were to win and Western went down – it would be in the context of a contest between two fully resourced operations. This is a very different situation to that of a new contractor winning a tender and the employees of the losing sitting contractor being ‘TUPE’ed over’ to the incoming service provider.
Dunoon would therefore see the loss of long established local jobs, where Western is a stable local employer. This is the situation the Ferry Action Group has been campaigning to bring about.
The market is not, as an operator told Transport Scotland, seen as big enough to justify the commercial risk of engagement. This means that the market is not realistically enlargeable, so the lost jobs at Western would not be replaced by additional jobs created by a thriving new business whose vehicle fares would have to be substantially higher than Western’s – and would be raised to try to recover the cost of the competitive war.
Dunoon would have lost good local jobs and a well priced and socially responsible local service – for what? One vehicle and passenger service – with no alternative, with no service on the shorter, cheaper route – and substantially higher commercial fares for vehicles?
How many townsfolk would consider that result a win?
Note:All emphases passages above quoted from documents or statements are ours. Below are the two papers to which we have referred above:
- The Transport Scotland paper on Gourock-Dunoon Ferry Service – Vessel Procurement is here
- The Transport Scotland paper on the results of the one-to-one discussions it had with potential operators of a town centres unsubsidised vehicle and subsidised passenger service is here: Market Engagement for Gourock Dunoon Ferry Service.
