Without competition our ferry services will be sunk

Without competition our ferry services will be sunk

by Liam Kerr
article from Thursday 13, April, 2017

THE SNP GOVERNMENT wants to nationalise Scotland’s ferry routes. Advice received from the European Commission stated that, in certain circumstances, public ferry services, will not have to be put out to competitive tender and could automatically be awarded to an “in-house operator” (basically, state-owned CalMac Ferries).

On receiving the advice, the Government decided to pause the tendering process for the Northern Isles routes and the Gourock-Dunoon route as it investigated the viability of this.

How likely is this to happen?  The Managing Director of CalMac Ferries Ltd, Martin Dorchester, indicated he would resign in March 2017. Last month he retracted, saying a move to nationalise ferry services changed his mind.

There are two major arguments.

Firstly, tendering works – providing a transparent system for passengers. It stress-tests the market by investigating which bidder will offer the best proposition for the particular route and passenger needs, whilst also providing value for the taxpayer.

Tendering allows Government to pick from a new, leaner supplier, which sources more innovative assets rather than those it could potentially purchase itself. The successful tenderer can ensure that design and innovation are continually reviewed to ensure best industry practice is maintained, including around staffing, technology and environmental considerations. Auto-awarding to the state requires use of the assets, staff and systems already in place, with no incentive to innovate.

The inevitability of a re-tender demands the incumbent continually delivers on the services and provides quality, efficiency and innovation during the contract, avoiding complacency.

The Government remains in control with bidders often offering or accepting a lower price and ensuring operators who don’t meet the terms of the contract can be removed. The nature of the contract can be innovated using e.g. profit sharing or subsidy reduction as the business develops and revenue increases, for example where the private operator has an interest in negotiating down port and passenger dues with reductions potentially passed on by way of reduced subsidy.

Of course, tendering can be burdensome but a pre-qualification selection process reduces time and cost, whilst ensuring only professional qualified companies progress. In any event, the cost of tendering is easily absorbed over the lifetime of the contract, just as happens in other high-end bidding processes such as oil and gas.

In addition, competitive tendering provides greater transparency through audit trails, selection processes and ability to change.

The second argument is a nationalised service would be much poorer in quality, lacking incentives to improve and invest.

A private company has much greater incentive than government-run companies to spend efficiently and reduce profligacy. Private companies (those whose fares are not under Government control) are more likely to keep fares down.

Shareholders demand profits which demands better services, selling points and managers. Where there is inefficiency, the company is taken over or “tendered away” rather than crawling to Government for State bailouts.

On that point, a private operator holds any risk: the cost to the taxpayer of any subsidy is capped whereas with a nationalised provider, any overruns (and commercial risk) land at the door of government i.e. the taxpayer. And on that subsidy, with a private company Government can direct the subsidy at specific “lifeline” routes rather than one big subsidy being swallowed by a Leviathan.

A private company ensures the right vessels on the right routes for the right market rather than for example deploying overlarge, over-capacity vessels on routes which demand speed and lower capacity. Where existing vessels are unsuitable for the route or become obsolete, a private company ensures there is no capital expenditure for the state on building new vessels and that any such expenditure is on the right vessel for that route. Similarly, there are no cost over-runs on new builds as the private company, not the state, takes that risk and funds it.

A private operator must generate sales to be viable. Therefore, the private operator must innovate on tourism and marketing opportunities on board, driving the wider local economy. Again, a state operator has no such incentive.

The private operator must invest to succeed. There is no such imperative on the nationalised operator as shown when, in the 2017-18 draft budget, which the SNP unveiled in December 2016 they proposed a cut to overall funding of £17.6 million.

Perhaps above all, not only are governments wasteful (people generally spending other people's money more carelessly than their own), they run businesses through the prism of political expediency and party advantage, as well as subsiding or bailing out struggling industries. A long-term economic or commercial view with big decisions rarely wins elections.

To my mind it is clear what is really going on. During the tendering process for the £1bn contract to service the Hebridean islands and the Clyde, some opposition parties made much of the fact that that Serco was in the running, suggesting this “privatisation” of heavily subsidised “lifeline” ferry services would put pensions and working conditions under threat. The cost of tendering was over £1m. I suspect that, spooked by this, the Government sees an easy appeasement. It is always populist to beat up on a large company like Serco. I don’t think that is good policy and I don’t think it delivers the outcomes the public need and deserve.

I travel on the Serco Northlink to Orkney and it is, in my view, an excellent service. I particularly like the emphasis they put on sourcing local produce to support the North East and Island economies. Why would anyone want it nationalised? If fares were no lower and the service no better (and potentially worse), passengers and businesses are no better served. Ownership is not the issue here, but a distraction.

I was out on the (subsidy free) Western Ferries route between Gourock and Dunoon this week. If they are put out of business by state interference, a cost effective, innovative, vital service, employing many local people and stimulating the local economy is lost. 

What matters is that we get the best deal for the communities who need quality and affordable ferry services. Despite warm words, the SNP have proven they are not able to deliver. Their plans would see investment cut, fares increase and quality decline. Older vessels, fewer services and longer delays – that’s what we can expect from these plans for nationalisation.

Private operation remains more efficient for the economy and for the taxpayer than services run, or too heavily subsidised, by the government. Competition, enterprise and diversity is what delivers value. Let’s keep it that way.

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