Transport and the Environment Committee, 11 Sep 2002

Meeting date: Wednesday, September 11, 2002

Official Report 258KB pdf

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Highlands and Islands Ferry Services

I welcome for the item on Highlands and Islands ferry services Lewis Macdonald MSP, the Deputy Minister for Enterprise, Transport and Lifelong Learning, and a number of officials from the Scottish Executive: Sandy McNeil, David Hart, Fiona Harrison and Claire Mollison. I understand that the minister wishes to make a brief introductory statement, following which we will move to questions. Jamie McGrigor MSP is interested in this issue and joins us today. I officially welcome him to the meeting

I thank the committee for inviting me to give evidence today. I have a brief introductory statement to make, and I look forward to answering the committee's questions afterwards.

I will begin with the background. As members know, we have been required to undertake competitive tendering to meet European Commission regulations on competition for subsidised services and on the provision of state aids to maritime transport. Following a period of wide consultation last year, we submitted proposals to the Commission, including a strong case for a single bundle and for the inclusion of two mainland-to-mainland routes. The Commission responded in November last year, making it clear that it would not oppose our proposals to tender the network as a whole, which was a welcome development.

On 27 June this year, I published for consultation the draft invitation to tender service specification, which outlines our proposals for taking forward the tendering process. The document explains the principles that we have adopted and seeks views on the options that are open to us. It is a substantial document, as members will all now be aware, but people will be reassured to see the degree of detail to which we are determined to specify the service. We have been keen to give as many people as possible the widest possible opportunity to comment on the document.

We propose to tender the network as a whole, or as a single bundle, which reflects the overwhelming preference of those who responded to our initial consultation paper. That will maximise the economies of scale and will, we believe, maximise service reliability. It will also help to deliver our overriding aim of integrated transport. We hope that it brings the further advantage of addressing the potential cherry picking of routes. It is likely to provide the optimum value for public money.

Following last year's discussions with the European Commission, we concluded that it would not oppose our inclusion of both mainland-to-mainland routes—Tarbert to Portavadie and Gourock to Dunoon—in the undertaking. It was equally clear that the Commission would not support a vehicle ferry subsidy on the Gourock to Dunoon route given the operation of a non-subsidised commercial company on the same route. Despite that, we believe that a robust case can be made for a service that would allow a direct connection for foot passengers between the bus station at Dunoon and the railhead at Gourock as part of an overall integrated transport strategy.

We would have preferred to continue the present provision of a passenger subsidy to a service that also carries vehicles but, following discussion with the Commission, we concluded that we should instead propose a passenger-only service as part of the single bundle.

With that one exception, we have been able to make proposals in the draft service specification to protect existing fare and service levels throughout the network. I was pleased to propose in our consultation paper a number of new and enhanced services, including the Mallaig to Armadale and Tarbert to Portavadie winter services; a new service across the Sound of Barra; an enhanced service across the Sound of Harris; the winter passenger service between Kilchoan and Tobermory; and enhanced services from Oban. Some of those improvements are scheduled to commence prior to the estimated date for the contract handover, and we are confident that they will be widely welcomed.

We have set out plans for a vessel-owning company, which will own Caledonian MacBrayne's vessels, piers and harbours.

I remind the committee of the proposed timetable to which we are working. The consultation period is due to close on 27 September. There has already been a strong response, and I expect more comments to arrive over the next couple of weeks. All of them will be considered fully, and they will help us to make decisions about the final invitation to tender. A prior information notice was issued to potential bidders over the summer to bring the consultation to their attention and to allow them to take part. We hope to commence the tendering process early in 2003, with the anticipated contract handover planned for late 2004.

I emphasise the fact that this is a consultation process. We have developed a draft of what we believe will best deliver a stable and expanding west coast ferry service over the next few years. We will, of course, take the views of the committee and of respondents to the consultation into account.

Thank you for your introductory remarks. We have a number of areas of questioning on the specification and on your introductory remarks.

You recognise that there is considerable interest in the Gourock to Dunoon proposals. That is the first area to which we will turn. Maureen Macmillan, who has been one of the committee's reporters on Highlands and Islands ferries, will open the questioning.

Des McNulty and I spent time in the summer going around the Western Isles and Argyll, gauging opinion on the draft proposals. Although the draft proposals were welcomed on the whole, some areas of concern were expressed. I want to discuss first the Gourock to Dunoon service.

The minister explained the reasoning behind the decision to restrict the Gourock to Dunoon ferry service to a passenger-only service. He told us that, after discussions with the Commission, it was felt that it had to be a passenger-only service because of the lack of transparency about cross-subsidy. However, there is a feeling in Dunoon that the situation has not been properly explained to the Commission. The vehicle service is not subsidised—it is profitable—and people feel that, if it was enhanced rather than abandoned, it could be even more profitable, meaning that less of a subsidy would be needed. People feel that the Commission should have taken that into account and that it would be only sensible to produce a solution that would require less of a subsidy.

There is also a fear that the proposals will result in the creation of a private monopoly on the Dunoon run across the Clyde. Has that been put to the Commission? Would that have any effect on the Commission's advice?

You raise several important points. The discussions that we have had with the European Commission have focused on the options for the service from Gourock to Dunoon. As committee members know, the current subsidy—the public service obligation support that is provided by the Government—is for the passenger service only. As I said in my introductory remarks, we had first to convince the European Commission to permit a mainland-to-mainland service. Having made that argument, we had to address the question of what kind of service between the two mainland points would be likely to be acceptable to the Commission.

The fundamental difficulty, which became clear following our discussions with the Commission, is the one that Maureen Macmillan has identified—the Commission's view of the question of subsidy. At the moment, we provide a subsidy for passengers only, but on a vessel that also carries vehicles. The Commission was not satisfied that the subsidy could be shown to subsidise only the passenger service and not the vehicle service. Had we been able to produce a proposal for the subsidy that demonstrably did not bring benefits to the vehicle side of the operation, we would be in a different position today. We explained in detail the history and nature of the service, and we ran through the options with the Commission.

You asked whether the vehicle service could run profitably. That is close to the heart of the issue. The fact that a profitable commercial vehicle service also operates on the route means that a subsidised vehicle service is not possible. Our difficulty was making that case. We wanted to demonstrate that there was a way of providing a subsidy for the passenger service that would not feed through to the vehicle side. However, we were unable to come up with a mechanism—an accounting system, if you like—that provided the reassurance that the Commission sought.

You wondered what the Commission was likely to look for. Although it has an overall responsibility to enforce European regulations and guidelines, it is not concerned with the level of public subsidy. The key judgment that it makes is not whether proposed service A costs the public purse more than proposed service B. Instead, the competition aspect and the question whether a subsidy will undermine the existing competitive position are fundamental to its considerations.

I was also asked whether the Commission would be interested in running a private monopoly on the service. The answer is no, because if no subsidy is involved, it is a matter for the marketplace. For example, bus operators provide other transport services for which there is no competition. The Commission would not require a public sector participant to enter the market in order to compete. [Interruption.]

I suggest that, before we go on, Maureen Macmillan switches her pager to silent.

I have a supplementary question. Is it not possible for the specification to tender out a subsidised passenger service and then for the successful operator to make a commercial decision to operate above the level stipulated in the specification? For example, if a car service turned out to be profitable, would the proposed set-up restrict commercial developments that would enhance the service? Does not the fact that the current private operator on the crossing is able to bid for the franchise influence the competitive side of things?

Just to move things forward, I ask Jamie McGrigor and Fiona McLeod to put their questions to the minister, who will then be able to answer them in bulk.

You said that the decision was made following discussions with the European Commission. Are you prepared to make those discussions available publicly to allow us to find out what you said to the Commission and how it responded? I am still puzzled by your comment that the Executive was unable to propose to the Commission a transparent accounting system that showed that the PSO was not subsidising vessels. You were able to satisfy the Commission about the NorthLink contract, which contains both a PSO element and an element of commercial gain against a private operator. It would be interesting to see what questions you were asked and the answers that you gave.

I ask the minister to respond to those two substantive questions before I bring in Jamie McGrigor.

On additional services, I should make it clear that our draft service specification mentions a passenger-only service between Gourock and Dunoon. Nothing in the draft service specification or in European law would prevent an operator from providing a vehicle service at their own risk as a commercial undertaking. However, although one could provide an additional service over and beyond the subsidy, the difficulty lies with the vessel that carries the subsidised service.

In other words, if the vessel is a passenger vessel that is carrying passengers only, there is no difficulty in showing that the subsidy is being used only for the purpose for which it is intended. If subsidy is provided for passengers on a vessel that can do other things, perhaps commercially for a profit, it is not possible to show in the same way that the subsidy is ring fenced. There is nothing to prevent an operator from providing a vehicle service, but it cannot be the same vehicle service that uses public subsidy for passengers.

The convener asked whether Western Ferries, which is the private operator on the route to Dunoon, would be free to bid for the subsidised service and, if it were able to do so, whether that would make a difference to the question about fair or unfair competition. Part of the answer to that question lies in the approach that we have taken, on the basis of our earlier consultation, to pursue a single bundle. Under the bidding process, it will be open to any shipping operator to apply for all 26 or—as it will be—27 routes. Operators cannot apply for individual routes. I understand the convener's point, but I do not think that a direct correlation exists between the freedom to bid for the entire west coast ferry network and a single-route operator being undermined by a subsidised service on the same route.

I return to an important point that relates to Maureen Macmillan's earlier questions. If Western Ferries, as the private sector operator, behaves in an anti-competitive fashion, the community or any other user of the service can make a complaint to the Office of Fair Trading under competition law. Where competition is unfair, that option is always available.

Fiona McLeod asked whether we would publish our exchanges with the European Commission. We will not do that, as the code of access to those documents requires that we do not do so. Our discussions with the European Commission are, by their nature, confidential. It is worth noting that when we discuss matters with the European Commission, as we have done, the discussions are informal. No formal process of prior approval for a tendering proposal exists in the way that the European Commission operates.

Formal procedures would apply either if the Commission judged that we had breached European law, in which case it would take infraction proceedings against us, or if a complaint was made by a private sector operator—for example, that the way in which we had provided subsidy was a breach of competition law—in which case the Commission would have a quasi-judicial role in making a judgment on that complaint. The Commission's quasi-judicial role means that it will not issue a view formally in advance of a tendering process or of a complaint being made.

Fiona McLeod also mentioned NorthLink. I will deal briefly with that question now—it may arise again later. The specification of the NorthLink PSO is different, as I think the member knows, from the west coast PSO. The competitive position that applies in the northern isles is not the same as that which applies on the Gourock to Dunoon route. When the PSO was let for the northern isles services, there was no competition for roll-on-roll-off freight services, for example, and there was no alternative lifeline service for Orkney or Shetland. That meant that no private sector competitor could say that the position undermined their market position and that they therefore had a complaint under European law.

I will take Jamie McGrigor next. Des McNulty has also indicated that he wishes to ask a question. I ask both members to be as brief as possible, as we want the minister to cover a range of other issues this morning.

The minister mentioned the phrase "fundamental to its considerations". Surely "fundamental to its considerations" must be the needs of the people of Dunoon. It is perfectly obvious to me from the meetings that I have attended that those people feel that they will be presented with an inferior ferry service from now on. How will you provide a sustainable ferry service to the people of Dunoon and the Cowal peninsula? How will you provide a service that is legal under European rules? Is not the interpretation of those rules at the heart of the issue? Proposals that have been made recently, including those by Professor Neil Kay, show that the way forward could be a roll-on-roll-off ferry service that would be legal under European rules. What in that proposal would be illegal?

If Des McNulty asks his question, the minister can respond to both.

The concern in Dunoon is twofold. People see it as paradoxical that, in supporting competition rules, one could end up with a situation where competition is actually denied. There seems to be a catch-22 element in the way that things are working. There is a prejudice towards common sense in such matters, but perhaps there is a commonsense solution.

The other issue is the relevance of the findings of the Deloitte & Touche report, which seemed to show that there could be a profitable vehicle service alongside a passenger service, which might be a way of getting round the competition requirements, linked through a public service obligation. That is what certain local councillors are suggesting.

Those questions raise several issues. I visited Dunoon three weeks ago and met community representatives and local councillors. I had a full discussion with them, from which I was able to glean the views of the community. I do not dispute that people in Dunoon would very much prefer to continue with the present service, which is why we tried to put that case to the European Commission. The issue is about what service we can provide within European rules. The interpretation of those rules is a matter for the European Commission, which has a quasi-judicial role in interpreting those rules. In performing our duty of the stewardship of public funds and delivering services, we must have regard to the discussions with the Commission and reach conclusions on what would be permitted on the basis of those discussions.

On that basis, we have pursued and included in the draft service specification a passenger-only service because we believe that there is a clear case for that. Our conclusions lead us to believe that such a service can be sustained and will pass muster in that it will not be an infringement of European rules.

Des McNulty referred to the Deloitte & Touche report, which we have considered carefully. The report concluded that it was difficult to make a value-for-money case for any service on the route and we took account of that. We took our own view about what is defensible and desirable. That is why we have pursued the option of a passenger-only subsidy. Providing a separate vehicle service is a possibility, but not as part of the current public service obligation.

When I met community groups in Dunoon, I made it clear that we would consider carefully the responses to the consultation and take some guidance from the community about its wishes. We propose to include within the PSO a passenger-only service. At least one person who attended the meeting I was at in Dunoon suggested that it would be better to take that service out of the undertaking altogether. That would work only if the route were potentially profitable. We are sceptical about whether a combined passenger and vehicle service from Gourock to Dunoon could be made profitable. I do not think that the Deloitte & Touche report provides any substantial grounds for reaching that conclusion, although it suggests ways in which the service might be profitable. Our judgment of the current position in the marketplace is that it would be difficult for that service to operate at a profit.

However, in consulting, we are open to what people have to say to us. The possibility of taking that service out of the PSO was raised with me in Dunoon. We will consider that along with the other consultation responses.

I ask Des McNulty to be brief, because we want to make progress.

The minister's comment was helpful. Can Argyll and Bute Council and other interested parties be consulted on market testing? Are opportunities available to consider the issue in a serious commercial way, before the die is cast?

Before the minister responds, I will give Maureen Macmillan another chance to speak. Some of the questions that she wanted to ask have been asked by other members. She can add comments before we move off the topic of the Gourock to Dunoon route.

I have been told that the vessel causes the problem for profitability and that a new vessel would have to be obtained. Does not the split between opco and vesco supply a mechanism for providing a vessel so that the service could be run profitably? I do not know whether that would be out of the undertaking in the bundle or whether a case can be made for taking the Dunoon to Gourock route out of the bundle and making it separate. Those alternatives must be considered.

The present Dunoon to Gourock service does not pose any threat to the competition. The competition is not cut-throat, because the other operator has 80 per cent of the vehicle traffic. Could not that be part of the equation? If the Dunoon to Gourock route were separated from the rest of the CalMac bundle, it might not be challenged. If a challenge were made, it would not unravel the whole network. I do not know whether that is a possibility.

The two routes are different. One is 70 per cent longer than the other and goes to a different place that is miles away. Both ferry services appear to be well used. If anything, there are queues to get across, so there is not a lack of people who are trying to use the services. If half the vehicle service is taken away, we will be left with an inferior service. That does not bode well for Dunoon, which is being paraded as a gateway to Scotland's first national park.

Maureen Macmillan is right to say that yet another option exists. At the end of the consultation, we will consider whether any mechanism has arisen from the responses that allows us to revisit with Europe the idea of ring fencing subsidy. We wish to have a result on that. We have not yet seen any proposal that would satisfy the European Commission's requirements on the competitive impact of public subsidy. That is a difficulty. However, as I say, we intend to continue discussions with the European Commission until we reach our final conclusions and publish our final service specification.

If we conclude that the current service configuration will be unacceptable to the European Commission, three options will exist. One will be the proposal in the draft service specification—a passenger-only service in the PSO. The second option would take the existing service out of the undertaking and encourage a commercial operator—possibly the winner of the tender for the network as a whole—to run the service as an out-of-undertaking service. The third option will be the suggestion that Maureen Macmillan highlighted—the possibility of unwrapping our single bundle, proposing the current Gourock to Dunoon service as a separate PSO and seeking Europe's support for that.

The third option has clear disadvantages. To avoid cherry picking and to keep the network together we have always argued for a single bundle. It would be difficult for us to change our position, but we would consider doing so if we felt that it would produce the result that we wanted with Europe. However, if we come to the conclusion that a passenger and vehicle service will not be acceptable to Europe as part of the wider package, we must also conclude that it is no more likely to be acceptable as a stand-alone item.

Maureen Macmillan is right to suggest that the proposal would have the advantage of not jeopardising anything else in the single bundle. However, it would jeopardise our current proposal for a passenger service. We could not propose a combined passenger and vehicle service as a separate undertaking and, having seen that rejected, restore the proposal for a passenger service to the single bundle.

There are difficulties with proposing a separate PSO for the Gourock to Dunoon service, but that is one of the options available to us. We may conclude that a case can be made for the profitability of the route as a passenger and vehicle service, and that the community would prefer such a service to the one that we propose. However, before taking the next step we would need to consider Des McNulty's point about investment.

In my view, a passenger-only service within the single bundle is the best option. That is why we included it in the draft service specification. However, we are open to other suggestions.

Jamie McGrigor suggests that the routes are different and therefore not comparable. That would not be the Commission's view. It has accepted our argument that for foot passengers alighting from buses or trains these are different routes, because the terminuses are several miles apart. However, the distance between the two points on either side of the Clyde is not significant for motor vehicle users. It does not affect the Commission's judgment that the routes serve the same market.

The Executive has not included the current freight discount scheme in the specification, as it is seen to contravene European competition regulations. What steps has the Executive taken to develop freight discount schemes that comply with European regulations? If no discount scheme is included in the specification, it could be cheaper for hauliers to set up their own ferry services. What would be the knock-on effects of the establishment of private freight services?

CalMac has just announced that it does not intend to increase freight rates in the financial year 2003-04. Freight charges will be included in the specification at a lower level than would have been the case had CalMac increased them.

Nora Radcliffe is right to say that some aspects of the current freight discount schemes are dubious as regards equity of treatment. CalMac is investigating what discount schemes would comply with European law. The essential points are competition and equity. In other words, discounts cannot be made on the basis of the nationality or place of residence of a haulier. However, they can be made on the basis of the long-term commitment of a haulier to a route and the volumes that they intend to carry. That would allow for a scheme to be introduced that provides significant discounts for hauliers who have a long-term interest in the service. We are monitoring the development of CalMac's proposals and hope that they will be helpful to hauliers on the west coast.

So you are confident that private arrangements will not be seen as desirable?

I am confident that we will be able to develop a discount scheme that is consistent in its application to all users and that will be attractive.

So the aim is to achieve the best service possible within the spec.

Yes.

When I took evidence, hauliers raised with me the problems of small hauliers who perhaps do one journey a week and have done so for the past 30 years. They feel that they do not get any discount. They are local people who regularly take loads to places such as Mull or Tiree, but they never build up enough air miles or sea miles, if you like, to get their discount. Can you consider their situation?

CalMac is examining two aspects. One is volume, which clearly would not help those individual hauliers, and the other is long-term commitment to the route, which clearly has the potential to help those individuals. I hope that what CalMac proposes will include elements of both aspects.

I am conscious of the developing aquaculture industry in the islands. Issues have been raised about the frequency of ferry services, because the aquaculture industry obviously needs to deliver its goods fresh to market daily and not a couple of times a week. Are you examining that issue more closely?

Yes. Again, the current operator is undertaking some of that work. For example, in the Argyll islands CalMac is consulting on timetable enhancements that would provide a more regular service to several islands that are in the position that you described. CalMac takes on board a wide range of considerations, including economic development aspects and others such as the use of ferries by passengers and tourists. We would expect that process of going from the draft service specification to the final specification to include enhancements that are proposed in the interim period.

Maureen Macmillan and I got a lot of information from the work that we did in the islands. There was general satisfaction that the specification would be based on current and projected timetables and that there would be a measure of stability and continuity. However, there was a view that that could lead to lack of flexibility in relation to future needs and development opportunities.

It was suggested that there should be a separate route development or route enhancement fund against which operators, local authorities or users could suggest proposals for service enhancement. That could be funded temporarily or in the long term as a means of route development outwith the specification. What is your view of that suggestion? What criteria other than revenue criteria would be appropriate to apply to a route enhancement or route development fund?

That is an interesting suggestion that we will consider carefully. We have indicated our intention, during the initial tender period, to carry forward work on enhancements for the second tender period. However, that would not just come to conclusions every five years. We envisage that as a continuous process. Any organisation that contributed to the support of services would obviously be included in the decision-making process on such services.

The service specification is not set in stone. There is provision for some flexibility. We would like to have flexibility for service enhancements of between 5 and 10 per cent of the contract value. That would allow a fair amount of room for the enhancement of services, when a good case can be made. Revenue would be part of the grounds for such a case, but we would consider a range of other criteria that apply to a lifeline service, including economic and tourism development and other opportunities, as well as social need.

You envisage the possibility, during the contract period, of being able to access route enhancement or route development funds from a source that would allow the provision of an improved service.

Potentially, as a continuing process.

There is a feeling, particularly in the Argyll islands, that the enhancements need to be done speedily because of the deteriorating social and economic conditions of some of the islands such as Tiree and Islay, where people feel that their economy and lifestyle are stifled by the fact that there are not enough ferry sailings. I would like to think that the enhancements will happen as soon as possible rather than in the distant future.

I know that the consultation on the enhanced timetables for Tiree is under way. We expect that to be a continuous process.

The contract will last for five years, but people have told us that the planning framework for the development of these services may be eight, 10 or even 15 years, in the context of vessel acquisition policy and people making economic commitments in the islands based on transport links and so on. Do you recognise the fact that there is a need for a planning framework to be constituted, perhaps separately from the direct relationship between the Executive and opco? It could be a consultative element that would allow people to contribute to the development of a planning framework for those services.

We are consulting on our consultative structure, which, as members will know, is rather haphazard. At the moment, the west coast Scottish ferries have a more thorough consultative structure than exists in the northern isles, for example. We will shortly begin consulting on our proposals for strengthening the consultative structure across Scotland's ferry services.

As I indicated in response to your point about the rural development fund, the Mull overland route and the Islay-Jura overland route are substantial projects. They are some way from being included in the service specification, but we will continue to work with all interested parties in developing those ideas and looking to incorporate them at an important stage in the process.

Almost everyone to whom we have spoken has said that the provision of lifeline services not only is a transport matter but is to do with the maintenance of the whole social and economic fabric and development of the areas that depend on them. In that context, do you think that there is a role for something like a strategic transport authority in the Highlands and Islands that would link together the transport issues with the economic development issues? How do you see the necessary joined-upness being created?

I will allow Jamie McGrigor to ask a supplementary question before the minister answers.

I actually have two questions on two separate points. The first is to do with the Ballycastle to Campbeltown service. I heard this morning on—

Excuse me, but I do not think that that is directly relevant to the service specification.

I thought that we were talking about Highlands and Islands ferry services. Campbeltown is in the Highlands and Islands.

We are asking specifically about the consultation on the draft specification. That is a separate issue.

The second point that I wanted to raise concerns NorthLink Ferries. Does that come under the subject that we are discussing?

Again, it is separate. The session today is specifically about the Executive's consultation on its draft service specification.

Perhaps I could ask about the consideration of livestock sailings. What services will be available for the carriage of livestock from the inner isles of Tiree, Coll, Barra and Mull?

On the issue of a Highlands and Islands transport authority, I believe that the committee will be familiar with the Executive's position. There were discussions in the Highlands and Islands strategic transport partnership about its development and the establishment of such an authority on the Strathclyde Passenger Transport Authority model. Those discussions have not reached a point at which that will happen in the short term. Perhaps the question will arise again should the HISTP choose to develop its partnership in that direction. That is perfectly feasible, but we have not yet reached that point.

The Ballycastle to Campbeltown route is an entirely separate service specification. The northern isles contract was entirely separate and the provisions are different. There is no specific provision in the Clyde and Hebrides ferry services specification that sets livestock aside from other freight and vehicle carriage.

We now move to issues relating to the Transfer of Undertakings (Protection of Employment) Regulations.

Is there any scope for the specification to contain a contractual requirement to ensure the effective application of TUPE regulations, regardless of whether they are found to apply by the courts?

No. The application of TUPE regulations is a matter for law. In the Clyde and Hebrides ferry services specification, we deliberately required bidders to bid as though TUPE regulations apply and to apply those regulations if they are successful in their bid. Those are firm and clear requirements on the bidders. However, at the end of the day, if a party decides on a court case and the conclusion is reached that TUPE regulations do not apply, the court ruling will overrule what is in the contract. The court's legal judgment on whether the regulations should apply will override anything in our tendering documents or the contract.

My supplementary question relates to how such a situation will be dealt with. Irrespective of whether there is a court ruling, if a successful bidder were to begin to undermine the conditions that are apparently part of the agreement on maintaining the regulations, what steps could you take to ensure that those conditions are sustained? What would you do in such circumstances?

I hope to provide a safeguard against such a possibility. However, in the invitation to tender, we made it clear that the subsidy will be accordingly adjusted if TUPE regulations are found not to apply. We have removed any financial incentive for the operator to seek not to apply TUPE regulations, as the level of subsidy that they will receive for operating the PSO will be reduced. That is the best mechanism that is available to us to ensure that there is no reason for an operator to seek to overturn the application of the regulations.

Will you apply financial penalties speedily? Are you sure that you have the legal basis to do so?

We are confident that we do. The penalties are built into the contract, so they would be immediate.

I am not clear why it would not be possible to build in many TUPE protections in the contract. The contract for the service would be knowingly and willingly entered into by the bidder and I do not understand why that is not possible.

The other issue that I want to raise does not relate only to TUPE regulations. In many areas, the Executive has given a commitment that it wants to see an end to two-tier work forces. With the contract, a two-tier work force could potentially apply if subsequent employees are offered lesser terms and conditions than existing employees. How does the Executive intend to address that issue?

On your first point, there is no mechanism in law that would allow us to override the law. The fundamental difficulty with the application of TUPE regulations is that the judgment on whether they apply is a matter for the law and not the Executive.

Why is it not possible to define terms and conditions in the contract? That would not override the law. Operators could then bid for the contract on that basis.

Is your suggestion that we should specify the terms and conditions of contracts of employment in the contract for the tender?

Yes.

That would be unwieldy and difficult to implement. We have gone as far as we can in laying down the contractual parameters within which potential operators must make their bids. I suspect that contracts of employment and contracts for provision of subsidised services are and will remain separate, but perhaps Sandy McNeil has a legal view on that.

The foreseeable difficulty with the convener's suggestion is that there might be a certain arrogance on the part of the Executive in trying to specify the terms and conditions, given that the courts could unravel the contract at a later stage. Also, specifying all of the position points in the contract would make the contract decidedly unwieldy. The best method is to get the bidders to do the homework as though TUPE applied and to bid on that basis. We should not give employers any incentive to try to make TUPE not apply, which would reduce the financial consideration.

That is the legal position. As the responsible minister, I would be concerned about setting in stone the terms and conditions. I would not want to prevent the operator from enhancing terms and conditions during the term of the contract.

I meant that a baseline set of conditions could be given.

I want an assurance that, in the due diligence exercise in which I know you will engage, the employment conditions and job security issues are taken into account. Will you check that the bidders have planned to maintain the employment conditions?

Will you also address the issue of the potential for a two-tier work force?

In considering bids, we will ensure that they comply with the specification, which includes the specification on the application of TUPE. TUPE has a number of difficulties, one of which is that it applies only at the point of transfer and does not impose on the future terms and conditions of members of staff, which would be the same with or without TUPE. That is not a matter that the Scottish Parliament can amend.

The best protection that the work force has in such circumstances is collective bargaining power. I expect the work force to use collective bargaining power so that the successful operating company protects the terms and conditions of existing members of staff and new employees. That is the extent to which we can provide protection for future terms and conditions.

I gather that the Executive has concluded that a requirement for Gaelic-speaking ferry crews is counter to EC procurement rules, which means that the specification does not include any such requirement. Trade union representatives have informed us that it is important to have one Gaelic-speaking crew member on routes with a strong Gaelic tradition, particularly in an emergency. The trade unions are of the view that that would not contradict EC procurement rules because the ability to speak Gaelic would not be a statutory requirement of all staff. What is your view on that?

We considered carefully whether a case could be made for a requirement for Gaelic speakers on safety grounds. The Maritime and Coastguard Agency requires that crews should be able to communicate effectively with passengers, which provides general support for employing crew members who are of the same language group as the majority of passengers. As I am a Hebridean, I considered the matter closely, but there is no longer a population on the west coast of Scotland that is unfamiliar with English. Therefore, the argument for a requirement for fluency in Gaelic on the basis of safety is not easy to sustain.

A number of points in the specification are designed to encourage the use of Gaelic. We are content to explore further with the appropriate authorities what minimum requirement might be imposed. I take on board the point that was made by the trade union side that it might not be a breach of European procurement rules to have a requirement for one Gaelic speaker on vessels that serve routes where there are many Gaelic-speaking residents. We must be confident that our solution does not breach the rules.

Does that mean that signage on the ships will not have to be in both languages?

Part of the specification is that Gaelic signage on vessels that serve those routes should continue. We will also require the continued use of welcome announcements in Gaelic and English.

Which routes will have dual signage?

That will be decided after consultation with the appropriate structures, such as local authorities.

That brings us to the end of our questions. I thank the minister and the various officials from the Scottish Executive.

Meeting continued in private until 13:04.