Transport and the Environment Committee, 12 Dec 2000

Meeting date: Tuesday, December 12, 2000

Official Report 304KB pdf

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Ferry Services (Northern Isles)

Our first item of business is the Executive undertaking on northern isles ferries. The committee will consider the draft undertaking that the minister has presented to us. It would be useful if she would introduce the item and update us on any significant events that have taken place, so that we can have a full discussion.

Thank you, convener. Today I wrote to you to clarify a point of detail in the minute of agreement that is attached to the draft undertaking. The background to the letter is that our subsidy assumptions were made on the basis that one of the vessels that NorthLink Orkney and Shetland Ferries Ltd was planning to use would be built at Fergusons shipyards. Unfortunately, the Scottish Executive was informed only late yesterday that there were severe difficulties in concluding the deal with Fergusons because of problems with design arrangements and the timetable for delivery. I am extremely disappointed that at this stage it appears that Fergusons will no longer be involved in building the ship, because bringing jobs to the Clyde was one of the elements of the package to which I was particularly keen to sign up.

To cover the possibility that the arrangements with Fergusons might fall through, NorthLink is working hard to seek revised quotations from the other yards from which they initially sought tenders for the ships. The objective is for the company to obtain the best possible price. However, that may mean that the assumptions in the company's tender about vessel price and the associated leasing cost will be changed. My letter to the convener brings to his attention the fact that figures included in the table in clause 3.3 of the draft minute of agreement may have to be adjusted in the light of that.

The Executive has agreed to consider with the company the impact of these developments on its subsidy, with a view to reaching an acceptable solution—on the important condition that value for money and the tendering competition are not affected. We are hopeful that a solution along those lines can be arrived at, so that the various agreements can be signed by the end of this week.

If the arrangements with Fergusons fall through, there will also be consequential changes in the tripartite agreement, which includes figures for charter termination payments and rentals in future years for any new operator. Those figures relate to termination of the contract, which would happen only in extreme situations.

I am sorry to bring this to the committee at such a late stage in the deliberations, but I felt that it was right to do so before the committee was invited to approve the draft undertaking. I am, however, pleased to bring that draft undertaking to the committee and to approve the terms and conditions for payment of a five-year block subsidy—from 2002 to 2007—for the northern isles ferry passenger services.

Trying to find the best deal for the taxpayer, while complying with open and fair procurement processes and the European Commission's regulations and guidelines, has presented challenges. The starting point for Executive policy has been a recognition of the importance of lifeline ferry services throughout the Highlands and Islands. We have the power to commit financial support for the services; the partnership is committed to delivering on that. We are also committed to consulting local communities, councils and others who rely on the services. In preparing the draft tender, we consulted exhaustively the islands' councils and others to ensure that we produced terms and conditions that suited their needs. The process was fair and open. The Executive has followed both its own requirements on procurement and the requirements on competition that are set out in the European Commission guidelines that apply to the subsidy of shipping.

Caledonian MacBrayne is part of the joint venture bidding, and we recognised the need for clear arrangements in the Executive to separate responsibilities. I am satisfied that we established proper arrangements that have worked well.

Three companies were involved in the last stage of preparing costed bids. All produced excellent bids that were carefully and thoroughly evaluated. I announced in October that NorthLink had been appointed as the preferred bidders. Since then, we have had lengthy and detailed negotiations on the final terms of the contract. Members now have that in front of them. To the non-lawyer, reading through the undertaking and the background details can be difficult; it might be helpful if I point out some of the main benefits and improvements.

From 2002, three new vessels will be plying the routes. The vessels will also be available for future contracts in the next tendering exercise under the tripartite agreement that is part of the contract documents. There will be service and timetable improvements on the Pentland firth crossing, with an additional third return crossing on most days. The crossing time will be 90 minutes.

For Shetland, there will be a seven-day, year-round service in each direction; in most weeks at present, there are only six services. There will be improved later departure times on certain services, and earlier arrival times in Shetland. On the Aberdeen services that call into Orkney, there will be increased and improved services, three times a week all year round. The timetabling will be improved.

For all services, there will be an integrated transport timetable for through-ticketing and transfers to coaches or, on the mainland, rail connections. There will be lower average passenger fares. The schedule to the grant agreement outlines fares that are lower by an average of 18 per cent on the average April 2000 prices. In return, the Executive will be paying a reduced subsidy of an average of just less than £10 million at April 2000 prices on current assumptions. That will increase in line with inflation. For members' information, I should add that the current subsidy is £11 million a year.

We have ensured that negotiations between the operator and the harbour authorities are taking place. With the new vessels, investment is required at the harbours involved. Each harbour has different requirements. A lot of detailed work has been carried out and I am satisfied that each of the harbour authorities is completely committed to the project and to securing the necessary finance to meet the timetable. The Executive will be involved in further partnership arrangements.

I believe that, overall, this represents a very good deal for the islands. We have involved people in the process, particularly in the tender specifications. The quality of the services will improve, meeting a key Executive objective and representing good value for money.

There will be a number of questions from committee members. I would like to be clear on a few points of procedure first, as that may flavour our discussions this afternoon. What would be the effect of our not approving this measure, bearing in mind the fact that the committee would be more than happy to meet on an emergency basis to approve what would be—for want of a better phrase—the proper undertaking, once the amendments and changes have taken place?

If we approve the undertaking as it stands and it goes to the chamber having been amended by the Executive, what we have said about it may not count. Would our approval then be immaterial? The undertaking would have to either come back to us or go straight to the chamber. I have had a short discussion with my committee colleagues and we would not wish you to take the latter route.

The document is a substantial piece of work. Having read it, I appreciate its significance and the amount of work that has gone into it. I would like some clarification on the processes in relation to the changes that you mentioned. If other committee members want to ask about the process—with regard to the issues that we have discussed—would they do so now?

I have a question about the implication of any change. It would be helpful if we were aware of what would happen if the requirement to retender for a ship from another yard meant that the deadline was missed. I am not clear, from what I have taken in of the material, whether it is acceptable to miss that deadline, in terms of the safety regulation. If there must be new shipping on that route by that date and the tenderer cannot deliver, what is the Scottish Executive's back-up plan? Presumably, it would be neither possible nor financially realistic to seek to maintain the current operator in some continuation of the existing service. That is an important piece of information.

Murray Tosh has raised utterly relevant points. On the first point, I was keen to make the committee fully aware of the background to the undertaking. Although the change has come late in the day, I felt that that was important for the purpose of transparency.

Not approving the undertaking this week would have an impact, because the two big ships that are coming from the Finnish yards—the 125 m ships—are eligible to receive support from the European Commission. To do that, the application must go through the Finnish parliamentary process by this Friday. A time scale is marching in on us, which is why it is important that we approve the undertaking this week. That is a major issue in terms of the affordability of the new boats. From my perspective, it is critical to ensure that the undertaking goes through our parliamentary process this week.

On the deadline, all new ships have to meet the new safety of life at sea regulations. They also have to meet the tougher Stockholm requirements that were introduced after the sinking of the Estonia. We now have much higher safety standards on all new passenger ferries. The new boats will be able to deliver all those exacting standards, whereas the existing boats do not meet them all, which is one of the driving factors behind the need to have the new boats. The deadline is October 2002; it was previously the summer of 2002. That gives us a little more time to ensure that the boats are up and running.

To allow the process to happen, what do you propose to take to the Parliament for its approval? That is what I find confusing. Will the problem be solved by Wednesday or Thursday of this week if it is to go to the chamber then?

Work is on-going. As we have notified the committee, the critical issue is that the subsidy will not be identical to the subsidy mentioned in the accompanying documents. In terms of value for money, it is important that we are able to deliver the subsidy at a certain level. We also have to ensure that any subsidy arrangements meet the competition requirements so that they are fair to all the bidders in the process. The current figures, which can be found in the revised information that we have given you today, meet the new requirements that arise as a result of yesterday's information.

I did not feel that the minister dealt fully with the point that I raised. I do not know enough about the procurement of ships to comment in detail, but I imagine that it is a fairly protracted and complicated business and the possibility arises that the third ship might not be in service by the right time. I asked what the Executive felt it might have to do in those circumstances. I quite understand if the minister feels that she cannot or should not answer that question at this stage, but I would like to know as much as she can tell us about what might happen in those circumstances.

I am sorry; it is just that I did not write down that point when you asked your question. I shall ask John Martin to tell you about our arrangements for such circumstances.

There are a couple of contingency arrangements. First, the preferred bidder is NorthLink, which is part owned by Caledonian MacBrayne. There would be a possibility of bringing CalMac's fleet reserve vessel on to at least one of the routes if the ships were not there in time. There is also a possibility of the present P&O ships being converted, albeit at considerable cost, on a short-term basis to span the gap between the expiry of the present contract and the new ships coming on stream. That would be a costly process and would not represent best value, but it is a contingency arrangement if all else fails.

Ensuring that the new ships—particularly the big ships for Shetland—are built on time is not only a question of getting the arrangements through the Finnish Parliament to secure intervention money; it is also a question of getting the contracts signed to enable the shipyard to start on the ships, so that they are ready to go on the route from 1 October 2002.

Does that answer your question, Murray?

Yes.

I seek clarification on one point. Tell me if I am wrong but, as I understand it, the Finnish contract and the Scottish contract are inextricably intertwined and, for the Finnish contract to go ahead, we must approve the Scottish contract in some way or sign a blank cheque. Is that right?

No. We are coming forward with our estimate on the subsidy that is required, which takes into account alternative arrangements if the Fergusons deal falls through. The critical thing about the timing is that we must be able to ensure that the contracts are signed for the two big ships at the Finnish yard. To do that, we must ensure that the package has been approved so that we can get on with the work.

I am not sure whether this is a procedural point or one that will follow later. Is there capacity to separate out the Finnish contracts from the Ferguson contracts so that we can allow the work to proceed in the Finnish shipyards while still holding out some prospect of Fergusons in Port Glasgow getting the other contract? Alternatively, is the whole issue of Fergusons so dead in the water that that is not going to happen? How can we get some leeway in the process to allow the work still to go to Fergusons?

We have to approve a contract with the operator. There is one contract, so we must have confidence that NorthLink will be able to identify an alternative arrangement to provide that third ship. We are satisfied that that is the case. The subsidy level outlined in the documentation is based on information given to us by NorthLink and on lengthy discussions. However, it is not possible to deal with Fergusons as a separate contract. Doing that would mean that we would have to tender for elements of the provision separately.

On the potential for Fergusons to build that ferry, does the problem with the time scale relate to the Finnish yard having a contract ready by the end of the week so that work can start? Is the time scale putting Fergusons in jeopardy? Would more time allow Fergusons to produce a bid and a process that would allow it to continue to build ships? What mechanisms could we use to help Fergusons to reach that point?

The negotiations have continued for the past two months. Lack of time is not the problem.

Fergusons was concerned that it would not be able to supply the ship within the time scale that was required to put the contract in place for 1 October 2002. From the information that we have received indirectly from Fergusons, I am not confident that it will be able to fulfil the contract, even if we allow it more time.

It might help if I give a little more detail of the negotiations that have been entered into in the past few days. Only at 6 o'clock last night did we hear that the Fergusons deal was not deliverable. Our concerns are that we get value for money and ensure that the ship is built. Not proceeding would cost the Scottish Executive considerably more than proceeding.

Another criterion applied in the second bid. As the minister said, we had three bids. The first that we took was the cheapest. For reasons of commercial confidentiality, I cannot tell the committee what the other bids were. However, we have a ceiling with which we can negotiate, which is below the level of the second bid.

The other criterion concerns what it would cost to abort the deal and start again. We are trying to work up an arrangement with CalMac NorthLink whereby we secure the deal. If necessary, CalMac NorthLink will go to another yard. It invited tenders for the ship and received several. The company chose Fergusons, but other yards were on the list. The company is now returning to those other yards for prices, to find out whether it can have the ship in place by the deadline that we have set.

We have negotiated a deal with NorthLink on a maximum figure that we are prepared to share from the additional costs. I think that we have made that deal, but I would be grateful if members did not press me for the details today. The deal is much better for the Scottish Executive than doing nothing or accepting the second bid would be. In the revised undertaking, we hope to make clear the mechanism for the deal, if not the exact figure. That will allow the committee and the Parliament to know how the subsidy will be calculated.

I do not want to press for information that might be commercially confidential but, given the position that we have reached, it strikes me that the balance of risk now moves significantly, because a third ship must be in service by the deadline or a time close to it. NorthLink is procuring the third ship and is approaching shipyards that were not successful in tendering for the ship first time round. The company is approaching those shipyards on the basis that the successful contractor is unable to deliver to the specification within the time scale. Does not that change the balance of advantage in the tendering process by which NorthLink procures the ship from a new supplier? That will feed into the financial equation, which involves the Scottish Executive.

Of course, that is the reason for your appearing before the committee and advising us that there is potential for a variation. What mechanism exists to ensure that the risk does not transfer unreasonably to the Scottish Executive and that the cost does not pass wholly to the public purse? The shipyards have an advantage and, if NorthLink is not tied into an agreement, it can simply pass the issue over to the Scottish Executive, because the Executive must have a ship to deliver the service.

We have in place a deal under which the maximum exposure of the Scottish Executive has been settled. The figure that we might have to pay to secure the ship is slightly more than the figure in the subsidy line that the committee saw in the undertaking, but not dramatically more. We have reached a provisional deal that shares the extra cost out so that the Scottish Executive picks up rather less than NorthLink. There will be a maximum exposure for public funds.

So NorthLink has a material incentive to ensure that it procures best value.

Yes.

I invite Shelagh McKinlay to update us on advice that we have received.

The convener has asked me to set out the advice that we have received on the procedure for dealing with the draft undertaking that is before the committee today. If the committee reports on the undertaking, it will be reporting only on the undertaking that is before it today. If subsequently a change is made to the undertaking before it is debated by the Parliament, the committee's report will be immaterial, because it will refer to a different undertaking.

If the undertaking is changed following the committee's meeting today, the undertaking must either be referred directly to the Parliament for consideration—under rule 10.1.3 of standing orders—or be referred to both the Subordinate Legislation Committee and this committee before being considered by a full meeting of the Parliament. The key point is that such an undertaking would be different from the one that the committee is considering today. It is not open to members to approve an undertaking today on the basis that it will be changed and become something different. The committee can take a view only on the undertaking that is before it today.

Now that the issues have been set out, the process should be clear to all members. As we can consider only the undertaking that is before us, it is now for the minister to move the motion that relates to that undertaking. Do members understand the process?

I understand it. However, given that if we approved the undertaking we would be approving something that we know is not going to exist, would it not be better to make this an information session?

Could we not leave the decision until Friday, when NorthLink will sign the contracts with the supplier of the other two ships?

We need to get back to the bottom-line question—what are the implications of the decision that we take today? Earlier, I said that we may approve this undertaking, but that it is not the undertaking that will be laid before Parliament. It will be for the Executive to deal with that problem. The committee has a right to discuss whether it is worth approving this undertaking. I would be happy to redesignate this as an information-gathering session—as a first examination of what is, after all, a draft undertaking. The minister will have the information that is needed to update the draft undertaking and to turn it into a finalised undertaking. She must do that as speedily as possible. Minister, how do you intend to deal with the amended draft undertaking?

We are partly in the hands of the parliamentary authorities. We know what we want to include in an amended draft undertaking. I was keen to ensure that members of the committee were aware of the background to this situation and were able to ask questions. Convener, do you want to consider the amended draft undertaking at another meeting of the committee before it is debated by the Parliament?

I would like to find out when you expect to be able to present the amended draft undertaking to the Parliament. The committee has indicated that it would be happy to meet at short notice to approve the undertaking, so that it can be debated by the Parliament.

Clearly, it is in everyone's interest that we do this as quickly as possible. I cannot say exactly how much the undertaking will need to be changed, but it will not need to be changed very much. The only changes of substance will relate to the subsidy, which will go up slightly. I hope that we will be able to provide the committee with a new draft undertaking by tomorrow, but I do not know whether that will be possible. This was sprung on us only last night, so I do not know precisely what changes will be needed.

If the committee is generally content with the undertaking and we can assure you that the only changes that we intend to make relate to the level of subsidy and the consequentials from that, the minister may be able to write to the committee outlining those changes. I am not sure whether the committee would need to meet to discuss such limited changes.

As I understand it—and we have received this advice consistently all day—if the undertaking is amended in any way, our discussions and report to the Parliament will be invalid and immaterial. At some point, the amended draft undertaking must either be considered by this committee or be referred directly to the Parliament under rule 10.1.3 of the standing orders.

I am trying to be helpful by saying that, today, we will discuss every aspect of the undertaking, with the exception of the provisions that may change as a result of your negotiations. The committee will then meet at short notice to approve the part of the undertaking that has been amended so that the undertaking can be referred to the chamber with our full support and in the recognised manner. If we proceed in that way, our discussion of the undertaking will be more tenable and credible. Given that we will all be around over the next couple days, I am sure that a meeting at short notice is feasible.

We cannot meet tomorrow, because Parliament will be meeting. I am not sure about the time scale for suspending standing orders to allow the committee to meet. It may be wise to assume provisionally that we will meet tomorrow, as soon as Parliament finishes meeting, for the purpose of receiving this additional information so that we can dispatch the business as quickly as possible.

I was assuming that we would meet either before 9.30, at lunchtime or after 5 o'clock.

It would have to be after 5.45.

We would also have to fit the Subordinate Legislation Committee into our timetable.

I was going to suggest a meeting on Thursday at 9 am, at the latest.

I am entirely relaxed about this. If the committee is prepared to meet to discuss this one issue, either just after the Parliament has finished meeting tomorrow or first thing on Thursday, that is fine by me. I will turn up whenever the committee is able to meet.

I appreciate that you will be available and that committee members will be available, but when will the information be available?

It should be available by the end of tomorrow, if members are able to make space in their diaries for a meeting then.

Are we content to meet tomorrow after close of business in the chamber? Shall we arrange to meet in the chamber?

We would have to wait until members' business had finished.

Alternatively, we could meet at 9.15 the next morning.

That is awfully close to Bruce Crawford's big moment.

This will not make good reading in the Official Report. We will arrange a meeting and indicate to members when it will take place. Shelagh McKinlay will make every attempt to contact members to ensure that the meeting is arranged for a time that suits us all. That is the route that members would like to take.

Do members have any other questions about the undertaking, apart from the difficulties relating to Fergusons shipyard?

I have one other question. Obviously, the undertaking has been considered by the Finance Committee, as parts of it fall within that committee's competence. Does the Finance Committee have to be re-engaged in this process?

I have no idea. I will seek clarification on that point and ensure that the Finance Committee is re-engaged in this process if that is necessary.

I have a specific question relating to part 6 of schedule 1 on maximum fares. The schedule includes definitions of low, mid and peak season, but at no point does it explain what children getting 50 per cent off the standard rate means. To what age group will the 50 per cent concession apply?

I understand that children's fares apply up to age 16.

That is not made clear in the undertaking.

The preferred bidder, NorthLink Orkney and Shetland Ferries, intends to define children as people below the age of 16.

I have an ancillary question. I believe that at least three ports will require works to allow the new, bigger ships to dock. Is that entirely separate from this agreement? Are you confident that all the work is well in hand and will be finished in time for the start of the new service?

Nora Radcliffe is right to say that much additional work needs to be done. Some of it needs to be done because of this contract and some of it needed to be done anyway. We are already in discussion with islands councils and the relevant harbour authorities. A number of proposals have been made or are in the pipeline. Testing is being carried out to assess the design implications of the introduction of the new ships. That work continues.

I have a question about European Community competition. I must be careful how I phrase this, because we have to act as if the previous discussion did not take place. If any part of this contract were not fulfilled, what impact would that have on an EC competition that has already taken place and been advertised in the EC journal? In those circumstances, would EC competition rules require us to start the process again?

We are required to accept the cheapest bid that would deliver the outputs that we have specified in the tender process. That stands, regardless of any potential changes. I ask Andrew Maclaren to outline briefly how the process works.

The European dimension of this derives from the EC regulation that deals with shipping subsidies, which stipulates that Governments should be non-discriminatory when they give subsidies. We have conducted this competition under that regulation and related guidelines that set out how the competition should be handled. That means that the Commission is being satisfied about the process and the competitive arrangements that have been put in place. The process started a long time ago, with an advert in the Official Journal of the European Communities.

Bruce Crawford asked what would happen if anything changed. It would depend on what the change was. If there were a major change to the definition of the competition—in this case, to provide ferry services to Orkney and Shetland—we would have to take advice on whether a new competition and re-tendering were required. If that happened, we would be in very serious trouble, given the timing of the project.

Would a change of shipyard builder be seen as a material or significant change?

In my view, it would not, because the shipyard contract is not with us, but with the bidding company. We are contracting with the bidding company for the subsidy; a change of shipyard would not be relevant to that.

As there are no other questions, we will suspend our discussion of this matter for the moment. At a future date that has yet to be determined, we will meet again to discuss one particular aspect of the draft undertaking. This has been an interesting process. I am sure that both the committee and the minister would have preferred not to have been faced with these difficulties. However, I think that we have managed to deal with them in a way that satisfies the committee and, I hope, the minister, so that this important undertaking can be promulgated. I thank the minister and her officials for their attendance.

Thank you. I am grateful to members both for their questions and for being prepared to listen to the points that I made at the start.

While the minister and her team depart, I advise the committee that the chairpersons and chief executives of the water companies will join us shortly. Before we start, the BBC would like to get a picture of them and us together. We will then proceed immediately with business.

Meeting adjourned.

On resuming—