Local Government and Transport Committee, 15 Mar 2005

Meeting date: Tuesday, March 15, 2005

Official Report 440KB pdf

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Ferry Services (Clyde and Hebrides)

The fifth agenda item is consideration of tendering for ferry services in the Clyde and Hebrides. I ask members, the minister and officials to make their questions and answers as concise as possible, because the committee has two further agenda items and it is already past 5.40 pm. We do not wish to breach our previous record of continuing until 9.40 pm, so I ask everyone to concentrate on the issues at hand.

The tendering of ferry services is of great import and is the subject of considerable debate in political circles, in communities and among the staff who deliver the services. The recent announcement of proposed industrial action highlights how important it is for the Parliament and the committee to resolve the matter effectively.

The minister will make introductory remarks, after which we will have questions and answers.

As members are all aware, following the parliamentary debate on ferry services last December, I agreed to raise the Parliament's concerns with the European Commission. I met the European transport commissioner, M Barrot, in December. Discussions with the Commission continue and we are pressing hard to find out whether any alternatives to tendering would comply with European Union rules. We continue to explore every possibility. No tendering will take place until we have concluded our discussions with the Commission and until I have reported to Parliament.

My priority is to protect the lifeline Clyde and Hebrides ferry services and to ensure that they continue to serve the remote and island communities that depend heavily on them. That is why I simply cannot understand strike action in such circumstances, as the only damage will be to the people and the communities that depend on those lifeline ferry services.

I am aware that you were in Brussels a day or two after the parliamentary debate and that you met the commissioner. Since then, what further discussions have taken place directly between you and the commissioner, between members of the UK Government and the commissioner or between officials of either Government and the commissioner?

I have exchanged correspondence with the commissioner, but I have not had a further meeting with him. Discussions at official level have taken place.

We have spent a considerable amount of time on reviewing the detailed legal advice. As members know, the issue is not new. It has been considered by the Parliament and by ministers for the past five years. However, I thought that it was important to update the legal advice and to ensure that we considered all the options in our discussions with the Commission. I expect further meetings to take place at official level before the end of March, after which I expect further discussions to take place at ministerial and commissioner level in the following month. That is the timetable to which we are working.

More than one member of the Scottish Parliament has impressed on me the importance of getting the matter right and ensuring that we investigate every possible alternative to tendering. If that means that the timetable might slip, I think that MSPs would prefer us to take the time fully to investigate the issues rather than force an early decision. I want to work to the timetable that I set out, which is reasonable, following the debate in Parliament, but my emphasis throughout the process will be on ensuring that there is a thorough investigation of the alternatives to tendering and that we receive the best legal advice, so that as we enter into negotiations with the Commission we are trying as hard as possible to protect the lifeline ferry services and to find an effective alternative to tendering.

You answered my question about the interaction between the Executive and the Commission. However, the EU works largely through the member state, which in our case is the UK. I imagine that the Department of Trade and Industry and the Department for Transport have an interest in the matter: what engagement has there been with those departments to ensure that the case is investigated from all angles?

There has been engagement with the Department for Transport at official and ministerial levels. I am not sure whether there has been engagement with the DTI at official level—perhaps officials can comment on that—but there has been no engagement with the DTI at ministerial level. We have also been dealing with the United Kingdom permanent representation to the European Union, to ensure that it is kept informed, and we have been dealing with the Commission through UKRep in the normal way. From a UK and Scottish perspective, everyone has been kept fully informed and that will continue.

The DTI is certainly in our circle of consultees on the exercise. It is fair to say that although the DTI is the lead department in the UK Government on state aid issues, the department does not regard itself as the expert on maritime cabotage rules—I think that the DTI would expect the Department for Transport to take the lead on such matters. We were in close contact with the Department for Transport before the vote in Parliament and we have had more specific contact since then.

I welcome two members who have a constituency interest in the matter: Alasdair Morrison, who is the MSP for the Western Isles; and George Lyon, who is the MSP for Argyll and Bute. For the record, I note that Jamie McGrigor was here earlier—I assume that he had to leave to attend to other business. I am sure that the two members who have joined us will participate in the committee's questioning of the minister.

The minister said that the Scottish Executive is engaging with Westminster. How can the minister's stated desire to find an alternative to competitive tendering be reconciled with the comments of Charlotte Atkins, Parliamentary Under-Secretary of State in the UK Government Department for Transport? She said that we must accept that services

"have to be subject to a competitive tender."—[Official Report, House of Commons, 2 March 2005; Vol 431, c 320.]

It is important to emphasise that responsibility for the matter lies with the Scottish Executive. I take very seriously my undertaking fully to investigate alternatives to tendering, which I repeated today, as do the officials who are accompanying me. We intend to conclude our discussions with the Commission and to report to Parliament the outcome of those discussions as soon as we can.

I certainly support that approach, although it appears that Westminster has ruled it out. I will move on.

A great deal of work has been done by academics, mostly pro bono I believe, to find a solution or an alternative to tendering. Professor Neil Kay has put forward a proposal, which I believe merits careful consideration. Paul Bennett and Jeanette Findlay have also done a great deal of work. I want to elicit factual responses about the consequences of tendering going ahead. What is the Scottish Executive's estimate, in units of millions of pounds, of the extra costs over and above the status quo if a company other than Caledonian MacBrayne were to win the tender?

At the start of our discussions, the convener urged us to keep our contributions short. I can be brief in my response to questions that anticipate tendering. At the moment, I am putting all my efforts into seeing whether tendering can be avoided. I believe that that will require a great deal of hard work involving ministers and Executive officials and will draw on the good work that has been done by academics to test the alternatives as fully as possible. At this stage, therefore, it is not sensible to consider issues associated with proceeding with the tender. Parliament has asked that we consider again avoiding the tender, so that is what my efforts are going into in the coming weeks.

I agree entirely with the sentiment, but I suggest that one way of avoiding the tender would be by pointing out—not least to the European Commission and to Charlotte Atkins and her boss, Alistair Darling—what the extra costs would be if tendering were to proceed. That would demonstrate clearly that the exercise would involve extra costs, rather than lesser costs. It has been put to us clearly—and, as far as I know, this is not being denied in many quarters—that if CalMac loses the tender, or even if it wins, having been split into an operations company, an unavoidable cost will be that of winding up or closing the pension fund, which is estimated at £10 million. Do you accept that estimate? Is it in the broad range of figures that you believe to be correct?

We could take arguments to the Commission based on cost. That is a fair point to make, but all the advice that I have received is that cost arguments are not likely to be persuasive. If we are to avoid tendering, it will be on the basis of successful legal argument. The requirement to tender is based on the laws of the European Union, such as the maritime cabotage regulation of 1992. It is issues of state aid that will or will not win the argument for us. It is wrong to raise false hopes, but that is the argument on which Professor Kay and Professor Bennett have focused. They have not put forward alternative options on cost grounds.

I appreciate that we have time constraints, but if members have tightly worded questions on the specification of the tender, it might be appropriate to take them tonight. Given that the consultation closes this week, this might be the best opportunity for members to record concerns that they have about the Executive proceeding with tendering. I am quite happy for members to ask questions of that nature, but they should try to keep them tightly worded.

I am grateful for that.

The figure of £30 million has been mentioned as the possible extra cost of going to tender in some scenarios. I would be surprised if the minister is saying that such a huge extra cost, compared with the annual subsidy of £21 million, would be considered by anybody to be irrelevant; it certainly would not be considered irrelevant by the taxpayer or the general public. However, if that is the minister's approach, that is the minister's approach.

I will move on, as the convener asked. Is it not the case that the European Commission does not require the division of CalMac into two separate companies?

I think that that is correct. The separation was proposed to ensure that the publicly owned fleet in CalMac's services would remain in public ownership and therefore be available not only for the first contract that was envisaged, but for the second and third ones as well. That was important given the long-term nature of investment in ships.

The Commission was interested in having a level playing field for all the different bidders. CalMac has a fleet of vessels that has been fairly expensively acquired. Until very recently, the fleet was acquired predominantly through a grant system rather than through a loan system. In effect, a lot of public subsidy is wrapped up in the fleet. I find it difficult to imagine that the Commission would be comfortable with a tendering process that allowed one operator to bid on the basis of a fleet, the acquisition of which had been heavily subsidised, while other bidders had to acquire their own fleets.

Subsidiary issues arise as well. For example, what would happen were CalMac to lose the tender? If other bidders arrived with their own vessels, there would be—based on the cost of replacements—more than £220 million-worth of vessels for which there was no obvious use. Another consideration is that the CalMac fleet has been purpose built for the routes that it serves. Virtually all CalMac's routes have specific draught requirements. The approaches are often very shallow and conventional ferries cannot use them.

All those considerations point to the sense of having a way of keeping the vessels in public ownership and securing their long-term future, and a way of allowing us to use a fleet that has been purpose built for the routes.

I am glad that you said that the European Commission does not, and did not, require the division of CalMac into two units. Do you accept that the tax liability of doing that would involve an extra £5 million to £10 million?

I understand that there will be an up-front tax liability but that it will be clawed back over time through the system of capital allowances.

I would like to bring in other committee members. Please ask just one more question.

Very well.

Paragraph 1.36 of the draft invitation to tender says:

"VesCo will also be responsible for providing an operator of last resort function".

Who will that be? How much will it cost? Will it be possible to fulfil that function?

We have said in the documentation that an early task for the vessel-owning company—which would be created before the tendering process, although, as the minister said, that is not necessarily the route that we will follow—would be to devise the specific method of delivering operator-of-last-resort systems. The obvious model, which is available, would be to procure such an arrangement—

From whom? Which companies could be operators of last resort? How much would it cost?

I suspect that it would be done through a tendering procedure, if that were the outcome for the main contract. It would cost, obviously, what the tendering process said it would cost.

But the procedure would have to be put in place before the contract. You are suggesting that there will be a tendering procedure to determine operator of last resort before the tendering procedure for the CalMac routes.

The procedure has to be in place before the main contract is implemented, if that is the route that we take. However, there will be a significant gap between identification of the successful bidder and implementation of the contract. There would be time in that period—

How much would it cost?

As I said, that would depend on the market. There is no obvious reason why a tendering process should result in a significantly higher cost. There would be an extra cost.

Would that cost be more than £1 million, £2 million, £3 million, £5 million or £10 million? Will you give us a clue? The taxpayer will have to pick up the tab.

I will not speculate on figures. That would be inappropriate.

Taxpayers' money is involved. Should we not have an answer about what the cost will be, minister?

Answers will be available in due course, but there is no need for an answer at this stage.

I will call other members to speak. If we have time at the end, I will call Fergus Ewing again.

Who in the minister's department has evaluated the academic papers that have been referred to—the papers by Neil Kay, Paul Bennett and Jeanette Findlay? When will reports of that evaluation be available?

Some of those papers have only just become available to us. The principal advice that I receive about all the suggested alternatives to tendering—some were generated in the department, some were suggested in previous years and some are in the more recent studies to which Tommy Sheridan refers—is from Scottish Executive solicitors. Jim Logie has the greatest expertise in the matter.

The papers by two of the individuals to whom I referred—Neil Kay and Paul Bennett—have been available for several months. Updated versions were made available for last Friday's seminar, to which I believe you were invited. As you know, Jeanette Findlay's paper became available only last week. The papers could have been evaluated by now. Who is evaluating them? Is Jim Logie doing that? What is the timescale?

As recently as this afternoon, Mr Logie advised me on some of the issues. The papers are being evaluated. We have ensured that the best-quality legal advice is available to the Executive on all the issues and we will take forward the arguments to the Commission. The individuals who have presented their thoughts and recommendations suggest different approaches. That is why it is important that we go to the Commission armed with the best advice.

I hope that you do not mind if I express my worry about what you say. You talk about going to the Commission with your arguments, but the point of the academic papers is that you should proceed with your alternatives to tendering, not ask the Commission for permission. The papers say that you are asking the referee to judge the rules, rather than playing the process that would be best for the taxpayer in Scotland.

Do you accept that the evidence that Neil Kay gave to the Transport and the Environment Committee back in 2001 about the tendering exercise for the northern isles contract has—unfortunately—proved relevant, given the disastrous collapse of that tender?

There are lessons to learn from the northern isles tender. We could spend another session on discussing all those issues, but for tonight, I will concentrate on the CalMac issues. I understand what Tommy Sheridan suggests, but it is important to discuss the issues with the Commission and to understand clearly the actions that the Commission is likely to take. The reason for that is clear. The absolute priority must be the preservation and maintenance of the lifeline ferry services. That is why I deplore any action that will undermine and lead to damage to those services.

Central to the actions of any responsible Government is knowledge of the Commission's likely reaction to any proposals that we develop. I am determined that we should continue to be able to subsidise the lifeline ferry services. We invest well over £20 million each year in those services and that must continue. The absolute priority is to make it certain that that occurs.

Yes, but—

You may ask one more question before we move on.

I will try to ask two questions in one. First, does the minister accept that when the process began in 2001 we were told that the tender would be ready by the end of the year? It is now 2005 and there has been no tender, but there has been no collapse and the European Commission has not sent in the troops. We must be careful not to create an artificial climate of fear about the removal of subsidy from the ferry services. Secondly, does the minister accept that the Executive's failure to listen to the good academic advice that it was given in 2001 cost us £13 million, because we had to renegotiate the northern isles contract? Will he assure us that the Executive will not make the same mistake this time?

We want to make certain that we offer the best possible quality lifeline ferry services in the Clyde and Hebrides and I am determined that we do so. It is important that we investigate thoroughly the alternatives to tendering and that we go to the Commission with the best possible arguments. However, the issue is not new. Tommy Sheridan knows that we have been considering the matter for the past five years. George Lyon and Alasdair Morrison can comment on this better than I can, but there was a feeling that we should draw the matter to a conclusion. The issue has been hanging over CalMac and the communities involved for a long time and the view was taken last year that it was important that we bring the process to a close.

I fully accept the outcome of the vote in Parliament in December, which means that it is vital that I go back to the Commission with the best possible information and advice about alternatives to tendering, to ascertain whether any such alternative would be achievable within EU law. I return to the difficulties of EU law in the area. It was not the Executive's policy decision to go to tendering; we moved forward with proposals but, as Tommy Sheridan pointed out, we did not move quickly and at each stage we considered alternatives and the best way of moving forward if tendering were to be required, for example through the bundling of the main Clyde and Hebrides services. We have had to operate on the basis of EU law as we find it and as we are advised on it, which means that we have had to consider the 1992 maritime cabotage regulation and the state aid rules. We have had to ensure that we act within the law—as an Executive and a Parliament must do.

Before I bring in other members, I raise a factual matter. Professor Kay's paper was made available only 10 days ago, rather than several months ago, so it is reasonable that the Executive is still considering the paper. I welcome the minister's commitment fully to consider and evaluate all the suggestions from academics, including those of Professor Kay.

I am not a member of the Local Government and Transport Committee and I am grateful to the convener and members for the opportunity to ask a number of brief questions. With the convener's permission, I make a brief observation, which relates to what the minister said about industrial action. I concur with what the minister said. The development is most regrettable and if strike action goes ahead it will do nothing to protect the jobs or conditions that members of National Union of Rail, Maritime and Transport Workers enjoy or to serve the interests of the people whom I represent.

Convener, that was the second time that reference has been made to industrial action. I did not think that we were here to discuss that matter.

It is perfectly appropriate for the minister to refer to the industrial relations situation, given that it is a material factor in the issue that we are debating. Indeed, it is appropriate that the local MSP should mention the matter, because the community that he represents is heavily dependent on the ferry services. The member was not out of order in that regard.

We are supposed to be asking the minister questions.

With respect, many members include observations in their questions; I am sure that you, too, have done so once or twice.

I am grateful to the convener. I will try to bundle together my questions—no pun intended.

I have four questions for the minister. First, does the Executive have to go down the tendering route? Secondly, what is your understanding of the sanctions that are available to the Commission? What measures can it deploy to pull both the Scottish Executive and the UK Government into line? Thirdly, can you share with us any of the experiences that you or your officials have had with the way in which other EU states are dealing with their state-funded ferry services? Lastly, could you expand on an issue that you mentioned in your opening remarks in relation to Government actively seeking ways to avoid tendering? In an ideal world, that is how it would be.

You asked whether we have to go down this route. All the advice that I have been given to date has been that we must do so to comply with the EU rules. I am now moving forward from that advice and considering all the suggestions that have been made—those that have been made over the past few years and those that have been made over the past few months and weeks—to ensure that we have the best chance in arguing with the Commission that tendering could be avoided. I intend to do exactly that: I intend to make the best possible argument in relation to alternatives to tendering.

If we are deemed by the Commission not to be following EU law, it can require us to stop paying aid to CalMac. That would mean, of course, that CalMac would not be in a position to continue to fund the lifeline ferry services. That is a significant threat and it is why most, if not all, EU countries have, as far as we are aware, either tendered their ferry services or are moving towards doing so. Some countries—for example Spain, in relation to Trasmed—have done so under threat of action by the European Commission. The Spanish were required by the Commission to proceed with a tendering process. The issue is not new, and it is not unique to Scotland. Other countries have been forced to face up to it and have been forced to tender by the Commission.

I think that that answers three of your questions. The fourth one—

I asked you to expand on your opening remarks. You mentioned how the Government—you and other Scottish ministers—is actively pursuing an agenda of avoidance of the tendering process, although commissioners would not want to hear it being described in that way.

The Commission understands the approach that we have been taking, and it understands that we are working hard to fulfil the requirements of EU law. In our correspondence with the commissioner, it is indicated that the Commission is content to hold discussions and, if necessary, negotiations with us. The Commission's core requirement is that the law of the European Union is followed. It is helpful that we have some time to achieve that.

The issue was first drawn to our attention by correspondence from the Commission back in 1999. There will come a time when the Commission's patience will wear thin and it will require us to respond on the issues. If it was sensed that we were not acting in good faith, the Commission could initiate infraction proceedings, as happened with Spain. There is no suggestion that that could happen over the next few weeks, while negotiations are proceeding, but it is important that we get the best legal advice on the issues and that we hold discussions with the Commission. It would be quite wrong at this stage to break off discussions with the Commission, because that would signify, in the minds of the commissioners, our intent to move away from EU law. More than likely, that would trigger the sort of infraction proceedings that could be damaging to the lifeline ferry services.

I thank the convener for giving me the opportunity to put a couple of questions. Can the minister or his officials confirm that an independent ferry company has already registered a complaint with the Commission with regard to unfair competition on one of the routes?

I am aware of the case that you mention. We have not had confirmation from the European Commission of such a complaint, but such things tend to take time, so that does not mean that there is not a complaint in the system.

For the sake of clarity, will the minister explain why we are taking a different approach to the Gourock to Dunoon route? That is a separate issue in some ways, although it is linked with the requirement to address the non-discrimination issues and to comply with EU law.

A company called Western Ferries (Clyde) Ltd operates a profitable ferry service from Gourock to Dunoon, although not on exactly the same route as the CalMac service. We have provided a subsidised service on that route for a considerable period. The CalMac service operates on a restricted basis, but views have been expressed to us by the local community, and indeed by Professor Kay, that it would be possible to operate on an unrestricted basis—in other words, that it would be possible to provide a better quality of service on the route if the subsidised service was no longer available.

It is proposed that a commercial operator—or, indeed, CalMac if it chose to put forward a proposal—could operate a passenger and vehicle service on a non-subsidised basis for the local community and that, because no subsidy would be involved, it could do so with a better frequency and a higher level of service than CalMac provides. We wanted to test whether that is the case through the normal procedures, which involve a prior information notice, but we have said that until clarification comes from the Commission we will not proceed with the main bundle or with the Gourock to Dunoon issue. There are clear and established differences and the academics who have suggested alternatives that might involve tendering appreciate that the Gourock to Dunoon route stands on its own because it is the only route that involves that form of competition.

My other question is on your promise to examine alternatives. The concession that your predecessor negotiated with the Commission was to ensure that the bundle—all the routes and the integrity of the CalMac service—is at the heart of the proposals. Will you explain the thinking that lay behind the single-bundle principle that was negotiated and will you confirm that it will be very much in your mind in evaluating any alternatives? Communities want to know that you will not be minded to move away from that principle, because it is so important.

It is crucial. Clearly, a significant level of service is provided by CalMac and it is impossible to imagine that that would continue if the bundle was broken down into individual services. For example, CalMac can provide cover if a vessel breaks down. It has to take vessels out of commission each year for repairs and maintenance, but cover can be provided by other vessels so that there is continuity of service. Vessels that are used on summer-only services can be used during the winter to help to support other services, so there is huge advantage in the 20-plus routes being considered together.

If the service was broken up, commercial operators could cherry pick routes or a breakdown on one route could lead to unsuccessful negotiations to try to bring in a vessel from another service, as all operators would operate on a tight basis and would not have additional vessels available. Therefore, there could be difficult situations. Initially, all the routes might be operated by CalMac, but there could be difficulties if another operator came in and wanted to run a particular route.

All those issues must be of concern to ministers and local communities, which is why the Commission's decision to allow the bundling following the Scottish Executive's lobbying was regarded as a major breakthrough at the time. Some proposed alternatives to tendering would involve a break-up of services. It is important that, in making the argument to the Commission for an alternative to tendering, we suggest a solution that will be acceptable to local communities and that will preserve services and the quality of the service that is currently provided. That will be at the forefront of my mind in all that we do over the next few weeks with the Commission. Preserving the bundle is important.

I have a small point to make. NorthLink was undermined by private competition coming into the route and creaming off revenue by providing a commercial service and one company has intimated that it might be interested in doing that on four or five routes in the CalMac bundle. What can you do to try to ensure that that does not happen under the current proposals? That is a clear weakness that was identified with the NorthLink process. The business case was established on a certain amount of revenue, but revenue was cherry picked by a private operator, which came in and took it away. Have you considered that issue?

All the advice that we have received from CalMac is that the current routes are unprofitable. The subsidy is well over £20 million and has been increasing above the rate of inflation. However, it is clearly up to any commercial operator to decide whether to start to operate a service, which is what happened in the NorthLink situation.

Another factor in the NorthLink situation was that entirely new vessels were brought into operation to replace the existing vessels. That was required for maritime safety reasons—new maritime safety regulations were introduced. Therefore, the problems that developed did not result only from competition.

David Hart might want to add something about the potential for a commercial operator to start to operate a service on the existing routes, but one of the reasons for going for a public service contract approach is to ensure that we provide a subsidy for elements of service. Other operators are then unable to come on to the route. That is an important element of the process of applying a public service contract in such circumstances.

We are certainly considering the contract procedures that are in place following the situation in the northern isles that George Lyon described; we want to find out whether we can make the contract's ability to withstand the sort of competition that has been mentioned more robust. The other possible approach is to explore, as we have done to some extent, whether there is any scope for a licensing system that would limit access to certain routes. That would be a pretty draconian measure, given the presumption that the freedom to operate maritime services would generally be seen as a good thing. However, we are at least investigating the option to see whether there is any scope for a licensing system.

I thought that the minister was suggesting that the tender would protect against someone coming in and operating in competition with CalMac, but it is clear from David Hart's answer that the tender would not prevent someone from coming in and competing, although that could be achieved with some sort of licensing scheme. Is my understanding correct?

Yes.

We have no powers at present to restrict any operator that wishes to operate any service.

A question has been raised with me by individuals who have a strong interest in the matter. Even though the Commission seems to be comfortable with the tendering process, is it correct that there would be no impediment to an individual company challenging the issue about overcompensation with the proposed tendering regime?

I am sorry, but I am not sure that I understood what you said.

Irrespective of the fact that the Commission has said that it is comfortable with the Executive's position on tendering, if a company believed that a specific route was profitable, would there be anything to impede that company taking a case to court on the question of overcompensation with regard to state aid?

It would be dangerous to say that companies could not take issues to court, because they are free to pursue action as they see fit, although whether such action would be successful is debatable. We have to satisfy ourselves in advance of the process that we are not subsidising profitable routes. According to the analysis that we have done on the main bundle of the CalMac routes, all the routes are loss making. That is the basis on which we are setting out. In addition, there will have to be procedures in the contract to claw back excessive profits if that is the outturn. Taking those two points together, I think that it would probably be difficult for someone to argue that we were offering overcompensation for the services.

To clarify, David Hart's answer is perfectly correct—we cannot anticipate the outcome of a court challenge—but the fact that a tendering process will have been gone through will be a strong defence to the challenge. If I misled the committee, I apologise. The point that I was trying to make was that if, through a tendering process such as the NorthLink process, we end up providing a subsidy for passengers or freight, as we do with the current CalMac services, that support is perfectly proper and legal, because the proper procedures to provide Government support have been gone through. If a competitor finds it difficult to operate or match those prices, that is the result of the appropriate public service contract or public service obligation procedures, as permitted under EU rules. That is the process that is being gone through; we are not talking about a licensing arrangement that would completely block any competitor on the route.

I draw the minister's attention to the written question by Catherine Stihler MEP and the answer from Mr Barrot on behalf of the Commission. I will not read out the whole question, but I am sure that the minister is aware of it. The first sentence of the question, which refers to the Community guidelines on state aid to maritime transport, states:

"Although it is considered appropriate for Member States to make maximum use of the above procedures, exceptions may be justified, such as in the case of island cabotage involving regular ferry services."

In his answer, Mr Barrot said that, to date,

"no Member States have ever taken advantage of this exception".

Obviously, he gives a far more complete response than that. However, the Western Isles are in a fairly unique position in comparison with other European island groups. For example, Spain's Balearic islands are far bigger than the Western Isles and have far more air links. Given the unique situation of the Western Isles and the fact that they rely economically and socially on the ferry links, could we not make a strong case to the Commission to accept the exception?

We have made exactly that argument to the Commission in the past, but it has not responded favourably. As members know, it has made exceptions for ferry services that carry fewer than 100,000 passengers a year—a number of such services in the CalMac bundle fall into that category. However, it has also indicated that, if we were to take that approach, we would have to consider the total cumulative impact of those services.

Members should remember that, if we took such an approach, we would effectively have to accept the need to split the bundle, because we would not be able to do the same with all the routes. After all, some carry significantly more than 100,000 passengers a year. In any case, if we took the approach that you outlined, we would still be trapped, because we would have to take into consideration the cumulative annual passenger numbers. As a result, according to the advice that we received previously, if passenger numbers on several of the routes came to more than 100,000 and the routes were all awarded to CalMac, we would breach the rules. Again, we will test the options with the Commission and find out whether we can get any movement on the issues.

Our lobbying has achieved changes to the regulations in some areas. For example, because of our representations, we were able to proceed with a bundle and to continue to support mainland-to-mainland routes. We have made some progress over the past five years, but the fundamental issue of tendering remains the most significant area of difficulty.

We have seen the quotation that is contained in Catherine Stihler's letter. I should point out that it comes from the now out-of-date 1997 state aid guidelines. More significant, it stops short of the full story, because after stating that

"exceptions may be justified, such as in the case of island cabotage involving regular ferry services",

the guideline in question goes on to say:

"In those instances, measures must be notified and will continue to be assessed under the general State aid rules."

As a result, being granted an exception does not allow someone just to carry on doing whatever they wish. They have to justify themselves under the state aid rules. Any assessment made under the state aid notification procedure will be much more rigorous than simply following the procedures laid down in the guideline; it is not the blanket exception that some people have tried to claim.

I have been following the committee's deliberations and I should point out that not much attention appears to have been given to the communication that the Commission issued on 22 December 2003, a month before the revised state aid guidelines were issued. Although quite a few commentators have picked up on the revised guidelines, they do not seem to have cottoned on to the fact that a relevant communication was issued a few weeks before them. It would be useful if the committee could reflect on that document, because in many ways it is critical to what we are doing.

I can confirm that members of the committee have copies of that document, which, in due course, we might well decide to explore with representatives of the Commission.

I declare an interest, in that I am a constant user of CalMac services in the Hebrides and the Western Isles and of the excellent Western Ferries service between Gourock and Dunoon.

The minister will be aware that, despite the fact that they might have some gripes over the timetables, the vast majority of people who live in the Western Isles and mainland Argyll and who use the ferry services are blissfully happy that they are served by a company that has as good a safety record and as much experience as CalMac does. Will you try to assuage some of the fears that people have about losing that ferry service? In 18 months, the previous tendering process cost £13.5 million extra on top of the £12 million cost for the northern isles.

Will CalMac be allowed to tender for the northern isles contract? If so, how can it do so on a level playing field if it might lose its whole being as the consequence of another tendering process?

I am aware of the strong support for CalMac in the island communities that it serves, the quality of the service that it provides, the quality of its staff and their dedication and commitment to maintaining the lifeline ferry services. All of my efforts in the next few weeks will be to ensure that we protect the lifeline ferry services and have the opportunity to improve on them.

It is worth pointing out that we are being forced towards tendering—a situation that has been hanging over us for the past five years—because of the 1992 maritime cabotage regulation, which was promoted and signed by John MacGregor, who was the Conservative minister with responsibility for transport at the time. That makes it difficult to take criticism from the Conservatives on this issue.

John MacGregor is not a relative of mine.

All the parties want to find an alternative to the current situation. On 5 January, I wrote to the minister with a series of questions, but I have received no answers, which is disappointing. I will ask one of those questions again just now. The minister has argued that the EU law requires tendering and that the legal advice has been reviewed carefully. Will the minister or any of the five expert advisers who are around the table specify the precise provision in EU law that says that we are required to put the CalMac routes out to tender?

I will allow Jim Logie to answer your question in detail, but I can say that the basic reason relates to article 4.1 of the maritime cabotage regulation of 1992. Although state aid is spoken about a lot in relation to this issue—and it is relevant and important—the main reason relates to public service contracts and obligations and the responsibility on a member state to proceed with such contracts on a non-discriminatory basis in respect of all ship owners in the European Community. Everything else flows from that.

With respect, the article to which you refer does not specify that tendering is required; nor does any other express provision of EU law. Am I right?

Article 4.1 does not use the word "tender". As the minister has just pointed out, it requires that public service contracts and obligations operate on a non-discriminatory basis. The question that arises is exactly what a non-discriminatory basis is. The Commission's answer—which is clear in all its publications, is entirely consistent with its practice in other areas and is supported by judgments from the European Court of Justice—is that the best means of demonstrating that something has operated on a non-discriminatory basis is by having a public tender. If the question is inverted slightly to ask whether Scottish ministers could challenge successfully a decision from the Commission that required them to tender on the basis that article 4.1 does not use the word "tender", the answer is almost certainly not.

I understand that you have now admitted that there is no express provision in EU law that says that tendering is necessary, but that that is your reading of the import of the law.

The 1997 guidelines on interpreting state aid rules per the maritime cabotage regulation state:

"for public service contracts to be consistent with the common market and not to constitute State aid, the commission expects public tenders to be made".

Those guidelines have now been scrapped and replaced with the 2004 guidelines, which make no reference to tendering. The later guidelines were produced following the Altmark case, which acknowledged that bus services in Bavaria did not require to be put out to tender.

Is it not the case that, by asking whether we need to go to tender, we are asking the wrong question, because tendering is, after all, simply a mechanism; it is not an objective or principle of EU law. Should not we be asking, as Professor Kay has said, the fundamental question of how we provide an essential lifeline service to vulnerable island communities in the context of a regulatory procurement and tendering regime? If we ask that question, we can find an alternative that does not require competitive tendering, which might be to appoint a regulator, as Professor Kay has argued.

Today is not the day to disagree on these issues or to fall out. Surely today is a day to prepare for our discussions with the Commission and, as I have said, to make the best argument possible for the avoidance of tendering. The rule is clear. The 1992 regulation states:

"Whenever a Member State concludes public service contracts or imposes public service obligations, it shall do so on a non-discriminatory basis in respect of all Community shipowners."

The interpretation of the phrase "non-discriminatory basis" lies at the heart of all this.

We will certainly consider the approach that Fergus Ewing is suggesting when we take our arguments to the Commission. I do not know whether Jim Logie wants to add anything to that. We will mount as solid a case as we can. The outcome has to be an alternative that is able to preserve the lifeline ferry services and assure the communities concerned, which is important.

I welcome the spirit of that response, and I just want to pursue the point.

Briefly.

This is the final point.

The document of December 2003 to which Mr Hart referred, the communication from the Commission on the interpretation of the maritime cabotage regulation, applying the principle of freedom to provide services to maritime cabotage transport, addresses the principle of non-discrimination at paragraph 5.3.2. It says that the state

"must not set obligations that are tailor-made for a given shipping company".

I put it to the minister that if the tender process were scrapped and a regulator were to apply benchmark objective standards about what routes should cost, what labour should cost and what all aspects of providing a ferry service should cost, that solution would not be tailor-made to any one company. That would be an objective, verifiable standard that could be used, as Professor Kay and others argue, as the kernel around which to put forward an alternative proposal and avoid the £30 million or more price tag of tendering.

We will consider those issues. I understand the positive points that you make, but potential negatives must also be assessed. The approach that you refer to would mean unbundling and would mean that a route-by-route approach would be taken. The issue could then arise of more than one company expressing an interest in a particular route. How would we resolve a situation in which more than one company expresses interest in a route under a regulatory regime? The answer that we would seem to come back to is tendering.

Each of the alternatives needs to be carefully thought through. It would be wrong of me to go into too much detail about any of them this afternoon, because in a sense that discloses our arguments to the Commission before we reach that stage. We need to go into the discussions with the Commission with the best information and advice possible in order to try to reach a satisfactory outcome. We have started that engagement. We have had discussions with the Commission and we believe that new approaches and new issues can sensibly be taken to it. I do not want to be anything other than realistic with the committee this afternoon, but I am determined to make the best case possible.

Tommy Sheridan and George Lyon have two brief points—if they are not brief points I will cut them off.

Like Fergus Ewing, I welcome at least the minister's spirit today, which is much more positive than his public pronouncements have been before. There is now a desire to avoid tendering rather than acceptance of the inevitability of tendering. I ask him, for the record, to assure us that there will be a ministerial assessment of the academic papers that have been mentioned. All of them are persuasive and all of them point to a huge potential waste of public money—not to mention the disruption to lifeline services to communities—if we go ahead with the tendering exercise. Will the minister please give me an assurance that, within a timescale, evaluations of the documents will be publicly available so that the committee can read them?

Before I invite the minister to answer, I will allow George Lyon to ask his final brief question.

As I have had the advantage of reading Neil Kay's proposals in depth, I draw the minister's attention to page 32, where he addresses the issue of non-discrimination. He says that the crux of the state aid question is the 1992 regulation, which, as he notes

"still is the rule of law here".

He goes on to say that one possible way of satisfying the non-discrimination aspect of the regulation would be to inform

"community shipowners that they are welcome to submit technical proposals and alternatives if they wish".

That seems to me to describe a tendering process. The minister should draw attention to that comment when he does the evaluation.

I genuinely do not want to get into the detail of the individual representations this afternoon. I mentioned to Fergus Ewing some of the potential issues that could arise if we go in the direction of the independent regulator that Professor Kay has suggested. George Lyon rightly draws attention to the point that if there is commercial interest from operators in a particular route, the question is how we resolve that. The answer would seem to draw us back into tendering.

However, I give a guarantee to Tommy Sheridan that there will be a full ministerial assessment of the different options and a full evaluation will be carried out. If they are willing, we will make contact with the individuals who obviously have worked so hard on these complicated issues over the past weeks and months. We will try to get clarification from them where that is important.

I do not guarantee to make all that information publicly available ahead of concluding our current discussions with the Commission. Once they are concluded, I might reconsider that, but I can see only disadvantage in making available our assessments in the likelihood of the Commission accepting our arguments and our reaching a successful outcome. That could undermine our negotiating position with the Commission and I do not want to do that.

That brings us to the end of evidence taking. I tell Tommy Sheridan that I would prefer us to deal with the other items of business now. We will have a further opportunity to decide on a way forward in subsequent meetings. I thank the minister and his officials.

I asked before about the idea of inviting academics to give evidence to the committee and you said, rightly at the time, that it would be very short notice to do so. At least one of the academics has now made it plain that they are willing to give evidence. Can we take that forward?

Rather than make a decision on that here, I would prefer to include it on the agenda of a subsequent meeting when we can discuss what further work we feel it is necessary to undertake on the ferry situation. We might well debate then whether we want to call the academics or, indeed, other potential witnesses. I agree to have such an agenda item at a subsequent meeting.

I see that Fergus Ewing wants to comment, but I would prefer to move on because we can deal with such matters at a subsequent meeting.