Transport and the Environment Committee, 26 Jun 2001

Meeting date: Tuesday, June 26, 2001

Official Report 284KB pdf

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Ferry Services (Highlands and Islands)

Agenda item 4 is the Scottish Executive's proposals for the future of the Highlands and Islands ferry service network. We shall take evidence from Sarah Boyack, the Minister for Transport and Planning, who is accompanied by Scottish Executive officials John Martin, Fiona Harrison, Murray Sinclair and Neil Jackson. We shall have a short break before they join us.

Meeting adjourned.

On resuming—

I welcome Sarah Boyack and all the officials who accompany her. Would you like to make an opening statement, minister?

I will kick off by thanking the committee for the opportunity to give evidence on the Scottish Executive's proposals to put Caledonian MacBrayne's lifeline services out to competitive tender. It is important that I let you know my plans and I am happy to answer any questions.

As members know, we are required to undertake competitive tendering to meet the European Commission regulations on the provision of state aids to maritime transport. Following wide consultation last year, I announced provisional proposals in January and we have submitted them to the Commission as we are required to do under the rules.

It might be helpful for me to run through our core proposals. We propose that all CalMac's undertaking services, including mainland-to-mainland routes, should be designated as public service obligations, and so remain eligible for subsidy. We propose to tender the network as one bundle to maximise economies of scale and service reliability, to facilitate the delivery of integrated transport objectives and to prevent cherry-picking of the routes.

We propose that there should be a publicly owned vessel-owning company, or vesco, which will manage the CalMac fleet and lease vessels to operators, which would be contractually bound to use vesco ships. To provide an extra safeguard during that period of change, we also plan that the vesco would have a role as a procurer of last resort. I know that there has been much comment about that proposal. It has significant merit as part of our measure to safeguard services during what everyone agrees will be a period of great change. We see that as providing extra cover, over and above that which is available for all other ferry services in the UK, and as a recognition of the lifeline nature of those routes. I have also given a commitment that levels of services and fares will be protected during the transition to the new delivery framework.

Since the announcement of the provisional proposals some months ago, there have been some developments that it might be helpful for me to share with the committee. First, although the details of communications between the Commission and the Executive are private, I can let members know that the Commission has asked for further information in support of tendering the network as one unit. We are in the process of replying to a number of detailed questions from the Commission on that aspect. We are stressing firmly that the Executive believes that tendering the whole network as one brings significant benefits. That was the overwhelming preference of the respondents to our consultation exercise.

While we await the Commission's views, we have been engaged in a great deal of work. That brings me to the second development. When I announced the proposals, I stressed that they would be the subject of further investigation. We have recently issued two separate tenders for consultancy advice to assist us with that detailed preparatory work.

The first consultancy provides an analysis of how we ensure that our vesco proposals pass our financial health check, and will give us a business and implementation plan for the new company. It will also look at the arrangements for CalMac's piers and harbours. The second consultancy will provide advice and recommendations on drafting the service specification. That document will address the levels of fares and services and highlight the priority that the Executive attaches to safety. Once we have a draft, it will be the subject of wide consultation before we finalise the document. We expect to select the winning bids for both tenders in July this year. When the successful consultants are in place, we plan for the process to commence as soon as possible.

I bring one last point to the committee's attention. I am aware that there has been a lot of speculation that the Commission's expected 2002 review of the cabotage guidelines might relax those guidelines and so exempt CalMac routes from the requirement to be tendered. However, a recent European parliamentary question confirmed that, although the guidelines might be reviewed next year, the regulations would not and that the principle of non-discrimination between European Community ship owners would remain. I thought that it might be helpful to put that on the record.

A great deal of work is on the go. The Commission is putting a great deal of pressure on the Executive to bring CalMac services into compliance quickly. I believe that the proposals that we submitted to the Commission will secure lifeline services for the future. We now must await the Commission's response to our detailed answers to its detailed questions. The timetable that we adopt thereafter will in part depend on that response.

I do not need to tell the committee that the implementation process is complex and represents a huge challenge. However, working in consultation with the local communities, CalMac, its work force, local authorities and other interests will enable us to deliver a framework for tendering that fosters the economic and social well-being of the Highlands and Islands communities. I believe that the Executive, CalMac and the communities that are involved are tuned into that set of challenges and that we will be able to rise to the undertaking ahead.

Thank you for your introductory comments, minister. They addressed several of the points that have come up in the course of the inquiry so far.

We note the tendering approach that the Executive intends to take. Will you explain any other tendering approaches that the Executive considered and why you eventually decided on the tendering proposals that you have?

Most recently we had the experience of the northern isles services tender. It was a useful exercise for the Executive to run through that process. The difference between the northern isles and the CalMac services is that there are an awful lot more CalMac services.

We are well aware that the CalMac tender will be a more complex exercise. However, the experience of the northern isles tender—not just for the Executive but for the communities, which were able to see how we consulted interests such as the local authorities and business interests—has given us a sense of how to listen to views and plug those into a final tender.

You have touched to some degree on my second question, which is whether you should proceed at this stage with the tendering proposals. I know that the Executive's position is that, in order to comply with European Union guidelines, it is necessary to proceed at this stage. However, in evidence that was given to the committee last week, the Scottish Trades Union Congress in particular suggested that there was still scope within existing guidelines for the Executive to seek some form of derogation from the requirements of the regulations. Could you respond to that?

We are clear that we are at the end of the queue of EU countries responding to the regulations for non-discrimination. I am aware that there was an option for derogation. That was available in the early 1990s, and a couple of countries exercised the right at that time. The position now is that all the other European countries are coming into line. The impression that we have from the Commission is crystal clear: we must comply with the regulations that it stipulates on maritime transport and with the current set of deadlines.

In the proposals as they are framed, the framework is guided by the tendering process and the tender documents. No form of legislative back-up is proposed at this stage for the regulation of the new organisation that will run the services. Why does the Executive believe that it is not necessary to proceed with a legislative framework to back up the new proposals at this stage?

I return to the first answer that I gave you and to the northern isles experience. We have been through that process and it is our view that, with the tender process that we intend, there is no need for primary legislation in advance of the tender process.

I will probe that a little bit further. The northern isles tender has been issued, but we do not have any live experience of the operation of that tender. Do you foresee a need for legislative back-up in the future? What might lead you to such an approach?

The purpose of a tender is to invite companies to put in bids to run the services that we specify in the tender. They will be contractually obliged to meet those requirements. It is not our view that any extra legislation is needed to deliver those services. The tender process should give us a contract that the successful company will be signed up to deliver.

Before I ask about procurement, I will add a supplementary question to Bristow Muldoon's questions. All committee members received on 23 June a piece of correspondence from a Captain Norman Martin. He gave evidence that other countries in Europe, such as Belgium, Denmark, Finland, France, Germany, Greece and Sweden, were using a form of the net wage system in which ship owners pay—

Would you repeat that? I missed what you said.

The evidence that we had was that the nations that I mentioned are using a form of the net wage system in which the ship owners pay seafarers their wages net of assumed taxes and social costs. In effect, they are not paying back into the Government. In that way, they overcome state aids and do not require to put out their vessels to competition.

I am not an expert on the subject. I had not heard that evidence before. It may be that you are not in a position to respond to that today, minister, which I would understand fully. It would be useful for the committee to send your office a copy of the letter so that we can get a response to it and understand whether the evidence has any basis.

Neither my officials nor I have seen the correspondence. I obviously want to take a close look at it. At this stage in the process, I would be amazed if there was a simple loophole in the way that you have suggested. I would be happy to examine the information and provide a swift and brief response to the committee on our conclusions on it, if that would be helpful.

That would be useful. I do not think that the loophole would be simple, by the sound of it, but we received that example.

I am sorry to have started off with that. I will move on to the area that I want to talk to you about. Can you tell us about the process that the vesco would undertake to procure, if required, a new operator and what the time scale of any such procurement might be?

It is worth stressing at the outset that we have developed the belt-and-braces concept of the vesco being able to work with the Executive to secure services as a last resort. It would apply if a successful tenderer for a contract had failed to deliver that contract for whatever reason. We have never had those circumstances with any Executive ferry contracts, whether with P&O Scottish Ferries in the northern isles or CalMac, which has provided services on behalf of the Government for a large number of years.

When we examined the process, we felt that it was important that we consider the whole process and develop a belt-and-braces approach. We do not expect the vesco to have to procure a new operator. The operator will provide lifeline services to the communities that it will serve. We had to consider the what-if scenario: what if an operator failed to deliver the services? It is important to say that we think that it is extremely unlikely that the situation would ever arise. However, we thought that it was important that the process exist.

We consider the vesco as the provider of the vessels. However, we thought that it was important to develop a mechanism whereby, if circumstances were to arise in which there was a problem with the operator of those vessels, the vesco would work with the Executive to ensure that we had the capacity to operate the routes. That is where our whole approach is coming from. Procuring a new operator would be very much a last resort.

I realise that it would be a last resort, but building in the whole vesco process suggests that, although it might not happen regularly, it would be possible. By what process would the vesco procure a new operator, if that was required in the circumstances that you have explained? What would the time scales be?

It would be a bit premature to go into the detail at this stage. I mentioned earlier that we are in the process of commissioning consultants to look at the structure that needs to be developed for the vesco. We have also been in regular discussion with the Maritime and Coastguard Agency. This summer, we are going through the process of pinning down the details. Although I cannot reply at the moment, I thought that it would be useful to give the committee the principles under which the vesco would be brought into play in such circumstances.

I am sure that the minister will understand that the community, the Executive and this committee wish to see continuity of service. Will the minister guarantee—or give some sort of indication—that, if a process cannot be arrived at that secures the islands' lifeline services in an unbroken way, the whole area will be reconsidered?

There are two stages. A successful operator needs to come through the end of the tender approach. Your question concerns something downstream from that approach, but we are working on it at the moment.

Tendering all the services in a single bundle will give a degree of certainty to the whole process and deliver economies of scale. We will also have thought through what might happen if an operator failed. The combination of those two things will give us confidence. Our approach is intended to reassure communities that we intend to deliver.

I hear the minister's assurances, but I am not very assured by the fact that we have got this far down the road without receiving answers to our questions about the procurer. The Executive has chosen to go down the procurer route, but perhaps that route was not fully thought out. It is a bit much to be undertaking work now to flesh out the details and build down from the idea of a procurer. Although it is unlikely, it is entirely possible that circumstances will arise in which an operator pulls out at short notice. The committee wants to be assured that, if the further work that will be done does not give the Executive confidence about the continuity of services, the whole area will be reconsidered.

I fundamentally disagree with the underlying tone of those questions and comments. We are considering how we can put in place a sensible approach for a worst-case scenario. We are talking to the MCA about the whole process to ensure that, in the worst-case scenario that you mention, a vesco could be given safety certificates at fairly short notice.

We have consulted the European Commission very carefully because we want to ensure that the Commission is comfortable with our final set of proposals. As well as meeting our own safety requirements, the proposals must meet the Commission's requirements. We want to ensure that we are able to deliver the lifeline services. A great deal of work has been done and is being done. We have consultancy support to help us work through the issues.

Bruce Crawford has pursued that issue with three or four questions. I want to move on to other areas.

I understand that, but I have a different question that relates to the same issue.

Any new operator that was brought in after an operator had pulled out would be able to maximise its leverage over the Executive in terms of the finance that it could secure. Will the minister reassure us that that issue will be examined very closely? How such a situation would be dealt with needs to be thought through.

That point was raised in evidence, when one of the witnesses used the phrase "over a barrel".

Obviously, we are keen to ensure that services are provided and that value for money is achieved—both for the sake of the Executive and for the communities that are served. We are looking at the cost issues.

My question is a supplementary to the minister's point about her discussions with the MCA. Did she discuss with the MCA whether the MCA would issue the vesco with a document of compliance?

Fiona Harrison, who has been more closely involved in the discussions with the MCA, will answer that question.

We have had useful discussions with the MCA about the proposal that the vesco should be the operator of last resort. The minister has already said that, in the first instance, we envisage that the vesco would procure another operator. We envisage that, if that were required, the tendering process would be very quick. However, if an operator had the Executive over a barrel, or if an operator could not be found, we believe that the vesco could deliver the services at its own hand. An interim document of compliance and interim safety management certificates can be granted quickly, provided that the MCA is satisfied that whoever operates the ferries can do so safely.

I want to tease that out a wee bit. The individual certificates for the ships are a separate issue. Presumably, the vesco would simply use the ships that were already in use anyway. However, the document of compliance concerns the safety management systems that a company has in place. If the vesco had to apply for an interim certificate, there would have to be a period when the vesco could not be the company operating the vessels.

Our advice from the MCA is that that process can be very quick and that an interim document of compliance could be got within hours, if absolutely necessary.

We will now consider regulation issues.

The industry will lack an independent regulator. Let me say at the outset that I am not talking about safety. Last week's evidence has convinced us that the MCA is the appropriate body to regulate safety, although perhaps—this is not a reserved issue—it needs more funding and more staff to do its job to the best of its ability.

The committee wants to consider the regulation of the fares and services that the company will offer. Can the minister name any other similar lifeline public service that does not have a regulator? For example, we have the office of Gas and Electricity Markets and the Office of Water Services. Should not ferry services be in a similar position? Given the fact that the company will still be part-owned by the Government, how can the Government both set and regulate the service requirements?

Let me comment briefly on the MCA, although it is an organisation for which I am not responsible. It is important to point out that the MCA has cost-recovery processes, so that if, post tendering, more work is involved in the process, the MCA can recover those costs from the successful operator.

As I was Minister for Transport and the Environment when the water industry commissioner was established, I am aware of the whole issue of regulation. However, there are differences between CalMac's services and the other industries that Fiona McLeod mentioned. In the case of CalMac's services, the Executive will sign a contract with an operator for the provision of services to a specified contract, in which a whole range of detailed issues will have been set out. That is not the case with the water industry, for example, for which a different type of market arrangement exists.

You raised the issue of the company being owned by the Government. The vesco will be owned by the Executive and will be responsible to us. It will have to provide services to the operating company, without subsidy and at cost. I do not agree with the arguments that I have read about the need for a separate regulator. In addition to the MCA, which the committee has already accepted as appropriate on safety grounds, there is a raft of competition legislation in the UK. There are issues to do with how we go about the tender specification process and how we consult in detail on that. The northern isles services provide a directly comparable example of how we have approached such processes in the past.

Are you saying that services and fares in the industry will be regulated through the five-year contracts? For fares and services to be changed, would those contracts have to be renegotiated?

No. We will set out in the contracts the process for making changes that we regard as acceptable.

The detail will be in the specification, which, as the minister has said, will be subject to scrutiny. We are all interested in that area of work.

The committee can come back to that.

I have received representations from constituents who are worried about the inclusion of local authority ferries in this process. Many routes in geographically isolated areas of the Highlands and Islands are run by local authorities. I am referring to routes such as Mallaig to Knoydart and the ferry from Port Askaig. People have also been in touch with me about the Lismore to Oban ferry. Does the Executive intend to bring such services within the tendering process or will it be for local authorities to offer them?

We are in discussion with local authorities, but we do not see the CalMac tendering process as an opportunity to bring all the local services to which Maureen Macmillan refers under one umbrella. Fiona Harrison can say more on this issue.

We propose to review and take decisions on a number of out-of-undertaking services, including the Lismore service, in the near future.

In some areas there has been anxiety—unrest would be too strong a word to use—about this issue. Are you negotiating with the local authorities about the routes that may be included in the tendering process? What is happening?

There is no process of negotiation, but we will consult local authorities carefully. The current process is concerned with the development of the tender specification. Before we formally consult on the draft specification, we will have consulted the local authorities, Highlands and Islands Enterprise and people who have an interest in the tender specification. There is an opportunity for detailed discussions at two stages. We are very keen to involve local authorities in those discussions.

I hope that the committee will also be involved.

I take that as read.

I presume that councils will have discussions with the local inhabitants who use the ferry.

In her introductory remarks, the minister referred to the considerable pressure that there has been to place all the services in one bundle. What is the Executive's current view on whether that will meet the requirements of competition law? Does the Executive have in mind any initiatives that will ensure that efficiency and value for money are demonstrated in the event that all the services are bundled together? In other words, do you have any ideas for making the process more competitive if it is felt not to be and there is a risk that it may fall foul of competition law?

We are providing extra information to the Commission in response to some of its questions in this key area. The Commission wanted us to provide detailed information on the rationale for the single bundle approach and on how we see that working in practice. We are in dialogue with the Commission about that.

Can you say at this stage whether you think you are winning?

It has been extremely useful that the Commission has been prepared to spend time with us. When I go to Brussels, I am conscious that we are one of many Governments that raise a lot of issues with the Commission, which has been generous with its time. It has met a number of the members of the committee, as well as local authorities and trade unions, and has been prepared to engage in that dialogue.

In the past year, we have made a lot of progress in giving the Commission a sense of the uniqueness of the services that are provided off the west coast of Scotland, in terms of the complexity of routes and the kind of seas that are crossed. It has a much better feel for the challenge facing us than it did a year ago. I am grateful to the people who have worked closely with the Executive, not so much to take a line from us, but to raise other people's views in Brussels. That has been helpful in giving the Commission a sense of the range of views in Scotland on the issue.

While being positive, the minister is being careful not to give anything away. I suppose that it is too early to know what is likely to happen, but presumably the Executive has considered what it will do if it loses its case and we are required to have the bundles broken into several smaller bundles. Given that that is a possibility, how does the Executive think that it can best go about preventing cherry-picking of the more attractive routes? How would it cope with the practical implications of unbundling? For example, how can it ensure that the marketing of the services as a whole, or through-ticketing for users who like to wander through the islands, and might therefore be moving from one provider and one contract to another, would continue? I think we would all be loth for that flexibility and user friendliness to be lost as a result of competition.

The arguments that Murray Tosh presents are precisely the kind of arguments that we have raised with the Commission. There are issues such as marketing and ensuring that the network can be easily understood and that we make the most of ticketing opportunities. We ran through a range of options in the consultation document that we issued last summer. The vast majority of consultees believed strongly in the virtue of a single bundle; that is why we are making the best possible arguments we can to the Commission. We know that there is general support for us, for the reasons Murray Tosh mentioned and because of issues such as economies of scale. Offering the services as a single bundle is complex, but we would still have complexities if we split them up into several bundles. We are very conscious about value for money and we want to make our subsidy to the process as efficient as possible.

Issues to do with variable costs can be addressed much more easily with a single bundle. We have made lengthy comments to the Commission on matters such as overhaul facilities, the purchase of fuel, harbour dues, insurance and catering, because we think that they will have a material influence on the cost of providing services. As members will know, I am keen that we provide the best possible service, but for a reasonable cost. For the reasons I have given, we are still at the stage of working hard with the Commission on the single bundle, which we think has a great deal to recommend it. We must have the best possible discussion with the Commission on why we have made that proposal.

Safety is also a priority for us; a single bundle would simplify the approach to safety. We are rehearsing a number of arguments with the Commission. Murray Tosh raised a "what if" scenario, but we are not at that stage at the moment. We are very much at the stage of working hard with the Commission to persuade it of our approach.

We can all agree with much of what the minister has just said. I appreciate that she does not want to be at the what-if stage, but it is important for us to understand whether the Executive has a feel for the consequences of reaching the what-if scenario. Could the minister give us an insight into her thinking on what the Executive would do to prevent the cherry-picking of the most attractive routes? Are there any effective measures that could be put in place to prevent unbundling having a knock-on effect on issues such as integrated marketing and through-ticketing, which are the advantages to the customer of the current integrated service? I know that the minister does not want to be driven into that position, but we need to know that work is being done to consider what we would do if we found ourselves in that situation.

We are putting consultants on the case to work up a draft specification for the tender process. Those are issues that we could address. The difficulty is that Murray Tosh is asking me to speculate without knowing why the Commission might not be happy with the suggestions that we have made. We could sit here and try to second-guess the Commission, but we are not at that stage yet. For that reason, this is not a fruitful conversation for us to have at this stage. We have all sorts of what-if ideas in our minds on a range of issues, but given that we have not had the Commission's formal response and we are still at the stage of providing it with supplementary information from earlier in the year, now is not the time for us to go down that route.

To pursue that further, in the event of the process going wrong—which no one wants to speculate on—are you happy that you will have sufficient time to implement plan B?

A number of options were set out in the consultation paper that we issued last summer. It is not that we have not thought through what the alternatives are, but that we came to a clear view on what the best possible solution would be for the interests of people who use the services.

Will the consultants who will be working on the specification consider different scenarios? Presumably you will want that detailed work to focus on those scenarios; otherwise you have to start again at the end of the process. If the minister is unwilling to spell out her thinking—or if her thinking on the matter is not yet formed sufficiently—it is important for us to know that at least the consultants will consider those options and give the Executive viable strategies to cope with whatever might come from the Commission's deliberations.

I very much agree that that is precisely the kind of approach that we could take. The Commission must also be realistic about timing and there is time pressure not only on us but on the Commission. The points that you make are not at all insurmountable; I am just saying that that is not the approach that we are taking at the moment. We have not thought about the "what if" scenarios. We are still working to persuade the Commission on the single bundle approach. I am not ignoring the possibilities on the issues that Murray Tosh has raised; we will reflect on those issues. It is not a waste of time to rehearse them in front of us.

Maureen Macmillan asked about consultation. Can we have some examples of how you see that going? The tender documentation and service specifications involve fairly detailed and in-depth issues. How will you increase transparency to ensure that communities, employees, local authorities and even the committee receive the level of detail and information that will allow us constructively to engage in the process of service specification and contract documentation?

There is a range of mechanisms that we think would be appropriate, which again build on the northern isles contracts. In the case of those contracts, we ensured that local authorities and local economic interests were informed of our draft specification. In this case, the CalMac users consultative committee will also be involved. That is the approach we have in mind. Other possibilities for the consultation process include such methods as focus group discussions, where people sit down and talk round the detail of the available options. I am conscious that we have to do this sensitively.

Our objectives are to achieve innovation and improve service delivery. I am conscious that any change that benefits one community might be seen as a threat by another and that there are different perspectives. We are not looking at just one group of people. We will ensure that we have a range of types of consultation. The number of local authorities that are involved means that we have to work hard to get the consultation right. We see local authorities as partners. Part of the success of the approach to northern isles services was that local authorities saw themselves as consultees, but were keen to receive views from local people. That balance will be important.

We will continue with the theme of local issues.

Witnesses last week believed that the Transfer of Undertakings (Protection of Employment)—TUPE—Regulations and rights of employees issues will have to be addressed in the tender document. I know that you have not been considering many what-if issues, but if CalMac is unsuccessful, local navigational, social and cultural knowledge will be lost. What actions will the Executive be taking to safeguard the interests of current CalMac employees?

I am keen to discuss those issues to reassure the work force that we are tuned in to their concerns. We have discussed the issues with the management of CalMac, which is tuned in to them also. I understand that CalMac has held several meetings with different groups of employees to talk through the process that it is about to embark upon. I am conscious that this is a live issue for employees, and it is important that they get as much information as possible.

We have focused on what will be in the tender process. There is the issue of whether TUPE applies—that will be a legal matter at the time of any potential transfer. We are keen to address employment issues, because a number of matters have been raised by employees, and we will investigate how that can be advanced as we draft the tender specification.

You mentioned TUPE. We have information that TUPE does not cover pension rights. Is it proposed to take any action to safeguard employees' pensions?

We are looking at that in drafting the tender specification. I have had meetings with trade unions, and we have received helpful feedback. In addition to local authorities, we will ensure that the people who are developing the tender specification, which includes the trade unions and the work force, will be aware of the issue and be able to comment on it.

Could you touch on the transfer issues that arose with the northern isles ferry services? In that situation, people had rights in transferring from P&O to CalMac. Has the Executive analysed the transfer issues that arose? Has it examined the implications for manning levels, wage levels and pension rights? That would inform this process.

In a more direct way than was the case with the controversial trunk roads contract earlier this year, in this case the Executive ultimately is the employer and budget holder. Even if it does not directly employ people, it has a duty to consider the implications for the labour force. If an analysis exists, it would be useful for the minister to give us a flavour of it, so that the CalMac people know better what their prospects could be, depending on the scenario.

We are still taking advice on the detailed legal aspects. However, it is my understanding that NorthLink has agreed to take on all those who want to transfer from P&O to NorthLink under their existing terms and conditions. We have not analysed that specifically, but we have kept an eye on it, although we are not the employer. We are keen to see how that transfer works, partly because we are conscious that CalMac staff will be looking at that process with an eye to what happens in their tender process.

Given your ultimate strategic and financial domination of the process, to what extent is it possible for you to specify things such as pension rights, which Robin Harper raised—for example, that there should be a contributory employer pension rather than a money purchase pension? So long as it is understood that those obligations will be attached to any potential winner of the contracts, they will not be anti-competitive measures. Has the Executive considered that? Although it is not strictly a TUPE issue, it is related to making sure that the work force is protected.

Those are exactly the issues that we are looking at.

I will tease out the issue of pensions, then I will move on to other issues regarding the contract. The guidance issued by the Treasury on the transfer of public sector employees and pensions said that the pensions that are provided by the new employer should be broadly similar to those of the old employer. I would have thought that the minister would be in a position to give assurances that that will be the case, rather than saying that it is being considered.

Will the minister be looking at the training and competencies of the work force, the skills specification of the work force, the qualifications of employees and their experience, and the wage levels that are being paid to the employees at the moment? Those factors are responsible for CalMac's special safety record, and a new company that takes over the contracts will have to provide continuity. We have to address those issues, to ensure that we maintain the quality of service that has been provided by CalMac.

Without being able to hand Bruce Crawford the draft specifications today, I suspect that I will be unable to respond satisfactorily to his detailed comments. I repeat what I said to Murray Tosh. We are examining those kinds of issues closely. I am well aware from the discussions that I have had with representatives of the CalMac work force that they expect us to examine the issues in great depth and to address them in the tender specifications, and we are doing that.

I agree with Bruce Crawford's comments on safety. We want to ensure that there is a safety culture in the company that takes over the routes. Safety is at the core of the project, and any company will have to satisfy the MCA about its detailed approach to safety and its ethos.

The driver of the process has been meeting European requirements on competition regulations and state aid. As part of the process of going out to tender, have you quantified whether any efficiency gains are likely to be made? What is the anticipated impact on the amount of subsidy? If savings are to be made, what might be done with them?

I mentioned the concept of innovation in route development and the services that already are provided. We are keen for that to develop. I am conscious of the fact that what feels like innovation to one community may feel like a backward step to a community on the same island or somewhere else. That is a sensitive issue. In getting the consultees to help us to examine the draft service specifications, I am open to the ideas that are coming from some communities. I have already met members of different island communities who have strong ideas about how to improve the existing service in ways that would save money.

The test will be lie in whether those assertions are true. We are keen to explore that through the process. It is not possible to quantify savings at this stage, but we are keen to follow the approach that I have outlined when we identify the tender specification. Beyond that, there will be the opportunity for potential operating companies to say how they think they could do things better or differently, to produce a better outcome that might save resources. I would love to be in the happy position of requiring a lower subsidy, but I am not assuming that that will be the case.

The emphasis that you are giving us is on innovation within service and service development rather than on an effort to save money.

With the northern isles ferry service, we did not set out to save money per se, but we have managed to get a subsidy and a contract over the next five years, which gives us a better deal—it means that we have to pay less subsidy. As a result of that process, people have faster sailings and new boats, and they will get more sailings. It is possible to deliver innovation.

We are trying to set a service specification framework that will enable us to consider some of the route issues over the summer, but it also raises that issue with potential operators. We are keen for them to come with innovative solutions, and we want to get the benefit of the process of competition throughout the tender process, so that we maximise on the benefits.

In that context, how do you see performance monitoring developing in relation to the two new entities that might be created and to service quality on particular routes? Do you envisage an enhanced regime of performance monitoring being created as part of the specification and management arrangements that you want to be introduced?

We certainly have that in the northern isles contracts, which deal with performance issues. At the moment, CalMac has an explicit set of performance targets, and it is agreed that it has to report back on those at the end of the year. It has a good track record, and the details are set out in the annual report. We would like to build on that, and have asked the consultants to consider developing the tender specifications and establishing what the right kind of performance monitoring approach is. We already have a system in place with CalMac, and the question on the agenda is whether that can be improved as we go through the tender process.

Can that be taken from the company level to the level of particular services?

At the moment, CalMac's approach is to meet some very challenging service level objectives in terms of percentages across the whole network—for example, the objective for sailings being on time is 98.5 per cent, I think. The process will make such factors more transparent. At the moment, the targets that apply across the network are very high.

I wish to return to Des McNulty's previous question about innovation. We know that there are ideas in people's heads that may take a long time to see the light of day, but that some very good schemes exist on paper. How will such ideas be processed if there has to be tendering every five years? Will that not mean that good ideas are stopped in their tracks and that, if they do not make it into the first round of tendering, nothing happens to them and there will not be another chance to consider them for several years more? Will it not mean that the current processes of innovation will somehow be stopped?

We have to work within the public service obligation framework that is set by the European Commission, which is firmly of the view that there has to be a five-year approach. The best way to address that question is to use the fact that there are ideas out there, and to ask people to make local authorities, Highlands and Islands Enterprise and the Highlands and Islands strategic transport partnership aware of their ideas as we move into the draft tender specification process, so that those ideas can at least be on the horizon.

In the end, we have to take a view on which innovations we accept and which we do not. Now is very much the time for people's ideas to be raised. When we get to the stage of companies being interested in the tender process, that is the point at which particular ideas can be plugged in and tested. There are a couple of ways in which people who have such innovative ideas can slot them into the process in a practical way.

I want to follow up in a similar area of questioning. I note what you have said about the potential for innovation forming part of the tendering process, and about the fact that the Commission is looking for a five-year tendering process. Does the question of innovation not suffer if we draw a comparison with the railway industry, in which we are moving from short tendering processes to longer ones because of the concerns that have been expressed about a lack of enhancement towards the end of the process? I recognise that the length of time of the tendering process is a restraint being placed upon you by the Commission, minister, but have you explored that issue in discussions with the Commission?

I am very conscious of that box that we have to fit into—a five-year contract. It is true that that limits the options. Through the northern isles contract approach, we have been able to opt for completely new boats. That has been achieved through a leasing system. It would have been very difficult for us, in the northern isles contract, to have met the five-year horizon, given that we had to replace boats that were 30 years old. The investment certainly could not be paid back over five years. In the case of the northern isles, a solution was identified.

As for the CalMac routes, a fleet is already in existence. The challenge in that case is to work out a tender process whereby we can roll forward new boats. That is one of the reasons why we arrived at the vesco idea, which enabled us to keep that Government investment together and to roll forward vessels. We have to meet the European requirements on how we do that, but I think that the tender process will allow us to consider what the priorities for investment in routes are and how we will proceed with that investment.

Bristow Muldoon is right that we have to meet the requirements that are set by Europe, but, in the two different contracts that we have been considering—that for the northern isles and that for the CalMac routes—there are different ways to address the problems. The Executive has tried to come up with the right approach for each set of circumstances. Those approaches are not always the same, but the aim is to meet the circumstances to the best of our ability.

Thank you very much. I think that we have exhausted our areas of questioning. I would like to express our appreciation for your coming to the committee today. I think that we have had a wide-ranging, detailed discussion. My thanks go to you, minister, and to your officials for coming along today.

Des McNulty, one of our reporters on this issue, will outline our consideration of the next steps.

The reporters intend to meet Commission officials in Brussels over the summer recess. We will also keep in touch with Executive officials regarding any progress that they may make with the Commission. Maureen Macmillan and I intend, over the summer recess, to take evidence from service users informally. After the recess, we intend to review the evidence that will have been received both from the formal committee meetings and from the meetings undertaken by the reporters, in order to identify any gaps or outstanding issues that require further meetings or consultation. Following that, we intend to put together a report to the committee early in the autumn term, and to take whatever action is appropriate to pursue matters with the Executive.

That seems to be fairly wide-ranging and sensible. Do members have any comments on what Des McNulty has said?

I have one point to raise. I have raised it before and, because Des McNulty did not mention it, I thought that I had better return to it. It is the issue of the MCA and the valid document of compliance. It would be useful if the reporters could tease out from the MCA whether the interim document of compliance, which we heard about today, could be issued to a company with no previous experience in running ferries.

Within hours.

Yes, whether it could be issued within hours.

We will try to pick up on that issue. We will come back to the committee after identifying whatever gaps there are. I hope that there will be an opportunity for people to feed in any points that they have at that stage.

I now offer the committee a quick break.

Meeting adjourned.

On resuming—