Meeting of the Parliament

Meeting date: Wednesday, December 20, 2017

Official Report 926KB pdf

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Ferry Services Procurement Policy Review

The next item of business is a statement by Humza Yousaf on the ferry services procurement policy review. The minister will take questions at the end of his statement, so there should be no interventions or interruptions.

15:13  

As Minister for Transport and the Islands, I am responsible for the provision of safe, efficient and reliable ferry services to the island and remote rural communities that rely on them for their economic, social and cultural sustainability. It is a responsibility that I, and this Government, take extremely seriously.

That is why, in my statement to Parliament on 2 February 2017, I announced a policy review on the future approach to the procurement of the Scottish Government’s three contracted ferry services: namely, the Clyde and Hebrides, the northern isles and the Gourock to Dunoon town centre route.

My announcement was informed by the Scottish Government’s joint approach with the National Union of Rail, Maritime and Transport Workers to the European Commission on 1 April 2016, and the Commission’s response of 22 September. That correspondence concerned the possibility of making a direct award to an in-house operator in compliance with full requirements of the Teckal exemption and the state-aid rules, potentially removing the need for competitive tendering procedures in the future.

In my announcement on 2 February, I said that, should the review conclude that it would be possible to apply the Teckal exemption and meet the state-aid rules, the Scottish Government would be minded to make a direct award to an in-house operator. That remains our position, subject to wider financial and policy implications and crucially to the views of local communities and stakeholders.

On 20 July 2017, I informed Parliament of the policy review’s progress. I said that further consideration would need to be given to the application of the Teckal exemption and the state-aid rules. Following that, a final decision could be taken on whether it would be possible to make a direct award to an in-house operator at some point in the future. I made it clear that that would require an extension to the planned timeline for the completion of the policy review, but that I would publish an interim report setting out the emerging findings and implications for each of the three ferry services. I have today published that report, copies of which are available in the Scottish Parliament information centre and on Transport Scotland’s website.

The report confirms that a direct award to a Teckal-compliant in-house operator under the procurement regime would be compatible with the maritime cabotage regulation, subject to further consideration of how we will in practice satisfy the Teckal control test. The control test requires the Scottish ministers to exert similar levels of control over the in-house operator to that which we exert over one of our own Government departments. The immediate consideration will therefore focus on changes to governance arrangements for the David MacBrayne Group companies, which we believe is achievable and can be completed with very little or no impact on employees.

The report also confirms the need to satisfy the state-aid rules. The rules pursue different aims from the procurement regime, although the two are related. The state-aid rules flow directly from article 107 of the Treaty on the Functioning of the European Union and state that any aid that is granted by a member state that threatens to distort competition is incompatible with the internal market.

It is therefore necessary to consider those rules when assessing the possibility of making a direct award to an in-house company, even if that company is Teckal compliant. That is clear from the Commission’s response of 22 September.

In our assessment of the state-aid rules, we have considered the application of the Altmark criteria, the 2007 passenger transport regulation and services of general economic interest. The conclusion that has been reached is that it will be necessary to demonstrate full compliance with the four Altmark criteria in order to satisfy the state-aid rules.

The fourth Altmark criterion can be particularly challenging. It can be satisfied by means of a public procurement procedure, as highlighted in the European Commission’s letter of 22 September. It can also be satisfied by means of a detailed benchmarking exercise to demonstrate that the compensation for discharging the public service obligation does not exceed that which would be required by a typical well-run and adequately equipped undertaking in the ferry sector.

It is therefore clear that a number of complex legal, policy and financial issues still need to be addressed before we can ascertain whether it would be possible to make a direct award to an in-house operator. However, I am working to address those issues in a positive manner. We need to build a case for making direct awards that satisfy the Teckal exemption and the state-aid rules, we have to follow up on the initial views of local communities and stakeholders, and we have to engage rigorously with the European Commission on the final approach that we intend to take to the future procurement of ferry services.

It will take time to conduct the necessary analysis, which has implications for each of the three ferry service contracts. The Clyde and Hebrides ferry services will continue to be operated by CalMac Ferries under the terms of the recently tendered contract. That contract will deliver efficiency savings and 350 service improvement commitments. That said, I believe that similar savings and improvements could also be delivered by means of a direct award to an in-house operator, and that will be part of our case for making direct awards that satisfy the requirements of Teckal and the state-aid rules.

The current contract effectively guarantees that the Clyde and Hebrides ferry services will be provided by a public sector operator for the best part of the next seven years, until the end of September 2024. We cannot, and will not, put the protection that is afforded to the Clyde and Hebrides ferry services by the current contract at any risk whatever. We need to be sure that a direct award to an in-house operator meets the full requirements of both the Teckal exemption and the state-aid rules before we make such an award. However, if I can satisfy the European Commission, which I will work hard to do, it is my intention to scrap future tendering processes for the Clyde and Hebrides ferry services and appoint the contract to CalMac indefinitely.

The current contract provides sufficient time for further detailed analysis to be given to CalMac’s governance arrangements, as required by the Teckal control test, and for detailed benchmarking, as required by the fourth Altmark criterion. The conclusion of that analysis will be used to build the Scottish Government’s case for making a direct award to an in-house operator for the Clyde and Hebrides ferry services in the future.

In the case of the northern isles ferry services, arrangements are in hand to extend the current contract by 18 months, from April 2018 to October 2019. A decision on whether it is possible to make a direct award for the northern isles services, and whether to continue tendering, will have to be taken by the spring of 2018. That timeline allows 18 months to complete a full tendering procedure, should that be required.

In reaching a decision, we will take account of progress that has been made in further consideration of the Teckal exemption and the state-aid rules. We will also follow up on our earlier engagement by writing to key local community stakeholders so that we can gain a better understanding of their preferences on the future approach to the procurement of the northern isles ferry services. That is crucial.

On the Gourock to Dunoon service, the current contract was due to expire in June 2017 but was extended by nine months, to March 2018. We will make arrangements to extend it by a further nine months, to December 2018. A direct award that allows for the transport of vehicles under the state-aid rules is not considered to be a deliverable option, given the limitations of the public service obligation, which applies only to the transport of foot passengers. The Scottish Government’s long-standing policy position and the local community’s aspiration is for the return of a vehicle-carrying service to the town centre route, and tendering is an approach that could realise that outcome. For that reason, the currently paused tender exercise will be restarted as soon as is practicably possible.

In setting out the implications for the three ferry service contracts, our priority is to ensure the provision of the best ferry services possible to our island and remote rural communities, while ensuring value for money to the taxpayer. That priority is supported by “A Nation With Ambition: The Government’s Programme for Scotland 2017-18”, in which we set out our commitment to

“maximise the socioeconomic development of Scotland’s remote and island communities”

through the provision of safe, efficient and reliable ferry services.

The interim report that has been published today demonstrates our continued commitment to delivering that outcome.

The minister will now take questions on the issues that were raised in his statement. I will allow about 20 minutes for questions.

I thank the minister for advance sight of his statement.

What we have learned today is that despite more than 18 months of intensive wrangling, the Government is no further forward in its pursuit of a policy to ditch open and transparent procurement of ferry services in favour of a strategy of directly awarding contracts to a Government-owned entity, which will effectively sew up future contracts, if contracts are given indefinitely to CalMac. It is clear that the Altmark criteria and Teckal exemption hoops that have to be jumped through are onerous and are causing the Government an unnecessary headache. In the minister’s words, they are “challenging”, to say the least.

Audit Scotland said:

“Transport Scotland will find it challenging to continue to provide ferry services that meet the needs of users within its allocated budget.”

In the context of that advice, why is the minister dogmatically pursuing an ideological decision to avoid future tenders? What are the cost implications to the taxpayer, including the legal costs and the cost of spending Government time on engaging with the European Commission on its state-aid rules?

Given the success of recent tenders, including the Arran service on the Firth of Clyde, does the minister agree that the tender process is vital in ensuring that incumbent operators are kept on their toes, and in offering the Government the opportunity to choose the best operator from a variety of bids, in order to best meet the needs of users and to provide value for money to the taxpayer?

I will try to be constructive in responding to Jamie Greene. I thought that it was unfair of him to say that we are “no further forward”. We are further forward; it is our belief that we can, as a result of the detailed work that we have done, make a case for a direct award.

We have to satisfy the European Commission, of course. Jamie Greene will know from his party’s discussions with the European Union that such things can take a bit of time. We will, of course, approach the issue as quickly as possible, but it is clear that we are reliant on the opinion of the European Commission. Work has been done, and the interim report is very detailed. I would welcome Jamie Greene’s feedback on it.

Jamie Greene made the good point that there can be benefits, or perceived benefits, in tendering. The competition helps those who are bidding to sharpen their pencils and ensure that they put in the most efficient bid. Competition can help to drive efficiency. Jamie Greene and some of his colleagues have made that argument to me before, and I do not dismiss it. On the other hand, I believe that it is possible to drive similar efficiencies with a direct award, through key performance indicators.

Tendering can cost, of course. We know that the Clyde and Hebrides ferry services tender cost about £1.1 million. That does not include the cost that would have resulted from CalMac—which is, of course, a wholly Scottish Government owned company—having to bid.

Jamie Greene mentioned Arran. He would do well to speak to the community on Arran to hear whether it would prefer to have the contract directly awarded to CalMac, or to have a competitive tender in the future.

Our ferry services are run well. On the final point that Jamie Greene made on the Audit Scotland report, the opening line of that report says that the ferry services in Scotland are run well.

I thank the minister for the advance copy of his statement.

It is inevitable that there will be some frustration that a decision on Teckal exemption has been delayed, but that gives us the opportunity to get it right. I ask the minister to build a case with island communities, trade unions and members across the chamber for ending the costly tendering process.

How many times has the minister met the European Commission to discuss the four Altmark criteria on state-aid guidelines? He will be aware that specification changes can be made to the northern isles service irrespective of Teckal. Will he agree to an expanded contract to include interisland services and increased freight capacity?

Two weeks ago, Parliament called on the Scottish Government to agree fair funding for interisland ferry services in the northern isles. What steps has the Scottish Government taken since then to ensure that investment in the fleet does not put the northern islands’ councils at a disproportionate financial risk?

Finally, since the minister’s previous statement, Audit Scotland has published its report on ferry services. It found that

“There is no Scotland-wide, long-term strategy”

for ferries, and it said that it would be

“challenging to continue to provide ferry services that meet the needs of users within”

allocated budgets. In the light of the minister’s statement, how will he address the concerns that Audit Scotland has raised—

This should be your final question, Mr Bibby.

Does the minister accept that publicly owned ferry services can be run effectively, affordably and in the public interest?

Of course I will engage with the unions and any other stakeholders on building a case. I have met them on a number of occasions—most recently, just a couple of weeks ago—to discuss the issue. My officials regularly meet the European Commission to discuss the Teckal exemption. That is how we have managed to get to the position that we are in.

Neil Bibby strayed slightly off topic and on to interisland ferry services. I am sure that he did so accidentally. I repeat what I said in the chamber only a few moments ago. There is a window of opportunity for his party to put on the record whether it would support a final budget in February if it were to include provision for interisland ferries. I asked his colleague Rhoda Grant that question and she, of course, refused to say that she would do that. She or any of Neil Bibby’s colleagues who are going to ask questions may clarify the point.

The recommendations in the Audit Scotland report were very positive, and we will reflect on them. We have a ferry plan up until 2022, of course. Audit Scotland called for a longer-term ferry plan, which is an eminently sensible recommendation on which we will reflect.

We are probably oversubscribed with questions, so please be succinct.

As the constituency MSP for the island of Arran, I can say that certainty on service delivery is very important to islanders, so I believe that they will welcome the minister’s comments.

The minister talked about governance arrangements in his statement. What changes to governance would have to be made by David MacBrayne Ltd should the minister’s plans come to fruition?

In the interests of brevity, I say that I am hoping that the changes will be minimal. We certainly do not envisage that the changes that we will make will have any impact on employees. If they do, we envisage the impact being small.

The matter relates to the Teckal tests. I will read out paragraph 8 of the judgment, which states:

“the contracting authority exercises over a person ... control ... similar to that which it exercises over its own departments”

That is called the control test.

Essentially, we will have to ensure that governance of David MacBrayne Ltd is aligned similarly to our own Government departments. How Transport Scotland aligns with the Government is perhaps an example of that. We will work through the detail of what that will mean and, of course, we will work closely with CalMac.

A minimal change would be better, because our relationship with CalMac works well at operational level.

I am pleased to learn from the minister that the Gourock to Dunoon ferry tender process has restarted. Will the minister confirm how the timeline and the process will be affected as a result of the tender? Will there be job losses? Will he also update us on the Gourock to Kilcreggan ferry tender process?

I cannot update Maurice Corry on the Gourock to Kilcreggan ferry tender because, as he knows, that is the responsibility of Strathclyde partnership for transport and not of the Government. However, I will look to get an update before the holidays from Councillor Martin Bartos, who is the chair of SPT.

On the member’s other question, we do not envisage job losses as a result of the tendering process. As I have said, there is a nine-month extension for the Gourock to Dunoon route contract. That measure is the only way that I can see that a vehicle service would come to fruition.

The minister has, of course, previously said that the transfer of the Gourock to Kilcreggan ferry service from SPT to the Scottish Government had to await the outcome of the procurement policy review. Local passengers and, indeed, members of Parliament, have been very patient. Now that the minister has decided to tender the Gourock to Kilcreggan route, will he—as promised—take steps to transfer that service to the Scottish Government? Will he provide me with an indication of the likely timetable for that?

Again, I am not entirely convinced that that question relates to my statement, but I will give Jackie Baillie an update. The promise has also been made to have constructive dialogue in order to explore the fair funding formula for the transfer. That will continue.

The member will be aware that the Gourock to Kilcreggan service was recently retendered and that a number of bidders have come forward. Once a bidder has been chosen, I hope that we will be able to establish the true cost of the contract, which will help to inform our discussions. I give the member the absolute assurance that those conversations will continue in the very constructive manner in which they have been conducted with SPT thus far.

I remind members that their questions should be about issues that were raised in the statement. Members are using very imaginative hooks, in that regard.

I thank the minister for early sight of the statement. I commend the good work that has been going on, and I hope that there will be much more of that to come.

Community views are very important, but they are only one factor in decision making. The problem with a commercial supplier, particularly a multinational company, is that they will always weigh up costs and profits, so the situation can change.

A member asked about political philosophy. That member was right: this is about a political philosophy.

Mr Finnie, can I have a question, please?

Yes.

We either support ferries to be run exclusively in the public interest, or we do not. Will the minister explain what weighting is given to the public’s views? Does he accept that they can change?

I accept that views can change. On political philosophy, since my statement in February, I have consistently said that the Government’s preference is to make a direct award. Equally, our political philosophy is that we should listen to communities, so that if they are hostile to a direct award, or if they want a tender process for whatever reason, we cannot discount that. I would give a lot of weight to that view, but it is not, by any means, the only factor that should be considered.

In the new year, my officials and I will engage with the community. I will keep the member updated on how that goes.

Will the minister be more specific about the timescale for the restarting of the Gourock to Dunoon ferry tender exercise? What does he hope to achieve with that process?

The process will start as soon as that is practicably possible. When a tender is paused, a number of things must be done in order to restart it. Our intention is to restart it in the new year. The extension that we have asked for will take us up to December 2018, so a new ferry contract will have to be in place by then. I will keep the member updated on the progress of the tender exercise.

Does the minister accept that people in the northern isles—Orkney and Shetland—will be disappointed that he has not announced the retendering of the northern isles services, which is very much what they want and which is, indeed, reflected in his own document that has been published today? Does he also accept that, if he decides to take this in-house, a freight operation will be set up in competition? That is what happened 15 years ago, and I do not think that it would be in the interests of either the Government or the islands. Given that situation, will he undertake to get on with retendering the northern isles services, which is very much what people are looking for, and publish the freight fares review, a document that is badly needed not just in the northern isles but on the west coast, too?

I do not mean to sound surprised, but I found those questions from Tavish Scott genuinely very helpful.

We did not commit to any timing for publication of the freight fares review, but I accept Mr Scott’s point whole-heartedly. Whenever I have travelled to the islands, I have found that to be an issue of much concern. I therefore accept what the member has said, and I assure him that we are working towards a solution that shows the benefits of a review in policy. I do not think that we have got there yet, but I will continue to keep the member updated.

On Mr Scott’s more substantive point, I found what he had to say interesting and helpful, because, if I heard it correctly, I think that it is probably the first indication that I have had from the constituency member that the people there would oppose a direct award. I have to say that, on my travels around Shetland and Orkney, I have found the communities to be agnostic on the matter at best, with some openly hostile. The member’s view is important to me, as are the views of the MP, the council, ferry groups and local communities, and he can be assured that our extending the contract should reassure the local community in Shetland that there will be stability for that 18-month period.

I very much welcome the fact that the minister is proceeding carefully in all this. What would be the risks if he rushed the process and made an in-house award?

I know that John Mason was an accountant in a former life, and I am pleased that he is continuing with his prudent approach. He is right that we have to be careful in our approach, because, if we simply awarded a contract directly without satisfying state-aid rules or the Teckal criteria, we could well face a challenge by the European Commission and would therefore have to retender, which would be a costly exercise in itself. We must fulfil the various criteria, whether they relate to state aid or to Teckal. I am of the opinion that we can do that, and that is the approach that the Government will take. If we can satisfy the criteria, certainly with regard to Clyde and Hebrides ferry services, it is my intention to scrap any future tenders.

Can the minister update us on the outcomes of discussions with Serco NorthLink on the extension of the northern isles ferries contract to October 2019? Moreover, is he able to give assurances that the extension will have no adverse impacts on the current service?

I give that assurance. I have a very good working relationship with Stuart Garrett, who, as members will know well, is based at Serco NorthLink. He has taken a very helpful and constructive approach from day 1, and I commend him and give him credit for that. The extension will mean stability for the service in the northern isles, and there should be no detriment at all to that service for the period of the extension of the contract.

I refer members to my entry in the register of members’ interests as an owner of a non-domestic property in the Western Isles.

Like, I am sure, the majority of customers, I hope that future tendering processes will be scrapped for Clyde and Hebrides ferry services and that CalMac will be appointed indefinitely. Does the minister agree that the priority of the whole process is to guarantee the best possible ferry services and to ensure value for money for taxpayers?

The member is absolutely right. Indeed, that brings me back to my answer to Jamie Greene. If a direct award is possible and legally compatible, we must put in place the appropriate KPIs to drive efficiency and best value for the taxpayer and consumer through the contract. It is worth pointing out the huge increase that there has been in ferry traffic and tourism to our islands, which has no doubt been driven by our decision to roll out the road equivalent tariff in the Western Isles. I hope to see a similar boom in tourism as we look to meet our manifesto commitment and roll out the RET in the northern isles in the first half of 2018.

15:39  

The minister referred to the challenging nature of the fourth Altmark criterion, but, as the solicitors Thompsons have made clear, that criterion has been successfully met in the past, in the case with place reference L189/03, which involved the Italian postal service. Will the minister ask his officials to check that case, as it may help in discussions around the northern isles and the Gourock to Dunoon ferry service?

I will, but I know that they have checked it. I, too, have looked at the case, and I know that it has been raised by David Stewart himself and by the RMT. I place on record my thanks to Mr Stewart, who, along with colleagues from the RMT, has been a driving force on the Teckal exemption. It is also my belief that we can satisfy both the state-aid criteria and the Teckal exemption test. Clearly, I now have to make that case to the European Commission, and it will be for the Commission to determine whether we have satisfied those. Nonetheless, I know the case that he is talking about and will give it further reflection.

Will the minister confirm that any decision that is taken will not delay arrangements for the introduction of cheaper fares on the northern isles services?

Yes.

Members have surpassed themselves this afternoon. We have run out of questions. That concludes questions on the ferry services procurement policy review, and we move on to the next item of business. I will allow a couple of minutes for members to move seats.