This article appears as part of the Scotland's Ferries newsletter

MINISTERS have been taxed with the vexed question of unlawful state aid since being found guilty of doing just that in relation to two airports.

It is the pain of that past reprimand from the European Commission that is understood to be in part making the Scottish Government tread carefully as it considers whether to ditch the usual tender process, and give Scottish Government-owned ferry operator a direct award of the Clyde and Hebrides Ferry Services contract when the current deal expires in September 2024.

Unlawful state aid was found to have been made to Sumburgh Airport on Shetland and Inverness Airport after both received taxpayer support that had not been approved by the European Commission.

Under EU rules, member-state governments are expected to notify the European Commission – which is in charge of treaty compliance – about proposed state aid moves.

The idea behind state aid rules is to avoid financial assistance given by a government that favours a certain company or commercial group and has the potential to distort business competition.

Read more:

Scotland's Ferries | Concern over 'aim' to limit ferry disruption in CalMac shake-up

Since the 1970s, the EU adopted legislation to ensure that the EU public procurement market is open and competitive and that suppliers are treated equally and fairly.

Now that the UK is out of the EU, procurement rules that exist in Scotland are still derived from EU law.  

According to Scottish Government guidance to local authorities, contracts above applicable threshold values need to be awarded following a fair, open and transparent competition in accordance with the relevant rules, "other than for a few exceptions where the rules may not apply or where direct awards are expressly permitted".

The EU state aid regime was effectively revoked from UK law from January 1, 2021 with the UK and European Union agreeing to terms on a Trade and Co-operation Agreement (TCA) which formed the basis for an interim subsidy control regime.  

Scottish Government ministers have stated that their position is to continue to align with EU state aid regulations where possible.  

The plan fits with the SNP belief that membership of the European Union is in Scotland's best interests.  Any independent Scotland would be looking to join the EU, and having policies that fit with Europe's might well be seen as imperative.

Transport Scotland officials are now known to be examining how to continue west coast ferry operations are currently looking at the potential to provide a direct award using what is described as a Teckal procurement exemption to avoid what some would see as unlawful state aid.

The exemption removes the legal obligation on a public authority to tender public contracts when it can be proven that the public authority can provide the services itself, subject to certain ‘control’ and tests.

The exemption was developed through EU case law to allow contracting authorities to award a contract to a supplier without the recourse to a regulated procurement procedure.

First Minister Humza Yousaf, when he was transport minister, indicated in 2017 while considering the Teckal exemption that it was his intention to scrap future tendering processes for the Clyde and Hebrides ferry services and appoint the contract to CalMac "indefinitely".

One expert on procurement said that the difficulty with a direct award was it left the door open to  non-competitive expensive contracts paid for out of the public purse which would not give value for money.

But the advantage in the immediate term was that it would allow ministers to concentrate on getting ferry services right, rather than get "bogged down" in a lengthy and expensive tender process.

The Scottish Government has estimated that the costs of tendering the 2016 to 2024 contract was £1.1m.

"A direct award gives the advantage of a more future-looking view on ferries that could have benefits in the long run, but it should be said that there would be value for money questions which would need to be justified," he said.

The European Commission has already found that Scottish Government support to two airports was illegal aid through the Highland and Islands Airports Limited (HIAL) company that it owns.

Ministers had told the commission it considered Inverness, which carried over 600,000 passengers a year, and Sumburgh, which carries over 300,000, would close to scheduled passenger services without public funding.

But the European Commission found that more than £20m provided to Inverness between 2012 and 2017, and £35.4m to Sumburgh were "illegal state aid" in breach of the Treaty on the Functioning of the European Union (TFEU), which states that aid measures must not be put into  effect before it had authorised it.

The commission also found that HIAL, the state operator of both airports, was "not selected by a public procurement procedure for the public service obligations it was entrusted with" and did not comply with its so-called Altmark Criterion which aims to ensure competition and transparency.

In separate rulings about the Scottish airports in 2017 and 2018, the directorate general for competition "regretted" that the UK had allowed the aid to be put into effect before the commission had made any decision authorising it. But it decided not to raise objections to financial support going forward.

A Holyrood ferry inquiry has, nevertheless,  given its nod to retain the status quo in terms of operating ferry services in the shorter term despite the ferry operator receiving some £10.5m in poor performance fines in the six-and-a-half years since CalMac took the franchise – nearly eight times more than in its first nine years in charge of the west coast fleet.

But the idea of CalMac getting the award, without seeking any competitive bid, has not gone down well with some islanders.

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