ScotGov warned of ferry privatisation threat after decision 'fudge'

On Tuesday the wellbeing cabinet secretary Neil Gray said that the threat of a legal challenge over UK's subsidy control rules prevented the Scottish Government from investing £25m into state-owned shipyard firm Ferguson Marine to try to secure its future beyond the two long-delayed and over budget lifeline ferries still being built at the Inverclyde yard.

Transport minister Fiona Hyslop said further investigations are to take place over whether to give CalMac the contract for the beleaguered west coast ferry services and effectively close the door to opening routes up to private operators.

READ MORE: Ferguson Marine: ScotGov firm admits 'significant doubt' over future

But Ms Hyslop said a competitive tender in the open market is in the mix because a final decision is not expected to be made until the summer of next year - with CalMac's current eight-year contract expiring in September.

A due diligence investigation will look at the feasibility of a direct award from a financial, operational and a legal perspective.

She admitted there were a number of "complex issues" to be considered including the subsidy controls which put to immediate investment in Ferguson Marine.

The investigation will look at whether it will provide a "value for money" solution.

If the direct award is not feasible, ministers would revert to a competitive tendering exercise - which could mean extending the current contract for up to 18 months.

Alex Salmond's Alba Party is concerned that a move to go to competitive tender runs the risk that the services would be run by private operators such as Serco and the Scottish Government would exert less control over services.

Serco, which currently operates the Northlink Ferries services to Orkney and Shetland lost out during the last competitive tender exercise in 2016.

The potential takeover by Serco led to a walk out by RMT union members at CalMac. The strike saw two thirds of west coast ferry services cancelled.

Christopher McEleny, general secretary of the party said that Ms Hyslop's announcement had been a non-decisive "fudge".

"The fact a competitive tender is still on the table means a private company can still win it and they make profits for their shareholders," he said. "At the moment profits made by CalMac, which is owned by the ministers, should go back into the services or cheaper fares."

The Alba Party's Holyrood leader Ash Regan MSP added: “Opening up this £1bn lifeline ferry contract to a tendering process would be the first step towards privatisation [of services].

"Scotland has a state owned company that procures ferries and a publicly owned shipyard so it simply makes no sense to then privatise."

Industry insiders had been expecting CalMac to get a direct award of the Clyde and Hebrides Ferry Services contract from the Scottish Government when the current deal expires in September 2024.

The Herald revealed that Transport Scotland officials have been examining how to make the award without leaving itself open to legal challenges through a breach of the UK's version of the state aid rules.

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.

A Holyrood 'future of ferry services' inquiry gave the nod to keep the operation of west coast ferry services with CalMac in the shorter term despite the Scottish Government-owned ferry operator receiving some £10.5m in poor performance fines in the six-and-a-half years since it took the franchise – nearly eight times more than in its first nine years in charge of the west coast fleet.

Ms Hyslop said a final decision after a due diligence process was expected by next summer.

She said a direct award should usher in change with a new management culture emerging, "one that is more supportive of the community's customers and passengers served by the network".

She warned: "The status quo of the current service levels is not an option. I expect the direct award to be a catalyst for change, leading to a more efficient flexible model in the delivery of this public service alongside the construction of new vessels and infrastructure."

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 CalMac a direct award of the Clyde and Hebrides Ferry Services contract when the current deal expires in September 2024.

READ MORE: Scottish Government's pay rules in 'disarray' over ferry firm bonuses

Unlawful state aid was found to have been made to Sumburgh Airport on Shetland and Inverness Airport between 2012 and 2017 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.

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, the procurement principals that exist in Scotland are still derived from EU law. Transport Scotland officials examining how to continue west coast ferry operations are known to have been looking at the potential to provide a direct award to CalMac 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 originally developed through EU case law to allow contracting authorities to award a contract to a supplier without the recourse to a regulated procurement procedure.

Experts on procurement have 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 west coast ferry contract was £1.1m.

While the Holyrood ferry inquiry earlier this year gave its nod to retaining the status quo in terms of operating ferry services in the shorter term, the idea of CalMac getting the award, without seeking any competitive bid, has not gone down well with some islanders.