Ministers could give uncontested permanent ferries contract to CalMac

It comes after the ferry operator received 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.

CalMac's current £975m eight-year Clyde and Hebrides Ferry Services contract expires in September 2024.

It had previously won the contract for six years in 2007 - after ministers were forced to tender for routes to satisfy European competition rules.

But now it it has emerged that ministers have a permanent contract on the agenda as it has stated a direct award no contest from other potential bidders is the preferred option - closing the door on opening routes up to private operators.

A final decision after a due diligence process - which will establish the feasibility of that approach from a financial, operational and legal perspective - was expected by next summer, with an aim to have the new arrangement in place by October 1, next year.

CalMac chief executive Robbie Drummond said that "taking the uncertainty out of the contract would allow us to focus all our efforts on improving service delivery, without the distraction of a highly resource-intensive procurement process".

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

At the time the plan was subject to satisfying EU rules on state aid and a legal exemption allowing public contracts to be awarded to in-house companies subject to strict regulations.

READ MORE: Keeping CalMac to operate ageing ferries is 'no vote of confidence'

The intent of state aid rules is to avoid financial assistance given by a government that favours a certain company or commercial group and which has the potential to distort market competition and give a supplier an advantage.

It has emerged that initial ferry services procurement policy review findings six years, before the UK exited the EU by Transport Scotland said there was a "very clear opportunity for progress to be made in achieving publicly owned and operated ferry services, free for the long term from the inhibiting and distorting demands created by competitive tendering.

"In so doing, the Scottish Government would be guaranteeing a positive future for the communities served by lifeline ferries and those who work in the service."

It also states: "It is also important to recognise that a direct award to an in-house operator is also capable of delivering similar levels of operational efficiency, innovation and service improvement to those which might otherwise be obtained from tendering."

The Scottish Government has previously said that a direct award should be a "catalyst for change" with a new management culture emerging, "one that is more supportive of the community's customers and passengers served by the network".

The move to prefer to directly award to CalMac has proved controversial in some quarters.

One ferry user group official said that there needed to be fundamental changes to the way that the ferries are run before a direct or permanent contract award to CalMac was considered.

"It is unthinkable to consider giving a permanent contract or even one that does not go to competitive tender, before there are massive improvements to the way our ferry services are being delivered.

"If millions in taxpayers money is to be provided to anyone, a good services has got to be delivered, and it cannot be right that there should be a reward for undoubted failings."

One advantage cited for a direct contract is a saving on the tender process. The Scottish Government has estimated that the costs of tendering the 2016 to 2024 contract was £1.1m. But that included a £439,000 bill for consultancy support.

But public spending auditors which were critical of the process said bidders had told them that their costs were increased due to delays during the project. One of the bidders, Secro said its costs rose due due to Transport Scotland providing insufficient data, on costs which created more work.

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

Officials have confirmed part of the consideration would be the length of any future contract, including whether it should be permanent.

The Scottish Parliament's Net Zero, Energy & Transport Committee inquiry said that CalMac should benefit from a direct award of an extended ten year contract to run lifeline services on the west coast of Scotland after the current deal ends in September, 2024.

It said it supported the length of the new CalMac contract from eight to ten years as it was needed to "ensure continuity of service and avoid disruption" with the current contract due to expire in September, next year.

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.

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 principles that exist in Scotland are still derived from EU law.

The government had considered two contractual arrangements to ensure continued operation of these services at the end of the current contract.

Either a direct award to the current operator, in what is known as a Teckal arrangement in accordance with the Public Contracts (Scotland Regulations 2015, or a competitive tender on the open market. It opted for the direct award option but said a further due diligence was needed.

The Teckal procurement exemption is seen as a way 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.

European Union state aid rules and guidelines still have a huge influence on the how ferry services were paid for in Scotland.

The requirement to tender for the Clyde and Hebrides Ferry Service (CHFS) led Scottish ministers to change the structure of its ferry operations in 2007.

The responsibilities of Caledonian MacBrayne Ltd were split between two new organisations, both of which are wholly owned by Scottish ministers.

Caledonian Maritime Assets Limited (CMAL) was established to own and manage the ferries and harbours on the network while David MacBrayne Limited was was established to bid for and operate the ferry contract.

The changes were intended to create a fairer competition for future bidders for the CHFS contract because it allowed would-be operators equal access to the vessels and harbours by leasing them from CMAL.

Teckal 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.

Before CalMac was awarded the current contract in 2016, the RMT union’s legal advice, provided by a European procurement law specialist, is that the exemption could be applied to Scottish ferry contracts tendered by the Scottish Government.

The QC for the RMT said that the rules leave the authority able to supply goods and services by itself and therefore not have to seek a tender.

Gordon Nardell said that where the authority makes that supply through a body that is legally distinct but which is sufficiently under its control and does not act as a market player in its own right – EU law as laid down in Teckal treats that as "tantamount to the authority supplying the service itself".

He believed that the relationship between CalMac with the Scottish ministers satisfied that 'control test' and that a direct award would not constitute unlawful state aid.

The transport minister Fiona Hyslop said last month: "Going down a direct award route would help change the ethos of the service by shifting the focus from a commercial arrangement to a model more focused on the delivery of a public service; this would help create a more agile approach to drive service improvements that we all want to see. Not least, we are determined to improve communication with communities, and will be looking to introduce meaningful Performance Indicators that better reflect their experience of using the service."

CalMac chief executive Robbie Drummond said: “With under a year remaining on the current contract, we welcome the opportunity to work alongside Scottish Government and Transport Scotland to ensure continuity of lifeline ferry services and a focus on continual improvement for communities across the Clyde and Hebrides.

Taking the uncertainty out of the contract would allow us to focus all our efforts on improving service delivery, without the distraction of a highly resource-intensive procurement process.

“We have a highly skilled, committed and experienced staff, who care deeply about island and rural communities and are passionate about delivering the best possible service.

“We will continue to work in partnership with local stakeholders and communities to ensure the best possible outcomes for all who rely on our services. We are also looking forward to welcoming six major and 10 small vessels into the fleet in the near future, which alongside ongoing port improvements will build capacity and resilience across our network.

"All of us at CalMac are committed to working together to focus our efforts on improving the service we deliver to our customers in partnership with Transport Scotland, partners and stakeholders.”