Options - Evaluation

Approach to Evaluation

Introduction

The long-list of options is based on observations of enhanced regulation and structural reform noted in the international and domestic benchmarking. This long-list represents a broad range of future options for delivering ferry services on the west coast of Scotland. The list of future options on regulation and structural reform is presented below:

Regulation

Commissioner or Regulator
Regulated Asset Base

Integration/ assimilation

TS / CMAL assimilation
CMAL / DML integration
CMAL / CFL integration

Privatisation

CMAL assets privatised
CFL does not bid on the next CHFS Contract
Cessation of non-core commercial operations

Decentralisation

Local authorities procure ferry services

In this section we will undertake a preliminary evaluation of these options using criteria that have been designed with reference to TS’ mission of delivering a “safe, efficient, cost-effective and sustainable transport system”.

The evaluation is intended to be high-level and focuses on drawing out key issues, that could render an option unviable. Legal and tax specialists have been engaged in this process to help identify relevant matters.

This evaluation seeks to provide a framework for identifying areas of interest that should be subject to further consideration as part of a more detailed options appraisal. The intent is not to definitively conclude on future options.

Evaluation Methodology

The below evaluation methodology has been adopted:

A qualitative assessment has been performed as to whether the impact of an option on a criterion would be positive, neutral or negative.
No attempt has been made to rank the options. However, options that receive an overall negative score are unlikely to be desirable.
Options that receive a neutral overall score may warrant further consideration as part of a future evaluation and consultation exercise.
Options that receive a positive overall score are likely to have merit and should be explored as part of a future evaluation and consultation exercise.

Our approach and indicators are intended to serve as a helpful framework that TS can deploy as it progresses towards a more detailed evaluation of future options.

Limitations of Review

NIFS

The scope of Project Neptune is limited to the three members of the Tripartite. However, it is recognised that changes to its structure could impact the holder of the NIFS contract, currently SNF. This evaluation has sought to identify instances where this may be the case, although it does not attempt to be exhaustive in doing so. A fuller evaluation of the impact of the proposed options on the holder of the NIFS contract should be undertaken as part of any subsequent evaluation.

Taxation

For comments relating to taxation, we have based our comments on a high level understanding of the group without access to detailed underlying tax computations. As part of the next phase of review, a detailed analysis of the options being considered should be undertaken which will require access to a detailed fact pattern.

Evaluation Criteria

The evaluation criteria reflect Scottish Ministers’ priorities that any structure for delivering ferry services in Scotland should enhance passenger experience and support local communities, as well as be accountable and transparent. Deliverability has been added in recognition that practical limitations may preclude an option’s viability. These criteria have been developed to understand whether an option has the potential to achieve Best Value.

Passenger Experience and Local Communities

It is recognised that any changes made by the Scottish Ministers with regards to ferry services in Scotland must have the passenger at its heart and improve the experience of the end user. The island communities that depend on these services are core to this group. Passenger Experience and Local Communities is regarded as the most important criterion for this reason.

Key considerations in appraising Passenger Experience and Local Communities will include:

Impact on service quality, resilience and reliability
Impact on vessel quality and standards
Impact on island communities
Impact on passenger
Impact on local economies of Island communities

Deliverability

The long-list of options developed in this report is wide ranging. Consequently, it is recognised that it may include options which are not deliverable in practice. The Deliverability criterion has been included to identify potential issues in this regard. As legal factors are expected to be a key limiting factor to deliverability, specialist legal input has been obtained for this criterion.

Key considerations in appraising the Deliverability of an option include:

Ease of implementation / complexity of delivery
Timescales for deliverability
Improvement of access to technical knowledge
Legal or regulatory barriers
Impact on resources
Stakeholder acceptance
Accounting, tax, Value Added Tax (VAT) and pension implications

Accountability and Transparency

It has been recognised throughout Project Neptune that a key challenge for the Tripartite structure is the relative complexity of its structure. For the public, this makes it difficult to understand which party is responsible for delivering which element of the service. The Accountability and Transparency criterion seeks to identify those options that could offer improvements in this regard.

Key considerations included:

Extent to which roles and responsibilities are clearly defined
Optimisation of risk allocation
Strength of governance framework
Level of oversight
Ability of Ministers to affect change
Ability of island communities to input in decision making
Alignment of objectives

Best Value considers the common framework for continuous improvement in public services, with particular reference to the effective management of resources and value for the tax payer. We have performed a preliminary assessment of each of the options against the chosen criteria to understand whether adopting these changes could improve service provision on the CHFS network.

Evaluation Overview

We have set out in the subsequent pages our initial evaluation of the options against the three criteria identified. Within our assessment of Deliverability, we have included taxation, VAT, accounting and pensions. The table below includes an overview of our preliminary evaluation on whether the options presented have the potential to achieve Best Value. We have highlighted overleaf our key observations in relation to the four themes.

Negative - Unlikely to achieve Best Value

Neutral - Requires further research to understand whether Best Value can be achieved

Positive - Potential to achieve Best Value

Enhanced Regluation

Evaluation Criteria	Passenger Experience	Deliverability	Accountability and Transparency	Overall potential to achieve Best Value
Commissioner or Regulator	Neutral	Positive	Positive	Positive
Regulated Asset Base	Positive	Negative	Neutral	Neutral

Structural Reform

Evaluation Criteria	Passenger Experience	Deliverability	Accountability and Transparency	Overall potential to achieve Best Value
TS / CMAL assimilation	Neutral	Negative	Positive	Negative
CMAL / DML integration	Positive	Neutral	Positive	Positive
CMAL / CFL integration	Positive	Neutral	Positive	Positive
CMAL assets privatised	Negative	Negative	Neutral	Negative
CFL does not bid on the next CHFS contract	Neutral	Neutral	Neutral	Neutral
Cease focus on non-core commercial operations	Neutral	Neutral	Positive	Neutral
Local authorities procure ferry services	Negative	Negative	Positive	Negative
Local authorities procure ferry services inc. vessels	Negative	Negative	Positive	Negative
TS manage major routes and smaller routes passed to local authorities	Neutral	Negative	Positive	Neutral

Evaluation Radar Chart

The text below describes the findings from our preliminary evaluation and provides an indication of the priority areas that may merit further exploration as part of TS’ full evaluation of future options. Each group of options is explored in more detail in the subsequent slides.

Regulation

The introduction of greater regulation in the form of a commissioner or regulator has the potential to increase accountability if the individual or body is equipped with appropriate powers; however, by introducing another body into an already crowded sector, there is a risk that roles and responsibilities become further confused, undermining transparency. Appropriate and considered regulation is needed to mitigate this risk

The legal barriers for a Regulated Asset Base model are higher as legislators are likely to demand greater evidence that this more expansive form of regulation is required . Our initial evaluation has not found justification for the more onerous regulation that would be present under a Regulated Asset Base model.

Decentralisation

Passing responsibility for the management and / or procurement of ferry services to local authorities through decentralisation could narrow the perceived gap between communities and decision makers. This could have benefits for accountability and transparency.

Evidence from Norway and other sectors suggests that passenger experience will vary according to the capabilities and priorities of the responsible local authority.

The ability of Ministers to effect change would be reduced as they would no longer be directly responsible for procurement.

It is possible that the positives associated with decentralisation could be achieved via other means that would avoid the complexities mentioned above.

Integration

By reducing the number of parties within the Tripartite through integration it may aid clarity, which has the potential to improve transparency and accountability in the sector.

By merging two members of the Tripartite there will be a stronger alignment of those organisations’ objectives. There may also be opportunities to achieve efficiencies in their operations, e.g. vessel maintenance.

CMAL possesses technical expertise that TS depends on. Were it to be integrated with CFL or DML, consideration would need to be given to how TS could retain this capacity.

There are a large number of taxation, legal and accounting issues associated with integrating or assimilating two members of the Tripartite. The cost associated with resolving these issues need to be more fully understood and judged in the context of Ministerial priorities.

Privatisation

Serco NorthLink Ferries (SNF) operate the NIFS contract and has demonstrated the success with which a private operator can deliver ferry services. TS could divest its interests in the ferries sector and depend on the private sector to deliver ferry services on the CHFS network however, in recent CHFS procurements there has been limited competition.

Without its ferry interests, TS / Scottish Ministers would be in a weak position to step in as OLR, a requirement for lifeline ferry services.

There are likely to be significant tax and accounting implications associated with the sale of CMAL.

The SG’s objectives with regards to DML’s commercial mandate require greater clarity to assess if this remains a desirable direction of travel.

Key Observations

The boxes below summarise the key themes and findings observed as part of our preliminary evaluation of the regulation and integration / assimilation groups of future options.

Regulation

The introduction of greater regulation to the sector has the potential to increase accountability if the individual or body is equipped with appropriate powers; further, it would bring the ferries sector into line with similar sectors that often have a commissioner or regulator.
Regulatory oversight has the potential to instigate some efficiencies in the sector although these are unlikely to be material.
By introducing another body into an already crowded sector, there is a risk that roles and responsibilities may become further confused, undermining transparency. Appropriate and considered regulation is needed to mitigate this risk.
Legislators are likely to require evidence of a need for regulation and consequently deliverability challenges may increase with the proposed level of regulation. This initial evaluation has not found justification for the more expansive regulation that would be present under a Regulated Asset Base, particularly if the desired outcomes can be achieved with more limited regulation. As such a lighter touch commissioner or regulator model is considered a more viable future option for the ferries sector.
As this group of future options does not lead to changes in the legal statuses of the Tripartite, no impediments relating to taxation are anticipated. However, from a public accounting perspective, if the Public Corporation status of CMAL were to change due to reduced income under a RAB regime, all of its revenues and spending could in future impact the SG Revenue Departmental Expenditure Limits (R-DELs).

Integration / Assimilation

The delivery and cost of ferry services and the relationships between the Tripartite are complex, and the Scottish Ministers have noted that they are mindful of the perception which exists regarding a lack of accountability among the parties.
The challenge of holding the Tripartite to account has its origins, in part, in confusion regarding each members’ respective roles and responsibilities. By reducing the number of parties within the Tripartite it may aid clarity in this respect, which has the potential to improve transparency and accountability.
By merging two members of the Tripartite there will be a stronger alignment of those organisations’ objectives. There may also be opportunities to achieve efficiencies in their operations, e.g. vessel maintenance.
CMAL possesses technical expertise that TS depends on. Were it to be integrated with CFL or DML, consideration would need to be given to how this function could be preserved.
There are a large number of taxation and accounting issues associated with integrating or assimilating members of the Tripartite. The challenge this may present becomes greater if it is CMAL’s assets that are moved, due to the potentially high market value of its assets. There are also a number of legal considerations that become relevant under these future options. The cost associated with resolving these issues needs to be more fully understood and judged in the context of Ministerial priorities as part of a full evaluation.

Privatisation

SNF, current holder of the NIFS contract, has demonstrated the success with which a private operator can deliver ferry services on behalf of TS and Scottish Ministers. Successful privately run ferry operations have also been observed in Norway.
It is feasible that TS / Scottish Ministers could divest its interests in the ferries sector and depend on the private sector to bid for and deliver the CHFS contract; however, in recent procurements there has been little or no competition and there is a risk that future procurements would attract limited interest under commercial terms similar to those currently in place. Without its ferry interests, TS / Scottish Ministers would be in a weak position to step in as Operator of Last Resort, a requirement for lifeline ferry services.
There are likely to be significant tax and accounting implications associated with the sale of CMAL, particularly due to the potentially high market value of its assets.
The contractual relationship that TS / Scottish Ministers would have with the holder of the CHFS contract is likely to be less influential than the shareholder relationship it currently benefits from.
Although current accounting rules may permit lease payments to a private asset owner to be treated as R-DEL, IFRS 16 will become effective from 1 April 2022, which will have a Capital-Departmental Expenditure Limits (C-DEL) impact equal to the present value of lease rentals, i.e. there may be limited benefits from a budgeting perspective.
The SG’s objectives with regards to DML’s commercial mandate require greater clarity to assess if this remains a desirable direction of travel.

Decentralisation

Passing responsibility for the management and / or procurement of ferry services to local authorities could narrow the gap between the communities served by the CHFS network and decision makers. This could benefit accountability and transparency.
Local authorities may be more able to take a holistic approach to the delivery of ferry services due to their involvement in other public services. This could lead to more joined up policy making with better outcomes for the communities on the west coast of Scotland.
A decentralised model would require contracts to be let as smaller bundles, which may attract more competition into the market and have a positive impact on pricing; however, the loss of economies of scale may undo some of these efficiencies.
Evidence from Norway and other sectors that adopt a decentralised approach suggests that passenger experience will vary according to the capabilities and priorities of the local authorities.
The ability of Ministers to drive change would be reduced as they would no longer be directly responsible for procurement.
Introducing multiple new procuring authorities to an already crowded arena could further undermine transparency.
It is possible that the positives associated with decentralisation, namely enhanced transparency and joined up policy making, could be achieved via other means that would avoid the pitfalls mentioned above. This could include the introduction of a more formal role for local authorities via which they can input into the sector.

Commissioner or Regulator

This option would introduce a commissioner or regulator who would provide an independent view on matters critical to the sector, including operator performance, price caps and capital spend.

Passenger Experience

Rating: Neutral

An independent commissioner or regulator could be responsible for monitoring operator performance and have the power to impose penalties for short comings. This could help the operator to improve its performance, which would positively impact passenger experience. However the practical limitations on the impact of regulators should also be noted in light of failiings in the UK’s energy supplier market in 2021.
If the commissioner is required to approve major capital spend, it could increase the likelihood that commissioned vessels are fit for purpose which would positively impact vessel quality.
Island communities and passengers would benefit from a clearly identifiable body that is responsible for overseeing service quality and potentially pricing.

Deliverability

Rating: Positive

British Columbia, which has a ferries commissioner, is frequently cited by Scottish stakeholders as a successful model for ferry services. Existing stakeholder support for a commissioner should ease implementation.
A commissioner’s office would increase the sector expertise available to TS.
Legal advice should be sought on the legal implications of introducing a commissioner model as legislation may be required.
Establishing and maintaining an office for the commissioner would incur a cost. Further VfM analysis is required to understand the value of introducing a commissioner.
However, an effective commissioner should be capable of driving efficiencies in the sector that are greater than its operating costs. If this is achieved, then the net impact should be positive.

Accountability & Transparency

Rating: Positive

Providing the remit of the commissioner is clearly defined, their introduction should not undermine accountability or transparency.
The commissioner would be responsible for monitoring performance in the sector, which could improve accountability in the sector.
Ministers may have to relinquish certain powers to the commissioner, which could reduce their influence over the sector and their ability to affect change.
As a dedicated resource, the commissioner should enhance oversight of the sector, particularly if it is able to fulfil this function more effectively than the current structures that are in place.

Summary

Overall Rating: Positive

An independent commissioner or regulator has the potential to drive enhanced passenger experience and accountability. Limited deliverability issues are noted providing the commissioner or regulator’s remit is limited to the CHFS network. No accounting or tax issues were noted in relation to this option although legislation may be required.

Regulated Asset Base

The Scottish Government could legislate to make the port and harbour infrastructure a Regulated Asset Base. This would help to ensure adequate capital investment in the sector’s fixed infrastructure (ports and harbours). Note that while this option would require the port and harbour infrastructure to be disposed of to the private sector, the appraisal of this option only considers the consequences of the RAB regime itself. For the purposes of clarity, privatisation of CMAL’s assets are appraised under a separate and distinct option.

Passenger Experience

Rating: Positive

The Regulated Asset Base would regulate returns for investors in the fixed infrastructure (ports and harbours), which could lead to increased investment in ports and harbours, which could improve the quality of the infrastructure and support enhanced service delivery

Deliverability

Rating: Negative

Scottish Ministers would need to undertake the administrative steps to establish a Regulated Asset Base. This process would be more intensive than that required for introducing a commissioner or regulator with lesser powers.
In order to introduce a RAB model, legislation may be required. Further investigation is needed to understand if SG would have the devolved competence to enact such a piece of legislation.
In order for the private investor to earn its regulated return, habour fees may need to increase. This would ultimately be borne by SG via the payment of higher subsidy to the operator that would be liable for the harbour fees.
If the Public Corporation status of CMAL changes due to reduced income under a RAB regime, all of its revenues and spending would impact the SG Revenue Departmental Expenditure Limits (R-DELs).
Excessive regulation has the potential to undermine the efficient operation of the CHFS network and wider sector. As part of the detailed evaluation, TS should consider if lighter touch regulation, e.g. a commissioner, would be sufficient to achieve its desired objectives.

Accountability and Transparency

Rating: Neutral

Regulation in excess of that required to achieve Ministerial objectives has the potential to introduce unnecessary complexity to the sector, which could undermine accountability and transparency.

Summary

Overall Rating: Neutral

Legislation may be required, which has the potential to introduce deliverability challenges if a RAB model is judged to be excessively burdensome versus a more light touch regulatory model. If this renders the option unviable it could move the overall score to red. Depending on impact of RAB regime on CMAL’s income, its Public Corporation status could also change, which could cause all of its revenues and spending to affect the SG’s R-DELs.

Assimilation of TS and CMAL

Passenger Experience

Rating: Neutral

If during assimilation key CMAL personnel leave the organisation due to concerns about change (e.g. impact on pay), TS will lose access to expertise, which could impact vessel and service quality in the long-term. Both could negatively impact passenger experience. However, there is a potential option for this expertise to be accessed via contractors or external recruitment.
Streamlined Tripartite structure should be more easily understood by key stakeholders, including island communities. There should be less confusion regarding the respective roles of CMAL and CFL as a consequence.

Deliverability

Rating: Negative

Transfer of CMAL staff and vessels to TS likely to be complex with significant accounting, tax, pension and HR implications.
Members of Tripartite may resist if it is felt that assimilation will not be in their interests
Assimilation would move CMAL’s activities from a Public Corporation to within General Government. This would move all of CMAL’s revenue spending into the SG R-DELs. This would be in addition to its current capital impact which is less likely to change.
Transfer of business from CMAL to TS may meet the VAT Transfer of Going Concern (TOGC) requirements, which would allow CMAL to transfer its business and assets without the need to charge VAT.
Transfer of vessels / harbours to TS will result in a cessation of the CMAL trade, with disposal values required to be brought into account in final period. Chargeable assets would be deemed to transfer at market value which may give rise to chargeable gains. Asset values and tax attributes should be considered further to quantify any tax exposures. Relief from land and buildings transaction tax (LBTT) should be available subject to satisfying necessary conditions.
CMAL is the principal employer for the CalMac Pension Fund, and has a legal responsibility to financially support it. We expect the transfer of business and assets from CMAL to TS will require a new principal employer.
Statutory basis for assimilation needs to be considered.
Significant TUPE / asset transfer / risk considerations.

Accountability and Transparency

Rating: Positive

Fewer organisations within the Tripartite should help to clarify the respective roles and responsibilities of TS and CFL.
As the asset owner, TS should have greater oversight over the vessels, including their condition. Fulfilling this oversight function successfully would depend on technical capabilities within TS.
TS would be directly responsible for vessel procurement.

Summary

Overall Rating: Negative

Simplified Tripartite structure may enhance accountability and transparency, although limited reason to believe passenger experience will be materially improved, especially if CMAL’s capabilities are weakened during the process of assimilation. Significant number of legal issues that may prevent delivery of option. CMAL would be classed as General Government, which would have budgeting implications. Chargeable gains, which have the potential to be significant depending on the market value of CMAL’s assets, may be payable on the transfer of CMAL’s assets.

Integration of CMAL and DML

The integration of the asset owner and operator would bring together the two commercial arms of the Tripartite into a single government owned organisation.

Passenger Experience

Rating: Positive

The integration of the operator and asset owner could lead to more streamlined decision-making and a better alignment of objectives, which should have a positive impact on service quality and reliability.

Deliverability

Rating: Neutral

The integration of CMAL and DML may bring efficiencies and streamline operations. An example of which would be in relation to the maintenance or upgrades to vessels or harbours.
The integration of CMAL and DML is likely to be complex with legal, tax, pension and HR implications.
SNF may not be content to lease vessels from an organisation that is also a competitor. This would need to be explored further as part of a stakeholder engagement exercise.
VAT status of the new entity to be considered. Would require VAT registration for TOGC. Transfer of businesses into a single entity may meet TOGC requirements. Capital Goods Scheme (CGS) implications need to be considered.
Merging a Public Corporation (CMAL) with an NDPD entity (DML) results in a new entity that Government controls. Its new classification will depend on whether the new body’s commercial revenues exceed 50% of its operating and financing costs (referred to here as the ‘Market Test’).
Tax consequences will depend on how integration is achieved. Where relevant conditions for a transfer of trade without a change in ownership are satisfied, transfers can be effected at tax written down value with existing trading losses transferred to new company. Chargeable gains may arise on transfers of chargeable assets as transfers will be deemed to take place at Market Value.
Further legal advice should be sought on the implications of the integration of the two organisations.

Accountability and Transparency

Rating: Positive

Streamlined Tripartite arrangements may increase clarity around roles. Objectives of CMAL and DML will be integrated and aligned.
TS oversight capabilities may be weakened as TS would no longer have access to CMAL expertise to challenge DML perspective or vice versa. To mitigate this the CMAL technical function could be subsumed within TS.
DML would bear greater asset risk than under the current structure as it would own rather than lease vessels. DML would expect to be compensated for assuming this risk via the contract.
A simplified Tripartite model should be better understood by island communities. Communication with key stakeholders should also be clearer as ferry services on the west coast of Scotland would have ‘one voice’.
CMAL and DML objectives will be aligned.

Summary

Overall Rating: Positive

Potential for an improved passenger experience in the longer term once initial challenges of integration are overcome. The new body may also benefit from greater alignment of objectives and be more easily understood by users. The subsidy control position would require further analysis. Potential for change in classification of CMAL, with associated implications for budgeting. Chargeable gains may arise on the transfer of CMAL’s assets, which could be significant depending on the market value of CMAL’s assets.

Integration of CMAL and CFL

CMAL and CFL could be integrated to form a “CHFS Ferries Company” that would focus exclusively on the delivery of the CHFS contract. DML would be separated from the CHFS Ferries Company to focus on other commercial ventures and potentially prepared for sale.

Passenger Experience

Rating: Positive

Better alignment of CMAL and CFL objectives under umbrella of “CHFS Ferries Co” could improve service delivery.
Process for vessel management / renewal should be easier to manage from within a single organisation, which should have positive repurcussions for vessel quality.
If during integration key personnel leave the organisation, TS may lose access to expertise, which could impact vessel and service quality over the long-term. Within a recent Audit Scotland report, it was recommended TS build on its ferry expertise, and whilst this is ongoing, TS recongises further work is required. Losing further expertise could undermine this effort. However, there is an option for this expertise to be accessed via contractors or recruitment.

Deliverability

Rating: Neutral

The integration of CMAL and CFL may bring efficiencies and streamline operations. An example of which would be in relation to the maintenance or upgrades to vessels or harbours.
The integration of CMAL and CFL is likely to be complex. There would be legal, tax, pension and HR implications.
DML / CFL may resist being separated. SNF may not be content to lease vessels from a competitor. This should explored via consultation with stakeholders.
New entity would require VAT registration to qualify for TOGC. Transfer of businesses into a single entity may meet TOGC requirements. CGS implications would also need to be considered. Under new structure, VAT compliance burden is simplified and reduced with only one VAT registration required.
Merging two Public Corporations (CMAL and CFL) results in a new entity that Government controls. Given that both bodies currently meet the Market Test, since they are both Public Corporations, the net budgetary impact is unlikely to change significantly.
Chargeable gains may arise on transfers of chargeable assets as these will be deemed to take place at market value. Impact of integration on beneficial tonnage tax election would require further consideration. Public bodies relief from LBTT may be available on the reorganisation of CMAL subject to satisfying necessary conditions.
Further legal advice should be sought on the implications of the integration of the two organisations.

Accountability and Transparency

Rating: Positive

Delivery of ferry services in Scotland will be streamlined, with a single organisation responsible for operations and the supply of vessels on the west coast of Scotland. This could improve clarity around responsibilities within the Tripartite.

CMAL and CFL objectives will be aligned.
Simplified Tripartite model should be better understood by island communities. Communication with key stakeholders should also be clearer as ferry services on the west coast of Scotland would have ‘one voice’.
TS oversight capabilities may be weakened as TS would no longer have access to CMAL’s expertise to challenge DML perspective or vice versa. To mitigate this, potential for CMAL technical function to be subsumed within TS.

Summary

Overall Rating: Positive

Potential for an improved passenger experience in the longer term, once initial challenges of integration overcome. The new body may also benefit from greater alignment of objectives and be more easily understood by users. There would be clearer accountability to customers and stakeholders and the potential to improve VfM by removing duplication and interfaces. Subsidy control position would require further analysis. Chargeable gains may arise on the transfer of CMAL’s assets, which could be significant depending on market value. Legal and tax considerations should be explored further as part of detailed evaluation to fully understand and analyse risks and opportunities.

CMAL assets are sold to the private sector

CMAL would be sold to the private sector and vessel ownership would be privatised. Sourcing vessels would become the responsibility of the operator.

Passenger Experience

Rating: Negative

Vessel quality would depend on what the operator is able to source from the private sector. SNF vessels now leased from CMAL were previously owned by RBS, indicating private asset owners can supply vessels of a similar quality to CMAL.
Freed from the obligation to use CMAL vessels, there is a risk that the operator could source lower quality vessels at a reduced cost. An appropriate vessel specification in the contract would be required to avoid this.
Ferry services in Scotland would no longer benefit from a guaranteed source of vessels, but would instead be reliant on the private sector’s appetite to meet the needs of market

Deliverability

Rating: Negative

Sale of CMAL is likely to be complex. There would be legal, tax, pension and HR implications.
The loss of CMAL’s technical knowledge could weaken TS’ capabilities as a procurer of ferry services. CMAL’s technical function could be moved to CFL or TS to avoid this.
There may be limited appetite to buy CMAL as a legal entity due to the liabilities this may entail, in which case the only viable option may be for the assets of CMAL to be sold separately. This is likely to have different and less favourable tax consequences.
VfM assessment required to understand merit of sale. Private sector vessel operator is likely to charge CFL a higher lease. Illustrative of this, the ROSCO model in the rail sector is not judged as VfM.
Transfer of CMAL business and assets into the new private entity may meet TOGC requirements. While the new entity will require to be VAT registered, VAT compliance burden should be reduced. CGS implications should be considered. CMAL VAT registration could be de-registered.
A sale of trade and assets would give rise to chargeable gains / cessation of trade implications for CMAL that would require further analysis.
This assessment assumes that CMAL receives the sale proceeds and then remits these to the SG. The requirement for CFL to lease from the private sector vessel owner rather than CMAL will cause an initial Capital Departmental Expenditure Limit (C-DEL) reduction from the disposal, followed by subsequent C-DEL impacts from the leases, i.e. there is little C-DEL benefit from a sale and lease back (this treatment applies to leases commencing after 1 April 2022 when IFRS 16 takes effect; it is presumed that no sale and lease back would occur before this date).
To preserve the continuity of CMAL employees’ defined benefit (DB) pension benefits, the associated assets and liabilities related to CMAL’s 38 active members could be transferred to the buyer’s DB scheme. The assets and liabilities related to CMAL’s inactive members could also be transferred to a buyer – however, we expect buyers to have a strong preference against this. A lump sum “exit” contribution to the CalMac Pension Fund or “top-up” contribution to facilitate the transfer of any assets and liabilities may also be required.

Accountability and Transparency

Rating: Neutral

Sale of CMAL would simplify Tripartite structure by removing one party.
Asset risk would be transferred away from the public sector (maintenance risk could be retained by CFL).
As assets would no longer be owned by public sector, Scottish Ministers would have less capacity to govern how these assets are managed. This is problematic as they are critical to the provision of lifeline services.
Influence over vessel design could only be achieved via contract specification and not via the SG’s role as shareholder.

Summary

Overall Rating: Negative

Unclear what impact of CMAL sale would be on passenger experience; likely to be dependent on quality of vessels that can be sourced from the market. Chargeable gains may be payable on the sale, which could be significant depending on market value. Operator is likely to suffer higher vessel leasing costs due to margin required by a private sector operator. There is unlikely to be a material C-DEL benefit from a sale and lease back arrangement. Tripartite structure would be simplified although TS will have less influence over new asset owner. There will be potential for greater risk transfer to the private sector.

CFL does not bid on the next CHFS contract

Ministers decide CFL will not bid on the next CHFS contract. TS would procure a contract for ferry services from the private sector through a competitive tendering process.

Passenger Experience

Rating: Neutral

SNF provides evidence that the private sector can run a high quality / reliable ferry service efficiently in Scotland.
However, a private operator would also be obliged to act in the interests of its shareholders, which could lead to excessive cost cuttings in pursuit of profit, which could detrimentally impact service quality / reliability.
In NSW the Government has leveraged the commercial expertise of its private sector operator to procure new vessels. Similar arrangement in Scotland could aid the vessel renewable programme.
If the private sector can deliver an improved service, local businesses could become more efficient and prosper as a consequence, benefiting local economies. Conversely, if the service declines, so could local economies.

Deliverability

Rating: Neutral

Stakeholder concern regarding CFL choosing not to bid on the next contract due to its important role as an employer and provider of lifeline services.
Institutional knowledge of ferries sector within TS may decline as it will no longer be the owner of an operator.
Uncertain what market appetite there would be to bid on the next contract.

Accountability and Transparency

Rating: Neutral

Operations would more clearly be the responsibility of the private sector operator and not the SG. A large degree of reputation risk would continue to rest with SG.
Financial risks transferred to the operator under the contract could genuinely be transferred away from the SG, whereas currently risk transferred to CFL is still ultimately the SG’s risk, as the owner of CFL.
As OLR for the ferries sector, there will always be a possibility that risk allocated to the private sector could be transferred back to the SG in the event of an operator’s failure or withdrawal.
The SG would have reduced oversight as the private sector operator would only be obliged to share information in line with the contract.
As SG would no longer be the operator’s shareholder, it may have less capacity to affect change within the sector.
Private operator’s objectives are less likely to be aligned with those of Scottish Ministers.

Summary

Overall Rating: Neutral

Unlikely to be material impact on passenger experience providing contract continues to be followed. However, it is unclear what the appetite is among the private sector to bid on the next CHFS3 contract. The governance structure would benefit from being streamlined and there will be opportunity to transfer greater risk to the private sector; however, SG will be less able to influence the operator and ensure it serves the purposes of Scottish Ministers.

Cessation of non-core commercial operations

DML’s commercial ventures not core to the delivery of the CHFS contract are ceased.

Passenger Experience

Rating: Neutral

Narrower DML scope post-divestment could increase the human resources available for delivering the CHFS contract, which may improve service quality and reliability, thereby contributing to passenger experience.
In the medium-to-long-term, DML may suffer a loss of commercial knowhow, which could have a negative impact on how successfully it manages its CHFS operation.

Deliverability

Rating: Neutral

The ease and speed with which DML’s commercial ventures could be ceased would depend on the market’s appetite for those businesses. This is untested and would need to be explored.
The Scottish Ministers would no longer benefit from any profits earned via DML’s commercial ventures; however, Ministers would also be protected from any losses incurred in pursuit of these.
TOGC conditions may be met. Consideration would need to be given to any CGS assets.
Tax implications of divestment following a sale to a third party would require further analysis, including impact on any existing tax attributes.
Since DML is a General Government entity, divestment of non-core activities causes a budgetary impact matching the net effect of those activities before divestment. If those activities require DML to borrow, the divestment reduces C-DEL by the amount of that borrowing, while any revenue spending or income foregone will cause corresponding R-DEL impacts. There will be further budgetary impacts from any sale proceeds from the divestments.
CFL, CMGC and DML HR are participating employers for the Calmac Pension Fund. As these employers are expected to remain after the divestment there is no direct impact on the fund.

Accountability and Transparency

Rating: Positive

DML’s roles and responsibilities should be clearer as there will no longer be any confusion regarding its commercial mandate.
The SG will no longer be exposed to any risk assumed by DML in relation to its commercial operations.
The narrower scope of DML’s objectives should enable a better alignment with the Scottish Ministers’ objectives.
The governance framework should be simpler as it will only need to account for delivery of the CHFS contract.

Summary

Overall Rating: Neutral

Unclear what the impact on passenger experience will be although possible that more focused operation will improve performance. The tax implications of any sale would require further analysis. Limited legal barriers to deliverability noted. A streamlined DML operation should facilitate greater transparency. The loss of DML’s commercial ‘know how’ gained via other ventures is, however, a key disadvantage of this option. Option should be explored as part of detailed evaluation and assessed in context of Ministerial priorities for DML.

Local authorities procure / manage ferry services

Powers are devolved to local authorities who would become responsible for procuring and managing ferry services in their geographies. CMAL retained as vessel owner.

Passenger Experience

Rating: Negative

Potential improvement across passenger experience metrics as there should be greater understanding of local services and needs within local authorities (LAs); although engagement with LAs suggests this could also be achieved via other means, e.g. improved lines of communication.
Evidence from comparators suggests there is likely to be significant variance in standard of service achieved across LAs based on the capabilities and priorities of the LA.
Capacity of LA to improve passenger experience will heavily depend on funding made available from the SG.

Deliverability

Rating: Negative

Represents a fundamental restructuring of the industry and therefore is likely to be complex.
Uncertain what appetite exists among LAs to assume responsibility for ferry services. Likely that there would be some hesitance due to additional resource requirements.
Smaller contracts could increase competition in market, lowering contract cost.
Uncertain that LA with limited experience of procuring ferry services will be able to achieve better value outcomes.
Reduced VAT compliance and registrations. LAs are subject to a different VAT regime; VAT treatment and recovery may differ.
How devolvement of activity is achieved may require further consideration. Restructuring of Caledonian MacBrayne Crewing (Guernsey) (CMCG) likely to be required under this option.
The only SG budgetary impacts arise from reductions in CFL’s activities to the extent that those activities affect SG budgets given CFL’s Public Corporation status. This is because LA activities do not effect any SG budgets. Further changes will however occur if as a result of these changes, CFL no longer meets the Market Test and so becomes a General Government entity.
No material impact on the CalMac Pension Fund is expected on the assumption that no CFL employees transfer to LAs.

Accountability and Transparency

Rating: Positive

Decentralisation should provide island communities with more opportunity to input into decision making process and hold procuring authority to account.
Governance within individual LAs will depend on competency of each LA.
Ability of Ministers to influence change is reduced as they will no longer be directly responsible for procurement. Central oversight of ferry network will be reduced.
The ‘Roles and Responsibilities Working Group’, which was set up as part of a wider review of Scotland’s National Transport Strategy, previously recognised in its recommendations the need for future transport governance arrangements “to be on the basis of some form of regional model” to allow for variations in approach between different geographic regions. This option would be consistent with this recommendation.

Summary

Overall Rating: Negative

Local authorities procure / manage ferry services and assets

Powers are devolved to local authorities who would become responsible for procuring and managing ferry service. Assets currently owned by CMAL are also transferred to local authorities.

Passenger Experience

Rating: Negative

Potential improvement across passenger experience metrics as there should be greater understanding of local services and needs within LAs.
However, evidence from comparators suggests there is likely to be significant variance in standard of service achieved across LAs based on the capabilities and priorities of the LA.
Vessel ownership will pass to local authorities. Highly technical function and unlikely that at present LAs will possess capabilities to deliver service to equal standard as CMAL. With appropriate training, it is possible that this could be achieved, although outcomes likely to be variable.
Potential for disruption in short-term as new contracts are embedded.
Unbundling would mean ferries being split up among the routes and local authorities. If one route only has one ferry and the ferry breaks down, the whole route is disrupted with limited flexibility.

Deliverability

Rating: Negative

Represents a fundamental restructuring of the industry and therefore is likely to be complex.
Uncertain what appetite exists among LAs to assume responsibility for ferry services. Likely that there would be some hesitance due to additional resource requirements.
Unlikely that all LAs have access to technical skill set required to procure / manage ferry contracts and vessels. Investment in training likely to be required.
TS would no longer have access to hub of expertise within CMAL.
Reduced VAT compliance and registrations. LAs are subject to a different VAT regime, VAT treatment and recovery may differ. Transfer of CMAL business to the private sector may meet the TOGC conditions. CGS implications should be considered. CMAL could be de-registered for VAT.
Restructuring of CMCG likely to be required under this option. Transfer value of vessels / harbours by CMAL to LAs will give rise to balancing adjustments and chargeable gains / losses which require further investigation.
The main SG budgetary impacts arise from any proceeds from sale of CMAL assets, along with reductions in CFL’s activities to the extent that those activities affect the SG budgets given CFL’s Public Corporation status. Any CFL lease for a route it successfully bids for will affect the SG C-DEL. Further changes will occur if CFL no longer meets the Market Test.
As the LA’s will procure and manage ferry services in place of TS, the employer will transfer members from the CalMac Pension Fund to the LA pension scheme. To preserve the continuity of employees’ DB pension benefits, the associated assets and liabilities related to the employers’ active members’ could be transferred to the LA pension scheme. The assets and liabilities of the deferred and pensioner members of the CalMac Pension Fund could also be transferred; however, the LA may not wish to take on inactive member liabilities. If they do not wish to take on inactive member liabilities, a solution would need to be found (e.g. liabilities assumed by Government, liabilities bought out with an insurance company, etc.). A ‘top-up’ contribution to facilitate the transfer of any assets and liabilities to the local authorities’ pension schemes may also be required.

Accountability and Transparency

Rating: Positive

Decentralisation should provide island communities with more opportunity to input into decision making processes and hold procuring authority to account.
Governance within individual LAs will depend on capability and capacity of each LA.
Ability of Ministers to influence change is reduced as they will no longer be directly responsible for procurement. Central oversight of ferry network will be reduced.
‘Roles and Responsibilities Working Group’, which was set up as part of a wider review of Scotland’s National Transport Strategy, previously recognised in its recommendations the need for future transport governance arrangements “to be on the basis of some form of regional model” to allow for variations in approach between different geographic regions. This option would be consistent with this recommendation.

Summary

Overall Rating: Negative

LA may leverage knowledge of local community needs to enhance passenger experience, although results likely to be mixed. From a legal perspective further consideration is required to understand the implications for subsidy control. Various budgeting implications noted. LA role should bring service delivery closer to communities, enhancing accountability. Sector may become more competitive due to larger volume of smaller contracts.

TS manages major routes and smaller routes passed to local authorities

Minor routes are unbundled and responsibility for management is passed to local authorities. TS would continue to procure ferry services for major routes as part of a more limited CHFS network.

Passenger Experience

Rating: Neutral

May offer the ‘best of both worlds’ as major routes are procured centrally allowing ‘joined up’ ferries strategy, while smaller routes are devolved and able to benefit from LAs better understanding of local needs.
Improved passenger experience on smaller routes is dependent on access to adequate technical expertise at the procuring LA.
Island communities should have more opportunity to influence service delivery on minor routes.
Retention of CMAL means vessel quality likely to remain unchanged.

Deliverability

Rating: Negative

Represents a fundamental restructuring of the industry and therefore is likely to be complex.
There will be an increase in the overall resource required to deliver ferry services as a result of the need to procure and monitor a greater number of contracts. There would also be a loss in network efficiencies in crewing cover, vessel cover and legislative compliance as a result of separation.
CFL / operators may resist restructuring of CHFS network as it would reduce revenues, although they would still have opportunity to bid for smaller contracts directly with LAs and to bid for major routes.
Sector may become more competitive due to larger volume of smaller contracts.
The SG budgetary impacts arise from reductions in CFL’s activities to the extent that those activities affect SG budgets given CFL’s Public Corporation status. Further changes will occur if as a result of changes CFL no longer meets the Market Test and so becomes a General Government entity.
LAs are subject to a different VAT regime; VAT treatment and recovery may differ. There will be an increase in VAT compliance with additional parties being added to the structure. TOGC conditions and CGS implications to be considered – specific fact pattern for each contract will be determinative.
Limited tax implications, although how devolvement of activity is achieved may require further consideration. Restructuring of CMCG may be required under this option depending on level of activity devolved to LAs.
No material impact on the CalMac Pension Fund is expected on the assumption that no employees transfer to LAs.

Accountability and Transparency

Rating: Positive

Introduction of additional parties likely to further complicate governance structures and understanding of roles and responsibilities.
Uncertain if LAs will be able to achieve better risk allocation on minor routes due to more limited procurement experience may be impediment to this.Ministerial oversight and ability to affect change will be more limited with regards to minor routes.
Island communities will have more ability to influence service delivery on minor routes and hold procuring authority to account.
Alignment of objectives likely to be unchanged on major routes. Uncertain if new operators delivering minor routes will share objectives of the Scottish Ministers.
‘Roles and Responsibilities Working Group’, which was set up as part of a wider review of Scotland’s National Transport Strategy, previously recognised in its recommendations the need for future transport governance arrangements “to be on the basis of some form of regional model” to allow for variations in approach between different geographic regions. This option would be consistent with this recommendation.

Summary

Overall Rating: Neutral

LAs may leverage knowledge of local community needs to enhance passenger experience, although results likely to be mixed. From a legal perspective further consideration is required to understand the implications for subsidy control. LA role should bring service delivery closer to communities, enhancing accountability, but overall oversight may be impaired due to introduction of new procuring authorities. There may be alternative, more efficient means by which the issues this future option seeks to address can be resolved. This could include a more formalised role for LAs via which they can input into the sector.

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