Herald Friday August 4th 2006

Ministers 'breaking law' in ferry deals

David Ross
Highland Correspondent
david.ross@theherald.co.uk

Lifeline ferry services to Scotland's islands are at risk because ministers'
approach to opening the routes up to competition break European laws on
state aid, experts have warned.

They believe the Scottish Executive's decision to depart from the bidding process may make illegal the very subsidies which protect the routes.

It could lead to the subsidies having to be repaid or the whole process of
allowing private companies to bid for CalMac routes having to start again.

The lifeline services to Orkney and Shetland have already been tendered and
will receive £31m in the first year. Invitations to tender for Caledonian MacBrayne's Clyde and Hebrides network are expected to be issued next month, seven years behind schedule.

European regulations on competition and state aid make the process necessary
because of the annual public subsidy of approximately £30m paid to CalMac. But the executive has chosen not to apply for the only licence to pay public
subsidy under European rules.

It has long been accepted that for a public subsidy to be permitted under
European law, a Public Service Obligation (PSO) has to be defined to explain
why exactly a route required a subsidy. But the executive has said it has decided instead to opt for a public service contract (PSC).

The Herald then asked Stefaan De Rynck, EU transport spokesman in Brussels,
whether under European law a member state was allowed to subsidise a ferry
service with a PSC but without an PSO. Mr De Rynck replied: 'Companies have to be able to compete and know in advance what the subsidy is exactly paid for. The
purpose of the subsidy has to be specified in the PSO. So yes, a PSO is
needed before one can pay out public service subsidies for ferry services'.

Professor Neil Kay, emeritus professor of business economics at Strathclyde University, said yesterday that while a PSC could safeguard the quality of a ferry service by, for example, penalising cancellations, it was totally insufficient to justify a subsidy for a route.

He said: 'If you now say you do not need PSOs, you're effectively saying you do not need subsidy and worse, any subsidy that you then give to these services may be argued to be illegal state aid under European law.

He said there was now a question whether the tendering for Orkney and Shetland was competent, adding: 'The executive's statement could threaten the continuance of these essential services to vulnerable and fragile communities. This would seem to represent incompetence of an order that is difficult to find precedent for.

Jim Mather, the Nationalist MSP, agreed. Most informed observers inside and outside parliament had taken for granted that the executive had continued to prepare the case for PSOs for the last three years. It beggars belief it now appears that was not the case and
the only way ministers can show proper contrition is by resignation.

Speaking before the European Commision statement, an executive spokesman
said regulations made clear that either the PSO and PSC mechanisms could be pursued. He added: 'The PSC approach allows us to deal with a wider range of matters and therefore allows us to go further to ensure the quality of the services provided'.