The Folly and Waste of RET

The Minister of Transport Stewart Stevenson yesterday made a statement about the Government's RET policy (the principle of setting ferry fares to the equivalent of travelling a similar distance by road) which adds further incoherence to what is already an indefensible and discredited policy. He has explained the decision to extend cheap RET fares in the Western Isles at an additional cost of £6.5m on the basis that "Over the last 20 years we've seen population in the Western Isles drop by 19%. We've seen population in the Northern Isles remain relatively stable. It is absolutely clear that investment in the Western Isles is investment to support the economy and the future of these islands".

In other words he is now saying that applying RET on the Western Isles is for social and economic reasons specific to these islands. Yet it was sold by him three years ago as a "pilot" which if successful would be adapted across the whole network - nothing at all to do with problems specific to Western Isles.

This follows hard on the heels of his recent announcement that the RET trial would be extended by another year. There was no defensible justification made for the extension. But had the pilot not been extended the original planned end of the trial meant CalMac fares there would have had to show a doubling in many cases, back up to pre-trial levels, all this around the time of the Spring 2011 Holyrood elections. .

There is no more logic in setting fares equal to road equivalents with RET than there would be for setting them equal to any other transport mode. If you want to go down this ludicrous route, why not BET or Bridge Equivalent Tariff (after all, bridges are the closest mode to ferries in terms of the transport function they perform), in which case you would set the fares of all ferries in Scotland to zero. Or turn it around, why not FET (Ferry Equivalent Tariff) for bridges and roads, why not set them equal to the ferry equivalent in fares - which is after all what they did with the Skye Bridge to begin with, sparking off the campaigns of civil disobedience that ill-advised policy warranted.

Any such policies based on a notional "Equivalent Tariff" are economically naïve and illiterate and no basis for coherent policy formulation.

But one of the most damning aspects of this whole charade is that it has absolutely no chance in fulfilling the objectives set for it, and indeed from the start it never had any chance of fulfilling these objectives - which those formulating this mess should have realised from the beginning.

The stated objectives of the RET pilot were to explore how lower ferry fares could help deal with barriers "to economic growth on the islands … and could also boost island economies by attracting tourists and supporting businesses".

In short, the RET trial had a supposedly long term economic growth objective. As any competent economist would almost certainly have advised the government if they had asked them, the study will tell them absolutely nothing about how these lower fares would affect island long term economic growth. RET is a short term trial originally intended to last just 30 months, but since extended some more months.

As long as it is believed to be a short term trial, whether extended or not, people will frame their actions around these expectations.

If the crises of recent years have taught even those who are generally ignorant of economics anything, it is that economics is fundamentally about expectations.

• Not one person will move residence to the Western Isles on the basis of a temporary low price trial whose expiration is expected to be a few months away.
  
• Not one business will relocate to the Western Isles on the basis of short term low costs that are programmed to end in the near future.
  
• Not one business in the Western Isles will borrow to make a long term expansion investment if the pilot is expected to expire in the short term and leave them back where they started but just saddled with more debt. .
  

In short, the RET trial will tell us absolutely nothing about the long term effects and potential impact on economic growth. This trial is a self-negating folly which has wasted tens of millions of pounds already on a project that simply cannot meet the objectives set for it.

I am also not surprised that others have raised fundamental questions on other grounds about this process. Soon after this pilot started I pointed out to the Minister that EC law required that subsidies for public service obligations in this context had to be made available to all qualified EC operators. At the very least it is not clear how that requirement was complied with here. This is very likely a mess than the next government will have to deal with.

Yet another issue that comes out of this mess is the question of what will happen when the trial ends. The Government knows there is no money for fare decreases on anything like the scale RET would demand, after all it has told the public in its latest consultation which also ended yesterday that there will actually be less public money available for ferries in the future, and all this in the context of a network already suffering from years of underinvestment in vessels and infrastructure. Even if the money for fare decreases could be found, the system simply could not cope with the sudden demand surge that an RET regime would lead to.

The government knows all this, so it is also knowingly wasting more public money with the extension of the RET trial beyond the next Holyrood election.

So there will be no extension of RET to the network after the trial does end. What will happen to ferry fares in the Western Isles then? Will they shoot back up to pre-RET levels, causing chaos and distress for many of those dealing with the sudden doubling of many fares and leaving nothing lasting except the waste of public money ? Or will some spurious justification be found for keeping the fares at RET level for Western Isles and continuing to discriminate in their favour against other needy, peripheral and fragile regions in the Highlands and Islands? This is just another aspect of the mess that the next government has been left to deal with. .

The deepest irony is that there is a strong and robust case that could and should have been made for low fares as a cost effective method of promoting economic growth in these peripheral and vulnerable areas, not just Western Isles. I did an earlier review of studies of the effects of possible fare changes on the CalMac network that provided all that was needed to know here from previously published research.

The present short term effects of RET being observed now are entirely consistent with what was estimated and predicted from the previous studies in this area that I reviewed, so we have not even learned anything more from the trial about the short term effects of ferry fare decreases. As far as long term effects of fare decreases relevant to econonic growth considerations are concerned, the best rule of thumb that I could find for ferry fares on the CalMac network based on the best economic research available was that in the long run fare changes could be taken to approximate revenue neutrality - that is, on average in the long run a 10% increase in fares could be expected to lead to about a 10% decease in traffic, while on average a 10% decrease in fares could be expected on average to lead to about a 10% increase in traffic. In general, you could choose a high fare or low fare regime for the network, it would not make much difference to farebox revenue, where it would make a difference would be in terms of the increased investment to support a low fare regime.

There are powerful arguments in favour of the investment needed to support a low fare strategy given the potential economic benefits of sustained low fares to these fragile areas in supporting economic growth and development. The analysis I conducted was based on good solid actual economic research by professional economists. Analysis like this is all that is needed to make a judgment on whether or not a low fares strategy in justified in principle, after that there are standard economic tools such as cost-benefit analysis and standard regulatory tools such as RPI- X which can put the fares policy into practice. There is no need to take all this on trust, there are numerous professionals working in the area of regulation of essential public services in the UK who could give similar advice and almost certainly would have had they been allowed near this folly of a policy.

These analyses and cost benefit studies could have been and can be achieved for a small fraction of the millions wasted on this RET trial, and would have produced a credible basis for policy which this RET trial is congenitally unable to achieve. But the worst aspect of all is that this debacle will almost certainly set what is a robust case for lower fares for these vulnerable regions back years, that is if it has not managed to discredit it altogether.

Neil Kay 1st October 2010