1. Scottish Government Ferries Review Steering Group Meeting Paul McCartney | 14 September 2009

2. Paul McCartney | 15 September 2009 Work Package Costs and Affordability Funding Fares Services and Routes

3. Paul McCartney | 15 September 2009 Our Approach Based on STAG Appraisal Process Objective-led Problems and Issues Opportunities and Constraints Option Generation Option Assessment Generation of Key Questions that will form a basis for the Strategy

4. Paul McCartney | 15 September 2009 Cost and Affordability – Findings

5. Paul McCartney | 15 September 2009 Requirements of the Brief Cost and Affordability Investigate means of improving the affordability of ferry services Consider the cost and affordability of ferry services in the context of public transport generally Consider how to make more efficient use of ferries resources

6. Paul McCartney | 15 September 2009 Ferry Costs (1) Source – WP1a Report

7. Paul McCartney | 15 September 2009 Ferry Costs (2) OperatorsGrant (£k)Annual PaxAnnual Subisy per pax Annual Sub per capita (Scotland) A&B£750 (est)138,600£5.41£0.15 Cowal Ferries £2,300550,849£4.18£0.45 CHFS£42,0004,533,215£9.26£8.16 NorthLink£32,000307,000£104.23£6.22 Orkney£5,640316,400£17.83£1.10 Shetland£10,500795,600£13.19£2.04 Total£93,1906,641,664£154.11£18.11

8. Paul McCartney | 15 September 2009 Key Findings Costs on the CHFS and NorthLink networks appear to be higher than industry standards High costs mainly driven by the ‘Major’ and ‘Intermediate Ferries’ (retail operations, high number of staff/crew, longer distances and more fuel) Costs in Orkney are also high (and rising relatively quickly) but are lower (and more stable) in A&B and Shetland Rising fuel costs are a threat across the board Complex tenders with little incentive deters outside interest Need for costly replacement of vessels and shoreside infrastructure

9. Paul McCartney | 15 September 2009 Network Cost Breakdown - CFL - Relatively high crew costs - Fuel also accounts for a significant proportion of costs - Vessel lease fees significantly lower proportion than NorthLink – are CFL paying a market rate?

10. Paul McCartney | 15 September 2009 Network Cost Breakdown - NorthLink - Graph does not include fuel - Lease costs very significant proportion of total costs - Hotel staff costs relatively large proportion of total crew costs

11. Paul McCartney | 15 September 2009 Network Cost Breakdown – Orkney (1) -Wages, Fuel and Maintenance account for around 90% of Orkney costs - 20% maintenance costs reflect aging fleet - Lease costs low because OIC own the vessels and do not charge for their use

12. Paul McCartney | 15 September 2009 Network Cost Breakdown – Orkney (2) -Orkney costs and trading subsidy have risen substantially in recent years - driven by a number of factors including fuel and wages

13. Paul McCartney | 15 September 2009 Network Cost Breakdown – Shetland - Costs in Shetland are stable, with any recent rise being driven principally by fuel costs - Reflects low cost of standardised network

14. Paul McCartney | 15 September 2009 Crew Costs Crew on CHFS and NorthLink vessels serve two weeks on / two weeks off as crew are vessel based, cannot easily tailor crew numbers to demand working hours legislation limits vessel operating hours – restricts timetable Above average T&C’s / pension / overtime / redundancy etc Net loss on retail activity

15. Paul McCartney | 15 September 2009 The Impact of TUPE TUPE ensures the protection of all staff in the event of a ‘transfer of undertakings’ – in the context of ferries, a change of operator via a tender valuable policy for protecting staff from unfair discrimination ensures retention of skilled staff But… preserves high cost base fixes costs within the system limits scope for innovation

16. Paul McCartney | 15 September 2009 Fuel Fuel prices have risen rapidly in recent years and will continue to do so: fuel is the 2 nd largest element of CFL’s costs (around 30%) also a significant element of NorthLink and Orkney costs Shetland – fuel costs risen by 181% between 2003-2008 Conversion of large vessels to IFO will help reduce costs in the short-term, but only delays the problem IFO has relatively greater negative environmental impacts

17. Paul McCartney | 15 September 2009 Vessel Specification Vessels are specified for high passenger carryings – historical issue but mismatch of car / passenger capacity Drives up crew requirements and costs

18. Paul McCartney | 15 September 2009 Rationalisation? – Ports and Routes Costs could be reduced by rationalising the number of ports and routes served Approach could be to concentrate on hubs like Oban or Fairlie – improving facilities; or Could focus on shortest sea crossings Slow vessels down Could be unpopular, although highlighting the benefits may minimise the impact

19. Paul McCartney | 15 September 2009 Capital Costs Need for significant investment in vessels, ports and harbours average age of vessels is rising, with a number of ships approaching 30 years old Ports and harbours also require significant investment – much of the shoreside infrastructure is already past its nominal ‘expiry date’ Need to modify ports and harbours if system is to be ‘opened up’? Insufficient public funds available to meet these needs at present Potential to reduce costs through more careful design process and multiple orders

20. Paul McCartney | 15 September 2009 Tender Specification Complex tenders with little incentive deters outside interest Current tender is restrictive and offers little scope for innovation CFL / NorthLink bid costs met by SG (illegal State Aid?) CFL / NorthLink will always win as their bid only requires a break-even return Lack of incentive to innovate – virtually all additional revenue ‘clawed back’ by SG

21. Paul McCartney | 15 September 2009 Funding – Findings

22. Paul McCartney | 15 September 2009 Requirements of the Brief Funding Define options for the future funding of ferry services Define the criteria under which the Scottish Government, LAs and other public bodies may fund particular services Assess the impact of different funding strategies on aims of the Review and the cost to SG Identification of additional funding streams available for ferries

23. Paul McCartney | 15 September 2009 Public Sector Funding Constraints Current ferries budget insufficient to meet investment needs and rising ops costs This is set against severe funding constraints in the public sector at present UK Govt and SG have made it clear that spending cuts can be expected LAs and RTPs budgets are likely to be cut Ferries funding is not ring-fenced – may potentially be reallocated to other more high profile spending areas – health / education

24. Paul McCartney | 15 September 2009 Funding Structure Considerable inconsistency in ‘who funds what’ SG, LAs, RTPs, private sector, local communities, charities and voluntary sector all involved in funding Lack of Scotland-wide strategic focus

25. Paul McCartney | 15 September 2009 Borrowing Powers SG, and thus CMAL, does not currently have borrowing powers LAs and RTPs can borrow from a number of sources (eg Public Works Loans Board & Euro Investment Bank) But borrowing constrained by what they can pay back / revenue streams Current administration does not favour PFI and ferries a low priority for SFT

26. Paul McCartney | 15 September 2009 Future Funding Opportunities Reform current set up Scottish Futures Trust Reclassification of CMAL Privatisation of assets CMAL – piers and harbours only Private sector bring vessels Each option has risks and benefits, but public sector may ultimately have to pay in some way for assets and operations

27. Paul McCartney | 15 September 2009 Fares – Findings

28. Paul McCartney | 15 September 2009 Requirements of the Brief Fares Exploration of options for rationalising fares structures Identify how changes to fare structures can support remote and island communities

29. Paul McCartney | 15 September 2009 Key Findings The current fare system is complex and based on historical evolution Some islands are at a disadvantage when compared against similar communities Fares bear little relation to costs or revenue maximisation Fares are generally perceived to be too high on the islands Initial analysis suggests a 10% reduction in fares appears the ‘optimal’ solution Grows revenue Grows patronage RET offers the greatest rise in patronage but largest loss of revenue

30. Paul McCartney | 15 September 2009 Contribution to Objectives

31. Paul McCartney | 15 September 2009 Key Strategic Questions Should fares be set to: provide optimal vessel loadings encourage travel within any given existing or future capacity maximise revenue / minimise subsidy? Different fare policies meet different strategic objectives Priorities? a common, standardised fare system? a fare system that may result in ‘winners and losers’? focus fare initiatives on a specific user groups – eg residents, tourists, freight etc? How much flexibility within Tender Specification?

32. Paul McCartney | 15 September 2009 Services and Routes

33. Paul McCartney| 15 September 2009 Principal Challenges – evidence from the Household Surveys

34. Paul McCartney| 15 September 2009 Key Statistics – further evidence from the Household Surveys Community level data Why do people travel? What modes do they use? What is most important to them? What causes them greatest dissatisfaction?

35. Paul McCartney | 15 September 2009 Where do people travel? Evidence from household survey

36. Paul McCartney | 15 September 2009 Baseline – what is currently being provided? What sort of service does a community currently have? From this identify positive and negative experiences – timetables, vessels, socio-economic needs Relate this to the levels of satisfaction in the Household Survey

37. Paul McCartney | 15 September 2009 Index of Need – which communities are most reliant on ferries? Analysis of community accessibility to services Employment Education Retail Some communities are more reliant in ferry links than others Index of Need

38. Paul McCartney | 15 September 2009 What is happening now? Other statistical evidence Identify existing trends – where is growth taking place? Analyse commercial data (retail sales, cost base, types of traffic carried) Compare support for alternative modes Distribution of subsidy – is it proportionate to population? Need? Opportunities? How do fares compare between routes?

39. Paul McCartney| 15 September 2009 Peaks and Troughs in Demand Demand is never evenly distributed across sailings Varies by time of day, by day of week, by month of year Catering for the peaks can be very costly For example: Aberdeen-Lerwick peak passengers (July) double the average, and almost four times the lowest (February)

40. Paul McCartney | 15 September 2009 Rebalancing Demand and Supply? Community level analysis Base passenger demand = current patronage X need Tourism Commercial Vehicles Supply = total capacity Regressed and used to predict optimum capacity

41. Paul McCartney| 15 September 2009 Consultation – summary of issues from public meetings around the country Example – issues raised and potential solutions suggested

42. Paul McCartney| 15 September 2009 Community Fact Sheets – bringing the whole picture together

43. Paul McCartney | 15 September 2009 Principles to be Adopted Location of overnight port Crews live onshore Later sailings Timetable reflects demand/need Reinforce growing routes Standardise timetables Consider freight requirements in vessel specifications Review and rationalise onboard retail facilities Reduce fares Improve/ co-ordinate information Improved check-in/ booking process Step change in integration Tackle accessibility challenges

44. Paul McCartney| 15 September 2009 Some of the Implications Change in fleet structure – move to smaller vessels Reduction in ports/harbours required Tailoring supply/demand Seasons Days Country-wide fleet management Ferry Replacement Fund Co-ordinated dry dock programme Tackle restrictive practices Target – sufficient savings to establish a Ferry Replacement Fund and support other improvement aspirations