OUTER HOUSE, COURT OF SESSION [2019] CSOH 39 P1291/18 OPINION OF LORD BOYD OF DUNCANSBY In the petition PENTLAND FERRIES Petitioner against SCOTTISH MINISTERS Respondent Pursuer: Lindsay QC; MacRoberts LLP Defender: Crawford QC, Campbell; Scottish Government Legal Directorate 26 April 2019 [1] Orkney and Shetland (“the northern isles”) are presently served by a subsidised ferry service which runs from Aberdeen to Kirkwall and Lerwick and between Scrabster in Caithness and Stromness (the Scrabster route). It comprises both passenger and vehicle services using “Ro-Pax” ships and a freight only service on “Ro-Ro” vessels. Together these services are known as the northern isles ferry services (NIFS). The current operator, Serco Ltd, (operating under the name Serco NorthLink Ferries (SNF)) has operated these routes since July 2012. [2] The Scrabster route crosses the Pentland Firth. Two other services cross this stretch of water. The petitioner operates a ferry carrying passengers and vehicles between Gills Bay 2 on the north coast of Caithness and St Margaret’s Hope in Orkney (the Gills Bay route). A passenger only service runs between John O’Groats and Burwick during the summer months. Neither of these routes is subsidised. [3] On 27 September 2018 the respondents published a contract notice in the Official Journal of the European Union giving notice of a procurement of a subsidised public service contract (PSC) for the NIFS in succession to the present PSC which expires in October 2019. The petitioner challenges the decision to subsidise the Scrabster route and to “bundle” the route with the rest of the NIFS. The petitioner claims that the Scrabster route is a direct competitor with the Gills Bay route and that the provision of a subsidy for the Scrabster route poses an existential threat to its business. [4] The petitioner is a family run business set up in 1997. It has operated a ferry service on the Gills Bay route since 2001. The petitioner has exclusive rights to the use of Gills Bay terminal. At no time has the petitioner received a subsidy. The petitioner currently uses a twin hulled Ro-Pax ship the MV Pentalina. A second larger ship, the MV Alfred, is due to enter service this summer. The petitioner’s public stance has been that the Alfred will be a replacement for the Pentalina. However in his affidavit, Mr Andrew Banks, the petitioner’s managing director, says that it would be possible to operate both vessels and meet all the demand for crossings of the Pentland Firth. I will return to this later. [5] For some time up until the mid-1990’s the ferry services to the northern isles were operated by P&O Ferries Ltd without a subsidy. Following P&O’s indication that they could no longer operate the services on a commercial basis the routes were put out to tender. P&O won the tender and operated the ferry services, including the Scrabster – Stromness route, between 1997 and 2002. Following a further competitive tender a contract was awarded to NorthLink, a joint venture between CalMac and RBS Group, for the period 2002-2007. 3 In 2003 NorthLink indicated that it would be unlikely to complete the contract due to financial difficulties. Following a period of interim arrangements and a tendering exercise CalMac operated the service between 2006 and 2012 under the name NorthLink Ferries Ltd. [6] Prior to advertising the new contract the respondents, through Transport Scotland (TS), commissioned an appraisal of options through a consultancy, Peter Brett Associates (PBA). That resulted in the production of a number of documents, namely: i. a draft market analysis ii. socio-economic baselining and future planning horizon iii. draft consultation report iv. pre-appraisal and part 1 appraisal report (the pre-appraisal report), and v. final report These documents were produced by the parties. I was also given a copy of TS’s Scottish Ferry Services – Ferries Plan 2013–2022. The respondents produced an affidavit from Mr Graham Laidlaw, the head of the Ferries Unit at TS, along with a supplementary affidavit. The petitioner produced an affidavit from Mr Andrew Banks, the petitioner’s managing director. [7] In 2017, which is the latest year for which data is available, the Scrabster route carried 146,000 passengers; Gills Bay, 150,000. These figures represent 38% and 39% of the market share respectively. The balance was carried on the Aberdeen–Kirkwall route and on the John O’Groats passenger ferry. The corresponding figures for cars was 41,000 (40%) on the Scrabster route and 56,000 (55%) on the Gills Bay route. In 2017 the Scrabster route carried 59,000 lane metres of commercial vehicles. TS did not have figures for the petitioner’s route but Mr Banks in his affidavit gave the figure of 89,860 lane metres. 4 [8] The pre-appraisal report emphasised that passenger and ferry services between the northern isles and the Scottish mainland are essential for the economies and sustainability of Orkney and Shetland Islands. Orkney has an increasing population with recent rates of growth exceeding the Scottish average. However the population is aging and the retention of younger people remains the challenge for the years ahead. The economy is relatively stable though some individual sectors have had significant changes. In particular the proportion of the GVA represented by transport and storage rose from 7.5% to 11.4% between 2000 and 2014. This has implications for demand for ferry services. The report concluded that frequent reliable and affordable transport to the Scottish mainland was a critical issue for Orkney in keeping younger “cohorts” on the islands. The report noted that Orkney and Shetland are unusual in that they are significant exporters of physical products. The success of agriculture, the principal industry on Orkney, was highly dependent on the provision of frequent and reliable ferry services with sufficient capacity and a timetable specifically attuned to the needs of exporting industries. [9] Chapter 3 of the pre-appraisal report analyses how the NIFS is used. Principally this looks at the SNF ferries though in section 3.5 the report brings in the petitioner’s service. The report noted that there was a significant decline in the use by passengers of the Scrabster route in 2013. This coincided with the withdrawal of the middle of the day sailing on the off-peak timetable. So far as car traffic is concerned the report notes that it was particularly noticeable that the carryings on the Scrabster route experienced a sharp decline when the MV Pentalina was introduced in 2009. [10] On freight there had been a steady decline in volumes on the Scrabster route with the 2015 freight carryings being around 15% less than in 2007. The report notes that this was in part due to enhanced Kirkwall to Aberdeen services since 2011 and in part due to the 5 “ramping up” of operations by the petitioner. It is noted that as a commercial operator the petitioner can agree individual pricing packages with freight operators providing, for example, volume based discounts. [11] A number of surveys had been carried out as part of the baseline research. These included online surveys of residents and businesses and onboard surveys of residents and visitors. Amongst other findings 85%, of Orkney respondents had used a NorthLink ferry in the last year of whom 91% had used the Scrabster route. The cost of travel was cited as the single most important issue for island residents and businesses. [12] The removal of the middle sailing on the Scrabster route was seen by the public, business and Orkney Islands Council as having a series of negative impacts on the Orkney islands. There was a particular issue with those wishing to travel onwards to or from other islands served from Stromness. There was also a perceived loss of resilience for the community especially when linked with the closure of the Churchill barriers which link South Ronaldsay to the Orkney Mainland. The number of closures and the length of time for which the barriers are closed varies from year to year but there is a general upward trend. [13] The report concludes that the Scrabster route and the Gills Bay route together provide the capacity to meet demand on the Pentland Firth (paragraph 12.1.1). [14] The pre-appraisal report noted that it was and would continue to be challenging to develop options and appraise their potential impact when there is a competitive dynamic in the Pentland Firth market. At present there was an equilibrium of sorts in the market but there were a number of prospective changes which could impact on this before or during the next contract. One of these was the purchase by the petitioners of a new vessel. The authors 6 of the report understood that this was to be a replacement for the Pentalina by a slightly larger vessel. The report continues, “This easing of capacity restraints could lead to an increase in the market share for Pentland Ferries, whilst a two vessel service would be transformative. Questions could therefore be raised over the justification for a continuing PSC service, across the Pentland Firth, particularly in any two vessel scenario.” [15] The report also examined the option of discontinuing the Scrabster route and deploying the MV Hamnavoe (the NFS ferry on the Scrabster route) to the Kirkwall– Aberdeen route. The Pentland Firth market would be served by Pentland Ferries alone with an appropriate contractual arrangement established with the operator. This was rejected in the report. The rationale for rejection is given as “reasons of public acceptability. It is not acceptable to remove the Stromness–Scrabster service as a publicly supported lifeline service.” (paragraph 6.5.18).