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David MacBrayne Limited, Marchwood Military Port contract – and consequences

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[Updated at foot 1 June 2015] Back on the 3rd March 2015, it was announced by the Ministry of Defence [MoD] that Solent Gateway Ltd was the preferred bidder for the contract to run the 91 hectare Marchwood Military Port.

Solent Gateway Ltd is a partnership  between David MacBrayne Limited and GBA (Holdings) Limited. David MacBrayne Limited is the Scottish Government-owned envelope for its wholly owned and subsidised ferry operating companies, now comprised of CalMac Ferries Limited and its subsidiary, Argyll Ferries Limited.

GBA [Holdings] Limited is the property investment holding and logistics service providing wing of Grimsby based GBA Group.

The losing bidder was the giant ABP [Associated British Ports], locally assumed to be the certain winner and now legally challenging the tender decision.

With David MacBrayne Limited a Scottish Government-owned company, we had assumed that there might have been some inter-governmental discussion in the background; but an informed Westminster source has assured us that there was no Scottish Government involvement of any kind.

This would put David MacBrayne Limited in a pretty innovative light, being prepared to go out into the market, partner a private sector company and bid for new business to make money for its sole shareholder, the Scottish Government.

There is substantial development potential in underused land at the Marchwood site so there are enterprises to be worked up and profits to be made. And the history of Marchwood’s service record is itself fascinating – talk about ‘all our yesterdays’.

We understand from a source in ABP’s Scottish Short Sea business that its challenge is motivated by the cost of a strategic misjudgment. Over confident of winning, ABP apparently bought up parcels of land adjacent to the Marchwood site, obviously with enhanced commercial development opportunities in mind – and is now the possessor of an expensive asset for which it has no immediate use.

There has been local opposition in the Solent area to the tender decision, with hopes for local jobs through developments on the site felt to be under threat from the award to a new partnership. The reality is that Solent Gateway Ltd will, in its own interests, be as keen as any to get development projects underway.

One can see the attractions of the Solent Gateway partnership for the MoD – with GBA Holdings a proven provider of high end logistics services to shipping lines, with its property investment holdings role for GBA Group; and with David MacBrayne Limited bringing, in addition to its ongoing [detailed below] ports management experience, its long background in the public sector, familiar with working close to government.

This overall package would have been and clearly has been, reassuring to the MoD.

DML experience of ports and harbours management

Scottish west coast ferry provision had earlier been split by the Scottish Government into two – moving the ships and most of the ports and harbours used into the ownership of their own wholly owned new company, Caledonian Asset Management Limited [CMAL] ;and leaving the familiar CalMac Ferries Limited as the operator of ferry services.

This was done to qualify under EU regulations for continuing to provide state subsidy. This is given for the lifeline services not for the company – since contract renewal tenders for the services is open to competition from other ferry operators, with the winner required to lease the fleet from CMAL.

CMAL as owner of 24 ports and harbours [with other under lease], has been the body to negotiate over the infrastructural changes to be made at Stornoway and at Ullapool to accommodate the new and much larger vessell – MV Loch Seaforth – that CMAL itself had conceived of and commissioned. It has to be  noted that the delivery of all three of these elements was fraught with issues of poor management.

CMAL is also making the changes to the harbour at Wemyss Bay, from which leaves the major ferry service to the Isle of Bute. These works have been a troubled and delayed project. CMAL is also engaged on a major upgrade to Brodick Harbour on Arran.

With CMAL the asset holder and knowing that it was responsible for the port and harbour developments noted above, we had assumed that as the ferry operator, that was all CalMac had to do, leasing its ships from CMAL and paying them its berthing and carryings dues.

For this reason we had been surprised at David MacBrayne Limited taking on the Marchwood port management, because we could not see that through Calmac, it could have any current port management capability

However – this is not so.

It emerges that CalMac has been required seamlessly to manage the ports and harbours used by its ferry services. CalMac also collects the berthing and passenger dues for other port users and transmits these to CMAL, along with its own very substantial fees in these respects.

We do not know whether or not CalMac receives a management fee for these duties; or whether it docks some agreed percentage off its own total annual harbour fees bill; or whether its fees collection service is a simple bonus for CMAL.

The total picture of CMAL is of a company that does little more than sit on its inherited assets – owning the ships and owning the ports and harbours, managing neither but just doing the books.

Calmac’s lease requires it to manage and pay for all vessell refits and repairs; to manage the ports and harbours it uses; and to collect and transfer the harbour dues from other users of the ports and harbours.

Our earlier confusion was driven by CMAL’s responsibilities at Stornoway, Ullapool and Wemyss Bay. This is now explained by the fact that CMAL, as the owner, is responsible for infrastructural developments at the ports and harbours. In the same way, as the owner of the fleet, it is responsible for the decisions taken in fleet replacement.

The question has to be asked as to why CMAL is as generously staffed as it is – with something around 27 permanent post – on top of breathtaking annual fees paid to the degree of external consultancy it appears to need to supplement its in-house deficiencies in expertise?

The core problem with splitting assets from operations as it has been done, is that there is no overall guiding strategic philosophy behind the decisions taken; and there is, as no one could expect there to be, any serious expertise available in Transport Scotland to act as the joined up strategic thinker, harmonising decisions and actions between the two state-owned companies.

It has to be said that a hard-wired ferry company would never have gone for the untried technology of the hybrid ferries commissioned by CMAL. If you are a service provider you need the tried and true not the unreliability – as has been the case  – of cutting edge technology which, in the case of the hybrids, is of questionable overall value anyway.

This set-up is all a very familiar public sector botch-and-go job.

That situation aside – a matter to which we will return – it is now clear that DML, through CalMac, does indeed have long-standing and contemporary expertise on the management of ports and harbours, albeit not of the size and complexity of Marchwood.

Whichever bidder, the preferred or the challenger, emerges as the contract holder for running Marchwood, the staff already there are certain to be TUPEd over to the incoming management, with the top level team including appointments by the winning contractor.

Implications of the Marchwood initiative for CalMac

Working with a private sector partner and winning the contract – now subject to the legal challenge from ABP – will be an earned fillip to the confidence and self belief of the CalMac/DML team.

This has to be recognised as a major achievement in anybody’s book.

DML had the guts and the pzazz to go right out of its comfort zone, in the nature and scale of the job it bid for and in the territory in which it would be operating. It won.

Whatever the outcome of the ABP  litigation, the meeting of this challenge and the success at the end of it will send CalMac into the remaining months of the tender period for the Clyde and Hebridean Ferry Services contract as a felt and proven winner. This makes it seem – internally and externally – less the local old familiar it has been easy to disregard and more of a capable contender in any company.

Winning the Marchwood contract is also the absolute guarantee of the continuation of DML as an active corporate entity, whatever happens with the Clyde and Hebridean Ferry Services [CHFS] contract.

If CalMac loses the CHFS contract, it would go to the competing bidder, Serco.

That loss would leave David MacBrayne Limited with no companies in its family other than Argyll Ferries Limited This is a subsidiary of CalMac whose sole raison d’etre is the contract to run the subsidised passenger ferry non-lifeline service across the Clyde between Gourock and Dunoon. This contract  runs out at the start of the summer of 2017.

Argyll Ferries receives its management and ship management services from CalMac – which, without CHFS, would then have no reason to exist other than support the single operation of Argyll Ferries’ single service – for one year. This would be so modest an operation it could not justify the corporate structure of David MacBrayne Limited with Argyll Ferries Limited’s immediate parent, CalMac, riding on its back, even for the 12 remaining months of its contract.

And how would Argyll Ferries fare alone as a bidder for its one service in 2017? Corporate restructuring would be inevitable – as would Scottish Government rethinking on the nature of the provision of this service.

But now DML will be an active and busy company regardless, with a major and defence-linked contract with the UK Ministry of Defence to run its largest UK fleet auxiliary facility – and to engage in serious income-generating commercial developments. Some of these may have no relation to maritime or defence matters but may be wholly civilian – and earning profits for the Scottish Government.

The Marchwood contract has the added advantage of seeing the protection of CalMac’s senior management in the event of the loss of the CHFS contract, which would see all other staff TUPEd to Serco.

Implications of the DML Marchwood initiative for the Scottish Government

This development is a bit of a game changer for the Scottish Government in a variety of ways:

  • one is arguably that it may have more public relations latitude should it choose to make a private sector appointment to provide the Clyde and Hebrides Ferry Services [CHFS];
  • the other is the latitude it wold have to revise radically and to make consistent its transport-related state owned companies.

A cost saving for the Scottish Government in moving the ferry service provision into the private sector would be in the current hefty consultancy fees CalMac has to pay in the working up of its bids, for example, to retain the operation of the Clyde and Hebridean ferry services. These fees run into many millions of pounds [see details in 1 June 2015 Update at foot of this article.]

With a private sector operator of scale – as with the giant multi-function outsourcer, Serco – there will be central in-house expertise more economically available to its various subsidiaries, with the internal cost factored into its bid price. Whether what will be the greater costs of the external consultancy fees paid by CalMac is also absorbed into its bid price, we cannot know; but either way, it’s all coming out of the public purse at some point.

Implications of Marchwood for Clyde and Hebridean Ferry Services

The Scottish Government has been known for some time to have been minded to move the provision of west coast ferry services [CHFS] into the private sector – following making this transition in the provision of the Northern Isles Ferry Services in 2012.

Having taken the plunge in awarding that contract to Serco in 2012, Transport Scotland, under then Transport Minister, Keith Brown MSP, was known t0 have been minded to hand the CHFS contract to Serco in 2014.

Former SNP Justice Minister Kenny MacAskill MSP has just admitted to choosing not to support votes for prisoners in order to avoid any destabilising issues in the run up to the indyref 1 vote in 2014.

Keith Brown took the same route in 2013, suddenly aborting the tender process and giving CalMac a three year extension of contract to 2017 – and Serco are back in the frame as a current bidder for this contract., to be awarded after the 2016 Scottish election.

No one has yet any indication of the thinking of Mr Brown’s successor, Derek Mackay MSP, who has been well received so far in the sector.

The chief argument for a having a private sector operator is less savings than the relative shield it offers government from public grievance in the event of an unreliable or failing service.

The CHFS tender is for a franchise – to run the same ageing and increasingly unreliable fleet on the same routes under the same brand.

There are three real differences to services between private and public sector delivery:

  • fares – with the operator having latitude to vary fares and fare structure – as has been the case, to community grievance in some instances, with the Northern Isles ferry services;
  • service frequency – with the service-oriented public sector delivery familiar to the west coast providing service frequencies to suit community wishes; and where a profits-oriented private sector delivery naturally provides frequencies consistent with proven demand;
  • continuity – where a contract delivering returns below expectation will be completed and probably retained under a public sector service provider, a private sector operator may break the contract and walk away. Serco, by the way, has considerable form in doing just that.

In the event of the appointment of a private sector operator who at some point within the term of the contract walked away, where would that leave the lifeline services to the islands? And where does that leave the Scottish Government with no available service provider of last resort?

The virtual certainty now of DML’s continued active existence [pending the decision in the ABP legal challenge to the Marchwood contract award] rather frees the Scottish Government to award the CHFS contract to a private sector operator.

CalMac staff at every level would have an assured future [with the caveat of potential later redundancies in current operations and administration staff. This dulls some of the negative public responses to the removal from the public sector of the lifeline ferry services - although their transfer to the public sector would undermine the certainty of their delivery.

It is traditional freely to accuse and complain about a familiar state-owned service, while tending dumbly to adopt a fated acceptance to whatever a private sector operator provides.

The greatest resulting food for thought by the Scottish Government is how on earth they could then be assured of an operator of last resort for the CHFS.

When they binned their own NorthLink Ferries in favour of Serco in 2012, they knew they had the continuing presence of state-owned CalMac's expertise to step into the emergency role should Serco fail or walk.

The CHFS contract is a very different scenario for Serco, infinitely more complex, with:

  • far more routes
  • a far more complex fleet
  • an already unreliable ageing fleet
  • existing service frequencies that in several cases, cannot be justified by need or demand
  • vocal local ferry action groups who watch out for their local interests, are blind to any bigger picture and are quick off the mark in the event of any service failure
  • no onsite current stress reliever - as is the case with the Orkney service in the  Northern Isles contract, with the successful private sector operator, Pentland Ferries, running a parallel vehicle and passenger service into the Orkney isles.

Pentland's ability to absorb the additional traffic when the Serco NorthLink service to Orkney failed for a month in the Spring of 2013 took the sting out of public anger at Serco's inability to fulfil its contractual obligation to provide a replacement vessel; allowed the islands to be accessed and supplied without a break; and, critically, undermined the security of the state subsidy for the Orkney ferry service which was then demonstrated not to be a lifeline service.

Implications of Marchwood for state-owned Scottish transport-related companies

Supposing the Scottish Government were to award the CHFS contract to Serco, David MacBrayne Limited [DML] would simply make any necessary repositionings to focus solely on Marchwood and in its currently ambitious mode, presumably, to pursue other contracts.

In-house staffing necessary to CHFS would transfer by TUPE to Serco in the usual way, leaving DML having no full capacity in ferry service delivery.

Would the Scottish Government then ask Serco to take over management and ship management for Argyll Ferries for the remaining year of its contract to 2017, closing down CalMac completely?

In 2017, David MacBrayne Limited would then have no ability or interest to bid for the Argyll Ferries contract.

Where then would there be any logic whatsoever in the Scottish Government continuing to own and fund a company that no longer delivered any services in Scotland; but was solely a contracted service provider to the UK Ministry of Defence.

The case for a management buy out, seeing DML into the private sector at commercial risk, would be unanswerable in these circumstances, particularly with the SNP Scottish Government focused almost wholly on taking Scotland to independence at the first available opportunity.

Since DML would have no assets beyond the expertise of its most senior staff, the cost of such a buyout could only be very modest.

Having hived off west coast ferry service provision to the private sector, and disposed of its then surplus-to-requirements ferry operator, the Scottish Government would be left with two state-owned companies which might then be brought into delivering consistent services in a way that is currently not the case.

Currently. both CMAL and HIAL [Highlands and Islands Airports Limited] are asset holders.

  • CMAL owns but does not operate the west coast ferries fleet. It owns west coast ports and harbours used by the services which this fleet is leased to operate. It is responsible for infrastructural developments at those ports and harbours; and for fleet replacement. [A month ago it received bids for two 100m ROPAX replacement ferry vessels - one of which is apparently destined to replace the MV Isle of Arran as the second boat in the service to that island; and the other to replace the MV Hebridean Isles, currently the second boat on the Islay service.]
  • HIAL owns and leases the two new Twin Otter aircraft commissioned and bought by Transport Scotland to serve on some Highlands and Islands routes for which they are solely capable; and transferred to HIAL. It will presumably be responsible for their eventual replacement, with funding provided or arranged by the Scottish Government. It owns [in some cases leases - as with Campbeltown] and operates its 11 airports across the Highlands and Islands. It too has responsibility for infrastructural development at these airports – in the case of Campbeltown, exercised negatively in reducing the length of its highly capable runway.

Both companies are asset holders of identical kinds – vessels/aircraft and ports/airports – with appropriate responsibilities for  fleet replacement, funded by or arranged through the Scottish Government; and appropriate responsibilities for infrastructural development.

Where they differ is in HIAL’s much greater operational responsibilities.

Where CMAL sloughs off port management responsibilities on the ferry operator, the air services contractor to HIAL, FlyBe, has no equivalent airport management obligations; and supplies most of its own aircraft.

Logic would dictate that, if CalMac does not win the CHFS contract, the Scottish Government, then owning no operating companies, should take the opportunity to rationalise the roles of CMAL and HIAL.

That logic would see CMAL taking on responsibility for operating its own ports and harbours as HIAL operates its own airports.

Update 1st June 2015 – annual spending on external consultants

Here are the facts of the levels of spending on consultants – mentioned above but undetailed – by the three related Scottish Governement-owned maritime services companies, Caledonian Maritime Assets Limited  {CMAL]; Calmac Ferries Limited [CFL]; David MacBrayne Limited [DML].

This inforamtion was the result of a written Parliamentary Question [S4W-24956] asked by David Stewart, Highlands and Islands Scottish Labour, MSP on 18th March 2015:

‘To ask the Scottish Government how much (a) Caledonian Maritime Assets Limited, (b) CalMac Ferries Ltd and (c) David MacBrayne Ltd has spent on external consultants each year since 2006.

The written answer provided on 27th March by new Transport Minister Derek Mackay, showed the following record of such spending:

The following table details Caledonian Maritime Assets Ltd (CMAL), CalMac Ferries Ltd (CFL) and David MacBrayne Ltd (DML) annual expenditure on external consultants from 2006. Note that the figures given are expressed in units of £1,000.

Consultancy fees 2006 -2015
* CMAL’s information has been published since October 2010 in accordance with the Public Services Reform (Scotland) Act 2010. Prior to October 2010, CMAL did not record the data in a manner which would allow consistency with the published information.
** From October 2010 to March 2011
CMAL spend on consultants includes expenditure on consulting engineers who are required for the design and development of the various civil engineering projects which CMAL deliver year on year, and these engineers also are engaged as the project managers on these works.
CMAL have delivered a number of major engineering projects over the period and the engineering consultants fees form a significant element of these costs.
CalMac brought in some temporary external contractors to help them prepare for their bid for the next Clyde and Hebrides ferry services contract.
CalMac are currently upgrading their ticketing and online booking systems as well as a major investment in their communication systems for ships and ports. This investment will make Wi-Fi available to their customers on every ship and at every port. These projects require specialised knowledge and expertise that CalMac personnel do not have.

Current Status: Answered by Derek Mackay on 27/03/2015.

Note: The 2004 photograph above of Marchwood Military Port is © Dashers and is reproduced here under the Creative Commons licence.


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