The Scottish Parliament is asking the wrong questions about ferry provision
The Scottish Parliament is conducting what it calls a ‘major inquiry into current and future ferry provision in Scotland’. Yet the questions it poses to respondents suggest that the future will look very much like the past — an under-capitalised and over-subsidised monopoly operator managed by quangos a hundred and more miles away in Holyrood.
As an economist, and one who spends much of the year on the Isle of Arran, it’s obvious to me that to have any future at all, ferry operations must be reliable. If, like today, they are not, vital island industries such as tourism and Scotch whisky will suffer, investment in businesses and infrastructure will decline, capital will be written off, and the islands will gradually depopulate —modern Clearances driven not by landlords but by politicians. And ferries without customers won’t exactly have a future.
Spare capacity, in both vessels and harbours, is a major part of reliability. Services must continue to operate despite disruptions such as breakdowns, accidents, annual or unexpected surges in demand, and adverse weather conditions. But the current CalMac fleet is among the oldest and least reliable in Europe. Other operators, for example, run ferries with multiple engines so that vessels are still able to run on one and rotate others for maintenance. They design their vessels and ports to be generally interoperable, so that when bad weather, breakdowns, accidents or other disruptions occur, nearby ports are easily accessible, and vessels can be diverted from one route to another. They also maintain spare capacity so that gaps in the service, and annual or unexpected surges in demand, can be accommodated. Even with the £1bn promised for new vessels (if it ever appears), CalMac will still lack such essential spare capacity.
Even the layout of the larger CalMac ferries shocks an economist, with almost half the main decks devoted to cafes, restaurants and bars — space that cannot be repurposed in the event that extra passenger or car capacity is needed (say, when island festivals or Highland Games are on). Continental ferries instead have bars from which passengers collect food and drink, consuming it back in their seats, maximising flexibility.
Future-proof ferry services must be able to evolve and adapt to changing demand. Just as natural evolution rests on their being biodiversity, so we need a diversity of operators if ferries are to adapt and evolve. Or at least the threat of other operators coming in and taking business off the incumbent by serving customers better — what economists call a contestable market. Today, though, we have one operator, supported by state subsidies, making it impossible for any other potential providers to get a look in.
Monopolists and governments, of course, like things to be big. They talk about ‘economies of scale’ and bring on bigger and bigger vessels. But real economists know that there are diseconomies of scale too. Ever-larger vessels require one-off design, construction methods and technologies, rather than mass produced ones. Hence all the problems with the massive maritime monsters so far behind schedule and above budget in Ferguson’s shipyard. With smaller, more frequent ferries, the occasional missed or delayed departure is little problem; with gigantic, infrequent vessels, it is a huge nightmare. Just the sort of thing to put off customers like tourists, whose travel decisions are made on the margin, but who are vital to the island economies.
The Road Equivalent Tariff (RET) system has further stifled any prospect of innovative new service operators coming in. The subsidy goes to solely to CalMac, which naturally fights to stop anyone else getting it. And by ignoring the realities of geography, the subsidy provides no incentive for the incumbent to invest in new ways to deal with these realities — essential, again, if the ferries are to have any future at all.
Whatever the arguments for it, RET has other damaging results too. Below-cost pricing of vehicles brings more large vehicles (such as campervans), onto inadequate island roads; already loaded with mainland provisions, they make local shops unsustainable. As do islanders, for whom it is now cheap to take the car over to the mainland and load up.
A ferry system with a future would charge commercial rates, bringing cash into ferry services and making customer demand, not bureaucratic decisions, drive development. If subsidies are thought desirable, they should be paid to the people who need them, not to service providers. And why should the populations of inland areas pay higher taxes for ferries that they might never use anyway? But then, if we did have a diversity of operators, it is likely that innovators would develop pricing structures (such as off-peak concessions for islanders, hospital patients or pensions) that would benefit deserving groups anyway.
Economists hate monopolies, and state monopolies are even less customer-aware than private ones. Scotland’s ferries will only have a future if there is an open, contestable market in vessels and ports. Only that will systematically drive innovation, progress and the evolution of services to meet changing circumstances. Right now, we are doing everything to kill off that future.