 Theye. Good morning, and welcome to the fourth meeting of the public audit and post legislative scrutiny committee in 2018. I ask everyone in the public gallery to switch off their electronic devices or switch them to silent so that they don't affect the committee's work this morning. Can I welcome Tavish Scott MSP, who has joined us for the committee meeting, this morning? Item 1, decision on taking business in private. Do we agree to take item 3 in private this morning? Item 2 is Transport Scotland's ferry services. We will now take evidence on Audit Scotland's report on Transport Scotland's ferry services, and I welcome witnesses from Transport Scotland. Roy Brannan, chief executive, John Nicholl's director, aviation maritime freight and canals, Graham Porteous, head of special projects, and Graham Laidlaw, head of the ferries unit. I'm going to ask Roy Brannan to make an opening statement. Thank you very much, convener. A brief opening statement. Thank you for the invitation, and we welcome the opportunity to discuss the report today. I'd just like to introduce my colleagues, John Nicholl's director of aviation maritime freight and canals. John leads on all ferries matters for TS. I have Graham Laidlaw, who is the head of the ferries team and has been involved with ferries for some considerable amount of time. Graham Porteous, who is head of special projects and deputy director of procurement, was involved with the procurement exercise for CHIFS 2. Our ferries are an iconic transport service within Scotland, and I recognise much further field as being part of our cultural heritage. However, it remains the case that, for remote and island communities, they provide essential lifeline connectivity. The road, rail and bus rolled into one. However, a good number of islands also have air links, many do not, particularly the smaller ones. Although air services are very good at moving people, ferries remain the workhorse, moving large numbers of vehicles and freight every year. Ferries are one of the vital transport services for which Transport Scotland has responsibility, not on the scale of road and rail, but comparable, for example, to national concessory travel. As part of that, we have sought to deliver ministers' policies and expectations for ferries. Most notably, in recent years, this has focused on commitments to reduce fares for all travellers, to and from the islands, as well as the provision of additional services and infrastructure. That has brought significant benefits in terms of reversing the sharp decline in passenger numbers that followed the financial crisis, a fall of almost 5 per cent between 2007, the base year that was taken by Audit Scotland in 2008. However, as Audit Scotland noted, increased demand in particular for limited vehicle deck space has led to new routes, more sailings, bigger vessels and upgraded harbours, all of which has required us to make the case for increased investment alongside our other priorities. That increase in investment has understandably attracted attention, leading to Audit Scotland's review. We were pleased to cooperate in our work and to take forward their conclusions and recommendations. We welcome the report and recognise that it provides a good basis for action. The key lessons that we are taking from the report is not that spending on ferry services is too high or, indeed, needs to be reduced, but that the specific contribution of ferries to the health of island economies is not well understood. We have started from an assumption that without an adequate ferry service, an island economy and community would suffer and potentially go into decline. However, we accept the view that there is value in making this link clearer and in understanding how available resources can be optimised to support key growth sectors such as food and drink, energy and tourism. We need to develop a range of future spending scenarios that give on-going pressures on public finances. We have long-term spending forecasts, which feed into annual budget rounds, but we intend to develop the ease to give ministers options within the context of our long-term strategy. That should enable us to plan more effectively in partnership with our ferry operators and harbour owners. We look forward to hearing the views of members, value the input and to discussing with you the important points raised by Audit Scotland. We are happy to answer any questions. If between us we do not have the answer today, and if the committee is content, we will follow that up in writing. That is very helpful. I invite Colin Beattie to open questioning for the committee. I would like to start with the pension deficit, which is not unusual in the public and private sector. In paragraph 23 of the Audit Scotland report, it details that the employer's pension contribution increased from 14.5 per cent to 24.2 per cent of employee's salaries in 2007 and then increased again to 30.8 per cent in 2016, yet the deficit has increased. A couple of questions. First, for the matter of record, what is the percentage that employees pay? Secondly, Audit Scotland has noted that the additional contributions have not really made a big difference to the deficit. It is still increasing, so what is the plan for that? Pensions remain a challenge across the piece, and John has been heavily involved in that, and I will ask John to take that question. I am not a pension specialist, but I have been fairly closely involved with that, as Roy says. If I can answer the second part of that question first, as Audit Scotland does note, yes, the deficit has been increasing, and we will obviously need to wait for the next triennial valuation to establish exactly what the position is and review our options at that time. It is fair to say that we would anticipate the deficit to remain fairly substantial, and there are a number of reasons for that. A number of factors go into the deficit, not just the amount of money going into the scheme from employers and employees, but also the deficit reflects the good or bad performance of the investments made by the scheme. It also reflects the assumptions that are used by actuaries in calculating how members of the scheme will be acting and what the projections will be. It also reflects the strength of the employer covenant who is standing behind the scheme, and all those things can affect the deficit. The management of the scheme is undertaken by the trustees of the scheme, such as the employers, employee representatives and an independent chair. Transport Scotland is not directly involved with that, but because we provide the vast majority of the funding through the employers, we have a real interest. We will need to wait for the triennial valuation. Once we see that and act with the trustees, we will need to decide on a range of options going forward. Currently, the Scottish Government, through Transport Scotland, puts in around about £5 million or £6 million a year to assist with the deficit. We will need to review whether that on-going funding is sufficient, but we may also need to consider, and as Audit Scotland mentioned in its report, whether action is required in terms of the scheme itself. That has been the subject of some discussion over recent years, both with employers and trade unions. We will do that. For the moment, a couple of points that I would make are that the existing scheme is fully protected through the Client Hebrides Ferry Services contract. The operator CalMac is required to maintain the scheme and keep it open to new members. Through the contract, it is also indemnified against any increasing costs in the scheme. The scheme itself is protected for at least the duration of the contract, and that is secured. The second point that I would make is that the current recovery plan for the deficit has been approved by the pensions regulator. The trustees and ourselves will need to keep that under review, but, for the moment, we have that level of assurance. Coming to Mr Beatty's first question, I do not have that figure in front of me. That is helpful, thank you very much. I hope that that is helpful to the committee. The next valuation is, in fact, this year. Presumably there will be a new figure as to what the deficit will be, and it sounds from what you are saying. It will not necessarily be a very positive response on that. However, looking at how much you are paying, 30.8 per cent in 2016 and employees paying 6 per cent, how does that compare with the rest of the public sector in terms of what is being paid into the pension fund? Is 30.8 high? Is 6 per cent low? We are doing a piece of work that is looking at pensions across the public sector. It is generally perceived that the benefits of the CalMac scheme are fairly generous compared with elsewhere, and that includes the proportions of the contributions that are made. There have been reforms elsewhere in the public sector. One particular example is Highlands and Islands airports, where contribution rates are slightly different. It might be simplest if we do that piece of work and share it with the committee around the various different contribution rates that apply, but I think that, from memory, the CalMac scheme is towards the upper end of that range. Is the Scottish Government going to continue to put the additional funding in that you are talking about to make that up? We are certainly committed as far as the budget for the next year goes. As we have seen through the draft budget, the pensions element is included in the Ferry's funding line. Clearly, through the contractual arrangements that I described earlier, there is an on-going commitment to keep those things in place. As far as that is concerned, I think that we can give that commitment for the foreseeable future. We will have to put advice to the ministers at some point once the outcome of 2018 is known. I think that what is at the front of my mind is that, if you have 30.8 per cent from the employer, that is 36.8 per cent. Is that a high proportion of salaries that are going into the pension fund? Is it disproportionate? That is beyond the limits of my knowledge at this stage. I apologise for that. What we recognise is that the CalMac scheme itself is still essentially a final salary scheme, and the demands upon such schemes, as everybody recognises and I think indeed Audit Scotland recognises, those are going to be higher than perhaps elsewhere in the public sector, where there have been changes in recent years. It is a good scheme and appreciated by its members, but we will need to keep a very close eye on it going forward. Moving on from the pension scheme, I am looking at passenger numbers, which I am a wee bit confused about. Overall, passenger numbers have increased by 0.3 per cent since 2007, which does not seem a very big increase overall. Across all three contracts, the total number of passengers decreased by 9 per cent between 2007-12, and between 2012-16 increased from that base by 10 per cent. Was that when RET became effective? Is that the reason why that uptick took place? The Audit Scotland baseline for the work was 2007. Clearly, that was pretty tumultuous in terms of the world economy, finance and growth in the sector. Clearly, that had an adverse impact on Carians. The ferries were growing at a pretty steady state of growth level. They fell quite dramatically over a year, a flat line for four or five years. I think that Audit Scotland's letter to the committee that we have made clear that the numbers dropped and they have taken back up again. Clearly, there are two factors that play here. RET and route by route as they have rolled out across the network has a very positive impact on passenger numbers and car numbers. Clearly, they have grown in the economy more generally and encouraged people to make trips and tourism growing in the back of that. Two issues are going on there in terms of the economy, and clearly, it is definitely RET. 2007-08 was the biggest decrease at 4.7 per cent. What was the reason for that? I think that that is a economy because RET, which was rolled out as a pilot to the Western Isles calling Tyree, started in October 2008 from memory. Clearly, most of your years passed without any RET impacts. Clearly, you have only got the three main routes to the Western Isles. It is part of your whole network. In Clyde and Hebrides, you have got 26 routes, so you have made four routes to Clyde and Tyree. The one that really concerns me is the Great Danone, where passenger numbers decreased by 50 per cent between 2007 and 11. Two thirds of that reduction took place between 2007 and 11. However, after the passenger only services introduced in 2011, numbers continued to fall, albeit at a slower rate. What is the prognosis for that? I think that the general prognosis is that there has been a move from what was then the CalMac Cardiol ferry service, a Cale ferry service, at that time, over to the commercial operator on the route, Western Ferries. Can CalMac compete? I think that the commercial operator runs basically a three or four sailings per hour service, or whatever. It feels a broadly comparable. Western ferry service is slightly shorter, because it always comes out of town. There are some practical elements that distance travelled, and the fact that there is a more frequent service. The CalMac service is basically that you only had a sailing every two and hour. Does the CalMac service survive if numbers continue to fall? I think that what we are doing at the moment is clearly in the throes of a procurement exercise, and we are working on the specification for that, and I cannot say too much when that is at the moment. However, clearly going forward, we intend to put in a more reliable service, and that is why we specified two larger vessels for the service, and the independent consultants work about three or four years ago indicated that reliability was a key element in people's dissatisfaction with the town centre service, the CalMac service or the Agilferries service. Clearly going forward, the intention is that there are more reliable vessels that will attract more people to the town centre service, which is clearly important because it connects connectivity to the town, but it also connects on the Gwrwch side to the railhead that serves the line-up to Glasgow. You have a business plan to turn this round over what period? Clearly, through the procurement, the contract was extended initially for nine months, then a further nine months, so that runs until the back end of this year. When a new contract kicks in starting next year, we will hopefully have vessels either immediately or over a short time within that. We will have new tonnage on the vessel or whatever, and clearly within the timescale of that, we would hope to be able to meet the demand and grow the servers. Before I come on to procurement and start developing stuff around subsidies, I would like to pick up on the questions that you were facing from Colin Beattie at the end there. If I can summarise, on the Gwrwch Dunwn route, you have Argyll ferries running a subsidised passenger-only service, which has seen a decline of, I think you said, 50 per cent in passenger numbers. Virtually next door, this is out of my region, so I can't quite picture it, but virtually next door you have an unsubsidised service provided by western ferries, which takes cars, which is seeing a 1 per cent increase in passenger numbers. I looked at the official report, and I said last time that Argyll ferries are running at 7 per cent capacity. As a taxpayer, I am paying for a competing service on apparently too big a vessel when a private company is doing a job right next door. Where is the value for money, and why are we going ahead with the procurement exercise that Mr Beattie alluded to, and saying that we will get bigger vessels and that we will get a better service, when apparently the Argyll ferries, you said, are losing passengers to the unsubsidised service next door? I am losing some passengers to the unsubsidised service, but clearly, since we moved the situation that we currently have where western ferries are on a commercial vehicle and passenger service and Argyll ferries on a passenger lonely service, there has been a substantial drop, and those traffic is almost disappeared. There are people who used to travel on either or both of the routes because the service provision currently does not seem to be travelling at all, so there are missing 200,000 or 300,000 people who used to travel who do not travel at all now. Are they not travelling because they are desperate to get an Argyll ferries with their car? That may be the situation, but it may be because they perceive that the service is unreliable or not as effective as it could be and that they choose not to travel. Just thinking very much aloud, have you sculpted out, then, whether it would be more cost effective to the taxpayer, for example, to subsidise a bus service from point to point on the western ferries service? Have you done that? We have looked at a number of issues and clearly we have put advice to ministers on all of this, and ministers clearly have got a commitment, and the European Commission back in 2009, where they looked at the town centre service, recognised of a socio-economic benefit, having a town centre to town centre passenger service, and that is the basis of how we are going forward with the service. Clearly, we have put all the options to ministers, with ministerial task force involved in the past, whatever it is. Clearly, minister, I come to view that they are going to take forward a passenger-only subsidy on the service, but with the hope that the operators can be with a commercial vehicle service on the back of that. Just to be clear, did you say that the evidence base for that decision was from 2009, or did I pick you up wrong? No, I said that the European Commission's assessment of the route when they carried out a full investigation of support for ferries services in Scotland was reported in 2009, but we have done further work since then, and we clearly see sustainability of the service being linked to a more reliable service, and we see a more reliable service being linked to bigger and better vessels. That all comes to value for money to the taxpayer, it seems to me, and so if I can drop into procurement exercises and subsidies, part three of the Audit Scotland report, there was a key message that talked about the CHIFS procurement, and it said that there were a number of weaknesses in that. In the following page, at page 33, Transport Scotland's procurement strategy for 2016-24 CHIFS contracts set out a number of learning points from the previous exercise, but the review of the exercise, the CHIFS 2 procurement exercise, found that those had not been applied. Did you assess whether there was any additional cost to Transport Scotland and or the bidders as a function of the lessons not being applied? I will start that off and then ask Graham to come in. There was a procurement strategy undertaken right at the very start of the CHIFS contract, and that evaluated a number of different procurement methods. It looked at not just the method that was finally chosen but pure competitive dialogue and negotiated procedures. It evaluated those procedures, and the output for that was that the new procedure that we adopted was the right procedure for this particular tender. The lessons learned from the previous CHIFS contract were included in that document, and I can supply that document to the committee if they wish to see that. The Audit Scotland report was very clear that there were issues during the process, and I want to know where I am going with this. If I want to tender for that contract, it is an extraordinarily expensive exercise. What I would want to know for future tendering exercises is that, if I am going to bid, I am not going to pay a premium for Transport Scotland learning on the job. Is that an unfair criticism? That is unfair, and I will ask Graham to come in and explain why. In principle, it was set out at the very outset of that tender process, how many touchpoints they would need to be with the tenders. In a way, any tender that is going forward in the competition makes an allowance for bidding, and they either recover that allowance through the successful winning of the tender or they offset it against their corporate accounts. Our job is to make it as clear as possible at the outset what is expected of the tenders and how we will engage with that throughout the process to minimise tender costs, both for ourselves and for the tenders themselves. However, we do not make an allowance for their tender costs, because they can either put an enormous amount of effort into it or very little effort into it. That is a judgment call that they need to make based on the specification that they are tendering on, and both parties did that. Graham, I do not know if you want me to do anything. The comment about learning on the job, the new procedure that was brought in was new, and we looked at that. Part of the tender process was that we wanted to be able to talk to the tenders. If we had gone for a restricted procedure, we would have had a very detailed specification. If we had gone the opposite way to competitive dialogue, we would have had a very relaxed specification, but the competitive procedure with negotiation was in between the two and less intensive. There is no learning to be done for us because the competitive dialogue and competitive procedure are very, very similar. Will you take a supplementary on that point specifically, Tavish Scott? Liam Kerr has asked some interesting questions. As far as I can read the Audit Scotland report on the particular tendering that you are describing, the original bid was £128 million lower than Transport Scotland estimated, and Transport Scotland was not required to assess the 350 subsequent commitments on Calmax bid. Why were you not asked to assess those commitments in terms of value for money? Again, I will try to explain it in simple terms, but Graham has probably got a broader explanation given his procurement background. In simple terms, the process is set up to bid to value both price and quality, but when you do not have a competitive tender in there, you cannot compare it with anything else. The 350 commitments were quality assessed rather than quantitatively assessed. The commitments are things such as that 80 per cent of produce is supplied locally, and a number of modern apprentices are not quantitative assessments. There was no need to do that, because we had a compliant bid. Do you not know whether those 350 commitments were good value for money or not? Will the tax payer know whether the Audit Committee know the Parliament because they have never assessed? Isn't that such a bad practice? Shouldn't they be assessed as a matter of routine practice? Will they be assessed in comparison to the other tenderer? The quality assessment score would have been against the other tenderer. There is not a monetary value, because it went up from £9.75 million, so there is a value for money. The final bid was a result of a pre-known variation to the contract. Both tenderers knew that there was going to be a variation to the contract based on timetable changes, and that was known well. Are those timetable changes alone cost £120 million? That is substantially a lot of it to do with that. Sorry, substantially. Do you mean a very specific year? Is it all about changes in timetables? Largely, timetables are things that I can supply the committee with detailed numbers, but what happened is that the tender started just before the last phase of the roll-out of RET, so we knew that there were going to be substantial reductions in fares, probably some substantial increases in patronage. Basically, in the revenue take, the operator was going to get back from the services, and the classic was, for example, open-creed newer, where the ferry fares fell dramatically. The operator bid on the basis of the then current fares regime—I have to fix a point in time to say that he bid on that basis, but we know that things are happening, because the real world is still changing as it went along. He bids on one basis, but he had a year and a half, two years of policy changes, timetable changes, fare changes, to update the final contract to reflect what happened at the bid stage. That is not a very fair bidding process, is it, for anyone? It is literally the ground that is moving under it, or the water is moving under it. You just do not change anything, do not change any timetables, any fares for two or three years. Yes, but you are responsible for the policy changes. You cannot blame the tendering companies for that. No, no, but what we are saying is that, if the policy changes that happened, because there were two or three phases of RET roll-out that happened immediately before it, and all the evidence on RET is that you get a big impact in year one, you get a sizable impact in year two, and it settles down after year three. Clearly, that had not happened for all those services. It is clearly unfair and a huge risk to the operator if they took on the risk of all the fares, all the changes, all the changes in patronage, whatever, in the midst of a very large contract. That was exposing them to a risk. If we took the view that we should not expose them to that level of risk, whatever, it is part of the procurement. Okay, thank you. Thank you. Just sticking with procurement, this is something that troubles me across a number of sectors. There appears to be no waiting for incumbency such that when one of these very contracts comes to an end, tenders will come in and the incumbent doesn't have any—the fact that they are the incumbent merely, as I understand it, gets them from the long list to the short list. Now, if that is right, the thing that troubles me is what incentive is there on the incumbent to invest in services, particularly towards the end of their contract? What protections does the taxpayer have for, let's say, a diminution in service towards the end of that contract? What protection do you build into your contracts that you award? Could you repeat the bit about the long list to the short list, please? Sure. In effect, my point is, if I am the incumbent, I want to tender for the contract again. My understanding is that there will be a filtering exercise at some point. You may correct me if I'm wrong, but my understanding is that there will be potentially a load of people tendering for it and you will sift out to the ones who are clearly worth considering further. If I am the incumbent, my understanding is that I will get through to that round 2. My point is even better. What incentive is there for me to invest towards the end of my contract if the incumbent doesn't count for anything? Because you are in a contract that has fixed terms and conditions, every tender that happens, people are allowed to apply for it, and then they are judged on their capability of tendering. It doesn't matter if you are the incumbent or not. That is why we have that process. It is governed, and because you are in a contract, you have to deliver right up to the end, otherwise you wouldn't get paid. If I am judged on my capability of tendering—or do you see any concern? You are judging your capability of performing the service that is being offered. You said that I am judged on my capability of tendering, and that is what concerns me, because I should be judged. Wouldn't it be logical that the taxpayer sitting out at home says that if somebody is in there and they provide a fantastic service and they upgrade the units and their customer service is amazing, shouldn't that at least count for something going forward? It allows them to demonstrate that they have the capability of operating the service once you are on the tender list, you are on the tender list. If I could just add to that. It is a very similar process. We are talking more generally about procurement, but in terms of our operating company contracts, it is exactly the same process. The incumbent will have experience of running those contracts, and they will have experience in demonstrating their ability to undertake whatever that new specification is. What is unknown to them at that time is what that new specification is. We have to treat everybody fairly. In applying for that new competition, they are treated as a blank sheet of paper, but they have the benefit of having that experience that they have gained from running that contract previously. It has to be open, fair and transparent in that way, so there is no waiting given to any incumbent across any of the procurement processes. Final question that I would like to ask at this stage is about procurement as value for money. It is about the subsidies. Between 2007 to 2017, the subsidies to the CHIFS contract was up 185 per cent and GERC to Dynun was up 148 per cent. In the latter case, the passenger numbers had halved. On the northern aisle service, the subsidies are up 3 per cent overall, but they have decreased 24 per cent since 2012. From the Audit Scotland report, I can see that there has been a 20 per cent passenger increase since 2013. What lessons are being learned from the northern aisle's contract on the other contracts? At the end of the day, this is taxpayers' money. Going back to my previous question, the incumbent on the northern aisle service appears from those figures to be doing a fantastic job. What does that count for? Graham, do you want to ask a question? I mean, dad is doing a great job, and I am sure that Tavish will support that comment. Clearly, CalMac is doing a great job on the Clyde and Hebrides ferry services, but as Roy and Graham were saying, once you get to the end of the contract, it is a clean sheet. Clearly, the knowledge you have gained and expertise can bring that into your bed and offer innovation and change, because you have seen it on the ground doing it. Clearly, you have a better insight than anyone else to how these services work. What I want to know is why is it that, up here, there are virtually no subsidies and they are decreasing, yet down here, the subsidies are rocketing? Clearly, that is something that we are going to keep looking at going forward. The bids for Clyde and Hebrides ferry services, Chyffs 2 or whatever, CalMac, came in substantially lower than the general trend over the past several years. Clearly, we think that we are going to be in a better trajectory going forward. I think that I know what you are getting at, but I do not think that that is linked to procurement, per se. The supplier up in the Northern Isles bid for the Chyffs contract. They did not submit a compliant bid at the end of the day, so we are not clear whether any efficiencies that they had brought from that contract would have materialised through into the Chyffs contract. Again, it comes back to that they all have to be treated absolutely independent and open and transparent and fair to each participant of the competition. Can I go back to the pension fund to begin with? Let me just check that I have this right. In terms of the contributions, employees put in 6 per cent of their salary as an employee contribution to the pension fund. The employer puts in 30.8 per cent. Is that right? On top of that, the taxpayer puts in £4.1 million a year. Between the 30.8 per cent and the £4.1 million, the taxpayer is probably paying 50 per cent of salaries and ends a contribution into the pension fund. In the meantime, the pension fund deficit is rising. If what is going wrong here, this is a mess. Is it not? Is it not a rip-off of the taxpayer? I mean, I don't know, maybe you can enlight me, but I certainly don't know of any other pension scheme in either the private or the public sector where that percentage of contribution is made by any employer and there is at least a six or 71 ratio between the employer's contribution and the employer's contribution. I will attempt to answer that. As I say, I am not a pension specialist, so to forgive me if I cannot give as complete an answer as I would like. But what we have seen or the advice that I have been given in my engagement with the trustees and also with colleagues from the Scottish Public Pensions Agency is that part of the deficit amount is down to a variety of other factors that are not directly connected to the contributions that are made either by employers or employees or indeed by the Government. As I mentioned earlier, those factors include the performance of the funds in which the pension trustees or managers are investing in. My understanding is that there has been a particular issue across the piece over recent years, not just related to the CalMac pension scheme, but with others as well. I think that there are also, as I said... John, what is the particular issue? I think that there has been the underperformance. I am getting into some financial services territory here that I am not totally comfortable with, but my understanding is that the performance of some guilds has not been what was originally projected and that has had an effect on the overall amount of the deficit. It is quite a complex picture, but the reassuring thing is that the pensions regulator is comfortable with the trustees repair plan and that is assisted by the money that is going in from the Scottish Government. Basically, the reason for the deficit and the deficit rising is to do with the investment strategy. It is not because of excessively additional liabilities that are made because of the increase in the number of retirees. I think that it is a multi-factorial position. I think that the terms of the scheme itself, as all its Scotland refers to, may be an element that needs to be examined at some point and in discussions with the various stakeholders. I think that that is accepted. Our overall long-term objective, which I think is shared across the piece by employers and employees and their representatives, is to have a scheme that is sustainable, affordable and fair to everyone going forward. That is what we will work to do when the triannual valuation is known and that work is very important. There are clearly two issues here. One is should employees be paying in more than 6 per cent, given the amount of money that the taxpayer and the employer is putting in. That is a fair question. I am the first to protect workers' rights and pensions and all the rest of it, but this seems to be way out of kilter with anything that I have ever heard of anywhere in either the public or the private sector. Is it not time to review that? The second thing is—you may not know this and I realise that I am asking a detailed question that we might have to write to you to get the answer to. Who are the trustees and who are their professional investment advisers? The trustees are made up of representatives of the employers. The employers in this case are CalMac and Caledonian Maritime Assets Ltd. There are also employee representatives on the trustees from the trade unions and, from memory, there are two or three of those. Then there is an independent chair of the trustees who is currently, I think, is still Grenville Johnston, who is a former chairman of both Caledonian Maritime Assets Ltd and, indeed, Highlands and Islands Airports Ltd. He is also a former president of the Chartered Accountants of Scotland Institute. We also have, I think, a trustee, David McGibbon, who is also involved with—he is from the David McBrane Ltd, but he also has significant pensions experience. He is a fairly expert bunch. Do they have a team of professional advisers? Do they have actuararial support from a commercial actress firm? Right. It is an area that we might need to pursue a bit further, because it seems to be those aspects of this. We are here to represent the taxpayer. This looks like a rip-off of the taxpayer to be at face value, but I might be being unfair, so I am prepared to be persuaded, but it seems to be that this is quite a worrying situation. As things stand, my understanding is that your budget this year will increase by £59.5 million from £181 million, which is a 32 per cent increase. Given the context of the budget in which budgets are being cut in many other services, and all of us MSPs are dealing with that at the moment on a daily basis, what is the additional £59.5 million for? The budgets on ferries are quite lumpy, depending on when infrastructure and vessels come on streams. If you split it into two, there is an element in revenue, so there is a small increase in revenue this year, and then there is a larger increase in capital. The capital is on three parts. One is the continuing build-out of 801 and 802, the development of new vessels coming forward, some infrastructure works around to the ports, and Graham can give more details. Then trying to secure the Northern Isles ferries. We have made an allowance for we are in a dialogue at the minute with trying to secure those vessels from RBS, so that is why there is quite a— It is only 4 per cent on revenue that has gone up. I think that it would be useful if we could just provide you with a split. Both of the 181 and 59.2 per cent, because it seemed a very big increase, given the context of budgeted decisions that we have made, but if it is capital, that explains a lot of it. We will provide you with a split. Obviously, the commercial discussions are on-going, I will not be able to identify exactly what that sum is that we are allowed, but we will provide you with a split on the other elements. My final question is clearly later this year, we will hopefully finalise a deal, the UK will finalise a deal on Brexit. Obviously, you are very much governed in terms of your procurement, very much governed by single market rules that force you to go out to tender at certain times and follow certain rules. Can I ask if any scenario planning has been done either within the Scottish Government or within Transport Scotland looking at beneficial changes that you might be able to make, depending on whether we are still governed or not by those rules? Has there been any scenario planning? In general terms, we have looked at transport across the piece, across all the legislation, all the elements that may or may not have an impact. As you will be aware, the uncertainty is that we just do not know as yet what is going to happen on the specifics around ferries. John can say a little bit more about what our analysis is, but in the short term, no change. You will be aware that we are undertaking a policy review into the procurement of our ferry services. Ministers have been quite clear that their preference would be not to have to tender for services in the future. That work is on-going, and the Minister for Transport in the Islands made an announcement on 20 December about emerging findings from that. One of the key things in that is around the state aid requirements that currently apply to our tendered ferry services generally. Those state aid rules emanate from the European Union, and the commission is the arbiter and guardian custodian of those rules. The point of the review into procurement is that it is governed by the existing rules. We will work that through, and we are currently engaged in seeing if we can build a case that indicates that those state aid rules can be met in circumstances where the services are not tendered. That is going to be quite a long-term piece of work. We do not anticipate that happening very quickly, but we will be progressing with that, and we are engaging again with the European Commission on it. To get to the point of your question, we are working on the basis—I think that the Minister's report published on 20 December set that out—that, in the post-Brexit situation, whatever that may be—we are all conscious that that is very uncertain at this stage—we are working on the basis that, at least in the short to medium term, the current state aid and EU arrangements will continue to apply. It may be that they are governed by other institutions, and we will obviously need to keep an eye on that as it goes along. However, we are working on the assumption that those will still be in place for a while at least. The scenario that we are looking at is what the various options might be within the current arrangements. Further out than that, I am afraid that my crystal ball is a bit faulty on this, and I really cannot see where it might end up. To some extent, we will have to keep it under review, but that is— No, it is good that you are doing that scenario planning. My final question is in relation to this. Is it not the case that if we do remain inside the single market, as it is, would we be allowed not to tender? Potentially, yes, I think is the answer to that. So how do we get around those rules then? There are two things that need to happen or that ministers have set out need to happen. First of all, we have to be clear that our in-house operator to whom the services would be directly awarded meets the what is called the TECL exemption. It has to be controlled by government and its functions have to be largely for government. 80 per cent of them have to be for government. We are pretty clear that that can happen with some small changes. The next and perhaps the more challenging hurdle is to meet the state aid requirements. We need to be able to demonstrate that the amount of funding or compensation that we are giving to our in-house operator is the same as that that we would give to an economic operator through a tendering process. We are building that case now and we are doing some work around benchmarking what the costs of those operations would be. As I say, we are engaging with the European Commission on all of that. There are some other tests that ministers have set out and that is around the wishes of communities who are being served and indeed the value for money that we would need to demonstrate under either scenario. There is still work to be done. We are not prejudging the outcome of that exercise. There is some evidence, as we have been hearing, around savings that can be made through tendering, but we also want to examine all sides of the argument. Presumably, to the state aid qualification, we require a significant cut in subsidies. Well, not necessarily, I think, is the answer to that. When we have gone out to tender, we have specified quite clearly the timetables, the fares, the routes and we would obviously want to do that under any scenario and it will cost what it costs to provide. We obviously want to get best value for money that we can, but— For example, if you take John, the guru to Danone, where you have an existing private operator who clearly is not subsidised, and side by side with that, you have the public sector operator, how would you go over state-aid rules in relation to that if you wanted to increase the subsidy? Again, at the moment, we are tendering that particular service because that is the only way that we could potentially deliver ministers' aspirations for a vehicle passenger service. I do not know Mr Neil, we are very familiar with that particular scenario. In that case, we do see that as being the only way to potentially deliver that. We will have to let that run and see where that takes us. I assure Mr Neil that if he wants a lecture on the tecle exemption, which is an arcane point of European law, Ian Gray is very knowledgeable about that from his previous life. That aside, I just wanted to ask Mr Brandon that you made the point about the tendering that may or may not take place in the future, that all will be the same until at least 2021 because of the transitional period following the UK leaving the EU in 2019. Can I therefore take it that the current exercise that is going on about the Northern Isles tendering will continue at our pace because what we do not want is to be in 2021 and nothing has happened on that, both for the company operating service and therefore for the value of the taxpayer. You are also aware that it is not the considered view in the Northern Isles that going back in house is the best way forward. There is a very strong view, particularly in the freight industry, who, after art, is the economy and therefore the basis of the figures that Liam Kerr was mentioning in terms of the reduction in subsidy. That is the reason why it has come down because so much freight has been carried. They think that tendering is a good thing. The minister has written out to everybody this week to seek the further views on what the community would like to see in terms of the approach that has been taken for the Northern Isles. I wonder if I could ask us a couple of questions, please. One on economic impact analysis and another on long-term strategic planning. The impact that the RET reduction has had, particularly for the Arran service, has been quite significant and very positive. According to the local member, Kenny Gibson, he is telling me that we have seen a 50 per cent increase in traffic on that route, with a 20 per cent increase in passenger numbers, with the consequent impact on tourism and so on. Are you planning to do any kind of economic impact analysis for that route and all the routes, particularly just to assess the… Sorry, can you move at the border for Mr Coffey? That would be appreciated. Thank you. Where was I? Are you planning to do any kind of economic analysis for that route and all the routes and when might we see the… So there are two parts of that. The first part is around the evaluation of RET being introduced on that route, which we have done and was published earlier this year. It is on our website, but I could supply that to the committee. It signals quite clearly what the benefits and disbenefits that are felt off the community. That builds on the previous two evaluations that were done as we started to roll out RET. This year, given that we are now three years in, there will be a much wider piece of work done on RET generally to understand both the benefits and the disbenefits. I think that there is a range of things that people acknowledge that it has generated an increase in vehicles. Could that increase in vehicles have a link to an impact on the asset? It is increasing ferry running, fuel servicing and all the other things. The RET evaluation that we will undertake this year, which we are just speccing out just now, will take a much broader perspective on exactly what the benefits are of RET and, probably more importantly, what the long-term forecast thing is. It is a really difficult thing to forecast. You can forecast when you introduce it what the first year may be, but then, thereafter, it is quite elastic, so it can change a number of other factors. That leads to your second question about a long-term vision and the economic worth of ferries more generally. I can try to take it in a couple of parts. The ferries have been funded by Government since the 60s across the piece. The first team to have tackled a review in ferries plan back in 2012. If you refer back to the ferries plan, it was quite clear about what it was intending to do, so it was intended to create social inclusion on the islands, better connectivity, economic growth and improved journey times. It had all the indicators of where we wanted to be measuring, but we have not yet taken it to the point of saying that that plan, set out to 2022 and all the investment that has gone in, how does that actually transfer into impact on rural and island communities? It comes back to the central question. For me, anyway, the Audit Scotland report is about value for money more generally with ferries. Three parts of that spend less, spend well and spend wisely. On the spend less part, we are able to demonstrate that through the CHIFS contract, through Northern Ireland ferries, which has been pointed out a couple of times now, we can spend less resource for that input service. The spend wisely comes out of the strategic plan up to 2022 plus the vehicle deployment and replacement plans that come out every year. The team and network strategic group look at each of those pressures across the network and look for the investment of capacity and demand across the network. Spending well is covered by the way that the team approaches that. The spend wisely bit is about all that investment and how it is linked to social economic impacts. That is the part that we need to strengthen this year in taking forward a different approach to the second plan that will be required from 2022. I was trying to signal in my letter to the committee that we put two diagrams in there—a journey of where we have been and where we are now and the journey of where we want to get to by bringing all those studies together into a single comprehensive strategy that looks at both the inputs and the outputs, but equally as important the outcomes. There are a couple of studies that we have done in 2015 on the economic worth of the maritime sector in Scotland. In 2013, it indicated that it was about £1.8 billion worth of value to the Scottish economy. Globally, we can see that ferries play a part in that value added to the economy, but we have not done it on a network-wide basis. I undertook a piece of work in terms of the strategic growth sectors and transport contribution to them. Again, ferries, we looked at case studies through Diageo, the Scottish Salmon Company and the Preserves Company. Their indicators were around reliability and capacity issues. Again, at the minute, we tend to cover that through the vehicle deployment and replacement plan. If we are going to look at the communities that run the islands and how they benefit from the connectivity, and I see them as sea bridges rather than ferries, the access to healthcare services, education services, the access to leisure facilities and everything else that everybody else enjoys in the mainland, that is a clear measurement that we would want to try to encompass in this piece of work. The second area that we want to cover is business. Both business to export markets for goods that have a particularly short shelf life and our world-class food and drink sector. For instance, we need to make sure that we capture in the outcome element of a metric that tries to identify what that means, and also for goods going back to the islands. The third part is tourism. If we can brigade it without writing the study and strategies just now, we can brigade it around those types of outcomes and measure it from input to output to outcome, then we will be able to satisfy the core question. For me, anyway, in the Audit Scotland report, it is £209 million a year. Is that actually value for money in terms of what you get in the rural and island communities? A longer answer than we were probably looking for, but— No, it is very helpful, Roy, but when did you say that we might expect to see all of that coming together for the committee and for the public? The team that is engaged now with our analysts and economists is trying to map out how that would be done. We have not—a transport model for Scotland does not include ferries, so one important part is to try and see if we can model and forecast what the future might be. Our economists are wrestling with how we get that direct input into ferries linked to those particular elements on the islands. Ile is a classic example of that with whisky distillery, so there is a bit of work to scope that. I do not want to commit too much, but we would hope that by the end of this summer period we would be in a stronger position to come back and say that this is the piece of work that we are going to take forward. The one thing that will really help us in that is that we had a conversation with Fraser and Graham on their input to this work, and I think that that is going to be extremely beneficial. Audit Scotland's input to this piece of work will be extremely beneficial so that we can truly come up with a value for money assessment for our ferries network. Are we able to see it on a root-by-root basis as well and thin your report of hope? I think that that is where it becomes quite difficult. The fourth E is equity, and to do it on a network basis is fine. When you start to break it down on a root by root basis, those lifeline ferries on themselves will probably not contribute to the same degree as some of an island like Islay, for instance. I think that the preference, and Audit Scotland quite helpfully pointed to that in the report, is a network-wide basis assessment rather than a root by root. If I might just add to that, I think that we also would want to ensure that that kind of assessment is done, as Audit Scotland has suggested, within the parameters of the national transport strategy review and the strategic transport projects review, which will follow that. We obviously want to make progress as soon as we can, but we need to be sure that it is all joined up and coherent, and we see it as part of the wider transport contribution to the economy and not just by itself. Do members have any further questions for our witnesses? Thank you very much. That is just two very brief ones. The first is from the summary from the Audit Scotland paper itself, in which they say in the second section on key messages that the condition of about half of the harbours used by transport Scotland's ferry operators is unknown. That must be a pretty significant worry for use and organisation. I just wondered in the context of the last answer that has been given to the committee, if that exercise will include solving that problem. Yes, the answer is yes. For me, the parallels are the piece of work that I came to committee with previously on road maintenance, where we undertook a piece of work to understand the totality of the state of the asset, the international benchmark of what we want to achieve with our road asset, and then the long-term investment plans to get there. I think that in ferries we do not yet have that, so there was an exercise done back in 2010 to look at all 52 or 59 harbours, if you take Northern Isles and Goodwick the Roon. The test now is to do a similar type of exercise across all the harbours, so we need to understand the totality of the asset, both vessels and infrastructure, before you can start to plan on it. Just say, Mr Wynn, if Lerwick Port Authority's board or Aberdeen Port Authority's board did not know the condition of the harbours, it always sacked, so how come this is the case? So they know them, so Graham has very close links and works with them, and he's actually going somewhere tomorrow to speak about the very same things. It would be more responsible for them, but I can't understand from that, who's responsible for all these harbours that we don't know the condition of, and why, you know, it doesn't make sense. I think they are known, I've already said. We know of clearly good relationships with Lerwick, Kirtwall, Aberdeen. Yeah, but they're not the ones I'm talking about. I'm talking about the ones that Order of Scotland has said that we just don't know the condition of. How come? Well, I think we haven't got a bit of paper that sets out the condition of every single harbour. Can my, as a female, know the condition of all their assets, clearly Highland Council, Highland Butte Council, trust ports and the like, know the condition of their facilities across the west coast, clearly Kirtwall, Lerwick and Aberdeen, know the condition of their facilities and clearly trust ports, and they've got to manage and maintain those assets and we work with them in that regard, whatever. But what we haven't got is all written down in one bit of paper. I think that Order of Scotland's point was that Transport Scotland doesn't know the totality of those 52 harbours. So, the 27 authorities that own harbours will know. They will know. You can assure me they do know. What we want to do is to bring that together so that we understand the totality of the asset that's being used by the vessels. I'm engaged closely with them and I'm clear. I'm up to more of what Manacor has been telling me at council about the condition of their ports and harbours, because clearly they have three or four key facilities, like Cainure, Port Asgay, Rossie, whatever. They're all council-owned facilities, but they're clearly essential to delivering Clyde and Heavies ferry services. That's very fair. The other one was the additional letter that the committee received from Order of Scotland, which I think came in before this committee, mentions the freight fares review. Can I ask when is that going to conclude? Because we have been waiting a long time for that to conclude. Yeah, we're very conscious of that. It has been a lengthy process. It has been a good process in that there's been very good engagement with the stakeholders through that four years, but I absolutely acknowledge that. It's something that is being considered by ministers. I'm afraid that I can't put a time scale on it, but we are in this year. I can't commit on behalf of the minister, I'm afraid, but it's actively being considered. Bill Bowman. We've had some discussions already on the pension, but if I could just come back to that. You've explained that you're waiting for the triennial valuation, the issues facing the trustees, the stock markets and maybe even the gilts. It seems to me that you're paying for every three employees, you're paying for a full sort of ghost employee that adds no value. That seems like a more current business issue that you should be dealing with now, not waiting for a report to come in to discuss with trustees. What are you actually doing to restructure your costs now, to free up those resources? I can't really add very much more to my previous answers, I'm afraid. We do engage regularly with the employers and with the trustees, and we've had recent discussions with CMAL and CalMac on both of those things. There is an acknowledgement, as I say, that these things do need some attention, and we do want to make it sustainable, affordable and fair. We need to be sure that we've got the right data, and we need to be sure that everybody is comfortable with the assumptions. More than that, I'm afraid. I can't say at this stage. Is that a confidentiality matter, or are you just being very passive in your approach? I don't think that we're being passive, but I think that we need to work off the most up-to-date information until we have the valuation that we don't have. I would have expected that you have estimates that you can see where you're going on this. You have a known problem. Why do you have to continually wait? I mean, I've heard this in other companies. It's nice to be able to say that we don't have it as a valuation coming, but you've a fair idea of the situation that you're in. Should you not actually be doing something from a business perspective? Well, I think that you're right. I mean, there is obviously a body of historical evidence and projections that are, in the first instance, the responsibility of the trustees to consider. We can look at that, but in the final analysis, it will come down to a decision about the affordability of the pension scheme and how it can be sustained going forward. Noe's raised some, obviously, quite challenging questions for employers and employees and their representatives and also for government on behalf of the taxpayer. So is that you then that takes that decision or somebody else? Well, ultimately, it's a policy decision for ministers, but the day-to-day administration of the scheme is done by the trustees and the employers. So the actual scheme or any changes to it are decided by the ministers or by yourselves? Well, historically, any changes to pension schemes have been negotiated between employers and employees. However, I think it's fair to say, given other Scottish Government commitments to fair work, that any future consideration of those issues, you would be done very much on a partnership basis. Government, I think, would want to be involved in that, but we don't yet have those forums in place. Do you think that you're getting the best value for this scheme? I'm not in a position to answer that question, I'm afraid. As a business person? I'm not an employer involved in this particular issue. Just one other question. Do you do any international benchmarking of the efficiency of your operations, looking at other countries that have ferry networks? We have good relationships with a number of areas. However, we have a tally different business models with the Swedes over back in the last year, talking about how they support their ferry services. I was with them in Corsica and they were over here a year or two ago with delegations from all over North America and the like. We do keep an eye out on how things are done elsewhere. We have quite a lot of work in discussion at the expert ferry group and they are guarding how their region ferry services are running and supported. There are quite different business models, more commercialised services largely in Scandinavian countries, but the state provides quite a lot in terms of Sweden, where the state runs basically all the ferry services themselves. We go down into the operating costs. This is one of the benchmarking issues that we will look at in terms of the procurement policy review. I expect that to be an area of activity, creating the benchmark, your services, you need to benchmark against what you do yourself and, clearly, the obvious thing would be to look at how other support ferry services in other parts of the world. Would you give an indication of any other operator that you would say would be a best practice that you would like to align to? I do not think so. To a different business model here, where we have clearly, in this circumstance, the tending for the services that we have done clearly across all of Europe, but here, certainly, the assets are managed and maintained by the state, in this case through Caledonia Maritime Assets Ltd. It means that ministers can continue to invest and improve the services, knowing that the infrastructure is in place. For example, we had a lot of dealings with the Irish Government several years ago, and they were basically over a barrel every time they went to Tender because the Tenderer would tend to walk away at the end and take his assets with him. You don't have to point the incumbent back to Liam Kerr's question on that later on. There are clearly a number of models out there, not all of them are perfect, I do not think, but I think that given the circumstances that we are in, I am pleased with how we are one of our ferry services. Liam Kerr, just a couple of points on RET, if I may take you back there. Mr Laidlaw, you said earlier in response to Mr Scott's question that the post-tender changes to timetables caused by meeting increased demand as a function of RET. Fair. There were quite a number of changes to the operating circumstances. Let me ask a question, if you will. I am sorry, I know. I am sorry, because it is what I heard from Mr Scott. My question was, has RET cost a taxpayer £128 million? You are presumably going to say no, because there was something else in there. What has RET cost a taxpayer in terms of that timetable change, and was that budgeted for? Yes, it was budgeted for. When RET was introduced, that figure— We had an RET line in our budget for the last several years, only it disappeared in the last couple of years, because it is now part of the main frame, it is no longer a pilot or a trial or a test, because it is really just a fair regime. How much was that? How much was budgeted for, for the increase in traffic leading to the timetable change? I think that our assessment of the cost of RET across the network is somewhere in the region of £14 million to £16 million per year. If you take an example across—that was not all of the network, quite a lot of changes happened at the back end of the roll-up, so I would not include all of that sum in terms of what the change would be to add up to that £128 million, but clearly over an eight-year contract, any sum multiplied by eight gets you quite a large number. My final question, which I have put before, concerns me. The Audit Scotland report says that the passenger numbers have been constant, but the vehicle carrying are increasing. Mr Brannan, you talked earlier about your looking to evaluate various things going forward. As part of that evaluation, will you be evaluating the impact of increased car numbers on the island communities and the quality of the road, the environment and the air quality? What cost will that put on local authorities? Will you be evaluating all of that? We are developing the specification for that review just now, so it is something that we need to consider. There are clearly difficulties in directly linking that vehicle with damage on an asset on any part of the network, whether it is on an island or on the mainland, so I would caution against saying that everything that is increased on ferries, i.e. on the sea bridge across the island, has resulted in a deterioration of the asset. In actual fact, cars do less damage than the commercial vehicles, so we need to look carefully at what the cause and effect is and what categories we can measure realistically in accordance with the study. We are doing the evaluation over the whole scheme this year. The evaluations that have been done today, and I referred back to the one that was published just at the start of the year, there was some assessment on why vehicles have increased over foot traffic, and it is because of the flexibility that the RET has given for individuals to then take their vehicle across the mainland, do some shopping and come back in vice versa. The full evaluation needs to take a broad spectrum of exactly what we want to cover, but I would not want to prejudge whether there is a cause and effect linkage to impact on assets or air quality or anything wider than that at this stage.