Friday, 8 July 2011

A little masterpiece of political economy

The latest Fraser of Allander economic commentary published a fortnight ago did not make for happy reading. Its analysis confirmed the views consistently expressed by the STUC through the first half of 2011: the recovery is weak to non-existent and the headline stats do not begin to tell the full story of what is happening in the labour market. Not good.

However, a pleasant surprise awaited those who managed to stick with the commentary to the end; an outstanding article on ‘The Governance of Scotland’s Ferries’ by Professor Neil Kay, Department of Economics, Strathclyde University. This is a little masterpiece of political economy – in six short pages Prof Kay manages to catalogue the failures of policy since devolution, describe the dangers that lie ahead and propose sensible solutions rooted in a deep understanding of microeconomic analysis, EU competition law (the great bogeyman of Scottish ferry policy) and the needs of our island and peninsula communities. Marvellous stuff, if ultimately depressing in the story it tells about policy development under devolution. 

Professor Kay has been a regular commentator on ferry policy over the last decade, contributing in depth to the seemingly endless stream of Government consultations and parliamentary inquiries. His contributions (which can be found on his website ) are offered as a ferry-using peninsula resident who happens to have much relevant expertise. Has Government welcomed this public spirited contribution? Not likely. Perhaps the most disillusioning moment I’ve experienced in the Scottish Parliament was to hear the term ‘academic’ being used pejoratively by Ministers against Prof Kay and other interested researchers during a debate on tendering back in 2005. Disgraceful. 

Nevertheless, Prof Kay has continued to provide valuable insights into the shambles that is ferries policy. I can’t improve on Prof Kay’s FoA article so would simply encourage people to take a look. The following quotes do not tell the full story but provide a flavour of where bad policy has left us and the nature of the dangers that lie ahead: 

“The…more dangerous scenario is that eventually Calmac loses its contract to another EU bidder. At this point, if there was a coherent regulatory framework in place as for other essential services then at least there is potential to guard against problems from moral hazard, adverse selection, opportunistic behaviour, technical or financial failure on the part of the incumbent operator. But obviously these safeguards would have to be in place before the tender process takes place, you do not start re-writing the rule book once the game has started and you are worried about who is winning, just as you do not start looking for an operator of last resort when you need them to start tomorrow”. 


“There is a debate to be had, and reasoned arguments on both sides, as to whether most of the Scottish ferry network should be run by a single state owned holding company or whether most of it should be in private hands, much of it awarded through public service contracts. There is also a debate to be had, and reasoned arguments on both sides, as to whether or not some routes should be tendered separately rather than as part of the main Calmac bundle, effectively to institutionalise cherry picking and bring in a degree of oversight by government. Indeed these very debates were encouraged in the current Scottish Ferries Review. The problem is that the debates are irrelevant, a waste of time and even counter- productive since they are not predicated on a real understanding of commercial logic and interests, let alone what EU law permits and prohibits in this context. In the absence of coherent oversight the market will provide its own solutions and one of the first lessons students learn in Economics 101 is that you cannot just rely on crossed fingers to ensure that private interest aligns with the public interest” (my emphasis). 

I’ll say it again, read the full article. 

The ferries debacle reflects some wider problems with policy development under devolution. These include: 
  • The inability or unwillingness to treat issues of profound importance to Scotland’s fragile peripheral economies in a serious fashion – Prof Kay highlights the fact that Western Ferries now has an unregulated monopoly of vehicle services on Gourock-Dunoon. He asks, not unreasonably, whether the Scottish Government would let a private operator have an unregulated monopoly of tolls on the Forth Bridge?
  • The extreme credulity of officials in the face of private sector companies and their lobbyists. Of course Western Ferries are motivated by the public interest. What else could possibly motivate them? 
  • The selective application of microeconomic analysis – when the STUC and others sought German style wage subsidy programmes at the start of the recession, the full weight of the Government’s analytical resources is thrown at us to show that high deadweight costs render such programmes inadvisable. But when standard economics strongly suggests that a regulated state ownership is the most appropriate model, the economics are dropped. All we get are vague statements about the need to ‘test the market’ whatever that is supposed to mean. 
  • Despite our devolved Parliament’s founding principles of openness, accountability, the sharing of power and equal opportunities, it still appears very, very difficult for civic minded individuals (organisations too?) to influence the policy process to any meaningful degree – no matter their level of expertise.  
That said, Prof Kay is trying once again. He currently has a petition before the Scottish Parliament which ‘calls on the Scottish Parliament to urge the Scottish Government to support the setting up of an independent expert group to consider and recommend institutional and regulatory options for issues relating to the provision of competitively tendered Scottish ferry services under EC law’. You can find it here. The background information contained therein is another beautifully concise summary of the failure of policy to date.
I do have some concerns over ‘expert groups’ and believe it is usually necessary to balance the experts with civic interests who tend to be more accomplished at seeing the bigger picture. The same goes for any future regulatory authority. But it is a good petition which deserves a fair hearing. 

As the Scottish Government's ferries review proceeds towards the completion of a ‘ferries plan’ which will help determine the structure and quality of ferry services for the next couple of decades, let’s hope that the powers that be start to listen to the Professor.

Stephen Boyd - STUC

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