Cross-Solent Ferries

Jim Shannon Excerpts
Tuesday 26th March 2024

(2 months ago)

Westminster Hall
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Bob Seely Portrait Bob Seely (Isle of Wight) (Con)
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I beg to move,

That this House has considered Government support for cross-Solent ferry transport.

As ever, it is a pleasure to serve under your chairmanship, Mrs Latham.

I will come straight to the point: the relationship between the ferry firms and the people of the Isle of Wight is breaking down. The ferries are a genuine lifeline; we have no choice but to use them. There is no public service obligation. We need to get a better deal. I have produced a study of the ferries, which I think is the first major work on the ferries that has come out of the Island for 40 years. In it, I highlight how we can get a better deal for the ferries, some of the options for the firms and how we can get there.

Time is tight, so I will make as much progress as I can. The Island depends on three private ferry operators: Wightlink, Red Funnel and Hovertravel. Hovertravel is not really part of the picture, but Wightlink and Red Funnel are. Wightlink was privatised in 1984, and Red Funnel has always been in private hands. The firms’ services initially improved throughout the ’80s and ’90s, but they are now worsening, in part because of the private equity-style ownership model. I will return to that, because it is a constant theme.

In 2009, under new Labour, the ferries were given a clean bill of health, and we were told there was open competition between them. That was not true. For passenger services, there are two local monopolies in the west: between Yarmouth and Lymington and between Cowes and Southampton. I am delighted to see my hon. Friend the Minister here, as ever. The idea that people will travel 25 miles from Yarmouth to Ryde to cross four miles of water into Portsmouth in order to travel 35 or 40 miles around to Lymington again is nonsense. In Ryde, there is competition of sorts between Hovertravel and Wightlink, although not to the same destination—one goes to Southsea, and one goes to Portsmouth harbour. On the car ferries, there is an effective monopoly in the West Wight, again on the Yarmouth to Lymington route, and a duopoly for the rest of the Island, with Red Funnel pitched slightly below Wightlink’s extortionate prices—but it is not true that there is a free market among Isle of Wight ferries.

Barriers to entry are very high. I am trying to support two potential competitors into the market—a passenger ferry and a potential car ferry—but that is difficult, because the ferry firms also own the ports.

Jim Shannon Portrait Jim Shannon (Strangford) (DUP)
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I commend the hon. Gentleman for bringing the debate forward. There is a similar issue back home, except for one difference. We have a ferry that connects Portaferry, in my constituency of Strangford, with the constituency of South Down—with the boundary changes, that will all be mine next time around, if everything goes according to plan. We never privatised the ferries back home; we retained them under the Department for Infrastructure, because we thought that that was the best idea. Does the hon. Gentleman feel that perhaps Government retention would be a better way forward?

Bob Seely Portrait Bob Seely
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It is always a pleasure to hear from the hon. Gentleman. That is absolutely one of the ideas that I will discuss later; I thank him.

What are the problems? First, as I have said, the ferry firms have no legal obligation to meet timetables or standards of service above the minimum levels of safety required in law. The Island’s connectivity is entirely at the discretion of the firms, which are answerable to—and overwhelmingly driven by—the needs of their shareholders. They have no public service obligation and no regulator, and they set their own service standards. The Minister should know that I am having a Bill on a ferries regulator for the United Kingdom written. The ferry firms change their speeds and timetables whenever they want, and they judge their own punctuality rates depending on the service that they want to run, not on the service that we agree they should run.

Secondly, the firm’s corporate structures and incredibly inflated valuations are becoming a critical issue for the Island. I also believe they are bad for the United Kingdom. What do I mean by that? The Solent market has an established model of private-equity style ownership that has several generations of acquisition and sales, and in all that time, debt has gone up. The Island is a captured market: we have no choice but to use the firms. They have reliable high incomes, there are high barriers to market entry and they are highly profitable. That makes them ideal for private equity investment.

Typically, owners purchase the ferry firms with borrowed money. The firms are subsequently restructured to pay interest on that debt. They effectively avoid tax perfectly legally because they pay back their shareholders through loans. We, the users, pay for the owners’ purchase of the firms, and then pay through the nose to pay back interest on those purchases. Returns to shareholders are via loans on the debt. Such private-equity style structures may be common elsewhere, and are sadly used by the water utilities, which are not a great example of them, but those firms have a utilities regulator, whereas the ferry firms that use such structures do not have any regulator to control them or to put limits on debt or limits or demands on service.

The firms have been increasingly overvalued by bankers with a vested interest in ramping up their value. The higher the value of the initial purchase, the greater the debt loaded on to the firm and the greater the need to repay that interest, so the more the Islanders—to put it bluntly—get stuffed by the ferry firms, and the more we have to pay through the nose to pay back the interest on buying the firms in the first place. Manchester United had a similar form of ownership, as do the water utilities, as I said, but the water utilities have a regulator that makes demands on the firms.

For example, for the year ending 2023, Wightlink had tangible assets of £85 million and an operating profit of £15 million. I know that my hon. Friend the Minister has distinguished expertise in matters of transport and will know the operating margins for the rail firms. If we look at the operating margins for the ferries in the last 30 years, we see that in 1990 the margin was 28%; in 1995 it was 19%; in 2000 it was 32%; in 2004 it was 29%; in 2010 it was 20%; and in 2019 it was 25%. Red Funnel’s operating margins over the years went from 15% in 1990, to 21% in 1995 and 24% in 2019. These companies have vast profit margins. Compare that with the operating profit for rail firms, which is perhaps 2%—is it 5% maximum? There is a real ethical problem with the amount of profit that these people are making and the amount of tax they pay on that, which is very low.

Effectively, since the early 2000s—I do not know why we have allowed them to get away with it—the Isle of Wight ferries have been treated as collateral for loans for private equity and for pension funds. Not only that, but there is a web of offshore companies that own both the firms. Wightlink’s parent company, Arca Topco, had borrowings—I find this amount unbelievable—of £261,593,000. A small ferry firm has borrowings or loans outstanding of more than a quarter of a billion. That is a phenomenal amount. Some of that is in terms of investment, but most is debt that has been loaded on to those firms over the years by pension funds and private equity in order to buy the firms.

Arca Topco paid interest totalling £16,825,000. Various bodies that have owned the company or been paid back those loans include Basalt Infrastructure, Fiera Infrastructure and, amazingly, the People’s Bank of China. The People’s Bank of China, an arm of the Chinese Communist party, has owned the company that owned the company that owned Isle of Wight ferry.

I will say one more thing about Wightlink. Wightlink argues that it makes no profit because it uses loans to invest in the company. Although that is not wholly untrue, because it does use some of the loans to buy new things and make investments, it is nothing like enough, on both counts. It is also largely dishonest because those loans are used not to invest in the company but to pay back the massive amounts of debt that are loaded on to the firms, which is why Islanders are being screwed—to put it in the vernacular; I apologise for my bad language—every time they use the firms. That is the problem here.

I personally feel that I have been lied to by both firms about the debt and the ownership structure for too long. Frankly, my tolerance of them is reaching a low point. The firms have become overvalued cash cows. Red Funnel was worth £200 million in 2007; 10 years later, the most recent time it was sold, it was worth £370 million. It is phenomenally overvalued and I suspect it was always going to have trouble paying back the loans based on that overvaluation.

Since covid-19, the passenger market has dropped 30%. So what are the firms doing? They are cutting back their services. I will come back to that in a moment. Effectively, they are overvalued cash cows, and because these cash cows are not delivering, we—the passengers—are being squeezed more. To deliver the returns they need on their inflated valuations, they have cut back services. For any given Monday in February, if we compare 2004 with now, we see that Wightlink reduced the 36 daily sailings from Fishbourne to 18, the 24 daily sailings from Yarmouth to 16, and the 32 daily sailings from Ryde to 18. Wightlink is cutting back significantly on services in order to increase profits. Since 1998, Red Funnel has reduced 33 daily sailings from West Cowes to 22. Although Red Funnel says it has increased daily car ferry sailings from 13 to 14, the number of unrestricted sailings has stayed the same.

Services are also slower. Red Jet used to take 22 minutes; it now takes 28 minutes. That means—the Minister should know this—that it is now a slipped service. Instead of departing every half an hour during peak periods, there is a delay of 10 minutes each time, and that is messing up people’s connectivity with the mainland when they want to get trains or buses to different places. Before 2009, Wightlink FastCat reported a maximum speed of 34 knots; today, it is 26 knots. Late-night services are also being cut. Red Funnel has just cut the late-night service between Cowes and Southampton. To its credit, Wightlink has put one back on, but it was painful to get it to do so.

Next is yield-management pricing, which the Minister will know about, being very expert on these things. We go online, we look for flights to Cairo, Ibiza or Paris, and we get different pricing because that is the way that yield-management pricing schemes work. If we do it in advance, it becomes cheaper, and so on. For air travel that works, but with monopolies it does not. Although the firms say, “We still have starting prices for a family of four with a car for £29,” because of their surge pricing, the amount of tickets in that bracket are tiny, if not non-existent.

There are somewhere between 13 and 15 price brackets. The fact that someone can go online to book a ferry on a bank holiday or in the summer at a weeks’ notice and pay £250 for a return ticket means that there are huge numbers of tickets available at the most expensive, rip-off prices, and virtually none at the cheaper rates. My concern is that this form of surge pricing is hiding significant inflation in the cost of travelling, and it is having a significant effect on our economy.

I will wrap up in the next five to six minutes, so I will really rattle through. Why change now? First, because the firms have old car ferries because they have spent too long paying back shareholders and not enough time investing. If they want green money from the Government, that should come at a price. Secondly, because I and the Scottish councils lobbied for the Islands Forum initiative, and the Government are now looking into connectivity between the mainland and the UK islands.

Thirdly, because during the covid pandemic the ferry companies took money from the Government, because they recognised that the firms ran a lifeline service. Fourthly, because Red Funnel is probably up for sale again, and I am worried that eventually one of these firms will be so overloaded with debt that it falls over.

Fifthly, because there may be an attempt by a local entrepreneur, Nick Wakefield, to introduce a public-service ferry service, which I believe the Government should support because it would help to break the duopoly of Red Funnel and Wightlink and break the monopoly of this corrupted private equity-style investment system.

There are many questions that I want the Department to answer, and I will follow up with letters if I do not get all the answers today. Does the Department for Transport have an opinion on supporting new ferry firms? Does it really believe, given the state of the private equity-style investment, that this is a healthy market and a healthy structure, or one with duopolies and monopolies? There is a rail Bill coming up, which I am sure the Minister knows about. Can we add the Isle of Wight ferries to it as well?

On the sale of Red Funnel, what powers do the Government have to block a sale? What powers do we have to prevent it from selling its third passenger ferry? Red Funnel is running a “comprehensive” service with just two passenger ferries and is even slowing them down to save money. If one or both of those ferries falls over, there will be no service. How do the Government feel about that?

Next, what is my answer? There should be easy multi-link tickets for poorer Islanders; a greater discount for journeys that start on the Island; electronic through-ticketing, which, ridiculously, is something we still do not have; and the ability to book places for passengers, including the elderly or those going for medical treatment. There should also be independent assessment of punctuality and reliability; permanent improvements in late and early passenger services, so that the ferry companies understand that they have a public service obligation; regular services, and not the unacceptable slip service that Red Funnel is running to save money; and a duty to ensure best connectivity with national rail services—I am bored of having to lecture the firms to ensure such connectivity.

There should be stronger sanctions for failures to deliver an agreed standard of service. A couple of weeks ago, the ferry firm did not run the last service, so someone living on the Isle of Wight coming back with his family would have been stuck in a hotel, which would have cost him three hundred quid. Does the Minister think that he should pay, or does he think he should be able to claim the money back from Wightlink or Red Funnel the next time it happens? It is completely unacceptable.

There should also be an accurate understanding of investment levels in recent years; a better deal for young people; better wheelchair and disabled access; more transparency about corporate structures; and some thought given to whether the Isle of Wight should take a seat on the board of the major ferry firms. I am happy to discuss nationalisation, although I cannot see it being on the cards—it has not been under any Government, including Labour Governments, in the past—but what happens when these firms have debts that become unmanageable?

What are the options for getting there? I am having an independent regulator Bill written. Would the Government consider supporting it and installing a regulator, not only for the Solent ferries but for all the national ferry firms? I have had to do a national Bill—I say that for Islanders watching this debate—because if I bring in a Solent Bill alone, I as an MP cannot present it. The parliamentary etiquette is that I can present only a national Bill; therefore, I am presenting a UK ferries regulator Bill, rather than a Bill just for the Solent. That is the first point.

Secondly, would the Government demand the rights to sign off on the firms’ timetables, as they do for rail services? Is there more money for central Government funding for healthcare-related visits to the Island? Might we persuade the companies to enter into voluntary regulation, so that there is a formal process and they have to listen to us more seriously, perhaps with beefed-up powers—maybe legal powers—for our transport infrastructure board to demand better things? I will be writing to the Competition and Markets Authority to see what scope there is, and whether I can request an inquiry into the ferries and, if so, how that could be initiated. Will the Department of Transport support my request?

We cannot go on as we are. Despite some incremental gains over the last two years, we are now reaching a crunch point, where these firms are so overvalued and their shareholders’ demands for returns are so loud, that we simply do not get listened to. It is harming our future, whether it is our tourist bookings, which are down, or the fact that young Islanders cannot go to Southampton in the evening because there is no way back—yes, they can get the car ferry from Portsmouth, but it goes from a different place from where they left.

I thank the Minister for bearing with me. I know that this is not his responsibility per se—the relevant Minister is in the House of Lords, so I am sorry to be unloading on him today—but to sum up, the ferry companies are failing the Island. The private equity model is now breaking down. The disparity between the power of the shareholders and the needs of the Island is becoming too great. The situation is becoming acute. Shareholders are relentlessly prioritised over the needs of the Island. Sailings are fewer, slower and more expensive than they were 20 years ago.

The firms have no obligation to run a service. One of the things that really grips me is that when I say to them, “Shouldn’t you be raising your game?”, their attitude is: “If you complain too loudly, we won’t invest.” It is literally a form of blackmail on a genuine lifeline service—if we dare to criticise them, they might rethink their investment plans. If we criticise them and they say, “Oh, we don’t know if we’re going to invest,” that is reason enough for the Government to give them an enormous kick up the backside. The Government should say, “If that’s the way you play it, we’ll force regulation on you to make sure that you are considerate and thoughtful, and that if you say you’re running a service, then you damn well run a service and don’t just change your timetable when you fancy slowing down your boats to save some money, to pay your shareholders over the needs of the Isle of Wight.”

As you can see, Mrs Latham, this is an issue grips me, because it is harming the people of the Island, and we need change. I am really hoping that the Minister will now work with me, because there is a window of opportunity for change when it comes to green funding for the ferries, to Island connectivity, because of the Islands Forum, and, potentially, to ferries clause in the rail Bill, whether that is voluntary change from the ferries firms or change that we encourage or force on them. It is now time to look again at this issue, because we cannot have another 20 years of this.