The Government should take into account that the cost of the ferry connection with Saaremaa and Hiiumaa will increase further and think about the future of maintaining the connection

9/3/2019 | 10:44 PM

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TALLINN, 4 September 2019 – The National Audit Office analysed the cost of maintaining the ferry connection with Saaremaa and Hiiumaa, the relevant contracts, the quantity of the passengers and vehicles transported, and found that the Government should consider the fact that the cost of the ferry connection to the state will continue growing as a result of the general price increase and demand, and that the outlooks of maintaining the connection must already be weighed.

The price of the ferry connection has increased every year: the estimated cost of the transport of each vehicle cost the state ca 11.4 euros in 2007 and 18.3 euros in 2018 (the price per passenger increased from 4 euros to 8 euros). Thus, the cost per passenger (without considering inflation) has doubled and the cost per vehicle has increased by half since the start of the contract entered into with the previous carrier. The number of transported vehicles has increased by ca 60% at the same time. Wages in transport have almost doubled since 2006 and consumer prices and the price of diesel have increased by almost half, so the price increase did not start with the arrival of the new ferries and the new carrier.

The amount of the subsidy will presumably increase until the expiry of the effective contract in 2026, because the service price is influenced by wages in the transport and warehousing sector, the consumer price index and the price of fuel.

The winners of the procurement for regular ferry services in 2014 were the joint tenderers TS Laevad and TS Shipping that submitted the tender with the lowest price. Calculations with both tenders and the actual change in the price indices that affected the cost of the service and the number of trips indicate that a contract awarded to Väinamere Liinid would’ve been more expensive for the state.

The ferries sail between the continent and the islands of Saaremaa and Hiiumaa almost as many times a year as during the times of the previous carrier, but more passengers and vehicles are transported and ticket income has increased. In 2011 the Government set itself the goal to create competition, save money and achieve better quality in the organisation of ferry transport. Competition did emerge, as two tenderers participate in the competition for regular services. In comparison with the previous contract (for the period of 2006-2016), the provision of the service hasn’t become cheaper as a whole, but four large new ferries are used for the connection instead of the previous three and the number of passengers and vehicles carried from 2016 to 2018 has increased by 10 and 15%, respectively, and the average number of passengers per trip has also increased.

The rapid increase in demand has increased the state’s expenses also during the time of the new carrier. The subsidy paid to the new carrier in 2017 was approximately the same as in 2015, i.e. in the last full year of operations of Väinamere Liinid – 15.8 and 15.4 million euros, respectively. Despite the continuing increase in the number of transported vehicles, the state could not foresee the increase in demand during the summer season, as a result of which additional trips with the third ferry were ordered from the carrier on the Virtsu-Kuivastu route in 2018. The state paid 1.71 million euros in total for the additional trips of the ferry Regula and the total annual cost for the state increased to 18.3 million euros. Additional trips were also ordered for summer 2019. The increasing trend in demand must be taken into account when the ferry service is planned in the future.

In the next three years, it must be decided what the future of maintaining transport connections with big islands and the organisation of ferry traffic after the expiry of the contract in 2026 will be like. If the state wants to use the option to buy out the ferries after the expiry of the contract, the carrier must be informed about this on 30 September 2022 at the latest and the money required for this must be allocated in the state budget strategy (SBS) and, on the basis of this, in the 2026 state budget at the latest. As 106.4 million euros is obviously too much to be included directly in state budget expenditure, it is necessary to develop the respective financing scheme. Also, when ferry traffic is planned, it must also be kept in mind that although the volume of the trips described in the procurement had not been reached by 2018, the rapid increase in the number of passengers and vehicles has already resulted in the use of additional ferries and trips in the summer period.

Background

In order to maintain the ferry connection between continental Estonia and the islands of Saaremaa and Hiiumaa, the state organises a public procurement for finding a carrier every 10 years, agrees the volume of transport and schedule with the carrier, and supports the transport of vehicles and passengers from the state budget.

Väinamere Liinid sailed between the big islands from 2006 to 2016 as a result of the competition for transport services organised in 2006.

TS Laevad and TS Shipping, both subsidiaries of AS Tallinna Sadam, participated in the public procurement of 2014 as joint tenderers in addition to Väinamere Liinid. Based on the tender assessment methodology, the price of the tender made by the joint tenderers at present value was 241.1 million euros, which was ca 30 millions lower than the price of the tender submitted by Väinamere Liinid. The difference in the cost of the tenders mostly emerged from the variable part of the period fee, which in the joint tender was lower than in the tender of Väinamere Liinid. The variable part of the period fee is the fee stipulated in the contract, which is paid once a month irrespective of the number of trips. It is adjusted once a year as a result of the changes in the level of wages and the consumer price index. The fixed part of the period fee and the trip fees did not differ significantly in the tenders.

As a result of the public procurement organised in 2014, the transport service is provided by TS Laevad and TS Shipping, both subsidiaries of Tallinna Sadam, from 1 October 2016 to 30 September 2026. In order to buy the ferries, the parent company of TS Laevad, Tallinna Sadam, issued bonds for 60 million euros in 2015 and for 80 million euros in July 2016.

The transport service with the ferries is provided by TS Laevad, which is a subsidiary owned to the extent of 100% by Tallinna Sadam. The group owns five ferries: Leiger, Tiiu, Tõll, Piret and Regula.

The Republic of Estonia has a holding of 67.03% (via the Ministry of Economic Affairs and Communications) since Tallinna Sadam was listed at the stock exchange on 13 June 2018. 32.97% belongs to Estonian and international investment funds, banks, pension funds and Estonian retail investors.

According to the contract, the state has the option (but not the obligation) to buy out one to four ferries for 26.6 million euros per ferry when the contract expires in 2026. If the state wants to use this option, it will have to give notice of this four years before the expiry of the contract, i.e. not later than on 30 September 2022.

The overview of the National Audit Office covers the period from 2006 to 2018, i.e. from the start of the last 10-year contract period of Väinamere Liinid until the end of 2018, when TS Laevad had been servicing the routes for more than two years. The overview covers the ferry connections with the big islands of Estonia, i.e. the Virtsu-Kuivastu and Rohuküla-Heltermaa routes.

The data used in the overview concern the volume of the ferry traffic (transported vehicles, passengers and number of trips), the subsidy paid by the state and the indicators that influence the subsidy (fuel prices, consumer price index, wage level). The terms and conditions of the effective and previous contract have been compared.

The auditors of the National Audit Office answered the following important questions:

  • How have the amounts of public transport subsidy changed since 2006?
  • How do the terms and conditions of the two contracts, i.e. the contracts entered into in 2006 and 2014, differ from each other?
  • How have the numbers of trips, passengers and vehicles changed since 2006?

It was also important to understand how the present organisation of providing ferry connections came about. The considerations of the state and the goals it had set were studied in order to clarify this.

When the state introduced its work plan in the end of 2018, the State Budget Control Select Committee of the Riigikogu was interested in whether the state had acted prudently in the organisation of ferry transport.

Toomas Mattson
Communication Manager of the National Audit Office
+372 640 0777
+372 513 4900
toomas.mattson@riigikontroll.ee
press@riigikontroll.ee
http://www.riigikontroll.ee/

  • Posted: 9/3/2019 10:44 PM
  • Last Update: 9/3/2019 11:21 PM
  • Last Review: 9/3/2019 11:21 PM

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