Audit Office: State must consider options in Saaremaa/Hiiumaa ferry service

The Tõll, one of five ferries operated by TS Laevad under the current Saaremaa/Hiumaa contract.
The Tõll, one of five ferries operated by TS Laevad under the current Saaremaa/Hiumaa contract. Source: TS Laevad

The National Audit Office (Riigikontroll) has analysed the cost of maintaining the ferry connection with Estonia's two largest islands, Saaremaa and Hiiumaa. The analysis has found an increase in volume of passengers and vehicles using the services, under the current, 10-year, contract which began in 2016. This has however cost the state more, and the analysis also looks at the reasons for this and possible options open to the government in maintaining the links.

The Estonian state is 67.03 percent stakeholder in Tallinna Sadam, the parent company of TS Laevad, which operates the ferries to the two islands. This has been the case since the company was listed on the stock exchange in 2018. The remaining stakeholders are Estonian and international investment funds, banks, pension funds and other investors.

The government introduced a plan for ferry provision in late 2018, which the Riigikogu's State Budget Control Select Committee took an interest in, wanting to check if the government had acted prudently. The state subsidises the ferry connections.

The audit office's own overview covers the period 2006-2018, spanning two different carriers' contracts to the islands of Hiiumaa and Saaremaa.

The state carries out procurement for the ferry service every 10 years, including transport volumes and schedules.

2014 tender for 2016-2026 contract

TS Laevad and TS Shipping, both subsidiaries of AS Tallinna Sadam, participated in the public 2014 procurement jointly, in addition to Väinamere Liinid, which held the previous contract.

TS Laevad/TS shipping's tender came in €30 million lower than Väinamere Liinid's, at €241.1 million.

The main cause of the difference in tender offers came from the variable part of the period fee (a fee stipulated in the contract, paid once a month irrespective of the number of trips made by ferries, adjusted yearly in line with wages and CPI).

The fixed part of the period fee and trip fees did not differ significantly across the two tenders, according to the audit office.

The current contract, awarded to TS Laevad/TS Shipping on the basis of the lower price, runs from 1 October 2016 to 30 September 2026.

Tallinna Sadam, TS Laevad/TS Shipping parent company, issued bonds for €60 million in 2015 and for €80 million in July 2016 to finance the purchase of additional ferries needed.

The group currently owns five ferries: the Leiger, the Tiiu, the Tõll, the Piret and the Regula.

Current contract and service details

The state has option to buy between one and four ferries from Tallinna Sadam when the contract expires, for €26.6 million, the audit office says.

The ferry connections concern the, i.e. the Virtsu-Kuivastu route (Saaremaa) and the Rohuküla-Heltermaa (Hiiumaa) routes.

As noted, awarding the contract again to Väinamere Liinid would have cost the Estonian state more than the TS Laevad/TS Shipping contract.

The government's goal, however, in 2011 was to create competition in the market, as well as to make cost savings and service quality improvements, the audit office says.

This desire for competition bore fruit as two companies tendered for regular services to the islands.

Volumes of passengers risen under current contract, rising costs to state

The current ferry services to the two islands have almost the same level of frequency as the previous carrier, but volume of passengers and vehicles, and thus fare revenues, have been rising.

While providing the service has not become cheaper since the previous contract period (2006-2016), four large, new ferries are used now compared with three under the old tender, and the number of passengers and vehicles carried has risen by 10 percent and 15 percent respectively, in the period 2016-2018. The average number of passengers per trip has also increased, the audit office says.

Ferry connections to the two islands have cost the state more and more per year, rising from around €11.40 per vehicle carried in 2007, to €18.30 in 2018, a rise of over 50 percent, the audit office says.

The price per passenger has risen even more, doubling from around €4 to around €8 over the same period.

Volumes of vehicles have also risen, by about 60 percent. However since transport wages have almost doubled since 2006, and inflation, including in diesel which has increased by almost half, the rising costs for the ferry connections did not coincide with the new ferry services and the new carrier starting work, but was a process already underway, according to the audit office.

This rapid increase in demand has also led to an increase in state expenses on servicing the current carriers. Whereas the subsidy in the final year of the previous carrier's operation (Väinamere Liinid in 2015), was about the same as the figure for 2017 (a slight fall, from €15.8 million to €15.4 million), unforeseen spikes in demand during the summer season caused the state to order additional trips from the carrier on the Virtsu-Kuivastu route, in 2018.

These additional trips, on the Regula ferry, cost the state €1.71 million in total, making the total annual cost to the state stand at €18.3 million.

Additional trips were also ordered for summer 2019, and this increasing trend in demand must be taken into account in future planning, the audit office says.

Future projections

The subsidy for the service is presumed to be likely to continue to increase down to 2026, when the current contract expires, given inflation in transport and warehousing sector wages, consumer price index inflation and rising fuel prices, the audit office found.

Over the next three years, plans for ferry links after the current contract expires, in 2026, must be carried out, the audit office finds.

One option is for the state to buy out the ferries after contract expiry. If this goes ahead, the carrier must be informed of the decision no later than Sept. 30 2022, and funds must be allocated from the state budget strategy, no later than 2026, according to the audit office.

Since the figure for carrying out the above is €106.4 million, it cannot be included directly in state budget strategy and a relevant financing scheme would be needed, the audit office says.

Furthermore, planning must bear in mind that while trips volume outlined in the procurement process had not been reached by 2018, a rapid increase in the number of passengers and vehicles has already required additional ferries and trips in the summer period.

The full text of the Saaremaa and Hiiumaa ferry services analysis carried out by the National Audit Office can be downloaded here.

Saaremaa and Hiiumaa are also connected to the mainland by air. The audit office said the proposed Saaremaa road bridge does not alter the need for analysis of the ferry links. A variety of smaller carriers link many of Estonia's smaller islands to the mainland, often seasonally.

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Editor: Andrew Whyte

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