The Isle of Sark Albatross

The big story of this week is the publication of the Isle of Sark Shipping accounts.

Let us remind those readers not familiar with this fact that the company received a massive government bailout only a few years ago. The minutes of the 21 January 2009 meeting of Chief Pleas record Chief Pleas as approving a proposition to “capitalize” £335k of Chief Pleas loans to the company and extending a further £304k interest-free loan to the company. What does it mean for a 100% shareholder of a company to “capitalize” a loan to his own company? It means to write off the loan and issue oneself some more shares in the company, so that one remains a 100% shareholder. It is code for “bailout” just in the same way as “quantitative easing” is a codeword used by world governments for “money printing”.

Despite this humungous bailout, the company continues to bleed money and last week it announced the largest loss in its history, of £344k. This amounts to about £600 for every man, woman and child on Sark, or probably about £1500 for every working person living on Sark, an amount which will undoubtedly have to be footed by a further bailout by the Sark taxpayer.

To put this in perspective, the entire annual public sector budget on Sark is about £1 million, so the bailout will consume about one third of the entire government budget. 15 years ago, the entire government budget was £250k per year, so the scale of the bailout will dwarf the amount by which the entire Sark government went by not so long ago.

Chief Pleas’ claimed reserves are about £1.5 million, while the Sark Newsletter disputes these and estimates them to be at about half that. Whichever figures you work with, it is obvious that the IoSS will bankrupt both itself, and through the required ongoing and continuing bailouts, the island, within only a few short years.

In our view, this is an inevitable consequence of the 2008 reform law, which we predicted at the time in court documents arguing in favour of quashing that reform law. Prior to 2008, the island was run by the people who own the island and who were spending the taxes they themselves paid. Now the budget is run by people who are spending other people’s money. Unsurprisingly, the result is both a ballooning government budget, and a blowout of public funds on white elephant projects, like the gargantuan bailouts of the behemoth government monopoly that is the Isle of Sark Shipping Company Limited.

Why do we have a shipping monopoly? What is the purpose of preventing competition in the provision of this service?

There are the publicly stated reasons and the real reasons.

The publicly stated reasons are publicly stated, so we can recall them and analyze them. The real reasons are not stated and we can merely speculate about them.

The publicly stated reason to maintain the monopoly is that it “helps protect the lifeline service”. It is argued (questionably, in our view) that the market cannot sustain more than one player, that if there were to be more than one player, they would compete on price and drive each other out of business and into bankruptcy, endangering the “lifeline” service to the island. It is further argued that opening the market to competition has been tried before, and that precisely this was the result.

The reality is, the “lifeline” service is bankrupt anyway, and, because it is publicly owned, it is not merely bankrupting itself, but is taking the whole island down and into bankruptcy with it.

There is, in fact, no valid argument to support the assertion that a competitive market cannot work in providing the shipping service to Sark. There is nothing special about this market which does not apply to any other market.

The reality is that wherever there is a regulatory monopoly, prices soars, the quality of service suffers, and the customers lose out. Wherever there is a competitive market, prices fall, the quality of service improves, and customers benefit.

If a company providing the service goes bust, it is because it is poorly managed, not because of competition in the market. Where there is a monopoly, there is no incentive for the management to manage the company well. Indeed, where the company can expect to be bailed out by the government (as it can where it is a monopoly, particularly a government-owned monopoly), the situation is worse and there is “moral hazard”: there is every incentive for the management to not manage the company well. There is no better guarantee that the “lifeline” service will go bankrupt and fail than having a government monopoly with a guaranteed government bailout if things go poorly. And there is no better guarantee for the continuity of the provision of the “lifeline” service than a competitive marketplace.

If an open, competitive, marketplace has been tried before, and some of the suppliers went bust, it is not because competition in this market does not work. It is because those particular suppliers were poorly run. In a competitive market, poorly run companies sometimes go bust.

The IoSS regulatory monopoly causes a tremendous loss to the consumer, to tourists, and to Sark’s tourism and economy. IoSS has a monopoly not merely on the Guernsey – Sark route; it has a blanket monopoly for both all cargo and over-12 passenger services between Sark and anywhere. Yet, despite the fact that IoSS only bothers to provide a service to (the island of) Guernsey, nobody else is allowed to provide a service between Sark and anywhere else.

This author had a friend visit Sark recently and together we enjoyed the beautiful view of Herm and its beautiful beaches from the West coast of Sark. Herm is only a couple of miles away from Sark; if he was willing to dare the currents, a strong swimmer could probably swim there and back in a couple of hours. Yet, it is impossible to go on a day trip from Sark to Herm (or vice versa) because IoSS does not allow anyone to offer such a service. To travel to Herm, one must first go to Guernsey, which takes an hour, then travel on Herm Trident to Herm. The whole journey probably takes two hours one way, even though a direct boat trip could probably be done in 15 minutes or less. On the return route, this whole procedure has to be done in reverse. Because of IoSS timetables, it is impossible to make the return trip in one day, so one must stay in Guernsey overnight. In peak season, the total costs of this is probably about £150 per person, or £600 for a family of 4. Yet, if it weren’t for the IoSS monopoly, a direct route could probably be offered at less than £10 per person return.

We tried some years ago to set up, in conjunction with Herm Trident, a service where tourists could board Herm Trident to travel from Guernsey to Herm, spend a couple of hours there, and a 12-and-under operator would then take them from Herm to Sark, where they would spend some more time, and return back to Herm and then Guernsey in the evening. Everyone was keen to take part in this venture, except the 12-and-under operators on Sark who feared that IoSS would come down on them like a ton of bricks on the pretext of “threatening the lifeline service”. The whole offering could be provided at £15 return, which would have been a great boon to the tourist sector both on Herm but particularly on Sark.

Other operators have offered to set up a shipping service directly between Sark and France. This initiative, too, has been killed by IoSS due to their monopoly, yet IoSS themselves will not offer that service, killing yet another business initiative which would have been a great boon to Sark’s tourism industry and providing yet another nail in the coffin of Sark’s economy.

IoSS timetables do not mesh well with either incoming or outgoing flights of airlines operating to and from Guernsey airport, and the last boat, even in the summer, leaves Sark so early that no day tripper can stay on Sark for dinner (thus spending some money in Sark’s tourist establishments), nor even stay long enough on the island to have the time both to explore the island and to spend a leisurely lunch in one of Sark’s establishments. In addition, the cost of return fare is so exorbitantly high (nearly £28 per person at the time of writing) that in our view a great proportion of day trippers do not spend any money on a meal in Sark’s restaurants.

It is our opinion that IoSS could make much brisker business if they lowered their fares and attracted a much higher volume of passegners, shed some staff (Herm Trident manages to ferry a greater volume of passengers with many fewer staff and at much lower cost — by any metric you choose, whether total cost, cost per mile travelled etc. — to Herm) and got rid of at least two boats. Sark’s tourism industry would benefit as a result.

Of course, the IoSS management no doubt disagrees with us. They are in our opinion manifestly wrong, and incompetent and in our view their latest accounts and their need for past (and we believe, future) bailouts prove this beyond all doubt. But we are not arguing with them — they are the management of IoSS and they can run the company as they (and their shareholders) see fit. We are instead willing to put our money where our mouth is and set up and finance a competitive service and run it by our principles. Yet, we are not allowed to do so because the “lifeline” has a regulatory monopoly.

It is the view of this author that the IoSS is not a lifeline but a millstone, an albatross, around Sark’s neck, which is well on its way to bankrupting the island. The monopoly – and the real reason for its existence – is in our view merely as a tool for providing cushy jobs for cronies of those who are really in charge of the company, paid for by the taxpayers.

It is the Sark equivalent of “too big to fail” crony banks of large countries, and it will bankrupt the island just as effectively as those “too big to fail” banks have bankrupted their own countries.

And who really controls the IoSS?

Well, put it this way. It is the Seigneur, the Treasurer and the Prevot, who, Chief Pleas minutes say, are the “nominees” for someone — be it the Chief Pleas, or the people of Sark. Yet, these “nominees” held the annual meeting of the company several weeks ago, and well before those they are supposedly nominees for will have a chance to give them their directions as to what shareholder propositions to propose at the public meeting this evening.

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