and here is the letter that was send to Bob Goldfield,
the head of DHB
please be aware that this is a big letter:
10 March 2010
Dear Bob
As the three major customers of Dover Harbour Board, we feel compelled to write to you to express our profound disagreement with (a) the plans for the cash fund built up from the excess dues charged to us over the last few years and (b) the pricing path for 2010 to 2012, both of which were communicated to us at our meeting on 18 February 2010.
Cash Fund
As confirmed by you at our meeting, DHB is currently holding a cash fund of c£60m. This cash fund has been built up from dues paid by us over the last three years at circa £20m per annum and is equivalent to one third of total port revenue and 50% of ferry income per annum for that period.
These dues were imposed on us, despite very strong objections from all operators, on the expressly stated understanding that they were to pre-fund the construction of Terminal 2. This intention had been frequently made clear in meetings between DHB management and the operators. It was also confirmed that this had been DHB's intention by Mike Krayenbrink at our recent meeting.
Now that privatisation plans have been announced, we discover that there is no obligation on the new owner to build Terminal 2. This change of plan would be palatable if, as a result, tariffs were to return to a lower base going forward from 2010 and the cash fund built to pre-fund Terminal 2 was to be returned to the operators by means of a rebate.
However, this is not the case. It was explained by DHB at the meeting that
(i) £30m of this fund was now earmarked for funding DHB's pension deficit (to prepare the port for privatisation); and (ii) the other £30m was to be spent on Terminal 1 development, based on a hastily drawn up schedule of works not yet fully costed or agreed with the operators.
Moreover, significant tariff increases are proposed for 2010, 2011 and 2012 (discussed below), the justification for which, quite incredibly, is building new cash reserves to pre-fund Terminal 2, to replace those that are now to be spent. As your customers, we feel totally misled.
With respect to expenditure (i), it is not acceptable or permissible that funds built up from excess dues charged to the operators to pre-fund Terminal 2 should now be used to pay a very significant amount into the DHB pension fund. We must query the basis for the calculation of this pension fund deficit and whether it is reasonable or necessary now to fully fund it, given that deficit payments are normally paid over many years.
This funding appears designed simply to enable a smooth privatisation process. As such it is a direct cost of the privatisation and should be paid for from the funds raised in the privatisation process.
With respect to expenditure (ii), the data provided at the meeting on the capital plan was limited and unsatisfactory. It appears to us to be no more than an excuse for spending cash reserves as fast as possible, to present the port undertaking in a more favourable commercial light to potential purchasers and to justify yet further price hikes to build up new cash reserves.
Price Path
We cannot accept your tariff for 2010 nor your tariffs as now proposed for both 2011 and 2012. The 2010 tariff sees an increase in the revenues you will receive from the operators as compared to what we paid you during 2009. This is despite you enjoying, in addition to the £60m cash fund, a significant £4.3rn reduction on your cost base as a result of you transferring all your ILO responsibilities to us.
Although we each received a rebate in 2009 to reflect our proportion of the savings on your cost base, your 2010 pricing makes no attempt to reflect this significant saving (achieved of course by increasing the cost base of the operators), and actually shows an increase in the revenues that you will receive. Moreover, the circulated price path for 2011 and 2012 sees substantial increases in the tariff. Inclusive of the impact of ILO, we calculate that 2012 represents a c35% increase in the tariffs that the operators would be expected to pay DHB as compared to 2009.
In any economic environment, this would be unacceptable, but in the current environment, which has induced other ports to either hold or indeed reduce their rates on 2009, we feel that this is an abuse of the dominant position that the Port of Dover enjoys and an unwarranted exploitation of the port users.
At the meeting, you attempted to justify the proposed price path for 2010 to 2012 on the basis that this level of tariff is required if privatisation does NOT go ahead. Without privatisation, you explained, you must continue to build up cash reserves to fund Terminal 2, as no borrowing would be available to you.
However, this strategy of planning on a non-privatisation basis is contradicted by the stated aim of spending all current cash reserves to prepare for privatisation.
It is yet further confused by the fact that the 2010 to 2012 price path is to be put in the prospectus for the privatisation of the port and hence used by potential bidders to value the port on a privatised basis. Given that (a) the building of Terminal 2 is not compulsory for a new owner and (b) if such owner decides to go ahead with the project, it would be financed on the basis of private sector borrowing, the inclusion in the price path of this premium to pre-fund Terminal 2 is in our view incomprehensible, illogical and without justification.
The relationship between DHB and its three major customers is in a severely damaged and untenable state. In order to try to move to a more workable and acceptable position, we ask for the following:
1. For information to be provided to all operators now by DHB on proposed capital expenditure on a project by project basis. This will enable us to have a full understanding of what DHB believes to be required in Terminal 1.
This would be followed by full consultation with the operators on each project prior to it being committed to, to establish the needs of the operators and whether the proposed expenditure is necessary.
2. An assurance that DHB make no injections into their pension fund in 2010 except for the £905,000 payment that was agreed with the Pension Trustees in 2008 and stipulated within the Schedule of Deficit Contribution. Additionally, we request full details of the current size of the pension deficit.
3. An undertaking from DHB to all operators that the cash reserves built up by DHB will not be used for the funding of the pension deficit until the issues raised by the operators with respect to these cash reserves have been resolved.
4. Any expenditure of the cash reserves to take place only after full consultation with and agreement with the operators.
5. A new price path for 2010 to 2012 to be drawn up and agreed with the operators based on the ongoing activities and conservancy of the port. This price path will not include any premium to pre-fund future capital expenditure, such as Terminal 2, that is not set out in an agreed capital expenditure plan. We would expect this to show decreases of c30% on the current price path circulated.
We must ask for a constructive response to this letter within five working days. If we do not receive such a response, we will consider taking appropriate legal action and without further notice to you.
Meanwhile, please note that we have lodged representations in relation to your Terminal 2 HRO application, on the basis that, whilst we are supportive of the development of the port, we need to reserve our position in relation to the application and have concerns in particular as to the basis for its funding, as to the projected development programme and as to how the application may be taken forward.
Yours sincerely
Helen Deeble, chief executive officer P&O Ferries
Robin Wilkins, managing director SeaFrance Limited
Andreas Teschl, route director Norfolkline
