Publicly subsidised state-owned ferry operator, CalMac, has admitted there is a material uncertainty over its future as a going concern because of questions remaining over whether it will continue to run lifeline island services.

The Scottish Government's preferred option to provide an uncontested direct public contract to CalMac, the ferry operator it owns, to run the ageing ferry fleet without going through a competitive tendering process has been opposed by its community board and no decision has yet been taken by ministers.

It comes as the state-controlled company that owns ferry operator CalMac, which provides lifeline services to Scotland's islands, has made a profit of £18.6m - after receiving a £165.424m public subsidy from the Scottish Government.

It is understood that no money was returned to the Scottish Government as it said that no dividends on the profits for the year to March 31, 2023 by David MacBrayne Limited will be made. In 2022/23, DML made a loss of £3.71m.

CalMac's current £975m eight-year Clyde and Hebrides Ferry Services (CHFS) contract expires in September 2024.

It had previously won the contract for six years in 2007 – after ministers were forced to tender for routes to satisfy European competition rules.

The Scottish Government has said that a direct award with no contest from other potential bidders is the preferred option – closing the door on opening routes up to private operators.

A final decision after a due diligence process - to establish the feasibility of that approach from a financial, operational and legal perspective – is expected in the summer.

It is thought that a direct award can only be legally done through what is called a Teckal arrangement which is seen as a way to avoid what some would see as unlawful state aid.

The exemption removes the legal obligation on a public authority to tender public contracts when it can be proven that the public authority can provide the services itself, subject to certain ‘control’ and tests.

The Ferries Community Board, formed as part of CalMac's franchise bid for the CHFS  contract to be the voice of the communities, is opposed to the direct contract move.

It says that to gain community support for a long term directly awarded contract, they would need to see "significant change in the structure organisation and culture of the management and operation of the ferry services".

The Herald: CalMac ferry

Independent auditors for CalMac's parent company David MacBrayne Limited said that directors had highlighted that its ability to continue as a going concern was dependent on the continuation of the lifeline services contract which is due to expire in September.

"These events and conditions, along with the other matters.... constitute a material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern," says the analysis from chartered accountants KPMG.

The DML board has that its latest annual financial analysis was prepared on a "going concern basis".

But it pointed out that a due diligence process was launched to establish the feasibility of a direct award to CalMac with a final decision not expected till the summer.

It has said its 'going concern'  belief is based on the assumption that the CHFS contract will be awarded directly to the company from October 1. "While the directors are confident that the contract will be extended or renewed under a direct award, this is outwith their control. Should the contract not be renewed then the company’s core trading activity would cease," the board has said.

Read more from Martin Williams on Scotland's 'Ferry fiasco':

"Taking these factors into consideration the directors believe that it remains appropriate to prepare the financial statements on a going concern basis. However, the renewal of the... contract represents a material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern and, therefore, to continue realising its assets and discharging its liabilities for a period of at least 12 months from the date of approval of the financial statements."

DML say that CalMac hold the risk on all other expenditure including fleet maintenance and delivery of services.

They say the increasing average age of the fleet, the volume and quantum of technical issues, was "driving significant increases in vessel maintenance costs" and is resulting in the level of its income being "insufficient to cover the costs to deliver ferry services".

The CalMac owner is therefore forecasting future "financial losses.

CalMac spent £36.5m on maintenance and its annual overhaul programme.

The ferry operator said that with one third of vessels now over 30 years old and operating beyond their life expectancy, the spend has been "essential" to provide a lifeline service to island communities and is up from £20m in 2017.

The Herald: Robbie Drummond of CalMac

CalMac said that the Scottish Government agency Transport Scotland and state-owned ferry and port operator Caledonian Maritime Assets Ltd also contributed funding to support maintaining the fleet.

CMAL invested £7.5m in 2023 up £2m from the previous year. Transport Scotland confirmed an additional grant of up to £11.1m to be received during 2023/24 to support "emergent vessel resilience and obsolescence costs".

Robbie Drummond, CalMac’s chief executive, said: “CalMac has been operating in extremely challenging conditions in recent years. However, we have been doing everything in our power to provide a lifeline service to the communities we serve and that is why we are investing in maintenance at record levels."

The annual report of CalMac's parent company said that the profit posted was due to its decision to sell its 50% state in port operator and developer Solent Gateway Ltd to Associated British Ports, which raised £22.4m.

But it said that there had been a rise in losses over its operations from £991,000 to £4.949m CalMac said its "determination to provide a reliable ferry service" was demonstrated through its spend on maintenance - which has doubled in six years.

A DML spokesman said that the profits that were generated in the year would be "retained within the company balance sheet reserves".

DML's subsidy from the Scottish Government rose by £15.403m in a year from £150.021m.

European Union state aid rules and guidelines still have a huge influence on the how ferry services were paid for in Scotland.

Teckal was developed through EU case law to allow contracting authorities to award a contract to a supplier without the recourse to a regulated procurement procedure.

Before CalMac was awarded the current contract in 2016, the RMT union’s legal advice, provided by a European procurement law specialist, is that the exemption could be applied to Scottish ferry contracts tendered by the Scottish Government.

The QC for the RMT said that the rules leave the authority able to supply goods and services by itself and therefore not have to seek a tender.

Gordon Nardell said that where the authority makes that supply through a body that is legally distinct but which is sufficiently under its control and does not act as a market player in its own right – EU law as laid down in Teckal treats that as "tantamount to the authority supplying the service itself".