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Submission to the Audit Committee

31-10-2009

Submission by the Cairngorms Campaign
On
Audit Scotland's Report on the Development of an All Year Round Visitor Attraction on Cairn Gorm by HIE
To
The Public Audit Committee of the Scottish Parliament

The Cairngorms Campaign is a voluntary organisation devoted to the sound, sustainable management of the Cairngorms including the Cairngorms National Park, with a membership of some 400 people spread across the UK. Its members and management committee include many hillwalkers, mountaineers, wildlife experts and others with a long and broad knowledge of the Cairngorms and a long experience of the development of downhill skiing and other recreations in the northern Cairngorms and also of mountain management and the management of protected areas including National Parks in many parts of the world.

Main Points
The committee should be under no illusion as to the seriousness of the situation regarding the implications of the Funicular Railway and associated developments on Cairn Gorm and the need for a action on the issue.

Specifically:-

1) All hope of a return to the taxpayer from some £25m or more of public investment has to be abandoned.
2) Despite massive and continuing financial support from public funds, and after all economies have been made, the operating company, continues to make losses ranging from £1/4m to over £1m per year.
3) Since the company is now under full public ownership, this loss must be borne by the taxpayer as long as the company operates.
4) The company faces an eroding customer base as climate change undermines the downhill skiing market through loss of snow cover and hence likely increasing losses.
5) There is no effective provision for the costs of the eventual decommissioning of the structures, initially estimated at £30m-£50m, which must also be borne by the taxpayer.
6) Effectively, these costs result in continuing loss of employment opportunities as the costs must be met from HIE’s limited investment budget, thus reducing funds available for investment elsewhere in the Highlands and Islands.
7) The options now open to HIE are limited:-

7.1 Find a business model that will make the operation solvent and cover public costs of running the estate etc, provide a return on public investment, and fund eventual decommissioning. The figures and the situation make it clear there is no potential business model available to meet any of these requirements. It is no longer a realistic option!

7.2 The taxpayer fund annual and increasing operating losses and an eventual massive decommissioning bill. This involves major diversion of HIE’s investment funding from other potential job creation schemes.

7.3 Close the operation now, pay for decommissioning etc an refund the European Unions £2.6m

The Campaign believes that the financial and, not least, the political costs to HIE in choosing between these options are so great that it is beyond the capacity of HIE to resolve this situation rationally. As stated later in our submission, “The situation on Cairn Gorm, where closing the system would involve large refunds to the European Union, massive costs of restoration and decommissioning, and huge political damage to HIE threatens to drive a process of long term public funding of a business that simply cannot be made profitable.”

8) The Campaign therefore strongly urges the Audit Committee to instruct Audit Scotland to make a more thorough investigation into this situation and/or to refer the issue to such other parliamentary committee(s) that could deal with it.

We believe Audit Scotland’s report is an inadequate assessment of the situation surrounding the construction of visitor facilities on Cairn Gorm in terms of the scope of the definition of the project, necessary considerations when constructing such facilities in a protected vulnerable mountain area, decommissioning, assessment of the declining situation during planning and construction, arithmetic errors in analysis, assessment of value to the taxpayer and, most importantly, in consideration of possible future options. We strongly recommend that Audit Scotland be instructed to revise their report including its analysis, assessment of value for money and recommendations for future actions.

Scope of the Audit Scotland’s Report
Para 9 of the report states that HIE’s strategy for regenerating tourism in Badenoch and Strathspey was:-

“HIE developed a strategy for regenerating the area that included modernising the facilities at Cairngorm through the funicular investment, the creation of the Cairngorm National Park and the redevelopment of Aviemore.”

The statement “modernising the facilities at Cairngorm” reflects the scope of Audit Scotland’s report, confining it to the physical construction of the funicular and associated buildings etc. But this is an inadequate scope. These facilities were simply a means to an end. HIE’s aim was the establishment of a year round, financially self sustaining visitor attraction on Cairn Gorm that could pay rent to cover a substantial part of HIE’s annual cost of managing its Cairngorm Estate (£105,000/yr) and a return to the taxpayer on the large investment of taxpayers’ money in the structures. Given that none of the proposed benefits of the project could be delivered unless this was achieved, and that government policy clearly demands that development must be SUSTAINABLE, financially and otherwise, no other overall aim would have been rationale and no narrower scope of the audit realistic!

By confining its focus to physical construction, Audit Scotland omits major costs. These include:-

1) Loss of £1m ratepayers’/taxpayers money when the £1m loan from Highland Council (paras 88 and 98) was bought by HIE for £1.
2) Cost of purchasing security over the assets (CML had a £3.5m overdraft) for an undisclosed sum estimated at £1.5-£2.1m (para 95)
3) Loss of rent when that reduced from £513,000 to £100,000 (para 93) and conversion of unpaid rent of £585,000 to a loan to the company and which was not repaid.
4)  Contributions by HIE of £760,000 to the company as working capital, and a further £774,000 between 1997 and June 2009 of £774,000 for consultancy and other work (para 100).

This would total some further £4.6- £5m not counting unpaid rent intended as a return on taxpayers’ investment of some £24m. It does not include continuing annual operating losses of upwards of £250,000/yr that must be borne by HIE and hence the taxpayer, since it took over the company to preserve it from bankruptcy. The Report says (para 13) that the total cost of the project since 2001 is £26.75 of which £23m is public (86% of the above).  Even adding up known public costs for construction of £19.54m, £3.5m for purchase of standing buildings, and £1m from Highland Council to complete the visitor centre (total £24.04m), this statement seems inaccurate but adding other support in 4) above brings it to £25.57m!

These figures have major implications for the cost/benefit analysis within the audit!

Assessment of the Project Against Known Principles of Mountain Management, Particularly within Protected Areas such as National Parks.

It was particularly important that the project be assessed against both accepted planning Principles and the known and well established Principles of mountain management, especially within an area of high environmental, recreational, and scientific value known to be highly vulnerable to human impact. Including provision for decommissioning of structures, particularly financial costs, has been conventional in planning for many years. All windfarms for example have financial provision for decommissioning built into their planning permission. Since HIE, as part of its wider strategy, as the report (para 9) points out, was trying to have the area established as a National Park, decommissioning should have had a high priority in its planning to safeguard the landscape of Scotland’s national park. Initially, the Section 50 governing planning consent given by Highland Council contained such provision and this was a significant part of the defense offered during the judicial review of the proposal. At a later date this was removed from the Section 50.

Para 31of the report states that “HIE’s approach to project appraisal has evolved since 1997 and the appraisal process now requires an exit strategy and consideration of the level of contingency within the costs.” This ignores the fact that the national skiing guidance, issued in June 1997, set the need to restore the land and dismantle the facilities if skiing ceased as condition of planning but there is no reference to this in the business case despite the fact that the operator of the facility, CML, was responsible for reinstating the land when the funicular ceased operating and, as the landlord, HIE became responsible if CML was unable to meet this obligation.

The Report says in para 105 that the eventual removal costs were estimated in 2007 to amount to "£30-50m" but that "the figures are speculative and no work has been been undertaken to provide realistic estimates".  In fact these costs should have been included in the original assessment (Report para 34, column 2). This would however have shown that the funicular was totally unviable as it would have been necessary to provide some £1m annually over the life of the project for a sinking fund to meet this eventual liability.  A gondola would have had to be preferred as the removal costs would be much lower.   It is unsatisfactory that the Report does not deal with this as it overshadows the whole of the project’s future financial prospects and hence cost to the taxpayer and any audit of costings and or cost benefit analysis of the project is quite unrealistic without them! 

An unexamined aspect of decommissioning in this case is the physical feasibility of doing it. The amounts of concrete in place are immense. Building in such a sensitive environment proved so difficult it added greatly to cost but in fact removing it could prove even more technically and ecologically difficult.

 

Delivered Benefits
The analysis of delivered benefits by Audit Scotland seems almost perfunctory in its lack of rigour. The number of jobs created by public investment is a core deliverable. Audit Scotland conclude that "Consultants report that the funicular has delivered the anticipated employment and wider benefits to the Strathspey area" (Key Message No 4). This is not what the consultants reported. They concluded that the overall employment impact of the funicular in the HIE area was a REDUCTION of 49 full time equivalents between 2002 and 2005/06.  (ref - Cairngorm Mountain - Economic Impact Evaluation, A Report for HIE Inverness and East Highland, by Brian Burns Associates and Steve Westbrook – (Also as analysed in the Economist of July 2006)

The investment comes from HIE’s limited funding which can be used to create jobs in any part of the Highlands and Islands. If cost per job created on Cairn Gorm exceeds that per job if the same funds were invested in other parts of the Highlands and Islands, then there is an overall loss of employment, not a gain. A key issue that Audit Scotland should have addressed is the public cost per job created. Exhibit 6, at the foot of page 22 states that the net grant equivalent cost per job was £11,000 but there is no analysis demonstrating the validity of this claim and, even on the face of it, if the project cost the public sector just the claimed £23m and there are 174.5 jobs, then the average cost to the public per job is about £131,457, far in excess of what was envisaged. Audit Scotland must address this issue.

Among the direct benefits to CML, the operating company, assessed in Exhibit 11, are that it would become less reliant on winter income, increase the capacity for skiers, and reduce queuing at times of peak demand (for skiing). These last two claims are based on a misunderstanding of the situation on Cairn Gorm. Downhill skiing is essentially a cyclical movement of uphill on lifts and downhill on snowslopes (pistes). Capacity for skiers on Cairn Gorm is limited basically by piste capacity and, on a day-to-day basis, by snow cover, not uplift capacity. Increasing uplift capacity by a funicular railway does not alter piste capacity. It simply moves queues from the bottom of the piste slopes to the top and has no impact on overall queuing times during peak demands. Whether attracting summer visitors makes CML less reliant on winter income depends on the success of the winter operation. In recent years for example, the Nevis Range operation at Fort William has received less than 10% of its income from winter activities and runs the winter operation at a loss simply to retain year round staff as it is almost impossible to run such an operation on seasonal, and hence less skilled and experienced staff. It is thus now more dependent on that winter operation to remain viable.

Further claims to have helped strengthen the economic base of the area encouraged others to invest in the area and are made in Exhibit 11 but largely unproven. It is unlikely that Aviemore Highland Resort for example, would have gone ahead with its £80m development in Aviemore, while taking over the Aviemore Centre with an accumulated debt of almost £60m, if the presence of a single visitor attraction and its viability were a significant influence on its decision.

Is There Any Alternative Viable Business Model for the Future of the Visitor Attraction on Cairn Gorm?

Whatever errors may have been made in the past, the key issue now is what should and can be done? Audit Scotland’s original project brief said its investigation would look into the future prospects for the funicular, in the light of the HIE rescue of Cairngorm Mountain Limited (CML) in May 2008.  However, there is practically nothing about this in the Report apart from the statements in paras 101-106 about HIE trying to work something out with consultants by the end of 2009.

Downhill skiing in Scotland has always been a marginal activity, highly dependent on variable weather conditions. Para 34 of the report accurately states that use of ski resorts in Scotland had peaked in 1988 at 654,000 skier days, with 60 per cent (391,000) of these at Cairngorm. However, by 1997, the Scottish figure had fallen to 272,000, with 96,500 (35 per cent) at Cairngorm (Exhibit 4, page 8) – a massive reduction of 75% at Cairngorm! As acknowledged in the report, 
“The Climate Change Impact Reviews Group concluded in March 1996 that ‘the viability of the Scottish ski industry was at risk from less snow and less certainty of snow at critical holiday period.”  This trend, driven by climate change, is likely to continue and make a viable business model even more difficult to achieve. The report also does not consider the steadily declining numbers of summer visitor numbers using the chairlift in the years prior to the construction of the funicular.

Given the apparent misunderstanding regarding the numbers of summer visitor numbers in the report, tackled by other commentators, and which strongly indicate that the number of summer visitor numbers achieved is not 165,000/yr but averages 113.949 over the 5 years, or 51,051 (one-third) less than the 165,000 forecast a serious question arises!

 

In the circumstances on Cairn Gorm, is there any business model that can raise to profitability an operation that, despite massive public and ongoing subsidy regularly turns in losses of £250,000 to £1m per year and faces a declining customer base?

The Audit Scotland report must address this key issue! It is indicative of the seriousness of the situation that facilities and buildings that it cost the taxpayer at least £24m to construct or acquire are now valued at only £232,000! There are real future dangers in the situation. Dr Friz Schwarzenbach, till recently Europe’s foremost problem analyst as well as an expert on Alpine tourism development, pointed out worrying aspects of how these problems develop. Tourism development, he points out, shows similar features to that found sometimes in natural ecosystems. There, self-accelerating cycles that can propel development either in growing or shrinking spirals. Looking at the analysis of tourism development in a range of Swiss mountain regions including Davos, Sass-Fe and Zermatt, he states, “The analyses show that the growth stages of tourist development are characterised by a stereotyped pattern of numerous expansive spirals which stimulate each other to the point they drag the development into a runaway phase accompanied by substantial risks.” He adds, “The longer this goes on, the worse the disadvantages get and these are warning signals including the growing danger the whole system may be overturned. “ We might tag them as “vicious circles” where each stage of development drives the next. Schwarzenbach points out that they behave as if they were obeying internal laws and, once set in motion, are difficult to limit or control. The situation is further described in Annex 1. The situation on Cairn Gorm, where closing the system would involve large refunds to the European Union, massive costs of restoration and decommissioning, and huge political damage to HIE threatens to drive a process of long term public funding of a business that simply cannot be made profitable.

For these reasons, Audit Scotland must look seriously at possible alternative business models for the operation and the implications of lack of any such model!

R Drennan Watson SDH, BSC(Hons), DIC, OBE
Convenor, Cairngorms Campaign
28 October 2009

 

 

 

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