Briefing report on the purchase of amphibious vessels
for use on the West Park to Elizabeth Castle route
June 2008
JERSEY HERITAGE
REPORT ON ACQUISITION OF AMPHIBIOUS SERVICE TO ELIZABETH CASTLE
COVER NOTE – JUNE 2008
The attached report was prepared as a record of the background to the purchase of the amphibious service to Elizabeth Castle by Jersey Heritage in spring 2008. The report is presented to the Minister for Education, Sport and Culture for distribution to States Members. In publishing this report the Board of Trustees of Jersey Heritage offers the following summary of the main points covered.
A - SUMMARY OF NARRATIVE
1 1997 BEAVER LANDING CRAFT SELL VESSELS TO PUDDLEDUCKS
- Jersey Heritage considers and rejects purchase and direct operation
- Vessels sold to Puddleducks Ltd in 1998
- Puddleducks operate service on fare charging basis but viability declines
2 2004 PUDDLEDUCKS LICENCE EXPIRES - OFFERED NEW CONTRACT BUT DECLINED
- Jersey Heritage offers a renewed contract for nine years, but Puddleducks decline, citing concern over long term decline in visitors – (NB visitors in 1989 were 150,000 – by 2006, last year of Puddleducks operation were 41,000)
- The business had become marginal to operate. It had become unviable for any new operator to make a new investment in the business
- This is confirmed in December 2006 when Puddleducks write to the Board: ‘should trustees see fit to offer the route to a third party operator it will leave the directors of Puddleducks with very little to show for the nine years of committed service except for three vehicles, a kiosk, a workshop and some unpaid directors loans’
3 2006 PUDDLEDUCKS DECIDE TO SELL
- Puddleducks write to Jersey Heritage to say ‘The Board of Directors of Puddleducks Ltd has decided that this company no longer factors in the general corporate strategy and therefore we have decided to make a disposal. Currently we are exploring two options. The first is to sell the vehicles off the Island to one of the many operators around the world that would operate this type of vehicle and the second alternative is a local sale’
- Jersey Heritage considers once again the option to purchase. The Board consider that on balance the appropriate first option was to seek an alternative independent operator who would make a contractual commitment
4 2006 JERSEY HERITAGE TENDER SERVICE
- Jersey Heritage advertise the licence jointly with the Puddleducks’ notice of sale and issue a joint press release in order to give maximum opportunity to associate the route with the existing operation/vessels
- Following discussion with Puddleducks about the economics of the route, their views on viability and in the light of analysis of Puddleducks’ accounts, Jersey Heritage makes changes to the business model under which the route is to be operated in order to encourage new applicants for the service. This enables the operator to invest in the vessels and enables Jersey Heritage to achieve control over prices for the first time
- Puddleducks are made aware of this offer and did not apply under these new terms
5 2006 PURE ADVENTURE WIN OPEN TENDER
- There are only two serious tenders. One to be provided with Puddleducks’ vessels and Pure Adventure’s to operate with new vessels
- Pure Adventure are preferred because a) they are cheaper b) the new vessels offer an upgrade and capabilities not achievable by the existing service (e.g. operation on the roads) and c) unlike the alternative operator the company are already involved in a marine based customer service business
6 2007 PURE ADVENTURE OFFER TO BUY PUDDLEDUCKS
- In January Puddleducks write to Jersey Heritage that ‘We would not be prepared to [make our vessels available for the season] just as cover for later delivery but we would be prepared to enter into negotiation with anybody who wishes to purchase our vehicles’
- Pure Adventure have the Puddleducks vessels valued independently and offered £50,000 - £8,000 above the valuation. This offer was declined. In further negotiations Pure and Puddleducks fail to agree a price
- Puddleducks change their earlier position and offer to operate a temporary service for the summer. This offer was considered but rejected by Jersey Heritage on the grounds that it would complicate the contractual position with Pure Adventure
7 2007 PURE ADVENTURE OPERATE TEMPORARY SERVICE
- The problems experienced by Pure Adventure in operating the service during the 2007 season are well documented. Elizabeth Castle experiences a decline in visitors of 17%
- These losses are taken account of in the recent severance agreement between Pure Adventure and Jersey Heritage in which Pure are penalised
- During this difficult period Jersey Heritage becomes increasingly involved in the operation
8 2007 JERSEY HERITAGE DECIDE TO BUY OPERATION
- At the end of the 2007 season Jersey Heritage reviews contract and reaches conclusion that it makes sense to seek to purchase the operation
- At this point Jersey Heritage remains in contract with Pure Adventure and carries the consequent legal and financial obligations
- The costs of the deal include a £121,000 sum representing an agreed position on the price of the contract. This figure is referred to as ‘goodwill’ but is simply the price agreed with Pure for them to relinquish their remaining contractual entitlements
- Prior to purchase Jersey Heritage engages MECAL, Jersey Harbours’ agent for survey and certification of commercial vessels, to confirm suitability of vessels
B – SUMMARY ISSUES
- Jersey Heritage wished to, and actively sought to, retain the services of Puddleducks on the Elizabeth Castle route
- Jersey Heritage acted openly and fairly in tendering the service and awarding the contract
- The new financial model for the basis of the contract was sound
- The vessels are safe and appropriate to the route
- The business case for the purchase of the service was sound
- In finally purchasing the vessels the Board made the decision based on all best available evidence and on appropriate professional advice
- Jersey Heritage are confident in being the most appropriate and cost effective operator of the service at this time
CONTENTS
0. Introduction
1. 1994 – 2003: background and obligation of Jersey Heritage to maintain a passenger service to Elizabeth Castle
2. 2004 – 2006: Puddleducks Limited decision not to renew contract – and Jersey Heritage decision allow Puddleducks Limited to continue operating without a contract
3. June 2006: Puddleducks Limited decision to cease operation – and Jersey Heritage decision to tender service
4. Jersey Heritage decision to change the nature of the contract
5. September – December 2006: tendering and appointment process
6. December 2006. The decision to award the contract to Pure Adventure Jersey Limited
7. February – October 2007: the decision to remain with Pure Adventure Jersey Limited throughout the 2007 season
8. Jersey Heritage administration of the contract
9. December 2007: proposal for revised contract
10. February 2008; the decision to sever the contract and buy the vessels
11. Viability of the vessels
12. Conclusion
APPENDICES
1. Two letters from Jonathan Segal (a Director of Puddleducks Limited) to Jersey Heritage dated 30 June 2006 and 6 September 2006.
2. Email from Brian Tanguy (a Director of Puddleducks Limited) to Jersey Heritage - December 2006.
3. Elizabeth Castle pricing structure 2006.
4. Indicative contract between Jersey Heritage and “the operator”.
5. Signed contract between Jersey Heritage and Pure Adventure dated 21 December 2006.
6. Letter from Jersey Heritage to the Ministers of Education, Sport and Culture and Economic Development dated 26 January 2007.
7. Letter from Pure Adventure to Jersey Heritage dated 28 March 2007.
8. Letter from O’Flaherty & Co (Pure Adventure’s accountant) to Jersey Heritage dated 10 August 2007.
9. Letter from O’Flaherty & Co to Jersey Heritage dated 18 October 2007.
10. Email from Ogier (Jersey Heritage’s legal adviser) to Jersey Heritage dated 3 January 2008.
11. Service acquisition costs – 2008.
12. MECAL report of condition re Charming Nancy and Charming Betty vessels – April 2008.
13. Letter from C-MAC Industries Limited (Sean Power, Managing Director) to Jersey Heritage (Michael Day, Director of Jersey Museums Service) dated 27 February 1994.
0. Introduction
The reasons for the decision by Jersey Heritage to purchase the two newly manufactured Hydra Terra Vessels can only be understood in the context of a full chronology of the commercial decisions and judgments that the Board of Trustees has been required to make.
In determining whether the investment represents value for money, there are two major considerations:
- That the Board made the right decision based on all the best evidence available at the time.
- That the vessels will remain economically viable for the estimated useful life of 10 years or more.
In this report the chronology of events is presented as background to each key decision made by the Board of Trustees.
In concluding this report Jersey Heritage puts forward the arguments it believes strongly support the decision not only to buy the vessels, but also to operate the service itself for the public benefit.
1. 1994 – 2003: background and obligations of Jersey Heritage to maintain a passenger service to Elizabeth Castle
Although Jersey Heritage took over the management of Elizabeth Castle only in 1994, it had some earlier involvement in developing the licence which established the terms under which the owner of amphibious vessels, at that time Beaver Landing Craft Ltd, would operate a service for visitors to Elizabeth Castle. A nine-year agreement between Jersey Heritage and Beaver Landing Craft Ltd was signed for the start of 1994 season.
The Licence required Beaver Landing Craft Ltd, to provide a continuous service from 10 am to 6 pm from the start of each April to the end of each October. In return the operator had the exclusive right to disembark passengers at Elizabeth Castle slipway and was able to charge passengers a fare that was agreed annually with Jersey Heritage.
In 1996 Jersey Heritage took on the usufruct of both Elizabeth and Mont Orgueil Castles. Under the terms of the usufruct Jersey Heritage has certain obligations one of which relates to the amphibious service:
“The Trust shall use its best endeavours to cause an appropriate passenger transport service to Elizabeth Castle to be maintained” (Paragraph 3.07)
In 1997 the vessels were offered for sale to Jersey Heritage for a sum in the region of £250,000 but, following a report questioning the economic value of the vessels, this offer was declined. A sale did proceed for a sum in excess of £350,000 but to a private company, Puddleducks Ltd, newly formed for the purpose by a consortium of local businessmen. The licence was assigned to Puddleducks Ltd in 1998.
Puddleducks Ltd provided an excellent service and was very proactive in promoting Elizabeth Castle. During that time Jersey Heritage worked closely with the operator to develop joint marketing and promotion of both the Castle and the amphibious service.
Due to the long term decline in visitor numbers, (visitors to the castle fell from 150,000 in 1989 to 41,000 in 2006 the final year of Puddleducks Limited operation) and the consequent declining viability of the service, the operator sought annual and above cost-of-living increases in fares in accordance with the terms of the licence. Jersey Heritage agreed all such requests, but it should be noted that visitors to Elizabeth Castles declined faster than the average rate of visitor decline in Jersey
2. 2004 – 2006: The decision to allow Puddleducks Limited to continue operating
At the end of 2003 the licence held by Puddleducks Limited expired. Consequently, in early 2004 Jersey Heritage offered to renew the agreement for a further nine-year period, on similar terms. Puddleducks Ltd declined the offer. The reasons cited at the time were that the company’s revenue had been in steady decline, as visitor numbers to the Castle fell and, added to this, the operator’s costs were increasing due to stricter marine regulations.
One Puddleducks Limited director indicated that the vessels could be sold off the Island where, outside of Jersey’s tightly regulated environment, their value could be fully realised. This consideration apparently far outweighed any residual value that might remain in renewing the agreement.
Key decision
The Jersey Heritage Board had two choices in early 2004:
- Offer to subsidise the service
- Give more time to Puddleducks Limited to find a buyer for the vessels locally
Jersey Heritage considered offering a subsidy. However Jersey Heritage was already under severe financial pressure and was contemplating major cuts in services in order to balance its budget. A subsidy would only exacerbate these difficulties.
Discussions with Puddleducks Limited did not progress any further and they continued to provide a service throughout the 2004, 2005 and 2006 seasons, without any formal documentation.
It should be stressed that Jersey Heritage was content with this informal, although less than ideal, arrangement because the service provided by Puddleducks Limited worked well and enabled Jersey Heritage to fulfil its obligations under the usufruct and meet the expectations of the public.
3. June 2006: Puddleducks decision to cease operation – and Jersey Heritage decision to tender service
On 30 June 2006 Puddleducks Limited wrote to Jersey Heritage (appendix 1) informing them of their decision to withdraw from the service at the end of that season and that it would be seeking to sell their vessels either on or off Island:
‘The Board of Directors of Puddleducks Limited has decided that this company no longer factors in the general corporate strategy and therefore we have decided to make a disposal. Currently we are exploring two options. The first is to sell the vehicles off the island to one of the many operators around the world that would operate this type of vehicle and the second alternative is a local sale’.
Puddleducks Limited offered to sell the three vessels to Jersey Heritage for a sum of around £250,000. With Jersey Heritage’s energies already focused on completing the remaining phases of the Mont Orgueil restoration, and with the Forts and Towers programme of development just beginning, the Board were concerned that Jersey Heritage management resources would be too stretched by becoming directly involved in the operation of an amphibious service. A small working group consisting of Jersey Heritage’s Director; Jon Carter, and Finance Director Nick Danby, and a Board member, Geoff Crill, were nominated to oversee the tender process.
In the months before and after Puddleducks Limited had announced its decision stop operating on the route informal discussions with the managing director of the company had taken place. One point of discussion was whether it would be possible for the operator to receive a greater proportion of the total castle revenue in order to ensure the service remained viable. i.e. a subsidy. Jersey Heritage ‘s Finance Director said any change to the relationship between Jersey Heritage and Puddleducks Limited would need to be proposed to and endorsed by the Board of Trustees.
4. Jersey Heritage decision to change the nature of the contract
As disclosed by Puddleducks Limited’s annual accounts, between 2002 and 2004 (appendix 3) revenue from fares charged on the route had declined from £178,000 to £158,000 p.a. against rising costs. Draft results for the company in 2005 indicated that the revenue levels had recovered somewhat, but that year was exceptional. It was the 60th Anniversary year of the Liberation of Jersey and a large exhibition had been built at Elizabeth Castle with the help and funding of the States Liberation 60 committee.
Puddleducks Limited were very open and transparent about the fact that the amphibious service had become increasingly unviable and it had become clear from its audited accounts that the revenue generated from the operation was barely sufficient to cover its operating costs. This would later be substantiated in an e-mail (dated 16 December 2006) from one of the directors of Puddleducks Limited, who, having been notified that a new operator with new vessels had been awarded the contract wrote:
‘In summing up, we feel that during our nine years of tenure we have done all we can to have fulfilled our responsibilities to the Trust and should the Trustees see fit to offer the route to a third party operator it will leave the directors of Puddleducks with very little to show for the nine years of committed service except for three vehicles a kiosk a workshop and some unpaid directors loans.’ (Appendix 2)
Key decision
The JERSEY HERITAGE Board had a choice between
- Seeking to continue with a newly-appointed operator on the basis that had subsisted with Puddleducks Limited
- Create a new agreement that fundamentally changed the relationship between the provider and the licensee in order to make it more attractive to an applicant. This would also mean advertising the licence in order to test the market and ensure Jersey Heritage was achieving value for money
It was clear that if Jersey Heritage were to encourage any operator of the service to come forward then it was essential to change the way that service operator was remunerated. This presented both a challenge and an opportunity for Jersey Heritage. If Jersey Heritage was not going to operate the service directly then it would have to offer a subsidy to attract an operator. Without this subsidy an operator could not afford to pay for the acquisition of vessels required for the route.
Another dimension to the contemplation of a change of contract basis would be that Jersey Heritage would be provided with the opportunity to have full control of the ferry pricing and create a more transparent pricing structure for visitors. The full pricing structure for 2006 (i.e. with the operator and the castle entry separated), compared to the simplified structure adopted for 2008, illustrates this clearly. (appendix 3).
Of almost equal importance in the decision to change, was the Board’s concern that Jersey Heritage should not be committed to any single provider for an excessively long period i.e. the 9-year span of the previous licence. If, as was hoped at the time, funds for a redevelopment of Elizabeth Castle became available then the way the castle was accessed would need to be re-assessed. Depending on the nature of the investment it might become necessary to provide a service that could operate in rougher weather conditions and throughout the year. Any such solution involving amphibious transport would be difficult and expensive to resolve but not insurmountable.
Following the Board’s decision, Jersey Heritage Finance Director kept one of Puddleducks Limited directors fully informed of the key changes that were being proposed to the agreement and had no reason to believe they had not been fully understood.
5. September – December 2006: tendering and appointment process
Jersey Heritage and Puddleducks Limited agreed an approach to the advertisement of the route licence and the sale of the vessels. In September 2006, with the agreement of Puddleducks Limited, Jersey Heritage placed an advert in the Jersey Evening Post, seeking expressions of interest in providing the service to Elizabeth Castle. Alongside, Puddleducks Limited placed an advert offering to sell their vessels.
The closing date set by Jersey Heritage for expressions of interest was 31 October 2006 to coincide with the end of that season’s trading.
It was made clear at the time that a further month would be granted to those expressing interest in order to complete their tenders. This also gave any applicant a chance to consider Puddleduck Limited’s 2006 accounts before making a formal application.
A number of individuals informally expressed some interest in operating the service, with one considering using a vessel other than the existing DUKWs.
Before the closing date for formal expressions of interest, an indicative contract (appendix 4) was e-mailed to all those concerned and, although they had expressed no interest in re-tendering, Puddleducks Limited was also copied in on the e-mail out of courtesy and in the hope this might still have prompted Puddleducks Limited to enter the bidding process.
Only three potential operators expressed interest. Two were considering purchasing the Puddleducks Limited vessels, a third proposed purchasing new vessels built in the United States.
Given the small number of those expressing interest Jersey Heritage asked if applicants would be prepared to come forward with formal tenders earlier than 30 November 2006. Two applicants could but, due to personal circumstances, a Guernsey based businessman, said he would be unable to. Without agreement from all three it would have been inappropriate to bring forward the deadline, and the date was left at 30 November 2006.
Regrettably, this third applicant was not able to produce proper documentation by the final date.
6. December 2006. The decision to award the contract to Pure Adventure Jersey Limited
The Jersey Heritage ‘working group’ interviewed the two remaining applicants on 10 December 2006.
The two tenders differed in their approach but not substantially in price. Both tenders represented an increase in cost to Jersey Heritage compared to the Puddleducks Limited operation and simply reflected the fact that both applicants needed an increase in revenue to pay for the capital investment in vessels, whether buying the old craft from Puddleducks Limited or investing in new vessels, as well as achieve a reasonable profit.
Pure Adventure’s bid appeared the more attractive. By basing their watersports business at West Park certain business synergies could be achieved. In particular they offered to sell tickets for the castle ferry and admission tickets to the castle from the purpose built ticket kiosk they intended building at West Park. Jersey Heritage would collect all takings but would save £25,000 p.a. in staff and other costs. At interview their presentation was carefully thought out and professionally organised.
Key decision
The Jersey Heritage Board had two choices:
- Not appointing and thereby closing the castle. This would not only break the terms of the States' granted usufruct but would effect no financial savings. The budgeted annual loss of revenue of £340,000 was greater than cost savings that could be achieved (Pure Adventure’s £250,000 average annual fee and Jersey Heritage staff costs of £70,000 p.a.)
- Appointing the lower tender and the applicant who had provided by far the stronger business case
On 14 December 2006 the Board received a report from the working group recommending the acceptance Pure Adventure’s tender and the Board agreed to this proposal. Pure Adventure was chosen as the preferred operator. The Board considered that not only did Pure offer the lowest overall price, the company also had some experience of operating in the marine environment. The managing director of Puddleducks Limited was informed almost immediately of the Board’s decision.
The contract (appendix 5) was signed on 20 December 2007. In concluding its agreement with Pure Adventure Jersey Limited, Jersey Heritage chose to consolidate its position with an agreement that covered a further five-year period under terms favourable to Jersey Heritage. To provide the Trust with greater flexibility, it acquired the option to terminate the agreement, giving 12 months’ notice at any point after the conclusion of the fourth year, while the operator was committed to providing access to the castle at an agreed price for a ten-year period.
As a matter of courtesy and given Jersey Heritage’s close working relationship with Puddleducks Limited it was felt important to invite the directors of Puddleducks Limited to meet with Jersey Heritage before announcing publicly the award of the contract. As the managing director of Puddleducks Limited was on leave in the early part of the year the announcement was delayed until late January.
On 26 January 2007 Jersey Heritage wrote to Ministers for ESC and EDD to inform them of the award of the contract to Pure Adventure, illustrating the new vehicles and setting out a narrative of the tender process (appendix 6).
7. February – October 2007: the decision to remain with Pure Adventure Jersey Limited throughout the 2007 season
In early February 2007 Pure Adventure reported to Jersey Heritage that CAMI, the US manufacturers of the vessels, was experiencing delays in receiving parts from the European supplier of the vessel chassis and there would be some delay in the delivery of perhaps a month.
Key decision
The Jersey Heritage Board had two choices:
- Immediately break the contract with Pure Adventure and either invite the second applicant in the tender process to reapply, or engage in a new bidding process. This would have significant legal consequences and would have put any 2007 service in jeopardy
- To continue with Pure Adventure and their short term “teething problem” but place pressure on them to ensure their performance in accordance with the contract
It was expected there would only be a short delay in the arrival of the vessels and Jersey Heritage announced that Elizabeth Castle would remain closed until 26 May 2007. This was in the expectation, and with assurances from Pure Adventure, that a service would be operating before then.
In March 2007 Pure Adventure reported that CAMI was again experiencing further delays, and that the delivery of the vessels would be further delayed until July 2007.
Pure Adventure made approaches to Puddleducks Limited to determine if the DUKWs could be purchased to enable provision of an interim service and they were offered the vessels for £100,000. However Pure Adventure, already committed to the purchase of two new vehicles, remained concerned that the DUKWs would have no residual value. A trader in amphibious vessels had indicated to them that this value would be no more than £42,500 for the three vessels, and the short term loss of some £60,000 was unacceptable.
Pure Adventure then entered into discussions with the US manufacturer and were able to secure a second hand Hydra Terra at a cost of £80,000 which, because it had been built to US specifications could, they believed, be re-sold in the US at the end of the season with no significant loss.
Pure Adventure put forward a revised proposal to the Board on 28 March 2007. In it they agreed to purchase the second hand Hydra Terra at their own expense. The vessel could be delivered and operational by 26 May 2007, the date Jersey Heritage had already publicised as the re-opening date for the Castle. The proposal included a compensation package to cover most of Jersey Heritage’s losses for that period of closure. The remaining losses would be covered by delaying the appointment of seasonal staff employed at the Castle.
The Board accepted that proposal. In making that decision the Board also took full account of the fact that Puddleducks Limited had made it clear that they would not be interested in operating a temporary service. (appendix 7).
‘We would not be prepared to [operate a service] just as a cover for late delivery but would be prepared to enter into negotiations with anybody who wishes to purchase our vehicles and our expertise.’
At the same time the Guernsey based businessman, who had fallen out of the autumn 2006 bidding process referred to earlier in this report, told Jersey Heritage that he had purchased the DUKWs from Puddleducks Limited. This was also reported in the media.
The interim service by Pure Adventure was scheduled to be replaced by a full service before the start of the height of the visitor season, following assurances received by the manufacturer about revised delivery dates for both vessels.
By this time there was growing media and public pressure on Jersey Heritage, as well as on Puddleducks Limited, to get an amphibious service up and running. In the minds of the public it seemed strange that the three vessels, which had operated on the route for 20 years, could not be brought back into service.
On 13 April 2007 two of the directors of Puddleducks Limited came to the Jersey Heritage offices to discuss the situation. One accepted that there had been errors in judgment made by Puddleducks Limited in respect of the Guernsey based businessman who claimed he had purchased the DUKWs. Apparently, they had signed an agreement but, following repeated failures by the other party to conclude the agreement, the offer had been withdrawn. The DUKWs were therefore now available, and were offered to help Jersey Heritage provided such help was not to the benefit of Puddleducks commercial rivals Pure Adventure.
There followed some exploratory discussions with the Managing Director of Puddleducks Limited to determine what form that help might take. Initially Puddleducks Limited was very reluctant to consider running a temporary service, preferring instead to negotiate a sale. However Jersey Heritage did not contemplate the purchase the vessels, given they had minimal residual value and the contract with Pure Adventure was still in place.
In a change of mind on 26 April 2007, Puddleducks Limited did finally offer to run a temporary service for Jersey Heritage commencing 1 May 2007 for one month until Pure Adventure’s interim ferry could be brought into service. Puddleducks Limited would be paid £25,000 for this service whilst Jersey Heritage would keep all the fares charged to passengers and the castle admission income. The net cost to Jersey Heritage of this one month of service was estimated at around £10,000.
This proposal was circulated by e-mail to the Board on 28 April 2007. However, because the consequence of accepting the offer involved an additional significant cost and the fact that acceptance might jeopardise Jersey Heritage’s contractual relationship with Pure Adventure, the Jersey Heritage Board declined this proposal.
Unfortunately, due to some mechanical and operational concerns on its first day in operation (26 May 2007) it was necessary to withdraw the interim vessel from operation. Following further vessel modifications it was brought into service on 2 June 2007.
8. Jersey Heritage administration of the contract
Under the terms of the contract, Pure Adventure was due monthly equal instalments of the annual contract sum. Pure Adventure had already agreed a reduction in payments payable by Jersey Heritage under the terms of the agreement of £42,076 due to the Puddleducks Limited planned start of the service being delayed until 26 May. A further reduction in this sum of £6,952 was negotiated following the additional delay of one week.
Jersey Heritage also exercised its entitlement to withhold a 25% retention as the standards set out in the service level agreement had not, and could not, be achieved with only the interim vessel in service.
During June and July it became increasingly clear that the date for delivery of the vessels would once again slip, firstly to September, then October, and finally toward the end of the year.
In accordance with its agreement with Pure Adventure, Jersey Heritage continued to hold a 25% retention against all payments due under the contract. By August, when the full service was due to be operating, this was placing Pure Adventure under increasing financial pressure threatening to make the company insolvent. Pure Adventure’s financial planning was based on the assumption that once the new vessels had arrived, retentions withheld by Jersey Heritage would be released.
Key decision
The Jersey Heritage Board had two choices:
- Retain the full retention.
- Release some of the retentions early.
Retaining all the retention could effectively force Pure Adventure into insolvency. If it ceased trading, the running of the service could be jeopardised for the rest of the season. Jersey Heritage could suffer substantial and potentially irrecoverable losses in excess of £100,000.
On 10 August Jersey Heritage agreed to release £15,000 of the amount retained on 1 August to mitigate risk. (appendix 8).
The £15,000 was clawed back with the retention due on 1 September.. However, further financial pressures on Pure Adventure developed throughout September 2007 and following a request, £15,000 of retentions was re-released on 26 October 2007 (appendix 9).
Although this was no longer peak visitor season and Jersey Heritage losses were lower, Jersey Heritage felt the risk of Pure Adventure’s insolvency would complicate negotiations over the coming ‘closed’ season.
At 1 December 2007, the due date for the final instalment of the 2007 contract sum, the payments summary was:
| £ |
2007 Contract Sum due to Pure Adventure | 254,648 |
Less: | |
Agreed compensation to Jersey Heritage to 26/05/07 | (42,076) |
Agreed compensation to Jersey Heritage to 02/06/07 | (6,952) |
Revised contract sum | 205,620 |
| |
Less retentions (i.e. £51,405 less £15,000) | 36,405 |
| |
| |
Payment made to 1.12.07 | 169,215 |
Balance due to reach full settlement of 2007 fee. | 3,267 |
| |
TOTAL due under severance agreement (see below) | £172,482 |
9. December 2007: proposal for revised contract
During September and October 2007 Jersey Heritage began working with Pure Adventure to determine if the contractual arrangements could be changed in order to reduce costs of operation. In particular the concept of a ‘peak and off peak’ service was developed. Although a considerable inconvenience to passengers in peak season, Pure Adventure had demonstrated it could provide an adequate service with just one vessel at off peak times. This could save Jersey Heritage considerable cost.
Jersey Heritage explored with Pure Adventure whether it would be prepared to bear more of the operating risks than existed under the current agreement. A revised proposal was considered by the Board of Trustees on 13 December 2007. In response to Jersey Heritage’s request that Pure Adventure bear the risks of operating the service more fully, Pure Adventure required a larger profit to compensate for those risks, thus increasing JH’s operating costs.
By now the context of the Board’s decision making had radically changed from when they had originally awarded the contract to Pure Adventure:
- The provider’s operating costs were greater than expected.
- There had been some considerable loss of confidence in Pure Adventure’s ability to provide a good service.
It was considered that purchasing the assets that allowed the service to run would mean more flexibility in determining how the service operates each season in response to a changing regulatory or economic environment.
The Finance Director began negotiations with Pure Adventure who were far from willing sellers, believing they had fulfilled the requirements of their contract and, where breaches had occurred, that Jersey Heritage had accepted them.
Jersey Heritage’s legal advisors reached a similar conclusion, believing that because the operation was out of season, it was difficult to regard Pure Adventure as being in fundamental breach (appendix 10). There can be little doubt that Pure Adventure had been in fundamental breach of the contract during 2007, but had Jersey Heritage then sought to revoke the contract the likely consequence would have been the closure of the castle at the peak of the season and an expensive dispute. Pure Adventure had a contract it believed it had fulfilled because by now one of the vessels had been delivered to Jersey and the second one was promised for delivery in late January 2008.
Any buy-out would have to be based upon negotiating the acquisition of Pure Adventure’s assets at a fair price and a payment to reflect the loss of profits, which Pure Adventure could realistically command over the remaining four year life of the contract.
As part of the negotiation a settlement of the 2007 contract sum would also be determined, as shown in the table above.
10. February 2008: the decision to sever the contract and buy the vessels
On 7 February 2008 the Board considered a paper, which set out in broad terms the estimated cost of severing the agreement with Pure Adventure.
The only alternative to such a settlement was to hope that Pure Adventure would deliver the service to a reasonable standard or, if the company became in fundamental breach of contract, that Jersey Heritage would be able to acquire the assets of the company quickly and find an alternative operator at short notice. Since contractually the most likely timing of any fundamental breach would be at the height of the visitor season, this could mean Jersey Heritage being forced to acquire the assets of Pure Adventure and take over direct operation of the service at very short notice if it was to avoid castle closure. The events over the proceeding two years provided no confidence that this could be done.
A severance agreement was signed on 26 February 2008. When on 2 May both vessels were deemed fit for purpose in accordance with the terms of the agreement, Jersey Heritage acquired the whole operation from Pure Adventure at a total cost of £513,000.
There were several key components of that settlement.
- Pure Adventure 2007 fee would be reduced from £254,648 to £172,482. This reduction of £82,166 effectively compensated Jersey Heritage for the losses it had suffered as a consequence of late delivery of the two new vessels.
- Jersey Heritage would meet Pure Adventure’s costs in acquiring the two new vessels it had commissioned to operate the service (see appendix 11).
- Pure Adventure would retain the interim vessel it had acquired at the company’s own expense at a cost of £80,000. This vessel remains as unsold and any losses on the resale of the vessel will be borne wholly by Pure Adventure.
- Jersey Heritage acquired the rights to the workshops and kiosk at West Park with effect from 1 January 2009.
- Jersey Heritage would buy out the residual value of the contract at a cost of £121,000.
11. Viability of the vessels
Following extensive testing and inspection by Driving Vehicle Standards (DVS) and then by Jersey Harbours (on recommendations by the Maritime and Coastguard Agency - MCA) the first of the two vessels (the Charming Nancy) became licensed on 18 March 2008 to operate as an amphibious vessel on the West Park to Elizabeth Castle route.
The purpose of the DVS licence is to enable the vessel to be driven on the Elizabeth Castle causeway, which is classified as a road. The licence also allows the vessels to be driven under escort on other roads within the Island, for instance to enable the vessels to be serviced or re-fueled.
Although the vessel required a number of technical exemptions from maritime regulations in order to be licensed for use on the route, Jersey Harbours were confident the vessels could be operated safely, provided that an appropriate risk mitigation strategy was in place. The mitigation strategy (Document Management System) was also approved by the MCA as being appropriate for a vessel that was operating in the protected waters of St Aubin's Bay.
Before purchasing Charming Nancy and Charming Betty, Jersey Heritage instructed MECAL (Jersey) Limited, to carry out a survey of the vessels. MECAL (Jersey) Limited assists Jersey Harbours in the survey and certification of commercial vessels.
The brief included assessing whether:
1. The current condition of the vessels is reasonable for a newly built construction of this type (pre-sale survey).
2. The exemptions granted by Jersey Harbours to enable the operator to use the vessel on the Elizabeth Castle route could be withdrawn.
The pre-sale survey confirmed both vessels were in sound condition and concluded it was reasonable to assume the licence could be maintained so far as the vessels were concerned (appendix 12).
The vessels have approved for use on the route by Driving Vehicle Standards, the Maritime and Coastguard Agency and Jersey Harbours.
In addition in order to ensure driver competency Jersey Heritage has developed a drivers syllabus. This syllabus represents a standard of attainment that all drivers are expected to achieve before they are permitted to driver the vessels on water unsupervised. Jersey Harbours’ has also approved this syllabus.
Conclusion
Jersey Heritage have for many years understood that if it became the operator of the amphibious transport service to Elizabeth Castle, the public would benefit.
Firstly it would enable Jersey Heritage to provide a consistent standard of customer care for visitors to the castle. For the majority of those visitors, around 70%, their visit to the castle begins when they embark the amphibious vessel operating from West Park.
Secondly, it would enable Jersey Heritage to introduce a simple and flexible pricing structure for typical Elizabeth Castle visitors (see appendix 3).
When Puddleducks Ltd announced the sale of their business in 2006, it had been apparent for some time that the service would need to be subsidised, if new operators were to be persuaded to tender for the service.
The alternative, considered at the time, was for Jersey Heritage to buy the vessels and run the service directly. Jersey Heritage’s Board concluded that it would still be in its interests if some of the commercial risks of running an amphibious service were borne by a private operator. Puddleducks Ltd had provided and managed an excellent service for nine years and the Board hoped an applicant with similar skills and qualities could be persuaded to come forward. Indeed, had Puddleducks Limited reapplied for the licence, their tender would have been favourably considered.
When the licence was put out to competitive tender the lowest overall bid came from Pure Adventure Jersey Ltd. The price, averaging £250,000 p.a. over the five-year term of the contract, exceeded the amount that could be raised from paying passengers by around £100,000 per annum.
This came as no surprise to Jersey Heritage. Puddleducks Ltd had been operating a highly marginal business for some years. Two applicants submitted tenders, one proposing to purchase the vessels operated by Puddleducks Ltd, the other buying new vessels. Both needed to achieve a reasonable return on their investment.
Throughout 2007 Jersey Heritage carefully managed the agreement it held with Pure Adventure Jersey Ltd to protect Jersey Heritage’s commercial interests. It also sought to recover the losses in 2007 caused by the operator’s failures.
Ironically, in recovering its losses Jersey Heritage found itself exposed to the commercial risks it was attempting to mitigate by employing a private operator. By now Pure Adventure Jersey Ltd had little remaining financial capacity to deal with the consequences of a further operational failure. If the business failed at the height of the visitor season Jersey Heritage faced potential irrecoverable losses of £200,000.
By the end of 2007 Jersey Heritage had concluded it could run a service more cost effectively and reliably than Pure Adventure Jersey Ltd and would not expose itself to any more commercial risks, provided it could purchase the business at a reasonable price.
In buying the business, Jersey Heritage was able to negotiate a substantial discount on the operator’s 2007 fee. Undoubtedly, Jersey Heritage’s claim for loss of earnings in 2007 would have been more heavily disputed had it not agreed to purchase the operator’s business. Jersey Heritage also acquired the residual value of the vessels which the operator would otherwise have still owned at the end of the contract.
Finally, the price paid by Jersey Heritage to acquire Pure Adventure Jersey Ltd business needs to be placed in the context of savings it can expect to achieve. Jersey Heritage can meet most of the annual costs of operating the service from passenger revenue and advertising. It will have saved most of the £100,000 p.a. in paying a subsidy to an operator. Jersey Heritage will of course need to service this debt but over a ten-year (minimum) life of the investment this still represents a substantial saving.
The Board of Jersey Heritage are now confident and pleased that it has finally secured access to Elizabeth Castle for its visitors.
Jersey Heritage Trustees
as at June 2008
Jurat John de Veulle OBE (JH Chairman)
Retired senior partner Ernst & Young. Honorary Financial Advisor to the Trust from 1988 – 1999. Appointed Chairman of the Board from 14 June 2000.
Philip Le Brocq (JH Vice Chairman)
Retired housemaster Eastbourne College. Former President of Société Jersiaise. Trustee from 2004.
Rowland (Chick) Anthony
Retired TV drama Sound Director for the BBC in London. President of Société Jersiaise. Trustee from 2007.
Geoffrey Crill
Senior Jersey Solicitor and Partner with local legal firm, Crill Canavan. Trustee from 2004.
Constable Simon Crowcroft
One of two required States Members. Trustee from July 1999.
Blair Gould
Retired Banker – former President of Jersey Symphony Orchestra. Trustee from 2005.
Clive Jones
Former Managing Director of Citigroup in Jersey. Currently Commissioner JFSC. Vice Chairman, Highlands College Governing Body. Long-term supporter of JH through Business Associates Scheme and sponsorship. Trustee from 2005.
Deputy Carolyn Labey
Assistant Minister for Education, Sport and Culture. One of two required States Members. Trustee from March 2003.
Paul Nicolle
Retired Corporate Director of Policy & Employee Development, States Human Resources Department. Chairman of Board of Governors, Beaulieu Convent School. Fully qualified Blue Badge Guide. Appointed as a Trustee in 2005 with effect from July 2006.
Jane Stubbs (resigned April 2008/moving to UK)
Partner with PricewaterhouseCoopers – Trustee from 2005.
Jonathan Voak
Fine art expert, former Victoria & Albert Curator, Société Jersiaise nominated Trustee from September 2006.
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