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Mr. James Wallace (Orkney and Shetland) rose--
Mr. Gallie: The hon. Gentleman wants to intervene, but it would be better to let me run.
A start point for contract conditions on block grant might be a maximum freight charge of £5.15 plus an allowance within the contract for an X-factor increase year by year of the inflation rate. That would alleviate fears of predatory pricing, which would drive competition out of the marketplace and leave P and OSF with the world as its oyster. The provision of such a service would be a major factor in the consideration of the contract. Increased TRS on livestock and provision for peak livestock capacity within the passenger contract would be welcomed all round.
I warmly welcome my right hon. Friend's decision to reinstate TRS on the carriage of bulk freight. From the minutes of proceedings in the report, it will be noted that my hon. Friend the Member for Eastwood (Mr. Stewart) and I urged that TRS should be amended or revamped, so that livestock and agricultural freight and industrial bulk and semi-bulk freight are covered. Given that the Government have addressed that matter, I am not in a position to complain about the Government's response to the report.
I want to quote a letter from Highlands and Islands Enterprise, which
On the consequences of the reinstatement of the bulk freight TRS, Highlands and Islands Enterprise says:
Without resorting to a line-by-line analysis of the Select Committee's report and the Government's response, I emphasise that my concern is to ensure that maximum advantage is taken for the islanders and the taxpayer of any continuing Government subsidy. I noted the remarks
of my hon. Friend the Member for St. Ives (Mr. Harris) in respect of the Scilly Isles ferry service, which is not subsidised, and I listened to the response of the hon. Member for Kilmarnock and Loudoun, which referred to falling populations in the Northern Isles. Having been an observer on the Committee's visits to Orkney and Shetland, I believe that there is a reversal of that process there, with many of the immigrants to the Northern Isles coming from south of the border, although I doubt that few are from the Scilly Isles.
I do not believe that the matter of livestock and bulk freight can be catered for in any way other than through the TRS system, as currently established. I referred earlier to the time scales in the Government response. However, I have several questions to ask and points to make in respect of the contract for passenger services. I queried from the start the suitability of the present P and O vessels and the philosophy of adapting old vessels for that route. Members of the Committee emphasised that that was a factor. I should like a guarantee that any future contract will ensure availability of stand-by vessels on the route. The under-utilisation factors of the service identified by the Committee should be addressed.
I want to know why the availability of European regional development fund money has not become known to those who tendered, until this late stage of the tender process. I understand that 18 companies originally tendered. It is only fair, correct, and in the interests of the taxpayer and all concerned, that any of the companies that feel that they could resubmit a bid, given the availability of ERDF funding, be allowed to do so. I ask my right hon. and learned Friend the Minister to take account of the fact that that would be in everyone's interests.
I understand that P and O has the lease on the roll on/roll off facilities in Aberdeen harbour. Whoever is the successful bidder for the contract must have open access to that facility; it cannot be blocked by P and O. I well understand that there will be difficulties. There will be a need for regular, timed services, which could be disruptive to P and O if that facility were used, but that facility is much needed for the service that is provided, and the successful bidder must have access to it.
I find it difficult to understand how the question of cross-subsidy on general freight can be addressed in full. I suggest that, whatever the method used to determine passenger subsidies, a link be made to the level of freight charges currently made and the level of freight volumes currently carried, and a substantial amount of subsidy made if no freight cross-subsidy is to be considered.
Mr. James Wallace (Orkney and Shetland):
I pay tribute to the Select Committee on Scottish Affairs and its Chairman, the hon. Member for Kilmarnock and Loudoun (Mr. McKelvey), for giving the House, the communities of Orkney and Shetland and those of Scotland as a whole, the benefits of the Committee's report. The Committee has many pressing needs to consider in addition to this one, so we were very grateful in the islands that its
That debate has raged since October 1994, when the former Secretary of State, the right hon. Member for Galloway and Upper Nithsdale (Mr. Lang), announced that the tariff rebate subsidy on freight to the Northern Isles would be abolished with effect from 1 May 1995. In the meantime, there was to be a negotiated level of subsidy to P and O Scottish Ferries for its passenger and car services.
That decision caused outrage among my constituents. The Secretary of State for Scotland got a taste--or perhaps an earful--of that when he visited Orkney in September 1996. Soon after his announcement, there was controversy about the content of the KPMG consultants' report on which that decision was apparently based. I shall not go over all the ground and ask for the report to be published or ask what was in it and what was kept secret.
The aspect that caused most anxiety among my constituents was the fact that those who were involved in the delivery of shipping services apart from P and O Scottish Ferries--Streamline Shipping and Orcargo--were barely consulted by the KPMG consultants. I believe that in both cases the conversations lasted about half an hour and in one case there was a follow-up telephone conversation, which shows how little the consultants had understood in the original conversation.
There was much dissatisfaction regarding the consultants' report on which the Secretary of State's decision was based, so it would be valuable--although it may be a little late in the day--to have the full study that the Select Committee undertook. This time, proper consultation took place with the various shipping lines, with the local authorities, with the local enterprise companies, with the National Farmers Union and with local businesses, which was welcomed and appreciated. It should have been done before.
In 1993, consultants prepared a report for the Scottish Office, with specific relevance to the Western Isles, evaluating the impact of ferry subsidies. I understand that the study concluded that any variation of subsidy level would lead to fare increases and result in loss of employment in all the main economic sectors in the islands. Notwithstanding that report, the following year the Government went ahead, without evaluating the likely effect on the Orkney and Shetland economy.
As a consequence of pressure and representations, the Minister agreed to monitor the position in the aftermath of the removal of the tariff rebate subsidy. A report that reflects much of that monitoring and contains an analysis of what has been going on has been prepared by EKOS--a firm of consultants--and is almost ready for publication. Any advance information that the Minister can give the House today of its contents would be welcome.
The hon. Member for Kilmarnock and Loudoun emphasised the importance of the subsidy in helping businesses. Partly as a result of the oil industry, my constituents have enjoyed unemployment rates below the Scottish average for several years. Many businesses have been built up, not least around the route between Kirkwall and Invergordon--a subject to which I shall return.
However, if one of the objects of the TRS system and of the fact that the Government and the House approved undertakings that admitted Streamline--
Orkney line and Shetland line--and Orcargo to the scheme was to promote competition and allow businesses to develop and benefit from the lower freight charges that resulted from subsidy, to a considerable extent it was a success. We are now in danger of losing some of the benefits that we have enjoyed in recent times.
Although existing companies may be able to monitor how they might be affected by the change in freight rates, we can never know how many potential firms have not invested there. One of the key factors in any business investment in the isles is transport and its costs, and one cannot tell how many people have been driven away by transport costs.
The Select Committee rightly said in its first recommendation
There is obvious concern about increased costs. My information is that, during recent months, P and O has increased its published tariffs by 3 per cent., Streamline has done so by 6 per cent. and Orcargo has done so by 18 per cent. I emphasise that those are only the published tariffs.
The Government have said throughout that they are prepared to impose a ceiling on the amount by which freight rates increase. That would appear to be a ceiling based on published tariffs, whereas the last thing that most people who use the service ever pay is the published tariff. Such has been the competition that, in most cases, there are discounts, and any potential bidder must find out the discounted rates. However, it would be reassuring if the Government were to say today that, when they talk about imposing a ceiling on freight charge increases, they mean a ceiling on what the charges have been in practice--the discounted charges, not published rates.
Concern about the re-emergence of a monopoly flows from that point. In its evidence to the Select Committee, Shetland Islands council, in a conclusion, phrased it very well, when it said:
When I responded to the passenger franchise specification in the new year, I suggested to the Minister that there may be an argument for introducing floor prices to combat predatory pricing. While the Minister was sympathetic to my argument, he responded:
"has been monitoring the prices of a range of goods in Orkney and Shetland following the changes in the Tariff Rebate Subsidy".
It has determined that
"there have been relatively few changes in prices of goods in Orkney and Shetland which can be linked to the Tariff Rebate Subsidy."
That is, to the removal of the TRS. That seems to justify to some extent the concentration of my hon. Friend the Member for Eastwood and myself on the bulk freight aspects of TRS. The letter also suggests that
"there are considerable concerns among the Orkney and Shetland business community"
about the renegotiation of the P and OSF contract and whether that might have an adverse effect. I am sure that my right hon. Friend the Secretary of State will take note of such concerns.
"This has reduced the price of sand imports from Aberdeen . . . and quarries on Shetland are in a position to resume exports of aggregates."
Members of the Committee felt strongly about that issue, and we all welcome those findings. We also welcome the fact that the Government have undertaken a bulk freight review, and I have no doubt that its findings will be welcomed.
"that the sea transport needs of Orkney and Shetland differ significantly and that each island group requires specific sea transport services which meet their particular needs."
I hope that the Government will bear that in mind when considering the current passenger service.
"The present level of freight tariffs on P&O services are the result of serious competitive pressure in recent years. The unanswered question is whether the creation of a monopolistic operator will be beneficial in the longer term when the memory of competition recedes."
Competition has managed to reduce prices. In its evidence to the Select Committee, the National Farmers Union for Scotland said:
"Previously, as a monopoly P&O had imposed high tariffs and had been unreceptive to customer requirements."
There is the important question of maintaining equality in the service, and the re-emergence of a monopoly gives rise to concern. The hon. Member for Ayr (Mr. Gallie) pointed to what might be described as signs of predatory pricing. He referred to the P and O service between Kirkwall and Invergordon, but in fact he meant between Stromness and Scrabster, outward bound. That is an important point, because he almost undermined his argument. The hon. Gentleman cited the much lower prices for cattle now than in 1992.
"However after some consideration we decided that this is not a practical option. Pricing floors are difficult to monitor and enforce given the many ways of discounting prices and would no doubt be perceived by the ferry operator as an unacceptable restriction on commercial discretion".
Nevertheless, I hope that the Minister will be alive to the possibility of predatory pricing and will explain how he intends to monitor it. I understand that the Office of Fair Trading is examining the matter, and perhaps the Minister could tell us the stage that the investigation has reached. One of the problems is the definition of "predatory pricing". However, if a problem is perceived in that area--evidence to the Select Committee highlighted such concerns--we should know how the Government intend to address it.
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