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The Minister of State, Scottish Office (Lord James Douglas-Hamilton): I welcome the involvement of the Office of Fair Trading in the matter. We understand that, if there were evidence of predatory pricing, it would take strong action.
Mr. Wallace: I am somewhat reassured by the Minister's response, but the problem will be resolved only by experience over time.
The loss of routes is also important, particularly the loss of the Kirkwall-Invergordon route. In paragraph 73 of its recommendations, the Select Committee said that it should
I have argued previously that the route should be franchised in its own right. I regret that that argument has not prevailed to date, but it is worth maintaining. The Minister may say that the TRS has been gone for almost two years, and that the Government responded to some extent by restoring the subsidy on livestock and by increasing it slightly--it went from 47.5 per cent. to 30 per cent. and then back to 50 per cent. The Government may say, "Orcargo is still there, and you have been proved wrong." However, we could turn that argument on its head, as the Government's case is based on access capacity, which is the same two years later. I know that Orcargo is finding things difficult. Preserving the route does not necessarily mean preserving a particular company. That route has proved to be of considerable importance, and I hope that it can be franchised and saved.
The mixture of passengers and livestock has been addressed. In a recent letter to me, the Minister said that he had not heard about that issue before. However,
I was present at a meeting in September 1995 when the convener of Orkney Islands council told the Secretary of State about his concerns. At present, there is a smaller mix of livestock and passengers on the P and O sailings between Scrabster and Stromness, because most of the livestock travels on the Invergordon route. There is concern that a switch back to livestock on that route would impact on tourism.
Shetland is worried about the movement of large volumes of livestock at peak times. I am grateful that the Government have acknowledged that point, and confirmed that any specification would require the operators to ensure that there was sufficient capacity to move livestock at peak times.
One of the continuing concerns in Shetland is the configuration of services. I share the Government's view, which was expressed in the passenger franchise specification and in their response to the Select Committee, that two vessels are almost certainly needed to serve Shetland if we are to secure daily sailings. However, I am unhappy at the suggestion that only daily sailings five days a week will be required during the winter months. The salmon and fish processing industries would prefer to have daily sailings six days a week in order to ensure that produce gets to market in a good state.
I hope that the Minister will answer several important questions. Is there an element of cross-subsidy? He has told me that the lifeline freight service might be covered by the fact that the Government are supporting a lifeline passenger service. It has been admitted that there will inevitably be a bias to the existing operators in the tendering process. I endorse the call for a delay and a suspension of the tendering process to allow CalMac to participate. At what stage was European development funding made available to potential bidders? When were they told about it?
The exercise began when P and O announced that it could not provide new vessels. The Minister has told me that there must be new vessels by 2002 in order to meet the Stockholm agreement on shipping safety. What do the Government have in mind in that regard? Why is the question of new build not focused more clearly in the draft specification?
As the bidding process proceeds, will the Minister confirm whether he will involve the islands councils in the final decision making? Several aspects of the specification are not hard and fast: qualitative decisions must be made about a marketing plan, timetabling, cleanliness, customer satisfaction and consultation. With the best will in the world, I do not believe that civil servants or Ministers in the Scottish Office can make those qualitative decisions. Those issues intimately affect the life style and the ways of the islands.
Therefore, I ask that the Government involve the islands councils in evaluating the bids where qualitative issues are at stake. They should also be involved in the monitoring process. The Scottish Office will rely on those councils, the NFU and other operators to assess how well the franchisee is performing.
Mr. Andrew Welsh (Angus, East):
I shall be brief, as I know that many hon. Members wish to participate in the debate. There is a feeling that the Government have not fully met the specific and important conclusions of the Scottish Affairs Committee, which were designed to be fair and to provide a long-term solution to the problems faced by the people of Orkney and Shetland. I have some specific questions for the Minister, which I hope that he will answer today.
Do the Government acknowledge that freight is an essential element of the lifeline service? If not, why not? We need an explanation. Is there under-utilisation of the existing P and O ferry fleet, with the consequence that public subsidy is being used to support excess capacity? The Secretary of State has declared that he is not able to deliver what people have asked for because it does not represent what he calls the "best value" for the taxpayer. Will he therefore confirm that the number of vessels operating the services will be reduced in order to prevent a mis-spending of public subsidy? I would like him to be more open about the Government's intentions so that the people may make a judgment about the fate that awaits them under Government policy.
The Committee expressed concern that the current interim subsidy arrangement appears to provide no incentive for the lifeline ferry operator to achieve potential operating efficiencies. That concern has not been addressed, and the Minister has a duty so to do.
The Committee highlighted the fact that the changes have given P and O Scottish Ferries an unfair competitive advantage. The Minister stated in evidence that the expected earnings from freight carrying were based on what he called "reasonable market rates", but the managing director of P and O stated in evidence that "net freight revenue"--that is, after the deduction of subsidy--was used in the P and O financial model submitted to the Scottish Office. It has been pointed out to me that the market rate should have been construed as the gross freight rate--that is, with the subsidy included--as that was the actual revenue earned by the operators before the changes.
The impact of that anomaly was compounded by the fact that P and O Scottish Ferries gave a guarantee as part of the interim arrangement with the Scottish Office that customers would pay the same net rate. That effectively undercut market rates by the amount of subsidy previously applied. Can the Minister justify P and O's position, or is the accusation of unfair competitive advantage true? I look forward to his detailed response.
Does the franchise specification favour older, depreciated ships, and hence act against newer vessels--
Mr. Robert Hughes:
And crews' wages.
Mr. Welsh:
--and crews' wages, as my hon. Friend says--as newer vessels would be less well placed to submit a lower bid?
Mr. Calum Macdonald (Western Isles):
I know that there are still hon. Members who served on the Select Committee who want to speak in the debate, so I shall restrict myself to one point, which concerns the recommendation in paragraph 55 that Caledonian MacBrayne be allowed to tender for the Northern Isles service.
In the Government's response on page 6, they say that one of the reasons why they rejected that recommendation was:
"be designated a lifeline freight and livestock route."
The operation of that route could not be described as opportunistic or as cherry-picking, but that is how the Government refer to it in their response to the Select Committee report when they accuse some operators of opportunism. The route did not exist previously and was built up by Orcargo. It is much favoured by Orkney farmers, and particularly by the auction mart as cattle may be transported from Orkney and down the A9. The scheduled service fits in well with the auction mart's arrangements. There is concern about the route's future unless it receives some recognition as a lifeline livestock route.
"CalMac's core business activities are the operation of ferry services in the Western Isles and the Government believe it would be detrimental to the efficiency of operations on the West Coast of Scotland to extend CalMac's responsibilities to the Northern Isles."
That is not the view of the people in the Western Isles or of the communities that are served by the ferries. We believe that CalMac should be allowed to tender for the Northern Isles routes. We believe that that would consolidate and enhance the services and the provision of CalMac. I hope that the Minister will not use that rationalisation in his reply to the debate.
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