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10.45 am
The Minister of State, Scottish Office (Lord James Douglas-Hamilton): This has been a very good debate, in which a number of important issues have been raised. I pay tribute to the Chairman and members of the Select Committee for their perseverance and application in inquiring into these complex matters.
We share the Committee's view that efficient and affordable sea transport services are vital to the movement of essential imports and economically important exports for the islands communities. As evidence of our commitment to support essential shipping services to the islands, we shall this year provide subsidies of £7.6 million for P and O Scottish Ferries for passenger services, £700,000 for P and O and Orcargo for livestock exports and £300,000 for bulk shipping operators. That is in addition to grant assistance for pier and harbour works at Scrabster, Stromness and elsewhere in Orkney and Shetland. The Government have paid Orkney and Shetland some £11 million in piers and harbours grant in the past five years.
Our policy is to allow the private sector, wherever appropriate, to deliver the necessary services, but I have been asked why CalMac is not being allowed to tender. CalMac is wholly owned by the Secretary of State, and the undertaking with the Secretary of State is to provide an approved lifeline ferry service on the west coast. There is no undertaking to provide services to the Northern Isles. We examined the matter carefully, and it was decided that, on balance, it would not be appropriate to allow CalMac to tender.
A number of factors influenced that decision. First, CalMac's core business is the provision of lifeline services on the west coast; secondly, we believe that the role of the public sector in the economy should be restricted and that, wherever possible, services should be provided by the private sector. Furthermore, the
Government wanted the tendering process to be seen as entirely fair. If CalMac had been allowed to tender on the back of Government funds, that would have been unfair to private sector competitors.
Mrs. Liddell:
Why is public sector operation not considered advantageous? Private sector operators have considerable expertise in operating lifeline services in the Western Isles. Is there not an impeccable logic in transplanting that expertise from the Western to the Northern Isles? Are the Government not taking part in a narrow sectarian vendetta against CalMac?
Lord James Douglas-Hamilton:
Certainly not. CalMac has an extremely good record, but, if a public sector organisation subsidised by the state were allowed to compete against the private sector, private sector tenderers would be deterred from coming forward. That could be seen to make for unfair competition.
The hon. Member for Orkney and Shetland (Mr. Wallace) asked whether the councils would be consulted. I give him an undertaking that that will certainly happen. The hon. Gentleman went further, however, and asked for the councils to be involved in the decision on the tender. While there have been extensive consultations on the specification, the final decision on the award must be for Ministers. After all, given that one of the bidders is Orkney islands council's own shipping company, involving the council in that decision would be hard to justify, and would lead to a conflict of interest.
Mr. Wallace:
I agree with that, but surely the Minister recognises that the franchise specification leaves a number of matters open. The bidders must come back with proposals of a qualitative nature. Is the Minister saying that, once the bids are in, there will be further consultation with the islands councils on aspects of the final bids submitted, which will be of a qualitative nature?
Lord James Douglas-Hamilton:
I am only too happy that there should be consultation on the terms of the specification, but the decision has to be for Ministers of the Government of the day.
The hon. Member for Kilmarnock and Loudoun (Mr. McKelvey) asked whether passenger vessels will carry freight in future. I can assure him that the service specification requires the operator to provide capacity for the carriage of passengers, cars, commercial vehicles, freight and livestock.
The hon. Gentleman also asked about the European regional development fund. It has always been possible since the beginning of the tendering process for ERDF money to be made available for vessel replacement. That is not a new issue. The Government's response makes that clear.
Some hon. Members, including the hon. Member for Monklands, East (Mrs. Liddell), asked whether I could delay the tendering process. It would not be sensible for the Scottish Office to halt it at this late stage. To do so would cause further uncertainty before lifeline services could be secured by block grant contract. There could also be a danger that tenderers would withdraw. We believe that final bids are due this week, so we do not believe that
that would be in the public interest. Of course, if a general election is declared, the normal rules will apply to decisions made during the election period.
My hon. Friend the Member for Ayr (Mr. Gallie) asked a very relevant question about standby vessels. The final service specification requires tenderers to make proposals for continuing service during refits and repairs. These will be examined very carefully during the evaluation of bids, and we will be keen to ensure that proper arrangements are put in place in respect of breakdowns and relief vessels, and, indeed, cover for annual overhauls.
My hon. Friend also asked about new vessels. It is probable that the requirements of the Stockholm agreement on passenger ferry service safety survivability will make it inevitable that new vessels are introduced in 2002. New build options are being considered as part of the competitive tendering process.
Mr. Gallie:
Will my right hon. and learned Friend give way?
Lord James Douglas-Hamilton:
Very quickly, as I have a lot of points to answer.
Mr. Gallie:
My right hon. and learned Friend emphasised the involvement of the private sector and the importance of competition--which I welcome--which was demonstrated by the 18 bids that came in. However, if factors have changed, it would not be unreasonable to give any of those bidders a further opportunity to be involved, particularly in relation to the comments on ERDF. Will he give further consideration to that point?
Lord James Douglas-Hamilton:
If my hon. Friend is asking for special pleading on behalf of any of those who have not made the shortlist, I cannot do that; he is asking that the whole process be started again. I cannot give that commitment at this stage, and one reason why I cannot is because I am totally opposed to cross-subsidy--a point echoed by the hon. Member for Monklands, East. In determining the subsidy to be paid to P and O Scottish Ferries under the interim arrangements, we have attempted, as far as possible, to ensure that cross-subsidy will not occur.
In negotiating the subsidy, explicit account was taken of P and O's expected earnings from freight carryings on the basis of reasonable market rates. The Scottish Office's objective was to achieve a transparent contract designed to provide the minimum subsidy in the interim period to secure P and O's continued operation of the passenger ferry service. By minimising subsidy in that way, we have sought to avoid any cross subsidisation of freight services. For the longer term, I believe that competitive tendering of the block grant contract will be a strong safeguard against cross-subsidy, to which we are wholeheartedly opposed.
The hon. Member for Kilmarnock and Loudoun raised the issue of bulk freight subsidy support. The key point is that we have restored the rate of bulk freight support, but recognise that there are flaws in the system and in the way in which the scheme operates. That is why we have sought views from all interested parties on various options to amend the scheme so that it meets the needs of bulk product producers and users in the islands as efficiently as possible. The deadline for responses is 19 April.
The hon. Member for Orkney and Shetland asked about the ceiling on published tariffs. We will set a ceiling in relation to current market rates. He also asked about EKOS. One of the commitments that we gave the Select Committee was to continue to monitor freight prices and the market generally. To fulfil that, with Highlands and Islands Enterprise and with Orkney Enterprise we commissioned EKOS to undertake a study to evaluate the trends in freight process and to assess the impact of transport costs to the Orkney economy. That work is under way, and EKOS is due to report shortly.
Many of the Select Committee's recommendations have been acted upon. Its report carried great influence with the Government. We have decided, first, to consult Orkney and Shetland council and other passenger interests on the service specification; secondly, to regulate maximum freight tariffs; thirdly, to provide sufficient capacity for the carriage of livestock; fourthly, to increase the rate of tariff rebate subsidy for the carriage of livestock, from 33 per cent. to 50 per cent.; fifthly, immediately to reinstate TRS for the carriage of Northern Isles bulk freight; sixthly, to consult towards identifying more suitable long-term subsidy arrangements to support bulk freight; and, seventhly, to commission, with Highlands and Islands Enterprise, the study with EKOS.
We have not been able to accept all the recommendations.I was asked, for example, about the Kirkwall-Invergordon route. I accept that Orcadians perceive there to be distinct benefits associated with that route for the carriage of freight and livestock, but subsidising that route would perpetuate the problems of excess capacity in the freight market. It would encourage the continuation of excessive price competition in the freight market, threaten the commercial viability of the passenger freight operator and make it much more difficult to conclude the new block grant tendering process. We have therefore concluded that it would not be appropriate to subsidise the route at the expense of the taxpayer and to the detriment of the competitive tendering process for the passenger ferry contract.
Considerable concern was expressed that a weakening of competition in the freight market could lead to the emergence of a monopoly. There is no evidence at present--two years after the withdrawal of TRS--that competition for general freight has weakened. We intend to provide the contract with a regulation on maximum freight tariffs. We believe that that would be a significant safeguard against the abuse of monopoly power.
I recognise the desire of the hon. Member for Orkney and Shetland to ensure that there is adequate consultation. We will certainly ensure that that happens. We regard that as extremely important.
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