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Subsidised Ferries (EU Regulations)
4 pm
Mr. Alan Reid (Argyll and Bute) (LD): I thank the Speaker for selecting this important topic for debate this afternoon. I know that other hon. Members who represent Scottish constituencies that have ferry ports will want to catch your eye, Mr. Deputy Speaker.
It is obvious that ferry services are important for islanders. The islands and peninsulas of the west of Scotland have been served for many years by the state-owed Caledonian MacBrayne shipping company, known locally as CalMac. The importance of shipping to the islands is reflected by the well known parody of the 24th psalm:
"The earth is the Lord's, and all it contains, except the Western Isles, which belong to MacBrayne's."
That parody shows how important ferry services are to islanders. They dictate much of island life.
Owing to the small populations on the islands, the CalMac services are viable only because the company receives an annual subsidy from the Scottish Executive. However, because of that subsidy, European Union regulations dictate that those services must be put out to competitive tender. There is no demand from islanders for those services to be put out to tender, but tenders are being forced on the Scottish Executive by the 1992 European maritime cabotage regulations. It is important to note that that demand did not originate in Brussels. It originated much nearer home, from the British Tory Government. That Government held the presidency of the European Union in 1992 and, during the term of their presidency, they pushed the regulations through Europe.
At the start of the British presidency, the then Transport Secretary, John MacGregor—now Lord MacGregor—boasted in a written answer that he would
"take forward the increasingly rigorous application of the state aid rules in the transport sector so as to provide for full and proper competition in the single market."
He certainly succeeded in that aim: he drove the regulations through the Council. However, Lord MacGregor clearly did not have a clue what he was talking about because, in the same written answer, he said:
"The anachronism of the United Kingdom and some other member states having their coastal trades open while the rest did not will be ended."—[Official Report, House of Commons, 24 June 1992; Vol. 210, c. 247–248W.]
The written answer made it clear that Lord MacGregor was completely unaware that, within the United Kingdom, Caledonian MacBrayne-operated services were not open to competition. When, as President of the Council, he signed the legislation into law, he seemed unaware of the situation on the CalMac routes. So we have a set of European rules that were foisted on us by a Tory Government who did not have a clue about the reality of ferry services in Scotland.
It is interesting to note that the legislation came into effect on 1 January 1993, yet here we are 12 years later without Britain being compliant with the regulations. During the latter years of the Tory Government, both Secretaries of State for Scotland—now Lord Lang of Monkton and Lord Forsyth of Drumlean—wisely
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ignored the legislation that their Cabinet colleague had promoted. Even the arch-privatiser, Lord Forsyth, decided that it was a privatisation too far.
The Commission noticed eventually that the United Kingdom was not complying with the legislation and shortly after the establishment of the Scottish Parliament in 1999, it ordered the Scottish Executive to comply. However, the Scottish Executive have found it difficult to comply with the legislation and, after six years of discussion and consultation, they have still not succeeded in coming up with a workable solution.
It is important to remember that the legislation was designed to open up the lucrative sea routes to holiday islands in the Mediterranean and the Aegean to competition.
Mr. Brian H. Donohoe (Cunninghame, South) (Lab): I am grateful to the hon. Gentleman for securing the debate. Let us consider the Greeks, for example. Is he aware that, even at this stage, they have not complied? The Italians are still not complying. If the Scottish Executive wanted to use a bit of initiative, they could overcome the problem.
Mr. Reid : I am grateful to the hon. Gentleman for his intervention. I was not aware that the Greeks were still not complying, although I knew that they had a derogation until 2004.
The measure is completely impractical for the unprofitable routes in the west of Scotland. In the second half of this year, the UK will again hold the EU presidency. My purpose in requesting the debate was to draw the House's attention to how unworkable the proposal is, and, assuming that the Government are still in office and that a certain event does not remove them before then, to ask them to use the power and influence of the presidency to get these unworkable European rules changed, so that the tender does not have to go ahead. A British presidency was responsible for creating this mess; let us make another British presidency bring it to an end.
I now want to turn to why the European rules are unworkable in the west of Scotland context. If left purely to the market, there would be sailings only to the larger islands and in winter, even those large islands would receive a very poor service; the small islands would have no service at all, so a subsidy is clearly necessary. Under the EU rules that means a tender; a tender means a contract and a contract must have a tight specification. That means complete timetable inflexibility for the six years of the contract. Under the current arrangements, no one in the public or the private sector would dream of trying to set a ferry timetable six years in advance, but under these rules, that is what has to be done. Until now, timetables have been reviewed every six months and can be altered as circumstances change. That flexibility will go with the tender.
Six years is the maximum length of the contract that the EU rules allow, but a six-year contract is clearly not long enough to allow the operator to think of the long term and develop the services. The vessels themselves will still be the property of the Scottish Executive, but the operator will be responsible for the maintenance
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during the six years of the contract. A vessel normally has a working life of about 25 years, but the operator will simply skimp on maintenance and not care what state the vessels are in at the end of the six-year contract. We all know that we look after our own car far better than a hire car, and that is inevitably what will happen in this case.
The European legislation ignores the fact that shipping services comprise many elements: vessels and crews, and land-based infrastructure such as piers and harbours. In order to implement the legislation, the Scottish Executive will be forced to set up a vessel-owning company with the generic name of Vesco and an operating company with the generic name of Opsco. They have to be set up as two separate companies instead of being integrated into one company, as at present. Clearly, that will cause problems.
The piers and harbours are owned by many different organisations, some by CalMac, some by local authorities, some by trusts. A multiplicity of contracts between Vesco, Opsco and the port and harbour authorities will be necessary, which reminds me of the railways fiasco. The situation has been called Railtrack on water and we are heading for the same sort of mess.
Another problem is what happens if the operator, Opsco, goes bankrupt. I doubt if the Scottish Executive will have retained the expertise necessary to step in and pick up the pieces. Any private shipping company asked to step in at short notice will be able to hold the Executive to ransom. After only a few days without a ferry service the islands will start to run out of food and other essential materials.
In order to compete with the private companies, CalMac will be forced to transfer the employment of its crews offshore to avoid paying United Kingdom employers' national insurance contributions, which will cost the Treasury £1 million a year. Under the EU rules, the Scottish Executive cannot insist on the vessels remaining under a UK flag; they can sail under the flag of any EU country. But other EU countries have lower standards for training and expertise of the crews than Britain, so standards will inevitably fall.
In order to enforce a contract it clearly needs penalty clauses for lateness or failure to complete a sailing. However, that also leads to problems. Already, because of the penalty clauses in rail contracts, connecting trains will not wait at the station if the boat is late. We will now be faced with the same situation with the ferries. The boats will not wait for the late trains for fear of the penalty clause.
Inevitably, we will get into a situation when passengers from the train at Oban, say, could even be sprinting along the pier, only to see the captain order the gangway up in order to avoid the penalty clause. To some small islands, the next sailing could be three days later. That is clearly a farcical situation, but it is what we will be faced with under a penalty clause system. A huge majority of my constituents want CalMac to continue to operate these lifeline services. CalMac has its faults—nobody would say that it is perfect—and it certainly has plenty, but a public body can be lobbied and pressurised into making changes, whereas a private sector body will be interested only in conforming to the timetable, avoiding penalty clauses and making a profit.
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Crews often live on the islands and are part of the local community. In the small islands, a large proportion of the work force work for CalMac. The crews have a commitment to those islands, whereas a private operator, with crews possibly from the far side of Europe, will not have same commitment to the island communities.
The legislation has already wasted a great deal of taxpayers' money. CalMac has spent considerable sums engaging consultants and has devoted a great deal of time and energy to preparing for the tendering process that would have been better spent improving ferry services.
One of the principles of the European Union is subsidiarity, which is supposed to be about devolving power to local communities. However, the Scottish Parliament is against the tendering, as are the local communities. The Government should back those communities in Europe.
As I have said before, the Tory Minister who was responsible for the legislation had not a clue about the situation in the west of Scotland. He was simply following the "if it moves, privatise it" ideology that gave us Railtrack. Rail privatisation failed. I know that my hon. Friend the Member for Orkney and Shetland (Mr. Carmichael) wants to catch your eye, Mr. Deputy Speaker, and he will be able to tell the House how these regulations failed the Northern Isles.
It is also interesting to note that the regulations do not apply to buses. European Governments can subsidise buses without the need for competitive tenders. There is no sense in the rules applying to ferries but not to buses. The Scottish Executive could subsidise the bus to Skye without a tender, so why not the ferry to Tiree? There is no logic in that at all.
I have explained all the problems that the regulations will cause. In the second half of this year, Britain will be in a uniquely influential position in Europe through holding the presidency. I urge the Government to use that position to persuade the Commission and the Council of Ministers that it simply does not make sense to enforce the rules in the fragile economies of the peninsulas and islands of the west of Scotland. They were designed for the lucrative Mediterranean, where competition might make sense.
This unwanted legislation could well wreck those economies completely. It was never designed for such a situation. I remind the Minister that even Lord Forsyth shied away from implementing it. I hope that the Government will not support such a privatisation and I appeal to them to do all that they can to end these unwanted and unworkable rules.
4.14 pm
Mr. Alistair Carmichael (Orkney and Shetland) (LD): I congratulate my hon. Friend the Member for Argyll and Bute (Mr. Reid) on securing the debate and on having presented a detailed and cogent case on behalf of his island and peninsula communities. I know well the importance of such services to his constituents, as I was born and brought up on one of the islands in his constituency, as well as representing an island constituency.
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My hon. Friend highlighted a number of the problems that have resulted from competitive tendering. Such problems are well known to us in the Northern Isles because we are one step down from the situation currently faced by the Western Isles. We have had one round of competitive tendering. The tender was called in early by the Scottish Executive and we are now going through the tendering process for the second time. Many of the fears that my hon. Friend outlined today have been well founded in our experience.
The matter to which I wish to bring the House's attention today, and on which I seek Government support, is that in the course of the re-tendering process, we have been told that the EU Commission has decided that state aid rules should exclude livestock transportation, so that livestock is to be treated in the same way as any other freight transport. The impact of that on Shetland farmers and crofters is an increase of up to 50 per cent. in the costs that will be exigible for the transportation of sheep and cattle to mainland Scotland. My farmers and crofters are already operating on exceptionally tight margins, so that will be a critical issue to be resolved in the next few months.
Yet again, I find myself frustrated in the extreme that although state aid rules are intended to ensure open competition, they operate in a narrow, restrictive way that excludes constituents of mine and, I suspect, other peripheral island communities from participating in the marketplace. The European Commission is supposed to operate according to the treaty of Amsterdam, subject to the special treatment of peripherality, as it is called. Island and remote communities can be treated differently, and it is an immense source of frustration to me that that never seems to apply in practice. It is a small point, but I hope that if the opportunity arises for the Minister to support our case, she will do so.
4.16 pm
Mr. Calum MacDonald (Western Isles) (Lab): I should like to congratulate the hon. Member for Argyll and Bute (Mr. Reid) on securing the debate on this important issue, and should like to make two quick points, as I agree pretty much with everything that he said. If it were possible to amend the European regulations, that would be a terrific breakthrough. Can the Minister enlighten us as to whether that is possible?
My first point is that one of the difficulties that people have is not knowing whether the whole tendering process was initiated at the behest of the Commission and forced upon the Government, or less cleverly, whether it was initiated by the Executive themselves. If people could be sure that it was forced on the Government by the Commission, they would not necessarily be happier, but would realise that such matters have to be accepted without breaking the law. Can the Minister address that point and give a reassurance that it is not something that the Government have initiated or rushed into, and that it has been forced on them? If so, that would be welcome.
My second point, which was touched on by the hon. Member for Argyll and Bute, concerns the question of the terms and conditions of employees of CalMac, and its health and safety record, which, we would all agree, is second to none. There is concern that the tendering process will threaten both the terms and conditions of
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those employees and CalMac's health and safety record. The Minister will know that the National Union of Rail, Maritime and Transport Workers is currently balloting, trying possibly to call industrial action, and we would all agree that it would be disastrous if that went ahead. It would be helpful if the Minister could give a reassurance that nothing in the tendering process will diminish the continuing commitment of CalMac and the Government to the health and safety record that it has established on the west coast, as well as to the employees' terms and conditions.
4.18 pm
The Parliamentary Under-Secretary of State for Transport (Charlotte Atkins) : I congratulate the hon. Member for Argyll and Bute (Mr. Reid) on securing this important debate, and other hon. Members on being here to represent their constituents on this important issue.
Let me first set out the situation, so that hon. Members are absolutely clear about it. Clearly, the Government have not chosen the situation. In terms of UK law, responsibility for transport links in Scotland lies within the devolved sector, by virtue of the Scotland Act 1998. As hon. Gentlemen know, the Department for Transport's Ministers have absolutely no say in what ferry services in Scotland should be subsidised, what the specifications are, or what the balance should be between subsidy provision and revenue from the farebox. Crucially, neither do the UK Government have any financial responsibility for any subsidy provided in Scotland. They are matters for local judgment in Scotland. The Scottish Executive have adequate policy and financial powers to support and maintain the lifeline ferry services.
It is important to make it clear that there is no threat to those services. The Scottish Executive specify the level of service, and will continue to do so. EU guidelines allow alterations to be made to the contract during the six-year period. It is not a matter of setting the level in stone six years in advance and sticking to it throughout. The service pattern can be changed. Neither the Scottish Executive nor the UK Government are, however, free-handed on the method by which such services are procured. Both are strictly bound by the UK's participation in the EU and by what EU policy and practice require.
The hon. Gentleman pleaded with the Government to change the rules, but whether or not we hold the EU presidency—I am grateful to the hon. Gentleman for reaffirming his belief that we will be returned to government after the general election, whenever that is—and having said that the Commission has the monopoly and the initiative to make changes, the presidency is a neutral chairmanship and does not have the chance to suggest changes to the regulations. We want to make progress on a range of issues, but an amendment to the regulations does not fall within our ambit.
As hon. Members will know, the EU policy of particular relevance is the single internal market in services and goods and in the movement of citizens and labour. As one would expect, there is a direct
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application of that doctrine in shipping services, as shipping is pre-eminently a service industry. Most services operating within the EU do so commercially without particular or distorting subsidy. That applies from Finland and Cyprus to Portugal and the UK. Where it is found that the single market is not being correctly applied, the Commission properly investigates and challenges the policies of member states. Where it is not satisfied that specific policies are being applied in accordance with treaty obligations, it is empowered to take member states to court, to seek rectification and to recover any money improperly applied as state aid. All that is inherent in the accession treaty signed by the UK. So we have no choice.
Inevitably, EU policy on the single market is also translated into EU regulation for purposes of enforcement. There is also, however, provision for addressing circumstances in which, exceptionally, shipping services cannot be sustained on a purely commercial basis. These are cases in which everyone agrees that subsidy is necessary and appropriate. In the case that we are examining today, regulation 3577/92 applies as the requirement specific to the supply of shipping services in EU member states.
A basic single-market freedom is the freedom to provide services competitively. That applies in shipping, too. It also applies specifically to the freedom to provide those services in return for a subsidy. As all Members know, article 4(1) is key. It states that member states must impose public service obligations on a non-discriminatory basis in respect of all Community shipowners.
The crucial words are "on a non-discriminatory basis." An exclusive financial arrangement between a subsidy provider, in this case the Scottish Executive, and a service provider, in this case Caledonian MacBrayne, fails the test. With the completion of a single market, other prospective operators of shipping services must have the opportunity to bid for whatever subsidy the public authority considers to be justified. Accordingly, the current arrangements must be replaced by those that comply with regulation 3577/92.
Mr. Carmichael : Does the Minister appreciate my frustration and that of my constituents that, time after time, the regulations are applied in a way that is, frankly, discriminatory? They discriminate against those of us who live in areas that are geographically remote and who rely on such services. As I said, that in itself contravenes the treaty of Amsterdam and the concept of peripherality. Why do the Government never argue that case in Europe?
Charlotte Atkins : As the hon. Member for Argyll and Bute stated, this Government did not negotiate the article. At present, we are stuck with something that was done by the previous Conservative Government. I appreciate the point that the hon. Member for Orkney and Shetland (Mr. Carmichael) made that the lifeline services are crucial to his constituency, and the very fact that it is remote indicates that when the tendering exercise does take place it is unlikely that many other companies would want to tender for the services, as they are specialist services. However, we must accept that they have to be subject to a competitive tender.
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Mr. Reid : The Minister correctly said that the problem was article 4(1), but surely there must be a mechanism by which European law can be changed. The Government are a big player in Europe. Can they not go to Europe and say that they want the article changed?
Charlotte Atkins : Clearly, that is an issue for the Commission, which is able to initiate the process, and, if that happens, there must be agreement right across Europe. That is the issue. Hon. Gentlemen said that other countries were not carrying out the requirements of the regulation, but the Commission can take action against them, as it can against the UK Government.
The Scottish Executive have made quite a lot of progress with the Commission, which has already acknowledged the special circumstances of ferry services in the Clyde and Western Isles. Indeed, it has indicated that it is content to regard the current bundle of services as the basis of a single contract, and that, instead of cherry-picking, the contract should not be split into individual services for tendering purposes.
The Commission has also accepted the idea of retaining the specialised ships used for these services in Scottish Executive hands, leaving only the operation of the services with those ships as the basis of the contract. It has also accepted the idea of some mainland-to-mainland services forming part of the lifeline services to the islands, and it has offered a de minimis clause for lightly used services below a threshold of 100,000
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passengers a year. That package is a tribute to the negotiating skills of the Scottish Executive, but, having conceded all that, the Commission now expect contracting to proceed through open competitive tendering, and we have no powers to change that.
The issue of competitive tendering is still being clarified with the Transport Commissioner, Mr. Barrot. Article 4(1) of the regulation requires the award of a contract on a basis that transparently demonstrates that there has been no discrimination among potential community bidders. How can one do that without having a competitive tender?
Clearly, if there were another way of doing it, we could propose that, but it is difficult to find a way that would ensure transparency. We have a problem, but we must move forward. The Scottish Executive have made progress with the Commission, and I believe that they will be able to take the matter forward. The services will be protected by the work that the Scottish Executive are already doing.
I appreciate that the uncertainty has been of real concern to hon. Members who are in the Chamber today, but it is important that we move forward to ensure that services are provided on a legal basis that we can defend, if necessary.
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