[Relevant documents: First report from the Scottish Affairs Committee of Session 1995–96, on the removal of tariff rebate subsidy on Northern Isles freight (HC 229), and the Government's response thereto (Cm 3492) ]

Motion made, and Question proposed, That this House do now adjourn.—[Mrs. Lait.]

9:34 am
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Mr William McKelvey (Kilmarnock and Loudoun)

Good morning, Madam Speaker. I am delighted to have this opportunity to debate tariff rebate subsidy. This is an historic event, as it is the first time that the Select Committee on Scottish Affairs, which was formed comparatively recently, has had time on the Floor of the House to discuss a report and the Government's response. By way of introduction, I shall outline the history of the tariff rebate subsidy scheme in the highlands and islands, so that people who enjoy reading the debate later on may understand what it is about.

The Highlands and Islands Shipping Services Act 1960 commits Governments to maintaining and improving sea transport services in the highlands and islands, by giving financial assistance to the operators. The Government introduced the tariff rebate subsidy for the carriage of freight to the Northern Isles in 1979.

The subsidy is intended to reduce the cost of supplying essential commodities to customers in remote highland and island locations and to promote exports. Its primary purpose, according to Highlands and Islands Enterprise, is to sustain the economy of the islands and to retain their populations, which I am sure that the whole House would agree to be a laudable and sensible objective.

Service users benefited directly by receiving freight accounts net of the tariff rebate subsidy, while shipping operators reclaimed the discounted figure from the Scottish Office. The scheme provided freight rate reductions of 10.5 per cent. on imports to Orkney and Shetland and 47.5 per cent. on exports.

In 1989, subsidy claims from P and O Scottish Ferries were limited to a fixed amount; in effect, a capping system was introduced. That system was then extended to cover the freight services operated by Orkney Line and Shetland Line from 1991 and Orcargo from 1993. On 1 May 1995, the Scottish Office withdrew the tariff rebate subsidy on freight, with two exceptions: fish meal and fish oil retained tariff rebate subsidy for three years, reducing from 30 per cent. on 1 May 1995 to zero from April 1998; and southbound livestock retained the subsidy, but at a reduced rate of 33 per cent.

The Government argued that tariff rebate subsidy was a flawed system, and initiated a review of the market, to identify better means of supporting the shipment of bulk freight in the future. At that time, the Select Committee on Scottish Affairs decided to investigate the matter. We all enjoyed the visits to Orkney and Shetland, which gave us a great opportunity to hear for ourselves the concerns of the local people about what was happening.

Some doubts were expressed about the Select Committee's ability to understand such an intricate subject, but at the end of the day I was happy to hear at least one person say that she was astonished by the scope of the questions that we asked and our obvious knowledge; I must therefore pay tribute to the people who fed us the questions.

The Government raised specific questions about the level of subsidy paid to the bulk shipping service operators in the Northern and Western Isles, which had increased in real terms from 800,000 to 2.7 million between 1981 and 1995. Tariff rebate subsidy increases with the level of carryings, which has caused the Government to view it as flawed. The Committee felt that they had missed the point. TRS was introduced to help retain population on the islands by improving economic competitiveness and hence the productivity of island communities. It is therefore obvious that, as economic activity increases, with, for example, increased exports, the subvention will also rise. That tariff rebate subsidy increases as economic activity increases might therefore be considered an acceptable outcome.

The difficulty arises when the tariff rebate subsidy begins to exceed the finite resources that the Government allocate for shipping subsidies, and the capping mechanism is employed. The Government concentrate their attention on the effect of capping on the providers of shipping services—the competitive effect—but it should be remembered that capping must also ultimately restrict economic activity on the islands, thus adversely affecting island communities—the opposite of the intention of TRS.

The Government have also suggested that TRS encourages excess capacity in the bulk freight market. The Select Committee considered the effect of the removal of TRS on Northern Isles freight, found no evidence for that, and reported accordingly to the House. Bulk shipping services are provided on a tramp—rather than a scheduled service—basis, as in the ferry sector. That means that bulk shipping capacity tends to arrive in the market only when demand warrants it.

For instance, the Hay and Company vessel was also employed on other coastal routes around the United Kingdom; it was not used solely for Northern Isles trade. The Government's suggestion that bulk operators were forced to run under-utilised vessels on Northern Isles routes and that such under-utilisation was subsidised by TRS was not borne out by the facts disclosed by our investigation. TRS applies to the freight rate in respect of cargo carried, not the vessel's space or the capacity that is provided. Therefore, TRS could hardly be said to create excess shipping capacity in the bulk freight market.

The concept that TRS is flawed ultimately depends on what the Government's objective is. Perhaps the Minister will enlighten us when he replies. If the objective is to restrict, or even withdraw, public expenditure in respect of shipping service subsidies, then, far from being flawed, it could be argued that Government policy has altered and that they believe that support for bulk shipments is no longer necessary. That is a sensible point at which to turn to examples of how the public sector supports essential passenger and freight ferry services in other European Union countries. The Government may want to consider some of those methods.

The Spanish Government provide guaranteed funds for ship mortgages, corporate tax allowances for Spanish-registered ships, and exemption from transfer tax and stamp duty, and pay 50 per cent. of the social security contributions of shipping employees. Ferry services to the Canaries, the Azores, Madeira and the French Atlantic possessions are all maintained, in one way or another, with state support. Italy supports its state-owned ferry operator with contributions to vessel costs and a subsidy to cover trading losses. For private operators, the Sicilian regional government reimburses 50 per cent. of the cost of round-trips for tourist cars between Genoa and Sicily.

The tariff rebate subsidy is flawed only from a certain viewpoint. If it is there to help island communities to compete economically, to survive and to allow people to remain on the islands, it can hardly be said to be flawed, as it clearly fulfils that purpose by aiding the creation of island businesses that specialise in production or consumption of bulk commodities. It is another matter if it is considered flawed because it is an increasing burden on the taxpayer.

The Government have argued that TRS is flawed because it does not offer value for money to the taxpayer and cannot be sustained in the longer term. That statement suggests that the Government favour restricting, if not entirely removing, the subsidy. I shall wait to hear what the Minister has to say on that. I am glad that the Government have listened to the Select Committee and rejected entirely removing the subsidy. I welcome the Government's acceptance of the immediate reinstatement of TRS for the carriage of bulk freight to and from Orkney and Shetland and of putting TRS for the carriage of livestock back up from 33 to 50 per cent.

I am concerned about the four options identified by the Government as alternatives to TRS for bulk freight. The first two options both involve capping. Each would effectively place a limit on the public funds allocated for shipping subsidies. When a cap is introduced, demand for shipping capacity must fall, as must economic activity. The question is one of balance: the quantity of public funds against how much economic activity is needed and desired on the islands.

The Government's third option involves completely tendered contracts operating on a geographical basis. That probably means that one or two bulk shipping operators would serve the Northern Isles routes. Curiously, the Government suggest that that would address the problem of excess capacity, a problem that does not exist for bulk freight services in the Northern Isles. Such franchise agreements would be a subsidy to the transport provider, not to the shipper or consignee of goods.

That was a core issue in the Select Committee's report. We said that the emphasis of tariff rebate subsidy had changed and had become a subsidy for the transport provider. While the operator would be monitored, it is reasonable to suggest that conflict might arise if market freight rates were subsequently increased to take account of a decline in demand or lack of adequate subsidy for a given period.

Bulk vessels seem to be regarded as homogeneous craft, but companies on Shetland need specialised tankers to transport fish oil. Such services would need to be considered in any franchise scheme and would increase the complexity of that option.

The fourth option would place the subsidy with the public authorities in the islands, to enable them to purchase their preferred service. It is not certain that all the islands councils would want to bear such a responsibility, although it was made clear to us that Orkney would favour it. Orkney islands council is bidding for the lifeline passenger service to Orkney.

Another issue of great concern is the Government's decision not to allow CalMac to tender for lifeline services. The main argument against that is the delay that would be caused in tendering. Our investigation has already caused some delay, but it was worth while, as I am sure the Government agreed when they received our report. A further delay would allow CalMac to tender, which could prove worth while. Even at that late stage, it would not be wise to rule it out. It has been argued that CalMac has an unfair competitive advantage, but the Committee thought that, as it has been found to be as efficient as the private sector by no fewer than three different consultants' reports, it could be more cost-effective to the taxpayer.

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Mr David Marshall (Glasgow Shettleston)

My hon. Friend mentioned the suggestion that CalMac might have an unfair competitive advantage. Could that not apply equally to P and O?

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Mr William McKelvey (Kilmarnock and Loudoun)

I was merely saying that the Government had suggested that there was an unfair advantage; I was not saying that. My hon. Friend is right, because the Select Committee strongly felt—I put it no higher—that there was a very cosy relationship between the Scottish Office and P and O. In effect, P and O has been subsidised at a time of loss, and I shall return to that matter in more detail later in my speech.

The competitive tendering process has more to do with dogma and a bias against publicly owned, yet—as in this case—successful operators than with any threat to competition. I am concerned also that the Scottish Office is saying that, as passenger ferries carry freight and livestock, those services do not need to be separately defined as "lifeline". Freight-only services are likely to be provided in line with demand without subsidy; and it was pointed out to the Select Committee that, if new craft were to be introduced on that route—as they no doubt will be in the future—they might not have freight capacity and might be simply for passengers and cars. That would leave the islanders in a precarious position—again, the reverse of what the subsidy was intended to preserve.

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Mr David Harris (St Ives)

I congratulate the hon. Gentleman and the Committee on this interesting report. Is he aware that the Isles of Scilly in my constituency have had no subsidy at all for the operating costs of ferries from the mainland to the islands, or from St. Mary's to the off islands? Does he think that that is right? Is he aware of the considerable resentment of the Scilly islanders at the difference in treatment between the Scottish islands and the Isles of Scilly?

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Mr William McKelvey (Kilmarnock and Loudoun)

In all its travels, the Select Committee on Scottish Affairs never had the opportunity to visit the Isles of Scilly. I wish that we had thought of that, as we could have compared the two areas.

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Mr William McKelvey (Kilmarnock and Loudoun)

Only a certain amount of finance is allowed to Select Committees—as you well know, Madam Speaker—and we Scots are frugal when it comes to travel. However, the hon. Member for St. Ives (Mr. Harris) raises an interesting point and it is something worth looking at. I am not sure whether there is a need to maintain the population in the Isles of Scilly—as there is in the Northern Isles—but if so, there is scope for argument that a subsidy should be provided to improve the services to those islands.

Many matters have been raised, and many hon. Members are anxious to catch your eye, Madam Speaker. The members of the Select Committee who are in the Chamber are now specialists in the area. My hon. Friend the Member for Glasgow, Shettleston (Mr. Marshall) referred to the perceived losses by P and O Scottish Ferries, because of competition, and the loss in market share for freight because of the new entrants to the TRS scheme. Between 1991 and 1992, P and OSF's financial performance deteriorated by some 4.4 million. During the same period, P and O's freight revenue fell by only 1.4 million.

Other factors in the loss of freight revenue were more significant, and I recall that the members of the Select Committee were surprised by them. Higher interest and depreciation charges in respect of replacement ships came to a total of 24 million. During 1991–92, P and O undertook the purchase and refit of two second-hand vessels—the St. Clair and the St. Ola. In the case of the St. Clair, the cost of 15 million was 50 per cent. more than all investment over the previous five years. The MDS Transmodal report suggested that P and 0 had incurred significantly higher finance charges over that period. Coincidentally, the current cost accounts of Caledonian MacBrayne show a loss of 4.4 million for 1991—almost all because of increased provision for depreciation.

The Select Committee saw the issue of vessel replacement as of central importance to the inquiry, and the report states: We believe the dramatic deterioration in profitability experienced by P & OSF between 1991 and 1992 was less as a consequence of the fall in freight revenues than due to an increase in depreciation, interest and other charges related to increased capital expenditure on replacement ships. I wish to refer to the recent tendering process for the contracts for supplying ferry and freight services. From the original 18 tenders—which did not include Caledonian MacBrayne—we are now down to three. There has been a change in the terms of the tendering for contracts, inasmuch as the three remaining firms will now be aware that—because of changes in European legislation—they would qualify for a 50 per cent. grant towards the purchase of a new vessel. That information was not known to the other 15 tenderers, which have since dropped out. That in itself leads me to believe that the Government should reconsider the tendering process.

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Dr Norman Godman (Greenock and Port Glasgow)

On the acquisition of new purpose-built vessels—I refer to paragraph 81 of the Committee's fine report—I should point out that, with European funding, the contracts for the building of such vessels would have to be advertised throughout the EU. More important, however, Caledonian MacBrayne has vast experience of designing and running purpose-built vessels to transport goods and people between the islands and the mainland.

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Mr William McKelvey (Kilmarnock and Loudoun)

My hon. Friend raises a relevant and helpful point.

I am nearing the end of my speech. If I may, I shall refer to a recent cartoon that appeared in the papers in the Northern Isles and which summed up the situation as most islanders believe it to be. The cartoon depicts a sporting scene and a stadium with three runners about to take off in a hurdle race. In the outside lane, we see Orkney Ferries, which has limited routes and is involved in the tendering process. In another lane, we see Sea Containers, which has the route from Argyll to Northern Ireland. Both those runners are depicted as quite muscular. P and O, however, is drawn as slightly bent and balding—not unlike myself—and certainly middle-aged.

The runners are about to take off at the sound of the starting pistol. The hurdles for Orkney Ferries and Sea Containers are drawn as about 6 ft high, while the hurdle for P and O is about 2 ft high. That encapsulates the feeling in the Northern Isles—people feel that P and O is again being favoured by the Scottish Office and that there is a cosy atmosphere between the two. That very much concerns local people.

We are to have a general election, and my hon. Friends and I hope that it is sooner rather than later. The Government must take cognisance of that fact, and of the fact that most commentators say that there will be a change of Government. We shall have to wait and see. Because of questions about the availability of grant, the Government would be wise to suspend the tendering operation, with a view to reconsidering it after the general election. Perhaps Caledonian MacBrayne might then be given an opportunity to tender, if it so wishes.

9:58 am
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Mr Phil Gallie (Ayr)

The hon. Member for Kilmarnock and Loudoun (Mr. McKelvey) said that this was something of an historic occasion, in that it was the first time that a report by the Select Committee on Scottish Affairs had been debated in the House. However, I believe that the Select Committee has created history since 1992. It was not constituted before 1992, and there was a gap. The hon. Gentleman is the Chairman of the Committee, and I commend him. The Committee has carried out many interesting investigations, and although I have not agreed with him on every occasion, he has always been fair and taken a positive view.

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Mr David Marshall (Glasgow Shettleston)

Is the hon. Gentleman aware that, between 1979 and 1987, the Select Committee on Scottish Affairs produced a number of good reports, and that one of the Chairmen was my hon. Friend the Member for Aberdeen, North (Mr. Hughes), who is present today? Does he agree that the reason why there was no Select Committee on Scottish Affairs between 1987 and 1992 was the failure of the Conservative party to provide enough Members of Parliament who were willing to serve on the Committee? Labour Members were only too willing to serve, but the Conservatives prevented the Committee from meeting.

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Mr Phil Gallie (Ayr)

I do not disagree with any of the hon. Gentleman's comments. Had I been a Member of Parliament before 1992, I should have wanted the Select Committee to be reconstituted, and I have worked pretty assiduously within the Committee since being elected. What happened before 1992 is another matter entirely.

I want to say to the hon. Member for Kilmarnock and Loudoun that recently we carried out an interesting investigation into community care, and I hope that today's debate has not slowed efforts to get that report published. I should like to think that I shall be here in the next Parliament to debate that issue on the Floor of the House, because it is vital to Scotland.

This debate arises from the abandonment in 1994 of the tariff rebate subsidy, albeit in conjunction with maintaining it at a reducing level for fish oil, fish meal and livestock. One pleasing aspect of the Committee's investigation is the fact that, as a direct consequence, my right hon. Friend the Secretary of State has uprated the TRS for livestock, principally in support of the Kirkwall-Invergordon route. The TRS has been uprated from 33 per cent. to 50 per cent.; I welcome that, and the Government's comments. The one thing that is not stated in the Government response is whether that is against a fixed time scale. I would suggest to my right hon. Friend or his successor, although I think that he will remain in his post after the general election, that that uprating should be continued.

The subsidy for Northern Isles services was turned around to the block grant for passenger services, to be competed for by service providers. As the hon. Member for Kilmarnock and Loudoun suggested, in the first instance, that certainly seemed to favour P and O Scottish Ferries and, to a degree, it allowed the company to set its own standards for that service. The results appear to be acceptable and they are welcome to Shetlanders, who receive a regular and extremely good service between the islands and Aberdeen, and there is no doubt that the service suits the commercial interests and tourism industry on Shetland.

However, concerns about the under-usage of capacity that was identified in the Committee's report are ignored. One difficulty that the Government must recognise is the difference of opinion between people on Shetland and people on Orkney. An easy answer might be for the Government to come up with additional cash to throw in different ways at the different islands, but I do not believe that that is a practical solution.

There are other issues in the report on which the Government have acted positively. They have addressed the issue of regulation of maximum freight tariffs within the passenger ferry service contract. However, in addition, we should consider the charges made in respect of cross-subsidy by P and OSF and examine the extent to which minimum freight tariffs would be appropriate. I am advised that P and OSF levies a livestock charge on the Invergordon run of 5.15 per head of cattle, which compares with a charge of 17.38 in 1992. Given Orcargo's charges, the 1992 figure appears to be more appropriate.

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Mr Phil Gallie (Ayr)

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 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.

On the consequences of the reinstatement of the bulk freight TRS, Highlands and Islands Enterprise says: 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.

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.

The list goes on, but as the hon. Member for Greenock and Port Glasgow (Dr. Godman) keeps pointing to me and to the clock, I recognise that other hon. Members wish to speak in the debate. I look forward to hearing what they have to say and, above all, to hearing the response of my right hon. and learned Friend the Minister.

10:11 am
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Mr Jim 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 members took time to visit the isles to take evidence and to prepare what has been a valuable contribution to the debate.

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 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.

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: 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.

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: 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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Lord James Douglas-Hamilton (Edinburgh West)

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.

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Mr Jim Wallace (Orkney and Shetland)

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 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.

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.

The services are vital to my constituency. We suffer the disadvantages of geography. but they can be mitigated. Business development depends on the availability of transport at affordable prices. We want to secure a safe, efficient and cost-effective system of transport for freight and livestock as well as for passengers and cars. We do not want to see the re-emergence of a monopoly. I do not believe that the Government have yet responded adequately to the Select Committee report, but we live in hope.

10:27 am
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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—

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Mr Andrew Welsh (Angus East)

—and crews' wages, as my hon. Friend says—as newer vessels would be less well placed to submit a lower bid?

I have been brief and specific. There is a clearly expressed concern on Orkney and Shetland about the possibility of the creation of a monopoly service. The view from Edinburgh may be different, but the issue affects everyone on the islands and their entire economic and social life. I ask the Government to address the questions specifically and to give the assurances being sought on a matter that is crucial to the future of every man, woman and child on Orkney and Shetland.

10:31 am
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Mr Calum MacDonald (Na h-Eileanan an Iar)

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: 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.

10:32 am
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Mrs Helen Liddell (Monklands East)

I shall be brief, as several of my hon. Friends have posed serious questions to the Minister and we want to give him the utmost opportunity to respond.

I, like my hon. Friends, congratulate my hon. Friend the Member for Kilmarnock and Loudoun (Mr. McKelvey) not just on his contribution to the debate and on securing it, but on the excellent way in which he has chaired the Scottish Affairs Committee. Before becoming a Member of Parliament, I watched the Committee's work closely, and I am well aware of the depth of knowledge and expertise that is applied to many significant issues that affect Scotland.

Through detailed examination of the issues raised in the debate, my hon. Friend the Member for Kilmarnock and Loudoun has done us a great service by bringing down to more simple terms an extremely complex but interesting subject that is of considerable import to the people of the Northern Isles.

The important point that my hon. Friend made relates to the reasoning behind the Government's decisions involving ferry services to the Northern Isles. I reiterate his concern about the value judgments that are being applied by the Government in their responses to the Select Committee report. He drew attention to a considerable misgiving that has been articulated to me by people from the Northern Isles, and a point that has been raised by a number of hon. Members today: the close relationship that seems to exist between the Scottish Office and P and 0 Scottish Ferries.

The fact that people from the Northern Isles raise the matter is an important aspect to be taken into account. The people of the Northern Isles require reassurances that their best interests are at the front of Government policy, not some other arrangement that the Government have yet to explain to us.

The decision, taken by the former Secretary of State for Scotland, the right hon. Member for Galloway and Upper Nithsdale (Mr. Lang), to change the basis of tariff subsidy to the Northern Isles is still questioned. The hon. Member for Orkney and Shetland (Mr. Wallace) drew attention to the consultants' report, over which there is a great question mark. Many of us want more detailed information about the way in which the right hon. Gentleman came to his conclusions on the future of tariff subsidy to the Northern Isles.

I share some common feeling with my hon. Friend the Member for Kilmarnock and Loudoun about whether the decisions in relation to P and O and the services that it provides to the Northern Isles have some dogmatic origin, rather than being directed to the best interests of the public in the Northern Isles.

My hon. Friend made a detailed point about the decline in the financial performance of P and O over 1991–92. The same point was made by the hon. Member for Angus, East (Mr. Welsh) when he drew attention to the depreciation of second-hand ferries and where they appear in the accounts of P and O.

Is it not ironic that I, on the Opposition Benches, am challenging the Government about their creation of an artificial monopoly for P and O, and advocating the free market and competition? Adam Smith must be turning in his grave at the Government's decisions that have led to this cosy relationship with P and O—and to 7.6 million being given to the company. It has been allowed to operate with an artificial monopoly.

In his closing remarks, my hon. Friend the Member for Kilmarnock and Loudoun made a plea for a sensible examination of the situation in the run-up to the general election. That is a reasoned request, and I do not wish to make any partisan point. A general election is looming. There are significant issues to be addressed. The Minister is a sensible man and takes his responsibilities seriously. I urge him to delay decisions on the tendering process to allow the Government elected in the next few weeks—whatever the colour of that Government—to re-examine the issues.

The points made in the Select Committee report about the involvement of Caledonian MacBrayne are very serious. I find it bizarre, to say the least, that a publicly owned company has been excluded from the tendering process for Northern Isles ferries. I find it questionable that we discovered the European regional development fund elements only after 15 of the companies that had entered the tendering process had withdrawn.

The cynicism of the people of the Northern Isles and the rest of Scotland must be addressed. The best way to do that would be to take the issue out of the fevered run-up to the general election and allow a more reasoned re-evaluation. That would provide an opportunity to re-evaluate the Kirkwall-Invergordon ferry as well. We must seek a resolution to the difficulties that have arisen in the case of the Northern Isles that takes into account the most economically efficient, as well as the most socially reasonable, option.

If the general election results in a change of Government, a Labour Government will seek to reopen the tendering process to allow CalMac to tender, and will seek to re-evaluate the issue of ferry services to the Northern Isles. We will try to find a solution that suits the Exchequer, and takes into account the concerns of people in the Northern Isles.

Let me make a more general point. I am worried about the apparent vendetta against CalMac. My hon. Friend the Member for Western Isles (Mr. Macdonald), who is probably more able than anyone else to analyse CalMac's performance because it provides a vital lifeline to the Western Isles, has referred to the importance attached by people there to CalMac's being given an opportunity to secure the contract for the Northern Isles. We have heard from my hon. Friend the Member for Greenock and Port Glasgow (Dr. Godman) about CalMac's expertise in operating custom-built ferries, and we know of its commitment to securing continuity of service to remote Scottish communities. It is bizarre that it should have been excluded from the tendering process.

I regret having to say this, but, when we look at what happened in relation to the Northern Ireland contract, we must ask what on earth was going on when CalMac was excluded. What makes the situation even worse is the fact that, having been excluded, CalMac was forced to sell one of its vessels at a knockdown price to Sea Containers, which won the contract. That alone is cause for re-evaluation of the issues.

In view of what KPMG has said about the Northern Isles service, there may well be a case for a monopoly to continue. I leave the judgment open, but, if there is such a case, is there not a pressing public responsibility to ensure that a public sector operator operates with the taxpayer's best interests in mind, rather than the profitability of an individual company? Reading the Government's responses to the issues that have been raised, I was surprised to note that P and O's financial performance figured so strongly. I wish that, just occasionally, the Government would take into account the requirement to ensure that CalMac, a well respected ferry operator, is given a level playing field in which to compete.

The issues involved are extremely serious. We are talking not just about the future viability of services to the Northern Isles, but about the economic viability of the Northern Isles. I listened carefully to the reasoned arguments of my hon. Friend the Member for Kilmarnock and Loudoun and, in particular, the hon. Member for Orkney and Shetland who, in his final remarks, made a number of important points about the role of the islands councils, their inclusion in the assessment of the qualitative aspects of tenders and the role that they should play in monitoring the operation of the service. The councillors are the elected representatives of the people of Orkney and Shetland, and their concerns should be taken into account.

The hon. Member for Ayr (Mr. Gallie) asked some pertinent and serious questions, which I hope the Government will answer. For instance, he questioned the suitability of the secondhand vessels that P and O has used, and spoke of the impact that that has had on P and O's accounts in terms of the depreciation of those vessels. He asked for guarantees that standby vessels would be available: such provision is important in remote communities. He also asked what the Government would do to deal with under-utilisation.

One of the hon. Gentleman's most important questions about the tendering process was, "Why was the issue of the European regional development fund raised so late in the day?" He also raised an issue that has caused me considerable anxiety since it was brought to my attention yesterday—access to ro-ro facilities for P and O at Aberdeen harbour. I am also a bit concerned about the fact that the Government have sought to appoint P and O's chief executive to Aberdeen harbour board. We must be assured of transparency in all decisions relating to the Northern Isles.

I think that my comments have been very restrained. I have not, for example, drawn attention to the fact that, since 1991, the Conservative party has benefited to the tune of 100,000 a year from P and O, because I feel that that would have made the debate partisan. It is, however, crucial in the run-up to the general election for us to stand back from the issues, and to give the new Government—whatever their persuasion—an opportunity to take account of the concerns of the people of the Northern Isles about monopolies, the concerns raised by hon. Members about the tendering process and the concerns about ensuring continued economic viability for the remote communities of the Northern Isles.

10:45 am
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Lord James Douglas-Hamilton (Edinburgh West)

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.

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Mrs Helen Liddell (Monklands East)

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?

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Lord James Douglas-Hamilton (Edinburgh West)

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.

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Mr Jim Wallace (Orkney and Shetland)

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?

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Lord James Douglas-Hamilton (Edinburgh West)

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.

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Mr Phil Gallie (Ayr)

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?

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Lord James Douglas-Hamilton (Edinburgh West)

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.

I should make it clear that the Government took the view in 1995 that continuing competition in the freight market, as well as customer resistance to price rises, would act as effective restraints on any significant increase in freight tariffs. We have promised to review the position on freight subsidies if evidence emerges to show that, over a period, prices charged in the freight market as a whole have risen substantially. That is why we commissioned the report.

I should also make it clear that our overriding objective remains to secure the long-term commercial viability of lifeline ferry services to Orkney and Shetland, which are central to the continuing social and economic development of the islands. Final tenders from the ferry operators bidding for the ferry services contract have been invited by 14 March. It is intended to reach agreement in principle on the contract terms with the preferred operator towards the end of April. Normal procedures and rules governing election periods will be followed.

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Mr William McKelvey (Kilmarnock and Loudoun)

Will the Minister give an answer to the problem that could arise from the appointment of the P and O Ferries managing director to the Aberdeen harbour board for three years, as many people would imagine that that implies that the tender has already been won?

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Lord James Douglas-Hamilton (Edinburgh West)

I am very sympathetic to the point made by the hon. Gentleman and by my hon. Friend the Member for Ayr, that whoever wins the tender—I have no idea who it will be—should have the necessary access. It is for the Scottish Office Minister at the time to use his or her good offices to ensure that that is implemented. I wish to ensure that the services are carried out effectively in that connection.

I think that I have answered most of the points raised by hon. Members. The new vessels issue is very important. I have made it clear that the Stockholm agreement requires the new vessels to be on the route by early next century. We are working on an agreement to give operators sufficient reassurance to allow them to invest in new build. The quality objectives laid down in the service specification were tightened after consultation with islands representatives.

We shall continue to monitor the effect of the present subsidy arrangements, in consultation with representatives of the islands' interests, to ensure that essential shipping services continue to be provided to the islands at affordable cost.

I thank hon. Members, and I would like to say how much I enjoyed being a member of the Select Committee that visited Shetland during the Falklands war when we were considering transport.