I beg to move,
That the Undertaking between the Secretary of State for Scotland and Caledonian MacBrayne Limited, a draft of which was laid before this House on 2nd July, be approved.
The purpose of the draft undertaking for which I seek approval tonight is to give effect to the Government's intention to pay a revenue grant to Caledonian MacBrayne Ltd., a wholly-owned subsidiary of the Scottish Transport Group, to meet a deficit in the group's shipping services on the Clyde and to the Western Isles.
My right hon. Friend the Secretary of State announced on 16th April this year his intention of paying to Caledonian MacBrayne a new revenue grant amounting to about £2½ million per year. Before I come to the reasons for that decision and before I deal with the main points of the draft undertaking, I should set these matters in perspective.
The shipping services on the Clyde were for many years operated by the Caledonian Steam Packet Company, owned by British Rail before it was brought into the Scottish Transport Group in 1969. Until this present year, no direct Government revenue grant was paid for these services, and any losses they incurred in the past were taken up within the general financial arrangements of British Rail and the Scottish Transport Group.
Services to the Western Isles were first subsidised by the Government as long ago as 1928, and for many years Government support for these services took the form of an annual deficit payment in respect of losses incurred by David MacBrayne Limited. This company, immediately prior to the setting up of the STG, was half owned by private interests and half by public interests. The STG, on its foundation, took over the public shareholding and shortly afterwards bought out the private holding.
The new STG decided that much needed to be done to modernise and improve the shipping services for which it was responsible. It therefore embarked on a programme of conversion to vehicle ferry operation to meet the growing demand from tourists as well as from the operators of commercial vehicles. The speed, frequency and capacity of the services to the islands have been greatly developed in recent years as a result of the change to roll-on/roll-off operation by modern vessels.
For example, in the summer there are now 31 sailings a week to Barra, the Uists, Harris and Lewis, compared with 12 in 1955 and 25 in 1965, and each sailing has a cargo capacity much greater than that of the old conventional mail-boat. The House will recognise from these figures how greatly the service has been extended—a point not always acknowledged by its critics, which is why I want it to be put on record.
After considering the finances and traffic prospects of the whole range of services for which it was responsible, the STG came to the conclusion that it should be possible to operate a number of the major services on a commercial basis without Government revenue grant and to concentrate the Government grant on a number of services to small and remote communities which could never hope to pay their way. These views were accepted by the then Government, and new arrangements were announced in April 1972.
As a part of that policy, the STG's shipping services were divided between two separate companies. Caledonian MacBrayne, with which we are concerned tonight, was set up to operate the commercial services, which included all the main vehicle ferry services to the principal islands. David MacBrayne Limited was to operate those uneconomic services which were known to need Government support on a continuing basis, such as those to the Small Isles and to Colonsay.
A new undertaking for David MacBrayne, giving effect to this change, was approved by resolution of this House on 11th December 1973. Because of the quite different nature of these two groups and services, we propose to keep the David MacBrayne undertaking in operation for the time being, and it is not affected by the draft undertaking we are considering.
As things turned out, since the new policy—and the policy of the previous Government—was announced in 1973, the STG has not been able to bring Caledonian MacBrayne on to a fully commercial footing. Price restraint, the fuel crisis, and inflation over the two years 1973 and 1974, brought about a sharp deterioration in the company's financial position. At the same time, there was a considerable volume of complaint from the islands about increases in charges resulting from cost increases, particularly as they affected the economic life in the islands. There was a large volume of complaint, in particular, in the spring last year following an increase introduced at that time.
After representations from the local authorities, we agreed to review the whole position, and I had a meeting with the local authorities concerned on 16th July 1974. This is bringing the story up to date.
As a result of that review, we came to the conclusion that it was no longer possible—certainly in the short term—to contemplate a continuation of the policy that Caledonian MacBrayne should operate on a straightforward commercial basis. To balance the books charges would have had to rise by about 65 per cent. in the current year and possibly by more if allowance were to be made for the falling off in demand which would have accompanied such a steep increase.
The Government concluded that this kind of increase could not be tolerated and, in accordance with the new policy statement of 16th April 1975, we there fore propose, through this present under taking, to pay a revenue grant to the company which is expected to be about £2½ million per year. This new subsidy represents a substantial increase in Government help to the Scottish Transport Group for shipping services from about £750,000, which has been going to David MacBrayne, to over £3 million a year. I want to emphasise that this is a considerable additional commitment by the Government. There is also help in other ways for capital purposes for these services in the Highlands and Islands, not all of it going directly to the Scottish Transport Group.
Nevertheless, we did not intend that this increase in subsidy, or this new subsidy, should mean that there would be no increases in charges at all. As was made clear in the statement in April, the new subsidy for the current year was not sufficient to cover all increases in costs and therefore ferry charges were increased from 1st May this year. The increases were those which had already been approved by the Price Commission last October but which were not implemented, on my request to the Scottish Transport Group. From 1st May this year basically the same increases have been introduced.
In making the increase the Scottish Transport Group sought to meet complaints from the islands about the effect of shipping charges on economic activity by limiting the increase for commercial vehicles to 5 per cent., with the main weight of the increase therefore falling on private cars and passengers, for which charges were increased by 25 per cent. The overall effect of the increase was that revenue from users was about 17 per cent. higher than before.
I should like to refer briefly to the suggestion that has been put forward from time to time, basically by the Highlands and Islands Development Board, but supported by others, that charges for ferry and shipping services should be based on what is called the "road equivalent tariff"; that is, that the charges should be related to the cost of moving a similar vehicle over the equivalent distance on the road.
We have rejected this suggestion for two reasons. First, we consider that charges must bear some relation to actual costs. Otherwise there is a possibility of the whole operation becoming removed from the real economics of the situation.
Secondly, we consider that the cost of such a charging system to the public-purse would be unacceptably high.
It is not possible to give precise figures, but the indications are that revenue based on such a system of charging would bring in only about a quarter of the actual operating cost. In terms of the Caledonian MacBrayne services, that would mean a subsidy of about £6 million instead of the £2½ million which we now propose.