Tariff Rebate Subsidy (Northern Isles)

Part of Prayers – in the House of Commons at 9:34 am on 12th March 1997.

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Photo of Mr William McKelvey Mr William McKelvey , Kilmarnock and Loudoun 9:34 am, 12th March 1997

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.