Tariff Rebate Subsidy (Northern Isles)

Part of Prayers – in the House of Commons at 10:11 am on 12th March 1997.

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Photo of Jim Wallace Jim Wallace , Orkney and Shetland 10:11 am, 12th March 1997

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.