Tariff Rebate Subsidy (Northern Isles)

Part of Prayers – in the House of Commons at 10:45 am on 12th March 1997.

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Photo of Lord James Douglas-Hamilton Lord James Douglas-Hamilton , Edinburgh West 10:45 am, 12th March 1997

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.