§ Mr. McKelvey
To ask the Secretary of State for Scotland when he plans to respond to the Scottish Affairs Committee report into the removal of tariff rebate subsidy on northern isles freight. 
§ Mr. Michael Forsyth
The Government welcomed the Committee's study of this subject and has considered the report very carefully. A command paper responding in full to the report will be presented to Parliament after the recess. We fully recognise, however, the importance of this issue to the island communities of Orkney and Shetland; and therefore wish to indicate now the nature of the Government's response on the key recommendations made by the Select Committee.
We welcome the Select Committee's acceptance of the Government's conclusion that the tariff rebate subside scheme was flawed and that there was a need therefore to consider other forms of subsidy. We also welcome its 237W endorsement of the importance that the Government attach to the current competitive tendering exercise for a lifeline passenger service in the northern isles. We note that it has not argued that the reintroduction of subsidies for the carriage of general freight has a place in a satisfactory long-term regime. These conclusions correspond closely to the Government's analysis of the position.
I promised, following the decision to withdraw freight subsidies, that we would ensure that the effect of withdrawal was monitored and reviewed. We have done so by listening to representations made to us and considering evidence put before us. In response to that and to the Select Committee's report, the Government propose to make four changes to policy. These are:
- i. to specify maximum freight rate levels in the lifeline service contract, which will provide some element of price stability to the freight market and ensure that tariffs do not increase excessively.
- ii. to require the successful bidder for the lifeline service contract to provide sufficient capacity to carry livestock during peak periods, which will for the first time guarantee that farmers will be able to export livestock during the busiest periods of the year.
- iii. to increase the subsidy level for the carriage of livestock from 33 per cent. to 50 per cent. with effect from 1 September 1996 to reflect the economic importance of the livestock trade, particularly to Orkney, and to alleviate the effects of the uncertainty which the bovine spongiform encephalopathy crisis has introduced into the livestock market since the Government's original decisions. The need for the increased rate of subsidy will be kept under review, in the light of conditions in the livestock market.
- iv. to reinstate tariff rebate subsidy support for bulk freight in the northern isles with effect from 1 September 1996, at a rate of 30 per cent. on exports and 10 per cent. on imports, in order to remove the adverse effect of the withdrawal of subsidies on bulk freight on companies exporting low-value bulk freight and on companies dependent on imported supplies of hulk freight. The Scottish Office will also undertake an urgent review of the bulk freight market, which will involve extensive consultations with the relevant local interests, in order to identify a more satisfactory system of bulk freight subsidies for introduction in the medium term. We are suspending the phasing out of tariff rebate subsidy in the Western Isles pending the conclusions of the review; and subsidy will continue at the present rate of 20 per cent. for both imports and exports during 1997–98.
In addition, we are able to give two assurances which the Select Committee sought. These are to confirm that:the tendering process for the lifeline service enables bidders to present alternative options to the present pattern of service: andthere is no obstacle, in principle, to the successful bidder for the contract applying, through a public sector sponsor, for European regional development fund assistance towards vessel replacement.
The inclusion of peak period livestock capacity within the contract for the lifeline passenger service, which will carry accompanied cars and freight as well as passengers, means that the contract will cover all of the categories of traffic which the Select Committee recommended should be included within the definition of a lifeline service, although the Government remain of the view that the lifeline service is properly defined by reference to the need for passenger ferry services.238W
The Government have been unable to accept some of the Select Committee's recommendations. We have been unable to reconcile several of the conclusions of the Select Committee with the need for a tendered contract for the lifeline services, which the Select Committee has endorsed, and with the Government's wish to respond urgently to the Select Committee's criticism of the present regime, by putting the tendered contract in place as soon as possible. The Select Committee's recommendation that tariff rebate subsidy be reintroduced for general freight on a temporary basis, despite its conclusion that there is no medium-term need of subsidy for such freight, would have a detrimental impact on the tendering of the lifeline services passenger ferry contract. The Committee's recommendation that the Kirkwall—Invergordon route should be separately tendered to carry freight and livestock would also have a detrimental effect on the tendering of the lifeline contract, and would place other freight carriers operating in the locality at a commercial disadvantage.
The likely adverse impact on the tendering exercise for the lifeline passenger service is also part of the reason that the Government do not accept the recommendation that CalMac be involved in the provision of services in the northern isles. Other important considerations are that it would constitute an unacceptable transfer of risk to the public sector; and would entail very substantial increased costs to the taxpayer to finance vessel procurement.
We regard the Select Committee's proposal for separate public sector procurement of vessels as unnecessary, in the light of the assurance given about eligibility of vessel replacement by private sector operators for European regional development fund assistance; and the proposal is also subject to some disadvantages.
In reaching these decisions, the Government's overriding objective remains to secure an unprecedented long-term guarantee to ensure the continuation of lifeline services to Orkney and Shetland, which are essential to the economic and social welfare of the islands, through a competitive tendering process which should command confidence that the subsidy level does not provide scope for cross-subsidy of freight operations. The additional measures announced today seek to provide help to four key sectors of the economy of the islands:the livestock farming community, which will benefit from the guaranteed provision within the lifeline contract of capacity to carry livestock during the peak periods and the increase in the rate of tariff rebate subsidy on livestock while the serious difficulties in the livestock market caused by the BSE crisis remain;companies dealing in general freight, which will benefit from the specification of maximum freight levels in the lifeline contract;companies dealing in bulk freight, which will benefit from the reintroduction of tariff rebate subsidy and the commitment to an improved system of bulk freight subsidy in the medium term;consumers in the islands, who will benefit from the effect on prices of the measures on general freight and imported bulk freight.
The Select Committee has rightly made the point that the purpose of subsidy arrangements is not to benefit the 239W operators of shipping services. Nevertheless, these measures should have a beneficial effect on the volume of business in the market and thus indirectly improve trading conditions for all operators. I believe that the overall effect of the measures set out above will be a significant further economic and social benefit to Scotland's islands communities.