Ferry Services (Hansard, 24 July 1997)

§ Mr. Dewar

I intend to lay before the House as soon as practicable a draft undertaking to secure the continuation of these ferry services. The draft undertaking will propose the payment of a block grant subsidy for the operation of the northern isles passenger ferry services to P and O Scottish Ferries. The duration of this agreement will be from 1997 to 2002. The Government have taken this decision following an evaluation of the bids received in response to an open competitive tendering exercise. I propose to commence a new open tendering exercise next year for the award of a longer—term subsidy agreement commencing in 2002. The Government expect that, by 2002, new vessels will be needed for these services and an early decision will allow sufficient time for the successful operator to build new ships. Prior to initiating a new competition, the Scottish office will, as part of the Government-wide comprehensive spending review, be re-evaluating northern isles services. The future service specification will be based on this review.

The Government have examined the option of allowing a bid from Caledonian MacBrayne for the immediate block contract. It is clear that CalMac does not have vessels in its fleet capable of taking over the northern isles services in the short-term, nor does the current second hand vessel market currently offer suitable tonnage. However, the Government have decided to invite CalMac 690W to consider whether it can identify a basis for entering the open tendering exercise for the new subsidy agreement commencing in 2002 which would be consistent with the overall level of public expenditure affordable for shipping services.

The previous Government initiated the open competitive tendering exercise in June 1995. Three bids were received and, after thorough consideration, the Government now conclude that P and O Scottish Ferries offers the best value for money.

The Government's agreement with P and O Scottish Ferries will safeguard the existing pattern of services for the next five years and includes guarantees for the export of livestock and the carriage of hazardous goods. Under the agreement, P and O Scottish Ferries will be paid a basic annual block grant of £11.018 million subject to clawback arrangements should profits exceed current forecasts.

The profitability of northern isles passenger ferry services has been declining over a number of years due to fierce competition from freight-only operators. This competition has resulted in a sharp fall in tariffs which, whilst good news for businesses and consumers in the northern isles, reduces the income from passenger ferry services which carry a substantial amount of freight.

Passenger ferry operators are also required to adhere to much stricter safety regulations than freight operators. The latest regulations, the Stockholm agreement—introduced following the Estonia tragedy—will require either expensive modifications or the withdrawal of non-compliant vessels by 2002. By that date, P and O Scottish Ferries' three passenger ships will be some 30 years old. Costly upgrades to ships this old are not judged worthwhile. Instead, the Government have agreed to cover the increased depreciation charges required to write down the vessels to a realistic market value by 2002. If any modifications to P and O Scottish Ferries' three passenger ferries are required to meet safety of life at sea—SOLAS—95 regulations in the period before 2002, the Government will fund these by capital grant.

Declining freight profits and the additional cost of depreciation require an addition to subsidy costs compared with previous years, even although P and O Scottish Ferries' bid was lower than any other. The alternative would be to impose significantly increased fares on islanders or visitors, which the Government have rejected. This subsidy agreement represents a substantial financial commitment by the Government to safeguarding the passenger ferry services to Orkney and Shetland and to keeping fares down.