I beg to move, That the undertaking between the Secretary of State for Scotland and David MacBrayne Limited, a draft of which was laid before this House on 30th November, be approved. The reason for the draft undertaking with David MacBrayne Ltd. for which I seek approval tonight is that the existing agreement with MacBrayne's, by a strange coincidence, was approved by this House exactly 12 years ago, on 11th December 1961, and it was designed for circumstances quite different from those of today. At that time MacBrayne's was a company partly in private and partly in public ownership; at that time it operated shipping services, road haulage and bus services in and to the Western Isles and West Highlands.

The company with which it is now proposed to make an undertaking is a wholly owned subsidiary of Scotland's nationalised transport industry, the Scottish Transport Group. It is engaged solely in the provision of shipping services subsidised by the Secretary of State. The shipping services of the group which are not covered by this undertaking are fully commercial and are operated by a separate company, Caledonian MacBrayne Ltd., and pay their own way entirely. The services that we are discussing this evening are only those being subsidised; we are not discussing the majority of services in the Western Isles, which are operated by Caledonian MacBrayne and which pay their own way without subsidy.

The new undertaking is designed to meet other new circumstances also. On 18th April 1972 my right hon. Friend the Secretary of State set out in reply to a question by my hon. Friend the Member for Glasgow, Cathcart (Mr. Edward Taylor) his policy for the modernisation and improvement of shipping services to the Scottish islands. The new undertaking aims to give effect to that policy as it applies to the services to those islands which, in general, are too small, or too remote, or too sparsely populated to have a service which can be expected to pay its own way. The policy stated that new arrangements would be introduced to provide for the improvement of services, and for capital grant and for revenue grant fixed in advance for individual loss-making services.

All the main services to the major islands are operated purely on a commercial basis. Those services to which the undertaking now in force applies and which it is intended should receive support from the Secretary of State under the new undertaking are the minor vehicle ferry service between Scalpay and Kyles of Scalpay in Harris; the services between Oban and Lismore; between Tobermory and Mingary; from Oban to Coll and Tiree; from Mallaig to the Small Isles; from Mallaig to Kyle of Lochalsh. Portree and Raasay: from Oban to Colonsay; the minor ferries to Iona and Eriskay and the cargo service from Glasgow to the Outer Isles and Stornoway. In addition, a temporary freight service to Gigha is subsidised under the undertaking.

It is the intention, as my right hon. Friend said last year, that those of the services which are "local and minor" should in time become the responsibility of the local authorities with the assistance of Government grant in approved cases under Section 34 of the Transport Act 1968. Under these arrangements, Inverness County Council intends to assume responsibility for Raasay to provide a new vehicle ferry service there, once the necessary procedures have been completed. Argyll County Council is taking similar action over Lismore and Gigha.

Government assistance to MacBrayne's services to the Western Isles goes back as far as 1928. Until now, the operating subsidy has been based on a retrospective calculation of the overall deficit incurred in operating the services. There was no provision for a capital grant for the subsidised services, and this led to the arrangement, since terminated, by which the Secretary of State built and owned ships which he chartered for operation by MacBrayne's.

Our review of shipping policy to the islands led us to the general conclusion that the overall deficit method of subsidy did not provide sufficient incentive for efficient operation and for innovation and modernisation. In particular, the existing undertaking had the following main disadvantages.

First, the grant arrangements, contrary to what was hoped when they were introduced, did not sufficiently encourage the company to improve its efficiency, because the services were lumped together and because at least half of any profit was liable to be "clawed back" by the Secretary of State, and at least half of any deficit could be recovered from the Secretary of State.

Secondly, the grant arrangements based upon the overall deficit did not enable an assessment to be made of the cost to the company of each approved service. This meant that the Secretary of State could not possibly know whether the expenditure on each route was receiving a proper return in service provided to the public.

Thirdly, the terms and conditions involved the Secretary of State in decisions on detailed operational matters.

Lastly, the grant was related to revenue losses and did not take adequate account of capital expenditure. The undertaking tended, therefore, not to give sufficient encouragement for the modernisation of services.

The new undertaking which we are discussing tonight provides: first, for advances to be made in respect of individually approved services rather than approved services in the aggregate; secondly, that the amount of the revenue grant payable in respect of any service is to be the deficit which it is estimated the company is likely to incur over a certain determined period in providing that service, irrespective of whether, in that period, the company actually makes a profit in doing so or incurs an even greater loss, and, lastly, capital grant available for providing or improving an approved facility, which could include either a vessel or a pier.

One change to which I should like to draw attention is that, whilst the new undertaking gives the Secretary of State fairly wide general powers in relation to the subsidised services, it relaxes some of the detailed controls which are in the undertaking now in force. In particular, the Secretary of State is no longer required to approve in detail changes in the charges made to users of the services. A general control will be exercised through discussion of the company's estimates and revenue and expenditure for the "eligible services" and through the fixing of the revenue grant.

In fixing the revenue grant the Secretary of State will have all the powers and information necessary to obviate any need for the company to raise its charges to a level which would have unacceptable social and economic effects on the residents in the communities served by these services. The aim, as the policy statement said, is that charges on the commercial and the subsidised services should be comparable on a per mile basis after adjustment for distance. The revenue shortfall on the subsidised services will be made up by the Government grant. There should be no apprehension about this change. The Secretary of State will still be able to influence charges in general, and I know that the Scottish Transport Group is very conscious of its public and social obligations. At the present time, of course, the Price and Pay Code is an additional restraint.

I have no need to go through the articles in detail, but I shall be glad to deal later with any particular points that hon. Members wish to raise.

In concluding, I would like to say only that I am sure that the new arrangements will provide a much more satisfactory basis than has existed hitherto for the operation of this comparatively small number of subsidised services. The amount of money that will be spent in 1974–75 is £580,000. This will provide a better basis for the taxpayer, for the Government, for the shipping company and for the people of the islands whom these services will serve.

I commend the undertaking to the House.