8 Wider Economic and Social Impacts
8.1.1 This chapter considers the wider economic and social impacts caused by the removal of RET fares for commercial vehicles. It is clear that the removal of RET in itself is not the sole cause of the difficult economic situation facing the islands over the period covered. Other factors such as the wider economic slowdown, which is impacting on all areas of Scotland, and the continued relatively high levels and rises in the price of fuel are also having a detrimental impact on business performance and economic activity more generally. It is difficult to completely separate these effects. However, the evidence from the interviews with hauliers and businesses, supplemented by the online business survey, suggests that the removal of RET has had some detrimental impacts on a number of businesses, the wider economy and the sustainability of the islands and their communities. Using the evidence gathered, this chapter explores the issues directly related to RET and provides an assessment of the impacts associated with this. It should be noted however that given the short time that has elapsed since RET has elapsed it is difficult to precisely quantify the wider economic and social impacts and the assessment therefore provides a qualitative assessment of the impacts.
8.2 Cost of RET
8.2.1 Before discussing the issues in detail, it is worth providing some context of the cost of removing RET for CVs to estimate how much extra the communities of the Western Isles, Coll and Tiree will have to absorb if the full impact of the increase in fares is paid for by local businesses.
8.2.2 In terms of spending, the cost to the Scottish Government of funding RET for CVs in the Western Isles, Coll and Tiree totalled £3.5m in 2011/12. Following the removal of RET, the cost of the transitional scheme for CVs is estimated to be £2.5m from 2012-13. The 10% increase in CV fares in 2013‑14 is estimated to cost the Scottish Government £2m in 2013‑14. These figures suggest that if the total additional reduction in funding was passed on to businesses in the Western Isles, Coll and Tiree, the leakage from the local economy would sum to £1.5m per annum.
8.2.3 While some of this could be passed on to customers in the supply chain, which could be located outside of the islands, the evidence from the interviews and survey discussed in the previous chapter did suggest that most of the increase in costs would have to be absorbed by local businesses. The total costs to local businesses will therefore be in the region of £1.5m. However, this depends on whether businesses can actually pay the higher transport charges. If it means that businesses cannot absorb them, which leads to loss of business and a reduction in employment, then it is possible that the impact on the local economies could be greater than the change in fares.
8.3 Vitality of the Islands
8.3.1 Earlier chapters reporting on the findings of the survey and interviews revealed there were significant concerns raised about the long-term economic prospects of the Western Isles, Coll and Tiree. While there was a general acceptance that there is a cost premium for undertaking business in the islands, a number of stakeholders noted that the cost differential between mainland and island life is now becoming so large that the ability to remain competitive and survive on the islands is becoming much more difficult for local businesses. It was acknowledged that this is simply market forces operating but numerous stakeholders emphasised that the Scottish Government has an explicit commitment to sustaining and developing Scotland's economy and this should include the island communities.
8.3.2 A number of stakeholders referred to the economic situation on the UK mainland, where the majority of businesses are experiencing poorer than average financial performance because of the general lower level of activity and growth within the economy. They noted that this problem is worse in the islands because the population and economy is small and the market, and therefore opportunities, much more limited. This makes it difficult to substitute lower export demand from the Scottish mainland and beyond to domestic demand / consumption when conditions worsen.
8.3.3 It was claimed that the small economies of the islands are highly dependent on domestic businesses for growth and survival, but are at the same time highly exposed to external competition. There was a strong feeling that as the initial and successive impacts of removing RET fares for CVs begin to be felt, both in direct terms for businesses and indirect terms for consumers, there will be a significantly adverse impact on the economic performance, and therefore sustainability, of the islands.
8.3.4 It is worth considering this issue both in terms of direct impacts on island business and indirect impacts on island life as a whole.
Impacts on Business Competitiveness
8.3.5 The evidence from the interviews and surveys suggest that, similar to the economy as a whole, there has been a squeeze on independent island domiciled businesses across a range of sectors. The additional removal of RET fares for CVs, it was claimed, was making it increasingly difficult for local businesses to compete with mainland and chain competitors, whilst there is insufficient 'domestic' demand to sustain these businesses in the long-term.
8.3.6 As explained in previous chapters, 33 businesses responded to the question on whether increases in ferry fares since the removal of RET for CVs in April 2012 has been passed on to their business. Of these respondents, 88% noted that hauliers have passed on the increase in CV fares to their business, while 97% of businesses explained that they expect that future price increases will be passed on to their company. Over 68% of businesses expect this increase to be in the region of £1,000 to £5,000 per annum. Given that 76% of the total registered businesses in the Western Isles at March 2012 were small, in terms of employing four staff or less, these are not insignificant sums and would have an important impact on their costs, competitiveness and ongoing performance.
8.3.7 Previous chapters have discussed the importance of the primary industries to the economies of the Western Isles, Coll and Tiree. The sector includes 23% of the total number of registered businesses in the islands (and in some areas over 35%) and accounts for 22% of total business turnover. However, many of the businesses in this sector are vulnerable to the increase in transport charges due to the nature of the market they are operating in and their limited ability to pass on costs through the supply chain.
8.3.8 In addition, it was claimed the independent retail sector in the islands is struggling to compete with both large retail chains and shopping trips to the mainland made possible by the introduction of lower RET fares for cars. RET for CVs played an important role in assisting the competitiveness of these businesses by lowering transport costs, particularly for big ticket items like furniture and electronics. Similarly to the primary sector, the retail sector is key to the ongoing performance of the islands. Wholesale, retail and repairs accounted for 185 enterprises in the islands at March 2012. This was only second to the primary industries and made up 16% of the total. The sector also accounted for employment of 1,410 people, which was the highest sector and 22% of the total. In terms of turnover, again this sector was highest, summing to £234m or 33% of the total.
8.3.9 While RET for commercial vehicles was not in itself a panacea for these problems, it was strongly felt it helped island firms compete both in the domestic and mainland markets by either reducing or maintaining transport charges to businesses. It played an important role in either increasing margins or cushioning firms against the increased costs of raw materials, fuel etc.
8.3.10 The direct impacts of this long-term loss of competitiveness due to the removal of RET, if it results in higher transport charges, are clear. The most notable immediate economic impacts will be:
- a reduction in profitability; followed by; and
- reduced salaries and employment and therefore local disposable income.
8.3.11 In the longer term this will feed through to:
- business closures or off-island relocation, with consequent losses in employment; and
- reduction in headcount, as firms attempt to adapt to new market realities.
8.3.12 Given the importance of transport charges for the competitiveness of key industries in the islands, such as primary and retail sectors, the impact of higher charges could have an important bearing on the short, medium and long-term performance of the economy.
Impacts on Communities
8.3.13 In addition to the direct impacts associated with the removal of RET for CVs, there are likely to be indirect / multiplier impacts as these filter through the local communities. This is a particular issue in the Western Isles, Coll and Tiree as the communities are relatively small and there is a high dependence on local expenditure and activity for their ongoing performance and sustainability. Therefore, the loss of even a small number of jobs could have more significant knock-on impacts across a number of vulnerable sectors which, from the evidence gathered in the interviews and surveys are very much operating at the margin, such as agriculture and crofting, both of which are important industries across the islands.
8.3.14 The long ferry crossing between the RET islands and the Scottish mainland has also historically made Lewis in particular relatively self-sufficient, with an above average number of, for example, furniture and carpet shops for a town the size of Stornoway. However, the increasingly open Lewis economy has had a large impact on these firms, many of whom have closed, reduced headcount and reduced the number of apprentices. Once again, this is just an example of a market 'working' but the negative impacts on the islands could be disproportionate to towns on the mainland.
8.4 Impact on Economic Development
8.4.1 The findings from the business interviews and surveys, together with the evidence from further research and analysis suggests that any increase in charges could have a number of impacts on the development of the island economies.
8.4.2 Firstly, the increase in costs and subsequent reduction in margin and profitability will have an immediate impact on those sectors most affected, such as the primary sector. This will also feed through to a loss of competitiveness, ability to invest and grow and lower employment opportunities. Given the importance of these sectors as key economic drivers of the local communities, the impact could be significant.
8.4.3 The increase in costs, and therefore relative competitiveness with mainland rivals, will also lessen the opportunity for new businesses to start, whether that is through domestic or inward investment to the islands. A number of businesses interviewed explained that higher costs, due to higher transport charges, could mean a halt in investment and expansion plans. While a number of firms had invested heavily to expand their business during the 2008 to 2012 period when transport charges had remained fairly stable, it was explained that the result of higher transport charges could lead to a reversal of these actions. Indeed, some businesses explained that their company had withdrawn from a particular market as a direct consequence of the higher costs ie the business had now become unviable.
8.4.4 There may also be impacts on the level of capital investment, such as housing. A number of stakeholders felt that this will hold the economies of the islands back in the long term. For example, there is a shortage of affordable housing on Coll and Tiree which is restraining population retention and growth, and is also impacting on the young and most marginal families. A number of people interviewed claimed the removal of RET for CVs puts between £8,000 and £20,000 on the cost of the average house - this increase in cost, coupled with difficulties in getting a mortgage or bank loan, is constraining the construction sector on the islands.
8.4.5 Storas Uibhist, a local community landowner, echoed this point. It explained that there is a shortage of high quality housing in Benbecula and South Uist and that the most attractive option is a self-build. Kits are typically purchased from Scott's on the mainland. Storas releases ten plots for new developments each year and there are typically six new houses built. However, this number is expected to decline with the removal of RET for commercial vehicles. Storas note that, on average, it costs 40% more to build a house on South Uist than on the mainland and that 10% of the total costs are related to moving goods by ferry. Therefore, any increase in ferry fares could impact heavily on the cost of building a new house. The incidence of this impact is likely to fall on young families and first time homebuyers and there were fears expressed that they may leave the island as a result of the cost of a home (or the difficulty getting a mortgage for an 'over-priced' house).
8.4.6 While the above example relates to housing, it can equally apply to the construction sector more generally, with impacts on private sector commercial developments as well as the public sector building investment. The importance of the construction sector in terms of its supply chain was discussed in Chapter 6.
8.4.7 The continued uncertainty is also seen to be of considerable detriment to the local economy. The RET pilot lasted for the better part of four years and this, combined with the loss of the commercial vehicle element, has prevented longer-term investment decisions being taken. There is also concern that constant political involvement (and in particular, party politicking) in the ferry industry is highly detrimental for island businesses as it impacts on forward planning and business confidence.
8.4.8 Overall the impacts on economic development could have implications for the Scottish Government's long-term sustainability objectives for the islands. For example, earlier chapters have explained that, while the most recent population estimates may show figures stabilising in recent years, the long-term trend has clearly shown a significant decline. The lack of development opportunities will impact on population retention if employment opportunities decline.
8.4.9 It was also shown in Chapter 7 that the Western Isles, Coll and Tiree already suffer from relatively high levels of deprivation. If the removal of RET for CVs and the subsequent increase in charges feed through to lower levels of business investment and employment, reduced salaries and number of business start-ups, this will have a negative impact on the levels of deprivation across the islands.
8.5 Lower Quality Products
8.5.1 It was explained in the business interviews that many livestock farmers have seen increasing costs, such as animal feed, in recent years in line with global commodity prices. In response to this a number of farmers have moved to substitutable options, such as silage rather than hay. This lower quality feed then impacts on the quality of the livestock produced. This then impacts on the price of the livestock at auction, which again impacts on the quality of feed that they can afford.
8.5.2 This downward spiral is impacting on the performance of these businesses and it was claimed that higher fares, if fed through to higher transport charges, will have further impacts, both in terms of higher costs for animal feed and higher costs for transporting livestock to auction.
8.6.1 Chapter 4 discussed in detail the impact of the traffic imbalance on transport charges and how these affect the competitiveness of island based firms through higher transport charges. It was claimed in the interviews with businesses that the impact of RET on lower haulage costs had allowed them to increase their competitiveness relative to mainland firms. The savings had also allowed them to invest in their business. If higher ferry fares lead to higher transport costs it means that island firms could see a reversal of these impacts. It was also claimed that the loss in competitiveness in particular could have a significant impact on their business performance. This is at a time when general economic conditions are putting pressure on their operations.
8.7 Hauliers as Key Contributors to Supporting Local Communities
8.7.1 It was clear from the interviews that many hauliers felt a moral responsibility for supporting communities. In many cases hauliers are key employers in the local areas. They also play an important part in supporting economic activity. Those interviewed felt a duty to keep freight services affordable and to ensure local businesses remained competitive and survived. However, higher ferry fares would be difficult to absorb and would need to be passed on. This could have a negative impact on the local communities and on the viability of businesses. Businesses would have to deal with this by reducing employment or lowering labour and other costs. This would lead to lower income and consumption in the local area, possibly resulting in a downward spiral of activity.
8.8 Impacts on "Prices in the Shops"
8.8.1 Estimating how the removal of RET on "prices in the shops" is not straightforward. One of the justifications for the policy was that it would help reduce the price of day-to-day goods purchased by both islanders and tourists in the shops. This was monitored as part of the wider RET evaluation exercise, principally through trying to ascertain via survey data whether residents felt prices in the shops had indeed gone down as a result of RET.
8.8.2 However, this link between a reduction in fares / transport charges and the price of a good is too simplistic, a point made by many stakeholders during the interview process. The main criticism was the price of any individual item in the shops (eg bread, milk, canned goods etc) is heavily influenced by a wide number of factors. For example, the price of a bottle of milk will depend on, amongst other items, the market rate of milk at that time (ie supply and demand in the dairy market which could be influenced by many volatile factors - eg good weather could lead to increased demand for milk to produce ice cream); the cost of the carton (ie raw materials, manufacturing; transport etc); the cost of transport (ie wages; fuel; ferry fares; insurance etc); and the pricing strategy of the retailer. Given the complexity of pricing for this one relatively simple product, it is difficult to estimate how RET affects the price of this one commodity.
8.8.3 This leads on to the key term of the unit price of a good. The majority of deliveries to retail outlets on the islands are by the pallet, with the average pallet costing anywhere between £40-£60 on average. However, within each pallet is a large number of units. For example, a pallet of baked beans or garden peas will typically have 864 cans on it. If we assume a pallet costs £50, the unit price of each can on that pallet is 5.78 pence - ie the transport cost of a can of baked beans is 5.78 pence per can. If we then assume that RET reduced the price of a pallet to £44, the unit price of a can of baked beans would be 5.09 pence per can. Therefore, even if RET reduced the cost of a pallet by £6 (from £50 to £44), the unit cost of a can of beans would only be reduced by 0.69 of a penny. Given that the majority of goods bought in the shops in the Western Isles are of a similar nature (ie each pallet has a large quantity on a fixed price pallet), it is difficult to see how someone could make well informed judgements on "prices in the shops". If anything, the loss of RET for CVs could be a means of hiding increased retailer margin - ie if the above example is reversed, a retailer may only experience a 0.69 of a penny increase in the cost of a can of baked beans but could add one penny to the price, taking a mark-up of 0.31 of a penny per can.
8.8.4 Notable price impacts are only likely to be seen on larger goods (eg washing up powder) where the smaller number of units means a larger increase in the unit price. Very large items, such as furniture and white goods are where an obvious price difference will be seen and this was borne out speaking to businesses in these sectors. In general, the impact of RET on "prices in the shops" is very difficult to determine and will only become apparent after a period of time. However, from discussions during the interviews it is likely to impact on the price of larger goods before it a noticeable impact on smaller goods.
8.9 Impacts on Households
8.9.1 It was claimed that the cost of living in the islands, particularly in the less populated islands, is increasing at a historically high rate. This is principally being driven by the sharp rise in fuel costs. However, it is expected that increased fares for commercial vehicles will eventually lead to increased prices in the shops, although the extent to which this is true will depend on the extent to which higher fares are passed on through higher transport charges, which will differ across the islands. As explained in the previous section, this will also depend on the type of goods being sold.
8.9.2 In addition, it was claimed the removal of RET has removed many of the positive competition impacts that were helping to keep prices down and expand consumer choice.
8.10 Impact on Vulnerable Communities
8.10.1 The previous chapter explained that the rates of unemployment in the Western Isles, Coll and Tiree have been relatively low compared to the Scottish average, and very much lower than most Scottish mainland authorities. However, the evidence shows that they have historically been higher than other island area such as Shetland and Orkney. Recent claimant count rates at January 2013 are set out below in Table 8.1 below.
Table 8.1 Claimant Count Rates (January 2013)
Claimant Count rate
Argyll & Bute
8.10.2 Moreover, while JSA claimant rates have been low, it is clear that the removal of RET for CVs will impact most heavily on certain sectors, particularly the primary industries. The previous chapter explained that the Western Isles, Coll and Tiree have a high dependence on businesses in this sector. This can make those area very vulnerable to the changes in fares.
8.11 Future Uncertainty
8.11.1 While higher fares and transport charges will have a negative impact on business performance, the decision itself to increase fares may also have a negative impact. It was made clear during the business interviews that the constant change in ferry fares policy for the islands is having adverse effects on business confidence and activity. The decision to remove RET ferry fares for CVs will create further uncertainty and could lead to more investment decisions being postponed.
8.12 Impact of redefining a CV from 5m to 6m
8.12.1 As part of the measures to mitigate the effects of the removal of RET ferry fares for commercial vehicles, vans of more than five but less than six metres now qualify as a non-commercial vehicle. This section considers the impacts of this change.
8.12.2 The new fares for a vehicle less than 6 metres are substantially less than the equivalent fare if they had been designated as a commercial vehicle. The fares for a non-commercial vehicle, compared to the fare for a six metre vehicle are set out in Table 8.2 below. The Table shows the fare under RET and the new fare for a vehicle of 5.5 metres. The Table shows that a vehicle of this length would now pay much less on a single trip. For example, on the Oban - Castlebay / Lochboisdale route the fare would fall from £115.40 under RET to £57 under the transitional arrangements, a reduction of £58.40 or just over 50%. For a return trip this would sum to £116.80.
Table 8.2 RET and Transitional Arrangement Fares for a 5.5 metre Van
Oban - Coll Tiree
Oban - Castlebay / Lochboisdale
Uig - Tarbert / Lochmaddy
Ullapool - Stornoway
Fare for 6m CV
Fare for non-commercial vehicle
8.12.3 The findings from the haulier interviews suggested that this policy change has had only a very limited impact in the islands to date. As the policy was only introduced in April 2012, there has been very little opportunity to change fleet configurations. In addition, vans do not offer the economies of scale of larger vehicles and there was little suggestion from stakeholders that redefining their fleet configuration was an immediate priority going forward. Nevertheless, it was explained that the issue will continue to be monitored over the medium term to determine whether the situation changes.
8.12.4 The geographic characteristics of the RET islands, coupled with the low frequency ferry service and long crossings has also limited the "white van invasion" from the mainland. There are only limited opportunities for mainland vans to pick off valuable traffics as a vehicle coming over from the mainland would be facing a full day round trip or, in the case of Coll and Tiree, at least one overnight stay on the islands. It is, in effect, uneconomical. While this may not necessarily be the case on islands that are located closer to the mainland and have higher ferry frequencies, eg Arran, Bute, Mull etc, it was not an attractive opportunity on services to the Western Isles, Coll and Tiree.
8.12.5 One aim of the study was to consider whether change in definition will encourage businesses to provide their own haulage arrangements at the expense of existing freight operators. There was very little evidence from the business interviews to suggest that island firms saw the redefinition of commercial vehicle length as an incentive to switch from using contracted haulage services to their own vans. The main reason for this was that it added another costly fixed overhead to the business - ie vehicles and servicing, fuel, driver costs; insurance etc. The majority of firms were moving small volumes and noted that contracted haulage arrangements remained far more cost effective. The only firm we consulted who noted that they had moved to using their own vehicles was Kallin Shellfish. However, this was due to the demise of MacAskill and the lack of an alternative direct chilled service to Glasgow rather than any RET related impact.
8.13.1 This chapter has discussed the wider economic and social impacts of removing ferry fares for commercial vehicles. The total reduction in costs to the Scottish Government associated with removing RET is estimated to be £1.5m. The extent of how this impacts on the Western Isles, Coll and Tiree will depend on how much these costs can be passed on to customers out with the islands concerned. The impact on the Western Isles, Coll and Tiree will also depend on how much they can actually be absorbed by businesses. For example, if businesses cannot pay the higher charges, this may lead to loss of activity and a reduction in employment, resulting in an impact which is greater than the change in fares.
8.13.2 In addition, the Chapter has discussed how higher transport charges will impact on business competitiveness if they can't be passed on to customers. They may also impact on the sustainability of communities and populations if higher fares result in reductions in profitability, employment, investment and growth. They could also result in a reversal of investment decisions and removal of competition as companies withdraw from the market. Ultimately, this will have implications for the long-term sustainability of the local communities, and the wider Western Isles, Coll and Tiree economies specifically.
8.13.3 Finally, many parts of the Western Isles are characterised by relatively high levels of deprivation. If higher fares and transport charges lead to a reduction in income and employment, as suggested in the business interviews, the outcome could be a worsening of this position and deprivation ranking.