The New Britain - New Parliament: Steel is Speaker in Scots House

AFTER A day of ceremonial on the first day of the new Scottish Parliament, Labour and Liberal Democrat negotiators were last night edging towards a deal to establish a coalition government.

Tension between the two parties was relaxed by Labour's enthusiastic support for the former Lib Dem leader, Lord Steel of Aikwood, who defeated an SNP challenger to become Presiding Officer, the Parliament's Speaker.

The vote was by secret ballot, despite protests from Dennis Canavan, the left-wing independent, who felt that the post should be elected openly in the spirit of "a modern democracy not a secret society". Labour's Patricia Ferguson and the SNP's George Reid took the posts of Deputy Presiding Officers.

The issue stalling a deal between Labour, nine short of an overall majority, and the 17 Lib Dem MSPs was university tuition fees. The Lib Dems, pledged to have them abolished, have refused to accept Labour's compromise of a broad-ranging Parliamentary review of university funding.

However, areas of possible agreement began to emerge. These include the appointment of at least one Liberal Democrat, probably party leader Jim Wallace, to a Cabinet post and two others to junior ministerial positions, possibly dealing with land reform and agriculture. And an aid package could be agreed for rural areas in the Highlands and Islands. The Lib Dems, who enjoy strong support in these areas, are seeking assistance to keep petrol stations and post offices open.

The party also wants more community ownership of land in rural areas, a sphere in which Labour might be prepared to offer them a leading role. Also on Jim Wallace's shopping list is the adoption of proportional representation for local council elections, a move which would weaken Labour's hold on big city councils such as Glasgow, where last week they won more than 90 per cent of the seats.

Another area of potential movement may be the private finance initiative, which Labour is pledged to use in the building of hospitals and schools in Scotland. It is understood that the Labour leadership is prepared to make some concessions to Mr Wallace, who has opposed PFI. Private companies would continue to receive payments from public bodies, but eventually the assets would return to public ownership.

Labour's leader, Donald Dewar, was keen to establish a deal with the Lib Dems before his election this afternoon as First Minister. However, a major difficulty for him is the need to ensure that Labour's Scottish programme does not contradict policy in Westminster, where there is little pressure to compromise on tuition fees and PFI.

But Mr Canavan warned against a backroom deal on tuition fees: "I am worried that the Parliament will be presented with a fait accompli between the largest party and the fourth largest party, with little attention paid to the will of the Scottish people, who want these fees abolished."

Last night, Henry McLeish, the devolution minister, said: "We don't want to spare any effort in trying to achieve a coalition, but the Scottish people don't want to wait for ever."