Harsh times ahead for fragile economy: The recession is hitting once successful industries in the Highlands and Islands. James Cusick reports

THE HIGHLANDS and Islands of Scotland, the most remote regional economy in the European Community, is preparing for an economic crisis that threatens to undo much of the area's success story of the past 30 years.

The fragile economy serving a scattered population of 370,000 faces jobs losses in every sector. A decline in oil-related jobs, worry over agriculture and fish farming, the running down of the UK Atomic Energy Authority's Dounreay complex, the final withdrawal this year of the American base on the Cowal Peninsula, and question marks over the survival of a declining tourist industry, have led senior economic analysts to predict a bleak future for the Highlands and Islands.

The region's main government development agency, Highlands and Islands Enterprise, yesterday published its first annual report since taking over the role of the former development board.

Although a relatively rosy picture is painted of 2,700 created and retained jobs and 1,000 business projects assisted, Sir Robert Cowan, HIE's outgoing chairman, said 'tough tasks' were ahead.

In the 12 months to March this year, Highland unemployment jumped from just over 9 per cent to more than 11 per cent, which is above the Scottish average. These are set to jump this week when McDermott's, the oil platform construction yard at Ardersier, begins to lay off 1,300 of its workforce. The American-owned company is the largest private sector employer in the Highlands. The redundancies, which represent 2.5 per cent of the total Highland workforce, are likely to cause a further 4,000 related jobs to go and will, on latest estimates, cost the local economy pounds 30m.

Sandy Brady, HIE's director of strategic planning, has the job of monitoring the Highlands' economic performance. In discussion with the Independent his analysis, based on information from all the HIE's related enterprise companies, is in sharp contrast to the optimism of the HIE's formal report. 'McDermott's is merely the first casualty. The North Sea is maturing as an oil province and we are at the point of seeing the long-term decline of oil-related employment.'

Scotland's three major fabrication yards - McDermott's, Highland Fabricators at Nigg just north of Inverness, and RGC at Methil in Fife - are now competing for fewer orders. If, as expected, Highland Fabricators announces it too is substantially reducing its workforce, a decline may well turn into a virtual termination.

However, oil is not the only concern. Nearly 10 per cent of the Highlands' workforce, make their living from the land - worth about pounds 200m to the region.

With reforms to the EC Common Agricultural Policy about to come on stream, Mr Brady predicted: 'It is a now a question of holding what we've got, at best.' Reduced subsidies for many marginal farmers in the Highlands 'will mean many farms just disappearing completely'.

The HIE report states that crofting, the small-scale low-intensity farming that covers much of the west coast and Western Isles, is also at risk from the planned CAP reforms.

Fish farming, once heralded as an economic saviour, is also in decline. 'We have 6,000 jobs we didn't have 20 years ago, but over the next 10 years we'll do well to hold these,' Mr Brady said. Many fish farmers, competing against imported salmon from Norway, are now having to sell at prices below their production costs. The food company Unilever's recent pull-out from its Scottish aquaculture business did little to boost confidence.

About 25 per cent of the Highlands and Islands income centres on tourism. It is the region's most important industry - and it is in real trouble. The poor figures for last year, with the Gulf war and even 'lack of snow' offered as excuses, are certain to worsen in this and in coming years. According to a spokesman in the HIE 'the attitude in Scotland is still that tourism is servile, not service'.

The tourist industry in the Highlands last year turned over pounds 500m and employed 30,000. But with the Scottish summer meaning only a short season, training is not a priority and private sector investment is currently low.

'That will have to change. As remote areas especially become tourist-dependent, in 10 years' time it will be hard to identify any alternatives,' said Mr Brady.

Of all the casualties on the HIE's list - including the attempts to resurrect Dunoon after the US Navy base finally closed this year, resulting in the loss of an estimated 800 job losses and millions of pounds from the Cowal economy - the potential impact of the UKAEA's decision to leave its nuclear reactor project at Dounreay in Caithness is causing most concern.

McDermott's 1,300 job losses are matched by 1,500 to go at Dounreay. 'Take away Dounreay from Caithness and what are you left with? Not a great deal. It's difficult to conceive how you get 1,500 jobs back in a region as remote as this. The answer is you can't,' Mr Brady said.

Population decline, with the young leaving in droves, is not only predicted for Caithness, but also in the Western Isles. Although the effects of the local council's disastrous losses in the collapse of Bank of Credit and Commerce International are contributing to their problems, their present difficulties emerged well before the BCCI crisis.

'All the symptoms we had in the 1960s are now reasserting themselves, ' Mr Brady said. 'The 1991 census figures are showing loss of population, the young moving away. In fact if you identify all the Highlands and Islands problem areas - fish farming, crofting, agriculture, sea fishing, poorly developed tourism - the Western Isles have got them all.'

The Arnish oil construction yard on Lewis is 'doing well', a company spokesman said. But it is highly dependent on sub-contracted work from McDermott's and Highland Fabricators. If the big firms catch a cold, Arnish will catch pneumonia.

But just what the economic medicine for a cure is, not just in the Western Isles, but throughout the Highlands, is becoming increasingly unclear.

The problems that forced the government to set up the Highland and Islands Development Board 30 years ago 'are revisiting us now', Mr Brady said.

(Photograph omitted)