The announcement that the Isles of Scilly Steamship Group (ISSG) has signed contracts with a French shipbuilder for a new passenger ferry is likely to lead to the loss of £48.5 million of Levelling Up money for the islands as previously agreed by the Government.

The head of transport at the Council for the Isles of Scilly says the decision spells a “dark day” for the islands’ community and economy.

Michael Gove, Secretary of State for Levelling Up, said last week that if ISSG announced it would privately finance two new ships – a new 600-seat passenger vessel, Scillonian IV, and a freight vessel – there would be “no rationale” for the millions of Levelling Up funding to be used to provide vessels for a competing, publicly funded option.

UK shipyard group Harland & Wolff (H&W) had pitched for the construction and operation of ferries to serve the Isles of Scilly to be funded by the £48.5m through the Council of the Isles of Scilly, which said it would lead to cheaper fares for people visiting the islands. The proposal was for two vessels for the route linking the archipelago with the mainland at Penzance, plus a small inter-island ferry.

The move was in direct competition to the long-established, sole provider of passenger and freight services, ISSG, which has now announced it has signed contracts with Brittany-based shipbuilder Piriou to deliver two new ships in 2026, “making journeys faster, more comfortable, and environmentally sustainable, whilst improving reliability”.

The new vessels will be delivered using finance provided by long-term partner of ISSG, Lombard (part of NatWest Group).

The current fleet is between 32 and 46 years old and was originally due to benefit from the Government’s £48.5m funding. Stuart Reid, chief executive of the Isles of Scilly Steamship Group, previously said: “Following the initial offer, significant changes to the terms of the offer and growing frustration with the delay both on and off the islands, the group has reverted to its original plan of privately financing the new vessels.”

Cllr Robert Francis, chairman of the Council of the Isles of Scilly, wrote to Michael Gove in November seeking his assurance that the millions allocated for the replacement of the existing passenger and freight vessels would be maintained.

He said: “The Isles of Scilly faces a challenge following the announcement by the incumbent operator, the Isles of Scilly Steamship Group, that it intends to replace the existing vessels using private finance.

"The business case submitted to the Department for Transport in September clearly demonstrated the debilitating impact funding the vessels in this way would have on the islands’ community and economy, due to the higher passenger fares and freight tariffs that would be required to meet the financing costs.

“Whilst the proposals for new passenger and freight services recently announced by Harland & Wolff offers the potential for significant service improvements and lower fares and tariffs for part of the year, the company has said that the ability to provide these services throughout the year and meet the lifeline link requirements is dependent on delivering the new vessels using Levelling Up funding.”

He added: “Given the Isles rely on these services, it is therefore essential that the Levelling Up allocation is maintained in order to keep a publicly funded option available to deliver the new vessels. If the vessels are delivered using private finance, then the affordability of the passenger and freight services will become a key issue which will become the responsibility of the Department for Transport to address.”

Mr Gove replied last week that if and when ISSG signed the private financing deal there would be no need for the islands to have the £48.5m.

“I can confirm, however, that until this happens the Levelling Up money will continue to remain available. In recognition of the complexities outlined in your letter, my department is pulling together a cross-government group of officials to work together on the challenges facing the Isles of Scilly.”

Cllr Steve Sims, lead member for economy, tourism and transport on Isles of Scilly’s council, said the news of ISSG signing contracts on Thursday was a “dark day for the islands”.

He said: “It doesn’t look positive for us. We’ll be talking to London about it, but one way or another it doesn’t look positive for the funding. We’ll continue to discuss things with the Department for Transport and the Levelling Up department, but from the council’s perspective [Thursday] was a really dark day for the islands.”

Cllr Francis said the islands’ council would be having an emergency meeting on Monday to discuss the matter, adding: “We are desperately attempting to hang on to that money. We are not going to let it go as far as we are concerned, but it’s not good news for the islands.”