Ministers sink £45m of taxpayers’ cash into Ferguson Marine despite ‘lack of due diligence’

The Scottish Government has ploughed in the equivalent of £2.8m of taxpayers money per month into the beleaguered shipyard firm in the first 16 months of its ownership of the yard - having already lost nearly all of the £45m in loans it used to support the business before it fell into administration just over two years ago.

Public spending auditors Audit Scotland have told Scottish Government that it needs to change its procedures saying they were not abreast of the full financial implications of taking Ferguson Marine under state control in late 2019, after the shipyard company headed by tycoon Jim McColl went under.

It can also be revealed that ministers have had to stump up more millions to support the ferry project - because as the delay in delivery soars to at least over five years - the warranties on the dual-fuel engines ordered from the Finnish company, Wärtsilä, have expired.

Some £3.5m has being put aside to provide cover over equipment whose warranties have time expired.

Ministers have pledged to keep giving providing working capital support for Ferguson Marine to keep the yard running.

READ MORE: 'Hypocrisy': Ministers under fire as CalMac uses P&O tax dodge to save £46m

The Herald on Sunday has previously revealed that ministers ensured there was a "right to buy" of the shipyard when it provided a the first of £45m in loans four years ago, knowing it was creating a path to a controversial state ownership.

While Derek Mackay, the finance secretary of the time, was telling the public the loan was “to further diversify their business", the real reason was that Ferguson Marine was in financial trouble and at risk of falling into administration.

Concerns over ministers' state intervention surfaced as major problems remain unresolved at the Port Glasgow shipyard constructing two lifeline ferries for Scottish islands, Glen Sannox and Hull 802, with costs of the calamitous project soaring to at least £250m - £50m more than the last estimate.

And there are worries over whether the vessels will ever set sail, after it was revealed there were in January 175 outstanding faults with the ferries that need resolved - more when the Scottish Government took control of the yard at the end of 2019.

New costs which emerged in last week, now include £45m of 'lost' Scottish Government loans and a further £8.7m because of further building faults, mean it is now two-and-a-half times the original contract price and more than three times the estimated budget in Transport Scotland’s business case of £72m.

Financial papers reveal the extent of the Scottish Government's financial support for Ferguson Marine since it was nationalised.

It has injected £45.1m into Ferguson Marine the shipyard company after nearly £12m in working capital to keep the business operational after it was formally adopted by ministers in December 2 and was renamed as Ferguson Marine (Port Glasgow) Ltd. The Scottish Government actually took the company into public control as Ferguson Marine fell into administration in mid-August, 2019.

The shipyard firm had gone into administration following a dispute with state-controlled ferry owners and procurers Caledonian Maritime Assets Ltd - over the spiralling costs and delays in the construction of the ferries which were on a £97m fixed price contract.

Ministers pumped £17.1m into state-owned shipyard business during the first four months of ownership to March 2020 - including £9.569m into the construction of the two ferries and £7.54m working capital by way of payment for the assets of Ferguson Marine.

And in the year to April, 2021, it injected a further £28m, including £4.7m in working capital, most of which was to cover the effects of the Covid pandemic, and £23.3m to the continuing costs of the two stricken ferries.

One union official who supported the the ministerial intervention to rescue more than 300 jobs at the yard admitted he was having doubts that nationalisation will work.

"Our loyalty is, of course, with those workers who could have lost their jobs if the shipyard had been lost, but we do concern ourselves with whether Ferguson's is actually viable going forward. The sums being quoted are unquestionably eyewatering and of course there will be questions about whether this is all sustainable going forward. All of it was predicated alongside an overwhelming need to get both ferries out of the construction phase and serving island communities. But there are now serious questions over even that."

Documents have shown that even two weeks before Ferguson Marine went into administration, its Jim McColl-led thought ministers were still trying to pursue what they called 'the solvent solution' involving keeping it intact as a private business - while behind the scenes ministers had created a pathway to nationalisation.

According to Audit Scotland analysis, ministers in July, 2019 considered two options for nationalisation: either purchasing it for £1 through the provisions set out in the loan agreement, or through a controversial pre-pack administration process involving the controlled acquisition of certain shipyard assets during the insolvency process.

Ministers favoured the latter.

Pre-pack administrations have generated a considerable amount of controversy, because the sale is pre-arranged, with critics saying it lacks regulation and transparency.

It is frowned upon by many who believe that it can be used as an escape route for writing off debts and merely starting again.

Adminstrators Deloitte say they commercially marketed Ferguson Marine and received three bids from prospective purchasers, in addition to the Scottish Government’s bid. Deloitte believed the Scottish Government’s bid represented the best return for creditors.

While public spending auditors say ministers carried out "some due diligence" before Ferguson Marine entered administration relationships with the current board directors broke down, and the auditors say that ministers had difficulty accesssing information from the company.

The Audit Scotland analysis says things were made further challenging by the complexity of the issues to be considered and the short timescales involved.

Ministers say they could not undertake technical diligence on the vessels at the centre of the ferry fiasco after Ferguson Marine entered administration.

"This meant that the Scottish Government made the decision to nationalise the shipyard without a full and detailed understanding of the amount of work required to complete the vessels, the likely costs, or the significant operational challenges at the shipyard," said Audit Scotland.

Meanwhile since nationalisation, which brought with it a new management team to identify and implement improvements to deliver the vessels, workforce representatives expressed a lack of confidence in their ability to turn the shipyard around.

Ferguson Marine workforce representatives were also concerned that high overheads due to the increased number of senior managers since nationalisation will impact the shipyard’s competitiveness and its ability to win future contracts.

Audit Scotland's dossier further reveals that prior to nationalisation, consultants PwC advised the Scottish Government that it should consider its exit strategy from the shipyard.

But the Scottish Government felt it was not appropriate to do so as the immediate priority was delivering the vessels. The future of the shipyard would be considered at a later stage.

Ministers have said that they have not made any strategic decisions on the long-term future of the shipyard, including whether it should be publicly or privately owned, as this will depend on many factors, including Ferguson Marine's future pipeline of work.

On Thursday, First Minister Nicola Sturgeon told MSPs that "the buck stops with me" as a row blew up over over the contract for two delayed and over budget ferries being given to Jim McColl's Ferguson Marine against the initial advice of CMAL and without the normal financial safeguards in place.

The public spending auditors have told ministers they have to improve the transparency of its investment decisions.

It said they have to be clear about the specific outcomes it expects to achieve from investing in private businesses and put "appropriate measures in place to assess and report value for money".

This includes setting clear conditions for its investment, ensuring that these are adhered to, and monitoring risks.

But Audit Scotland have been calling for ministers to be more transparent over its financial support for struggling companies such as Ferguson Marine for nearly four years.

Nearly four years ago, Audit Scotland said that the Scottish Government should develop a 'framework' that clearly outlines its role in financial interventions in private companies to support its decision.

It came after the Auditor General said there was limited public information about the extent of financial support to both Ferguson Marine and then newly insolvent renewables manufacuturer BiFab which both went into administration.

The Scottish Government had been insisting that the Scottish Public Finance Manual (SPFM) first introduced over 20 years ago after the Scottish Parliament was established sets out how it deals with private businesses.

By the end of 2020, the clear 'transparency framework' had not been drawn up.

And in a December analysis of the Scottish Government's public spending performance, Audit Scotland again stressed the need to adopt the framework for investment "to ensure there is greater transparency over the value of financial support provided, the risks involved and the expected outcomes for the public".

A Scottish Government spokesman said: “The Scottish Government saved hundreds of jobs when we rescued Ferguson Marine from administration and stand by our commitment to the shipbuilding communities in Inverclyde, and our island communities that rely on the vessels.

“We fully accept the Audit Scotland recommendations on Ferguson Marine in public ownership and work is well underway on a number of the recommendations including updating the Public Finance Manual.

“There is still work to do to complete both the vessels and turnaround the business. We have made it clear the board and leadership of Ferguson Marine that they will be held to account for delivery of these critical ferries in line with the new schedule.”