Taxpayers lose millions after ministers' gave £100m carrot to ensure ferries deal went to Ferguson Marine

But in the end the taxpayer ended up out of pocket to the tune of  millions when the Inverclyde shipyard firm went under  - while the costs of the two ferries at the centre of the debacle continue to escalate.

Audit Scotland had said it was unable to establish why the £97m order for the two lifeline ferries was given to the Jim McColl-led Ferguson Marine shipyard firm without refund guarantees, saying that ministers were unable to provide any documentary evidence.

Caledonian Maritime Assets Limited (CMAL), the state-controlled firm that owns and procures CalMac’s ferries wanted to pull out of the contract weeks after it sanctioned Ferguson Marine being named as the preferred bidder raising concerns that they faced financial risk.

But documents seen by the Herald on Sunday reveal how ministers sanctioned special financial support for CMAL after it raised concerns about the lack of guarantees should things go wrong.

READ MORE: Ferguson Marine: Two faulty £240m ferries may never set sail with defects and costs rising under SNP control

Ministers approved a £106m public money loan with special provisos to CMAL to protect them as it raised concerns about the yard being unable to provide “mandatory refund guarantees” for the financial risk over the ferries after making Ferguson Marine the preferred bidder in August, 2015.

It came with a crucial pledge that they would not have to repay anything until after the vessels had been delivered.

And they promised other public funding to cover other performance risks to ensure it did not lose out and further money to meet any debts to ensure CMAL remained in existence.

The £82.5m that had been drawn down from the loan has become a taxpayer loss as CMAL says it was "eliminated" after Ferguson Marine went into insolvency, in August, 2019.

CMAL would normally have been expected to pay off the loan over 25 years using revenue it generates from the fees they get from the lease of vessels like CalMac's ferry fleet and harbour access charges.

The special deal came after CMAL registered concern that they were being put at commercial risk if Ferguson Marine became insolvent or failed to deliver on the ships without the full refund guarantees.

Mr McColl, one of Scotland's richest men had acquired Ferguson Marine out of insolvency 11 months before becoming the preferred bidder.

The shipyard firm fell into administration after a dispute with CMAL over the spiralling costs and delays in the construction of the ferries which were on a £97m fixed price contract.

The two dual-fuel ships Glen Sannox and Hull 802 are both languishing at Ferguson Marine's Port Glasgow shipyard, are at least five years late and are expected to cost more than £250m.

The now state-owned Ferguson Marine have told auditors there was a risk that it has underestimated the amount of work required to complete the vessels and that if the multiple issues are not resolved "there is a risk" that CMAL "will not accept the completed vessels".

One ferry users group official said: "What this all really shows is that the taxpayer and those of us who rely on ferries have lost out, big time."

READ MORE: Ministers axe ferry experts over 'dissenting voices' amid CalMac services 'fiasco'

The public funding offers came after CMAL chairman Erik Østergaard raised concerns with John Nicholls, then director of aviation and maritime at the Scottish Government agency Transport Scotland on September 26, 2015 about the commercial risk the company was exposed to.

He said the level of refund guarantees was "not sufficient" and led to an unsecured risk to them of £60m which he said was "totally off the track of what is normal practice for the shipping industry in respect of contracting for new buildings..."

He said: "If FMEL don't get back with substantially improved conditions in this respect, the board of CMAL have no other option than once again reject the deal."

He said that unless the Scottish Government had substantially changed its view on the level of unsecured risk there would have to be a refund guarantee that covers them if the yard failed to deliver.

But he said: "In my opinion, the best option would be to bin the present result and start from scratch..."

The following month Mr Nicholls told Mr Østergaard about the loan while saying that ministers were content for the public company to proceed with the contracts award having "noted and accepted the various technical and commercial risks identified and assessed by CMAL".

He acknowledged "a number of concerns and reservations have been expressed by the [CMAL] board members" over the proposed award of the contracts.

The letter further acknowledged that CMAL had sought confirmation from ministers on how the risk arising from the contract awards to Ferguson Marine will be managed.

He then stated that ministers are content for the contracts to be signed and that it had committed to the £106m loan funding, saying it would cover CMAL "if any of the identified risks materialises prior to delivery of the vessels."

He said if any risks materialised, prior to delivery, CMAL would "not be required to need to repay any loan drawn down unless or until the position is resolved to allow the vessels to be completed".

Mr Nicholls said that while it did not mitigate the risks about ferry-building performance issues, they could be effectively mitigated through the "robust project management arrangements that CMAL will put in place".

And he added: "If any of the identified risks arise and, despite the best endeavours of CMAL to mitigate and manage their consequences, additional costs are incurred by CMAL, then the Scottish ministers will look favourably on requests by CMAL for additional resources.

"I note in this context that the Scottish ministers intend for CMAL to receive sufficient funding for the company to continue to operate in accordance with its statutory obligations and contractual requirements and to deliver the tasks entrusted to it by the Scottish ministers...

"Funds will be provided as they are required in order for CMAL to meet its debts as they fall due and maintain the company as a going concern."

The letter confirmed that ministers had approved the award of the contracts to Ferguson Marine.

"The Scottish ministers, both in their capacity as CMAL's sole shareholder and more generally, also confirm that CMAL is authorised to enter into the contracts and any associated documentation."

The loan offer was accepted by CMAL chief executive Tom Docherty and money was due to be drawn down over five years. It was to be repaid over 25 years.

It included an allowance for CMAL's project management costs up to a maximum of £9m.

Mr McColl said all parties were aware of the lack of a builders' refund guarantee and that he was unaware that there remained concerns - as in the end both CMAL and Ferguson Marine jointly signed off on the contract.

"CMAL gave us the order and were told from day one that we wouldn't be able to put it up. I told the government why. It was because we were up against Polish, German and Turkish yards all of which had government schemes that back their refund guarantees," he said. "We don't have that in the UK so there is not a level playing field, so I could not put up a guarantee for £100m and it was not on from day one."

The Scottish Government went on to plough in the equivalent of £2.8m of taxpayers money per month into Ferguson Marine 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.

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

CMAL confirmed the loan had been given with amendments to provide additional assurances.

A Scottish Government spokesman said: "The contract for the vessels was awarded in line with all of the procurement rules and practices in the normal way, and the recent Audit Scotland report has noted the independent procurement review that highlighted there was nothing untoward in the procurement of the contract at the time."

In its analysis, Audit Scotland stated that the "Scottish Government’s procurement directorate conducted an independent, high-level review of CMAL’s procurement procedure".

It added: "Although it did not examine the technical details in depth, the review found no material issues with the procurement."

Audit Scotland also noted that in December 2020, an inquiry by the Scottish Parliament’s former Rural Economy and Connectivity Committee (RECC) found "serious  failures  in  vessel  procurement,  project planning,  project  management, and communication".

It said that Transport Scotland and CMAL, ministers and Ferguson's  should participate in a formal review of "what went wrong" with the project with a view to "learning lessons to help prevent future recurrence with other vessel. procurements". 

And it stated: "There is insufficient documentary evidence to explain why Scottish ministers accepted the risks and were content to approve the contract award in October 2015."

The Scottish Government spoksman added: “The Scottish Government operates under collective responsibility and remains focused on delivery of the ferries by Ferguson Marine.

"The actions that the Scottish Government has taken have helped to secure jobs at the last remaining commercial shipbuilder on the Clyde.”