Ferguson Marine ferry contract scandal: Jim McColl told by Derek Mackay contract refund pledges not essential

He added that state-owned ferry owner and procurement firm Caledonian Maritime Assets Limited (CMAL) had “on occasion taken alternative approaches” to the bonds while explaining how a “different approach" may be required for shipbuilding contracts”.

Mr Mackay’s stance came four months after CMAL told bidders a different story in a pre-qualification contract questionnaire for the £97 million contract for two ferries that are still languishing in the Port Glasgow yard.

According to CMAL’s contract rules, seen by The Herald, any would-be preferred bidder would be disqualified without the mandatory guarantees, meaning they would not be scored and therefore fail at the first of the three-step procurement hurdle.

The development has now raised fresh questions about the legality of the process which has cost the taxpayer over £80m.

READ MORE: Ferguson Marine: Shipyard bosses fear £250m ferries will never be used amidst spiralling series of serious faults

The lack of the guarantees have been at the centre of a political storm as public funds auditors said ministers sanctioned giving the contract to Mr McColl's Ferguson Marine Engineering Limited (FMEL) in 2015 despite the yard being unable to provide them to protect CMAL and the taxpayer from financial risk if things went wrong.

Mr Mackay, now an ex-minister who resigned in a sleaze scandal involving a teenager in 2020 had been blamed for signing off the contract to build the new vessels despite a number of red flags over the finances.

The latest development has raised new questions about the legality of the process which has cost the taxpayer over £80m All bidders were asked by CMAL to provide an evidence statement in the form of a letter from the bank confirming their willingness to provide the guarantee “if requested to show you can provide this requirement”.

Mr McColl, formerly one of Nicola Sturgeon’s own economic advisers who has said the SNP government favoured the yard, insisted to the Herald that no such was evidence was sought because it had made it clear that it was unable to put up a guarantee.

He said Ferguson Marine bid for the ferries contract off the back of Mr Mackay’s indication that refund guarantees were not mandatory. He says that all CMAL and ministers would have been aware of the lack of a builders’ refund guarantee before Ferguson Marine was picked in August, 2015 as the preferred bidder, and said alternative arrangements to the bonds had been agreed in advance.

Mr Mackay rubber stamped the deal to give the Inverclyde shipyard the disastrous contract to build two lifeline island ferries before deputy first minister John Swinney gave final approval two months after Ferguson Marine got preferred bidder status, having already cleared the 'mandatory refund guarantee' questionnaire stage.

It comes as the Herald revealed shipyard concerns that the two unseaworthy dual-fuel ferries Glen Sannox and Hull 802 that are languishing at Ferguson Marine's Port Glasgow shipyard will not see service through a rise in major faults. They are at least five years late and costs have soared by over two-a-half-times to more than £250m, according to latest estimates.

The shipyard firm under Mr McColl fell into administration in August, 2019, after a dispute with CMAL over the spiralling costs and delays, with both sides blaming each other.

READ MORE: Ferries fiasco: £1m paid for Nicola Sturgeon's launch of Glen Sannox that hasn't sailed five years on

Issues over the guarantees are understood to have been raised with ministers by local MSP Stuart McMillan in February, 2015, four months after the contract questionnaire was distributed to would-be ferry builders. Mr McColl says the MSP was approached by Ferguson directors to explain that the shipyard firm would not be able to provide the refund guarantees for the two ferries which were being tendered.

It is understood Mr McMillan, the SNP Greenock and Inverclyde MSP wrote to deputy first minister John Swinney about the issues before a response came from Mr Mackay "given my transport responsibilities".   Mr McColl says correspondence was also sent to  Keith Brown, then the infrastructure, investment and cities secretary.

Mr Mackay wrote back: "Regarding the question of refund guarantees or 'bonds'. I would like to clarify the position relating to standard construction projects and why a different approach may be required for shipbuilding contracts."

From the CMAL questionnaire given to ferry contract bidders

He said that in standard construction projects, if a contractor goes out of business part way through a contract or fails to perform, what is being built can be secured by the buyer even if only partially completed.

But, he said, in the case of shipbuilding, the vessel is being built on the contractor's yard, so if it went into liquidation, the purchaser was in a "much less advantageous position" regarding work that has already been completed.

He said that "in theory" it was possible to take ownership of parts of the ship that have been built.

But he said ship owners were "usually reluctant to take ownership of parts of a vessel which is not yet complete as this would have implications for the builder's responsibility and liability for satisfactory completion of the contract".

Therefore, he said, it was "fairly common" for ship buyers to insist that each staged payment in a contract was protected by a refund guarantee, provided by a bank.

But he added: "Ferries for the Clyde and Hebrides fleet operated by CalMac are procured and owned by CMAL. While CMAL's board in line with standard industry practice has a preference for refund guarantees it has on occasion taken alternative approaches to ensure that ship yards, including Ferguson under its previous owners, were not excluded from bidding for those government contracts."

He concluded: "FMEL, and Jim McColl personally, have publicly stated their ambition with regard to these orders, and I am sure they will be seeking to put this ambition into effect.

"I hope this reassures you that, in line with the 2012 Ferries Plan, the Scottish Government is continuing in its commitment to vessel replacement and providing potential work for the shipbuilding industry in Scotland."

READ MORE: Revealed: Ministers' secret path to the controversial state takeover of Ferguson Marine

The discussions came four months after the CMAL prequalification questionnaire produced to contractors in October, 2014 to be even considered as the preferred bidder stated: "The ability to provide staged payment refund guarantee from a suitably accredited bank is sought for this project as a MANDATORY MINIMUM REQUIREMENT. The guarantee must be in place before work starts. Please provide an evidentiary statement in the form of a letter from your bank confirming their willingness to provide the guarantee if requested to show you can provide this requirement."

CMAL stated in the document seen by the Herald that an "inability to meet mandatory requirements will result in exclusion" and the six companies with the highest scores will be "taken forward to tender".

Mr McColl said CMAL were told "from day one" that his company were never able to provide refund guarantees.

He said they had been competing against Polish, German and Turkish yards all of which had government schemes that backed their refund guarantees.

He said the need for refund guarantees was relaxed and an "alternative arrangement put in place" which consisted of a smaller cash deposit of £15m and an insurance bond.

In addition to this all material purchased and all work in progress immediately transferred to CMAL as security.

He said: "The letter from Derek Mackay suggested that alternative approaches were acceptable. On this basis FMEL proceeded with the tender."

But before Mr MacKay and Mr Swinney signed off on the contract to preferred bidder Ferguson Marine in October, 2015, the CMAL board “considered that there were too many risks involved to award the contract” to Ferguson Marine and told Transport Scotland it would prefer to start the procurement process again.

According to Audit Scotland, Scottish ministers were "aware of the risks but were content to proceed to contract award”.

Mr McColl said he was "surprised" to hear that CMAL chairman Erik Østergaard subsequently objected to Ferguson Marine at the 11th hour having provided a "positive" commentary in awarding the contract to his firm.

When preferred bidder status was announced, Mr Østergaard, said that subject to agreement "on all points", they hoped to be in a position to finalise the award of the contract the following month.

“We have undertaken a complex process of technical evaluation to ensure the new vessels will meet CalMac Ferries Ltd’s rigorous requirements on capacity, speed, draft and dual fuel capabilities, including the ability to operate to a wide number of harbours and routes over their lifetime. We are confident that the specification from FMEL can deliver on all of these conditions."

A political row erupted after Audit Scotland said it was unable to find documentary evidence justifying the decision to give the contract without the guarantees adding that “there should have been a proper record of this important decision”.

Taxpayers ended up losing over £80m after ministers subsequently provided a £106m special incentive to ensure that the ferry fiasco contract could go through without the normal financial safeguards.

The costs came as the Inverclyde shipyard firm went under - to be taken over by the Scottish Government -while the costs of the two ferries at the centre of the debacle continue to escalate.

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 the guarantees.

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

Excerpt from Mr Mackay's letter

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 collects from fees.

The Scottish Government and CMAL were asked by the Herald how Ferguson Marine managed to get past the questionnaire stage without any evidence whatsoever of a builders' guarantee.

The Scottish Government did not address the issue saying only: “While CMAL did express concerns about the absence of a full refund guarantee, it put measures in place to mitigate those risks.”

A CMAL spokesperson said: “To clarify, Ferguson Marine Engineering Limited (FMEL) was announced as the preferred bidder in August 2015 and in the following month,  the company confirmed that it could not provide the full builder’s refund guarantee, contrary to what was included in its bid. 

"The timeline of events around the refund guarantee is clearly and accurately described in the Audit Scotland report, published in March 2022, which also accurately describes CMAL’s concerns in relation to the absence of a full refund guarantee and preference to restart the procurement process."