Ferguson Marine: Ministers accused of ferry cash state aid 'cover up'

Concerns over a cover-up have risen as Scottish Government documents show that while ministers were publicly saying that the loan was in place to diversify the business - it was actually because Ferguson Marine was in financial trouble while dealing with the calamitous contract to build two lifeline ferries for Scottish islands. 

The Scottish Government says it acted lawfully throughout the process.

Mr McColl has spoken out as it emerged that public spending auditors warned that legal problems were preventing them from carrying out a full forensic analysis of the soaring costs of the Scotland's ferry crisis before nationalisation.

Confidential Scottish Government papers have revealed that the Lord Advocate James Wolffe, the chief legal officer of the Scottish Government and the Crown for both civil and criminal matters had been briefed and sought answers over the loan. It came against a background of avoiding unlawful state aid concerns.

The intent of state aid rules is to avoid financial assistance given by a government that favours a certain company or commercial group and which has the potential to distort market competition.

READ MORE: Ferguson Marine: Fears for future of state shipyard over lack of work

Mr McColl said he would "bet my life" that there was 'nothing to see' in relation to where the £128m ploughed into the firm was spent, and believes the inquiry is a distraction from wider issues regarding the handling of the project.

Failed attempts have been made by Audit Scotland to establish where pre-nationalisation Ferguson Marine Engineering Limited (FMEL) under Mr McColl spent over £128.25m in public money in relation to the building of two long-delayed lifeline ferries before it was nationalised at the end of 2019.

Two lifeline ferries for Scottish Government-owned CalMac were ordered in 2015 when Ferguson Marine was owned by Jim McColl,  then a pro-independence businessman who rescued the Inverclyde shipyard firm from administration a year earlier.

Delivery of the vessels procured by Scottish Government-controlled ferry owner CMAL is now over five years late with costs expected to quadruple compared to the original £97m contract costs.

When the build ran into trouble, the shipyard firm fell into insolvency in August, 2019 and was nationalised with Mr McColl and CMAL blaming each other for the fiasco.

Included in the audit scrutiny is the £30m loan which the Scottish Government said would provide working capital alongside investment from Mr McColl's Clyde Blowers Capital firm to help FMEL "diversify its business".

Ministers said in an announcement that the loan would enable the "shipyard to target investment in repair and maintenance capability and to win business opportunities in areas like ship servicing and repair, low carbon marine projects and decommissioning work".

Then finance secretary Derek Mackay said it was a "strategic investment in our industrial capability as both the marine engineering sector and commercial shipbuilding have vital roles to play in Scotland’s future".

But internal Scottish Government documents reveal that the agreement was clearly linked to the delivery of the vessels and the dispute between FMEL, which was then a struggling company, and CMAL over the rising ferry costs.

"The reason that the government gave for claiming that the £30m loan was to further diversify the business was to avoid being accused of state aid. All of the funding by the government went towards progressing the build of the ships and this was verified," said Mr McColl.

READ MORE: Ministers do not rule out more public money millions over ferry crisis

Also included in the scrutiny is the £83.25m of the £97m contract that was paid to FMEL by CMAL as milestone payments for the completion of the project - despite the fact they were largely incomplete.

He said that it was already known "exactly where the money went" and that drawdowns on the money would not have been sanctioned otherwise.

"The £82.25m that was legally due to be paid to FMEL because they had completed all the milestones to qualify for the payments."

Internal Scottish Government documents revealed that the "urgent" £30m loan was required "immediately if severe cost-cutting measures and further significant delays to the CMAL order are to be avoided".

One confidential memo said Liz Ditchburn, the Scottish Government's director general of economy and accountable officer over the matter said that the loan agreement as negotiated represented a "legitimate basis for action" and that the "consideration of regularity, propriety, and value for money have been considered and I believe are satisfied on the basis of evidence and advice available to me".

Mary McAllan, the director of economic development warned in a pre-loan memo that without access to the further finance Ferguson Marine's next planned step was to issue redundancy notices to the bulk of the core staff at the yard – around 230 from a total headcount of 280.

Administration was "a real risk" which could "damage the business, even further delay vessel delivery and risk generating significant job losses."

She said that legal and commercial consultants PwC and MacRoberts "provided assurance that the loan agreement and associated documents in their final form are commercial, legally robust and conform to the Scottish Government's intentions and duties".

The £30m came with it a "right to buy" if the company fell into insolvency.

One ferry user group official said that the public statements from the Scottish Government over the £30m loan had "clearly been far from the whole truth".

He said: "There has always been issues with transparency regarding the ferries mess, and the more you peel back the layers, the more is revealed that leaves you to seriously question whether public money was spent wisely on this affair. If it was clear why the money was being spent and the Scottish Government gave its justifications from the start, there could be no criticism. But the actual reasons for this loan appear to have been covered up."

Audit Scotland is to carry out a new wave of monitoring over the ferry fiasco - and is to carry out a full costing of the project if and when the vessels have been completed.

It has been confirmed that the public spending watchdog will also examine the reasons behind going ahead with the completion of one of the ferries, Hull 802, after a Scottish Government due diligence examination found that it failed a value for money test, saying it was cheaper to build it again from scratch.

Scotland's Auditor General Stephen Boyle has been seeking to uncover what happened to the public money that was provided to support both the shipyard firm and the beleaguered project before nationalisation.

But the public spending watchdogs say there have been a "number of complex legal and practical challenges that may inhibit" their ability to undertake the analysis.

The public spending watchdog said that while consultants PwC were providing the Scottish Government with reports on FMEL spending, they did not go into detail on where the money went, so were "unable" to trace exactly how that money was spent and what progress was made on the vessels as a result.

But Mr McColl said: "There was no question that FMEL had received payments for work that had not been completed. The additional funds provided by the government was used to continue work on the vessels and was agreed and drawn down after a robust review of the costs by PwC.

"They should not be allowed to claim that they did not go into detail of where the money went. They knew exactly where the money went... otherwise how could they sanction the drawdown."

Audit Scotland previously found that ministers went ahead with the contract despite the concerns raised by CMAL over the lack of financial guarantees that placed them at risk.

The auditors' examination of the issues said there was no documented evidence to confirm why Scottish ministers were willing to accept the risks of awarding the contract without a builder's refund guarantee in place despite the concerns.

Officials say that without a builder's refund guarantee in place, there was no link between the payments that CMAL was making and the quality of the build.

But Mr McColl said: "The lack of financial guarantees were not what created the risk, it was the serious failings in the original specification by CMAL. A bank guarantee would have been for a maximum of £97m. We are looking at a £350m -£400m overrun on this. The guarantee is not the issue."

Mr Boyle had previously advised that the spending during Mr McColl's tenure at the shipyard firm had been outside his remit because it does not include private companies.

But the nationalised firm has now received FMEL's financial records.

And Audit Scotland has said that existing records relating to transactions were "not organised or categorised".

David Tydeman, chief executive of the now nationalised Ferguson Marine had been asked for help in tracing what happened to the £128m which was ploughed into the firm before it was nationalised.

He previously said they had not sought to evaulate old files because they "do not add value to the planning or budgeting work still needed to complete the vessels".

He previously told MSPs he did not have details of the taxpayer-funded loans and had been focussing on the the £83.25m paid by CMAL.

Mr Boyle said: "I have received legal advice on what statutory powers I have to forensically examine and report on FMEL’s financial records in these circumstances. However, there are a number of critical issues which remain unresolved for which I am currently seeking clarification on from our lawyers. This is designed to ensure that I have explored all potential statutory examination and reporting routes for me to take further action."

He is expected to update MSPs on his progress in due course.

A Scottish Government spokesman said: “This claim is simply untrue. The Scottish Government has acted lawfully throughout.

"The Scottish Government stands firm on its commitment to the vessels, the workforce and the yard. The delivery of the vessels is critical to supporting the lifeline ferry network by adding two new badly needed vessels to the Calmac fleet."

PwC declined to comment.