Revealed: Ministers' five-year-old warning over Ferguson Marine costs

Documents seen by the Herald on Sunday show how the Scottish Government procured advice from PwC to fashion two loan deals worth £15m and then £30m to the company then run by then independence supporting tycoon Jim McColl and that they said the funds would soon be exhausted.

They reveal the logic of its stance in propping up the financially troubled yard twice in the space of a year in 2017 and 2018  - having gone into administration three years earlier.

It had been claimed that the disastrous £97m contract to build two lifeline ferries was rigged in favour the firm run by Mr McColl, who rescued the yard in the summer of 2014 in a move partly brokered by former First Minister Alex Salmond, who kept the entrepreneur abreast of businesses that needed saving.

The shipyard firm went into administration again in August, 2019 - just over a year after the second Scottish Government bailout loan amidst soaring costs and delays in the construction of the two ferries and was nationalised with Mr McColl's Ferguson Marine and the Scottish Government-owned ferry procurer CMAL blaming each other for what went wrong.

The Ferguson Marine board admitted there was a "significant doubt" over its ability to continue as a going concern due to doubts over future funding in its last 2021/22 financial statement.

And Auditor General Stephen Boyle (below) said at the end of April that there remains doubts over the long term future of the shipyard firm because of a lack of a business plan.

Official financial budget statements have revealed that the cost to the taxpayer of the Scottish Government's intervention in Ferguson Marine which is yet to deliver the long-delayed lifeline ferries has now soared to more than £450m.

The sum is more than £200m more than what public spending watchdogs Audit Scotland were expecting would be spent to finally deliver the two ferries at the centre of the Ferguson Marine debacle last year during its inquiry into the rising costs.

READ MORE: Auditor concerns over shake-up of bonus culture at Ferguson Marine

The Scottish Government had already committed £128m through £45m in loans and milestone payment costs for the ferries before nationalisation before sanctioning the ploughing in of just over £330m into Ferguson Marine since coming under state control at the end of 2019 - including a further £72m budgeted for the next financial year after eight months of due diligence - with the firm's primary aim to deliver the ferries.

Ministers were accused of presiding over an “outrageous mismanagement of public funds” after pressing ahead with the second ferry at the Ferguson shipyard, known only as Hull 802, despite learning through the due diligence that it would be cheaper to scrap the vessel and tender for a new one.

Meanwhile, the Scottish Government is considering a request from Ferguson Marine for a multi-million-pound tranche of capital expenditure on top of the £72m as part of a plan to make it more competitive.

Ministers have overspent against budget to the tune of over £121.9m over the last three years in the wake of continuing delays in the production of two vessels being built to serve island communities. Their delivery has been put back  over five years in the wake of the soaring costs.

In 2021/22 what was supposed to be a £47.4m Ferguson Marine budget ended up with an outturn spend of £115.1m. In the last financial year a £35.9m budget has resulted in a spend so far of £55.1m. And in 2020/21 a £49.6m budget ended up with expenditure of £84.7m leaving a £35.1m overspend.

One ferry user group official said that there "would be alarm over the financial prudence of throwing money at a company that has a history of financial problems".

"It is clear the Scottish Government has gone into this knowing that this was not going to be a one off, and once they started putting taxpayers' money in, they been unable to stop," he said. "But at some point there has to be an examination of whether the public is getting value for money in the hundreds of millions that has been put into the yard and I don't think you need to be a rocket scientist to work out that that isn't the case.

"We desperately need those ferries, don't get me wrong, but the yard is haemorrhaging money, the costs mentioned are mindblowing and it seems clear that the Scottish Government will not stop their spending at just their delivery."

Scottish Conservatives' shadow transport minister Graham Simpson said that he has asked the wellbeing economy minister Neil Gray to divulge how much more would be needed to make the yard competitive but has refused to answer.

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"It is quite obvious that more money will need to be spent if the yard is to be able to win more orders and the government needs to come clean on that," he said.

"I have also asked how much it is going to take to finish Hull 802 as opposed to building a new ferry elsewhere and, again, no answer was forthcoming. That's not good enough.

"Furthermore there is a report which is being kept secret which outlines options for the yard. The government needs to set out what these options might be."

But GMB Scotland, the main union at the nationalised yard have urged the need for further investment.

Union sources say the workforce has been impressed by how chief executive David Tydeman has gone about his business since arriving at the yard.

READ MORE: CalMac ferry remains sidelined months after rust and engine issues

“He has shipbuilding in his veins and took a pay cut to come back to the Clyde because he wants to do a job here. He wants this yard to succeed and have a future, " said a source.

“He knows what he is doing, what needs done and has the experience and determination to move things forward. He’s been a breath of fresh air. Like chalk and cheese to what we had before.

“Obviously these ferries have become an anchor around our neck. There is enough blame to go around but none of it should be on the workforce.

“The workers have been scapegoated for the errors and incompetence of the people in charge while politicians queue up to use the yard as a punchbag.

“Mr Tydeman has been approachable and is clear in what he wants to do and how he thinks he can do it.

“Like everyone in the yard, he wants the ferries finished and out the door but, unlike his predecessors, he is properly focused on the challenges and opportunities that come after that.

“He has plans and ideas and sees the chance to win work and keep this yard going for decades but we need backing in the short-term, the investment in the yard that will open the door to the contracts we need.

“He is clear about how he thinks this yard can move past these ferries and build a proper, long-term future. The workers here have been waiting a long time to hear that.

“The workers have every faith in him and ministers should share that faith and give us what we need to build a future here.”

The financial issues with Ferguson Marine first came to the Scottish Government's attention in August, 2017, 22 months after  the deal to build the ferries was announced at the SNP’s annual conference in Aberdeen by transport minister Derek McKay.

Before the first £15m loan, senior officials, including the First Minister, the transport secretary and the chief legal officer of the Scottish Government and the Crown - Lord Advocate James Wolffe, were warned in a confidential internal briefing that a PwC analysis considered that a Ferguson Marine cash balance of just £20,000 was insuffienct in terms of the continuing operation of the business and it would quickly move to insolvency and administration.

"In considering how to address this we are very alive to the implications of possible administration in terms of the 400+ jobs at [Ferguson Marine] and the future of shipbuilding in Scotland; the significant real and process costs to CMAL in terms of delivery of the vessels; and the likely political and media spotlight at a time when we are stepping up our work on the economy and future industries."

But PwC told ministers before they sanctioned a second £30m loan in June, 2018 that those funds would be "largely exhausted " on completion of the ferries.

Its analysis said: "There is private sector precedent for customers providing funding in similar situations to protect their supply chain to ensure contract delivery and avoid the worse financial outcome that an insolvent supplier would bring about.

"Inevitably, there remain further risks for [Ferguson Marine] which may result in [it] requiring further funding in the future, such as further delays in the build out of [the ferries] or fewer and/or timeline slippage on new orders than are currently forecast by management."

Ministers were last week accused of concealing the real reason for sinking millions into the shipyard company  to avoid claims of acting unlawfully.
Mr McColl who has spoken out about a planned money trail inquiry by Audit Scotland indicated the real reason for a controversial Scottish Government £30m loan intervention in June, 2018 was not divulged to avoid unlawful state aid issues.

Concerns over a cover-up arose 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 ferry contract.

The Scottish Government says it acted lawfully throughout the process.

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.

A Scottish Government spokesman said: “Ministers have apologised for the delay to the ferries and the difficulty caused. We are committed to their completion, securing a sustainable future for the yard and supporting our island communities that rely on this type of vessel on a daily basis," said a spokesman.

“The Accountable Officer has discussed the issue of costs to complete the vessels with the Auditor General and we will provide as much information as possible to Parliament, subject to commercial sensitivities, in the coming weeks.”

The spokesman said that Ferguson Marine believes the total cost to complete both vessels is expected to be £277m.  But the calculation at the very least did not include  £45m in loans given to the yard before it fell into administration, which Audit Scotland stated was part of the costs involved.