Ferguson Marine: Public cost of ferry fiasco firm at nearly £600m

The bill, which includes the Scottish Government payments for the running costs of the struggling yard - does not include the further £25m requested by the yard to secure its future beyond the delivery of the ferries.

On Tuesday the wellbeing cabinet secretary Neil Gray said that the threat of a legal challenge over UK's subsidy control rules had so far prevented the Scottish Government from pumping in the latest tranche of cash - but that ministers were still trying to work out a way forward.

The Herald on Sunday can reveal that the Scottish Government's expenditure on Ferguson Marine since the first steel was cut on the ferries in April, 2016 has soared to nearly £560m.

In the four years since nationalisation ministers have 'overspent' against budget to the tune of over £148m in the wake of continuing delays in the production Glen Sannox and Glen Rosa being built to serve island communities. Their delivery has been put back over six years in the wake of soaring costs.

READ MORE: ScotGov warned of ferry privatisation threat after decision 'fudge'

It has spent double the taxpayer-backed budget for Ferguson Marine -  -whose primary aim is to deliver the ferries -in the past two years incurring a near £250m spend in that time.

Transport Scotland's business case for the ferries project was just £72m while it emerged that Audit Scotland estimates that the extra mainly capital cost to complete both vessels has more than doubled since nationalisation in December, 2019.

The public spending auditor's latest estimate for the public cost of the ferries since nationalisation as of September was £240m and focuses on direct capital spending but does not include full Scottish Government expenditure on running costs such as salaries. That's on top of the £128.25m already ploughed in by the Scottish Government when Ferguson Marine was under the control of tycoon and businessman Jim McColl.

Their latest Audit Scotland estimates also do not take into account the further up to £51m that Ferguson Marine say has been needed for the ferries since September.

When the Scottish Government took control of the firm, which operates the last remaining shipyard on the lower Clyde, the auditors said the extra capital costs were estimated at between £110.3m to £114.3m.

When the contract was agreed in October, 2015, both ferries were due to cost a total of just £97m - and were to be paid for by the Scottish Government-owned ferries and ports owner Caledonian Maritime Assets Limited by repaying a ministers' loan over 25 years through using revenue it generates from the fees it gets from the lease of vessels like operator CalMac’s ferry fleet and harbour access fees.

But it is understood that part of the Scottish Government's special deal to allow then independence-supporting tycoon Mr McColl's Ferguson Marine to win the contract in the wake of CMAL's concerns over a lack of financial guarantees, meant that loan was wiped out and it will not have to be paid back as would be the norm.

The £83.25m of public money that was drawn down to pay for the construction of the vessels was "eliminated" after Ferguson Marine under Mr McColl fell into financial trouble at the end of 2019.

Ministers had previously pumped in £45m in taxpayer-backed loans into Mr McColl's firm which was mostly lost when it fell into administration.

The collapse of the Mr McColl-led Ferguson Marine, came amid soaring costs and delays, with the firm and CMAL blaming one another. This paved the way for the Scottish Government-pursued nationalisation to ensure the ferries were delivered - five years after the tycoon first rescued the yard when it went bust.

A ferry user group official described the costs as "mindblowing" and said that further investigations should be carried out by public spending auditors into the expenditure.

"There is no question that all islanders want is a ferry service that works for them. We want to be able to go to the shops and know that we will have fresh food there, we want to be able to reliably get to the mainland for schools and health care but we know it comes at a cost and that cost is just not sustainable.

"The hidden costs of this scandal are what is concerning, and I really do think there should be a proper investigation into the true costs of delivering these vessels.

"I think that the Scottish Government has dug its furrow with regard to the costs of the ferries and with Ferguson Marine in general and will have to keep spending until those ferries are finally here. What happens after that though, is anyone's guess. But with the wellbeing economy minister seemingly questioning the extra costs of expanding Ferguson Marine's operations, the future does not look so bright."

It can be revealed that according to the Scottish Government's own expenditure data, for 2022/23 alone the spending on Ferguson Marine was nearly double the budget. It had a £68m budget, but the actual spend was at £131m.

Around £60m of the rise is understood to have been put down to the cost of the declining market value of the ferries that have still to be delivered along with the materials used in construction. Some £3m of the overspend was put down to consultancy costs by Ferguson Marine and the timing of work being completed by the firm and its sub-contractors.

In 2020/21 what was supposed to be a budget of £63.1m became an outturn spend of £84.7m while in 2021/22 a £52.2m budget became £115.1m of expenditure.

The Scottish Government has overseen a spend of nearly £350m into Ferguson Marine since it was nationalised at the end of 2019 - including a further £60.9m budgeted for this financial year.

It includes a further £21m that Ferguson Marine say is needed to cover extra costs on the ferries incurred since September because of required changes to evacuation routes and passenger seating layouts to secure safety certification and approvals from the Maritime and Coastguard Agency (MCA), which is responsible for implementing British and international maritime law and safety policy.

READ MORE: Ferguson Marine: ScotGov firm admits 'significant doubt' over future

The £21m extra costs are subject to a due diligence investigation by the Scottish Government - but Mr Gray has said that the government is committed to the completion of the ferries.

The capital and resource committed spend to date does not include the request by Ferguson Marine of an additional £30m to cover contingency contingency issues that may arise, particularly during the sea trials that need to take place before final handover over the ferries.

Mr McColl who ran Ferguson Marine before it fell into insolvency in August, 2019, had estimated the total cost of completing the ferries would be £200m.

He said that they made an eleventh-hour proposal to the Government to share in half of the extra costs and capped the additional cost to CMAL at £50m but that that was turned down.

He had predicted that the final costs of the ferries would be at around £500m once "hidden" costs were included.

He said the additional costs incurred since nationalisation are due to the "continued interventions" by CMAL and the "absolute chaos" caused by £2m turnaround director Tim Hair.

He said: "A red flag was raised to the Government over six years ago, that this contract was going off the rails. They failed to address the issues.

"An independent expert determination would have exposed all of this, but they blocked that with their [false] claim that this was a fixed price contract and that there was no legal way for CMAL to pay more than the original contract price."

Issues over whether it was a fixed price led to CMAL refuting a claim for £67m over the £97m proposed price to complete the ferries under Mr McColl's Ferguson Marine.

The Scottish Government concluded two months before Ferguson Marine went under that there was no legal basis for CMAL to pay more than what it said was a £97m fixed price.

Mr McColl, one of the key forces behind Scotland's newest bank, Alba, says if the extra costs claim had not been rejected because of the false idea that it was a fixed price, the ferries would have been built for just £200m rather than the near £500m he believes it will end up being.

The full unredacted contract for the building of the first of the two ferries, Glen Sannox, seen by the Herald, states that the buyer [CMAL] had the right to request "reasonable modifications and changes" and that the consequences "may include changes in the contract price, delivery date, capacity, draft, speed, fuel consumption, or any other provisions of this contract".

The Herald revealed that the board of the firm Ferguson Marine has admitted that a lack of financial support from ministers over its future plans has cast a "significant doubt" on the firm's ability to continue operations.

The directors of Ferguson Marine (Port Glasgow), which has made a net loss of £1.3m in 2022/23 have laid bare the risks to the business and pointed to a failure to get investment of £25m to support future work at the Inverclyde yard.

Its chief executive David Tydeman admitted that the lack of investment to upgrade shipyard facilities as part of a five-year business plan puts at risk its hopes of extra work from BAE Systems which is delivering City Class Type 26 frigates on the Clyde.

It also places uncertainty over its hopes to get the contract from the Scottish Government's Transport Scotland agency for the replacement of up to seven 50m ageing 'loch class' ferries vessels serving the Clyde & Hebrides Ferry Services (CHFS).

A CMAL spokesman said: “The contract with FMEL was a standard design and build contract used throughout the world in commercial shipping. It was unequivocally a fixed price contract and we – again - firmly reject any allegations to the contrary. 

“Within these types of contracts there are clauses that allow for variations between both parties; in the case of [Ferguson Marine], the agreed variation was £1.6m across both dual fuel vessels.  CMAL normally allows up to 3% [in this case that would have been £2.9m] so the agreed variation was well within the maximum contingency amount.

“It bears repeating that it was FMEL’s own decision to commence the build of Hull 801 before [Ferguson Marine's]  design was fully developed.  Its claim for £66m only accounted for the period until August 2018, and has been found to be entirely without contractual foundation by three separate QC opinions.

“FMEL also declined to take up the option to test its claim in court.  Someone needs to ask why it failed to do that.

“As a public body CMAL will never entertain paying monies to an organisation that are not legally due.”

The Scottish Government said £60m of the overspend in 2022/23 was an "accounting adjustment, referred to as impairments which are recorded as expenditure".

The spokesman said: "Impairments, like this one relating to FMPG, are required as part of Scottish Government’s accounts to ensure any assets are carried at no more than their recoverable amount and take account of issues such as depreciation in the value of materials used in the construction.

"Consultancy fees comprised only a part of [a further] £3m overspend. It was largely due to the timing of work being completed by Ferguson Marine and its sub-contractors, with more of this work being completed prior to the year-end than was forecast. Variances of this nature are not uncommon in large-scale construction contracts."