Jim McColl: What lay behind the Ferguson Marine crisis

Jim McColl: The difficulties FMEL encountered in seeking a resolution to the damaging CMAL contracts

It is deeply unfortunate that the situation between Ferguson Marine Engineering (FMEL) and the Scottish Government has come to such a crisis, but the problem is hardly of our making and a proper perspective with regards to the events that created the situation needs to be presented to the Scottish Public as they should be fully informed as to what FMEL has had to contend with over the past 2 years.

The Scottish Government Cabinet Secretary for Finance, Economy and Fair Work has consistently repeated, “we have always been clear that we want to complete the vessels, secure jobs and give the yard a future.” I find this incredibly ironic, as this objective could have been achieved over 2 years ago had the Scottish Government responded to Ferguson Marine Engineering’s (FMEL), requests to take a strong leadership role and facilitate a review of the contract to build two prototype LNG dual-fuelled ferries for Caledonian Maritime Assets (CMAL), a Scottish Government quango - a move which would have enabled a more expeditious completion of the vessels, secured more jobs, and ultimately ensured a significantly better future for the yard, the local economy and the Inverclyde community.

I have been constantly frustrated, and at times bewildered, by the behaviour and actions of both the Scottish Government and, in particular, CMAL. I have detailed the many issues encountered over the last 2 years in an attempt to shed some light on the multitude of inaccuracies which have been reported of late.

Early 2017

Approximately 18 months into the much publicised contract to build two prototype LNG dual-fuelled ferries for CMAL, variations to the original contract (VTC’s) were resulting in significant changes and cost increases. These were well beyond what would normally be expected in a ‘Standard New Building Contract.’ Unfortunately, CMAL repeatedly refused to meet and discuss the issues.

31 May 2017

I met with the First Minister at Bute House to request her intervention by facilitating meaningful discussions around the significant changes and cost increases being experienced on the 2 ferry contracts. Following this meeting the First Minister asked the Director-General for Economy to lead a Government Task Force to work with both parties to try and resolve matters. The First Minister also requested FMEL to submit the current cost overruns to CMAL.

7 July 2017

Gerry Marshall, CEO of FMEL, presented a detailed breakdown of the costs to date to CMAL. This was met with hostility by CMAL, and was followed by an unfittingly aggressive email from the CEO of CMAL to Gerry Marshall, closing off any further discussions on the matter. Incredibly, since this meeting CMAL has refused to engage in any meaningful discussions with FMEL on the significant changes and the resultant cost increases being experienced on both contracts.

31 August 2017

Despite many efforts throughout the summer of 2017, including numerous meetings with the Director-General for Economy, Transport Scotland and other officials from the Scottish Government, no progress was made with CMAL and a Notice of Mediation was served by FMEL.

Three potential Mediation candidates were identified by FMEL and CMAL. The preferred candidate was agreed by both parties, but when approached was not available until April 2018. CMAL insisted on waiting for the first choice candidate to become available. Preparation of the scope of the mediation followed, but it became very clear that CMAL would not agree to the proposed scope.

In the absence of a settlement by CMAL, cost overruns were now placing significant pressure on FMEL’s cash flow. Subsequently, I approached the Scottish Government to release £15m of FMEL’s own funds which they had deposited ‘in escrow’ at the start of the contract as part of a guarantee for the 2 vessels. The Government held the opinion that this could be construed as a breach of EU rules and instead of agreeing to release FMEL’s own money, they facilitated a Government loan of £15 million at an interest rate of 15%.

In effect, this was a bridging loan to allow work to continue on the 2 vessels while FMEL pursued settlement on the additional costs. We were seeking a fair settlement on the costs rather than a loan but as it was clearly going to take longer to resolve, creating even further slippage, we had no option but to accept the proposal.

6 September 2017

The £15M loan was drawn down. To ensure transparency on all sides, the Scottish Government engaged PwC to review FMEL’s cash flow and confirmed the loan was used to fund ongoing work on the 2 prototype vessels for CMAL.

9 November 2017

The Minister for Transport and the Islands agreed to arrange a third party peer review of the production programme. An independent expert was appointed to carry out the review.

11 December 2017

Concerned about the effect on the shipyard of any further delays in reaching agreement, FMEL sought further independent assessment of the contracts and engaged Naval Architects and Marine Engineering Consultants, Burness Corlett Three Quays Group (BCTQ). BCTQ was tasked with carrying out a review of the technical background of the contracts and the merits for a claim for the additional costs incurred.

14 March 2018

After three months of forensic assessment of all evidence, BCTQ issued their report, at which point I contacted the First Minister’s office to request a meeting to discuss the outcome and make a direct appeal for the First Minister to intervene by bringing CMAL to the table.

31 March 2018

I was contacted by the Principal Private Secretary to the First Minister on the 31st March to arrange a call for the following Tuesday – 3 April 2018.

2 April 2018

The day prior to the call, I sent the First Minister an email outlining the background information on the situation. At the same time, she was also advised of the BCTQ report and its main findings: a

report that was damning of CMAL and raised a red flag about their handling of the 2 contracts under construction.

With CMAL’s continual refusal to engage in good-faith, bilateral, commercial negotiations to address the issues, Transport Scotland proposed an Expert Determination process, to which FMEL responded positively and provided constructive feedback. The objective of the process was to provide assessment of the claims, thus allowing all to proceed with a proper, commercial discussion around an appropriate price increase to reflect the UK, first in class, prototype nature of the vessels.

As anticipated, CMAL again refused to participate in the process.

3 April 2018

During my call with the First Minister, I updated her on the situation with CMAL and how, since our meeting on 31st May almost a year earlier, FMEL had been unable to make any progress whatsoever with CMAL. We also discussed the findings of the independent BCTQ report, which was highly critical of CMAL. The First Minister asked me to give CMAL a copy of the report and stated that she would guarantee to set up an ‘All Parties’ meeting to include FMEL, CMAL, Transport Scotland and the Scottish Government, to discuss the additional costs being experienced in the construction of the 2 vessels. As requested, Gerry Marshall provided a copy to Transport Scotland and CMAL.

10 April 2018

The ‘All Parties’ meeting was then held at Victoria Quay in Edinburgh, including representatives from the Scottish Government, Transport Scotland, CMAL, FMEL and Clyde Blowers Capital.

The meeting proved to be fruitless when, consistent with all previous attempts at finding a resolution, CMAL refused any suggestion of compromise.

Transport Scotland had previously proposed an Expert Determination process. I put that proposal to the Scottish Government, Transport Scotland and CMAL: to agree to the appointment of an Independent Expert, appropriately qualified in Naval Architecture and Marine Engineering, to review both parties’ claims. I made the request 14 times at the ‘All Parties’ meeting only to have it rejected 14 times by the chairman of CMAL, who said that his Board had taken the staggering decision not to allow an independent expert.

When pressed on why they were not prepared to even discuss FMEL’s claim for additional costs, CMAL said they did not have enough detail and granularity of the claim. I asked if they were given even more detail would they then agree to have a follow up meeting with FMEL to discuss the claim. They agreed to this and a follow up meeting was arranged.

At this meeting, Gerry Marshall repeated the request for the appointment of a suitably qualified expert, but yet again, CMAL refused.

At the end of the meeting, Transport Scotland summed up that FMEL were proposing the appointment of an independent expert and before summing up that CMAL were rejecting the proposal, the CEO of CMAL offered to go back to his board to ask if they were prepared to consider the appointment of an independent expert. Within two weeks he contacted Gerry Marshall to tell him that the board had agreed to the appointment. This appeared to suggest a major breakthrough.

Within 2 weeks The CEO of CMAL contacted Gerry Marshall to tell him that CMAL had appointed an independent expert. Given the simple principal that an ‘independent’ expert should be acceptable to both parties, Gerry Marshall queried why FMEL was not consulted. When he then requested to know who the independent expert was, he was told by the CEO of CMAL that he was not at liberty to disclose the identity and that FMEL would find out when they got the report.

Given the significance of such a stance, I suggested to the Scottish Government that CMAL were making a farce of the process and appealed to the Government to intervene and ensure a truly independent expert process. FMEL expected the Government to demonstrate leadership by facilitating a truly independent expert process, but they failed to intervene.

12 May 2018

FMEL was advised that CMAL had received their report, despite the fact that no-one had contacted FMEL for their side of the dispute. Gerry Marshall requested a copy of the report and was told by the CEO of CMAL that it was ‘over 100 pages’ and that it would take ‘a few days to review.’

23 May 2018 FMEL

received a 25-page summary. Gerry Marshall then called the CEO of CMAL to ask where the other 70+ pages were, to be told that they were only back-up and that 25 pages was all he was receiving.

Once again, I contacted the Scottish Government, to complain that FMEL had not received the full report. The Government confirmed that they also had only received 25 pages and I then asked the Government to insist on the release of the remainder of the report. The Government later confirmed they had contacted CMAL and had received the same response from the CEO, as that given to Gerry Marshall.

On reading the 25-page summary, it transpired the author had stated clearly that this was a preliminary report. I contacted the Government to point out the preliminary nature of the report and asked that FMEL be introduced to the author in order to give their input and allow the report to be completed. The Government put this request to CMAL to be told that they would not allow FMEL access to the ‘independent’ author of the report. Again, it was expected that the Government would step in and insist on FMEL being allowed to give their input. In a now familiar pattern, they failed to intervene.

April - May 2018

Unfortunately, FMEL were again coming under extreme cash flow pressure arising from the additional costs constructing the ferries, while discussions were continuing with the Government on how to resolve the dispute with CMAL. Meanwhile, despite the obvious and severe financial restrictions, the Government was encouraging FMEL to continue working on the 2 vessels, which suggested an inferred support for the shipyard’s position. Appreciating the pressure from the disappointed communities who were waiting for these vessels, and with the confidence of the implied Government support, FMEL continued working on the vessels.

26 June 2018

Still with no agreement from CMAL against the disputed amount, the Scottish Government made available a £30M facility against which FMEL could draw down cash to meet the additional costs of construction. PwC, who had been reviewing the cash flows on behalf of the Government since August 2017, continued to monitor the drawdowns on the loan.

In addition, the Government appointed expert had the responsibility of signing off all FMEL requests before they were able to draw down the funds. His remit was to give the government assurance that progress of the build of 801 and 802 was proceeding in accordance with overall resource program.

During his one and a half years of reviewing the contracts for the 2 vessels on behalf of the Government, the Commodore submitted monthly reports and numerous communications to the Government, commenting on both the performance of FMEL and CMAL.

August 2018

Yet again, the meetings and discussions with the Government continued and FMEL were asked to put together a detailed claim for the additional costs. HKA, consultants, advisors and experts on Dispute Avoidance, were appointed by FMEL in August 2018. HKA submitted their detailed report in December 2018 and the report was then forwarded - in full - to CMAL and the Scottish Government. The total amount of the claim for additional costs to the end of August 2018, was £61 million.

It should come as no surprise that, since receiving the detailed HKA report, CMAL have refused to engage in any meaningful discussion on dispute resolution and the Scottish Government has failed to adopt a leadership role to intervene with CMAL and insist on a meaningful dispute resolution process.

6 March 2019

The last £5m drawdown of the £30m loan facility was made on 6 March 2019. It was made clear to the Government that this last drawdown would only allow FMEL to continue work on the 2 vessels until the end of June.

Owing to an abundance of factors beyond the control of FMEL, the ongoing contract with CMAL for the construction of the 2 duel fuelled ferries had become frustrated and financially burdensome for FMEL.

Given the shortcomings of the technical specifications of the vessels utilised by CMAL for the contract award, the inappropriate behaviours of CMAL, unbecoming of a company wholly owned by the Scottish Ministers and the realities of building the first of its kind prototype vessels, FMEL found itself in a situation where it had (to date) funded £45m growth on project costs. The total projected costs to construct both vessels for CMAL was now over £195m versus and original contract value of £97m.

25 April 2019

A letter from the Director General, Economy was sent to Gerry Marshall on 25 April 2019. The letter acknowledged the Scottish Government’s awareness of the challenges surrounding the build of the CMAL vessels and the stalemate with respect to the claim, also noting the meeting between the contracting parties on the 26th March 2019 had again been unproductive. The letter also stated that “to better illuminate matters the Scottish Government will now seek an independent view of the claim. We expect this process to last around 1 month and be conducted by a senior QC. The individual conducting this work on our behalf will need access to relevant documentation. We would welcome FMEL’s support with this process.”

Gerry Marshal responded to the Director General’s letter on 25th April thanking the Scottish Government for finally accepting that intervention was required. He confirmed FMEL’s full support in the process and said that he assumed the senior QC would also have independent technical assistance where required but would be grateful if the Director General could confirm this point. Disappointingly, she did not confirm this.

June 2019

The opinion of senior counsel was received on 21st June 2019. He had not contacted FMEL for any input nor had he sought independent technical assistance - a critical omission.

FMEL disagreed with the inadequate conclusion and highlighted a number of limitations with the opinion of senior counsel in so far as it might be contended that it was determinative or indicative of the ultimate success of any claim by FMEL against CMAL. FMEL was of the view that senior counsel’s opinion was of limited value in ascertaining whether any claim by FMEL against CMAL was likely to succeed. FMEL were of the opinion it was of narrow scope, heavily caveated and did not consider the full extent of FMEL’s potential remedies. FMEL updated the Scottish Government with their comments and asked that they be offered to senior counsel. Surprisingly, the Scottish government refused to go back to senior counsel with FMEL’s comments.

Conclusion Despite a formal complaint sent to the First Minister over 2 years ago, two detailed reports conducted by highly qualified, impartial experts and regular feedback from an expert appointed by the Scottish Government to ensure that progress of the build of 801 and 802 was proceeding in accordance with the resource plan and to sign off all FMEL requests before they were able to drawdown funds, the Scottish Government has consistently failed as owners of CMAL to take a leadership role and insist on the appointment of a suitably qualified expert to resolve the dispute.

Clyde Blowers Capital has made a significant investment in FMEL to build a modern, efficient, commercial shipbuilding facility. Notwithstanding the many issues highlighted throughout this article, FMEL has successfully executed an ambitious business plan to diversify into new markets allowing the company to build the world’s first self-propelled air cushion barge, win vital contracts in the fish farming industry, be well placed to win a significant export order for offshore patrol vessels and, crucially, showcase their innovative and ground-breaking work in hydrogen technology via leading the EU-funded HySeas III project which will deliver the world’s first sea-going vehicle and passenger ferry fuelled entirely by hydrogen.

Furthermore, FMEL was also included in the Sir John Parker review of the UK’s National Shipbuilding Strategy and was approved as a recommended yard. As an approved yard, FMEL is in 2 of the final 3 consortia to build the new Type 31e destroyers with the preferred consortium likely to be announced at the upcoming DSEI conference between 10-13 September.

Over the past 5 years the management of FMEL has built an exceptional business with a fantastic workforce and a potential for a very exciting future making a significant contribution to the local economy. The future could be extremely bright for FMEL but the damaging CMAL contract, coupled with the Scottish Government’s unwillingness to take a strong leadership role, has led to the grave difficulties the business is currently experiencing. These difficulties are not of FMEL’s making.

My fear now is with the prospect of the Scottish Government nationalising the shipyard on the horizon, FMEL will be unable to fully exploit the diverse range of opportunities which will be a huge missed opportunity for the revival of the Scottish commercial shipbuilding industry and also for the wider Inverclyde community and local economy.

To date, the Scottish Government has repeatedly stated they have no idea on what the true final cost of this sorry situation will be. I would, therefore, ask every elected MSP, irrespective of Party, to

please honour your constitutional duty and firmly hold the Scottish Government to account. When the Scottish Government publish the full cost of nationalisation, the figure must be fully scrutinised by Parliament alongside the private sector bids.

There are various options to ‘save the yard and the jobs’ and it is imperative that this is done in a way that minimises the cost to the public purse and maximises the benefit to the workforce and the local community.

I’m aware of the current calls for a Parliamentary Enquiry and I would be happy to participate in and fully support this process. I remain confident that after a thorough enquiry process, FMEL will be vindicated in its management of this contract and its claim for additional costs. The Scottish people, particularly the island communities, deserve better than the way this whole sorry affair has been handled.