MINISTERS ensured there was a "right to buy" of the shipyard at the centre of a ferry building fiasco when it provided a £30m loan two years ago knowing it was creating a path to controversial state ownership, the Herald on Sunday can reveal.

Confidential documents have revealed that the Scottish Government knew Ferguson Marine Engineering Limited was in danger of financial collapse two years before it undertook a state takeover in December, last year after the major shipbuilder finally fell into insolvency.

They reveal that ministers were making financial arrangements should the shipbuilder fall into administration two years earlier - offering a £15m loan a month later.

While finance secretary Derek Mackay was telling the public a further £30m loan a year later was “to further diversify their business", internal documents state the real reason was that Ferguson was in financial trouble and at risk of falling into administration.

Meanwhile, ministers were ensuring that the loan came with it a potential pathway to nationalisation.

It comes after former managers of the shipyard accused the Scottish Government of having no serious intention of leaving it in private ownership while being warned nationalisation would be subject to EU state aid laws.

They accused ministers of forcing it into insolvency by rejecting a plan that would avoid any state aid claim, save the taxpayer at least £120m and prevent the costs of building two key lifeline ferries soaring to over £230m.

READ MORE: Shipyard bosses accused of 'designing as they went along'

The Herald on Sunday has previously revealed the government has faced questions about failing to notify the EU about nationalising Ferguson after being found to have given £50m of "illegal state aid" to two Scottish airports.

The EU confirmed it was not notified of the state takeover or the issuing of two commercial loans to Ferguson in Port Glasgow totalling £45m before the yard fell into administration and then public ownership.

A matter of days before Ferguson fell into administration counsel in an analysis forwarded to ministers warned that nationalisation would "still be subject to state aid law".

Under EU rules, member-state governments are expected to notify the European Commission – which is in charge of treaty compliance – about proposed state aid moves.The intent of state aid rules is to avoid financial assistance given by a government that favours a certain company or commercial group and has the potential to distort market competition.

Ferguson went into administration following a dispute with Caledonian Maritime Assets Ltd - the taxpayer-funded company which buys and leases publicly owned CalMac's ships on behalf of the Scottish government - over the construction of two ferries under a £97m fixed price contract.

The Scottish Government began the process of taking control of the last civilian shipyard on the Clyde in August, last year, as it went under because of the soaring costs of the ferry contract, now said to be nearing £300m.

In June, 2018, Mr Mackay publicly announced he was lending £30m to Ferguson Marine “to further diversify their business by moving into innovative areas, like low-carbon marine projects, and target decommissioning work.”

HeraldScotland:

"The loan is 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," said Mr Mackay.

It would allow the yard to bid for work repairing and servicing ships, and decommissioning oil platforms.

But new documents reveal that its real purpose was to support a struggling company.

A memo about the "urgent" loan from Mary McAllan, director of economic development, to Mr Mackay said that Ferguson Marine required the funding "immediately if severe cost-cutting measures and further significant delays to the CMAL order are to be avoided".

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, she said. Administration was "a real risk".

Her memo reveals the £30m due to be paid back in ten years came with it a "right to buy" if the company fell into insolvency.

And it said the loan agreement "specifically creates a path to full nationalisation in the event that that becomes ministers’ preference".

The right to buy clause also kicked in if Ferguson major shareholder Clyde Blowers, owned by Scots tycoon Jim McColl, who sits on the First Minister’s council of economic advisers, did not invest £8.5m within two years.

Outwith that, ministers had "scope" to turn what was owed into shares in the company - giving ministers a level of ownership and the right to appoint a director to the Ferguson Marine board.

READ MORE: Ferguson Marine say ferry-building is "back on track" after four years of delay

Ministers had by then already given a £15m unsecured loan to the firm in an arrangement that was withheld from the public on “commercial confidentiality” grounds. It later negotiated a security over the assets of Ferguson Marine for the full £45m, ranking second only to Texas-based insurance firm Tokio Marine HCC which provided a "surety bond" to ensure the delivery of the ferries.

"Reducing headcount would buy the Ferguson directors limited time to consider their options while the business remained solvent but, crucially, it would further set back the delivery dates for the CMAL vessels," wrote Ms McAllan. "This is an outcome Ministers and CMAL are keen to avoid.

The loan would improve the "liquidity" of Ferguson and support the delivery of the troubled ferry contract, while providing "improved security" of an existing loan.

The Scottish Government's legal directorate briefed Scotland's chief legal officer, the Lord Advocate about the loan.

Ms McAllan added:"The value for money and strategic arguments for the intervention proposed are strong: the deal secures commitment, albeit conditional, to new private investment in Ferguson by bringing in shareholder money alongside SG’s loan; it reduces the risk of further delay to the CMAL vessel programme; it prevents the immediate risk of insolvency; it creates some security for SG’s existing loan; allows time for the business to implement a diversification plan; and it preserves optionality.

HeraldScotland: Ferguson Marine (Ferguson's) shipyard in Port Glasgow.

"The case for intervention would look very different if the Scottish public sector were not the major customer of the business with a specific and important contract in place for the CMAL vessels – the intervention is therefore strongly influenced by our supply chain interests. Without these interests we would in all probability make a different judgement on the merits of the intervention proposed."

But ministers were being warned about the perilous state of Ferguson in around August, 2017.

A report by consultants PricewaterhouseCoopers (PwC) told ministers that assuming payments of around £1.9m to critical suppliers to the end August, Ferguson Marine's cash balance at the start of September would be around just £20,000.

An August, 2017 memo from Richard Rollison, then deputy director of the Scottish Government's innovation, industries and investment section to finance secretary Derek Mackay and copied to the First Minister among others said: "PwC considers this insufficient in terms of the continued operation of the business and that it would quickly precipitate insolvency and administration."

Ferguson had been looking to Goverment and its agencies to help close a cash gap of between £20m and £30m and Mr Rollison advised: "In considering how to address this we are very alive to the implications of possible administration in terms of the 400+ jobs at Ferguson 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 he acknowledged that the Scottish Government's room for manoeuvre was "constrained by procurement and state aid rules" and said officials were continuing to explore "options for possible public sector intervention".

It further revealed that while Ferguson Marine were commissioned by CMAL to provide two ferries for a total cost of £97m - ministers had agreed to bring forward forward payments to the contract as the firm hit cashflow problems - with £74m paid over.

This cut the final payment, for completing the job to just £10m.

But the memo reveals that to give them extra security, a "surety bond" was put in place which "ensures that should Ferguson enter into administration and be unable to deliver the [ferries] CMAL would receive £24.5m to enable their completion.

The bond came from Tokio Marine HCC which became a secured creditor with a hold over the assets of Ferguson, including the shipyard and equipment, and at that point first in line ahead other unsecured debtors should the the shipbuilders go into administration.

And Mr Rollison acknowledged that the minsters' position was "constrained" because of that secured creditor status.

A PwC report in considering options for Ferguson Marine's financial position considered whether HCC would agree to amend the surety bond value or the time of any funding release but acknowledged that the American firm was "significant unlikely to happen" as it was in a "favourable position".

It acknowledged state aid implications over an option involving finance that would switch to shares in the company saying it would be necessary to show that Ferguson Marine had a "viable five year business plan and that there is the potential to offer protection/return on public sector investment."

Last week, the nationalised shipbuilders insisted that hopes of ending the ferry building affair were on track after completing a crucial phase of a massive repair job but it still leaves the completion four years behind schedule because of construction delays.

One of the ferries being built by the now publicly owned Ferguson, MV Glen Sannox – which is destined for the Arran-Ardrossan route – was due to enter service in the summer of 2018.

The second vessel, known only as Hull 802, was supposed to be delivered to CalMac in the autumn of 2018 for use on the Uig-Lochmaddy-Tarbert triangle, but that has also been held up.

Mr McColl, who rescued the yard when it went bust in 2014, blamed repeated design changes by CMAL.

A Scottish Government spokesman said: “The Scottish Government provided two loans to Ferguson Marine on commercial terms. Parliament was advised of the loans and full information on them is publicly available.

“The loans were designed to provide working capital and to enhance the yard’s capabilities and sustainability. Following normal commercial practice the loans were secured against the assets of the business.

“The Turnaround Director has been asked to provide an updated report on cost and programme for vessels 801 and 802 to reflect the impact of COVID 19.”

Timeline

March, 1903: Ferguson Shipbuilders lease the Newark Shipyard in Port Glasgow for £500 a year and secures its first order for two steam tugs.

August, 2014: Ferguson goes into receivership with the loss of up to 77 jobs.

September, 2014: Clyde Blowers Capital, an industrial company owned by tycoon Jim McColl, purchases the yard for £600,000 and renamed it Ferguson Marine Engineering Ltd (FMEL).

August 2015: Government-owned Caledonian Maritime Assets announced that an order for two ferries for publicly owned CalMac capable of operating on either marine diesel oil or liquefied natural gas, had been won by Ferguson.

August, 2019: The directors of FMEL gave notice that the company would be put into administration after a failure to resolove a dispute over increased costs and delays to the construction of the ferries.

December, 2019: The government takes over ownership of the shipyard, writing off about £50 million of previous loans.

January, 2020: A Scottish Parliament inquiry is told that the large ferries MV Glen Sannox and Hull 802 were "significantly less than half built".