Ferguson Marine: background to the company being taken into public ownership

Ferguson Marine Engineering Limited (FMEL) was awarded contracts by Caledonian Maritime Assets Limited (CMAL) for two ferries in 2015. FMEL entered administration in August 2019.

We have proactively published documents covering the Scottish Government’s engagement with FMEL. These describe key events leading to the company being taken into public ownership and illustrate our interventions with the business.

Scottish Ministers’ objectives have been consistent throughout this process, being to: 

• complete the two public sector vessels under construction at the shipyard in Port Glasgow
• secure the jobs of the workforce
• secure a future for FMEL and commercial shipbuilding on the Clyde

Within the context of those wider objectives, Scottish Ministers have acted on a commercial basis in relation to the loans provided to the business.  

Public interest in the acquisition of FMEL and the progress of the two vessels under construction is high. 

Ministers are accountable to the public and Parliament when taking significant investment decisions.  Scottish Ministers have sought to be clear in their intentions and fully transparent, updating Parliament regularly by correspondence and via parliamentary statements.  With the yard now in public ownership, there is an opportunity to increase the information available to the public. 

This additional release of information provides a clear and accessible articulation of the basis on which Ministers have acted, and will continue to act, in relation to FMEL and the yard. 

Ferry procurement

Ferries are an essential part of Scotland’s transport network, maintaining lifeline connectivity to some of Scotland’s most remote and geographically dispersed communities. 

The Scottish Ministers’ Vessel Replacement and Deployment Plan established the need for two new major vessels for the Clyde and Hebrides network, and in 2014, CMAL, a company wholly owned by Scottish Ministers which owns and operates the vessels and ports on our network, began a competitive tendering process.

Contract award and monitoring

FMEL was successful in the tender exercise achieving the highest overall evaluation score in a process that scored price and quality equally. 

Scottish Ministers authorised the award of the contracts by CMAL for the construction of two dual fuel passenger vessels, known as hulls 801 and 802, to FMEL in October 2015.  The contract delivery dates for 801 and 802 were May 2018 and July 2018 respectively, subject to final clarification and permissible delays under the contracts. 

The contract price for each vessel was £48.5 million.  This was funded by way of loan from Scottish Ministers to CMAL under the Transport (Scotland) Act 2001, as set out in a letter from Transport Scotland to CMAL dated 9 October 2015.  The loan also includes allowance for 3% contingency for variations, CalMac crew costs at the shipyard, costs for purchasing capital spares and stores for the vessels, CMAL’s on site supervision and CMAL’s project management costs. 

The total loan to CMAL amounts to £106 million.  Payment of the loan was profiled against performance milestones.  In keeping with standard practice and the terms of the loan agreement, repayment of the loan to Scottish Ministers will commence after the vessels enter into service.

CMAL keeps Scottish Ministers informed of progress on the two vessels as a condition of the loan, by way of regular engagement with Transport Scotland officials and by written updates.  Written updates were initially provided on a quarterly basis, with frequency increasing to monthly.  The updates address progress of construction of the vessels and expenditure against profiled plans.  

CMAL highlighted concerns about vessel delivery in February 2016, advising Ministers that with a slow start to the project, the contract delivery dates were at risk of being missed. In November 2016, CMAL also questioned whether the vessels could be delivered nine weeks apart as planned.  In December 2016, CMAL reported to Ministers that key performance milestones had been missed, with foreseeable delays to delivery of both vessels.  CMAL worked with FMEL to understand the reasons for project delay, and to offer advice and support to mitigate against further slippage.  

Ministers met with Mr Jim McColl, Chairman and CEO of Clyde Blowers Capital (CBC) (FMEL’s parent company) and then Chairman of FMEL, on 2 March 2017.  At that meeting, Ministers expressed their concern at delays, and discussed the cash flow challenges of the business.  

We worked with CMAL to identify measures to address the cash flow issues facing FMEL, while at the same time ensuring that Ministers’ interests were protected.  This was done to facilitate delivery of the vessels.  In line with flexibility available to them in relation to the contract, Ministers agreed to authorise an acceleration of payments by CMAL to FMEL under the contracts for vessels 801 and 802.  

The final delivery payment was reduced from 25% (£24.25 million) to 10% (£9.70 million), allowing payments of up to £14.55 million to be brought forward.  CMAL agreed a robust process with FMEL regarding the spending of the £14.55 million. Invoices from suppliers were reviewed and CMAL ensured that these were fully paid directly to the supplier. Some invoices presented were rejected on the basis they related to other projects and not hulls 801 and 802.

Scottish Government loans

Despite these constructive steps by CMAL, it was evident by May 2017 that FMEL continued to experience cash flow issues.

The Scottish Ministers made two commercial loans available to FMEL for an aggregate amount of £45 million.  The loans are referenced in some of the project documentation under the title ‘Poseidon’. 

The first of these was an unsecured loan of £15 million to FMEL in September 2017, to aid cash flow for the vessels under construction and to allow the business to diversify.  CBC also committed to providing a substantial sum of CBC funding to FMEL.  

In February 2018 CBC asked Scottish Ministers to enter into an intercreditor agreement with HCCI, the provider of surety bonds to FMEL for performance of the contracts for hulls 801 and 802, in order to release some of FMEL’s own resources and assist cash flow. 

In May 2018 the directors of FMEL presented a cash flow forecast to Scottish Ministers that showed the business had all but exhausted its cash reserves and had no viable route to access external funding.  Against this background, a second loan by Scottish Ministers of £30 million was agreed in June 2018.  The purpose of the loan was to fund FMEL to assist with cash flow and assist diversification of the business.

The second loan secured all funds owed to Scottish Ministers and created the potential for the loans to be converted to equity in FMEL.  

We appointed an operational expert to monitor FMEL’s performance against its vessel delivery programme and resourcing plan in order to provide assurance that loan conditions were being met.  The operational expert produced a total of eight written reports relating to the FMEL assignment: one initial construction review, five loan drawdown reports and two quarterly reviews.  

In December 2018 Scottish Ministers signalled to CBC they would be prepared to consider amending the terms of the loan agreed in June 2018 to facilitate the injection of CBC’s committed investment, subject to agreement of acceptable commercial terms.  The amended legal documentation was concluded on 1 February 2019.

Contractual dispute

Throughout the duration of the contracts, Scottish Ministers actively encouraged both CMAL and FMEL to work together to expedite progress on the vessels.  This included both considering all options available through the contract and non-contractual mechanisms. FMEL also indicated that it intended to raise a claim against CMAL under the contract. 

Mediation was encouraged but it did not prove possible for both parties to conclude the terms under which this would be conducted.

Both parties also separately sought independent advice from experts but were unable to agree collectively on the output from those reports. 

Scottish Ministers noted that FMEL could submit its contractual claim at any time. In December 2018, FMEL provided CMAL with the detail that would form the basis of a claim for over £60 million, asserting changes to the contract and a number of other factors. FMEL did not however take the claim forward through the courts, despite being encouraged to consider this course of action throughout the dispute period.

Following detailed consideration of the FMEL claim, CMAL responded refuting all aspects.

Options analysis

Given the ongoing dispute and the anticipation of cash flow problems once the loans had been fully drawn down, and in the absence of other solutions or progress on the contractual claim, it was prudent that Scottish Ministers considered all of the possible options and scenarios to move the situation forward.

PricewaterhouseCoopers UK and legal advisers were appointed by Scottish Ministers in January 2018 to undertake this work. They were instructed to consider all possible options against criteria of delivery of the vessels, safeguarding the workforce, and supporting a future for the site against the background of the Scottish Ministers acting on a commercial basis in relation to the loans provided to the business.  An initial long list of 29 scenarios were then tested against a range of procurement and state aid considerations.

This analysis identified a short list of three broad options, which were to retender the work (with the potential for FMEL to secure this), administration (work with an administrator to complete the vessels) or nationalisation.

Independent view

In April 2019, whilst work was ongoing on the options analysis, FMEL wrote to Scottish Ministers indicating that they were in a position where they would have to make significant redundancies in order to protect the financial position of the company and its creditors.

Following due consideration and in the absence of a formal claim being lodged in the courts by FMEL, Scottish Ministers undertook to obtain an Independent View on the claim in order to move matters forward.

Both parties were informed of this intention and FMEL indicated that given this action it removed the need for it to take decisions on redundancies at that time.

Under the terms of the Ministerial Code, which precludes the publication of legal advice, the output of the Independent View cannot be fully published, however it can be noted that this did not provide an option for Ministers to intervene in the commercial dispute between the FMEL and CMAL.

The Independent View reported to Ministers and was shared in confidence with both parties.

Alternative CBC proposals

After receiving the output of the Independent View, CBC proposed an alternative way forward that involved restructuring the business under CBC control with significant investment required by Scottish Ministers to complete the vessels. CBC’s proposal offered no further investments in the business from them as owners and it confirmed that CBC would not be providing FMEL with the remaining substantial investment to which it was committed.

We gave due consideration to this proposal over a number of weeks.  However, after consideration it confirmed to CBC that this option was not viable given it raised significant risks in relation to procurement rules and State Aid.

Considerations of options

In the absence of a commercial solution to the claim and considering the implications for lengthy closure of the yard and delays to the vessels (working with administrator should a buyer not be found in the event of an administration), taking the business into public ownership presented itself as the most viable option in relation to Ministers’ stated priorities.

We engaged with CBC around exercising its options to purchase the business in these circumstances.

While these discussions were continuing, in August 2019, the directors of FMEL set out notice of their intention to put the business into administration. This intention meant that HCCI, in its position as first ranking creditor, was able to appoint administrators and this is the course of action they adopted.

Public ownership

Scottish Ministers are committed to completing the much needed ferries under construction at the yard.  Their engagement with the business has consistently been focused on joint objectives of ensuring delivery of the vessels and securing a future for the yard and its workforce. 

In the absence of a workable commercial proposition to buy the business the administrators concluded that the proposal by Scottish Ministers to bring the business and its assets into public ownership was in the best interests of the business’ secured creditors. 

By taking this action, the jobs of the workforce and a future for the business have been secured.  Under Scottish Ministers’ control, work has begun to stabilise the yard and put the business on a more sound footing.  Progress is being made.  The ambition of Scottish Ministers is for a sustainable future for the yard and its highly-skilled and capable workforce.  Scottish Ministers will work closely with the business in public ownership, and others, to explore options to secure that sustainable future.