Derek Mackay: CalMac ferry cost overruns a 'scandalous state of affairs'

Two ferries being built years late and hundreds of millions over budget is a “scandalous state of affairs”, the minister who awarded the contract has told STV News.

In his first media interview since quitting government, Derek Mackay also said procurement agency Caledonian Maritime Assets Limited (CMAL) had a case to answer for the potentially illegal award of the contract.

He rejected any suggestions that Scottish Government ministers, such as himself or First Minister Nicola Sturgeon, were to blame.

The two vessels being built at Ferguson Marine’s shipyard in Port Glasgow – the Glen Sannox and the as-yet-unnamed Hull 802 – were due to be completed in 2018.

But they have been delayed until at least 2023 at a cost of more than £300m – three times the initial £97m contract value.

Ferguson Marine was nationalised in December 2019 to save it from administration.

Mackay, who quit as finance secretary after being suspended from the SNP over messages he sent to a teenage boy, was the transport minister who awarded the contract to Ferguson in 2015.

But he told STV’s special correspondent Bernard Ponsonby for Scotland Tonight that the bid should arguably never have been put before ministers due to concerns around the lack of a ‘refund guarantee’.

The financial safeguard places the risk for failure on the builder and not on the taxpayer.

“I don’t know (if it should be called a scandal),” Mackay said. “I don’t think so. I think that’s for other people to judge. It’s contract failure, certainly.

“I’ve said ‘contract failure’, because when we’ve had to deal with this issue in detail, it’s very important that I choose the right words. Other people can describe it as a scandal. That’s up to them.

“It’s a scandalous state of affairs. Maybe we can agree on those wordings.”

A parliamentary committee investigating the ‘ferries fiasco’ is due to publish its findings soon.

‘Goodwill for the yard’

Mackay described the cost overruns as “regrettable”, but said the decision was made with the “best of intentions”.

“There was a lot of goodwill for Ferguson’s and there was a backdrop of cross-party political campaigning to support Ferguson’s, which was in difficulty, that had come out of administration.

“I welcomed the award of the contract because it was good for Inverclyde, it was good for shipbuilding, it was good for the workers and we thought it would be good for the CalMac fleet.

“Ministers acted lawfully at the time and I certainly acted lawfully at the time. I do think CMAL has a case to answer, but I don’t want to prejudice that because there is an investigation under way.

“What I do know is ministers had nothing to do with it; ministers were very clear in our intentions as to a proper legal procurement exercise that would deliver the best result.

“If there’s any wrongdoing or any impropriety that’s happened at the hands of a government agency, then they will have to answer for that.”

‘CMAL has case to answer’

Mackay says he would not like to think that CMAL – which denies any impropriety – did anything wrong during the procurement process, but believes they have a case to answer on the potential illegality of how Ferguson was awarded the contract.

Ferguson could not provide CMAL with a Builder’s Refund Guarantee (BRG), which Mackay described as “mandatory” in the procurement process.

An Audit Scotland report found that ministers awarded the contract to Ferguson Marine despite the yard being unable to provide mandatory refund guarantees for the financial risk to CMAL.

A typical shipbuilding contract contains a refund guarantee to ensure risk is borne by the shipbuilder.

“Why was it the case that a mandatory requirement wasn’t met,” Mackay argued. “It arguably shouldn’t have been presented to ministers, it shouldn’t have been taken forward if it was a mandatory requirement.

“The anticipation was that Ferguson’s could complete these vessels on time and on budget. And the advice I was given, everyone was satisfied that that could be delivered.

“Therefore, the risk of the BRG being required was very low. Now that hasn’t transpired to be the case.

“I agree that there was some transfer of risk, but my assessment was based on the advice that had been given. That advice was that CMAL had given an assessment, an evaluation, of Ferguson’s bid, it was a strong bid, it was the best bid that had been received.

“Ferguson’s had successfully built vessels for the CalMac fleet for a number of years – there was no suggestion that Ferguson’s couldn’t deliver these vessels, so we made the decision on that basis, with Ferguson’s having the strongest bid of all the competitors.

Derek Mackay at Ferguson's shipyard in Port Glasgow. — Derek Mackay at Ferguson’s shipyard in Port Glasgow. STV News

“We’re speculating, and I can do that if you want, but because of the financial model that Ferguson’s had deployed, they had said that they couldn’t have provided a BRG, so the order would not have gone to Ferguson’s.

“Ferguson’s would probably have closed and the jobs would have been lost and the order would have went elsewhere.

“There was due process to go though, there was an evaluation process, and CMAL was the procuring authority, so they were to consider all the issues and then present their recommendation, so I wouldn’t accept there was any wrongdoing in that regard.”

A BBC documentary released last September said, among other issues, the yard was in possession of a more-than 400 page report from CMAL detailing technical requirements for the ships before they submitted a bid for the contract.

Large parts of the document, the BBC said, was copied verbatim into the shipyard’s bid.

The Auditor General is examining the allegations and said the documentary “raises new concerns and makes several claims related to whether CMAL followed due process”.

What did Nicola Sturgeon know?

First Minister Nicola Sturgeon gave evidence to the Scottish Parliament’s public audit committee last November. She said suggestions that the Ferguson contract represented “jobs for the boys” is categorically untrue.

She also said she was not aware of any impropriety in the procurement process, but labelled allegations made in the BBC documentary as “serious”.

Mackay may have been the key minister in the awarding of the contract, but Sturgeon has previously told MSPs she takes responsibility for what happens on her watch.

Mackay said he did not personally discuss a submission about concerns raised by CMAL about the lack of a builder’s refund guarantee with the First Minister.

“The First Minister was not asked to give an opinion whether she was content or she wasn’t content,” he said. “But I knew from the submission that the Scottish Government legal director was content, economy section was content, the lawyers were content, transport was content.

“The recommendation that was put to me was to proceed in accordance with the advice that had been given…

“I think the breakdown in the relationship between the procuring authority and the contractor was an issue, but there are other agencies involved as well, and there was contradictory information and advice and opinion. So I’d say part of the issue was the nature of relationships.

“I don’t think the structure overall is any longer fit for purpose. I would pose the question, why have CMAL separate to CalMac, separate to Transport Scotland? There’s clearly an opportunity to bring it all together, to have a far more robust and resilient transport organisation or department that serves our country.

“I’m not a minister and I’m not in government and I’m not a politician. But when I was there, I was making the right decisions by the people of Scotland and I was convinced we were doing the right thing at the time.

“I felt it was a team approach, a collective decision. I was the lead minister and when things started to go wrong I was certainly proactive as a minister as well.

Giving evidence to the committee, Sturgeon said it was not unusual for her to personally announce Ferguson Marine as the preferred bidder, saying she was aware that negotiations were still ongoing at the time.

She said: “I had no awareness or knowledge that CMAL had concerns about the announcement of that. Obviously, I have heard the concerns they have expressed in the evidence to this committee, for example.”

Sturgeon also reiterated her support for the Scottish Government’s decision to step in and nationalise Ferguson Marine.

Political decision to announce the contract at SNP conference?

Critics have claimed the contract was rushed to allow for an announcement to be made at the SNP conference in 2015, but Mackay rejected that assertion.

“There were jobs involved,” he said. “There was the potential of a Scottish shipyard delivering vessels for the CalMac fleet, which were desperately needed.

“The evaluation proved to to be the case that Ferguson’s had the best bid of all the yards that put in a bid. It was a good outcome for a Scottish yard to get this work.

“It was highly likely that if it hadn’t gone to Ferguson’s, it would have gone to a foreign yard. I think Ferguson’s is still operational today thanks to the award of the time – accepting though that this contract has failed, but it was made with the best intentions at the time, and based on very strong advice that Ferguson’s could deliver those vessels.

“In fact, the financial guarantees – even if they had been provided – wouldn’t negate the risk of legal challenge anyway, so there’s a whole host of issues to be considered in the submission that was put to me to make a decision at the end of the process.

“There was no suggestion that Ferguson’s couldn’t deliver the contract. There was a high level of confidence in Ferguson’s at the time. It had been producing vessels for the CalMac fleet.

“Everybody knows that we urgently need new vessels for the CalMac fleet. Therefore, it was appropriate to proceed on the basis of the information that we had at the time.

“The final decision to award the contracts was mine – different ministers were involved along the way but the final decision in a submission was to me and I’ve taken my share of responsibility for that and the reasons for it are very simple.

“It was the best bid presented to me and I thought it would be the right thing to do to support commercial shipbuilding on the Clyde, save the jobs and vessels for the CalMac fleet.”

What is CMAL’s view?

A spokesperson for Caledonian Maritime Assets Ltd said: “CMAL takes very seriously the allegations made last year concerning the procurement of hulls 801 and 802.

“In addition to a previous independent audit of the procurement process, a comprehensive investigation into those allegations is underway.”

A Scottish Government spokesperson added: “The Scottish Government remains committed to transparency and has proactively published over 200 documents relating to Ferguson Marine on our website, and fully supported inquiries by parliamentary committees and Audit Scotland.

“We deeply regret that the vessels are taking longer and costing more than they should, and we have already committed to a formal review upon completion.

“The Scottish Government’s priorities have always been the completion of the two ferries, securing a future for the yard and its workforce, and supporting our island communities that rely on this type of vessel on a daily basis.”

‘Heads must roll’

The Scottish Conservatives said the awarding of the contract was a “catastrophic” decision by the Scottish Government.

Shadow transport minister Graham Simpson said: “Derek Mackay thought the risks of pushing on without the standard builder’s refund guarantee were low. He was spectacularly wrong. But he still can’t, or won’t, tell us why.

“The public will regard that with astonishment, and his claim to have ‘acted with the best of intentions’ as woefully inadequate.

“If we are ever to get to the bottom of arguably the greatest scandal in Holyrood’s history, there must be a full public inquiry as soon as possible. And heads must roll.”

Insight Bernard Ponsonby Special Correspondent

Two new ferries, a lifeline to island communities at a cost to the taxpayer of £97.5m. That was the plan. What transpired was a shambles.

The procurement body CMAL commissioned the two new vessels. A recent BBC documentary alleged that process could have been illegal, with the winning yard – Ferguson – being given preferential treatment over other bidders.

Ministers awarded the contract to Ferguson despite CMAL raising concerns that the yard couldn’t produce a builders refund guarantee – a legally binding agreement that protects the public purse should the builder default.

Ferguson was awarded preferred bidder status despite concerns by CMAL. Ministers, specifically the then-finance secretary Derek Mackay, signed off on the deal. The relationship between Ferguson and CMAL broke down; the builder and the procurement agency were continually at loggerheads over the design and delivery of the ferries. The acrimony was mutual.

The government has had to repeatedly shovel millions to sustain the commissioning of the vessels. The First Minister has repeatedly told parliament that the buck stops with her but no ministerial head has rolled for what is one of the great financial scandals of the devolved era.

Until he quit the cabinet as finance secretary following tabloid allegations about his private life, Derek Mackay was the minister most closely associated with the award of the contract. He hasn’t given any interview on his role in the fiasco – until now.

Read Bernard Ponsonby’s full analysis here.

Scotland Tonight is on STV and the STV Player at 10.40pm on Wednesday, January 11.