A Holyrood probe into the construction of two overdue and over-budget ferries to serve the Clyde and Hebrides network has described the management of the process as a “catastrophic failure” and called for a “root and branch overhaul” of the approach to the procurement of new vessels in Scotland.
The Scottish Parliament’s Rural Economy and Connectivity (REC) Committee, which launched an inquiry in October 2019, has demanded an independent review of the ferry procurement process after concluding that the established procedures are “no longer fit for purpose”.
The inquiry was launched shortly before the Scottish Government’s decision to take Ferguson Marine Engineering Limited (FMEL) into public ownership following delays in the delivery of the two new hybrid ferries being built at the Ferguson Marine shipyard.
MSPs were seeking to establish what lessons could be learned for the future procurement and construction of new ferries after it emerged that the cost for the completion of vessels 801 and 802 had risen from an initial fixed price of £97m to between £192.8 million and £196.8 million, with the delivery of the ships delayed from 2018 to 2022 and 2023 respectively.
In a 129-page report published today, the Committee said the evidence exposed a “lack of robust due diligence” on the part of procurement agency Caledonian Maritime Assets Ltd. (CMAL) in assessing the financial stability of FMEL and its capabilities in areas such as project management and design. It was also critical of the Scottish Government’s apparent willingness to proceed despite the apparent significant risks in awarding the contract to the company.
Following the contract award, insufficient work was undertaken by the contractor to develop and secure sign-off on the basic design before commencing construction of the vessels, and thereafter it failed to manage the design iteration process effectively – resulting in delays and cost overruns.
The Committee said it was appalled to learn that CMAL was legally bound to continue to make milestone payments on the contract despite ongoing concerns about the performance of the contractor, adding that there was strong evidence that FMEL deliberately proceeded to construct specific sections of the vessel either out of sequence or not according to the proper specification, purely as a means of triggering payments.
It therefore urged the Scottish Government to take action to ensure that future contracts achieve the most appropriate balance between cash flow and risk and include more robust safeguards to prevent payment for work that has been completed out of sequence or otherwise contrary to the agreed terms of the contract.
The report also called on Audit Scotland to undertake a separate review of the financial management of the contract by CMAL and the role of Transport Scotland in the process, adding that it would be in the “public interest” for this investigation to take place as soon as possible.
The inquiry highlighted concerns about what the Committee considered to be the “complete lack of transparency” surrounding the purpose, agreement and payment of commercial loans totalling £45m to FMEL by the Scottish Government. It was also concerned that there was no effective monitoring or oversight of how the loans were subsequently spent by FMEL. The Committee called on Audit Scotland to investigate the processes followed by the Scottish Government in granting and administering these loans to FMEL.
MSPs further considered that the decision-making procedures for the procurement of ferries in Scotland is “cluttered” and suggested a root and branch overhaul should consider how these structures can be streamlined, including the possibility of merging or abolishing certain bodies.
Committee Convener, Edward Mountain MSP, said:
“The evidence to our inquiry into this fiasco has revealed that all parties involved must share in the responsibility for the catastrophic failure to deliver this contract on time or on budget. A lack of due diligence, poor project management and a failure by all parties to take the necessary action to resolve problems as they emerged, means that the cost of the contract has increased from £97m to almost £200m while the island communities who are relying on these ferries to be delivered continue to suffer.
“Our report calls on the Scottish Government to commission an independent external review of the processes for public procurement of ferries to ensure appropriate lessons are learned for the future. This review should consider the robustness of financial due diligence, the processes for assessing the technical capabilities of bidders, and the design development and sign-off procedures, investigating precisely how such a situation could have arisen and to ensure such errors are never repeated.
“The Committee acknowledges that existing processes for procuring new ferries to serve the Clyde and Hebrides ferries network have, in the past, resulted in new vessels being delivered on time and on budget. However, based on the evidence it has received, the Committee believes that there has been a catastrophic failure in the management of the procurement of vessels 801 and 802, leading us to conclude that these processes are no longer fit for purpose and that a complete overhaul is needed. That could include merging or even abolishing certain bodies currently involved in decision-making on ferry procurement.”
Other conclusions and recommendations in the report include:
- MSPs expressed dismay that CMAL, as part of its responsibility as contract owner to monitor and oversee the delivery of the project, did not identify and act upon project planning and management failings as these were emerging, particularly given their on-site presence at the shipyard.
- Transport Scotland, as project sponsors, also failed to intervene more quickly when these significant project planning and management problems became apparent, while the Scottish Government could and should have taken action at an earlier stage to resolve these problems, the report stated.
- Evidence to the inquiry highlighted that the problems experienced in delivering the contract were compounded over time by the rapidly deteriorating relationship between FMEL and CMAL, which at a certain point broke down completely.
- The Committee paid tribute to the skills and dedication of the workforce at the Ferguson Marine shipyard throughout what has been a challenging period, but also expressed concern about the impact of delays to the delivery of vessels 801 and 802 on communities throughout the Clyde and Hebrides network and across Scotland’s wider ferry network.
- The report found that the Scottish Government’s approach to the procurement and construction of new vessels to serve Scotland’s ferries network has been “short-term, piecemeal and lacking in strategic direction”.
- The Committee also voiced its disquiet about the overall age profile of Scotland’s ferry fleet with many vessels now operating significantly beyond their originally planned operational lifespan, reflecting a failure by successive administrations in Scotland to develop and implement an effective strategy for renewing the fleet.
- MSPs said the Scottish Government’s future islands connectivity plan must set out a clear vision for Scotland’s ferries network, including an overarching strategy to renew the entire ferry fleet over the next 25 years.
Background
CMAL (Caledonian Maritime Assets Ltd) placed orders for two new ferries with Ferguson Marine Engineering Ltd (FMEL) in October 2015. The ferries are being delivered on a fixed-price basis under a design and build contract, with a combined fixed-price of £97m. The first ferry, MV Glen Sannox (vessel 801) was due to be delivered in summer 2018, with the second ferry (vessel 802) slightly later.
The Minister for Transport and the Islands wrote to the Committee on 9 November 2017, highlighting a delay in the delivery of the ferries with vessel 801 delayed until Winter 2018/19 and vessel 802 some time later. The Cabinet Secretary wrote again to the Committee on 16 August 2018 to advise that “…the first vessel, the MV Glen Sannox, will be delivered during Summer 2019 and the second vessel in Spring 2020”. The Minister for Energy, Connectivity and the Islands, wrote to the Committee on 25 April 2019 advising that he anticipated a further delay to the delivery of both vessels.
The directors of FMEL filed a notice of intention to appoint administrators on 8 August 2019, effectively starting the process which would place the business in administration. On 2 December 2019, the Scottish Government confirmed that it had taken the Ferguson Marine shipyard into public ownership following the rejection by administrators of three commercial bids for the company.
On 18 December 2019, the Scottish Government published the Ferguson Marine Programme Review Board report, which indicated a delivery range for vessel 801 of October to December 2021 and a delivery range of July to October 2022 for vessel 802, with an estimated outstanding cost for delivery of the two ferries of £110.3m.
Assuming no further increase in costs or slippage in delivery dates, compared to an original fixed price budget of £97 million, the total estimated cost for the design and build of vessels 801 and 802 is now between £192.8 million and £196.8 million. And compared to the original contractually agreed delivery dates for the vessels, delivery of vessel 801 will have been delayed by between 47 and 49 months and delivery of vessel 802 will have been delayed by between 53 and 55 months.
