Ferguson Marine - due diligence vessel 802: written authority approval 14 May 2023

Dear Gregor

Thank you for the submission of 13th May 2023 on the costs to complete vessels 801 and 802 at Ferguson Marine Port Glasgow (FMPG). It is clear that there has been an extensive process of due diligence around these cost estimates and I would like to thank your team and their advisors for the quality of their work.

The Scottish Government’s decision to take Fergusons Shipyard into public ownership back in 2019 was driven by three key objectives: the completion of vessels 801 and 802 in order to provide sustainable, high quality lifeline services to our island communities; to support a highly skilled and dedicated workforce; and to ensure a sustainable future for the shipyard given its importance to the local economy and the resilience of Scotland. I believe that this was the right thing for the Scottish Government to do and I continue to be impressed by the way in which the workforce in the yard have worked so hard and with such pride to deliver the vessels in often difficult circumstances.

Your Accountable Officer duties are set out in the Public Finance and Accountability (Scotland) Act 2000, in particular section 15, and are further covered in the Scottish Public Finance Manual. These duties require that any public expenditure should meet with the regularity and propriety principles and the value for money principles (that resources are used economically, efficiently and effectively). I am satisfied that you have scrutinised and interrogated the projected costs provided by FMPG and assessed these against alternative options.

Ministers have been very clear over a long period of time that every effort must be made by FMPG to deliver the vessels in the most cost-effective way possible. It is therefore very concerning that costs have increased and anticipated delivery dates for the vessels have slipped back.

I do, of course, acknowledge that there are always risks around the delivery of first-in- class vessels and that FMPG continue to incur costs related to design decisions taken some time ago and under previous ownership. I am also conscious of the impact that inflationary pressures in the wider economy have had upon capital and operational costs.

I have considered the due diligence conducted very carefully and am satisfied that a comprehensive process has been carried out with the support of external advisors. I therefore accept your judgment around the narrow value for money case for continuing to build vessel 802 at FMPG. Having said that, in making a decision around the way forward I am, as your minute acknowledges, guided by a wider set of considerations relating to the policy objectives set out by Scottish Ministers and the impact that any decision might have on people, communities and national resilience.

From the very start, Scottish Ministers have been clear that our island communities deserve to be supported by two new, energy efficient vessels with the capacity and reliability required to support vibrant island economies. While I accept that the value for money assessment concludes that it would be cheaper to re-procure a new vessel, this work also shows that doing so would result in further delays. A new vessel could not be deployed until May 2027 at the earliest – four years from now. I do not consider that it is acceptable to ask our island communities to wait this further period. Vessel 802 will provide lifeline connectivity to the mainland, ensure that people on Arran are supported for day-to-day needs around health, education and commercial activity and provide a resilient service to support the tourist industry which contributes so much to the island’s economy. Recent issues with the reliability of an ageing island fleet and the costs associated with hiring replacement vessels in order to maintain services have merely added to the compelling case for delivering additional capacity as quickly as possible.

While the value for money case takes account of the direct economic benefit of completing Vessel 802, under the Treasury Green Book rules it cannot consider wider economic considerations. I think it is imperative that Ministers consider the wider economic factors. I am committed to supporting the workforce at FMPG and recognise the importance for jobs, skills and the opportunities for future generations that the yard provides. We have set a clear policy objective of protecting commercial shipbuilding on the Clyde and, in particular, retaining skills that have both a long-term tradition in the area and a vital role to play in the future economy where significant investment is planned in offshore wind and other renewables. More immediately, of course, the continuing delivery of Vessel 802 through FMPG ensures that the local economy benefits from the company’s spend on salaries, subcontractors and taxes which support the local labour market and wider businesses in the Inverclyde area and beyond, which would be lost if we did not proceed.

Finally, I remain committed to supporting a sustainable future for FMPG. I believe that cancelling the contract with the impact that this would have on the company’s reputation and financial position and the concerns it would generate for the workforce mean that it would be extraordinarily difficult to see a route to such a future. I believe that confirming our intention to deliver Vessel 802 at the yard provides a platform upon which future success can be built.