BiFab: intervention analysis

Key Findings

Our work has highlighted a number of findings, summarised in the following slides. These findings have allowed us to identify lessons and proposed recommendations for change (the numbers under the recommendations headings cross-reference to the recommendations listed later in the report.)

Finding 1

The original intervention at BiFab was agreed under significant time pressure and with limited access to information.

Good Practice

• Despite the limited time allowed at Intervention Point 1, SG identified the need for financial and restructuring focussed advice and engaged advisors with the appropriate skill sets.
• Enterprise Agencies were in contact with BiFab prior to SG intervening.

Areas for Improvement

• Despite Enterprise Agency communication with BiFab, both the Enterprise Agencies and SG were not made aware of the scale of the deterioration in BiFab’s financial position prior to receiving a request to intervene. As a result, SG did not have sufficient warning at Intervention Point 1 to perform detailed diligence/options appraisals.

Lessons Learned

• Advance warning of intervention requests is beneficial to allow sufficient time to appropriately consider options, perform due diligence and engage advisors.
• Continued, meaningful collaboration with Enterprise Agencies allows discussion and identification of potential issues before they arise.
• Ensuring management provide full and complete information facilitates a detailed intervention assessment.

Recommendations

1.1, 1.2, 1.3, 1.4

2.1, 2.2, 2.3

Finding 2

The intervention was agreed against a backdrop of public interest and strong strategic rationale for intervention.

Good Practice

• SG documented clear strategic rationale for intervention at each stage and different intervention options were considered.
• Formal options appraisals were performed when there was sufficient time to do so at later intervention points.
• Financial due diligence was performed by financial advisors at appropriate stages and sensitivity analysis was performed which demonstrated the risk.

Areas for Improvement

• The time pressure and public interest brought a level of resource intensiveness and the intervention team was stretched.

Lessons Learned

• Providing additional resource support facilitates an appropriate level of review in the time allowed and ensures the ability to respond to public information requests.
• Building sufficient time into the process ensures options can be appropriately considered, recognising there may be a need for a streamlined process where this is not possible in reactive interventions.
• Considering completion of commercial due diligence at each intervention point may improve decision making.

Recommendations

1.1

3.3

Finding 3

SG developed a clear rationale for intervention, however, specific intervention objectives were not formally set/documented in advance of intervention, and lacked the required characteristics for use in options appraisal.

Good Practice

• SG documented clear strategic rationale for intervention.
• Many of the intervention objectives set were achieved.

Areas for Improvement

• Options appraisal focussed on strategic themes rather than specific intervention objectives.
• Objectives were not designed “SMART”, which limits the ability to accurately evaluate their success in line with Green Book principles.
• Some objectives were not worded appropriately to facilitate options appraisal.
• Many of the intervention objectives that were achieved required further rounds of intervention before they were achieved.
• Intervention objectives were not revisited at each intervention point to ensure alignment with strategic themes.

Lessons Learned

• Setting specific intervention objectives prior to intervention facilitates effective options appraisal.
• Well designed objectives (e.g. with “SMART” principles) enable effective options analysis, evaluation, and ongoing monitoring. This allows for clear monitoring and challenge of the intervention.
• Revisiting intervention objectives at each intervention point ensures alignment with strategic themes.

Recommendations

3.1

Finding 4

Whilst Value for Money (VfM) was considered, economic appraisal was inconsistent with Green Book principles. Options appraisal improved throughout and was detailed in the 2nd phase of the intervention.

Good Practice

• Economic appraisal was performed and later intervention rounds performed detailed options analysis. By Intervention Point 4 this was significantly improved, however, it still fell short of performing Green Book consistent analysis.
• Advisor diligence and sensitivity analysis consistently highlighted the risk of recovery, which was documented in briefing papers and reflected in quasi-equity loan terms.
• During the second phase of the intervention (post DF Barnes acquisition), SG set clear review thresholds, prior to refinancing of the restructuring loan.

Areas for Improvement

• A non-Green Book compliant economic appraisal was performed. At Intervention Point 1 this was constrained by the time allowed.
• We have not seen evidence of clear review thresholds, e.g. what level of exposure, and overall cost of intervention SG was prepared to ultimately accept.
• Advisor scope of works were focussed on diligence and restructuring advice, and does not appear to have included an economic appraisal.

Lessons Learned

• An economic appraisal and options appraisal performed consistent with Green Book principles is beneficial when determining the most appropriate intervention action. Where time does not allow full Green Book to be followed, this could take the form of a streamlined assessment.
• Including downside scenarios and risk in economic appraisals and benefit cost analysis helps support informed decision making.
• Ongoing evaluation and update of the business case is beneficial to ensure SG is aware of, and able to react to, changing circumstances.
• Including economic appraisals and options analysis in advisor scope may reduce the resource impact on SG.
• Liaison with SG’s in-house economists ensures that wider economic benefits of relevance to SG’s wider strategic vision are captured in the economic appraisal.
• Establishing clear review thresholds, documented from the outset and revisited at each intervention point, helps inform future intervention analysis.

Recommendations

3.2, 3.3, 3.4, 3.5, 3.7, 3.8

Finding 5

SG’s actions and contributions were generally not matched by other equity holders.

Good Practice

• SG later negotiated an amendment of the Moray East guarantee, to reflect the parties’ respective shareholdings.
• SG intervention generally leveraged contributions/ concessions from other equity holders and key customers.

Areas for Improvement

• DF Barnes did not input any equity as part of their takeover, and generally failed to provide the level of backing expected by a majority shareholder.
• Despite being a 32% shareholder, SG was asked to provide 50% of a guarantee needed to complete the Moray East pin piles contract.
• Despite assurances and commitment in their business plan, DF Barnes later adopted a low risk approach, leaving SG as the sole funder and minority shareholder.

Lessons Learned

• Understanding other shareholder/stakeholder incentives and exposure helps ensure all parties’ remain motivated and interests align.

Recommendations

3.6

Finding 6

The intervention was challenged internally by SG at each Intervention Point.

Good Practice

• A level of internal challenge took place by Accountable Officers and Chief Financial Officer before submissions went to Ministers.
• SG’s finance and legal departments worked alongside unit heads, senior civil servants and subsidy control colleagues to provide an additional level of challenge.
• There was a level of SG team continuity throughout ensuring a level of consistency.

Areas for Improvement

• Standardised documentation recording some elements of the challenge process was not available.

Lessons Learned

• The Accountable Officer process and review from internal departments such as finance and legal is necessary to ensure the intervention is subject to sufficient challenge.
• The inherent subjectivity of the challenge process could be limited by introducing a standardised process with formal documentation requirements.

Recommendations

4.1, 4.2

Finding 7

SG maintained close involvement with BiFab following Intervention Point 1 and put in place strong lending conditions.

Good Practice

• SG included good practice lending conditions for a transaction of this nature including:
  • Board representation rights, which were utilised.
  • Financial reporting requirements.
  • Requirement for each drawdown to be subject to an accountant’s report to verify the need for funding.
  • The best security available was linked to the lending.
  • Lending leveraged equity contributions from key shareholders at Intervention Point 1 and ‘unlocked’ disputed customer payments.
  • Given the core aim of funding provided at interventions 1-3 was completion of the BOWL contract, SG included conditionality allowing the funding to only be used for those purposes.
  • SG also included weekly reporting requirements on these key contracts, e.g. project milestones, payments from customers.
• SG acted in a convening role with all parties, ensuring effective collaboration.

Areas for Improvement

• Civil servants took up Board meeting representation rights. It may have been appropriate for SG to seek support from external experts in order to provide constructive challenge to management. We note SG was in the process of recruiting for additional Non-Executive Directors to address this when BiFab was placed into administration.

Lessons Learned

• The inclusion of strong lending conditions on intervention funding provided is beneficial to protect SG’s position.
• Board representation rights allow SG to be an ‘active investor’, influencing performance where possible. Ensuring the attendee has sufficient experience enables effective contribution and oversight.
• Monitoring of lending conditions ensures the appropriate levels of protection are in place and facilitates the identification of any breaches of conditions.
• SG has the ability to act in a convening role, liaising with other key industry players to potentially improve outcomes for all (including the intervention company).

Recommendations

5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7