 I welcome everyone to this, the 21st meeting of the Public Audit Committee in 2022. The first item is for members of the committee to consider whether or not to take agenda item 3 in private. Are we agreed? Agreed. Thank you very much. Our second agenda item is consideration of the Auditor General for Scotland's section 23 report into new vessels for the Clyde and Hebrides arrangements to deliver vessels 801 and 802. Can I welcome our first witness this morning, David Middleton, who in 2015 was the chief executive of Transport Scotland? David, before I invite you to make a short opening statement, the committee appreciates that time has lapsed since you left your role at Transport Scotland. However, you were the most senior official at Transport Scotland when key decisions to award that contract to Ferguson Marine Engineering Limited were made. So, there are questions that we need to ask and questions that we need you to answer. But before we proceed to questions, can I invite you to make a short opening statement? It is just a short opening statement and it is perhaps just a few remarks because it is not really about the substance. It is really just to follow what you just said, convener. As I believe you are aware, I have had exchanges with your clerk about the basis of my appearance but for the record I should say that I have been returned from full time public service for over six years. I left office as chief executive of Transport Scotland in early November 2015, just after contract award nearly seven years ago. I am not there for any position to offer opinion ddweud o rydych chi ar gyfer o gyllideg lift, iddyn ni wedi gwaith i gêmuno efallai hwnnw, iddyn nhw, a hynny'n nhw cael ei wneud o gyllideg llwyf yn ddifrif yr ydych chi, chi'n adnod ei ddweud o chi'r ddych chi adnod i ei ddweud o'r pwyllастьol, i ni'n edrych i'r still i gweithio i gweithio unrhyw o'r digon o'r myndau adnod o gair, mewn gwneud o gweithio i gweithio i gweithio i'r gweithio i gweithio i'r gweithio i gweithio i gweithio. ac ydych chi'n sefydlu cyntafolol yn cyfaluadau ydylo i mi gyd yn mythbynu. Rwyf i'n gwiswg wrth fy drylch a'r dyfu, ac rwyf i'n gwiswg y dyfu gwladion nad yw fel chi bod rhywbeth nesaf â'u gwahoddiaeth yn credu fy mhwr. Felly, rwyf i'r credu, dwi'n credu, rydw i'n credu i'r credu sut yn dweud ir faulti i córgymwynau i'r censgloedd, ond rysun uch yn helpu mewn ddeall i mi gyd yn mythbynuod. I'm going to turn first of all to the deputy convener of the committee, Sharon Dowie, who's got some questions to put to you to begin with. Sharon. Good morning, Mr Middleton. The Auditor General for Scotland states that there's a mismatch between semial strength of feeling about the scale of risk involved in awarding the contract to AFMail and how that was communicated to ministers. As accountable officer for Transport Scotland at that time, what role did you have in providing advice to ministers? I do direct role. I mean, can I just clarify when the Auditor General said mismatch, is that in his report or is that something he said separately? Yeah, it's in the reports, it's in from the evidence we've taken yet. Semial had a view of risk. Concerns came to light. My director of the relevant part of Transport Scotland was working on these matters and he and his officials worked through those issues and produced the submission that I think people are aware of, which reported to ministers the risks that semial perceived. They reported the extent to which semial had negotiated some reduction in risk with Ferguson's. They also reported the ways in which we felt that we could offer reassurance and comfort to semial. I was kept aware of those developments and I saw the papers that were prepared in the relevant directorate in Transport Scotland. I didn't personally participate in the discussions and I didn't personally participate in any discussions with ministers. So you didn't have any meetings with semial? I had no meetings with semial, no. And do you feel that the strength of feeling from semial about the preference for a builders refund guarantee was fully conveyed to the ministers? I think it was fully conveyed to the ministers and I think the Audit Scotland report said in terms that our submission, I don't think anyone's doubted that the submission of 8 October, if I'm right, set out that position very clearly and closed a number of documents as well as giving the directorate's perspective on the issue. From semial's submissions, they seemed very keen to go back to the procurement process because they would have preferred to proceed with a full builders refund guarantee. Why were the ministers at that time so keen to proceed with the contract? I think that in terms of being keen, ministers understood that Ferguson's came out in top of the procurement in terms of cost and quality. Once the issues came to light on the builders refund guarantee, there were extensive discussions between Transport Scotland and semial about how that could be dealt with. Indeed, I think that in part of the covering advice that Transport Scotland put up to ministers at the time, we see ministers in plural, but to Derek Mackay, who I know we are speaking to later, it outlined the fact that some officials in semial had actually said that they might well have run into these problems in other respects. What we discussed with semial and what semial helped in a way to prepare was the form of reassurance and the form of comfort about where risk would lie that gave them the confidence that they could accept the contract. I know that semial had their doubts about that, but nonetheless, they participated in the process that drafted the letter of comfort, which gave them the opportunity to ultimately enter into the contract. I know that some of my colleagues here have other questions. When were you aware that there was not going to be a full builders refund guarantee? When did you become aware of that? I cannot remember precisely. It emerged in that period between the announcement of the preferred bidder at the end of August through the course of September. I cannot tell you what precise date in September, but I became aware of that. So you weren't aware of it prior to the contract being awarded? I think that until the discussions after the contract award, I mean that I honestly cannot recollect, but in terms of reading of the documents, I would not be formally aware until sometime after that stage. Can I just pick that point up, because, first question, was Transport Scotland present at the semial board during that period, August 2, October? I think that the record would show that John Nicholls and a colleague went along to the board meeting on 25 September. That's my understanding. And on 25 August as well? Okay. Yeah, we have minutes from semial, submitted to us, which show that. I accept that, yes. If that's what's in the minutes, that's what's in the minutes. So based on what you've just said, I'm a bit confused, because the papers for the semial board meeting on 25 August referred to the problem with the builders refund guarantees, item 13, on the agenda of that meeting at which Transport Scotland officials were present. So surely you would be aware, as the accountable officer of that major stumbling block? I think that the question that I was asked was when precisely I was aware, and I cannot, I mean best of my recollection, I cannot go back and say precisely when I was aware. If the semial board papers say that and Transport Scotland officials were aware of that at that time, I mean not everything is instantly reported to everybody in Transport Scotland, but that, I mean certainly in the course of that period I became aware of the builder refund guarantee and the extent to which my officials in that directorate were trying to deal with that issue. But if you're asking me a question of when, but what precise date and why didn't I know what was in the semial board papers, I can't, I can't give you a satisfactory answer to that, but I became aware as it was at that period unfolded. But in and around that period as well was quite a crucial date, because five days before that semial board meeting where the builder's refund guarantee was a major issue, the 20th of August, Keith Brown, as the Cabinet Secretary for Infrastructure, Investment and Cities, was told by a Transport Scotland official to approve the preferred bidder award to Ferguson Marine. So if there was knowledge of there being an issue around the builder's refund guarantee, certainly by the 25th of August, surely it was known on the 20th of August and if so, why was that not communicated to the Cabinet Secretary? I can't, I can't honestly answer that, it's probably the simplest answer rather than dissembl. If the 20th August submission was about advising ministers on the outcome of the procurement and who had come top on price and quality, and thereafter the builder's refund guarantee became an issue as this process developed after the identification of the preferred bidder. Now did someone, I mean I can't go back in time to the 20th of August and you say if it was known by the board of the 25th of August, so why was it not known by the 20th of August? I can't, I mean I'm sorry this is the problem just operating on your own and going back and looking at papers as I can't give you an answer to that. Okay but you would expect would you not in that period for that to be quite well known that semial had identified there being this major problem with the contract as it was being outlined by Fergus Maureen? I mean it's not unusual in procurements for issues to develop. I appreciate because of the fact that the ferries remain unfinished that things like the builder's refund guarantee which essentially is a financial transaction. I mean there was still widespread confidence that the yards could build the ships but it is not uncommon in procurements for there to be issues which are then discussed even after the identification of preferred bidder, I mean negotiations and discussions go on. It doesn't mean it would have been a showstopper at that time. Okay we're limited in time so I want to move on to another issue which is the issue of written authority and in your written submission to the committee you said that on the issue of written authority you said that you did not then nor now see this as any kind of decision. Could you explain to us what you mean by that? Well I think you asked me a question you know how did I decide. You don't decide whether to seek a written authority. I mean if you think you're a tall in the territory of requiring a written authority which is an extremely rare event I wouldn't like to quote how many there have been in post devolution Scotland but I gather it's really tiny tiny numbers. It has been more prevalent in white all for other reasons and I think there's been a subject of journalistic comment but that's another matter. So it would never have I mean I didn't have to sit and stroke my chin and say oh gosh you're a secret written authority. I didn't have to seek a written authority about anything because I wasn't in a position to think that we were going into something that I regarded as unwise. If I actually thought it was unwise and difficult and problematic then there's a whole matter of consideration and ultimately the first quarter call would have been a serious discussion with ministers so the whole point was to try and find a way forward on this and that's why we ended up in the submission in October which advised ministers of the risks which Siebal asked us to do and advised of the mitigations in terms of the risk which both Siebal had negotiated with Ferguson's and the further way in which we transferred some of the financial risk as Siebal asked so that they would be harmless I think the word they used in their submission. So I didn't have reasons to seek a written authority in a sense the main thing was that the matter was written up and put up to ministers so that they were fully aware of all the facts and fully aware of the positions and that's why the documents from Siebal both the longer one that came in early October and the previous documents were put up to ministers in terms and in that sense that was making sure ministers had in writing before them all the issues but the notion that an accountable officer as I was would ask for a written authority which I had to say in all my upbringing was usually referred to as an instruction or a direction the idea I would have asked for an instruction and a direction straight off because of issues that come to light just wasn't it wasn't the way one's mind worked but you know that the Scottish public finance manual says that as the accountable officer the essence of the accountable officer's role is a personal responsibility for the propriety regularity of the finances under their stewardship so the book stops with you doesn't it it did indeed but ultimately I was not in a position where I was saying I regard this as unwise or poor value for money or a poor or a poor judgment to enter into we still had the outcome of the procurement which told us this was the best bid for price and quality and we had secured some negotiations of risk both from Siemal to Ferguson's and from ourselves with Siemal so I didn't see how I was exposed and indeed I don't think that the auditor general's report in anywhere said that I should have sort of written an authority and that's why I don't I don't I don't see any reason to review that now at all well the vessels are five years late in two and a half times over budget so maybe that's the reason you should reflect on it well I'm going to bring willy coffee in thanks very much convener and good morning mr middleton it's in that area I want to ask a few questions if I may as well up up to the point where the approval was given there was clearly concern about the contracts and it did not lead to anyone asking for written authority or ministerial direction so there has to have been some kind of assurance process in that space that enabled yourselves to recommend to the ministers to proceed with the contract and what that seems to be missing for for the members of the committee and perhaps for the public is what happened in there to take us from concerns to being feeling able to recommend proceeding with the contract what happened what did that assurance process look like to enable that advice to be given to the minister I think the process was as I've outlined and I'm sorry if it's if it's been unclear that discussions between Transport Scotland officials and CMAL went over the ground they the CMAL themselves sought to negotiate some of the financial risks back from the from the extreme position perhaps taken by Ferguson's at the outset so whether it's the 25 percent and other matters I think that are outlined in the auditor general's report so some of the financial issues were were negotiated with Ferguson's and then CMAL made clear that they were still uncomfortable but that they would want assurances from government that if we proceeded they would not be left in an exposed position themselves and therefore to render them that they used the word harmless I think in their in their written submission and we therefore drew up a letter of comfort as well as looking at our standard loan letter and those letter that letter those those correspondents were drawn up in consultation with CMAL in consultation with other parts of the Scottish government procurement legal financial and we believe that that provided us with sufficient basis to say to ministers you are able to proceed but in proceeding you must minister be aware of the risks that have been identified but those risks were primarily financial no one I think raised the issue of the vessels not being completed or not being built no one suggested the yard was somehow going to be incapable of building the ships now I understand perfectly well the point that convener put to me a few minutes ago that it does it is not a satisfactory situation but I don't know whether you have to put you know you're asking me to put myself back into the period of August September October 2015 and as far as we were concerned the papers we put to ministers I think on the eighth of October covered the ground as far as we were able to do both in terms of risks with Ferguson's and in terms of how we were giving comfort and reassurance to CMAL that they would not be exposed and that was all put up to ministers so that they could take a decision on whether they were content to proceed so just to clarify that if all the key players at that point in the process were content perhaps not happy but content that the risks that we were being presented with were manageable so everyone at that stage was content to make the recommendation to proceed well everyone within government I mean I understand CMAL have made their views and I'm not seeking to disparage any views that CMAL have expressed I mean the word content may not be a word that they would use but I mean I think they accepted the reassurances they accepted the the letter of comfort which they were involved in drawing up and they entered into the contract. Craig Hoy has got some questions to put to you. Thank you convener and good morning Mr Middleton. I just want to look a little bit deeper into the issue of the builders refund guarantee and Jim McCall's account of the discussions that he undertook with what he said was Scottish Government and CMAL in developing a bid in which he says that you knew that they were not in a position to offer a builders refund guarantee and that's obviously documented in relation to an exchange of letters between Stuart McMillan and Derek Mackay in February 2015 in which it is intimated that it would be possible to proceed without a full builders refund guarantee. What was your awareness of that correspondence? I have to be honest I have no recollection of that correspondence and I was not in the pile of material I was allowed to reread that was not in that pile. Now if you asked me to say had I my recollection is zero if someone did a troll of the documents improved I had seen that then you know you have to be buying to write but my recollection is zero and I did not see that in the pile of documents so I have my awareness of that exchange between Derek Mackay and Stuart McMillan is not in my recollection at all. The letter of February 2015 has not been formally released to the committee but has been quoted in the press and within the reports of that Mr Mackay gives reassurance to Mr McMillan that it would be possible to proceed without a builders refund guarantee and he says that CMAL has on occasion taken different approaches. Are you aware of any different approaches in relation to that fundamental issue of a builders refund guarantee in relation to any prior procurements? I couldn't quote you any. I know from some of the documents that I reread that it was quoted from some of my officials that a letter of comfort had been given in previous instances that I think that is stated but I can't quote you those instances because I don't have access to the documents that could research and advise me on that but I did read in the pile that I was permitted to look at again a reference to a letter of comfort having been used in the past. Whether that letter of comfort was used directly in relation to the builders refund guarantee and I do not have the papers advice to be able to answer that, I'm sorry. Obviously you mentioned financial risk but there was an element of political risk in this decision in that the contract was being awarded to a well-known businessman who was aligned to the SNP, the party of government and the independence cause. What were your thoughts at the time about awarding such a high-profile contract to a figure who was clearly known to have connections to the party of government? We're not politically naive, I hope. To the extent that there was a motivation to see the contract awarded if it was possible to do so within the bounds of risk and propriety. If there was a motivation it was simply that Ferguson's was a well-known producer in Scotland in a part of the country which had its economic difficulties so if there was an underlying motivation from our part to try and secure the award of their contract it was because the importance of Ferguson's and significance of Ferguson's was well-known and well-understood. The Jim McCall angle and the politics of it, I have to say, we understand the awareness of that but that was not in the forefront of our minds at all. You would consider that there was something great political risk in proceeding that? I'm not sure I'm best judged to offer a view on the political risk I think if you can say that there was a procurement process which had Ferguson's as top for quality and price then I think that's your best defence against any suggestion and there could be no suggestion that the minister as a politician was trying to influence us towards Ferguson's just because of the influence of Mr McCall. Okay, you seem always pressed concerns to this committee about the mrazmataz, the fanfare around the preferred business status being announced, because obviously they thought at that point that it almost locked in the deal and it would bind the hands and future negotiations. Did Transport Scotland advise Scottish ministers to consider perhaps a more discreet way to achieve that milestone of preferred business status? Not specifically, no. Preferred business status, the outcome of procurement is something that we deal with quite regularly and that point of preferred bidder, the issue, the problem with the issue of alcatel letters if you understand the significance of the point at which everyone's informed and especially in a competition where you might have five or six parties informed is when you issue letters you tell quite a lot of people and ministers conducting business tend to like to have communications on their terms otherwise they get things fed back from others who say, oh, we've heard such and such and Minister X and Minister Y says, well I didn't know anything about that. So it was not uncommon, I mean I understand the point you're making, but it was not uncommon indeed it was relatively common at other procurements for contracts for preferred bidder status to become known and the effort for ministers to seek to publicise that on their own terms. So I think we understood that that had become part and parcel of procurement outcomes. But this wasn't just issuing letters, this was lights, camera, action, the first minister. Did you have any concern that given that you hadn't got there yet and there was still this unresolved issue of the boat as refund guarantee that you were going to compromise the further negotiations? I mean, I don't think that the negotiations were actually compromised. I mean, obviously there was a resumatised and in some ways in the wider, you've just asked me about political awareness and the wider politics one can understand that. But there's plenty of times when there's post tender negotiation and post outcome negotiation, I mean contractors are not always in business for charitable purposes and they often come back at various stages to try and negotiate things and indeed once contracts are underway contractors can come back and try and negotiate things. So I don't think that the publicity in and of itself prejudice is anything, but I'm not suggesting I don't understand why some in Seymal might have felt uncomfortable. Perhaps we were more used to it. Okay, I'm now going to bring Colleen Beattie in for some questions. Colleen. Thank you, convener. It's middle and I'm probably covering a little bit of ground that others have covered maybe from a different angle. Looking at your submission of 24 June, you stated in here, I do not think there was ever any suggestion of Seymal requesting a written ministerial authority. Would it have been you that would advise Seymal if a written ministerial authority was required? Depends on what you mean by advised. Sorry, I won't try to dodge it. What I'm saying is that they could well have come to me and asked that and I could well have discussed it with them. Did they do so? No, they didn't come to me to ask for my advice. So, there was no real advice given, particularly in this case, as to whether it was required any sort of direction. From what you're saying, and please correct me, from what you're saying, it was just a routine process with a sign-off from the minister. Well, it was routine but high profile and had a number of sensitivities, which we've discussed this morning. I wrote my note to you on 24 June in response to your questions. I have in my head, as I discussed a little bit with the convener, written authority represents that. I hesitate to use the word nuclear option, but a very rare event of seeking an instruction or direction. When you asked me, I did seemal consider that. It was never in my head at the time that they were seeking that. They were seeking other things, they were seeking reassurance, they were seeking transfer of risk, they were seeking letters of comfort. They were not saying, we will not do this under any circumstances, the only way we'll do it is if we get a direction, whatever that meant, in precise terms, for an NDPB. That would have raised quite a lot of questions in my mind. He offered the word routine and clearly it wasn't routine. There was quite extensive discussions about how we managed risk and how we presented it in a way to the minister that we judged was acceptable to proceed. I know that Seymal have expressed their own views. I saw their submission after I wrote to you, I saw their appearance after I wrote to you. They clearly had stronger feelings about whether they were in effect. I think that their written submission effectively instructed. They also made reference to being told not to ask for a direction, which I didn't really understand. I don't think that in legal terms, in order to general's report, they did not say that we issued an instruction or direction. Whether they could have thought differently about the processes that they might have followed and whether they might have come to me and talked further about that or talked to others, I really can't say. I gave an equivocal response to the question that you posed to me in writing, because that was the understanding of my mind at the time that Seymal were not seeking anything analogous to what I called in my mind a written authority, which was an instruction or direction, which is really quite heavy duty. As far as your recollections concerned, that was never discussed? No, not within your... Not within my ambit, no. I mean, I've heard the reference to shareholder instruction and if that's how things are perceived, well, that's for others to say. Seymal themselves were involved in drawing up what I think within our ambit that we called the letter of comfort, the letter of reassurance. It was not a direction, it was not an instruction. If the terminology about referring to us as a shareholder made it effectively a shareholder instruction, well, I'll leave others to judge that, but in our heads, in our minds, we were not setting out to direct anybody. What I believe the term written authority really means, it means instructor direct in my head. I think some of the terminology has been a bit confusing. Just continuing on this, a fairly important document was the Transport Scotland submission to ministers on 8 October 2015. Do you consider that that made a clear case for awarding the contract to FML? Yes, I do. Well, it made a clear case that ministers were in a position to authorise the award of the contract because all avenues had been explored to manage risk in such a way that we assumed was acceptable to Seymal. So, as far as you were concerned, it's not confusing. It's not strange that the minister signed off based on the information that he was given. No. Okay. Now, there's some differing views in the evidence that we've had done in the 26th month, again on 30 June, on whether the contract award decision was down to Seymal. Do you consider that Seymal was given a direct instruction to proceed? That's not how I would have proceed in my mind. If someone wants to advise me that the letters are mounted to a direct instruction, that would be for others to say. But in our mind, we were giving them a letter of comfort, a letter of reassurance, a letter around where financial risks would lie if certain things unfolded. So, I did not regard us as giving them an instruction. No. So, as far as you're concerned, the decision on the contract award was down to Seymal. It was their decision at the end of the day. Yes, and I think, I can't remember the precise words, but I think on the Auditor General's report in paragraph 29, a conclusion, the Seymal board accepted those assurances and on 16 October awarded the contracts. As far as I'm concerned, that's it. So, as far as you're concerned, there was nothing unusual about the process that was followed. High profile, yes, but it's not unusual in terms of how it was handled. There were sensitivities and there were issues that were required to be addressed, but we gave assurances. Whether those assurances are killed with a whole range of other procurements, I would need more time to analyse. I wouldn't go for routine and normal, but we certainly were not instructing them in my head. In my mind, we were not instructing them. Okay, thank you. John De Cwlinigraith? Okay, convener. Absolutely. Thank you very much. Mr Middleton, just going back to what you said, pretty much right at the start, where you described reporting the risks to ministers, did I pick you up right that it was only Derek Mackay that that was reported to? I need to remind myself of the copy list, but I would assume that the cabinet secretary would be copied into that. That would be the normal practice. So you didn't personally do the reporting. How was it done? Was it by letter or was it a discussion? It was a written submission of just over two pages, which had a number of enclosures, including the most up-to-date paper from CMAL, and including previous papers from CMAL and included drafts of the amended loan letter that would go from Transport Scotland and drafts of the letter of comfort. I'm calling it the letter of comfort from my relevant director, John Nicholls, to the chair of CMAL. So the whole kind of story of risk, how the risk was to be mitigated and the letters that had been agreed with CMAL were presented to the minister so that we felt that he was in a position to say whether he was content to approve or not. So in your recollection and your view, those risks would have been reported to Derek Mackay and his then-boss, Keith Brown? Yes, but they were more widely reported to officials across the Scottish Government, including procurement, finance and legal, and special advisers would be involved, so matters were quite well... You know, it was not a narrow thing, it was quite well trolled across the Government machine. And then who... Which minister, either Mr Brown or Mr Mackay, then gave the nod to going ahead? It was... Well, it was a note from Mr Mackay, I know that it was the note that was not discovered until some subsequent time and that it was his sign-off to that final deal, yes. And prior to that, of course, we had the announcement of the preferred bidder status. Who was it? Which minister was involved in that? Well, from recollection, Keith Brown, I think, had to see that advice in August because Derek Mackay, I think, was away at annual leave. But, I mean, the practice in any... Within any portfolio, the Cabinet Secretary decides the issues on which he or she will lead on and therefore take direct decisions on and the Cabinet Secretary will decide which issues are led on by their relevant junior or juniors, the ministers. But all papers are, I think, almost always copied to both offices. Okay, so one final question from me, convener. What leaps out from the Auditor General's report is that despite the risks being reported, we actually don't know why ministers took the decision they did and the Auditor General said when he wrote the report that there was no documentary evidence. Do you know why ministers ignored the reservations from CML? I don't think they ignored them. They stated they were aware of them. My view is, and I think you have an opportunity to ask this more directly later, is that Mr Mackay saw the advice of 8 October, understood it clearly, indeed he said some of this in writing, it's on your website, I think. He understood the advice, he understood what was explained to him, he understood how risks had been managed in various ways to mitigate risks to CML in particular and he therefore felt able to sign off the approval to award a contract. Okay, thanks, convener. Just on that point, on the 9th of October, one of the final emails in the collection was sent at 1715 and it's from Ainsley McLaughlin saying, I just finished my call with DFM, he now understands the background and that Mr Mackay has cleared the proposal so the way is clear to award. So the Deputy First Minister, either as the Deputy First Minister or as the Cabinet Secretary for Finance at the time, was involved right at the point of decision and the email before that says, would you drop a note in the system to confirm the absence of banana skins after your call with the DFM please? What would the banana skins be? Well, banana skins, I think, is probably just a flippant term for anything that might conceivably go wrong. Now, given where we are with the ships, I don't wish to make any flippancy about the use of that terminology. I mean, the decision that had been taken by Mr Mackay, the DFM as finance secretary at the time, it would be perfectly normal and not inconsistent with other issues for the finance secretary to want to be aware of things and to be clear about things. I mean, his own officials were on the copy list for a number of the submissions. So I appreciate from where you are, this may seem something of great significance. I don't think for us in the system, the DFM just cross-checking at the final stage that he was content and understood what was going on. I don't think that was abnormal in our contact of business and I don't think that it was something that should lead you down some other routes of thinking there's some great clever game going on here. I think just in an organisation where there's collective responsibility within the Scottish Government, the Deputy First Minister and finance secretary was an extremely important person and he took an interest across all matters and he therefore just wanted some, well I don't know what was in the phone call between Ainslie McLaughlin and himself but he just wanted some final reassurance and that was done and there we are. So why did Roy Brannan tell this committee on the 26th of May and I quote him, if it was a transport project it will be a decision entirely for the transport minister? Well I'm afraid, you know, I can't speak for Roy Brannan. I mean in a sense in ministerial decision terms that's true. The fact that the DFM takes an interest in matters doesn't mean that he somehow pulls every decision. I mean if it had been the case and that here I am speculating, purely speculating, if Ainslie McLaughlin had told him something and John Swinney had said, oh I don't like the sound of that, then I guess the next thing would have been a phone call between the DFM and Derek Mackay and either at that point something else would have been done or else Derek Mackay would have said it's okay, DFM this is my reasoning and DFM might say well that's fine okay. Now again all that speculation but I don't think that detracts from what Roy was saying that transport ministers decide transport business within the portfolio whether that's the cabinet secretary, it's Keith Brown or whether it's the minister as Derek Mackay they decide things. If other ministers want to query or other ministers want to clarify a point and the finance secretary's always an important person then that can happen. I don't think that necessarily delutes where decision making lies. But I suppose the critical point is the language used where Mr Brannan told us that it will be a decision entirely for the transport minister and the evidence appears to suggest otherwise. Do you have any final comment on that? No, I don't think there is actually a gulf in what Roy said and what you're noting from the record of emails with DFM, I don't think there is actually a gulf but I understand why you're posing the question. Okay Mr Middleton thank you very much for your evidence this morning we appreciate your time and your written submission and if anything else occurs to you after you leave the room or your recollection expands then please don't hesitate to contact us and put in writing anything that you think would be helpful to the pursuit of our inquiry but I'm now going to suspend the committee as we have a changeover of witnesses thank you. Well can I welcome everybody back to the next session of the public audit committee's meeting this morning. In the second half of our evidence gathering today we are pleased to welcome Derek Mackay who has given us a written submission but is also here to answer questions that the committee wishes to pose. Mr Mackay of course you were formally Minister for Transport and the Islands and also Cabinet Secretary for Finance and the Constitution and it may be that we'll ask you questions related to both of your roles but can I invite you first of all to make a short opening statement. Okay thank you convener and good morning and can I thank the committee for inviting me to attend today. I followed your proceedings as well as the auditor general's report and the rec committee findings from the previous parliament. To answer your questions as comprehensively as possible I've sought access to government papers I would have seen at the time as the minister and of course will respect the rules that govern that access. Much information is already in the public domain or has been presented as evidence and therefore I don't believe I will infringe any commercial confidentiality or protocol in being as open as possible. The rec committee has identified procurement and management failures, catastrophic failures and of course I take my share of responsibility. However in doing so I believe that at every stage and in every decision I acted with the best of intentions with the interests of island communities, workers, Scottish shipbuilding and communities that relied upon their success foremost in my mind. As vessel construction entered difficulty I set out the objectives to complete the vessels, safeguard the workforce and give the yard a future. Those are objectives I do not regret and I believe that Ferguson's is still operational today with a future because of the objectives set at the time. My responsibilities as you say convener were as transport and islands minister from November 2014 to May 2016 and then as finance and subsequently also economy secretary thereafter until February 2020. I am speaking in a personal capacity and do welcome the opportunity to supplement my evidence and answer your questions to the best of my ability. Thank you very much indeed. Can I begin by asking you something quite particular in the written submission that you submitted to us on the 23rd of June and that is around events on the 31st of August where an announcement was made that Ferguson's were being awarded preferred bidder status and you said in your written submission press release and coverage at the time would have stated the award would be subject to ongoing negotiations therefore I do not believe the announcement would have undermined CMAL's negotiating position but the BBC piece for example which was the one tweeted by the First Minister said quoted her saying this is an excellent result for Ferguson Marine Engineering Limited and I am delighted to name them as preferred tenderer for the contract. The contract will see the 150 strong workforce retained and more staff taken on at the shipyard. You said on that date this is a significant investment that proves Scottish ship building can succeed in a competitive market etc etc I mean there is no suggestion that other than that this was a done deal at that stage Ferguson's had been identified as the preferred bidder that that's the fact there were ongoing negotiations so everything would have been subject to those ongoing negotiations no it wasn't a done deal of course until the papers were finalised and the contract was signed later in October. Okay can I take you back then to the 20th of August 2015 you were on leave at the time but a letter an email was sent to Keith Brown as the Cabinet Secretary for Infrastructure Investment and Cities and that email covered a range of things Jim McCall's position and so on but it also spoke about presentational issues and in that it said that you as the minister for not only transport but the islands was the person that was to lead on the announcement that would subsequently be made but as we know now you didn't lead on it the first minister led on it can you tell us what happened in those intervening days I do you mean from the period of that submission and how come the first minister made that announcement at the yard rather than you on the 31st well that was the period as you've just heard from David Middleton the former chief executive of transport Scotland that I was on annual leave so that's why this paper which was sent to the cabinet secretary to deal with was approved by him happy to cover the decisions that I have taken that paper was approved by the cabinet secretary and I returned from leave I think that week around the 31st as it happens convener I'd like to correct something you've said in your previous submissions that I was accompanying the first minister she was accompanying me I was actually Glasgow airport that day on the 31st as part of the airport extension of a pier so I wasn't at the presentation of Ferguson's as the preferred bidder on the 31st what I would also say is over that period that is the period I was on annual leave so that's you know you're asking me what was going on during that time yes I think there's a quote from me in the pressure lease you would expect that would you not from the minister for transport in the islands but over that period I was an annual leave okay but you were back from annual leave on the 31st it's just that you were not at pot Glasgow that's correct okay okay right I'm going to bring in other members of the committee now who've got questions to put to you starting with craig hoy thank you thank you good morning Mr McKayen thank you for appearing before us in his report the auditor general identifies a major issue in relation to insufficient documentary evidence and that's been a concern for this committee subsequent to the report appearing there was documentary evidence to suggest that you were responsible and that that was the release that came out to suggest that that you were responsible taking decision so we now know who took the decision but we don't know why do you think there is still some documentary evidence out there that may give us further information as to why the decision was taken to e announce Ferguson as the preferred bidder and be then to award the contract despite the misgivings around full builders refund guarantee oh can I thank mr hoy for the question to be direct I don't think there's any further paperwork around that day of the submission on the eighth of august that was presented to me on the issues and the risks and then the decision that I took now there is a volumes of course of information in this matter as you would expect I think it was actually in December 2019 when I as cabinet secretary instructed the information release so that the government could be as transparent as possible but I don't have the ability to cross check every document that's in the public domain with what has maybe happened over the last few years but I don't think there's any further documentation around the decision that was taken on the eighth of august that is missing and I have looked at my own records everything that well ministers can't retain records I've had access to government papers to try and reassure myself of that that there's no further documentation that I could provide you with okay in relation to obviously preferred bidder status seem I was a concern at that point on onwards it was almost seen as a done deal before you left on holiday what status was that decision at and would you have approved it had you been in the office rather than on leave so the period at which I was on annual leave was at the preferred bidder status the papers came up for that decision on the 20th of august and as you have heard Keith Brown made that decision and then on my return I considered the papers that came to me okay but prior prior to you going did you get the impression that that's the direction of travel that the preferred bidder status was going towards ffil and were you comfortable with that no I don't think there was any step for a hint I would have been briefed as you would expect that submissions would be forth coming to ministers to expect that but you know I was on annual leave and you know that's just a matter of fact but I was advised that papers would be forthcoming at some point of course it was in the hands of civil servants when submissions were presented to us for decision were you aware of any cabinet level discussions around the decision to award preferred bidder status to ffil no I'm not at that point I wasn't a member of cabinet I was appointed to cabinet seven it became finance secretary in 2016 so I'm not aware of what discussions there might have been at cabinet but there could have been discussions there could have been and that's entirely possible okay did you get the impression that the First Minister was actively involved in the negotiations at that stage or at least was being well briefed about the discussions to reach that preferred bidder status I can't speak for you know how much the First Minister knew other than the copy lists that I've seen in submissions put to ministers which is largely to cabinet secretary as you've heard from David Middleton or myself so it's a bit unfair to ask me what information the First Minister may have known because I don't know what she was briefed on in relation to preferred bidder status but I can't imagine that she would have been personally involved beyond what her ministers were doing on the subject in terms of the culture of government it appears to be quite tight it would be safe to assume that there was channels of communication there are formal channels of communication cabinet meetings or meetings with other ministers as transport minister as you would expect I would speak to my cabinet secretary and engage with him on matters of importance so most government business is conducted through the formal channels and written paperwork communication submissions notes memos and a sharing of of submissions and responses there is an issue here of course which is that the proposed contractor was somebody who did have a close personal connections to your party to the independence movement and therefore the party of government what was your personal relationship with mr mccall like well mr mccall was a member of the council of economic advisors and clearly a very high profile businessman in scotland and was a member of other government for us so that was my relationship with mr mccall as it would be with with any one of his significance in the business community and as a finance secretary I would have engaged with him through the council of economic advisors but given the widespread media reporting that he was perhaps close to the party did you foresee any political risk in that could that be one of the banana skins that wanted you wanted to clear no i mean nobody was ever compromised on that matter and you know the decision to award the contract to fergusons was based on fergusons but nothing else okay seamale said that they didn't attend the ceremony for preferred better status as as you didn't we found out today because they had concerns that it would compromise the negotiation position further critically around the builders refund guarantee in hindsight what's what's your view on that so i wasn't aware of that at the time because again i would have been on annual leave from that period of fergusons appointment of preferred bidder up into the visit on the 31st of august so in my evidence i've clearly said i thought it had no impact on the negotiations because i didn't believe you know when i've been asked the question by the committee do you think it had any impact in the negotiations and i said no because of the you know the submission of put in my evidence now clearly seamale have said something different in their evidence but that wasn't something i was aware of at the time that they felt the way that they did as they've expressed to evidence to you that was not conveyed to me but in any event as i've answered the convener that's not a subject on which i was engaged because at that point i was an annual leave obviously you want that for the unveiling of preferred bidder status it did say however that um you would be taking the lead on that announcement and then subsequently something changed um would it be in the first minister's office's decision to press for this to be announced at a kind of high profile kind of photo shoot style event rather than just as mr middleton said that you are showing of the usual contractual letters again you're asking me something that happened in my absence and i'm not cited on the exchanges that might have been going on at the time but yes i did lead on the announcement on the decisions on my return to the subject my return to to business um seamale has provided their view on how the visit has come about and you know said it hasn't come from the transport minister's office because you know i wasn't i wasn't there on the day are you a bit concerned that um you weren't there for preferred bidder status but everything seems to have hung on on that decision and that since effectively what happened afterwards but i was the fate of the company and are you concerned that the Scottish Government and the First Minister in in light of documents like this that come to light that you've been lined up to be the fall guy here that this is operation blame Derek Mackay i said in my opening remarks to committee that i'll take my share of responsibility and i'll answer robustly any decision that i have taken and i take my share of responsibility but equally i recognise the catastrophic failure at Ferguson's to complete the vessels on time and on budget that is deeply regrettable but what i don't regret convener is protecting the workforce and ensuring that the yard was supported it has a future and that we were able to support scottish ship building so i can answer for my decisions and my involvement i was a proactive minister and i did carefully consider all the submissions and happy to explain through the rationale of in every single one it was also taking my share of responsibility and who else has a a stake or a share in that responsibility well according to the auditor general and the previous rec committee in the previous parliament there are multiple failings so i don't think it all rests on me but other people have advised that clearly there are multiple failings here but i'm taking my share of responsibility i was the lead minister okay thank you sharon dowey has some questions for you sharon thank you good morning mr mackay following on from craze questions was the decision to award the ferry contract to ffmail in any way linked to political calculations or dictated by a political timescale no in your opinion no in my opinion absolutely not okay do you think there was an error in rushing to the decision made to meet a political agenda you're saying that you don't think there was one but the uk government's announcement on defense contracts and to make this a top line announcement at your party's conference so do you think there was that was a political agenda can i say to miss dowey that i'm going to resist any petty politics any comparing with the uk government in any procurement decisions they made of taking about any matter and stick to just answering your questions in the subject i don't think there was a political agenda i don't think it was rushed at all i don't think there was any evidence it was rushed it was a methodical approach to procurement and i've recognised the failure of it but it was made with the best of intentions processes were followed and no i don't think it was rushed and i don't think it was a partisan decision it was a decision about trying to ensure we could get two vessels complete as it happens built in scotland and ensuring the future of the yard and growing the workforce at the yard which actually was a consequence of the decision no so i don't think there was any partisan ship in it or or wrongdoing as is suggested i think we heard from mr mccall that he thought there was a future for the yard even without that ferry contract and there was a rush to put the announcement out because the negotiations were still going on which seamale felt hindered them in their negotiations and it would have been harder for the government to go and pull back from that announcement after having made such a high profile announcement that the contract was going there but anyway moving on can i answer the question though convener because charges are put and i'm happy to answer yeah i'm happy to let you answer yeah so i don't to to be honest believe that anything was rushed in fact there were extensions in part of the process so more time was taken there was no rush there was no artificial deadline i do remember saying once the decision had been taken though now let's get on with it you know the decisions taken let's move on you know and act as swiftly as possible but there was no rush to the decision making there was no rush for any reason whatsoever this was a methodical approach to get the right decision around the procurement of these vessels and there is no evidence i haven't seen the auditor general or anyone else other than mr mccall say that he felt there was a rush but the evidence shows the timelines and the milestones set out to conduct this in a proper fashion okay well i'm a bit disagree because i think that we could maybe have waited until you come back your holidays for you to sign the contract rather than it being Keith Brown that signed it while you were on holiday but anyway moving on just as a point of fact convener ministers don't sign contracts but if we're going to be absolutely factually correct i will be absolutely factually correct he was asked to approve it though wasn't he yeah that's different from signing it yes i'm just being clear about signing because i saw a lot of parliamentary debate around who signed the contract ministers don't ordinarily sign contracts okay on that point then who signed the contract it would have been officials from seamal because ultimately seamal was leading the procurement process on behalf of you know transport scotland and the Scottish government and then of course for fml it would have been essentially their director signing wouldn't it okay so on the point where the contract was awarded did you know at that time that seamal had concerns about the awarding of the contract too and would you be aware of how much concern they had well the submission to me on the eighth of uh october i think quite comprehensively outlines their concerns and that was decision that was a submission to me to consider the information that had been presented but crucially in that to give authorization to proceed so that submission outlined their concerns and they did have concerns primarily well in fact really only around the builders refund guarantee and i'm happily i'll talk through the rationale of how i believe that those risks were mitigated but the submission to me outlined that the request from me as minister was to proceed so it wasn't to to revisit to reject or go through an options appraisal or to restart the process it was a recommendation to proceed to give seamal the necessary authorization to proceed and then it outlined having raised all the concerns from seamal about the lack of a full builders refund guarantee the the ways in which those fears could be eladed the report talks about the best deal in the circumstances how we could best address the concerns of seamal government lawyers had been advised and contain sg finance procurement fairly assessed at the risk here it spoke of similar problems can arise even where a full builders refund guarantee is in place and ultimately asked me if i was content to proceed and i was considering as you've heard from david middleton and indeed his successor roi brannan chief executive of transport scotland that the information submitted showed that there had been progress from the worst point i think of negotiations between seamal and fml to a far more satisfactory position so much so seamal we've heard subsequently co-produced the note that came to me they co-produced the risk assessment that came to me but as a submission for me to give authorization to proceed with the process and i'm happy to go into more detail as to what was in that submission right so do you weren't concerned then at this point that you didn't have the full builders refund guarantee well of course i was concerned because the papers give reason to be concerned but also gives the mitigations to be taken into account to make a balanced decision that's exactly what it did so the paper was asking for my recommendation and the affirmative and the positive do we have permission to proceed you know and now the interpretation that i got from this is that the matters under negotiation had been resolved at the point i was presented with the submission because of the narration of the issues and the reassurances within it and you know i've seen elsewhere in the seamal evidence that they claim not to have put in a recommendation positive or negative but then of course in evidence they've said subsequently that they didn't really want to award the contract but the paper that i was considering was asking exactly for that for authorization to proceed notwithstanding the concerns that they had raised i felt there was the necessary mitigations to to address that and i'm also aware that a full brg builders refund guarantee is not the panacea it doesn't ensure that there will be no issues in both procurement or indeed the build out and it's really curious when you look at the note that the note didn't suggest that fergusons was incapable of building these vessels or even that there was a high risk that they were going to be late or that the contractor wouldn't perform the risk was around the the financing that the builders refund guarantee because fml was a relatively new financial entity but the shipyard was already well established and had been producing vessels for the calmac fleet so i was looking at the assessment the history the confidence in the yard the fact that the evaluation exercise showed that fml came out on top as overall you know bittersaw there was a lot of reasons to have reassurance and confidence in the submission that had been put to me of course seamale were concerned they were right to be concerned in that they felt they would be carrying a lot of risk as their own corporate organisation and that's fair and that's therefore why transport scotland with with the support of ministers then offered that letter of comfort which you've heard in evidence was co-produced so it was co-produced to the point that transport scotland thought they were recommending to me that they were seeking approval to proceed you've now got two former chief executives of transport scotland confirming that and for completeness the director general in the equivalent of economy at the time that was the understanding of the submission put to me yep there still seems to be a lot of concerns from seamale who felt as if they were maybe forced into it so with all the different concerns that were raised to you did you discuss that with any other ministers or cabinet's ex-chries or indeed the first minister or the first minister's advisors no on the concerns well two points there first of all you have said miss the way that seamale felt forced that was the word you used it and i think you know i can see how you might get that impression from the more recent evidence we've had from seamale but can i refer you to the evidence they gave to the rec committee asked directly whether the scotland government or transport scotland had ever applied pressure either directly or indirectly for seamale to award the ferries contract to a particular bidder kevin hobs was categorical in his response that this had not happened and the contract had been awarded to fmil purely based on evaluation of the quality and price of its bid and past reputation so you know i would challenge some of the evidence that's maybe emerged from seamale seamale just based on on what they've said before i didn't have discussions with other ministers because i didn't think it was necessary at the point of the submission on the eighth of october i received the advice i considered the advice i was satisfied with the advice for the reasons that i've given and therefore i informed private office my private office to to proceed that i was content with the paper that i had received a letter between yourself and student mcmillan suggests that seamale had been comfortable to proceed with other procurement and ship builds without a full builders guarantee something that eri costa guard said in his evidence wasn't true but can you say more about the letter and would you be willing to share it with the committee do you have a copy of this letter but the issue about correspondence between me as a minister and an individual msp at the time i think it's what ministers are not allowed to former ministers are not allowed to retain government papers so now i'm not in a position to share anything that's not already in the public domain but of course i'm more than happy for communication to be released by whoever has it so i'm no difficulty with that whatsoever but it would be me breaching rules of access to correspondence that if i'd access to in a restricted environment to then share that so i'd be quite happy if that communication was released it doesn't give me any difficulty whatsoever if i can then explain what the communication would have been doing you know an msp inquires to me about then actually the letter was to scotch government it was to cabinet secretary john swinney about you know fml or ferguson's the procurement process and i was responding now i responded in the terms that would have been drafted for me so the way ministerial correspondence works as i'm sure you're aware msp writes to minister a draft letter is produced by the civil service and then either amended approved projected whatever and then sent to the uh the member so i was satisfied the information i was sending to the msp the msp at the time was uh was addressing a concern that they had so i responded as minister to an individual msp and i'm sure i think that that's what you would expect of a minister now that is confidential communication between a minister and a constituent msp but if people wish to share that and there's permission to do so i have no difficulty with that whatsoever can i just pick that that point up because you've told us already this morning that you were a proactive minister so i don't really think it's satisfactorily to rely on a civil service draft as a reason for that letter going out which said that the builders refund guarantee was a preference that the seamal board had a preference for refund guarantees it has on occasion taken alternative approaches because jim mccall told us and i quote him that gave us the green light to go ahead and put the resources into putting the tender there is a lot of work that goes into tenders and we were not going to go ahead and do all of that if we were not going to be allowed to negotiate a different form of guarantee so how appropriate do you think it is in the middle of a tender process for you to send that kind of letter as the minister well if you look at the timing of the letter the reason i made the point about the civil service convener i signed the letter it's my letter to a constituent msp what i'm describing though is that letter would have been composed for those that are familiar with ministerial office you receive a draft letter you often get advice with the communication the original letter and then you can either amend reject or send the letter so yes i sent the letter and everything in it is information that i would have been advised this true at the time and this morning i think hopefully you've heard from david middleton who as part of transport scotland said behind that letter would have been a background information that previously letters of comfort had been issued and i assume that was in relation to builders refund guarantee now i can't then go through well where else was you know this flexibility given but the advice i would have been given at the time would have been that that would be accurate to put in the letter and that was a letter between as i say me and an msp i didn't send the letter to anyone else i responded to a member of the scotland parliament as a minister at the time based on the information i had and the draft that i would assume haven't been composed and drafted by officials is accurate and confident that the substance of that could be verified you've talked about other evidence so we've received which you think revises the history book a little bit but i mean you've said in your written submission to the committee that you were first aware of the guarantees issue following the selection of preferred bidder but that correspondence from febru of 2015 suggests you are aware of that issue much earlier no i think it's two separate issues i and in no way got involved in that issue in relation to c miles procurement exercise the question that was put to me was when did i first become aware that your committee's question to me is at what stage in the procurement process you first become aware that ffml was unable to offer a full builders refund guarantee is true to say that that was after the selection is preferred bidder and in detail on the submission in the eighth of august i had no engagement with c mal as they you know i'm sure would confirm in their processes throughout that time indeed that letter as they've also confirmed was not sent to c mal yeah but c mal have also told us that they offered to meet with you to talk about their concerns which were clearly still live and outstanding come that second week in october why didn't you take that offer up i would say again convener that i was reassured by the information and the submission to me that the issues had been resolved that the recommendation that was being put to me it was in the affirmative to proceed to give that authorization to proceed not to reject not to reconsider the co-produce submission to me had the risk analysis and incidentally of course when ministers consider decisions there's there's often a risk analysis and there is the risk of challenging most decisions that a government takes but i was convinced by the information that i had that was a satisfactory process which i won't repeat the evidence that i gave earlier around the mitigations the convincing argument the tender bids being the best overall and if c mal's actual request was not to proceed that should have been what featured in a submission to me it was not okay well they um as you know they've taken a different view in in evidence that they've submitted to us can i just ask you one final thing before i bring in willy coffee um going back to the letter of comfort and the voted loan i mean the voted loans value was 106 million pounds i think and the the value of the tender was 96 97 million pounds um who was party to decisions about the issuing of the letter of comfort and uh agreeing to the voted loan of that scale the so the decision would the submission would have been in the 8th of august and then the the letter would have been signed thereafter by officials is that what you're driving at convener no what i'm trying to understand is did you have to sign off the voted loan decision the drafts were in the submission on the 8th of october so in essence in making the decision i had that copied into the pack at the time but i mean for example would that have gone to the cabinet secretary for finance would that have gone to the dg finance would that have gone to the cabinet i don't think so because i was lead minister and that's the kind of detail that would be dealt with by officials so i don't think that kind of submission or that annex to a submission would have been sent to others the copy list is on the on the papers at the time in terms of the politicians involved so the but you're saying the transfer of risk from female to female from female to female and then to the scottish government would have been taken by officials with no political sign-up no i'm not saying that at all convener what i'm saying what you asked is is individual officials technical no i'm asking who signed off that voted loan decision to your knowledge the decision is in the 8th of october to proceed with the letter of comfort in the financial background that goes with it you know i would i would want to look at the papers to give you an absolutely accurate answer so the papers that i'm looking at incidentally is nothing exclusive it's just what's in the public domain and so i'm looking at it right now draft voted loan letter from transport Scotland setting out an agreement to fund the two new hundred meter vessels to be built at fmil so the draft letters were in the pack on the 8th of october in the submission to me which of course i approved the decision and then further refinement or discussion would have gone on with seamal and fmil up to the point of contract award which of course later in october does that help yeah but if i can just very briefly ask you as a former cabinet secretary for finance would i mean would you not have had any involvement in that kind of decision as the cabinet secretary it not specifically and individually in a specific element of it what the finance what any finance secretary would have wanted to have known his overall budget and whatever risks were involved and i've seen discussion around that but i'm not saying for a minute that anyone else would have been engaged in the detail other than the officials having seen the draft in the submission to me on the 8th of october and the copy list includes the cabinet secretary for infrastructure investment in cities who of course was my cabinet secretary at the time but of course you would expect dg finance so the officials in finance dg sorry i'm squished government legal directorate and squished government procurement to be involved as well to make sure everything's in order of course you would okay well we may investigate that a little bit more deeply but i'm going to turn to willy coffey who's got some questions to put to you thank you very much convener and good morning Derek i just wanted to unpick a wee bit if you don't mind in the committee doesn't mind the nature and substance of the assurance that was given to you to allow you to proceed to award the contract is it submissions of a nature just simply saying we assure you everything is okay minister or are there technical documents in that assurance framework containing information and technical advice and guidance and so forth and evidence what is the substance of the assurance that you read to enable you to make the award i think there was a great deal of reassurance but some of it would have been to say that there would be a monitoring arrangements there would be oversight so without seeing all the detail of that you're reassured as a minister that there is an assurance framework you know there's also contract compliance arrangements which we may all come back to and but there's enough reassurance in the paper to show that there's the mechanisms in place to hold a contractor to account now clearly in decisions that ministers would make as you're making the the decision and any officials get on with their area of expertise but you know i was quite satisfied with the risk analysis that i saw in the mitigations that have been put in place that it's satisfied in my mind that CMAW could be authorized to proceed again for for many of the reasons that i've already given can i reflect on one thing even i think this is important in the risk analysis it said that the risk of lateness or poor performance was low so no one was saying ferbysons couldn't build the vessels where there was more concern was around this builders refund full builders refund guarantee actually despite that evidence the opposite has turned out to be the case the vessels are late and have overrun regrettably but there were that there's actually no legal challenge to this date to the to the decision itself so you know some of CMAW's concerns rightly made you make a judgment based on what you've been presented it with again key comments in the submission to me this was the best deal that could be negotiated it was broadly comparable with the tender specification you know legal finance procurement are all content therefore proceed to contract word and it's true to say this of course follows the whole evaluation process where people talked about how impressed they were by ferbysons bid at the evaluation process and also that it came out on top in terms of the overall scoring and particularly on quality so i was reassured with the mechanisms within and of course you would expect regular updates now wasn't transport minister beyond 2016 and i'm quite sure in fact i know that the transport minister would then have been updated on progress and of course i re-engaged on the subject as finance secretary because there were emerging concerns about the contract so those triggers of concern did come into action and then of course there are many many further issues to be addressed so all the key players i asked mr middleton this earlier the key players that were involved in giving you that recommendation must surely also have been similarly assured that what they were seeing to you was deliverable absolutely and i think you heard that from a david middleton the former at transport transport scotland chief executive at the time and then of course his successors looked through all the paperwork and picked up the issue on his appointment as transport scotland chief executive and has also given you that in evidence that that's what they believed they were advising me it's for a minister to then make a judgment and decide and that's what i did the key component that's perhaps missing in the process is is probably possibly about the ability of the yard to deliver the ships i mean hindsight is a wonderful thing we all know but why wouldn't there be in that process some kind of assessment about the actual ability of the yard to complete the vessels on time on budget because we know that's what's happened since so where was the assurance around that about their ability to complete it where where was that in the process yeah it was a fair question i'm sure it would have been taken into account as part of the evaluation of the bid the expertise that they had but in the mind that fergusons had been constructing vessels for the calmak fleet for years and many of the vessels in the current calmak fleet aging as they are were built at fergusons so it attract record of delivery so that as well as all the information that would have been in the tender one one member of seamale said i think it was one of the best bids that they had ever seen it was of an exceptionally paraphrasing high quality so of course there was divided opinion within seamale but it was referenced as a very strong bid so all the evaluation exercises before to get the preferred bidder status to come through the pqq and everything else would have got to you to a point that there was confidence in the yard because of the case that the bid that they had put in and also the fact that they had been completing vessels for calmak through seamale as the contracting agency previously can you can you think of any other additional process of assurance that could have should have taken place in the process that may have helped us to avoid where we arrived that today what could we possibly have done at that time to try to avoid the circumstances that we find ourselves in well i think you've got a volume of recommendations from the auditor general and the rec committee to helpfully suggest how this is better handled in the future and i would support of course only an individual private citizen but i think there are many recommendations as to how things could be improved in the future a personal view is also that transport governance as it stands at the moment and as i had at the time as transport minister wasn't perfect so that's also a point i think that's made by the rec committee and the recommendations that i think there's definitely room for improvement into the transport governance at the time between the agencies and the structures and so on and there of course is also the potential to restructure things in a fashion whether you remove that that competitive contractual conflictual conflicting hostile ultimately relationship that we got into between contractor and the contracting body then of course with the government into the bargain so i think there are recommendations that been made by by others that should be adopted to ensure that this doesn't happen again okay thank you thank you very much for that thanks convener thanks willy calling beatie has some questions to put calling thank you very much i'd like to start with you know this there's a lot being made of the possible relationships between mr mccall and the government because of his alleged political views i mean to what extent are contractors political views taken into account when allocating contracts not at all and are there robust processes to ensure that doesn't take place absolutely but there'd be no way that that would be taken into account whilst making a contracting decision a procurement decision absolutely not and in your personal case did you have any communications directly with mr mccall during the the procurement process as i've said in my evidence it's very difficult not having the diaries in front of me to say how often i would have met with a mr mccall so i would engage with them through the council of economic advisors or meetings that were diared or a telephone there's a telephone call arranged but i think you've got access to all that information it's on the government's information release but there was absolutely no inappropriate involvement or preferential treatment to mr mccall i think mr mccall's been quite effusive in saying that he doesn't feel as if he was treated particularly well by the Scottish government so i don't think that would surprise you now it's well known that there were disputes between mr mccall and mr mccall at which it seemed to have been fairly extreme now what discussions did you have with other ministers or what actions did you explore to try and resolve this dispute and bring them together because mediation didn't go anywhere yeah yeah i said to the convener earlier i was very proactive minister so even beyond my term as transport minister i re-engaged as finance and economy secretary because when it was clear there were problems emerging in the contract and the lateness of the vessels and potential cost overruns there was also the risk to the workforce 400 workers and their families there was a risk to the yard there's a risk to the future of the yard so i was regularly and involved in my capacity as finance secretary of course looking after the finances of the government and the fulfillment of the contract clearly other ministers would have been involved there have been a number of transport ministers but it would have been primarily homes of use if it first is transport minister and then paul wheelhouse as transport minister that i dealt with so of course engage with other ministers to try and ensure that we got a resolution to the difficulties as they emerged mediation expert determination other intervention proved unsuccessful in that we couldn't get them started because of the relationship breakdown or lack of agreement around remit or mediator and then ultimately as you have heard in evidence from others no legal basis in which to proceed which became a key issue and why further mediation couldn't have been taken forward so i was proactive in trying to resolve the issues and then of course that then led to me being involved as finance secretary around other matters such as in the loans now this committee's heard that drawdowns were made against milestones now subsequent to your departure there was a report in december 2020 from the rural economy and connectivity committee which clearly highlighted that these milestones were not sure i'm picking the right word but artificially achieved so they would pick a milestone on cutting metal whatever and and and achieving that particular piece without having all the bits up to that point actually in place but because they had achieved that milestone they could claim the money and there was no way in which payment could be refused because seem i'll took legal advice on that now clearly that's all part and parcel of the dispute and i don't know the extent to which you might have been aware of that or involved during that period well seamile would have led on the milestone arrangements largely at the outset of the contract i remember becoming involved when it was put to me that the milestone payments and i'm i'm not dismissing what the rec committee has actually found on the milestone payments although fml and jimma call object and disagree with what seamile have said around that matter and but my view is further down the line when there was clear issues with fergusons and fml being able to proceed that we had to try and find some further flexibility some further support to assist with the issue of construction and cash flow and payment of suppliers so on and so forth and these would have been considerations in my mind at the point of looking again at the milestone payments and also the loan support that the scottish government gave direct to fml as well but the original milestone payments was an arrangement between seamile and fml of course seamile will tell you it's standard what they did and fml will tell you that it caused some of the problems and then the rec committee and the auditor general may have other views on whether that caused problems or not just just quoting mr mccall he he said that you had advised him privately that the seamile board would resign if you interfered in the board's proceedings do you recall that conversation no i i don't recall the that kind of detail but what i would have expressed to mr mccall at the time and i think the evidence fairly shows this now that there had been a breakdown in relationships ministers couldn't interfere and there's some reference in convener i've seen you refer to this as well of a legal position and what you now subsequently know thanks to the evidence that's come out and the papers released that there was indeed dispute over both parties positions and both had a different legal position so what i would have expressed and you will appreciate how i haven't seen all the evidence and counter evidence you've had so far how difficult this was to manage and to try and ensure that we kept doing the right thing so i would have expressed the frustration with the issue the fact that the vessels were late and that you know that we were concerned by that i would have expressed the frustration of seamile but equally i gave f mil a fair hearing because they had a case to make as well which you've heard this was a total breakdown in relationships and i would have expressed that in the meeting and you know if there was a reason we couldn't have proceeded with expert determination or anything else that had a legal impasse then it had a legal impasse and possibly that's what jim mccall was referring to but let me press in the particular statement that mr mccall made which which is that you said the seamile board would resign which is fairly dramatic yeah i think it's fair to say as you've now seen from the evidence as it went on the the there was conflict between seamile and f mil and i was expressing that the relationship breakdown but there was no letter you know i've seen in evidence you know and when i'm hearing about that you know i've checked there was no letter about resignation from the seamile board um so you know i don't recall i don't remember saying that but i do remember expressing the concern about all the issues about how dissatisfied seamile was f mil was obviously clearly frustrated as well and they were having that dispute and i was trying to navigate a way through this in the interests of taxpayers interests island communities the workforce at the yard and to try and find a resolution so i was probably expressing my exasperation at the issue which i think having seen the evidence now you would well understand you've said that you found some government arrangements to be a barrier to resolving the dispute could you give us a little more information on that yes specifically transport governance arrangements particularly at the time um because we when i was genuinely when i was transport minister i just felt that having you know seamile as an agency the the the contractual arrangements as they were transport scotland and then when problems emerged of course i was been advised by a multitude of people at that point for good reason and i just felt that it's quite a cluttered landscape in transport governance at that point but of course when dealing with the daily issues as transport minister you also don't necessarily want to embark on structural reform when you were dealing then with the issues that we were dealing with but i have had a view for some time that the transport governance arrangements were not were far from perfect now that rec committee has made the same conclusion in their inquiry looking at the loan support for fml and in particular i would ask why did you prove the drawdown of 30 million pounds which was conditional on the vessel's progress because the progress wasn't there i mean there's clear evidence that the vessels were in delay already so given that the funding was linked to progress what was the justification so the government has a wider it's a fair question mr beattie but the government's a wider responsibility of course we had a responsibility to try and complete the contracts but our wider responsibility was also around the yard the yard's future the workforce and for that reason the government made other interventions and we we're in the conditions and i'm not entirely sure how much i can speak about the conditions without encroaching into commercial confidentiality some of it i think is in the public domain but there were conditions attached to the funding and the funding was primarily to help diversify the business trying to secure further work but of course help with the immediate cash flow issues ie workers needed to be paid convener workers needed to be paid i wasn't going to have a situation where the staff potentially were going to be made redundant get sent home not get paid and all the consequences that that could have had therefore the wider economic and community interests that we would have had in mind as a government at the time it came into that consideration in the loan payment so there were conditions and as part of that of course we appointed an expert to give assurance around progress on the vessels now it then turns out in addition to all the other advice i was telling you about earlier that advice was challenged and was then contradicted by others such was the nature of the dispute but the issue around the loans was a very specific intervention with the government's wider interests in mind and that was more than just the contract of course we were trying to ensure that the contract was progressed and the vessels were complete and they got on with that work and suppliers would be paid and the work would continue but i was not going to have the workforce sacrificed as part of this process so although there was it there was fairly solid information that the vessels were in delay and there was conditions around the payment of the 30 million that there had to be progress on the vessels you took a public interest view yes rather rather than simply a literal view of the contract wider i'd say public interest yes of course but wider interest because you know if if uh if there was an industrial difficulty somewhere and i know that convener was very fond and quite rightly so of industrial interventions you would expect the government to have got involved whether we had this contract or not would you not if jobs were at risk if there was the viability of scottish shipbuilding commercial shipbuilding and the Clyde was at risk you'd expect us to get involved now there's the the matters that we've covered on the the contract but the loans was part of helping the business diversify it get on with progress on the vessels that's why we had appointed an independent expert to try and reassure us because we were getting different messages between c mal f mal as to the nature of progress and the nature of difficulties so we brought in another independent expert we've got another view but we did try and use that information to help us with the drawdown of loan funding but i've been very clear on what the purpose of the loan funding was and the actual effect of it was to ensure the effect was to ensure that the business clearly could continue and i have got involved in other industrial interventions such as Michelin of course in Dundee where the company decided to withdraw and i got involved with interventions there to ensure that Dundee had a future Michelin had a future so it's not uncommon for the government to get involved where there was a risk to business or to communities or or expertise and i think if the yard had ever closed and the workforce was sent home i don't think it would ever have recovered from that i guess one of the most important things the other side of the corner really is how they spent the money and in your submission you have a fairly short response yes and information was forthcoming what was that information and how was it supplied to you at that point in the process we were being advised as well as the independent advisor transport scotland c mile of course we're we're feeding information information through their sponsor agency but pwc were engaged in the process as well so they were looking at the conditions and cash flow and other matters and i assume you'll come to the question what was the money spent on exactly yeah wages and supplies that was my understanding clear is that you put in these loans the business can diversify we can continue with work we'll make progress in the vessels the yard will have a future and i will continue to make progress but the money of course was actually spent in line with that but on wages to keep people working on the vessels and supplies so that contractors could be paid because of course there's jobs involved in that as well and of course if these vessels were successfully completed then the yard will have a future in an ongoing programme of work and they were also bidding for other work at the same time another reason to keep the yard going and what was quite a stressful and distressed time so you received the information on this from several different sources which must have been pulled together someplace is that is there a document that covers that so what i recall is convening meetings i convened meetings with all officials involved so we would have been advised by transport scotland other relevant officials whether that's you know from procurement or finance and the advisors from pwc so yes i had briefings with officials and as i've said earlier i can't go through my entire diary for so this is 2015 through to 2020 seven years but you know there were meetings there were updates ministers were briefed and i was satisfied with the i'm not satisfied with lack progress but satisfied that the information was forthcoming that you asked me about at the time community want me to carry on if you could briefly touch on the question of nationalisation calling then i'll bring graham simpson right let me let me touch on nationalisation nationalisation and one of the key things here is that the decision was taken to nationalise the company but there seems to have not been a full due due diligence carried out as would normally have been the case can you maybe comment on that how we how why that was the case what i would disagree with the premise of the question as i've said there were numerous meetings with numerous officials advisors from pwc and they are had reached a point clearly where all other opportunities and options had been exhausted and i think much of this information has actually been released in december 2019 is on the government's information release around the events leading to nationalisation we whittled down something like 27 options to about three and in the end there came a crisis point a critical point where it looked like fml was going to go into administration and therefore the government had to act if we wanted to safeguard the workforce and ensure that the yard had a future so as much due diligence it could be carried out was carried out at the time clearly we wouldn't have had access to absolutely everything but we had enough information and i certainly had enough information to judge that nationalisation was the right thing to do for many many reasons but foremost the three objectives were complete the vessels safeguard the jobs and give the yard a future and in the end that appeared to be and i still believe to be the case the right intervention at the time and that's why we took that decision so there was i think even the auditor general refers to this and his report there's no lack of documentation or information around this issue in terms of the decision to proceed with with nationalisation and certainly consider the options now my memory is that the countable officer and i can't remember his name said that only a partial due diligence could be carried out partly due to i think it was time that was quoted and availability of information so the point i'd make there is we carried out and i think i said this in my answer to your question mr beaty that we carried out as much due diligence as was possible at the time fml wouldn't have been under an obligation to give the scotch government and our agency's absolutely everything that we might choose to have and of course with conflicting reports on the state of the vessels and how long it would take to complete them it would have been hard to come up with an accurate assessment of progress at the yard than where the vessels were without having direct control in the end because of the conflicting nature of information that was forthcoming to government maybe that's what's meant by due diligence but there was no lack of due diligence there was no lack of inquiring into our options and no lack of effort in trying to find the right thing to do and i tell you exactly what the consequences would have been if we hadn't nationalised in the fashion that we did that day it would have gone into administration workers would have been sent home and i believe that that would have severely impacted in the yard's ability in the future to recover because obviously workers would have to find new jobs and they would lose the expertise so on and so forth so that continuity in a crisis i felt was necessary and absolutely the right thing to do given the decision was taken without a full understanding of the costs and challenges within the company and in the light of subsequent issues given its history do you still think it was the right thing to do nationalisation yes yes because it has allowed us to continue on the completion of the vessels taking much longer than anyone would like of course and costing more than anyone would have liked of course but we were determined to complete the vessels and clearly there was advice if we had started again it would take longer so complete the vessels safeguard the workforce because you know the workforce are blameless in this and i said earlier i didn't want the workforce to be sacrificed in this so i tried to ensure that there was continuity from one day to the next and the arrangements to continue with the efforts of the yard to complete the vessels safeguard that workforce and give the yard a future and incidentally mr beatie i believe that the yard does actually have a promising future and i wish them well in continuing but if the decision to nationalise hadn't been taken i fear for the consequences of the yard notwithstanding the regretability of failure to complete these vessels on time and on budget but i can assure you i exhausted every option throughout to try and complete the vessels support the workforce and give the yard a future through every intervention that i could thank you in the remaining minutes that we've got i want to bring in craig hoy briefly and then i'll ask graham simpson if he's got a question to put to you mr mackay craig hoy if you're just i'm in relation to nationalisation and you see all options were exhausted i just wanted to challenge that because jim mcall said that he put to you a qc's report that would have shown that a financial restructuring would have meant that fmil he and the government would have split any future risk potentially saving the tax per 100 million pounds he says he gave you that qc's report and that you ignored it or dismissed it without taking legal advice is that correct that is correct mr hoy that he did put that proposition to me and to the scotch government at the reason that i couldn't take that proposition forward because of course i explored it there was never anything that i didn't explore in hearing it sympathetically from from anyone involved in this issue but it could not proceed frankly that proposition because we didn't have a legal basis to proceed now some of this is already in the public domain that mr mcall had one legal opinion the scotch government would have had a different legal opinion and c mal of course as they have advised you um regularly take legal advice as well so i just want to state for the record i was advised by officials that that proposition could not be taken forward because it would have breached um the advice that we had been given okay and did you seek an independent qc's legal advice on that or did you just take the advice of officials no i legal opinion was sought to form that advice are you certain of that am i certain that we took that legal advice was taken to inform that opinion yes okay okay thanks graham simpson graham do you want to um put your question questions thanks very much convener um good good morning mr mckay morning good good to see you and um can i just ask you about this go go back to the preferred bitter decision have i picked you up right that you weren't involved in that at all the submission on preferred bitter yes that submission went to keith brown yes right so it was his decision and his decision alone was anyone else involved well i wasn't involved which is the question you're putting to me i suppose you'd have to ask others who else was involved in that but i think keith brown took that decision i as you know was an annual leave i can only speak to the decisions that i've taken and then i can't speak for what other people might know or might not know you can look at the copy list who has been copied into submissions i accept i accept you had a holiday but there must have been discussions before you went on holiday about that issue were you not involved in any discussions at all i would have been involved of course on state of progress but not not an indication of this is what's about to happen what i would have been indicated to me as a submission is about to come now the minister's not there the cabinet secretary can take a decision and that's what happened i wasn't there so the cabinet secretary took a decision at that stage on preferred bitter status okay so that's nothing to do with you but what was to do with you was the ultimate decision to award the contract and can i just be clear that you did know about the concerns of seamale when you took that decision yes as i've said this morning i was given a comprehensive briefing on the 8th of october about the concerns but also the resolutions to that and fundamentally what i was being asked to do was authorization to proceed not to revisit not to refuse you know not to go back to the start i was been asked to authorize to proceed and that's what i did okay based on all the information i had before me convener i've got just one one other area i want to explore and this is when when things started to go wrong you've been asked about this already you had a meeting with jim mccall in in the parliament in june 2018 and this is when seamale and fml were let's say out loggerheads jim mccall asked you to intervene he says and instructs seamale to take part in the expert determination process let's call that mediation and according to him you said you couldn't intervene so is that is his recollection correct so i i i again i think i tried to answer this to mr is mr beatie i think that was asked again me about this that i expressed concern about the whole issue but it wouldn't be true to say that i didn't make efforts to intervene i think i've quite comprehensively outlined the many efforts i made to intervene but specifically on mediation through transport scotland because member transport scotland is the sponsored body that engages with seamale i did encourage mediation i did encourage expert determination i did encourage all sorts of interventions including a review of what's the procurement carried out properly you know in-house by our procurement officials so i did exhaust every option possible that's that's not what i'm asking i'm asking about a specific meeting where he says you told him i cannot tell seamale to get involved in mediation i encouraged seamale to get involved through transport scotland a discussion with them and trying to find a resolution so much so seamale tells you that in the evidence they said in their evidence sessions that they they did feel that ministers wanted mediation but they couldn't do it and then they outlined the reasons they couldn't do mediation because they felt in their words there was no legal basis to take that forward so in different stages in mediation i couldn't agree the terms of reference when that could have been agreed couldn't get a mediator but fundamentally the reason expert determination or mediation couldn't have proceeded from memory was the advice was it couldn't lead to the conclusion which ffml fundamentally wanted which was more money for a fixed price contract and seamale's view is that cannot be done and should not be done and no mediation will sort that up that is you know in short why it was felt that mediation couldn't proceed in the words of seamale okay as advised to me finally for me convener would you agree with me that this has been a shambles from start to finish so i think there's two sides to this coin the first is that it is very regrettable that the vessels are not yet complete i look forward to them being complete of course everyone does particularly island communities and then i look forward to fergusons having a fergusons port glasgow having a future and so whilst of course i've said at the outset i'll take my share of responsibility and i think it's regrettable but equally every action i took had in my mind scottish shipbuilding island communities the workforce and let's not forget there was a cross party campaign to save fergusons which of course happened in 2014 so there's political support for fergusons i think across the board so whilst there's a lot of support of course we want contracts to be delivered with value for money so it is regrettable what has gone wrong and of course lessons need to be learned about that and that's why this committee's work is so important the previous committee's work is so important the auditor general work is so important but in saying i take my share of responsibility i hope the committee appreciates my efforts also to do the right thing by the yard by the workforce and by scottish shipbuilding so that it has a future and i do believe if it wasn't for the actions that had been taken by me and others at the time it wouldn't be here today okay look thank you just i've got one very quick probably yes or no uh question for you mr mckay which is are you mentioned in the passing there about whether it was a fixed price contract or not is it your belief that it was a fixed price contract that you approved yes it is thank you we've had a lot of conflicting evidence over the course of the last few months both in writing and orally and it's our duty as a committee to try to get to the bottom of that and i suppose exercise a sense of a test of reasonableness in in what we believe so can i thank you for your evidence this morning which i think has illuminated some of that in some areas it's perhaps created more areas where there appears to be conflicting evidence but we appreciate your willingness to appear before us and your frankness and if of course there are other issues on reflection that you want to bring to our attention then please don't hesitate to do that and again thank you for your time this morning and i'm now going to call the public part of this morning's committee to a close thank you