Economy, Energy and Fair Work Committee

Meeting date: Tuesday, December 1, 2020

Official Report 683KB pdf

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Scottish Offshore Wind Sector Inquiry

We continue our inquiry into Burntisland Fabrications, the offshore wind sector and the Scottish supply chain. I welcome our first panel of witnesses, who join us remotely: Jason Fudge, president of DF Barnes; Sean Power, vice-president of DF Barnes; and Hazel Nolan, GMB Scotland organiser—I particularly thank Sean and Jason for joining us from Canada at what is a fairly early stage in the day.

Our broadcasting colleagues here will control your microphones and cameras, so please allow a few seconds before you speak, so that we can hear everything that you have to say. If you want to speak, please just type R in the chat box on your screen or raise your hand; the clerks will pick that up and let me know that I should bring you into the discussion.

Let me start with a general question. After the recent announcements, what are your views on the future for the supply chain for offshore wind development, for Scotland and Scottish businesses?

Good morning, convener. From our perspective, we can speak about the fabrication aspect, particularly in relation to foundation work for the renewables sector. Obviously, we are quite concerned. The state aid limitations and market conditions in the United Kingdom offshore wind sector are challenging for the domestic supply chain—we have had that discussion numerous times with various officials from Government. Our opinion is that that is one of the primary reasons why BiFab has had a challenging time in the past years, in particular with the renewables sector.

If neither of our other witnesses wants to come in, we will move on to other committee members. We have approximately an hour for this evidence session. I do not know whether Hazel Nolan wants to come in.

It needs to be pointed out that, in Scotland, almost every offshore wind turbine has been built by a state aid-backed company. That is extremely important because, with BiFab facing potential collapse, ministers know what the realistic prospects are of a domestic supply chain in Scottish offshore wind and of Scotland being the world leader in offshore wind. We have just had two projects amounting to over £7 billion, and not one job in manufacturing will be brought to Scottish shores as a result.

We may be having slight difficulties on the technical side of things. Everyone is online remotely apart from two committee members, the clerks and me. We will just have to work with the system. I will bring in Richard Lyle, who is joining us remotely.

My questions are for Jason Fudge. What investment or financial guarantees were in your business plan when you took over BiFab? Have you met all those commitments? Would you be willing to share that business plan publicly with the committee? How much has DF Barnes invested in BiFab since its acquisition of the firm in 2018? What has that money bought and achieved?

Our business plan was set out in great detail, and it was provided to the Government late in 2017 and into early 2018. As part of that business plan, we set out our vision for BiFab, and we set out how we would implement that business plan in conjunction with the Scottish ministers, who were the other shareholder. The business plan’s intent was always that the Scottish ministers would be the primary financer of the business. It set out the money that was required as part of the revitalisation of BiFab, and that money was coming from the Scottish ministers. That was agreed between the parties.

There was quite a lot of discussion about the investment that might be required in the yards in Fife and Lewis, which are primarily Government owned, particularly the yard in Methil. We decided and said in our business plan that we would convene an infrastructure working group, and that group began in 2018. It met numerous times and included folks from BiFab, DF Barnes and JV Driver in Canada, the Government and local government in Fife. The group met and agreed on primary infrastructure works that would happen, particularly at the Methil yard. Concreting happened there. It was agreed that that investment would be paid by JV Driver, as was done in previous agreements with BiFab, as part of the increase in rents for the yard.

The infrastructure investment is not the primary reason why BiFab has struggled. That was set out in our business plan. The primary reason why BiFab has had a challenging time with the renewables sector has been driven—Hazel Nolan referred to this earlier—by open market competition, state aid legislation and the fact that we have an ever-increasing scope of competition from state-financed enterprise. We ran into that situation many times with other entities in Europe and see it now in particular with firms from the middle east and Asia.

If we understand the market that BiFab must compete against, we can see that there is no level of investment that could overcome that. Developers must agree supply chain plans that guarantee a minimum amount of work for the Scottish supply chain. That is what happens in most jurisdictions in which we operate and we view it as a key success factor for supply chains in the Scottish renewables sector.

This is a question that I posed last week. If we cannot get a contract because the price here is too high and companies can buy from east Asia or somewhere else, how will we win contracts? How can you, or the Government, ensure that work goes to BiFab? I am sorry if I am straying into someone else’s question.

There must be supply chain agreements. Those are the basis of major energy infrastructure work here in Canada and in the United States and contracts for executing infrastructure in Africa. Many jurisdictions have local supply chain protection. If we look at land-based projects, such as an energy infrastructure project, in the UK, that work is largely completed in the UK because of the type and location of the work. That type of work requires less supply chain protection than a marine-based project, for which the work can be brought in from elsewhere.

When we first looked at acquiring BiFab as a going concern in 2017, BiFab’s competition came at that time from the UK and northern Europe. The scope of that competition had increased by 2018 to include all of continental Europe, and then it expanded to include the middle east. Competition now comes from across the globe, particularly from Asia. Much, if not all, of the current foundation work for offshore UK renewables projects is happening in the middle east and Asia, which have the lowest costs because of cheap labour, state aid and economies of scale. There is virtually nothing that the UK supply chain can do to compete with those companies on price, other than creating supply chain protection for the industry.

We never expected 100 per cent of the work to be done in the UK. We know that the UK does not have the capacity to do 100 per cent of the work, particularly on foundations. However, a reasonable amount of that work could have been executed in the UK, had there been the appropriate agreements with developers.

It was suggested last week that Scotland does not have the facilities.

Why does DF Barnes think that the Scottish Government should provide the financial guarantee for the Neart na Gaoithe project? What prevents DF Barnes, or its parent company, JV Driver, from providing that guarantee? Are you suggesting that Government should provide the guarantee?

09:15  

When we took over the business in 2018, the first thing that we did was to add BiFab to our global bonding facility. That was not easy. I was involved in that process, which took many months. BiFab was in a challenging financial and commercial situation and was in effect an unbondable business. We worked closely with BiFab’s management and with our bonding provider to get BiFab on to our global bonding facility. We provided the first insurance and guarantees for the project for 150 pin piles for Moray East. That was largely executed on Lewis.

Sometime towards the end of that project, an annual review undertaken by our bonding agency reviewed the commercial situation of BiFab, the market conditions and the contractual forms that are utilised in the offshore renewables industry, and determined that the associated risk profile was beyond the scope of what the bonding agency could sustain and that, therefore, 100 per cent cash security was required for all future bonding. We set that out in a statement that we made last week.

We brought that to the attention of the Government, because that was not part of our plan. It was something that happened unexpectedly and we wanted to work together to find a solution, so that BiFab would not be precluded from future works, particularly because we were negotiating the NnG contract at that time. We discussed it with the Government, the Government discussed it with its advisers and it was determined that the Government could provide the bond and guarantee for the NnG project. That was put in front of the finance committee sometime late in 2019 and commercially approved, based on the award of contract.

Thanks for that.

There is a supplementary from Graham Simpson.

Hello, Jason. I really appreciate you either staying up late or getting up very early, because I realise what the time difference is. I am not sure that I heard an answer to Richard Lyle’s question about how much DF Barnes has invested in BiFab since it was acquired in 2018. Did you give that answer? I did not hear it.

I would not be able to tell you exactly what we invested in terms of financial dollars, but I can tell you that we invested a huge amount of time and resources in terms of our people here in eastern Canada, particularly me and Sean Power, who are in this committee session today. We spent more than 50 per cent of our time involving ourselves with the management team at BiFab, supporting them and actively pursuing bids. A project management team came from Canada to support the pin piles project. We invested in training and the bonding facility and we worked closely with the infrastructure working committee to make sure that there was an appropriate level of investment in the yards for them to be successful. Since our partial acquisition of the business in 2018, alongside the Scottish Government, none of our pursuits, particularly in the offshore wind sector, was ever not awarded because of lack of infrastructure or investment in BiFab. They were always lost due to cost competition from foreign fabricators.

You must know how much money you have invested in the company. You must have an idea. Jason Fudge or Sean Power, one of you must know that figure. What is it?

I can probably come in on that. On this whole type of investment, the committee will probably remember that, when we began looking at the acquisition of BiFab, it was a going concern. It was going through a project called the Beatrice project. However, just before we were able to acquire BiFab, the Beatrice project got into some trouble, the company got into significant trouble and all the cash was depleted. Were it not for Government support at that time, the company would certainly have closed and gone into administration. It was in that atmosphere that we came in—the Scottish Government invited us in—to take a look at operating the company and restoring it over a period of time. We agreed to do that. At that time, BiFab was not an investable company, because it had just lost all its money and had significant trouble with the execution of a contract. We thought that there was a lot of promise in both the management and the workers of the company, and we wanted to do business in Scotland.

As for investment, however, after that kind of significant loss and near catastrophe, it was not a company that we would put millions of pounds into. That would not have made sense. In the discussions with the Government at the time, it was always understood that we would come in and try to restore the company, but we would not be providing a lot of cash. The Scottish Government agreed to that and understood that, and it thought that it would be the primary financers, as Jason Fudge said.

That is fine but, while we know how much money the Government put in—£37 million, or probably more than that, in fact—neither of you has yet answered the question of how much money you have put in.

You have to remember that, of the £37 million, the lion’s share, by far, went to saving the company from the Beatrice project.

I do not think that we are going to get an answer to that question.

All £37 million of the money that Sean Power has just referred to was put into the business to save the Beatrice contract. There was a further working capital facility that was provided by Government after we acquired the business. The £37 million was a pre-existing issue, from before our ownership of the business. That level of investment was much smaller than was required by the business, and it was set out in our business plan.

Obviously, I am not going to get a figure out of them, convener.

What was wanted—as Mr Simpson asked—was the figure invested, not the amount from the Government, which we know.

I will pick up on the points that have just been made. I note the statement that was made by BiFab last week, which said:

“The final purchase discussions and agreements always envisaged that the Scottish Government would be the primary financier of the business as it recovered from the Beatrice project”,

which is where the £37 million went. The statement went on to say that the Scottish Government

“to date have provided less than 50% of the working capital”.

If, at the time of the discussions for the final purchase, there was recognition of that in Government, what changed? The Government minister who was dealing with the matter at the time was the finance secretary—the minister obviously changed—and the Government department seemed to shift from finance to a different part of Government.

In your opinion, what changed? You had an agreement and it seemed clear that the Government understood that it needed to invest. In late 2019, the Government was prepared to put up the bond and went to the finance committee to do that. What changed? That is the question that the workforce are asking.

It is a great question, and we do not have the answer to it, unfortunately. It is a question for Government officials and ministers.

In our view, and according to the general line of communication, there were challenges in providing additional financing in a way that would have been state aid compliant. We have had an on-going discussion with the Government on that subject for years. That point was identified pre-acquisition, and it was discussed during the acquisition process to ensure that our financing was state aid compliant.

We recognised that as a challenge for the business, not only from a financing point of view but from a competitive point of view, in relation to European Union open market rules. We view them as being akin to each other—state aid in terms of investment into the business but also challenges associated with state-led supply chain preference policies. That made the situation very challenging for BiFab throughout the term of our ownership.

What changed in 2020? Again, it became evident to Scottish Government ministers—we have had no feedback on this—that they could not provide additional financing for BiFab in September 2020 because doing so would not be deemed to be state aid compliant. We were shocked by the decision, because we had just signed a letter of intent to enter into a contract with Saipem for the NnG contract that would have put 400 or 500 people back to work in Fife.

The contract, which had been negotiated for quite some time, was delayed because of the Covid-19 pandemic. However, in the face of the pandemic, and despite the major infrastructure project that would put a bunch of people back to work, the financing, assurances and guarantees were withdrawn. We were shocked.

Can I follow that up, convener?

Please do.

I have read the legal opinion that GMB Scotland got on the issue. That certainly seems to contradict what the Government says. Have the company and the trade union been involved in any of the discussions around the Government’s legal opinion? Has either the company or the trade union been involved in the discussions between both Governments and the BiFab working group?

We have provided information to the Scottish Government and its advisers on state aid matters. We were not involved with the BiFab working group, which was particularly frustrating for us because the management and directors of BiFab, alongside our union partners, were instrumental in facilitating the working group.

We have not had as much involvement. We do not understand all the ins and outs of state aid compliance, because that was always a matter for Government officials. We brought up numerous options and discussion points that we thought were relevant, particularly in relation to the NnG contract.

The intent of EU state compliance and open market economics is—at least in our view—to ensure that there is fair competition between all member states of the EU. In the case of the NnG contract, we were not even competing against other fabricators in the EU—all our competition was foreign. Therefore, we provided our opinion on the matter that, while acknowledging that we are not experts on state aid compliance, we did not see how state aid compliance could apply in a situation in which we were not even competing against other firms in Europe. However, that did not seem to impact the view of advisers or Government officials, and, unfortunately, their decision on state aid compliance has not changed.

Was GMB Scotland involved?

I would say that it was involved in a very limited capacity, if at all. Perhaps Hazel Nolan can answer that question better.

I agree with that assessment—we have had limited communication. In fact, that has been one of the issues that we have had with the whole process.

There are a number of questions that we would ask, based on the legal advice that we have submitted to the committee for the purposes of this session. Our understanding is that the Scottish Government made clear its guarantee in September 2019, so why did it take so long for it to pull it and why did it do so only at the last minute? What evidence is there that it tested the market? What evidence does it rely on that providing support would be in breach of state aid rules? Why will the Government not release that information?

The matter should be subject to judicial review. Obviously, the committee is not in a position to call for a judicial review, but we will be calling for that, and we would like the committee to call for the release of the Government’s legal advice.

I ask Hazel Nolan to clarify—

I can add one thing to that statement, if you do not mind, convener.

Briefly.

Part of the reason why there were issues of state aid compliance was the matter of time. The support was state aid compliant in late 2019 and in early 2020. Then came the Covid-19 pandemic, which is obviously beyond the control of the business, and that impacted many businesses in the wider UK, particularly in Scotland. That is what pushed out the ultimate award and commencement of the project. At that time, when there was such a negative impact on employment globally and there was an opportunity to put 500 people back to work, the position moved from being state aid compliant to being non-compliant in the Government’s view. During that time, we also had a request for proposals for another offshore wind project, Seagreen, for which the scope of our competition was entirely Asian. BiFab was not successful in getting that project, purely because of the price. The amount of time also had a negative impact on the state aid view.

09:30  

I want to go back to Hazel Nolan briefly, before we go to questions from Colin Beattie. You said that you are calling for a judicial review. Surely, you have to decide whether to take the matter to court; it is not for the committee to initiate judicial reviews. What did you mean by that?

The only way that we would be able to get the information is through a judicial review. I did stipulate that that is beyond the remit of the committee, because it cannot call a judicial review on its own body.

It is something that the GMB can do. It can initiate a judicial review, can it not?

Potentially. Fiona Hyslop has told us that the only way that we will be given the legal advice that was provided to the Scottish Government is if there is a judicial review. That is what a Scottish Government minister has told us.

Yes, and the advice that you have received, which you have shared with the committee, indicates that that advice proceeds partially on incomplete information because of the unwillingness of the Scottish Government to reveal the advice that it has received.

That is correct.

We will move on to questions from Colin Beattie.

I would like to pursue one or two angles on the question of this guarantee business. Just to clarify, is it DF Barnes’s view that BiFab could get a financial guarantee to cover the NnG contract from the private sector? Would it be a question of the price of that particular bond, or is it completely impossible?

It would be extremely challenging for BiFab to get that assurance and bonding on its own merits.

Going back to the situation of DF Barnes and JV Driver, which you said went through a challenging period in terms of their ability to get bonding, why are you not providing that guarantee?

We addressed the situation in the statement that we made last week. Just to clarify, it is not an issue for us to get bonding or provide guarantees. The company has the ability to do that, and we can do it for companies within our business that qualify for the bonding and guarantees that come through our bonding agency. Upon review of BiFab, our bonding agency determined that the company was, in effect, unbondable and that it would require 100 per cent cash security for any future bonds and guarantees.

Just so that the committee is aware, we are talking about large sums of money that are required as part of offshore wind contracts to provide assurance that the work will proceed as planned. The terms of the warranty bonds and performance bonds are quite long. We attempted to negotiate those terms to the lowest common denominator, but we were competing against large, state-led firms from outside Europe that have very significant resources. If another fabricator is prepared to provide a bond, BiFab will also have to provide a bond.

We are talking about large amounts of money—millions and millions of pounds—that would need to be cash secured and outstanding for up to seven years. That is the scope of what you are talking about from a bonding and guarantee point of view.

You are saying that the term of those bonds can be seven years.

Yes. For clarity, the term of the bonds is typically the duration of the execution of the work, which, in these contracts, typically runs for between 18 and 24 months. There is then a minimum, in many cases, of five years for the warranty period.

Are you aware of any other Governments in Europe providing financial guarantees to companies in the offshore wind supply chain?

We cannot say for certain. We certainly do not have insight into those businesses and how the assurances and guarantees were provided. However, we will bring to the attention of the committee the example of a state-led fabricator and ship repair business in Spain that we competed against on numerous occasions. It is state financed and state owned in Spain, and we were uncompetitive against that business on the basis of the pricing that it could offer, because it was a state-led business, and the assurance package that it could offer.

One pursuit that was particularly frustrating for us, as shareholders in BiFab, and for the BiFab management team, was the Kincardine offshore wind project. If anyone has read the consenting documents associated with Kincardine, they will know that it was set out in those documents that 100 per cent of the fabrication was going to happen in Scotland—in fact, 100 per cent of the fabrication for that project happened in Spain.

That brings us back to the challenge that we identified around making sure that there are supply chain plans that are enforceable and that protect the Scottish supply chain. In our view, on the basis of a commitment from the developer, 100 per cent of that work should have been done in Scotland; however, 100 per cent of the work was done by a state-led business in Spain.

I recall that we heard allegations in previous evidence sessions that state aid is not a level playing field across Europe. We have not investigated that as a committee, as it is outwith the remit of what we are doing. Nonetheless, do you have any comment on the issue of there being a level playing field in relation to state aid across Europe?

State aid compliance rules are not our area of expertise. However, in my opinion—which is based on my involvement in the industry and, in particular, BiFab’s scope for competition over the past two and a half years—it is worth investigating how all the countries of the EU manage state aid compliance. Although we cannot say that any one country or business is not complying with state aid rules, operating in Scotland was particularly challenging for us, and it seemed to be less challenging for other businesses to operate in other parts of the EU.

Earlier in the meeting, it was mentioned that the £37.4 million of Scottish Government investment, which included equity and loan facilities, was purely to save the Beatrice contract. Will you say a little bit more about that, including about whether the Scottish Government knew that that investment was not necessarily about securing further contracts but simply about saving the Beatrice contract, and how many jobs that was associated with? I would like to hear a bit more information on those points.

The entirety of the £37 million that Maurice Golden referred to was invested in BiFab to complete the Beatrice contract; we and the Government are fully aware of that amount. That amount, and a small additional amount shortly thereafter, was converted at the time of our acquisition into the Government’s equity position in BiFab. It is therefore clear that that amount was 100 per cent specific to the close-out of the Beatrice contract.

How many jobs were associated with that investment in completing the Beatrice contract?

That takes us back about three years, so I cannot say specifically, but about 1,000 people would have been working on that project to close it out. Sean, is that your recollection as well?

Yes—between 1,000 and 1,200 people were working on it.

Thank you for that. Since that contract, did the Scottish Government invest that amount on the presumption that you would be successful in winning new contracts, which have since transpired? Were there any discussions around that, and did you have any communications in relation to that?

That initial money was purely for Beatrice, so, although it was helpful in the sense that it kept BiFab as a going concern, ultimately it was consumed entirely by completing that project. Therefore, it did not provide access to capital for future projects and pursuits.

Okay. Similarly, was the separate loan facility of £15 million after the DF Barnes acquisition to help with on-going work or to help the cash flow?

That was what we refer to as a restructuring loan. It was agreed in the early days, prior to our acquisition of BiFab, and, as you say, it was intended to restructure the business, to help in the pursuit of contracts and to provide working capital for the execution of projects including the Moray East pin pile project. We did a subsea infrastructure project for FIRST Exploration & Petroleum Development, which was exported to Africa and was, in part, intended to finance on-going works for the NnG project as well.

Thank you, Jason. Over the past few years, how has communication and non-financial support been received from the Scottish Government and its enterprise agencies? Have they been working closely with you? Have they kept that dialogue going? Has that helped you to continue or not?

Let us go back to before we acquired the business and became a shareholder in BiFab. Our relationship and interaction with Government were, in our view, incredibly strong. We happened to be working with the business on a going concern acquisition prior to the problems that were encountered on Beatrice. That translated into an on-going dialogue with Government, as part of supporting the business through that difficult time and restructuring it for future pursuits.

Our relationship was incredibly strong, but what the Government did to support the business at that time was significant; it brought all its agencies to bear in support of BiFab and the Scottish supply chain. We had a very strong working relationship with the minister in place at the time, then Derek Mackay became the minister responsible, and we had a strong relationship with him and his team. We continued our pursuits and we were about to begin the NnG contract when we ran into the pandemic, which was unexpected for everybody. During that time, we could not travel to the UK, and a lot of issues were competing for the attention of Government officials and Scottish ministers. In the past six months, we have had less interaction with Government officials, and it became challenging for us to continue in our pursuits.

09:45  

Ultimately, in September, we were advised that the Scottish ministers would provide no further support to BiFab. As I said, that was incredibly shocking for us. We had very little, if any, advance warning, and we were about to put 400 or 500 people back to work in Fife. We had worked so hard on the contract. It was pretty disappointing.

We heard from GMB Scotland that every wind turbine in Scotland has been built by a state aid-backed company. In relation to NnG, was the contract that you thought that you could win predicated on some form of state aid finance? The Scottish Government and you would have known the broad cost differentials between you and your competitors. Were you expecting some form of continuing support from the Scottish Government in order to be able to continue to operate at a level similar to the level at which you had operated previously?

Up to September, we were expecting the Government to support the business with the bonding guarantees and working capital facilities that had previously been agreed. When that support was withdrawn, it put the business in a very challenging situation.

Outside that, we had on-going and recurring dialogue with Government officials and ministers regarding the competitiveness of the UK and Scottish supply chain without supply chain protections.

The Government was working very closely with us to improve market conditions in the offshore wind sector. Unfortunately, improvement was happening much slower than we and other businesses in the Scottish supply chain for offshore wind would have liked. The ScotWind initiative, which will put greater onus on making developers live by the supply chain plans that they present as part of the consenting process, is a huge step forward. Unfortunately, the support for BiFab has been withdrawn at a critical juncture, prior to ScotWind having a lasting and significant impact on future projects. That is also disappointing for us.

Thank you.

Many nations have supply chain protections that limit the amount of international sourcing that is available to major energy infrastructure projects. No such legislation exists in Scotland or indeed the United Kingdom. Have DF Barnes and the GMB made representations and suggestions to Governments? Have you asked why we do not have such protections? I think that people in Scotland will be astonished to hear that, although the company that got the contract for Kincardine said that 100 per cent would be fabricated in Scotland, 100 per cent was fabricated in Spain. Does that mean that we need legislation? Do other European countries have legislation?

I think that Jason Fudge has said that the problem is that there is no protection and no enforcement. There are contractual conditions, as Mr Rowley said, but they are not enforced. I suppose that there are two aspects to that. Is there a need to change the law, or is it just a question of contracts being enforced before the courts—instead of just talking about that—by whoever has the power to do so, which in this context is, I presume, the Scottish Government?

I will speak to the issue from BiFab’s point of view. I think that the most significant changes that can be made that will have a lasting and positive impact on the Scottish and UK supply chains for many things, including the offshore wind sector, are legislative changes to provide protection to Scotland-based and UK-based business.

Many of our businesses operate in Canada, where we work on large energy infrastructure projects, such as oil and gas and hydro, although not offshore wind. All our jurisdictions have supply chain protection. When a developer or a proponent wants to develop an offshore oil and gas platform or a major hydro project, they negotiate with the Government, and the Government and the proponent agree on what percentage or components of the work it will be mandatory to have done in the local supply chain. That is legislated in, as part of the approval of the project, which means that the developer or the proponent cannot not do that without paying massive penalties that would be in excess of what they would pay to get the work done in the local supply chain.

Those protections are important. They are good for the local supply chain and, importantly, good for the people who, ultimately, will pay for the energy and the power that come from the projects. In addition, such protections help to overcome major differences in the cost structure of businesses that operate in different jurisdictions, which are driven, in particular, by people’s pay. The pay of those who live in more developed nations such as the UK, Scotland and Canada is much higher than the pay of those in other, less developed parts of the world. Such protections ensure that we can have good, high-paying, skilled jobs that enable the work to be done in a safe way, at the highest level of quality and in geographic proximity to the projects, and which allow the people and families who will pay for the projects by paying for the power and the other energy that they produce to get the economic impact from those projects.

We are a huge supporter of local supply chain regulations, legislation and plans. That is what we see in Canada, the United States and other jurisdictions, and we think that it is important for people and businesses in Scotland, too.

Hazel Nolan, would you like to comment?

Yes, I would. I know that most of this morning’s session has been focused on the ins and outs of the NnG and Seagreen projects, but more than 10 years ago, we were promised 130,000 jobs in the renewables sector by 2020. We have a couple of thousand jobs when it comes to construction, and the whole sector in the low-carbon renewables economy is worth about 20,000 jobs. Therefore, we are more than 100,000 jobs short of the predictions that we made. That is not down to the intricacies of the Seagreen contract. For example, why were the yards not concreted years ago for that investment? That comes down to a lack of a holistic strategy at a UK and a Scottish Government level. That needs to be pointed out.

However disappointing it is to lose out on Neart na Gaoithe and Seagreen, we have missed out on a litany of contracts. France is a country that, historically, has been overreliant on nuclear and has come to the renewables industry for offshore wind quite late, yet it has made it clear that companies that want to win contracts to produce offshore wind in France need to build in France.

Earlier, we discussed the cost impacts. There is also an environmental impact of putting all the offshore jackets on diesel-powered ships and sailing them halfway across the world. That needs to be taken into account just as much. We have a situation in which Scotland has historically been a world leader in the production of offshore wind and a world loser when it comes to generating jobs in this country.

I have two other quick questions. Earlier this week, BiFab issued a statement in which it said:

“Recognising the growing state aid challenges faced by Scottish Ministers ... JV Driver offered, on numerous occasions, to transfer some or all of its shares in BiFab to Scottish Ministers at no charge to the Scottish purse.”

What difference would it have made if the ownership of the company had sat with the Scottish Government—if Scottish ministers had taken up that offer? Briefly, what are your thoughts when you hear Fiona Hyslop stand up in the Scottish Parliament and say that part of the reason behind the situation has been the unwillingness of the parent company and major shareholder to provide working capital?

Those are great questions. When it became evident to us that it was going to be challenging for the funding agency to provide assurance for BiFab, we discussed many solutions and ideas with the Government around replacing the assurance and guarantee coverage that the agency had previously provided to the business. Ultimately, it was determined that the Government could provide the guarantees on a state aid-compliant basis, and that is what was agreed and put in front of the finance committee late in 2019. That was what we considered to be the solution and what we and, in our view, the Scottish Government were intent on doing, up until the support was withdrawn in September.

In relation to the transfer of ownership of the business, things became increasingly challenging due to the pandemic and market conditions being in a distressed state, and we understood that those circumstances would be considered as part of state aid compliance. We again discussed solutions with the Government, which said that the most important thing was that the business survived and that we could continue as the shareholder and major stakeholder.

Beyond the scope of our interests in the business and in relation to the Scottish supply chain more generally, we said that, if it made sense to transfer ownership at no cost to the Scottish Government and if that facilitated solutions for the business, we were prepared to do that, because the important thing was that the business continued to survive. Unfortunately, that did not happen. We cannot say whether the situation would have improved or whether that would have had no effect on state aid compliance, because that was a matter for Government officials and advisers. However, we put that offer out there as a mechanism to ensure that no stone was left unturned in finding a solution for BiFab and assurance for NnG.

Graham Simpson has a few brief questions before I bring in the deputy convener, Willie Coffey.

I want to go back to the state aid issue and the legal advice that Hazel Nolan has had. I have read through that advice, which seems to be saying that the Scottish Government could have provided a guarantee and that, even if it felt that it could not do so right now, it could defer the decision for a few weeks until 31 December, when the EU state aid regime will not apply here. Would you agree with my analysis of that?

I guess that I would. I mentioned France earlier. When we had our last summit on renewables, I asked the minister what the difference was between France and Scotland, for example, and I was told that the French have more vociferous lawyers. That is a really disappointing response from the Scottish Government.

I believe that this is ultimately down to political will. Our legal advice has been provided, but I repeat the caveat that we do not have the legal advice that has been provided to the Scottish Government—I make that clear again. However, I agree with the sentiment of your point.

You mentioned that Fiona Hyslop had told you that, in order to get the legal advice that was provided to the Government, you would have to embark on a judicial review. How did she communicate that to you?

10:00  

I held a meeting with members of the Scottish Trades Union Congress and minister Hyslop’s office. Again, we asked formally for the legal advice, and the minister said that the only way that that advice would be released would be under judicial review.

That was said at an in-person meeting, or a virtual meeting, so she spoke those words—she did not email them to you or anything like that. It was in a meeting.

Yes—it was in a meeting.

Good morning, everybody. My questions follow on from the point about state aid rules. The cabinet secretary stated clearly that state aid rules make it impossible to intervene, and that view is shared by United Kingdom Government ministers. Has the GMB pursued that direction of travel by seeking the UK Government’s view on all this?

Yes, we have. From the moment that we heard about the situation regarding the guarantee and the effect that that would have on the BiFab yards, the GMB pursued a dialogue with the UK Government. One question that needs to be asked is, at what stage did the Government began to initiate a conversation with Westminster in order to intervene on the issue?

Our information tells us that that was very late in the day, despite the fact that it knew more than a year ago that it was going to need a further guarantee, and it rescinded that at very short notice. The committee should take that up.

So it was the view of UK ministers, too, that it was not possible to intervene in such circumstances. Is that quite clear? Is that correct? They both had that view.

That is what they wrote in their statement; I have no reason to dispute it.

In order to clear that up, I have a question for Jason Fudge.

Some committee members have asked questions about your company’s level of engagement, involvement, investment and so on. Can you explain something to us? How can any of us reasonably expect a successful outcome if your company and the parent company, JV Driver, have not really invested in anything other than your own staffing resources and expertise? There has not really been the level of investment of capital or anything from the two parent companies that, let us say, make such projects a success. How would you respond to that?

We set out a business plan that could have been very successful for BiFab. That plan set out that we were going to finish the Beatrice project and revitalise the business in its existing markets.

When a business is trying to turn things around, the primary focus—at least in our view—is on opportunities that are closest to the business at home. Numerous multibillion-pound projects were going to be installed within a stone’s throw of BiFab’s own facilities.

Our view, which was shared by Government at the time, was that BiFab had, and should have had, a competitive advantage, and should be able to pursue, and be successful in pursuing, those projects. We did that vigorously. All our staff, right through to our senior management team, which is based in western Canada, pursued and supported that initiative vigorously.

Ultimately, the reason that BiFab was not successful in all its pursuits—it was successful in some of them, but it was unsuccessful in the major projects—had nothing to do with the level of investment in the business or in the yards. It had to do with foreign, international, low-cost competition, which was, in many cases, state financed. That is the single largest factor that led to the situation that we currently face with BiFab.

Hazel Nolan gave you some numbers on the limited impact, from an employment point of view, of the offshore sector on the Scottish and UK supply chain. It is shocking for me to look at that, as the president of a company that—along with our parent company in western Canada—has invested a lot of time, effort and resources in BiFab. The UK and Scottish supply chains were set up for success and to take on a global leadership position on offshore wind, as a result of Scotland’s success in the oil and gas industry.

Scotland was a world leader—Canada’s offshore oil and gas sector is in its infancy compared to how established and successful the Scottish offshore sector has been. Many of the businesses that could have been successful in offshore wind had all the necessary skills from the oil and gas sector. The Scottish and UK supply chains had many advantages, but unfortunately there was not the necessary supply chain protections. The financing for the projects is extremely onerous and is led by large investment firms that require huge amounts of assurance and warranty. Given what we have seen in the past two years, any business that wants to be successful in the offshore wind sector will need Government support in its endeavours to win contracts. The businesses need protections from the Government. If they do not have that support the work will all go to the lowest cost provider.

We have not yet discussed the contracts for difference auction process, which is what drives that in part. That process is a race to the bottom. It is based purely on price and, in our view, it is not reviewed substantively on the basis of local supply chain commitment—the successful companies are those that have the lowest CFD rate. The lowest one—probably of all time—that has come out of the auction process is the Seagreen project. From the point of view of the scope of competition for BiFab, that project will be executed 100 per cent outside the UK—it will be a 100 per cent Asian and middle east solution. In some ways, we cannot blame the developers for doing that because the contract for difference auction is so aggressive that they were driven to the absolute lowest cost solution, which was in Asia.

Thank you for that detailed answer. My colleague Gordon MacDonald is going to ask about contracts for difference, so I will hand over to him.

Before I ask questions on contracts for difference, I have a question for Sean Power on employment. When you gave evidence to the committee back in April 2019 you highlighted that the Fife yards had only 30 employees, and that most of those were in management positions, alongside a couple of union folk. Can you give us an update on the current situation?

Since that time, we have executed a couple of successful projects that we are pretty proud of and that we have not talked about much today. The Moray East project was executed first in Lewis and then in Fife, using a combination of both facilities. That employed about 150 tradespeople at the time, as well as the management group. There was another project for offshore oil that was also very successful and employed about 30 or 40 people in Fife. Those projects spoke a lot to us about the ability of the workforce to execute successful and safe projects. We were pretty excited about those projects. Employment probably peaked at about 200 or 220 people during those projects. We are now back down to fewer than 30 employees—about 15 or 16.

JV Driver is a multimillion-pound company with fabrication yards in Canada. Have you brought any work to BiFab from any of your other yards?

We have not done that because several things got in the way. Primarily, Covid-19 has meant that some of our opportunities have been pushed back.

As Jason Fudge pointed out, it was always our first intention to compete successfully in the local market for projects that were low-hanging fruit. That is where we have been focusing so that we can try to win work, get people back to work and prove the company’s capability. There has not been a lot of work from JV Driver simply because the world’s economy has not allowed for it due to Covid. Beyond that, our focus has been 100 per cent laser sharp on projects in Scotland.

Jason Fudge started to touch on contracts for difference and he has already highlighted that he would like to see supply chain plans with a minimum work guarantee for Scotland’s yards.

We heard evidence last week that competitive pricing has driven down the amount of funds that are available to fabricators and developers, which are being forced to look to the far east, and we have heard today about the lack of supply chain protection and that people are not held to account on contract conditions. One of the reasons for introducing contracts for difference was to provide the cheapest electricity in Europe to consumers. The European Union carries out regular comparisons across Europe, and United Kingdom electricity prices are in the top third of 30 countries.

Through JV Driver and others, I know that you have contracts all over the world. Are contracts for difference used anywhere else in the world?

Unfortunately, I cannot answer the specific question about whether those contracts are used elsewhere. Certainly, in other parts of our business we have not come up against an auction process such as that.

The intention of contracts for difference, which is to try to keep the rates as low as possible for the consumer and to try to make pricing competitive to reduce the impact on families in Scotland and the UK, is obviously positive. However, it has the unintended consequence of moving thousands and thousands of high-paying jobs out of the UK and Scottish supply chain and into low-cost jurisdictions in the middle east and Asia, to state-led businesses in many cases. The economic impact of that is incredibly substantial, and it is lost.

In our view, a broader view needs to be taken on the CFD auction process. Yes, of course we need to keep prices competitive for the rate payer. However, we need to make sure that we have the right support for our economy and supply chain, so that the rate payers who are looking for work in those sectors have a job to go to.

We could be thousands and thousands of jobs ahead and, in turn, the funds generated could be reinvested into the economy in restaurants, retail, car sales, home sales and everything else—it could grow from there. In the early days, Scotland and the UK would not have had enough capacity to take on 100 per cent of those projects, so we are looking for a relatively small piece of the pie. When we had those discussions and worked out high-level computations, in our view the additional cost of the projects and additional cost to the rate payer would have been negligible, but it would have started the process of redomesticating those jobs into the supply chain, which would continue to grow. In our opinion, that would have had a lasting and tremendous effect on Scotland’s economy.

I have a question for Hazel Nolan. We have seen Scotland lose out on those highly skilled jobs because of the contracts for difference scheme and the drive to the bottom on competitive pricing.

How sure is GMB that the operational contracts over the lifetime of a wind farm will come to Scottish companies? What can we do about that, when we see that centres of excellence are already being developed south of the border to support and service the offshore wind technology that is being developed there? How sure are we that we can get those operational jobs to be based in Scotland—in Fife and elsewhere—over the 30 years that the wind farms will be operational? What can we do to ensure that that happens?

10:15  

That is a very good question, because of course it is extremely difficult. Changes were made to the CFD funding mechanism a good while ago—I can get back to the committee with the exact date of that. It was changed to have a lifetime content guarantee. A big announcement was made recently in terms of moving that content to 60 per cent; however, that is over the 30-year tentative lifespan of those wind farms, only after which we can expect to look back to see whether it lived up to that guarantee. At that point it will already be too late.

We need to change the CFD system—that is extremely important. An earlier question was about what GMB has done. We have made submissions to the UK Government and the Department for Business, Energy and Industrial Strategy. We are doing a review of the contract for difference system, which could lead to the same results, which is that jobs in manufacturing are not being brought into the UK. Jobs are produced, but they are largely in law or in marketing relating to the renewables sector, not in manufacturing. We will lose a skill base if we do not change something soon.

We have heard from the tier 1 contractors that they want more work. Seagreen is ultimately under the provision of the Scottish energy company SSE, and yet jobs are not coming to Scotland. The heads of renewables of the companies in tier 1 just want a level playing field. They will factor in the cost of manufacturing in the UK and in Scotland as part of the mechanism that they have to go through. They have told us that the rules and regulations are disincentivising manufacturing jobs in the UK and in Scotland. We might find out in 30 years’ time whether that content has actually been provided but, as I said, it will be way too late then.

Thank you.

I have a quick question for Jason Fudge, before I bring Richard Lyle back in.

You have talked a lot about legislation being necessary to deal with this. I have two questions about that. We have heard reference to the French having more vociferous lawyers; one can have all the legislation in the world, but if there is not a culture in Government of seeking to fight one’s own corner and enforce legislation or requirements in contracts, it will not change the end result. That is my first point.

Secondly, you made clear that you do not have a comparative knowledge—indeed, probably no one has—of the legal systems of the world. However, in Canada, where you indicate that you have some understanding of how the legislative set-up works, there are both federal and provincial Governments. Would you agree that it is necessary for them to work together to bring about such legislation and to bring about a culture that protects local supply chains and the local market?

On the first point, we view legislation as being very important in Scotland and the UK for supply chain protection. Right now, legislation does not exist, so there is nothing to enforce. The supply chain plan that I referred to earlier was just that—a plan. It was presented by a developer for use in the initial consenting process, but ultimately it was unenforceable because there was no legislation that included that plan as an enforceable item.

According to feedback from the Scottish Government, the state aid rules and the EU open market rules prevent it from doing that.

That is something that needs to change. I am not sure how it should change but, if it does not change, the Scottish and UK supply chains will always be at a competitive disadvantage in relation to companies in lower-cost jurisdictions, including the middle east and Asia.

In Canada, we have a different set of legislation and a certain capacity that is available to us. In our operations in eastern Canada, we work primarily on energy projects—wind, hydro, oil and gas and so on—but, in all those cases, which are multibillion-dollar infrastructure projects that are similar in commercial scope to the offshore wind projects in Scotland, the developer and the applicable government, be it federal or provincial, all agree on a supply chain plan, which is written into legislation and is 100 per cent enforceable.

In my experience in eastern Canada, where I have worked for the past 20 years, primarily on energy infrastructure projects, there has never been an instance in which a developer has not lived up to those agreements. In any situation in which a component of the work that was intended to be done in Canada was ultimately not done in Canada, the developer has paid a massive penalty to the applicable government. That arrangement is important. We think that the Scottish Government and the UK Government should work together to ensure that the necessary legislation and rules are in place to protect the Scottish supply chain for offshore wind.

On that question about vociferous lawyers or the culture, as it were, in which the developments take place, those arrangements, which are in legislation, are enforced in respect of private companies through agreed contracts and, obviously, through the courts. If a company has the understanding that it is not going to be brought to the courts to fulfil its obligations, that would surely make a difference to how it approaches its obligations.

I agree, but, in Canada, that has not been an issue. If work is not done, the penalties and other requirements are absolutely enforced and are paid by the developer.

The issue that we are seeing in Scotland is that the commitments are not enforceable. There is no legislation in place that would enable a Government to take an aggressive position to enforce the supply chain plan. That is the critical first step that needs to happen. Once that is in place, the Government at hand—be it the Scottish Government or the UK Government—needs to take the initiative to ensure that those agreements and the legislation are enforced.

Richard Lyle will ask the next question.

My question is for Jason Fudge or Hazel Nolan. We know that many countries have job safeguards. If we do not safeguard our contracts, we will not win any—basically, that is what you have told us this morning. Therefore, should the Scottish Government do the same as other Governments seem to have done, which is to ignore state aid rules and ensure that contracts stay in Scotland by devising ways to do that, such as by citing carbon footprint reasons and so on?

I think that the Scottish Government and the UK Government should do everything that they can to pursue those projects. I am certainly not advocating that they break rules, but they need to explore every opportunity to pursue them.

I think that the EU rules need to change. As we said earlier, BiFab is bound by EU state aid and open market rules even when it is not competing against EU companies. It became problematic for us to provide assurances, guarantees and working capital financing for a project in which we had no European competition. How do those rules make sense? In my view, the rules are supposed to ensure that there is a level playing field across the European Union, but they should not be enforced in relation to competition outside Europe. That does not make sense for anyone.

Without understanding all the specifics of the rules, what we have seen with BiFab, and in the supply chain for offshore wind more broadly, is that the rules need to change in order to ensure that the maximum amount of work is done by Scottish and UK people in the respective supply chains.

I think that Sean Fudge wants to come in on that. I am sorry—I am now confusing names. It is not Sean Fudge—it is Jason Fudge and Sean Power. My apologies to both of you for conflating your names.

That is no problem at all. The question was about Canada’s federal and provincial systems of government, how that compares to Scotland and what the benefits are. We are involved in a lot of mining projects and resource projects, and a lot of big projects overall. In Canada, the resources are generally considered to be the property of the provinces. When a company comes in to develop those resources, the agreements on development have to be between the developer and the province. Therefore, the province stipulates the benefits agreements. There is a separate agreement with the developer, which is enforceable in the courts.

Hazel Nolan wanted to comment, so she can round things off.

It does not come down to any one thing. If we want to have a successful Scottish supply chain—[Interruption.]—we need the investment in the infrastructure to be able to build that, we need the proper funding mechanisms to support the Scottish supply chain or a UK supply chain, and we need to have political will. On all three fronts, it looks as though we are lacking. [Interruption.] The earlier question about why the Scottish Government could not delay the decision so that we would then be outside the parameters of state aid rules was pertinent. We are not asking—[Interruption.]—people to break the rules, but on those three fronts, we have absolutely been lacking. That is why, as I said, we are 100,000 jobs short of the predictions. It is much bigger than just the ins and outs of what has happened around NnG and Seagreen.

There was a question about environmental concerns. I absolutely believe that we should be factoring those in when it comes to the construction of these wind farms. There is a reason why we are doing this: it is to have a better future for our children, our country and our world. However, when we consider the UK’s impact on CO₂ emissions over the past decade, we can see that, when we include imports, all that we have done is offshore jobs and import virtue. We are still contaminating the environment in the same way, because we are building offshore wind technology in China and shipping it back halfway across the world on diesel-powered boats. It is absolutely ludicrous.

Think of the predicament of Scottish workers: they are paying, through their energy bills, for the construction of the wind farms. They can see them from their homes, but they are not getting the work involved in that. We are going to lose that skill base in the very near future. Why would a young person living in Fife invest in welding, for example? Why would they do that at this stage? It is an absolute tragedy.

The union has seen everyone lining up to point the finger for where the blame lies. We are not interested in blame any more. We are just interested in solutions. That is what we have to focus on.

Thank you. That was a very vociferous dog in the background, so we have heard from everyone.

Alex Rowley wants to come in with an extremely brief question or comment, and perhaps one of the witnesses can come back with a very short, sharp and witty reply.

I want to conclude by asking: where do we go now? In its statement earlier this week, BiFab said:

“BiFab management proposed several project execution alternatives to keep the work at BiFab’s facilities in Scotland. This included an option to work alongside Saipem in the Fife yards with the full support of our union partners. BiFab management invited Scottish Ministers to jointly present this option to Saipem and NnG developer EDF. Unfortunately this did not happen. This option still exists today.”

For the workers in Fife and Scotland, are there still options on the table that could bring work and save these yards?

10:30  

On the question of where we go now, the witnesses have already given their comments on a wide variety of matters. We are out of time. I thank the witnesses for joining us. The committee will, of course, carefully consider what all of you have said and where we, as a committee, consider matters should now go.

I suspend the meeting to allow a changeover of witnesses.

10:30 Meeting suspended.  

10:32 On resuming—