The Inquiry Report

Chair's letter to the Cabinet Secretary for Transport, Net Zero and Just Transition

Acknowledgements

The conclusion of my Report could not have been achieved without the diligence of Angela Worth as Secretary to the Inquiry, who assumed the responsibilities of that role following the departure of Ann Martin. Angela managed the preparation for and the administration of the public hearings efficiently, enabling me to ensure that they commenced on time and concluded within the allotted nine months. Thereafter the core members of the Secretariat, consisting of the Secretary to the Inquiry supported by Ann Peffers and Nenko Nedialkov, provided me with invaluable administrative support and gave a commitment to remain as members of the ETI team until the conclusion of the Inquiry following the transfer of its records to the National Records of Scotland. I am extremely grateful to them for their diligence and helpful advice throughout.

I also acknowledge the invaluable assistance provided by the three Counsel to the Inquiry led by Jonathan Lake QC (now Lord Lake KC). Apart from preparing for and conducting the public hearings Mr Lake gave me sound advice on significant issues that arose at different stages of the Inquiry. In the litigation in the Court of Session at the instance of Bilfinger Construction UK Limited (Bilfinger) Mr Lake, assisted by Mr McClelland, Advocate, successfully resisted the challenge to my decision to refuse a restriction order relating to documents produced by Bilfinger to the Inquiry.

The acknowledgement of the legal support that I received would not be complete without recognising the significant contribution of Gordon McNicoll, the Solicitor to the Inquiry. His unexpected retirement for health reasons was a serious loss to the Inquiry’s legal team but thankfully he was able to return as Solicitor to the Inquiry when the post became vacant as a result of the transfer of Timothy Glennie to the Legal Department of the States of Jersey.

Guide to Reading the Report

Where the Report can be found

The Inquiry Report is published on the Edinburgh Tram Inquiry website at: https://www.edinburghtraminquiry.org/
as fully searchable web (HTML) text and downloadable PDF file.

To access either version of the Report, click the “The Inquiry Report” tab on the “Home” page on the Inquiry website.

Structure of the Report

The Report comprises 25 chapters, 8 appendices, 24 recommendations and an Executive Summary.

At a very early stage of the Inquiry, it was considered impracticable to set out the events in chronological order because of the need to examine particular matters as distinct issues in some detail. A particular issue may arise in different contexts and is addressed in each chapter in the context of the subject-matter of that chapter. The heading of each chapter identifies its subject-matter. It will be apparent that this approach may result in a certain amount of repetition, but that has been minimised by the use of cross-references, although in some instances it was considered necessary to have a certain amount of repetition.

Apart from the recommendations relating to Public Inquiries generally, which are contained in Chapter 2 concerning the establishment and progress of the Inquiry, it was not feasible to include recommendations within particular chapters. This is because the basis for many of these recommendations is contained in several chapters. Accordingly, recommendations 5–24 inclusive are contained in Chapter 25, after the findings in fact, and they should be read in the context of the Report as a whole. For ease of reference, a list of all of the recommendations has been prepared and appears immediately before the Executive Summary.

Documents and Referencing

Documents referred to in the Report have been published on the Inquiry website and are identified by a reference code consisting of a three-letter prefix followed by eight numbers. The three-letter prefix is derived by the source of the document, as shown in the table in the Glossary. Document references appear in bold in brackets (for example, [CEC00775849]) and contain a hyperlink to the document as published on the Inquiry website. Alternatively, click on the document search box at the top right on each chapter page. This re-directs the reader to the “Find Documents” search function on the Documents page on the Inquiry website. Where reference was made to several parts of a multi-part document – for example, [CEC00775849, Parts 3-7] – the document code (CEC00775849) is hyperlinked to the first part in the reference (in this case, Part 3). To view other parts of a document, please use the document search functionality on the Inquiry website as described above, and search for the document code (in this case, CEC00775849). This will return all document parts.

Where reference is made to a document, using the document referencing system mentioned above, the standard referencing “[ibid]” has been used in all subsequent references to that document, until reference is made to another document. The word “[ibid]” contains the hyperlink to the original document.

Where a quotation from a document contains a spelling, grammatical or other error, but has been reproduced as originally written, “[sic]” has been used to indicate that the error appears in the original document.

Page numbering was automatically inserted in documents by the Inquiry’s document management system, Relativity, on the bottom right of each page. On pages with landscape orientation, page numbering may appear in the left page margin. Page numbering uses the format CEC00775849_0053, i.e. document code_page number, and may not follow from page numbering used by the document creator/owner. For multi-part documents the original page numbering remains continuous throughout all document parts.

Where footnotes have been used, these are clearly notated with a number in superscript, which contains a hyperlink to the footnote’s text at the bottom of the page. Clicking on the in-text reference number will direct the reader to the relevant footnote text at the bottom of the page. To go back to the in-text reference, readers should either click on the return arrow icon at the end of the footnote, or use the “go back” button in their Internet browser.

Glossary

Below is a list of acronyms used in the Report. Each acronym is expanded on first use in a chapter unless it appears in quoted text, in which case in order to preserve the integrity of the source document the meaning has not been added to the acronym. An acronym may have two meanings that refer to its use in the original documents: for example, “QC” may mean “Quality Control” and also “Queen’s Counsel”.

Abbreviation	Meaning
the Act	Inquiries Act 2005
the 1991 Act	New Roads and Street Works Act 1991
AFC	approved for construction
ALEO	arm’s-length external organisation
AMIS	Alfred McAlpine Infrastructure Services Limited
BB	Bilfinger Berger UK Limited/Bilfinger Berger Civil UK Limited/Bilfinger Construction UK Limited, all referred to as Bilfinger Berger or BB
BBS	Bilfinger Berger UK Limited and Siemens plc, known as Bilfinger Berger Siemens or Bilfinger Siemens Consortium
BCR	Benefit to Cost Ratio
BDDI	Base Date Design Information
BSC	Bilfinger Berger, Siemens and Construcciones y Auxiliar de Ferrocarriles SA Consortium
BT	British Telecom
CAF	Construcciones y Auxiliar de Ferrocarriles SA
Carlisle 1	first Project Carlisle proposal
Carlisle 2	second Project Carlisle proposal
Carillion	Carillion Utility Services Limited
CEC	City of Edinburgh Council
CEO	Chief Executive Officer
CERT	Central Edinburgh Rapid Transport
CIPFA	Chartered Institute of Public Finance and Accountancy
COSLA	Convention of Scottish Local Authorities
CPO	Corporate Programme Office
D&W	Dundas & Wilson
Deloitte	Deloitte & Touche Limited
DfT	Department for Transport
DLA	DLA Scotland LLP, DLA Piper Rudnick Gray Carey Scotland LLP and DLA Piper Scotland LLP being the name changes of the firm of solicitors representing tie
DPD	Design, Procurement and Delivery
DPOFA	Development Partnering and Operating Franchise Agreement
DRP	dispute resolution procedure
EARL	Edinburgh Airport Rail Link
ENTICO	A company used as a vehicle for the incorporation of tie
ETN	Edinburgh Tram Network
FBC	Final Business Case
FBCv1	First version of the Final Business Case
FBCv2	Second version of the Final Business Case
GPR	ground-penetrating radar
GRBV	Governance, Risk and Best Value Committee
IFC	Issued for Construction
Infraco	Company/consortium that carried out the construction and engineering work on the tram line. Initially the consortium comprised Bilfinger Berger, Siemens (BBS), but it included CAF following novation, although BBS carried out the work.
Infraco contract	Infrastructure contract
INTC	Infraco Notice of tie Change
IOBC	Interim Outline Business Case
IPG	Internal Planning Group
ISIS	Information Services and Information Systems Division
IT	information technology
ITN	invitation to negotiate
JRC	Joint Revenue Commission
LB	Lothian Buses
McNicholas	McNicholas Construction Services Limited
MFRA	Moray Feu Residents’ Association
Minister for Transport	Minister for Enterprise, Transport and Lifelong Learning
MoU	Memorandum of Understanding
MoV	Minute of Variation
MoV4	Minute of Variation 4
MoV5	Minute of Variation 5
MUDFA	Multi-Utilities Diversion Framework Agreement
NAO	National Audit Office
NIA	Notice of Intention to Award the Infraco contract and/or Tramco contract
NTI	New Transport Initiative
OB	optimism bias
OGC	Office of Government Commerce
OJEU	Official Journal of the European Union
OLE	overhead line equipment
OSSA	On-Street Supplemental Agreement
PA1	Pricing Assumption 1
PB	Parsons Brinckerhoff
PFI	Private Finance Initiative
PMP	Project Management Panel
PPP	public–private partnership
the project	Edinburgh Tram project
PRINCE2	PRojects IN Controlled Environments
PSSA	Princes Street Supplemental Agreement
QA/QC	quality assurance/quality control
QRA	quantitative risk analysis
RTN	Remediable Termination Notice
SAK	Stirling–Alloa–Kincardine railway
SDS	System Design Services
SDS Contract	System Design Services Contract
SG	Scottish Government
SGLD	Scottish Government Legal Directorate
SGN	Scotland Gas Networks
SNP	Scottish National Party
SMT	Senior Management Team
SP4	Schedule Part 4 to the Infraco contract
SRO	Senior Responsible Owner
SRU	Scottish Rugby Union
STAG	Scottish Transport Appraisal Guidance
TAG	Transport Analysis Guidance
TEE	Transport Economic Efficiency
TEL	Transport Edinburgh Limited
tie	tie Limited (formerly Transport Initiatives Edinburgh Limited and now CEC Recovery Limited)
TMO	Tram Monitoring Officer
TPB	Tram Project Board
TPD	Tram Project Director
Tramco	Company tendering for, and ultimately awarded, the contract for the supply and maintenance of the tram vehicles
Tramco contract	Tram vehicle supply and maintenance contract
Transdev	Transdev Edinburgh Tram Limited
TROs	Traffic Regulation Orders
TSS	Technical Support Services
VE	value engineering

 

Document codes used in the Report and provider organisations

Document Cipher	Document Provider/Type
ADS	Audit Scotland
BFB	Bilfinger Construction UK Limited
CAR	Carillion Utility Services Limited
CEC	City of Edinburgh Council
CZS	Responses to the Call for Evidence
DLA	DLA Piper Scotland LLP
GOV	Scottish Government
PBH	Parsons Brinckerhoff
PHT	Public Hearing transcript
SCP	Scottish Parliament
SIE	Siemens plc
SWT	Sweett Group
TIE	tie
TRI	Written witness statements (including closing submissions)
TRS	Transport Scotland
USB	Interim Document Management (initial material provided to the Inquiry in summer 2014)
WED	witness evidence

List of Figures and Tables

Figures

Figure 1.1 Planned construction phases of lines 1 and 2

Figure 1.2 Tram route for phase 1a

Figure 20.1 Project governance structure as agreed by CEC on 25 August and 2 September 2011

Figure 20.2 Project governance structure as at 27 March 2013

Figure 22.1 Project organisation: the integrated project team

Figure 22.2 Governance structure during construction period

Figure 22.3 Tram organisational structure

Figure 22.4 Proposed governance structure for Integrated Edinburgh Transport Authority

Tables

Table 6.1 Periods during which most significant critical issues affecting SDS contract remained unresolved

Table 8.1 Sections of the route of line 1a

Table 9.1 Construction Works Price Analysis

Table 10.1 Attendance at joint meeting of tie Board and TPB on 15 October 2007

Table 19.1 Estimates of cost of change in construction works (on-street sections)

Table 19.2 Estimates of cost of change in construction works (off-street sections)

Table 19.3 Additional duration of sub-contractors’ programme

Table 19.4 Cost of options to be considered by CEC on 30 June 2011

Table 19.5 Estimated cost of options excluding risk allowance

Table 20.1 Comparison between Financial Close Budget and Estimated Final Expenditure

Table 21.1 Proposed modification to risk allowance in February 2008

Table 21.2 Proposed modification to risk allowance at Financial Close

Table 22.1 Membership of TEL Board and Tram Project Board

Table 24.1 Estimated cost to public purse

Table 24.2 Updated TEE Outputs (Source – JRC, June 2011)

Table 25.1 Construction Works Price Analysis

Recommendations

1. Scottish Ministers should undertake a review of public inquiries to determine the most cost-effective method of avoiding delay in the establishment of an inquiry, including consideration of establishing a dedicated unit within the Scottish Courts and Tribunals Service and publishing regularly updated guidance for people involved in the establishment and progress of public inquiries.

2. In any event Scottish Ministers should not appoint as the sponsor of any public inquiry any department, agency or other government organisation where it, or any of its employees, has had any involvement in the project or other event giving rise to the establishment of the public inquiry.

3. The guidance mentioned in the first recommendation should include: advice concerning the circumstances in which civil servants in the inquiry team may properly transfer to posts, other than promoted posts, within other government departments or agencies; which positions within the administration of a public inquiry may be filled by the employment of agency staff; and whether longer-term contracts as temporary civil servants are more appropriate for particular positions that cannot be filled by permanent civil servants.

4. In reporting the cost of a public inquiry Scottish Ministers should report its net cost to the public purse, after discounting expenditure already incurred on accommodation, staff and other resources, as well as the total cost appearing in the accounts of the sponsor department.

5. Where the Business Case for any future light rail project is based upon an assumption that, prior to the award of the contract for the construction of the infrastructure, certain matters will have been completed (eg design, the obtaining of all necessary approvals and consents or the diversion of utilities), the contract negotiations should be delayed until completion of these matters has been achieved, failing which before any infrastructure contract is signed a new Business Case should be prepared on the basis of the altered assumptions that prevail and should be approved by the promoter and owner of the project.

6. All versions of the Business Case, including any Business Case required as a result of altered assumptions, should include an assessment of risk that takes account of optimism bias in accordance with published government guidance.

7. The assessment of risk at each stage mentioned in Recommendation 6 should be the subject of a peer review by external consultants with experience of similar large-scale infrastructure projects in the transportation sector, who should submit a report of each review to the promoter and owner of the project as well as to the procurement and project manager sufficiently far in advance of the signature of the infrastructure contract to enable the promoter and owner to consider whether to authorise its signature and, as appropriate, to consider any other available options requiring a strategic decision.

8. The existing Guidance on optimism bias was based on empirical data available almost two decades ago and should be revised to take into account the additional data that is now available. In particular, the reference classes should be updated to include a specific reference to light rail projects and the recommended uplifts for the different reference classes should be adjusted to reflect the additional empirical data that is now available. Thereafter the Guidance should be reviewed and revised to take account of additional data on a regular basis at intervals of not more than five years.

9. The identification and management of risk should be an integral part of the governance of all major public-sector contracts in future. In identifying and managing risk the following principles should be adopted.

• Probabilistic forecasts rather than single-point forecasts should be used to take account of the risk appetite of funders and project sponsors.
• Funders, sponsors and project managers should be cautious when adjusting uplifts and there should be critical review of claims that mitigation measures have reduced project risk.
• Effective governance needs to provide constant challenge and control of the project, including recording of where the project is compared with its baseline, and reacting quickly to get the project back on track, whenever there are signs that it is veering off course. This necessitates providing senior decision makers with data-driven reports on project performance and forecasts combined with reports by the management team and independent audits.
• In reporting to governance bodies there should be special emphasis on detecting early warning signs that the cost, schedule and benefit risks may be materialising so that damage to the project can be prevented. If early warning signs do emerge, the project should revisit assumptions and reassess risk and optimism bias forecasts.
• The quality of evidence rather than process is the key to providing effective oversight and validation.

10. In the interests of protecting the public purse and maximising the benefits from public expenditure on major projects, the Scottish Ministers should contemplate establishing a joint working group consisting of officials in Transport Scotland and representatives of the Convention of Scottish Local Authorities (“COSLA”) to consider how best to take advantage of:

• tolerating the risk of cost overrun that is always a possibility in risk assessments by including all public-sector light rail projects in the portfolio of large projects undertaken by the Scottish Ministers, including those to be constructed wholly within the geographical boundaries of a single local authority;
• the greater experience within Transport Scotland of managing major projects in the public sector; and
• the necessary skills and expertise within Transport Scotland to deliver the project on time and within budget.

11. The Scottish Ministers and local authorities responsible for funding light rail projects should be mindful at all times of their obligation to protect public funds and to obtain value for public expenditure. In that regard:

• the Scottish Ministers should impose conditions on the payments of grants, similar to the “hold points” imposed on the offer of grant made on 19 March 2007, that enable them to review at each “hold point” whether the scheme is continuing to meet its objectives and to determine whether to continue to support the funding and implementation of the scheme;
• continued financial support from the Scottish Ministers should require their critical review of all versions of the draft Business Case and their approval of the final Business Case as well as their review, and approval before signature, of the draft contracts for the delivery of the project;
• the Scottish Ministers should be involved in the delivery of the project as they were before the withdrawal of the support of officials from Transport Scotland in 2007 and following the resumption of infrastructure works after the mediation settlement at Mar Hall; and
• as a condition of the grant the local authority should be obliged to comply with the project monitoring and control procedures of Transport Scotland and should ensure that robust, transparent, externally verifiable project controls for the project are in place.

12. For reasons of transparency and accountability for public expenditure the Scottish Ministers should keep minutes of:

• the nature and content of any discussions and the reasons for any decisions taken at all meetings, discussions or telephone conversations, and in email or other correspondence between a Minister and civil servants relating to the nature and extent of any involvement by civil servants in the procurement and delivery of a project funded or to be funded in whole or in part from public funds (including a grant from the Scottish Ministers);
• all discussions between a Minister and representatives of a local authority, the company responsible for the procurement and delivery of a publicly funded project or the company responsible for its construction to record what was discussed and what, if any, decisions were reached and the reasons for any such decision; and
• all discussions between a Minister and civil servants including telephone discussions concerning any negotiations, including, but not restricted to, negotiations at mediation for settling disputes involving contracts funded or to be funded in whole or in part from public funds (including a grant from the Scottish Ministers) to record what was discussed and what, if any, decisions were reached and the reasons for any such decision.

13. The procurement strategy for any future light rail project should make adequate provision for the uncertainties concerning the location of utilities and redundant equipment belonging to present and past utility companies, particularly in urban centres. In particular, although it is not possible to be prescriptive about the appropriate timescale:

• the procurement strategy should include a requirement that the route of the track should be exposed and cleared of utilities well in advance of the infrastructure contractors commencing their work;
• the procurement strategy should specify the period that should elapse between the exposure and clearance of the route and the commencement of construction, to ensure that the contractors have unrestricted access to the construction site and may proceed with the infrastructure works unencumbered by the presence of utilities;
• in fixing the period mentioned above, the procurement strategy should take into account the length of the route to be constructed, past experience of the time taken for the diversion of utilities in light rail projects in other parts of the UK, and any additional constraints peculiar to the project such as an embargo on work to divert utilities during particular periods such as the festive season or special events (e.g. the Edinburgh Festival).

14. Although some participants in the Inquiry criticised the use of the Multi-Utilities Diversion Framework Agreement (“MUDFA”) to divert utilities in advance of the infrastructure works and advocated the “bow wave” approach to the diversion of utilities that followed the mediation settlement at Mar Hall, I do not think it appropriate to be prescriptive about how the risks associated with the diversion of utilities are managed. It is sufficient for promoters of light rail schemes to be aware of such risks and to demonstrate that they have adequate proposals for managing them.

15. In recognition of the various difficulties likely to be experienced in the design and construction of a light rail project through a city centre, the promoter and owner of the project should appoint as its procurement and project manager a company with suitably qualified and experienced permanent employees that has delivered a similar project successfully on time and within budget or can demonstrate that it will be able to do so.

16. Immediately following the appointment of the designer and throughout the design of the project the designer should engage with the promoter and owner of the project, the procurement and project manager, the local planning authority, the utility companies and interested third parties owning land that may be affected by the project, to clarify their design criteria. In such discussions throughout the design of the project the promoter and owner of the project should co-ordinate responses to the various stages of design and, in doing so, should take into account the competing interests of different parties and of various departments within any local authority exercising different statutory functions as well as the significance of the project in the context of the community as a whole and should provide all necessary assistance and clear and timeous instructions to the designer to avoid delays and additional expense. In that regard:

• prior to the appointment of the designer the local planning authority ought to produce sufficiently detailed design guidelines to enable the designer to take them into account from the outset when designing the tram network, and to improve the prospects of obtaining the necessary consents and approvals without requiring repeated re-submission of designs that will result in delay to the project with resultant expense;
• throughout the project a collaborative approach should be adopted by the promoter and owner to achieve an early resolution of any design issues that arise; and
• the promoter and owner should assume primary responsibility for co-ordinating the local authority’s response and for negotiating the resolution of all issues, to enable clear instructions to be issued to the designer and to avoid re-design of sections of the route following reconsideration of matters that have been resolved at an earlier stage.

17. The governance structure for the delivery of a major project such as a light rail scheme should follow the published guidance and should ensure that there is clarity regarding the respective roles of the various bodies and individuals involved in its delivery. In particular, the chairman of the company responsible for the procurement and management of the project should not also be its chief executive.

18. As part of their investigations representatives of OGC undertaking an independent “readiness review” of a publicly funded project and representatives of any person, including representatives of any public body such as Audit Scotland, undertaking a review of the progress of and/or expenditure on a project funded in whole or in part by public funds should be required to interview key personnel involved in the project to ensure that each of them understands his or her role and is performing it effectively. In preparing any list of key personnel to be interviewed the individuals undertaking the investigations shall include the person designated as SRO.

19. At all stages of the project there should be a collaborative approach to delivering it. This should include the co-location of representatives from each organisation relevant to the particular stage reached and having an interest in its completion to enable any issues to be addressed and resolved at the earliest opportunity, thereby minimising the risk of the escalation of disputes with associated delays and increased expense.

20. The directors, employees and consultants of the company responsible for the procurement and delivery of the project as project managers, including an arm’s-length external organisation (“ALEO”) wholly owned by the local authority that is the promoter and owner of the project, should not submit to the local authority information that is deceptive or reports that are misleading either by the inclusion of false statements or by the omission of references to facts that might influence the strategic decisions of councillors if they were disclosed. In that regard they should recognise and respect the need for local authority officials to scrutinise and challenge the accuracy of information and reports submitted to them and should not seek to frustrate, or interfere with, the instruction of independent consultants to advise officials on the accuracy of the risk assessment in such reports or on the terms of any draft contracts for which they seek authority to sign.

21. Local authority officials should be mindful at all times of the distinction in roles between them and councillors, who are solely responsible for strategic decisions, and of their duty to provide accurate reports to councillors to enable them to take informed decisions based upon the reality of the situation. Such reports should not be misleading either by the inclusion of false statements or by the omission of relevant facts. Where officials prepare and submit reports based upon reports to them from an ALEO acting as the procurement and delivery vehicle, they should not assume the accuracy of these reports based upon the adoption of a “one family” approach involving the local authority and the ALEO.

22. Where a company, including an ALEO, knowingly submits a report or other information to local authority officials that is misleading by reason of the inclusion of false statements or the omission of relevant facts or where such officials knowingly submit misleading information to councillors, whether or not councillors act upon that information, the Scottish Ministers should consider whether there should be an appropriate sanction in damages against the relevant individuals within the company responsible for the false statements or omission of relevant facts, as well as against the company itself, and against the relevant local authority officials involved in submitting misleading information to councillors.

23. In addition to any civil liability arising from any sanction introduced in accordance with Recommendation 22, the Scottish Ministers should consider whether there is a need for a statutory criminal offence involving strict liability once it is established that the information and/or report was misleading by reason of the inclusion of false statements or the omission of relevant facts.

24. The Scottish Ministers should also give consideration to the need for legislation to impose a similar duty of disclosure to that owed by policyholders to their insurers upon a company, its directors, employees or consultants and upon a local authority and its officials towards representatives of OGC or of Audit Scotland undertaking any review of a publicly funded project. Any such legislation should determine the appropriate civil and/or criminal sanctions to be imposed for breach of the duty of disclosure.

Executive Summary

Background

1. The construction of the Edinburgh Tram Network (“ETN”) was identified as a proposal in the City of Edinburgh Council’s (“CEC’s”) New Transport Initiative (“NTI”), a long-term project involving a number of transportation proposals to be funded by road user charging, also known as congestion charging. On 19 October 2000, CEC approved a draft Local Transport Strategy which identified a number of proposals including the development of a tram network. CEC concluded that there was a need to incorporate an arm’s-length external organisation (“ALEO”) to operate the proposed congestion charging scheme and to use the revenue from it to fund the transportation projects identified by CEC.

2. Apart from being able to recruit staff with the necessary skills to operate such a scheme without the constraints of public sector pay scales, an ALEO could use the revenue stream from congestion charging to borrow funds in the open market without being hindered by borrowing constraints imposed on local authorities by the Scottish Ministers or the United Kingdom Government. Accordingly, in 2002 CEC incorporated “Transport Initiatives Edinburgh Limited”, which was wholly owned by CEC, and which later changed its name to “TIE Limited” and is now known as “CEC Recovery Limited”. Throughout this report, “tie” is used to refer to that company whatever its name at the relevant time.

3. Following its incorporation tie produced a report entitled “A Vision for Edinburgh” [CEC01623145], which set out a programme for the development and implementation of £1.5 billion-worth of transport improvements, using public and private sources of funding including congestion charging. The programme required the early support of the Scottish Ministers

“principally through agreement to provide £375 million of funding towards the development and construction of three tram lines, which form a key part of the improved transport infrastructure” [ibid, page 0004].

4. The Scottish Ministers guaranteed the availability of that sum of money to ensure that funding for at least the first tram line was available as soon as CEC produced a robust Final Business Case (“FBC”); see Chapter 5 (Procurement Strategy). The funding was not conditional on the introduction of congestion charging. After the abandonment of congestion charging in 2005 CEC retained ETN as a major construction project although no reassessment of the project’s viability appeared to be undertaken at that time.

5. The Tram project was the largest capital project undertaken by CEC in living memory. It remained politically controversial throughout the lifetime of the project. CEC had a budget of £545 million for the project, consisting of a grant of £500 million from Scottish Ministers (being the original sum of £375 million mentioned above with indexation applied to it) with the balance being funded by CEC. The budget included the purchase of tram vehicles to operate on the network as well as the construction of the network itself.

6. Although CEC was the promoter of the necessary private legislation consisting of two separate Bills authorising the construction of lines 1 and 2, it used tie to represent its interests in the proceedings before the Scottish Parliament. tie was also responsible for the preparation of the Business Case for the Tram project and for the procurement and delivery of the project. tie determined the procurement strategy and concluded the various contracts necessary for the delivery of the project with CEC acting as guarantor of tie’s financial obligations, as a result of which all financial risk of exceeding the available budget of £545 million remained with CEC.

7. Price certainty was important for CEC. Councillors’ support for the project and their authorisation to tie to enter into the necessary contracts for the project was given on the basis that phase 1a (from the Airport to Newhaven) at least was to be constructed and opened for service in the summer of 2011 within the budget of £545 million, with an expectation that part of phase 1b (from Roseburn to Granton) might also be constructed within that budget.^[1]

8. In May 2008, in the exercise of delegated powers granted by the councillors, CEC’s then Chief Executive (Mr Aitchison) authorised tie to sign the necessary contracts for the construction of phase 1a of the network and the manufacture, delivery and maintenance of the tram vehicles. The contracts were signed on 13 and 14 May 2008.

9. Although the procurement strategy had envisaged that tie would conclude a separate contract for the purchase and maintenance of the tram vehicles which would be novated to the infrastructure consortium (“Infraco”) upon signature of the infrastructure contract (“Infraco contract”), in the Rutland Square Agreement dated 7 February 2008 tie agreed to Construcciones y Auxiliar de Ferrocarriles SA (“CAF”), the supplier of the tram vehicles, joining the consortium with Siemens plc and Bilfinger Berger (UK) Limited (“BBS”) either before or following the signature of the Infraco contract and the novation of the tram vehicle supply and maintenance contract (“Tramco contract”). Following the signature of the Infraco contract on 14 May 2008, which included the Tramco contract as a separate schedule, the consortium included CAF and became known as BSC. Despite the obligations of BSC to deliver the project, it should be acknowledged that the difficulties with the implementation of the strategy related to the infrastructure works to be undertaken by BBS.

10. After a delay of almost three years, line 1a of the ETN was opened for revenue service on 31 May 2014, although its extent was restricted to a line from the Airport to York Place (the “restricted line 1a”) rather than to Newhaven as had been the intention in the FBC. The restricted line 1a was reportedly completed within an increased budget of £776 million. In light of the reported increased cost of £231 million and of the restricted scope of the network that was delivered, as well as the delay in opening the truncated line for service, Scottish Ministers commissioned this Inquiry.

11. Before considering the reasons for the failure to deliver the entirety of line 1a on time and within the budget of £545 million it may be helpful to consider the actual cost of the restricted line as well as the estimated cost of the extension to Newhaven to enable a comparison to be made between the anticipated final total cost of line 1a and the original budget of £545 million. It is also convenient at this stage to consider the consequences of the additional cost incurred in constructing the restricted line 1a and of the delay in its construction.

Actual cost of the restricted line to York Place

12. There is uncertainty about the final total cost of completing the restricted line 1a. Following the settlement reached at the mediation at Mar Hall in March 2011, work on the construction of the restricted line 1a recommenced and the projected budget for completing it was £776 million. In March 2017, CEC reported the cost of completing

the restricted line 1a as £776.7 million, being £231.7 million in excess of the budget of £545 million (the “additional expenditure”). Most of the additional expenditure within the reported cost of £776.7 million related to the total cost of the works by BBS under the Infraco contract. It was £427,206,309.52 for the restricted line 1a, compared with the original construction works price of £238,607,664.00 for a line between the Airport and Newhaven (the “entire line 1a”).

13. The reported cost of £776.7 million was not, however, an accurate statement of the total cost because it underestimated outstanding claims by third parties, principally because CEC was unaware of a substantial claim that had not been intimated at that time; it did not include certain costs such as the cost of other infrastructure works undertaken by CEC directly attributable to the Tram project but allocated to other CEC budgets; it failed to include a pension fund deficit arising from the cessation of tie’s business; it omitted compensation payments to businesses and the Net Present Value of the cost of borrowing the additional £246.5 million needed to complete the project. Taking these items into account, the best estimate of the total cost of the restricted line 1a is £835.739 million.

14. Had the increased budgeted cost of the restricted line (£776 million) been known before CEC approved the FBC on 20 December 2007, the Benefit to Cost Ratio (“BCR”) would have been 0.73, indicating that neither CEC nor the Scottish Ministers would receive value for the anticipated public expenditure. In that situation CEC could not have justified proceeding with the project and the Scottish Ministers could not have justified payment of the grant of £500 million towards its funding and would have needed to consider their available options, including the possibility of constructing a shorter line within the available budget assuming that its economic appraisal produced a BCR greater than 1.

Cost of line 1a from the Airport to Newhaven

15. The full cost of the entire line 1a, and the extent to which it has exceeded the budget of £545 million, will only be known once the extension from York Place to Newhaven has been completed and its cost added to the £835.739 million estimated cost of the restricted line 1a. Based upon the estimated cost of £207.3 million, including risk, support for business, and optimism bias, in the business case submitted to CEC in 2019 in support of the extension from York Place to Newhaven, the total expenditure on line 1a will exceed £1,043 million – almost double the original estimated cost. That difference will obviously increase if the estimated cost for the extension is exceeded. In reporting the cost of the extension from York Place to Newhaven, officials should include all tram-related expenditure and recharge any such expenditure that may have been allocated to other CEC budgets, as occurred with the restricted line, as well as including the net present value of any borrowing by CEC to fund the extension.

Consequences of increased costs and delay

16. The most obvious consequence of the increased costs was the effect upon CEC’s finances. CEC had to borrow £246.5 million to complete the restricted line 1a. Increased borrowing results in the commitment of additional future revenue expenditure to enable sums borrowed to be repaid with interest. A consequence of that commitment is the lost opportunity for CEC represented by its inability to provide the level of service to the community throughout the 30 year repayment period of the loan that it would otherwise have been able to fund from its revenue account without such a commitment. The annual revenue charge of £14.3 million required to repay capital and interest of the sum borrowed to complete the tram line to York Place represented 1 per cent of CEC’s gross expenditure and is an indication of the money that would otherwise have been available annually over a period of 30 years to fund services in the City of Edinburgh. Moreover, if there has been any additional borrowing to fund the extension the loss of money available to fund such services annually over the period of repayment will be increased. More significantly it will result in an increase in the loss of CEC’s opportunity to fund future services because of the need to repay capital and interest arising from the additional borrowing.

17. I accept that the effect on funding for future services is a consequence of borrowing by local authorities to fund capital projects. However, it seems to me that different considerations apply where borrowing for a capital project is planned in advance of the local authority’s commitment to proceed with that project and the cost of borrowing is included in the business case for the project. In that situation councillors will be aware of the implications for future services of borrowing funds to deliver the project. In this instance councillors were concerned to have price certainty and they authorised construction of the ETN based on assurances by their officials, who in turn relied on assurances by tie, that the line from the Airport to Newhaven could be constructed and the necessary vehicles purchased within the available budget of £545 million. Councillors did not anticipate, and were not advised to anticipate, any restriction on the future provision of Council services if they authorised officials to proceed with the project based on the FBC. No provision was made for the borrowing of £246.5 million or for any additional sum to complete the extension from York Place to Newhaven. Such borrowing was unplanned at the outset, and its costs are a direct consequence of the failure to deliver line 1a within the available budget.

18. A further financial consequence for CEC of the failure to complete the line to Newhaven on time was the loss of fare box revenue from passengers who would have used the tram service if the line had been completed as planned. That loss has been estimated at £4 million per annum. It also resulted in the loss of the anticipated benefit of a tram service as a catalyst for the development and regeneration of the Leith and Newhaven areas. In that regard it failed to deliver the benefits anticipated in the FBC.

19. Apart from the consequences for CEC another obvious consequence of the delay in the completion of line 1a as originally planned was the effect upon businesses and residents along the proposed route, as well as upon residents in streets used for diverted traffic and upon the public whose access to the city was impeded and whose travelling time to work increased.

20. Although I acknowledge that the calculation of losses suffered by businesses that are directly attributable to the construction work is complicated by the effects of the recession following the banking crisis in 2008, the evidence has persuaded me that the delay in the construction work and the associated disruption were significant contributors to the losses incurred by businesses at that time. Businesses along the route of line 1a, particularly in the west end of the city and in the section between York Place and Newhaven, suffered loss because of the disruption caused by the construction works, which impeded access to their premises by prospective customers and goods delivery personnel. Some businesses ceased trading altogether, and others reported significant losses. While some disruption during the construction phase was inevitable, the disruption to businesses in these localities lasted much longer than would have occurred if the project had been completed on time. The disruption to businesses in the section between York Place and Newhaven, particularly on Leith Walk and in Constitution Street, will have continued during the construction of the extension of the line to Newhaven. This additional disruption would have been avoided if line 1a of the project had been completed on time and without restriction of its scope.

21. Residents along the route of line 1a also experienced loss of amenity due to noise and disturbance as well as considerable inconvenience for much longer than anticipated because of difficulties of access to their homes caused by the construction works and during prolonged periods when barriers impeding access to their homes remained in place when no work was being undertaken. Residents in other residential streets were adversely affected by diverted traffic, including heavy goods vehicles, for several years longer than should have been the case because of the failure to complete the project on time. The public, especially those with more restricted mobility, had difficulty in accessing the city centre because of barriers erected to enable construction to be undertaken but which remained in place when work had ceased pending resolution of disputes. Traffic diversions adversely affected residents throughout the city and commuters to it.

Causes of failure to deliver project within budget and to the extent projected

22. The principal causes of the failure to deliver the project within budget and to the extent provided can be summarised as follows.

• tie’s departure from the procurement strategy that had been intended to manage risk out of the project.
• The failure of tie to work collaboratively with CEC and others including, in particular, Parsons Brinckerhoff (“PB”) and BSC.
• Failure by tie to report accurately on progress and failure by CEC officials to monitor progress.
• Delay with production of design due to poor performance by PB and failure by tie and BSC to manage the design contract effectively.
• tie’s failure to follow the guidance about optimism bias when preparing various versions of the Business Case such that the cost of the project was underestimated.
• tie’s failure to achieve the price certainty sought by CEC and to transfer risk to BSC in accordance with the procurement strategy.
• The negotiation of the Infraco contract on terms that were inconsistent with the FBC and prevented progress being made in the construction of the project when there were Notified Departures from the pricing assumptions in the contract.
• The governance structure did not follow any recognised model. There was a lack of clarity as to who had responsibility for the performance of certain tasks and there was some overlap regarding the respective roles of the various bodies created, and individuals appointed, to deliver the project. It is also unclear whether all of the individuals appointed to specific roles actually fulfilled these roles.
• The failure of CEC’s officials to protect CEC’s interests as the client and promoter of the project bearing the risk of exceeding the allocated budget of £545 million.
• The Scottish Ministers’ decision following the debate in Parliament on 27 June 2007 to withdraw the involvement in the project of officials in Transport Scotland resulting in a loss of expertise in the management of major transport infrastructure projects and in particular a lost opportunity to review the FBC and the draft Infraco contract before its signature.

These will be considered in the sections that follow.

Procurement strategy

23. As I have noted in paragraph 4 above, the grant from the Scottish Ministers depended upon CEC producing a robust FBC. tie had the responsibility of preparing the FBC but it had to be approved by CEC. In that regard CEC wished the price certainty necessary to ensure delivery of the project within the available budget of £545 million.

24. Between 2002 and 2004, tie ran a procurement group that was tasked with considering how best to procure the tram system. The procurement group included professional advisers from various disciplines, including DLA Piper Scotland LLP (“DLA”), Grant Thornton, Mott MacDonald, Faber Maunsell, and Partnerships UK. A report by the National Audit Office (the “NAO”) published in 2004, which was entitled ‘Improving public transport in England through light rail’ [CEC01708649], noted the poor financial performance of several existing light rail schemes, and the tendency of scheme promoters to seek to transfer as many of the project risks as possible to the private sector. Such factors were leading to inflated project costs, because the private sector either avoided light rail projects altogether (removing competition) or sought greater margins for taking the risks. The NAO suggested that better sharing of project risk and alternative contract structures could help to reduce the cost of such projects and encourage private sector investment.

25. Following the above advice from the NAO, tie developed a procurement strategy that involved having separate contracts with different contractors for distinct parts of the project. In accordance with that strategy the contracts for the construction of the network infrastructure and for the purchase and maintenance of the tram vehicles were to be negotiated separately. tie negotiated the contract for the construction of the network infrastructure with BBS and the contract for the purchase and maintenance of the tram vehicles with CAF respectively.

26. By contracting separately for the purchase and maintenance of the vehicles (under the Tramco contract) tie would not be restricted to a supplier that was part of the consortium selected to deliver the project. The greater choice of vehicle suppliers ensured that tie secured a competitive price and avoided the infrastructure contractor adding any risk premium or other surcharge in respect of the vehicle supply and maintenance contract. No issues of delay or increased cost of the Tram project arose in respect of the Tramco contract, apart from the additional storage costs incurred by CAF associated with the delay in tie taking delivery of the vehicles as a consequence of the delay in progressing the project.

27. Bearing in mind CEC’s desire for price certainty and the report from the NAO, tie’s procurement strategy was intended to take active steps to manage risk out of the project. Apart from the separation of the procurement of the Tramco contract and the Infraco contract mentioned in paragraph 25 above, these included: prior to the conclusion of the Infraco contract, providing Infraco with completed designs with all necessary approvals and consents subject to the population of these designs with specific systems and components chosen by Infraco; novating the design contract to Infraco at the date of signature of the Infraco contract; and completing the diversion of utilities in advance of the infrastructure work to enable Infraco to construct the tram line unimpeded by the existence of utilities.

Failures in implementing the strategy

28. Although some witnesses from tie criticised the procurement strategy, I have concluded that it was a sensible response to the difficulties experienced elsewhere in the UK in the construction of light rail systems. The difficulties with the project were not attributable to the procurement strategy; they were a result of tie’s failure to implement it in relation to the completion of design in advance of the Infraco contract and the diversion of utilities in advance of the infrastructure works. It seemed to me that criticisms of the strategy by tie witnesses were motivated by a desire to divert attention from their own failures.

Design

29. The procurement strategy was intended to limit the allowance for risk related to design that would be included by Infraco in the Infraco contract price. The method for achieving this was that, prior to the award of the Infraco contract, tie would conclude a contract for System Design Services (the “SDS contract”) with a provider of such services (the “SDS” provider), who would develop the design to a certain level and obtain all necessary consents and technical approvals from CEC and from third parties such as Network Rail, Forth Ports Authority, Edinburgh Airport and Royal Bank of Scotland who might be affected by the design of the route.

30. The effect of this strategy was that tie would bear the risk of design prior to the signature of the Infraco contract, thereby avoiding the inclusion in the contract price of a risk premium for design that contractors would normally add to their bid if they had the responsibility for designing the project and for obtaining the necessary approvals and consents. Upon signature of the Infraco contract the SDS contract would be novated to Infraco, who would thereafter accept design risk and would complete the design by incorporating the components and systems upon which its bid had been based and would carry out the construction, installation, commissioning, and maintenance planning in respect of the ETN. If that strategy had been implemented, tie would not have incurred any additional expense resulting from any design change after the Infraco contract was signed unless tie had requested such change and, in terms of the change provisions in the Infraco contract, had agreed the cost of such change in advance of instructing Infraco to proceed with it.

31. tie signed the SDS contract with PB on 19 September 2005, but tie lacked the necessary skills to manage that contract to ensure that design was completed as planned before the signature of the Infraco contract. Initially, tie appears to have thought that it could simply rely on the obligation on the SDS provider to produce design and obtain approvals in accordance with the design programme, with minimal involvement by tie in the design process. Moreover, tie and PB failed to engage CEC in the design process at the outset and to ascertain the wishes of CEC which was responsible for granting planning and technical approvals as planning and roads authority. tie also failed, in conjunction with CEC, to ascertain at the outset and thereafter manage the expectations of third parties whose consent was required for the design of sections of the route affecting their property.

32. The strategy relating to completion of design was intended to provide potential infrastructure contractors with an informed basis for pricing their bids, thereby reducing the need for risk premiums and increasing the probability of achieving the price certainty that CEC sought. However, completion of the design was delayed. At the date of signature of the Infraco contract, design was incomplete and subsequent development of the design, treated by the contract as change, was inevitable. Concluding the Infraco contract while the design was incomplete was a material departure from the procurement strategy and failed to transfer risk to Infraco to the extent upon which the FBC was based, meaning that the desire for certainty as to price could not be achieved. tie ought to have delayed signature of the Infraco contract and the novation of design until the design was nearer completion but it refused to do so, reflecting a marked reluctance within tie to do anything that would delay the award of the Infraco contract. Although there was a recognition within tie that the price for the Infraco works was not fixed at contract close, contrary to the procurement strategy, elected members of CEC were not made aware of this development. Although some CEC officials were aware that the price for the Infraco works was not fixed at contract close most CEC officials were not, due to the fact that they relied on what was reported to them by tie and its advisers. There was a failure by CEC officials to take separate advice to protect CEC’s interests.

33. The primary responsibility for the delay in completing design lay with tie for mismanaging the design contract. tie acted for CEC during the Scottish Parliament’s consideration of the private legislation promoted by CEC to enable the construction of the ETN. In the summer and autumn of 2005 the Scottish Parliament was considering various proposed amendments to the alignment of the route and did not conclude its consideration of that issue until Christmas 2005. Nevertheless, tie concluded the SDS contract three months prior to the conclusion of the parliamentary procedure.

34. Moreover, significant changes were made to the original plans and sections submitted to the Scottish Parliament, particularly those for Haymarket Yards, Newhaven, and the Gyle. At Haymarket Yards, the route changed completely. The changes also included changes to the horizontal and vertical limits of deviation. PB had not been involved in the parliamentary process and tie failed to notify it of these changes with the result that the preliminary design was prepared from the wrong baseline. The changes to the baseline from which PB had to prepare designs and the failure of tie to keep PB informed of such changes meant that PB had to carry forward elements of preliminary design into the detailed design phase. This prevented the orderly progression of design and introduced the risk of tie, or CEC, requiring changes to the preliminary design during the detailed design phase. tie’s failure to inform PB of the changes when they arose reflects upon its poor management of the project.

35. Underlying tie’s mismanagement of the design contract was its unrealistic programme for design delivery. The draft FBC [CEC01821403] prepared by tie and presented for approval to councillors on 21 December 2006 included a programme summary, showing that detailed design for phase 1a was due to be completed and all approvals and consents to be obtained by 4 September 2007, with the Infraco contract being awarded in October 2007. The programme had little float and was based upon the assumption of “right first time and on-time delivery of activities” [ibid, page 0164, paragraph 11.3]. tie’s aspirations for the completion of design within that timescale were unachievable. In its comments dated 30 March 2007 on the draft FBC [TRS00004145, page 0009] Transport Scotland queried whether the intention to complete design by October 2007 was realistic. Mr Harries and Mr Glazebrook, two of the most experienced consultants at tie, did not think that the design would ever be delivered to programme when they were involved in the project. Mr Harries was involved in the project between November 2004 and February 2008 and Mr Glazebrook commenced work with the project early in 2007 and remained until 2011.

36. The programme was never achieved, and tie’s solution to design delay, following Mr Gallagher’s mantra of getting design “right first time and on time delivery”, was unrealistic and displayed a lack of appreciation of the iterative nature of design and of the challenges in obtaining planning and technical approvals in a UNESCO World Heritage Site. The delay in completing design in accordance with the programme was compounded by tie’s failure to provide PB with instructions on critical issues, resulting in PB ceasing work on the SDS contract between February and June 2007. By the summer of 2007 it was apparent to tie’s senior management that it would be impossible to complete the design in accordance with the programme.

37. Further examples of tie’s mismanagement of the design contract include the following.

• tie failed to respond to the preliminary design within the period of 20 days specified in the SDS contract, resulting in PB proceeding to detailed design in the absence of tie’s responses to the preliminary design because of the limited time allowed for design. This had an adverse effect upon the orderly progression of design.
• tie failed to engage with CEC and third parties at an early stage in the design process to determine their wishes and requirements and to manage their expectations. The result was frequent and belated requests for changes to design including the reconsideration of options that had already been rejected.
• Different teams within tie requested that PB prioritise different items of design, at different times, in a manner that lacked co-ordination, resulting in an inefficient process to produce design.
• tie’s procurement team amended the Employer’s Requirements to take account of its discussions with Infraco bidders without reference to PB and PB continued to develop the design based on the original Employer’s Requirements. In early 2007, it became evident that the proposals received from the Infraco bidders, the Employer’s Requirements and the SDS design did not align.

38. In May 2008, tie agreed to settle various claims by PB for additional costs, arising largely because of the delays in progressing design, including change notices issued from October 2006 onwards. The additional payments totalled £7,452,343 and represented an increase more than 30 per cent above the SDS contract price. The amount of the additional payments indicates the extent of the changes and delays that occurred in the design process before the award of the Infraco contract. The fact that tie agreed to make these additional payments to PB suggests that it recognised that many of the changes and delays to design before the award of the Infraco contract had occurred for reasons for which tie was responsible.

39. Although tie’s mismanagement of the design contract was the primary cause of the delays in design, CEC’s failure to clarify its requirements and the requirements of interested third parties before the commencement of design also contributed to delays in the design of the project. As owner and promoter of the project and as the statutory body responsible for granting planning consents and technical approvals for the project, CEC failed to provide adequate guidance about the design principles to be applied. Although, around December 2005, CEC did produce a Tram Design Manual [CEC00069887], which gave some guidance on design principles, that guidance was of a very general nature, and it was not until April 2008, a month before the Infraco contract was signed, that CEC produced a draft Tram Public Realm Design Workbook, [PBH00018590; CEC02086917; CEC02086918; CEC02086920–CEC02086934]^[2] which was intended to supplement the guidance in the Tram Design Manual [CEC00069887] and the Edinburgh Standards for Streets [CEC00669586] and to assist PB in developing the details of the designs for the City Centre to obtain consents and approvals. Such guidance was produced too late. CEC ought to have produced sufficient detailed design guidelines before the SDS contract between tie and PB was signed to enable PB to take them into account when designing the tram network. Had that occurred it is likely that PB would have received the necessary consents and approvals from CEC sooner than occurred and there would have been more likelihood of implementing the procurement strategy in relation to design.

40. For the sake of completeness, I acknowledge that PB recognised its failures in the production of the design of the project, principally by omitting to engage with CEC prior to the commencement of the SDS contract to discuss CEC’s design requirements and, prior to the arrival in 2007 of Mr Reynolds, by failing to manage change control effectively. However, these failures do not alter my conclusion that tie and CEC were principally responsible for design delay. Any criticisms of PB require to be viewed in the context of the environment in which it was working, being one of continual changes, a failure to close out issues and poor overall project management by tie.

Novation of the design contract to Infraco

41. Novation is a process whereby, with the agreement of all parties, all rights and obligations under a contract are transferred from one party to another. Commonly, the agreement for novation will state that the relationship between the provider of goods and services and the “new” client will be regulated by – and be taken always to have been regulated by – the existing contract and that, as between the existing parties to the contract, that contract shall be regarded as at an end. This means that the parties to the original contract no longer have rights against, or obligations owed to, each other and the new party stands in the shoes of the party that has been released from its obligations. It is up to the parties to determine how their relationship(s) should be structured, and it may differ from what I have just described, but in the Tram project it followed that outline. This meant that not only would the contractual relations concerning design in the period following novation be between PB and BSC; it would be as if this had always been the case. The only rights and obligations that tie would have in relation to design would be against BSC.

42. In terms of the SDS contract tie was entitled, but not obliged, to require that contract to be novated to Infraco when the Infraco contract was signed. Although the concept of novation of the design contract was predicated upon the assumption that design would have been completed to the extent specified in the SDS contract and that PB would have obtained all necessary approvals and consents before the signature of the Infraco contract, tie insisted upon novation of the SDS contract to Infraco despite the incomplete design and the absence of a substantial number of approvals and consents. That was a serious error by tie. The incomplete design and the fact that not all the necessary consents and approvals had been obtained had to be reflected in the terms of the Infraco contract. The result was that the risk of design development was not passed to Infraco as intended and tie retained a significant risk of design change after the award of the Infraco contract, with consequential increases in the cost of the project.

43. By insisting upon the novation agreement when design was incomplete, tie transferred control of completion of the design process to BSC but retained the significant risk of increased cost associated with it. In his oral evidence to the Inquiry Mr Maclean, Head of Legal and Administrative Services at CEC from December 2009, observed that the novation of the design contract in such circumstances meant that the designer and the contractor were “on the same team” [PHT00000008, page 42].

44. The novation agreement also amended the SDS contract by removing the absolute obligation imposed upon PB to obtain all necessary consents and approvals. Instead, PB would not have to bear the costs of amendments required by any approval body where the requirements were:

• inconsistent with or in addition to the Infraco proposals or the Employer’s Requirements;
• not reasonable given the nature of the approval body; or
• not foreseeable within the context of the Infraco proposals or the Employer’s Requirements.

In any of these circumstances tie bore the financial risk related to obtaining consents and approvals.

45. After novation, slippage in the design programme and delays in the obtaining of consents and approvals continued. The continual slippage in design is apparent from the fact that Version 51 of the SDS programme was provided to BSC on 23 November 2009 [recorded in PB progress report for January 2010, BFB00004338, page 0005, paragraph 2.3], whereas in May 2008, when the Novation Agreement was signed, version 31 was current [Close Report, CEC01338853, page 0007, paragraph 2.2]. The dispute between tie and BSC as to where responsibility lay for completion of design was a principal cause of the slippage of design because PB was unwilling to alter the design without being assured of payment from BSC. Moreover, internal reports by BB referred to the late production of design by Siemens that PB required to complete its design. Both of these were indicative of the failure of BSC to manage the design at least until it signed an agreement with PB on 25 February 2010 [TRI00000011] resulting in PB committing more resources to design and BSC guaranteeing payment in full for some of PB’s services and 75 per cent of the costs of others. In relation to the latter group, BSC would seek the whole amount from tie and PB would assist them in this. If BSC were successful in recovering all the cost from tie, it would make a balancing payment to PB so that PB would also be paid in full for these services.

46. Design remained incomplete in March 2011 during the mediation at Mar Hall. Although BSC bears some responsibility for failing to manage the design contract post novation and for the delay in reaching the agreement with PB on 25 February 2010 to enable progress to be made with design, the principal cause of design delay after novation was attributable to the dispute that arose between tie and BSC as to which party was to bear the risks under the Infraco contract arising from the development and completion of design and the concerns about whether PB would be paid for work that was the subject of that dispute. The responsibility for that situation rests with tie and, in particular, the persons responsible for negotiation of the terms of Schedule Part 4 to the Infraco contract (“SP4”) that are considered below in the context of the negotiation of the Infraco contract on terms that were inconsistent with the FBC.

47. The extent of the problem with design after novation is reflected in the payment of £14,117,112 made by BSC to PB in relation to services provided between SDS novation in May 2008 and the completion of the project. Although that payment included sums relating to additional services not included in the SDS contract, the payments made in respect of design core scope and design change, for design completion and for prolongation, exceeded £9.3 million, representing a further increase of approximately 40 per cent of the SDS contract price of £23,329,853.

48. I consider that CEC bears some responsibility in this period just as it did before contract close. CEC continued to fail to work in a collaborative manner to resolve design issues swiftly and with clarity or to provide a focus on enabling the project to proceed smoothly. The lateness and sheer volume of its comments were bound to cause delay and expense. I accept that as a public body with statutory responsibilities it would be inappropriate or even unlawful for it to fetter its discretion. The change that came about after the Mar Hall mediation, however, is striking. There is no suggestion that CEC ignored or in any way compromised its obligations in that period, and yet matters were dealt with in a wholly different way. The number of CEC staff allocated to the design process increased significantly and they were co-located with representatives from BSC and PB. The impression that I have is that, prior to the agreement at mediation, each department or section of CEC had been focusing only on what the ideal position would be for its own particular responsibilities. In effect, CEC commented with a number of voices rather than a single considered voice. The decisions made by local authorities in relation to consents etc. are usually matters that require some judgement, which involves balancing different – and sometimes competing – issues before reaching a single concluded view; they are not black and white. As such, it would have been legitimate to consider (when commenting on design) the overriding CEC view that there should be a tram system and that it would bring benefit to the city. Had there been someone with responsibility to oversee and co-ordinate the response from CEC to the many requests for approvals and consents, I think it likely that the responses would have been more proportionate, focused and reasonable. Without this, in carrying out its work, PB in effect had to meet the requirements of multiple departments with divergent interests.

Utilities

49. The need to divert underground utilities from the path of the proposed tram lines was recognised as a particular problem for the construction of any tram line through a city centre. There were usually uncertainties about the extent and precise location of utilities as records kept by utility companies were often incomplete or inaccurate. There was also unrecorded redundant apparatus relating to disconnected utilities that contributed to the congestion under ground, limiting the space available for relocation of utilities. In view of these uncertainties the diversion of utilities has tended to be an expensive part of tram or light rail schemes. Following the experience of contractors in earlier schemes to construct tram networks through city centres in the UK, tenderers were not willing to take the risk of bearing the costs of diverting utilities without adding substantial premiums to their bids.

50. The procurement strategy required the diversion of utilities in advance of the infrastructure works, to remove the uncertainty and the disruption to the programme for these works that undiverted utilities would otherwise cause for the infrastructure contractor. This strategy was intended to provide potential infrastructure contractors with an informed basis for pricing their bids, to reduce the need for risk premiums and to increase the probability of achieving the price certainty that CEC sought.

51. Instead of having utility companies diverting their own apparatus, tie planned to conclude an agreement with a single contractor who would have responsibility for the diversion of all utilities, except high-pressure mains and high-voltage power cables or other apparatus requiring the specialist involvement of the utility company owning the apparatus. Following a tendering exercise, on 4 October 2006, tie entered into the Multi-Utilities Diversion Framework Agreement (“MUDFA”) with Alfred McAlpine Infrastructure Services Limited. That company later changed its name to Carillion Utility Services Limited. At that time, this was the largest multi-utility project ever undertaken in Europe.

52. Even viewed in isolation, this element of the works itself ran over budget and took longer than expected. The effects went further than the works to the utilities, however, as the delay caused knock-on effects with the infrastructure works, which led to further delay and expense there. There were several reasons for the delay associated with the MUDFA works, including the uncertainty about the work that would be required, the delays in obtaining information from the utility companies about the location of their apparatus, the complexity of securing the consent of all utility companies to the draft Issued for Construction designs requiring the designs to be redrafted and resubmitted for approval before being issued to the MUDFA contractor, the unrealistic programme, the failure of the MUDFA contractor to relocate all utilities that had to be moved in advance of the Infraco works to construct the tram line and the inability of tie to manage such a complex contract.

53. The programme in MUDFA was unrealistic. It envisaged that the pre-construction services would be undertaken between October and December 2006 and the MUDFA works would thereafter take approximately 14 months between March 2007 and June 2008. This allowed for a gap of approximately 7 months between the programmed completion of the MUDFA works and the planned commencement of the works under the Infraco contract. The programme failed to make adequate provision for the uncertainties about the number and location of utilities in city centres at that time or for the extent of the delays experienced in other cities in the UK due to such uncertainties.

54. In March 2007, prior to the Scottish Parliament election in May, there was uncertainty whether the project would proceed, because the Scottish National Party (“SNP”) was committed to abandoning it. Accordingly, a revised MUDFA programme was agreed, which provided for the MUDFA works starting in July 2007 and finishing by the end of 2008, i.e. a period of approximately 18 months, with almost no buffer between then and the start of the Infraco works. Even this new period for the works for the diversion of utilities was inconsistent with the experience of other light rail projects in the UK. The length of the on-street section in the Edinburgh Tram project (i.e., from Haymarket to Newhaven) was approximately eight kilometres. A total duration of 18 months for the MUDFA works was unrealistic when compared with the experience in Manchester, where there was a two-kilometre on-street section, and in Birmingham, where there was an 800-metre on-street section. In each case the works took about two years to complete. In view of erosion of the buffer period between completion of the MUDFA works and the commencement of the Infraco works, it should have been obvious to tie’s senior officials from the outset that problems were inevitable and that the MUDFA works would impinge on the Infraco works.

55. The utilities programme kept slipping and the cost of the MUDFA works increased due to the discovery of additional utility apparatus and unexpected underground obstructions. Each revised programme was too optimistic and was based on levels of production that had never been achieved previously. When additional apparatus was encountered the absence of any allowance for slippage in the programme meant that there was likely to be delay. The MUDFA works were not completed before the signature of the Infraco contract. By the date of the mediation at Mar Hall in 2011, the MUDFA works were still incomplete. This included areas in which Carillion Utility Services Limited had ostensibly completed its works. For example, in the 700 metres of Shandwick Place, there were 302 utilities within the designated working area that had not been moved despite the alleged completion of the MUDFA works there.

56. The failure of the MUDFA contractor to clear utilities from the designated working area of Infraco in Shandwick Place was not an exceptional occurrence. When Infraco started work on Leith Walk in 2008 it encountered difficulties that prevented it from working in an efficient manner. These included lack of unrestricted access to designated work areas due to continuing MUDFA works in those locations, and the existence of utilities in other designated work areas that had not been moved despite the MUDFA contractor ostensibly having completed the MUDFA works in that location.

57. Following difficulties in the implementation of MUDFA it was terminated early, by agreement, in December 2009. Two further contractors were appointed to carry out the remaining required works to utilities. After mediation a different approach was adopted to the diversion of utilities. It was described as a “bow-wave” approach in which utilities were diverted in sections of the route immediately ahead of the Infraco works. Some core participants suggested that the bow wave approach should be used in all future tram projects but I do not think that it is necessary or appropriate to be prescriptive about the method of diverting utilities in advance of infrastructure works. It is sufficient that those involved in planning and constructing tram lines through city centres should be aware of the particular problems associated with the existence of utilities and the need to allow adequate time for their diversion in order to avoid delays to the construction of the tram lines.

58. Slippage in the SDS contract and MUDFA was largely the result of deficiencies in tie’s ability to manage contractors and their programmes. tie’s failures in that regard were in stark contrast to the management of the project after mediation. After the mediation, McNicholas Construction Services Limited (“McNicholas”) was appointed to carry out the remaining utility works and Turner & Townsend replaced tie as project managers. New governance arrangements were introduced. A weekly utility meeting was established to discuss and agree utilities issues. In addition, a utilities project manager was appointed, who acted like a clerk of works. He had a roving role to move up and down the site; problems discovered on the ground were immediately brought to his attention and there was a short line of communication from the utilities project manager to Mr C Smith, the Senior Responsible Owner, to enable issues to be resolved or recorded quickly. Moreover, a representative from each of the utility companies was co-located with the on-street works team, including experienced project managers, commercial managers, and representatives from McNicholas, to identify what the best solution would be to the utility diversions where conflicts arose. In short there was a collaborative approach to the removal of utilities which did not exist before mediation.

59. Despite the discovery of a considerable number of additional utilities conflicts in the on-street section between Haymarket and York Place after mediation, the necessary work was carried out more smoothly, with less confrontation with the contractor and within the required timescale. Although this was vastly different from what had happened during the MUDFA works, not everything changed. The estimate of the cost to complete utilities works was £2.91 million, of which £1.1 million was for legacy works on Leith Walk [WED00000092, page 0001]. Mr C Smith considered that the estimate was based upon unreliable information and £5 million was allocated to utilities risks [TRI00000153, page 0020]. The final account for the utility works completed after Mar Hall exceeded £20 million [ibid, page 0065].

60. The conclusions that can be drawn from the existence of utilities in city centres and the need for their relocation to accommodate light rail infrastructure are that:

• there are uncertainties about their precise location and the location of redundant apparatus and other underground obstructions.
• although site investigation will assist in identifying such problems, it is apparent from the experience after mediation that uncertainties will remain.
• the budget for diverting utilities should contain sufficient contingency to allow for such uncertainties.
• a collaborative approach to the diversion of utilities should be adopted.

tie’s failure to collaborate with others

61. tie’s failure to collaborate with designers, contractors, and stakeholders to resolve any issues that arose and minimise delays and consequent expense was not confined to the SDS contract or MUDFA. Although tie’s failure in that regard continued throughout the procurement of the Infraco contract and following its signature, the difficulties in the relationship between tie and BSC after the signature of the Infraco contract might be explained by tie’s distrust of BSC, notably BB which was part of that consortium, because of the events leading to the signature of the Infraco contract resulting in demands for increases in the contract price. After contract signature BSC’s demands for additional payments that were shown to have been excessive did nothing to improve the relationship between tie and BSC. However, once the Infraco contract was signed on 14 May 2008 the die was cast. Thereafter parties were bound by the terms of the contract. Before considering tie’s failures in the negotiation of that contract and the problems with the contract terms it is appropriate to recognise that CEC was among the stakeholders with whom tie failed to collaborate despite giving the appearance of doing so.

62. The culture within tie’s senior management prior to the signature of the Infraco contract was one of resentment of any challenge to, or perceived interference in, their role of procuring and managing the project. This is best illustrated by tie’s attitude to the involvement of a group of senior CEC officials from the Solicitor’s Department and the Departments of Finance and City Development responsible as members of the project team for scrutinising various aspects of the project, looking after CEC’s interests and reporting to their respective managers (the Solicitor to CEC and the Directors of Finance and City Development as the two responsible directors). This group was known colloquially as “the B team” and referred to as such by some witnesses in their evidence to the Inquiry. Following meetings between representatives of the “B team” and of tie at which members of the “B team” asked appropriate but searching questions, tie would complain to the appropriate director within CEC about what tie interpreted as interference in its procurement of the project. In September 2007, when the Director of Finance and the Director of City Development decided, on the advice of the “B team”, to appoint external consultants (Turner & Townsend) to review and quantify the risks to CEC arising from the proposed Infraco contract and Tramco contract, tie instructed an OGC risk review instead. The nature of the OGC risk review differed from CEC’s requirements and Mr Heath, a consultant involved in the OGC risk review, acknowledged that a review by Turner & Townsend would have gone into much more detail than the OGC team was able to do. tie’s resistance to scrutiny by Turner & Townsend was indicative of its resistance to any criticism that might, in its view, result in the project being cancelled.

63. tie’s attitude to CEC’s officials continued after the signature of the Infraco contract and was underlined by the actions of Mr Hamill, of tie, who confirmed in his evidence to the Inquiry that the relationship between some of the members of the senior management of tie and CEC officials was not very harmonious. On Mr McGarrity’s instruction he adjusted the quantitative risk analysis (“QRA”) after financial close to reduce the allowance for general programme delay by £1.3 million, despite the fact that the reasons for doing so were not explained to him. Although the changes proposed by Mr McGarrity reflected the recommendation by tie contained in the Financial Close Process and Record of Recent Events document [CEC01338847], it is clear from the terms of his communication with the members of the tie management team mentioned below that Mr Hamill was unaware of the justification for the change or of its relationship to the Financial Close Process. He altered the relevant figure manually and sent the amended QRA to CEC officials. In doing so, he advised Mr Bell, Mr McGarrity, Ms Clark and Mr Murray, of tie, that he had “pockled the spreadsheet” [PHT00000023, page 61] and that it solved the problem and helped them to “get the final result past CEC as I doubt they will notice what I have done” [ibid]. Mr Hamill asked the recipients of his email to confirm by a specified date before he sent his email to CEC officials that they were content with his proposed approach and that he would take no response as being acceptance. None of the recipients of the email responded to Mr Hamill to advise that they disagreed with his proposed approach, from which I have inferred that they approved of Mr Hamill’s actions and his attitude towards CEC officials. Although the effect of the change may not have been material in the context of the project as a whole Mr Hamill was aware that his actions were irregular. As was recognised by Mr McGarrity, Mr Hamill ought to have explained to CEC officials that he had not re-run the computer programme and had entered the figures manually as well as his reasons for doing so. Although Mr McGarrity stated that he would have wanted CEC officials to know what had been done if there was a manual adjustment to the QRA, he did not respond to Mr Hamill’s email to make that suggestion. Mr Hamill’s failure to explain to CEC officials what he had done, together with the failure of the recipients of his email to challenge Mr Hamill’s explanation that what he had done was apparently intended to avoid scrutiny of his actions by CEC officials, illustrate an acceptance by senior management in tie that it was permissible to withhold information from CEC officials in order to get the project underway.

64. tie’s failure to collaborate with others extended to its engagement with Audit Scotland. Its resistance to what it perceived as criticism mentioned in paragraph 62 may also have been influenced by uncertainties about the future of the project because of the political climate prior to and after the Scottish Parliament election when it was known that the SNP administration was opposed to the project. In June 2007 when there was political scrutiny of the project tie withheld relevant information from Audit Scotland in its inquiries prior to the preparation of its report to the Scottish Parliament. In particular, it withheld two Powerpoint slides from Mr Greenhill, the official from Audit Scotland responsible for the report about the Tram project. These slides disclosed significant slippage in the design programme and were material to Mr Greenhill’s investigations. A further example of manipulation of the provision of information to Audit Scotland arose in relation to a claim that was being made in 2007 by PB for an extension of time of 40 weeks and an additional payment of £2,248,517 in respect of prolongation and additional services between 3 July 2006 and 9 April 2007. Although tie advised PB that the claim was well presented and worthy of consideration, tie requested PB to delay processing the final claim through document control until after the Audit Scotland report had been submitted to the Cabinet. There were also legitimate concerns about the accuracy of the information provided by tie to Audit Scotland about the cost estimate and the statement that the Infraco bids were “firm”.

Risk

65. The personnel at tie involved in the procurement and delivery of the Tram project were aware of the danger of events that might result in delay and in increased costs. Such danger is commonly understood by those engaged in construction and engineering contracts and is known as risk. In all such contracts it is necessary to make allowance for risk within the cost of the project. In the Edinburgh Tram project, the allowance for risk within the total estimated cost of £498 million reported in the FBC was just under £49 million although that figure was not disclosed publicly. That allowance for risk was assessed on a P90 basis, which meant that there was a 90 per cent probability that the allowance would not be exceeded. Using P90 meant that tie had greater confidence in delivering the project within budget than if they had used the more normal basis for such projects of 80 per cent probability that the allowance would not be exceeded (P80). By using P90 the amount allowed for risk within the estimated price was less than if tie had used P80.

66. Whatever allowance is made for it, risk must be managed throughout the project. The management of risk can involve various measures including its elimination, its transfer to the contractor, its minimisation or control and its quantification. tie set out to use measures falling into each of these categories, but it is apparent that its risk management was not successful.

67. The elimination of risk associated with design and utilities was dependent upon the implementation of the strategy that the design for the infrastructure works would be fully complete by the time that a price for those works was agreed, and that the works to divert utilities would be carried out under a different contract and would be complete in a section of the route before the Infraco works commenced in that section. The failure to implement that strategy meant that the risk had not been eliminated as planned. As the risks had not been eliminated, tie intended to transfer them to Infraco, particularly the risk arising from the incomplete design, and it was this that led to the discussions in December 2007 in Wiesbaden. However, both the written agreement that followed those discussions, the “Agreement for contract price for phase 1A” [CEC02085660, Parts 1–2] and the pricing schedule in the Infraco contract, SP4 [USB00000032], left substantially the entire risk with tie, as it was the intended purpose, as well as the effect, of each of the pricing assumptions in SP4 to allocate to tie the risk if the circumstances were not as assumed.

68. The most relevant of the assumptions in SP4 were that:

• the delivery of design would be aligned with the Infraco construction delivery programme.
• the design delivery programme under the SDS Agreement was the same as the programme contained in Schedule 15 to the Infraco contract.
• no additional earthworks would be required, and the consortium would not encounter any below-ground obstructions, voids, contamination, or soft material.
• the works required in relation to the road structures in Princes Street, Shandwick Place, Haymarket junction and St Andrew Square would not extend to full-depth reconstruction.
• the diversion of utilities would be complete in accordance with the programme, save for ones that had been specified in the Infraco contract as being the responsibility of the consortium.

69. In SP4 tie and Infraco acknowledged that many of the assumptions were known not to reflect the reality of the situation and that there would be Notified Departures resulting in increased costs immediately after the signature of the Infraco contract. tie failed to make any assessment of the likely number of Notified Departures or to quantify the risk to which it was exposed if the circumstances differed from the various assumptions in SP4. tie took no steps to ensure that there was an awareness within CEC of the effect that the terms of SP4 would have on the contract price. Although some officials in CEC were aware of the terms of SP4, others were not, having taken a conscious decision to rely on tie officials to keep them informed.

70. Apart from failing to eliminate risks or transfer them to Infraco, tie’s efforts to control and quantify risk also included errors that had the effect of underestimating the risk allowance and therefore the cost of the project. tie followed a QRA process that was recognised as a standard procedure. It involved tie entering the estimated cost and likelihood of more than 400 risks contained in the project risk register into specialist computer software. The output of the computer programme provided an assessment of probabilities of various out-turn costs from which a risk allowance could be derived for the project assuming a particular percentage probability. Although that was a standard procedure, the computer output was only as reliable as the input. tie’s estimated costs of possible risks was based upon optimistic assessments of the required allowance for such risks made by a group of people within tie but their determination of the values to be put on the individual risks and their consequences were not adjusted to take account of optimism bias, which will be considered in paragraphs 72–75 below.

71. It is apparent that, in some instances, tie’s risk allowance was wholly inadequate. The best example of this concerns the MUDFA works. In the budget at FBC in December 2007, the price for these was noted as being approximately £51.5 million and the risk allowance for them was just under £11.5 million. At financial close these figures were reduced to approximately £48.5 million and £8.5 million respectively. Ultimately the cost overrun for utility diversions was approximately £50 million.

72. Professor Flyvbjerg described optimism bias as follows:

“a cognitive predisposition found with most people to judge future events in a more positive light than is warranted by actual experience. Clearly an optimistic budget is a low budget, and cost overrun follows” [TRI00000265, page 0006].

The available guidance at the time of the project recognised the need for an upward adjustment of the allowance made for risk in the estimated cost of major construction and engineering projects to take account of optimism bias. tie failed to comply with the guidance and accordingly underestimated the allowance for risk in the budget.

73. In the Preliminary Financial Case in 2003, tie adopted the approach that the percentage figure brought out as the risk contingency could be deducted from the percentage that was to be allowed for optimism bias in terms of the guidance. This was not appropriate as the allowance for optimism bias was intended as an uplift to the risk contingency.

74. In the draft Interim Outline Business Case tie classified the project as “standard civil engineering” [CEC01875336, Part 5, page 0090, paragraph 6.4.3] and selected the uplift for optimism bias on that basis. tie considered that the starting values for uplifts in the Treasury Guidance were high and could be reduced with the application of procurement and project and risk management best practice. The consequence of this approach was that no realistic allowance was made for the effects of optimism bias. Moreover, the project should have been classified as “non-standard civil engineering”. Had that occurred and the appropriate uplift been used for that classification it could not have been accommodated within the available “headroom”; that is, the amount by which available funding exceeded the anticipated cost. Even if the 80 per cent confidence level had been used the uplift would have resulted in the estimated cost of the project exceeding the available budget. Thus even if tie assumed a risk of cost overrun of 20 per cent, representing four times the risk of cost overrun that was reflected in the statements by tie to CEC that there was 95 per cent certainty that it could deliver the project within the budget envelope, the estimated cost would exceed the available funds.

75. By the time of the draft FBC, tie had decided that there should be no provision for optimism bias and in accordance with that decision no allowance was made for it in the FBC.

76. Apart from the above errors in risk management, tie made significant unjustified reductions in the risk allowance between the approval of the FBC in December 2007 and the signature of the contract in May 2008. For example, on 11 February 2008 tie reduced the risk allowance for design and consents by £1.124 million and for MUDFA by £3 million. Although the claimed justification for these reductions was the conclusion of the Wiesbaden and Rutland Square Agreements it is not apparent that either agreement could provide a justification for reductions to the risk in respect of either design or MUDFA. In addition, the risk allowance of £17,526,000 for the procurement of the Infraco contract and the Tramco contract was reduced to nil. Although it is true that once the Infraco contract and the Tramco contract were in place it could be said that the risks of procurement could not arise, at that time the conclusion of the contracts was still some time away and, until their terms were finalised, the risks of procurement were still live such that there was no justification for reducing the risk to nil. It appears that the real driver for the risk reductions was an attempt to present the price as being within budget despite the increase in price brought about by each of the Wiesbaden and Rutland Square Agreements.

77. In addition to the changes mentioned in paragraph 76, for the period ending 1 March 2008 the QRA provided by tie to CEC was expressed to a P80 probability, which means that there was only an 80 per cent probability that the costs would not be exceeded. Although it is not unusual to use P80 in calculating risks, tie had used P90 in their risk assessments until that date to reflect CEC’s desire for price certainty. Where the probability threshold is reduced, the allowance that must be made for risk is reduced, which in turn reduces the overall estimated cost of the project. The practical effect was to reduce the risk allowance, and consequently the estimated cost, by £3 million. Despite this, tie said nothing to CEC to draw attention to the change that had been made, to explain the effect that it would have on the total risk allowance or to justify it. It was another device by tie to present the price as being within budget.

Governance

Governance structure

78. The governance structure for the project was unnecessarily complex. The structure adopted did not follow any recognised governance model used at the material time. There was a lack of clarity as to who had responsibility for the performance of certain tasks and there was some overlap regarding the respective roles of the various bodies created, and individuals appointed, to deliver the project. It is also unclear whether all the individuals appointed to specific roles actually fulfilled these roles. The problems with governance are apparent when one considers the various decisions taken concerning the governance structure from July 2005 onwards.

Project Board

79. The first apparent problem relates to the failure to follow the guidance upon the creation of the project board. The guidance indicated that the project board should consist of representatives of the three interests in the project represented by the Senior User, the Senior Supplier and the Executive. The Senior User is a person or persons who represent the entity that will make use of the output of the project when it is complete. The function of the Senior User is to ensure that, when complete, the project output will meet the needs of those who will use it. The Senior Supplier will be a person or persons who represent the teams that do most of the work. The function of the Senior Supplier role is to be in a position to commit or acquire resources necessary to complete the project. The Senior Supplier role need not come from the customer organisation and may consist of representatives of external contractors as well as, or in place of, internal managers. Applied to the Tram project, it would be expected that representatives from BSC would be included in the supplier role, as might representatives from PB. The Executive represents the business interest and is a person rather than a group of people. That person is ultimately in charge of the project. The guidance is clear that the project board is not intended as a democracy in which decisions are taken by a majority. The decisions are ultimately those of the Executive, and it is that individual who instructs the project managers. In terms of the PRINCE2 method. The Executive is responsible for appointing the other project board roles and chairs the project board.

80. The core governance proposals were similar for each of the Edinburgh Airport Rail Link and the Tram project. When project boards for each of them were first proposed there was no clear statement of their role and their responsibility. The statement in the Report for the tie Board meeting on 25 July 2005 that the Tram Project Board (“TPB”) would be the principal decision-making body is inconsistent with the guidance in the PRINCE2 model that a project board should not have directive power. The suggestion in that Report that tie would delegate its powers to the boards also indicates that their role would be that previously undertaken by tie and would therefore be directive or executive. In terms of the guidance on project boards, however, that is not the proper function of a project board. It appears that what was done was, in essence, to regard each project board as a mini-tie, which would focus on a single project. There is a further fundamental inconsistency between the statement that powers would be delegated to the project boards and the comment by Mr Bissett in his evidence to the Inquiry that they would have the function of oversight and challenge but tie would retain the ultimate responsibilities of the project boards. [PHT00000028, pages 39-41]

81. Later reports to the tie Board contained similar statements. The TPB was noted to be the primary decision-making forum and also the oversight body for the project, but nonetheless tie retained overall responsibility for the quality of tie‘s service delivery and for fundamental matters affecting the project. Also, decisions of the TPB were to be reported to the tie Board for ratification, and the TPB was to be seen as a committee of the tie Board so as to enable the delegation of powers to it. It is hard to see how it was intended to reconcile the notions that:

• the project board was the decision maker, but was also providing oversight;
• the project board was the decision maker, but tie retained responsibility; or
• the project board was the decision maker, but its decisions would require ratification by tie.

82. A further difficulty was that the Chairman of the TPB was initially to be Mr Gemmell, a non-executive director of tie, but that was also at odds with both the OGC and the PRINCE2 guidance. According to both, the chair of the TPB should be someone with a core executive role and responsibility. In the OGC guidance the Senior Responsible Owner (“SRO”) mentioned in paragraph 83 below was to chair the project board.

83. The second problem was identified in May 2006, following the OGC review. That review noted that the governance structure was complicated compared with best practice which it explained as follows:

“A best practice project governance structure would consist of an empowered project team under the direct control of an empowered and accountable project director. The project director would report to a project board chaired by the Senior Responsible Owner (‘SRO’) for the project on behalf of the project promoter.

“The project board and the project director would have clear terms of reference in respect of their respective responsibilities delegated from the project stakeholders.

“The OGC describes the role of the SRO as ‘the individual responsible for ensuring that a project or programme of change meets its objectives and delivers the projected benefits. They should be the owner of the overall business change that is being supported by the project. The SRO/PO should ensure that the change maintains its business focus, has clear authority and that the context, including risks, is actively managed. This individual must be senior and must take personal responsibility for successfully [sic] delivery of the project. They should be recognised as the owner throughout the organisation.” [CEC01395434, page 0006, paragraph 3.1.]

84. Prior to this review no SRO had been appointed. Although Mr Renilson was appointed immediately thereafter he interpreted the role as requiring him to use his best endeavours to “make the project happen” [PHT00000040, page 91]. He also considered that his role as SRO related only to the period when the tram would be operational and not during the construction period. I have seen no evidence that could justify his belief that his role was so limited; to the contrary there was clear evidence, of which Mr Renilson must have been aware, that the responsibilities of the SRO covered the construction period. The result was that no one was performing the SRO role before and during the construction phase until the appointment in June 2009 of Mr Jeffrey as SRO. Having regard to his position as chairman of tie Mr Jeffrey’s appointment as SRO was inappropriate.

85. The fact that nobody was performing the role of SRO before June 2009 should have been apparent to all the members of the TPB and it is extraordinary that nothing was said or done at the time to rectify this omission. Allowing the project to proceed in the absence of someone to perform the key role of SRO – or the equivalent of the Executive in PRINCE2 terms – was a fundamental defect in the governance arrangements. It meant that there was no single person with responsibility for the project and the focus that could be expected from an active SRO was absent.

86. Even if Mr Renilson had undertaken the role assigned to him, the situation would still have been far from ideal. As the project governance developed, Transport Edinburgh Limited (“TEL”) became a delivery vehicle for the project and Mr Renilson was its CEO. As the person with ultimate responsibility for the project, in my view it is better for an SRO to be someone within the client that is commissioning the work or the end user of what is provided. The SRO should be on the outside looking in. As such, the SRO will have some objectivity in relation to the actions of the entity or entities responsible for delivery. Although TEL might have been considered as an end user, it was not appropriate to have a representative from it because it was also a delivery vehicle. As CEC was the owner of this project, it would have been most appropriate to have had an SRO from within CEC. This would also have addressed the issue of unsatisfactory reporting to CEC.

87. The third problem, related to the second, was the appointment of Mr Gallagher to the joint roles of Chairman and Chief Executive of tie in August 2006. This was a departure from the code on good corporate governance derived from the Cadbury and Greenbury Reports. Mr Aitchison’s purported justification for that departure was that it was a pragmatic approach in the prevailing circumstances, including the finalisation of the business case. In terms of OGC guidance it should have been the SRO who had responsibility for the business case. Had CEC recognised the role of the SRO and ensured that someone was protecting the interests of CEC by performing that role, the perceived justification for departing from the code would have been shown to be without foundation. Allowing Mr Gallagher to perform the dual role removed a check that would otherwise have been in place in the period throughout contract negotiation and execution.

Relationship between tie and TEL

88. When TEL was incorporated in 2004 with a view to integrating bus and tram services in Edinburgh, Lothian Buses (“LB”), the operator of bus services, had no role in the development or operation of the trams because the latter role had been awarded to Transdev Edinburgh Tram Limited (“Transdev”), whose parent company was an experienced operating company with invaluable expertise in the development and procurement of similar projects. In November 2005 the minutes of the TPB as a sub-committee of the tie Board recorded that TEL would “hold the mantle of control and ownership post financial close” [TRS00002067, page 0002, paragraph 3.1] meaning that it had control during construction. It is difficult to understand that decision because tie was the body that employed the people to carry out the work necessary to deliver the project. It was also the body that was seeking tenders for the infrastructure and tram works. It was the body that had entered into the SDS contract. It was the only body in receipt of funds from CEC. In any event, it is not obvious that TEL had sufficient resources or employees to play an important role in the delivery and/or oversight of the project, given that TEL had only two employees (Mr Renilson and Mr Richards) and derived all its funding from tie.

89. Despite TEL’s lack of resources mentioned in paragraph 88, the minutes of the TPB of 23 January 2006 record the merger of the TPB and TEL with the result that instead of tie delegating responsibilities to the TPB, the TPB would be part of the body that owned tie. In February a governance structure was proposed that resulted in TEL “stepping into tie’s shoes” for the project. The decisions of the merged body of TEL and the TPB would be taken solely by directors of TEL. This meant that, in effect, TEL had been put in charge and tie was taken out of the picture. Nevertheless, the paper proposed that the regular attendees at the TEL Board should include the Tram Project Director (“TPD”), other tie operational management, other CEC representatives, Transdev representatives, a representative from the Scottish Executive and Mr Papps. This further obscured the point of the changes and blurred the distinction between the various entities. There was still no representation of the supplier interest.

90. In June 2006 a paper on governance [CEC01803822] was presented to the TEL Board that was intended to address the position through to financial close. It referred to the “fulcrum” of the project as TEL’s Board acting as the TPB. The authority of the TPD came from TEL. Following the merger of TEL and the TPB it was felt necessary to have clearer delineation between TEL, acting as the TPB, and its acting in its other capacities. Accordingly it was proposed that the project board would revert to the title of TPB and would be a formal committee of TEL.

91. The paper also noted the establishment of two sub-committees of TEL, one of which was the Design, Procurement and Delivery (“DPD”) Sub-Committee. It was to be headed by Mr Gallagher, the Executive Chairman of tie. This further complicated the decision-making path. The DPD Sub-Committee under Mr Gallagher could take a decision that would advise the TPB, a sub-committee of the TEL Board. In order for a decision to take effect it was necessary that TEL give a direction to tie under the chairmanship of Mr Gallagher. It may be said that formal steps were not required to achieve this, but it remained the position that this was a very complex structure and that reliance on informal directions or instructions usually creates scope for misunderstanding and confusion.

92. There were further iterations of the governance proposals in which the TPB became an independent entity, rather than a sub-committee of TEL. By October 2006 in the structure to financial close the key bodies were listed as the TEL Board, the TPB and the two sub-committees of TEL referred to in paragraph 91. tie was no longer identified as a key body despite the fact that it employed almost everyone necessary to deliver the project and was the only body in receipt of funds to do so; in short anything that TEL was required to do would be done by tie.

93. In September 2007, both the TPB and TEL were each charged with execution and oversight of the project and there was a substantial overlap in the membership of the TPB and the TEL Board. The overlap in both the roles and the membership of both bodies provided scope for confusion as to where the ultimate responsibility should lie. This created a danger that issues that arose would not be properly examined and this is what happened in practice.

94. The complexity and extent of duplication built into the governance structure is illustrated by the practice of the TPB having joint meetings with the tie Board. Although this only occurred in October during 2007, it resumed in January 2008 and for the first half of the year the TPB held joint meetings – sometimes with TEL and sometimes with tie. There was then a gap until there were further joint meetings with tie in November and December 2008 and from January 2009 to March 2009. When presentations were given to a joint meeting of tie and the TPB, the minutes of the meeting refer only to the latter, adding to the difficulty of identifying where responsibilities lay and which bodies were taking decisions. The alternation of joint meetings between the various entities in early 2008 also created the situation in which the minutes of a joint meeting of TPB and TEL would be approved at a joint meeting of TPB and tie, and vice versa. These practices suggest that there was no proper understanding of what the governance structures should achieve.

95. On 23 January 2008, there was a joint meeting of the TPB, tie and TEL. The papers for the meeting contained yet another iteration of governance within weeks of the CEC’s approval of the old one. The new governance structure was intended for the construction period that it was hoped would commence shortly after January 2008. If there was to be a separate structure for the construction period it clearly would have made sense to record it and seek approval at the end of 2007. Taking many months to agree a structure only to have it superseded almost immediately clearly demonstrates very poor management of this issue.

96. As was the case with earlier structures, the new proposed arrangements both describe the TPB as an oversight body and as having full delegated authority to execute the project. There was a confusion of roles within the proposed structure. tie’s role was described as being the management of the relevant contracts to deliver the tram network in a fit state for operational purposes, on time and budget. The papers for this meeting on 23 January 2008 included a copy of the proposed operating agreement between tie and CEC in terms of which tie was to provide the services to deliver the tram service to CEC. This conflicted with the intention, expressed elsewhere in the papers, that tie was to provide the delivery services to TEL. It also conflicted with what had been agreed by CEC just the month before. Once again, the clear inference is that there was a lack of understanding as to what the parties were trying to achieve and a corresponding lack of understanding of the roles and responsibilities of each body.

97. The proposals also noted that it was intended that there be “appropriate common membership” [CEC01015023, page 0074] across the tie, TEL and LB (Lothian Buses) Boards and that the councillors would be the same on both the tie and TEL Boards. Mr Bissett accepted that, in practice, the members of the boards came together in a single meeting. This further calls into question the purpose of having distinct bodies and blurs the allocation of responsibilities.

98. This meeting also established the Approvals Committee, which was intended to give final approval to the contracts prior to signature. It is relevant that the Approvals Committee was to be a sub-committee of the TPB and of the Boards of both tie and TEL. This overlap is not surprising as, on the basis of the structures that had been put in place, it would be very difficult to determine which entity should take the decisions and give the advice. It is perhaps one of the most pointed indicators of how confused the governance structures had become that in order to ensure that such a critical decision was properly taken, it was necessary that it be structured so that all three bodies took it.

Bonuses

99. The issue of bonuses paid to the people engaged in tie and TEL was the subject of comment during the Inquiry and it seems that this matter can most appropriately be considered along with the structures created for the project.

100. Guidance on good governance required companies to have a formal and transparent procedure for developing policy on executive remuneration and for fixing packages of individual directors. It also stipulated that remuneration committees should consist exclusively of non-executive directors who are independent of management (Cadbury Report).

101. In 2003, tie’s bonus scheme allowed certain of its employees a relatively modest performance-related bonus of 10 per cent of base salary (15 per cent for director-level staff). The stated justification for such a bonus was that tie had hired certain employees from the private sector and the absence of a car and bonus would be perceived as a disadvantage to the tie package.

102. Mr Gallagher was a member of the Remuneration Committee and at its first meeting on 16 October 2006 he nominated Mr Cox as its Chairman and submitted a paper for the committee’s consideration. The committee approved the paper that proposed that (with effect from 1 April 2007) tie executive directors and other recommended senior managers be entitled to an annual bonus opportunity of 50 per cent of salary. All other tie employees were to have an annual bonus opportunity of 25 per cent of salary [CEC01830099, page 0002, item 4; CEC01828971, page 0004, paragraphs 1 and 3]. The context for the increase in bonus opportunity was noted to be that 2006 had seen a significant transformation in tie (from a project development organisation to a project management organisation, responsible for project managing and delivering world-class transport infrastructure projects valued in hundreds of millions of pounds) and that tie was now competing with the very best organisations in the private sector to attract and retain the best talent.

103. Even although he was not present when the Remuneration Committee considered what actual bonus should be paid him, it was inappropriate and contrary to good governance for Mr Gallagher, as the Executive Chairman of tie, to be a member of this committee, far less to propose the level of the bonus opportunities for tie’s executive directors who included himself.

104. The committee merely endorsed Mr Gallagher’s proposals at its first meeting and did not seek any expert advice or undertake independent checks about the suitability of the proposed criteria for bonus payments. Nor did it consider deferring at least part of the payments until the actual cost of the project was known. In these respects it lacked a formal and transparent procedure for developing policy on executive remuneration and did not give the appearance of being independent of management.

105. In the run-up to financial close in May 2008, the bonus entitlement of senior tie staff (and contractors) was dependent partly on individual performance and partly on the timing of financial close and the reported cost, or budget, of the Tram project at financial close. In the event, it appears that the part of the bonus entitlement relating to the timing of financial close was not paid (because financial close took place later than 28 March 2008), but that the part of the bonus entitlement relating to the estimated cost of the project was paid.

106. Following the departure of Mr Gallagher the Remuneration Committee concluded that there were inadequate performance management processes in place and it approved a new bonus scheme which related future bonus payments to senior directors to the completion of the project within agreed cost and timing criteria. In the event the committee accepted Mr Jeffrey’s recommendation that there should be no bonus payments made for 2009/10.

Contract close

107. As part of the procedure in which CEC authorised tie to close the Infraco contract the following steps were necessary and were each undertaken on 13 May 2008.

(1) The tie management team, including Mr Gallagher, met and formally concluded that it was satisfied with the contract terms and that the tie Chairman should send a letter to the CEC Chief Executive recommending that contract completion should proceed.

(2) Following on from the above, Mr Gallagher wrote to Mr Aitchison, advising him that tie was of the view that the final terms negotiated were materially consistent with the terms of the FBC, that the final terms confirmed the value-for-money proposition demonstrated by the FBC and that it was appropriate to conclude the contracts. A letter from Mr Mackay as Chairman of TEL was sent in parallel.

(3) The Policy and Strategy Committee of the Council authorised the CEC Chief Executive:

“to instruct tie Ltd to enter into contracts with the Infraco and Tramco bidders in the context of recent changes detailed in the report by the Chief Executive” [CEC01891564, page 0007, item 11].

(4) The CEC Chief Executive wrote to Mr Gallagher confirming that tie should immediately enter into the Infraco contract and the Tramco contract.

(5) The Approvals Committee consisting of Mr Gallagher, Mr Mackay and Mr Renilson, Chief Executive of TEL, met and gave authority to Mr Gallagher, as tie Chairman, to proceed with completion of the contracts. In reaching that decision the committee had to consider whether the final terms of the contractual arrangements were within the terms of the FBC, subject to slippage of up to one month in programmed revenue service in 2011. If it did consider that this requirement was satisfied, it had to decide whether it was appropriate to enter into the contracts and their decision had to be unanimously in favour of doing so before tie could proceed to sign the contracts. It also had to be satisfied that approval had been received from the CEC Chief Executive to proceed to execution of the Infraco Contract Suite.

108. The Approvals Committee failed to recognise that when they are taken together the documents submitted to them in support of contract close presented a materially misleading picture. There was inadequate scrutiny of the material and a failure to question relevant officials when the Approvals Committee met. The only people present at the meeting were the three members of the committee. There was no common understanding among the members of the committee of their role. There was conflicting evidence from them as to what they did. Mr Mackay gave evidence, which I have rejected, that the committee went through the contract but the evidence of Mr Renilson and Mr Gallagher was that the process was a formality with members simply checking that material existed. There was no effective oversight by the committee. No records were kept of the deliberations of the committee or of their reasons for being satisfied that tie should proceed to conclude the contracts.

109. The governance arrangements for the authorisation of tie to conclude the contracts were woefully inadequate. Nothing in the various steps towards contract close required a person or persons with sufficient independence from those who had negotiated the contract to apply their minds to the issue of whether the contract conformed to the FBC, to identify what material was available and what conclusions ought properly to be drawn from it, to make a decision and, importantly, to keep a record of all that they had done.

110. The revised governance arrangements for the project as a whole introduced in 2011 were, in my view, a very significant improvement on what had existed previously. Although the mediation at Mar Hall had resulted in a settlement that meant that the project should be easier to administer than it had been, nonetheless, a substantial amount of construction work remained to be done and the improved governance arrangements were an important factor in that work being completed within the revised timetable. A number of features of the revised governance arrangements contributed to that outcome, including:

• The governance arrangements were simpler and clearer than those prior to Mar Hall and were easy to understand.
• As promoter of the project, CEC took responsibility for, and direct control of, governance.
• CEC invested a large measure of responsibility for the project in the hands of a single person, Mr C Smith, as the SRO, who understood and performed that role.
• There were regular meetings between employer and contractors to resolve any issues that arose before they escalated.

The Infraco contract

(a) Contract negotiations

111. tie’s failure to implement the procurement strategy resulted in the need for the contract negotiations and the resulting Infraco contract to reflect the altered circumstances. The Infraco contract that was signed on 14 May 2008 was the result of protracted negotiations between tie and BBS commencing with the invitation to negotiate (“ITN”) issued on 3 October 2006 by tie to pre-qualified bidders. On 23 and 25 October 2006, BBS expressed concerns about various issues, including the early stages of the design provided to them, gaps in the supplied drawings, and the potential influence on the final design caused by unresolved planning requirements and the wishes of third parties. Moreover, significant issues were raised regarding drawings provided for bridges and other structures including the absence of drawings for 24 structures, and it was said to be questionable whether the design, based on the drawings supplied, was sufficiently advanced to enable a robust and credible price to be prepared. There were also significant inconsistencies in the information provided by tie. Some of tie’s employees shared these concerns and suggested on several occasions that the project be paused to allow the design to catch up and to enable the process of awarding the Infraco contract to start on a proper footing. By the end of 2006, considerable difficulties and delays existed in relation to design but tie, led by Mr Gallagher, refused to delay the tendering process because of emerging concerns that the project might not go ahead, and that a lot of time could have been lost while waiting for more detailed design to become available before obtaining bids. In adhering to a programme that was incapable of being delivered tie was reckless and placed its own interests ahead of the public interest, despite the fact that it was a company wholly owned by CEC and dependent on public funds.

112. tie’s concerns about the future of the project were heightened by the SNP’s opposition to it in its manifesto for the Scottish Parliament election published in 2007 and the SNP minority Government’s attempt to cancel the project in June 2007 that was frustrated by the Scottish Parliament. As will be discussed in paragraphs 188–189 below, the Scottish Ministers withdrew the support of officials in Transport Scotland whose technical experience would have been invaluable in advising tie in the contract negotiations.

113. It is worthy of note that, during contract negotiations in the period between April and June 2007, tie did not have access to legal advice, having dispensed with the services of DLA in April and before the start in June of the internal solicitor recruited to replace DLA. Thereafter tie had advice only from the internal solicitor until the re-engagement of DLA. There is some uncertainty about the latter date but it was probably around August 2007. It is not possible to conclude that tie’s actions in this respect resulted in increased costs for the project but dispensing with the services of solicitors, experienced in procurement and in advising on the terms of commercial contracts, and replacing them with a newly recruited internal solicitor who had had no prior involvement with the project was a serious error by tie, particularly at a critical period when tie had to evaluate tenders including the consolidated proposals submitted by BBS and the other tenderer in May 2007. The probable reason for tie’s actions in this respect was to save expenditure but if that is correct, it was a false economy.

114. tie’s approach to the contract negotiations was determined by CEC’s desire for price certainty for the project which included, but was not restricted to, the cost of the infrastructure works. In an attempt to satisfy that requirement tie advised tenderers that it was not obliged to award the Infraco contract to the preferred bidder if the price exceeded £218.5 million but could do so at its sole discretion. Following receipt of the tenders from both bidders in May 2007 it was apparent to tie that forecast capital costs exceeded available funding and that further savings were required.

115. tie’s proposed solution was to reduce capital costs to a sum within the available budget by value engineering (“VE”) savings. VE is a process routinely carried out in construction contracts whereby the parties involved in the works consider whether there is a cheaper means by which the objectives of the contract can be met. It is normal for clients and contractors to seek VE opportunities to achieve savings on the cost of a project. Such opportunities vary according to the individual project but, for example, might relate to the method of construction or changes to the form of specific structures, resulting in lower costs. The two bidders for the Infraco contract had identified a number of opportunities for cost savings and improvements. The difference in the treatment of VE savings in this project from that adopted in other projects was that all the savings were to accrue to tie, with no share being payable to the contractor.

116. A series of VE workshops were arranged with each of the Infraco bidders to discuss savings to close the funding gap. The level of VE savings sought by tie was unachievable, not least because tie failed to take into account the cost of redesign occasioned by changes in structures necessary to achieve such savings and of the consequent delay resulting from the redesign. I accepted Mr McFadzen’s description of the VE savings being sought by tie as a “fantasy” and that they were being used as a form of “financial engineering” so that tie could “manipulate” the figures in order to report to CEC that the cost of the project was within the available budget [PHT00000034, pages 43–44].

117. In October 2007, tie appointed BBS as the preferred bidder for the Infraco contract. There had only been one other remaining bidder at that stage. However, the assessment of best and final offers from each of the bidders had been carried out while the design was only approximately 58–60 per cent complete with the result that the bids had been prepared on the basis of the preliminary rather than the final design, and 30 per cent of the price from each preferred bidder consisted of “provisional sums” being no better than a “round-figure guess”. The effect of the state of design also meant that the bidders amended the proposed contract terms and conditions to protect their risk position pending receipt of more design information and completion of due diligence. Although tie sought to have this provisional element of the price firmed up once BBS had been appointed as the preferred bidder, BBS was resistant to providing more fixed prices. To have such a large element of the price remain uncertain was clearly at odds with CEC’s desire for price certainty.

118. Although tie might have had an aspiration that matters would improve in the negotiations leading to the signature of the Infraco contract, the conduct of the negotiations and the terms of the Infraco contract failed to achieve tie’s ambitions. On 13 December 2007, a week before the CEC meeting to approve the FBC, Mr Gallagher and Mr Crosse attended a meeting with representatives of BBS at Wiesbaden. Mr Gilbert, tie’s commercial director in charge of procurement, prepared briefing notes for the meeting that recommended conceding an increase in the price in return for BBS accepting the liability for “design development risk”. However, Mr Gallagher’s agenda was to secure an agreement on a figure that could be used to illustrate that the project would be delivered within the estimated cost of £498 million even although he was aware that the agreed figure would be subject to unquantified and unquantifiable increases as design progressed. Mr Gallagher and the principals of the consortium, Dr Enenkel and Mr Hofsaess, had a private meeting following which tie agreed to an increase of £8 million in the Infraco contract price in exchange for certain provisional sums being made firm and fixed. The adjusted contract price after Wiesbaden was £218,262,426 which was within the target price mentioned in paragraph 114 and satisfied Mr Gallagher’s objective. Design development risk was not transferred to BBS. The agreement reached at Wiesbaden resulted in a written agreement signed on 20 and 21 December 2007.

119. On 20 December 2007, CEC approved the FBC which stated that the capital and maintenance costs of the scheme had been finalised and that, for line 1a, it was forecast to be £498m. The forecast was stated to be based upon firm rates and prices received from the bidders for system construction, vehicle supply and maintenance and included a risk contingency. The figure of £498 million was a “target number” that tie management felt should be given to CEC, as opposed to a cost derived from empirical data that is suggested in the FBC. Moreover the quantification of the risk contingency was an underestimate as it failed to make any allowance for optimism bias. In these respects the FBC was misleading.

120. Thereafter contract negotiations continued. On 7 February 2008, tie and BBS concluded the Rutland Square Agreement in terms of which the price agreed at Wiesbaden was increased by £3.8 million resulting in a construction contract price of £222,062,426. In addition, the agreement acknowledged that there was a claim by BBS for £3.2 million in respect of changes from the Employer’s Requirements version 3.1 which was later settled at £2.7 million and was not part of the construction contract price. The Rutland Square Agreement contained a provision that tie and BBS agreed that under no circumstances would the construction contract price be increased prior to formal signature of the Infraco Contract. Despite that provision tie and BBS signed the Citypoint Agreement on 7 March 2008 in which there was a further price increase of £8.6 million to reflect:

(a) an amendment to the contract programme extending the opening date for revenue service from March 2011 to July 2011;

(b) the impacts of version 3.5 of the Employer’s Requirements;

(c) BBS accepting the design quality risk and consequential impact on time;

(d) providing compliant depot equipment; and

(e) provision of tapered poles for the overhead electrification lines. This was an issue of aesthetics according to which CEC considered that the tapered poles looked better.

The Inquiry has seen no evidence of tie resisting this price increase based on the agreement that there would be no further construction price increases before signature of the Infraco contract.

121. Contrary to legal advice tendered by DLA, on 18 March 2008 tie issued a Notice of Intention to Award (“NIA”) the Infraco contract to BBS. The NIA is a precursor to the award of the contract and affords the parties a short period to reflect upon the terms of the negotiated deal before formally committing to it. When tie issued the NIA there was no agreed contract price; no milestone payment schedule; no bills of quantity; no agreed master construction programme; and no agreed post-novation design delivery programme. It was contrary to normal procurement management practice for the procuring party to issue an NIA when the parties were still in negotiation over central contractual documentation. tie’s actions in issuing the NIA prematurely strengthened BBS’s negotiating position.

122. The premature issue of the NIA and tie’s failure to enforce the provision in the Rutland Square Agreement that there would be no further construction price increases prior to signature of the Infraco contract appear to have encouraged BBS to make a last-minute demand for an additional £12 million on the eve of the planned signature of the Infraco contract. This demand was ultimately settled in the Kingdom Agreement, in terms of which tie agreed to pay BBS an additional £4.8 million in four instalments of £1.2 million each, described as an “incentivisation bonus” [CEC00036952, Part 2, page 0143]. The payments were to be made upon the completion of each of four sections. As was accepted by Mr Walker and was apparent to Mr Fitchie, they were not incentive payments and suggesting otherwise was simply a device to give the impression that something had been obtained in return for the increased price. In addition to the payment of £4.8 million tie agreed to pay BBS £3.2 million to compensate it for work done in the procurement period if tie did not proceed with phase 1b of the project. There was no justification in this case for such a payment, and it would appear that this was another device to limit the apparent cost of line 1a by moving the cost of liabilities from line 1a to line 1b. The Infraco contract that was to be signed on 2 May 2008 was amended to incorporate the terms of the Kingdom Agreement, and the amended contract was signed on 14 May 2008.

(b) Contract terms

123. Although many parts of the contract had been drafted by late 2007, the pricing schedule (“SP4”) was blank at the time of the signature of the Wiesbaden Agreement. When CEC made the decision to approve the FBC and to proceed with the project in December 2007 there were still no draft provisions on the pricing mechanism. Once approval had been given, however, it was necessary that the terms of this part of the contract be drafted and agreed. tie and BBS negotiated the terms of SP4 between January and April 2008 and CEC officials received a copy of SP4 on 15 April 2008.

124. The construction works price, analysed in Appendix A to SP4, which is reproduced here, was stated to be on a lump-sum basis that was fixed until completion of the Infraco works and not subject to variation except in accordance with the provisions of the Infraco contract (sections 1.1 and 1.2). Although there is a recognition of the possibility of change to the price, there is an impression of price certainty created by the terms “lump sum” and “fixed until completion of the Infraco works”.

Source: USB00000032, page 0015

125. The table in Appendix A to SP4 was a matter of presentation and was designed to show that BBS’s price was affordable. It was misleading. As can be seen from the table, the analysis results in achieving a price of £219,162,336 when VE savings are deducted and provisional sums are excluded, apparently achieving tie’s objective of a target price in the region of £219 million excluding provisional sums. VE savings had to be delivered to achieve the construction works price of £238,607.664 and, as tie was aware, the nearer one approached the start of construction work the harder it would be to achieve such savings. The VE savings in the table were unlikely to be achieved. tie failed to consider the design implications and associated costs mentioned in paragraph 116 above and the deductions for VE represented financial engineering. If the VE savings of almost £12 million were not achieved they would be added back into the contract price in full and BBS would also be recompensed up to a maximum figure of £25,000 per VE saving for each potential saving considered. Insofar as the table sought to illustrate a firm price of £219,162,336, it was misleading and recognised as such by Mr Reynolds, of PB. In an internal report dated 28 March 2008 he commented upon the VE savings of approximately £12 million without making any allowance for the cost of design required to provide VE savings and observed that tie intended to instruct changes immediately after signature of the contract to remedy the situation. He also expressed his concern that the major stakeholders, including CEC, did not appear to be aware of the position and he advocated that PB must ensure that the Novation Agreement was worded such that it protected PB from any accusations of deception which could be levelled at tie in future.

126. In paragraph 22 above I summarised the principal causes of the failure to deliver the project within budget and to the extent projected, and I have considered most of them relating to tie. The criticisms of tie thus far demonstrate not only its poor management of the project but also a culture within tie that withheld information from CEC and at times positively misled it. There can be little doubt that tie’s mismanagement played a significant role in the failure to deliver the project on time and within budget and to the extent projected. However, the principal cause of these failures was the Infraco contract itself, the terms of which resulted in disputes about its interpretation and the cessation of work at particular locations until the relevant dispute had been resolved. The disputes that arose shortly after the signature of the contract centred principally on two related sets of provisions in the Infraco contract: (1) the provisions relating to entitlement to additional payments in SP4; and (2) the provisions in clause 80 as to what should happen in relation to execution of the works when it was considered that a change was being made to those works.

127. The provisions relating to an entitlement to additional payments in SP4 centred on assumptions that were stated in SP4 to be the basis on which the price had been fixed. If those assumptions did not hold true, Infraco could be entitled to additional payment. Clauses in contracts stating the basis on which the price has been determined and regulating entitlement to additional payments are common enough in construction contracts. In themselves, therefore, the existence of such clauses in the Infraco contract is not remarkable. It is apparent, however, that the terms as they appeared in the contract for the Tram project caused substantial problems that led to the breakdown of working relationships and, ultimately, the practical cessation of works.

128. Section 3.2.1 of SP4 is in the following terms:

“It is accepted by tie that certain Pricing Assumptions have been necessary and these are listed and defined in Section 3.4 below. The Parties acknowledge that certain of these Pricing Assumptions may result in the notification of a Notified Departure immediately following execution of this Agreement. This arises as a consequence of the need to fix the Contract Price against a developing factual background. In order to fix the Contract Price at the date of this Agreement certain Pricing Assumptions represent factual statements that the Parties acknowledge represent facts and circumstances that are not consistent with the actual facts and circumstances that apply. For the avoidance of doubt, the commercial intention of the Parties is that in such circumstances the Notified Departure mechanism will apply.” [USB00000032, page 0005.]

Although clauses explaining the basis upon which the price has been determined and regulating the contractor’s entitlement to additional payment are common in construction contracts, this clause acknowledged that some of the assumptions upon which the price had been calculated were not factually correct and both parties were aware of that. The contract did not specify which assumptions were factually incorrect but if Infraco could show that a pricing assumption was no longer applicable, either because parties were aware that it had never been true or because Infraco experienced difficulties that had been assumed would not arise, this could give rise to a Notified Departure resulting in a claim for additional payment. In such a situation the claim would be based upon Infraco asserting that a deemed Mandatory tie Change to the work required to be undertaken and that it would incur additional costs to implement that change. When the terms of SP4 were agreed, tie and BBS were both aware that there would be Notified Departures and that some would arise immediately after contract signature. tie had no idea how many there would be and made no attempt to estimate the number or the likely financial consequences before signing the contract. Senior management in tie thought that there might be between 60 and 100 Notified Departures as a result of SP4, but there were approximately 800. In making that comparison it should be borne in mind that SP4 was not the only part of the contract that could give rise to a Notified Departure. For example, clause 22 of the contract provided that unidentified utilities uncovered by the Infraco contractor would amount to a tie Change. However, most of the disputed Notified Departures related to SP4.

129. Section 3.4 of SP4 contained a list of 43 pricing assumptions. An example of pricing assumptions that were known to be untrue at the date of signature of the contract related to the diversion of utilities. The relevant assumptions were 24 and 32. Pricing Assumption 24 was that the utilities diversions were to be completed in accordance with the requirements of the Infraco programme, save for utilities diversions to be carried out by the Infraco contractor. Pricing Assumption 32, that programming assumptions in Schedule Part 15 of the Infraco contract would remain true in all respects, included an assumption that diversion of utilities would have been completed for each of the sectors by specified dates and there would be no slippage in the MUDFA programme. By May 2008, when the parties were in a position to sign the Infraco contract, there were already delays in the MUDFA works and there were a number of areas where MUDFA was the early start constraint for Infraco.

130. Pricing Assumption 1 (“PA1”) featured most in the disputes between tie and Infraco. In terms of that assumption the design prepared by the SDS Provider would not “other than amendments arising from the normal development and completion of designs” [ibid, page 0005, paragraph 3.4] be amended in terms of design principle, shape, form and/or specification from the Base Date Design Information (“BDDI”). In a proviso at the end of PA1 normal development and completion of designs was defined as “the evolution of design through the stages of preliminary to construction stage and excludes changes of design principle, shape and form and outline specification” [ibid, page 0006, paragraph 3.4]. If PA1 were to be given a literal interpretation, the proviso at the end deprived the opening words of meaning. I agree with the advice tendered by Ms Davies QC^[3] that it was unlikely that it had been intended that the opening words were to be deprived of effect or that the proviso was intended to be devoid of meaning but it is difficult to give it any meaning that does not undermine the opening words. In passing it would appear that the consideration given to normal development and completion of design may have been unnecessary because there would be a Mandatory tie Change resulting from the change to the BDDI upon which the price had been fixed (see paragraph 132 below) but it does not appear that Infraco sought to rely upon this.

131. Apart from the difficulty mentioned in the preceding paragraph, there was also a difference of understanding between tie and Infraco as to what amounted to normal development of design. That difference was never resolved because the disputes were determined on the basis of their particular facts and the decisions did not resolve matters of principle. The exception was the decision of Lord Dervaird in relation to the meaning of clause 80.

132. A further difficulty arose from the lack of clarity of the terms of PA1. BDDI is defined as “the design information drawings issued to Infraco up to and including 25th November 2007 listed in Appendix H to this Schedule Part 4” [SP4, ibid, page 0003, clause 2.3]. These drawings were the basis upon which Infraco had based its negotiations and agreement on price. As a result of the continued development of design after 25 November 2007, tie and Infraco were both aware that there would probably be Notified Departures due to design changes. It was, therefore, essential that there was no dubiety about the design baseline from which any changes would be assessed in determining such claims. Despite that, Appendix H does not have a list of drawings and merely states: “[a]ll of the Drawings available to Infraco up to and including 25th November 2007” [ibid, page 0053]. The failure to list the drawings in Appendix H arose in the Tower Place bridge adjudication where tie and BSC disagreed about the drawings that had been available to Infraco at the relevant date. The adjudicator was unable to establish that the drawings upon which tie relied had all been issued to Infraco and it was not possible for him to compare the Issued for Construction (“IFC”) drawings with the drawings that were part of the BDDI. He also concluded that the parties were unclear why Appendix H had not contained a definitive list of drawings that had been issued to Infraco up to and including 25 November 2007.

133. In most construction contracts there will be changes to the client’s requirements as the contract progresses, and it is customary for the contract to provide a mechanism for dealing with such changes. The mechanism for changes requested by tie is contained in section 80 of the contract. It had been the subject of negotiation and agreement before the start of negotiations about the terms of SP4. Essentially, if tie wished a change to the Infraco works, it had to serve a Notice of Change on Infraco, providing details of the required change. Upon receipt of such a notice Infraco had to provide tie with an estimate of the cost of the change, following which parties had to agree the contents of the estimate, failing which either party could refer the estimate for determination in accordance with the dispute resolution procedure (“DRP”). Following agreement or determination of the estimate, tie could either issue a tie Change Order to Infraco, or withdraw the tie Notice of Change except where the estimate related to a Mandatory tie Change. There were also provisions within clause 80 about the contents of the various documents and the timetable to be observed. More significantly, in cases of urgency, tie could instruct Infraco to carry out the proposed tie Change prior to the determination or agreement of the estimate by issuing a tie Change Order to that effect. In that event Infraco was bound to implement the tie Change but prior to agreement or determination of the estimate was entitled to payment of its demonstrable costs for implementing the tie Change.

134. tie’s purpose in insisting upon the procedure outlined in paragraph 133 was to enable it to exercise control over expenditure by preventing Infraco from acting upon a tie Notice of Change without tie’s agreement on the cost of such change. If the cost, as determined following the DRP, was deemed by tie to be too expensive it could withdraw the notice and compensate Infraco for its expenses associated with the procedure following service of the notice.

135. Section 3.5 of SP4 provided that there would be a Mandatory tie Change if the facts or circumstances differed in any way from the Base Case Assumptions (or any part of them) upon which the contract price had been fixed. The Base Case Assumptions included the BDDI, the pricing assumptions in SP4 and specified exclusions listed in section 3.3 of SP4 as well as certain tram vehicle information. In the case of a Mandatory tie Change the procedure outlined in paragraph 133 applied, except that Infraco could issue a Notice of tie Change (“INTC”) and tie could not withdraw the deemed Notice of tie Change. Significantly, no work could be undertaken until the estimate for the change had been agreed by tie and Infraco or determined in the DRP or unless tie, as a matter of urgency, issued a tie Change Order before the determination of the estimate, in which case it had to pay Infraco for its demonstrable costs for implementing the tie Change Order. This procedure was inappropriate for Mandatory tie Changes because it introduced unnecessary delays for work that had to be undertaken and which could have been valued after the event by agreement between the parties or by reference to the DRP. When the terms of SP4 were being negotiated, Mr Laing, of Pinsent Masons, questioned the appropriateness of this procedure for Mandatory tie Changes but his representations were misconstrued by tie as an attempt by Infraco to alter a provision that had been settled. tie failed to appreciate the distinction in procedure that ought to have been made between a tie Notice of Change where tie had the option to withdraw the notice if it considered that the cost of implementing the notice was excessive in light of the available budget and a Mandatory tie Change arising from the contractual provisions which tie could not withdraw. In the latter case a procedure ought to have been devised to permit work to proceed without incurring the delays associated with prior agreement about its cost. As the work had to proceed in any event, agreement about its cost could be deferred until after it had commenced or even after its completion.

136. Although tie had intended to enter into a lump-sum, fixed-price contract, the pricing assumptions in SP4 frustrated that aim. The provisions relating to entitlement to additional payments in SP4, coupled with the provisions in clause 80 of the contract as to what should happen in relation to the execution of the works when it was considered that a change was being made to those works, were the principal reasons for the disputes between tie and BBS. These disputes caused substantial problems, leading to the breakdown of working relationships and, ultimately, the practical cessation of works. Both parties should accept responsibility for the breakdown in their relationship that affected the ultimate cost of the project.

137. tie did not trust BBS because, during the contract negotiations, BBS had demanded and secured price increases reflected in the Rutland Square Agreement, the Citypoint Agreement and the Kingdom Agreement. The last two agreements were reached despite a clause in the Rutland Square Agreement that there would be no further price increases before the signature of the Infraco contract. The Kingdom Agreement resulted from demands for a further sum of £12 million made on the eve of signature of the Infraco contract, coupled with threats to refuse to sign it. When disputes arose BSC was substantially successful on the merits of its claims that there had been tie changes entitling BSC to additional payments but tie reported savings of about £11 million on the estimates originally submitted by BSC for these changes. On the other hand, tie decided in advance of the signature of the Infraco contract that it would resist INTCs by fighting Notified Departures “tooth and nail”. This was wholly inappropriate in the context of a public sector contract which should have discriminated between INTCs that were justified in principle and those that were not. It also displayed an attitude towards the Infraco contractor that was inconsistent with the collaborative approach that was required to complete the project at the earliest opportunity, although it must be doubtful whether it could have been delivered on time and within budget once the Infraco contract was signed on terms that were inconsistent with the procurement strategy.

Involvement of CEC

Relationship between ownership and performance of statutory duties

138. CEC was the promoter, owner, funder and financial guarantor of the project, with grant support from the Scottish Ministers, and tie was responsible for procuring and delivering it. CEC was the statutory body consisting of councillors who had the strategic role of determining policy, including budget priorities within their local authority, and deciding at all stages whether to proceed with the project. Their role should be contrasted with that of CEC officials who were responsible for advising councillors and implementing their decisions.

139. The absence of anyone performing the role of SRO is mentioned in paragraph 84 above. As the promoter and owner of the project, it was the responsibility of CEC to appoint an SRO. Such an appointment would have resulted in a direct line of reporting from the SRO to CEC and should have ensured that CEC was kept informed of progress and could be reassured that its interests were being protected.

140. Whereas tie’s sole focus was on the Tram project, CEC had a number of different roles and functions to perform, including the exercise of various statutory powers as the authority responsible for planning and roads and transport, as well as bridges. The exercise of these powers had an effect upon the progress of the project. As was noted in paragraphs 39 and 40 above, CEC and tie were principally responsible for the delays in design. As the local authority exercising the statutory powers mentioned above, CEC ought to have liaised with the prospective designers of the project, and thereafter with PB when it was appointed to undertake the SDS contract, to clarify CEC’s design requirements at the earliest opportunity. CEC ought to have provided adequate guidance at the earliest opportunity to assist designers in developing the details of the Prior Approval Designs and Technical Approvals that would be acceptable to it as planning and roads and transport authority. The Tram Design Manual [CEC00069887], produced around December 2005, only gave guidance on design principles of a very general nature and the delivery of a draft Tram Public Realm Design Workbook [PBH00018590; CEC02086917; CEC02086918; CEC02086920–CEC02086934]^[4] in April 2008, which gave more detailed guidance on matters such as surfacing, materials and construction details, was too late because it arrived only one month before contract close.

141. CEC failed to work in a collaborative manner to resolve design issues swiftly and with clarity or to provide a focus on enabling the project to proceed smoothly. The lateness and sheer volume of the comments on design, including the reconsideration of issues that had been rejected at an earlier stage in the design process, were bound to cause delay and expense. It is very surprising that such a disorganised and uncoordinated response was allowed to continue unchecked. In paragraph 48, I have recognised that, as a public body with statutory responsibilities, it would have been inappropriate or even unlawful for CEC to fetter its discretion. However, CEC could, and should, have taken steps to reduce the delays in granting consents and approvals without affecting the proper performance of its statutory duties. As design progressed before and after contract close CEC ought to have co-ordinated the various comments and objections to design from within CEC and ought to have managed the expectations of third parties whose consent was also required. Instead it commented with a number of voices rather than a single, considered voice. The change that came about in consents and approvals after the Mar Hall mediation is striking. There is no suggestion that CEC ignored or in any way compromised its obligations in that period, and yet it dealt with matters in a wholly different way.

Review of Business Cases

142. The Business Case is a document that is critical to identifying what the project should deliver and what the costs will be. It is intended to be a “living” document that is updated to reflect changing situations that arise as a project develops. In this context, it performed the additional functions of informing councillors of the details of the project and providing a factual basis on which a decision could be taken as to whether or not to proceed.

143. The Business Cases were prepared by tie with assistance from external advisers. Prior to the decision of Scottish Ministers to withdraw the active involvement of Transport Scotland from the project following the decision of the Scottish Parliament on 27 June 2007, the necessary technical expertise required for the review of the draft FBC had been provided to CEC by Transport Scotland with support from independent professional advisers. The intention had been that Transport Scotland would be involved, along with CEC, in the approval of the FBC. After the withdrawal of Transport Scotland from that role, CEC lacked the necessary expertise internally to undertake a meaningful review of tie‘s QRA.

144. On 24 September 2007, CEC’s officials decided to instruct Turner & Townsend to undertake an external review of the FBC and requested Ms Clark of tie to provide certain information to enable CEC to progress the commission. On 28 September, Mr Crosse, of tie, advised Mr Fraser, of CEC, that OGC had agreed to undertake the risk review following an OGC review scheduled for the beginning of October and that Turner & Townsend would be “stood down”. Although the OGC risk review provided some reassurance to CEC that review was at too high a level and was of too short a duration to provide what CEC required. Given the size, complexity and value of the project and the potential risks to CEC, a longer, more detailed, forensic-type review was necessary to protect CEC’s interests properly. That was what was envisaged in the brief for Turner & Townsend.

145. Having decided to seek an independent review, CEC officials ought to have insisted upon determining its nature and scope as well as the identity of the provider of the service required. The whole point of obtaining independent project assurance is that it is independent from the project manager whose work is the subject of review. It was wholly inappropriate for tie, as project manager, to seek to influence the identity of the reviewer or to control the process and the scope of the review. In allowing tie to take control of the risk review CEC officials, notably Mr McGougan and Mr Holmes as the responsible directors, showed undue deference to tie by failing to insist upon the appointment of Turner & Townsend.

Information provided to councillors

146. It is axiomatic that in preparing reports for the consideration of councillors to enable them to take informed decisions, local authority officials must take care to ensure that the information given to councillors in such reports is both complete and accurate. During the last quarter of 2007, CEC had to take significant decisions at its meetings on 25 October and 20 December in relation to the FBC and whether to authorise tie to enter into the Infraco contract and the Tramco contract. At the October meeting councillors had to consider the first version of the FBC (“FBCv1”) and at the December meeting the second version (“FBCv2”). As was normal practice, senior officials provided councillors with reports to assist them in reaching their decisions. In addition, councillors were given other information in a number of forms including a copy of the relevant version of the FBC and, at the October meeting, there was a joint presentation by Mr Gallagher, Mr Renilson and Mr Holmes.

147. The information provided to councillors at the meeting on 25 October was inaccurate, and as such misleading, in the following respects.

• The statement in the Executive Summary of the FBCv1, that the procurement of the main contracts had reached a stage where all material terms, including the capital costs, were agreed, was inaccurate insofar as it related to the Infraco contract. Although there was agreement about certain fixed rates in the Infraco contract, the main terms, including the provisions relating to pricing, risk allocation and the capital costs, were not agreed at that time. They were not agreed until May 2008.
• The Executive Summary recognised that delay in moving utilities and handing over work sites to Infraco could result in significant financial penalties for which CEC would ultimately bear responsibility. To address that risk, work had started on the diversion of utilities, and progress to date was stated to have been “excellent with no major issues encountered so far” [CEC02083538, page 0036, paragraph 1.85]. The reality was that the MUDFA works were behind programme due to a variety of reasons, including the lack of Issued for Construction (“IFC”) drawings, the discovery of significantly more utilities than expected and the existence of underground obstructions impeding the MUDFA works.
• Mr Gallagher’s statements that the contract would be close to a fixed final price, that almost all risk transferred to the private sector, that there was very limited exposure should things go wrong in the contracts, and that the cost of the project would be about £498 million or £500 million, must have provided councillors with considerable reassurance. Unfortunately, such statements were incorrect.

148. The information provided to councillors at the meeting on 20 December included FBCv2 and a report signed by Mr McGougan and Mr Holmes but the evidence disclosed that a draft of this report had been revised by senior employees of tie. The involvement of tie in drafting the report, including the section on risk, is a matter of some concern. It highlights the reliance of CEC’s senior officials on information provided to them by tie without satisfying themselves about the accuracy of that information. CEC officials did not have the necessary skills to undertake that exercise and ought to have commissioned multi-disciplinary engineering, transport and project management consultants to advise them. Without such advice they could not fulfil their duties towards councillors in advising them upon the accuracy and implications for CEC of the FBC.

149. The information provided to councillors at this meeting was also inaccurate, and therefore misleading, in the following respects.

• The report referred to the completion of the design “in the coming months” [CEC02083448, page 0001, paragraph 3.2]. There was no reasonable basis for asserting that design would be completed in the coming months. By the date of the report there had been a history of design difficulties and delays and progress was still very slow. The length of time required to complete detailed design was indeterminate because the design programme kept slipping. To suggest that design would be completed in the coming months, while not making members aware of the chronic design delays, was inaccurate and misleading.
• There was no mention in the report of the delays and difficulties with the MUDFA works, of which the signatories of the report were aware. Mr Holmes explained that omission by stating that he had been relying on assurances that he had received from tie about how that work was going to be resolved and integrated with the construction programme. This omission was significant and misleading. The purpose of the report was to inform councillors of the situation that existed – not of what officials assumed it to be, based on assurances from tie. The mere acceptance of tie’s assurances and estimates of CEC’s risk exposure even where these emanated from a company that was wholly owned by CEC was, to my mind, reckless. It failed to protect CEC’s interests, particularly when one has in mind that this was the largest capital project undertaken by CEC and one of the largest capital projects in Scotland where the financial consequences of failure to deliver the project on time could be, and ultimately were, severe.
• FBCv2 stated that all material terms had been agreed, including the capital, operational and maintenance costs and that the capital and maintenance costs of the scheme had been finalised at a level slightly below the draft FBC estimate. This was untrue. There was no agreement as to the costs for the contract for the infrastructure work and intensive efforts were still under way to agree the price.
• The FBC also gave the impression that the estimated cost of £498 million for the construction of line 1a and the purchase and maintenance of the tram vehicles was based on agreed rates and prices. There were no firm prices for the Infraco contract; there was not even agreement as to the rates for that contract, although rates had been agreed for MUDFA.
• The manner in which the estimate of £498 million as the total cost was presented gave the clear impression that it had been built up in some detail from the underlying contracts. From the evidence available to the Inquiry it is clear that, although a range of possible figures was justified by the material available at that time, that range was not given and instead an essentially arbitrary figure was chosen for effect. In December 2007, months before the negotiation on price, Mr Gallagher had made up his mind what price he would report to CEC, and there was a fixed intention that that arbitrary figure was then to be repeated for the FBC.
• The FBC claimed that the bids had been priced with a “less onerous risk allocation” [CEC01395434, Part 5, page 0098, paragraph 7.7], and that the key benefits of the Infraco procurement strategy included “the award of a single turnkey fixed price contract” [CEC01649235, Part 6, page 0114, paragraph 7.110]. In fact, the design had not been progressed as intended, a consequence of which was that the bids had not been priced with a “less onerous risk allocation”. There was a significant element of the works for which the consortium would not give a firm price. It could certainly not be said that there was minimal risk allowance within the bids, or that risk premium had been minimised. As matters then stood, tie was not in a position to say that it would be in position to conclude a “single turnkey fixed price contract” as they could not get firm prices. Overall, it must have been apparent to tie, TEL and the TPB that the procurement strategy had not worked and was being departed from, and yet they presented to CEC that it was still being implemented. By 20 December 2007, when the Wiesbaden Agreement had been completed and was ready for signature on that date, it was clear that the price for the Infraco works had not been fixed and the transfer of risk of design had not been achieved.
• The FBC gives no intimation of just how much of the detailed design was still outstanding. As this was material for the purposes of the implementation of the procurement strategy, this is a striking omission.
• The FBC referred to the strategy of diverting utilities in advance of the Infraco work and stated that the diversion of utilities had commenced in July 2007 and was scheduled to end in winter 2008. It anticipated that the majority of utilities diversion works would be completed prior to commencement of “on street” works by Infraco. From the evidence available to the Inquiry it is clear that the proposed timescale was unrealistic which ought to have been apparent to tie at that time. It meant that the sort of conflicts that the strategy sought to avoid would inevitably become a reality. As a result, the FBC did not accurately represent the situation.

150. The information provided to councillors at the meeting of CEC on 1 May 2008 was also inaccurate in the following respects.

• The statement in the report by CEC’s Chief Executive to councillors that 95 per cent of the combined Infraco and Tramco costs were “fixed”, with the remainder being provisional sums, was untrue.
• The statement in that report that the utility diversion works along the tram route were “progressing to programme and budget” [CEC00906940, page 0002, paragraph 3.6] did not reflect reality.
• The report stated that the final estimate for Phase 1a was £508 million. Although that was the correct figure when the report was drafted the Chief Executive was aware that BBS had made a demand for a further £12 million on 30 April 2008. Although the Chief Executive told the Leader of the Council of this demand, other councillors were not told of it before or during the meeting and he allowed them to take a decision based upon the false assumption that the final estimate was £508 million.

151. Prior to the signature of the Infraco contract the state of knowledge of councillors even became a matter of concern to BBS. Mr Laing, of Pinsent Masons solicitors who acted for the consortium, explained that shortly before contract close there was a CEC meeting at which it was reported that the contract was near finalisation and that it was a lump-sum, fixed-price contract. He thought that there was a risk that CEC might misunderstand the position, and he raised the matter with Mr Fitchie. He recalled that Mr Fitchie was irritated by this and told him in effect that it was none of his business and that CEC was being advised by its legal advisers. The misinformation extended to the media release issued by tie and Edinburgh Trams on 14 May 2008 immediately after the signature of the contracts. That release included the following statement:

“With these final fixed price contracts now completed all parties can now proceed to delivering this project safely to programme and budget.” [CEC01231567, page 0001.]

152. The provision of misleading information to councillors by CEC officials may have been caused by the circulation of draft reports to tie and the acceptance of changes proposed by tie, particularly regarding the contract negotiations and the progress of design and MUDFA works. Such a level of reliance on tie was inappropriate and tends to suggest a failure by senior CEC officials to protect CEC’s interests by subjecting the FBC, the draft Infraco contract and generally the information provided to them by tie to independent scrutiny. On any view that was a serious omission. Whatever the reason for the misleading information in reports to CEC the signatories of the reports were responsible for their contents.

153. However, the evidence of Mr N Smith’s briefing of Mr Maclean and his revision of draft reports to CEC in June and October 2010 caused me to consider whether the misleading reports were truly the result of errors based upon officials’ reliance upon inaccurate information from tie, or the result of a deliberate policy of withholding information from councillors or simply reckless.

154. The briefing note dated 8 January 2010 to Mr Maclean from Mr N Smith included the following statement:

“be very careful what info you impart to the politicians as the Directors and tie have kept them on a restricted info flow. Given current sensitivities it is critical that this remains in place.” [CEC00473789]

155. In a report to CEC on 24 June 2010 Mr McGougan and Mr David Anderson, the responsible directors, provided councillors with an update on the project, including the then current contractual difficulties with the consortium. It noted that the formal adjudications under the DRP had produced mixed results but advised councillors that “the outcome of the DRPs, in terms of legal principles, remains finely balanced and subject to debate between the parties” [CEC02083184, page 0005, paragraph 3.12]. The latter statement about the outcome in terms of legal principles was incorrect, as was accepted by Mr N Smith when he first gave evidence at the public hearings of the Inquiry. Following his evidence the Inquiry undertook investigations to identify the source of this statement and discovered that it had been inserted by Mr N Smith and that he had assured the responsible directors that it was correct. He sought to justify his actions by stating that the statement probably emanated from Mr Jeffrey and in any event it had not been challenged by others to whom copies of the draft report had been circulated. As this was a statement about the outcome of DRPs in terms of legal principles it is hardly surprising that nobody challenged the views of the only solicitor who was involved in the drafting of the report. Mr N Smith was also responsible for the inclusion of a similar false statement in the update report by the responsible directors on 14 October 2010. He had inserted that statement contrary to the terms of an earlier revision by Mr Maclean in which Mr Maclean had deleted detailed references to the DRPs. Councillors rely upon the accuracy of reports to enable them to take informed decisions. Clearly, on occasions, mistakes may occur in the drafting of reports, but that is not the situation with the June and October reports because Mr N Smith was aware that the statements were untrue. As such they were liable to mislead councillors for whom they were prepared.

Lack of scrutiny by CEC

156. There was a failure by CEC to exercise proper oversight of the project with senior officials, including the responsible directors, failing to challenge tie and adopting what was described as a “one family” approach. It is apparent from the approach adopted by tie that CEC’s approach was not reciprocated. tie resented any legitimate questioning by members of the “B team” and the responsible directors intervened at tie’s request to deflect such questioning. The “one family” approach advocated by the Chief Executive (Mr Aitchison) explained the failures of CEC’s senior management to protect CEC’s interests as tie’s guarantor. In particular, they had failed to subject the project to careful independent scrutiny.

157. As was noted in paragraph 62 above, CEC’s responsible directors (Mr McGougan and Mr Holmes) permitted tie to countermand their decision to instruct Turner & Townsend to undertake the review of the project desired by CEC in October 2007. The brief for that review would have required an independent examination of the FBC, the draft FBC, the proposed Infraco contract and Tramco contract, the contract Heads of Terms and Risk Matrix prepared by tie’s legal advisers (DLA) and Capital Cost Estimates, and incorporating best and final offers provided by bidders. In addition, meetings would be arranged with relevant personnel within CEC and tie as was necessary to meet the assignment objectives. Although the substituted OGC risk review provided some reassurance to CEC, that review was at too high a level and was of too short a duration to provide what CEC required. Given the size, complexity and value of the project, the potential risks to CEC and the concerns that had been expressed, a longer, more detailed, forensic-type review was necessary to protect CEC’s interests properly. That was what was envisaged in the brief for Turner & Townsend.

158. On 20 December 2007, CEC delegated power to the Chief Executive (Mr Aitchison) to authorise tie to award the Infraco contract and the Tramco contract, subject to price and terms being consistent with the FBC and subject to the Chief Executive being satisfied that all remaining due diligence was resolved to his satisfaction. The delegated power was refreshed on 13 May 2008 by the Policy and Strategy Committee to reflect the increase in price reported to it. Before the Chief Executive could exercise his delegated authority he required to be satisfied that the price had to be consistent with FBCv2 as adjusted to reflect the increased price to £512 million plus a contingent sum of £3.2 million if line 1b did not proceed. The terms of his delegated authority meant that, before he exercised it, he had to be satisfied that it was appropriate to do so. It was not sufficient to rely upon assurances from tie or from DLA that the price and contract terms were consistent with the FBC. In that regard he relied upon the responsible directors and Ms Lindsay, the Solicitor to CEC (“the Solicitor”), to confirm that he could issue the necessary instruction to tie to award the contracts.

159. The issue of the NIA was a precursor to the award of the contract and also required the authorisation of the Chief Executive. As had happened in the decision to authorise tie to award the contract, he relied upon the responsible directors and the Solicitor to confirm that he could sign the NIA. Mr McGougan gave evidence that there was frustration with the consortium at that time for not closing out negotiations, and that one of the reasons for issuing the NIA was to try to “encourage them towards the finish line” [PHT00000043, page 5]. That consideration seems to me to be inconsistent with the obligation to ensure that the price and contract terms were consistent with the FBC.

160. In any event, Mr Aitchison ought not to have authorised tie to issue the NIA on 18 March 2008. His authority to do so was circumscribed by conditions that the price and contract terms had to be consistent with the FBC approved by CEC on 20 December 2007 and that all remaining due diligence had been resolved to his satisfaction. Before 18 March 2008 he was aware that the price had increased by £10 million and risks, including those relating to SDS, had been transferred to the public sector. Apart from the inconsistency between the price and contract terms negotiated by that date and the FBC, it was not possible to resolve all due diligence at that stage because the contract terms, notably the price, had not been finalised.

161. The conditions attached to the Chief Executive’s delegated power to authorise tie to award the contract to BBS were amended by the Policy and Strategy Committee on 13 May 2008 to reflect the increases in price since 20 December 2007. As with the NIA he depended on the receipt of confirmation from the responsible directors and the Solicitor before authorising tie to award the contract.

162. Mr McGougan could not remember whether, before signing the report to Mr Aitchison, he had checked that all the outstanding matters identified in the director’s briefing note to the IPG on 11 December 2007 had been resolved. He was aware that Ms Andrew and Mr Coyle, officials in the Finance Department providing accounting support to the City Development Department in respect of the Tram project, still did not feel that they had 100 per cent understanding of all the risks that might attach to the contract and to the project. He himself did not have a complete understanding of the risks arising from the contract, for which CEC would bear ultimate financial responsibility. He stated that he was relying on the processes that had been gone through, the reviews that had been undertaken, the professional advice from industry expert firms and the commercial experience and abilities of tie. He also stated that CEC was relying upon tie and DLA to a very significant extent. There were no reviews of the contract suite as at May 2008 other than those undertaken by tie, or DLA on its behalf, or by CEC officials. Given the lack of experience of CEC officials in the Department of Finance he was effectively relying upon tie and DLA whose assessments ought to have been subjected to independent scrutiny if he were to fulfil his responsibilities to the Chief Executive when confirming that he could authorise tie to award the contract to BBS. Without such independent scrutiny the Chief Executive could not exercise his delegated powers because he was required to satisfy himself, independently of tie, that it was appropriate for tie to award the contract to BBS.

163. The Solicitor was also a signatory to the letter to the Chief Executive confirming that he could authorise tie to award the contract to BBS. She relied upon Mr C MacKenzie and Mr N Smith, the members of the “B team” from her department, for advice as they were responsible for the day-to-day scrutiny of documents. The relationship between the Solicitor and these solicitors was not harmonious. The solicitors in the “B team” did not consider that they had the necessary experience to advise on the contract documentation and did not think that CEC should rely upon DLA; rather an independent firm of solicitors with appropriate experience should be instructed to represent CEC’s interests. The Solicitor disagreed.

164. In August 2007, Mr C MacKenzie sent an email to Mr N Smith telling him that the Solicitor had directed him to read through the draft Infraco contract (then consisting of about 1,000 pages) with a view to reporting “on the implications for the Council on risks, liabilities, step-in rights etc” [CEC01567527]. The report was to be produced within two days. The email was copied to the Solicitor. Mr Smith replied to the effect that this was an impossible task and he agreed with an earlier email from Mr MacKenzie to the Solicitor that CEC should instruct an independent firm with appropriate experience and that CEC did not have the necessary experience or manpower to undertake this task. He did not copy his email to the Solicitor and Mr MacKenzie did not tell her of the response. No report was produced on the draft Infraco contract and it does not appear that the Solicitor pursued its absence.

165. On 15 April 2008, Mr Coyle forwarded an email and attachments including the draft SP4 and a cost analysis spreadsheet, which included the QRA to the Solicitor, Mr C MacKenzie and Mr N Smith. It is clear from the evidence of Ms Lindsay, Mr C MacKenzie and Mr N Smith that each of them realised the significance of SP4 upon reading it for the first time. However, Ms Lindsay and Mr N Smith stated that they did not read SP4 prior to the signature of the Infraco contract but Mr C MacKenzie agreed that he did. Although Mr C MacKenzie thought that there had been a “read over” of SP4 within the Legal Department that involved Mr N Smith, he could not be certain of that. Accordingly I proceeded on the basis of Mr N Smith’s denial that he had read it when he received it in April or at any time before contract close. Although it is understandable that Ms Lindsay, as the Solicitor with a strategic role, did not read SP4 and relied upon Mr MacKenzie and Mr N Smith to draw her attention to any particular issues relating to the contract, Mr N Smith’s failure to read it is inexplicable. Unlike the earlier draft document extending to almost 1,000 pages that he had been asked to review and produce a report within two days, the main text of the final version of SP4 only extended to 14 pages. Had he read it at that time he could have alerted the Solicitor to his concerns before she signed the letter of advice to the Chief Executive.

166. Mr C MacKenzie gave evidence that the draft SP4, when finally produced, was the most definitive document from tie that he had seen, setting out the price negotiated, what was to be included and, just as significantly what was not to be included, in the price. He stated that it was evident to him that clauses 3.2 and 3.3 of SP4 excluded a fair amount from the certainty of the lump sum, fixed and firm price of the construction works price. The Inquiry has found no evidence to indicate that before going on holiday on 2 May 2008 he mentioned to Ms Lindsay his increased concerns about the adequacy of the risk allocation because of the terms of SP4 or of his expressing any views or seeking advice about the meaning and effect of the specific provisions of SP4.

167. Although I have accepted that it was reasonable for the Solicitor to rely upon Mr C MacKenzie and Mr Smith to draw her attention to issues arising from SP4, it is surprising that she did not seek a report from them before signing the letter to the Chief Executive confirming that he could authorise tie to award the Infraco contract to BBS. That omission and her failure to pursue the non-receipt of Mr N Smith’s report in 2007, as well as her earlier failures to return signed copies of letters of engagement to DLA, call into question the management of the Solicitor’s department.

168. The failures of the Director of Finance and of the Solicitor and of those whom she managed illustrate that the internal exercise undertaken by senior CEC officials was woefully inadequate as independent scrutiny of the contract suite. In the absence of independent reassurance about the contract suite they should not have agreed that the Chief Executive could authorise tie to award the Infraco contract to BBS.

Mediation settlement and reporting to councillors

169. As preparations for mediation progressed it became clear that CEC realistically had no alternative but to negotiate a resolution with BSC at mediation, and had to do so from a position of weakness. The resolution sought by CEC was an agreement based on BSC’s Project Phoenix proposal (the “Project Phoenix proposal”) which would result in the construction of a truncated line for a price that had a considerable degree of certainty. The other option, favoured by tie, was to agree to separate from BSC and to re-procure the contract.

170. tie’s estimates of the cost of separating and re-procuring were incomplete by the time of mediation because of limited resources available and priority in their allocation having been given to the Project Phoenix proposal, but they resulted in the cost of separation and re-procurement being substantially less than CEC’s preferred option of the Project Phoenix option. On the day before the mediation, CEC’s negotiators increased the estimated cost for separation and re-procurement by £150 million, resulting in the favoured option of the Project Phoenix proposal being the cheaper option. This last-minute adjustment of £150 million to the cost estimate for the option of separation and re-procurement substantially improved the prospects of CEC’s negotiators leaving the mediation with a deal. The circumstances in which it was done, however, do not inspire confidence that the £150 million increase was grounded in any particularly strong evidence or analysis. The increase was of a magnitude that was unacceptable to Mr Murray, the quantity surveyor at tie with the most detailed understanding of the project costs of all those who were at mediation.

171. At the mediation between 8 and 12 March 2011 at Mar Hall Hotel, Bishopton, the principal negotiators were Dame Sue Bruce (Chief Executive of CEC), Mr Emery (Chairman of tie) and Mr McLaughlin (Transport Scotland official). Although the Infraco contract was between tie and the consortium the mediation was conducted on behalf of CEC, as owners and funders of the project, with senior representatives of tie in attendance. Following protracted negotiations and offers and counter offers that were rejected, CEC made a final offer of £362.5 million for the off-street section, with no exclusions and Infraco taking all the risk with the exception of minor utilities. On the face of it, that represented significant progress by CEC at the mediation, at least when the Project Phoenix proposal is taken as the benchmark. It indicates that, as well as negotiating a reduction of £21.5 million in the price sought by BBS for its works (from £384 million in the Project Phoenix proposal to £362.5 million), CEC also successfully negotiated for the removal of most of the exclusions and risks which tie had valued at £80 million, albeit on a pessimistic basis. This was described by Mr Nolan as a “massive point”, which took a further day to resolve after the price had been agreed. In addition, CEC agreed a target price of £47.3 million for on-street works to St Andrew Square.

172. Many of those present, especially the tie representatives, considered that the settlement price was excessive. There is some support for that view when one considers that the project result that BB achieved was considerably better than it had projected both at the outset of the project and on conclusion of the settlement agreement: the projected figure for profit at contract close in 2008 was 11.07 per cent; following conclusion of the settlement agreement in September 2011 it was 7.23 per cent; and the outturn figure on conclusion of the project was 21.21 per cent. Moreover there was no structured calculation of CEC’s offer that was described by several witnesses as a “horse trade” (a description accepted by Dame Sue Bruce in her evidence). However, the advantage of the outcome of the mediation was that it heralded the end of an acrimonious dispute that adversely affected the reputation of the City of Edinburgh and which did not reflect well on BBS.

173. The agreement reached at Mar Hall was incorporated into two Minutes of Variation to the Infraco contract, namely MoV4 and MoV5. MoV5 was signed in September 2011 and recorded the final settlement of the dispute between the parties. On 20 May 2011, tie entered into MoV4, which was an interim and partial settlement of the parties’ dispute. It provided for the recommencement of work on the tram infrastructure in specified priority areas and for the payment of significant sums to Bilfinger Berger (“BB”) and Siemens. Its purpose was to vary the Infraco contract between tie and BSC. For that reason tie had to sign MoV4 although it was Dame Sue Bruce who had led negotiations on behalf of the client and took the ultimate decision to recommend settlement of the dispute on terms reflected in MoV4 and MoV5. tie claimed that MoV4 resulted in a breach of the expenditure limit imposed on tie by CEC in the Operating Agreement between them. On the evidence available to the Inquiry tie was correct in that regard. Expenditure incurred following mediation and before the signature of MoV5 resulted in actual and projected expenditure exceeding TEL’s authorised expenditure limit of £546 million. Although MoV4 permitted tie and BSC to terminate the Infraco contract if MoV5 was not signed, the financial consequences of such termination plus actual expenditure incurred would exceed the budget of £546 million. Accordingly, tie entered into MoV4 at the direction of CEC’s officials. CEC’s councillors were not asked formally to approve MoV4 before it was signed, and did not do so.

174. Although CEC’s approval of the final settlement in September 2011 meant that there were no negative consequences from these actions, in the interim period CEC officials had incurred unauthorised expenditure. Moreover, before signature of MoV4 CEC officials authorised payments of £27 million and £9 million in terms of MoV4. £27 million was certainly paid and £9 million was probably paid before signature of MoV4. Such payments were made in anticipation of the signature of the agreement but were contrary to good governance. They should not have been made. An apparent desire to keep decision making on the project out of the political arena at that stage was no justification for their actions. Officials ought to have kept councillors as a whole informed of significant events and to have sought their approval of the settlement and their authority to incur expenditure above the limit already authorised by CEC before incurring such expenditure. In that regard officials failed to observe the distinction in roles between them and councillors and strayed into the political arena itself.

175. There were several meetings of CEC during summer 2011, as a result of which a decision was taken to terminate the route at Haymarket until there were adequate funds to extend it. Officials did not give councillors any information about the availability of the balance of grant funding before that decision was taken. Termination at Haymarket had been an option that BSC had suggested and it is probable that a less expensive settlement could have been reached although there were other considerations favouring building the line beyond Haymarket at least to St Andrew Square. Ultimately, approval of the settlement occurred only because of the intervention of the Scottish Ministers, threatening to withdraw funding unless CEC’s August 2011 decision to seek a line only between the Airport and Haymarket was reversed. The project delay caused by CEC’s decision of August 2011 and its reversal in September 2011 increased the cost of the project by £4.541 million. This additional cost could have been avoided if, before being asked to take a decision about the reduced scope, the councillors had been more fully informed about the views of the Scottish Ministers towards funding the project in those circumstances. In my view, any criticism for the increase in costs that resulted from their decision, taken in the absence of such information, should be not be directed towards councillors.

Role of the Scottish Ministers

Conditions of financial support for the project

176. No experience existed in modern times of building a tram line in Scotland but the Scottish Ministers did have access to advice from their officials who had experience in the negotiation and delivery of large transport infrastructure contracts (primarily roads, but also heavy rail) that could assist in the delivery of the Tram project. Until 2007, the Scottish Ministers availed themselves of such expertise in order to protect their proposed grant of £500 million, but thereafter they abandoned the measures that were in place for that purpose.

177. In March 2003, the Scottish Ministers offered CEC a grant of £375 million for the construction of line 1a, subject to the production of an acceptable business case, and in February 2006 they announced an increase of the proposed grant to approximately £500 million, in line with indexation.

178. The contribution by the Scottish Ministers of £500 million towards a total budget for the project of £545 million was a significant commitment of public funds for which the Scottish Ministers were accountable. In implement of their obligations to protect the public purse the payment of the grant was not only conditional on the production of an acceptable business case that would demonstrate that the total estimated public expenditure on the project would provide value for money by having a Benefit to Cost Ratio (“BCR”) of more than 1; as matters progressed various other measures were taken to ensure that their commitment of £500 million towards the cost of this project was an appropriate use of public funds.

179. Following their conditional commitment of grant funding for the project until summer 2007, the Scottish Ministers or officials in the Scottish Executive and, after 1 January 2006, officials in Transport Scotland on their behalf, had involvement in the project in a number of respects:

• as funders;
• in considering the various drafts of the business cases;
• in a supporting or facilitative role; and
• through participation in the TPB.

Funding

180. The evidence to the Inquiry was clear that, throughout the period between 2003 and prior to the election of the minority SNP Government to the Scottish Parliament in May 2007, the Scottish Ministers had emphasised to CEC officials and their technical advisers that the proposed grant was capped at £375 million plus indexation. Moreover, in the proceedings before the Edinburgh Tram (Line One) Bill Committee of the Scottish Parliament the evidence given by the Minister for Transport (Mr Scott) and Mr Sharp clearly indicated that the proposed grant was capped at £375 million plus indexation, resulting in a grant of between £450 million and £500 million, depending on the rate of construction cost inflation, and that release of funds was dependent on the production of a robust and positive business case. Any suggestion that there was a lack of clarity about the limit imposed on funding from Scottish Ministers until after the decision of the Scottish Parliament on 27 June 2007 is without any credible basis in fact.

181. The Scottish Ministers took active steps to protect the public funds to be provided by them to CEC for this project. As at summer 2007, of the total grant monies that the Scottish Ministers had said would be made available, a formal offer of grant had been made on 19 March 2007 in respect of £60 million. In terms of the offer, this money was to be used for utilities diversions, advance works and continuing development and procurement for phase 1a. The conditions attached to the offer had the following principal features.

• The monies were to be used only for continuing the development and procurement of phase 1a of the Edinburgh Tram Network and for advance works, land acquisition and utilities diversions.
• CEC was required to produce an audit certificate prepared by its Head of Internal Audit, showing actual expenditure met from the grant.
• If considered necessary, the Scottish Ministers would be granted access to CEC’s accounts and records to verify the proper use of the grant.
• The project governance procedures were those agreed at the TPB meeting on 25 September 2006 and could be amended only with the agreement of the Scottish Ministers.
• CEC was to ensure that action plans for implementation of any recommendations from project reviews were agreed and implemented unless otherwise agreed by the Scottish Ministers.
• There were a number of “project hold points” at which CEC and the Scottish Ministers would “review whether the scheme is continuing to meet its objectives and will determine whether to continue to support scheme development and implementation” [TRS00004112, page 0005, paragraph 18]. One such point was on receipt of best and final offers from the infrastructure contractors and tram vehicle suppliers. The review at this stage would consider the affordability of the scheme in light of available funds. The next review point was before conclusion of negotiations with the preferred bidders for the infrastructure and tram vehicle supply contracts. At this stage, it would be necessary to have in place a signed agreement between the Scottish Ministers and CEC, covering all aspects of project funding and risk allocation. The final hold point was completion of the FBC.
• CEC had to ensure that robust, transparent, externally verifiable project controls for the project were in place.
• CEC had to comply with the project monitoring and control procedures of Transport Scotland.

Considering drafts of the Business Cases

182. The Scottish Ministers took a keen interest in the business cases from the outset. It was intended that the business cases should contain details of the justification for the project and, among other things, a consideration of the BCR. This was an important factor in any decision of the Scottish Ministers to make funds available to a project. The involvement of officials in Transport Scotland extended both to specifying the matters that would have to be considered in a business case and commenting on its contents. When reviewing the various iterations of the Business Case officials used both internal resources of various disciplines and external consultants.

183. There was good reason for the active role that Transport Scotland maintained in scrutinising and suggesting development of the FBC. Although the development of the trams was the project of CEC, the Scottish Ministers would provide the majority of the funding – at least for phase 1a. With the largest financial stake, it was natural that they would want to consider the benefits that might arise, the governance mechanisms, the procurement strategy and similar issues. In addition, the decision to provide the grant was dependent on there being a BCR greater than 1. In order to be sure of this, Transport Scotland would need to examine, with some care, the estimated cost of the project and its claimed benefits. In the absence of a thorough examination of the business case, it would not be able to satisfy itself of either of these matters. The conditions for the grant referred to in paragraph 181 indicated the intention of the Scottish Ministers, as at March 2007, to continue to maintain an interest in the business cases.

Supporting/facilitating

184. The evidence to the Inquiry demonstrated that Transport Scotland had provided further assistance in addition to provision of funds. The Audit Scotland report carried out in 2007 noted that Transport Scotland took a close interest in the progress and cost of the project. In his evidence to the Audit Committee of the Scottish Parliament on 27 June 2007, the Auditor General observed that it was clear that the project was approaching a critical phase leading up to early 2008, when “cabinet secretaries” and the local authority were expected to be asked to approve tie’s Final Business Case to allow the infrastructure construction to commence. In response to a question from the convener of the committee the Auditor General confirmed that “the business plan would be submitted to the twin sponsor bodies, the local authority and Transport Scotland, which would scrutinise it carefully – particularly Transport Scotland, because it is concerned with Parliament’s interests. Final approval would then be given by the cabinet secretaries.” [SCP00000031] The Auditor General clearly anticipated the continued involvement of the Scottish Ministers in the project, including their approval of the FBC before subsequent grant payments were made.

Participating in Tram Project Board

185. Until June 2007, Mr Reeve was nominated by Transport Scotland to sit on the TPB as its representative. If he was not available Mr Sharp would attend in his place. Mr Reeve accepted that this role would include expressing opinions with a view to influencing the decisions to be taken by the TPB. He said that he took decisions at the TPB on behalf of Transport Scotland and that he provided a conduit through which information would be passed between the Board and Transport Scotland.

Changes in the involvement of the Scottish Ministers after 2007

186. The SNP manifesto for the Scottish Parliament election in May 2007 contained a commitment to abandon the Edinburgh Tram project and the Edinburgh Airport Rail Link. The SNP formed a minority administration after that election.

187. A debate was held in the Scottish Parliament in June 2007 on the future of the Edinburgh Tram project and the Edinburgh Airport Rail Link project. Although the debate concerned both projects, the Edinburgh Airport Rail Link project is beyond the remit of this Inquiry. The Scottish Ministers proposed that both projects should be cancelled, but the Scottish Parliament voted to continue with them. Although that decision was not binding on the Scottish Ministers, they decided to continue with the Tram project despite their manifesto commitment to the contrary. It appears that their reason for doing so was a fear that failure to implement the decision concerning the Tram project could result in a vote of no confidence in the Government, and Mr Swinney explained that he did not want the “first SNP Government in 70 years to be curtailed on the basis of a trams project” [PHT00000050, page 22]. However, the Scottish Ministers instructed officials to “scale back” their involvement in the project. No clear guidance was given to officials from Ministers on what “scale back” meant and what the outcome of that should be.

188. Implementation of the ministerial instruction to “scale back” resulted in the removal of the Transport Scotland representative from the TPB, resulting in the withdrawal of officials from governance arrangements that Audit Scotland had found satisfactory. One of the principal functions of the Transport Scotland representative on the TPB was as a conduit of information in both directions. As a result of the changes made, that was lost, as was the chance for Transport Scotland to influence directly decisions taken by the Board. The decision of Scottish Ministers was taken despite the evidence of the Auditor General to the Audit Committee of the Scottish Parliament on 27 June 2007, mentioned in paragraph 184 above, anticipating the continued involvement of the Scottish Ministers in the project after that date. It is significant also that Audit Scotland recommended in its 2011 report that Transport Scotland should reconsider its role and thereafter it was represented in the membership of the TPB. There was no satisfactory or rational justification for the removal of a representative of the TPB between 2007 and 2011 and it was inconsistent with the practice in other projects undertaken by other bodies in which the Scottish Ministers were providing grant funding.

189. Moreover, instead of the conditions of grant payments mentioned in paragraph 181 above, there would be an agreement to release further funds in January 2008 and that the approval of Transport Scotland for such payment would be based on:

• compliance with standard grant conditions to date.
• having received a copy of the completed Final Business Case as endorsed by City of Edinburgh Council.
• having received confirmation that the project had successfully passed a standard OGC Gateway 3 Review.
• ongoing information received via the standard Transport Scotland reporting process and four-weekly meetings with the City of Edinburgh Council.

190. Under these new arrangements less scrutiny was undertaken by Transport Scotland officials. The existing “hold points” mentioned in paragraph 181 above, when officials would review whether the project was continuing to meet its objectives and whether it was appropriate for Ministers to continue to provide support, were removed. There was no independent review of the FBC by Transport Scotland officials and their external consultants. Had that occurred the misleading statements within it mentioned in paragraph 119 above might have been identified. Moreover, had the Scottish Ministers remained involved to the extent that they had been prior to June 2007, officials would have instructed external solicitors experienced in engineering and construction contracts to provide advice about the draft Infraco contract before contract close, to satisfy themselves that the investment in the project was protected and still appropriate. Had that occurred it is probable that the defects in the Infraco contract would have been identified before it was signed.

191. Although, in public, the Scottish Ministers did not take an active role in the project after May 2007, they did seek to exert influence in the background once disputes between tie and Infraco emerged and work on the project ceased. For example, Mr Swinney met Mr Mackay in February 2009 regarding the “Princes Street Dispute”, when Mr Swinney told him to “get it sorted” [PHT00000038, page 96]. This resulted in the Princes Street Supplemental Agreement (“PSSA”), in terms of which Infraco was paid on the “cost-plus” basis of payment that had been requested by BSC. The rates that would be paid were specified in the PSSA, but BSC would be entitled to payment for all the time taken. This meant that it was not necessary to reach agreement as to the existence of changes or the value of the work that would be required to implement them. This was a departure from what had been one of the fundamental precepts of the procurement strategy.

192. Mr Swinney also held meetings with representatives of CEC or of tie on several occasions throughout 2009 and 2010 and, on 8 November 2010, at the request of the consortium, a meeting was held, attended by Mr Swinney and Mr McLaughlin for the Scottish Ministers, Dr Keysberg for BB and a senior manager for Siemens. It appears that there was discussion about mediation at the meeting on 8 November, following which Mr Swinney had a meeting with the leader of CEC and its Chief Executive and Director of Finance on 16 November 2010. He told them that they were going to mediation. Mr Stevenson also had meetings with various participants in the project including representatives of BBS. No minutes of any of the meetings between Ministers and the various participants in the project were produced to the Inquiry. The absence of minutes of meetings between Ministers and the various participants in the project meant that the Inquiry had no contemporaneous record of what had been discussed at the various meetings.

193. At the mediation at Mar Hall Mr McLaughlin was in attendance and participated as one of three negotiators. Before the final proposal was put to the consortium by CEC Mr McLaughlin telephoned Mr Swinney. The evidence of Mr McLaughlin and Mr Swinney about the reasons for that call was incredible. It seemed to me that this was another example of the involvement of the Scottish Ministers in the project. Their active involvement in the mediation and in the project after 2011 coupled with the activity of Mr Swinney described above illustrate just how far the Scottish Ministers had moved from their stance in 2007. From seeking to distance themselves from major decisions on the project, they were now directing CEC as to what should be done. This may be seen as recognition that their original approach had failed. On any view, any policy that they were “hands off” or that they had a “scaled-back” approach had been abandoned.

194. The actions of the Scottish Ministers during 2009, 2010 and 2011 and in authorising the involvement of officials in Transport Scotland in the management of the project between 2011 and 2014 reinforce my view that the limitations imposed by them on the involvement of officials in 2007 was a serious error and resulted in the failure by the Scottish Ministers to protect the public purse, insofar as their contribution of £500 million was concerned.

Footnotes

1. Throughout this Report the designation “councillor” means that the person referred to was a councillor for all or part of the period during which the project was being planned and constructed. ↵

2. CEC were unable to provide the Inquiry with the “Tram Public Realm Design Workbook” as a single document [CEC02087292]. ↵

3. Following the death of Her Majesty Queen Elizabeth II and the accession of His Majesty King Charles III all Queen’s Counsel (QCs) automatically became King’s Counsel (KCs) but throughout the Report the acronym QC has been used to reflect the position that prevailed during evidence sessions. ↵

4. CEC were unable to provide the Inquiry with the “Tram Public Realm Design Workbook” as a single document [CEC02087292]. ↵