Chapter 10: Events Between October and December 2007

Introduction

10.1 Before turning to the substance of the evidence available to the Inquiry, it is appropriate to make a few comments about certain witnesses.

(i) Mr Hofsaess is resident in Germany. As observed in paragraph 2.57 the Inquiry was unable to compel him to co-operate with the Inquiry by giving evidence in person or by way of video link. However, he did provide voluntarily responses to a set of questions provided to him. There are, however, areas in which he has not fully addressed the question put to him or, in his answer, has raised matters that would have justified further questions. These are matters that could have been addressed had he given evidence in person or by video link, but could not be explored using the response method.

(ii) Mr Gallagher was not a satisfactory witness. He had a poor recollection of matters even where they concerned key areas rather than matters of detail. At times it was difficult for me to accept that his unsatisfactory answers were truly the result of poor recollection of events; rather, there were instances where it appeared that he was fabricating evidence or was not being candid in his responses. By way of illustration, he was adamant that no meeting of City of Edinburgh Council (“CEC”) was planned for 20 December 2007 to approve the project and make the decision to proceed [see, eg, PHT00000037, page 77]. He said that the existence of such a meeting was invented by tie Limited (“tie”) to put pressure on the consortium, consisting of Bilfinger Berger UK Limited and Siemens plc (“BBS”), to make progress in negotiations.^[15]
There is, however, ample contemporaneous documentary evidence that there was such a meeting and that it had been planned since the time of the draft Final Business Case (“FBC”).

More significantly, I considered that his answers were often evasive and his evidence at times incredible [see, eg, ibid, pages 35–46]. In later paragraphs of this chapter I will deal more fully with the assessment of his evidence relating to particular issues considered at that stage. In assessing his evidence I took into account the medical reports supplied by Mr Gallagher indicating that he would not be able to cope with giving evidence in public but could do so in a more private setting. To that end a commission was arranged to take his evidence in private at a hotel in Kilmarnock. Mr Gallagher was accompanied by his daughter, who is a solicitor, and the only people present when he gave evidence apart from his daughter were myself, senior counsel to the Inquiry and the solicitor to the Inquiry together with the shorthand writers recording his evidence. His evidence extended into the afternoon and Mr Gallagher and his daughter took the opportunity to be alone during the lunch break. At no stage in the proceedings did Mr Gallagher or his daughter indicate that his health issues were affecting his ability to understand and respond to questions from senior counsel.

(iii) Mr Gilbert was also an unsatisfactory witness. He held a key position with responsibility for award of the infrastructure contract (“Infraco contract”). I fully take into account the fact that he was being asked about the events of some 10 years before, which might have posed difficulties. However, he had had the benefit of having sight of relevant documents that had been provided to him when he was asked for his statement, and Counsel to the Inquiry referred him to documents during the course of his oral evidence. Despite this, it was striking how often he responded to questions by saying that he could not remember or could not recall. No other witness to the Inquiry has been so afflicted by memory lapse. I formed the impression that he did not really wish to assist the Inquiry and saw this approach as a means of avoiding answering difficult questions.

10.2 Following the changes to the role of Transport Scotland and confirmation by the Scottish Ministers that the project would proceed, work continued on the selection of the contractor to undertake the infrastructure works. The effect of the Scottish Ministers’ decision not to proceed with the Edinburgh Airport Rail Link (“EARL”) project, however, had knock-on effects within tie. As congestion charging was not proceeding and the Stirling–Alloa–Kincardine (“SAK”) railway project had been taken from it, tie had only one project remaining. Mr Gallagher therefore began to assume more responsibility. Mr Crosse said that, as a result, he felt a loss of power and independence in his role as Tram Project Director (“TPD”) [PHT00000021, page 9]. This was a surprising thing for Mr Gallagher to do at this stage, as he did not have the degree of experience in transport projects that Mr Crosse had. Mr Crosse did not think that there was a loss of experience when Mr Gallagher took over responsibility but, in view of their respective experience, this was clearly the effect. A number of the personnel who had been working on the EARL project were reassigned to work on the Edinburgh Tram project. Mr Bell was an employee of tie and had been Project Director for EARL. Once it was clear that his role there was to be redundant he was moved to the Tram project. Mr Crosse had wanted to manage the Edinburgh Tram project (the “project”) to conclusion and had made this known [ibid, page 11]. Nonetheless, the decision was made to replace him with Mr Bell at the end of January 2008. Mr Crosse left at that time. When Mr Bell took up the post, he was the fourth TPD in 30 months, following on from Mr Kendall, Mr Harper and Mr Crosse.

10.3 In late 2007, the intention remained that the contracts for the delivery of the tram vehicles and for carrying out the infrastructure works could be entered into in January 2008 and, in order to achieve this, CEC would decide to approve the second version of the Final Business Case (“FBCv2”) and authorise tie to enter into the contracts at a meeting on 20 December 2007. This timetable could not be maintained unless a final price for the proposed Infraco contract could be determined before the Council meeting. As was noted in Chapter 9 (Tendering of the Infraco Contract to the Appointment of Preferred Bidder in October 2007), the Tram Project Board (“TPB”) had approved the selection of the consortium as preferred bidders at the meeting on 15 October 2007 [CEC01357124, Part 1, page 0011] and this was formalised in an agreement between tie and the consortium on 22 October 2007 [CEC00569119]. 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 [minutes of meetings of TPB of 26 September 2007 and 15 October 2007 [CEC01357124, Parts 1–3; Mr Crosse PHT00000021, page 121]. The result was 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 the preferred bidder consisted of “provisional sums” [CEC01357124, Part 1, page 0011; PHT00000021, page 122]. The effect of the state of design also meant that the bidders had amended the proposed contract terms and conditions to protect their risk position pending receipt of more design information and completion of due diligence [TRS00003667, page 0003].

10.4 As there was a concern as to the element of the bid that was made up of “provisional sums”, it is useful here to consider what that term means. It does not have an entirely fixed meaning, but has been described as follows:

“The term ‘provisional sum’ is generally well understood in the construction industry. It is used in pricing construction contracts to refer either to work which is truly provisional, in the sense that it may or may not be carried out at all, or to work whose content is undefined, so that the parties decide not to try to price it accurately when they enter into their contract. A provisional sum is usually included as a round figure guess. It is included mathematically in the original contract price but the parties do not expect the initial round figure to be paid without adjustment. The contract usually provides expressly how it is to be dealt with. A common clause in substance provides for the provisional sum to be omitted and an appropriate valuation of the work actually carried out to be substituted for it. In this general sense, the term ‘provisional sum’ is close to a term of art but its precise meaning and effect depends on the terms of the individual contract.” [May LJ in Midland Expressway Limited v Carillion Construction Limited [2006] EWCA Civ 936; (2006) 107 Con LR 235, quoted in Hudson, Building and Engineering Contracts, 13th edition, paragraphs 9–079.]

10.5 Although I note that Mr Crosse did not consider that this large element of provisional pricing presented a difficulty in evaluating and comparing the competing bids [PHT00000021, page 123], I find this surprising. It meant that almost a third of the price quoted by each of the bidders was something to which they would not commit and was little better than a “round-figure guess”. To have such a large element of the price remain uncertain was clearly at odds with the intention to have a fixed price for the works that was a key element of the procurement strategy outlined in the draft Final Business Case (“FBC”). To put the 30 per cent provisional component of the bids in context, in purely financial terms there was a 4 per cent difference between the two bids for the Infraco works pre-normalisation and just a 2 per cent difference after it [TRS00003667, page 0002].^[16] This meant that any decision as to which contractor to appoint was based on price was highly artificial. Unsurprisingly, tie sought to have this element of the price firmed up once the preferred bidder had been appointed. The consortium was, however, resistant to providing more fixed prices. In order to consider its reasons for this, it is necessary to review the stage reached on the design work at the end of 2007.

10.6 As noted above, the prices for the best and final offers prior to choosing the preferred bidder had been provided on the basis of preliminary design. By the time that the decision as to preferred bidder was made, the design was only about 60 per cent complete, and it had not progressed much by the end of the year. A progress report for a meeting of the TPB on 7 December 2007 [CEC01023764, page 0012] noted that just 66 per cent of phase 1a detailed design was complete and that it was expected that about 75 per cent would be complete when the Infraco contract was awarded in January 2008. This can be contrasted with the earlier expectation as to how much design would be complete. In this regard, there were some differences in the evidence or the emphasis placed upon it by some of the witnesses and it is notable that the intention changed over time. In the draft Interim Outline Business Case produced in May 2005 [CEC01875336, Parts 1–7] and the draft Outline Business Case produced in March 2006 [CEC00380898], the intention had been that the design work would be 60–70 per cent complete at the time that the Infraco contract was signed. However, the position as stated in the draft FBC from December 2006 that was submitted to CEC for approval was:

“It is expected that the overall design work to Detailed Design will be 100% complete when the Infraco contract is signed. However by identifying key risk areas and prioritising SDS activities, tie is seeking to complete the key elements of the Detailed Design prior to selecting the successful Infraco bidder in summer 2007. This will enable Infraco bidders to firm up their bids based on the emerging Detailed Design and thereby reduce the scope and design risk allowances that they would otherwise include.” [CEC01821403, page 0085, paragraph 7.53.]

10.7 Mr Gallagher noted that if design was to be 100 per cent complete at contract award, it followed that it would be less complete when the contractors were asked to provide their final price [PHT00000037, page 8]. He said that the consortium’s claims that it believed that the design would be complete were part of its negotiating strategy [TRI00000037_C, page 0076, paragraph 247] but accepted that tie had given rise to an expectation on the part of the bidders that a full design would be available. When asked about this he replied by saying only that there should have been a better definition of what was meant by “full design” [PHT00000037, page 16]. The expectation was apparent in the evidence of Dr Enenkel, who said that it had been assumed that tie would “complete the design … and provide full pricing detail to BSC” [TRI00000161_C, page 0018, paragraph 9].

10.8 Mr Crosse said that he considered the reference to design being 100 per cent complete was misleading [PHT00000021, page 39] and that it was difficult to say how much work tie anticipated would be complete at contract award [TRI00000031_C, page 0010, paragraph 24]. He said that 100 per cent complete was an “idealised concept” (see paragraphs 5.83 and 6.59 above for discussion of this in different contexts) and that the tie management team was aware that design would not be 100 per cent complete [PHT00000021, page 45]. He noted that some elements would always be designed by the contractor and in this regard referred to the apparatus that would be installed by Siemens [ibid, page 41], but accepted that the civil engineering works, including structures such as bridges, should be complete [ibid, pages 41–43]. In relation to the big areas of design, he considered that in the preliminary designs available to the bidders sufficient information was available to enable them to price “within a few per cent on those designs” [TRI00000031_C, page 0014, paragraph 40]. He stated:

“Ian Kendall’s idea was that the design would be completely finished and handed over to bidders – but that’s not how it usually works in practice. Bidders don’t get a complete package of design.” [ibid, page 0023, paragraph 69.]

10.9 He also said:

“Ian Kendall’s concept, in which design would be fully completed before lnfraco was let, was an idealised concept.” [ibid, page 0026, paragraph 77.]

10.10 The references to “Ian Kendall’s idea” and “Ian Kendall’s concept” are misleading. They are references to the procurement strategy for the project contained in the draft FBC that had been approved by CEC in December 2006. It is apparent that Mr Crosse did not think it workable or appropriate. Clearly, there would be room for differences of opinion, but this appeared to be a conscious disregard of the agreed strategy without the matter being the subject of a formal decision or it being notified to CEC. Even if it was thought that the strategy was not realistic, it was realistic to expect CEC to be given clear notification of the change.

10.11 The difficulties that arose in advancing the designs were well known to the TPB throughout 2007 and are considered in Chapter 9 on procurement up to the appointment of preferred bidder. It is significant for what followed that, at the July 2007 meeting of the TPB, Mr Gallagher said:

“a line on the design may have to be drawn prior to full completion to allow lnfraco pricing and VE [value engineering] savings to be firmed up” [CEC01018359, page 0005].

10.12 Mr Gallagher said that in making his comment he intended to have a baseline from which tie and the consortium could have a discussion on price [PHT00000037, page 18]. Mr Crosse understood the comment to mean that a reference point should be fixed against which both the bidders could price [PHT00000021, page 111]. It was the first express recognition that, rather than have the contractors price a concluded design, they would be asked to price an incomplete one [ibid, page 112]. Two things flow from this. The first is that it appears to be a realisation at the TPB that the design would not be in the state that had been hoped, for the purpose of getting prices from the consortium, and that there would therefore be a departure from the procurement strategy. The second issue that arises is that, if the design that was to be priced was known not to be the final version, it would follow that either there would have to be a mechanism for adjusting the price as the design developed or the consortium would require to put in a price in advance of the final design, based on the risk that additional costs would arise as the design evolved. Mr Gallagher did not give a clear answer on what he had in mind in this regard [PHT00000037, pages 20–22]. I have the clear impression that it was a matter to which neither he nor anyone else involved had properly directed their minds. However, there is no record of the consortium being told, prior to December 2007, to price the design as it existed at a particular point and that it was intended that the bidders should take on the risk arising from the incomplete design and price accordingly. At the time, there was no express consideration of whether the bidders would be able or willing to do so.

10.13 In this regard, Mr Crosse expressed the view that, as at December 2007, more design had been completed than had typically been the case at similar stages on previous tram schemes [TRI00000031_C, pages 0038–0039, paragraphs 112 and 116]. That statement is misleading, however, as other schemes adopted procurement strategies whereby the contractor would be responsible for the design. Mr Gallagher recognised that in other projects where bids were obtained purely on the basis of an outline design, the employer’s role in design would end at that point [PHT00000037, pages 15–16]. Where that is the case, it is inevitable that the designs will be less developed at the stage of seeking bids than was the case for the strategy adopted in Edinburgh. Mr Crosse also recognised this [PHT00000021, page 114], but considered that the Inquiry was becoming “slaves to semantics” in focusing on what was meant by 100 per cent complete design [ibid, page 113]. I do not agree. It is clear that the incomplete design had a material effect upon the pricing of the contract and on the extent to which tie could achieve the degree of price certainty sought by CEC to ensure that the project would be delivered within its budget.

10.14 Both Mr Crosse and Mr Gallagher considered that BB and Siemens ought to be able to price on the basis of the information that they had. Mr Crosse pointed out that the consortium’s claims, in January 2008, that design was not complete could be seen as just a ploy to negotiate increases in the contract price [TRI00000031_C, page 0025, paragraph 76], and the same could perhaps be said of the reluctance to fix prices in late 2007. Whether or not this was correct, by December 2007 it was apparent that little progress had been made and that the consortium was not willing to do so. Eventually this was accepted by Mr Gallagher when giving his evidence to the Inquiry [PHT00000037, page 48]. I consider that it is clear that the design was incomplete to a material extent, that it was less complete than had been anticipated in the procurement strategy set out in the draft FBC in December 2006, and that the consortium was not willing to assume the risk of fixing prices on the basis of such incomplete designs.

10.15 It was clear that the witnesses from the consortium companies relied on the incompleteness of design as a reason for the state of the bid. Mr Walker, of BB, said that the problem was that they had no information or drawings for 40 per cent of the project [PHT00000035, pages 31–32]. Mr Gilbert accepted that this would have a cost consequence, because the consortium would price according to the risk that it was being asked to undertake. From the standpoint of the consortium, however, the objection was more fundamental; it was not willing to assume that risk, even in return for a payment. Mr McFadzen said that, by November 2007, the designs were not as well developed as was needed to price and assess commercial risk [PHT00000034, pages 51–52]. He said that giving a fixed price on the basis of incomplete designs would mean that the consortium bore the whole risk of any increases in cost arising in the course of completion of the designs. He said that to take the risk for all the matters for which there was no information would be “commercial suicide” [ibid, page 65]. Mr Flynn, the Director of Major Projects for Siemens, recognised tie’s desire for a fixed price, but said that Siemens was clear throughout that, in the absence of a completed design, there was not going to be a fully fixed price [PHT00000045, page 32]. He said that the desire for a fixed price was not acceptable to organisations, such as Siemens, who wished to limit their liabilities and risk [TRI00000151_C, page 0004, paragraph 18].

Final Business Case

10.16 The result of all the above factors was that, at the start of December 2007, there was still no firm price. Before turning to the actions taken to address this, to keep matters in broadly chronological order it is necessary to consider the terms of the FBC. In Chapter 22 (Governance) and Chapter 23 (OGC and Audit Scotland), I note that the intention had been to adopt the PRojects IN Controlled Environments (“PRINCE2”) method. In that method, 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. Two versions of the FBC were prepared in 2007. FBCv1, dated 3 October 2007 [CEC01649235, Parts 1–11], and FBCv2, dated 7 December 2007 [CEC01395434, Parts 1–11]. I have focused here on FBCv2 as it was the last version to be produced and was available to members of CEC when they were asked to vote on the project. It recorded that responsibility for delivering the project had been given to the TPB by CEC through Transport Edinburgh Limited (“TEL”) [ibid, Part 2, page 0024, paragraph 1.110], and no mention was made of tie in this context. Notwithstanding this statement, FBCv2 was prepared by employees of and consultants retained by tie.

10.17 In discussing the FBC in this chapter, I may appear to repeat observations made in Chapter 5 (Procurement Strategy). While acknowledging that such repetition may occur, I consider making these observations to be worthwhile in the different contexts under examination. The FBC ran to 209 pages. There was nothing in it to indicate what had changed from the draft version provided in November 2006. A large part of it consisted of arguments for the project generally rather than details of the position that had been reached in relation to costs, risk, contracts and other issues that had been developing materially since the draft. It may be said that if CEC was to make a decision to commit to the project, it was appropriate that the whole of the project data be set out. It might have been appropriate that councillors should have all information, but the manner in which it had been provided meant that a lot of it duplicated information that had already been given. It seems to me that, bearing in mind the decision that councillors required to make in December 2007, they would have been better served had they been referred to information that had already been provided, followed by a statement of data on key issues and any areas in which there had been changes. This would have enabled them to concentrate on the price, the procurement strategy and the treatment of contracting risks. I accept that Mr McGougan said at the meeting of the TPB in September 2007 that, in view of the change in Council administration, it was necessary to “sell” the project. It remains the case, however, that this had already been undertaken over many years, and the purpose of the approval was to ensure that the financial case had been made. I do not consider that this is a point that can be made only with the advantage of hindsight. Had anyone asked what councillors needed to know in order to take the decision in December 2007, they would not readily have found it in the FBC. This is all the more important when regard is had to the number of items of business that the meeting of the full Council was to consider on 20 December 2007. The minutes of the meeting [CEC02083446] ran to 43 pages and considered 41 items. The consideration of the FBC was item 14, which appears on pages 0018–0021 of the minute. There are 13 paragraphs to the motion that was moved in relation to the project.

10.18 Apart from the difficulty in accessing the most relevant information within it, FBCv2 contained a number of inaccurate and misleading statements. It is therefore useful to look at its contents in relation to some of the key issues that existed in early December 2007.

State of contracts

10.19 Relevant paragraphs from FBCv2 are quoted below and are followed by my critique of them.

“1.3 … a. The procurement of the principal contracts has reached a stage where all material terms are agreed, including the capital, operational and maintenance costs;

“[… ] 1.4 After an intensive and lengthy competitive procurement process, the capital and maintenance costs of the scheme have now been finalised at a level slightly below the DFBC estimate.” [CEC01395434, Part 1, page 0007.]

10.20 In fact, there was no agreement as to the costs for the contract for the infrastructure work. Far from such costs being “finalised”, as noted in paragraph 1.4 of FBCv2 (above), intensive efforts were still under way to agree the price. Below, I consider negotiations later in December 2007 and the extent to which there was agreement by the time of CEC’s meeting but, taking these statements at face value on the date of the report, they are incorrect.

Estimates of cost

10.21 “1.4 … Based on firm rates and prices received from the bidders for system construction, vehicle supply and maintenance, the capital cost for Phase 1a, the tram line from Edinburgh Airport to Newhaven, is forecast at £498m.

“… 1.65 Building on the detailed cost estimates prepared in November 2006, and incorporating the firm rates and prices received from bidders in 2007, the updated project cost estimates reflect the agreed scope for Phase 1a and a programme for delivery of Phase 1a by the first Quarter 2011. If the option for Phase 1b was exercised within the window of opportunity to March 2009, it could commence revenue service in 2012.

	Concurrent construction	Sequential construction
Phase 1a	£498m	£498m
Phase 1b	£82m	£87m
Phase 1 in total	£580m	£585m

“… 1.73 On 27th June the Scottish Government confirmed support for up to £500m funding for the Edinburgh Tram scheme. In January 2006, CEC made an in-principle commitment to make a contribution of £45m towards the capital cost of Phase 1, to be deployed initially on Phase 1a. Therefore, the benchmark total funding package is currently £545m. The updated cost estimates above reflect that Phase 1a, at a cost of £498m, is affordable within this level of funding, with 14% headroom over and above the 15% risk allowance provided for in the cost estimate.

“… 10.4 The tender processes for the Tramco and Infraco contracts are close to completion and disclosure in this FBCv2 must respect the commercial sensitivity of the tender process. Reference to cost estimates is restricted to totals only and certain other sensitive commercial terms are described in summary terms only. The full detail of the submitted and negotiated bids has been discussed with Council officials and has been subject to the project governance and approvals processes. The cost estimates set out in this section reflect the terms of the anticipated preferred bids for the Infraco and Tramco projects.

“… 10.9 The ‘updated estimate’ was reflected in the DFBC, as follows:

Phase 1 in total	£592m
Phase 1a only	£500m
Phase 1b incremental cost	£92m

“10.10 The estimated total inflated cost of Phase 1 had increased by approximately 4%, compared to the estimates reported in January 2006, reflecting clarification with regard to scope, progress on design and the inflationary effect of an extension to the target opening date.

“10.11 Based on the estimating methodology used, the level of certainty and confidence associated with the updated estimate was considered to be relatively high. Nearly 98% of the costs were estimated based on rates and prices from firm bids received, known rates applied to quantities or based on market rates applied to quantities derived from Preliminary Design. The level of confidence was reinforced by the benchmarking exercises completed and the relatively high allowance for risk included in the estimate, as explained below.” [ibid, Part 1, pages 0007, 0016–0017 and Part 8, pages 0160–0161.]

10.22 The same issue that was highlighted above arises here: there was no finalised agreement for firm prices for the Infraco contract. There was not even agreement as to the rates for that contract, although rates had been agreed for the Multi-Utilities Diversion Framework Agreement (“MUDFA”).

10.23 The manner in which the estimate of £498 million as the total cost is presented gives the clear impression that it has been built up in some detail from the underlying contracts. When the issue was considered in the evidence to the Inquiry, it was apparent that this was not the case. However, the same figure had been stated in the first version of the FBC (“FBCv1”), which had been prepared months earlier, in October [CEC01649235, Part 1, page 0016, paragraph 1.65]. As this is an important issue, it is useful to set out the relevant evidence of Mr Gallagher in full.

“Q. The Inquiry may hear evidence in due course from Neil Renilson to the effect that you had said to him in a meeting: we can’t possibly put out a figure in excess of 500 million, let’s make it 480 million, it starts with a 4. And you said: ‘Watch me. Well, not 480 million. What we’re saying is we need to have something that starts with a 4. GBP490 million is too bloody obvious. Let’s make it 498.’ What’s your comment on that?

A. My comment is that we had to – we had a discussion at the time about what we felt the final number should be. And I wanted to signal a number less than 500 million. Neil’s advice was funnily enough to go with a range, which I think – I think I have already said that I think I would have went with a range. I wouldn’t have went with a final number. So I would agree with Neil.

Q. What do you mean when you said there in your answer: we were having a discussion as to what the final number should be. [sic]

A. Well, it was a number that was going to go into the public domain. That’s all we’re talking about here.

Q. And essentially that was something that you just chose?

A. No, it was something that there was a range of options available to us, and we had to decide what we felt was our target budget number was going to be.

Q. So how did you choose benefit [sic] [between] the various options that were available to you?

A. I think that there was a range of outcomes, and I have to couch this in – I can’t remember. I think there was a range of outcomes put forward to us by the team, and I think there was a discussion at the Board. It wasn’t my decision. It was a discussion at the Board. And there was various input from various Board members, and the Board collectively decided what the final number would be.

Q. Mr Renilson is saying it was entirely your decision that it had to start with a 4, and he said –

A. No, it couldn’t have been my decision. It would have been the Board’s decision.

Q. What you’re saying in your answers here, it seems, it wasn’t something that was decided from an objective analysis of the numbers. There was an element of choice as to what this number would be?

A. I would disagree with you and say it wasn’t decided by an objective analysis of numbers. It was. But there was an element of choice between an allocation of where you felt your final negotiations were going to be, and also what the element of risk that you wanted to be. I felt that by going with a number which was less than 500, it would help in the negotiations with the Infraco and the other tenders that were underway [sic], because it helped set a kind of lower ceiling number, and that was the rationale. But at the same time I was conscious of the fact that I wanted to be able to achieve, or the company wanted to be able to achieve a successful outcome to the negotiations. And if you’re saying, why was 498 the number, it was probably the balance between these two complete – competing objectives.

Q. If you say it was – the number of 498 was put on it, that was what was chosen, that seems to imply that it was also known that that could go over. Just because you had chosen that figure, doesn’t mean that was what it was going to cost?

A. No. And I think what we said at the time, and I think when I was communicating that, that this was the target number. There was funds available for – to build the network, which was fixed. We were going to do all we could to try and minimise the cost, because at that time I was hoping that if possible, we could get below that number, because the original proposal for the tram network was to build tramline 1a and tramline 1b. Now we were only talking about 1a, and my hope would have been that if the construction had went well, then there may have been a political appetite to have found some additional funds to be able to build the full network that was envisaged.

Q. Once you had announced the figure of 498, or fixed on that in the Version 1 of the Final Business Case in October, it was essentially necessary that you brought the final Final Business Case in at that figure or less?

A. No. I think – I think what would – what would have been the case would have been that if the negotiations had moved, we would have to accurately report to the Board, or the Board would have to accurately report to the City of Edinburgh how the final negotiations ended up.

Q. Was there not a practice of adjusting the risk allowances or value engineering figures to ensure that it always came below the figure?

A. No.

Q. Because it came in exactly as £498 million again in the December Final Business Case?

A. No. There was no – if the final number would have had to have been 510, if it had to have been 470, it would have been the number that was the number. If it was relatively close to what we had said before, and there was no reason to change the number, then that’s what we would have done. But no, there was no predetermined that we were going to design the numbers to achieve the same output. It was based on what the analysis was at that time.” [PHT00000037, pages 40–45.]

10.24 In relation to the cost estimate of £498.1 million in paragraph 10.36 of FBCv2, Mr Renilson gave the following evidence

“Q. In your statement, if we take a look at this for a moment, please, at page 66, could we enlarge paragraph 204, please. [sic]

A. Yes.

Q. We see here you set out: ‘Regarding the issue of GBP498 million I remember very clearly attending a heavyweight meeting in one of the rooms at Citypoint in 2007. I recall there were no politicians present, but that David Mackay and Willie Gallagher amongst others were there. I recall that the latest cost advice was somewhere well above GBP500 million, GBP530 million–GBP540 million or thereabouts. I recall Willie Gallagher saying words to the effect of we can’t possibly put that out because that sounds like an absolutely huge increase. Let’s take it down, let’s make it, say, GBP480 million. That figure doesn’t sound nearly so bad, it starts with a four. Someone said that he could not do that and his response was, watch me, well, all right, not GBP480 million. What we are saying is we need to have something that starts with four. GBP499 million is too bloody obvious, let’s make it GBP498 million. A discussion ensued. That’s where the GBP498 million came from. This was not Gallagher acting alone, most of those present either agreed, or acquiesced.’

I presume you would include yourself in that?

A. Correct.

Q. I have to suggest to you that what the position was at that meeting was that there were a range of costs available, running from somewhere down to about GBP480 million all the way up to GBP530 million. And it was necessary to exercise judgment on various factors to determine which figure within the range should be put forward.

A. Absolutely.

Q. It was a question of trying to decide, rather than taking the top end figure, say GBP530 million, where it would be put, and there was a collective exercise of judgment?

A. Correct.

Q. That came to be that the correct figure was GBP498 million?

A. Correct.

Q. And it wasn’t a situation that we just want to squeeze it down beneath GBP500 million?

A. Yes. Well, it wasn’t just that situation. It was important. It was deemed important by all present that the figure started with a 4. Well, as verbalised by Willie. But it was where do we settle? It could have been, as you say – I can’t remember the specific figures, but quite possibly somewhere between 480 and 530.” [PHT00000040, pages 106–108.]

10.25 It is very obvious that what Mr Gallagher said about the figure of £498.1 million being a “target number” is wholly inconsistent with the way in which it was presented in the FBC. There, it is presented as a cost derived from empirical data and not the figure that management “felt” should be given. The discrepancy between the impression created in the FBC and the means by which the figure came to be included in it for price is even more marked when one considers an email dated 25 October 2007, which Mr Gallagher sent in reply to an email from Mr McEwan [CEC01453723]. Mr McEwan’s email was forwarding a copy of a proposed presentation on VE. VE was a means by which it was hoped that savings could be made on the contract price without compromising the functioning of the works. In his email reply Mr Gallagher stated:

“Let no one be [in] any doubt, we will be going back [to the Council] with a number of £498m for Phase 1(a). Get cracking on whatever needs to be done.” [ibid]

10.26 When asked about this, Mr Gallagher maintained that this was simply him indicating what the budget was. He explained that it was necessary to set a target to avoid increases in costs and to avoid the impression that it was acceptable for costs to increase [PHT00000037, pages 39–40]. I reject this explanation of the email. While I accept that setting a maximum price would put pressure on everyone to avoid cost increases, that is not what the email says. It is plainly making a statement that the sum that will be taken to the Council is £498 million. It is not a coincidence that this is the figure that had been contained in the draft FBC.

10.27 As a generality I did not think that either Mr Gallagher or Mr Renilson were witnesses of credit. However, on this matter I preferred the evidence of Mr Renilson to that of Mr Gallagher where there were discrepancies between them, not least because Mr Renilson accepted that he had agreed or acquiesced in Mr Gallagher’s proposal to quote a fixed figure of £498 million. I considered that his evidence to that extent was a statement against interest and that it was improbable that he would have fabricated evidence that implicated himself. Putting the evidence quoted above in the context of the email and the draft FBC, it is clear that, although a range of possible figures was justified by the material available at the time, that range was not given and instead an essentially arbitrary figure was chosen for effect. 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. With the uncertainties that existed at the time in relation to pricing, there could be no criticism if only a range had been quoted, and this would have been the most appropriate way to communicate the reality of the situation. Equally, it could be seen as legitimate and as being in the interests of the project to choose a figure within the range as a target or an aspiration. However, simply to choose the figure that the Board “felt” was correct and to present it as a figure derived from “firm rates and prices” was highly misleading.

Procurement strategy

10.28 “7.7 tie’s Procurement Strategy has resulted in it taking a greater degree of control over the process during the early ‘development’ phase, compared to what the public sector has done on other projects. This has resulted in tie progressing the overall project sufficiently in advance of seeking bids from Infraco bidders such that it was able to offer the private sector Infraco and Tramco bidders a better defined basis on which to bid and a less onerous risk allocation (and in particular reducing the extent of design and approval uncertainty at bid stage). Therefore the private sector were able to price their bids with a greater degree of accuracy and certainty than has been achieved on other projects. In this way, tie believes it has significantly reduced the cost of the overall project, having considerably de-risked certain of the elements of the project that fall to the private sector to deliver. This is shown by the minimal risk allowance included in the Infraco and Tramco bids.

“… 7.9 The objectives of the Procurement Strategy are summarised as follows:

• Transfer design, construction and maintenance performance risks to the private sector
• Minimise the risk premium (and/or exclusions of liability) that bidders for a design, construct and maintain contract normally include. Usually at tender stage bidders would not have a design with key consents proven to meet the contract performance obligations and hence they would usually add risk premiums for this.
• Mitigation of utilities diversion risk (ie potential impact of delays to utilities diversion programme on Infraco works).
• Gain the early involvement of the operator to mitigate risks on takeover of the operation Tram Network

“… 7.13 In summary the key attributes of the strategy are:

• Separate procurement of utilities works to enable completion of the utilities diversions before commencement of infrastructure works, thus reducing risk to the construction phase and avoiding the risk premiums that would otherwise be included if this work was included with the Infraco package;

“… 7.100 The principal attributes of the procurement approach for this contract are:

• Lump sum price for delivery into service of the tram system. Thereafter lump sum payment each period for maintenance works, subject to performance adjustment;

“… 7.111 The key benefits of the Infraco procurement strategy are primarily through the award of a single turnkey fixed price contract and in the novation of the SDS and Tramco contracts and the transfer of risks to the Infraco. The benefits include […]

• Full design risk passed to Infraco post contract award, including critically the deliverability of the design;” [CEC01395434, Part 5, pages 0097–0099 and Part 6, pages 0113–0116.]

10.29 The statements concerning implementation of the strategy are misleading. 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” [ibid, Part 5, page 0098, paragraph 7.7]. 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” [ibid, Part 6, page 0115, paragraph 7.111] as they could not get firm prices. Overall, it must have been apparent to tie, TEL and the TPB on 7 December that the procurement strategy had not worked and was being departed from, and yet they represented in the FBC that it was still being implemented. As is evident from the consideration below, the position was even worse by the time of CEC’s meeting on 20 December. By then, 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.

Work on design

10.30 “7.51 … The Infraco bidders have prepared their bids on the basis of the emerging SDS designs and the successful bidder is required, following a process of due diligence of the design, to adopt the SDS provider’s design as at the date of Infraco contract signature. Variations to this design can be introduced with the agreement of tie, but at the risk of the Infraco unless they represent changes to tie’s Employer’s Requirements (ERs), which are at cost to the public sector.

“… 7.53 The original assumption was that overall design work to Detailed Design would be 100% complete when the Infraco contract is signed. Due to a number of delays, largely outwith tie’s control, this is now not achievable. However, by identifying key risk areas and prioritising SDS activities, tie is completing several key elements of the Detailed Design in time to inform the Infraco bids on price-critical items. This has enabled the Infraco bidders to firm up their bids based on the emerging Detailed Design and thereby reduce the provisional scope allowances and design risk allowances that they would otherwise have included.

“… 7.60 Following novation of SDS, after completion of the design due diligence process at Financial Close, the design risks pass to Infraco (although tie will retain a collateral warranty over the work of the SDS provider), but without the disadvantage of substantial risk premiums applied by Infraco bidders where design works are executed post contract award. Therefore, tie’s approach will provide the benefits of having a designer involved in the project from an early stage, whilst retaining substantial risk transfer to the private sector.

“… 7.61 In more detail the key delivered benefits of the SDS strategy are as follows:

• Delivery of preliminary design and key elements of the detailed design has resulted in a reduction in risk pricing in the Infraco tenders […]
• Early design of utilities has enabled commencement and completion before commencement of Infraco works, which again reduces overall programme duration;
• Reduction in risks associated with utilities diversion – early completion of utilities diversions will result in a reduced likelihood that utilities works will disrupt progress of the main infrastructure works. It has also reduced pricing premiums because utilities diversion cost is a risk that the private sector has found difficult to assess and then manage;” [ibid, Part 5, pages 0105–0107.]

10.31 It is noteworthy that 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.

10.32 As noted above, the statement that there had been a reduction in risk pricing as a result of the design being prepared is not borne out by the facts. While it is correct that the design process was ongoing and it was hoped that the price could be firmed up, this text, particularly when read with the passages above about the procurement strategy, does not give an accurate account of the extent to which there was a departure from the procurement strategy in relation to completion of design. At the date of the FBC, as tie was aware, the consortium was indicating that it could not firm up its price and blamed this on the absence of design.

10.33 It is not clear what is meant by the section referring to transfer of design risks. The reference to provision of a collateral warranty tends to indicate that it means the responsibility for ensuring that the design was correct and workable. If that is so, the statement that the risk passes to Infraco is not quite correct. Prior to novation, the risk of that lay with Parsons Brinckerhoff (“PB”) under the contract for the provision of the System Design Services (“SDS contract”). After novation, the ultimate responsibility still lay with PB, but the obligation would be owed to the consortium, which, in turn, would owe obligations to tie. It was never the case that that risk lay with tie.

10.34 “Design risk” or similar expressions such as “design completion risk” or “risk of design completion” were not always used in a consistent way, either at the time or in evidence to the Inquiry. They could be used to refer to the cost of completing the designs or to the increase in the construction costs arising from changes to the designs that had to be made to reach the stage of completed design. The first risk arose because, by December 2007, it was clear that, at the time the Infraco contract was to be signed, the design work that it was intended would be undertaken by PB to tie would not be complete. Had the work been done before signature of the Infraco contract, it would have been paid for by tie under the SDS contract. There was an issue as to who would pay for the work that would have to be undertaken after the Infraco contract was signed and the SDS contract was novated to the consortium. The second issue arose because a completed design was not available in December 2007 and it was at least possible that the design as finalised would cost more to construct than was apparent from the design as it stood in December 2007. The lack of consistent use and understanding is likely to have contributed to the confusion apparent in the period up to signature of the contract as to transfer of the risks that existed in relation to design.

MUDFA

10.35 “7.78 The physical diversion of utilities commenced in July 2007 and is scheduled to end in winter 2008. This will result in the majority of utilities diversion works being completed prior to commencement of ‘on street’ works by Infraco. This means that potential conflicts between the utilities and infrastructure works will be minimised and any remaining time overlap can be managed so as to avoid programme conflicts on the ground. To date work has commenced on some of the most congested sections, such as Leith Walk, and it is expected to be complete on cost and programme.

“… 7.82 Key risks remaining with the public sector [for MUDFA] are as follows: […]

• Price risks – MUDFA is essentially a re-measurement contract and there are a number of areas in which there is a risk of price increase including extension of time, unforeseen obstructions and work which was unquantifiable at the time of tendering, but is reasonably foreseeable. These risks are managed in a number of ways:
• The use of prime cost sums in the bill of quantities to make a provision for foreseeable but unquantifiable work;
• The use of provisional items in the bill of quantities. These work in a similar way to prime cost sums, but are used where there is more doubt about whether or not the work in question will be required; and
• Contractor incentivisation scheme in the MUDFA contract under which the contractor shares benefits arising from efficient delivery. This helps to ensure that it is in the contractor’s interest as well as tie’s that the contract outturn cost be minimised.” [ibid, Part 5, pages 0109–0110.]

10.36 Avoiding the situation in which MUDFA works interfered with and caused additional costs to the infrastructure works had always been an important part of the procurement strategy. However, the Inquiry had evidence from Mr Rumney that the proposed timescale was obviously unrealistic. This ought to have been apparent. 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.

Risk

10.37 “1.82 These arrangements provide early involvement of the tram system operator, risk transfer to the private sector at an affordable level, a shorter overall programme and a single point of responsibility for the delivery of the operating tram system and subsequent maintenance.” [ibid, Part 1, page 0019.]

10.38 There is a theme throughout the FBC that risk was transferred to the private-sector entities with whom contracts had been or would be concluded. This was something of significance to councillors when they considered the project. In view of the importance placed on this within the FBC, which, in turn, recognised its importance to CEC, it would be expected that achieving this risk transfer would be a priority. As the evidence as to what happened from December until contract close demonstrates, this was not the case.

“1.85 As the project moves towards physical construction, the following are the most significant risks which could impact on the delivery of the project on time and within the capital cost estimates (including risk allowances):

• Utility diversions – tie will manage the interface between utility diversions and the follow-on works by Infraco. A significant delay in the hand over of worksites to the Infraco could result in significant financial penalties to the extent these are not met by the MUDFA contractor’s liability limits. For this reason, a prompt start to these works was made in 2007, including advance works at the Gogar depot site. This allowed some of the delay, caused by the review of the project following the May election, to be absorbed. The current programme is fully aligned with the preferred Infraco bidder’s programme of works and progress to date has been excellent with no major issues encountered so far;
• Changes to scope or specification – A great deal of care has been taken in defining the scope and specification of the tram project throughout the Parliamentary process and during design development, with input from TEL and Transdev and extensive consultation with CEC and TS. However, significant unforeseen changes to scope and specification could have a very significant impact on the deliverability of the project. Similarly, any changes introduced by stakeholders that are over and above the approved scope will increase the project estimate. Effective management of the consideration of changes through the Governance processes implemented for the project will be vital to mitigate this risk; and
• Obtaining consents and approvals – Responsibility for the preparation and application for most necessary consents and approvals has been passed to the SDS provider and this risk will pass to the Infraco at the point of novation. However, tie and the other stakeholders must continue to ensure there are clear strategies and effective processes to deliver all consents and approvals including planning approvals and Traffic Regulation Orders (TROs).” [ibid, Part 1, pages 0019–0020.]

10.39 As was noted in paragraph 10.36 above, Mr Rumney explained that it should have been apparent that the MUDFA works would take longer than planned and that there would be a consequent impact on the Infraco works. The statement in the FBC gives the impression that part of the cost impact might be borne by the MUDFA contractor – the reference to their liability limits. This was not an accurate statement of the position. There was no penalty to the MUDFA contractor if the works took longer. Even ahead of conclusion of the Infraco contract, there should have been an understanding within tie that there would be a cost consequence for tie if this occurred.

“10.29 The contractual structure for the Infraco and Tramco contracts effectively creates one legal relationship, improving risk transfer from the perspective of the Council. The negotiations on the bids submitted during 2007 have resulted in an aggregate capital cost from the anticipated Preferred Bidders, which is in line with the November 2006 estimate.

“10.30 The final aggregate cost remains subject to finalising the terms of the contracts in the period to Financial Close. A risk relating to late cost escalation is normal in these circumstances but the extent of the risk is assessed as minimal. The risk is being managed through the creation of detailed deal packages which confirm the principal agreements reached during the competitive tender stages. The resulting draft deal ensures that the preferred bidder status has legal standing and commits the bidders to the obligations agreed to during negotiations. Additionally, the main price critical design elements have been incorporated, with provisional allowances for final roads, paving and structures designs.” [ibid, Part 8, page 0163.]

10.40 As was noted in paragraph 10.14 above, the negotiations with the consortium at the date of the FBC were incomplete and it was not accurate to say that it had resulted in an aggregate capital cost in line with the November 2006 estimate. Even allowing for the normal risk relating to late cost escalation, the impression created by the above section of FBCv2 is that such risk would be minimal and managed with the result that the final contract price would reflect the estimate mentioned above.

10.41 As far as the infrastructure works were concerned, there was nothing in the evidence of the nature of “detailed deal packages which confirm the principal agreements reached during the competitive tender stages” [ibid, Part 8, page 0163]. It is also not apparent that the preferred bidder was in any practical way committed to obligations agreed during negotiations. If anything, as Mr Crosse noted, the effect of appointment of the consortium as preferred bidder had been to change the power balance [PHT00000021, page 129] and made it difficult to get firm prices. In addition, although it might be said that the start of MUDFA was prompt, there had been a period of several months when nothing was done pending the outcome of the Scottish Parliament election and a decision of the incoming administration as to whether it would proceed with the project.

“11.14 A number of key areas with potential to delay the project programme (with consequential cost impact) have been identified. The following bullet points outline the risks identified at the DFBC stage and beyond and sets [sic] out their current status and mitigating actions: […]

• Infraco tenders are unaffordable, bidders withdraw or bids are late requiring delays to the approval process: Affordability risks were being mitigated at the DFBC stage by developing and updating the estimate of capital costs for Phase 1 of the project with independent validation of the estimate by TSS and benchmarking of costs against those of other comparable tram systems. The revised cost estimates in section 10 now fully incorporate the negotiated prices from the Infraco bidders. As the negotiations are nearing completion, this risk is less significant;

“… 11.16 Although the cost estimate is based on the negotiated contracts for Infraco and Tramco, a number of capital costs risks remain.

“… 11.17 Risks have been identified in relation to the progress of Detailed Design and the progression of TROs which could affect the overall programme. tie have mitigated these risks as follows:

• Progress of Detailed Design – through a staged release of design information to Infraco bidders, the project maintained the flexibility for Infraco to take a greater role in design development and by applying effective project and contract management to the design process. Further, the acceptance of the SDS design by the Infraco is dependent on the outcome of their due diligence of the design;
• Progression of TRO’s – by consultation with CEC on detailed traffic modelling and close alignment of TRO programme with the construction programme. A detailed TRO strategy has been developed by tie as set out in section 9.” [CEC01395434, Part 8, pages 0171–0173.]

10.42 The comments above in relation to the state of negotiations with the consortium apply here also. The comment that “through a staged release of design information to Infraco bidders, the project maintained the flexibility for Infraco to take a greater role in design development and by applying effective project and contract management to the design process” does not reflect the reality of the reasons for the piecemeal release of information. It was not done to maintain flexibility or to give the bidders a greater role in design development; it was done because there was a failure to have the design ready on time. Efforts to apply effective project and contract management to the design process had failed to have any material effect on the progress of the design as noted above and had been discussed in meetings of the TPB throughout 2007.

“11.46 There is no standard contract for use in tram schemes which embodies a settled approach to responsibility for risk and its financial implications. Bespoke forms of contract have been prepared to meet tram requirements and the proposed risk allocation, and bring consistency to the legal framework on key terms eg dispute resolution. tie and its advisors have used experience from previous tram schemes and the proposed risk allocation as a basis for settling contractual provisions where appropriate.

“11.47 In the development of the contracts, tie and their advisors have designed risk allocation matrices to reflect the allocation of risks to private sector, public sector and those that are effectively shared. This is in order to construct the contracts, with clarity of those risks which the private sector will take (and allow for within their bids) and those risks which the public sector will need to manage.

“11.48 Set out below are the key risks that tie is responsible for managing up to award of Infraco.

• Model development, ticketing and fare strategy;
• Tram priority in highway;
• Land acquisition and compensation;
• Detailed Design development;
• Agreements with heavy rail parties;
• Public utility diversions;
• Consents and approvals;
• Project Management; and
• Programme and Cost Management.

“… 11.54 Risk for the execution of utilities diversions has been transferred under MUDFA. The scope of work has been specified by the utilities and designed by SDS and the risk that these are significantly greater than anticipated are covered by the public sector. tie had carried out detailed survey works under SDS to get a view of the quantity of works to be required. Additional survey and trial hole works have now been undertaken by AMIS to obtain greater clarity of both quantity and accuracy of the location. Together with the significant allowances included in the risk register, this approach mitigates the exposure of the public sector.

“11.55 Should MUDFA fail to complete in time to allow Infraco on to the site, then the public sector will be responsible for delay to Infraco works. However, in certain locations, utility diversions will be undertaken by the Infraco contractor, as this provides practical advantages for construction works or traffic management reasons. tie is mitigating the risks to programme arising from delays in MUDFA by incentivisation of the MUDFA contractor to complete on time. This risk further minimised by:

(i) The early involvement of the MUDFA contractor during design development with SDS;

(ii) The early scheduling of utilities diversion works which are anticipated to be significantly advanced, by the time that the Infraco contract is signed; and

(iii) Release to Infraco, as staged handovers, of completed sections.

“… 11.59 Design – Changes in design which are required by the public sector after the signing of the Infraco contract will be at the risk of the public sector. The progress of detailed design has somewhat mitigated this risk. However, a significant failure in the agreed design will effectively be transferred to the Infraco contractor following novation. Provision of consents for Prior Approvals and Temporary and Permanent TROs by the statutory authorities remains a public sector risk, but provision of the necessary information in the required format and timescales will be at the risk of SDS and/or Infraco.” [ibid, Part 9, pages 0178–0181.]

10.43 The use of the term “risk” is often misleading in these paragraphs. What is being considered is the identity of the party to whom a particular responsibility has been allocated. So, paragraph 11.48 sets out the responsibilities of tie rather than risks and, in paragraph 11.54, it is not accurate to say that the risk of execution of utilities diversions has been transferred under MUDFA. Although the responsibility for undertaking the work had been passed to Alfred McAlpine Infrastructure Services Limited/Carillion Utility Services Limited under the contract, the financial risk if the works cost more than predicted lay entirely with tie. A “risk” refers to the possibility that an uncertain event or situation (known or unknown) will occur. The issue is who will bear the additional burden – financial or otherwise – if the risk eventuates. This same issue is apparent in the risk tables that are referred to in this section of the FBC. Insofar as there is reliance, in paragraph 11.54, on the extent of site investigations to mitigate the risk that the scope of the MUDFA works is significantly greater than anticipated, this is considered in more detail in Chapter 8 (Utilities). Suffice it to note here that I have concluded from the evidence that the investigations were inadequate and failed to identify the scale of the diversions required.

10.44 In similar vein to the above, paragraph 11.55 skirts round the real issue and does not provide a clear statement to the effect that tie bears the risk in the event that the MUDFA works are not completed on time and they prejudice the Infraco works.

Quantification of risk and optimism bias

10.45 “10.12 The updated estimates comprised base costs and an allowance for risk and uncertainty. As part of the project estimate update, the Project Risk Register was updated with cost impacts and risks re-assessed. As explained in section 11, a rigorous quantitative risk analysis (QRA) was then applied to the risk and cost impacts to derive a risk allowance for a very high level of confidence (statistically at a 90% confidence level, meaning that there is a 90% chance that costs will come in below the risk-adjusted level).

“10.13 The level of risk allowance, so calculated and included in the estimate at that time, represented 12% of the underlying base cost estimates. This was considered to be a prudent allowance to allow for cost uncertainty at that stage of the project. It reflected the evolution of design and the increasing level of certainty and confidence in the costs of Phase 1 as procurement had progressed through 2006.

“10.14 tie continued to comply with the HM Treasury recommendations for the estimation of potential OB and had determined, in consultation with TS, that no allowances for OB were required in addition to the 12% risk allowance above.

“… 10.25 Since November 2006, all of the critical aspects of the project have progressed and revisions made to the cost estimates as necessary. The progress made and the impact on final costs is summarised below.

“… 10.35 A risk contingency sum has been retained in the final cost estimate. The level of contingency reflects the reduced risk attaching to project costs, in the light of the further work described above and, in particular, the conclusion of negotiations on the Infraco and Tramco contracts. This allowance provides an uplift of 15% on the construction period base cost estimates of Phase 1a, calculated using the QRA at this point in time. Added to the balance of the committed funding available for the tram, this allowance currently provides a headroom of 29% over the future Phase 1a costs. This is considered a very reasonable allowance for headroom.

“… 11.40 The Project Risk Register has been developed since the instigation of the project. Each item in the risk register contains a probability of occurrence and the range of minimum, most likely and maximum financial impacts, where appropriate. The financial impacts are over and above costs included in the base estimate. This allows a quantitative risk analysis (QRA), using Monte Carlo simulation, to be undertaken.

“11.41 Analysis showed that a ‘very high’ confidence that the outturn of the project costs will be derived from the inclusion of risk contingencies as shown below. tie has extended this analysis in the period through the current stage of negotiations and conditional award recommendation. tie will continue to apply this analysis through to final negotiation and award of the Tramco and Infraco contracts in January and include inputs from the continuing design negotiation and MUDFA progress.

Table 10.4. Risk allowances

Probability	Increase to base cost – DFBC	Increase to base cost estimate for future costs at contract award – FBCv2
Very high confidence – P90	12%	15%

“11.42 By the time of the DFBC, OB was effectively eradicated, as per the findings explained in the Mott MacDonald Review of Large Public Procurement in the UK. This was in view of greater scheme certainty and the mitigation of factors built into the procurement process, as well as project specific risks and environmental and external risks. Instead of using OB, TS and CEC adopted a very high confidence figure of 90% (P90) in the estimate of risk allowances to cover for specified risk, unspecified risk and OB.

“11.43 There are no proposed increased allowances for OB in addition to the above estimated risk allowances.

“11.44 The level of risk allowance represents a significant proportion of the project estimate value. In addition, there remains £47 million headroom between the project estimate and maximum funding available. This provides comfortable headroom of 29% over base cost estimates for future costs of Phase 1a at Contract Award.

“11.45 The development of the Procurement Strategy was one of the key elements of risk mitigation for the tram project. Risk has been quantified following a detailed assessment process performed by tie and its advisors in accordance with industry best practice and experience.

“… 11.60 Utilities diversion – As discussed above the risk associated with utilities diversion under the swept path of the tramway remains with the public sector. The risk of the impact of any delays caused by incomplete utility diversions at the time of commencement of on-site work by Infraco will be carried by the public sector (but it is expected that they will be complete in key areas)

“… 12.6 In order to have the depot built and commissioned ready for 1st tram deliveries in December 2009 an advance works contract has been awarded to allow for enabling works and mass excavation prior to Infraco commencement. The first two phases of this work have now been completed – some six weeks ahead of schedule.” [ibid, Parts 8–9, pages 0161–0188.]

10.46 In Chapter 21 (Risk and Optimism Bias) there is a detailed consideration of the way in which risk and optimism bias were managed in the project. For present purposes, it is enough to note that the approach to risk was flawed in that no account was taken of the fact that it was apparent by this time that it had not been possible to adhere to the procurement strategy, which had formed the basis on which it was assumed that risks were mitigated.

10.47 By email dated 7 December 2007 Mr MacKenzie sent a briefing note to Ms Lindsay from which it appears that the “B team” had concerns about the assumptions underlying the reduction in risk allowance and about potential additional costs [CEC01400190; CEC01400191]. Officials attending the meeting of the Chief Executive’s Internal Planning Group on 11 December 2007 considered the briefing note which was reproduced as Appendix 3 of the papers for the meeting. Following that meeting there were further meetings between representatives of tie and CEC officials prior to the CEC meeting on 20 December in which tie representatives provided assurances about the adequacy of risk allowances, that the Infraco contract was 97 per cent fixed price and that BBS had accepted design risk. Moreover, representatives of tie had revised and approved the draft Report that had been prepared by Mr McGougan and Mr Holmes for the CEC meeting on 20 December. The Report that was submitted to councillors omitted references to the fact that design was only about two-thirds complete and that there was a chronic history of design difficulties. It also failed to mention that there had been delays and difficulties with the MUDFA works. It also confirmed that the estimate of £498m for Phase 1a inclusive of a risk allowance as reported in October 2007 remained valid after taking into account the latest negotiated position. [CEC02083448, page 0005 paragraph 8.2]. I consider these issues in more detail in Chapter 13 entitled ‘Events during 2006 and 2007’, in the section from paragraph 13.123 to the end of the chapter. Although the ultimate responsibility for the Report to councillors rested with the authors of the Report tie must also bear some responsibility for misleading councillors in so far as the information provided to them was based upon FBCv2 and subsequent assurances given by representatives of tie to CEC officials.

Wiesbaden

10.48 As mid-December 2007 approached, some progress had been made in firming up the price element of the bid from the consortium. A Contract Cost Report attached to an email from Mr Gilbert to Mr Crosse dated 13 December [CEC00573343 contains both the email and the attachment] indicates that the provisional element of the bid from the consortium had dropped from just under £50 million at preferred bidder stage to a little under £15 million. Despite this, it was apparent that the efforts to have the consortium firm up its price entirely to accord with the procurement strategy were not bearing fruit. It was necessary to have the price finalised in time for CEC’s meeting on 20 December, so, with a view to breaking the impasse, the management at tie considered that it would be useful to have a meeting between the most senior personnel for tie and the members of the consortium. Mr Gallagher explained that the intention of this was to get commitments from the senior representatives of the companies and to get them to agree the required price even if it included a risk premium [TRI00000037_C, pages 0075–0076, paragraphs 245–246; PHT00000037, pages 52 and 59]. Mr Crosse stated that the sole objective of the meeting was to get the consortium to fix its price and “to accept most of the risk of design completion” [TRI00000031_C, pages 28 and 0037–0038, paragraphs 84 and 111 respectively]. Mr Flynn said that the intention on the part of tie appeared to be that it wanted to firm up the price and to get the contract concluded. It sought to escalate the matter within BB and Siemens with a view to getting the contract finalised. He considered that tie’s priority was the completion of the contract rather than securing a fixed price. The consortium had been clear throughout that there would not be a fixed-price contract [PHT00000045, page 32]. Mr Walker considered that tie’s objective at the meeting was to get the price down to below the “gateway” or maximum price that it could agree in terms of the business case [TRI00000072_C, page 0020, paragraph 31].

10.49 A meeting between the parties had already been scheduled for 13 and 14 December, at the headquarters of BB at Wiesbaden, and it was decided that these dates should be used for the meeting of senior personnel. Correspondence regarding pricing continued in the run-up to the meeting, and it is useful to look at that in some detail. By letter dated 11 December 2007 to Mr Walker [CEC01481843], Mr Gallagher referred to the proposed meeting of the parties in Wiesbaden, and said:

“Unless you are able to confirm that, by the end of Thursday’s meeting, we will have been able to consider, and agreed the following items then I must state that tie will not attend and we will need to revisit the entire preferred bidder programme.

1 Price confidence: we ask you to consider fixing your price, save for a very few notable exceptions where for example the design itself is absent.

2 Price level: we ask that, having been through the value engineering exercise including the targets agreed at preferred bidder date – your price level and VE savings are confirmed at a level that enables our project business case target to be met …”

10.50 Although the letter raised issues of price confidence and price level, as well as other matters, in evidence Mr Gallagher said that what he really sought was a fixed price that delivered the scope of what tie was seeking to achieve [PHT00000037, page 56].

10.51 Mr Walker replied the following day [CEC00547788], saying that prices could be fixed where design was available. The letter is written on the notepaper of the consortium but signed by him as managing director of BB. I have assumed that it reflects the views of the consortium because there could be no agreement with the consortium unless each of its members consented. In practical terms, the letter identified seven items marked “provisional” in the August price submission, which could be made firm for an increase in price of £8.12 million. The letter also noted, however, that assumptions had been made in respect of pricing and programming certainty. The assumptions in respect of design clarified that the consortium was unable to fix its price where design was absent, and gave typical examples of locations affected. Where design was partial, it had made reasonable assumptions based upon its experience, and Mr Walker expressed only “a high level of confidence in our pricing”. A further assumption was that design must be delivered by System Design Services (“SDS”) in line with the consortium’s delivery programme that had previously been submitted to tie.

10.52 Mr McFadzen, who had been involved in preparing the calculations in Mr Walker’s letter but who was not at Wiesbaden, considered that the effect of the assumptions was that in situations where there was only partial design, the consortium would have been able to adjust its prices, upwards or downwards, as further information became available [TRI00000058_C, page 0026, paragraph 93; PHT00000034, pages 60–61]. He described the letter as being “round one” of the process of buying out risk. Mr Walker considered that where the consortium offered to firm up prices in return for an increase in price of £8.12 million, this was to be a fixed price [PHT00000035, page 33]. It is therefore apparent that there was a lack of common view even within the consortium. I consider that the terms of the letter are quite clear. In exchange for £7.12 million, the consortium was offering to fix the price of six areas for which provisional sums had been included in its August submission. The offer in that regard was unqualified. As regards the seventh item, “Earthworks“, the price could be fixed in exchange for an additional sum of £1 million, subject to the qualification that that price did not include any allowance for replacement of any materials below earthworks outline or for dealing with below-ground obstructions or voids, soft material or any contaminated materials.

10.53 Mr Crosse referred to the preferred bidder update addressed to him, which was also dated 12 December 2007 [CEC01482234]. He considered that the issues raised in it were a smoke screen to avoid addressing the issues raised by tie in the letter of the day before. To illustrate this, he drew attention to the issue of building fixings that the consortium raised. This, he said, was a minor matter that all light rail projects had to contend with and that could be resolved in a pragmatic way [TRI00000031_C, page 0038, paragraph 112]. He said that, on 12 December, he and Mr Gallagher were close to calling off the meeting planned in Wiesbaden for the next day [ibid, page 0038, paragraph 114].

10.54 On 13 December 2007, Mr Gallagher responded to Mr Walker [CEC00547779]. He expressed disappointment and said that Mr Walker’s response to his letter did not give the certainty that was required. Although Mr Gallagher’s letter was sent on the day on which the parties were to meet in Wiesbaden (13 December), it noted that if a way forward could not be found, Mr Gallagher would recommend to CEC that the project should not proceed. The letter required that the consortium should reply, saying that it would fix its prices in accordance with an attached schedule. Mr Crosse said that these letters were at the heart of a negotiating game [PHT00000021, pages 134 and 171], that the threat to withdraw was a negotiating tactic and that he did not agree that the project should not proceed [ibid, page 133]. However, at the time that these letters were being exchanged with tie, BB had said to Siemens that it wished to withdraw from the bid as, in the time between its offer and December 2007, steel prices had increased significantly [TRI00000294, pages 0003–0004, paragraph 4(c)]. Mr Hofsaess was involved in meetings with BB to persuade it not to withdraw. These intentions indicate how difficult matters had become, and the scope for parties’ positions to become entrenched. Despite the various threats and concerns in relation to the meeting, it did go ahead.

10.55 Prior to the meeting in Wiesbaden, there were meetings within tie to discuss the negotiation strategy that was to be adopted. No minutes were taken at these meetings, although attendees would have taken their own notes [Mr Crosse TRI00000031_C, page 0037, paragraph 111]. Documents were produced by Mr Gilbert to brief Mr Gallagher and Mr Crosse [CEC00573343; TIE00087524; TIE00087525; TIE00035209; TIE00035210; PHT00000021, pages 137–138]. These disclose an intention to concede an increase in the price, in return for the consortium accepting the “design development risk” liability [ibid, pages 139–143]. The papers produced by Mr Gilbert suggested that tie might have £10 million available, which could be given in return for the transfer of this risk. In this context, Mr Gilbert was clear that it meant the responsibility for absorbing additional construction costs arising from designs that were subsequently completed, and this is borne out by the wording of the documents. Mr Crosse referred to the consortium being asked to accept the risk of small design changes and VE [TRI00000031_C, page 0038, paragraph 113], but this is inconsistent with Mr Gilbert’s papers. Even although the document entitled “Infraco Deal Negotiations”, referred to below [TIE00035210], mentions “detailed design changes”, this was in contrast to “fundamental design changes” and did not require that all changes be “small”. I consider that Mr Crosse is confusing the issue of what was intended in December 2007 with the disputes as to drafting and interpretation that arose later.

10.56 Mr Gallagher said that he could not recall the papers produced by Mr Gilbert being discussed with him prior to the meeting [PHT00000037, pages 66–67]. While this is understandable in relation to the VE issues, it makes no sense in relation to the issue of getting firm prices, because the main purpose of the meeting in Wiesbaden was to have a discussion between principals to break the impasse on this issue. That assumed that the principals – and Mr Gallagher, in particular – would have some knowledge about the point that they were attempting to resolve. Moreover, although the email sent by Mr Gilbert to Mr Crosse at 10.12 am on 13 December, enclosing the Infraco Contract Cost Report and the Infraco Deal Parameters, was not copied to Mr Gallagher, Mr Gilbert sent a later email, at 13.02 that day, to Mr Crosse and Mr Gallagher, with an attachment entitled “Infraco Deal Tactic” [TIE00035209; TIE00035210]. This was a document headed “Infraco Deal Negotiations”, which listed what should be reflected in exchange for Infraco firming up the contract price, including “BBS taking the risk of design development to construction stage, excluding changes to design principles and adding scope”. I have concluded that Mr Gallagher must have been aware of the briefing notes from Mr Gilbert, but that his 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. This is another example of tie’s “financial engineering” approach, which was mentioned by Mr McFadzen in the context of the VE target savings sought by tie, which were mentioned in Chapter 9 on procurement up to the appointment of preferred bidder in October 2007, and is consistent with Mr Walker’s view that Mr Gallagher’s goal was to get the price below a “gateway” figure.

10.57 Accounts of who was in attendance at the meeting in Wiesbaden varied from person to person. There is general agreement that Mr Gallagher and Mr Crosse represented tie, Mr Flynn and Mr Hofsaess attended for Siemens, and Dr Enenkel and Mr Walker attended for BB, and I conclude that these were the persons who were in attendance. Dr Enenkel believed that Mr McFadzen was there [TRI00000161_C, page 0016, paragraph 7; PHT00000034, page 128]. However, Mr McFadzen stated that he was not present, although he had been involved in the build-up to that meeting [TRI00000058_C, page 0026, paragraph 93]. I have concluded that Mr McFadzen was not there and that Dr Enenkel was mistaken in that regard. Mr Flynn thought that Mr Brückmann had been there with himself and Mr Hofsaess [TRI00000151_C, page 0011, paragraph 44; PHT00000045, page 37]. Again, no other witness refers to this, and I conclude that Mr Brückmann did not attend. Both Mr McFadzen and Mr Walker thought that Mr Metzger was there, but this is not referred to by other witnesses. Part of the confusion as to whether other people from BB and Siemens were in attendance may arise from the fact that the meetings were held at the offices of BB and that it had ready access to any of its staff and advisers. Mr Hofsaess recalled only attendance by Mr Gallagher, Mr Flynn, one board member of BB and himself [TRI00000294, page 0003, paragraph 4(a)], which would exclude Dr Enenkel and Mr Crosse.

10.58 There was some conflict in the evidence as to whether BB had the benefit of legal advice. Mr McFadzen, Dr Enenkel and Mr Walker thought that the BB legal adviser, Mr Korff, was in attendance, but this was not confirmed by either Mr Gallagher or Mr Crosse. On balance, in this regard I prefer the evidence of the tie witnesses, which is consistent with the points noted below in relation to the presence of legal advisers. Although I conclude that Mr Korff did not attend the sessions with tie, he would have been available on site and in a position to provide advice. Both Mr Walker and Mr McFadzen thought that Mr Laing of Pinsent Masons was also there, but Mr Laing denied this and no other witness spoke to his having been there.

10.59 tie’s representatives did not take legal advisers with them. This is surprising, particularly as these events were taking place only a couple of months after DLA Piper Scotland LLP (“DLA”) had been re-engaged by tie after it was recognised that standing that firm down had been a mistake. Both Mr Crosse and Mr Gallagher were asked why they decided not to take a legal adviser with them. Mr Crosse said that Mr Fitchie was not asked to attend, as the meeting was to discuss numbers rather than contract terms [TRI00000031_C, page 0037, paragraph 111; PHT00000021, page 134]. He said that Mr Fitchie would not have added any value at the meeting. In my view, this makes no sense. All the senior management team were – or should have been – aware that the difficulty in obtaining firm prices centred on the concerns as to the liability for increased costs where the designs were not completed. They were all aware that this was an issue of allocation of risk. That is a key element in the context of any contract negotiations and drafting. As the parties were clearly aware from the briefing papers that they would be discussing issues of allocation of risk, the sensible thing to do would have been to have access to legal advice. Also, it was foreseeable that BB would have access on site to its legal advisers, and this was another reason why tie should have had the benefit of advice. As matters transpired, however, I conclude that the absence of legal advice did not determine the outcome of discussions to the prejudice of tie.

10.60 As for the role that each person had at the meeting, Mr Gallagher said that he had not been there to get involved in the detail [PHT00000037, page 73], and he was at pains to point out that he had not been there to negotiate the deal [TRI00000037_C, page 0087, paragraph 276]. Instead, he said that he was there “to help close the negotiations on the discussions with the consortium”. This begs the question as to how he could close the negotiations if he was not there to negotiate the deal. His job title indicated that he had an executive role within the company, and it is notable that he wrote the letters in the lead-up to the meeting, demanding that the consortium make the prices firm. As discussed below, I accept that, away from the main meeting, Mr Gallagher had private discussions with Dr Enenkel and Mr Hofsaess about the critical issue of price. The whole approach of Mr Gallagher to this phase of the progress to agreement put him at the very heart of it, and I reject his attempts now to distance himself from it. By December 2007, the issue of reaching agreement on price that enabled tie to report that the project could be delivered within the available budget of £545 million was so critical that it is inconceivable that he would genuinely forget his involvement in the relevant negotiations.

10.61 Similarly, Dr Enenkel said that he had been there for only part of the meeting and had played the role of a host rather than a negotiator. I reject his evidence as to his limited involvement. Other witnesses recorded him as having a more significant role [Mr Flynn PHT00000045, pages 62–63] and, in particular, participating in the discussions between principals as will be discussed in paragraph 10.65 below. I prefer that evidence to the position adopted by Dr Enenkel.

10.62 Mr Gallagher said that the fact that the designs were behind schedule “was not a key issue at Wiesbaden” [TRI00000037_C, page 0079, paragraph 256]. I do not accept this statement. It is clear that it was the inability of tie to obtain designs timeously and its determination nonetheless to conclude the contract in the absence of designs that gave rise to the reluctance of the consortium to give firm prices. It was precisely that which led to the requirement for the meeting. It also has a critical bearing on what was agreed in the aftermath of the meeting. tie wanted a fixed price for the works, despite the design being incomplete. Mr Gallagher said that there were parameters within which the deal had to be done in order to be acceptable. One requirement was that the consortium accepted the design and development risk; if it did not, as Mr Gallagher put it, “in essence we would have no idea of what the end of the – the end product was going to cost” [PHT00000037, page 69].

10.63 I have noted in paragraph 10.1 above that the evidence given by Mr Gallagher was not satisfactory in many respects. An example was in relation to his lack of recollection of discussions that he had had with a view to getting a fixed price. In the course of his oral evidence, the following exchange took place:

“Q. Did you have discussions, though, about what the price would be and getting it fixed as opposed to variable?

A. Actually, I truthfully can’t recall. What we were trying to achieve at the time was the price that we had on the table, we want to get Bilfinger Berger Siemens to stand behind it. That’s what we were trying to achieve. They had put in a request for 8.12 million. So I knew about that. And that was being analysed by the procurement people. So there was no response to that. But what we were trying to get to was a position where there was a price which would be acceptable to both parties, and an agreement on programme risk.” [ibid, page 74.]

10.64 It is difficult to understand how he could have expected to achieve his stated objectives without seeking to agree a price. Moreover, in contrast to his lack of recollection about the discussions about price, mentioned above, when asked about discussions regarding the design development risk, his position was that, by the end of the discussions, the parties had an agreement for a target price in which the consortium would take on the design development risk [ibid, page 76]. These answers were closely related in time, as is evident from the page numbers of the transcript, and are inconsistent with each other. From the later answer it is clear that he did have a recollection of allegedly reaching agreement on a target price despite his earlier lack of recollection about discussions about price.

10.65 As for how the agreement was eventually reached, Mr Walker is clear that Mr Gallagher left the room with the principals of BB and Siemens, to discuss price [PHT00000035, pages 46 and 50], even although he thought that it was possibly “not a totally correct way of arriving at a contract sum”. Mr Gallagher did not say that it had not happened, but said that he did not recall any such meeting [PHT00000037, page 72]. Dr Enenkel had no memory of a private meeting away from the others, at which the price was agreed [PHT00000034, page 128]. Mr Flynn did not recall a meeting between the principals, but thought that it was possible that it had happened [PHT00000045, pages 37–38]. Although, in the request to him to provide a statement, Mr Hofsaess was asked whether there was such a discussion, he did not respond on that issue. Having seen the witnesses, I found Mr Walker’s account compelling and concluded that there was such a separate private discussion involving Mr Gallagher, Dr Enenkel and Mr Hofsaess and that that was indeed how the price was fixed for the Infraco contract. I also accept his evidence that the three principals returned to the meeting and stated the figure that had been agreed for inclusion in the spreadsheet.

10.66 However, in the accounts there is a lack of consistency and coherence on what was actually agreed. The parties do not appear to have come away from the meeting with any document summarising or recording the agreement in even the most informal terms. Mr Gallagher said that notes were kept by both sides during the meeting and that the notes were compared to make sure “that they reconciled with each other so that we didn’t have one interpretation and the consortium had another” [TRI00000037_C, page 0083, paragraph 267]. Mr Crosse said that, at the time of the Wiesbaden meeting, he would have prepared notes of the discussion that took place, but that he no longer had them [PHT00000021, page 146]. No such written record was provided in the documents made available to the Inquiry, nor is there any reference to it in emails that passed in the days and weeks following the meeting. If any note was to have been kept for tie about the separate price discussions, that would have been the responsibility of Mr Gallagher as the person who had had the discussions that formed the agreement in price.

10.67 It was clear that it had been agreed that there would be an increase of £8 million to the best and final offer price but there were several different accounts of what this was for. Mr Gallagher believed that they had “agreed price, scope and the whole process” [TRI00000037_C, page 0094, paragraph 294]. By reference to the minute of the TPB meeting dated 12 March 2008 [CEC01246825], he noted that it appeared to have been recognised that the payment agreed at Wiesbaden was simply in respect of provisional items and some contingencies on design issues [TRI00000037_C, page 0086, paragraph 274]. This is much narrower than accepting the design development liability generally. Mr McGarrity’s view of what happened contained inconsistencies. On one hand, he considered that the effect of the agreement reached at Wiesbaden was that the consortium would pay for any additional costs arising on the completion of design [PHT00000047, page 107] and that the additional £8 million was in return for the contractor taking designs from where they were to completion and bearing the risk of any resulting construction cost increase [ibid, page 143]. The practical effect of this was that he believed that the risk arising from incomplete design had been significantly removed [ibid, pages 107–108]. However, on the other hand, he referred to the sum of £8 million being added to the price as having been in return for provisional sums being made firm and fixed [TRI00000059_C, page 0083, paragraph 79]. The difficulty with his evidence is that he got his information as to what had happened from Mr Gilbert, who in turn got it from Mr Crosse. The recollection of Mr Walker was that nothing was discussed or agreed at Wiesbaden in relation to design and design risk.

10.68 Mr Crosse was very vague when asked what had been agreed at Wiesbaden. He said:

“They agreed to take on the VE savings, I think, of GBP19 million. … And I think they agreed to fix the price. I can’t recall what for. I think we achieved the commercial objectives that we set out before we left for Germany.” [PHT00000021, page 142.]

10.69 It was apparent that one element of the agreement was that the price would be increased by £8.12 million. In relation to this, Mr Crosse said:

“I understand it was to fix their price subject to certain things which aren’t documented and were not documented the next day when we came back; sufficient enough for us to put a reliable, in FBC terms, price into the FBC.” [ibid]

It was obviously of importance that there should be clarity about what qualifications there were to the agreed price, and the absence of documentation of this was to be a continuing factor in the events that unfolded in the days that followed. In similar vein, he said that tie had used remaining sums available in the project budget to get BBS to agree to a fixed-price contract [TRI00000031_C, page 0041, paragraph 123]. He considered that the effect of the agreement was that the consortium would accept the design development risk, with the exception of junctions such as Picardy Place the design for which remained the responsibility of tie [PHT00000021, page 143]. However, he also said that the price was fixed on the basis of the design as it stood at 25 November 2007. These statements are contradictory. If the price was solely for construction in accordance with the design as it stood at a particular date, of necessity that would mean that the financial consequences of any change in the design would fall on tie and is inconsistent with the consortium accepting design development risk apart from specified exceptions.

10.70 In view of the importance of the Wiesbaden meeting, it is surprising that there is a lack of clarity or consistency in the evidence as to what was agreed. To some extent this may be attributable to the effects of the agreements concluded later in relation to price, but it is also indicative of a lack of focus or clear thinking on this critical issue. I consider that it is likely also to have been caused, at least in part, by having Mr Gilbert, as the person responsible for conclusion of the contract, remain in Edinburgh, and the negotiations on the critical issue of price carried out by Mr Gallagher, who believed that he was not going to get involved in detail. It was a recipe for disaster, and it is not just with hindsight that that should have been apparent.

10.71 Despite the presence of senior people from each organisation at the meeting, it appears to have been understood by Mr Gallagher that there would be a provisional quality to any agreement. In relation to getting the agreement of the consortium members, he recognised that the best that tie could have achieved at Wiesbaden would have been an agreement of a target price that was supported by the directors of the members of the consortium, but he acknowledged that there was

“a two-month type cycle that was going to be required by not only the City of Edinburgh to get all the approvals, but also to go through the risk management process and the approvals process of the consortium” [PHT00000037, page 53].

10.72 In addition, he accepted that the agreement that had been reached was subject to “due diligence” [ibid, page 76], and he said that this was because the parties had not had legal representation at the meeting. He said that he

“expected that there would be a degree of tinkering, shall we say, once the agreement, the high level agreement was then taken by the procurement and the legal people” [ibid, page 54].

10.73 In other words he could not have thought that the position reached in Wiesbaden was a final one until it was ratified. This means that he would have been aware of the need to be alert for any changes in position on the part of the consortium. In fact, as I consider below, he did not scrutinise in any detail what was to happen afterwards. Mr Gilbert, too, said that it was not intended that the agreement would be legally enforceable [TRI00000038_C, page 0051, paragraph 138] and Mr Crosse was clear that although the agreement reached in Wiesbaden was intended to fix the price, in reality a price is never fixed until the formal contract is signed [PHT00000021, page 139].

10.74 Mr Flynn considered that, with all the qualifications that had been made, it would have been wrong to focus on the headline figure of £218 million [PHT00000045, page 41]. This was the approximate value of the contract after inclusion of the increase of £8.12 million that had been agreed and this is illustrated in a spreadsheet prepared later by Mr McGarrity [CEC00132442]. He said, however, that, in view of the additional items and excluded items, an expectation that £218 million was the end of the line “would have been a premature conclusion” [PHT00000045, page 43]. Mr Walker went further in that he was adamant that Mr Gallagher had said at the meeting that the price agreed was not the real figure, because all parties knew that it would increase once the contract was signed [PHT00000035, pages 51–52; TRI00000072_C, page 0022, paragraph 37]. Mr Walker said that Mr Gallagher had made his comments more than once, but that the first occasion had been at the end of the first day of the meetings in Wiesbaden. When asked by how much he thought that the price would increase, Mr Walker said that it would be by tens of millions, and he was clear that he had relayed this to Mr Gallagher [PHT00000035, pages 65–67]. He said that Mr Gallagher responded by saying “everybody knows that” [ibid, page 67]. As mentioned below, in an email dated 19 December 2007, he also relayed to Mr Gilbert that he anticipated that the Infraco contract price would increase by several million pounds because of incomplete design [CEC00547735; PHT00000035, pages 62–64]. Mr Walker said that he had also discussed the likely price increase with Mr Gilbert in the presence of Mr Fitchie [ibid, pages 75–76]. In his statement [TRI00000102_C, page 0150, paragraphs 7.123–7.124], Mr Fitchie says that Mr Walker spoke to him directly about this matter at a meeting in early December 2007, but Mr Walker had no recollection of this. Mr Fitchie said that, following a meeting with Mr Walker in late 2007, at which he had been told that the cost might increase by £80 million, he immediately told Mr McGarrity about this [PHT00000017, page 76]. Mr McGarrity said that he had no recollection of this [PHT00000047, pages 139–140]. Given that an increase of that sum would have represented approximately 40 per cent of the Infraco contract price, it is reasonable to suppose that, had it been said, anyone would remember it, and I conclude that Mr McGarrity was not told. Although it comes slightly later, Mr Walker said that there was a meeting in January 2008, which was attended by Mr McFadzen, Mr Flynn, Mr Gallagher and himself, which centred on a discussion to the effect that all parties were aware that the cost was going to go up [PHT00000035, pages 82–83]. Mr Gallagher, on the other hand, denied that he always knew that the price would go up [PHT00000037, page 97]. He denied both that he said it and that he thought it.

10.75 It is unnecessary fully to resolve the conflicts in evidence among Mr Fitchie, Mr Walker and Mr McGarrity. It is sufficient to note that Mr Fitchie’s evidence discloses his awareness, in late 2007, that the Infraco price would increase significantly, and to that extent supports the evidence of Mr Walker. Mr Walker’s account of notifying tie representatives of the likelihood of an increase of several million pounds in the price of the Infraco contract following the Wiesbaden meeting is supported by the email that he sent to Mr Gilbert on 19 December 2007 [CEC00547735]. It is also consistent with his wish, which I will consider in Chapter 11 (Contract Negotiations), to warn CEC of the position. I also accepted his evidence that he advised Mr Gilbert of the likely price increase in the presence of Mr Fitchie. I preferred Mr Walker’s evidence on this issue to Mr Gallagher’s denials that he was aware that the price would increase and that he had said so.

10.76 Despite the comments, noted in paragraphs 10.72 and 10.73 above, about the agreement not being enforceable and requiring the approval of the consortium and the understanding that there would be further “tinkering” [PHT00000037, page 54] to be done, both sides were keen to record the agreement in writing shortly after the agreement. The remainder of the Infraco contract was under negotiation, but no stand-alone agreements had been concluded between the parties in respect of any other agreed components. There is no record from either side as to why it was felt necessary or appropriate to have an interim formal agreement in respect of what was discussed at Wiesbaden.

10.77 Often, where an agreement is to be recorded in advance of its being incorporated into a formal contract, the parties will draw up heads of terms. Commonly, a term is inserted into such heads, saying that they are not intended to be legally binding so as to create rights and obligations. The parties thereby make it clear that this should not occur until the stage of putting the agreement into the formal contract with the accompanying detailed consideration of the wording, and that the heads of terms are there solely to record the consensus at a very general level. This was not done in relation to recording the outcome in Wiesbaden, and this created a dangerous situation in which an agreement on a key issue was being put together in a rush without the benefit of legal advice. As the person in charge, and having had experience of contract negotiation, Mr Gilbert should have been aware of that.

10.78 In relation to documenting the agreement, another issue of allocation of responsibilities arises. Neither Mr Gallagher nor Mr Crosse was involved in the process of preparing the written agreement, which was instead entrusted to Mr Gilbert. Despite this, Mr Gallagher claimed that Mr Crosse would document what was agreed and would be responsible for whatever actions had to be taken [TRI00000037_C, page 0089, paragraph 282; PHT00000037, page 86]. He said that that was his role. He did not explain why documenting the agreement should not have been his responsibility, standing the part that he had played in the discussions, particularly those discussions in which he was the sole tie representative and which resulted in the announcement of an agreed figure. When asked about this, he said that he “wouldn’t have been involved in that level of detail” [TRI00000037_C, pages 0090–0091, paragraphs 284 and 288]. He said that he did not consider it disadvantageous that he was not involved in turning the agreement into contract terms [ibid, page 0090, paragraph 284]. I do not agree. He confirmed that he was interested in the high-level process in which he was involved, “i.e. agreeing a final price and ensuring that the transfer of risk and deliverables was consistent with the remit of the TPB” [ibid, page 0091, paragraph 288]. It is difficult to imagine how he could fulfil that obligation without some involvement in turning the agreement into contract terms, even if it were merely limited to a supervisory function whereby he could satisfy himself that the contract truly reflected the agreement at Wiesbaden. It is clear that he did not do so. He did not even have an accurate recollection of who had been responsible for documenting the agreement. He believed that it was Mr Fitchie, working with Mr Crosse and then Mr Bell, who dealt with it [ibid, page 0090, paragraph 284]. The involvement of Mr Gallagher could best be described as “dabbling”, and that was inappropriate. While it is likely that Mr Gilbert was given an oral briefing as to what had happened in Wiesbaden, there is no record of his having been given a written statement of what had been agreed and should therefore be reflected in the agreement. As is apparent from the discussion below, in the process of having the outcome of discussions turned into an agreement, the position of tie was made significantly worse. If either Mr Crosse or Mr Gallagher had been involved to any material degree in the process, I consider that what was happening would have been apparent to them. If they had objected and pointed out that that was not what they considered had been agreed, it could not be said that the consortium would necessarily have conceded the point. There would, however, have been at least a chance that this would have been the outcome.

10.79 As was done for the correspondence that passed before the meeting, it is convenient to set out the principal items of correspondence in chronological order.

10.80 On 17 December 2007 at 14:15, Mr Crosse sent Mr Walker an email with a draft agreement attached [CEC01494927; CEC01494928; PHT00000021, pages 149–151]. The agreement had been prepared by Mr Gilbert after discussions with Mr Crosse. Both expected that the consortium would respond by seeking to challenge the terms. Appendix A of the draft agreement [CEC01494929] referred to the sum of £8 million as “negotiated sum for firming up all elements”, but there was still an allowance of over £10 million for provisional sums. The body of the draft agreement included the following statement in relation to detailed designs:

“Detailed designs – BBS included in their price for the construction cost risk in the development and completion of detailed designs being prepared by SDS, save for:- a) Any future changes to elements of the design for civils works that are substantially different compared to those forming the current scheme being designed by SDS. b) items designated as provisional in the Appendix … c) Excluded items, to the extent described in 3.4 below.” [CEC01494928]

10.81 A discussion took place between Mr Gilbert and Mr Walker and later, on 17 December 2007, Mr Gilbert sent Mr Walker an email with revised wording for the agreement [CEC01494951]. This did not change the statement about detailed designs. When that statement is read with the comment in the Appendix, a clear impression is given that, other than in respect of provisional items, the consortium will assume the risk of additional cost arising from development of designs.

10.82 Mr Walker then sent an email at 16:23 on 17 December [CEC01494961]. In it, he forwarded comments from Mr McFadzen of BB, which said:

“My comment is that this does not look like a good deal (understatement) unless there is some side agreement that I don’t know about.”

10.83 Mr Crosse commented that it appeared that Mr Walker had checked the detail of the agreement with Mr McFadzen and that he had expressed the view that the company should not enter into the deal as had been agreed. Mr Gilbert thought that BB was perhaps trying to develop a negotiating position and change the view of the tie representatives as to what was agreed [PHT00000023, page 93]. In his oral evidence to the Inquiry, Mr McFadzen said that when Mr Walker described to him what had been agreed, “I thought we had agreed to take on a bit more risk than I thought we should” [PHT00000034, page 74].

10.84 On 18 December 2007, Mr Fitchie sent an email [CEC01430872] to Mr Crosse and Mr Gilbert, among others, commenting on a draft of the agreement that he had been given that morning. As he pointed out, not having seen it before, he was able to make only limited comment.

10.85 On 19 December 2007 at 08:37, there was a further email from Mr Walker [reproduced in both CEC00573352; CEC00547732], which included the following:

“Secondly, having consulted with my team and reviewed e mails and meeting minutes, our firm price including the additional £8m to fix the ‘variable’ sums noted in our tender is based on all the additional information which we received from SDS via the 4 No. CDs. The last of which was delivered to us on 25th. November 2007. We therefore insist that our contract be related to this.”

10.86 Mr Crosse noted that this meant that the £8 million was viewed by the consortium as being to fix the price rather than to fix provisional sums [PHT00000021, page 154]. That is not apparent from the wording, which, if anything, seems to relate more to provisional sums than to design generally. It is of note, however, that the email makes the express qualification that the price payable is to be linked to the design as notified to the consortium on 25 November 2007. By insisting that the price be fixed by reference to the design as at a certain date, it indicates clearly that the design changes after that date will not be included in the price. If this was not the case, there would be no need to refer to the design as at a certain date. This is therefore wholly inconsistent with the consortium accepting the design development risk arising after the chosen date and means that the additional money could be only in exchange for firming up provisional items. Mr McFadzen was of the view that the reference to the design information on CDs was part of his attempts to try to make the agreement fit with what he believed the BB corporate position was [PHT00000034, page 78]. Mr Walker agreed that the consortium sought to draw a line and price only up to a certain point [PHT00000035, page 61]. He said that he had explained this to Mr Gilbert many times. Mr Gilbert, however, did not accept that the reference to fixing the design as at the date in November 2007 indicated an intention on the part of the consortium not to accept responsibility for design development after that date [PHT00000023, page 103]. Mr Gallagher would not accept that this was the position either [PHT00000037, page 87].

10.87 Later, at 11:42, Mr Gilbert replied to Mr Walker and Mr McFadzen [CEC00547733], saying:

“ … Regarding your second point Scott [McFadzen] has had a discussion with Matthew [Crosse]. Based on that discussion there would be no reason to change the current wording on design – which was acceptable to you yesterday. Scott I’ve left a message for you to contact me. We need to close this out now if we are to move forward and so that I can brief the Tram Board and CEC correctly.”

10.88 A meeting of the TPB was due to take place the following day. Later in the day (13:29) Mr Gilbert sent Mr Walker a further email with a new draft of the agreement attached [CEC01384941; CEC01384942]. In relation to the price, it said that:

“BBS included in their price for the construction cost risk in the development and completion of detailed designs being prepared by SDS,” [ibid, page 0003]

but the first exception had been revised to read:

“save for:–

a) Any future changes to elements of the design intent for civils works that are substantially different compared to those forming the current scheme being designed by SDS, as typically represented by the drawings issued to BBS with the design information drop on 25th November 2007” [ibid].

10.89 The words in italics were those added by Mr Gilbert in this draft. As would be expected, Mr Gilbert considered that this reflected the terms of his discussions with Mr Walker [PHT00000023, page 106]. Mr McFadzen said that, from the standpoint of the consortium, this was still considered too onerous [PHT00000034, page 82].

10.90 Later still, on 19 December at 13:44, Mr Walker sent Mr Gilbert a further email [CEC00547735], saying that the pricing was envisaged on the basis that the design would be complete and that as it was clear that it would not be, there would be an increase in price. He said that he was concerned that tie might not have the budget to accommodate this [PHT00000035, pages 62–65]. This, too, was inconsistent with the consortium taking the design development risk.

10.91 Mr Gilbert made a few changes to the draft agreement to accommodate CEC and sent it back to Mr Walker at 19:42 [CEC00547740]. Early on 20 December, Mr Walker replied, saying:

“We still have issues with accepting design risk. We have not priced this contract on a design and build basis always believing until very recently that design would be complete upon novation. With the exception of the items marked provisional which we have now fixed by way of the 8 million we cannot accept more drain [sic] development other than minor tweaking around detail. Your current wording is too onerous. Trust we can find a solution.”

10.92 The word “drain” appears to be an error; the context indicates that “design” was intended. Mr Crosse said that this was the consortium resiling from commitments that it had made, but he saw it as a negotiating strategy. Mr Gilbert said that he was concerned and frustrated at the reply and thought that it was completely contrary to the agreement that the parties had made [PHT00000023, page 108]. Mr Gallagher was not clear in his understanding of this. When asked about it, he said:

“This email is making it plain at this moment in time that Bilfinger Berger Siemens are not [going to accept design risk], and then there will be another meeting, and there will be another negotiation, which I think did take place, where there would be another discussion about what it’s worth to them to take design development risk, which would then increase and crystallise higher price for the bid; and this was typical of the behaviour all the way through to financial close.” [PHT00000037, page 92.]

10.93 This illustrates how evasive he sought to be in his answers. The import of Mr Walker’s email is quite plain: the consortium would not accept the design risk. Mr Gallagher’s explanation that the consortium was adopting a negotiating position to obtain a higher contract price fails to appreciate that the nature of the contract under negotiation had altered materially. The original intention had been that design would have been completed prior to completion of the Infraco contract and that, at that date, tie’s contract with SDS would be novated to Infraco. The effect of that arrangement would have been that Infraco would have borne the risk of design development, but that tie would pay for any changes of design resulting from tie’s change of instructions. However, by December 2007, the delays in completion of design were substantial and there was little or no prospect of its being completed prior to the signing of the Infraco contract unless that itself was substantially delayed. If the design contract had been novated to Infraco when the design was incomplete, with all risk of design development passing to Infraco, it would have transformed the nature of its obligations from those of a build-only contract to those of a design-and-build contract in which it had not included a substantial risk premium associated with the latter. Mr Gallagher’s response fails to acknowledge this – either because he did not understand the position or because he was being disingenuous. In either event, it suggests his unsuitability as chairman and chief executive of a publicly owned company in charge of a multi-million pound project that was being funded by the public purse.

10.94 In response, in an email dated that day at 14:07, Mr Gilbert sent Mr Walker a further draft of the agreement [CEC01495066; CEC01495067]. In this, clause 3.3 was amended to read:

“The BBS price for civils works includes for any impact on construction cost arising from the normal development and completion of designs based on the design intent for the scheme as represented by the design information drawings issued to BBS up to and including the design information drop on 25th November 2007. The price excludes:-

a) Items designated as provisional in the Appendix A4.

b) Any material changes to the design resulting from the impact of the kinematic envelope of the CAF tram vehicle on the civils design.

c) Excluded items, to the extent described in 3.4 below.

In respect of footways, full reuse of existing kerbs and flags and minimal reinstatement behind kerb lines is assumed. i.e. not wall to wall. Design must be delivered by the SDS in line with our construction delivery programme previously submitted.

For the avoidance of doubt normal development and completion of designs means the evolution of design through the stages of preliminary to construction stage and excludes changes of design principle, shape and form and outline specification.”

10.95 The text in italics was marked up in the draft to show that it was new. Mr Crosse said that this wording “reflects what was agreed in Wiesbaden but there might have been changes in the detail” [TRI00000031_C, page 0041, paragraph 122]. Mr Gilbert said that in making the adjustments he was trying to ensure that the intent of the Wiesbaden Agreement to fix the transfer of risk for the remaining design development to BBS was articulated [PHT00000023, page 109]. He denied that the changes meant that he was no longer seeking to transfer the design risk as a result of what Mr Walker had said. It is useful, however, to consider exactly how the changes were made. Mr Gilbert thought that the proviso at the end had come out of discussion that he had had with Mr Walker. However, he also said that he recalled sitting with Mr Wright of Siemens and writing out wording that they wanted [TRI00000038_C, page 0051, paragraph 138]. However, Mr Walker said that the wording of the Wiesbaden Agreement relating to normal design development had come from him in discussion with Mr Gilbert [TRI00000072_C, page 0024, paragraph 41; PHT00000035, page 73]. He said that he had probably suggested an original draft that was even tougher.

10.96 There is no record of the new draft having been discussed with the boards of tie or TEL or the TPB. There is no written record of Mr Gilbert discussing it with any of his colleagues. Mr Gallagher claimed that although he was not involved in discussion on the new wording and what effect it would have, “there was discussions to [sic] the Board to outline what concession that would make” [PHT00000037, page 93]. When asked about the lack of time, he said:

“I think I must have had meetings with both the tie procurement and finance team. I must have had discussions with the Board, and on the basis of these discussions, we must have been comfortable for the document to be signed.” [ibid, page 94.]

10.97 I reject this. There is no record of the views of either company board or the TPB being sought on this, and it is apparent that there was no time to do so.

10.98 Mr Crosse considered that the agreement did not require legal input, yet he also considered that it was important that the point was captured with no ambiguity [PHT00000021, pages 160–161]. On the other hand, Mr Gallagher said, it was “absolutely the case that follow up advice was sought as to the content of the [Wiesbaden] deal. It would have been sought from Andrew [Fitchie]” [TRI00000037_C, page 0091, paragraph 287]. Mr Gilbert said that he could not recall whether he took legal advice on this new drafting [PHT00000023, page 115], but I conclude that he did not do so. There was little time between the email from Mr Walker in the morning and Mr Gilbert sending out the new draft. In that period of a few hours it is apparent that there was some discussion between Mr Gilbert and someone within the consortium. Time would then be required for drafting, which would leave almost no time in which to take advice. That, coupled with the absence of any recollection on the part of Mr Fitchie or any record of a request for advice, leads me to conclude that Mr Gilbert decided to make the changes without advice as to the consequences. Mr Gallagher’s answer, noted above, suggests that he would have been of the view that advice ought to be taken. That being so, it is very surprising that he did not take any steps to verify that this was the position before signing the agreement.

10.99 The decision not to take advice may have been coloured by Mr Gilbert’s view that, even in its concluded form, the agreement was not expected to be legally enforceable [TRI00000038_C, page 0051, paragraph 138]. If he truly believed this, it is an astonishing position for him to take. He was responsible for appointment of the Infraco contractor and was aware that the contract was yet to be drafted. He then participated in an email exchange over some days while parties sought to agree on a wording for their agreement. It was to be subject to formal signature. At no time did he suggest a clause to the effect that the agreement would not create legally enforceable rights and obligations. I can see no rational basis on which anyone in the position of Mr Gilbert could be unaware that they were drafting an agreement that would have legal consequences. I reject his evidence in this respect. His evidence about the intention that the agreement would not be legally enforceable is, at best, wishful thinking with the benefit of hindsight once he was aware of the contractual disputes and their disastrous consequences for tie following the incorporation of clause 3.3 into the Infraco contract with minor changes, as will be mentioned in paragraph 10.100 below.

10.100 Taken at face value, the effect of the new wording was that changes to the design principle existing at 25 November 2007, changes of shape and form after 25 November 2007, and changes to the outline specification existing as at 25 November 2007 would not be considered normal design development, were not included in the price and would therefore generate additional liability on the part of tie. With some minor changes, the new wording of clause 3.3 found its way into the Infraco contract and was the subject of considerable dispute. These disputes were referred to adjudication and will be considered in Chapter 15 (Contractual Disputes: May–December 2008). Although, as a matter of law, the views of the parties to a contract are irrelevant to the issue of how it should be interpreted, witnesses were asked what they thought the effect of the proviso was, simply so that the Inquiry could assess the extent to which there was understanding of the agreement. In relation to the introduction of the qualification that normal design development would not include changes to “design principle, shape and form and outline specification”, Mr Gilbert said that this wording “was an attempt to try to establish an ‘envelope’ for the physical boundaries of the design, works and the boundaries of Infraco’s obligations” [ibid, page 0102, paragraph 261] or was an attempt to differentiate true design development from betterment to meet the aspirations of stakeholders (in practice, CEC) [ibid, pages 0098–0100, paragraphs 253–255]. He remained of the view that design risk had been transferred [PHT00000023, pages 87–88]. When Mr Walker was asked what the proviso meant, he said “[c]hanging the quantities by plus or minus 5 per cent” [PHT00000035, page 74]. Mr McFadzen said the consortium would expect to bear the costs of some changes in design. The import of his evidence in this respect was similar to that of Mr Walker. The intention was to limit the consortium’s risk to “normal design development” – for example, by accepting relatively minor changes such as an increase in section depth from 1 metre to 1.1 metres or an increase in reinforcement content from 250 kilograms per cube to 255 kilograms [PHT00000034, pages 87–88; TRI00000058_C, page 0050, paragraph 174].

10.101 The agreement was signed by Mr Gallagher and Mr Walker a few hours later, on 20 December 2007. Mr Gallagher either did not check the agreement before signature or failed to appreciate that it did not accord with the verbal agreement reached in Wiesbaden. Prior to signature he did not seek any legal advice on its terms. As it was an agreement that addressed transfer of risk and established the price in a contract worth over £200 million, this was a material failing and represented the first of a number of failings in control that, if applied properly, could have detected and possibly corrected the deal done before it was concluded in May 2008. While it might be said that there was no certainty as to what the outcome would have been if the problem had been identified in December, or at any other time prior to May 2008, I consider that it is clear that the contract would not have been entered into in terms that were as materially disadvantageous to tie as they turned out to be. Whether the result would have been a more favourable contract from tie’s perspective, or a failure to reach a mutually acceptable contract resulting in the cancellation of the project, is a matter of speculation, but they are clearly both possibilities.

10.102 When the above evidence is considered together, the clear picture that emerges is that, at Wiesbaden, the agreement was that the consortium would assume the design development risk. As was noted in paragraph 10.71 above, Mr Gallagher understood that there was a provisional quality to any agreement, which would be subject to the approval of the consortium’s risk committees and the board of BB. Allowing for that process, Mr Gallagher hoped that the basis and substance of what had been agreed at Wiesbaden would remain and would be crystallised into an agreement that both parties could sign in January [PHT00000037, page 54]. However, within a few days of the meeting at Wiesbaden, and certainly by 17 December, the consortium considered that the assumption of design development risk was an error, and it was seeking to pull back. It made comments to tie – including statements in emails – that demonstrated that this was the case. Mr Gilbert did not recognise that this was happening, and it therefore appears to have proceeded unchecked. While it would be a mistake for Mr Gilbert to fail to notice the change from what should have been reported to him as the outcome of the meeting, his failure to spot it is truly remarkable when regard is had to the fact that he wrote the negotiating paper stating what should be obtained in return for conceding an increase in price [see paragraph 10.55 above]. He, of all people, knew that the intention was to ensure that design development risk did transfer. The position was no doubt made more difficult in that he had not been at Wiesbaden and had not prepared the first draft of the agreement. Nonetheless, he had responsibility for negotiating this matter, which required that he understood what had been agreed in Germany and the effect of the draft agreement. If there was to be a change to what had been agreed, it would have been appropriate for him to obtain guidance or instruction on it from Mr Crosse and Mr Gallagher, both as the parties who had been at the discussions and as the persons most senior in the company. He failed to do this. Instead, he did not raise any objection to this approach by the consortium as being inconsistent with what had been agreed in Wiesbaden. Surprisingly, in relation to such an important matter, Mr Gilbert did not bother to seek advice to ascertain whether his understanding of the agreement at Wiesbaden was correct. He proceeded to conclude an agreement in modified terms that reflected the approach preferred by the consortium.

10.103 It may be said that the consortium would simply not have adhered to what had been agreed in Wiesbaden, particularly after the agreement had been reviewed by the risk committee and board of BB. It is not possible to conclude whether this is or is not the case. However, if there was to be a significant change to the contract arrangements that transferred risk back to tie, resulting in financial risk to CEC, it is a matter that should have been clearly reported so that both tie and CEC could have taken an informed decision about it. In that regard in paragraphs 3.129 and 4.49 I have already rejected any suggestion that it would have made no difference to the outcome of the project even if CEC had been made aware of the true position.

10.104 Possibly as a result of the many differing interpretations of what had taken place at Wiesbaden, the outcome was reported in a number of different ways.

(a) Section 2 of the minutes of the Legal Affairs Group meeting of 17 December 2007 [CEC01501051] records that Mr Gallagher reported that the lnfraco contract was 97 per cent fixed price, with BBS taking on design risk [Mr Gallagher TRI00000037_C, page 0089, paragraph 281; Mr Crosse TRI00000031_C, page 0040, paragraph 119].

(b) Section 4.2 of the minutes of the TPB meeting on 19 December 2007 [CEC01363703] notes that Mr McGarrity explained “that a premium had been included in the contract price to firm up previous provisional sums”. His presentation to the meeting [CEC01483731] said that it was a good deal for tie as the design development risk was transferred to BBS. He was therefore making inconsistent statements about what had been agreed. Each report had therefore focused on a different objective of the two that tie had when it went into the discussions in Germany. To add to the confusion, at this meeting, Mr Gallagher is recorded as saying that design risk is passed through novation. Although, in oral evidence, Mr Gallagher said that this was design risk in the narrow sense of the cost of completing the designs [PHT00000037, pages 81–82], it does not appear that this was the point of the question in response to which Mr Gallagher made his statement. I do not accept the evidence of Mr Gallagher in this regard but, even if I had, it is plain that his comment would open the way to confusion.

(c) The pack of papers for the TPB meeting on 23 January 2008 [CEC01015023] contains conflicting statements. In the minutes of the 9 January meeting there is a statement that the discussion on design risk transfer is continuing [ibid, page 0005, item 1.5]. When Mr Gallagher was asked what discussions were still ongoing in January 2008, his response was that he had no idea [PHT00000037, pages 82–83]. As a statement from the Executive Chairman of a company concluding a contract of this value, that is wholly unsatisfactory. In the Executive Summary of the report from the Project Director, Mr Bell, later in the papers, he says that the “effective transfer of design development risk excluding scope changes to BBS” [CEC01015023, page 0009] is a key part of the concluded agreement.

10.105 What is striking about the reporting after the conclusion of the agreement is that no change was made to the cost estimate of £498 million that had been included in the two business cases.

10.106 That neither Mr Gallagher nor Mr Crosse oversaw or supervised the drafting of that agreement, or even provided a detailed written account of the discussions and agreement, was surprising. It was the responsibility of those who had attended the meeting – and particularly Mr Gallagher as Executive Chairman – to ensure that the task of drafting the agreement was delegated in such a way that the person charged with it would be able to achieve it and would be provided with sufficient information to do so. Even then, prior to such a critical agreement being signed, the person who had made the oral agreement and who was to be the signatory of the written agreement should have verified that one correctly reflected the other.

10.107 From the matters that I have considered above, it is apparent that, by the end of December 2007, there had been a significant departure from the procurement strategy in relation to the intention to have design completed by the date of contract signature and the extent to which the price was fixed. It appears that the latter change was not appreciated at the time. The former was, however, understood by the senior management at tie and, to a large extent, created the situation in which the price could not be fixed. Not only was the change in relation to completion of design prior to contract signature understood; it appears to have been regarded by the senior management as necessary and appropriate. What is striking about this decision is that it was not reported clearly to the TPB, CEC or to officials in Transport Scotland.

10.108 Underlying all the above is the question whether there should have been a pause in the process in December 2007. The possibility of pausing at an earlier stage to allow the design to catch up had been considered but had been rejected because of the desire to maintain the timetable of the programme. The situation that arose in December 2007 was, however, different. At the earlier stage, the hope was frequently expressed that the position could be recovered. In April 2007, when design was only 50 per cent complete, Mr Crosse was still relaxed about completing the design “Sufficient enough to enable the contract to be awarded” [PHT00000021, page 89]. In view of the significance of this, it might assist to recall the relevant passage in his evidence in its entirety:

“Q. This is now the second half of April 2007. We saw the Draft Final Business Case saying that detailed design would be 100 per cent complete at contract award, which was planned for the end of the year.

A. Mm-hm.

Q. The fact that the detailed design was only 50 per cent complete, did you think it was going to be possible to award the contract on schedule?

A. I – I didn’t have a problem with this. I didn’t think this would prevent us from doing that.

Q. You thought the other 50 per cent of design should be capable of completion in the seven months which followed?

A. Sufficient enough for the contract to be awarded. Yes.

Q. If we go then, please, to page 23.

A. Let’s be clear, there were many different stages to the design. There was a preliminary design, and what amount of design did the contractors need in order to price it reasonably accurately is the kind of – the big question.

And I thought, based on my experience, the amount of work that had been done for this stage of the project, it was quite mature. But this was a different procurement model, and I think therein lies the issue.

So on Nottingham and Croydon, the level of design that was done at this stage, at this point of procurement, was actually much lower, but the design responsibility was the turnkey consortium that went on to build it.

Because tie were doing the design, it had to be much more complete. And I didn’t – it didn’t register. Hindsight is a wonderful thing. I didn’t think at the time that we couldn’t achieve a design that would prevent us from closing the contract.

I think I knew there were challenges all the way through without a doubt.” [ibid, pages 89–90.]

10.109 It is clear from the entirety of Mr Crosse’s response that he was basing his judgement about the adequacy of the design for contract award on his experience of other contracts that had different procurement strategies. He failed to recognise, or at least have any regard to, the procurement strategy in this contract, which was significantly different from those in the Nottingham and Croydon Tram projects. In his response he acknowledged that he did not appreciate that in this project design had to be much more complete than in those other projects, because it was tie’s responsibility to ensure that it was complete before contract close. His reliance upon hindsight as an excuse for failing to appreciate that is astonishing. He was the project director, and had been appointed to lead the procurement phase of the project because of his experience in procurement [TRI00000031_C, page 0001, paragraph 1]. It was impossible for him to perform his duties as procurement director without understanding the procurement strategy; yet from his responses, noted above, it appears that he negotiated with Infraco without realising where the responsibility for design lay. His lack of understanding and his treatment of design based upon the different procurement strategies for the Nottingham and Croydon projects might explain some of the confusion around the Wiesbaden negotiations. His reference to hindsight suggests that he appreciated the different procurement strategy adopted by tie only after he left the project. By December 2007, the issues that had previously been anticipated were crystallising and it was clear that there was no prospect whatsoever of the design being completed before contract close unless there was a pause and a significant delay in the procurement process. CEC would shortly take a decision on whether it wanted to proceed with the project. The availability of reliable cost information was clearly critical to the quality of the decision-making process, and it was entirely plain that that depended on the completed design if price certainty was to be achieved.

10.110 Mr Crosse noted that there was a concern that the construction costs would increase with each month of delay and, as the Scottish Ministers had made it clear that there would be no additional money to meet these costs, there was some urgency to get the contract signed [ibid, page 0035, paragraph 106; PHT00000021, page 124]. He made the point that the Inquiry concentrated on the bad news that was arising in the project in 2007 and that attention was not paid to the good news and what was going well. The remit of the Inquiry set by Scottish Ministers described in the Annex to the Letter of Appointment of the chairman, reproduced in Appendix 1, meant that the Inquiry would be required to focus on problems with progress that arose throughout the project but that does not mean that the Inquiry entirely disregarded what was being achieved. It remains the position, however, that, on any view, there was bad news as to the progress of the design and the impact that this was having on the agreed procurement strategy, and there was therefore a very real question as to how this should be managed, irrespective of what was going well elsewhere.

Conclusions

10.111 From the foregoing it is apparent that there are very material inaccuracies in the statements within the FBC that was submitted to CEC for consideration by councillors (see paragraph 10.18 above and the paragraphs following it). I do not consider that it is any answer to this to say that some councillors sat on the various boards and should have been aware of the true situation. The FBC was intended to inform the decision to be taken in relation to the trams, and separate briefings were provided to each of the political groups within CEC to familiarise its members with the contents. This was a key decision. It is obvious that any report that was intended to provide the basis for the decision should not have misrepresented the position. The issue, then, is who bears the responsibility for the misleading FBC. As with those of other key decisions in the project, the records as to approval of the FBC are incomplete.

10.112 In the passage of his evidence, quoted in paragraph 10.24 Mr Renilson noted that although the figure of £498 million was identified by Mr Gallagher, it was accepted by all those who had attended the meeting. Which meeting was it? Mr Renilson said that it was a “heavyweight meeting” at which no politicians were present but he recalled that Mr Mackay and Mr Gallagher “amongst others” were there. On the basis of that evidence I have concluded that it was a meeting of representatives of senior management, including but not restricted to Mr Mackay, Mr Gallagher and Mr Renilson but may not have involved other members of the Tram Project Board (TPB). It was not a meeting of the TPB, otherwise councillors would probably have been present. Unfortunately the Inquiry has been unable to identify minutes of such a meeting in the papers supplied to it and cannot therefore be certain who was involved in the discussion on this matter. Given the significance of this matter that is unfortunate to say the least. Although the evidence of Mr Renilson referred to the figure to be included in FBCv2, the issue of reporting a range of figures for the estimated cost of the project, as distinct from a single figure, was considered at the joint meeting of the TPB and tie board on 15 October 2007 when an earlier version of the Business Case (FBCv1) was discussed. The minutes of that meeting record the endorsement of FBCv1 [CEC01357124, Part 1, page 0012]. In FBCv1 the updated cost estimate for Phase 1a is stated to be £498 million reflecting “substantial external validation from the procurement process for the major contracts and contains a sensible level of risk contingency” [CEC01649235, Part 1, pages 0016–0017, paragraphs 1.65 and 1.72]. The minutes of the joint meeting of the TPB and tie board note specifically that there was discussion of the merits of using a single figure for cost rather than a range and the decision was taken to use a single figure in FBCv1. A key reason for that decision was “the credibility issue with the bidders and the public which would arise if a range was to be used.” [CEC01357124, Part 1, page 0012, paragraph 4.1]. The effect of that decision was to create the impression of greater price certainty than actually existed. The attendance at the joint meeting of the TPB and tie board was as shown in Table 10.1:

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

Members:
tie Board		Tram Project Board
Willie Gallagher (Chair tie Board)	WG	David Mackay (Chair TPB)	DJM
Brian Cox	BC	Neil Renilson	NR
Kenneth Hogg	KH	Andrew Holmes	AH
Neil Scales	NS	James Papps (for James Stewart)	JP
Cllr Ricky Henderson	RH
Cllr Allan Jackson	AJ
Cllr Phil Wheeler	PW
Cllr Gordon MacKenzie	GMcK
In Attendance:
Matthew Crosse	MC	Jim McEwan	JMcE
Susan Clark	SC	Gill Lindsay	GL
Geoff Gilbert	GG	Steven Bell	SB
Colin McLauchlan	CMcL	Duncan Fraser	DF
Andrew Fitchie	AF	Jim Harries	JH
Alastair Richards	AR	Colin McKenzie	CMcK
		Miriam Thorne (minutes)	MT

It is a matter of concern that while the non-executive directors cannot be expected to have had detailed knowledge of the pricing and contents of the business case, they appear not to have questioned how the figure of £498 million was calculated or the approach that was being taken either then or in December as part of their challenge function. For something as important as this I consider that it would have been appropriate for them to do so.

10.113 The minutes of the tie Board meeting of that date note the endorsement by both tie and the TPB of the recommendations and conclusions of FBCv1 [TIE00147431]. Despite the apparent prominence given to it in the governance structures (see Chapter 22, Governance) at the TEL Board meetings of 31 October 2007 and 19 December 2007, there was no mention of the FBC.

10.114 As was noted above, FBCv2 is dated 7 December 2007, but there is no record of its having been approved on or after this date by the tie Board or by the TPB. This is a further indication of the very casual approach that was taken to issues of project governance. A presentation to the meeting of the tie Board on 12 November 2007 [CEC01427080] noted that FBCv2 would be approved by it on 20 December 2007. There is no record of a meeting of the tie Board on 20 December, but there was one on 11 December. Although FBCv2 is dated prior to the date of the meeting on 11 December, neither the presentation to that meeting [CEC01387401] nor the minutes of it [CEC01048838] makes any reference to FBCv2, In passing, and having regard to what is said in FBCv2 as to pricing, it is significant that the minutes of that meeting [ibid, page 0003] record that “[i]ncreasing certainty of pricing of Infraco is proving slower than planned”.

10.115 There was a meeting of the TPB on 7 December, and it may be that it was not possible for it to consider FBCv2 which was dated that day. However, the minutes note that, in relation to FBCv2, Mr McGarrity reported that no significant changes to FBCv1 had been necessary [CEC01526422, page 0009]. The terms of FBCv2 quoted above are substantially the same as those that appeared in FBCv1. If anything, it is all the more remarkable that the boards were willing to approve statements that capital costs had been agreed in October 2007 rather than in December. The statements quoted above materially misrepresent the position. The issue then is: who bears responsibility for this misrepresentation? All the members of the Board of tie and the TPB are accountable for it. They cannot hide behind the committee structure. Each member of each Board bears a direct and personal responsibility for the contents of the FBC. Although some details of the contracts and negotiations might not be known to the non-executive directors and the councillors, they should clearly have been aware of the headline issues, such as the state of the contracts overall and whether there was agreement on the contract price. I therefore do not think that the non-executive directors or councillors can rely on ignorance to avoid responsibility. In addition to the members of the Boards, of the people who were in attendance, Mr Crosse, Ms Clark, Mr Gilbert, Mr Fitchie, Mr McEwan and Mr Bell were all involved in the preparation of the FBC or were in a position in which they should have been aware that the facts were other than as stated in the FBC.

10.116 By December 2007 there was a perception within tie that the contract had to be concluded without delay and that, as a consequence, there was a requirement for a price to be stated. This aspiration was akin to desperation to conclude the contract, or at least report to CEC on 20 December that the contract negotiations were such that tram line 1a from the Airport to Newhaven would be delivered within the budget of £545 million, with the possibility that part of line 1b might also be delivered, depending upon the extent to which contingency sums were spent in the construction of line 1a. This desperation was manifested in the decision to use the pre-arranged routine meeting in Wiesbaden as a high-level meeting, involving principals, to seek to progress to a conclusion of the contract. It was also manifested in the correspondence from Mr Gallagher prior to that meeting, in which he threatened to advise CEC to withdraw from the project unless his objectives were achieved. Neither he nor Mr Crosse seemed to appreciate that the stating of a fixed price was in conflict with the lack of design information and the consortium’s reluctance – which should have been clear – such that it did not want to take the risk of design development even in return for additional payment. This conflict was not articulated. Instead, a deal was done on an informal basis in Wiesbaden, where a price was quoted that enabled tie to report that the project could be delivered within budget, albeit that both parties were aware that the price would increase. As part of the price negotiations, an additional £8.12 million was agreed to firm up certain elements in the Infraco bid that were costed as provisional sums. Moreover, there was an agreement that the consortium would assume responsibility for design development, subject to the approval of its risk management committees. That agreement favoured the interests of tie in that it did involve the consortium absorbing the risk presented by the incomplete designs. On that basis, it cannot be said that the failure to take legal advisers to Wiesbaden caused any prejudice to tie – in fact, it appeared to have secured all that it wanted. The problem was that, within days, the consortium became unhappy with the informal agreement and returned to the position that it would not take the risk. The critical failure on the part of tie was that this went unnoticed, and that a more formal agreement was concluded in which the substantial risk fell on it. At the start of the month, there had been an element of price that was provisional, which tie sought to firm up. The signature of the agreement on 20 December had the effect that the fixed nature of any price was compromised over the entire scope of the agreement. Taking December 2007 as a whole, at the end of the month, and as a result of the actions of persons employed by tie, the position was materially worse for its interest than it had been at the start. In that this was not the final Infraco contract, it might have been possible for matters to have been recognised and recovered in the negotiations that would follow but, as will be seen in Chapter 11 (Contract Negotiations), that did not happen.

Footnotes

15. References in documents and in this Report to BBS are references to the consortium. ↵

16. “Normalisation” was the process by which adjustments were made to the bids to reflect the fact that they contained different assumptions, qualifications and omissions. By correcting for these, it was hoped that there would be a level playing field for the comparison of bids. ↵