Chapter 12: Contract Close

Contract Close

12.1 Although a decision had been taken to proceed with the Edinburgh Tram project (the “project”) in December 2007, the final formal decision to sign the infrastructure contract (“Infraco contract”) and the tram vehicle supply and maintenance contract (“Tramco contract”) was not taken until 14 May 2008 – the day on which they were actually signed. As will have been apparent from previous chapters, between December and that date the content of the Infraco contract had developed to a material extent. It was therefore necessary that there be some means of providing the various decision makers with assurance that it was appropriate to proceed.

12.2 The decision was ultimately that of City of Edinburgh Council (“CEC”) – that is, the councillors. However, there was a sequence of decisions and actions that had to be taken before signature could take place, which was as follows.

(1) The tie management team met and formally concluded that:

“procedures to ensure the quality and acceptability of the terms of the lnfraco Contract Suite had been adequately executed and that the tie Chairman should send the letter to the CEC Chief Executive with the recommendation that completion should proceed” [CEC01319006].

(2) Following on from the above, Mr Gallagher wrote to Mr Aitchison, advising him that tie was of the view that the final terms negotiated were materially consistent with the terms of the Final Business Case (“FBC”), that the final terms confirmed the value-for-money proposition demonstrated by the FBC and that it was appropriate to conclude the contracts [CEC01284042]. A letter from Mr Mackay as Chairman of Transport Edinburgh Limited (“TEL”) was sent in parallel [CEC00079774, page 0007].

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

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

(4) The CEC Chief Executive wrote to Mr Gallagher in the following terms:

“I hereby agree and confirm that tie now immediately enter into the Edinburgh Tram contracts without further adjustment to the terms, except as to minor and inconsequential changes required to complete the documentation suite which has been advised to and agreed by the Council Solicitor.” [CEC00590620]

(5) A committee consisting of Mr Gallagher, Mr Mackay and Mr Renilson, Chief Executive of TEL, met and gave authority to Mr Gallagher, as tie Chairman, to proceed with completion [CEC01289240].

12.3 All these steps were taken on 13 May 2008, in the order listed above although the letter from Mr Gallagher was erroneously dated 12 May (see paragraph 12.70 below). There was also a meeting of the Tram Project Board (“TPB”) in order to finalise novation of the System Design Services contract (“SDS contract”), but that is not considered further in this chapter.

12.4 In order to consider whether this was an appropriate way to conclude the contract it is necessary to consider what information was available to each of the decision-making bodies and what scrutiny they were able to apply to the issues before them.

tie management team meeting

12.5 The tie management team consisted of Mr Gallagher, Mr Bissett, Mr Bell, Ms Clark, Mr McEwan and Mr Murray. Although each member of the team would have been familiar with the Infraco Contract Suite, the minute of their decision [CEC01319006] notes that “adequate information had been provided on which to competently proceed” and records that the following material had been considered by them “[t]he

• … Close Report prepared by tie Limited
• A letter from DLA Piper Scotland LLP (“DLA”) providing an opinion on the legal competence of the lnfraco contract suite and including a comprehensive risk matrix
• Supporting papers prepared by tie Limited addressing:
  • Detailed lnfraco Contract Suite terms and conditions
  • Procurement process and risk of challenge
  • The final deal terms and relationship to value for money and the risk of challenge …

“1. A summary of the quality control process undergone in relation to all significant documents.

“2. Confirmatory letters from the members of the bidding consortium that they were prepared to sign the lnfraco Contract Suite in its current form.

“3. A copy of a letter from the tie Chairman to the Chief Executive of CEC requesting confirmation in relation to the tie Operating Agreement that the references to the Final Business Case should reflect the final terms of the lnfraco Contract Suite and recommending that the completion of the lnfraco Contract Suites should proceed.” [ibid]

12.6 As well as informing the tie team’s deliberations, materials noted in the first three points mentioned above were used to inform other decisions in relation to the contract close, so it is appropriate to look at them in a little detail to assess the contents of the material and the means by which it was produced.

The Close Report

12.7 The Close Report was a document prepared over several months and several drafts, considered by Mr Bissett to be in double figures [TRI00000025_C, page 0063, paragraph 172]. The process of drafting it and the other contract close documents was started by an email from Mr Bissett dated 15 January 2008 [TIE00020436]. Of the people already referred to in this report his email was addressed to Mr Bell, Mr McGarrity, Mr Crosse, Mr Sharp (who had by this time left Transport Scotland and joined tie), Mr McEwan, Mr Murray and Mr Hamill. It was also addressed to Mr Sim (Interface Manager for CEC), Ms Kinloch (formerly Insurance Manager for tie) and Mr Rimmer (formerly Traffic Management Director for CEC). It was copied to Ms Clark, Mr Gilbert and Mr Fitchie. It is apparent from the email that the Close Report was to be drafted by a number of tie personnel. Mr Gallagher confirmed that the tie management team would have contributed to the document [PHT00000037, page 119]. Although it was produced later, the table that set out the quality assurance/quality control (“QA/QC”) process [CEC01431195] identified individuals responsible for the various parts of the report and for reviewing it once complete.

12.8 Mr Bissett’s email contained the following statements as to the intended function of the Close Report:

“The purpose of the Report is to provide a comprehensive view of all important aspects of the work done to support Financial Close. The recipients will be the Tram Project Board, TEL Board, tie Board and CEC officials (for use, as they wish, to support their own internal reporting) …

“The focus is on the final/current position, but it is important that material changes from the position reached as of 20 December 2007 are explained and justified. Currently open areas must be clearly reflected with explanation of next steps to close such matters down …” [TIE00020436]

12.9 In his statement, Mr Bissett said that this document:

“attempted to capture all of the important technical and commercial information as it evolved over that period in the run up to Financial Close in May 2008” [TRI00000025_C, page 0060, paragraph 164].

12.10 It was intended that the first drafts of the report would be prepared by 18 January 2008, but this was with the intention that the contract close itself would be achieved by the end of January. As was noted above, that would turn out not to be the case.

12.11 The final version of the Close Report was attached to an email from Mr Bissett, which was sent on 12 May 2008 at 19:49 [CEC01338846]. This was sent to Ms Lindsay, Mr N Smith, Mr McGougan, Ms Andrew, Mr Coyle, Mr David Anderson, Mr Fraser and Mr Conway at CEC. It was copied to Mr Fitchie, Mr Mackay, Mr Gallagher, Mr Renilson, Mr Bell and Ms Clark. The email presents the attachments as a “final set of our internal approval documents”. Although this was sent after office hours on the day before the completion was due to take place, copies of many of the drafts had been supplied to the recipients during the drafting process [see, eg, email of 10 March 2008 from Mr Bissett in CEC01428730]. They had also been considered at the meetings of CEC’s Internal Planning Group (“IPG”) [see, eg, IPG report of 29 February 2008, CEC01246993]. The final versions attached to the email of 12 May included both clean copies of the various documents and versions marked up to show revisions from previous drafts. The clean version of the Close Report [CEC01338853] had the following notable features.

(a) It noted that it and the report from DLA provided a comprehensive view of the principal terms of the contracts and related documents, and that “[s]pecific issues of interest to CEC are addressed in each document” [ibid, page 0001]. This put it beyond doubt, despite the attempts of Mr Fitchie in his oral evidence to say otherwise, that it was anticipated that CEC would rely on what was being done both by tie and by DLA.

(b) The report stated that “[i]t is understood that the Council will prepare appropriate papers for its own approval purposes” [ibid]. This seems at odds with the preceding statement. It might have been intended to refer simply to the report to CEC that was prepared by the Chief Executive, as was standard practice with significant items considered by the Council. CEC was not obtaining any other reports to inform its decision-making, and this was known by the parties involved.

(c) The report noted, at page 0004, that there had been an increase in the price of the Infraco contract of £17.8 million, and it said that this was a result of, among other things, “substantially achieving the level of risk transfer to the private sector anticipated by the procurement strategy”. As has been noted in Chapter 11 (Contract Negotiations), and as became apparent once the works had started, the risks had not been transferred in the way intended. Mr Fitchie acknowledged that this was misleading [PHT00000017, pages 188–189]. Mr Bissett said that it was his understanding, from discussions with the commercial team at tie, that it had substantially achieved the level of risk transfer to the private sector that had been anticipated in the procurement strategy [PHT00000028, page 208]. As I noted in Chapter 11 (Contract Negotiations) in relation to the issue of negotiation of Schedule Part 4 (“SP4”), no advice had been taken on the issue of whether risk had been transferred. To make a statement that the contract had achieved transfer of risk on the basis solely of statements by the persons involved in the discussions on that very issue is not a proper basis upon which one should be satisfied that risk transfer had in fact been achieved. Reliance upon such statements alone was, at best, ill judged.

(d) Under the heading “Tramco relationship with Infraco programme” [CEC01338854, page 0007], the report said:

“Programme version V31 will be contained within the SDS novation agreement. Any variance between V26 and V31 which has an impact on the BBS programme will be dealt with through the contract change process.”

The marked-up version of the Close Report [ibid] reveals that this had been included only in the final draft. Its placing is misleading. This was not an issue of the relationship between the Infraco and Tramco programmes; it was a reference to the Notified Departure that might arise because the design delivery programme referred to in the contract had already been superseded by that time. This referred to one of the major risks that faced the contract but, by putting it in the wrong section and putting no value on the risk, any sense of warning is lost.

(e) Under a heading relating to risk, there was a sub-heading “Price Certainty Achieved” [ibid, page 0026]. It referred to a breakdown of the price, consisting of £227 million of “firm costs”, a deduction of £12.9 million in respect of value engineering and £19.4 million for items that remained provisional. The conjunction of “certainty” and “firm prices” gave rise to the clear view that the price would not change. This was reinforced by the apparent contrast with provisional prices so as to give rise to a clear inference that these prices would not change [Mr Bissett PHT00000028, page 175].

(f) Under the same heading relating to risk, there was a further sub-heading, “Infraco price basis and exclusions” [CEC01338854, page 0027], which stated:

“The Infraco price is based upon the Employers Requirements [sic] which have been in turn subject to thorough quality assurance and the significant areas where post contract alignment of the SDS design will be required. Crucially the price includes for normal design development (through to the completion of the consents and approvals process – see below) meaning the evolution of design to construction stage and excluding changes if [sic] design principle shape form and outline specification as per the Employers Requirements [sic]. The responsibility for consents and approvals is further considered below.”

There was then a note of works that were specifically not included in the Employer’s Requirements and therefore were not included in the price. Mr Bissett said that this wording as to normal design development was part of SP4 [PHT00000028, page 176], but this is incorrect. As the contract was drafted, any reference to the inclusion of normal design development in the price had been removed. The contract stated clearly what was not covered but made no statement as to what was covered. The report gives no indication of the particular matters that the contract specified would not be considered to be normal design development. In effect, the report contained a statement of what tie had intended, instead of being an account of and assessment of what had been agreed.

(g) There was a section entitled “QRA and Risk Allowance” that described the quantitative risk analysis [CEC01338854, page 0028]. It referred to risk allocation matrices, which it was said that tie had maintained and reviewed as procurement had progressed and reflected the risks retained by the public sector. It then noted:

“The only material change in the Risk Allocation Matrices between Preferred Bidder stage and the position at Financial Close is in respect of the construction programme costs associated with any delay by SDS in delivery of remaining design submissions into the consents and approvals process beyond Financial Close.” [ibid, page 0029.]

The matrices themselves are considered in paragraphs 12.15 onwards in the context of the DLA letter. However, in so far as this conveys the impression that there had been no change in allocation of risk since preferred bidder stage, it is incorrect [see, eg, Mr McGarrity in PHT00000047, page 179]. At preferred bidder stage, tie intended that the risk of cost increases arising from development of designs would be borne by Bilfinger Berger Siemens (“BBS”). As negotiated, the contract put the risk substantially on tie. SP4 had also placed the risks of changes in the design delivery programme and the risks of cost increases arising from delays to the Multi-Utilities Diversion Framework Agreement (“MUDFA”) works on tie. These were material changes in risk allocation. It might be said that many of the issues that arose as a result of the wording of SP4 were not the subject of direct consideration in the risk allocation matrices. That is true, and can be considered a failing of the matrices. What matters for the present purposes is that the impression created in the report was one that was untrue. Moreover, the statement, in the paragraph within the “QRA and Risk Allowance” section following the passage quoted above, that the decrease in the risk allowance by £17 million (from £49 million at FBC to £32 million at Financial Close [CEC01338854, page 0029]) reflected successful achievement of risk transfer to the private sector in the Infraco contract – is also misleading for the same reasons. There had been no such risk transfer. When taken with the statements noted above, they compound the picture that price certainty had been achieved.

(h) The report noted [ibid] that increases in costs might arise from:

“[s]ignificant changes in scope from that defined in the Employers Requirements [sic] – whether such changes were to emerge from the consents and approvals process or otherwise”; and

“[s]ignificant delays to the programme as a result of the consenting or approving authorities failing to adhere to the agreed programme … or any other tie/CEC initiated amendment to the construction programme which forms part of the Infraco contract”.

In reality, there were numerous bases on which the price might increase, but they were not stated. The first paragraph, in particular, misrepresented the potential causes of price increases by referring specifically to “[s]ignificant” changes. The way in which SP4 had been drafted meant that it was not just significant changes that would increase the cost.

(i) The report stated [ibid, page 0030] that the risk allowance of £32 million:

“adequately reflects the risks identified and the change in such risks retained by the public sector since approval of the FBC in December 2007”.

No allowance had been made for any of the new risks assumed in the negotiations of SP4. It may be pointed out that the statement concerned only the “risks identified” and that the SP4 risks had not been identified. Nonetheless, this statement was clearly intended to convey the impression that the allowance made was adequate, when in fact it was not. Mr McGarrity accepted that the statement was not accurate and that this risk should have been provided for separately [PHT00000049, page 79].

(j) Appendix 1 to the report considered the risk that arose from the fact that the design period and the construction period now overlapped. The report noted that this had not been anticipated when the SDS contract was concluded in 2005. This appeared to be a recognition that matters had in fact changed, but there the various risks that it presented were not spelled out, still less assessed or valued. Within this appendix, risks that the design packages still to be approved would not be provided in time or would not be of sufficient quality were identified [CEC01338854, page 0035]. This was the only section of the report that gave any consideration to the unanticipated risks that were going to arise because it had become impossible to adhere to the agreed procurement strategy as a result of the late delivery of design. These risks were summarised in a few lines [ibid, page 0035, points B, C, D and E]. There was a statement that the option of delaying financial close until autumn 2008 was “unattractive”, but no consideration of the value of the risks arising as a result of proceeding on the original timescale. There was instead a statement that measures had been identified as the primary means “by which these risks can be contained, through an effective management process controlled by tie/CEC” [ibid, page 0036].

12.12 It is notable that there is no general explanation of the pricing assumptions in SP4 in this narrative, despite the fact that they clearly fell within the category of “important technical and commercial information” noted by Mr Bissett [TRI00000025_C, page 0060, paragraph 164]. Mr Bissett said that the contributors to the report were happy that the pricing assumptions would hold true except where specific provision had been made [PHT00000028, page 201]. If that was correct, it would be very surprising. The change in the design delivery programme had not been the subject of express consideration. In addition, however, it should have been apparent by this time that the MUDFA works would not be complete as assumed and that the design would not remain unchanged as assumed. Mr Fitchie, who reviewed the draft before it was finalised, acknowledged that in considering the draft of this report he had overlooked the need to have mention of the risks represented by SP4 [PHT00000017, pages 195–196].

12.13 Mr Bissett had responsibility for managing the preparation of the Close Report, although not for the technical element of the contents. He noted that successive drafts of the documents including the Close Report were circulated, with changes marked up, to the entire drafting group. He said that the responsibility for accuracy was a “team effort”. While formal responsibility for the contents lay with the Board, in terms of practical delivery, accuracy depended on the team doing their individual jobs properly [PHT00000028, pages 160–161]. There is, however, no record of formal approval by any of the Boards. On one view, it is not surprising that there was no formal Board approval, in that it was a document that was to be used by it to inform its decisions. However, this conflicts with what Mr Bissett thought was the ultimate approval mechanism, and indicates that there was no clear decision process to determine that it was appropriate that the report be released for others to rely on.

12.14 In his examination of Mr Fitchie, counsel for DLA sought to have him identify that, notwithstanding the paucity of information about risks, CEC officials would have been aware of this anyway. In this context, Mr Fitchie repeated his view that tie management was aware of the risks inherent in Notified Departures. Mr Fitchie also said that CEC officials knew of the risks, even if they did not like them. The officials’ state of knowledge may be relevant to the extent to which they complied with their obligations to advise councillors and the Chief Executive of CEC when he was acting on behalf of councillors under delegated powers. It is clear from the evidence of Mr C MacKenzie that, prior to 30 April 2008, he considered the letters from DLA dated 12 and 18 March and 28 April, and that he and Mr N Smith expressed their concerns in an email dated 30 April [CEC01246045]. Mr C MacKenzie explained that his concerns related to design risk and the resultant cost implications for CEC [PHT00000026, pages 111–113]. Before contract close he had also considered the pricing assumptions in SP4 and recognised that paragraphs 2 and 3 excluded “a fair amount from the certainty of the fixed price”, and he wished to know whether the quantitative risk analysis (“QRA”) made adequate provision for that [TRI00000054_C, page 0096]. He also anticipated that there would be an immediate Notified Departure shortly after the contract was signed. It does not appear that he shared his concerns about risks to CEC arising from SP4 with Ms Lindsay, and he accepted that he ought to have done so [PHT00000026, pages 93–97]. As indicated in Chapter 13 (CEC: Events during 2006 and 2007), Mr C MacKenzie and other members of the “B team” wished CEC to obtain independent legal advice about the contract. There seems little doubt that if the Solicitor to CEC had accepted the need for independent legal advice and had sought such advice on the terms of the contract before recommending that it could be signed, the risks inherent in SP4 would probably have been identified and reported to CEC.

Letter from DLA and risk matrices

12.15 As with the Close Report, there had been several iterations of a formal advice letter from DLA. The final version was dated 12 May 2008 [CEC01033532]. It was addressed to Ms Lindsay at CEC and Mr Gallagher at tie, which confirms that advice was being provided by DLA to CEC. The final version referred to letters of advice of 12 and 18 March 2008, copies of which were appended for ease of reference, and stated that the former was the baseline for the update that it contained. The letter dated 12 March, which was addressed only to Ms Lindsay at the Council [CEC01351479], in turn was described as having been intended as an update on matters that had been addressed in a report of 16 December 2007. In fact, this appears to be a typographical error, as the letter of advice from DLA to Ms Lindsay from around that time is dated 17 December 2007 [CEC01500975]. To obtain a proper impression of the DLA advice, it is necessary to consider all three letters together.

12.16 In relation to risk, the letter of 17 December said:

“the contractual allocation of risk and responsibility between tie Limited and the competitively selected private sector providers remains broadly aligned with the market norm for UK urban light rail projects, taking into account: the distinct characteristics of the Edinburgh Tram Network, its technical and commercial state of readiness at ITN issue in October 2006 coupled with the development of scheme engineering and data design since that date” [ibid, pages 0002–0003].

12.17 It noted that further refinement of the Contract Suite was required, but that it was not expected either materially to alter the risk allocation or to adjust core contractual rights and responsibilities. The letter of 12 March 2008 [CEC01351479] repeated the statement as to conformity of the risk allocation with the market norm. However, it went on to note that the fact that work was still required on the Employer’s Requirements meant that:

“technical ambiguity (and therefore delay/cost risk) may exist in the interplay between design, scope and method of execution”.

12.18 It expressed the view that contractual mitigation of this risk was available, and did not offer any view on the scope or value of the risk. By this date, the pricing assumptions – in particular, Pricing Assumption 1 (“PA1”) – were quite well developed and it should have been clear that risk was being retained by tie. I consider that the matter went far beyond “technical ambiguity”, and I do not think that the letter properly reflected the position faced by tie and CEC.

12.19 The letter of 12 May [CEC01033532, page 0002, paragraph 1.1] said:

“No issues have arisen since we last reported which have resulted in any adverse alteration (of consequence) to risk balance.”

12.20 Although that letter said that the letter of 12 March [CEC01347797] was the baseline from which tie had been able to issue its notification of intent to award the Edinburgh Tram Network (“ETN”) contracts, the last report provided was actually that of 18 March [CEC01347796]. However, it did not say anything about this element of risk. For completeness, I add that the letter of 18 March opened by stating that its purpose was to update Ms Lindsay on “our report yesterday” [ibid]. In fact, there was no report of 17 March. The heading of the letter dated 18 March referred to the contract suite as at 13 March. It appears that the 18 March letter was drafted then and that the reference to “yesterday” was intended to denote 12 March. The need to correct this was not noted before the letter was sent days later.

12.21 The letter of 12 May [CEC01033532, page 0003, paragraph 5] also had a further separate section on risk, which stated:

“Following on from our letter of 12 March, we would observe that delay caused by SDS design production and CEC consenting process has resulted in BBS requiring contractual protection and a set of assumptions surrounding programme and pricing.

“tie are prepared for the BBS request for an immediate contractual variation to accommodate a new construction programme needed as a consequence of the SDS Consents Programme which will eventuate, as well as for the management of contractual Notified Departures when (and if) any of the programme related pricing assumptions fall.”

12.22 This wording at least acknowledged the assumptions and the scope that they have for giving rise to claims, but it is nonetheless misleading as to the scale of the risk. In conjunction with what had been said about risk in the earlier letters, by saying that tie was prepared for the immediate contract variation, the impression was given that this could be resisted and that it did not present a significant risk. Although there was reference to the possibility of other Notified Departures, it was limited to “programme related pricing assumptions”, which gives no warning of the issues that might arise out of PA1 when the design was developed or as a result of delay in MUDFA.

12.23 When taken with the earlier reports that are referred to, the earlier statement in the letter that there had been no alteration to risk balance gave the impression that there had been no adverse movement in the risk allocation since December 2007. At that time, drafting of SP4 had not even begun. In view of everything that had happened in relation to SP4 since negotiations commenced in January 2008, the statement made was clearly false. It seems to me that this is not a matter of opinion or judgement: there is simply no basis on which it could sensibly be maintained that what was said in the letter could be correct.

12.24 As noted above, Mr Fitchie was adamant that he was fully aware of the risk presented by PA1, in terms of both the likelihood that claims would be made and the possible scale of the claims. If that is so, his failure to make reference to them here was inexplicable, irrespective of whether he should have noted that they were not referred to in the Close Report. This was precisely the context in which it would be expected that a clear and unambiguous warning would be given. By saying nothing, any person who was aware of the warning in his email of 31 March 2008 (mentioned in paragraph 11.71) would reasonably consider that the issue was no longer live. Far from giving proper notice of the risk that was present, the DLA letter gave a false impression that all was well. In addition to the effect that this would have had on the Council, it might have had a bearing on the employees of tie in giving rise to, or confirming, their views that risks had been transferred.

12.25 In questioning by counsel for DLA, Mr Fitchie’s attention was also drawn to the DLA advice letter of 17 December 2007 [CEC01500975]. He was referred to passages on the final page, where there were references to safeguards in the penultimate paragraph, commencing with the words “These agreements” [PHT00000018, pages 110–111]. His evidence was that what he had written was correct when he wrote it. His attention was not drawn, however, to the context of the passage put to him. This paragraph appeared in the last section of the letter [CEC01500975], entitled “ETN Third Party Agreements”. It was concerned with agreements with third parties reached at the parliamentary stage or later and recognised that the project programme and budget would be “to some degree vulnerable to any of these stakeholders seeking redress within the limits of their commitments/rights” [ibid, page 0004, paragraph 3]. It was therefore wholly irrelevant to the issue of disclosure of risks in the Infraco contract. In a similar vein, Mr Fitchie was referred to his letter of 12 March 2008 [CEC01312366] and the passage in it about the risk arising from the fact that the design was not aligned with the Infraco proposals and the Employer’s Requirements [PHT00000018, page 112]. This was a problem that had emerged only in 2008 and required some time and expense to correct. It was, however, an issue of programme and a different matter from PA1 and the general need for design development. In his evidence, Mr Fitchie sought to suggest that this paragraph in the letter of 12 March concerned “the entire resistance to risk on design which was coming from BBS and had been coming from BBS consistently since BAFO [Best and Final Offer]” and “I was referring there to the fact that the SDS design would – I say could have an impact on project programme” [ibid]. This is patently not what the letter said and is an example of Mr Fitchie attempting to reconstruct matters to say things that they did not. These points made in questioning of Mr Fitchie were not repeated in the submissions for DLA. That is not surprising.

12.26 The risk allocation matrix consisted of a table in which the first column identified a risk and gave the clause or schedule number [CEC01347795; PHT00000018, page 34]. For each obligation, one of three boxes in the column to the right was ticked. The choice of box was to indicate whether the risk was allocated to the public sector, was allocated to the private sector or was shared. The description of the “risks” in the left-hand column is of some importance. Rather than consider risks that might be envisioned – for instance, contractors’ insolvency, increase in price of raw materials, industrial action, fire, sabotage etc – and indicate which party was to bear the financial consequences, in essence it paraphrased the wording of provisions of the contract and then identified the party on which the obligation was placed. So, on the first page of the matrix, there was an entry:

“[6.8] Failure to procure the attendance of any of the Infraco Parties as required by tie at the quarterly meetings described in 6.5 above; failure to invite tie to Tram Supply and/or Tram Maintainer meetings.” [CEC01347795, page 0001.]

12.27 Clause 6.8 of the contract [CEC00036952, Part 1, page 0017] was in the following terms:

“6.8 As required by tie, the Infraco shall procure the attendance of any of the Infraco Parties at the meetings described in Clause 6.5. The Infraco shall provide tie with reasonable notice of any regular progress meetings regarding performance of the Tram Supply Agreement and the Tram Maintenance Agreement and tie shall be entitled to attend such meetings where tie or tie’s Representative have a right to attend such meetings (the Infraco using reasonable endeavours to secure such attendance) pursuant to the Tram Supply Agreement and the Tram Maintenance Agreement and, if tie reasonably requires to attend any other meeting, the Infraco shall use reasonable endeavours to facilitate such attendance.”

12.28 It can be seen that the risk allocation matrix merely echoed the terms of the contract and was not in fact identifying a risk. This can be demonstrated further by consideration of a risk identified in relation to the novation agreement. On page 0007 [CEC01347795], under the heading “Novation and Other Key Interfaces”, the first entry was “[11.1] [f]ailure of the Infraco to execute the novation agreement”.

12.29 Clause 11.1 of the contract made execution of the System Design Services (“SDS”) Novation Agreement a condition precedent. BBS was obliged to enter into the agreement and tie was required to execute it and procure that Parsons Brinckerhoff (“PB”) executed it. Overall, it seems to me that the exercise of producing this matrix was mechanistic and purely formal. As Mr Fitchie said in his evidence, risk matrices such as these are a standard project tool (TRI00000102_C, page 0351, paragraph 11.118). Nonetheless, the way in which it had been completed might give rise to the danger that a person, knowing there is a risk matrix, might think that there has been an analysis and assessment of risk, when in fact there has not.

12.30 SP4 was not mentioned expressly in the risk allocation matrix. There was very limited discussion of pricing assumptions and Notified Departures. On page 0022 [CEC01347795], under the heading “Risk: Relief Events (time) and Compensation Events (time and/or costs)”, the first and fifth entries were:

“[Definition of Compensation Event] Pricing Assumption does not hold good.”

“[Definition of Compensation Event] Execution of Utilities Works or MUDFA works.”

12.31 These risks were allocated to the public sector. The entry above was the only one to mention pricing assumptions. It did not give any indication of the scale and scope of those assumptions. Without information about that, no real indication was given of the nature or magnitude of risk that had been allocated to the public sector (in practice, CEC). The reader was given no notice that any change of shape, form and/or specification to the Base Date Design Information or the fact that a failure to complete MUDFA works prior to the commencement of Infraco might be at CEC’s risk. It was also misleading to refer to this in the context of a compensation event. SP4 stated that a non-compliance with the pricing assumptions was a Notified Departure and Mandatory tie Change rather than a compensation event. The provisions of the Infraco contract concerning tie changes were different from those concerning compensation events. It does not appear, however, that this particular mischaracterisation had any practical consequence. On page 0026 [CEC01347795], there was an entry as follows: “[80] tie changes, Mandatory tie Changes and Notified Departures”. It indicated that this risk fell on the public sector but, again, no indication was given as to the content of these risks. In both this entry and the one quoted above, the entry in the matrix said much less about the underlying contract clause than most of the other entries.

12.32 There was a note on page 2 of the report that since its terms had been finalised a further round of negotiations had taken place and that the detail behind them was contained in the report entitled ‘Close Considerations and event history’. I consider that report in paragraph 12.46 below. The first page in the report [CEC01338851] stated:

“Appropriate quality control procedures have been applied to finalisation of the Infraco contract suite.”

12.33 In fact, as noted above in relation to SP4, it is apparent that the QA/QC process was not carried out. The report also stated:

“In broad terms, the principal pillars of the ETN contract suite in terms of scope and risk transfer have not changed materially since the approval of the Final Business Case in October 2007. The process of negotiation and quality control has operated effectively to ensure the final contract terms are robust and that where risk allocation has altered this has been adequately reflected in suitable commercial compromises.” [ibid, page 0001.]

12.34 Even allowing for the qualification that the statement was made “in broad terms”, this was materially inaccurate. The procurement strategy described in the FBC had envisaged a transfer of risk to the private sector [CEC01395434, Part 1, pages 0018–0019, paragraphs 1.77 and 1.82] although it recognised that the risk arising from delayed completion of MUDFA works, from changes to the scope or specification and obtaining consents or approvals would remain with tie. The effect of SP4 had been to make a significant transfer of risk to tie/CEC. This was a material change to one of the “principal pillars” and there was no “commercial compromise” to counterbalance that. Mr Gallagher claimed that the additional payment was justified by BBS having taken on the design development risk [PHT00000037, page 120]. That does not accord with what was said in the report. Reading the words quoted above as a whole, they considered where the risk had moved in a way adverse to tie, and it was claimed that in this situation there had been commercial compromises. It is clear that in some respects the risk balance had moved against tie, but there had been no counterbalancing commercial compromise.

12.35 In relation to the contract price, this report stated:

“A contract price has been agreed. The detailed contract price and pricing schedules for carrying out the Infraco Works is contained in Schedules to the Infraco Contract. A substantial portion of the Contract Price is agreed on a lump sum fixed price basis. There are certain work elements that cannot be definitively concluded in price and therefore Provisional Sums are included. A number of core pricing and programming assumptions have been agreed as the basis for the Contract Price. If these do not hold, Infraco is entitled to a price and programme variation known as ‘Notified Departure.’” [CEC01338851, page 0004.]

12.36 In relation to legal provisions in construction contracts, a “fixed price” is one that can be stated at the time of the contract, as opposed to a re-measurement contract in which the quantity of work to be done is not known at the time that it is made, or provisional sums as described above. Even in a “fixed-price” contract as so understood, the price may change if difficulties are encountered or there is a change in the works. The difficulty is that the reference to “fixed price” in this context is more likely to be read in an ordinary, everyday sense. When viewed in that way, the passage above gives a false impression as to the degree to which the project price was fixed. Although, as with the documents above, there was reference to the possibility of a Notified Departure, there was no indication of the risk presented by this, in terms of probability or potential size of claim. Reading this part of the report gives no impression whatsoever of the scale of the liabilities that were inherent in the contract. The danger that the terms used might not be understood in the technical sense was identified in an email sent by Mr Bissett on 12 October 2007 [CEC01624078] to Mr Gallagher, Mr Crosse, Mr Gilbert and Mr McLauchlan. In it, he said that it would be useful to have some clarity as to “the extent to which ‘fixed price’ means ‘fixed price’.” He noted that a lay audience might assume that this meant fixed with no risk. He said:

“We know the circumstances in which this might not be true and we should have a statement ready which explains fairly what the position is without involving a detailed risk analysis.”

12.37 In a follow-up email dated the same day [ibid], Mr Bissett attached a spreadsheet giving what he described as a “layman’s commercial view of the risk analysis and relationship to the risk allowance” [CEC01624079]. This noted that 51 per cent of the project cost was “[l]imited or no risk”, 37 per cent was “[s]ome risk but at the margin” and 12 per cent was “[i]nherently risky but subject to control”. This gave a very different picture as to risk from the statements in the report. What was said in the emails as to the understanding of a layman was an important point and one that should have been picked up and acted on. Although the Inquiry has found no record of express consideration of the point, it is apparent that this was not done. While this could be a matter of oversight, it is relevant to note that at the joint meeting of the TPB and the tie Board on 13 March 2008 a decision was taken to “stress the achievements of the proposed deal in all communications” and that this included “the fact of fixed pricing” [CEC00114831, Part 1, page 0007, item 11.3]. This suggests that there was a calculated desire to present the price as “fixed”. I consider that Mr Bissett’s view was correct and that the terms should have been revised.

Report on Procurement Process and Risk of Challenge

12.38 As its name suggests, this report [CEC01338850] largely dealt with the issue of whether there was a chance that a decision to award the contract to BBS in May 2008 might be challenged under the public procurement rules. However, it did make a number of comments in relation to the contracts. These comments would have been bound to have affected the understanding of anyone reading the reports as a whole and it is therefore necessary to consider the contents of the report.

12.39 It stated in relation to the overall outcome that the current position was summarised for the TPB on 12 March 2008. The date of 12 March is that stated on page 2 of the report, but in fact the meeting was on 13 March [see Minutes, CEC00114831, Part 1] It also stated that the Board had concluded that:

“the outcome of the contractual negotiations was in line in all material respects with the Business Case which supported the selection of the Preferred Bidders in October 2007” [CEC01338850, page 0002].

12.40 As I have considered above, that was the meeting of the Joint Tram Project Board (“TPB”) /tie Board which approved the issue of the notification of award. The suggestion that the TPB reached the above conclusion is not supported by the minutes of that meeting [CEC00114831, Part 1, pages 0005–0009]. Item 11.1 of the minutes records that Mr Bissett summarised the position in relation to the forecasts in the FBC and a reference to a summary being given below. It is not clear, however, what entry in the Minutes this is referring to for the summary. The most likely is item 11.5, which states:

“WG provided a summary to the boards to approve for the project to proceed on the basis of:

– total project budget at £508m;

– programme to commence revenue operations Jul 2011;

– that the SDS novation and Network Rail APA [Asset Protection Agreement] are non-negotiable requirements for proceeding

– scope and risk profiles as previously presented; and

– all other matters as presented at the TPB 23rd Jan;

with delegation of authority to DJM/WG/NR.” [ibid, Part 1, page 0007.]

12.41 Item 14.1 states:

“WG requested the boards to formally notice the following;

– recognition that the achieved position is a result of extensive efforts

– documents are moving into acceptable form

– changes to programme and budget are within acceptable tolerances and compare sufficiently closely to the FBC

– no major changes are anticipated, but a rigorous quality control process will be implemented.” [ibid, Part 1, page 0008.]

12.42 It is apparent from this that the Board was presented with a conclusion that there was compliance with the FBC rather than carrying out any consideration of the issue itself. The statement in the report that the position had been approved by the TPB was likely to give rise to a view that it had been properly evaluated by the Board rather than that this was a statement made to it. The report recognised that there had been further amendments to the contractual terms since March, but considered the effect of these only from the standpoint of procurement challenge.

12.43 In relation to risk, the report stated:

“It would be normal to expect that the risk profile will change as contracts are concluded, but only to a marginal degree. This is the case for the Infraco/Tramco contracts and risk profile. One specific area requires more detailed assessment – the risks arising from the overlap of design and construction.” [CEC01338850, page 0003.]

12.44 The statement that the risk has changed only to a marginal degree is misleading when viewed against the background of the transfer of risk envisaged in the FBC. It might be said that the effect of the Wiesbaden Agreement was to transfer risk to some extent. However, this report made statements about the agreement to the contrary effect. The Appendix to the report noted that it had been difficult for BBS to firm up the provisional elements of its bid. This was attributed to the SDS design taking longer to be completed than had been anticipated, the emerging design departing to a greater extent than anticipated from the preliminary design and BBS not being sufficiently resourced to turn emerging designs into quantities and prices. The report noted that BBS had eventually agreed to fix its price with qualifications, which led to negotiations in Wiesbaden. When referring to the “Wiesbaden Fixed Price” and the increase in price as a result of those discussions, the table at the end of the Appendix noted:

“Increase relates to design completion risk and would have also been priced by Tramlines. The amount would have been based on negotiation tactics and judgment.” [ibid, page 0008.]

12.45 When read with the other statements in the report, this gives the clear impression that the “design completion risk” in the final form of the contract had been passed to BBS. This was not correct.

Financial Close Process and Record of Recent Events

12.46 The title above is that which appears on the document [CEC01338847]. However, when attached to emails, the Word file was called “Close Considerations and Event History” and it therefore appears to be the document referred to in the Report on Infraco Contract Suite.

12.47 This document was intended primarily to consider the events in the final few weeks before close, when BBS demanded a further increase in price. It referred back to the contents of the Council report for the meeting of 1 May [CEC00906940], which had been prepared prior to the last-minute demands for further money. This Council report indicated that work had been undertaken to minimise the Council’s exposure to financial risk, with significant elements of risk being transferred to the private sector. It reported that 95 per cent of the combined Infraco and Tramco costs were “fixed”, with the remainder being provisional sums. The contrast between “fixed” costs and “provisional sums” suggested that these terms were being used in their technical sense. Understood in that way, the “fixed” costs might change, for many reasons defined by the contract. However, this was not explained and, without some additional information being given, I very much doubt that this was the sense in which they were understood by the intended recipients of the report. If the two terms are understood in their ordinary sense, a clear impression is given that the “fixed” costs would not change. Indeed, it is clear from the evidence of the councillors that they understood the reference to “fixed” costs to mean that they would not increase beyond the sum specified other than in “extreme circumstances” [Councillor Dawe PHT00000001, page 96]. Councillor Aitken, for instance, considered that the prices were fixed and that the element that might change to make up the overall costs was the provisional part [PHT00000002, page 155]. With this understanding, the councillors said that it was important to them that it was fixed cost. Returning to the report, in relation to the change between the report for the Council meeting and the position as at 12 May, it stated:

 “As was noted in the recent Council Report, underlying costs have been subject to the firming up of provisional prices to fixed sums, currency fluctuations and the crystallisation of the risk transfer to the private sector as described in the project’s Final Business Case. The finalisation of the contracts required further amendment for similar reasons and supply chain pressure on the bidding consortium has been accommodated in the marginal increase over the most-recently reported cost estimate. Offsetting the increased cost is a range of negotiated improvements in favour of tie and the Council, in the areas of programme delay mitigation, cost exposure capping and more advantageous contractual positions.” [CEC01338847, page 0001.]

12.48 As noted above, it is not apparent that there were a “range of negotiated improvements” or “more advantageous contractual provisions” referred to in this report.

Report on Infraco Contract Suite: Conclusions on materials available

12.49 Taking the above-mentioned documents together, I consider that they presented a materially misleading picture. Adopting the purpose of the Close Report outlined by Mr Bissett in his email of 15 January, in no way could the Close Report be said to have provided a comprehensive view of all aspects of work done to support financial close or to explain material changes from the position as at 20 December 2007 [TIE00020436; paragraph 12.8 above]. I agree with the statement by Ms Andrew that:

“While providing useful background, these documents did not allow CEC to fully understand the contractual position and the risks to which the Council was exposed.” [TRI00000023_C, page 0061, paragraph 65(2).]

12.50 The clear impression was given that risk had been transferred in the way intended in the FBC and that the price for the Infraco works was fixed. The references to the change of programme were played down so as to suggest that it could be controlled, and the absence of mention of anything else, when taken with the statements as to fixed price, gave the impression that there was little risk to the public purse.

12.51 Further, the assumption as to completion of MUDFA works would, by itself, have merited mention. In his statement, Mr McGarrity said that the fact that MUDFA works were not complete at commencement of the Infraco works was reported in the Close Report [TRI00000059_C, page 0155, paragraph 109]. Although there is a statement of the fact that the MUDFA works were not completed, they were described only as an “early start constraint for INFRACO” [CEC01338853, page 0006] and it was said that regular reviews of MUDFA progress would be carried out “to ensure no conflict with Infraco works” [ibid, page 0030]. What was lacking was any statement that this was in conflict with a pricing assumption that, in turn, would give rise to a Notified Departure and the ability of BBS to make claims. The approach of Mr McGarrity to what was sufficient to disclose the position might be indicative of the mindset that lay at the root of the problem.

12.52 The DLA letter dated 12 May 2008 also failed to make clear the position in relation to risk allocation and, in particular, the change that had taken place between December 2007 and May 2008 [CEC01033532]. The references in the various letters to earlier versions mean that the letters have to be read together. Doing so gives a clear representation that the position had not worsened since December 2007, when in fact the opposite was true. Although there is reference to the pricing assumptions and to the possibility of Notified Departures, in no way could it be considered to convey the breadth of the risk that was being assumed or the consequences that were possible or even likely. The risk matrix did not add to this.

12.53 The issue then arises as to whether the various contributors to the documents were aware of the situation. As I have set out above, Mr Fitchie was clear that he did know of the dangers. This carries with it a conclusion that he must have been aware that the DLA letter and the other elements of the Close Suite that he examined did not accurately portray the position. He had accepted that DLA had a duty of care to CEC and was aware that CEC intended to rely on these documents in making a decision to enter into the contracts. Despite this, he did nothing to correct the DLA letter or express any concern in relation to the remainder of the Close Suite.

12.54 Mr Fitchie said that he had told the tie officials of his concerns, but they have consistently denied this. I have considered this in Chapter 11 (Contract Negotiations). There is some awareness in the responses of Mr Gilbert within tie to the emails from Mr Laing dated 26 and 31 March 2008 [CEC01548431; CEC01466394] that there was a risk in relation to the design delivery programme, but it is not clear that there was an understanding of the much broader risk that was being undertaken [CEC01465933]. I consider that, with the possible exception of Mr McEwan, the project team within tie was not aware of the risk inherent in SP4/PA1. However, it should have been aware of the risk that was presented by delays in the programme resulting from design slippage and delays that were becoming apparent in the MUDFA programme. The Project Director’s report to the TPB meeting of 9 April 2008 noted that while the plan was that 12,112 metres of utilities should have been moved, by that time only 10,081 metres had been, and further that of 104 chambers planned to have been moved, work had been done on only 54. This was said to represent a delay of six weeks, although recovery plans were being finalised [CEC00114831, Part 1, pages 0012–0013.] In the papers for the meeting on 7 May, there was no table on MUDFA progress. However, it was noted that progress had reduced from the previous period, although revised recovery plans were under way [CEC00079902, page 0012]. Similarly, in the presentation provided to that meeting it was noted that there had been further slippage in the progress of the MUDFA works, but the critical path delay remained at two weeks [CEC01282186, page 0015]. The lack of success with earlier recovery plans should have cast doubt on the suggestion that the delays could be mitigated. On any view, I consider that before tie made statements to CEC concerning risk transfer that it knew would be relied upon to decide whether to proceed with the contracts, it was incumbent upon the persons who collectively authorised the making of that statement to have verified the position. This would have entailed having sought advice before making statements that the risk had been transferred. To make statements on a matter that tie must have known was of considerable importance to CEC, without having checked whether they were true, was reckless. It had not taken adequate steps to put itself in a positon of being properly advised or informed to be in a position to make these statements. It simply did not know whether or not what was said was true. Although Mr Bissett had the responsibility for managing the preparation of the Close Report, the contents of it were prepared by members of the management team, and I consider that any shortcomings, including inaccurate or reckless statements, were the collective responsibility of everyone involved in that process. The fact that he was aware of the risk that CEC was taking means that the position of Mr Fitchie is different. His own evidence is to the effect that he had knowledge that was inconsistent with what I consider is the only sensible way in which to read the Close Suite. He therefore had actual knowledge that the documents would misrepresent the position to any persons or bodies to whom they were provided.

12.55 In addition to these documents being used to inform the decisions of the TPB, they were relied upon by CEC and the Approvals Committee. In that context, the point has been made in submissions to the Inquiry that these documents were not the only information available to CEC and that it therefore should not be viewed in isolation. It has been maintained that there was awareness within the CEC Solicitor’s Department of the shortcomings of the contract. On the evidence, I am satisfied that, on 15 April 2008, Ms Lindsay, Mr C MacKenzie and Mr N Smith were sent an email with SP4 attached to it [PHT00000026, page 89; CEC01245223]. Mr C MacKenzie, at least, read it and understood its significance (see paragraphs 14.77, 14.81 and 14.84). He was concerned to know whether the figures in the accompanying QRA were sufficient for all foreseeable risks, and he asked Mr Coyle about that [PHT00000026, pages 89–92; TRI00000054_C, page 0077, paragraph 165]. He accepted Mr Coyle’s response and did not report his concerns to Ms Lindsay. It is clear that CEC was not advised about SP4 by anyone within the Council Solicitor’s office. Obviously, the members of the Approvals Committee also ought to have been aware of the background circumstances and that the Close Suite might not contain the full story.

12.56 Whatever level of understanding there might have been in any of these bodies cannot justify or excuse the errors in the Close Suite. These were formal documents that were expressly intended to draw together information in relation to the contract and to form the basis for the decision whether it was appropriate to enter into the contracts. They were not intended to make the case for trams or to encourage a decision one way or the other. Their purpose and the context in which they were to be considered required that they were objective and gave an account that was complete and factually accurate. It should not be necessary to look behind them to different channels of communication to uncover risks and possible problems. As a sequence of decisions to be taken, it was also important that when the decisions earlier in the process were viewed it was apparent what they had taken into account. This mattered not only for having a proper record of the basis for earlier decisions in a contract involving a large amount of public money but also because later decisions by others needed to refer to, and understand the reasons for, the earlier decisions. I now turn to consider these remaining parts of the process and these further decisions.

Letters from Mr Gallagher and Mr Mackay to Mr Aitchison

12.57 These letters [CEC01284042; CEC00079774, page 0007] were sent in compliance with the decision of the tie management team as recorded in the minute of the meeting on 13 May 2008 [CEC01319006]. They refer to the Close Report and the DLA advice letters, to provide a summary of the final terms of the contract. The letter from Mr Gallagher on behalf of tie states, in relation to the Contract Suite, that certain matters have been concluded that are “marginally different” from the terms set out in the FBC, including a revision in cost from £498 million to £512 million, for phase 1a. As I have noted above, in fact the risk allocation was materially different from that in the FBC, and this was true even without knowledge of the liability present in PA1.

CEC Policy and Strategy Committee meeting

12.58 In order to provide context for this meeting and a proper understanding of the information available to CEC and the decision taken, it is necessary to have regard also to the decision made at the meeting of CEC on 1 May 2008 and the material that was available to it for that decision.

12.59 The approval for the Chief Executive to instruct tie to enter into the contracts was initially sought at the meeting of 1 May 2008 but following upon the last-minute demand for more money by BBS, it was considered appropriate that there be a further decision of CEC.

12.60 The reason for consideration of the Tram project by the meeting of the full Council on 1 May 2008 was to note the changes from the FBC approved in December 2007 and to refresh the delegated power given to the Chief Executive to authorise tie to enter into the contracts. The report for the meeting was signed by Mr Aitchison [CEC00906940]. It contained the following elements:

(a) It recorded that a substantial amount of work had been done to minimise CEC’s exposure to financial risk, that significant elements of risk had been transferred to the private sector and that, as a result, 95 per cent of the Tramco and Infraco costs were “fixed”, with the remainder being provisional sums [ibid, page 0001, paragraph 2.3]. This was a repetition of what has been said in the document Financial Close Process and Record of Recent Events provided by tie and considered above [paragraph 12.46 et seq]. Later in the report, the reference was to 95 per cent of the costs being “firm” [ibid, page 0002, paragraph 3.4]. The transfer of risk to the private sector was said to be one of the reasons that the price had increased [ibid, page 0002, paragraph 3.5]. The conclusions included the following statement:

“A significant level of risk has been assumed by the private sector considerably reducing the Council’s exposure to future uncertainty.” [ibid, page 0003, paragraph 5.1.]

(b) It noted that:

“As a result of the overlapping period of design and construction a new risk area has emerged which has been the subject of extensive and difficult negotiation. tie Ltd advise that the outcome is the best deal that is currently available to themselves and the Council. Both tie Ltd and the Council have worked and will continue to work diligently to examine and reduce this risk in practical terms” [ibid, page 0003, paragraph 3.10].

And:

“A written statement from tie Ltd has been provided stating that they are satisfied that £32m is an adequate level of risk allowance” [ibid, page 0003, paragraph 3.11].

The minute of the meeting records that the councillors acted in accordance with all the recommendations in the report but that they also noted that the increase in cost might impact on the proposal to deliver line 1b and instructed the Director of Finance to investigate and report to councillors on the likely financial impacts of the construction period on businesses on Leith Walk and Constitution Street [CEC02083356, Parts 1–2].

12.61 The report to the Council did not accurately reflect the underlying position. Stating that risk had been transferred and that this had resulted in costs being 95 per cent fixed misrepresented the nature of the proposed contract. There was always a possibility that the costs under a construction contract such as the Infraco contract could increase. Further, the terms of SP4 meant that it was likely that they would increase and that such an increase would be substantial. It is not entirely clear where the reference to 95 per cent came from, but it is notable that it was the figure provided by Mr McGarrity to the TPB meeting on 13 March 2008 [CEC00114831, Parts 1–2]. Mr Aitchison said that his understanding of the position was based on the above-noted letter from tie and on comments from the Directors of City Development, Finance and Corporate Services and the Council Solicitor [TRI00000022_C, pages 0045–0046, paragraphs 120, 123–124]. The terms of the report to the Council [CEC00906940] indicate that it is likely that it was also informed by the Close Suite of documents. Although the final versions were completed later, earlier versions had been sent to CEC officials [see, eg, CEC01393819 on 10 March 2008; CEC01312358 on 28 April 2008].

12.62 As noted above, the increase in cost caused by the last-minute demand for additional money meant that it was considered appropriate that it was councillors rather than CEC officials who approved the change [Mr Aitchison TRI00000022_C, pages 0047–0048, paragraph 130]. There was a desire to have matters approved as soon as possible. Mr Aitchison took the decision to report the matter to the Policy and Strategy Committee. He explained that it was composed of senior elected members of all parties, including the leader of the Council, the leader of the opposition and the leaders of the political groups and that if the Committee was concerned about the proposal, it would be open to it to continue it to another meeting of the Committee to allow more time for its consideration of the matter or to refer the decision to a meeting of the full Council.

12.63 The report to the Policy and Strategy Committee on 13 May 2008 [USB00000357] was prepared by Ms Andrew and signed by Mr Aitchison on the day of the meeting. The minutes of the meeting [CEC01891564] record that notice that the project was to be considered by the Committee had been given to members only at the start of the meeting. This gave the members no notice of what they would have to decide. The report noted that a final decision was required “with immediate effect to allow an immediate financial close” [USB00000357, page 0001, paragraph 2.5]. An email circulated on 9 May 2008 by Mr Gallagher had noted that the contract was to be signed at 2pm on Tuesday 13 May 2008 [CEC01231125]. Mr Aitchison said that had approval not been given at the meeting, the signing of the contracts would not have gone ahead [TRI00000022_C, pages 0048–0049, paragraph 131]. While that is no doubt true, the extreme urgency recorded in the report would have created the impression that this was not an opportunity for any detailed scrutiny of the recommended course of action. The lack of time available for councillors to scrutinise this item on their agenda is highlighted by the fact that eight other items of business were considered at the same meeting. I appreciate that members of the committee could have deferred consideration of this issue or referred it to a meeting of the full Council. While subsequent events have shown that that would have been the more advisable course of action, that option should be seen in light of the prevailing circumstances at that time. This was the most significant capital project in Edinburgh. Progress had been delayed for a variety of reasons and there was a significant amount of public and political disquiet about the cost and the disruption already caused, which would increase if the project were delayed. When councillors had authorised the Chief Executive to authorise tie to sign the contract under delegated powers granted on 1 May there had been a further delay due to the last-minute demands from BBS. In these circumstances councillors might have considered that the Chief Executive must have been satisfied that CEC’s interests were protected by the terms of the contract that the Chief Executive had intended to authorise tie to sign. As is clear from the Chief Executive’s recommendations in his report, the only issues for their determination were to approve the increased costs, to authorise the Chief Executive to instruct tie to enter into contracts reflecting those changes, to refresh the delegated powers to the Chief Executive and to note the consequential amendment to the FBC. When considered in that light, councillors had to be satisfied about the nature and extent of the increased costs, as well as the reasons for them, together with the nature and extent of any benefit accruing to CEC following the increased costs. The basis upon which they could be so satisfied was the report by the Chief Executive, dated that day and tabled at the commencement of the meeting, supplemented by questions addressed to the Chief Executive and other senior officials, including the Director of City Development and the Director of Finance. It is axiomatic that the report had to be accurate and that the Chief Executive was sufficiently familiar with the issues in it to answer such questions.

12.64 The report explained the increase in price in the following terms:

“Capital Cost and Quantified Risk Allowance

“2.8 The estimated capital cost of phase 1a, as reported to the Council on 1 May 2008, was £508 million, consisting of base costs of £476m and a Quantified Risk Allowance (QRA) of £32m.

“2.9 Following the introduction by Bilfinger Berger Siemens (BBS) of additional cost pressures late in the due diligence process, tie Ltd held negotiations with BBS to substantiate its requests for contract price increases and to seek to limit the increase. To help reduce the risk of programme delays, the price increase agreed will be paid as a series of incentivisation bonuses over the life of the contract, on achievement of specified milestones. This approach should minimise the risk to businesses and residents of Edinburgh of delays to the agreed programme of works. These changes increase costs by £4m to £512m, but have corresponding advantages by further transferring risks to the private sector. In addition, part of the package negotiated entitles BBS to an additional payment of £3.2m, should the Council decide not to construct phase 1b of the tram network.

“2.10 The combined effect of these changes, therefore, is to increase the estimated project cost of phase 1a to £512m, with a further contingent payment of £3.2m due, if phase 1b is not built.

“Benefits of the final deal

“2.11 In return for the financial amendments, tie Ltd has secured a range of improvements to the contract terms and risk profile. Currently, these areas are regarded as highly confidential but, subsequent to contractual close, a more detailed report will be submitted to the Tram Sub-Committee.” [USB00000357, page 0002.]

12.65 Apart from the above paragraphs, paragraph 2.7 [ibid] repeated the assertion contained in the Financial Close Process and Record of Recent Events [CEC01338847] that the increase in costs had been offset by a range of negotiated improvements favouring tie and the Council to reduce the risk of programme delays. As will be noted in paragraph 14.155, this assertion was untrue because the incentive instalment payments were payable whenever a section of the route was completed, irrespective of the time taken for completion. The reference in paragraph 2.9 of the report to incentive payments totalling £4 million is an error because it is clear from the Financial Close Process and Record of Recent Events mentioned above that the correct figure was £4.8 million [CEC01340805, page 0004]. The significance of this error in the Chief Executive’s report to the Policy and Strategy Committee is that it is an indication of a lack of scrutiny by him of the draft report submitted to him for approval and signature. Although Mr Aitchison stated that the draft report had been prepared by officials within the Departments of City Development, Finance and Legal Services [Mr Aitchison TRI00000022_C, page 0051, paragraph 148], the report does not include any official within Legal Services as a contact. I have concluded that only officials from the departments of City Development and Finance were involved in the drafting of the report and that Mr Aitchison was mistaken when he included officials from Legal Services in that exercise. As noted above, the Council Solicitor and the director of each of the two departments of City Development and Finance were present at the meeting. Each of them was aware that the figure of £4 million was incorrect because, at 07.49 that day, an email was sent on behalf of Ms Lindsay to these two directors [CEC01222437]. It attached a draft report for the three of them to sign to provide comfort to the Chief Executive as he authorised tie to close the deal following the committee meeting later that day. It requested intimation of any proposed changes. The draft document referred to “additional incentivisation payments of approximately £4.8m” [CEC01222438]. As the report from the three senior officials had been requested by the Chief Executive, it is difficult to imagine that he did not approve of its contents, although the Inquiry has not found direct evidence that he received it before the committee meeting. This is addressed below. On any view, three senior officials who attended the meeting were aware that the correct figure was £4.8 million. Their failure to correct the report to committee is an indication of the lack of scrutiny that they exercised in respect of the report.

12.66 It is apparent from the paragraphs quoted above that the report does not describe the whole of the deal done, concessions made and revisions to risk allowance. It may be that it was considered that those matters were covered by the reference to “improvements to the contract terms and risk profile”, but it is hardly a full report of the position. While I accept that there was a general concern about leaks of information and the actions of BBS to take advantage of them, the fact that the report was provided very late and the contracts were to be signed within hours meant that, in reality, there was little risk of a leak. As already noted the additional payments amounting to £4.8 million were not structured as an incentive. Accordingly, the statement that the new approach should minimise the risk to businesses and residents of Edinburgh of delays was simply not true. Equally untrue was the assertion that there were corresponding advantages to the increase in price by securing a further transfer of risk to the private sector.

12.67 Mr Aitchison said that the recommendations to the Committee “were based on the considered, and consistent, advice from TIE and senior Council colleagues” [TRI00000022_C, page 0049, paragraph 143]. These senior colleagues, the Directors of City Development and Finance and the Council Solicitor, had been involved on his behalf in undertaking contract due diligence after December 2007, and the draft report prepared by the Solicitor for signature by the two officials mentioned by her and mentioned in Mr Aitchison’s statement [ibid, page 0050, paragraph 144] was the culmination of a work programme over many weeks. During that period Mr Aitchison had been in discussion with them, participated in briefings and had been involved in discussions at the IPG [ibid, page 0050, paragraph 145]. The recommendations were principally to approve the new final costs and authorise the Chief Executive to instruct tie to enter into the contracts. While it is apparent that these would have reflected the advice from tie officials – who had, after all, concluded the new deal – the origin of the statements of fact in the report is not clear. As was noted above, Mr Aitchison received a report dated 13 May, from Mr McGougan, Ms Lindsay and Mr David Anderson, which supported the statement from tie recommending imminent financial close [CEC01244245]. Mr Aitchison said that he had advised all three that he would not consider approving the document for signing until he had written assurance from them that it was appropriate to do so [TRI00000022_C, page 0050, paragraph 144]. While the Inquiry has not found any direct evidence that Mr Aitchison received the report before the committee meeting, I think that it unlikely that he would have signed the report to the Policy and Strategy Committee, seeking approval for immediate financial close, and which involved the signature of the contract at 2pm that day, unless he had been satisfied that a written assurance in acceptable terms would be available for him immediately after the committee meeting. Only he could confirm that the report to him in that regard was in acceptable terms. On balance, I have concluded that, before the Policy and Strategy Committee meeting, Mr Aitchison had seen and approved the terms of the report to be signed by the three senior officials and given to him. Remarkably, he said that he did not recall having seen the Close Report and letters from DLA to the Council and tie referred to above. As to the basis for the contents of his report, Mr Aitchison said:

“Two Council Directors were members of the TPB and saw all the documentation going there. They, in turn, were able to bring that documentation/information back and share it with colleagues at the Council. There was, therefore, a thorough awareness of the main documentation going from TIE to the TPB. Colleagues on the TPB had the opportunity to challenge their counterparts in TIE and seek clarification or further information where and when appropriate. Reports to Council were able to draw on all this analysis and information.” [ibid, page 0051, paragraph 149.]

12.68 It is not correct to state that members of the TPB – which was a sub-committee of the tie or TEL Board – were entitled to bring information back from their deliberations and share it with other CEC officials. The suggestion that members of the TPB were able to challenge their counterparts in tie showed that he did not have an understanding of the membership of these bodies and how they operated in practice. On any view, however, it was the responsibility of Mr Aitchison to satisfy himself that what was said in his report was correct. This responsibility was all the greater when the urgency meant that councillors would have little chance to look beyond his report when making their decision. It is not possible to say that the decision would necessarily have been any different had a more detailed account been given of the position, but it is another example of inadequate reporting and the councillors not having full information when taking decisions relating to the project.

12.69 Mr Aitchison said that there was a very lengthy spell of questioning of Mr David Anderson, Ms Lindsay, Mr McGougan and himself by way of scrutiny of the issue. The contents of that discussion are not recorded, so it is not possible to say whether there was elaboration or qualification of the contents of the report. At the conclusion of their deliberations, the Committee made a decision in line with the recommendations in the report.

Letter from Mr Aitchison to Mr Gallagher

12.70 On the basis of the decision of the Committee, Mr Aitchison wrote to Mr Gallagher, confirming that tie should immediately enter into the contracts [CEC00590620]. In error, this letter was dated 12 May 2008, but it was in fact sent after the meeting.

The Approvals Committee

12.71 Following CEC’s decision in December 2007 to proceed, in January 2008 tie, TEL and the TPB created delegated authority arrangements in relation to the process to be followed to contractual implementation [see minutes of joint meeting of the TPB, tie and TEL of 23 January 2008 in CEC01246826, page 0008, and the draft Resolutions at pages 0037–0040]. They established a committee consisting of Mr Gallagher, Mr Renilson and Mr Mackay. It was to be a committee of the Boards of tie, TEL and the TPB and was known as the Approvals Committee. In terms of the Resolutions it would approve final execution by the Chairman of tie of the Notification of Intention to Award, the Infraco Contract Suite and any necessary related agreements. In terms of the resolutions establishing the Approvals Committee this authority to approve in relation to tie was to be on condition that:

(1) the final terms of the contractual arrangements were within the terms of the FBC, subject to slippage of up to one month in programmed revenue service in 2011, and

(2) it unanimously concluded that it was appropriate to do so, and

(3) approval had been received from the CEC Chief Executive to proceed to execution of the Infraco Contract Suite.

12.72 The conditions of approval for the committee, in so far as it was a sub-committee of the Board of TEL and the TPB, are slightly different in that the unanimous conclusion and the approval from the CEC Chief Executive need relate only to the execution of the Infraco Contract Suite. In fact, there is no record of this committee having approved the issue of the Notification to Award prior to its issue in March 2008, and instead it appears that the decision was taken at the joint meeting of the TPB and tie’s Board on 13 March 2008 [CEC00114831, Part 1, page 0008, paragraph 14.2].

12.73 The decision to make the Approvals Committee a sub-committee of the Boards of tie and TEL and the TPB may reflect a degree of uncertainty or confusion due to the convoluted governance procedures as to which body should decide to sign. It is worth pausing, however, to consider the situation once the Approvals Committee had been set up. tie was a subsidiary of TEL. Officially, the TPB was a committee of the Board of TEL. This meant that, in addition to the decision to proceed being taken by a sub-committee of the Board of tie – which would be perfectly natural – a sub-committee of a sub-committee of the Board of the parent of tie, and a sub-committee of that same Board of the parent of tie, would also be pivotal in instructing tie to enter into the contract. This is a clear illustration of how complex and confused the governance of the project had become.

12.74 Although the form of the decision-making was unsatisfactory, the real problems lay in the substance of what was done. In this regard it is appropriate to look at the evidence of the three members of the Approvals Committee on 13 May 2008 in a little detail, but before doing so it is necessary to examine the minute of the meeting of the Committee [CEC01289240]. Although he was not part of the Committee, the minute was prepared by Mr Bissett in advance of the meeting to which it relates. It included a note that:

“The Committee and each member individually noted that adequate information had been provided on which to competently proceed. In particular, the terms of the Infraco Contract Suite and all key related information had been set out in successive versions of:

• The Close Report prepared by tie Limited
• A letter from DLA providing an opinion on the legal competence of the Infraco contract suite and including a comprehensive risk matrix
• Supporting papers prepared by tie Limited addressing:
  • Detailed Infraco Contract Suite terms and conditions
  • Procurement process and risk of challenge
  • The final deal terms and relationship to value for money and the risk of challenge” [ibid, page 0001].

12.75 These are the same first three items that were before the tie management at the commencement of the closure process considered above. The minute then noted that “the final contract terms had been approved at a meeting of the Council’s Policy & Strategy Committee earlier in the day” [ibid]. This did not accurately reflect what had been done by the Policy and Strategy Committee, whose purpose had been to consider the Chief Executive’s report and, if appropriate, approve his recommendations. The minute of that meeting disclosed that there was an approval of a price increase and not the contract terms. Nonetheless, when I asked Mr Mackay whether that approval influenced the committee’s consideration of the issues, he said: “It would help our decision-making.” [PHT00000038, page 54.] The minute of the Approvals Committee meeting referred to the various formal items of correspondence referred to above. It then concluded that:

“The terms of these draft documents was noted as in acceptable form by all parties. The Committee and each individual member confirmed that authority should thereby be given to the tie Chairman to proceed with completion.” [CEC01289240]

Mr Mackay

12.76 As a member of the Approvals Committee, Mr Mackay said that its remit was to run through the contract once again to see whether there was anything that troubled the committee or would prevent it from going ahead and signing [PHT00000038, page 51]. He said that it was there to test the material and it was not a “rubber-stamping exercise” [ibid, page 59]. Part of the remit was for it to be satisfied that the final arrangements fell within the FBC and, as described there, the strategy involved the transfer of design, construction and maintenance risks to the contractor.

12.77 Mr Mackay could not provide a clear picture of what material was available to the committee and what it did to test the reports. He could not recall whether there had been any verbal presentation to it in addition to the documents referred to in the minute. He thought that it might have been talked through the contract but, when asked who had done this, he said, “Perhaps Graeme Bissett” [ibid, page 53]. From the evidence that I have heard of Mr Bissett’s involvement, I do not believe that he would have provided a narrative of the contract. Mr Mackay was asked what information he had to support the view that there had been a transfer of risk as required by the strategy in the FBC, but his answer was unclear and unsatisfactory. He said that he asked questions of senior executives, lawyers and Mr McGougan, as well as officials in Transport Scotland even after the decision of Scottish Ministers to withdraw officials in Transport Scotland from the project [ibid, pages 79–83], but there is no record of this. He said that some of the information for the committee to rely on was coming from Mr Gallagher [ibid, pages 72–73]. This produces a position that Mr Gallagher is both part of the decision-making body and the provider of information to that body. He said that he was told by Mr Gallagher and others that the design risk “would not be a major difficulty” [ibid, pages 73–74 and 86]. That, of course, is a rather different matter from concluding that it had been transferred to the contractor as envisioned in the FBC.

12.78 No records were kept to the effect that any information was provided in addition to the documents narrated in the minutes. Mr Mackay’s response was to say that the committee did not need to have a record as it had been satisfied with the papers and the answers that it was given to its questions [ibid, pages 60–61]. That is false logic. If the committee was not giving approval, with the result that nothing was to happen, then it might not have been necessary to keep a record. When giving approval for a very substantial public contract, however, I consider that it was critical that a record was kept as to what material was relied upon.

12.79 Mr Mackay said that he had never had any doubts that the contract was not fixed price in the sense that the payment could not change because design was incomplete, MUDFA was running late, there were extensions of time and CEC kept wanting changes [TRI00000113_C, page 0040, paragraph 143], but he did not raise this when reviewing reports [PHT00000038, pages 85–86]. There were a number of other respects, however, in which it was clear that Mr Mackay did not fully understand the position. Mr Mackay was not aware of the contract assumption that the MUDFA works would be complete, and that assumption was wrong. If he had been aware of it, it would have been a matter of concern. Nor was he aware of the terms of SP4, which expressly stated that the facts were in some respects at odds with the assumptions, and he said that if he had been aware, “[i]t would have made a big difference” [ibid, pages 68–69]. He was aware that changes of design principle, shape, form and outline specification would be at tie’s risk but that he thought that the risk allowance would cover it [ibid, page 78]. In fact, as I note above, no addition had been made to the risk allowance to reflect the terms of SP4. He was under the impression that the novation of the contract would transfer the design risk from tie [ibid, page 74]. The lack of information and understanding was material. Mr Mackay said that if he had been aware of how onerous the design changes would be he would not have agreed to proceed [ibid, page 67]. I have concluded that if Mr Mackay had understood the terms of the contract, particularly SP4, it is probable that he would not have agreed to its signature. Indeed, had he authorised the contract signature with a proper understanding of its terms and the likelihood that it would fail to deliver the project on time and within budget, questions would justifiably be asked about his integrity if he had failed to alert CEC to the risks to which it was exposed.

Mr Gallagher

12.80 Mr Gallagher said that the committee had not met prior to the meeting on 13 May 2008. His evidence was that this committee was a purely formal step to approve the work of others in writing and drawing together the Close Suite, and that it carried out no independent review of the materials before it [PHT00000037, page 142]. When asked how the committee discharged its remit to check that the contracts were within the FBC, Mr Gallagher said that there would have been a review as part of the preparation of the Close Suite [ibid, page 141].

12.81 In relation to the issue of whether the price might change, Mr Gallagher would have been aware, on the basis of the email from Mr Bissett sent to him the previous October [CEC01624078 referred to in paragraph 12.36 above], that the statement that the price was “fixed” did not denote that it would not increase, but this was not a matter that he raised in the context of the work of the Approvals Committee.

Mr Renilson

12.82 Mr Renilson said that he had no clear recollection of whether the Approvals Committee met prior to 13 May 2008 [PHT00000049, page 28]. His evidence seemed to amount to a statement that the committee members worked in close proximity to each other in the tie offices and that the discussions were:

“just part of everything, of the general high tension activity that was in place in the run-up to contract close” [ibid, page 33].

12.83 At first, he said that he thought that the three committee members would “almost certainly” have got together to apply their minds to the issue of whether the contract came within the FBC, but he could not actually recall it [ibid, page 34]. However, he later said that the issue of departure from the procurement strategy and additional costs were discussed at the TPB, but he could not recollect any discussion in the Approvals Committee and doubted that it had happened [ibid, pages 37–38 and 45].

12.84 He said that the Approvals Committee was dependent on information provided largely by tie, with some from TEL [ibid, page 40]. He said that he was concerned about the MUDFA progress and felt that he was not able to get information about it [ibid, page 35]. He said that it was a “big concern” that this could generate liability, but also that he was “not convinced that it would produce a deviation from the agreed price” [ibid, page 36]. This was on the basis that he was being told by tie employees that there were ways around the problem. His approach to the Close Suite appeared to be quite cavalier and he said that he would not have read the DLA letter [ibid, pages 39–40].

12.85 He believed that the risk of incomplete design lay with BBS [ibid, page 46]. He had “doubts” as to the statement that BBS was to bear the lion’s share of risk [TRI00000068_C, page 0074, paragraph 250; PHT00000049, page 47]. Despite having doubts, he did not investigate or request someone else to investigate this matter. He said that he would not have understood what he was told if he had caused it to be investigated [ibid, page 48]. He did not have an understanding that the price would change if the pricing assumptions did not hold good, and he thought that, barring adverse weather or unforeseen ground conditions, or “CEC’s planners’ moods”, the price was fixed [ibid, page 68]. Like others, he believed that the effect of the novation was that the risk of design change lay with BBS [ibid, page 50].

12.86 He was not confident that the contract should be awarded, but he felt pressurised to sign off on the contracts [TRI00000068_C, page 0076, paragraph 259]. He said:

“I felt I might be told that, if I didn’t sign, an immediate Board meeting would be convened and I would be removed from the Board.” [PHT00000049, page 51.]

12.87 He said that the pressure came from a number of senior people and that Mr Aitchison had said that signature of the contract had to go ahead. He felt that if he had taken a stand it would not have stopped the project but that he would have been removed and therefore would not have been present to contribute to dealing with some of the problems that arose later.

Conclusions

12.88 While Mr Mackay said that there was discussion as to whether the contracts fulfilled the requirements of the procurement strategy, he could not recall the details. I do not accept his evidence in this regard. It is my view that, in certain respects, what was proposed did not accord with what was outlined in the FBC. I consider that the problems – in particular with transfer of risk – should have been apparent at the time. Even if the view had been taken that it could, on some basis, be said that the necessary conformity with FBC was still there, I would have expected those present to have been able to recall the discussions even now if the issue had been discussed. The meeting of the Approval Committee was a pivotal one and led to tie undertaking a commitment of hundreds of millions of pounds. As such, at least the outline of the discussions would tend to stick in the participants’ minds even if the detail did not. The absence of any recollection is therefore telling.

12.89 I do not accept Mr Mackay’s evidence that the Approvals Committee ran through the contract or tested the material. The absence of any records of additional material or information being provided to the committee, the minute and the evidence of Mr Gallagher and Mr Renilson indicate that giving approval was a mere formality. I conclude that no material was before the Approvals Committee in addition to that narrated in the minute. There was no advance consideration of the issues to be decided and, when the committee met, it did not even scrutinise the limited materials available. It did not go beyond checking that the various documents actually existed and the assumption was that problems would have been ironed out in the TPB before matters reached the committee. It is apparent that it did not even check that the QA/QC process had been concluded as, had it done so, it would have been apparent that parts in relation to SP4 were missing. It does not appear that there was any discussion of the issues or the understanding of each committee member. If there had been any such discussion, I would have expected that the committee members would have had a greater awareness of the differences in their understanding of the position and how that could have a bearing on the issues that they were to consider. An example lies in Mr Mackay’s evidence that he was aware that changes of design principle, shape, form and outline specification would be at tie’s risk but that he nonetheless believed that there had been no change from the strategy in the FBC. If there had been a discussion in which all three members understood that tie bore this risk, it seems unlikely that, collectively, they could have concluded that the contract fell within the FBC. Such an exercise might have produced a situation in which they would have become aware of potential problems such that they would at least have started to ask appropriate questions. This would in turn have increased their awareness of the pitfalls of the contract. Instead, I consider that the members of the committee never applied their collective judgement to the issue of whether the contractual arrangements were within the terms of the FBC.

12.90 Having been able to form an impression of Mr Renilson in the course of his giving evidence to the Inquiry, and having heard the evidence from Mr Mackay, I do not accept that Mr Renilson would allow himself to be bullied into giving approval if he did not think that that was what should happen. I also reject the allegation that he was subjected to the bullying tactics to which he refers.

12.91 The result of the above is that the way in which the Approvals Committee performed its role meant that it provided no effective oversight of, or check on, the close process. It would have been preferable to have had a much simpler decision-making process that made it absolutely clear which person or body had the responsibility for being satisfied as to the appropriateness of signing the contract. This could not guarantee that there would not be a failure to identify problems, but I consider that clear responsibility would make it much less likely. It would have avoided the situation in which each person thought that someone else had determined that it was in order to proceed.

12.92 There were many elements or stages to the Close process that I have described in this chapter, but the merits of the position were not properly examined at any of them. There was a process-driven approach that relied on boxes being ticked rather than any independent assessment of the merits of the proposal. In some situations, it is reasonable to conclude that, provided that a process has been followed, all will be well. That will be the position where implementation of the process will inevitably rectify or at least detect problems. That is not the case here. Nothing in the various steps towards contract close required a person or persons with sufficient independence from those who had negotiated the contract to apply their minds to the issue of whether the contract conformed to the FBC, to identify what material was available and what conclusions ought properly to be drawn from it, to make a decision and, importantly, to keep a record of all that they had done. The necessity for keeping a record not only means that after the event it is possible to see how decisions were made and what information was available; it also acts as a discipline or focus to ensure that responsibilities are properly discharged. The lack of a substantive check on the contract meant that it slipped through the various close stages; the problems that had first arisen in December 2007 went unnoticed; and in May 2008 the last chance for CEC to make an informed decision as to whether it wished to take on the associated liabilities was lost.

12.93 The fact that all the steps in the close process were planned in advance is not, of itself, a problem. It would clearly not be practicable for the person or persons making the decision to sit and read the contract and all related material fully at the last minute and then make decisions. Here, as in other commercial transactions, there were a number of participating bodies from whom approval would be required. The only practical way in which such decisions can be taken is for the work to be done in advance and all the various strands brought together at the last minute. The very fact that it will not be possible for there to be detailed consideration of all the issues on the day means, however, that it is necessary that all parties involved have been fully informed, have fully studied the issue and have made a considered decision in advance of the completion day. That did not occur.

12.94 Would a more thorough approach have made any difference? As I have noted above, the argument is made by some of the Core Participants that the deal that was done was the only one available. Accordingly, unless CEC wanted to abandon the project, this is the contract that was going to be concluded. That, however, is not the point. In taking a decision to commit to substantial expenditure of public funds, it is necessary that it is taken in an appropriate and defensible way. I doubt that this was the only basis on which a deal could be done. However, even if it was, it is essential that any decision to spend public money is taken by politicians, accountable to the electorate or by their appointed delegate, on a properly informed basis and in the full knowledge of the likely cost. Otherwise, the very situation that arose with the Tram project will be created, in which there is disillusionment with the project and public outrage as to the cost.