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Chapter 13: CEC: Events During 2006 and 2007

Introduction

13.1 In the immediately preceding four chapters I have considered the evidence relating to events from the publication in 2005 of tie’s intention to seek tenders for the infrastructure contract (“Infraco contract”) to the appointment of Bilfinger Berger Siemens (“BBS”) as the preferred bidder and thereafter until contract close in May 2008. These chapters were concerned principally with the actions of tie Limited (“tie”), Transport Edinburgh Limited (“TEL”) and the Tram Project Board (“TPB”) during that period. This chapter and Chapter 14 (CEC: January–May 2008) will consider the actions of the City of Edinburgh Council (“CEC”) in respect of the Edinburgh Tram project (the “project”) between 2006 and 2008.

13.2 The respective roles of CEC and tie are outlined in the overview in Chapter 1 (Introduction and Overview). In short, CEC was the promoter, owner, funder and financial guarantor of the project, with grant support from Scottish Ministers, and tie was responsible for procuring and delivering it. CEC was the statutory body consisting of councillors who had the strategic role of determining policy, including budget priorities within their local authority, and deciding at all stages whether to proceed with the project. Its role should be contrasted with that of CEC officials who were responsible for advising councillors and implementing their decisions. Throughout the Report, that distinction is maintained, although the actions of officials are relevant to the extent that they influenced CEC decisions.

Draft Final Business Case

13.3 Mr Holmes, CEC’s Director of City Development, submitted a report for consideration of CEC at the Council meeting on 26 January 2006 [CEC02083547]. The report noted that it would be necessary to phase construction of the tram network, because the total estimated cost for both lines 1 and 2 was £634 million, in contrast to the estimated available funding of £535 million, being a £45 million contribution from CEC and £490 million (£375 million index linked) from the Scottish Ministers. The line from Edinburgh Airport to Leith Waterfront, via Haymarket and Princes Street, gave the greatest benefits and was the optimum first phase (phase 1a). The total cost of phase 1a was estimated at £429 million. The additional contingency for optimism bias requested by officials in Transport Scotland would take the estimate for construction to £484 million, which would be comfortably within the anticipated available funds of £535 million. Members accepted the recommendations in the report and approved the development of the Airport to Leith Waterfront sections of lines 1 and 2 as the first phase of the network, noting that the extension of tram line 1 from Haymarket via Roseburn to Granton Square (line 1b) would be within the first phase of development, providing that funding and construction costs permitted [CEC01891456].

13.4 Mr Holmes and Mr McGougan, CEC’s Director of Finance, submitted a joint report for CEC’s consideration at its meeting on 21 December 2006 [CEC02083466]. The report updated councillors on progress to date and sought approval of the draft Final Business Case (“FBC”) dated November 2006 [CEC01821403]. The estimated cost of phase 1a had increased from £484 million to £500 million. The Executive Summary of the draft FBC, attached to the report, contained the following observation in relation to cost estimates:

“Based on the estimating methodology used, the level of certainty and confidence associated with the updated estimate is considered to be relatively high. Nearly 98% of the costs have been estimated based on rates and prices from firm bids received, known rates applied to quantities or based on market rates applied to quantities derived from Preliminary Design. The level of confidence is reinforced by benchmarking against other tram schemes and the relatively high allowance for risk included in the estimate.” [CEC02083466, page 0028, paragraph 1.57.]

13.5 It was considered that there was a 90 per cent chance that costs would come in below the risk-adjusted level [ibid, pages 0028–0029, paragraph 1.58].

13.6 The report said that the following actions were required to maintain control over the capital cost of the project:

  • enabling works, including utility diversions, should be authorised to proceed on a timetable that would not disrupt the main infrastructure programme; and
  • negotiations with bidders should continue, with a focus on achieving a high proportion of fixed cost in the final contracted capital cost [ibid, page 0012, paragraph 4.32].

13.7 The report included a table (taken from the draft FBC) showing the principal milestone events in the final stages of the procurement and construction of the tram system. It was envisaged that utility diversions under the Multi-Utilities Diversion Framework Agreement (“MUDFA”) would commence in April 2007, approval of the FBC would be sought from CEC and from Transport Scotland in September 2007 and the Infraco contract and the tram vehicle supply and maintenance contract (“Tramco contract”) would be awarded in October 2007. Construction of phase 1a should commence in December 2007, and be completed in July 2010, with the line becoming operational in December 2010 [ibid, page 0015].

13.8 The most significant risks affecting the timeous completion of the project within budget were reported to be those arising from the advance utility diversion works, changes to project scope or specification and obtaining consents and approvals [ibid, pages 0007 and 0011, paragraphs 4.2 and 4.28]. The strategy for minimising such risks was part of the procurement strategy outlined in the Executive Summary of the draft FBC, including:

  • “Transfer design, construction and maintenance performance risks to the private sector.”
  • “Minimise the risk premia (and/or exclusions of liability) that bidders for a design, construct and maintain contract normally include. Usually at tender stage bidders would not have a design with key consents proven to meet the contract performance obligations and hence they would usually add risk premiums for this.”
  • “Mitigation of utilities diversion risk (i.e. potential impact of delays to utilities diversion programme on Infraco works).” [ibid, page 0032, paragraph 1.77.]

13.9 The above strategy would result in the System Design Services (“SDS”) contractor providing design up to the detailed design stage and obtaining all necessary approvals, with responsibility for both of these as well as consequential risks transferring to the Infraco contractor upon novation of the System Design Services contract (“SDS contract”). While it was expected that all design up to detailed design would be 100 per cent complete at the date of signature of the Infraco contract, tie was also seeking to complete the key elements of the detailed design prior to selecting the successful Infraco bidder in summer 2007, thereby reducing the design risk allowances normally included by contractors.

13.10 The draft FBC said that reduction in risk associated with the conflict between the diversion of utilities and the progress of the Infraco contract would be achieved by scheduling utilities work to start in 2007 and end in summer 2008. This would result in significant utilities diversion works being completed prior to commencement of “on-street” works by Infraco so that potential conflicts between the utilities and infrastructure works would be minimised. Any remaining time overlap could be managed so as to avoid programme conflicts on the ground [CEC01821403, page 0090, paragraph 7.77].

13.11 In relation to the Infraco contract, the draft FBC noted that the principal attributes of the procurement approach included the transfer of design liability “by novation of SDS contract into Infraco” as well as a “[l]ump sum price for delivery into service of the tram system” [ibid, page 0093, paragraph 7.97]. It was noted that the creation of the Infraco contract as a “lump-sum contract” transferred the pricing risk to the private sector, and basing the lump-sum price on SDS detailed design significantly reduced the scope and performance risk pricing premium that would otherwise be necessary in a conventional design and build or private finance initiative approach [ibid, page 0098, paragraph 7.125].

13.12 I note in passing that the report to CEC on 21 December 2006, and the draft FBC, made no mention of the difficulties and delays with design that, as discussed elsewhere, had already become apparent by this time. The draft FBC was approved by CEC on 21 December 2006 [CEC02083464, page 0006, paragraph 2(b)]. CEC also approved the continuation of contract negotiations for the award of the Infraco contract and the Tramco contract, subject to there being no significant adverse changes to the figures upon which the business case was based.

Concerns expressed in the first half of 2007

13.13 Various senior officials within CEC had responsibility for the project, including Mr Aitchison, the Chief Executive. He chaired an Internal Planning Group (“IPG”), to ensure that there was adequate internal co-ordination within CEC in respect of the project. The IPG was attended by senior officials in the Council with responsibilities for the Tram project, namely: Mr Aitchison, Mr Holmes, Mr McGougan, Mr Inch (Director of Corporate Services) and Ms Lindsay (Council Solicitor). A number of more junior (albeit experienced) officials in relevant departments assisted by briefing their superiors and attending meetings as required. As was mentioned in paragraph 4.28, these junior officials came to be known as the “B team”, which included Mr Fraser (City Development Department), Ms Andrew and Mr Coyle (Finance Department) and Mr C MacKenzie and Mr N Smith (Legal Services). Mr Coyle was a finance official who operated as a finance manager in the City Development Department.

13.14 Throughout 2007, members of the “B team” raised concerns in relation to the project. In April 2007, Mr Fraser and Ms Andrew responded to comments by Transport Scotland on the draft FBC [CEC01559060; CEC01559061]. As well as largely agreeing with them, Mr Fraser and Ms Andrew made a number of additional comments, including that:

“CEC have some concerns over how project is being managed. Need to
build in independent ‘Project Assurance’ reporting to TPB, to give comfort
on tie-produced reports” [ibid, page 0003].

13.15 They agreed with the comment by Transport Scotland that there was a general concern that the programme was tight, with little float, and only proceeded on a “best case” scenario, and they added:

“We are also concerned by the drive to achieve milestones prior to completion of critical activities. For example, failure to complete detailed design before commencing MUDFA is likely to cause contract variations and substantial additional costs. This will be compounded if Infraco is also let before design is complete. There is also a risk that Infraco could be delayed by MUDFA delays due to incomplete designs. All delays and changes increase costs and threaten quality. It is also worth noting that the procurement strategy required advanced design and diversions to ‘derisk’ the project – commencing MUDFA and potentially Infraco prior to design completion is potentially building that risk back into the project. TIE should consider whether it is necessary to review the programme, build in more slack and if necessary delay project completion.” [ibid, page 0007.]

13.16 Ms Andrew gave evidence that it was good practice to obtain independent project assurance. Her evidence in that regard was supported by the requirements of Office of Government Commerce (“OGC”) PRINCE2 project management guidance, which will be mentioned in Chapter 23 (OGC and Audit Scotland). Moreover, she did not consider that those sitting on the TPB, or CEC officials, had the necessary experience and expertise to check independently the accuracy of what was being reported by tie.

13.17 Ms Andrew’s concern about the need for independent project assurance was heightened by her views about the project itself. In particular, she considered that slippage in the SDS contract and MUDFA indicated deficiencies in tie’s ability to manage contractors and to deliver projects on time and within budget. She considered that tie’s management of other capital projects (eg Ingliston park
and ride, and Fastlink) did not compare favourably with similar projects managed directly by CEC. She was also concerned that tie was over-optimistic and too
quick to dismiss legitimate concerns raised by CEC and Transport Scotland.
She had reservations about tie’s transparency and co-operation with CEC
officials [PHT00000005, pages 20, 25–26, 63–65 and 92–93; TRI00000023_C,
pages 0020 and 0029].

13.18 Ms Andrew expressed her concerns in a briefing paper provided to Mr McGougan for the meeting of the IPG on 17 April 2007 [CEC01559075].
Her greatest concern was the expected delay in MUDFA of five months, extending to 11 months if line 1b was to be undertaken. While this would have cost implications, tie had not reported on this. Her comments on programming were in the following terms:

“As you know key parts of the programme are slipping (notably detailed design and MUDFA) and I, along with colleagues in City Development, am becoming increasingly concerned on the impact on costs.

“The procurement strategy was founded on the basis that the design was done in advance to ‘derisk’ the project and therefore reduce the risk premium built into the Infraco and Tramco and MUDFA contract prices. Similarly utilities diversions were to be done in advance to ‘derisk’ Infraco. This process meant that risks were being retained by tie to manage and potentially abortive design and diversion costs have been incurred as this was required to reduce costs and risks in the overall project.

“However, what has happened is that the MUDFA contract has been let and will shortly commence in earnest with detailed designs only 50% complete, due to SDS slippage. This means that MUDFA is likely to take longer than planned and could require numerous variations. This will undoubtedly lead to claims from the contractor. The contract price for MUDFA is £45m with a risk element taking the total cost to £61m (it should be noted that the risk element is for unforeseen diversions, not contract mismanagement!). City Development (unofficially) would not be surprised if the final cost of MUDFA was as high as £100m.

“Infraco is scheduled to be let by 30th September. If this is also let without detailed design in place, tie could be leaving us open to much larger claims. There is also the risk that as MUDFA has started late with inadequate designs that it could delay Infraco, leading to further claims. Given that the Infraco contract is about £300m, a 10% [cost] overrun could cause costs to rise by £30m.

“The TPB need to be considering these issues urgently.”
[ibid, page 0003.]

13.19 Ms Andrew’s concerns, shared by Mr Fraser, were clearly legitimate and were of such significance that they merited a considered response and action to address them. However, she gave evidence, which I accepted as credible, that she did not feel that her concerns were being properly addressed by the TPB. Rather, she would raise issues one month and then, in the next month’s papers, nothing would seem to have changed [PHT00000005, page 44]. Further support for the existence of concerns about the project in the first half of 2007 can be found in Mr C MacKenzie’s evidence that although tie repeated a “mantra” that the project was “on time and on budget”, from about late spring into summer 2007 it was becoming apparent to him, and other officials in CEC, that that was not the case [PHT00000026, page 5]. As will be noted later in this chapter, their fears were realised to the extent that the programme anticipated in paragraph 13.7 above was not achieved. In particular, the contract was not awarded in October 2007 and construction did not start in December 2007.

The withdrawal of Transport Scotland

13.20 Following a debate and vote in the Scottish Parliament on 27 June 2007, the Scottish Ministers announced that funding for the Tram project would be capped at £500 million, with any cost overrun being borne by CEC. As was noted in Chapter 3 (Involvement of the Scottish Ministers), this was not a material change in the funding arrangements, as the original offer of a grant of £375 million had been index linked and capped. When rounded up, that produced the figure of £500 million at 2007 prices. Of more significance was the reaction of the Cabinet Secretary (Mr Swinney) to the parliamentary vote. He instructed Transport Scotland to “scale back” its direct involvement in the project, including relinquishing its seat on the TPB and ceasing to attend TPB meetings in any capacity. Instead, Transport Scotland would meet CEC on a four-weekly basis in order to receive a progress report on the project, and CEC was to provide confirmation, on a quarterly basis, that the grant conditions were being complied with. Furthermore the grant conditions were varied so that there was less scrutiny of the project by Transport Scotland. For example, there was no longer a requirement for Transport Scotland to approve the FBC [letter dated 2 August 2007 from Dr Reed, Chief Executive, Transport Scotland, to Mr Aitchison – CEC01566705]. This was considered in more detail in Chapter 3 (Involvement of the Scottish Ministers).

13.21 In paragraph 3.125 I referred to the disappointment of various CEC officials about the withdrawal of Transport Scotland from the project and their various descriptions of consequential adverse consequences for CEC. For the purposes of this chapter it is useful to repeat these concerns. It left a gap in expertise and experience that CEC was unable to fill because it was hard to replicate the input of a national organisation [Mr Aitchison PHT00000041, pages 71–72]; Transport Scotland had brought experience in relation to major projects from the client’s perspective, which was not matched elsewhere, and the individuals involved had made significant contributions to the general discussion and debate; CEC had been reliant “[t]o a considerable extent” on Transport Scotland’s experience and expertise in delivering major transport infrastructure projects. CEC had not been able to fill the gap in experience and expertise left by Transport Scotland’s withdrawal [Mr Holmes PHT00000042, pages 2–4]; Transport Scotland had provided an additional check on tie but after its withdrawal from the project its role changed to that of simply funder [Mr McGougan ibid, pages 135–137; TRI00000060_C, page 0146]. Prior to its withdrawal, Transport Scotland, representing Scottish Ministers as the major funder of the project, had taken the lead role in scrutinising the capital costs and bids. It had a wide pool of specialists and access to experience that had been available to CEC, but its withdrawal greatly increased the challenges on CEC, which did not have the same level of expertise or resources with which to scrutinise the project [Ms Andrew PHT00000005, page 49; TRI00000023_C, pages 0013 and 0020].

13.22 Following the withdrawal of Transport Scotland, Mr Inch produced a briefing paper for Mr Aitchison on the governance arrangements for tie, in which he expressed a number of concerns [CEC01566497]. tie had no assets but had procured contracts in its own name with little or no input from CEC, although CEC indemnified it in respect of all sums due under the various contracts. The paper noted that although there was a general operating agreement between CEC and tie, dealing with various transport projects, there was no operating agreement specific to the Tram project, with the result that:

“there is no satisfactory detailed level of control over TIE and its activities as ‘agent’ for the Council in matters such as procurement, contracting and incurring expenditure” [ibid, page 0001, paragraph 2.3].

13.23 It was also noted that, increasingly, CEC officials had found it necessary to take a much closer and more proactive role in seeking to protect CEC’s interests and that
“[i]t cannot always be said that TIE’s close focus on the tram project, and the Council’s wider interests, are at one” [ibid, page 0001, paragraph 2.4]. The current governance arrangements were noted to be “complex”. The report concluded:

“Against the background of the funding cap set by Transport Scotland, and a greater financial risk to be borne by the Council, it is imperative that far more rigorous financial and governance controls are put in place by the Council.”
[ibid, page 0002, paragraph 2.6.]

13.24 In relation to the respective interests of CEC and tie, Mr C MacKenzie (who had drafted the briefing paper mentioned in paragraph 13.22 above) gave evidence that CEC had a number of different roles and functions in relation to the Tram project that it required to consider. He said,

“Not only was it the sponsor and promoter of the tram project, but it was also going to be giving a financial guarantee.

“It [also] exercised various statutory powers such as the Planning Authority, Roads and Bridges Authority.” [PHT00000026, page 10.]

In contrast, tie was focused only on delivering the Tram project.

13.25 By a report dated 15 August 2007, for CEC’s consideration at its meeting on 23 August 2007, Mr Aitchison advised councillors of recent developments in relation to the Tram project, following the vote in the Scottish Parliament on 27 June and the subsequent confirmation by Scottish Ministers that work on the project should continue [CEC02083490]. He sought CEC’s approval for proposed future governance arrangements. The report noted that approval for the project to proceed and the revised funding situation had highlighted the need to re-assess the current governance arrangements associated with the project. These included the relationship between CEC, TEL and tie, the role of the TPB and the necessity for the appropriate involvement of councillors in decisions associated with the project. Against the background of the funding cap set by Transport Scotland, and the greater financial risk that would now be borne by CEC, he considered that it was imperative that rigorous financial and governance controls were in place to manage the next crucial phases of the project. CEC’s authority was sought to conclude operating agreements with tie and TEL. It was recommended that a Tram Sub-Committee (being a sub-committee of the Council’s Environmental and Infrastructure Committee) be set up to review and oversee decisions in respect of the Tram project. At its meeting on 23 August 2007, CEC noted the contents of the report, instructed the Council Solicitor to conclude Operating Agreements with tie and TEL and established a

“subcommittee of the Transport, Infrastructure and Environment Committee with a remit to review and oversee decisions with respect to the Tram Project” [CEC01891408, Part 2, page 0031, paragraph 22].

13.26 To the extent that the report implied that the decision of Scottish Ministers to cap the grant at £500 million revised funding arrangements and transferred greater financial risk to CEC, it is incorrect. As was discussed in Chapter 3 (Involvement of the Scottish Ministers), both CEC and tie were aware, long before the election in 2007, that the proposed funding of £375 million with indexation was capped. When indexation was applied to £375 million, the appropriate sum in 2007 was £490 million, which was rounded up to £500 million. Although the Chief Executive’s recommendation to review governance arrangements was predicated upon a transfer of greater financial risk to CEC, I consider that the decision of Scottish Ministers to withdraw the technical support that officials in Transport Scotland had hitherto provided to CEC and tie in relation to the project was of more significance. It was essential in those circumstances that governance arrangements should be reviewed. I also consider that it was also important to replace the technical expertise that Transport Scotland had provided to CEC before its withdrawal from the project in scrutinising the capital costs and bids. As that expertise did not exist at CEC, the replacement of that expertise could be provided only by the private sector. In particular, it was necessary to instruct a suitably qualified independent firm of multi-disciplinary engineering, transport and project management consultants to scrutinise the FBC when it became available, to scrutinise the evolving Infraco contract and generally to advise CEC on its risk exposure. Although that was not considered at this stage, it later became apparent that there was the need for such expertise in the context of reviewing CEC’s risk exposure. This will be discussed in more detail in paragraph 13.61 below and subsequent paragraphs. However, I consider that, through its officials, CEC ought to have considered the need to replace the technical expertise of Transport Scotland, particularly in view of officials’ awareness of the adverse consequences for CEC of its withdrawal, mentioned in paragraph 13.21 above.

13.27 Mr Aitchison submitted a subsequent report to the Council meeting on 20 September 2007, in which he referred to its decision on 23 August to establish a Tram Sub-Committee, with a view to enhancing councillors’ oversight of the project, and he recommended that the sub-committee should meet every six-to-eight weeks. His recommended remit for the sub-committee included the receipt of reports on progress of the project from CEC officials, TPB, tie and TEL as well as “regular reports from the Director of City Development on the performance of tie with respect to the Operating Agreement” and the regular review of “the risk profile for the Council” [CEC02083455, page 0002, paragraph 13]. CEC approved the proposed remit for the sub-committee [CEC01891423, Part 1, page 0018, paragraph 8].

13.28 In the event, however, and as will be discussed in Chapter 22 (Governance), the Tram Sub-Committee met infrequently and did not exercise the oversight and scrutiny role intended for it. It did not receive regular reports on progress of the project or on the performance of tie. Thus the need for effective governance as a check on tie’s assessment of capital costs, including CEC’s risk exposure, was not achieved. As will be noted below, CEC also failed to replace the expertise of Transport Scotland in scrutinising CEC’s financial exposure.

The culture in the department of the Council Solicitor

13.37 The evidence available to the Inquiry also caused me to consider the culture and the working relationships within the Council Solicitor’s department in the context of the tram project. I recognise that the Council Solicitor had numerous responsibilities and managed a large department but my comments about the culture and working relationships are confined to those involving Mr C MacKenzie, Mr N Smith and Ms Lindsay. There was evidence available to the Inquiry that Ms Lindsay provided some support to Mr C MacKenzie [for example, CEC01400013; CEC01400439] and I accepted that evidence. However, the examples cited in the following paragraphs suggest that there was a lack of mutual respect between the Council Solicitor, on one hand, and Mr C MacKenzie and Mr N Smith, on the other, which was not conducive to the efficient performance of their professional obligations to provide legal advice to, and act in the best interests of, CEC. This impression will be reinforced in Chapter 14 (CEC: January–May 2008), in which I consider the action taken in relation to the draft SP4 of the Infraco contract.

13.38 By email dated 27 August 2007, Mr C MacKenzie advised Mr N Smith that he had been “directed” by Ms Lindsay to instruct him to read through the draft Infraco contract that had been supplied by tie, with a view to reporting “on the implications for the Council on risks, liabilities, step-in rights etc”. The report was to be produced within two days and was for internal purposes only [CEC01567527]. This email was copied to Ms Lindsay and Mr Squair, a senior solicitor with CEC.

13.39 From Mr N Smith’s reply, by email dated 28 August 2007, it appears that the documentation sent to him by Mr C MacKenzie consisted of almost 1,000 pages, which Mr C MacKenzie expected him to review and thereafter prepare a report within 36 hours. Not surprisingly, Mr N Smith thought that this was an impossible task. Moreover, he stated that he agreed with the comment in Mr C MacKenzie’s previous email to Ms Lindsay that CEC’s Legal Services department had neither the experience nor the manpower to review the contract documentation. Mr N Smith continued:

“As discussed with you at length, anything less than a comprehensive review of risks and obligations would not in my view be in the Council’s best interests and I would be failing in my professional obligations if I did not raise this issue with you.” [CEC01564795]

13.40 Mr N Smith stated that, as a result, he would not be able to comply with Mr C MacKenzie’s request to review the contractual documentation, but would assist with “other more appropriate matters” [ibid] in relation to the Tram project. Although this email was copied to Mr Squair, Mr N Smith did not send a copy to Ms Lindsay. The Inquiry has found no written intimation of this decision to Ms Lindsay. Mr C MacKenzie’s evidence about telling Ms Lindsay was not clear, but he doubted that he “would have left it lying because obviously there was a timescale put on it by Gill Lindsay in her instruction” [PHT00000026, page 44]. I accepted Ms Lindsay’s evidence that she was unaware of this email until she received a copy of it from the Inquiry for comment. I also consider that it is unlikely that Mr C MacKenzie told her of Mr N Smith’s response, because I suspect that she would have taken some action, particularly as she said that Mr C MacKenzie had told her that he was having difficulty in getting Mr N Smith to produce work [Ms Lindsay PHT00000027, pages 48–49].

13.41 It is a poor reflection on the working relationships within CEC’s legal department that Mr N Smith elected not to copy his email to Ms Lindsay when she had been a recipient of the originating email from Mr C MacKenzie. It is also unsatisfactory that Mr C MacKenzie did not advise Ms Lindsay of Mr N Smith’s response but was content to rely upon the non-production of the report as sufficient intimation to the Council Solicitor. This incident also suggests poor management by Ms Lindsay. Although she never received the required report from Mr N Smith, it does not appear that she followed up her request, because she was unaware of Mr N Smith’s decision contained in his email until the Inquiry sent her a copy of it.

13.42 The discussions surrounding the letter of engagement of DLA and the action taken in that respect provide another indication of the poor relationships within the legal department and its management.

13.43 Following a discussion about the issue of obtaining independent legal advice, Ms Lindsay sent Mr C MacKenzie an email dated 24 August 2007, in which she stated:

“We agreed that the letter [of engagement] from DLA would be revised and finalised this week. Please ensure this is actioned without further delay. I will not be utilising time in addition to meetings to revisit issues. The DLA letter must be concluded now.” [CEC01567522, page 0001.]

13.44 The issues to which she was referring related to the need for independent advice and her view that it was unnecessary. From that email it was clear that Ms Lindsay considered the completion, and presumably the signature, of the final version of the letter of engagement to be important and urgent.

13.45 By email to Ms Lindsay, dated 27 August 2007, Mr C MacKenzie noted that he had been instructed to revise the draft letter by DLA, notwithstanding his concerns about the need for CEC to obtain independent legal advice [ibid]. He proposed certain comments and amendments to DLA’s draft letter.

13.46 It appears that the proposed letter from DLA to CEC confirming the basis on which DLA agreed to provide advice to CEC was never agreed or signed. That is despite further emails from Mr C MacKenzie to Ms Lindsay in late 2007 and early 2008, asking whether a signed version of the letter was available [see emails dated 20 and 21 September 2007 from Mr C MacKenzie to Ms Lindsay, CEC01567660; email dated 7 December 2007 from Mr Fitchie to Mr C MacKenzie, CEC01545855; and email dated 18 January 2008 from Mr C MacKenzie to Ms Lindsay, CEC01400601]. It appears, from the emails dated 20 and 21 September 2007, that in response to a request for a copy of any signed letter of instruction Ms Lindsay cryptically responded: “Present situation is as advised re DLA at present.” [CEC01567660, page 0001.] Mr C MacKenzie did not understand that response, and he told Ms Lindsay so. On 18 January 2008, Mr C MacKenzie was still asking Ms Lindsay whether a duty of care letter was in place. He also gave evidence that he never saw an agreed letter of engagement [PHT00000026, pages 33–37]. CEC did not produce any signed letter to the Inquiry and, indeed, Mr N Smith (who, by the time of the Inquiry, had become CEC’s Head of Legal Services) gave evidence that CEC had never found a signed letter setting out the agreed basis on which DLA would act for CEC [PHT00000005, page 147].

13.47 Counsel to the Inquiry suggested to Ms Lindsay that, on receipt of Mr C MacKenzie’s email dated 18 January 2008, she would have been aware that the terms and conditions on which DLA had agreed to act on behalf of CEC had not been agreed and signed. Ms Lindsay denied that suggestion and stated that Mr C MacKenzie was very aware of the arrangement that had been made and that she probably regarded Mr C MacKenzie’s email in January as simply another attempt to open up what had already been agreed (ie that DLA would advise CEC as well as tie) [PHT00000027, pages 44–46].

13.48 I reject Ms Lindsay’s evidence in that regard. I consider that it is perfectly clear from the terms of Mr C MacKenzie’s email of 18 January 2008 that he was not aware whether an agreement had been reached with DLA relating to the provision of legal services to CEC and, if so, what its terms were. The purpose of his email was to seek clarification of that from Ms Lindsay, together with a copy of any signed letter or agreement in that regard for record purposes. The absence of any signed letter from CEC’s records justifies his concerns in that regard. It is disappointing that Ms Lindsay sought to dispute in her evidence what was the very clear meaning of Mr C MacKenzie’s email. I consider that this indicated her reluctance to admit what was essentially a failure on her part, as Council Solicitor, to ensure that a signed letter was obtained, setting out the agreed terms on which DLA would provide advice to CEC. That failure was particularly remarkable given the previous omissions to obtain such a letter in 2003, and again in 2005.

13.49 The foregoing paragraphs call into question the adequacy of internal due diligence within the Council Solicitor’s department. Ms Lindsay ought to have been aware that she had not signed any letter of appointment on behalf of CEC. Even if she had inadvertently omitted to finalise and obtain a letter of engagement signed by both parties, she ought to have been alerted to that omission by Mr C MacKenzie’s emails to her, mentioned in paragraph 13.46 above. Had she given proper consideration to them, she would have noted her omission to sign the letter and could have rectified it. Rather, her unfounded dismissal of his request for a copy of the signed letter of engagement as simply another attempt to open up discussion about the need for independent legal advice exposed CEC to the risk that DLA might claim that it was not bound by the draft letter of appointment.

13.50 As it transpired, that risk was avoided not by any action on the part of the Council Solicitor or departmental procedures but by a concession given to the Inquiry by senior counsel for DLA that the position of DLA was that it considered itself bound by the draft letter sent with Mr Fitchie’s email of 16 August 2007, regardless of whether the letter was signed [ibid, page 34]. From CEC’s perspective, however, it is self-evident that a signed letter ought to have been obtained that clearly set out the agreed basis on which DLA provided advice to CEC. That is particularly so given the evidence of Ms Lindsay herself. In August 2007, when she received Mr Fitchie’s draft letter, Ms Lindsay was of the view that it should be revised to provide greater clarity on certain matters, including express terms that DLA was to act in, and take into account, the best interests of both tie and CEC and that DLA would bring any conflicts of interest to the attention of CEC [ibid, pages 40–42].

Discussion

13.51 Although legal officials in CEC reported on the existence of high-level risks relating to existing delays in design, it appears that they did not review or advise on the detailed terms of the evolving Infraco contract during 2007, and accordingly did not consider any risks arising from them. That approach can be contrasted with Mr C MacKenzie’s consideration of SP4 at a much later stage in 2008, as will be discussed in Chapter 14 (CEC: January–May 2008). The result was that the only assessment of risks arising from the provisions of the draft Infraco contract that was available to CEC emanated from tie and DLA.

13.52 The culture in CEC’s legal services division was not conducive to the efficient performance of its duties. Although I understand Mr N Smith’s reaction to Mr C MacKenzie’s email dated 27 August 2007, his failure to copy it to Ms Lindsay or to speak to her about his concerns is indicative of poor communication in the department. The same can be said for Mr C MacKenzie’s evidence about whether he told Ms Lindsay about Mr N Smith’s decision not to accept her instruction. He could not recall doing so, but “probably would have” [PHT00000026, page 44]. I have reached the conclusion that he did not tell her, otherwise it is probable that he would be able to have recalled doing so, as well as her reaction to Mr N Smith’s refusal to comply with her instructions. Moreover, as he had received a written instruction from Ms Lindsay to direct Mr N Smith to undertake the work specified in his email to Mr N Smith, and as the work was of importance to the Council Solicitor, I would have expected Mr C MacKenzie to have advised Ms Lindsay of the position in writing.

13.53 The failure of Mr N Smith to produce the required report at any time, far less within the impossible timescale prescribed in the email, reflects badly on the management in the department. Although Mr C MacKenzie was Mr N Smith’s line manager, and was aware of his refusal to act upon the instruction, he took no further action to ensure that Mr N Smith produced the report, albeit later than had been requested by the Council Solicitor. Moreover, although I have accepted Ms Lindsay’s evidence that she was not aware of Mr C MacKenzie’s and Mr N Smith’s position that, as a matter of principle, they would not review or advise on the Infraco contract, I consider that, as Council Solicitor, she ought to have been aware of the work that the solicitors within her department were (and were not) undertaking, particularly given the high profile, and financial risks, of the Tram project. The fact that Ms Lindsay was not aware of the position of Mr C MacKenzie and Mr N Smith on such an important matter is surprising and indicates a lack of proper communication in, and management of, the legal services division.

13.54 It is also surprising that Mr Inch and Mr McGougan appear to have been under the mistaken impression that CEC’s legal services division, including Ms Lindsay, was undertaking a greater review of the contract documentation than was, in fact, the case. That might also indicate communication failures, but I am unable to conclude who should bear responsibility for any such failures. On any view, however, had Council directors been aware of the limited role that the Council Solicitor and the solicitors in her department were undertaking in respect of reviewing the main contracts, they might have wished to reconsider whether an independent legal review of the main contracts was required in order to protect CEC’s interests properly.

Concerns about the QRA process

13.55 tie followed a quantitative risk analysis (“QRA”) process that involved tie entering the estimated cost and likelihood of more than 400 risks contained in the project risk register into specialist computer software. They then carried out a ‘Monte Carlo’ analysis in which software was used to undertake a range of detailed calculations to arrive at an assessment of probabilities of various out-turn costs from which a risk allowance could be derived for the project assuming a particular percentage probability.

13.56 As will appear from the paragraphs that follow, the difficulty for CEC officials involved in the oversight of the QRA process was that they were not in a position to verify independently whether the “inputs” to the QRA process and, therefore, the “outputs” (ie the risk allowance) were correct.

13.57 Mr McGougan gave evidence that CEC officials were not expected to have
100 per cent understanding of all the risks in the project that might arise, but were expected to satisfy themselves that a proper process had been undertaken, ie that, in general terms, risks (and risk owners) had been identified and mitigation plans put in place. CEC officials had an oversight of the QRA and the risk process, and the TPB considered the risk register on a regular basis. He expected the QRA process and methodology to continue to be followed until contract award [PHT00000042,
pages 152–156].

13.58 Ms Andrew gave evidence that she was reliant on tie to ensure that the figures that it put into the QRA were correct. The key to the analysis was whether the inputs were correct. For the QRA to be an effective tool, it had to include all the project risks, and these risks had to be correctly quantified in terms of financial value and likelihood. If the inputs to the QRA were not correct, the risk allowance was worthless.[19] She felt that in the Tram project there was not the sort of proactive risk management process that she had experienced in other projects (ie whereby the risks, mitigation measures and the effectiveness of the mitigation measures were regularly reviewed and updated) and, instead, the whole focus appeared to be on the “black box” of the QRA, and the outputs from it [PHT00000005, pages 102–106; TRI00000023_C, pages 0007 and 0019].

13.59 Ms Andrew also stated that although the QRA in the Tram project seemed to provide a comprehensive list of the risks, she was concerned that the impact or likelihood of some of the more significant risks might have been understated. That could then have led to the understatement of the risk allowance when the statistical modelling exercise was carried out. She was also concerned that the analysis might not have taken account of risks being linked (eg if risk A occurred, the probability of risk B occurring might increase). Another of her concerns was that the management of each of the risks was not always described and she could not see a process for monitoring the effectiveness of mitigation measures [ibid, pages 0028–0029].

13.60 Mr Fraser and Mr C MacKenzie gave similar evidence to the effect that they did not know how the figures in the QRA had been arrived at and, essentially, had to rely on what tie told them. There was no independent review of tie‘s analysis and quantification of risks [PHT00000004, pages 84–85; PHT00000026, page 107].

Independent review of risk

13.61 Having regard to the above concerns, and in light of the lack of internal expertise in CEC to review tie‘s risk assessment, Ms Andrew and Mr Fraser recommended to their directors, Mr McGougan and Mr Holmes respectively, that CEC should instruct a suitably qualified independent firm of multi-disciplinary engineering, transport and project management consultants to carry out a detailed review of the risks arising to CEC from the Tram project, the quantification of these risks and whether the existing risk allowance was adequate.

13.62 An email dated 23 August 2007 from Ms Andrew to Mr McGougan explained:

“We are looking for an analysis of the retained risks from the contract and what is the potential financial impact, should they materialise.

“We don’t think we have sufficient internal resource in CEC to get this, and Andrew [Holmes] and Gill [Lindsay] are both reluctant to engage external advisers …

“Having said that, DLA have written to say they will also act on the Council’s behalf and will produce a risk matrix, which will help. However, external advice will probably give us greater comfort, particularly as DLA are using a pro forma contract, which is unfamiliar to CEC lawyers.

“What is your view on this, and how do you think we should approach tie? We are not seeking to challenge tie’s work, simply to get a better idea of the amount of Head room we need.” [CEC01560815]

13.63 A subsequent email dated 28 August 2007 from Ms Andrew to Ms Lindsay stated that Mr McGougan was keen that CEC was able to understand the risks and quantify them as a matter of urgency [CEC01560895].

13.64 Ms Andrew gave evidence that, at the stage of the draft FBC, Transport Scotland had commissioned a similar external review and had found it useful. CEC did not have the skills in house to review tie’s work, and tie had not engaged independent advisers to review its own assumptions. Ms Andrew understood that Mr McGougan and Mr Holmes were in agreement on instructing external experts to review the project [TRI00000023_C, page 0027].

13.65 Mr Fraser gave evidence that:

  • the scale and complexity of the Tram project were greater than those of any other project in which members of the “B team” had previously been involved;
  • none of the members of the “B team” had been involved in the project from the start;
  • they did not have access to confidential documents; and
  • they had to rely on advice from tie.

13.66 Mr Fraser found it slightly uncomfortable to be in that position, given the importance and value of the project and the main contracts. He felt it important that members of the “B team” understood the risks with regard to legal issues, contract matters and financial issues, so that they could better inform the directorate on what they thought were salient matters. He was of the view that an independent review by external consultants was required in order to provide the best information to councillors, who would ultimately be asked to decide whether to authorise tie to enter into the contracts [PHT00000004, pages 30 and 43].

13.67 The matter was set out in a report to the IPG on 30 August 2007, as follows:

“Currently tie is preparing the final business case. The outcome of the Government decision to make the Council ‘Funder of Last Resort’ significantly changes the risk profile of the Council. Consequently it will be incumbent upon the Council working with tie to determine the risks inherent in the bespoke Infraco contract … and assess what headroom is to be recommended for budgeting purposes. The time available to do this is very short, because the FBC requires to be reported to the Full Council on 25 October 2007.

“It can be anticipated that there will be scrutiny from members of all parties as to the affordability and liability of entering into this contract. The Council currently does not have this information, as it was not party to the development of the Infraco contract nor negotiations. Guidance is sought as to the procurement of resources necessary to provide a risk assessment and analysis of the Infraco contract for the Council …” [CEC01566861, pages 0008–0009.]

13.68 In an email dated 31 August 2007, Ms Andrew noted that the cost of procuring external consultants to analyse and quantify the risks in the tram business case, in order to give some comfort on the work carried out by tie and its advisers, was unlikely to exceed £25,000 [CEC01566895].

13.69 In an email dated 12 September 2007, Ms Andrew advised Ms Clark, of tie, that the Directors of both City Development and Finance supported the procurement of external advisers to advise upon and quantify the risks to CEC from the outstanding contracts. Ms Andrew stated in her email that the procurement of external advisers was not a criticism of the expertise or work carried out within tie, but simply a recognition that CEC officials did not have the appropriate experience to perform their monitoring/assurance role, particularly given the extent of the risks involved [CEC01630955].

13.70 On 18 September 2007, CEC published an Invitation to Tender Notice for the appointment of external consultants to review and quantify the risks to CEC arising from the proposed Infraco contract and Tramco contract [TIE00678245].

13.71 Mr Crosse, of tie, gave evidence that there was some unhappiness at tie when the advertisement was placed. He stated that although CEC had created tie as a project management company, the advertisement suggested that CEC was doubting tie [TRI00000031_C, page 0048, paragraph 144]. An internal tie email dated 19 September 2007 from Mr Bissett recorded that unhappiness [CEC01643076]. In his email, Mr Bissett stated that a review by an external firm was an over-the-top and expensive option. The brief for the external consultants had been published at a very sensitive time and could be used by anyone wishing to attack the project when authorisation was sought for the FBC at the CEC meeting on 25 October. Mr Bissett’s email stated that this was:

“[a] shambles that should have been strangled at birth, or at least a week ago. We need to control this process from this point on and make sure the scope and programme are aggressively driven to minimise the wasted effort and disruption to the main programme.” [ibid, page 0001.]

13.72 By email dated 24 September 2007, Mr Fraser advised Ms Clark that the Directors of City Development and Finance were in agreement with the appointment of Turner & Townsend to fulfil the brief attached to Mr Fraser’s email [CEC01652668; CEC01652669]. Although CEC would commission the report from Turner & Townsend, the mechanism for instructing and paying for the report was for CEC to require tie to do so, because all payments were made by tie with funds requisitioned from CEC [Mr Fraser PHT00000004, pages 43–44].

13.73 The nature of the review envisaged by CEC officials is apparent from the expectation, expressed in the brief, that it would be undertaken “by qualified professionals with experience of similar large-scale infrastructure projects in the transportation sector” [CEC01652669, page 0002]. The proposed timescale at that time for external consultants to carry out a review and prepare a report was relatively tight, given that there was a period of only a few weeks in which to provide the report before the CEC meeting on 25 October 2007. Mr Fraser gave evidence, however, that the timescale was sufficient at least to obtain an initial view from the external consultants where there was agreement with tie‘s position and where there was a difference of opinion, if any. He confirmed that it would have been open to CEC officials (or the consultants) to have concluded that further work required to be done. In addition, a further, or follow-up, review could have been instructed as the contracts became more final, given that it was an evolving process [PHT00000004, page 42]. Indeed, in Mr Fraser’s email of 2 September 2007 he noted that there would require to be provision for a final review before the report to Council on 20 December 2007 [CEC01566895].

13.74 As with an independent legal review, I consider that a further review of tie‘s risk assessment would have been required when the terms of the draft contracts had been agreed but before the contracts were signed, particularly if, as occurred, there were substantial changes to the documentation after the first review had been undertaken.

13.75 A stage 3 OGC “gateway” review of the Tram project was due to take place around this time. It appears that tie took the initiative in contacting the OGC review team to ask whether it could also undertake a review of the risks to CEC arising from the project (rather than that review being undertaken by a firm of external consultants,
as had been CEC’s intention).

13.76 Despite Mr Fraser’s email dated 24 September 2007 advising Ms Clark that CEC intended to instruct Turner & Townsend to undertake the external review, and requesting contact details to enable him to progress the commission, Ms Clark
sent an email dated 27 September 2007 to Mr Hutchinson, the leader of the OGC review team, asking whether his team would also be able to undertake a separate review of risk on behalf of CEC [CEC01567757]. By email dated 28 September 2008, Mr Crosse advised Mr Fraser that the OGC review team had agreed to add a separate assignment to its remit to undertake a risk review on behalf of CEC and that, as soon as the detail had been sorted out, he would stand Turner & Townsend down [ibid].

13.77 By email dated 2 October 2007 to Mr Grieve (CEC Interim Head of Transport), Ms Andrew stated that she had discovered that tie had engaged the OGC team to review risk, and not Turner & Townsend as had previously been understood [ibid].
Ms Andrew expressed concern that “the OGC review may be at too high a level
and that our need to have comfort over the detail of the risks will not be met”.

13.78 An OGC gateway review of the project took place on 25 September and between 1 and 4 October 2007. The OGC team produced a report of that review for the Chief Executive of CEC on 9 October 2007 [CEC01562064]. On 15 October 2007, the OGC team produced a further report, on risk, following a review carried out between 10 and 12 October [CEC01496784]. The report noted that a number of risks remained with the public sector, including those relating to delays in design or the utility diversion works causing delay to the infrastructure works. It was noted that:

“[t]he linkage between design/approval and InfraCo is critical and will need serious attention … It is clear that the amount of design envisaged to be delivered to support novation will not be achieved” [ibid, page 0008, paragraph 3.5.3];

and that;

“[o]nce FC [financial close] has been achieved fixed costs are at risk to variations in scope” [ibid, page 0008, paragraph 3.5.3].

13.79 In respect of the risk allowance, the review team concluded:

“We believe that the overall headroom of £49m in the capital expenditure is a prudent provision at this stage of the project’s development.” [ibid, page 0004.]

13.80 In the evidence there was a difference of opinion about tie‘s decision to instruct an OGC review instead of complying with the instructions of CEC to instruct Turner & Townsend. Although Mr Holmes had no recollection of any discussion about the OGC team undertaking the risk review rather than Turner & Townsend, he considered that it was reasonable to do so, given that the OGC team was very experienced and was going to undertake a review of the project in any case around that time. His view that the substitution of OGC was reasonable was conditional on the review by OGC being undertaken in terms of the brief attached to Mr Fraser’s email of 24 September 2007 [PHT00000042, pages 26–27; CEC01652668; CEC01652669]. That brief included a review of the FBC, the draft FBC, the proposed Infraco contract and Tramco contract, the contract Heads of Terms and Risk Matrix prepared by tie’s legal advisers (DLA) and Capital Cost Estimates, incorporating best and final offers provided by bidders. In addition, meetings would be arranged with relevant personnel within CEC and tie as was necessary to meet the assignment objectives. Mr McGougan was also content for the review to be undertaken by the OGC team, which was experienced in the review of major public-sector projects and had experience of the Tram project, having previously undertaken gateway reviews [PHT00000042, pages 141–148].

13.81 Ms Andrew and Mr Fraser were of a different view. Ms Andrew explained that a review undertaken by an OGC team differed from a review by a firm of consultants such as Turner & Townsend. An OGC review was based largely on interviews with various individuals involved in the project, with limited analysis of documents. In contrast, a firm of consultants would be expected to undertake a more detailed, and forensic, examination of the project, including a detailed examination of the relevant contracts and documents [PHT00000005, page 59]. She stated that she was concerned at the level of contingency in the project budget and was seeking to gain a greater understanding of the risks to determine whether the level of contingency proposed by tie was sufficient. She found it frustrating that tie was resistant to the type of independent review that she was seeking and appeared to put pressure on senior CEC management to ensure that it did not take place. Although the OGC risk review was better than no review at all, she did not consider that it went into a sufficient level of detail to give CEC the assurance that it required [TRI00000023_C, pages 0027–0028].

13.82 Mr Fraser was “slightly uncomfortable” that the OGC team was instructed instead of Turner & Townsend. When he read the OGC report on risk, he felt that it slightly underplayed the potential risk associated with design, approvals and consents being delayed. He considered that that issue was more than just a concern, and required to be addressed at the highest level. He was of the opinion that, had Turner & Townsend carried out the review, it would have gone into risk assessment in much greater detail, and undertaken its own independent review of it, which would have been invaluable for CEC [PHT00000004, pages 46–49; TRI00000096_C, pages 0019 and 0020].

13.83 Mr Heath, a consultant involved in a number of OGC reviews of the Tram project including the risk review, gave evidence that a review by Turner & Townsend would probably have gone into much more detail than the OGC review and might have acted as some sort of audit on the numbers, which the OGC team was not able to do. In that sense, he considered that a review by such a company would probably have been beneficial, albeit that the length of time taken by such a review and any risk from the resultant delay might have been relevant [PHT00000009, page 93].

13.84 In his evidence, Mr Inch said that he thought that it would have been better to obtain a review by Turner & Townsend as it had a reputation of having good specialist advisers and that, as a commercial organisation, it might bring greater clarity to the risks to CEC. However, he would have deferred to the views of those officials who had a more direct involvement in the project. In this context I infer that he was referring to Mr Holmes and Mr McGougan [PHT00000007, page 169].

Discussion

13.85 Prior to the decision to withdraw the active involvement of Transport Scotland from the project, the necessary technical expertise required for the review of the draft FBC had been provided to CEC by Transport Scotland with support from independent professional advisers. As was noted in paragraph 13.7 above, the intention had been that Transport Scotland would be involved, along with CEC, in the approval of the FBC. After the withdrawal of Transport Scotland from that role, CEC did not put in place any procedures to assist its officials to scrutinise the FBC. I accepted the evidence to the effect that CEC lacked the necessary expertise internally to undertake a meaningful review of tie‘s QRA and that it was essential for it to commission an external independent review.

13.86 Such a review ought to have been carried out for the protection of CEC’s interests as the public body having the financial exposure if tie‘s quantification of risks or if its proposed risk allowance were inadequate. CEC had no effective remedy against tie in that event because tie was wholly owned by CEC, with the result that the public purse would bear any loss arising from tie’s errors or omissions in the QRA. That would have adverse implications for council tax payers and businesses in the City of Edinburgh as the necessary expenditure to meet these losses or to fund any borrowing to do so would diminish the expenditure available for other local authority services.

13.87 Although the OGC risk review provided some reassurance to CEC, I consider that Ms Andrew was correct in her opinion that that review was at too high a level and was of too short a duration to provide what CEC required. Given the size, complexity and value of the project, the potential risks to CEC and the concerns that had been expressed, it seems to me that a longer, more detailed, forensic-type review was necessary to protect CEC’s interests properly. That was what was envisaged in the brief for Turner & Townsend. In making these observations I do not intend any criticism of Mr Heath or the review team that undertook the OGC review. Mr Heath recognised that a review by Turner & Townsend would probably have gone into much more detail than the OGC review and might have acted as some sort of audit on the numbers, which the OGC team was not able to do. Although such a review would probably have taken longer than the OGC risk review, I accepted Mr Fraser’s assessment that the timescale of producing a report by 14 October could have been achieved.

13.88 An example of the sort of review that could have been undertaken in the time available is to be found in Turner & Townsend’s preliminary report on the Tram project produced after the Mar Hall mediation in March 2011 [WED00000103]. Although that review was, of course, carried out in very different circumstances and at a time when the areas of dispute that had arisen were clear, the draft report nevertheless illustrates the type of forensic review that can be undertaken in a relatively short period of time. The report consists of approximately 80 pages and was produced within a period of about 2 weeks.

13.89 It should also be remembered that the OGC reviews were undertaken at a time when it was hoped that CEC would approve the FBC on 25 October 2007 and that contract signature would be achieved at the end of January 2008. The OGC gateway 3 review recognised that it would be very challenging during the preferred bidder period to finalise the required list of activities and agreements as well as the areas of uncertainty of scope and price. Following both OGC reviews there were delays in contract signature due to negotiations, which continued until May 2008 when the Infraco contract was signed. If Turner & Townsend had undertaken the review originally envisaged and had expressed any reservations about the QRA or about the state of the project generally CEC could, and should, have commissioned a subsequent review of risk before the contract was signed. Even if Turner & Townsend’s review had not expressed any such reservations, CEC should have instructed it to undertake a further review immediately prior to contract close if, as occurred, the negotiations extended for several months beyond the planned date for contract close.

13.90 In October 2007, there were already delays with design and utility diversions that could impact upon the planned progress of the Infraco works. That, in turn, might have implications for CEC’s risk exposure. In these circumstances I consider that it was important for CEC to instruct a suitably qualified firm of multi-disciplinary engineering, transport and project management consultants to undertake a detailed review of risk, along the lines of the brief drawn up by Mr Fraser. In particular, such a review ought to have covered the state of the project, the risks to CEC, the quantification of these risks and whether the proposed risk allowance was adequate.

13.91 Moreover, having decided to seek an independent review, CEC officials ought to have determined its nature and scope as well as the identity of the provider of the service required. The whole point of obtaining independent project assurance is that it is “independent” from the project manager. In my view it was wholly inappropriate for tie, as project manager, to seek to influence the identity of the reviewer or to control the process and the scope of the review, as was suggested by Mr Bissett in his email mentioned in paragraph 13.71.

13.92 Equally, I consider that CEC officials showed undue deference in allowing tie to take control of the risk review. It appears that the decision to investigate the possibility of a risk review by an OGC team instead of Turner & Townsend was taken unilaterally by tie. It is not entirely clear whether there was any subsequent consultation with CEC officials before instructing the OGC team or, if so, who agreed with tie’s decision in that respect. However, having regard to their respective responsibilities for the Tram project and their evidence to the Inquiry that they were happy for the OGC team to undertake such a review, it seems likely to have been either Mr Holmes or Mr McGougan, or both of them, if there was any prior consultation.

13.93 If such a review had been undertaken by Turner & Townsend, or some other suitably experienced firm of specialists, I consider that it is likely that it would have recognised the challenges identified by OGC in its gateway 3 and risk reviews mentioned in paragraph 13.78. In that event I am of the view that it is probable that it would have recommended a subsequent review immediately prior to contract signature. Mr Holmes accepted in evidence that, with the benefit of hindsight, it would have been prudent to have obtained a further independent review of risk shortly before contract award and that it was an error not to have done so [PHT00000042, page 31]. Mr McGougan, similarly, accepted that, with hindsight, a further independent review of risk, shortly before the award of the Infraco contract, is something that might well have proven to be of value [ibid, page 149]. Even without the benefit of hindsight, it seems to me that there would be little purpose in instructing a review in the first instance if there was no continuing scrutiny of CEC’s risk exposure as the contracts evolved between October 2007 and May 2008.

13.94 I consider that a further, or follow-up, independent review of risk before signature of the contract would have identified the continuing difficulties and delays with design and the utility diversion works. That is likely to have led to an examination of how these risks were dealt with in the Infraco contract. In addition, the person reviewing the documentation for this purpose would have been aware of CEC’s sensitivity to price increases and its objective of maintaining the total cost of the project within the available budget of £545 million. Accordingly, any review would have considered CEC’s risk exposure arising from the pricing assumptions in SP4 of that contract, which will be discussed in Chapter 14 (CEC: January–May 2008). Had that been done, CEC would have been better informed of its risk exposure and could have considered the options available to it, including delaying signature of the contract until the risks had been reduced to a manageable level, deciding to truncate the line to be built as a first stage of the project, as ultimately occurred, or deciding not to proceed with the project at that stage altogether.

Information provided to councillors

13.95 During the last quarter of 2007, CEC had to take significant decisions at its meetings on 25 October and 20 December in relation to the FBC and whether to authorise tie to enter into the Infraco contract and the Tramco contract. As was normal practice, senior officials provided councillors with reports to assist them in reaching their decisions. In addition, members were given other information in a number of forms, as will be discussed below. Having considered the documents and other evidence, a question has arisen as to the accuracy of the information provided to councillors to assist their deliberations. That issue will be considered in the paragraphs that follow.

CEC meeting on 25 October 2007

13.96 At the CEC meeting on 25 October 2007, councillors were asked to approve version 1 of the FBC [CEC01649235, Parts 1–11]. The principal report to members, prepared by Mr McGougan and Mr Holmes, explained that the assumptions in the draft FBC held good for the FBC [CEC02083538, page 0001, paragraph 2.3]. Version 1 of the FBC would be updated for any material changes arising during the final period of negotiations up to contract close, and CEC’s approval would be sought on 20 December 2007 for the updated FBC, leading to contract award in January 2008 [ibid, page 0002, paragraph 2.8]. Mr McGougan and Mr Holmes also provided members with a supplementary report on the procurement of the Infraco contract and the Tramco contract [CEC02083539]. In subsequent paragraphs, references to the report are to the principal report.

13.97 The report stated that tie’s procurement strategy had been given the “seal of approval” by the Auditor General of Scotland, who had reported that procedures were in place actively to manage risks associated with the Tram project and that tie had implemented a clear procurement strategy aimed at minimising risk and delivering successful project outcomes [CEC02083538, page 0005, paragraph 3.17]. The Auditor General’s report will be more fully discussed in Chapter 23 (OGC and Audit Scotland).

13.98 The report noted that the SDS team had prepared preliminary designs and was currently finalising the detailed designs for all the components of the tram system. It was anticipated that the SDS contract and the Tramco contract would be novated to the provider of the infrastructure works, which meant that significant elements of the responsibility for the design and vehicle provision and the associated risks would be transferred to the private sector [ibid, pages 0006–0007, paragraphs 3.22 and 3.27].

13.99 In relation to capital costs of the project, the report observed that:

“The infrastructure costs are … based on the fixed prices and rates received from the recommended infrastructure bidder. However, there is scope for this cost to move slightly, prior to contract close as further design work is required to define more fully the scope of the works to allow a firm price to be negotiated. There is a risk allowance to take account of these variations.”

It was reported that the significant majority of contracts were either fixed price or fixed rate, meaning that any inflation costs would be borne by the contractors [ibid, page 0009, paragraphs 4.3 and 4.7].

13.100 The report explained that there was a risk allowance of £49 million, which had been calculated based on the perceived cost and likelihood of more than 400 risks in the project risk register. A statistical analysis had been carried out at a 90 per cent probability level, which had concluded that there was a 90 per cent chance that final costs would be within the risk allowance of £49 million. The report concluded that “[t]his demonstrates a higher than normal confidence factor for a project of this scale and complexity.” [ibid, page 0010, paragraph 4.10.]

13.101 The report also referred to the recent reviews of the project by the OGC team, and advised councillors that the gateway 3 review had given the project the green light. Although that review recognised that the project faced a challenging period over the next three months, requiring the appointment of a preferred bidder, the finalisation of due diligence, novation of contracts and the provision of evidence of formal funding support, nevertheless tie had procedures and work streams in place to address these issues. In addition to the identification, allocation and mitigation of risk, described in the FBC, CEC had sought a further review from OGC to assess and quantify the risks to the project. That review had concluded that tie’s risk management was well developed and reflected best practice and that the current risk contingency in tie’s budget was sufficient [ibid, pages 0013–0014, paragraphs 4.28–4.29].

13.102 The report concluded that although the total project cost estimate remained at £498 million, it was acknowledged:

“that there are a number of design related matters which have yet to be finalised but allowances have been included for these in the estimate. Consequently there is the potential for some variation to capex out turn costs. Fixed price and contract details will be reported to the Council in December 2007 before contract close in January 2008.” [ibid, page 0016, paragraph 5.3.]

Tram operations were expected to commence in February 2011.

13.103 Appendix 2 to the report contained the Executive Summary of version 1 of the FBC [ibid, page 0022]. The Executive Summary stated that:

“The procurement of the principal contracts has reached a stage where all material terms are agreed, including the capital, operational and maintenance costs.” [ibid, page 0022, paragraph 1.3.]

13.104 It said that the risk allowance represented a prudent allowance for cost uncertainty and reflected the evolution of design and the increasing level of certainty and confidence in the costs of phase 1a as procurement had progressed through 2006/2007 and “fixed price bids” for the Infraco contract and the Tramco contract had been received [ibid, page 0032, paragraph 1.68]. As had been reported in the draft FBC dated November 2006, it was, again, noted that the objectives of the procurement strategy included the transfer of design, construction and maintenance performance risks to the private sector, the minimisation of the risk premium (and/or exclusions of liability) that bidders for a design, construct and maintain contract normally included to reflect the absence of a design with key consents and the mitigation of risk associated with the diversion of utilities diversion [ibid, page 0034, paragraph 1.77]. The main risks to the delivery of the project on time and within the capital cost estimates remained those arising from the utility diversions, changes to scope or specification and obtaining consents and approvals. In relation to the utility diversion works, it was stated that the current programme of utility diversions “is fully aligned with the preferred Infraco bidder’s programme of works” and that progress to date had been “excellent with no major issues encountered so far” [ibid, page 0036, paragraph 1.85].

13.105 In appendix 3 to the report its authors set out the main project and operational risks [ibid, pages 0042–0044]. The most significant risks affecting the timeous completion of the project within budget were, again, noted to arise from the advance utility diversion works, changes to project scope or specification and obtaining consents or approvals [ibid, page 0042, paragraph 2]. Appendix 3 stated that the Infraco contract was a “substantially fixed price contract”. Any scope changes after financial close would have to be implemented using a variation order, which would add costs to the project. It was, therefore, important that changes were kept to a minimum and there were clearly defined, tight change control procedures supervised by the TPB [ibid, page 0042, paragraph 4].

13.106 It was also recognised that designs were not yet complete and that some design assumptions might be different to the aspirations of CEC and/or other third parties (eg Forth Ports). It was noted that:

“[i]f the designs are built into the contract at contract close and the decision is made to change them at a later date, this will lead to additional costs and potential delay” [ibid, page 0042, paragraph 5].

13.107 It said that, in order to reduce that risk, further work would be done on design prior to contract close [ibid].

13.108 Linked to that risk was a risk that planning approval might not be given to the designs for reasons of visual amenity as a result of which the designs would need to be reworked. This would also result in additional cost and delay. The planning prior approvals programme was expected to be complete by March 2008, which was post contract close. To minimise the risk of planning approval being withheld post-contract close, SDS and tie were involving planning staff in the design process so that concerns could be addressed at an early stage [ibid, page 0042, paragraph 6].

13.109 To supplement the report, Mr Gallagher, Mr Renilson and Mr Holmes gave a joint presentation to councillors. Mr Gallagher informed members that 99 per cent of the capital costs were now firm, meaning that they were fixed or based on agreed rates. There was very limited exposure to cost overrun if CEC and tie adhered to the programme and scope. Design was a private-sector responsibility, and the risk management and mitigation measures already in place included robust contracts with unambiguous risk allocation [CEC02083536, pages 0014–0017].

13.110 In his evidence to the Inquiry Mr Aitchison described Mr Gallagher’s presentation as “upbeat and confident”. Mr Gallagher’s message was that the contract would be close to a fixed final price, with almost all risk transferred to the private sector, and that there was very limited exposure should things go wrong in the contracts. Those views coincided with the views of Mr Aitchison’s colleagues in CEC who were involved in the project. Like Mr Gallagher, they considered that the cost of the project would be about £498 million or £500 million. Mr Aitchison was reliant on his colleagues who were heavily involved in the project and he had no reason to have any different view from them [TRI00000022_C, page 0021, paragraph 53].

13.111 Members duly approved version 1 of the FBC and endorsed tie’s procurement process and selection of the preferred bidders for the Infraco contract and the Tramco contract [CEC01891412, page 0005, paragraph 3].

Discussion

13.112 In considering advice given to councillors, one must remember the distinction between their roles and the roles of officials. Councillors require sufficient and accurate information provided to them by officials to enable them to take strategic decisions about a project. These include policy decisions on whether to undertake the project in the first instance and, thereafter, at critical stages, whether to continue with the project in light of evolving circumstances and bearing in mind the cost implications for the local authority’s budget. It is not necessary for them to be aware of the details of every issue being addressed by officials or the company charged with the implementation of their decision to proceed with a project. In contrast to councillors, officials have the responsibility, either alone or in conjunction with the delivery vehicle (in this case tie), for the implementation of the policy decisions taken by councillors.

13.113 Information necessary for councillors to take an informed decision included issues such as the likely capital cost of the project, as well as reassurance that the procurement strategy was being achieved because that was fundamental to the degree of price certainty and aversion of risk required by CEC. Officials and tie had a duty to report any uncertainties or difficulties relating to such matters to CEC.

13.114 I have considered whether there was any failure by officials and/or tie or its executive chairman, Mr Gallagher, in that regard because the information provided to councillors was misleading. The statement in the Executive Summary of the first version of the Final Business Case (“FBCv1”), contained in Appendix 2 to the report, that the procurement of the main contracts had reached a stage where all material terms, including the capital costs, were agreed, was inaccurate. Although there was price certainty in respect of expenditure incurred to date, as well as confidence of achieving price certainty in the Tramco contract and agreement about certain fixed rates in the Infraco contract, the main terms, including the pricing and risk allocation provisions, and the capital costs of the Infraco contract, were not agreed at that time. They were not agreed until May 2008.

13.115 Moreover, Mr Gallagher’s statements that the contract would be close to a fixed final price, with almost all risk transferred to the private sector, that there was very limited exposure should things go wrong in the contracts, and that the cost of the project would be about £498 million or £500 million, must have provided councillors with considerable reassurance. Unfortunately, such statements were incorrect. This aspect was considered in more detail in Chapter 10 (Events between October and December 2007).

13.116 However, the stage reached in contract negotiations and the context in which officials were seeking the approval of councillors are relevant, as is the other information provided to councillors. The report was seeking approval of FBCv1, which would be updated for any material changes arising during the final period of negotiations up to contract close, and CEC’s approval would be sought on 20 December 2007 for the updated FBC and to proceed to contract award in January 2008. Although it was no doubt the aspiration of Mr Gallagher and CEC officials, as well as tie, that agreement would be reached about capital costs, it was clear that negotiations were still ongoing. Moreover, the supplementary report to CEC, seeking approval of tie’s selection of the preferred bidder for each of the Tramco contract and Infraco contract, confirmed that further negotiations would take place in advance of final offers being made and presented to CEC at its meeting on 20 December. That report disclosed that negotiations in the Infraco contract would address the following issues:

  • “Resolving outstanding design issues”
  • “Assessing Value Engineering proposals for additional cost savings”
  • “Novation of SDS and Tramco Contracts to the Infraco”
  • “Finalising contract terms and conditions, including risk allocation”
    [CEC02083539, page 0004, paragraph 3.15].

13.117 Nevertheless, councillors were entitled to conclude that the expected capital cost of the project was as reported to them and that if there was any significant change in that respect they would be notified of it.

13.118 Although the above list of issues referred to the need to resolve outstanding design issues and allocate risk, it did not mention the difficulties and delays that had been experienced with the diversion of utilities. That was an issue that could affect the capital cost of the project if tie failed to achieve the procurement strategy of clearing utilities from sections of the route in advance of construction work to be undertaken there by Infraco.

13.119 Although the supplementary report did not list the issue of the utility diversion works, the Executive Summary of FBCv1 did. It stated that tie would “manage the interface between utility diversions and follow on works by Infraco” [CEC02083538, page 0036, paragraph 1.85]. It recognised that delay in handing over work sites to Infraco could result in significant financial penalties for which CEC would ultimately bear responsibility. To address that risk, work had started on the diversion of utilities, and progress to date had been “excellent with no major issues encountered so far” [ibid]. This was certainly misleading because, as was discussed in Chapter 8 (Utilities), there had been a number of difficulties and delays with the utility diversion works throughout 2007. By way of example, the monthly progress reports between October 2006 and October 2007 submitted to tie by Alfred McAlpine Infrastructure Services Limited (“AMIS”), the MUDFA contractor, noted concerns in relation to the lack of availability and the accuracy of Issued for Construction (“IFC”) utility drawings and supporting information. In the report submitted to tie on 8 October 2007, relating to progress in September 2007, AMIS repeated that concern and noted that around 35 IFC detailed utility drawings were unavailable along with associated supporting documentation. In addition, in section 1A (between Newhaven Road and the foot of Leith Walk) the scope of work had increased by 134 per cent due to additional diversion works and underground obstructions not identified in the drawings supplied to them. The report noted, under areas of concern, that there was an “overall trend in relation to future emerging MUDFA works not previously identified by SDS Provider” and “[ex]cessive underground congestion of utilities and impact on cost and timescales” [CEC01684924, pages 0004, 0007–0009].

13.120 Following the OGC risk report and prior to the CEC meeting, Mr Fraser identified three critical issues, one of which related to delays in utility diversions. In an email dated 19 October 2007 to Ms Andrew, he stated:

“Mudfa works are behind programme which has a direct impact both on the cost of these works and the potential time thus cost impact on Infraco– action for there to be enough drawing to enable planned works to be carried out with sufficient lead time” [CEC01399632, page 0002].

13.121 His concerns at that time coincided with the latest AMIS monthly progress report mentioned in paragraph 13.119 above. This is in stark contrast to the suggestion in the report to councillors that progress had been excellent and that no major issues had been encountered. Moreover, there was a significant risk that these difficulties and delays would become worse as the more difficult, on-street utility work sites were opened up in late 2007 and early 2008.

13.122 It is difficult to assess the full significance of this misstatement at that time, because the intention was that councillors would have a further opportunity to consider a report on the draft contract in December and to decide whether to authorise its signature. Nevertheless, I consider that it was unacceptable for a report to councillors to be misleading in this material respect. Moreover, insofar as tie was responsible for the production of FBCv1, the suggestion in that document, that progress with the diversion of utilities had been excellent and that no major issues had been encountered, was not only inaccurate and withheld from councillors relevant information when considering FBCv1, but was known by tie to be false. In addition, the report to the Council noted that the designers were “currently finalising the detailed designs for all of the Tram components” [CEC02083538, page 0006, paragraph 3.22] of the tram system. That statement, when read in isolation, was misleading in that it failed to inform members of the chronic difficulties and delays that had beset design, the fact that few, if any, approvals and consents had been obtained and that there remained considerable uncertainty as to when detailed design would be complete.

Events following the report to the Council on 25 October 2007

13.123 Members of the “B team” continued to express concerns in relation to the project. In an email to Mr Holmes dated 20 November 2007, Mr Fraser stated that the original basis for obtaining a fixed price from the Infraco contractor was that detailed design would be complete and all approvals and consents would have been obtained. The situation at that time, however, was that only some of the designs had been completed in detail, none of the designs had been technically approved and only 4 out of the 61 packages for prior approvals had been agreed. Mr Fraser suggested, therefore, that there should be a “risk premium” of £25 million to enable changes to be made post-financial close. He anticipated that the additional cost would be less than that allowance, “thus avoiding any suggestion that the costs are not in control ‘Holyrood on Wheels’” [CEC01383667]. Mr Fraser explained in his evidence that the figure of £25 million was an indicative figure, arrived at by multiplying tie’s risk allowance of £3 million for one month’s design delay by eight months [PHT00000004, page 75].

13.124 In his evidence Mr Fraser stated that he believed that, until the designs, statutory consents and approvals process were completed, the full cost implications for the consented and approved design would be difficult to determine and evaluate, notwithstanding the QRA. He considered that the assumptions in the QRA seemed to be based on an overly optimistic, aspirational design programme rather than the actual delivery of designs to date. The aspirations of tie for delivery did not reflect his experience of actual delivery by SDS for consents and approvals and he did not have confidence that the planned programmed progress could be delivered in the correct quality and quantity required under the contracts [TRI00000096_C, page 0032].

13.125 Mr Fraser also explained that, in a fixed-price contract, any change in the scope of the work after the award of the contract results in a change in the price. If design had been completed and all approvals and consents obtained before the award of the Infraco contract, as had originally been intended, the consortium would have known the scope of the works and would have been able to price for that. Conversely, where design was incomplete and few approvals and consents had been obtained there was a risk of uncertainty over the scope of the work that the consortium had agreed to undertake and had included in its price. The QRA that had been produced by tie did not align with his “intuition” that there would be scope change, with a corresponding increase in price after the award of the contract, and the risk premium of £25 million that he suggested was to illustrate that point [PHT00000004, pages 70, 76 and 134–135].

13.126 Similar concerns were expressed by Mr Fraser at a CEC Property and Legal meeting on 20 November 2007. These included how tie’s QRA risk register took “full account of tie entering into a fixed price contract without having any approved designs with the Council” [CEC01397445]. There was also a concern that the final price at contract close would increase for a range of reasons, including the lack of agreed technical and prior approvals and a mismatch between the current designs and BBS’ assumptions. Any variation to a fixed-price contract results in an increased scope of works and delay or disruption claims, which could prejudice a best-value outcome. Pricing by BBS was based on 60 per cent of detailed design, which was unapproved. For these reasons, Mr Fraser considered that the risk premium mentioned in paragraph 13.125 should be applied, to take account of unapproved design.

13.127 Mr C MacKenzie expressed similar concerns. In an email dated 4 December 2007, he advised Mr Inch, during the absence on leave of the Council Solicitor, that there was concern that it might be premature to report to councillors on 20 December, since so many issues would be qualified by the time that the report was circulated on 13 December. He further noted his understanding that, following a meeting the previous day (attended by Mr Gallagher, Mr Holmes, Mr McGougan and others), the message was that “the show must go on” at the December meeting. He indicated, however, that there remained great concern in Legal Services about the pressure to report to the Council on 20 December while so many risks remained on the table, some of which had not been quantified for CEC [CEC01400143].

13.128 By email dated 7 December 2007, Mr C MacKenzie sent Ms Lindsay a briefing note that had been prepared by members of the “B team”. He observed that the briefing note reflected the very real concern by members of the “B team” about the Council report, including whether there should be a report to the Council at all [CEC01400190; CEC01400191]. The briefing note was considered at the meeting of the IPG on 11 December 2007, which will be discussed below.

13.129 The minutes of a meeting of CEC’s Property and Legal group on 11 December 2007 noted that concerns continued to be expressed that CEC was not clear on the scope of the works and that there was uncertainty whether tie was clear on the scope of the works. There required to be a fuller understanding of these matters in order to enter into a fixed-price contract [CEC01397823].

The meeting of the IPG on 11 December 2007

13.130 Prior to the meeting of the IPG on 11 December 2007, apart from the concerns of the “B team” mentioned in paragraph 13.128 above, other information was made available to CEC in relation to risk. By email dated 3 December 2007, Mr Hamill, tie’s Risk Manager, sent Mr Coyle tie’s QRA [CEC01500301; CEC01500303] and, by letter dated 30 November 2007, DLA advised Ms Lindsay on the draft contract suite [CEC01512159]. The letter confirmed DLA’s view that the contractual allocation of risk and responsibility was broadly aligned with the market norm for UK urban light rail projects, and it provided an interim report on risk generally. There had been a “predictable hardening of stance by the consortium on matters where their position had been expressly reserved or outlined only” [ibid, page 0002, paragraph 1]. DLA considered that risk allocation desired by CEC might not be achieved in two areas, namely consents and third-party agreements. The primary reason for this was that the consortium considered that tie/CEC was “best placed to manage risk associated with certain consents and full compliance with third party undertakings” [ibid, page 0003, paragraph 1]. DLA considered that that was:

“also the primary reason why adjusted responsibility retention by tie/CEC for these matters (which are essentially a project management and stakeholder interface function) may not be unpalatable”
[ibid].

13.131 The IPG met on 11 December 2007. The report to the IPG noted that further delays to the design programme were becoming apparent, with all technical reviews programmed to complete after financial close [CEC01398245, pages 0004–0005].

13.132 The report to the IPG included, in Appendix 3, the briefing paper noted above, setting out the concerns of the “B team” in relation to the Tram project, including whether, given the outstanding issues, there should be a report to the Council on 20 December 2007 at all [ibid, page 0091].

13.133 In the section of the briefing paper entitled ‘Potential Additional Project Costs’
the following observations were made:

“3.2 It is currently unclear to CEC as to the scope of the works, the timescale of
the project, and the allowance for incomplete detailed design and implication
for gaining approved designs (technical and prior approvals). All the above
can have potential impacts on time and costs and under this form of contract
potential major cost implications because of delay and disruption to the
position at financial close.

“3.3 This form of contract was adopted ‘fixed price’ on the basis of complete approved designs however as this is not where we are this current position requires to be reflected in the QRA and contingency allowance.

“3.4 The underlying concern is that while it may be achievable to reach a financial close of £498m, this will result in a major challenge in managing this during the contract. It has been confirmed by tie that the extension of time from the current target would have a significant impact on overhead costs on this form of contract.” [ibid]

13.134 In her evidence to the Inquiry, Ms Andrew explained that she was concerned that some of the matters in the briefing note would, or could, result in a significant increase in project cost and that tie appeared to be rushing to achieve contract close without resolving them. Her principal concern in that respect was in relation to design, where it was not clear how the delay would impact upon the Infraco contract, including whether the completion of design would amount to a change to the fixed-price contract, allowing the contractor to claim against tie and resulting in a liability for CEC. She considered that the costs could increase significantly if design changes impacted upon the programme. She did not achieve clarity on these matters before contract close in May 2008, and continued to have some concerns in that regard, despite assurances being given by tie that “the design was more complete than it actually was, or that more risk had in fact been transferred to the contractor in terms of completing the design than actually was” [TRI00000023_C, page 0035; PHT00000005, pages 71–72].

13.135 Other concerns noted in the briefing paper related to delays with the MUDFA works caused by a variety of reasons, including the failure to have signed agreements with Scottish Power and Telewest despite their urgency five months previously, as well as utility companies failing to adhere to the MUDFA programme and providing inaccurate information about the location of active pipes and cables. These delays could affect the Infraco works, as could incomplete design and lack of approvals and consents. The result could be additional risks and costs for CEC, it being noted that: “[t]he fact that design is incomplete will increase the risk of variation orders, delay to MUDFA and subsequent delay to Infraco” [CEC01398245, pages 0093–0094, paragraphs 6–7].

13.136 In Ms Lindsay’s absence on leave, Mr C MacKenzie was not satisfied that the letter from DLA provided CEC with the comfort that it anticipated, because DLA had been acting on tie’s instructions and he was unclear on the extent to which they reflected CEC’s best interests. The briefing paper also noted that, “Council officials do not understand the contract nor have had any independent review of the contract document” [ibid, page 0096, paragraph 13.4]. I observe in passing that, even if Ms Lindsay had not previously been aware that Mr N Smith was not complying with her instruction to review the contract, once she became aware of the briefing paper she knew, or ought to have known, that there was a serious problem in that solicitors in her department were reporting that they did not understand the contract.

13.137 The briefing paper referred to the recent receipt of the QRA from tie for investigation on behalf of CEC. The reduction in risk allowance from £49 million to £34 million after financial close due to risks being closed out at that point depended upon there being “100% fixed price and 100% fixed time for the contract being in place at contract close” [ibid, page 0092, paragraph 4]. In his evidence to the Inquiry Mr Fraser explained that:

“while there seemed to be an impression that the risks were sitting with the private sector, there was a growing realisation that might not be the case” [PHT00000004, pages 112–113].

13.138 The briefing paper concluded by seeking guidance from the Directors of Finance and City Development on how the issues detailed in the paper should be reported to members, including whether, given the outstanding issues, it was appropriate for there to be a report to the Council on 20 December at all [CEC01398245, page 0097, paragraph 16]. The background to that request was the observation in an earlier paragraph of the briefing note to the effect that:

“The Council members are committing to the biggest project it has ever undertaken and as Council officers we must ensure we are presenting them
with enough information to allow them to make a competent decision.”
[ibid, page 0096, paragraph 14.2.]

13.139 In his evidence to the Inquiry, Mr C MacKenzie explained that he was adopting a cautious approach because information was awaited from tie and “there were developing risks such as the misalignment between the SDS contract and the
Infraco contract” [PHT00000026, page 54].

13.140 From the evidence given to the Inquiry by senior officials in CEC it is clear that they took the concerns of the “B team” seriously, to the extent that they concluded that it would not be appropriate to recommend contract close until these concerns were addressed [Mr Aitchison PHT00000041, page 84; Mr Holmes TRI00000046_C, page 0062, paragraph 230; PHT00000042, page 53; Mr McGougan ibid, pages 158–162; Ms Lindsay PHT00000027, page 70].

13.141 Either at, or shortly after, the meeting of the IPG on 11 December 2007, senior CEC officials decided that a list of deliverables would be required from tie to address the various concerns that had been raised by members of the “B team”. Members of CEC would not be asked to authorise the award of the contracts at the meeting on 20 December and, instead, they would be asked to delegate authority to Mr Aitchison, as Chief Executive, to authorise tie to award the contracts subject to price and terms being consistent with the FBC and subject to all remaining due diligence being resolved to his satisfaction. Mr McGougan considered that it was preferable to proceed in this way, as opposed to withdrawing the matter from the agenda of the Council meeting, to avoid the consequent expense of a delay of about six weeks until the next meeting. He did not see any difficulty in seeking members’ approval for the FBC in advance of every outstanding issue being resolved, provided that it would be necessary to report the matter to councillors and seek their further approval if there was a subsequent change to the FBC [PHT00000042, pages 172–175].

The run-up to the CEC meeting on 20 December 2007

13.142 On 13 December 2007, Mr Gilbert, of tie, gave CEC officials a presentation on risk [CEC01494866]. The presentation slides disclosed that the risk matrices had been prepared on the basis of negotiations to date and that the negotiations for the Infraco contract were “well advanced (all ‘big ticket’ issues done)” [ibid, page 0004]. I am unaware of what the “big ticket” issues were, but on the same day Mr Gallagher was in Wiesbaden to attempt to agree a target price against a background of negotiations that he described as having:

“unreliable outcomes, where we would think that we’d had a discussion with them, we would think that we had an agreement with them and then when we went to the next meeting things that we thought were agreed were then re-opened by predominantly Bilfinger Berger” [Mr Gallagher PHT00000037, page 49].

13.143 Mr Gallagher was also aware that once the target price had been agreed Bilfinger Berger would need to obtain the approval of its risk committee and the relevant Board committees [ibid, page 53].

13.144 By email dated 14 December 2007, Mr Fraser advised Mr Gilbert of certain issues that arose from the presentation, including that the QRA did not include an adequate allowance for extensions of time and that:

“[t]he scope of the works is not clear to CEC and specifically the quality and quantity and status of designs on which BBS have based their price. Also none of the designs are approved … hence the scope is likely to change, hence provision for this should be made.” [CEC01397774]

13.145 In a reply dated the same day, Mr Gilbert stated that tie considered that the allowances in the QRA were adequate if the mitigations referred to in the presentation and in the QRA were applied. Mr Gilbert went on:

“I have previously explained the interrelationship between emerging detail [sic] design, Employer’s Requirements and Infraco Proposals works and how price certainty is obtained out of this process and are in the process of delivering such certainty. Therefore, please advise what scope changes you anticipate arising out of the prior approvals and technical approvals. The overall scope of the scheme is surely now fixed, is it not?” [ibid]

13.146 In his evidence to the Inquiry Mr Fraser explained that the above exchange appeared to disclose a fundamental difference in understanding of what was meant by scope and scope change. He was concerned that in Mr Gilbert’s reply there was an implication that the scope was not going to change, and Mr Fraser could not see how that could be the case given the incomplete design and outstanding approvals and consents. There was a risk that, as designs were completed after the award of the Infraco contract, the contractor could claim that there had been a change in scope (with consequent cost increases) because the contract price had been based upon assumptions that had changed as a result of the completed designs [PHT00000004, pages 119–120 and 135].

13.147 By email dated 14 December 2007, Mr Hecht, of DLA, sent tie an Infraco Risk Allocation Matrix together with a document comparing that version with a version provided in September 2007 [CEC01430855; CEC01430857; CEC01430856]. The email chain included an internal email within tie from Mr McGarrity to Messrs Gilbert, Crosse and Bell of tie and Mr Richards of TEL in which Mr McGarrity sought confirmation “amongst ourselves” that the information already provided to CEC was correct that there had been no major change in risk allocation to the public sector.

13.148 By letter dated 17 December 2007, DLA reported to Ms Lindsay on the draft contract suite as at 16 December 2007 [CEC01473264]. The letter again noted that “[w]ork remains to translate commercial and technical positions being settled into agreed detailed drafting …” and that DLA considered that two areas in which the CEC desired public/private risk allocation may not be achieved were consents and third-party agreements.

13.149 At a meeting of the CEC/tie Legal Affairs Group on 17 December 2007, Mr Gallagher was noted as having reported that “the Infraco Contract is now at 97% fixed price with BBS taking on design risk” [CEC01501051, page 0001]. At that date, the meeting had taken place in Wiesbaden and negotiations were under way in relation to the written agreement that followed it. The timings of correspondence were such that it is likely that it was not yet apparent to them that BBS had changed its mind and would not accept design risk.[20] Further negotiations were to be undertaken until financial close. Ms Clark presented a paper on the deliverables that required to be in place to allow the Chief Executive of CEC to authorise tie to award the Infraco contract and the Tramco contract [CEC01501053].

13.150 The minutes of the TPB meeting on 19 December 2007 record that Mr Holmes had questioned how the risk of programme delays, specifically due to design delays, had been allowed for in the cost estimate and that Mr Gallagher had explained that a number of factors provided comfort in that matter, including that “[n]ormal design risk is passed to BBS through the SDS novation” [CEC01363703, page 0006, item 5.4]. It was also noted that Mr Holmes had requested further details on the design risk being passed to BBS and that Mr Bell would provide these details. Similarly, it was noted that Mr Holmes had expressed his concern about potential programme impacts arising from design delays and that Mr Bell would provide greater detail on how the risk was passed to BBS [ibid, pages 0006–0007, items 5.4 and 8.3]. The minutes of the next meeting of the TPB, on 9 January 2008, recorded that further details had been provided by Mr Bell to Mr Holmes in relation to SDS design and risk transfer. These minutes also noted that: “The discussion on risk transfer was continuing with BBS and progress updates would be presented to the TPB.” [CEC01015023, page 0005, item 1.5.]

13.151 Mr Holmes gave evidence that, at the meeting of the TPB on 19 December 2007, members were given a report of the Wiesbaden meeting by Mr Gallagher and members of his staff who had been involved in the discussion. It was reported that agreement had been reached on de-risking elements that had been of concern and that premiums had been applied to different elements in return for reduction of risk. Mr Holmes stated that the fact that design development risk had been transferred to BBS was “at the core” of his understanding of the outcome of the agreement. He remembered questioning the issues noted in the minutes in relation to design and programme delay because of their criticality [PHT00000042, pages 55–59].

13.152 From the meeting Mr McGougan had a similar understanding to that of Mr Holmes, which was that at Wiesbaden the consortium had agreed in principle to take on design development risk [PHT00000042, page 175; TRI00000060_C, page 0027, paragraph 75]. As was noted in paragraph 13.143 above, all decisions about risk transfer to BB required the approval of the relevant risk and Board committees. Discussions in Wiesbaden had recently concluded and the relevant committees had not considered BB’s risk exposure. Thus the impression created by Mr Gallagher that risk transfer for design development had been agreed by the consortium was not accurate and might have been attributable to his optimism that the necessary approval would be forthcoming.

The evolution of the report to the Council on 20 December 2007

13.153 Mr McGougan and Mr Holmes provided councillors with a report dated 17 December for the Council meeting on 20 December 2007, at which they sought members’ approval of the second version of the Final Business Case (“FBCv2”) prepared by tie for the Edinburgh Tram Network [CEC02083448]. The preparation of the report to the Council on 20 December 2007 was an iterative process.

13.154 The normal procedure with most reports to CEC on any subject was for an official within the relevant department to prepare the initial draft for review, finalisation and signature by the Director. In this case Mr Fraser, perhaps with input from Ms Andrew, prepared the initial draft and a subsequent draft, as will be discussed below. However, in reports relating to the Tram project tie was also given the opportunity either to comment on the draft report or to supply specific paragraphs [PHT00000042, pages 39–43.

13.155 In the initial draft of the report Mr Fraser expressed the view that, as a result of the negotiations and the submission of designs for technical and planning approval, final designs might be changed from the preliminary designs, upon which the final price for the Infraco contract was based. He considered that this would have cost implications and suggested including the additional risk premium of £25 million mentioned in paragraph 13.123 [CEC01384000, pages 0002–0003, paragraphs 3.3 and 4.3]. The report included sections on capital costs and risks, as well as a proposed appendix on the agreed scope of the works to be carried out by BBS and an appendix on risks. The appendix on the agreed scope of the works was left blank for completion later, and the appendix on risks was the same one on risks included in the report to the Council in October 2007 [ibid, pages 0003–0005, 0009 and 0011].

13.156 By email dated 29 November 2007, Mr McGarrity, of tie, provided CEC with a revised draft containing his comments and those of his colleague, Miriam Thorne [CEC01383999; CEC01384000]. In relation to the proposed additional contingency of £25 million, Mr McGarrity commented: “ALARM BELLS ALL OVER THE PLACE. WHAT ADDITIONAL £25M???” [ibid, page 0003, paragraph 4.3.] Ms Thorne commented:

“a) this gives impression cost estimate has risen by £25m & b) we should not indicate to contractors what we think their changes could be worth” [ibid].

13.157 Following Mr McGarrity’s email, Mr Fraser met Mr McGarrity, Mr Bell and Ms Clark, of tie, to discuss the risks arising from incomplete design and approvals, but remained unclear about how that risk would be managed, transferred or quantified. There was considerable concern within tie at Mr Fraser’s suggestion that there should be a further risk allowance or premium for incomplete design and the risk of design and scope change after the award of the Infraco contract. Thereafter Mr Fraser met Mr Holmes, as a result of which Mr Holmes told him to compress the report. Mr Fraser disagreed with that instruction, but recognised that it was a report by Mr Holmes and Mr McGougan and that it was for them to decide on its content. He was of the view that there required to be both transparency and a sufficiently detailed report to help members to understand the complexity of the situation and to be aware of what the risks were [PHT00000004, pages 78–79 and 83–86]. Mr McGougan also instructed Mr Coyle to make modifications to drafts of the report [TRI00000096_C, page 0035].

13.158 Although Mr Holmes gave evidence that he could not recall asking Mr Fraser to compress the report, he observed that such a request would not have been unusual because reports required to be as clear and concise as possible to assist members to understand the recommendations being made to them. The purpose of such a request would not have been intended to suppress any vital information [PHT00000042, pages 44–46].

13.159 By email dated 30 November 2007, Mr Fraser circulated a fresh draft of the report, stating:

“I have compressed the report as requested by Andrew [Holmes] to show what can be done, however I still have concerns about the completeness of information that informs the members [sic] decisions.” [CEC01384035]

13.160 In the compressed report the reference to the additional risk contingency of £25 million for design changes after financial close had been deleted. The sections on capital costs and risk were also largely deleted, as was the proposed appendix on the agreed scope of the works to be carried out by BBS and the appendix on risk. The section on risk in the main body of the draft report simply stated: “Tie to provide text” [CEC01384036, page 0005].

13.161 In an email dated 14 December 2007, commenting on the draft “compressed” report, Ms Lindsay stated: “we will need to be more explicit that further risk matters require to close prior to financial close” [CEC01397758]. In a later email the same day she noted that the earlier version of the report that she had been working on was much more explicit in relation to risks, and she queried whether the text had been removed and, if so, why [ibid]. By email dated 15 December 2007 (which was supported by Ms Lindsay), Mr C MacKenzie suggested that the outstanding matters should be drawn to the attention of members in the report and that there should be a position statement on the extent to which design was complete, that still being a Council risk [CEC01397776].

13.162 In the event, however, as will be discussed below, the report to the Council on 20 December 2007 followed the “compressed” version of the report produced by Mr Fraser on the instructions of Mr Holmes.

CEC meeting on 20 December 2007

13.163 The report was dated 17 December and was available to members in advance of the meeting for only three days at the most, contrary to the normal period of seven days. The meeting on 20 December considered almost 40 items of business, including the Tram project. The report recommended approval of FBCv2 and staged approval for the award by tie of the Infraco contract and the Tramco contract:

“subject to price and terms being consistent with the Final Business Case and subject to the Chief Executive being satisfied that all remaining due diligence is resolved to his satisfaction” [CEC02083448, page 0001, paragraph 1.2].

13.164 The report explained that FBCv2 was materially unchanged from FBCv1, which had been approved by members in October 2007, in respect of the scope, programme and estimated capital cost. The estimated cost of phase 1a (Edinburgh Airport to Newhaven) of £498 million, including a risk allowance, remained valid [ibid, page 0001, paragraph 2.1 and page 0005, paragraph 8.2]. It also noted that detailed negotiations between tie, BBS and Construcciones y Auxiliar de Ferrocarriles SA had progressed satisfactorily, with negotiations having focused on novation of the Tramco contract and the SDS contract to Infraco, design matters, price and risk allocation and the construction programme. The report stated that:

“The cost estimates for the project reflect provision for evolution as the detailed design will be completed in the coming months. The design is completed under the Infraco contract from the point of award of that contract through novation of the [SDS] contract with Parsons Brinckerhoff to Infraco.” [ibid, pages 0001–0002, paragraphs 3.1–3.2.]

13.165 In relation to risk generally, the report recorded that:

“The fundamental approach to the Tram contracts has been to transfer risk to the private sector. This has largely been achieved.” [ibid, page 0006, paragraph 8.10.]

13.166 In respect of public-sector risks, a number of ongoing matters were set out in the report and work would continue until financial close to ensure an acceptable outcome for CEC [ibid, pages 0006–0007, paragraph 8.11].

13.167 Risks retained by the public sector included agreements with third parties, delays to utility diversions, finalisation of technical and prior approvals, and the fact that the market could not provide professional indemnity insurance to tie in respect of a claim by CEC against tie because tie was wholly owned by CEC. The report noted that: “[t]he risk contingency does not cover major changes to scope”. The current construction programme had been compressed to reduce the length of disruption and provide best value. However, the report recognised that “[c]hanges to the programme could involve significant costs, not currently allowed for in the risk contingency”. A “substantial” risk contingency had been included in the estimate of phase 1a and there was currently further headroom of £47 million between the cost of phase 1a and the total available funding of £545 million [ibid, page 0007, paragraphs 8.13, 8.16–8.17].

13.168 The expected milestones were that the Infraco contract and the Tramco contract would be awarded by 28 January 2008, construction of phase 1a would commence in February 2008 and tram operations would commence in the first quarter of 2011 [ibid, page 0008, paragraph 8.19].

13.169 The report concluded by stating:

“The preferred bidder negotiations, in terms of price, scope, design, and risk apportionment, give further assurance that Phase 1a can be completed within the available funding and are consistent with the Final Business Case … tie is confident that risk contingencies and the final approved design can be accommodated within the funding available.” [ibid, page 0008, paragraphs 9.2–9.3.]

13.170 On 20 December 2007, by a majority, CEC approved FBCv2 and authorised tie to award the Infraco contract and the Tramco contract, subject to price and terms being consistent with the FBC and subject to the Chief Executive being satisfied that all remaining due diligence was resolved to his satisfaction [CEC02083446, pages 0018–0021].

Discussion

13.171 The report to CEC together with FBCv2 was provided to councillors within three days of the meeting. Although the option of withdrawing the report from the agenda of the CEC meeting on 20 December was raised by members of the “B team”, that did not find favour with the Chief Executive and other senior officials. Although the time afforded to councillors to consider the report, as well as many other issues on the agenda for that meeting, was unacceptably short, it is difficult for me to draw any conclusions from that fact, other than that it may suggest the existence of pressure by tie on CEC officials to obtain approval of the FBC at that meeting. Such an impression would be consistent with the impression gained by Mr C MacKenzie that Mr Gallagher was opposed to any delay in the date of the meeting to approve the FBC. Mr Holmes gave evidence that he could not recall what different factors were taken into account when officials decided to seek approval of the FBC at that meeting rather than waiting for resolution of the concerns of the “B team” expressed in the briefing note for the IPG meeting on 11 December. However, he was aware of issues relating to construction price inflation and to the risk of losing a tranche of the grant from the Scottish Ministers if CEC failed to reach particular milestones [Mr Holmes PHT00000042, page 54]. His evidence in that respect might support the existence of pressure on CEC officials to report to CEC on 20 December.

13.172 In addition, I consider that councillors should not have been asked to approve FBCv2 until senior CEC officials had satisfied themselves that the serious concerns about the project raised by members of the “B team” in the briefing paper had been resolved to senior officials’ satisfaction. Mr McGougan’s justification for seeking members’ approval at that meeting was to avoid a delay of about six weeks until the next CEC meeting and the consequent expense of that delay. That concern should be seen in the light of an intention – which in reality was no more than a pious hope that did not come to fruition – of concluding the Infraco contract in January 2008. Even if that had been a realistic timetable, I am of the view that the resolution of these concerns was paramount and ought to have been addressed even if it meant delay.

13.173 Although Mr Holmes accepted that, with the benefit of hindsight, members should not have been asked to approve the FBC at that stage [ibid, pages 53–55 and 67–70], I consider that, even without the benefit of hindsight, senior CEC officials ought to have been aware that it was not appropriate to seek councillors’ approval on 20 December 2007 while so many important issues remained unresolved.

13.174 The resolution of these concerns could only reasonably have been achieved by CEC’s obtaining adequate independent assurance on these matters, rather than relying on assurances provided by tie and its legal advisers. In coming to that conclusion I have had regard to CEC’s duty to protect public funds (a duty that could not be delegated to others, including tie); as well as other factors mentioned earlier, such as the lack of the necessary internal skills within CEC to undertake this task, the withdrawal of the expertise previously provided to CEC by Transport Scotland and the guidance discussed elsewhere in this Report on the importance of obtaining assurance of a project independent of the project manager.

13.175 The content of the report and FBCv2 is also a matter that I have had cause to consider in two respects.

13.176 The first is concerned with the involvement of tie in the preparation of these documents. As with the previous drafts of the business case, tie prepared FBCv2. There had been no independent review of tie’s work, and CEC did not have the skills in house to do so. In the absence of independent scrutiny of the business case it appeared to me that CEC’s officials relied upon assurances provided by tie that the negotiations that had already taken place had sufficiently removed or mitigated the public-sector risks in the project and that there were adequate sums in the risk allowance for those risks remaining with CEC. However, it is precisely because those responsible for delivering a major project may, whether consciously or subconsciously, present an overly optimistic view of matters that there is a need for independent assurance.

13.177 It is clear from the evidence that tie was also involved in the drafting of the report to CEC. As part of its review of the draft report it removed the reference to the additional risk premium of £25 million included in Mr Fraser’s initial draft. Although Mr Fraser expressed concern at that deletion from his draft, I consider that the removal of the reference to the figure of £25 million was appropriate because its inclusion in the report to which the public had access would have given BBS a commercial advantage by disclosing the amount of money that CEC had allocated to a particular risk.

13.178 Although it was appropriate for tie to make representations about the inclusion of the amount allocated to the additional risk premium the involvement of tie in drafting the report, including the section on risk, causes me some concern. This practice highlights the reliance of CEC’s senior officials on information provided to them by tie without satisfying themselves about that information. As I have already observed, CEC officials did not have the necessary skills to undertake that exercise and ought to have commissioned multi-disciplinary engineering, transport and project management consultants to advise them. Without such advice they could not fulfil their duties towards councillors in advising them upon the accuracy and implications for CEC of the FBC.

13.179 The second respect in which I have considered the report and FBCv2 is whether the information in these documents provided to councillors for the meeting on 20 December 2007 was misleading in any respect. In the first instance I shall consider the terms of the report.

13.180 By the date of the report there had been a history of design difficulties and delays, but that was omitted from the report; rather, paragraph 3.2 of the report referred to the completion of the design “in the coming months” [CEC02083448, page 0001, paragraph 3.2]. The report also had a table (at paragraph 8.19) showing the expected timetable of events, including financial close on 28 January 2008. Paragraph 8.1 stated that “[s]ome cost allowance has been made for the risk associated with the detailed design work not being completed, at the time of financial close” [ibid, page 0005, paragraph 8.1]. When these paragraphs are considered together I am of the view that the statement that detailed design would be completed in the coming months created the impression that this would occur within a few months after financial close and that some financial provision had been made for that eventuality.

13.181 Mr Fraser gave evidence that he was surprised by the reference in the report to the detailed design being “completed in the coming months”. At that stage, progress with the designs was still very slow, and he considered that the length of time required to complete detailed design was indeterminate because the design programme kept slipping. He considered that this reference in the report was slightly misleading [PHT00000004, pages 129–130]. Although tie was advising CEC that the transfer of risk to the private sector had largely been achieved, Mr Fraser was more sceptical, and he could not understand how that could be so, given that design was incomplete and few approvals and consents had been obtained [ibid, page 136.]

13.182 Mr Holmes, who had responsibility for the report along with Mr McGougan, also gave evidence to the Inquiry about this matter. He acknowledged that the report omitted reference to the fact that design was only about two-thirds complete and that there was a chronic history of design difficulties and delays. He had been aware of that at the time of the report, but he believed that what was emerging at that time was going to “de-risk” that element [PHT00000042, pages 72–73]. Mr Holmes accepted that, with hindsight, the report to the Council could have said more about the outstanding risks and how they were being addressed, including, for example, in relation to CEC’s understanding of the transfer of design risk through SDS novation. He said that there was no intention to mislead members, and CEC officials tried to summarise matters as they understood them at the time, and relied on assurances from tie that issues had been dealt with [ibid, page 74].

13.183 I do not consider that it was appropriate to omit reference to significant design delays on the basis of such assurances without subjecting them to careful scrutiny. The report should have advised councillors of such delays and thereafter explained what steps were being taken to remove or mitigate risks associated with them. Such an approach would have provided councillors with a factually correct report on design progress and would have enabled them to consider whether the proposed measures to transfer or mitigate the associated risk were adequate. In particular, they could have questioned how long it was likely to take to complete the detailed designs in view of the chronic history of difficulties and delays with design and whether the cost allowance mentioned in paragraph 8.1 of the report was adequate.

13.184 I agree with Mr Fraser that the report was misleading in the above respect, but I disagree with his suggestion that it was “slightly” misleading. There was no reasonable basis for asserting that design would be completed in the coming months. To make such a statement, while not making members aware of the chronic design delays, was inaccurate and misleading. The stage of the design
was significant because it would affect the willingness of Infraco to accept the transfer of all design risk from the public sector to it by novation. It could also affect the terms upon which Infraco might be willing to accept such risk.

13.185 Apart from the issue of design, I have considered the treatment in the report of issues relating to the MUDFA works. Mr Holmes was also aware that there had been delays and difficulties with the MUDFA works, but there was no mention of them in the report. He explained that failure by stating that he had been relying on assurances that he had received about how that work was going to be resolved and integrated with the construction programme. He said that the intention had been

“to try and summarise the case as we assumed it at the time, that on the basis of the assurances in discussions that these issues had been dealt with” [ibid, pages 73–74].

13.186 In my opinion, this omission was significant and misleading. The purpose of the report was to inform councillors of the situation that existed – not of what officials assumed it to be, based on assurances from tie.

13.187 Mr Holmes’ explanation for omitting the reference to delays and difficulties with the MUDFA confirms my suspicion, expressed in paragraph 13.178 that CEC officials placed undue reliance upon assurances given to them by tie without subjecting such assurances to careful scrutiny. Where, as appears to have been the case, the expertise to test the assumptions in the business case and assurances given about it did not exist within CEC, CEC senior officials ought to have sought an independent assessment of these issues from a suitably qualified and experienced firm of multi-disciplinary engineering, transport and project management consultants to advise them. As was said to tie when CEC proposed to instruct Turner & Townsend in September 2007, the instruction of an independent assessment was not intended to reflect adversely on tie. Rather, it was designed to inform CEC officials in their scrutiny of the risk exposure of CEC. The mere acceptance of tie’s assurances and estimates of CEC’s risk exposure even where these emanated from a company that was wholly owned by CEC was, to my mind, reckless. It failed to protect CEC’s interests, particularly when one has in mind that this was the largest capital project undertaken by CEC and one of the largest capital projects in Scotland where the financial consequences of failure to deliver the project on time could be, and ultimately were, severe. An added risk for CEC was the lack of any effective remedy against tie, irrespective of the nature and extent of any failures by it that resulted in loss to CEC.

13.188 As regards FBCv2, in Chapter 10 (Events between October and December 2007), I have concluded that it contained a number of inaccurate and misleading statements. In short, these related to issues of cost, implementation of the procurement strategy, work on design, MUDFA and a flawed approach to risk.

13.189 The statements in the FBC to the effect that the capital costs had been agreed and finalised at a level slightly below the draft FBC estimate were untrue. The forecast that the estimated cost for phase 1a of £498 million was misleading. The price for
the Infraco works had not been fixed and the transfer of risk of design had not
been achieved.

13.190 Unlike the report, FBCv2 did mention the utility diversions at paragraph 1.85. That paragraph identified utility diversions as one of the three most significant risks. The business case proposed that tie would manage the interface between MUDFA and Infraco works, and it recognised that delays in handing over worksites to Infraco could result in significant financial penalties. Accordingly, work had started on the MUDFA works in 2007 and their progress to date had been “excellent with no major issues encountered so far” [CEC01395434, Part 1, pages 0019–0020, paragraph 1.85].

13.191 As with version 1 of the FBC, this did not reflect the reality of the situation. Prior to November 2007, the monthly progress reports relating to utilities diversions were prepared by AMIS and submitted to tie. They regularly reported concerns about lack of IFC utility design drawings and necessary information from utility companies. In November 2007, tie had started preparing the monthly progress reports in relation to MUDFA. The first report was dated 17 December 2007 and covered the period from 10 November to 7 December. It recorded a cumulative slippage in the programme of 804 metres and 7 chambers. In addition, in section 1B (from the foot of Leith Walk to McDonald Road) there were early indications that the programme was exhibiting signs of slippage. Moreover, there was significant delay in the issue of IFC utility drawings. A graph appended to the report showed the extent of that delay. Only 44 IFC design packages had been issued, compared with an anticipated 138, representing about 32 per cent of those originally planned to be issued by that date [CEC01452199, pages 0001–0002 and 0027]. Thus, it is clear that tie had knowledge of such issues. CEC officials were also aware of delays and difficulties with MUDFA works, but Mr Holmes explained that he was relying upon assurances from tie about how these would be resolved and integrated with the construction programme. Mr Holmes stated that, with the benefit of hindsight, CEC was “not necessarily getting the full position on the utilities diversion works” and in its reporting tie was “being overoptimistic as to the rate of progress and the completion of the works” [PHT00000042, page 79]. I have concluded that the statement about progress of the MUDFA works in the business case was inaccurate and liable to mislead the councillors.

13.192 I also consider that the report to the Council and the FBCv2 were inaccurate and misleading in respect of the extent to which the aims of the procurement strategy had been, and were likely to be, achieved. By December, the procurement strategy had not worked and was being departed from but was presented to CEC as still being implemented. In particular, it was an important part of the procurement strategy that design and utility diversions would be completed in advance of the infrastructure works. The problems and delays with design and the utility works (which I have found were not properly reported to members) inevitably meant that it would be difficult to achieve the aims of the procurement strategy of transferring risk to the private sector and achieving a fixed price for the infrastructure works. Against that background, it was unhelpful, and inaccurate, for the report to CEC to state that the fundamental approach to the tram contract had been to transfer risk to the private sector and that “[t]his has largely been achieved” [CEC02083448, page 0006, paragraph 8.10].

Conclusions

13.193 As was discussed more fully in Chapter 4 (Legal Advice), I do not consider that the unsigned letters of engagement between DLA and CEC were adequate to protect CEC’s interests in respect of the emerging Infraco contract.

13.194 The management, culture and working relationships within the Council Solicitor’s department disclosed inefficiency and a lack of mutual respect by the Council Solicitor, on one hand, and Mr C MacKenzie and Mr N Smith, on the other, which were not conducive to the efficient performance of their professional obligations
to provide legal advice to, and act in the best interests of, CEC.

13.195 Having regard to the lack of the necessary specialist expertise and experience within the Council Solicitor’s Department to undertake a detailed review of the contracts for the Tram project, particularly the Infraco contract, for the purpose of identifying the main risks for CEC arising from them and in view of the financial exposure of CEC as guarantor in these contracts without CEC having any effective remedy against tie for any of its acts and omissions resulting in loss to CEC, I consider that CEC ought to have insisted upon being the primary client of DLA if tie was also to be a client.

13.196 Alternatively, in the absence of any agreement recognising the primacy of CEC if tie was also a client of DLA, CEC ought to have instructed an independent firm of solicitors to undertake a review of the risks to it arising from the draft Infraco contract as it evolved from 2007 and, in any event before its signature in May 2008.

13.197 Having regard to the lack of the necessary specialist expertise and experience within CEC to review tie’s assessment of risks I consider that CEC ought to have instructed a suitably qualified firm of multi-disciplinary engineering, transport and project management consultants to undertake a detailed review of risk in accordance with the brief specified in the Invitation to Tender Notice mentioned in paragraph 13.70. In fulfilling that brief those conducting such a review would have examined the documents specified in the brief, notably the FBC, the proposed Infraco contract and the contract Heads of Terms and Risk Matrix prepared by tie’s legal advisers (DLA). They would also have the opportunity to interview relevant personnel in CEC and tie and would have reported on the state of the project, the risks to CEC, the quantification of these risks and whether the proposed risk allowance was adequate.

13.198 As project manager, tie had no role other than to comply with CEC’s instructions to appoint Turner & Townsend and to co-operate in the review as required by CEC and the reviewers. It was inappropriate, and contrary to CEC’s interests, that tie, whose assessment of risk was to be the subject of review, was permitted to determine the identity of the reviewer and the nature and scope of the review and to overrule CEC’s desire to engage Turner & Townsend. tie’s actions illustrated a failure on its part to recognise its obligation to act in the best interests of CEC at all times and a failure of senior officials in CEC to ensure that tie was complying with that obligation.

13.199 Had Turner & Townsend undertaken a review in accordance with the brief detailed in CEC01652669, as opposed to the different high-level OGC review instructed by tie, they would probably have gone into much more detail than the OGC review and might have acted as some sort of audit on the numbers in the QRA.

13.200 The Executive Summary of the FBCv1, which formed Appendix 2 to the report to the Council on 25 October 2007, contained a number of material errors and omissions and was misleading. These included false assurances that the work to award the main contracts had reached a stage at which all material terms, including the capital costs, had been agreed; that “fixed price” bids for the Infraco contract had been received; that progress on the diversion of utilities had been excellent and that no major issues had been encountered; and the omission to mention that, contrary to the procurement strategy, detailed design was incomplete, and few, if any, approvals and consents had been obtained.

13.201 The report to the Council on 20 December 2007, and the accompanying FBCv2, also contained errors and omissions similar to those mentioned in paragraph 13.200 above, and was misleading.

13.202 More generally, I consider that, in the autumn of 2007, CEC’s senior officials (largely relying upon assurances by tie) and Mr Gallagher provided councillors with an overly optimistic view of the Tram project, thereby inhibiting councillors from reaching properly informed decisions in relation to the project.

Footnotes

19. This will be considered further in Chapter 21 (Risk and Optimism Bias). ↵

20. See paragraphs 10.80–10.110. ↵

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