Chapter 14: CEC: January – May 2008

Introduction

14.1 As was discussed in Chapter 13 (CEC: Events during 2006 and 2007), at the meeting of the City of Edinburgh Council (“CEC”) on 20 December 2007, CEC approved the second version of the Final Business Case (“FBCv2”) and authorised Transport Initiatives Edinburgh Limited (“tie”) to award the infrastructure contract (“Infraco contract”) and the tram vehicle supply and maintenance contract (“Tramco contract”), subject to price and terms being consistent with FBCv2 and subject to the Chief Executive (Mr Aitchison) being satisfied that all remaining due diligence had been resolved to his satisfaction. The intention remained to achieve financial close, and the award of the Infraco contract and Tramco contract, by the end of January 2008. As was discussed in Chapter 10 (Events between October and December 2007), the agreement following the meeting in Wiesbaden on 13 and 14 December was signed on 20 and 21 December and is entitled ‘Agreement for Contract Price for Phase 1A’ [CEC02085660, Parts 1–2]. Thereafter negotiations continued, leading to the issue of the Notice of Intention to Award (“NIA”) the Infraco contract and the Tramco contract on 18 March 2008 and the signature of these contracts on 14 May 2008. The inclusion of the Tramco contract simply recognised the need to co-ordinate the signature of the Infraco contract and the Tramco contract because they were both necessary for the Tram project, and the intention was to vary the Infraco contract immediately after its signature to incorporate the Tramco contract. Thereafter the consortium would include Construcciones y Auxiliar de Ferrocarriles SA (“CAF”) and be known as BSC. In this chapter I have restricted my consideration to CEC’s decision to authorise tie to publish the NIA relating to the Infraco contract and to negotiations with the Bilfinger Siemens Consortium (“BBS”) leading to the conclusion of that contract.

14.2 By email dated 3 January 2008, Ms Lindsay advised Mr C MacKenzie that it was imperative that CEC’s legal department fully support work and progress towards delivery of the Edinburgh Tram project (“the project”). She asked Mr C MacKenzie to ensure that all possible resources relating to the project were utilised on a full-time basis to support the legal work that required to be undertaken as a matter of urgency during January and leading to financial close, which was planned for the end of that month. As was to become apparent, that timescale for concluding contract negotiations was unrealistic.

14.3 Ms Lindsay requested that Mr C MacKenzie have “constant interface with Dr Fitzgerald” of DLA Piper Scotland LLP (“DLA”) in respect of understanding, recognising and providing instructions as appropriate concerning progress towards financial close and risk assessment of the principal contracts [CEC01400439]. Mr C MacKenzie gave evidence that he did not recall that there was much contact at all with Dr Fitzgerald during this period and that, instead, there continued to be contact with Mr Fitchie of DLA [PHT00000026, pages 59–60]. This is consistent with the evidence, noted below, that, from time to time, Mr Fitchie provided Ms Lindsay with letters from DLA advising on the contract suite, together with a contract risk matrix.

14.4 Before considering events between January and May 2008, it is convenient to address concerns expressed by members of the “B team” in relation to tie’s reporting and information sharing with them throughout the project. If well founded, the significance of such concerns is that any lack of transparency and co-operation with CEC officials would interfere with the role of these officials in ensuring that the price and terms of any draft agreements between tie and Infraco were consistent with FBCv2 and that the interests of CEC as tie’s guarantor and ultimate funder of the Tram project were protected.

14.5 In an email dated 19 February 2008, Mr C MacKenzie advised Ms Lindsay of his concerns about tie’s lack of transparency and co-operation with CEC officials [CEC01400919]. Mr C MacKenzie gave evidence that, from around the summer of 2007, the “B team” had been disappointed and frustrated with tie’s lack of transparency and its delivery of facts and information to CEC [PHT00000026, pages 66–67]. He considered that tie did not welcome the role of CEC legal, that higher up within tie there was more than a hint of resentment of the role that CEC legal was performing, and that CEC legal was perceived to be asking awkward questions while attempting to represent CEC’s interests [TRI00000054_C, pages 0108 and 0113, paragraphs 222 and 235]. He also gave evidence that, in March 2008, he did not feel that CEC was being provided with a complete picture with regard to risk, and he was taking comments from tie with “a pinch of salt”. His doubts were increasing, and his trust in what tie was telling CEC was decreasing [PHT00000026, page 72; TRI00000054_C, pages 0065 and 0067, paragraphs 142 and 144].

14.6 Mr Coyle expressed “concerns that CEC were not party to all the information it needed to get comfortable with the risks that were being taken” [TRI00000144_C, page 0040]. Mr Fraser gave evidence that he agreed with the views expressed by Mr C MacKenzie about tie’s lack of transparency with CEC [TRI00000096_C, page 0040].

14.7 Ms Andrew gave evidence that she had concerns about tie’s lack of transparency with CEC officials throughout her dealings with the company and throughout the project. There was not a systematic or proactive way for sharing important information with CEC officials, who would pick up partial information from Tram Project Board (“TPB”) papers or conversations with tie staff. Difficult or awkward questions could result in a complaint to CEC senior management. Ms Andrew experienced that personally when, after attending a meeting of the TPB, her superior, Mr McGougan, was approached and she was requested not to attend any future meetings. Ms Andrew considered that it felt as though tie did not understand that CEC’s officials had a duty to question them to ensure that CEC’s interests were being protected [TRI00000023_C, page 0047].

14.8 I accepted that these were legitimate concerns, genuinely held by members of the “B team” at the time. Mr C MacKenzie articulated his concerns in his email to Ms Lindsay on 19 February 2008 [CEC01400919] mentioned in paragraph 14.5 above. Moreover, their suspicions about the extent of tie’s co-operation with CEC and the completeness of the information provided by tie were supported by the evidence of Mr Hamill concerning his email dated 27 May 2008 addressed to Mr Bell, Mr McGarrity, Ms Clark and Mr Murray, all of tie, about making a manual adjustment to the quantitative risk analysis (“QRA”) to reduce the risk allocation for delay and the overall risk allocation by £1.3 million. In that email he explained that he thought that the manual adjustment helped tie to “get the final result past CEC as I doubt that they will notice what I have done” [CEC01288043]. He also thought that the manual adjustment was the best way to avoid “unnecessary scrutiny from our ‘colleagues’ at CEC” [ibid]. When asked about his reason for putting the word “colleagues” in inverted commas he explained that it was “reflective of the atmosphere and mood at the time between tie and CEC personnel” [PHT00000023, page 62]. There then followed this exchange:

“Q. How would you describe that mood?

A. Well, they certainly weren’t aligned. So if you think – if you like, the tie employees obviously wanted to – it was in their interest for the project to go ahead, and there was a general feeling that some of the CEC employees were – let’s just say they wouldn’t have been unhappy if the project had been cancelled or it hadn’t got across the line.

So there was – the relationship between some of the tie and CEC people at that point wasn’t – wasn’t very harmonious.” [ibid, pages 62–63.]

14.9 Although this event occurred shortly after the Infraco contract was signed, it is indicative of the culture within tie and the attitude of its employees towards co-operating with CEC. It suggests that tie was unwilling to share information that might have a negative effect on the project or that would cause CEC to undertake independent investigations of the contract suite and the allowance for risk. In Chapter 13 (CEC: Events during 2006 and 2007), I referred to the attitude of tie to CEC’s publication of a notice inviting tenders for the appointment of external consultants to review and quantify the risks to CEC arising from the proposed Infraco contract. Mr Bissett’s internal email dated 19 September 2007 is a clear indication of tie’s failure to acknowledge CEC’s legitimate interest in undertaking independent scrutiny of the contract and the public-sector’s risk exposure and of tie’s resentment at CEC’s officials’ attempts to protect those interests. In that email Mr Bissett referred to the decision to instruct independent consultants as “[a] shambles that should have been strangled at birth” and stated that tie needed “to control this process from this point on” [CEC01643076].

Events between January and 18 March

14.10 Following CEC’s approval of FBCv2, negotiations continued between BBS and tie to finalise the terms of the Infraco contract. As part of the process tie published the NIA on 18 March 2008. As Mr Fitchie explained in his evidence, the publication of the NIA was

“a stage beyond conferring Preferred Bidder status, which indicates that the award of the contract is imminent and that the parties have concluded all permitted negotiation” [TRI00000102_C, page 0221, paragraph 7.473].

14.11 It is a precursor to the award of the contract and affords the parties a short period to reflect upon the terms of the negotiated deal before formally committing to it. As was discussed in Chapter 11 (Contract Negotiations), it also confers certain rights on the unsuccessful bidder.

14.12 A question arose in the evidence concerning the appropriateness of issuing the NIA on 18 March. In his evidence Mr Fitchie stated:

“In my experience, it is entirely outwith normal procurement management practice for the procuring party to issue a Notification of Intention to Award when the parties are still in negotiation over central contractual documentation, as was still the case on 18 March 2008. For example there was: no agreed contract price; no milestone payment schedule; no bills of quantity; no agreed master construction programme with critical path to PSCD; and no agreed post novation design delivery programme.” [ibid, page 0029, paragraph 2.147.]

14.13 Mr Fitchie’s statement about lack of agreement concerning essential contract terms and central contract documentation is supported by the other evidence available to the Inquiry, and will be discussed below.

14.14 The consequences of issuing the NIA prior to agreement on contractual terms were that it “would strengthen BBS’s resolve to squeeze all the pricing and/or risk transfer concessions that they could from TIE” [ibid, page 0222, paragraph 7.479] and that there was an increased risk of a procurement challenge from the unsuccessful bidder if there was an extended delay between the publication of the NIA and contract close. Mr Fitchie had advised tie of his views on this matter on several occasions in January 2008 and had succeeded in stalling the publication of the NIA for several months [ibid, page 0222, paragraphs 7.479 and 7.481]. He stated that:

“TIE did not appear to agree with my view that issuing the Notice of Intent prematurely would simply strengthen BBS’ negotiating hand – but it did. And it impacted TIE’s ability to simply withdraw BBS’s preferred bidder status.” [ibid, page 0222, paragraph 7.481.]

14.15 This evidence seems to me to indicate a clear divergence of interests between tie and CEC. In those circumstances Mr Fitchie ought to have advised CEC of the potential conflict of interest arising at that time.

14.16 In considering the appropriateness of publishing the NIA on 18 March, one should also remember that entering into the Infraco contract was a reserved matter for CEC and was excluded from the delegated responsibility of the Tram Project Board for delivery of an integrated Edinburgh Tram and Bus Network [CEC02083455, page_0005]. Moreover,the contract could not be signed without the authority of the Chief Executive that had been delegated to him by CEC. In these circumstances tie also required the Chief Executive’s authority to publish the NIA as an essential precursor to the signature of the contract. His authority was circumscribed by the need for the terms of the negotiated contract to be consistent with FBCv2 and by the necessity for him to be satisfied that all due diligence had been resolved. The effect of the above considerations was that it was necessary for the Chief Executive to be made aware of the relevant terms of the negotiated contract before he could be satisfied that they did not differ in any material respect from FBCv2. Obviously, he could not be so satisfied if material conditions were still the subject of continuing negotiations. In addition, he had to be satisfied that all remaining due diligence had been resolved. In the absence of these requirements he could not authorise tie either to publish the NIA or to sign the contract. The need for him to be satisfied about the consistency of the contract terms with FBCv2 and the resolution of due diligence did not mean that he had to consider the relevant documents himself. He could rely upon others doing so and providing him with advice. He did so, and entrusted these tasks to the two directors responsible for the project (the Director of City Development (Mr Holmes) and the Director of Finance (Mr McGougan)) and the Council Solicitor (Ms Lindsay). The involvement of these officials in supporting the Chief Executive in the exercise of his delegated authority reflected the report by the Director of City Development and the Director of Finance dated 17 December 2007 [CEC02083448, page 0007, paragraph 8.12] and approved by CEC at its meeting on 20 December 2007 [CEC02083446, page 0019, paragraphs 2 and 3].

14.17 In the foregoing circumstances it was necessary for CEC to advise tie what information would be necessary to enable the Chief Executive to exercise his delegated authority. Accordingly, in an email dated 10 January 2008, Mr C MacKenzie advised Ms Clark, of tie, of the “deliverables” that were required to enable the Chief Executive of CEC to authorise tie to enter into the Infraco contract and the Tramco contract [CEC01485884]. As was discussed in Chapter13 (CEC: Events during 2006 and 2007), these deliverables had arisen from the concerns expressed in the directors’ briefing note prepared by members of CEC’s “B team” for the meeting of the Internal Planning Group (“IPG”) on 11 December 2007 [CEC01400191].

14.18 In relation to the contracts, the deliverables included that all contract terms required to be finalised and ready to be signed, supported by a letter from DLA to the Council Solicitor, together with updated risk allocation matrices. An explanation of the risk profile was required “so as to give comfort to the Chief Executive before the Council executes the Guarantee in respect of tie’s financial obligations” [CEC01485884, page 0001]. tie was also to provide a list of the items specifically excluded from the Infraco contract, with a financial value against each item, and to advise on the current status of the Multi-Utilities Diversion Framework Agreement (“MUDFA” ) and whether it had the potential to hold up the Infraco contract and result in an increase in costs. In relation to risk, there was a need for the QRA to be fully transparent. tie required to produce a summary statement on the QRA, with details of black-flag risks and the strategy for avoiding them materialising, together with an assessment of the cost of exiting them. CEC also needed details of the risk management strategy for the key risks and a detailed analysis of programme risks, together with the risk allowance for programme delay. tie was to produce a written statement comparing each risk as at 25 October 2007 and January 2008, explaining any changes in cash value. In relation to pricing, CEC required a detailed analysis of prices, costs and risk allowances. A statement was required of the percentage of fixed costs and the percentage outstanding as provisional sums (with a programme for moving these to fixed costs).

14.19 The report to the IPG on 24 January 2008 (and subsequent reports) included an appendix showing the status of the various deliverables (also called “critical contractual decisions”) necessary to enable the Chief Executive of CEC to use his delegated powers to authorise tie to award the Infraco contract and the Tramco contract [CEC01390618]. By 17 March 2008, a number of necessary critical contractual decisions were still outstanding in respect of the Infraco contract, including the Employer’s Requirements, value engineering, pricing and funding and System Design Services (“SDS”) assurances [CEC01399109; CEC01399110].

14.20 The reference to critical contractual decisions relating to pricing concerned negotiations to finalise the pricing schedule of the Infraco contract, Schedule Part 4 (“SP4”), which will be considered later in this chapter and was also considered in Chapter 11 (Contract Negotiations). However, prior to 18 March, price increases of £8 million, £3.8 million and £8.6 million had been agreed and were reflected in the Wiesbaden Agreement on 20 and 21 December 2007, the Rutland Square Agreement on 7 February 2008 and the Citypoint Agreement on 7 March 2008 respectively, all of which were discussed more fully in Chapter 11 (Contract Negotiations). Some of these sums represented the conversion of provisional sums to fixed prices, but there was an overall increase of £10 million in the price of £498 million reported to CEC on 20 December 2007.

14.21 Another issue that was outstanding at 18 March related to design risk and novation of the SDS contract. As was explained in Chapter 5 (Procurement Strategy), tie expected that, by the time that the Infraco contract was signed, the design of utility diversions would be complete; planning permissions for the most critical sections (that is, between Haymarket and St Andrew Square) would have been granted; and the design would be “60-70% complete” [CEC01875336, Part 3, page 0054, paragraph 5.7.1]. Mr Kendall explained that this meant that the scope of the project would be designed and that, insofar as design was incomplete, it would be in matters of “detailed engineering”. Had the original procurement strategy been followed, of completing design sufficiently to enable CEC to grant most, if not all, of the necessary approvals in advance of the finalisation and signature of the Infraco contract, the System Design Services contract (“SDS contract”) would have been novated to the Infraco contractors, who would retain design development risk. From January until the issue of the NIA in March, and thereafter between the issue of the NIA and the award of the Infraco contract, CEC officials sought clarification about the risks retained by the public sector associated with design delays.

14.22 On 7 January 2008, an update on the current status of design was given to a meeting of the CEC/tie legal affairs group. The meeting was advised that SDS had completed 70 per cent of detailed design and that BBS was “prepared to accept SDS under novation agreement [in respect of] (the quality of design, programme and commercial position)” [CEC01475121, page 0004]. BBS was not prepared to sign up to the risk of delays associated with consents and approvals because there was no time limit on SDS to obtain all necessary approvals, whereas the Infraco contract had a liquidated damages mechanism in place for delay. The tie commercial team was working through these issues with BBS, but the expectation remained that financial close would take place on 28 January 2008, with the NIA being published on 18 January to allow for the 10-day cooling-off period.

14.23 In the information listed in Mr C MacKenzie’s email to Ms Clark, dated 10 January, under the heading “SDS Assurances” [CEC01485884, page 0002], which is mentioned in paragraph 14.17, tie was required to provide CEC with a full written explanation of SDS novation, including the risks of failing to deliver design and whether that would lead to an extension of time claim and additional costs being payable to BBS. Full details were also required from tie of the status and degree of completion of SDS design work as at 14 January 2008, including prior and technical approvals. If approvals risk was not being transferred to BBS, CEC required to know the impact and likelihood of the risks and the strategy for managing them. tie was required to confirm that the public sector would not incur the cost of any delays by the planning authority or roads authority in processing prior and technical approvals.

14.24 The minutes of a meeting of the CEC/tie legal affairs group on 21 January 2008 note that Mr N Smith queried who would be liable if the SDS provider did not work to the programme, and that he was advised by Mr Crosse, of tie, that the SDS novation agreement would take care of that. At Mr N Smith’s request, Mr Crosse was to confirm that the agreement contained details of who would take the risk of knock-on effects of delays [CEC01476409, page 0003]. In his evidence to the Inquiry, Mr N Smith stated that it was obvious to him, from a common-sense perspective, that delays to design could impact on the infrastructure works and programme, which could, in turn, create risks for CEC, and so he asked the “daft laddie” question of who would be liable if the designer did not work to programme. tie’s response was to the effect that “this is all taken care of, don’t worry about it” [PHT00000005, pages 181.

14.25 In an email dated 22 January 2008 [CEC00481318], addressed to members of the “B team” and copied to Ms Lindsay, Mr N Smith advised of “a significant issue” in relation to which party bore the risks arising from incomplete design, approvals and consents, against the background that the design process was now more than 12 months late in delivery and SDS contractors were under no definitive timetable for the production of design (there being no penalties for non-timeous delivery in the SDS contract). He noted that although these issues were highlighted in the briefing note provided to directors for the meeting of the IPG on 11 December 2007, “the full extent of the risk is becoming clearer as contract close gets closer with no appreciable advance is [sc. in] approvals being obtained” [ibid, page 0006]. In an email dated 23 January 2003 (in the same chain), Mr Fraser stated that:

“Based on our confidence and experience to date we do not expect any of the submission[s] to [be] right first time and also expect a number of iteration[s] until they are acceptable. This means that each time the submission is re-submitted the clock starts again.” [ibid, page 0002.]

14.26 The implications of the above statement should be considered in light of Mr Fraser’s statement in an earlier email on that date (in the same chain) that planners might not like the shape or form of an object even although its design complied with the minimum standards contained in the Tram Design Manual [CEC00069887] and other CEC policies and guidelines. If approval was withheld in that situation he envisaged that the additional cost from any consequent delay would be borne by CEC. In my opinion, there was a reasonable likelihood of CEC’s exposure to risk arising from delay attributable to the need to change the shape or form of an object in view of the status as a World Heritage Site of those parts of the city between Haymarket and Leith Walk in the vicinity of London Road, through which the tram would travel, and the probable need for several iterations of submissions before obtaining the necessary approvals. That risk would not have existed if tie had followed the original procurement strategy of obtaining most, if not all, of the necessary approvals in advance of the award of the Infraco contract or if, having recognised the existence of significant delay in the completion of designs and obtaining the necessary consents, tie had postponed the award of the contracts until the designs had been completed and the necessary consents and approvals obtained.

14.27 The scale of the problem with consents and approvals is illustrated in the report to the IPG on 24 January 2008, which noted, under planning prior approvals, that, of 63 batched submissions, 1 planning permission had been granted, 8 prior approvals had been granted, a further 8 prior approvals were currently under consideration, 2 submissions had been cancelled and 44 batches remained to be submitted for prior approval (of which 26 batches were under informal consultation) [CEC01390618, page 0007]. Of the batches received, a number had been put on hold, awaiting revised details from the designers. There was noted to be concern that prior approvals might have to be revisited if there were substantial changes as a result of inter-disciplinary co-ordination, technical approvals or value engineering. In addition, no technical roads approvals had been obtained and there was significant slippage in that respect. The report contained a table showing the extent of the delay to the programme for obtaining roads technical approvals based on a proposed programme (version 24) which would become the contractual programme with BBS. Comparing version 24 of the programme with the base programme (version 17), the slippage in obtaining these approvals for different sections of the route varied from about 6 weeks (41 days) to about 11 months (336 days).

14.28 Little progress was made in the following month, as was shown in the report to CEC’s IPG on 29 February 2008. In respect of planning prior approvals it recorded that, of 63 batched submissions, 1 planning permission had been granted, 11 prior approvals had been granted, 1 application was pending consideration at planning committee, 8 prior approvals were under consideration, 2 submissions had been cancelled and 40 batches remained to be submitted for prior approval (of which 25 were under informal consultation) [CEC01246993, page 0006]. It was, again, noted that a number of batches received had been put on hold, awaiting revised details from the designers, and concern was, again, expressed that prior approvals might require to be revisited if there were substantial changes in design. In relation to technical approvals, it was noted that CEC had received 2 out of 14 roads technical approvals and that the programme for the remaining approvals was still being revised to align with the Infraco construction programme.

14.29 The concern at that time about CEC’s exposure to risk attributable to delays in obtaining consents and approvals is illustrated by the email dated 29 January 2008 from Mr N Smith to Ms Lindsay, which included a proposed text for Ms Lindsay to send to Mr Holmes and Mr McGougan [CEC01395151]. Mr N Smith noted that only approximately 20 per cent of approvals and consents had been granted, and that

“as CEC has no real visibility on what is being delivered in relation to the currently unapproved drawings, this opens up the possibility of significant risk of increased cost to the project” [ibid, page 0001].

14.30 The proposed text stated that the only way to exclude that risk entirely would be to require all drawings to be approved before financial close, which would be impossible on current timescales. The proposed text queried whether these directors were of the view that CEC should accept the unquantified risk of claims for compensation from BBS as a result of that situation. It is not clear whether Ms Lindsay sent an email or a note to that effect to Mr Holmes and Mr McGougan on these matters or, if so, what their response was.

14.31 Ms Lindsay gave evidence that this was the first time that she had been made aware that not all of the design risk would be passed to BBS following SDS novation and that some of that risk would be retained by tie. She understood that if there was a delay in obtaining consents, which resulted in additional costs, BBS would require to claim liquidated and ascertained damages from the SDS contractors in terms of the novated contract, but only up to a particular cap, beyond which the exposure would lie with tie, and ultimately CEC as the guarantor and funder of the project. tie had advised that the position that it had negotiated in that regard was the best that could be achieved and that there would be additional and separate risk within the QRA to deal with that. Ms Lindsay’s own instinctive view was that the proposed cap appeared small and that the allowance for that particular risk in the QRA seemed relatively modest [PHT00000027, pages 84–86 and 96]. Her view did not alter prior to the award of the Infraco contract in May 2008, although she acknowledged that it was just an instinctive view. She had no specialist knowledge of, or role in, financial and technical matters and deferred to the two responsible directors on such matters, namely the Director of Finance and the Director of City Development [ibid, pages 97–98, 119–121 and 125].

14.32 By email dated 19 February 2008, Mr C MacKenzie provided Ms Lindsay with an update following the meeting of the legal affairs group the previous evening [CEC01400919]. He noted that the position regarding novation of the SDS contract had been given next to no clarification at the meeting, with a contradictory explanation having been given by tie.

14.33 By email dated 22 February 2008, Mr Bissett, of tie, circulated a draft paper on “SDS – DELIVERY AND CONSENT RISK MANAGEMENT”, setting out how it was proposed to address the risks arising from the overlapping design and construction periods and the outstanding approvals and consents [CEC01474243; CEC01474244]. The draft paper noted that tie/CEC were exposed to risks relating to timeliness of submission of design and/or quality, which could be heightened by deliberate or inadvertent actions by BBS/SDS. In summary, it was proposed that these risks would be controlled by management processes (led and directed by tie/CEC) and by focusing on the key elements of design, which had been subject to prioritisation to mitigate their risk profile. The combination of controlling the management process and focusing on the key elements of the residual risk were considered to constitute “an effective risk mitigation framework”. In addition, there was a risk contingency of £3 million in the QRA, which related to the approvals and consents risks described in the paper.

14.34 Mr Fraser gave evidence that although he welcomed the fact that steps were being taken to minimise the design risk, he remained of the view that the allowance for that risk required to be substantial (provisionally, £25 million), and that it was difficult to understand the justification for having an allowance for that risk of only approximately £3 million [TRI00000096_C, pages 0042–0043].

14.35 In an email dated 28 February 2008 [CEC01400987], Mr C MacKenzie advised Ms Lindsay of his concerns that there had been a number of changes since the report to the Council in December 2007 and that there was a need for the Chief Executive to seek the fresh authority of members at the CEC meeting on 13 March to allow him to authorise tie to enter into the Infraco contract and the Tramco contract. That did not occur. There is no reference to the project in the agenda for, or minutes of, that meeting [CEC02083387; CEC02083388 Parts 1–4]. In that email Mr C MacKenzie also identified SDS novation and the costs of dealing with it as the “number one risk for the Council”. He explained that it was unclear what the financial and legal implications were for CEC “because the Council is not kept fully advised of ongoing discussions between tie, SDS and BBS” [CEC01400987, page 0003].

14.36 In a reply dated 29 February 2008, in the same chain, Ms Lindsay advised Mr C MacKenzie that, essentially, matters were unresolved in relation to SDS and novation. She stated:

“My concerns are around the robustness of risk and contingency as although I accept there are movements from risk to price and closing of … some risks, I believe that the residual risk re SDS may be very significant and I understand we still have no figures to assess this … The previous level of around £3m is appearing to me grossly undervalued depending on final position. I agree fully with Donald that we need the best contract and if more money is required for the contract sum that is more easily dealt with as it is a defined figure. I am also concerned re timetable to close and whether we can close to an award of notice stage by 10 March in current circumstances.” [ibid, page 0002.]

14.37 While Ms Lindsay stated that she had no knowledge of, or responsibility for, financial matters and deferred to the two responsible directors, Mr McGougan and Mr Holmes, her instinctive reaction supports the evidence of Mr Fraser that £3 million was a gross underestimate of the allowance for design risk.

14.38 On 10 March 2008, Mr Bissett circulated the “approval supporting documents”, comprising an updated draft Close Report and a DLA report, letter and risk matrix [CEC01393819; CEC01393820; CEC01393821; CEC01393822]. Mr Bissett stated that the main outstanding areas in the draft Close Report included the section on the pricing schedule (which was being finalised) and the appendix on design and consents (which would require to be updated to the final position on submission and consent status).

14.39 In an email dated 11 March 2008 [CEC01393838], addressed to Mr Bissett, Mr Holmes, Mr McGougan and Ms Lindsay as well as members of the “B team”, Mr C MacKenzie advised that members of the “B team” had met to consider the documents supplied by Mr Bissett, as a result of which they were not yet in a position to advise their directors and heads of service that they could recommend to the Chief Executive that he should exercise his delegated authority to authorise tie to award the contracts. Mr C MacKenzie listed a number of crucial points that remained outstanding, including the need for more details on price and value engineering and the settled position on SDS novation. As was explained in paragraph 10.25 relating to events in December 2007, value engineering was a means by which it was hoped that savings could be made on the contract price without compromising the functioning of the works.

14.40 By email dated 11 March 2008 [CEC01490289], Mr Coyle advised tie that before CEC could approve the issue of the NIA for the Infraco contract and the Tramco contract, CEC required a letter from Mr Gallagher stating that tie considered that the deal with BBS/CAF represented value for money on price, scope and programme and that it was the appropriate time to issue the NIA. He also stated:

“Assurance is also required on the outstanding risks and that the level of risk allowance, as determined by the QRA is appropriate … and that the price is now fixed (excluding know[n] estimated costs).” [ibid]

14.41 By letter dated 12 March 2008 [CEC01399076], Mr Gallagher advised Mr Aitchison that a thorough review of the key contracts and issues had been given to the TPB. The TPB had concluded that the final terms negotiated were consistent with the terms set out in the FBCv2 approved in December 2007 and had confirmed the value-for-money proposition demonstrated by the FBC. tie was, accordingly, of the view that it was appropriate to issue NIAs for the Infraco contract and the Tramco contract.

14.42 By email dated 13 March 2008, Mr C MacKenzie advised Ms Lindsay that he had concerns about giving tie authority to issue the NIAs [CEC01399075]. He found it hard to agree with the statement in Mr Gallagher’s letter that the final terms negotiated with BBS were consistent with the FBC approved by the Council in December 2007, given that the price had risen by £10 million since then, the project timetable was now three months later than predicted, and the risk on consents had not been assumed by the private sector. Mr C MacKenzie stated that he would be uncomfortable if these facts were not made known to councillors, or at very least to group leaders, before the Chief Executive authorised tie to issue the NIAs.

14.43 By email dated 13 March 2008 [CEC01474537], Mr Bissett provided Ms Lindsay with an update on various matters, with a view to issuing the NIA the next day at the latest, assuming that a robust position on the outstanding Infraco issues could be achieved. Mr Bissett noted that delay in issuing the notice would diminish tie’s negotiating credibility and, even more fundamentally, would jeopardise the chances of completing the contract in time to crystallise the 2006/07 funding from Transport Scotland, which would create a range of possible difficulties for achieving close on the agreed financial terms and put substantial borrowing pressure on CEC. The reference to 2006/07 appears to me to be an error and must relate to 2007/08, which was the then current financial year. Mr Bissett attached a short note on the QRA and risk allowance [CEC01474538]. The note explained that the total risk allowance provided in the QRA in respect of the continuing consents and approvals risk was £3.3 million, which equated to the cost of some three months of BBS standing time and was considered adequate by tie’s management in the context of the number and criticality of the consents still to be delivered, the liquidated damages available to BBS from SDS in the event that the delay was caused by SDS, the responsibility of BBS to mitigate the costs of any delay and tie’s close management of the process beyond financial close.

14.44 By email dated 17 March 2008 [CEC01399109], Mr Coyle circulated an updated version of the spreadsheet [CEC01399110] setting out the deliverables required for Mr Aitchison to authorise tie to award the Infraco contract and the Tramco contract. The recipients included Ms Lindsay and Mr C MacKenzie. The spreadsheet indicated that a number of deliverables remained outstanding, including, in relation to the contracts, the Employer’s Requirements, value engineering, pricing and funding and SDS assurances.

14.45 On 18 March 2008, DLA sent a further letter to the Council Solicitor, advising on the draft contract suite as at 13 March 2008 [CEC01347796]. The letter contains five numbered paragraphs. In the first, dealing with the core Infraco and Tramco terms, it stated:

“There has been measured progress in closing out the core provisions, despite extreme time pressure and interruption for detailed commercial discussion. tie has achieved a level of closure and agreement which will support the notification of intent to award letters being dispatched today.” [ibid, page 0001.]

14.46 It explained that: tie had advised that both SDS and BBS were content that the Employer’s Requirements were now in an acceptable form and detail to be used as a contractual scope; final Infraco proposals had been received; a project master programme had been agreed; and execution of the Network Rail Asset Protection Agreement was confirmed.

14.47 In the third numbered paragraph, under the heading “FURTHER TASKS”, the letter stated:

“We understand that tie will confirm settled pricing for all major fixed price elements of the Infraco Contract. If tie has achieved these objections [sic] and BBS has been able to confirm its commitment to abide by these positions, tie should have every confidence in closing the contract suite efficiently, commencing with the issue of notification of intention to award today. We would stress that full cooperation of the BBS Consortium on this objective is essential.” [ibid, page 0002.]

14.48 Although this suggests that DLA understood that there had been agreement on price for all major fixed-price elements of the Infraco contract that remained to be confirmed by tie, that was dependent on BBS’s commitment to abide by such agreement. These qualifications, particularly the latter, introduced an element of uncertainty. Moreover, Mr Fitchie confirmed in his evidence that at that date there was an absence of an agreed contract price, as well as other outstanding issues. Whatever tie’s understanding or expectation may have been at 18 March, subsequent events, including the demand for additional sums prior to contract signature and the terms of SP4, established that Mr Fitchie was correct in his evidence that there was an absence of agreement about the contract price. In view of his evidence, mentioned in paragraph 14.12 above, it is surprising that he considered that the level of agreement reached supported the NIA being issued on 18 March. This letter omits any reference to his concerns that it was premature to do so.

14.49 On 18 March 2008, Mr Holmes, Mr McGougan and Ms Lindsay provided a short note to Mr Aitchison, confirming that it was appropriate to accept tie’s recommendation to authorise tie to issue NIAs in relation to the Infraco contract and the Tramco contract [CEC02086755]. The note stated that the final contract price was now £508 million and that the risk contingency had been reduced from £49 million to £33 million as part of the closure process. There had been a three-month extension to the programme and a range of adjustments to the risk allocations. Many of the adjustments to risk allocation were positive, but others had transferred risk to the public sector including risks relating to SDS. Referring to the need for the immediate issue of the NIA, the note stated:

“We are also advised by tie … of the requirement to immediately lodge the Notice of Intention to Award and the financial and commercial risks which will accrue to the Project if this is not done immediately, with particular reference to the period of 10 days from lodging of Notice of Intention to Award to contract signing and the financial advantage of signing and booking expenditure prior to 31 March.” [ibid, page 0002.]

14.50 The above passage tends to suggest that the ability to requisition funds from Scottish Ministers during the financial year ending 31 March 2008 depended upon the signature of the Infraco contract and the Tramco contract before that date and not merely the NIA. The Tramco contract and Infraco contract were not signed until 13 and 14 May 2008 respectively. There was no evidence before the Inquiry that suggested that Scottish Ministers did not make payment of the total grant of £500 million, despite the delayed signature of the contract.

14.51 Despite the fact that the price had increased by £10 million and risks, including those relating to SDS, had been transferred to the public sector, Mr Aitchison duly authorised tie to issue NIAs for the Infraco contract and the Tramco contract. His delegated power to do so was circumscribed by conditions that the price and contract terms had to be consistent with the FBCv2 approved by CEC on 20 December 2007 and that all remaining due diligence had been resolved to his satisfaction. Apart from the inconsistency between the price and contract terms negotiated by that date and the FBC, it was not possible to resolve all due diligence at that stage because the contract terms, notably the price, had not been finalised. Accordingly I have concluded that his authorisation to issue the NIAs exceeded Mr Aitchison’s delegated powers. He ought to have reported the changes in price and risk allocation to councillors to ascertain whether they were willing to amend his delegated powers. The notices to award the Infraco contract and the Tramco contract were issued by tie on 18 March 2008 [CEC01314422; CEC01314423].

14.52 Apart from Mr Fitchie’s evidence about the inappropriateness of issuing an NIA where crucial contract terms were still the subject of negotiation, as noted in paragraph 14.51 above, the obligations imposed upon the Chief Executive on 20 December 2007 required him to be satisfied that the price and terms of any contract were consistent with FBCv2 and that all due diligence had been resolved. Only then could he authorise tie to issue the NIA and enter into the contract with Infraco. In the exercise of his obligations in this regard the Chief Executive relied upon advice from the two responsible directors and the Council Solicitor. To fulfil their role in supporting the Chief Executive in this respect, these officials required relevant information from tie. However, it was not sufficient for them to accept information and assurances from tie without undertaking independent scrutiny of the contract terms. Moreover, it was essential that tie was frank in its dealings with CEC and provided CEC officials with full disclosure of relevant facts to enable them to assess whether to advise the Chief Executive to authorise tie to issue the NIA and ultimately sign the Infraco contract. As noted in paragraphs 14.4–14.8 above, it is apparent that tie did not display such candour in its dealings with CEC.

14.53 Even if there were no issue about the accuracy or completeness of the information provided by tie to CEC, it was still necessary for CEC officials to scrutinise the information to satisfy themselves that the proposed agreement met the requirements of the resolution of 20 December 2007 before the Chief Executive could authorise tie to issue the NIA and ultimately sign the Infraco contract. Mr C MacKenzie, Ms Andrew and Mr Coyle were each of the opinion that it was not appropriate to issue the NIAs, but they recognised that the ultimate decision rested with the Chief Executive, as advised by the responsible directors and the Council Solicitor. It is, therefore, important to understand what steps were taken by the Chief Executive, Director of City Development, Director of Finance and the Council Solicitor before authorisation was given to tie to issue the NIAs.

14.54 During his evidence Mr Aitchison stated that he had relied upon discussions at the IPG and briefings that he had had from his colleagues, as well as the professional advice from his colleagues to whom he had delegated the task of being satisfied professionally that what was being proposed was in the best interests of CEC. In addition, tie had provided a letter confirming that it was appropriate for the NIAs to be issued. Nevertheless, he confirmed that, when the NIAs were issued, he was aware that contract terms had not been finalised and that agreement on the pricing schedule had still to be reached. He knew that CEC was accepting the additional risk of design delay which was not within CEC’s control, but that was judged to be financially relatively small and time-limited based upon the assertion (which proved to be wrong) that design would be completed within a few months. He also accepted that the retention by the public sector of significant risks arising from SDS delay was a departure from the procurement strategy and the FBC. Councillors were not formally told, before the NIAs were issued, that CEC had accepted risks arising from SDS delay, nor were they ever told that the retention of that risk by CEC either was, or might be, inconsistent with the FBC [PHT00000041, pages 103–109]. Accordingly, it is clear that, on the basis of his knowledge at the time, Mr Aitchison should not have authorised tie to issue the NIAs, irrespective of the advice tendered by Messrs McGougan and Holmes and Ms Lindsay.

14.55 Nevertheless, the signatories of the note to Mr Aitchison confirming that it was appropriate to accept tie’s recommendation to authorise the NIA’s must also bear some responsibility for Mr Aitchison’s actions, as he relied upon their professional expertise, and I consider it highly unlikely that he would have granted the authorisation to tie without such a note. It is thus relevant to consider what investigations they undertook before signing the note to him.

14.56 Mr Holmes gave evidence that there would have been extensive discussions, including with his support staff, before he signed the note to Mr Aitchison, and that he could not imagine having signed the note if unresolved concerns remained. The discussions would also have included Ms Lindsay as to the appropriateness of the agreement that was being concluded. In relation to whether any independent checks were carried out by Mr Holmes, Mr McGougan or Ms Lindsay, Mr Holmes stated that the checks were just CEC’s own questioning of tie, CEC’s own understanding of the contract and the information that CEC had received. It was internal due diligence rather than engaging an independent third party to review these matters. He stated that while he would have tried to satisfy himself that what he was being told was correct, a point would have been reached where he would have had to believe what he was being told [PHT00000042, pages 93–95 and 115–117]. It is apparent that the internal due diligence did not provide CEC with the same protection and reassurance as a review by an independent firm of professionals with experience of similar large-scale infrastructure projects in the transportation sector. CEC officials did not have the same experience or expertise to scrutinise the documentation or to challenge tie’s assumptions or optimistic assertions as independent experts would have had. For example, CEC officials did not see a draft of the SDS novation agreement before the issue of the NIAs, and Mr Holmes must have relied upon assurances given by tie as to its effectiveness in transferring design risk to BBS. This was despite an email dated 18 March 2008, which was copied to Mr Holmes, stating that the NIAs should not be issued until four issues had been addressed, including that a copy of the SDS novation agreement required to be provided by tie [CEC01401041; TRI00000096_C, page 0048]. It is inconceivable that an independent firm would have recommended proceeding without having seen and considered such a document to assess the risk exposure of CEC.

14.57 Mr Holmes accepted that the retention by the public sector of risks arising from SDS delay was a departure from the procurement strategy and the FBC. He considered that CEC officials must have “assumed” (emphasis added) that the retention of that risk was covered by the risk contingency. The possibility of delaying the procurement process to enable designs to be completed and approvals and consents obtained was not really discussed because of concerns about the continuing availability of the grant from Scottish Ministers if there was such delay. He remembered being told that if grant was not taken up in that financial year it would be lost. There were also concerns in relation to construction price inflation. In short, there was always a worry that a long delay would be counterproductive in that money would no longer be available to complete the project [PHT00000042, pages 95–109]. These concerns, whether realistic or not, were not relevant considerations for officials charged with the responsibility of ensuring that the price and terms of the contract documents were consistent with FBCv2 and that all due diligence had been completed to their satisfaction. The political and financial implications of delay to secure that objective, including the potential loss of grant allocated to the then current financial year, and any relevant strategic decisions were matters for the consideration and determination of councillors, not officials.

14.58 Mr Holmes retired from CEC on 1 April 2008. When he left, his understanding was that the Infraco price was largely fixed, apart from any issues that might arise from the consents process, which he assumed was manageable by CEC. With the exception of residual risks relating to consents and approvals, he understood that the vast majority of the design risks would be novated to the Infraco contractor and that that was reflected in the Infraco contract and the contract sums [ibid]. When he retired the contract terms, including the price, had not been finalised, and his understanding can only have been based upon assurances that he had received from tie. This is a clear illustration that senior officials in CEC, including Mr Holmes, failed to undertake the necessary independent scrutiny of the proposed contract terms to satisfy themselves that they were consistent with FBCv2 and the report to CEC on 20 December 2007. He should not have confirmed that the Chief Executive could authorise tie to issue the NIAs.

14.59 Mr McGougan gave evidence that there was frustration with the consortium at that time for not closing out negotiations, and that one of the reasons for issuing the NIA was to try to “encourage them towards the finish line” [PHT00000043, page 5]. That consideration seems to me to be inconsistent with the obligation to ensure that the price and contract terms were consistent with the FBC. Mr McGougan could not remember whether, before signing the report to Mr Aitchison, he had checked that all the outstanding matters identified in the director’s briefing note to the IPG on 11 December 2007 had been resolved. He was aware that Ms Andrew and Mr Coyle still did not feel that they had 100 per cent understanding of all the risks that might attach to the contract and to the project. Mr McGougan himself did not have 100 per cent understanding of all the risks that arose from the contract (not having read the contract and not having been in a position to understand it even if he had read it). He was relying on the processes that had been gone through, the reviews that had been undertaken, the professional advice from industry expert firms and the commercial experience and abilities of tie. CEC was relying on tie and DLA to a very significant extent [ibid, pages 5–11]. As Director of Finance he had responsibility for considering and advising upon risk allowance. His evidence that he was aware that officials within his department, and he himself, did not have a complete understanding of the risks arising from the contract, for which CEC would bear ultimate financial responsibility, demonstrates the extent to which he was relying upon assurances from tie. The fact that CEC was relying upon tie and DLA to a significant extent in this regard illustrates that the internal exercise undertaken by senior CEC officials was woefully inadequate as independent scrutiny of the contract suite.

14.60 Mr McGougan accepted that the retention by the public sector of potentially significant risks arising from SDS delay was a departure from the procurement strategy and from the FBC. He agreed that members ought to have been advised of these matters. There was £3.3 million for retained design risk in the risk allowance, and mitigation measures were in place. The option of delaying the award of the contract was not put to councillors. He considered that if the project had been delayed to allow design to be completed, and approvals and consents obtained, there was the potential for re-procurement, and the project was likely to have been cancelled given the political environment at that time [ibid, pages 12–13, 18–20 and 29–33]. Although tie wished to proceed with expedition to avoid cancellation of the project and potential loss of grant payments from Transport Scotland, it put BBS into a strong negotiating position by issuing the NIA prematurely and exposed CEC to increases in the contract price. Insofar as Mr McGougan, as Director of Finance of CEC, shared tie’s concerns about loss of grant payments and was apparently persuaded to support the publication of the NIA for that reason he was in error. As will be discussed in paragraph 14.61 below, tie’s concerns in that regard appear to have their foundation in speculation by Mr McGarrity of tie. Before basing his decision on such concerns Mr McGougan ought to have clarified the position with officials in Transport Scotland. This is an example of his reliance upon assertions by tie without making any independent check about their accuracy. Moreover, the consequences for the future of the project of the possible loss of grant funding, in whole or in part, and the available options were strategic issues for determination by councillors, not officials.

14.61 tie’s concerns in March 2008 about possible loss of grant funding from Scottish Ministers appear to have their derivation in an email exchange dated 4 and 10 March between Ms Andrew, of CEC, and Messrs McGarrity and Hamill, of tie [CEC01506128]. In her email dated 4 March Ms Andrew sought tie’s response to a number of issues, the second of which was a comparison of the risks of delaying contract signature with the risks of signing the contract when items in the matrix were unresolved. In his email dated 10 March Mr McGarrity explained that his responses had been added to Ms Andrew’s email. The response to her second issue envisaged a delay in contract signature until September to enable design completion and estimated the cost of inflation to be between £15 million and £20 million. However, he added:

“More likely is that either BBS or the TS funding or both would walk away and we’d have no project.” [ibid, page 0002.]

14.62 Ms Andrew gave evidence that she did not think that additional delay would have meant Transport Scotland cancelling financial support for the project, as she thought that it would have been supportive of measures to reduce risk and increase cost certainty. She also pointed to the fact that slippages earlier in the project had been tolerated [TRI00000023_C, page 0049]. Her reasoning appeared to me to be more persuasive than Mr McGarrity’s speculation about the possibility that Transport Scotland would withdraw all grant support, particularly when one has regard to the decision of the Scottish Parliament in June 2007.

14.63 Ms Lindsay gave evidence that she required to satisfy herself, in respect of legal matters, that it was appropriate for Mr Aitchison to authorise tie to issue the NIAs. She was not involved in commercial, pricing or financial matters. These were matters upon which Mr McGougan had to be satisfied, including whether, by that stage, the price had been fixed. While Ms Lindsay was not involved in the composition of the contract price, she would have wanted to know the overall project cost, including the overall figure for risk, to ensure that CEC officials acted within the authority delegated by CEC. There was a drive by CEC directors and tie to issue the NIA quickly, because of a desire to meet the funding deadline of 31 March 2008. Her clear understanding was that legal matters had been closed; there was sufficient certainty in respect of other matters; the Chief Executive, the leader of CEC and the two directors clearly wished the matter to proceed; and she did not have any information about inconsistency between what had been agreed and the FBC. She accepted that, with hindsight, it would appear that the NIAs were issued prematurely, albeit that she did not have enough experience to know, in a contract of this sort, whether one would still expect some variation in prices prior to contract close, and to what extent [PHT00000027, pages 103–120 and 145].

14.64 Ms Lindsay was asked whether she considered that the risk retained by the public sector in relation to design delay was consistent with the FBC, and replied that she had only a “very, very general” understanding of the FBC and that, insofar as the FBC required a price and a QRA to fall within a certain price then, as long as the risk of design delay was contained within the QRA, she would have considered that the retention of that risk by the public sector was consistent with the FBC. She stated that she was not sufficiently familiar with the FBC to know whether it required that risk to be with a particular party. She accepted, however, that the retention by the public sector of risk in relation to approvals and consents delay was a significant change in the risk profile since December 2007 [ibid, pages 113–122].

14.65 Having regard to their acceptance that there had been significant changes to the risks accepted by the public sector since FBCv2, I have concluded that Messrs McGougan and Holmes and Ms Lindsay ought not to have advised Mr Aitchison to authorise tie to issue the NIAs. If that advice had been withheld I am of the view that the NIAs would not have been issued unless councillors instructed the Chief Executive to do so, after they had been fully informed of the stage of negotiations, changes to price and to public-sector risk since December 2007, the additional risks to tie and/or CEC resulting from premature issue of the NIA and the effect, if any, of the availability of grant funding. If there was to be delay in concluding the contract, the issue of grant funding should have been clarified with Transport Scotland before informing councillors of the position.

Events after 18 March

14.66 Almost immediately after the issue of the NIA relating to the Infraco contract, serious concerns arose in relation to design, approvals and consents and the adequacy of the risk allowance. By letter dated 28 March 2008, Mr Leslie, Development Management Manager, Planning, of CEC, wrote to Mr Gallagher [CEC01493318], expressing certain concerns in relation to the programme of submissions of prior approvals and the quality of the submissions that had been received. On 3 April 2008, Mr Fraser wrote to Mr Gallagher [CEC01493639], setting out similar concerns in relation to technical approvals and quality control issues. Mr Gallagher responded to Mr Leslie’s letter on 10 April 2008, noting that

“[g]iven where we are with design & approvals, all parties (tie, SDS, CEC, BBS) need to get it right first time to meet the construction programme” [CEC01494162, page 0002].

14.67 Mr Gallagher’s acknowledgement that it was necessary to “get it right first time to meet the construction programme” was unrealistic and displays a lack of awareness of the planning and technical approvals processes. In the first place applications had to be submitted on time and in accordance with the agreed programme. Secondly, the submissions had to be to an appropriate standard. Mr Leslie’s letter disclosed failures in both respects. Thirdly, even if the submissions had been timeous and met the minimum standards contained in the Tram Design Manual [CEC00069887] and other CEC policies and guidelines, it was necessary to allow for the possibility that some applications would be rejected and require to be resubmitted for aesthetic reasons associated with Edinburgh’s status as a World Heritage Site, as was mentioned in paragraph 14.26 above, or for other legitimate planning and technical reasons.

14.68 By email dated 4 April 2008, Mr C MacKenzie advised Ms Lindsay of the continuing concern about SDS and the submission of prior and technical approvals, which showed no signs of improving. He referred to the formal letters of concern issued by CEC to Mr Gallagher, which led Mr C MacKenzie to question what implications there might be for CEC, as client and funder, in the longer term should the tie/SDS collaboration not “get its act together” [CEC01395476].

14.69 An email chain on 10 and 11 April 2008 [CEC01401109] between members of the “B team” noted that an issue had arisen in relation to the prior approval for the Russell Road bridge and its impact on the construction programme. In an email dated 10 April, Mr C MacKenzie noted:

“This appears to be one of the dreaded scenarios which we have regularly discussed … I would be most reluctant to see a situation whereby the Council ends up paying the cost of delays brought about by the fault of another party in failing to secure a timeous Prior Approval. I cannot confidently say that I understand what the settled position is among tie/SDS/BBS and communicated to the Council about Prior and Technical Approvals, and specifically the liability for delays.” [ibid, page 0005.]

14.70 In an email dated 10 April (in the same chain), Mr Coyle asked: “how many of these things are going to come out of the woodwork?” [ibid, page 0004].

14.71 In an email dated 11 April 2008 addressed to Mr David Anderson, the Director of City Development who succeeded Mr Holmes, and copied to the Director of Finance and the Council Solicitor as well as others, Mr Conway reported on a discussion that he had had with Mr Sharp of tie about the likely delay to the Infraco contract as a result of the prior approval for the Russell Road bridge not being complete. Mr Sharp had inquired about piling commencing before the necessary approval, and Mr Conway had advised that a formal application for that would be necessary to avoid any legal challenge. According to Mr Conway, Mr Sharp refused to do that and suggested that “they could charge on regardless” [ibid, page 0002]. Mr Sharp’s proposal that tie might be party to construction and engineering work on a structure which, as noted in paragraph 6.98, still needed detailed planning consent was inappropriate and exposed tie and CEC to a risk of public criticism for failing to comply with planning legislation and to the possibility of a legal challenge to their actions. His proposal also exposed tie and CEC to a risk of incurring unnecessary expenditure in the event that there were changes to the design of the structure as a result of the planning process requiring changes to the piling.

14.72 Prior to his discussion with Mr Sharp, Mr Conway had been unaware of the likely delay to the Infraco contract as a result of the prior approval for the Russell Road bridge not being complete and expressed his concern as follows:

“The main issue is that this was news to us, and wasn’t an issue that we [were] aware about. It’s not been mentioned in the Tram Project Board papers from Wednesday’s meeting. It is not in the QRA or in the close-our [sic] report … a total of £3M is identified in the QRA for delays to prior and technical approvals. That said; it wouldn’t be very palatable if we use that up in the first week of the contract award and [it] doesn’t quite align with the positive wording in the current draft of the Council report.” [ibid]

The reference to the “Council report” was a draft report in preparation for the CEC meeting on 1 May 2008.

14.73 In an email dated 11 April 2008, in the same chain, Mr Coyle explained to Mr McGougan that the issue could give rise to a claim by BBS for delay or disruption in two situations. The first was that BBS was likely to claim for a compensation event as a result of delay if permission was not granted to undertake piling works in advance of the approvals process for the structure. The second was that if BBS went ahead with the piling but needed to amend the work as a result of the approvals process the cost would ultimately be the liability of CEC. He repeated concerns that had been expressed earlier about the adequacy of the design risk allocation when he said:

“We have been led to believe that the structures have been given priority in terms of design approval. The point is we as the Council are being backed into a corner. I think this needs bottomed out with tie. SDS continue not to deliver and these type of issues could eat into the QRA (£3m for SDS delay, £6m for General Delay) pretty quickly.” [ibid, page 0001.]

14.74 Although this issue arose in the context of the structure of the Russell Road bridge, the manner in which it arose and the reactions of Mr Sharp and Mr Gallagher ought to have alerted CEC officials to the real possibility of increased risk exposure to tie, and consequently CEC.

Schedule Part 4 to the Infraco contract

14.75 As was mentioned in paragraphs 14.19 and 14.20 above, negotiations to settle the terms of the pricing schedule of the Infraco contract, SP4, were continuing on 18 March 2008. The progress of these negotiations and the meaning and effect of the agreed terms were discussed more fully in Chapter 11 (Contract Negotiations).

14.76 At a meeting of the CEC/tie legal affairs group on 14 April 2008, it was noted that Mr McGarrity, of tie, would send CEC a copy of the draft SP4, which set out the pricing provisions, and which was “now mostly agreed” [CEC01227009].

14.77 By email dated 15 April 2008, Mr McGarrity sent Mr Coyle and Ms Andrew the draft SP4 and a cost analysis spreadsheet, which included the QRA [CEC01245223; CEC01245224; CEC01245225]. Mr Coyle forwarded the email and attachments “for information” to Ms Lindsay, Mr C MacKenzie and Mr N Smith on the same day.

14.78 Clause 3.3 of SP4 contained a list of specified exclusions from the construction works price. Unlike its failure (mentioned in paragraph 14.117 below) to discuss the risks inherent in Pricing Assumption 1 (“PA1”), tie made specific reference to these exclusions in correspondence with CEC [CEC01297117; CEC01297118].

14.79 At that stage SP4 contained the following clauses that became part of the signed Infraco contract:

“3.2 It is accepted by tie that certain Pricing Assumptions have been necessary and these are listed and defined in Section 3.4 below. The Parties acknowledge that certain of these Pricing Assumptions may result in the notification of a Notified Departure immediately following execution of this Agreement. This arises as a consequence of the need to fix the Contract Price against a developing factual background. In order to fix the Contract Price at the date of this Agreement certain Pricing Assumptions represent factual statements that the Parties acknowledge to represent facts and circumstances that are not consistent with the actual facts and circumstances that apply. For the avoidance of doubt, the commercial intention of the Parties is that in such circumstances the Notified Departure mechanism will apply.” [CEC01245224, page 0005.]

“3.4 Pricing Assumptions are:

“1. The design prepared by the SDS Provider will not (other than amendments arising from the normal development and completion of designs):

“1.1 in terms of design principle, shape, form and/or specification be amended from the drawings forming the Base Date Design Information (except in respect of Value Engineering identified in Appendices C or D); 

“1.2 be amended from the scope shown on the Base Date Design Information and Infraco Proposals as a consequence of any Third Party Agreement (except in connection with changes in respect of Provisional Sums identified in Appendix B); and 

“1.3 be amended from the drawings forming the Base Date Design Information and Infraco Proposals as a consequence of the requirements of any Approval Body. 

“For the avoidance of doubt normal development and completion of designs means the evolution of design through the stages of preliminary to construction stage and excludes changes of design principle, shape and form and outline specification.” [ibid, pages 0005–0006.]

“3.5 The Contract Price has been fixed on the basis of inter alia the Base Case Assumptions noted herein. If now or at any time the facts or circumstances differ in any way from the Base Case Assumptions (or any part of them) such Notified Departure will be deemed to be a Mandatory tie Change requiring a change to the Employers Requirements [sic] and/or the Infraco Proposals or otherwise requiring the Infraco to take account of the Notified Departure in the Contract Price and/or Programme in respect of which tie will be deemed to have issued a tie Change on the date that such Notified Departure is notified by either Party to the other …” [ibid, page 0010.]

14.80 The meaning of the above clauses was considered in Chapter 11 (Contract Negotiations). Although I have concluded at paragraph 11.131 of that chapter that there is no letter or report from DLA or Mr Fitchie that draws the attention of CEC to the risks inherent in SP4 as it had been drafted, it is also necessary to consider the state of CEC’s knowledge and understanding of the terms of SP4.

14.81 It is clear from the evidence of Ms Lindsay, Mr C MacKenzie and Mr N Smith, discussed below, that each of them realised the significance of SP4 upon reading it for the first time. Ms Lindsay and Mr N Smith stated that they did not read SP4 prior to the signature of the Infraco contract, although Mr C MacKenzie did.

14.82 Ms Lindsay explained to the Inquiry that she did not read SP4 when it was forwarded to her “for information”, because she had a strategic role as Council Solicitor and had to deal with many other legal issues on behalf of CEC apart from the Tram project. She had delegated legal issues relating to the Tram project to Mr C MacKenzie and Mr N Smith, and neither of them had drawn her attention to SP4. She stated that it was unfortunate that SP4 was not sent to CEC by DLA and that the risk matrix provided by DLA to CEC made no mention of the schedule [PHT00000027, pages 189 and 191–192]. Mr C MacKenzie was very risk-aware, and she could not understand why he failed to make her aware of the risks in SP4 [ibid, page 195]. I agree with Ms Lindsay that she required to delegate to solicitors within her department particular tasks, including those relating to the Tram project, and that it was reasonable for her to expect those delegates to report any particular concerns to her for her consideration. Prior to any issue being brought to her attention in relation to SP4 or any specific request being made for her advice about SP4 it was unreasonable to expect her to read the contract suite, including SP4, having regard to the scope of her duties as Council Solicitor.

14.83 When Ms Lindsay read SP4 for the first time, in the context of the disputes that had arisen after the award of the Infraco contract, she realised how significant a part of the contract it was and how imprecise it was. Counsel to the Inquiry referred her to paragraph 3.2 of SP4, and she agreed that it was clear that there would be Notified Departures and price changes after contract close. She stated that if she had read the schedule before contract close she would have considered that the contents of paragraph 3.2 of the schedule were not appropriate in a public-sector contract and that she would have raised her concerns in relation to SP4 at the highest level within CEC. Serious consideration would have been required to ascertain where allowance was made in the QRA for the risks arising from SP4 and what the value of these risks ought to have been [ibid, pages 137–142].

14.84 Mr C MacKenzie gave evidence that the draft SP4, when finally produced, was the most definitive document from tie that he had seen, setting out the price negotiated, what was to be included and, just as significantly, what was not to be included, in the price. He stated that it was evident to him that clauses 2 and 3 of SP4 excluded a fair amount from the certainty of the lump sum, fixed and firm price of the construction works price. His reference to paragraphs 2 and 3 must refer to paragraphs 3.2 and 3.3, because paragraph 2 relates to definitions of terms used in the schedule.

14.85 The issue that arose relating to the prior approval for the Russell Road bridge, discussed in paragraph 14.69 above onwards, had increased Mr C MacKenzie’s concerns about the adequacy of the £3.3 million provision in the risk allowance for design, including prior and technical approvals. In his evidence Mr C MacKenzie accepted that these concerns were heightened when he read the draft SP4. He could not remember whether he raised these heightened concerns with anyone at the time and accepted that perhaps he should have. His evidence on this matter was as follows:

“Q. Were those concerns [about the adequacy of the £3m risk allowance after the issue relating to the Russell Road bridge prior approvals] not heightened when you saw the draft Schedule 4?

A. Yes, I think they probably were.

Q. Did you raise these concerns with anyone at the time?

A. I can’t remember.

Q. Do you consider you ought to have?

A. Yes, maybe I should have. But it was – I felt I’d done quite a bit in the run-up to this to draw attention to the fact that the risk pot was on the low side, and that how could we be sure that that was sufficient to cover all foreseeable risks.

I think after – before I went off on holiday on 2 May, I seem to recall asking or suggesting in a note to Gill Lindsay, there were a number of issues I covered there. And I think I recall asking or raising a question whether 3.3 million was still enough to cover all of these risks.

Q. … when you have been sent and read draft Schedule 4, which contains the obvious risks you have described, surely that was an obvious time at which to email Ms Lindsay or in some way raise these risks and concerns with her?

A. Yes, it probably was.

Q. Do you recall whether you did at this time raise these risks with her?

A. I can’t recall if I did or not. It may be covered in emails, but no, I can’t point to one at the moment.” [PHT00000026, pages 93–94.]

14.86 The Inquiry has found no evidence to indicate that he mentioned to Ms Lindsay increased concerns about the adequacy of the risk allocation because of the terms of SP4 or expressing any views or seeking advice about the meaning and effect of the specific provisions of SP4 mentioned above. His reference above to drawing attention to the fact that the risk pot was on the low side, and seeking reassurance for CEC that it was sufficient to cover all foreseeable risks, was not obviously linked to SP4 and appeared to be a separate issue that had pre-dated the delivery to CEC of SP4. Before he had gone off on holiday on 2 May 2008, he had set out the concerns of the “B team” in a note to Ms Lindsay, including asking whether £3.3 million was still enough to cover design delay risk. His note did not mention SP4. Mr C MacKenzie accepted that he probably did not raise his concerns in relation to SP4 with Ms Lindsay and that, with the benefit of hindsight, he ought to have done so. He also accepted that, with hindsight, he ought to have clarified with tie the likely number and value of Notified Departures that were expected [ibid, pages 89–97; CEC01222467].

14.87 Although Mr C MacKenzie did not raise his concerns about SP4, he wanted to know whether the figures mentioned in the QRA accompanying SP4 would be enough to meet all the foreseeable risks for tie/CEC [PHT00000026, page 92; TRI00000054_C, page 0096, paragraph 195], and he emailed Mr Coyle on 16 April, asking if tie could

“safely say that there is still enough in the QRA to meet all foreseeable risks: in other words can the Council be comfortable with the reduced figure?” [CEC01247693]

Mr C MacKenzie received a short reply from Mr Coyle, explaining his understanding of the reduction in the risk allowance and stating: “I guess it still holds and I guess we have to accept their [ie tie’s] word” [ibid]. Mr Coyle also referred to the Office of Government Commerce (“OGC”) review, which stated that the previous level of risk allowance had been in line with the industry norm. Mr C MacKenzie gave evidence that he was satisfied with Mr Coyle’s response against the background of tie’s delay or reluctance to provide CEC with detailed information over a period of time. He stated that there was an element of resignation on his part that he simply had to accept that tie was being transparent and accurate with CEC [TRI00000054_C, page 0096, paragraph 195].

14.88 Mr C MacKenzie suggested that his inquiry of Mr Coyle was related to the conditions in SP4, and he wanted to know “what implications these conditions had for the ballpark figure of risk allowance previously advised by TIE” [ibid]. The context of the email correspondence between Mr C MacKenzie and Mr Coyle was Mr Coyle’s email correspondence with Mr McGarrity of tie [CEC01247693] about an increase of £1 million for Tramco, but no corresponding increase in the overall price of £508 million for the Tram project. tie’s explanation was that the additional sum for Tramco had been achieved by reducing the QRA by £1 million. Mr C MacKenzie’s email made no reference to the content of SP4 or to any concerns that he may have had about that document. Mr Coyle’s response to Mr C MacKenzie referred to the restricted issue mentioned above and to the reduction of risk attributable to the completion of the procurement process from the figure that OGC had said was consistent with the industry norm. If Mr C MacKenzie had wanted to know the implications of the conditions in SP4 for the amount of risk allocation, I would have expected him to have been more explicit in seeking clarification that adequate provision had been made for risk after taking account of the terms of SP4.

14.89 In the same context Ms Lindsay emailed Mr Coyle on 16 April [CEC01247679], asking whether it would be appropriate to obtain a revised statement from tie confirming that the risk allowance was still sufficient. Mr Coyle responded that the previous statement provided on the QRA by tie was approximately £32 million, which still stood. The email correspondence involving Mr Coyle, Mr C MacKenzie and Ms Lindsay gives the clear impression that the concerns of the Solicitor’s department at that time were related to the reduction of £1 million in the risk allowance to accommodate the increase in the Tramco price. No specific concerns were raised relating to the effect of SP4 on the adequacy of the risk allowance. In these circumstances the responses of Mr Coyle seemed reasonable.

14.90 Mr N Smith gave evidence that he did not read SP4 at that time, partly because it was part of the contractual terms on which he had refused to advise and partly because he had just returned to work after a period of medical absence and was not fully up to speed with developments during his absence. He also gave evidence that he did not read SP4 at any time before the award of the Infraco contract, that he was unaware of any discussion within CEC’s legal department of SP4 at any time before the award of the Infraco contract, and that he probably first read the schedule sometime in 2009 or 2010, as part of the dispute phase. He stated that, prior to the award of the Infraco contract, he was not aware that there would be Notified Departures. If he had read SP4 at the time it would have rung a number of “alarm bells”, which he would have raised with Mr C MacKenzie and Ms Lindsay and, possibly, with DLA. He agreed with the suggestions put to him that anyone reading the 15 pages of the draft SP4 at that time would have been left uncertain as to which pricing assumptions were acknowledged not to be correct; that one would be uncertain as to how the price might change; and that, on one view, the fixed contract price was based on a fiction, given that the day after the contract was signed there would be an automatic increase in price (as a result of a Notified Departure or Departures). He gave evidence that, in relation to PA1 (definition of “normal design development”), he did not immediately understand it and that, even now, its meaning was not clear to him [PHT00000006, pages 3–4, 9–19 and 150–162].

14.91 Mr N Smith’s evidence about being unaware of any discussion about SP4 within CEC legal conflicted with the impression that Mr C MacKenzie had. Apart from reading SP4 when he received it, Mr C MacKenzie thought that there had been a read over of the document within legal services and discussion about it within the “B team”, although Mr C MacKenzie could not be more specific about such discussions in view of the passage of time. He presumed that Mr N Smith had read SP4 at that time, but could not categorically say that he did. If Mr N Smith did not read SP4 at that time, that would be consistent with his earlier refusal to review contract terms [PHT00000026 pages 156–158]. Prior to preparing his statement for the Inquiry Mr C MacKenzie had asked the Inquiry to recover from CEC his notebooks containing records of meetings, discussions and actions taken by him when he was involved in the Tram project. He stated that he had left these notebooks for his successor when he took voluntary redundancy from CEC in April 2011. The Inquiry was unable to recover these notebooks because CEC could not locate them. Accordingly, Mr C MacKenzie had no notes to assist him in resolving the question whether Mr N Smith read SP4 or was aware of its terms at the end of April 2008.

14.92 I have been unable to resolve this apparent discrepancy, but of the two witnesses Mr C MacKenzie was the more impressive. He was obviously doing his best to assist the Inquiry and was prepared to admit that he might have made mistakes, particularly in failing to advise the Council Solicitor of his concerns about SP4. In contrast, Mr N Smith gave the impression of seeking to distance himself from any possible criticism of his actions or of his failure to act to protect the interests of CEC. In his evidence to the Inquiry when he was asked by counsel to the Inquiry what he might have done if he had read clause 3.2 of SP4 in April, he replied:

“I guess I would have queried this. Yes, I guess I would have queried that. I need to be slightly careful, because I need to consider that there are ongoing litigations in relation to this.” [PHT00000006, page 10.]

14.93 When I sought clarification of that comment, he replied:

“The contract and advice given in relation to the contract is subject to ongoing legal matters in the Court of Session. So I just wanted to make sure that I don’t stray into areas which may impinge on that.” [ibid]

14.94 The nature and extent of any internal advice given, or omitted to be given, to CEC prior to contract signature was pertinent to the remit of the Inquiry. If Mr N Smith was being truthful about his knowledge of SP4 in April 2008, or about the actions that he would have taken had he been aware of its terms at that time, it is difficult to understand how his evidence to the Inquiry would, or should, differ from any evidence that he may ultimately give about these matters in the Court of Session actions. Mr N Smith’s explanation that he thought that he could adjust his evidence to the Inquiry because of litigation in the Court of Session caused me to question whether he was being entirely frank as a witness. In reaching that view I have taken into account that CEC was represented by the now deceased Mr Martin QC, a former Dean of Faculty, who would have undoubtedly intervened if he had thought that Mr N Smith’s evidence to the Inquiry should be limited in any way in light of the litigation in the Court of Session.

14.95 My concerns about Mr N Smith’s integrity as a witness increased when he disavowed knowledge of the contents of other documents that had been sent to him. Mr Dunlop QC tested Mr N Smith’s evidence about his knowledge of the contents of documents that Mr Bissett of tie had sent to him and others on 28 April 2008 [CEC01312358]. These included tie’s report on the Infraco Contract Suite [CEC01312363] and the DLA letter reporting on the Edinburgh Tram Network contract suite as at that date [CEC01312368]. The DLA letter referred to pricing assumptions surrounding programme and pricing and to tie being prepared for an immediate contractual variation to accommodate a new construction programme and for the management of contractual Notified Departures “when (and if) any of the programme related pricing assumptions fall” [ibid, page 0003]. Following receipt of these documents from Mr Bissett, Mr C MacKenzie and Mr N Smith sent a joint email from Mr C MacKenzie’s email address to Mr Conway and Mr Coyle [CEC01246045], commenting on the DLA letters dated 12 and 18 March and 28 April.

14.96 The unsatisfactory nature of Mr N Smith as a witness is illustrated in the following exchange about whether he reviewed the attachments to Mr Bissett’s email mentioned in paragraph 14.95, including the DLA letter dated 28 April.

“Q. You will have considered the attachments to it [Mr Bissett’s email]?

A. I can’t recall whether I did or not. Certainly I wasn’t reviewing the DLA letters.

Q. This is why I am confused, Mr Smith. Are you saying that you did not review it, or are you saying that you cannot recall whether you reviewed it?

A. Sorry, I did not review those documents. I – yes.

Q. Are you sure about that, Mr Smith?

A. I don’t – so, can you please confirm exactly which documents you are referring to?

Q. Well, the attachments and in particular the DLA letter which is mentioned in point 2 in the body of the text, the DLA letter effective today which updates DLA views.

A. I cannot recall – sorry, I cannot recall reviewing those letters.

Q. Again, can we have some clarity. You say in your statement you didn’t review. You say now you can’t recall. Which is it?

A. I don’t recall reviewing. So my position was I was not involved in reviewing the DLA letters generally, because I didn’t believe they gave the Council sufficient comfort. I don’t recall reviewing them in any detail.

Q. If you didn’t review them, how could you be of the view that they did not give sufficient comfort?

A. Because they were not independent enough.

Q. So you were able to say that there was insufficient comfort in letters that you had not reviewed?

A. There was insufficient comfort for me. No matter what those DLA letters said, there was insufficient comfort for me. Because the view that I took was that independence was required.

Q. So when you say there was insufficient comfort in these letters, you are not talking about the content at all? Merely about the fact that DLA had been involved in negotiating the contract?

A. Largely, yes. There was insufficient, um, comfort for me that these provided the Council with sufficient comfort

Q. I’m not clear as to what you mean by “largely”, Mr Smith. Are you saying that you didn’t review these letters at all, or are you not?

A. I can’t recall whether I reviewed them. I may have opened them and read one line, I can’t honestly remember. But my position is I wasn’t reviewing those letters as a principle.” [PHT00000006, pages 152–154.]

14.97 At the end of the day I was unclear whether he definitely did not review the documents, or whether he did but could not recall doing so, or whether he merely opened them and “read one line”.

14.98 Although I have concluded that Mr C MacKenzie was a truthful witness, and a more reliable one than Mr N Smith, it is unnecessary for me to determine whether Mr N Smith was a truthful witness, despite my concerns expressed above. Mr C MacKenzie’s evidence alone is sufficient for me to conclude that within the CEC legal department there was an awareness of the significance of the terms of SP4 in April 2008. It is unnecessary for me to determine whether that awareness was confined to Mr C MacKenzie or was shared by Mr N Smith as the other solicitor tasked with reporting upon legal issues relating to the Tram project. However, assuming that Mr N Smith did not read SP4 when he received it, his failure to do so is inexplicable, particularly as he ought to have been aware that the Solicitor relied upon him and Mr C MacKenzie to draw her attention to any particular issues relating to the contract. Unlike the earlier draft document extending to almost 1,000 pages that he had been asked to review and produce a report within two days, to which reference is made in paragraph 13.39, the main text of the final version of SP4 only extended to 14 pages. Had he read it at that time he could have alerted the Solicitor to his concerns before she signed the letter of advice to the Chief Executive.

14.99 Mr C MacKenzie ought to have taken steps to report his concerns about SP4 to the Council Solicitor to enable her, along with the two responsible directors, to ascertain their effect on the contract price and any resultant increased risk exposure to the public purse. Such steps would have involved considering the remainder of the contract suite, including clause 80. That exercise ought to have been undertaken by an independent firm of solicitors experienced in construction law, as it is apparent that the necessary expertise did not exist within the department of the Council Solicitor. Had that been done, CEC would have been aware of the true nature of the proposed Infraco contract and could have taken an informed decision about the available options to it, including constructing phase 1a in its entirety even if the price was likely to exceed £545 million or constructing part of phase 1a, as ultimately occurred, but within the available funding of £545 million, or suspending the decision to enter into the Infraco contract and the Tramco contract until the necessary stages of design had been reached and the necessary consents and approvals had been obtained in accordance with the procurement strategy. I appreciate that each of these options would have had financial and political implications for CEC. The decision about how to proceed was a strategic one for councillors, informed by detailed advice from officials about the implications of each of the above options and any other options that might have been available to CEC. In the event, councillors were not afforded the opportunity to take an informed decision on these options as they were not provided with the relevant information.

Events leading to financial close on 14 May

14.100 Members of the “B team” continued to have concerns about councillors’ awareness of changes since December 2007 as well as tie‘s assessment of, and provision for, the risks associated with change and delay. They also took issue with the extent to which the DLA letters about the contract suite and the risk matrix sent to CEC provided adequate reassurance for CEC.

14.101 By email dated 14 April 2008, addressed to members of the “B team” and copied to Ms Lindsay [CEC01256710], Mr C MacKenzie noted that councillors had received no formal update on the project since 20 December 2007. He considered that it would be prudent and proper to report to councillors at the Council meeting on 1 May before financial close on the various changes that had occurred since then and that the Chief Executive should not exercise his delegated authority to permit tie to sign the Infraco contract and the Tramco contract before that meeting. He had no difficulty with the Chief Executive exercising his authority immediately after the meeting if councillors were aware of the changes since December, and they accepted a recommendation that he should do so.

14.102 On 15 April 2008, Ms Clark sent Mr Conway a short document, entitled “Analysis of Inclusions/Exclusions from BBS Fixed Price” [CEC01297117; CEC01297118]. Mr Conway responded on 16 April with the following query:

“The scope of the works related issues refer to the status of the design as of 25th November [2007]. Our concern is that if the design has changed, or at least developed, since then (and say a prior approval has been granted) then a change will need to be issued. Have tie undertaken an exercise to determine the extent and cost of changes that will be required since the design freeze in November?” [CEC01245274, page 0002.]

14.103 Ms Clark replied:

“BBS are contractually obliged to construct to the designs that SDS produce and get consented. We have been identifying significant changes as design has progressed to ensure we have made financial provision – eg Burnside Road. Normal design development is a BBS risk as described in Schedule 4 of the Infraco contract.” [ibid, page 0001.]

14.104 The above statement is not strictly accurate. If the design produced by SDS obtained the necessary consent from CEC, it might also give rise to a Notified Departure if that design failed to comply with the provisions of PA1 in clause 3.4, quoted in paragraph 14.79 above. Ms Clark gave evidence that she would have written her email on the basis of advice received from the people negotiating the relevant clauses of the contract, whom she understood to be Mr Gilbert and Mr Bell, with the involvement of DLA [PHT00000025, pages 151–152].

14.105 Mr Fraser gave evidence that although, on one level, Ms Clark’s reply gave him some reassurance that CEC’s concerns had been addressed, he considered that there was still no clarification as to how that was possible under this form of contract. He thought that changes to design would be necessary in order to obtain approvals, and that CEC still did not have comfort that that was encompassed within the contract. It was not transparent to Mr Fraser how the contract allowed for such changes [PHT00000004, page 162].

14.106 A report to the meeting of the IPG on 16 April 2008 noted, under planning prior approvals [CEC01246992, page 0004], that, of 63 batched submissions, 1 planning permission had been granted, 18 prior approvals had been granted, 4 prior approvals were currently under consideration, 2 submissions had been cancelled and 40 batches remained to be submitted for prior approval (of which 26 batches were under informal consultation). There was, again, noted to be concern that prior approvals might have to be revisited if there were substantial changes in design (reference was made to the planning department having written to tie on 28 March 2008, expressing its concerns). Under technical approvals, it was, again, noted that, to date, no roads technical approvals had been obtained and there had been significant slippage. It was noted that:

“Similar to the concerns raised by Planning, Transport have also written to tie on 3 April 2008 reiterating their concerns about the quality of the submissions being received … There is potential for the approvals to cause a delay to the construction programme.” [emphasis in original; ibid]

14.107 The report recorded that delay in submissions for prior and technical approvals might leave CEC in a difficult position. It was likely that the appropriate planning prior approvals would not be obtained prior to the commencement of construction work at three locations (Russell Road bridge, Haymarket tram stop and the Gogar depot), which were on the critical path for delivery. If construction was delayed, CEC would be responsible for these compensation events and resultant claims from BBS, which could easily be in excess of £2 million. The only possible mitigation measure would be for the planning department to allow the construction works to commence before planning approval had been granted, which would leave CEC open to the potential for legal challenge as well as negative press from people objecting to the prior approvals during the consultation stage.

14.108 The evidence in paragraphs 10.105–10.107 simply confirms the need for CEC to have obtained an independent review of its risk exposure, including the nature and extent of such exposure arising from fixing the design as at November 2007 and from the terms of SP4. The mere acceptance of tie’s assurances by Messrs McGougan and Mr David Anderson, as the responsible directors, meant that the Chief Executive did not exercise the scrutiny necessary for CEC’s protection and expected of him before authorising tie to enter into the Infraco contract and the Tramco contract. Even although Mr David Anderson had recently been appointed as Director of City Development following the retirement of Mr Holmes, that did not absolve him of his responsibilities towards CEC in respect of the Tram project. He could, and should, have sought information about the project from officials within his department, including members of the “B team”, who had been involved in the project for a considerable period of time. Moreover, in light of his own awareness of the delays with planning and technical prior approvals and of the possible consequences for CEC, the Chief Executive ought to have considered the need for an independent risk assessment.

14.109 On 28 April 2008, DLA sent a letter to Ms Lindsay and Mr Gallagher in respect of the draft contract suite as at 28 April 2008 [CEC01312368; an updated risk allocation matrix was also provided, CEC01312367]. The letter noted that, since DLA’s last letter of 18 March, tie had been engaged largely on negotiations to close the SDS novation and to complete programme and final pricing and commercial discussions with Parsons Brinckerhoff and BBS respectively.

14.110 In relation to the core Infraco terms, the letter noted:

“The Core Infraco terms are closed as to all matters of contractual, technical and commercial principle … No issues have arisen since we last reported which have resulted in an alteration (of consequence) to risk balance. As they stand, the terms and conditions represent a clear reflection of the positions which have been negotiated by tie and are competent to protect and enforce those positions.” [CEC01312368, page 0002.]

14.111 In relation to risk, it noted:

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

“tie are prepared for the BBS request for an immediate contractual variation to accommodate a new construction programme needed as a consequence of the SDS Consents Programme which will eventuate, as well as for the management of contractual Notified Departures when (and if) any of the programme related pricing assumptions fall.” [ibid, page 0003.]

14.112 The letter noted further:

“The Pricing Schedule (Infraco Contract Schedule Part 4) has been extensively discussed over the past six weeks and is now settled as to its key assumptions, value engineering items, provisional sums and fixed prices. tie has assessed the likely financial assumptions not holding true and triggering changes.” [ibid, page 0005.]

14.113 On 30 April 2008, Mr C MacKenzie sent a joint email from himself and Mr N Smith to Mr Conway and Mr Coyle, copied to Mr Fraser [CEC01246045], which stated:

“Further to the meeting this morning Nick and I have considered the DLA letters dated 12th March, 18th March and 28th April. You sought our views on this correspondence.

“As you are aware we have from the outset expressed reservations about the ability of DLA to effectively review their own work. In this regard, it is difficult to see how any letter from DLA could give full comfort to the Council. Our preferred route was always that the Council seek independent legal advice. In particular, all the DLA letters are heavily caveated, and refer to instructions from tie, or positions achieved by tie. The reality of the contract structure is that the Council is to give a guarantee in respect of all financial obligations being undertaken by tie. Instructions have been given throughout by tie to DLA, with little input from Council officers and accordingly no certainty that Council instructions flowed through to DLA. The most recent letter dated 28th April does little to remove doubts and uncertainties. Specifically, that letter appears to give no comfort on the risk profile and acceptability in relation to the market norm. The lengthy letter also narrates matters which appear to us to be risky for the Council and are not covered by the QRA.

“No doubt the Directors of Finance and City Development, respectively, will be seeking confirmation from the Council Solicitor as to the acceptability to her of the DLA letter.”

14.114 Mr Bell gave evidence that around this time (ie in late April or early May 2008) he and Mr Fitchie had a telephone conference call with Ms Lindsay to discuss DLA’s letter and updated risk allocation matrix [CEC01347797]. Mr Bell believed that there was discussion of the mechanism in the contract whereby a departure from the pricing assumptions would lead to Notified Departures and a requirement to change the price. He did not think that there was any discussion of the number or value of any Notified Departures that might arise. He thought it likely that he would have confirmed that tie had incorporated items within the risk register and risk allowance for elements that it thought were likely to generate a change. Although there was discussion of the general risk items, areas and values, and whether they were included in the risk allowance, there was none on specific Notified Departures or groupings of such departures [PHT00000024, pages 114–119].

14.115 Ms Lindsay gave evidence that she had no recollection of such a phone call with Mr Bell and Mr Fitchie taking place, and she considered that it was unlikely to have taken place. She had checked her notes, and the only record of a conference call that she had was of one on 8 May 2008, which had involved the Directors of City Development and Finance, Ms Andrew and the Tram Monitoring Officer, the purpose of which was for tie to update CEC on the developing situation in relation to the increase in price, mentioned in paragraph 14.116 below. She did not recall any discussion with Mr Bell outside the legal affairs group, and she stated that he was not one of her usual contacts in relation to the project [PHT00000027, pages 149–152].

14.116 The Inquiry has seen no record of the telephone call mentioned by Mr Bell, and it is difficult to come to a view on whether such a call took place. Regardless of whether it took place, however, I do not consider that a discussion along the lines described by Mr Bell in his evidence was sufficient to alert Ms Lindsay to the dangers inherent in SP4 to the Infraco contract, including that it was expressly recognised that the price was based on pricing assumptions, some of which were known not to be correct and were likely to result in Notified Departures, and price increases, immediately after the contract was signed.

14.117 Furthermore, even on Mr Bell’s evidence, there was no discussion of the risks in PA1, whereby the language used to describe “normal design development” contained an exception that, on a literal reading, appeared to deprive the expression “normal design development” of much of its content. In addition, in his evidence to the Inquiry, Mr Bell stated that he would have expected between 60 and 100 Notified Departures to have arisen after the award of the Infraco contract [TRI00000109_C, page 0072]. As was indicated in paragraph 14.114 above, Mr Bell did not think that in the alleged conference call involving Ms Lindsay there was any discussion of the number or value of any Notified Departures that might arise. Nor, indeed, is there any contemporaneous documentary evidence whatsoever from Mr Bell, or others in tie, to anyone in CEC advising of the number and/or value of Notified Departures that were expected, or likely, to arise after the award of the Infraco contract.

14.118 Although Mr Bell had expected between 60 and 100 Notified Departures, there were in fact more than 800 [ibid]. There was other evidence suggesting that the total number was not as high as that but certainly exceeded 700 (see Chapter 15, Contractual Disputes: May–December 2008). Whatever the accurate figure, it is clear that there were a substantial number of Notified Departures. That is an indication of the over-optimistic approach adopted by tie in assessing and evaluating the risk exposure of the public sector and is a further adminicle of evidence supporting the need for CEC to have commissioned the type of independent review advocated by the “B team” in September 2007 and discussed in Chapter 13 (CEC: Events during 2006 and 2007). Had such a review been commissioned at that time, CEC would have appreciated the need for further reviews as the contract negotiations progressed and, on any view, once the terms had been finalised but before contract signature. By failing to do so, and instead relying upon the untested assumptions made by tie as to the number, nature and value of risks to which the public sector was exposed, CEC failed to protect the public purse. The Chief Executive together with the responsible directors jointly bear responsibility for that failure.

Councillors’ consideration of the project in May 2008

14.119 Mr C MacKenzie’s concerns, mentioned in paragraph 14.101 above, were addressed at a Council meeting on 1 May 2008 [CEC00906940], although Mr C MacKenzie had further concerns when he became aware that BBS had made a demand for a further price increase shortly before that meeting and after the report of the Chief Executive to councillors had been signed and submitted to them in advance of the meeting. He suggested that either the report should be withdrawn from consideration at that meeting, the true picture assembled and then a report made to councillors or, alternatively, officials should be open with councillors at that meeting about the changed situation. Mr C MacKenzie posed the questions: “Are members being properly served by officers? Are there implications for us as professional legal advisors?” [CEC01241689]

14.120 The preparation of the Chief Executive’s report for the meeting on 1 May followed the same pattern as other reports to CEC in respect of the Tram project. It was drafted by officials within the responsible departments and circulated for comment to senior officials and tie. As was discussed in paragraph 12.61, the report itself was misleading to the extent that it reported that 95 per cent of the combined Infraco and Tramco costs were “fixed”, with the remainder being provisional sums. Moreover the report included a statement that the utility diversion works along the tram route were “progressing to programme and budget” [CEC00906940, page 0002, paragraph 3.6]. This statement had been proposed by Mr Bissett of tie, and the report makes it clear that the statement was based upon a report by tie. As will be apparent from Mr Fraser’s evidence noted in paragraph 14.122 below, the statement about the utility diversion works did not reflect reality.

14.121 Ms Andrew gave evidence, which I accepted, that she considered noteworthy the number of times that the report referred to tie (rather than CEC’s officials) carrying out activities or providing information or assurance. She considered that that reflected nervousness on the part of CEC’s officials over tie’s management of the process. However, given that CEC had ultimate responsibility for the project, it was her view that such a level of reliance on tie was inappropriate. She also considered that the statement in the report describing the movement in risk as a “risk transfer to the private sector” was slightly misleading, as there was less risk transfer to the private sector than had been envisaged at the stage of the FBC [TRI00000023, page 0057].

14.122 Mr Fraser was asked for his views on the statement in the report that the utility diversion works were progressing to programme and budget, and he replied that that was not his recollection. He explained that the programme kept slipping, additional utility apparatus was discovered and the budget required to be increased. He considered that every time there was a new programme for the MUDFA works it was very optimistic and was based on levels of production that had never been achieved previously. If apparatus was uncovered that was not expected, there was no scope for slippage in the programme and there was likely to be delay [PHT00000004, pages 164–165 and 180].

14.123 On 30 April 2008, during a telephone conversation between Mr Walker of Bilfinger Berger (“BB”) and Mr Gallagher of tie, Mr Walker made a demand for an increase in the Infraco contract price of £12 million [CEC01338847, page 0003]. CEC officials, including the Chief Executive, were aware of this demand prior to the meeting on 1 May but took no steps to advise councillors as a whole of this significant event, despite Mr C MacKenzie’s suggestions, noted in paragraph 14.101 above. In his evidence Mr C MacKenzie expressed concern about the failure to advise councillors of the price increase that had been sought. In his view, officials had a duty to be transparent with councillors and to give them as much information as possible [PHT00000026, page 119].

14.124 Mr N Smith also considered that councillors ought to have been told that the price increase had been sought by BB. He gave evidence that the obligation of Council officials was to present the correct facts to members to allow them to take decisions, otherwise the basis for those decisions was flawed [PHT00000006, page 29].

14.125 Mr Aitchison gave evidence that he advised the leader of the Council, Councillor Dawe, about the demand for a price increase before the meeting of the Council started, but that other councillors were not advised of it either before or during the meeting. He accepted that it was both inaccurate and potentially misleading to have represented to councillors that £508 million was the final price, when he knew that a substantial price increase had been sought and remained unresolved. Moreover, with the benefit of hindsight, Mr Aitchison did not consider that his report gave members sufficient information to enable them to come to an informed view before accepting the recommendations in his report. He considered that there ought to have been a more detailed report, drawing out issues associated with design and the reconciliation of design to the construction programme. The reference in the report to the utility works progressing on time and budget was consistent with his broad understanding at that time, albeit that he was not in a position to query whether the utility works were exactly on track [PHT00000041, pages 117–133].

14.126 In his evidence, Mr McGougan accepted that although the reference to the “final price” of £508 million was correct when the report was drafted, that reference was no longer correct when the report was considered by councillors at the meeting on 1 May. He agreed that councillors should have been advised that it was an estimated or anticipated final price [PHT00000043, page 36].

14.127 Apart from the misleading nature of the report, mentioned in paragraph 14.120 above, I consider that the councillors were misled at the meeting on 1 May by the Chief Executive’s failure to advise them of the demand for a price increase of £12 million. Even if he did notify the Leader of the Administration alone of that demand, I do not consider that that was sufficient when he was aware that councillors would be asked to take a decision based upon inaccurate and incomplete facts. In that situation it was incumbent on him to withdraw his report or to explain to councillors at the meeting that there had been a demand for a price increase and that negotiations would ensue. In ignorance of that material fact, councillors accepted the Chief Executive’s recommendations in his report, noted “the imminent award of the two contracts with a final price for the Edinburgh Tram Network of £508m” [CEC02083356, Part 1, page 12, item 12] and refreshed the delegated powers previously given to him to authorise tie to award the Infraco contract and the Tramco contract.

14.128 Following the meeting on 1 May, negotiations between tie and BBS continued, resulting in the “Kingdom Agreement” between them, dated 9 May 2008, whereby the contract price increased by £4.8 million with an additional £3.2 million if phase 1b did not proceed [WED00000023]. The details of the negotiations and terms of the Kingdom Agreement, as well as my assessment of it, were discussed more fully in paragraphs 11.125–11.142.

14.129 In short, an “incentivisation payment” of £1.2 million was payable for each of four sections of the route (A, B, C and D). As I note above, while described as “incentivisation” in the Kingdom Agreement and also in the clause in the Infraco Contract which gave effect to it [CEC00036952, Part 2, page 0143, clause 61.8] the contract had effect so that the payment was not dependent on works being completed on time. In that situation justification for additional payment based upon minimising the risk to businesses and residents of Edinburgh of delays to the agreed programme of works was illusory.

14.130 Mr Aitchison considered that councillors, rather than CEC officials, should approve the change since 1 May, and he decided to report the matter to a meeting of the Policy and Strategy Committee of CEC on 13 May. A report signed by him was tabled at that meeting. The composition of that committee as well as the reasons for reporting the matter to it were explained in paragraph 12.62.

14.131 Mr Fraser and Ms Andrew drafted the report to the Policy and Strategy Committee, based on the draft Financial Close Process and Record of Recent Events emailed by Mr Bissett of tie to CEC on 8 May [CEC01294645; CEC01294646]. The draft Financial Close Process and Record of Recent Events was superseded by an updated version on 12 May 2008 [CEC01338847] which was considered in more detail in Chapter 12 (Contract Close). Mr Fraser and Ms Andrew were in the position of having to prepare their report despite not having had first-hand knowledge of the events described in the draft document emailed to them by Mr Bisset. The draft committee report was edited a number of times, following comments by the responsible directors, before being passed to the Chief Executive for signature and tabling at the committee meeting [TRI00000096_C, pages 0057–0058].

14.132 As was explained in paragraph 12.65 the report to the Policy and Strategy Committee erroneously referred to an increase of £4 million instead of £4.8 million, indicating a lack of scrutiny of the report by the Chief Executive, the Director of Finance, the Director of City Development and the Council Solicitor, all of whom were aware of the correct figure and were present at the committee meeting when councillors asked questions about the report. There is no record of the questions asked or answers given. More importantly, the report was misleading. As was discussed in paragraphs 12.64 and 12.66 the explanation for the price increase after 1 May included the following statement:

“To help reduce the risk of programme delays, the price increase agreed will be paid as a series of incentivisation bonuses over the life of the contract, on achievement of specified milestones. This approach should minimise the risk to businesses and residents of Edinburgh of delays to the agreed programme of works. These changes increase costs by £4m [sic] to £512m [sic], but have corresponding advantages by further transferring risks to the private sector.” [USB00000357, paragraph 2.9.]

14.133 In paragraph 12.66 I have concluded that the above statement was untrue in two material respects. First, if, as was probable, the programmed completion date of a section was delayed because of a Notified Departure or other event specified in clause 61.8, the four payments of £1.2 million were each payable on the completion of a section of the route irrespective of the date of completion. Thus it was untrue to assert that they “should minimise the risk to businesses and residents of Edinburgh of delays to the agreed programme of works”. Secondly, it was also untrue to state that there were corresponding advantages to the increase in price by securing a further transfer of risk to the private sector.

14.134 On 13 May, the Policy and Strategy Committee approved the final estimate cost of £512 million [sic] for phase 1a and the contingent payment of £3.2 million if phase 1b was not built, authorised the Chief Executive to enter into contracts with the Infraco and Tramco bidders, refreshed the Chief Executive’s delegated powers to make any final minor amendments to the contracts and modified FBCv2 to reflect the new circumstances.

14.135 By letter dated 13 May 2008 [CEC01284042], Mr Gallagher advised Mr Aitchison that tie was of the view that the final terms negotiated were materially consistent with the terms of the FBC, that the final terms confirmed the value-for-money proposition demonstrated by the FBC and that it was now appropriate to conclude the contracts.

14.136 On 13 May 2008, Mr McGougan, Mr David Anderson and Ms Lindsay provided a short note to Mr Aitchison confirming that it was appropriate to support tie’s recommendation that there was an imminent financial close to the project [CEC01244245]. Mr Aitchison authorised tie to enter into the contracts, and on 14 May 2008 the Infraco contract and the Tramco contract were signed.

14.137 I have considered whether Mr McGougan, Mr David Anderson and Ms Lindsay ought to have given the above advice to Mr Aitchison. Mr McGougan was aware that Ms Andrew still felt uncomfortable that she did not have 100 per cent understanding of the risks relating to the contract. Although Mr McGougan had concerns about risk, he took comfort from the positive Audit Scotland and OGC reviews. It should be borne in mind that the later of these two reviews took place in October 2007 and that since then there had been significant material changes to the contract terms, including three price increases, the retention by the public sector of potentially significant risks arising from SDS delay, and the negotiation and subsequent agreement about the pricing schedule. Although Mr McGougan considered that it was not unusual for changes to be made up to the last minute in major public-sector projects contracts, it would have been a matter of concern for him if these changes were material in nature [PHT00000042, pages 149–150]. As noted above, the changes after the OGC review were material. At the time of the OGC review, the price, terms and conditions of contract and risk allocation had yet to be agreed. When asked whether CEC should have instructed a further independent review of the risks when price, terms and conditions and risk allocation had been agreed, Mr McGougan replied: “I think with hindsight that is something that may well have proven of value” [ibid, page 149]. Having regard to the fact that a review had been undertaken in October 2007, and that since then there had been several material changes, it should not have required hindsight to appreciate that a further review was required before contract signature. Failure to instruct such a review was an error of judgement on his part and failed to protect CEC’s interests.

14.138 Mr McGougan explained that CEC was entitled to rely on due diligence by tie and the written information from DLA, together with the discussions that CEC legal was having with DLA, to take the view that the changes in risk that had happened in the run-up to contract close had been understood in terms of the overlapping elements of design construction and that a provision had been made for them in the risk register. DLA had a duty of care to the Council and was expected to undertake that duty of care properly and to alert CEC to any areas in which the final contract negotiation had changed the transfer of risk balance [ibid, page 150].

14.139 Mr McGougan gave evidence that if a decision had been taken to delay the award of the Infraco contract until design was complete, and all approvals and consents had been obtained, that would probably have required re-procurement of the contract, which would have led to further delay and increased costs and there would have been a likelihood of cancellation of the project. The Scottish Ministers and Transport Scotland were already very concerned by the project delay. Grant expenditure that had been planned for that financial year would require to be deferred to a future year, leading to an under-spend in the present year’s budget. Mr McGougan considered that there was little doubt that the project would have been cancelled if that had happened [TRI00000060_C, page 0069, paragraph 184]. This evidence seemed to suggest that, as an official, Mr McGougan was taking a strategic decision to proceed with the project in the knowledge of known difficulties that ought to have been reported to councillors, who alone were responsible for strategic decisions.

14.140 In paragraph 14.19 above, reference is made to reports to the IPG from January 2008 onwards, which showed the status of the various deliverables, also called “critical contractual decisions”, necessary to enable the Chief Executive of CEC to use his delegated powers to authorise tie to award the Infraco contract and the Tramco contract and to the fact that a number of necessary critical contractual decisions were still outstanding at the date of the NIA. When the Chief Executive authorised tie to enter into the contracts it appears that deliverables were still outstanding, indicating a lack of diligence on his part and on the part of those advising him in protecting CEC’s interests.

14.141 By email dated 21 May 2008, after contract signature, Mr Coyle circulated the latest version of the spreadsheet detailing the deliverables for contract award, which showed that a number of items remained outstanding [CEC01249269; CEC01249270]. These will be listed in Chapter 15 (Contractual Disputes: May–December 2008), but they included obtaining a copy of the SDS novation agreement, obtaining an update of the QRA (including to take account of the changed risk profile at financial close), obtaining a detailed analysis of programme risk and obtaining full details on the status and degree of completion of the SDS design work. Mr Coyle also gave evidence that the status of the deliverables was reported to senior officials in CEC on a daily basis (as well as at meetings of the IPG) and that senior officials were aware that some of the deliverables were outstanding but nevertheless decided to authorise signature of the Infraco contract by tie [PHT00000010, pages 4–12 and 18–19].

Conclusions

14.142 In fulfilling their advisory role to the Chief Executive, the Director of Finance, the sequential Directors of City Development and the Council Solicitor relied upon assurances given by tie about matters having potential financial consequences for CEC and upon risk matrices prepared by DLA without subjecting any of them to informed independent scrutiny.

14.143 The material changes in the terms of the draft Infraco contract as a result of negotiations after the reports of the Audit Scotland and OGC reviews, and the Director of Finance’s acknowledgement that neither he nor his staff had a complete understanding of all the risks that might attach to the contract, as well as the qualifications in the DLA letters to CEC from which it was clear that CEC’s interests were not considered independently of those of tie, indicated the need for CEC as the funder of the project to obtain independent advice.

14.144 Accordingly, I consider that before signature of the Infraco contract, but when the final price and risk allocation and up-to-date factual position was known, CEC officials ought to have obtained independent legal advice on the terms of the draft contract and ought to have obtained an assessment of the state of the project, the risks, the quantification of the risks and the adequacy of the risk allowance from an independent firm of suitably qualified engineering, transport and project management consultants. These experts ought to have been retained during contract negotiations to advise CEC, independently of tie, of the implications for it of proposed contractual terms.

14.145 Had suitable independent reviews been instructed by CEC, it is likely that the risks affecting the project would have been identified and evaluated, including risks arising from the difficulties and delays with the design and the utility diversion works, as well as the risks arising from the pricing provisions in SP4 to the contract, enabling CEC officials to determine the adequacy of the risk allocation and to provide councillors with accurate information.

14.146 Before the Council meeting on 13 March 2008 there had been significant changes to the FBC that had been approved by CEC on 20 December 2007, in respect that BBS and tie had agreed three separate price increases resulting in a net increase of £10 million above the price of £498 million reported to councillors on 20 December 2007, and there were continuing discussions indicating that BBS was unwilling to accept some of the risks allocated to it in the FBC. In these circumstances, before authorising tie to issue the Notice of Intention to Award the Infraco contract to BBS, the Chief Executive of CEC had a duty to report the changes to CEC, as well as his inability to complete due diligence because the contract terms had not been finalised, but he failed to do so.

14.147 Having regard to the fact that, on 18 March 2008, tie and BBS were still in negotiation over critical contractual documentation (deliverables), including the final pricing and risk provisions, and that at that date the Chief Executive and other senior CEC officials were aware that certain deliverables were still outstanding that were necessary to enable the Chief Executive to exercise his delegated powers to authorise tie to issue the NIAs for the Infraco contract and the Tramco contract, the responsible directors and the Council Solicitor should not have advised the Chief Executive to authorise tie to issue the notices, and in any event the Chief Executive should not have authorised tie to do so, in light of his own knowledge mentioned above.

14.148 The premature issue of the NIAs on 18 March 2008 strengthened BBS’s negotiating position and resulted in its securing the transfer of risks to the public sector that, in terms of the procurement strategy, were meant to be retained by Infraco as well as a last-minute price increase of £4.8 million plus a contingent payment of £3.2 million if phase 1b did not proceed.

14.149 DLA was aware that prematurely issuing the NIAs would strengthen BBS’s negotiating position, and it advised tie accordingly but failed to notify CEC of the potential conflict of interest between CEC and tie arising from the divergence of their interests if tie issued the NIAs prematurely. Had DLA done so, CEC officials would have had the opportunity to reconsider their decision in 2007 not to instruct an independent firm of solicitors with expertise in construction contracts, and in any event could have considered whether it was appropriate to issue the NIAs before the conclusion of negotiations about critical contractual documentation.

14.150 The terms of SP4 of the draft Infraco contract were such that they alerted an informed reader that pricing assumptions had been based upon a factual situation that was known by tie and BBS to be inaccurate, leading to price increases as a result of a Notified Departure or Notified Departures immediately after contract signature based upon the true factual position, and that design risk had not been transferred to Infraco as had been intended in the procurement strategy.

14.151 When Mr C MacKenzie read SP4 in April 2008, it was evident to him that it excluded a fair amount from the certainty of the lump sum, fixed and firm price elements of the construction works price, but he did not advise the Council Solicitor of his concerns in relation to that schedule, including the risk of changes resulting in price increases after the award of the contract. His failure to do so was a serious error of judgement on his part.

14.152 Mr N Smith alleged that he did not read SP4 until 2009 or 2010, and therefore could not have advised the Council Solicitor before contract close of the obvious concerns apparent to him when he read the schedule. If that is correct, it calls into question the culture within the legal department and indicates a lack of the scrutiny of documents sent to him required of Mr N Smith for the protection of CEC’s interests.

14.153 Had the Council Solicitor been alerted to the terms of SP4, she would have read the schedule and raised her concerns at the highest level within CEC, as a result of which it is probable that CEC officials would have reconsidered the need for legal advice about the draft contract as a whole from a firm of solicitors experienced in construction contracts and who had not been involved in negotiating the terms of SP4, and for advice from qualified professionals with experience of similar large-scale infrastructure projects in the transportation sector about CEC’s risk exposure as guarantor of tie.

14.154 At the Council meeting on 1 May 2008, CEC officials did not provide councillors with accurate or complete information. The Chief Executive’s report to them was misleading to the extent that it reported that 95 per cent of the combined Infraco and Tramco costs were “fixed”, with the remainder being provisional sums, and it was inaccurate in stating that the utility diversion works along the tram route were “progressing to programme and budget” [CEC00906940, page 0002, paragraph 3.6]. These statements were made in reliance on information from tie, but the ultimate responsibility for the accuracy of the report rested with the Chief Executive as its signatory. Moreover, although the reference in the report to the final price of £508 million was accurate at the date of signing the report to councillors, it was no longer accurate or complete at the date of the Council meeting, in view of the demand for a further price increase of £12 million, but the Chief Executive failed to advise councillors of that fact and allowed them to make a determination on the basis of the incomplete information about price. In the foregoing respects the Chief Executive failed in his duty to councillors to provide them with complete and accurate information to enable them to take informed decisions.

14.155 The report to the Policy and Strategy Committee on 13 May 2008 was also inaccurate and misleading. It claimed that the additional sum of £4.8 million (wrongly stated to be £4 million) represented incentive payments for the completion of sections of the tram route that should minimise the risk to businesses and residents of Edinburgh of delays to the agreed programme of works. This did not accurately reflect the agreement reached and which was due to be signed the following day, subject to the Policy and Strategy Committee’s giving the Chief Executive the necessary authority. The report failed to advise the committee that incentives already existed to induce Infraco to achieve sectional completions by the scheduled programme date because of the provisions for liquidated and ascertained damages for failure to do so. It also failed to advise the committee that if completion was delayed due to Notified Departures (which were anticipated immediately after contract signature) or another event specified in clause 61.8 the incentive payments were payable within seven days of the issue of a certificate of sectional completion and were not related to the programmed dates for sectional completion. In that event there could be no minimisation of risk to businesses or residents.

14.156 I consider that the inaccuracies and deficiencies in the reports to councillors on 1 and 13 May arose for reasons similar to those discussed in paragraphs 13.171 – 13.178 inclusive in respect of the report to the Council in December 2007. In short, senior officials placed too much reliance on information and assurances provided by tie and its legal advisers, DLA, without subjecting them to proper scrutiny and placed insufficient reliance on the concerns expressed by more junior Council officials.