Chapter 19: Mediation and settlement

Overview

19.1 Between 8 and 12 March 2011, the parties took part in a mediation at the Mar Hall hotel in Bishopton, outside Glasgow. By 10 March, they had reached agreement on key points of principle to resolve their dispute, and on 12 March they signed non-binding Heads of Terms setting out in more detail a basis for the permanent settlement of their differences [CEC02084685]. The City of Edinburgh Council (“CEC”) had been represented at the mediation by its officials, and the negotiated agreement was subject to approval by its councillors.

19.2 The mediated agreement provided for the completion of a tram line between the Airport and Haymarket, the settlement of all claims accrued to date, and the transfer to CEC of all Siemens materials and equipment for the line between the Airport and Newhaven, in return for a price of £362.5 million. At mediation the parties were unable to agree a price for the on-street works between Haymarket and St Andrew Square, but agreed to negotiate further on a target price mechanism for them.

19.3 On 20 May 2011, tie Limited (“tie”) entered into Minute of Variation 4 with BSC (“MoV4”) [CEC01731817]. MoV4 was an interim and partial settlement of the parties’ dispute. It provided for the recommencement of work on the tram infrastructure in specified priority areas and the payment of significant sums to Bilfinger Berger (“BB”) and Siemens. Its purpose was to vary the Infrastructure contract (“Infraco contract”) between tie and Bilfinger Berger, Siemens and CAF (“BSC”). For that reason tie had to sign MoV4, although it was the Chief Executive of CEC (Dame Sue Bruce) who led negotiations on behalf of the client and took the ultimate decision to recommend settlement of the dispute on the terms discussed below. tie claimed that MoV4 resulted in a breach of the expenditure limit imposed on tie by CEC in the Operating Agreement between them. Accordingly tie entered into MoV4 at the direction of CEC’s senior officials. Although other CEC officials and third parties were at meetings resulting in the decision to implement MoV4, the CEC officials responsible for taking that decision were Dame Sue Bruce, as Chief Executive, and Mr David Anderson and Mr McGougan as the responsible directors. Mr Anderson was also the SRO and as Director of Finance Mr McGougan was also Chief Financial Officer of CEC. Other senior officials in CEC were aware of the decision. In particular, Mr Maclean, Head of Legal Services, attended the relevant meetings and was aware of the decision to authorise tie to enter into MoV4 despite its being contrary to legal advice from officials in CEC Legal, including Mr Maclean, that the decision was properly one for councillors where the decision resulted in tie and TEL exceeding financial limits imposed on them by decisions taken by the Council. CEC’s councillors were not asked formally to approve MoV4 before it was signed, and did not do so. MoV4 left CEC with three strategic options for the future of the Edinburgh Tram project (the “project”):

• approval of a settlement based on the mediated agreement;
• agreed termination of the infrastructure contract (“Infraco contract”); and
• a return to the project under the pre-existing Infraco contract terms.

19.4 On 30 June 2011, on the recommendation of Mr David Anderson, CEC’s Director of City Development, CEC resolved to pursue completion of a tram line between the Airport and St Andrew Square/York Place on the basis of the agreement reached at mediation. The total cost of that option was estimated at between £725 million and £773 million [CEC02044271, page 0008, paragraph 3.42]. CEC instructed the Director of City Development to report on funding and on the risks associated with the works.

19.5On 25 August 2011, the Director of City Development reported a revised budget estimate of £776 million. CEC therefore had to find an additional £231 million to fund the project, which the Director recommended it borrow under prudential borrowing rules via the prudential framework for local authority investment, the key principles of which were to ensure that capital programmes were affordable, prudent and sustainable [ibid; Mr Connarty PHT00000048, page 34]. The Director also reported on risk. After several rounds of voting, with divisions along party lines, CEC rejected the Director’s funding recommendation. It also resolved that construction of the on-street section between Haymarket and St Andrew Square/York Place had not been sufficiently de-risked, and it instructed the Chief Executive to negotiate a settlement for a line between the Airport and Haymarket only.

19.6 The Scottish Ministers considered CEC’s decision to stop the line at Haymarket to be a fundamental change to the basis on which they had grant-funded the project, and were not therefore prepared to provide the balance of their funding. On 2 September 2011, having been informed of the Scottish Ministers’ position, CEC reversed its decision of 25 August and agreed once again to pursue the option of a line to St Andrew Square/York Place. It instructed its Chief Executive to enter into a settlement agreement to that effect, and approved the funding proposals that it had rejected in August [CEC02083154].

19.7 On 15 September 2011, tie, CEC and BSC entered into a settlement agreement that fully and finally settled their disputes under the Infraco contract [CEC02085585]. CEC put in place a new governance structure for the project, and appointed Turner & Townsend as project manager. tie was wound down. The infrastructure works were completed, and the line opened for revenue service on 31 May 2014.

19.8 The total outturn cost of the works by BB and Siemens under the Infraco contract was £427,206,309.52 [CEC02085668] for a line between the Airport and York Place, compared with the original construction works price of £238,607,664 for a line between the Airport and Newhaven.

Background and preparations for mediation

Background

19.9 By late 2010, the project was in crisis. BSC’s initial proposals to settle the Infraco contract disputes were given the name “Project Carlisle”. The first Project Carlisle proposal (“Carlisle 1”) was for a shortened line between the Airport and the east end of Princes Street, for an agreed maximum price. It therefore omitted the stretch of line between the east end of Princes Street and Newhaven. As noted below, a revised proposal involved the termination of the line from the Airport at Haymarket. The parties’ attempts under Project Carlisle to negotiate a revised basis for the continuation of the project had borne no fruit [see, e.g., CEC00133316]. BSC had stopped work at a large number of sites, drawing support from Lord Dervaird’s decision in the Murrayfield underpass adjudication that tie had no power under clause 80.13 of the Infraco contract to insist on work being done prior to agreement of an estimate for the work, if it was subject to a change claim [TIE00409574]. Lord Dervaird’s decision was discussed more fully in Chapter 17 (Adjudications and Beyond). tie’s policy of assertive enforcement of the contract (including the service of Remediable Termination Notices (“RTNs”) and underperformance warning notices) had neither persuaded BSC to act as tie wished, nor established any basis for tie to compel it so to act [see, e.g., Mr Nolan TRI00000114_C, page 0026, paragraph 67]. tie had failed to establish any momentum behind its preferred interpretation of the contract, and in many important respects the adjudicators had applied the contract in a manner more consistent with BSC’s interpretation.

19.10 Project funding had become a pressing issue for both parties. CEC’s approved funding was no longer enough to complete the project: by letter dated 8 June 2010, the Transport Edinburgh Limited (“TEL”) Board formally notified CEC of its reasonable expectation that the full scope of phase 1a could not be delivered within the budget of £545 million and that it was:

“now certain that further Council approval will be required in due course, whether for staged delivery or for additional funding” [TIE00084642].

19.11 Nevertheless TEL did not seek any increase in its authorised limit of expenditure at that stage. On the consortium side, both BB and Siemens had, or were about to have, substantial negative cash flow positions on the project [BFB00112204, page 0004, paragraph 1.2.5; Mr Foerder PHT00000044, page 123; Mr Eickhorn TRI00000171, page 0055, paragraph 120].

19.12Until late 2010, CEC had respected the contractual and governance structure of the project and had left tie, as the contracting party to the Infraco contract, to be the project interface with BSC. CEC had rebuffed BSC’s attempts to engage directly with it [see, eg, CEC00356309 (24 March 2010); CEC00242190 (19 April 2010); CEC00236123 (21 April 2010)]. Over the course of 2010, however, CEC’s senior officials progressively lost faith in tie. In August 2010, they became deeply concerned after tie’s failure, in the Murrayfield underpass adjudication, to establish a clear basis for compelling BSC to carry out work pending resolution of disputes over change without referring the matter to the dispute resolution procedure and committing to pay BSC’s demonstrable costs. Mr Aitchison concluded that the Council officials

“had to try and find, over the coming weeks and months, a way in which we could definitively give the Council some clear policy advice on how to handle the tram project” [TRI00000022_C, page 0074, paragraph 223].

19.13 From this point on, rather than rely on
tie for information and strategic thinking about the project, CEC’s senior officials became increasingly directly involved [ibid, pages 0074–0075, paragraph 224]. In Mr David Anderson’s view, it was the failure of the Project Carlisle negotiations that:

“effectively took tie out of play. The Council now had no option but to step in and take control” [TRI00000108_C, page 0095, paragraph 123].

19.14 Around this time, following Ms Lindsay’s departure from CEC in July or August 2010, Mr Maclean, CEC’s Head of Legal and Administrative Services, became much more closely involved in advising CEC on the Tram project. For many months he had held the view that CEC needed to be more proactive in addressing the project’s problems [CEC00473835]. Mr Maclean’s legal abilities and strategic thinking in relation to the project were valued by CEC’s senior officials. This appears to have marked a change from the previous position. In contrast to the view that he and other senior officials had of Mr Maclean, Mr David Anderson said that he was “never confident” in advice from Ms Lindsay. He considered that she relied too heavily on the opinion of DLA and lacked the “authority or gravitas that I would have expected in a Chief Solicitor” [TRI00000108_C, page 0062, paragraph 73(e)]. Mr Maclean’s increased involvement coincided with the recognition by CEC’s senior officials that they had to become more directly involved in finding a solution to the project’s problems.

The last resorts: termination of the Infraco contract, or mediation

19.15 Having failed through its other initiatives to bring about a resolution of the project’s problems, tie turned its attention to the possible termination of the Infraco contract. The possibility of termination had been under consideration for some time, but only as a last resort [see, e.g., CEC00575128, a presentation to the Tram Project Board (“TPB”) in March 2010 at which termination was described as “the ultimate sanction” (page 0018)]. Between August and October 2010, tie served on BSC a series of formal notices under the contract, which, if valid, would be the first step towards tie establishing a contractual entitlement to terminate the contract [CEC02084518; CEC02084519; CEC02084520; CEC02084521; CEC02084522, Parts 1–2; CEC02084523; CEC02084524; CEC02084525; Parts 1–2; CEC02084526; CEC02084527; CEC02084628; CEC02084529].

19.16 tie’s purpose in serving the notices was, in the first instance, to strengthen its position for a negotiated resolution, with termination being an option only if that failed [WED00000641, Part 2, page 0046, paragraph 4.4; Mr Jeffrey TRI00000097_C, page 0016, paragraph 290; Mr Bell TRI00000109_C, page 0155, paragraph 130]. Prior to serving the notices, tie had been advised by senior counsel that, to justify termination of the Infraco contract, it would be necessary for it to produce evidence that BSC had breached it. It decided, apparently based on advice from senior counsel, to issue the notices without first compiling or testing a body of evidence in support of its right to terminate, recognising that this would need to be done before actually terminating the contract. It cited time pressure from CEC as the reason for proceeding in that way [WED00000641, Part 2, pages 0047–0048, paragraph 4.4.1]. In my view this was a serious error, regardless of any pressure from CEC. To serve RTNs without having compiled and tested a sound evidential basis for such notices exposed tie to the risk of being unable to act upon the notices, revealing to BSC the weakness of tie’s position. The consequence would be to strengthen BSC’s hand in any negotiations to resolve the disputes between it and tie.

19.17 CEC’s officials were concerned by the prospect of the Infraco contract being terminated. They continued to regard that as a last resort. Mr Aitchison, CEC’s Chief Executive, had:

“considerable reservations about any attempt to cancel the contractual arrangements with BBS as this could have landed the Council in years of litigation, substantial costs and an incomplete tramline” [TRI00000022_C, page 0080, paragraph 237].

19.18 Mr David Anderson was concerned about the costs that had been sunk into the project, the likelihood of litigation following termination, the potential for damages claims and the need to make good construction sites even on a temporary basis until a fresh procurement exercise could be concluded [TRI00000108_C, page 0092, paragraph 117]. Senior CEC officials could see only political grief and major problems for the city if sites were abandoned and there followed years of potential litigation [ibid, page 0095, paragraph 123]. Mr Swinney regarded termination of the Infraco contract as an “undeliverable” option and he would not have agreed to it [TRI00000149_C, pages 0096–0097, paragraphs 286–287; TRS00011262]. Mr McGougan, CEC’s Director of Finance, recalled a meeting with Mr Swinney on 7 October 2010, at which he remembered

“discussing the importance of securing an asset at the end of the project … The focus of the meeting was really about how we could reach a solution that protected the public purse as far as possible, secured an asset and delivered a working tram.” [TRI00000060_C, page 0097, paragraph 245.]

19.19 These concerns prompted CEC’s officials to seek their own legal advice, independent of tie, on terminating the contract [CEC00012498; CEC00012941]. At this stage, they did not have a clear understanding of the extent to which there was an evidential basis for each of the BSC defaults alleged in the formal contractual notices that tie had served [CEC00135311]. Nor, for that matter, did tie, not having gathered or tested the evidence for doing so.

19.20 Discussions between tie and BSC raised the possibility, distinct from a unilateral termination of the Infraco contract by tie, of achieving a so-called “mature divorce”, which meant an agreed separation of the parties [WED00000641, Part 1, page 0042; Dr Keysberg TRI00000050_C, pages 0026–0027, paragraph 29; PHT00000036, page 57; CEC00099403].

19.21 Despite the reservations about termination, CEC publicly identified it as an option. Having received a report that an acceptable commercial settlement with BSC was unlikely in the short term [CEC02083124, page 0007, paragraph 2.49], CEC noted that, in the absence of robust remediation plans from BSC and a change in its behaviour in relation to progressing the works, serious consideration would need to be given to termination of the contract and re-procuring the work [CEC02083123, page 0004, decision point 4].

19.22 Around this time, both Mr Swinney and CEC’s officials agreed to engage directly with BSC for the first time. On 13 October 2010, BSC wrote direct to councillors [CEC00012755]. It did so again on 5 November 2010, following Mr Mackay’s resignation as chairman of tie and TEL [CEC00013012]. BSC instigated a meeting with Mr Swinney, which took place on 8 November 2010 [TRS00011187; TRS00011272]. Dr Keysberg of BB considered this to be the “turning point in the whole contract”, at which he was able to discuss BB’s perspective on the contract with “a person who understands construction”, namely Mr Mclaughlin of Transport Scotland [TRI00000050_C, pages 0027–0028, paragraph 30(a)]. That is in contrast to Dr Keysberg’s comments about tie, which he considered to lack people with experience of major projects, especially in inner city areas [ibid, pages 0016–0017, paragraph 19(a)]. Following this meeting, Mr Swinney decided that he would tell CEC to mediate with BSC [TRI00000149_C, pages 0092 and 0107, paragraphs 275 and 318]. On 15 November 2010, CEC’s Chief Executive, Mr Aitchison, confirmed that CEC was now prepared to agree to two of its senior officials (Mr McGougan and Mr Maclean) meeting with BSC [CEC00054284].

19.23 On 16 November 2010, Mr Swinney met the Council Leader (Councillor Dawe), Mr Aitchison and Mr McGougan. Mr Swinney’s evidence was that he told them to mediate with BSC; and that, although he could not compel them to do so, they agreed [PHT00000050, pages 133–136]; TRI00000149_C, pages 0066, 0107 and 0109, paragraphs 191, 318 and 325]. He described Councillor Dawe and Mr Aitchison as “steadily becoming resigned”
to the fact that mediation was inevitable [ibid, page 0109, paragraph 325]. Councillor Dawe said that she was keen to move the project towards mediation as fast as possible: this was a last resort and something had to be done to “knock heads together and get things moving” [PHT00000001, page 186].

19.24 On 17 November 2010, the TPB authorised Mr Jeffrey to approach BSC with an offer to mediate [TIE00896978, page 0007]. On 18 November 2010, CEC approved an emergency motion by the Council Leader to instruct CEC’s Chief Executive to continue to make preparations with tie and BSC for mediation or other dispute resolution procedure [CEC02083139, page 0021].

19.25 tie’s proposal to mediate came as a surprise to BSC, which expected tie, having served RTNs under the contract, to proceed to terminate it [Mr Foerder TRI00000095_C, page 0084, paragraph 253].

19.26 The political impetus towards mediation, and its timing, caused some concern for those in operational and advisory roles on the project. For example, an email drafted by Mr Jeffrey to Mr Aitchison on 22 November 2010, described by the former as an “angry draft for discussion”, referred to rapid developments the previous week

“with the public call for mediation, then the mounting political pressure to enter mediation followed by our board meeting on Wednesday and the council meeting on Thursday” [TIE00304261, page 0001].

19.27 He noted that he had always favoured an agreed way forward between tie and BSC, and that

“any final agreement will be determined in part by the relative strengths of the parties on entering any process to reach that agreement” [ibid].

19.28 He continued:

“I believe that one of the factors that created some of the issues we now face were [sic] caused by working to a political timetable, and I am concerned that we are in danger of making the same mistakes yet again.” [ibid, page 0002.]

19.29 As will be discussed in more detail below, Mr Jeffrey shortly afterwards came to the view that the timing was right for mediation, although Mr Maclean, based on advice from CEC’s senior counsel, maintained that it was not.

19.30 A few days after CEC’s commitment to mediation, tie and CEC each received advice, separately and from its own senior counsel, on termination of the Infraco contract. Both were advised that termination came with very considerable risks for tie and CEC. On 22 November, senior counsel for tie, Mr Keen QC (as he then was), advised that tie would be entitled to terminate the Infraco contract only if it could prove that BSC was in default, as that was defined in the contract. If BSC disputed that it was in default, challenged the validity of tie’s termination, and sought to insist on its right to complete the works, BSC would be likely to obtain an interim interdict precluding tie from entering upon the works until the challenge was resolved. That, he advised, would take at least a year (perhaps a number of years), and if successful BSC would have a claim for damages for loss and expense suffered by reason of tie’s wrongful termination notice [TIE00080959, Part 2, page 0030 onwards; see also tie’s Project Resolution report, WED00000641, Part 2, page 0058]. Accordingly, Mr Keen’s advice was that:

“unless tie is absolutely certain of being able to serve a valid termination notice such a course of action would carry considerable risk” [TIE00080959, Part 2, page 0037, paragraph 14].

19.31 Not having gathered or analysed an evidential basis for termination, tie did not have the requisite certainty.

19.32 On the following day (23 November 2010), CEC consulted Mr Dennys QC. His advice was that even tie’s strongest termination notice, which related to defects on Princes Street, did not yet give it firm grounds for termination, in light of BSC’s response to it. tie’s other notices were not, in his view, sufficiently specific in their terms to form a sound basis for termination. He advised that the best strategy for tie was not to rely on the existing notices, but through continued operation of the contract to seek to establish clear grounds for termination [CEC00013529]. That was a process which would take time. There was recognition that tie’s credibility would potentially be damaged if, having served RTNs, it did not then follow through on them to terminate the contract [ibid, page 0004].

19.33 By 24 November 2010, and in light of the legal advice from both senior counsel, CEC’s officials and Mr Jeffrey agreed that immediate unilateral termination of the Infraco contract by tie was not the preferred way forward [CEC00013441]. Having previously been concerned about the timing of mediation, Mr Jeffrey now considered that there were reasons to mediate sooner rather than later: the mediation proposal was gathering a momentum of its own; further delay was unlikely to bring advantages for tie/CEC; and the political pressure on tie and CEC was likely to increase the longer the delay, making a good result less likely [PHT00000033, page 54; CEC00013441].

19.34 Mr Maclean, influenced by the advice of Mr Dennys QC, disagreed [CEC00013537; CEC00014282; WED00000008]. He considered mediation at this stage to be premature, and thought it should be delayed to allow CEC to investigate the facts and develop a clearer and more incisive strategy. He recommended continued enforcement of the contract with a view to establishing fresh and more compelling grounds for termination.

19.35 In further advice on 1 December 2010, Mr Keen QC advised tie that its RTN concerning the Princes Street defects could, in some respects, be criticised for a lack of specification; and that, although no such criticism could validly be made of the notice concerning design, he questioned whether that notice properly identified an Infraco default. In light of those views, he concluded that, if tie gave notice of termination of the contract relying on these notices, there would be a material risk that it would be found to have wrongfully repudiated the contract [TIE00683941]. This, if anything, made it even clearer that it would be unwise for tie to terminate the Infraco contract based on the existing notices. However, in his evidence to the Inquiry Mr Jeffrey expressed his frustration that tie, having followed the legal and technical advice that it had received on the drafting of the notices before they were served, found themselves unable to rely on them. It did not appear that tie had a clear mechanism for resolving the issues between tie and BSC [TRI00000097_C, page 0052, paragraph 317; PHT00000033, pages 105–114].

Discussion

19.36 In my view it is clear that, by late 2010, tie and CEC had few options left to resolve the difficulties with the Infraco contract.

19.37 tie’s strategy of serving RTNs and underperformance warning notices under the Infraco contract, without having investigated the circumstances allegedly supporting them, was in my view misconceived. The failure to gather and analyse evidence to justify termination before the notices were drafted and served meant that there was a significant risk that the notices would not be capable of forming a valid, or reliable, basis for termination. That was exactly what transpired. This was damaging for tie and CEC. It meant that there was no proper basis for them to terminate the Infraco contract or, perhaps more importantly, persuasively to threaten termination. Even if tie’s primary objective was not to terminate the contract, the persuasive force of the notices was much reduced if they did not rest on solid grounds for termination. The consequence was that the notices gave tie and CEC little or no negotiating leverage over BSC. Indeed, in my view, serving them without a fully investigated basis undermined tie’s credibility. In its mediation statement sent to the mediator on 24 February 2011 BSC referred to tie’s failure to terminate the contract in reliance upon the matters specified in the RTNs as having “seriously compromised the credibility of its position” [CEC02084511, pages 0020–0021, paragraph 7.5]. I agree with that observation.

19.38 Further, the failure to carry out the detailed investigation into grounds for termination meant that tie and CEC simply did not know whether such grounds existed. Their decision-making was therefore based on assumptions, rather than clear evidence, about the true position.

19.39 The move to mediation was a political decision, rather than a strategic one. It was in practical terms taken by Mr Swinney, in response to overtures from BSC, and endorsed by Councillor Dawe as Council Leader and ultimately by CEC. In my view, it was taken out of frustration that tie had failed over the first two and a half years of the Infraco contract’s implementation to resolve that contract’s difficulties, and from the perspective that something had to be done. It is difficult to disagree with that sentiment. The fact that the impetus to act came from Mr Swinney rather than either tie or CEC does not reflect well on the latter two.

19.40 There is no evidence, however, that the decision was taken as part of a co-ordinated strategy for the employer side of the project (which in its broadest sense comprised tie, CEC and Transport Scotland) to achieve an outcome most beneficial to them. Indeed, the evidence rather suggests an absence of joined-up strategic thinking within that group. That is most apparent from the following facts: the commitment to mediation was made before: (i) tie and CEC had obtained their legal advice on termination; and (ii) tie and CEC had agreed on the best timing for the mediation, followed by the disagreements about that after the commitment had been made. At the time the commitment to mediation was made, Mr Maclean was attempting to formulate a strategy and disagreed with Mr Jeffrey about what it should be. In advance of any decision to seek resolution of a dispute by mediation it seems to me to be fundamental that each party should have considered the strengths and weaknesses of its position and formulated a strategy, based on professional advice, aimed at achieving the best outcome at mediation.

19.41Apart from the failure of CEC and tie to agree a strategy before agreeing to mediate, the decision to mediate was taken at a time when Mr Mackay had resigned as chairman of tie and TEL and a recruitment process was to be commenced immediately to replace him. CEC’s Chief Executive, Mr Aitchison, was also due to retire at the end of the year. When CEC and tie took the decision to mediate they must, or certainly should, have appreciated that any mediation would take place with newcomers in the leadership positions in all three organisations involved in the project, namely CEC, tie and TEL, none of whom was yet in post. Although those newcomers would not be associated with the acrimony and lack of trust which had built up between the parties on the project, they would on the other hand lack experience of the project, familiarity with its personnel and any detailed knowledge of its issues. This was obviously likely to be to their disadvantage in the negotiations to follow.

19.42A decision to mediate does not of itself imply anything about the manner in which the mediation should be conducted, or the objectives to be achieved. Nonetheless, the mediation proposal, once made, introduced a momentum of its own and it ought to have been obvious that it would do so. To subject the employer side of the project to that momentum, without a strategy in place for the mediation and without leaders in position, was strategically naïve. In my view, this lack of joined-up thinking was at least in part attributable to the fact that there was no single point of responsibility for decision-making about the project.

CEC’s formulation of its approach to mediation

19.43 On 3 December 2010, Mr Maclean and Mr McGougan met Mr Walker of BB and a representative of Construcciones y Auxiliar de Ferrocarriles SA (“CAF”) [CEC02084346]. In his opening words at that meeting, Mr Walker said that BSC had “been kind of crying out to talk to somebody for quite a while”. He went on to explain his view of the problems with the Infraco contract.

19.44 His wide-ranging explanation included the following points: that the Infraco contract price was not fixed, but rather subject to the pricing assumptions in Schedule Part 4 (“SP4”) of that contract; that, contrary to the information provided to CEC at financial close that the contract price was 95 per cent fixed, the contract price was only around 45 per cent fixed at that time; that BSC had faced difficulty in assessing the programme implications of changes because of the parties’ failure to agree the programme impact of prior changes; the difficulties BSC had faced in attempting to share work areas with the Multi-Utilities Diversion Framework Agreement (“MUDFA”) contractor; that BSC had initially, on the basis of an understanding between Mr Walker and Mr Gallagher, carried on work generated by change notices prior to tie agreeing to these change notices, but that tie then refused to agree the change notices; that the contract change mechanism did not permit BSC to progress work in the absence of agreement about the cost of the change and, in the circumstances of this contract, was therefore inadequate; and that resolving all of the disputes via the dispute resolution procedure was time consuming and expensive.

19.45 Mr Walker presented three possibilities for resolving the project disputes. The first was for the parties to work to the letter of the contract and resolve their differences through dispute resolution procedures (which he did not favour because of the expense and delay it would involve). The second was for CEC to identify exactly what it now wanted from the project, and to fix a price for that as far as possible in light of the updated state of knowledge the parties now had. In this context, there remained risks that BSC was unwilling to take, including, in particular, those relating to delays in approving designs, contaminated ground and remaining utility conflicts. Mr Walker made clear that BSC had lost trust in tie and no longer wanted to work with it. The third option was for BB to walk away and for CEC to take on its sub-contractors.

19.46 Mr Maclean said that he “found the points made by Mr Walker entirely credible” [TRI00000055_C, page 0030, paragraph 77].

19.47 Following that meeting, Mr Maclean prepared a note summarising his view on matters [WED00000009], which he circulated on 4 December to Mr Aitchison, Mr McGougan and Mr Inch and on 10 December to Councillor Dawe [WED00000003]. In his note, he said:

“4.5 tie presently appear to be in a very weak position legally and tactically, as a result of the successive losses in adjudications, and service of remediable termination notices which do not set out valid and specific grounds of termination.

“4.6 It was also clear from the documentation produced at the meeting by [Richard Walker] that [Bilfinger Berger] was extremely well prepared. That may well place them at a tactical advantage …

“4.9 Legally we (I and our QC) would prefer tie to enhance its tactical position first (as indicated in the last note) but I am mindful that a potential window of opportunity has now opened up since the resignation of David Mackay and that [Bilfinger Berger] seem to be welcoming that (and that CEC appears to be willing to enter into a dialogue) …

“4.12 Grinding on, assessing the design and programme of works and enforcing performance of the contract as a whole with a view to future termination or enabling a tactically better backdrop for mediation to take place is the preferred option.

“4.13 However, there would appear to be a growing desire commercially and politically to move towards mediation notwithstanding tie’s (apparently) relatively weak tactical and legal position.

“4.14 Clearly the respective pros and cons will need to be weighed up but if the commercial preference is to seize the opportunity for an early mediation then that could be accommodated. That said, it is likely to have a financial implication with the party in the stronger position faring rather better out of it than might otherwise have been the case. Against that there are financial and other costs involved in allowing matters to continue.” [WED00000009, pages 0005–0006.]

19.48 CEC’s officials took further legal advice from Shepherd & Wedderburn WS, again independent of tie, on the outcomes of the disputes that had been resolved under the Infraco contract [CEC00013525]. They did so because of their concerns that tie had not accurately reported the import of those outcomes. A report by CEC’s in-house legal team summarising this advice noted that:

“the three negotiated settlements and three mediations all increased the overall base project cost, meaning that BSC “won”. Seven of the adjudications went to BSC and two went to tie. Therefore an overall 13:2 BSC versus
tie win/lose ratio is correct. However, it is also true to say that there has been a significant saving to the public purse through the application of the DRP process.” [CEC02082694]

19.49 This paper is indicative of the view being formed among CEC’s officials about the weakness of tie’s position under the Infraco contract. It confirmed their view that tie had put a positive gloss on the adjudication outcomes [Mr N Smith PHT00000006, page 105]. It also, however, acknowledged savings tie had achieved from the estimates initially submitted by BSC.

19.50 On 6 December 2010, Mr Maclean wrote to Mr Jeffrey to confirm that, following a meeting that day with Mr Aitchison and Mr McGougan:

“CEC’s preferred strategy (for commercial reasons) is to move to mediation on a short-form basis, ideally with a view to both sides ‘walking away’ from the Infraco contract. This could perhaps (at least initially) take place under the guise of a rebased route and a new contract with the consortium.” [TIE00668156]

19.51 Thus, early in December 2010, it appears that CEC’s preference, or at least that of its officials, was not for separation from BSC but rather for a new contract with BSC for a shortened route. This is, in outline form, the basis for the agreement reached at mediation in March 2011.

19.52 However, this strategy was contrary to Mr Maclean’s own tactical instincts. In his evidence to the Inquiry, Mr Maclean said that a:

“short form mediation was CEC going in without having all its ducks in a row hoping to do some sort of a deal. My clear view from a legal and financial perspective was that you only go into something when you’re ready for it. I advised that mediation for a contractual dispute such as this would take a lot longer than two or three days but I can understand why that was undertaken. It was because there were huge political and reputational issues. The decision was not all just legal and financial. I think one of the questions here is whether I agreed with the strategy that came out of the meeting on 6 December 2010? Legally and tactically, no I did not. Politically and pragmatically I could understand why that decision was taken. Whilst it was a matter for others, I could see the tension between legal, financial and tactical against political and pragmatism.” [TRI00000055_C, pages 0031–0032, paragraph 80.]

19.53 The evidence of Mr McGougan, who had been directly involved in the Tram project for much longer than Mr Maclean, was that:

“Alastair was suggesting that [the mediation] should be put off until they did more legal diligence. By that time a lot of people, including probably myself, felt that there had been enough legal diligence and that we needed to try another route.” [TRI00000060_C, page 0104, paragraph 264.]

19.54 Both CEC and BSC wanted a swift solution. For example, at the meeting on 3 December 2010, Mr Walker had said the key thing for the consortium was a “speedy resolution” [CEC02084346]; in his advice note of 24 November 2010, Mr Maclean had observed that, although the Internal Planning Group (“IPG”) was yet to agree on what CEC should seek to achieve:

“The working assumption is that CEC would like an operational tram from Edinburgh Airport to at least St Andrew Square for the best price possible and as soon as possible.” [WED00000008; emphasis added.]

19.55 That essentially ruled out the more considered, investigatory preparation advocated by Mr Dennys QC and Mr Maclean.

19.56 On 13 December 2010, Mr Aitchison, Mr McGougan and Councillor Dawe met Mr Darcy of BB and Dr Schneppendahl of Siemens [CEC02084349]. Councillor Dawe restated CEC’s desire to have trams operational in Edinburgh as quickly and as economically as possible. Mr Darcy indicated that BSC, too, remained committed to those objectives. He confirmed that BSC were aware that termination of the contract was not now to be discussed at CEC’s meeting on 16 December. He said that BSC believed that it would cost between £100 million and £150 million more than the currently approved funding to build the line between the Airport and St Andrew Square (which would mean a total project cost of between £645 million and £695 million). The consortium representatives repeated its wish for tie to be replaced by a consultant with greater technical know-how and practical experience of contract administration than tie had; and insisted that CEC participate in the mediation. They expressed appreciation at having finally met the most senior people at the political and official level in CEC.

19.57 On 14 December 2010, McGrigors submitted a report to tie on certain issues relating to the project, including termination of the Infraco contract, drawing on the advice of Mr Keen QC [TIE00080959, Parts 1–2]. It advised that a detailed forensic analysis would be needed if tie wished to establish that an Infraco Default had occurred. It noted that such an analysis was now under way, but that tie had issued the RTNs without having carried out such an analysis. In that regard, the report noted:

“5.8 It would appear that this forensic exercise has not been carried out in relation to the RTNs which have been issued by tie: the selection of issues which were to form the basis of the RTNs, and the subsequent production of the RTNs themselves, emanated from a series of discussions between various members of the tie team and external advisers.

“5.9 Following those discussions, the RTNs were drafted, and then subject to review by members of the tie team and some advisers. Whilst this process involved some element of testing and challenge, with external expert engineering views being sought, it was neither preceded, nor followed, by a rigorous forensic examination based on all relevant documentation and witness evidence. Isolated items of documentation were identified, but these were few in number, and largely consisted of correspondence exchanged between the parties after the events complained of, setting out their arguments. The documents did not consist of the underlying evidence that would support the assertions made by tie. Formal independent expert evidence of the type that would be required in the context of court or other proceedings was not obtained.” [ibid, Part 1, page 0012.]

19.58 McGrigors’ report also noted a strategic option that had not been used:

“11.4 An alternative approach to termination on the basis of existing RTNs and litigation is for tie to seek a declarator from the courts on the existence of Infraco Defaults which provide the basis for existing RTNs as well as new ones. This approach should enable work to proceed in the interim, to the extent that the work relates to undisputed obligations on the part of Infraco, pending resolution of the issues by the courts. The actions referred to in paragraph 11.3 [viz., a detailed forensic investigation and a definitive expert opinion] above are equally necessary in relation to this approach.

“11.5 This alternative approach could potentially involve similar timescales to proceedings which take place after termination. However, the stakes would be considerably lower because work should continue and tie would be in a position to review its options in the lights [sic] of the court’s decision.” [ibid, Part 2, page 0029.]

19.59 On 15 December 2010, the TPB approved Mr Jeffrey’s recommendation for a “fast-track” mediation to commence as soon as possible, with the aim of completing a route from the Airport to St Andrew Square [TIE00897052, page 0008]. The TPB increased the project budget to the full extent of the approved funding (£545 million) and agreed to ask the TEL Board to inform CEC’s Chief Executive that the £545 million limit required to be extended. It was noted (consistently with the terms of TEL’s operating agreement [CEC00645838, page 0009, clause 2.22]) that an increase in the budget would require the approval of CEC [ibid, pages 0011–0012]. It was therefore clear that the TPB, tie and TEL had reached the limit of their authority to increase project costs. By this stage the only realistic outcome was a settlement at a higher cost than the limit of £545 million authorised by CEC. Any increase in that limit required the approval of CEC: in other words, the councillors.

19.60 In my view, that was a consideration of the utmost importance. Given the political divisions that had affected the project, a request for additional funding was likely to be a sensitive matter. There would have been considerable uncertainty about any such request being approved in the absence of some resolution to the project’s difficulties. To settle the political waters and obtain CEC approval for an increase in funding, it seems to me that there was a political imperative for the CEC negotiators to emerge from the mediation with a resolution of the project disputes.

19.61 At its meeting on 16 December 2010, CEC was given a brief update on arrangements for the mediation. The report gave no indication of the approach that CEC’s officials would take, except to say that they would approach the mediation “constructively”, while

“at the same time all strategic options [would] continue to be explored and developed by tie and the Council” [CEC01891570, page 0003, paragraph 3.6].

In December, following concerns that had been expressed at CEC’s meeting of 14 October 2010, councillors were given access to an unredacted version of the updated business case dated August 2010. The business case noted that the “main focus” of incremental delivery had been on a first phase between the Airport and St Andrew Square and that, in arriving at a recommendation for incremental delivery, consideration had been given to “the significant downsides of project cancellation” [ibid, page 0008]. The business case stated that:

“Based on the work undertaken to date, … a first incremental phase from the Airport to St Andrew Square is capable of being delivered within the current funding commitment.” [ibid, page 0010; page 0012, paragraph 2.6 and page 0032, paragraph 5.3.]

19.63 When councillors were given access to the updated business case that view was already cast into serious doubt, if not completely superseded: the papers for the November meeting of CEC’s IPG indicated that current estimates for a line to St Andrew Square were between £545 million and £600 million [CEC00010632, page 0004]. The papers for the December IPG meeting indicated that the cost was likely to be in the region of £600 million should the work be re-procured [CEC00013539, page 0005]. As noted in paragraph 19.56 above, at the meeting on 13 December BSC’s representatives had indicated that the cost for a revised deal with them for that line would be between £645 million and £695 million.

19.64 Mr McGougan’s evidence was that:

“In December CEC wouldn’t be confident that the line from the airport to St Andrew Square could be delivered within the funding commitment [of] £545m. At this stage we couldn’t be very confident about any of the figures because there was no agreed programme, there was no agreed resolution to the commercial issues and there was no indication of changed behaviour from the contractor.” [TRI00000060_C, page 0108, paragraph 271.]

19.65 Nevertheless he considered that extra borrowing to complete a line would be prudent since that would produce an asset capable of generating future revenue surpluses. The alternative, namely termination, would mean the loss of all expenditure to date in return for no completed asset, and the need to write off all of that expenditure in one year to CEC’s revenue account [ibid, page 0108, paragraph 272]. There was a conflict in the evidence about Mr McGougan’s statement about the need to write off all expended capital in one year to the revenue account, and I will consider that later.

19.66 At the CEC meeting on 16 December 2010, an update was given to councillors about the refreshed Tram Business Case and progress on mediation between tie and BSC and other issues. The administration of CEC proposed a motion in the name of Councillors G Mackenzie and Wheeler, the first two parts of which were to note the position in respect of the refreshed Tram Business Case and to note the steps taken to date to take forward a mediation proposal. In response, an amendment in the names of Councillor Parry on behalf of the Labour Group and Councillor Balfour on behalf of the Conservative Group was passed expressing regret that the updated business case provided detailed information only on the Airport to St Andrew Square phase, and failed to provide the information that CEC had sought following its June 2010 meeting on “the capital and revenue implications of all the options currently being investigated”, including phased delivery from the Airport to each of the Foot of the Walk, Ocean Terminal and Newhaven [CEC02083128, page 0021 onwards].

19.67 Following a meeting with BSC representatives on 20 December 2010, Mr Jeffrey reported that Mr Walker had suggested the parties mediate on the Project Carlisle proposal (which, in its most recent form, had been for a revised agreement for the delivery of a line between the Airport and Haymarket) and, if that failed, consider an agreed termination. He also reported that when Mr Walker was asked what had changed since the parties had failed to reach agreement on Project Carlisle, he had said that from his discussions with CEC it appeared that CEC, and in particular Mr Maclean, was now more sympathetic to BSC’s arguments [TIE00105840].

19.68 tie produced a report for the TPB dated 22 December 2010, entitled ‘Project Resolution (incorporating Carlisle and Notice)’ [WED00000641, Parts 1–2]. On the so-called “enforced adherence” option, under which tie would continue its robust enforcement of the Infraco contract, the report said that:

“[i]t is unlikely that this will deliver a tram network with any degree of cost or programme certainty at all and current progress across nearly all the route has stalled indefinitely. Carrying on is unlikely to act as a catalyst for improved behaviours by the Consortium – infact [sic] we are likely to see more of the same. Additionally, the impact on tie and it’s [sic] team becomes harder to manage and predict.” [ibid, Part 1, page 0009, paragraph 1.6].

“ … [W]e have not resolved our principal commercial differences to any material extent.” [ibid, Part 2, page 0062, paragraph. 8.1].

“[I]t is simply not possible to provide a reliable estimate of outturn costs and completion time for any element of the project under the enforced adherence option. In this respect it fails completely to deliver on the requirement to deliver cost and programme certainty.” [ibid, Part 2, page 0064.]

19.69 The other options were to revive Project Carlisle or terminate the Infraco contract (either unilaterally or by agreement), with sub-options of carrying on, postponing or cancelling the project [ibid, Part 1, page 0009, paragraph 1.6]. The report recommended that tie mediate with BSC, with a focus on the options of an amended scope of the project along the lines of Project Carlisle or an agreed termination of the Infraco contract [ibid, Part 1, page 0010, paragraph 1.8].

19.70 The report noted that contingency planning had begun to identify the tasks required should the Infraco contract be terminated [ibid, Part 2, chapter 9, from page 0070]. This envisaged certain work streams being initiated “immediately following any termination”, including “reprocurement”. In relation to these, the report noted that:

“In many cases these workstreams have already commenced … ”

“The totality of these workstreams is envisaged as being completed by September 2011 at which time the strategy for completion of the project would be presented for approval.”

“These workstreams will require the commitment of additional funding for the project in advance of clarity and certainty with regard to outturn costs, phasing and funding and in advance of determination of either out of court settlement with BSC or litigation.”

19.71 From page 74 of the report [ibid], there is a discussion of the “reprocurement” work stream. In it, tie envisaged, after termination of Infraco, reviewing arrangements with existing sub-contractors to assess tie’s ability to step in. This would involve consideration of whether those sub-contractors were willing to do the required work at a price and on terms acceptable to tie. Also following termination, tie would embark on an exercise to procure completion of an integrated and assured design prior to the re-procurement of any new works. This might involve novation of System Design Services (“SDS”) back to tie, or the engagement of a new designer. Value engineering would be considered with a view to a significant reduction in anticipated cost before re-tendering the works. It was noted that initial workshops had taken place on the development of a re-procurement strategy, and tie had appointed Cyrill Sweet to assist. The report noted that:

“Following a mediated settlement or termination we would embark on full development of a strategy …

“For planning purposes we have assumed that tie engages in a 9 month exercise to develop and refine a reprocurement strategy … At the end of the 9 month period a gateway review will be undertaken to determine validity of reprocurement strategy and costs thereof alongside then extant funding and affordability constraints.” [ibid, Part 2, page 0076.]

19.72 From that summary, it is clear that, at least at 22 December 2010, although work was under way in planning for re-procurement of the project works, some considerable work remained to be done before the details of any re-procurement would be resolved. Indeed, many of those details would not be known until after the Infraco contract had been terminated. It is also clear that any re-procurement would have involved significant delay to the project.

Discussion

19.73 As a preliminary matter, I wish to address Mr McGougan’s evidence, mentioned in paragraph 19.65 above, about the treatment of past capital expenditure in the event of termination resulting in no capital asset, referred to as “separation” in some parts of the evidence. The first point to note is that there would be no requirement to reconsider past capital expenditure if any part of the tram line was completed and became operational. In that situation there would be an asset in exchange for the capital expenditure. It would not matter that the capital expenditure was incurred in the expectation of the completion of a longer route. On the other hand, if there was no capital asset in exchange for past capital expenditure, it was clear from the evidence that some provision had to be made in CEC’s accounts for that event. What provision should be made and its effect was, however, a matter of dispute. Mr McGougan considered that all of the past capital expenditure would need to be charged to the revenue account in the year in which separation occurred. In that event he envisaged a revenue charge of about £500 million in one financial year and CEC would not be able to meet that cost from its reserves.

19.74 The Inquiry heard evidence from Mr Fair of the Chartered Institute of Public Finance and Accountancy (“CIPFA”). CIPFA is the only chartered accountancy body in the world that specialises in public-sector accounting [PHT00000057, page 128]. Mr Fair carried out a review of some of CEC’s decisions and management practices relating to the Tram project against standards of best practice that were in place at the relevant time. Mr Fair was critical of Mr McGougan’s evidence mentioned in paragraph 19.73. Although Mr Fair agreed with Mr McGougan that CEC would have struggled to meet a cost of almost £500 million from its reserves, he did not agree that the accounting rules demanded such an approach. In terms of the Code of Practice on Local Authority Accounting Terms of Finance and International Accounting Standards an asset is capitalised when one means it to be capitalised [ibid, page 194]. I understood that in practice assets shown as capital in accounts from previous years would not be transferred to revenue if the project failed to deliver an asset. Rather, it was his professional opinion that, on cancellation of the project, any expenditure treated as capital in previous years accounts would be impaired and would suffer an impairment loss, being the difference between the value of the asset in the capital accounts to date and its recoverable amount. That loss could be ameliorated through statutory mitigation and spread over future years [ibid; TRI00000264, pages 0032–0033, paragraph 3.42].

19.75 I preferred the evidence of Mr Fair on this matter. He was an independent expert from a unique professional body specialising in public-sector accounting, who was an impressive witness. His evidence was supported by the Code of Practice on Local Authority Accounting in the United Kingdom 2010/11 [WED00000643, Part 4, pages 0138–0139, paragraph 4.7.2]. I considered that Mr McGougan was in error when he thought that the entire capital expenditure would be treated as revenue expenditure in a single year. Nevertheless it is clear that there would have been an impact on CEC’s funds available to provide public services in future years. I am unable to assess the extent of that impact because that would have depended upon the success of the mitigatory measures and the period over which the mitigated sum could be spread.

19.76 Mr McGougan also speculated that there was a possibility that the Scottish Ministers would seek repayment of its grant, resulting in a revenue payment from CEC to them of almost £500 million in a single financial year. At the stage of mediation grant payments were closer to £400 million but that is not material because the consequences of repaying that sum in a single year would also be devastating. Mr Fair had not seen any examples of a Government requiring repayment of a grant in a similar situation but he accepted that it was a possibility. However, even if a demand for repayment was made, he considered that a demand for repayment of the entire sum in a single financial year would be unlikely. He recognised that whether to demand repayment and, if so, on what terms would be a political decision for Ministers at the appropriate time. I have no doubt that in taking any decision Ministers would have regard to all relevant considerations, including the implications of their decision on the provision of services within the local authority area. In reaching that view I have taken into account the evidence of Mr Sharp to the effect that, in a situation where the cost overrun of the project was such that it had a severe impact on CEC’s ability to provide services and forced it to consider such measures as school closures, Ministers would have had to reconsider their decision to cap the grant at £500 million. The reason for his view was that they would have found the impact on services without their intervention to be politically unsustainable [Mr Sharp PHT00000015, pages 119–120]. Similar considerations would have applied when Ministers were considering demanding repayment of the grant. As for the implications of a demand for repayment in a single financial year of a sum of about £400 million I have had regard to the evidence of Councillor Dawe when she was considering the implications of a revenue liability of £161 million in a single year. She had sought advice from the Director of Finance about the implications of such a liability for Council services. She described receiving “pages and pages of cuts to schools, libraries and other community services”. Almost every service would suffer cuts [TRI00000019_C, page 0211, paragraph 794]. Any demand for the repayment of the grant in a single financial year would have even greater adverse implications for service provision in Edinburgh because the sum to be repaid would significantly exceed £161 million. On that basis, I agree with Mr Fair’s assessment that the likelihood of Ministers demanding repayment of the total sum in a single financial year was remote [PHT00000057, page 194].

19.77 It is clear, in my view, that the shift in project control from tie to CEC which was under way in the latter half of 2010 brought with it renewed confidence that a resolution might be achieved under which BSC would complete a tram line; and that this was based on BSC’s perception that CEC would be more amenable to their arguments than tie had been.

19.78 It is also clear, however, that CEC went forward to mediation against the instincts of the head of its legal service, Mr Maclean. The reason for doing so was the desire on all sides to reach a resolution sooner rather than later, and the political momentum behind the mediation proposal.

19.79 Having met BSC’s representatives, Mr Maclean’s view that was that BSC was much better organised for a mediation than CEC was; that tie was in a much weaker position than BSC, given the adjudication outcomes and the absence of a basis for its termination notices; and that tie/CEC would be better advised to carry on enforcing the Infraco contract until tie got itself into a better position for negotiations.

19.80 Mr Maclean was well placed to assess his state of preparation, and CEC’s, compared with BSC’s. I therefore accept his view that BSC was much better organised than CEC was in December 2010. It is not at all surprising that was the case. BSC had been intimately involved in the project’s difficulties since the outset, whereas CEC was one step removed. It was only in the latter part of 2010 that CEC started to take a more direct role in the project. CEC lacked a detailed knowledge of the facts and circumstances of the disputes and remained sceptical that tie had given it a full and accurate understanding of them. It also lacked in-house expertise on construction disputes, in contrast with BB and Siemens, which were very experienced construction contractors.

19.81 I also accept that tie (and thus CEC) was in a much weaker position than BSC as a consequence of the adjudication outcomes and the lack of a proper basis for the termination notices. That should not be taken too far, however: tie had achieved a measure of success in reducing the amounts initially claimed by BSC in its change estimates, and in undermining the approach BSC had taken in its extension of time claim in the MUDFA revision 8 adjudication [CEC00407650].

19.82 In the written closing submission on behalf of BB issue is taken with the claimed savings by tie as a result of the adjudication process [TRI00000292, pages 0155–0163, paragraphs 266–281A]. In doing so BB refers to the statement in the Selected Ex-Tie Employees [“SETE”] submission that “[t]he savings through the DRP process were significant, the process reduced claims totalling £24m down to £11.2m” and suggests that this misquotes paragraph 44 of the Audit Scotland Report dated February 2011 [ADS00046, Part 1, page 0021], upon which it is claimed to be based. The justification for that criticism is that paragraph 44 “provides commentary on the settlement of Notified Departures, not the outcome of the adjudications” [TRI00000292, page 0163, paragraph 281A]. This error is stated to be “a common and repeated misunderstanding propagated by TIE” and I am invited to prefer BB’s analysis of the adjudication outcomes. Having considered this criticism, I do not agree that the statement in the SETE submission is based upon a misinterpretation of the Audit Scotland Report.

19.83 It is correct that paragraph 44 of the Audit Scotland Report [ADS00046, Part 1, page 0021] is not confined to the adjudication process. It considers and analyses the outcome of the 816 notices of claim submitted by BBS and illustrates that analysis by a diagram. From that diagram, and the text in paragraph 44, it appears that 198 claims were settled by tie paying to BBS £23.8 million against the sum of £44 million claimed by BBS. Moreover, of the 198 claims settled, 178 were settled informally and 20 were settled through formal dispute resolution procedures. The formal procedures were resolved in the following manner: 7 by negotiation; 2 by external mediation; and 11 by adjudication. The settlement of these 20 claims resulted in a payment of £11.2 million against BBS’s claim for £24 million. It is clear from that analysis that the statement on behalf of SETE quoted in paragraph 19.82 is correct. Having said that, I consider that it is over-simplistic to compare the sums originally claimed by BBS in respect of notified changes with those ultimately paid by tie for these changes. The reduction in the sums claimed may be explained in a variety of ways, such as, revision of the scope or nature of the change works by engagement and discussion following the initial change notice with a consequent reduction in the ultimate cost of the works occasioned by the change notice or for many other acceptable reasons. On the other hand, it is also possible that the original estimate was inflated but reduced when it was challenged. On the information available to me I am unable to explain the reasons for the reduction in cost of each of the 198 notices of claim, or even the 20 notices of claim that were referred to the dispute resolution procedure. However, I am able to conclude that it was appropriate for tie to scrutinise estimates by BBS in respect of the change notices as the reductions were indications that, if they did so, there was a good chance it would prove to be possible to do the work for less than BBS had initially estimated.

19.84 I have more difficulty in accepting the suggestion that tie/CEC would have been better served by continuing to enforce the contract with a view to improving their position for negotiations. At this distance of time, one can only speculate about whether doing so would have yielded an improvement in tie/CEC’s negotiating position. It is possible that tie might have established a stronger foundation for terminating the Infraco contract. Since that would have given it a viable alternative to a revised deal with BSC, and one which did not require BSC’s co-operation, it might have significantly improved their negotiating position. However, it would not have been a genuinely viable alternative unless tie/CEC could also be confident of securing another contractor to complete the work on a reasonable timescale and for a reasonable price. There was no basis in fact, at that point in time, for tie/CEC to be confident that either of these would be the case.

19.85 Furthermore, pressing on in the way in which Mr Maclean proposed certainly involved risks: it might have achieved nothing except to increase the number of disputes, cause further delay and deepen the antagonism between the parties. Indeed, that antagonism might as a consequence have extended to include CEC as well as tie. It might have resulted in the loss of the relative degree of goodwill that CEC enjoyed at that time, and of the opportunity to mediate.

19.86 There was, in my view, also a risk that an ongoing lack of progress with work, associated with the risk that CEC would ultimately bear the cost consequences of continued delay, would place considerable political pressure on CEC to the detriment of their negotiating position. That was a consideration of importance, given that the TPB, TEL and tie had reached the limit of their approved funding: pressing on with the contract would almost certainly have brought about a need for an increase in the project budget. That would have required the approval of CEC; and given the political divisions which already existed, the prospects of obtaining such approval would have been uncertain, especially if it were sought before any resolution of the contractual disputes [Mr Coyle PHT00000010, page 76 onwards].

19.87 Mr Maclean’s advice is readily understandable, and may reflect a lawyer’s instinct to understand all aspects of a dispute before deciding on the best way to resolve it. He was, however, a relatively new arrival to the project and was employed by CEC, which was itself one step removed from the details of the project. He was influenced by advice from Mr Dennys QC, who had himself only recently been instructed in the project and who also lacked a full understanding of the project’s circumstances. One has to set against their views the equally instinctive, but perhaps better informed, judgement of those with longer experience of the project that it was better to mediate now rather than later. Their experience was of having tried, and failed, to gain the upper hand.

19.88 In all the circumstances, I am not prepared to find that it was unreasonable for CEC to proceed with the mediation against Mr Maclean’s advice. I accept, however, that it did so from a position of considerable weakness and in a state of poor organisation when compared with BSC; and that this was likely to undermine the prospects of CEC negotiating a settlement which departed much from BSC’s demands. I should emphasise, too, that I do not criticise Mr Maclean for his advice. His view was certainly defensible and, as I note above, I can understand why he held it. The circumstances in which he gave his advice were very challenging indeed and in such circumstances there is rarely only one single correct course to take.

19.89 Should CEC have become involved sooner? Some witnesses suggested that it should have. For example, Councillor Balfour, the Conservative group leader at the time, said that CEC’s Chief Executive (Mr Aitchison) or leader (Councillor Dawe) ought to have been in contact with BSC nine months or a year earlier than the Mar Hall mediation [TRI00000016, page 0019, paragraph 58]. In my view, however, that would not have been appropriate, having regard to the project governance structure. tie, TEL and the TPB had been given the task of delivering the project. tie was the contracting party. Although I consider that the expertise in tie for managing a project of this scale was limited when compared with engineering consultancies who had been involved in similar transportation projects, it was greater than the equivalent expertise in CEC. Throughout 2009 and 2010, tie had strategies in place which aimed to address the project’s problems. Although the suggested involvement of CEC a year earlier than the Mar Hall mediation might have resulted in savings of expenditure because of an earlier resolution of the disputes between tie and BBS, it was reasonable, in my view, for CEC to allow those strategies to be implemented and to intervene only once it became clear that tie‘s strategies had failed.

19.90 In those circumstances, however, it was almost inevitable that CEC would find itself relatively unprepared. That was a consequence of the governance structure. Almost all the project governance and expertise (tie, TEL and the TPB) sat outside CEC. CEC had delegated much of the responsibility for delivering the project but, as the project funder of last resort, bore all the risk. The events in late 2010 are a reminder that, although the management of the project can be delegated, the responsibility for managing its risks cannot.

19.91 In the latter part of 2010 it was already becoming clear that the main alternative to a revised deal with BSC, a negotiated separation from them with re-procurement of the project works, would involve uncertainty about whether, and if so at what price, the works could be re-procured. Even if re-procurement could be achieved there would be further delay to allow the re-procurement to take place.

19.2 In its report mentioned in paragraphs 19.57 and 19.58 above, McGrigors discussed a possible alternative strategy of seeking a declarator from the courts that an Infraco Default existed, thereby confirming that there were grounds for tie to terminate the contract. Such an approach would have avoided the considerable risks associated with tie proceeding directly to termination and would allow work to proceed pending a judicial determination. It would have provided a forum in which tie’s allegations of BSC default could be properly and dispassionately assessed. It was not, however, a practicable option by the time McGrigors proposed it: it would have required the detailed forensic investigation to be carried out into the alleged default which had not been undertaken hitherto, and almost certainly would have led to relatively protracted litigation, although merely raising the litigation might have brought some improvement in CEC/tie’s negotiating position. Had this option been identified earlier, and assuming that the forensic investigation had been carried out and supported tie‘s allegations of Infraco Default, it had the potential to place greater pressure on BSC and therefore increase tie/CEC’s negotiating leverage over them. Whether tie/CEC would have benefitted if this proposed course of action had been undertaken earlier is now speculation but the failure to do it was, in my view, a missed opportunity.

Preparations for mediation

19.93 Dame Sue Bruce started work as CEC’s new Chief Executive on 1 January 2011, and she immediately took a leadership role on the Tram project [TRI00000084, page 0004, paragraph 12]. She was not responsible for the decision to mediate, but was confronted with the task of implementing it. She had received briefings on the project prior to her arrival, but found these inadequate [ibid, pages 0004–0005, 0007, paragraphs 13–15 and 22]. She did not have any preconceived strategy or preferred outcome, but acknowledged that there was “a general feeling that people wanted to finish what had been started” [ibid, pages 0005, 0017–0018, paragraphs 18 and 54]. That is consistent with the evidence of Mr McGougan about his meeting with Mr Swinney in October, when the focus had been on how to secure a tram line for the investment made [see paragraph 19.18 above].

19.94 Shortly after her arrival, Dame Sue Bruce engaged a quantity surveyor called Mr C Smith as an adviser. In the period prior to mediation his role was to assist her in preparing for the mediation. Councillor Dawe, whom Dame Sue Bruce consulted prior to recruiting Mr Smith, said that Dame Sue Bruce had said the engagement of Mr Smith was essential because CEC lacked the engineering capacity to make informed comments on some aspects of the scheme [PHT00000001, pages 193–194]. In her evidence to the Inquiry, Dame Sue Bruce was somewhat more frank, and said that she needed someone she knew to be competent and whom she could trust and, having worked previously with Mr Smith, considered him to meet those requirements [PHT00000054, pages 15–18; TRI00000084, pages 0009–0010, paragraph 31]. I accept the evidence that, prior to Mr Smith’s appointment, CEC lacked someone with his construction project expertise. The project structure assumed that such expertise in relation to the Tram project would have been found in tie. Given the mistrust that had built up between tie and CEC’s officials, the appointment of a new adviser, independent of tie, made sense.

19.95 Mr Smith was an experienced chartered surveyor, with a background in quantity surveying and project management of large-scale projects. That background and his training meant he was capable of fully understanding the building costs of a civil engineering project [PHT00000053, page 2]. He described his role in the run-up to mediation as including ensuring that CEC would be “well prepared to go into mediation and to understand what could be a possible good outcome from that experience” [ibid, page 4]. The timing of his appointment meant that he was not able to review all of the project documentation, and his exposure to project cost information was mainly focused on the so-called “deck chair” spreadsheet prepared by tie, which will be discussed below. tie, through Mr Murray and Mr Jeffrey, was the main source of financial information about the project. Mr Smith described difficulties that he encountered in understanding the information on costs when he first became involved [ibid, pages 8–9], and in getting detailed information underlying tie’s estimates [ibid, pages 7–8, 18–24]. This is important to understand, because one of the most pertinent issues at mediation, if not the most pertinent, was the increase in project cost likely to be crystallised in any agreement reached there. As Mr Smith put it, there was a question mark over his ability to form a view about project costs. He had to take tie’s information as being presented in good faith. Nonetheless, he was instinctively sceptical of tie’s cost estimates, which he considered to be routinely too low. He said that other advisers shared that view, and that the basis for the difference appeared to be a different view on the correct interpretation of the contract.

19.96 To help to address its lack of detailed information about the commercial aspects of the project, CEC seconded Mr Coyle into tie from late 2010. He was an accountant in the Finance Department of CEC who had been allocated the City Development Department as one of his clients. He had worked on the project since 2007 and considered himself to have had “[q]uite a lot of understanding, certainly in terms of the make-up of the financials of the numbers” [PHT00000006, page 171], by which he meant the potential outturn costs of the project. His role on secondment was to observe tie’s production of cost estimates, but also to question how they were calculated. He said that it was difficult to come to a view on cost estimates. tie’s commercial team was calculating its potential liabilities under the Infraco contract. In his evidence to the Inquiry, Mr Coyle had no recollection of the way in which tie’s liabilities were calculated and, in general, had poor recollection about the calculations. My impression from his evidence was that he was entirely reliant on tie for information about project costs and had formed no meaningful views of his own about them. That would be entirely consistent with Mr Coyle’s professional background as an accountant rather than as a specialist in construction project costs. Mr Coyle was, however, the CEC official with the greatest exposure to tie’s cost estimates. CEC officials had no particular understanding or perspective on the project costs distinct from that of tie. They took no advice independent of tie on the details of project costs and relied upon the assumptions tie had made in arriving at its cost estimates. In the context of calculating estimates for the likely cost of a new deal with Infraco Mr Coyle said:

“The estimates would have been largely prepared by tie … I can’t recall that the Council had any particular view on numbers that were coming from – from BSC or in Project Phoenix. The numbers that we were looking at would have been primarily prepared by tie.” [ibid, page 186.]

19.97 He also considered that in the lead-up to mediation, CEC officials were “wholly reliant on tie” [ibid, page 188].

19.98 At the meeting of the TPB on 12 January 2011, it was agreed that certainty around price and delivery were key requirements of any mediated settlement. In my view, that reflected CEC’s low tolerance for risk on the project. The TPB also discussed the governance arrangements for future decision-making about the mediation. These envisaged the tie Chief Executive presenting a recommendation to the TPB; the TPB considering that recommendation and making its own recommendation to the TEL Board; the TEL Board considering that recommendation and making its own recommendation to CEC; and the full council meeting to consider and, if necessary, ratify the TEL Board recommendation [TIE00897058, pages 0006–0007]. In the event, those governance arrangements were not followed, and key decisions were taken by CEC’s officials. tie, TEL and the TPB had little or no formal role in decision making about the mediation or the settlement agreed there. That reflected their lack of authority to agree to any increase in costs over the approved budget.

19.99 On 18 January 2011, Mr Cox, the interim chairman of TEL, wrote to CEC’s Tram Monitoring Officer (“TMO”) (Mr Poulton) to report that TEL and tie were unable to make any further financial commitments given the £545 million limit on their existing delegated authority [TIE00109225]. He requested authority to make financial commitments in excess of that limit. Mr Poulton’s reply noted that:

“Council officers are presently considering when would be the most appropriate time to seek further funding approval and this will be done as soon as practicable. However, clearly the forthcoming mediation and purdah will have a significant bearing on this.” [TIE00082534]

19.100 The reference to “purdah” appears to relate to the period immediately prior to the Scottish Parliament election on 5 May 2011 when officials in local authorities and in the Scottish Government would have had to be circumspect in their actions to avoid any suggestion of influencing the outcome of that election. The note highlights both that project spending commitments had reached the limit of CEC’s existing authority and that political considerations affected the timing of any request to increase the authorised spending level.

19.101 CEC’s IPG met on 21 January 2011. This was the first meeting of the IPG following Dame Sue Bruce’s appointment as Chief Executive. The Highlight Report to the IPG identified three potential outcomes from mediation: a revised Carlisle deal; a mature divorce; and grinding on with contract adherence. It set out a high-level summary of the pros and cons of each option [CEC01715625, page 0005]. The table noted that “grinding on” had no benefits and would result in funding running out; and that although a “mature divorce” would offer an opportunity to re-tender the works, it would also cause delays that “would likely lead to a lack of political support”. On a revised Carlisle deal, the table noted that it had the potential for works to progress quickly, but there remained a lack of trust in BSC and limited price certainty.

19.102 The Highlight Report also specified how close spending commitments were to the limit of funding approved by the Council:

“The current estimated tram budget at the end of period 10 of 2010/11 is £541m, with the funding available totalling £545m. The remaining headroom of £3.8m will not allow all the sufficient project changes to be made without requiring a commitment to increase the budget above £545m. It is important to note that £541m includes all anticipated costs and that only £402.4m has actually been incurred to date.” [ibid, page 0004.]

19.103 This summary therefore makes clear that it was the total payments already made plus the anticipated costs, rather than actual spending, which were close to the limit of the approved budget. The report referred to a proposal which would increase the headroom to £5.5 million, expected to last until March 2011. An appendix noted CEC’s internal legal advice to the effect that any increase in funding would require the approval of the Council, particularly given that the issue would be “politically contentious”. The action note from the meeting includes the following:

“Potential to report to Council to seek consent to incur costs over £546m– need to consider TEL letter to TMO in relation to Operating Agreement and clarify reporting obligations to Council. Preferable for timing of next report to Council to follow mediation in March, otherwise a holding position may be necessary.

“Previous Council motions and minutes to be analysed in detail to determine what authorities we have and what has already been reported.” [CEC01715621, page 0001.]

19.104 The Highlight Report noted that the mediation dates had been confirmed as 7–10 March, tie having taken the view that arranging dates at the start of February would have left it insufficient time to prepare. In the report and at the meeting Mr Maclean repeated his view, earlier expressed in his note of the meeting on 3 December, that tie was in a weak position, legally and tactically, relative to BSC and that the commercial and political desire to move towards mediation despite tie‘s weak position was likely to have an adverse financial implication for tie. BSC was likely to fare better out of mediation than might otherwise have been the case [CEC01715625]. Mr Maclean explained in evidence to the Inquiry his concern at that time that CEC was going into mediation without a full understanding of the facts and without being fully prepared, and he had a strong view that it should not be doing so [PHT00000008, pages 103–111; TRI00000055_C, pages 0031–0032, paragraph 80]. Even by the time of the mediation he was of the view that CEC did not have full knowledge of the facts of the project, and continued to depend on
tie for that. If tie could establish grounds for termination, that would place tie in the strongest position for a negotiated settlement. To that end, McGrigors continued to investigate the facts to establish if any valid grounds for termination existed but this work was not expected to be completed until late February 2011 [CEC01715625, page 0007].

19.105 On costs, the Highlight Report noted a further upward shift in the anticipated cost of delivering the project to St Andrew Square and that this could still be done

“for £600m (£633.8m – £33.3m) if BSC are not paid the delta between the cost and value of work done, though this will be subject to the negotiations” [ibid, page 0009].

19.106 In relation to CEC’s receipt of information from tie, the action note from the meeting recorded:

“View remains that the Council is still not receiving full information from tie Ltd despite pursuing ‘one family’ approach.” [CEC01715621, page 0001.]

19.107 Dame Sue Bruce confirmed that there were difficulties in CEC getting information from tie when she started on the project because tie and CEC did not think that “they were in the same family at that point” [TRI00000084, page 0017, paragraph 52].

19.108 On 29 January 2011, tie and CEC held a mediation preparatory workshop. The minutes record Dame Sue Bruce as having remarked: “£½ B in the ground: need to make good this investment” [CEC02087133, page 0001]. This indicates that the focus was on completing the line and that there was no question, in Dame Sue Bruce’s mind at least, of the project being cancelled [Mr C Smith PHT00000053, pages 12–13]. That reflects the discussion between Mr McGougan and Mr Swinney in October 2010 [paragraph 19.18 above]. The minutes also recorded that, for the project to progress, the alternatives were: Phoenix (a truncated line to Haymarket and then separate implementation to St Andrew Square) or Separation (a mature separation from Infraco with the current works being made good, a separation payment agreed, and the contract re-specified to complete the line to St Andrew Square) [CEC02087133, pages 0004–0005].

19.109 On these options, CEC officials seemed to prefer a solution that resulted in Infraco resuming work. In that regard Mr C Smith said in his evidence to the Inquiry:

“I continually felt in that period, from January through to March, that objective number 1 was to see if Bilfinger, Siemens and CAF were willing or able to come back to the table, to come back to complete works, and once that was established, if it could be established, what the cost of that might be. I do not think – certainly my thinking didn’t go beyond those two targets. All the while considering, you know, what would happen if separation or attrition was going to be the position that the consortium were going to take …” [PHT00000053, page 15.]

19.110 Similar evidence came from Mr Coyle:

“As I understood it, I thought that the Council wanted to make a successful go of the project with the [existing] contractor.” [PHT00000006, page 178.]

In referring to “the Council” it should be borne in mind that at this time the councillors as a body had not been consulted on the preferred outcome from the mediation and accordingly he must have meant the Chief Executive and the Director of Finance informed by the views of the Leader of the Administration (Councillor Dawe) and the Cabinet Secretary for Finance and Sustainable Growth (Mr Swinney) respectively.

19.111 Ultimately, tie did not share that view. tie’s preference was for termination of the Infraco contract and re-procurement. That was the impression gained by Mr Coyle, who stated:

“I don’t know for sure. But it seemed that, I think – well, I think that the preferred outcome tie had was to terminate the contract” [ibid].

19.112 This was not the original preference that Mr Jeffrey expressed. Initially he also considered that mediation should aim to secure the resumption of work based upon Project Carlisle with the completion of the line from the Airport stopping at Haymarket. If that could not be achieved consideration should be given to termination on mutually agreed terms. However, by 21 December 2010 his view changed, as he considered that it was unlikely that agreement would be reached on Project Carlisle because the difference between the parties on the price of that option was too great [TIE00105840; TRI00000097_C, pages 0056–0057, paragraph 346]. On 21 December 2010, following a meeting with representatives of the consortium, he had said:

“I think we will not be able to accept their revised offer, so the mediation will actually end up being about ‘mutual termination’ even though that is not where we are now” [TIE00105840, page 0002].

19.113 Even if mutual termination could not be achieved, Mr Jeffrey considered that such an option should be canvassed seriously at mediation. In his evidence to the Inquiry, in relation to separating from BSC and re-procuring the works he said:

“Emotionally that was my preferred option, but practically I think that option should have at least been on the table so that there was something to compare the deal to.” [PHT00000033, page 76.]

19.114 Mr C Smith prepared a note dated 31 January 2011 following the 29 January workshop [CEC02083835]. According to this, tie was still working on the cost estimates both for completing the project under Phoenix and for Separation. Mr Rush was noted as having said that there was not enough time to prepare both, and that the focus should therefore be on Phoenix. Mr Smith noted his agreement with that decision, adding the qualification that “[s]eparation should be developed to some degree as a negotiating lever”. The majority of the quantity surveying resources available to CEC and tie were, however, concentrated on Phoenix [Mr C Smith PHT00000053, page 26]. Mr Smith’s file note recorded that CEC’s opening position should be for BSC to build a line between the Airport and St Andrew Square. In other words, it should seek to persuade BSC to go beyond its second Project Carlisle proposal to build only on the off-street section between the Airport and Haymarket by including a section of on-street works east of Haymarket.

19.115 It is apparent from this note, and Mr Smith accepted in his evidence to the Inquiry, that Phoenix was preferred over Separation even before detailed cost estimates were available. Two reasons were, first, the concern that new contractors would generally be unwilling to take on the Tram project; and, second, the risk that a different contractor’s systems would be incompatible with those BSC had installed [PHT00000053, pages 27–28; see also Mr Coyle PHT00000010, page 75]. Separation therefore involved significant risk and uncertainty. It may be added that Separation would also involve delay pending a re-procurement exercise, which would have conflicted with the desire for a tram line to be completed as early as possible.

19.116 Mr Smith’s note also records that the best alternative to a negotiated settlement had not yet been fully defined [CEC02083835, page 0006]. The “best alternative” is often considered an important benchmark against which to compare the merits of a proposal under negotiation, as it is the best that can be hoped for without the other side’s co-operation. When asked at the Inquiry’s oral hearing what tie/CEC’s best alternative was to a negotiated settlement with BSC, Mr Smith said it would have been a period of attrition leading to discussions between the parties about separation [PHT00000053, pages 30–31. Since such discussions imply work towards a negotiated settlement after the period of attrition, they are not themselves an alternative to a negotiated settlement. In my view, it is plain that the alternative to a negotiated settlement was for the parties to continue with the status quo under the scenario vividly called “grinding on” or “attrition”. As tie later put it in its mediation statement:

“[a]bsent an agreed solution the Parties fall back to the current position, where the project is effectively at a standstill and a number of fundamental differences will remain to be determined through judicial proceedings” [BFB00053300, page 0004].

19.117 That option was by this stage regarded by all parties involved in the project as intolerable [see, e.g., Mr Coyle PHT00000010, page 33; TIE00897064, page 0006; WED00000641, Part 2, pages 0062–0064; Mr Nolan PHT00000046, page 199; Mr Foerder TRI00000095_C, pages 0081, 0084–0085, paragraphs 242–245, 254–255]. In my view, CEC and tie having by this stage also rejected unilateral termination of the contract by tie, it is clear that there was not in fact any practicable or realistic alternative but for CEC/tie‘s representatives to emerge from the mediation with a negotiated resolution in some form. That involved the necessity to reach agreement with BSC in circumstances where BSC would be aware that unilateral termination was no longer being considered by tie/CEC. It follows that Separation would have little force as a negotiating lever, since it also depended on BSC’s co-operation in circumstances where tie/CEC went into mediation with some understanding but no “clear idea” of the cost of separation and re-procurement [Mr C Smith PHT00000053, page 38]. The uncertainty surrounding that cost was not confined to the amount of the premium that BSC would require for a negotiated settlement; another contributing factor was the lack of detailed information, with which Mr Smith would have been comfortable going into mediation, about the cost of the works to be undertaken by any new contractor [Mr C Smith ibid, pages 32–38].

19.118 By late February, Dame Sue Bruce’s preference for a revised deal with the BSC Consortium had become fixed. In an email dated 24 February 2011, Mr C Smith noted:

“Sue is clear.

“Sequential preference is phoenix with separation only there with attrition as fall back. The mediation spirit is to make phoenix work though we will revert if we need to, to the other two options. Therefore my advice is not to give equal billing or weight to separation or attrition albeit they are still open to us.” [CEC02087154]

19.119 In her witness statement, Dame Sue Bruce commented on her “forthright and determinedly positive” opening statement at the mediation and said “we were trying to resolve a conflict situation to deliver the will of the Council, to have a tram” [TRI00000084, page 0014, paragraph 43].

19.120 This view implies that it continued to be correct, at this time, to construe the policy position of CEC as being that a tram line should be completed. I am not satisfied that CEC’s policy position is reflected in such an unequivocal statement. Dame Sue Bruce is correct that the will of CEC, as expressed in its decisions, was to construct a tram line, but that should be seen in context. The tram line was to be constructed within an approved budget of £545 million and any increase in that budget required the approval of CEC. It was clear that additional funding beyond the £545 million limit would be needed even for the completion of the truncated tram line envisaged in Project Phoenix. Although the Leader of the Council and other individual councillors may well have appreciated that any mediation settlement resulting in the resumption of construction work would have entailed an increase in expenditure beyond CEC’s limit, that is different from representing the will of the Council. The will of any local authority is determined by the decisions of its councillors and the councillors had not by this stage approved any increase to the funding limit. Their policy position in these circumstances was not known: it could only be known once they were presented with new options in the context of a decision to approve additional funding. This is not a theoretical or fanciful point. The political history of the Tram project within CEC indicated that there were differing views about it. In addition, events subsequent to the mediation agreement to build the tram line from the Airport to St Andrew Square illustrated that, on a vote, councillors supported a less expensive option of stopping construction at Haymarket, with incremental extensions eastwards at a later date. As will be noted in paragraph 19.560 below) the will of CEC in that regard was reversed following the intervention of the Scottish Ministers threatening to withhold any further grant payments, causing CEC to review its decision and support the construction of the route agreed at mediation.

19.121 On 3 February 2011, Mr Emery became the chairman of tie and TEL. At the TPB meeting on 9 February, he noted that continuing under the existing terms of the Infraco contract with a view to unilateral termination of the contract was not a realistic option having regard to the litigation risks [TIE00897064, page 0006]. His recollection was that:

“in all of my discussions with the CEC officers, there was an overwhelming desire to try and finish this tram project. So going into the mediation, there was a desire to continue with the work and that by going to an alternative supplier, or trying to redo this, would simply cost more, take a long time, and subject the citizens of Edinburgh to what they’d already been suffering over the previous years.” [PHT00000052, page 23.]

19.122 By the time of the mediation:

“[t]he main focus was to mediate and get to a solution so that the project could continue with the contractors that we currently had … I think going into that meeting, I think it had already been pretty much decided – that’s the impression that I got – that we needed to find a solution with the existing players.” [ibid, page 39.]

19.123 In my view, that is an accurate summary that reflects the other evidence. In clarification he explained that he gained the above impression from particular CEC officials, whom he specified as Dame Sue Bruce, Mr Maclean and Mr McLaughlin, although the latter was an official in Transport Scotland. Mr Emery’s inclusion of Mr McLaughlin in this list might tend to indicate that the latter played a more significant role in the mediation than he (Mr McLaughlin) was prepared to admit.

Discussion

19.124 Decision-making on the strategy for mediation lay with CEC’s officials. tie, TEL and the TPB lacked the authority that they would need to negotiate any resolution of the disputes. There was therefore a departure from the project’s existing governance structures. No attempt was made to increase the authority of tie, TEL and the TPB, ostensibly to respect the “purdah” period for the forthcoming Parliament election, but also reflecting the widespread loss of faith by CEC officials in tie’s ability to resolve the project’s difficulties.

19.125 Dame Sue Bruce led CEC’s preparations for the mediation from early 2011. She was newly appointed, as was Mr C Smith, her technical adviser appointed on her recommendation. tie and TEL were also under new leadership, with Mr Emery as chairman. Although Mr Smith was an experienced quantity surveyor, he had insufficient time to familiarise himself with the details of the project costs. Although responsibility for decision making and strategy in the mediation rested with CEC’s officials, they remained entirely dependent on tie for information on the project and its costs. Notwithstanding his lack of familiarity with their details, Mr Smith was instinctively sceptical about the accuracy of tie’s cost estimates.

19.126 Under the leadership of Dame Sue Bruce, the objective of CEC’s negotiating team was to explore and achieve a revised deal with BSC for a tram line to be built as soon as possible. That objective took precedence over the main alternative solution of a negotiated separation from BSC and re-procurement of the project from another contractor. The decision to follow that strategy was taken before detailed cost estimates were available for both options and meant that the limited resources of the CEC/tie team were focused on preparing for a revised deal with BSC.

19.127 CEC realistically had no alternative but to negotiate a resolution with BSC at mediation, and had to do so from a position of weakness. The resolution sought by CEC was an agreement on the Project Phoenix proposal which would result in the construction of a truncated line for a price that had a considerable degree of certainty, failing which an agreement to separate from BSC and to re-procure the contract. Although Mr Smith described the alternative of a negotiated separation from BSC as a negotiating lever, the leverage to be derived from it, if any, was severely limited in practical terms because it also depended upon agreement with BSC at a time when parties would have failed to agree on terms to continue with the project. The absence of a mediated resolution would have resulted in a return to the contractual attrition which had hitherto blighted the project. This would have necessitated obtaining additional funding from CEC without any resolution of the disputes and without any reliable estimate of likely project costs or timescales. In the context of a project which had disrupted the life of the city for so long and had generated public criticism of CEC, I consider that the future of the project in those circumstances would have been highly uncertain.

BSC’s Project Phoenix Proposal

19.128 BSC supplied its price proposal for Project Phoenix by letter dated 24 February 2011 [BFB00053258]. This formed the basis for the negotiations at mediation and the agreement reached there. It evolved from BSC’s Project Carlisle proposals that the parties had discussed in 2010. Its proposed scope was a line between the Airport and Haymarket, and it excluded the on-street section beyond Haymarket except in relation to limited enabling works in section 1A and work already done in sections 1B to 1D; see Table 8.1 in Chapter 8 (Utilities). It acknowledged, however, the possibility that the parties might reach agreement separately for BSC to carry out work on the on-street section.

The total price BSC proposed for the Phoenix scope was £449,166,366, comprising £231,837,822 to BB, £136,881,719 to Siemens, £65,306,030 to CAF and £15,140,795 to SDS. Excluding the CAF element, which is necessary for the purposes of comparison with tie’s calculations and the prices agreed at mediation, the price proposal for the work of BB, Siemens and its sub-contractor SDS was £383.9 million. The offer was a fixed price for those items that BSC felt able to price, but was subject to extensive exclusions and qualifications. BSC’s approach was to propose a new price for the revised project scope, rather than to attempt to calculate, and persuade tie/CEC to agree, the price that would have emerged through an application of the Infraco contract’s terms.

Infraco Entitlement paper

19.130 Around 24 February 2011, tie’s commercial team, under the direction of Mr Murray, produced a paper reporting on the price to which it considered BSC would be entitled under the Infraco contract to complete the off-street works between the Airport and Haymarket [TIE00106500]. The team had been tasked with preparing this on 10 January 2011 [Mr Nolan TRI00000114_C, pages 0026–0029, paragraphs 68 and 71].

19.131 As far as the Inquiry is aware, this was the most up-to-date assessment of BSC’s contractual entitlements available to tie, and thus to CEC, at the time of the mediation. It formed the basis for entries in the so-called “deck chair” spreadsheet used by the tie and CEC teams in preparing for mediation [ibid, page 0032, paragraph 78]. It was also used by Mr Murray as the basis for any discussions about cost that he was involved in during the mediation. There is no indication that BSC saw this document at the time. Nor is there any indication that BSC accepted its conclusions or the calculations on which they were based. Given the parties’ differences, I am confident it would not have done. Indeed, it was heavily criticised by Siemens in its closing submissions [TRI00000290_C, page 0122, paragraph 351 onwards]. I do not therefore treat this document as an objectively accurate assessment of BSC’s entitlements. It is, however, an important reference point in assessing decision-making within the CEC team at the mediation.

19.132 tie‘s Infraco Entitlement paper and the BSC Project Phoenix Price proposal were prepared on different bases and cannot therefore be directly compared. Whereas the Project Phoenix proposal was a new price to complete a redefined scope of work on revised terms, tie’s assessment sought to apply the existing contract terms to the facts and circumstances of the project. tie‘s Infraco Entitlement Paper was described by Mr Murray as having started from the construction works price stated in the contract, with changes and other contractual entitlements being added, and adhering to the mechanisms in the Infraco contract to arrive at an estimated final price [TRI00000249, pages 0011–0013, 0015–0017, paragraphs 23 and 25; PHT00000055, pages 65–68].

19.133 It is apparent from the opening text of the Infraco Entitlement paper that it had been intended to include two parts: one relating to Project Phoenix, and another relating to Project Separation. From the text it appears that the Project Separation calculations would have assessed BSC’s entitlement to complete the works to a suitable point and then demobilise. The document available to the Inquiry only addressed the former, and the Inquiry has not identified any document bearing to be the intended assessment relating to Project Separation. Mr Murray’s recollection was that no separate paper was prepared for that assessment, but that the work done for the extant paper would have informed it [ibid, page 66]. For the Separation paper not to have been prepared is consistent with tie having had insufficient time to investigate it fully and having focused its resources on Project Phoenix, as Mr C Smith had recorded to be the case in his note dated 31 January 2011. That approach, in turn, reflects Dame Sue Bruce’s decision, recorded by Mr C Smith in his email of 24 February 2011 that separation was a fall-back option to be used only if Phoenix failed. There is evidence that members of the tie/CEC team, even a few days before the mediation, lacked critical elements of the likely cost of separating and re-procuring [see, e.g., CEC02084603; Mr C Smith PHT00000053, pages 33–38]. Mr Coyle accepted that the separation option was left undeveloped by the time of the mediation [PHT00000010, pages 72–73].

19.134 The assumptions described by Mr Murray as having been made by tie in its Infraco Entitlement calculations are, on one view, pessimistic in relation to tie’s liability for change. Firstly, tie assumed that it was liable to pay for all changes that BSC had intimated and which were yet to be resolved. That was in contrast to the position that tie had taken when those changes were intimated, which in relation to many was to dispute BSC’s entitlement to increased time and cost. Secondly, tie assumed that it would be liable to pay for further changes yet to be intimated by BSC. Thirdly, tie valued those changes on two distinct bases. The first was based on tie’s estimate of the value of the change and was the more optimistic. The second was based on BSC’s estimate and can be described as pessimistic when compared with the success
tie claimed to have achieved in reducing the price for changes below the level initially claimed by BSC. The extent of that claimed success was discussed in paragraphs 17.58 and 19.81-19.83. In Mr Murray’s words, which I quote here as describing his view, and not as an undisputed statement of fact: “BSC’s estimates were usually excessive and not proven either by subsequent agreement or determination by adjudication to be realistic” [TRI00000063_C, page 0055, postscript]. These calculations were based on a design that Mr Murray described as “to all intents and purposes complete” [TRI00000155, page 0002], so could be taken to have been relatively well informed.

19.135 tie’s calculations on the cost of change related largely to BB’s scope of work, and assumed no further change relating to Siemens’ scope of work [see, eg, TIE00106500, page 0015].

19.136 In addition to estimating the cost of work including taking account of change, tie calculated preliminaries taking into account the two extension of time claims that had been settled, and applying the data and principles from those settled claims to a third extension of time claim that remained in dispute [TRI00000155]. The two settled claims were of relatively low financial value: £3.524 million and £1.167 million respectively [TIE00106500, page 0004]. The still-disputed claim was Infraco Notice of tie Change (“INTC”) 536, which was based on known delays in utility diversions up to 31 July 2010 [CEC02084514]. tie’s calculations in respect of that claim assumed a liability for an extension of time of between 38 and 66 weeks, valued by tie at between £15.553 million and £30.159 million. When that estimate was added to the known cost of the settled extension of time claims, the total estimate for the cost of extended time ranged between £20.244 million and £34.85 million.

19.137 The upper estimate of tie’s liability for INTC 536 was based on an assumed extension of time of 66 weeks. That appears to have been the full extension claimed by BSC in relation to that INTC, which refers to a claim for 461 days, being 65.9 weeks [ibid]. However, the values placed on it by tie appear to be considerably below BSC’s estimate: BSC’s change register of 26 March 2011 records a value of £42.8 million for INTC 536 [BFB00003290, Part 3, page 0380]. The reason for tie’s estimate, even its pessimistic estimate, being so far below that figure is not clear. It may be noted that tie had advice from Acutus, construction contracts consultants, that there were substantial grounds for defending that extension of time claim [WED00000533, passim]. If that is the reason for the lower estimate, it is not stated in tie’s paper. It cannot, however, be said that in this respect tie’s estimate was particularly pessimistic, given the amount by which it is below the amount claimed by BSC.

19.138 The Infraco Entitlement report acknowledged that “Infraco may view their entitlement as greater than this when they submit all of their notified delays” [TIE00106500, page 0005]. In fact, shortly before the mediation, on 4 March 2011, BSC intimated an estimate of extensions of time arising from a series of INTCs. The extensions of time sought in the estimate were:

• section A, 285 days;
• section B, 302 days;
• section C, 105 days; and
• section D, 154 days.

19.139 These extensions were in addition to those sought in the estimate for INTC 536 and assessed the cost of these delays at £16,020,323 in respect of BB and Siemens and €4,532,035 in respect of CAF, the Spanish manufacturer and supplier of the tram vehicles. The Infraco Entitlement paper was completed prior to receipt of that estimate, so did not take these figures into account.

19.140 It is readily apparent, therefore, that the estimates of delay costs in tie’s Infraco Entitlement paper fell far below what BSC considered to be its entitlement.

19.141 In addition to calculating liability for change and extended preliminaries, tie also calculated certain “Further Entitlements” [ibid, pages 0005–0006]. The report cited as examples that:

“it is expected that Siemens will have incurred cost in the delivery or part delivery of certain items not included in the measured value of Off Street works or elsewhere. These items are only to be considered if the deliverables associated are satisfactory to tie, warranted and appropriate for tie to use in the remaining works.

“In addition Infraco will pursue disruption and other claims some or all of which may have to be given credence.”

19.142 This category of “Further Entitlements” was valued by tie in the Infraco Entitlement report at £18.967 million.

19.143 The Infraco Entitlement paper also reported on work tie had commissioned from Cyrill Sweet as its quantity surveyors. The work undertaken by Cyrill Sweet involved preparing a Bill of Quantities based upon the Issued for Construction drawings for the section of the route from the Airport to Haymarket. tie‘s quantity surveyors priced the Bills of Quantity based upon SP4 rates and prices or prices derived from them. The result was compared with the outcome of the exercise undertaken by tie in the Infraco Entitlement paper mentioned above. The outcome of that comparison was that the figures in the Infraco Entitlement paper were marginally higher than the priced Bills of Quantities, which reassured tie [ibid, page 0006].

19.144 As a result of its calculations, tie estimated BSC’s entitlement for completing the line to Haymarket, including the costs for CAF and SDS, at £324.395 million, using tie’s own estimate of the cost of change and £357.651 million, using BSC’s estimates [ibid, pages 0019–0020; cf. the slightly lower estimates at pages 0015–0016]. Removing the CAF element of these estimates, which is necessary to allow a comparison with the sums agreed at mediation, the totals were £265.185 million and £298.541 million respectively. Those figures may be compared with BSC’s Phoenix price proposal for the work of BB, Siemens and SDS, which was £383.9 million. In other words, the price sought by BBS in its price proposal exceeded tie’s most pessimistic estimate of BSC’s likely entitlement under the Infraco contract by about £85 million. It exceeded tie’s more optimistic estimate by more than £118 million. These are, obviously, very significant differences.

19.145 Not surprisingly, given the magnitude of the difference between his estimates and BSC’s Phoenix price proposal, Mr Murray felt unable to assent to BSC’s price proposal [TRI00000063_C, page 0048]. Mr Jeffrey believed the cost increase that it represented to be unjustified [TRI00000097_C, page 0057, paragraph 349; TIE00685894].

BSC’s claims by the time of the mediation

19.146 The cumulative changes claimed by BSC by the time of the mediation were as follows. Taking account of changes that had been superseded, withdrawn or had a delay impact only, 588 changes required estimates. BSC had submitted 543 estimates, with an estimated value of £165,797,161. Of these, 213 had been accepted through the issue of a tie Change Order, with an aggregate value of £25,829,137 [BFB00003290, Part 1, pages 0003–0004]. The estimates that remained under consideration by tie were for a combined value of £119.8 million. A further 63 estimates were yet to come [ibid, Part 3, page 0362]. There was therefore over £120 million in change claims that remained but were not agreed. Eighty-seven changes had a delay-only impact, and that impact was shown in the entitlement programmes that BSC had submitted to tie [ibid, Part 1, page 0063, paragraph 7.2.1].

19.147 The same report noted BSC’s view of the change procedure:

“The complexity, nature and amount of changes have overloaded the change mechanism included in the Infraco Contract, because the Estimates cannot be submitted within the time frame requested in the Infraco Contract and also due to the fact that the overall impact to the Programme from a given change cannot be assessed on an individual basis. It has been agreed between tie and Infraco that the estimates submitted by Infraco will only deal with direct related effects (costs) of each Change. Time related effect will be assessed separately.” [ibid, Part 1, page 0064.]

19.148 As for the extent of delay, in an internal report of 2 February 2011 Siemens noted that:

“The progressed [programme] Revision 03A, that only include [sic] changes known until December 2009, presents a 35 month delay for the entire project to the current contractual programme. The latest submitted estimate MUDFA 2 [INTC 536] requests for 15 month EoT [Extension of Time]. Further estimates are under preparation.” [SIE00000301, page 0001.]

19.149 BSC’s Period Report to 26 March 2011 also referred to a 35-month delay to the sectional completion date for section D (being the period between the original completion date of 6 September 2011 and the forecast date of 31 August 2014 in the Updated Programme) [BFB00003290, Part 1, page 0003]. The report does not specify the total delay for which BSC considered tie to carry contractual responsibility, or the cost consequences, but again noted that the impact of the 87 changes that had a delay-only impact was reflected in the various entitlement programmes submitted to tie [ibid, page 0063, paragraph 7.2.1].

19.150 It has not proved possible for the Inquiry to reconcile BSC’s change register, tie’s Infraco Entitlement paper and BSC’s Project Phoenix price proposal. Nor is it possible to resolve the differences between them. What can be said, however, is as follows. By the time of the mediation:

• more than £120 million of change claimed by BSC remained to be agreed;
• a significant number of changes were not yet the subject of estimates, from which it is reasonable to assume that the price claimed in respect of change was likely to increase;
• tie’s estimates did not take full account of the claims made by BSC in respect of delay;
• the revised price sought by BSC was considerably in excess of tie‘s calculation of BSC’s entitlement under the Infraco contract;
• the change mechanism, as operated by the parties, had proved unable to cope with the volume of change.

Siemens’ criticism of tie’s Infraco Entitlement paper

19.151 tie’s methodology in its Infraco Entitlement paper was subject to sustained criticism by Siemens in its closing submissions. Essentially, Siemens considered that tie had failed to take into account the distinction between civil engineering works, on the one hand, where the cost of a truncated line could be estimated from measuring the line to be built against that originally proposed and applying pro rata calculations, and the provision of systems and track work, on the other hand, where the cost of system-wide elements would be incurred in full irrespective of the length of track that was laid. In its closing submissions Siemens cited three examples [TRI00000290_C, pages 0128–0132, paragraphs 369–383] to illustrate the error in tie‘s apportionment of system-wide costs between off-street and on-street works. The first example relates to the provision and installation of on-board signalling equipment to each of the 28 vehicles (27 trams plus the maintenance vehicle). I accept that this expenditure would be necessarily incurred whatever the length of the route otherwise some of the trams could not be used. The second example cited by Siemens is the Supervisory Control and Communications System provided in the control room at Gogar. In my opinion, this element of Siemens’ work was required for the safe operation of the trams, whatever the length of the network, and is properly categorised as system wide. Accordingly, the cost of this system should not have been subject to reduction to reflect the truncated route. The third example related to the Testing and Commissioning of the system which was required irrespective of the length of the track. The cost of these three elements was £1,058,275, £3,492,980 and £2,361,870 respectively, totalling £6,913,125. That total should be compared with the total sum apportioned by tie to the off-street system-wide price of £4,919,086. In their view, tie’s calculations understated Siemens’ entitlements, and were “at best … an ill-informed ‘pro-rata’ calculation” and “in Siemens’ view … nothing more than a crude and arbitrary ‘raid’ on Siemens’ Construction Works Price, which fails properly to ascertain, and accurately to report to stakeholders, the extent of Siemens’ true entitlement” [ibid, page 0146, paragraph 429]. I accept Siemens’ submission to the extent that it criticises tie‘s apportionment of their system-wide costs as ill-informed.

19.152 Siemens also submitted that tie had understated the value of change costs, both those agreed and those still to be agreed, in relation to Siemens’ work [ibid, pages 0132–0137, paragraphs 384–394]. It is clear that by far the greatest part of the change costs to be agreed related to delay, and in particular BSC’s claim under INTC 536 [ibid, pages 0135–0136, paragraph 391]. In its Infraco Entitlement paper tie took this into account, although not at the full value claimed by BSC [TIE00106500, pages 0004–0005]. When purporting to use the BSC figure, tie stated the value of the claim to be £30.159 million in their reference to “EoT3” [ibid, page 0005]. However, the total value claimed by BSC was £42,759,847 [BFB00003290, Part 3, page 0380, entry 536] or even £44.279 million [BFB00003289, Part 13, page 0318, entry 536].

19.153 A further criticism of the Infraco entitlement paper was that tie had failed to take proper account of Siemens’ accrued entitlement to preliminaries, again through an inappropriate apportionment and had made a “grossly inadequate” [TRI00000290_C, page 0143, paragraph 414] provision for prolongation. This criticism was apparently based on the assumption that tie was liable for the entirety of the project delay [ibid, page 0143, paragraph 416]; and had failed to respect an agreement on the calculation of prolongation [ibid, pages 0137–0145, paragraphs 395–426].

19.154 Although I have accepted Siemens’ criticism of tie‘s methodology in apportioning system-wide costs, I do not consider that the evidence before the Inquiry allows me to resolve the differences between tie and BSC on the sums properly due under the Infraco contract. Further, it would have been impossible to do so. It would have required a full investigation into the facts of every dispute between the parties and a determination of their respective entitlements. That was something that proved impossible to achieve during the project, when those with intimate knowledge of the disputes were fully engaged on them and had the relevant evidence close at hand. The evidence now available could not, in my view, realistically have been reassembled by reference to each claim, nor would it have been practicable for the Inquiry to obtain the engagement that would be needed from relevant witnesses to fact and expert witnesses in relation to each dispute. Even had it been possible, it would have required an entirely disproportionate use of resources.

19.155 It is plain, however, that Siemens continued to maintain that tie had grossly underestimated its entitlement under the contract, especially in relation to the cost of delay.

Final preparations for mediation

19.156 The initial reaction of CEC’s senior officials to the Project Phoenix price proposal was that it was too high, given the number of items which BSC sought to exclude from it [Mr McGougan TRI00000060_C, page 0111, paragraph 278] and seemed excessive when compared with both the industry benchmark of £13 million per kilometre and the original contract price [Mr David Anderson TRI00000108_C, page 0103, paragraph 136]. Mr Jeffrey shared these views as he considered that it did not provide cost certainty and that the costs were too high [TRI00000097_C, page 0057, paragraph 349]. Indeed, he never changed his view about the costs being too high [ibid].

19.157 On 2 March 2011, Lord Dervaird issued his decision in an adjudication relating to the payment of preliminaries under the Infraco contract [BFB00053489]. The adjudication concerned preliminaries claimed by BSC for each of the months between March and July 2010, but which tie had not paid. Lord Dervaird determined that preliminaries were a time-based cost. As a consequence of that decision BSC had a claim for payment of £14 million in outstanding preliminaries [SIE00000304, page 0003].

19.158 There was debate within tie/CEC, prior to mediation, about the cost of the alternative to the Phoenix deal; that is, of separating from BSC and re-procuring the work from another contractor. In an email dated 27 February 2011, Mr Rush expressed the view that the cost of separation and re-procurement would be “substantially more than forecast by tie in their ‘Deck-chair’ presentation” and that “[a] prudent estimate” would be “between £765 million and £800 million” [CEC02084651, page 0001]. Mr Rush acknowledged the significance of the cost of separation and re-procurement in observing that it was:

“a critical threshold on which we may decide to ditch Phoenix or conversely decide to agree on a price for Phoenix which is higher than we needed to. But ditching Phoenix is an irrevocable action with an uncertain end.” [CEC02084603, 2 March 2011.]

19.159 In my view, this remark accurately focused a consideration of importance to CEC’s decision making at mediation: in assessing what it was reasonable to pay for a Phoenix-based settlement, it was of the utmost importance for CEC to know what the most realistic alternative would cost. If that alternative was less expensive than the Phoenix proposal, CEC would have to consider rejecting the Phoenix proposal, although there were considerable uncertainties to be confronted in doing so. If the alternative was more expensive than Phoenix, CEC could use that as a justification for paying more for Phoenix. Although that latter approach would certainly not be an ideal means of setting a price in a normal procurement process, it was a commercially realistic one in the circumstances in which CEC now found itself.

19.160 On 2 March 2011, Mr Jeffrey circulated an email in which he said:

“I have seen a copy of a report prepared by GHP (I’m not sure who commissioned it) which gives figures for separation and phoenix [sic] which give a markedly different perspective to tie’s figures” [CEC02084602].

19.161 “GHP” was the Gordon Harris Partnership, a firm of quantity surveyors. Mr Jeffrey attached a reconciliation between GHP’s estimates and tie’s figures, which demonstrated that GHP’s estimate of the cost of Phoenix, at £661 million, was £99 million lower than tie’s; and that GHP’s estimate of the cost of separation, at £769 million, was £145.6 million higher than tie’s assessment [TIE00109274]. In short, although tie considered that separation and re-procurement would be less expensive than Phoenix, GHP disagreed.

19.162 The figures in the reconciliation circulated by Mr Jeffrey appear to derive from a GHP report dated 25 February 2011, marked “Draft” [CEC02084612]. In that draft, GHP noted that it had been asked to give

“a quick opinion on the Project Separation costs as prepared in the ‘deck chair’ PowerPoint presentation by tie, to identify, in headline terms, any costs or ‘premiums’ not included, together with any other assessment/overview/comment on the credibility of the figures.” [ibid, page 0002.]

19.163 It also commented:

“We set out indicative figures and stress that we cannot say that these can be taken as definitive without further work.” [ibid]

19.164 GHP’s views were, therefore, heavily qualified.

19.165 The GHP report refers to discussions with Mr Rush, indicating that it might have been he who commissioned it. That view tends to be confirmed by Mr Rush’s email of 27 February [CEC02084651], which both refers to his discussions with Mr Molyneux of GHP and provides an estimate of the cost of separation (£765 million to £800 million) which was consistent with the figure in the GHP report (£769 million). These figures are of interest because, as will be discussed more fully below, on the day before the mediation an adjustment was made to tie’s estimates of the cost of separation to increase them to £800 million or more [WED00000134, Part 3, page 0235, paragraph 7.6]. That figure is at least consistent with the figures discussed by Mr Rush in his email.

19.166 A major concern for those in the tie/CEC negotiating team prior to mediation was the extent to which matters were excluded from BSC’s price proposal; or, to put it another way, the extent to which BSC was still unwilling to accept certain risks relating to the construction work. Mr Robson was an independent consultant instructed to advise tie initially and latterly CEC on the process, procedures, strategy and tactics of mediation. On 25 February 2011, he noted that the proposal contained:

“significant exclusions … and 36 “Clarifications” which are effectively pricing assumptions. These are carefully written and in some cases widely drawn in terms of potential financial/programme impact.” [TIE00685852]

19.167 The initial thought of Gregor Roberts, tie’s finance director, was that:

“this is a very high price to have so many exclusions … I honestly think that the £20m allowance that we have made for ‘further risk’ in our assessment would be insufficient taking into account the proposed exclusions” [TIE00109264].

19.168 Mr McGougan “agreed completely” with that assessment [TRI00000060_C, page 0111, paragraph 278]. Mr Rush noted that:

“[i]n normal circumstances it would require at least 4 weeks intensive work to review and report on the risks to the Client”

and that:

“[t]he price is capable of being reduced but it is the conditions and qualifications which are more so of the essence to an agreement.” [CEC02084651, page 0001, points 5 and 12.]

19.169 When Mr Rush sent that email on 27 February, the mediation was nine days away. Mr Jeffrey, Mr Richards and Mr Bell also expressed concerns about BSC’s proposals.

19.170 On 4 March 2011, Mr Bell circulated his assessment of the risks associated with the Project Phoenix proposal [TIE00355073; TIE00355074]. His document included estimated provisions for the items that the Phoenix proposal excluded from the price. For each item, Mr Bell estimated a “high” and a “low” provision. The high provisions totalled £106.6 million and the low provisions totalled £39.6 million. The range between these figures, £39.6 million to £106.6 million, was, therefore, tie’s estimate of the potential additional cost, over and above BSC’s proposed Phoenix price, for the Infraco works between the Airport and St Andrew Square, were tie to accept BSC’s Phoenix proposal subject to the conditions it then contained. There was a considerable amount of uncertainty about these figures. That is demonstrated by the range between the higher and lower estimates. It is also confirmed by the terms of Mr Bell’s covering email, which noted that the day previously he had spoken of a range of £30 million to £60 million, but that following his attempt to price what could be priced, he had amended that to £40 million to £107 million. He added:

“There is inevitable judgement calls [sic] which are exactly that, but it feels sensible where we can range a cost.

“Please remember that there are some items I do not think are capable of sensible pricing.” [TIE00355073]

19.171 For those items not capable of being priced, no allowance was included. I infer from this that Mr Bell would have considered the estimated cost of risk to be higher than the figures quoted in this paragraph, but to an unknown extent.

19.172 One feature of Mr Bell’s figures should be noted, because it correlates with a specific point made in one of the written accounts of decision making at the mediation. Mr Bell’s calculations included an estimate of the cost of the work between Haymarket and St Andrew Square, of £18 million to £20 million [TIE00355074, cells I10 and J10]. That is not the pricing of a risk; rather, it is the cost of additional works which tie wanted but which were outside the scope of the Phoenix proposal. Deducting those costs, Mr Bell’s estimated provision for the cost of the risks and exclusions associated with Project Phoenix ranged from £21.6 million to £86.6 million. That is relevant because, as will be discussed below, CEC’s negotiations at mediation proceeded on the basis that the “cost” of the Project Phoenix exclusions was about £80 million [see paragraph 19.242 below]. As was noted by Mr C Smith and Mr Coyle in their 2012 summary of negotiations at the mediation:

“there were still a significant number of exclusions that sat outside the off-street price which were estimated at £80m. This price did not include for the remainder of the on-street works, which were thought to have been in the region of £20m” [WED00000134, Part 3, page 0235].

19.173 I infer that it was Mr Bell’s figures in this document which formed the basis for that comment. It is therefore apparent that the £80 million value attached to the Project Phoenix exclusions was a top-end estimate, and that the estimate at the lower end of the range was about £21 million.

19.174 On 5 March 2011, Mr Coyle circulated the final version of tie’s “deck chair” spreadsheet, the document prepared prior to the mediation and used to report tie’s assessment of costs under the different scenarios for the project [TIE00355077; TIE00355078]. The most salient feature of this spreadsheet is its indication that, on tie’s estimates, separation from BSC and re-procurement would be less expensive than a Phoenix-based deal with BSC. For a line between the Airport and St Andrew Square, tie’s range of estimates for separation and re-procurement was from £645 million to £698 million compared with a range between £682 million and £749 million to conclude a Phoenix-based deal with BSC [TIE00355078, row 84]. As was discussed at paragraph 19.158 above, Mr Rush’s view was that this estimate of the cost of termination and re-procurement was substantially too low [CEC02084651].

19.175 The spreadsheet took into account Mr Bell’s estimate of the cost of the items excluded from the Project Phoenix price [Mr Murray PHT00000055, pages 101–103; Mr Coyle PHT00000010, page 38; TIE00355078, cells U66 and V66]. It may be noted in passing that its estimates of the cost of a Phoenix-based deal appear to double count the cost of building the on-street section between Haymarket and St Andrew Square: provision for it appears both in cells U39 and V39, as a cost item in its own right, and in cells U66 and V66, as an element of Mr Bell’s estimate of the cost of the items excluded from the Phoenix proposal. The effect of that would have been to overstate tie’s estimate of the cost of a Phoenix-based deal to St Andrew Square by £18 million to £20 million.

19.176 The most expensive estimate on tie’s “deck chair” spreadsheet for a line to St Andrew Square was £774.9 million, which assumed that tie terminated the Infraco contract, re-procured the work from another contractor, and then lost a litigation with BSC [ibid, cell P84].

19.177 There was recognition that the Infraco contract placed tie/CEC at risk if there were any delay in reaching a settlement. In an email of 27 February 2011 Mr Rush noted that although there was a view that BB’s Project Phoenix price proposal exceeded both the current market price and its entitlement under the Infraco contract – a view that reflected the conclusions of tie’s Infraco Entitlement paper:

“[t]he risk for the Clients is that by rejecting their offer increased costs of delay will accrue which may outweigh the difference between entitlement and what could be negotiated through Phoenix – this is a key consideration for the Clients” [CEC02084651, page 0002, point 13].

19.178 This indicates a view held by one of tie’s advisers that, even if BSC’s strict contractual entitlement was lower in amount than the Project Phoenix price proposal, it might still not be worth it for tie/CEC to hold out for a settlement reflecting the former, given their exposure to the cost of ongoing delay.

Discussion

19.179 In the run-up to mediation, tie formed the view that the true cost of a Phoenix deal on BSC’s terms might be as much as £80 million above the price proposed by BSC in its Phoenix proposal. BSC’s proposed Phoenix price was itself well above the estimates that tie had prepared. In those circumstances, CEC had to decide what price it would be prepared to pay BSC for a Phoenix deal. The only meaningful comparator available to CEC was the estimated cost of separating from BSC and re-procuring the work from another contractor. There were conflicting views within the tie/CEC team about the cost of that option, and even about whether it would be less or more expensive than the Phoenix proposal. There was much uncertainty about costs. There was, therefore, little objective guidance to those negotiating on behalf of CEC about what would be an appropriate price to pay. tie/CEC were facing the risk, however, that continued delay would simply increase their costs regardless of which option was taken.

19.180 Those circumstances were, in my view, likely to leave CEC’s negotiators at mediation with little negotiating leverage against the prices sought by BSC.

Mediation

19.181 The mediation began on 8 March 2011, and on 10 March 2011 the parties agreed 13 key points of principle [CEC02084685]. These included:

• a price of £362.5 million for the work of BB, Siemens and SDS in completing a line between the Airport and Haymarket;
• that that price be “absolutely certain”;
• the re-commencement of certain priority works by 1 May 2011; and
• a price proposal of £39 million from BBS for the line between Haymarket and St Andrew Square, subject to adjustment under a target price mechanism.

19.182 The agreement was not legally binding at this stage, being subject to approval by CEC and to funding being available to pay for it.

19.183 By 12 March 2011, the parties’ agreement had been developed into more detailed Heads of Terms. These reflected the key points of principle and were also non-binding. They established timescales for CEC to obtain funding and for the parties to implement their settlement by formal agreements. BSC were to commence the prioritised works on or before 1 May, subject, among other things, to the parties having entered into a minute of agreement relating to those works. The parties were to enter into a further minute of agreement relating to the remainder of the off-street works, and the on-street works, by 1 July 2011, failing which they were to discuss a mutually agreed separation. If CEC was unable to secure funding for the works beyond the prioritised works, the Infraco contract would terminate automatically on 1 September 2011.

The off-street works price of £362.5 million

19.184 By far the largest financial element agreed at mediation was the off-street works price of £362.5 million. Although it was agreed on a non-binding basis, and was subject to approval by CEC, there was no change in that price between its agreement at mediation on 10 March 2011, and its incorporation into the formal settlement agreement of 15 September 2011 [CEC02085642, page 0003].

19.185 Senior tie management who were present at the mediation did not agree with the price [Mr Jeffrey TRI00000097_C, pages 0058, 0061, paragraphs 354, 375–376; Mr Coyle PHT00000010, pages 88 and 139; Mr Bell TRI00000109_C, pages 0180–0182, paragraph 155(3); PHT00000025, pages 53–55; Mr Murray TRI00000249, pages 0015–0017, paragraph 25].

19.186 An important focus of the Inquiry’s work was, therefore, to understand the basis on which that figure was agreed at the mediation. The Inquiry was unable to identify any document which provided a full and clear explanation. It therefore sought an explanation from CEC. As will be discussed in the section below, CEC was unable to advance matters.

CEC’s lack of knowledge

19.187 On 28 August 2017, the Inquiry served a notice on CEC under section 21 of the Inquiries Act 2005 [TRI00000136]. It required CEC to provide: a written statement explaining the basis of calculation for, or derivation of, the off-street works price of £362.5 million; and any documents in its custody or control that were relevant to that explanation.

19.188 In response, CEC claimed that it was unable to comply with the notice, or that it was not reasonable in all the circumstances to require it to do so. The basis for this claim was that:

“the Council is unable to speak for the individuals concerned in agreeing the price of £362.5m and/or the target sum of £39m. For the Council’s part, none of the relevant individuals are still employed by the Council. However, we note that a number of witnesses have addressed these matters in their statements and appear on the list of witnesses who will give evidence at the oral hearings” [CEC02087289].

19.189 I rejected that claim on 11 September 2017. My decision said the following about CEC’s claim.

“This seems to me to fail to recognise that CEC is a local authority accountable to the public for its actions. It cannot be the case that individuals, as opposed to the Council, can spend in excess of £400 m of public funds without the approval of the Council. That is a decision of CEC and where such approval is given the public is entitled to know the basis of calculation or derivation of settlement figures of that amount. For that purpose proper records are required. CEC cannot evade its obligations in this regard by seeking to pass them on to former employees. The Notice was seeking the evidence of CEC, as opposed to its current or former employees, about the expenditure totalling in excess of £400 m. If CEC cannot explain that expenditure, it should say so in a certified and authenticated statement.” [TRI00000312]

19.190 By letter dated 25 September 2017, Mr Clarke, senior solicitor at CEC, responded as follows:

“Following further consideration and investigation of the request, the Council considers that it is unable to certify and authenticate the basis of derivation of the figures referred to in paragraphs (a) and (b) of numbered paragraph (1) of the Notice or that the figures were supported by calculations carried out or checked on its behalf. This is because the officers who were involved in the matter are no longer with the Council.

“However, in an effort to assist the Inquiry, we enclose a statement which has been prepared on the basis of contemporaneous historical records.” [CEC02087288]

19.191 The statement mentioned in the letter is CEC02087284.

19.192 CEC produced the letter and statement mentioned in paragraph 19.191 on 25 September 2017, three days after Mr Coyle concluded his oral evidence. From a comparison of the statement with the Transcript of Mr Coyle’s evidence [PHT00000010] from page 39 to the end it is apparent that the statement in large part reflects the line of questioning pursued by counsel to the Inquiry with Mr Coyle, and in particular the documents put to Mr Coyle. I conclude that, to produce its statement, CEC was dependent upon the information made available through counsel to the Inquiry’s questions and Mr Coyle’s answers.

19.193 CEC as an institution was unable to explain on what basis the price agreed by its own Chief Executive at mediation had been calculated, or how it had been derived. Further, CEC was unable to say whether that price had been supported by calculations either carried out, or checked, on its behalf. CEC was apparently dependent on the work of this Inquiry to provide any information in relation to that price.

19.194 It is not possible to say whether CEC was unable to explain these matters, because either no such records were kept at the time or any such records were not filed in such a way that they are able now to be retrieved. Either way, it is a remarkable failure of CEC to maintain basic standards of administration.

19.195 In June 2011, Deloitte & Touche Limited (“Deloitte”) produced a draft report for tie entitled “Internal Audit Project: Review of the Commercial Strategy – March 2010 to March 2011” [CEC02086351]. This followed a request to supplement an earlier report to include:

“a high level review of the processes applied by tie for the period from the issue of the Project Pitchfork report in March 2010 to the issue of the Project Resolution report during December 2010, and further, to include the key events leading up to the commencement of mediation in March 2011” [ibid, page 0005].

19.196 The report continues:

“Due to the confidentiality of the March 2011 mediation discussions, we have been provided with limited access to information produced and all documentation and discussions from the mediation is excluded from the scope of this report.” [ibid]

19.197 Nonetheless, the report records the following:

“During our discussions with tie senior management on 28 April 2011, concern was expressed over the unrecorded nature of the mediation process and how the decision making process during the mediation could be reviewed, should it be required in future.” [ibid, page 0044.]

19.198 I share that concern. Mediations are typically conducted under strict obligations of confidentiality. There are good reasons for that. However, that does not, in my view, excuse a public authority from keeping a proper record of the basis for any decisions that it might reach there.

19.199 Dame Sue Bruce said in evidence before the Inquiry that she expected that there would be a typed record of proceedings at the mediation to explain how agreement was reached on the price of £362.5 million [PHT00000054, pages 50–52]. The Inquiry has been unable to find any documentary record that does so, beyond those discussed below.

Evidence before the Inquiry

19.200 In the absence of a clear contemporary record, or an explanation from CEC, I have found it necessary to consider at some length the evidence about the basis of agreement at mediation on the price of £362.5 million.

19.201 The witnesses involved in the mediation were generally content to accept the description of the agreement on the figure of £362.5 million as a ‘horse trade’ [Dame Sue Bruce ibid, pages 47–48; Mr Emery PHT00000052, pages 63–66; Mr C Smith PHT00000053, page 56; Mr Coyle PHT00000010, page 106]. By “horse trade”, I take them to mean that the figure was a compromise reached by the parties to resolve their dispute, without the necessity of any shared rationale for the particular figure at which they compromised. It is not uncommon for disputes to be resolved in that way. It is pragmatic and avoids the need to specify a precise solution to every element of a dispute. That does not, however, obviate the need for a public body to explain the basis on which it has decided that the settlement price is acceptable.

19.202It is clear that the ultimate decision-maker for the employer team at the mediation was Dame Sue Bruce. She was CEC’s Chief Executive and therefore its most senior official. She signed both the key points of principle document on 10 March and the Heads of Terms document on 12 March. Although Mr Emery, the chairman of tie and TEL, also signed both of those documents, and together with Dame Sue Bruce formed part of the core negotiating team, he was clearly in a subordinate role by virtue of the fact that tie and TEL were CEC subsidiaries. Although it was tie, and not CEC, which was the counterparty to BSC under the Infraco contract, it was clear that tie had reached the limit of its funding authority and that the approval of any settlement had to come from CEC [Mr Emery PHT00000052, pages 10–13]. It was CEC that would have to pay for any price increase agreed at mediation. There would have been no point in Mr Emery approving the agreements at mediation unless Dame Sue Bruce did too, because she had taken charge of, and was the “deciding person” for, the employers’ side at mediation [Mr Rush PHT00000033, page 184; TRI00000141_C, page 0033, Addendum to Answers, question 87]. There is no question, therefore, that responsibility for agreement to the price of £362.5 million at mediation rested with Dame Sue Bruce.

19.203In reaching this conclusion, I keep in mind that it was ultimately for CEC’s councillors to approve or reject the final settlement and that the terms agreed by Dame Sue Bruce did not bind them [cf. Dame Sue Bruce TRI00000084, pages 0028–0029, paragraphs 90–91]. I also keep in mind that Dame Sue Bruce was not herself an expert in construction projects and was heavily reliant on information from tie and advice from others. Further, although Mr Emery was in a subordinate role as chairman of CEC’s subsidiaries, he took full responsibility for his own decision to overrule the views of tie’s senior management and accept the deal [PHT00000052, page 51 onwards]. Given his considerably greater experience with large-value commercial contracts, I am in no doubt that his views were influential in decision-making at the mediation. These considerations do not detract from the fact that it was, and could only have been, Dame Sue Bruce who decided that £362.5 million was a price that could be agreed in principle and later put to the Council for approval.

19.204I also keep in mind that, despite his attempts to distance himself from his role as one of the negotiators, Mr McLaughlin of Transport Scotland was the third member of the core negotiating team at Mar Hall. I do not consider, however, that he was instrumental in the deal agreed. Having said that, Mr Emery described Mr McLaughlin as a member of the “decision making collective” [ibid, page 10], as well as a ”main player” [ibid, page 50]. More significantly, although Mr Emery did not consider that Mr McLaughlin had a veto over any proposed settlement, he commented: “clearly he [McLaughlin] was consulted and we needed his agreement to go forward with that number” [ibid, page 63]. I accept that evidence. In addition, as will be discussed more fully in paragraphs 19.260–19.263 below, Mr McLaughlin accepted that in the course of the mediation he left to report by telephone to the Cabinet Secretary [Mr Swinney] on the progress of the mediation, including the likely settlement figure [PHT00000011, pages 185–188]. That evidence tends to suggest that Mr McLaughlin had more influence in the settlement process than he led the inquiry to believe, although I accept that this does not detract from the ultimate responsibility of Dame Sue Bruce mentioned above.

19.205All the information available to the CEC team at mediation about project costs came from tie. CEC did not engage its own independent advisers in relation to project costs. Although several members of tie’s senior management team were present at the mediation (Mr Jeffrey, Mr Bell and Mr Murray), and were involved to the extent of providing information, being consulted and making comment, they were not involved in any decision-making capacity [Mr Jeffrey TRI00000097_C, page 0058, paragraph 353; Dame Sue Bruce PHT00000054, page 62; Mr Emery PHT00000052, pages 14–16; WED00000582].

19.206Dame Sue Bruce did not herself have any clear recollection of the basis on which the price of £362.5 million was agreed [PHT00000054, page 46 onwards]. That is not particularly surprising, given the passage of time and her own lack of technical expertise in relation to project costs. It does, however, demonstrate the importance of written records documenting the basis on which such decisions are taken. She accepted as accurate the summary of offers and counter-offers [WED00000134, Parts 1–5; Dame Sue Bruce PHT00000054, page 35 onwards and page 64 onwards], which will be discussed further below.

19.207 Mr Emery’s evidence was that the price agreed at mediation was around half what BSC had originally sought [PHT00000052, pages 48 and 60–61]. That is plainly incorrect, and Mr Emery was mistaken about it. I attribute that to the dimming of Mr Emery’s memory in the seven years since the mediation. The reality was that the price agreed at mediation was reduced only to a very limited extent from BSC’s proposal.

19.208 The most detailed written account of decision-making at the mediation is a report by Mr C Smith and Mr Coyle [WED00000134, Part 3, page 0233 onwards]. In the discussion that follows, I refer to it as the “Smith and Coyle report”. They wrote it in 2012 as a briefing for CEC’s incoming Transport, Infrastructure and Environment convener on the evolution of the capital cost of the project from the period leading up to mediation. Since it was written by two representatives of CEC who were actually present at the mediation, I am prepared to treat it as in general an accurate summary of what occurred. However, since it was apparently not written until more than a year after the mediation, I must remain open to the possibility that in certain respects it may not be completely accurate. I would also observe that it is surprising that no similar exercise was undertaken immediately after the conclusion of the mediation to avoid any inaccuracies due to the passage of time and also as part of the public record of events.

19.209 I must also keep in mind that neither Mr Smith nor Mr Coyle was part of the triumvirate that formed the core negotiating team and may not in all respects have known what that team did or why.

19.210 The report is not, unfortunately, an especially clear or full account of the thinking which underlay agreement on the price. It is, however, a guide.

19.211 An important feature of the report is its account of a discussion which it describes as having taken place “[d]uring the initial stages of mediation” [ibid, Part 3, page 0235, paragraph 7.6]. Other evidence confirms that this discussion in fact took place on the day prior to the mediation, being 7 March 2011, and took up most of that day [WED00000582, page 0002].

19.212 The discussion concerned tie’s preferred option, of separating from BSC and re-procuring the work from another contractor. tie’s cost estimates indicated that this would be less expensive than a Phoenix-based settlement with BSC. The estimates discussed were those from tie’s “deck chair” spreadsheet, being a range of £646 million to £698 million to separate and re-procure, and a higher range of £682 million to £749 million for a Phoenix-based settlement with BSC. As was noted at paragraph 19.175 above, it appears that the latter figures were overstated by c. £20 million due to double counting of the cost of the section between Haymarket and St Andrew Square. Adjusting for that, tie’s figures still forecast the option to separate and re-procure as less expensive than BSC’s Phoenix proposal.

19.213 The Smith and Coyle report notes that tie’s preference for separating and re-procuring “went against all the advice that was given by independent advisors at this time” [WED00000134, Part 3, page 0235, paragraph 7.6]. It does not identify these advisers, but those involved in the preparations for mediation included Mr C Smith, one of the authors of the report, Mr Robson, Mr Rush, Gordon Harris Partnership and McGrigors [Mr Coyle PHT00000010, page 48 onwards].

19.214 The report then describes a number of “fatal flaws” in the assumptions that tie had made in estimating the cost of separating and re-procuring. These included a failure to take account of BSC’s entitlement to payment for delay, or for disputed design change for work already done [WED00000134, Part 3, page 0234, paragraph 7.4]. This criticism appears to have been well founded: the cost estimates in tie’s “deck chair” spreadsheet for the “settle and re-procure” option do not appear to make provision for the cost of delay or disputed design changes [TIE00355078, columns P to S]. I have considered why that should be so. The “deck chair” spreadsheet columns addressing the cost of a deal with BSC, in contrast, did make provision for the cost of delay and disputed design change: they derived from tie’s Infraco Entitlement paper, which had made pessimistic assumptions about tie’s liability for such costs [ibid, columns U–V, rows 24–25, when compared with TIE00106500, pages 0016–0017 and the evidence of Mr Murray PHT00000055, pages 101–102]. Further, in assessing the “continue as is” option, the spreadsheet included significant figures for change and delay, both to date and projected (columns B and C). One possible explanation lies in the fact that, due to a shortage of time, tie had focused its preparation on BSC’s Phoenix proposal to the exclusion of the separation option. That explains the absence of the “separation” part of the Infraco Entitlement paper; and that might in turn explain why the separation figures in the “deck chair” spreadsheet take no account of tie’s liability for delay and design costs. The alternative explanation is that tie assumed a settlement could be negotiated with BSC which did not include any additional payment for change and delay – an assumption that I have no hesitation in rejecting as unrealistic.

19.215 The fact that the Smith and Coyle report describes the absence of such costs from tie’s estimates as a “fatal flaw” indicates that the tie/CEC team proceeded at mediation on the basis that it was indeed to be assumed that tie/CEC bore substantial liability for the cost of design change and delay. The precise basis for this judgement is not clear. Mr C Smith accepted that he made this judgement. At the time of the mediation, his judgement was based on discussions with others, as opposed to his own detailed knowledge of the project because at that time he lacked such knowledge [PHT00000053, pages 42–46]. When asked to explain the basis, he said:

“I think it was reading the papers that were presented to me and observing the behaviours, and primarily the behaviours of tie … it would have been watching the debate between – I think it was Jim Molyneaux [a quantity surveyor with Gordon Harris Partnership] and Tony Rush, versus Steven Bell, Richard Jeffrey and to a lesser degree Dennis Murray.” [ibid, page 46.]

19.216 This indicates a preference for the views of Mr Rush and Mr Molyneux over those of tie’s senior management. It does not appear, from this description at least, to have been a preference based on a detailed consideration of the relevant facts and issues.

19.217 The Smith and Coyle report noted that it had:

“become clear that the dominant cause of delay to the works was the delayed MUDFA utility diversions” [WED00000134, Part 3, page 0233, paragraph 7.2].

19.218 Apart from utility diversions to be carried out by Infraco as part of the expenditure on provisional sums in Appendix B of SP4 of the contract tie had the responsibility for completion of the diversion of all utilities in accordance with the construction programme and delay in that programme due to utility diversions was a risk that tie bore under the Infraco contract [USB00000032, page 0008, clause 3.4, Pricing Assumption 24]. The assumption that MUDFA was the dominant cause of delay was confirmed to be an important one underlying the agreement reached at mediation [Mr C Smith PHT00000053, pages 83 and 85; Dame Sue Bruce TRI00000084, page 0054, paragraph 170]. The view that MUDFA delays were the critical delaying factor throughout the project is supported by BB [TRI00000292, pages 0133–0140, paragraphs 225–235A]. The basis on which CEC’s representatives made that judgement at the time of the mediation is, however, unclear. It was contrary to the position being taken by tie in the then still-unresolved dispute over BSC’s claim for extension of time and related costs arising out of utility diversion delays up to 31 July 2010 (INTC 536). In that dispute tie maintained that it was not liable for an extension of time due to utility delays because something else – perhaps delays relating to design, or delays attributable to the contract change process – was in fact the dominant cause of delay [WED00000587]. As far as the Inquiry is aware, there is no documentary evidence to demonstrate any consideration being given by the CEC negotiators at mediation to the arguments that tie, with Acutus, had developed. It is unclear whether they were used in any way to negotiate a discount in the price to be paid. Nor is it clear that the arguments were consciously discarded, or, if they were, on what basis. There is simply no record at all.

19.219 The report identified a second category of “fatal flaws” [WED00000134, Part 3, page 0234, paragraph 7.4], relating to the likely cost of re-procuring the work from another contractor. These flaws were:

• an assumption that a new contractor would take over the project without a risk allowance or a “bad project” premium being included;
• a failure to take into account the effect of inflation on the cost of materials;
• a failure to account in the price for the significant risks remaining in the on-street section; and
• a failure to allow for extension to the programme as a result of having to re-procure the work.

19.220 I am prepared to accept that tie had not included these costs in its “deck chair” spreadsheet: there is certainly no entry that obviously includes them. Although there is a line entry for “Further Risk allowance on new procurement” no figures are included [TIE00355078, row 42].

19.221 I also accept that the factors listed in the report as the second category of fatal flaws would be likely to increase the risk and cost of the project, were the works to be re-procured.

19.222 The Smith and Coyle report records that the difference of views over the likely cost of separating and re-procuring led to:

“a significant amount of discussion between tie and CEC (including CEC advisors) on the assumptions tie had made in the forecasts for separation. It soon became clear that tie had not considered a number of cost headings at this time which would have had a significant impact on the final cost. In very broad terms, these items were in the order of £150m for settlement, professional costs, bad project premium risk, systems re-procurement risk, and inflation, which would have potentially resulted in a final outturn cost of at least £800m.” [WED00000134, Part 3, page 0235, paragraph 7.6.]

19.223 What the report does not make explicit is that the addition of £150 million of costs to tie’s estimate of the separate/re-procure option had the effect of making it more expensive than a Phoenix-based deal with BSC. That reversed the position as it had appeared on tie’s estimates up until then. Only as a consequence of this discussion, the day before the mediation, was it possible for CEC’s negotiators to justify their already established preference for a Phoenix-based deal on cost grounds.

19.224 It is, to say the least, very surprising that there is an absence of any detailed calculation for such a significant sum. Even more surprising is that the decision whether to include such cost elements in tie’s estimates was not resolved until the day before the mediation. They are costs and risks that seem relatively obvious, even to a lay person, when one thinks about a re-procurement exercise in a project such as this. That their absence was only addressed the day before the mediation is a significant indicator that tie and CEC’s preparations were inadequate by the time of the mediation.

19.225 Even accepting, as I do, that some adjustment was necessary for these missing cost elements, it is difficult not to be sceptical about the magnitude of the adjustment.

19.226 Firstly, it had the benefit for the CEC team that it rendered their preferred option – a Phoenix-based deal with BSC – the more cost-effective of the two main options.

19.227 Secondly, since separate and re-procure was the only practicable alternative to a Phoenix deal, the extent to which it was more expensive was important: its likely cost was an important consideration in deciding what CEC could justifiably pay for Phoenix. As Mr Rush had put it on 2 March 2011:

“the potential cost of Separation is a critical threshold on which we may decide to ditch Phoenix or conversely decide to agree on a price for Phoenix which is higher than we needed to [sic]” [CEC02084603].

19.228 In his evidence to the Inquiry Mr Emery agreed that, to make a good decision about Phoenix, one needed a good view on what separation would cost. From his evidence it is also clear that the main focus of the negotiating team for CEC was to achieve a solution that would enable the project to continue with the same contractors [PHT00000052, pages 36–39]. I gained the impression from Mr Emery’s evidence that he did not give any serious consideration to any alternative to the main focus of the mediation, the consequence of which was the possibility envisaged by Mr Rush that agreement would be reached on a higher price than was necessary for Infraco to continue with the project. Mr C Smith accepted that the negotiating team lacked a clear idea of the cost of separation and re-procurement, and that this would have had a bearing on their ability to make a rational judgement on an appropriate price to pay for Phoenix [PHT00000053, pages 38 and 51].

19.229 Increasing the estimated cost for separation and re-procurement, as CEC’s negotiators did the day before the mediation, raised the price that those negotiators could justify agreeing for Phoenix, which in turn increased the prospect of a deal being agreed at mediation. A last-minute adjustment of £150 million to the cost estimate substantially improved the prospects of CEC’s negotiators leaving the mediation with a deal. The circumstances in which it was done, however, do not inspire confidence that the £150 million increase was grounded in any particularly strong evidence or analysis.

19.230 From paragraphs 19.222 to 19.229 above it appears that there is no record of the detailed breakdown of the £150 million adjustment. Mr Coyle, one of the authors of the Smith and Coyle report, could not recall how that figure was calculated [PHT00000010, pages 60–64; WED00000134, Part 3, page 0249]. I do not consider that that report provides any clear explanation of the adjustment.

19.231 Before considering the circumstances in which the £150 million adjustment was made it is important to bear in mind that Mr C Smith was wary about estimates provided by tie. He had a “gut instinct” scepticism about tie’s cost estimates in general, on the basis that they were routinely lower than others’ and he was sceptical that separation and re-procurement would be less expensive than the Phoenix option [PHT00000053, pages 21 and 39 onwards]. His evidence was that there was no ‘feel’ for what the cost implications of separation might be; and that no one knew if a new contractor would be willing to take on the project, or what premium they might charge [TRI00000143_C, page 0011, question 26 and page 0013, question 34]. He said his scepticism was shared by Mr Rush and Mr Robson. I accept that Mr Rush shared that scepticism [Mr Rush TRI00000141_C, pages 0035–0036, answer to questions 93 and 94]. However, I have reached a different view about the support that he seeks for his scepticism from Mr Robson. In email correspondence with the Inquiry Mr Robson told the Inquiry that he had no background or experience in project costs [WED00000653]. I consider it unlikely that if he had any views about costs they would have had any meaningful influence compared with the views of Mr Smith and Mr Rush, who, given their professional backgrounds, had more relevant experience in the matter.

19.232 Mr C Smith gave evidence to the Inquiry about the circumstances surrounding the £150 million adjustment [PHT00000053, pages 46–55]. From that evidence I have concluded that he was instrumental in that adjustment, which emerged following a meeting with Mr Coyle and possibly Mr McGougan. Of those three, only Mr Smith was a quantity surveyor, and by his own admission he had a very limited knowledge of the facts and circumstances of the project [ibid, pages 18–20, 36]. Mr Coyle and Mr McGougan were accountants with no particular expertise in project costs; and, as will be noted below, Mr McGougan explicitly gave evidence that he did not know how to quantify the risks. Mr Smith described making “round number” provisions for the exclusions in SP4 of the Infraco contract. The £150 million adjustment was, at least in part, a high-level, “gut instinct” adjustment. Mr Smith did not discuss this with tie’s quantity surveyors and he confirmed that he did not go through the calculations “line by line” with them, although his adjustment would have been added to the “deck chair” spreadsheet that would be available to the remainder of the team. The decision to accept the adjustment rested with Dame Sue Bruce and Mr Emery.

19.233 Since Mr C Smith had been engaged at the instigation of Dame Sue Bruce to advise her, based on a relationship of trust which had developed between them, and was also an experienced quantity surveyor, it seems to me likely that Mr Smith’s views on the risk associated with separating and re-procuring would have had a significant influence on Dame Sue Bruce.

19.234 Mr McGougan provided a different perspective on this adjustment. When asked whether he thought that the settlement figure was reasonable, he said that he was prepared to support the settlement as being affordable but demurred from confirming that he thought it was reasonable. He said it was very clear to him that the risks associated with termination and re-procurement were not fully built into tie’s figures. He did not recall a figure of £150 million, and did not himself know how to value the various risks, but said:

“The key thing for me was … to go for … the option with least delay and least risk which was – to my mind, was [sic] clearly settlement, and if we paid more for that through these prices than going out and reprocuring, then that could still be better value for money … because of all the delays and all the risks attached to that second option” [PHT00000043, pages 92–93];

“I was clearly seeking to get to an agreement on settlement because the risk of not having an asset at the end of this process, after all the city had been through, and all the costs that had been incurred, was to my mind much greater under termination and reprocurement than reaching an agreement on settlement” [ibid, pages 89–90].

19.235 He noted that tie agreed that there were a lot of risks that were difficult to quantify. Mr McGougan’s evidence in this respect supports the concerns expressed by Mr Jeffrey to Dame Sue Bruce that the proposed settlement price was unjustifiable to which he received the reply: “[t]his is about more than money” [TRI00000097_C, page 0058, paragraph 354], suggesting that the preference for an option which might be more expensive than the alternative possibility was not dependent on cost alone. I refer to this in paragraph 19.256 below.

19.236 Mr Murray of tie accepted that it was always going to be difficult to assess the cost of the separate and re-procure option, because of the variables and unknown factors associated with it. He also did not recall a figure of £150 million, but considered that it was likely to be made up of:

“significant risk allowances added to the calculated figures when CEC advisors were considering and overviewing the final figures. The final allowances were hugely subjective and I don’t think that I concurred with them at that time” [TRI00000249, page 0014, paragraph 24].

19.237 Later in the same answer he described the risk allowances as “speculative and highly subjective” and confirmed that he did not concur with their magnitude and would have said so at the time [ibid].

19.238 Mr Smith said that one reason why preparations focused on the Phoenix option was the time that it would take to complete a thorough exercise on separation. Moreover, it proved very difficult to place a value on the separation option [PHT00000053, page 25]. He accepted that the preference for Phoenix over separation was established before completed cost estimates were available. Indeed, the Phoenix option was preferred over separation for reasons other than cost, being the risk of integrating a new contractor’s system with what had already been built, and the risk that other contractors might not be willing to step in to the Edinburgh project given its troubled past [ibid, page 27]. Mr Rush considered that, if the works had been re-tendered, the prices obtained “would have had large premiums above market because of the toxic reputation the project had” [TRI00000141_C, page 0037].

19.239 As is noted in the Smith and Coyle report the effect of the £150 million adjustment was to take the estimated cost of separating and re-procuring to “at least £800m” [WED00000134, Part 3, page 0235, paragraph 7.6]. This was the figure at the top end of the range that Mr Rush had proposed as a “prudent estimate”
for separation as early as 27 February 2011 [CEC02084651]. Although the basis for the figures in the range between £765 million and £800 million is not clear, it may be linked to the GHP report of 24 February. That report, as noted above, expressed views that were heavily qualified.

Conclusions: preparations for mediation

19.240 Taking all this evidence together, I reach the following conclusions.

• tie’s estimates of the cost of separating and re-procuring were incomplete by the time of mediation.
• That was at least in part a consequence of resources being limited, and priority in allocating them having been given to the Project Phoenix proposal, which had been identified as the preferred option before detailed cost estimates were available. That preference had been established among CEC’s senior officials as the quickest and least risky means of having a tram line completed, although not necessarily at the cheapest price.
• By the time of the mediation, the “external” advisers, including in particular Mr C Smith and Mr Rush, had come to the view that separating and re-procuring was risky and, as a consequence, likely to be expensive. The extent of that expense was not known or assessed with any precision.
• Due to the lack of time for tie and CEC to prepare, adjustments to reflect these considerations were made only on the day before the mediation.
• Insofar as those adjustments related to the risks of separating and re-procuring, they were highly subjective and open to debate. They were of a magnitude that was unacceptable to Mr Murray, the quantity surveyor with the most detailed understanding of the project costs of all those who were at mediation.
• The effect of the adjustment was to increase significantly the amount that CEC’s negotiators could justify paying for a Phoenix-based deal with BSC, and therefore the prospects of a settlement price being agreed at the mediation.
• The adjustment also meant the option preferred by CEC’s officials went from being more expensive than the alternative to being less expensive.

19.241 This is, in my view, an unsatisfactory feature of CEC’s preparation for mediation. The fact that an adjustment of such magnitude and importance was made at such a late stage casts doubt on the quality of that preparation overall. It is a matter of considerable concern that a highly subjective adjustment, about which there was a lack of consensus and an absence of objective calculation, should be introduced on the eve of the mediation, particularly as its impact resulted in the preferred option of CEC’s officials becoming the least expensive one. It created the impression that their preferred option had been subjected to greater financial scrutiny than in reality and affected the settlement price that CEC’s negotiators could justify agreeing.

Negotiations at mediation

19.242 The Smith and Coyle report describes the exchange of offers and counter-offers at the mediation. BSC’s Project Phoenix proposal from 24 February was the opening offer. For the work of BB, Siemens and SDS, the Phoenix proposal was a price of £384 million. According to the report, CEC’s first offer for these works was £304 million. The rationale for this figure was that “there were still a significant number of exclusions that sat outside the off-street price which were estimated at £80m” [WED00000134, Part 3, page 0235, paragraph 7.7]. £80 million was the upper figure derived from Mr Bell’s calculations of 4 March (see paragraphs 19.172 and 19.173] above). The basis for CEC’s opening offer therefore appears to have been to deduct from BBS’s proposed price the most pessimistic estimate of the costs that tie considered the Phoenix proposal still left it with. This was logical because of CEC’s objective of negotiating a guaranteed maximum price. It indicates, however, that the negotiating ground was BSC’s Project Phoenix proposal rather than tie’s calculation of BSC’s entitlement under the Infraco contract.

19.243 CEC’s offer of £304 million was rejected, as was a counter-offer from BSC. According to the report:

“CEC then replied with a final offer of £362.5m for the off-street section, with no exclusions and Infraco taking all the risk with the exception of minor utilities.” [ibid]

19.244 On the face of it, that represents significant progress by CEC at the mediation, at least when BSC’s Project Phoenix proposal is taken as the benchmark. It indicates that, as well as negotiating a reduction of £21.5 million in the price sought by BBS for its works (from £384 million in the Project Phoenix proposal, to £362.5 million), CEC also successfully negotiated for the removal of most of the exclusions and risks which tie had valued at £80 million, albeit on a pessimistic basis. This was described by Mr Nolan as a “massive point”, which took a further day to resolve after the price had been agreed [PHT00000046, pages 204–206].

19.245 Based on the agreed off-street works price of £362.5 million, the report gives an estimate of £743.5 million for the total project cost of building a line to St Andrew Square. That, however, assumed a cost for the on-street works of £22.5 million, as opposed to the £39 million proposed by BBS at the mediation for those works. In estimating the total cost of the project to St Andrew Square it would seem more appropriate to use that latter figure. Doing so gives an estimated overall cost of £760 million, based on what was known at the mediation. Indeed £39 million was itself below the £47.3 million target price ultimately agreed for on-street works (paragraph 19.602 below).

19.246 Another explanation of the basis on which CEC’s negotiators agreed at mediation to the price of £362.5 million is offered by Mr Rush. An email he sent to Mr Nolan of McGrigors on 14 March 2011 is the only other written record known to the Inquiry summarising decision making by CEC’s negotiators at the mediation, and it is the only one that is almost contemporary to the mediation [WED00000582].

19.247 It also refers to the meeting of the CEC and tie teams, and their advisers, on the day before the mediation (7 March). It notes that:

“The discussions were inconclusive other than there was an understanding that the ‘trigger point’ for rejecting a Project Phoenix Offer was in the region of £740 million for all costs.” [ibid]

19.248 It describes the agreed price as producing an estimated total project cost inside that trigger point.

19.249 This email therefore indicates that, the day before the mediation, the CEC team identified £740 million as an upper limit on what would be an acceptable price to pay for the entire project. If a deal based on Project Phoenix would lead to an overall price higher than that, the email indicates that those negotiating for CEC were inclined to reject it.

19.250 Since this email is closely contemporary with the mediation, it carries weight. I accept that it accurately reflects Mr Rush’s understanding of events at the time. Dame Sue Bruce recalled having:

“a line in the sand which we had set for ourselves to draw back and reflect … 740 was deemed to be the point at which we would have to give serious consideration to the advice we would then give back to Council about the options” [PHT00000054, pages 39–40].

19.251 The email does not explain how the £740 million figure was fixed. Dame Sue Bruce could not explain it [ibid, page 40], nor could Mr Coyle [PHT00000010, page 95]. Mr Emery had no recollection of a trigger point, or the relevance of the figure of £740 million, but did not dispute it [PHT00000052, pages 54–55]. Mr C Smith did not recall a figure of £740 million, but did recall an upper limit being established and accepted it was, in fact, the most important figure before going into mediation [PHT00000053, pages 63–64]. He referred to the frustration of the senior negotiators that it was established so late, and said:

“it would have been a more well managed process immediately prior to mediation if that figure had been fully embraced by all parties” [ibid, page 64].

19.252 That is apparently a reference to the refusal of tie’s senior management to agree the figures.

19.253 Mr Rush’s email about the £740 million “trigger point” can be reconciled with the Smith and Coyle report. In my view, on the balance of probabilities, the CEC negotiators considered that they would have to give serious consideration to separating from BSC and re-procuring the project if the Phoenix price then under discussion would result in overall project costs of £740 million or more. A trigger point at that level indicates that they did not take full advantage of the £150 million adjustment that had been discussed the day before: had they done so, the “trigger point” would have been £796 million to £848 million. In the event, the price that they agreed gave rise to an overall estimate of £760 million, which was £20 million above the trigger point and between £62 million and £114 million higher than tie’s estimate of the cost of separating and re-procuring [TIE00355078; WED00000134, Part 3, page 0234, paragraph 7.3].

19.254 It is relevant at this point to consider the remainder of Mr Rush’s email [WED00000582]. In that email, Mr Rush says that, after BSC made its revised proposal at mediation:

“It emerged that CEC were in need of making progress which avoided political damage at this time. A response was discussed which gave CEC absolute price certainty and being subject to funding did not commit them to the deal.”

19.255 This indicates that those negotiating for CEC were under pressure to leave mediation with a deal. I consider that undoubtedly to have been the case. When this passage was put to Dame Sue Bruce, she explained that:

“The Council also had to consider the wider implications for Edinburgh. So all the focus was on the technical to-ing and fro-ing of this contract, but surrounding that was the reputational damage to the city, the damage to traders, to householders, the fact that the city was busy, there were festivals. So there were other risks that the Council was carrying which added to its consideration.” [PHT00000054, page 42; see also Mr C Smith PHT00000053, page 67.]

19.256 These were factors beyond the direct cost of the project, but nonetheless pertinent to decision making about it. That perspective was reflected in Mr Jeffrey’s evidence about what Dame Sue Bruce had said to him during the mediation, in response to him having strongly expressed the view that the price under discussion was unacceptable:

“This is about more than money.” [TRI00000097_C, page 0058, paragraph 354.]

19.257 In his statement to the Inquiry, Mr Rush said:

“Early in the (I think 4th) morning it appeared that the mediation was about to break down. I drafted a skeleton of what I thought would break the dead-lock and Sue Bruce was enthusiastic about it. It had the majority backing of those involved, including Vic Emery, Andrew [sic: Alastair] Maclean and the representative from Transport for Scotland [sic]. At that point, I had no further input. Sue Bruce, Vic Emery and I think Nigel Robson met the three executives from Infraco’s partner companies. An agreement was reached.” [TRI00000141_C, page 0033, paragraph 6; see also PHT00000033, pages 174–179.]

19.258 Dame Sue Bruce did not demur from Mr Rush’s recollection.

19.259 This indicates that it was Mr Rush who proposed the £362.5 million figure and that he proposed it because he thought it would break the deadlock. In other words, it was a pragmatic proposal, reflecting his instinct for the level at which a deal might be done. I consider that his proposal will have been influenced, at least in part, by the £740 million “upper limit” discussed the day before the mediation. As I have noted above, the agreed price in fact led to an estimated cost of £760 million. The justification for exceeding the upper limit was, in my judgement, the political imperative that CEC’s negotiators leave the mediation with a deal that could be put to the councillors.

19.260 The political imperative was not, in my opinion, confined to the local authority; it included Scottish Ministers. Mr Swinney confirmed that he was interested in a deal being reached at mediation. That is understandable because Scottish Ministers had offered a grant of £500 million towards the project and had paid a substantial proportion of that to CEC. However, it appears that immediately before going to discuss Mr Rush’s proposal with the principals of the companies in BSC Dame Sue Bruce confirmed that she “could go for that” proposal and Mr McLaughlin telephoned “John Swinney and got his approval” [Mr Rush PHT00000033, page 179]. In his evidence Mr Swinney stated that Mr McLaughlin did not require his approval but Mr McLaughlin had telephoned to let him know how it was going and commented:

“What I was interested in was a deal being arrived at that would lead to the completion of the project, and my approval for the terms of that were not required and I did not give them.” [PHT00000050, page 139.]

19.261 I have difficulty in accepting Mr Swinney’s evidence on this matter. There is no doubt that he was interested in securing the completion of the project. He had had meetings with Councillor Dawe, the Leader of the Administration at CEC, designed to ensure that progress was made. However, In the course of any negotiations one might expect there to be several proposals and counter proposals and it is not possible to provide reassurance of the type sought by Mr Swinney until agreement has been reached, The negotiations at mediation were no different in respect that various proposals and counter proposals had been made and rejected and towards the end of the mediation there was a prospect that negotiations had broken down. Mr Rush drafted a compromise memorandum of understanding that he thought might break the deadlock and Dame Sue Bruce confirmed that its terms were acceptable to her. Mr Rush thought that it was at that point that Mr McLaughlin telephoned Mr Swinney after which the principals from each negotiating team met and reached agreement. If the genuine purpose of the call was to provide Mr Swinney with the reassurance sought by him, it was premature. Mr McLaughlin could not reassure Mr Swinney that the project would be completed until an agreement had been reached that would have that result. I have concluded that the telephone call was made before the latest proposal was made to BSC and in circumstances where various proposals had previously been rejected. I have also accepted Mr Rush’s impression that the purpose of the telephone call was to obtain Mr Swinney’s approval of the proposal [PHT00000033, page 179]. Although I am unable to determine what was discussed between Mr Swinney and Mr McLaughlin on the telephone, I have rejected Mr Swinney’s evidence about the reason for the telephone call. My assessment of the evidence of Mr McLaughlin is also relevant in this regard.

19.262 Mr McLaughlin confirmed telephoning Mr Swinney and gave similar evidence to the Minister to the effect that the purpose of the call was not to seek Mr Swinney’s approval for the deal that was about to be offered but to provide him with an update on the progress of the mediation and to give him an indication of the sum likely to be paid [PHT00000011, page 185]. His explanation for providing an update at that particular point and for giving him an indication of the likely settlement figure does not bear scrutiny. Mr McLaughlin’s original justification in his evidence for Mr Swinney’s interest in the settlement figure was that the grant from Scottish Ministers was £500 million and the Minister wanted to make it clear that any excess over £545 million had to be borne by CEC [ibid, page 186]. That was clearly untrue. Mr McLaughlin agreed that it was self-evident before going to mediation that the figure for the project would exceed £545 million. He also accepted in his evidence that for almost four years before mediation the Minister’s position about CEC’s sole liability for any excess over £545 million had been made plain [ibid, page 187]. He then sought to justify telling the Minister about the proposed settlement figure by saying that “there was a natural interest in what the final cost of the project was going to be and what the implications of that would be for the Council” [ibid, pages 187–188]. The “natural interest” in the final cost of the project and the implications for CEC may well have been of political interest to Scottish Ministers ultimately but in the first instance they were the practical concerns of CEC. Moreover, I do not understand why it was felt necessary to satisfy the “natural interest” of the Cabinet Secretary before the settlement proposal had been made, far less accepted, unless it was to seek his approval for the proposed offer in the sense mentioned in paragraph 19.261. The timing of the telephone call was clearly significant. In all the circumstances I have rejected Mr McLaughlin’s explanation for the telephone call as not credible.

19.263 I do not understand why Mr Swinney and Mr McLaughlin felt obliged to obscure what transpired in their telephone conversation or its true purpose. The timing of the telephone call immediately before Dame Sue Bruce made the final offer to the contractors tends to support Mr Rush’s impression that it was to seek the Minister’s approval before the offer was made. The lack of candour on this matter by Mr Swinney and Mr McLaughlin and Mr McLaughlin’s attempted justification for making the telephone call simply gives rise to suspicion as to the true purpose of the telephone conversation. As with all witnesses who gave evidence in person, they testified on oath and their lack of candour calls into question their integrity.

19.264 Mr Rush referred in his oral evidence to having written a “rough” calculation down, and to his belief that Mr C Smith would have kept it [PHT00000033, pages 175–176]. The Inquiry has not been able to identify any such calculation, and the Smith and Coyle report [WED00000134, Parts 1–5] does not contain one. Mr Rush was asked if his figures were based on an assessment of BSC’s entitlement and said:

“No, they would be judgement figures at that time … I would judge, from what I was told, and what I’d seen happening at the mediation, what figure should settle it.” [PHT00000033, page 180.]

19.265 Dame Sue Bruce said:

“I cannot imagine for a minute that Tony Rush would have recommended a figure to me based on his technical knowledge of construction that he didn’t think was just. And the backdrop to that would have been the finance figures probably with the finance team and the background figures with the tie team.” [PHT00000054, page 52.]

19.266 In my view, that is over-optimistic: the price was not fixed by considerations of what was “just”. It was simply the lowest sum that, in Mr Rush’s judgement at the mediation, BSC could be persuaded to accept. It was the price CEC had to agree to pay to get a deal. Dame Sue Bruce, under questioning from senior counsel to the Inquiry, came to accept that [ibid, pages 55–60].

19.267 Mr Smith said that he was never asked to agree or to “interject or reject” the figure and that Dame Sue Bruce and Mr Emery received advice about the price from Mr Robson, Mr Rush and Mr Coyle [Mr C Smith PHT00000053, pages 75–76]. From October 2010, Mr Robson was engaged by tie, and then CEC, to advise upon the mediation, but in an email to the Inquiry said that he had “no background or expertise in engineering costs/costings, and thus had no input into these figures” [WED00000653].

19.268 I do not consider that Mr Robson would have been in a position to provide meaningful advice on what would be a reasonable price to pay. Nor do I think that Mr Coyle would have been able to provide such meaningful advice, based on my assessment of his evidence and his lack of recollection about the project costs noted above. Mr Rush’s input on the price was focused on what would achieve a settlement, rather than what was reasonable or due. It is interesting in this regard that Mr Rush thought that Mr C Smith verified the cost estimates for the mediation team [TRI00000141_C, page 0035]. This conflicts with the position adopted by Mr Smith. His various responses to questions about the price of £362.5 million for off-street works were that he could not comment on the figures, he could not explain them or that he did not know the answer to the questions [TRI00000143_C, page 0037 onwards]. As noted in paragraph 19.269, there is no doubt that he was aware of the proposed settlement figure as he was in the room when it was discussed before Dame Sue Bruce, Mr Emery and Mr McLaughlin met the principals of BSC when the figure was advanced. I have difficulty in accepting his evidence that he could not comment on it. He was a quantity surveyor who would, or should, have been interested in the derivation of figures that his client was being asked to agree and use as a basis for settlement of the mediation. He had been engaged to advise the Chief Executive of CEC (Dame Sue Bruce) based upon a relationship of trust that had developed between them. It is inconceivable that his advice on Mr Rush’s settlement figure was not sought. Whether or not he was asked to comment on it, it seems to me that he should have inquired about the derivation of the figure and thereafter considered its justification to enable him to advise Dame Sue Bruce about it, particularly in view of his position as her special adviser. I consider that it is probable that he was aware that the proposed settlement figure, like the addition of £150 million to tie‘s calculations for termination and re-procurement on the eve of the mediation, was a high-level “gut instinct” figure incapable of objective verification which it was hoped would settle the mediation. As a professional adviser present at the meeting to consider the proposed settlement figure, he ought to have taken a proactive role in the scrutiny of the figure and in providing advice to Dame Sue Bruce. It does not appear that he did so. It is disappointing that in his evidence he sought to distance himself from any omission to provide such advice which might have influenced the ultimate decision to propose the settlement figure.

19.269 Dame Sue Bruce and Mr C Smith were keen to characterise the agreement on price as a collective decision of all those present at the mediation. Mr Rush also referred to an “almost unanimous decision” [PHT00000033, page 184]. When it was put to Dame Sue Bruce that there was no report available at the mediation to support a price of £362.5 million she said:

“But we had the information in the room. We had the combined knowledge that was in the room, all of the advisers, everybody’s opinion coming together to state that this was a reasonable sum for what we had to do … I think it was an exercise of collective judgment.” [PHT00000054, pages 48 and 52.]

19.270 Mr C Smith said that:

“no one in the room prior to those numbers being passed through to the consortium’s meeting room, no one in the room said: stop, don’t go there, don’t take those numbers out … Everyone understood that’s what was happening and, as I say, no one stepped in front of the door to stop that process.” [PHT00000053, page 57.]

By the same token, however, his recollection was that no one openly declared agreement and he referred to comments from Mr Jeffrey and Mr Bell that the sum mentioned was “generous” [ibid, page 77].

19.271 I accept that the price proposals were discussed within the CEC/tie mediation team, and that this will have included input from those with a detailed understanding of the project and its costs. I reject, however, the suggestion that agreement on the price was an exercise of collective judgement of the entire team that this was a reasonable sum to pay. It is clear that at least two members of tie’s senior management who were present at the mediation (Mr Jeffrey and Mr Murray), and possibly a third (Mr Bell) did not agree with it [Mr Emery TRI00000035, page 0033, question 113; cf. Mr Bell PHT00000025, pages 53–55; Mr Jeffrey PHT00000033, pages 72–76; Mr Murray PHT00000055, pages 103–106; Mr Coyle PHT00000010, pages 87–88]. Mr Emery accepted that he, as tie Chairman, had to override their views to agree the price [PHT00000052, page 51]. Indeed, the £150 million adjustment to tie’s cost estimates the day before mediation made plain that their views were being overridden. The price must have had Mr Rush’s support, as he had suggested it, but, as noted above, in my view he did so not because he considered it a reasonable price but rather because he thought it might achieve a settlement. Although Mr McGougan did not consider the proposed settlement to be reasonable, he thought it was a price worth paying because settlement was strategically better than other options and resulted in a better chance of providing an asset for CEC [PHT00000043, pages 88–91]. On the other hand, Mr David Anderson did not consider that the settlement price could be justified when reference was made to Mr Rush’s analysis of Project Carlisle and his estimate about nine months previously for the provision of a line to St Andrew Square at a cost considerably less than £776 million. In his view the settlement price was excessive to the extent of between £50 million and £75 million. He stated that the cost of £13 per kilometre was a benchmark figure for tramways in the United Kingdom but the settlement figure made the Edinburgh tramway the most expensive in the world, when measured by cost per kilometre [ibid, pages 186–189]. The original estimated cost at contract close for the works to be undertaken by BBS was £246 million for the entire route from the Airport to Newhaven – a distance of 18.5 km, representing the industry benchmark of £13 million per kilometre. That does not take into account the distinction made by Mr Foerder that the price of £246 million was subject to the pricing assumptions in SP4. The route from the Airport to St Andrew Square is approximately 14 kilometres. The settlement included the price of £362.5 million agreed at mediation for the off-street works to Haymarket plus the cost of the on-street works from Haymarket to St Andrew Square. BBS had proposed £39 million as an estimated cost of these on-street works although ultimately agreement was reached on a target price of £47.3 million for them. Even if one takes the lower figure of £39 million, the average cost per kilometre exceeded £28 million and was more than double the industry benchmark mentioned above. While one cannot compare the two prices without making an adjustment for the pricing assumptions in the original contract, I consider that the average of more than £28 million per kilometre provides support for the views expressed by Mr David Anderson mentioned above. Mr C Smith’s position was that he was neither consulted on the price, nor held any view about whether an offer of £362.5 million was appropriate [PHT00000053, pages 74–75]; although Mr Coyle contradicted that [PHT00000010, page 89]. For the reasons given in paragraph 19.268 above, I prefer the evidence of Mr Coyle and reject Mr Smith’s attempts to distance himself from the settlement figure. In summary, there was clearly not unanimity about the proposed settlement figure. I am not prepared to infer that those who did not declare opposition thereby endorsed that figure. No one had authority to stop Dame Sue Bruce and Mr Emery making the offer that they had decided to make; and, given the debate which had preceded it, and the political pressure to emerge from mediation with a settlement, it is unrealistic to imagine that the representatives of tie would have done so when their views about the excessive nature of other figures used in the mediation had been rejected. As a special adviser, Mr Smith was in a different position and it is possible that Dame Sue Bruce took some comfort in the proposed settlement figure from his silence.

19.273 Furthermore, even those who agreed the figure did not all accept that it was a good deal. Mr Emery described it as a “pig deal”, “where you have to carry on, if that is what you want to do” [PHT00000052, page 52]. In other words, it was the price that had to be agreed to get a resolution [ibid, page 49 onwards]. That is consistent with the view I have reached about Mr Rush’s evidence. Mr Emery recalled that no one in the tie/CEC team thought the deal was good value. Thus purely in financial terms the deal could not be justified objectively and it is probable that the settlement price was excessive. It seems to me that the justification for the offer in such circumstances depended upon other factors based upon political considerations relating to past delays and their effect on businesses and residents in Edinburgh as well as the damage to the reputation of the city.

19.274 Dame Sue Bruce came to agree:

“there had to be a pragmatic approach taken to reaching an outcome that was deliverable, and something that was justifiable in financial terms, but we all recognised that we didn’t think it was the best value for money.” [PHT00000054, page 61.]

19.275 In that regard it seems to me that there may be a tension between a settlement that “was justifiable in financial terms” and a pragmatic approach to reach an outcome that was deliverable. The latter involved taking into account political and other considerations, such as those mentioned in paragraph 19.274 whereas justification in financial terms would require an analysis of the proposed figure to show how it was reached and that it was prudent from a financial perspective. I am not satisfied that the evidence allows me to conclude that this settlement was justified in financial terms.

19.276 Mr C Smith did not accept that no one thought the price was good value. He spoke of a feeling of relief in the room when the offer was passed to the consortium and observed that nobody in the tie/CEC team voiced an objection or tried to stop the offer being passed to BSC. He thought it was good value, in the sense that it:

“was the only value that was going to deliver something that was worthwhile, but it was good value” [PHT00000053, page 57].

19.277 The deal was acceptable in price terms, in his view, because it was less expensive than the alternative, of separating and re-procuring [ibid, pages 67–69]. That is, of course, far from a view that the price was an objectively reasonable one for the work; and is, rather, simply an assertion that the alternative would be worse.

Negotiations at mediation: summary

19.278 In summary, an assessment of decision-making at the mediation is very considerably hampered by the lack of documentary evidence about it. The decision at mediation to agree a price of £362.5 million was taken by Dame Sue Bruce, as the head of the CEC/tie negotiating team, with advice and assistance from other members of that team. That decision was taken over the objections of tie’s senior management. The price was selected, and proposed to her on the pragmatic grounds that it was a price which BSC might be persuaded to accept, and not because it represented a fair or reasonable assessment of tie’s liability to BSC under the existing contract terms. Indeed, there is no evidence recording how the CEC negotiators at mediation handled any of the arguments that tie had developed; or to what extent they were used, if at all, to negotiate a reduced price. Nor, in my view, was there any indication available to the CEC negotiators at the mediation that the price represented an objectively reasonable price for the work. The estimated total costs of the project based on the agreed price were lower than the estimated total costs of separating from BSC and re-procuring the works, once Mr Smith’s adjustment of £150 million was included in the estimate. That adjusted estimate came very late in the day, was highly subjective, and was regarded as excessive by those with the most intimate knowledge of the project. The impression that I formed was that this last-minute adjustment of that scale was made to enable the negotiators to justify concentrating on a Project Phoenix solution on the basis of cost as well as political pragmatism, which was the domain of councillors.

19.279 The deal being done in this way reflected the following factors:

• CEC’s need to emerge from the mediation with a deal;
• the relative lack of knowledge within the CEC negotiating team about the detailed facts and circumstances of the project;
• the instinctive aversion of CEC and its advisers to the risks and uncertainties inherent in seeking to re-procure the project;
• the consequent lack of any realistic alternative to a revised deal with BSC; and
• the relative lack of time that the CEC negotiating team had to prepare for the mediation.

Assessment of the increased price agreed at mediation

Comparison with contract price

19.280 It is important to recognise the magnitude of the price increase crystallised at the mediation. The CEC negotiators had agreed in principle to pay £362.5 million for the off-street works, Siemens’ materials and equipment, and the settlement of all claims. BSC had proposed a price of £39 million for the on-street works. The total price for the Infraco works, as it then stood was, therefore, £401.5 million. That was an increase of £155.5 million over the price originally specified in the Infraco contract.

19.281 However, the price specified in the Infraco contract was for a line to Newhaven. The mediation agreement was for a line that stopped at St Andrew Square. As well as the increase in price for the Infraco works, the cost to CEC of resolving the Infraco contract disputes therefore also included giving up BSC’s obligation to build the line between St Andrew Square and Newhaven that had been part of the original contract scope. An indication of the value of that loss is that the capital cost for building the extension to Newhaven was estimated at £165.2 million in the Updated Outline Business Case of 2017 [CEC02086792, Part 1].^[24]

19.282 Taking that into account, the cost to CEC of the Infraco contract civil engineering and systems works to build a tram line between the Airport and Newhaven increased from £246 million to something more like £567 million, or 230 per cent of the original contract price. That does not take into account any of the other cost increases outside of the Infraco contract, such as increased project management costs or the borrowing costs which had to be incurred to fund the new, higher price.

19.283 That 230 per cent figure may be contrasted with the assurances given to the Council in the report by the Chief Executive (Mr Aitchison) dated 23 April 2008. That report was prepared for the CEC meeting on 1 May 2008. It advised councillors of the imminent award of the contracts for the Edinburgh Tram Network (“ETN”) with a final price of £508 million and requested them to refresh the delegated powers already given to the Chief Executive to authorise him to instruct tie to enter into the contracts with BBS for the civil engineering and systems work and CAF for the manufacture and delivery of the tram vehicles. The report assured councillors that:

“95% of the combined Tramco and Infraco costs [had been] fixed with the remainder being provisional sums which tie Ltd [had] confirmed as being adequate” [CEC02083359, page 0001, paragraph 2.3].

19.284 In view of the terms of the report it is unsurprising that CEC granted the authority sought [CEC02083356, Part 1, page 0012].

Comparison with tie’s Infraco Entitlement calculations

19.285 The off-street works price agreed at mediation exceeded tie’s Infraco Entitlement calculations by a substantial margin: it was £64 million over the more pessimistic assessment made by tie in its Infraco Entitlement paper (£298.541 million) and £97.3 million over its more optimistic assessment (£265.185 million) [TIE00106500].

19.286 Dame Sue Bruce could not recall on what basis a price had been agreed that was so much higher than tie had calculated, except to say:

“We were in a mediation here, and trying to get a result.

“I can’t from memory tell you how we got to the exact figure, but it was a build-up of the previous information which is shown here, plus the elements that were brought to the table at mediation, plus the advice of our team of advisers. That’s how we reached the figure.” [PHT00000054, page 75.]

19.287 Mr C Smith could not explain how Dame Sue Bruce and Mr Emery justified offering a price that exceeded tie’s calculations. He could not recollect having seen Mr Murray’s Infraco Entitlement paper [TIE00106500; PHT00000053, page 79]. Having regard to the significance of that document in representing tie‘s assessment of the range of BBS’s entitlement, I consider that it is unlikely that Mr Smith would forget if he had seen it. On the assumption that he did not see it, it is a matter of concern that he did not see this document and take it into account in considering the proposed settlement figure at mediation. The alternative explanation for his failure to recollect seeing the document is that he had, in fact, seen it but rejected it without giving any reasoned explanation for doing so. That would equally be a matter of concern.

19.288 The Inquiry has, therefore, been unable to identify any reasoned connection between the price agreed at mediation and tie’s calculations of BSC’s entitlement under the Infraco contract.

Comparison with BSC’s Project Phoenix proposal price

19.289 The off-street works price of £362.5 million agreed at mediation was £21.4 million lower than BSC’s Project Phoenix price proposal. That discount was split among the consortium members as follows:

• £10 million off BB’s share;
• £11 million off Siemens’ share; and
• £360,336 off SDS’s share [SIE00000184].

Comparison with BSC’s claims by the time of the mediation

19.290 The mediation settlement can also be compared with the total value of claims that BSC had intimated by the time of the mediation. Deducting the £7 million relating to CAF, the total value of those claims was £166 million, of which almost £120 million was yet to be agreed, with a significant number of estimates yet to come [BFB00003290, Part 1, pages 0003–0004, 0062–0063, 0084 onwards].

19.291 It is therefore apparent, first of all, that the mediation settlement resolved a dispute over claims totalling more than £120 million in respect of changes.

19.292 It is also apparent that the uplift agreed at mediation in the cost of BBS’s work (£156 million, plus the loss of the line between York Place and Newhaven) was far in excess of the total value placed by BSC on all claims relating to the full scope (Airport to Newhaven) that had been intimated by the date of the mediation.

19.293 The value placed by BSC on claims made by the date of mediation is not directly comparable to the settlement price, firstly because it related to the full scheme and not the curtailed one agreed at mediation, and secondly because it was made up only of those claims already submitted, whereas the price agreed at mediation (at least in relation to the off-street works) was intended to cover all costs to completion.

19.294 Nonetheless, it is clear that the price agreed at mediation could not readily be reconciled to the claims that BSC had intimated to date. Furthermore, the Inquiry is not aware of any such reconciliation being carried out.

19.295 More significantly, despite the absence of accurate records of the approach taken by CEC/tie in the negotiations I have concluded that it is probable that no significant attempt was made to reduce the settlement price to reflect the fact that BSC’s claims were probably capable of significant reduction by negotiation as occurred with previous claims. Mr Maclean understood that agreement on the off-street works price was to settle all claims for Notified Departures, but did not know at what value [PHT00000008, page 125]. Mr Eickhorn was not aware of any analysis which would indicate at what value the off-street works price settled BSC’s claims [TRI00000171, page 0070, paragraph 167]. Mr Emery explained that the CEC/tie negotiators wanted a settlement that resulted in starting with a “clean slate” with no outstanding claims. In that situation one might have thought that the outstanding claims would have been scrutinised and attempts made to reduce the overall price to reflect reductions in the claims but it seems that no agreed value was placed on BSC’s accrued claims and in any event the CEC/tie negotiators considered that it was difficult, if not impossible, to value them [Mr Emery PHT00000052, page 69]. Mr C Smith accepted that:

“by reaching a settlement deal which settled all of the existing claims and which increased the price paid, in substance the Council were accepting that the claims made by the consortium were well-founded” [PHT00000053, page 81].

CAF

19.296 The original contract price for the supply of the tram vehicles was £55,781,634, with £2,275,806 for tram maintenance mobilisation [USB00000032, page 0003, clause 2.5].

19.297 The Project Phoenix price proposal included cumulative claims on behalf of CAF for all delays to date totalling €9.24 million (or £6.84 million at the assumed exchange rate of €0.7402 per pound). Other changes and provision for depot equipment took the total proposed cost to £65.3 million being the total of the two columns in the table entitled ‘TSA & TMA payments’ [BFB00053258, pages 0031–0032].

SDS

19.298 The original SDS price under the Infraco contract was £4,983,815, including £1.675 million of provisional sums [USB00000032, page 0003, clause 2.5]. The tables in Appendix 1.4 of the Project Phoenix Proposal contain a breakdown of the SDS price totalling £15,140,795 [BFB00053258, page 0033 onwards]. It included £10,156,980 for changes and new submissions, of which totals of £4,234,948, £500,000 and £1,157,593 were estimated costs of changes, disruption and prolongation claims respectively [ibid, page 0034]. It was noted that SDS’s claim against tie under the Novation Agreement for an incentivisation payment of £973,214, was not included in the Phoenix price [ibid, page 0035].

19.299 Of the off-street works price of £362.5 million, £14,780,459 was allocated to SDS [SIE00000184]. As was noted in paragraph 19.289 above, that was a reduction of £360,336 from their proposal.

Siemens’ explanation of its price increase

19.301 In detailed evidence to the Inquiry, submitted as a second supplemental witness statement on 18 March 2018, Mr Eickhorn explained how Siemens’ price evolved between the original contract in 2008 and the settlement agreed at Mar Hall [TRI00000276]. The discussion that follows is based on his evidence.

19.302 As was noted in paragraph 19.9, Carlisle 1 was for a shortened line between the Airport and the east end of Princes Street. Despite the shortened scope of work Siemens’ proposed price of £126,901,620 was about £25 million higher than its original contract price of £101,679,003. Part of the increase was attributable to Change Orders (£5.3 million), many of which gave finalised prices for items that had originally been provisionally priced. The reduction in work scope allowed savings of £3.7 million to be made, but these were more than cancelled out by additional costs of £26 million [CEC00183919, Part 1, page 0029 onwards]. Siemens attributed the great majority of these additional costs to delay: namely, increased preliminaries incurred through prolongation of the works and the resultant extended site presence by Siemens [TRI00000276, page 0005, paragraph 15.2]. The Project Carlisle 1 proposal was based on a service commencement date of 19 November 2012, which was nearly 16 months later than had been provided for in the original Infraco contract programme. It is therefore plain, and was plain from Siemens’ Carlisle 1 proposal, that any savings to be made from shortening the line were modest; and were more than offset by very considerable cost increases attributable to delay.

19.303 The second Project Carlisle proposal (“Carlisle 2”) was for a line from the Airport to Haymarket. Siemens’ pricing for Carlisle 2 used the same methodology for its calculations as for Carlisle 1 [ibid, page 0007, paragraph 23]. It included £20.6 million in extension of time costs, based on the projected delay in project completion to 18 December 2012 [ibid, pages 0005, 0015, 0017, paragraph 19, exhibits AE1 and AE3]. At £118.6 million the overall cost of this proposal was lower than Carlisle 1. That was because it proposed a line which stopped at Haymarket, entirely removing the on-street works.

19.304 Siemens’ price included an element for “system-wide” costs. Despite the curtailed scope of the Carlisle proposals, these barely changed: £41 million in the original contract price; £40.5 million in Carlisle 1; and £40.4 million in Carlisle 2 [ibid, page 0027, exhibit AE3]. In paragraph 19.151 above, I have accepted the distinction between civil engineering works and work on systems in calculating apportionment of costs arising from changes in the scope of work. In his evidence Mr Eickhorn explained that by the time of the Carlisle proposals in 2010 Siemens had either already incurred, or committed to, many of the system-wide costs, which mostly related to design and project management. For that reason, neither proposed shortened line resulted in a proportionate saving in these costs.

19.305 Siemens’ Project Phoenix price was calculated differently from the Carlisle proposals. It was a re-pricing for the revised scope of work, rather than a series of additions and deductions from the original price. Nonetheless, the foregoing background is helpful in understanding it.

19.306 The Project Phoenix scope of work was similar to that of Carlisle 2: a line between the Airport and Haymarket. Siemens’ Phoenix price proposal was £136.8 million, which was around £18.2 million higher than it had proposed for Carlisle 2.

19.307 Mr Eickhorn attributed that increase to three things:

• A longer period of delay. The Project Phoenix proposal assumed a completion date of 22 September 2013, nine months later than under Carlisle 2. That programme extension led to considerably increased costs. The nine-month extension arose because, firstly, the Phoenix proposal came five months later than Carlisle 2; and, secondly, in the interim, in October 2010, BSC had stopped work on any areas which were the subject of disputed Change Orders. The programme therefore had to take account of the time and cost involved in remobilising, which had not been the case at the time of the Carlisle 2 proposal.
• The Project Phoenix proposal was based on a reduced number of pricing assumptions, when compared with the Carlisle proposals. Siemens accordingly included higher risk provisions in its price to compensate for that.
• Siemens included finance costs in its Project Phoenix proposal to cover the cost of its cash-flow deficit attributable to the delay in payments by tie as well as costs incurred in hedging against adverse currency fluctuations during that delay.

(Siemens’ Project Phoenix price proposal includes £3.6 million for risk and £3.1 million for finance costs [BFB00053258, page 0027].)

19.307 Notwithstanding the reduction in scope, Siemens’ price included the cost of the completion of the design for the line from York Place to Newhaven as well as the cost of its materials and equipment for that section of the line. It had sought payment for these items in its Project Carlisle proposals, and in an even earlier proposal that it made in May 2010 [CEC01927619].

19.308 Mr Eickhorn explained that Siemens had already paid for these materials and equipment, and had either used them in construction or held them in storage. However, it had not received payment for them because the Infraco contract payment milestones relating to them had not been reached due to the project delays.

19.309 Siemens submitted that payment for the equipment and materials was wholly warranted because they had been manufactured and procured in accordance with the programme and then stored at cost to Siemens because of the project delays. I accept that submission.

19.310 The unfortunate consequence of any settlement including payment for the design to Newhaven and the equipment and materials mentioned in paragraph 19.309 was that CEC would have paid for materials and equipment and a design, which would not be needed for the curtailed scheme. It appears, however, that the wasted cost of this was not substantial. Mr Eickhorn estimated that 90 per cent of the materials and equipment bought by CEC in this respect were ultimately installed in the line that was built and Siemens managed to agree beneficial terms for the cancellation of materials that were no longer required because of the restricted route [TRI00000276, pages 0012, 0029, paragraph 52 and exhibit AE4; Mr C Smith PHT00000053, page 86]. In its closing submissions Siemens estimated the cost of the unused items at £3 million [TRI00000290_C, pages 0151–0153, paragraphs 445–446]. In the absence of evidence, I make no finding about the precise value of these items, but I accept that they are not substantial in the context of the whole project. It is possible that these items will be used in the extension but that remains to be seen and depends, among other things, on their condition after several years in storage [Mr Eickhorn PHT00000046, page 32]. CEC presumably has incurred costs in storing and insuring those items in the interim, but may save on cost inflation by having bought them sooner than required.

19.311 The most important conclusion about Siemens’ price is that delay was the primary and major factor in its increase. Although that is not immediately obvious from Siemens’ Project Phoenix proposal, it is clear enough when one considers the Project Carlisle proposals that preceded it.

19.312 The full cost impact of delay was not covered by the off-street works price. When the parties agreed that price at mediation, they did not also agree a specific programme for the remaining works [TRI00000276, page 0010, paragraphs 41–42; see also clause 8.1 of the Heads of Terms agreed following Mar Hall [CEC02084685]. Programme revision 3a was eventually agreed several months later with a service commencement date of 20 May 2014 – around eight months later than had been proposed in the Project Phoenix proposal. That programme extension was attributable to the inclusion of the on-street works which had not been part of the Phoenix proposal. The cost impact of that programme extension was addressed in the on-street price, as will be discussed further below.

19.313 Finally, it appears that immediately before the mediation CEC lacked any meaningful understanding of Siemens’ element of the Project Phoenix price proposal. In an email dated 1 March 2011 (seven days before the mediation), Mr Nolan requested:

“more detailed information in relation to Siemens’ PPP [Project Phoenix proposal] Price Breakdown …

“Siemens’ PPP of c £136.5m is double Siemens’ original price of c £68m (Airport to Haymarket). It is not clear what the basis for this increase is. There is no Schedule Part 4 PA1 issue in relation to Siemens’ work which has undergone little change since tender.

“Without further information in relation to Siemens’ PPP Price Breakdown meaningful analysis of it is not possible. Nor is it possible for tie and CEC to understand the basis for the very substantial increase which is being proposed.” [TIE00685959]

19.314 The same point was made by Dame Sue Bruce in her opening statement at the mediation [CEC02084575, page 0013].

19.315 Given the brevity with which Siemens’ price was presented in the Project Phoenix proposal, it is understandable that these points were made [cf. BFB00053258, page 0027]. I am satisfied, for reasons explained by Mr Eickhorn, that it was misconceived to suggest that £68 million was, or ever had been, Siemens’ price for the Airport to Haymarket section [TRI00000171, pages 0061–0062, paragraphs 133–134]. Further, tie had, in its Infraco Entitlement paper, estimated Siemens’ entitlement for that section at between £98.6 million and £103.2 million based upon tie‘s estimates and Infraco’s estimates respectively [TIE00106500, pages 0015–0016]. Against that background, I read Mr Nolan and Dame Sue Bruce’s comments as merely calling upon Siemens to provide more detail to justify its price, as a means of testing the robustness of the calculations in the Infraco Entitlement paper.

19.316 It remains the case, however, that there is no documentary evidence to explain on what basis those negotiating for CEC agreed to pay Siemens £125.881 million, which was its share of the £362.5 million agreed at mediation [SIE00000184]. That was around £25 million more than the range of £98.6 million to £103.2 million that tie had calculated as due to Siemens in its Infraco Entitlement paper [TIE00106500, pages 0015–0016]. The evidence of witnesses to the Inquiry added little. Mr C Smith was unable at the Inquiry’s oral hearing to explain the significant increase in the price that CEC agreed to pay Siemens, and indeed said he had never known how it was to be explained. Nor did he know if those agreeing the price on behalf of CEC had satisfied themselves that the increase was appropriate [PHT00000053, page 82]. Mr Emery confirmed that the settlement was “a deal to get the project up and running back [sic] again, and not in detail” [PHT00000052, page 74]. The CEC negotiators did not examine the numbers and reach a professional view about them, as tie had done. Mr Emery understood that there should be an increase in Siemens’ price because of the extension of time and some of the groundworks “[b]ut not to the level they claimed” [ibid, page 75]. Although Mr Eickhorn has explained the increase in Siemens’ price to the Inquiry, there is no evidence to confirm that the CEC negotiators sought, or were given, a similar explanation at the time. This is an unfortunate consequence of the lack of record keeping by CEC at the mediation. The tenor of the evidence of Mr Smith and Mr Emery is that they did not receive any explanation that would justify the increase in Siemens’ price. If that is the case it is a matter of concern as it might suggest that public funds were expended on a settlement which was excessive. On the other hand, if an explanation along the lines of that supplied by Mr Eickhorn to the Inquiry was given to the CEC negotiators they must have accepted responsibility for much of the project delay in agreeing the increased price. I repeat, however, how unsatisfactory it is that there is no written record to give the public the necessary reassurance that CEC exercised proper scrutiny before expending substantial sums of public money.

Explanation of Bilfinger Berger’s price

19.317 The Inquiry initially lacked an explanation of BB’s pricing in the Project Phoenix proposal. Mr Gough, who had been heavily involved in pricing Project Phoenix for BB, when first questioned by the Inquiry, said that he had “no memory of how the Bilfinger price was arrived at” [TRI00000040_C, page 0019, paragraph 9.5].

19.318 The Inquiry in due course recovered BB’s internal project reports [BFB00112166–BFB00112250 inclusive]. These were the subject of an unsuccessful court application by BB both at first instance and on appeal to preserve the confidentiality of certain information that they contained. After that court application was resolved in the Inquiry’s favour, Mr Gough was asked by BB to provide an additional witness statement, which he did [TRI00000295, page 0001, paragraph 2; the statement is dated 1 October 2018]. This statement was intended to explain how the positive project outcome for BB, revealed by the reports, came about [ibid, page 0001, paragraph 4]. In preparing his statement, Mr Gough was given access by BB to the Project Phoenix proposal and spent some time reminding himself about it [ibid, page 0002, paragraph 11]. As a result, he was able to provide a brief explanation of BB’s Project Phoenix pricing. The discussion that follows is based on Mr Gough’s comments and the Inquiry’s own interpretation of the available documents.

19.319 BB’s share of the original Infraco construction works price was £137.1 million [SIE00000227, page 0002]. That price included value engineering assumptions and provisionally priced items [USB00000032, page 0015].

19.320 Its share of the Project Phoenix price proposal was £231,837,820, broken down as follows [BFB00053258, page 0012].

• Direct cost (that is, sub-contractor costs): £149,993,600
• Items previously excluded from price: £8,058,450
• Indirect cost: £51,333,169
• Overheads (at 7 per cent): £15,716,821.06^[25]
• Profit (at 3 per cent): £6,735,780.45^[26]

19.321 I will now discuss these elements in turn.

Direct cost

19.322 The Phoenix price proposal included a detailed breakdown of the direct cost element of £149,993,600. It was broken down into work sections, in most cases by reference to the sub-contractor engaged by BB to carry out the work in each section. The breakdown showed the costs of each sub-contractor, broken down into preliminaries, construction costs, changes (including those already agreed, submitted but not agreed, and new submissions) and risk. The presentation is helpful, insofar as it allows one to see where the most significant cost changes occurred.

19.323 The direct cost total of c. £150 million was split: £27 million for the on-street works and £123 million for the off-street works [ibid, page 0013]. Those prices were compared with the original sub-contract prices quoted in the table of £12.3 million (for the on-street works) and £55 million (for the off-street works), being a total of £67.4 million. It is therefore apparent that:

• [t]he direct costs of BB’s sub-contractors more than doubled, from £67.4 million to £150 million;
• [t]he greater part of that increase related to the off-street sections (an increase of £68 million, from £55 million to £123 million); and
• [t]his proposal, for completion of a line only to Haymarket, included an element for the on-street works which was more than double the original price (an increase from £12.3 million to £27 million). It must be kept in mind that the parties ultimately agreed a target price of £34.9 million for BB’s part of the on-street works [see paragraph 19.582 below].

19.324 These increases were in part attributed to significant change. The changes shown may be summarised as shown in Tables 19.1 and 19.2:

Source: Project Phoenix Proposal Appendix 1.1 [ibid, page 0013]

Source: Project Phoenix Proposal Appendix 1.1 [ibid, page 0013]

19.325 From these figures, it is apparent that BB’s proposal incorporated its sub-contractors’ costs of £64 million for change, and that about £44 million of that had not previously been agreed. £51 million of the total change costs related to the off-street section.

19.326 The increase in the sub-contractors’ costs was also in part attributed to an increase in preliminaries and method-related charges. These figures are not presented in a way that allows one readily to ascertain what proportion of these costs was attributable to delay on the project. However, under the original Infraco contract programme the service commencement date was 16 July 2011. Any time after that was delay. In the table summarising direct costs in the Project Phoenix proposal, the figure for preliminaries and method-related charges from 1 April 2011 to completion is £16.988 million [ibid, page 0013, column 5]. I am unable to determine what proportion of that sum may be attributable to delay, but it is probably significant in view of the extent of the delay given in paragraph 19.327.

19.327 The price proposal also includes information on the sub-contractors’ programmes [ibid, page 0014]. Table 19.3 shows the following additional durations over the original sub-contract programmes:

Source: Project Phoenix Proposal Appendix 1.1 [ibid, page 0014]

19.328 The increased preliminaries included in the sub-contractors’ prices presumably reflect these programme extensions.

19.329 From this summary, it is apparent that the much greater part of the increase in BB’s sub-contractors’ prices (£64 million) was attributed to change and that a significant, but lesser, part was attributed to delay.

19.330 The direct cost element of c. £150 million also included £2.629 million for risk. Mr Gough explained that this was one of the three risk elements that BB had included in return for providing a fixed price. He explained that this particular element was to cover items such as design changes, programme and general risk identified by BB’s sub-contractors [TRI00000295, page 0002, paragraph 14.1.1]. Nearly all of this related to the off-street section [BFB00053258, page 0013].

Items excluded from price

19.331 The figure of £8,058,450 appears with the label: “Previous GMP Exclusions/Qualifications now priced”. There is no further breakdown or explanation of it in the Phoenix proposal. Mr Gough explained that it was BB’s price for reducing the number of exclusions that had been included in the Project Carlisle proposals. According to Mr Gough:

“[t]he evaluation of these exclusions was predominantly based on rates agreed in earlier tie Change Orders or Infraco Notices of tie changes for work of a similar nature and largely related to dealing with contaminated ground” [TRI00000295, page 0002, paragraph 14.1.3].

Indirect cost

19.332 The Phoenix proposal did not include any further explanation of the indirect cost of £51,333,169, except to show that it included an element for “risk/opportunity” of £5.04 million. Mr Gough explained that this element was another of the three risk allowances that BB had included in return for fixing a price for certain items that had previously been the subject of pricing assumptions and exclusions. This figure, he said, derived from a Monte Carlo calculation of the probability of certain risks being realised [ibid, page 0002, paragraph 14.1.2]. A Monte Carlo simulation is a computer-based model used in assessing risk.

19.333 The Inquiry has no further explanation of the indirect cost element. I assume that it consists of costs attributable to BB itself. It is not clear, however, how that element was broken down or how it compared with the original construction works price.

Overheads and profit

19.334 Mr Gough, who had been employed by BB on the project between 2007 and 2012, initially as project quantity surveyor and thereafter as commercial manager, explained that BB internally reported a “project result” figure, which was a gross figure for the project’s contribution to profit and overheads [ibid, page 0007, paragraph 40]. The project result that BB achieved was considerably better than it had projected both at the outset of the project and on conclusion of the settlement agreement: the projected figure at contract close in 2008 was 11.07 per cent; following conclusion of the settlement agreement in September 2011 it was 7.23 per cent; and the outturn figure on conclusion of the project was 21.21 per cent [see, e.g., BFB00112249, page 0003]. Put crudely, the commercial outcome for BB on the project was twice as good as it had forecast when it began, and three times as good as it had forecast on conclusion of the settlement agreement. As Mr Gough put it: “[t]he result for BCUK on the ETN Project was ultimately a positive one” [TRI00000295, page 0001, paragraph 4].

19.335 Mr Gough attributed the improvement in BB’s project result (from that which was forecast on conclusion of the settlement agreement) to a number of factors, including: risks for which allowances and contingencies were made not coming to pass; constructive dialogue with CEC, Mr C Smith and Turner & Townsend; and BB’s “proper and efficient management” of the contract and its sub-contractors [ibid, page 0007, paragraph 40]. These will be discussed in paragraphs 19.339 and 19.340.

Risk elements

19.336 Mr Gough emphasised that the profit and overhead percentage that BB wished to achieve, and the contingencies that it had applied, were entirely visible to those negotiating for CEC at the mediation [ibid, page 0003, paragraph 20]. He is correct. For example, BSC’s Project Phoenix price proposal included a clearly shown 10 per cent figure for BB’s overheads and profit [BFB00053258, page 0012], as well as the following specified sums in relation to risk.

• £2,629,383 for risk related to direct costs for items such as design changes, programme and general risk identified by BB’s supply chain partners [ibid, pages 0012–0013].
• £5,040,000 for risk related to indirect costs, which Mr Gough said was derived from a Monte Carlo simulation [ibid, page 0012].
• £8,058,450 for matters previously excluded from the Project Carlisle price proposals but included by BB within its Phoenix price proposal [ibid]. The Project Phoenix proposal did not include a breakdown of that figure, but Mr Gough explained that these items were predominantly priced on rates agreed in relation to earlier contract changes for work of a similar nature, and related largely to dealing with contaminated ground [TRI00000295, page 0002, paragraph 14.1.3].

19.337 The sums mentioned in paragraph 19.336 were described by Mr Gough as having been intended to cover the additional items that, under the Project Phoenix proposal, would be included within BB’s fixed price, but which had not previously been included by reason of the pricing assumptions in SP4 to the Infraco contract or the subsequent Project Carlisle proposals. In his statement he listed various items within this category of additional items, as follows:

“15.1.1 design changes up to the issue of drawings included at Appendix Part 4 of the Project Phoenix Proposal;

“15.1.2 known utilities on the Off Street works;

“15.1.3 known quantities of contaminated ground;

“15.1.4 third party approvals; and

“15.1.5 programme and general risk” [ibid, page 0003, paragraph 15].

19.338 These overheads, profit and contingency figures together made up 15.5 per cent of BB’s total Project Phoenix price proposal. A reduction of c. £10.4 million from BB’s proposed price for the off-street works was negotiated at Mar Hall. Taking account of that, and a 10 per cent overheads and profit element in BB’s £25 million share of the £39 million target price proposed for the on-street works, the percentage of BB’s price attributable to overheads, profit and contingencies reduced to 13.5 per cent. Mr Gough explained that, following negotiation of the settlement agreement, the percentage of BB’s price attributable to profit, overheads and contingencies was 13.3 per cent [ibid, page 0004, paragraph 29]

19.339 Mr Gough, like other witnesses, described how the project ran much more smoothly after mediation than had been expected. He referred to the improved relationships mentioned in paragraph 19.335 above that BBS had with CEC, Mr C Smith and Turner & Townsend when compared with the relationship that it had had with tie; to much more efficient tackling of planning and third-party approvals; and to the “bow wave” approach used for the diversion of utilities [ibid, pages 0004–0005, paragraphs 30–34]. As Mr Gough put it, the consequence of these improvements was that “BCUK was able to bank the contingencies included within the revised Price”. This, together with other operational and efficiency savings, was the primary reason why BB made a significantly improved return on the project than it had earlier forecast [ibid, page 0005, paragraph 35].

19.340 It is apparent from this explanation that the price CEC agreed at mediation to pay BB included a significant element to compensate BB for taking on risks that did not, in the event, materialise. According to Mr Gough, the savings that BB made included the following principal items.

• £1.9 million for the 22-week time bank, being what Mr Gough described as a “net uplift” [ibid, page 0005, paragraph 36.1.1]. I understand him to mean by this that £1.9 million net of its costs was BB’s share of the £6.45 million cost of the time bank. (The Final Account Statement allocates £3.16 million of the £6.45 million total cost to BB [WED00000101 page 0008, tCO reference 620].)
• Savings of £6 million achieved through negotiating confirmed orders with key sub-contractors and suppliers following mediation, and the careful management of them. Mr Gough said that this figure “includes the benefit of mitigating the risk provision of £2.629 million on this element of work, identified in Project Phoenix” [TRI00000295, page 0005, paragraph 36.1.2]. It is therefore clear that at least some of the risks for which this provision was made did not actually transpire.
• A saving of £5.04 million against the risk provision relating to indirect costs. Since that is the entirety of the risk provision, I infer that none of the risks for which this provision was made actually transpired. As it was put by Mr Gough: “Through good and proper management post the Settlement Agreement and developing a sensible way of working with CEC, we managed to avoid design, programme and commercial risks associated with the Off Street Works and this sum was added to the BCUK gross profit.” [ibid, page 0006, paragraph 36.1.3.]
• A saving of £8.058 million resulting from a reduction in off-street risks, in particular relating to contamination. Once again, since that is the entirety of the risk provision, I infer that none of the risks for which that provision was made actually transpired.
• Further savings of £10.7 million from allowances made for costs for staff/consultants, legal support and office running costs, attributed by Mr Gough to the smooth running of the project.
• Savings of £1.2 million relating to the SDS designer [ibid, page 0006, paragraph 36.1.7].

19.341 These are very substantial savings, constituting a very considerable improvement in BB’s profit on the project. What is most striking about them is the extent to which they resulted from risk provisions included in the price, and accepted by CEC, for risks which did not transpire at all. This is remarkable. It demonstrates that the project happened to be nowhere near as risky as the price agreed at Mar Hall had assumed. There are a number of possible explanations for this. It could be that BB overstated the risk and CEC naively agreed to pay for it. It might also reflect a degree of scepticism on BB’s part that its working relationship with CEC would be so much better than it had been with tie. It could be that, based on their previous experience of the project, BB and CEC genuinely perceived it to be very risky, but worked exceptionally well together to eradicate that risk. To the extent that that was the case, the effort CEC put into working co-operatively with BBS to ensure that the curtailed project was completed on time and reportedly within budget benefited BB at the cost of the public purse. It could be that, once risk is transferred to an experienced contractor, it is very good at mitigating or avoiding that risk because it is incentivised, by the prospect of an increased profit, to do so.

On-street works

19.342 According to Mr Gough, BB’s share of the proposed price of £39 million for the on-street works to St Andrew Square was £25 million [ibid, page 0004, paragraph 22].

Reduction

19.343 BB agreed to a reduction of £10.4 million in its price, compared with its Project Phoenix proposal [Mr Gough ibid, page 0003, paragraph 19].

Discussion

19.344 BSC’s Project Phoenix proposal was an offer of a new price for a reduced scope of the Infraco contract work. Siemens’ and BB’s prices increased substantially, notwithstanding the reduced scope. The increase in BB’s price was attributable largely to change, and partly to delay. The increase in Siemens’ price was largely attributable to delay, with a small amount attributable to change.

19.345 I have found no evidence that there was any substantial discussion at the mediation of the proper value of the claims that BSC had accrued under the Infraco contract. Indeed, the evidence suggests that this matter was so contentious that the parties avoided any detailed discussion of it and focused instead on BSC’s Project Phoenix proposal [see BSC’s Mediation Statement, BFB00053260, pages 0004–0005, paragraphs 2.7–2.8; Mr Foerder TRI00000095_C, pages 0085–0086, paragraphs 256–258; cf. Mr Coyle PHT00000006, pages 198–200].

19.346 The magnitude of the price increase represented by the Project Phoenix proposal, however, and the extent to which it exceeded intimated claims, tends to indicate that it aimed at something close to, if not greater than, full recovery by BSC of all claims that it had made, and anticipated, in respect of change and delay. There was evidence that the price proposal was intended to cover the value that BSC had placed on its claims [Mr Eickhorn TRI00000171, pages 0059–0060, paragraph 127], and that is indeed as one might expect in an initial proposal.

19.347 Further, knowing that the price proposal was to form the basis for negotiations about to take place, one might expect the party making it to be mindful that a successful conclusion to the negotiations would probably require it to make some concessions. That is particularly so where the project costs had already been the subject of extensive dispute. It would be unrealistic, in my view, to imagine that the Project Phoenix proposal was made without headroom for concessions. There is nothing wrong with such an approach by experienced contractors with obligations to their shareholders: it would be commercially realistic.

19.348 Although CEC’s negotiators at mediation can be said to have made some progress by negotiating concessions from the Project Phoenix proposal, those concessions have to be considered against that background. The main concessions that they achieved were:

• to agree an off-street works price that, at £362.5 million, was around £21 million lower than BSC had proposed (£10 million of which related to BB’s price, and £11 million of which related to Siemens’) [SIE00000184]; and
• to negotiate away the pricing exclusions that had been specified in the Project Phoenix proposal. Prior to the mediation, tie had placed a range of values on these, of between £21.6 million and £80 million [see paragraph 19.172 above].

19.349 Taken at face value, these seem to be substantial concessions by BBS. Indeed, that is how they were considered by representatives of BB and Siemens [Mr Foerder PHT00000044, page 147; Mr Eickhorn PHT00000046, pages 25–26]. The concessions were made by BBS to avoid the negative consequences of not reaching a settlement, being the risk of a disputed termination of the contract, and the reputational damage and expensive and lengthy litigation likely to result to its prejudice [Mr Eickhorn TRI00000171, pages 0062–0066, paragraphs 137–147]. I accept that these factors will have influenced BBS to compromise, but not that they gave CEC any significant negotiating leverage. That is for the simple reason that the same considerations applied equally to it, and probably with greater force.

19.350 I am not satisfied, on the evidence available to me, that CEC’s negotiators used the Infraco contract as a significant brake, or limiting factor, on the price agreed at mediation. There is no evidence of the various arguments identified by tie against BSC’s claims having been used to any extent to reduce the settlement price.

19.351 In my view, for CEC’s agreement to the off-street works price of £362.5 million to be capable of rational justification, one must assume that, in the absence of a settlement, further claims of very significant value would come from BSC; and that the very much increased price agreed at the mediation was a better option for CEC than taking its chances against BSC’s claims under the existing terms of the contract. In other words, the settlement involved an implicit rejection by CEC of the defences that tie had been running, and an implicit acceptance of the view of the contract that had been advanced by BSC.

19.352 Dame Sue Bruce could not remember whether CEC’s negotiators rationalised the settlement in that way, but accepted that they might have done [PHT00000054, pages 58–59]. Mr C Smith did not recall any such view being expressed, but accepted that by agreeing the off-street works price of £362.5 million CEC’s negotiators were in substance accepting that BSC’s claims under the Infraco contract for delay and change were well founded [PHT00000053, pages 80–81]. So did Mr Coyle [PHT00000010, page 114].

19.353 Mr Murray did not agree that, by accepting the settlement, CEC essentially conceded that BSC’s claims in respect of design change and delay were substantially well founded. Rather, in his view:

“by the time we got to Mar Hall the disagreements over design change, the magnitude of design change and delay responsibility were set aside to consider the best outcome for the project stakeholders and the city” [TRI00000249, page 0017, paragraph 26].

19.354 I do not accept that view. For the reasons that I have given, agreement to the off-street works price of £362.5 million at Mar Hall is only consistent with CEC having largely conceded BSC’s arguments. Put another way, by settling at such a high price, CEC must (at least implicitly) have given up all the arguments that tie had identified and maintained during the life of the project. To maintain that BSC’s claims were ill founded, while agreeing the price that it did, would have been irrational and an obvious waste of a substantial sum of public money.

19.355 Mr Walker said that:

“By the end of day one [at the mediation], there was agreement in principle that they were going to have to pay for what they could afford, and we were right.” [TRI00000072_C, page 0084, paragraph 151; emphasis added.]

I accept that view.

19.356 Insofar as there was a limiting factor on the price that CEC’s negotiators were prepared to agree, it was the estimated price at which CEC could separate from BSC and procure the works from a new contractor. That was in no sense, however, a closely defined or precise constraint: it was subjective, disputed and dependent upon last-minute, high-level adjustments.

19.357 That CEC should end up paying a price set in that way, having started with a public procurement strategy that aimed to minimise risk and cost and to maximise price certainty, demonstrates the complete failure of the Infraco contract, and its subsequent management by tie and CEC, to implement that strategy or to protect their interests and the public purse.

19.358 I accept that the CEC/tie representatives who resolved the mediation inherited a very weak negotiating position and had little choice but to do the best deal that they could. In the absence of a settlement agreed at mediation, the political pressure for a resolution would have increased and the future of the project would have been highly uncertain. That was particularly so because the project had reached its funding limit and a decision to increase funding would rapidly have been needed – something that would have returned decision making on the project to the political arena. Moreover, the sheer complexity of the parties’ dispute was such that the time, effort and cost involved in resolving it strictly according to their contract would have been disproportionate. Further delay was likely to result in further accrued cost, with a significant risk that that cost would be borne by CEC, making the project unaffordable.

19.359 Although I accept that continuing with attempts to resolve the dispute strictly in accordance with the contract was not an option and that the CEC/tie negotiators had to achieve the best deal that they could, that does not mean that it was necessary for them to accept sole responsibility for the full amount of the claims for design change and delay as quantified by BBS. When asked about the acceptance of these claims in the settlement figure, Dame Sue Bruce was uncertain but considered that the figures suggested that was the case. By way of justification, she added: “given the track record of tie on the adjudications, they were losing all the claims anyway” [PHT00000054, page 59]. This suggests a failure to appreciate the distinction between the issues of principle referred to adjudication where BBS had been substantially successful and the claims for payment in respect of delay and design change where tie had enjoyed a measure of success in reducing the amounts claimed by the consortium. It does not appear that tie‘s past success in reducing the claims for payment in respect of delay and design change was replicated by the CEC/tie negotiators.

19.360 In its closing submissions to the Inquiry, CEC contended that there was no proper basis in the evidence for concluding that settlement could have been reached with BSC at a significantly lower price, or that the contract could have been terminated and the works re-procured at a lower cost. In its submission, it followed that there was no support in the evidence for the view that the actions of CEC at mediation materially contributed to the increase in cost of or delay to the project [TRI00000287_C, pages 0504–0506, paragraphs 20.94–20.96]. I accept that the evidence does not enable me to conclude that the contract could have been terminated and re-procured at a lower price. I am of the view that any attempt by tie to terminate the contract prior to re-procurement would probably have been the subject of litigation and in that event would have delayed the project for a considerable period of time, with serious financial consequences for CEC that may even have prevented the project’s partial completion. However, the question whether agreement could have been reached at a significantly lower price is one that I have found more difficult to reject. Indeed, it seems to me that the real question is whether CEC’s negotiators did everything that they reasonably could at mediation to negotiate the price down. The absence of any detailed records of their decision making at mediation means that there is no audit trail to vouch that they did. Nobody in the CEC/tie negotiating team considered that the settlement agreed at Mar Hall was a good deal from their perspective, except Mr C Smith, whose evidence on that matter I discuss at paragraph 19.232. The settlement involved CEC paying £20 million more than the upper limit fixed by its negotiating team as a settlement price immediately before the commencement of the mediation. Moreover, as indicated in paragraph 19.359, the reduction negotiated by the CEC negotiators from the Project Phoenix price proposal was not of the same magnitude as the reductions that tie had achieved from BSC’s estimates. The Project Phoenix price is not, of course, directly comparable with individual estimates, as it is a price for the whole project and not just one change. It must be remembered that the settlement resolved more than £120 million of disputed claims by BSC without any apparent discussion of these claims, although some of these will have related to works that did not, in the event, proceed.

19.361 In paragraphs 19.334 to 19.341 inclusive above I have discussed the contribution made to BB’s enhanced profit due to its provision in Project Phoenix for risks that did not materialise, and that this benefit was at least partly attributable to the effort that CEC put into working co-operatively with BBS. The risk provisions were clearly stated in the Project Phoenix proposal. They were there, in my view, in response to CEC’s risk aversion: it was CEC’s desire for a fixed price that formed the basis for BB including the risk provisions in its price proposal. Although CEC negotiated a reduction in BBS’s Project Phoenix price, BB appear to have proceeded on the basis that these risk provisions were retained in full. It therefore appears that, if CEC had had a different risk tolerance, and had been prepared to accept these risks itself, its outturn price would probably have been much reduced. Alternatively, or in any event, it must be borne in mind that the settlement at Mar Hall was achieved partly because of the fear of reputational damage that would be suffered by all parties if the negotiations failed, but mainly because of the optimism that the curtailed project would be completed on time and within a revised budget due to the radical change in culture and the commitment of all parties to work co-operatively towards securing their common goal. In that situation one might have expected CEC to challenge the reasonableness of the risk provisions. If CEC had done so it might have proved possible to include a provision in the settlement agreement for sharing the savings. The absence of records of the Mar Hall negotiations has prevented me from considering whether CEC ever advanced any such argument, but having regard to the fact that the settlement was described as a “horse trade” it seems unlikely that any attempt was made in that respect. The result was that all the benefit from unused risk provision accrued to BBS.

19.362 I do not consider that there is any basis in the evidence for criticism of BB in relation to its enhanced profit figures. It was its function, as a commercial enterprise, to generate profits for its shareholders, and to evaluate the risks that it was being asked to take. It transparently stated its proposed figures for risk. The parties’ decision making at the time cannot be second guessed with the benefit of hindsight. As BB noted in its closing submission:

“the deal which was agreed at Mar Hall was not without risk … there was a significant risk that post mediation the deal would break down and parties would be in deadlock once again” [TRI00000292, page 0258, paragraph 446D].

19.363 Dr Keysberg considered that a

“vital element … of the outcome of the mediation was as well regaining trust and regaining a different project management and governance on the project itself” [PHT00000036, page 72].

19.364 In that situation it is inconceivable that the risk provision did not take into account the possibility that these aspirations might not be achieved. Although there is no evidence from which I could conclude that the risk provisions were excessive at the time at which they were agreed, it is clear that the negotiations at mediation were predicated upon a change in culture if BBS were to resume work and complete the construction of line 1a as far as St Andrew Square/York Place. The change in culture involved the removal of Mr Walker and tie from the project and envisaged a co-operative approach between BBS and CEC to achieve the common goal of completing construction of the restricted line to York Place, as opposed to the confrontational approach that had frustrated the progress of the project hitherto. Even without the benefit of hindsight it ought to have been foreseeable that such a radical change might result in cost savings. In these circumstances I consider that the settlement agreement ought to have included a provision for sharing the cost savings attributable to the improvements in working relationships, project management and governance in which CEC played a significant role.

19.365 In all the circumstances I am not prepared to find that CEC’s negotiators did everything that they could and should have done to negotiate the price down.

Implementation of the mediation settlement

Minute of Variation 4

19.366 The agreement reached at mediation concerned only the high-level principles for settlement of the parties’ dispute. Negotiation of the detailed terms, and CEC’s decision making on whether to approve and fund the settlement, took place over the following six months.

19.367 CEC finally approved the settlement and agreed to fund it on 2 September 2011. Councillors did so after a summer of somewhat turbulent decision making. They first approved the settlement in principle (in June 2011). They then rejected it in favour of a further-shortened line between the Airport and Haymarket (in August 2011), only to reverse that rejection and approve the settlement once more on 2 September, at an emergency meeting arranged following the intervention of the Scottish Ministers. There was clear political division about the appropriate future for the project.

19.368 In the meantime, as noted in paragraph 19.3, on the direction of CEC’s officials, tie concluded a legally binding contract with BSC that put in place a partial, and interim, settlement of their dispute. This contract was known as MoV4 and was signed on 20 May 2011 [CEC01731817]. It varied the Infraco contract to enable prioritised works to be undertaken by BB and payment to be made for these works as well as payment to Siemens plc for materials and equipment. It did not provide for any payment to CAF except where the contract was terminated in accordance with clause 3.3 [ibid, page 0006]. In that event CAF was obliged to deliver to tie or CEC, as directed by CEC, the trams, tram related equipment and depot equipment specified in the Tram Supply Agreement and to receive payment for them [ibid, page 0006, clause 3.3.6]. The contract was not terminated and all payments under MoV4 were made to BB or to Siemens, as appropriate.

19.369 MoV4 largely left open the major strategic decisions about the future of the project. Under its terms, CEC had the following options:

• • it could approve any settlement agreement that its officials agreed with BSC and the funding necessary to implement it;
  • it could refuse to fund a settlement and bring about an automatic termination of the Infraco contract on “no-fault” grounds; or
  • it could refuse for any other reason to settle, and return to the project under the Infraco contract’s original terms, except insofar as amended under MoV4.

These were all options that MoV4 left open.

19.370 MoV4 was in many respects an elegant interim solution. It allowed some work, of importance to the overall programme, to restart in early course. That mitigated further delay and the associated costs. It provided breathing space for negotiations on the detail of a final settlement. It introduced a new change procedure to replace clause 80 in relation to the prioritised works [ibid, page 0012, clause 10]. It placed a moratorium on enforcement of BSC’s claims and tie’s remediable termination and underperformance warning notices, which would revive only if a final settlement was not agreed [ibid, page 0013, clause 14]. It gave both parties an opportunity to see whether they could, with the benefit of a new understanding and partially revised contractual arrangements, work together successfully before committing finally to a settlement. It gave CEC, and the public, an opportunity to assess progress on those interim arrangements before the final vote to approve any final settlement. It gave CEC an opportunity to carry out further investigations into its alternative options, and their relative cost, so that its final decision could be informed by a better understanding of those alternatives.

19.371 On the other hand, MoV4 restored momentum to the project before CEC’s councillors voted on whether to approve a settlement. By providing the legal basis for BB and Siemens to start the prioritised works, it brought them back on site. It also provided for the payment by tie to BBS of sums totalling £78 million. This was more than simply the cost of the prioritised works: it included a sum of £49 million, part of which was described as being for the contractors’ remobilisation and part of which (£25 million) was for the Siemens materials and equipment that CEC had agreed at mediation to buy [ibid, pages 0011–0012, clause 9 and pages 0027–0048, schedule part 2]. Under the terms of MoV4, BBS would keep that payment regardless of whether CEC in due course approved or rejected the settlement [ibid, pages 0006–0009, clause 3].

19.372 tie considered the £49 million payment to be excessive. It also considered that MoV4 made financial commitments beyond the limits of tie’s financial authority of £546 million in terms of its Operating Agreement with CEC. tie committed to MoV4 only following direction by CEC’s officials, who assured tie‘s directors that CEC would not take any action in respect of their breach of the Operating Agreement between CEC and tie.

19.373 In these circumstances, the Inquiry was interested in the governance related to MoV4, and in particular the basis on which it was authorised.

19.374 As noted above, MoV4 was put in place before any decision of CEC’s councillors to approve the settlement or the funding necessary to pay for it. On 30 June 2011, after MoV4 had been signed the councillors did authorise tie to progress the priority works in accordance with MoV4 and to incur expenditure within the limits of the project budget of £545 million, until the end of August 2011 [CEC02083232, Part 1, page 0030]. By that time, work in terms of it had commenced and payments had been made to BBS in accordance with its provisions. In particular work had commenced on 4 April on the priority works at the depot and the mini test track with the balance of the priority works commencing on 3 May 2011. As will be noted below, tie made payments under MoV4 even although that resulted in tie exceeding the financial limits imposed upon it by CEC.

19.375 MoV4 was not subjected to scrutiny by the TEL or tie Boards, or the TPB [TIE00896987, page 0004; Mr Emery PHT00000052, page 88 onwards; Mr Hogg TRI00000045_C, page 0051, paragraph 120]. Most of TEL and tie’s non-executive directors resigned in response to CEC’s officials having agreed to MoV4 without their input or scrutiny [Mr Hogg ibid; Mr Emery PHT00000052, pages 88–90].

MoV4: the £49 million payment

19.376 There was disagreement between tie, on the one hand, and CEC’s officials and representatives on the other, over the amount that should be paid to BBS under MoV4. The £49 million figure for mobilisation, materials and equipment had been proposed by BBS. tie considered it could not be justified and suggested that £19 million would be more appropriate [see, e.g., TIE00687654; CEC02083825, page 0014, paragraph 5.2.1; for the appendices to the latter document, see CEC02087170, Parts 1–5]. BBS said that it could not remobilise for £19 million [CEC02083825, page 0014].

19.377 The disagreement was resolved in favour of BBS [Mr C Smith PHT00000053, pages 90–91; Mr David Anderson PHT00000043, page 198]. Mr Smith thought that Dame Sue Bruce and Mr Emery had approved the payment, but that is not consistent with Mr Emery’s evidence [TRI00000035, page 0027, paragraphs 81–86]. On this, I prefer Mr Emery’s evidence: he was by this stage acting on CEC’s instructions as tie’s shareholder, and I conclude that the ultimate authority to pay £49 million must have come from Dame Sue Bruce.

19.378 The £49 million formed part of the off-street works price of £362.5 million agreed at mediation [CEC01731817, page 0012, clause 10; CEC02084685, page 0003, clause 6.1]. The Council was, however, yet to approve any settlement at that figure. Payment of the £49 million prior to approval of the settlement therefore carried risks, as Mr Jeffrey had noted on 7 April 2011 in an email to Mr Emery:

“ … the profile of this payment means that, prior to any deal becoming unconditional on 1st September, the gap between value of work done, and payments made will be much larger than it is now. This obviously creates risks if the deal is not done.” [TIE00686573, page 0001.]

19.379 Apparently to address this risk, an arrangement was put in place under which tie was to pay the £49 million against certificates issued by Hg Consulting (that is, by Mr C Smith). Mr C Smith, with legal input from McGrigors, had been the principal negotiator of MoV4 on behalf of CEC [Mr Emery PHT00000052, pages 105–106; CEC02087193; Mr Hogg TRI00000045_C, page 0051, paragraph 122]. As it was put by Mr Smith in a note:

“The mobilisation certification process was to release cash flow against a measurement of value being transferred to the employer.” [CEC02083825, page 0014, paragraph 5.2.1.]

19.380 It is clear that the payments under MoV4 were important to BBS to address their negative cash flow [Mr Foerder TRI00000095_C, page 0090, paragraph 272; Mr Eickhorn TRI00000171, page 0075, paragraph 183].

19.381 Mr Smith confirmed in his oral evidence that the purpose of his company’s certificates was to certify that, in return for the payment of £49 million, CEC received something worth £49 million [PHT00000053, page 90]. It was put a little more graphically on 23 April 2011 in a legal advice note on MoV4 by McGrigors:

“There was considerable debate in relation to what the various payments under clauses 6, 7 and 8 of MOV4^[27] (other than those for Materials and Equipment) were intended to be in respect of. The BBS view was very much that these were mobilisation payments, but tie/CEC had certain concerns in relation to making

any form of advance payment or pre-payment in respect of matters which would have no value to the project if MOV5 does not go ahead (ie, will the payments pass the ‘anti-embarrassment test’?).” [CEC02087178, page 0007.]

19.382 It also noted that:

“ … Hg Consulting was comfortable with the value to tie/CEC in respect of the sums to be certified” [ibid].

19.383 £25 million of the £49 million was attributed by MoV4 to Siemens’ materials and equipment, which CEC had agreed at mediation to buy. £12.5 million was attributed to BB’s mobilisation and £11.5 million was attributed to Siemens’ mobilisation [CEC01731817, page 0047].

19.384 Beyond the label of “mobilisation”, there is little clarity about what was covered by the latter two sums. MoV4 gives no indication of the basis on which these payments were to be certified [ibid, pages 0010–0011, clauses 6–8]. The agreement appointing Mr Smith’s company (Hg Consulting) as the certifier describes the first instalment of the £49 million payment (£27 million) in this way:

“£7,500,000 to BBUK in respect of an agreed first D&C Costs for design and structures and £19,500,000 to Siemens in respect of an agreed first D&C Costs for pre-installation and pre-commissioning works” [BFB00097700, Schedule Part 1, page 0018, clause 2.1].

19.385 The meaning of these descriptions is not clear, and the descriptions give little indication of the basis on which certificates relating to them were to be issued. Indeed, the wording of the certifier agreement indicates that the certifier was obliged to issue these certificates in these amounts [ibid]. However, from MoV4 it is apparent that the £19.5 million payment to Siemens consisted of £12 million for materials and equipment, and the balance of £7.5 million was for mobilisation.

19.386 The lack of clarity about these payments means that it is difficult to know whether, and if so to what extent, the payments made under MoV4 were sums that had already fallen due for payment under the Infraco contract, or whether their payment, at this time, either innovated on that contract or constituted settlement of previously unsettled claims. The reality is, however, that certificates issued by Hg Consulting were issued in terms of the Certifier agreement between tie, CEC and BSC and related to payments due under MoV4. Payments made in respect of these certificates were accordingly made under MoV4.

19.387 A meeting took place on 26 April 2011 to discuss Hg Consulting’s first certificate relating to the payment of £27 million as the first instalment of the £49 million payment. On 27 April 2011, Mr Coyle circulated a note of the meeting with his observations to CEC’s senior officials, who, at a meeting the following day, approved the payment [CEC02087180].

19.388 Mr Coyle referred to tie’s disagreement over the amount to be paid, and said:

“Whilst I cannot comment from a QS perspective it would seem that the respective positions will never agree. What is important is that the Hg Certificate provides a fair and professional valuation of the issues. I believe, following the meeting yesterday, that the valuation is fair and professional, whilst, importantly, ensuring that CEC acquire something tangible for the payment, whether asset in the ground or intellectual property through design. The important issue is that the Hg position is arrived at without being clouded by detailed knowledge of the Infraco contract and the original Construction Works Price (which has clearly moved on). The Hg position is also based on MOV4 and the Heads of Terms from Mar Hall.” [ibid, page 0002.]

19.389 This confirms the view, which I expressed in paragraph 19.386 above, that the payments were made under MoV4. It also indicates that Mr Coyle was inclined to favour Mr C Smith’s valuation over tie’s, and to do so on the basis that Mr Smith’s valuation was not “clouded by detailed knowledge of the Infraco contract and the original Construction Works Price” [ibid], but was based instead on MoV4 and the Mar Hall heads of terms. This in turn indicates that the payments did indeed innovate on the pre-mediation provisions of the Infraco contract, and did so to reflect the mediation settlement. Indeed, the fact that Mr Smith was issuing certificates that had no basis in the original terms of the Infraco contract is itself an indication that the sums he was certifying innovated on those terms.

That view is confirmed by other passages in Mr Coyle’s note:

“tie will argue that the £5.4m item for Siemens is a catch up on historical items and cannot be justified by any other means.”

“Overall, tie will argue that, in part, the application from Infraco for Cert 1 has elements of historical delay costs included. They will also argue that Infraco are including changes that were in dispute (not formal DRP) either for areas of principle or value.” [ibid, page 0003.]

19.390 The fact that there was scope for argument indicates that there was a lack of objective clarity over what these payments were for.

19.391 Mr Coyle’s paper concluded:

“None of tie’s arguments are relevant at the point MOV5 is signed. They will argue that by agreeing to pay Cert 1 at the point of MOV4, that CEC increases it’s [sic] risk of cash exposure if MOV5 is not signed.

“It is my view that this is a commercial call from CEC’s perspective to make payment. However, the payment secures title to assets that we will use on the project and pays the consortium for work they have physically done. There is no point in continuing to argue historical commercial points when the issues have moved on as we seek to move the project forward for the good of the city.” [ibid].

19.393 MoV5 was the name given by the parties to the settlement agreement of September 2011, which finally resolved their disputes in full.

19.394 In my view, the critical sentences here are the first and third ones:

“None of tie’s arguments are relevant at the point MOV5 is signed. … It is my view that this is a commercial call from CEC’s perspective to make payment.”

19.395 In other words, the uncertainty over the payments under MoV4 would not matter if, in due course, CEC approved the settlement. At the time that Mr Coyle wrote his note, CEC’s councillors had not yet approved that settlement. Indeed at that time CEC’s officials had not even sought authority from councillors to sign MoV4 as an interim measure pending negotiation and agreement of the detailed MoV5. It is apparent that it was CEC’s officials who approved the payments as certified by Mr Smith, and that it was therefore those officials who took the “commercial call” referred to by Mr Coyle in his note.

19.396 The payment was approved at a meeting on 28 April 2011, attended by Mr Emery, Dame Sue Bruce, Mr Jeffrey, Mr Bell, Mr David Anderson, Mr McGougan, Mr C Smith, Mr Maclean, Mr Coyle and Mr Somerville, another CEC official [CEC02086882].

19.397 The critical decision makers at this meeting were the Chief Executive, the Director of City Development and the Director of Finance of CEC. Unless they decided that it was appropriate to pay the sums as certified by Mr Smith, those payments would not have been made. Members of tie’s management team do not appear to have departed from their view that the payments were not supported by their own commercial analysis [TIE00107170].

19.398 In the absence of any other explanation, I proceed on the basis that CEC’s officials authorised the payment on the basis of the reasoning articulated by Mr Coyle in his note mentioned above. That would indicate that the £49 million payment was most accurately rationalised as a down-payment on the off-street works price of £362.5 million which had been agreed at mediation, but which had not yet been approved by CEC’s councillors; and which could not easily, or at least without disagreement, be reconciled to the payment structure of the Infraco contract in its pre-mediation form.

19.399 Mr Foerder, Infraco and BB Project Director, gave evidence that the sums paid under MoV4 were already due under the Infraco contract. That comment must, of course, be seen in the context that BSC’s position was that very substantial additional sums were due under the contract.
tie disputed the sums claimed by BSC in that respect. Mr Foerder said the sum paid under MoV4 was:

“not really a remobilisation payment, even if it was quoted as such. This was actually a payment of the settlement sum which was agreed at mediation to bring us back to a so-called cash-neutral position.” [TRI00000095_C, page 0090, paragraph 272.]

19.400 In other words, it was a payment towards the off-street works price of £362.5 million.

19.401 Mr Foerder said that the sum paid under MoV4 was for outstanding preliminaries. Shortly before the mediation, Lord Dervaird had decided at adjudication that preliminaries were a time-based cost, and this formed the basis for a claim by BSC that it was entitled to payment of preliminaries that tie had left unpaid for some months [Mr Foerder PHT00000044, pages 159–160; Mr Eickhorn PHT00000046, pages 37–38].

19.402 Support for that view comes from an email exchange between Mr Foerder and Mr Gough, BB Project Quantity Surveyor, on 23 and 24 March 2011 attaching two documents [BFB00095990]. The first document listed outstanding preliminaries totalling £10.24 million for the period March 2010 to March 2011 [BFB00095962]. This sum included £764,000 in respect of an extension of time. Once that is deducted, the balance is equivalent to the outstanding figure for preliminaries quoted in BB’s monthly reports between May and September 2011. The second document showed Mr Gough’s proposed figures for the prioritised works including a figure of £10.24 million for mobilisation [BFB00095963]. The fact that the mobilisation figure is exactly the same as the figure for outstanding preliminaries indicates that what was described as a mobilisation payment was in fact, as Mr Foerder said in evidence, a catch-up payment to clear the overdue preliminaries.

19.403 In response to a specific question from the Inquiry, however, Mr Gough’s evidence was that the shortfall in payments for preliminaries which had accrued prior to the Mar Hall mediation:

“was not cleared by the payments tie made to BCUK under Minute of Variation 4 (£12.5 million paid in instalments on 22 April and 17 May 2011: CEC01731817, paragraphs 6–7). The payments made under MOV4 related to Site Wide Remobilisation as set on [sic] page 47 of MOV4, as well as some payment towards the unpaid preliminaries.” [TRI00000295, pages 0007–0008, paragraph 42.]

19.404 As Mr Gough noted, BB continued to report the shortfall in preliminaries in its monthly reports between May and August 2011 inclusive, and it was only in the September report (after the MoV5 settlement agreement was executed) that it stopped doing so [BFB00112211; BFB00112212; BFB00112213; BFB00112214; BFB00112215]. The reports between May and August do not support Mr Gough’s statement that the MoV4 payments included some payment towards the unpaid preliminaries, since the amount that they report as outstanding does not change over the relevant period.

19.405 BB’s monthly project report to 30 April 2011 noted a shortfall of approximately £16.7 million in the sums tie had paid as against those BSC had invoiced [BFB00112210]. Of that sum, £7,759,734 was in respect of “certified construction works to be paid in early May” [ibid, page 0004, paragraph 1.2.4]. The balance (of approximately £8.9 million) was for preliminaries which had been invoiced but not certified by tie. The report also noted that, following payments expected in May, project cash flow would return to being positive [ibid, page 0004, paragraph 1.2.5].

19.406 BB’s report to 31 May 2011 indicated that the sum for construction works had indeed been paid and that the project cash flow had returned to positive, but that the figure for invoiced but unpaid preliminaries had increased to £9.5 million [BFB00112211]. This indicates that the payment BB received in early May 2011 did not include the invoiced but uncertified preliminaries, but probably did include the certified construction works.

19.407 Mr McGougan said that the payments under MoV4:

“were payments that had been withheld by tie in the run-up to the mediation and during the dispute process …

“So it didn’t have to wait for MoV4 because these sums were due and payable under the existing contract …

“These sums would have been due and payable anyway.” [PHT00000043, pages 97 and 101.]

19.408 Apart from the £25 million that related to Siemens’ materials and equipment, I have been unable to determine with any precision what the balance of the £49 million payments was for. At a pragmatic level, it was a payment that had to be made if BBS was to return to site and recommence work. It was important to it for cash flow reasons. The fact that it was paid was very important in re-establishing goodwill with the contractors [Mr Eickhorn TRI00000171, page 0075, paragraph 184]. It formed part of the off-street works price of £362.5 million agreed at mediation, and any uncertainty over what it was for would cease to matter if CEC’s councillors approved a settlement at that price. That there was a lack of objective certainty over what the sum was for is, perhaps, a reflection of the parties’ settlement having been a “horse trade”, under which they compromised their respective claims but without placing any agreed price on any individual element of it.

19.409 I was not persuaded by Mr McGougan’s attempts to justify payment of the initial instalment of £27 million, because the sums that it represented would have been payable anyway under the Infraco contract. The reality is that they were paid in accordance with MoV4, which was a separate agreement to vary the Infraco contract and appears to have been signed without the necessary authority from CEC. Indeed, payments were even made before MoV4 was signed but were ratified by its subsequent signature. For reasons that will be explained below, it seems to me that payments made under MoV4, whether before or after its signature, before CEC formally approved the mediation settlement were unauthorised public expenditure at the time that they were made but were legitimised after the decision of CEC on 2 September 2011 [CEC02083154] and signature of MoV5 on 15 September 2011 [CEC02085585].

19.410 My concern, which I have been unable to dispel with any confidence, is that the £49 million payment under MoV4 represented a partial implementation of a settlement that took place before CEC’s councillors voted on whether to agree that settlement. In her evidence Dame Sue Bruce emphasised the different roles undertaken by councillors and CEC officials, with the former being responsible for taking decisions and the latter being responsible for making recommendations and implementing decisions [TRI00000084, page 0011, paragraph 34]. Following the mediation, a report ought to have been made to CEC to enable it to consider whether to approve a recommendation to implement the agreement reached at mediation, including a staged approach starting with MoV4. Such a report ought to have sought authority to exceed the existing budget of £546 million in the event that MoV5 was not signed.

Authority to enter into MoV4

19.411 tie was concerned that it lacked authority to enter into, and make the payments due under, MoV4. It considered that those payments would take them beyond the £546 million spending limit which CEC had set for the project. Although the limit imposed on tie‘s expenditure was £545 million in terms of its operating agreement with CEC, TEL’s expenditure limit was £546 million, as will be explained below. tie was the vehicle for all payments in respect of the project, including these authorised by TEL.

19.412 This led TEL to seek formal approval under its operating agreement to incur expenditure beyond that limit.

19.413 TEL’s operating agreement reserved to CEC “any actual or reasonably expected increase in capital cost which would mean that the Baseline Cost is exceeded by greater than £1,000,000” [CEC00645838, page 0009, clause 2.22]. The Baseline Cost was to be determined by CEC’s Chief Executive and notified to TEL from time to time but CEC’s Chief Executive would require Council approval to specify a Baseline Cost exceeding £545 million. This reflected the Council having approved the project only within a spending limit of that amount. Thus without CEC’s approval the limit of TEL’s authority was to permit tie to incur expenditure on the project up to a maximum of £546 million, being the maximum Baseline Cost plus a maximum sum of £1 million.

19.414 CEC’s officials recognised that the approval of the councillors would be needed for expenditure beyond £546 million. Papers for the IPG meeting on 21 January 2011 included legal advice from Mr N Smith, a solicitor in CEC’s Solicitor’s Department, to that effect. The advice also noted that delegated authority could not be used to determine any application for approval of an increase in expenditure because of the politically contentious nature of the issue and that any decision would require to be taken by the Council as a whole [CEC01715625, pages 0015–0016, Appendix 2].

19.415 Views to similar effect were expressed in a CEC paper dated 10 March 2011 [CEC02087164]. Mr David Anderson forwarded it to the Chief Executive (Dame Sue Bruce) with a handwritten note to the effect that Mr Maclean and Mr Somerville had prepared the paper. The reason for the paper was to identify the steps necessary to implement the mediation settlement. Apart from recognising the need to update CEC on the outcome of the mediation, the authors of the paper recognised that two authorities were required from CEC. The first related to the existing cap on expenditure and was in the following terms.

“The Council will be required to give tie Ltd authority to allow for spend and commitments that will exceed the current £546M cap. This is not the same as saying that they will spend more than £546M, but rather that potential commitments exceed that figure;” [ibid, page 0001].

19.416 As was noted in paragraph 19.413 above, the mechanism would be for CEC to grant the necessary authority to TEL in terms of its operating agreement with CEC, and TEL would authorise tie to pay such sums as may be due. The proposed course of action was to seek authority from an executive committee of the Council, or from the full Council:

“to temporarily relaxes [sic] the provision of the Operating Agreement (Scope; Price; Programme), and either approves indicative potential spend from now to September (Operation Phoenix) or seek agreement to Project Phoenix and all the related issues associated with this” [ibid].

19.417 The authors of the paper noted, however, a pre-election period between 11 March and 6 May 2011, on which latter date the Scottish Parliament election was scheduled to take place. According to the paper, that:

“politicises the context for decisions, and leads to a need to consider whether to delay progressing a formal request for authority until after this period” [ibid].

19.418 Alternatives considered in the paper included seeking authority from the Transport, Infrastructure and Environment Committee on 10 May 2011, or from the Full Council on 28 April. A third option was based on standing order 63, which the paper quoted as stating that:

“[i]f a decision which would normally be made by a Committee requires to be made urgently between meetings of the Committee, the appropriate Head of Department, or the Chief Executive, in consultation with the Convener or Vice-Convener can take action subject to the matter being reported to the next meeting of the Committee for information” [ibid, page 0002].

19.419 The authors did not recommend that course. Instead their conclusion was that while there were risks with whichever option was pursued, the balance of risk suggested proceeding irrespective of the pre-election period, giving an earliest reporting date of 28 April to the full Council. CEC officials did not submit a report about the mediation to this meeting. If this option had been taken CEC’s decision would have been known prior to the completion of MoV4. As I have noted at paragraph 19.374, at its meeting of 30 June 2011, some six weeks after MoV4 was signed, CEC’s councillors did give a measure of approval to tie progressing the priority works and incurring expenditure under MoV4, albeit only within the limits of the project budget of £545 million and only until the end of August 2011 [CEC02083232, Part 1, page 0023].

19.420 On 15 April 2011, Mr Maclean gave similar advice about the need for councillor approval to increase TEL’s authority. On that date, Mr Bell emailed CEC a draft letter seeking an increase in TEL’s authority beyond the £546 million limit [CEC02087172]. The draft letter stated that the value of budget contingency available for drawdown was £2.8 million after including the £1 million funding variance permitted by TEL’s operating agreement with CEC in addition to the £545 million cap. Mr Maclean forwarded Mr Bell’s email to Dame Sue Bruce, and said:

“If they seek approval you cannot give that without council approval as it would amend the tel operating agreement.” [ibid]

19.421 This is recognition by Mr Maclean that approval by the councillors was required, and that Dame Sue Bruce, as Chief Executive, could not herself provide the necessary authority. Mr Maclean appears, however, to have had in mind proceeding without seeking approval from the councillors, because he continued:

“Realistically we are not likely to sue tel as it is a wholly owned company of CEC for a technical breach of the operating agreement so long as actual spend does not go over 545/546m. they should be able to take a reasonable commercial view of this.” [ibid]

19.422 In this passage, Mr Maclean appears to distinguish between a ‘technical breach’ of the operating agreement, and “actual spend” exceeding the approved limit. By this, I understand him to be distinguishing between TEL having financial commitments in excess of £546 million (the “technical breach”) and TEL actually having spent over £546 million. Mr Maclean’s suggestion appears to have been that TEL should be willing to incur liabilities in excess of £546 million without councillors’ approval, as long as it could keep actual spending below that limit. Mr Maclean’s email does not indicate his reasoning for such a distinction. It appears that Mr Maclean may have envisaged CEC granting TEL immunity from any action arising from exceeding the limit of its authority to incur expenditure as long as actual expenditure did not exceed that limit. That possible course of action would still result in a breach of the expenditure limit if actual and committed expenditure exceeded the authorised limit. The justification for granting immunity was the relationship between CEC and TEL. Although the relationship between them would undoubtedly influence the options available to CEC if there were a breach of the expenditure limit, the assurance by CEC officials that no action would be taken had the practical effect of inducing TEL to breach the limit of its expenditure without having the necessary approval from councillors as a whole to do so. I do not consider that the reluctance of senior officials to seek the required approval from the Council at that stage justified circumventing councillors in this way.

19.423 Whatever his reasoning may have been, I consider that the distinction that he sought to make was wrong. In the operating agreement between CEC and TEL dated 12 and 13 May 2008, which will be discussed more fully in Chapter 22 (Governance), various matters are reserved to CEC. In particular, there is reserved “any projected or actual overspend of the available funding budget (being £545 million) at any time (whether on an annual or overall basis)” [CEC01315173, page 0008]. An actual overspend will arise where payments already made exceed the budget and a projected overspend may arise in two situations. The first is where actual expenditure together with liabilities incurred but not yet paid exceed the budget. The second is where anticipated expenditure necessary to complete the project is added to actual expenditure and current liabilities. It is clear that the intention of CEC was to impose limits on the ability of TEL to incur expenditure in excess of the budget of £545 million.

19.424 In the later agreement between CEC and TEL dated 18 December 2009, there is reserved to CEC “any actual or reasonably expected increase in capital cost which would mean that the Baseline Cost is exceeded by greater than £1,000,000” [CEC00645838, page 0009]. As I have explained in paragraph 19.413 above, this resulted in a budget limit for TEL of £546 million. I have no hesitation in concluding that, in determining whether there was a reasonably expected increase in capital cost beyond £546 million, liabilities that had been incurred but not paid as well as any anticipated expenditure necessary to complete the project should be added to actual expenditure to date.

19.425 Further, Mr Maclean’s suggested approach could only work if the councillors did in due course approve spending beyond the existing limit: a present-day spending commitment in excess of £546 million would at some point become actual spending in excess of £546 million and, without an increase in the permitted expenditure limits, would be unauthorised. Similarly, a contingent liability to pay compensation if the Infraco contract was terminated would become actual expenditure if termination occurred. As will be discussed in paragraphs 19.447–19.451 below the costs of termination would have resulted in CEC exceeding the authorised limit of £546 million when added to actual expenditure.

19.426 On 3 May 2011, when £27 million was due to be paid to BBS as the first instalment of the £49 million payment under MoV4, Mr Bell wrote to Mr David Anderson in the following terms:

“ … whilst such a payment does not exceed the authorised actual expenditure of up to £546m delegated to tie via TPB, TEL and CEC, on execution of MoV4 this will become a commitment to a total project cost in excess of £546m. Consequently, in confirming agreement to pay Certificate 1, CEC confirm and accepts that this would take tie/TEL outwith their current operating agreements with CEC once MOV4 is signed.” [CEC02086879]

19.427 I have no reason to doubt that this was an accurate statement of the spending position of tie and TEL relative to the approved budget, and I therefore treat it as such. It is consistent with Mr Bell’s letter dated 15 April 2011, which was mentioned in paragraph 19.420 above. Moreover, in his evidence to the Inquiry, Mr Coyle said that by the time of the mediation project spending plus accrued liabilities was over the funding limit of £545 million [PHT00000010, pages 76–77]. He was the finance manager at CEC who had worked on the project since 2007 and considered himself to be familiar with the financial aspects of the project (see paragraph 19.96 above).

19.428 Mr Bell sent that letter by email to Mr David Anderson. Mr Maclean forwarded the email to Dame Sue Bruce and the file copy of that email carries the handwritten annotation:

“Stitch up – Alastair raging! This needs to be responded to formally and quickly. /S” [CEC02086879]

19.429 Although in her evidence at the Inquiry Hearing Dame Sue Bruce said this was not her handwriting and that she did not know whose it was, she subsequently advised the Inquiry that she now recognised the handwriting as that of a member of her secretariat. In her evidence at the Inquiry she accepted, however, that the letter from Mr Bell indicated there had been no formal Council approval to increase tie and TEL’s spending limits [PHT00000054, page 131]. It is unnecessary for me to determine the author of the handwritten annotation; it is sufficient for me to conclude that it indicates that someone understood that Mr Maclean was irritated because Mr Bell had drawn attention to MoV4 taking tie and TEL beyond the limits of the authorised expenditure in their operating agreements.

19.430 Mr David Anderson responded to Mr Bell the same day. He referred to all parties at the meeting on 28 April having collectively agreed that the £27 million payment should be made, based on Hg Consulting’s certificates, and confirmed, in his capacity as CEC’s Senior Responsible Owner (“SRO”) for the project, that he was content for that decision now to be implemented [TIE00687804]. I simply observe that it is irrelevant how many people agreed to this arrangement or that Mr David Anderson as SRO was content for the decision to be implemented if, as appears to have been the case, the expenditure limits imposed by CEC would be exceeded once the payment was made in implement of an obligation incurred by entering into MoV4. In that situation only CEC could authorise payment by increasing the expenditure limit.

19.431 On 6 May 2011, Mr Emery wrote to Mr David Anderson pursuant to TEL’s reporting obligations under clauses 2.22 and 2.24 of the TEL operating agreement [CEC02087184]. The letter noted that only £2.823 million of the budget contingency remained available for drawdown. As was noted in paragraph 19.420 above, the remaining budget contingency included the £1 million funding variance permitted by TEL’s operating agreement with CEC. Despite steps taken by TEL and tie to minimise additional funding commitments and to review expenditure, the letter advised that the remaining funding was under pressure. The letter continued that:

“ … we now anticipate that we will have committed any residual funding within the current delegated limits before the end of May 2011” [ibid, page 0002].

19.432 It concluded:

“In terms of the CEC/TEL and CEC/tie Operating Agreements, TEL and tie are unable to make any further commitments without a change in the authorised and delegated funding from CEC.

“I request an increase in TEL’s delegated authority to make financial commitments exceeding the £546m in the TEL/CEC Operating Agreement and MOU.” [ibid]

19.433 On 12 May 2011, Mr David Anderson emailed consortium representatives and advised that:

“[t]he Council is due to consider the initial outcome of the mediation and the provisions of MoV4 on Monday …

… our elected members wish to see the full details of MoV5 before holding a formal debate on the issues.” [CEC02087186]

19.434 That is a reference to the special meeting of CEC which took place on 16 May 2011. The Agenda for that meeting contained only one item of special business: an update on the project based upon a report from the Director of City Development (Mr David Anderson), which was to be produced [CEC02083756]. The only date on the report is 16 May 2011, and it is unclear when it was prepared [CEC01891505]. The report gave members an update on the outcome at the end of the mediation and told them in general terms about MoV4. Although it is in the name of the Director of City Development, who has ultimate responsibility for its contents I note that, in accordance with CEC practice, more junior officials were involved in drafting it. In this case one of the officials involved in drafting the report was Mr Coyle, who was aware that the spending limit of the project had been reached, if not exceeded by that date. Moreover, Mr Anderson was also aware from Mr Bell’s letter dated 3 May that the signature of MoV4 would commit tie/TEL to expenditure greater than £546 million and from Mr Emery’s letter dated 6 May that an increase in the expenditure limit was required. Despite that, the report makes no mention of the commitment to expenditure greater than the £546 million limit following the signature of MoV4 or of Mr Emery’s request for an increase in that limit. On the contrary the impression from the report is that the signature of MoV4 does not affect the expenditure limit imposed on the project by CEC. It states:

“The costs associated with the re-commencement of work, the transfer of [Siemens’] materials to Council ownership and related matters has [sic] been subject to independent verification by an external Chartered Quantity Surveyor and cleared with Transport Scotland officials. These costs, added to these already incurred, take the cumulative expenditure on the tram project up to 6 May 2011 to a total of £440M.” [ibid, page 0003, paragraph 3.8.]

19.435 The above observations about cost can only be reconciled with the contrary evidence of Mr Coyle and Mr Bell as well as Mr Emery’s prior request for an increase in the expenditure limit if they relate to actual expenditure, ignoring any future payments due in respect of liabilities. As I have indicated above, treating the expenditure limit as restricted to actual expenditure is misleading and contrary to CEC’s intentions when it imposed the limit. The report recommended that councillors should note the outcome of the mediation process to date, the proposals for remedial work in Princes Street and that a further detailed report would be brought to a meeting of CEC in the summer of that year. Councillors were not asked to approve MoV4 and to authorise its signature; accordingly they accepted Mr Anderson’s recommendation. Mr Anderson’s email indicates that this was because the councillors themselves did not wish any debate on the interim settlement arrangements reflected in MoV4. There is no explanation why that was their preference. The Inquiry is not aware which councillors were consulted about this arrangement, nor the nature of discussions with them. What is clear is that there is no record of any advice to councillors about the effect that the signature of MoV4 would have on the available budget of £546 million or about the request by Mr Emery for an increase in the expenditure limit. By virtue of the reference to the expenditure in terms of MoV4 taking “the cumulative expenditure on the tram project up to 6 May 2011 to a total of £440M”, as well as the omissions mentioned above, I have concluded that the report was misleading.

19.436 In the context of whether the cost of the priority works could be undertaken within the budget limit of £545 million I have also considered the briefing note for Ministers (Mr Swinney and Mr Neil, the Cabinet Secretary for Infrastructure and Capital Investment) prior to a meeting with CEC Chief Executive (Dame Sue Bruce) and Director of Finance (Mr McGougan) on 21 June 2011 [TRS00011522]. Paragraph 2 of Annex A of that document refers to the priority works to be undertaken by Infraco in terms of MoV4 and states:

“[t]he cost of this work can be accommodated within the existing £545m funding envelope, and is expected to lead to a further drawdown of grant support from Scottish Government of around £50m to end of August” [ibid, page 0003].

19.437 At first sight this might suggest that MoV4 did not result in tie/TEL exceeding the expenditure limit of £545 million or £546 million imposed on them by CEC. However, closer examination of the briefing note confirms that it is only concerned with actual expenditure to date. That is evident from paragraph 3, where it states:

“Total project spend to date is £431m of which the Scottish Government contribution is £395m (£105m of grant remains unspent), however, CEC has just invoiced Transport Scotland for a further £38m covering our share of CEC’s substantial re-mobilisation costs of the Priority Works outlined above.” [ibid, page 0003.]

19.438 In his evidence to the Inquiry, Mr McGougan noted that many issues remained outstanding in May 2011 and that the issues taken before CEC’s councillors that month were those

“that the Council needed to make a decision on there and then to make sure progress on the project was not delayed. We wanted to get as full a picture as possible before we could take the overall position back to the Council. We knew it was going to be a very difficult report for the Council to deal with. We didn’t want to go back with a less than fully developed proposal. That’s why we asked the Councillors to be patient and wait for the full picture.” [TRI00000060_C, page 0117, paragraph 295.]

19.439 This suggests that it was CEC’s officials, rather than the councillors, who limited the issues put before the May meeting of the Council; and that they did so recognising the “difficulty” that CEC faced in dealing with a decision on the project’s future. This also suggests that CEC’s officials had rejected the option of a staged approval whereby councillors would be asked to approve the temporary suspension of the limit, authorise the signature of MoV4 to enable priority works to be undertaken and approve indicative potential spend under MoV4 until August or September when members would be asked to approve MoV5. Such an approach would have ensured that strategic decisions, including increasing authorised expenditure temporarily, were taken by councillors rather than officials.

19.440 On 13 May 2011, Mr David Anderson responded to Mr Emery’s letter of 6 May. In his letter, Mr Anderson said that, at its meeting of 16 May 2011, CEC would receive a summary of MoV4, and he expressed the expectation that CEC would simply note the agreement and defer a decision on the future of the project until fuller details on scope, budget and programme were available. That seems to me to be different from CEC taking a decision “to make sure progress on the project was not delayed”, as suggested by Mr McGougan in his evidence quoted in paragraph 19.438 above. Mr Anderson’s letter continued:

“In the meantime, I would like to give you the comfort that after consultation with the Council’s Chief Executive, Group Leaders, Director of Finance, and Head of Legal Services, we will not be recommending any action being taken in relation to any technical breach of the operating agreement as a result of implementing MoV4.” [CEC02087187]

19.441 This letter implicitly acknowledges that implementation of MoV4 might place tie and TEL in breach of their operating agreement. It certainly does not contradict tie and TEL’s concerns that this was in fact the case. The context would suggest that the breach that Mr Anderson had in mind was exceeding the approved budget. Mr McGougan accepted that MoV4 constituted a commitment to an amount in excess of the authorised expenditure [PHT00000043, page 99; see also Mr Emery PHT00000052, page 97]. Rather than secure the Council’s authority for expenditure in excess of that budget, however, Mr Anderson’s letter indicated that such approval was not going to be sought but that tie and TEL would be allowed to exceed their spending limits without action being taken against them for doing so. That decision was not approved by councillors as a whole but, taking Mr Anderson’s letter at face value, had been approved by the group leaders. In my view that cannot be equated to a decision of councillors as a whole, who collectively were the only body with power to authorise the necessary increase in TEL’s expenditure limits on the project.

19.442 Mr Emery signed MoV4 for tie, but had to be instructed by CEC’s senior officials to do so [PHT00000052, pages 105–106; CEC02087193].

19.443 The decision to proceed in this way allowed progress to be made following the agreement at mediation brokered by Mr Rush by committing to expenditure which exceeded the spending limits thus far approved by CEC’s councillors, but without seeking any formal authority for that to be done. Dame Sue Bruce came to accept that this was the nature of the arrangement [PHT00000054, page 139]. She could not, however, remember why it was done. When it was put to her at the public hearing that the matter was not put before CEC’s councillors because of concern they would vote MoV4 down and scupper the entire Mar Hall deal, she said she did not think that was the case but could not remember [ibid, pages 114 and 140]. One might infer from the approval of the group leaders that such an outcome was unlikely, but Messrs Maclean and Somerville’s paper of 10 March had identified a risk that:

“some elected members seeking election to the Scottish Parliament could see this as an opportunity to set out their own position, independent of their local government party stance” [CEC02087164, page 0002].

19.444 On the evidence, it seems to me to be clear that senior CEC officials, including the Chief Executive, the Director of City Development, the Director of Finance and the Head of Legal Services, had a desire to keep decision making on the project out of the political arena at this stage, while nonetheless restoring momentum to the project and taking steps towards an ultimate settlement. Their reason for acting in this way is far from clear, but in her oral evidence Dame Sue Bruce gave an insight into their thinking in response to a question from me about the risk that councillors might ultimately reject the settlement, even though the prioritised works had been undertaken. In her response Dame Sue Bruce distinguished between the remedial works in Princes Street and the prioritised works and said:

“it was almost like a statement of good faith by both parties, that whilst the rest of the work was going on to get the bigger parcel of agreement completed [i.e. MOV5 work] that this work [MOV4 work] could start off, and I think the term that was used at the time was to get yellow jackets back out there, make a visible impact that there was work going on to contribute to the bigger piece.” [PHT00000054, page 84.]

19.445 Thus the intention of the strategy was to undertake work with the object of persuading councillors to support the settlement solution of constructing a line from the Airport to St Andrew Square/York Place on terms that had been agreed in principle, even if that strategy meant exceeding the formal limits of CEC’s existing authority. If that is correct, it transgresses the distinction drawn by Dame Sue Bruce between the role of officials and councillors. Only councillors could authorise an increase in the spending limits. Even without the commencement of prioritised works councillors were capable of deciding the future of the project and it was not the role of officials to commission such work as a means of further influencing the decision of councillors.

19.446 There is no clear evidence to identify the source of any authority for CEC’s officials to order tie to commit to payment of these sums, or to direct tie to execute MoV4. As I have noted in paragraph 19.441 above, the Director of Finance was aware that MoV4 constituted a commitment to expenditure beyond the permitted limit. I consider that in light of that awareness he had a duty, as the Chief Financial Officer of CEC, to advise his fellow officials of his views and to seek the approval of councillors as a whole for an increase in authorised expenditure. The view that the officials were operating inside the existing authority appears to have been founded on the contention that the £546 million spending limit related to payments actually made, rather than spending to which
tie was committed.

19.447 The basis for the assertion that MoV4 had the effect of restricting the spending limit of £546 million to expenditure actually incurred appears to be that following the signature of MoV4 tie no longer had any obligation to make future payments in respect of liabilities incurred under the Infraco contract before MoV4 was signed, The reasoning appears to be that either party could terminate the Infraco contract on a no-fault basis if they did not enter into MoV5. If that were the case and there were no financial consequences of termination I agree that CEC’s liability, as tie’s guarantor, would be limited to actual expenditure. As stated in paragraph 19.102 the Highlight Report to CEC’s IPG meeting on 21 January 2011 noted that actual expenditure incurred to that date was £402.4 million [CEC01715625, page 0004]. Payments totalling £78 million were due under MoV4 (see paragraph 19.371). Thus total actual expenditure was £480.4 million. On that basis it might appear that the commitments following MoV4 were contained within the budget of £546 million.

19.448 There is a fundamental error in that approach to the question of the legitimacy of the payments under MoV4. Although it is correct that once MoV5 was signed the expenditure incurred as a result of MoV4 would be legitimated, it is necessary to include within the budget provision for tie’s liabilities in the event of a failure to agree and sign MoV5. If the parties failed to sign MoV5 because tie and/or CEC did not have sufficient funding to meet tie’s obligations under the Infraco contract, the Infraco contract would terminate automatically at 5 pm on 1 September 2011 and the parties would have no future rights or obligations in respect of the future performance of the Infraco works “save as provided in Clause 94.6 of the Infraco Contract” [CEC01731817, page 0006, clauses 3.3 and 3.3.3]. Clause 94.6 of the Infraco contract provided that termination did not affect each party’s obligations in terms of various clauses specified in that clause [CEC00036952, Part 3, page 0219]. Thus tie had contingent liabilities in the event of termination of the Infraco contract. At the stage of negotiating MoV4 CEC and tie ought to have assessed these contingent liabilities to satisfy themselves that the termination of the Infraco contract in accordance with MoV4 did not result in exceeding the budget. As is mentioned in paragraph 19.562 below by a second Memorandum of Understanding dated 2 September 2011 the funding deadline was extended to 14 September 2011 [TIE00899947] and the memorandum recorded the parties’ agreement, albeit on a non-legally binding basis, that the compensation to be paid to BSC if funding was not approved was £27,761,517 to BB and £38,488,963 to Siemens. These figures for compensation in the event of termination of the Infraco contract are the best available to the Inquiry. If they are added to the actual expenditure of £480.4 million the resulting figure is £546.65 million.

19.449 Furthermore, the project budget included the cost of the supply of trams, tram-related equipment and depot equipment in terms of the Tram Supply Agreement (TSA) between tie and CAF. MoV4 did not vary or amend the TSA [CEC01731817, page 0008] but it included provisions relating to the effect of termination of the Infraco contract on the TSA which had been novated to the Infraco contract. Clause 3.3.6 of MoV4 imposed an obligation upon CAF to deliver the trams and equipment to tie or CEC in exchange for payment by tie or CEC of all milestone payments listed in Schedule 5 of the TSA even although the milestones to allow application for payment of such milestone payments had not occurred [ibid, page 0007]. Although clause 3.3.6 provided for certified deductions to reflect any difference between what should have been delivered at a milestone payment and what was actually delivered, provision should have been made for contingency payments to CAF in the event of the termination of the Infraco contract. Clause 3.3.6 conferred upon CAF the right to pursue such claims independently of Infraco. Although it has not been possible to estimate such contingent liabilities accurately, the Project Phoenix proposal illustrated the possible claims by CAF as at 24 February 2011 [BFB00053258, pages 0031–0032]. This predated MoV4. It assumed that milestone payments would be met but there was £10 million outstanding of the contract price for the delivery of the trams and some allowance should have been made prior to the signature of MoV4 for this existing liability. If that had occurred there would have been a further increase in the sum of £546.65 million, possibly by as much as £10 million.

19.450 Finally CEC incurred expenditure in respect of the conduct of the mediation, the negotiation of the detailed agreement comprising MoV4, the supervision and certification of the work undertaken in terms of MoV4 and the negotiation of the detailed agreement comprising MoV5. That expenditure should properly have been allocated to the tram budget. Even if a proportion of the salary of officials engaged in these aspects of the project was not included as costs to be set against the budget, the costs incurred in retaining Mr C Smith, Mr Rush and McGrigors prior to, and during, the mediation and in retaining Mr C Smith as SRO and independent certifier and McGrigors as solicitors for the preparation of MoV4 and Mov5 ought to have been funded from the tram budget.

19.451 When one considers actual expenditure on work undertaken following MoV4 in addition to expenditure prior to mediation plus liabilities in the event of termination under MoV4 and the cost of experts it is clear that MoV4 would result in expenditure in excess of the budget if MoV5 had not been signed and the Infraco contract had been terminated. In these circumstances the decision to authorise the signature of MoV4 and to make payments in terms of it was a matter for councillors, not officials.

19.452 On the balance of the evidence available to me, I find that the effect of MoV4 was to commit tie to expenditure in excess of the spending limit. It was, therefore, in excess of the authority conferred by CEC. Any lack of authority was subsequently addressed but only when councillors authorised officials to enter into MoV5 in September 2011. At its meeting on 30 June 2011, CEC authorised tie:

“to progress on [sic] the priority works, in accordance with MoV4, and incur expenditure within the limits of the project budget of £545m, until the end of August 2011” [CEC02083232, Part 1, pages 0023 and 0030].

19.453 Thus even the approval of MoV4 at that date was subject to the expenditure limit imposed by CEC. As I have already explained, there was clear evidence, which I have accepted, that the signature of MoV4 breached the expenditure limit. It was not until CEC’s decision on 2 September 2011 authorising the Chief Executive to enter into MoV5, the Settlement Agreement with Infraco to build the line from the Airport to St Andrew Square/York Place, that it can be said that the expenditure incurred following MoV4 was authorised by CEC. At the time that MoV4 was signed, however, no authority existed to do so, although it could have been sought in April [CEC02087164].

19.454 In her evidence Dame Sue Bruce agreed that it was “putting a coach and horses through good financial governance at the Council” for CEC’s officials to respond to Mr Bell’s concerns about MoV4 resulting in the expenditure limit being breached and to Mr Emery’s request for an increase in TEL’s delegated authority to make financial commitments exceeding the £546 million by telling them to proceed with the payment of £27 million and by indicating that no action would be taken for any breach of the expenditure limits [PHT00000054, pages 134–136]. CEC’s officials had been advised by Mr Maclean that any request for an increase in the expenditure limit had to be determined by CEC or one of its committees, and that officials had no power to determine such applications because it would involve amending an operating agreement between TEL and CEC. The granting of immunity for any breach of the expenditure limit is not an appropriate response to a request for an increase in the limit, even where it seems to have the approval of the Chief Executive, the Director of City Development, the Director of Finance and the Head of Legal Services as well as Group Leaders. By purporting to grant immunity they were in reality authorising a variation of the operating agreement by permitting increased expenditure. That was a matter solely within the discretion of CEC or one of its committees.

Payments under MoV4 before it was signed

19.455 MoV4 was signed on 20 May 2011 [CEC01731817, page 0015]. Of the £49 million, it provided for £27 million to be paid on 22 April 2011 and £9 million to be paid on 17 May 2011 – that is, on dates before it was signed [ibid, page 0010, clauses 6.1 and 7]. The £27 million was in fact paid on or around 3 May 2011 [see, e.g., TIE00107170; Mr McGougan PHT00000043, pages 95–98; TIE00687901, page 0001, paragraph 3; TIE00109614], and the £9 million was at least authorised for payment, and appears to have been paid, before MoV4 was signed [see, e.g., TIE00690794; TIE00687929; TIE00107232].

19.456 The concern with payments being made before the related agreement is signed is that it puts the money out of the paying party’s control, without them having yet secured a legally binding commitment by the other party to the terms on which the payment was made. Where the sums in question are in the tens of millions, it would ordinarily be a serious failure of governance for payments to be made in such circumstances and I see no reason to reach any other conclusion in this case.

19.457 In approving payment, CEC’s senior officials appeared to be confident that the paperwork would catch up. While that ultimately occurred, it does not alter my views expressed in paragraph 19.456. Moreover, the senior officials in CEC mentioned in paragraph 19.458 were, or should have been, aware that the signature of MoV4 resulted in tie/TEL exceeding the expenditure limits imposed upon them by CEC. As was noted in paragraphs 19.430 and 19.437 above, the restriction on expenditure could only be varied by CEC itself. CEC officials breached that limit by making payments before CEC authorised the settlement agreement or otherwise increased the limit on expenditure. This, too, was a serious failure in governance. To the extent that senior officials acted in this manner they must also bear responsibility for these governance failures.

19.458 In his letter to Mr David Anderson of 3 May 2011, which was copied to the Director of Finance and Head of Legal Services, Mr Bell said that the £27 million payment would be made:

“ … on the basis of agreement by CEC that they have the reasonable expectation that MoV4 and the draft Certifier Agreement will be executed as soon as they can convene a Council Meeting …. We understand that Infraco have advised Hg Consulting that they intend to sign MOV4 in its current form and will be sending a time bound offer letter to confirm that.” [CEC02086879, page 0003.]

19.459 Mr Bell’s letter also stated:

“ … whilst such a payment does not exceed the authorised actual expenditure of up to £546m delegated to tie via TPB, TEL and CEC, on execution of MOV4 this will become a commitment to a total project cost in excess of £546m. Consequently, in confirming agreement to pay Certificate 1, CEC confirm [sic] and accepts that this would take tie/TEL outwith their current Operating Agreements with CEC once MOV4 is signed.” [ibid]

19.460 Mr Maclean forwarded a copy of the letter to the Chief Executive. Although it appears that this letter may have been based on the actual expenditure and committed expenditure under the Infraco contract, for the reasons explained in paragraphs 19.447 to 19.451 the payments under MoV4 exceeded the authorised expenditure notwithstanding the varied terms of the Infraco contract as a result of MoV4.

19.461 In his emailed reply [TIE00687804], Mr Anderson referred to the payment being made:

“on the understanding that MoV4 and the associated certification arrangements are in train and that all the outstanding matters will be concluded quickly.”

19.462 Mr David Anderson’s evidence to the Inquiry was that, although MoV4 had not yet been signed at this stage, he understood it to have been substantively agreed by both parties and he was acting under the direction of the Chief Executive [PHT00000043, page 200]. There is some support for his understanding in a draft tie paper on MoV4, dated 20 April 2011, which notes that the terms of MoV4 had been agreed by 16 April 2011 [TIE00687724] and an updated draft dated 12 May 2011 refers to the terms being revisited on 10 and 11 May to address matters concerning CAF [TIE00086095].

19.463 BB and Siemens subsequently sent letters dated 11 May 2011 offering to undertake to enter into an agreed form of Minute of Variation [BFB00094819; BFB00094820]. The letters purport to attach the Minute of Variation, but it is not attached to the versions available to the Inquiry. It is therefore not possible to confirm what terms they contained, although I infer it was likely to have been a version of MoV4. Nor has the Inquiry identified any acceptance by CEC of the offers, which would be necessary for it to have taken legal effect. Without an acceptance, the offers from BBS could have been withdrawn at any time, at least in theory.

19.464 In any event the offer letters, being dated 11 May 2011, came eight days after the £27 million had been paid [TIE00107170]. On the face of it, therefore, CEC’s officials authorised very large sums to be paid prior to the related terms and conditions having been made the subject of a legally binding agreement. Although this did not in the event have any negative impact, since BBS did in fact sign MoV4 shortly afterwards, it is concerning that CEC’s officials should have authorised the payments in these circumstances.

19.465 tie’s non-executive directors were not told about the £27 million payment until after it had been made [Mr Hogg TRI00000045_C, page 0052, paragraph 124].

19.466 No satisfactory explanation is available to the Inquiry for the payment of such large sums of money without the necessary signed agreement, which in turn required the approval of councillors to exceed the expenditure limits imposed by them on the project. CEC offiials did not seek the necessary approval at the CEC meeting on 28 April 2011 or at the meeting of 16 May 2011. At its meeting on 16 May CEC was simply asked to note the outcome of the mediation, and did so [CEC01891389].

19.467 This was a matter of concern to Mr Jeffrey, who, in an email to Mr Emery dated 16 May 2011 noted that CEC was not to be asked to approve MoV4. He explained that the first MoV4 payment of £27 million had been made on the basis that MoV4 was due to be signed imminently, but that this had not happened. In his view, tie needed a specific written instruction from CEC to make the second payment of £9 million, which was to be paid the following day [TIE00687929].

19.468 Mr C Smith’s evidence was that the payments were made before MoV4 was signed so that progress could be made with the priority works. He recognised there was a risk in paying the sums before MoV4 was signed, but considered it was “contained”, and referred to the fact the sum fell “within the 362 figure”. That is a reference to the sum of £362.5 million agreed at mediation for the off-street works which was part of the settlement that was not agreed by CEC until September 2011. He said that whether to take the risk was a decision for the Tram senior management team (“SMT”) meeting [PHT00000053, pages 99–100]. As noted at paragraph 19.396 above, members of CEC’s SMT approved payment of the first instalment at a meeting on 28 April 2011 [CEC02086882].

19.469 Dame Sue Bruce said the sums were paid in the context of a “good faith element of the period between Mar Hall and the final signing”, and that it was fair and reasonable to pay the contractors to remobilise and get ready for the priority works [PHT00000054, page 92]. She confirmed that it would cause her concern that CEC paid £27 million when the agreement creating the liability had not been signed and could not recall why this had occurred although she considered that “[t]here must have been certainty around why we did this at the time” [ibid, page 98].

19.470 Mr McGougan said that the payments were made to honour the parties’ agreement at Mar Hall to show mutual goodwill, through executing the works (BSC) and paying for them (CEC/tie). The contractor started the works on 4 April 2011, well in advance of MoV4 being signed [PHT00000043, page 96 onwards; CEC02083825, page 0009, paragraph 3.2.1]. The payments were, Mr McGougan said, of sums withheld by tie in the run-up to mediation: “it didn’t have to wait for MoV4 because these sums were due and payable under the existing contract” [PHT00000043, pages 96–100]. In paragraph 19.410 above I have expressed my concern that the £49 million payment under MoV4 represented a partial implementation of a settlement that had not been approved by councillors. Nevertheless, I have difficulty in accepting Mr McGougan’s evidence that the payments could be made because they were due under the Infraco contract before it was varied by MoV4.. Prior to Mar Hall, the procedure followed for payments made under the Infraco contract was that BSC requested payment from tie and if tie agreed that it was due TEL applied for funds from CEC to make the necessary payment. Unless TEL requested funds from CEC for payment of sums due to BSC, CEC did not make payments to Infraco. The request from TEL with supporting documentation was an essential part of the audit trail for the CEC payments. The arrangements for payment were varied by the agreement at Mar Hall. Thereafter the audit trail depended upon Mr C Smith issuing certificates for payment.

19.471 Mr Walker also referred to the prioritised works as time-critical works to be completed before the Edinburgh Festival, which were carried out in the context of restored good faith [TRI00000072_C, pages 0084–0085, paragraph 152]. His reference and that of Dame Sue Bruce in paragraph 19.469 above support my conclusion that the payments were only due as a result of the mediation settlement and were regulated by MoV4, although it was unsigned.

19.472 In its submissions, Siemens referred to the fact that the terms of MoV4 had been agreed between tie, CEC, Siemens and BB by 16 April 2011 but that it was not executed until 20 May 2011 because of amendments required by CAF. The parties were, Siemens submitted, prepared in good faith to implement what they had agreed (BB starting the prioritised works, and CEC authorising payments) before the agreement was signed, making progress that avoided delay and therefore saved money [TRI00000290_C, page 0154, paragraph 449 onwards]. BBS did indeed start the priority works at the depot and mini-test track as early as 4 April 2011 [CEC02083825, page 0009, paragraph 3.2.1; BFB00003297].

19.473 As events turned out, CEC suffered no negative consequences as a result of £36 million being paid to BBS prior to MoV4 being signed. In return for the payment, BBS started work and substantial goodwill appears to have been generated – the importance of which I do not underestimate, given the project’s history. CEC also held a vesting certificate for Siemens’ materials and equipment valued at c. £14.6 million, which took effect on receipt by Siemens of the equivalent payment [SIE00000393, dated 15 April 2011]; and, by 17 May 2011, CEC held another vesting certificate for equipment valued at c. £402,676 [SIE00000394]. The effect of these was that, on payment being made, CEC became the owner of the items specified in the certificates. I am not, however, satisfied that in instructing these payments prior to the execution of MoV4, CEC achieved the standards of administration that one would reasonably expect of a local authority.

Council meetings, May-September 2011

19.474 Between May and September 2011, CEC held four meetings to update councillors about the future of the project and to ascertain their views, namely on 16 May, 30 June, 25 August and 2 September. These will be considered below.

Meeting on 16 May 2011

19.475 As was discussed in paragraph 19.434 above, on 16 May 2011 a special meeting was convened to discuss the project. As requested in the report to them, councillors noted the update from the Director of City Development about the outcome of mediation in the expectation of a more detailed report in the summer. For their next meeting, among other things, they also called for detailed figures and analysis of the cost of cancelling the project to enable them to weigh it up against proceeding to St Andrew Square. The information was to be as accurate as possible and officials were to provide the sources of the information so that it could be verified [CEC01891389, page 0003, paragraph 5].

Meeting on 30 June 2011

19.476 Prior to the meeting on 30 June 2011, various reports were made available to councillors. First, the Director of City Development produced a report recommending approval of the terms agreed at mediation and pursuit of the option to complete the line to St Andrew Square/York Place [CEC02044271]. This was the principal report to councillors but the other reports underlay its recommendations. In a marked departure from protocol, CEC’s standing orders were suspended to allow officials to make presentations at the meeting to explain their recommendation in that report [TRI00000084, page 0029, paragraph 91 onwards]. As Dame Sue Bruce put it:

“We had tested and re-tested it and were trying to demonstrate to elected members that we felt very strongly that our recommendations were reliable and we had come to do the right thing, the right way.” [ibid, page 0029, paragraph 92.]

19.477 Councillors were given the opportunity to ask questions of the officials at the meeting, and did so [Mr Maclean PHT00000008, pages 142–143].

19.478 The recommendation was based on a comparison of the merits of the settlement with two other options, namely continuing with the status quo or separation from the Infraco contract either by mutual agreement or unilaterally based on specific grounds followed either by re-procurement of the works or cancellation of the project. According to the report neither of these other options was likely to be materially less expensive than the recommended option and each of them involved significant risks and uncertainties. Only the recommended option would, with a strong degree of certainty, produce a tram line for Edinburgh [CEC02044271, page 0008, paragraph 3.38].

19.479 In Mr David Anderson’s opinion, continuing under the Infraco contract in its existing form was likely to be fraught with practical difficulties; would involve a lack of certainty on timescales and cost; presented the risk of tie losing in dispute resolution forums on key points of contractual principle; would involve the risk of additional project management and legal costs; and would result in a prolonged period of disruption and uncertainty for the city, with no guarantee of a positive outcome. The report noted that the “costs of this type of attrition are difficult to estimate” [ibid, page 0007, paragraphs 3.32–3.33]. Given the history of the project, it is difficult to disagree with any of these remarks.

19.480 On the option of separation, the report noted, no doubt correctly, that it came with no guarantee that there would ever be a return for the £461 million already sunk into the project [ibid, page 0007, paragraph 3.34]. If separation were to be based upon unilateral termination by tie, it could lead to a protracted and costly legal dispute with no clear outcome [ibid, pages 0007–0008, paragraph 3.36]. Again, it is difficult to disagree.

19.481 Section 4 of the report considered the financial implications of terminating the line at St Andrew Square or Haymarket as well as terminating the project. The comments on the financial implications of termination of the project were highlighted and were as follows:

“Should the project be terminated separation and cancellation costs will create a significant funding gap to be met from revenue, with a potentially higher risk to the sums for grant support already received from Transport Scotland” [ibid, page 0018, paragraph 4.4].

19.482 As is apparent two issues would arise in the event of termination of the project. The first was that, if cancellation meant CEC would receive no functioning asset for its expenditure, the expenditure would be treated as revenue spending rather than capital spending, and could not therefore be funded from borrowing [Mr Coyle PHT00000010, pages 146–147]. The second point was a perceived risk that, if the scheme were cancelled, Transport Scotland might seek repayment of grant sums already paid.

19.483 On the settlement proposal, the report also noted the option of a first phase of a line from the Airport to Haymarket only, but explained that such a line would be loss-making, require a substantial subsidy and compromise integration of the tram with bus and rail [CEC02044271, page 0009, paragraph 3.46]. The business case estimated the annual operating loss to be initially £4 million and getting no better than £3.1 million per year over the life of the project [ibid, page 0012, paragraph 3.61].

19.484 The report stated that:

“Whilst negotiations (both between the Council and Infraco and also within Infraco itself) are not yet complete the intended commercial position has been set.” [ibid, page 0008, paragraph 3.40.]

19.485 In my view, this was intended to make clear to councillors that there was no realistic prospect of any change being agreed to the key settlement parameters agreed at Mar Hall, including most importantly the off-street works price of £362.5 million [see, e.g., Mr Coyle PHT00000010, page 149 onwards]. Those had been fixed by the agreement in principle at mediation, without input from members, and indeed did not subsequently change.

19.486 The councillors approved the recommendation in the report, subject to being satisfied in due course that sufficient funding was available to pay for the settlement and that risks, particularly relating to the on-street section, were sufficiently mitigated. They instructed the Chief Executive to report on these matters later in the summer [CEC02083232, Part 1, page 0023 onwards]. In the meantime, by approving the Director’s recommendation (c) they retrospectively authorised tie to progress with the priority works under MoV4 and to “incur expenditure within the limits of the project budget of £545m, until the end of August 2011” [ibid]. As already discussed, expenditure following the signature of MoV4 required an increase in the budget but the report failed to advise councillors of that fact or of the request by TEL to increase the budget.

19.487 The approval of these steps did not rest on a political consensus. The motion that passed was proposed by the Liberal Democrat group. Separate amendments were proposed by each of the Labour, Scottish National Party (“SNP”), Conservative and Green groups. The amendments reveal the political divisions over the project. The Labour amendment favoured a line between the Airport and Haymarket, as phase one of a longer-term plan, should funding be available, and sought the resignation of the Council Leader and deputy leader; the SNP amendment proposed a referendum on the Tram project; the Conservative amendment expressed no confidence in the figures presented in the Director’s report, noting in particular that it lacked detailed figures and analysis of the cost of cancelling the project, and sought further information on that option as well as the options of building the line to either Haymarket or St Andrew Square; the Green amendment favoured a line to St Andrew Square, subject to information on cost and risks [ibid].

Other material available to councillors

19.488 In reaching the decision mentioned above it should be borne in mind that in advance of the meeting councillors had access to other documents, apart from the report by the Director of City Development. These documents underlay the Director’s report and were made available to members on a confidential basis in a “data room” because CEC was still negotiating with BSC over the settlement. Exactly what documents were made available to members in this way remains unclear: CEC was unable, in response to the Inquiry’s requests, to provide that information. It appears to have included reports by the following professional consultants: McGrigors [CEC02086431], Atkins [CEC02085600], Hg Consulting [CEC02085602] and Ashurst [CEC02086430]. According to Mr Coyle, only about a third of the members took the opportunity to consult these documents [PHT00000010, pages 143–145]. Although the majority of members would appear not to have consulted the documents, it remains relevant to consider them because they formed the basis for the recommendations in the Director’s report and may well have influenced those members who did consult them.

19.489 The documents in the data room also included a spreadsheet file (or workbook) entitled ‘Budget Appraisal’ [CEC02085613; Mr Coyle PHT00000010, page 151 onwards]. This was prepared by CEC’s finance department and compared the estimated costs of the various options for the future of the project. The figures in this spreadsheet lay behind the statement in the Director’s report that none of the alternatives to the settlement proposal was likely to be materially less expensive than that settlement which had an anticipated outturn cost of £773.4 million [Mr Coyle ibid, page 153].

19.490 The cost estimates set out in the spreadsheet, from least expensive to most expensive, were as shown in Table 19.4:

Source: Budget Appraisal prepared by CEC’s finance department comparing the estimated costs of the various options for the future of the project [CEC02085613]

19.491 Taking these headline figures at face value, the settlement proposal was by far the most attractive option when considered on cost grounds, and might reasonably be described as the only rational choice out of those presented in the spreadsheet. All other options leading to a functional tram line were forecast to be significantly more expensive, and beyond the reach of any additional funding likely to be available. The only option that was less expensive – to suspend or cancel the project – would produce no tram line for over £600 million of expenditure, and would result in a significant cost being written off against CEC’s revenue account [Mr Coyle ibid, pages 157–158]. It is no surprise that no political group committed itself to any of these alternatives to the settlement proposal.

19.492 Prior to the mediation, the front-running alternative to settlement with BSC was to separate from them and re-procure the works from another contractor. That had, indeed, been tie’s preferred option. What is particularly striking about the cost estimates presented to councillors in June 2011 is the enormous increase in the estimated cost of that option. Immediately before the mediation, tie had estimated its cost at between £646 million and £698 million [WED00000134, Part 3, page 0234, paragraph 7.3]. The discussion on the day before the mediation led to an increase of £150 million on those estimates, taking them to between £796 million and £848 million. The estimates presented to councillors in June 2011, just three months later, were £1.032 billion to £1.145 billion, an increase of a further £236 million to £297 million. Compared with tie’s original estimate, the increase was as much as £500 million.

19.493 It is clear, therefore, that, over the three months between March and June 2011, the estimated cost of re-procuring the project was increased to such an extent that it went from the least expensive option to being so expensive that it could not be seriously contemplated at all.

19.494 Such variance in the cost estimates is difficult to accept. At the very least, the enormity of the increase is a stark illustration of the extent to which subjectivity and uncertainty affected cost estimating over this period of the project.

Cost estimates: discussion

19.495 On closer analysis, the key distinction between the cost estimate for the settlement proposal and the cost estimates for the other options for a completed tram line is its degree of certainty. The estimated cost of the settlement proposal was the most certain of all options. That is not surprising, since the settlement proposal was a negotiated agreement-in-principle which had specifically aimed at cost certainty, whereas all of the other options remained, at this stage, hypothetical scenarios replete with unknown parameters and outcomes.

19.496 The uncertainties affecting all of the options except the settlement option, fell broadly into the following categories:

• the extent of tie’s accrued and future liabilities under the Infraco contract, in the absence of a settlement;
• the risks, and likely resultant costs, of re-procuring work from a new contractor.

19.497 The first of these was not known with any certainty because of the range of unresolved disputes between the parties and the unpredictability of their outcome. The second was not known with any certainty because no re-procurement process had taken place [see, e.g., Mr Coyle PHT00000010, pages 166–167].

19.498 The spreadsheet reflects that uncertainty. One significant manifestation of the uncertainty is in the risk provisions included in the cost estimates.

Risk provisions

19.499 For the settlement option, the proposed risk allowance was £77.5 million [CEC02085613, worksheet ‘McG Entitlement Basis’, cell B79]. For continuing under the existing Infraco terms, it ranged from £178.4 million to £248.1 million. For separating from BSC and re-procuring the works, it ranged from £192.4 million to £262.1 million [ibid, cells Q79, O79, J79, H79 respectively].

19.500 To the non-specialist eye, the risk provisions for these alternatives to the settlement proposal are astonishingly high. At their upper limit (£262.1 million), they are greater than the entire construction works price in the Infraco contract as originally concluded (£238.6 million [USB00000032, page 0003, clause 2.5]), and more than eight times the risk allowance for the whole project fixed at financial close (£32.3 million [CEC01338853, page 0005]). The latter figure should, however, be seen in the context of the criticisms of the risk allocation matrix at financial close contained in Chapter 12 (Contract Close). In particular it failed to give any real indication of the nature or magnitude of risk that had been allocated to the public sector (in practice, CEC). The fact that three years after financial close CEC’s options involved such large risk provisions illustrates the extent to which CEC and tie had failed to identify, manage or control the project’s risks.

19.501 However, it appears from the evidence that a considerable degree of caution is required when assessing the robustness of the risk figures. Mr C Smith, the source of many of the risk figures, accepted that many of them were based on broad exercises of judgement rather than detailed analysis. He estimated that his calculations for risk were based to the extent of one-third upon empirical evidence and two-thirds on his judgement [PHT00000053, pages 109–114].

19.502 Mr Murray, tie’s commercial director and the most senior quantity surveyor on the employer side with significant experience of the project, was not involved in the preparation of these risk allowances. When he was questioned about the risk allowances by the Inquiry, he noted that the figures for risk were not explained or supported and seemed “extraordinarily high allowances in my opinion”. I understand this comment by Mr Murray to relate to the allowances for risk in general, but he referred in particular to the figures for “primary risk” (£106 million), “bad project risk” (£40 million), “inflation risk” (£25 million) and the “specified and exclusion risk” (£77.5 million). He accepted that these allowances were highly subjective. He did not agree with them and did not consider them to be reasonable [TRI00000249, page 0018, paragraph 27]. Mr Murray’s comments also applied to another element of the estimated cost of separation, an £80 million “premium” for settling with BSC, which will be discussed further below.

19.503 The “primary risk” figures (an upper figure of £106 million and a lower figure of £36.9 million) in fact came from tie. These are the figures which Mr Bell had supplied shortly before the mediation, as an estimate of the cost associated with items excluded by BSC from its Project Phoenix proposal [TIE00355073; TIE00355074]. The view was apparently taken in compiling the spreadsheet that similar risks would exist on pricing proposals from other contractors. As noted above, there was a very significant degree of uncertainty about these figures (see paragraphs 19.501 and 19.502 above).

19.504 The £80 million “premium” for settling with BSC appears in the Budget Appraisal spreadsheet for each of the scenarios involving separation from BSC [CEC02085613, worksheet “McG Entitlement Basis”, row 59]. The description for the entry is “BSC Settlement Premium +Risk (Demob etc.) + potential further claim items”. The figure was supplied by Mr C Smith, and his explanation for it is set out in a short report [CEC02085602]. That report is very brief and difficult to understand. Taken in and of itself, it is so lacking in detail as to be virtually meaningless. It certainly does not contain sufficient information to satisfy me that there was a properly reasoned basis for the inclusion of the £80 million figure. It gives rise to a concern, which I have been unable to resolve, that it double counts other items shown elsewhere in the spreadsheet – for example, entries for BSC’s accrued entitlements under the contract. I am also concerned that it has been misunderstood by whoever assembled the spreadsheet: as I read the report, its £80 million estimate applied only to the attrition scenario, and not to separation, yet that figure has been used indiscriminately in the spreadsheet for both of these alternatives. In his evidence to the Inquiry, Mr Smith said that the figure had not been analysed in any depth beyond an impressionistic level [PHT00000053, pages 109–111]. If this report is evidence of anything at all, it is the lack of reliable, evidence-based cost estimates available to CEC when deciding on the future of the project in mid-2011.

Non-risk elements of the cost estimates

19.505 The source for many of the non-risk entries in the spreadsheet was a report by McGrigors [CEC02086431]. The purpose of this report was to set out the cost of the tram infrastructure works under each of the principal options open to CEC for the future of the project.

19.506 It had been intended for the report to include a section on the settlement agreement itself, but since that agreement remained under negotiation at the date of the report, that section was never drafted [Mr Nolan TRI00000114_C, page 0034, paragraph 86; CEC02086431, pages 0006, 0014, paragraphs 1.8 and 4 of the report].

19.507 The report did not, therefore, seek to analyse, or scrutinise, the off-street works price of £362.5 million agreed at mediation. That figure was in substance a price to settle all of BSC’s accrued claims, and to complete the line between the Airport and Haymarket. Neither the McGrigors report nor any other report obtained by CEC breaks that price down, or assesses whether it constituted a fair, or objectively reasonable, price to pay for what tie or CEC was receiving in return. Indeed, the price of £362.5 million was not analysed or scrutinised, in and of itself, in any way after having been agreed at the Mar Hall mediation [Mr Coyle PHT00000010, pages 212–214]. The only way in which its acceptability was measured was to compare it with what the project would cost under the other options.

19.508 The final version of the McGrigors report was dated 29 June 2011, but the version made available to CEC’s councillors in the data room in advance of their meeting of 30 June was an earlier version of 24 June 2011 [version of 24 June: CEC02086431; Appendix 1, CEC02086429; CEC01942217; version of 29 June: CEC01942218; CEC01942219; CEC01942220; CEC01942221; CEC01942222; CEC01942223; CEC01942224; CEC01942225].

19.509 The McGrigors report included an appendix that set out cost ranges for each of the options. These cost estimates did not include the risk allowances which appeared in the Budget Appraisal spreadsheet. Without those risk allowances, the cost differences between the options were much reduced, although the settlement agreement option was still the least expensive. At this point in time, the estimated cost of the works of BSC under the settlement proposal, and excluding any risk allowance, was £447.9 million [CEC02085613, worksheet ‘McG Entitlement Basis’, cell B36]. A comparison of that figure with the cost ranges for the alternatives set out in McGrigors’ appendix is set out in Table 19.5 (the McGrigors figures are from the latest version of its report, dated 29 June 2011 [CEC01942219]).

19.510 It is apparent from the McGrigors report that uncertainty pervaded these cost estimates.

19.511 The first point to note is that the report’s conclusions were heavily qualified. At paragraphs 1.5–1.7, McGrigors noted:

“1.5 The approach taken to the assessment of the options in this report is to arrive at the prudent assessment that should be made in relation to tie/CEC’s exposure for the purposes of carrying out a comparison of the consequences of adopting the various options identified.

“1.6 This does not involve arriving at a definitive view of the value and merits of each head of Infraco claim; that could only be achieved following detailed factual, legal and expert analysis. Instead, the approach that has been taken is to build up the commercial components of the various options in order to arrive at a working comparison between them.

“1.7 The outcome of this exercise does not represent the starting point that would be adopted in the context of any negotiations with Infraco, nor does it necessarily reflect the approach that would be taken in the context of any formal dispute resolution proceedings. It provides a context in which to examine a number of potential options in order to provide a basis of comparison between them.” [CEC02086431, page 0005.]

19.512 McGrigors did not arrive at a definitive view of the value and merits of each head of BSC’s claims, because the “detailed factual, legal and expert analysis” necessary to do so had not been carried out. Indeed, it never was carried out [ibid, page 0005, paragraph 1.6; Mr Coyle PHT00000010, page 181 onwards]. Broad assumptions had to be made. The conclusions of this report were, therefore, subject to a significant degree of uncertainty, as were the spreadsheets based upon the report [Mr Coyle ibid, page 187].

Secondly, there were other important qualifications to the report’s conclusions. The report was based on figures supplied by tie and assumed that they were correct. The accuracy of tie’s figures had not, however, been verified [CEC02086431, page 0010, paragraph 2.7]. For the valuation of disputed change, the report used a mid-point between tie’s estimate and BSC’s estimate, rather than any definitive prediction of the sum BSC might recover [ibid, page 0010, paragraph 2.8]; and, in relation to a number of key issues affecting tie’s liability, BSC’s position was not even known [ibid, page 0010, paragraph 2.9].

Extension of time

19.514 The McGrigors report proceeded on an assumption that BSC were likely to be successful in securing a significant extension of time because of delay attributable to tie but noted that the additional cost associated with that delay was “difficult to predict with any degree of certainty” [ibid, page 0006, paragraphs 1.10(c)–(d)].

19.515 Two relatively small extensions of time had been substantially resolved: EoT1 (arising from the delay in the design programme prior to financial close) and INTC 429 (arising from the utility diversion delays disclosed in revision 8 of the MUDFA programme). The cost of EoT1 had been agreed at £3.542 million for a delay of 7.6 weeks but had not been paid as it was not yet due and Infraco had only claimed £2.8 million of the total sum prior to the date of the report [ibid, page 0041, paragraph 11.4]. INTC 429 had been agreed at £210,715 for Siemens and €785,797 for CAF. BB’s claim for £565,455 remained in dispute [ibid, page 0041, paragraph 11.5]. There were two other extension of time claims which had not been resolved: INTC 536 (arising from further utility diversion delays up to 31 July 2010); and a claim arising from delays affecting work at the depot [ibid, page 0033, paragraph 9.2]. The financial claims associated with these were much higher: £43.67 million in relation to INTC 536 and £20.08 million in relation to the depot [ibid, page 0041, paragraphs 11.6–11.7].

19.516 The report acknowledged the existence of arguments in tie’s defence against the INTC 536 claim, but expressed the view that BSC was nonetheless likely to receive a substantial extension of time [ibid, page 0034, paragraph 9.6]. It does not explain that view, nor how it was reached. It does not discuss or address the conclusion of a report that tie had obtained from Acutus: that issues relating to design, and not utility diversions, may have been the dominant cause of delay. Two possible explanations for that occur to me. The first is that tie/CEC had come to accept that, on a proper construction of the Infraco contract, BSC was entitled to an extension of time based on the falsification of the utilities programme pricing assumption, regardless of other contemporaneous causes of delay. The other is that tie/CEC had come to accept that, whatever those other contemporaneous causes of delay, tie carried the contractual responsibility for them [compare, for example, BB’s closing submission: TRI00000292, pages 0133–0140, paragraphs 225–235A]. There does not appear, however, to be any record of any reasoned basis for tie/CEC in 2011 accepting responsibility for the project delays.

19.517 In addition to the four specified extension of time claims, other claims had either been made as part of the contract change process, or were reasonably anticipated [CEC02086431, page 0033, paragraph 9.3]. These claims related to: the hiatus associated with the settlement process, during which construction work was confined to the MoV4 prioritised works; delays in the operation of the clause 80 change mechanism; and presently unknown heads of claim. A significant degree of uncertainty was associated with these. As the report said:

“[i]t is almost impossible to gainsay the likely nature of these claims and even harder to predict any financial outcome” [ibid, page 0034, paragraph 9.9].

19.518 The value of these claims was, therefore, unknown and additional to the total of £64.5 million claimed under INTC 536 and in relation to the depot.

19.519 In the face of these uncertainties, the view taken in the report was that:

“it would be prudent to assume that [BSC] are likely to be entitled to an extension of time that would cover at least the period to the point at which separation occurs” [ibid, page 0034, paragraph 9.10].

19.520 That was in spite of the acknowledgement that:

“there are arguments available to tie in relation to issues of causation, conditions precedent, and so on” [ibid, page 0034, paragraph 9.11].

19.521 Chapter 10 (Events between October and December 2007) and Chapter 11 (Contract Negotiations) are concerned with the financial value of the assumed extension of time. That value was affected first by uncertainty over the correct basis for BSC’s entitlement: it was entitled either to payment of preliminaries due simply to the effluxion of time (as Lord Dervaird had held at adjudication),^[28] or to the actual costs suffered through delay. Each of these bases would lead to a different financial outcome. McGrigors favoured the view that Lord Dervaird’s decision was correct, in which event the preliminaries due for the extension of time to separation would be £54.405 million [ibid, pages 0038, 0044, paragraphs 10.15 and 11.18–11.20]. If Lord Dervaird was wrong, and BSC was entitled to its actual costs, the report proposed a figure of up to £82.176 million, but it is clear from the discussion in the report that there was much uncertainty about that [ibid, pages 0042–0045, paragraphs 11.11–11.23]. These two figures formed the upper and lower estimates of the cost of extended time that were used in the Budget Appraisal spreadsheet.

19.522 The extent of the uncertainty over extension of time is also revealed by the work underlying these estimates. The estimated duration of extension of time for which tie would be held liable rested on work by Acutus – in particular, an email from Mr McAlister dated 4 May 2011 [TIE00899963]. This estimated that the range of delay to the completion of work section D, for which tie might be found liable, was between 340 and 686 days. Mr McAlister made clear, however, that the estimate was primarily based on judgement and not on a completed or fully detailed analysis. Indeed, Acutus had not previously been directed to carry out a detailed assessment of tie’s overall liability for delay. In his evidence to the Inquiry, Mr McAlister said his advice was prepared under some pressure of time, having been requested only a couple of days previously. He lacked the information needed to fully assess the causes of delay. He could not rule out the possibility that, had a full investigation into delay been carried out, tie’s liability might have been significantly lower than his estimated range [PHT00000039, page 98].

19.523 Mr McAlister explained that the size of the range in his estimate reflected uncertainty on a key issue: whether BSC was entitled to an extension of time for matters which appeared to him not to be the dominant cause of delay. The analysis supporting his view was limited by the time available to him.

19.524 It is clear that the settlement was reached without any full investigation by tie or CEC into, or analysis by them of, the “factual” causes of delay. tie never reached the point of having sufficient information about the reasons for the apparent delay in production of the design to be able to form a view about that. Mr McAlister and his colleague Mr Burt gave evidence that a full investigation of these matters would be a very large task (perhaps involving four or five staff in work for more than a year, at a cost of several hundred thousand pounds or more), and could not be carried out in any event until the end of the project [Mr McAlister PHT00000039, pages 100–103; Mr Burt TRI00000146_C, page 0029, question 84].

Change

19.525 On the cost of change, as noted above, the report took a mid-point between tie’s estimate and BSC’s estimate (where that was known). It acknowledged that this was “not based on any scientific or definitive prediction of the sums which Infraco might recover”, although it at least reflected tie’s suggestion that changes it managed to agree with BSC were typically 50 to 55 per cent of the sum BSC had originally claimed [CEC02086431, page 0010, paragraph 2.8].

19.526 It noted that it would be prudent to proceed on the assumption that BSC would be entitled to recover on disputed INTCs relating to Pricing Assumption 1. The value of the dispute between the parties on change relating to work done was relatively low [ibid, pages 0024–0032, chapter 8], but was greater in relation to work yet to be carried out [ibid, pages 0055–0060, chapter 19].

Other matters

19.527 The McGrigors report also addressed the question of whether, on termination of the Infraco contract, tie would be entitled to reclaim any part of a £45.2 million payment that it had made to BSC at an early stage of the Infraco contract as a mobilisation, or advance, payment. If CEC accepted the settlement proposal, this payment would be set off against the overall cost of the project. If the Infraco contract were terminated, however, and BSC’s work stopped, the question would arise over the extent to which tie had received proper value for this payment and, if it had not, the extent to which it would be entitled to repayment. The view expressed in the report was that although there was

“ … some force to the proposition that some of this money [fell] to be returned to tie” it was “not straightforward to arrive at a formulation of the way in which this repayment should be calculated” [ibid, page 0007, paragraph 1.10(f)]

and that:

“[i]n the absence of a cogent explanation of the way in which the calculation of any repayment ought to be calculated, the prudent approach … would be to assume that Infraco will be entitled to retain the full extent of the mobilisation payment” [ibid, page 0047, paragraph 12.10].

19.528 It would seem, therefore, that a failure of the contract to provide clearly for the treatment of this payment in the event of termination of the Infraco contract prior to the completion of the works, was a further factor adding to the uncertainty of the cost of separating from BSC.

The approach taken in the McGrigors report was the subject of a review by Atkins [CEC02085600]. It, too, made plain the limitations on the scope of its work: it had been

“a sense check on the figures taken forward [from the McGrigor’s report] to the Budget Analysis spreadsheet produced by the City of Edinburgh Council (CEC).

“This has been a very high level review of [the processes and procedures used in the McGrigors report] with information taken at face value. Faithful+Gould [i.e., Atkins] has not had access to the contract documents nor had the time to scrutinise at a molecular level the build up of costs/prices supplied.” [ibid, page 0004.]

19.530 It was unable to comment “on the validity of the conclusions reached” by McGrigors [ibid].

19.531 In the context of risks arising from the employment of another contractor Atkins noted that in addition to the direct cost of employing a new contractor other risk items had been identified and included in the budget analysis spreadsheet. It was of the view that “between the McGrigor [sic] report and the Budget Analysis spreadsheet the relevant heads of liabilities have been covered” [ibid, page 0007]. Its report does not, however, comment on the level of the risk allowances.

McGrigors report: summary

19.532 It is pertinent for the Inquiry to consider what benefit CEC derived from the McGrigors report. In my view, it was a useful exercise to carry out and, within its express limitations, it bears to be a careful analysis. However, it was extremely limited in its utility as a cross-check of the costs which the CEC negotiators had agreed to pay for a revised deal with BSC. That is not criticism of McGrigors: it reflected the uncertainties about the correct interpretation of the contract and the surrounding facts.

19.533 Further, since it brought out costs that were, on any other option leading to the construction of a tram line, more expensive than the settlement proposal, the report could not have applied any downward pressure on the price that CEC would have to pay under the settlement agreement.

19.534 Mr David Anderson, who had not seen the reports until asked by the Inquiry to consider them, considered that they were “rather high level and [didn’t] add a lot of value” [TRI00000108_C, page 0109]. Mr Coyle disagreed with that assessment [PHT00000010, page 195]. Mr Anderson’s assessment of the context prevailing at the time was that:

“ … there was strong political pressure to complete the project and … the Council’s Chief Executive Mrs Bruce and the Chairman of tie/TEL were keen to deliver the tram to St Andrew Square. I think these reports were commissioned primarily to check that this option was reasonable, relative to the costs and risks associated with other options” [TRI00000108_C, page 0108].

19.535 Mr Coyle considered that to be a fair assessment [PHT00000010, pages 193–194]. It seems to me likely that this was the case.

Discussion on material available to councillors in June 2011

19.536 As there is uncertainty about the nature and extent of other material available to councillors in the data room this discussion is, of necessity, confined to a consideration of the material known to have been available. Viewed at the highest level, the message conveyed to CEC’s councillors by the Budget Appraisal spreadsheet was that it was too risky for CEC to contemplate completing the tram line either under the Infraco contract in its existing form, or by separating from BSC and re-procuring the work from another contractor. The extent of the uncertainties associated with those options, at least as they had been valued and presented in the spreadsheet, was sufficient on its own to rule them out as credible options.

19.537 The exclusion of these alternatives was consistent with the preference identified by the CEC management team, and in particular Dame Sue Bruce and Mr C Smith, at a relatively early stage in preparations for the mediation. Therefore the possibility has to be considered that the cost estimates of the alternatives to the settlement proposal, and in particular the magnitude of the risk elements, were deliberately set high to rule out any possibility of the councillors (for whose benefit the estimates had been prepared) taking any option other than the settlement proposal.^[29] To this it might be added that Mr C Smith, who was the source of many of the risk figures, stood to benefit from engagement as the independent certifier for the project if it proceeded [Mr Coyle ibid, page 173 onwards].

19.538 I have no hesitation in rejecting any suggestion of any intention deliberately to present unduly high-risk estimates in order to influence the decision-making of councillors. There is no evidence of any such intention and it would be entirely at odds with the impression I formed of Mr Smith and Dame Sue Bruce as individuals.

19.539 There was, however, a lack of solid, objective evidence to support the very high-risk allowances that were used. Although that is unsatisfactory, in my view little could realistically have been done to gain greater objective certainty. To have achieved greater certainty over the extent of tie’s liabilities under the Infraco contract would have required either an agreed resolution to the parties’ disputes, or decisions on those disputes from a third-party decision maker. The former was very unlikely to be achieved, having proved impossible to date, and the latter would have absorbed enormous resources of time and cost, neither of which was realistically available to tie/CEC by the spring and summer of 2011. To have achieved greater certainty over the costs and risks of re-procuring the works would in practice have required a new procurement exercise to be carried out. It is plainly unrealistic to expect that to have been done in circumstances where its main purpose was to assess the merits of a settlement proposal from the incumbent contractor.

19.540 In my view, the cost estimates of the alternatives to the settlement proposal were undoubtedly on the high side, reflecting a high degree of caution about the risks those alternatives involved. I do not, however, find any basis for criticism of those who presented these figures. In my view, they were plainly correct in the headline point that the alternatives to the settlement proposal involved significant uncertainties and risks, not quantifiable with any precision, which were not present in the settlement proposal. It was obviously important to CEC that any assessment of the cost of risks and uncertainties did not underestimate them again, as had happened at financial close. Given what had happened on the project, CEC was if anything even more averse to risk than it had been at financial close. The only way to be confident that the estimated cost of the alternatives would not be exceeded if those alternatives were chosen was to make a large provision for risk. As is clear from the evidence of Professor Flyvbjerg, the higher the risk allowance, the more confidence one can have that the cost estimate will not be exceeded.

19.541 In my view, therefore, the very high cost estimates in June 2011 for alternatives to the settlement option reflected two things: (1) the genuine uncertainty about those costs; and (2) CEC’s increased risk aversion. Those presenting the cost estimates in 2011 were not responsible for either of those factors. Both factors were a consequence of the risk inherent in the project at financial close, and the failure of the Infraco contract to allocate that risk in a manner which accorded with CEC’s expectations. In my view, any criticism about the lack of options for CEC in June 2011 is properly directed to those who were responsible for committing tie to the Infraco contract in May 2008.

Council meeting, 25 August 2011

19.542 On 30 June 2011, CEC had approved in principle the option of building a line to St Andrew Square, subject to the availability of sufficient funding and also subject to CEC’s satisfaction that the project had been sufficiently de-risked. To that end CEC had instructed the Chief Executive to report on how funding was to be provided and on the risks to be incurred by CEC in relation to utilities in the on-street section from Haymarket to St Andrew Square and the extent to which, and how, that section had been de-risked [CEC02083232, Part 1, pages 0023–0024]. Those matters were the subject of a report from the Director of City Development to councillors in advance of their meeting of 25 August 2011 [TRS00011725].

19.543 On funding, the report noted that the settlement required £231 million more than the previous budget of £545 million, based on a revised total budget of £776 million [ibid, page 0003, paragraph 3.13]. The most immediately deliverable funding source was borrowing via the prudential framework for local authority investment mentioned in paragraph 19.5 above [Mr Connarty PHT00000048, page 34]. On a 30-year repayment period, at an interest rate of 5.1 per cent per year, the annual cost of the additional borrowing was estimated to be £15.3 million, or 1 per cent of the Council’s gross budget. The total cost of the borrowing would therefore be £459 million over 30 years, reduced to a net present value of £291 million using the UK Government’s discount rate of 3.5 per cent. The revenues derived from the completed tram line would offset its costs. It was noted that the allocation of revenue streams to the Tram project had an opportunity cost, and would reduce CEC’s options to meet future service pressures which might result from demographic changes, inflation and reduced government funding. Even with the additional borrowing CEC’s existing capital commitments would be honoured [TRS00011725, page 0007, paragraph 3.32].

19.544 The report explained that if the Tram project were cancelled, there would be a one-year negative revenue impact of over £161 million, equivalent to a one-year increase in council tax of 80 per cent, which CEC’s reserves were not sufficient to meet. That assumed the Transport Scotland grant funding would not have to be repaid. The negative revenue impact would arise because, without a completed asset, any costs arising as a result of the separation could not be capitalised [Mr Coyle TRI00000144_C, page 0112, answer 59; PHT00000010, page 146]. As discussed in paragraph 19.76 above the impact of funding the revenue shortfall by cutting CEC services would be unacceptable. There would also be reputational damage, potentially harming the city’s future investment prospects [TRS00011725, page 0007, paragraph 3.34].

19.545 On risk, the report noted that a detailed review of the key project risks had been carried out and had been ‘validated’ by Faithful+Gould, construction cost management consultants, to ensure appropriate risk management procedures were in place [ibid, pages 0001–0002, 0004, paragraphs 2.3, 3.4–3.6, 3.16]. A confidential appendix summarising their findings was said by the report to have been shared with councillors. On utilities, the report noted that further investigations had been instructed on key sections between Haymarket and York Place, in particular to identify conflicts arising from the finalised design, including the locations for overhead line poles [ibid, page 0002, paragraph 3.8]. Trial bore holes supplemented by radar scanning had identified around 550 potential utility conflicts, although not all of these were believed to lie on the critical path [ibid, page 0002, paragraph 3.9]. An appropriate risk allowance was said to have been included in the project budget to cover clashes between utilities and infrastructure [ibid, pages 0002–0003, paragraph 3.10].

19.546 The report’s recommendations included that the councillors:

• agree to the funding proposals;
• agree to increase CEC’s prudential funding limits to accommodate the funding proposals;
• note the risks highlighted in the report;
• agree arrangements that it proposed for the project’s governance; and
• note the appointment of Turner & Townsend as project managers in place of tie.

19.547 At the meeting, a Liberal Democrat motion sought approval of those recommendations, with amendments concerning funding and risk. In relation to funding, the proposed amendment sought to allow CEC to seek funding without being bound to do so from the resources specified in the report. On risk, the proposed amendment was to note the risks and instruct the Chief Executive to pursue further risk mitigation prior to settlement and beyond. These amendments were no doubt tabled in an attempt to address opposition to the recommendations, reflected in the competing amendments which were proposed.

19.548 An SNP amendment contrasted that party’s historic opposition to the Tram project with the support the project had received from the other parties, and sought a full public inquiry.

19.549 A Conservative amendment sought, inter alia, to reject the funding package and instruct the Chief Executive to negotiate a binding cost for termination of the existing contractual arrangements and develop an alternative funding package for future tram line construction.

19.550 A Green Party amendment called for ongoing work to continue to further reduce risks and fix costs for the line to St Andrew Square. It also noted that the likely cost of cancellation of the project was £161 million in one financial year, which CEC could not afford, and that financing of the construction of the line to St Andrew Square through prudential borrowing would have a possible impact on the delivery of other CEC services in the future.

19.551 The ultimately successful amendment was proposed by Councillor Hinds on behalf of the Labour group. Support from the Conservative group was sufficient for it to pass because of abstentions by SNP members. The councillors approved the governance proposals but rejected those for funding. As the minutes noted, the resolution of 30 June 2011 in favour of a line to St Andrew Square/York Place had been subject to funding. The rejection of the funding proposals meant the approval of that option fell away. The majority of those councillors who voted agreed that that option had not been sufficiently de-risked, and that the proposal with the least risk was to build a line between the Airport and Haymarket as phase one of a longer-term, strategic plan. The councillors instructed the Chief Executive to negotiate a settlement agreement reflecting that revised approach.

19.552 This outcome came as a surprise to nearly everyone [Ms Hinds TRI00000099_C, page 0140, paragraph 566; Dame Sue Bruce TRI00000084, pages 0056–0057, paragraph 180; Councillor Dawe TRI00000019_C, page 0215, paragraph 807; Mr Eickhorn TRI00000171, pages 0078–0079, paragraph 194; Mr Cardownie TRI00000104_C, pages 0069–0071, paragraph 144; Evening News report, WED00000167]. Dame Sue Bruce said in evidence to the Inquiry that, following the decision, there was:

“chaos because nobody in the Chamber expected the motion to be approved. The press were all over it and you could tell from the reactions of the members that they had not really expected it to be approved … I had ministers, Infraco reps and the papers all calling on the phone.” [TRI00000084, page 0058, paragraph 185.]

19.553 Some witnesses expressed the view that this decision was influenced by wider political considerations, rather than being based on the best interests of the project [Councillor Dawe PHT00000001, page 200; Councillor G Mackenzie TRI00000086_C, pages 0152–0153, paragraph 473; Mr Donald Anderson TRI00000117_C, pages 0088–0089, paragraph 220].

19.554 Councillor Dawe described this decision as “absolutely disastrous” and “very foolish”, and said there was outcry at the decision with strong condemnation from the press and stakeholders [TRI00000019_C, pages 0213–0214, paragraphs 802–803].

19.555 The decision was, arguably, not without logic. It reflected the amendment that the Labour group had proposed at the June meeting. Councillor Whyte, of the Conservative group, explained that:

“My group voted for it because it was the quickest and cheapest way of getting out of the contract whilst still having something and it would certainly have left the possibility of extending to St Andrew’s [sic] Square/York Place in the not too distant future.” [TRI00000125, page 0057, paragraph 71.]

19.556 Moreover, at the June meeting the Conservative amendment had sought further information on other options, including building the line to Haymarket.

19.557 If, as appears to have been the case, some councillors remained uncomfortable with the level of risk still to be borne in relation to the on-street work, it was rational for them not to commit to that risk. A majority of the councillors clearly supported a tram line of some extent and having rejected the on-street works as too risky, approval of a line between the Airport and Haymarket was one way to get something for all of the money spent to date. The decision instructed the Chief Executive to negotiate a settlement with BSC to reflect members’ preference for the terminus at Haymarket. Since the construction of a line to Haymarket was the subject of BSC’s Project Phoenix proposal, it is probable that such a settlement would have been achieved. Such a settlement would also avoid the risk of a single-year impact on the Council’s revenue budget, which the councillors had been told would arise if the scheme were cancelled. On the basis of the information provided to councillors at the time, such a payment would only arise if the Infraco contract was terminated. As ultimately occurred, a negotiated settlement for a truncated line, whether it ended at Haymarket or St Andrew Square or York Place, would result in a capital asset being obtained in exchange for the expenditure incurred. In such an event the risk of a one-year revenue impact, mentioned in paragraph 19.65 above, would be avoided.

19.558 The option of a line to Haymarket had not been raised in the officials’ August report. At the June meeting CEC had rejected this option, because CEC officials had advised that it would be loss-making and in need of annual subsidy. In the context of Carlisle 2, Mr Eickhorn described a similar proposal to terminate the line at Haymarket with the intention of extending it later as “an idea born out of desperation”. Although he acknowledged that it would have been “a first step to establishing a functioning tram system and significant parts would have been built such as the depot”, it would not have fulfilled the objective of removing traffic from the city centre [TRI00000171, pages 0053–0054, 0078–0079, paragraphs 117 and 194]. This option was also criticised by others [see, eg, Mr Richards TRI00000116, page 0025, paragraph 31; Dame Sue Bruce TRI00000084, pages 0056–0057, paragraph 180; Councillor Dawe PHT00000001, page 200; Mr Maclean TRI00000055_C, page 0047, paragraph 129; Mr McLaughlin TRI00000061_C, page 0009, paragraph 21; Mr Donald Anderson TRI00000117_C, pages 0088–0089, paragraph 220; Mr Cardownie TRI00000104_C, pages 0069–0071, paragraph 144; Mr Wheeler TRI00000092_C, pages 0071–0072, paragraph 159]. Transport Scotland considered a line to St Andrew Square to be more logical than a line which stopped at Haymarket, given that the bulk of the infrastructure had been installed albeit not completed; the Scottish Ministers agreed with that view [Mr Ramsay TRI00000065_C, page 0029].

19.559 The councillors’ decision to stop the line at Haymarket had significant implications for the infrastructure works themselves. It introduced the need to design a new turn-back at Haymarket and an increase in the price; the need to address compensation for the non-execution of the on-street works; and caused delay [Mr Eickhorn TRI00000171, page 0079, paragraph 196; TRI00000179, page 0007].

19.560 Mr Swinney decided that, in consequence of the Council’s decision to stop the line at Haymarket, he would not release the remainder of the grant funding [TRS00011809; TRI00000149_C, page 0121, paragraph 377]. Transport Scotland therefore wrote to Dame Sue Bruce, advising that the Scottish Ministers took the view that the Council’s decision represented a fundamental change to the basis on which they had agreed to grant fund the project, and that they were not prepared to make any further payments [CEC01721794]. Mr Swinney said he:

“knew full well if [he] withheld money at that stage the Council would have to reverse its decision to stop the line at Haymarket” [TRI00000149_C, page 0121, paragraph 379].

19.561 Mr Swinney plainly considered that the Scottish Ministers, as the principal funder of the project, were in a strong position to influence decision making. That is how it was perceived by councillors [see, e.g., Councillor Whyte PHT00000003, page 99; Councillor Hinds TRI00000099_C, pages 0141–0142, paragraphs 569–571; Councillor Jackson TRI00000106_C, page 0152, paragraph 109(b); Councillor Dawe TRI00000019_C, page 0215, paragraph 809]. Indeed, Councillor Hinds said that she felt that the decision was that of the Scottish Ministers rather than CEC [TRI00000099_C, pages 0141–0142, paragraph 571].

19.562 On 30 August, BSC wrote to CEC, offering to extend until 5pm on 2 September 2011 the deadline for CEC to approve funding. In the absence of such approval the Infraco contract would terminate and, as discussed in paragraph 19.448, compensation would fall due by CEC to BB and Siemens [TRI00000179, page 0007]. That outcome was in line with clause 3.3 of MoV4 [CEC01731817, page 0006]. tie, CEC and BSC agreed a second memorandum of understanding on 2 September 2011 formally extending the funding deadline to 14 September [TIE00899947]. The memorandum recorded the parties’ agreement, albeit on a non-legally binding basis, that the compensation to be paid to BSC if funding was not approved was £27,761,517 to BB and £38,488,963 to Siemens. Those figures had been proposed by BBS, in a detailed breakdown supplied to CEC on 21 June 2011 [SIE00000399]. They appear, therefore, to have been BBS’s proposal for the sum to be paid to them under clauses 3.3.4–3.3.6 of MoV4 [CEC01731817, page 0006]. It is not clear what, if any, scrutiny CEC applied to these figures, or on what basis CEC was prepared to agree to them even on a non-binding basis. They excluded the cost to CEC of purchasing the trams [ibid, clause 3.3.6 of MoV4]. Mr Emery’s evidence was that he did not know how these figures had been calculated and considered that they “were excessive and designed to encourage CEC to proceed to complete the project” [TRI00000035, page 0030].

19.563 The memorandum also recorded the parties’ agreement that, as a consequence of CEC’s decision on 25 August, BSC were entitled to additional cost and time. Although there was only a two-week delay between that decision and its reversal on 2 September 2011, which will be discussed further below, that caused a six-week delay to the programme for which CEC had to compensate BSC [Mr Maclean TRI00000055_C, page 0048, paragraph 132]. Those costs were ultimately fixed by the Independent Certifier, Mr C Smith, at £4.541 million [CEC02031937]^[30], and formed part of the final cost of the project [WED00000101, page 0005, tCO529]. These costs would not have been incurred if the councillors had followed the officials’ recommendation at the August meeting. Having said that, I do not consider the councillors should be blamed for the cost increase, not least because they made their decisions without having been fully informed of their funding implications. I will elaborate on that view later in this chapter.

Council meeting, 2 September 2011

19.564 A further meeting of CEC’s councillors was held on 2 September 2011. It had been called by the Lord Provost under CEC’s Standing Order 6. The Lord Provost ruled, in terms of Standing Order 22, that there had been a material change of circumstances since the meeting of 25 August 2011, being the further information about the financial implications to CEC of terminating the tram line at Haymarket [CEC02083154].

19.565 The Chief Executive’s report to that meeting sought to update the councillors on critical developments since the meeting of 25 August that had a material effect on the Haymarket option [CEC01891495].

19.566 The report commented on Transport Scotland’s letter of 30 August, and noted that the remaining balance of the grant that the Scottish Ministers were now refusing to pay was £72 million [ibid, page 0002]. That new funding shortfall would result in CEC having to fund around £4.8 million per year out of its revenue budget for 30 years.

19.567 An Appendix noted the steps taken in implementation of the councillors’ decision that a line be built only to Haymarket [ibid, page 0007]. Dame Sue Bruce had met BBS, which, although expressing willingness to discuss a further truncation of the route to Haymarket, had raised a number of issues that required to be addressed. These included:

• the additional costs resulting from CEC having reversed its June decision to proceed with a line to St Andrew Square/York Place. These costs included: the cost of demobilising sub-contractors who had been ready to start on-street on 5 September 2011; prolongation costs to BSC; and a loss of profit claim by BSC for the section between Haymarket and St Andrew Square, the extent of which, as yet, was unclear.
• whether the existing switch at Haymarket Yards, which had been designed for occasional use, could be used as a regular turn-back point. There were other options, but they would come with additional cost.
• other technical matters would have to be addressed.

19.568 The report said that, on automatic termination of the Infraco contract, “[t]he costs of termination would require to be agreed with the Infraco” and were “likely to be significant” [CEC01891495, page 0001, paragraph 2]. That is a reference to the anticipated cost to CEC of meeting its obligations on termination of the Infraco contract on “no-fault” grounds under clause 3.3 of MoV4. CEC’s officials had agreed with BBS, albeit on a non-legally binding basis, that the payment due by CEC to BBS on these grounds would be £66,250,480 [TIE00899947, page 0012, SP4]. As noted above, that figure appears to have come from BBS, and it is not clear to the Inquiry that it was subject to any scrutiny or challenge by CEC’s officials. The figure stands, nonetheless, as an indication of the level of claim likely to have been made by BBS if CEC refused to fund the project.

19.569 CEC was, therefore, faced with the imminent termination of the Infraco contract if it did not agree to fund completion of the line either to St Andrew Square/York Place or to Haymarket.

19.570 Against that background, the Chief Executive’s report included recommendations to councillors to agree, once again, to pursue the option to build the line to St Andrew Square/York Place; to agree to the funding proposals in the 25 August report; and to authorise her to enter into a settlement agreement, unconditionally in relation to funding [CEC01891495, page 0003]. The councillors approved those recommendations following several rounds of voting.

19.571 Councillor Hinds’ evidence was that the Council had no option but to go to St Andrew Square/York Place, and that it was “bullied” into it by the Scottish Ministers [TRI00000099_C, pages 0141–0142, paragraphs 569–571]. Mr Maclean agreed that the “members had effectively no choice. They had to change their mind” [TRI00000055_C, page 0047, paragraph 130; see also Councillor Jackson TRI00000106_C, page 0152, paragraph 109(b)].

19.572 An amendment on behalf of the Labour group [CEC02083154], which was unsuccessful, referred to the Scottish Ministers’ decision to withhold the final project grant payment as “a belated and aggressive tactic which forced the Council into an intolerable level of risk and financial commitment”, accepted that “to reject this thinly veiled ultimatum, to take the trams to St Andrew Square, would be likely to lead to the cancellation of the project”, and noted that to complete the line to St Andrew Square would require CEC to borrow at least £231 million, raising its debt to unprecedented levels. It also noted concern that this would “lead to an ongoing reduction in services” [ibid, page 0005].

19.573 An SNP amendment noted that “the cost of cancellation notified to the Council is £161m” [ibid, page 0006].

19.574 A Conservative amendment again sought to instruct the Chief Executive to negotiate a binding cost for termination of the existing contract and to develop an alternative funding package for any future line.

19.575 A Green Party amendment noted that Transport Scotland’s decision to withhold funding effectively made the option of a line to Haymarket financially unviable. It also noted that the cancellation cost was £161 million, and that this would devastate CEC’s finances requiring large increases in council tax or sale of council assets. It also noted that the £15 million annual cost of prudential borrowing would have a “possible impact on delivery of other Council services in future” [ibid, page 0009].

19.576 On 14 September 2011, Transport Scotland announced the reinstatement of its grant funding, following the councillors’ decision of 2 September to construct the line to St Andrew Square/York Place. The remaining £72 million of that funding would now be paid. A team of experienced project managers from Transport Scotland would take up key senior roles in the new governance structure [TRS00012212].

19.577 In my view, the Scottish Ministers’ intervention was a critical factor in CEC’s councillors reversing the decision that they had made in August. I do not accept the description of their intervention as “bullying”: as principal funders of the project they were entitled to bring their influence to bear upon it.

19.578 Nor do I consider that councillors should be criticised for their decision of 25 August even though its reversal the following month had a measurable financial impact of £4.541 million. Councillors have an essential role to play in the taking of strategic decisions at appropriate stages in major infrastructure projects. It is important that they are asked to make those decisions at the appropriate time, and are given the information they need to do so. An important piece of information for councillors was the potential impact of the mediation settlement on project funding. Since the settlement was for a shortened line instead of the full Phase 1(a), it was in my view clear from the moment the mediation concluded that the project was no longer the one that the Scottish Ministers had agreed to fund [CEC00021548; CEC00021547]. This was the case whether the line ended at Haymarket or continued to St Andrew Square or York Place. Stopping the line at Haymarket would also require an operating subsidy [CEC02044271, pages 0012–0013, paragraph 3.61], another departure from the basis on which the grant was made. In those circumstances it was, in my view, incumbent on CEC’s officials to obtain, if they could, written confirmation from Transport Scotland about the Scottish Ministers’ attitude to funding the project in either of these guises, and to report on that response to councillors. Councillors should have been given that information before they were asked to vote on whether to approve the mediation settlement or pursue a different strategy. The councillors should also have been told, before voting, what the financial implications for the project and CEC would be if the Scottish Ministers withdrew their funding. Had that been done, the councillors would have made their decisions fully informed about the funding implications of stopping at Haymarket, instead of being confronted with that information only after they had made their decision. Based on what they ultimately did at their September meeting, they would probably not have voted to stop at Haymarket, and the £4.5 million delay costs would not have been incurred. It is not clear to me why councillors were not given this information. At their meeting on 16 May, they had resolved to instruct the Chief Executive to “to seek absolute clarification on the new Scottish Government’s intention in relation to the release of the remainder of the £500 million Government Grant and that such an update be received by Council prior to any further decisions on this project” [CEC01891389, page 0002]. Notwithstanding that instruction, it appears clarity was not forthcoming. The report to the meeting on 30 June 2011 stated that:

“[f]uture capital allocations from the Scottish Government are, at this stage, uncertain and may not be known in advance of the September spending review …

“Given the current decision making timetable, further engagement will be needed with the Scottish Government before a funding package for the project can be concluded. … The Scottish Government’s current position is that they remain committed to a grant of up to £500m. Once clarity on funding is established, the proposed solution will be brought back to Council.” [CEC02044271, page 0011, paragraphs 3.54–3.56; see also page 0018, paragraph 4.5.]

19.579 The councillors were, therefore, called upon to make a strategic decision on the project in June without clear information about the funding implications of their decision. They were given funding information in August, but unsurprisingly that did not deal with the Haymarket option they had apparently rejected in June. It is not clear to me whether failure in this regard lay with CEC’s officials, in not taking sufficient steps to obtain clear information, or with Transport Scotland and/or the Scottish Ministers in not providing it. Whatever the explanation, I am not prepared to criticise the councillors for the costs resulting from the project delays consequent on CEC’s decisions in August and September 2011. It is also, in my view, unsatisfactory that the timing of the August meeting was such that the councillors’ decision had an immediate, and substantial, cost impact on the project. Ideally, meetings should be timed so that the strategic decisions of councillors can be investigated and given effect without having an immediate and dramatic impact on costs. I recognise, however, that the settlement negotiations were complicated and drawn out and that it may not have been possible for the final decision to have been taken any earlier.

19.580 In paragraphs 19.260–19.263 above I have referred to the telephone call made by Mr McLaughlin to the Cabinet Secretary (Mr Swinney) before the final offer of settlement was made by CEC officials. I concluded that the purpose of that call was to obtain Mr Swinney’s approval of the proposed offer and that he gave it. There was no evidence that CEC officials were made aware of the content of that conversation. Nevetheless it seems to me that Mr McLaughlin’s continued involvement in the mediation might have given them some comfort that the grant would continue to be available if a settlement was achieved that resulted in the line terminating at St Andrew Square. To proceed to settle the mediation on that basis was not unreasonable as any settlement was to be conditional on CEC’s approval which in turn would depend upon CEC having the necessary funds from whatever sources. However, following the conditional settlement it would not, in my view, have been appropriate for officials to continue to assume the availability of the continued grant funding from the Scottish Ministers for the purposes of advising councillors on that matter.

On-street price

19.581 The parties were unable at mediation to agree a price for the on-street works between Haymarket and St Andrew Square/York Place. BBS had proposed a “target price” of £39 million.

19.582 The price for these works was the subject of further discussion between the parties over the summer of 2011. They ultimately agreed a target price of £47,384,510 (split: £34.9 million for BB and £12.5 million for Siemens) [CEC02085642, page 0003, clause 2.1; SIE00000184].

19.583 Mr Gough of BB attributed the increase from the Mar Hall proposal as being “in large part dictated by CEC’s decision to extend the tram from St Andrew’s Square [sic] to York Place” [TRI00000295, page 0004, paragraph 26].

19.584 BBS’s price proposals for the on-street works were the subject of some critical comment. In a report dated 19 August 2011, Faithful+Gould, which had been engaged by CEC to advise on a post-settlement agreement budget, commented on the price then proposed by BBS for the on-street works [CEC02083979]. It expressed the view that the costs presented by Siemens for the on-street works were “extremely high and not value for money”, but that CEC had little negotiating leverage because they had already paid for Siemens’ materials and changing a contractor on the systems works would probably introduce a very high risk. Both Siemens’ and BB’s price proposals were said to be “grossly inflated”. Faithful+Gould recommended that CEC consider instructing the works on a cost-plus basis [ibid, pages 0005–0006, paragraphs 2.6–2.8].

19.585 These comments have to be seen in context. Faithful+Gould suggested a revised price for the on-street works of £41.7 million [ibid, page 0016, paragraph 4.2.4.1], subject to further investigation and re-measurement [ibid, page 0016, paragraphs 4.2.4.2–4.2.4.3]. The target price ultimately agreed for the on-street works in the settlement agreement was £47.38 million [see above]. The report noted that, following observations already made by tie, Siemens’ proposed price had been reduced from £20.16 million to £14.48 million [ibid, pages 0014–0015, paragraph 4.2.3.1], and that a further reduction of between £1 million and £1.5 million could be realised following completion of the negotiations. In the event, the target price agreed for Siemens’ on-street works was £12.5 million, suggesting success by CEC/tie in negotiating a price for Siemens’ on-street works that reflected their advisers’ view of what would be reasonable.

19.586 The BB price was also reduced from that considered by Faithful+Gould. Faithful+Gould expressed the opinion that a reduction of around £6 million might be negotiated from BB’s proposal of £36.76 million then under consideration [ibid, pages 0014 and 0016, paragraphs 4.2.2.5 and 4.2.4.1–4.2.4.2]. They also suggested that other elements of BB’s proposal be further investigated, including their proposal of £5 million for indirect costs [ibid, page 0016, paragraph 4.2.4.2] and that certain works might be repriced provisionally and re-measured [ibid, page 0016, paragraph 4.2.4.3]. The target price agreed in due course for BB’s works was £34.9 million, again suggesting a measure of success in negotiating them down.

19.587 Mr C Smith agreed with Faithful+Gould’s comments, but said that CEC was ultimately able to address and overcome the concerns it had raised [PHT00000053, page 117 onwards].

19.588 BB conducted an open-book tender process for their sub-contractors, in which Mr C Smith participated on behalf of CEC. Dr Keysberg of BB described the process as a transparent one in which it was difficult to inflate a price, and as being close to a cost-plus fee basis, which Faithful+Gould had recommended [PHT00000036, pages 76–78]. Mr Foerder referred to the change of culture after Mar Hall and described “an approach of partnership and open collaboration” with CEC in concluding the settlement agreement. He said that the CEC representative was permitted to be present at negotiations with the sub-contractors over their prices [PHT00000044, page 157 onwards].

19.589 Mr C Smith explained that BB’s prospective sub-contractors tendered against bills of quantities and that, through his supervision of that process, he could see clearly which prospective sub-contractor proposed the best value price. The lowest tendered rates were incorporated into the revised Infraco contract. Mr Smith took encouragement from his involvement in the tendering process that he was able to see exactly what the market rate was for the work. Measurement of that work thereafter took place, using the tendered values. He was satisfied that the prices paid by CEC for the on-street civil engineering works represented good value.

19.590 In addition to the cost of the sub-contracted work BB included a mark-up for themselves, to cover their overheads, profit, preliminaries and work in managing the sub-contractors. Mr Smith was not given access to the process used for arriving at the mark-up percentage used by BB, which he said was the same one as had been agreed in the original Infraco contract. It was Mr Smith’s view, however, that this mark-up percentage was excessive. His attempts to renegotiate it were rebuffed.

19.591 As reported by Faithful+Gould, BB used a mark-up of 10 per cent, made up of 7 per cent for overheads and 3 per cent for profit. Faithful+Gould described that as high in the prevailing economic climate, but as reflecting the values contained in the original contract [CEC02083979, page 0013]. That is consistent with the view expressed by Mr C Smith. Faithful+Gould also expressed the view that £5 million for BB’s indirect costs appeared excessive when viewed against the programme timescales. It also noted that the off-street price might itself already include an element of built-in indirect cost, although it did not know if that was so [ibid, pages 0012–0014 and 0016, paragraphs 4.2.2.3–4.2.2.4 and 4.2.4.2]. BB’s share of the off-street price did, in fact, include an element for indirect cost: their Project Phoenix price proposal included £51.3 million for that. Since that price proposal included direct costs relating to the on-street works, it is reasonable to infer that this indirect cost partly related to the on-street works [BFB00053258, page 0012].

19.592 I see no reason not to accept Mr Smith’s evidence that the cost of the sub-contracted part of the on-street civil engineering works ultimately represented good value reflecting the market at the time. That was the consequence of the open tender process that Mr Smith described.

19.593 I have some difficulty in accepting his view that the BB mark-up percentage was excessive. This had been negotiated with BB prior to financial close in 2008. BB had been selected as the preferred bidder following a tender process and had participated in a negotiation with tie in which price was, as one would expect, a major component. It is reasonable therefore to infer that the mark-up percentage for BB agreed at that time was the best which could be negotiated in the market in relation to this project. Although Faithful+Gould remarked in its report that the mark-up was high for the prevailing economic climate, that was not the subject of detailed evidence before me and I do not feel able to conclude that it was the case. Even if that were the case, I can understand that BB would wish to retain the higher mark-up rate negotiated for the Infraco contract which was to be varied once agreement was reached. I prefer to find that there was room for differing views about the appropriate rate for such uplifts and that BB’s view prevailed. In my view, that is plainly a consequence of its strong negotiating position.

19.594 As noted in the Faithful+Gould report, Siemens had accepted reductions in its price following negotiations with tie, and the price ultimately agreed with Siemens reflected the further reduced price recommended by Faithful+Gould in its report.

19.595 Mr C Smith provided further explanation of the negotiation of Siemens’ price, by reference to a document recording discussions about the on-street price which had been circulated on 16 August 2011 [TIE00691425]. This document noted that the reduction in Siemens’ proposed price for the on-street works from £20 million to £14 million, referred to by Faithful+Gould in its report, followed tie having identified that the higher price included provision for preliminaries that tie considered already to have formed part of the off-street price. Although Siemens had responded to all of tie’s detailed queries, tie’s view as expressed in that document was that:

“there are still many issues that remain illogical and a lot of detail missing. There is no attempt to correlate programme with resources for each section of work.” [ibid, page 0003, paragraph 2.]

19.596 The document noted further that, at a meeting on 10 August 2011:

“… Siemens stated that they have arrived at a price for the works and there was to be no further reduction. Infraco confirmed at this meeting that the price was the price and if we did not like it then we could find another contractor.” [ibid, page 0004.]

19.597 It also noted that tie’s assessment of the price for Siemens’ works was £8.399 million. That was considerably below the price that CEC ultimately agreed to pay for Siemens’ part of the on-street works. Notwithstanding tie’s concerns, Mr Smith’s evidence was that he became satisfied that the price CEC agreed to pay was justified, and referred to a greater understanding of that price which he derived from a project programmer. Mr Smith agreed with the way this had been put by Mr Eickhorn in his evidence to the inquiry, that the on-street price included the cost of the programme extension which was necessary if the on-street works were to be carried out, the off-street price having been based only on the duration of programme needed to complete the line to Haymarket [Mr Eickhorn TRI00000171, page 0076, paragraph 187 onwards; Mr C Smith PHT00000053, pages 124–129].

19.598 In light of this evidence, I see no basis for concluding that the price CEC ultimately agreed to pay for Siemens’ element of the on-street works was excessive.

19.599 Mr Bell’s understanding was that Siemens, having conceded at Mar Hall a £14 million reduction in its Project Phoenix price from £140 million to £126 million, then simply sought to recover that £14 million by adding it to the cost of the on-street works [TRI00000109_C, page 0168, paragraph 144]. I am not sure I have fully understood why Mr Bell reached that view, except that it may derive from an email chain involving Mr Coyle, Mr Murray, Mr Bell and Mr Emery in which Mr Murray gives an account of a meeting he had with Mr Eickhorn about the calculation of Siemens’ price for the on-street works [TIE00688781]. Mr Murray also mentions the reduction in Siemens’ price for off-street works agreed at Mar Hall as being £14 million. Both Mr Bell and Mr Murray are clearly wrong about the amount of that price reduction. As indicated in paragraph 19.348 above, the discount was £11 million, not £14 million.

19.600 Apart from the error mentioned in paragraph 19.599, suggestive of a lack of rigour in the assessment of Siemens’ estimate for the on-street works, the assertion that Siemens sought to recoup the £14 million discount [sic] by adding it to the actual cost of the works plus an allowance of £2 million for changes since Mar Hall to arrive at a sum for the on-street works also appears to me to involve a misunderstanding of Siemens’ pricing. The difference between the estimated cost of the construction work, including the installation of equipment on the street, and the estimated total price was principally due to an extension of about eight months in the programmed completion date in the Project Phoenix proposal, which had not included the on-street works and is mentioned in paragraph 19.312 above. Moreover the terminus of the truncated line was extended from St Andrew Square to York Place. The fact that, in terms of the Employer’s Requirements, Siemens had to commence and complete final Systems Acceptance Tests after the completion of construction work also required Siemens to retain the necessary staff for this purpose. All the above factors contributed to increased costs.

19.601 The price for both the on-street and off-street works rose subsequent to the settlement agreement as a consequence of further change. That will be considered further in Chapter 20 (Post-Mar Hall), which relates to events leading to the completion of the line to York Place and the final cost of the project at the commencement of revenue service in May 2014.

Settlement agreement

19.602 tie, CEC and BSC signed a settlement agreement, known as MoV5, on 15 September 2011 [BFB00005464 (also CEC02085585; CEC02085622)]. This finally settled the parties’ dispute and made extensive revisions to the Infraco contract. Its key provisions included the following:

• An off-street works price of £362.5 million (being the price which had been agreed at mediation), being “genuinely a fixed price” [Mr Foerder TRI00000095_C, page 0095, paragraph 285(b)].
• A target price for the on-street works of £47,384,510, split £34,911,010 to BB and £12,473,500 to Siemens.
• A full and final settlement of all the parties’ claims against one another under the Infraco contract, with a few specified exceptions [BFB00005464, pages 0004–0005, clause 3]. The exceptions included any disputes arising in relation to the prioritised works under MoV4, third-party claims and claims by tie for, inter alia, latent construction defects [Mr Foerder TRI00000095_C, pages 0094–0095, paragraph 284(c)].
• All the pricing assumptions were removed from SP4, with the consequence that few pricing assumptions any longer applied to the off-street works [CEC02085642; Mr Maclean TRI00000055_C, pages 0049–0050, paragraph 136].
• A revised set of pricing assumptions applied to the on-street works, and were set out in Schedule Part 45 [CEC02085627; CEC02085628]. In the event of any change to these pricing assumptions, any claim by BBS was to be processed through a new mechanism in Schedule Part 45 instead of through clause 80 [TRI00000095_C, page 0095, paragraph 285(c)]. Under that new mechanism, there was no prohibition on BBS working on a change prior to agreement on its value, although there was an escalation procedure requiring senior representatives of the parties to discuss any disagreement over price or programme consequences above a specified level, and which allowed BBS to suspend work if the disagreement related to higher values [ibid, page 0096, paragraph 285(d)]. This was described by Mr Foerder as:

“a far more workable mechanism that [sic] the previous Schedule Part 4 and Clause 80 mechanism which had been at the centre of so many of our disputes with TIE” [ibid, page 0096, paragraph 285(e)].

• Clause 80, which continued to apply to tie changes outside of the on-street works, was amended to make clear that tie was entitled to instruct BBS to commence work on a change prior to the submission, determination or agreement of any estimate in respect of the change, by issuing a Change Order to that effect [CEC02085623, Part 4, pages 0205–0206, clauses 80.13 and 80.15].
• The CAF contracts for tram supply and maintenance were novated from the BSC Consortium back to CEC.
• The Employer’s Requirements were amended to reflect the reduced scope [Mr Foerder TRI00000095_C, page 0095, paragraph 285(a)].

19.603 A new contractual programme (revision 4) was agreed, with the following completion dates:

• Section A, 16 December 2011;
• Section B, 8 March 2013;
• Section C, 9 April 2014;
• Section D, 8 July 2014. [BFB00112215, page 0004, paragraph 1.2.7. As will be noted in Chapter 20 (Post-Mar Hall), the works were completed five weeks ahead of this date.]

19.604 A revision 5 of the programme was later agreed, but it did not change the completion dates [BFB00112221, 31 August 2012, page 0005, paragraph 1.3.3].

Conclusions

19.605 By late 2010, the project had reached a crisis point. Resolution of the parties’ disputes had become a pressing requirement due, among other things, to BSC having stopped work, CEC’s funding limit being reached, project cash flow issues for the consortium, and tie’s failure to establish any momentum behind its preferred interpretation of the contract.

19.606 The decision to mediate was a political decision, taken out of frustration that tie and CEC had failed over the preceding two and a half years to resolve the difficulties of the Infraco contract. The decision to mediate, and its timing, were a reaction to failure and there was no evidence that it was part of any co-ordinated strategy aimed at achieving an outcome most beneficial to CEC. In practical terms the decision was taken by Mr Swinney, endorsed by Councillor Dawe as Council leader and then by CEC’s councillors.

19.607 The involvement of CEC instead of tie brought renewed optimism that a settlement might be possible.

19.608 The fact that the project had reached CEC’s funding limit of £545 million, and required an increase in that budget to be approved by CEC’s full council, meant that, in practice, given the political sensitivities, CEC’s negotiators had to leave mediation with a resolution of the project disputes.

19.609 Before the mediation took place, tie and CEC had ruled out unilateral termination by tie of the Infraco contract on the basis that they had established no solid foundation for doing so, despite tie having served Remediable Termination Notices and Underperformance Warning Notices. tie and CEC’s decision to rule out unilateral termination of the contract increased BSC’s already strong bargaining position and further undermined CEC/tie‘s room for negotiation. CEC and tie had also ruled out continued strict adherence to the terms of the Infraco contract on the basis that doing so was unlikely to deliver a tram network with any degree of cost or programme certainty. This meant that the only realistic options were to agree a revised basis for BSC to complete part of the project or to negotiate an end to the Infraco contract and either shelve the project or re-procure the works from another contractor.

19.610 tie and CEC entered mediation in a weak negotiating position. Both viable alternative outcomes required them to get an agreement with BSC. They had no realistic alternative: failing to reach an agreement and returning to the Infraco contract on its existing terms, was not viable. It would have necessitated a request to CEC’s councillors for additional funding, the prospects for approval of which without a resolution of the disputes were highly uncertain.

19.611 I am not persuaded that any significant benefit would have been achieved by CEC delaying mediation any further; indeed, there was a risk that their position would have got worse.

19.612 CEC’s negotiators entered mediation with the primary objective of negotiating a revised deal with BSC for the completion of a tram line. The main alternative, of negotiating a separation from BSC and re-procuring the work from another contractor, was a reserve option which had not been fully investigated by the time of the mediation because the limited available resources were allocated to the Project Phoenix proposal, which had been identified as the preferred option before detailed cost estimates were available.

19.613 It was important for CEC’s negotiators to have an estimate of the cost of separating from BSC and re-procuring the work from another contractor to enable them to compare it with any settlement proposals by BSC. By the time of the mediation, the “external” advisers, namely Mr C Smith and Mr Rush, had come to the view that separating and re-procuring was risky and, as a consequence, likely to be expensive. The extent of that expense was not known or assessed with any precision. Nevertheless on the day before mediation started a highly subjective adjustment of £150 million was made to reflect the risks of separating and re-procuring, which was of a magnitude that was unacceptable to Mr Murray, the quantity surveyor with the most detailed understanding of the project of all those who were at mediation.

19.614 The effect of the adjustment was to increase significantly the amount that CEC’s negotiators could justify paying for a Phoenix-based deal with BSC, and therefore the prospects of a settlement price being agreed at the mediation.

19.615 CEC’s negotiators decided that if the overall project cost was likely to exceed £740 million, they would have to think seriously about the alternative option of separating and re-procuring. At the time of mediation the price agreed exceeded that sum by £20 million. The reason for doing so rested upon the political need to leave the mediation with a deal of some kind. That price could not be regarded as good value for the work, and instead reflected the highly unusual circumstances of this project.

19.616 There is very little evidence of the basis on which the new price was agreed, or of any expert advice tie and CEC received about it. The Inquiry was not provided with any contemporaneous record of the discussions or reasoning among CEC’s negotiators explaining the decision to settle at that price. The settlement was close to the price sought by BSC, and their price was presented with a rational explanation. BB’s price increased to meet the costs of change and delay; Siemens’ and CAF’s prices increased largely due to delay. There was no evidence of CEC having any advice of its own that it was an objectively reasonable price for the work. There is no evidence of a reasoned connection between the price agreed at mediation and BSC’s accrued entitlement under the Infraco contract. The price was less than the estimate of the cost of separating from BSC and re-procuring the work which had been increased by £150 million on the eve of the mediation. Agreement to a revised deal with BSC reflected the advice CEC’s officials received about the risks and uncertainties inherent in seeking to re-procure the project.

19.617 The level of the settlement implies that those negotiating for CEC accepted full, or almost full, responsibility for the project changes and delays. They were compelled, in effect, to renegotiate a new price for the scope and programme as they were now understood in 2011. They did so from a very weak position: they had little or no leverage under the existing contract in relation to the accrued claims; they lacked the resources to establish a stronger position under that contract, if that could even be achieved; they had a half-constructed tram line into which they had invested hundreds of millions of pounds; and their reputation for proper and effective management of the project had been damaged. The Inquiry found no evidence that CEC’s negotiators engaged in any detailed discussion about the costs associated with individual changes and delays with a view to reducing them, as tie had done to reduce sums originally claimed by BSC in its change estimates during the pre-mediation phase.

19.618 The mediation was the point at which the true cost of the previous failings was crystallised. Those negotiating for CEC at the mediation were not responsible for those failings. However, in the absence of detailed records vouching how CEC’s negotiators reached their decisions at mediation, I am not prepared to find that they did everything they could and should have done to negotiate the price down. I cannot therefore rule out the possibility that the conduct of the mediation negotiations itself contributed to the increased cost of the project.

19.619 By the time of the mediation settlement, CEC had departed from the project governance structure that had until then been in place. tie, TEL and the TPB had no decision-making role in the settlement reached at mediation or its implementation. The mediation settlement was partially implemented by MoV4, concluded on the direction of CEC’s officials prior to formal approval being obtained from CEC’s councillors. This committed tie to spending that exceeded the £546 million funding limit that CEC had imposed, without prior formal authority from CEC’s councillors to that effect. Further, £36 million was paid under MoV4 before it was signed. This was done in return for early progress by BBS on the prioritised works and to restore goodwill between the parties. It had that effect. It was therefore an important step towards the completion of a tram line, attributable to the efforts of CEC’s officials. Nevertheless, the payment of £36 million in those circumstances and the signature of MoV4 in advance of authority to do so represented a serious breach of good governance and amounted to actions by the Chief Executive, Director of Finance, Director of City Development and Head of Legal Services which transgressed the boundary between the advisory role of officials and the strategic role of politicians, who alone should have determined whether to increase the limit on funding set by them and whether to authorise the signature of MoV4. Although CEC’s approval of the final settlement in September 2011 meant that there were no negative consequences from these actions, in the interim period CEC had been exposed to unauthorised expenditure. An apparent desire to keep decision making on the project out of the political arena at that stage is no justification for the actions of officials and merely confirms my view that they strayed into the political arena itself.

19.620 CEC’s approval of the settlement was informed by reports on the estimated cost of the alternatives. Although those cost estimates demonstrated that the alternatives were unlikely to be materially less expensive, they were highly subjective, full of uncertainty and rested on incomplete investigation into the facts. CEC’s approval of the settlement was attributable, in the final analysis, to two things: its desire to get something for the money already spent on the project; and its aversion to any further risk that project costs would increase further.

19.621 Ultimately, approval of the settlement occurred only because of the intervention of the Scottish Ministers, threatening to withdraw funding unless CEC’s August 2011 decision to seek a line only between the Airport and Haymarket was reversed. The project delay caused by CEC’s decision of August 2011 and its reversal in September 2011 increased the cost of the project by £4.541 million. This additional cost could have been avoided if, before asking councillors to take a decision about the reduced scope, CEC officials had investigated Scottish Ministers’ attitude to the reduced scope. Had they done so they could have advised councillors about the views of the Scottish Ministers towards funding the project if the line terminated at Haymarket and if it terminated at St Andrew Square/York Place. In my view, any criticism for the increase in costs that resulted from the councillors’ decision, taken in the absence of such information, should not be directed towards them.

Footnotes

24. The £165.2 million was made up of £114.1 million in construction costs, £32.8 million for risk and £18.3 million for inflation [CEC02086792, Part 1, page 0012]. The Final Business Case for the extension, dated February 2019, estimates the project cost at £207.3 million, of which £156.7 million was capital cost to completion. The other elements were development costs, support for business, risk and optimism bias [CEC02087287, page 0059]. ↵

25. This figure is higher than 7 per cent of the preceding figures in the list. The reason is that the overhead percentage was applied to a figure that, as well as the costs noted above, also included the SDS provider’s price of £15,140,795. ↵

26. As with the overheads figure, this percentage was applied to a figure that included the SDS provider’s price. ↵

27. These were the clauses providing for payment of the £49 million in five instalments. ↵

28. This entitlement would apply up to 1 September 2011, under the Infraco contract and then MoV4, after which BSC’s entitlement would be for actual costs incurred through delay [CEC02086431, pages 0038–0039, paragraphs 10.17–10.24]. ↵

29. See Closing Submissions of SETE [TRI00000289_C, page 0122]; Closing Submissions of CEC [TRI00000287_C, pages 0494–0495, paragraph 20.76]. ↵

30. This is considerably greater than the costs reported by the press. See, for example, the report in the Evening News of 6 August 2012, which indicated that the cost was “nearly £1.4 million”, based on information in the Council’s annual report on over-expenditure [WED00000167]. ↵