Chapter 22: Governance

Project-specific governance structures

22.1 The governance structures put in place for the Edinburgh Tram project (“the Tram project”) from time to time were complicated and confusing. Perhaps unsurprisingly, at times they were not adhered to. This means that it is not possible to give a concise and comprehensive statement of what was intended and what was in fact done. I have, however, attempted to identify the principal bodies involved and applicable guidance, and have prepared a timeline summary as to how matters developed. Identifying these makes it possible to evaluate what was done. There were two principal bodies – Transport Initiatives Edinburgh Limited (“tie“) and Transport Edinburgh Limited (“TEL”) – and I turn to consider them first.

Transport Initiatives Edinburgh Limited

22.2 On 18 October 2001, the City of Edinburgh Council (“CEC”) resolved in principle to set up an “arm’s-length company” to develop and deliver the New Transport Initiative [USB00000228]. It would be regulated by the memorandum and articles of association and a shareholders’ agreement. Individuals from the private sector were to be approached to join the board of the company, which would also comprise: councillors, including those from Opposition parties; the Executive Member for Transport; and the Executive Member for Finance. It was established by May 2002 under the name “Transport Initiatives Edinburgh Limited”. Its name was changed to tie Limited on 24 August 2004 and to CEC Recovery Limited on 13 May 2013. It is referred to in this Report generally as “tie“. It is important to note that this company was established with a view to its being the body to implement the whole of CEC’s New Transport Initiative. This included a proposal to instruct a road charging scheme, together with a programme of transport improvements including improvements to the bus network, improvements to the rail network, a ring of “park and ride” schemes and a network of pedestrian routes [USB00000228, pages 0011 and 0033–0034]. The Tram project was just one of those improvements.

22.3 In common with other local authorities, CEC already had experience of undertaking activities through companies wholly or principally owned by it [Dame Sue Bruce PHT00000054, page 5]. These examples included Lothian Buses (“LB”), the Edinburgh International Conference Centre, Edinburgh Leisure and companies engaged in property development. The list of the major companies at that time appears in Appendix 2 to the report prepared by the Chief Executive of CEC, dated 13 December 2001 for the Council meeting on 18 December [CEC02084490]. However, the ambiguity as to the precise meaning of the expression “arm’s-length company” and the consequences that it had for the management of the project provide the basis for many of the difficulties in management that were to follow. I consider these difficulties below.

22.4 It was anticipated that an operating agreement would be concluded between the company and CEC to regulate its activities [USB00000232, Parts 1–6]. An unsigned draft of the operating agreement concluded between tie and CEC in 2002 [CEC02086416] stated that the services to be provided were to develop, procure and implement integrated transport projects that were part of the Integrated Transport Initiative. This 2002 agreement was superseded by a further version in September 2005 (the “2005 Agreement”) [CEC00478603]. This extended the company’s services to include third-party projects in the South East of Scotland Transport Partnership area approved by CEC. Again, it was not specific to trams.

22.5 The later agreement made provision for the appointment by CEC of a monitoring officer in relation to the company. Such an appointment was in accord with CEC policy to monitor the company to ensure that CEC’s interests were safeguarded. The detailed obligations of the monitoring officer are set out in Appendix 1 section C to the Chief Executive’s report entitled “A Framework for the Governance of Council Companies”, approved by CEC in December 2001 [CEC02084490]. All new and existing companies were required to adopt the code. Included in his obligations was the duty to ensure that the company adhered to best practice at all times, particularly in relation to corporate governance, to achieve its objectives. The appointment of a monitoring officer was clearly intended to oversee the company’s activities and governance to safeguard CEC’s interests. The company monitoring officer is distinct from the Tram Monitoring Officer (“TMO”), whose role I consider below.

Transport Edinburgh Limited

22.6 The first major addition to the governance structure was TEL, which was established in summer 2004 [CEC01875550] to enable integration of bus and tram services in a single entity and to promote transport policy generally [Mr Aitchison TRI00000022_C, pages 0106–0107, paragraph 327]. It appears that there was both a positive and a negative aspect to the creation of TEL. The positive was that, at the time that the Tram project was being considered, Edinburgh had the benefit of a very popular and successful bus company: LB. CEC owned 91 per cent of the shares in this company, with the balance being owned by West Lothian Council, Midlothian Council and East Lothian Council. When TEL was established, LB had no role in the development or operation of the trams because the latter role had been awarded to Transdev Edinburgh Tram Limited (“Transdev”), an experienced operating company whose expertise was considered invaluable in the development and procurement of the project. Nonetheless, it clearly made sense that the new tram service should work with the existing bus service rather than against it. tie and CEC were advised that, in order to avoid falling foul of rules of competition law on concerted practices, it was necessary that the activities to be integrated be carried on by a single economic entity. If the positive aspect of creation of TEL was the opportunity to integrate with an existing and flourishing service, the negative aspect arose out of the concerns as to the attitude of LB to the Tram project and its ability and willingness to act to the detriment of the project.

22.7 There was mixed evidence as to the extent that LB was opposed to the Tram project. Initially it was opposed to the project because it was seen as a threat [Mr Mackay TRI00000113_C, pages 0004–0005, paragraph 10]. Mr Holmes said that it was a constant struggle to get LB to stop conspiring against the project [TRI00000046_C, page 0120, paragraphs 447–448]. Mr Howell noted that Mr Renilson, Chief Executive Officer (“CEO”) at LB, had displayed “hostility” to the Tram project when he was not in charge [PHT00000011, page 33], that it was not possible to have a trusting relationship with him [ibid, page 29] and that he had been an influential early opponent of the scheme [TRI00000129, page 0006, paragraph 16]. He noted that LB was against the scheme and he described its conduct as disruptive. Mr Renilson disputed this and it is, perhaps, to some extent contradicted by Mr Gallagher, who said that Mr Renilson’s input was invaluable [TRI00000037_C, page 0058, paragraph 193]. Mr Mackay said that the decision to bring Mr Renilson to sit on TEL was a deliberate tactic to bring him on board [TRI00000113_C, page 0023, paragraph 78]. As Mr Holmes put it, the purpose was “to ensure he was inside the tent” [TRI00000046_C, pages 0120–0121, paragraph 449].

22.8 There was, however, consensus, that it was necessary to avoid competition between the bus and tram services [Mr Gallagher TRI00000037_C, page 0058, paragraph 193; Councillor Donald Anderson TRI00000117_C, pages 0098–0099, paragraph 250]. Apart from the general observation of Councillor Donald Anderson that other authorities had lost money because of such competition, there was a sound basis for concerns as to competition from LB, because, in the past, that company had acted to frustrate council-sponsored transport projects that LB considered were not in its interests. Although the Central Edinburgh Rapid Transport (“CERT”) project had pre-dated his time on the board of LB, Mr Renilson explained that once the contract to operate the buses on the CERT route was awarded to a rival bus operator, LB decided to saturate the route with high-frequency services with the intention of taking custom away from the rival operator on the CERT route [PHT00000039, pages 188–192]. The party that had been awarded the contract withdrew. In those circumstances, no other operator wished to step in, so the project failed. Mr Renilson thought that the cost to CEC was in the region of £10 million [ibid, page 187]. It was therefore clear that, as well as wielding significant influence, LB wielded considerable power and would use it to undermine even projects promoted by its principal shareholder.

22.9 It is perhaps surprising that this matter was not dealt with by CEC directly. In terms of LB’s articles of association, the power of the directors to manage the business was subject to regulations made by the company in general meeting [TRI00000310,pages 0042–0043, article 27.1]. The extent of CEC’s shareholding was such that it would be able to ensure that a vote to make such a regulation was carried, and it could have given directions to the LB board by this means. It is not within the remit of this Inquiry to investigate the reasons for the reluctance on the part of CEC to manage the situation in this way. For present purposes, it is enough to note that LB was seen as a threat to the success of the project and that the way it was dealt with was to put representatives from LB in a position to make decisions on the Tram project at the procurement and construction stage and to ensure that there was integration of the services.While a desire for integration might dictate that LB would work with tie, it did not in any way justify LB’s being in a position to make decisions relating to procurement and construction of the project.

22.10 The introduction of TEL with its representation from LB was not welcomed by everyone in the Tram project. Mr Howell recognised that TEL was necessary for integration, but said that he was surprised when TEL was put forward as the lead organisation [PHT00000011, page 29]. Mr Kendall said of the creation of, and passing powers to, TEL:

“it was not just hugely disruptive, it was almost debilitating to my ability to be clear and to direct solutions and outcomes and it changed materially the ability that I had to move this project forward at pace and in 2006. It set up a lot of conflict and the major conflict, as I have already alluded to, the major conflict came between myself and Renilson and also Andy Wood who was the only other person who had built and operated a tram scheme before.” [TRI00000136, page 0190.]

22.11 When considering its role below, it is relevant to have in mind that both the Chief Executive of tie and the Project Director were opposed to the interposition of TEL.

22.12 Thereafter, there were a number of developments from time to time, and it is most straightforward to summarise the principal ones in chronological order. Prior to doing so, however, it is useful to consider the guidance that existed at that time in relation to management of projects such as the Tram project.

Office of Government Commerce guidance

22.13 Office of Government Commerce (“OGC”) guidance and the OGC reviews of the project will be considered in Chapter 23 (OGC and Audit Scotland), but it is useful to note here the features relevant to the governance structures adopted for the project. The guidance current at the time included a series of booklets, including “Achieving Excellence in Construction, 02 Project Organisation: roles and responsibilities, (2003)” [CEC02084819]. This guidance was revised and reissued in 2007 [GOV00000003], but the passages quoted below were not materially changed. It identified the following key roles:

• the investment decision-maker;
• the Senior Responsible Owner;
• the project sponsor; and
• the project manager.

22.14 The Senior Responsible Owner is generally referred to as the “SRO”, and that abbreviation is used in this Report. The guidance stated that the roles and responsibilities of those involved should be clearly defined. It supported a structure with an integrated project team that includes input from the supply team and designers. The guidance noted that this approach would help to encourage innovation and avoid an adversarial culture and would also encourage collective responsibility for a successful outcome. The intention is indicated in a diagram
taken from the booklet, which is reproduced in Figure 22.1.

Figure 22.1: Project organisation: the integrated project team

The guidance noted that a traditional project structure was not integrated, as it separated out the responsibilities of each party, and should not be followed unless it demonstrated significantly better value for money than the recommended procurement routes [CEC02084819, page 0010].

22.15 As is apparent, this places considerable importance on the role of the SRO, who should be a senior manager in the business unit that requires the project. Of this role the guidance stated:

“The senior responsible owner is responsible for project success. This named individual should be accessible to key stakeholders within the client organisation and, in order to reinforce commitment to the project, should also be visible to the top management of the partnering organisations involved. The IDM [Investment Decision-Maker] should ensure that the SRO has the authority that matches the responsibilities of the role.

“The SRO defines the scope of the project, is personally responsible for its delivery and should be accessible to stakeholders. The SRO may be assisted by a project board, to ensure that other stakeholders buy in to the project as early as possible. The project board should not have any powers that cut across the accountability and authority of the SRO. Project boards should be advisory only, addressing strategic issues and major points of difficulty. If a major issue cannot be resolved with the SRO, project board members would have recourse to the IDM. The SRO must form part of a clear reporting line from the top of the office to the project sponsor.” [ibid, pages 0012–0013.]

22.16 In relation to the role with other entities and persons in the delivery team, the guidance stated:

“The SRO should be committed to encouraging good teamworking practices within the client organisation and with other organisations involved with the project, to ensure that the whole project team really is integrated – client and supply teams working together as an integrated project team. In particular, the SRO should give clear, decisive backing where the client enters into partnering or teamworking arrangements with the integrated supply team (consultants, constructors and specialist suppliers) during the life of the project.” [ibid,page 0014.]

22.17 The guidance does not use the term “project director”, but does refer to the “Project Manager” as the person who leads the project team on a day-to-day basis. The SRO’s role is obviously distinct from that of the Project Manager. It is notable that, in the guidance, the role of the project board is purely an advisory one, assisting, and chaired by, the SRO.

22.18 The Guidance emphasised that lines of reporting and decision-making should be as short as possible and also very clear. It was also stated to be important that delegations and individual responsibilities for decision-taking should be clearly established at the outset of the project and understood by everyone involved in it. It stated that experience had shown that, where these conditions were not met, the likelihood of conflicting, poorly informed or delayed decisions would significantly increase the risk of failure of a project [ibid, page 0009].

PRINCE2

22.19 The OGC also issued guidance on best practice in project management. That advice was called “PRojects IN Controlled Environments” (“PRINCE2”) and applied to all projects (ie it was not restricted to construction projects). It was used extensively by the UK Government [GOV00000029, page 0002]. Ms Andrew said that this was used on all major CEC projects [PHT00000005, page 46; TRI00000023_C, pages 0022–0023, paragraph 20(2)], and Mr Poulton analysed the roles of the various participants in terms of it [PHT00000051, pages 61–65]. On the other hand, Mr Heath of OGC said that he did not recall any mention of PRINCE2 in relation to the project [PHT00000009, page 22]. On any view, however, it is relevant background against which to consider the arrangements that were put in place.

22.20 As with the OGC guidance considered above, it is a project method that considers more than just the structures used to deliver the project. A key feature of PRINCE2 is the need for independent project assurance. It stated that while the project board was responsible for project assurance, it might find it beneficial to delegate project assurance to others, as members of the board did not work full time on the project and, therefore, placed a great deal of reliance on the project manager. The guidance stated:

“Although they receive regular reports from the Project Manager, there may always be questions at the back of their minds: ‘Are things really going as well as we are being told?’, ‘Are any problems being hidden from us?’, ‘Is the solution going to be what we want?’, ‘Are we suddenly going to find that the project is over budget or late?’, ‘Is the Business Case intact?’, ‘Will the intended benefits be realised?’ … All of these points mean that there is a need in the project organisation for monitoring all aspects of the project’s performance and products independently of the Project Manager. This is the role of Project Assurance.” [GOV00000029, page 0033.]

22.21 Although this is relevant as background, it is the governance structures that are of concern here. In relation to that, the PRINCE2 method identified three project interests:

• the business;
• the user; and
• the supplier.

22.22 The business, which may also be seen as the customer, is the interest that decides to proceed with the project and makes available the funds for it. The business interest therefore must take the decision as to whether the benefits of the project are such that it is worth committing expenditure to it. In relation to the Tram project, the business interest is most obviously represented by CEC, although a large part of its responsibilities was delegated, initially at least, to tie. As the name suggests, the user is the entity that will make use of whatever is delivered by the project. As matters stood at the start of 2005 and through to August 2009, that was Transdev – the appointed operator. Later, the contract with Transdev was terminated in favour of TEL’s becoming operator which meant it would have become the user. The supplier interest, again as the name suggests, consists of the people or entities that will provide the project outputs.

22.23 For projects of the size and complexity of the Tram project, the PRINCE2 project management structure below the corporate entities consists of a project board, a project manager and a team manager or managers. The project manager runs the project on a day-to-day basis. The project manager may delegate responsibility for certain elements of the project to particular team managers, just as was done in the Tram project.

22.24 The project board should consist of representatives of the three interests in the project. These interests will be represented by the Executive, the Senior User and the Senior Supplier. The Senior User is a person or persons who represent the entity that will make use of the output of the project when it is complete. The function of the Senior User is to ensure that, when complete, the project output will meet the needs of those who will use it. The Senior Supplier will be a person or persons who represent the teams that do most of the work. The function of the Senior Supplier role is to be in a position to commit or acquire resources necessary to complete the project. The Senior Supplier role need not come from the customer organisation and may consist of representatives of external contractors as well as, or in place of, internal managers. Applied to the Tram project, it would be expected that representatives from Bilfinger Berger, Siemens and CAF (“BSC”) would be included in the supplier role, as might representatives from Parsons Brinckerhoff (“PB”).

22.25 The third element of the project board – the Executive – represents the business interest. The Executive is a person rather than a group of people and is ultimately in charge of the project. The guidance is clear that the project board is not intended as a democracy in which decisions are taken by a majority [GOV00000029, pages 0028 and 0052–0053]. The decisions are ultimately those of the Executive, and it is that individual who instructs the project managers. In terms of the PRINCE2 method, the Executive is responsible for appointing the other project board roles and chairs the project board.

22.26 I have given only a brief account of the principal elements of the structures identified in these two project management methods. It is clear that there are both similarities and differences in the various roles and workings of the two methods. The purpose of the Inquiry does not require a detailed evaluation of these. What is appropriate is to have an understanding of the background guidance that was deemed to be of some relevance to the Tram project to provide a framework within which to evaluate what was done.

Timeline (July 2005 - December 2009)

22.27 To state all the various decisions in relation to governance and the papers that lay behind them would be a lengthy process, and could obscure the main elements. Setting out even the main events in the changing governance picture requires a reasonably detailed narration of events between 2005 and 2010. In my view, the main events during that period were as follows:

July 2005

22.28 In July 2005, the Chief Executive’s Report to the tie Board anticipated that a Tram Project Board (“TPB”) and an Edinburgh Airport Rail Link Project Board would be set up in respect of their two principal projects [TRS00008524, page 0015]. This was said to be required as the magnitude and frequency of decisions on the project was increasing [ibid, page 0019]. The precise role of the boards was not stated clearly at the time. The tie Board papers said that the project boards would assume responsibility for each project, that they would be the principal decision-making bodies and tie would delegate its powers to them. However, it was also stated that the boards “will not have directive power” [ibid, page 0015]. It was envisaged that
the boards would report to the tie Board. The papers for this meeting also state that “[t]here must be migration of tie Board project responsibility to TEL at the appropriate time in a seamless, controlled way” [ibid, page 0019]. As noted above, TEL was envisaged to be the single economic entity that would facilitate service integration. There was no indication of what the “appropriate time” would be. The paper also noted that delegation to the project board of the principal decision-making authority would come by way of delegation from tie and later TEL [ibid, page 0019].

22.29 At this time, Mr Bissett was working for tie as a consultant and was primarily using his background in finance and business to develop the financial aspects of the business cases. He also had a prime role in developing the governance structures. He said that the intention was that the project boards should be “the primary oversight and challenge body for each of the two projects” or the “primary governance and oversight body” [PHT00000028, page 40]. On the other hand, he said that it was intended that it would replace decision-taking by tie [ibid, page 42]. Despite this, he also said that “tie would still retain the ultimate responsibility for the activities of the Board” [ibid, page 41]. He was asked whether it might be the role of the project boards to facilitate the implementation of the project rather than to take decisions in respect of it [ibid, page 44]. This is consistent in part with what was said in the board papers and is consistent also with the discussion of project boards in guidance on the PRINCE2 model. It does not accord, however, with the statements that it would be a decision-making body. Although Mr Bissett said that it was envisaged that the boards might have this facilitating role, his descriptions of how they would operate suggested that their role would be an executive one in which each member of the board could seek to determine the decision [ibid, pages 40–45].

22.30 At this stage, no statement was made as to the membership of the project boards. Mr Bissett said that it was intended that they would have representatives from CEC and Transport Scotland and would include all the “main parties” or “all of the main stakeholders” [ibid, page 42]. He thought that this would give the persons in question more involvement rather than their just being observers. The consequence of this is that it would be these stakeholders who would be taking decisions in relation to delivery of the trams rather than tie. Asked why this should be the case, he said that tie‘s primary purpose was just to get the project through the development stage to be ready for procurement [ibid, page 43]. I do not accept this. No such limitation on the remit of tie was envisaged when it was established. This was an innovation on what had been intended, and it is notable that it was being brought about within tie rather than by CEC.

22.31 Even at this stage, when the project boards were first proposed, it is apparent that there was a lack of clear expression of their role and their responsibility. The statement that they would be the principal decision-making bodies is quite inconsistent with the guidance in the PRINCE2 model that they would not have directive power. To say that tie would delegate its powers to them indicates that their role would be that previously undertaken by tie and was therefore directive or executive. In terms of the guidance on project boards, however, that is not the proper function of a project board. It appears that what is being done is, in essence, regarding each project board as a mini-tie, which would focus on the single project. There is a further fundamental inconsistency between the statement that powers would be delegated to the project boards and the comment by Mr Bissett that they would have the function of oversight and challenge. If the statement as to delegation of powers is true, the decisions and actions that they would be overseeing or challenging would be their own. This clearly illustrates tie‘s lack of understanding for the need for independent review of actions and decisions in any system of governance. It is also a good example of the confusing and ineffective nature of the governance structures that were proposed from time to time. It is also apparent from the OGC and PRINCE2 guidance mentioned above that neither intended the project board to function as an oversight body. Thus, from the inception of the project board, there was confusion and ambiguity and a departure from guidance without any apparent appreciation that this was being done.

August 2005

22.32 The papers for the tie Board Meeting in August 2005 [TRS00008528,Parts 1–2] stated that a report on governance had been approved at the July board meeting [ibid, Part 1, pages 0005 and 0026] and attached a remit for the TPB [ibid, Part 1, page 0050]. This was described by its author, Mr Bissett, as “not an easy read” [ibid, Part 1, page 0026]. That is an understatement. This remit refers to the board as “a body consisting of the key stakeholders who have influence in facilitating the development and delivery of the Tram Project” [ibid, page Part 1, 0050]. This function is also picked up in the requirement that members of the board will seek to resolve within their own organisation any potential obstacles to the project [ibid, Part 1, page 0052]. It is of note that the paper indicates that the project board will make only recommendations to the tie Board in relation to ongoing governance, project management arrangements and changes to cost and programme. Despite this reference to a facilitative function and the making of only recommendations, the remit envisages that the board will take over most of the authority vested in tie by way of delegation [ibid, Part 1, pages 0051–0052]. It was noted that these arrangements would change when the tie Board handed over formal responsibility to the TEL Board, but Mr Bissett noted that this was to deal with the situation when the service was in place and that tie remained the delivery body [ibid, pages 0051–0053]. It recognised that the TPB was not a legal entity but nonetheless said that it would have powers delegated to it by the tie Board [ibid, page 0058]. There is no mention in this paper of any function of “oversight” in relation to tie. The remit was approved at the August meeting of the tie Board, which recognised that tie could take back the powers and responsibilities of TPB if the latter did not fulfil its remit [TRS00008535, page 0007].

22.33 The reference within the remit paper to the project board’s having a “facilitative” role echoes one of the roles suggested in the July paper. This role is perhaps closer to the intended role of a project board that brings together representatives of the various interests necessary to make the project a success and that provides advice to the principal decision-taker rather than being that decision-taker. The statement that the project board would make recommendations rather than taking decisions is also consistent with the guidance. Once again, however, the remit contains the contradictory statement that the project board would take over the authority of the tie Board. Although the two functions referred to in the paper (facilitation on the one hand, and taking over authority on the other) appear to be at odds, Mr Bissett considered that it was intended that they should do both [PHT00000028, page 48]. I reject this explanation. Instead, that such mutually exclusive comments are contained in the remit suggests that the tie Board participants had not read it or, at the very least, had not taken the trouble to understand it.

22.34 At this stage it was intended that the TPB would comprise:

• the Chief Executive and Project Director from tie;
• the Chief Executive and all non-executive directors from TEL;
• a representative of CEC;
• a representative of the Scottish Executive (this being before the change of name to the Scottish Government and the creation of Transport Scotland);
• a representative of Transdev; and
• Mr Papps from Partnerships UK (a body established by the UK Government to provide advice in relation to management of large construction projects).

22.35 The Chairman of the TPB was initially to be Mr Gemmell, a non-executive director of tie, but it was noted that “in due course” the Chairman would be the Chairman of TEL or a non-executive director of TEL [ibid, page 51].

22.36 The composition of the proposed project board is not consistent with either guidance model. To a large extent, it merely replicates tie and TEL or is a cross between them. This is perhaps unsurprising, in that it is being asked to perform the functions previously carried on by the companies. It raises the issue of why it was thought necessary to have a project board when a body or bodies with similar members was or were performing the same role. That question does not appear to have been considered at the time.

September 2005

22.37 In September 2005, a progress report was produced by tie to the committee of the Scottish Parliament considering the Tram Bills. The report stated that the members of the TPB acted as “champions of the project” within their respective organisations for the progression of necessary permissions and approvals and that the TPB operated under delegated authority from the tie Board and, in turn, provided the Tram Project Director (“TPD”) with delegated authority to deliver the project [CEC00380894, page 0004, paragraph 1.9]. It is hard to see how the TPB could have played an oversight or governance role while its members were also acting as “champions” of the project. The report did not give a clear statement as to what authorisation had been delegated to the TPB and what the remaining role and responsibilities of the tie Board were.

October 2005

22.38 The papers for the tie Board meeting for October 2005 [TRS00008535] again contain statements that are hard to reconcile [ibid, pages 0030–0031 and 0043]. The TPB was noted to be the primary decision-making forum and also the oversight body for the project, but nonetheless tie retained overall responsibility for the quality of tie‘s service delivery and for fundamental matters affecting the project [ibid,page 0030; Mr Bissett PHT00000028, pages 61–62]. Also, decisions of the TPB were to be reported to the tie Board for ratification, and the TPB was to be seen as a committee of the tie Board so as to enable the delegation of powers [TRS00008535, page 0043]. When asked about the number of bodies – CEC, tie, TEL and the TPB – Mr Bissett accepted that there was overlap and that having four layers in the hierarchy was “less than efficient” [PHT00000028, pages 62–63].

22.39 The same defects in the earlier two papers appear here also. It is hard to see how it was intended to reconcile the notions that:

• the TPB was the decision-maker, but was also providing oversight;
• the TPB was the decision-maker, but tie retained responsibility; or
• the TPB was the decision-maker, but its decisions would require ratification by tie.

22.40 It was apparent from the TPB membership suggested in August that most of the members of the TPB were not drawn from tie.There was also nothing to suggest that tie could change the membership of the TPB. It was also clear that further debate of issues before the tie Board would be the exception. This makes it odd that tie would retain responsibility for the decisions taken.

22.41 The role for the TPB that was being developed in this paper meant that it was not apparent who was to play the role of the executive or the SRO. If the decisions were to be taken by the TPB collectively, the result would be the loss of individual accountability that is a feature in both the OGC guidance and PRINCE2. This was not considered in the review. Having the TPB as the body that would take decisions may be the reason that BSC and PB were not represented on the TPB to represent the supplier interest. It may have been felt that they could not participate in making decisions as to how affairs under the contracts with them should be conducted. That need not have been an issue if the role of the project board had been limited as had been suggested in the guidance.

November 2005

22.42 The minutes of the meeting of the TPB in November 2005 (as a sub-committee of the tie Board) dealt not with the structures that were to be in place but where the responsibilities lay [TRS00002067]. They noted that TEL will “hold the mantle of control and ownership post financial close”[ibid, page 0002, paragraph 3.1]. This would obviously be much earlier than taking responsibility once services commenced and would mean that TEL had control during construction. No justification was given for taking responsibility for construction of the tram infrastructure away from tie and giving it to TEL. The minutes noted that TEL, tie and the TPB would work together. They did not explain how, but noted that the matter was to be considered at a meeting of the TEL Board which it was said would follow on from the TPB meeting. The Inquiry has been unable to find any minutes of such a meeting, but a note of a meeting of the TPB in December 2005 noted that a paper concerning governance was presented to the TEL Board on that date, but no substantive discussion had taken place then or since [TRS00002065].

22.43 The attendance list for this meeting of the TPB recorded the presence of representatives of tie in addition to the persons who in the previous month had been said would make up the board. This appears to be a further indication of a lack of clarity about the constitution and function of the TPB.

January 2006

22.44 In the minutes of the TPB of 23 January 2006 the merger of the TEL Board and the TPB was recorded, and it was recognised that there had to be clear governance for decisions to be made [TIE00090588, page 0002]. Having created the TPB as a separate body to assist in construction of the Tram project, it is odd both that it was being merged into a board of directors and that the board in question was that of TEL. Mr Bissett, who is recorded as being present at the meeting in January, could not recall why this had been decided. Even if it was now considered that TEL rather than tie was delivering the tram infrastructure, the company board and the project board had distinct functions and different membership. This merger shows that this was not properly understood at the time.

February 2006

22.45 A paper entitled ‘Proposed Governance Structure’ [TRS00002175] set out proposals that differed from those from November 2005 and were said to incorporate TEL fully into the project and produce governance and a decision-making structure “which reflects clear project roles and responsibilities”. These entailed that TEL would undertake to CEC to deliver the tram system integrated with other modes of transport, and tie would be responsible to TEL for delivery of the trams. tie would deliver services “on behalf of CEC”. It assumed that tie would enter into the contracts for construction of the tram system and delivery of the tram vehicles, but that these would be novated to TEL once operations commenced. Despite the statement in the January minutes noting the merger of the TPB with the TEL Board, this paper described it as a proposed situation. Amalgamating the two would mean that instead of tie delegating responsibilities to the TPB, the TPB would be part of the body that owned tie [PHT00000028, page 73]. It noted that the decisions of the merged body would be taken solely by directors of TEL. This meant that, in effect, TEL had been put in charge and tie was taken out of the picture [ibid, pages 75–76], and the paper noted that “TEL has effectively stepped into tie’s shoes for the tram project”. Mr Bissett acknowledged that he could not now see the advantages in this change [ibid, page 75]. Despite the transfer of responsibility, the paper noted that TEL was not to employ a management team other than its CEO.

22.46 At the same time as proposing the merger of the TPB and the TEL Board, this paper proposed that TEL Board meetings should routinely be attended by the TPD, other tie operational management, other CEC representatives, Transdev representatives, a representative of the Scottish Executive and Mr Papps. This, in effect, brought it directly into line with attendance at the tie Board. This further obscured the point of the changes and blurred the distinction between the various entities. There was still no representation of the supplier interest.

22.47 Although the paper sought to incorporate TEL into the management structures for the project, it provided no justification for this. As was mentioned in paragraph 22.45 above, the paper stated that “TEL has effectively stepped into tie’s shoes for the tram project” [TRS00002175, page 0003], but did not say why this was or should be the position. As I have noted above, having regard to the purpose for which TEL was created and the expertise of the persons recruited to it, there is no apparent reason why it should take over responsibility for construction works. There was no explanation of the benefit that would arise from having tie enter into all the contracts and provide its services to TEL. It is of note that at this stage almost all the employees were engaged by tie and it was tie that was in receipt of the monies from CEC, including those that had been provided by Scottish Ministers. That being so, one would have expected a reasoned statement of the rationale for a new body being included in the structure. While it might be expected, it was not given. One is left with the feeling that it was simply an attempt to bring LB into the project to head off potential opposition and difficulty.

March 2006

22.48 Although the February paper entitled ‘Proposed Governance Structure’ was approved by both the tie and TEL Boards that month, a revised version was prepared in March 2006 [TRS00000330]. The following are the principal changes that it made to the structure that had been agreed the previous month.

(a) There was no longer express provision that tie would be providing its services to TEL, although it was not clear to whom services would be provided.

(b) In the structure set out in February, tie was said to be providing services to TEL on behalf of CEC. This appeared to indicate that TEL stood in the shoes of CEC as the recipient of the services. In the March structure, tie was to deliver the project “on behalf of CEC”, which appeared to indicate that the services were provided to CEC.

(c) It recorded that TPB had already been merged with TEL and stated that the TEL Board’s authority (and therefore, by necessary implication, the TPB authority) was exercisable by TEL’s CEO.

(d) A sub-committee of the TEL Board was formed to issue guidance to the TPD and individual work stream leaders. This indicated that it was the collective body rather than the individual that was in charge and is the opposite of what is contained in the guidance.

(e) While tie was to remain the counter-party for all contracts until service commencement, the terms of those contracts were to be subject to approval by TEL “in its project Board role”. This maintains the odd position that the party that had the ultimate say on decisions was not the one incurring contractual obligations.

May 2006

22.49 A project readiness review carried out by the OGC in May 2006 [CEC01793454] noted that the governance structure was complicated compared with best practice. By way of explanation, the review stated:

“A best practice project governance structure would consist of an empowered project team under the direct control of an empowered and accountable project director. The project director would report to a project board chaired by the Senior Responsible Owner (‘SRO’) for the project on behalf of the project promoter.

“The project board and the project director would have clear terms of reference in respect of their respective responsibilities delegated from the project stakeholders.

“The OGC describes the role of the SRO as ‘the individual responsible for ensuring that a project or programme of change meets its objectives and delivers the projected benefits. They should be the owner of the overall business change that is being supported by the project. The SRO/PO should ensure that the change maintains its business focus, has clear authority and that the context, including risks, is actively managed. This individual must be senior and must take personal responsibility for successfully delivery of the project. They should be recognised as the owner throughout the organisation.‘” [ibid, page 0006, paragraph 3.1.]

22.50 The review recommended that a TPB be set up as a matter of urgency and that there be clarity as to the identity of the SRO. It also said that the TPB should be the only body through which key decisions on the project scope should be taken.

22.51 From the terminology used it is clear that it is OGC guidance rather than PRINCE2 that is being applied. In that compliance with the recommendations of these reviews was a condition of the grant monies being made available by the Scottish Ministers, there should have been some impetus to adhere to the OGC model.

22.52 As was noted in paragraph 22.15 above, the OGC guidance refers to the SRO as merely being “assisted” by the project board. The OGC review does not state expressly where the executive power would lie. It did not say that all project decisions should be taken by the board, but it clearly accords it primacy. Oddly, therefore, the review appears to contemplate a different structure to that stated in the OGC guidance. It may be relevant that Mr Heath, who was a member of the team, was unaware of the OGC guidance until it was sent to him by the Inquiry [PHT00000009, pages 7–13]. No basis was stated for departing from the Guidance and doing so is likely to have added to the uncertainty surrounding the role of the project board. The apparent predominance afforded to the project board in this Review adds to the difficulty in determining the role of the SRO. As with the structure proposed in March 2006, it adopts collective responsibility in place of individual responsibility and this gives rise to the danger that, with a number of people and interests involved, there is a culture in which each person assumes that someone else is exercising judgement and control. As will be apparent from the discussion below, that is what happened.

22.53 In relation to the recommendation that there should be a project board at all, it will be apparent from the foregoing that, in fact, such a board had been in operation for some time. However, this fact may have been obscured as a result of the board’s having been merged with TEL and being composed of the same people as the board of tie or TEL rather than following the OGC guidance. It appears, however, that, up to this time, there had been no SRO. The papers submitted to tie and to the TPB in relation to guidance prior to this time had not made mention of the SRO, by way of identifying either the role or the person who performed it. Although Mr Howell thought that Mr Kendall might have been designated SRO [PHT00000011, page 37], there is no record of this and, as Mr Howell appeared very tentative in his views on this matter, I conclude that he was mistaken in this regard. This means that the only oversight by an individual would come from the Monitoring Officer appointed in relation to tie‘s operating agreement with CEC. At this time, it appears that, in terms of that agreement, the Monitoring Officer would be concerned with the company rather than the project as a whole so there was no one performing the SRO role.

22.54 Following the review, Mr Renilson, then the CEO of TEL, was appointed as SRO. This is confirmed in a number of papers on guidance prepared by Mr Bissett, which came later and will be considered below. It was also noted in a later readiness review conducted by OGC in September 2006 [CEC01629382, page 0005]. Mr Renilson interpreted the role as requiring him to use his best endeavours to “make the project happen” [PHT00000040, page 91]. However, he considered that his role as SRO related only to the period when the tram would be operational and not the construction period [TRI00000068_C, pages 0039–0040, paragraph 129]. I have seen no evidence that could justify his belief that his role was so limited but, on any view, the result was that no one was performing the SRO role during that stage. This should have been apparent to all the members of the TPB, and I find it extraordinary that nothing was said at the time. Had the issue been noted then, either Mr Renilson would have started to perform the role or another person could have been appointed SRO in his place. Allowing the project to proceed in the absence of someone to perform this key role – or the equivalent of the Executive in PRINCE2 terms – was a fundamental defect in the governance arrangements. It meant that there was no single person with responsibility for the project and the focus that could be expected from an active SRO was absent.

22.55 Even if Mr Renilson had undertaken the role assigned to him, the situation would still have been far from ideal. TEL became a delivery organisation as the project governance developed and Mr Renilson was its Chief Executive. In my view it is better for an SRO, as the person with ultimate responsibility for the project, to be someone within the client that is commissioning the work, or the end user of what is provided – they should be on the outside looking in. As such, they have some objectivity in relation to the actions of the entity or entities responsible for delivery. It would have been most appropriate to have had an SRO from within CEC because the project “belonged” to CEC. This would have addressed the issue of unsatisfactory reporting to CEC. As I will consider below, the alternative of reporting from the TPB to the CEC Tram Sub-Committee was not satisfactory for this purpose.

June 2006

22.56 A further paper prepared by Mr Bissett on governance – this time for the TEL Board meeting in June 2006 – was intended to address the position through to financial close [CEC01803822]. It said that the “fulcrum” of the project was the TEL Board’s “[acting] as the Tram Project Board” [ibid, page 0001; PHT00000028, page 83] and that the authority for the Project Director came from TEL. tie was noted to be the “delivery agent” specified by CEC acting through TEL. Although the TPB and the TEL Board had been merged, this paper noted that it was necessary to have more clear demarcation between TEL as the project board and TEL in its other capacities. It said that TEL was an element of the “project approval” part of governance but also, as the project board, at the project execution level. To achieve demarcation, it was proposed that the project board would revert to the title of the TPB and would be a formal committee of the TEL Board. The paper indicated that Mr Mackay, the non-executive Chairman of TEL, was to chair the TPB. The remainder of the membership would consist of:

• Mr Renilson, the TEL CEO and SRO;
• Mr Gallagher;
• Mr Harper, the Project Director;
• Mr Campbell, a director of TEL and LB;
• a CEC representative;
• a Transport Scotland representative; and
• other advisers as required.

22.57 This paper noted that the need to identify an SRO was one of the issues that required to be addressed. It stated:

“The TEL CEO has overall responsibility to ensure project execution is working effectively. As such he would be the Senior Responsible Owner (SRO) under OGC guidelines and is the lead operational director on the Tram Project Board. This does not precisely fit OGC guidelines, which would for example call for the SRO to chair the TPB, but is a practical approach appropriate for this project.” [CEC01803822, page 0002.]

22.58 It referred to Mr Renilson as being the SRO [ibid, page 0003], and there is no doubt from this that this role covered the construction phase as well as the operational phase. Mr Renilson was a director of TEL and would have received a copy of the paper. Whatever had been the position prior to this it meant that he should have been aware of what was expected of him in that role.

22.59 Mr Bissett was asked about the development of the business case that was ongoing at this time, and he explained that that was the responsibility of the Tram project team employed by tie, but once approved at that level it would “move through the hierarchy to the Tram Project Board and ultimately TEL to give its seal of approval if it thought appropriate to the Council” [PHT00000028, page 87]. Mr Bissett recognised that the various layers were duplicative. In terms of the guidance noted above, it should have been the SRO who had responsibility for the business case.

22.60 If the re-emergent TPB took a decision in relation to implementation of the project, it would do so as a sub-committee of the TEL Board. That decision could take effect within TEL and then tie would, in effect, require to be instructed to implement the decision [ibid, page 90]. The complexity of this is obvious. Mr Bissett said that the process worked better in practice than it appeared on paper, which he attributed to:

“the consistency of membership by senior people of the Tram Project Boards. So, for example, the Tram Project Board meeting to address the tram project would be, give or take two or three hours, possibly longer than that at some points, whereas the TEL Board, which had the same people, had been represented as attendees on Tram Project Board meetings to avoid having two meetings about the same topics.

“So the TEL Board meeting was actually a fairly limited affair. They had statutory legal responsibilities, obviously, but they didn’t have to revisit the entire conversation about the tram project.

“So in practical terms, it wasn’t as duplicative as it may appear on paper.”
[ibid, pages 90–91.]

22.61 Mr Bissett did not accept that a situation in which both bodies would have to consider the issue and had to rely on overlaps in membership to avoid repetition indicated that something was amiss. Mr Bissett did not accept that there was a lack of clarity as to which body was taking which decisions and/or providing advice to CEC. I consider the issue of the overlaps of membership in more detail in paragraphs 22.92 and 22.93 below.

22.62 The paper also noted that two sub-committees of the TPB were established. One of them – the Design, Procurement and Delivery (“DPD”) Sub-Committee – was to be headed by Mr Gallagher, the Executive Chairman of tie [ibid, pages 92–95]. This further complicated the decision-making path. The DPD Sub-Committee under Mr Gallagher could take a decision that would advise the TPB, a sub-committee of the TEL Board. In order for a decision to take effect it was necessary that TEL give a direction to tie under the chairmanship of Mr Gallagher. It may be said that formal steps were not required to achieve this, but it remained the position that there was a very complex structure and that reliance on informal directions or instructions usually creates scope for misunderstanding and confusion.

22.63 The paper continued the approach that the TPB was to have executive rather than advisory powers, which, as I have already noted, did not conform to the OGC guidance. The decision to have someone in a non-executive role (Mr Mackay) chair the TPB was also at odds with either the OGC or the PRINCE2 guidance. According to both, the chair of the TPB was someone with core executive role and responsibility. Further, as the function of the TPB and the SRO/executive was to instruct the project director, it is odd that the project director was a member of the board rather than reporting to it. The basis for recommendation as to the membership of the TPB was not stated and is not clear. Once the non-executive chairman and the project director are left out of account it is apparent that although there were people involved who had experience of managing LB (Mr Renilson and Mr Campbell) the only person who might have had experience of a large construction project would be the representative from Transport Scotland. As I noted in Chapter 3 relating to the involvement of Scottish Ministers, however, Transport Scotland’s involvement in the project was later brought to an end.

August 2006

22.64 The minute of the meeting of the TEL Board on 21 August 2006 [CEC01794941] suggested that the TPB would be separated from TEL. This had been considered as an option in the previous document, and Mr Bissett noted that there was a recognition that the TEL Board had not yet arrived at the best structure for the future [PHT00000028, page 97].

22.65 In this month, Mr Gallagher was appointed as Executive Chairman of tie, having been made Non-Executive Chairman the previous month. Mr Gallagher said that that was because the political uncertainties surrounding the project meant that it would be difficult to recruit a Chief Executive to replace Mr Howell. The dual role was intended to be an interim arrangement, but it remained in place until Mr Gallagher resigned in late 2008. Having one person serve as both Chairman and Chief Executive does not comply with the code on good corporate governance derived from the Cadbury and Greenbury Reports [the Combined Code, Principles of Good Governance and Code of Best Practice, CEC02084834]. This was recognised by CEC at the time of making the appointment, but Mr Aitchison maintained that the departure from good practice was a pragmatic approach in the prevailing circumstances, including the finalisation of the business case [Mr Aitchison TRI00000022_C, pages 0098–0099, paragraph 324]. However, that excuse for departing from the code as to good governance fails to take into account the responsibility of the SRO for the business case. Had CEC recognised the role of the SRO and ensured that Mr Renilson was protecting the interests of CEC by performing that role, the perceived justification for departing from the code would have been shown to be without foundation. Allowing the dual role removed a check that would otherwise have been in place in the period through contract negotiation and execution.

September 2006

22.66 A note prepared by Mr Bissett for the meeting of the TEL Board and the TPB on
25 September 2006 [TIE00000905; TIE00000906] outlined the project governance structure for Edinburgh’s integrated transport system. It noted that the TPB would be an independent entity, rather than a sub-committee of TEL as had previously been said to be intended. The TPB was to have full authority delegated from CEC. The document setting out the new structure stated that this was to be formalised by the TEL Board’s approval of the paper. This is questionable: the decision of the TEL Board might have been effective as between it and the TPB, but the authority of CEC would have been required for such a delegation. On any view, this intention that there be delegation from CEC indicates that an executive function was intended for the TPB. The covering memorandum, on the other hand, said that the members of the TPB were to be empowered by their organisations to take decisions rather than by CEC. This suggests that they could bind only those organisations and is suggestive of a facilitative function. It is therefore apparent that there was still no clarity as to the role that the TPB was to play.

October 2006

22.67 The minutes of the TPB for October 2006 [CEC01355258] noted the approval of a new governance structure. That structure is described in a paper that had been sent to the tie and TEL Boards in August [CEC01758865]. It set out the structure which it was said would take the project through to financial close. It also described the key bodies as being the TEL Board, the TPB and the two TPB sub-committees – tie was no longer identified as a key body. The paper stated that TEL would make recommendations to CEC as to the project. It also stated that:

“The TPB is established as an independent body with full delegated authority from CEC (through TEL) and TS to execute the project in line with the remit set out in Appendix 3. In summary, the TPB has full delegated authority to take the actions needed to deliver the project to the agreed standards of cost, programme and quality.” [ibid, page 0002.]

22.68 The remit in Appendix 3 gave the TPB responsibility:

“To oversee the execution of all matters relevant to the delivery of an integrated Edinburgh Tram and Bus Network with the following delegations:

a. Changes above the following thresholds

i. Delays to key milestones of > 1 month

ii. Increases in capital cost of > £1m

iii. Adversely affects annual operational surplus by >£100k

iv. is (or is likely to) materially affect economic viability, measured by BCR impact of > 0.1

b. Changes to project design which significantly and adversely affect prospective service quality, physical presentation or have material impact on other aspects of activity in the city

c. Delegate authority for execution of changes to TEL CEO with a cumulative impact as follows:

i. Delays to key milestones of up to 1 month

ii. Increases in capital cost of up to £1m

iii. Adversely affects annual operational surplus by <£100k pa

iv. is (or is likely to) materially affect economic viability, measured by BCR impact of <0.1″ [ibid, page 0006].

22.69 Even within this remit, the conflict as to the role of the TPB is notable. It is first said to be the body with authority to execute the project and then it is stated that it is there to oversee what is done by others – presumably tie.

22.70 When asked about the contents of this paper, Mr Bissett said that the function given to the TPB was that which had been originally given to tie, but this is far from clear from the paper’s terms. tie had been created to execute the project, and this paper cannot make up its mind as to whether the TPB was there to execute the project or to oversee execution. Mr Bissett sought to modify his position by saying that the TPB was overseeing the project team employed by tie rather than undertaking the delivery itself [PHT00000028, pages 105–107]. This merely reinforces the confusion and is clearly at odds with the statement in the paper that the TPB would “execute” the project [CEC01758865].

22.71 The paper suggests the following as the membership of the TPB:

• chair
• senior Transport Scotland representative
• senior CEC representative (“Senior User Representative”)
• TEL CEO and project SRO
• tie executive chairman and TEL operations director (“Senior Supplier Representatives”)

22.72 The titles noted in brackets were said to be the ones that accorded with the OGC guidance as to composition of a project board. This is an error. The designations in brackets conform to the PRINCE2 guidance. The term “SRO”, on the other hand, does come from the OGC guidance and not from PRINCE2. This betrays a further lack of clarity as to the model that was being employed. The identified “Senior Supplier Representatives” are not people who fall within the term “Supplier”, as it is used in the PRINCE2 guidance. Neither was CEC the “User” in terms of that model, as people from Transdev (or possibly TEL) should have been the “User” and CEC, or tie in its stead, the “Business” or client. I further consider the issue of membership below, but my impression is that first a decision was made as to who to include and then an attempt was made to fit designations from the guidance to them.

22.73 The decision no longer to consider tie a key body in favour of TEL and its board sub-committees is puzzling. In reality, tie was the body that employed almost all the people to carry out the work necessary to deliver the project. It was also the body that was seeking tenders for the infrastructure and tram works. It was the body that had entered into the System Design Services contract. It was the only body in receipt of funds from CEC; TEL obtained its funding from tie. Anything that TEL was to do would, in reality, be done by tie. All the recommendations that TEL might make to CEC would depend on work carried out by tie, and it is not apparent that the TEL Board would be in a position to interpret information provided by tie employees and consultants so as to reach a different view. This factor means that the recommendations must inevitably arise within tie but would be “rebadged” as though they had come from TEL. Mr Bissett said:

“tie would make the proposals through the Tram Project Director to the Tram Project Board, which is where the main discussions on any issues took place. And the Tram Project Board formally reports up to TEL and to the Council.” [PHT00000028, page 108.]

22.74 No reason was given as to why there should be such a bureaucratic and complex process. It is of note, however, that such processes were apparent elsewhere in the management structures of the project, and most strikingly in the process for giving approval to execute the Infrastructure contract (“Infraco contract”) and the tram vehicle supply and maintenance contract (“Tramco contract”). The structure that was put in place appears quite artificial and does not reflect the reality, which is that recommendations and advice would come from tie. In response to questions as to
the difficulties that might arise where formal structures do not match the practice,
Mr Bissett said that “informal communications are very often very important in project delivery” [ibid, page 107]. In my view this is yet another unfortunate example of something that is a feature in the Tram project: attempts to rely on informal procedures and communications when it is noted that the formal ones are defective or unsuitable.

Audit Scotland report

22.75 In June 2007, after the Scottish Parliament election, at the request of the Cabinet Secretary for Finance (Mr Swinney) the Auditor General for Scotland published his review of the Edinburgh transport projects [CEC00785541]. This will be considered in more detail in Chapter 23 (OGC and Audit Scotland). In relation to the Tram project, Audit Scotland’s report concluded that arrangements put in place to manage the project appeared to be sound, with “a clear corporate governance structure” and “clearly defined project management and organisation”. Unlike the internal TPB paper from October 2006 [CEC01355258], Audit Scotland’s report described tie as one of the “key players”. The report recorded that the TPB exercised overall governance and had the authority needed to deliver the project to agreed cost, timescale and quality standards. This was clearly an executive rather than a facilitiative role. The report said that the authority was delegated to it by CEC via TEL. This is the only identified role for TEL in the governance structure. It is apparent that the structure as narrated by Audit Scotland is not that which had been put in place the previous October. Mr Aitchison noted that what was said about the role and authority of the TPB was not accurate at the time that it was made [TRI00000022_C, page 0106, paragraph 326].

22.76 From the comments that I have already made, it will be apparent that I do not agree with the positive assessment made by Audit Scotland and as matters were to turn out, the confidence expressed was clearly unfounded. This could be partly as a result of the changes made to governance after the report. It could also be a feature of the limited time available to produce the report. Even allowing for these factors, however, in view of the patent lack of clarity as to the roles to be undertaken by each body, the errors in the statements as to the role and authority of the TPB and the unexplained demotion of tie, I would have expected the report to have included a note of caution or a note of the need for further work to be undertaken.

22.77 The effect of the report from Audit Scotland was to engender a confidence in the ability of tie to complete the project [Mr Aitchison ibid, pages 0086, 0088–0089, paragraphs 260, 264 and 267]. Councillor Balfour noted that councillors had drawn comfort from the report [TRI00000016, page 0066 and 0025–0026, paragraphs 66 and 74]. Even people within tie appeared to draw support from it. Mr Bissett said:

“Audit Scotland performed what I regarded as a very thorough review in (I think) 2007, of the governance system that was put in place. I recall they reported positively and I was encouraged to know that tie and the Council were on the right track in respect of this.” [TRI00000025_C, page 0022, paragraph 58.]

22.78 Mr Bissett would have been aware of the timescale within which Audit Scotland performed its role. I do not see how he could have regarded it as very thorough. More importantly, however, if there was satisfaction on the part of Audit Scotland it is all the more remarkable that, within months, major changes had been made to the governance arrangements. The false confidence that the report created was unfortunate, in that it meant that chances to examine and improve the governance structures were lost.

July 2007

22.79 In July 2007, following Scottish Ministers’ decision to withdraw from involvement in the project, Mr Inch sent a briefing paper to the CEC Chief Executive, Mr Aitchison [CEC01566497]. This was considered in further detail in Chapter 13 (CEC: Events during 2006 and 2007). Mr Inch noted that the arrangements in place were complex, and expressed concern about them. He also questioned whether CEC could competently delegate powers to TPB and observed that having a company (TEL)
that was not integrated into the decision-making process as part of governance
was inefficient. He said:

“it is now vital that more rigorous financial and governance controls are put
in place by the Council given the funding cap that has been placed on the
project and the greater financial risks that are to be borne by the Council.”
[ibid, page 0008.]

22.80 Although he recognised that there might be other options, he canvassed three:

• winding up tie and transferring appropriate staff to CEC;
• tie’s continuing to progress the project on the basis of a fully documented principal/agent agreement with CEC; and
• establishing a Tram Committee, which would meet on a four-weekly cycle, to replace the TPB and perform its duties.

22.81 It is significant that, in mentioning the second option, Mr Inch commented that
“TS have previously urged the Council to implement a more robust monitoring of TIE’s activities in delivering the project” [ibid]. It would appear that CEC failed to
act in that regard.

August 2007

22.82 It is highly relevant that, in mid-2007, CEC had some appreciation of the need for better governance. The concerns expressed by Mr Inch appear to have led to a paper being prepared by the CEC Chief Executive, Mr Aitchison, for the August 2007 meeting of the Full Council [CEC02083490]. That paper notes the approval that had been given by the Auditor General to the governance arrangements, but nonetheless states a need for rigorous financial and governance controls to be in place. This, too, was considered in further detail in Chapter 13 (CEC: Events during 2006 and 2007). Throughout the paper there are repeated statements that there has been a change in the risk to CEC as a result of the Cabinet Secretary’s statement that a grant of no more than £500 million could be provided. As I noted in Chapter 3 (Involvement of the Scottish Ministers), in fact there is clear evidence that there had always been a cap, despite any aspirations from CEC or tie to the contrary. I consider that this should have been apparent to Mr Aitchison and others in CEC. On any view, however, it could never have been thought that the Scottish Ministers would bear the whole of the cost increase, so that CEC would be exposed to increased costs to some extent. It is therefore not clear why risk issues should necessitate a review of governance. In particular, there does not seem to be any proper basis for the statement in the papers that:

“Following the change in the risk profile for the Council, the role of the Tram Project Board requires to be considered afresh.” [ibid, page 0003.]

22.83 For completeness, I add that although the paper states that the TPB was a requirement of Transport Scotland, it is apparent from the documents noted above that this is incorrect.

22.84 Although the paper notes the need for rigorous financial and governance controls, it did little to identify what should be done. It reiterated that it was intended that TEL should have the role of integrating bus and tram services and that tie was project managing and would have a role in both the procurement and construction phases. It stated that tie‘s role would be one of agency of the CEC and that it would be set out in clear written terms. It said that senior Council officials had met their counterparts in tie and agreed measures to “clarify the relationship between the two parties in the next phase of the contract” [ibid], but it did not say what had been agreed. There was no mention of the changes that had already been made by tie and TEL to reduce the role and relevance of tie. It indicated that operating agreements would be concluded with each company to formalise and define its function but did not give an outline as to the contents of these documents.

22.85 In relation to the councillors, the paper stated:

“The role of elected members in project decision-making also needs to be defined. The dynamics of the project have changed following the creation of the cap on funding from Transport Scotland. As a result, it is now appropriate to establish a dedicated Tram Sub-Committee. I will report in September on what powers should be delegated to this sub committee [sic] and what powers should be delegated to officers. In the meantime Council is requested to delegate powers to me with respect to any decisions that may require to be taken. Consideration is also being given to the requirements for the Tram Project Board to report to the Tram Sub-Committee.” [ibid]

22.86 The Tram Sub-Committee will be considered in more detail below and has also been considered in Chapter 13 (CEC: Events during 2006 and 2007). In that the intention had been to establish an arm’s-length company to deal with implementation, it is odd that the paper assumed that the councillors had any role in project decision-making as opposed to strategic decisions. Although it was not well articulated, it appears that what was intended was a form of monitoring by CEC of the work being undertaken by tie and, perhaps, TEL. If so, that is potentially quite an inroad into the concept of using an arm’s-length company. If there were to be oversight, it would lead to an inference that if CEC was not happy with what it saw, it would give directions to the companies, override decisions or take decisions itself. This being the case, I would have expected there to be a more detailed consideration by CEC as to the purpose of this oversight and how it affected the role of the companies. Despite this and
Mr Inch’s concerns, no attempt was made to grapple with the issues fully, to clarify
or simplify the structures or to take control away from tie, TEL or the TPB.

September 2007

22.87 In September 2007, Mr Bissett wrote a further draft paper on governance for tie, TEL and the TPB [included in papers for the September TPB meeting – USB00000006 page 0032 onwards] with new structures that, again, were said to be for the period to financial close (then planned for January 2008) and construction [PHT00000028, page 109]. The paper stated that it updated the governance structures from a year earlier and described the structures as having been agreed. The recommendations in the paper were adopted at the September 2007 meeting of the TPB [CEC01357124, Part 1, page 0006]. The paper recorded that Transport Scotland had withdrawn from involvement in the project and that CEC had established a Tram Sub-Committee. The purpose of this was stated to be “to review and oversee decisions with respect to the project” [USB00000006, page 0033]. Despite this, elsewhere in the paper there was reference to making changes in the composition of the TEL Board “to be the active arm of the Council in oversight of project delivery and preparation for integrated operations” [ibid, page 0034]. There was no indication of how this would be related to the role of the Tram Sub-Committee. There was also reference to:

“[t]he emphasis of the TEL Board on oversight (on behalf of the Council) of matters of significance to the Elected Members in relation to project delivery and preparation for integrated operations” [ibid].

22.88 Despite this, the TPB was described as “the pivotal oversight body” [ibid, page 0035]. Apart from the oversight role that it might or might not have, TEL was also said to have overall responsibility to deliver an integrated tram and bus network and, in addition to its oversight responsibilities, the TPB was said to have delegated authority from TEL to execute the project. Thus, each body was charged with both execution and oversight of the project. Needless to say, this was not explained. The paper referred also to the SRO having delegated authority from the TPB. This was a marked departure from the OGC guidance as to the relationship between the two.

22.89 Once again, the TPB was identified as a sub-committee of the TEL Board rather than a free-standing body. The paper recognised that tie now had only one project and proposed that the councillors and other non-executive directors sitting on the tie Board would leave and join TEL or the TPB, but it did not say which. This could have been regarded as material if the two bodies were to have different roles. The intention was that this would leave tie with a board consisting of its chairman and a senior council official. It was envisaged that the Boards of tie and TEL would meet only quarterly.

22.90 Mr Mackay said that the decision to move the councillors to the TPB from tie was his [TRI00000113_C, page 0021, paragraph 71]. This might have been dictated by his view of the role of each of the bodies. In this regard, he said:

“CEC were the owners and they delegated authority to TIE, TEL and the Tram Project Board. tie was primarily design, TEL was integration and the Tram Project Board was the engine room and workhorse, preparing and proposing the detail.” [ibid, page 0019, paragraph 64.]

22.91 This put TPB essentially in the position that tie would have been in at the start of the project. There does not appear to be any foundation for regarding tie as having responsibility only for design either in the governance structures or in the work undertaken generally by tie up to this date.

22.92 It is apparent from a table of composition of the boards [USB00000006, page 0042], which is reproduced in Table 22.1, that there is very substantial overlap between the TPB and the TEL Board. Although changes were made to memberships over time, this amply illustrates the extent of the commonality of membership.

Table 22.1: Membership of TEL Board and Tram Project Board

Source: Tram Project Board Report on Period 6, Papers for meeting 26 September 2007 [ibid, page 0042]

22.93 Despite the statement that the councillors and non-executive directors on the tie Board would join the TEL Board or the TPB, when considering the proposed membership of the TPB the only change from the October 2006 structure was that there would be no representative from Transport Scotland and the CEC Executive Member for Transport, Councillor Wheeler, was to join. The lack of clarity in membership of the various bodies and lack of clear distinction between them tends to indicate once again that there was a lack of clear understanding of the different roles that they were intended to play. When both the roles and the membership between the various bodies overlap, there is scope for confusion as to where the ultimate responsibility should lie. This created a danger that issues that arose would not be properly examined and this is what happened in practice.

22.94 Although the Tram Sub-Committee referred to in Mr Bissett’s paper was said to have the function of overseeing decisions made by the other entities involved, it did not operate as intended. It did not ever discharge an effective oversight function. This was said to be as a result of concerns as to commercial confidentiality and political differences about the project rather than the availability of TEL and/or the TPB to provide oversight [Mr Aitchison TRI00000022_C, page 0086 paragraph 258 and pages 0103–0104, paragraphs 317–318; Mr Aitken TRI00000015, page 0030, paragraph 104; Mr David Anderson TRI00000108_C, page 004, paragraph 2(c)]. Even if it had functioned as intended, it formed part of the governance of CEC rather than of the project as such. More fundamentally, it is not clear that the councillors who would be appointed to sit on it would have the experience and skills to enable them to fulfil a meaningful oversight role.

22.95 It is of note that, at the time that these arrangements were being developed, in an email of 28 September 2007, Mr Hogg, a non-executive director of tie, concluded that there was very little role left for tie in what was proposed [CEC01667446]. This seems to be correct.

October 2007

22.96 The October meeting of TPB was held together with the meeting of the tie Board [CEC01713462]. This was the only time that it occurred in 2007 but it resumed in January 2008 [CEC01246826], and for the first half of the year the TPB held joint meetings – sometimes with TEL and sometimes with tie. There was then a gap and further joint meetings with tie in November 2008 [CEC00988024, Parts 1–2], December 2008 [CEC01053908], January 2009 [CEC01150181], February 2009 [CEC00988034] and March 2009 [CEC00933351]. As the year progressed there was greater ambiguity in that the presentations given indicated that they were given to a joint meeting of tie and the TPB, but the minutes refer only to the latter. This perhaps reflects the complexity and extent of duplication built into the governance structure, but it also adds to the difficulty of identifying where responsibilities lay and which bodies were taking decisions. The alternation of joint meetings between the various entities in early 2008 also creates the situation in which the minutes of a joint meeting of TPB and TEL would be approved at a meeting of TPB and tie,and vice versa.

December 2007

22.97 The Final Business Case (“FBC”) dated 7 December and approved on 20 December 2007 [CEC01395434, Parts 1–11] set out the governance structures envisaged for the construction period and largely re-stated the governance structures agreed at the meeting in September. (See also Chapter 5, Procurement Stategy.) The diagram in Figure 6.4 of the FBC depicting these structures [ibid, Part 5, page 0094], which is reproduced in Figure 22.2 for ease of reference, did not include tie at all. Nonetheless, the text recognised that there was duplication between the scrutiny by the tie Board of its activities and the oversight role performed by the TPB, which suggested that it was envisaged that tie would be undertaking this work.

Figure 22.2: Governance structure during construction period

Source: Edinburgh Tram Network, Final Business Case Version 2, 7^th December 2007 [CEC01395434, Part 5, page 0094]

22.98 Contrary to what had been agreed in September, the FBC stated that the composition of the tie Board was to be maintained in its then current form. It was also stated that the composition of the TEL Board would be based on the existing position. As with the paper in October, this was in apparent conflict with a statement that councillors and non-executive members of the tie Board would join TEL or the TPB. This change was said to be to “ensure consistency of approach”, to strengthen the role of TPB as the body that delivered the tram system and to reflect TEL as the body that would provide oversight. If the goal was “consistency of approach” and the way to achieve it was overlapping membership of the various bodies, it further calls into question why there were so many bodies and why they were not more distinct. It was envisaged that the TEL Board would require to meet only quarterly, but that the tie Board and TPB would meet four-weekly. Reading the FBC gives the strong impression that it lacks clarity, coherence and proper purpose. In saying that, it should be borne in mind that, unlike previous drafts, this version of the business case was not subject to detailed scrutiny by Transport Scotland before it was finalised. Such a lack of scrutiny was a consequence of the decision of Scottish Ministers to withdraw Transport Scotland officials from their previous involvement in the project.

22.99 At its meeting on 20 December 2007, in addition to approving the FBC and giving its Chief Executive authority to enter into the contracts, CEC approved governance structures described in a joint report to the meeting and delegated “general authority to the Tram Project Board through TEL and tie” [CEC02083446, page 0019]. The report from Mr McGougan and Mr Holmes in relation to this [CEC02083448] adopted the approach, contained in the TPB paper of September 2007, of making the TPB a sub-committee of the TEL Board. The report said that this is what was proposed, although in fact it had already been adopted by the TPB in September. In terms of authority, the report said that there would need to be “seamless” delegation from CEC through TEL to TPB to ensure proper governance and accountability. The report did not consider why it should be TEL or TPB rather than tie to which authority was delegated. The report then stated:

“To further ensure that all aspects of governance are in place Council is asked to authorise through tie that this company also has a firm delegation of appropriate powers to engage with the TPB.” [ibid, page 0002.]

22.100 I find this impossible to understand. It is not clear what entity is referred to by the expression “this company”. If it is tie, how can authorisation of tie be made through tie? If it is TEL, how is it envisaged that delegation to the parent company will be through its subsidiary? What is a “firm delegation”, and what are “appropriate powers”? It is another example of a lack of clarity, which suggests that there was no proper understanding of what the governance structures should achieve. Despite the statements that there would be delegation to TEL or the TPB, the report also noted that CEC must agree to tie entering into and managing the contracts that would be necessary to deliver the tram system. It contained the diagram reproduced in Figure 22.3 [ibid, page 0010], depicting the governance structures:

Figure 22.3: Tram organisational structure

Source: Joint Report (dated 17 December 2007) by the Director of Finance (Mr McGougan) and the Director of City Development (Mr Holmes) for the meeting of the Council on 20 December 2007 recommending (i) approval of the Final Business Case version 2, (ii) staged approval for the award by tie of the Infraco contract and the Tramco contract and (iii) approval of the governance arrangements [CEC02083448, page 0010]

22.101 There was no key explaining what the various arrows were intended to represent: whether they were reporting, conferring of authority, accounting or a combination of any of these. It is not easy to read, but the arrow between tie and TEL is captioned “Handover of project”.It is not immediately possible to reconcile that diagram with the governance structures described in the documents noted above. Notably, other than ownership, this diagram contains no link directly between CEC and tie.

22.102 Both the FBC and the report are difficult to follow. To the likely audience for these documents, who could not be expected to spend the time that I have had to examine them closely and attempt to interpret them, they would be largely meaningless. Nonetheless all the recommendations made in the report were accepted by CEC. Despite the internal contradictions, the impression is given that this report adhered to what had been happening in the preceding months and consolidated the shift of responsibility from tie to TEL. As with the reports and papers that have gone before,
it does not define roles clearly and does not state a rationale for sidelining tie.

January 2008

22.103 On 23 January 2008, there was a joint meeting of the TPB, tie and TEL [CEC01015023]. The Project Director’s report for it noted that, after several months of consideration, the new governance structure had been approved. However, the papers for the meeting contained yet another iteration of governance. This was said to be the structure that would be put in place for the construction period. As of the start of 2008, it was intended that the contract would be signed at the end of January, with work to commence shortly thereafter, so the intention would have been to introduce the new structure within weeks of the CEC’s approval of the old one. If there was to be a separate structure for the construction period it clearly would have made sense to record it and seek approval at the end of 2007. Taking many months to agree a structure only to have it superseded almost immediately clearly demonstrates very poor management of this issue.

22.104 As before, the new proposed arrangements both describe the TPB as an oversight body and state that it has full delegated authority to execute the project [ibid, page 0074]. In his suggestion that the obligation to execute the project should be rewritten as one of overseeing its execution Mr Bissett seemed to accept that there was an apparent conflict between these roles. The basis for the suggestion was that he did not think that “the Tram Project Board was executing in an executive way” [PHT00000028, page 125]. The self-contradictory – or even nonsensical – nature of this does not require comment. Furthermore, the fact that he had to suggest amending the wording of his report several years after it was written at a time when inconsistencies in governance were highlighted by Counsel to the Inquiry indicates at least a failure to understand the confusion of roles within the proposed structure. tie‘s role was described as being the management of the relevant contracts to deliver the tram network in a fit state for operational purposes, on time and budget [CEC01015023, page 0075]. The papers for this meeting included a copy of the proposed operating agreement between tie and CEC [ibid, page 0083]. This noted that tie provided the services to deliver the tram service to CEC [ibid, pages 0084–0085 and 0092]. This conflicted with the intention, expressed elsewhere in the papers, that tie was to provide the delivery services to TEL [PHT00000028, pages 126–127]. It also conflicted with what had been agreed by CEC just the month before. Once again, the clear inference is that there was a lack of understanding as to what the parties were trying to achieve and a corresponding lack of understanding of the roles and responsibilities of each body.

22.105 The proposals also noted that it was intended that there be “appropriate common membership” [CEC01015023, page 0074] across the tie, TEL and LB Boards and that the councillors would be the same on both the tie and TEL Boards. Mr Bissett accepted that, in practice, the members of the boards came together in a single meeting. This further calls into question the purpose of having distinct bodies and blurs the allocation of responsibilities.

22.106 This meeting also established the Approvals Committee, which was intended to give final approval to the contracts prior to signature. This was considered in more detail in Chapter 12 (Contract Close). It is relevant that the Approvals Committee was to be a sub-committee of the TPB and of the Boards of both tie and TEL. This overlap is not surprising as, on the basis of the structures that had been put in place, it would be very difficult to determine which entity should take the decisions and give the advice. It is perhaps one of the most pointed indicators of how confused the governance structures had become that in order to ensure that such a critical decision was properly taken, it was necessary that it be structured so that all three bodies took it.

May 2008

22.107 As part of the contract close in May 2008, a new operating agreement was concluded by CEC with tie, and for the first time one was concluded with TEL. Each of these is dated 12 May 2008: two days before contract close. Although, by this time, the procurement was complete, the agreement that was put in place between CEC and tie at this stage was the first that regulated the Tram project specifically (the “Operating Agreement”) [CEC01315172]. Prior to this, there had been only an agreement covering transport projects generally.

22.108 In the Operating Agreement, the services that tie was to provide were listed in Schedule 1 as follows:

“1. Procurement and contract award of all contracts required to deliver the tram project, including the Council’s obligations

2. Provide accurate and current information to Tram Project Board, Transport Edinburgh Limited and the Council for appropriate decision making and approvals

3. Provide efficient and effective project management services for the Project including cost, financial programme, risk, contract and change management

4. Provide traffic management expertise to effectively implement and manage both temporary and permanent traffic management alterations, including the Traffic Regulation Order process

5. Comply with Health and Safety requirements and act as the Construction Design Management Regulations co-ordinator, provide Health, Safety, Quality and Environmental management and expertise to ensure effective approvals through the The [sic] Railways and Other Guided Transport Systems (Safety) Regulations process. This should include protecting the Council’s interests

6. Ensure the design is assured, and provide the necessary quality of design for technical and prior approvals in a timeous manner

7. Develop and agree a communication strategy with the Council and provide effective communications, consistent with this strategy

8. Provide and demonstrate to the Council that appropriate site management services are in place to ensure quality is delivered

9. Ensure a continued focus on value engineering and deliver any agreed initiatives

10. Manage the interface with TEL in order to deliver a smooth handover for operations

11. Manage project land in accordance with the tie/CBC licence

12. Ensure and demonstrate to the Council that all contracting parties meet their obligations (including protocols, traffic management, contract conditions, employers requirements [sic], site supervision and testing etc)

13. Manage all third-party agreements in an effective manner and demonstrate that they are in the Council’s interest

14. Carry out other duties as instructed by the Council in relation to the Project

15. Act on efficiently and effectively all formal instructions issued by the Council in relation to the tram project” [ibid, page 0016].

22.109 It is immediately apparent that the provision of many of these services must have taken place prior to the Operating Agreement being in place. It is of note that, regardless of the statements in the copious iterations of the governance structures considered above, to the effect that tie would provide services to TEL, the Operating Agreement stated that the services were to be provided to CEC. In clause 3.1, CEC delegated to tie the power to enter into the various contracts required for construction. Again, this power was passed directly from CEC to tie rather than through TEL or the TPB. Significantly, CEC agreed to guarantee the financial obligations of tie in relation to certain aspects of the project.

22.110 The Operating Agreement contained several provisions that tie should use its best endeavours to achieve certain goals, and it included a general provision that all obligations were to be discharged in an honest, faithful and diligent manner in the best interests of CEC, but it did not include any fixed targets in relation to delivery of the trams in terms of output, timings or costs. Schedule 2 to the Operating Agreement set out the diagram depicting governance structures that had been in the report to CEC in December 2007, which was reproduced in paragraph 22.100 above as Figure 22.3. It did not show any contractual link between tie and CEC, so its inclusion in a contract between tie and CEC is, at the very least, ironic.

22.111 The Operating Agreement noted that a TMO had been appointed by CEC to monitor tie in relation to the project. It contained a number of provisions in terms of which tie was bound to provide information to the TMO. It was bound to notify the TMO immediately that it became aware of the likelihood of delay to, or overspend in, the project. The TMO will be considered in more detail in paragraph 22.255 and following paragraphs.

22.112 In the Agreement concluded with TEL [CEC01315173], the Scope of Services to be provided by TEL to CEC was listed in Schedule 1 as follows:

“1. Development of a fully integrated bus and tram service plan in advance of tram commissioning.

2. Provide or procure the provision of accurate and current information to the Council for appropriate decision-making and approvals

3. Address with the Council the funding and related implications of Phase 1B

4. Develop and agree a communication strategy with tie and the Council and provide effective communications, consistent with this strategy.

5. Plan and manage the interface with tie in order to deliver a smooth handover for operations

6. Carry out other duties as instructed by the Council in relation to the Project

7. Act on efficiently and effectively all formal instructions issued by the Council in relation to the Project” [ibid, page 0017].

22.113 It is immediately notable that this did not entail any work in relation to the construction works, and it included no obligation in relation to delivery of the network. Despite this, clause 2.3 of the Agreement stated:

“TEL shall use best endeavours to ensure that it delivers the Project as set out in the Final Business Case. TEL shall use best endeavours to comply with all timescales and financial projections detailed in the Final Business Case. It is acknowledged by the Council and TEL that the primary responsibility for delivery of the Tram System rests with tie Limited. TEL will use best endeavours to support delivery of the Tram System so far as it can do within its powers and resources.” [ibid,pages 0004–0005.]

22.114 The overlap with the responsibilities of tie is immediately obvious; the intention as to which party should actually be undertaking them is not.

22.115 There was a requirement in clause 2.20 for TEL to establish the TPB as a committee of the TEL Board and to delegate authority to it to enable it to carry out its responsibilities. Those responsibilities were not, however, defined in the Operating Agreement and instead it was stated that they were for the TEL Board to define. TEL was entitled to delegate to the TPB any matter that affected the programme, cost and scope of the project, other than the following matters which were reserved to CEC:

“(A) (i) any actual or reasonably expected delay to the Project programme of greater than 3 months; or (ii) any actual or reasonably expected increase in cost of over £10m; relative respectively to the programme leading to commencement of revenue service by 31 July 2011 and capital cost of £512 million (Phase 1A) or £87 million (Phase 1B) as set out in the Final Business Case (or as subsequently approved by the Council prior to commitment by tie to the Infraco Contract); or (iii) notwithstanding the terms of (i) and (ii) above, any projected or actual overspend of the available funding budget (being £545 million) at any time (whether on an annual or overall basis); or (iv) any substantial change to the design, scope or service pattern set out in the Final Business Case; and

“(B) the settlement of any single claim in excess of £500,000, or series of claims in any 12 month period which would exceed in aggregate £1,000,000”
[ibid,page 0008].

22.116 Although it is easy to see how settlement of claims was a matter that could not be delegated, it is difficult to determine what delegation was prohibited by the references to delay, increase in cost and overspend in the first part of paragraph (A). None of these matters would be at the discretion of TEL, so what was it that it might not do? Was it approval or recognition of the situation; choice of remedial actions; implementation of remedial actions; or something else? I would have expected that in relation to something as fundamental as the delegation of powers there would have been a well-defined position that would be expressed with clarity. The Operating Agreement permitted the sub-delegation of any matter from the TPB to tie. TEL agreed that it would retain ultimate responsibility for all matters that it so delegated. This is not easy to reconcile with the responsibilities placed on tie in its agreement with CEC.

22.117 TEL was required to report to CEC on a four-weekly and annual basis with regard to financial matters and progress on the project. In this regard, it should be noted that TEL had no employees, with the result that, in practice, all the reporting would be carried out by tie. This must have been known to all parties at the time. The governance diagram attached to the Operating Agreement is at least the same as that attached to the December report to CEC.

October/November 2008

22.118 In October 2008, Deloitte & Touche Limited (“Deloitte”) was instructed by tie to report on the project governance arrangements, and it did so in February 2009 (see paragraph 22.123 below) [CEC00111617]. In November, following the resignation of Mr Gallagher from his roles at tie, Mr Mackay was appointed Chairman of tie, having been a director for some time.

December 2008

22.119 The minutes of the December meeting of the TPB record an expanded membership of the TPB [CEC01053908]. Although there had been additional attendees at earlier meetings, these were expressed to be meetings held jointly with the tie and/or TEL Boards. In January 2009, the councillors and non-executive directors of tie reverted to being designated as attendees rather than members of the Board [CEC00988034]. Matters remained this way until 2011, with the sole change being that Councillor G Mackenzie replaced Councillor Wheeler.

22.120 Following Mr Renilson’s resignation, Mr McGarrity, tie‘s Finance Director, was appointed interim SRO in his stead [CEC01053908]. Despite this, Mr McGarrity said that at no time was he responsible for the outputs of the project [TRI00000059_C, page 0002] and in his oral evidence he stated that his appointment made no difference at all to what the team was doing on a day-to-day basis [PHT00000047, page 3]. This suggests that the real function of an SRO was still not being fulfilled.

January 2009

22.121 On 20 January 2009, Mr C MacKenzie emailed Mr Inch [CEC01077814] in response to a paper on governance that had been circulated for the TPB. He noted a concern that the Council should be taking a lead on this. As he put it:

“it is not a matter for the family members to debate among themselves what is best for them: it is for the parent to decide on which model or structure it wishes to put in place.”

22.122 In my view, his analysis of the situation was entirely correct, but nonetheless, tie/TEL/the TPB continued to assume the lead.

February 2009

22.123 In February 2009, Deloitte presented the findings of the review that had been instructed in October the previous year [CEC00111617]. Its overall conclusion was that the governance arrangements appeared to have been operating effectively and that it had not observed control weaknesses. Its principal recommendations were:

• There should be early creation of a single legal entity owned by CEC, which would take in tie, TEL and LB. It was said that this would help to “streamline” governance arrangements and assist in the transition of the project through the construction stage to operation.
• There should be consideration of the remit of tie in relation to the TPB, as there was duplication in membership and agenda items. The review noted that the TPB had been established when tie had more than one project, but as that was no longer the case it was difficult to delineate the two entities.
• An SRO should be identified as a permanent replacement for Mr Renilson, who had left some months earlier and whose role had been allocated to Mr McGarrity, tie‘s finance Director, on a temporary basis.

22.124 In relation to the division of responsibilities for the project, the review’s findings stated:

“The role of tie is to deliver a project fit for operational purpose, on time and budget yet individuals and organisations outside tie have the ability to influence decisions that have a direct bearing on the achievement of these goals. In particular, the TEL Board are responsible for all matters affecting the programme, cost and scope of the project except those which would involve a significant change to the Council’s obligations, or settlement of a single or series of claims. In effect, the TEL Board delegate responsibility to the TPB, and tie provides services to the TPB.” [ibid, page 0010.]

22.125 The review recognised that this situation gave rise to potential ambiguity as to where key decisions were made and ratified. The situation that it describes was not that which the governance plans had sought to create. Deloitte identified the matter in a nutshell in saying:

“key stakeholders hold the tie board accountable for decisions made in respect of the Tram Project when in actual fact the TPB have delegated authority for the delivery of an integrated Tram and Bus network on behalf of CEC and TEL.” [ibid]

22.126 To avoid this, the review suggested an arrangement in which there would be an integrated Edinburgh Transport Authority. It proposed a structure as shown in Figure 22.4:

Figure 22.4: Proposed governance structure for Integrated Edinburgh Transport Authority

Source: Internal Audit, Project 2008-01: Review of Governance Arrangements, Final Report, February 2009 [CEC00111617, page 0019]

22.127 It can be seen from Figure 22.4 that the business unit that represented tie was regarded as being distinct from the part responsible for operation of the trams. This was not put into effect.

22.128 I agree with the review’s comments as to the anomalous situation that had been created for tie, the need for more clarity in remits, the desirability of avoiding overlapping memberships and the need for an SRO. In view of these identified problems, I am surprised at its conclusion that governance arrangements were operating satisfactorily and I disagree with that conclusion. As was the case with the report from Audit Scotland, the danger of a conclusion that matters were broadly satisfactory is that it gave rise to false confidence and the problems that undoubtedly existed were not addressed.

June 2009

22.129 After he had joined tie, in June 2009 Mr Jeffrey was appointed SRO in place of the interim appointment of Mr McGarrity [CEC00983221, page 0005].

August 2009

22.130 In August 2009, CEC approved changes to the corporate governance for the Tram project [CEC01891434,page 0015]. The report that had been submitted to the meeting on this issue [CEC00110352] said that changes were required to “enable the transition towards the integration of tram and bus services” and “to serve changing circumstances”. It envisaged the transfer of CEC’s shareholding in tie to TEL. In view of the very limited progress that had been made in the construction work by late 2009, it is far from clear that there was suddenly an issue requiring the governance structure to be revisited or even in what respect circumstances had changed. Mr Bissett explained that the changes made were:

“an attempt to streamline the governance structure and also to ensure that the model was being developed looking ahead to the tram opening for revenue service” [TRI00000025_C, page 0019, paragraph 48].

22.131 If that was so, it is not clear why it was being done at that time. The changes were being made six months after the Deloitte report but they are not stated to be prompted by, or the result of, that report. Even if they were, it is notable that they do not implement the recommendations that had been made. A need to consider the requirements of the tram system when it was operating had always been there and should have been the role of the user representative on a project board. What is not clear is why control during the construction phase should be handed over to the user rather than the company that had been established to achieve delivery.

22.132 The report stated that:

“While day to day management, control and execution of the Tram Project will remain with tie Ltd, all strategic and other material decisions will be made by TEL (or in certain circumstances by the Council) and direction will be given to tie Ltd on such matters, through the Tram Project Board, a formal sub-Committee of the TEL Board.” [CEC00110352, pages 0002–0003.]

22.133 The report considered that the changes would streamline and clarify the structures then in place. It did not discuss in any detail the fact that tie would remain the body with the contract to build the network and that it was the only body with employees to carry out work. Any decisions in relation to implementation of the work would affect tie‘scontractual liabilities and not those of TEL. It would therefore normally be the responsibility of the directors of tie to take such decisions rather than have them taken by other directors of another company. Despite this, on 29 September 2009 [CEC00680472] the CEC Policy and Strategy Committee on Governance gave approval for new governance arrangements and operating agreements, including the transfer of CEC’s shares in tie to TEL as soon as possible after the signature of an operating agreement and a memorandum of understanding.

December 2009

22.134 The minutes of a tie Board meeting on 16 December 2009 [CEC00531325] noted that, subject to the decision to be taken by CEC, it would be the last formal tie Board and would be replaced by the new TEL Board. A draft minute for a tie Board meeting on 18 December 2009 noted the approval of the transfer of the entire issued share capital in the company to TEL. While the Inquiry has obtained copies of papers that bear to have been prepared for tie Board meetings after that date, there are no written records of any further such meetings actually having taken place. This is surprising. Even if there was a transfer of the shareholding such that tie was a subsidiary of TEL and it was intended that TEL or the TPB would be taking many decisions in relation to the project, tie was the employer for almost all the persons engaged in the works and was the party to contracts for very substantial sums of money. It had the responsibilities for the health and safety of its employees. This was a responsibility that it could not delegate or transfer. Not to have held board meetings in this period or to have declined to keep records of board meetings that were held is a conspicuous failure of corporate governance. In essence, tie was being treated as a fiction.

22.135 On 18 December 2009, there was a meeting of the TEL Board, which inter alia approved acquisition of shares in tie from CEC, resolved to enter into a new Operating Agreement with CEC and made Mr Hogg, Mr Jeffrey, Mr Craig, Mr Scales, Mr Strachan and Mr David Anderson additional directors of TEL [CEC00645841]. There were already Councillors on the Board of TEL. The new Operating Agreement was signed on 18 December 2009 [CEC00645838]. In it, the following elements were added to the scope of services:

“7. The management of tie in order to ensure that reasonable steps are taken to deliver the Project and the Tram System.

8. Manage and deliver (through tie) the Gogar Intermodal Station project
on behalf of the Council in terms of the Gogar Funding Agreement”
[ibid, page 0018].

22.136 In the body of the Operating Agreement, there was still a requirement to use best endeavours to deliver the project in accordance with the FBC. There was no longer a reference to tie having the principal responsibility and, instead, the Agreement stated that TEL should use its best endeavours to support delivery of the tram system so far as it could do within its powers and resources, and:

“TEL shall be responsible for the management of tie and ensuring that all appropriate steps are taken to deliver the Project in accordance with the terms of the tie Operating Agreement and the Memorandum of Understanding between the Parties and tie dated of even date with this Agreement.” [ibid, page 0006.]

22.137 The scope of matters for TEL to determine was modified to read as follows:

“The following matters will be for the TEL Board to determine and report to the Council as appropriate in terms of the governance arrangements set out in Schedule 2:

“All matters affecting the programme, cost and scope of the Project except the following which are matters reserved to the Council:

“(i) any actual or reasonably expected delay beyond 3 months after the Baseline Date; or (ii) any actual or reasonably expected increase in capital cost which would mean that the Baseline Cost is exceeded by greater than £1,000,000; or (iii) any substantial change to the design, scope or service pattern set out in the Final Business Case.

“On the basis of information provided by TEL to the Council, the Baseline Date and the Baseline Cost will be determined by the Council’s Chief Executive and notified to TEL from time to time.” [ibid, page 0009.]

22.138 The minutes for the meeting of the TEL Board on 10 February 2010 [CEC00475301] included a welcome by the Chairman, Mr Mackay, to the first meeting of the “new TEL Board”. Mr Hogg and Mr Strachan, directors of tie who had not previously sat on the TEL Board, were included as directors. The last meeting of the TEL Board prior to the changes appears to have been over a year earlier, on 24 September 2008. The minutes for that meeting were contained in a pack of papers that included an agenda for a meeting on 19 November 2008 [CEC01107538], but there are no records of that meeting having taken place. The failure to hold or record board meetings of TEL in the period from September 2008 to February 2010 is again a serious failing. Apart from constituting a disregard of good corporate governance, it indicates that the structures that had been debated at length were ignored in practice. The directors of TEL would have been aware of it and should have taken some steps. The fact that they did not suggests that they were not aware of their responsibilities as directors.

22.139 Looking further back, the minutes of meetings solely of the TEL Board from earlier in 2008 contain no record of dealing with substantive business in relation to the Tram project, and that seems to have been left to the TPB. The minutes in 2007 are similarly brief and contain little or no discussion of the project. Even after the changes had been implemented in late 2009, the records of the Board meetings of TEL do not disclose that any substantive business was conducted. The limited role played by the TEL Board is illustrated by the evidence of Mr McGougan that, despite his being registered as a director of TEL between March 2006 and August 2011, he had no recollection of being a director or of any meetings of the TEL Board [PHT00000042, page 123]. In any event, it is not obvious that TEL had sufficient resources or employees to play an important role in the delivery and/or oversight of the project, given that TEL had only two employees (Mr Renilson and Mr Richards) and derived all its funding from tie.

22.140 The tie Board played little more by way of an active role. There was more by way of consideration of the issues arising out of the project in the minutes of the tie Board meeting in 2008, but issues of substance were left to the TPB. For instance, when issues were raised at the Board meeting in August 2008 regarding the Multi-Utilities Diversion Framework Agreement (“MUDFA”) and Infraco mobilisation, it was said that they would be addressed within the TPB [CEC01150362, page 0002]. The consideration of issues at the tie Board had died away completely by April 2009. From May 2009, consideration of the key work streams was deferred for consideration at the TPB. From the minutes of tie Board meetings it was apparent that, as the year progressed, discussion became increasingly perfunctory.

22.141 The rationale for these changes is explained in a paper submitted to the TPB in September 2009 [CEC00680385]. The paper as drafted is intended for all three boards but, as I note elsewhere in this chapter (for example, in paragraphs 22.138 and 22.139), it is apparent that the TEL Board was not active at this time. In addition, although there was a meeting of the tie Board on the date referred to in the paper – 23 September 2009 – the minutes of the meeting contain no reference to the paper being considered. The paper noted that the intention to integrate LB was being left to a later stage. The intention was that TEL could oversee the whole project from construction to commencement of operations. This meant that governance over construction activity moved to TEL. Despite this, the contracts remained with tie. This situation was confirmed by a memorandum of understanding signed by CEC, TEL and tie on 18 December 2009 [CEC00170165], a draft of which was attached to the paper. The memorandum stated that although day-to-day management of the project remained with tie, all strategic and other material decisions would be made by TEL and direction would be given to tie through the TPB. It is appropriate to note that the same two individuals signed the minute as directors on behalf of both tie and TEL. Although this does not affect its legal validity, it does illustrate the overlapping of roles and scope for confusion. More fundamentally, a decision that put TEL entirely in charge of strategy was clearly at odds with the intention that this should have been reserved to CEC.

Conclusions on the timeline

22.142 Drawing matters together, a number of themes occur in relation to the governance arrangements. Although I have sought to separate them and list them here for convenience, in fact they are closely bound up and one may be the consequence
of another.

The ascendancy of TEL

22.143 Transdev was given notice of tie‘s intention to terminate the Development Partnering and Operating Franchise Agreement with them by letter dated 21 August 2009 [CEC00736909]. Once Transdev was no longer involved and TEL was the intended operator of both bus and tram services, it was entirely appropriate that TEL would have an input into the project. This was recognised in the OGC governance model by the “user” interest. Its role did not, however, indicate or imply that it should have responsibility for or oversight of the construction phase of the project.

22.144 Despite this, TEL was put in charge both in its own right and as the “seat” of the TPB even before the contract with Transdev had been brought to an end. None of the purported justifications for creating this situation is remotely credible. The overwhelming impression is one of trying to create a role for TEL in the construction phase where one did not truly exist. The rationale for this is not clear. As I have discussed above, there was concern – which was justified – that LB would seek to damage the project. It was clearly influential and powerful. It is also apparent that, in terms of running a transport system, it had a great deal of experience that could be of assistance to the project. That is not a justification, however, for putting it in charge of construction of and delivery of infrastructure. tie had been created for that specific purpose, and at both board and management levels had recruited people with this objective in mind. To ignore this and put the project in the hands of a company created for a separate purpose was simply perverse. Mr Bissett said that it was “logical” that TEL would take overall responsibility, but nothing in his evidence or the contemporaneous documentation came close to supporting this assertion. The very fact that such a view was expressed casts considerable doubt on the value of Mr Bissett’s evidence as a whole.

22.145 Mr Bissett also said:

“TIE’s only function was delivery of the Tram Project. So, rather than have multiple reporting lines, the attempt was made to concentrate the governance of the project through the TEL/TPB model with tie as a legal entity executing its own legal responsibilities but not acting as a parallel governance body for the Tram Project.” [TRI00000025_C, page 0019, paragraph 48.]

“In order to make sure that the tie Board’s legal responsibilities were still appropriately addressed without duplicating Tram Project governance arrangements, the Tram Project Board effectively provided the governance over the project. tie reported through Steven Bell as the Tram Project Director to the Tram Project Board. Therefore, there was no change to the position of the people in tie in operational terms, only the reporting lines above the Tram Project Director. The advantages of this were that duplication, reporting to tie as a legal entity and reporting the same to the TPB and the Council, was avoided. I don’t believe that there were any disadvantages to this approach.” [ibid, page 0019, paragraph 49.]

22.146 To the extent that there were “multiple reporting lines”, this can be seen as being the result of the inclusion of TEL into the governance structures. It seems that the more obvious question that should have been asked was why TEL should have any role.

22.147 The effect of putting TEL in charge was that people with no experience of delivery of engineering projects were in control. This is epitomised by the appointment of Mr Renilson as the SRO for the construction part of the project. He was candid that he had no interest in the construction phase and yet he was appointed as the key individual with ownership of the project. The result was that, during the whole of the period to the end of 2008, no one was discharging the responsibilities of SRO. Although Mr Renilson bears part of the blame for this by declining to perform a role that he had accepted, it should have been apparent to the other senior management that this was the situation. Mr Bissett, in particular, had written papers on governance that noted the relevance of the SRO’s role, yet nothing was done to ensure that the role was actually performed. It is another example of an approach to the project being based on box ticking: once a person was appointed SRO, that box was ticked but nothing was done to check that the objectives that that was intended to secure were actually being achieved.

Inconsistencies

22.148 There were inconsistences and ambiguities in the roles given to the various bodies in documents and also among different documents intended to apply during the same period. This indicates that matters were not thought through when they were formulated or prior to adoption. It is unsatisfactory that tie undertook a contractual obligation to CEC to do something, yet the governance structures placed the responsibility elsewhere. In this situation, how could there be any clarity as to where the ultimate decision-making powers rested? In an email of 26 September 2007 [CEC01561555], Mr C MacKenzie noted that the delivery of the Tram project was something for which tie owed a contractual obligation to CEC, and that the danger of governance structures that involved the TPB was that they could weaken accountability. He correctly identified that the TPB would be taking decisions in respect of major contracts to which it was not even a party. This is not a minor or detailed issue of governance; it is fundamental that a matter such as this should be clear.

Confusion as to the various aspects of governance

22.149 In general, there was no clear analysis of the concepts of responsibility, accountability, authority, powers, reporting, oversight and undertaking. Often the various matters were fudged and the result was a lack of clarity as to what would happen or who was to perform tasks. Once there is clarity as to who is to undertake a task, that party requires to be given the authority or the powers they need to do it. It is therefore natural that the party with that authority is accountable for its exercise. Oversight is a different function and should not be given to the party exercising the powers. As a separate task, the entity upon which it is conferred has the responsibility for undertaking that role and will be accountable for its discharge. This may all seem obvious, but the confused positions on the entities to which authority should be delegated, which bodies should be accountable and which should take executive decisions demonstrates that it was not understood. As noted above, the OGC review of the governance structure said that it “appears complicated” [CEC01793454, page 0006, paragraph 3.1], and Councillor Dawe said that the relationship between tie and TEL was confusing [TRI00000019_C, page 0233, paragraph 874]. Some witnesses expressed the view that the roles and responsibilities of each of the bodies were clear [see, eg, Mr Bell TRI00000109_C, page 0171, paragraph 147(2)]. Others said that the state of governance was not a problem. For example, Mr Gallagher said that although governance was complex “we worked well with it” [TRI00000037_C, page 0002, paragraph 7], and Mr Bissett said that it worked “a lot better in practice than it appears on paper” [PHT00000028, page 90] and “it worked reasonably well in bringing the various parties together” [TRI00000025_C, page 0006, paragraph 16]. I do not accept these comments, and I agree with those who considered that the governance arrangements were deficient as being both unclear and confused. Nothing illustrates the position better than that, when he was asked who was in charge of the project, Mr Howell, the Chief Executive of tie, replied:

“That’s a very good question and I at the time would have liked to have asked particularly Tom Aitchison, because I think he should have helped us to figure it out.” [PHT00000011, page 42.]

22.150 Mr Howell also considered the governance arrangements linking TPB and TEL to be confusing because TPB was a sub-committee of tie “merging”with another company (TEL). In referring to a “merger” in this context he was referring to Mr Mackay’s misunderstanding that the TPB and the TEL Board were “one and the same”. He thought that Mr Mackay might have failed to appreciate the distinction between the two entities with different responsibilities because he was chair of both of them, and the distinction between the two was not evident to Mr Mackay [TRI00000113_C, pages 0042–0043, paragraphs 150–152; PHT00000011, pages 40–41]. Mr Howell was an impressive witness with considerable experience of engineering projects and management. I accept his criticisms of the governance arrangements mentioned above. When someone in his position cannot follow the governance procedures, there could be no better indication that something had gone very wrong. The fact that first the Board of TEL and then the Board of tie ceased to sit at all should also have been a clear indicator that governance was breaking down.

Overlaps in “responsibility” and in membership of the various entities

22.151 The list of memberships of TEL and the TPB attached to the governance paper prepared in August 2006 [CEC01758865] indicated some overlap in membership. As was noted in paragraphs 22.87–22.93 above, in September 2007 the TPB approved an updated structure to remain in place until contract close. The only change in the membership of the TPB from the October 2006 structure was that there would be no representative from Transport Scotland and the CEC Executive Member for Transport, Councillor Wheeler, was to join it. Table 22.1 in paragraph 22.92 above illustrates the overlap in membership between the TEL Board and the TPB. This overlap creates confusion as to where decisions should have been taken and even where they had been taken. It also means that any idea that one of the bodies was in a position properly to oversee the work of another was flawed.

22.152 Mr Bissett said that tie would retain ultimate responsibility for the activities of the TPB [PHT00000028, page 41]. There is no basis why this should be the case – a subsidiary would not normally be responsible for the acts of a sub-committee of the board of its parent. What was true was that tie was the entity that would accrue any legal liabilities that arose under the contracts arising out of the way in which they were operated by the TPB. On the other hand, he also said that tie was to be accountable to the TPB [TRI00000025_C, page 0022, paragraph 56].

22.153 Mr Gallagher stated:

“At the time it was necessary to have TIE, TPB and TEL because they all performed different functions for different reasons. There wasn’t really an overlap in terms of TIE, TPB and TEL. The TPB was a sub-committee and that was where all of the work was focussed. [sic] tie was an overseeing body helping to provide an increased degree of scrutiny. Originally tie would have overseen other project boards as well but those other projects either fell away or were completed. Having tie was a good idea, in particular in its role as an arm’s-length recruiter. The structure was a bit more entrepreneurial as a result of tie being there. It offered an entrepreneurial aspect that would not have been present had the projects been purely overseen by CEC.” [TRI00000037_C, pages 0053–0054, paragraph 178.]

22.154 In my view, almost all of this is incorrect. There clearly was an overlap between the bodies, as demonstrated by the fact that from time to time tie or TEL Board meetings did not take place. I cannot see that there is any justification for the view that tie was an “overseeing body”. Neither in the theory of the arrangements put in place nor in the reality of what happened can it be said that tie had any oversight function. It was the project manager with responsibility for delivering the project on a day-to-day basis and as such it is self-evident that it could not exercise oversight over itself in any meaningful sense of the word. This demonstrates a concerning lack of proper understanding of the governance structures, their operation and their objectives at the highest level within tie.

22.155 In relation to membership of the bodies, Mr Gallagher said that the overlaps in membership were helpful, as it meant that it was not necessary to “have the meeting three times” [ibid, page 0056, paragraph 185]. Mr Bissett commented to similar effect [PHT00000028, page 57]. This misses the point. If there was such an overlap that it would be necessary to have the meeting three times, that is a clear indication that something is wrong. Dealing with it by duplicating membership of the various bodies does not address the real issue. It also means that any suggestion that one body could provide effective oversight of another is bogus. That would require independence, which cannot be achieved with a significant overlap in membership.

22.156 Mr Aitchison went so far as to say that it was CEC policy to encourage overlap in the membership of the boards [TRI00000022_C, page 0097, paragraph 321]. I have not seen written expression of this policy, and no justification for it has been offered. I consider that it is apparent that it would undermine clear decision-making and oversight.

22.157 Mr Bissett stated:

“I am always very keen in governance models to see that responsibilities and accountabilities are absolutely crystal clear. It was important that it was known who was responsible for what.” [TRI00000025_C, page 0022, paragraph 58.]

22.158 I entirely agree that this is important and that responsibilities and accountabilities should be clear. What is apparent from the foregoing, however, is that there was a lack of clarity about the allocations of responsibilities and accountabilities. Creating overlapping responsibilities does not create a safety net in decision-making. It results in a danger that each party or entity involved may think that a responsibility is being discharged by someone else.

The role and membership of the TPB and the lack of an accountable individual

22.159 The role afforded to the TPB in the Tram project cannot be reconciled to either of the established project models that were said to have been relevant. The OGC guidance suggested that there should be a project board, and this was duly noted by the OGC in its review in May 2006. One had already been established and then merged into TEL, but in response to that OGC review a body called the TPB was created. It is notable, however, that in terms of both its composition and its operation, it did not function as a project board as the OGC guidance intended. This appears to be another example of box-ticking in that there is formal compliance with a requirement but no consideration as to whether the substance of the guidance was being followed and its objectives were being met. This is not to suggest that a project must necessarily adhere to some pre-existing guidance. Where, however, there was to be a departure from guidance or a new structure was to be adopted, it would be appropriate to have set out the justification or rationale for this action. This process should ensure that the justification for change is properly understood and that all the implications are properly considered.

22.160 There appeared to be a general lack of understanding as to the proper role for a project board. Councillor Dawe considered that the TPB was the main means for CEC to have oversight and control by means of the councillors sitting on it [TRI00000019_C, page 0238, paragraph 893]. Mr David Anderson suggested that it was to act as a conduit between tie/TEL and CEC or to provide oversight of the project and tie‘s management of it or to allow risk and opportunities to be discussed in a forum where councillors and senior officials sat alongside board members of tie and TEL [TRI00000108_C, page 0122, paragraph 155]. While it is perhaps understandable that councillors and CEC officials would not be in a position to understand in detail what the purpose and function of a project board should be, there was ignorance on this issue even within tie. Mr Gallagher said that the TPB was a “statutory body” that was required to manage the funds supplied by Government [TRI00000037_C, pages 0053–0054, paragraph 178]. This is a serious failure in understanding, and I cannot see how it could be maintained. He also said:

“The delivery for the Edinburgh Tram Project was for the TPB which was initially managed through TIE.” [ibid]

22.161 This is closer to the mark in terms of the role in delivery, but it was not managed through tie. Mr Bissett gave various justifications for the project board as it was used in relation to the trams. He said that it was to be an oversight and challenge body [PHT00000028, page 40], but also that the intention in forming it in October 2005 was to have “a group of people with a single purpose to take the project forward” [TRI00000025_C, page 0017, paragraph 43]. Although a project board may consist of people with an interest in taking a project forward, there is more to it than that. It is not merely a subset of the management of whatever entity is delivering the project. It is intended that it should consist of persons representing particular interests in the project. There would, for example, be a clear purpose in maintaining a properly constituted project board for the Tram project even when tie had no other projects. Even the Project Director, Mr Bell, did not understand the proper role for a project board [TRI00000109_C, page 0171, paragraph 147(2)].

22.162 The misconception as to the true purpose of the TPB is epitomised in the comment from Mr Howell that the TPB would be the tie Board for all intents and purposes [PHT00000011, page 27]. This accurately reflects what was being done in practice, but is not what should have been done to have an effective project board. Those bodies should have had distinct but complementary roles. The function of a project board is not the same as the board of directors of a company undertaking a construction project. The membership should not be the same, because the interests and the decision-making processes of the two would not be the same. In the Tram project, these interests and processes were conflated, with the result that governance of tie and TEL by their boards of directors broke down and, from time to time, ceased altogether. Meanwhile, the project board was not able to perform the function that would be expected of it. I noted in paragraph 22.150 above that I considered Mr Howell an impressive witness and that his misunderstanding reflects the lack of clarity in what was being proposed.

22.163 The misunderstanding of the function of the TPB and the way in which it should work was compounded by the provision for each of the political groups to appoint a representative to attend TPB meetings. Whether this was seen as political accountability or information provision, it was quite inappropriate in terms of the focus of a project board. It is intended to be not a debating club or a forum for scrutiny but a means of bringing together the persons with key involvement in delivery to assist in that delivery. That is not a politician’s role – even in a publicly funded project.

22.164 As noted above, the first point at which there was an SRO who actually discharged the responsibilities that come with that position was in 2009, when Mr Jeffrey joined tie. Although Mr Inch suggested that CEC was the SRO [PHT00000007, pages 97–98] and Ms Drummond, a solicitor at CEC, took the view that CEC was the SRO [CEC01565047], in terms of guidance the holder of that position must be an individual. This meant that, in the critical period in which the contracts were put in place, there was no one performing that role. As I consider above, putting a collective body such as the TPB, the TEL Board or the tie Board in charge of exercising powers and making decisions removes the critical element of individual accountability. In paragraph 22.55 I have observed that it was inappropriate to appoint Mr Renilson as SRO when he was Chief Executive of TEL. Equally, although Mr Jeffrey did seek to undertake the role of SRO allocated to him, he was not the appropriate person for that task because he was the Chief Executive of tie,which had responsibility for the delivery of the project.

22.165 The overall impression that I have formed is that the decisions about which structures should be in place was in part a box-ticking exercise and in part an exercise in creating a role for TEL at the construction stage when, in reality, none existed. This resulted in a dissonance between the various theoretical models and the general understanding of the position. It is notable that the councillors and, from personal experience, both the news media and the public regarded tie as being the party that bore responsibility.

22.166 I recognise that the views I have expressed are at odds with the comments from Audit Scotland, the OGC team and Deloitte. I have, of course, taken those competing expressions of view into account when forming my opinions, but I consider that they cannot stand in the face of examination of the facts. This is of itself a cause for concern in governance, as verdicts of the review team applying OGC guidance and, particularly, Audit Scotland played a material part in fostering confidence in the structures that were in place. I accept that in part it may be said that the reliance placed on these reports went beyond anything that was intended when the reports were provided. Nonetheless, in a similar situation in future care should be taken to avoid such false confidence. The difficulty with this is not only that the wrong message is taken on by decision-makers; it is also that the confidence means that other, more effective, controls are not put in place.

22.167 It is not possible or appropriate for me to recommend that any particular governance structure is used on a project such as this. There are far too many variables in the planning of such a project to mean that guidance could be given that would apply to every situation, or even most. What can be said is that focus is required on what the overall structure should achieve and how each body will contribute. If there are to be departures from published and accepted guidance, a clear written record should be kept of the fact that there is a departure and why it has been made. At all stages, there needs to be consideration of whether the structures put in place are achieving what was intended from them. This is not a matter of considering merely that matters seem to be getting along; there needs to be proper scrutiny of whether the objectives that should have been identified at the outset are being attained. Each body should have clear roles and responsibilities. It should be clear which body or individual is ultimately responsible for ensuring that a project is delivered on budget and on time. There should be independent oversight of the body responsible for delivering the project on a day-to-day basis to provide a check function.

Bonuses

22.168 The issue of bonuses paid to the people engaged in tie and TEL was the subject of comment during the project, and I have considered whether they had any bearing on the problems that arose. It seems that they can most appropriately be considered along with the structures created for the project.

Guidance

22.169 The Cadbury Report included the following guidance:

• companies should establish a formal and transparent procedure for developing policy on executive remuneration and for fixing packages of individual directors;
• a company’s annual report should contain a statement of remuneration policy and details of the remuneration of each director;
• remuneration committees should consist exclusively of non-executive directors who are independent of management; and
• a company’s annual report and accounts should include full details of all elements in the remuneration package of each individual director by name, including annual bonuses [CEC02084834, pages 0003, 0007–0008 and 0013].

22.170 The 2006 CEC report “Council Companies: ‘Code of Guidance'” [CEC01813429] stated that each company’s remuneration committee required to formulate a transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. Where appropriate, a portion of an executive director’s remuneration could be structured to link rewards to corporate and individual performance. No director was to be involved in deciding his or her own remuneration [ibid, page 0012]. Mr Inch considered that the requirement for transparency included transparency to officials and members of the CEC [PHT00000007, page 62].

tie’s bonus scheme

22.171 In 2003, tie‘s bonus scheme allowed certain of its employees a relatively modest performance-related bonus of 10 per cent of base salary (15 per cent for director-level staff) [CEC02083550, page 0023]. The stated justification for such a bonus was that tie had hired certain employees from the private sector and the absence of a car and bonus would be perceived as a disadvantage to the tie package.

22.172 A meeting of tie‘s Remuneration Committee on 16 October 2006 approved a paper that proposed that (with effect from 1 April 2007) tie executive directors (and recommended other senior managers) be entitled to an annual bonus opportunity of 50 per cent of salary. All other tie employees were to have an annual bonus opportunity of 25 per cent of salary [CEC01830099, page 0002, item 4; CEC01828971, page 0004, paragraphs 1 and 3]. The context for the increase in bonus opportunity was noted to be that 2006 had seen a significant transformation in tie (from a project development organisation to a project management organisation, responsible for project managing and delivering world-class transport infrastructure projects valued in hundreds of millions of pounds) and that tie was now competing with the very best organisations in the private sector to attract and retain the best talent [ibid, page 0001].

22.173 Mr Cox chaired tie‘s Remuneration Committee and gave evidence that he thought that the briefing paper came from Mr Gallagher [PHT00000052, pages 181–182]. Although the paper approved by the Remuneration Committee in October 2006 only dealt with bonuses for tie staff, in the event, significant bonuses were also paid to contractors who were not directly employed by tie, but provided services to it on a full-time, or largely full-time, basis. Mr Cox was not sure whether it was normal practice to pay bonuses to contractors (rather than simply to employees), but he considered that it was an odd situation in that it was not normal to have so many of the key jobs filled by contractors. He considered that tie was a peculiar company, in that it was not a standard commercial business, being a “mishmash” between a private-sector company and a public-sector one [ibid, pages 182–183 and 196–197].

22.174 In the run-up to financial close in May 2008, the bonus entitlement of senior tie staff (and contractors) was dependent partly on individual performance and partly on the timing of financial close and the reported cost, or budget, of the Tram project at financial close [WED00000140, pages 0004–0005; TIE00151106; CEC00114414; CEC01515065; Mr McGarrity PHT00000047, pages 181–188; PHT00000049, pages 72–75]. In the event, it appears that the part of the bonus entitlement relating to the timing of financial close was not paid (because financial close took place later than 28 March 2008), but that the part of the bonus entitlement relating to the estimated cost of the project was paid [WED00000140; Mr Cox PHT00000052, pages 188–191].

22.175 Mr Cox gave evidence that although the bonus criteria were set by the Remuneration Committee, they were probably proposed by Mr Gallagher. He accepted that it was not normal practice for the bonus criteria to be set by the chief executive of a company, although he considered that it was not unreasonable to seek the chief executive’s views. As chairman of the Remuneration Committee he could not recall whether any independent checks or research was undertaken to determine whether the criteria for bonus payments were appropriate. He agreed with the suggestion that it would have been better for the Remuneration Committee to have sought the assistance of human resource experts to compare the market and to advise on appropriate bonus criteria [PHT00000052, pages 184–186]. He accepted that, with hindsight, it would have been better, in general, to defer part of a bonus based on the cost of a project until the actual cost of the project was known [ibid, pages 191–192].

22.176 In the absence of any independent checks or expert advice about the suitability of the proposed criteria for bonus payments and the failure to consider deferring at least part of them until the actual cost of the project was known, I have concluded that the Remuneration Committee failed to perform its function of independent scrutiny of proposed bonus payments. Rather, it merely endorsed the recommendations of Mr Gallagher, who was in attendance at its meetings and who had presented the initial paper concerning bonus payments to the committee’s first meeting. The Remuneration Committee’s lack of adequate scrutiny of Mr Gallagher’s proposals is illustrated in the following passage from Mr Cox’s evidence:

“I was never entirely comfortable with the level of or procedure for tie bonus payments during the period of Willie Gallagher’s tenure, but found myself between a rock and a hard place. tie had encountered difficulty in recruiting and retaining staff of a sufficiently high calibre to deliver a project of such size and complexity, with no promise of a secure long-term career. Willie had rebuilt the team, and he was very concerned that if team members were not adequately incentivised it could result in a significant risk, potentially adding perhaps millions of pounds to the project’s cost. It seemed to me safer, and the committee agreed, given this scenario, to approve the proposed bonuses.

“Looking back now, I would have subjected to much closer scrutiny the proposed bonus arrangements and levels, and the likely risk and cost to the project of further key staff losses, but whether I would have reached a different conclusion I don’t know.” [TRI00000259,page 0015.]

22.177 Mr Gallagher attended meetings of tie‘s Remuneration Committee between 2006 and 2008. Mr Cox gave evidence that Mr Gallagher was not a member of the Remuneration Committee, that he simply attended to give advice to the committee and that he was not involved in setting his own remuneration or bonus [PHT00000052, pages 174–182]. The minutes of the committee, however, list
Mr Gallagher as a member of the committee rather than simply attending it in an advisory role [CEC01830099; CEC01182504; CEC01515068; CEC02086949].

22.178 At the initial meeting of the Remuneration Committee on 16 October 2006
Mr Gallagher proposed that Mr Cox should be its chairman. It is inconceivable that someone other than a member of the committee could propose such a motion. Furthermore, CEC officials were under the impression that Mr Gallagher was a member of the Remuneration Committee and queried the appropriateness of that [CEC01222545]. For his part, Mr Gallagher could not recall whether he was a member of the Remuneration Committee, but he was certain that he did not sit in on any matters concerning himself [PHT00000037, page 150]. Although that may be so, it fails to acknowledge that he had an interest in the terms of the bonus scheme that he presented to the first meeting of the Remuneration Committee for its consideration.

22.179 Whether Mr Gallagher was formally a member of tie‘s Remuneration Committee or not (and it appears to me that he was), the impression given (at least to those outside of the committee) is that he was heavily involved in the working of the committee. This was contrary to the guidance on good corporate governance mentioned in paragraph 22.169 above, which was to the effect that remuneration committees should consist exclusively of non-executive directors who were independent of management. Mr Mackay also testified it was not good practice for executives of tie to sit on the Remuneration Committee and that he had a “very strong feeling” that there was influence on the committee by people who were in receipt of bonuses [PHT00000038, pages 38–39].

Changes to the bonus scheme in 2009

22.180 Mr Gallagher resigned as executive chairman of tie in late 2008. The dispute between tie and BSC lingered on. A meeting of tie‘s Remuneration Committee on 23 September 2009 considered a paper on a proposed new bonus scheme. It was noted that, in the past, there had been insufficient formal linkage between bonus payments and corporate performance (with payments, instead, having been linked mainly to individual performance). There were currently inadequate performance management processes in place to underpin payments and that was also being addressed. Under the new bonus scheme no bonus would be paid to senior directors unless and until the project was completed within agreed cost and timing criteria [CEC00736780; CEC00672874].

22.181 Mr Mackay gave evidence that he was dissatisfied with the bonus scheme and took the opportunity in 2009 (with the assistance of Mr Jeffrey) to “dismantle” it after Mr Gallagher had left. Mr Mackay considered that the bonus scheme was not challenging enough, that there was not enough independent supervision of it and that bonuses should be dealt with by the Remuneration Committee, with those involved in receiving bonuses having no part in the decision-making process [PHT00000038, pages 37–40]. Although Mr Mackay suggested that he encouraged Mr Cox to become chairman of the Remuneration Committee, he was clearly mistaken because Mr Cox was chairman of that committee from its inception [ibid, page 40; CEC01830099]. Nevertheless I accepted the generality of his evidence about his criticisms of the bonus scheme introduced during Mr Gallagher’s tenure as Executive Chairman of tie and the need for change. Mr Cox welcomed the new bonus scheme, having not been entirely happy with the previous scheme [PHT00000052, pages 193 and 198]. Looking back, as indicated in paragraph 22.176 above, he considered that the proposed bonus arrangements and levels of bonus payments ought to have been subjected to much closer scrutiny [TRI00000259, page 0015, answer 37].

22.182 CEC was sent details of the proposed new scheme and expressed certain concerns, which were resolved at a meeting between Mr Inch and Mr Jeffrey in October 2009 [CEC00674778;CEC00672873; CEC00673126; TIE00034046; see also Mr Inch PHT00000007, pages 160–161].

22.183 Even under the new scheme, there was potential for payment of significant bonuses. In May 2010, tie submitted an application for payment that included total potential bonus payments of £730,000. Transport Scotland expressed concern internally about the appropriateness of making bonus payments given the state of the project [TRS00017572]. In the event, tie‘s Remuneration Committee met in June 2010 and accepted Mr Jeffrey’s recommendation that no bonus payments should be made for 2009/10 [CEC00314582].

22.184 I note in passing that, although tie‘s annual accounts included a note of the total remuneration of directors, there was no individual breakdown of the amount of bonus paid to individual directors, contrary to the guidance on good corporate governance noted above (see, eg, tie‘s annual accounts for the years ended: 31 March 2007 [TIE00899959, page 0022], 31 March 2008 [TIE00899960, page 0024] and 31 March 2009 [TIE00899961, page 0024]).

CEC’s oversight of tie’s bonus scheme

22.185 The 2005 operating agreement between CEC and tie contained no provision for CEC to monitor either tie‘s bonus scheme or individual bonus payments [CEC00478603]. The Operating Agreement between CEC and tie entered into on 12 May 2008 introduced, for the first time, monitoring arrangements of tie‘s bonus scheme. In particular, the new Operating Agreement provided that tie was to approve a remuneration policy, to include the benchmarks and procedures for proposed bonus payments and the project milestones to which bonus payments were to be linked, and that tie‘s Board required to confirm annually to CEC’s TMO that tie‘s incentivisation arrangements were aligned to appropriate project milestones [CEC01315172, page 0008, paragraph 2.25].

22.186 These provisions were weaker than had originally been inserted by Mr N Smith when drafting the new Operating Agreement. In short, although Mr N Smith had attempted to introduce greater transparency and oversight of tie‘s bonus scheme when drafting the new Operating Agreement, that was met with resistance from senior tie officials, who made their concerns known to senior CEC officials, which resulted in the provisions of the final Operating Agreement being “watered down” [email from Mr N Smith to Mr McGougan and Mr Holmes CEC00013392 attaching comments on new draft operating agreement CEC00013393, page 0002, paragraph 14; email from Mr N Smith to Ms Lindsay dated 10 January 2008 CEC01394985; Mr N Smith PHT00000006, pages 131–135; Mr C MacKenzie TRI00000054_C, pages 0042–0043 and 0113; Mr Inch PHT00000007, pages 112 and 164; Ms Andrew PHT00000005, pages 126–127]. Mr Cox also gave evidence of being aware of a reluctance on the part of Mr Gallagher to share remuneration information with CEC because of terms and conditions disparities between tie and CEC [PHT00000052, pages 196–197].

22.187 Prior to the new bonus scheme proposed by Mr Mackay in 2009, CEC had little knowledge or awareness of tie‘s bonus scheme or individual bonus payments. An email from Mr C MacKenzie to Mr Inch, dated 15 June 2009, expressed concern that there was no visibility of tie‘s bonus scheme: “we do not know how it operates and what milestones trigger payment of bonus” [CEC00908380; see also Mr Inch’s email dated 24 June 2009 to Mr Aitchison – CEC00880015].

22.188 Mr Aitchison and Mr McGougan considered that, as tie‘s monitoring officer,
Mr Holmes was the council official responsible for overseeing tie‘s bonus scheme
[Mr Aitchison PHT00000041, pages 165–166; Mr McGougan PHT00000043, page 102]. Although Mr Holmes accepted that he was the monitoring officer for tie, he had no knowledge of how the bonus scheme operated, and he considered that bonuses were an internal matter for tie and its Remuneration Committee. He also considered (as did Mr Inch) that there was a need for confidentiality in relation to salaries, including bonuses [Mr Holmes TRI00000046_C, pages 0105–0106, paragraph 388; PHT00000042, pages 112–115; Mr Inch PHT00000007, page 51]. Although Mr McGougan, as CEC’s Director of Finance, was aware of the total bonus figure, he was not aware of the scheme’s detailed operation or of what was paid to individuals [TRI00000060_C, page 0134, paragraph 347; PHT00000043, page 102].

22.189 I consider that tie‘s bonus scheme and the amount of individual bonus payments made were not clear and transparent and did not follow the guidance noted in paragraph 22.169 above. I consider that CEC exercised inadequate oversight and control over tie‘s bonus scheme and was simply unaware of whether the large sums paid out in bonuses were appropriate or justified. I also question the appropriateness of significant bonuses being paid to contractors (rather than to permanent staff or employees), which, again, appears to have been a matter about which CEC was unaware.

22.190 Furthermore, the bonus scheme provided an incentive for senior tie officials to aim to bring the project budget and programme within certain targets. Although that, in itself, is a good thing, what is questionable is whether the bonus scheme provided an incentive (whether conscious or unconscious) to report that the project budget and programme targets were being met, whether that was the case or not. The fact that no bonuses were paid for achieving the desired contract close dates means that there can be no suggestion that the contract was rushed in order to obtain those benefits. Nonetheless, bonuses were paid based on the estimated contract price. In Chapter 9 on procurement up to the appointment of preferred bidder I have considered the unsatisfactory position underlying the determination of the figure for contract price to be reported in the FBC. The only way in which it seems to me to be possible to eliminate any improper incentive would be to ensure that bonus payments are based on the actual or outturn, rather than estimated, cost and programme of the project. That would mean that bonuses based on these criteria were only paid at the conclusion of a project (when the final cost and completion date were known), which might have the further benefit of encouraging senior staff to remain with a project until its completion. Recruitment of staff was said to be a problem, and I can see that this approach might make it more difficult. That, however, calls into question the decision to use a company created specifically for the project, which would have to recruit all the expertise required rather than using existing consultants. I consider this further below.

Role of CEC

22.191 The core idea of governance is perhaps about the proper and effective exercise of the authority to implement the project. Since, for the Tram project, it was always clear that such authority derived from CEC, it must bear the ultimate responsibility for supervising the exercise of that authority. It seems to me that the need to supervise is the corollary of having granted the authority in the first place. A failure to check that the authority that has been granted is being properly exercised results in a loss of control over it. It was necessary, therefore, that CEC be clear about what it had authorised, who it was authorising to do it, what reporting it needed to supervise the exercise of that authority adequately, and what arrangements it had in place to supplement or countermand that authority in response to events.

22.192 The very notion of a company at “arm’s-length” denotes both a measure of independence but also some element of control. There is, however, no fixed template as to how much freedom the company will have, the extent of control to which it will be subject and how that control will be exercised. The extent of control was a source of tension in relation to tie. Some of the councillors who gave evidence expressed concern that tie essentially saw itself as a free agent that should be free from any interference by CEC. Others said that, through its councillors, CEC should have taken a greater hand in managing the situation as it deteriorated. Within the company, there were people who appeared to resist or resent CEC involvement and others who believed that, ultimately, CEC was in charge.

22.193 It is difficult to avoid the view that the phrase “arm’s-length” in relation to a company serves, at best, to obscure the intended nature of the relationship of a company with CEC and, at worst, is a misnomer having regard to the effective control of the company that arises from CEC’s 100 per cent ownership of it. It appears to me that the following issues are raised in relation to companies wholly owned by CEC:

• control of the companies
• reporting by the companies
• supervision of the companies and mechanisms for scrutiny
• residual powers of CEC

22.194 I consider each of these in turn, but first I consider the guidance available to CEC in relation to these companies.

Guidance on council-owned companies

22.195 On 18 December 2001, the executive members of CEC approved a Code of Guidance and Conduct for the governance of council companies (the “Council’s Code”) [CEC02084490, pages 0009–0017]. All new and existing council companies were required to adopt the Council’s Code. The report to members of the executive by Mr Aitchison [ibid, page 0003] explained that the Council’s Code was based on the principles of good corporate governance contained in the report of the Cadbury Committee on the Financial Aspects of Corporate Governance (the “Cadbury Report”) [TRI00000309] and the joint Code of Guidance on Funding External Bodies and Following the Public Pound (the “FPP guidance”) published by the Accounts Commission and the Convention of Scottish Local Authorities (“COSLA”) [CEC02084822, pages 0005–0008].

22.196 The joint letter from the Accounts Commission and COSLA issued to local authorities in Scotland on 24 May 1996 explained that the context in which the FPP guidance was prepared was the “basic premise that where public funds are involved there is an expectation of a high degree of control and accountability” [ibid, page 0003]. The FPP guidance was in force throughout the Tram project and remains in force (see the report by the Accounts Commission, ‘Councils’ use of arm’s-length organisations’, May 2018, page 5, key message 2) [TRI00000306]. The significance of the FPP guidance is illustrated by the fact that, on 29 June 2005, Scottish Ministers issued a Ministerial Direction requiring local authorities to comply with the guidance [TRI00000305]. The FPP guidance noted that the principles of openness, integrity and accountability applied to councils in their decisions on spending public money (which were subject to public record and external audit) and that the same principles should apply to funds or other resources that were transferred by councils to arm’s-length bodies [CEC02084822, page 0006].

22.197 The Council’s Code included provision for CEC to appoint a monitoring officer for each company, to ensure that the council’s interests were being safeguarded and that the requirements of the Council’s Code, and any operating agreement with the company, were being implemented and enforced. The monitoring officer was responsible for ensuring that an annual report was made to CEC on the performance of the company [CEC02084490, pages 0013–0014].

22.198 In 2006, the Council’s Code was updated to introduce more detailed requirements for monitoring CEC companies [CEC01813429]. The overall purpose of the monitoring officer was, again, to ensure that the CEC’s interests were safeguarded. In addition, he or she had to ensure that the company was at all times adhering to best practice in relation to corporate governance. The monitoring officer was to receive quarterly reports from the company on items of interest or concern, including risk reporting. In turn, the monitoring officer required to make biannual reports to CEC on the performance of the company. The company was to provide draft annual accounts
to the monitoring officer and an annual business plan for approval by CEC [ibid,
pages 0007–0009].

Control of the companies

22.199 Although there can be no single “correct” answer in relation to the residual role of a local authority in this situation, it is obvious that what is required is clarity about how much control is in place. Put another way, there should be clarity as to:

• the remaining powers of the local authority to act, which powers they still have to take action themselves, and the circumstances in which they will use them; and
• what control it has in relation to the decisions that will be taken by the other bodies in the governance structure.

22.200 Turning first to the latter issue of what a local authority could do to control the activities of the companies or other entities that were established, evidence was given to the Inquiry that there are three means by which local authorities exercise control over arm’s-length companies:

• as shareholders;
• by agreement(s) concluded with the company; and
• by appointment of directors.

Shareholder powers

22.201 The articles of association of both tie and TEL included article 70 from the standard form Table A (Companies (Tables A to F) Regulations 1985) (as amended) [TRI00000304]. Article 70 states that the business of the company is to be managed by the directors, but is subject to any directions given to them by means of a special resolution passed by the shareholders. A special resolution requires 75 per cent of the votes cast to be in favour of it but, as sole owner, the CEC was always in a position to give directions. By this means it could exercise some control over the decisions taken by directors. In addition, its shareholding meant that it was at all times in a position to remove any of the directors and/or appoint further ones.

22.202 There is no indication that CEC sought directly to use any of these powers or indicated that it might do so. The closest was the emergency motion passed by CEC on 18 November 2010, in which the council’s Chief Executive was instructed to make preparations with tie and BSC for mediation or another dispute resolution procedure [CEC02083139, page 0021]. As Councillor Dawe explained:

“this was us as a Council saying: TIE has failed to achieve what needs to be achieved, and therefore we’ll use another means.” [PHT00000001, page 186.]

22.203 In response, Mr Jeffrey was concerned that CEC would effectively take control of the project without officially doing so [PHT00000033, page 65]. This led to a draft email from Mr Jeffrey dated 22 November 2010, intended for Mr Aitchison, in which he indicated that it was necessary to be clear on roles and responsibilities and that if CEC wanted to take formal control this should be communicated to the Board [TIE00304261]; and an email that was sent to Mr Aitchison, Mr Maclean and
Mr McGougan on 24 November, in which he said:

“if the council have lost confidence in tie, then exercise your prerogative and removetiefrom the equation. I am not defensive about this, indeed I first suggested it in my e-mail to you several weeks ago, and it is a real option for CEC to consider, but please do not keep re-‐opening it. I expressed my views to you today on the potential implications of such a course of action.” [CEC00013441, page 0002.]

22.204 As Mr Jeffrey’s email indicates, this is a drastic step that would terminate the autonomy of the company. Even if directions were given in terms of the articles of association, the freedom of the company to regulate its affairs would be materially eroded and, to a significant degree, it does away with the idea that the company is at “arm’s-length”. What happened in relation to the decision to seek mediation shows that it could be done in a less drastic manner but, as Mr Jeffrey identified, that could quickly lead to confusion as to who was in control. It is also of note that such informal communication of wishes really only had “teeth” when viewed against the background of the powers to remove the Board or give directions. If the wishes of CEC were just that – nothing more than wishes – this course of action could not really be considered an avenue of “control”.

22.205 In summary, these powers are capable of providing hard-edged control but come at the cost of collapsing the notion of the company being at arm’s-length.

Agreements

22.206 The second means by which a local authority can exercise control over its wholly owned companies is by agreement (see paragraph 22.200 above ). It is not uncommon for shareholders to conclude an agreement between themselves and with the company owned by them that seeks to regulate what the company can and cannot do and the manner in which it is to be managed. As the extent and nature of the control are dictated by the terms of the negotiated agreement, there is no upper or lower limit on the extent of control that can be exercised. In addition to agreements regulating these matters, there can be agreement regulating the service that should be provided by the company to CEC or others.

22.207 In the Tram project, there were agreements with both tie and TEL, as narrated above. However, the agreement with tie that related to the negotiation and conclusion of the contract was concluded after the work had been done, so it was of no value. The controls in the TEL agreement once it was put in place in 2008 were also ineffective. It was signed on 12 and 13 May 2008 and, as was noted in paragraph 22.115 above, it reserved to CEC:

“any actual or reasonably expected increase in cost of over £10m; relative respectively to the … capital cost of £512m (Phase 1A)”

and

“the settlement of any single claim in excess of £500,000, or series of claims in any 12 month period which would exceed in aggregate £1,000,000” [CEC01315173, page 0008].

22.208 It is not clear what is being reserved here. Such lack of clarity in something that defines the scope of responsibility is unacceptable. If it is intended to prevent liabilities being incurred in excess of the capital cost it is ineffective having regard to the form of the contract that was concluded with BSC. Once the contracts were signed, tie was liable for all sums due in terms of them and, provided that there was authority to enter into the contract, limits set by CEC could not temper that. In theory, CEC could have put a ceiling on the sums that it was willing to pay under the guarantee that it provided of the obligations of tie under the contract, but it is inconceivable that any of the contractors would have agreed to proceed on such a basis. The statement of a such limit in the agreement may, however, have been another factor that provided a false confidence that the costs would not be exceeded.

22.209 The above factors highlight the key issues in relation to control of this type – it must be the correct form of control and it must be at the time when it can still be of effect. To ensure that the control is exercised at a time when it can be effective it is necessary to have a clear idea of what the intention is behind the control. Is it to avoid paying claims that are not due, to ensure that decisions are taken in a way that will not lead to more cost than is strictly necessary, or to ensure that unforeseen contractual liabilities are not undertaken? Each may require a different form of control but, more importantly, each requires that the control is exercised at a different time. If the aim is to ensure that undue liabilities are not undertaken, then no procedures that operate after the agreement has been signed will be effective. This is locking the stable door after the horse has bolted. In addition to such controls being ineffective they may create a false impression that the concern in question is properly managed and, in so doing, may mean that more effective controls are not put in place.

22.210 In relation to the agreements between CEC and both tie and TEL, it is apparent that the obligations imposed are couched in very general terms. This, however, is a feature that is to be expected in a contract between a company and its sole shareholder. In drafting such a contract there will be no expectation that the matter would ever require to be enforced by court action. To an extent, in that situation, the agreement could be seen as more of a set of aspirations or targets than a statement of rights and responsibilities. That being the position, it is hardly surprising that the agreement is relatively short and very different from that which would be concluded with a third-party supplier of services. The generality of such agreements does, however, mean that it must be recognised that the extent of control that is afforded in practice by them may be fairly limited.

Appointment of directors

22.211 The final means of the local authority exercising control over its wholly owned company is by the appointment of directors (see paragraph 22.200 above). The idea that councillors should sit on the tie Board was expressed at the very outset in the approval given by CEC to form tie [USB00000228]. From the date on which it was formed, the articles of association of tie entitled CEC to appoint up to four directors of the company [CEC00775279]. The articles of TEL initially entitled CEC to appoint two directors and LB to appoint two directors. Later versions entitled CEC to appoint up to five directors, LB to appoint up to two and tie to appoint a single director. Later still, the provisions for these appointments were dropped.

22.212 Various justifications were given for the arrangements for appointment of directors by CEC. As well as providing control [Mr Aitchison TRI00000022_C, page 0005 paragraph 15; Mr Macaulay TRI00000053_C, page 0008 paragraph 14], it was suggested that they provide “democratic accountability” [Councillor Dawe PHT00000001 pages 77–87], assist in the flow of information and policy from CEC to the various bodies and vice versa, and represent CEC on the board [Dame Sue Bruce PHT00000054, page 4]. I consider the issue of flow of information in its own section below (see paragraph 22.219 onwards), and here I concentrate on control and accountability.

22.213 A consideration of the duties and obligations of the directors once appointed demonstrates that it is not an effective means of control. Although a director may be appointed by a person or entity outside the company, it is well established in the UK that, once appointed, such a director owes duties only to the company and not to the person or body that appointed them. For instance, it would not be permissible for a director appointed by CEC to the tie Board to make a decision on the basis of what was best for the Council’s interests. Where there is only one shareholder in the company, there may be little difference between the interests of the company and those of the shareholder, but the distinction remains. In taking a decision for the company, the director in this position may take into account the perspective of the appointing shareholder as to what is best for the company but cannot simply take as a starting point what is best for the shareholder. Although, at times, these directors are described as “representatives”, that is inaccurate and it is better to consider them nominees. This creates a possible difficulty that could have arisen for the CEC-appointed directors when the interests of CEC and the interests of tie started to diverge. This was recognised by some witnesses [see, eg, Mr Macaulay TRI00000053_C, page 0008, paragraph 14; Mr Aitchison TRI00000022_C, page 0090, paragraph 270]. Although apparently aware of the conflict that might arise as a result of owing duties to CEC and to the company in question, others seemed untroubled by this. There seemed to be a general approach that the councillor or director in question would be able to work matters out as and when a problem arose. I do not accept these casual dismissals of the problem or glib beliefs that matters could be resolved. Often, the suggested solution would involve disclosing to CEC what was happening within the company. As I consider below, that option would often not be available due to the obligations of confidentiality owed to the company. I do not consider that any of these suggestions properly addresses the conflict and provides an acceptable solution.

22.214 This problem of the potential incompatibility of duties incumbent on councillors
or directors had been recognised in CEC prior to the Inquiry. In December 2012,
Mr Maclean, in his capacity as Director of Corporate Governance, prepared a report for councillors in relation to council-owned companies [CEC02086791]. This noted that an earlier review that had been carried out made a number of recommendations, including:

“1.5.1 Elected members should not be directly involved in operational decision-making of Council companies. Given the potential for conflict of interest between their roles as councillors and as directors (where there is a statutory duty to act in the best interests of the company and not the shareholder), it is recommended that elected members do not act as directors on company boards, but carry out a strategic direction-setting, oversight and challenge role as members of the relevant Council committees.

“1.5.2 In light of the same potential conflicts of interest, council officials should not sit on company boards. As an alternative to acting as company directors, it is recommended they have observer right on boards of Council companies.

“1.5.3 Council companies should recruit and appoint executive and non-executive directors with the appropriate skills and experience. The boards should meet atregular intervals, with a minimum of five meetings every year. Each board should, where appropriate, have properly constituted audit, remuneration and nominations committees.” [ibid,pages 0004–0005.]

22.215 Despite this, Mr Maclean’s report notes that a working group of councillors had determined that they wished to participate directly in decision-making. I would comment in passing in relation to this that a desire to participate in decision-making is at odds with the idea of an arm’s-length company and may suggest that the councillors would be better not transferring control to companies at all. However, as the desire was there, to accommodate it the report proposes that three councillors should sit on the board of each CEC company. The motion as passed by CEC gave effect to this modified proposal [CEC02083113]. The report does not indicate that the councillors’ working group had identified or even considered any solutions to the concern as to conflict of interest. I consider that Mr Maclean was correct to identify the problem and that it cannot be ignored in the way that the councillors wish.

22.216 The effect for the Tram project of the requirement of directors to act according only to the company’s interests was that the presence of directors did not mean that it was necessarily possible to give effect to the interests of CEC in decision-making. It means that their presence did not provide democratic accountability and that it could not ensure that CEC policies were respected in decision-making. Therefore appointment of directors by CEC was ineffective for almost all the purposes for which it was said to have been carried out. The only thing that could have been done by the appointed directors when a CEC policy or decision was relevant was to draw it to the attention of the other directors. Not only is putting councillors on the board(s) as directors ineffective; as with the other ineffective safeguards I note above, it creates a false feeling of confidence. The danger in that is that, as a result, other effective measures are not put into place.

22.217 I recognise that nominated directors are a common feature of business life and are routinely used by lenders and investors. Even in those situations, however, unless there is agreement to the contrary the obligation of confidence and the requirement to put the interest of the company first will apply. In those situations, there may be express contractual modification of these obligations and the underlying investment or lending agreement may have its own mechanisms to provide control if situations occur that are contrary to the interests of the lender or investor.

22.218 It is not surprising that there were such diverging views on what control CEC had over tie and the other entities and the extent to which there should be control. There was no comprehensive and clear view taken at the outset and matters were left to be adjusted as they went along. As a result of this, false reassurance was taken from various measures that had been put in place without any proper assessment of whether they met the needs or desires of CEC. If arm’s-length companies are to be used it is necessary that at the outset there is full consideration of the controls that are to be put in place. This needs to consider the extent to which control is desirable and the various measures to be used need to be the subject of critical evaluation to assess whether they will actually provide the desired regulation. Here, as elsewhere, failings occur when the approach is simply one of ticking boxes without considering the substance of what is to be achieved.

Reporting by the companies

22.219 Whatever scope for intervention by CEC existed, its effectiveness depended on both a flow of sufficient accurate information to CEC and whether CEC’s procedures provided an effective form of scrutiny. There cannot be effective scrutiny by either councillors or officials unless they are sufficiently well informed. This can be illustrated by the view of Councillor Balfour that had accurate information been provided to councillors, the decisions taken by them would have been different [TRI00000016, pages 0002–0003, paragraphs 4–8].

22.220 In relation to the councillors, there were a number of different sources of information. Some information came direct from tie, but the majority came via council officials.

(a) The Chief Executive briefed the council Leader [Mr Aitchison TRI00000022_C, page 0102, paragraph 313 NB This statement contains two paragraphs each with the numbers 313 and 314].

(b) The CEC Director of Finance briefed the Executive Member for Finance [ibid].

(c) The CEC Director of City Development briefed the Executive Member for Transport [ibid].

(d) Briefings were given to Opposition spokespersons [ibid].

(e) Briefings were given when reports were submitted to the full council [ibid, page 0102, paragraph 314]. These were done to each political group separately.

(f) Briefings from tie personnel and council officials were given to group leaders. According to Councillor Balfour, on occasions these briefings contained confidential information that he could not share with other colleagues [Mr Aitken TRI00000015, page 0032, paragraph 112; Mr David Anderson TRI00000108_C, page 0004, paragraph 2(c); Councillor Balfour TRI00000016, page 0027, paragraph 80].

(g) Requests for information could be made [Mr Aitken TRI00000015, page 0032, paragraph 110]. These would generally be made to officials who would, if necessary, seek information from the other entities involved.

22.221 As with most areas of the project, witnesses also said that reliance was placed on informal discussions [Mr David Anderson TRI00000108_C, page 0119, paragraph 154]. Different classes of councillors were informed to different degrees. Those who sat on the TPB or the Boards of tie and TEL would have information that they were unable to share. As mentioned above, the information provided in the briefings to group leaders was sometimes termed “confidential”, so it could not be shared with other councillors, and Executive Members could not share the content of the briefings that they had had. This created an unsatisfactory position in which not all the councillors voting on any matter had the same information.

22.222 I note in paragraph 22.212 above that one of the suggested reasons for appointing councillors to the boards of companies wholly owned by CEC is that they assist in provision of information. In some quarters, there was a view that officials and councillors attended the TPB meetings and sat on the Boards of tie and TEL so they would have known what was happening, and that this meant that CEC was aware [see, eg, Mr Gallagher TRI00000037_C, page 0060, paragraph 199]. In my view, these views are misconceived. Irrespective of whether any duty would arise at common law as a result of the director being aware that the information given to him or her was of a confidential nature, the director’s duties to act in the best interests of the company will, in general, mean that it is unlawful to disclose that information. It is perhaps with this in mind that the articles of TEL contained a provision that a director of the company who was also a director of tie or LB was entitled to make disclosures about the affairs of TEL to those other companies [CEC00478762, page 0008, article 9]. There is no provision to this effect in the articles of tie and no provision in the articles of either company to permit disclosure to CEC.

22.223 Although attending meetings of the TPB did not of itself make the attendees directors of TEL, it was a sub-committee of the Board of that company and the circumstances of the discussion there are such that it would be expected that confidentiality would attach to them so this information, too, would be protected. The error in understanding of the position in relation to sharing information creates a danger. Here, as elsewhere, it gives rise to the risk that the incorrect assumption that a safeguard exists means that proper measures are not put in place. The view that appointment of directors was an informal means of passing information appears to have been used as a substitute for proper reporting.

22.224 The Council’s Code of Guidance for its companies and the relevant operating agreements between CEC and tie set out the reporting and other requirements in detail [CEC01813429 (Council’s Code); CEC00478603 (2005 agreement); CEC01315172 (2008 agreement)]. I note that in the various copies of the 2005 agreement provided to the Inquiry the agreement was signed by the Council Solicitor on behalf of CEC, but was not signed on behalf of tie. This did not have any effect on CEC, however, because in any event tie was regulated by the Council’s Code, as will be mentioned below. Rather the significance of the failure to complete the documentation is similar to the failure to sign and return the letter of appointment of DLA mentioned in Chapter 4 (Legal Advice), and the failure to have the report requested by the Solicitor about the Infraco contract for her consideration before agreeing that the Chief Executive should sign it. All these failures suggest a lack of appropriate procedures within the Legal Department to ensure that documentation was completed for the protection of CEC. This was of significance in relation to contract close, which was discussed in Chapter 12 (Contract Close).

22.225 The financial reporting by tie did not meet the requirements imposed by CEC. In short, while tie appears to have produced an annual business plan and draft annual accounts for CEC’s approval, quarterly reports were not produced to CEC’s monitoring officer, nor did the monitoring officer provide regular reports to CEC (whether annually or biannually) on tie‘s performance. Mr Holmes was tie‘s monitoring officer [CEC02087101], but he could not recollect receiving quarterly reports from the company or making annual or biannual reports on its performance to CEC [PHT00000041, pages 189–191]. The Inquiry has been unable to recover any such reports. Mr Inch stated that although quarterly reports may not have been provided by tie, Mr Holmes was, in fact, receiving information more frequently – on a daily basis. He also referred to CEC’s Internal Planning Group (“IPG”), which was regularly provided with information in relation to the performance and progress of the project. In saying that, Mr Inch accepted that such reporting was done in a less structured or formal way than that envisaged in the Council’s Code [PHT00000007, pages 78–80]. Although it is true that a lot of information was provided to CEC in relation to the Tram project in a variety of different ways, I consider that that is not the same as the formal system for monitoring the performance of a council-owned company envisaged in the guidance noted above. It is a matter of concern that these requirements were not fulfilled and no consideration was given to whether the information that CEC actually received (and the manner in which it was provided) was a suitable and adequate alternative. Mr Fair, of the Chartered Institute of Public Finance and Accountancy, gave evidence that he could find no objective evidence of formal performance appraisal of tie and that critical controls over the formal management of performance between 2007 and 2011 were difficult to find [TRI00000264, page 0053, paragraph 3.108]. The guidance noted above, and the operating agreements between CEC and tie, contained provision for regular performance appraisals, and I consider that it was indicative of the “light touch” applied by CEC to its monitoring of tie that it did not insist on these provisions being complied with. The Council’s Code also required tie to provide the monitoring officer with all agendas and papers for Board meetings at least five days before the meeting. Although Mr Holmes could recollect receiving such material, he stated that he would not have necessarily read them all himself because “a lot of paper came across my desk” [PHT00000041, page 190]. This evidence, coupled with his failure to obtain quarterly reports or to make annual or biannual reports on the performance of the company, tends to suggest that Mr Holmes did not appreciate the extent of his obligations as tie’s monitoring officer or that, if he did, he failed to fulfil them.

22.226 As with other issues, the failures of Mr Holmes in this regard should not be seen in isolation. The absence of formal annual or biannual reports to CEC in accordance with the Council’s Code ought to have been apparent to the Chief Executive (Mr Aitchison), who had submitted the Code to CEC for approval. Mr Aitchison ought to have raised the absence of such reports with Mr Holmes and, in any event, ought to have had procedures in place to ensure that such reports were provided regularly and timeously to CEC. Had that occurred, councillors would have been better informed about tie‘s performance before contract close.

22.227 In relation to the project itself, the quality of reporting by the tie team engaged in the project was poor. Complaints came from Transport Scotland about the standard of reports that it received. As early as June 2008 – within days of the contracts being signed – Mr Gallagher expressed his dissatisfaction with the standard of reporting in relation to the MUDFA works [CEC01288728]. He noted that the problems that existed would not have been picked up from the formal report to the TPB and that “there are issues all over the place”. In another email in the same chain, Mr Bissett agreed and said “I do think the reporting here and in the TPB papers (which I assume is the TS report) is not sufficiently detailed to disclose the vital signs.” [ibid, page 0001]. Reports to the TPB would have been an informal route by which council officials such as Mr Holmes and Mr McGougan could have become aware of problems.

22.228 Reading though the reports that were submitted, I agree with the criticisms of them. In the first year of the contract, a dispute of fundamental importance was clearly emerging, yet its existence and nature are not apparent from the reports. In months in which there was a lack of any real progress, a number of possible justifications were offered without a clear indication that there was a disagreement as to the meaning of core terms of the contract. The reports give “[f]inalisation of the agreement of change delaying the commencement of work” as a reason for lack of progress. This tells the reader nothing of the dispute that was emerging as to the interpretation of the contract and whether works would be a “Notified Departure” giving rise to an Infraco Notice of tie Change in terms of the contract. It provides no indication that the issue that had arisen had the potential to increase the costs of the project significantly. The Project Director’s reports contain large amounts of word-for-word repetition from month to month over extended periods. During the hearings it was said that the same issues were arising in relation to lack of progress from month to month, and that is why they were repeated. I do not accept, however, that it was the position that what could be reported in one month was identical to what had been reported three or four months earlier. If that was the position, it would indicate that absolutely nothing was being done by tie to address the issues. Identical estimates for completion dates were repeated month after month, long after it must have been apparent that they were wholly unrealistic. Tellingly, errors were repeated from month to month. These factors indicate that the reports were not being scrutinised, checked or corrected.

22.229 The opaque reporting on the project is in stark contrast to the clear and accurate manner in which the problems were identified and reported by the OGC peer review team as early as July 2008 [CEC01327777]. It noted that:

• MUDFA works were only 60 per cent complete, with an uncertain completion date that would have an increasing impact on the Infraco works;
• the design was not complete at contract award;
• it was unclear to the review team where risk lay for design development;
• in interview, BBS and tie each considered that risk lay with the other party;
• there were concerns regarding changes and management of changes;
• the programme was then currently three months behind schedule; and
• there were significant risks of further delay.

22.230 This shows that the problems were identifiable, which makes the quality of the reporting by tie all the more concerning.

22.231 The effect of the omissions and errors is that the reports are misleading. Anyone who knew of the disputes with BSC must have been aware of this. Mr Bell, who wrote the Project Director’s reports, would clearly have been aware, but he was not alone. All members of senior management in tie would have been aware that the nature and extent of the problem were not being reported, and all these people bear responsibility for the state of the reports. There is not sufficient evidence available to me to conclude that there was collusion within tie to give a misleading picture, but it is striking that this position was allowed to remain. These reports were, in a sense, intended for internal use within the project. However they formed the majority of the substance of the reports provided to Transport Scotland and were also used to inform CEC. Their shortcomings are therefore material beyond the TPB and tie.

22.232 During the hearings and in submissions it was said that defects in the formal reporting did not matter, as the necessary information was being provided in informal discussions or in oral briefings. In a large-value project funded with public money, those are not an adequate substitute for clear, concise and formal written reports. The written record will assist in ensuring that matters are understood and not overlooked.

22.233 Even when information was available to council officials, it was not always made available to councillors. In an email of 8 January 2010 sent to Mr Maclean (which was also considered in Chapter 18 (CEC: May 2008 to 2010)), Mr Smith attached a brief history of the project [CEC00473790] and said:

“dissemination of the actual history here could cause serious problems and we definitely don’t want to set hares running … be very careful what info you impart to the politicians as the Directors and tie have kept them on a restricted info flow” [CEC00473789].

22.234 It had been apparent from the outset of the Tram project that it was a source of political controversy. This highlights the problem that can flow from that: any information that indicates that there are problems may be the subject of public debate. Opponents of the scheme will use it to revisit the original decision, or at least to attempt to cause political damage to the proponents of the scheme. This could lead to doubts as to whether the project would be curtailed or stopped.

22.235 Mr Ramsay referred to this reluctance of a delivery body to pass on information as the “agent–principal” dilemma, in which the delivery agent would choose not to give the principal as clear and as full a picture as they should have done [PHT00000012, pages 195–196]. This was also considered in the evidence of Professor Flyvbjerg on optimism bias and was considered in Chapter 21 (Risk and Optimism Bias). This general reluctance to communicate information could apply to any aspect of the project, but there are inevitably particular areas of commercial sensitivity in any construction project that one party does not want the other party to know of. This raises the issue of confidentiality, and it is to that issue that I now turn.

Confidentiality

22.236 A requirement for confidentiality was invoked during the period in which disputes under the Infraco contract were being pursued to adjudication to restrict information available to councillors and council officials or to restrict communication of information that was made available. It is easy to respond to the withholding of information by saying that it is wrong that councillors should not be given the full picture, but is that really correct?

22.237 It is apparent that some restriction on the dissemination of information was required. Leaks of information were capable of causing embarrassment or inconvenience to tie, but the problems could be more fundamental – particularly as the relationship with BSC deteriorated. If commercial strategies, concerns, analysis of the position and similarly commercially sensitive information were to leak back to BSC – either directly or through the media – there was scope for causing material prejudice. As Mr Aitchison noted, reporting in public would have put tie at a clear commercial disadvantage [TRI00000022_C, page 0103, paragraph 316]. It is easy to see how a concern to prevent this harm would give rise to a default position of not handing over material. There was particular concern that legal advice obtained in relation to the disputes should not become available [Mr David Anderson TRI00000108_C, page 0120, paragraph 154]. No commercial entity would be happy to be party to a contract in which it had to disclose all its deliberations as to the issues arising under the contract while the other party could keep its considerations and evaluations private. Without some ability to control release of information, public authorities would be put at a disadvantage.

22.238 There were sharply divided views as to where to draw the line on what should be kept back. By way of illustration of one extreme, Councillor Donald Anderson said:

“I fully understand that there is a need to have confidential discussions particularly on commercial issues and there is a need in a difficult contractual situation to reflect privately on the issues raised and the questions posed for you as an elected member of a decision-making body. However, there is also at times a need to be open about the decisions you are taking, and the need for appropriate scrutiny and discussions about such issues. The Council is not a private company, and the council was essentially the client and jopint [sic] shareholder in the delivery of the project. All its decisions have to be publicly justified and there is
no excuse for keeping vital and important information from elected members
who are the ones that, ultimately, take those decisions.” [TRI00000117_C,
pages 0009–0010, paragraph 17.]

22.239 Although it is true that CEC was the client and shareholder, and it is also true that, over time, decisions will have to be justified publicly, I do not think that it follows that all material must be made public and that each decision must be publicly justified as it is taken. If this was taken to its logical conclusion it would have the effect that all material must be available in all council contracts, and I do not agree that that should be the position.

22.240 There were nonetheless concerns on the part of councillors that arguments as to confidentiality were being used simply as a device to keep information from them. For example, when disputes were taken to adjudication, the councillors were told that they could not see the decisions that had been made. (This was also considered in Chapter 18, CEC: May 2008–2010.) This meant that they had to depend on reports that were given by tie. As will be considered below, although there may have been informal channels in which a full picture was given, the formal reports did not accurately reflect the outcomes. Another example is that Councillor Donald Anderson objected to the fact that tie had said to councillors that if they questioned what was being done, it would cost the taxpayer more, as a consequence of which scrutiny and debate were inhibited [ibid, page 0050, paragraph 115].

22.241 It is not apparent why the decisions in the adjudications (see Chapter 17, Adjudications and Beyond) could not have been made available. They were already known to BSC, so leaks were not a concern. Councillors said that they were told that the Infraco contract stipulated that they should remain confidential. Having considered the contract, I can see nothing in it to this effect. It therefore appears that this is an example of information being withheld simply because it was undoubtedly bad news. The result was that when the true picture in relation to the adjudications began to emerge, there was lack of trust between councillors and tie personnel.

22.242 In recent years, CEC has begun to address the problem of reconciling the need for confidentiality with the requirement to inform councillors by use of “data rooms”. These are stores of information that can be consulted by authorised parties, but the documents themselves cannot be removed and copies may not be taken. Although that approach is not a complete answer to the dilemma, the general view within CEC is that it has been effective.

22.243 Although data rooms deal with practicalities, they do not address the core issues: should councillors see all information, or only information that they require; and, if the latter, what information do they require to see? The common justification for provision of information is that there is a need for accountability and informed decision-making. Although there is undoubtedly a need for both, I consider that it is an error to assume that this means that all communications must be released. There is a danger of conflating accountability with transparency. No one could doubt that there must be accountability for the expenditure of public money. That does not mean, however, that the whole operation of a contract has to be transparent to the public. This would mean that public-sector bodies would always be at a material disadvantage compared with private bodies. It is of note that the need to keep some information private is recognised in the Freedom of Information (Scotland) Act 2002, section 33, which allows certain information to be withheld on the basis of commercial confidentiality. Where government – at either Holyrood or Westminster – enters into contracts involving large sums of money, individuals or departments may be called to account and the project can be scrutinised by bodies such as Audit Scotland or National Audit Office. It is not the case, however, that every MSP or MP is kept informed of commercial strategies, negotiations and the like. There is no reason why the position should be any different for local government.

22.244 Ultimately, I consider that the proper ambit of the requirement for information is determined by the residual scope for action by CEC, so the question of what information must be provided has to be answered along with the determination of those retained powers. As I have noted in paragraph 22.199 above, there is no single, correct answer in relation to the question of what residual powers should be retained where an arm’s-length company is used. However, where, as here, the actions of the company in question have the potential to expose CEC to a substantial liability in respect of which CEC will have no recourse against any other party, it would be reasonable that there should be a much more significant residual role. Whatever decision is taken in that regard, the information that must be made available should enable CEC to determine whether the situation is one that requires intervention. If there is a feeling that the barrier should be set low on the assumption that there should be intervention quite readily, that would be a factor suggesting that the project in question is one that is simply not suitable for transfer to an arm’s-length company. Below, I return to the issue of the decision to use such companies. Here, as elsewhere, what was needed was clarity – clarity as to what the future role of the council would be so that there could, in turn, be clarity as to what information should be given to it. Such clarity was absent in the Tram project.

Supervision of the companies and mechanisms for scrutiny

Full council

22.245 In addition to having information available to councillors, the other ingredient required for effective scrutiny by the CEC is that there should be efficient and effective procedures to enable this to take place.

22.246 In relation to proceedings before the full council it is apparent from an examination of the minutes of its meetings that, when matters came before it, the Tram project was just one of many items that had to be discussed. This would limit the amount of time available for consideration of the issues that were arising. Although councillors said that they considered that they had sufficient time, any objective consideration of how matters were put before CEC meetings indicates that there would have been benefit in ensuring that there was sufficient time for fuller consideration of the papers in advance of the meetings. In addition, voting on issues concerned with the Tram project proceeded upon party lines [Mr Aitken TRI00000015, pages 0031–0032, paragraph 109; Mr Donald Anderson TRI00000117_C, pages 0006–0007, paragraph 11; Councillor Balfour TRI00000016, page 0026, paragraph 77]. This was preceded by discussions in the party groups, in which there would be agreement as to what line should be taken. Nonetheless, the Tram project had already given rise to sharp divisions on party lines, so voting on this basis meant that there was unlikely to be close scrutiny.

22.247 The above factors meant that proceedings before the full council could not be expected to provide an effective form of scrutiny. The Tram Sub-Committee of CEC could have functioned so as to better inform members and to afford sufficient time for effective examination of any issues that arose. However, concerns as to commercial confidentiality meant that the minutes of the TPB were not provided to the Tram Sub-Committee [Mr Aitchison TRI00000022_C, pages 0103–0104, paragraph 318], and it did not meet frequently. These both undermined its ability to function as an oversight body. The suggestion that the TPB was itself a form of scrutiny on behalf of CEC does not bear examination, for the reasons outlined above.

22.248 In addition to scrutiny from councillors, various council officials had particular responsibilities in relation to the project:

• Ms Lindsay had a role in relation to the legal arrangements;
• senior council officials were tasked with financial and budgetary monitoring;
• Mr McGougan also provided oversight on finance and budget monitoring;
• Mr Holmes was the Director of City Development, the lead department in CEC for the Tram project, and he was succeeded by Mr David Anderson, who oversaw construction progress; and
• the Chief Executive, Mr Aitchison, chaired the IPG, which reviewed progress as a whole [Mr David Anderson TRI00000108_C, page 0117, paragraph 153].

22.249 Ultimately, however, decisions in relation to what was to happen were taken by councillors. Even if the councillors entrusted the oversight function to the officials, there would have to be a way in which strategic issues that were identified could be reported back to the councillors and a structure put in place for councillors to give them appropriate consideration before taking a decision.

CEC’s Internal Planning Group

22.250 CEC’s IPG was chaired by Mr Aitchison and comprised senior officials of CEC
(ie Mr Aitchison, Mr Holmes, Mr McGougan, Mr Inch and Ms Lindsay), supported by more junior officials. It was created in October 2006 with the remit of ensuring that CEC had a clear understanding and oversight of the various strands of work that would require to be undertaken to enable CEC to approve the FBC for the Tram project at its meeting on 1 February 2007 [CEC01565477 – see paragraphs 6 and 10 for the IPG’s remit]. The IPG met frequently throughout the life of the Tram project, meeting regularly from October 2006 and on a monthly basis from July 2007 onwards.

22.251 Although the IPG was able to, and did, exercise some informal oversight of the project, its main focus (as stated in its original remit) was to co-ordinate the various actions required of CEC to deliver the project, but it did not carry out a formal, or express, oversight or governance role. If it was expected to carry out such a role then that ought to have been clearly stated in its remit and clearly understood by all involved. That was not the case, as is clear from emails from Mr Turley dated 12 May 2010 and 15 June 2010 in which he noted the uncertainty over the IPG’s remit, including, in particular, its responsibility for oversight of the project’s programme and budget [CEC00236984; CEC00241274].

22.252 It is also worth noting, more generally, that responsibility for the Tram project was shared among several senior officials within CEC and no one official was responsible for delivering the project within budget and on time [Mr Inch PHT00000007, pages 20–21; Mr Holmes TRI00000046_C, page 0112, paragraph 413]. I consider that, as a matter of good project governance, there ought to have been an individual senior official within CEC who was responsible for ensuring that the project was delivered within budget and on time. This is not intended to overlap with the function of the SRO. The purpose would be to have an individual responsible for overseeing and co-ordinating the activity of CEC in relation to the project rather than the project as a whole. The person would have responsibility for ensuring that the manner in which decisions were taken by the CEC and resources were made available would be coherent and supportive of the project. Purely by way of example, this might require bringing together other persons from different parts of the council, taking steps to avoid conflict in objectives or decisions between different parts of CEC or requiring that information be given or steps be taken by departments within the council. Although it might be said that these were the functions of the Chief Executive of CEC, it is not realistic to expect someone in that position to provide the time and focus that would be required to fulfil the role.

CEC’s Tram Sub-Committee

22.253 In a report to CEC on 23 August 2007 it was recommended that a CEC Tram Sub-Committee be set up to review and oversee decisions in respect of the Tram project [CEC02083490, pages 0003–0004, paragraphs 16 and 20]. A subsequent report to CEC on 20 September 2007 noted that such a sub-committee had been established to review and oversee decisions in relation to the Tram project, with a view to enhancing councillors’ oversight of it. It was proposed that the sub-committee would meet every six-to-eight weeks. Its remit included regular review of the risk profile for CEC, and it was proposed that the TPB would report to the Tram Sub-Committee [CEC02083455, pages 0002–0003, paragraphs 11–16].

22.254 In the event, the Tram Sub-Committee first met on 12 May 2008 and, clearly, was not in a position to exercise any meaningful oversight of the project before financial close on 14 May 2008. The sub-committee met only infrequently thereafter (it met on a further six occasions between 2008 and March 2011) and was unable to exercise any meaningful oversight of the project, even in the period after financial close. This seems to have been due partly to concerns in relation to providing members with commercially confidential information after the disputes arose between tie and BSC [Mr McGougan TRI00000060_C, page 0142, paragraph 369].

Tram Monitoring Officer

22.255 CEC’s Code of Guidance required the appointment of a monitoring officer for each company in which it had an interest. The overall purpose was to ensure that CEC’s interests were safeguarded [CEC02084254, page 0007].

22.256 CEC’s 2008 operating agreements with tie and TEL each provided for the appointment of a monitoring officer [CEC01315172 (tie); CEC00039231 (TEL)]. The intention was for the same person to monitor both tie and TEL, as the “Tram Monitoring Officer”, and to designate the Director of City Development or his nominee as such [CEC02083448, page 0003, paragraph 4.6; CEC02083446; CEC01338853, page 0043]. Clause 3.5 of each of the operating agreements anticipated that the monitoring officer would be a director of TEL and a member of the TPB. For the TEL monitoring officer to be a director of TEL was, however, contrary to the Code, which did not allow a director of a company to be its monitoring officer, presumably to avoid conflicts of interest [CEC02084254, page 0007; cf Mr Holmes PHT00000041, pages 185–186; Mr Inch TRI00000049_C, pages 0083–0084, paragraph 195]. The requirement for the TEL monitoring officer to be a member of the TPB gave rise to a similar difficulty, given that the TPB was a committee of the TEL Board [CEC02083448, page 0002, paragraph 4.2]. It is difficult to see how an officer could objectively and impartially monitor TEL if he was himself a member of a committee of its board.

22.257 Despite these terms appearing in the TEL and tie operating agreements when they were formally executed in May 2008, CEC did not appoint a monitoring officer under either agreement. This appears to have been an oversight. Such an oversight is surprising, given that the agreements were signed by the Council Solicitor, Ms Lindsay, who was also involved in the preparation of at least the TEL agreement [ibid]. Mr Holmes had been the monitoring officer for both tie and TEL prior to his retirement on 1 April 2008 [CEC01392168], but his successor as Director of City Development, Mr David Anderson, did not take over either position. There was some evidence that Mr Holmes had been the TMO, but since that post was formally created only on execution of the tie operating agreement in May 2008, this must have been an informal use of that title [see, eg, Mr Inch TRI00000049_C, page 0016, paragraph 40; Mr Holmes TRI00000046, page 0002, paragraph 2; Mr Holmes PHT00000041, page 183].

22.258 In a review of Tram project governance in October 2008, it was assumed that Mr Poulton had been nominated TMO, but this had not been formalised by CEC issuing a letter of appointment to tie. This led to a recommendation to appoint him as monitoring officer for tie [CEC01053689]. No equivalent recommendation was made in relation to TEL. The reason for that is unclear.

22.259 Mr Poulton was formally appointed as TMO on 5 January 2009, and his appointment was intimated to the Chairman of tie on the same date [CEC02086935; CEC01182449]. The terms of these letters indicate that they were in response to the governance review mentioned in paragraph 22.258 above. It is clear from the letter of appointment that Mr Poulton’s role related only to tie. There is no evidence that anyone was appointed as TEL monitoring officer at this time. Since he was neither the Director of Finance nor the Director of City Development, Mr Poulton did not meet the requirements of the TEL operating agreement to be its monitoring officer. Mr Poulton had made it clear to the Director of City Development (Mr David Anderson) when recruited as CEC’s Head of Transport that he was reluctant to be involved in the Tram project [TRI00000115_C, pages 0001–0002, paragraph 1]. He was, therefore, a strange choice for the role. Despite his reluctance, he agreed to take on at least some TMO functions from around October 2008, although, as noted above, he was not formally appointed to that role until January 2009 [PHT00000051, page 23]. Mr Poulton said that Mr Anderson wanted to formalise the TMO role because of difficulties with the Tram project [ibid, pages 16–17].

22.260 Mr Poulton considered himself to lack the experience, time and resources to perform the TMO role [ibid, pages 39–40]. He had no experience of tram projects. He was a civil engineer by profession, but focused on traffic and transportation matters rather than on civil engineering or construction management [TRI00000115_C, pages 0001–0002; PHT00000051, page 5 onwards and pages 39–40]. He agreed to take on the TMO role on the basis that he would report to Mr Anderson and would not be required to commit more than 5 per cent of his working time to it. The 5 per cent figure reflected the time that Mr Anderson was himself able to devote to the Tram project. In this, Mr Poulton did not meet the expectations of Mr Aitchison, who in his evidence to the Inquiry described Mr Poulton as:

“probably the first person in the management structure whom you were
expecting to be able to devote something like 100 per cent of his time to
the project” [PHT00000041, page 21].

22.261 It is concerning that CEC’s Chief Executive misunderstood the position to that degree.

22.262 Notwithstanding the provisions of the tie operating agreement, Mr Poulton was neither a member of the TPB nor a director of TEL. He attended meetings of the TPB, but not as a board member. He did not attend any meetings of TEL’s Board. Mr Poulton did not know why he was not appointed to either body. He considered his role to lack “teeth”, and that this might have been different if he had been an office holder at the TPB. On the other hand, Mr David Anderson, to whom Mr Poulton reported, was a member of the TPB.

22.263 Mr Poulton received little by way of briefing on his appointment. He did not know who, if anyone, had preceded him as TMO. He received no files or papers from a predecessor. His letter of appointment enclosed a copy of the tie operating agreement and said that he would be required to monitor tie‘s activities as detailed in it. It asked him to provide Mr David Anderson with a brief monthly TMO update report for inclusion in IPG reports. Mr Poulton thought that his appointment might have been in part to address CEC’s concerns that it lacked information about the project.

22.264 Mr Poulton saw his TMO role as gathering information from tie and reporting it within CEC, both to the IPG and to the convener of CEC’s Transport, Infrastructure and Environment Committee [PHT00000051, page 31 onwards and page 49]. Mr Fraser, and later Mr Conway, helped him [ibid, page 32 onwards]. Mr Poulton accepted Mr Inch’s description of the TMO role as “the eyes and ears of the Council in terms of monitoring the project” [ibid,page 73]. The matters to be reported to him by tie, and by him within CEC, included cost overruns, programme overruns and what tie was doing to mitigate them. Mr Poulton’s appointment as TMO therefore opened up an additional line of reporting between tie and CEC.

22.265 The TEL and tie monitoring agreements were revised in December 2009, reflecting the fact that tie was by then a subsidiary of TEL. Under these new arrangements, day-to-day management of the project remained with tie,but strategic and material decisions were to be taken by TEL, who would give directions on such matters to tie.TEL was also responsible for the management of tie, including ensuring that it acted in accordance with its operating agreement [CEC00645836, page 0002, clause 1.4; CEC00645838, page 0006, clause 2.4].

22.266 The revised TEL operating agreement, unlike the 2008 version, used the title “Tram Monitoring Officer”. In my view, this underscored the intention that the same person should monitor both TEL and tie. Indeed, since tie was now a subsidiary of TEL, and TEL now had responsibility for monitoring tie‘s compliance with its operating agreement, it was arguably more important for the protection of CEC’s interests that TEL had a monitoring officer than that tie did. Furthermore, while the TPB could plausibly supervise the activities of tie, it could not realistically supervise the activities of TEL, because it was a sub-committee of the TEL Board.

22.267 In terms of the revised agreement, the TMO was no longer required to be a member of the TPB, or a director of TEL, but was to attend meetings of the TPB and the TEL Board [CEC00645836, page 0003, clause 1.11]. This removed the conflict of interest inherent in the 2008 TEL operating agreement. In a further change from the 2008 TEL operating agreement, the TMO could be an appointee of the Directors of Finance or City Development [CEC00645838, page 0012, clause 3.5]. This change made it possible for Mr Poulton, as the incumbent TMO, to take on responsibility
for the monitoring of TEL. Mr Poulton, however, maintained that he was never
asked to monitor TEL and, indeed, that he had been specifically instructed by
Mr David Anderson not to do so. Furthermore, he was unaware of anyone else
being appointed as the monitoring officer of TEL [Mr Poulton PHT00000051, pages 106–109]. He assumed that Mr McGougan, or someone in the Finance Department, was responsible for that role [TRI00000115_C, page 0005, answer 20]. By contrast,
Mr McGougan said that Mr Poulton (as the then TMO) “would have responsibility
for monitoring TEL” and was unaware of any instruction from Mr Anderson that
Mr Poulton was not to do so [TRI00000256, page 0001, answer 3]. However,
Mr McGougan provided no evidence of Mr Poulton being directed or instructed
to take on the monitoring officer role in relation to TEL.

22.268 In the absence of any evidence confirming the appointment of a monitoring officer to TEL, I accept Mr Poulton’s evidence in this regard, and find that CEC did not appoint a monitoring officer to TEL following the 2009 revision of the operating agreements. This is notwithstanding the fact of the TEL operating agreement making specific provision for this role to be revised, approved by CEC and signed by officials from its legal department (on this occasion, Mr N Smith and Mr Maclean) in the course of 2009. The oversight is, in those circumstances, surprising.

22.269 Notwithstanding the lack of any formal appointment, it appears to have been assumed that Mr Poulton was indeed TEL’s monitoring officer. For example, clause 2.24 of TEL’s operating agreement required TEL to notify the TMO of likely delay or overspend in the project. When TEL’s chairman gave notice under that provision, he sent it to Mr Poulton [TIE00084642]. Mr Poulton did not respond to the notice but passed it to the Director of City Development.

Operating agreement descriptions of TMO role

22.270tie‘s operating agreement set out both general and particular features of the TMO role. The most general provision described the TMO as “the Council officer nominated by the Council to monitor tie in relation to the Project” [CEC01315172, page 0003, clause 1.1]. That reflects the broad language of CEC’s Code of Guidance, which stated that the purpose of the monitoring officer was to “ensure that the Council’s interests are being safeguarded” [CEC02084254, page 0007]. The role of the monitoring officer under the TEL operating agreement was described in similar, although not identical, terms.

22.271 A broad view of the TMO’s function under the operating agreement would amount to a single-handed supervision of all of tie‘s functions in relation to the Tram project. It was plainly not construed by Mr David Anderson or Mr Poulton in that way, not least given their arrangement that Mr Poulton would spend no more than 5 per cent of his time fulfilling the role.

22.272 The TMO’s role in supervising tie has to be considered in the context of the wider governance arrangements, which to some extent superseded it. Mr Inch said in his evidence to the Inquiry that:

“The [TMO] role was to deal with that interface between tie and the Council. It was confused a bit by the TPB because, clearly, the Tram Monitoring Officer was meant to have that responsibility and it changed over time. There is no simple answer to this. The Tram Monitoring Officer was the individual who had the responsibility for dealing with issues arising from the tram but that became a little confused later on with the introduction of the TPB and then, latterly, the Tram Subcommittee. The Tram Monitoring Officer was still operating, but the role of that person changed as the project developed.” [TRI00000049_C, page 0066, paragraph 159.]

22.273 As far as I am aware, there is no document explaining how the TMO’s functions were meant to fit in to the rest of the project governance structure, or to demarcate its responsibilities from those of the other participants within that structure. The scope of the TMO’s role within that governance structure was, in my view, not properly defined.

Mr Poulton’s work as TMO

22.274 Mr Poulton saw the TMO role as an additional channel of communication between tie and CEC. His main source of information was Mr Bell, tie‘s TPD, from whom he received weekly reports – typically only two or three pages long – between March 2009 and October 2010. A typical example of such a report was CEC00863074.
Mr Poulton passed these reports to each of the CEC Chief Executive and Group Leader. He received daily reports from Mr Bell on the Princes Street works from March 2009, but (according to Mr Poulton) these were concerned with traffic and pedestrian safety rather than matters of contract or programme management [PHT00000051, pages 77–78].

22.275 The monthly reports to the IPG included a TMO report between February 2009 and September 2010. These, too, were brief and covered the main matters of dispute under the Infraco contract in a high-level and summary form.

22.276 Mr Poulton was not himself a decision-maker in relation to the issues that he was reporting. He did not consider himself qualified to scrutinise tie‘s handling of the contractual disputes. He regarded that as a matter for more senior officials, in particular Mr David Anderson, who attended the IPG along with CEC’s Chief Executive (Mr Aitchison) and its Director of Finance (Mr McGougan). Mr Anderson and Mr McGougan were also both members of the TPB. They were both in a position to seek more information or to raise concerns as they saw fit.

22.277 Mr Poulton, for his part, was content with tie‘s reporting. Although he initially considered it poor, he said that CEC ultimately got “near enough everything [they wanted or needed] … over a period of time” [ibid, pages 81, 100 and 103]. He was aware of tie‘s obligations under the operating agreement to provide information to CEC, and to his role as TMO in enforcing those obligations. He considered the powers under the operating agreement to be sufficient for CEC to get the information that it needed from tie. Nonetheless, CEC’s officials continued to have concerns about tie‘s reporting, and it recorded them, for example, in the IPG’s action notes from its meetings in September 2010 and January 2011 [TIE00896604; CEC01715621]. These comments were made after Mr Poulton’s activities as TMO were either winding down or had come to an end. It is possible that reporting declined as he ceased to be involved. However, I consider the more likely explanation to be that CEC’s expectations of reporting increased. From the second half of 2010, CEC’s officials made a concerted effort to understand more about the project, so that they could, independently of tie, formulate a strategy to resolve the project’s difficulties. It seems to me that Mr Poulton’s satisfaction with reporting reflected the very limited purposes for which he personally needed it and the fact that he was not himself bringing any critical thinking to bear upon it.

22.278 In addition to reporting to the IPG, Mr Poulton, together with other senior officials, was involved in briefing political group leaders monthly on progress, costs and timescales. Although the Inquiry does not appear to have written records of these reports, they are likely to have been brief. Mr Poulton said that the councillors were generally dissatisfied with these briefings, citing a lack of clarity, repetition of issues, delay in resolving issues, vagueness of information, and a lack of any clear indication of mitigation measures [PHT00000051, pages 82–83].

22.279 Overall, in my view the reporting via Mr Poulton added little, if anything, to CEC’s understanding of those matters, which were of fundamental importance to the duration and cost of the project.

2010 Changes to the role of TMO

22.280 In April 2010, the IPG decided that Mr Poulton was to undertake a more intensive role on the project. He spent three months full time at tie‘s office, examining various project issues, and produced a report for senior CEC management in a greater level of detail than his previous work as TMO [CEC00236871; CEC00236872, page 0005; CEC02086414].

22.281 Around the same time, CEC reviewed the role of the IPG and the TMO. In August 2010, the Director of City Development proposed that in future the IPG’s remit should be more explicitly focused on objectives, including the following:

• providing CEC management scrutiny and oversight of the Tram project;
• identifying high-level risks against the programme and budget for possible discussion at the TPB or with tie‘s senior management; and
• identifying, managing and mitigating programme-level risks to the CEC and the city resulting from a failure by the project to achieve its objectives, including risks arising from commercial and legal disputes and financial pressures arising from programme delays and scope changes [CEC00242752, pages 0009 and 0034].

22.282 Mr David Anderson considered the TMO to be critical to the effective functioning of the IPG, acting as a key link between CEC and tie and being responsible for monitoring the project on behalf of CEC. The TMO would, in particular, oversee the programme, project management, and financial, commercial and legal aspects of the project [ibid, pages 0035 and 0039].

22.283 Mr Poulton said that, except in minor respects, Mr David Anderson’s proposals reflected the TMO role as he had understood it from the outset [PHT00000051, pages 115 and 116]. However, at the time, Mr Poulton recognised that the TMO role had to be given greater consideration than it had received previously [CEC00236872, page 0005]. In my view, Mr Anderson’s proposals involved a significant strengthening of the TMO role, based on the recognition by CEC’s officials that they needed to improve their oversight of the project, in response to the difficulties that it had encountered. The proposals coincided in time with CEC’s senior officials having lost faith in tie‘s management of the project and starting themselves to take a more direct role in it.

22.284 Mr Poulton was approached by Mr David Anderson with a proposal to make the TMO a full-time role. In hindsight, Mr Poulton agreed that the role ought properly to have been a full-time one [PHT00000051, pages 39 and 52]. He said that:

“any city authority … delivering a tram project or mass rapid transit … [should] have a good, competent and capable monitoring officer in place, and it would have to be 100 per cent of the person’s role” [ibid, page 117].

22.285 That was his view irrespective of whether a company such as tie was in place to manage the project [ibid, page 118].

22.286 Mr Poulton declined to take on the role on a full-time basis, and suggested instead his engineering manager, Mr McCafferty, for appointment. He described his own involvement with the role as “ramping down” from August 2010, and it came to a formal end in December 2010. Mr McCafferty took up the role after the Mar Hall mediation in March 2011.

Discussion

22.287 I had difficulty in forming a clear understanding of Mr Poulton’s expertise. On the one hand, he was keen to emphasise his expertise in traffic matters and to downplay any suggestion that he was experienced in construction management [ibid, pages, 5, 6 and 14]. On the other hand, he made critical comments on the performance of Bilfinger Berger (“BB”) and tie‘s management of them. In short, these were that BB were “claim orientated” and had a deliberate tactic of disruption or delay to gain extra payment from tie, and that those at tie were “kidding themselves on” that they could make the contract work through strong contract management techniques [TRI00000115_C, page 0034; PHT00000051, page 145 onwards]. These comments suggested that Mr Poulton had sufficient experience to form a view about these matters. If he did, it begs the question of why he did not do more about it at the time. Under examination from Inquiry Counsel, Mr Poulton conceded that these comments were not based on his own direct knowledge of the project’s facts and circumstances, and for that reason I do not attach any weight to those particular views.

22.288 In his statement Mr Poulton also referred to his “personal feeling was that the contractor never wanted to deliver the programme to the contracted price in the first instance” [TRI00000115_C, page 0035]. It is difficult to understand this comment in the context of the pricing assumptions contained in Schedule Part 4 to the contract, and it tends to suggest that he was under the impression that the contract had a fixed and firm price. If that is correct it is a matter of concern that the TMO was unaware of the mechanism for calculating the price payable to the contractor. On the other hand, he later referred to the contractor sticking to the letter of the contract rather than its spirit [PHT00000051, page 153]. I question whether these two positions are compatible with each other. I am also troubled by the fact that, in the undernoted passages of his evidence, he referred to his experience of dealing with contractors. He stated: “…that was really my own personal opinion, having dealt with a number of contractors throughout the years” [ibid, page 148]; and “… it’s just my own personal thought on dealing with a lot of contracts over the years” [ibid, page 150]. He was also critical of tie, describing its approach to the project as “naïve”. To describe someone as naïve implies that one has better knowledge and experience of the relevant matters than the person criticised, but Mr Poulton denied that this was the case for him in relation to tie [ibid, pages 152–153]. In his evidence he also referred to different construction contract forms, suggesting that he had background knowledge of such matters [ibid, page 161]. These remarks tended to contradict Mr Poulton’s earlier evidence that he lacked experience in such matters. Overall, I was left with the impression that Mr Poulton probably had more experience in relation to construction matters than he was willing to admit. His denial of such experience might be seen as a convenient means of attempting to avoid criticism for his failings as TMO.

22.289 Furthermore, it is my firm impression from other evidence that Mr Poulton sought to underplay his role in the project. This was most obvious from his misleading remarks that he attended the TPB only “on occasions” [TRI00000115_C, pages 0002–0003, answer 7; page 0006, answer 25; pages 0006–0007, answer 32; page 0009, answer 38]. This was something that he repeated under affirmation at the Inquiry’s oral hearing. Moreover, when Inquiry Counsel raised with him whether that was accurate, Mr Poulton attempted further evasions before being compelled to accept that his attendance was indeed more than occasional. The minutes of the meetings of the TPB record his attendance at 29 out of its 40 meetings between 2008 and 2011 [PHT00000051, page 26 onwards]. A distinction can be made between a witness who genuinely cannot remember events and one who advances a positive, but untrue, explanation of occasional attendances at meetings as an observer in order to minimise his involvement in, and responsibility along with others for the failure of, the project. I concluded that Mr Poulton was in the latter category. When the Inquiry was on a non-statutory basis he refused, as was his right, to authorise CEC to release his contact details to the Inquiry. However, his explanation for doing so was not convincing. It failed to recognise that it was ultimately for the Inquiry, as opposed to a witness, to determine the value of interviewing and citing that witness [see TRI00000252; PHT00000051, pages 2–5]. This evidence is another indication of Mr Poulton’s endeavour to avoid scrutiny for his actions and failings as TMO.

Monitoring officer role and function

22.290 The role of a monitoring officer, as conceived in CEC’s Code of Guidance, is expressed in very broad terms: to ensure that “the Council’s interests are being safeguarded”. “The Council’s interests” in tie and TEL, and thus the Tram project, were far reaching. At the very least, they included anything with a significant impact on the scope, programme and cost of the project. That implies a prominent and important role for the monitoring officer in the Tram project. However, the project had a governance structure that already included senior council officials and councillors, who could be expected to look out for CEC’s interests. There is no indication that at financial close the TMO was intended to play a significant role in supervising the operational management of the Tram project.

22.291 CEC’s handling of the role is, nonetheless, a matter of some concern. The roles of monitoring officer for tie and TEL had existed prior to financial close. The fact that they fell into abeyance on Mr Holmes’ retirement from CEC, and were not revived when Mr David Anderson replaced him, does not reflect well on CEC’s arrangements for business continuity. The fact that the posts were not filled at financial close, when the operating agreements were signed, does not reflect well on CEC’s internal administration, especially given that the signatories were CEC solicitors. The fact that a governance review identified the absence of a monitoring officer for tie, but not the absence of one for TEL, confirms the view that internal administration of project governance at CEC was poor, as does the failure to appoint a monitoring officer for TEL in 2009 when that company’s operating agreement was revised. These failings are, in my view, symptomatic of a wider failure by CEC to establish robust governance arrangements.

22.292 CEC’s discovery, in late 2008, that tie had no monitoring officer coincided with the realisation that the project was in difficulty and that CEC lacked information about it. It is therefore understandable that the TMO role was seen as a way for CEC to gather information. The commitment of only 5 per cent of Mr Poulton’s time to the role meant that he was never likely to have a significant impact. The reporting to, and by, Mr Poulton was brief. It is unlikely to have added much, if anything, to the much more detailed reporting already taking place via the TPB, at least when it came to the more serious problems that fundamentally affected the cost and duration of the project.

22.293 It is not realistic to have expected Mr Poulton, on 5 per cent of his time, to have fulfilled any broader supervisory function of tie. One only has to consider (for example) the paperwork before the TPB to recognise that.

22.294 The greater emphasis placed upon the TMO role in 2010 was a response to the continued deterioration of the project. It was part of a general shift by CEC to take a more direct role in project governance after tie‘s efforts were perceived to have failed. Mr Poulton’s more detailed report produced in that year is an indication of what might have been achieved if CEC had had a full-time TMO from the outset of the project. If CEC had appointed a full-time TMO who was willing and able to understand construction management and disputes, it might have had a better appreciation of the project’s problems at an earlier stage. It might then have been equipped to resolve them earlier, or at the very least to be better informed about them when the mediation took place in 2011.

Residual powers of CEC

22.295 Councillor Dawe said that, as the funder of last resort, CEC had the task of making sure that tie was doing what it should have been doing [TRI00000019_C, page 0234, paragraph 880]. I consider that this goes too far. Although it was true that CEC had a very obvious financial interest in what was done by tie, to say that it had the task of making sure that tie was doing as it should places too great an obligation on CEC – at least when applied to the whole of the functions undertaken by tie. In terms of the major strategic decisions in terms of which CEC was ultimately the party accepting a liability – most notably the conclusion of the contracts – it was critical that CEC formed its own view of whether this step should be taken. At that stage, it is not merely a question of considering whether tie was doing as it should or was making the correct decision; it was a decision that was properly for CEC to take. In the context of CEC’s decision to authorise tie to sign the Infraco contract, this required the Director of Finance, the Director of City Development and the Council Solicitor to be satisfied that the draft contract reflected CEC’s objectives, including price certainty. It appears that this was recognised by the Council Solicitor, because she instructed Mr C MacKenzie to request that Mr N Smith report on the draft contract as noted in paragraphs 4.32 and 13.38–39 above. She was unaware that Mr N Smith had refused to do so. At the date of contract close, Mr C MacKenzie was on annual leave. In any event, the Council Solicitor was not in possession of the required report when she joined with the other two senior officials in signing the certificate to the Chief Executive confirming that he could authorise tie to conclude the Infraco contract. Once that decision was taken, however, CEC had established other entities to implement the contracts. To suggest that CEC should conduct any form of close monitoring to “ensure” that tie did as it was supposed to would place a very onerous burden on CEC and is not consistent with an arm’s-length approach. Some form of oversight is nonetheless appropriate. The question is: what would have been the appropriate degree of oversight? This may depend on many factors, including the importance of the project and the costs involved. Applied to the Tram project, it seems to me that a system of reporting and verification was required.

22.296 In relation to matters other than strategic ones, although CEC had delegated authority to the TPB in December 2007 (see above), it would have been open for CEC to have taken executive steps itself or to have countermanded or reversed decisions of the TPB (or either of the companies). Mr Mackay said:

“At the end of the day, any decisions taken by any of these Boards [TPB and TEL Boards] had to be referred to the City of Edinburgh and Transport Scotland. We could have been overruled at any stage. I have to say seldom did that happen, but I think it was important.” [TRI00000113_C, pages 0023–0024, paragraph 82.]

22.297 I do not think that it is correct that every decision had to be referred to CEC, let alone Transport Scotland, but this statement of the continuing powers within CEC is correct. There was, however, confusion as to the role that remained for CEC once the arm’s-length company was established. The evidence from the councillors as to what role existed or should exist for CEC disclosed a variety of different positions. It was highlighted in particular in the evidence to the effect that CEC should have stepped in or taken some action at the stage that the problems in the relationship between tie and BSC became apparent. In this field, it seems that the issue of party politics intrudes, and some allowance must be made for that. Councillor Aitken was of the view that CEC should be taking action, and he thought that the problem was in part that there was a lack of political leadership. He considered that CEC ought to have been consulted about the issue of disputes as soon as they arose, to enable CEC to take a strategic decision about the approach to be taken to its resolution. Instead, CEC officials and tie decided to invoke legal procedures that he considered to have been an error [TRI00000015, pages 0019–0020, paragraph 65]. Councillor Balfour said that, ultimately, CEC made the decisions and were responsible for them, but that should be seen against a background of a lack of clarity about the roles and responsibilities of the main project stakeholders. He considered that CEC’s role should have been to monitor the situation and intervene when required [TRI00000016, page 0022, paragraph 65]. In his view, the companies should have been entrusted with the works and then left to report back when they were completed [ibid, page 0023, paragraph 66]. Councillor Dawe disagreed with the criticisms [PHT00000001, pages 204–206].

22.298 The issue of what oversight and control should have been exercised by CEC is another in relation to which there is no single correct answer. Just as the decision to have an arm’s-length company is one on which there are different points of view, all of which may reasonably be held, views may legitimately differ on what residual role should be retained by a local authority in the position of CEC. What can be said with certainty, however, is that that role should be clearly stated and be understood by councillors, council officials and personnel within the company. If there is a proper understanding of the residual powers, an informed decision can be taken as to when they should be exercised. This was not the case for the Tram project, as the evidence from the councillors indicates a lack of consensus on this issue. The term “arm’s-length company” was familiar to them and appears to have been adopted without any real understanding of what it meant in practice. To fudge the issue by having a company and then assume that CEC should be intervening, without any clear idea when this should happen, has the effect that there is no clear allocation of responsibility. The result may be that neither party clearly takes control, that a consistent approach is not maintained, or that effective action becomes impossible.

The decision to use an arm’s length company

22.299 Although I have looked at the relationships and responsibilities of entities that were created to progress the project, and then considered the wider issue of the residual powers of CEC, there is a still more fundamental issue of why the project was entrusted to an arm’s-length company rather than being undertaken directly by the CEC as it later came to be. CEC guaranteed the obligations of tie under the various contracts entered into by tie to deliver the trams. This meant that, in terms of exposure to the liabilities of the Tram project, using tie was no different from having the contract undertaken directly by a department of CEC or having an agent conclude contracts on its behalf. As is apparent from the discussion above, the difference that arose from using tie was that CEC had much less control of both the conclusion and the operation of the contract and therefore much less control over the liabilities to which it was subject. CEC had handed over its powers but retained all the financial responsibility. This was recognised by Dame Sue Bruce in her evidence [PHT00000054, page 3]. On the face of it, this seems to be the worst of all worlds for CEC. This raises the issue as to where the intention to use an arm’s-length company came from and what the justification for it was.

22.300 There was no consensus in the evidence as to where the idea of using an arm’s-length company originated. It was suggested by a number of witnesses that it was imposed as a condition of grant availability by the Scottish Ministers, or later by Transport Scotland, but there is no evidence to support this. A letter dated 28 February 2002 from the Minister for Enterprise, Transport and Lifelong Learning,
Ms Alexander MSP, said that she would “strongly support the principle of an off balance sheet company … to progress the Council plans” [USB00000232, Part 1,
page 0010]. This is the only communication from Scottish Ministers that comes close to dictating the delivery mechanism. The concept of an “off balance sheet” company relates to the way in which the liabilities and expenditure are reflected in accounting terms. It means that the expenditure will not be caught by any spending limits on the public body. It also enables any income to be retained within the company and spent on projects without counting towards any public expenditure limits. The decision to have tie as an “off balance sheet” company was taken against the background that it would have a revenue stream from congestion charging, which could be ring-fenced for funding various transport schemes. Following the rejection of the congestion charging scheme, however, there is no further reference to the company being “off balance sheet” and instead it was consistently referred to as an “arm’s-length company”. It appears that the term “off balance sheet” company may have been used loosely at the outset, without any particular intent beyond an arm’s-length company.

22.301 Some of the reasons or justifications proffered for using a company to deliver the Tram project are as follows.

• It was said that as a result of past problems there had been a loss of confidence in the ability of CEC to deliver projects [Mr Howell PHT00000011, page 7; Mr Macaulay TRI00000053_C, page 0006 paragraph 10; PHT00000016, page 68; Mr Renilson PHT00000039, pages 182–183]. It is not clear, however, why it was thought that giving CEC less control rather than identifying and addressing problems would make the situation better. If the problems were thought to have been inherent in CEC, leaving it ultimately in charge would simply leave the problems in place.
• It was required for the parliamentary process, to get the Bills through [Mr Macaulay TRI00000053_C, page 0007 paragraph 12]. This is not borne out by other evidence.
• It was a condition of the grant from the Scottish Executive or the Scottish Government [Mr Howell TRI00000129, page 0009, paragraph 26]. No such condition was imposed.
• It made it possible to recruit staff with the necessary abilities [Mr Macaulay PHT00000016, page 69]. This includes a need to be free from the salary constraints that were applicable to local authorities [Mr Howell TRI00000129, page 0009, paragraph 25]. Like any other Scottish local authority, CEC did not, as a matter of routine, employ people with the skill sets necessary to deliver such a project because there would be simply no need to have them on the payroll all the time. While having the company did provide a recruitment vehicle and mean that higher salaries could be paid, both the procurement of the necessary skills and the issue of salaries could be met by using external consultants. This is demonstrated by what was done after the Mar Hall mediation. Obtaining the appropriate experience does not therefore necessitate loss of control. In addition, merely having a company did not solve recruitment difficulties. Mr Gallagher noted that there was international competition for people with the appropriate skills, which made recruitment difficult [TRI00000037_C, page 0010, paragraph 33].
• It meant that the body carrying out delivery was able to be entrepreneurial [ibid, page 0054, paragraph 180]. The success of the property companies established by CEC shows that this can be true. It is not clear, however, in what way tie was expected to be entrepreneurial or in what way it is thought that it displayed such attributes. This does not appear to have been articulated at the time that tie was established, and there was therefore no consideration of whether it was a factor that should outweigh the loss of control by CEC. It prevented the governance of the project from getting lost in the governance of a large public authority [ibid]. Larger projects than this can be – and are – delivered by large public authorities. The project management models considered above have been developed in part to address this and are intended to provide means, when they are followed, of preventing governance processes from getting lost. In fact, as noted above, tie did not provide focus to the Tram project and a number of elaborate governance structures were put in place over time.

22.302 In my view, none of the witnesses to the Inquiry was able to give a justification for the decision to use an arm’s-length company to undertake the project.

22.303 At the time that the decision was made to establish tie, it was intended that there would be a number of projects falling under the umbrella of the New Transport Initiative. The intention was that there should be major investment in transport schemes that would be funded in part from congestion charging revenue [USB00000228]. Apart from developing transport projects identified by CEC, tie would also generate ideas and projects of its own. This could have been relevant to the argument that an arm’s-length company would be entrepreneurial. However, even the broad policy objectives that were to be pursued at the outset could be seen as a reason to keep a structure that retained control where it would ultimately be required – with CEC. The determination of such broad policy issues was precisely the sort of area in which the input of the councillors would be required for decisions. It was perhaps in recognition of this that although an arm’s-length company was proposed, it was always clear that strategic direction and key policy decisions would remain with CEC.

22.304 It is not clear to what extent the possibility that there would be a road charging scheme was relevant to the decision. CEC had made it clear that the arm’s-length company should be used irrespective of whether road charging went ahead [ibid, page 0024]. On the other hand, Mr Macaulay said that the existence of a potential revenue stream from congestion charging was “pretty fundamental” to the creation of tie [PHT00000016, page 75]. It is easy to see why a company that holds the revenue of any scheme separately from general CEC funds is attractive. This is more a matter of ring fencing the money and was one of the matters referred to in the Council Report concerning the New Transport Initiative dated 18 October 2001 [USB00000228]. However, once the intention to have a road charging scheme was dropped after the local referendum in February 2005, this possible justification lost any force. From at least that time on, tie was not going to be in a position akin to CEC’s leisure or property companies. There would be no income or profit to be set against the need for public funds to provide the facilities. It was never the intention that the construction costs for the Tram project could be paid out of fare box revenue. The position was that tie was simply a conduit through which CEC funds would be expended. Although it is not clear that this justification was actually one that influenced the original decision, I consider that, even if it had been, when the charging scheme was dropped it would have been appropriate to reconsider whether this was the most suitable delivery vehicle. It would have been appropriate that consideration was given to whether there continued to be a role for tie or whether the Tram project should, instead, be delivered by an experienced engineering consultancy organisation, with an established track record of delivering major transport infrastructure projects. Instead, what happened was that tie was given increased funds and grew in size, morphing into a project management organisation (or quasi-project management organisation) [Mr Macaulay PHT00000016, pages 60–66].

22.305 Ultimately, the reasons for choosing an arm’s-length company were not well articulated. I find this surprising, as it would be natural to expect that something as fundamental as the delivery model would be the subject of detailed consideration. Even after Mar Hall, there does not appear to have been much contemplation of the issue. The change at that late stage appears to have come about because CEC had lost confidence in tie and BSC did not want it to be part of the contract rather than because a fundamental re-consideration of the most effective way to deliver the works was required.

22.306 I have noted above that the whole of the burden of contractual liabilities remained on CEC despite the creation of tie, but there are further financial consequences that should be considered. A structure in which a wholly owned company was the delivery vehicle meant that CEC bore the entire risk of that company providing services of a poor quality. Had a third party independent of CEC been instructed, there would normally be a remedy in damages if it failed to provided services of the quality contracted for or if it was negligent in the performance of the services. Prior to contracting it would be possible to assess the financial strength of the service provider to meet any claim arising in such a situation or, as is more common in professional services, to obtain details of the insurance cover maintained by the service provider in respect of such claims. By these means the risks of poor quality of service are passed to the service provider as the person with control over this. Although the operating agreements with TEL and tie referred to insurance, it was to be maintained only if available at “commercially reasonable rates” [CEC02083448, pages 0015–0016, paragraphs 2.12–2.13].

22.307 As noted in paragraph 2.49 (d), CEC has raised court proceedings against a number of people, including tie.The action against tie will not result in the direct recovery of damages from tie,as tie has no assets and was not insured against claims by CEC. In a report dated 17 December 2007, prepared by the Director of Finance and the Director of City Development for consideration by CEC at its meeting on 20 December, one of the risks identified as being retained by CEC was that the market could not “provide Professional Indemnity Insurance to tie vis-à-vis a claim by the Council against tie, because tie is wholly owned by the Council” [ibid, page 0007, paragraph 8.13]. By contracting in this way, CEC put itself in a position in which it had a very large financial interest in the quality of the service provided by tie but had no real control over that quality and no recourse if it suffered loss as a result of poor service.

22.308 Further, had the services been provided by an external body or consultancy, it would have been possible to examine the past performance of the party being considered for appointment. It would be possible to find a business that had experience of similar projects or employed staff that had such experience. Instead, using a newly created company meant that there was no existing staff and no history of successful project delivery. I do not think that it is just with the benefit of hindsight that it can be said that there is a clear advantage when delivering a project such as this to look to a body with established capability rather than hoping that the body that is to be formed will acquire that capability. As implementation of the project reached the construction phase, there was increasing cause to call into question the ability of tie to deliver what was required. As was considered in Chapter 3 on the involvement of Scottish Ministers, the Stirling–Alloa–Kincardine (“SAK”) railway project managed by tie was not a success. To respond to that by leaving the Tram project with tie and ending the involvement of Transport Scotland cannot be justified. Even if the matter had not occurred to CEC earlier, the disengagement of tie from the SAK rail project should have set alarm bells ringing.

22.309 Since the Inquiry hearings, in May 2018 Audit Scotland published a report entitled ‘Councils’ use of arm’s-length organisations’ [TRI00000306] following on from its 2011 publication ‘Arm’s-length external organisations (ALEOs): are you getting it right?’ [TRI00000311]. These documents use the term “arm’s-length external organisations” (“ALEOs”) rather than “arm’s-length companies” because they cover other entities. The latest report notes that councils value ALEOs. It does, however, note a number of areas of concern that resonate with the experience in the project.
In particular:

• councils must have clear reasons for using ALEOs and must consider alternatives;
• oversight accountability and good management are essential;
• councils should consider at the outset the risks involved in using ALEOs;
• there is a need to demonstrate more clearly how use of ALEOs improves outcomes;
• there are risks of conflicts of interest where councillors or council officials take board positions. There can also be difficulties where board members are privy to information that they are unable to share.
• there should be clear reasons for appointing councillors and officials to ALEO boards. This should recognise the responsibilities and requirements of the role.

22.310 The Audit Scotland report considers ALEOs across a wide range of provision of services that are very different from the implementation of a transport project. Many, such as provision of leisure services, cultural services, and property and development, involve generation of revenue, although three councils use them for social care. It notes that financial benefits to the use of ALEOs have arisen from rules on non-domestic rates relief and VAT. These factors are not relevant to a project such as the project, which was a one-off project entailing expenditure in excess of £540 million and which would not generate any revenue while the work was being carried out. Nothing in the Audit Scotland report causes me to doubt the view that I have taken as to the inappropriateness of using tie or TEL as arm’s-length organisations to deliver the project.

Conclusions

22.311 The governance structures put in place for the Tram project were bureaucratic and ineffective. The approach contained in applicable guidance was put to one side. There was no clearly articulated rationale for this, and it appears that the intent was simply to include as many people and bodies as possible rather than having something that would provide what was required. There was not only a move from individual to collective responsibility, but a duplication of layers of collective responsibility. A key aspect of effective governance is that it should be clear where responsibilities lie, but this was not the case with this project. The remit of the bodies was often written in unclear language. The role of CEC was not well defined, and procedures were not in place to ensure the adequate communication of information and consideration of it once it was communicated. On almost every level, the governance structures were inadequate.

22.312 Where does responsibility for this mess lie? It is easy to focus on certain individuals. Mr Renilson accepted an appointment as SRO, but did not discharge any of the responsibilities that came with it. Mr Bissett was the author of the many papers that led to the various inadequate structures. It might be expected that he ought to have realised that what he proposed would not provide the required clarity and focus. It would be a mistake, however, to attach responsibility solely to these individuals. As I noted in paragraph 22.54 above, the fact that Mr Renilson was not performing the duties of SRO ought to have been apparent to all the members of the TPB and the Boards of tie and TEL. The structures devised by Mr Bissett were approved by the boards of both companies and the TPB. The shortcomings in what was proposed should have been clear to everyone on those boards. When the stage was reached that the Boards of TEL or tie were not sitting, the duties of the directors required them to raise the matter and seek to remedy it.

22.313 Above all, CEC was in charge and approved the structures. It had direct responsibility for determination of its residual role and putting in place mechanisms to ensure that that role could be performed effectively in the public interest. In relation to the entities created to implement the project, it ought to have been apparent to CEC officials, at least, that the effect of the various proposals from 2007 onwards was to divert power, responsibility and accountability away from the company with which CEC had contracted for delivery: tie. The introduction of these structures is another example of something that was subject to multiple approvals, but at no stage was it scrutinised with sufficient care. The impression is created that, in giving approval, reliance was placed on the fact that it had been approved already by another entity or that it was known that it would be approved elsewhere.

Footnotes

33. There are a number of differing approaches in the documents and statements as to whether there should be an apostrophe in this term and, if so, where it falls and whether it should be hyphenated. It seems to me that “arm’s” with a hyphen is correct. Others may differ. ↵

34. Mr Aitchison’s written statement contains 2 paragraphs numbered 326 (see pages 0099 and 0106). ↵