Chapter 23: OGC and Audit Scotland

Introduction

23.1 During the Edinburgh Tram project (the “Tram project”), independent reviews of it were undertaken in accordance with guidance issued by the Office of Government Commerce (“OGC”) and by the Auditor General for Scotland. While the reviews are referred to in the earlier chapters of the Report, I consider it useful to draw the various considerations together here. These did not identify the problems that came to affect the project and it is useful to consider why this was the case and if anything could or should be done differently in future. The fact that these reviews – in particular that of the Auditor General – had been carried out was a factor relied upon by CEC and tie to indicate that the project was in good health.

OGC

23.2 The OGC was part of HM Treasury. In 2003 the OGC published a series of guidance notes on best practice in the procurement and delivery of construction projects, which were re-issued, in substantially the same terms, in 2007 [the background to the guidance is set out in ‘Procurement Guide 01, Initiative into action’ – GOV00000020]. The guidance was produced after extensive consultation within government and with contributions from leading individuals and organisations across the construction industry, and it was endorsed by the National Audit Office. It was taken into account by the Scottish Government when formulating its guidance (contained in its Construction Procurement Manual) and was relevant to the procurement of construction projects in Scotland.

The gateway review process – Introduction

23.3 One of the OGC guidance notes related to project organisation, roles and responsibilities. [The 2003 note is CEC02084819; the 2007 note is GOV00000003.] The elements that address structures relating to governance were considered in Chapter 22 (Governance) of this Report. In addition, however, the guidance set out certain principles that required to be put in place by the client organisation and which were stated to be critical factors for success. These included that:

• everyone involved in a project should work together as an integrated team (i.e. the client, designers, constructors and specialist suppliers), with effective communication and co-ordination across the whole team;
• there should be clear roles and responsibilities, which should be defined and understood and should be supported by an uncomplicated project management structure; and
• the procurement route for the project should support and facilitate integrated team working [CEC02084819, pages 0004–0005].

23.4 In addition, guidance was provided on procurement strategies and the need for projects to undergo a gateway review process, whereby they would be subject to independent reviews at certain critical stages in the procurement process, before proceeding to the next stage. The gateway review procedure was set out in OGC guidance note 2, ‘Project procurement lifecycle’. [The 2003 guidance is GOV00000018; the 2007 guidance is CEC02084815.] The various gateway reviews were shown in a diagram in the guidance note [GOV00000018; CEC02084815, pages 0006–0007]. The diagrams in the guidance dated 2003 and 2007 were not materially different. At the time, five gateway reviews were identified and each was tied to a key decision required in relation to the project.

23.5 Gateway reviews were conducted in the Tram project. Reviews had originally been required by Transport Scotland but they were continued even after the changes made in the summer of 2007. They took place over a relatively short period of time (usually a few days) and were based largely on interviews, rather than on a detailed consideration of documents. A report was produced immediately after each review, which was intended to provide a high-level, or strategic, summary of the state of the project and its readiness to proceed to the next stage in the procurement process.

23.6 Mr Heath, who was a member of the review team for the project in 2006, gave evidence that the OGC team conducted short, high-level reviews that identified areas of action. He stated that the reviews of the project were not, and were not intended to be, akin to a quasi-audit. In the time available, the review team was not able to verify the accuracy of the information provided to it and required to assume its accuracy. In addition, because of the variable frequency of the reviews of the project, members of the review team were often looking at situations long after they had delivered their previous report [TRI00000044, pages 0013, 0016 and 0034; PHT00000009, page 65].

May 2006 review

23.7 Between 22 and 25 May 2006, an independent “readiness review” of the project was carried out by a team led by Mr Hutchinson. The people making up the team had considerable experience of the delivery of transport infrastructure. A report was issued to Mr Howell, Chief Executive of tie, on 25 May 2006 [CEC01793454]. The terms of reference, reproduced in Appendix A to the report, noted that the purpose of the review was to provide an independent assessment of various matters, including the extent to which the project satisfied criteria similar to those that would be assessed as part of an OGC gateway 2 review. As noted in the report, no OGC gateway reviews had previously been undertaken and the stage of the project at the time of the review and the decisions that had to be made were not the same as in the OGC guidance. The terms of reference also envisaged that the review would be high-level and strategic, and would rely principally on interviews with members of the tie project team, advisers, contractors and representatives of CEC, Transport Scotland and Transport Edinburgh Limited (“TEL”) [ibid, pages 0002, 0010–0011]. Although a number of documents were made available to the review team, they were not all comprehensively reviewed [ibid, page 0003].

23.8 The report of the review assessed the overall status of the project as being “red” (i.e. to achieve success, the project should take action immediately) [ibid, page 0004]. It included the following conclusions:

• the procurement and contractual strategy should be reviewed in the light of market feedback;
• the Vehicles Invitation to Tender Notice was not yet sufficiently developed to be released to bidders, and the project team (including Transdev Edinburgh Tram Limited and advisers) were not yet ready to manage the processes that would follow from release of that notice and which lead-up to the release of the Infraco ITN [Invitation to Negotiate];
• the programmes to deliver the project, including Infraco ITN documentation, the TEL business plan and the draft Tram Final Business Case (“FBC”) were not fully developed; and
• the project would not currently satisfy the criteria that would be assessed as part of an OGC gateway 2 review [ibid, page 0003].

23.9 The findings and recommendations section of the report noted that the procurement model should be reviewed because of concerns that potential Infraco contract bidders might not want to take on designers or might charge a premium for full novation of the System Design Services contract (“SDS contract”) [ibid, page 0004]. It also noted that the governance structure for the project appeared complicated compared with best practice. It was recommended that a project board be set up as a matter of urgency and that there should be clarity as to the identity of the senior responsible owner (“SRO”) for the project [ibid, pages 0006–0007]. The report also recommended that the operation of tie and its board should be reviewed to ensure that it remained fit for purpose as a high-quality delivery organisation and that the availability of permanent members of tie staff with engineering, transport planning and commercial skills should also be reviewed. The review team was surprised at the number of occasions on which there were inconsistent messages from interviewees, giving rise to concern that this was evidence of impaired communications within the team and its advisers [ibid, page 0007].

23.10 In relation to risk management, while the main risks were regularly reported to senior management and board members, the review team found no obvious evidence of that being acted upon. The report recommended that the project director review the process for acting upon and mitigating risks to ensure successful delivery of the project [ibid, page 0008]. The report also noted that a number of activities had taken longer than expected, necessitating a series of revisions to the project programme, and it recommended that a revised programme should be developed and approved by all stakeholders [ibid, pages 0008–0009]. In relation to affordability and funding, there was no agreed common understanding as to the expected out-turn costs of the project and the consequent balance between scope and affordability [ibid, page 0009].

23.11 Andrew Harper was interim Tram Project Director (“TPD”) at the time of the review. He gave evidence to the Inquiry that he was responsible for implementing the recommendations of the review and that he addressed all its recommendations such that, by the time of the next review in September 2006, all the recommendations had been implemented to the satisfaction of the review team [TRI00000043_C, page 0033, paragraphs 122–123].

September 2006 review

23.12 In September 2006, a further readiness review was undertaken, although on this occasion the Chief Executive of Transport Scotland instructed it. Again, the criteria to be applied were those for an OGC gateway 2 review. Interviews were conducted by the review team on 26 and 27 September, and a report was produced on 28 September 2006 [CEC01629382].

23.13 The overall status of the project was assessed as being “amber” (i.e. the project should move forward, with actions on recommendations to be carried out before the next review of the project) [ibid, page 0004]. The report concluded that:

• there had been a considerable transformation in the organisation, attitude and effectiveness of the tie team since the previous review, with a common understanding of the requirements of the procurement process and the challenges faced;
• while communications and joint working between TEL, tie and Transport Scotland had significantly improved, there was still room for improvement in respect of communications in some areas between CEC and Transport Scotland;
• there was a challenging timetable for the submission of the draft FBC to CEC for approval on 21 December 2006;
• the period until February 2007 was a critical period for the project, with key deliverables being due (including completion of project estimates, issue of Infraco contract ITN and completion of the draft FBC);
• a detailed tender and negotiation process for both the tram vehicle supply and maintenance contract (“Tramco contract”) and Infraco contract tenders was required; and
• there was no compelling reason not to issue phase 1 of the Infraco contract ITN documentation on the planned date of 3 October 2006 [ibid, pages 0003–0004].

23.14 The findings and recommendation section of the report noted that the various recommendations arising from the previous review had been either achieved or partially achieved. It noted that a Tram Project Board (“TPB”) had been set up and was meeting regularly and that Mr Renilson had been identified and recognised as the SRO for the project. While a review of the skills of permanent
tie staff had been undertaken, and some key permanent appointments had been made, the review team considered that further work was still required to reinforce permanent staff in individual project teams, particularly those with design engineering skills [ibid, pages 0004–0006].

23.15 In relation to the procurement strategy, the review identified that the key risks remained the proposed multiple novations of the SDS contract and the Tramco contract to the Infraco contractor. While the Infraco bidders had agreed to tender on the proposed basis, the inherent pricing risk would not be known until the tender returns were received. All the Infraco bidders had expressed a desire to change the responsibilities for some aspects of the detailed design, and the Review noted that it was vital that any concerns from the Infraco bidders were fully considered and acted upon during the bid period in order to maximise the probability of success of the procurement strategy. It concluded that procurement plan appeared “tight but deliverable” [ibid, pages 0006–0008].

23.16 A follow-up to the September 2006 review took place on 21 and 22 November 2006, and a report was issued to Transport Scotland [CEC01791014]. The review concluded that:

• all the recommendations from the recent gateway 2 review had been fully or substantially achieved;
• the improvements in communications and joint working previously noted had continued;
• the tie project director would leave towards the end of December 2006; concern was expressed at the loss of continuity and possible loss of momentum during the critical early months of 2007, and a prompt replacement was essential;
• there remained a challenging timetable for the submission of the draft FBC to CEC and Transport Scotland for approval on 21 December 2006;
• the period until the end of March 2007 remained critical for the project;
• the levels of experienced negotiating resource within tie should be reviewed with a view to maximising the chances of the “ambitious” timetable for selection of the preferred bidders and appointment of the Infraco and Tramco contractors to be met; and
• although the review team understood that the design contractor was being better managed, it considered that the SDS contract would require active management by tie [ibid, page 0003].

23.17 The findings and recommendations section of the report noted that a number of interviewees had expressed concern that SDS performance to date could undermine bidder confidence. The review team understood that tie was now managing SDS contract performance actively and effectively, but it considered that additional engagement and engineering leadership could prove beneficial [ibid, page 0005].

September/October 2007 review

23.18 An OGC gateway 3 review of the project took place on 25 September and 1–4 October 2007, this time on the instructions of the Chief Executive of CEC (reflecting the withdrawal of Transport Scotland from the project in the summer of 2007), and a report was produced on 9 October 2007 (erroneously dated 9 October 2006) [CEC01562064]. Again, the review was based largely on interviews rather than detailed consideration of documentation. The overall status of the project was assessed as being “green” (i.e. the project was on target to succeed, provided that the recommendations were acted upon) [ibid, page 0003]. The review team concluded that:

• the project was continuing to make good progress and tie had conducted a robust competitive procurement in a difficult market within the agreed procurement strategy;
• there had been a number of changes in the senior management team (including that of project director) and tie had successfully managed these changes. Some further changes would be necessary going forward; and
• the project faced a challenging period over the next three months, with the requirement to appoint a preferred bidder, for due diligence and contract novation to be finalised and formal funding support to be evidenced. All these matters were to be achieved alongside the Multi-Utilities Diversion Framework Agreement (“MUDFA”) and mobilisation works and the maintenance of a tight programme of planning and technical approvals [ibid].

23.19 The findings and recommendations section of the report noted that both Infraco bidders had stated that they would prefer an early appointment of the preferred bidder, in order to optimise the time available for the due diligence and final negotiation processes, particularly as there had already been a delay from the dates notified to bidders at the time of submission of best and final offers. Both Infraco bidders and the Tramco bidder noted the unusual process in respect of novation, but all stated that they had become comfortable with it. While the review team had not studied the agreements in detail, it had been assured that there was a process in place to ensure that there were no mismatches in obligations between the Infraco contract and the two contracts that would be novated to the Infraco contractor. It noted that the partner from DLA Piper Scotland LLP (“DLA”), who had led the legal advice to tie to date, would be seconded to tie full time, to ensure that the suite of contracts was fully aligned. The timeliness of project delivery was noted to be of concern. Both Infraco bidders had raised a concern that the planned preferred bidder period, which would include due diligence on the designs and the novated contracts, was tight. There was already a requirement for an overlap between the due diligence process and the mobilisation phase. The review team had seen a draft of the Infraco preferred bidder agreement, which included a list of activities and agreements that required to be finalised during the preferred bidder period and the areas of uncertainty of scope and price that required to be finalised. It believed that it would be very challenging to finalise these matters by the target date, at the level of quality expected, and it recommended that the preferred bidder be appointed as soon as possible, with the programme during the preferred bidder period being closely monitored at a senior level. The team also recommended that tie should actively consider:

(i) the levels of certainty required to meet the CEC approval process, and how that would be achieved;

(ii) the implications of contract signature not being achieved by the target date of 28 January 2008; and

(iii) the necessary consequences of any areas that could not be finalised by contract signature and novation, and how (and when) full certainty would be established [ibid, pages 0004–0005].

23.20 The review noted the understanding that there was significant contingency within the current costings and that the project team expected that the current budget would be more than adequate for phase 1a and for the majority of phase 1b (albeit that it would not be possible to determine that precisely until the Infraco contract price was finalised). It recommended that the process of managing funding and contingencies should be agreed between tie and CEC and regularly reported [ibid, page 0005]. Continuity of resource was considered important to ensure that the “corporate memory” was retained from the negotiating phase into the implementation phase [ibid, page 0006].

23.21 The Review recorded a number of key changes within the overall delivery strategy, including the reduction of the role of the Technical Support Services (“TSS”) contractor as design checkers and an increase in the responsibilities of tie in that area (including the introduction of the tie engineering department) and the co-location of CEC planning officials and tie employees to expedite the planning approval process. Following the withdrawal of Transport Scotland from the project, the report noted that there had been a major change to its governance, resulting in a more focused strategy whereby CEC had sole responsibility for the procurement and the risk of any cost overruns. The review team considered that all these changes had been extremely positive and would contribute to the likelihood of the project’s succeeding [ibid]. I would note that, as was considered in Chapter 3 relating to the involvement of the Scottish Ministers, in fact the withdrawal of Transport Scotland from the project did not result in any change to CEC’s responsibility for cost overruns. The mistaken belief to the contrary in the report is understandable, however, when one recalls that it was based upon interviews rather than a detailed examination of the relevant documentation.

23.22 The Review does not state the basis on which it was thought that the change away from using TSS and the reduction in the role of Transport Scotland would contribute to the success of the project. In relation to the withdrawal of Transport Scotland from the project, in his oral evidence to the Inquiry Mr Heath stated that the review team was of the view that there were risks in having a project reporting to two different bodies, with two potentially diverging sets of objectives. It considered that these risks could be removed by having Transport Scotland behaving simply as a funder, overseeing its investment, and using an independent assessor to confirm milestones for payment. Mr Heath accepted, however, that, whatever changes took place to the governance arrangements, it was self-evident that one would not wish to lose the experience and expertise of Transport Scotland in the project, particularly as CEC did not have such expertise or experience itself, and that the experience and expertise of Transport Scotland required to be fed into the project somehow (while also taking account of the need to ensure that the roles and responsibilities of each party were clearly identified) [PHT00000009, pages 61–67].

Risk review in October 2007

23.23 As was discussed in Chapter 13 (CEC: Events during 2006 and 2007) the team that undertook the OGC 3 gateway review in September/October 2007 was also asked by CEC to undertake a review of the risks arising to CEC from the project. Such a review was carried out between 10 and 12 October 2007, and a report was provided to the Chief Executive of CEC on 15 October 2007 [CEC01496784]. Its terms of reference, which were set out in an appendix, required the review team to identify, assess and quantify the risks that remained with the public sector, all with reference to a risk allocation matrix prepared by tie/DLA. In his evidence to the Inquiry Mr Heath explained that the review team would not have had time to review the terms of the lengthy contracts and their schedules and that as, in any event, the members of the review team were not lawyers, it would not have been good value to the client for them to have reviewed the contracts [PHT00000009, page 74]. The review team was also asked to provide a reasoned explanation of the adequacy or otherwise of the available financial headroom in the project [CEC01496784, pages 0014–0015].

23.24 The review team reached the following conclusions on what risks remained with the public sector:

• the out-turn price and delivery programme of MUDFA works
• the design and approvals processes delayed the programme
• financial close was delayed and had knock-on effects on the approvals and programme
• the novation process was not fully effective
• changes of scope
• delivering land packages to programme
• third-party delays
• ground conditions
• systems integration was not fully effective
• delayed and/or qualified acceptance
• project management skills and costs [ibid, page 0003]

23.25 The review team endorsed the assessment of the value of public-sector risk on the capital expenditure programme at £49 million at a 90 per cent confidence level. Its best estimate of the schedule risk was currently 21 days, also at a 90 per cent confidence level, which equated to a capital expenditure risk of £2.2 million in the context of the proposed contracts. The team also concluded that the overall headroom of £49 million in the capital expenditure was a prudent provision at that stage of the project’s development [ibid, pages 0003–0004]. The review did, however, note that this was a “snapshot” taken at a particular moment in time and would have to be the subject of regular review [ibid, pages 0012–0013]. It was also an assessment of risk carried out on the assumption derived from tie that, of the project costs, £320 million was fixed or certain through being spent already or subject to agreed prices. Regard was also had to the extent to which the available funding of £545 million exceeded the estimated costs of £498 million in concluding that this was extremely advantageous compared with those of other tram projects and that CEC could “take comfort” from it [ibid, page 12]. These apparently confident statements must be viewed in light of the evidence from Mr Heath about them. He explained, for example, that in endorsing tie’s assessment of public-sector risk, the review team was merely stating that it was satisfied that correct procedures and processes had been followed by tie in arriving at that figure. It was not in a position to confirm that the figures were correct or sufficient. Significantly, the review team was proceeding on the important assumption that the Infraco contract was for a fixed sum. If it had been told that the sum was not entirely fixed, it would have wished to understand the extent to which the price was not fixed [PHT00000009, pages 75 and 77–80; TRI00000044, page 0018].

23.26 The findings and recommendations section of the report noted that the tie risk management process was well developed and reflected best practice, that a mature risk register was in place together with excellent risk capture and management processes and that advanced quantitative risk analysis of capital cost estimates was routinely produced and incorporated into project estimates [CEC01496784, page 0004].

23.27 Mr Heath considered that the two critical factors in the project were the control of the utilities diversions and the ability to deliver and novate design successfully, and that each of the review team’s reports had gradually “ramped up” the warnings about the need to keep an eye on these matters [PHT00000009, page 82]. As is apparent from the following paragraphs, these two issues were interrelated.

23.28 In relation to the utilities diversion works, it was noted that delays in the MUDFA works could introduce consequent delays to the Infraco works. There appeared to be a strong tie team managing these works, with the result that the review team considered the main risk to be delays or changes to design resulting in MUDFA works starting late. The review team considered that the amount in the risk allowance for MUDFA risks appeared adequate at that stage, and it recommended that there should be considerable focus on the design preparation and design approval mechanism to ensure that the MUDFA works were commenced on time and did not require to be revisited. In addition, the emphasis on strong contract management required to continue [CEC01496784, page 0005]. In his evidence to the Inquiry Mr Heath stated that he did not think that the review team had been told that the MUDFA programme had been revised to extend the completion date for these works from May/June 2008 to November 2008 (which was shortly before the planned commencement of the Infraco works at the beginning of 2009). Had the team been aware of that, and had some of the delayed works been on the critical path of the Infraco works, the team would have taken a different view in its report [PHT00000009, pages 69–70].

23.29 Generally, Mr Heath stated that the review was based on the facts and information provided to the review team at the time. Therefore, if the facts or information were to change then it would need to reconsider its views on the adequacy or otherwise of the risk allowance in light of the changed circumstances [ibid, page 88].

23.30 This provides an illustration of the limitations inherent in OGC reviews. In the limited time available to a review team it is unreasonable to expect it to undertake detailed investigations amounting to an audit, and it is dependent upon the provision of accurate information for the compilation of its report. The Gateway assessment should be seen as a valuable check that is of assistance to the project management team to assist them in providing fresh eyes to consider the position. While it might be suggested that the body that is the subject of such a review need only answer questions raised by the review team, it respectfully seems to me that this undermines the purpose of the Review. Information about changes to the programme resulting in delay to work that could impact on the commencement and/or progress of the Infraco contract works should have been volunteered, together with details of the plan to address such delay. That would have enabled the review team to comment on the effect of delay and the adequacy of the remedial measures, and to require an update of the position at subsequent reviews.

23.31 In my view, a duty of disclosure should apply to all publicly funded projects that are subject to independent review, whether they are being undertaken by a public body directly or indirectly, otherwise the objective of protecting the public purse will be frustrated. The fact that the project was being delivered by tie, on behalf of CEC, rather than by CEC itself does not excuse the failure to disclose material facts to the OGC review team. I return to consider shortcomings in the information provided below.

23.32 In relation to the infrastructure works, the report noted that the Infraco contract was the immediate focus of the project, and considered that it was at risk of the possibility of delay in confirming a preferred bidder and of “cost creep” between the award of the preferred bidder and final contract signature. That risk had been exacerbated by the delays in design. It noted that while a value engineering programme was ongoing, that programme had yet to be finalised, thereby impacting on the certainty of the final costs. Based upon an assurance from the tie commercial team that 70 per cent of both of the Infraco contract bidders’ costs were fixed, the review team recorded that £150 million of the Infraco contract costs were fixed. It noted however, a number of risks that could affect the Infraco contract. These included changes in scope and the elements such as planning or MUDFA which were not the responsibility of the Infraco contractor. The introduction of a “no change” culture was essential in view of the review team’s experience that major projects became destabilised if there was no rigid change mechanism. The link between design/approval and Infraco contract was critical and would need serious attention. The review team recommended that the forthcoming tie organisational changes place programme management at the centre of the project. It was clear that the amount of design that it was envisaged would be delivered to support novation of the SDS contract to the Infraco contractor would not be achieved, and the review team recommended that tie and CEC agree a package of work to deliver design work to support novation and to minimise risk [CEC01496784, page 0009, paragraph 3.5.4].

23.33 As was discussed in Chapter 13 (CEC: Events during 2006 and 2007), CEC had originally intended to instruct Turner & Townsend to undertake a review of the risks arising from the project and the adequacy of the risk allowance, but tie had dissuaded it from doing so. Instead, this OGC review on risk was commissioned. Mr Heath gave evidence that such a review by Turner & Townsend might well have been a good idea, as it would probably have gone into much more detail than the OGC review and might have acted as some sort of audit on the numbers, which the OGC team was not able to do. In that sense, he considered that a review by such a company would probably have been beneficial (albeit that one would have had to have had regard to how long it would have taken and whether it would have imported the risk of delay) [PHT00000009, page 93].

23.34 Having regard to the respective dates of the risk review in October 2007 and of contract close in May 2008, I consider that it would have been possible to require Turner & Townsend to report on its findings before contract close. Even if there was delay occasioned by a risk review by Turner & Townsend, that delay would have arisen because of issues discovered by it which had to be resolved before contract close. CEC would have been better informed of the need to resolve these issues before concluding the Infraco contract and the likely consequences of failure to do so.

23.35 In the event, no further reviews were instructed between the OGC team’s reviews in September/October 2007 and financial close in May 2008. It was suggested to Mr Heath by Inquiry Counsel that it was only once a contract was agreed that the rights, duties and liabilities of parties, and the allocation of risk, became clear, with the result that there should be a final review once the terms of the contract were agreed, but before the contract was signed. Mr Heath considered that that was a sensible suggestion that, with the benefit of hindsight, might well have proved useful in the case of the Tram project [ibid, page 72]. Although Mr Heath referred to the benefit of hindsight, it is clear that Transport Scotland would have instructed a review of the draft contract before signature had Scottish Ministers not instructed it to withdraw from active participation in the governance of the project. As was discussed in Chapter 13 (CEC: Events during 2006 and 2007), such a review is likely to have identified the problems with the contract that ultimately emerged, as well as the fact that the contract price was not fixed and the associated risk of price increases.

Conclusions on the OGC reviews carried out before financial close

23.36 In his evidence to the Inquiry, Mr Heath stated that the views of the OGC team were highly dependent on the information provided by others (e.g. tie). He accepted that the risk review was, of necessity, at a very high level, given the short timeframe. The OGC reviews of the project were each carried out over a few days, were largely based on interviews and involved limited consideration of documents. By their very nature, they were intended to be reasonably quick and high-level reviews that gave correspondingly high-level, or strategic, advice on the state of the project at that time, highlighting any particular issues to be addressed. While it is apparent that this approach is necessary in the context of a review which must be carried out quickly, it does not seem that it was a point that was generally understood. The consequence of that is that the reviews were relied on as having determined matters when in fact they had not. Although an important and necessary independent check on a project, such reviews were not intended, by themselves, to provide the client with sufficient independent assurance about the state of a project. Three matters arise from this. The first is that in addition to OGC reviews, there was a need for a client to obtain independent advice and assurance from specialist advisers from time to time. This was recognised in the OGC guidance discussed in paragraph 23.3 above in relation to project organisation, roles and responsibilities in a construction project. I also note, in that regard, the practice of Transport Scotland at the time. The second is that it is necessary that there is full disclosure of information to the team carrying out the review and some means of ensuring or compelling this. The third is that it is not reasonable to rely on the review as having given the project or any aspect of it a seal of approval. That is not the function of the review.

23.37 As was discussed in Chapter 13 (CEC: Events during 2006 and 2007), I consider that, as well as ensuring that the project underwent OGC gateway reviews, CEC ought also to have obtained independent legal advice on the risks to it arising from the Infraco contract (and that such advice ought to have been obtained after the terms of the contract were finalised but before the contract was entered into). Clearly, such a review could have been undertaken only by suitably experienced legal experts and was not within the scope of an OGC gateway review or the expertise of the review team.

23.38 In addition, and as was discussed in Chapter 13 (CEC: Events during 2006 and 2007), I consider that, before authorising the award of the Infraco contract, CEC ought also to have instructed a suitably experienced firm of multi-disciplinary engineering, transport and project management consultants to undertake a detailed review of the state of the project, the risks to CEC, the quantification of these risks and whether the proposed risk allowance was adequate. Such a review was in accordance with the OGC guidance noted above and was necessary to enable CEC to obtain suitable independent assurance of the risks to which it would be exposed if the contract was signed.

OGC reviews after financial close

23.39 tie asked the OGC review team to undertake a number of independent peer reviews of the project after financial close, in order to provide assurance in advance of the critical milestones in the Project Delivery Phase. These reviews are considered in the paragraphs that follow.

July 2008

23.40 The first of these reviews was carried out on 1 and 2 July 2008, with a report being issued to tie’s TPD on 2 July 2008 [CEC01327777]. The report noted that the recommendations from the gateway and risk reviews carried out in September/October 2007 had been implemented [ibid, page 0002]. It recorded that the MUDFA works were continuing and were about 60 per cent complete, the Infraco contract was a bespoke contract tailored specifically for the project, the programme had been delayed due to the lengthy contract negotiations and the project faced a challenging period over the next three months, given the need to mobilise the Infraco contractor’s supply chain properly [ibid, page 0003]. It noted that the uncertainty surrounding the completion date for the MUDFA works would have an increasing impact on the Infraco contract works, and the review team recommended that the remaining such works be prioritised in order to minimise the impact on the Infraco contract programme [ibid, page 0006]. In his oral evidence to the Inquiry, Mr Heath stated that at the time of this review the review team had been surprised to find out that progress of the MUDFA works had been slower than it had previously been led to believe [PHT00000009, pages 95–96].

23.41 This review also noted delays in design and programme [CEC01327777, pages 0006–0008]. System Design Services (“SDS”) design was not complete at the point of novation to Bilfinger Berger Siemens (“BBS”) and it was unclear to the review team where risk lay for design development. In interview, BBS and tie each considered that the risk of design development lay with the other party. The review team considered that the bespoke nature of the Infraco contract introduced “additional risks arising from the inevitable areas of uncertainty associated with the interpretation of this unique form of contract”, and it was recommended that tie management should consider whether it had sufficient legal skills to fully understand and execute the contract on a daily basis.

23.42 Moreover, although it had not reviewed the Infraco contract in detail, the review team considered that it was necessary for tie to determine how it would manage the Contract and whether it intended to apply the change management procedure in relation to a number of issues. The most significant of these issues was in relation to “Issued for Construction” drawings if they varied from the “frozen baseline design”. Although it did not state the fact, the existence of changes brought about by this means would be in conflict with the requirement for a “no change”
culture identified in the last review before the contract was signed, carried out in October 2007 [see paragraph 23.32 above].

23.43 The review noted that the programme was three months behind schedule and considered that there were significant risks that it would be delayed further because no apparent progress had been made since the award of the Infraco contract. Significant programme risks identified included possible delay by SDS in design development, the failure of CEC to complete approvals in line with the programme and the failure to complete MUDFA works before the start of the Infraco works.

23.44 The report considered that key to the success of the project was the working relationship between tie and Bilfinger Berger, Siemens and CAF (“BSC”), especially because all parties had “come through an extended and bruising period of negotiation”. Accordingly, it recommended that tie

“should proactively lead the development of partnering relationship approach with it’s [sic] suppliers and agree roles and responsibilities especially where there are opportunities for team integration” [ibid, page 0008].

23.45 When Mr Heath was shown Schedule Part 4 (“SP4”) to the Infraco contract for the first time during his evidence to the Inquiry, he expressed surprise at the wording of Pricing Assumption 1 (normal design development), stating that one person’s normal design development might be another person’s major change. He also expressed surprise at paragraph 3.2.1 of SP4 (which stated that the contract price was based on certain pricing assumptions that represented factual statements that the parties acknowledged were not correct). Having read that provision, Mr Heath recognised that it threw considerable doubt on whether the contract was truly a fixed-price one [PHT00000009, pages 100–103].

23.46 In relation to the reference to a “frozen baseline design” in paragraph 23.42 above, Mr Heath explained that, throughout the process, the review team had talked of the need to freeze the baseline design at some stage in order to provide certainty on cost and, to some extent, certainty on programme. A baseline design was necessary to know what was expected to be built; once that was known it was possible to estimate how long it would take, and how much it would cost, to build it. That was standard practice [ibid, pages 104–105]. While this would be true if the design was truly frozen, it is apparent that what was done was to attempt to obtain a price for the project on the basis of a design at a particular date in the clear knowledge that the design would continue to evolve and without any common understanding as to which party would bear the cost burden of the changes.

23.47 Mr Heath explained the context of the recommendation, mentioned in paragraph 23.41 above, that tie management should consider whether it had sufficient legal skills to understand the contract fully and to execute it. A tie management representative had given the review team a presentation on contract management, in the course of which Mr Heath and Mr Gillan, another review team member, had asked whether tie intended to apply a light touch to the management of the contract. The answer was in the affirmative. Mr Heath and Mr Gillan then had a peremptory look at a couple of issues in the contract and considered that these issues did not lend themselves to a light touch. That resulted in the recommendation that the people running the contract needed to understand what its provisions meant and how they were to be applied [ibid, pages 105–106].

March 2009

23.48 In February 2009, after the Princes Street dispute arose, the review team was asked to review and report on tie’s decision to commence the dispute resolution procedure (“DRP”) in relation to that dispute and on the strength of tie’s case in relation to the matters referred to DRP. On 19 March 2009, the review team issued a report to Mr McGarrity, tie‘s Finance Director, who was also, at that time, the SRO. In relation to the issue of whether tie was entitled to instruct BSC to undertake the works subject to the Princes Street Change Order, the review team found tie’s reasoning difficult to follow and suggested that an adjudicator would have the same difficulty [CEC01002735, page 0004]. It is clear from Mr Heath’s evidence that the review team was concerned at the lack of a co-operative approach between tie and BBS. While it was clear that tie had made a number of mistakes, he considered that many of them could have been mitigated by a contractor properly participating in the partnering relationship necessary for the project’s success [TRI00000044, page 0034, paragraph f]. The importance of a co-operative approach was recognised by tie at the outset and ironically appears to have influenced its decision to select BBS as preferred bidder. In the following passage of his evidence Mr Heath explained his concerns about the approach adopted by the parties soon after the conclusion of the contract:

“[I]n these type of contracts, partnering is very important. It always struck me that both parties had rushed to an adversarial approach rather early on in the process; didn’t really seem to explore their options to at least work out what they’d agreed about before they started working out what they’ve disagreed about.” [PHT00000009, page 118.]

23.49 It is not possible to identify the origin of tie’s approach to BSC with certainty. However, it appears to me that BSC’s demand for a price increase made immediately before signature of the contract and which had led to the Kingdom Agreement, which was discussed in Chapter 11 (Contract Negotiations), and their intimation that they would commence works on Princes Street only once the road closures had been put in place played a large part in destroying any sense of trust.

June 2009

23.50 A further independent peer review was conducted on 25–26 June and a report was issued to tie’s TPD on 29 June 2009. The review concluded that:

• the projected out-turn costs of the project were approaching the limits of affordability and value for money;
• BSC had not mobilised to deliver the project;
• BSC had not delivered a valid programme;
• BSC had not engaged constructively with tie to deliver the project;
• the tie team appeared to be “shell shocked” and needed to be reinforced and re-energised; and
• the mediation process that arose out of the Princes Street dispute offered a last chance for
  tie to proceed within the existing scope and framework [CEC01012780, page 0003].

23.51 In the findings and recommendations section of the report the review team noted its surprise that the parties were so far apart from the position that they thought they had reached during the prolonged tender evaluation and award and preferred bidder stages. In relation to the MUDFA works, the review team noted its extreme disappointment at hearing that the overall delay to the balance of the 40 per cent of works due to be completed between July 2008 and January 2009 would be almost a year in some cases, noting that tie had been generally positive about the management and progress of the MUDFA works in July 2008. Design was also on the critical path, and the review team recommended that the remaining design and outstanding drawings be reviewed by an experienced design co-ordinator to ensure a proper balance between “buildability”, programme and cost [ibid, pages 0004–0006].

December 2009

23.52 A further peer review was carried out on 22 December 2009 and a short report was provided to
tie on the same day [CEC00584282]. The review team supported tie’s willingness to bring the performance and commercial issues to a head within a realistic timeframe, and it commented on the options being considered to deliver the most advantageous outcome, balancing time and cost.

23.53 In a letter dated 5 January 2010 to Mr Jeffrey, Chief Executive of tie, Mr Hutchinson expressed concerns about the changing role of the peer review team [CEC00585164]. Mr Hutchinson noted that while the independent peer review process for the project had emerged from the gateway reviews required by Transport Scotland, the sponsor, as a prerequisite for its approval of the project and its funding, recently the role of the peer review team had become less clear. Reviews were now sponsored by tie’s management team and the style of review was limited to a commentary on presentations by the management team. These developments had resulted in a review that was, in effect, “management directed Consultancy”, and conflicted with the concept of an independent peer review as exemplified by the OGC gateway process. While Mr Hutchinson considered that members of the review team had the potential to make a significant contribution going forward, he considered that members of the review team should be employed either as management consultants on the rescue effort for the project or as part of the challenge/peer review team, but not both.

March 2010

23.54 On 4 March 2010, a final meeting with members of the peer review team took place, at which the review team was asked to provide its views on tie’s recommendations to the TPB and to identify any flaws in tie’s strategy, as well as providing feedback on the structure and presentation of the report. While there is a file note of the meeting, which records the comments of the review team [CEC00541592], it does not appear that a formal report was produced. By this point, the involvement of the review team was that of providing ad hoc consultancy-type advice rather than the type of independent peer review carried out at earlier stages [Mr Heath TRI00000044, pages 0029–0030].

23.55 While Mr Heath felt that the members of tie’s management who were interviewed during reviews were giving open and honest answers and believed in the information that they were providing, it appears that the review team began to have concerns about this. Mr Heath gave evidence that the review team slowly reached the conclusion that bad news did not necessarily travel upwards in tie and beyond [ibid, page 0031]. He stated that the obvious example was the MUDFA works, on which the review team had formed the impression that things were going well, and it had not been disabused of that impression. That clearly was not the case. In relation to design, when the review team was interviewing the people managing the design process, it was hard to get concrete numbers out of them about what the state of progress actually was. That seemed to vary between one report and another in a way that the review team could not really “get to the bottom of” [PHT00000009, pages 108–109]. Mr Heath’s concerns were explicitly mentioned in his email to Ms Clark, dated 21 January 2010. Although this was in the context of the provision of management consultancy services, it provides a useful insight into his concerns about the quality and veracity of information provided by tie to the review team and also in relation to the reporting of the review team’s advice to the TPB. In particular in relation to concerns about veracity of information provided to the team, Mr Heath stated:

“We have registered concerns that we have been commenting on information provided by tie management without any way of establishing its scope or veracity.” [CEC00588414]

23.56 In relation to future reports to the TPB he observed:

“If we believe that evidence is wrong or is insufficient or a conclusion has been drawn that is questionable how will that be presented by tie management to the TPB, since, as you know, previous reports have been caveated by tie management.”
[ibid]

Conclusions on the OGC reviews after financial close

23.57 As noted above, the expressed intention behind the post-contract peer reviews was to provide assurance in relation to the implementation of the project. Instead, they gradually changed from being independent reviews of the project in the style of a gateway review to reviews providing high-level, or strategic, consultancy-type advice to tie’s management, including, in relation to tie’s strategy in the dispute with BSC. It seems to be that the driver for this was the concern on the part of the review team that they could not perform the function sought of them when they were not being given full information and were instead being asked to proceed on the basis of presentations. In the period when the process was still akin to a review, the team identified increasing delays with MUDFA and design as well as concerns about the accuracy of information provided to the review team in earlier reviews. I do not consider that the review team can be faulted for not uncovering more. The approach of tie in this phase is another example of the intention on the part of its senior management to restrict information flow to give an impression that all was well.

Involvement of Audit Scotland

23.58 The circumstances surrounding the decision in June 2007 by the Auditor General for Scotland, Mr Black, to undertake a review of the project and the subsequent proceedings in the Scottish Parliament were considered in more detail in Chapter 3 (Involvement of the Scottish Ministers). In short, on 4 June 2007 the Cabinet Secretary for Finance and Sustainable Growth, Mr Swinney, asked the then Auditor General for Scotland to carry out a high-level review of the arrangements in place for estimating the costs and managing the Edinburgh Tram and Edinburgh Airport Rail Link (“EARL”) projects [CEC00785541, page 0004, paragraph 1]. The high-level review was to be focused on the overall arrangements and its aims and objectives were to assess: a) whether the Edinburgh trams are progressing in relation to time and cost targets, and b) whether appropriate management systems are in place to promote the successful completion of the Edinburgh trams project [ibid, page 0004, paragraph 2]. While the Auditor General was not obliged to undertake the review because his position was independent of both Parliament and Scottish Ministers, he nevertheless agreed to do so.

23.59 In his evidence Mr Swinney stated that the review was to provide a level of scrutiny about the strategic direction and conditions of the projects to enable Parliament to be informed of issues in advance of any further parliamentary discussion about them [TRI00000149_C, page 0026, paragraph 74]. He also frankly acknowledged that he was hoping that Audit Scotland might produce a report “which would do for the trams what it did for EARL”, but that did not occur because the report was positive about the project but critical of the EARL project [ibid, page 0028, paragraph 78].

23.60 On behalf of the Auditor General for Scotland, Audit Scotland produced its report dated 20 June 2007, in relation to the Edinburgh Tram and EARL projects. The report noted that the high-level objectives of the review were to assess, firstly, whether those projects were progressing in relation to time and cost targets and, secondly, whether appropriate management systems were in place to promote successful completion of the projects. It was noted that the review had examined the process for estimating project costs and project management arrangements for the two projects but did not provide assurances on the accuracy of the estimated project costs. In undertaking the review, interviews had been carried out with senior officials from Transport Scotland, CEC and tie, and supporting documents had been considered [CEC00785541, pages 0004–0005].

23.61 The report noted that three key bodies were common to both projects – namely, Transport Scotland, CEC and tie – all of which had satisfactory high-level governance arrangements in place [ibid, page 0005]. In relation to the Tram project, the report noted the following conclusions:

• the current anticipated final cost of phase 1 in its entirety (i.e. both phases 1a and 1b) was £593.8 million, and estimated project costs had been subjected to robust testing;
• some slippage in the project had occurred, but tie was taking action to ensure that phase 1a was operational by early 2011;
• arrangements in place to manage the project appeared sound, with
  • a clear corporate governance structure for the project, which involved all key stakeholders,
  • clearly defined project management and organisation,
  • sound financial management and reporting,
  • procedures in place actively to manage the risks associated with the project, and
  • a clear procurement strategy aimed at minimising risk and delivering successful project outcomes;
• the project was approaching a critical phase leading up to early 2008 when Scottish Ministers and CEC were expected to be asked to approve tie’s FBC, which would allow infrastructure construction to commence; and
• a range of key tasks required to be completed before the FBC could be signed off and, unless work progressed to plan, the cost and time targets might not be met [ibid, pages 0005–0006].

The justification for these conclusions is contained in pages 0014–0020 of the report.

23.62 In his evidence to the Audit Committee of the Scottish Parliament on 27 June 2007, the Auditor General explained that, earlier that year, he had decided that Audit Scotland would undertake a review of major capital projects in Scotland as part of its forward work programme. The report on the Edinburgh Tram and EARL projects brought forward work that would have been undertaken anyway, albeit over a longer timescale. He considered that it was in the public interest, and Parliament’s interest, that he should make the objective audit evidence available to Parliament on a timescale that fitted in with the decision-making procedures in relation to the projects [SCP00000031].

23.63 The report should be considered in the context of the nature of the review, the short timescale available for the investigation and production of the report and the evidence available to Mr Greenhill of Audit Scotland, whose investigations were confined to the project and who drafted that section of the report. The work undertaken was a very high-level review, reflecting the progress of the project at that time [TRI00000041_C, page 0011, paragraph 20]. It focused mainly on management arrangements within tie. It looked at the process for estimating project costs and at project management arrangements. It did not provide assurances on the accuracy of the estimated costs and was not intended to provide such assurance. In considering Audit Scotland’s expressed satisfaction with the governance arrangements at that time, it should be remembered that at the time Transport Scotland had not withdrawn from the project and the report recorded its involvement in it.

23.64 In the limited time available to him, Mr Greenhill was not able to look at the tendering and tender evaluation or the delivery of the project itself. Although the report pre-dated the Infraco contract and the completion and approval of the FBC, the contract for delivery of design was in existence and design work had commenced in terms of that contract. Within the period of 16 days between the report being requested and produced, he spent no more than 5 days on substantive investigations, including looking at documents [PHT00000009, pages 140–143]. The meetings with individuals from tie, CEC and Transport Scotland were high-level introductory meetings at which Mr Greenhill advised how the audit would be undertaken and asked the individuals for their account of progress to date. There would also have been discussion of the key documents that Audit Scotland would require to consider [TRI00000041_C, pages 0009–0010, paragraph 17]. The contemporaneous records of meetings were no longer in existence, having been discarded in accordance with the document retention policy of Audit Scotland but Mr Greenhill was aware of some of the people interviewed from entries in diaries of engagements that were still in existence.

23.65 Mr Greenhill was not made aware of any difficulties or delays with the MUDFA works and he was not informed of there being problems and delays in the production of utilities design and in receiving responses from the utility companies. Nor was he aware that, around May 2007, the programme had been revised to show a five-month slippage in the end date of the MUDFA works. That slippage envisaged completion of the MUDFA works in November 2008, as opposed to the original completion date in May/June 2008, but the Infraco works were still intended to commence at the beginning of 2009. If he had been aware of these matters he would have mentioned them in his report, given the criticality of the MUDFA works being completed in advance of the infrastructure works. He did not examine what had been done since MUDFA was entered into in October 2006, and he acknowledged that he could have done so if there had been more time in which to conduct the review [PHT00000009, pages 167–169 and 187]. I consider below the issue of the responsibility of tie to inform him of these matters but there is a separate issue of Audit Scotland proceeding with an investigation and issuing a report in the awareness that there has not been sufficient time to investigate and consider issues fully. I do not consider that the lack of time to undertake investigations is an acceptable excuse for the failure to inquire about progress. Rather, the failure to do so tends to indicate that the Auditor General undertook the investigation within a restricted timescale that was reflected in the shortcomings of the report.

23.66 Fundamentally, however, the report depended for its accuracy on interviewees providing full and frank disclosure of progress in their responses to Mr Greenhill’s request for an account of progress up to the date of his interviews with them. It is apparent that only restricted information was provided. Mr Greenhill was not made aware that there were difficulties and delays with design and he said that if he had been told of such difficulties and delays he would have commented on those in the report, because design was an issue of significant importance. The procurement strategy involved the completion of design to provide certainty and confidence to the Infraco contractors, enabling them to provide a fixed price for the infrastructure works. The design contract had been awarded in September 2005, and Mr Greenhill accepted that he could have looked at how the design works had progressed since the award of that contract if he had had more time to undertake the review [ibid, pages 154–157, 187 and 201].

23.67 The issue of disclosure of design delays arose in the context of the meeting between Mr Crosse, tie‘s TPD, and Mr Greenhill. While Mr Greenhill could not recall such a meeting, it is clear that it did take place. It is also clear that Mr Crosse chose not to disclose two Powerpoint slides relating to design delay. In response to a request from Mr Crosse by email dated 8 June 2007, Mr Crawley, tie’s engineering director, had provided him with slides for a presentation to brief Audit Scotland in relation to engineering assurance and approvals [CEC01630025; CEC01630026]. Mr McGarrity, tie’s finance director, was asked to review the slides. While he had no problems with the presentation, he considered that Mr Crosse would need to prepare for the following direct questions:

• “Has the design gone according to programme so far – if not why not?
• “What has changed which gives you confidence that the design process will deliver to the procurement programme now on the table?” [CEC01670035].

By email dated 10 June 2007, Mr Crawley advised Mr Crosse that he had updated the presentation with two additional slides that attempted to answer Mr McGarrity’s questions [CEC01674234]. One of the additional slides included a graph showing slippage in design to date and the need for a sharp increase in the rate of design production if the design programme was to be met [CEC01674236, page 0008]. The other additional slide stated that there had been slippage in design for three reasons:

• a logged critical issue;
• a tie change notice having the effect of changing the scope; and
• slippage due to the performance of the design contractor.

The slide explained that these issues were now well understood, that the principal blockers (critical issues) were being removed systematically, that all stakeholders were represented, that matters were being managed in detail on a weekly basis and that there was demonstrable progress in their removal [ibid, page 0009]. Mr Crawley stated in his email that Mr Crosse would require to take a view on the slides. In response, by email dated 11 June 2007, Mr Crosse advised Mr Crawley that he had decided to “stick with” the original slides, that the two new slides begged a lot of questions and that if Audit Scotland wanted to understand more about current and past progress, “we can respond when asked” [CEC01670035].

23.68 Mr Crawley stated that while he had no recollection of these emails, the graph in the additional slides indicated that there required to be something akin to a doubling of design deliverables for the design programme to be met. He stated that he did not recall being involved in the briefing on design to Audit Scotland, but that if he had been asked by Audit Scotland about the progress of the design works he would have shown it the additional slides and would have advised it of the difficulties and delays that had been experienced with design. If Audit Scotland had asked him whether design was likely to be delivered to programme, he would have replied in the negative [PHT00000014, pages 57–60]. Mr Crawley shared the post of tie’s engineering director with Mr Glazebrook. Mr Glazebrook gave evidence that while he did not have any involvement in the briefing to Audit Scotland, he would have advised it that it was impossible in June 2007 for design to be produced in accordance with the programme if he had been asked about that [ibid, page 161]. I accepted their evidence on this matter.

23.69 Mr Greenhill gave evidence that if he had been shown the two additional slides noted above, or if he had been advised of their content, he would have followed that up in discussion with the relevant individual in tie who was responsible for managing the design contract with a view to understanding what was going on [PHT00000009, pages 162–163]. Mr Greenhill considered that one interpretation of the email from Mr Crosse was that tie had deliberately withheld information from him. If that had happened he would take a very dim view of that. In his experience he had never seen that happen or, at least, had never been aware of it happening. He expected and relied on people to be open and transparent with him in order that he could produce an accurate report [ibid, page 166]. In my view it is clear that the information was deliberately withheld from Audit Scotland in order to avoid difficult questions and to conceal difficulties with the project which it was known would be of interest to Audit Scotland’s investigator (Mr Greenhill).

23.70 A further example of manipulation of the provision of information arose in relation to a claim that was being made by Parsons Brinckerhoff (“PB”). In a PB internal email dated 15 June 2007, Mr Ayres, of PB, reported on the outcome of a meeting that he had with tie and advised Mr Reynolds, PB’s project director for the SDS contract, that a prolongation claim by PB had been acknowledged by tie as being well presented and worthy of consideration and that Mr Gilbert, tie‘s commercial director, was taking legal advice. However, Mr Ayres also recorded that PB had been asked not to run the final claim through document control until after the Audit Scotland report had been submitted to the Cabinet in the middle of the following week [PBH00025674]. As was discussed in Chapter 6 (Design (to May 2008)), in late May/early June 2007 PB submitted a claim to tie for an extension of time of 40 weeks and an additional payment of £2,248,517 in respect of prolongation and additional services between 3 July 2006 and 9 April 2007 [CEC02085580]. Although Mr Reynolds speculated that the claim was less important than other aspects of the Audit Scotland review, I do not consider that to be a plausible explanation for tie asking PB to delay submission of the claim through the formal document control system until after the Audit Scotland report had been submitted to the Cabinet. Rather, I consider that it is further evidence of tie‘s attempt to conceal from Audit Scotland the difficulties and delays in relation to design and their effect upon the programme and cost of the project.

23.71 Concerns about the accuracy of the information provided to Audit Scotland were also expressed in the memorandum dated 21 June 2007 from Nadia Savage, Head of Programme Management in Transport Scotland, to Mr Reeve. This was discussed briefly in Chapter 3 (Involvement of the Scottish Ministers), in the context of its non-disclosure to the Inquiry by officials within Transport Scotland, and my assessment of Mr Reeve’s evidence in this regard. The memorandum contained concerns that Transport Scotland and tie had information that did not support the information that had been presented to Audit Scotland [SWT00000056]. Key discrepancies included those in relation to the cost estimate, where the figure set out in the Audit Scotland report was dependent on over £43 million of savings. Transport Scotland had not been provided with evidence that such savings were being secured. In addition, the Infraco contract bidder returns were higher than the initial tie estimates and, contrary to what had been reported to Audit Scotland, it could not be said that the Infraco contract bids were “firm”. It was also noted that Transport Scotland had not received an updated programme from tie since January 2007, that the programme at that time was described as having “zero float”, that there had been slippage in design and MUDFA progress, and that it was unclear what actions had been taken by tie to mitigate the five-month delay on a zero-float programme. Mr Reeve stated that he could not recall receiving Ms Savage’s memorandum or what, if anything, had been done in response to it [PHT00000012, pages 111–128]. As was indicated in Chapter 3 (Involvement of the Scottish Ministers), I did not find Mr Reeve to be a credible witness in this respect. The Inquiry did not find any evidence of action by officials within Transport Scotland to inform Scottish Ministers or Audit Scotland of the apparent inconsistencies between the information available to Transport Scotland and what had been provided to Audit Scotland. Although Ms Savage’s memorandum was dated the day after publication of the Audit Scotland report, prompt action by Transport Scotland would have alerted Scottish Ministers and Audit Scotland to these issues in advance of the appearance of the Auditor General before the Audit Committee of the Scottish Parliament and of the debate in Parliament on 27 June 2007.

23.72 Mr Sharp, Head of Projects, Transport Scotland, gave evidence that he provided Audit Scotland with documents requested by it, but he was not interviewed as part of the review. If he had been interviewed, and asked about his views on the project, he would have stated that there were issues and concerns in relation to the programme for the project. He would also have shared with Audit Scotland the various concerns that Transport Scotland had previously reported to CEC and tie – for example, in Transport Scotland’s comments on the draft FBC in March/April 2007 [TRS00004145; CEC01559061]. It does not appear that these issues and concerns were shared with Audit Scotland. It was unclear to me why Mr Sharp, as a relatively senior and experienced civil servant within Transport Scotland, had not volunteered the information in his possession to Audit Scotland, either directly or through his superiors, particularly as the project was being funded by the public purse.

23.73 Mr Sharp considered that it was reasonable for Ministers to seek an independent review of the project from Audit Scotland. However, given Transport Scotland’s experience and expertise in large infrastructure projects and its officials’ involvement in the project from the outset, he agreed that, in addition to the review by Audit Scotland, it would have made sense for Ministers to have requested a review of the project, or a factual briefing relating to it, from relevant officials in Transport Scotland with involvement in, and knowledge of, the project. Had they done so, Ministers would have been able to take a more informed decision [PHT00000015, pages 109–115]. I formed the impression that Mr Sharp was aware that Ministers would have other information apart from the report from Audit Scotland and that Scottish Ministers could have requested a review or factual briefing about the project from relevant officials within Transport Scotland if they had wanted that, but it does not appear that Mr Sharp or other officials offered such a briefing to Scottish Ministers. As was explained in Chapter 3 (Involvement of the Scottish Ministers), Mr Swinney suggested that there might have been presentational difficulties in requesting Transport Scotland to undertake the review in June 2007. Nevertheless, the consequence of his decision to invite Audit Scotland to do so without also seeking a report from Transport Scotland was that factual information in the possession of civil servants and the expertise then available within Transport Scotland was not provided to Scottish Ministers.

23.74 In relation to the governance arrangements for the project, Mr Greenhill stated that it would have been a matter of concern if he had been told that there had been no formal delegation of authority to the TPB at the date of his investigations [PHT00000009, page 188]. Mr Greenhill said that he had understood that Mr Renilson was the SRO for the project. He would have been concerned to have heard of Mr Renilson’s claim that he was only the SRO for the operational phase of the project, because the consequence of that would have been that there was no SRO during the procurement or construction phases [ibid, pages 191–192]. Although the report referred to a clear corporate governance structure for the project, which involved all key stakeholders, Mr Greenhill stated that that conclusion was intended to refer only to the governance structure in relation to the TPB and that he had not looked at the governance structure for the whole of the project [ibid, pages 203–204]. I found this explanation difficult to understand, but have concluded that it may be simply another indication of the limited value of a performance audit by the Auditor General of a current major capital project within the timescale allowed in this case. In his evidence to the Audit Committee on 27 June 2007 about the report on the project, the Auditor General stated that he could offer the committee and the Parliament a positive assurance about the strength of the management systems and control systems that were in place for the project [SCP00000031, page 0012, column 21]. That evidence, and the report itself, should be considered in light of the evidence mentioned above.

Conclusions in relation to the 2007 Audit Scotland Review

23.75 Although the report by Audit Scotland provided a degree of independent assurance in relation to the project, I consider that it ought to have been treated with a degree of caution, for the following reasons:

(a) Audit Scotland usually undertook reviews of completed projects, and it was unusual for it to undertake a review of a project part-way through its development;

(b) the review was undertaken in an unusually short period of time and, by necessity, could be only a very high-level review;

(c) the review was restricted to whether appropriate procedures, processes and systems were in place. Importantly, it was not within the scope of the review to consider in any detail the delivery of the project to date or whether the project was being, or was likely to be, delivered on time and to budget.

(d) I consider that tie was not entirely open with Audit Scotland in relation to a number of key issues. Had Audit Scotland been aware of these difficulties and delays it seems likely that it would have made further investigation of these matters and mentioned them in its report, including the risk that these difficulties and delays posed to the delivery of the project on time and within budget.

(e) In preparing Audit Scotland’s report Mr Greenhill was aware of the involvement of officials in Transport Scotland in the project, and in his evidence to the Audit Committee of the Scottish Parliament on 27 June 2007 the Auditor General anticipated the continued involvement of Scottish Ministers in the project after that date [SCP00000031, page 0012, column 22].

23.76 Had it been known that the involvement of Transport Scotland in the project would cease it might have influenced Audit Scotland’s conclusion, in the time available to it, that high-level governance arrangements were satisfactory. I do not consider that the organisational and governance arrangements for the project were, in fact, satisfactory. Instead, in my view, in 2007 (both before and after Transport Scotland’s withdrawal) those arrangements were both confused and confusing, and had not fully been implemented.

23.77 Officials in Transport Scotland were aware of difficulties and delays with design and with the utilities diversion works and had previously expressed concern about the programme for the project. As was noted in Chapter 3 (Involvement of the Scottish Ministers), both Dr Reed and Mr Sharp were of the view that Transport Scotland would have been better placed than Audit Scotland to give an in-depth report on the project at that time [PHT00000013, page 123; PHT00000015, page 113]. In my view, their input should have been obtained in addition to the involvement of Audit Scotland. If the Scottish Ministers had requested a review, or factual briefing, of the project from officials in Transport Scotland, or if such officials had elected to provide such a briefing to the Scottish Ministers, it is likely that the Scottish Ministers and, in turn, Parliament, would also have become aware of these matters. In any event, once Ms Savage expressed her concerns in the memorandum dated 21 June 2007, action should have been taken by officials in Transport Scotland prior to the meeting of the Audit Committee and the debate in the Scottish Parliament on 27 June to alert the Scottish Ministers and Audit Scotland to these concerns.

Later publications by Audit Scotland

23.78 Audit Scotland published two other documents of relevance to the project. The first publication, in June 2008, was its review of major capital projects in Scotland [CEC01318113]. A summary of the key messages arising from the review was also published [CEC01318765], together with a supplement to the report, comprising a good practice checklist for public authorities [CEC01318764].

23.79 The good practice checklist noted that good project planning required proper organisation and strong leadership. It said that clarity about the various roles and responsibilities for a project were essential, with a need for clear and agreed reporting lines. Extensive advice on project organisation was available from the Scottish Government and the OGC. The key roles were summarised in an appendix and included a senior responsible owner, project sponsor and project manager [ibid, pages 0008 and 0020]. It was noted that there should be effective change control at the design and construction stages, that changes may not be able to be made economically once construction began and that the approach to risk management should consider how change would be controlled and managed [ibid, page 0008].

23.80 The appendix outlined the importance and function of the SRO in the following passages:

“The Senior Responsible Owner is ultimately accountable for the success of the project”; and

“While the SRO is not involved directly with the project team, he or she will chair the Project Board, own the business case, act as a senior advocate and hold the project team accountable for their actions. Ultimately, the success of the project is their responsibility. Only they can redefine the scope, or decide to close the project if it becomes clear the project objectives are unattainable.” [ibid, page 0020.]

23.81 It seems to me that the above observations about the role of the SRO simply expressed what was already recognised to be his or her functions in the OGC Guidance applicable at the time [see Chapter 22 (Governance), paragraphs 22.14–22.15]. In that event it illustrates the inadequacies of the Audit Scotland review in June 2007. I am of the view that it was not sufficient for the auditor to inquire about the governance arrangements, including whether an SRO had been appointed; the SRO ought to have been interviewed to ascertain his understanding of his role and the procedures in place to assist him to fulfil his duties. It is understandable that the limited time available for the review may have prevented this more detailed investigation, but this simply highlights my view that the Auditor General ought not to have undertaken the review within such a restricted timescale, particularly as there was a risk that the report would give a false sense of security to its readers despite the caveats within it and the qualifications expressed by the Auditor General to the Audit Committee of the Scottish Parliament.

23.82 In any event the advice from Audit Scotland in June 2008 ought to have been followed by Mr Renilson as SRO from that date. He remained in post as SRO until he left the project in or about December 2008 and was replaced by Mr McGarrity as interim SRO [CEC01053908, page 0006, paragraph 6.1; PHT00000040, page 70]. Mr Renilson had a duty to comply with the guidance in that document about the role of the SRO. This publication highlights the significance of Mr Renilson’s failure to perform his duties as SRO and the failure of CEC and tie to ensure that the governance arrangements included the appointment of a SRO who was chairing the project board and holding the project team accountable for their actions. The failures of Mr Renilson, CEC and tie in this regard are discussed in Chapter 22 (Governance).

23.83 The guidance in the publication in June 2008 also noted the challenge of obtaining assurance about contractor and project team performance and likely outcomes. It said that while there was value at key stages in using an independent team with relevant expertise to undertake gateway reviews of the project, SROs should not rely on such reviews to indicate if a project was in difficulty. The gateway review simply represented a point in time assessment and was only one of several sources of information to help assess performance of the project [CEC01318764, page 0009].

23.84 The second publication by Audit Scotland, between the conclusion of the Infraco contract and the commencement of passenger services on the truncated line, was the interim report on the Edinburgh Trams, issued on 3 February 2011 [ADS00046, Parts 1–2]. That report followed a review of the project by Mr Greenhill over a period of approximately 10 weeks between the middle of November 2010 and the publication of the report [TRI00000041_C, page 0034, paragraphs 78 and page 0036, paragraph 82]. This review had been undertaken by the Auditor General and the Accounts Commission jointly, for their respective interests, against a background of media and public concern about the dispute between tie and BSC and the related disruption. Unlike the position with the earlier review in 2007, the decision to conduct it had been taken without any intervention by Scottish Ministers.

23.85 The February 2011 Audit Scotland report noted the contractual dispute between tie and BSC and stated that the report did not include a detailed review of the various contracts that were in place, nor was any opinion expressed on the management of the project, the cause or cost of time overruns or the performance of any of the contractors involved [ADS00046, Part 1, pages 0004–0005]. Key messages included that the original plan to have trams operational by summer 2011 would not be achieved. The utilities work was now 97 per cent complete, and good progress was being made with the delivery of the tram vehicles. Greater than anticipated utilities and disputes with the infrastructure contractor had delayed progress, and it was possible that trams would not be operational until at least 2013. The dispute between tie and BSC showed no sign of abating, and significant disagreement between those parties remained about the interpretation of elements of the infrastructure construction contract. Some 28 per cent of infrastructure construction works had been completed against an original plan of 99 per cent by the end of December 2010 [ibid, page 0006].

23.86 It recorded that tie had spent a total of £402 million on phase 1a to the end of December 2010. The cost of resolving the infrastructure dispute was unknown, and it was unlikely that all of phase 1a could be delivered for £545 million. The current situation between tie and BSC was complex, and the outcome of mediation talks would help inform the options to be taken forward.

23.87 In relation to governance, it was noted that CEC’s governance arrangements for the project were complex and were intended to allow the work of tie to be subject to scrutiny while keeping councillors informed of the project’s progress. It said that the commercially sensitive nature of the dispute with BSC had meant that the information presented to councillors who were not involved with the project had been limited and that this this had caused frustration [ibid, pages 0006–0007]. It suggested that CEC required to consider the scope for a wider review of governance arrangements while the project was in the construction phase. In particular, CEC required to satisfy itself that the membership and remit of each element of the governance framework contained sufficient scrutiny of the project’s progress and risk management arrangements. CEC also required to consider the best ways to ensure that councillors were kept informed about the project while having due regard to the requirements of legislation relating to companies and any commercial confidentiality of the issues under consideration [ibid, page 0009]. For the reasons that were discussed in Chapter 22 (Governance), I consider that the governance arrangements for the project were complex, confused and ineffective throughout the life of the project (at least until the changes made to the governance arrangements following the Mar Hall mediation).

23.88 The report considered it to be imperative that CEC, tie and BSC worked together to establish a clear way ahead for the project. Care required to be taken to ensure that any negotiated solution secured value for money for the public purse. If a satisfactory solution could not be found through mediation, CEC and tie would require to consider fully the consequences of alternatives, including terminating the contract with BSC [ibid, page 0008].

23.89 Importantly it stated that officials in Transport Scotland already monitored project spend, the Scottish Ministers had a significant financial commitment to the project and required to consider Transport Scotland’s future involvement in providing advice and monitoring the project’s progress. In particular, the Scottish Ministers should consider whether Transport Scotland should use its expertise in managing major transport projects to be more actively involved and assist the project in avoiding possible further delays and cost overruns [ibid, page 0009]. As was discussed in Chapter 3 (Involvement of the Scottish Ministers), the expertise of Transport Scotland had been withdrawn from the project following Ministers’
reluctant acceptance, for reasons of political expediency, of the decision of the Scottish Parliament on 27 June 2007, that the project should proceed.

23.90 I consider that Audit Scotland was correct to have recommended that the Scottish Ministers consider whether Transport Scotland, with its expertise in managing major transport projects, should be more actively involved in, and assist, the project in avoiding possible further delays and cost overruns. Indeed Transport Scotland should not have been withdrawn from the project and ought to have remained actively involved throughout. Had that occurred, it is probable that a review of the contract documentation by a firm of solicitors experienced in the drafting and interpretation of construction and engineering contracts would have been commissioned prior to the signature of the contract. The disputes that arose shortly after the signature of the contract centred principally on two related sets of provisions in the Infraco contract: (1) the provisions relating to entitlement to additional payments in SP4; and (2) the provisions in clause 80 as to what should happen in relation to execution of the works when it was considered that a change was being made to those works. Prior to the signature of the Infraco contract Mr C MacKenzie, a solicitor with CEC, had concerns about the terms of SP4 despite lacking the experience and legal expertise to be found in solicitors specialising in construction and engineering contracts. In the course of negotiating the Infraco contract Mr Laing, the solicitor for Infraco who did have such experience, had drawn attention to the possibility of an immediate notified departure because the pricing assumptions were based upon an earlier version of design than would exist at the date of contract signature. In advance of contract signature he also identified the problems that might arise, and ultimately did arise, if the change procedure in clause 80 of the Infraco contract were applied to notified departures and he questioned the appropriateness of using clause 80 in such circumstances. The views of Mr C MacKenzie and Mr Laing were not formed with the benefit of hindsight and I have concluded that a review of the contract documentation by solicitors experienced in the drafting and interpretation of construction and engineering contracts would have identified the problems associated with the terms of the Infraco contract before it was signed. Accordingly, there would have been an opportunity for CEC to consider delaying signature of the contract to enable design and diversion of utilities to be completed in accordance with the procurement strategy or limiting the scope of the project to a shorter route that could be constructed within the available budget or even cancelling the project altogether. In making that observation I recognise that the cancellation of the project would have resulted in wasted expenditure already incurred and that would be a relevant consideration to be taken into consideration by CEC. The determination of the course of action to be taken would have been a strategic one for councillors to make. In any event I consider that there might have been an opportunity for CEC to make a significant saving of public expenditure compared with the ultimate cost of the truncated line 1a.

23.91 This report recorded that utilities diversion work was almost two years late but was 97 per cent complete. tie had expected that such work would take 70 weeks between July 2007 and November 2008. While it had originally been anticipated that 27,000 metres of pipes and cables would require to be diverted, around 48,500 metres of pipes and cables had been diverted and tie now estimated that the final extent of diverted utilities was around 50,000 metres. In tie’s view, the remaining utilities diversion work, mainly in the vicinity of Baltic Street, would not prevent infrastructure construction work from going ahead [ibid, page 0018].

Conclusions

23.92 The reviews by the OGC review team and Audit Scotland prior to the signature of the contract were short, high-level reviews and were not intended as a substitute for detailed reviews, instructed by CEC as the client and promoter of the tram scheme, from suitably experienced independent advisers. The issue is not merely that these reviews did not identify the problems. They appear to have given CEC and members of the Scottish Parliament a false sense of reassurance about the project, despite the caveats in the report and in the evidence given by the Auditor General to the Scottish Parliament’s Audit Committee. That false reassurance had long-term effects for the project. Had it not been for it, I consider that there would have been greater scrutiny of the project and, in particular, the contracts prior to May 2008.

23.93 The conclusions of the Audit Scotland report in 2007 relating to the project depended upon the information provided to Mr Greenhill and should be considered in light of my observations above. Although the review by Audit Scotland in 2007 identified issues with EARL, which merited the cancellation of that project, it was of limited value in relation to the Tram project. It was of such short duration that it failed to identify the delays in design and MUDFA works, as well as fundamental flaws in the governance arrangements, particularly as regards the SRO. It is likely that a longer and more detailed investigation by Audit Scotland would have discovered these issues.

23.94 The review in 2007 was undertaken when officials in Transport Scotland were involved in the project, and in his evidence to the Audit Committee of the Scottish Parliament on 27 June 2007 the Auditor General anticipated the continued involvement of Scottish Ministers in the project after that date.

23.95 The review in 2007 was inhibited by the failure of tie to advise Mr Greenhill of the delays in the progress of design and the unlikelihood of achieving completion of design in accordance with the programme as well as delays in completion of the MUDFA works. Even in the context of a short review, some of these issues would have been discovered had tie been frank about problems at that time.

23.96 The review in 2007 also contained the factual inaccuracies mentioned in the memorandum from Ms Savage to Mr Reeve, suggesting that incomplete or inaccurate information was provided to Mr Greenhill who prepared the section of the report relating to the project.

23.97 The failure of officials in Transport Scotland to advise Audit Scotland or the Scottish Ministers of the inaccuracies mentioned in paragraph 23.77 is inexplicable. Had they done so in advance of the appearance of the Auditor General before the Audit Committee and the debate in the Scottish Parliament on 27 June 2007, Ministers could have asked the Auditor General to consider the implications of that information and to advise the Audit Committee accordingly. Moreover, if that had occurred, CEC would also have been alerted to the problem, although officials there must also have been aware of the issues relating to delays in design and MUDFA mentioned above.

23.98 In 2011, tie disclosed to Audit Scotland problems relating to the progress of design and MUDFA works, many of which had existed in 2007. The length of time allocated to the review in 2011, compared with that for the earlier review, may explain the difference in results between the two reviews, but this simply reinforces my impression that it was a mistake to undertake the 2007 review in such a short timescale. While that timescale was influenced by the parliamentary timetable, the implications for the public purse of proceeding with the project on the basis of an inadequately short review outweighed any inconvenience and additional cost resulting from delaying the decision to enable a fuller review to be undertaken.

23.99 In any event, the review by Audit Scotland should not have been seen as a substitute for the involvement of officials in Transport Scotland in advising Ministers on the basis of their expertise and knowledge of the project. They should have offered such advice to Ministers, whatever impression may have been given by Ministers about that.

23.100 CEC placed too much reliance on the OGC and Audit Scotland reviews prior to the conclusion of the Infraco contract.