Chapter 24: Consequences

Consequences

24.1 As was noted in Chapter 2 (Establishment and Progress of the Inquiry), my Terms of Reference require me “to examine the consequences of the failure to deliver the Edinburgh Tram project (the “project”) in the time, within the budget and to the extent projected”. Apart from the failure to deliver the benefits associated with a tram line from the Airport to Newhaven and the consequences of the increase in public expenditure, I have considered the impact that the prolonged construction period had on the owners and occupiers of residential and business premises on the route of the tram line as well as on other city residents and on people whose travel arrangements were disrupted due to road closures and construction work. In this chapter, references to construction work include work undertaken to divert utilities in advance of the work to construct the tram line. In the section between York Place and Newhaven, construction work was mainly restricted to the diversion of utilities although Bilfinger Berger, Siemens and Construcciones y Auxiliar de Ferrocarriles SA Consortium (“BSC”) undertook some construction work including the alteration of pavements, much of which had to be reinstated when the decision was taken not to construct that section, while in the section between the Airport and York Place it included the diversion of utilities and the construction of the tram line.

Financial consequences for City of Edinburgh Council

24.2 The most obvious consequences of the failure to deliver the project in the time, within the budget and to the extent projected were the present and future effects
of the substantial increase in public expenditure for a limited route. In authorising
the Chief Executive to permit tieLimited (“tie“)to enter into the Infrastructure contract (“Infraco contract”) and the Tram Vehicle Supply and Maintenance Contract (“Tramco contract”) councillors expected that line 1a would be constructed in its entirety within the budget of £545 million. Indeed there was an expectation that the budget might even permit partial construction of line 1b. However, the pricing assumptions in Schedule Part 4 to the Infraco contract, the delays in the diversion of utilities, the failure to transfer design risk to the private sector and generally the departure from the procurement strategy upon which the budget of £545 million relied meant that City of Edinburgh Council’s (“CEC’s”) expectation that line 1a would be constructed within that budget was unrealistic and unachievable.

24.3 The common perception is that the increase in public expenditure attributable to the construction of the line to York Place after mediation was £231 million, being the difference between the project budget in 2011 of £776 million for the restricted line and the original budget of £545 million for line 1a in its entirety. If one wishes to ascertain the total cost to the public purse of the project such an approach is over-simplistic as it omits ancillary expenditure related to the project incurred by CEC as well as expenditure incurred by Scottish Ministers in addition to the grant of £500 million made to CEC for the project. Accordingly, the Inquiry sought assistance from CEC to obtain an account of the project budget and final costs for the completion of the line to York Place.

24.4 In response to the request for assistance from CEC mentioned in paragraph 24.3,
Mr Connarty, a qualified accountant and senior manager in CEC reporting to the
Head of Finance, submitted a statement to the Inquiry [TRI00000153]. Although
Mr Connarty had been employed by CEC over the duration of the project, he had no direct involvement in it. His analysis was based upon a review of the available public reports and the financial management records for the project maintained by CEC following the handover of responsibility from tieto CEC during the financial year 2011/12.

24.5 As is apparent from the ‘Revenue Monitoring 2011/12 – Outturn Report to the
Finance and Resource Committee of CEC’ on 31 July 2012, reproduced as Appendix 14 to Mr Connarty’s statement, the projected spend on the truncated route was
£776 million, which comprised both capital and revenue expenditure [ibid, page 0053]. Mr Connarty’s analysis and my calculations have adopted a similar approach, and have not attempted to distinguish between capital and revenue expenditure in arriving at an estimate of the overall expenditure on the project.

24.6 Mr Connarty’s analysis of the project cost as at 31 March 2017 disclosed that it was £776.7 million, net of contributions and recharges [ibid, page 0002,paragraph 5.1]. Appendix 6 to his statement discloses that the actual sum was £776,662,473, which Mr Connarty rounded up to £776.7 million [ibid, page 0023]. I have used Mr Connarty’s figure of £776.7 million except when considering additions to the cost of the project mentioned below, where I have used £776.662 million because some of the additional costs mentioned by Mr Connarty are expressed in figures rounded to three decimal points of a million. Mr Connarty testified that the total sum of £776.7 million was not the final figure because there were a small number of outstanding issues including the final settlement with Scottish Water in respect of utility diversions. However, he confirmed that the project costs included provision for CEC’s estimated cost of settlement of these issues and that there would be an adjustment to the figure for project expenditure when settlement was achieved [ibid,page 0003,paragraph 5.4; PHT00000048,pages 18–19]. Although he could not confirm the date when the account would be closed following resolution of outstanding matters, Mr Connarty hoped that it would be during “this financial year” i.e. the financial year 2017/18, and he undertook to provide the Inquiry with that final account, although CEC was not anticipating a material change to the numbers that he had provided in his evidence to the Inquiry [ibid,page 48].

24.7 On 4 May 2018, I wrote to the Chief Executive of CEC, seeking a copy of the final account, if it had been prepared and approved, and also seeking other information. In the event that the final account had not been prepared and approved I sought confirmation that it would be sent to the Inquiry team immediately it became available. In his response dated 5 June 2018 the Chief Executive confirmed that certain matters were still outstanding and provided me with confidential information about them. On 19 August 2020, I wrote a further letter to the Chief Executive of CEC, inquiring whether the outstanding matters had been resolved and, if so, at what cost to CEC, to enable me to adjust Mr Connarty’s figure of £776.662 million, if necessary. In the correspondence that ensued, the Chief Executive provided me with confidential information about various claims that were outstanding or had recently been settled. These claims included disputes with utility companies and an issue with a land owner about the Sustainable Urban Drainage System and contamination remediation. The Chief Executive confirmed that although provision had been made in the final figure of £776.662 million for some of these claims, no such provision had been made for all of them, including the largest claim in relation to the land owner mentioned above. His best estimate of the additional sum required to settle all claims was £4.456 million. That sum should be added to the figure of £776.662 million, giving a total figure of £781.118 million. CEC hoped that all claims would be settled in the financial year ending 31 March 2021. To ensure that I was not breaching any confidentiality in respect of the information that the Chief Executive had provided to me I sought and obtained his approval of the content of this paragraph.

24.8 On the basis of the evidence, I have concluded that in May 2014 when the restricted line opened for service, any impression that the final cost was within the envelope of the revised budget of £776 million was mistaken and that there was uncertainty about the actual cost of the project. In the first place, the reported cost exceeded the revised budget figure by £0.662 million but more significantly it is apparent from paragraph 24.7 that the provision within the reported cost for the settlement of outstanding claims was inadequate. The inadequacy of the provision for future claims occurred largely because of the settlement of a claim that had not been anticipated but also because of the underestimate of the sum required to settle other claims. However, even when the reported cost is adjusted to £781.118 million net of contributions and recharges to reflect the anticipated additional expenditure of £4.456 million on claims, that does not accurately reflect the actual cost of the project. Although it is remarkable that there should be any continuing uncertainty about the actual cost of a major public expenditure project almost nine years after its completion, that is attributable to the inclusion of certain items of expenditure in other budgets without recharging, or otherwise attributing, them to the Tram project’s budget. Even if all relevant expenditure had been properly charged to the Tram project’s budget the resulting figure would still have been the best estimate of the cost of the project because of uncertainties attributable to fluctuations in interest rates during the 30-year period for repayment of the capital sum borrowed by CEC to complete the truncated line.

24.9 Although all of the expenditure relating to the Tram project that was included in other budgets was properly incurred by CEC or by Scottish Ministers I consider that it is in the public interest to recharge it to the Tram project to assess the best estimate of the final cost of that project. Apart from anything else such an exercise will enable an assessment to be made of the extent to which CEC exceeded the increased budget of £776 million for the truncated line as well as the original budget of £545 million for the entirety of line 1a and potentially part of line 1b.

24.10 In undertaking the exercise of recharging expenditure mentioned in paragraph 24.9, for consistency, I have treated the adjusted figure of £781.118 million as the base figure net of contributions and recharges, and have used it for calculations to determine the best estimate of the final cost of the project. Mr Connarty’s analysis disclosed that additional tram-related expenditure had been incurred that had been paid either by CEC and allocated to other budgets within CEC or by the Scottish Ministers. In order to gain a more accurate indication of the overall cost of the project to the public purse it is appropriate that the additional tram-related expenditure should be added to the base figure.

24.11 The first item of additional tram-related expenditure funded by the Scottish Ministers was the cost of the Scottish Parliamentary process leading to the enactment of the Tram Acts. Although this was expenditure incurred by tiefor which CEC had ultimate responsibility, the Scottish Ministers provided separate grant funding to CEC to meet the entire cost of this procedure, which amounted to £16.852 million [TRI00000153,page 0004,paragraph 6.2;PHT00000048, pages 21–22]. It should be borne in mind that this expenditure was incurred in the initial stages of the project when the Bills to enable the construction of the tram network were introduced in the Scottish Parliament in 2004. If the cost of the parliamentary procedure was not included in the grant of £500 million promised by Scottish Ministers towards the funding of the project, it should be excluded when comparing costs incurred against the budget of £545 million although it should be added to the cost of the project to ascertain the total cost of the project to the public purse.

24.12 Various schemes were introduced to support businesses during the construction work. These included a rateable value reduction scheme for retail properties with a frontage on to the area of the construction work and adversely impacted by it. Under this scheme there was a total estimated reduction of non-domestic or business rates of £6.3 million. This was the second item of expenditure funded entirely by Scottish Ministers but not included in the base figure [TRI00000153,page 0004,paragraph 6.4; PHT00000048,pages 26–27].

24.13 There was also a separate non-domestic rates Hardship Relief scheme for businesses severely impacted by the tram project. Expenditure totalling £85,469 (£0.085 million) was incurred, of which £64,102 (£0.064 million) was met by Scottish Ministers, with the balance of £21,367 (£0.021 million) being paid by CEC [TRI00000153, page 0004,paragraph 6.5; PHT00000048,page 27]. The sum of £0.085 million, including the Scottish Ministers’ contribution of £0.064 million, was
not included in the base figure.

24.14 Thus, in addition to the grant of £500 million the Scottish Ministers contributed £23.216 million, being the sum of its expenditure mentioned in paragraphs 24.11–24.13. That total sum should be added to the base figure, along with the additional sums, mentioned in paragraphs 24.15–24.27 below, which have been or will be incurred by CEC, in order to determine the best estimate of the cost of the project to the public purse.

24.15 As mentioned above, there were various schemes designed to provide some financial support for businesses adversely affected by the construction work. Apart from £21,367 (£0.021 million), being its share of the Hardship Relief scheme mentioned in paragraph 24.13 above, CEC incurred expenditure in respect of other schemes such as the “Open for Business” scheme and an additional support scheme for small businesses. CEC’s expenditure on the “Open for Business” scheme totalled £990,000 (£0.99 million) and was not included in the base figure. It was funded separately through CEC’s revenue budget. In contrast, expenditure of £1.697 million on the additional support scheme for small businesses was included in the base figure. There is no logic in treating expenditure on these support schemes differently, and I have concluded that CEC ought to have included the expenditure on the Hardship Relief and “Open for Business” schemes in the Tram project budget as it did with the expenditure of £1.697 million on the additional support scheme for small businesses. Accordingly the sums expended by CEC on the Hardship Relief and “Open for Business” schemes but omitted from the Tram project budget should be added to the base figure.

24.16 In his analysis, Mr Connarty identified various items of expenditure in respect of infrastructure works directly attributable to the Tram project but not included in the base figure. These are listed in Appendix 11 to his statement and include:

• work at Coates Crescent and Atholl Crescent due to damage caused during the construction work;
• redesign of Morrison Street traffic signal system for traffic management and pedestrian safety, which had been planned and taken forward by the tram
  project team;
• the purchase of vehicle management signs to cover the amendment of a traffic regulation order at Shandwick Place, planned and commissioned by the tram project team;
• work on Leith Walk and Constitution Street to reinstate pavements and repair damage caused by the incomplete tram works; and
• reinstatement work at St Andrew Square.

The cost of these works totalled £5.38 million and had been charged to CEC’s Capital Investment Programme [TRI00000153, page 0004, paragraph 6.3 and page 0031, Appendix 11]. Additional expenditure estimated at £1.547 million would be incurred to complete the reinstatement work on Leith Walk and Constitution Street but would be included in the cost of the extension of the line to Newhaven if that took place. Since Mr Connarty gave evidence to the Inquiry, CEC resolved to construct the extension and it is anticipated that it will be completed and open for service in the summer of 2023. Nevertheless, as that expenditure will be incurred for identical reasons to the expenditure of £5.38 million for the reinstatement of other areas in that locality, which are related to the failure to deliver the line to the extent projected, I consider that it is reasonable to include that estimated sum in the cost of the Tram project that terminated at York Place, resulting in the addition of £6.927 million to the base figure. In determining the total cost of the line between the Airport and Newhaven it will be necessary to adjust the cost of the extension to avoid double counting costs of reinstatement work on Leith Walk and Constitution Street.

24.17 A further additional cost identified by Mr Connarty arose from tie‘s cessation of business following the mediation and CEC’s assumption of direct responsibility for managing the project. tie‘s cessation of business resulted in a liability for voluntary redundancy costs totalling £2.561 million, which was included in the base figure [ibid,page 0005,paragraph 6.10]. However, tiealso had a pension fund deficit as a result of its cessation of business. In termsof the arrangements under the Lothian Pension Fund, CEC was liable for meeting the costs of that deficit. The total cost incurred by CEC in this respect was £4.798 million [ibid, pages 0043 and 0045, Appendix 14 and paragraph 2.11]. It was directly related to the project and ought to have been treated in the same way as the redundancy payments. However, it was included in CEC’s revenue budget for 2011/12 and should be recharged to the project cost by adding
it to the base figure.

24.18 In his statement Mr Connarty also noted that:

“From 2012/13, following a decision within the Tram Project, project revenue expenditure, including CEC tram-related costs previously funded through the Tram project budget, was funded outwith the £776m project budget with this expenditure being met through the Council’s overall revenue budget.” [ibid,page 0005,paragraph 6.12.]

24.19 In the three financial years, 2012/13 to 2014/15, the total expenditure treated in this manner was £9.821 million, consisting of £8.682 million recharged from the Tram project account to CEC’s revenue budget and £1.139 million charged directly to that budget. As this expenditure related to the Tram project and expenditure of this nature had previously been recognised as a proper charge to be included in the Tram project budget, it should be added to the base figure.

24.20 The original budget of £545 million anticipated funding from the grant of £500 million from Scottish Ministers, with CEC providing the balance of £45 million. CEC’s contribution anticipated receipts from developers totalling £25 million over a period of 30 years. Mr Connarty’s analysis disclosed that total contributions of £9.5 million had been received, leaving a shortfall of £15.5 million to be managed through prudential borrowing. This resulted in increasing the amount borrowed to fund the difference between the budget of £776 million and the original budget of £545 million from £231 million to £246.5 million. However, the cost of servicing the increased loan was within the original estimate of £15.3 million per annum for servicing a loan of £231 million over 30 years, because of lower marginal interest rates. In paragraphs 24.22, 24.24, 24.26 and 24.30 below I consider the financial consequences for CEC of borrowing £246.5 million, but in the meantime it is sufficient to note that the shortfall in developers’ contributions resulted in CEC bearing the additional cost of borrowing £15.5 million funded through the prudential borrowing scheme. Although the cost of borrowing the additional sum of £15.5 million should be added to the base figure, as part of the cost of borrowing the larger sum of £246.5 million, the capital sum of £15.5 million should not be added to the base figure because it was already included in the estimate of £545 million.

24.21 From the above narrative it will be apparent that the main financial consequence for CEC of the failure to deliver the project within budget was that additional funds had to be procured to pay for the increased cost of the project. This was accepted in the closing submissions on behalf of CEC [TRI00000287_C, page 0293, paragraph 7.13].

24.22 As noted in paragraph 24.20 above, CEC borrowed £246.5 million using the prudential borrowing framework for local authorities. Local authority borrowing using this framework is carried out on a programme basis through a consolidated loans fund, and it is not possible to specify the actual cost directly associated with the additional borrowing of £246.5 million required to fund the completion of the line to York Place. Despite that constraint, local authorities obviously incur costs of borrowing capital to fund particular projects, and CEC’s borrowing of £246.5 million is no different in that respect. I acknowledge that the cost of borrowing over a 30-year period will vary depending on the rate of interest payable at any moment in time and that local authorities can take advantage of reductions in interest rates by restructuring their consolidated loans fund. This involves substituting loans at more favourable rates for existing loans with higher rates of interest when there is a downward movement in long-term interest rates. Although there is uncertainty about the ultimate cost of borrowing of the sum of £246.5 million there is clearly a cost of servicing the loan, and I have estimated that cost on the basis of Mr Connarty’s evidence supplemented by his letter dated 30 September 2020 and its appendices [WED00000656].

24.23 Mr Connarty assumed a marginal interest rate of 4 per cent and estimated that the annual revenue cost to CEC of the additional borrowing would equate to £14.3 million per annum over a 30-year period. The annual repayment includes capital and interest as well as management expenses. On that basis, total repayments will amount to £429 million. After deducting the capital sum borrowed (£246.5 million) the interest and management expenses payable over 30 years will amount to £182.5 million. Mr Connarty was an impressive witness who had obviously undertaken his analysis with care and objectivity. I considered that his assumption of a marginal interest rate of 4 per cent was reasonable. It reflected a reduction of 1.1 per cent from the assumed interest rate of 5.1 per cent when CEC was considering funding options for the additional sum of £231 million in August 2011 [TRS00011725, page 0005,paragraph 3.23].

24.24 On 16 September 2020, the Inquiry sought clarification from Mr Connarty about the calculations mentioned above, and he responded by letter dated 30 September [WED00000656]. Various calculations were appended to the letter. Appendix 2 contains the calculations of the loan charges forecast based upon a loan of £246.5 million with a repayment period of 30 years and an interest rate of 4 per cent. When rounded to the nearest decimal point these figures disclose that the total interest payable will be £181.154 million and total management fees and expenses will be £2.510 million. When added to the sum borrowed the total sum payable will be £430.164 million, representing an annual charge of £14.339 million. On that basis the total interest and management fees and expenses payable over 30 years will be £183.664 million. Nevertheless the interest payable will vary depending upon fluctuations in marginal interest rates over the 30-year period. Taking into account the uncertainty associated with future fluctuations I consider that it is prudent to adopt Mr Connarty’s original figure of £429 million as the total sum payable over the 30-year period.

24.25 Mr Connarty accepted that, from a lay perspective, and subject to the caveat about the interest rate mentioned paragraph 24.24 above, the cost to the public purse of the line from the Airport to York Place would exceed £1 billion if the total cost of borrowing over the 30-year period of the loan and the additional sums attributable to the Tram project mentioned in his statement and discussed in paragraphs 24.9–24.19 above were added to the project cost of £776.7 million [PHT00000048,pages 39–41]. If the increased base figure of £781.118 million was used instead of £776.7 million the cost in excess of £1 billion would be even greater. However, the total cost of borrowing is based upon a repayment period of 30 years and most of it will be incurred in the future.

24.26 As was explained in the report to the CEC on 25 August 2011 [TRS00011725], the annual revenue charge required to repay the capital and interest of the sum borrowed does not take account of the time value of money. That report discussed borrowing £231 million over 30 years at a marginal interest rate of 5.1 per cent, resulting in repayments of capital and interest of £15.3 million that totalled £459 million. To enable a proper comparison of time-related cash flows to be made the United Kingdom Government’s discount rate was applied, resulting in a reduction of the cumulative charge from £459 million to £291 million. The equivalent exercise reduces the cumulative charge mentioned in paragraph 24.24 above from £429 million to £272.2 million, resulting in an additional cost to CEC at net present value of £25.7 million in interest payments and management fees and expenses, being the difference between the discounted figure of £272.2 million and the sum borrowed (£246.5 million) [WED00000656, page 0006,Appendix 4; WED00000658].

24.27 Table 24.1 illustrates that when that sum of £25.7 million is added to the base figure along with the other additional costs mentioned in paragraphs 24.7, 24.8, 24.11–24.13 inclusive and 24.15–17 and 24.19 inclusive above the best estimate of the total cost to the public purse of the Tram project terminating at York Place is £852.591 million and the cost to CEC is £329.375 million after deducting grants and other payments made by the Scottish Ministers. Based upon these figures, a fair comparison of the final estimated cost of the restricted project terminating at York Place with the original budget of £545 million for the line extending to Newhaven requires an adjustment of the final cost to reflect the fact that the cost of the parliamentary process (£16.852 million) was expenditure incurred beforehand and might not have been included in the original budget. Thus, as opposed to the budgeted cost of £545 million for the line between the Airport and Newhaven, the best estimate of the final outturn cost of the project resulting in the line terminating at York Place is £835.739 million, being the total cost of £852.591 million less the expenditure of £16.852 million on the procedure relating to the enactment of the Tram Acts. The contributions of Scottish Ministers and CEC towards the cost of £835.739 million were £506.364 million and £329.375 million respectively. The most striking result of these calculations is that CEC spent £329.375 million as its share of constructing the line from the Airport to York Place as opposed to its budget of £45 million representing its share of constructing the line from the Airport to Newhaven.

Table 24.1: Estimated cost to public purse

* Scottish Ministers
** This should be excluded if comparing actual expenditure with budgeted expenditure of £545 m

24.28 In the longer term, a better indication of the increase in cost over the estimated cost of £545 million for a tram line from the Airport to Newhaven will be obtained when the final cost of the route to Newhaven is known.. At that stage CEC should have more accurate information about the total cost of that section, including the cost of any necessary borrowing. In calculating the cost of the extension CEC should ensure that all of the associated costs are included in the Tram project expenditure and not attributed to other CEC budgets. CEC should also adjust the calculation of costs to avoid double counting the cost of the reinstatement work mentioned in paragraph 24.16. Although uncertainties about the final cost of borrowing £246.5 million will remain, a more accurate estimate of the cost of the section to York Place should be possible because of the knowledge of fluctuations in interest rates between 2014 and the date of completion of the line to Newhaven. In the meantime an estimate of the cost of the line from the Airport to Newhaven can be made based upon the Business Case for the extension to Newhaven that was submitted to CEC’s Transport and Environment Committee on 28 February 2019. The estimated cost for that section was £207.3 million, including risk, support for business and optimism bias [CEC02087287, page 0059, paragraph 5.17]. If that sum is added to the current best estimate of £835.739 million for completing the line to York Place, the estimated cost of the line from the Airport to Newhaven is £1,043.039 million (£835.739 million + £207.30 million) and is the best current available comparator for the estimated cost of £545 million although the cost of any borrowing to complete the line to Newhaven will need to be added to the total cost. Once the extension has been completed, the actual cost can be ascertained and added to the adjusted cost of the section from the Airport to York Place.

24.29 The report to the CEC meeting on 25 August 2011 confirmed that CEC would be able to honour its existing capital commitments even if CEC borrowed the then proposed sum of £231 million at a marginal interest rate of 5.1 per cent [TRS00011725, page 0007, paragraph 3.32]. That is hardly surprising because I presume that CEC had allocated funding for its existing capital commitments from its capital budget and, if necessary, secured any shortfall in that funding from other sources – including, but not restricted to, prudential borrowing. As the cost of the overspend on the tram project was to be funded from additional borrowing it is self-evident that the overspend would not impact on CEC’s other capital commitments. I also accept the evidence of Councillors Dawe, Henderson and Hinds (mentioned in paragraph 7.20 of the closing submission on behalf of CEC [TRI00000287_C, page 0296]) that they could not remember any other capital project being delayed as a result of the increased capital expenditure on the Tram project.

24.30 However, as the above report acknowledged, the most significant financial consequence of the increased expenditure was the opportunity cost to CEC of borrowing £246.5 million. It noted that the allocation of revenue streams to service that loan represented

“an opportunity cost for the Council and will therefore reduce the options available to meet future service pressures in the context of demographic changes, price inflation and reduced government funding” [TRS00011725, page 0007, paragraph 3.32].

That observation will apply to the servicing costs of all sums borrowed by CEC whichever borrowing scheme is used. Increased borrowing increases the commitment of future revenue expenditure to enable sums borrowed to be repaid with interest. A consequence of that commitment is that CEC will be unable to provide the level of service to the community that it would otherwise have been able to fund from its revenue account without such a commitment. The annual revenue charge of £14.3 million required to repay capital and interest of the sum borrowed to complete the tram line to York Place represented 1 per cent of CEC’s gross expenditure. That is an indication of the money that would have been available annually over a period of 30 years to fund services in the City of Edinburgh. The allocation of that money to the various services provided by CEC would have been a matter for councillors to determine in the context of the annual budget for each financial year. The annual cost of borrowing to fund the extension to Newhaven will result in a further opportunity cost to CEC resulting in a reduction of available funds for future expenditure on public services within the local authority area of the City of Edinburgh.

Communication with those affected by the construction work

24.31 In considering the issue of the impact on others it must be borne in mind that the project would have resulted in some disruption to the public generally, and to local residents and businesses specifically, as well as to residents in streets through which traffic had to be diverted, even if the project had been delivered on time and to the extent projected. Such disruption normally includes noise as well as vehicular and pedestrian access issues associated with major construction work. It results in an adverse effect upon the amenity of affected streets, including those used by diverted traffic as well as those where construction work is being undertaken. That is simply a consequence of living and working in a city during such works. However, there is a reasonable expectation on the part of the public that they will be kept informed of changes that are about to affect them and that such disruption will be kept to a minimum by ensuring reasonable access to homes and businesses during the work and by completing the work on time.

24.32 I will consider the impact on others of the delayed project and the failure to complete the line to Newhaven, but before doing so it is appropriate to consider the question of communication with those affected by the construction work. In doing so I recognise the need for effective communication with the public generally about such issues as road closures, diverted routes for traffic, altered public service routes and timetables, and changes to the location of bus stops. However, the greatest need for regular and effective communication is in the immediate locality of the work where it is essential to keep residents and businesses informed in advance of changes to access to their premises and of other changes that they will experience. A particular problem with this project was that for a significant period of time after work had started no progress was made owing to the disputes described in more detail in Chapter 15 (Contractual Disputes: May – December 2008) and Chapter 16 (The Princes Street Dispute). During that time there could be no certainty for those affected by the disruption when or, indeed, if it would end and little, if any, information or reassurance was provided to those affected.

24.33 As part of the revised governance structure introduced following its meeting on 30 June 2011, CEC established a Stakeholder Forum. It was intended to enable CEC and the contractors to manage key relationships with stakeholders directly affected by the project [CEC02044271, page 0016, paragraph 3.91]. The introduction of such a forum is an indication that theearlier arrangements for informing residents and business owners in advance of construction work that might affect them and discussing possible mitigation measures had not been successful. That is certainly the impression that I gained from responses from members of the public, indicating that changes to the work affecting access to properties often occurred without prior notice. Even when notice was given, it did not necessarily reflect what actually occurred.

24.34 Although the composition of the Stakeholder Forum included representatives of local communities affected by the project, it is clear from the list in paragraph 3.91 that it mainly related to the concerns of major companies and business organisations [ibid]. In his written evidence to the Inquiry, Mr C Smith observed that the efforts made by CEC to engage with stakeholders had not worked effectively because it excluded a significant section of the public such as “members of the public, neighbours, as in domestic neighbours, to areas of work and small businesses and shopkeepers and the like”. Some months after work recommenced following mediation, those defects were recognised and addressed [TRI00000143_C, pages 0096–0097, paragraph 335].

24.35 I recognise that with a project of this nature and scale some disruption is inevitable, and that such disruption can lead, at least in the short term, to a loss of business. However it is also important to demonstrate to affected people that their concerns are being taken seriously and, where possible, will be addressed. Equally it is also important to recognise that not all concerns can be addressed, but the fact of listening to concerns and explaining why action cannot be taken to mitigate their effect may provide some reassurance to aggrieved residents and business owners.

24.36 I accept Mr C Smith’s evidence that, prior to his appointment, and even several months after work re-commenced after the mediation settlement, this matter may not have been given the attention that it deserved. If, as appears to have been the case, the arrangements for consultation and communication with those members of the public most adversely affected by the construction work were deficient in 2011, it would appear that the arrangements by tie/CEC during the construction work prior to mediation were woefully inadequate. My views in that respect are reinforced by the acknowledgement in the closing submission on behalf of CEC that:

“inadequate road closure notifications and late communication of work plans by tie Communications team impacted on local retailers and communities
and restrictions on work and consequent delay in progress” [TRI00000287_C,
page 0375,paragraph 12.18].

24.37 Although CEC attributed blame to the tiecommunications team, CEC cannot avoid all responsibility for communication failures. It could have influenced the timing of road closures to ensure that the public had adequate notification of them. Moreover, it is unlikely that councillors in affected wards were unaware that their constituents were aggrieved by the poor standard of prior communication, and CEC ought to have intervened to ensure that tie improved its communication with those likely to be directly affected by the construction work.

Impact on the public generally

24.38 On 12 May 2015, in a formal call for issues and evidence the Inquiry invited members of the public to inform the Inquiry about how they were affected by the failure of the project. In total, 91 responses were received and considered as part of the evidence to the Inquiry. These responses have informed my understanding of the impact suffered by the public as a result of the delays to the project and its curtailment at York Place.

24.39 Before considering the evidence of disruption to business proprietors and residents along the route of line 1a, I wish to acknowledge that the delay to the construction work had an adverse impact on the public generally. The comments about noise, disturbance and difficulties of access mentioned in paragraph 24.43 below in the context of local residents and businesses apply equally to those members of the public visiting those parts of the city affected directly by the construction work. Indeed the impact of the construction work was not confined to the areas of the construction work or to visitors to those areas. There was an indirect effect on most areas of the city due to the re-routing of traffic, increased travelling times and alterations to bus services. These difficulties were compounded for those with disability. In that regard Mr Thomas observed:

“During the works it was virtually impossible for the disabled to access large areas of town. Closed roads and diversions meant it closed the city to all but the able bodied.” [CZS00000082]

The prolongation of the construction work by three years meant that the exclusion of the disabled from large areas of the city continued for that extended period.

24.40 The first experience of putting in place substantial traffic management plans involved the closure of the Mound on 1 October 2008. That had resulted in “an absolute snarl up of the greatest order” and councillors did not want that to be repeated [Councillor Dawe TRI00000019_C, page 0108,paragraph 415]. Although the gridlock experienced on that occasion was not repeated commuters by public transport experienced increased journey times because of delays, route diversions or changes in the location of bus stops, which often occurred without prior notice. Some journeys to work that normally took an hour were extended by 20 minutes, adding 40 minutes to travelling time taken by commuters each day [Mr Goodall CZS00000069]. Had the project proceeded on time, such increases in journey time during construction might have been understandable and tolerable to the travelling public as a consequence of living in a vibrant city where major works were occasionally necessary. However the prolongation of that disruption by almost three years was unacceptable. Although the evidence in this regard was given by Mr Goodall, a witness living in the south-west of the city it was supported by the evidence of Ms Amos[CZS00000031]and Ms Bruce [CZS00000034], both of whom lived in the vicinity of Leith Walk. Each of them spoke of similar issues relating to public transport experienced by Mr Goodall. Ms Bruce observed: “You were never sure where the buses were going as they were diverted a lot of the time and the bus stops were moved regularly” [ibid]. Ms Amos referred to the bus services being “COMPLETELY disturbed” [CZS00000031] from 2008 onwards, and she only knew that bus stops had been moved when she left her flat in the morning, resulting in her being late for work or hospital appointments.

24.41 Having regard to the areas affected by the construction work, it is reasonable to conclude that delays to journeys were experienced by commuters from outside Edinburgh as well as those within Edinburgh, whether they used public transport or travelled by car. Allowing for delays to commuters that would have been expected had the project proceeded on time and to the extent projected, I consider that the economic cost of the increased duration of the construction work reflected in the increased daily journey times will have been significant when one considers the number of people likely to have been affected and the increased period of the disruption.

24.42 After the conclusion of the public hearing sessions, CEC decided to construct the extension of line 1a from York Place to Newhaven and construction is expected to be completed in the summer of 2023. During the construction of that extension the travelling public will have experienced increased journey times attributable to delays occasioned by traffic diversions and re-routed public service vehicles as occurred over the many years leading to the opening of the curtailed route for service. The additional disruption to journey times and consequent economic disadvantage attributable to the work on the extension to Newhaven will be a direct result of the failure to complete the project as originally planned. Had the project been completed on time, the disruption would have ended in 2011, when it was expected that the trams would be operational throughout the entirety of line 1a.

Impact on residents

24.43 Apart from the impact upon members of the public generally, those most seriously affected by the failure to deliver the project in the time and to the extent projected were the residents and businesses along the route of line 1a during the construction work. They lived and worked beside a construction site and were exposed to noise, disruption, difficulties of access and general loss of amenity for several years longer than anticipated. Although that impact might appear to be self-evident to all residents of, and visitors to, Edinburgh at that time, who witnessed for themselves the disruption caused by the construction work, some respondents elaborated upon the scale of the impact on themselves and on their businesses. I have no doubt that their experiences also reflected the impact upon many others at that time.

24.44 The delay of almost three years in opening even a part of the route for service resulted in an unacceptable burden on those affected residents and businesses. Even that inordinate delay did not end the disruption in the section of the line between York Place and Newhaven. The decision to terminate the line at York Place necessitated reinstatement work beyond York Place, with its inevitable disruption. Moreover, as a result of the construction work on the extension to Newhaven residents and businesses along that route and in streets accommodating diverted traffic will have been the most severely affected by the consequent disruption. That should be seen as a consequence of the failure to complete the project as originally planned.

24.45 In considering the impact on residents along the route of the construction work, I have included within this category those residents living in residential streets through which traffic was diverted to accommodate the work, as well as residents living in streets directly affected by the construction work. I will consider the residents in streets accommodating diverted traffic later but, before doing so, I wish to consider those residents in streets where construction work was undertaken. As with Edinburgh residents generally, residents in this category also suffered the difficulties of access to other parts of the city and increased journey times mentioned above, but in addition they experienced the adverse impact of living immediately adjacent to the construction work for many years. In the section between the Airport and York Place the period of disruption was six years, ending with the commencement date of the operation of the trams. That exceeded the planned period of construction work between the Airport and Newhaven by at least three years. The period of disruption between York Place and Newhaven will ultimately exceed that three-year period by several years. The total period of construction work will be longer in that section because the diversion of utilities started in that area in 2007, and work on the reinstatement of Leith Walk and Constitution Street was incomplete in 2017 [TRI00000153, page 0031, Appendix 11]. Although the disruption due to the reinstatement of Leith Walk and Constitution Street was probably of a much lesser magnitude than that experienced during the construction work in that locality, and was probably more localised, nevertheless it compounded the adverse effects experienced by residents there during the diversion of utilities. To that prolonged period of 10 years when some work was under way in that locality, including reinstatement work, one should add the work on the extension that CEC plans to be open for service in 2023. On that basis the disruption to residents and businesses in that section and to the general public will cover a period of approximately 16 years. That should be compared with the planned period of four years between 2007 and 2011 when it was expected that the trams would be operational along the entirety of line 1a.

24.46 Residents in the vicinity of the construction work experienced noise and disturbance normally associated with such work generally but, as noted in paragraph 24.45, endured such disturbance for several years longer than had been planned. The increased duration of that disturbance varied according to the location of the residents, but it was at least three years in the west end of the city and much longer in the north-east.

24.47 Access difficulties were a common theme of the evidence submitted by members of the public. In short, pedestrian access to houses and shops in the streets along the route of the tram was difficult because of the barriers erected between the site of the construction work and the buildings to which pedestrians were seeking access. The barriers were left in place even when no work was being undertaken. They were altered overnight without any prior notice. Crossing the road was also problematic because of high Heras fences or other barriers and the distance between crossing points [see, e.g., CZS00000007; CZS00000013; CZS00000026; CZS00000030; CZS00000032; CZS00000033; CZS00000034; CZS00000038; Dr C Mackenzie CZS00000064]. Dr C Mackenzie, whose evidence I will discuss in paragraphs 24.61 and 24.62 below in the context of the effect of the construction work on business, spoke of an account given at a public meeting of an undertaker having to carry coffins hundreds of yards due to ongoing delayed construction work.

24.48 Dr Herbert, a resident in the west end, on the route of the tram, compared the disruption caused by the construction work with his experiences as a schoolboy in London during World War 2. He said that as he made his way to the venue for his exams in 1944 the route differed each day and he “had to negotiate holes, rubble and debris” [CZS00000038,page 0003]. He summarised his experience of the construction work as follows:

“… there were such frequent changes of barriers that routes and access could change from day to day. Rubble, material and heavy equipment would suddenly appear to block the way. Familiar bus routes became unfamiliar and it was sometimes necessary to walk a long distance to find a stop – which might have changed next time.” [ibid]

He illustrated the scene in the vicinity of his home that he witnessed over these years by submitting photographs covering the period between 2008 and 2013 [CZS00000039–CZS00000044]. He also explained the difficulty that he experienced in the delivery of kitchen units because of the unexpected and unannounced overnight alteration of barriers outside his home [CZS00000038, page 0003].

24.49 As I indicated at the commencement of this section, I have included within the class of residents affected by the failure to deliver the project on time and to the extent planned those who resided in streets through which traffic was diverted. Although traffic diversions are necessary in many situations to enable major works to be undertaken, they undoubtedly result in increases in the volume and nature of traffic in the streets accommodating the diversions. In most situations such increases can have an adverse effect upon the amenity of those streets, particularly if they are residential. That appears to have occurred in 2007 as part of the Tram project, with the diversion of traffic along Randolph Crescent affecting the amenity of that street, Great Stuart Street and Ainslie Place, all of which are residential streets in Edinburgh’s New Town.

24.50 Mr Renfrew was of the view that the introduction of that traffic into Randolph Crescent resulted in a substantial reduction in the sale price of his house there [CZS00000072; CZS00000035]. Although I am unable to reach the conclusion that this was the sole cause of the difficulty that he experienced in selling his property, the amenity of an area in which a house is situated is a relevant consideration for many house purchasers. As will be noted in paragraph 24.53 below, noise, vibration and air pollution associated with traffic, particularly heavy goods vehicles, adversely affects amenity. However, the temporary diversion of traffic into residential streets in the New Town was a necessary consequence of the construction work in the west end at that time. It was not – and cannot be – attributed to the delay in the project or failure to deliver it to the extent projected. Although some people might consider the extended duration of the displacement of traffic following the temporary traffic regulation order a consequence of the delay in the project, because the construction work lasted at least three years longer than planned, Mr Renfrew sold his house in 2009, which was within the anticipated timescale of the work. Moreover, any conclusion about traffic displacement has to be seen in the context of other measures taken by CEC to divert traffic from the city centre as part of its vision for the city. Mrs Frame, whose evidence is discussed in paragraph 24.53 below, approved of that policy but acknowledged that one of its consequences has been the redistribution of traffic into residential streets in the New Town. That issue is not part of my remit and ought to be raised in another forum.

24.51 The evidence submitted by the Moray Feu Residents’ Association (“MFRA”) confirms that traffic displacement had occurred in the west end of the city prior to 2008, under a temporary traffic regulation order [CZS00000051]. That order was necessary to permit the diversion of traffic to enable the construction work to be undertaken between Shandwick Place and Haymarket. The diverted traffic included lorries and buses that had previously used more suitable routes for their journeys. Mr Ditchburn, also a resident in a New Town street affected by diverted traffic, accepted that the temporary traffic regulation order was just “one of those things”, and he believed that the wording of the notices meant that the traffic levels would revert to the status quo when the construction work was completed. However, he subsequently learned of CEC’s intention to replace the order after the completion of the construction work with a permanent traffic regulation order “cementing the traffic displacement in place” [CZS00000022, page 0002]. Although I can understand Mr Ditchburn’s expressed concerns about the manner in which CEC behaved in this regard, it is beyond the remit of the Inquiry to investigate this issue. I am unable to conclude that the subsequent permanent traffic regulation order was a consequence of the delay to the project or the failure to complete it; it is more likely to have been related to other measures taken by CEC to divert traffic from the city centre as part of its vision for the city centre, as mentioned by Mrs Frame (paragraph 24.53 below). If that is correct, it tends to suggest that the displaced traffic in Randolph Crescent, Great Stuart Street and Ainslie Place after CEC made the permanent traffic regulation order was not caused by the delay to the construction work or by its cessation at York Place but was attributable to other CEC policies.

24.52 As indicated in the evidence submitted by MFRA, air pollution from traffic has a severe adverse impact upon health, and to that extent that evidence is relevant to the effect on the amenity of residential streets caused by increased traffic. The remainder of the MFRA submission is not within the scope of the Inquiry. It relates to the question whether the shortened tram line should have terminated at Haymarket as opposed to York Place. My remit is concerned with the delivery of the project, which included the proposal to build the line from the Airport to Newhaven and why that project was delayed, exceeded projected costs and delivered a much shorter tram line. In Chapter 19 (Mediation and Settlement) I have considered the decisions taken by CEC in June, August and September 2011, but only in the context of implementing the settlement agreement and the reasons for, and costs associated with, changing its decision taken in August 2011 to terminate the line in the meantime at Haymarket.

24.53 Between July 2012 and September 2013, York Place was closed to traffic to facilitate tram construction works there. During that period further diversions were introduced, resulting in diverted traffic being channelled along the Abercromby Place/Albany Street corridor in both directions [CZS00000009]. The increased volume and nature of traffic in that corridor impacted adversely on the amenity of these residential streets, which are also located in the New Town. Mrs Frame, a resident in that locality, summarised that adverse impact as follows:

“It was a very difficult time with noise, air pollution, structural damage to some properties and a change of ambience in what is supposed to be a protected National Heritage Site. The CEC team told us that there was no alternative and residents would have to bear the pollution and inconvenience. Our window frames and sills became black during this period and we were not able to open the windows due to noise.” [CZS00000050,page 0002.]

Despite that evidence, the extension of time taken to deliver the curtailed route did not result in, or exacerbate, the adverse impact recorded above. It simply resulted in that impact occurring at a later date than if the project had been delivered on time.

24.54 During the period when the traffic was diverted along Abercromby Place/Albany Street, traffic flows of 1,200 vehicles per hour were recorded. CEC officials advised residents that nothing could be done at that time to reduce these levels but that traffic flows would return to pre-diversion flows after completion of the construction work. Residents have undertaken monitoring of traffic flows following the commencement of the tram service to York Place. Although traffic flows have reduced to 500 vehicles per hour, they have not returned to pre-diversion flows [ibid; see also Mr Brown CZS00000067]. I regret that this is not an issue within the remit of this Inquiry. For that reason it is not one upon which I am able to express any views. If residents and the New Town Broughton Community Council wish to pursue their complaints about it they should continue to lobby politicians to seek a solution to the use of residential streets as a “rat-run” by vehicles, including heavy goods vehicles. Residents also expressed concerns that similar diversions would occur during the construction of the extension of the tram line to Newhaven. Loss of amenity due to future diversions along that corridor to accommodate work associated with the extension of the line to Newhaven could be a consequence of the failure to complete the project on time and to the extent projected but the construction of the extension commenced after the conclusion of the public hearings and there is no evidence available to the Inquiry on this matter.

Businesses

24.55 Another common theme in the public responses was the effect on businesses along the route of the tram, particularly in the corridor between Haymarket and Leith Walk/Constitution Street.

24.56 Although businesses in Princes Street and St Andrew Square probably suffered loss of trade as a result of the disruption caused by the construction work, the retailers in those locations tended to be major retail outlets and did not respond to the call for evidence. The implication that I take from their silence is that any loss of trade was more manageable than was the case for smaller businesses.

24.57 The Inquiry considered evidence from, or on behalf of, business owners operating at the relevant time in Haddington Place, Leith Walk and Constitution Street to the north-east of the city, and in Rose Street and from Shandwick Place to Haymarket to the west. From that evidence it is clear that there was significant disruption to trade and consequent loss to the business owners in those areas caused by the construction work. The delays to the work exacerbated these losses and prolonged the disruption that would normally have been anticipated, assuming that the work was completed in the time originally projected. Indeed, with the termination of line 1a at York Place instead of Newhaven, the businesses in the areas to the north-east of the city suffered losses associated with the work that was never completed as originally planned. It is probable that businesses in that location will have been exposed to further disruption and will have suffered additional loss due to the work to complete line 1a from York Place to Newhaven. The nature of some of the difficulties experienced by business owners was illustrated by a number of witnesses, as will be discussed in paragraphs 24.59–24.70, inclusive, below.

Businesses on Leith Walk

24.58 This section is intended to address issues raised by, or on behalf of, business owners in the section between York Place and Newhaven, and for ease of reference I have described them as businesses on Leith Walk.

24.59 Ms Marshall was a founder member of the Leith Business Association, which was established in April 2008 in response to the effect on businesses as the construction work on Leith Walk became more intrusive. In September 2007 she had started a business selling handmade arts and crafts from 115 Leith Walk. Although not busy, her shop had been frequented by a reasonable number of people before any significant construction work began, and she had been reasonably happy with her initial sales figures. However, her sales decreased as construction work intensified. In August 2008 she took a stall at the Edinburgh Festival Fringe to promote her business and to raise some income that could be used to support it. When she returned to the shop after the Festival it was surrounded by metre-high Heras fences, with a narrow path to the door. Mechanical diggers were digging deep holes in the ground just inches from her shop window, adversely affecting access to her shop and restricting the ability of customers to move freely from one shop to another, as a result of which customers to all affected businesses elected to shop elsewhere. Her financial position deteriorated and her mental and physical health suffered. She considers that she lost a good business as a result of the prolonged work in the vicinity of her shop [CZS00000032].

24.60 While Ms Marshall’s experiences illustrate the effects of the construction work on a relatively new business, the evidence given by Mrs Johnstoneconcerned the effect that it had had on a long-established successful business located on Leith Walk near Pilrig Church, a location which she described as being at the heart of major road works associated with the Tram project. Her husband, who died in 2004, had established a business selling and installing fireplaces and heating systems in 1981. The company employed six people, including her son, who aspired to running the business in the future. When construction work commenced there was very little communication or co-operation between the Council and local businesses. Her reference to “the Council” is indicative of the public perception that CEC was responsible for every act or omission associated with the project. Poor communication was also the responsibility of tie,which was responsible for management and progress of the work. Contrary to initial assurances that there would be minimal disruption to businesses and that plans would be put in place to ensure “business as usual”, traffic on Leith Walk was restricted to a single lane and weekly deliveries to her business of bulky, heavy goods such as granite and marble slabs, central heating boilers, fires or fire surrounds could not be offloaded. Without these materials the company had to cease trading, resulting in the dismissal of its employees [CZS00000030]. Mrs Johnstone’s account of the roadworks preventing deliveries of essential bulky goods was supported to some extent by the evidence of Dr C Mackenzie about problems with deliveries at his business premises in Haddington Place and that of Dr Herbert mentioned in paragraph 24.48 above, although the latter referred to a single delivery to his home in the west end of the city.

24.61 From the evidence submitted by Dr C Mackenzie it is apparent that the construction work adversely affected his family business [CZS00000064]. Dr C Mackenzie was
the managing director of Hi-Fi Corner (Edinburgh) Limited. It had retail outlets at
1 Haddington Place (which is at the corner of Leith Walk, opposite Gayfield Square) and at 121 Rose Street (which is situated parallel to Princes Street and at the west end of the city centre). In addition, the company traded from premises in Falkirk. Apart from his experiences related to the company’s outlets in Edinburgh during the construction works, Dr C Mackenzie attended a public meeting at which other business proprietors recounted their experiences. He recalled a restaurateur having to make his employees engaged in home deliveries redundant because of access issues to the restaurant premises.

24.62 As part of the construction work, the loading bay near the shop at Haddington Place had been moved, and there were resultant difficulties with loading and unloading goods. tieoffered help to load and unload goods but in the event those allocated to help apparently refused to move goods because of “health and safety” reasons [ibid,page 0003]. Moreover, couriers would not wait, with consequent loss of deliveries and uplifts. As a result of the trading difficulties at Haddington Place caused by the construction work on Leith Walk, the company took a conscious decision to move the business to its premises in Rose Street. However, when the construction work extended to the west end of the city-centre customers stopped going there because of access issues. Despite a substantial rent reduction, the company was unable to continue trading there. After more than 20 years of successful trading at that location, trading at Rose Street ceased on 30 April 2011 resulting in staff redundancies. Dr C Mackenzie gave evidence that he lost rental income at Haddington Place. He owned the shop premises and a flat nearby, and he rented the former to the company and the latter to a tenant. Throughout the period of the construction work he did not charge any rent for the shop premises and reduced the tenant’s rent for the flat because of disturbance caused by the works. He reported that he suffered a personal loss of £40,000, which had been intended for his pension provision.

24.63 Apart from the personal loss mentioned in paragraph 24.62 above, Dr C Mackenzie reported a steady decline in the net assets of the company until the cessation of tram works, at which point the business started to recover. He estimated the loss of the company’s retained profits accumulated over many years to be in the order of £300,000. He attributed the losses to the construction work. In addition, as a result of the closure of the premises in Rose Street the company lost at least three employees – and potentially more, as it would have been in a position to recruit further people had business not been interrupted.

24.64 Mr Steedman, the managing director of an accountancy firm whose clients are predominantly small-to-medium-sized businesses, also gave evidence about the effect on businesses on Leith Walk [TRI00000082; CZS00000066]. He referred to four businesses in that location each of whom had suffered a reduction in turnover because of the construction work in the vicinity of their premises that caused access problems to their business premises for customers. In the case of a hairdresser the loss of custom during the construction work had a long-term effect because it was difficult to entice some customers back if they had found a satisfactory alternative service. He had direct knowledge of the reduction in turnover because of his professional involvement with these businesses in preparing their accounts.

Businesses in the west end of the city

24.65 Businesses in the west end of the city centre suffered in a similar manner to those on Leith Walk. The increase in the time taken to complete the construction work meant that the financial loss suffered by them was extended over a period of three years in excess of the period originally planned had the line been operational by 2011.

24.66 I have already mentioned Dr C Mackenzie’s evidence of the effect of the construction work upon the retail outlet of Hi-Fi Corner (Edinburgh) Limited in Rose Street, which ultimately resulted in its closure. Mr Steedman also referred to the adverse impact of the construction work on businesses in the west end near Haymarket for which he had acted in a professional advisory capacity. One of these businesses ceased trading altogether, and he considered that the disruption caused by the construction work was a contributory factor in the closure of that business.

24.67 Ms Adamson’s evidence about the effect on her business near Haymarket was to a similar effect. Her business suffered a “huge financial burden during the construction process” due to the “failure of CEC and Contractors in allowing our customers safe access to our business premises during the entire tram construction project”. Even when no construction work was being carried out, she was unable to get the barriers removed to allow easier local access. After the completion of the works her business and neighbouring businesses had difficulty in encouraging customers back to the area. She also considered that the financial assistance of £3,000 or £4,000 offered
to small businesses depending on turnover was totally inadequate [CZS00000013]. Mr Steedman shared that view. Bearing in mind the prolonged period of disruption
to businesses in this locality and on Leith Walk, and the associated losses incurred
by them, I consider that there may well be merit in that complaint.

24.68 Mr Johnson, the owner or part-owner of several commercial properties in Stafford Street and Alva Street in the west end of Edinburgh, explained that “six years of indecisive tramway construction” had contributed to the destruction of that area “as a shopping area, full of lovely small specialist shops”. Subsequent traffic measures making it difficult for vehicular traffic to access the area had also contributed to the area’s decline as a location for specialist shops. Although the latter issue is not within the terms of my remit, Mr Johnson’s evidence about the effect of the construction work is relevant when considering the consequences of the delay to the project. As a landlord he witnessed a significant decline in the area’s prosperity. He said that small specialist shops closed and the cost to his company was “in six figures” [CZS00000075].

24.69 Although I acknowledge that the calculation of losses suffered by businesses in Edinburgh that are directly attributable to the construction work is complicated by the effects of the recession following the banking crisis at that time, I am satisfied from Dr C Mackenzie’s evidence that the company suffered significant financial loss as a result of the inordinate delay in the construction works that affected both of its business outlets along the route of the tram. His experience is mirrored by that of other businesses on Leith Walk and in the west end. The evidence as a whole has persuaded me that the delay in the construction work and the associated disruption were significant contributors to the losses incurred by businesses at that time. Many members of the public who responded to the Inquiry’s call for evidence referred to access difficulties in the vicinity of their homes and businesses. In particular, Ms Paterson stated that Leith Walk was blocked off with Heras fencing for years and that “[m]any shops went out of business because the street was fenced off and the crossing places sited so far apart” [CZS00000026]. It is self-evident that difficulty in accessing business premises that rely on passing trade is likely to have a detrimental effect on the turnover and profitability of that business, and it is unsurprising that some businesses ceased trading if access was constrained to the extent mentioned by Ms Paterson. Access issues are distinct from any loss of trade related to the recession. Indeed, it is clear that CEC recognised that the financial difficulties experienced by businesses were caused to a significant extent by the construction works. CEC introduced the various schemes designed to support affected businesses that are mentioned in paragraphs 24.12–24.15 above. No equivalent schemes were introduced in other parts of the city to compensate businesses for losses suffered
as a result of the recession.

24.70 As an indication of the generality of the impact on businesses, Mr Clarkson, a resident in the west end of Edinburgh at the time of the construction work, observed:

“The extended timescales caused huge disruption to traffic routes locally and led directly to many businesses closing down along the route. Barriers, noise, lack of access, unsightly ditches, etc. all made for an unpleasant experience. This last effect made me go shopping elsewhere (malls out of town) in order to drive and park without hassle.” [CZS00000007]

Although that was the perception of one member of the public, I have no doubt that it reflected the views of many others. From consideration of the evidence in its entirety it is clear that there was undoubtedly a significant adverse impact on businesses and residents, particularly in the west end and in the section from York Place to Newhaven.

Unnecessary costs

24.71 As was recognised in the closing submission on behalf of CEC, one of the consequences of the failure to complete the line to Newhaven as projected was that CEC incurred costs unnecessarily. In summary, these included:

• the costs of the design of the line between York Place and Newhaven;
• the costs of all construction work undertaken beyond York Place (inclusive of all professional and management fees); and
• the purchase of an excessive number of trams (which CEC estimated at between seven and ten) which it was unable to resell or to lease to other tram operators [see, e.g., Mr C Smith PHT00000053, page 177]. In a report to CEC dated 16 May 2011 the surplus was estimated at between six to ten vehicles [CEC01914650, page 0009, paragraph 3.20].
• CEC’s purchase of material and equipment from Infraco, which it had in preparation for the construction of the line beyond York Place and the cost of their storage, as well as compensation payments made to businesses on Leith Walk and beyond.

The inclusion of the compensation paid to businesses on Leith Walk in the list of wasted costs is a recognition that such expenditure would have been unnecessary if the line had terminated at York Place and no work had been undertaken beyond that point.

24.72 As noted in paragraph 24.71, senior counsel for CEC acknowledged that the cost of the design between York Place and Newhaven was wasted costs. Although part of the mediation settlement figure required BBS to complete the design for that section of the line, CEC later instructed BBS to stop work on that design at no cost saving to CEC. This was discussed more fully in Chapter 20 (Post-Mar Hall).

24.73 On the evidence available, I have been unable to evaluate the unnecessary costs but on any view the excessive costs relating to tram vehicles ranged between sums in excess of £12 million and £20 million being 22 per cent and 37 per cent respectively of the original contract price of £55,041,624.88 [BFB00053258, page 0032]. Obviously the figures for these excessive costs will increase when account is taken of the additional £6,636,003 paid to Construcciones y Auxiliar de Ferrocarriles SA (“CAF”) which I mentioned in Chapter 20 (Post-Mar Hall), some of which related to the storage in Spain of tram vehicles that CAF was unable to deliver because the depot was not completed on time [TRI00000290_C, pages 0086–0087, paragraphs 246–250]. As discussed in paragraph 24.76 the unnecessary costs associated with tram vehicles will be mitigated when all of the vehicles are brought into service following the opening of the extension to Newhaven but there will still have been an element of wasted costs relating to vehicles.

24.74 Apart from the above wasted costs which were acknowledged on behalf of CEC, tieincurred expenditure on the design of line 1b and on compensation of £3.2 million paid to Bilfinger Berger because the construction of line 1b did not proceed. This was also wasted expenditure.

24.75 Taking into account the additional expenditure incurred in relation to tram vehicles and the nature of the other elements of wasted costs mentioned above, particularly all expenditure on design and on the diversion of utilities as well as other construction work, inclusive of all professional and management fees, I consider that a reasonable estimate of the total figure for wasted costs would certainly amount to several tens of millions of pounds.

24.76 The completion of the extension and the commencement of the service to Newhaven should result in the use of the trams that were surplus to requirement when the route terminated at York Place. That does not mean that there would have been no unnecessary costs associated with these trams. Despite the completion of the extension CEC will have incurred storage and maintenance costs of the extra vehicles when they were surplus to requirements as well as wasted financial costs associated with purchasing them nearly a decade prior to their use. However, on the evidence available to me, I am unable to reach any view about those possible costs. As a generality, it is not possible for me to determine at this stage the extent to which the unnecessary costs will be mitigated. Such determination will need to await the completion of the extension and the publication of its final costs. These should indicate the extent to which the cost of the various items mentioned in paragraphs 24.71–24.73 above has been subsumed into the cost of the extension.

24.77 In the closing submissions on its behalf, senior counsel for CEC observed that the agreement to transfer material, equipment and design as part of the settlement agreement was sensible and would benefit CEC if it decided to proceed with the extension to Newhaven, although he recognised that:

“a number of utilities conflicts remain especially in Picardy Place and Leith Walk and that any materials retained would need to be carefully checked before being re-used” [TRI00000287_C, page 0306, paragraph 7.49].

While that is correct, it risks being an over-simplification of the extent to which the unnecessary costs will cease to be wasted costs as a result of the extension. By implication from the quotation mentioned above CEC recognises that it may not be possible to use all the material and equipment that it acquired following the mediation settlement. If that occurs, the cost of any unused material and equipment will have been unnecessary. However, as was noted in Chapter 19 (Mediation and Settlement), much of the material and equipment that CEC purchased following the settlement was utilised by Infraco in constructing the section to York Place, and Siemens managed to reduce the items to be transferred to CEC by cancelling some of its orders for material and equipment. In its closing submissions Siemens estimated £3 million as the cost to CEC of items transferred to it but unused in the section to York Place. To the extent that such material cannot be utilised it will remain unnecessary expenditure. Moreover, irrespective of whether all such material is capable of being used in the construction of the extension to Newhaven, CEC will have incurred the cost of its storage between the implementation of MoV4 in 2011 and the date of its use or disposal. That will also be an unnecessary cost, which will be ascertainable only after the completion of the extension.

24.78 As was discussed in Chapter 5 (Procurement Strategy), tie‘s strategy involved diverting utilities in advance of the tram construction works. This had the claimed advantage of enabling the construction of the tram line to proceed unencumbered by the existence of utility pipes or cables. On that basis, one might think that the residents and the owners of businesses north of York Place could have a reasonable expectation that the construction work for the extension to Newhaven should proceed expeditiously because of the efficient diversion of all utilities in that location during the prolonged period of disruption already experienced by them. Nothing could be further from the truth. As was noted in paragraph 24.77 above, in the closing submissions on behalf of CEC senior counsel acknowledged that a number of utilities conflicts remain, especially in Picardy Place and Leith Walk. That would appear to be an understatement if one takes into account the additional work required to divert utilities in the west end, which was discussed in Chapter 20 (Post-Mar Hall) It is not possible to quantify that unnecessary expenditure at this stage, but it will be reflected in the final cost of the extension.

24.79 A further item of unnecessary expenditure resulting from the termination of the line at York Place has been incurred in the construction of the tram stop at that location. The extension involves the removal of that tram stop and its relocation to Picardy Place. Had the line been built to the extent projected, there would have been no need for the tram stop at York Place.

Unrealised benefits

24.80 As already noted, the expectation had been that the entire route from the Airport to Newhaven would be completed within the same construction period, and that the tram service along that entire route would have been operational by 2011. Mr Coyle estimated the loss of revenue from the trams at approximately £4 million per annum as a result of the shortening of the route. Leith Walk was expected to be a significant trip generator, especially given the foot of Leith Walk’s status as a major public transport interchange [TRI00000144_C, page 0132]. Although that consequence is expressed from the perspective of the tram operator, CEC would have benefitted as the sole shareholder of the tram operator from the profit derived from that lost revenue. Mr Coyle’s evidence in this respect highlights the removal of a mode of public transport that residents in that locality and the public generally had been promised as a benefit of the project. Mr Drysdale, who responded to the public call for evidence, observed:

“The most striking consequence of the failure to construct the full tram network has been the lack of any improvements to public transport services in North Edinburgh, where the tram would have provided many new journey opportunities, much faster links between North Edinburgh and West Edinburgh … better access to the airport, and improved mobility for people living across a large part of North and North West Edinburgh.” [CZS00000014, page 0003, paragraph 11.]

24.81 Related to the lack of improvements to the public transport network was the loss of the anticipated benefit of a tram service as a catalyst for the development and regeneration of the Leith and Newhaven areas. In that regard Mr Balfour MSP, who had been a councillor since 2005 and was Conservative group leader at CEC between May 2010 and May 2012, observed:

“The shortened tram line demonstrated that the Tram Project had failed to meet the objectives and benefits of the Final Business case. One of the main reasons for the tram system was to provide a link to Leith and Ocean Terminal. I believe there was a requirement to provide a better transport system for the north of Edinburgh. This would have supported regeneration of the area.” [TRI00000016,pages 0032–0033,paragraph 95.]

Other witnesses expressed similar views about the loss of the support of the tram service for the regeneration of the area [see, e.g., Councillor Donald Anderson TRI00000117_C,pages 0131–0132,paragraph 349; Councillor Wheeler TRI00000092_C, page 0085, paragraph 190].

That in turn resulted in a loss of developer contributions, mentioned in paragraph 24.20 above, although the economic downturn from 2008 may also have been a contributory factor in the loss of these contributions.

24.82 I consider that a further consequence of the shortened tram line was its impact upon CEC’s obligation to provide value for money. In any major capital transportation project in the public sector it is essential to undertake a technical and economic assessment of the project prior to deciding to proceed with it. tie/CEC undertook such assessments at various stages of the process, from which it appeared that the Benefit to Cost Ratio (“BCR”) was greater than 1, indicating that the project would deliver value for money. Moreover, such a conclusion satisfied a condition of the grant of £500 million from Scottish Ministers. The Atkins report mentioned in paragraph 24.84 below noted that a BCR of “less than one suggests that the economic return would be less that [sic] the investment, even when appraised over 60 years” [CEC02044271, page 0034].

24.83 In April 2011, CEC commissioned Atkins, Engineering and Project Management Consultants, to undertake an independent review of the Business Case for the Tram project. The main focus of the audit was a review of the work of the Joint Revenue Commission (“JRC”) in assessing the benefits of the introduction of a tram system. Among the documents considered by Atkins were the Final Business Case version 2 (2007) and the Business Case Update (2010), as well as an updated Transport Economic Efficiency (“TEE”) analysis by JRC of three route options also commissioned by CEC in April 2011. The options analysed by JRC were the complete phase 1a from the Airport to Newhaven, a truncated route from the Airport to St Andrew Square, and a truncated route from the Airport to the foot of Leith Walk.

24.84 In its report, Atkins noted that if one took account of the full costs and benefits the BCR was less than 1 for each of the three routes mentioned above. However, to abandon the scheme would represent a zero return on a very large investment. The consequences for CEC of having no asset in exchange for the capital expenditure incurred prior to 2011 would have been catastrophic and were discussed in Chapter 19 (Mediation and Settlement). JRC had considered the future cost of each option without taking into account the spent costs. In that situation, the BCR in each case exceeded 1. JRC’s relevant table illustrating the BCR for each option when spent costs are taken into account and when they are omitted was reproduced in Atkins’ report and is reproduced in Table 24.2 [ibid, page 0035].

Table 24.2: Updated TEE Outputs (Source – JRC, June 2011)

*Please note that following an update on the treatment of sunk costs in relation to St Andrew Square, the BCR for St Andrew Square should now read 1.85.

24.85 From Table 24.2, the BCR of the route from the Airport to St Andrew Square is 0.73 if one includes the costs incurred prior to 2011, and 1.85 if these costs are excluded. I recognise that it is appropriate to ignore sunk costs when faced with a decision as to which future option to take. However, when looking at the cost of the project overall it is clear that if the outturn figure had been known at the outset and a BCR of 0.73 had been reported, Scottish Ministers would not have made the grant of £500 million towards the project. In that event it is probable that the project would not have proceeded until CEC could establish a positive economic case in its support.

Reputational damage

24.86 In its closing submissions CEC noted that several witnesses had acknowledged that the cost over-run and delay had an adverse impact on CEC’s reputation and on the city in general [TRI00000287_C, page 0308, paragraph 7.54]. The prolonged nature of the work, the escalating costs and the curtailment of the route, as well as the difficulties experienced by Edinburgh residents and businesses and visitors to the city alike, were well documented in the media. I have little doubt that the experience of visitors to the city – and the legitimate media scrutiny of the consequences of the failure of the project to deliver what had been promised within, or approximate to, the allocated budget – had some effect on the perception of others on the competence of CEC as a local authority. However, it is difficult to establish and quantify any resulting damage that may have been caused to the city’s reputation. In his evidence to the Inquiry Mr Harries expressed his view that:

“what Edinburgh has now is an excellent tram system. It operates well. It’s reliable. And technically it is good. So I think Edinburgh is in a good place now.” [PHT00000016, page 44.]

24.87 The quality and efficiency of the existing tram service are not within the scope of the Inquiry but may be relevant considerations for those seeking to invest or establish businesses in the city. Whether the existence of the tram system will reduce any reputational damage caused to the city or whether it will feature in the history of the city as a reminder of the mismanagement of the project will be determined in the distant future.

Conclusions

24.88 A consequence of curtailing the route at York Place is that it is not possible to assess by how much the cost of line 1a will exceed the budget of £545 million. What is undoubtedly the case is that the cost of line 1a will be at least £1,043,039 million if the extension to Newhaven is completed on time and within budget, resulting in an overspend of at least £498 million to construct line 1a.

24.89 Although the decision to reject the abandonment of the project in 2011 is understandable – because that would have resulted in wasted expenditure in excess of £500 million, for which CEC would have received no asset – CEC’s decision to construct the line to York Place at a cost substantially in excess of the budget for the entire line resulted in CEC failing to receive value for money if one takes into account the total expenditure on the line from the Airport to York Place.

24.90 A consequence of failing to deliver the project on budget was the need for CEC to borrow £246.5 million to complete the section to York Place, with the result that CEC had to commit future revenue over a 30-year period to meet repayments of capital and interest. That commitment will result in future lost opportunities for CEC to provide services to the citizens of Edinburgh throughout that period of 30 years.

24.91 The current best estimate of the extent of the commitment of future expenditure is 1 per cent of CEC’s annual revenue budget over a 30-year period. However, if any borrowing has been required to complete the extension to Newhaven that commitment will increase, resulting in more lost opportunities in the future. Any additional borrowing will also have been incurred as a result of CEC failing to deliver the project within budget.

24.92 A consequence of curtailing the line at York Place is that CEC has incurred unnecessary costs amounting to several tens of millions of pounds relating to the section between York Place and Newhaven. Although the extent of these costs may be mitigated by the completion of the extension to Newhaven, the extent of any mitigation cannot be determined until after the completion of the extension.

24.93 The failure to deliver the project on time and to complete the line to Newhaven has also resulted in a loss of revenue of about £4 million per annum for a period of about 10 years and has deprived residents in that locality and the public generally of the improvements to public transport that they had been promised.

24.94 The failure to deliver the project on time and to complete the line to Newhaven also removed the claimed benefit of having a tram service as a catalyst for the development and regeneration of the Leith and Newhaven areas.

24.95 The failure to deliver the project on time extended by several years the period of disruption, inconvenience and loss of amenity suffered by the public generally and by residents along the length of the route, particularly those living in the west end of the city and between York Place and Newhaven.

24.96 The residents between York Place and Newhaven will have continued to suffer such disruption, inconvenience and loss of amenity during the construction of the extension to Newhaven, which itself is a consequence of the failure to deliver the project to the extent projected.

24.97 Businesses in the west end and on Leith Walk suffered loss for several years longer than anticipated because of the failure to deliver the project on time. Businesses between York Place and Newhaven will have continued to suffer loss because of the construction of the extension to Newhaven, which is a result of the failure to deliver the project to the extent projected.