Chapter 25: Findings in Fact and Recommendations

Findings in Fact

Background

25.1 The construction of the Edinburgh Tram Network (“ETN”) was identified as a proposal in the City of Edinburgh Council’s (“CEC’s”) New Transport Initiative (“NTI”), a long-term project involving a number of proposals to be funded by congestion charging. After the abandonment of congestion charging in 2005, CEC retained the ETN as a major construction project. The procurement and delivery of the ETN was to be undertaken by tie Limited (“tie”), a company incorporated, and wholly owned, by CEC to deliver the proposals in NTI, including the Edinburgh Tram project (the “Tram project”).

25.2 The Tram project was the largest capital project undertaken by CEC in living memory. CEC had a budget of £545 million for the project, consisting of a grant of £500 million from the Scottish Ministers, with the balance being funded by CEC. The budget included the purchase of tram vehicles to operate on the network as well as the construction of the network itself.

25.3 The contracts for the construction of the network infrastructure (“Infraco contract”) and for the tram vehicle supply and maintenance contract (“Tramco contract”) were to be negotiated separately as part of the procurement strategy but were to be signed simultaneously as each of them was an integral part of the project. By separating these contracts the intention was that the risks associated with each of them were allocated to the company or consortium best able to manage these risks. There was the added advantage that tie was not bound to accept the vehicles selected by a consortium including Infraco and Tramco and could benefit from the competition between different vehicle manufacturers and suppliers. In accordance with that strategy, tie negotiated these contracts separately with the consortium of Bilfinger Berger UK Limited (“BB”) and Siemens plc (“BBS”) and Construcciones y Auxiliar de Ferrocarriles SA (“CAF”) respectively.

25.4 The strategy involved the novation of the Tramco contract to BBS at the date of signature of the Infraco contract, but on 7 February 2008 in the Rutland Square Agreement mentioned in findings 25.79-25.81 and 25.104 below tie confirmed that it had no objection to CAF joining the consortium of BBS either before or following the signature of the Infraco contract and the novation of the Tramco contract. Following the signature of the Infraco contract on 14 May 2008, which included the Tramco contract as a separate schedule, the consortium included CAF and became known as BSC.

25.5 Planned construction and financial appraisal of the project were based upon a phased approach consisting of phase 1a (Edinburgh Airport to Newhaven) and phase 1b (the Roseburn spur from Haymarket to Granton Square).

25.6 On 20 December 2007, by a majority, CEC approved the second version of the Final Business Case (“FBCv2”) and delegated to the Chief Executive the power to authorise tie to award the Infraco contract and the Tramco contract, subject to price and terms being consistent with the Final Business Case (“FBC”) and subject to the Chief Executive being satisfied that all remaining due diligence was resolved to his satisfaction.

25.7 Price certainty was important for CEC and its decision on 20 December 2007 to enter into the necessary contracts for the project was taken on the basis that phase 1a at least was to be constructed and opened for service in the summer of 2011 within the budget of £545 million, with an expectation that part of phase 1b might also be constructed within that budget.

25.8 CEC councillors based their decision on 20 December 2007 to proceed with the project upon both the FBC prepared by tie and reports from senior officials in CEC that reassured them that line 1a, at least, could be completed within available funds and would provide a Benefit to Cost Ratio (“BCR”) greater than 1, indicating that the project provided value for money.

25.9 After a delay of almost three years, line 1a of the ETN was opened for revenue service on 31 May 2014, although its extent was restricted to a line from the Airport to York Place (the “restricted line 1a”) rather than to Newhaven as had been the intention in the FBC.

25.10 The total outturn cost of the works by BSC under the Infraco contract was £427,206,309.52 for the restricted line 1a, compared with the original construction works price of £238,607,664 for a line between the Airport and Newhaven (the “entire line 1a”).

25.11 There is uncertainty about the final total cost of completing the restricted line 1a. Following the mediation at Mar Hall the projected budget for doing so was £776 million. In March 2017, CEC reported the cost of completing the restricted line 1a as £776.7 million. This was not, however, an accurate statement of the total cost, because:

• it underestimated outstanding claims by third parties;
• CEC was unaware of a substantial claim that had not been intimated at that time;
• it did not include certain costs of the project such as the cost of other infrastructure works undertaken by CEC directly attributable to the Tram project but allocated to other CEC budgets;
• it failed to include a pension fund deficit arising from the cessation of tie’s business;
• it omitted compensation payments to businesses and the Net Present Value of the cost of borrowing the additional £246.5 million needed to complete the restricted line 1a.
• Taking these items into account, the best estimate of the total cost of the restricted line 1a is £835.739 million.

25.12 The full cost of the entire line 1a, and the extent to which it has exceeded the budget of £545 million, will only be known once the extension from York Place to Newhaven has been completed and its cost added to the £835.739 million cost of the restricted line 1a. In undertaking that exercise the cost of the extension should not be understated for reasons similar to those mentioned in the preceding finding or for any other reason that omits to include all expenditure incidental to the construction of the extension.

25.13 Based upon the estimated cost of £207.3 million, including risk, support for business and optimism bias in the business case submitted to CEC in 2019 in support of the extension from York Place to Newhaven, the total expenditure on line 1a will exceed £1,043 million — nearly double the original estimated cost. Obviously, the increase in price of the entire line 1a above the estimated cost of £545 million will be even greater if CEC has borrowed money to fund the extension or if the estimated cost for the extension is otherwise exceeded.

tie’s procurement strategy and failures in its implementation

25.14 CEC was the promoter and owner of the project but did not have the necessary expertise to procure and manage it. It therefore appointed tie to do so.

25.15 As a newly formed company, tie had no corporate experience of delivering any major project. It had no knowledge of, or experience in managing, the particular difficulties associated with the construction of a tram or light rail system through the centre of a city in the United Kingdom.

25.16 Although some senior personnel in tie had prior experience of the construction of a tram line in the UK, the majority, including those in the most senior positions, did not.

25.17 tie recruited senior staff as consultants rather than as employees, and on contracts with relatively short notice periods. There was a significant turnover of staff, including those in senior positions. Between 2006 and 2008, four different individuals had filled the senior role of Tram Project Director (“TPD”). Loss of experienced staff resulting from the short-term contracts was exacerbated by tie’s replacement of experienced staff with redeployed staff who had previously worked on the Stirling–Alloa–Kincardine railway (“SAK”) project or the Edinburgh Airport Rail Link (“EARL”) project after tie’s involvement with these projects ceased.

25.18 The most significant change of TPD occurred early in 2008 with the replacement of Mr Crosse, who had prior experience of tram projects, with Mr Bell, who had none.

25.19 The ostensible reason for the removal of Mr Crosse as TPD was to enable him to focus on managing the final stages of the appointment of the Infraco contractors with the assistance of Mr Gilbert and Mr Dawson. Mr Crosse left before the completion of the contract negotiations and Mr Gilbert assumed the role of principal negotiator until he was replaced by Mr McEwan. The frequent changes in personnel at the critical stage of finalising the pricing schedule of the Infraco contract was not in the best interests of tie or CEC and was in stark contrast to the approach of BBS, which retained the same personnel for negotiations throughout.

25.20 Bearing in mind CEC’s desire for price certainty, tie’s procurement strategy was intended to take active steps to manage risk out of the project. Apart from the separation of the procurement of the Tramco contract and the Infraco contract mentioned in finding 25.3 above, these included:

• prior to the conclusion of the Infraco contract, providing the infrastructure contractor (“Infraco”) with completed designs with all necessary approvals and consents subject to the population of these designs with specific systems and components chosen by Infraco;
• completing the diversion of utilities in advance of the infrastructure work; and
• novating the design contract to Infraco at the date of signature of the Infraco contract.

25.21 The procurement strategy was a sensible response to the difficulties experienced elsewhere in the UK in the construction of light rail systems. The failure of the Tram project was caused by the failure to implement the procurement strategy in a number of respects considered in the following findings in fact.

Design

25.22 In implement of its procurement strategy, tie concluded various contracts, the first of which was the contract for System Design Services (“SDS”) with Parsons Brinckerhoff (“PB”) on 19 September 2005, for design and technical services in relation to both phases 1a and 1b (the “SDS contract”).

25.23 The scope of design to be carried out by PB depended on the element of works in question. In relation to the civil engineering elements, PB was to produce the design up to the detailed design stage. In relation to the electrical and mechanical elements, PB was to develop specifications of the functionality and technical elements required and the infrastructure required to support them. The detailed design of the electrical and mechanical elements would then be completed by the appointed infrastructure contractor depending on the particular components and systems that formed part of its bid.

25.24 Completion of the design was delayed. At the date of signature of the Infraco contract, design was incomplete and subsequent development of the design, treated by the contract as change, was inevitable. The effect of this, combined with the terms of the contract relating to change mentioned in findings 25.88 and 25.89 below, was inevitable delay and additional expense.

25.25 The strategy relating to completion of design was intended to provide potential infrastructure contractors with an informed basis for pricing their bids, thereby reducing the need for risk premiums and increasing the probability of achieving the price certainty that CEC sought.

25.26 Concluding the Infraco contract while the design was incomplete was a material departure from the procurement strategy and failed to transfer risk to Infraco to the extent upon which the FBC was based, meaning that the desire for certainty as to price could not be achieved.

25.27 The primary responsibility for design delay lay with tie for mismanaging the SDS contract, but PB’s failure, before commencing design, to engage with CEC to discuss CEC’s design requirements also contributed to the delay.

25.28 Some examples of tie’s mismanagement of the SDS contract are:

• For three months between December 2005 and March 2006, tie failed to notify PB of significant changes made to the original plans and sections submitted to the Scottish Parliament during the parliamentary process for approval of the Tram Bills, with the result that PB continued with the preparation of design on the basis of the wrong baseline.
• tie failed to involve CEC and third parties at an early stage in the design process to determine their wishes and requirements and to manage their expectations. The result was frequent and belated requests for changes to design including the reconsideration of options that had already been rejected.
• Different teams within tie requested that PB prioritise different items of design, at different times, in a manner that lacked co-ordination, resulting in an inefficient process for the production of design.
• tie failed to provide PB with instructions on critical issues, resulting in PB ceasing work on the SDS contract between February and June 2007.
• A misalignment between tie’s Employer’s Requirements and the design produced by PB arose as a result of tie’s procurement team amending the Employer’s Requirements to take account of its discussions with Infraco bidders without reference to PB. PB continued to develop the design for the tram network on the basis of the unamended requirements. In early 2007, it became evident that the proposals received from the Infraco bidders, the Employer’s Requirements and the SDS design did not align.

25.29 Although the primary responsibility for design delay was attributable to tie’s mismanagement the SDS contract failures by CEC officials, referred to as CEC’s failures, were a major contributor to such delay. Some examples of CEC’s failures in that regard are:

• Its failure to clarify its own requirements and the requirements of interested third parties before the commencement of design: for example, it failed to determine land uses in the vicinity of the Picardy Place junction and thereby prevented the design of that junction. Moreover, although, around December 2005, it did produce the Tram Design Manual [CEC00069887], which gave some guidance on design principles, that guidance was of a very general nature. In April 2008, a month before contract close, it produced the draft Tram Public Realm Design Workbook [PBH00018590; CEC02086917; CEC02086918; CEC02086920–CEC02086934], which was intended to supplement the guidance in the Tram Design Manual [CEC00069887] and the Edinburgh Standards for Streets [CEC00669586] and to assist PB in developing the details of the designs for the City Centre to obtain consents and approvals. Such guidance was produced too late and ought to have been available prior to the award of the SDS contract.
• Prior to the settlement of disputes between tie and BSC following mediation in 2011, CEC failed to work in a collaborative manner to resolve design issues swiftly and with clarity or to provide a focus on enabling the project to proceed smoothly.
• The lateness and sheer volume of its comments on design caused delay and expense.
• It commented on design with a number of voices, representing different departments within CEC with their own responsibilities, in which each of them focused only on what the ideal position would be for its own particular responsibilities rather than a single, considered voice. Had there been someone with responsibility to oversee and co-ordinate the response from CEC to the many requests for approvals and consents and to take into account the significance of the project and its benefits for Edinburgh and the wider community, as well as departmental responses, it is likely that the responses would have been more proportionate, focused and reasonable and would have avoided much of the delay that occurred in the production of design and the obtaining of consents and approvals.

Novation of SDS contract to Infraco

25.30 The procurement strategy included the novation of the SDS contract to Infraco when the Infraco contract was signed. The strategy was based upon the expectation that design would have been completed by PB to the extent specified in the SDS contract and that PB would have obtained all necessary consents and approvals. On that basis, the risk of the cost of making design changes after the signature of the Infraco contract would be transferred to Infraco unless the change was made at the request of tie.

25.31 The novation of the SDS contract to Infraco did not have the effect of transferring the risk of design change to Infraco as intended, because at the date of signature of the Infraco contract design was incomplete and not all consents and approvals had been obtained.

25.32 The incomplete design and the fact that not all the necessary consents and approvals had been obtained had to be reflected in the terms of the Infraco contract. The result was that the risk of design development was not passed to Infraco as intended.

25.33 tie retained a significant risk of design change after the award of the Infraco contract, with consequential increases in the cost of the project.

25.34 By insisting upon the novation agreement when design was incomplete, tie transferred control of completion of the design process to BSC but retained the significant risk of increased cost associated with it.

25.35 The novation agreement also removed the absolute obligation imposed upon PB in the SDS contract to obtain all necessary consents and approvals. Instead, PB would not have to bear the costs of amendments required by any approval body where the requirements were:

• inconsistent with or in addition to the Infraco proposals or the Employer’s Requirements;
• not reasonable given the nature of the approval body; or
• not reasonably foreseeable within the context of the lnfraco proposals or the Employer’s Requirements.

Utilities

25.36 The need to divert underground utilities from the path of the proposed tram lines was recognised as a particular problem for the construction of any tram line through a city centre. There were usually uncertainties about the extent and precise location of utilities as records kept by utility companies were often incomplete or inaccurate. There was also unrecorded redundant apparatus relating to disconnected utilities that contributed to the congestion under ground, limiting the space available for relocation of utilities.

25.37 The diversion of utilities tended to be an expensive part of tram or light rail schemes. Following the experience of earlier schemes for contracts to construct tram networks through city centres, tenderers were not willing to take the risk of bearing the costs of diverting utilities without adding substantial premiums to their bids.

25.38 The procurement strategy required the diversion of utilities in advance of the infrastructure works, to remove the uncertainty and disruption to the programme for these works that undiverted utilities would otherwise cause for the infrastructure contractor.

25.39 The strategy relating to the diversion of utilities would have provided potential infrastructure contractors with an informed basis for pricing their bids, reduced the need for risk premiums and increased the probability of achieving the price certainty that CEC sought.

25.40 Instead of having utility companies diverting their own apparatus, tie planned to conclude an agreement with a single contractor who would have responsibility for the diversion of all utilities, except high-pressure mains and high-voltage power cables or other apparatus requiring the specialist involvement of the utility company owning the apparatus.

25.41 At that time, this was the largest multi-utility project ever undertaken in Europe.

25.42 Following a tendering exercise, on 4 October 2006, tie entered into the Multi-Utilities Diversion Framework Agreement (“MUDFA”) with Alfred McAlpine Infrastructure Services Limited. That company later changed its name to Carillion Utility Services Limited.

25.43 When MUDFA was signed it was recognised that it was not possible to make an accurate assessment of the work that would be required. Accordingly, the contract did not provide a fixed price for the diversion of utilities but instead stipulated rates that would be payable for whatever work was required.

25.44 tie did not have the experience or skills to manage such a complex project. The programme in MUDFA envisaged that the pre-construction services would be undertaken between October and December 2006 and the MUDFA construction works would thereafter take approximately 14 months between March 2007 and June 2008. This allowed for a gap of approximately seven months between the programmed completion of the MUDFA works and the planned commencement of the works under the Infraco contract.

25.45 In March 2007, prior to the Scottish Parliament election in May, there was uncertainty whether the project would proceed because the Scottish National Party (“SNP”) was committed to abandoning it. Accordingly, a revised MUDFA programme was agreed, which provided for the MUDFA construction works starting in July 2007 and finishing by the end of 2008, i.e. a period of approximately 18 months, with almost no buffer between then and the start of the Infraco works.

25.46 Even this new period for the works for the diversion of utilities was not realistic and was inconsistent with the experience of other light rail projects in the UK. In projects in both Manchester and Birmingham, where the on-street works had been of a significantly shorter length, the diversion works took about two years to complete.

25.47 There were delays in obtaining information from utility companies about the location of their apparatus, which resulted in delays in the preparation of designs to be issued to the MUDFA contractor.

25.48 The utilities programme kept slipping and the cost of the MUDFA works increased due to the discovery of additional utility apparatus and unexpected underground obstructions. Each revised programme was too optimistic and was based on levels of production that had never been achieved previously. When additional apparatus was encountered the absence of any allowance for slippage in the programme meant that there was likely to be delay.

25.49 The MUDFA works were not completed before the signature of the Infraco contract.

25.50 When Bilfinger Berger (“BB”) started work on Leith Walk in 2008 it encountered difficulties that prevented it from working in an efficient manner. These included lack of unrestricted access to designated work areas due to continuing MUDFA works in those locations, and the existence of utilities that had not been moved despite the MUDFA contractor ostensibly having completed the MUDFA works in that location.

25.51 Following difficulties in the implementation of MUDFA it was terminated early, by agreement, in December 2009. Two further contractors were appointed to carry out the remaining required works to utilities.

25.52 By the date of the mediation at Mar Hall in 2011, the MUDFA works were still incomplete. This included areas in which Carillion Utility Services Limited had ostensibly completed its works. For example, in the 700 metres of Shandwick Place, there were 302 utilities within the designated working area that had not been moved despite the alleged completion of the MUDFA works there.

25.53 Changes to the design of the infrastructure works after the diversion of utilities also caused delay because further consultation with, and the agreement of, utility companies was required to relocate the apparatus that had already been diverted.

25.54 Slippage in the SDS contract and MUDFA was principally the result of deficiencies in tie’s ability to manage contractors and their programmes and to deliver projects on time and within budget.

Contract negotiations with Infraco

25.55 On 3 October 2006, tie issued an ITN to pre-qualified bidders, and tender submissions were required by 9 January 2007. On 9 January 2007, tie issued Supplemental Instructions to Tenderers, which required them to return as much as possible of the tender submission on 12 January 2007, with any outstanding, amended or updated tender information to be submitted as part of consolidated proposals on 16 April 2007.

25.56 The quality of the information provided by tie to tenderers was extremely poor. It was incomplete and was insufficient to enable tenderers to produce a firm price. The design and scope information provided during the bid phase was incomplete and immature. Although the Supplemental Instructions to Tenderers referred to the detailed design of structures, there was none. Even at the stage of signature of the contract, the final design was absent.

25.57 tie received bids from two consortia, one of which was BBS. Both bidders made substantial amendments to the proposed terms and conditions of the Infraco contract in order to protect their risk position pending receipt of more detailed design information and the completion of due diligence. Both bidders were nervous about the designs produced, and to be produced, by PB.

25.58 The state of design impacted on the intention, as part of the procurement strategy, to novate the design contract to Infraco. The strategy had been devised in the expectation that the design would be complete by that stage, and there was concern that the contract should not be novated at a time when the designs were still incomplete. tie recognised that at least critical design must be completed before contract award if novation was to be achieved.

25.59 The tender submitted by BBS was heavily qualified because of the incomplete design. It included a large list of qualifications and clarifications, some of which were maintained until contract award.

25.60 In 2007 it was clear that tie’s procurement programme was becoming increasingly unachievable as a result of the delays with design and MUDFA works. There was no recovery plan for the design or for the utilities contract. No arrangements, such as additional payment or instructions, were in place to accelerate progress on these matters.

25.61DLA Piper Scotland LLP (“DLA”) were appointed as legal advisers to tie in November 2002. The scope of their work included advice on procurement and strategy options. In 2005 DLA recognised CEC as a joint client with tie but despite the fact that CEC was the client for the project and bore the responsibility for any cost overruns, DLA gave primacy to the obligations owed to tie. It also deemed tie’s instructions to be the same as any that would be given by CEC. As noted in findings 25.76 and 25.77 below when the interests of tie and CEC diverged, DLA did not advise CEC separately of its views concerning the premature publication of the Notice of Intention to Award (“NIA”) the Infraco contract and the Tramco contract in March 2008 or of the apparent divergence of Interests between CEC and tie at that date.

25.62 For a period in 2007, while negotiations were being carried out with the Infraco bidders, tie dispensed with the services of DLA. It did so to save costs. For part of the period tie did not have any legal adviser. From June 2007, it had the benefit of only a junior solicitor whom it employed. It was a material error of judgement to proceed without legal advice – particularly in a critical phase of negotiations.

25.63 In June 2007, the Tram Project Board (“TPB”) accepted that, because of the delay with the designs, it would be necessary to seek tenders on the basis of design information that was incomplete. This was a change of strategy, but councillors were not advised of this change and its implications for their desire for price certainty.

25.64 In late 2007, it was the intention that CEC should formally approve the FBC and authorise conclusion of the contracts at its meeting on 20 December that year. However, by December it was apparent that the efforts to have BBS firm up its price entirely to accord with the procurement strategy had been unsuccessful and that both the MUDFA works and the design were materially behind schedule.

25.65 The delays in the MUDFA works and the design meant that a decision was required as to whether to continue with the timetable for contract signature as planned or to postpone it to permit a return to the procurement strategy. There was a concern at this time within tie that if there was delay to the conclusion of the contract, the prices would rise and it would not be possible to implement the project within the funding available. tie was also concerned about the continued availability of the grant funding from the Scottish Ministers if the signature of the Infraco contract was delayed beyond the end of the financial year in which funding was to commence. The withdrawal of grant funding would almost certainly have resulted in the abandonment of the project which was the only remaining project in which tie was involved. As a result, tie insisted on adhering to the planned timetable. This decision was a major component in the difficulties that were to follow.

25.66 There was no factual basis for tie’s concern about the continued availability of grant funding mentioned in finding 25.65. In particular no information was sought from the Scottish Ministers about the availability of funding if the signature of the Infraco contract was delayed. In the event payments of grant were made even although the signature of the Infraco contract occurred after the end of the financial year in which it had been planned.

25.67 The political and financial implications of delay, including the potential loss of grant allocated to the then current financial year, and any relevant strategic decisions were matters for the consideration and determination of councillors, not CEC officials or tie. Despite that, councillors were not advised of the options of proceeding to contract signature as planned or of postponing signature until the procurement strategy could be implemented or of amending or cancelling the project.

25.68 By December 2007 there was an aspiration that was almost akin to desperation by tie to conclude the Infraco contract early in 2008. This was manifested in the decision to use the pre-arranged routine meeting on 13 December 2007 in Wiesbaden as a high-level meeting, involving principals, to seek to progress to a conclusion of the contract. It was also manifested in the correspondence from Mr Gallagher prior to that meeting, in which he threatened to advise CEC to withdraw from the project unless his objectives were achieved. In an attempt to have the price finalised in time for CEC’s meeting on 20 December 2007, negotiations between Mr Gallagher and Mr Crosse (representing tie) and representatives of BBS took place on 13 December 2007 in Wiesbaden, Germany.

25.69 Neither Mr Gilbert, the person at tie with responsibility at that time for negotiating the contract with Infraco, nor tie’s legal advisers attended the meeting in Wiesbaden.

25.70 In Wiesbaden, at a private meeting between Mr Gallagher (of tie), Dr Enenkel (of BB) and Mr Hofsaess (of Siemens), a conditional oral agreement was reached that the price for the infrastructure works would be increased by £8 million and that BBS would bear any additional costs arising from changes to the design after 25 November 2007 – the date of the design on which BBS had based its pricing. The acceptance of risk of design change had to be approved by relevant committees in BB and the agreement was conditional on their approval. In the event, BB did not accept the unquantified risk of design change.

25.71 The price agreed in the private meeting between Mr Gallagher, Dr Enenkel and Mr Hofsaess mentioned in finding 25.70 equated to the figure in the draft preferred bidder agreement as a limit for the Infraco contract price, above which tie was not obliged to award the contract but could do so at its discretion. It was also similar to the price included for infrastructure works in the total price of £498 million for the project in the version of the Business Case approved by CEC in October 2007 and the version to be approved by it on 20 December 2007.

25.72 Following the meeting in Wiesbaden, an agreement between tie and BBS was signed on 20 December 2007 in respect of the price for the delivery of phase 1a of the Tram project (the “Wiesbaden Agreement”). The effect of this was different from the conditional oral agreement, in that BBS would not bear the whole of the costs arising from changes in design after 25 November 2007. As it was clear that the design had changed since that date and was continuing to change, that meant that the price would increase above the sum stated. On this basis, certainty as to price was removed. This was not brought to the attention of councillors as a whole at the Council meeting on 20 December 2007, or at any stage prior to the signature of the Infraco contract.

25.73 Between December 2007 and May 2008, negotiations were undertaken to finalise the terms of the Infraco contract as to price.

25.74 On 18 March 2008, tie published the NIA. The NIA is a precursor to the award of a contract indicating that the award of the contract is imminent and that the parties have concluded all permitted negotiation. It affords the parties a short period to reflect upon the terms of the negotiated deal before formally committing to it.

25.75 It was contrary to normal procurement management practice to issue an NIA when the parties were still in negotiation over central contractual documentation, as was the case on 18 March 2008. At that date there was no agreed contract price, no milestone payment schedule, no bills of quantity, no agreed master construction programme and no agreed post novation design delivery programme.

25.76 The premature issue of the NIA strengthened BBS’s negotiating hand and is an indication of the divergence of interests between tie’s desire to conclude the Infraco contract without delay and CEC’s desire to do so only if it resulted in the opening for service of line 1a from the Airport to Newhaven within the available budget of £545 million.

25.77 Despite DLA’s awareness that the premature issue of the NIA was contrary to normal procurement management practice and strengthened BBS’s negotiating hand, and its advising tie to that effect, it did not advise CEC of its views in that regard or of the divergence of interests between tie and CEC that arose from tie’s insistence on issuing the NIA contrary to DLA’s advice.

25.78 tie’s insistence on issuing the NIA contrary to DLA’s advice is another manifestation of its desperation to conclude the Infraco contract and of its placing its own interests ahead of the interests of CEC.

25.79 Following the Wiesbaden Agreement mentioned in finding 25.72 above three further agreements were concluded prior to the signature of the Infraco contract on 14 May 2008. These were the Rutland Square Agreement, the Citypoint Agreement and the Kingdom Agreement, dated 7 February 2008, 7 March 2008 and 14 May 2008 respectively. Each resulted in an increase in the price.

25.80 The Rutland Square Agreement contained a clause in terms of which BBS could lose preferred bidder status if it did not adhere to its terms, including the requirement that there be no further claims for additional payment, but tie neither used nor threatened to use this sanction when the increased prices were sought and obtained by BBS in the later Citypoint and Kingdom Agreements. tie’s failures in this regard indicated to BBS its desire to award the Infraco contract to BBS irrespective of repeated price increases and, as with the premature issue of the NIA, represented a divergence of interests between tie and CEC and was a sign of tie’s weak negotiating position, which BBS was able to use to its advantage.

25.81 The Kingdom Agreement arose out of a last-minute demand on 30 April 2008 from BBS for an additional £12 million, coupled with a threat to refuse to sign the Infraco contract. The signature of the contract had been planned for the beginning of May 2008, after the Council meeting on 1 May at which the Chief Executive of CEC (Mr Aitchison) reported the increase of £10 million in the contract price to £508 million resulting from the Rutland Square and Citypoint Agreements and sought, and was granted, refreshed delegated powers to authorise tie to enter into the necessary contracts. At that meeting councillors were not advised of the demand for the additional sum of £12 million.

25.82 Following negotiations between BBS and tie about BBS’s claim for the additional sum of £12 million, agreement was reached as a result of which the contract price increased by £4.8 million with an additional £3.2 million if phase 1b did not proceed. The Chief Executive of CEC reported the increased costs to a meeting of the Policy and Strategy Committee on 13 May and sought and obtained refreshed delegated powers to authorise tie to enter into the necessary contracts.

25.83 The price increases resulting from the agreements mentioned in finding 25.79 were included in the construction works price in the contract signed by Infraco on 14 May 2008. The construction works price was £238,607,664. This figure is analysed in Table 25.1, which has been reproduced from Appendix A1 in Schedule Part 4: Pricing of the Infraco Contract (“SP4”) [USB00000032, page 0015].

Table 25.1: Construction Works Price Analysis

A1 Construction Works Price Analysis
Lump Sum Firm and Fixed Price		£231,797,342
Deduct Identified Value Engineering	Taken To Firm Price	£9,965,006
	(See Appendix C)
Firm Price		£221,832,336
Deduct Further Value Engineering	(see Appendix D)	£2,670,000
Sub Total		£219,162,336
Add Defined Provisional Sums	(see Appendix B)	£11,434,316
Add Undefined Provisional Sums	(see Appendix B)	£8,011,012
Construction Works Price		£238,607,664

 

25.84 The deductions for value engineering and the exclusion of provisional sums resulted in a net construction works price of £219,162,336, apparently achieving tie’s objective of a target price in the region of £219 million excluding provisional sums.

25.85 The deductions for value engineering were unrealistic, unlikely to be achieved, and failed to take into account the cost of design changes to achieve them or the cost of associated delays. They were a device to reduce the construction works price to a figure approximate to one that would enable tie to claim that the project could be delivered within budget. They were properly described by Mr McFadzen, of BB, as “financial engineering”.

25.86 When finalised, the Infraco contract included several pricing assumptions in SP4. They represented assumptions on which it was agreed that the price had been given. It was also agreed that if there was a divergence from these assumptions, it would constitute a change – termed a “Notified Departure” – under the contract. Where this occurred, the terms of the contract as to entitlement to additional payment and additional time to complete the works applied.

25.87 When the contract was signed, it was known by both parties that some of the pricing assumptions did not reflect the true factual position and that Notified Departures would therefore arise with the consequent entitlement on the part of BSC to additional payment. This situation was expressly recognised in the wording of the contract.

25.88 Although senior employees of tie, including Mr Bell and Mr McEwan, were aware of the inevitability of Notified Departures that would increase the price of the project, tie did not make any detailed assessment of the likelihood of such price increases or the effect on the contract price.

25.89 Undertaking such an assessment would have been appropriate and prudent rather than proceeding by accepting an unquantified risk in order to conclude the deal. In concluding the Infraco contract, which anticipated Notified Departures immediately after its signature without a clear picture of the risk that was being taken, tie’s actions were reckless.

25.90 In general, changes, including their cost consequences, were regulated by clause 80 of the contract. Any departure from the pricing assumptions in SP4 would constitute a Mandatory tie Change and engage this clause. A Mandatory tie Change meant that it was not within the discretion of tie to decide that the scope of work should be revised to obviate the need for a change.

25.91 Clause 80 stated that Infraco could not commence the work in respect of any change, including a Mandatory tie Change, until tie had issued a Change Order under the contract. Issuing such an order would mean that tie accepted that the situation was one in which a change had arisen. The issue of such an order required that there had been agreement between the parties as to the cost consequence of the change. BB was to provide an estimate of costs when it gave notification of the change. If this could not be agreed, the matter required to be addressed in accordance with the dispute resolution procedure in the contract. There was an exception to the need for agreement where it was necessary that the work proceed as a matter of urgency. In that situation Infraco was entitled to payment on a demonstrable cost basis. In other words, Infraco would be paid based on a re-measurement of the actual time, resources and materials spent carrying out the works rather than an agreed price for the change.

25.92 tie had a quality assurance scheme in place in respect of the documents that had to be signed to conclude arrangements for construction to commence. It required that a named individual or individuals within tie carry out a main quality control review of the document in question and that a further named individual or individuals carry out a secondary quality control review. It also required that all elements should be subject to a full legal quality control review by DLA. In relation to SP4, neither the secondary quality control review nor the legal quality control review was carried out.

25.93 The terms of the Infraco contract that was ultimately signed were inconsistent with CEC’s desire for price certainty and were the primary cause of the project costing considerably more than originally budgeted for and delivering significantly less than was projected through reductions in scope.

25.94 The combination of the provisions in SP4 and clause 80 meant that where Infraco considered that there was a departure from the pricing assumptions in SP4, construction work would be delayed until agreement was reached about both whether there was such a change constituting a Notified Departure and the increase in sums payable under the Infraco contract in respect of such change.

25.95 As soon as the works commenced, Pricing Assumption 1 (“PA1”) gave rise to demands for additional payment under the Infraco contract and, when taken with the requirement in clause 80 of the contract to agree the cost implications of a change prior to works commencing, it resulted in significant delays to the progress of the works, with consequential increases in cost.

Assessment of risk

25.96 In the period up to the end of February 2008, tie carried out activities to manage and assess risk that were appropriate. Risks were identified and assessed and included in a risk register, which was reviewed. On the basis of the contents of the register, a quantitative risk analysis (“QRA”) was carried out. The output from this was then analysed further to provide a probabilistic assessment. This made it possible to determine the allowance that should be made for risk to achieve various degrees of confidence.

25.97 Based upon the above process, the estimated cost of phase 1a in the versions of the FBC approved by CEC in October and December 2007 amounting to £498 million in each case included a risk allowance of £49 million. It was considered that when this was added to the further £47 million available within the funding limit of £545 million there was an adequate allowance for risk and contingencies.

25.98 Official guidance available up to May 2008 also required that, when assessing the likely cost of a project, an allowance be made for optimism bias. Optimism bias is an innate human tendency to underestimate costs.

25.99 The guidance suggested uplifts that should be made depending on the type of the project and the stage at which the assessment of cost was being made. The suggested uplifts were derived from data from past projects, grouped into reference classes. Although the reference classes in the guidance did not mention light rail or tram projects specifically, they are statistically similar to heavy rail projects and the data relative to heavy rail projects should have been used in determining the uplift to be applied to the quantification of risk.

25.100 In the draft Interim Outline Business Case (“IOBC”) in 2005, tie applied an optimism bias. This was not based on the most up-to-date available guidance, reductions had been made on a subjective basis and it used the wrong reference class.

25.101 Had tie used the then current Department for Transport (“DfT”) guidance for optimism bias in preparing the draft IOBC in 2005 and used the correct reference class, the allowance for optimism bias would have had the effect that the cost estimate exceeded the available funding even if tie had adopted an 80 per cent percentile confidence level.

25.102 An 80 per cent confidence percentile means that there would be a 20 per cent chance that the cost of the project would exceed the stated sum. At the time, tie had made statements that there was 95 per cent certainty that it could deliver the project within the budget envelope, meaning that there was only a 5 per cent risk of exceeding it. Had the correct position been reported in the IOBC, there would have been an awareness within tie and CEC of the risk that costs would exceed the available funding. This would have led to a greater focus on the costs and on means of mitigating them. More care would have been taken before approval was sought for the Infraco contract and/or consideration would have been given to the possibility of constructing a restricted line or abandoning the project. The last two options were strategic decisions for councillors to take, but they were not given the opportunity to do so.

25.103 tie did not apply any uplift for optimism bias in either of the two versions of the FBC. This was contrary to the guidance current at that time.

25.104 In 2008, cost increases in the Infraco contract resulting from the Rutland Square, Citypoint and Kingdom Agreements were offset in the cost estimates by reductions to the risk allowance that did not have a proper objective basis. This gave a misleading impression that the estimated cost of line 1a of the project, including risk allowance, remained constant.

25.105 Since the publication of the guidance relating to optimism bias, much more empirical data has become available and the guidance is now out of date. It should be updated to reflect the additional data collected since 2004 and thereafter updated on a regular basis every five years to reflect additional empirical data collected in the intervening period.

Governance

25.106 The governance structure for the project was unduly complex. There was a lack of clarity regarding the respective roles of the various bodies and persons. In general, there was no clear analysis of the concepts of responsibility, accountability, authority, powers, reporting, oversight and undertaking. Often the various matters were fudged and the result was a lack of clarity as to what would happen or who was to perform particular tasks.

25.107 The governance structure did not accord with any established model.

25.108 The creation of a TPB as the principal decision-making body was inconsistent with the guidance in the PRojects IN Controlled Environments (“PRINCE2”) model that a Project Board should not have directive power.

25.109 Following an Office of Government Commerce (“OGC”) review, Mr Renilson was appointed Senior Responsible Owner (“SRO”) in May 2006. This is a key role and the SRO should be personally responsible for project delivery. However, Mr Renilson considered that his role as SRO related only to the period when the tram would be operational and not the construction period. This was not noted or commented on at the time. It had the result that no one was performing the SRO role before and during the construction phase until Mr McGarritty assumed it in December 2008, seven months after the Infraco contract was signed.

25.110 Between August 2006 and his resignation in late 2008, Mr Gallagher was Executive Chairman of tie. Having one person serve as both Chairman and Chief Executive does not comply with the code on good corporate governance derived from the Cadbury and Greenbury Reports [The Combined Code, Principles of Good Governance and Code of Best Practice].

25.111 The quality of reporting by tie was generally poor and was the subject of complaints by CEC and Transport Scotland.

Progress of Infraco works

25.112 After the signature of the Infraco contract, the progress of work under that contract was poor. Issues arose because of BBS’s inability to access sites that were still in the possession of the MUDFA contractor and an inability to progress the infrastructure works because of the existence of utilities that had not been diverted or of other unexpected obstructions.

25.113 tie and BBS failed to work in a collaborative manner to seek to resolve problems as they arose or were anticipated; instead, they each adopted an adversarial approach.

25.114 Based upon the price increases demanded by BBS prior to the signature of the Infraco contract, particularly the last-minute demand for an additional £12 million that led to the Kingdom Agreement, tie considered that BBS’s behaviour was opportunistic and that it was engaging in brinkmanship. tie considered that the cost estimates provided in respect of Notified Departures were inflated. On the other hand, within tie there was not a proper understanding of the contract.

25.115 Infrastructure works were carried out on Leith Walk in 2008. There was considerable disruption to these as a result of discoveries of undiverted utilities and other obstructions. BB considered that it had sustained financial loss as a result.

25.116 In early 2009, shortly before Infraco was due to start work on Princes Street, there was a dispute because of tie’s requirement for the retention of a bus lane. The original plan had been to close Princes Street to all traffic to enable the infrastructure works to be undertaken. However, after extreme traffic congestion resulting from the implementation of measures to effect this, a decision was taken to retain one lane open for buses. The difference between the parties as to the cost of that change was less than £1,500. After the experience in Leith Walk, however, BB was unwilling to start work on Princes Street because it anticipated that it would encounter unexpected obstructions. It wished to be paid on a cost-plus basis rather than the basis set out in the Infraco contract.

25.117 After Princes Street had been closed in readiness for the works, BB indicated that it would not start them until it had an agreement as to costs. In doing so it was in breach of the contract between tie and BSC. It was entitled to stop work only when it actually encountered obstructions and agreement had not been reached about the cost of the change associated with dealing with these obstructions.

25.118 BB’s refusal to start work on Princes Street put great pressure on tie. It resulted in the parties entering into the Princes Street Supplemental Agreement (“PSSA”), in which tie agreed to BB’s demand for payment for work there on a cost-plus basis.

25.119 The disputes between tie and BSC about the proper interpretation of the contract continued throughout 2009 and 2010 and resulted in various adjudications under the dispute resolution procedure, the decisions in which were issued between October 2009 and August 2010.

25.120 BSC had a substantial measure of success in the determination of the legal principles referred to adjudication although, as a generality, tie succeeded in reducing estimates submitted by BSC in relation to change notifications by substantial amounts.

CEC’s involvement

25.121 CEC is a statutory body consisting of councillors responsible for formulating policy and taking strategic decisions based upon advice given by paid officials whose responsibility also includes implementing CEC decisions.

25.122 Although tie was the vehicle by which CEC sought to implement its plan to construct a tram network serving the City of Edinburgh, CEC was the client and funded the project from public funds. It received a grant of £500 million from the Scottish Ministers towards the cost, with the balance being paid from CEC’s own funds. CEC bore the entire risk of any cost overruns.

25.123 As Chief Executive of CEC until his retirement in December 2010, Mr Aitchison had overall responsibility for ensuring that the decisions of councillors relating to the project were implemented and that CEC’s interests were protected. In fulfilling that responsibility he relied upon advice from two directors responsible for the project: the Director of Finance (Mr McGougan) and the Director of City Development (Mr Holmes until 31 March 2008, and thereafter Mr David Anderson), as well as the Council Solicitor (Ms Lindsay).

25.124 The responsible directors and the Council Solicitor in turn relied upon senior personnel within their respective departments to undertake detailed scrutiny of the project and to report to them. Members of the group of senior personnel mentioned in the preceding sentence were known as the “B team”.

25.125 CEC had no effective remedy against tie in the event of tie’s mismanagement of the project resulting in loss to CEC because tie was wholly owned and funded by it. CEC was unable to obtain insurance against such loss because of the relationship between it and tie.

25.126 The exposure to risk on the part of CEC was such that, through its officials, it ought to have exercised oversight of tie’s procurement and management of the project, including commissioning regular detailed reviews by a suitably experienced firm of multi-disciplinary engineering, transport and project management consultants.

25.127 The Infraco contract was a bespoke contract. To assess the risks that it presented, prior to authorising tie to sign it, CEC’s officials should also have instructed a firm of solicitors experienced in construction contracts to review the terms of the final draft of the contract and to advise it of any issues arising from the contract terms.

25.128 CEC’s senior officials failed to take either of the courses of action mentioned in findings 25.126 and 25.127 to protect CEC’s interests despite recommendations from members of the “B team” to do so.

25.129 The “one family” approach advocated by the Chief Executive (Mr Aitchison) wrongly assumed that there was no difference in position or interests between CEC and tie and that there should be the appearance of little or no challenge by CEC of tie.

25.130 As a result of the “one family” approach, CEC officials failed to give sufficient consideration to the adequacy of the governance procedures to protect CEC’s interests. In particular, they ought to have been aware of the fact that nobody was performing the duties of SRO, including reporting to CEC as client on a regular basis.

25.131 Another consequence of the “one family” approach was that the responsible directors within CEC deferred to tie’s wishes rather than follow the advice of the officials in the “B team”, as a result of which the FBC was not subjected to independent scrutiny from the perspective of CEC’s interests.

25.132 In September 2007, on the recommendation of the “B team”, CEC invited tenders for the appointment of external consultants with experience of similar large-scale infrastructure projects in the transportation sector to review and quantify the risks to CEC arising from the proposed Infraco contract. CEC identified Turner & Townsend for this role. tie vociferously opposed such an appointment and persuaded the responsible directors in CEC that a review of risk should be undertaken by OGC.

25.133 It was inappropriate for tie to seek to influence the identity of the organisation undertaking a review of tie’s assessment of CEC’s risk exposure.

25.134 A peer review undertaken by external consultants such as Turner & Townsend would have involved more detailed scrutiny of the risk assessments made by tie than was possible for OGC.

25.135 Although CEC officials followed the “one family” approach to management of the project, both before and after signature of the Infraco contract, tie did not. The attitude of tie’s senior management towards CEC’s officials is illustrated by the instruction to Mr Hamill, of tie, to adjust the QRA after financial close to reduce the allowance for general programme delay by £1.3 million, for reasons that were not explained to him, and his response to that instruction. He altered the relevant figure manually and sent the amended QRA to CEC officials. In doing so, he advised Mr Bell, Mr McGarrity, Ms Clark and Mr Murray, of tie, that he had “pockled the spreadsheet” and that it solved the problem and helped them to “get the final result past CEC as I doubt they will notice what I have done”. Although Mr McGarrity stated that he would have wanted CEC officials to know what had been done if there was a manual adjustment to the QRA, he did not respond to Mr Hamill’s email to make that suggestion. Neither he nor any of the other senior employees of tie to whom Mr Hamill had sent his email responded to it, from which I have inferred that they approved of Mr Hamill’s actions and his attitude towards CEC officials.

25.136 Senior management within tie failed to understand or to accept that CEC’s officials had a duty to question them to ensure that CEC’s interests were being protected and resented any challenge to their approach from members of the “B team”. They adopted an adversarial approach in dealings with CEC’s officials.

25.137 Following meetings where there had been such challenges, senior managers in tie requested the responsible directors directly, or indirectly through the Chief Executive, to speak to the member of the “B team” to discourage him or her from pursuing the matter. The responsible directors did so and, in one case, requested that the official (Ms Andrew) not attend any future meetings. By deferring to tie in this respect CEC’s senior officials failed to protect CEC’s interests as the promoter and funder of the project.

25.138 Reports by the Chief Executive and by the responsible directors to councillors were often based upon unchallenged information provided to them by tie and were misleading, both before and after the signature of the Infraco contract, either because they included statements that were false or because they omitted relevant information to enable councillors to take informed strategic decisions.

25.139 Prior to the signature of the Infraco contract, misleading reports to councillors created the impression that there was little risk that the project would not be delivered within budget. For example, the report by the Chief Executive for the Council meeting on 1 May 2008 stated that 95 per cent of the combined Infraco and Tramco costs were “fixed”, with the remainder being provisional sums. Moreover, the report included a statement that the utility diversion works along the tram route were “progressing to programme and budget”. Both of these statements were false.

25.140 After contract signature, officials continued to submit misleading reports to councillors. For example, Mr N Smith of CEC’s legal department accepted that reports to councillors on 24 June and 14 October 2010 were inaccurate in stating that the outcomes of disputes that had been referred to adjudication were “finely balanced” “in terms of legal principles”. He had been responsible for the inclusion of that false statement in the report. As a solicitor within CEC’s legal department, he would or should have been aware that the signatories of the report, who were not legally qualified, would act upon his advice on a legal matter such as the categorisation of adjudication decisions in terms of legal principles. His explanation that he was responding to pressure from Mr Jeffrey, of tie, does not detract from the fact that he must bear responsibility for misleading councillors.

25.141 As noted in finding 25.6 the exercise of the Chief Executive’s delegated powers to authorise tie to enter into the necessary contracts was conditional on the price and terms being consistent with the FBC and subject to the Chief Executive being satisfied that all remaining due diligence was resolved to his satisfaction. When councillors refreshed the Chief Executive’s delegated powers on 1 and 13 May 2008 respectively the only variation to the conditions related to the increases in the price specified in findings 25.81 and 25.82 that had been negotiated since the FBC.

25.142 The decision to award the contracts was a strategic decision that was properly one for councillors to take, independently of any views expressed by tie. As was noted in finding 25.6, councillors delegated their power to authorise tie to award the Infraco contract and the Tramco contract to the Chief Executive of CEC. As was explained in finding 25.74, the issue of the NIA was a precursor to the award of the contract indicating that the award of the contract was imminent and that the parties had concluded all permitted negotiation. tie also required the Chief Executive to exercise his delegated power to permit it to issue the NIA on 18 March 2008.

25.143 In exercising his delegated power to authorise tie to issue the NIA on 18 March 2008 and to sign the Infraco contract and the Tramco contract on 14 May 2008, the Chief Executive of CEC required to act independently of tie.

25.144 Before authorising tie to issue the NIA and subsequently to sign the Infraco contract and the Tramco contract the Chief Executive sought advice from the Director of Finance and the Director of City Development at the relevant date as well as the Council Solicitor, who were also required to be satisfied independently of tie that it was appropriate to issue the NIA and that the draft contract reflected CEC’s objectives, including price certainty.

25.145 By 17 March 2008, a number of necessary critical contractual decisions were still outstanding in respect of the Infraco contract, including the Employer’s Requirements, value engineering, pricing and funding and SDS assurances. In the absence of agreement about these critical decisions it was impossible for the Chief Executive to be satisfied that the price and terms were consistent with the FBC or that all remaining due diligence had been resolved. In these circumstances he should not have authorised the issue of the NIA on 18 March.

25.146 In May 2008, the Director of Finance was aware that Ms Andrew, a senior official in the Department of Finance to whom he had delegated the responsibility for considering the proposals and attending meetings with other officials and reporting to him, still felt uncomfortable that she did not have full understanding of the risks relating to the Infraco contract. Moreover, the Director of Finance also had concerns about risk at that time, but he took comfort from the positive Audit Scotland and OGC reviews, despite the fact that these had been undertaken in June 2007 and October 2007 respectively prior to the existence of the FBC and the draft Infraco contract including SP4.

25.147 Reports to the Chief Executive’s Internal Planning Group (“IPG”) from January 2008 onwards showed the status of the various deliverables, also called “critical contractual decisions”, necessary to enable the Chief Executive to use his delegated powers to authorise tie to award the Infraco contract. A number of necessary critical contractual decisions were still outstanding when the Chief Executive exercised his delegated powers to authorise tie to enter into the Infraco contract. This indicates a lack of diligence in protecting CEC’s interests on his part and on the part of the responsible directors and the Council Solicitor when they advised him that he could authorise tie to enter into that contract.

25.148 There was a lack of mutual respect between the Solicitor to the Council and the solicitors working directly on the Tram project, particularly Mr C MacKenzie and Mr N Smith. Communication was poor, as will be illustrated below.

• Mr MacKenzie’s various requests for a copy of the Letter of Engagement of DLA signed by the Council Solicitor did not result in its delivery to him.
• In August 2007, Mr C MacKenzie sent an email to Mr N Smith, advising him that he had been directed by the Council Solicitor that Mr Smith should review the draft Infraco contract and prepare a report on its implications for CEC within two days. Although Mr C MacKenzie’s email had been copied to Ms Lindsay, Mr Smith responded to Mr C MacKenzie alone, refusing to undertake such a task as he considered that he lacked the necessary expertise and considered that the timescale for completion of the task was unrealistic.
• Mr C MacKenzie did not advise Ms Lindsay of Mr Smith’s response, and she remained unaware of that reaction until the Inquiry provided her with a copy of Mr Smith’s email. This reflected poor management on her part as well as a lack of communication within the department.
• In April 2008, Mr C MacKenzie received and considered a draft of SP4 from which it was evident to him that clauses 2 and 3 of SP4 excluded a fair amount from the certainty of the lump sum, fixed and firm price of the construction works price and which increased his concerns about the adequacy of the risk allowance.
• Although both the Council Solicitor and Mr N Smith each received the draft of SP4 at the same time as Mr C MacKenzie, neither of them read it. Each of them recognised the difficulties that SP4 had for CEC’s desire to have price certainty as soon as they read it after the contract was signed.
• Having regard to her numerous other duties, it was understandable for the Council Solicitor to rely upon reports from Mr C MacKenzie and Mr N Smith to advise her about the terms of SP4 and of any concerns that they may have had about it.
• There was no justification for Mr N Smith failing to read SP4. Had he read it he would have recognised the difficulties that it had for CEC’s desire for price certainty and could have advised the Council Solicitor of these difficulties before 1 May 2008.
• Before going on holiday on 2 May 2008, Mr C MacKenzie failed to advise the Council Solicitor of his concerns arising from the terms of SP4, although he left a note dealing with other issues. Had he expressed his concerns about SP4 to the Council Solicitor at that time she could have considered the terms of SP4 in light of his concerns and would have recognised the difficulties that it posed for CEC’s desire for price certainty.

25.149 As a result of the failures of Mr C MacKenzie and Mr N Smith relating to SP4 mentioned in finding in fact 25.148, the Council Solicitor was not in possession of any report from solicitors within her department about the implications for CEC of the terms of the draft Infraco contract before advising the Chief Executive that he could authorise tie to sign the Infraco contract and the Tramco contract.

25.150 Had the Council Solicitor been aware of Mr C MacKenzie’s concerns about SP4, or had Mr N Smith read it and made her aware of his concerns, or had she herself read SP4 and become aware of the concerns that she had when she ultimately read it after signature of the contract, and had she been exercising the care expected of a reasonable solicitor, she could not have advised the Chief Executive to authorise tie to sign the Infraco contract and the Tramco contract.

25.151 tie and CEC are jointly responsible for the failure of the Infraco contract to implement the strategy designed to achieve price certainty. Officials failed to advise councillors of departures from the strategy which had been set out in the FBC approved by members in December 2007, particularly in relation to the failure to implement the planned transfer of risk to BSC.

Mediation

25.152 By the middle of 2010, parties had been embroiled in dispute resolution procedures for several months. tie had been unsuccessful, in terms of legal principle, in most of the adjudications that had been determined, but had legitimate concerns about the estimates produced by BSC in relation to change notifications.

25.153 By late 2010, work on the project had effectively ceased.

25.154 The parties had been in discussion about a proposal known as Project Carlisle, in which a new contract would be agreed for a fixed price but for a reduced scope of works. Despite offers and counter-offers, no agreement had been reached.

25.155 By that time tie had issued Remediable Termination Notices (“RTNs”) with a view to applying pressure to BSC. However, tie had not carried out the necessary forensic analysis to establish that BSC was in fact in default and tie was unable to enforce the RTNs.

25.156 The Cabinet Secretary, Mr Swinney, intervened in November 2010 and told CEC to take the dispute to mediation. There were then discussions involving representatives of BSC and CEC, including the leader of the administration (Councillor Dawe). As a result, it was agreed that parties should seek to resolve their differences at mediation.

25.157 In preparation for mediation, CEC/tie explored two options: (i) termination and re-procurement of the Infraco contract and (ii) continuing with the same contractors to complete the project.

25.158 In the analysis undertaken in advance of mediation, the first of these options was substantially cheaper than the second, although there were uncertainties about the level of risk associated with re-procurement.

25.159 On the eve of the mediation, £150 million was added to the estimated cost of the termination and re-procurement option. As a result, CEC’s preferred option of allowing BSC to continue with the project was the cheaper option.

25.160 No detailed support for the additional sum of £150 million was presented to the Inquiry. Having regard to the timing of the addition of that sum to the estimate of the cheaper option and its consequences, it is difficult to avoid the inference that its purpose was to provide a further justification for the acceptance of a mediation settlement that permitted BSC to resume work on the project.

25.161 The mediation took place between 8 and 10 March 2011 at Mar Hall, with a further two days of discussions immediately afterwards.

25.162 CEC’s negotiating team was led by its Chief Executive (Dame Sue Bruce) and included the chairman of tie (Mr Emery) and Mr McLaughlin, of Transport Scotland.

25.163 At and immediately after the mediation, agreement about the basis for settlement was reached. This was subject to ratification by councillors. That agreement for settlement was thereafter recorded in two Minutes of Variation (“MoV4” and “MoV5”) to the Infraco contract.

25.164 MoV4 provided for payment of £49 million to BBS, consisting of £25 million for the purchase of Siemens’ materials and equipment, £12.5 million for BB’s mobilisation and £11.5 million for Siemens’ mobilisation. Payment of these sums was to be made in instalments against certificates issued by Mr C Smith of Hg Consulting.

25.165 CEC officials instructed tie to make certified payments under MoV4 totalling £36 million before it was signed. This resulted in payments being made without CEC obtaining a legally binding commitment from the recipient. As such, it was a serious breach of governance by senior CEC officials. The fact that they were confident that the paperwork “would catch up” and that their confidence was ultimately realised does not justify their decision or detract from the recklessness of paying substantial sums of public money without the necessary signed agreement.

25.166 Payments under MoV4 were also made in the absence of approval of councillors for that variation. When councillors ultimately authorised the signature of MoV4 on 30 June 2011, it was conditional on payments made under it not taking tie beyond the expenditure limit of £546 million for the project that the members had previously approved, being the budget of £545 million plus £1 million that tie was permitted to incur without seeking further prior approval from CEC. Councillors were not advised that payments under MoV4 had already been made and took tie beyond those limits when added to expenditure already incurred and contingent liabilities in respect of compensation payable if MoV5 were not signed and the Infraco contract was terminated. These payments were unauthorised payments and would have remained so, if councillors had not subsequently ratified MoV5.

25.167 MoV5 provided for the route to be completed from the Airport to St Andrew Square/York Place. It included a fixed price of £362.5 million for off-street works and a target price of £47,384,510 for the remaining on-street works. It was signed in September 2011, following the approval of that settlement by councillors. MoV5 also made significant changes to the Infraco contract, including the variation of clause 80 so that where there was a change notice BBS was permitted to continue working before agreement was reached about the cost of such change.

25.168 tie senior employees present at the mediation considered that the settlement figure offered by CEC and accepted by BBS was excessive, and expressed that view before it was offered as a settlement figure. The figure was not based upon detailed calculations that could be verified, and in their evidence to the Inquiry was described by CEC’s representatives, including Dame Sue Bruce, as a “horse trade”.

25.169 There is some support for the concerns of the tie senior employees when one considers the contribution made by the project to Bilfinger’s profit and overheads. The projected figure for its profit and overheads at contract close in 2008 was 11.07 per cent; following conclusion of the settlement agreement in September 2011 it was 7.23 per cent; but the actual figure for its profit and overheads on conclusion of the project was 21.21 per cent.

Completion of the line to York Place

25.170 Following CEC’s approval of MoV5, the budget for completion of the line to York Place was fixed at £776 million.

25.171 When the line was completed and ready for service, councillors were advised that the project had been delivered within the revised budget. However, as indicated in finding 25.11 above, this was inaccurate, and the best estimate of the cost of constructing the tram line from the Airport to York Place is in excess of £835 million, excluding expenditure of £16.8 million on the parliamentary procedure to obtain the necessary private legislation underwritten by the Scottish Ministers.

25.172 Following the recommencement of work after mediation, tie was no longer involved in the project and its role was assumed by CEC with the assistance of Turner & Townsend and Mr C Smith of Hg Consulting. A different culture was adopted by all parties. Instead of the confrontational approach adopted by BSC and tie before mediation there was a collaborative approach towards resolving any issues that arose in the completion of the line to York Place..

Involvement of the Scottish Ministers

25.173 The Scottish Ministers were supportive of the project until the Scottish Parliament election in May 2007. Until then, they took an active role in the following capacities:

• as funders
• in having their officials consider and comment on various drafts of the business cases
• in a supportive and facilitative role
• through participation of their officials in the TPB

25.174 The Scottish Ministers were the principal funders for the project, having committed a grant of £500 million (being the original committed sum of £375 million with indexation).

25.175 Before the election of the SNP minority Government in 2007, the previous Administration had made it clear that no further sums would be made available to CEC for this project.

25.176 Although there was no experience in modern times of the construction of a tram line in Scotland, the Scottish Ministers had access to advice initially from officials in the Scottish Executive and, after 1 January 2006, from officials in Transport Scotland following the creation of that body as an executive agency of the Scottish Executive. These officials had relevant expertise in large-scale transport infrastructure projects originally in their role as trunk roads authority, which subsequently expanded to include heavy rail projects.

25.177 As with other major public-sector construction and civil engineering contracts in which it was involved, Transport Scotland engaged external consultants to advise on particular aspects of the project, including, but not confined to, its economic appraisal.

25.178 The election manifesto for the SNP in the May 2007 Scottish Parliament election included a commitment to cancel the Tram and EARL projects. The SNP was elected to form a minority Government. Thereafter the Scottish Ministers requested that the Auditor General prepare a report on both projects before the debate in the Scottish Parliament about them that was scheduled for 27 June 2007.

25.179 On 27 June 2007, the Scottish Parliament resolved to continue the existing support for the Tram project. Although not bound to do so, but with a view to the risk of losing a vote of no confidence if they did not accede to the will of Parliament, the Scottish Ministers accepted that resolution.

25.180 Following the vote and their decision to continue to provide financial support to the project, the Scottish Ministers decided to “scale back” their involvement in the project. The decision was made prior to there being any clear agreement on, or understanding, of what was meant by the phrase “scale back”.

25.181 The main changes that were made were that Transport Scotland would no longer have a nominee on the TPB, Transport Scotland would no longer play a facilitative or supporting role and the conditions on which the grant for the project was to be made available to CEC were varied. Those changes meant that Transport Scotland lost its veto on governance arrangements, the project hold points included in the conditions attached to the offer of grant funding were removed and the assessment of the FBC to see whether it met the requirements to proceed was to be carried out only by CEC.

25.182 Thereafter, the involvement of Transport Scotland officials was restricted to meeting CEC officials on a four-weekly basis to receive progress reports and to receiving confirmation on a quarterly basis that grant conditions were being complied with.

25.183 In accordance with the revised grant conditions, Transport Scotland officials did not scrutinise the draft FBCs submitted to CEC for approval in October and December 2007. Nor did they subject the draft Infraco contract to scrutiny by lawyers experienced in major construction and engineering contracts, as they normally did in projects where Scottish Ministers were providing substantial sums of grant funding. Had they done so, it is likely that the problems with the contract would have been identified.

25.184 The decision of the Scottish Ministers to scale back the involvement of Transport Scotland officials in the manner outlined above resulted in the failure of the Scottish Ministers to protect public funds of £500 million committed to the project. Had the original grant conditions remained in place and the normal reviews been undertaken of the FBC and of the draft Infraco contract before its signature, the Scottish Ministers would have been aware that the tram line from the Airport to Newhaven could not be delivered within the budget of £545 million and they could have instructed a further economic appraisal of it.

25.185 Instead of a tram line from the Airport to Newhaven at a maximum cost of £545 million, which produced a Benefit to Cost Ratio (“BCR”) greater than 1 (indicating value for money), the Scottish Ministers’ grant of £500 million towards the cost of the project only resulted in a truncated line ending at York Place, which cost in excess of £835 million, excluding the expenses of securing private legislation.

25.186 If the reported cost to CEC of £776 million for the truncated line had been known prior to CEC’s signature of the Infraco contract, and had it been subjected to an economic analysis at that time, it would have resulted in a BCR of less than 1, indicating that the Scottish Ministers and CEC would fail to obtain value for the public money to be spent on the project. Such value for public money would have been even less if the ultimate cost in excess of £835 million had been known in advance of the decision to proceed.

25.187 There was no acceptable explanation provided to the Inquiry for the decision of the Scottish Ministers to continue to fund the project to the extent agreed by their predecessors but to remove the safeguards to protect that funding.

25.188 In the discussions between senior officials in Transport Scotland about the ministerial decision to “scale back” its involvement in the project, Mr Reeve was sufficiently concerned about it that in order to provide clarity and cover he canvassed the possibility of seeking a ministerial direction that normal governance processes should not be followed. Seeking a ministerial direction is a highly unusual and extreme course of action available to civil servants to emphasise to Ministers their concern about proposed ministerial action and to protect the civil servants from criticism for ministerial actions. Although no such direction was sought, it indicates a concern on the part of Mr Reeve that there could be adverse consequences for the public purse from what was being proposed.

25.189 Although in public the Scottish Ministers did not take an active role in the project after May 2007, they did exert influence in the background once disputes between tie and Infraco emerged and work on the project ceased. For example, Mr Swinney met the Chairman of tie (Mr Mackay) in February 2009 regarding the Princes Street dispute, when he told him to “get it sorted”, following which the PSSA was negotiated and signed between tie and BSC.

25.190 In 2010, Mr Swinney also had about eight meetings with representatives of CEC and tie, culminating in a meeting with CEC in November 2010 when he told CEC to take the ongoing dispute between tie and BSC to mediation.

25.191 Mr Swinney also had a meeting with representatives of BBS on 8 November 2010 to discuss the disputes between it and tie.

25.192 Minutes were not taken at any of the meetings between Mr Swinney and representatives of tie, CEC or BBS and there is no contemporaneous record of the detail of the discussions.

25.193 A senior official in Transport Scotland (Mr McLaughlin) participated in the mediation and acted as one of three negotiators in CEC’s/tie’s discussions with BSC. Although Mr McLaughlin was a member of the negotiating team, Dame Sue Bruce alone could determine the terms of any negotiated settlement at mediation.

25.194 Before CEC/tie made the offer that BSC accepted, Mr McLaughlin telephoned Mr Swinney to advise him of the proposed offer in settlement. Although both of them were insistent that the purpose of the call was not to secure Mr Swinney’s approval of the offer, no plausible explanation was given by Mr Swinney or Mr McLaughlin to the Inquiry for the telephone call being made at that stage of the mediation proceedings.

25.195 Following the mediation settlement, and with the approval of the Scottish Ministers, officials from Transport Scotland assumed a role in the management of the project until the commencement of revenue service on the curtailed line in May 2014.

25.196 The actions of the Scottish Ministers during 2009, 2010 and 2011 and in authorising the involvement of officials in Transport Scotland in the management of the project between 2011 and 2014 reinforces my view that the limitations imposed by them on the involvement of officials in 2007 was a serious error and resulted in the failure by the Scottish Ministers to protect the public purse, insofar as their contribution of £500 million was concerned.

Reports by OGC and Audit Scotland

25.197 The reports by OGC and the report by Audit Scotland in June 2007 appear to have given CEC and members of the Scottish Parliament a false sense of reassurance about the project, despite the caveats in the latter report and in the evidence given by the Auditor General to the Scottish Parliament’s Audit Committee. However these reports were based upon short, high-level reviews and were not intended as a substitute for detailed reviews from suitably experienced independent advisers, instructed by CEC as the client and promoter of the Tram project.

25.198 In the OGC report following the signature of the Infraco contract, the team charged with preparing the report expressed surprise to learn that the MUDFA works were only 60 per cent complete, which was much slower progress than it had been led to believe when preparing the reports prior to the signature of that contract.

25.199 The review in 2007 by Audit Scotland was inhibited by the failure of tie to advise Mr Greenhill, who prepared the section of the report relating to the Tram project, of the delays in the completion of the MUDFA works and in the progress of design and of the unlikelihood of achieving completion of design in accordance with the programme. 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 and had Mr Crosse, of tie, not withheld two slides from the briefing note to be given to Audit Scotland that showed slippage in the design programme.

25.200 As the records of the audit information collected by Audit Scotland had been destroyed after six years from the audit in 2007 in accordance with Audit Scotland’s policy relating to the period for their retention, I have been unable to determine whether tie positively misled Audit Scotland about delays or simply failed to provide information to that effect which was not requested.

25.201 Although officials in Transport Scotland were aware on 21 June 2007 of factual inaccuracies in the Audit Scotland report, suggesting that incomplete or inaccurate information had been provided to Mr Greenhill, they took no action to advise Ministers, CEC officials or the Auditor General prior to his appearance before the Audit Committee of the Scottish Parliament on 27 June 2007 in advance of the parliamentary debate about the Tram project and EARL.

25.202 The Auditor General anticipated the continued involvement of the Scottish Ministers in the project after June 2007, as is apparent from his evidence to the Audit Committee of the Scottish Parliament on 27 June 2007. In particular, he envisaged the submission of the FBC early in 2008

“to the twin sponsor bodies, the local authority and Transport Scotland, which would scrutinise it carefully—particularly Transport Scotland, because it is concerned with Parliament’s interests. Final approval would then be afforded by the cabinet secretaries.” [SCP00000031, page 0012, column 22.]

Consequences

25.203 The consequences of the delay in completing the restricted line to York Place and the substantial overspend were far-reaching.

25.204 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 has 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.

25.205 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.

25.206 A consequence of curtailing the line at York Place is that CEC has incurred wasted expenditure relating to the section between York Place and Newhaven, even allowing for the completion of the extension to Newhaven in 2023. The estimate of such wasted expenditure cannot be determined until after the completion of the extension.

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

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

25.209 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.

25.210 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.

25.211 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 during the construction of the extension to Newhaven, which is a result of the failure to deliver the project to the extent projected.

25.212 The disruption to residents and businesses was aggravated by the fact that it was apparent that, for considerable periods of time, little or no work was being undertaken following the commencement of on-street work, and after streets were closed or access to and from residential and business premises was restricted.

25.213 There was also disruption to Edinburgh residents generally and to members of the public travelling to and from the city. Road closures and diversions to accommodate the work lasted longer than they should have; journey times were longer and there was a consequential unquantified economic loss.

25.214 CEC’s subsequent decision to complete line 1a by constructing the line from York Place to Newhaven will have resulted in wasted expenditure relating to the terminus at York Place. Moreover, the completion of the line to Newhaven will mitigate but not eliminate wasted expenditure already incurred in the tram project. Following completion of the extension to Newhaven wasted expenditure will still include payment for design of the extension that was not required, payment for the design of line 1b, compensation of £3.2 million paid to BBS in respect of their procurement costs relating to line 1b, costs associated with the initial purchase, delivery and storage of surplus trams, and expenditure incurred for remedial works to the work already undertaken to divert utilities between York Place and Newhaven.

25.215 Any associated need for additional borrowing by CEC to complete the line to Newhaven is a consequence of the failure to deliver the project within the budget and to the extent projected. It will result in a further reduction in revenue available for essential services for its citizens over a prolonged period to repay the capital and interest on such borrowing.

Recommendations

(b) Recommendations

25.216 In Chapter 2 (Establishment and Progress of the Inquiry), I made recommendations concerning public inquiries generally. The following recommendations relate to light rail projects or similar major projects promoted by public authorities.

Recommendation 5

25.217 Where the Business Case for any future light rail project is based upon an assumption that, prior to the award of the contract for the construction of the infrastructure, certain matters will have been completed (e.g. design, the obtaining of all necessary approvals and consents or the diversion of utilities), the contract negotiations should be delayed until completion of these matters has been achieved, failing which before any infrastructure contract is signed a new Business Case should be prepared on the basis of the altered assumptions that prevail and should be approved by the promoter and owner of the project.

Recommendation 6

25.218 All versions of the Business Case, including any Business Case required as a result of altered assumptions, should include an assessment of risk that takes account of optimism bias in accordance with the current published government guidance.

Recommendation 7

25.219 The assessment of risk at each stage mentioned in Recommendation 6 should be the subject of a peer review by external consultants with experience of similar large-scale infrastructure projects in the transportation sector who should submit a report of each review to the promoter and owner of the project as well as to the procurement and project manager sufficiently far in advance of the signature of the infrastructure contract to enable the promoter and owner to consider whether to authorise its signature and, as appropriate, to consider any other available options requiring a strategic decision.

Recommendation 8

25.220 The existing Guidance on optimism bias was based on empirical data available almost two decades ago and should be revised to take into account the additional data that is now available. In particular, the reference classes should be updated to include a specific reference to light rail projects and the recommended uplifts for the different reference classes should be adjusted to reflect the additional empirical data that is now available. Thereafter the Guidance should be reviewed and revised to take account of additional data on a regular basis at intervals of not more than five years.

Recommendation 9

25.221 The identification and management of risk should be an integral part of the governance of all major public-sector contracts in future. In identifying and managing risk the following principles should be adopted:

• Probabilistic forecasts rather than single-point forecasts should be used to take account of the risk appetite of funders and project sponsors.
• Funders, sponsors and project managers should be cautious when adjusting uplifts and there should be critical review of claims that mitigation measures have reduced project risk.
• Effective governance needs to provide constant challenge and control of the project, including recording of where the project is compared with its baseline, and reacting quickly to get the project back on track, whenever there are signs that it is veering off course. This necessitates providing senior decision-makers with data-driven reports on project performance and forecasts combined with reports by the management team and independent audits.
• In reporting to governance bodies there should be special emphasis on detecting early warning signs that the cost, schedule and benefit risks may be materialising so that damage to the project can be prevented. If early warning signs do emerge, the project should revisit assumptions and reassess risk and optimism bias forecasts.
• The quality of evidence rather than process is the key to providing effective oversight and validation.

Recommendation 10

25.222 In the interests of protecting the public purse and maximising the benefits from public expenditure on major projects, the Scottish Ministers should contemplate establishing a joint working group consisting of officials in Transport Scotland and representatives of the Convention of Scottish Local Authorities (“COSLA”) to consider how best to take advantage of:

• tolerating the risk of cost overrun that is always a possibility in risk assessments by including all public-sector light rail projects in the portfolio of large projects undertaken by the Scottish Government, including those to be constructed wholly within the geographical boundaries of a single local authority;
• the greater experience within Transport Scotland of managing major projects in the public sector; and
• the necessary skills and expertise within Transport Scotland to deliver the project on time and within budget.

Recommendation 11

25.223 The Scottish Ministers and local authorities responsible for funding light rail projects should be mindful at all times of their obligation to protect public funds and to obtain value for public expenditure. In that regard:

• the Scottish Ministers should impose conditions on the payments of grants, similar to the “hold points” imposed on the offer of grant made on 19 March 2007 that enable them to review at each “hold point” whether the scheme is continuing to meet its objectives and to determine whether to continue to support the funding and implementation of the scheme;
• continued financial support from the Scottish Ministers should require their critical review of all versions of the draft Business Case and their approval of the FBC as well as their review, and approval before their signature, of the draft contracts for the delivery of the project;
• the Scottish Ministers should be involved in the delivery of the project as they were before the withdrawal of the support of officials from Transport Scotland in 2007 and following the resumption of infrastructure works after the mediation settlement at Mar Hall; and
• as a condition of the grant the local authority should be obliged to comply with the project monitoring and control procedures of Transport Scotland and should ensure that robust, transparent, externally verifiable project controls for the project are in place.

Recommendation 12

25.224 For reasons of transparency and accountability for public expenditure, the Scottish Ministers should keep minutes of:

• the nature and content of any discussions and the reasons for any decisions taken at all meetings, discussions or telephone conversations, and in email or other correspondence between a Minister and civil servants relating to the nature and extent of any involvement by civil servants in the procurement and delivery of a project funded or to be funded in whole or in part from public funds (including a grant from the Scottish Ministers);
• all discussions between a Minister and representatives of a local authority, the company responsible for the procurement and delivery of a publicly funded project or the company responsible for its construction to record what was discussed and what, if any, decisions were reached and the reasons for any such decision;
• all discussions between a Minister and civil servants including telephone discussions concerning any negotiations, including, but not restricted to, negotiations at mediation, for settling disputes involving contracts funded or to be funded in whole or in part from public funds (including a grant from the Scottish Ministers) to record what was discussed and what, if any, decisions were reached and the reasons for any such decision.

Recommendation 13

25.225 The procurement strategy for any future light rail project should make adequate provision for the uncertainties concerning the location of utilities and redundant equipment belonging to present and past utility companies, particularly in urban centres. In particular, although it is not possible to be prescriptive about the appropriate timescale:

• the procurement strategy should include a requirement that the route of the track should be exposed and cleared of utilities well in advance of the infrastructure contractors commencing their work;
• the procurement strategy should specify the period that should elapse between the exposure and clearance of the route and the commencement of construction, to ensure that the contractors have unrestricted access to the construction site and may proceed with the infrastructure works unencumbered by the presence of utilities; and
• in fixing the period mentioned above, the procurement strategy should take into account the length of the route to be constructed, past experience of the time taken for the diversion of utilities in light rail projects in other parts of the UK and any additional constraints peculiar to the project such as an embargo on work to divert utilities during particular periods such as the festive season or special events (e.g. the Edinburgh Festival).

Recommendation 14

25.226 Although some participants in the Inquiry criticised the use of MUDFA to divert utilities in advance of the infrastructure works and advocated the “bow wave” approach to the diversion of utilities that followed the mediation settlement at Mar Hall, I do not think it appropriate to be prescriptive about how the risks associated with the diversion of utilities are managed. It is sufficient for promoters of light rail schemes to be aware of such risks and to demonstrate that they have adequate proposals for managing them.

Recommendation 15

25.227 In recognition of the various difficulties likely to be experienced in the design and construction of a light rail project through a city centre, the promoter and owner of the project should appoint as its procurement and project manager a company with suitably qualified and experienced permanent employees that has delivered a similar project successfully on time and within budget or can demonstrate that it will be able to do so.

Recommendation 16

25.228 Immediately following the appointment of the designer, and throughout the design of the project, the designer should engage with the promoter and owner of the project, the procurement and project manager, the local planning authority, the utility companies and interested third parties owning land that may be affected by the project to clarify their design criteria. In such discussions throughout the design of the project the promoter and owner of the project should co-ordinate responses to the various stages of design and, in doing so, should take into account the competing interests of different parties and of various departments within any local authority exercising different statutory functions as well as the significance of the project in the context of the community as a whole and should provide all necessary assistance and clear and timeous instructions to the designer to avoid delays and additional expense. In that regard:

• prior to the appointment of the designer the local planning authority ought to produce sufficiently detailed design guidelines to enable the designer to take them into account from the outset when designing the tram network and to improve the prospects of obtaining the necessary consents and approvals without requiring repeated re-submission of designs that will result in delay to the project with resultant expense;
• throughout the project a collaborative approach should be adopted by the promoter and owner to achieve an early resolution of any design issues that arise; and
• the promoter and owner should assume primary responsibility for co-ordinating the local authority’s response and for negotiating the resolution of all issues to enable clear instructions to be issued to the designer and to avoid re-design of sections of the route following reconsideration of matters that have been resolved at an earlier stage.

Recommendation 17

25.229 The governance structure for the delivery of a major project such as a light rail scheme should follow the published guidance and should ensure that there is clarity regarding the respective roles of the various bodies and individuals involved in its delivery. In particular, the chairman of the company responsible for the procurement and management of the project should not also be its chief executive.

Recommendation 18

25.230 As part of their investigations, representatives of OGC undertaking an independent “readiness review” of a publicly funded project and representatives of any person, including representatives of any public body such as Audit Scotland, undertaking a review of the progress of and/or expenditure on a project funded in whole or in part by public funds should interview key personnel involved in the project to ensure that each of them understands his or her role and is performing it effectively. In preparing any list of key personnel to be interviewed, the individuals undertaking the investigations shall include the person designated as SRO.

Recommendation 19

25.231 At all stages of the project there should be a collaborative approach to delivering it. This should include the co-location of representatives from each organisation relevant to the particular stage reached and having an interest in its completion to enable any issues to be addressed and resolved at the earliest opportunity, thereby minimising the risk of the escalation of disputes with associated delays and increased expense.

Recommendation 20

25.232 The directors, employees and consultants of the company responsible for the procurement and delivery of the project as project managers, including an arm’s-length external organisation (“ALEO”) wholly owned by the local authority that is the promoter and owner of the project, should not submit to the local authority information that is deceptive or reports that are misleading either by the inclusion of false statements or by the omission of references to facts that might influence the strategic decisions of councillors if they were disclosed. In that regard they should recognise and respect the need for local authority officials to scrutinise and challenge the accuracy of information and reports submitted to them and should not seek to frustrate, or interfere with, the instruction of independent consultants to advise officials on the accuracy of the risk assessment in such reports or on the terms of any draft contracts for which they seek authority to sign.

Recommendation 21

25.233 Local authority officials should be mindful at all times of the distinction in roles between them and councillors, who are solely responsible for strategic decisions, and of their duty to provide accurate reports to councillors to enable them to take informed decisions based upon the reality of the situation. Such reports should not be misleading either by the inclusion of false statements or by the omission of relevant facts. Where officials prepare and submit reports based upon reports to them from an ALEO acting as the procurement and delivery vehicle, they should not assume the accuracy of these reports based upon the adoption of a “one family” approach involving the local authority and the ALEO.

Recommendation 22

25.234 Where a company, including an ALEO, knowingly submits a report or other information to local authority officials that is misleading by reason of the inclusion of false statements or the omission of relevant facts or where such officials knowingly submit misleading information to councillors, whether or not councillors act upon that information, the Scottish Ministers should consider whether there should be an appropriate sanction in damages against the relevant individuals within the company responsible for the false statements or omission of relevant facts, as well as against the company itself, and against the relevant local authority officials involved in misleading councillors.

Recommendation 23

25.235 In addition to any civil liability arising from any sanction introduced in accordance with Recommendation 22, the Scottish Ministers should consider whether there is a need for a statutory criminal offence involving strict liability once it is established that the information and/or report was misleading by reason of the inclusion of false statements or the omission of relevant facts.

Recommendation 24

25.236 The Scottish Ministers should also give consideration to the need for legislation to impose a similar duty of disclosure to that owed by policyholders to their insurers upon a company, its directors, employees or consultants and upon a local authority and its officials towards representatives of OGC or of Audit Scotland undertaking any review of a publicly funded project. Any such legislation should determine the appropriate civil and/or criminal sanctions to be imposed for breach of the duty of disclosure.

Footnotes

35. CEC were unable to provide the Inquiry with the “Tram Public Realm Design Workbook” as a single
document [CEC02087292]. ↵

36. No signed copy was produced to the Inquiry. CEC stated that a signed copy could not be found in its
records. ↵