1 Tuesday, 19 September 2017 2 (9.30 am) 3 CHAIR OF THE INQUIRY: Good morning. Mr Mackenzie? 4 MR MACKENZIE: Good morning, my Lord. The next witness is 5 Jim Inch. 6 MR JIM INCH (sworn) 7 CHAIR OF THE INQUIRY: I should advise you that at 8 10 o'clock, there's a fire alarm test every Tuesday. So 9 don't be worried when the alarm sounds. 10 Also, if you just listen to the question and try to 11 answer it as best you can. Mr Mackenzie. 12 Examination by MR MACKENZIE 13 MR MACKENZIE: Good morning. 14 A. Good morning. 15 Q. Could you state your full name, please? 16 A. Jim Inch. 17 Q. And your current occupation? 18 A. I'm retired. 19 Q. I think you provided a statement to the Inquiry, 20 Mr Inch. If we look at that. It will come up on the 21 screen. The reference is TRI00000049_C. I think you 22 may also have a hard copy before you as well; is that 23 right? 24 A. Correct. 25 Q. If we firstly go to the last page, please. I think it's 1 1 page 101, just to check that's your signature. 2 A. That is, yes. 3 Q. That is your signature at page 101. We will see it 4 coming up on the screen in a second. Can you confirm 5 that's the statement you provided to the Inquiry? 6 A. I can confirm that. 7 Q. Thank you. So, Mr Inch, that written statement, 8 together with evidence you give today, will comprise 9 your evidence to the Inquiry. 10 Now, just sticking with -- go back to page 1 of the 11 statement, please. We can see just above the word 12 "Introduction", you explain you were the Director of 13 Corporate Services for the City of Edinburgh Council 14 between 2002 and January 2011. Is that correct? 15 A. That's correct. 16 Q. I think you retired in January 2011; is that correct? 17 A. That is correct. 18 Q. Thank you. I would like, Mr Inch, to ask you some 19 questions about the structure of the Council Directorate 20 at the time you were in the Council, in particular 2007 21 and 2008, round about that period. 22 Now, we obviously know you were a member of the 23 Council Directorate, presumably along with the Directors 24 of City Development and Finance; is that correct? 25 A. That's correct. 2 1 Q. So were you the same seniority as those other directors? 2 A. Yes, I believe so. 3 Q. And presumably the Chief Executive, did that post sit 4 one above the directors? 5 A. Correct. 6 Q. Also, I think the Council Solicitor was part of your 7 Directorate; is that correct? 8 A. That is correct. 9 Q. Does the Council Solicitor sit one beneath you in terms 10 of seniority? 11 A. That's correct. 12 Q. Thank you. 13 You've also referred in your statement to being 14 a member of the Council's management team and attending 15 management team meetings. Can you tell us a little 16 about that? 17 A. Yes. The Council, the Chief Executive had weekly 18 meetings with all of the directors within the Council, 19 and these meetings dealt with the whole array of Council 20 business, and any issues that were arising in relation 21 to a relationship with elected members. 22 Q. Thank you. Was it only officers who attended these 23 management team meetings, or did the leaders of the 24 administration attend as well? 25 A. No, only officers. 3 1 Q. Thank you. You also mention you were the Council's 2 Monitoring Officer. Is that a role that was always 3 given to the Director of Corporate Services? 4 A. No, it varies between councils and quite often can be 5 the most senior legal person, but it varies 6 significantly between all councils. I think my 7 predecessor in the role of Corporate Services took that 8 role on and I inherited it from him. 9 Q. Thank you. What was the role of the Council's 10 Monitoring Officer? 11 A. The Monitoring Officer has a role in relation to 12 addressing any references to maladministration, to any 13 injustice that might be -- and unfairness that might be 14 brought to the attention of the Council. 15 It tended to be a role that was rarely used 16 latterly, because the Council had a variety of other 17 policies and procedures, whistleblowing policies is an 18 example, where issues that would normally or previously 19 have been dealt with by the Monitoring Officer had 20 a different route to be dealt with. 21 Q. Thank you. I think it is a statutory role across the 22 UK, certainly Scotland, England and Wales, I think I'm 23 right in saying that if it appears to the Monitoring 24 Officer that any proposed decision et cetera by the 25 local authority or committee or any officer has given 4 1 rise or would give rise to illegality, maladministration 2 or injustice, then there's an obligation on the 3 Monitoring Officer to report to the Council; is that 4 correct? 5 A. That's correct. 6 Q. Thank you. Moving on, please, to the tram project, just 7 by way of overview, what were your duties and 8 responsibilities in relation to the tram project? 9 A. I think I had -- the tram project was really a project 10 apart from the daily business of the Council. And my 11 involvement with the tram contract was very limited up 12 until the Chief Executive set up the internal -- the 13 IPG, as it was described, and he asked me to be a member 14 of that group. 15 My recollection was it was early 2007. I have been 16 corrected. I think it was late 2006 that the IPG was 17 set up. And I attended most of the meetings of the IPG. 18 The IPG was set up by the Chief Executive. 19 I suspect because he felt the need for greater 20 governance and greater appreciation of what was going on 21 within the tram project. That provided us with a forum 22 to call our own and specialist staff and our own staff 23 who were involved with the tram project directly, and 24 get updates as to progress and issues that might be 25 arising. 5 1 My own role in the IPG was a bit unclear, I have to 2 admit, because I wasn't bringing any professional 3 expertise to the table. I was not a qualified finance 4 person. I didn't have the technical knowledge that 5 would have been of use. 6 I guess I was in an observational role. I certainly 7 was there to support the Chief Executive. And I think 8 I was there to ask the daft laddie questions that 9 probably no one else had thought of, and I did that, 10 I think, quite well because I'm quite used to doing 11 that. 12 Q. I see. We will come back to the Internal Planning Group 13 shortly. 14 Could I also please move on. What were the duties 15 and responsibilities of each of the other directors in 16 relation to the tram project? 17 A. Both of the Director of City Development and the 18 Director of Finance had very direct role in relation to 19 the tram project. They were key players in the 20 development of the tram. It was in fact projects that 21 they established and ran, and it was they that formed 22 the main liaison with tie in terms of the operation of 23 the tram or -- the operation of the tram, but the 24 management and oversight of the tram development. 25 Q. Thank you. What was the role and responsibilities of 6 1 the Chief Executive in relation to the tram project? 2 A. The Chief Executive clearly had overarching 3 responsibility for the tram project, as the 4 Chief Executive has overarching responsibility for all 5 Council business. 6 I think I mentioned a few minutes ago that I thought 7 the IPG was a reflection of his feeling that he didn't 8 have enough direct involvement with the tram project at 9 the date of 2006 when IPG was set up. 10 But the Chief Executive is the responsible officer. 11 He does have a responsibility for the Director of 12 Finance and the Director of City Development. 13 Consequently, he sits above and apart. He is the person 14 who would liaise most directly with the Chief Executive 15 of tie. He's the person that would liaise most directly 16 with the elected members, in relation to informing 17 elected members of what was happening in relation to the 18 tram. 19 Q. Thank you. What was the role and responsibilities of 20 the Council Solicitor in relation to the tram project? 21 A. The Council Solicitor -- it was recognised, of course, 22 that there are many legal issues arising in relation to 23 the development of the tram project. Quite complex 24 legal matters, and in order to address that, it was 25 agreed that the Council Solicitor would be not entirely 7 1 seconded but more or less seconded to the tram project. 2 I say that because Council Solicitor had other 3 duties, and had a division to run. But we agreed at the 4 time that the priority had to be the tram. 5 So the Council Solicitor was heavily involved in 6 liaising with tie and the tie legal advisers on the 7 development of the various legal issues that arose 8 through the tram project. 9 Q. Just to be quite clear about that, in the period 2007 up 10 until, say, May 2008, that period, you said that the 11 Council Solicitor was -- I think you mentioned more or 12 less -- not entirely seconded but more or less seconded 13 to the tram project. 14 Is that really right? 15 A. I used that -- a very unfortunate word, I think. I used 16 the word "embedded", and that was maybe misleading, but 17 I would -- I think it would be up to the 18 Council Solicitor to assess how much of the 19 Council Solicitor's time was devoted to the tram. But 20 I would have expected it to be a very high proportion of 21 the Council Solicitor's time that would be dedicated to 22 tram activity. 23 Q. So during this period, as I understand it, the Council 24 Solicitor remained in the Council Headquarters; is that 25 correct? 8 1 A. That's correct. 2 Q. The Council Solicitor had all of her other duties and 3 responsibilities in relation to other Council matters; 4 is that correct? 5 A. That's correct. But she was expected to delegate a lot 6 of that to her colleagues. 7 Q. Yes. I think you explained she was expected to devote 8 a significant, reasonable amount of time to the tram 9 project. 10 Presumably, ultimately the Council Solicitor was 11 responsible for providing legal advice to the Council in 12 relation to the tram project? 13 A. That's correct. 14 Q. Thank you. 15 Can I move on, please, to the role of the Tram 16 Monitoring Officer. I think that's something quite 17 different to your role as Monitoring Officer of the 18 Council; is that right? 19 A. Yes. It was very specifically Monitoring Officer in 20 relation to tram activity. So it was very much narrower 21 than the Monitoring Officer. It wasn't a statutory 22 role. It arose out of the development of tie, the tie 23 monitoring -- the Tram Monitoring Officer had 24 responsibilities in relation to the technical operation 25 of the project, and to ensure that standards were 9 1 maintained and to address any issues that would arise, 2 dispute that would arise, between the various parties 3 involved in the development of the tram. 4 So it was a very narrow role, and one that was 5 developed as time went on. 6 Q. The question is the role having developed as time went 7 on, we will come on shortly to look at various documents 8 relating to how the Council exercised oversight and 9 control over its Council-owned companies, and we will 10 come to see that there required to be a Monitoring 11 Officer appointed for each of the Council-owned 12 companies. 13 I just wonder who would be the Monitoring Officer 14 for tie as one of the Council-owned companies; was that 15 the same thing as the Monitoring Officer for the tram 16 project more generally? 17 A. I think this developed. So it is a bit confusing. 18 I recognise that. 19 There was a Monitoring Officer for the Council-owned 20 companies. One of the Council-owned companies was tie. 21 So that Monitoring Officer had a responsibility in the 22 early stages for tie. 23 As time went on, the Council determined that they 24 needed to have greater monitoring of the project and it 25 was agreed that the Director of City Development should 10 1 take the role of Monitoring Officer for the tram project 2 and in doing that, tie. 3 So -- but as I say, that did develop out of a lot of 4 discussion and over time in recognition of the needs of 5 the project. 6 Q. Do you remember approximately when the Director of City 7 Development appointed the Monitoring Officer of the tram 8 project? 9 A. I can't remember directly. I know that it was through 10 a Council report which recommended that and was 11 approved. So it was formally done and -- but the date, 12 I'm sorry, I don't have the date in my head. 13 Q. We know that Marshall Poulton, was, I think, formally 14 appointed the Tram Monitoring Officer at around 15 May 2008, but before that period is it your recollection 16 that the Director of City Development perhaps fulfilled 17 that role? 18 A. I think the Director of City Development or his nominee 19 filled that role, and I certainly recollect 20 Marshall Poulton; who was there before him, I'm not 21 entirely sure. 22 Q. Thank you. 23 If we could now please go back to your statement and 24 pick up one or two points. Again, just sticking with 25 duties and responsibilities. 11 1 At page 15, please, it will also come up on the 2 screen. Paragraph 39, starting at the bottom of the 3 page. You stated: 4 "In relation to with regards to which official or 5 officials in CEC were responsible for ensuring the 6 affordability of the tram project to the Council, it 7 would have been Council Solicitor, the Director of City 8 Development, that is the lead officer, and the Director 9 of Finance. The Chief Executive had an overarching 10 responsibility for that." 11 Then I should just pause there and say: why do you 12 include the Council Solicitor in that paragraph as being 13 responsible for ensuring the affordability of the tram 14 project? 15 A. When I re-read my statement, I realised that that was 16 not -- it is not that it's not appropriate, because 17 I saw these three individuals as forming a team, and it 18 was these three individuals together that were -- had 19 that responsibility in my view. 20 The Chief Executive clearly had that overarching 21 responsibility. 22 I suppose the other -- the other thing that I did 23 not mention in that response was elected members had 24 a responsibility, of course, for overseeing this and 25 that was a bit of an omission when I answered that 12 1 question. 2 Q. Yes. Should you also be included in that paragraph as 3 well, given that the Council Solicitor sits below you in 4 terms of seniority? 5 A. You could argue that. I would suggest that when it came 6 to tram business, the Council Solicitor reported to the 7 Director of Finance and the Director of City 8 Development. Consequently, I didn't really see myself 9 in that position. 10 Q. I think you have explained in your evidence that in 11 naming those three individuals and the Chief Executive, 12 that really reflected your understanding of who were the 13 main individuals among the Council officers who were 14 involved in the project, leading the project; is that 15 correct? 16 A. That's correct. 17 Q. Then, please, in paragraph 40, you say: 18 "It is very difficult to identify which official or 19 officials in CEC were responsible for ensuring that the 20 tram project was delivered within time and within 21 budget, because I guess they didn't necessarily see that 22 as being their defined responsibility, and I can 23 understand that, particularly given that we had worked 24 so hard to set up an organisation with a professional 25 project management arrangement in place. I think they 13 1 would, quite rightly, say ”while we had obviously 2 a major role to play sitting alongside TIE, TIE has got 3 to be considered to be the organisation with that 4 responsibility”". 5 So just pause there. You say that it's difficult to 6 identify which official or officials in the Council were 7 responsible for ensuring that the tram project was 8 delivered within time and budget. 9 For the avoidance of doubt, why was it difficult to 10 identify that? 11 A. I think previously I have obviously said that I saw the 12 three officers as being together those officers who were 13 most responsible, if I can put it that way. But this 14 question takes it to a different stage. I really see 15 the Council worked very hard to set up an arm's length 16 organisation to take the task away from the Council, to 17 remove the risk from the Council, and if the question is 18 who I would regard as the most responsible for the 19 delivery of the project, and consequently through the 20 delivery, the reference to on budget and in time, then 21 it has to be tie. 22 But I do recognise that the three individuals that 23 I have identified had a major role in relation to 24 monitoring the business of tie and ensuring that tie met 25 the Council's requirements in relation to exactly these 14 1 points. 2 Q. Was it ever written down as to which officer or officers 3 in the Council were responsible for ensuring the tram 4 project was delivered within time and budget? 5 A. I'm not sure. I'm pretty sure -- I'm pretty sure it 6 will have been written down in various documents, but if 7 you ask me to be specific about that, I wouldn't be able 8 to tell you. 9 Q. What type of documents? Would it be reports to Council 10 or somewhere else? 11 A. There would be reports to the Council, but there would 12 also be documents that -- correspondence between the 13 Chief Executive and the directors involved. I'm sure 14 within these, it would be apparent that these 15 individuals -- these directors or that team of people 16 were regarded as having that responsibility. 17 I believe that they themselves accepted that that 18 was their responsibility. 19 Q. If the project had been delivered in house, perhaps with 20 the assistance of external advisers, would it have been 21 clearer then which officers had responsibility for 22 delivering the project on time and within budget? 23 A. Yes. 24 Q. If it had been delivered in-house, perhaps by the City 25 Development Department, presumably the director of that 15 1 department would have that responsibility; is that 2 correct? 3 A. That's correct. 4 Q. You go on then within the paragraph. You say: 5 "The Director of City Development, Andrew Holmes, 6 was the person who was the Tram Monitoring Officer. And 7 he had the responsibility to report back to the Council 8 in terms of risks and liabilities arising from the 9 Infraco contract and progress and difficulties in 10 relation to the project. At one level there can't be 11 any doubt that he is the one individual who had that 12 responsibility." 13 Pausing there, why do you say Mr Holmes was the one 14 individual with that responsibility, when in the 15 previous paragraph you had mentioned Mr Holmes among the 16 Council Solicitor and Director of Finance and 17 Chief Executive having overarching responsibility? 18 A. Well, the Tram Monitoring Officer role would have been 19 to report on difficulties that were arising in relation 20 to the delivery of the project on time and in budget. 21 So just from the point of view of a need to report, 22 the Tram Monitoring Officer had opportunity to report, 23 because that was part of the Tram Monitoring Officer's 24 role. 25 Consequently -- and it may not have been 16 1 Andrew Holmes. It may have been his nominee who had 2 that responsibility, but nominally it was the Director 3 of City Development who would determine who that Tram 4 Monitoring Officer was. 5 Q. The Tram Monitoring Officer was intended to be the eyes 6 and ears of the Council in terms of monitoring the 7 project; is that a fair way to put it? 8 A. That's correct. It was a key element in the governance 9 of the project. 10 Q. Thank you. 11 Again, just sticking in terms of responsibilities, 12 can we look, please, now at page 86 of the statement. 13 Paragraph 201. You state that in your opinion: 14 "The body or organisation that was ultimately 15 responsible for ensuring that the tram project was 16 delivered on time and within budget would be TIE. I can 17 see other people suggesting that it was the Council 18 because the Council were funding TIE, but in my view it 19 was TIE. TIE was set up and designed to take on that 20 role." 21 So was that your view at the time, Mr Inch, that tie 22 were responsible ultimately for ensuring the project was 23 delivered on time and within budget? 24 A. Yes. 25 Q. Does that remain your view? 17 1 A. Yes. 2 Q. Do you consider that is consistent with the fact that 3 the Transport Scotland grant was to the Council and also 4 the Council were responsible for meeting any costs 5 overrun in the project? 6 A. I do believe it is because it was Transport Scotland who 7 encouraged the Council to adopt an arm's length -- to 8 set up an arm's length organisation. Indeed, 9 Transport Scotland were very clear that they did not -- 10 they were not happy with the prospect of the Council 11 carrying out this project in-house; and were quite sure 12 that they expected us to set up an arm's length 13 organisation. 14 Q. Okay. We will come back to that. 15 Then, please, go to page 90 of your statement. In 16 paragraph 207 you state: 17 "In general with regard to the responsibilities of 18 each of the Council's senior officers in relation to the 19 tram project, it was the Director of City Development, 20 Director of Finance and the Council Solicitor." 21 Again, that's consistent with what you mentioned 22 before. You go on: 23 "At an earlier stage, it was the Director of City 24 Development and his Business Unit colleagues. 25 Colin Hunter was in charge of that unit. He was the 18 1 officer in CEC that was responsible for ensuring that 2 CEC exercised effective governance and control over 3 Council-owned companies such as TIE and TEL." 4 Just pausing there, could you explain, please, 5 a little about the Business Unit within the Council and 6 their duties and responsibilities, if any, in relation 7 to the tram project. 8 A. The Business Unit was a very small unit. Colin Hunter 9 led it. I don't think there was more than two or three 10 people involved in the Business Unit. But the Business 11 Unit had a responsibility to monitor the operation of 12 the Council's range of arm's length companies. So it 13 certainly wasn't restricted to tie and TEL and there was 14 a very wide range of activity, a large number of 15 organisations that were managed at arm's length. They 16 had different shapes. They were organised in different 17 ways. Some had shareholdings. Others were set up in -- 18 with different technical -- different technical way, and 19 so they all had to be addressed together individually. 20 He was responsible for monitoring issues that might 21 be arising from the conduct of business through these 22 companies, and he was also expected to keep an eye on 23 the remuneration arrangements within these organisations 24 and generally keep the Council informed of any issues 25 that might arise in relation to the operation of these 19 1 companies. 2 So the tie/TEL bit of the -- Mr Hunter's duties was 3 probably a very small part of his activity. 4 Q. And presumably Mr Hunter sat underneath the Director of 5 City Development in terms of seniority? 6 A. Absolutely. 7 Q. So am I right in thinking that the Business Unit were 8 very much in the background of responsibilities in 9 relation to all Council-owned companies, but they didn't 10 have any particular role or responsibilities in relation 11 to the tram project? 12 A. That's correct. 13 Q. You go on in this paragraph to say: 14 "With regard to whether one officer or officers in 15 CEC were responsible for ensuring that the tram project 16 was delivered on time and within budget, there was no 17 one officer with that responsibility. The constants 18 were the Director of City Development, Director of 19 Finance, Council Solicitor, Tram Monitoring Officer and 20 the Tram Project Board being the key people and 21 organisations engaged in the monitoring of the tram and 22 the development of the tram project." 23 But the point in short, Mr Inch, is it your position 24 that at the time, so in 2007/2008 and onwards, there was 25 no one officer or officers responsible for ensuring the 20 1 project was delivered on time and within budget? 2 A. My position was at that period that it was a collection 3 of officers, not one officer, that had that 4 responsibility. 5 Q. Thank you. 6 Now, you mentioned the Chief Executive's Internal 7 Planning Group. It might be worth us looking at, 8 I think, the initial draft agenda and remit of that 9 group. If we could go, please, to document CEC01565477. 10 You may not have seen this document when you were 11 asked to provide your statement. So I'll just go 12 through it with you now. 13 We can see at the top it's headed "EDINBURGH TRAM 14 INTERNAL PLANNING GROUP, DRAFT AGENDA 26 October 2006". 15 If we go to the next page, please, this, I think, 16 will tell us a little of the background about the 17 setting-up of this group, and we can see that the 18 heading of this report, remit of the group, same date, 19 26 October 2006. And we can see in -- at paragraph 1: 20 "This report identifies the purpose of the Edinburgh 21 tram Internal Planning Group." 22 Then if we go to paragraph 3, please, we can see: 23 "A Business Case will be presented to the City of 24 Edinburgh Council and the Scottish Executive in 25 December 2006. The intention is to report to Council on 21 1 1 February 2007 seeking their approval of the Business 2 Case." 3 Go then, please, to the next paragraph, paragraph 4. 4 It states: 5 "It is imperative that this decision is taken at the 6 February Council meeting to avoid a substantial delay in 7 progressing the project work. Should a decision not be 8 made at that point, further discussion and decisions 9 would be prevented by the impending local government and 10 Scottish Parliamentary elections. Such a delay would be 11 costly in time ..." 12 So this, I think, is why this group has been set up. 13 Look at paragraph 5, please. We see: 14 "The Department of City Development has the primary 15 role in achieving this deadline. However, support from 16 Finance and legal input from Corporate Services will 17 also be necessary factors without which the timescales 18 will not be met." 19 Paragraph 6, please. It states: 20 "I have therefore instituted this group to ensure 21 that there is a clear corporate understanding and 22 oversight of the various strands of work that must be 23 undertaken in anticipation for the February decision." 24 To pause there, Mr Inch, does what I read out so far 25 accord with your recollection of why this group was set 22 1 up? 2 A. Yes. Yes, I recollect the difficulty that the 3 Chief Executive was anticipating through the possible 4 delay caused by elections forthcoming. So yes, 5 I recognise that. 6 I do think there was another element to it in 7 relation to the Chief Executive's thinking, because I do 8 believe the Chief Executive wanted to become more 9 directly involved. He didn't feel he knew enough about 10 what was going on and wanted to take a bit more control 11 over what was going on. 12 Q. Thank you. 13 In paragraph 6, "to ensure that there is a clear 14 corporate understanding and oversight of the various 15 strands of work", is that perhaps a clue as to why you 16 were there as Director of Corporate Services? Did you 17 play a role in making sure there were sufficient 18 resources from different parts of the Council available 19 at necessary times? 20 A. Yes, I think that was the expectation, that I would 21 ensure that this was given priority and any resources 22 that were required were found by hook or by crook. 23 Q. Thank you. Then finally, please, the next page. In 24 paragraph 10, under "Recommendations", we can see the 25 intention at this stage to have weekly meetings. Can 23 1 you see that? 2 A. Yes. 3 Q. Now, Mr Inch, just for the record, I have looked at the 4 other minutes and reports of this group and I think 5 there were weekly meetings between 26 October 2006 until 6 7 December 2006 when I think the Draft Final Business 7 Case went to the Council. As far as we are aware, the 8 group didn't meet at all then in January or 9 February 2007, but it did then meet on 1 March 2007 and 10 20 March 2007, 17 April, 14 May, 31 May 2007. There 11 then appears to be a gap in June when it didn't sit 12 until, then, 20 July 2007, it met again, and after that, 13 it appears to have met on a monthly basis. 14 Does that accord with your general recollection, or 15 do you have no recollection at all? 16 A. I certainly recollected that we met weekly for 17 a significant period, and thereafter I recollect that 18 the frequency of meeting was less defined, and was 19 perhaps more a reflection of the needs that were arising 20 at the time. 21 I think also in later stages, the intensity of 22 activity in relation to the tram work and the 23 development meant that it was increasingly difficult to 24 separate out what we were doing as individuals, and 25 sitting down together to discuss the same matters. 24 1 Q. I'm not sure I understood that answer, Mr Inch: 2 "increasingly difficult to separate out what we were 3 doing as individuals, and sitting down together to 4 discuss the same matters". Can you explain that, 5 please? 6 A. What I'm suggesting is that we lost the regularity of 7 meetings, because of the stage we were at in relation to 8 the tram development and the level of -- more intense 9 levels of discussion that were taking place between tie 10 and the status of the project regarding the contractors. 11 I think it became increasingly difficult to get the 12 group together from a time urgency point of view and the 13 prioritising point of view. I do come back often to the 14 fact that in the context of a Council that has a budget 15 of nearly a billion pounds, staffing of 18,000, there 16 was an awful lot else going on, and there were tensions 17 and pressures arising in different parts of the 18 organisation. 19 So the discipline of setting aside the time 20 necessary in this way was perhaps really quite -- got 21 very difficult later on. 22 Q. Be that as it may, the records do indicate that from 23 July 2007, the group did meet on a monthly basis until 24 certainly May 2008, but I think after that as well. 25 Does that differ from your recollection? 25 1 A. No, I will agree with exactly that. 2 I don't have a clear recollection of the frequency, 3 but I do recollect that it wasn't as frequent as it had 4 been in the early stages. 5 Q. Could we now then please -- you mentioned the question 6 of the creation of tie. Could we look at page 3 of your 7 statement, please. In paragraph 2, about halfway down 8 it, can we see: 9 "However, this all happened prior to my appointment, 10 therefore I was not involved." 11 I think there, can you just zoom back out, we see in 12 short, I think you're referring to a letter dated 13 28 February 2002 from the Minister for Enterprise, 14 Transport and Lifelong Learning, which supported private 15 sector involvement with the principle of an off balance 16 sheet company. 17 I think what you're saying there is that that was 18 before you were appointed Director of Corporate Services 19 in 2002; is that correct? 20 A. That's correct. 21 Q. So you have no direct knowledge of the circumstances 22 surrounding the setting up of tie; is that correct? 23 A. No direct knowledge. 24 Q. But you do go on to express some opinions. For example, 25 in paragraph 5, you say: 26 1 "The reason for setting up TIE was that the Council 2 had assessed that they didn't have the capacity or the 3 expertise in-house and this was a very specialist area. 4 We had long lost our capacity for that sort of activity 5 through various re-organisations and adjustments. I can 6 perfectly understand why TIE was set up and we 7 definitely did not have resources in-house." 8 Then I think in a similar vein, if you go over the 9 page, please, to page 4, in paragraph 9, you then go on 10 to say that: 11 "With regards to the extent to which the creation of 12 TIE to deliver projects in the New Transport Initiative 13 reflects the views of CEC and the extent that decision 14 was influenced by the views of the Scottish Executive, 15 I would say that quite simply Transport Scotland 16 insisted that it couldn't be held in-house, it needed to 17 be placed in some sort of governance arrangement which 18 didn't involve the Council taking direct responsibility. 19 That was a condition of Transport Scotland's support for 20 the project. This was not unusual, and I think 21 Transport Scotland were simply observing that it would 22 be extremely difficult for a local authority to take on 23 a project of this scale and deal with the issues that 24 would arise from it. I agreed with that assessment." 25 Just as a point of accuracy, Mr Inch, I don't think 27 1 Transport Scotland were set up by this stage, were they? 2 I think they came along in 2005, perhaps. But I take it 3 by referring to Transport Scotland you mean the Scottish 4 Executive? 5 A. Scottish Executive. 6 Q. Yes. I think essentially you are saying you agreed with 7 that view that the Council didn't have the resources or 8 expertise at this time to deliver the tram project; is 9 that true? 10 A. That was my view at that time. 11 Q. Presumably we do know that the Council took the project 12 back in-house in 2011 and delivered it with the 13 assistance of external project management consultants. 14 So presumably that was, at least in theory, an option 15 open to the Council at any time? 16 A. It was, and as time went on, it became clear to me that 17 that option should be given some other consideration. 18 So as the project proceeded, and as things evolved, it 19 seemed to me that we did have options that we should 20 look at seriously in relation to our relationship with 21 tie and whether there was a different way of dealing 22 with the various issues that were arising. 23 Q. We'll come back to look at that with reference to 24 a document, but you mentioned as time went on that was 25 an option which you began to consider. Can you indicate 28 1 approximately when that was? 2 A. I suspect I was referring to the stage where we got into 3 very serious difficulties and were finding it very 4 difficult to -- working with tie, to progress the 5 project as we would have wished, and it was increasingly 6 awkward because we did see, I think, then that another 7 option would have been to bring tie in-house or to 8 disband tie and manage the project more directly 9 ourselves. 10 That would be around 2006/2007. I think probably 11 mid-2006 onwards. 12 Q. Thank you. I would like to put tie and the tram project 13 to one side for now, and look at the question of the 14 Council's oversight of Council-owned companies and just 15 ask you a few general questions about that, if I may. 16 Firstly, and in general, what are the main 17 advantages and disadvantages of a Council setting up 18 a Council-owned activity -- a Council-owned company to 19 undertake an activity or a project rather than 20 undertaking the activity or project itself in-house? 21 A. The Council had a suite of these companies. The 22 companies that fared best were property and 23 property-related companies and activities, and there 24 were significant financial benefits to the Council in 25 creating arm's length organisations to conduct that 29 1 business. 2 It also ensured that these were outwith the direct 3 responsibility of elected members. So it became -- they 4 were allowed to operate in a commercial way, whereas if 5 the business was in-house, that commerciality, if you 6 like, would have been less and there would have been 7 greater restrictions on how the organisations could 8 operate, and I think that the proof of that pudding is 9 the success of the property companies that the Council 10 had, all of whom were very profitable. 11 But there were other companies, Lothian Buses is 12 a good example which obviously had statutory 13 requirements to meet in relation to setting that up, but 14 again, it would operate as an arm's length highly 15 profitable organisation which operated outwith the 16 Council's control. Edinburgh Leisure, another 17 organisation that operated outwith the company's direct 18 control. 19 Some of these companies had shareholdings. Others 20 did not. All of them -- most of them had boards, but 21 the boards were formed not of elected members purely, 22 but with professional and with a degree of expertise 23 built into these boards. 24 There was always -- the monitoring of the Business 25 Unit was always -- one of the tasks of the Business Unit 30 1 was to ensure that these organisations were properly 2 governed, and that when vacancies arose on the boards, 3 these vacancies were dealt with in an appropriate and 4 proper manner. So -- but the suite of organisations 5 ranged widely and the nature of these organisations were 6 distinct. But I suppose the common feature was that 7 they were businesses. They operated as businesses. 8 They had a commercial edge which wouldn't have been 9 possible within the Council. 10 Q. Thank you. 11 CHAIR OF THE INQUIRY: Sorry, was there also an advantage 12 from the point of view of capital receipts, so that if 13 the property company made a substantial capital gain, 14 then that could be drip-fed into the Council budget, 15 whereas if the Council had been operating and had made 16 a significant capital receipt, that might affect its 17 funding from other sources. 18 A. That's correct, my Lord, yes. 19 MR MACKENZIE: Thank you. Those are some of the advantages, 20 Mr Inch. Are there any disadvantages? 21 A. I personally thought they were excellent -- it was an 22 excellent way to carry out business. I think some 23 elected members would feel that they would want to have 24 greater influence on what these organisations did or did 25 not do, and we were in many cases the sole funders of 31 1 these organisations, and consequently elected members 2 would quite often think that they needed to have 3 a greater say in what these organisations did or did not 4 do. 5 But from a personal perspective, I thought they were 6 to be applauded and were a greater asset to the Council 7 and enabled us to do business that we would not 8 otherwise be able to do. 9 Q. In general, how did the Council monitor and exercise 10 control over the activities and performance of 11 Council-owned companies? 12 A. There was various types of agreement, and as I have 13 mentioned already, some of these companies had -- most 14 of them had at least a representation from a Council -- 15 Council officers or, more like, elected members on their 16 boards. 17 There were shareholder agreements and various other 18 devices which were part of the make-up of these 19 organisations. There was no one formula for the -- 20 exercising control. It was a range of things that 21 brought control to these organisations. 22 They were answerable, of course, to the Council in 23 due course because the Council was their funder and the 24 Council did have the opportunity, if things were not 25 operating as the Council wished, to step in. 32 1 Q. Which senior Council officer was responsible for the 2 governance of these companies? 3 A. It was the Director of City Development. 4 Q. Was the Director of City Development responsible for the 5 governance of every Council-owned company? 6 A. Yes. 7 Q. Did you have any role or involvement in the governance 8 of Council-owned companies? 9 A. Yes, and in particular I have mentioned 10 Edinburgh Leisure, because latterly, in my role as 11 Director of Corporate Services, I inherited the 12 responsibility for culture and sport, and 13 Edinburgh Leisure is clearly an element of the culture 14 and sport activity in the Council. 15 So I did have an involvement with Edinburgh Leisure, 16 but we worked with the Director of Finance and the 17 Director of City Development in relation to the 18 governance arrangements that were put in place. 19 Q. We know there were various codes of conduct and guidance 20 issued by the Council in relation to monitoring of 21 Council-owned companies. Did you have any role or 22 involvement in these Codes of Conduct or guidance? 23 A. Yes. I mean, we encouraged many of these companies to 24 adopt the Codes of Practice that the Council had. So 25 there was -- and there was a willingness usually on the 33 1 part of these companies to embrace what we were 2 suggesting was best practice in relation to the Code of 3 Conduct, Code of Practice, whatever that might be. 4 Q. You are or you were the Director of Corporate Services, 5 and were also the Monitoring Officer for the Council. 6 Can I take it from that you had responsibilities in 7 relation to the corporate governance of the Council? 8 A. Yes. I would accept I had a responsibility for 9 corporate governance. I might say that that was not -- 10 that was not my responsibility alone. I think the 11 corporate governance of the Council is set out in 12 a framework and is controlled through the 13 Chief Executive. 14 But yes, I would be the person who would advise on 15 the appropriateness of governance arrangements. 16 Q. Would that include the governance of Council-owned 17 companies? 18 A. Yes. I think I would be -- if asked, I would be in 19 a position to advise on the governance -- if I knew 20 a company was being set up, for example, most of the 21 companies I have just described were companies that were 22 long standing, and we would review their governance on 23 an ongoing basis against the standards that were being 24 set within the Council, and that would be the role of 25 the Business Unit, the monitoring done by the Council's 34 1 Business Unit, which sat in City Development. 2 But that person would seek my department's advice on 3 these matters. So the governance that applied in due 4 course to these organisations would have come through my 5 department, and if I knew an arm's length company was 6 being set up, then I certainly would be party to the 7 setting up of the appropriate governance arrangements. 8 Q. Thank you. Mr Inch, I'm going to look at documents 9 issued in 2001 and 2006 by the Council, in relation to 10 the governance and monitoring of Council-owned 11 companies. The Inquiry has not looked at these yet at 12 the hearing, so I will read out certain parts and put 13 them to you for your comments. 14 Before I do that, both of the Codes of Conduct 15 issued by the Council in 2001 and 2006 refer back to two 16 earlier documents. So I'll start with them. As I say, 17 the purpose in doing so is because they are referred to 18 in later Council documents. 19 So I would like to start, please, with a document 20 issued in 1996. It's CEC02084822. 21 Now, we can ignore the first page because it appears 22 in a report put to Angus Council which was not of 23 relevance to us, but if we start at page 3, please. We 24 can see from the heading this is a letter, a joint 25 letter by the Accounts Commission and COSLA. We can see 35 1 it's dated 24 May 1996, and it is sent to all of the 2 Chief Executives in Scotland and copied to the Directors 3 of Finance. You can see the heading, if I blow up the 4 heading of this letter. We can see it states: 5 "CODE OF GUIDANCE ON FUNDING EXTERNAL BODIES AND 6 FOLLOWING THE PUBLIC POUND". 7 In the next two paragraphs we see: 8 "Dear Chief Executive, I enclose copies of the Code 9 of Guidance on funding external bodies and following the 10 public pound which is being issued jointly by the 11 Accounts Commission and COSLA. 12 For a number of years there have been concerns 13 about the increasing use by councils of companies, 14 trusts and other arms-length bodies. These concerns 15 derive from the basic premise that where public funds 16 are involved, there is an expectation of a high degree 17 of control and accountability." 18 So just to pause there, Mr Inch, I take it you would 19 agree with what's called the basic premise, that where 20 public funds are involved, there is an expectation of 21 a high degree of control, accountability? 22 A. Yes, I do. 23 Q. That's nothing new. That's always been the case when 24 public funds were being spent and that must remain the 25 case? 36 1 A. Correct. 2 Q. If we can then go, please, over the page, and just in 3 passing we can note the signatories of this letter. We 4 see on the left, the Chief Executive of COSLA and the 5 right, Robert Black, the Controller of Audit at that 6 time. 7 If we can then please go to page 5. We can see this 8 is the Code of Guidance on funding external bodies and 9 following the public pound. Were you aware of this Code 10 when you were Director of Corporate Services? 11 A. I was aware that there was a code -- I recognised as 12 following the public pound. So yes. 13 Q. Thank you. Then please go over the page, to page 6. We 14 read out these paragraphs. We haven't referred to these 15 documents at the hearing thus far. So 1, OBJECTIVE. It 16 states: 17 "It is important to ensure clear public 18 accountability for public funds at the same time as 19 supporting initiatives for securing quality local 20 authority services in the most effective, efficient and 21 economic manner. The principles of openness, integrity 22 and accountability apply to councils in their decisions 23 on spending public money which are subject to public 24 record and external audit. These principles should also 25 apply to funds or other resources which are transferred 37 1 by councils to arms-length bodies such as companies, 2 trusts and voluntary bodies. This guidance is intended 3 to ensure proper accountability for such funds and that 4 the principles of regularity and probity are not 5 circumvented. It has the support of the Convention of 6 Scottish Local Authorities." 7 If we then please go over the page to page 7, I'll 8 read out paragraph 4, “FINANCIAL REGIME”: 9 "The Council should spell out clearly the extent of 10 its financial commitment to the external body and the 11 nature of the financial relationship eg shareholding, 12 grant, loan, contractual payments. Criteria for making 13 and receiving payments should be specified. The 14 transfer of any assets should be clearly regulated in 15 a written agreement and the end destination of any such 16 assets should be specified. The Council's entitlements 17 to any financial return should be stipulated and 18 commitments to financial contributions by councils 19 should not be open-ended in duration or amount. The 20 written agreement should refer to the minimum standard 21 of management arrangements which need to be in place and 22 any specific or additional responsibility and 23 accountability which is being vested in a board or 24 management committee. The minimum accounting and audit 25 requirements should also be included." 38 1 Then under paragraph 5, “MONITORING ARRANGEMENTS”, it 2 is set out: 3 "The council should make clear any requirements 4 which it has of external bodies to operate in 5 a particular way ... The council should also stipulate 6 how it intends to monitor the relationship between 7 itself and the external body. For example, the council 8 may wish to stipulate that it will have appropriate 9 access to records held by the body. The council may 10 require the body to take appropriate advice on its 11 actions and to make frequent monitoring reports to the 12 council on such matters as income, expenditure, 13 profitability, liquidity and other financial matters; 14 achievement of targets; future plans." 15 The next paragraph states: 16 "Regardless of representation on committees or 17 boards, the council should insist on regular monitoring 18 and reporting back by such bodies. Where the council 19 designates a member of staff in a supervisory officer or 20 equivalent capacity, it should ensure that such officers 21 are clearly aware of their responsibilities and of the 22 relevant monitoring procedure." 23 Just going back to that sentence stating: 24 "Regardless of representation on committees or 25 boards, the council should insist on regular monitoring 39 1 and reporting back by such bodies." 2 I think what that says is it's not enough if an 3 officer or member sits on the board of an external 4 company. There should still be regular monitoring and 5 reporting back, is that correct? 6 A. Yes. 7 Q. Above the bullet points: 8 "The council may require the body to take 9 appropriate advice on its actions and to make frequent 10 monitoring reports to the council ..." 11 So there -- what do you understand by Council? Do 12 you mean that to mean an officer, or is that the Council 13 ie the members? 14 A. I think it's both. I think the practice was for the 15 Council or in the guise of myself, or the Director of 16 City Development, or the -- Director of Finance, to ask 17 whichever body it was to report formally to us on a 18 particular matter. 19 And depending on the nature of that, it would 20 also -- could also be reported to the Council or one of 21 the Council committees that had a more specific 22 relationship to the level of activity that was going on. 23 Q. Yes. Presumably the Council would set out any 24 monitoring requirements in operating agreements with 25 these Council-owned companies? 40 1 A. These were -- as far as I'm concerned, these were 2 detailed and there was an expectation that they would be 3 followed. 4 I suppose the one other matter that I should have 5 pointed out was that the Director of Finance was very 6 much involved with the monitoring of these companies and 7 the way in which they conducted themselves, and indeed 8 his internal audit function was deployed at times to 9 assist with that. 10 Q. And perhaps very broadly, one may say there are two 11 particular aspects to this. There are the financial 12 aspects and also the performance of the -- the wider 13 performance of the company, and presumably the Director 14 of Finance is particularly concerned with financial 15 monitoring, and it may be that other directors may have 16 a role in monitoring the wider performance of the 17 company. Is that a fair way to put it? 18 A. I think that's a reasonable way to put it, yes. 19 Q. Over the page, please, at page 8, under the paragraph 7, 20 “LIMITATIONS”, it states: 21 "In entering into a substantial funding commitment 22 with an external body the council should lay down 23 a timetable for the achievement of the objectives. If 24 the purpose is a continuing one, then provision should 25 be made for regular review of achievements and of the 41 1 relationship between the body and the council. 2 Arrangements should include regular reporting to an 3 appropriate Council committee ..." 4 So again, this is perhaps more to do with the 5 performance side of things, the achievement of 6 objectives, but we can see there it is recommended 7 arrangements should include regular reporting to an 8 appropriate Council committee. Presumably, that is to 9 involve members in these matters? 10 A. Yes. It would be reporting directly to the particular 11 Council committee that had an oversight of the function. 12 Q. Thank you. Put that document to one side, please, and 13 move on to another document which is referred to when we 14 come to the Council's own Codes of Conduct and Guidance. 15 The next document is from 1998. It's CEC02084834. We 16 can see from the headings at the top of the page, this 17 is referred to as “THE COMBINED CODE, PRINCIPLES OF GOOD 18 GOVERNANCE AND CODE OF BEST PRACTICE. Derived by the 19 Committee on Corporate Governance from the Committee's 20 Final Report and from the Cadbury and Greenbury Reports”. 21 So I think in short, Mr Inch, this combined code is 22 primarily directed at the private sector. I think 23 certain companies listed on the London stock exchange. 24 I think it derives from, I think, the Cadbury Report 25 initially on good governance, and the principles were 42 1 then developed over time into this combined code. 2 Are you aware of this combined code? 3 A. I'm not aware of this combined code, but I was very much 4 aware of the Cadbury Report, and the fact that the 5 Cadbury Report set out a benchmark really for good 6 governance, and it was always the Council's intent to 7 ensure that we followed that as best we could in terms 8 of our practice. 9 Q. While this is a combined Code for Good Corporate 10 Governance, so one may think that doesn't necessarily 11 apply to local authorities. However, when local 12 authorities set up an arm's length company, that's, 13 I think, when the code kicks in; is that right? 14 A. Yes. I think that's right, but I think it had more 15 general application as well. There were a number of 16 features of the guidance which were easily applicable to 17 all activity within the Council, never mind arm's length 18 companies. 19 Q. Yes. Let's just clarify one point. You said you 20 weren't aware of this combined code. It is, however, 21 referred to, I think, certainly in the Council's 2006 22 guidance. I just wonder if that's right? 23 A. I think I referred to the Cadbury Code, but not this 24 combined code. I don't remember referring to the 25 combined code. 43 1 Q. Yes. If we could then, please, look through some parts 2 of it. We will start at page 2, please. Simply to note 3 the date. The date is June 1998. We see the date 4 there. Page 3, please. We can see this page is headed 5 "PRINCIPLES OF GOOD GOVERNANCE", at the top of the page, 6 and essentially it sets out on two sides of paper the 7 principles of good governance as set out in the combined 8 code. We can see “SECTION 1 COMPANIES; A. DIRECTORS - 9 The Board; and principle 1: 10 "Every listed company should be headed by an 11 effective board which should lead and control the 12 company." 13 Then we can see principle 2 under "Chairman and 14 CEO", it's stated: 15 "There are two key tasks at the top of every public 16 company: the running of the board and the executive 17 responsibility for the running of the company's 18 business. There should be a clear division of 19 responsibilities at the head of the company which will 20 ensure a balance of power and authority, such that no 21 one individual has unfettered powers of decision." 22 Now, to pause there, Mr Inch, we know that 23 Mr Gallagher was Executive Chair of tie between, 24 I think, June 2006 and November 2008. I think that was 25 initially described as an interim appointment, that 44 1 lasted for two years, five months. Do you have any 2 comments on whether that is in accordance with the 3 principle we just looked at? 4 A. Clearly it is not. But that appointment was made -- at 5 the time the appointment was made, it was clear that 6 this was going to be a stopgap arrangement. It was not 7 intended for it to last any great length of time. But 8 circumstances changed and it lasted far longer than we 9 had anticipated and far longer, I think, than was 10 desirable, given that we were fully aware that this was 11 not best practice and that we needed to at the 12 appropriate time change the arrangements we had. 13 I think I have reported on a number of occasions -- 14 I did report on a number of occasions some concerns 15 around the governance arrangements that were operating 16 at that time, and I did give the Executive some advice 17 on that. It isn't easy, of course, to change governance 18 at the drop of a hat. The situations and circumstances 19 will dictate how you get to your end point, and in this 20 case it was -- it was a matter of circumstance that led 21 to that appointment being far longer than had been 22 expected, and it quite clearly is not in accordance with 23 best practice. 24 CHAIR OF THE INQUIRY: Even as a stopgap measure, is it in 25 accordance with best practice? 45 1 A. I think there are circumstances where you could make 2 a case for justifying such an arrangement, and I think 3 in the case of Mr Gallagher, I think we were able to 4 make some sort of case. 5 It isn't ideal. I would always admit that we should 6 have that separation. It is important from a governance 7 standpoint. But in the particular circumstances that we 8 found ourselves in in relation to the organisation, it was 9 a way of moving forward which might otherwise have been 10 difficult. 11 MR MACKENZIE: For the avoidance of doubt, Mr Inch, what 12 were the circumstances which justified that departure 13 from the code? 14 A. I think the status -- not the status, the circumstances 15 that we were encountering with tie. The difficulties 16 that tie were experiencing, the complexity of the 17 situation that was arising between tie and the 18 contractors, and the -- and I think the difficulty of 19 finding appropriate people who had the appropriate 20 levels of expertise that were -- that would have helped 21 us in this circumstance, and I think we took a view that 22 it was very -- we had already been looking in different 23 ways at options. And we thought that it was going to be 24 very, very difficult to find someone who could take on 25 the -- either the -- a chairing role as opposed to the 46 1 executive role. 2 Q. If there are difficulties or if an organisation is 3 experiencing difficulties, does that not make it all the 4 more important to put into place proper corporate 5 governance arrangements? 6 A. Yes. 7 Q. Looking back, do you think it was a mistake to allow 8 that arrangement whereby Mr Gallagher was both the 9 Chairman and Chief Executive of tie to last so long? 10 A. Yes. 11 Q. Looking back, when do you think the nettle should have 12 been grasped and that should have been changed, 13 approximately? 14 A. I think it is difficult to say exactly when that should 15 have happened, but I think temporary -- it should be 16 temporary, and I think anything over a year begins to 17 drift away from what I regard as temporary. 18 Q. Thank you. 19 Just returning to the code, please, under the 20 “section B. DIRECTORS' REMUNERATION”, under the heading, 21 "The Level and Make-up of Remuneration", at principle 22 B1, it states: 23 "Levels of remuneration should be sufficient to 24 attract and retain the directors needed to run the 25 company successfully, but companies should avoid paying 47 1 more than is necessary for this purpose. A proportion 2 of executive directors' remuneration should be 3 structured so as to link rewards to corporate and 4 individual performance." 5 Under "Procedure", principle B2 states: 6 "Companies should establish a formal and transparent 7 procedure for developing policy on executive 8 remuneration and for fixing the remuneration packages of 9 individual directors. No director should be involved in 10 deciding his or her own remuneration." 11 Just pause there. Mr Inch, the question of the 12 remuneration of tie executive directors, including bonus 13 packages -- I'll come back to that issue later on -- but 14 did you regard that -- did you consider that tie had 15 a formal and transparent procedure for dealing with 16 executive remuneration? 17 A. If tie had a remuneration committee which dealt with 18 remuneration, I had personally no awareness of how that 19 operated, or indeed the levels of remuneration that were 20 being paid to directors of tie. 21 I think my involvement came when bonus payments were 22 being proposed. I do know, though, that the 23 remuneration levels were looked at very carefully, that 24 research was done in terms of industry norms to secure 25 a range of appropriate payment, so numbers were not 48 1 picked out of the air. They were considered, and 2 considered in very great detail. 3 I might also say that the elected members had an 4 interest in this, and elected members were advised of 5 the levels of remuneration that were being considered, 6 and at times indeed elected members were not -- needed 7 to be convinced of the levels of remuneration of certain 8 post holders. I'm aware of that because I was asked by 9 elected members for comments on some of that. 10 But as I say, my own personal involvement, the 11 involvement of my team, really came into focus when 12 bonuses were being proposed. 13 Q. Were elected members aware of the payments made to the 14 individual executive directors of tie, including the 15 amount of bonus payments? 16 A. I can only assume that they were, and I say that because 17 I know that the leaders of the various parties and the 18 individuals who were board members of the organisations 19 would have most certainly had a knowledge of what 20 various payments were. 21 Q. Would members who were not board members of tie have 22 known how much was being paid to each director in tie, 23 including the bonus payments that were being made? 24 A. I would doubt that. 25 CHAIR OF THE INQUIRY: You mentioned the knowledge that 49 1 councillors who sat on the board would have about bonus 2 payments. But did you consider that they were then at 3 liberty to disclose that or -- 4 A. I anticipated, my Lord, that they were dealing with that 5 under confidential matters. 6 MR MACKENZIE: Would Council members sitting on boards not 7 have duties as directors to the company? 8 A. Yes. 9 Q. Indeed, I think members were given training on their 10 duties as directors? 11 A. That's correct. 12 Q. Would it have been part of those duties that there are 13 certain matters that should remain confidential within 14 the company? 15 A. That's correct. 16 Q. So do you think they would be at liberty to tell their 17 own colleagues on the Council how much individual 18 directors at tie were getting paid in level of bonuses? 19 A. No, I think that would have been breaching their -- the 20 confidentiality regarding their positions as directors 21 of the company. 22 Q. Were Council officers aware of how much was being paid 23 to the individual executive directors of tie, including 24 the amount of their bonuses? 25 A. I'm not -- I'm not sure about that. I know that 50 1 obviously the Chief Executive would know, as Director of 2 City Development, the Director of Finance. So there 3 would be a range of Council officers who would have an 4 awareness of that. But if you're asking me, did the 5 generality of Council staff know what payments were 6 being made to individual staff, I would doubt that very 7 much. 8 Having said that, you know, remuneration paid to 9 individuals has always been deemed to be a private and 10 confidential matter. 11 Q. We will come on to that. We're talking about executive 12 directors in tie. But are you quite sure that the 13 directors you named, the Directors of City Development, 14 Finance and the Chief Executive, were aware of how much 15 was being paid to each of the executive directors in 16 tie, including the bonus payments? 17 A. I can't be sure of that, but I would have -- I would 18 have thought that they would have an awareness of that. 19 Q. We can perhaps explore that with them in due course. 20 The reason I'm asking these questions, Mr Inch, is 21 really to examine whether tie had a transparent 22 procedure for dealing with these matters. 23 Then I think we go on then to under the heading 24 "Disclosure", principle B3 states: 25 "The company's annual report should contain 51 1 a statement of remuneration policy and details of the 2 remuneration of each director." 3 Now, are you aware whether tie's annual report 4 contained such a statement? 5 A. I know that it contained a statement in regard to 6 bonuses, but I'm not sure about whether it indicated the 7 overall remuneration package, and I don't know that. 8 Q. What did you understand the annual report to say in 9 relation to bonuses? 10 A. I think it was -- it gave information in a very general 11 way. It identified the amount of money spent on bonuses 12 overall. But it also compartmentalised that a bit by 13 indicating the top, however many staff -- I can't 14 recollect -- and the bonus that was payable to that 15 group, and then there was a reference, I think, to the 16 total amount of money spent on bonuses for the total 17 number of staff employed. 18 So it was very general. 19 Q. Thank you. We can perhaps come back and check the 20 particular documents with other witnesses. 21 Just to pause there, the question of financial 22 matters relating to tie, the matters we've just been 23 discussing, would that be a matter for the Director of 24 Finance? 25 A. Yes. 52 1 Q. If I could go on then, please, to page 12. Perhaps in 2 fairness, we should go back to page 5. So I think this 3 is now the combined code giving a little bit of 4 explanation about each of these principles we have 5 looked at. 6 If we go about two thirds of the way down, under 7 "A2. Chairman and CEO", it sets out the principle again, 8 and then under "Code Provision", provides the following 9 explanation that: 10 "A decision to combine the posts of chairman and 11 chief executive officer in one person should be publicly 12 justified." 13 So to pause there, the code isn't saying it's an 14 absolute prohibition. It's saying that good corporate 15 governance is not to do it, but if it is done, it should 16 be at least publicly justified. 17 I think in this case, as I understand it, the 18 justification to members was that it was interim 19 appointment, but you have explained your views on that. 20 It then goes on to say: 21 "Whether the posts are held by different people or 22 by the same person, there should be a strong and 23 independent non-executive element on the board, with 24 a recognised senior member other than the chairman to 25 whom concerns can be conveyed. The chairman, chief 53 1 executive and senior independent director should be 2 identified in the annual report." 3 Are you aware of whether tie had such a senior 4 independent director? 5 A. The short answer is I'm not aware of that, although 6 I suspect it could be argued that they did, but I'm 7 not -- I'm not -- I'm not aware in the context of this, 8 I'm not aware of it. 9 Q. We can perhaps again check the annual report to 10 Companies House and see what was said about that. 11 Could you then, please, look at page 7. We see the 12 heading B, under "DIRECTORS' REMUNERATION", we're back 13 to this subject. Halfway down, under B.1.4, it states: 14 "The performance-related elements of remuneration 15 should form a significant proportion of the total 16 remuneration package of executive directors and should 17 be designed to align their interests with those of 18 shareholders and to give these directors keen incentives 19 to perform at the highest levels." 20 Then in paragraph B.1.6, it states: 21 "In designing schemes of performance-related 22 remuneration, remuneration committees should follow the 23 provisions in Schedule A to this code." 24 Which we will come back to in a second. Then, 25 please, over the page to page 8, and under "B.2 54 1 Procedure", a third of the way down, paragraph B.2.2 2 states: 3 "Remuneration committees should consist exclusively 4 of non-executive directors who are independent of 5 management and free from any business or other 6 relationship which could materially interfere with the 7 exercise of their independent judgment." 8 Now, pause there, Mr Inch. And we will take you 9 later to some emails which suggested that Mr Gallagher 10 sat on both the audit and remuneration committees of 11 tie. 12 Were you aware of that? 13 A. Not at the time, but I was aware of it having seen some 14 of that correspondence. 15 Q. We will come back to that, but in short, if that was 16 correct, does that appear to be a departure from this 17 part of the guidance? 18 A. It's definitely a departure from best practice. 19 Q. Thank you. The next commentary is on principle B.2.3, 20 which states: 21 "The members of the remuneration committee should be 22 listed each year in the board's remuneration report to 23 shareholders." 24 Then please go towards the bottom of the page, under 25 "Code Provisions". It is under the principle of 55 1 disclosure, and B.3.1 states: 2 "The board should report to the shareholders each 3 year on remuneration. The report should form part of, 4 or be annexed to, the company's annual report and 5 accounts. It should be the main vehicle through which 6 the company reports to shareholders on directors' 7 remuneration." 8 Paragraph B.3.2: 9 "The report should set out the company's policy on 10 executive directors' remuneration. It should draw 11 attention to factors specific to the company." 12 B.3.3: 13 "In preparing the remuneration report, the board 14 should follow the provisions in schedule B to this 15 code." 16 We are almost finished with this document, but if 17 I could just look at each of these Schedules A and B. 18 So on to page 12, please. We can see this is headed 19 "Schedule A". This is the advice to remuneration 20 committees, provisions on the design of 21 performance-related remuneration. 1 states: 22 "Remuneration committees should consider whether the 23 directors should be eligible for annual bonuses. If so, 24 performance conditions should be relevant, stretching 25 and designed to enhance the business." 56 1 Then paragraph 4 states: 2 "Payouts or grants under all incentive schemes, 3 including new grants under existing share option 4 schemes, should be subject to challenging performance 5 criteria reflecting the company's objectives." 6 Just finally, please, Schedule B, over the page. So 7 this is headed, "Schedule B: Provisions on what should 8 be included in the Remuneration Report". We looked at 9 the guidance earlier which stated that this report 10 should be annexed to the companies' annual reports and 11 accounts to Companies House. Paragraph 1 states: 12 "The report should include full details of all 13 elements in the remuneration package of each individual 14 director by name, such as basic salary, benefits in 15 kind, annual bonuses and long-term incentive schemes 16 including share options." 17 So that's the guidance in relation to what should be 18 done. I have asked you some questions about the 19 financial matters, Mr Inch, but maybe we will have to 20 check carefully the documentation and perhaps come back 21 with Mr McGougan, perhaps, over some of these matters. 22 CHAIR OF THE INQUIRY: Before you leave that, Mr Mackenzie, 23 I think when you were taking the evidence you referred 24 to the -- a date in 1998 for this document, but in fact 25 the combined code which is attached to the 1998 document 57 1 seems to be May of 2000. It may not matter, but I think 2 just for accuracy. 3 MR MACKENZIE: Yes, my Lord. I suspect what has happened is 4 that this document we have looked at has been published 5 in a book or some sort of guidance manual that itself 6 was published in May 2000, but there's no doubt, I think 7 that, the actual combined code itself was published in 8 June 1998, we saw from page 2 of this. I think the 9 difficulty is trying to get an original copy of the 10 code. 11 My Lord, I propose now moving on to the guidance 12 issued by the Council, but it may be an appropriate time 13 to take a break. 14 CHAIR OF THE INQUIRY: Yes. We'll break for 15 minutes to 15 give everyone an opportunity for a short break, but 16 mainly the shorthand writers. We will resume again at 17 11.15. 18 (11.00 am) 19 (A short break) 20 (11.19 am) 21 MR MACKENZIE: Mr Inch, I would like please now to move on 22 to 2001, to the Council's Code of Guidance and Conduct 23 and Council-owned companies. I'll try not to take too 24 long over this, because it is then replaced in 2006 by 25 a later version. 58 1 If we can have up on screen document CEC02084490. 2 We can see this document is the minutes of a meeting 3 of the Executive of the Council in December 2001, and we 4 can see at the bottom of the page, under decision, 1: 5 "To approve the Code of Guidance and Conduct as set 6 out in Appendix 1 to the report by the Chief Executive." 7 And 2: 8 "To agree to require all new and existing Council 9 companies to adopt the Code." 10 tie I think was set up in 2002. So it wasn't yet in 11 existence, but it would be required to adopt the code as 12 a new company; is that right? 13 A. Yes. 14 Q. Thank you. Could you then please go to page 3 of this 15 document. We can see -- this is a report by the 16 Chief Executive Tom Aitchison and it's headed, 17 "A Framework for the Governance of Council Companies". 18 We can see in paragraph 2.1, the last sentence states: 19 "The Code is based on the principles of corporate 20 governance contained in the Report of the Cadbury 21 Committee on the financial aspects of corporate 22 governance and COSLA's report. The Code of Guidance on 23 Funding External Bodies and Following the Public Pound." 24 The reference to COSLA's report is a document we 25 looked at earlier, in 1996, and you see there 59 1 a reference to the Cadbury Report which I think then 2 became superseded and became the combined code we looked 3 at earlier. 4 Certainly I think, just to pause for the 5 observation, once we come to look at the 2006 guidance, 6 it expressly refers to the combined Code on Good 7 Corporate Governance, rather than just the Cadbury Code. 8 We will come to that. 9 If we then please look at page 9, to look at the 10 2001 Code issued by the Council. We can see this is 11 headed "Appendix 1. Code of Guidance and Conduct 12 governing the Relationship between the City of Edinburgh 13 Council and its Companies". 14 Then please go on to page 10. We come under the 15 heading B in bold, "Principles of Good Corporate 16 Governance to be Applied by all Council Companies". I'm 17 just going to go to some parts of this. If we then 18 please go to page 11, we see in the sixth bullet point 19 down states: 20 "The company and board, where appropriate, will 21 adopt and apply the Accounts Commission/COSLA joint code 22 of Guidance ..." 23 The one we looked at earlier. Page 12, please. 24 Under Section 11 “ACCOUNTING AND AUDIT”, we see various 25 things. The final bullet point states: 60 1 "The Company should have due regard for the 2 principles of good Corporate Governance as applicable 3 from time to time." 4 A few more details over the page at page 13 under 5 Section 12 “REMUNERATION”. I'll read out each of the 6 bullet points. Firstly: 7 "Levels of remuneration should be sufficient to 8 attract and retain staff needed to run the company 9 successfully, but companies should avoid paying more 10 than is necessary for this purpose. Where appropriate, 11 a proportion of Executive Directors' remuneration should 12 be structured to link rewards to corporate and 13 individual performance." 14 The next bullet point: 15 "There should be a formal and transparent procedure 16 for developing policy on executive remuneration and for 17 fixing the remuneration packages of individual 18 Directors. No Director should be involved in deciding 19 his or her own remuneration." 20 Just to pause there, Mr Inch, transparent to whom? 21 A. Can you refer me to the specific -- 22 Q. Yes, I'm sorry. It's the second bullet point which 23 states: 24 "There should be a formal and transparent procedure 25 for developing policy on executive remuneration and for 61 1 fixing the remuneration packages of individual 2 Directors." 3 I'm just wondering, these things should be 4 transparent to who or to whom? 5 A. My reading of that is they should be transparent to 6 everyone. 7 Q. So that must be the company itself, perhaps the Board of 8 Directors of the company, but also to the Council 9 officers and members? 10 A. That's my view. 11 Q. The next bullet point states: 12 "Remuneration for independent non-executive 13 Directors may be appropriate in some circumstances ..." 14 The next bullet point: 15 "The Company's annual report should contain 16 a statement of remuneration policy and details of the 17 remuneration of each Director, as required by Company 18 Law." 19 Now, the next section deals, “C. Relationship 20 between Council Companies and Council”. I'm not going to 21 read these bullet points out, but we can see the first 22 bullet point there, requirement for Operating Agreement. 23 Do you see that? 24 A. Yes. 25 Q. The second bullet point: 62 1 "The Council requires that all Companies in which it 2 has an interest are monitored on behalf of the Council." 3 Then we see: 4 "The Council will appoint a Monitoring Officer whose 5 function is to ensure that the Council's interests are 6 being safeguarded in the various Companies." 7 The next bullet point, we can see it's the duty of 8 the Monitoring Officer to ensure that the requirements 9 in the Operating Agreement with the company and this 10 Code of Guidance and Conduct are being implemented and 11 enforced. Then the last bullet point: 12 "The Monitoring Officer will ensure ..." 13 That certain things, including (c) that the Company 14 is at all times adhering to best practice, in 15 particular, in relation to corporate governance to 16 achieve its objectives". There's a reference to the 17 report by Monitoring Officer. 18 Over the page, please, at page 14, we can see the 19 first bullet point at the head of the page: 20 "The Council will inform the Company of its 21 representative as Monitoring Officer, who will also be 22 responsible for ensuring that an annual report is made 23 to the Council on the performance of the Company." 24 So just to pause there, Mr Inch, that seems to be -- 25 we discussed before at a general level, the difference 63 1 between the financial aspects of the company and perhaps 2 its wider performance, and that seems to be directed at 3 the latter of these two things, the performance of the 4 company; is that correct? 5 A. Yes, that's my understanding. 6 Q. Going back to the financial aspects, the third bullet 7 point, we can see: 8 "The Company shall submit to the Council, within 9 three months of the Company's financial year, draft 10 annual accounts, together with an annual review of 11 pattern of expenditure." 12 So that would provide an opportunity for the Council 13 to monitor the financial aspects of the company; is that 14 correct? 15 A. That's correct, yes. 16 Q. Also, the bullet point after that: 17 "Companies must provide annual business plans and 18 performance targets to the Council prior to the start of 19 the Company's financial year." 20 Then just to note in passing the bullet point 21 beneath that, we again see: 22 "The Monitoring Officer for each company shall each 23 year submit an annual report." 24 Then if we could please go to page 15, simply to 25 note this is an Annex at the top, headed "Explanation of 64 1 Terms Used". If we then go on to the next page of the 2 Annex, please, page 16, simply to note in passing under 3 4, Chairperson, it states: 4 "The Chairperson will be an individual of 5 appropriate experience and counterbalance to the 6 Chief Executive but with clear division of 7 responsibility so that neither has unfettered powers of 8 decision." 9 I've already discussed with you the question of 10 Mr Gallagher. So I won't repeat that. 11 Then just on that same point, finally, please, at 12 page 28, we can see this is an Appendix 3 “Appointment 13 of Directors to Companies – Checklist”. In section 3, 14 paragraph 3: 15 "What Impact do Corporate Governance 16 standards/Companies Act have?" 17 It's stated: 18 "Best practice in Corporate Governance standards 19 calls for (a) the separation of roles of Chairman and 20 Chief Executive with a clearly accepted division of 21 responsibility." 22 We have covered that. Just perhaps finally out of 23 interest, before leaving this document, if we can go to 24 page 30, please, simply to note that Appendix 4 is 25 a list of all of the various and diverse companies and 65 1 trusts in which the Council either owned or had an 2 interest. I won't spend time going through it, but we 3 can see that the various organisations are listed. 4 There's then a column headed, "Category" and after 5 that, "Responsible Monitoring Department". 6 What does the category, do you think, stand for, 7 Mr Inch; we see reference to letters C, B, BC, 8 et cetera? 9 A. I would have to examine that in some detail before 10 I gave you that answer. 11 Q. I appreciate that. I won't ask you to do that. 12 This Appendix runs to three pages. We can just get 13 an indication of the variety of diverse organisations 14 that the Council had an interest in and required to 15 monitor. 16 So I'll leave the 2001 guidance at this point, 17 please, and then go on to look at an Operating Agreement 18 between the Council and tie dated on or about 19 16 September 2005 to see how the guidance is given 20 effect in practice. 21 Document number CEC00478603. We can see towards the 22 top right-hand corner of this page 1, it's stated, 23 “AGREEMENT BETWEEN THE CITY OF EDINBURGH COUNCIL and 24 TRANSPORT INITIATIVES EDINBURGH LIMITED”. 25 If we can go, please, to page 21 -- I'm so sorry. 66 1 It’s page 18 of this version. We can see there at the 2 bottom left-hand corner, this agreement was executed on 3 behalf of the Council by the Council Solicitor, 4 Gill Lindsay. Just go on to the next page, please. The 5 signature on behalf of tie, I'm afraid, is blank. This 6 was the best version we've been able to recover. 7 If we then please look at certain parts of this 8 document, back to page 4, please. At the top of this 9 page, under clause second, it states: 10 "This Agreement shall commence on the date of 11 execution hereof ... This Agreement supersedes the 12 Operating Agreement between the parties dated 13 3 May 2002." 14 So in short, Mr Inch, what appears to have happened 15 is there appears to have been an Operating Agreement 16 between the Council and tie when tie came into existence 17 in 2002, and that Agreement was being superseded by this 18 2005 Agreement. Does that seem correct? 19 A. Yes. 20 Q. Just by way of general observation, this 2005 Agreement 21 is not tram specific. What I mean by that, it's not 22 specifically related to the tram project, but rather to 23 all projects tie were responsible for at that time. 24 Does that accord with your recollection? 25 A. Yes. 67 1 Q. If we could then please in clause third in this page -- 2 it provides that the company hereby binds and obliges 3 itself to provide the following services. One, to 4 comply in all respects with the Annual Business Plan, 5 and two, insofar as not already done, 1: 6 "To develop, procure and implement integrated 7 transport projects." 8 We can see there it's not tram specific; it's 9 generally to do with transport projects. 10 Over the page, please, to pause by way of general 11 observation, I think what we can see, looking throughout 12 this Agreement, is that the company's obligations tend 13 to be set out in mandatory language. We see words like 14 "will", "shall", "require", whereas when we come to look 15 at the new Agreement in 2008, I think we'll see 16 a difference in that the words tend to be "use best 17 endeavours" to do something. I will examine that with 18 you when we come to the other Agreement. 19 Top of page 5, we see in subparagraph 3, one of the 20 company's obligations is to ensure best value in the 21 provision of services to the Council, to act 22 commercially, to act in the Council's best interests at 23 all times. A few sentences down, we see, to apply 24 principles of good corporate governance; and a few lines 25 down, to co-operate with any monitoring operation 68 1 carried out by or on behalf of the Council; in 2 particular, the company will provide a copy of all board 3 papers to the Council's Monitoring Officer as advised by 4 the Council. 5 If we could then look at page 10, which deals with 6 the question of accounting information. Sorry, page 10. 7 We can see in subparagraph 3 -- I won't read it in 8 detail, but we can see the Council will be supplied by 9 the company or on before 31 December in each year with 10 a draft Annual Business Plan, including certain budgets 11 and accounts, et cetera. About halfway down, it states: 12 "The Annual Business Plan will also include 13 timescales and output measures for all work streams." 14 So applying that to the tram project, one would 15 perhaps expect to see an Annual Business Plan from tie 16 to the Council setting out the timescales and output 17 measures in relation to the tram project; is that 18 correct? 19 A. That's correct. 20 Q. And possibly even broken down into the individual 21 components of the tram project in relation to the 22 separate design contract and works, the separate utility 23 design and contract and works, and then the procurement 24 of the infrastructure structure; is that correct? 25 A. Yes. 69 1 Q. These are the sorts of things one would expect to see in 2 the Annual Business Plan. 3 At the bottom of the page, it refers to the company 4 also including in the Annual Business Plan -- the last 5 six lines -- any proposed procurement strategy, a risk 6 allocation model, and also to deliver the Business Plan 7 on time and within budget, together with contingency 8 provision. 9 Over the page, please. Page 11, we can see in the 10 subparagraph 4 that the draft Annual Business Plan for 11 each financial year shall be approved by the Council. 12 So that requires to be done; is that correct? 13 A. That is exactly right. 14 Q. As far as you were aware, did tie produce a draft Annual 15 Business Plan which was approved by the Council each 16 year from tie's existence, 2002 onwards? 17 A. If they did, I'm not aware of it. 18 Q. Just to note in passing, please, at page 13 -- I get 19 confused between the original page numbering and the 20 database numbering. At page 13, under paragraph 13, we 21 see: 22 "The identity of the Chairman shall be determined 23 annually by the Council ..." 24 And also that the Council shall be entitled to 25 change the identity of the Chairman, et cetera, by 70 1 written notice. In short, the Council had the power to 2 appoint -- identify the chairman of tie. That's 3 correct? 4 Then 14 begins: 5 "Except with the consent in writing of the Council, 6 the company shall not:-" 7 So this then lists various things the company 8 requires the Council's consent in writing to do. Over 9 the page, please, at page 14, we can see under letter 10 (i) it states: 11 "appoint any person as Chief Executive or Chief 12 Financial Officer of the company." 13 So again, the Council had powers in that regard. 14 Finally, please, in respect of this document, 15 page 18 in clause 27th provides that: 16 "The Company and the Council agree that both parties 17 where appropriate, will apply the Code of Guidance and 18 Conduct ..." 19 Which we have looked at; is that correct? 20 A. That's correct. 21 Q. Thank you. Now, we can put that document down, and then 22 please go on to the Council's 2006 Code of Guidance on 23 Council companies, and the doc ID number is CEC01813429. 24 We can see this is headed "Council Companies: Code 25 of Guidance", dated 29 June 2006. This is the report 71 1 again by Tom Aitchison, Chief Executive. We can see in 2 paragraphs 1.1, the purpose of the report is to propose 3 a revised code of guidance, et cetera. 4 Look at one matter in passing, please, Mr Inch. Go 5 to page 3 of this document. Paragraph 2.13 at the top 6 states: 7 "More recently a Council Companies Strategy Group 8 has been established to monitor the performance of the 9 shareholding companies and to ensure that best practice 10 in relation to the principles of corporate governance is 11 being demonstrated." 12 Now, I don't think we have seen a reference to that 13 strategy group before. Are you aware of that group and 14 what it did? 15 A. I suspect that's a reference to at one stage earlier on 16 the discussion about companies, I indicated that the 17 Director of City Development was the person who had 18 oversight of companies. But at some stage or other, the 19 Director of Finance became much more involved and 20 engaged in that, and indeed, the Director of Finance 21 always had to have a role in relation to the oversight 22 of the performance of arm's length companies. I think 23 at some stage or other, the Director of Finance took 24 a more direct role, a more interested role, in terms of 25 the Best Practice of Corporate Governance. 72 1 That was for a variety of reasons. I think 2 publication of audit papers and other advice and 3 guidance was coming through the finance stream. But 4 I suspect that's a reference to the Director of Finance 5 wanting to review the way in which we were organising 6 our companies. 7 In addition to that, I think it was just -- it was 8 a reference to best value because at that time best 9 value was the thing in local government, and I think we 10 were wanting to be sure that our Council company 11 portfolio was operating as it should. 12 Q. Thank you. If we now please go to page 6 of this 13 document. We can see it's headed "Appendix two, Code of 14 Guidance". It's split into two parts, part A, 15 relationship between the City of Edinburgh Council and 16 companies of which it is a major shareholder, et cetera, 17 and B, how these companies demonstrate good corporate 18 governance. 19 If we then please go to page 7. There are various 20 provisions here we should look at. Under 1, Company 21 Monitoring Officer, we see again at the top of the page: 22 "The Council requires that all companies in which it 23 has an interest are monitored on behalf of the Council." 24 The next paragraph states: 25 "The Council will appoint a Company Monitoring 73 1 Officer for each company ... the overall purpose of the 2 Company Monitoring Officer is to ensure that the 3 Council's interests are being safeguarded." 4 Two paragraphs down: 5 "Where Council Officers have a liaison and support 6 role with companies, such officers will not be the 7 Company Monitoring Officer." 8 To pause there, Mr Inch, this was introduced as 9 a result, perhaps, of a concern there should be some 10 independence between officers who are actively involved 11 in liaising with and supporting the Council-owned 12 company, and the Monitoring Officer who should perhaps 13 step back a little and be more independent; is that 14 right? 15 A. Yes, that's the idea behind that. It has to be treated 16 against the backcloth of that long list of companies and 17 organisations into which we had an interest, because 18 some of them were extremely small, and in organisational 19 terms, it was difficult to, in some instances, see how 20 that could be achieved without incurring costs that were 21 prohibitive in terms of the operation of that 22 organisation. 23 Mr Hunter, as I mentioned before, was the Monitoring 24 Officer generally, and Mr Hunter, I think, was the 25 Monitoring Officer for a range of the smaller 74 1 organisations and continued to be that. The bigger 2 organisations had different arrangements, more defined 3 arrangements, because they were larger entities. 4 Q. Now, applying this to tie, I emphasise I don't think 5 that Council Directors were on the board of tie as 6 directors, but if they on that hypothesis, if they had 7 been directors of tie, would it have been appropriate 8 for them to also be the Company Monitoring Officer? 9 A. No. 10 Q. How about the case of the tram project, where I think 11 both the Directors of Finance and City Development did 12 sit on the Tram Project Board, did that amount to 13 a liaison and support role such that they shouldn't be 14 Company Monitoring Officers of tie? 15 A. That is a debatable point. I accept that, though 16 I would remind you that it wasn't necessarily the 17 Director who was a Monitoring Officer. It was the 18 Director or his nominee. 19 Q. I think certainly up until May 2008, where we have seen 20 that Marshall Poulton was appointed, at least in that 21 important period up to financial close, I think it must 22 have been Director of City Development who was the -- I 23 think both the Monitoring Officer of tie, but also the 24 wider Tram Monitoring Officer; is that correct? 25 A. That is my understanding. 75 1 Q. We can explore that with Mr Holmes in due course. 2 Returning to the Code of Guidance, please, and two 3 paragraphs down states: 4 "The Company Monitoring Officer will ensure that the 5 company is at all times adhering to best practice in 6 relation to Corporate Governance of shareholding 7 companies as informed by the combined code ..." 8 So that's the reference to the combined code we 9 looked at earlier. 10 Just pausing, Mr Inch, again, I think we can see 11 it's fairly mandatory language used here. Certain 12 things will be done. Will ensure to be done. It's not 13 permissive language; is that correct? 14 A. It is, but I think it was generally perceived as 15 guidance as opposed to mandatory language, as you 16 suggest. 17 Q. I understand that distinction, of course. 18 The next paragraph states that the Company 19 Monitoring Officer will ensure that the other 20 requirements of this Code are fulfilled. 21 I think the next paragraph is something new that 22 I think we didn't see in the 2001 Code. This states: 23 "The Company Monitoring Officer will receive from 24 the Company quarterly reports on items identified in the 25 Operating Agreement and any other aspect which is of 76 1 interest/concern to the Company Monitoring Officer. The 2 Company Monitoring Officer will be responsible for 3 ensuring that bi-annual reports are made to the Council 4 on the performance of the Company." 5 So I think the two things required here are, 6 firstly, quarterly reports from the company to the 7 Monitoring Officer on any aspects identified in the 8 Operating Agreement or other aspects of interest/concern 9 to the company, and just to pause there, applying that 10 to the tram project, it may have been of interest to the 11 Monitoring Officer to know the progress being made on 12 the tram project; is that correct? 13 A. Yes, absolutely. 14 Q. So, for example, it may have been of interest to the 15 company -- sorry, the Monitoring Officer to know of the 16 progress being made by tie in relation to each of the 17 design works, the utility diversion works, and the 18 procurement of Infraco contracts; is that correct? 19 A. That's correct. 20 Q. Having received these quarterly reports, the Company 21 Monitoring Officer could then use the information in 22 those sorts of reports when compiling his twice yearly 23 reports to the Council on performance of the company; is 24 that right? 25 A. Yes. 77 1 Q. Are you aware whether, as a matter of fact, 2 the Monitoring Officer for tie, who I think was 3 Mr Holmes, did receive quarterly reports? 4 A. I'm not aware of that. 5 Q. When you say you're not aware of that, does that mean 6 you simply don't know if that happened or not, or you 7 think it's likely to have happened, it's unlikely to 8 have happened? 9 A. I don't know if it happened or not. I think -- thinking 10 back to that time, I suspect that the Monitoring Officer 11 was receiving that information not on a quarterly basis, 12 but on a daily basis. The intensity of the enquiry into 13 what was going on in relation to the tram scheme meant 14 that we were getting a lot of information through 15 various sources, and the IPG received a lot of 16 information in relation to the performance and progress 17 of the project. 18 I suspect the Monitoring Officer -- I suspect if he 19 did get quarterly reports, I don't know about that. But 20 I think he would have satisfied himself that he was 21 getting the information the quarterly reports would have 22 contained in a different way. 23 Q. Certainly we know that the Directors of City Development 24 and Finance sat in on the Tram Project Board, which 25 I think met monthly, perhaps, and received monthly 78 1 reports from tie. I just wonder whether that is a more 2 indirect way of reporting than tie reporting directly to 3 the Monitoring Officer by providing quarterly reports? 4 A. I think my own view on this was that we had quite 5 a confused picture in relation to the reporting 6 arrangements, and so the structured arrangements that 7 are proposed here, they may have taken place, but I'm 8 doubtful of that, and in replacement of that was what 9 I'd regard as much less structured reporting, through 10 the TPG, through the IPG, and through the direct contact 11 that the Director of City Development, Director of 12 Finance was having with their equivalents within tie. 13 Q. Thank you. The other requirement as set out in the Code 14 of Guidance is that the Company Monitoring Officer will 15 ensure that twice yearly reports are made to the Council 16 on the performance of the company. Are you aware 17 whether the Monitoring Officer for tie made twice yearly 18 reports to Council on the performance of tie? 19 A. I'm not aware whether that happened or not, but I am 20 aware that the Monitoring Officer reported as the 21 Director of City Development along with the Director of 22 Finance on numerous occasions regarding the performance 23 of tie and the progress of the report. 24 So while it maybe doesn't conform specifically to 25 the proposals here, I think the practice incorporated 79 1 the essence of what the -- was suggesting. 2 Q. Yes. I think we have looked at reports from time to 3 time by both directors in relation to the tram project 4 more generally perhaps, seeking approval for Draft Final 5 Business Case or Final Business Case. 6 Of interest on this point, a report specifically to 7 the Council, specifically on the performance of the 8 company. 9 Now, one of the things which may be included in such 10 reports might be the performance of the company in 11 managing and progressing the individual components of 12 the tram project. So again I come back to how was the 13 company performing in terms of the design works and 14 programme, utility works and programme, and the 15 programme for procurement of the Infraco contract. 16 If these sorts of things were being reported 17 directly to the Council twice yearly, then on one view 18 that would be quite a good way to inform members on the 19 performance of tie, but in particular in relation to the 20 progress of these individual and important components of 21 the project. 22 A. I would agree. 23 Q. Moving on to page 8, please. Top of the page, again, we 24 see Operating Agreement and also Funding Agreement. 25 Then under "OPERATING AGREEMENT", heading, it's stated: 80 1 "With respect to Operating Agreements, these will 2 include the following." 3 We see paragraph 2, again: 4 "Provision for an annual Business Plan ... 5 containing financial and performance targets." 6 Just a little bit down, it states: 7 "The performance targets are to be measurable." 8 Over at page 9, please, there's then in paragraph 9, 9 an undertaking that the Company will adopt, et cetera, 10 policies regarding various things, including risk 11 management and maintenance of a risk register. A few 12 bullet points down, reference to Accounts 13 Commission/COSLA guidance paper we looked at earlier. 14 Then it's stated that implementation of the policies 15 will be illustrated by the company in the quarterly 16 reports to the Company Monitoring Officer. So I think 17 that bullet point is a -- list of bullet points in short 18 is an indication of the sort of things one might expect 19 to see in the quarterly reports. 20 Then again at paragraph 13: 21 "An undertaking that written quarterly reports will 22 be made to the Company Monitoring Officer with details 23 of risk reporting ..." 24 So again, that's the sort of thing one may expect to 25 see in the quarterly reports; is that correct? 81 1 A. Yes. 2 Q. Page 12, please. This is the other section of the 3 guidance, B, and how a company demonstrates good 4 corporate governance. In the introduction, the second 5 paragraph, we see: 6 "The Company's Board is to be effective and will 7 lead and direct the Company as informed by the Combined 8 Code ..." 9 We looked at. I think we'll now start to see 10 reflected some parts of the combined code. If we go 11 halfway down the subparagraph 2, A Remuneration 12 Committee. The first bullet point states: 13 "To formulate a transparent procedure for developing 14 policy on executive remuneration and for fixing the 15 remuneration packages of individual directors." 16 The next bullet point: 17 "To ensure no Director is involved in deciding his 18 or her own remuneration." 19 The next bullet point: 20 "Where appropriate, to have a portion of Executive 21 Directors' remuneration structured to link rewards to 22 corporate and individual performance." 23 So that's the 2006 guidance. 24 It might also be worth looking at page 13. In the 25 final paragraph, conclusion, states: 82 1 "The Company will demonstrate the above by liaising 2 with Company Monitoring Officer and if requested by the 3 Company Monitoring Officer, providing a report on how 4 the Company deals with these matters." 5 That's an overview, I think, of the main provisions 6 by which the Council can exercise monitoring and control 7 over its Council-owned companies; is that correct? 8 A. Yes, that's correct. 9 Q. Thank you. 10 CHAIR OF THE INQUIRY: So is this really the Council simply 11 incorporating into its own procedures the advice that 12 we've seen from other bodies? 13 A. That is correct, my Lord. 14 MR MACKENZIE: Thank you, my Lord. 15 I would like now to move away from the guidance, 16 Mr Inch, and look at some of the particular documents 17 relating to governance of the tram project more broadly 18 and some of the issues that arose. 19 Could we start, please, with a document dated 20 November 2006. The reference is CEC01565047. We can 21 see, the top left hand, this is a memorandum from 22 Jenny Drummond, who was a Senior Solicitor in the 23 Council's Legal Services Department to Keith Rimmer who 24 was the Head of Transport, and it's dated 25 14 November 2006, and in the top right-hand part of the 83 1 page we can see in handwriting, it states: 2 "Copies given by hand to Andrew Holmes, 3 Gill Lindsay, Rebecca Andrew and Colin MacKenzie." 4 Mr Inch, did you see this memo at the time? 5 A. No. 6 Q. It's not addressed to you, and nor were you given a copy 7 by hand, but the reason I would like to go over it with 8 you is that it does raise certain issues which do then 9 appear in a memo you produce a little later. 10 So really in short what I'll be asking you to 11 consider is the extent to which you were aware of the 12 issues in this document at the time, even if you haven't 13 seen the actual document. So just going through it, 14 please, we can see the memo is headed "TEL OPERATING 15 AGREEMENT". We can see in the first paragraph, 16 Ms Drummond states: 17 "I see that Graeme Bissett has copied you into the 18 email that he sent to me on 5 November regarding the 19 Operating Agreement ..." 20 Then in the fourth paragraph, Ms Drummond repeats: 21 "May I repeat that I am uncomfortable that no TEL 22 representative was present at the meeting with Graeme or 23 included in the latest circulation of the draft." 24 Then the last paragraph on the page states -- before 25 we get to that, I should say who is Graeme Bissett? Do 84 1 you remember him? 2 A. I recognise the name. He was certainly, I thought, one 3 of the senior officers in tie, as I recollect. 4 Q. Do you know what his job title was or what he did? 5 A. I don't know. 6 Q. Then we see in the last paragraph on the page: 7 "Turning to the points Graeme raises, with regard to 8 his reluctance to have an Operating Agreement, I must 9 make it clear that having an Operating Agreement is 10 standard practice and the Council has Operating 11 Agreements with both Lothian Buses and tie. There is no 12 reason why TEL should not have an Operating Agreement." 13 To pause there, do you know why Mr Bissett would be 14 reluctant that the Council had an Operating Agreement 15 with TEL? 16 A. I don't. I wouldn't know what his views were at that 17 time. I could, having later experienced the 18 relationship between the Council and TEL, and tie 19 rather, I could guess that Mr Bissett would find the 20 Operating Agreement a bit onerous in terms of its 21 requirements. 22 Q. In short, with respect to Mr Bissett, what does it have 23 to do with him as an employee of tie as to whether the 24 Council had an Operating Agreement with TEL? 25 A. I could not answer that question. 85 1 Q. We can perhaps ask Mr Bissett in due course. 2 Is this perhaps more widely reflective of 3 essentially tie taking the lead on the whole question of 4 governance, when in short that should have been a matter 5 in which the Council took the lead? 6 A. Correct. 7 Q. Did you ever have any concerns in that regard, that tie 8 were taking the lead on governance when it should have 9 been a matter for the Council to take the lead on? 10 A. I don't think tie ever took the lead on governance, but 11 I know that tie tried to take the lead on governance on 12 a number of occasions, and I was not happy with that. 13 Q. I understand. If we could then go over the page, to 14 page 2, in the second paragraph states: 15 "The Operating Agreement is a mechanism for control 16 and ..." 17 I take it you would agree with that? 18 A. Yes. 19 Q. Is the corollary that if there is no Operating Agreement 20 in force, then there's less control? 21 A. That is true. 22 Q. Then it is stated, in the next paragraph: 23 "A Memorandum of Understanding is not sufficient 24 control for a company. This company is tasked with 25 a very important matter for the Council and it should be 86 1 clear what is expected of them." 2 I take it you would agree with that? 3 A. Yes, I would. 4 Q. It's then Ms Drummond states: 5 "I do not know who TEL's legal advisers are 6 currently. It is for TEL to tell us who their legal 7 advisers are and what they think of the draft Operating 8 Agreement." 9 Then: 10 "While Graeme's views are noted, it is now time to 11 discuss the matter with TEL directly. Therefore I would 12 urge you to include, at minimum, both the 13 Chief Executive, Neil Renilson, and chair David Mackay 14 in future discussions of the draft. I think it is 15 appropriate that all directors of TEL are given a copy 16 of the current draft at this stage so an informed 17 discussion with TEL can take place." 18 I take it you would agree with what Ms Drummond has 19 set out in those paragraphs? 20 A. Yes, absolutely. 21 Q. It is really self-evident, is it not, that the two 22 parties that have an interest in an agreement between 23 the Council and TEL are the Council and TEL? 24 Then further down the page, the bottom paragraph 25 states: 87 1 "I would be obliged if you would indicate which 2 reports have identified the delegated powers given to 3 TEL by the Council. It must be clear what 4 power/authority has been delegated by the Council to TEL 5 and any delegation of power/authority has been properly 6 given. Further, depending on what the powers/authority 7 are, it may be that TEL is not a competent entity to 8 receive such powers/authority." 9 I simply ask you to note in passing that issue of 10 concern and we will come back to it. 11 Over the page, please, page 3 of this document, 12 page 3 of this document, we can see just over halfway 13 down, the paragraph commencing: 14 "A key activity for TEL is to take part in the Tram 15 Project Board. Accordingly, I would be obliged if you 16 could clarify the status of the Tram Project Board. 17 Graeme states in the governance paper that it is ”an 18 established independent body with full delegated powers 19 from CEC (through TEL) and T[ransport] S[cotland]”". 20 Ms Drummond goes on to say: 21 "As far as I was aware, and I appreciate I may not 22 have had all the facts, when I looked into this matter 23 before, there was no formally constituted Joint Board, 24 Joint Committee or even a constituted unincorporated 25 body with a Board. All I could find was a set of 88 1 individuals representing various bodies who met together 2 to work on things pertaining to the Edinburgh trams. 3 I think this had developed from the Liaison Group which 4 met with the Scottish Executive. Is this how the Tram 5 Project Board was set up? Has there been a Report to 6 Council on the Tram Project Board, outlining its 7 membership, remit and detailing how it is controlled?" 8 I'll come back to ask questions about that shortly. 9 Just to finish this document, over the page, and in 10 the third paragraph commencing: 11 "If the Tram Project Board is not a Joint Committee, 12 but is merely a group of individuals representing other 13 bodies in a transport endeavour I have serious concerns 14 of the competency of any local authority statutory 15 transport functions being delegated either to TEL or 16 through TEL to the Tram Project Board. All such matters 17 must be reserved to the Council." 18 It's then stated: 19 "Graeme states in his corporate governance paper 20 that the Tram Project Board is independent ... However, 21 is TEL seen as the body who has final say within the 22 Tram Project Board or attends as an adviser or an 23 observer? As TEL attends the Tram Project Board, why is 24 the Tram Project Board also reporting to TEL. 25 I appreciate that the reporting procedure may have 89 1 changed, so your more up-to-date knowledge is 2 appreciated." 3 Just to pause there, Mr Inch, what was your 4 awareness at this time in late 2006 of these various 5 governance issues and concerns? 6 A. I was aware of much of this and I was of the view that 7 there was a great deal of confusion that needed to be 8 addressed. 9 Q. Was that confusion addressed? 10 A. I think it was over time. It wasn't addressed directly. 11 I think changes were made that reinforced the 12 requirements of better governance and there was 13 a recognition that there needed to be formal 14 acknowledgement of TEL and TEL's role as the integrating 15 body for the transport arrangements in the city. 16 And that meant that TEL needed to have powers 17 transferred to it and it needed to have a direct 18 responsibility for TPB. That didn't happen immediately. 19 It happened over time. 20 Q. So would it be correct to say that at this time, in late 21 2006, you recognised that the governance structure of 22 the tram project was confused? 23 A. I would say yes to that. 24 Q. Did there come a point when clarity was achieved? 25 A. I wouldn't say there was a point in time. I think, as 90 1 I mentioned before, it evolved. Opportunities were 2 taken to tidy up the governance and to address 3 weaknesses we perceived to be in the governance. 4 A good example of that was Mr Gallagher's position 5 with joint appointment, and these matters needed to be 6 addressed. That was one of a number of question marks 7 that I have over the relationship between TEL, tie, the 8 TPB and the Council, and I think the irony in a sense is 9 that Audit Scotland reviewed the governance arrangements 10 operating in this area, and gave it a clean bill of 11 health. 12 Q. To what extent did you derive satisfactory reassurance, 13 perhaps, from the Audit Scotland report in that regard? 14 A. Yes, clearly the Council took that to be an acceptance 15 that what we had in place was appropriate and met the 16 standards required. And I guess that's maybe one of the 17 reasons it took us a bit longer to address some of these 18 issues, because we felt that we were in a more 19 comfortable place, because Audit Scotland had identified 20 that they had reviewed the situation as being 21 acceptable. 22 Q. I'll come back to the question of the Audit Scotland 23 report, Mr Inch. You mentioned two matters. One was 24 clarity in relation to Mr Gallagher and his dual 25 appointment as the Chair and Chief Executive of tie, but 91 1 he resigned in November 2008. That was nothing to do 2 with the Council taking steps to clarify that; is that 3 correct? 4 A. He did resign in 2008, but I think if he hadn't resigned 5 in 2008, we would have addressed the issue that we've 6 just talked about. 7 Q. You say that. Were there any reports to Council or any 8 recorded discussion among officers in October 2008 that 9 this needed to be addressed? 10 A. I'm sure that there were discussions with Mr Gallagher 11 around that time about his role and the need for us to 12 change that situation. I think Mr Gallagher fully 13 appreciated that what was a temporary arrangement had 14 gone on far too long, and I would have anticipated that 15 that would have been resolved if Mr Gallagher -- even if 16 Mr Gallagher had stayed on or, as you say, he moved on. 17 Q. It had been in place for two years, five months. How 18 much longer was it going to go on for? 19 A. I can't speculate, but what I'm suggesting is that we 20 were acutely aware that this was not best practice and 21 that we needed to do something about it. 22 In the same stage, at the same time, over that 23 two-year period, things had changed quite dramatically 24 in terms of the whole area of transport -- Council 25 transport arrangements, not just in relation to the 92 1 difficulties that tie was experiencing over the 2 contract, but also in relation to the need to look more 3 strategically at the future arrangements for -- 4 involving TEL and involving Lothian Buses. 5 So there was -- even at that stage there were 6 discussions going on about how we would facilitate the 7 integration of the transport arrangements within the 8 city, and even at that stage there was an involvement 9 with -- and discussions with Lothian Buses and with TEL 10 so that we began to get to a position where we 11 understood what we were trying to achieve. 12 Mr Gallagher was part of that, and these 13 discussions. He knew the direction of travel and he 14 understood that we would have to change that temporary 15 arrangement. 16 Obviously it would be speculation on my part to say 17 that if he had not gone at that time, how long he would 18 have stayed in that role. I can't speculate, but I'm 19 pretty certain in my own mind that that wouldn't have 20 been very long. 21 Q. You mentioned the question of integration with bus 22 services. I can quite understand the role of TEL to 23 ensure there is proper integration between the tram and 24 the bus system. 25 I'm particularly interested, however, so before we 93 1 get to that operational phase, I'm particularly 2 interested in the governance arrangements in the 3 important period leading up to financial close of the 4 infrastructure contract. So up to May 2008. 5 I think you have accepted that in late 2006, around 6 the time of this memo, I think you had accepted that 7 governance arrangements were confused. Is that right? 8 A. They were confused to me, yes. 9 Q. I think you had also mentioned in your evidence that one 10 of the things which perhaps brought some clarity was 11 when powers were formally delegated with the Council for 12 TEL; is that correct? 13 A. Yes. 14 Q. Now, we will come on to look at that having happened in 15 May 2008. Is it your position that between late 2006 16 and up until that happening in May 2008, the governance 17 arrangements for the tram project were confusing? 18 A. They were confusing to me. And they may not have been 19 confusing to others who were -- had the responsibility 20 around these matters, but from my perspective, as 21 Director of Corporate Services, who had perhaps more 22 responsibility around the exercising of governance, 23 I found it confusing. 24 Q. Did you have a clear understanding of the duties and 25 responsibilities of each of the bodies and organisations 94 1 involved in the tram project during that period, ie 2 between late 2006 or May 2008? 3 A. I think these were pretty well-documented, I have to 4 say, though while they were documented, there was room 5 for misinterpretation, and I think that's where we ended 6 up with a lot of misinterpretation of the words that 7 were used to express the roles and responsibilities of 8 the different organisations. 9 Q. Misinterpretation by who? 10 A. By the individuals in these organisations. 11 Q. Well, your answer suggests that the individuals in the 12 various organisations didn't have a consistent and clear 13 understanding of everyone's duties and responsibilities; 14 is that a fair way to put it? 15 A. Yes, I think in answer to a different question, I made 16 a reference to the possibility that the Council's 17 interest and tie's interests were not necessarily 18 aligned. I used the word "aligned", and that's really 19 what I was getting to, that our respective 20 understandings of what -- of the circumstances and the 21 operation were different. tie's views clearly were -- 22 their interpretation of what was required of them was 23 different to the Council's interpretation. 24 Q. Can you explain that a little more? 25 A. I can't remember the document, to be honest with you, 95 1 which I was addressing, but the view I have is that tie 2 often took a view which was contrary to the view the 3 Council had of the interpretation made of different 4 instructions or different papers, and that caused extra 5 work in terms of getting together to resolve what were 6 differences of opinion. 7 I think it might also be a little bit to do with the 8 differences that would naturally arise between 9 a commercial organisation and a public sector 10 organisation, where the mind-set is not necessarily the 11 same. 12 Q. Very well. Returning, please, to this memo we've been 13 looking at, towards the bottom of page 4, rather halfway 14 down, we see a reference: 15 "This takes me on to the Prince 2 names used by 16 Graeme to describe the roles of the various attenders of 17 the Tram Project Board." 18 Now, Prince 2, I think, is a reference to project 19 management guidance issued by the OGC, the -- what have 20 you. 21 Were you familiar with Prince 2 terminology and OGC 22 guidance on governance of projects? 23 A. I was aware of it. I had no need to practise it. I was 24 aware of the presence of that, and indeed some of the 25 staff in my department would apply Prince 2’s approaches 96 1 to some of the work that they were doing. 2 Q. Over the page, please, at page 5, I would like to look 3 at the question of the senior responsible owner. Do you 4 think that was a term used by the OGC in their guidance? 5 Does that sound familiar? 6 A. I think so. 7 Q. Senior responsible owner. Ms Drummond states: 8 "I would suggest on information currently in my 9 possession, the roles should be as follows. Senior 10 Responsible Owner: CEC." 11 If we then go halfway down the page, it's stated: 12 "I note that Graeme has indicated in his Corporate 13 Governance paper that TEL are the “Senior Representative 14 Owner."” 15 I think it should perhaps be "Senior Responsible 16 Owner". She goes on to say: 17 "I do not think that this is correct as that would 18 cast TEL as the ultimate decision-maker over the Tram 19 Project Board. For example, can TEL decide that the 20 project is not to proceed without reference to any other 21 party? If the answer is no, TEL is not the “Senior 22 Representative Owner”. It would be more appropriate for 23 the Council to be the Senior Representative Owner. As 24 the Scottish Executive are part funders, their interest 25 would have to be recognised." 97 1 In short, Mr Inch, in relation to this period 2 between late 2006 and May 2008, who did you consider to 3 be the Senior Responsible Owner for the tram project? 4 A. The Council. 5 Q. Were you firmly of that view? 6 A. Yes. 7 Q. Then please go over the page. I should just pause to 8 say: what do you understand by the term "Senior 9 Responsible Owner"? 10 A. I think the -- I think the paper also referred to the 11 funder being the Scottish Executive. So the prime 12 funder is Scottish Executive, but the junior funder was 13 the Council. 14 The instigator was the Council. So if you like, the 15 client was the Council. And as client, the Council had, 16 I would argue, the role as Senior Responsible Owner. 17 tie was an agent of the Council. 18 Q. Thank you. On page 6 of this document, in the second 19 paragraph: 20 "I also note that the governance paper indicates 21 that there is to be an independent Chair." 22 I think that's a reference to an independent Chair 23 of the Tram Project Board. 24 "Is that person to be independent of TEL, tie, CEC, 25 Transport Scotland and Transdev? I think this should be 98 1 checked against the Prince 2 rationale. I await your 2 clarification as to what the Tram Project Board is, how 3 TEL are expected to participate on the Tram Project 4 Board and if the Prince 2 system of project management is 5 being adopted." 6 The next paragraph, a reference to: 7 "On a separate matter is there a Service Contract 8 for the Chief Executive of TEL in place? I have been 9 told by our Chief Executive that he considers the time 10 is now right for such a service contract to be in 11 place." 12 So in short, Mr Inch, the various concerns and 13 issues set out in this memo in relation to governance, 14 I think your position is that you were aware of most if 15 not all of these matters at that time? 16 A. Yes. 17 Q. Thank you. 18 We can put that document to one side, please. 19 I would like now to look at what the Council were 20 advised in December 2006 about the governance 21 arrangements. So if we could please look at 22 CEC01821403. We can see there is the Draft Final 23 Business Case dated November 2006 that was presented to 24 the Council in December 2006. 25 If we go, please, to page 73, we see in 99 1 paragraph 6.1, under Background, it states: 2 "The delivery of Edinburgh's integrated transport 3 system has the following key players ..." 4 The Council, TEL and tie is the delivery agent, and 5 Transport Scotland. 6 Paragraph 6.2, it says: 7 "This section describes the project governance 8 structure through to Financial Close. It is anticipated 9 that a revised structure will be required to execute the 10 construction phase ..." 11 Under 6.3, Governance structure, we see: 12 "The structure highlights the following four key 13 bodies ..." 14 TEL Board, Tram Project Board, stated to be an 15 independent body with authority delegated to it by CEC 16 through TEL and by TS, and two sub-committees. 17 If we then please go over the page, in paragraph 6.4 18 it's stated: 19 "The role of each body is as follows." 20 Paragraph 6.5, the TEL Board states: 21 "The role of the TEL Board is focused on its 22 statutory stewardship role and on its overall 23 responsibility to deliver an integrated tram and bus 24 network for Edinburgh, on behalf of CEC." 25 To pause there, do you understand what is meant by 100 1 TEL's statutory stewardship role? 2 A. I don't fully understand that., no. 3 Q. Was it your understanding at this time that TEL had 4 overall responsibility to deliver an integrated tram and 5 bus network for Edinburgh on behalf of CEC? 6 A. That is certain -- was certainly the intention for TEL. 7 Whether at this particular point in time, I hesitate, 8 because while it was always known that that was going to 9 be the case, I know that the fulfilment of that probably 10 didn't -- was probably not realised for some time yet. 11 Q. I think it's correct to say, Mr Inch, that the first 12 Operating Agreement between the Council and TEL was in 13 May 2008. Does that accord with your recollection? 14 A. Yes. 15 Q. Was it perhaps a little difficult to see how TEL can 16 undertake things on behalf of the Council if there's no 17 Operating Agreement between the two? 18 A. Correct. 19 Q. An Operating Agreement would spell out exactly what it 20 was TEL were required to do on behalf of the Council; is 21 that correct? 22 A. That's correct. 23 Q. The next paragraph, 6.6, in relation to the Tram Project 24 Board, states: 25 "The Tram Project Board is established as an 101 1 independent body with full delegated authority from CEC 2 (through TEL) and TS to execute the project. In 3 summary, the Tram Project Board has full delegated 4 authority to take the actions needed to deliver the 5 project to the agreed standards of cost, programme and 6 quality." 7 Pausing there, as at this time in late 2006, were 8 those statements correct? 9 A. Again, I recognise that as being the intention, but 10 I don't think the mechanisms required to make that the 11 reality were necessarily in place at that point of time. 12 Q. Thank you. 13 CHAIR OF THE INQUIRY: So it wasn't correct to say that the 14 Tram Project Board had full delegated authority at that 15 stage? 16 A. I don't think it did. It is unfortunately very 17 confusing to people because as time -- the timelines get 18 very confused and blurred, but I think at this 19 particular point in time, I think the intention was 20 clear, but we didn't necessarily have the authorities 21 that would have been required in order to bring about 22 that arrangement. 23 MR MACKENZIE: So your position essentially is that what we 24 have looked at, these statements are aspirational as to 25 what is to happen in the future? 102 1 A. That is what I think is the case. 2 Q. But if you are a member of the Council or indeed of the 3 public, looking at these statements, it's not said 4 anywhere we have looked at: these are aspirational, this 5 will happen in the future. This is presented as what 6 are the governance arrangements just now. 7 A. I can see that that is a confusion. 8 Q. Yes. 9 If we then leave that document, please, and go on to 10 a briefing paper that has your name on it in July 2007, 11 please. Perhaps start with the accompanying email. 12 It’s CEC01566495. 13 We can see this is headed from a Chris Highcock, 14 sent on 24 July 2007, and the subject is: tram IPG 15 papers for meeting 27 July. And various attachments, 16 including tie governance documents. I think in short 17 this email is simply distributing papers for the 18 forthcoming meeting of the IPG on 27 July. 19 If we then please go to one of those attachments, 20 which is CEC01566497, if we go to page 8, please, we see 21 at the bottom right-hand corner your name, dated 22 20 July 2007. Mr Inch, I'm also aware of other 23 documents where I think Colin MacKenzie, one of the 24 Council solicitors, produced an initial draft, albeit 25 the final version has your name on it. Does that accord 103 1 with your recollection? 2 A. Yes. 3 Q. Do you remember why this briefing paper was produced? 4 A. I seem to recollect it was requested. I think probably 5 requested by the Chief Executive. 6 Q. Thank you. We also know of course that this is around 7 the time after Transport Scotland withdrew from the 8 direct governance arrangements in the project; is that 9 correct? 10 A. That's correct. 11 Q. I should just pause to ask what were your views at that 12 time on Transport Scotland's withdrawal? 13 A. That was very disappointing. I had a view that 14 Transport Scotland brought a lot to the project, a lot 15 of expertise and experience, and I took great comfort 16 from the fact that Transport Scotland were monitoring 17 what we were doing and how we were doing it, and so 18 their withdrawal from direct involvement was really very 19 disappointing, and I feel damaging to the governance 20 arrangements that we had this place, because they were 21 part of the governance arrangements for the project. 22 This, I think, illustrates that there was a need in 23 that situation to review our governance arrangements, 24 not just for that, but also because of the risk involved 25 as the Council then becoming the funder of last resort. 104 1 Q. Thank you. Coming back to the paper, please, at page 1, 2 it does raise a number of matters which have been raised 3 by Ms Drummond in her memo. So I'll try not to spend 4 too long, if I may, on this paper, but we will go 5 through some parts of it. 6 We can see in paragraph 1.1, as you mentioned: 7 "This paper has been prepared in response to your 8 memorandum dated 28 June 2007 which requested my views 9 on the most appropriate governance arrangements for TIE 10 in the longer term." 11 What's the reference to the longer term? 12 A. I think that suggests a lot longer than I was actually 13 meaning, because we were -- the pace of change, the pace 14 of what was having to take place, meant that the longer 15 term could be a month or so, rather than a year or so. 16 Q. I think in any event, I think Mr Colin MacKenzie is 17 taking the opportunity, I think, in this paper to set 18 out certain observations on the current governance 19 arrangements which we'll come to. 20 I take it, although I think the paper had been 21 drafted by Mr MacKenzie, I take it you agree with what's 22 set out in it because you put your name to it? 23 A. Yes, absolutely. 24 Q. Thank you. 25 On page 1, I can see in paragraph 2.3 it's stated: 105 1 "There is currently no “tram operating agreement” 2 between the Council and TIE, merely a general agreement 3 dealing with various transport projects." 4 That's the 2005 Operating Agreement we looked at 5 earlier. It's then said: 6 "The consequence of this is that there is no 7 satisfactory detailed level of control over TIE and its 8 activities as 'agent' for the Council in matters such as 9 procurement, contracting and incurring expenditure." 10 Now, just to pause here, Mr Inch, I take it you 11 agree with that? 12 A. Yes. 13 Q. As we'll come on to see, I think there was no tram 14 specific Operating Agreement between the Council and tie 15 until again May 2008. So does that suggest that there 16 was no satisfactory detailed level of control over tie 17 at this time in July 2007 up until the tram specific 18 Operating Agreement in May 2008? 19 A. I think it's true to say that that is the case. I think 20 the Tram Operating Agreement has a particular 21 application. It is a -- an Operating Agreement is an 22 extensive document with a great deal of detail in terms 23 of what is expected and what is not expected. 24 I think what was in place was a general agreement 25 dealing with various transport projects, which did 106 1 include quite a lot of what would have been in the 2 Operating Agreement, but it hadn't been formalised into 3 an Operating Agreement. 4 However, I nevertheless felt that was a weakness, 5 and that's why I was making this -- or agreeing with 6 Colin's point that there should be an Operating 7 Agreement. 8 Indeed, I seem to recollect that in some other 9 documents, there was a reference to there being a tie 10 Operating Agreement earlier than this, but I suspect 11 that it was simply was referring to or these documents 12 were referring to the general agreements that Colin is 13 referring to here, because there was no formal Operating 14 Agreement. 15 Q. In paragraph 2.4, about halfway down, it's said: 16 "Increasingly, officials have found it necessary to 17 take a much closer and proactive role in seeking to 18 protect the Council's interests. It cannot always be 19 said that TIE’s close focus on the tram project, and the 20 Council's wider interests, are at one." 21 Do you have any comments on that last sentence of 22 the paragraph? 23 A. I think I accept entirely what is being said, and 24 I think it goes back to what I was saying a little 25 earlier, that we were never always aligned, and I think 107 1 there were issues in terms of our different 2 interpretation of what was needed and there needed to 3 be -- later on in the operation between tie and the 4 Council there was an effort made to -- and a description 5 of our working arrangements as a family, and that we 6 needed to work together as a family, as opposed to 7 working separately and coming together only when we were 8 forced to come together. 9 I think that's -- there's a little bit of that in 10 here, that the Council had wider interests clearly, and 11 the focus that tie had, the very close focus, purely on 12 the tram project, meant that the tie didn't have -- 13 didn't have vision or understanding of some of the 14 situations that we might encounter and didn't really 15 have a regard for that, because they were single minded 16 about getting the -- as we would expect, they were 17 single-minded about getting the tram project together. 18 But the Council clearly had wider interests and 19 these had to be taken into account. 20 Part of tie's frustration, I think, as time went on, 21 was the fact that we did have to regard what the general 22 public had to say, what the elected members had to say, 23 in relation to some of the activities. tie took up an 24 entirely business-like approach to that, which is 25 understandable, but they had little room for taking 108 1 account of the wider interests of the Council. 2 Q. Can you give any examples of these wider interests of 3 the Council? 4 A. I think that manifested itself in various ways. I think 5 it's difficult to pick out an example. 6 I'm sure an example will come to me as we go through 7 this, but it is true to say that tie were, as it says 8 here, single minded and that the regard or thoughts they 9 had -- a good example might be, as we were going to come 10 on no doubt and talk about, is bonus payments. tie were 11 wanting to introduce a new bonus scheme for their staff 12 at a time when Council staff were experiencing a pay 13 freeze. 14 So tie were minded to disregard the fact they were 15 operating in an environment where remuneration was 16 highly emotive issue, but that wasn't or shouldn't, in 17 tie's view, should not be taken into account in their 18 consideration of that. 19 I think it's little issues like that that maybe 20 evidence what I'm thinking in relation to them not being 21 prepared or not able to take Council's wider interests 22 into account. 23 Q. You've referred to little issues like that, but I think 24 you also referred earlier, you evidenced the Council 25 being funder of last resort. That may be another matter 109 1 in which the Council had a very strong interest, but 2 tie's interest was perhaps more closely focused on 3 building the tramlines; is that correct? 4 A. Yes, absolutely. 5 Q. Over the page, please, at page 2, in paragraph 2.5 at 6 the top, we have discussed this already, it's really in 7 short the question that it should be noted that the Tram 8 Project Board is not a legal entity, and there must be 9 some doubt as to whether the Council can competently 10 delegate its functions to the said board. I have asked 11 you about that already. 12 Then paragraph 2.6, it states: 13 "Against the background of the funding cap set by 14 Transport Scotland, and a greater financial risk to be 15 borne by the Council, it is imperative that far more 16 rigorous financial and governance controls are put in 17 place by the Council." 18 I take it you agreed with that at the time? 19 A. Absolutely. 20 CHAIR OF THE INQUIRY: Sorry, why was it important to put in 21 more rigorous financial and governance controls? Were 22 these not important even where you were concerned with 23 spending GBP500 million of public money? 24 A. Yes, my Lord. Of course they were. But it became even 25 more -- if we looked at it from a risk management 110 1 perspective, the Council was facing greater risk than 2 had been the case before, because they didn't have the 3 government standing behind them in relation to any 4 funding beyond the 500 million cap. 5 MR MACKENZIE: Then -- yes. Did there come a time, Mr Inch, 6 when far more rigorous financial and governance controls 7 were put in place by the Council? 8 A. Yes. Over time that did happen. I believe that 9 increasingly we were able to put in place more 10 requirements for financial reporting and stronger 11 governance controls. 12 That was not achieved easily, and was maybe part of 13 the difficulty that the Council had in its relationship 14 with tie. 15 Q. Two matters arise there. Why wasn't that achieved 16 easily? 17 A. It may again come back to tie's view or lack of 18 consideration of the Council's situation, because tie 19 resisted giving as much information as we would have 20 liked. It may come back to their concerns about an 21 Operating Agreement which was deemed to be unnecessary 22 and overly prescriptive because -- and as such, probably 23 costly to deliver. 24 I guess there was always a cost benefit 25 consideration to these things in terms of how much 111 1 information the Council required and how long it took to 2 prepare that information, and for what purpose. 3 These were always debates that were had in relation 4 to putting in place new and maybe more onerous financial 5 reporting arrangements than had hitherto been the case. 6 Q. You seem to be painting or describing a picture of tie 7 being resistant to the Council seeking to exercise 8 greater control over tie. Is that fair for me to 9 presume? 10 A. It's how I saw things. I found that tie was resistant 11 and felt that what we were asking for was unnecessary, 12 and creating an overhead, a needless overhead in terms 13 of the operation of tie. 14 So -- but I do believe that there was resistance and 15 there was a lot of discussion around that between tie 16 officials and Council officials in terms of trying to 17 get to a position where there was greater comfort on our 18 part -- that's the Council's part -- in relation to the 19 information that was being supplied. 20 I might say that was also coloured by the fact that 21 we were at one level within tie being given information 22 about the status of the project, and at another level, 23 a more detailed level, receiving information which 24 suggested that the status that was being presented by 25 tie was not necessarily the true position. 112 1 Q. It is a separate matter, Mr Inch, the question of 2 information provided by tie in the project. So let's 3 not forget about that. 4 Sticking with the matters we have been discussing 5 for now, this question of tie being resistant to greater 6 control by the Council, tie is a wholly owned -- tie is 7 a company that is wholly owned by Council. It's wholly 8 funded by the Council. Why didn't the Council just take 9 control and say: it's very interesting, you don't want 10 greater control, but tough; we are going to impose it on 11 you? 12 A. Yes, and I think at various stages that did happen. But 13 generally speaking, and I suppose the options that were 14 identified in this paper kind of demonstrate that, that 15 the Council could step in. It was in the position to 16 step in and -- or to determine a new way forward in 17 relation to the way of delivering the tram project. 18 But what we had put together was a team of experts, 19 and they were industry experts in terms of what we were 20 trying to achieve, trying to -- and we had to have 21 regard to the information and the views that they had 22 about the appropriateness of the sorts of controls that 23 we were wishing to exercise. 24 So there was on our part, I think, a view that maybe 25 we didn't understand sufficiently why controls of 113 1 a particular nature were not appropriate, and so there 2 was quite a lot of catch-up, both on the Council's part 3 to understand where tie were coming from, but also 4 I felt there should have been catch-up on tie's part to 5 determine how -- why the Council was asking for that 6 information. 7 The bit that was missing was the tie bit about 8 understanding where we were coming from. I think we 9 understood that we might not be understanding fully why 10 tie were resistant to providing information, remembering 11 that these were highly technical and very complex 12 matters that we were dealing with, and the effort that 13 had been put in to draw together this team within tie 14 was not inconsiderable. 15 So there was a reluctance to throw the baby out with 16 the bathwater, I suppose, and there was a reluctance 17 to -- and a concern that that wouldn't necessarily 18 improve our position, because we would have had to find 19 a new way forward which we'd already discounted in terms 20 of setting up the whole arrangement. 21 Q. One can quite see how tie and the individuals there may 22 be experts in the particular project they were involved 23 in involving engineering and technical expertise and 24 what have you, but we are simply talking here about 25 governance arrangements, having proper governance 114 1 arrangements in place, and I suggest, Mr Inch, that 2 Council officers were as well placed, if not better 3 placed, than those in tie, to know what governance 4 arrangements ought to be in place. 5 A. I can but agree. 6 Q. Now, another matter you have mentioned, coming back to 7 paragraph 2.6, the question of -- this being imperative, 8 far more rigorous financial and governance controls are 9 put in place, and you mentioned that happened over time, 10 but I do want to pin you down about this. 11 When did that happen? Is this again a reference to 12 events in May 2008 when we see, for example, the TEL 13 Operating Agreement with the Council? Is there 14 a reference to that? 15 A. That's one of the references. I think my memory is not 16 good enough to give you chapter and verse exactly when 17 the various building blocks were put in place, but 18 I think these were put in place over a number of reports 19 to Council or to the P and R Committee, over that period 20 between then and 2008. 21 I think there were other Council reports which 22 addressed some of these matters. 23 Q. Yes. I'll take you to the December 2007 report in 24 particular in that regard, but really the point in short 25 is that we see in this memo recognition of an imperative 115 1 need that far more rigorous financial and governance 2 controls are put in place by the Council. 3 Really, what I wonder is whether can you point to 4 anything the Council did in that regard before May 2008, 5 and if not, does it suggest that that need went 6 essentially unanswered until perhaps May 2008 onward? 7 A. No, I don't think it went unanswered. I think there 8 were a number of actions taken by the IPG in particular 9 to ratchet up the level of control through the -- 10 through requesting large tracts of additional 11 information which had not to that point in time been 12 made available to the IPG. 13 So there was clearly efforts made to increase 14 control through the acquisition of more up-to-date and 15 more comprehensive information. 16 Q. I understand. Also on page 2, paragraph 3.1, it's 17 stated: 18 "The current governance arrangements for TIE are 19 complex and ..." 20 I think you would accept that at this time? 21 A. Yes. 22 Q. And you in fact describe them as confusing. In 23 paragraph 3.2: 24 "The diagram attached as appendix 1 clearly exposes 25 this complexity." 116 1 It might be worth just pausing to look at that 2 diagram. CEC01566500. I'll give you a minute just to 3 look at it, Mr Inch, and to be fair, the diagram, 4 I think, was produced by Mr Colin MacKenzie, just to 5 illustrate the complexity, but you agree that it does 6 illustrate the complexity of the governance 7 arrangements? 8 A. Absolutely. 9 Q. I think in short, Mr Inch, the suggestion is that it was 10 perfectly obvious at the time that there was an urgent 11 need to simplify and clarify the governance arrangements 12 and to clarify parties' respective powers, duties and 13 responsibilities in relation to the tram project. And 14 despite that being an obvious and urgent need, it wasn't 15 done until May 2008 at the earliest? 16 A. It wasn't formally achieved until May 2008. I would 17 suggest that a number of actions were taken in that 18 period that did improve the governance and did give 19 greater comfort. I'm not for one minute suggesting that 20 that was fast enough, because I think in my statement 21 I've said that on reflection, with hindsight, we should 22 have done more, and done more more quickly. 23 Q. The last point on this diagram, we can see in a box on 24 the bottom right-hand corner, joint responsibilities, 25 issues, a number of individuals, and describes their 117 1 roles. We can see Mr Gallagher was the Executive Chair 2 of tie. He was a director of TEL, a director of 3 Lothian Buses. We can see Neil Renilson was the 4 Chief Executive of TEL, Chief Executive of 5 Lothian Buses. Bill Campbell, we can see, a director of 6 Lothian Buses and also of TEL, Brian Cox is mentioned. 7 It doesn't mention David Mackay, who as I understand it 8 was the Chairman of TEL and the Chair of the Tram 9 Project Board. 10 This issue, Mr Inch, of there being a number of main 11 individuals in the tram project who had roles in more 12 than one body or organisation, did that cause you any 13 concern in respect of whether that amounted to good 14 governance? 15 A. In terms of the tram project, we were really focusing in 16 on tie, and so what sticks out is Mr Gallagher's role as 17 Executive Chair as being something that is not 18 appropriate in terms of good governance. 19 The overlaps between the other organisations was of 20 itself not interfering with tie in terms of tie's 21 governance. It did in terms of -- it was in terms of 22 the Council's overall governance of its transport 23 initiatives something that was -- needed to be 24 addressed. There's no -- no one would be defending 25 these overlaps. They are not in accordance with best 118 1 practice. 2 Q. Why do you say that these overlaps would not be in 3 accordance with best practice? 4 A. Remembering that these are -- Neil Renilson, 5 Bill Campbell and Brian Cox's positions were positions 6 of longstanding, and had been developed through 7 discussions in terms of Lothian Buses with 8 Lothian Buses' Board, and -- so his role as 9 Chief Executive and his role as Chief Executive of TEL, 10 for example, Mr Renilson, were matters of inheritance in 11 terms of this situation. They'd been in place for some 12 considerable time. 13 I suspect the same would be the case with 14 Bill Campbell and Brian Cox, although I wouldn't 15 necessarily understand exactly the timelines associated 16 with them taking up their different appointments in 17 different organisations. But it is -- I'm not trying 18 for one moment to defend this. I'm simply saying that 19 it needs to be seen in the context of a number of 20 organisations who did not work together at that time. 21 TEL's role of integrating might have been understood as 22 being something that we wished to happen, but TEL was 23 never in a position to make that happen until later, 24 when the powers that were needed to enable TEL to do 25 that were passed to TEL. 119 1 MR MACKENZIE: Thank you. 2 CHAIR OF THE INQUIRY: We will break for lunch now, Mr Inch. 3 We will resume again at 2.15. 4 (1.05 pm) 5 (The short adjournment) 6 (2.15 pm) 7 CHAIR OF THE INQUIRY: You're still under oath, Mr Inch. 8 MR MACKENZIE: Mr Inch, before lunch you made mention of the 9 Audit Scotland Report on the tram project and the EARL 10 project. Now, that I think was issued on 21 June 2006. 11 The briefing paper we are looking at is almost four 12 weeks later, 20 July 2007. Sorry, I think I said the 13 Audit Scotland Report was June 2006; it was June 2007, 14 of course. So in short the Audit Scotland Report is 15 published about four weeks before the governance paper 16 we are looking at just now. 17 So presumably you couldn't have derived any 18 reassurance from the Audit Scotland Report, in respect 19 of their conclusions on governance, in respect of the 20 governance issues and concerns set out in your memo some 21 four weeks later. 22 CHAIR OF THE INQUIRY: What time did you say the Audit 23 Scotland report was? 24 MR MACKENZIE: It was 21 June 2007, my Lord, and Mr Inch's 25 memorandum on governance is 20 July 2007. 120 1 Is that correct, Mr Inch? 2 A. I think I get the gist of that. 3 My report followed the Audit Scotland Report. 4 Q. By about four weeks? 5 A. Yes. And you will appreciate of course that Audit 6 Scotland don't do that blind, don't prepare the 7 report -- you know, that report took some time to 8 compile and involved Audit Scotland asking the Council 9 a lot of questions about the nature of the governance 10 that was in place. 11 So there is a connection between the two, because 12 that report in preparation would have probably taken 13 four or five months, maybe even six months. 14 Q. Mr Inch, we will hear tomorrow from the Audit Scotland 15 witness who compiled that report. Do you know what 16 investigations were made by Audit Scotland in compiling 17 that report? 18 A. No, I don't, but I do know the normal arrangements for 19 Audit Scotland, because I was involved in a number of 20 Audit Scotland reports. But in this particular 21 instance, I don't know what preparation went into it. 22 Q. I think what we'll hear tomorrow is that this report 23 didn't follow the normal arrangements. In fact, the 24 report, we'll hear tomorrow, was prepared and published 25 within 16 days. 121 1 A. That is surprising, but I accept what you say. 2 Q. But in short, you don't know which officers in the 3 Council spoke to the author of the Audit Scotland 4 Report; is that correct? 5 A. That's correct. 6 Q. So you don't know what the author of the Audit Scotland 7 Report was told in arriving at his conclusions? 8 A. No, I wasn't. 9 Q. We can explore that with the Audit Scotland witness 10 tomorrow, but simply, Mr Inch, you're -- I think the 11 point you made before lunch that in relation to 12 governance, you derived some reassurance from the 13 conclusions set out in the Audit Scotland Report. What 14 I'm simply suggesting is that because that report was 15 dated 21 June 2007, and you then have a paper on 16 governance setting out a number of issues and concerns 17 some four weeks later, that at least in relation to the 18 governance matters set out in your paper, you couldn't 19 possibly have derived any reassurance from the Audit 20 Scotland Report because (a) it was four weeks earlier, 21 but, more importantly, (b) there are all sorts of issues 22 set out in your governance paper which may or may not 23 have been known to the author of the Audit Scotland 24 Report? 25 A. Yes, but I think my reassurance was not in relation to 122 1 what was in this report. It was reassurance generally 2 that what the Council had been doing was acceptable in 3 terms of governance. 4 It wasn't necessarily in relation to I had described 5 in this report as being -- needing addressed. 6 Q. Yes, but I think if we looked back at page 2 of your 7 paper -- I'm sorry, the document reference is 8 CEC01566497. 9 In paragraph 2.6 we looked earlier at the statement 10 that: 11 "It is imperative that far more rigorous financial 12 and governance controls are put in place by the 13 Council." 14 I think you accepted that you would have agreed with 15 that at the time; is that correct? 16 A. Yes, absolutely. 17 Q. So whatever had been said and concluded by Audit 18 Scotland, based on the information before them, on the 19 information before you, you were quite clear that it was 20 imperative that far more rigorous financial and 21 governance controls were put in place by the Council? 22 A. That's correct. 23 Q. Thank you. If we go now, please, to page 5 of this 24 document. I'm not going to go through everything in 25 detail, some of the points we saw in Jenny Drummond's 123 1 paper in November 2006. But do you see the box saying 2 TEL and CEC, and it states in the second paragraph: 3 "TEL receives no direct funding of itself, but 4 obtains a proportion of the funding received by TIE from 5 Transport Scotland." 6 It's then stated: 7 "TEL is envisaged as TIE’s monitor. However, the 8 fact of not having any money of its own and being paid 9 by TIE undermines TEL's position." 10 Was that your understanding at the time, that TEL 11 essentially was funded by tie? 12 A. I think that's potentially a little bit misleading 13 because the funds came to the Council and the Council 14 funded tie. The Council would fund TEL from the funds 15 that had been made available for tie. So it wasn't tie 16 directly funding TEL. It was TEL being funded by the 17 Council out of the monies that had been provided for the 18 tram project. 19 Q. So is it your position that money to TEL did not pass 20 through tie? 21 A. My understanding is that money for TEL did not pass 22 through tie. It was -- and indeed, I think the money 23 for TEL was very limited indeed, and probably only dealt 24 with the salaries of the individuals who were employed 25 by TEL. There was no other -- there was no other 124 1 funding required. 2 Q. Approximately how many individuals did you understand 3 TEL to employ at this time, in the middle of 2007? 4 A. I'm only hazarding a guess, but I would think it's no 5 more than two or three. 6 Q. I think Nick Smith mentioned Alastair Richards. We have 7 seen mention of Neil Renilson, the Chief Executive. So 8 that's certainly two. 9 Just pausing, at this point, Mr Inch, one can quite 10 understand TEL's intended role during the operational 11 phase of the tram to ensure integration of tram and bus. 12 Really my query is whether, despite what we see in 13 the various governance diagrams, whether TEL in reality 14 played a substantive role during the procurement phase 15 of the tram project, ie up until May 2008? Do you have 16 any comments on that suggestion? 17 A. Well, I would agree with that suggestion. I don't think 18 TEL did play a material role in terms of that period. 19 Q. Up until May 2008? 20 A. Yes. 21 Q. That's perhaps despite what we might see in any 22 governance diagrams we have looked at? 23 A. Yes. 24 Q. Just finishing off with this memo, please, page 8, one 25 can see 4, Options for Future Governance. I won't 125 1 repeat paragraph 4.1. 4.2: 2 "A number of options have been identified to achieve 3 these enhanced controls." 4 The first of the three options is winding up of tie 5 and bringing the relevant and necessary staff into the 6 employment of the Council. 7 Was any consideration given to that option at this 8 time? 9 A. I believe all options were considered and continued to 10 be considered throughout this period and beyond. So 11 this was always an option that we needed to have regard 12 to. But whether it was given serious consideration, 13 maybe that's the difference. I don't think it was at 14 this particular point in time. 15 Q. Just as an aside, I think we have heard other evidence 16 that by this time tie employed approximately 60 17 employees, and I think their accounts suggest they were 18 costing about GBP5 million a year to run tie. So 19 presumably it may have been thought to be a fairly 20 draconian step to wind up tie at that stage and take the 21 project back within the Council's control? 22 A. Yes, it was seen as being a very draconian step which 23 would involve us in a great deal of extra work and 24 potentially extra cost. 25 Q. The next option: 126 1 "TIE continues to progress the project on the basis 2 of a fully documented principal/agent agreement with the 3 Council." 4 Is that essentially the option that was chosen? 5 A. Yes. 6 Q. Then the next option for completeness: 7 "The Council to set up a Tram Committee, meeting on 8 a four-weekly cycle, to replace the Tram Project Board, 9 essentially performing the current Tram Project Board 10 functions." 11 I don't think that option was chosen, was it? 12 A. That option wasn't, but a tram sub-committee was formed, 13 but not on the back of this. 14 Q. Not to replace the Tram Project Board? 15 A. No, indeed. 16 Q. We will come back to that. 17 Next, I would like to turn to the report to Council 18 on 20 December 2007. The document reference is 19 CEC02083448. 20 Please go to page 9. We can see the report is by 21 the Directors of Finance and City Development. 22 Under "Recommendations", we see under 23 paragraph 10.8, one of the recommendations is to approve 24 (i) the governance structure (Appendix 1); secondly, the 25 draft tie Operating Agreement and to delegate authority, 127 1 et cetera; and (iii) To delegate general authority to 2 the Tram Project Board through TEL and tie. 3 Now, I think, Mr Inch, I may be corrected but 4 I think this is the first time we see the Council 5 formally delegating authority to the Tram Project Board; 6 does that tie with your recollection? 7 A. Yes. 8 Q. The only catch is that delegation is through TEL and 9 tie. So on one view for that delegation to take effect, 10 there requires to be an Operating Agreement between the 11 Council and TEL, and that may be ultimately a legal 12 matter, but do you have any views on that? 13 A. No, I spotted that that was a requirement, but I had 14 assumed that that prerequisite had been dealt with. 15 Q. By prerequisite -- 16 A. Because that is a prerequisite, that there needed to be 17 an agreement between TEL and tie in relation to how that 18 would work. 19 I understood that that was the case. 20 Q. Yes, I see. So is it your position that there required 21 to be an Operating Agreement between the Council and TEL 22 for powers to properly flow through from the Council to 23 TEL, to the Tram Project Board? 24 A. Correct. 25 Q. But we also know, and we will come to shortly, that the 128 1 Council didn't enter into an Operating Agreement with 2 TEL until the middle of May 2008. So does that suggest, 3 at least on one view, that no power was delegated to the 4 Tram Project Board by the Council until the middle of 5 2008? 6 A. I think in practical terms that would not be the case 7 because the powers were assumed by the TPB, but in legal 8 terms you're correct. 9 Q. I understand. There was mention of Appendix 1, the 10 Approved Governance Structure. Could we look at that, 11 please. It's over the page. It's possibly not a great 12 copy, but let's see if we can work with it. 13 Could we blow up generally the structure a little. 14 I think we can see at the top is a box with "Full 15 Council", and below that box we have the Transport 16 Infrastructure and Environment Committee, that must be. 17 Sorry, I think what it is, that's the Tram 18 Sub-Committee, which is a Sub-Committee of the Transport 19 Infrastructure and Environment Committee; is that 20 correct? 21 A. That's correct. 22 Q. Yes. And beneath that we see the Directors of City 23 Development, Finance and Corporate. That includes 24 yourself, Mr Inch? 25 A. Correct. 129 1 Q. Beneath that, the IPG Internal Planning Group, and if we 2 go to the right of that box, we see a box headed "Public 3 Realm" and that's really standalone. So we're back into 4 the Directors of City Development, et cetera, and then 5 at the bottom right of that box, we see TEL, I think, 6 Operating Agreement. And then going clockwise we then 7 see the Tram Project Board; do you see that? 8 A. Yes. 9 Q. Again, going to the left, continuing clockwise, we see 10 tie. Above tie we see an arrow going to the OGC 11 overview, and from there we see an arrow going back to 12 the directors in the Council. 13 Now, this is the new approved governance structure 14 as at December 2007. Do you consider this brings 15 clarity to the governance arrangements? 16 A. It's perhaps clearer than it was, but I think I could 17 have maybe improved upon the schematic. 18 Q. So still room for improvement? 19 A. I think so. 20 Q. Yes. Do we see, for example, the Tram Project Board 21 reporting to TEL and then on to the Council. 22 Now, how can that be consistent with the evidence 23 you gave a short time earlier, that TEL didn't play 24 a material part in the project before -- during the 25 procurement phase? 130 1 A. Clearly TEL was there simply as an entity, not really 2 playing any role whatsoever. 3 I think the way the Tram Project Board is shown here 4 is a little bit misleading, because the Tram Project 5 Board -- the intention was for the Tram Project Board to 6 report through TEL, and that happens later, as I have no 7 doubt we will find out. TEL was to be the organisation 8 that controlled, and the Tram Project Board reported to 9 TEL in the first instance. 10 This suggests that the Tram Project Board is 11 reporting to tie and TEL together, and that was not what 12 was meant to happen, but I think it may be an accurate 13 representation of what was expected to be happening at 14 that point in time. 15 But I would suggest that TEL wasn't really playing 16 a very important part in the arrangements at that 17 particular point in time. 18 Q. We also see that tie on the left appeared to be 19 reporting to the Council, if one goes anticlockwise 20 through the Tram Project Board, through TEL and on to 21 the Council, but also some sort of reporting structure 22 via the OGC overviews to the Council. Do you have any 23 comments on that? 24 A. Well, I'm beginning to think that this doesn't really 25 represent an organisation chart in my understanding of 131 1 an organisation chart. It's a schematic which is trying 2 to demonstrate the range of organisations and -- that 3 are involved in this, but it doesn't, I think, truly 4 reflect the reporting lines. 5 Clearly we've got tie on the face of this reporting 6 to OGC, with an arrow to OGC, which is nonsense. 7 tie reported to the Council. 8 Q. So is it your position that this diagram, which appears 9 to set out the organisational structure, and in fact 10 it's referred to as the governance structure on page 9, 11 that the members have been asked to approve, is it your 12 position that this diagram doesn't reflect the reality 13 of what was happening? 14 A. I think it contains all of the elements of what was 15 happening, but what it misses is an accurate description 16 of the reporting lines, the actual reporting lines. 17 I mean, it suggests here that tie reports to OGC, which 18 is obviously not the case. 19 So in normal terms, if I had been producing this, 20 I would have had the organisations reporting to whoever 21 they were answerable to, and that doesn't seem in this 22 case to be apparent. 23 Q. Yes. Quite apart from the reporting lines from that 24 issue, you've also mentioned the question of TEL in your 25 view not actually playing a material part in the tram 132 1 project at this stage, the procurement stage? 2 A. Yes. Until TEL got its Operating Agreement and had 3 authority transferred from the Council, it didn't really 4 play a significant part. 5 Q. Now, this was something members had been asked to 6 approve. Go back to page 9, please. We can see 7 paragraph 10.8: 8 "To approve: 1 the governance structure 9 (Appendix 1)." 10 Do you consider it was appropriate that members were 11 asked to approve this diagram as representing the 12 governance structure? 13 A. I think it accurately represented the intentions in 14 regard to all of the different elements. What it 15 doesn't do, and it could be misleading, because when an 16 organisation chart is projected in that manner, the 17 normal assumption is it's representing the reporting 18 lines as well as representing the substance of the roles 19 that each individual entity plays, and that doesn't 20 happen here. 21 So it could be -- for someone who is unaware of 22 what -- the situation here, it could be misleading. 23 Q. Also, if we go back to the diagram, please, at page 10, 24 might it also be potentially misleading in not 25 explaining that TEL, as a matter of fact, were not 133 1 taking an active part during the procurement phase? 2 A. Yes, you could argue that it's incomplete in that 3 regard. 4 Q. And also I don't think there's any mention in this 5 report of the overlap we looked at earlier between 6 a number of important individuals having roles in 7 a number of different organisations. So we see the same 8 names appearing as having roles on the board of TEL, 9 sitting on the Tram Project Board, and perhaps in tie as 10 well, and one really wonders whether, without that 11 information, one may look at this diagram and think: 12 well, there is separation and a degree of independence 13 between each of these bodies and organisations; that 14 sounds like good governance because there are 15 independent checks and balances; but if one is told: 16 well, hang on, it's the same people appearing, sitting 17 on a number of these boards and organisations, might 18 that give rise to any concerns about good governance and 19 independence between checks? 20 A. Clearly, as I have said before, these overlaps were 21 unacceptable and needed to be addressed. I think this 22 was a step towards doing that, but it clearly didn't go 23 far enough in terms of putting all of that on the table 24 and putting forward a proposal in relation to how that 25 could be dealt with. I think that comes at a later 134 1 stage. 2 Q. Do you know whether members were told of these overlaps 3 when they were asked to approve this diagram as 4 representing the governance structure? 5 A. I think those members that were most involved with the 6 tram programme would understand that and would recognise 7 that there were issues that needed to be resolved. 8 Q. So in short, might some of members been aware of these 9 overlaps because those members themselves perhaps sat on 10 the boards of tie or Tram Project Board, but those 11 members who were less closely involved with the tram 12 project may not have been aware of these overlaps? 13 A. That's correct. 14 Q. Put that to one side, please. 15 The document accompanying this report was the Final 16 Business Case. We should look at that a little, without 17 taking too much time. It's CEC01395434. 18 Now, if we can go, please, to page 84, we can see 19 this is section 6 in the Final Business Case dealing 20 with governance. I would like, please, to go to 21 page 88. If we can go, please, to the top of the page, 22 it says, "Governance structure - mid-2007 to Financial 23 Close". So this is representing this as the governance 24 structure during that period. So mid-2007 to May 2008. 25 In paragraph 6.22 it states -- to do with the 135 1 withdrawal of Transport Scotland from the governance 2 arrangements. In 6.22 it states: 3 "Discussions subsequent to 27 June 2007 among the 4 principal stakeholders determined that the changes to 5 the governance structure set out in Sections 6.23 to 6 6.68 below would be implemented to reflect the revised 7 funding arrangements." 8 Were you involved in these discussions? 9 A. No, I was not. 10 Q. Then paragraph 6.25, please. It is stated: 11 "In the light of the revised funding arrangements 12 and, in particular, the increased risk resting on CEC's 13 resources, CEC reassessed its internal arrangements, 14 including the relationship between the Council, TEL and 15 tie, together with the role of the Tram Project Board, 16 and the necessity for the appropriate involvement of 17 elected members in decisions associated with the 18 project." 19 Paragraph 6.26, it's stated: 20 "The principal revisions to the internal Council 21 processes included updating of the Operating Agreements 22 which govern the relationship between the Council and 23 its arms length companies ..." 24 Just to pause there, I'm sorry for labouring the 25 point, I think we know that they weren't in fact finally 136 1 updated and signed until May 2008. I think you have 2 agreed with that; is that correct? 3 A. Yes, that's correct. 4 Q. Thank you. 5 The paragraph goes on to say that: 6 "... and the creation of a consultative group of 7 senior officers within the Council (the tram Internal 8 Planning Group) ..." 9 To pause there, I don't think that's quite right, is 10 it, because we saw that that group was created in 11 November 2006. 12 A. That's correct. 13 Q. Then the next paragraph, 6.27, states: 14 "In addition, the role of elected members in project 15 decision-making was addressed and a sub-committee of the 16 Council's Transport, Infrastructure and Environment 17 Committee, dedicated to the tram project, was 18 established. This codified the powers reserved to 19 elected members and those delegated to officials and 20 facilitated communication with elected members on the 21 key aspects of the project. The sub-Committee will be 22 chaired by the Executive Member for Transport and will 23 meet on a 6-8 weekly cycle. The purpose of the 24 sub-Committee is to review and oversee decisions with 25 respect to the project." 137 1 Now, in relation to the Tram sub-Committee, Mr Inch, 2 I think what was intended to happen and what happened 3 are two different things; is that correct? 4 A. Yes. I believe so. 5 Q. I think in fact that that Tram sub-Committee first met 6 on 12 May 2008. Is that consistent with your 7 recollection? 8 A. I recognise 2008, mid-2008, yes. 9 Q. So in short, I suggest that that Tram Committee was not 10 in a position to review or oversee decisions in the 11 procurement phase, ie up until the letting of the 12 Infraco contract on 14/15 May 2008? 13 A. I think there may still have been some decision-taking 14 that the tram -- that particular sub-Committee could 15 have been involved with. But I wouldn't be certain 16 about that. I do think it did have a role at that 17 particular point in time, and of course the intention 18 was to fill a gap, if you like, in relation to the 19 elected members' involvement, because those elected 20 members were involved -- up to that point were involved 21 directly in tie and TEL and consequently had 22 confidentiality issues in relation to what they were 23 being told and what they could share with their 24 colleagues. 25 So this was a sub-Committee, a formal sub-Committee 138 1 of a Committee of the Council and consequently these 2 issues were not a difficulty. 3 Q. The Final Business Case mentioned the necessity for the 4 appropriate involvement of elected members into 5 decisions associated with projects. So that suggests 6 that there was a need for that? 7 A. Yes. As ever, you know, the weakness that we had 8 spotted was the fact that we had a number of elected 9 members involved, but involved in a manner that didn't 10 give them the freedom to participate fully with their 11 colleagues in relation to decisions that needed to be 12 taken at the Council or in other committees. 13 Q. I think my suggestion in short was that in fact the 14 sub-Committee met for the first time literally two days 15 before financial close. It wasn't really in a position 16 to review or oversee decisions in the period up until 17 financial close? 18 A. I agree with that. 19 Q. Yes. We see, I think, the intention had been the 20 sub-Committee would meet on a six to eight weekly cycle. 21 I think in fact it met on about six occasions in total, 22 I think between 2008 and March 2011. I think it met 23 a further six occasions. 24 So again, I suggest that by meeting so infrequently, 25 it wasn't in a position to fulfil the role intended for 139 1 it. 2 A. I'm not sure if I could say that. But I did recognise 3 that it was meeting very infrequently, and 4 consequently -- but why that was, I'm not at all sure, 5 and it may just have been a factor of the way in which 6 the project was then going into a different area and 7 different phase, and that meant that there was little 8 point in the sub-Committee meeting. 9 Q. I would like then to move on to the Operating Agreement 10 between the Council and tie entered into in May 2008. 11 The document reference is CEC01315172. If you could go, 12 please, to page 15, just to check the date of it. 13 We can see it's dated 12 May, signed on behalf of 14 the Council, I think that's Gill Lindsay, perhaps, the 15 Council Solicitor's signature, and it is signed by 16 Willie Gallagher, I think on behalf of tie, albeit the 17 date is not shown. 18 If we then go back to page 2, if I may. 19 We can see in paragraph 6 at the top, it states: 20 "The parties now wish to enter into this agreement 21 to more particularly regulate the relationship between 22 the parties specifically with regard to the procurement 23 and delivery of the trams project and to define the 24 services tie will provide to the Council." 25 In relation to the procurement of the tram project, 140 1 I suggest that this Agreement comes too late, at least 2 in relation to the procurement of the infrastructure and 3 tram contracts? 4 A. In all practical terms you're correct. 5 Q. Then, please, on to page 4. We can see under 6 sub-paragraph 2 -- paragraph 2, heading, "tie's 7 Obligations", and go on to page 5, please. 8 Paragraph 2.3, we see: 9 "tie shall use best endeavours to ensure that it 10 delivers a tram system for Edinburgh ..." 11 Pause there. I would like to compare that with the 12 Operating Agreement between the Council and TEL, at 13 CEC01315173. We can see, I think, from the heading, 14 rather than the narrative, this is the Agreement between 15 the Council and TEL. 16 If we can go, please, to look at the date, perhaps, 17 we see from page 16, please, and we can see it is signed 18 on 12 May by, I think, the Council Solicitor and 13 May 19 by someone on behalf of TEL. 20 If we can go, please, to page 4, in paragraph 2.3, 21 it states: 22 "TEL shall use best endeavours to ensure that it 23 delivers the Project ..." 24 If you go to the page previously at page 2, to check 25 what is meant by "Project" -- sorry, it's page 3. Under 141 1 "Project" is defined as meaning: 2 "The delivery of the tram system." 3 So on the face of it, Mr Inch, the Operating 4 Agreement with TEL says that it shall deliver the 5 project, and the Operating Agreement with tie says that 6 tie, it, shall deliver the project. 7 I'm just wondering which was it? Which body was 8 responsible of those two for delivering the tram system? 9 A. In my understanding it was tie. The Operating Agreement 10 for TEL of course includes the -- what I would recognise 11 as being TEL's responsibility. That's the integration 12 of tram and bus system in Edinburgh. 13 I think what was happening was there was an effort 14 made to give TEL some responsibility for tie and this, 15 I think, is a flavour of that. But I can understand the 16 possible confliction here, and I'm very clear that it 17 was tie that had the responsibility for delivering the 18 tram system. 19 Q. Thank you. 20 If we go back, please, to the tie Operating 21 Agreement at CEC01315172. 22 Now, I want -- sorry, page 5. We had got to page 5, 23 starting with 2.3, about using best endeavours to ensure 24 that it delivers a tram system. I'm not going to go 25 through each of them, but I think we can see the 142 1 expression "best endeavours" appears quite a lot in this 2 document in a way that it didn't in the general 3 Operating Agreement in 2005. I think in short, why were 4 those words put in? Why did the Council agree to that? 5 A. I don't know for sure, but I can guess it is no more 6 than a guess, that a document like this needs to be 7 negotiated with the organisation, and I think tie would 8 think it unreasonable to be expected to do anything 9 other than make their best endeavours, given the 10 circumstances that they were facing. 11 Q. Did other Council-owned companies' Operating Agreements 12 similarly include the best endeavours qualification? 13 A. Not to my knowledge, though I wouldn't be surprised if 14 some did, given the nature of their business and the 15 circumstances within which they were operating. 16 Q. Simply by way of illustration and example, in 17 paragraph 2.6, which isn't in itself important, simply 18 by way of illustration: 19 "tie shall use best endeavours to ensure that it 20 complies ... with all Legislation." 21 Does that strike you as odd? 22 A. It strikes me as very odd, and I certainly wouldn't have 23 been comfortable with that phrase in that circumstance. 24 Q. I think, Mr Inch, all of us in this room have an 25 obligation to comply with the law, not to use our best 143 1 endeavours to comply with it? 2 A. I agree. 3 Q. Does it strike you as a little surprising that the words 4 "best endeavours" even appear in a clause such as this? 5 A. Yes. 6 Q. Can I ask you please then to go to, more importantly, 7 I think, at page 7. In paragraph 2.16 it provides: 8 "tie shall use best endeavours to ensure best value 9 when providing the services and in the discharge of all 10 of tie's responsibilities. tie shall use best 11 endeavours to ensure best value in the use of funds or 12 resources provided through or by the Council." 13 Do you have any comments on that clause? 14 A. Again, I find that use of the term "best endeavours" 15 unacceptable. 16 Q. Yes. I think I am right in saying that the Council is 17 under a legal duty to ensure best value when dealing 18 with public money; is that correct? 19 A. That's absolutely correct. 20 Q. And the Council's duty isn't qualified by the words 21 "best endeavours"? 22 A. Correct. 23 Q. So why would the Council agree to tie's duty of spending 24 public funds to be simply best endeavours to ensure best 25 value? 144 1 A. I think you would need to ask those that were involved 2 in the preparation of this document because I don't 3 think if I had been involved in preparation of this 4 document, I would have been accepting use of "best 5 endeavours". 6 Q. I think we can see the Operating Agreement was signed by 7 the Council Solicitor on behalf of the Council. I can 8 certainly discuss these matters with the 9 Council Solicitor at the time. 10 The Council Solicitor was under your -- within your 11 department and one below you. Were these matters ever 12 discussed with you? Did they ever come across your 13 desk? 14 A. Yes, these matters were discussed with me, but the 15 Council Solicitor, for all intents and purposes, was 16 seconded to this project, and operated through the 17 Directors of City Development and Finance. 18 I held weekly meetings with the Council Solicitor to 19 bring me up to date with what was going on, but the very 20 nature of these meetings was only a very small amount of 21 time was spent on bringing me information on the tram 22 project, because these meetings were really about the 23 generality of the Council's business. 24 I also, of course, was in receipt of correspondence 25 from other legal services staff, like Mr MacKenzie, 145 1 and I know that Mr MacKenzie was not comfortable with 2 the use of the term "best endeavours" either, but 3 clearly, as I have mentioned before, my guess is that in 4 the negotiation, the consultation with tie, that was 5 a product of these negotiations. 6 As I say, I don't accept that we should have been 7 accepting the term "best endeavours" in relation to 8 a number of these clauses. 9 CHAIR OF THE INQUIRY: Did you say that Mr MacKenzie was 10 a senior solicitor but below the Council Solicitor? You 11 say he wasn't happy with the phrase "best endeavours"? 12 A. Yes, my Lord. In correspondence I'd raised a concern 13 that the Council -- it was either him or Nick Smith. 14 I think there was these two solicitors were working on 15 the tram project. And I know that they were 16 uncomfortable with the term "best endeavours", because 17 they told me so. 18 CHAIR OF THE INQUIRY: Was that before or after this 19 document was signed? 20 A. I suspect it was before, but that discussion between the 21 Council Solicitor and her staff needed to take place. 22 The Council Solicitor had the overall responsibility for 23 putting this together and she had to take on board the 24 views of her senior officers, namely Mr MacKenzie and 25 Mr Smith. 146 1 CHAIR OF THE INQUIRY: Given the Council's greater 2 obligation and the fact that the Council couldn't rely 3 upon the qualification of best endeavours, did you not 4 think, as a senior Council officer, you should either do 5 something about that or draw it to the attention of the 6 Director of Finance or ...? 7 A. I did believe that if the term "best endeavours" was 8 being used inappropriately, that I should take action. 9 But I was never informed that it was going to be 10 sprinkled through the Operating Agreement, and I never 11 saw the Operating Agreement before it was approved. 12 So had I done so, had I been involved more directly, 13 then I would have taken issue with the term "best 14 endeavours". 15 MR MACKENZIE: Just on that point, Mr Inch, I think it was 16 your position in short that you were not aware that the 17 duty on the Council to ensure best value had been 18 diluted to best endeavours to ensure best value as it 19 applied to tie. 20 A. Absolutely. 21 Q. Now, if you had been advised of that, would that have 22 raised any alarm bells for you, in particular in your 23 role as Council Monitoring Officer? 24 A. Not necessarily in my role as Council Monitoring 25 Officer, but certainly in my role as Director of 147 1 Corporate Services, and I would have taken whatever 2 action was necessary to make the Chief Executive more 3 aware of what was happening in relation to this 4 document. 5 That didn't happen unfortunately. 6 Q. But as Monitoring Officer for the Council, you have 7 duties if there are concerns in respect of illegality or 8 maladministration, and what appears to be the position 9 here is that there is over half a billion pounds' public 10 money which is going to the Council and 11 Transport Scotland, and while it remains within the 12 Council's control, the Council has a duty to ensure best 13 value in how it is spent, but when that money goes into 14 tie's control, that duty is diluted to ensure -- to use 15 best endeavours to ensure best value. Would that not 16 have raised alarm bells with you as Council Monitoring 17 Officer? 18 A. As I say, I'm not sure it would have raised alarm bells 19 as Council Monitoring Officer, but it would do in my 20 role as Director of Corporate Services. 21 Q. Well, do you think that would have given rise to any 22 concerns of whether the Council was acting legally and 23 whether there may be issues of maladministration? 24 A. I don't think the use of the term best value -- best 25 endeavours could be construed to put the Council into 148 1 a position of acting illegally. 2 Therefore, I don't think it would be a Monitoring 3 Officer issue, but I appreciate that would be a matter 4 of discussion, and a point of view would have to be 5 taken. 6 Q. Thank you. I would like to move on, please, to page 8. 7 In paragraph 2.25 -- I won't read it all out. It 8 concerns remuneration policy, including in relation to 9 the bonuses, and about halfway through this paragraph, 10 you can see that: 11 "Such policy to be approved by the tie Board, 12 through its Remuneration Committee, in advance of annual 13 reporting periods as it will apply in the succeeding 14 annual reporting period. tie's board shall confirm 15 annually to the Tram Monitoring Officer that tie's 16 incentivisation arrangements are aligned to appropriate 17 project milestones." 18 Reading that now, does that give rise to any 19 concerns as to whether these matters were transparent to 20 the Council? 21 A. I think these matters were reported and contained in 22 documentation produced by tie. It's the level of that 23 reporting which I would personally have taken issue 24 with, because I don't think it went into sufficient 25 detail to give us a proper understanding of the levels 149 1 of remuneration and the levels of bonus payments that 2 were being paid. 3 The Tram Monitoring Officer clearly accepted the 4 numbers that were being given, and these were couched in 5 very general language. 6 Q. Presumably the Director of Finance as well must have 7 presumably been satisfied with that too, in terms of 8 financial reporting. So we can discuss that with the 9 director. 10 Lastly, please, in this document, page 10, if I may. 11 In paragraph 3.9 it states: 12 "The Council agrees to waive its rights to claim 13 against any director, officer or employee of tie, save 14 in respect of any criminal, fraudulent or wilfully 15 negligent action of any such person. This waiver shall 16 not apply to any contractor or consultant engaged by tie 17 operating in any such role as director or officer." 18 Were you aware the Operating Agreement contained 19 this clause? 20 A. No. 21 Q. Is this standard for this sort of clause to be included 22 in Operating Agreements with Council and companies? 23 A. It's not standard in relation to Council business, but 24 I guess it must be a standard clause applied in the 25 commercial world. 150 1 Q. Are you assuming that or you know that? 2 A. I'm assuming that. 3 Q. So I take it you don't know why this clause was 4 included? 5 A. I don't know why it was included. 6 Q. If in contrast -- if the Council, as happened after 7 2011, had taken the project back in-house and employed 8 external consultants, then I assume the Council wouldn't 9 ordinarily grant such a waiver to any external 10 consultants that were employed? 11 A. The Council employed a lot of consultants and that 12 clause was never incorporated in any of the contractual 13 arrangements with these consultants. 14 Q. Yes. Thank you. 15 We can put that document to one side. We have 16 touched upon the question of bonuses. I should perhaps 17 go through some documents in that regard. 18 We will start, please -- before we go to this, I'm 19 not sure if I drew your attention to this, but in the 20 2005 Council and tie Operating Agreement, I think it was 21 silent on the question of bonuses. We've looked at what 22 was in the 2008 Agreement in relation to bonuses. 23 I think then things happen in 2009. Can we look firstly 24 at document CEC00908380. 25 CHAIR OF THE INQUIRY: Mr Mackenzie, is this a different 151 1 chapter now? 2 MR MACKENZIE: It is, my Lord. There are a few documents to 3 go through. 4 CHAIR OF THE INQUIRY: We will maybe have a ten-minute break 5 for the shorthand writers? 6 MR MACKENZIE: That may be sensible. 7 CHAIR OF THE INQUIRY: We will have a ten-minute break and 8 resume again at 3.20. 9 (3.08 pm) 10 (A short break) 11 (3.20 pm) 12 CHAIR OF THE INQUIRY: You are still under oath, Mr Inch. 13 MR MACKENZIE: Mr Inch, on the question of bonuses, I think 14 what I will do is start at the beginning and go to the 15 end, because in short, between pages 71 and 82 of your 16 statement, you do deal with the question of bonuses in 17 a number of documents to you. 18 So rather than take up time dealing with each and 19 every document, if I could start at the beginning, and 20 this is document CEC00908380. 21 You will see towards the bottom third of the page, 22 this is an email from Colin MacKenzie dated 15 June, 23 from yourself, copied into Nick Smith. 24 Mr MacKenzie states: 25 "Following the meeting last week, I have given 152 1 further consideration to detailed aspects of governance 2 and to changes which are necessary or desirable heading 3 towards integration of bus and tram." 4 Can you remember what prompted this meeting and 5 consideration of this issue? 6 A. No, I can't remember the detail of that. 7 Q. Mr MacKenzie goes on to say: 8 "One issue of significant concern relates to tie's 9 project management skills, or lack thereof. You may 10 recall this was a shortcoming identified and commented 11 upon by external reviewers back in 2007 ..." 12 Over the page is the purpose of taking you to this. 13 The top of the page states: 14 "This brings me to the point: the Council has no 15 real teeth in its control of tie. This has always been 16 understood from the early days ... it is clear the 17 Council has very little leverage, apart perhaps from 18 seizing control of the bonus scheme. At the moment 19 there is no visibility of this scheme: we do not know 20 how it operates and what milestones trigger payment of 21 bonus. I believe from Finance that there is little, if 22 anything, in writing between the Council and tie setting 23 out how the money flows from the former to the latter." 24 Then in the next paragraph Mr MacKenzie goes on to 25 say that: 153 1 "Might I recommend that now would be the appropriate 2 time for the Council to step in and instigate a greater 3 degree of control over the bonus scheme by setting 4 performance targets aligned to its expectations of 5 service delivery by tie and its professional officers?" 6 What were your general views on Mr MacKenzie's 7 comments? 8 A. Well, I concurred with his comments. Through IPG we 9 were beginning to -- or at that stage we were finding 10 that some of the deliverables from tie were of poor 11 quality, and were causing us some concern, not just in 12 terms of the quality, but the timing as well, there were 13 delays and generally we were -- the Director of City 14 Development in particular was dissatisfied with the work 15 that was arising from tie. 16 So I can only concur. I agree with Mr MacKenzie in 17 relation to his view that the Council lacked teeth in 18 this regard. Indeed, I think all of his comments are 19 correct, and I think this signalled his view that we 20 could intervene in relation to bonuses in particular, 21 was just one area of interest. Clearly there was issues 22 around tie's performance which needed to be addressed in 23 a variety of ways. Bonus was a manifestation of that. 24 Q. Thank you. 25 I think you then did have discussions with senior 154 1 representatives of tie in relation to their bonus scheme 2 being revised; is that correct? 3 A. Yes, the reason the bonus scheme had come to my notice 4 was there was a proposal from tie to introduce a new 5 scheme. I had not been involved in the previous scheme 6 and knew very little about it. That scheme had been 7 operating for some time and was a scheme that had been 8 previously reported on. So I didn't have visibility of 9 that. 10 But when tie proposed a new scheme, the 11 Chief Executive asked me to review that scheme, 12 and I did review it and found it to be wanting in 13 a number of respects, and that initiated correspondence 14 and meetings between myself and tie representatives. 15 Q. Were changes made that essentially you were satisfied 16 with? 17 A. Changes were made, but they weren't made easily. It 18 took a long time to resolve this bonus matter. I think 19 it's worth just putting a little bit of context in. 20 This new bonus arrangement, which I wasn't 21 challenging the need for bonus, because I think in 22 a commercial organisation such as tie, bonus was a very 23 proper means of remunerating people. Both in terms of 24 trying to improve performance, but also in some 25 instances to try and retain people who were otherwise 155 1 going to be poached because of the specialist skills 2 that they had. 3 tie at that time, of course, were leaking people. 4 They had quite a significant staff turnover. So 5 I suspected that tie's intention was to introduce 6 a scheme that was designed to try and hold on to staff, 7 as much as it was to try and incentivise them through 8 performance. 9 But the context is wider than that because at the 10 same time the Council was experiencing a remuneration 11 problem in that there was no inflationary increases in 12 the Council and the Council staff were looking at 13 a one per cent, if any, annual increase, whereas the bonus 14 scheme was operating with the possibility of 15 a 40 per cent pay -- enhancement to staff working in 16 tie. 17 That, I thought, was a bit anomalous and it 18 certainly was questionable in terms of best value. 19 Q. Yes. If we could perhaps go to document CEC00673126. 20 This is an email by yourself, Mr Inch, dated 21 25 September 2009 to Tom Aitchison, and you set out 22 certain concerns in relation to tie's proposals. 23 Number 1, you refer to there being a conspicuous lack of 24 commentary about affordability of bonus payments: 25 "Using the example cited, if the top six employees 156 1 get bonuses similar to the illustration shown then the 2 project (or the Council) will need to find approximately 3 GBP750,000 to fund their bonuses alone ..." 4 Then 2: 5 "It seems inappropriate to me to be structuring 6 a bonus scheme element around a sliding scale relating 7 to an overspend -- surely this is celebrating failure?" 8 Then 3: 9 "Is there a proven and definitive need in the 10 current economic climate to offer 25% bonuses to 11 all staff (excluding the most senior) to retain them? 12 Should we not just pay an attractive rate for the job?" 13 I think in short, Mr Inch, that all the staff within 14 tie were eligible for bonus payments, not just the 15 executive directors or the directors generally; is that 16 correct? 17 A. That's correct. 18 Q. And I think -- I suspect because of that, the annual 19 bonus figures were quite high for tie as an 20 organisation; is that correct? 21 A. That's correct, yes. 22 CHAIR OF THE INQUIRY: That figure of 750,000, is that over 23 the whole project? 24 A. No, the 750,000, my Lord, was to do with just my 25 estimate of what would be paid out to the top six 157 1 individuals within tie organisation, had the particular 2 scheme that they wished to introduce been applied. 3 CHAIR OF THE INQUIRY: But that would be a bonus? 4 A. It would be bonus. It wouldn't be the remuneration. It 5 would be a bonus. 6 CHAIR OF THE INQUIRY: But it would be their bonus over the 7 entire project. It wasn't the bonus, annual bonus? 8 A. It would be their annual bonus, my Lord. 9 MR MACKENZIE: We can see the reference to a similar figure 10 if we go, please, to TRS00017572. You probably won't 11 have seen this document, Mr Inch. We can see in the 12 bottom half there's an email from Jerry Morrissey within 13 Transport Scotland dated 14 May 2010 to Bill Reeve, and 14 this email, Mr Morrissey states: 15 "tie have submitted an invoice ... that includes 16 a potential bonus payment of GBP730,000. tie have 17 stated that their Remuneration committee that sits in 18 June will decide if the bonus should be paid." 19 That was in terms of tie's internal procedures and 20 there are certain concerns then set out by Mr Morrissey 21 as to whether it's appropriate for the bonus to be paid. 22 Then the email above that, we'll see an email from 23 Bill Reeve of Transport Scotland dated 14 May 2010, 24 saying that: 25 "You rightly identify the sensitivity and 158 1 appropriateness of bonus payments for tie staff. I am 2 content with your suggestion that we should withhold 3 payment of the amount requested at present, noting that 4 the remuneration committee has not met yet. I will 5 raise the matter with Richard Jeffrey." 6 So Transport Scotland step in, and let me just 7 finish off this line, please, by looking at 8 document CEC00314582. This is an internal tie 9 communication by Richard Jeffrey, the Chief Executive, 10 sent on 2 June 2010 and we can see under the heading 11 "Annual Bonus Announcement", Mr Jeffrey says: 12 "I would like to take this opportunity to update you 13 all on the annual bonus scheme and the outcome of the 14 Remuneration Committee, which met this morning. At this 15 meeting I made a recommendation that there should be no 16 bonus payments made for 2009/2010. I can confirm that 17 this was approved ..." 18 So I think in short, tie have made provision for 19 possible payment of bonuses for this financial year 20 totalling GBP730,000, but for whatever reason at the 21 meeting of the remuneration committee of tie in June, it 22 is decided in fact that no bonus should be paid. Does 23 that accord with your recollection? 24 A. Yes. Yes, it did. I think Mr Mackay had managed to 25 reduce in the period just before that the level of bonus 159 1 payments through a more rigorous application of the 2 scheme. The scheme itself wasn't -- was a good scheme. 3 It was very well developed, and was quite sophisticated, 4 but it needed to be applied in a particular way. 5 Applying it loosely would have made huge payments. 6 Apply it tightly in terms of the performance element, it 7 would have been more manageable. 8 But this result, I think, was exactly what I would 9 have hoped for in the fullness of time. 10 Q. So presumably, Mr Inch, you were satisfied with the 11 terms of the new bonus scheme; is that correct? 12 A. Yes. The scheme itself was -- initially the scheme 13 itself was not acceptable, but through discussion and 14 a degree of involvement, we were able to tweak it to the 15 point where I felt it was a good scheme that could be 16 applied. So the scheme itself was okay, but I -- what 17 I wasn't confident of was the way the scheme would be 18 applied, and I think that was my particular concern 19 latterly, which I think David Mackay understood and 20 accepted, and Richard Jeffrey could see the risks 21 associated with paying bonuses in circumstances where 22 there was no way best value could be used as a reason 23 for paying bonuses. 24 Q. When you said that initially this scheme itself was not 25 acceptable, for the avoidance of doubt, are you 160 1 referring there to the original tie bonus scheme or the 2 new suggested scheme Mr Mackay brought forward? 3 A. Yes, my evidence was confusing on that point. I was 4 relating to the new proposed scheme. The new proposed 5 scheme initially wasn't acceptable because it was -- it 6 itself was too loose, but with a degree of work on both 7 the Council's part and tie's part, it was changed and 8 adjusted to tighten up the various criteria to the point 9 where I was comfortable with the scheme, but my concern 10 remained as to how the scheme would be applied. 11 Q. The new scheme, I think, was brought into effect perhaps 12 at the very end of 2009, about then; is that correct? 13 A. That's correct. 14 Q. Had you ever seen this scheme before then? 15 A. I've never seen the previous scheme. I had no knowledge 16 of the previous scheme. 17 Q. Thank you. I'm also interested in one final document in 18 this chapter. CEC00063531. 19 If we go to page 7, please, we will see this is 20 a report by yourself, Mr Inch. We can see your 21 signature and name there. If we go back to page 1, 22 please. 23 A. I think the signature was on behalf. It was my deputy 24 that signed that document. 25 Q. Thank you for clarifying that. 161 1 Then on page 1 we can see this is a report headed, 2 "Remuneration and Reward Policy Issues: Council Arms- 3 Length Companies and Trusts". It's a report to the 4 Policy and Strategy Committee on 2 November 2010. 5 Paragraph 1 explains that: 6 "This report reviews arrangements for the 7 remuneration and reward of senior salaried employees and 8 non-Executive Directors of Council arms-length 9 companies and trusts. It proposes a framework agreement 10 which will support consistency, transparency and best 11 value and the establishment of a Council Remuneration 12 Committee as a basis for consultation with the various 13 arm's length companies and trusts." 14 Can you just explain a little about this committee? 15 A. I think that the intention to set up a framework 16 agreement was driven mainly by the experience we had 17 over tie and the difficulties that we had encountered 18 there, but on reflection, when we looked across our 19 portfolio of arm's length companies and other 20 organisations and trusts, it seemed to me to make sense 21 to approach this in a more standardised way, and a more 22 consistent way. And the way I thought was best to do 23 that was to establish a Remuneration Committee which 24 enabled all of these matters to be dealt with in that 25 consistent way. 162 1 Q. Was this committee duly established and did it take on 2 that role? 3 A. My understanding is it was, but you'll note that that 4 report was dated 2 November 2010, and I left the 5 Council's employ in January 2011. 6 Q. Of course. It may be suggested that there was a need 7 for such a committee in Council a number of years 8 earlier. 9 A. I don't think we'd encountered the sorts of problems 10 that we had encountered with tie in any other situation 11 and any other circumstance, and indeed, had we had -- 12 had we had a lot of complaints, and these complaints 13 would have normally come through elected members, we 14 would have done something about that. But lessons 15 learned, I suspect, is what I would describe this. We 16 learned the lesson that we needed to take into all of 17 our activities with arm's length companies and that was 18 the purpose of this report. 19 Q. Perhaps again it may be suggested that if tie's scheme 20 for payment, including bonuses, had been more 21 transparent from the outset, then this issue may have 22 been brought to a head a lot earlier? 23 A. Yes. The frustration was that, having signalled that 24 the Council was unhappy with the proposals, and from 25 that date, it probably took about 18 months to resolve 163 1 the issue to our satisfaction, a matter that could have 2 been resolved in a few weeks. 3 Q. Thank you. There's one final matter I would like to ask 4 you in relation to governance. If we can go to 5 document CEC01222545. 6 CHAIR OF THE INQUIRY: While we are looking for that, 7 can I just ask you, why did it take so long? 8 A. I think it took so long because tie took the attitude 9 that they knew best and that -- and to be fair to tie, 10 they had put a lot of work into the development of their 11 new scheme, and they'd used external advisers in order 12 to do that. So the scheme itself was quite 13 a sophisticated product. 14 But they didn't think the Council should have a say 15 in their remuneration matters. They wanted the 16 Council -- they wanted to avoid the Council, through 17 their Operating Agreement, having a great deal of 18 influence on remuneration matters for tie. And so there 19 was an issue which tie thought was worth fighting for 20 and they resisted the Council's involvement in this. 21 Having said that, I do accept that David Mackay and 22 Richard Jeffrey in the fullness of time did take the 23 correct actions and were sympathetic to the fact that 24 the Council needed to be involved in these matters, 25 my Lord. 164 1 CHAIR OF THE INQUIRY: Thank you. 2 MR MACKENZIE: It may be said, Mr Inch, that in the fullness 3 of time was too late, because that was at a time when on 4 any view, the project had run into difficulties and the 5 time when one may have thought it would be quite 6 difficult to justify a -- performance-based additional 7 payments on one view. 8 A. Well, performance-based additional payments were the 9 norm for the industry. So, you know, it wasn't 10 surprising that that -- these were there. 11 We talked previously about Mr Gallagher, for 12 example, who we had a bonus payment arrangement. That 13 bonus payment arrangement was designed to try and hold 14 him to the Council, because the expert knowledge that he 15 had and the experience meant that he was very much 16 sought after by a variety of different utility and other 17 engineering organisations. 18 Q. On the subject of Mr Gallagher, let's look at this 19 document before us, CEC01222545. You can see at the top 20 that it was an email from Rebecca Andrew, who is one of 21 the finance staff, dated 29 May 2008 to Ian Stirton. 22 Who was Ian Stirton? 23 A. Ian Stirton was the internal auditor. 24 Q. And Ms Andrew states: 25 "What is your view on this? We are aware that 165 1 Willie Gallagher is not the only Executive Chair of a 2 Council Company, which is contrary to the Cadbury Code 3 (and presumably its successor codes) but the fact that 4 he is on both the audit and remuneration committees is 5 also bad practice. It is my understanding that these 6 committees should only comprise non-execs." 7 Were you aware whether Mr Gallagher had sat on both 8 the audit and remuneration committees of tie? 9 A. I wasn't aware at the time, but clearly I became aware 10 through reviewing the various pieces of correspondence 11 and the various reports. 12 Q. Did you become aware at the time, when you were still a 13 director with the Council, or do you mean you became 14 aware when you provided your statement to the Inquiry? 15 A. Sorry, could you just -- 16 Q. Yes, when did you first become aware that Mr Gallagher 17 sat on both the Audit and Remuneration Committees? Was 18 it while you were still employed by the Council or was 19 it more recently? 20 A. No, it was more recently. 21 Q. I see, yes. So you don't know whether that is correct 22 or not? 23 A. Well, I knew it was wrong. As I've said before, the 24 fact that Mr Gallagher was temporarily placed into the 25 role he had was in itself a temporary expedient. It was 166 1 not intended to last two and a half years, and the fact 2 that he obviously participated in remuneration 3 committees and audit committees was contrary to best 4 practice. 5 Q. Yes. Again, out of fairness to Mr Gallagher, we'll have 6 to check these matters with him and perhaps other 7 witnesses, including, we will also have to check, it may 8 be the case that even if he sat in these committees, he 9 may have excused himself in relation to the question of 10 his own pay and bonuses. So I just flag that up as 11 matters we will have to enquire into. 12 A. I'm almost certain that he would do that, but that is 13 certainly worth checking. 14 Q. Thank you. 15 That was governance. 16 There are one or two particular matters I would like 17 to ask you about, please. We've heard evidence that 18 around August/September 2007, there was an issue as to 19 whether the Council should obtain its own independent 20 legal advice on the Infraco contract. Were you aware of 21 that issue at the time? 22 A. Yes, I was aware that there was a lot of discussion 23 about that. 24 Q. Do you have any views on it? 25 A. And I personally thought that it would be a good idea to 167 1 have our own independent legal advice, but I wasn't 2 close enough to what was going on to understand why we 3 shouldn't. These discussions took place with the 4 Director of City Development, the Director of Finance 5 and the Council Solicitor, and they were -- and with tie 6 as well, and they were far more linked into what was 7 happening than I was. 8 Q. So did you essentially defer to those other individuals 9 on that issue? 10 A. I did. 11 Q. Also around the same time, a question arose at the 12 Council instructing internal consultants, 13 Turner & Townsend, to carry out a review of the risks to 14 the Council arising from Infraco contract and the 15 project, and in the event, the OGC were asked to carry 16 out a review of risks instead. 17 Were you aware of that issue at the time? 18 A. Yes. Yes, I was. And I think I thought that was an 19 appropriate thing to do, given the circumstances we were 20 in, and the difficulties we were beginning to face. So 21 some external professional expert advice was, I think, 22 a good idea at the time. 23 Q. Did you have any views on whether it was better to get 24 advice or a review from a company such as 25 Turner & Townsend or from the OGC, or you had no 168 1 particular views on that matter? 2 A. I did think it would be better getting advice from 3 Turner & Townsend. I'm not sure quite why I thought 4 that, but I think my view was that they would have 5 a greater impact. We understood that they had 6 a reputation of having good specialist advisers. And 7 while the OGC offered something very similar, we felt 8 that a commercial organisation, that might bring greater 9 clarity to the risks that we were encountering at that 10 time. 11 And I might say as well, of course, the OGC was 12 replacing in some respects what we would have expected 13 from Transport Scotland, and the advice and guidance 14 that would have normally been present from 15 Transport Scotland, had Transport Scotland not been -- 16 withdrawn. 17 Q. Do you know who within the Council decided to instruct 18 the OGC to review these matters rather than 19 Turner & Townsend? 20 A. I'm not clear as to how that came about. 21 Q. Is that, however, again, another matter which you would 22 defer to those individuals who you say had more direct 23 involvement with the project than yourself? 24 A. That's correct. 25 Q. Thank you. Could I then turn to your statement, please, 169 1 to page 37, and your statement is TRI00000049_C. 2 To put this in context, I should perhaps go to the 3 previous page, page 36. Paragraph 92, we see 4 a reference to a report to the IPG on 16 April 2008. So 5 that's the context for this part of your statement. 6 Could you then please go to page 37. In 7 paragraph 95, I think in short you were asked if you had 8 an understanding at that time as to whether agreement 9 had been reached between tie and the consortium in 10 relation to which party would bear the risks and 11 liabilities arising from incomplete and outstanding 12 design, approvals and consents, and how that was or 13 would be reflected in the Infraco price and pricing 14 schedule. 15 You say in your statement that it was a matter of 16 some concern and raised questions over tie: 17 "This is because TIE negotiated these matters with 18 BBS and gave the Council reassurance that they were 19 negotiated in a manner that limited the Council's 20 exposure to risk. That was the position that TIE 21 adopted and the message that they gave us. Intuitively, 22 I could not see how that was going to be the case, given 23 that there was much talk about difficulties and other 24 issues arising from the designs." 25 Can you just explain a little more, please, what you 170 1 meant there? 2 A. Yes. This thing in the IPG, we were at that stage 3 getting a lot of information from tie. We had requested 4 a lot of information from tie which exposed significant 5 delays and a big issue around the quality of the plans 6 that were being produced by SDS, and the numbers that we 7 were talking about suggested a real problem, 8 a significant problem, and a significant risk. 9 So to hear that tie had negotiated these risks out, 10 basically, leaving the Council with exposure to 11 a relatively small risk, was surprising, and I had not 12 seen and never did see the evidence that that in fact 13 had been the case. 14 Q. I'm just interested, as well, Mr Inch, in your statement 15 that intuitively you could not see how that was going to 16 be the case. Is this an example where you are being 17 told reassuring things on the one hand, but just your 18 instinct, your intuition is telling you something else? 19 A. That's correct. I mean, my intuition was based on all 20 of the information that was then being presented at the 21 IPG, and there seemed to me to be a disconnect between 22 what we were being told and the information that we were 23 receiving, which suggested that there was a very 24 significant risk and tie previously, in other 25 circumstances, had not demonstrated that they were able 171 1 to negotiate these matters out, which is what was being 2 suggested. 3 Q. Presumably, this is again an example of something where 4 you would presumably have deferred to the Directors of 5 City Development and Finance and the Council Solicitor 6 because they were more closely involved with the 7 project; is that correct? 8 A. Yes, and these risks were principally technical risks 9 and to do with planning matters and to do with technical 10 matters, and so the nature of the risk itself was not 11 clear to me other than its financial consequence. 12 Q. Thank you. I would like to turn now to another matter, 13 that concerns the report to Council on 1 May 2008, when 14 in short I think the consortium had sought a significant 15 price increase shortly before this report went to 16 Council. 17 One issue for us to look at is whether members were 18 told about the price increase at the time and whether 19 they ought to have been. 20 Could you please go to document CEC01241689. At the 21 very bottom of the page we see an email from 22 Colin MacKenzie, at the very bottom of the page, dated 23 30 April 2008 to Gill Lindsay. Over the page, please, 24 it's stated: 25 "You may know this already but BBS have increased 172 1 the price by a significant amount. Urgent discussions 2 under way at tie this afternoon. Wonder how this leaves 3 the report to Council tomorrow!!" 4 Then back to page 1, please, in the middle email, 5 again from Colin MacKenzie, dated 1 May 2008, at 9.49 am 6 to Gill Lindsay, copied to Nick Smith, Mr MacKenzie 7 states: 8 "I have just received a briefing from the client on 9 this matter. I am advised that the suggested price 10 increase is confidential, that it is not a done deal 11 with BBS, and that there will be further negotiations 12 over the weekend between tie and BBS. Most 13 significantly, I am led to believe that members will not 14 be advised on these recent developments when Council 15 considers the report today." 16 Pause there. Were you aware of these matters, 17 Mr Inch, at the time, and in particular that the 18 consortium had increased the price by a significant 19 amount, and there was an intention, at least at one 20 stage, not to advise members of that development, at 21 that meeting on 1 May? 22 A. I was. 23 Q. What were your views? 24 A. My view in this particular instance was that the -- that 25 we were being advised by tie not to react to this 173 1 proposed price increase, because tie felt confident that 2 they would be able to again negotiate it away, and so to 3 have put that information to elected members would have 4 been misleading in itself, because tie was assuring us 5 that the numbers that were presented or proposed by BBS 6 were inaccurate and were not likely to be required. 7 My own view was it would have been appropriate maybe 8 to put a caveat into the Council paper or to mention 9 something. I suspect that the leader of the Council was 10 advised of this, and I think other elected members would 11 have been aware of this behind the scenes movement, but 12 until it was possible to be more precise and to be more 13 certain about the level of the price increase, it was 14 the view that it should not be put into the report. 15 Q. Do you know whether members were advised of the price 16 increase sought before the meeting on 1 May when they 17 voted on the report before them? 18 A. I believe that the leader of the Council and -- the 19 leaders of the Council would have been advised of that 20 by the Chief Executive. 21 Q. By the Chief Executive. We can check with Mr Aitchison 22 about that matter. Thank you. 23 CHAIR OF THE INQUIRY: But that wouldn't be conveyed to the 24 other councillors, would it? 25 A. No. Correct, my Lord. It would only have been the 174 1 leader. 2 Again, the justification -- there was a lot of 3 movement here in terms of price, some of which was 4 realised and other elements of it were not realised. 5 Every time there was a movement in price, there was 6 a hiatus within the Council. The political issues -- 7 the project itself was politicised to the extent that 8 every movement was used as a lever to build up greater 9 criticism of the whole project. So there was 10 a sensitivity around providing the Council and 11 councillors with information that might not be accurate. 12 CHAIR OF THE INQUIRY: Mr MacKenzie suggested one option was 13 to withdraw the report. Would that not have been the 14 prudent thing to do, because if there was in fact an 15 increase in price, you've provided the councillors with 16 wrong information, and if you told them about the 17 possible increase in price, which didn't materialise, 18 you might be giving them false information. So the 19 compromise would be to withdraw the report. 20 A. I agree with that assessment, my Lord, but I also would 21 suggest that it is a judgment call at the end of the day 22 as to what is the best in all the circumstances, and 23 I don't think there was any right answer here because 24 there would have been technical reasons why that report 25 had to go in the timing at that particular point in 175 1 time, and if it had been withdrawn, that would have 2 created just as much of a flurry of complaint as had the 3 report gone with information that was not wholly 4 accurate. 5 MR MACKENZIE: Do you accept, Mr Inch, that members required 6 to be given sufficient information to enable them to 7 come to informed decisions? 8 A. I absolutely accept that, and as I have said in many 9 parts of my statement, I believe members should be given 10 more information rather than less at all times. I think 11 it's very important that members are given as much 12 information as is possible. 13 That information, however, has got to be accurate 14 information, and I think that is where the problem 15 sometimes arises. 16 Q. If we could now, please, go to the report on 1 May 2008. 17 It's reference CEC00906940. Paragraph 1 explains the 18 purpose of the report is: 19 "To notify the Council of the progress on the suite 20 of contracts for the Edinburgh Tram Network and to 21 provide an update on financial close and the capital 22 costs." 23 Then, please, page 3. Under "Recommendations", 24 paragraph 6.1: 25 "It is recommended that the Council: note the 176 1 imminent award of the two contracts with a final price 2 for the Edinburgh Tram Network of GBP508 million ..." 3 It's the reference to a final price that I draw your 4 attention to, Mr Inch. 5 For completeness over the page, please, at the top 6 of page 4, what is sought is for members to: 7 "... refresh the delegated powers already given, to 8 authorise me to instruct tie Ltd to enter the 9 contracts ..." 10 So the rank and file member -- if I put it that 11 way -- are being advised that there is a final price for 12 the project and are being asked to refresh the delegated 13 powers given to the Chief Executive to authorise the 14 entering into of the contracts. 15 Is it really correct that this was or could be 16 reported as a final price when it was known that the 17 consortium had sought to increase the price by 18 a significant amount, and there were ongoing 19 discussions? 20 A. I understand the point that you make. I reiterate that 21 it would be a judgment call as to whether or not to 22 report in this manner. 23 Reassurances given by tie were convincing, that the 24 price increase by the consortium could be contained, and 25 so it was the Council's position that it was accepting 177 1 the guidance from tie that this increase was not going 2 to materialise. 3 Q. Was this the first price increase sought by the 4 consortium this year? 5 A. I don't believe so. I think we'd had previous price 6 increases, and indeed this was not the last price 7 increase that we were advised of either. 8 So this project was difficult to tie down and report 9 on in any confident manner, because the price was 10 shifting and moving as negotiations continued, and as 11 circumstances changed. 12 Q. But in short, Mr Inch, given you mentioned the 13 importance of giving members more information rather 14 than less, should they not have been either told of the 15 further increase sought or, if the matter was considered 16 confidential, simply pull the report and not tell them 17 anything until matters had been properly concluded? 18 A. I agree that these were options. I think a judgment was 19 made that this was the best way forward. My personal 20 view would have been to add some sort of caveat to the 21 report to make it plain that while these were the 22 numbers that we were currently dealing with, there were 23 outstanding matters which still need to be addressed. 24 I think that would have been, with hindsight, that 25 would have been a better approach, but the judgment call 178 1 was that we should report the information that we had 2 and the information that was being confirmed by tie. 3 Q. It may be suggested that without such a caveat along the 4 lines you have suggested, a report in these terms is 5 potentially misleading. 6 A. I don't regard it as misleading. I think on the 7 evidence and on the information available to the 8 Council, at the point that this report was prepared, it 9 was accurate. We were advised by our professional 10 advisers that the contractor consortium had made a bid 11 for additional monies. That's not the same as the 12 situation that would have arisen, had tie agreed that 13 there was additional monies going to have to be paid to 14 the contractor. That was not tie's position. 15 Q. In the event, did the price go up? 16 A. In the event, the price went up. 17 Q. I think members, at least some of them, were advised of 18 that the next and final report before financial close, 19 and this concerns a meeting of the Policy and Resources 20 Committee on 13 May 2008. The Policy and Strategy 21 Committee, I should say. 22 Then if we can go, please, to your statement, you 23 deal with this matter at page 41. 24 In paragraph 107 you say towards the bottom, you 25 say: 179 1 "The urgency of the situation, however, dictated 2 that we just had to accept that we had to go to the P 3 and R committee, much against my better judgment, but 4 I think on balance it probably needed to go. Of course 5 it also had to go on to the special meeting of the 6 Council and it was deemed to be a matter of such 7 importance that it needed to be given special 8 treatment." 9 It's the reference there to against your better 10 judgment you considered the report should go to this 11 committee. What did you mean by that? 12 A. I mean that it was very unusual. Mr Cunningham, the 13 Committee Services Manager, made the point that it was 14 very unusual to adopt this approach. 15 I might say there was two things wrong with my 16 statement. One was in relation to special councils. 17 There was an option to go to or call a special committee 18 meeting, a special meeting of the Council. That was 19 decided not to be an appropriate measure in this 20 situation. 21 The reports of the Policy and Strategy -- I get 22 mixed up as well. Policy and Resources, it's changed 23 name halfway through. But the Policy and Strategy 24 Committee, go to the Council in any case. So it would 25 have gone to the next Council. 180 1 In order to get this report to the Policy and 2 Resource -- Policy and Strategy Committee, it needed to 3 be approved by the Council leader as a matter of 4 urgency, and part of that was that there were material 5 differences in this report to the previous report that 6 had gone to Council, and our standing orders allowed us 7 to do that. I think it was standing order 25 or 8 somewhere around there, which allowed us to take 9 a report of this nature as a matter of urgency in 10 circumstances where there had been material change, and 11 that's why we went to the Policy and Strategy Committee. 12 Councillor Dawe approved of that. Otherwise it 13 wouldn't have happened. 14 Q. I understand. Also, please, at page 42 of your 15 statement, in the very top, you say: 16 "It was my decision to go with the report to the P 17 and S committee [I think it should be] and we would 18 manage the difficulties that were suggested in terms of 19 some of the members coming across this matter the first 20 time." 21 What were the difficulties and how were they 22 addressed? 23 A. I think elected members generally don't wish surprises. 24 This would have been a surprise. 25 So normally in terms of managing committee business, 181 1 we avoid at all costs introducing information or reports 2 that are or could be considered to be a surprise. 3 This would be deemed to be bad practice, and 4 Mr Cunningham made exactly that point, that this would 5 be -- a number of elected members would be seeing this 6 material for the first time and would have a lot of 7 questions around the content of the report. 8 That was again the judgment call. I recognise that, 9 but I felt it was better that the report went and was 10 regarded as an urgent report because of the material 11 changes that were before us. 12 It comes back to my view that we should give elected 13 members more information rather than less, and I felt 14 that we were reporting that quicker than might otherwise 15 be the case. 16 Q. Given the size of the tram project and the amount of 17 money involved, it may be suggested that it would have 18 been better to report back to a Full Council perhaps by 19 organising a special meeting? 20 A. I think I have touched on that. It was obviously an 21 option to call a special meeting. It is something that 22 was very rarely done in the Council. It had to be a 23 really extreme situation. 24 This in our terms was not really extreme. It was 25 par for the course. We were beginning to see changes of 182 1 this sort in terms of increased cost arising on a more 2 regular basis. 3 Q. Also in paragraph 110 on the same page, we will pick up 4 towards the very bottom, a few lines up, you say: 5 "I thought it was necessary to go to the P and R 6 Committee and agree the report. I continued to have 7 concerns about the Infraco contract. However, 8 I continued to rely on Willie Gallagher in terms of his 9 recommendations and indeed tie and Transport Scotland. 10 Transport Scotland was still keeping a brief on this and 11 they agreed that the Infraco contract represented value 12 for money." 13 Pausing there, is that correct, that 14 Transport Scotland agreed the contract represented value 15 for money? 16 A. My understanding was that while Transport Scotland had 17 withdrawn from active participation, there was still 18 contact with Transport Scotland on a drawdown basis, 19 because the Council still had to draw down the cash from 20 the Scottish Executive through Transport Scotland, and 21 my understanding was that Transport Scotland were kept 22 briefed, but didn't participate in the activity of -- 23 associated with the tram. 24 Q. Yes. I think we'll hear next week from 25 Transport Scotland witnesses who can explain their 183 1 involvement at that time. 2 Another point you make, Mr Inch, you continue to 3 have concerns about the contract even at this late 4 stage. Can you explain that a little? 5 A. That concern arose because of the information that I had 6 gleaned at the IPG, that there was very significant 7 delays in terms of the designs and I had begun to 8 understand what that meant for the contract in terms of 9 moving forward. 10 The MUDFA part of the contract was running behind 11 schedule, but much more importantly, the designs were 12 only partially complete, and that had a knock-on effect 13 both in time and cost. 14 The planning department in the Council was 15 identifying that the plans arising from that -- from SDS 16 were not only slow, but also incomplete or inadequate. 17 That caused huge delay, and of course all of that was in 18 the Infraco contract. I suspected that that was going 19 to be an issue going forward. 20 Q. Were you aware of all of these matters you just 21 explained before signature of Infraco contracts? 22 A. Yes, before signature. 23 Q. Did you tell anybody else of these concerns? 24 A. No, but all of these concerns were obviously talked 25 about endlessly, but the reassurance was constantly 184 1 coming from tie that these matters were being managed 2 and that the contract was robust, and indeed the 3 contract involved the passing of risk to the private 4 sector with very little residual risk lying still with 5 the Council. 6 CHAIR OF THE INQUIRY: I think you said earlier that you had 7 some concerns about the information you were getting 8 from tie. In light of that, and because of your 9 understanding of the consequences of late designs and 10 delays in the MUDFA contract, did you consider whether 11 it would be appropriate to have the Council Solicitor or 12 an expert solicitor or counsel to assist her in looking 13 at the draft contract before it was signed? 14 A. I think the draft contract was looked at by a number of 15 legal representatives. DLA were obviously representing 16 tie and were responsible very much for contractual 17 arrangements. The Council Solicitor herself was 18 examining these contract documents. 19 It was suggested at various stages that we should 20 augment that scrutiny by drawing in additional legal 21 support, and I think it's with hindsight best maybe -- 22 it is correct to suggest that that might have been 23 a good thing to do, my Lord. 24 MR MACKENZIE: Thank you. Mr Inch, we know financial close 25 then took place, and there was a dispute or various 185 1 disputes between tie and the contractor. I take it you 2 weren't directly involved in these disputes? 3 A. No, I wasn't. 4 Q. I won't ask you about them. I would, however, like to 5 ask you questions about Alastair Maclean who was 6 appointed the Head of Law and Admin in December 2009. 7 I think the Council Solicitor Gill Lindsay continued to 8 be employed by the Council until, I think, August 2010; 9 is that correct? 10 A. That's correct. 11 Q. Now, what happened there? Was there some 12 re-organisation so that Council Solicitor, that post 13 disappeared and became a new post, the Head of Law and 14 Administration? Is that correct? 15 A. Yes. Can I maybe give you a little bit of context that 16 will explain that. 17 The Council Solicitor had become Council Solicitor 18 on the retiral of the previous Council Solicitor, and it 19 was a straight replacement that the Council Solicitor 20 had been appointed through a ring-fenced internal 21 recruitment process to the post of Council Solicitor. 22 But moving on, the Council had reached a stage where 23 all departments of the Council were having to produce 24 efficiency statements. There was a significant sum of 25 money to be saved in the Council, and every department 186 1 was allocated a sum of money to save in a financial 2 year. 3 That sum of money for my own department was 4 a significant percentage of the total budget. The 5 Council had protected education services which amounted 6 to about approximately 50 per cent of the Council's 7 overall budget. So the knock-on effect on departments 8 such as my own, responsible for back office services, 9 was that we had to find very significant savings for -- 10 in the year. 11 Departments were requested to put forward proposals 12 as to how we would do that, and one proposal I put 13 forward was that we merged two divisions, the Council -- 14 the solicitors and the secretaries. These were two 15 separate divisions in the Council. 16 And so a revised job description was prepared for 17 the appointment of a post to manage a combination of 18 Council secretary activity and the Council solicitors. 19 At the same time, the Council had been encouraging 20 people to take early retiral because the only way we 21 were ever going to make the sums of money proposed was 22 if we were able to shed staff. And at the same time the 23 Council Solicitor made a case for suggesting that the 24 post -- new post should simply be -- she should simply 25 step into that new post, that there shouldn't be 187 1 a recruitment. It wasn't a new post in the sense that 2 it was sufficiently different from her previous post to 3 warrant going to -- out to the market. 4 I differed in that because it was an entirely new 5 post. It brought a range of new responsibilities to the 6 legal job, and so I think it was a combination of 7 things. There was an offer on the table for early 8 retiral and at the same time there was an offer on the 9 table for the Council Solicitor to apply for the new 10 post. 11 And the Council Solicitor determined that she would 12 prefer to take early retiral than go through 13 a recruitment process for this new post. 14 So the negotiation that I then had with the 15 Council Solicitor was in relation to the timing of her 16 departure, and clearly the Council Solicitor had been 17 immersed in the tram work and would have been at that 18 particular point in time a really difficult person to 19 replace, given the experience and the knowledge that 20 individual was carrying. 21 In addition to that, we had another major exercise 22 going on in the Council, alternative -- I can't remember 23 what we called it now. Alternative business 24 arrangements, whereby we were looking at outsourcing 25 large chunks of Council service as a means of saving 188 1 money. And there was a huge amount of contract work 2 involved in considering the outsourcing of Council, 3 large tracts of Council activity, and the 4 Council Solicitor had been very much involved in that. 5 So there was two major projects. One, the tram and 6 one, the alternative business arrangements, that the 7 Council Solicitor had been very much involved in for 8 a significant period of time. 9 Consequently, I did negotiate that the 10 Council Solicitor should delay her leaving the Council, 11 but agree that she did leave the Council, for a period 12 to allow the new person, whoever that might be, to gain 13 the knowledge and the wisdom that she might be able to 14 impart. 15 So that's the reason for the delay. I think the 16 dates that are in the papers are maybe not quite right, 17 because I think the Council Solicitor had accrued quite 18 a lot of annual leave, so I think the departure date 19 would be earlier than is suggested in the papers. 20 I'm only guessing but I think that was the case. 21 Q. We can perhaps check that with Ms Lindsay. I think she 22 left the Council's employment in August 2009. We could 23 perhaps check with her whether physically she left a bit 24 earlier because of accrued leave. We can check that. 25 Did any difficulties arise from the fact that 189 1 Alastair Maclean was in post as Head of Law and Admin 2 from December 2009 and the former Council Solicitor 3 remained with responsibility for trams until she left? 4 A. No, I didn't see any conflict in that. As I explained 5 earlier, I had weekly meetings with the 6 Council Solicitor, Gill Lindsay, and when Mr Maclean 7 came on board, I asked the Council -- Gill Lindsay to 8 have these same meetings with the new Council Solicitor. 9 The new Council Solicitor. And so that enabled them to 10 impart their knowledge and understanding. 11 I felt it was a very good arrangement. I thought it 12 was an appropriate arrangement, given the nature of the 13 issues that we were -- were around at the time. It 14 enabled the new person to get up to speed with what was 15 around, and to understand why we were where we were, and 16 I think all of that went particularly well. 17 Q. Now, for the avoidance of doubt, who was responsible for 18 providing legal advice to the Council on the tram 19 project during that period? 20 A. I think Mr Maclean would be the person responsible, but 21 he would do so in consultation with Gill Lindsay. 22 Q. Thank you. Before coming to the final document, there 23 are two matters raised in other witness statements 24 I should put to you for your comments, if any. 25 Firstly, Mr Maclean. He refers in his statement to 190 1 there having been significant issues with CEC legal 2 prior to his commencement. Now, are you aware of there 3 having been significant issues with CEC legal? 4 A. I was aware of difficulties. I don't know what he means 5 by "significant issues". I think Legal Services were 6 going through a period of -- a period of change which 7 was difficult for many of the individuals in legal 8 services. The requirements of the Council were 9 changing, and so the requirements -- the needs for 10 certain types of solicitors, certain solicitors with 11 particular expertise had reduced, and so there was 12 a variety of problems arising in relation to sorting 13 that out and re-organising and restructuring the 14 division. 15 I think that might be what he means. I think there 16 were a number of individuals who took the early 17 retirement option in the lead-up to Mr Maclean coming on 18 board, and that was difficult for some people. It was 19 certainly a change, and Gill Lindsay, I think, probably 20 found that quite difficult as well as everyone else. 21 Q. For the avoidance of doubt, do you consider that any 22 such issues impacted upon the tram project? 23 A. No. Definitely not. I mean, there was -- there is no 24 doubt there were -- and I think very positive 25 differences of opinion between Gill Lindsay and the 191 1 other legal representatives, but I found that to be 2 a positive thing. It meant there was a positive debate 3 between them as to how best to deal with certain issues. 4 Q. I understand. Another matter I should put to you in 5 fairness, David Anderson, the Director of City 6 Development, he mentions in his statement, he says there 7 was a reluctance on your part, Mr Inch, to commit funds 8 to get to the roots of the contractual issues in 9 dispute. Do you have any comment on that suggestion? 10 A. Sorry, I don't quite get that. 11 Q. David Anderson in his statement states that -- he refers 12 to the reluctance of Jim Inch to commit funds to get to 13 the roots of the contractual issues in dispute. 14 A. I don't understand that. The tram project had priority. 15 That was primarily the reason I was in the IPG, to 16 ensure that the resources, when they were needed, were 17 made available, and on a matter like that, there would 18 have been no question that we would find the necessary 19 resources. 20 Q. Do you have any recollection of having been asked for 21 funds for that purpose and having refused? 22 A. No. 23 Q. The final document, please, Mr Inch, arrives later in 24 2010. CEC00013342. 25 Now, if we go over the page, please, over the page 192 1 again, please, we can see this is a document from 2 Alastair Maclean dated 17 November 2010, and back to the 3 first page, please, I think we've seen this document 4 before, Mr Inch; is that correct? 5 A. I don't recollect. 6 Q. Okay. Let's then blow up, please, paragraph 1. We can 7 see the purpose: 8 "The purpose of this note is to report to the 9 Council monitoring officer concerns in relation to tie 10 which yesterday were raised with Alastair Maclean ... 11 and to propose an initial course of action in the 12 meantime." 13 Then please go to the next paragraph. 14 Issue: 15 "Richard Jeffrey ... yesterday indicated that he had 16 concerns in relation to events at the time the tram 17 contract with Infraco was entered into." 18 The next paragraph, paragraph 2.2: 19 "Those events require to be investigated but there 20 is a suspicion that ..." 21 To paraphrase, certain directors or employees of tie 22 were incentivised to negotiate a concluded deal at 23 a certain headline rate, the question of bonus payments 24 for softer provisions; and then Mr Fitchie, who was 25 seconded to tie, was paid a thank you payment or bonus; 193 1 the contract was defective in a number of respects which 2 may or may not be as a result of such incentivisation or 3 negligence. 4 Then 2.2.6: 5 "The closing report which was prepared by tie for 6 CEC reporting and reliance purposes ... was materially 7 incorrect. That ”misrepresentation” could be innocent, 8 negligent or fraudulent." 9 Do you remember this document now, Mr Inch? 10 A. I do. 11 Q. So I think in short what Mr Maclean is doing is alerting 12 you to certain serious concerns which Mr Jeffrey of tie 13 has raised with him; is that correct? 14 A. That's correct. 15 Q. Now, what were your views when you received this 16 document? 17 A. Obviously I wanted to know a bit more about it. My 18 immediate reaction was that this was a matter for the 19 Tram Monitoring Officer in the first instance, and not 20 necessarily for my attention. 21 As I heard a bit more about it, I felt that indeed 22 was the case. It was more appropriate initially for the 23 Tram Monitoring Officer to look at this. Mr Maclean 24 hadn't long been in the Council, and I suspect hadn't 25 differentiated between the roles of Tram Monitoring 194 1 Officer and the Council Monitoring Officer. I might be 2 wrong about that. In any case, I did ask a bit more 3 about it and I was informed that Mr Jeffrey was seeking 4 a legal opinion in relation to his situation regarding 5 these matters, and I took the view that the information 6 we had was at this particular juncture hearsay. There 7 was no evidence to support any of what was being 8 suggested, and I suggested to Mr Maclean that it needed 9 to be treated in that fashion, and if Mr Jeffrey cared 10 to provide us with more information and more evidence, 11 then it would be possible to take the matter further. 12 As it happened, I believe Mr Jeffrey, having 13 commissioned legal support, was informed that there was 14 insufficient substance -- I won't say there was no 15 substance, but insufficient information to confirm any 16 of these suggestions, and as such, the matter then was 17 left. 18 I believe that the matter was also raised with the 19 Director of Finance. Clearly these were financial 20 matters in relation to the project, and I think the 21 Director of Finance held the same view that I had, that 22 without there being more evidence or something 23 substantial to enable us to take further action, the 24 matter couldn't be followed up. 25 Q. You say, Mr Inch, that Mr Maclean, you suspect, hadn't 195 1 differentiated between the roles of Tram Monitoring 2 Officer and the Council Monitoring Officer. I suggest 3 that it's perfectly clear Mr Maclean sent this note to 4 you as Council Monitoring Officer because he was 5 concerned that, if true, these concerns may amount to 6 illegality and/or maladministration? 7 A. I understand that, and I agree with that, but I think 8 the first -- the first view and the first assessment of 9 the substance of these allegations should have been 10 taken with the Tram Monitoring Officer because it was 11 a tram matter. 12 That's not to say that it wouldn't end up with the 13 Council Monitoring Officer, if that proved to be 14 necessary. 15 Q. Did the Council take any steps to investigate these 16 concerns? 17 A. The Council did not take any steps to investigate these 18 concerns. It was in our view or my view, it was up to 19 the individual raising these concerns to give us 20 information that would enable us to take the matter 21 further. 22 Q. So in short, what appears to have happened is that 23 Mr Jeffrey, on behalf of tie, instructed solicitors to 24 investigate these matters and these solicitors reported 25 back to Mr Jeffrey, and in short, the Council appeared 196 1 to have relied on that as an end of matters; is that 2 correct? 3 A. That's correct. 4 Q. But essentially the Council is relying on a report 5 instructed by the body which is the subject matter of 6 the concerns? 7 A. Yes, I agree with that. 8 Q. It may be suggested that the Council should have 9 independently investigated these concerns? 10 A. I believe the Council would have investigated these 11 concerns had the -- the accusations made had greater 12 substance. 13 Q. I think, Mr Inch, you retired in January 2011? 14 A. Correct. 15 MR MACKENZIE: Thank you. My Lord, I have no further 16 questions. 17 CHAIR OF THE INQUIRY: I don't think anyone has given notice 18 of any questions. So that's the end of your evidence, 19 Mr Inch. 20 You're still under citation. It may be that you 21 will be called back, but hopefully you won't be required 22 again. Thank you very much? 23 A. Thank you very much, my Lord. 24 (The witness withdrew) 25 (4.36 pm) 197 1 (The hearing adjourned until Wednesday, 20 September 2017 at 2 9.30 am) 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 198 1 INDEX 2 PAGE 3 MR JIM INCH (sworn) ..................................1 4 5 Examination by MR MACKENZIE ...................1 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 199