1 Thursday, 21 September 2017 2 (9.30 am) 3 CHAIR OF THE INQUIRY: Good morning, Mr Mackenzie. 4 MR MACKENZIE: The next witness is Michael Heath. 5 MR MICHAEL HEATH (sworn) 6 Examination by MR MACKENZIE 7 CHAIR OF THE INQUIRY: Could I ask you to sit close to the 8 microphone and speak relatively steadily, not too 9 quickly, for the shorthand writers. 10 A. I'll try to. 11 MR MACKENZIE: Good morning. 12 A. Good morning. 13 Q. Can you state your full name, please? 14 A. Michael Gordon Heath. 15 Q. And your current occupation? 16 A. Retired. 17 Q. Thank you. You have helpfully provided a CV to the 18 Inquiry, Mr Heath. I'll take you to that first, please. 19 It will come up on the screen in a second. The 20 reference number is CVS00000039, and you can see that 21 now on the screen before you; is that correct? 22 A. That's correct. 23 Q. Thank you. We can see under "PROFILE/EXPERIENCE 24 SUMMARY", you list a number of areas of particular 25 expertise, including financial and business management, 1 1 project management of interdisciplinary projects around 2 the public sector, corporate governance in PPP-type 3 companies, and other matters. 4 We can also just, if you go down to the middle of 5 the page, we can see, under "PROFESSIONAL 6 QUALIFICATIONS", you were awarded an MBE for services to 7 Public Transport in London in 1996. If we can then 8 please go to page 3 of your CV, without taking too long 9 on this, we can see, I think, you had various roles in 10 London buses, including, at the top of the page, in 11 relation to bus privatisation; is that correct? 12 A. That's correct. 13 Q. Thank you. Over the page to page 2, please, we can see 14 of interest to us, I think, in particular between 1996 15 and 1998, you were Project Manager for Tramlink. The CV 16 states you took the Croydon Tramlink Act 1994: 17 "... and created a competition to design, build, 18 maintain, finance and operate a light rail system in 19 Croydon for 99 years." 20 Pausing there, it appears the procurement model 21 there was as stated, a design, build, maintain, finance 22 and operate model; is that correct? 23 A. That's absolutely correct. 24 Q. Just to read on in your CV, it states: 25 "Negotiated the public sector side of all agreements 2 1 with bidders ..." 2 You stated achievement: 3 "GBP250 million value project delivered at the 4 Government's financial target (GBP125 million)." 5 Can you explain the difference between the two 6 figures? 7 A. The 125 million was the government target for the costs 8 of the public sector side delivering the project and 9 a competition for grant. The competition -- the grant 10 amount was in the order of GBP100 million. And the 11 GBP250 million was effectively the total value of the -- 12 the total value of the project at that time, with the 13 estimate of the consortium's costs. 14 Q. Did that project involve private finance in the funding 15 of it? 16 A. It was one of the initial major projects of the 17 government at the time's private finance initiative. It 18 was the first project that had actually introduced major 19 shareholding and a 99-year concession term. 20 Q. Thank you. Were you employed by Tramlink? 21 A. No, I was employed by London Buses. 22 Q. I see. So your employer at this time was London Buses. 23 Was this a project that was delivered by London Buses? 24 A. It was a project that was delivered by London Buses, 25 yes. 3 1 Q. I understand. What was your title exactly? 2 A. It was actually called Project Manager Tramlink. 3 Q. I see. Just to be clear, were you involved in each of 4 the procurement, construction and operation phases? 5 A. No, I was involved in the procurement phase. I then 6 moved on to become Operations and Services Director for 7 London Buses. I then had a very high level overview of 8 progress and, as when things go wrong in these major 9 projects, I got involved in trying to resolve the issues 10 between the parties to bring the project to a successful 11 conclusion. And that was during the construction -- 12 that was during the construction phase. 13 Q. Yes. Was that tram project delivered on time and within 14 budget? 15 A. It wasn't delivered -- it wasn't delivered against the 16 original timescale. And the on-budget issue was clearly 17 a matter for the private sector. 18 Q. Because they bore the risk? 19 A. They took the construction risk. 20 Q. So do you know whether it was delivered on budget? 21 A. To the best of my knowledge, I think it cost more than 22 they estimated. 23 Q. I see. But we are aware that there had been various 24 problems with the various tramlines in the UK that had 25 been built in the 1990s in particular, not that many 4 1 were built. I'm just wondering if Croydon tram project 2 encountered these sorts of problems, whether in fact 3 everything was fine there? 4 A. It wasn't all fine. I think it's fair to say that most 5 tram projects underestimate the costs at the outset. 6 Q. Thank you. 7 Now, if we go back to your CV, please, and just 8 finish that. We see further up you made reference to 9 London Buses' Operations and Services Director until 10 2001. 11 Then please go to page 1, just to finish the CV off. 12 At the bottom of the page you say: 13 "Concurrently from September 2003 to date". 14 You say "to date". Are you actually retired now? 15 A. When I submitted my CV to the Inquiry, I pointed out 16 that it was a CV dated 2010. 17 Q. I understand. So we should read "to date" now as 18 being -- 19 A. To date was 2010 because when I was asked, I thought 20 that was the most relevant CV to send. 21 Q. Thank you. We can see what is stated here is that you 22 acted as Transaction Manager for Partnerships in Health, 23 et cetera. So is that essentially involvement in 24 procurement in the health sector? 25 A. Yes. 5 1 Q. And then above that, please, we see, between March 2001 2 to October 2007, you were the Chairman of the 3 Transportation Division of Schofield Lothian. I think 4 Schofield Lothian were construction and infrastructure 5 consultant; is that correct? 6 A. They were basically quantity surveyors, but that's 7 probably a good description. 8 Q. Thank you. Then just to complete that, we'll see from 9 April 2007 to 2010 -- was this your own consultancy 10 company, Mr Heath? 11 A. Yes. 12 Q. Thank you. We can see there that as part of that you 13 were involved in reviewing the Edinburgh tram project? 14 A. Correct. 15 Q. Thank you. We will put your CV to one side, please. 16 You have also helpfully provided a statement to the 17 Inquiry. I would like to bring that up, please. The 18 reference is TRI00000044. I would like please to go to 19 the last page, just for you to confirm this is your 20 signature. It's at page 35? 21 A. It is. 22 Q. Can you confirm, please, this is the written statement 23 you've prepared for the Inquiry? 24 A. I can confirm that. 25 Q. Mr Heath, your evidence to the Inquiry will comprise 6 1 both the written statement and the evidence you give 2 today. 3 Now, Mr Heath, you were involved in a number of 4 reviews of the Edinburgh tram project, but I think to 5 put that in context, it may be helpful to look at three 6 guidance documents so we can see what the review 7 procedure involved. 8 I'm not going to go into the details, but simply to 9 look at the overview of these matters. 10 The first guidance document is CEC02084815. We can 11 see this is published in the top right-hand corner by 12 the Office of Government Commerce, the OGC, and the 13 title is "Project procurement lifecycle, the integrated 14 process", and it's part of a series of guides in 15 relation to achieving excellence in construction 16 procurement. We can see this is guide 3 in that series. 17 If we can go over the page, we can see when it was 18 published. At the bottom of the page, under 19 "Acknowledgments", it's quite hard to see in the blow 20 up. We can see the Crown copyright 2007. So this guide 21 is published in 2007, and for the record, there was 22 guidance in 2003 in essentially the same terms, and I'll 23 provide the reference if anyone wants to look at it 24 later. It is GOV00000018. We don't have to go to that 25 because what is in the 2003 guidance is pretty much the 7 1 same as what appears in the 2007 guidance. 2 So sticking with the 2007 guidance, I would like, 3 please, to go to page 8, I think it is. If we blow up 4 the middle section, please, and scroll down a little 5 please and stop there. 6 So in short, Mr Heath, I'm taking you to this to 7 look at the OGC's Gateway Review process and the 8 different stages or gateways that the project should go 9 through. 10 We can see the paragraph commences: 11 "OGC's Gateway review process identifies points 12 along the project planning route, beyond which the 13 project should not proceed without specific management 14 and funding activities having been completed. At each 15 decision point, the investment decision-maker should 16 evaluate the business case and investment proposals and, 17 if justified, give approval for the project to proceed." 18 It's then stated: 19 "It is important to note that for construction 20 projects, there are two additional major decision points 21 between Gates 3 and 4. These are: Decision 22 point 1: Outline design, after which no client change 23 should be made; Decision point 2: Detailed design, when 24 the team must have reached time and cost certainty 25 against the required quality. At this point there is 8 1 a commitment to build. 2 In addition, there may be a requirement to repeat 3 Gate 3, if there is a two stage investment decision 4 (such as for contract award and then for the 5 construction price)." 6 Just to pause there, Mr Heath, I take it that at the 7 time you were undertaking these reviews, you were aware 8 of this sort of guidance and these Gateway review 9 stages? 10 A. I have not seen that guidance before. And in fact, 11 you've introduced something that I didn't know about 12 when you talked about the document in 2003. This is -- 13 I only saw this document, I think, two weeks ago. 14 In that sense, there was also an OGC Manager's 15 Guidance Note about these projects -- these reviews, 16 sorry. 17 We were committed to the OGC process, which is very 18 much driven by the Senior Responsible Officer. 19 So there is a risk that this conversation may become 20 a bit hypothetical, I think, but we carried out the 21 reviews in accordance with the terms of reference that 22 you have seen in the report. Those terms of reference 23 were consistent with the OGC guidelines. They don't 24 quite match what's said here. 25 Q. I see. I'll just continue with this document, just to 9 1 see if you're familiar with the different stages of the 2 Gateway review process. 3 So if we then -- 4 CHAIR OF THE INQUIRY: Mr Mackenzie, is there much point in 5 doing that? Because the witness has said he wasn't 6 aware of this until two weeks ago, and he operated in 7 accordance with the guidance at that time. So is there 8 something particular? 9 MR MACKENZIE: My Lord, what I simply wish to explore is 10 whether the witness is aware of the different stages of 11 the gateway review process, whether or not he's seen 12 this particular document. 13 CHAIR OF THE INQUIRY: Very well. 14 MR MACKENZIE: I can take it quite shortly. I think it may 15 also help inform the Inquiry in putting the different 16 reviews in context. 17 Please go to page 10. Under the coloured band at 18 the bottom, it states: 19 "Gate 0: Strategic assessment". 20 Then over the page, please. Again, the coloured 21 band is: 22 "Gate 1: Business justification". 23 Do any of these Gates appear familiar to you, 24 Mr Heath? 25 A. Well, the report -- the report, I think you've seen, 10 1 make it clear that there wasn't a Gateway 0 process, 2 that the project had gone beyond that already. The Gate 3 1 is very familiar because we produced two reports as if 4 it were Gateway -- as if it were Gateway 1, which I'm 5 sure you are going to be coming to. 6 Q. I will indeed. I think that's the point, Mr Heath, that 7 some of these reports were produced as if they were -- 8 A. Yes. 9 Q. Gateway reviews? 10 A. Absolutely. 11 Q. I'll just continue, if I may, just to identify the 12 different gateways. Then please, page 13. Let me see 13 the coloured band, Gate 2: Procurement strategy. So 14 that's a stage within a project at which a review ought 15 to take place; is that correct. 16 A. Yes. 17 Q. Over the page, please. Again, the coloured band states: 18 "Gate 3: Investment decision". 19 It's stated: 20 "Note that there could be more than one Gate 3 21 review depending on the procurement route eg two-stage 22 Design and Build. Where there is an investment 23 decision, there is a Gate 3 review." 24 Then at the bottom of the page, we see: 25 "Decision point 1: Outline design". 11 1 Over the page, please, again, the coloured band: 2 "Decision point 2: Detailed design". 3 The box under that states: 4 "Approval for detailed design and for project to 5 proceed to construction. Confirm affordability, 6 including provision of risk allowances. Commit funds 7 for construction." 8 Then two more gates to finish this document off, 9 please. 10 Over the page, Gate 4: 11 "Readiness for service." 12 Finally, please, the page after that: 13 "Gate 5: Benefits evaluation". 14 So I think you said you are familiar with the 15 general gateway process? 16 A. Yes. 17 Q. Thank you. Now, the next document by way of guidance 18 I would like to take you to, please, and it's because in 19 your reports, which we will come to, you touch on some 20 governance matters and use some terminology. Again 21 I think it's helpful just to put that -- these matters 22 in context. 23 So if we could please look at document GOV00000003. 24 This is again one of the OGC guides in the same 25 series, achieving excellence in construction 12 1 procurement. This is guide 2, entitled "Project 2 organisation roles and responsibilities". Again, this 3 particular document was published in 2007, but is 4 essentially the same terms as the guidance issues in 5 2003. Again I'll give the reference simply in passing 6 to the 2003 guidance. It is CEC02084819. 7 Pause here, Mr Heath. Had you seen this document -- 8 the 2007 guidance -- 9 A. The answer is exactly the same as the previous document. 10 Q. Yes. So the first time you saw this 2007 guidance was 11 when the Inquiry sent it to you a week or two back? 12 A. Yes. Can I add, I was actually on holiday for a week 13 between you sending me this document and you bringing it 14 to my attention here. 15 Q. I see. I'm grateful to you for looking at it, Mr Heath. 16 Now, again, while you may not have seen this 17 document, I would like to check if you are familiar with 18 the terminology used, if I may. 19 So if we could please start at page 4. This is 20 headed, "Project organisation: roles and 21 responsibilities". Just to pause, Mr Heath, what 22 I really -- part of the reason I'm putting it to you as 23 well is to see if these are the sorts of things you 24 would be considering, the criteria you would be 25 considering when reviewing a project, reviewing perhaps 13 1 the governance processes in particular. 2 So you see the guidance states: 3 "Projects should be organised in such a way that 4 everyone is committed and empowered to achieve 5 successful delivery. Roles and responsibilities should 6 be clearly defined; there must be short and effective 7 lines of communication to senior management so that they 8 can take prompt action when needed." 9 I take it you would have agreed with that at the 10 time you were conducting these reviews? 11 A. Absolutely. 12 Q. Then under "Introduction", the guide states: 13 "This guide explains the key roles and 14 responsibilities involved in construction procurement 15 projects. It provides a recommended framework for 16 project organisation that can be adapted to individual 17 circumstances." 18 Then under "Principles", please, it is stated: 19 "Critical factors for success." 20 I'm not going to read all the bullet points, but we 21 can see: 22 "The client organisation must ensure that:" 23 The third bullet point: 24 "The right people are given the roles of senior 25 responsible owner - SRO (that is, the individual 14 1 responsible for the success of the project) and project 2 sponsor (empowered to take decisions on behalf of the 3 SRO role) ..." 4 I take it you were familiar with these terms at the 5 time? 6 A. Yes, and I think if you read our reports, you can see 7 they refer to those principles on a regular basis. 8 Q. Thank you. Then the second last bullet point on the 9 page states: 10 "Everyone involved in the project works together as 11 an integrated team (client, designers, constructors, and 12 specialist suppliers), with effective communication and 13 co-ordination across the whole team." 14 Then over the page there's some more helpful 15 guidance. Page 5 from the top -- 16 A. Can I just stop you. When you talk about everybody 17 working together, because I think I just add a note of 18 caution that the everybody working together needs to be 19 thought -- and potentially co-locating needs to be given 20 an element of caution, because of the potential for 21 unwitting risk transfer by the client unwittingly 22 importing risk back to itself by giving well-meaning 23 instructions that can easily be misinterpreted. 24 This in my view, this document is rather aimed at 25 a traditional form of public sector purchasing where the 15 1 public sector has set out what it wants. It goes out to 2 contract and then it monitors how the product is being 3 delivered; whereas projects like tram projects require 4 much more system integration, much more integration of 5 various organisations, and in consequence, they create 6 much more complex relationships that are envisaged here. 7 Q. Yes. I think this guidance document is setting out 8 guidance, it does say it may require to be tailored in 9 individual circumstances. I'm interested in one thing, 10 you mentioned, Mr Heath, about the need for integration. 11 The document does come back to that in a second. We 12 will look at governance diagrams. I would like to 13 compare a diagram in this document in relation to 14 integration with the procurement of Edinburgh tram. 15 So the second bullet point on page 5 states: 16 "Levels of delegated authority for the project team 17 are clearly set out and understood and enable effective 18 and timely decision-making." 19 The next bullet point: 20 "Clear roles and responsibilities are defined and 21 understood, supported by an uncomplicated project 22 management structure that reflects good practice." 23 The next bullet point: 24 "The procurement route for the project supports and 25 facilitates integrated team working." 16 1 The next paragraph states: 2 "The client organisation undertaking each project 3 should have clearly identified responsibilities for 4 investment decisions, project ownership and project 5 sponsorship; the people concerned should have formal 6 statements of their responsibilities and be accountable 7 for them. The senior responsible owner role should be 8 a formal appointment in the part of the business that 9 requires the finished project, with sufficient seniority 10 to understand the business drivers and to make decisions 11 on behalf of the business. Priority should be given to 12 ensuring that project delivery teams are composed of 13 high quality individuals; there must also be 14 a commitment to continuity in key roles." 15 The next paragraph states: 16 "Wherever possible, the project should be delivered 17 by an integrated project team made up of the client 18 project team, consultants, contractors and specialist 19 suppliers working together as a single team. This 20 approach should be used on all construction projects 21 because it helps to encourage innovation and avoid an 22 adversarial culture; it encourages collective 23 responsibility for a successful outcome." 24 I'll leave that there. It may be helpful, I think, 25 to look at page 6. In the second bullet point -- this 17 1 is under "Essential roles and responsibilities", the 2 second bullet point states: 3 "Provision of independent advice to the client -- 4 independent advice may be required on a range of issues, 5 including business strategy, investment appraisal, 6 financial, legal, and technical aspects. This is the 7 role of independent client advisers ... they should be 8 independent from suppliers to avoid any conflict of 9 interest." 10 Do you agree with that as general guidance? 11 A. Yes. 12 Q. Why is there a need for independent advice? 13 A. I think it's relatively self-evident. On the basis that 14 these are very large complex projects which usually are 15 outside of the normal business experience of the client, 16 and so they need -- and they are normally public sector 17 bodies. So there is a natural desire to make sure that 18 there is some form of independent advice alongside the 19 advice that they may be getting from in-house. 20 Q. Thank you, Mr Heath. 21 Next, please, page 7. In the middle of the page we 22 see: 23 "There may also be a requirement for a project 24 board -- an advisory panel including a technical adviser 25 and business adviser, to address strategic issues and 18 1 ensure stakeholder buy-in at a high level." 2 I pause there, Mr Heath. The reason I'm mentioning 3 this is that I don't want us to be confused by the term 4 "Project Board" used in two different senses. This 5 document refers to it being an advisory panel to ensure 6 the buy-in stakeholders. I'm going to take you to the 7 PRINCE2 guidance where "Project Board" is used in the 8 term of being part of the project management team. 9 I think the term is used in two different ways; is that 10 correct? 11 A. It looks like that to me. 12 Q. Yes. Because I think if we go through the diagram over 13 the page, I think that will explain that for us. 14 Blow up the diagram, please. 15 So this is essentially the suggested governance 16 structure to ensure an integrated approach. 17 Just sticking with the Project Board, we can see, 18 I think, in this diagram, the top right-hand corner, it 19 states: 20 "Project board (advisory only) May not be required." 21 So that's the sense that "Project Board" is being 22 used in this guidance, that is to ensure the buy-in of 23 stakeholders, but not part of the decision-making tree, 24 if I can put it that way? 25 A. Yes, and I think for this project, it demonstrates how 19 1 this document would need some significant tailoring. 2 Q. Well, we will come on to that in a second, perhaps. 3 I think we can see essentially a linear decision-making 4 structure. Perhaps interestingly at the bottom, it 5 talks about an integrated supply team: 6 "The Integrated supply team comprises the lead 7 supplier and a number of integrated supply chains. 8 Examples of integrated supply chains include designers, 9 constructors, specialist suppliers, maintainers, 10 etc." 11 Pause there, Mr Heath. Presumably in the Croydon 12 project you were involved in, where the procurement 13 model was one of design and build and maintain and 14 finance and operate, presumably it's quite easy in that 15 model to have an integrated supply chain? 16 A. Exactly. Yes, you outsource the integrated supply 17 obtain. 18 Q. If we can finally in this document go to page 10. Read 19 the text at the top, please. It states: 20 "A traditional project structure is not integrated; 21 it separates out the responsibilities of each party (see 22 Figure 4). For this reason it should not be followed 23 unless it demonstrates significantly better value for 24 money than the recommended procurement routes. However, 25 even with this fragmented approach, it is possible to 20 1 aim for some level of integration." 2 Look then, please, at the diagram. We can see at 3 the bottom, I think, this is an example of what's been 4 referred to as a fragmented approach where we have 5 separate consultants, constructors and specialist 6 suppliers. I think, just to pause there, Mr Heath, 7 I think in the Edinburgh tram project, the procurement 8 model is more of this fragmented approach, because the 9 decision was taken to separately procure the design 10 contract, separately procure the utilities contract and 11 separately the infrastructure and tram vehicle 12 contracts; is that correct? 13 A. I believe that to be correct. 14 Q. Albeit there were reasons for that because of the other 15 problems with the UK tram schemes and this was a new 16 approach to try and avoid some of those problems, and 17 there was an attempt at some integration later on by 18 novation of the design contractor to the Infraco 19 contractor and also the tram vehicle manufacturer joined 20 the consortium with the Infraco contractor; is that 21 correct? 22 A. I believe that's correct, yes. 23 Q. Thank you. So that's really by way of overview of that 24 guidance. 25 One final guidance document, if I may I will take 21 1 you to shortly, but it's to do with -- back to the 2 question of the Project Board in the sense that I think 3 it was used for the Edinburgh Tram Project Board, and 4 this final document is GOV00000029. 5 This is PRINCE2 guidance. Again, we can see, 6 bottom left-hand corner, published by the OGC in 2005, 7 entitled, "Managing Successful Projects with PRINCE2". 8 Have you seen this document before, Mr Heath? 9 A. No. 10 Q. Were you familiar with the PRINCE2 management 11 principles? 12 A. Having read it in the same time frame as I have referred 13 to earlier, familiar with the principles, but for the 14 record, I can never remember a reference to PRINCE2 15 throughout discussions on this project. 16 Q. I see. 17 Now, there is some similar terminology in terms of 18 senior responsible owner. I think you were familiar 19 with that terminology? 20 A. Sorry, I missed that. 21 Q. I'm sorry. I think you had explained before, you were 22 familiar with the terminology such as senior responsible 23 owner? 24 A. Yes. 25 Q. We saw that in the OGC construction procurement 22 1 guidance. It also appears in this PRINCE2 guidance. 2 Perhaps I'll just take you to one page, the question 3 of Project Board. 4 Go to page 23, please. 5 Now, the heading, 14.1.1, Four layers. Blow that 6 up. Thank you. 7 The second paragraph states: 8 "A fundamental principle is that the project 9 management structure has four layers, illustrated in 10 [the figure below]." 11 We can see there, I think, that of the four layers, 12 the project management team comprises the Project Board, 13 the project manager and the team managers. 14 In short, Mr Heath, we'll look at the Edinburgh Tram 15 Project Board. Is it your understanding that when you 16 heard talk about the Project Board, that your 17 understanding was it was a Project Board which sat 18 within the project management team? 19 A. I think it sat outside it. We -- I think our -- I think 20 in my evidence I've said somewhere that we met 21 individual members of the Project Board, but we never 22 met the Project Board as an entity. 23 I believe, and having looked at the documents that 24 you sent me about -- from the Business Case reviews 25 about the Project Board, I believe that the Tram Project 23 1 Board sat outside of the project management, and was 2 largely expected to provide an overview of the 3 performance of the project management. 4 One thing I would say though. I think, again, to 5 make sure that there's no confusion. If you look at the 6 corporate or programme management at the top -- the 7 first bullet point in that, one of the issues in this 8 project, when you read through the evidence, is whose 9 programme was it. 10 Q. What was your understanding at the time? 11 A. I think if you read our reports, it was never clear 12 whose programme it was. One would have expected it to 13 have been the Infraco's programme which had been 14 approved at financial -- at contract close, and then any 15 variations to that programme would be agreed in 16 accordance with the contract provisions. 17 Q. I understand. This may be an appropriate time, 18 Mr Heath, to go through the various reports you were 19 involved in, if I may? 20 A. Yes. 21 Q. I think the first review was the May 2006. The document 22 will come up on the screen. It's CEC01793454. 23 We can blow up the first page, please. We can see 24 it's headed "tie Project Readiness Review". It's issued 25 to the Chief Executive of tie on 21 May 2006. Is that 24 1 because the review has been instructed by tie? 2 A. It should -- the terms of reference should be in the 3 report and that should tell you who instructed it. 4 Q. We will come to that in a second. We can see the review 5 dates were between 22 and 25 May, and we can also see 6 that the report was issued on 25 May. What happens? 7 Does the review team go up to Edinburgh? Can you talk 8 us through what happened? 9 A. The review team would go to Edinburgh, in this case 10 would have had two days to interview people, and again, 11 the methodology is set out in the report. Basically, 12 interviews, and referring the outcome of those 13 interviews to their own experience, and then effectively 14 putting together a report, probably on the morning of 15 the 25th, and taking the client through that report 16 to -- on the afternoon of the 25th to make sure that 17 there were no factual errors in the report. 18 Q. Thank you. We see the team comprised -- it was led by 19 Malcolm Hutchinson and you were one of the team members. 20 If we could then please look at Appendix A, page 10, you 21 can see the terms of reference are set out here. 22 Halfway down the page, it explains: 23 "The review will be high level and strategic and 24 will not be concerned with contract drafting or detailed 25 provisions of the ITN documentation and schedules, nor 25 1 with the economic case for the project, but will focus 2 on key issues which underpin successful procurements and 3 will take four full days." 4 We can see the paragraph after that. Some of the 5 people and documents the review team have access to. 6 I think the next appendix is helpful to list the 7 interviewees at page 12. Without dwelling on this, 8 I think this gives an idea of the variety of different 9 people you interviewed as part of this review. For 10 example, we see people from tie, from TEL, from the 11 design contractor, Parsons Brinckerhoff, 12 Transport Scotland, other consultants, and the Council. 13 So a real variety of people you interview as part of 14 the review; is that fair to say? 15 A. Yes. 16 Q. Thank you. If we then please go back to page 3, to look 17 at the conclusion at this time. We can blow up the 18 second half of the page, please. 19 So of course it's a very early stage of the project 20 and various things are said there. I'm not going to 21 read them out, other than the last bullet point states: 22 "The project would not currently satisfy the 23 criteria that would be assessed as part of an OGC 24 Gateway 2 review." 25 So presumably, Mr Heath, if that is one of the 26 1 conclusions, you must have been familiar at the time as 2 to the OGC Gateway 2 criteria? 3 A. Yes. Sorry, the team was. 4 I think we're talking about review team. We're 5 talking about the team, not just me. 6 Q. I see. So going back to page 1 of this document, and if 7 we blow up the second half, the members of the team, was 8 it the case, Mr Heath, that other members of this team 9 were more familiar with the OGC guidance and criteria 10 than you were? 11 A. I would have thought that Malcolm as the team leader had 12 had more experience in dealing with OGC reviews than 13 I had. This was the first OGC Review I'd done. 14 But this was, as I think I said in my written 15 statement, the -- these were a team effort. 16 Q. I understand. 17 CHAIR OF THE INQUIRY: I think also your statement sets out 18 the experience of the other team members. Yourself as 19 well, but it's apparent that they have all got 20 significant experience. 21 A. That's correct, my Lord. 22 MR MACKENZIE: Thank you. 23 At the top of page 4, please? It states: 24 "The review team has assessed the overall status of 25 the project as red as defined below." 27 1 It's defined as being: 2 "To achieve success the project should take action 3 immediately." 4 Just to pause there, it may be you can't answer 5 this, Mr Heath, if this was your first review, but one 6 assumes it's not particularly unusual for a project at 7 an early stage to get a red assessment? 8 A. I wouldn't have thought so. I think it's -- I would -- 9 one would hope in these projects that you'd start with 10 an amber. 11 Q. I understand. One point under "Procurement approach", 12 further down the page, under "Procurement approach", the 13 second paragraph, the point the team raise is that: 14 "We understand that some of the prequalified 15 bidders (for both Tramco and Infraco) have expressed 16 concern at the requirements to accept novation of 17 subcontractors. For example, there are reports that 18 potential Infracos may not want to take on designers or 19 charge a premium for full novation of the SDS contract." 20 In short, that's a potential concern the team are 21 raising at this stage so those responsible for the 22 project can take this on board and address it; is that 23 fair to say? 24 A. That's fair. 25 Q. Thank you. Page 13, please. Just to finish off with 28 1 the recommendations in Appendix C, I'm not going to read 2 each of them out. We can see a variety of reds and 3 ambers. No greens. 4 In paragraph 6 -- sorry, recommendation 6, halfway 5 down, it states: 6 "A project board is set up as a matter of urgency 7 and that there is clarity as to the identity of the SRO 8 for the project." 9 Now, pausing there, do you remember whether that was 10 a recommendation that another member of the review team 11 had led on, or is that something you agreed with as 12 well? 13 A. That was a collective -- that was a collective 14 recommendation. They all were collective 15 recommendations. 16 Q. Thank you. What did the review team mean by "a project 17 board"? 18 A. I think it meant -- and this is 11 years ago -- I think 19 it meant a board that was overseeing the -- very much 20 the project delivery, as opposed to the wider transport 21 issues. And that goes alongside the clarity as to the 22 identity of the senior responsible owner so that -- 23 going back to some of the principles that you were 24 taking me through earlier, there was very clear 25 responsibility for delivery within the project and 29 1 authorisation of various actions, which I believe at the 2 time we were not clear -- we were unclear as to how some 3 of these things were being taken forward. 4 Q. In fairness to you, I should also have taken you to 5 page 6, where the report sets out in a bit more detail 6 what is meant by that. 7 Page 6, please. Halfway down, under 3, "Governance 8 and related matters", the report states: 9 "The governance structure for the project appears 10 complicated compared to best practice." 11 To pause there, when the team referred to best 12 practice, is that a reference to OGC best practice or 13 something else? 14 A. I think it's -- it is not restricted to OGC best 15 practice. I think it's what one might describe as 16 common sense best practice. 17 Q. Okay. The report goes on: 18 "We acknowledge that it is in the process of 19 evolution and a number of key players have changed 20 recently. A best practice project governance structure 21 would consist of an empowered project team under the 22 direct control of an empowered and accountable project 23 director. The project director would report to 24 a project board chaired by the senior responsible owner 25 for the project on behalf of the project promoter." 30 1 Then: 2 "The Project Board and the project director would 3 have clear terms of reference in respect of their 4 respective responsibilities delegated from the project 5 stakeholders." 6 That was a bit more flesh, I think, on the 7 recommendation I took you to earlier? 8 A. Yes. 9 Q. Thank you. Then just going back, please, to page 13, to 10 look at two more recommendations in a similar vein. 11 Recommendation 7, it states: 12 "The project board is the only forum through which 13 key decisions in respect of the scope of the project are 14 determined." 15 Then 8, to finish this off, it's recommended: 16 "The operation of tie and its board is reviewed to 17 ensure it remains fit for purpose as a high quality 18 delivery organisation." 19 It may be you can't recollect, Mr Heath, but can you 20 recollect any concerns in relation to tie and its board 21 at that stage? 22 A. Other than those that are in the body of the report, no. 23 Q. Thank you. 24 There's one passage in your statement I should 25 clarify, please, at this stage. Go back to your 31 1 statement at page 8. You will see these are questions 2 in relation to this report and review. At the very 3 bottom of the page, we asked the question, c.: 4 "Did you have any concerns about the fact that TIE, 5 as an organisation, had no prior experience on project 6 managing, and delivering major infrastructure projects?" 7 You replied: 8 "In practice Tie was the nominated delivery agent 9 for the ultimate client CEC. The Gateway process and 10 peer reviews were a methodology to acknowledge a known 11 deficiency." 12 I just wondered what you meant by "a known 13 deficiency". 14 A. It was an answer to the question about having had no 15 prior experience on project managing and delivering 16 major infrastructure projects. 17 Q. So that was a deficiency on the part of tie and the 18 Gateway process and peer reviews were to try and address 19 that -- 20 A. They were a methodology. They were a methodology, not 21 the methodology. 22 Q. I understand. Thank you. 23 We can leave that review, please, and go to 24 a further review carried out later in 2006, in 25 September. This document is at CEC01629382. Again, we 32 1 can get some details from the title sheet, if we blow 2 that up, please. We can see date of issue to 3 Transport Scotland Head of Projects, 28 September 2006. 4 Now, we will go on to the terms of reference, but 5 I think that suggests this review was instructed by 6 Transport Scotland; is that correct? 7 A. Yes, I'm sure that's right. 8 Q. You see the review dates are 26 September to 9 28 September 2006. I think it's the same review team 10 led by Mr Hutchinson. 11 We should briefly look at the terms of reference. 12 Those are at page 11, please. We can see in the 13 paragraph under "Introduction": 14 "The Chief Executive of Transport Scotland requires 15 an independent Gateway assessment of the Edinburgh Trams 16 Project. The work will meet the requirements of the 17 Scottish Executive Gateway 2 (as set out on page 3 of 18 the OGC Gateway Review Guidance Version 1 2004). The 19 work will be undertaken ..." 20 So that's the terms of reference. Again, it's 21 helpful, I think, that the next page again, actually, 22 page 13, we will see a list of interviewees. Again, 23 without dwelling on it, I think there's a similar 24 variety of people from different organisations, 25 including tie, TEL, the design contractor, 33 1 Transport Scotland, DLA, KPMG and CEC. So again, an 2 impressively wide variety of people you interviewed? 3 A. I think you can notice that there is more of a bias 4 towards people from Transport Scotland this time than 5 there was the first time. 6 Q. Why was that? Does that suggest Transport Scotland were 7 taking a greater role or interest? 8 A. Because they commissioned it. 9 Q. So they could set the terms and say who you interview? 10 A. I don't think -- I think we -- we to some extent decided 11 who we'd interview, but clearly there were some very 12 clear steers who we ought to see. 13 Q. Yes. So while there wasn't an independent review, every 14 team was independent, you would discuss and listen to 15 what the party instructing said in terms of who they 16 thought you should speak to? 17 A. No, I think I've misled you there. 18 I can't -- actually thinking about it, I can't 19 remember how the list of interviewees was created. 20 I think we got to the stage of we turned up and 21 interviewed a group of people with a schedule of 22 interviews. So in that sense, I think, the first thing 23 is more likely that we -- it was decided in advance who 24 we were going to interview. 25 All I was saying here was that in terms of this 34 1 round, because it was commissioned by 2 Transport Scotland, it was not surprising that we saw 3 more people from Transport Scotland than we had the 4 first time. 5 Q. I understand, thank you. 6 Just to note in passing, we see at the top of the 7 page, this states Willie Gallagher, Chief Executive of 8 tie. 9 I'm not sure Mr Gallagher had been in that post in 10 the May review. I don't think he had been in 2006. 11 I'll come back to him in a second, but next, please, go 12 to page 3 to look at the conclusion. 13 We see under "Conclusion": 14 "The review team finds that:" 15 The first bullet point: 16 "There has been a considerable transformation in the 17 organisation, attitude and effectiveness of the tie team 18 since the readiness review with a common understanding 19 of the requirements of the procurement process and the 20 challenges faced. The majority of the recommendations 21 from the readiness review have been fully achieved with 22 a few being partially achieved." 23 Over the page, please, to see some of the other 24 bullet points. I'm not going to read them out. We can 25 see what they say for ourselves. But then under 35 1 "Status", we can see: 2 "The review team has assessed the overall status of 3 the project as amber as defined below." 4 Is that a step forward for the project? It's gone 5 from red to amber? 6 A. Yes. 7 Q. Amber is defined as: 8 "The project should go forward with actions on 9 recommendations to be carried out before the next review 10 of the project." 11 Then please go to the next page, to page 5. Here, 12 I think, the report is commenting on the steps taken to 13 address the previous recommendations. Go, please, to 14 paragraph (f). We have seen before the recommendation: 15 "A project board is set up as a matter of urgency 16 and that there is clarity as to the identity of the SRO 17 for the project." 18 The report goes on to say: 19 "A Tram Project Board has been set up and is meeting 20 regularly. Neil Renilson has been identified and 21 recognised as the SRO for the project. Board members we 22 have seen have commented that the board is now an 23 effective decision-making body which is appropriately 24 empowered." 25 To pause there, Mr Heath, what is your understanding 36 1 of the board being appropriately empowered? 2 A. I think we were reporting what we were told, and we were 3 given that information in good faith and we've reported 4 it there. 5 Q. So your understanding was that the board were given 6 powers to do what they needed to do? 7 A. Yes. 8 Q. And given powers by whom? 9 A. I can only presume. I can presume that it filtered -- 10 it would have come from the ultimate client, which was 11 the City Council, although I think at that stage 12 Transport Scotland were still involved in a role as the 13 involved with the governance of the project from 14 documents that you've sent me. 15 So I can only presume that that empowerment 16 fundamentally came from the City Council. 17 Q. Thank you. 18 CHAIR OF THE INQUIRY: Can I ask you, I think you said 19 earlier on the first review you saw members of the 20 board, but not the board. 21 A. Correct. 22 CHAIR OF THE INQUIRY: Is that the same position here? 23 A. That's right, my Lord. 24 CHAIR OF THE INQUIRY: Would it be normal to see the board 25 in its entirety? 37 1 A. At this stage I wouldn't have thought so. I think 2 I comment in my evidence later that we didn't, and in 3 terms of recommendations for the way forward, perhaps 4 it's a change that should be made. But at the time, 5 I don't think we saw anything unusual in that. 6 CHAIR OF THE INQUIRY: Thank you. 7 MR MACKENZIE: So in short, Mr Heath, the review team is 8 told that a project board has been set up with 9 appropriate powers, so that meets the recommendation 10 from the previous report. 11 A. Yes. And I think the key thing was the -- was actually 12 having a named SRO. 13 Q. Yes. Now, I'll come on to that. 14 We see that Mr Renilson was identified -- sorry, 15 before I ask the question, why was that key? 16 A. I think because, again from memory, it wasn't -- I think 17 our previous report had said it wasn't clear who the SRO 18 was. We were aware that Neil Renilson was a very 19 important figure in the planning and delivery of 20 transport -- of integrated transport in Edinburgh. So 21 we thought it was a particularly good appointment. 22 Q. Presumably the SRO was SRO for the project from the 23 procurement phase onwards? 24 A. I think that's what we'd expected. 25 Q. Now, the Inquiry might hear evidence from Mr Renilson 38 1 that he considered he was only the SRO for the 2 operational phase, not for the procurement phase. 3 If you had been told that at this time, would that 4 have caused any concern? 5 A. Yes. 6 Q. Why? 7 A. Because we'd made a recommendation -- at the previous 8 Gateway which we'd said as red, that the -- a clear 9 responsible SRO was vital to the project, and as you've 10 pointed out to me, all of the guidance that we've talked 11 about in the first half an hour of this discussion is 12 based on having a clear, responsible, accountable SRO. 13 The project at this stage is fundamentally about 14 delivery. And if you don't have somebody who is truly 15 accountable for delivery, then major projects like this 16 will find it difficult to succeed. 17 Q. Thank you. We will have to explore that further with 18 Mr Renilson in due course. 19 In relation to the next paragraph, please -- sorry, 20 it's paragraph (h), this was in relation to the 21 recommendation: 22 "The operation of tie and its board is reviewed to 23 ensure it remains fit for purpose as a high quality 24 delivery organisation." 25 The report then notes: 39 1 "There has been a radical change in personnel, 2 organisation and process within tie which is now acting 3 effectively as a project delivery and control 4 organisation." 5 This is achieved. 6 One point I should raise with you, Mr Heath. We saw 7 earlier in the appendix of interviewees that 8 Mr Willie Gallagher in this report was listed as 9 Chief Executive of tie. I think the Inquiry has heard 10 evidence that in fact Mr Gallagher acted in the dual 11 roles of Chief Executive of tie and Chair of tie between 12 May 2006 and his resignation in November 2008. 13 Do you consider that is consistent with good 14 corporate governance? 15 A. Not necessarily. 16 Q. Can you expand upon that? 17 A. Well, I have seen executive chairmen being very 18 effective and I have seen executive chairmen being very 19 ineffective. 20 Q. In terms of guidance on these matters, are you aware of 21 the Cadbury Code? 22 A. I was going to say, in corporate governance terms, you 23 would -- you would divide the roles and 24 responsibilities. 25 Q. I understand. 40 1 A. But, as I say, I have seen organisations where on 2 a needs must basis, an executive -- an Executive 3 Chairman is sometimes more effective than the Chairman 4 and the Chief Executive spending most of their time 5 squabbling with each other. 6 Q. I understand. 7 Also please go on to page 9. Under the heading, 8 "Readiness to issue Infraco ITN documentation", I'll try 9 not to spend too long on this, but I think in short tie 10 had asked the reviewing team to consider whether they 11 should issue their Infraco invitation to negotiate 12 documentation and whether they should hold off. I think 13 that was something that the review team considered and 14 the review team, towards the bottom, set out risks if 15 they issue too early, and then risks if they issue it 16 too late. 17 At the very bottom of the page, it's stated in the 18 report: 19 "On the basis of the work done by the team and their 20 advisers, we believe that the impact of the risks due to 21 delay outweigh those of an early issue." 22 Over the page, please: 23 "We also believe that the risks associated from 24 early issue could be mitigated as follows." 25 Various steps set out. 41 1 "This, combined with the stated commitment to close 2 bidder liaison and commitment to a phased approach, 3 would lead us to conclude that the Infraco ITN 4 documentation should not be delayed beyond the planned 5 date." 6 I don't know if you remember this issue at all, 7 Mr Heath, do you? 8 A. Yes, I do. 9 Q. Presumably you agreed with the team's view as set out in 10 the report? 11 A. It was a collective decision. 12 Q. Is there anything you wish to add to that, or does the 13 report set it out? 14 A. I think the report sets it out fairly clearly. I think 15 we said -- I can't remember in this report or one of the 16 others -- that one of the ways of making this effective 17 was to reduce the number of variant options and 18 introduce a baseline -- a baseline reference bid. 19 We thought that this was very much an on balance 20 recommendation, as you can see from the analysis. We 21 took the view that, with the appropriate mitigation 22 measures, that on balance it was the right thing to do. 23 Q. Thank you. Just to finish this report, please, with 24 Appendix C at page 14, we will see the Summary of 25 recommendations table again. I'm not going to read them 42 1 out, but you can see, I think there are two reds in the 2 right-hand column, one green has now appeared, and the 3 rest are ambers. So that's a step forward from before? 4 A. Yes. 5 Q. Thank you. 6 Put that to one side, please. 7 There was then a follow-up to this review in 8 November 2006. If we can go to that, please, it's 9 CEC01791014. We can see that you weren't involved in 10 this one, Mr Heath. If we look at the team members, we 11 can see Malcolm Hutchinson and Sian Dunstan were 12 involved, but not your name; is that correct? 13 A. It looks like it. 14 Q. I take it you've no recollection of being involved in 15 this, Mr Heath? 16 A. I can certainly recollect I wasn't involved in it. 17 Q. Thank you. Again, we can see from the title sheet, the 18 review date is 21 November and 22nd, and it's issued 19 again to Transport Scotland. 20 We should perhaps then go to page 3, just to see the 21 conclusion. In the middle of the page, the conclusion 22 states: 23 "The Review Team finds that: All of the 24 recommendations from the Gateway 2 review have been 25 fully or substantially achieved." 43 1 It's also perhaps of interest to note at the bottom 2 of the page: 3 "We understand that SDS are being better managed and 4 have delivered as requested in respect of the Infraco 5 ITN and are now engaging in a practical way to optimise 6 the deliverability of the Traffic management orders and 7 planning approvals. However, this contract will 8 continue to need active management by tie." 9 Just to pause there, Mr Heath, we will go on to see 10 other reference in the other reports about the question 11 of SDS and design delay and difficulties. 12 Just in general, what was your understanding at the 13 time of the reports as to any difficulties or delays in 14 the production of design? 15 A. I wasn't part of this review. So I can only -- I can 16 only speak from memory. 17 Clearly with the procurement strategy, the 18 management of timely design was going to be crucial to 19 the success of the project. So we would always be 20 saying you need to keep an eye on the design. So the 21 review team almost has a duty to the project to keep 22 reminding them that you keep -- you take your eye off 23 the ball with the design management at your peril. 24 Q. Thank you. Just for completeness, on this report we see 25 design is raised again at page 5, please, if we can go 44 1 to that. 2 At the bottom of the page, the last bullet point, 3 this is under Comment on the robustness of the 4 Project going forward, the last bullet point states: 5 "A number of interviewees have expressed concern 6 that the SDS performance to date could undermine bidder 7 confidence. We understand that the SDS contract 8 performance is now being actively and effectively 9 managed by tie but that additional engagement and 10 engineering leadership should prove beneficial." 11 Again, this is just an example of a concern the 12 review team are raising, saying it's for the project 13 team to address this? 14 A. Yes. It might be helpful just if I could see the list 15 of interviewees to get more of a flavour for that 16 comment. 17 Q. Of course. 18 A. As I say, because I wasn't there. 19 Q. It's at page 9. If we blow it up, it's a shorter list, 20 including tie, TEL, Transport Scotland and CEC. So we 21 don't see the design contractors here, for example. 22 A. No. If you look at that list, it does look like tie and 23 TEL confirming something that they knew already. 24 Q. Thank you. 25 Can I then go to your statement, please, again, to 45 1 clarify one answer you gave us. Page 12, please, of 2 your statement. 3 Now, about halfway up, under letter a. we asked: 4 "What was the purpose of the follow-up? Was 5 a follow-up conducted after every review?" 6 You answered: 7 "The purpose was set out in the report. A follow-up 8 was not conducted after every review, but 9 Transport Scotland would have been derelict in its duty 10 not to require a follow-up." 11 Can you explain what you meant by that, please? 12 A. Which -- which piece would you like me to explain? 13 Q. That Transport Scotland would have been derelict in its 14 duty not to require a follow-up. 15 A. I think I was simply making the point that 16 Transport Scotland was investing GBP500 million into 17 a project. The project at that stage was still only in 18 an amber status. And that's -- and from memory, 19 Transport Scotland -- one of Transport Scotland's 20 objectives was to make sure that it was getting value 21 for the public pound. 22 So I would have thought Transport Scotland would 23 have been heavily criticised if it didn't follow the 24 review that it had commissioned up, and it did so. 25 That's what I mean by derelict in its duty. 46 1 Q. Thank you. Just to pause there and step back a little, 2 I think I'm right in saying that of the reviews we've 3 looked at, and we will go on to look at, I think this 4 was the only one where the review team went back for 5 a follow-up? 6 A. Yes. 7 Q. I'm just wondering, was there a general practice, should 8 a follow-up by the review team always take place, or 9 what? 10 A. The reviews -- I think -- sorry, I'll start again. 11 The reviews are commissioned by the SRO and reviews 12 are client driven. I think I have said on more than one 13 occasion in my evidence that these were matters for the 14 client. 15 So the decision whether to follow up was very 16 much -- it would be very much a matter for the client, 17 in this case Transport Scotland took the decision to 18 follow-up. In other cases the client chose not to. 19 Q. Thank you. One question I should have asked earlier. 20 How were members of the review team chosen? Is there 21 a panel of reviewers that clients go to to choose or 22 what happens? 23 A. The review team -- my understanding, and I wasn't 24 part -- as I think I have said in my evidence, I wasn't 25 part of the selection process. I think the review -- 47 1 the review team had been created as a consequence of 2 a discussion, presumably between Transport Scotland and 3 Partnerships UK, which was then the Treasury sort of 4 quasi-consultancy organisation, in which it took people 5 it knew who were either in work or out of work at 6 a full-time occupation, with relevant experience, and 7 then put them to the client and said: look, this is the 8 sort of team that we can field. 9 I remember getting a phone call from Sian Dunstan 10 that said: would you like to be involved? Because in 11 that sense my experience was closer than most to the 12 circumstances, as was Malcolm's, and as was -- and 13 Willie's was because very much he'd successfully 14 delivered a major motorway project in Scotland. They 15 were all seen to be very relevant experiences. 16 So whether Partnerships UK at the time had a panel 17 or not, I couldn't tell you. 18 Q. Thank you. The next document, please, moving on to 2007 19 in September. The document is CEC01562064. We can blow 20 up the cover page. It's headed "tie Project Gateway 3 21 Review". Date of issue to -- this time is the Chief 22 Executive of City of Edinburgh Council on 23 9 October 2006. I think that year is wrong. It should 24 be 2007? 25 A. So do I in retrospect. 48 1 Q. Yes, thank you. 2 We can see a change here that I think this review 3 has been instructed by the City of Edinburgh Council, 4 rather than Transport Scotland. Are you aware why that 5 was? 6 A. No. 7 Q. I see. 8 Were you aware that in the summer of 2007, 9 Transport Scotland had decided to cap their contribution 10 to the project at GBP500 million with the result that 11 any overspend would be borne by the City of Edinburgh 12 Council? Were you aware of that? 13 A. Yes. 14 Q. Were you aware that at around that time, 15 Transport Scotland withdraw from the direct governance 16 arrangements for the project? 17 A. I'm not sure I was. 18 Q. So are you aware whether Transport Scotland withdrew 19 their representatives sitting on the Tram Project Board? 20 A. I couldn't say. 21 Q. Just for completeness, I take it you wouldn't be aware 22 of them also withdrawing their representatives from 23 sitting on any sub-committees of the Tram Project Board? 24 A. No. 25 Q. Thank you. Just the last point on this. Were you aware 49 1 whether Transport Scotland had changed their position to 2 they were now no longer going to review and approve the 3 Final Business Case? 4 A. I honestly can't remember. No, I can't remember. 5 Q. I understand. So sticking with the first sheet of this, 6 we can see the review dates are 25 September and 1 to 7 4 October 2007. It's the same review team, led by 8 Mr Hutchinson, including yourself, Mr Heath. 9 I should perhaps then go to the instruction Appendix 10 A at page 8. I'm not going to dwell on it, but, for 11 example, under "Purpose", it's to include: 12 "Confirm that the latest version of the full 13 business case shows that the benefits plan is still 14 valid ..." 15 There's a number of other things I'm not going to 16 read out. In short, it's to review the project again; 17 is that right? 18 A. Yes. But you'll notice it's a considerable number of 19 tasks relative to the amount of time available. 20 Q. Yes. Essentially it's -- we will go on to that when we 21 come back to the text. 22 Just sticking with this, the interviewees, I think, 23 are on page 10. We blow that Appendix B up again, 24 I think we'll find a similarly varied mixture of people. 25 Just to note, Mr Gallagher is now noted here as 50 1 Executive Chairman. So that's noted. But the other 2 organisations again, tie, TEL, the Council, DLA Piper, 3 Transport Scotland, but also, towards the bottom, we see 4 representatives from both the Tramco and Infraco bidders 5 towards the bottom there. So again it's a fairly wide 6 sample of people you're interviewing at the time you 7 have. 8 Also, please, the next appendix, Appendix C, 9 page 11. We see now this includes a list of documents 10 made available to the review team by tie. So as well as 11 interviewing quite a formidable list of people, you have 12 also quite a formidable list of documents available for 13 review. 14 If you go over the page, just to complete that 15 appendix, we will see there 48 documents, including some 16 fairly bulky things like number 33, STAG2 appraisal. 17 I remember looking at that. It's quite bulky. The 18 previous page mentioned the Final Business Case. So 19 some of these are quite lengthy documents? 20 A. Yes. 21 Q. Then if I can then go back to the body of the report, 22 please, and start at page 2, we should note under 23 "Procurement status", in the second bullet point, the 24 report notes: 25 "Our understanding of the position is as 51 1 follows: Designer appointed with preliminary designs 2 completed and 65 per cent of detailed designs 3 completed." 4 So it sounds as though that is a question of design 5 has remained on the review team's radar, and you are 6 asking about it? 7 A. Yes. 8 Q. If we then please go on to page 3. At the top of the 9 page it explains what happened. The first paragraph 10 states: 11 "This Gateway Review was carried out from 1 October 12 to 4 October 2007 ... with one interview held by video 13 conference on 25 September." 14 Then it states: 15 "The documents listed in Appendix C were made 16 available to the review team but these were not all 17 comprehensively reviewed." 18 I think for understandable reasons. We should then 19 look at the conclusion, please, and blow up the 20 conclusion and look at the three bullet points. Again, 21 I don't want to read them out, in the interests of time, 22 but perhaps I could paraphrase. Bullet point 1 refers 23 to continuing to make good progress. Bullet point 2 24 refers to a number of changes in the senior management 25 team, including project director, et cetera. And bullet 52 1 point 3 notes: 2 "The project faces a challenging period over the 3 next three months with the requirement to appoint 4 a preferred bidder; for due diligence and contract 5 novations ... all of these to be achieved alongside 6 MUDFA and mobilisation works and the maintenance of 7 a tight programme of planning and technical approvals." 8 So that's all been highlighted. Then under 9 "Status", the report states: 10 "The review team has assessed the overall status of 11 the Project as Green ..." 12 That's defined below as follows: 13 "The project is on target to succeed, provided that 14 the recommendations are acted upon." 15 So that's a qualified green, if I can put it that 16 way; is that correct? 17 A. Yes, but I think that's consistent with the OGC Gateway 18 colour code. 19 Q. Thank you. There are some other passages in the report 20 we should look at. If we look at page 4, please, under 21 "Findings and recommendations", about halfway down, 22 I will read out this paragraph which comments: 23 "We would also comment that the entire costs of the 24 project cannot be finalised until the due diligence 25 process with the preferred bidder, value engineering and 53 1 alignment of contract terms has been completed. We 2 understand that value engineering could lead to 3 a significant element of reduction, but that some of 4 this could be offset by the outcome of the due diligence 5 process. We understand that there is significant 6 contingency in the costings, so it may well be that 7 these effects will have a minimal impact on BCR." 8 Is that the benefit cost ratio, I think; is that 9 right? 10 A. It says so earlier in the document. 11 Q. Thank you. Now, just to pause on the question of the 12 due diligence process, I wondered, did that mean due 13 diligence by the bidder? 14 A. Yes. 15 Q. I see. 16 A. And if it's helpful, I would guess that one of the key 17 issues from due diligence for the bidder would be about 18 ground conditions. 19 Q. I understand. And presumably what information the 20 bidder is being provided with in relation to ground 21 condition, what reports and surveys have been carried 22 out and that sort of thing? 23 A. I think that's right, yes. 24 Q. On page 5, please, if I could please go to paragraph c. 25 and I'll read this out: 54 1 "The timeliness of project delivery is of concern. 2 Both bidders have raised the concern that the planned 3 preferred bidder period which will include due diligence 4 on the designs and the novated contracts is tight. 5 There is already a requirement for an overlap between 6 the due diligence process and the mobilisation 7 phase ..." 8 To take it up again later, it states: 9 "We believe that this would be very challenging to 10 achieve by the target date at the level of quality that 11 is expected and we recommend that the preferred bidder 12 is appointed as soon as possible and that the programme 13 during the preferred bidder period is monitored closely 14 at a senior level. We recommend that the tie team 15 should actively consider i. the levels of certainty 16 required to meet the CEC approval process and how this 17 will be achieved; and ii. the implications of contract 18 signature not being achieved by the target date of 19 28 January; and iii. the necessary consequences of any 20 areas which cannot be finalised by contract signature 21 and novation and how (and when) full certainty will be 22 established." 23 If I can lastly read out the paragraph below that, 24 it states: 25 "We understand that there is significant contingency 55 1 within the current costings and that the team expect 2 that the current budget will be more than adequate for 3 phase 1a and the majority of 1b. It will not be 4 possible to determine this precisely until the 5 infrastructure contract price is finalised after the due 6 diligence and value engineering work is complete." 7 And also: 8 "The MUDFA contract is not a fixed price contract so 9 there will always be uncertainty on outturn costs until 10 these works are complete." 11 Just to pause there, Mr Heath, I should first ask 12 you if you have anything to add to what's set out there? 13 A. No, I think that's pretty comprehensive. 14 Q. Is this again an example of, although the review team 15 have given the project a green light, you're still 16 raising a number of matters that require to be addressed 17 by the project team going forward? 18 A. But the green light, as you've seen is conditional. It 19 effectively imposes conditions. 20 Q. I understand. I should also then go on to page 6, 21 please. The paragraph at the top headed 5: 22 "Ensure that management controls are in place to 23 manage the project through to completion, including 24 contract management aspects." 25 I won't read out that paragraph. The paragraph 56 1 after that states: 2 "In addition, there is a recognition that, over the 3 construction period, the TEL management team will need 4 to be strengthened." 5 Then that continues: 6 "Continuity of resource is important within the 7 structure to ensure that the 'corporate memory' is 8 retained from the negotiating phase into the 9 implementation." 10 Why is it important to ensure the corporate memory 11 is retained between these two phases? 12 A. I think it's implicit that in any of these arrangements, 13 as time evolves, people's memories tend to get either 14 more specific or less specific, depending on which side 15 of the table they're on or which is to their commercial 16 advantage. 17 So it was important that tie, as the contractor 18 authority, retained knowledge to remind itself why it 19 was doing things, so that if there were disputes later 20 on, and I think it's perfectly reasonable to expect in 21 projects of this size there will be disputes, you can 22 remember why you did things and you can try and remember 23 what was the underlying agreement and what was the 24 position of the other side at the time, so that if 25 necessary, you can remind them. 57 1 Q. Thank you. If we then move on further down the page to 2 another matter. Under recommendation 7: 3 "Confirm that the approved delivery strategy has 4 been followed or understand why there have been 5 changes." 6 In the context of that we see then there have been 7 a number of key changes within this overall delivery 8 strategy. 9 There are three bullet points. The third bullet 10 point states: 11 "major change to the governance for the project 12 which has resulted in a more focused strategy whereby 13 CEC has sole responsibility for the procurement and risk 14 of any cost overruns and Transport Scotland being the 15 major funder." 16 To pause there, I think that brings back the 17 questions I asked before we looked at this report, about 18 your awareness of Transport Scotland having capped their 19 grant. 20 Is what I just read perhaps a reference back to 21 that? 22 A. Yes. 23 Q. So it looks as though the review team had some awareness 24 of that change? 25 A. We'd known about the numbers before, but not about the 58 1 change in the governance structure. 2 Q. I see. So when I referred you before to 3 Transport Scotland no longer sitting on the Tram Project 4 Board or its sub-committees, has this helped prompt your 5 memory or does your position remain you still don't 6 recollect being aware that they no longer sat on the 7 Tram Project Board or sub-committees? 8 A. Well, to the best of my memory, the two reviews are 9 nearly a year apart. So the opportunity to know that, 10 I think I'm absolutely sure that the first statement 11 I gave you was the correct one, in my mind. 12 Q. Yes. I don't want to confuse you, Mr Heath, but just in 13 terms of the chronology, it was in the summer of 2007 14 that Transport Scotland capped their grant and withdrew 15 from the direct governance of the project and this 16 report had taken place in October. So just a few months 17 after that? 18 A. Sorry, I thought we were talking in terms of the review 19 in 2006. So my misunderstanding. 20 Q. So just to clarify that because it did start with the 21 wrong date, I think, including in the letter to the 22 Council in 2006. 23 Put that to one side. This is the review in October 24 2007? 25 A. And in my view that's the first time we realised the 59 1 implications of Transport Scotland withdrawing from the 2 governance. 3 Q. Yes. Sorry for labouring this, but we've seen the 4 reference to the report, the major change for the 5 governance for the project was to result in a more 6 focused strategy whereby CEC has sole responsibility for 7 the procurement and risk of any cost overruns. So if we 8 pause there, that's pretty clear. The review team must 9 have been aware of that fact, that CEC had sole 10 responsibility for the risk of any cost overruns. 11 A. Yes. That would have come out during -- that would have 12 clearly come out during the discussion. 13 Q. Yes. But what is not obvious is whether the review team 14 were also aware of the governance changes whereby 15 Transport Scotland no longer sat on the Tram Project 16 Board or its sub-committees? 17 A. I don't believe we were until we did that review. 18 Q. When you did this review, do you know whether the review 19 team were also told that Transport Scotland no longer 20 sat on the Tram Project Board nor on any of the Tram 21 Project Board sub-committees? 22 A. I can't remember. I honestly can't remember. I guess 23 it's implicit from that last -- that last bullet point, 24 but I couldn't confirm that we absolutely knew that 25 they'd withdrawn from all of the committees. 60 1 Q. I understand. 2 Now, it's then said in the report that: 3 "The review team believes that all of the above 4 changes have been extremely positive and will contribute 5 to the likelihood of success of the project." 6 Looking at that, why did you consider that the 7 change to the governance of the project was extremely 8 positive and would contribute to the likelihood of 9 success of the project? 10 A. I think there's an answer to that question in my written 11 statement. If we deal with them point by point, I think 12 the criticality of the design -- managing the design is 13 the first bullet point, and the fact that tie had 14 said: we won't effectively subcontract that review and 15 we'll do it ourselves. We saw that as -- at the time as 16 a positive message on the basis that trying to manage 17 a process through a second body at this stage of the 18 project, when by then tie had got the necessary 19 experience and could buy in the necessary skills to do 20 it themselves, was positive. 21 I think we'd realised that the co-location of 22 planning officials at tie, from my experience within 23 Croydon, it's -- the traffic management works and the 24 stopping-up orders and those sort of things just work so 25 much better when everybody is sitting in the same room, 61 1 just the levels of detail that you have to deal with can 2 be dealt with there and then, rather than somebody 3 making a phone call or sending an email and waiting, you 4 know, two hours or longer to get a response. 5 So we saw that as very positive. 6 On the change to the governance, leaving aside when 7 we may or may not have known about it, we saw that 8 having one single body that was responsible for delivery 9 was absolutely a move in the right direction. 10 I think in my written evidence I have said that 11 I thought that Transport Scotland's withdrawal -- and 12 this is a personal opinion -- was positive for the 13 project because the risks of having a project reporting 14 to two different groups of people, with two potentially 15 diverging sets of objectives, I think I have said in my 16 written evidence that if you're not careful, people get 17 much better at reporting than they do at doing, and so 18 if you remove that risk by getting Transport Scotland to 19 behave as if it was an independent fund, overseeing the 20 project, overseeing its investment and having clearly 21 defined processes of an independent assessor to confirm 22 milestones for payment, produces some certainty that 23 wouldn't have been there if they were part of project 24 teams. 25 With their responsibility for the 500 million of the 62 1 public purse, their independence, I think, through an 2 independent assessor, would be extremely valuable. 3 I do understand that perhaps there was some 4 expertise that did reside within Transport Scotland that 5 could have assisted the project later on when it got 6 into difficulties. But I'm still firmly of the view 7 that that could have been done, as I have said in my 8 written evidence, off-line, but from a basic set of 9 arrangements between the parties, I thought 10 Transport Scotland taking a very clear clinical view as 11 a funder was the best thing that could have happened and 12 I think that was the view of the project team. 13 Q. It sounds, Mr Heath, as though your view in that regard 14 is dependent upon Transport Scotland, while not perhaps 15 being part of the formal governance arrangements, still 16 playing a role, whether it's off-line. 17 And I think you mentioned a role of independent 18 assessment; is that right? 19 A. They would have employed an independent assessor to 20 actually validate their stage payments to the project. 21 That's traditional in these type of projects. 22 Q. So what we'll have to examine, perhaps, is the precise 23 role that Transport Scotland did play after the summer 24 of 2007 when they withdrew from the formal governance 25 arrangements? 63 1 A. Yes. The reason I have said what I have said is because 2 my experience of working with Government in London was 3 that you dealt with them on a -- more than 4 a need-to-know basis. You dealt with them on an 5 informed basis, and that was what I meant by being -- by 6 being able to deal with issues of -- with issues 7 off-line. 8 There would be times when you would receive advice 9 and guidance that was particularly irrelevant, that you 10 didn't have, and you wouldn't have thought you needed. 11 That's what I mean by dealing with things off-line. 12 Q. I think just to finally, on this point, conclude, you 13 made reference to, when applying for staged payments, 14 you would expect there to be an independent assessment 15 by the funder as to whether -- 16 A. By somebody on behalf of the funder. It would normally 17 be an engineer -- it would normally be an engineering 18 consultant. 19 Q. I understand. 20 My Lord, it's maybe an appropriate time to pause. 21 CHAIR OF THE INQUIRY: Yes. Just one thing. I think you 22 were asked -- your attention was drawn to the passage in 23 the report where there's reference to your understanding 24 of the state of the design being 65 per cent or whatever 25 it was. 64 1 How did you get that understanding? Was that what 2 someone told you or did you do an examination? 3 A. It was -- we would have a presentation about the state 4 of the design from the then design co-ordinator. And it 5 was based -- basically what we were told. We had no 6 real -- you can see we'd had -- we had no real time or 7 actual opportunity to be able to validate that for 8 ourselves. I think I have said on a number of occasions 9 that we had to rely on the quality of the information 10 that we were given to make these high level strategic 11 recommendations. 12 CHAIR OF THE INQUIRY: Thank you very much. 13 We'll adjourn for 15 minutes to give the shorthand 14 writers a break. We will sit again at 11.25. 15 (11.10 am) 16 (A short break) 17 (11.26 am) 18 CHAIR OF THE INQUIRY: Mr Heath, you're still under oath. 19 A. Yes, my Lord. 20 MR MACKENZIE: Thank you, my Lord. Mr Heath, before we 21 leave the question of Transport Scotland's withdrawal in 22 the summer of 2007, I'll just run a series of 23 propositions by you. 24 I take it you would agree that Transport Scotland 25 have considerable experience and expertise in the 65 1 delivery of major transport infrastructure projects? 2 A. I've got no direct experience of that personally, but 3 I would assume so. 4 Q. And that would be of benefit to the tram project? 5 A. In certain circumstances, yes. 6 Q. By contrast, if we have heard evidence that the Council, 7 City of Edinburgh Council, at the time had little or no 8 expertise or experience in major transport 9 infrastructure projects, would that surprise you to hear 10 in a? 11 A. No. 12 Q. So could I suggest that whatever changes to the form of 13 governance arrangements took place, what you don't want 14 to do is to lose that experience and expertise in the 15 delivery of major transport infrastructure projects? 16 A. I think that's self-evident. However, I think that the 17 circumstances need to be taken into account and the -- 18 in those situations, the roles and responsibilities of 19 both parties would need to be very clearly identified. 20 Q. I can quite understand that. And I can quite understand 21 your position in relation to clear reporting lines, 22 clear responsibilities, only having one owner of the 23 project. The point in short I'm seeking to make is that 24 whatever the governance structure, if there is valuable 25 experience and expertise, one doesn't want to lose that 66 1 and it has to be fed into the project somehow? 2 A. I couldn't agree with you more. 3 Q. Thank you. 4 Now, if I could then go back, please, to the report 5 we were looking at before the break, this was the review 6 carried out in October 2007. 7 If we go to page 10, please. Sorry, it's page 7. 8 This is another matter under paragraph 10. The finding 9 or recommendation had been: 10 "Confirm that there are plans for risk 11 management ..." 12 In answer to that, the report states: 13 "We have met the risk manager who has explained the 14 tools that are being used to identify, monitor and 15 manage the risks in the project. These are impressive. 16 The registers are kept up to date and there is a process 17 for key risks to be highlighted at the Tram Project 18 Board and the tie Board. If there is any weakness, we 19 would note that discussions of these risks have not 20 always been reflected in specific actions in the Tram 21 Project Board minutes." 22 Now, what was the importance of ensuring that there 23 were specific actions noted in the board minutes? 24 A. I think it's basically good project management that if 25 risks -- if risks are being referred to an authorising 67 1 body, you would expect the authorising body to record 2 the actions that they've taken to mitigate or, more 3 importantly, to manage those risks. I think it's no 4 more than that. 5 Q. So it's not enough simply to recognise a risk. One also 6 has to think of ways to address those risks and reduce 7 them and manage them, and all of that should be 8 monitored and recorded? 9 A. That's the whole point of risk management. 10 Q. Thank you. This may tie into, if we can go back to your 11 statement, please, at page 5, at the top of the page we 12 had asked a number of questions in relation to risk, and 13 in letter d., we had asked: 14 "Do you consider that the risk management on the 15 tram project was effective and can you give reasons for 16 your view?" 17 You replied: 18 "I think there was a disconnect between the Risk 19 Manager and his process and effective management action 20 to mitigate risk. This was reflected in one of our 21 reports." 22 Is that a reference to the passage I just read out 23 in the -- 24 A. Yes. 25 Q. Thank you. 68 1 Mr Heath, maybe you can't recall this, but I should 2 ask. At this time in September 2007, do you have any 3 recollection of what the team was told in respect of the 4 progress of the utility diversion works? 5 A. Not in terms of a percentage of substantial completion, 6 no. 7 Q. Because in short, by this time the MUDFA programme, if 8 I can call it that, had been revised by five months, 9 which extended the completion date for the utility 10 diversion works from around May/June 2008 to 11 November 2008, while the Infraco works were planned to 12 start at the beginning of 2009. So quite a short gap 13 between the programmed end of the utility diversion 14 works and the commencement of the Infraco works. 15 Can you recollect if the review team were made aware 16 of these matters? 17 A. I don't think we were. 18 Q. If you had been, is that something that you may have 19 asked questions about and referred to in your report? 20 A. Yes. I think the qualification to that answer would be 21 it would be which of those works were very much on the 22 critical path for the whole of the project. I think 23 I have said in my evidence that in these project -- in 24 these type of projects, some works can be delayed 25 off-line, because they can be dealt with by agreement 69 1 with -- depending on mobilisation works. 2 But if we'd have known that some of them were on the 3 critical path, then clearly we would have had 4 a different view. 5 Q. Thank you. 6 Now, finally in relation to this report, we should 7 just look at the summary of recommendations at page 13. 8 I'm not going to read them all out, but we can see they 9 range between "urgent" to "as soon as possible" to 10 "ongoing". 11 Now, Mr Heath, in this report, which gives a green 12 light with conditions to the project, what would you 13 expect to happen next? 14 A. I would have expected that the recommendations would 15 have been acted on, on the basis at that that was the -- 16 effectively the relationship between that and the green 17 light. 18 Q. And -- 19 A. The green status -- it's very dangerous to call it 20 a green light, because it looks like that you could just 21 pass without anything else happening. It's very clear 22 from the documentation that green means almost proceed 23 with caution, rather than just off you go. 24 Q. I think that's a good point, Mr Heath, but it's perhaps 25 an unfortunate -- those three colours are used. One 70 1 does tend to think of a traffic light, where it's either 2 stop, go or amber? 3 A. Exactly. But I'm afraid that's the way the 4 documentation has been drafted. 5 Q. I understand. But essentially, once you issue your 6 report, it's a matter for the client and the project 7 managers to address the conditions and concerns set out 8 in the report? 9 A. Yes. 10 Q. Thank you. 11 Would you have expected a further review to have 12 taken place before signature of the infrastructure and 13 tram vehicle contracts? 14 A. I think that's hard to say. It didn't because the 15 client decided it didn't need to do -- to have a further 16 review. And I think because of our intermittent 17 involvement in the project, without having sort of 18 regular involvement and sometimes at quite a detailed 19 level, it would be very difficult to form a sensible 20 view about whether a further review was required or not. 21 Q. Is that essentially a matter for the client? 22 A. Yes. 23 Q. I think you did mention in your statement this question 24 of the regularity of review. My impression was you 25 would have expected there to be more regular reviews; is 71 1 that correct? 2 A. I think all I was doing was drawing attention to the 3 fact that the reviews were quite apart in time, and so 4 being able to form views on particular detailed matters, 5 some of which have been alluded to in your questioning, 6 was difficult to form a definitive opinion, 7 and I wouldn't want to mislead the Inquiry by 8 speculating. 9 Q. I understand. Just one final matter at this point. 10 It occurs to me that it's only once a contract is 11 signed that the rights, duties, liabilities, allocation 12 of risk is clear. 13 So it seems on one view, it's only once a contract 14 has been agreed that one can have -- one should have 15 a final review before actually signing the contract. 16 Do you have any views on that suggestion? 17 A. I think that's a sound suggestion. I think with the 18 benefit of hindsight, that is something that might well 19 have proved useful. 20 Q. Again, that's a matter for the client though? 21 A. Yes. 22 Q. Thank you. 23 Could we then please look at a separate review 24 carried out by the team in October 2007, please. The 25 document is CEC01496784. If we look at the first page, 72 1 again this tells us -- a different heading this time: 2 "tie Project Risk Review". 3 Issued to the Chief Executive of the Council, 4 15 October 2007. The review dates 10 to 5 12 October 2007. I think the same review team, but 6 without Ms Dunstan; is that correct? 7 A. Yes. 8 Q. Can you remember how this risk review came about? 9 A. I think that's spelled out in -- that's spelled out in 10 the report, in the terms of reference. 11 Q. So let's go to that, please. Page 14. We see Appendix 12 A, and the client again is the Council. The background 13 is set out there. 14 Then over the page, please, to page 15, we see under 15 "Assignment Objectives", first bullet point: 16 "To review the contract Risk Allocation Matrix for 17 the Infrastructure and Tram Vehicle contracts and 18 identify those risks that remain within the public 19 sector. DLA, the projects and CEC's legal 20 representatives have validated that the Risk Allocation 21 Matrix reflects the risk allocation in these contracts." 22 The next bullet point: 23 "To assess and quantify the level of public sector 24 risk in proposed contractual arrangement, by reference 25 to the Risk Allocation Matrix ..." 73 1 Thirdly: 2 "To provide a reasoned explanation of the adequacy 3 or otherwise of the available financial headroom, in 4 view of the identified risks retained by the public 5 sector." 6 So in short, it is a review of risks, if I can call 7 it that for shorthand? 8 A. Yes. 9 Q. One point which did occur is that why review the 10 contract Risk Allocation Matrix to see the risks, rather 11 than reviewing the contract itself? 12 A. I think it was fundamentally a matter of time. The 13 contract that was helpfully placed in my SteelNet was 14 289 pages long and we didn't get to the appendices. And 15 in that sense none of us -- none of us were lawyers. So 16 what we would have added to that was, I think -- 17 wouldn't have been good value for the client. I think 18 the important thing was to be assured that the risk 19 allocation matrix in the contracts matched what was 20 actually in the client's documentation, and that's 21 I think what you would expect at a high level review. 22 Q. To be fair to the team, perhaps two points. 23 Firstly, you're just doing what you're being asked 24 to do, and secondly, I think I read out that you were 25 being told that both DLA and CEC legal had validated 74 1 that the risk allocation matrix reflected the risk 2 allocation in these contracts? 3 A. I think that's what I was trying to say, however 4 clumsily. 5 Q. I'm sure the clumsiness was mine, Mr Heath. 6 If we then look at page 16, this may be a point of 7 detail, but can we see under "Programme", it says: 8 "The team will visit Edinburgh on 10 and 9 11 October ... the report will be provided on the 15th." 10 I wonder whether the review was two days or three 11 days, because this suggests it was two days. However, 12 the cover sheet said 10 to 12 October, which suggests 13 three days. It may be a point of detail, but do you 14 have any recollection of that? 15 A. No. 16 Q. But whether it's two or three days, either way it's by 17 necessity, given the time frame, going to be a very high 18 level review? 19 A. Exactly. 20 Q. Thank you. I should look at the interviewees, please, 21 at page 17, just to note in passing. Appendix B. It's 22 a shorter list than we saw before. I think essentially 23 it's restricted to tie and CEC representatives. Is that 24 correct? 25 A. Yes. 75 1 Q. This may not be within your knowledge, Mr Heath, but 2 I don't think there are no lawyers on that list, but 3 that may not matter because, as I say, we saw earlier 4 and you have been told in the brief that lawyers have 5 validated the risk allocation matrix? 6 A. Yes. 7 Q. Could we then please look at page 3 of the report. I'll 8 just go through what appear to be some relevant 9 passages, if I may. 10 Under "Conclusions", halfway down, it states: 11 "The review team finds that ..." 12 Firstly: 13 "The risks that remain with the public sector 14 are:" 15 I'll just read out the first few bullet points: 16 "The outturn price and delivery programme of 17 MUDFA works; the design and approvals processes delay 18 the programme; financial close is delayed and has knock 19 on effects on approvals and programme; the novation 20 process is not fully effective; changes of scope." 21 So these are risks identified. 22 Then the next major bullet point, I should read out. 23 It states: 24 "We endorse the assessment that the level of public 25 sector risk on the capital expenditure programme is 76 1 currently GBP49 million at a 90 per cent confidence 2 level. Further, our best estimate of the schedule risk 3 is currently 21 days also at a 90 per cent confidence 4 level ..." 5 Just to pause there, Mr Heath, I wondered when the 6 report states, "We endorse the assessment that the level 7 of public sector risk on the capital expenditure 8 programme is currently GBP49 million at a 90 per cent 9 confidence level", is the review team saying that that 10 risk figure is correct and sufficient, or is the review 11 team saying that you're satisfied correct procedures and 12 processes have been followed in arriving at that figure? 13 A. I think it's the second point. 14 Q. I see. 15 A. I think it's the second point. I couldn't be certain, 16 but I think it's more likely to be the second point than 17 the first. 18 Q. It might become clear if we read on in the report, 19 perhaps? 20 A. I think so. 21 Q. Page 4, please, of the report. The top bullet point 22 states: 23 "We believe that the overall headroom of 24 GBP49 million in the capital expenditure is a prudent 25 provision at this stage of the project's development." 77 1 We'll come back to that. Then, please, if we can go 2 to page 5, where I think the review team go through 3 certain risk areas and consider their positions. On 4 page 5, it's headed "UTILITIES AND MUDFA", and just we 5 note in passing, in paragraph 1.5, under the 6 recommendation: 7 "We recommend that there needs to be considerable 8 focus on the design preparation and design approval 9 mechanism to ensure that MUDFA works are commenced on 10 time and do not need to be revisited. The emphasis on 11 strong contract management must be continued." 12 So is that perhaps again in the category of 13 a concern or issue that the review team are flagging up 14 to the client and project manager to address? 15 A. It is. 16 Q. Thank you. 17 Page 6, please. Under the discussion of 18 infrastructure, look at paragraph 3.1. It's stated: 19 "Final Business Case cost equals GBP223 million." 20 So I think that is information the team is being 21 provided with -- 22 A. That's correct. 23 Q. -- for the estimated cost of infrastructure work? 24 A. I think that -- I think it's fair to say that was 25 probably taken from tender returns. 78 1 Q. I understand. I'll go on in a second to read out what 2 follows. But just to pause there, presumably the review 3 team's approach is obviously based on information you 4 were given, and if the information were to change, then 5 your conclusions may change as well? 6 A. That must be correct. 7 Q. Yes. So when you are assessing the adequacy of the risk 8 provision, one of the assumptions must be that that is 9 a correct estimate of the infrastructure costs? 10 A. Yes. That one should be the easiest one to look at, 11 because you should just be taking an estimate of the 12 fixed cost from the tender. Clearly, the issues that 13 may vary it are the contingency that you're applying. 14 So in that sense, our report then deals with, as you 15 can see in 3.3, the amount that's absolutely fixed and 16 the amount of that 223 that's potentially variable, 17 which is a much smaller number. 18 Q. The review team were proceeding on the important 19 assumption that the infrastructure contract was for 20 a fixed price sum? 21 A. Yes. 22 Q. If you had been told, well, it may not be entirely fixed 23 price, what might the review team have done in their 24 review of risks? 25 A. I think we would have probably wanted to look to 79 1 understand what -- "well, it might not be entirely" 2 meant. 3 Q. Thank you. So returning to the report, please, and 4 under 3.2, "Current Risk", it sets out: 5 "The InfraCo contract is the immediate focus of the 6 project. It is at risk to the possibility of delay in 7 confirming a preferred bidder and cost creep between 8 award of preferred bidder and final contract signature. 9 This risk has been exacerbated by the delays in design." 10 So we see that issue appearing again in the report. 11 Then in paragraph 3.3, please, it states: 12 "Estimated fixed costs equal GBP150 million. This 13 figure is based on the assurance from the tie commercial 14 team that 70 per cent of both of the InfraCo bidders' 15 costs are fixed." 16 So again, that's simply recording what you have been 17 told? 18 A. Yes. I mean, when you're producing a report like this, 19 it's crucial that you specify your assumptions. 20 Q. I understand. Over the page, please, to see 21 a continuation of the question of infrastructure. Under 22 paragraph 3.4.2, "Programme", in the second paragraph we 23 see it states: 24 "The programme will also be at risk to changes in 25 scope but more importantly, vulnerable to delays to 80 1 tasks for which CEC and tie are responsible, notably 2 MUDFA works and approvals. The alignment of the SDS 3 design going forward with the Infraco programme will 4 have a major effect on this aspect." 5 So again, these are simply matters that the review 6 team are flagging up as assumptions on which their 7 report is based, matters that the client and project 8 manager will have to address? 9 A. Yes. 10 Q. Thank you. 11 On page 8, please, if we go to the bottom of the 12 page, please, under paragraph 3.5.3, and I'll read this 13 out again: 14 "Given the financial impacts of delays to the 15 programme, we consider that the tie Programme management 16 function should be central to the Project's management. 17 The linkage between design/approval and InfraCo is 18 critical and will need serious attention." 19 So again, I'm not sure the review team could do more 20 to highlight this as a matter of importance; is that 21 correct? 22 A. I agree with you. 23 Q. Just to pause there, was this a matter that was causing 24 the review team serious concern? 25 A. At that stage, not -- it depends for how you look at the 81 1 word "serious", but sufficient concern to write 2 a recommendation like that. 3 Q. Presumably the review team are having to indulge 4 a little in crystal ball gazing, having to look at ahead 5 at what may happen, the risks that might eventualise. 6 A. I think so, but again, with hindsight, you can see that 7 the two critical factors in this project were the 8 control of the utilities diversion works and the ability 9 to deliver and novate design successfully. 10 And you've seen that every single report we've 11 written has gradually just -- I use the word ramped up, 12 I can't think of a better phrase -- the warnings 13 about: you really do need to keep an eye on design and 14 you do need to keep an eye on the MUDFA works. As you 15 said to me earlier, had we known that the MUDFA works 16 were only 60 per cent completed, we might have taken 17 a slightly different view about those as well. 18 Q. Yes. In relation to the design, I think you prefaced 19 that answer with the benefit of hindsight, but in fact 20 at the time the review team were putting in the reports, 21 they were concerned about design and the effect that 22 might have on the infrastructure contract? 23 A. Yes. 24 Q. Just to continue this passage, please, over the page, 25 page 9, in paragraph 3.5.4, it's stated: 82 1 "It is clear that the amount of design envisaged to 2 be delivered to support novation of the contract to 3 Infraco will not be achieved. We recommend that: tie and 4 CEC need to agree a package of work to deliver design 5 work to support novation and minimises risk." 6 To finish that, I would then like please to go to 7 another passage in the report -- 8 CHAIR OF THE INQUIRY: Before we do that, could you go back 9 to 3.5.3. I think you said that there was 10 a recommendation that you made in relation to that, and 11 can we just look at that recommendation. 12 So you're identifying that there are to be tie 13 organisational changes, but your recommendation is that 14 in those changes certain priorities should be given? 15 A. That's correct, my Lord. 16 CHAIR OF THE INQUIRY: And that's to put programme 17 management at the centre of the -- 18 A. That's absolutely correct. On the basis that the 19 programme will be at the centre of all the discussions 20 throughout the life of the project. 21 CHAIR OF THE INQUIRY: Thank you. 22 MR MACKENZIE: Thank you, my Lord. 23 Presumably, Mr Heath, that would be having realistic 24 programmes as to what can be achieved, rather than 25 aspirational or optimistic programmes? 83 1 A. That's correct. You'll remember that I said very early 2 on in our discussions: whose programme was it. 3 Q. So at this stage, when the review team are producing 4 this report, were the review team clear whose programme 5 it was? 6 A. The only programme we'd seen was the one that was being 7 provided by tie. We had to assume that that 8 incorporated the likely bidders' programme. 9 Q. I understand. 10 A. I'm trying to remember whether this report -- I think 11 this report was completed before financial close, wasn't 12 it? 13 Q. It was, Mr Heath. Financial close in the event was 14 May 2008. 15 A. So in that sense -- in that sense the programme we would 16 have seen probably was more influenced by tie than the 17 contractors on the basis of the -- it was seven months 18 later, when the contract was signed. 19 Q. Seven months later when the contract is signed, would 20 you expect to see alignment between the contractor's 21 construction programme and every other programme, 22 including for design and utility diversion works? 23 A. Yes. 24 Q. What are the risks that may arise if there isn't that 25 alignment? 84 1 A. The first risk is that the project is very unlikely to 2 be delivered on -- is very unlikely to be delivered on 3 time. If it's very unlikely to be delivered on time, 4 I think it's pretty likely to be delivered late, rather 5 than early. 6 If it's going to be delivered late rather than 7 early, it's almost certainly going to involve additional 8 cost, and also, given that this was a highly politicised 9 project, there would be some significant reputational 10 risk to both sides on the -- of the contract. 11 Q. Was it one of the assumptions on which the risk review 12 report was based that there would be alignment between 13 these various contracts by the time the contracts were 14 signed? 15 A. We haven't made that clear, but I think it's implicit 16 that we were basing our report on the programme that 17 we'd seen. We would expect the programme that we'd seen 18 to have done what you described to me, and we would 19 expect a future programme to do the same. 20 Q. Is it normal practice to ensure that all programmes are 21 aligned when a contract is signed? 22 A. Yes, in my experience. It's usually one of the issues 23 that may delay contract signature. 24 Q. Thank you. If we now move on to another matter, please, 25 at page 11. Under the heading, "Assessment and 85 1 quantification of Public Sector risk", it starts by 2 saying: 3 "QRA of the risk matrix produces an estimate of the 4 Public Sector Risk on capital expenditure of 5 GBP49 million. There is currently a matching risk 6 contingency of GBP49 million in the project budget. 7 As part of this risk review, we commissioned 8 a series of 'Monte Carlo' simulations on ..." 9 Various things set out. 10 Just to pause there, Mr Heath. When the report says 11 "we commissioned", does that suggest the review team 12 instructed or asked somebody else to do this? 13 A. I think so. I think it's fair to say that Malcolm was 14 the expert on this because he'd done it in his previous 15 life in defence procurement as well. So I'm pretty sure 16 that he actually just got those run. 17 I can't remember who by. 18 Q. Do you know what Monte Carlo simulations are? 19 A. Personally, I can remember talking about Monte Carlo 20 simulations but if you wanted me to describe them to 21 you, I wouldn't have a clue. 22 Q. I think does it involve a statistical analysis, usually 23 used by computer software, to produce a large variety of 24 different things or events or possibilities and one then 25 can, by running that software, undertake some sort of 86 1 analysis? That's a terrible way to describe it -- 2 A. I think it's better than mine. 3 Q. But something to do with using computers to try and 4 quantify in this case risk? 5 A. Yes. 6 Q. So presumably, like anything involving computers, or 7 indeed any calculation, the output is dependent on 8 inputs? 9 A. Yes. I think -- I think it -- but it also was designed 10 to just act as a reference on the calculations that had 11 already been done. So it was, if you like, a second 12 opinion on those. 13 Q. Do you remember, was it one of the tie individuals who 14 had been asked to run these simulations? 15 A. I don't know. 16 Q. I see. Thank you. I can see what else is said there. 17 Before we leave that, to what extent are these 18 Monte Carlo simulations based on the review team's own 19 figures or input and to what extent are they simulations 20 based on figures and input produced by tie? 21 A. The second. 22 Q. I understand. Over the page, please. I think we will 23 leave Monte Carlo simulations? 24 A. Thank you. 25 Q. Page 12. Under the heading, "The adequacy or otherwise 87 1 of the available financial headroom", it states: 2 "We have reviewed the individual elements of risk 3 and the total amount. We understand that the 4 consideration of risk by the project leaders is 5 a dynamic process and our view must therefore be very 6 much a 'snapshot' taken at this moment." 7 So in short, Mr Heath, your view was based on the -- 8 the team's view was based on that moment in time, but 9 clearly if the facts or information were to change, then 10 the team's views may have changed? 11 A. I think that's what we're saying, yes. 12 Q. I should perhaps just briefly, if I can, then mention 13 some of the conclusions. The report goes on to say: 14 "On this basis, we believe that the overall 15 portfolio amount of GBP49 million is a prudent estimate 16 at this stage of the project's development." 17 Then: 18 "Our review of the individual elements of risk has 19 concluded that we believe the quantum of risk is 20 well-founded. There may be questions whether the 21 assessments of the probability of the risk crystallising 22 and its likely cost are individually good forecasts but 23 it is our view that any variations to these are likely 24 to be very much self-compensating. The key risks at 25 this stage of the project relate to MUDFA, InfraCo cost, 88 1 Programme, Testing/Commissioning." 2 Pausing there, design isn't separately listed as 3 a key risk. Why is that? 4 A. I think it's incorporated in Infraco costs. 5 Q. I understand. It then states in the report: 6 "These risks are appropriately represented in the 7 ”Top 13" risks and we think the sums allocated to them are 8 of the right order at present ..." 9 And in bold text: 10 "... but will require regular review." 11 The report goes on: 12 "Although the Testing/Commissioning risks are not 13 yet individually specified in the risk Portfolio, we 14 consider their impact can be incorporated within the 15 amount envisaged for the overall programme risk." 16 Then: 17 "In our experience we would expect an overall 18 contingency for ”risk“ items of around 10 per cent to have 19 been included in budget estimates. This would equate to 20 a figure of GBP54.5 million. This figure would have 21 been the one-off for the project throughout its life." 22 Then: 23 "The Council should take comfort that the current 24 cost estimates, including risk, are for a total project 25 cost of GBP498 million compared with the budget of 89 1 GBP545 million. From a funding approval viewpoint in 2 late December, it should be recognised that there may be 3 some variation in the GBP498 million figure as the deal 4 is concluded." 5 I think I should finally read out the paragraph over 6 the page. There's a recommendation that the figure of 7 498 million is used as the budget ceiling for all 8 discussions through to financial close, and that the 9 infrastructure amount of GBP222 million remains the 10 focus for all parties through to financial close. 11 Finally, if I then read out, the next paragraph 12 states: 13 "This means that the current GBP49 million of risk 14 is set against a total project cost of GBP498 million. 15 We think GBP320 million of the GBP498 million is 16 fixed/certain through being spent already or subject to 17 agreed firm prices. This means that the GBP49 million 18 of risk is a contingency to a sum of GBP180 million (the 19 variable amount to completion at this stage), which is 20 an extremely healthy position for the project. If we 21 then take the project budget's outstanding GBP45 million 22 as additional contingency plus any amounts built into 23 individual cost estimates, then there is around 24 GBP90 million to GBP95 million of contingency to set up 25 against outstanding costs of GBP180 million to 90 1 GBP225 million. This position is extremely advantageous 2 compared with other tram projects, and should give the 3 Council considerable reassurance at this stage." 4 Mr Heath, looking back on these comments, do you 5 have any views? 6 A. No. 7 Q. So you're quite satisfied they correctly reflected the 8 views of the team at the time? 9 A. Yes. 10 Q. Based on the various assumptions we see set out in the 11 report? 12 A. Yes. I think it's fair to say that when the team looked 13 at that, the team thought that the project was in an 14 extremely good position. 15 Q. For the reasons set out in the report? 16 A. Yes. 17 Q. I understand. 18 Now, I think in relation to the previous report, the 19 September 2007 Gateway type review report, I think I had 20 asked if you would have expected any follow-up review. 21 So if I could ask the same question in relation to this 22 risk review report, would you have expected any 23 follow-up review of the risks? 24 A. I don't think so. I think it's fairly clear in the 25 recommendations what's expected to have been done. I'm 91 1 not sure that having us turning up and looking over 2 somebody's shoulder would have added very much to the 3 process. 4 The report is fairly clear that the governance 5 bodies needed to manage that risk and that was very 6 much -- was very much up to them. 7 They were going to make most of the critical 8 decisions that were -- that would affect the numbers. 9 And so it would have been of little value us trying to 10 second-guess them. 11 Q. You've also set out in the report very clearly the 12 various Final Business Case figures for the various 13 items that your report is based on. So the client and 14 project manager is aware that if any of these figures 15 are to change, then the views in the report may change? 16 A. Yes. 17 Q. If I can put that report to one side, please, another 18 issue, Mr Heath, I think we made you aware of when we 19 sent you some documents requesting your statement, we've 20 heard evidence that shortly before this, within the 21 Council, there was an intention to instruct 22 Turner & Townsend to carry out a review of the risks on 23 behalf of the Council, and that that didn't then take 24 place, and instead the OGC team were asked to produce 25 this review. 92 1 I think we asked you what were your views on whether 2 a review of the risks of a company such as 3 Turner & Townsend may have been a good idea. 4 What was your response to that? 5 A. I think I said that, with the benefit of hindsight -- 6 not with the benefit of hindsight, it may well have been 7 a good idea. The question would have been whether that 8 became burdensome in terms of time, and also what was 9 actually trying to be achieved. 10 The Turner & Townsend review probably would have 11 actually gone into much more detail than we had, and 12 I can only speculate that would have acted as some sort 13 of audit on the numbers, which clearly we were not able 14 to do. 15 In that sense it probably would have been 16 beneficial. But again, it would have been an on balance 17 issue about how long would it have taken relative to 18 importing another programme risk. 19 CHAIR OF THE INQUIRY: If the client had concerns about the 20 accuracy of the information it was receiving, would that 21 be -- would it be appropriate in those circumstances to 22 instruct a review by someone like Turner & Townsend? 23 A. My Lord, Turner & Townsend have got a very good 24 reputation for doing these sort of things. The 25 question -- I think I'd interpret your question would be 93 1 that the client would have had to have been satisfied 2 that they had concerns about the information. 3 CHAIR OF THE INQUIRY: Yes. 4 A. The employment of somebody like Turner & Townsend may 5 well have actually identified that, but it may not have 6 done. There was no guarantee that it would. I'm just 7 floating the possibility that it might have done. 8 MR MACKENZIE: Thank you. 9 Mr Heath, we know that the financial close took 10 place in May 2008. I think then there's one last 11 document I would like to take you to, please. This 12 concerns a peer review carried out in July 2008. The 13 document reference is CEC01327777. 14 We can see from the cover sheet, this is headed 15 "Edinburgh Tram Project Peer Review". The date of issue 16 to tie Project Director, 2 July 2008. Review dates 1 to 17 2 July 2008. 18 So this appears to have been instructed by tie's 19 Project Director; is that correct? 20 A. Yes. 21 Q. Is there something a bit different to the Gateway type 22 reviews we looked at earlier? 23 A. Yes. The Gateway -- the OGC guidance indicates that 24 when the formal Gateway Reviews have completed their 25 cycle, it's quite normal for what are called peer 94 1 reviews, for the people's independent experts to provide 2 a review capability to the client. 3 And this was the first -- I think this was the first 4 one. 5 Q. It was, I think, Mr Heath, yes. 6 Perhaps I can go again to the list of interviewees 7 at page 12, please. We can see you interviewed not only 8 people from tie and the Council, but also two 9 individuals from the infrastructure consortium, 10 Mr McFadzen and Colin Brady, of Bilfinger Berger 11 Siemens, you were able to get their view of things as 12 well. 13 If we then please go -- I'll take this quite 14 shortly. At page 3, firstly, I go to this because 15 I think you made this point yourself earlier, Mr Heath. 16 Under "Conclusion", in the second bullet point, we 17 see the MUDFA works have continued and are some 18 60 per cent complete. Did that cause the team any 19 concerns at that stage? 20 A. I think we were surprised. 21 Q. I see. Can you explain that a little more? 22 A. The presentations that we'd seen throughout the process 23 had been very present -- had been very professional and 24 very positive. I think we were quite surprised to see 25 that progress had been slower than we'd been led to 95 1 believe. 2 Q. Thank you. On to page 6, please. Under "MUDFA Lessons 3 Learned", we see the team received a presentation from 4 Graeme Barclay, and the report states: 5 "We believe that the exercise of the MUDFA works in 6 advance of Infraco is of major benefit to the project 7 and the lesson learned document is honest and open. 8 While the MUDFA contract has developed into a reasonably 9 successful operation with many of the lessons learned 10 being taken forward into the Infraco contract, the fact 11 that the completion date remains uncertain (Works 12 60% complete) will have an increasing impact on 13 the Infraco works. Recommendation 5: that prioritising 14 the remaining MUDFA works packages in order to minimise 15 the impact on the Infraco programme should be undertaken 16 as soon as possible." 17 I think that's self-evident, what that means. 18 Then, please, under "Contract Issues", there are two 19 other bullet points I would like to take you to. The 20 last two bullet points, the second last one states: 21 "SDS design was not complete at the point of 22 novation to BBS, the schedule of outstanding works is 23 captured in the BBS Contract. It is unclear to the 24 review team where risk lies for design development. BBS 25 and tie in interview considered risk lay with the other 96 1 party." 2 Did that surprise you? 3 A. I think from -- I think from the point of the contract, 4 yes. From behaviour, at that stage, yes, I think it did 5 surprise us. 6 Q. Because this is quite soon after contract signature. 7 I think the contracts were signed on 14 and 15 May 2008. 8 This review was 1 and 2 July. So within a matter of 9 weeks of contract signature, parties appear to be unable 10 to agree on where the risk lies for design development? 11 A. Exactly. 12 Q. Just to pause here, the Inquiry has heard reference to 13 something called Schedule Part 4 of the Infraco 14 contract, setting out the price and certain pricing 15 assumptions. 16 Do you remember whether you ever saw Schedule 4? 17 A. I don't believe that we saw Schedule 4 in any detail. 18 I think in my witness statement somewhere in the papers 19 I'd seen, it said we had seen Schedule 4, but I think we 20 might have seen Schedule 4 in passing in the same way as 21 we saw the major Infraco contract. 22 Again, when I -- sort of evidence the contract 23 document that I'd been sent, Schedule 4 isn't there, 24 which is perhaps unfortunate. 25 CHAIR OF THE INQUIRY: That was sent by ... 97 1 A. By -- this was the document that I was sent by the 2 Inquiry team. 3 MR MACKENZIE: I can take you to it now, Mr Heath, if that 4 would be helpful. Might it help to refresh your memory? 5 Give me a minute. 6 If we can go, please, to document USB00000032. We 7 can see this states this is Schedule Part 4, et cetera. 8 Next page, please. The next page again. 9 Now, if we can blow up this page, please, we can see 10 clause 1.1: 11 "The Infraco Construction Works Price is detailed in 12 Appendix A." 13 We then see 1.2: 14 "The Construction Works Price is on a lump sum basis 15 that is fixed ... and not subject to variation except in 16 accordance with the provisions of this Agreement." 17 If we can then please go to -- paragraphs 2.2 and 18 2.3 refer to certain base case assumptions. 2.3, the 19 ”Base Date Design Information” means the design 20 information drawings issued to Infraco up to and 21 including 25 November 2007. 22 If we go over the page, please, we can scroll down 23 that page, please, if we can stop at paragraph 2.8, we 24 see a ”Notified Departure“ is where 25 now or at any time the facts or circumstances 98 1 differ in any way from the Base Case Assumptions ..." 2 Then 2.9: 3 "Pricing Assumptions" means the assumptions in 4 respect of the Contract Price as noted in Section 3.4 5 below." 6 If we can go to the next page, please? 7 A. Is it possible that we could go back to the numbers 8 above? 9 Q. Sorry, yes? 10 A. They look a bit strange to me. 11 Q. Yes. So there we have a construction works price of 12 238,607,664. I think the construction works price in 13 the risk review were -- 14 A. 223. 15 Q. So that's gone up a little. But has gone up. Was that 16 the figure in particular that looks strange to you? 17 A. No, I just saw a figure of 304, and I wanted to see what 18 was -- just wanted to see what we'd already covered in 19 the risk review and the ones that we hadn't. That's 20 fine. 21 Q. Yes, I think that's explained mainly by the tram supply 22 price of the GBP55 million. 23 A. Yes. That's already elsewhere in the risk review. 24 I wouldn't like the figure to go past without me looking 25 at it. 99 1 Q. Next page, please. Top of the page, paragraph 3.1: 2 "The Construction Works Price is a lump sum, fixed 3 and firm price for all elements of work required as 4 specified in the Employer's Requirements as Schedule 5 Part 2 and the Infraco proposals and is not subject to 6 variation except in accordance with the provisions of 7 this Agreement." 8 I'll let you, Mr Heath, just read to yourself the 9 next paragraph. Take a minute to do that. 10 A. Can I look at 3.4 as well? 11 Q. Yes. 3.4 starts with pricing assumptions, and goes on 12 to list, I think, 40 Pricing Assumptions over -- 13 A. Oh, okay. 14 Q. -- the following pages. The first pricing assumption 15 relates to design. You may wish to take a minute to 16 read that, I think. 17 A. No, that's fine. 18 Q. If I may just put you over the page as well, just to 19 complete it, so we can see all of that. You can see, 20 just to complete the top of the page, a little bit more 21 is said about that Pricing Assumption. 22 I think, Mr Smith, I think when you read price 23 Assumption 1, I think you both grimaced and raised your 24 eyebrows. What was your impression? 25 A. I was reading the point about: for the avoidance of 100 1 doubt, normal development and completion of designs 2 means the evolution of design; which seems to me to 3 be -- having read some of your other witnesses' 4 statements, clearly a matter that became an issue. 5 Q. In short, Mr Heath, having just read that Pricing 6 Assumption 1 -- sorry, I should have asked you this, do 7 you recall, does this help jog your memory -- 8 A. No, I have never seen any of this before. 9 Q. I understand. So reading Price Assumption 1 for the 10 first time, what were your initial impressions? 11 A. Could you just go back to it because it's between 12 screens. 13 Q. Sorry. It might be possible to split the screen. Or it 14 may be sufficient just to show you the beginning part of 15 it again. 16 A. It's fine, I have read it now. 17 Q. Thank you. So what are your initial views on that? 18 A. I'm quite surprised. I probably, having read the 19 issue -- having read 3.4, I could see how the two 20 parties could have said something differently to us 21 when -- when we did that review, peer review. 22 And that's why I drew attention to -- I raised my 23 eyebrows about normal design development. 24 One person's normal design development might be 25 another person's major change. 101 1 Q. Did you understand Pricing Assumption 1 when you read 2 it? 3 A. I think so. 4 Q. What was your understanding? 5 A. That the original drawings were fixed and if you changed 6 anything, it was a variation. And I think was it 7 described as a notifiable departure? 8 Q. I understand. If I could go back to the other 9 paragraph, the page on the left-hand of this split 10 screen, page 5, and the paragraph 3.2.1, did you have 11 any views on this paragraph, having read it? 12 A. A personal opinion is I'm quite surprised at it. 13 Q. Why are you surprised? What causes you surprise? 14 A. It looks to be potentially quite open-ended. 15 Q. Why? 16 A. It talks about a developing factual background, which is 17 naturally going to be a cause for debate as it goes into 18 the future. 19 Q. How about the sentence: 20 "In order to fix the Contract Price at the date of 21 this Agreement, certain Pricing Assumptions represent 22 factual statements that the Parties acknowledge 23 represent facts and circumstances that are not 24 consistent with the actual facts and circumstances that 25 apply." 102 1 A. I think you having read it out like that, that's 2 particularly surprising. 3 Q. What does that say in terms of whether this is truly 4 a fixed price contract? 5 A. I think it throws considerable doubt to whether it's 6 a fixed price contract. 7 Q. Mr Heath, you have come to that view on reading this for 8 the first time in a few minutes and with no legal 9 qualifications; is that correct? 10 A. Yes. 11 Q. Thank you. 12 CHAIR OF THE INQUIRY: I think this also recognises that 13 there may be a notified departure literally seconds 14 after the contract is signed. 15 A. That's right, my Lord. 16 MR MACKENZIE: Thank you. Mr Heath, we got diverted a 17 little on to Schedule 4. 18 Can we just go back, please, and complete the report 19 we were looking at, which was CEC01327777. At page 7, 20 please, about halfway down, the top half under the 21 bullet point, "Change and Contract Management", it's 22 said: 23 "We have not reviewed the revised infrastructure 24 contract in detail. However, having listened to the 25 presentation on contract management, we believe there 103 1 are a number of issues that need tie to determine how it 2 will manage the contract and whether it intends to apply 3 the CMP ..." 4 What's that a reference to? 5 A. I wish I knew. I don't know. 6 Q. Yes. I think -- 7 A. It's referred above as a document. So I guess it's -- 8 it's a tie acronym for a document. 9 Q. But what it is, I'm sorry, Mr Heath, in the previous 10 page, which is off-screen, it is described as a change 11 management procedure? 12 A. Okay. 13 Q. As you say, that is a document called change management 14 procedure, you're quite correct. 15 The first bullet point is: 16 "Any outcome from the IFC drawings if they vary from 17 the frozen baseline design (design development)." 18 So it suggests at this time the team were told 19 something about there being a frozen baseline design? 20 A. Yes. I think we'd recommended that all the way through 21 the process, from the outset, we'd always talked about 22 a reference bid and at some stage freezing the baseline 23 design. 24 Q. Why was that recommended? 25 A. On the basis that providing certainty on cost and to 104 1 some extent certainty on programme. You needed to know 2 what you were building. You could then form a view 3 about how long it was going to take and how much it was 4 going to cost. 5 Q. Is that again standard practice? 6 A. Absolutely. 7 Q. Then finally, please, on this document, if I may look at 8 the recommendations on page 13. Look at number 7, if we 9 may. 10 It states, 7: 11 "That tie management should consider whether it has 12 sufficient legal skills to fully understand and execute 13 the contract on a daily basis." 14 I'll leave that document there, unless you have any 15 further comments on that matter, Mr Heath? 16 A. The only thing I would say to the reason for that 17 recommendation is that we've said earlier that we had 18 very little time to look at the Infraco contract. You 19 saw that we effectively had a day to do the work. 20 I can remember that Willie Gillan and I had a very, 21 very peremptory look at a couple of issues in the 22 contract, just to get a feel for it. There was no way 23 you could read the document that that was -- that long. 24 We'd asked the -- contract management whether they 25 were going to apply a light touch to the management of 105 1 the contract, and they said they were. Then we looked 2 at a couple of the provisions and they didn't exactly 3 lend themselves to a light touch. 4 And that sort of rather drove our recommendation 5 here that the people running the contract needed to 6 understand what the intention behind the contract 7 provisions meant, and then how they were going to 8 behave. 9 Q. Just for the avoidance of doubt, what you have just 10 referred to, this discussion where tie said they were 11 going to apply a light touch to the management of the 12 contract, is that in relation to this review in 13 July 2008, after financial close? 14 A. Yes. It was after we'd had the contract management -- 15 well, it was actually some questions that we'd asked the 16 person doing the contract management presentation. 17 Q. So that's after financial close? 18 A. Yes. 19 Q. Thank you. I would like now, please, just to finish 20 off, Mr Heath, but going back to your statement and 21 seeking clarification on one or two matters, if I may. 22 If we could go back to your statement, please, and 23 to page 31. In question 52, in relation to tie and 24 question (b), we asked: 25 "Did you have any concerns at any stage in relation 106 1 to TIE's reporting to the OGC or peer review teams?" 2 You replied: 3 "I think these were set out later in reports. We 4 did slowly reach the conclusion that bad news did not 5 necessarily travel upwards in Tie and beyond, but given 6 our reliance on Tie's information and its own audit and 7 governance procedures to ensure the accuracy of such 8 information we could not refer to hard and fast 9 examples. At the time I felt that the management we 10 interviewed were giving open and honest answers and 11 believed in the information they were providing." 12 Pause there, Mr Heath. I should have said that 13 while we looked at the peer review in July 2008, I think 14 there were some further reviews carried out, certainly 15 I think in 2009, and possibly also in 2010. 16 In short, they're all set out in your statement, 17 I intend to take that as read and not go to them. 18 Can you remember the last peer review that was 19 carried out? 20 A. Not with -- not without looking at the chronology that 21 is in my documents, no. 22 Q. Yes. Certainly if we can go to page 26 of your 23 statement. Question 43 refers to a further peer review 24 having been carried out in December 2009. There's 25 reference there to a report. I think also then if we go 107 1 also, please, to page 29 of your statement. In question 2 47, at the top is a reference to an email from 3 Susan Clark to others in tie in March 2010, and then 4 reference to a note of the meeting with the peer review 5 group on 4 March 2010. 6 Yes, over the page, please, page 30, in letter f., 7 we ask the question: 8 "Was March 2010 the end of the peer review team 9 involvement in the project?" 10 You reply: 11 "To the best of my knowledge that was the end of our 12 involvement." 13 A. That's correct. 14 Q. Thank you. So that was really to provide context for -- 15 going back to page 31, please. Again, if we blow up, 16 please, answer 52(b). 17 So when you say there that "We did slowly reach the 18 conclusion that bad news did not necessarily travel 19 upwards in Tie and beyond", I just wondered 20 approximately when was that? 21 A. I have said we did slowly reach the conclusion. So it 22 was -- it was a gradual -- it was a gradual process. 23 But given our intermittent engagement with the project, 24 it would be -- there wasn't -- there wasn't a critical 25 point that you could say: this has got to a stage where 108 1 we feel uncomfortable. I think in my statement I have 2 drawn attention to issues in an email to Susan Clark 3 indicating that I think we needed to be very clear about 4 the level of information we were getting. 5 So it was about at that stage we realised. 6 It's fair to say that, you know, if you wanted some 7 examples, the obvious example would be the MUDFA works 8 being -- us forming the impression that things were 9 going well, and not being disabused of that impression, 10 and it's also fair to say that when we were interviewing 11 the design people managing the design process, it was 12 hard to get concrete numbers out of them about what the 13 stage -- what the actual stages of progress were. They 14 seemed to vary between one report and another in a way 15 that -- in the time available, we couldn't really be 16 able to get to the bottom of. 17 But I think you just get a feel from experience that 18 things are not going quite as well as people want you to 19 think they are. 20 Q. Just for clarification, when you say interviewing people 21 responsible for managing the design process, do you mean 22 people from tie? 23 A. Yes. 24 Q. I understand. There are some other matters in your 25 statement, please, Mr Heath, I should also go through 109 1 for clarification. 2 Then please go to page 33. We had asked you here 3 for your certain final thoughts. In paragraph (b) of 4 question 57, we had asked you for any views that you had 5 on the main reasons for the failure of the project, and 6 you helpfully set out a number of matters. I would like 7 to ask you about one, please. 8 In paragraph 7 you say: 9 "The contractor was ill prepared for the task, and 10 had probably under-estimated the costs." 11 Could you explain that, please? 12 A. We learned that although -- I think in the review after 13 the contract had been signed, that some of the key 14 subcontractors hadn't been appointed and weren't in 15 place, which struck us as not a sign of preparation, 16 given that the contract signature was seven months later 17 than people had expected in the first place. 18 I think my comment about -- and I said a personal 19 view, they had probably underestimated the costs. 20 The adversarial approach may well have been driven 21 by somebody looking to get their money back. I don't 22 know. I couldn't -- but it's -- it wouldn't be unusual. 23 Q. Thank you. 24 Now, again, at the very bottom of this page, please, 25 if we may, we had also asked in the next subparagraph 110 1 c. whether you had any comments with the benefit of 2 hindsight on how the failures might have been avoided. 3 Again, you helpfully set out your opinions. Look at 4: 4 "Far tighter control of the Utilities Diversion 5 works. (In Croydon these were delivered on time and on 6 budget ... so it is achievable) ..." 7 I just wondered, how was that done in Croydon in 8 a successful way? 9 A. Interestingly enough, we left the utilities to do their 10 own works and agreed sums with them, and had 11 a project -- well, we had a consultant advising and 12 co-ordinating and we had literally just one of my staff 13 actually managing them -- managing the liaison and 14 dealing with all the health and safety matters. 15 I think that was about GBP25 million worth of work. 16 Interestingly enough, the person that was actually 17 helping oversee the utilities diversion works was 18 somebody who had done the similar job in Sheffield, and 19 in fact it was Bill Woolgar who became the Chairman of 20 Turner & Townsend. 21 Q. How were you able to ensure the utility companies did 22 the works on time as opposed to delaying and doing it in 23 their own time? 24 A. I think it was a man management skill. We learned very 25 early on that actually -- this may sound slightly 111 1 strange, but if you keep most of the management out of 2 the process, the guys on the ground are much more 3 effective at getting on with it than having a large 4 number of people turning up now and again and telling 5 them how to do it. 6 Q. Do you remember -- might there have been contracts 7 perhaps as well with the utility companies that may have 8 set out time limits? 9 A. In that sense, they were moving their equipment on their 10 terms. So basically we were persuading -- there was 11 clearly a local incentive because of the -- you know, 12 their relationship with Croydon Council. All I was 13 trying to make the point was that you could do it in 14 a different way with a lot less people, and potentially 15 a lot less project management costs. 16 CHAIR OF THE INQUIRY: How did you co-ordinate or how -- 17 what was the work co-ordinated? Because you've got 18 different utilities companies -- 19 A. Yes, we had a programme to -- a programme to co-ordinate 20 it, and we may have been a bit more lucky than 21 apparently in Edinburgh that actually we were able to, 22 you know, pretty much identify all the key utilities 23 that needed moving, and because we'd done the work 24 before the contractor started, you could make a couple 25 of design changes that were at no cost, so that you 112 1 didn't have to move a very expensive BT cable, for 2 example. 3 So you could work round things and -- by being able 4 to get the work done in good time before it started. 5 CHAIR OF THE INQUIRY: Were the records of utilities in 6 Croydon, were they quite good or did you have to use 7 ground penetrating radar or other -- 8 A. We -- and this is in 1996. So technology has clearly 9 moved on since then, but they used the best technical 10 equipment they could at the time, and I'm not saying 11 Croydon did it any better than Edinburgh would have 12 done, but all I was trying to allude to was that I was 13 quite surprised that the MUDFA works became so complex, 14 when I'd seen circumstances where it had been done 15 within budget and -- I mean, the interesting thing was 16 I think we ended up -- to give you an example, we ended 17 up organising a do for all the people that did the 18 works, and that was the nearest they got to a bonus. We 19 had an absolutely exemplary health and safety 20 relationship because they all just joined into the 21 project. It was very much about managing them as much 22 as anything else. 23 I think the moment you start talking about the 24 contractual process, you introduce, as they would 25 describe it, the men in suits, and once that happens, 113 1 then it's usually -- it doesn't usually speed things up. 2 CHAIR OF THE INQUIRY: Thank you. 3 MR MACKENZIE: Just to finish Croydon, Mr Heath, I take it 4 the Croydon tramline also runs along -- on street. 5 A. Yes. Yes. 6 Q. Is there anything different -- 7 A. The -- Croydon has probably -- I think the numbers were 8 something like 52 per cent were on street and 9 48 per cent were using former railway lines or segmented 10 pathway. 11 There was -- I mean, the centre of Croydon is not 12 anywhere near the same complexity as the centre of 13 Edinburgh. 14 Q. Thank you. Then returning, please, to your statement at 15 page 34, we see point 6 at the top of the page. You 16 say: 17 "Expecting a Claims culture from its contractor." 18 Is that comment particular to this contractor or is 19 that directed at any situation? 20 A. It's directed at any situation in -- after I -- after 21 we'd finished the Tramlink construction, and I was still 22 there, we had a series of -- we, London Transport, had 23 a series of claims to defend that we successfully 24 defended. 25 Q. Thank you. 114 1 CHAIR OF THE INQUIRY: Number 5 you say is: 2 "Better oversight of Tie with greater challenge from 3 above." 4 Who do you anticipate would be doing that? 5 A. I would have anticipated that the -- I suppose the first 6 place would -- having looked at the Business Case, which 7 counsel kindly sent me to look at, that the tie Board, 8 the Business Case indicated that the tie Board had the 9 necessary expertise and skills to challenge -- challenge 10 the delivery element of tie. 11 So that would be the first place. 12 The second place would be if the Council had 13 determined that the Tram Project Board effectively was 14 the controlling body for the project delivery, then it 15 would have been the Tram Project Board and the 16 tie Board. 17 I think my only concern is that those two, looking 18 at the documentation, seem to overlap in terms of 19 responsibility, which again had the potential for 20 confusion. 21 I have some sympathy for the tie project team that 22 working out who they were actually meant to be reporting 23 to at certain stages of the project, it wouldn't have 24 been easy for them. 25 MR MACKENZIE: Thank you. Finally, Mr Heath, I should take 115 1 you to paragraph (f). We asked: 2 "Are there any final comments you would like to make 3 that fall within the Inquiry's Terms of Reference ..." 4 You replied: 5 "I think the role of the contractor in this case 6 needs serious consideration. Was its leadership up to 7 the task in terms of experience?" 8 Pause there. Why do you say that? 9 A. I think -- I think the first point was that we'd 10 interviewed the BBS Project Manager and that was 11 relatively positive, but if you then saw the delivery of 12 the subcontractors, that positive impression was to some 13 extent dissipated. 14 Q. I understand. You also then said: 15 "I was always of the view that exchange rate 16 fluctuations with a subsidiary pricing in sterling and 17 declaring its profits to group in euro may have been 18 a contributory factor to its behaviour." 19 Can you explain that, please? 20 A. It's a personal kite I flew, but I've always found 21 multinational companies that are pricing to the client 22 in one currency and then reporting their profits in 23 another currency are clearly running the risk of 24 a currency fluctuation, and from memory, the pound and 25 the euro oscillated during that period. 116 1 So it would have been perfectly understandable to 2 suddenly find that, depending on the way the exchange 3 rate was fluctuating, the profits that were being 4 reported might have been significantly higher or 5 significantly lower than a group would have expected. 6 And in my experience in those situations, a group 7 would usually expect its subsidiary to do something 8 about it, especially if the profits are lower than they 9 thought they were going to be. 10 CHAIR OF THE INQUIRY: Do you know if Bilfinger Berger had 11 ever constructed a tram system through a city? 12 A. I'm not sure, my Lord. They certainly hadn't done one 13 in the UK. I think later on we asked -- we'd made some 14 enquiries and I think they'd done something in 15 Vancouver, but I don't think they've -- only they would 16 tell you their experience, and it wasn't something at 17 the time that we explored with tie. 18 CHAIR OF THE INQUIRY: Thank you. 19 MR MACKENZIE: Thank you. 20 You then say: 21 "Whilst Tie made a number of mistakes in the 22 process, many of them should have been mitigated by 23 a contractor properly participating in the partnering 24 relationship necessary for the project's success." 25 Can you explain that, please? 117 1 A. I think it -- I think the conversation we had about 2 Schedule 4 and the difference of opinion of the two 3 parties about who was responsible for design development 4 a month after we'd signed the contract was clearly not 5 going to bode well for the future. 6 The part -- in these type of contracts, partnering 7 is very important. It always struck me that both 8 parties had rushed to an adversarial approach rather 9 early on in the process; didn't really seem to explore 10 their options to at least work out what they'd agreed 11 about before they started working out what they've 12 disagreed about. 13 Q. Was that an impression you formed at the time? 14 A. It was certainly an impression that we formed later on 15 when we were doing peer reviews, and in 2010 when we 16 were effectively doing, in inverted commas, consultancy, 17 away from the peer review process to tie, that they were 18 in an adversarial position rather early in the day. 19 Q. Finally, when you stated, over the page, please -- at 20 the top of the page you stated: 21 "Unfortunately when Partnering breaks down 22 a number of people in construction on both client and 23 contractor sides revert to what they know best which is 24 claims and litigation." 25 Is that a final closing comment? 118 1 A. Yes. 2 MR MACKENZIE: Thank you, Mr Heath. I have no further 3 questions. 4 Questions by CHAIR OF THE INQUIRY 5 CHAIR OF THE INQUIRY: Before that sentence, you say 6 something to the effect it's ironic that they -- because 7 Bilfinger Berger had been chosen on the basis of their 8 partnership approach. Where did you get that 9 information? 10 A. That was something we drew from tie reporting to us when 11 they decided who the preferred bidder was, and on that 12 basis. 13 I think I ought to say in fairness to tie, I think 14 the actual negotiations to reach a preferred bidder 15 would have been very difficult because the market for 16 tram delivery in the sense of major projects had shrunk 17 quite appreciably, and so they were having to choose 18 between -- I think they only had two bidders by the end. 19 And I can remember in Tramlink, we were -- we were 20 advised by Ministers that they wanted us to have another 21 bidder for competition, even if the bidder wasn't 22 particularly strong, to keep the competitive pressure. 23 So when there's only two, that's quite -- that's 24 quite difficult. I think they -- in the circumstances, 25 they would have had to work hard to reach a conclusion. 119 1 From memory, I think the two bidders were quite 2 close together on price. So the partnering issue would 3 have probably been one of the factors that made the 4 decision easier for them. 5 I can't be certain, but I think that was the case. 6 CHAIR OF THE INQUIRY: Thank you. I don't think anyone has 7 given any indication of questions. So I presume there's 8 no matter. 9 Thank you very much, Mr Heath. You're free to go. 10 You will still be under your citation in the event 11 that it was necessary to recall you. I hope that's not 12 necessary, but thank you very much. 13 A. Thank you, my Lord. 14 (The witness withdrew) 15 CHAIR OF THE INQUIRY: We will adjourn until 2 o'clock. 16 (1.00 pm) 204 1 INDEX 2 PAGE 3 MR MICHAEL HEATH (sworn) .............................1 4 5 Examination by MR MACKENZIE ...................1 6 7 Questions by CHAIR OF THE INQUIRY ...........119 8 9 MR GRAEME GREENHILL (affirmed) .....................120 10 11 Examination by MR MACKENZIE .................120 12 13 205