1 Friday, 6 October 2017 19 (The witness withdrew) 20 MR MACKENZIE: My Lord, the next witness is Alec Macaulay. 21 CHAIR OF THE INQUIRY: Mr Mackenzie, we will get this 22 witness started, but if you could find a point around 23 about 11 o'clock for the benefit of the shorthand 24 writer. 25 47 1 MR ALEXANDER MACAULAY 2 CHAIR OF THE INQUIRY: Mr Macaulay. 3 A. Good morning, Lord Hardie. 4 (Witness affirmed) 5 Examination by MR MACKENZIE 6 CHAIR OF THE INQUIRY: I appreciate you have given evidence 7 on many occasions. Could I ask you to speak clearly 8 into the microphone and sufficiently slowly so that the 9 shorthand writers can keep up with you. 10 If you listen to the question and answer it 11 directly, if it's capable of a yes or no, then that 12 should be your answer. Subject of course to any 13 qualification that you may then want to add. 14 MR MACKENZIE: Thank you, my Lord. Good morning. 15 A. Good morning. 16 Q. Can you state your full name, please? 17 A. Alexander Macaulay. 18 Q. And your current occupation? 19 A. Retired. 20 Q. Now, you have provided a CV, Mr Macaulay. I'll take you 21 to that. 22 A. Yes. 23 Q. It's CVS00000004. We can see in the right-hand column 24 you have a degree in civil engineering, towards the top, 25 we see that, top right-hand column. Degree in civil 48 1 engineering. 2 If we now go to the bottom right of this page, 3 please, we can see membership of various professional 4 bodies. 5 We can also see at the very bottom two lines, you 6 are a past chair of the Institution of Civil Engineers, 7 and also a past chair of the Institution of Highways & 8 Transportation. Are these UK-wide or Scottish bodies? 9 A. Scottish bodies. 10 Q. Then if we can go over, please, to page 3, to look at 11 your experience, we can read that for ourselves. Up 12 towards the top of the page, please, we can see then on 13 page 2 -- that's the wrong document, perhaps. 14 Yes, there we go. At the bottom of page 2, we see 15 from 1994 to 1996, at Lothian Regional Council, you were 16 the Depute Director of Transportation, et cetera. 17 Then if we go up that page a little and stop there, 18 we see between 1996 and 2000 you were the Head of Local 19 Area Services and Special Projects with Edinburgh City 20 Council. We can see that included in the next 21 paragraph, Waterfront Edinburgh, and the redevelopment 22 of that area. And also we see a reference to various 23 other matters, including development of a major 24 programme of urban streetscape in the city centre, 25 et cetera. At the top we see between September 2000 and 49 1 April 2002, you were Project Director for the new 2 transport initiative. We can read for ourselves what is 3 then set out. 4 If we could then please carry on up the page and 5 then over to the first page, we can see at the bottom of 6 the page, between April 2002 to July 2006, you were 7 employed by tie Ltd and you explain that having set up 8 tie, you moved to the company as Projects Director. 9 Just to pause there, Mr Macaulay, as a point of 10 detail, were you projects Plural Director at tie or 11 Project Director, so I can refer to the correct title? 12 A. Plural. 13 Q. We can see what is set out there. Scrolling down the 14 page, to finish off, we see that you were then, in 15 July 2006, you were Director of SEStran. When did you 16 stop that role? 17 A. I stopped at the end of June 2016. I'm now retired. 18 And in terms of the right-hand column, I am no longer 19 a member of the Institution of Civil Engineers. I am 20 still a member of the Institution of Highways & 21 Transportation. I'm no longer a Director of 22 Partnerships UK, nor One Ticket Limited. But I am 23 a non-elected member of the Strathclyde Partnership for 24 Transport. 25 Q. Thank you. You've also provided a statement to the 50 1 Inquiry. I think you may have a hard copy in front of 2 you. I'll also bring it up on the screen. Our document 3 reference number is TRI00000053_C. I should formally go 4 to the last page, please, page 51. We can see 5 a signature, the date 7 December 2016. Can you confirm, 6 please, this is your signature and this is the written 7 statement you have provided to the Inquiry? 8 A. It is my signature, and it's the written statement that 9 was provided to the Inquiry at that date. It was 10 a written statement to the best of my recollection at 11 that time, and I would take the opportunity to correct 12 a couple of points in it later on, if you give me the 13 opportunity. 14 Q. It might be easier to do that now, Mr Macaulay, if it's 15 fresh in your mind? 16 A. Yes, I can do that now. 17 If you go to paragraph 5 of my statement, which is 18 on page 3. 19 Q. Perhaps we can put that up on the screen? 20 A. Yes. I state in there that I had never seen 21 a particular organisation chart before, and also on 22 page 6, I also state in there that I had not seen 23 a particular memorandum from Michael Howell. I can only 24 suspect that my memory was not fully in gear when I was 25 doing that at the time. I do now recall both 51 1 Michael Howell's memorandum and the associated 2 organisation chart which in my statement I had 3 misinterpreted as what it was. Michael Howell's 4 memorandum talked about a programme of work to 5 reconfigure the business of the company, and the chart 6 referred to in paragraph 5 is an organisation chart for 7 how that programme of reconsideration and 8 reconfiguration of the company would be carried out. It 9 doesn't represent a definition of the responsibilities 10 at that time within the company. It represented the 11 responsibilities for moving the project forward. 12 So apologies for that, my Lord. I had to correct 13 that, but memory is never perfect. 14 Q. Thank you for clarifying that. I think in fact you said 15 the memorandum was page 6. I think it's paragraph 6. 16 If we go to page 4? 17 A. Yes. Apologies. Paragraph 6. 18 Q. Yes. We see in paragraph 6, reference to the note of 19 a memorandum from Mr Howell you referred to. So thank 20 you for clarifying that, Mr Macaulay. 21 I should say on my part that your evidence to the 22 Inquiry will comprise both the written statement and 23 what you say today as well. Thank you. 24 CHAIR OF THE INQUIRY: Before we go on, I see from your CV 25 that when you were with -- while you were the Projects 52 1 Director at tie, there's reference to congestion 2 charging as being one of the sources of funding for the 3 various projects. 4 Can I just be quite clear. Was that a concept that 5 was in mind when tie was set up? 6 A. Absolutely, my Lord. The initial concept of setting up 7 tie was in the context of the congestion charging 8 legislation which the Scottish Government had 9 introduced. I can't remember the exact date of it. It 10 might have been -- I won't speculate on the date. 11 But as a result of that the City Council and indeed 12 prior to that, there was work done by the Regional 13 Council, took the view that the opportunity of 14 introducing congestion charging within Edinburgh would 15 have two major advantages. One being contributing to 16 reduction of congestion, the second being to generate 17 a revenue stream against which further investment could 18 be set. 19 I think I go in my written statement later on to 20 explain the background to that, as to why there were 21 advantages in having it off-balance sheet as far as the 22 Council was concerned. There were advantages in 23 addressing the public perception of whether or not the 24 City Council could deliver such a major programme of 25 work. And other issues as well. 53 1 But I think I cover them later in the statement. 2 CHAIR OF THE INQUIRY: The effect of that would be to use 3 the funding from congestion charging to carry out 4 transport projects within the city. 5 A. Correct. 6 CHAIR OF THE INQUIRY: Including the tram. 7 A. Correct. The legislation in fact required a number of 8 issues. The first being that any income from congestion 9 charging should be genuinely additional to the funding 10 available to the local authority, and not be offset by 11 cuts elsewhere in the local authority's budget. And the 12 funding that comes in from congestion charging should be 13 ring-fenced for transport investment, and the original 14 New Transport Initiative documentation laid out, 15 I believe, as an appendix, a fairly extensive programme 16 of the types of investment that congestion charging 17 could be used to implement. 18 The other advantage of it in that it became -- it 19 potentially would have become an independent revenue 20 stream, independent of the Council. Once that revenue 21 stream was established, it could actually potentially be 22 used as collateral, if you like, for borrowing to take 23 over -- to deal with peaks and troughs in any particular 24 investment programme. 25 So it was a big opportunity for the City Council. 54 1 In the event it didn't go ahead as a result of the 2 referendum. 3 CHAIR OF THE INQUIRY: Thank you. Sorry to have taken that 4 out of context, but I wanted to get clear in my own mind 5 what the position was. 6 Could I also say, as I should have said in the 7 beginning, I apologise for bringing you here today as 8 opposed to Tuesday, but I was unavailable for 9 circumstances beyond my control that I couldn't be here. 10 Is this a convenient point? 11 MR MACKENZIE: My Lord, this may be an appropriate place to 12 stop. 13 CHAIR OF THE INQUIRY: We will adjourn for 15 minutes to 14 give the shorthand writers a break, and we'll resume 15 again about 11.15. 16 A. Okay. 17 (10.59 am) 18 (A short break) 19 (11.15 am) 20 CHAIR OF THE INQUIRY: You're still under oath, Mr Macaulay. 21 MR MACKENZIE: Thank you, my Lord. 22 Mr Macaulay, I would like now to look at your main 23 duties and responsibilities with a particular focus on 24 the tram project. We can find that, I think, at page 3 25 of your statement, in paragraph 3. 55 1 It will come up on the screen shortly. 2 You explain there that: 3 "Whilst employed by TIE my job title was projects 4 director responsible for a range of projects including 5 the tram project." 6 You say: 7 "My duties and responsibilities in relation to the 8 Tram Project included developing the project from 9 concept through to the stage where it could achieve 10 parliamentary approval and, in doing that, to procure 11 the necessary technical, legal and financial advice that 12 would get us through to a parliamentary approval and 13 confirmation of the Bills and Acts of Parliament." 14 That was your primary responsibility with the tram 15 network and you also had other responsibilities in 16 relation to other tie projects. 17 Now, I think Royal Assent for the Bills and Acts was 18 achieved in April 2006, about then; is that correct? 19 A. I'll take your guidance on that. 20 Q. Thank you. 21 Now, we also know that in 2005, in the tram project, 22 the design contract was procured and let. I think it 23 was awarded in September 2005. 24 Is that something you had any involvement with? 25 A. It's not. I think we need to be clear in terms of the 56 1 division of responsibilities within the company. 2 My -- as it says in here, in paragraph 3, my primary 3 role was to focus on the parliamentary process. When we 4 first started on the -- on the tram project that was not 5 necessarily the case, but I do recall a meeting of the 6 staff. Unfortunately I can't remember the exact date of 7 that, when the Chief Executive advised the staff that 8 I was not going to be involved in the implementation 9 programme and would be focusing, as far as the tram was 10 concerned, purely on the parliamentary process. 11 Now, it's worth clarifying paragraph 3 here, that 12 while initially we set out that I would be responsible 13 for all these procurements, there is one set of 14 procurement that I didn't take responsibility for, which 15 is the procuring of legal advisers, and the reason for 16 that is quite simple. My wife was and still is 17 a partner in one of the firms that was potentially 18 tendering for the work. That therefore created 19 a potential conflict of interest on my part, 20 and I withdrew from all of the procurement of DLA, 21 Dundas & Wilson, BDB, as legal advisers to the tram. 22 The lead for that was taken by the Chief Executive 23 supported by other staff within the company. 24 Q. Thank you. You do explain that in your statement, 25 I think, to be fair to you. 57 1 A. Yes. 2 Q. You explain very clearly. 3 Now, in relation to the procurement of the design 4 contract, we also know that Ian Kendall was Procurement 5 Director at tie between, I think, September 2003 and 6 July 2005. And that Mr Kendall was then Tram Project 7 Director between, I think, August 2005 to May 2006. 8 So would it have been Mr Kendall who was responsible 9 for procuring the design contract? 10 A. That's correct. The last contract procurement that 11 I was involved in, which did stray into the 12 implementation stage, was the procuring of Transdev as 13 the operator. And that, I believe, from memory, was 14 early 2004, that we appointed Transdev as the operator. 15 From there on in, the subsequent procurements were 16 the primary responsibility of Ian. 17 Q. Now, where did Mr Kendall sit in the organisational 18 structure in relation to you? Was he beneath you? Was 19 he to the side of you or what? 20 A. It's unclear. Initially when he arrived, and during the 21 period that we were involved in the procurement of 22 Transdev, Ian did defer to me as necessary in terms of 23 the work he was doing. 24 Thereafter it changed as I focused much more 25 seriously on the parliamentary process. 58 1 I would love to find the exact date at which it 2 changed, but I don't have access to the documents 3 associated with that. 4 So we have a situation where Ian was effectively the 5 Procurement and Implementation Director of the tram. My 6 job title still remained Projects Director in plural 7 because I had other projects under my responsibility, 8 but there was an evolution during the process where 9 Ian's degree of autonomy increased gradually. He did 10 come to the company as -- with the experience of having 11 built the tram in Croydon, and therefore his background 12 in that area in terms of the implementation was much 13 more relevant than mine. 14 Q. Did Mr Kendall ever report to you in terms of the 15 reporting structure within tie? 16 A. In terms of the reporting structure within tie, up 17 until, I think, about mid-2004, he would have reported 18 to me. Thereafter it was made quite clear to me by the 19 Chief Exec that he wanted me to not be involved in 20 implementation, but be involved in the statutory 21 process. 22 Q. And at or about that time, did Mr Kendall perhaps then 23 report to the Chief Executive? 24 A. Yes. 25 Q. Now, if we then please go to page 4 of your statement 59 1 and paragraph 7, this is all just by way of overview. 2 In paragraph 7 you explain that you left employment with 3 tie in July 2006. You found a new job as Director of 4 SEStran which was closer to your areas of expertise and 5 experience. It was all about transport policy and 6 transport strategy, rather than implementing 7 construction of a project: 8 "So that fitted my own areas of interest more 9 appropriately." 10 You also say: 11 "I have to say I was not particularly happy at that 12 time working in TIE. I did not like the way the company 13 was evolving ..." 14 Just by way of overview, what was it about the way 15 the company was evolving that you didn't like? 16 A. There were a number of things. Firstly, my view of tie 17 was that -- the initial concept of tie was that we were 18 a programme management organisation, and as such would 19 procure the necessary project management and technical 20 and legal services and financial services in order that 21 the programme of works could be delivered. 22 That was the initial concept when we set it up under 23 the New Transport Initiative. 24 Over time I felt that the company was moving much 25 more closely to a project management organisation, but 60 1 not fully to a project management organisation. There 2 was potential in my view for conflict of interest 3 between the tie staff who were directly employed by tie 4 and their professional advisers, and it would leave gaps 5 in the firmament between the two in terms of 6 decision-making. 7 In my view, if you want to be a project management 8 organisation, the organisation would have had to have 9 been significantly larger than tie was, even at its 10 peak, whereas as a programme management organisation 11 you're managing the input from experts in their field. 12 So that was one area where I wasn't particularly 13 comfortable. The other area that I wasn't particularly 14 comfortable relates to your earlier question, where 15 I referred to the memorandum from Michael Howell about 16 the restructuring or reconfiguration of the company, 17 which I referred to in paragraph 6 of my statement. 18 One of the key messages that was in that was that 19 business development would not be part of the 20 reconfiguration of the organisation. The net result of 21 that being that the opportunity for the company to, if 22 you like, spread its risk among a range of different 23 clients and a range of different projects was 24 effectively being removed and the company was going to 25 focus in my view solely on the delivery of the tram; in 61 1 that I was not involved in the delivery of the tram, and 2 the projects which under that scenario would not be 3 continuing, or indeed no new projects, because business 4 development was not part of the review. It was not 5 going to feature in future. 6 So that was another reason why I wasn't particularly 7 happy there, and it seemed the right time to consider 8 going. 9 Q. In relation to the first of the matters you mentioned, 10 the question of original intention of tie as programme 11 managers but not project managers, and you say initially 12 it was intended that tie would be programme managers and 13 would, I think, instruct external experts as project 14 managers; is that correct? 15 A. Yes. 16 Q. These external experts may be perhaps civil engineers 17 who have experience in project management; is that 18 correct? 19 A. Yes. 20 Q. You say over time that changed towards, but not wholly, 21 tie being a project management organisation. Just for 22 the avoidance of doubt, when you say not wholly, is that 23 because you say tie wasn't big enough? Even though it 24 expanded, it wasn't big enough to be a proper project 25 management organisation? 62 1 A. I think there was the potential for confusion in that 2 within the contracts that had been awarded or were going 3 to be awarded to professional advisers, there would 4 obviously have been a responsibility to project manage 5 their work and to project manage the work which they 6 subsequently would be procuring. 7 On the other hand, we had staff within tie who 8 apparently were having the same level of responsibility, 9 and it looked to me at the time as a recipe for: this is 10 not my fault, it's your fault and so on, a bounce back 11 between them. 12 So that was my -- if they were going to be, on 13 a project of this scale, project managing it in detail, 14 they would have been checking effectively every nut and 15 bolt on the contractor's delivery, and that was 16 certainly not, as I could see, the role of tie. 17 Q. Thank you. I would like to take you to a document 18 I don't think you have seen before, but it illustrates 19 how tie grew in size. 20 If we can go, please, to TIE00899954. We can see 21 from the cover first page, under the heading we can see: 22 "Extracts From the Directors Reports and Audited 23 Financial Statements Lodged with Companies House". 24 So the information we are about to look at, I think, 25 has been taken from the reports and accounts lodged at 63 1 Companies House. 2 Page 2, please, we can see a table which is headed 3 "Summary of Directors Emoluments and Staff Costs 4 Published in the Annual Director's Report and Audited 5 Financial Statements". 6 We can see the left-hand column, the year ended. We 7 can then see in the far right-hand column the number of 8 staff excluding seconded and contracted staff, and then 9 two columns in from that we can see employment and other 10 staff costs, and then to the right of that, seconded and 11 contract staff. 12 I think this may give an illustration of how tie as 13 a company grew. So we can see, for example, at year 14 ended 31 March 2003, the employment and other staff 15 costs were about GBP183,000. Seconded and contract 16 staff were about GBP469,000. And the number of staff 17 excluding seconded and contract staff were 7. 18 In the next financial year to 31 March 2004, we can 19 see the employment and other staff costs rising to 20 GBP760,000, the figure for seconded and contract staff 21 staying about the same at 486,000, and the number of 22 staff creeping up a little to 13. Then the year ended 23 31 March 2005, we see a big increase under employment 24 and staff costs. It's now just over GBP1.5 million. 25 Seconded and contract staff are about GBP675,000. The 64 1 number of staff has doubled, excluding second and 2 contracted, to 27, and finally we can see the year ended 3 31 March 2006, the employment and other staff costs are 4 just under 2.2 million. We don't see anything for 5 seconded and contracted staff, and the number of staff 6 excluding seconded and contracted staff has jumped to 7 48. 8 Does that broadly accord with your recollection, 9 Mr Macaulay, of how the company grew over that period? 10 A. In terms of the numbers of staff or numbers of people 11 involved, that broadly reflects my recollection of it up 12 until, obviously, 2006, which is when I left the 13 company. 14 You're quite correct. I haven't seen this document 15 before, and therefore the actual costs figures that are 16 in there are new to me. 17 Q. You may not know the answer to this, but it may just be 18 a point of detail. We can see for the year ended 19 31 March 2005, if we add together the employment and 20 other staff costs figure of about 1.5 million and then 21 the seconded and contract staff of 675,000, we get 22 a total of approximately 2.2 million, which is for 27 23 staff excluding seconded and contracted. We see in the 24 next financial year that number of staff has gone to 48, 25 and yet the total employment and other staff costs 65 1 remains at about 2.2 million. I couldn't work out why 2 that may be. Do you have any thoughts on that or is 3 that simply not something within your knowledge? 4 A. That's not within my knowledge. 5 Q. I understand. Thank you. 6 We can put that document to one side -- 7 CHAIR OF THE INQUIRY: Before we do, do we see that 8 directors' emoluments go from 15,000 on 31 March 2003 up 9 to 288,321 on 31 March 2010? We see that -- 10 A. Can I explain that, my Lord? Is that what you're 11 asking? 12 CHAIR OF THE INQUIRY: Yes. 13 A. When we originally set up tie, as far as I recall, the 14 emolument to appointed directors as opposed to elected 15 directors was of the order of 15,000 a year. 16 As far as I recall, there were only one of the 17 non-elected directors who actually accepted that. The 18 others decided to waive their fee, if you like. 19 So that would explain it up to the end of 20 March 2006. Thereafter, just before I left, we had 21 a new chairman appointed who was an executive chairman, 22 and effectively took over the role of Chief Executive 23 when Michael Howell left the company, and that may 24 explain the kick-start in the level of payments. But 25 that's my speculation only at this stage because by 66 1 31 March 2007, obviously I was away from the company. 2 CHAIR OF THE INQUIRY: We can ask somebody else who was 3 around at that time. Thank you. 4 MR MACKENZIE: Thank you, my Lord. 5 Mr Macaulay, I should now ask you about the creation 6 of tie. We know that tie was created in 2002. And 7 we'll go to some documents in that regard shortly. 8 Just by way of overview, what were the main reasons 9 for the creation of tie to deliver the Council's New 10 Transport Initiative? 11 A. I do cover these in my written statement, but I'm happy 12 to review them again. 13 The context of the development of the New Transport 14 Initiative was a step change in terms of scale of 15 potential investment and scale of numbers of projects 16 that were potentially going to be delivered. 17 In the run-up to the establishment of tie, the team 18 involved in the New Transport Initiative, which I led, 19 carried out a very extensive public participation 20 exercise, and from memory that probably still ranks as 21 the biggest public participation exercise the city has 22 ever carried out. 23 It was critically assessed and evaluated by 24 academics and the results were published as background 25 information to the Council in terms of their 67 1 decision-making process to go ahead with the NTI. 2 One of the issues that came out of that public 3 participation quite strongly was a disbelief, if you 4 like, from the general public that the City Council 5 would be in a position to deliver a project of this 6 scale. So that was one issue. 7 The second issue related to -- and I think 8 I referred to it earlier, my Lord -- the legislative 9 requirement that any income would be additional, 10 genuinely additional, and would be ring-fenced for 11 transport investment, and there was a lot of doubt in 12 the public's mind that the ring-fencing would not happen 13 if the City Council progressed with it and money would 14 simply be siphoned off budgets elsewhere in order to 15 create savings or whatever. 16 So what we wanted to do was set up a company which 17 was patently obviously separate from the City Council, 18 would have its own set of accounts and would have its 19 own reconciliation of those accounts and would produce 20 a clear path between the income and the investment. 21 So that was another reason for it. 22 Q. Just to pause there, Mr Macaulay, and sorry to 23 interrupt, would that in some way -- perhaps by public 24 acceptance of what might otherwise be an unpopular 25 measure such as road congestion charging, the public 68 1 could see the money was going into positive transport 2 initiatives for the city? 3 A. I think at that time there was overwhelming support for 4 congestion charging and the New Transport Initiative. 5 But in examining the results of the public 6 participation, we obviously took note of the concerns 7 that had been raised by members of the public in their 8 responses. 9 The other issue related to availability of staff, 10 and at that time I recall it was very difficult for 11 local authorities to appoint new staff, and I seem to 12 recall we needed ministerial approval to increase the 13 staff establishment of a local authority, which meant 14 the opportunity to respond quickly to changing 15 circumstances in a major programme was being potentially 16 constrained in terms of the time it would take to get 17 the necessary approvals for additional staff. It was 18 seen at that time, if it was an arm's length company, 19 that flexibility would be much greater. 20 There was another one. 21 Q. I think you also refer in your statement to 22 Scottish Executive having wished this to be delivered by 23 an arm's length company; is that correct? 24 A. If -- my comments earlier related to the establishment 25 of tie in the context of the new Transport Initiative, 69 1 and tie was established in the context of the New 2 Transport Initiative and was a legal entity and was 3 operating as a company before we were appointed to 4 deliver on the tram scheme, and I recall the letter from 5 Wendy Alexander who was a Minister at the time saying 6 that when awarding the grant to the City Council, it was 7 conditional upon them using an arm's length company. 8 But the arm's length company was already there, 9 which is why the City Council put the work towards tie. 10 Q. Thank you. We will come to that later, very shortly, 11 but I think you explain in your statement in short that 12 you have no doubt at all the Council had made up its own 13 mind to deliver the New Transport Initiative Projects by 14 an arm's length company, even before the Scottish 15 Ministers said that was also what they wanted done? 16 A. Correct. 17 Q. Thank you. If we could then go to that letter. The 18 reference is USB00000232. This starts with a report to 19 Council on 2 May 2002. We see that from the top. We 20 can see the purpose of the report in paragraph 1.1: 21 "To advise the Council on progress on the New 22 Transport Initiative and to seek agreement for a number 23 of steps required to take the initiative forward, 24 including the legal framework and budget needed to 25 finalise the establishment of the arms-length delivery 70 1 company." 2 If we can go to page 2, please, and try not to dwell 3 on this, but we can see that paragraphs 3.6, 3.7 and 3.8 4 all explain a little more in relation to the 5 establishment of the arm's length company, and you 6 explain that -- the report explains: 7 "On 18 October 2001, the Council approved in 8 principle the establishment of an arms-length company 9 to develop and deliver the ... initiative ..." 10 If we then please go to page 10 of this report, 11 I think you will see the letter from the Minister we 12 referred to earlier. Page 10. We can see it's dated 13 25 February 2002. It is from Wendy Alexander, the then 14 Minister for Enterprise, Transport and Lifelong 15 Learning. In the second paragraph, we see the Minister 16 stated: 17 "As you know I firmly believe that the private 18 sector has much to contribute to this process 19 and I strongly support the principle of an off-balance 20 sheet company to progress the Council's plans." 21 So there's a meeting of minds, essentially, on the 22 way to deliver these projects. 23 Now, could we also please, stick with this document, 24 go to page 51. We can see this is described as an 25 Application to Scottish Ministers for Approval in 71 1 Principle for the Integrated Transport Initiative for 2 Edinburgh and South-East Scotland. It's dated 3 October 2001. 4 If we then please go to page 64, we can see in 5 section 11, "Delivering the Initiative - a new approach", 6 I won't read it out, but I think we can see for 7 ourselves the various reasons set out for delivering the 8 initiative by means of an arm's length company. Is that 9 correct? 10 A. Yes, that's correct. 11 Q. Thank you. Finally, over the page, please, the 12 discussion continues. On the first half of the page, 13 and then just finally, if we look at the diagram, we can 14 see ENTICO, which became tie. Above that is CEC, and 15 above that again is Scottish Executive. 16 To pause here, Mr Macaulay, this seems a fairly 17 simple diagram. Does this also show the reporting 18 structure in that was it envisaged at this time that tie 19 would report directly to the Council? 20 A. It would effectively be in partnership with the Council. 21 I think in that same report, there is a description of 22 the levels of responsibility and involvement that the 23 Council wished to keep unto itself, which were policy 24 issues, strategy issues, statutory approval issues. 25 ENTICO would be their agent company for the delivery 72 1 of the programme of the New Transport Initiative, but 2 the content of the programme would be decided by the 3 City of Edinburgh Council. 4 So it was envisaged that the direction of 5 ENTICO would come from the City of Edinburgh Council as 6 the owner of the company, as the strategic transport 7 planning organisation for the city. 8 As a result of that, in that the City Council 9 retained those responsibilities and owned the company 10 100 per cent, it would be inevitable that ENTICO would 11 be reporting to the City Council, not necessarily on the 12 detailed implementation, but certainly where it impinged 13 upon those areas that the City Council kept unto itself. 14 Q. Thank you. We can put that document to one side. If 15 I could return to your statement, please, to page 8, 16 paragraph 14. This relates to the issue of how the 17 Council exercised control over tie, and you explain 18 that: 19 "It was envisaged that CEC would exercise control 20 over TIE primarily through their representation on the 21 board of TIE." 22 Now, would that be representation by members or 23 officers or both of the Council? 24 A. That was elected members. 25 Q. You also say at the bottom of this paragraph, as you've 73 1 just said: 2 "It was always envisaged that it would be 3 effectively a partnership operating between the two." 4 You explain the division between policy and strategy 5 and the operation or implementation. 6 Now, in paragraph 15 in the same page, if we can go 7 to that, please, we may have touched upon this earlier 8 this morning, towards the bottom, you say: 9 "One needs to set in the context of the 10 establishment of TIE the promotion of the NTI, which was 11 generating potentially multi-million pounds of income. 12 Having established that income stream, it would then be 13 able to operate much more as an arm's length 14 organisation and use that income stream as the lever for 15 other commercial arrangements with other third parties." 16 Is the income stream -- let me ask you this. What 17 would have been the source of that income stream? 18 A. Congestion charging. 19 Q. Just congestion charging? 20 A. Yes. At that time, yes. 21 Q. At the time of the establishment of tie? 22 A. Yes. 23 Q. I'm sorry if we've touched upon this already, but what 24 was the relevance of that income stream to the 25 establishment of tie? 74 1 A. It comes back again to the transparency of accounting. 2 The income stream under the legislation required to be 3 additional to any other investment that the City Council 4 would normally have carried out in transport, and it had 5 to be ring-fenced for transport projects, which is why 6 there is an indicative list at the end of the document 7 of the types of projects that could potentially be 8 funded by making use of the income stream or indeed by 9 using the income stream to secure levels of borrowing. 10 Q. How important was that income stream to the reasons 11 behind the establishment of tie? 12 A. I think it was pretty fundamental. 13 Q. Now, if there were to come a time when tie were no 14 longer in receipt of that income stream, and also had 15 only one or two projects to deliver, would that call 16 into question whether tie remained an appropriate 17 delivery model for the Council? 18 A. It is one element that obviously would have changed. 19 The other reasons for the establishment of tie that 20 I outlined earlier still would prevail. And on balance, 21 the view at the time was that it should continue as 22 a delivery organisation. Arm's length from the Council. 23 Q. Yes. We know that the road charging referendum took 24 place, I think, in early 2005. And the result of course 25 was not to proceed with that. 75 1 Was there any discussion either within tie or with 2 the Council around that time as to whether tie remained 3 the most appropriate delivery vehicle for the tram 4 project? 5 A. I honestly don't recall any major discussion of that 6 nature. The major change that took place at that time 7 was that we discontinued the development of tram line 3, 8 which was identified as requiring the income stream in 9 order for tram line 3 to proceed, and since we didn't 10 have the income stream, we couldn't demonstrate to the 11 Parliament that there was a robust financial case for 12 it, and therefore we abandoned the proposal to take 13 tram line 3 into the Parliament. 14 CHAIR OF THE INQUIRY: Tram line 3 was going to go to the 15 Royal Infirmary; is that correct? 16 A. It was going to go -- well, now, past the Royal 17 Infirmary, my Lord. It came out to the Royal Infirmary 18 and split into two, and one heading towards -- going up 19 the old A7 and the other one heading across further west 20 to the major retail park that's there. 21 The names of these things escape me at the moment. 22 MR MACKENZIE: Thank you. 23 We asked you various questions in relation to the 24 procurement model, Mr Macaulay. There's only one aspect 25 I would like to ask you about in that regard. If we can 76 1 go, please, to page 25 of your statement, there's the 2 question of utility diversions on page 25, and towards 3 the bottom third of this answer we see the sentence 4 beginning: 5 "Other key issues were that there was always a risk 6 with public utilities in gaining statutory approvals, 7 delays with utilities, and the discovery of utilities 8 that the companies do not know are under the road ..." 9 What we wanted to do was de-risk these areas, which 10 is why we separated out the utility contract. The other 11 big risk with utility contracts is, if there are half 12 a dozen different utilities, one cannot control the 13 programming of the works. So for the first time in the 14 UK, we considered looking at a combined utility contract 15 with one experienced utility contractor doing all the 16 main trunk service diversions: the game plan was to get 17 those done and dusted and get the utility contractor 18 off-site before the main contractor came on site." 19 To pause there, presumably that was primarily 20 a matter Ian Kendall was involved in; is that correct? 21 A. He would have been involved in awarding the contract and 22 managing the contract, yes. 23 Q. But you certainly had an awareness of these issues? 24 A. I did, because I was involved in the early 25 considerations of alternative procurement strategies, 77 1 which was a range of at least half a dozen different 2 alternatives which were evaluated at some length by the 3 procurement workshop, and the net result of that, as far 4 as utilities is concerned, is what's recounted there in 5 my statement. 6 In other words, because of the fact that the main 7 contracts were going to be expensive and the utilities 8 in terms of their proportion of the main contract was 9 relatively small, but the risk associated with delays on 10 the utilities contract, if they had knock-on effects on 11 the main contract, were substantial; and the risk of 12 lumping the utilities in with the main contract would 13 have meant that delays in the utilities potentially 14 would have significant knock-on delays in the main 15 contract, which is why we separated them out; and as it 16 says here, the game plan was to have the trunk 17 utilities, not the local services into individual 18 properties, but the trunk utilities all diverted and 19 done and dusted before the main contractor came on site. 20 Q. I was going to ask you what you meant by the trunk 21 utilities? 22 A. The trunk utilities would be, for example, 12-inch water 23 mains or similar-sized sewers or main communications 24 networks. What it wouldn't necessarily include is the 25 half-inch water pipe that goes from the main pipe into 78 1 the property, or the cable TV connection that goes into 2 a house adjacent. 3 It was primarily the trunk services which was -- 4 were perceived as being the major risk to -- with 5 potential delays and potential cost impacts. 6 Q. Thank you. Now, I quite understand the philosophy of 7 getting the utility work done in advance. I quite 8 understand the philosophy of only digging up the road 9 once, to do all the utilities at the same time. 10 One just wonders whether, in relation to only 11 digging up the road once to minimise disruption, whether 12 that could have been done by tie and/or the Council 13 co-ordinating works in such a way that the road or 14 a section of the road was dug up once; then the onus was 15 on each utility company to undertake their own works. 16 Would that have been an option? 17 A. It is an option. There is no question that it's an 18 option, but my own experience and experience of others 19 as well is that if we leave it to the utility companies 20 to do the diversions, you cannot necessarily have 21 control over the timescale in which they'll do it. That 22 was a consideration going for a directly appointed 23 utilities contractor. 24 Q. Why is it you don't have control over the timescales? 25 A. Because it's their services and it's their diversion and 79 1 if they're doing the diversion, you don't have direct 2 control over when they'll do it. 3 Q. They have certain statutory rights, I think, as well? 4 A. Yes, of course they do. 5 Q. Thank you. Another matter, please, leaving that to one 6 side. Go, please, to look at design at page 26 of your 7 statement. 8 In paragraph 48 you stated: 9 "My view on the importance of achieving a transfer 10 of design risk to the private sector was that it was 11 fundamental." 12 Can you explain why it was fundamental? 13 A. Well, there is -- I'll take you back to the concept of 14 the procurement. It was envisaged this would be 15 a design and build contract, and in awarding a design 16 and build contract, one has the option of simply lumping 17 the design and the implementation into one contract and 18 dealing with it as a totality. 19 We were going through a World Heritage site. We 20 were going past several thousand front doors of property 21 in the middle of Edinburgh. So therefore it was viewed 22 at the time of the procurement workshop that design was 23 a significant risk. In other words, if at the stage of 24 going for a design and build contract, the tendering 25 organisation didn't really have a good definition of 80 1 what they were tendering for, then there was a potential 2 for inflated costs in their tender price. 3 So having the design carried out in advance was seen 4 as a major benefit. Having done that, there was -- the 5 whole issue of integration between the different 6 elements that were being procured, and it was 7 intended -- I don't know whether it ever happened, but 8 the objective was that the design company would transfer 9 to the successful design and build contractor, thereby 10 providing continuity of knowledge of the various design 11 problems and issues that had come up during the design 12 period, and at the time that the main contractor was 13 tendering, they would have sight of a fairly well 14 advanced, hopefully 100 per cent well advanced, design, 15 and would then be able to provide a much firmer price in 16 his tender. 17 So in my view, the two elements of it were 18 fundamentally important. The first one is to get as 19 much of a design as possible done in advance before the 20 main contract was awarded, and secondly, having awarded 21 the main contract, to transfer that design risk to the 22 main contractor. 23 In the same way that we were aiming to transfer the 24 integration risk between the tram vehicles supplier and 25 the main contractor. 81 1 Q. Thank you. I think on the question of how much of the 2 design would be complete, if we can go, please, to 3 page 27 of your statement, to the paragraph at the top 4 of the page. We see in the last sentence, you say: 5 "Having the design virtually complete at the time of 6 tendering the main contract was always envisaged as part 7 of the process." 8 So that was your understanding while you were with 9 tie? 10 A. Correct. It was my understanding while I was involved 11 in that element of the tram in tie. As I've said, when 12 it moved on to much more detailed implementation, others 13 were deciding how to move forward. 14 Q. Thank you. 15 We go, please, to page 11, and it's back to the 16 issue of project management. 17 Paragraph 18 starts off: 18 "Consideration was given to instructing an external 19 expert body to act as project managers for the Tram 20 Project." 21 I just wondered, when was that? Was this when tie 22 was created? Was this some time later on? 23 A. Well, we did actually employ externals in terms of the 24 civil engineering contractors that were involved -- 25 civil engineering consultants that provided the bulk of 82 1 the input to the parliamentary process. I think that 2 was what I was referring to. 3 Q. So is it project management of the parliamentary process 4 part of the project? 5 A. It certainly -- it's interesting. The project 6 management of an engineering consultant is -- was at 7 that stage the project managing their own element of 8 work, such that they were in a position to produce cost 9 estimates, preliminary designs, other technical 10 information, which was necessary for the parliamentary 11 process. 12 The project management of the parliamentary process 13 itself was initially carried out by Bircham Dyson Bell, 14 legal advisers, who were parliamentary agents, well 15 experienced parliamentary agents, dealing with the 16 Westminster statutory processes. 17 They produced the draft Bills, so their legal input 18 was there in the draft Bills. But they were also acting 19 as parliamentary agents to make sure that the process 20 through Parliament was being conducted appropriately. 21 We did have difficulty with that halfway through the 22 parliamentary process, I think as a result of remoteness 23 with their headquarters being in London, and I had to 24 take -- I had recourse to change that and move it across 25 to Dundas & Wilson, who were able to respond much more 83 1 quickly to questions that were coming from the 2 Parliamentary Committee. 3 Q. On the wider question of the project management of the 4 tram project, you have explained how -- your concerns in 5 that regard and how it had initially been envisaged tie 6 would be a programme management organisation, rather 7 than project management, and that your concerns were 8 that tie became a sort of halfway house towards project 9 management, and there may be an overlap or confusion of 10 responsibilities between those in tie and those 11 externally. 12 But on a separate point, did you have any concerns 13 about tie taking on the role of project managers for the 14 tram project, when as an organisation, tie had no 15 experience of procuring and delivering a tram system? 16 A. I certainly had concerns about tie taking on the project 17 management of the implementation of the tram. 18 As far as the parliamentary process was concerned, 19 there was nobody anywhere in the world who had taken 20 a Bill through the Scottish Parliament for a tram, and 21 we were as well equipped to do that as possible, which 22 is why we procured the expert advice that we did. 23 As far as my initial concept early on with the 24 establishment of tie, having a project management 25 company to assist the programme management company would 84 1 have been quite consistent with that concept. 2 As it turned out, tie, as we've said earlier, grew 3 very rapidly and took on that role. 4 CHAIR OF THE INQUIRY: I think not only did nobody in the 5 world have experience of a tram Bill, my understanding 6 was that this was the first Bill -- first Private Bill 7 going through the Scottish Parliament. So nobody had 8 any experience of that at all. 9 A. That's correct, my Lord. The two Bills that we 10 submitted were the first Private Bills that the Scottish 11 Parliament considered. 12 I understand the legislation in terms of what type 13 of Bills can be put forward to the Parliament now has 14 changed, with the hybrid bill concept, but the hybrid 15 Bill concept wasn't there at the time, which was 16 potentially another reason why Scottish Government were 17 comfortable or wishing to see the project progressed by 18 an arm's length company. 19 CHAIR OF THE INQUIRY: Thank you. 20 MR MACKENZIE: Thank you. 21 Another point, Mr Macaulay. If we can go, please, 22 to page 15 of your statement, we had asked you various 23 questions about the different initial estimates for the 24 tram project. I'm quite happy to take that as read as 25 set out in your statement. 85 1 But in paragraph 28, just a point of clarification. 2 You say: 3 "In the early stages I had no concerns about cost 4 increases or cost estimates increasing ... and also 5 bearing in mind that we were dealing in Edinburgh with 6 a pretty unique situation and there was no benchmark 7 elsewhere in the UK to compare with. For example, none 8 of the other tram schemes had been built on 9 a World Heritage Site and that was a major issue in 10 terms of timescale for approvals and in terms of how we 11 would need to deal with the sensitive area that we were 12 going through." 13 You have touched upon that this morning, but 14 am I correct in thinking what you've set out there about 15 Edinburgh being fairly unique and the question of 16 timescale, is that something you were aware of at the 17 time or was that something you say with the benefit of 18 hindsight? 19 A. No, no, we were aware of that at the time. 20 What we did endeavour to do at the time was to 21 benchmark the cost estimates that were coming from our 22 consultant engineers, against published information on 23 a cost per kilometre basis for other tram schemes that 24 had been delivered in the UK. 25 If anything, we were in the upper range of the cost 86 1 per kilometre. That gave us a degree of comfort that 2 our consultants were actually doing their job properly, 3 but the fact always remained that we were in 4 a World Heritage site. We had a context where the 5 City Council's planning enthusiasm was very great. They 6 were very careful in guarding the World Heritage site 7 and the number of listed buildings and so on that are 8 within the city centre, and therefore it was always 9 expected that there could potentially be significant 10 delays in getting statutory approvals. 11 One reason why the design was intended to be done in 12 advance of the main contract. 13 Q. Thank you. I would like to turn to another issue and go 14 back to the question of the reporting by tie to the 15 Council. I think you deal with it at page 31 of your 16 statement. Page 31, in paragraph 57, and you explain: 17 "CEC's senior officers received information and 18 updates from TIE from all the board reports and the 19 briefings by the chief executive and there were 20 information meetings in addition to that as necessary. 21 They were well briefed on what was going on. I had no 22 concerns about TIE's reporting to CEC ..." 23 Can you recall who were the senior officers in the 24 Council who tie reported to? 25 A. That depends how senior you want to go, but the key 87 1 officer was the Director of -- was he Director of City 2 Development at the time, Andrew Holmes? And that was -- 3 as far as I'm aware, that was our main contact. He 4 obviously had staff within his organisation. He had 5 appointed staff who would report back to him in terms of 6 progress on the individual tram lines. I can't remember 7 what the job title was that he gave these members of 8 staff, but certainly we -- I had no concerns about how 9 we were reporting back to the City Council. 10 Q. In terms of the mechanics of how that reporting took 11 place, during your time at tie, between 2002 and 12 July 2006, was there regular reporting to the Council or 13 was it on an ad hoc as and when required basis? 14 A. It generally was of an ad hoc as and when required 15 basis, and I think you will see from the documents, 16 there were various different draft interim business 17 plans prepared and so on. There were various reports 18 coming back from technical advisers, all of which would 19 be advised to the City Council. But over and above 20 that, there was the regular board meetings of tie at 21 which the City Council was represented. 22 From memory, not only were the three board members 23 there, but officers of the City Council would attend the 24 board meeting as observers at the same time. 25 Q. Thank you. 88 1 Now, did there come a time when you were at tie that 2 the reporting procedures or practices changed in any 3 way? 4 A. Not as far as I'm aware. 5 Q. What I'm thinking of is there came a time when the Tram 6 Project Board was set up, and tie's Tram Project Manager 7 then I think reported to the Tram Project Board. It may 8 be that was after your time at tie. I'm not sure. 9 A. When you look at the date of some of the diagrams 10 relating to that, I think I was still there, but I was 11 unaware of the existence of a Tram Project Board. It 12 was viewed very much as an implementation mechanism, not 13 my area of work. 14 Q. Thank you. Now, you also have mentioned in your 15 statement certain other projects delivered by tie. Go 16 perhaps to page 33. 17 A. Yes. 18 Q. In paragraph 64 you refer to different projects being 19 successfully delivered. You refer to the West Edinburgh 20 Busway. Were there any problems in the delivery of that 21 project? 22 A. There are always problems in a civil engineering 23 project. However, any problems that we did have were 24 overcome. The project was delivered ahead of schedule 25 and under budget. 89 1 Q. The Ingliston Park and Ride, we've heard evidence from 2 someone in the Council's Finance Department who thought 3 there had been problems with that project, in particular 4 with another -- I think the Hermiston, perhaps, Park and 5 Ride Scheme which was delivered in-house by the Council. 6 Do you have any comments on that suggestion? 7 A. Obviously I have no comments to make about Hermiston 8 because I was not involved in it. 9 As far as Ingliston Park and Ride was concerned, 10 there was an outstanding claim from the design and build 11 contractor. It was a technical issue in relation to 12 a particular retaining wall at the entrancing to the 13 park and ride site. I don't think that that outstanding 14 issue had been finally resolved by the time I left tie, 15 but that was the only significant issue related to 16 Ingliston Park and Ride. Otherwise the contract went 17 very well. 18 Q. If we then go back to your statement then. The other 19 project I should ask you about is the 20 Stirling-Alloa-Kincardine railway. 21 At paragraph 65 at the bottom, the last sentence: 22 "There were concerns about TIE's project management 23 of the Stirling-Alloa-Kincardine railway." 24 Over the page, please. You go on to explain that 25 you need to put that into context. tie went into this 90 1 project at a late stage and the role that tie had was to 2 tidy up the concerns that were associated with the 3 delivery of that project late on in its delivery: 4 "A lot of the decisions in relation to increased 5 costs had already been made." 6 So in short, Mr Macaulay, what was tie's role in 7 that project? 8 A. Well, my understanding of it is that tie took on 9 a project management role for that project quite late on 10 in the evolution of the project, when the project had 11 started to have problems, and Clackmannanshire Council, 12 I assume in association with Scottish Government, 13 decided that they would want to pull in tie to help 14 resolve those particular problems. 15 I have to say that that is an arm's length view 16 because you may be aware that there was a Rail Director 17 appointed in tie at the time, Paul Prescott by name, and 18 Paul -- the Project Manager for 19 Stirling-Alloa-Kincardine reported to Paul, and then on 20 to the Chief Executive, rather than via me. 21 Q. Thank you. Then finally, please, back to your statement 22 at page 50. In paragraph 96 you say: 23 "Out of a number of issues, the one that I was most 24 uncomfortable with was the high levels of bonus being 25 paid. I was uncomfortable with high levels of 91 1 remuneration being paid ..." 2 You've touched upon that earlier. I think we've 3 also touched upon a number of these points: 4 "If TIE was to continue as a business, it needed to 5 spread its own business risks ..." 6 We can understand the reasons why you left. You 7 have explained that already. 8 When you left, Mr Macaulay, in July 2006, did you 9 have any concerns at that stage in relation to the tram 10 project? 11 A. I have been quoted in the past of saying that it was all 12 going swimmingly when I left. And certainly we had 13 successfully achieved parliamentary powers, and work was 14 progressing in terms of the procurement of the other 15 elements of the tram. 16 So my only concerns are those that I had previously 17 expressed in terms of: was this the right structure of 18 a company to take forward the project. 19 So other than that, no. 20 MR MACKENZIE: Thank you. I have no further questions. 21 CHAIR OF THE INQUIRY: I don't think anyone has intimated 22 any questions. 23 Thanks very much, Mr Macaulay. 24 A. Thank you. 25 CHAIR OF THE INQUIRY: That is all. You're still 92 1 technically under your citation and may be recalled, but 2 I hope that's not necessary. 3 In the meantime, I hope you have a good holiday. 4 A. Thank you. I hope so too, my Lord. Can I take this 5 with me? 6 CHAIR OF THE INQUIRY: No. Thank you very much. 7 A. Thank you. 8 (The witness withdrew) 93 1 INDEX 2 PAGE 3 MR JIM HARRIES (continued) ...........................1 4 5 Examination by MR MACKENZIE (continued) .......1 6 7 Questions by CHAIR OF THE INQUIRY ............44 8 9 Examination by MR DUNLOP QC ..................46 10 11 MR ALEXANDER MACAULAY ..............................48 12 13 Examination by MR MACKENZIE ..................48 14 15 MS TRUDI CRAGGS (affirmed) ..........................93 16 17 Examination by MR MACKENZIE ..................93 18 19 20 21 22 23 24 25 197