1 Wednesday, 6 December 2017 2 (9.30 am) 3 CHAIR OF THE INQUIRY: Good morning. 4 MR MCCLELLAND: Yes, my Lord. The next witness is 5 Michael Flynn. 6 MR MICHAEL FLYNN (sworn) 7 CHAIR OF THE INQUIRY: You are going to be asked some 8 questions initially at least by Mr McClelland, the 9 Counsel to the Inquiry. 10 If you listen to the question and answer it as 11 directly as possible. If you also speak into the 12 microphone so that everyone can hear what you're saying, 13 and if you speak in a measured pace so that the 14 shorthand writers can keep up with you. 15 I also see you've got a folder beside you. You will 16 be referred to documents on screen. So you shouldn't 17 actually need to look at the folder. 18 Examination by MR MCCLELLAND 19 MR MCCLELLAND: Could you please state your full name. 20 A. Michael Anthony Flynn. 21 Q. You should see sitting in front of you, Mr Flynn, a copy 22 of the statement that you supplied to the Inquiry. Do 23 you have that there? 24 A. Yes. 25 Q. You do. Now that you're under oath, are you happy to 1 1 confirm that the contents of your statement are true and 2 should be taken as your evidence to the Inquiry? 3 A. Yes. 4 Q. Is there anything in your statement that you no longer 5 think accurate or would like to clarify? 6 A. No. 7 Q. Thank you. 8 Now, we will take your statement as read, but there 9 are some additional questions that we have. First, just 10 by way of introduction, could you please confirm what 11 your professional qualifications are? 12 A. So I have a primary degree in technology, and a masters 13 degree in business administration. 14 Q. Are you an electrical engineer; is that correct? 15 A. Mechanical. 16 Q. Mechanical engineer. I think your statement says that 17 you're also a member of the association of project 18 managers? 19 A. Correct. 20 Q. Is that something that requires a qualification? 21 A. I believe so, but it's a long time ago so I don't recall 22 what the entry criteria was at the time. 23 Q. Before you started work on the Edinburgh Project, what 24 experience did you have of working on tram or light rail 25 infrastructure projects? 2 1 A. I started my career in 1988, and the first project 2 I worked on was Docklands Light Railway, in which we 3 developed and deployed advance signalling systems to 4 create a driverless train. 5 Then I went on to work on Manchester Metrolink, 6 again a light rail system. Following that, I went into 7 the energy sector for a while. Then I went to the 8 Channel Tunnel. So I worked on the Channel Tunnel, 9 which is principally a rail project. Heavy rail, 10 I might add. 11 After that, I went to Asia. I worked on mass 12 transit systems in Bangkok. Then went to Kuala Lumpur, 13 worked on light rail system in Kuala Lumpur. 14 After that, I came back to the UK, and did some work 15 on the main line railway. Then I got involved in 16 a number of bids, because as you go through your career, 17 you progress from delivering to becoming more involved 18 in the business end of organisations. 19 So I got involved in a number of tram projects and 20 metro projects. So I think overall probably 35, 21 40 per cent of my time was associated with light rail. 22 Q. Thank you. You mentioned there a transition over the 23 course of your career, I think you said towards -- 24 working more on bids towards the later stages. 25 Was it more technical work that you'd been doing at 3 1 the start of your career that evolved into work on bids? 2 A. Yes. So in the early stages you get involved in project 3 delivery. So you look at the technical aspects, the 4 delivery aspects, understanding how you deploy the 5 technology in an urban or whatever environment. 6 Q. Thank you. 7 If you focus for a moment on Siemens, can you give 8 us just some indication of the experience Siemens had of 9 installing tram and light rail systems? 10 A. I think Siemens were one of the leading providers of 11 tram systems around the world. I don't have an 12 exhaustive list in my mind, but trams were provided in 13 Italy, Portugal, Germany, South America, and a range of 14 other -- a range of other locations. So they were one 15 of the leading providers of tram systems. 16 Q. Was this something that Siemens had been doing for many 17 years? 18 A. Yes. 19 Q. Your statement says that you yourself worked on the 20 Edinburgh Project between April 2007 and the summer of 21 2011. It also says that over that period, the title of 22 your role was Siemens Director of major projects; is 23 that correct? 24 A. Correct. 25 Q. When you were working on the Edinburgh Project, was that 4 1 the only one that you were working on at that time? 2 A. That was the -- the only one that was current. The 3 others were bids. 4 Q. Sorry, the others were -- 5 A. Bids. 6 Q. Can you give an indication of what proportion of your 7 time was spent working on the Edinburgh Project? 8 A. I think, as time went on, it consumed more of my time. 9 So probably 50 per cent of my time. 10 Q. It may be difficult to say, but can you recall when it 11 started to consume more of your time? 12 A. Towards the -- initially, it consumed quite a bit of 13 time leading up to what was the Preferred Bidder 14 Agreement. 15 Then I thought things would calm down a little bit, 16 but it didn't. 17 So it consumed quite a lot of time up until the 18 contract was signed. Again, I thought we would calm 19 down, you know, it would become a conventional contract. 20 But as time went on, it became clear that it was going 21 to be a little bit more of a challenge. So it required 22 more of my time. 23 Then it consumed a lot of time in the latter stages, 24 before I ultimately left Siemens. 25 Q. If you focus on the period from preferred bidder, the 5 1 late part of 2007, up to financial close of the contract 2 in May 2008, can you give an indication, just in 3 overview, of the factors that led to you being more 4 involved than you'd expected? 5 A. I think we submitted a bid which I felt was quite 6 transparent in terms of what we had included in our 7 price, and the terms by which we were willing to 8 undertake the work. But it seemed that there was quite 9 a lot of subsequent changes to what tie required, and 10 various Employer's Requirements changed. So it meant we 11 had to revisit the scope. So once you revisit the 12 scope, you need to revisit the schedule, which then 13 leads you to revisit the price. 14 And ultimately you need to do that within the 15 context of what the terms and conditions are for the 16 contract. 17 So there were a lot of changes as we went through, 18 and the changes were -- were of a nature that they're 19 not the sort that you could just absorb and because the 20 changes required either additional time or additional 21 money or something like that. There was quite a lot of 22 discussion in terms of demonstrating that the basis upon 23 which our original bid was submitted changed. 24 Q. So just to be clear, you mentioned there changes in the 25 Employer's Requirements, and discussions about the 6 1 effect of that on your programme and price and so on. 2 Do we understand from your answer that this is referring 3 to the period between preferred bidder and financial 4 close in May 2008? 5 A. Correct. 6 Q. Can you give us just an indication of your main 7 responsibilities when you were working on the Edinburgh 8 project? 9 A. Basically I led the team in the UK. We had a German -- 10 a joint German/UK team. I looked after the technical 11 aspects and the delivery aspects. One of my colleagues 12 looked after the commercial element and dealt 13 principally with the terms and conditions. 14 Q. Could you name that person, please? 15 A. Herbert Fettig. To a large extent the team were able to 16 get on and deal with putting the bid together. We had 17 a bid leader who pulled the bid together, and my role 18 was principally reviewing the bid, challenging the bid, 19 and also looking at the risk situation in terms of how 20 does this stack up against our corporate guidelines, in 21 terms of are we absorbing too much risk and so on. 22 Q. Okay. 23 A. It was more of an oversight. 24 Q. Does that describe your role up until financial close in 25 May 2008? 7 1 A. Yes. However, I ended up having to get more involved 2 with the discussions with tie as time went on. 3 Q. Just to be clear, you mean the period after financial 4 close, once the period was up and running? 5 A. Leading up to and post financial close. 6 Q. Could we please have up on screen document TIE00079228. 7 Now, you should see a document on the screen in 8 front of you, Mr Flynn, headed up "CONSORTIUM AGREEMENT" 9 between Bilfinger Berger AG and Siemens plc. Do you see 10 that? 11 A. Yes. 12 Q. This agreement appears to have been signed by Bilfinger 13 and Siemens shortly after you joined the project. 14 I think May 2008 is the date of the document. 15 Are you familiar with the Consortium Agreement? 16 A. I would have been quite familiar at the time. I have 17 not reviewed it. So -- 18 Q. No, that's okay. We understand that. 19 I think it's fair to say, just for the record, that 20 there were some slight changes made to this when CAF 21 joined the consortium, but I don't think any of those 22 changes are material to the questions that I have for 23 you this morning. 24 Just in broad overview, did Bilfinger and Siemens 25 conduct their consortium arrangements in accordance with 8 1 the terms of that Consortium Agreement for the duration 2 of your involvement in the project? 3 A. I believe the principles, yes. 4 Q. This is not a document that the Inquiry has looked at in 5 the oral hearing. So I'm going to just take a little 6 while with you to go through some of its provisions, if 7 I may. 8 If we go, first of all, to page 5, please. We see 9 there clause 3.1 says: 10 "The Parties shall be jointly and severally liable 11 towards the Employer for the performance of the 12 Contract." 13 I think that was reflected in the terms of the 14 Infraco contract itself. Is that your recollection? 15 A. Yes. 16 Q. Just for the record, the reference for that is -- we 17 don't need to go to it, but it's CEC00036952 at 18 clause 120.1. 19 CHAIR OF THE INQUIRY: Mr McClelland, we didn't get 20 a reference for the statement, the witness statement. 21 Perhaps just for the record. 22 MR MCCLELLAND: Yes, thank you, my Lord. I apologise for 23 not having gone to that previously. The reference for 24 that is TRI00000151_C. 25 Then we see in clause 3.2, Mr Flynn, it says: 9 1 "For the purpose of the realisation of the Project, 2 the Works shall internally be allocated as 3 follows: Siemens Systems and Track Works; Bilfinger 4 Berger Civil and Building Works." 5 Did that remain the split of the work throughout the 6 project? 7 A. I believe so. There may have been some minor changes as 8 time went on, but -- 9 Q. But in broad terms? 10 A. Conceptually, yes. 11 Q. Thank you. We see in clause 3.3 it starts off on this 12 page by saying: 13 "The detailed scope and value of each Party's Share 14 of the Works shall be as set forth in Annex 1 to this 15 Consortium Agreement." 16 Then if we move on to the next page, please, the 17 remainder of that clause: 18 "Provided that the final Share of the Works shall be 19 in proportion to the values of their respective scopes 20 of work fixed at the date of submission of the Tender. 21 In the event of changes in the scope of the work in the 22 awarded Contract or during the performance of the 23 Contract, the Parties' Shares of the Works shall be 24 adjusted accordingly." 25 So do we take from that that if the scope of the 10 1 works was adjusted later because of change, the civil 2 works would still all be Bilfinger's responsibility and 3 the systems and track works would still all be Siemens' 4 responsibility? 5 A. In principle, yes. Like all consortium agreements, it's 6 down to agreements between the parties as time goes by, 7 because events and circumstances can change. 8 Q. Was there any significant change, as you recall, during 9 the project about the division of work that we've looked 10 at? 11 A. I don't believe there was anything material. 12 Q. Thank you. 13 A. I think there were some local arrangements between the 14 people on site because logistically things would work 15 better. So those are the sorts of things that would be 16 quite normal in this situation. 17 Q. Thank you. 18 Then if we move down to 3.5 and 3.6, if we just have 19 those together, please, 3.5 reads: 20 "In the internal relationship of the Parties each 21 Party shall be under the obligation, without prejudice 22 to the provisions of this Consortium Agreement, to 23 produce its Share of the Works at its own expense and 24 risk as if it had directly concluded its own contract 25 for its Share of the Works with the Employer. Each 11 1 Party shall bear all risks associated with its Share of 2 the Works ..." 3 Then 3.6: 4 "Each Party hereby indemnifies the other Party 5 against such liability which has been incurred by the 6 other Party in excess of such other Party's share of 7 liability." 8 So again, at least as set out in this agreement, as 9 between Bilfinger and Siemens, all of the risk arising 10 under the Infraco contract for civil engineering works 11 was to be borne by Bilfinger; correct? 12 A. Correct. 13 Q. And Siemens would share that risk so far as tie were 14 concerned, but would be protected against any costs by 15 Bilfinger's indemnity? 16 A. Effectively, yes. There's a cross indemnity. So in the 17 event one of the parties failed in their obligations, 18 the other party would have a right to pursue them. 19 Q. Thank you. If we could move, please, to page 9, and 20 clause 8, please, we see that headed up "Consortium 21 Board". 8.1 reads: 22 "The Parties shall establish a Consortium Board. It 23 shall be the supreme authority of the Consortium and 24 shall enjoy any and all powers for this purpose. It 25 shall be authorised to take any decisions relating to 12 1 the Consortium and to bind thereby the Parties." 2 8.2: 3 "The Consortium Board shall decide all issues of 4 fundamental importance and issues submitted by itself 5 for its decision, or submitted to it by a Party for this 6 purpose." 7 Do you recall when the consortium board was 8 established? 9 A. Not really. I imagine it would have been directly after 10 the contract was signed. 11 Q. Okay. So your recollection is it wasn't in place during 12 the bid phase? 13 A. I -- I don't recall. Typically these were minuted 14 meetings. So there would be some records as to when the 15 first meeting occurred. 16 Q. What sort of matters did the Consortium Board deal with? 17 A. Principally items affecting progress. Were we on 18 schedule? What was the status of payments. Were we 19 being exposed to any particular type of risks? We 20 consider stakeholder issues. So it would typically look 21 at the wider state of the contract and try to also 22 provide a degree of escalation for the project team, so 23 that in the event they were having difficulties, we 24 would try and provide some support guidance and so on. 25 Q. Would it be fair to describe the Consortium Board as 13 1 providing strategic direction for the project? 2 A. Yes, that's a fair comment. 3 Q. As we all know, once the contract got under way, there 4 were a range of disputes. Was the strategy for 5 addressing those disputes something that came up for 6 discussion in the Consortium Board? 7 A. Yes. 8 Q. Do I take from your expression that it took up a fair 9 amount of the time of the Consortium Board? 10 A. Regrettably it did. 11 Q. 8.3 reads: 12 "Each Party shall appoint two members to the 13 Consortium Board." 14 Do you recall who were the representatives for 15 Bilfinger and Siemens over the project's duration? 16 A. I think the -- myself and Richard Walker were there for 17 the duration, and I believe that Bilfinger -- the second 18 representative from Bilfinger changed once or twice, and 19 from Siemens, I think Joe Frentz remained there for the 20 bulk of the time as the second Siemens rep. 21 Q. Okay. The contract describes the Consortium Board as 22 the supreme authority of the consortium. Were there 23 reporting duties that you had higher up within Siemens 24 or did it effectively stop with you and Mr Frentz? 25 A. We had reporting on the state of the contract. As 14 1 you've outlined earlier, we were joint and several in 2 the eyes of the client, but we had a cross-indemnity 3 with Bilfinger. So we would provide a holistic picture 4 of the state of the contract internally to our 5 corporate -- our corporate reporting channels. 6 Q. To what extent did you require authority from higher up 7 within the company and to what extent were you free to 8 take decisions yourself? 9 A. There were -- within Siemens, there are a range of gate 10 processes whereby you have a limit of authority to 11 a period of time or to a decision point. So before you 12 would submit a bid, you would have to go through 13 a rigorous process to evaluate whether the bid was 14 robust, whether we were being exposed to a high degree 15 of risk, whether the costs were robust and so on. 16 Before you would sign a contract, there would also 17 be an internal gate process whereby all of those 18 activities would be checked. There would be 19 participation of the legal team, and other corporate 20 functions to ensure that before we entered the 21 commitment, that the rights of the -- ultimately our 22 shareholders were protected. 23 Then, as you go through a contract, there would be 24 regular touch points where there would be a need to 25 report, and on occasion, in the event, there were issues 15 1 that were significant. They would be -- there would be 2 a need to report those into the corporate organisation. 3 Q. You've described there some guidelines that applied in 4 relation to bids, in relation to risk and so on. 5 We'll see later on that over the period between 6 preferred bidder and financial close, there were some 7 increases in price sought by Siemens. 8 During that period, were these guidelines that you 9 refer to in relation to risk and so on, were they 10 a factor in determining how Siemens reacted to 11 developments over that period? 12 A. Absolutely, yes. 13 Q. Can you just, in overview, explain in what way? 14 A. So in the event there was a material shift from what we 15 had submitted as a bid. We would then have to go and 16 seek further approval to move from the position that had 17 been submitted, and each time that there was a change, 18 there was a need to go back and double-check. Because 19 ultimately you are potentially exposing the company to 20 greater liabilities, and therefore there's an obligation 21 to make sure that within the corporate function, there 22 is an awareness to how that bid is evolving. 23 Q. Thank you. 24 If we move to page 11 of the document on screen, 25 please. We see clause 9 there, headed up, "The Leading 16 1 Company". 9.1 reads: 2 "Bilfinger Berger shall act as the leading company 3 of the Consortium and shall provide a spokesman for the 4 project as representative of the consortium." 5 It reads on: 6 "The leading company shall co-ordinate the 7 preparation of the Tender. The leading company shall 8 represent the Consortium towards the Employer ... 9 Negotiations shall be led jointly with the Parties 10 concerned." 11 Why did Bilfinger have that status? 12 A. Typically they had a larger scare -- a larger scope, and 13 it's not unusual for the entity with the larger scope to 14 have that responsibility. Ultimately that was the 15 motivation. 16 Q. Okay. What did it mean in practical terms for 17 decision-making and so on about the project? 18 A. Recognising that we have the cross-indemnities, the 19 focus was principally on making sure that our element 20 and the Bilfinger element could be developed 21 independently, but also when we sat down, we had to sit 22 down and make sure that both elements when brought 23 together integrated so that it was one holistic bid to 24 support the tram. 25 So that would typically revolve around the teams 17 1 getting together, walking through elements of the bid, 2 and that would be done in a collaborative way to find 3 what is the best solution. 4 Q. Did the leading company status give Bilfinger any kind 5 of casting vote or ability to impose its decision-making 6 will on Siemens or not? 7 A. No. Ultimately the -- the cross-indemnity provided each 8 party with a focus that there was no casting vote. 9 CHAIR OF THE INQUIRY: What happened if there's a difference 10 of opinion at the Consortium Board? 11 A. We would typically escalate that to somebody who was in 12 the corporate organisation, so that more senior people 13 would sit down to review any issue, to see whether the 14 people involved in the contract were a little bit too 15 close to the matter. 16 MR MCCLELLAND: If we could move, please, to page 14 and 17 clause 11.8. Just reading from this: 18 "If either Party wishes to assert a claim for 19 additional costs or an extension of time, it shall 20 notify the other Party. The PM ..." 21 Which I think is project management: 22 "... shall manage the submission of all such claims 23 to the Employer in accordance with the terms of the 24 Contract, but in consultation with the Party to whom 25 each claim relates. Any compensation paid by the 18 1 Employer for additional costs (eg costs arising from an 2 extension of time for completion of the Works, from an 3 acceleration of the Works or from damages) shall be paid 4 to the Parties in accordance with the Share of the Works 5 to which they relate unless such compensation relates to 6 the Key Subcontractors ..." 7 In summary, did each consortium partner decide for 8 itself whether to pursue additional time and cost in 9 relation to its share of the works? 10 A. Typically, there was one scheduled for the contract, and 11 in the event there was a delay. Then those delays would 12 be evaluated against the schedule, and the parties would 13 then consider who would be -- who would be disadvantaged 14 by that delay. 15 So again, it's one of those things, where if 16 somebody identified an issue, the parties would step 17 back and look at how does that issue affect one or both 18 entities. 19 Q. So if all of the financial burden or risk associated 20 with the change or a particular event fell on one of the 21 consortium parties, would it typically be left to that 22 party to take forward the claim? 23 A. Yes, unless there was a consequential effect on the 24 other party. 25 Q. Okay. If additional money became available through the 19 1 operation of the contract, do we understand from this 2 clause that each of the consortium companies would 3 receive any increased payment which related to its share 4 of the works? 5 A. In the event that payment was for one party, that one 6 party would receive the full sum. It would be very much 7 dependent on what would that event be. 8 Q. Yes. If the increase related, for example, 75 per cent 9 to one party's scope, 25 per cent to the other party's 10 scope, would we understand that the money would flow in 11 that proportion? 12 A. Yes. 13 Q. Thank you. 14 Now, on this project change was obviously a matter 15 of some contention. To what extent was there 16 consultation between Bilfinger and Siemens about the 17 strategy for dealing with change? 18 A. I believe there were -- there was a consortium change 19 process. So that the contract defined a particular 20 approach to how changes were required to be notified and 21 then pursued. 22 That got translated into a consortium process, 23 I believe. Each party had their own people dealing with 24 the change in terms of a team. And a change manager. 25 And those people would sit regularly to review what 20 1 were -- what were the issues current, what was the sort 2 of forecast. 3 So there would be quite an open dialogue between the 4 parties, and that's quite consistent with other 5 contracts in this situation. 6 Q. We understand from the general evidence available that 7 most of the changes concerned Bilfinger's scope of work. 8 To what extent did Siemens influence how Bilfinger went 9 about pursuing their changes? 10 A. Typically all matters would have been discussed within 11 the team in Edinburgh. If matters were more 12 significant, then they would likely be discussed at 13 Consortium Board. 14 We would regularly test each other, challenge each 15 other, to make sure that we were not pursuing something 16 that -- in one channel that may ignore the other party. 17 So there was quite an open dialogue between the 18 parties around change. 19 Q. Now, one can understand that there may be discussions at 20 the level of the individual change, and I suspect that 21 sort of discussion would be further down the chain from 22 your level. But in addition to that, were there also 23 more strategic issues to do with change which did arise 24 for consideration at your level, at Consortium Board 25 level? 21 1 A. Yes. As time went on, it became quite obvious that this 2 was not going to be a straightforward contract. And 3 therefore, rather than dealing with changes on an 4 individual basis, we'd look at what is the sort of 5 direction of travel for this contract, and look at how 6 could we mitigate the effects of some of those changes. 7 Were there ways to try and deal with this in -- rather 8 than trying to knife and fork every change, were there 9 opportunities to look at a more holistic solution? 10 So we would look at it sort of from a strategic 11 level. 12 Q. Thank you. If we can look finally at page 15 of the 13 consortium agreement, please. Clause 14 down at the 14 bottom. Just reading from there, 14.1: 15 "Each Party shall be liable towards the Consortium 16 and the other Party for the proper and timely 17 performance of the obligations assumed for its Share of 18 the Works ..." 19 14.2: 20 "The following compensatory regulations shall 21 internally apply for the handling of claims submitted by 22 the Employer." 23 Then just over the page, please, just the top 24 paragraph, picking up the sentence that begins there: 25 "The responsible Party shall immediately take action 22 1 to rectify, to the extent possible, its negligent act or 2 omission or failure to perform and shall indemnify the 3 other Party from and against any liability which the 4 other Party may incur as a result of such claim." 5 So again, this is another aspect of the 6 cross-indemnities that you've been discussing. Just in 7 short, if one consortium member for its own reasons 8 acted in breach of a contract provision, it was liable 9 to indemnify the other consortium members for any loss? 10 A. Correct. 11 Q. We have finished with that document, thank you. 12 I would like to ask you briefly, Mr Flynn, about 13 design on the project. If we go to page 4 of your 14 statement, please, which is -- I think we have that up 15 on screen. 16 At paragraph 16, what you say there is: 17 "Typically, for comparable build contracts, the 18 client would provide a complete design for the whole 19 scheme against which bidders could bid, but that was not 20 the case in this Contract ..." 21 When you refer there to "complete design for the 22 whole scheme", can you just clarify what you mean; in 23 particular, do you mean the whole design for civil 24 engineering in building works and the whole design for 25 electrical and mechanical items? 23 1 A. I understand the intention for tie was to get to the 2 point where effectively they only wanted to buy -- or to 3 let a contract for a build, and in that scenario then it 4 would have been the civil works and the mechanical and 5 electrical works. 6 Q. So had it just simply been a build contract, the entire 7 design for all of these elements would have been 8 completed and made available to the bidders? 9 A. Yes. 10 Q. Now, at what point during the bid process did it become 11 apparent to you that that wasn't going to be the case 12 for this project? 13 A. When the team undertook an initial assessment of the 14 ITT, it became clear that the ITT documents did not have 15 a complete suite of design. 16 Q. What was the consequence of that for Siemens in terms of 17 the role or any role Siemens had to perform in the 18 production of design? 19 A. Basically, we looked at that. We identified how we 20 could provide a bid that would ultimately provide 21 a system solution that could work, recognising that we 22 would have to do some of the design work ourselves. 23 Q. Just in broad overview terms, to what extent did Siemens 24 produce the design? 25 A. To a very large extent, I believe. Siemens undertook 24 1 the design. Our bid was quite transparent, from what 2 I recall, we identified a large amount of 3 clarifications, exclusions and assumptions to cover the 4 fact that there were -- there was information missing. 5 I recall there were issues around missing tram design 6 information that would have been important to evaluate 7 the amount of power and energy that would have needed to 8 have been provided for the tram system; and that would 9 then influence the design of the power system, would 10 influence how many transformers and so on that we would 11 have to manufacture and so on. 12 Q. Parsons Brinckerhoff were producing the design for the 13 civil engineering and building works. Can you just 14 explain in overview how Siemens' work on design 15 integrated, if you like, with the work done by 16 Parsons Brinckerhoff? 17 A. I don't recall a tremendous involvement by myself in 18 that aspect. I think anecdotally it would be done at 19 a working level, where our design team would sit with 20 Parsons Brinckerhoff, people would work through various 21 activities, and look at what were the key interfaces 22 between what we had to provide and what the civil -- 23 civil works needed to accommodate. 24 Q. I should say, Mr Flynn, if I ask you any questions which 25 you think fall outside of your own experience or 25 1 knowledge, please feel free to say that, and don't feel 2 compelled to speculate about things. 3 A. Okay. 4 Q. Presumably, the design for the Siemens part and the 5 design for the civils works had to integrate with one 6 another? 7 A. Correct. 8 Q. Is it the case then that before you get a completed 9 design, you have to have both elements of it completed? 10 A. Indeed. 11 Q. Until you get to that point, is there the possibility 12 that information or design from one element will have an 13 influence or a change on the design for the other 14 element? 15 A. Yes. 16 Q. If you could look, please, at your statement at 17 page 4 -- 18 CHAIR OF THE INQUIRY: Before doing that, you've told us 19 about the requirements for a build contract. You expect 20 to complete design. That then would include the number 21 and location of transformers and other technical 22 equipment for the mechanical and electrical side; is 23 that right? 24 A. Yes, my Lord. 25 CHAIR OF THE INQUIRY: What would happen if you were faced 26 1 with a detailed design that didn't fit in with Siemens' 2 equipment, or would you always be able to accommodate 3 the design? 4 A. In the event that we had a completed design, and for 5 whatever reason it didn't match 100 per cent what we 6 would have provided, then within the bid submission we 7 would clarify that, and we would propose an alternative 8 arrangement so that our equipment would fit. Then it 9 would be up to the client to accept or reject our 10 alternative proposal, and then we'd take it forward from 11 there, or in some instances some clients may say: we 12 don't want that arrangement; and that element would be 13 rejected. 14 CHAIR OF THE INQUIRY: Thank you. 15 MR MCCLELLAND: You described in your earlier answers that 16 there were changes made to the Employer's Requirements 17 and so on over the period between preferred bidder and 18 financial close. 19 Do you recall to what extent Siemens were able to 20 accommodate these changes within the fixed part of their 21 price for the works? 22 A. I have a vague recollection. I believe one of the 23 objectives leading up to December 2007 was to take our 24 bid submission and align the Employer's Requirements 25 with our bid submission because we had provided more 27 1 information, but instead of that occurring, 2 I understand, there were additional requirements being 3 introduced. 4 So it deviated from what we believed was going to 5 happen, and typically we would look at what these 6 requirements were. Some elements, you could absorb. 7 Some elements could not be absorbed. So we tried to 8 accommodate where possible, but ultimately it got to the 9 point where there was a cumulative effect. An 10 individual change may not be a big deal, but when you 11 get five or ten, the cumulative effect of that may be 12 significant. 13 Ultimately, every time there's a change, there needs 14 to be a review of what does that do to the schedule, and 15 then the cost of schedule delay can sometimes be greater 16 than the cost of the material change. 17 Q. Okay. I understand these changes being made over the 18 period after December 2007, preferred bidder, through to 19 financial close. What I'm keen to try and understand is 20 whether Siemens had managed to address all of these 21 changes that were coming through and provide a fixed 22 price for those items, or whether there was uncertainty 23 left which carried forward after the contract was 24 closed. 25 A. I think any item that had uncertainty, we would have 28 1 identified that in Schedule 4 of the contract. And that 2 would be either identified as an exclusion or 3 an assumption or a provisional sum, and from what 4 I recall, there were a number of provisional sum items 5 within Schedule 4 and the basis of provisional sum is 6 you don't necessarily have the full information. So 7 it's not a fixed cost. 8 Q. If I was to suggest -- well, do you recall what element 9 of Siemens' price was provisionally priced? 10 A. I can recall a couple, but there may have been more. 11 Q. I mean just in terms of value? 12 A. I believe there were a range of exclusions, and 13 therefore there was no value against those. I believe 14 there were something in the order of 6 million of 15 provisional sums, I think. 16 Q. Okay. As I said, it's not a memory test. So if you 17 don't recall, that's fine. We understand from another 18 witness that the provisional elements of Siemens were 19 around GBP5 million. That seems to tie in with what you 20 recall? 21 A. Yes. I think within Schedule 4, there's quite 22 a transparent breakdown. 23 Q. Could we please have document SIE00000227. If we could 24 go to page 2 of that document, please. Just take 25 a moment to look at that, please, Mr Flynn. Do you know 29 1 what that document is? 2 A. No. 3 Q. I can say to you that this was a document recovered by 4 the Inquiry from Siemens. If we see along the top line, 5 there's a line, "PB Price October 2008". If we take 6 "PB" to mean preferred bidder, I suggest that 7 "October 2008" should in fact read "October 2007". Then 8 we see a column in the middle, of total, 209 million, 9 column to the left, headed up "BB", for Bilfinger, 10 122 million. Then a column on the right for Siemens of 11 87.3 million. 12 Does that reflect your recollection of the breakdown 13 of the preferred bidder price from October 2007? 14 A. I don't know. I have to check the document, but I take 15 it at face value. 16 Q. Okay. Well, if we proceed on the assumption that that 17 is what it is, and then we see down the second box from 18 the bottom, in red, says "Schedule 4 Construction Works 19 Price 14 May 2008", and then the total figure there, 20 238,607,664. Now, you can take from me that is the -- 21 exactly the construction works price from Schedule 4 of 22 the Infraco contract. 23 We see the breakdown there, 137 million for 24 Bilfinger and 101 million for Siemens. Does that 25 reflect your recollection of the breakdown in the price 30 1 between those companies? 2 A. I believe it is in that order. 3 Q. Thank you. What this document appears to do is if we 4 look at the top part from the preferred bidder price 5 down, we have then got entries for Wiesbaden, 6 Rutland Square, Brunel and final negotiation May 2008. 7 Do you see that? 8 A. Yes. 9 Q. This document appears to be charting the evolution of 10 the Infraco price from preferred bidder onwards. 11 At the very highest level, if we take the Siemens 12 column, and the progression from 87.3 million at the top 13 down through all of those events, if we take the numbers 14 as read, but could you just explain in broad terms why 15 that apparent increase in the price happened? 16 A. In principle, it will have been a result of changing 17 scope, and changing schedule. 18 Q. As you have described to us this morning already? 19 A. Yes. 20 Q. We're finished with that document for the moment, thank 21 you. 22 I would like to turn now, Mr Flynn, to a meeting 23 that took place in Wiesbaden in December 2007, attended 24 by representatives of tie, Bilfinger and Siemens. 25 I think you say in your statement that you were at 31 1 that meeting? 2 A. Correct. 3 Q. What was its purpose? 4 A. I believe at that time tie were under pressure to 5 conclude the contract, and they were growing impatient 6 at the pace of concluding the discussions, and they 7 sought to escalate the issue within the management of 8 Siemens and Bilfinger. So they chose to meet with 9 senior representatives from the corporate organisation, 10 with the view of pressing ahead to conclude a contract 11 at the earliest possible date. 12 Q. Was it your understanding that at least one element of 13 that was tie's desire to firm up the contract price as 14 much as possible? 15 A. That's -- that's probably their motivation. I'm not 16 entirely sure that it came across that way. I think it 17 was more a case of: we need to get this contract 18 completed; rather than necessarily looking for a fixed 19 price. I think we'd been quite clear throughout that in 20 the absence of a complete design, there wasn't going to 21 be a fully fixed price. 22 Q. Okay. So that's the consortium position. There wasn't 23 going to be a fixed price. 24 If we could just briefly have document CEC01481843, 25 this is a document or a letter, rather, from 32 1 Willie Gallagher of tie to Richard Walker dated 2 11 December 2007. 3 He says -- if we just pause there actually. If 4 a letter was sent to Richard Walker, would it generally 5 have been copied to you? 6 A. Yes. 7 Q. Do you recall seeing this letter? I appreciate it's ten 8 years ago. 9 A. It's likely that I would have seen this letter. 10 Q. What Mr Gallagher says is: 11 "Dear Richard, your news today that BBS are unable 12 to achieve the pricing objectives we set you is 13 extremely disappointing." 14 Then three paragraphs down: 15 "Our visit to Germany on Thursday is focused on 16 cementing the final deal and particularly finalising the 17 price." 18 That would be a reference to the meeting in 19 Wiesbaden; is that correct? 20 A. I would imagine so, yes. 21 Q. Then he carries on in the next paragraph: 22 "Unless you are able to confirm that, by the end of 23 Thursday's meeting, we will have been able to consider, 24 and agreed the following items then I must state that 25 tie will not attend and we will need to revisit the 33 1 entire preferred bidder programme." 2 Number 1: 3 "Price confidence: we ask you to consider fixing 4 your price, save for a very few notable exceptions 5 where, for example, the design itself is absent." 6 So do we take from that then that Mr Gallagher, at 7 least, on behalf of tie saw obtaining a price that was 8 as fixed as possible as one of his objectives for the 9 meeting in Wiesbaden? 10 A. Yes. 11 Q. What discussions took place around that issue of fixing 12 the price? As far as you recall? 13 A. I don't recall the -- within -- while we were in 14 Wiesbaden? 15 Q. Yes. 16 A. I don't recall the specifics. I do recall a lot of time 17 spent talking about value engineering, and the desire 18 from tie to apply pressure on us to make sure we were 19 focused on pursuing the value engineering activities. 20 I believe there was discussions around timescales 21 and schedule. 22 Q. Why was there so much time spent discussing value 23 engineering? 24 A. I think principally there were -- because of the 25 immature state of the scope of work, it was felt that 34 1 there may have been opportunities to seek some 2 opportunities to reduce some of the designs. I recall 3 various discussions around different types of bridges 4 and various other things, that perhaps if a slightly 5 different approach was taken, then a cheaper design and 6 a cheaper construction could be materialised. 7 Q. So was value engineering one way for tie to reduce the 8 headline price? 9 A. That -- yes. 10 Q. During the Wiesbaden meeting, to what extent were 11 Bilfinger and Siemens negotiating as a single unit, 12 a consortium, and to what extent was each left to 13 negotiate those matters which directly affected its own 14 commercial interests? 15 A. I believe that it occurred simultaneously. I think it 16 was -- it was a case of going through the issues, you 17 know, one by one. I recall there was a handwritten -- 18 there was a list of things, and then there were some 19 handwritten comments behind it in terms of going through 20 those items one by one, and challenging what is this 21 for, is there an opportunity to find some value 22 engineering opportunities within those individual items, 23 and also what were the conditions around how those value 24 engineering items could be realised. 25 For example, some items would have needed Edinburgh 35 1 City Council's approval because a planning consent or 2 some such thing may have already been achieved for 3 perhaps a more expensive structure. So therefore, 4 before anybody could commit to realising a different 5 design, there would have needed to have been an approval 6 from CEC for a slightly different design. 7 Q. Okay. 8 A. So -- 9 Q. Are those discussions featuring input from both 10 consortium partners? 11 A. On a case-by-case basis. I think from -- from my 12 recollection, the Siemens component of that list was 13 probably 10 per cent of the total number of items. 14 Q. We'll see in a moment that in the written agreement 15 which followed Wiesbaden, the price of around about 16 GBP218 million was recorded, subject to a range of 17 qualifications and exclusions. 18 When and how was that price agreed? In particular, 19 what I want to know is: was that price agreed at the 20 meeting itself? 21 A. I believe the list was agreed. I don't know, and 22 I don't recall if the actual number was agreed there and 23 then. 24 Q. When you say the list, the list of -- 25 A. Value engineering items. I imagine it probably was, 36 1 because I would have thought there would have been 2 a build-up of the price and the exclusions to get to 3 a number. 4 Q. Well, that's a follow-up question. Which way round was 5 it? Was there agreement on a headline price with 6 workings then done to arrive at that figure, or was it 7 the other way round, from the bottom up, all the 8 qualifications and so on leading to a particular price? 9 A. I believe we worked it up to a number. It's likely that 10 tie probably had a target in their mind, but ours 11 endeavoured to be sort of based on some form of logic 12 and rationale. 13 Q. Do you recall being given a target by tie? 14 A. I don't recall. 15 Q. Who for Siemens would have agreed the price? 16 A. I believe in the room it was myself, Stefan Hofsaess and 17 Roland Bruckmann. 18 Q. Those three, were those the only three representatives 19 from Siemens at the meeting? 20 A. I think so. 21 Q. And out of the three of you, who was the senior person? 22 A. Stefan Hofsaess. 23 Q. Can I put it to you that at one point during the 24 meeting, the senior representatives of each of the 25 parties left the main discussion room and returned 37 1 a short while later, having agreed a headline price? 2 A. It's not something I recall. It may have happened. 3 It's -- again, it's not unusual that when you have the 4 senior -- the principals in a room, sometimes they may 5 have a private discussion. 6 Q. Do you think it's possible that happened? 7 A. It's possible. But I can't 100 per cent say it did or 8 100 per cent say it didn't. 9 Q. Do you have a feel for whether it's more likely than 10 not, or can you not say? 11 A. I'd only be speculating. 12 Q. Could we please have on screen together, if we can, 13 document CEC00569119 and CEC02085660. 14 On the left, Mr Flynn, we have the Preferred Bidder 15 Agreement between tie, Bilfinger and Siemens. And on 16 the right-hand side, we have the agreement that the 17 parties signed up to a few days after the Wiesbaden 18 meeting. 19 In the left-hand document, could we go, please, to 20 page 8 and clause 4.3 down to 4.3.1. Maybe we can't 21 increase the size of it? If we look at that one first, 22 please, just down to the bottom of 4.3.1. 23 We see this is a term of the preferred bidder 24 agreement: 25 "tie shall not be obliged to, but at its sole 38 1 discretion may, award a contract to the Preferred Bidder 2 where. 3 The estimated infrastructure works cost for 4 Phase 1a as finalised during the Preferred Bidder Period 5 exceeds or is forecast to exceed GBP218.5 million 6 inclusive of the Infraco Contract Price." 7 So we see there tie is setting an upper limit on its 8 price for what it's prepared to pay for Infraco works. 9 If we look, please, at the agreement on the 10 right-hand side, at page 5, at clause 2.1, we see there 11 that in the Wiesbaden Agreement: 12 "The negotiated price for Phase 1a is 13 GBP218,262,426." 14 So we see that the Wiesbaden price is just within 15 the limit set in the Preferred Bidder Agreement. Was 16 the figure in the Preferred Bidder Agreement a factor in 17 arriving at the price agreed at Wiesbaden? 18 A. I -- I don't recall. I think in both agreements there 19 is a substantial list of exclusions, provisional sums 20 and so on. So whilst that may be there, it's pretty 21 clear that there are other costs. 22 Q. Yes. So is it your view then that the closeness of 23 these figures is just a coincidence, rather than 24 anything that was aspired to at the meeting? 25 A. To be honest, I'd only be speculating. 39 1 Q. I think, as you just adverted to yourself, the Wiesbaden 2 Agreement, whilst stating that headline price, also set 3 out a long list of exclusions and qualifications. Why 4 was it done that way, with a specified price heavily 5 qualified, rather than a higher price without so many 6 qualifications? 7 A. Again, I think that's something to ask -- ask tie. 8 Ultimately we could only identify a price against -- 9 a fixed component against a fixed scope, and then the 10 other elements. 11 If you don't know the scope, it is very hard to 12 guess-estimate what that price is or the schedule 13 impact. So you could end up either overdoing it or 14 underdoing it, and therefore, because we didn't have 15 a high degree of confidence in those excluded items or 16 provisional sum items, we wouldn't be prepared to take 17 a risk on effectively guessing what that cost would be. 18 Q. Sorry, I didn't mean to speak over the top of you. 19 A. That's fine. 20 But again, it's one of those things, where I think 21 in both of these agreements, tie had the opportunity and 22 the right to actually negotiate in parallel with the 23 second bidder. So I don't know whether part of these 24 numbers were driven by the second bidder or some other 25 thing like that. 40 1 Q. Now, I was struck by something you said a moment ago, 2 that if we were to understand why the price was set out 3 at one level with a lot of qualifications, that's 4 something we should ask tie about. I just wonder, why 5 do you say that, if this was an agreement which tie, 6 Siemens and Bilfinger had all reached together? 7 A. Because I would have thought the 218.5 would have been 8 a number coming from tie, rather than from us, because 9 I think it was the right for tie to cease discussions if 10 it exceeded that price. 11 Q. Yes. So that's what I mean with some of my earlier 12 questions. Were all of the qualifications that appeared 13 in the Wiesbaden Agreement things that have been 14 necessary to achieve a price that tie wanted? 15 A. To be honest, given the number of qualifications and the 16 provisional sum items and so on, the focus of -- focus 17 on 218 would have been a wrong focus for tie to take. 18 Q. Yes. Well, if I could follow up on that point, did you 19 yourself have any view at the stage of Wiesbaden of the 20 likelihood that the Infraco works would be delivered for 21 that price of GBP218 million? 22 A. As I said, the scope of work included a range of 23 provisional sum items. Therefore there was no certainty 24 that the value against those provisional sum items would 25 bring about that scope of work. 41 1 So inherent, there would be risk of a price on 2 a schedule going in one way or the other. 3 Q. Yes. I appreciate that at the stage of Wiesbaden, it is 4 a question of risk rather than a known figure, but if 5 you had been asked at Wiesbaden, what was it going to 6 cost to complete this tramline, would you have been able 7 to express a view of what that would cost in relation to 8 the 218 million? 9 A. I think we're describing one component of delivering the 10 tramline. So the Infraco contract is just one element 11 of the wider scope of work to deliver the whole of the 12 tramline. 13 So again, tie having the obligation to deliver the 14 entirety of the tramline was a different obligation to 15 what we had under the Infraco contract. We were just 16 providing one component of that tramline. And therefore 17 in the event that tie had difficulties delivering some 18 of its other obligations, then that would have had an 19 impact on any of the numbers that would have been in 20 these agreements. 21 Q. Yes. I perhaps phrased my question poorly. If you'd 22 been asked at Wiesbaden about the work to be done by 23 Siemens and Bilfinger towards completing the tramline, 24 would you have had a view of where that was likely to be 25 relative to the 218 million? 42 1 A. I wouldn't have had a view on the Bilfinger component. 2 In terms of the Siemens component, we go through quite 3 a robust process in terms of making sure what we submit 4 in bids is as robust as possible, and in the event that 5 we're not sure about something, we'll exclude that or 6 we'll qualify it or we'll do -- identify some 7 provisional sums. 8 So I think in terms of what we had to do, we as 9 a company were quite comfortable that our price and how 10 we set out our price was quite transparent and we were 11 willing to stand behind it. 12 Q. Thank you. 13 Were you aware of any discussion at the Wiesbaden 14 meeting or round about then with tie which revealed 15 their understanding of whether or not they were going to 16 get all of the Infraco works for GBP218 million? 17 A. I don't -- I don't recall any specific discussion on 18 that. I think from my perspective it's quite 19 transparent that there were a lot of additional items, 20 excluded items, and so on. And therefore an expectation 21 that 218 was the end of the line, would have been 22 a premature conclusion. 23 Q. Yes. 24 A. Typically clients, when they're in that situation, would 25 identify a separate risk provision over and above 43 1 a number like that against that schedule of exclusions, 2 provisional sums, to make sure that they understood the 3 entirety of what the costs may be. 4 Q. Yes. If we could please take those documents off the 5 screen and bring up CEC00547738. 6 We see here it's an email from Geoff Gilbert to 7 Richard Walker, copied to you and Matthew Crosse, dated 8 19 December 2007. 9 Mr Gilbert says: 10 "Richard, we went through this at the Board today 11 and generally everyone was okay with it." 12 If we just go to the attachment to that email, 13 please, which is CEC00547739, what we have here, 14 Mr Flynn, is a draft of the Wiesbaden Agreement that 15 Mr Gilbert had attached to his email. 16 If we could go to page 3, please, clause 3.3, and 17 just reading from that: 18 "Detailed designs - BBS included in their price for 19 the construction cost risk in the development and 20 completion of detailed designs being prepared by SDS, 21 save for 22 a) any future changes to elements of the design 23 intent for civils works that are substantially different 24 compared to those forming the current scheme being 25 designed by SDS, as typically represented by the 44 1 drawings issued to BBS with the design information done 2 on 25 November 2007." 3 Can I just ask, is that a clause that Siemens -- 4 that had any impact on Siemens' scope of work? 5 A. It's likely that this is principally focused on the 6 civil -- civil works. And as we discussed earlier, 7 sometimes there is an interface between the civil works 8 and the system works. 9 So it might be that in the event that there was 10 a change resulting from this, there might have been 11 a consequential change on what we have to do. 12 Q. Were you involved in discussions about the way in which 13 this matter was expressed in the contract? 14 A. I believe this was identified as one of the opening 15 paragraphs in Schedule 4. 16 Q. Just in terms of Wiesbaden itself, do you recall being 17 part of any discussions about the extent of the 18 construction cost risk to be accepted by the consortium 19 arising from completion of the design? 20 A. I think we were quite clear in that small elements of 21 design change could be accepted, but if there was 22 a significant change, then that would not be 23 accommodated. 24 Q. What I'm particularly interested in is focusing on the 25 nature of the agreement reached at the meeting itself. 45 1 We'll come later to what happens in the final version of 2 the Wiesbaden Agreement and then Schedule 4. But 3 thinking back to the meeting itself, what was discussed 4 at that stage about the scope of the construction 5 risk -- the construction cost risk being accepted by the 6 consortium? 7 A. I don't recall that there was a great deal of detailed 8 discussion on that item. I think it was a more general 9 discussion round effectively limiting any exposure to 10 further changes post contract resulting from changes in 11 design. 12 Q. What -- the way that Mr Gilbert puts it in this draft 13 is, just reading short from what's there, that the 14 consortium included for a certain amount of construction 15 cost risk in their price from the development of design, 16 but excluded from it future changes that are 17 substantially different from those forming the design 18 intent in the drawings. 19 Do you recall a discussion about the limitation 20 being for substantial differences from the design? 21 A. I don't recall. It's unlikely to have been a long 22 discussion and a detailed discussion. 23 Q. Okay. 24 A. I recall most of the time being spent going through the 25 list of value engineering items on -- line by line by 46 1 line. 2 Q. Okay. If we could then go, please, to CEC00547740. If 3 we could just -- we see at the bottom there the email we 4 just looked at a moment ago from Geoff Gilbert, and then 5 the top is a reply from Richard Walker to Geoff Gilbert 6 and Scott McFadzen. You're not copied into this. What 7 Mr Walker says is: 8 "Geoff, we still have issues with accepting design 9 risk. We have not priced this contract on a design and 10 build basis always believing until very recently that 11 design would be complete upon novation. With the 12 exception of the items marked provisional which we have 13 now fixed by way of the 8 million, we cannot accept 14 more ..." 15 I think that should be "design development": 16 "... other than minor tweaking around detail. Your 17 current wording is too onerous. Trust we can find 18 a solution." 19 By referring to the current wording as being too 20 onerous, it appears Mr Walker is talking about the draft 21 we just looked at. 22 Do you recall any discussions with Mr Walker about 23 responding to Mr Gilbert's draft? 24 A. I don't recall. 25 Q. Do you recall any discussion about narrowing the extent 47 1 of the construction cost risk being taken by the 2 consortium for design development? 3 A. I think in this context, this is principally focusing on 4 the civil and building works. The civil and building 5 design. 6 Because of the approach we took with the Siemens 7 scope of work, whereby effectively we've -- we said we 8 would undertake the design ourselves, the focus from us 9 on this topic would not have been great. 10 Q. Okay. Thank you. 11 So in other words, would it be fair to infer that 12 the detailed drafting of that clause would have been 13 left more to Bilfinger than -- 14 A. Yes, we would obviously check to make sure that it 15 wouldn't disadvantage us in any way, and that we had 16 a good understanding of it. But the likely risk that 17 he's referring to is -- would be potentially within 18 their scope in terms of it was to be realised. 19 Q. Thank you. 20 If we could just briefly, please, look at the final 21 version of the agreement, which is CEC02085660. Sorry. 22 It's page 5, please. 23 It's clause 3.3 down at the bottom. Now, in light 24 of the answer you've just given, Mr Flynn, if I'm asking 25 you any questions which you think are outside of your 48 1 scope of knowledge, then please feel free to say that. 2 This is the final version of the clause in the 3 Wiesbaden Agreement. It provides that: 4 "The BBS price for civils works includes for any 5 impact on construction cost arising from the normal 6 development and completion of designs based on the 7 design intent for the scheme as represented by the 8 design information drawings ..." 9 If we go on over the page, please, I think it's 10 actually to page 7, there's a blank page in the middle, 11 and then at the top we have: 12 "For the avoidance of doubt normal development and 13 completion of designs means the evolution of design 14 through the stages of preliminary to construction stage 15 and excludes changes of design principle, shape and form 16 and outline specification." 17 Could I just ask you this: if one takes normal 18 design development and excludes from it any change in 19 design principle, shape and form and outline 20 specification, what's left? Is that something that you 21 have a view on? 22 A. I think in this context, if there's a design on the 23 table, and you discover that actually that design will 24 not work due to ground conditions, and there's 25 a fundamental shift in that design, then clearly how you 49 1 calculate the cost to construct first design, the 2 materials required and so on, may not be appropriate for 3 whatever that second design would be. 4 So where the expectation is that you're going to go 5 and build something and somebody gives you a design, 6 then that's what you price for. 7 Q. So your answer is in terms of the price consequences of 8 one design. But my question, and if you can't answer 9 it, please feel free to say, my question is just this. 10 If one starts with normal design development, but then 11 takes out of that any change of design principle, shape 12 and form and outline specification, is there any content 13 left to the concept of design development? 14 A. I think -- when looking at it as a whole, and within the 15 context of the Base Date Design Information, which this 16 is referring to, it's providing, in my view, and 17 recognising that this is relating to civil engineering, 18 which is not my skill set, that in the context of how 19 this is presented, and looking at it on a whole, this 20 provides that for those items where there's an 21 expectation that you're pricing to build something 22 that's already designed, then there should be no more 23 design development. It's when you then get to 24 a situation where that design is no longer applicable 25 because of ground condition or something else, where you 50 1 then end up having to go back to the beginning. 2 So that's not -- that's not design development. 3 That's a redesign. 4 Q. Yes. Okay. 5 We'll leave that there, thank you. 6 Again, if we just -- if you imagine yourself and 7 your state of mind back in 2007, if you can, when this 8 was agreed, and if you have in mind the state of the 9 tram design as it stood at that time, could one have 10 said at that time whether the design could be completed 11 without any change in design principle, shape, form or 12 outline specification, or would one simply not know? 13 A. It's not something that would have been on my radar. 14 It's something that would have been specifically in this 15 instance Bilfinger Berger related. 16 Q. Okay. Thank you. 17 If we could move, please, to page 23 of the 18 Wiesbaden Agreement. We see here a breakdown of -- 19 right at the bottom there is the price from clause 2.1, 20 the GBP218 million price. Do you see about halfway up 21 the page, just above the line, there's a line that 22 reads: 23 "Premium for current provisional items. 24 GBP8 million. Negotiated sum for firming up all 25 elements." 51 1 What was your understanding of what that payment was 2 for, or that element of the price was for? 3 A. I don't have a particularly good recollection. I can 4 provide a -- I suspect that was to do with reducing the 5 number of provisional sum items that were within the 6 original bid. And therefore to effectively transfer 7 some of the risk from those items, there was a premium 8 identified. 9 Q. Do you recall if that GBP8 million was allocated to one 10 or other company within the consortium? 11 A. I don't recall, but it may have been in that table you 12 showed a little bit earlier. 13 Q. If we have a look at that, it's SIE00000227, page 2, 14 please. 15 We see the Wiesbaden line, which is the second line. 16 We've got a total increase in the price of 17 GBP12.2 million, with GBP8 million in the Bilfinger 18 column and GBP4.2 million in the Siemens column. 19 Does that help you recall who got the GBP8 million 20 for firming up the provisional items? 21 A. I would suspect it -- based on that, it would have been 22 Bilfinger. 23 Q. You say suspect. Are you -- is that an inference you're 24 drawing from this -- from seeing this table now, or is 25 it something that chimes with your memory of what was 52 1 agreed? 2 A. It's just derived from -- it was 8 million on the 3 previous table, it's 8 million on this one. 4 Q. Okay, thank you. 5 We can take that off the screen now, thank you. 6 After the Wiesbaden meeting, and before financial 7 close, that period between December 2007 and May 2008, 8 were you aware of tie either being told or themselves 9 acknowledging that the various qualifications in the 10 Wiesbaden Agreement were likely to lead to the cost of 11 the Infraco works going up? 12 A. I don't -- I don't recall, but as I said, when faced 13 with a list of exclusions and provisional sums, it would 14 be reasonable to infer that there is likely to be some 15 impact on cost in the schedule. 16 Q. You don't recall anything being said, for example, to or 17 by Willie Gallagher of tie about the likelihood of 18 a price increase for the Infraco works? 19 A. I don't recall. 20 Q. If we could look briefly, please, at CEC01284179. Now, 21 this is an agreement that's been referred to as the 22 Rutland Square Agreement from 7 February 2008, which 23 I think you signed. Do you remember this agreement? 24 A. Yes. 25 Q. I think I can say that Siemens negotiated 53 1 a GBP3.8 million increase in their part of the Infraco 2 price. Does that accord with your recollection? 3 A. Yes. 4 Q. The way you have put it in your statement is that that 5 price increase was to reflect changes that had been made 6 by tie to the scope and conditions from our bid 7 submission for the contract after conclusion of the 8 Wiesbaden Agreement. 9 Could you just expand a little bit on what that 10 price increase was for? 11 A. I recall that there was an expectation that once we 12 concluded Wiesbaden, then that was the end of the line 13 in terms of changing the scope that affected us. 14 But no sooner had Wiesbaden been signed than there 15 was a change in the Employer's Requirements. I think 16 there was a range of new changes falling out of that. 17 There were also changes in the terms and conditions 18 which would have increased some of our commercial risk. 19 And consequently, it went to the point where it was 20 no longer -- we could accommodate that, and therefore it 21 was necessary to basically seek recompense for that 22 increase in scope and liability. 23 Q. Just one point to clarify. You referred there to the 24 Employer's Requirements. Was it essentially the 25 Employer's Requirements that formed the basis for 54 1 Siemens' pricing? 2 A. The expectation was that our bid would be translated 3 into the Employer's Requirements, but that didn't 4 transpire, and other obligations -- other requirements 5 were introduced. 6 Q. Okay. Are you referring there to what has been referred 7 to as the misalignment between the Infraco proposals and 8 the Employer's Requirements? 9 A. Yes, that seems to ring a bell. 10 Q. Just while we're on this point, you referred a few 11 moments ago to the Base Date Design Information from 12 November 2007. Was that primarily relevant to the 13 civils and building designs? 14 A. Principally. 15 Q. Essentially therefore to Bilfinger's scope, rather than 16 Siemens'? 17 A. Principally, yes. 18 Q. If there were to be criticisms of the consortium for 19 having sought price increases between Wiesbaden and 20 financial close, what would be your response? 21 A. I think this is a situation where if a client is 22 changing their mind, changing the scope, then sometimes 23 those can be accommodated. Other times they cannot be 24 because the extent of the changes are greater than what 25 could be accommodated. I believe that between Wiesbaden 55 1 and the close, from our position of Siemens, the scope 2 changed, and therefore we flagged that and sought an 3 increase. 4 Ultimately, if that was not acceptable to the 5 client, they had rights under all of these agreements 6 that were signed to actually give the contract to the 7 second bidder. So again, it was one of those things 8 where we were -- felt we were being quite transparent 9 throughout, and tie always had the right to go to the 10 second bidder. 11 Q. The preferred bidder period ended up lasting from about 12 October 2007 all the way through to May 2008, about 13 eight months. If it was to be suggested that as that 14 period wore on, the competitive element started to fade 15 because of the passage of time, and that the consortium 16 took advantage of that to secure increases in their own 17 price, what would your response be to that? 18 A. I think basically tie had two bidders. I don't know how 19 competitive the second bidder was. If at any point tie 20 were unhappy with the -- what was being put forward by 21 our consortium, then they could have gone to that second 22 bidder, and -- that's typically what you would do as 23 a client in the event that you're dissatisfied with 24 a price or an element of the bid. You would go to the 25 second bidder. 56 1 Q. So were you -- 2 CHAIR OF THE INQUIRY: I think the question was based upon 3 any suggestion that the passage of time in this case was 4 such that the competitive element faded, and if that 5 were the position, the consortium took advantage of 6 that. 7 A. Okay. I think that's an observation that can be made. 8 I don't necessarily -- I wouldn't necessarily suggest 9 that that was something that was in our mind. I think 10 we were very focused, certainly from Siemens' 11 perspective, of making sure that we were stepping into 12 something that washed its face commercially and in terms 13 of liabilities, and it wasn't necessarily driven by any 14 lack of competitiveness. 15 We were quite aware that the second bidder was there 16 in the wings, and tie had the right to pull them in at 17 any point. 18 So as I say, I don't think it was something that was 19 in the forefront of our minds that there was a lack of 20 competition. 21 MR MCCLELLAND: Would it be fair to suggest that in the 22 consortium's minds, as that eight-month period of being 23 preferred bidder wore on, that their concerns about 24 being dropped in favour of the other bidder would lessen 25 over that period? 57 1 A. I think our concern was more on making sure it was 2 a deal that was acceptable to us rather than the risk of 3 being dropped. 4 Q. Thank you. If we could go, please, to page 3 of that 5 document. Sorry, just bear with me, Mr Flynn. 6 Just clause 2 there reads: 7 "tie and the BBS Consortium agree that under no 8 circumstances shall the Construction Contract Price of 9 222 million be increased prior to formal signature of 10 the Infraco Contract and Schedules ..." 11 Then reading on to the end of that paragraph: 12 "... except in respect of: 13 2.1 the formalisation of the price for changes to 14 the Employer's Requirements Version 3.1; and 15 2.2 the resolution of the SDS Residual Risk Issue." 16 First of all, we can see that there were in fact 17 increases which came after that agreement. Can you say 18 to what extent they complied with that obligation? 19 A. I'm sorry, could you repeat the question? 20 Q. Yes. The passage in that clause, clause 2, says that 21 under no circumstances will the construction price go up 22 from GBP222 million, except in relation to the two items 23 at 2.1 and 2.2. Did the later price increases comply 24 with that? 25 A. I believe the later price increases went beyond the 222. 58 1 Q. Yes. What this clause -- forgive me, Mr Flynn. It's no 2 doubt the convoluted nature of my questions. What this 3 clause says is that effectively increases from 4 GBP222 million will be permitted if, but only if, they 5 are for reasons falling within paragraphs 2.1 and 2.2 on 6 screen. What I want to know is: the later price 7 increases, were they for reasons that fell within those 8 parameters? 9 A. I don't recall the origin of the later price increases. 10 I think they were principally Bilfinger Berger price 11 increases. There may also have been a delay in 12 completion that -- perhaps there was a Siemens component 13 in the final element. 14 Q. Okay. So can we take your answer as being that you're 15 not sure whether the subsequent price increases fell 16 within those paragraphs? 17 A. Thank you. 18 Q. If we could look briefly at page 27 of that document. 19 Now, this page is within the electronic document of 20 the Rutland Square Agreement. It's not clear to me 21 whether it's formally part of that agreement or not. 22 Do you know what this document is? 23 A. I'm not -- quick answer is no. I'm trying to guess what 24 "RODs" mean at the top. It's presumably something to do 25 with the SDS novation. 59 1 Q. Please don't guess. If we could just look at -- there's 2 a bullet point there with "Systems Design" written next 3 to it, about halfway up the page. What it says is: 4 "Siemens are uncomfortable with certain aspects of 5 the systems design. Siemens to consider what items of 6 the SDS design scope could be removed from the SDS and 7 performed by Siemens in order to resolve this concern." 8 Do you know what that refers to? 9 A. I -- I don't -- I don't recall the specifics. 10 Q. Do you recall Siemens being unhappy with systems design 11 produced by Parsons Brinckerhoff? 12 A. I think we had some concerns around potentially the 13 communications of signalling system. 14 I -- there was some issue, but I don't remember the 15 detail. 16 Q. Was it -- 17 A. I think -- sorry. I think also we were interested in 18 the modelling in terms of power supply. So I think 19 there were a couple of issues there where our team 20 sought to get more information. 21 Q. What this paragraph would suggest, that there was some 22 design that had been done by Parsons which was then 23 going to have to be done again by Siemens. Is that your 24 recollection of what happened? 25 A. That's -- that's possible. 60 1 Q. Did that lead to any significant change in both Siemens' 2 own design, and did it have any knock-on effect on the 3 civil engineering design? 4 A. I don't recall that there was. 5 MR MCCLELLAND: I note the time, my Lord. There's just one 6 document which I might be able to squeeze in before 7 quarter past. If we could go, please, to SIE00000227. 8 Sorry. Well, that was the wrong document. But my 9 fault. 10 Do you see there a line, Brunel, then with 11 GBP8.6 million in the total column and GBP3.3 million in 12 the Siemens column? You were asked about an agreement 13 reached in March 2008, and in your statement you thought 14 that it concerned only Bilfinger Berger. 15 Now, the agreement sometimes referred to as the 16 Brunel Agreement, we see an element of GBP3.3 million 17 for Siemens. Do you recall what Siemens sought a price 18 increase of that level for? 19 A. No, I don't recall. 20 Q. Okay. That's a convenient -- 21 CHAIR OF THE INQUIRY: We normally have a break in the 22 morning for the benefit of the shorthand writers. So 23 we'll resume again about 11.30. And in the interim, you 24 can get tea or coffee if you like. 25 A. Thank you. 61 1 (11.15 am) 2 (A short break) 3 (11.32 am) 4 CHAIR OF THE INQUIRY: You're still under oath, Mr Flynn. 5 MR MCCLELLAND: Mr Flynn, if I could return very briefly to 6 the meeting at Wiesbaden. Do you recall if 7 Joachim Enenkel of Bilfinger was there? 8 A. Enenkel, yes. 9 Q. What role did he play in the meeting? 10 A. Basically, I would probably describe him as a sort of 11 chair from the consortium perspective. 12 Q. Can you just describe what he did in his role as the 13 chair? 14 A. I think he -- he facilitated the conversation that the 15 meeting was in the Bilfinger building, and as Bilfinger 16 under the Consortium Agreement is the -- was effectively 17 the lead entity, then -- and he was the more senior 18 Bilfinger person, he would have been in that sort of 19 senior chair role. 20 Q. Did he play a role in the substantive discussions? 21 A. I -- I believe it was he who wrote up the list or 22 annotated the list. So I think -- 23 Q. So you are referring there to the list of value 24 engineering items? 25 A. Yes. 62 1 Q. If it was to be suggested that he was there in a no more 2 than hosting, meeting and greeting capacity, would you 3 agree or disagree with that? 4 A. I think we all participated in some way, shape or form 5 in the discussion; as I say. I recall him being that 6 sort of lead person. 7 He would rely on Bilfinger colleagues for detail and 8 so on, but I believe he sort of assumed that lead role. 9 Q. Insofar as there were discussions about, for example, 10 the high level price, is that the sort of thing that 11 Mr Enenkel was involved in? 12 A. I think -- unfortunately, I don't recall. My memory is 13 quite clear that we went through that list of details, 14 I imagine we ended up with a number at the end of it. 15 So he would have been in the room. There would have 16 been -- all parties would have had some say in the 17 evolution of the discussion. 18 Q. You've said that your memory of these events is a little 19 vague. The answers that you've given us about 20 Mr Enenkel's involvement, how sure are you about those 21 answers on a scale of certain to don't know? 22 A. He participated the same as the rest of us did, in my 23 view. 24 Q. Thank you. 25 Moving away from Wiesbaden, as the project moved 63 1 towards financial close, what were the views within the 2 consortium about whether or not the project was likely 3 to run smoothly? 4 A. Sorry, could you -- 5 Q. As the project moved on towards financial close, so I'm 6 talking about the months in the run-up to May 2008, when 7 the Infraco contract was signed, were there views within 8 the consortium about whether or not the project was 9 likely to run smoothly? 10 A. I think we set out in the expectation that once all 11 these matters were taken care of in the contract 12 negotiations, the expectation was that it would proceed 13 like a regular contract. That was certainly the view 14 from Siemens. 15 Unfortunately, it didn't develop like that as it 16 ended up. So I think there was a reasonable view that 17 it should become a normal -- a normal contract that 18 could be left to the site team to get on with. 19 Q. As you got closer to financial close, April and 20 May 2008, were there any concerns that those 21 expectations of a normal project might not transpire? 22 A. I think we probably started getting more concerned about 23 MUDFA and some of those other issues as we got more 24 understanding of what was going on in Edinburgh. We had 25 been very much focused on the bid, the -- and the 64 1 process around what is our scope and so on, that as we 2 spent more time in Edinburgh, we got more visibility of 3 in particular the MUDFA works, and there were quite 4 a lot of issues, I believe, at Leith Walk with residents 5 and business owners. 6 So some of those things started to come to the fore, 7 but again, we worked on the basis that that was part of 8 tie's obligations. So that was for them to take care 9 of, under the arrangement all of those things would have 10 been completed before we would get in to do any work as 11 a consortium. 12 Q. Are you talking about -- you mentioned increasing 13 awareness of what was happening with MUDFA. Is that in 14 the period prior to financial close? 15 A. Yes. 16 Q. What was your awareness of MUDFA in that period? 17 A. So I understand there were some commercial discussions 18 between tie and MUDFA, and I don't believe it was 19 a happy ship between tie and the MUDFA contractor. So 20 that, I think, suggested that tie would have, you know, 21 quite a bit of work to do in terms of taking care of the 22 utilities. 23 Q. The risk of Infraco delay caused by MUDFA delay, as you 24 said a moment ago, rested with tie. But did you 25 anticipate that there were likely to be delays caused to 65 1 the Infraco works by utility diversion delays before 2 financial close? 3 A. We relied on a -- on dates, I believe, provided by tie 4 in terms of when they believed the MUDFA works would be 5 complete. So again, working on the basis that tie were 6 responsible for that, and these dates were given to us 7 by tie, we thought, okay, fine, tie will take care of 8 it. 9 Q. Could we please have on screen document SIE00000401. 10 Just take a moment to read that, Mr Flynn. It's not 11 a document that was sent to you previously. You read it 12 and let me know once you're finished, please. 13 (Pause) 14 It goes on over the page so just let us know when 15 you're ready. 16 A. Yes. Next page. 17 (Pause) 18 Okay. 19 Q. Now, you see that that appears to be a letter to tie for 20 the attention of Willie Gallagher from Richard Walker 21 and from yourself. Do you see that? 22 A. Yes. 23 Q. Have you seen this document before? 24 A. I believe there's a little bit of background. So 25 I recall one -- I think it was one Monday, Richard 66 1 phoned me. He said he'd had some concerns over that 2 weekend, and he wasn't quite sure whether CEC were fully 3 bought in to what tie were doing. And he expressed 4 a degree of concern. 5 My comment to him was: Richard, you need to put your 6 company first, but you need to -- issues like this, you 7 need to escalate within your organisation. 8 And I believe he put that down in this document. 9 I can't say for certain that I saw it before, but 10 it's consistent with a view that Richard had at the 11 time. Again, I may have seen it. I certainly recall 12 the events around this letter. And I believe he raised 13 the issues that he expressed to me that are identified 14 here because some of the language here is consistent 15 with what he said to me over the phone. I believe he 16 raised it with his German headquarters. 17 Shortly after that, I believe there was either 18 a visit from Germany or some such thing, and I believe 19 there was a further increase in the Bilfinger costs. 20 And then the letter -- and the issues around that seemed 21 to disappear. 22 Q. The issues that Mr Walker raised in his telephone call 23 with you that Monday morning, are they fully reflected 24 in that draft letter or was there anything different 25 that he said? 67 1 A. I think his language would have been a bit more direct 2 in the telephone call than in writing, and he was -- he 3 was concerned whether tie had the full backing of CEC 4 and -- because the discussions had been dragging on 5 because scope and various things were changing, he got 6 quite uncomfortable. 7 Q. That issue that you refer to between tie and CEC and 8 whether tie had the full backing of CEC, did he explain 9 why he was concerned about that? 10 A. I think he -- he was getting a bit anxious around the 11 focus on value engineering and the numbers that were 12 identified as exclusions and so on, whether CEC were 13 fully aware of the extent of the provisional sums, 14 exclusions, value engineering and so on. 15 Q. Would that be reflected in CEC's understanding of the 16 price, for example? 17 A. I think that was his concern. He wasn't sure whether 18 CEC were fully aware that the headline number is just 19 for one component of -- of the scope, but there were 20 quite a lot of other elements that potentially could 21 have an impact on the cost or the time. 22 Q. Were you involved in the drafting of the letter, or was 23 that all Mr Walker's work? 24 A. I think that was all Richard's. 25 Q. Did you share his concerns to any extent? 68 1 A. Not really. I took the view on two levels. One, tie 2 are an arm's length company of CEC. They have non-exec 3 directors. There are members of the Council on the 4 Board. And therefore tie only existed to do that 5 project. 6 So I didn't worry to any extent in that regard, and 7 secondly, from what we had identified in our scope of 8 works, we had a very small component of value 9 engineering. We had a relatively small component of 10 provisional sums. 11 So I -- you know, my -- my concerns would not have 12 been directed in this way. 13 Q. Okay. Were you consulted on the terms of the letter? 14 A. I recall having the conversation with him around the 15 sentiment within the letter, but I don't recall 16 necessarily going through it line by line. 17 Q. If we just look a bit more closely at the terms of the 18 letter then, at the first paragraph: 19 "Dear Willie, I refer to our meeting on the evening 20 of 17 April 2008 in which you advised of the change to 21 the CEC signing authorisation procedure, and our 22 subsequent telephone call today." 23 Do you recall if you were at that meeting? 24 A. I don't. 25 Q. "We are becoming increasingly concerned with final 69 1 negotiations of the Infraco Contract and Schedules, in 2 particular, the acknowledged misalignment between the 3 SDS design and the Infraco Proposals (price and 4 programme). Notwithstanding your stated intent to 5 resolve these issues by way of an all party workshop 6 immediately following contract signature we firmly 7 believe that these issues should be brought to 8 a satisfactory conclusion before the award of 9 a contract." 10 Were those issues that affected Siemens or were 11 those predominantly Bilfinger issues? 12 A. I think principally Bilfinger. For example, the SDS 13 design. Again, I understood there was some issues 14 between tie and SDS, some commercial issues. And 15 I think the commercial issues didn't necessarily help 16 expedite the conclusion of the design issues. 17 So I think somewhere around this, there was 18 discussions around some sort of incentivisation and some 19 settlement of outstanding fees due to the SDS. 20 Q. Then just reading on: 21 "We are also concerned that in addition to the 22 foregoing, there are further delays to the Design 23 Programme and MUDFA Works, and indications that the 24 Advance Works being undertaken at Haymarket Depot ... may 25 also be delayed. It is clear from this that substantial 70 1 additional costs and prolongation of the Construction 2 Programme will result." 3 Now, just pause there. Was that your view at the 4 time? 5 A. If there was a delay to Bilfinger, then that would 6 typically impact us. 7 Q. I think what Mr Walker is saying is that in his view, 8 substantial additional costs and prolongation of the 9 construction programme will result. So he's describing 10 it as a certainty. Was it your view that it was 11 a certainty? 12 A. To be honest, I don't recall, but I would have assumed 13 that if Richard was quite convinced there would be an 14 impact on the civil works, then by -- you know, by 15 association, we would also be affected by that. 16 Q. Yes. Is the point there that the civil works would 17 generally come before the installation of the systems, 18 so any delay would affect Bilfinger first and Siemens 19 second? 20 A. Yes. 21 Q. He then goes on: 22 "Whilst there are processes in the Contract to value 23 and assess these, we are extremely uncomfortable with 24 these circumstances which will, undoubtedly, strain 25 contractual relations at an early stage in the Project." 71 1 Again, was that a view that -- the view there about 2 straining relationships, was that a concern that you 3 had? 4 A. Not directly. And again, the rationale for that was 5 that Bilfinger were ahead of us. So therefore they 6 would be the first people to sort of get involved, do 7 the work, and then we would come along, sort of in terms 8 of the logical sequences, we would come second. 9 So I didn't have the same level of sensitivity. 10 From what I recall, I believe there was a change to 11 the completion dates around about this time to take 12 account of some of the delays that were introduced by 13 the MUDFA works. 14 So -- and part of those delays would have pushed 15 out -- part of those delays would have pushed out the 16 completion date for both this -- the civil works and 17 also the Siemens work. 18 Q. The points that Mr Walker makes there are essentially in 19 a nutshell the problems that did arise afterwards. 20 Would you agree with that? 21 A. Yes. 22 Q. Reading on: 23 "In addition, we are concerned that, while tie and 24 BBS understand the processes and risk allocation as it 25 is largely agreed, we understand that DLA Piper have 72 1 briefed CEC and they appreciate the detail of the 2 Contract that they are about to authorise you to sign 3 with us, which we believe will require CEC to fund 4 substantial increases in the construction works price 5 and prolongation to the construction programme after 6 contract award." 7 Again, did you agree that substantial increases in 8 the price were going to happen? 9 A. In the event the MUDFA works were further delayed, then 10 there would have been an automatic -- almost an 11 automatic impact. 12 Q. Yes. Then he goes on: 13 "With respect, I request you advise CEC of these 14 matters and in particular affirm their understanding of 15 the requirement under the contract for additional funds 16 to be made available to Infraco as a result of the 17 alignment and Notified Departure processes, including, 18 for example, the effect of pricing assumption 4 which 19 means there will be an immediate requirement for 20 a Notified Departure due to the misalignment between the 21 Infraco and SDS design delivery programmes." 22 Now, I think you said earlier that you weren't so 23 concerned about that, because the Council had directors 24 on the Board, the Tram Project Board and so on; is that 25 correct? 73 1 A. That's correct, yes. 2 Q. We understand the letter was not in fact sent; is that 3 your understanding? 4 A. Yes. 5 Q. Do you know why it wasn't sent? 6 A. I believe, as I mentioned earlier, there was 7 a discussion between Bilfinger Berger and tie, and there 8 was a price increase, and I think additionally the 9 schedule dates were re-aligned to take account of some 10 of the delays from the MUDFA works. 11 So I believe the issues that were identified there 12 that would have had an impact were dealt with before the 13 contract was signed. 14 Q. Well, not fully dealt with in that the problems 15 Mr Walker anticipates are exactly the problems that 16 transpired. Is that not the case? 17 A. I think in hindsight that was the case. 18 Q. Now, the letter wasn't sent to tie, but the general 19 tenor of it, was that at any time the subject of 20 discussion between consortium and tie? 21 A. I believe we would regularly, at the differing levels 22 within the organisations, we would regularly talk about 23 the misalignment. We would regularly talk about the 24 progress of the design. We would regularly talk about 25 progress of MUDFA and I would imagine that Haymarket 74 1 depot and ScotRail would have been part of the 2 discussion between the teams. 3 So these issues would have been discussed, as they 4 emerged between the teams. 5 Q. This letter is quite direct in saying that there will be 6 cost increases and programme delay. Was that point made 7 as directly as that by the consortium to tie? 8 A. Ultimately, yes, as the -- the next activities that 9 occurred in this time frame was an increase in costs, 10 and a change to the completion date. 11 Q. The letter suggests that Willie Gallagher should go and 12 raise these issues with the Council. Do you know if he 13 or anyone else at tie in fact did that? 14 A. I have no idea. 15 Q. Okay. If we could look at page 15 of your statement, 16 please. You referred a moment ago to events that 17 happened in the same time frame as that letter. 18 Paragraph 62: 19 "I have also been made aware that around this time, 20 in April 2008, Richard Walker had advised tie that 21 Bilfinger required an additional GBP12 million in 22 respect of its works under the Contract. It seems 23 unlikely that I was involved in these discussions, given 24 it appears to have been a matter between Bilfinger and 25 tie, and I do not recall anything on this point." 75 1 Paragraph 63: 2 "In May 2008, the parties signed the 'Kingdom 3 Agreement'. Having reviewed the agreement, the bulk, if 4 not all of its terms, principally related to Bilfinger's 5 works but I do not recall any specifics around this 6 agreement given the passage of time." 7 Does that remain the state of your memory? 8 A. I think in terms of the 12 million, I don't believe 9 I was involved in any of the discussions around the 10 component parts of that 12 million. 11 Q. You were aware, presumably, that Bilfinger had come 12 along at the last minute and asked for a substantial 13 increase in their price? 14 A. Yes. 15 Q. Were you concerned about that? 16 A. It's one of those -- if they had -- if they weren't 17 happy with the deal, then it -- the deal wouldn't have 18 been signed. 19 I wasn't particularly concerned because 20 philosophically, no deal is better than a bad deal, and 21 one of the things that you don't want to get involved 22 with is a contract where your partner is disillusioned 23 or whatever. 24 So I was -- I would rather things like these are 25 taken care of before a contract is signed, rather than 76 1 after a contract is signed. 2 Q. Yes. Better to confront these issues before signing up 3 than leave them afterwards. 4 To what extent did you understand the GBP12 million 5 Bilfinger were seeking as intended to address the 6 concerns that had been raised in the draft letter we 7 looked at a moment ago? 8 A. I don't recall what was the rationale or logic for the 9 12 million in terms of which elements of the issues they 10 raised equated to how much of that 12 million. 11 Q. If we could look, please, at WED00000023. This is 12 what's referred to as the Kingdom Agreement you referred 13 to in your statement. 14 We understand that this was the outcome following on 15 Bilfinger's request for an extra 12 million in their 16 price. 17 Is that your recollection? 18 A. I recall there was -- it wasn't one number, but in terms 19 of the payment of it, it was broken down into a number 20 of different bits. 21 Q. Well, if we look at condition 1 on that page, it says: 22 "tie shall pay the BBS Consortium an incentivisation 23 bonus of GBP4.8 million, such sum to be paid as 24 follows." 25 Then it's broken down by the four sections in the 77 1 contract. 2 Then the achievement of those sectional completions, 3 that of course would be work that Siemens would 4 contribute to; is that correct? 5 A. I believe the payment -- the completion would be, yes. 6 Q. Yes. 7 A. But I believe the payment was entirely for Bilfinger 8 Berger. 9 Q. Why was it done that way? If Siemens and Bilfinger both 10 had to do work to achieve the sectional completions, why 11 did all the money go to Bilfinger? 12 A. I believe that was part of the discussions between 13 Bilfinger and tie as the issue emerged within Bilfinger, 14 about their perceived risk of signing. 15 Q. Were you involved in the discussions as to -- which led 16 to the price being framed in that way as an 17 incentivisation bonus? 18 A. I don't recall. Typically I would rather a more 19 transparent approach, where it would be allocated more 20 specifically, because it avoids subsequent discussions 21 among how much of that is mine, how much of that is 22 yours and so on. 23 Q. Yes. So -- well, by framing it as an incentivisation 24 bonus, due on completion of the work sections, to which 25 both consortium parties are contributing, that perhaps 78 1 creates ambiguity about whose money it is? 2 A. Yes. I don't -- I don't like -- particularly around 3 contracts to have ambiguity. 4 Q. Yes. So would you have preferred this GBP4.8 million 5 simply to have been shown as an increase in Bilfinger's 6 price? 7 A. It would have been a more -- a simpler approach. 8 Q. If we look down at condition 2: 9 "If tie does not proceed with Phase 1b of the ETN 10 Project or tie does proceed but BBS has proposed 11 an estimate which tie has rejected unreasonably then: 12 BBC Consortium shall be compensated for its work in 13 the procurement period on Phase 1b by a payment of 14 GBP3.2 million (currently contained in the BBS 15 Consortium price for Phase 1b)." 16 Now, again, was the work towards -- the work during 17 the procurement period on phase 1b, was that work that 18 Siemens had done as well as Bilfinger? 19 A. I believe that that would have been part of the bidding 20 process. So we would have participated in doing some 21 work on phase 1b. 22 Q. Yes. Now, this GBP3.2 million, with a that is shared 23 between Bilfinger and Siemens, or did it all go to 24 Bilfinger? 25 A. I don't recall. I suspect it would have gone to 79 1 Bilfinger. But I do have some recollection of some 2 price movements between phase 1a and phase 1b in terms 3 of some of the Siemens elements, because of the way we 4 built up our price within the bid. But I don't know 5 whether -- I don't know whether it's captured in this or 6 whether it's captured somewhere else. 7 Q. We may come to that in a moment. I want to be clear 8 about -- this bullet point says that GBP3.2 million will 9 be compensation for work done in the procurement period 10 on phase 1b. I just want to be clear, that was work 11 done by Siemens as well as Bilfinger? 12 A. I -- I believe that the payment of this was to Bilfinger 13 Berger. We did do work in terms of bidding for phase 1a 14 together with Bilfinger. 15 Q. I'm just wondering why what started as a demand for 16 Bilfinger for an increase in their price is framed in 17 this way. 18 A. Indeed. 19 Q. Did you have concerns about it as you did in relation to 20 the other part? 21 A. I think the -- the build-up of the 12 million was 22 something that was discussed principally between 23 Bilfinger and tie. I believe we were insulated from any 24 issues emerging from this 12 million by the 25 cross-indemnity. I would have been quite interested to 80 1 make sure that there would be no adverse effect on us 2 from an agreement between Bilfinger and tie on this 3 matter. 4 Q. Yes. So did this -- did the way -- I appreciate the 5 point about being insulated from the consequences of it, 6 but did it concern you that what started as a demand by 7 Bilfinger for an increase in their price was framed in 8 this way, apparently as compensation for work done by 9 the consortium as a whole, for work during the 10 procurement period? 11 A. No. Situations like this, particularly with an 12 agreement of this nature, in addition to myself, my 13 commercial team, and our legal team, would have reviewed 14 it in terms of understanding whether it would have had 15 an impact on us, consequences and so on. 16 So in order for us to sign something like this, we 17 would have undertaken some internal review of it. 18 Q. Thank you. 19 CHAIR OF THE INQUIRY: Does it not concern you that someone 20 looking from the outside at this document might have the 21 impression that Siemens would share in the 22 incentivisation bonus and in the fee for the abandonment 23 of 1b? 24 A. It wasn't something that I would have considered, 25 my Lord. It would have been -- we would have relied on 81 1 the Consortium Agreement in terms of managing the 2 relationship between ourselves and Bilfinger, and making 3 sure that our -- our component of what we had to deliver 4 and the payment for that -- making sure that that was 5 quite clear between ourselves and Bilfinger would have 6 been our primary objective. 7 CHAIR OF THE INQUIRY: Thank you. 8 MR MCCLELLAND: Turning briefly to the question of the 9 4.8 million, which is described there as an 10 incentivisation bonus, if I was to put to you that it 11 wasn't intended as an incentivisation bonus at all, what 12 would you say to that? 13 A. I think this would have been part of the discussions 14 between Bilfinger and tie. It identifies it as an 15 incentivisation bonus. Therefore, presumably, there was 16 a risk to Bilfinger that in the event that those dates 17 were not achieved, then they would not have received the 18 payment. 19 So I suspect that was perhaps some of the 20 negotiations that they had. 21 Q. So is it your evidence that you didn't have any part in 22 the negotiation of these payments in the Kingdom 23 Agreement? 24 A. I don't recall having part in the negotiations. As 25 I recall, the money wasn't going to be coming to 82 1 Siemens, and therefore I would have been standing back 2 from any discussion. 3 CHAIR OF THE INQUIRY: Would a normal incentivisation bonus 4 not identify a deadline for doing something, and then 5 rewarding someone for achieving that deadline? But this 6 seems to say that it's payable seven days after the 7 section is completed, whatever the date. So even if 8 there were a delay of a year on the face of that, you 9 would be incentivised for that. 10 A. That would appear to be how it's written, my Lord. 11 CHAIR OF THE INQUIRY: So would you then describe that as an 12 incentivisation bonus? 13 A. I think it would be -- typically incentivisation bonus, 14 there's an element of if you'd missed the date, you 15 don't get the incentive, because therefore you failed to 16 achieve the objective. 17 So in that context, I would agree with you. 18 MR MCCLELLAND: I'm just going to read to you from the 19 statement of Richard Walker. We don't need to go to it, 20 but it's TRI00000072_C at page 38, paragraph 75. What 21 Mr Walker says about this is: 22 "The purpose of the Agreement was to take some money 23 out of the price in the Infraco Contract and package it 24 partly as a incentivisation bonus and partly 25 compensation for phase 1b of the Project not going 83 1 ahead. Condition one of the Agreement was an 2 incentivisation bonus of GBP4.8 million ... This was not 3 really a bonus it was simply part of the price which 4 was taken out of the Infraco contract meaning that 5 GBP1.2 million of the Contract Price would be paid to us 6 within 7 days of Sectional Completion of each of the 7 four sections of the Project (irrespective of when that 8 was actually achieved so it wasn't really an 9 incentivisation to complete early at all). I believe 10 that it was another attempt by tie to keep the Contract 11 figure low, whilst accepting that that money would be 12 payable to us." 13 Was that your understanding at the time? 14 A. I -- my recollection was that Bilfinger required 15 GBP12 million. I wasn't -- I didn't give any 16 consideration around how it was presented. 17 Q. Were you aware that Bilfinger were presenting it as 18 Mr Walker described there? 19 A. I think, given that I was aware that they were looking 20 for GBP12 million, and that instead of it appearing as 21 a single line item, GBP12 million, then yes. 22 Q. Sorry, I don't understand your answer. 23 A. Richard described it as a means of presenting 24 GBP12 million in a different way. I'm paraphrasing. 25 So given that it has been presented in a different 84 1 way, it's not something that I was particularly 2 concerned about. I was aware that Bilfinger had put 3 a demand of GBP12 million on the table. 4 CHAIR OF THE INQUIRY: If it was being presented in a way 5 that gave the impression that it was something other 6 than it really was, and what it was was a device to 7 reduce the Infraco price, would you have gone along with 8 that? Would Siemens have approved of that? 9 A. I think how the price was presented, it's not -- we 10 wouldn't go along with misrepresenting numbers. That's 11 not something that we would have gone along with, as you 12 described to reduce a contract price. 13 So I'm not sure how that was subsequently 14 transmitted to CEC. 15 MR MCCLELLAND: So when Mr Walker describes it as another 16 attempt by tie to keep the contract figure low whilst 17 accepting that this money would be payable to us, he 18 seems to be suggesting that the contract figure is being 19 kept artificially low by that means. 20 A. I think that is something for Richard. As I said, it's 21 not -- the presentation of the numbers to CEC or others 22 was a matter for tie. Whether this was presented as 23 part of the contract price or not part of the contract 24 price, I don't know. 25 CHAIR OF THE INQUIRY: In the context of a consortium, can 85 1 you really just hide behind that and say it's a matter 2 for tie to report it to the Council, or it's a matter 3 for Richard Walker to explain? Surely as the 4 consortium, it's the consortium's figures in total that 5 are going forward? 6 A. The -- the channel to CEC was tie, and tie made it quite 7 clear to us that they were responsible for the 8 interaction with CEC, and therefore we had no -- no 9 participation or contribution to how tie presented 10 information to CEC. 11 MR MCCLELLAND: Just reading on from what Mr Walker says, 12 paragraph 75, he says: 13 "Condition Two of the Agreement related to Phase 1b of 14 the Project. This was the "Roseburn Loop" which was 15 envisaged at the outset of the Project. The Roseburn 16 Loop was a section of the Project which was never built, 17 but was planned to run from Roseburn to Newhaven. The 18 compensation for this part of the Project not going 19 ahead was agreed at GBP3.2 million in the Kingdom 20 Agreement. Infraco were ultimately paid this sum by 21 tie. Kingdom Agreement wasn't really a compensatory or 22 bonus payment, it was simply part of the price which 23 was moved into a separate agreement so that tie could 24 keep the price for Phase 1a of the Infraco Contract 25 below a certain level." 86 1 Mr Walker appears there to be saying that the way 2 the GBP3.2 million was dealt with was also in some sense 3 intended to keep the headline price low; is that your 4 recollection? 5 A. Again, it's not something that occupied me at the time. 6 Q. Bear with me, Mr Flynn, please. 7 I think you mentioned earlier on something about 8 movement of GBP3.2 million of the price from phase 1a 9 into phase 1b; is that correct? 10 A. I recall there was some movement of some elements of the 11 cost. 12 Q. Do you recall why that was done and when? 13 A. I don't recall the specifics. I can -- I think I -- 14 I can try and recount what I think may have happened. 15 So I think we probably presented a price where we 16 provided the preliminaries across both 1a and 1b. So 17 when 1b didn't go ahead, some of the costs that we 18 needed for 1a would have been in the 1b price build-up; 19 and I think we transferred some of those costs back into 20 1a. 21 Q. Back into 1a. 22 I'm just going to read to you a passage of evidence 23 from Mr Walker when he was here. Just for the record, 24 it's the transcript for 15 November 2011 at page 106, 25 starting from line 14. The question that's put to him 87 1 is: 2 "In relation to the payment of GBP3.2 million in 3 relation to phase 1b, could I take you to something in 4 your statement, please, at page 19, paragraph 28." 5 The question goes on: 6 "... I think there had been some previous discussion 7 at the end of 2007 in relation to this sum, and you 8 refer here to an email dated 12 December 2007 from 9 Michael Flynn in Siemens which referred to the transfer 10 of money from 1a price to 1b price, and you say ..." 11 This is now a quote from Richard Walker's statement: 12 "This was tie's attempt to reduce the price of 13 phase 1a by moving monies for phase 1a into phase 1b 14 because phase 1b did not seem to be under the commercial 15 scrutiny that phase 1a was, and it was an attempt to 16 mislead City of Edinburgh Council. There cannot have 17 been any other reason for it." 18 Does that reflect your understanding of the reason 19 why the money was moved from the price for one phase to 20 the other? 21 A. No. I think regarding the specific numbers, there would 22 be somewhere in our archive the build-up to what was in 23 those numbers. And the rationale and the logic as to 24 why it was where it was and why it moved. 25 Q. Do we take from your answer that you can't at the moment 88 1 recall why the money was moved from one to the other? 2 A. Correct. 3 Q. As for Mr Walker's suggestion that it was done to 4 mislead the City of Edinburgh Council and that there can 5 have been no other reason for it, do you accept that or 6 reject it? 7 A. No, I wouldn't accept that. 8 CHAIR OF THE INQUIRY: What other reason would there be? 9 A. It could be that in the way the price was presented in 10 the bid, that the preliminaries were identified across 11 both phases. Because I believe at the time the bid was 12 considered, both phases would have been built. 13 It could be that, as part of undertaking the works 14 for 1a, and then 1b not going forward, it could be that 15 that money would be required for 1a. But that would 16 have been an administrative activity that would be 17 recorded somewhere in the documentation. 18 MR MCCLELLAND: If we stand back from it all, in 19 December 2007 you have on the face of it GBP3.2 million 20 being taken out of the phase 1a price. Then, with the 21 Kingdom Agreement, on the face of it, you have 22 GBP3.2 million coming back in to the phase 1a price. 23 Is it the same sum of money? 24 A. I can't speculate. Is there something within the 25 Kingdom Agreement that identifies the scope of work 89 1 covered that perhaps may point to what -- whether 2 it's -- what that 3.2 million is for? 3 Q. We can perhaps look at that. What I'm interested in for 4 the moment, Mr Flynn, is your recollection as to whether 5 the 3.2 was the same? 6 A. To be honest, I have no recollection. It may be that 7 one of my colleagues may provide some further insight. 8 CHAIR OF THE INQUIRY: Which of your colleagues would be the 9 best? 10 A. Herbert Fettig would have been the person who would have 11 been dealing with that side. 12 CHAIR OF THE INQUIRY: Is he still with Siemens, do you 13 know? 14 A. I don't know. 15 MR MCCLELLAND: If you just have the Kingdom Agreement back 16 up on screen, which is WED00000023. Condition 2, the 17 first bullet point there -- rather, the opening words 18 and then the first bullet point provides that the 19 consortium will be paid that GBP3.2 million if phase 1b 20 doesn't go ahead. 21 It provides that the consortium are to provide 22 an estimate for the cost of that work. 23 As at May 2008, did you have any view on how likely 24 it was that tie would proceed with phase 1b? 25 A. I believe we were required to undertake an activity to 90 1 look at what are the costs and build up an estimate for 2 phase 1b, and I have a recollection that tie had until 3 something like the end of 2008 or so to exercise the 4 option to proceed with it or not. 5 Q. The consortium had provided a price for phase 1b at the 6 preferred bidder stage; is that correct? 7 A. I think so. 8 Q. So what was to come was another pricing of phase 1b? 9 A. Yes. 10 Q. At financial close the contract proceeded on the basis 11 of phase 1a being done, with this essentially option to 12 do phase 1b in the future? 13 A. Yes. 14 Q. What I would like to know is just whether you had a view 15 at financial close as to how likely it was that tie were 16 going to elect to proceed with phase 1b? 17 A. We understood that tie had an expectation to build 1b 18 and also 1c, to basically do a complete loop down Leith 19 and then connect back up to Haymarket. 20 Q. So that was tie's expectation, but I'm just asking what 21 your view was of the likelihood of phase 1b going ahead. 22 A. We were told they had a strong Business Case. So 23 I would have worked on the basis that this would be 24 a normal evolution, where -- and it's not uncommon in 25 cities to start with a tramline and then progressively 91 1 extend it. 2 Q. Thank you. 3 A. Is it possible to go further into -- to just -- into 4 that document? 5 Q. Into the Kingdom Agreement? 6 A. Yes. 7 Q. Well, I'm just -- I don't want to hide it from you or 8 anything like that. I'm just keen to make progress if 9 we can. I wonder if one way to deal with it might be to 10 let you take a look at that over lunch. Would that be 11 acceptable? 12 A. Yes. 13 Q. If there's anything that you think helps clarify it, 14 then we can deal with it -- 15 A. I'm keen to address it, yes. 16 Q. Thank you. 17 Once the contract was signed in May 2008, did you 18 have a view or did the consortium as a whole have a view 19 about the likelihood of the various Pricing Assumptions 20 in Schedule 4 giving rise to additional time and cost? 21 A. I think the fact that they were identified as a range of 22 provisional sums and that there were conditions against 23 the value engineering, it's -- there was no certainty 24 that it would materialise in terms of additional time or 25 additional cost, but by the same token there was no -- 92 1 there was no reason to suspect it didn't either. 2 Q. Have a look, please, at SIE00000228. 3 Now, as you can see, that's a minute of a meeting of 4 the Bilfinger Berger Siemens Consortium on 5 June 2008. 5 So two or three weeks after the contract had been 6 signed. I think we see your name in the list of 7 attendees at that meeting. 8 So about eight or so from the bottom. 9 Just look, please, at page 4, at item 8. The 10 heading there, "Conditions of Contract": 11 "Lump sum but 'soft' because price is based on Design 12 Information from 25 November 2007 and later changes in 13 the IFC Design is regulated in Schedule Part 4. 14 Everyone to read first part of Schedule 4 to understand 15 BBS strategy towards Design Changes." 16 Now, you will recall that Schedule Part 4 contained 17 about 40 Pricing Assumptions. Is that your 18 recollection? 19 A. Yes. 20 Q. But this passage here focuses only on one of them, which 21 is Pricing Assumption 1, about changes from the Base 22 Date Design Information. 23 Why the focus on one out of the 40 Pricing 24 Assumptions? 25 A. I'm -- if you don't mind, I have read this second 93 1 paragraph as well. 2 So I think this is basically making sure that the 3 team are fully aware of what's in Schedule 4. It 4 identifies the first part of Schedule 4, and it also 5 makes reference to schedule in terms of programme 6 version 26 and so on. 7 So -- 8 Q. So -- 9 A. I think it's just highlighting the need for the entire 10 team to be aware of the obligations that we have. 11 Q. You're quite right to correct me. The second paragraph 12 does -- I think there's another Pricing Assumption that 13 relates to that. So there's essentially in this 14 discussion at this meeting a few weeks after financial 15 close, there's a discussion of two out of the 40 Pricing 16 Assumptions. If I just put it this way. Was Pricing 17 Assumption 1 in relation to the Base Date Design 18 Information, was that regarded as a particularly 19 important Pricing Assumption? 20 A. I think they were all considered quite important. 21 Q. If they were all considered important, I'm just 22 interested in why there's a particular focus on that 23 one. 24 A. I don't believe that there was necessarily a particular 25 focus on that one. I believe it would be normal because 94 1 if you're at the beginning of a contract, the first 2 activity in this sort of contract is the design element. 3 So it's important to make sure everybody is aware of the 4 obligations around design. 5 But it also describes, everyone to read the first 6 part of Schedule 4. It also makes reference to 7 schedule. So they're all quite important elements. 8 Q. The final sentence in the first paragraph refers -- 9 requires everybody to read the first part of Schedule 4, 10 to understand BBS strategy towards design changes. It's 11 just that word "strategy". What was the strategy? 12 A. As recorded in Schedule 4. 13 Q. Okay. So you just take that as a reference to the 14 procedure and the requirements laid down in the 15 contract? 16 Then just reading on down that entry, there's the 17 heading, "Changes and Claims": 18 "A dedicated Change Team is being built under 19 management of Tom Murray. Up to now 24 Changes have 20 been notified. Pinsent Masons hold a teaching session 21 about the contractual Change Mechanism to be followed by 22 BBS." 23 Then the line below: 24 "Weekly change meetings to be held. Siemens to 25 advise their counterpart for handling of Changes." 95 1 The impression that one might take from that entry 2 is that the consortium were gearing up for a barrage of 3 change-related claims, or design change related claims. 4 Would that be fair? 5 A. I think every contract, these are typical activities 6 that you undertake at the commencement of a contract, to 7 make sure that you have an appropriate organisation in 8 place to manage the contract. 9 Q. Do you accept that at that stage, three weeks or so 10 after financial close, that the consortium were 11 anticipating a lot of design changes and therefore 12 Notified Departures from the Base Date Design 13 Information? 14 A. I think, as it became a -- it moved from originally 15 being a build type contract to a design and build 16 contract, it was reasonable to assume that there would 17 be some changes. Particularly recognising that there 18 was, as you identified, 40-odd items within Schedule 4. 19 Q. Now, we've seen in that passage reference to 24 changes 20 having already been notified three weeks in. Were tie 21 content to agree programme extensions and price 22 increases before the works had got under way? 23 A. The contract mechanism didn't seem to function very 24 effectively in respect of tie's administration of it. 25 Q. Can you just expand a bit on that, please? 96 1 A. So I don't recall tie issuing notifications under that 2 mechanism under the contract. That ultimately ended up 3 going to several adjudications. So it wasn't 4 a mechanism that was effectively executed by tie. 5 Q. In the early stages of the contract, were the consortium 6 content to proceed with work and leave the agreement 7 over the implications of the change for later 8 discussion? 9 A. I don't recall. I think -- I think there was some -- 10 some efforts initially to try and do something, but 11 nothing -- nothing formalised. So I think the position 12 hardened. 13 Q. Yes. So you said nothing formalised. I'm just 14 interested in that first summer. Was there some sort of 15 understanding, formalised or not, between the consortium 16 and tie which would allow works to continue, but with 17 change being -- the consequences of change being 18 addressed later? 19 A. I recall that for the first couple of months, and again, 20 I hope it's accurate, that there were efforts to 21 expedite some works, in the absence of the formal 22 mechanism being in place. 23 But I don't believe that was then -- the 24 compensation for the changes that occurred from getting 25 on with the work, I don't believe that -- that got paid 97 1 in the end or there was some arguments. 2 Again, it's an area that -- I seem to recall it was 3 Haymarket area, I think, was one of the areas that work 4 started in goodwill, in spite of some issues, and then 5 I think the issues never got sorted out. So work 6 stopped. 7 Q. Do you know between which individuals that understanding 8 had been reached? 9 A. I think there was some pressure being applied from CEC 10 on to tie to show progress after -- after the signing of 11 the contract. I think, as it was civil engineering 12 works, it would have been Bilfinger Berger. So it was 13 likely to have been a discussion between tie and 14 Bilfinger Berger. 15 Q. Were you consulted about whether works could proceed on 16 that informal understanding? 17 A. I was never a fan of informal arrangements. But 18 Bilfinger Berger's work, if they were willing to proceed 19 on that basis, so long as it didn't compromise the 20 Siemens component, happy for them to proceed. 21 Q. I understand that you -- I understand those 22 considerations, but I'm just wondering, were you aware 23 of an informal arrangement having been reached that 24 would allow works to proceed? 25 A. It's likely that that would have been discussed within 98 1 the consortium. It's likely that -- and I do recall 2 that there was some dialogue around pressure from CEC, 3 the need to show some progress. So yes. There would 4 have been some dialogue. 5 Q. The Inquiry has heard some reference to a gentlemen's 6 agreement between Richard Walker and Willie Gallagher 7 that would allow work to proceed with the cost 8 consequences of change being addressed later on. Does 9 that accord with your understanding? 10 A. I don't -- I'm not aware of a sort of gentlemen's 11 agreement, but I do recall there were some discussions 12 where the contract processes were considered to be slow 13 and tie's execution of the contract was slow. 14 So in an effort to show goodwill, I believe Richard 15 proceeded with some works on the basis that those 16 contract processes would catch up. But I don't believe 17 they did catch up, and consequently the position from 18 Bilfinger hardened. 19 Q. When you say the position from Bilfinger hardened, just 20 what do you mean by that? 21 A. Basically, when they proceeded with some work and the 22 money wasn't coming forward, then they reverted to the 23 terms of the contract to say, you know, the contract 24 says this is the process. We must follow the process. 25 Q. After financial close, the difficulties that arose in 99 1 broad terms included delayed utility works and disputes 2 over change. 3 From the perspective within the consortium, to what 4 extent did you consider these to be Siemens problems as 5 opposed to Bilfinger's problems to deal with? 6 A. Basically, if there was a delay to Bilfinger, there 7 would be a knock-on delay to us. 8 So we were quite keen to make sure that we were 9 sighted on those issues, to see what mitigations we 10 could take. But also to make sure that we were aware of 11 any issues that could adversely affect us. So we would 12 have had open dialogue with Bilfinger on that. 13 Q. So if there were programme implications, then Siemens 14 would be involved in dealing with the consequences of 15 it? I think that's a fair summary of what you said. 16 A. We would be effectively tail end Charlie, so -- yes. 17 Q. If the effect of the change was a change in the scope of 18 Bilfinger's work, was that something in which Siemens 19 would have any interest or would Bilfinger be left to 20 get on with it? 21 A. We would have -- we would have had an oversight in some 22 way. As the minutes you referred to earlier identified, 23 there were -- there was regular dialogue on site in 24 Edinburgh between the teams around what was occurring. 25 Changes would have been reviewed by Bilfinger team 100 1 and Siemens team to see whether there was any direct or 2 indirect consequence of those changes. 3 Q. If Siemens reviewed a particular change and came to the 4 view that it didn't affect them, would that be the end 5 of Siemens' involvement in that particular change or 6 would Siemens remain involved? 7 A. I believe we would have probably stepped back from those 8 individual changes where we would not have had a direct 9 involvement. I think potentially there comes a point 10 when the cumulative effect of changes means that the sum 11 of those changes could have an impact. So we would 12 probably have kept some form of oversight of what was 13 the cumulative impact of some of those changes. 14 Q. Could I ask you about the general attitude of Siemens to 15 the various challenges that the project encountered. 16 Can I suggest to you that on one view it's a positive 17 thing, or at least a neutral thing, if these challenges 18 gave rise to entitlements to more time and money. Is 19 that how they were viewed by the consortium or were the 20 implications more negative than that? 21 A. I think once the contract was signed, we wanted to get 22 on with the job, build the job, move on to the next job. 23 We'd mobilised a good team. A team that were motivated 24 to build the system. And there was a high degree of 25 motivation to get on and build it. 101 1 So we were content with the arrangement in terms of 2 the financial arrangement for the contract, and our 3 objective was in the first instance to get on with the 4 job, but when that wasn't occurring, we started to think 5 about, okay, what's our position in terms of liabilities 6 and so on. 7 Q. Did Siemens take any steps to attempt to resolve the 8 problems? 9 A. We made several efforts to try and break the deadlock 10 over the years that I was involved. 11 Q. Can you remember any particular ones that you were 12 involved in? Just in overview. 13 A. Invariably we would try to look at the things, stand 14 back and look at things in a -- on a sort of holistic 15 picture. Occasionally I got the feeling that within tie 16 they got into the weeds, worried about, you know, the 17 nuts and bolts of individual changes, rather than 18 standing back and seeing: is there a better way. So 19 over time we tried to encourage different approaches, to 20 sections of work. I believe we tried to encourage 21 sectional completions and various things, just to try 22 and get a bit of focus. 23 Q. I think we know that any of these attempts were not 24 successful. 25 A. Unfortunately. 102 1 Q. Do you have any view as to why that was? 2 A. Personal view, I just think people got lost in the 3 detail. I think instead of -- there's too much focus on 4 the contract, rather than what is the whole point of 5 building the system from a client and having been 6 a client for a number of years, your focus as a client 7 is to get the thing built as quickly as you can, so you 8 can realise the benefits as quickly as you can. Because 9 ultimately there's a wider economic benefit for the city 10 and so on. 11 So I think that bigger picture was missing, and 12 I think there was too much potential emotion involved in 13 some instances that clouded that bigger picture. 14 Q. You are referring there to people being lost in the 15 detail and so on. Who specifically are you referring 16 to? 17 A. I think it might be -- I think you look at it from 18 a corporate perspective. So in organisations that I 19 have worked for in the past, there would be a hierarchy 20 who would challenge you in terms of what are you doing 21 and how are you going about it. They would drag you out 22 of your day-to-day activity to see the bigger picture. 23 So I suspect corporately, I wonder whether tie were 24 subjected to that degree of challenge by their corporate 25 organisation. 103 1 Q. Okay. Could we look, please, at TIE00089656. 2 CHAIR OF THE INQUIRY: While we are waiting for that, you 3 said earlier that you thought there was too much focus 4 on the contract as opposed to getting the system built. 5 Then when you were asked to indicate who you were 6 talking about, essentially, you mentioned tie. Was it 7 one-sided or did the consortium focus too much on the 8 contract as well? 9 A. I think ultimately we were all signatories to the 10 contract. The -- I think both entities ended up 11 focusing on the contract. The view from the consortium 12 was that their understanding of the contract and the 13 execution -- the manner by which the contract should be 14 operated was right, and that the approach tie took was 15 wrong. 16 I believe the adjudications reinforced that view 17 within the mind of the consortium that our understanding 18 of the contract and its mechanism was the correct 19 understanding; and I think it goes back to a number of 20 occasions where various efforts were made to seek 21 progress outside of just looking at the contract, but 22 ultimately those failed, and we spent a little bit of 23 time talking about works that occurred post contract, 24 sort of, if you like, waiting for the formal 25 arrangements to catch up. Those arrangements never 104 1 caught up. 2 Later, there were instances where Princes Street and 3 so on, there were efforts to seek a resolution to some 4 of the matters there, where the utilities weren't 5 diverted and so on, to find an alternative approach. 6 But ultimately it came back to the contract in pretty 7 much every event. 8 CHAIR OF THE INQUIRY: And you referred to emotion, I think, 9 in that context. Where did the emotion lie? Was that 10 one-sided or was there emotion on both sides? 11 A. I think it -- the emotion crept in on all sides over 12 time. 13 CHAIR OF THE INQUIRY: Thank you. 14 MR MCCLELLAND: The document we have on screen, if we could 15 move to page 2 of that, please. 16 What we have here, Mr Flynn, is a note by 17 Stewart McGarrity, who is the Finance Director of tie, 18 of meetings that took place in February 2009. It's been 19 circulated within tie. So you may not have seen this 20 before, unless it was sent to you by the Inquiry. 21 Do you recall these meetings, February 2009? 22 A. I would need to know what it was about. 23 Q. Okay. 24 A. If you don't mind. 25 Q. We will look through some of the provisions first. 105 1 It begins: 2 "Unless stated otherwise the comment or assertion 3 came from M Heerdt backed up by R Sheehan." 4 Do you know who those individuals are? 5 A. I believe they worked for Bilfinger Berger. 6 Q. Point 1, there's a discussion about design development 7 and the parties' different views about it. Paragraph 2: 8 "They are unable [I think we can take "they" as 9 being the consortium] to provide us with prices for 10 changes because: 11 The multiple impacts of design changes, design 12 delay, delayed completion of utility diversions, 13 uncertain ground conditions are so pervasive as to 14 render them unable to plan the sequence of the works in 15 an orderly manner. 16 Notwithstanding this difficulty, the volume of 17 changes is far greater than they could have anticipated 18 and they do not have the resources to progress them." 19 Then what follows, I think, can be taken as 20 a comment by Mr McGarrity: 21 "The reasonable man is never going to accept that 22 a Bilfinger and Siemens consortium found the project 23 management of a linear rail project too difficult in the 24 round. What have they been doing for nine months given 25 so little progress or a plan to progress? What have 106 1 their substantial team of QS's been doing? Why is their 2 supply chain not wholly contracted and ready?" 3 What would your response be to that comment by 4 Mr McGarrity? 5 A. So it's quite a naive comment. If you have a -- if you 6 have one change, and then there's a second change, you 7 would have to assess the second change on the basis that 8 the first change may occur or may not occur. 9 So as you get to the point where you have 100 10 changes and then you have a whole variety of scenarios 11 to consider, but the point -- my reference to being 12 naive is there was a contract mechanism in place, and 13 tie were, you know, key to making that contract 14 mechanism work. 15 So a reference to what have Bilfinger Berger and 16 Siemens being doing for nine months is a little bit 17 rich, given that the key point in the Notified Departure 18 process is tie and that would be my reaction to the 19 comment. 20 Q. If we read on to paragraph 4: 21 "M Flynn. Questioned as he has before whether the 22 budget/funding is actually in place to complete the 23 project and notes that the client was in need of 24 a project management service." 25 Then there's a comment which has been added by 107 1 Steven Bell: 2 "Didn't hear that specific comment re project 3 management." 4 Then I think a comment by Mr McGarrity: 5 "These were MF's comments as he was pulling on his 6 jacket to leave ..." 7 Just to clear up, do you recall making remarks along 8 those lines? 9 A. To be honest, I don't -- I don't recall the discussion. 10 I note in introduction I was there for 30 minutes. 11 So -- 12 Q. What you're reported as having said, does that reflect 13 your views? 14 A. I have -- I have no recollection. It was 2009. So two 15 years after the contract was signed. Two years of 16 frustration, so it's quite possible I made those 17 remarks, but sitting here now, I couldn't honestly say 18 that I made those remarks. 19 Q. You yourself are project manager. I think you said 20 earlier you were -- I don't remember the detail. 21 A. Indeed. 22 Q. You're reported there as having said the client was in 23 need of a project management service. Is that something 24 that sort of -- you would regard that as a well-founded 25 comment on tie's performance? 108 1 A. Yes. 2 Q. Can you just expand why? 3 A. The objective of a client, when they undertake 4 a contract or a project like this, is to realise the 5 benefits as quickly as possible. These things were not 6 built for sport. These things are built to generate 7 a wider economic social benefit. 8 The longer these things go on, the more they cost, 9 the more the disruption is and so on. 10 So typical project managers are motivated to get 11 stuff done quickly. They're motivated to make sure 12 contracts are executed efficiently and effectively, and 13 for clients not to -- for clients to be content to drag 14 this out over a number of years, it suggested to me that 15 there was a wider issue that needed to be addressed; and 16 it's interesting that when -- the Mar Hall activity and 17 the involvement of CEC is quite interesting, that the 18 approach to completing the contract changed, 19 and I believe there was a project management service 20 introduced. 21 Q. From your experience in dealing with light rail and 22 other projects over your career, are you familiar with 23 the approach generally taken by project managers on 24 those projects? 25 A. I've -- I've been on a number of projects on a number of 109 1 contracts, both on the client side and on the contractor 2 side. So I have a reasonable experience. 3 Q. In terms of the project management service or project 4 management performance, how did tie measure up to what 5 you've typically seen from other project managers on 6 comparable projects? 7 A. I think the results speak for themselves in terms of the 8 delay to the contract and the realisation of the 9 project. 10 Q. That's perhaps an inference that we could all draw. I'm 11 just interested from your direct experience, both on 12 this project and on others, if -- could you put some 13 flesh on the bones of the way in which tie's performance 14 compared to what you would typically see? 15 A. So I mentioned before that clients tend to focus on 16 realising the benefits as quickly as possible. They 17 have an amount of money, a budget to invest on a capital 18 investment. 19 Clients typically look at it on the whole, and in 20 this instance there were many components to the tram 21 project. The Infraco contract was just one component of 22 that. 23 It appeared to me that the other elements of the 24 project were not given the necessary focus. The origin 25 of the contract in terms of the interface to the utility 110 1 works, that dragged on and dragged on. So in terms of 2 being a key component and a key deliverable, that wasn't 3 addressed. 4 Then the focus on the Infraco contract, it seemed 5 that the utility works were -- were not getting 6 sufficient focus, and therefore the utility works 7 generated a huge amount of problems for the Infraco 8 contract. 9 So I think having that rounded approach to the 10 project is quite important as a client, and there was no 11 evidence that that approach existed. There seemed to be 12 an acceptance that things would just muddle on, rather 13 than necessarily being proactive. 14 We from the consortium side tried to introduce 15 initiatives to bring about a different approach to break 16 the deadlock. Typically that's what you would expect 17 clients to do, and that wasn't forthcoming. 18 Q. Thank you. Just a couple of more questions on this, try 19 and get done before lunch. 20 If you go to page 3, please, of that document, just 21 paragraph 6 at the top, just to remind you, Mr Flynn, 22 these are Mr McGarrity's notes of a meeting. 23 He says: 24 "Reiterated their previous assertion (Keysberg 25 meeting in December) that the best outcome for CEC in 111 1 cost and programme terms is to suspend construction for 2 a period of time (except where we have agreed to 3 progress on an actual costs basis) sufficient to 4 complete design and utility diversions and 5 re-price/re-programme." 6 Were you aware of that proposal being suggested? 7 A. I believe Keysberg tabled that at some point. 8 Q. Did you agree with it as a sensible way forward? 9 A. Probably. I think it's one of those things where 10 I don't recall at the time, but if we're talking about 11 February two years after the event, any opportunities to 12 bring about a different approach. We had quite a lot of 13 people in Edinburgh, not necessarily getting a huge 14 amount of job satisfaction. So -- 15 Q. If that opportunity had been taken, are you able to say 16 what the implications would have been for the cost and 17 duration of the project? 18 A. Personally, sitting here, I wouldn't be able to. 19 Q. Then if we could please go to page 4, paragraph 8. To 20 be clear, Mr Flynn, this is a note of a meeting that you 21 weren't at, but what appears to have been said by 22 Richard Walker, or at least what Mr McGarrity reports 23 him to have said, is that: 24 "There was general acceptance by tie pre-contract 25 that the project would cost GBP50 million to 112 1 GBP100 million more than was in the contract at 2 15 May 2008. (Completely refuted by Stewart and I)." 3 Which I think we can take as Mr Bell's comment. 4 Can you comment on the accuracy of that statement or 5 otherwise? 6 A. I can't comment on -- I wasn't in the room. He's 7 paraphrasing somebody else. 8 Q. Sorry, I don't mean what was said at that meeting. 9 I should be clearer. 10 Was there general acceptance by tie pre contract, ie 11 before May 2008, that the project would cost 50 million 12 to 100 million more than was in the contract at 13 15 May 2008? Do you recall that being the case? 14 A. I don't recall that being the case. 15 MR MCCLELLAND: That may be an appropriate place to pause 16 for lunch. 17 CHAIR OF THE INQUIRY: We will adjourn for lunch and we will 18 take slightly longer, I think, because we'll make 19 available to you the document in the witness room. 20 Clearly you shouldn't discuss it with anyone else, 21 or your evidence for that matter. 22 A. Okay. 23 CHAIR OF THE INQUIRY: We'll resume again at 2.15. 24 (1.03 pm) 25 (The short adjournment) 113 1 (2.15 pm) 2 CHAIR OF THE INQUIRY: Good afternoon. Mr Flynn. You're 3 still under oath. 4 A. Thank you. 5 MR MCCLELLAND: Now, Mr Flynn, I understand that over the 6 lunch break you were given a copy of the Kingdom 7 Agreement which, just for the record, is WED00000023. 8 Have you had an opportunity to look at that? 9 A. Yes. 10 Q. Is there anything in it that you would like to tell us 11 about, to expand on the answers that you gave this 12 morning? 13 A. Is it possible to go back to the table with the three 14 columns of numbers? 15 Q. Yes. That is SIE00000227. 16 Is that the document you were asking for? 17 A. Yes. 18 I was -- I was trying to recall the chronology, and 19 I thought this table might help. But I can't see the 20 3.2 million identified. 21 Q. Well, I can perhaps help you with that. If you look at 22 the bit that's highlighted in green -- 23 A. Okay. 24 Q. There are four entries there for a figure of 25 3.2 million, if that's of any help. 114 1 A. Okay. So that looks like it's a Bilfinger 3.2 million. 2 Q. By that, do you mean that the GBP3.2 million provided 3 for in the Kingdom agreement, if phase 1b is not 4 proceeded with, was allocated wholly to Bilfinger? 5 A. That's -- that's my conclusion. I couldn't understand 6 the chronology because I thought I was going to see 7 12 million or something in this. It comes to a total of 8 8. And then I couldn't recall the 3.2 in a Siemens 9 context. 10 Q. Yes. 11 A. So I think this document identifies the 3.2 being 12 a Bilfinger Berger sum of money. 13 Q. Is that something that you say solely because you've 14 seen that document just now, or does that reflect your 15 recollection of what happened at the time? 16 A. To be honest, I don't recall, and I'm just trying to 17 utilise what we have got available to try and support 18 the discussion. 19 Q. I think I'm right in saying that in your statement you 20 said that the final negotiation in the Kingdom Agreement 21 were essentially a Bilfinger matter. 22 A. That's what I -- that's what I recall, but unfortunately 23 it's some time ago. 24 Q. Okay. I think we can probably leave that there. 25 CHAIR OF THE INQUIRY: Was there anything else in the 115 1 document that you were given that you want to comment 2 on? 3 A. Other than this -- this was before the contract got 4 signed. So is ultimately all of these agreements would 5 get rolled up in some way and implemented in the final 6 formal contract. 7 MR MCCLELLAND: Thank you. 8 I would like to ask you briefly about the dispute 9 that arose between the parties over works on 10 Princes Street in February 2009. Do you recall that 11 dispute? 12 A. Yes. 13 Q. In your statement, you say that you considered that to 14 be a Bilfinger issue rather than a Siemens one. 15 A. In principle, yes. 16 Q. Can you just explain why that was? 17 A. The sequence of construction is Bilfinger would go in 18 and do the work and then it would be subsequently 19 Siemens to deliver. 20 So as the issues surrounded access to the site for 21 Bilfinger, the direct issue affected Bilfinger Berger. 22 Q. I think I'm right in saying that the dispute was 23 prompted by an issue over change and the consortium 24 taking the view that they weren't obliged to start work; 25 is that correct? 116 1 A. I believe so. 2 Q. Was that a decision in which Siemens were involved or 3 was that a Bilfinger decision? 4 A. We would have discussed it within the consortium. 5 Ultimately there was quite an open relationship around 6 these matters about Bilfinger. So we would regularly 7 challenge each other in terms of what we were doing, 8 recognise that we have cross-indemnities and so on. 9 Nevertheless, there was a wider objective to make sure 10 that we did not stray into something that -- without 11 considering it. 12 Q. So can we take it from that that the decisions leading 13 up to the Princes Street dispute had been agreed upon by 14 both members of the consortium? 15 A. In principle, yes. 16 Q. When you said that you considered it to be a Bilfinger 17 issue rather than a Siemens one, did that to any extent 18 influence who within the consortium took responsibility 19 for handling the matter? 20 A. Yes, because ultimately it was Bilfinger who were 21 directly affected by the issue at Princes Street. 22 Ultimately, coming back to the Consortium Agreement, we 23 would try to make sure that we did not stray into 24 Bilfinger matters. 25 Q. If we could have your statement up, please, which is 117 1 TRI00000151_C at page 18, please. 2 In paragraph 76 you were discussing the 3 Princes Street issue. Just picking up about five lines 4 from the top, it says: 5 "Due to restrictions under the Contract, the 6 Consortium was unable to express its position to the 7 media. Whilst I'm not certain, I presume that tie were 8 trying to use the perceived pressure exerted by the 9 media as a form of leverage to have the Consortium 10 accept risks it was not willing to yield, to undertake 11 works without additional costs and price and time being 12 agreed as per the conditions of the Contract. Those 13 media tactics were inappropriate and ultimately pointed 14 to a weakness in tie to administer the contract." 15 What did you mean by saying that this pointed to 16 a weakness in tie to administer the contract? 17 A. Basically, if an entity has to utilise a third party 18 such as the media to try and coerce or to encourage or 19 entice another entity who they're in contract with, then 20 that was the rationale. Ordinarily you would expect 21 a client on a contract to deal with those matters across 22 a table, rather than via media. 23 To some extent I do wonder whether this was some 24 form of activity to divert attention away from some 25 other MUDFA delays that existed on the project. 118 1 Q. You've referred to an attempt to place pressure on the 2 consortium in the context of this dispute. Would you 3 agree that the Council and tie were probably under more 4 pressure than the consortium were as a result of the 5 standoff over Princes Street? 6 A. As -- as the time went on, I imagine the pressure would 7 have increased on tie and the Council. 8 Q. Because it would be -- Princes Street is a very public 9 place. And it would be embarrassing for the Council and 10 for tie to have a big standoff with no work being done 11 in such a high profile location? 12 A. Yes. 13 Q. Do you agree with that? 14 A. That's a fair comment, I would say. 15 Q. The outcome of the disagreement was ultimately that tie 16 and the Council agreed to a Supplemental Agreement for 17 works being done on Princes Street; is that correct? 18 A. Again, I'm not sighted or don't recall the Council being 19 involved in the agreement, but -- 20 Q. Sorry. tie then. 21 A. Yes. 22 Q. But that was the outcome of it? 23 A. Yes. 24 Q. Was that an outcome which suited the consortium well? 25 A. It provided an opportunity to work in an area and 119 1 actually undertake some work. So it facilitated 2 progress. 3 Q. And the work was being done on a cost plus basis; is 4 that correct? 5 A. I understand it was some form of cost plus basis. 6 Q. I just want to ask you this, Mr Flynn. Was the standoff 7 over Princes Street in fact a deliberate strategy by the 8 consortium to select a high profile location for 9 a refusal to start work, to put pressure on tie to agree 10 a new basis for doing the works? 11 A. I don't recall exactly how Princes Street got selected. 12 But I believe there was some relationship with starting 13 in Princes Street and I believe tie were keen to get 14 work started in Princes Street because Christmas was 15 coming. So I believe -- I may not be correct, but 16 I believe tie were involved in the selection of 17 Princes Street as an area to start work. 18 Q. Yes, but the standoff arose because the consortium 19 exercises its view of its rights not to work. I'm just 20 wondering if that had been done as part of a deliberate 21 strategy in such a high profile place as part of an 22 effort to put pressure on tie to renegotiate the price 23 increases for the works. 24 A. I don't -- I don't recall or I don't believe that being 25 a deliberate objective. I believe it was principally to 120 1 make sure that starting the work -- there was history at 2 that point. As he touched on earlier, the first few 3 months of the contract work was undertaken, but the 4 formal element didn't get sorted out. 5 So I think it was an element of making sure that 6 before stepping into Princes Street, that the basis upon 7 which the work would be done was sorted out. 8 I believe, and this was discussed within the 9 consortium, as to, well, why not start and then force 10 the contract to be applied, but there was a view that 11 that would be even more disruptive, and again, it was 12 one of those things where there wasn't a desire to 13 prolong the pain unnecessarily. 14 Q. You say even more disruptive. Was that simply because 15 starting the work and then stopping it would be more 16 disruptive than not starting it at all? 17 A. Yes. 18 Q. Now, there were a large number of change notices issued 19 by the consortium up to the time of the Mar Hall 20 mediation. Something like 800 or so. 21 The majority of those related to Bilfinger's scope 22 of work; is that correct? 23 A. I believe so. 24 Q. Is it fair to say that there were disagreements within 25 the consortium about the approach that Bilfinger took in 121 1 relation to those changes? 2 A. I think there was a healthy challenge between us. As 3 I said earlier, there was an open dialogue, and neither 4 party -- neither party wanted to get in a situation 5 where in the end we would undermine the obligations 6 within the contract. 7 Q. Were there particular aspects of Bilfinger's approach to 8 change that caused Siemens concern? 9 A. I think it was more a case of the wider issue was there 10 was no progress with tie. The volume of change was 11 increasing. There was effectively no light at the end 12 of the tunnel. So it was the entirety of the 13 environment that was generating stress and frustration. 14 Q. Yes, I understand that. But just specifically in 15 relation to the way in which Bilfinger were processing 16 change, were there aspects of that that caused Siemens 17 concern, and if so, what were they? 18 A. I think we were generally cautious about the approach. 19 We tend to be a bit more cautious than potentially other 20 organisations, and therefore we would challenge on 21 a regular basis: is this the right thing to do? Is this 22 appropriate? And so on. 23 Again, it's trying to understand how does this work 24 in the wider context. 25 Q. As we know, there were various adjudication decisions 122 1 over the life of the contract. Did the decisions in 2 those adjudications have any impact on Siemens' 3 concerns? 4 A. I think it -- those decisions helped. It demonstrated 5 that the understanding and approach to the contract and 6 the application of the contract was supported by the 7 adjudications. So to a large extent, those adjudication 8 decisions helped with the situation. 9 Q. By helped, do you mean addressed Siemens' concerns? 10 A. Yes. It reinforced that the approach that Bilfinger 11 were taking was applicable under the contract. 12 Q. We discussed this morning the agreement under which the 13 consortium would be entitled to payment of 14 GBP3.2 million if tie decided not to proceed with 15 phase 1b. 16 Just for the record, I don't think we need to go to 17 it unless you would find it helpful, that is embodied in 18 schedule part 37 of the Infraco contract, which is at 19 USB00000055. 20 Do you recall that the consortium did in due course 21 supply a price for phase 1b? 22 A. We would have done. There was -- as I mentioned, 23 I think there was an option to be exercised and, from 24 memory, it was something around December. I have 25 a feeling something happened before Christmas. So 123 1 I believe there was a submission. 2 Q. I think, as we discussed this morning, the consortium 3 had provided a price for phase 1b at the preferred 4 bidder stage. Do you recollect what the difference was 5 between the price at the preferred bidder stage and the 6 price that was made available under the Infraco 7 contract? 8 A. No, I don't. 9 Q. Have a look, please, at CEC01120001. This document has 10 the names of the consortium companies along the top, 11 then Edinburgh Tram Network, phase 1b. Just below that, 12 detailed comparison between phase 1b price, September 13 2007, and proposed phase 1b price, December 2008. 14 Are you familiar with this document? 15 A. I'm not familiar with -- I may have seen it, but it's 16 not something I know in any detail. 17 Q. Would you have been involved to any extent in the 18 pricing of phase 1b? 19 A. Not in the -- it's unlikely I would have been involved 20 in the preparation of the price. It would be more 21 a case of a challenge after the team have put the price 22 together. 23 Q. If we could take this at a high level then, please, if 24 we could go to page 2 of that document. It may be 25 a little difficult to read, but if you look along the 124 1 top, do you see that there are three columns which have 2 the heading, "Civil", and then to the right of that, 3 there's another three columns that have the heading, 4 "System"? 5 A. Mm-hm. 6 Q. It appears that in each of these columns, there are 7 prices for the civils element of the work and then 8 prices for the systems element of the work. 9 If you look right down at the bottom, there's 10 a total line. Do you see that? 11 A. Yes. 12 Q. If we look at the civil column first, in the column for 13 September 2007, you can just read it, there's a figure 14 of GBP27.7 million. 15 A. Yes. 16 Q. Do you see that? 17 A. Yes. 18 Q. Then to the right of that, there's a column for 19 December 2008, where the figure is, I think it's 95 -- 20 GBP85.9 million. Do you see that? 21 A. Yes. 22 Q. Then the third column gives you the difference between 23 them? 24 A. Mm-hm. 25 Q. Then the next three columns are the same in relation to 125 1 system, where we see the September 2007 price of 2 GBP22 million, and then the December 2008 price of 3 GBP47 million. 4 So if you take all of these figures together, it 5 would appear that the price proposed for phase 1b in 6 September 2007 was a total of GBP49 million. Does that 7 sound about right to you? 8 You don't know? 9 A. Yes. 10 Q. Okay. Well, if we compare it to the price for phase 1b 11 in December 2008, which is GBP133 million, it appears 12 that the price for phase 1b proposed in December 2008 is 13 about two and a half times as high as the price that had 14 been proposed just a year or so beforehand. 15 At the highest level, are you able to explain why 16 there was such a large increase in the price? 17 A. I probably suspect that it's due to a different 18 schedule, and the fact that the Employer's Requirements 19 would have changed between the September 2007 and the 20 December 2008. 21 So it would be a situation where the scope will have 22 changed, the schedule will have changed, and just 23 quickly looking at that table, there's a degree of 24 transparency there around some of the items that have 25 changed, insofar as exchange rate risk, escalation, and 126 1 so on. 2 So -- so some of the levers of change are identified 3 there. 4 Q. Now, the consequence, of course, if tie decided not to 5 proceed with phase 1b, was that the consortium received 6 payment of GBP3.2 million. That's correct? 7 A. So I understand. 8 Q. And if it was to be suggested that the price proposed in 9 December 2008 was made deliberately high to ensure that 10 tie declined to proceed with phase 1b to secure that 11 payment, what would your reaction be to that? 12 A. There was an obligation to undertake the work. The 13 obligation was undertaken in good faith, as far as I'm 14 concerned. 15 I didn't see a connection between a high price and 16 the 3.2 million. And as I said, the starting point is 17 likely to have changed -- negotiating the Infraco 18 contract, we saw that the scope of work in terms of the 19 Employer's Requirements changed over time. So 20 there's -- there's a number of elements that could have 21 led to an increase in price, I believe. 22 Q. Thank you. 23 CHAIR OF THE INQUIRY: You say you don't -- you didn't see 24 any link between an increased price and 3.2 million. 25 Thinking back to the clause, there were two situations 127 1 where the 3.2 million would be payable. One would be if 2 the 1b didn't proceed at all, and was the other one not 3 if the estimate from Infraco was rejected because it was 4 too high, then you got back -- you got 3.2 million to 5 reflect your costs of preparing the tender? 6 A. So it would -- if I may, the agreement we looked at at 7 lunchtime was pre Infraco contract. I don't know 8 whether those terms were directly related -- cut and 9 paste into the Infraco contract. 10 But from our perspective we had price increase. The 11 reason the price increased is identified there. 12 So from Siemens' perspective, there was no linkage 13 between the 3.2 million and the price that has been 14 submitted. 15 CHAIR OF THE INQUIRY: Thank you. 16 MR MCCLELLAND: If we could look, please, at your statement, 17 Mr Flynn, at page 29, paragraph 107. This is in the 18 context of the mediation which took place at Mar Hall in 19 early 2011. 20 You say there: 21 "My understanding is that the parties agreed to 22 attend the mediation as the Consortium in desperation at 23 trying to resolve the disputes with tie interacted with 24 the Scottish Government." 25 Can you just explain why you say "in desperation"? 128 1 A. Basically, we had quite a large team sitting in 2 Edinburgh, not necessarily generating a lot of positive 3 progress. The job had been ongoing for two to three 4 years at that point. There was no light at the end of 5 the tunnel, and ultimately it didn't look like there was 6 any possibility of a happy ending. 7 Therefore, a tremendous amount of frustration 8 existed within the teams; but also corporately, the 9 corporate organisations were getting quite irritated by 10 what was happening. 11 Q. Were you involved in the mediation? 12 A. Yes. 13 Q. What role did you play? 14 A. I supported our principals. 15 Q. Who led the mediation for Siemens? 16 A. Joerg Schneppendahl. 17 Q. Do you recall to what extent there was discussion at the 18 mediation of the increase in Siemens' price from the 19 original Infraco price? 20 A. I recall that there were one or two occasions when the 21 parties sat around the table to debate and discuss the 22 pricing and the schedule and associated matters. 23 Q. If there had been detailed discussions around Siemens' 24 price, would you have been involved in those, or would 25 that have been somebody else at Siemens? 129 1 A. I was involved in some of the pricing discussions. 2 Q. If we could look, please, at CEC02084575. 3 This is what we understand to be the script of an 4 opening statement given by Sue Bruce, the Chief 5 Executive of the Council at the mediation. 6 If we can go, please, to page 13. 7 Just in the final bullet point on that page, she's 8 discussing here the Project Phoenix proposal which 9 preceded the mediation. She says: 10 "In this Proposal the price for Siemens has gone up 11 from GBP68 million to GBP136.5 million (which price also 12 has huge exclusions - so is not a final price) - 13 a 100 per cent increase despite virtually no change. 14 Why a doubling - and no justification and breakdown?" 15 If we could please look next at SIE00000184. 16 I think -- do you see there, Mr Flynn, in the second 17 column, there is a list of figures under the heading, 18 "Original Submission"? 19 A. Yes, okay. 20 Q. With 231 million for Bilfinger, 136 million for Siemens 21 and so on. 22 If I was to say to you that those were the figures 23 from the consortium's Project Phoenix proposal, would 24 you agree with that? 25 A. I'll take your word for it. 130 1 Q. Yes, okay. I can confirm that it is. 2 If we see the column to the right of that, discount, 3 then there are various figures in red. 4 Then the next column headed up, "Off-Street Works 5 Price", 221 million for Bilfinger, 125 million for 6 Siemens and so on. 7 If we could just scroll back out, please, so it 8 would appear from this document that for Siemens, the 9 reduction agreed at Mar Hall between their proposal of 10 GBP136 million and what was agreed at GBP125 million was 11 a discount of GBP11 million; does that reflect your 12 recollection of what was agreed at the mediation? 13 A. I don't recall the specific numbers at mediation. 14 Q. Well, if you take from me that that -- that the figures 15 reported there are the ones in the -- that end up in the 16 Settlement Agreement, I'm just interested to know what 17 discussion took place at the mediation which led from 18 the Council's position being as expressed by Sue Bruce, 19 which was the concern about Siemens' price doubling, to 20 accepting essentially just GBP11 million off the price 21 that Siemens were asking for. 22 Are you able to explain to us what discussion took 23 place about it? 24 A. I don't recall the 68 million. It's not a number 25 I recognise. 131 1 From what I recall in Mar Hall, we had -- a lot of 2 effort into preparing for Mar Hall. We prepared video 3 to try and enhance the understanding of the issues, 4 because we had a feeling that the issues that were at 5 play were not fully understood by CEC and so on. 6 So we put quite a lot of effort and energy into 7 preparing for Mar Hall. 8 When we went to sit down and go through some of the 9 pricing issues, I didn't find that the tie side of the 10 table had done much preparation, and when we were 11 discussing these issues, there was nothing material 12 presented by tie. We provided a coherent explanation of 13 what -- how the price was built up. 14 Q. So as it appeared to you, was there an interest on the 15 part of the Council to understand the breakdown of 16 Siemens' price? 17 A. We provided that as part of the dialogue in terms of the 18 origin and the evolution of the price, from what 19 I recall. 20 Q. Right, thank you. 21 If we could just return to your statement, please, 22 at page 27, paragraph 110. This is still in the context 23 of the Mar Hall -- sorry, next page. It must be page -- 24 I think page 29, paragraph 110. So we're still in the 25 context of Mar Hall here. You say: 132 1 "I believe that the Consortium sought for the CEC to 2 act as client, as opposed to tie - as the Consortium had 3 no confidence that tie was able to deliver the 4 Contract." 5 Just in overview, why had the consortium lost faith 6 in tie? 7 A. I think we had deployed a capable team. We had tried 8 many attempts at taking the contract forward, applied 9 many initiatives to try and break through the deadlock. 10 Nothing was forthcoming. Instead, it was just, you 11 know, continued attrition. There were various attempts, 12 various tactics being deployed by tie to Notices of 13 Termination and various other activities that were doing 14 nothing to actually take the contract forward. 15 So ultimately we couldn't see that tie were ever 16 going to deliver this contract. 17 What we were looking for was a sustainable 18 conclusion to mediation. We didn't want a sticking 19 plaster. So, you know, we were quite concerned that if 20 we had made some form of arrangement in mediation, and 21 then the following Monday we'd all go back to work, the 22 same people would be involved, and potentially there was 23 a risk the same thing would kick off, and another 24 attempt would fail. 25 So we felt there was a need to change the dynamic. 133 1 Q. It might be said on behalf of tie that they were simply 2 resolute in sticking by their interpretation of the 3 contract. Would that be a fair observation? 4 A. My only comment would be the various mediation -- 5 adjudications didn't support their position, and I don't 6 recall the specific numbers, but I vaguely recall there 7 were something in the order of 15 adjudications and the 8 majority of those were successful for the consortium. 9 So -- 10 Q. I'm just trying to understand if the consortium's loss 11 of faith in tie was confined to the fact that tie had 12 a different view of the contract, or whether the 13 concerns went beyond that. 14 A. I think it's the entity. I think from our perspective, 15 the arrival of Sue Bruce and Vic Emery brought about 16 a positive dynamic within the relationship in terms of 17 CEC. And we didn't want to waste the opportunity by 18 effectively going back to work on the following Monday 19 and having to deal with the issues again. 20 Q. Was the removal of tie from the project a prerequisite 21 for the consortium doing a deal at Mar Hall? 22 A. I think we were quite vocal in the opening statement at 23 mediation that we lost confidence in tie and we felt 24 that success could not be guaranteed with tie in the 25 picture. I don't recall exactly what words were used in 134 1 the opening statement, but that was the intent. 2 CHAIR OF THE INQUIRY: What was the intent, that tie would 3 be removed? 4 A. We felt that it would be better with tie removed, yes. 5 MR MCCLELLAND: Just bear with me, Mr Flynn. 6 If we could please have up on screen TRI00000141_C. 7 While we are waiting for that to come up, were you 8 familiar with Tony Rush? 9 A. Yes. 10 Q. Did you have any dealings with him? 11 A. Yes, I met Tony on a number of occasions. 12 Q. What was the nature of the discussions that you had with 13 him? 14 A. I believe Tony was introduced to tie as a means to 15 pursue the contract in a more robust manner. I saw that 16 as not a positive development, and I spent time to try 17 and develop a relationship with Tony, to understand what 18 was the motivation; is there some possibilities of some 19 common ground? Rather than pursue a negative direction, 20 I was trying to engage to see whether there's some 21 possibility of developing a more positive outlook. 22 Q. I think we have heard elsewhere that your dealings with 23 Mr Rush led to the Project Carlisle initiative; is that 24 correct? 25 A. Yes. 135 1 Q. If we could just look, please, at page 9 of Mr -- this 2 is Mr Rush's statement to the Inquiry. He's talking 3 here about the Project Carlisle Proposals made by the 4 consortium. What he said was: 5 "We analysed the differences between tie's offer and 6 Infraco's counter offer. The difference in relation to 7 Siemens work was disproportionately higher than 8 Bilfinger Berger's. I think I regarded both sums as 9 being "negotiable claims". Because Siemens work content 10 was substantially unchanged from BDDI my reaction was 11 that their element was largely opportunistic and likely 12 intended to correct tender errors." 13 Could you just respond to his suggestion that 14 Siemens' proposal was "largely opportunistic and likely 15 intended to correct tender errors"? 16 A. I think it's speculation on Tony's part. 17 Q. What was the position? 18 A. We would have put together a price that would have 19 composed a build-up to get to whatever the number was. 20 So there would have been a rationale and a logic 21 developed to submit the price. 22 Typically, the increase in price would have been 23 driven from either changes or delay in prolongation. 24 Q. Okay. Just to be clear, was it in any extent to correct 25 tender errors? 136 1 A. Not from my perspective. 2 Q. Just standing back, at the very highest level, Mr Flynn, 3 do you think it was possible for the project to have 4 been delivered more quickly and for less cost than 5 transpired? 6 A. I think absolutely. If you look at the origin of all of 7 these issues, if they had been dealt with in a more 8 effective way, rather than simply slow down the contract 9 process, and then it could have been delivered much 10 faster, and therefore much cheaper. 11 Q. By that, do you mean taking account of the contract with 12 its given terms, the utility diversion delays and the 13 incomplete nature of the design? Do you mean that 14 despite all of those things, it should still have been 15 possible to deliver the project for less money in 16 a shorter time period? 17 A. So one of the key issues was the utility diversions. So 18 had the utility diversions been taken care of, had an 19 agile approach been taken to dealing with the change, 20 then, yes, it would have been -- could have been 21 delivered faster and more economically. 22 Q. In terms of the magnitude of cost savings which that 23 could have brought about, can you -- I wouldn't ask you 24 to speculate, but could you indicate what -- 25 A. I think if you look at the -- the delay from what was -- 137 1 the completion dates that were in the contract relative 2 to the actual completion dates, I think that would give 3 you an order of magnitude. So there would have been 4 substantial -- substantial sums saved. 5 MR MCCLELLAND: Thank you very much, Mr Flynn. I have no 6 more questions for you. 7 A. Thank you. 8 MR MCCLELLAND: Others may do. 9 CHAIR OF THE INQUIRY: I don't think there are any questions 10 from anyone else. Thank you very much, Mr Flynn. 11 You're still under your citation. So you could be 12 recalled if issues arise. In the meantime, thank you 13 very much for your attendance. You're free to go. 14 A. Thank you. 15 CHAIR OF THE INQUIRY: Is that your statement, your signed 16 statement, if you just leave your signed statement 17 there. 18 A. Okay. 19 (The witness withdrew) 138 1 INDEX 2 PAGE 3 MR MICHAEL FLYNN (sworn) .............................1 4 5 Examination by MR MCCLELLAND ..................1 6 7 MR AXEL EICKHORN (sworn) ...........................138 8 9 Examination by MR MCCLELLAND ................139 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 184