1 Friday, 17 November 2017 2 (10.30 am) 3 (Proceedings delayed) 4 (10.42 am) 5 MR WILLIE GALLAGHER (sworn) 6 CHAIR OF THE INQUIRY: You will be asked some questions at 7 the Inquiry, I say initially, at least, but you will 8 only be asked questions by Counsel to the Inquiry, Mr 9 Lake. I might ask a couple to clarify things, but 10 essentially it will be Mr Lake who will be asking you 11 questions. 12 If you can just listen to the question and answer it 13 as directly as possible, and if you keep your voice up 14 so that the shorthand writers can hear what you're 15 saying and speak at a measured pace so that they 16 don't -- 17 A. I appreciate you taking the time to come here today. 18 I mean, it's probably no secret, I mean, I have had 19 a series of health issues over the last ten years, 20 and I try and manage my conditions as best I can. But 21 unfortunately one of the issues to do with anxiety and 22 stress then has a kick-on which can end up causing me 23 quite serious side effects. So I was always keen to 24 provide my evidence to the Inquiry. There was no 25 thought of not wanting to contribute because I do 1 1 believe that I have views and I have history that's of 2 relevance. 3 CHAIR OF THE INQUIRY: We are very grateful for your 4 co-operation and clearly we were anxious, or I was 5 anxious to accommodate you as best we could, so that you 6 had the opportunity to explain what you want to explain. 7 A. If I can. 8 CHAIR OF THE INQUIRY: If you can, yes. 9 Examination by MR LAKE 10 MR LAKE: Mr Gallagher, could you start by giving us your 11 full name, please. 12 A. William Gerard Gallagher. 13 Q. I think you have a document that has been provided to 14 you there, and that would be a hard copy of the 15 statement that you provided. I think it should be, if 16 you check, the one that's been signed by you on the last 17 page. 18 A. Yes, that's correct. 19 Q. Are you content that that be adopted as your evidence 20 for the purposes of the Inquiry? 21 A. Yes. 22 Q. There are further questions that I would like to ask you 23 as we run through things, and I want to start with your 24 role where you were both Chairman and Chief Executive, 25 and I think you first took on both roles in about 2 1 August 2006; is that correct? 2 A. That's correct. 3 Q. Now, you say at that time it was thought it was going to 4 be an interim arrangement? 5 A. Yes. 6 Q. But it went on quite a while with you managing both 7 those roles? 8 A. Yes. 9 Q. Did that give rise to concerns in your mind? 10 A. No, because at the time it seemed the expedient thing to 11 do. When I took on the role as non-Exec Chairman, that 12 was the role I applied for and it was the role I wanted, 13 and when the Chief Exec Michael Howell resigned, we then 14 had a decision to make about recruiting a new Chief 15 Exec, but because of the political uncertainty there was 16 at that time surrounding both the projects that tie were 17 involved with, the Edinburgh Air Rail Link Project and 18 the tram project, the role of Board and the City of 19 Edinburgh felt that it would be difficult to recruit 20 a Chief Exec until there was more certainty about the 21 future of both the projects. 22 So I was asked initially to take on the role for 23 a period of nine months, which would see us through the 24 general election, and then provide a bit more certainty 25 about what would happen. 3 1 History shows then that there was an election, there 2 was a change of government. The Edinburgh Rail Link 3 Project was cancelled. There was challenges with the 4 Edinburgh Tram Project as no doubt we will talk about as 5 we go through our statement. 6 But once the contract was signed, my intent then was 7 very much to recruit a Chief Exec and either remain as 8 non-Exec Chairman, or indeed maybe leave because it 9 might be that at that time, because I had been in the 10 role of Executive Chairman, there would have been 11 difficulty for the new Chief Exec with the relationships 12 that I had perhaps with some of the staff. 13 So I had actually kicked off the process. I had 14 informed the City of Edinburgh, Tom Aitchison, that 15 I felt it was about time after the contract close, to 16 start to look at that, and I would have moved quickly, 17 had I not left anyway, I would have moved quickly to 18 have put in a more conventional governance structure. 19 Q. The decision as to who would be Chief Executive was one 20 in which the Council had a large say? 21 A. Yes. 22 Q. Do you know whether tie or the Council had actively 23 taken steps to replace Michael Howell as 24 Chief Executive? 25 A. No, there was no steps taken. Not at that time. 4 1 Q. You've made the point that it was difficult to find 2 someone standing the political uncertainty that existed 3 at the time? 4 A. Yes. 5 Q. Do you know what efforts were carried out to try and 6 find someone? 7 A. I don't, but I don't think -- I think the decision was 8 that to recruit someone would take probably a process of 9 six months, that the successful candidate would 10 definitely be in a role. Therefore there would be the 11 potential for working notice, and that would take us 12 beyond the time of the election. 13 And there was at that time a real possibility that 14 there would be no projects. So that was the rationale 15 behind the decision not to go ahead and do the 16 recruitment at that time. 17 Q. What was your working relationship like with 18 Michael Howell when you were both there? 19 A. It was good, but it was very brief. I only knew Michael 20 for a very short period of time. And I was only in the 21 door a few weeks when Michael decided to leave. 22 Q. Were you aware that he had felt unhappy that you were, 23 as he saw it, encroaching upon his executive role, 24 despite the fact you were a Chairman at that time? 25 A. He did, but, I mean, I had a different view. I think 5 1 all I did was I chatted, or I asked to speak to some of 2 his first line reports to understand what was going on. 3 That was all. I wasn't involved in executive meetings. 4 I wasn't -- I wasn't involved in executive meetings. 5 I wasn't involved in any of the detail towards running 6 the project. I mean, I was only in the door two or 7 three weeks. That was all. 8 Q. You will be aware, perhaps, of the concerns that had 9 already been expressed by that time about having one 10 person fulfilling the role of both Chairman and 11 Chief Executive arising from the Cadbury report? 12 A. Yes, but I -- I didn't -- I was asked to do the role by 13 the City of Edinburgh. And the reasons for doing it was 14 as I have already outlined. 15 CHAIR OF THE INQUIRY: Who was it in the City of Edinburgh 16 who -- 17 A. Tom Aitchison. 18 MR LAKE: We can see from some emails that you worked 19 through your own company, Touchdown Services. 20 A. Yes. 21 Q. I think I'm correct in saying that you were employed 22 directly by tie? 23 A. Yes. 24 Q. Nonetheless, you still obviously continued using 25 sometimes the email account at Touchdown Services and 6 1 also your personal email account, a BT account? 2 A. I had many email accounts. 3 Q. To what extent were these other email accounts, ie 4 non-tie, used for the company business? 5 A. No. Not that I'm aware of. 6 Q. So you wouldn't have had any email traffic with, for 7 example, Parsons Brinckerhoff, Bilfinger, Siemens? 8 A. No. 9 Q. Using any of those accounts. 10 A. No, not that I'm aware of. 11 Q. Now, I would like you to look at the Draft Final 12 Business Case with me. This will be calling up 13 a reference which is reference CEC01821403. 14 We can see this is the Draft Final Business Case, 15 and I just want to go and look at something on page 84 16 of this. 17 If you press Control, Shift and N together, it 18 should bring up a box where you can just enter the page 19 number. 84. 20 Scroll down that page so we can see paragraph 7.53. 21 Can you read that all right, Mr Gallagher? 22 A. Yes. 23 Q. 7.53, where it notes that: 24 "It is expected that the overall design work to 25 Detailed Design will be 100 per cent complete when the 7 1 Infraco contract is signed. However, by identifying key 2 risk areas and prioritising SDS activities, tie is 3 seeking to complete the key elements of the Detailed 4 Design prior to selecting the successful Infraco bidder 5 in summer 2007. This will enable Infraco bidders to 6 firm up their bids based on the emerging Detailed Design 7 and thereby reduce the scope and design risk allowances 8 that they would otherwise include." 9 Two things arise out of that. We can see that it 10 was intended to try and find key elements to get prices 11 at the preferred bidder stage in summer 2007? 12 A. Yes. 13 Q. But it's also stated quite clearly in the first sentence 14 that the intention was that the detailed design would be 15 100 per cent complete when the Infraco contract was to 16 be signed? 17 A. Yes. 18 Q. Was that your understanding of where matters should be? 19 A. That was my understanding where matters should be at 20 that time, yes. 21 Q. Because I think if you look at your statement in the 22 hard copy there, page 26, paragraph 92, you will see in 23 paragraph 92, in the fourth line, you say: 24 "That is not the case. They were never going to 25 have 100 per cent of the design." 8 1 A. Yes, but I think we're talking about different time 2 frames. I think when I was making my statement there, 3 I think my comment was at a time which was much nearer 4 to the close of -- final close and saying at that point 5 with the information that we had, they weren't going to 6 have 100 per cent of the design. 7 Q. It's understood that by the time they got to having the 8 contract awarded, the intention was that they would have 9 100 per cent? 10 A. The plan was that they would, and that was the intent, 11 but as I think I have said in my statement, it became 12 apparent as we were moving to financial close that that 13 wasn't going to be the case. 14 Q. Now, it was clear obviously throughout 2007 that the 15 design was lagging behind programme? 16 A. Yes. 17 Q. Do you recall at one time threatening to pull the MUDFA 18 contract if they couldn't get designs out on time? 19 A. Yes. 20 Q. Now, in your statement you say that this was no big 21 thing. 22 A. No. When I read the email that was put forward to me, 23 I was thinking that the reference was towards a piece of 24 work down in Leith Walk. It wasn't the full MUDFA 25 programme. 9 1 Q. Might we just look at the email. Again, it will come up 2 on the screen. It's TIE00035918. If we scroll down 3 until we get to the second page, to provide a bit of 4 context for this, we will see there at the top of the 5 page there's an email from Matthew Crosse to 6 Steve Reynolds which has been copied to various people, 7 including you, dated 24 July 2007. I think we can see 8 that. Are you comfortable with that, Mr Gallagher? 9 A. Give me just the time to read it. My eyesight is not 10 the best. 11 CHAIR OF THE INQUIRY: Do you want it enlarged? 12 A. I think I can read it. Okay. If you go back up. 13 Q. I'm just concerned we use the email to Matthew Crosse to 14 find out where we are and what has been going on. 15 Matthew Crosse is writing to Steve Reynolds of 16 Parsons Brinckerhoff. Could we go up the screen, 17 please. 18 Stop there. 19 Matthew Crosse says: 20 "Steve, needless to say I'm very disappointed - 21 particularly after the assurance that both you and Greg 22 provided on 27 June. I raised this milestone last 23 Friday first thing with Jason at the Critical Issues 24 Meeting where there was a Halcrow person present. 25 Neither Jason nor Halcrow gave me any hint that the 10 1 milestone would not be achieved. So much for 2 micromanagement of Halcrow." 3 Did you understand the context was that there had 4 been a failure to deliver designs that were due? 5 A. Yes. 6 Q. This was Matthew Crosse complaining to Steve Reynolds 7 about this matter and copying you in on it? 8 A. Yes. 9 Q. If we look to the previous page, in the foot of the 10 previous page we see in the response to the email 11 Mr Matthew Crosse, there's one from you to him and 12 Steve Reynolds, also dated 24 July. Do you see that's 13 what we're looking at? 14 A. Yes. 15 Q. What you say is: 16 "I only became aware of this tonight after briefing 17 the press about the MUDFA Programme going forward. To 18 say I was astonished that the IFC for Leith Walk 19 (6 August) has not arrived is an understatement. 20 Moreover, I'm really worried and I am seriously 21 considering pulling the MUDFA Programme. We clearly 22 would be exposed if we run into major issues and it is 23 discovered that the IFC had not been delivered and 24 analysed. The reputation of my Company and the Project 25 is at stake. We just cannot continue like this." 11 1 That would seem to be not just a suggestion to 2 suspend the works on Leith Walk, but what you were 3 saying is you would pull the MUDFA programme in its 4 entirety if this carried on. 5 A. I hadn't any plans to pull the MUDFA programme at that 6 time. I was seriously concerned about the consistent 7 late delivery or indeed non-delivery of agreed pieces of 8 work, and I was putting an enormous amount of pressure 9 on both -- well, not on both, on Parsons Brinckerhoff to 10 improve their control of the process. 11 Now, further -- if the introduction of particularly 12 Steve Reynolds hadn't taken place, and the performance 13 hadn't stabilised, would that have been an option that 14 the company would have had to have looked at? I think 15 it would have been something that would have been 16 discussed, yes. 17 Q. That would have clearly had quite major repercussions. 18 If you pulled the MUDFA programme, that would hit the 19 Infraco programme as well? 20 A. Well, it would have been and that would have been 21 something we would have had to have considered. 22 We haven't yet discussed the structure of the 23 procurement strategy, and I don't know whether you want 24 to talk about that later on. But the procurement 25 strategy was a strategy that the Board, myself 12 1 inherited, and it's probably as I have said in my 2 statement, it's probably not a strategy -- I would 3 have -- I would have designed, but the strategy had been 4 designed back in 2002 by -- with input from 5 Transport Scotland. It appeared to be best practice, 6 and the objective was that the MUDFA programme would be 7 complete, the utilities would be complete in the city 8 centre of Edinburgh. The design would be 100 per cent 9 complete. 10 I don't know what 100 per cent complete for a design 11 for a network would actually mean. I think -- I think 12 there had to be a definition of what was appropriate for 13 that. And at that point you would then be able to get 14 a highly competitive bidding process to get the best 15 price for the output. 16 Clearly that didn't happen for many reasons, and 17 I think -- I guess one of the findings I would hope, or 18 one of the things that the Inquiry would look at would 19 be what would be the right structure of contract for -- 20 or the right structure of contract going forward for any 21 extensions to the Edinburgh tram network because I think 22 that's important. 23 Q. Just looking at the procurement strategy that you have 24 described, MUDFA was to be done first and be largely out 25 of the way before the infrastructure works commenced? 13 1 A. Yes. 2 Q. It was intended, as we have looked at, the Draft Final 3 Business Case, the design would be done before the 4 Infraco contract was concluded? 5 A. Yes. 6 Q. The thing started to go through 2007. Was it plain to 7 you that this just simply, whatever the intention had 8 been, wasn't going to happen? 9 A. The MUDFA programme, I would think, is different to -- 10 in my view, the progress of MUDFA was different to the 11 progress on the design. 12 In MUDFA there was a lot of progress, but there were 13 some specific issues to do with major crossings on 14 Princes Street, to do with Scottish Water pipes. 15 I also think that there was an underestimation by 16 the designers on the amount of work that was required to 17 move the BT fibre connections, and that's a relatively 18 new phenomenon. I think perhaps when the design -- 19 sorry, the tender for MUDFA took place, there was a lot 20 of concentration on water, electricity and gas. But 21 actually from my perspective, and talking to the 22 directors of tie and companies that were doing the work, 23 I think the BT work caused as much -- caused them a lot 24 of concern. 25 So -- but I felt that with the MUDFA work, there 14 1 could be specific areas, and that could be planned to 2 be -- work with the Infraco contract, and indeed it 3 might be that for -- to minimise disruptions to 4 Edinburgh, and the citizens of Edinburgh, it might make 5 sense to do some of the work together, and that was 6 something that could be discussed. 7 The design work, however, that was a different -- 8 that was a different -- had a different perspective on 9 that. 10 Q. That just wasn't happening to timescale? 11 A. No. 12 Q. Now, that -- I come back to the question I was asking. 13 If the strategy had required things to be done 14 sequentially and then put together, it was becoming 15 clear in 2007 that that strategy wasn't working because 16 things weren't being done on time? 17 A. No, but at the same time, the Board had to take a view 18 about, well, can we still enter negotiations to secure 19 a fixed price for the delivery of the tram network. 20 The view at that time, and the advice that we got 21 from the procurement experts that we were working with, 22 and indeed from your designers, was that we could, 23 because it was wrong to suggest that there was no design 24 there. The initial bids had been secured from having 25 outline design in place, which for many projects would 15 1 be the point that the design would stop and then the 2 builders would take the further design development on 3 beyond that. 4 From the point of selecting the consortium that were 5 going to work, then there was an attempt to work with 6 them, to prioritise the parts of the design that they 7 felt most uncertain about. But there was many elements 8 of the design where, based on experience and also based 9 on metrics, and also their specific equipment would 10 dictate what the design would have to be. 11 Q. But do you accept that there had been an expectation 12 created when tendering for the Infraco contract that the 13 design -- the full design would be available? 14 A. I actually think that the issue was there should have 15 been better definition of what does full design mean. 16 Q. Well, I'll come back to that in a moment, but for the 17 time being, do you accept that when the contract was put 18 out for tender in Infraco, there was an expectation 19 created that the full design would be available? 20 A. Yes. 21 Q. You come back to what does it mean by 100 per cent 22 design. You see that was the phrase used in the Draft 23 Final Business Case, which we looked at on screen? 24 A. Yes. 25 Q. Surely you, in your position in the company, must have 16 1 had a view on what 100 per cent design meant to put it 2 out in that document? 3 A. When the Board first -- when the Board were involved and 4 approved the document, our advice was, and the 5 recommendation to the Board was, that we would have the 6 design complete. 7 We were concerned about the fact that there was 8 delays in progressing towards that target. We put a lot 9 of pressure -- the Board put a lot of pressure both on 10 the Tram Project Director, who was working on that part, 11 and also indeed on Parsons Brinckerhoff, to get us to 12 a position where we could recover any slippage that was 13 there. 14 Q. But it wasn't recovered throughout the whole of 2007? 15 A. No. 16 Q. The design wasn't anything like complete when the 17 contract was signed in May 2008? 18 A. No. 19 Q. So to that extent, there was a departure from what had 20 been the established procurement strategy? 21 A. Yes. 22 Q. Now, in relation to the need to move on beyond that, 23 could we look at another document, please. It's 24 reference CEC01018359. We can see from looking at the 25 full page here, that this is the papers for the Tram 17 1 Project Board meeting on 9 August 2007. Then if we go 2 to page 5, the easiest way to do it is Shift-Control-N. 3 I would like to -- to make that a little bit larger now, 4 could we press Control-1. Try Control-2. Scroll down. 5 Just move down the page a little bit to see the foot of 6 that page. Item 3.2. 7 I should say, at the top of the page notes that this 8 is the minutes of the Tram Project Board meeting that 9 took place on 12 July 2007. At 3.2 it's recorded that: 10 "WG explained that SDS seem to be making progress in 11 delivering the required design. However, he highlighted 12 that a line on the design may have to be drawn prior to 13 full completion to allow Infraco pricing and VE savings 14 to be firmed up." 15 Can you recall, what did you mean by that? 16 A. It was a statement of that if you followed through the 17 pace that the designs were being complete, and the 18 negotiation period that we were going have to Infraco, 19 that we had to have a baseline for which we could have 20 a discussion on price. That's what I meant. 21 That was the advice I was getting or the Board was 22 getting at that time, and indeed that's what actually 23 transpired. 24 Q. Who was that advice coming from? 25 A. Well, the advice could be coming from the Tram Project 18 1 Director at that time, who I think would be Matthew, and 2 also from Steve Reynolds. I can't recall whether 3 Steve Reynolds had joined us at that time, but certainly 4 Steve Reynolds, when he did join the team in a full-time 5 capacity, made a huge difference, and, you know, one of 6 the lessons for me, I suspect, would have been I wished 7 that Steve had been -- or someone of Steve's seniority 8 and ability had been part of the Parsons Brinckerhoff 9 team from day 1. 10 Q. Just to go back to something you answered a few minutes 11 ago, you mentioned you had advice from procurement 12 experts? 13 A. Yes. 14 Q. Can you recall who they were? 15 A. Well, it would be Matthew and -- 16 Q. Or in-house people? 17 A. Yes. 18 Q. Returning to this question of drawing a line, does that 19 mean you were going to have to stop developing the 20 design and essentially crystallise it at a point in 21 time, so that the contractors would have something on 22 which to base their prices? 23 A. To a degree. There was no intent to stop it, but there 24 was an intent to get a moment in time where there was 25 a reference point that we could have a discussion about 19 1 programme cost. 2 Then there was also a decision about where did we 3 prioritise the resources, because I do make the point 4 that there were certain elements of work that were still 5 to be complete where the design would actually be 6 better -- or indeed, would be dictated by the approach 7 that the contractor was going to use, in terms of 8 equipment and construction techniques. 9 So there was a prioritisation -- and it was 10 a sensible prioritisation that then needed to take 11 place, and we recognised at that time then that there 12 would be a degree of cost that then would be involved in 13 terms of risk that the contractor would then put into 14 their final bid, in terms of applying a higher risk 15 premium for certain parts of the construction, where 16 they weren't 100 per cent sure of what the design would 17 be. 18 Q. Right. So at that time are you saying, just to be sure 19 I'm understanding what you were saying, you would have 20 to have a discussion about programme and design and 21 price by reference to the design as it stood at 22 a particular date? 23 A. Yes. 24 Q. That date would be chosen in a sense arbitrarily, just 25 so you could have that discussion? 20 1 A. No, I think -- arbitrarily -- I think it was chosen 2 based on the best information that we could provide. It 3 wasn't just like we are here where we are today. We 4 started then, through discussions with -- the 5 discussions that we were having with Infraco, to 6 prioritise the resources into the areas that they had 7 most concerns on. 8 Q. From what you're saying, you recognised in terms of risk 9 that if you were to have price and programme discussions 10 by reference to the design at a certain point, and that 11 wasn't the final design, there would be a risk to the 12 contractor that they would be asked to build something 13 for which they hadn't seen all the designs? 14 A. No. 15 Q. What was the -- 16 A. Sorry. 17 Q. What was the risk that they would price? 18 A. They would price the final -- the specification of the 19 Edinburgh tram network based on the element of the 20 design which was fixed, the element of the design which 21 was uncomplete, and it's not -- I think it's not that it 22 wasn't at all there. It was incomplete. But they would 23 then have to take a view on what the risk premium would 24 be due to the uncertainty of the final design not being 25 complete for that section. 21 1 Q. And that's because the design could change between the 2 reference point for discussions and the final position? 3 A. Or the design would be based upon proprietary equipment 4 that Siemens -- or construction techniques that they 5 would use which would be different to what 6 Parsons Brinckerhoff may suggest as the way within the 7 specification. 8 Q. But in addition to the question of the Siemens 9 proprietary systems for the overhead line 10 electrification equipment, there was the civils work 11 that Bilfinger would be carrying out? 12 A. Yes. 13 Q. Where the designs were not complete at about this time 14 we're looking at, in July and August 2007? 15 A. That's correct. 16 Q. So there was going to be a chance, if you priced by 17 reference to designs as they stood at that date, both 18 parties would know that those weren't the final designs 19 they would develop? 20 A. Yes. 21 Q. The question would be someone was going to have to carry 22 the risk of the additional cost as a result of those 23 designs developing? 24 A. Yes. 25 Q. What you're saying is you thought the contractors would 22 1 have to take a view on that? 2 A. And -- no, they did take a view on it. There were many 3 discussions upon it. And as you'll see, as the 4 negotiations took place, the discussions on risk and the 5 design development risk that was there, was part of all 6 the discussions that went through. 7 Q. Now, were you having discussions with them about design 8 development risk -- when I say them, the contractors -- 9 in about July or August 2007, or were these discussions 10 that happened at the end of the year when it was 11 approaching financial close? 12 A. I only became involved -- I actually had -- I didn't 13 have a lot of discussions with the successful 14 contractor. I only became involved in the discussions 15 once the final bidder had been selected. And also in 16 the final stages of the negotiations. 17 Q. So did you have any discussions -- from what you are 18 saying, it seems you had no discussions with prospective 19 contractors around about this time of July and August? 20 A. No. I met -- for both presentations -- the initial 21 select -- the initial selection for Infraco had taken 22 place, and I believe when I joined, in 2006, there was 23 a selection process under way. 24 I became Executive Chair and I remember there was 25 a small procurement committee, selection committee 23 1 established, and I think it comprised of Neil Renilson, 2 myself, and someone else. I can't recall who it was. 3 We didn't know the identity of the bidders. We had to 4 ensure that the evaluation of both bids by the 5 procurement team had been done professionally and to the 6 law, to the letter. And then at the end of the day 7 there was the successful bidders for tramline, and that 8 was unveiled as being CAF, and then there was the 9 only -- the two bids that came in for Infraco, which was 10 disappointing, because the whole direction, the purpose 11 of the strategy was to have a lot of competition for 12 that work, and it didn't materialise, and one of those 13 bids, Tramlines, I do believe, and I may be wrong, but 14 I do believe Matthew informed me it was non-compliant. 15 So there would have been a lot of work for 16 Tramlines' bid then to have been considered properly. 17 Q. That decision you just described taking in relation to 18 Infraco contractors, that was to decide who should be 19 appointed preferred bidder; is that correct? 20 A. Yes. 21 Q. At the stage we are looking at just now, it was 22 necessary before you could consider who was preferred 23 bidder, to get their best and final offers? 24 A. Yes. 25 Q. I think what you're saying here is you're going to ask 24 1 them to do that by reference to the design as it was at 2 that time? 3 A. Sorry, can I -- can we be clear. When you say best and 4 final offers to both bidders, are you talking about the 5 Infraco -- you are talking about the Bilfinger Berger 6 bid? 7 Q. No, both Bilfinger Berger Siemens consortium and the 8 Tramlines consortium were invited to provide their best 9 and final offers? 10 A. Based on -- 11 Q. Based on the design as it stood at the time? 12 A. Yes, but that wasn't the detailed design. I think that 13 was the preliminary design. 14 Q. Well, that was going to be my next question. The best 15 and final offer prices they provided were in fact based 16 entirely on the preliminary design. They didn't do any 17 detailed design, was taken into account in these offers? 18 A. I think -- I don't know, but my understanding at the 19 time would have been that -- for the tender -- the 20 tender documents must have been released in 200 ... 21 Q. The initial documents. The initial invitation to 22 tender, 2006? 23 A. 2006, yes. And the design would have been as it was 24 summer 2006, if it went out in the autumn 2006. 25 Q. But then once we get to summer 2007, in this minute we 25 1 are looking at, the invitation was made to the bidders 2 to submit their best and final offer on the basis of the 3 design as it stood in mid-2007? 4 A. Yes. 5 Q. The best and final offers they submitted were based 6 entirely on preliminary design still? 7 A. I can't recall. 8 Q. Now, in that the design -- if you take it from me at the 9 moment that it was reported to the Board that the best 10 and final offers had been based on preliminary design, 11 and you are aware that the design contract was running 12 behind schedule, as you narrated, would it have been 13 preferable to hold off appointing the preferred bidder 14 at that stage and try and preserve competition between 15 the two bidders for a bit longer? 16 A. It was -- it was a matter that was debated at the Board, 17 and my recollection is that the advice and actually the 18 information was there was significant blue water between 19 Tramlines and the Bilfinger Berger Siemens, and it was 20 recognised that there was going to be significant effort 21 required by both tie, TEL, the whole City of Edinburgh 22 resourcing, and also it was going to require significant 23 resourcing from the other parties as well. 24 I think the judgement was made that the most sensible 25 way forward was to concentrate that effort on the 26 1 successful bidder. And that was a decision that the 2 Board made. 3 Q. I think when you were asked later to consider the 4 lessons that might be learned from the whole exercise, 5 you felt that the preferred bidder had been appointed 6 rather too early? 7 A. I would have liked -- I would have liked there to have 8 been more competition, and I think it would have helped 9 us to have secured better progress on a final price with 10 Bilfinger Berger. And that didn't happen, and that 11 became very difficult. 12 So yes, if I could have -- if we had the resources 13 and we had the time, then I would have preferred to have 14 kept it going. 15 Q. You felt that the Tramlines bid -- I don't intend to go 16 through its detailed contents now -- but it had value to 17 tie in the sense it could have been used to apply 18 pressure to the Bilfinger Berger Siemens consortium? 19 A. Yes, but there's also the element of how much time and 20 effort Tramlines were actually going to put into the 21 bid. 22 At the time -- I think this was after the 23 pronouncement from the Government and the change in tack 24 by the Government in terms of the support for the 25 project. 27 1 Q. Yes. 2 A. I think both consortiums then were taking the view that 3 this was going to be a difficult landscape before 4 a change in government, and this was now an extremely 5 difficult landscape, and the Tramlines body language in 6 the discussions with Tramlines showed no great 7 enthusiasm for potentially wanting to spend a lot more 8 time and money if there was no guarantee of success. 9 Q. Can I ask you please to go back to your statement, 10 please, and look at something. It will be on page 74. 11 It's paragraph 243? 12 A. Sorry, page? 13 Q. 74. 14 A. Yes. 15 Q. I want to ask you about what is set out in the first 16 seven lines of that. I'll just read it for the purpose 17 of the transcript: 18 "The consortium used the fact that the funds were 19 capped as a negotiating factor against us. They knew 20 that was all the money there was. It was a concern for 21 them as to what would happen if the money ran out. As 22 part of their negotiation strategy, they made sure that 23 they secured as much of the risk transfer and money as 24 they could. If we had been in a different position 25 where the funding cap hadn't been public knowledge, we 28 1 potentially may have been able to negotiate a better 2 deal." 3 There's two things that arise from that. The first 4 is: what did you mean when you said that the consortium 5 secured as much of the risk transfer and money as they 6 could? 7 A. Because they knew what our ceiling was. They knew that 8 total funds for the project were 545 million. 9 Q. What did they seek to do as a result of that? 10 A. They negotiated -- they negotiated knowing that if I had 11 said I have no more money, they could do the sums and 12 they could add it up and they would know exactly where 13 the ceiling was. 14 Q. The ceiling was a matter of public knowledge because 15 John Swinney had announced it. What I'm interested in 16 is: what do you mean, they secured as much of the risk 17 transfer and money. What risk transfer and what money 18 are you talking about? 19 A. We had money which was fixed and we had money which was 20 in a contingency and risk pot. The idea being that you 21 try -- what we were trying to do was hold on as much of 22 the risk and contingency as we possibly could, because 23 that would be required to deal with any changes that may 24 anticipate as the build started. 25 But they will then want to negotiate in terms of the 29 1 development of the design, in terms of small changes and 2 say: unless we get X; and you will see the consistent 3 request for additional money, because they knew that we 4 had these funds here, and their -- I guess their 5 objective was to say: right, we know that there is so 6 much money. We know that we have got this part of the 7 money. We now want to secure some of the risk element 8 and transfer it into the contracted price. 9 Q. So it wasn't that they were seeking a transfer of risk 10 as such; what they were seeking to do was essentially 11 get their hands on the risk allowance money? 12 A. Their negotiation was to try and secure the highest 13 price that they could for the minimum risk that they 14 could for building a network. I guess that's 15 a legitimate strategy from the consortium. 16 Q. But I'm just trying to get to the bottom of what you 17 mean by risk transfer. Is what you mean they were 18 essentially hoping to get their hands on the risk, the 19 money that represented the risk allowance? 20 A. What they were looking to do was to secure as much 21 guaranteed funds as they can for as minimum risk to the 22 delivery of the -- of their outputs. 23 Q. I'm still struggling with what you mean by they secured 24 as much of the risk transfer as they could? 25 A. I'm talking about the financial elements that we had 30 1 allocated against the risk pot. 2 Q. So they basically wanted to get their hands on that 3 allocation? 4 A. Yes. 5 Q. Now, the issue there would seem to be not so much with 6 knowing that there's a cap, but it being public 7 knowledge that there has been a sum of X million pounds 8 set aside for risk. 9 A. Can you ask that again, sorry? 10 Q. The issue there is not so much whether or not the 11 contractors knew there was a cap on the money. The 12 problem was that the contractors knew that there was 13 a pot of money set aside for risk? 14 A. Well, they were one and the same because contractors 15 knew what the total sums were. They also then knew what 16 their element of that total was; so they could then take 17 a view on therefore what was left. 18 If you think about the Infraco contract in total, 19 the Infraco contract would include the tramline which 20 they would know, the infrastructure which they would 21 know, and already as part of the business information 22 that was in the public domain, the amount of money that 23 was being spent on utilities and that was a matter of 24 record. 25 So there was a lot of information in the public 31 1 domain that wouldn't normally be in the public domain 2 when you were doing negotiations of this significance. 3 Q. So they were able to take advantage of or exploit the 4 publicly available information as to tie, the Council's 5 position? 6 A. Yes. Well, I don't want to give the impression here 7 that I think what the consortium were doing was wrong. 8 I mean, I think what they were doing was they were 9 negotiating to get the best deal that they could for 10 their company. And if that information was available, 11 they were perfectly entitled to try and use it. 12 Q. The last bit of the paragraph from your statement that 13 I read out noted that "we potentially may have been able 14 to negotiate a better deal", "if we had been in 15 a different position". 16 A. If the information that was in the public domain wasn't 17 in the public domain, then there would have been more 18 uncertainty in the minds of the consortium about where 19 the ceiling or how much funds or what the conditions on 20 these funds actually was. And we negotiated hard 21 because we wanted to secure the best deal that we could 22 for Edinburgh. And for the City of Edinburgh. 23 Q. Can I just be clear. If it wasn't a matter of public 24 record as to how much money was available, you would 25 have been able to say, as a standard negotiating tactic: 32 1 we can't pay you that, we don't have the money. The 2 problem was they knew how much money you had? 3 A. Yes. 4 CHAIR OF THE INQUIRY: Could I ask, do you have any ideas as 5 to how that could be avoided in public contracts? 6 A. I -- one of the things that I learned in the Edinburgh 7 Tram Project was try not to get too focused on a single 8 number. A range of numbers or a range is much 9 preferable. 10 It didn't actually matter terribly much when it was 11 in the public domain that initially the final cost of, 12 say, producing Edinburgh Business Case was going to be 13 498 million. It could have been that there is a range 14 of possibilities between 475 and 550. 15 One of the -- one of the things that I learned, and 16 indeed I applied as I went through the project, I would 17 never speculate on numbers because the truth of the 18 matter was that these numbers would move around, and 19 there may be -- there would be an attempt to try and pin 20 this number and justify this number at any one time. 21 So I think that when you're looking at this in the 22 future, I think ranges -- if you have to put anything 23 into the public domain, then don't put a specific number 24 in. Put a range of numbers or a range of outcomes, and 25 leave it as open as possible, both in terms of numbers 33 1 and both in terms of what you expect to get coming out 2 of that. 3 CHAIR OF THE INQUIRY: Did you ever have any experience of 4 projects where the funding was provided centrally, by 5 central government, as opposed to a local authority? 6 I know that the money here was coming from central 7 government, it was going via the local authority and the 8 publicity attaching to local authority dealings is 9 probably greater than what might be available if it had 10 been a project administered by Transport Scotland. 11 A. No, I can truthfully say I have never been involved in 12 a project that was as complex and had as many different 13 hurdles for funding as Edinburgh Tram Project. So I've 14 been involved in projects not to the same degree, with 15 the same amount of expenditure, where the funding has 16 come from central government, either from Holyrood or 17 from Westminster, where the Business Case is done 18 through the Treasury. 19 It is a defined and difficult process to get access 20 to the funding, but it is not as difficult then to 21 control the expenditure and the information that flows 22 with it. 23 CHAIR OF THE INQUIRY: So the information from the Treasury 24 contracts, if I put it that way, wouldn't be publicly 25 available? 34 1 A. No. 2 MR LAKE: You mentioned there the Final Business Case, and 3 I would just like to look at this, please. It's 4 document reference CEC01649235. You see on the front 5 page there, you can see it's the Final Business Case 6 Version 1, as it was then termed, with a date of 7 3 October 2007. 8 What was your role in producing this, Mr Gallagher? 9 A. I wasn't involved in the production at all. 10 Q. Did you review it before it was released? 11 A. I would have reviewed it as part of the Board. The team 12 or the -- I think the author of the Final Business Case 13 was Stewart McGarrity, the Finance Director. 14 Q. Could we look at page 16 of this, please, towards the 15 lower half of the page. If we look -- there's 16 a heading, "Cost estimates", and paragraph 1.65. 17 This is in the -- just the executive summary, but 18 I think it gives us the detail we need for our present 19 purposes. 20 We can see that under the heading, "Cost estimates", 21 it says: 22 "Building on the detailed cost estimates prepared in 23 November 2006 and incorporating the firm rates and 24 prices received from bidders in 2007, the updated 25 project cost estimates reflect the agreed scope for 35 1 Phase 1a and a programme for delivery of Phase 1a by the 2 first Quarter 2011. If the option for Phase 1b was 3 exercised within the window of opportunity to 4 March 2009, it could commence revenue service in 2012." 5 Then there's a summary table in which the price of 6 phase 1a, if there is concurrent construction, is 7 GBP498 million. It's also exactly the same as the 8 sequential construction; do you see that? 9 A. Yes. 10 Q. Now, at this time the Draft Final Business Case was 11 produced, the pricing provisions of the Infraco contract 12 weren't in place; is that right? 13 A. What date is this? 14 Q. This is October 2007? 15 A. No. 16 Q. Standing the fact there were no pricing provisions, to 17 what extent was it really reasonable to describe these 18 as firm rates and prices received from the bidders in 19 2007? 20 A. I think it -- I think we were -- at that point we were 21 confident that the negotiations had positioned us in the 22 areas that -- the area that we would expect to be in, 23 that there would be modifications probably subject to 24 final negotiation. But we weren't expecting that the 25 outcome would be significantly different from what was 36 1 reported. 2 Q. But you weren't really expecting that those were firm 3 prices? Because you hadn't had your price negotiations? 4 A. Well, I think you have to go through and say out of the 5 498, how much of that would be firm. I think you have 6 to remember that a lot of the prices by that time would 7 have been firm. At that time, my recollection would be 8 that we had spent over 200 million. The tramline 9 contract on trams was firm. 10 Q. You say the tramline contract? 11 A. Sorry, the trams, not tramline. The tramlines were CAF. 12 We also knew that -- the expenditure on MUDFA and we 13 also knew the contract rates that we were paying for 14 MUDFA. 15 Q. Pause there. You knew the rates, but you didn't know 16 what the final sum was going to be, because it was 17 a re-measurement contract? 18 A. No, but within degrees we knew what that was likely to 19 be. 20 We then come to the Infraco contract, and out of the 21 Infraco contract at that time, which was 22 GBP200 million-odd, out of that, that was split between 23 Bilfinger Berger and Siemens, and Siemens -- my 24 recollection might not be correct. It was either -- the 25 Siemens element of that was either 60 million or 37 1 80 million. So it was split something like that between 2 that and the civils. So that left the civils element of 3 that being 100 to -- 120 million to 140 million, and out 4 of that, then there was a percentage of that that was 5 fixed in terms of rates. 6 So I think that if you take the overall project as 7 a whole and not just think of the number based on the 8 Infraco contract, then a high degree of that estimation 9 or in terms of confidence of getting that outcome, 10 I think, would be quite high. 11 Q. Then if we go forward a little in time to an email you 12 sent a few weeks later, on 25 October, could we look at 13 CEC01453723. If we look at the lower half of that email 14 first, we can see it's running from Jim McEwan, to you, 15 Matthew Crosse, Geoff Gilbert, Graeme Bissett and 16 Steven Bell, and that it's as dated 25 October 2007. Do 17 you see all that? 18 A. Yes. 19 Q. What Jim McEwan says is: 20 "Please find attached VE presentation for the Tram 21 Project Board next week." 22 VE is value engineering. One of the aims at this 23 time was to obtain value engineering savings in order to 24 ensure that the project could be brought in on budget; 25 is that fair? 38 1 A. Okay. 2 Q. If you look at what you said in response, you said: 3 "Let no one be in any doubt. We will be going back 4 with a number of GBP498 million for Phase 1(a). Get 5 cracking on whatever needs to be done." 6 On the face of this, this is telling people long 7 before pricing negotiations that you will go back to the 8 Council with a number of 498 for phase 1a? 9 A. No, I think you misinterpret what I'm saying. 10 Q. What are you saying there? 11 A. What I'm saying there is that we have communicated 12 a budget, and we are going to make that budget. 13 In projects like this, or indeed any project, the 14 opportunity for slippage in terms of increased cost and 15 filtering away your contingency and risk element is at 16 this time in a project. 17 So you have to ensure that everyone is 100 per cent 18 focused on the most efficient, most productive way to 19 achieve their targets, and if you give the -- you give 20 the impression as a Director and a Manager at that time 21 that it's okay to spend a bit more money, whether it 22 would be 498, you could end up with something that you 23 would look -- something significantly greater than that. 24 So that was management pressure to remain and tell 25 everyone within the tie management team on behalf of the 39 1 Board that the focus here is to deliver the best price 2 that we can get for the Edinburgh tram network, whether 3 it would be 498 or 495 or whatever; it's to keep the 4 pressure on the negotiations, to keep the pressure on 5 the design, to keep the pressure on the delivery, to try 6 and reduce the cost, because the more money that we had 7 in the contingency and risk element would give us 8 a higher degree of securing the success of the project. 9 Q. Now, you wrote that email in response to the one from 10 Mr McEwan about value engineering. And value 11 engineering is a means by which when savings are 12 identified, the estimated cost can be reduced? 13 A. Yes. 14 Q. So when you're told there's a presentation about value 15 engineering, your response to that is: we will be going 16 back with a number of 498. 17 A. I haven't seen the presentation for value engineering. 18 So I don't know what the context would be and I don't 19 know what the discussions would be. But I -- you 20 probably won't see many long emails from me. I don't 21 write long emails. This was very much to do about a line, 22 three, to focus the attention of the tie management team 23 on achieving their targets. 24 Q. The Inquiry may hear evidence in due course from 25 Neil Renilson to the effect that you had said to him in 40 1 a meeting: we can't possibly put out a figure in excess 2 of 500 million, let's make it 480 million, it starts 3 with a 4. And you said: 4 "Watch me. Well, not 480 million. What we're 5 saying is we need to have something that starts with 6 a 4. GBP490 million is too bloody obvious. Let's make 7 it 498." 8 What's your comment on that? 9 A. My comment is that we had to -- we had a discussion at 10 the time about what we felt the final number should be. 11 And I wanted to signal a number less than 500 million. 12 Neil's advice was funnily enough to go with a range, 13 which I think -- I think I have already said that 14 I think I would have went with a range. I wouldn't have 15 went with a final number. 16 So I would agree with Neil. 17 Q. What do you mean when you said there in your answer: we 18 were having a discussion as to what the final number 19 should be. 20 A. Well, it was a number that was going to go into the 21 public domain. That's all we're talking about here. 22 Q. And essentially that was something that you just chose? 23 A. No, it was something that there was a range of options 24 available to us, and we had to decide what we felt was 25 our target budget number was going to be. 41 1 Q. So how did you choose benefit between the various 2 options that were available to you? 3 A. I think that there was a range of outcomes, and I have 4 to couch this in -- I can't remember. I think there was 5 a range of outcomes put forward to us by the team, and 6 I think there was a discussion at the Board. It wasn't 7 my decision. It was a discussion at the Board. And 8 there was various input from various Board members, and 9 the Board collectively decided what the final number 10 would be. 11 Q. Mr Renilson is saying it was entirely your decision that 12 it had to start with a 4, and he said -- 13 A. No, it couldn't have been my decision. It would have 14 been the Board's decision. 15 Q. What you're saying in your answers here, it seems, it 16 wasn't something that was decided from an objective 17 analysis of the numbers. There was an element of choice 18 as to what this number would be? 19 A. I would disagree with you and say it wasn't decided by 20 an objective analysis of numbers. It was. But there 21 was an element of choice between an allocation of where 22 you felt your final negotiations were going to be, and 23 also what the element of risk that you wanted to be. 24 I felt that by going with a number which was less 25 than 500, it would help in the negotiations with the 42 1 Infraco and the other tenders that were underway, 2 because it helped set a kind of lower ceiling number, 3 and that was the rationale. But at the same time I was 4 conscious of the fact that I wanted to be able to 5 achieve, or the company wanted to be able to achieve 6 a successful outcome to the negotiations. 7 And if you're saying, why was 498 the number, it was 8 probably the balance between these two complete -- 9 competing objectives. 10 Q. If you say it was -- the number of 498 was put on it, 11 that was what was chosen, that seems to imply that it 12 was also known that that could go over. Just because 13 you had chosen that figure, doesn't mean that was what 14 it was going to cost? 15 A. No. And I think what we said at the time, and I think 16 when I was communicating that, that this was the target 17 number. There was funds available for -- to build the 18 network, which was fixed. We were going to do all we 19 could to try and minimise the cost, because at that time 20 I was hoping that if possible, we could get below that 21 number, because the original proposal for the tram 22 network was to build tramline 1a and tramline 1b. Now 23 we were only talking about 1a, and my hope would have 24 been that if the construction had went well, then there 25 may have been a political appetite to have found some 43 1 additional funds to be able to build the full network 2 that was envisaged. 3 Q. Once you had announced the figure of 498, or fixed on 4 that in the Version 1 of the Final Business Case in 5 October, it was essentially necessary that you brought 6 the final Final Business Case in at that figure or less? 7 A. No. I think -- I think what would -- what would have 8 been the case would have been that if the negotiations 9 had moved, we would have to accurately report to the 10 Board, or the Board would have to accurately report to 11 the City of Edinburgh how the final negotiations ended 12 up. 13 Q. Was there not a practice of adjusting the risk 14 allowances or value engineering figures to ensure that 15 it always came below the figure? 16 A. No. 17 Q. Because it came in exactly as 498 million again in the 18 December Final Business Case? 19 A. No. There was no -- if the final number would have had 20 to have been 510, if it had to have been 470, it would 21 have been the number that was the number. If it was 22 relatively close to what we had said before, and there 23 was no reason to change the number, then that's what we 24 would have done. 25 But no, there was no predetermined that we were 44 1 going to design the numbers to achieve the same output. 2 It was based on what the analysis was at that time. 3 Q. Does your email that we still have on screen here not 4 put it most accurately: there could be no doubt, we will 5 be going back with a number of 498. 6 A. No, I think you misinterpret. This was an email for me 7 to the tie team to refocus their appetite and attention 8 and to get the best deal possible we could. If I had 9 said to them something differently, it may have been 10 that you would have found that the number would have 11 increased. 12 Q. If there hadn't been a 498 ceiling set, it could have 13 gone up from that? 14 A. No, I don't -- I don't think it would have been -- 15 I think it would have been the -- the number would have 16 been what the number was. 17 Q. Mm-hm. 18 A. It would have been based on the best information that 19 was available at that moment in time. 20 Q. So why is it that if you say: I don't want it more than 21 498, it will be that or less; but if you haven't said, 22 that you are acknowledging that it might in fact be more 23 that you went back with? 24 A. I think this email, that was sent by me at nine minutes 25 past 9, I suspect I probably reacted to something that 45 1 was in an email or something that came forward. And 2 that it's no more than that. And it's a reminder to the 3 guys that are doing the work to focus on the task in 4 hand. 5 It's not a strategic statement of intent. 6 Q. Okay. I want to go forward to the question of as 7 matters move into December, and you knew that the design 8 even then was still quite incomplete, consideration to 9 pausing award of the contract rather than going ahead. 10 I think you say in your statement that you did give 11 consideration that there should be a pause? 12 A. Yes. 13 Q. I just want to understand why it wasn't done. You 14 considered this at pages 26 and 27 of your statement. 15 If we could take a look at them. 16 Start with paragraph 91. You note there that you 17 did give consideration as to whether we should slow 18 things down: 19 "The problem was, at that point, we had the government 20 change. We were burning money. tie's running costs 21 were about GBP1 million a month. I don't know what the 22 consortium's costs were. But the cost in terms of 23 penalties for say a further three month delay would 24 have been about GBP15 million to GBP20 million." 25 Just dealing with the penalties, there was no 46 1 contract signed then, was there? 2 A. No. But the programme -- the programme would have 3 slipped, and in terms of cost of money, in terms of the 4 amount of money that we would have needed to have funded 5 that, just in terms of inflation, the price would have 6 gone up. 7 Q. So was the concern, it was more inflation rather than 8 penalties? 9 A. It wasn't penalties on the consortium. It was what was 10 the total cost it was going to have to be to build it. 11 Q. What information did you have that costs would increase 12 if you took further time? 13 A. No, I think -- I think what we looked at at that time 14 was in terms of the cost of running the programme. What 15 the cost of the extending to -- extension of the 16 timelines on another six months or another year before 17 the commissioning of the tram project would be, what the 18 cost of financing that would be at a later time and 19 date, what the impact on the Business Case would be by 20 having a further delay on the Business Case coming 21 through a bit later on. 22 And I suppose being pragmatic about -- and would the 23 situation and the negotiations we were having with the 24 contractor or the Final Business Case actually improve 25 significantly to make it all worthwhile. 47 1 Q. Might the designs have improved significantly to have 2 something a little bit more fixed? 3 A. Possibly, but at that time we were also taking the view 4 that there was significant design available. We were in 5 discussions with Bilfinger Berger. We -- we were 6 talking relatively. I go back to my point about taking 7 the full point of the Infraco contract and breaking it 8 down into its element chunks. Taking out the part that 9 was fixed in Siemens. Taking out the part that was 10 already fixed in terms of the design. Taking out the 11 bits that Bilfinger Berger who build roads and 12 infrastructure should be able to do as part of their 13 core business, and that left a small amount of 14 uncertainty which we were on focusing on. 15 Q. But leaving aside whether Bilfinger should be able to 16 price from their experience, it was clear by this time 17 that they were unwilling to price on the basis of the 18 designs that were available? 19 A. Well, they were unwilling, but at the end of the day 20 they signed the contract. 21 Q. But my point is you knew that they were unwilling to 22 commit at this time? 23 A. No. Can you remind me of the dates, sorry? 24 Q. I'm talking here about December 2007. 25 A. No. At that time we felt that the discussions were now 48 1 getting to a critical stage. And I do think this was 2 perhaps the precursor for going to Wiesbaden. 3 My discussions -- not mine, but the team's 4 discussions with Bilfinger Berger Siemens could at best 5 be deemed to be what I would call unreliable outcomes, 6 where we would think that we'd had a discussion with 7 them, we would think that we had an agreement with them, 8 and then when we went to the next meeting, things that 9 we thought were agreed were then re-opened by 10 predominantly Bilfinger Berger, not so much Siemens. 11 Therefore I was concerned about how much authority, 12 or indeed how much knowledge the senior directors of 13 Bilfinger Berger had in terms of the negotiations that 14 were being undertaken by Richard Walker, because the 15 discussions that we had with Richard Walker, I would -- 16 felt that we had achieved (a); he would agree at the 17 meeting that we'd achieved (a); and then we went or the 18 team would go to the next meeting, the agreements that 19 we thought we'd had, we were necessarily -- or the team 20 were having the same meeting over and over again, 21 and I felt that we had to try and break through that. 22 We had to -- we had to find out were Bilfinger Berger 23 Siemens, and most importantly were Bilfinger Berger 24 committed to this project or not? Did they want to do 25 the project? Why were they agreeing on the one hand one 49 1 meeting, and then walking away from that agreement and 2 wanting to have the same meeting over again three weeks 3 later? 4 Q. That suggests you had doubts about their commitment to 5 the project at the end of 2007? 6 A. I was uncertain about the commitment of the directors of 7 Bilfinger Berger to the Edinburgh Tram Project, and 8 I was unclear from the discussions that was taking 9 place, being led by Richard Walker, how much authority 10 he actually had to negotiate on behalf of the 11 consortium. 12 Q. In terms of pressure to get the deal done, was there 13 pressure from the Council at all? 14 A. No. I don't recall that. I recall it being a very 15 stressful time, but I think everybody would have 16 preferred an agreement as soon as practical, but I can't 17 recall having discussions with Government or discussions 18 with the Council which effectively said -- which would 19 put that pressure on us. 20 They just wanted information about where the 21 negotiations were, what the range of likely outcomes 22 would be, and when did we think realistically we would 23 be able to get the contract signed, and if not, what the 24 contingency options may be. 25 So I have to -- I mean, I didn't have difficulties 50 1 working with the Council or indeed working -- well, 2 working with Government to the degree that that was 3 possible at that time. 4 Q. You mentioned Government. Was there any pressure coming 5 from Transport Scotland or the Ministers to get the deal 6 done? 7 A. No. 8 Q. Was there a concern that the grant monies might be taken 9 away if you couldn't get the deal done? 10 A. There was -- no. There was an issue to do with timing 11 of when money had to be spent, because there was money 12 allocated in various financial years, but there was no 13 pressure from Ministers to try and cut corners in terms 14 of the negotiations to achieve a date. 15 Q. Now, you've already mentioned this was in the run-up to 16 the Wiesbaden Agreement. 17 A. Yes. 18 Q. What were the issues that had to be discussed or agreed 19 at Wiesbaden? 20 A. I wanted to look -- I wanted to -- when I say I, I'm 21 using "we" here as the Board. I wanted to look the main 22 partners of Siemens and Bilfinger Berger in the eye and 23 say: are you committed to this project? I had met with 24 Johan -- 25 Q. Mr Enenkel? 51 1 A. Yes, I had met with him once socially, because I felt 2 that I wanted to build a relationship at that level, and 3 I wanted them to be committed to the same project in the 4 same degree that I was. 5 But I wanted to now say: look, we have been 6 negotiating round the same issues; and when I say we, 7 the procurement teams had been negotiating around these 8 issues for months. And made little progress. 9 You know, I wanted to look at them in the eye and 10 say: are you really committed to doing this? Are we all 11 wanting to achieve the same outcome? 12 At the same time, there was certain elements of 13 uncertainty around about price, and I wanted to see that 14 with the support of their directors, could an agreement 15 be made on a target price which would then enable the 16 procurement and the legal people to crystallise the 17 contract which could then be available to sign 18 after Christmas. 19 Q. So what did you want to come away from Wiesbaden with? 20 A. I wanted to come away from Wiesbaden with two things. 21 I wanted to be able to report back to the Board and also 22 to our stakeholders that Bilfinger Berger Siemens were 23 absolutely committed to the project and wanted to make 24 this project a success; and that a target price which 25 was supported by the Directors of Bilfinger Berger 52 1 Siemens, who were on the Board of these companies, and 2 would be happy to support as it goes through their risk 3 premiums; because I think the thing that a lot of people 4 were unaware of, that there was a two-month type cycle 5 that was going to be required by not only the City of 6 Edinburgh to get all the approvals, but also to go 7 through the risk management process and the approvals 8 process of the consortium. 9 So that was going to take time, and I wanted them to 10 know that we wanted to try and achieve that process as 11 quickly as practical. 12 Q. To your knowledge, what was the approvals process that 13 would have to be undertaken by the German companies? 14 A. They would have to take the project to their risk 15 committee. All their projects were ranked based on 16 risk, ie risk -- I'm unclear whether it was risk of 17 delivery, risk of reputation, risk of exposure on costs. 18 It then would have to go to the various -- their 19 Board Committee. The German company, Bilfinger Berger, 20 they were a multinational global company, and they had 21 different boards. 22 Q. So if things were going to be discussed in Wiesbaden, 23 was it your understanding -- correct me if I'm wrong, 24 but was it your understanding that whatever was agreed, 25 that the German companies would have to take it away and 53 1 put it to their Board and Risk Committees afterwards? 2 A. I expected that there would be a degree of tinkering, 3 shall we say, once the agreement, the high level 4 agreement was then taken by the procurement and the 5 legal people. 6 Q. Mm-hm. 7 A. But the basis and the substance of what we'd agreed 8 would remain, that -- and in January that would be 9 crystallised into a position where we are able then to 10 prepare a contract that was acceptable for both parties 11 for signing. 12 Q. Did you expect to be agreeing value engineering matters? 13 A. I expected to be agreeing a target. The strategy was 14 that Matthew Crosse and myself went across to Wiesbaden. 15 Matthew had all the detail of the areas in terms of 16 value engineering that we still had to work through. 17 I took no part in terms of the discussion of the detail. 18 Matthew dealt with that. 19 I made it clear or emphasised the importance of 20 trying to achieve a number which was acceptable to us. 21 And also acceptable to the consortium. I never 22 thought the Edinburgh Tram Project was a bad contract 23 for -- somebody -- there was one of the statements that 24 was put to me was it was a bad contract for Bilfinger 25 Berger Siemens. I didn't think that at all. I thought 54 1 that it was a fair contract for both parties. 2 Q. Were you aware in the run-up to going to Wiesbaden, 3 there had been difficulty in getting firm prices out of 4 the consortium? 5 A. Yes. 6 Q. I think if we could look at another document, it's 7 CEC01481843. What we can see there is a letter running 8 from tie, dated 11 December. If we go to the second 9 page of this, at the end of this, we can see it was 10 a letter from you with your signature on it. 11 Do you recall writing to Richard Walker at Bilfinger 12 about this time? 13 A. I asked Matthew to prepare a letter for us. The 14 objective of the letter was to set out the agenda for 15 what we wanted to discuss at Wiesbaden. That would have 16 been the content of the letter that was sent. 17 Q. If you look at the foot of the first page of the letter. 18 Is that readable to you? 19 A. Yes. 20 Q. Third last paragraph there: 21 "Unless you are able to confirm that by the end of 22 Thursday's meeting, we will have been able to consider 23 and agreed the following items. Then I must state that 24 tie will not attend and we will need to revisit the 25 entire preferred bidder programme." 55 1 The first thing is: 2 "Price confidence. We ask you to consider fixing 3 your price, save for a very few notable exceptions 4 where, for example, the design itself is absent. 5 2. Price level. We ask that, having been through 6 the value engineering exercise, including the targets 7 agreed at preferred bidder date, your price level and VE 8 savings are confirmed at a level that enables our 9 project business case target to be met." 10 So these are two aspects of price outstanding. You 11 didn't have firm prices and you wanted the value 12 engineering firmed up? 13 A. No, we had prices. Sorry, we didn't have complete 14 prices. 15 Q. You didn't have fixed price by looking at this? 16 A. We didn't have a total which said that the total price 17 from -- the fixed price from the consortium to build up 18 the network was X. We had -- we had bits of that, and 19 what I wanted to achieve was I wanted to achieve a fixed 20 price that delivered the scope and the outputs of what 21 we were looking to achieve. 22 Q. You didn't have a fixed price at that time, and that's 23 what you were saying you wanted from the consortium? 24 A. Yes. 25 Q. If we look at their response, please, it's letter 56 1 CEC00547788. We can perhaps see this is a letter to you 2 from Richard Walker dated 12 December, the following 3 day. Do you recall this letter? 4 A. I don't know, to be honest. 5 Q. Look at the terms of it in a bit more detail. Again, is 6 that comfortably readable for you? 7 A. Yes. 8 Q. "Dear Willie, further to your letter of 11 December and 9 our telephone conversation, we too are disappointed at 10 our combined inability to achieve all the measures 11 necessary to fully achieve the pricing objectives of 12 tie. However, we are firmly wedded to achieving the 13 goals leading to contract award and a successful 14 contract for all stakeholders. Our response to your 15 particular points 1 to 5 are detailed below. 16 1. Price Confidence. We have considered fixing 17 our price on the information provided and believe that 18 we are able to do this in all areas where the design is 19 available. See attached schedule." 20 We will come to the schedule in a moment. Point 2: 21 "Price Level. We believe that with the willingness 22 and co-operation of all concerned parties, we will be 23 able to achieve the VE savings targets agreed at 24 preferred bidder date." 25 Dealing with the second point first, that seems to 57 1 be quite encouraging in relation to value engineering 2 that they could agree the things. 3 But if we look at the second page of this letter for 4 the Schedule of Clarifications, we can see that if we 5 scroll down a little so we can see a little more of it, 6 there are seven different areas where they indicate they 7 are willing to firm up the prices, and that the total 8 value of those will be GBP8.12 million for moving from 9 provisional to firm? 10 A. Yes. 11 Q. If we go over to the third page, we can see under the 12 heading, there's a big heading, "Assumptions": 13 "In respect of our pricing and programming certainty 14 exercise we have made the following assumptions." 15 Under the heading, "Design": 16 "In those locations where is the design is absent, we 17 are not able to fix our price. Typically these include: 18 Picardy Place, St Andrew Square, London Road, 19 York Place, Forth Ports Area, et cetera. 20 In areas where design is partial, we have made 21 reasonable assumptions based upon our experience and the 22 existing design information provided." 23 What did you take from this, that they were just 24 making assumptions as to the design? How fixed was that 25 price? 58 1 A. Our objective was for them to agree a final price which 2 they would be -- they would then stand behind their 3 assumptions, both for where they had the fixed part of 4 the design and where the design -- they had made 5 an assumption for the design, and indeed where they felt 6 that they weren't able to fix it, we wanted them to fix 7 it. 8 So we -- what we were -- what we were attempting to 9 achieve was to say: let's take this whole element here 10 and let's try and agree a final price where, accepting 11 that the design is not complete and there's some design 12 development risk that has to be applied, and we 13 understood that they were going to put a risk premium in 14 to uplift that, what will the final price be to go ahead 15 and build the Edinburgh trams network? 16 That's what we were attempting to achieve, and we 17 thought we had achieved in the outcome of Wiesbaden, and 18 the process that therefore ensured us to achieve the 19 final price that was in the contract. 20 Q. What they're saying here in this letter is that there's 21 GBP8 million for moving these seven specified matters 22 from provisional sums to firm sums? 23 A. Mm-hm. 24 Q. They've also told you they're making certain assumptions 25 about design. You said you wanted them to stand behind 59 1 their assumptions. What did you mean by that? 2 A. No, I wanted them to -- I wanted -- this was part of an 3 ongoing debate which was being undertaken by Matthew and 4 his procurement team with the Bilfinger Berger and 5 Siemens team, where effectively they would take each of 6 these elements and they would agree a way forward on 7 indeed what the price may be, and then you would visit 8 this two or three weeks later or two weeks later and it 9 was as if the initial discussions hadn't taken place. 10 So what we wanted to do was we wanted to say: look, 11 there has been so much work undertaken on this. There 12 is a lot of information that's available. You are an 13 experienced civils company. You are able to price in 14 contracts where you have less design than you have just 15 now. We want to understand from you what is the total 16 price that the City of Edinburgh is going to have to pay 17 for us to build this -- to build this network. 18 Q. Now, at this stage, when you've got this letter, by that 19 time they have been unwilling to accept the design 20 development risk and give you firm prices; is that 21 a fair comment? 22 A. I think that there had been a degree of design 23 development risk already built into the proposal. 24 Can I -- 25 Q. Can I just ask my question again. Is it clear that up 60 1 to this point they had been refusing to accept the 2 design development risk and give you firm prices? 3 A. No, I can't -- I don't think that's the case. I think 4 what they've already done is they have provided firm 5 prices, including an element of design development risk, 6 on all parts of their bids coming forward. 7 I think it's helpful if you look at what the initial 8 budget was set for doing the design of the 9 Edinburgh trams network. The original contract was with 10 Parsons Brinckerhoff, and if you actually look at what 11 the total cost for design development that Bilfinger 12 Berger ended up securing as part of the negotiation, 13 I think it's of an order -- I think it's actually bigger 14 than what the original budget was for 15 Parsons Brinckerhoff. 16 Q. Can we be clear, in terms of the risk of design 17 development, one of the risks as the design continues is 18 that someone is going to have to pay to have the design 19 work done? 20 A. Or someone is going to have to pay in terms of taking 21 the risk that their interpretation of what they have to 22 do, and it may be that they -- that the design -- the 23 design that they do, they will do in a different way. 24 Q. I want to be clear because it seems to me there are two 25 different things here. One is they're actually carrying 61 1 out design works costs, engaging engineers and 2 designers? 3 A. Yes. 4 Q. The second matter is once the design is complete, you've 5 got to build what's shown in the designs? 6 A. Yes. 7 Q. Now, one design development risk might be thought it's 8 actually paying people to carry out the designs. 9 A. Yes. 10 Q. The other design development risk is that, as the 11 designs develop, the cost of constructing what is shown 12 in the designs might increase. 13 A. Yes. 14 Q. Now, the thing that was being dealt with with 15 Parsons Brinckerhoff could only be the first one. 16 A. Yes. 17 Q. But what we're looking at here is the second one, that 18 Bilfinger and Siemens were showing a marked reluctance 19 to accept the liability for building whatever was shown 20 in the final designs because they had priced only 21 preliminary designs? 22 A. Not at this time. At this time, the initial prices they 23 got was based on preliminary design. At these points in 24 negotiations the final design was available for elements 25 of the network. 62 1 Q. So what change had there been in their price between the 2 preliminary design and December? 3 A. I can't comment. 4 Q. Can we look at your response to this letter, please. 5 It's reference CEC00547779. 6 This is a reply from you to Mr Walker's letter. You 7 can see to whom it's addressed. We can see the date, 8 13 December, and on the second page you will see, 9 although this is not a signed version, it has got your 10 name. 11 The text of it refers to the letter of 12 December. 12 You say: 13 "... and have to convey to you the deep 14 disappointment that I and my team feel in its content. 15 This letter is the product of the labours undertaken 16 since the announcement of BBS as the preferred bidder 17 and yet it gives little of the required certainty we are 18 seeking and without which we cannot proceed. The 19 seriousness of this in the context of the approval of 20 this Project cannot be overstated and unless we can find 21 some way forward which removes the uncertainty, then my 22 recommendation to the City of Edinburgh Council will be 23 that the Project should not proceed. I would see that 24 as my duty and professional responsibility." 25 That's being presented as something really quite 63 1 fundamental, something that could stop the project in 2 its tracks. 3 A. Yes, that's how I felt at the time. 4 Q. Well, it's not a question of really just how you felt, 5 is it, Mr Gallagher? This is a serious issue which was 6 in danger of bringing matters to a halt. 7 A. I think in the run-up to meeting with the Directors of 8 Germany, they needed to know that if we could not agree 9 a successful outcome to the negotiations, then we 10 wouldn't be held to ransom. We would have to walk away. 11 Q. And your frustration at your inability to get the firm 12 prices is quite apparent from the terms of this letter. 13 A. Yes. 14 Q. Because the first thing you say is: 15 "In reviewing your response to our particular points 16 1 to 5, I have outlined below the form and assurance we 17 require against each". 18 The first one, price confidence, is that -- 19 A. The -- 20 Q. Can we one at a time so we don't cause the shorthand 21 notes difficulties. "Price Confidence. 22 We will fix our price in accordance with the 23 attached schedule." 24 That's what you were demanding from them, that they 25 would come back and say: we will fix our price? 64 1 A. Mm-hm. 2 MR LAKE: My Lord, I notice it's now past 12.10 and I'm 3 aware we did say the shorthand writers require a break. 4 So this might be an appropriate time to take an early 5 lunch break and we can resume this afternoon. 6 CHAIR OF THE INQUIRY: Hopefully there's sandwiches and 7 stuff outside for us. We will have a break and resume 8 again once we've had sandwiches and a reasonable time. 9 (12.13 pm) 10 (The short adjournment) 11 (1.00 pm) 12 CHAIR OF THE INQUIRY: Good afternoon. You're still under 13 oath. 14 MR LAKE: I want to stick with the subject matter of 15 Wiesbaden, please. Could we look at another document. 16 It's reference CEC00573343. What we have got here is an 17 email sent by Geoff Gilbert on 13 December to 18 Matthew Crosse. And copied to others. You're not one 19 of the named recipients of this email. But do you see 20 what he's saying is: 21 "Matthew, updated deal paper and current Infraco 22 cost report." 23 A. Can you remind me, what date was the Wiesbaden visit? 24 Q. 13 -- this day, 13 December. 25 A. Yes. Because Matthew and I flew out on that day, but 65 1 Geoff was providing the support to Matthew, and would be 2 sending out information, because I remember while 3 waiting for the meeting that Matthew was in deep 4 conversation with Geoff. 5 Q. If we look at the various things attached to this, if we 6 could go to page 8, please. This is entitled "INFRACO 7 DEAL Financial Negotiating Parameters". Did 8 Matthew Crosse, a recipient of this, discuss this with 9 you at all? 10 A. I can't recall. 11 Q. Let's look at some of the items here. If we start by 12 looking at the first page here, we can see a break-up of 13 where matters have got to in terms of the bid, 14 normalisation and value engineering. If we look 15 underneath those figures, if we scroll down a little, 16 Geoff Gilbert says: 17 "We need to reserve a proportion of the contingency 18 and risk to uncertainties in the things that are outside 19 the deal. Reserve GBP6.5 million for this. This leaves 20 up to GBP10 million for BBS to take pricing risk for the 21 scope and risks that are included in the deal." 22 If we slide down a page further, we can see 23 "Proposition", and "The proposition is that". The third 24 of the bullet points is: 25 "Plus GBP3 million to GBP10 million for pricing 66 1 risk." 2 Do you recall there being discussion of a particular 3 sum that would have to be paid or could be paid to the 4 consortium in order to get them to take the risk? 5 A. Not at that meeting, no. 6 Q. Do you recall discussing that with Matthew Crosse in 7 advance? 8 A. No. 9 Q. Do you recall those discussions at the meeting? 10 A. No. The -- the meeting that we had a discussion was 11 very much on the numbers that had been socialised 12 between tie and BBS. 13 Q. What do you mean, socialised? 14 A. Discussed, already agreed. There was no -- there was no 15 offer at that time for us to go beyond where we were. 16 Q. If we go on another two pages, please, on page 10 of 17 this document, and we look down the page, there's the 18 heading, "Scope", which we can just see. Underneath 19 that it says: 20 "The Scope to be delivered for the negotiated price 21 is: Programme ..." 22 There are two bullet points. Underneath that, 23 technical scope, and the last bullet point under 24 "Technical scope" is: 25 "BBS take design development risk." 67 1 Now, it would appear from this that what is being 2 contemplated by Geoff Gilbert and said to Matthew Crosse 3 is that this is to be a new situation. Bilfinger are 4 expressly to take a design development risk. Did you 5 understand that to be one of the parameters of 6 discussion? 7 A. No, I understood that to be new. That was a statement 8 of our current position. 9 Q. Can you understand then why, or explain to us why it is 10 that Geoff Gilbert is contacting Matthew Crosse on the 11 day you go to Wiesbaden, saying you should be paying 12 between GBP3 million and GBP10 million, but this is what 13 you should be getting in return? 14 A. No, I think there must have been a request from Matthew 15 to Geoff to give them a concise document which would 16 articulate what he's trying to achieve. So I think 17 Geoff perhaps was -- and I really don't want to 18 speculate because I don't know. But it looked -- it 19 looks to me as if it's a statement of what we would say 20 would be the outcome, the successful outcome of the 21 discussions. 22 Q. But it does contemplate you accept on the one hand 23 giving more money and getting in return for that that 24 Bilfinger would adopt the pricing risk? 25 A. Yes. 68 1 Q. But you didn't seem to understand that as something you 2 were going to be discussing with them quid pro quo, more 3 money for them taking risk. 4 A. No, sorry. I think we anticipated that they would ask 5 for it. It was not something that we were going to 6 offer. 7 Q. But did you understand you had a pot available? 8 A. I knew that we had money available, and I knew that 9 there would have to be some sort of negotiation to try 10 and agree a deal within parameters that were acceptable 11 to the Board and the City of Edinburgh. And if it went 12 beyond that, then we wouldn't be able to achieve 13 a negotiated settlement. 14 Q. What was the parameter beyond which you couldn't go? 15 A. I think -- I can't recall, but I think it was a judgement 16 in terms of the split between the risk -- the risk pot 17 and what the total cost to completion was going to be, 18 or indeed if they wouldn't accept -- they wouldn't 19 accept the design and development risk, because in 20 essence we would have no idea of what the end of the -- 21 the end product was going to cost. 22 Q. Take the two parts of that. Firstly, you talked about 23 the design, so the risk pot. You would be drawing on 24 that to try and -- 25 A. We had GBP545 million ceiling. 69 1 Q. Yes. 2 A. And if we had so much in contingency, if we could agree 3 with Bilfinger Berger that they would then accept some 4 of the risks, then we could transfer money that had been 5 allocated in the risk pot into the main contract, so 6 that's what we were doing. 7 Q. You seemed to say the second aspect was you were clear 8 that you had to have them accepting the design risk? 9 A. Yes. 10 Q. So that was something -- if I recall your earlier 11 answer, you believed they had already accepted? 12 A. They understood that that's what we wanted to achieve. 13 Q. That's a slightly different matter. 14 A. No, but they hadn't agreed it yet, but that's what they 15 knew we wanted to achieve. 16 Q. So you knew as you were going out there that they had 17 not yet accepted the design development risk? 18 A. No. 19 Q. Just to be clear, when you say no, is that saying: no, 20 they weren't accepting it; or you agree they weren't 21 accepting it. 22 A. No, I -- I understood when I was going out that there 23 were parts of the design that were incomplete. And that 24 we wanted Bilfinger Berger Siemens to give us a fixed 25 price based on their understanding of what was required 70 1 to complete the design and build those parts of the 2 network. 3 Q. And accept the design risk? 4 A. And accept the design risk on it. 5 Q. You knew obviously that they'd already asked for more 6 money because they had asked for GBP8 million in their 7 letter of 12 December? 8 A. Yes. 9 Q. In terms of the people who went out, you said you went 10 out with Matthew Crosse, Geoff Gilbert stayed behind and 11 provided advice. Was any consideration taken to having 12 him along? 13 A. We didn't want -- we didn't want -- neither side, 14 I think, wanted a huge meeting. I go back to what the 15 primary purpose was. The purpose was really to look the 16 Senior Directors of Bilfinger Berger Siemens and 17 say: are they committed to the project? 18 There was then discussions in value engineering. 19 Matthew was well briefed in that and comfortable with 20 it. So we decided, because if Geoff had went along, 21 then the guys who reported to Michael and Richard Walker 22 would probably come along and it would end up being 23 a cast of thousands. 24 Q. Who was there from the consortium? 25 A. Do you know, I can't recall. I recall it just being 71 1 Matthew and myself, Richard, Michael Flynn, 2 Richard Walker, and Johan -- 3 Q. Enenkel? 4 A. Enenkel, and his associate from Siemens. I don't recall 5 anyone else being there. 6 Q. Do you remember a lawyer, Christian Korf from the 7 consortium? 8 A. No, I don't, but that's not to say he wasn't there. 9 Q. Did any of the consortium people leave after a while or 10 were they all there throughout your discussions? 11 A. No, we took about -- I think the meeting took between 12 three and four hours, and we -- we had a break, 13 a comfort break. 14 I don't recall break-out meetings taking place. 15 Q. Is it not the case that at one point, on the Thursday, 16 you left the room with Mr Enenkel and the representative 17 from Siemens and you -- the three of you left the room 18 and had discussions for a while, came back after about 19 half an hour, announced: this is the price we've agreed. 20 A. No, I can't recall that. 21 Q. Might it have happened? 22 A. I don't understand why we would have left the room. 23 Q. Did you leave the room? 24 A. No, I just can't recall. I can't recall whether it 25 happened or not. 72 1 CHAIR OF THE INQUIRY: Can I ask, was Mr Enenkel in the 2 meeting throughout the time that you were there? 3 A. Yes. 4 CHAIR OF THE INQUIRY: I think he suggested in his evidence 5 that he was really the host, he wanted to be there to 6 meet you and he met you, and he didn't stay in the 7 meeting. The meeting was conducted by other people. 8 A. No. No, he was -- he was there. And his equivalent 9 from Siemens was there. 10 MR LAKE: Were they actively involved in the discussions 11 regarding price and value engineering? 12 A. They weren't actively involved in terms of the value 13 engineering discussions. But they were -- they were 14 involved in the kind of statesman-like discussions 15 about, you know, they were supportive of the project, 16 but, you know, there was a lot of risk associated with 17 the project. So they -- they inputted this sort of 18 Chairman/Senior Director level that you would expect. 19 Q. Did you and Matthew Crosse play different roles? 20 A. Yes. I was chair. I was the Chairman of the company 21 and I played the Chairman role. I didn't get involved 22 in any of the detail. That was Matthew's role. 23 Q. You were also the Executive Chair and you had been 24 sending the letters about pricing beforehand? 25 A. Yes, but I was quite clear that this is what we wanted 73 1 to achieve. I wasn't intending or indeed expected to be 2 getting into discussions about whether this structure or 3 that structure could be redesigned. 4 Q. Did you have discussions, though, about what the price 5 would be and getting it fixed as opposed to variable? 6 A. Actually, I truthfully can't recall. What we were 7 trying to achieve at the time was the price that we had 8 on the table, we want to get Bilfinger Berger Siemens to 9 stand behind it. That's what we were trying to achieve. 10 They had put in a request for 8.12 million. So 11 I knew about that. And that was being analysed by the 12 procurement people. So there was no response to that. 13 But what we were trying to get to was a position 14 where there was a price which would be acceptable to 15 both parties, and an agreement on programme risk. 16 Q. What do you mean, you wanted them to stand behind the 17 price? 18 A. Because we had various prices from the consortium as we 19 moved through the negotiation, and we thought we'd 20 agreements and then they kept changing. 21 Q. So this was a price they would adhere to. 22 A. Yes. 23 Q. How was that price to relate to the question of 24 accepting the design responsibility? 25 A. That was included in accepting the design 74 1 responsibility. 2 Q. Can you recall, did you have discussions with the people 3 there about them accepting the design responsibility? 4 A. Yes. 5 Q. What was the response to that? 6 A. Well, the response was that it was very difficult, they 7 hadn't done the design. And our response was we 8 understand that, but you have understood our position 9 now for -- since the negotiations have started. You are 10 a major construction company. You have undertaken 11 builds like this over the world. You have the means and 12 you have the intelligence and you have the experience to 13 be able to determine what a price for you to design and 14 build that piece of apparatus is. 15 Q. Their response to that? 16 A. Their response was we will look at it, and that's what 17 they did. 18 Q. When did they look at it? 19 A. They looked at it, they came to an agreement on what we 20 thought the final price was going to be. And that is 21 the discussions that then took place with Matthew and 22 with Michael and Richard Walker. 23 Q. To be clear, did they go away from Wiesbaden, saying: we 24 will look at the issue of whether or not we accept 25 design development risk; or had they said: that's the 75 1 price and for that we will accept the design development 2 risk. 3 A. My -- my recollection is that at the end of the 4 Wiesbaden deal, we had an agreement which was subject to 5 due diligence by both sides, but that had a target 6 price. 7 Q. What about the design development? 8 A. Including the design development risk. 9 Q. What do you mean, it was subject to due diligence by 10 each side? 11 A. Because at the meeting there was no legal 12 representation. So the work then had to be taken and 13 had to be given to our legal people and also to the 14 legal people of Bilfinger Berger; and it was also 15 a recognition of the fact that when we had agreements 16 with Bilfinger Berger, or understandings with Bilfinger 17 Berger Siemens, they had a tendency to change. 18 So I really wanted to try and say: look, let us get 19 us to a final position, and recognise that we've agreed 20 a target or we've agreed the basis of an agreement. 21 Let's do -- if they want to do due diligence, the 22 Christmas period was coming up. That would take us into 23 early January, and let's meet back in to then go through 24 the contractual discussions and finalisation, which 25 would enable us to get a contract ready for the various 76 1 parties to sign. 2 Q. You refer in your statement, and it is known to be the 3 fact, that there was a Council meeting taking place on 4 20 December. 5 A. There wasn't. 6 Q. There was no Council meeting then at all? 7 A. No. Never. 8 Q. You refer in your statement to that. You had used that 9 20 December date, or that 20 December alleged meeting as 10 a burning bridge. What did you mean by burning bridge? 11 A. Yes, because the consortium on the whole was very 12 concerned about us reporting to Council. At 20 December 13 there was no Council meeting, but I felt that it was 14 an opportunity to say that we were going to Council with 15 the report. It would give a bit more impetus in terms 16 of getting a meeting and trying to get to a position 17 where we could agree an outcome. 18 Q. In terms of how the matter was reported to the Tram 19 Project Board, if we could look, please, firstly, at 20 a presentation to the Tram Project Board meeting on 21 19 December. The reference for that is CEC01483731. 22 We can see here a title page, just Tram Project 23 Board, 19 December 2007. 24 If you go first of all to page 3 of this. 25 A. Was there a Tram Project Board on 19 December, or was it 77 1 an update to the Tram Project Board? 2 Q. Perhaps the easiest way is -- I'll take you to another 3 document which may assist in relation to this. 4 A. Just -- 5 Q. If we could go to document CEC01363703. What we have 6 got here is the pack of papers for the Tram Project 7 Board meeting on 9 January the following year, 2008. 8 But if we go to page 5 of this, we can see we've got -- 9 this is just to confirm the position. This is the 10 minutes of the Tram Project Board meeting of 11 19 December 2007. You can see you were one of the 12 people that was there? 13 A. Yes. 14 Q. In fact, while we are here, it makes sense if we go down 15 to the foot of this page, page 5. We can see it notes 16 at item 4.1 that: 17 "[Stewart McGarrity] provided an update to the 18 status of the project cost estimate and the anticipated 19 Infraco contract price. He explained that the contract 20 price was based on the Wiesbaden deal, subject to 21 certain conditions that were covered by existing 22 contingency. This deal meant that BBS had accepted most 23 items on the VE register and had taken them into their 24 contract price. 25 He further explained that a premium had been 78 1 included in the contract price to firm up previous 2 provisional sums. Of the outstanding provisional sums, 3 the vast majority relates to Picardy Place. A final 4 decision on the layout is still outstanding for 5 Picardy Place and the design has not been sufficiently 6 progressed to enable fixed pricing." 7 This is presenting the matter very much as one of 8 just providing particular sums to firm up previously 9 provisional items, rather than an overall fixed price. 10 Can you comment on that? 11 A. No, I think -- I think what Mr McGarrity is doing or 12 Stewart is doing is saying in terms of the price that's 13 there, what -- perhaps what the changes have been in 14 terms of movements from one pot of money to another. 15 Picardy Place was -- was an issue because it was 16 a Council issue to do with the fact that they had wanted 17 to do the redevelopment and they were looking to move 18 the tram stop. And that's -- that -- Picardy Place was 19 an outstanding issue. 20 But there was money allocated towards what the -- an 21 outcome for Picardy Place might look like. 22 Q. If we look further down this page 6, at item 6.1, we can 23 see: 24 "GG [who I think would be Geoff Gilbert] presented 25 the basis of the Wiesbaden deal in terms of technical, 79 1 programme, and risk transfer assumptions. SB [who I 2 think would be Steve Bell] confirmed that the BBS 3 programme reflected all currently known CEC changes and 4 that these were not on the critical path." 5 We've seen mention there by Stewart McGarrity and 6 Geoff Gilbert. In that you were at the meeting in terms 7 of the people recorded as attending, as was 8 Matthew Crosse, why were the two of you not reporting 9 the outcome of the meeting? Was that not going to be 10 the most straightforward? 11 A. To be honest, I can't recall. I mean, Matthew would 12 have reported it, but at the end of the day, the tasks 13 of the -- was Finance Director. The Finance Director 14 then had to do the analysis and present the numbers. 15 And the task of Geoff, who was the procurement number 2 16 to Matthew, who would understand all the detail, they 17 would have walked that through, and they would have made 18 as part of the due diligence that there was nothing that 19 had been overlooked by Matthew and myself. 20 Also, as part of the way that the tie executive 21 worked, it was trying to spread, not just spread the 22 load, but the people who were -- roles it was, to make 23 sure that they understood the importance of their role 24 and that they were responsible for what we were doing. 25 Q. I understand spreading roles, but Matthew Crosse and you 80 1 had been there. You'd actually had the discussion, just 2 days before. And yet it's left to two other people to 3 explain it to the Tram Project Board? 4 A. No, I'm absolutely sure at the meeting, both Matthew and 5 I would have given a verbal overview and a verbal update 6 of what was going on. I cannot recall the meeting, but 7 I do not believe that I would have been silent, and 8 Matthew silent. 9 Q. I have to tell you, it doesn't appear in the minutes, 10 which is surprising, isn't it? Look at what it records 11 as we have just seen, that the details of the Wiesbaden 12 deal are provided by Stewart McGarrity and 13 Geoff Gilbert. 14 A. The minutes would be accurate. 15 Q. If we look further up the minutes to item 5.4, we can 16 see that: 17 "AH [Andrew Holmes] questioned how the risk of 18 programme delays, specifically due to design delays, had 19 been allowed for in the cost estimate. WG explained 20 that a number of factors provided comfort in this 21 matter. Normal design risk is passed to BBS through the 22 SDS novation." 23 What was the relevance of novation, the novation of 24 the design contract of passing risk? 25 A. Well, if there had been any design or any -- when it 81 1 came to construction, it was because the work that 2 Parsons Brinckerhoff had undertaken wasn't fit for 3 purpose, then that would be to the responsibility of 4 Parsons Brinckerhoff to resolve. 5 Q. So that would be looking at the design risk in the sense 6 of the two items we discussed earlier, simply paying -- 7 A. Yes. 8 Q. -- to complete the design? 9 A. Yes. 10 Q. If we go then to the minutes of the 9 January meeting, 11 we'll find them in CEC01015023. This, if we scroll 12 down, we'll see is the papers for the Tram Project Board 13 meeting, also a tie Board and TEL Board meeting, that 14 took place on 23 January 2008. Do you see that? 15 A. Yes. 16 Q. Could we look, please, at page 5. We see here we have 17 got the minutes of the last meeting we were looking at, 18 the one on 9 January 2008. 19 Item 1.5, if we scroll down the page, we can see 20 that: 21 "SDS design and risk transfer. SB stated that 22 further details had been provided to AH [Andrew Holmes] 23 regarding his queries. The discussion on risk transfer 24 was continuing with BBS and progress updates would be 25 presented to the Tram Project Board." 82 1 Why were discussions still ongoing regarding risk 2 transfer? 3 A. No idea. I mean, I genuinely don't know what Steven was 4 referring to at that point. And it may be that the due 5 diligence of the work that had been undertaken at 6 Wiesbaden was under way with the consortium and Steven 7 was reflecting that back in his response. 8 Q. For completeness, if we go forward to page 9 of the same 9 document, we can see in the report of the Project 10 Director, in the first part of that, there's three 11 bullet points, the first of which is he is reporting: 12 "Effective transfer of design development risk 13 excluding scope changes to BBS." 14 Were you happy with that inaccurate statement of the 15 position at the time? 16 A. I don't understand when I'm looking at this just now, 17 what the scope changes mean. So I -- my understanding 18 of the deal was that the design development risk had 19 passed through, it had been agreed we'd take on 20 through -- with the consortium. 21 Now, I don't know what scope changes at that moment 22 in time actually meant. Was that still the work that 23 was underway by SDS as part of the development as we 24 were working our way through to final close? I just 25 don't know. 83 1 Q. I think ultimately an agreement that was signed, 2 a formal agreement that was known as the Wiesbaden 3 Agreement. Or became to be known as the Wiesbaden 4 Agreement. 5 A. Yes. 6 Q. If we could look, please, at the -- 7 CHAIR OF THE INQUIRY: Before you do that, Mr Lake, I think 8 you mentioned a document or were about to refer to 9 a document, and Mr Gallagher asked whether the Tram 10 Project Board was in existence at that time, and then 11 you took him to the documents that we've been looking 12 at. 13 MR LAKE: I was about to look at the presentation to the 14 Tram Project Board meeting. Would that still be useful, 15 my Lord? 16 CHAIR OF THE INQUIRY: No, I thought you had maybe left out 17 a document. I may obviously have misunderstood. 18 MR LAKE: For completeness we should go back to it. It was 19 CEC01483731. 20 CHAIR OF THE INQUIRY: It was just if you had specific 21 questions that you were going to ask about that. 22 MR LAKE: We notice, if we look to page 3, there's 23 a sub-heading in the presentation, "Infraco/Tramco", and 24 the people named as giving the presentation are 25 Stewart McGarrity, Steven Bell and Geoff Gilbert. 84 1 If you jump forward to page 8, under the heading 2 "Progress to Closing Infraco Contract", the question is 3 posed: 4 "Why is this a good deal?" 5 It says: 6 "Design development risk transferred to Infraco from 7 this point on." 8 Once again, was that your understanding of what had 9 been secured? 10 A. Yes. 11 Q. Again, the reason I was referring to this was the same 12 question as earlier. It seemed curious that this part 13 of the presentation was being given by three people, 14 none of whom had been there, neither you nor 15 Matthew Crosse? 16 A. No, but the presentations to the Tram Project Board, 17 the -- the norm was that there were certain sections 18 presented by certain senior guys, and at the same time 19 they had all the information that was available, and 20 more, and they were then doing the due diligence to 21 report this is what the final position is. And the 22 Finance Director, Stewart McGarrity, was very, very 23 important to the whole process and making sure that 24 there was no cracks in terms of their understanding of 25 what the financials would be. 85 1 Q. In terms of recording or documenting what was achieved 2 at Wiesbaden, we've heard from other witnesses there was 3 an exchange of emails immediately upon return to try and 4 produce a document. What was your involvement in that? 5 A. None. Matthew Crosse produced a document. 6 Q. Can I just ask you to look at some documents then in the 7 course of that, I appreciate they were not emails 8 addressed to you, but the first is CEC00573352. 9 This is an email from Richard Walker. It's dated 10 19 December 2007. It's addressed to Geoff Gilbert and 11 Scott McFadzen. 12 He says: 13 "Thanks for your latest updates. In respect of new 14 clause 3.7, the description is fine but this must cover 15 the on-street area of Shandwick Place and Haymarket 16 Junction, ie Haymarket to the far end of 17 Princes Street." 18 Then the bit that's more important: 19 "Secondly, having consulted with my team and 20 reviewed emails and meeting minutes, our firm price 21 including the additional GBP8 million to fix the 22 'variable' sums noted in our tender is based on all the 23 additional information which we received from SDS via 24 the 4 No. CDs, the last of which was delivered to 25 us on 25 November 2007. We therefore insist that our 86 1 contract be related to this." 2 Was this brought to your attention at the time? 3 A. No, but there were -- there were many emails from 4 Bilfinger Berger on subjects which was to do with the 5 base line for the design. And our response to all of 6 this was there is a baseline. The design will improve, 7 but we have agreed a position where you take the design 8 and the development risk to give us a fixed price for 9 the development of the contract. 10 So in many ways, as the design improves, it should 11 give you more confidence in terms of what the final 12 price would be. 13 Q. Well, in a sense that's my point. Precisely because 14 they had agreed to take on the design development 15 responsibility, the fact they specifically wanted to 16 have it noted that their price was for the design as at 17 a certain date should have started the alarm bells 18 ringing that they weren't going to accept development 19 after that date? 20 A. No. This was not untypical of some of the behavioural 21 points, I think, that I referred to earlier with the 22 Bilfinger Berger Siemens and Richard in particular, 23 where we -- what we thought we had agreed, and then that 24 position -- he or they would come back with something 25 which was slightly at odds, and then we would have to go 87 1 back and have another discussion. 2 Q. Let's see how this discussion developed. Can we go to 3 CEC01384941. 4 This is an email from Geoff Gilbert to 5 Richard Walker, dated 19 December. Later the same day. 6 You see this one has in fact been copied to people, 7 including yourself. Do you see that? It says: 8 "Richard, further to our discussion earlier I have 9 amended the agreement (in red italics) for the wording 10 we agreed. We are I believe now clear to sign up on 11 this basis and move forward. For the avoidance of doubt 12 please confirm this by return. 13 I will talk to Scott regarding the additional 14 paving issue at the Shandwick Place tramstop." 15 Do you recall this email? 16 A. No. 17 Q. Can we look at the attachment to it, the new draft 18 agreement. It's reference CEC01384942. 19 We can see the front page of the document there, 20 just marked "AGREEMENT FOR CONTRACT PRICE FOR PHASE 1A 21 Dated 19 December 2007". 22 What I would like to do is look at clause 3.3 on 23 page 3. 24 Slightly unfortunately, the version we have got 25 isn't in colour, but I will tell you which where the 88 1 bits in red italics. What 3.3 says is: 2 "Detailed designs. BBS included in their price for 3 the construction cost risk in the development and 4 completion of detailed designs being prepared by SDS, 5 save for: (a) Any future changes to elements of the 6 design intent for civils works that are substantially 7 different compared to those forming the current scheme 8 being designed by SDS, as typically represented by the 9 drawings issued to BBS with the design information drop 10 on 25 November 2007." 11 In fact I'm not sure you can see there that certain 12 of the text is in italics. The word "intent" in the 13 first line of subparagraph (a) and then the rest of it, 14 the wording from "as typically" represented after that. 15 That is the text that was in red italics in the 16 original, which Geoff Gilbert says he has added to the 17 draft. Did you comment on this draft when it was sent 18 to you? 19 A. I cannot recall. 20 Q. In that it now says that BBS have included in their 21 price for development and completion, save for things 22 substantially different from the design at that date, 23 does that not seem to be moving away from them accepting 24 the design responsibility? 25 A. I can't recall at the time reading the document, but all 89 1 I can say at that time was I had no doubt in my mind 2 that what we were agreeing with Bilfinger Berger Siemens 3 was that the design development risk was part of their 4 responsibility in delivering the contract. 5 Q. In that regard, could we look at another email in the 6 chain. This is CEC00573351. 7 Now, if you go down towards the foot of the page, 8 you see there an email from Geoff Gilbert to 9 Richard Walker, again it's dated 19 December 2007. What 10 Geoff Gilbert says is: 11 "Richard, we went through this at the Board 12 yesterday and generally everyone was okay with it. 13 However, to get CEC's buy in we need to make a few 14 changes. I have also corrected a few typos as well. 15 I don't think there is anything controversial in this 16 but call me if you wish to discuss." 17 The response from Richard Walker the following day 18 on the 20th, early in the morning, was: 19 "Geoff, we still have issues with accepting design 20 risk. We have not priced this contract on a design and 21 build basis always believing until very recently that 22 design would be complete upon novation. With the 23 exception of the items marked provisional which we have 24 now fixed by way of the 8 million we cannot accept 25 more..." 90 1 It says "drain development", that should perhaps be 2 "design development": 3 "... other than minor tweaking around detail. Your 4 current wording is too onerous. Trust we can find 5 a solution." 6 We can see from the top part that Geoff Gilbert 7 forwarded that to Matthew Crosse and Steve Bell, just 8 with a series of exclamation marks. 9 It really couldn't be clearer, could it, that the 10 consortium is not willing to take the design development 11 rather than minor tweaking? 12 A. No. I think -- yes, that's what the email says. But 13 that is different to what Richard Walker and Bilfinger 14 Berger had said at a previous meeting. 15 This goes back to my earlier point about the 16 behavioural difficulties that we had with people 17 accepting positions at a meeting, and then changing 18 their position after the meeting, and then re-opening 19 a discussion on very important points which we thought 20 we had agreed, and particularly where we thought we had 21 agreed it, giving a concession on either price or 22 programme. 23 I think the exclamation marks that you can see there 24 from Geoff are heartfelt how he felt and how everyone 25 felt at that time in dealing with Richard Walker and the 91 1 negotiations. 2 Then it would have to have been picked up again, and 3 the same points would have had to have been discussed 4 again. 5 Q. Standing what you say, this was in effect another 6 example of the behaviour you are referring to, that 7 whatever had been said in Wiesbaden, on the 13th, this 8 email is making it plain they're not going to accept the 9 design risk? 10 A. This email is making it plain at this moment in time 11 that Bilfinger Berger Siemens are not, and then there 12 will be another meeting, and there will be another 13 negotiation, which I think did take place, where there 14 would be another discussion about what it's worth to 15 them to take design development risk, which would then 16 increase and crystallise higher price for the bid; and 17 this was typical of the behaviour all the way through to 18 financial close. 19 Q. If you look at the one of the draft agreements which 20 followed this, this is document CEC02085660. We can see 21 once again, the title page is simply referring to the 22 fact that this is the agreement for contract price. 23 If we go again to clause 3.3 on page 3, we can see 24 how the wording has changed. 25 It's page 5 this time. I said 3. It's my error. 92 1 3.3 now says: 2 "The BBS price for civils works includes for any 3 impact on construction cost arising from the normal 4 development and completion of designs based on the 5 design intent for the scheme as represented by the 6 design information drawings issued to BBS up to and 7 including the design information drop on 8 25 November 2007. The price excludes ..." 9 We can see three specific exclusions and then 10 a comment on footways. 11 If we look over two pages, because there's a blank 12 page first, you then see at the top of the page: 13 "For the avoidance of doubt normal development and 14 completion of designs means the evolution of design 15 through the stages of preliminary to construction stage 16 and excludes changes of design principle, shape and form 17 and outline specification." 18 So it's now made plain that although they are taking 19 responsibility for normal development and completion of 20 designs, it won't include any of these matters in the 21 qualification. 22 Were you involved in discussions about that and what 23 its effect was? 24 A. No, I wasn't, but there was discussions to the Board to 25 outline what concession that would make. 93 1 But I'm not -- I'm not sure whether the Board were 2 comfortable with that, and I think the Board asked the 3 procurement team to go back and get more clarity on what 4 the agreement was actually going to be. 5 Q. If we look at page 9 of this, if we press Control-zero, 6 it gives us the whole page. 7 We can see that this is the version of the agreement 8 that was signed. It was signed by you on 20 December. 9 If we go another two pages on, we can see the 10 representatives' signatures of Bilfinger Berger and 11 Siemens. 12 So we saw on the 20th, the morning of 20 December, 13 they say they are not willing to take design risk, and 14 then later in the day, this is signed. 15 What had happened in between time that made you 16 happy to sign this? 17 A. I think I must have had meetings with both the tie 18 procurement and finance team. I must have had 19 discussions with the Board, and on the basis of these 20 discussions, we must have been comfortable for the 21 document to be signed. 22 Q. What did you understand the effect of the changes being? 23 A. The effect of the changes being that it was consistent 24 with enabling us to achieve a fixed price delivery for 25 the delivery of the programme. 94 1 Q. That's what it enabled you to do, but what was the 2 effect of these changes in terms of their acceptance of 3 design development responsibility? 4 A. I don't understand the question. 5 Q. What -- how did this affect their obligation or their 6 responsibility for design development risk? 7 A. I think it crystallised it and made it clear what they 8 were required to do. 9 Q. Did you take any legal advice in relation to that? 10 A. The legal DLA would be involved, in all aspects of this, 11 in all aspects of this work. 12 Q. Because Andrew Fitchie says he wasn't consulted about 13 this at all. Would you disagree with him on that? 14 A. I would find that surprising. 15 Q. Would you disagree with him, never mind finding it 16 surprising? 17 A. No, because I can't -- I can't at that time be 18 absolutely sure whether Andrew had been involved or 19 whether DLA had been involved, but I would find it 20 surprising if they were not. 21 Q. What in your view was the purpose of this agreement? 22 Did it close down these matters once and for all? Or 23 was it simply where you were at that time? 24 A. No, we had hoped that it would close down the matters 25 once and for all. And that we would hope that when we 95 1 went into January, that we then both parties could start 2 to prepare for going through the approvals process to 3 get approval from the parent companies. There were 4 contractual issues to do with parent company guarantees 5 that had to be put in place. 6 So I was hopeful that that process then would go 7 through. But as events will probably show, that wasn't 8 the case. 9 Q. Do you recall having a meeting before you went to 10 Wiesbaden, back on 12 December, at the Council offices 11 with the Council representatives in which they said 12 there were a number of major risks still in the project 13 and they wanted them closed out by the time of a Council 14 meeting on the 20th? 15 A. Well, there wasn't a Council meeting on the 20th. So 16 I don't recall the meeting, but there was no Council 17 meeting on the 20th. There was no -- I don't believe 18 there was any report. That was part of the whole 19 discussions at Wiesbaden. Because it was in advance of 20 Christmas week. 21 Q. Do you recall Andrew Holmes at a meeting around about 22 12 December saying that there was a concern as to the 23 level and number of project risks, and that they would 24 need to be satisfied about these so that they could 25 report to the Council? 96 1 A. No. I don't recall the meeting. But, I mean, what 2 Andrew would be asking for would be entirely reasonable. 3 Q. Did you advise Andrew Holmes or any other Council 4 officers as to report to them on how risks had been 5 handled and closed out? 6 A. Yes. But Andrew was a member of the Tram Project Board. 7 And Andrew would have been updated at the Tram Project 8 Board along with Donald McGougan and every other member 9 that was there. 10 Q. Did you provide him with any briefings in addition to 11 those he would have got through the Tram Project Board? 12 A. If Andrew had asked for them, he would have been 13 provided with them. 14 Q. It has been suggested in evidence by others that at the 15 Wiesbaden Agreement, and when you had achieved your -- 16 had your discussions with Mr Enenkel and representatives 17 of Siemens, you made it plain that you knew that 18 wouldn't be the final price, that it would go up as soon 19 as the contract was signed. 20 A. Absolutely not the case. 21 Q. You didn't say: this is not the real price, everyone 22 knows it's going to go up. 23 A. No, of course not. 24 Q. It is suggested that not only at the Wiesbaden meeting, 25 but a couple of times afterwards, at a meeting in late 97 1 December and then again in January, you repeated the 2 same thing, that everybody knew the price will increase 3 after award? 4 A. No, who did I say it to? 5 Q. Richard Walker. 6 A. Absolutely not. Why would I -- why would I have 7 discussions of that matter with Richard Walker? I've 8 already said that I was very careful in terms of 9 discussions with Bilfinger Berger in particular. But 10 certainly -- and given that we are in the process of 11 negotiating a contract, you know, why would I be so 12 careless in terms of what was said? 13 And more to the point, I didn't believe that at all. 14 I stand by what I said earlier on, which was that we 15 were hoping to achieve the price that was in the 16 contract. If there were going to be changes to the 17 price, it had to be approved through the contract, and 18 we, ie the Council team, were going to work as hard as 19 we can to secure the best price for the best outcome for 20 the Council. And I guess -- I mean, it was a hard 21 negotiation, and we negotiated hard to try and achieve 22 that. 23 But I didn't believe, and I certainly didn't 24 communicate anything other than what I have just stated. 25 Q. It was suggested that you knew, because of the 98 1 assumptions and the qualifications and the exclusions in 2 their offer, the price was always going to go up once 3 the contract started? 4 A. No. No. 5 Q. I want to move now to the question of moving beyond the 6 documentation, the Wiesbaden Agreement, to the 7 preparation of the Infraco contract itself. 8 Now, we've heard that Part 4 of the Schedule to the 9 Infraco contract was the one that dealt with price. 10 A. Yes. 11 Q. And discussion of the terms of that seem to start right 12 at the very end of 2007 and then into 2008? 13 A. Yes. 14 Q. Were you involved in the discussions of that schedule? 15 A. No. 16 Q. Did you have some discussions with the principals of the 17 companies, the consortium companies, as to what should 18 be in them? 19 A. The principals of the company, I only -- I only met with 20 twice. I met with at Wiesbaden and then I met with at 21 Haymarket House, when there was a breakdown very close 22 to the signature. 23 The preparation of the final contract, there was 24 a governance position that was put in place by myself 25 and the Board, in which case the contract was a very 99 1 complicated document, with many schedules, and what we 2 allocated responsibility to each of the schedules and 3 parts of the document to a line manager who would be 4 responsible for it, a legal representative from DLA, 5 a commercial member as part of the negotiating or the 6 commercial team, and also who the finance person would 7 be in terms of looking to see if there was numbers, and 8 also if there was any connection back into CEC Legal. 9 And that document, before that clause would be 10 accepted as being -- taken as being firm; then there was 11 a traffic light control system which went from red, 12 amber, green; and only once everything was at green and 13 consistent with all the other schedules, was the 14 document in the position where all these people, the 15 involved people, the line managers, the legal people, 16 the commercial people and the procurement people, able 17 to recommend that the document was now ready for the 18 Board. 19 Q. Were there documents prepared that had the traffic 20 lights actually colour coded in them, clause by clause, 21 schedule by schedule? 22 A. No. The spreadsheet sat separate to that, and I believe 23 there was a daily meeting where -- well, there was 24 a daily meeting, where the work was undertaken, and if 25 there was changes or if there was concerns, then it was 100 1 dealt with that morning and they continued to work on it 2 the rest of the day. 3 Q. Do you know what the position was in relation to Part 4 4 of the Schedule, the pricing, or who -- 5 A. I don't know, but if -- you will have as a matter of 6 record all these spreadsheets, and it will be whoever 7 was responsible for that schedule. 8 Because I have been asked the question before, my 9 recollection was that Geoff Gilbert would have been the 10 procurement person. The legal person would have been 11 somebody from DLA probably. Andrew or someone else. 12 Q. Just while we are dealing with Andrew Fitchie, I think 13 by this time he was on secondment. You have referred to 14 him being on secondment to tie? 15 A. Yes. 16 Q. What difference did that make from him being in his 17 previous situation, where he was a partner in DLA, to 18 a phase where he was said to be on secondment? What was 19 the practical difference? 20 A. The reality was that there was very little. But he was 21 part of the team. 22 Q. What do you mean by that? 23 A. Well, he was working day and night in the office. He 24 was attending all the meetings and he had full access to 25 everyone and full access to all information. 101 1 Q. Could I ask you to look at a document. It's 2 CEC01449877. 3 It's a document marked "Schedule Part 4 Pricing", 4 and there's various drafting notes on the front here 5 about BBS comments. Do you see that? 6 A. Yes. 7 Q. Could we look at page 11 of this, please. This comes 8 right at the end of the section on Pricing Assumptions. 9 If we scroll down a little bit, we'll see there is 10 a paragraph beginning: 11 "Please also not that BBS require that the Infraco 12 will be deemed not to be in breach of the Infraco 13 contract to the extent that any breach arises as 14 a consequence of the occurrence of a Notified Departure. 15 The reasons for this can be illustrated by the 16 assumption agreed (in principle) with Willie Gallagher 17 on 21 February 2008." 18 Then it's set out. The terms of that, precisely 19 what was agreed are less important than the fact that 20 this seems to put you at the heart of having discussions 21 and agreeing matters about this document in 22 February 2008? 23 A. No. 24 Q. That doesn't refresh your memory that you'd been 25 involved in discussions and agreeing stuff. 102 1 A. Not in February 2008, no. 2 Q. I think by this time Matthew Crosse was leaving or had 3 left? 4 A. No. He hadn't. What happened was that there was 5 a handover that had been agreed between Matthew and 6 Steven Bell, and that Matthew was continuing to lead 7 and -- the negotiations all the way through to contract 8 close; whereas Steven was taking control of the 9 construction and starting to ramp up from moving from 10 being chief engineer to take on board the building of 11 the project. 12 Q. In that you and Matthew Crosse were the ones that had 13 been in Wiesbaden, would it not have made sense to have 14 at least one of you negotiating Part 4 of the Schedule, 15 if you had an understanding of what it was supposed to 16 do? 17 A. Yes, but the person that would have been doing that 18 negotiation then would have been Matthew. Because that 19 is what we brought Matthew on board to do. Matthew had 20 built and negotiated tram systems in the UK and perhaps 21 beyond. 22 Q. Take it from me that he wasn't involved in it. Do you 23 agree it would have made sense to have at least one of 24 you involved? 25 A. It would have made sense for Matthew to be involved with 103 1 Geoff, yes. 2 Q. What do you understand was the purpose of Part 4 of the 3 Schedule? Was it to reconsider the whole question of 4 pricing risk, or was it simply as a means of recording 5 in a more formal manner what had been agreed at 6 Wiesbaden? 7 A. I think Part 4 of the Schedule always had a Part 4. 8 I think the schedule was in terms of describing the 9 financial agreement. 10 I mean, the contract that was built was a DLA 11 contract, the draft of which in terms of the boilerplate 12 had been available for everyone since the initial start 13 of the bidders. So this was finalising the content 14 within the schedules. It wasn't a new schedule. 15 Q. What did you understand the purpose of the drafting that 16 was going to go on in January and thereafter in relation 17 to Schedule Part 4? 18 A. It was to update the contract, the draft contract, to 19 reflect the final agreement between the two parties. 20 Q. But your understanding was that that Schedule Part 4 21 was -- a version of that was already in existence by 22 that time? 23 A. Yes. 24 Q. What role, if any, did you have in relation to that? 25 Were you providing oversight or feeding in information? 104 1 A. No, I -- as part of the Board was ensuring that the 2 governance and that the people who were detailed -- 3 involved and understood the detail in terms of 4 monitoring the development were actually taking his 5 place, and what we were looking for was the traffic 6 light report to go for green all the way through the 7 schedules. There was lots of subject matter 8 specialists, and that was being overseen by Matthew and 9 by the Finance Director, Stewart McGarrity. 10 Q. Who was in the position ultimately of deciding if 11 Schedule Part 4 did what it was supposed to do, what it 12 was intended to have done? 13 A. In my understanding, that would be Matthew. 14 Q. He had definitely left by the time the contract was 15 signed. 16 A. Well, it would have transferred to Steven as Tram 17 Project Director. 18 Q. Where would Steven's information have come as to what 19 that was supposed to achieve? 20 A. Steven at that time was deeply involved in all aspects 21 of what was going on in the project. And had been fully 22 briefed in all decisions, access to all documents. 23 Steven was pivotal in what was going on at that time. 24 Q. You say in your statement in relation to negotiation of 25 this that it was absolutely the case that the follow-up 105 1 advice was sought as to the content of the deal. It 2 would have been sought from Andrew Fitchie? 3 A. Yes. 4 Q. Is that a recollection on your part, or an assumption? 5 A. It will be a matter of record. 6 Q. Well, Andrew Fitchie says he was not consulted at all 7 and did not advise upon the terms of Schedule Part 4 8 pricing. And that no one else from the firm did either? 9 A. Well, there will be a matter of record in terms of the 10 information of who was allocated to what part of the 11 contract, and there was certainly a legal representation 12 allocated to every clause within the schedule. 13 Q. I would ask you to comment on the suggestion that there 14 was an intent on the part of persons within tie to keep 15 the lawyers out of the Part 4 of the Schedule, quite 16 deliberately to keep them away from it? 17 A. No. 18 Q. Could I ask you to look at another email, please. It's 19 got document reference CEC01548431. This is a long 20 email chain. If we go to page 4, if you scroll down the 21 page a little bit. 22 Could I ask you to scroll up and keep improving. 23 The pagination is different in the different versions. 24 This is an email, we can see, from Ian Laing, dated 25 26 March 2008, to various people, both in DLA Piper and 106 1 tie, and I have to accept you're not someone to whom 2 this has been sent. 3 What Ian Laing says there is: 4 "Steven/Jim, as we discussed earlier today, the 5 Design Delivery Programme that will be V28. The Pricing 6 Assumption in Schedule 4 of the Infraco Contract assumes 7 that the Design Delivery Programme will not change from 8 V26. It follows that there is the possibility that 9 there will be an immediate Notified Departure on 10 contract execution. Given the unusual position that we 11 are in, please can you confirm that this is understood 12 and agreed by tie." 13 If you can scroll up a little bit more, a little bit 14 further, stop there, and we go down a little bit more, 15 yes. We are now looking at a part of the email chain 16 which is again an email from Ian Laing to various 17 people, this time it's dated 31 March 2008. It says: 18 "Please can you let me have confirmation that the 19 position on the Notified Departure in relation to the 20 Design Delivery Programme is understood and agreed by 21 tie." 22 Now, were you made aware of this at the time, that 23 it was anticipated that there would be an immediate 24 Notified Departure when the contract was signed? 25 A. Truthfully, I can't recall. I -- I do recall the 107 1 discussion about what did that mean, and will be 2 implications to the project maybe. But I just -- 3 I can't recall at the time what the discussions were or 4 who they were with, but it would be wrong of me not to 5 say that I remember -- I do remember something about 6 this. 7 Q. You can't remember whether there was any discussion 8 about whether or not there would be Notified Departures 9 arising out of other assumptions almost immediately? 10 A. No. 11 Q. You can't recall or there definitely wasn't. 12 A. No, I just can't recall. 13 CHAIR OF THE INQUIRY: If there was a discussion about what 14 it meant, does that not suggest that it was brought to 15 your attention or to the attention of the people 16 discussing it? 17 A. Yes, it would be updated. There would be an update to 18 the Tram Project Board. And there would be a discussion 19 about what does it mean and what are the implications. 20 MR LAKE: Can you remember what it was said the implications 21 were? 22 A. No, I can't. 23 CHAIR OF THE INQUIRY: Is this something that would really 24 have to be put to the Board itself? If it meant that 25 contract signing plus 1, day 1, you were going to get 108 1 a bill because of a Notified Departure resulting from 2 the change in design from the baseline that was taken, 3 would that be a matter that the Board would really have 4 to -- 5 A. The Board withdrew here -- but the Board may then -- the 6 Board may have taken a view which was that this would be 7 unacceptable because the design development risk is with 8 the consortium. 9 CHAIR OF THE INQUIRY: But if the Board took that view, 10 then, would you not have to go back to Infraco and 11 say: this is not acceptable. 12 A. I really don't know what the debate was at that time. 13 CHAIR OF THE INQUIRY: Ultimately you signed this contract 14 with that provision in. 15 A. Yes. 16 CHAIR OF THE INQUIRY: Which presumably indicates that the 17 Board didn't take the view that it shouldn't be signed, 18 or you wouldn't sign anything in that situation. 19 MR LAKE: In relation to the quality control, I would like 20 to look at a document quite briefly. It's reference 21 CEC00114831. We can -- from looking at the front page, 22 we can see this is the pack of papers for the Tram 23 Project Board meeting on 9 April 2008. I would like to 24 go to page 117 of this. 25 We can see part of the papers -- part of the Tram 109 1 Project Board papers consist of this paper with the 2 heading, "TRAM PROJECT FINANCIAL CLOSE PROGRAMME, QC AND 3 APPROVALS PROCESS". Do you recall, was that something 4 prepared by Graeme Bissett? 5 A. Probably. 6 Q. I should have said, it's not intended to be a memory 7 test. If we look at the following page, 118, and scroll 8 down a little, we ultimately come to the initial GB and 9 the date 28 March 2008. Does that tend to indicate it's 10 Graeme Bissett we're talking about? 11 A. Yes. 12 Q. If we scroll back up the page, the bullet points on the 13 top of the page, there's a reference to -- we see 14 there's a paragraph there that's got underlining: 15 "All matters identified by (or through) the Primary 16 Reviewer should be discussed with Jim McEwan, 17 Steven Bell and Andrew Fitchie before being communicated 18 in any way to the counterparties. 19 DLA will perform their own legal QC review on the 20 full set of final documents and this will support and 21 complement the review by tie/TEL people." 22 That's the legal review I think you've already 23 referred to? 24 A. Yes. 25 Q. Do you know who was responsible for liaising with DLA to 110 1 see that that was done? 2 A. I presume that it would be -- it would be Graeme. 3 Q. It would be Graeme, okay. 4 Now, I would like to go to the version of Part 4 of 5 the Schedule as it was signed. That's got reference 6 USB00000032. We can see we've got the heading there: 7 "THIS IS SCHEDULE PART 4 REFERRED TO IN THE 8 FOREGOING AGREEMENT BETWEEN TIE AND THE INFRACO." 9 Could we go to page 5 of this, please. What we are 10 interested in has now become clause 3.4. 11 It's Pricing Assumptions. The first pricing 12 assumption there is: 13 "The Design prepared by the SDS Provider will not 14 (other than amendments arising from the normal 15 development and completion of designs) ... in terms of 16 design principle, shape, form and/or specification be 17 amended from the drawings forming the Base Date Design 18 Information." 19 Now, were you aware of this wording at the time? 20 A. The process for the sign-off of the contract is that the 21 team who had been through the detailed review were then 22 asked to provide updates to the partners, including 23 myself, who was going to have to sign, of any changes 24 that had been undertaken through the drafting. Or 25 anything that they felt was considered worthy of further 111 1 discussion. 2 There was no discussion with me about, at that 3 point, changes to clause 4. 4 Q. Schedule Part 4? 5 A. Schedule Part 4. There was none. 6 Q. Nonetheless, I want to just bear with me and look at 7 what it says in a bit more detail. We can see that what 8 it's saying in essence is the design should not change 9 in terms of design principle, shape, form and/or 10 specification. That's the assumption. If we read it 11 short. Do you agree? 12 A. Sorry? 13 Q. Do you agree, if we read it short, leave out the 14 brackets, it becomes: 15 "The Design prepared by the SDS Provider will 16 not ... in terms of design principle, shape, form and/or 17 specification be amended from the drawings forming the 18 Base Date Design Information." 19 A. The two -- the two conditions in that was the value 20 engineering, but also the design development risk. 21 Q. When you refer to the design development risk, is that 22 the part that we see in the brackets there, that is 23 "other than ... arising from the normal development and 24 completion of designs"? 25 A. What brackets? 112 1 Q. I'll start that again. If we just read this, first of 2 all: 3 "The Design prepared by the SDS Provider will not 4 (other than amendments arising from the normal 5 development and completion of designs) ... in terms of 6 design principle, shape, form and/or specification be 7 amended from the drawings forming the Base Date Design 8 Information." 9 What I would like to do is just break that down into 10 some of its parts. If we leave aside what's in the 11 brackets, the first assumption is that the design will 12 not in terms of the design principle, et cetera, be 13 amended from the Base Date Design Information. 14 A. Other than the development -- the design development 15 areas which was -- still had to be delivered as the part 16 of the baseline. 17 Q. Where does that qualification you're saying there, other 18 than the design development areas, is that the text in 19 brackets that we see there? 20 A. I really -- I would be speculating if I said that that 21 was the case. I would need to sit back and I would need 22 to read the document. 23 Q. Is it fair to say you're not familiar, closely familiar 24 with the terms of this document? 25 A. No. 113 1 Q. You've acknowledged that you weren't given any briefing 2 about it at the time? 3 A. Yes. 4 Q. Were you given any legal advice about it at the time 5 that you can recall? 6 A. Yes, I mean, we had DLA and Andrew working, and they had 7 to produce their own document for the Council. 8 Q. Andrew Fitchie says in essence that he gave you advice 9 that this had the effect of transferring all the risk 10 back to tie for design development. And that it gave 11 rise to unquantified risks on the part of tie? 12 A. No, not the case. 13 Q. Did he give you that advice? 14 A. No. If Andrew had given me that advice, then Andrew 15 would have been asked to give that advice not to me, but 16 to the Board, and also, Andrew attended as DLA attended 17 all the Tram Project Board meetings. He attended all 18 the working sessions. And Andrew was asked to present 19 at all times his considered and impartial view of where 20 we were. There was no attempt to somehow fetter or 21 water down whatever the view that Andrew had. Andrew 22 was part of the team and Andrew was expected to 23 contribute in that way. 24 If Andrew had said: don't sign this contract; then 25 that would have been listened to. 114 1 Q. Well, that's -- you sort of pre-empt my next question 2 then. He says he advised prior to the actual signature 3 of the contract in May that tie should pause and not 4 sign until matters were clarified. Do you recall that 5 advice? 6 A. No. And if he was giving that advice, he had the 7 opportunity to give that advice not just to me. He 8 would have had the opportunity to give that advice to 9 the Board. 10 I mean, my style of management is not to focus 11 everything through myself. I expect the specialists who 12 are responsible for their areas to take responsibility 13 for their areas and speak up. 14 We were hugely reliant in this process on DLA, and 15 also on particularly Matthew, Geoff and Steven, because 16 these were the people who had been involved in procuring 17 systems like this before and also involved in the 18 contractual side of this before. 19 For the rest of us, this was our first tram project. 20 So if our legal advisers or if our procurement advisers 21 had raised even a hint of a red flag, then we would have 22 listened. 23 Q. I want to ask you to look at one more document in this 24 regard, leading up to contract signature. It's only 25 just recently come to light and I'm not aware that it 115 1 has a document reference given yet. If I identify it 2 was the one handed over by the legal representatives of 3 Bilfinger earlier in the week, I think we will identify 4 it for the purposes of the transcript. 5 CHAIR OF THE INQUIRY: Yesterday, I think. 6 MR LAKE: Was it just yesterday? 7 CHAIR OF THE INQUIRY: Yes. 8 MR LAKE: It's so recent it's not even on the computers yet. 9 Now, I should make it plain at the outset this 10 letter was not sent to you. This is a draft that was 11 not sent. 12 You can see it is from the consortium, Bilfinger 13 Berger Siemens, dated 22 April 2008, addressed to you, 14 and refers initially to a change to the Council's 15 signing authorisation procedure. 16 What I'm really concerned with is if we read to the 17 third paragraph: 18 "In addition, we are concerned that while tie and 19 BBS understand the processes and risk allocation as it 20 is largely agreed, we understand that DLA Piper have 21 briefed CEC and they appreciate the detail of the 22 contract that they are about to authorise you to sign 23 with us which we believe will require CEC to fund 24 substantial increases in the construction works price 25 and prolongation to the construction programme after 116 1 contract award. 2 With respect, I request you to advise CEC of these 3 matters and in particular to affirm the understanding of 4 the requirement under the contract for additional funds 5 to be made available to Infraco as a result of the 6 alignment and Notified Departure processes including, 7 for example, the effect of Pricing Assumption 4 which 8 means that there will be an immediate requirement for 9 a Notified Departure due to the misalignment between 10 Infraco and SDS design delivery programmes." 11 Now, you never received this letter, but were these 12 issues discussed with you by Mr Walker, Mr Flynn or any 13 other of the consortium representatives? 14 A. No, I can confirm that I never received the letter, and 15 if Richard Walker -- if Richard felt so strongly about 16 it, I don't understand why he didn't send it. 17 I -- the issues are issues that -- at that point of 18 discussions that were being worked through. The -- it 19 is fair to say that Bilfinger Berger would have liked to 20 have a better relationship with the City of Edinburgh 21 and to reach in, and they had asked for meetings and in 22 essence we had said no. We were trying to get the 23 contract approved and also to get them focused on 24 actually doing the construction. 25 Q. Did they ever make it known to you, as they put it here, 117 1 that the Council, through tie, would have to fund 2 substantial increases in the construction works price 3 and prolongation? 4 A. No. But, I mean, they had a view which is that they 5 obviously felt that the contract was going to increase 6 in value for them. We had a view that it wouldn't, that 7 they had signed up to a contract, that they had taken 8 responsibility for building the contract, and that we 9 would have to negotiate and hold them to that agreement. 10 CHAIR OF THE INQUIRY: On the question of why he didn't send 11 the letter, to follow it through, as it were, I can 12 advise you that his evidence was to the effect that he'd 13 been prevented from doing so by his Director in Germany, 14 who thought it was not good client relations to send 15 a letter of that type. He was prohibited from sending 16 it. That's his explanation. 17 A. Yes. 18 MR LAKE: I want to move now on to close reports, documents 19 that were prepared within tie to advise on the close. 20 Could I ask you to look at a document, CEC01338851. 21 You will see a document here with the heading "REPORT ON 22 INFRACO CONTRACT SUITE". Underneath that it's got the 23 contents of this section of the report. Do you 24 recognise this document? 25 A. Yes. 118 1 Q. It was something that was prepared at contract close. 2 A. It was prepared by Graeme Bissett. 3 Q. Who was going to be the beneficiary of this report? Who 4 was it going to? 5 A. That I can't recall. I did see the document. I think 6 the Tram Project Board would have seen the document, and 7 certainly the tie management team would have seen the 8 document and would have contributed to the document. 9 Q. Did you contribute to the contents of the document? 10 A. I can't recall. I just can't recall. 11 Q. Can we look down on this page, please, and we will see 12 a paragraph towards the bottom beginning "In broad 13 terms": 14 "In broad terms, the principal pillars of the ETN 15 contract suite in terms of scope and risk therefore have 16 not changed materially since the approval of the Final 17 Business Case in October 2007. The process of 18 negotiation and quality control has operated effectively 19 to ensure the final contract terms are robust and that 20 where risk allocation has altered this has been 21 adequately reflected in suitable commercial 22 compromises." 23 Now, in relation to the design development risk, do 24 you consider that there had been any material change in 25 relation to that? 119 1 A. No, I think that is included in what is said there, that 2 the commercial compromises reflect the fact that we paid 3 additional sums to reward the consortium for taking on 4 the design development risk. So I think that's -- 5 I think that paragraph there is accurate. 6 Q. Can we look on at page 4, please. If we scroll down 7 towards the foot of the page, you will see a sub-heading 8 "Price". What it says under that is: 9 "A contract price has been agreed. The detailed 10 contract price and pricing schedules for carrying out 11 the Infraco Works is contained in Schedules to the 12 Infraco Contract. A substantial portion of the Contract 13 Price is agreed on a lump sum fixed price basis. There 14 are certain work elements that cannot be definitively 15 concluded in price and therefore Provisional Sums are 16 included. A number of core pricing and programming 17 assumptions have been agreed as the basis for the 18 Contract Price. If these do not hold, Infraco is 19 entitled to a price and programme variation known as 20 'Notified Departure'." 21 What did you know of the Notified Departure 22 mechanism? 23 A. What did I know? 24 Q. Yes. 25 A. I knew that it was part of the -- within the contract it 120 1 was a mechanism for then discussion on change control in 2 terms of impact, maybe a negotiation, a discussion that 3 would take place between the tie procurement and change 4 control team, and a Notified Departure which would come 5 forward, and then there would be a decision made of 6 whether it was reasonable, acceptable, whether it could 7 be avoided, whether the impact of it could be somewhat 8 reduced, and what that final position would be. 9 Q. This notes that the Notified Departure arises if the 10 assumptions do not hold. Did you have any information 11 as to how likely it was that they would hold or that 12 some of them would not? 13 A. No, we were -- we were confident that the basis of the 14 contract was sound. But we did recognise that there may 15 be elements of where perhaps there would be an issue to 16 do with a crossover between, say, the MUDFA programme 17 and the Infraco programme, and that may cause a change 18 to the programme. 19 Now, what we would want to do then is try and see if 20 that -- the impact of that change in terms of programme 21 or cost could be in some way accommodated in a different 22 way. 23 Q. As you say, one of the assumptions that had been made is 24 that the MUDFA works would be -- the MUDFA works to be 25 carried out by the appointed MUDFA contractor would be 121 1 complete by the time the Infraco contractor started 2 their works? 3 A. Yes. 4 Q. It was clear that wasn't going to hold. 5 A. No, but there were two -- I think there were two major 6 points, if my recollection is the one on Princes Street. 7 It was to do with Scottish Water pipes which were over 8 100 years old, and the estimation by the MUDFA 9 contractor in terms of the work that was going to be 10 required. They had underestimated it. And because of 11 the -- also, the impact on traffic management, I felt -- 12 and this was -- this was coming close to my time when 13 I was leaving the project, but I think there was 14 consensus that it might make sense to do the Infraco 15 work and the MUDFA work at the same time, because it 16 would minimise the disruption to traffic and to the 17 overall running of Edinburgh. 18 Q. I really just want to look at the position as at 19 May 2008, and the close of time leading up to the 20 contract close. 21 I think what you are saying is it was clear to you 22 that the assumption that the MUDFA works would be 23 finished was not going to hold? 24 A. No. Sorry, no. What we had -- what we were attempting 25 to do through discussions, and indeed I think that was 122 1 successful, was prioritise the areas that Infraco were 2 going to work. So that the MUDFA works would carry on, 3 but wouldn't be impacting the Infraco work. 4 There wasn't a lot of work required in the section 5 that went from the Gyle out to the airport, and also 6 down Leith Walk. 7 Q. If you accept from me for the time being that one of the 8 assumptions was that the MUDFA works would be complete, 9 it would follow that you would know that that assumption 10 was not going to be true and there would be a Notified 11 Departure? 12 A. No. I think -- if the MUDFA programme in its entirety, 13 I accept wasn't going to be complete. But if there was 14 elements of the MUDFA work that could carry on which 15 wasn't impacting Infraco in any shape and form, then 16 I wouldn't understand and I wouldn't think it would be 17 reasonable to accept that that would be a Notified 18 Departure. 19 CHAIR OF THE INQUIRY: Is there not a difference between it 20 being a Notified Departure and what action was taken 21 when you get it? 22 A. No, because the work might not have any impact at all on 23 the Infraco programme. So this would be a Notified 24 Departure for Infraco, saying that because this piece of 25 work is not complete, this is causing us additional cost 123 1 or causing us a change to the programme, and that might 2 not be the case. 3 MR LAKE: What work had been carried out, for example, to 4 assess the potential liability in relation to the MUDFA 5 works not being complete? 6 A. I can't recall. I mean, the MUDFA programme was 7 a detailed programme. It was an evolving programme. 8 There was full information available about MUDFA at any 9 point in time. 10 Q. Did you have an estimate of what the potential 11 liabilities might be if that assumption didn't hold 12 true? 13 A. I can't recall. 14 Q. There was another assumption -- 15 CHAIR OF THE INQUIRY: I'm just wondering about time. We 16 will take a break for the shorthand writers. 17 We will have a break. We will adjourn for ten 18 minutes. 19 (2.23 pm) 20 (A short break) 21 (2.35 pm) 22 MR LAKE: My Lord, we were discussing the question of 23 Notified Departures, and I had just been talking about 24 MUDFA. I think you can take it from me that there was 25 another Notified Departure concerning which version of 124 1 the design programme was to be used, and we already saw 2 in the email from Mr Laing that that was to be varied. 3 Had you had the benefit of any assessment of what the 4 likely exposure to liability was for that Notified 5 Departure? 6 A. No, but I think this comes back to the -- the underlying 7 debate, I guess, that then ensued later on about the 8 definition of design and development, because the 9 Notified Departure would be that the design and 10 development of the design had moved on. Our view would 11 be that that is part of what our agreement is. 12 Q. I think we are at the moment talking not so much about 13 the content of the design, of the design programme. 14 I think it was always clear that the design programme 15 for delivery of designs was going to be different. So 16 that assumption would not hold true. 17 Is that something for which there had been any 18 assessment of liability? 19 A. No, I think -- I think there had been assessments of 20 liability in terms of -- sorry, I think this goes back 21 to the underlying -- sorry, I'm just getting a bit 22 tired. It goes back to the underlying issue about if 23 the design programme was going to evolve, it would 24 evolve, and as it evolved, then perhaps there would be 25 changes. But that is what we had paid the premium for 125 1 the design development. 2 Therefore our view would be that that wouldn't be 3 a Notified Departure. It may be a view for the 4 consortium, but we wouldn't agree to it, and I guess we 5 would probably argue against it. 6 Q. I would like to look at another document within the 7 suite of contract close documents. 8 It's reference CEC01338853. This has the title, 9 "REPORT ON TERMS OF FINANCIAL CLOSE", also known as the 10 close report. Do you recognise this? 11 A. I do, yes. I think there was a suite of documents all 12 produced at the same time. 13 Q. Perhaps we could start at page 7 of this. We can see 14 a reference here in the second paragraph to: 15 "Programme version V31 will be contained within the 16 SDS novation agreement. Any variance between V26 and 17 V31 which has an impact on the BBS programme will be 18 dealt with through the contract change process." 19 It's not very clearly expressed, but V26 was the 20 assumption stated in Schedule Part 4. And this is 21 noting that in fact it will be version 31 that is the 22 SDS obligation in terms of Novation Agreement. Is that 23 the point that we have just been talking about, that you 24 thought that had all been addressed? 25 A. Yes. 126 1 Q. Can we then go to page 25 of this document, please. We 2 look towards the foot of the page, there's a heading, 3 "Price certainty achieved", and in the second paragraph 4 underneath that, we see it's noted: 5 "The Infraco price of GBP233.5 million 6 comprises ..." 7 There's three elements, firm costs, value 8 engineering initiatives and provisional items of 9 financial close. That was your understanding? 10 A. Yes. 11 Q. Obviously the provisional items were not fixed and firm. 12 A. No, and I think -- I think that an element of that was 13 Picardy Place. 14 Q. That's simply because the Council couldn't decide, or 15 hadn't decided what design they wanted? 16 A. There was a major development proposed for St James 17 Centre, and the final decision on that, which, you know, 18 was significant, had implications of where the tram stop 19 was going to be, and also the power supplies had to be. 20 Q. Then if we could look at the following page, page 26, 21 under the heading, "Infraco price basis and exclusions", 22 it notes: 23 "The Infraco price is based upon the Employer's 24 Requirements which have been in turn subject to thorough 25 quality assurance and the significant areas where 127 1 post contract alignment of the SDS design will be 2 required. Crucially the price includes for normal 3 design development (through to the completion of the 4 consents and approvals process, see below) meaning the 5 evolution of design to construction stage and excluding 6 changes of design principle, shape, form and outline 7 specification as per the Employer's Requirements." 8 Is that simply -- that was your understanding of the 9 position at that time? 10 A. Yes. 11 Q. Do you recall having seen any legal advice confirming 12 that position? 13 A. We were -- we were receiving legal -- legal advice and 14 having review of all documents by DLA throughout this 15 whole process. And I think even if you look at all the 16 circulation lists for all these emails, you will see that 17 DLA are copied into them all. 18 I think you must not believe that there was any plan 19 to exclude DLA from any parts of the process. Indeed, 20 that was the whole point of having Andrew as part of the 21 team, that he attended every meeting, that he had access 22 to all the information that was available, and I go back 23 to my original point. We were hugely reliant on DLA and 24 indeed the -- the professional procurement people who 25 had been involved in procuring tram systems, because 128 1 they had done this before. 2 So they had produced -- in DLA's case, they had 3 taken responsibility for the contract, the contract was 4 their contract. They were involved in the evolvement of 5 the contract and they were -- involvement in the 6 detailed evaluation and examination of all the clauses; 7 and if at any point Andrew or the DLA team felt that 8 this was not consistent with the outcome that we were 9 intending to achieve, then they had the opportunity to 10 write to us. They had the opportunity at Tram Project 11 Board meetings or at internal meetings to state their 12 position, and indeed, in the end of the day, I believe 13 they produced a formal report to the Council which 14 reflected their position. 15 Q. I want to look at the formal report just now. That's 16 document reference CEC01312368. You can see this is 17 a letter, that's addressed to you at tie and 18 Gill Lindsay at the Council, with a date of 19 28 April 2008. It's signed with the firm's signature, 20 DLA Piper Scotland. 21 Now, if we look at the foot of the first page, 22 there's a paragraph: 23 "Taking our letter of 12 March as the baseline from 24 which tie was able to issue its notifications of intent 25 to award the ETN Contracts, we are in a position to 129 1 update as follows: (using the sections and numbering in 2 that earlier letter)." 3 If we look forward to page 3, we will see there's 4 a heading, "RISK". What it says there is: 5 "Following on from our letter of 12 March, we would 6 observe that delay caused by SDS design production and 7 CEC consenting process has resulted in BBS requiring 8 contractual protection and a set of assumptions 9 surrounding programme and pricing. 10 tie are prepared for the BBS request for an 11 immediate contractual variation to accommodate a new 12 construction programme needed as a consequence of the 13 SDS Consents Programme which will eventuate, as well as 14 for the management of contractual Notified Departures 15 when (and if) any of the programme related pricing 16 assumptions fall." 17 A. Yes. But that's a statement of fact at that time. 18 I mean, overarching the fact that we had an agreement on 19 design development, there would be issues that would 20 arise during the construction of the network which 21 Bilfinger Berger would want to come forward as 22 a Notified Departure to negotiate what the impact on 23 their pricing contract would be. 24 Q. So put it this way. How great did you understand the 25 risk to be that there would be Notified Departures? 130 1 A. I mean, we understood that there would be change -- the 2 change control requirements, and that that was why we 3 were trying to have as much risk allocation or as much 4 of a contingency pot available to deal with that. 5 And we also understood that the tie management team 6 would need to be robust in terms of managing the change 7 control process, to determine what has a real impact on 8 the Infraco programme and what doesn't. 9 So there was an understanding that there would be, 10 as the process developed, there would be -- there would 11 be unforeseen issues which may have an impact positively 12 or negatively, and that would have to be discussed. 13 Q. I come back to the core of my question. What was your 14 assessment of the magnitude of the extent of the risk of 15 Notified Departures? How great was it? 16 A. Our assessment of the magnitude of the risk, that it 17 could be managed within the funds that we had available 18 to us. 19 Q. Who provided you with the factual material on which to 20 make that assessment? 21 A. The procurement team, the financial team, and the legal 22 team. 23 Q. Within tie? 24 A. Within tie, and within DLA. 25 Q. Just for completeness, because of the reference there to 131 1 the DLA letter of 12 March, could we look, please, at 2 document CEC01351479. 3 We can see this, and an earlier one is addressed 4 only to Gill Lindsay, but you can see the letter dated 5 12 March 2008 there. Do you see that? 6 A. Yes. 7 Q. Could we look, please, at page number 4 for the 8 sub-heading, "Risk". 9 Scroll down to "Risk". You see what Andrew Fitchie 10 says is: 11 "Our view on the contractual allocation of risk and 12 responsibility between tie and the competitively 13 selected private sector providers remains that the 14 Infraco Contract and the Tram Supply and Maintenance 15 Agreements are broadly aligned with the market norm for 16 UK urban light rail projects, taking into account the 17 distinct characteristics of the ETN and the attitudes of 18 BBS and SDS to novation." 19 What did you understand by that qualification, 20 "taking into account the distinct characteristics of the 21 ETN and the attitudes of BBS and SDS to novation"? 22 A. Because BBS had no -- I don't want to use the word 23 "respect", but they were concerned about the expertise 24 of Parsons Brinckerhoff to do the work, and 25 Parsons Brinckerhoff had concerns about continuing to 132 1 work under the auspices of BBS rather than tie. And it 2 was -- I don't know why Andrew chose to bring that out 3 as part of the letter, but it was a known issue that we 4 had to manage as part of moving towards financial close, 5 was the reluctance of Parsons Brinckerhoff to novate as 6 per the contractual requirements. 7 This would have been an issue, had there been 8 a design and build contract, this wouldn't have been an 9 issue. This would have been a part of the core because 10 the designer would also have been responsibility -- it 11 would have been the same overarching company that would 12 have done both. 13 Q. Andrew Fitchie seems to be of the view that this would 14 have some relevance to the allocation of risk. Did you 15 think that that was having an impact on the allocation 16 of risk? 17 A. No. In the context of what's said there, my 18 interpretation of it, if my interpretation of it is 19 right, it's to do with the novation, the reluctance of 20 both parties. Both parties really didn't want that 21 novation. 22 Q. I have finished with that document now. 23 I would like to move to documents concerning the 24 decision to sign in May 2008. I would like to look, 25 please, at a document CEC01515189. 133 1 This is this time a draft resolution of the Tram 2 Project Board for a date of 23 January 2008. 3 We can see the various things are -- the paragraph 4 numbered 1 resolves: 5 "... to approve the terms of Infraco Contract Suite 6 and all related agreements and documents." 7 Number 2: 8 "... to recommend that the Board of TEL and the Tram 9 Project Board approve the terms of Infraco Contract 10 Suite." 11 3: 12 "to approve the terms of the Governance and 13 Delegations paper." 14 Number 4: 15 "to approve the proposed delegated authority 16 arrangements." 17 Then it goes on to say: 18 "The delegated authority arrangements proposed and 19 approved were ... A Committee of the Boards of the 20 Company, the Tram Project Board and tie Limited would be 21 immediately formed comprising Messrs Gallagher, Mackay 22 and Renilson, to whom authority is delegated to approve 23 final execution by the tie Chairman of Notification to 24 Award, the Infraco Contract Suite and any necessary 25 related agreements on condition that: 1. The final 134 1 terms of the contractual arrangements are within the 2 terms of the Final Business Case, subject to slippage of 3 up to one month in programmed revenue service in 4 2011 ..." 5 Now, do you recall that committee of three being set 6 up? 7 A. Yes. 8 Q. How did you go about discharging the responsibility of 9 deciding whether or not to make that recommendation? 10 A. Because we had a process whereby we brought in 11 representatives of each of the items that we had to talk 12 who were either tie or legal representatives, and we 13 asked a question formally: are you recommending that 14 it's okay for us to go ahead and sign these documents? 15 Q. Who did you have in to speak to you about these things? 16 A. I think we would have had Steven Bell. I think we would 17 have Andrew Fitchie. I think we would have had the 18 Finance Director. They would have come in and they 19 would have said that it was okay for us to go ahead and 20 do so. 21 I never signed any document of this nature just 22 myself. I actually asked for approval from whoever was 23 appropriate to say that this now document had been 24 reviewed. All the qualifications, all the quality 25 controls had taken place, and it was now appropriate for 135 1 me to sign. 2 Q. When did you speak -- did you speak to these people in 3 a formal way or an informal way? 4 A. In a formal way. 5 Q. When did that take place? 6 A. It took place round about -- it took place before the 7 contracts -- had approval to go and sign the contracts. 8 Q. Can we look at another document then. It's CEC01289240. 9 We will see the heading is "MEETING OF TIE AND TEL 10 APPROVALS COMMITTEE TO CONFIRM THE AUTHORITY TO PROCEED 11 WITH COMPLETION OF THE INFRACO CONTRACT SUITE". It has 12 a date of 13 May 2008. And attending are you, on behalf 13 of tie Ltd, and Messrs Mackay and Renilson on behalf of 14 TEL; do you see that? 15 A. Yes. 16 Q. The minute notes: 17 "The Committee noted that it had been established by 18 the Boards of tie and TEL and approved also by the Tram 19 Project Board, all on 23 January 2008, as a means of 20 ensuring the integrity of the governance process 21 controlling the approval to sign the Infraco Contract 22 Suite. 23 The Committee and each member individually noted 24 that adequate information had been provided on which to 25 competently proceed. In particular, the terms of the 136 1 Infraco Contract Suite and all key related information 2 had been set out in successive versions of: The Close 3 Report prepared by tie Limited; A letter from DLA providing 4 an opinion on the legal competence of the Infraco 5 contract suite and including a comprehensive risk 6 matrix; Supporting papers prepared by tie Limited 7 addressing: Detailed Infraco Contract Suite terms and 8 conditions; Procurement process and risk of challenge; 9 The final deal terms and relationship to value for money 10 and the risk of challenge." 11 I think those last several bullet points were part 12 of what were known as the close papers we've already 13 discussed? 14 A. Yes. 15 Q. Do I take it from your earlier answer, that in addition 16 to this, the various people attended? 17 A. No, I think that I was talking about the approval 18 process to get the papers approved to get to that 19 meeting. 20 So by the time that David Mackay, Neil and I sat 21 down, and then all the minutes for all the various 22 boards had taken place. 23 But as part of the approval process to get the 24 minutes to take place, the various subject matter 25 experts and legal experts had made their recommendations 137 1 to the various boards. 2 Q. We saw when we were looking at the minute which set up 3 the three-man committee that it had to be the case that 4 the contractual arrangements are within the terms of the 5 Final Business Case. 6 A. Yes. 7 Q. Now, which particular aspects, can you remember, of the 8 Final Business Case did you ensure there was compliance 9 with? 10 A. I -- the Final Business Case was in terms of the 11 information that had been put into the contract. 12 Q. Let me ask you this way. If we look at document 13 CEC01395434, is that not there? 14 Take it from me, I'll read it slowly so it can be 15 noted. Within that, at paragraph 7.111, it was noted 16 that: 17 "The key benefits of the Infraco procurement 18 strategy are primarily through the award of a single 19 turnkey fixed price contract in the novation of the SDS 20 and Tramco contracts and the transfer of risks to 21 Infraco." 22 Now, how did you go about assessing whether this 23 contract was fixed price, the novation will speak for 24 itself, but the transfer of risks to Infraco? How did 25 you ensure that the fixed price and the transfer of 138 1 risks? 2 A. That had already taken place as part of the agreements 3 that were then within the contract. And this was the 4 discussion about the transfer of development of risk, 5 about the process by which if there was going to be any 6 change, how the contract would be managed. 7 That had then been -- the detail of that had been 8 explained and presented to each of the boards, so that 9 the full understanding of the content, the deliverables 10 from the content and the risk associated with the 11 content, would have been put forward at the Tram Project 12 Board, the tie Board, the TEL Board, to the City of 13 Edinburgh as part of the Final Business Case. 14 All these documents were a suite of documents which 15 were consistent. 16 Q. The Final Business Case was December 2007? 17 A. Yes. But there was a final report and an update that 18 went into the Council that provided the Full Council 19 with the information that was the basis for which the 20 contract would be signed. 21 Q. Yes, but what I'm interested in is between the Final 22 Business Case and the signature of the contract, there 23 had been quite extensive negotiations about the terms of 24 the contracts, in particular the Infraco one? 25 A. Yes. 139 1 Q. And the terms had developed and progressed over time? 2 A. Yes. 3 Q. And this is -- the end of January, the three-man 4 committee is set up to report whether or not the 5 contract should be entered into? 6 A. I thought this was May. 7 Q. This is May now, yes. 8 A. Yes. 9 Q. But if we go back to the minute -- sorry, it might be 10 helpful if we do that. It's document -- it will be 11 CEC01289240. 12 Now, this is, you see, it starts by noting that this 13 committee has been established on 23 January 2008. But 14 here it is now 13 May and it's required to do its job of 15 reporting whether or not the contracts should be entered 16 into. We saw from when the committees -- the three-man 17 committee was appointed that one of the things it had to 18 consider was whether or not the agreement was within the 19 Final Business Case. 20 A. Yes. Although -- although the -- there was 21 consideration -- I think I mentioned earlier on that 22 following out of the Wiesbaden Agreement and then moving 23 into the final negotiations, there was then 24 a requirement to go through the approvals process. 25 So I think at that time, both tie and BBS started 140 1 their approvals process, of which there would be 2 a requirement to have this final committee. 3 So although this was established at 16 -- in 4 January, the final review of all the documents were the 5 documents that were pertinent to what deal would be at 6 the point of closure in May. 7 Q. Mm-hm. So what I'm saying is: come May time, how did 8 you go about satisfying yourself that the contracts were 9 within the terms of the Final Business Case? 10 A. Because they were within the -- there would have been 11 a review -- I mean, there would have been a review as 12 part of the final closedown documents, where there would 13 have been a description of what was in the Final 14 Business Case, and if there was any variant to that, 15 what that would be and what the impact would be. 16 Q. What do you mean when you refer to the final closedown 17 documents? 18 A. The documents that we're reading. There was a suite of 19 documents. 20 Q. The suite of documents? 21 A. Yes. 22 Q. We can see that this minute makes it plain that you've 23 had some regard to those. Because we see of the three 24 bullet points, as we look at the first one, is the close 25 report, and then the third one, all three sub-bullet 141 1 points there appear to be part of that suite of 2 documents. But did you have any information over and 3 above that, or was it based simply on those documents? 4 A. No, Jonathan, I don't recall there being any 5 information. I recall this being a process. I recall 6 there had been a lot of work going through all the 7 documents to ensure the consistency of the documents, 8 and our approvals process at that point was co-ordinated 9 and comprehensive. 10 Q. So this exercise, the three-man committee, the minute of 11 which we see on 13 May, is really simply a formal step 12 only to approve the other work that's already been 13 carried out on the suite of close documents? 14 A. Yes. 15 Q. There was no further or independent review on those 16 three? 17 A. No. 18 Q. I understand. 19 Could you look, please, also at another document, 20 CEC00079774. That's 00079774. 21 If we look at page 6 of this, we can see this is 22 a letter to Tom Aitchison. It's dated 13 May, the date 23 of contract close. 24 If we go right to the bottom of the page, we can see 25 that this is a letter from you to him? 142 1 A. Yes. 2 Q. If we look at the second paragraph of the letter, it 3 notes: 4 "The operating agreement between tie and the 5 Council, which will be signed as part of the Financial 6 Close procedures, requires that tie deploys best 7 endeavours to deliver the project in line with the Final 8 Business Case approved on 20 December 2007. In 9 finalising the terms of the Infraco Contract Suite, 10 certain matters have been concluded which are marginally 11 different from the terms set out in the FBC including 12 a revision to total project cost from GBP498 million to 13 GBP512 million (Phase 1A) and a revised estimated date 14 for commencement of revenue service of July 2011." 15 What did you consider were the terms that were 16 marginally different? What did you have in mind for 17 that? 18 A. The price and the opening for -- opening for business 19 dates. 20 Q. Was that all? 21 A. At the point that was highlighted there. 22 Q. You didn't consider there was any variation in the form 23 that the risk had returned to tie for design 24 development? 25 A. No, because we were quite clear that the design 143 1 development risk had transferred to the consortium. 2 Q. I think quite soon after the contract was signed, the 3 first Notified Departure was in fact submitted by the 4 consortium alleging that there had been changes in 5 design between the Base Date Design Information and the 6 designs they would actually have to build, the issued 7 for constructions. Are you aware of that? 8 A. Yes. 9 Q. It is claimed by the representatives of the consortium 10 that your response to that first Notified Departure 11 claim was that you couldn't be seen to be paying 12 additional sums to them or agreeing additional sums even 13 before the works had started, and therefore you said to 14 them: just start works and we'll sort it out later? 15 A. No. I mean, they were obliged to go on and do work. 16 I mean -- and I think here is that I was Executive 17 Chairman. I mean, I wasn't involved -- I wouldn't be 18 involved in the management of the contract. That would 19 be the project team. And I do recall a discussion with 20 Bilfinger Berger Siemens, and I said: look, the point 21 here now is that we need to go on and build the tram. 22 That was the extent of it. 23 Q. Is that that you were keen that works would be started? 24 A. Absolutely I was keen that work be started. In fact, 25 what did start, the day after we signed the contract, we 144 1 pulled down the pub beside Haymarket House to show 2 a visible sign to the residents of Edinburgh that work 3 was going to be under way. 4 Q. What's been said by the consortium is that precisely 5 because everyone wanted to get work started, that rather 6 than wait to agree their estimate for Notified Departure 7 1, you said to them -- you intervened and said: just 8 work without estimates and we will arrange for you to be 9 paid later. 10 A. No. And anyway, I mean, I would have been uncomfortable 11 having the conversation at that level of detail. 12 I would have passed anything to do with that to the Tram 13 Project Director, to Steven Bell. And I would have 14 asked Steven to deal with the process in the way that 15 any other discussions, commercial discussions were going 16 to take place. 17 CHAIR OF THE INQUIRY: I think one of the witnesses 18 suggested that you indicated it might be embarrassing, 19 the day after contract signed, to go back to the Council 20 and say: we need X million pounds, or whatever, without 21 a shovel seen being put into the ground. Do you 22 remember saying anything like that? 23 A. No, I remember having a meeting with Bilfinger -- 24 I remember having a discussion with Bilfinger Berger. 25 It wasn't a meeting. I remember saying we need to get 145 1 on. 2 They had raised the issue with me, I suspect, about 3 what happens if the money runs out. And I said: if 4 we're in the position where we have built the network or 5 build most of the network, we will be in a good position 6 perhaps to ask for more. That was the context in which 7 I said we need to go on and build the network. 8 MR LAKE: The Inquiry has heard some evidence of the 9 provision of information to the Council post financial 10 close, but relating to the cost estimates where 11 adjustments had to be made to the allowance for risk in 12 order to ensure that the overall contract price came 13 within the sum that had been reported to the Council; 14 and that what was done was to reduce some risk figures 15 manually making entries in the spreadsheets to overwrite 16 the quantified risk analysis. Were you aware of that? 17 A. No. 18 Q. The person who was carrying out that work, 19 Stewart McGarrity asked them to carry out. It was 20 carried out by Mark Hamill. When he emailed 21 Stewart McGarrity and Steve Bell back, he said: 22 "I think this is the best way to do it in order to 23 avoid unnecessary scrutiny from our 'colleagues' at 24 CEC." 25 In putting "colleagues" in inverted commas, it 146 1 seemed to indicate there was a difficult relationship 2 with the people at CEC around about the time of 3 financial close. Would you agree? 4 A. No. I wouldn't. And I can only -- I can only speak 5 from my perspective. I didn't have a difficult 6 relationship. I understood the pressures that our 7 colleagues in the City of Edinburgh were under. These 8 were stressful times for all of us, but there were 9 occasional flash points at low level because perhaps 10 people from CEC and people within tie had different 11 priorities at that time. But the relationship 12 between -- we worked -- we were a part of the City of 13 Edinburgh. We weren't distinct from them. And I always 14 felt that, and I always felt that I had good support and 15 good connection with the officials, with the 16 councillors, with the staff. 17 I felt that was the case in the organisation. 18 Q. Did you feel there was some element of unwelcome 19 scrutiny or examination of what tie were doing? 20 A. No, but I could understand why some staff underneath me, 21 because they had already prepared the work. They had 22 already had, say, external scrutiny from -- whether it 23 be an accounting firm or a legal firm, and then all of 24 a sudden -- and a good example would be legals, whereby 25 CEC Legal Department might decide that they wanted to 147 1 take their own view, and commission work by external 2 lawyers to then commission what had been undertaken by 3 DLA on tie's behalf; and stuff like this I tried to 4 prevent because I felt we are part of the City of 5 Edinburgh, and this -- this is maybe an unnecessary 6 waste of money. 7 But no, I mean, I think we tried to be as helpful 8 and as inclusive as we can, because in the end of the 9 day, you know, it was important that once the network 10 was going to be constructed and built, there was going 11 to be a lot of work for all of us. 12 CHAIR OF THE INQUIRY: tie was a separate company, 13 a separate legal entity. 14 A. Yes. 15 CHAIR OF THE INQUIRY: Did you ever consider it legitimate 16 or not for Edinburgh to try to protect its interests, 17 separate from the company's interests? 18 A. No, I did. 19 CHAIR OF THE INQUIRY: You did? 20 A. Yes, I did. 21 CHAIR OF THE INQUIRY: In that regard, did you consider that 22 it was reasonable or unreasonable for the city to employ 23 lawyers to -- 24 A. No, I thought it was reasonable. And I thought it gave 25 additional assurance to the work that we were doing. 148 1 CHAIR OF THE INQUIRY: But you thought it might be wasting 2 money. 3 A. No. In certain instances, there might be certain small 4 instances where we may end up having different lawyers 5 reviewing different things, but in terms of the overall 6 close and contract close, I thought it was sensible to 7 have as much assurance as we can. 8 MR LAKE: But of course there wasn't a separate firm engaged 9 by the Council at contract close. They had 10 Andrew Fitchie of DLA advising them as well. 11 A. Yes. 12 Q. Now, tie had a responsibility to deliver the trams, and 13 by that time that was its project, in May 2008. The 14 Council clearly has much wider responsibilities. Would 15 you accept that? 16 A. Yes. 17 Q. So whilst -- in terms of costs of the tram project, that 18 was something where the Council very much had the rather 19 more sharply defined interest as the person that was 20 going to be footing the bill, rather than tie. 21 A. Yes. 22 Q. So in that regard would you agree that the interests of 23 the Council really weren't quite the same as tie when it 24 came to considering the costs of likely overrun? 25 A. Yes, I would concede that, because if there was overrun 149 1 and there was going to be additional expenditure, it was 2 quite clear that the Government weren't going to provide 3 additional funds. So it would have to come from the 4 Council. 5 Q. Turning to a different matter now, that of bonuses. We 6 know there was a remuneration committee within tie? 7 A. Yes. 8 Q. You sat on that committee? 9 A. I can't recall whether I did or I didn't, because best 10 practice would be that the chairman would not be 11 a member. 12 Q. That's my question, because the evidence is that you did 13 sit on the remuneration committee, despite the fact you 14 were a Chairman and an Executive Director -- 15 A. Yes. 16 Q. -- which would be unusual. Was any consideration given 17 to whether that created a problem? 18 A. I certainly did not sit on any matters concerning 19 myself. And I am not sure that I did sit when 20 a discussion on -- bonuses were discussed. 21 If I was a member of the committee, I think I would 22 have excused myself and left because it wouldn't have 23 been appropriate. 24 Q. I think some of the bonuses were achieved on obtaining 25 certain milestones in the progress towards contracts and 150 1 works? 2 A. Yes. 3 Q. Did that create a pressure to get to the milestones, to 4 get things done? 5 A. No. I don't believe that -- I think in terms of the 6 negotiation of the contracts initially, the bonuses were 7 important to the staff, particularly the third party 8 contractors to come in. But it wasn't something that 9 was spoken to me about at all by any of the directors in 10 terms of: where is my bonus; or: what's my bonus going 11 to be? 12 Q. When you say it was important to the staff, to 13 contractors coming in, I don't quite understand that 14 answer? 15 A. Because we were only able to offer -- in terms of 16 remuneration, you know, if we were going to bring people 17 in on a fixed-term contract, then in terms of what we 18 offered, it was salary, which was paid as an employee 19 with PAYE and National Insurance, and also then the 20 opportunity on bonus. 21 There wasn't cars. There wasn't medical insurance. 22 Q. I see. You don't mean contractors as in Bilfinger or 23 these people. You mean the people who entered into 24 contracts for service, rather than contracts of 25 employment? 151 1 A. Yes. 2 Q. Do you think it would have been better to have the 3 contracts structured in such a way that it was based 4 more on individual performance, rather than on the 5 company achieving certain milestones? 6 A. My recollection was that it was both. There was 7 individual performance measures for the manager or 8 director who was responsible, which contributed a high 9 degree of what the percentage of the bonus was going to 10 be, and there was also then an overall objective in 11 terms of what the company had to achieve. But I can't 12 recall what the weighting was. 13 Q. We know that the contract, the conclusion of the 14 contract slipped quite substantially. So it wasn't 15 ultimately done until May 2008? 16 A. Yes. 17 Q. Can you recall whether that meant it was too late for 18 anyone to achieve their bonuses in terms of time for 19 contract close? 20 A. No, I think bonuses were paid. 21 MR LAKE: My Lord, I think that is all the questions I have. 22 I don't know if you wish to take a break, to discuss 23 whether there are any other issues you want me to 24 ventilate? 25 CHAIR OF THE INQUIRY: Well, I've got a few questions. 152 1 I could ask them, if I may. 2 Questions by CHAIR OF THE INQUIRY 3 CHAIR OF THE INQUIRY: You mentioned at the beginning, or 4 towards the beginning of your evidence, that the 5 procurement strategy that was adopted was maybe not one 6 that you would advise in future contracts of this type. 7 A. Yes. 8 CHAIR OF THE INQUIRY: What procurement strategy would you 9 advise? 10 A. I would look for a design and build contract. If you 11 have a design and build contract, then it's much clearer 12 where the very issues we've been discussing at length 13 reside. 14 It also means that you wouldn't require an 15 organisation of the scale of tie, because I guess one of 16 the areas of overlap was the role of Bilfinger Berger. 17 I didn't quite -- I suppose I didn't quite 18 understand their model before, but their model was very 19 much to be as management consultants and subcontract the 20 work out to the third parties. And I think that was an 21 element of -- part of the final frustration in getting 22 agreement was that they hadn't secured their contracts 23 with their supply chain, which meant that that was 24 another uncertainty that we didn't know about, that they 25 were facing. 153 1 But to go back to the original point, I would go for 2 a design and build contract. I would include the full 3 scope of works, and then I would look at a small number 4 of focused team to manage that. 5 CHAIR OF THE INQUIRY: What about utilities? Would that be 6 part of the scope of the works or would you deal with 7 utilities separately? 8 A. It could be either. But I think the learning here is 9 that there are certain -- in terms of mitigating the 10 impact on the road and traffic management, that the 11 programmes would -- if they were going to be separate, 12 would have to be much more clearly co-ordinated, so that 13 work can keep pieces of work. 14 If Edinburgh was looking to finish off the project 15 down at Constitution Street and Leith Walk area, that 16 that work would need to be well co-ordinated because of 17 the impact it has to cause major traffic congestion. 18 CHAIR OF THE INQUIRY: You have spoken about the behaviour 19 of Bilfinger Berger and given your views about that. 20 Given what you experienced and you've said, did you 21 at any time consider whether it was prudent to continue 22 dealing with Bilfinger Berger before signing the 23 contract? 24 A. Yes, I did. And the period when Richard Walker -- after 25 we had agreed finally all the detail of the contract, 154 1 the signing of the contract, the approvals process had 2 been sought with the Council, and then Richard Walker 3 stopped answering my telephone calls or he stopped 4 communicating with anybody in tie; and then eventually 5 I got a communication from Richard to say that they 6 couldn't sign the contract. And this was the part when 7 he said to me was that he had lost control of his supply 8 chain. And that they therefore were unable to meet the 9 agreement. 10 I was extremely angry, but I was also extremely -- 11 I just felt let down that this could happen so late in 12 the day. 13 CHAIR OF THE INQUIRY: What sort of time -- what date are we 14 talking about roughly? 15 A. We are talking about April. 16 CHAIR OF THE INQUIRY: April. 17 A. And -- 18 CHAIR OF THE INQUIRY: Given that, that's a pretty extreme 19 position, did you not then think: that is going to be 20 embarrassing for the city and embarrassing for tie, but 21 I can't take the risk of going ahead with this company 22 under this -- 23 A. Yes. And we looked at all options. DLA advised us that 24 if -- because one of the options was to effectively 25 change the consortium, remove Bilfinger Berger, make 155 1 Siemens the prime contractor, and let Siemens have the 2 contracts, because this seemed to be a uniquely 3 Bilfinger Berger issue. In fact, it was a Bilfinger 4 Berger issue. 5 I was advised by Andrew Fitchie, DLA, that we 6 couldn't do this. The procurement process. So the view 7 was taken that we have to have one further push or we 8 would have to walk away. 9 CHAIR OF THE INQUIRY: Finally, it's a personal matter. At 10 the beginning of your evidence, you made comments to me 11 which involved a reference to your health. Obviously we 12 haven't -- I haven't disclosed anything about your 13 health other than to tell core participants that we 14 were -- I was persuaded on medical advice that we 15 wouldn't take your evidence in public. 16 That's all that has been said. Do you want us to 17 redact -- to take these comments out at the beginning? 18 Because the transcript will be published. So I don't 19 know what you want to do about that. 20 A. My position is that I had -- I mean, I perversely 21 enough, I enjoyed working on tie. 22 CHAIR OF THE INQUIRY: No, it's the comment. 23 A. No, I'm happy. The reason I left was a private and 24 personal matter. I had a health issue. It was going to 25 take -- so it's what I said at the start. 156 1 CHAIR OF THE INQUIRY: There's no objection to that 2 remaining in the transcript as far as you're concerned? 3 A. No, not at all. 4 CHAIR OF THE INQUIRY: Thank you very much. I don't think 5 there's anything else that we need to ask you. 6 Thank you very much, Mr Gallagher. You're still 7 technically under your citation, as I say to everyone at 8 the end of their evidence, and it would be possible for 9 us to seek another opportunity to ask questions. If 10 things -- hopefully we won't need to do that, but if 11 that happens, we will get in touch with your daughter, 12 and make arrangements. 13 But as I say, hopefully that won't arise. 14 A. When do you finish all your interviews, do you think? 15 CHAIR OF THE INQUIRY: Well, we don't know that yet. We 16 have evidence sessions until Christmas. 17 (3.22 pm) 18 (The hearing adjourned until Tuesday 21 November 2017 at 19 9.30 am) 20 21 22 23 24 25 157 1 INDEX 2 PAGE 3 MR WILLIE GALLAGHER (sworn) ..........................1 4 5 Examination by MR LAKE ........................2 6 7 Questions by CHAIR OF THE INQUIRY ...........153 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 158