1 Thursday, 30 November 2017 2 (9.30 am) 3 MR DONALD MCGOUGAN (continued) 4 Examination by MR MACKENZIE (continued) 5 CHAIR OF THE INQUIRY: Good morning. You're still under 6 oath, Mr McGougan. 7 Yes, Mr Mackenzie. 8 MR MACKENZIE: Good morning. 9 A. Good morning, Mr Mackenzie. 10 Q. I would like to turn now, please, to events in 11 February 2008. Bring up, please, document CEC01246825. 12 You will see these are the papers for a meeting of the 13 Tram Project Board on 12 March 2008. If we go, please, 14 to page 5, we should see, I think, the minutes. Yes, we 15 can see the minutes of the meeting, the joint meeting of 16 the Tram Project Board and the TEL Board on 17 13 February 2008. 18 If we look then at item 4, I think we can see that 19 is in relation to SDS. 20 If we then, please, go over to page 6, and to 21 item 4.4, we see a reference, Mr McGougan, to yourself 22 having questioned whether it would have been possible to 23 buy out the design risk: 24 "The Boards heard that, throughout the negotiations 25 pre and post preferred bidder, neither consortium was 1 1 willing to accept this risk. The reasons were not 2 related to design quality concerns but due to the 3 dependency on the public sector approvals processes, and 4 the fact of a mismatch in contracts, where SDS was not 5 penalised for programme delays." 6 Can you remember, what was the design risk that you 7 were asking at this time whether it would have been 8 possible to buy out? 9 A. I think we were discussing this new area of risk of the 10 potential for overlapping design and construction. If 11 there were SDS delays in bringing forward the documents 12 for approval, then that may have an impact on the 13 construction programme. 14 I would stress, I'd always understood that the 15 approvals risk was remaining with the public sector, 16 that there was -- I think it was an eight-week period 17 that we had in the Council to make the approvals on 18 receipt of suitable documentation. And it was always 19 understood that that would lie with the public sector. 20 But this was a new area of risk that tie were 21 seeking to transfer to the contractor, but were finding 22 difficulties. 23 Q. Yes. So this new area was if there was delay on the 24 part of SDS in getting the designs and applications to 25 the Council for approvals and consents? 2 1 A. I think so, because we were being constantly reassured 2 that the normal design development was capable of being 3 transferred to the contractor. So I'd make 4 a distinction between those areas. 5 Q. I understand. 6 Now, can you remember why you had asked if it would 7 have been possible to buy out that risk, namely the risk 8 of SDS delay? 9 A. Yes, because my view at that time in the lead-up to 10 contractual close was that if there was a possibility of 11 doing that and having more security on the price that we 12 were going to have to pay over the terms of the 13 contract, I would prefer to have the sums included in 14 the contract price, and the risk, if possible, sitting 15 with the private sector. 16 Q. Yes. So if that risk had been bought out, the Council 17 would have had greater price certainty? 18 A. Yes. There would have been a higher -- a higher price 19 for the contract, but greater price certainty, yes. 20 Q. And it must follow that if that risk isn't bought out, 21 there's greater price uncertainty? 22 A. Yes, and that was translated, if this was the risk that 23 we were talking about, there was a further risk 24 provision brought in of, I think, 3.3 million before 25 close. 3 1 Q. Thank you. 2 I would like to move on to another document, please. 3 It's to do with the Notice of Intention to Award on 4 18 March 2008. If we can go, please, to CEC02086755. 5 I suspect you might recall this document, Mr McGougan. 6 It's essentially the note that was provided by yourself, 7 Mr Holmes and Ms Lindsay, to Mr Aitchison around the 8 time of Notice of Intention to Award. 9 If we go to page 3, I think we will see the 10 signatures. Perhaps blow that up, please. Thank you. 11 So reading from the bottom, we see there 12 Mr Aitchison's signature, and above that the text says 13 Mr Aitchison, in short, agrees and confirms that tie may 14 immediately lodge the Notice of Intention to Award 15 contract. 16 We then see the signatures of yourself, Mr Holmes 17 and Ms Lindsay, and the paragraph above that saying: 18 "Having considered all of the above, we consider 19 that it is appropriate to accept tie's recommendation to 20 you to authorise and permit them to immediately lodge 21 the Notice of Intention to Award." 22 Now, can you remember, what steps did you take to 23 satisfy yourself at this time before signing this 24 document that it was appropriate to authorise the Notice 25 of Intention to Award? 4 1 A. Well, I think we'd been immersed in the -- the project 2 updates and the updates on contract negotiations. So 3 through the Tram Project Board and other meetings, I was 4 aware of the stage that that had reached. 5 But in sending this to me, the Council Solicitor had 6 confirmed that she'd had a meeting with the relevant 7 officials and that she felt it was now appropriate to 8 move to this stage. 9 I would have known at this time, I think, what the 10 tests were for moving to the ITA or ITN stage, but I'm 11 afraid that that knowledge has slipped over time. So 12 I can't -- I can't sort of be definitive about that at 13 the moment. 14 But this was a stage that was clearly prior to 15 contract close, but it indicated that we were becoming 16 close to contract close, and the effect of signing it 17 was to -- designed to be twofold at that stage. One was 18 to flush out whether there were going to be any 19 challenges in respect to procurement from the 20 alternative bidder. But also, I think, tactically, 21 because of frustrations with the consortium at that 22 stage in terms of the negotiations, it was an attempt as 23 well to try and encourage them towards the finish line. 24 Now, perhaps a formal notice like this shouldn't be 25 used for that purpose, but I think there was an element 5 1 of tactical thinking in there. 2 In terms of what I would have been satisfied with, 3 I think we were -- we're going to be straying into the 4 area of financial close as well, but, I mean, really it 5 was the iterations that had been done on the capital and 6 indeed the revenue projections for the tram over 7 a number of -- a number of times, the advice we were 8 getting from tie and TLA -- DLA, sorry, the reviews that 9 had been undertaken on the project by, I suppose, going 10 back to Cyril Sweett under Transport Scotland's auspices 11 before the summer of 2007, and also the OGC and 12 Audit Scotland. 13 The close report drafts were emerging by then, and 14 they were indicating a position where nearly all issues 15 with the contractor had been buttoned down and were 16 ready for approval. 17 Now, that changed subsequently to this date with new 18 items coming in that required to be dealt with, and we 19 were aware, I think, by this time of this new area of 20 risk that we've just talked about, with the SDA or SDS 21 delays. 22 I think by this time as well, tie were perhaps 23 reporting to the Tram Project Board or maybe that was 24 later, that they were in a position where they 25 considered 95 per cent of the cost to be fixed. 6 1 So really we may come back to this at contract 2 close, but we were -- we were in a position where we 3 were -- we felt we were close to contract close. 4 Q. Thank you. One of the things you mentioned I think was 5 that -- is it correct that one of the purposes of 6 issuing Notice of Intention to Award was to try to bring 7 negotiations to a close, and to try to force the 8 consortium into entering the contract? 9 A. I said I thought that was a tactical consideration, yes. 10 Q. Do you consider that was an appropriate reason for 11 issuing a Notice of Intention to Award? 12 A. No, I think I said that when I -- when I answered your 13 first question, that I wasn't sure that that was what 14 the purpose of an ITA was. 15 But that was certainly part of the tactical 16 considerations, I think. 17 Q. Can you remember who told you that? Was that thinking 18 within the Council or outwith the Council or what? 19 A. No, I think I was conscious of the fact that there was 20 frustration that further issues kept being raised on -- 21 by the consortium, and that this might be an 22 encouragement to them to indicate that at least the tie 23 side were feeling that they were close to a conclusion 24 on this and were prepared to issue an ITA. 25 Q. I suppose the other way of looking at that is that if 7 1 new issues keep on being raised, then it's premature to 2 rush into entering a contract? 3 A. You could look at it that way. But my experience in 4 other public sector contracts is that it's -- it's 5 certainly not unusual for the other party to be raising 6 last minute issues as we move towards contract close. 7 Q. Now, another matter I would like to ask about in your 8 answer, I think you said that -- we are back to the note 9 we were looking at on the screen. You said: 10 "In sending this to me the Council Solicitor had 11 confirmed that she'd had a meeting with the relevant 12 officials and she felt it was now appropriate to move to 13 this stage." 14 Who did you mean by the relevant officials? 15 A. I assumed that to mean the support officials from the 16 Council who were -- who were involved from the -- the 17 three different departments. 18 Q. Thank you. 19 Now, do you remember before signing this note 20 whether you checked that all the key issues identified 21 in the note to the IPG in December we looked at 22 yesterday had been resolved? 23 A. No, I don't remember doing that. 24 Q. Were you aware whether all of those issues had been 25 resolved? 8 1 A. No, I don't think I could say that I had confirmed to 2 myself that all those issues had been resolved. 3 Q. Do you consider they ought to have been resolved before 4 the NIA was issued? 5 A. I'm not sure about that. I'm not sure of the tests for 6 the -- the NIA. Certainly the issues that had been 7 raised should all have been resolved before contract 8 close. I'm trying to think back, obviously, to all the 9 issues that were raised yesterday, and I think in 10 relation to design and the SDS and the approvals 11 process, certainly we were aware of progress in that, 12 and other items were included in the close report. 13 Q. Now, were you aware at this time whether members of the 14 B team, if I can call them that for shorthand, continued 15 to have concerns about entering into the contract? 16 A. I think -- I don't know what was happening in legal 17 services. So, I mean, I can't go any further than that. 18 In relation to the finance support officials, I knew 19 that they still didn't feel they had a 100 per cent 20 understanding of all the risks that might attach to the 21 contract and to the project. And I -- I understood that 22 and I felt that that -- only way that you could get that 23 100 per cent understanding was through full duplication 24 of tie and DLA activity, and I thought that was 25 realistic. 9 1 So I was taking comfort in the reviews that had been 2 undertaken, the reporting back, and we were relying on 3 tie and DLA to a significant extent, because otherwise 4 I think you'll find that the delivery model was -- was 5 not fit for purpose. 6 CHAIR OF THE INQUIRY: I think you said you thought that 7 that -- that's the duplication of tie and DLA -- 8 activity, at least you're recorded as saying, "I thought 9 that was realistic". 10 Did you mean that? 11 A. Sorry, unrealistic, my Lord. Thank you. 12 MR MACKENZIE: Now, when you say that finance support 13 officials, you knew that they still didn't feel they had 14 a 100 per cent understanding of all the risks that might 15 attach to the contract and to the project, did you have 16 a complete understanding yourself of all the risks that 17 might attach to the contract and the project? 18 A. I didn't have a 100 per cent understanding of all the 19 risks that attached to the contract. I -- and I think 20 I say this in my statement on several occasions, 21 Mr Mackenzie -- I hadn't read the contract, 22 and I wouldn't have been in a position to understand it 23 even if I had read it. 24 So I was relying on the processes that we had been 25 through, the reviews that had been undertaken, and the 10 1 professional advice from industry expert legal firm, and 2 the commercial experience and abilities of tie as 3 reported back through the -- through the TPB and 4 directly to the Council, and included in all the 5 iterations of the close report. 6 Q. I would like now please to look to page 1 of this note, 7 and come back to this design risk we've already 8 mentioned, I think. 9 The last paragraph of this note, do we see in the 10 fourth line down, towards the right-hand side, 11 a sentence starting: 12 "Many of these adjustments to risk allocation are 13 positive, reflecting the reduced risk contingency. 14 There are some which do pass additional risk to the 15 public sector. Of these, the most important is 16 considered to be SDS. As you are aware, this has been 17 a very difficult point for tie to negotiate and they 18 have provided for the best deal which they advise us is 19 currently available to themselves and the Council. In 20 essence, the contractor BBS will accept the design risk 21 for SDS to a high financial ceiling, whereas the Council 22 and tie must remain financially liable for delay by SDS 23 in relation to the provision by them of information for 24 a range of consents and approvals." 25 To pause there, is that the risk beyond that high 11 1 financial ceiling, the Council and tie remaining liable 2 for delay by SDS in relation to the provision by them of 3 information for a range of consents and approvals, is 4 that the risk you had asked back in February, could that 5 be bought out? 6 A. Yes, that's exactly the risk. 7 Q. Just to read on: 8 "Both tie and the Council have worked diligently to 9 examine and reduce this risk in practical terms and tie 10 advises that the new risk contingency contains suitable 11 adjustment for this residual risk." 12 I think you'd mentioned a figure of GBP3.3 million. 13 Was that the new risk contingency? 14 A. That was the new risk contingency. 15 Q. In relation to this risk? 16 A. Yes. There was -- there was a more general risk 17 contingency for delay of the order of 6 million or 6 18 point something million. But the 3.3 million, as 19 I understood it, was specifically for this risk, and 20 there were mitigation measures put in place by tie in 21 conjunction with the Council, the approvals side of the 22 Council, and intended to be with the consortium and SDS, 23 to mitigate this risk going forward. And there was the 24 identification of three areas on the critical path where 25 this was most pertinent and sharpest, and the proposal 12 1 was that everybody would work together in these areas to 2 make sure that when the -- when the design came forward, 3 that came forward expeditiously, I think, but also in 4 the right form and manner and was capable of -- of 5 fairly swift approval. 6 Q. Could we go back, please, to page 1 again, and go back 7 to the reference to the high financial ceiling. Blow up 8 the last paragraph again, please. We see: 9 "The contractor BBS will accept the design risk for 10 SDS to a high financial ceiling." 11 Can you remember what that ceiling was? 12 A. From memory, I think it was GBP1 million. 13 Q. Was that per claim or was that in total? If you can't 14 remember, just say. 15 A. I can't remember, but I would imagine that was in total, 16 rather than per claim. I would have been less 17 concerned, I think, about this new risk if it was 18 GBP1 million per claim. But that's ... 19 Q. Thank you. 20 Now, would it be fair to say that in accepting 21 responsibility for SDS delay, the Council were accepting 22 liability for something that was not its fault, and was 23 outwith its control? 24 A. I'm sure SDS would have said that some of the delay in 25 the design programme was -- was down to the Council and 13 1 the planning issues in the first instance. But setting 2 that aside, I think it would be outwith the Council's 3 control, but the Council were involved in -- very much 4 involved in the proposals to mitigate the risk. 5 So it was outwith the Council's control, but it 6 wasn't entirely outwith the Council's influence. Our 7 actions would have an impact on the quantum of this risk 8 eventually. 9 Q. Is it also fair to say that the Council was accepting 10 this risk in the knowledge that responsibility for 11 managing design would be transferred to the consortium 12 after SDS novation? 13 A. Yes, and there was -- there was no -- there was 14 documentation in the close report that the consortium 15 were obliged to manage SDS effectively, to ensure that 16 designs came forward in a proper timescale, and to 17 a required quality. 18 But tie themselves had been wrestling with that 19 issue for some time. So that obligation was now passed 20 to -- to the consortium, as I understood it. 21 Q. Why did the Council accept the risk? 22 A. It was reported by tie that that was the best 23 arrangement that they could come to and that the 24 contractors were not willing to accept that particular 25 risk, and that -- I think it came down to the fact that 14 1 there may not have been penalty clauses in the SDS 2 contract that was to the contractor's satisfaction. 3 No, could I retract that because I think there's an 4 issue I was trying to get to there that might have 5 worked the other way actually, that -- no, sorry. I'm 6 wandering into an area I don't have proper recall of. 7 CHAIR OF THE INQUIRY: Could I ask about this -- you 8 mentioned that the SDS might attribute blame or fault to 9 the Council because it was the Council Planning 10 Department that was dealing with this. 11 As I understand it, the Council had a period of 12 weeks from the receipt of a proper application with 13 proper design -- proper drawings, and what is now 14 being -- the risk that's now being assumed is for -- in 15 the event of the whole process being delayed because SDS 16 were slow or failed to produce designs to start the 17 planning process. Is that right? 18 A. Yes, the -- yes, my Lord. The time the Council are 19 allowed to come to a decision on this, I think, was 20 eight weeks, but I think what SDS might have claimed was 21 that the prior approval process was not working as 22 smoothly as it might, and that the Council needed to, to 23 some extent, tell the designers in advance of them 24 actually doing the design what type of thing at a higher 25 level would be acceptable. 15 1 So -- 2 CHAIR OF THE INQUIRY: I think we heard from Mr Holmes 3 yesterday that there was a design manual which clearly 4 set out what the design parameters were for designers. 5 A. Yes. Well, Mr Holmes would know more about this area 6 than I would, but I think -- I think there were maybe 7 over a dozen reports to the Planning Committee over the 8 period in -- before financial close about tram design 9 and design manuals. So I think to be -- to be honest 10 about it, I think there were -- there were difficulties 11 with discussions on design within the overall ambit of 12 the Council activity. Prior to this stage. 13 CHAIR OF THE INQUIRY: If we concentrate then on the period 14 prior to the submission of a planning application, what 15 control, if any, did the Council have over SDS? If they 16 weren't managing SDS? 17 A. They had influence, I think, rather than control. 18 CHAIR OF THE INQUIRY: But influence simply means that they 19 would be able to suggest that SDS get on with it. 20 A. No, I think they were able to give SDS clear parameters. 21 That would have been the intention. At the prior 22 approval stage, the planners give as clear a steer as 23 they possibly can to the designers about what will or 24 will not be acceptable once the design application is 25 made. 16 1 CHAIR OF THE INQUIRY: And if the designers still fail to 2 deliver on time, then the Council just accept that risk 3 financially? 4 A. Yes. We were accepting that risk, although in the close 5 report it does indicate that there was a general 6 obligation on BBS to ensure that designs were brought 7 forward in a proper timescale and to a proper quality. 8 But I can't say what the penalty would have been on 9 the contractor. So there was a risk there sitting with 10 the Council. There's no doubt about that. That was 11 a new area of risk that we had been forced to take on 12 because it wasn't capable of being negotiated away. 13 CHAIR OF THE INQUIRY: And the only -- the other matter 14 I wanted to ask about, just to go back to this tactical 15 thinking, when you were signing or advising the 16 Chief Executive that he could sign a Notice of Intention 17 to Award, was there discussion with the three 18 advisers -- that's Mr Holmes, and Ms Lindsay -- about 19 this tactical aspect? 20 A. No, my Lord. Not that I can remember. That was just 21 something that was in my mind that I thought that that 22 was perhaps one of the side effects of getting to the 23 ITA stage. 24 I can't be absolutely definitive that that had come 25 up in discussions with tie, because if I was asked who 17 1 in tie discussed that with me, I wouldn't be able to 2 say. 3 But I think I had in my mind that this was another 4 step in the process that might help encourage the 5 contractor towards the finishing line. 6 CHAIR OF THE INQUIRY: Did you tell Mr Aitchison that before 7 he was asked to sign it? 8 A. I don't recall telling Mr Aitchison that. 9 MR MACKENZIE: Thank you. 10 Is it correct to say that the procurement strategy 11 and the Final Business Case which members had been asked 12 to approve were both based on the premise that design 13 risk would be transferred to the private sector? 14 A. Yes. 15 Q. Is it also correct to say that the retention by the 16 public sector of potentially significant risks arising 17 from SDS delay was a departure from both the procurement 18 strategy and the Final Business Case that members had 19 been asked to approve? 20 A. Yes. 21 Q. Now, were members ever told that the Council were 22 accepting risks arising from SDS delay, and that that 23 was a departure from both the procurement strategy and 24 the Final Business Case? 25 A. Yes. The report to Council on, I think, 1 May would 18 1 have covered this by detailing the new area of risk that 2 we hadn't been able to negotiate away. 3 Q. We'll come back to that report shortly. 4 Do you accept that members ought to have been 5 advised of these matters? 6 A. Yes, and I think members were advised. 7 Q. Now, just, again, on this point, was any consideration 8 given around this time to delaying the award of the 9 Infraco contract until design was complete and all 10 approvals and consents were in place, on the basis that 11 that would have avoided the Council taking on this new 12 risk, and would have been more consistent with both the 13 procurement strategy and the Final Business Case? 14 A. I don't recall a formal consideration of that. I would 15 offer that this risk came with a plan for mitigation and 16 quantification of GBP3.3 million. 17 Now, in relation to -- at this stage, if we had 18 decided not to go to contract close, then that would 19 have meant a delay, considerable delay while designs 20 were completed and projects approvals sought, and then 21 a further delay due to reprocurement because in terms of 22 procurement legislation, the two tenderers had bid on 23 a basis of accepting a level of design risk. 24 And also the timescales that were passing in 25 relation to the receipt of bids back in 2007 would have 19 1 meant that we would have had to go out to reprocurement. 2 My own view is that, given the political environment 3 at that time, that that would have led to project 4 cancellation. 5 Q. Do you recall whether the option of delaying contract 6 award was ever put to members? 7 A. I'm certain that was not put to members. 8 Q. So it must have been a decision on the part of officers 9 not to delay contract award? 10 A. That's -- that's another decision not to do something. 11 There was no action taken by officers to formulate that 12 proposal or make such a recommendation to -- to members. 13 Q. Thank you. 14 I would like to move on to another document, please. 15 It's a report to the IPG on 16 April 2008. It's 16 CEC01246992. It's back to the issue of approvals and 17 consents. If we can go, please, to page 4. 18 Under number 6, Infraco planning prior approvals, we 19 can see for ourselves the state of play there. 20 Underneath the bullet points, we see the paragraph 21 stating: 22 "There is concern that prior approvals may have to 23 be revisited if there are substantial changes in design 24 coming from inter-disciplinary coordination, technical 25 approvals or value engineering. Planning has written to 20 1 tie on 28 March 2008 raising their concerns." 2 Under "Technical Approvals" in the last paragraph on 3 the page, we see: 4 "Similar to the concerns raised by Planning, 5 Transport have also written to tie on 3 April 2008 6 reiterating their concerns about the quality of the 7 submissions being received. A copy of that letter is 8 attached ..." 9 In bold text: 10 "There is potential for the approvals to cause 11 a delay to the construction programme." 12 Then over the page, please, on a similar theme, blow 13 up the second paragraph, the last paragraph on the page, 14 please, under the heading, "Infraco Works commencing 15 before Approvals in Place", it states: 16 "The delay in the submissions from tie Ltd and their 17 designers SDS for the prior and technical approvals may 18 leave the Council in a difficult position. It is likely 19 that the appropriate Planning Prior Approvals will not 20 have been obtained prior to the commencement of 21 construction works for three locations. They include 22 Russell Road bridge, Haymarket Tramstop and the Depot at 23 Gogar. These three locations are on the critical path 24 for the tram delivery and if construction is delayed, 25 the Council is responsible for these compensation events 21 1 and claims from the construction contractor BBS - these 2 claims could easily be in excess of GBP2 million." 3 Now, to pause there, the statement that it is likely 4 that the appropriate planning prior approvals would not 5 have been obtained prior to the commencement of 6 construction works in three locations, presumably that 7 must have been based on the design programme at that 8 time, and if there were to be further delays in design, 9 then there may be more clashes and problems. Would that 10 be a fair reading? 11 A. Well, I wasn't particularly close to whether that was at 12 that time or whether that was in anticipation of further 13 delays in the design process. But that's -- I'm not -- 14 I'm not sure I would go the whole way with you on that, 15 Mr Mackenzie. 16 Q. Do you recall, Mr McGougan, having any concerns around 17 this time that here were three locations, where just 18 these three locations, officers were mentioning claims 19 could easily be in excess of GBP2 million, against, 20 I think you said, a risk allowance of 3.3 million? 21 Did that give rise to any concerns in your mind 22 around this time as to whether the risk allowance was 23 adequate? 24 A. Well, this was -- this was at the same time that this 25 position was being covered in the close report. And 22 1 that indicated that these were the three areas on the 2 critical path, and these were the areas where it was 3 felt that there was a difficulty, and the total risk 4 allowance was 3.3 million, and these claims are being 5 suggested to be in excess of 2 million. 6 So on the face of it, in regard to that, this was 7 covered within the 3.3 million. 8 There were other risk provisions in relation to 9 delays, as I've said earlier, and a total risk provision 10 of -- of GBP32 million. 11 So I don't think I was unduly concerned by this 12 report at this stage. 13 Q. Did you give any consideration to whether the risk 14 provision for this risk was adequate if there was 15 further design delay? 16 A. I couldn't remember specifically a particular action in 17 that regard. These were -- these were the three areas 18 that I was being advised that were on the critical path, 19 and these were the -- the areas that people were focused 20 on. 21 Q. Did you ask tie to re-run or update the QRA? 22 A. The QRA was updated in April at some stage, from memory, 23 and there were further manual adjustments made to it in 24 relation to the final position at contractual close. 25 Whether the 3.3 million came from the QRA or was 23 1 a manual adjustment, I couldn't be sure now. 2 Q. We will come back to that point. 3 Just taking matters chronologically, if we go next 4 to the report to Council on 1 May 2008, and that should 5 be, I think, CEC00906940. If we go, please, to page 4 6 I think we will see this is a report by Mr Aitchison. 7 We see his name there. 8 Go back to page 1, please. Can you recall, 9 Mr McGougan, were you present at this meeting in Council 10 on 1 May 2008? 11 A. I would assume so. I was -- that would be -- it should 12 be a matter of record, but I would imagine I would be at 13 Council. I was nearly always at all Council meetings. 14 Q. Thank you. We can see in paragraph 1.1 the purpose of 15 the report. We can perhaps blow that up. Thank you. 16 "To notify the Council of the progress on the suite 17 of contracts for the Edinburgh Tram Network and to 18 provide an update on financial close and the capital 19 costs." 20 Go to page 2, please. In paragraph 3.5 you see it 21 states: 22 "The increase in baseline aggregate costs is largely 23 due to the firming up of provisional prices to fixed 24 sums, currency fluctuations and the crystallisation of 25 the risk transfer to the private sector as described in 24 1 the FBC." 2 Presumably I think you would accept that the 3 acceptance by the Council of the risks arising from SDS 4 delay, that wasn't consistent with the risk transferred 5 to the private sector as described in the Final Business 6 Case; is that correct? 7 A. That's correct, but I'm -- I would have imagined -- 8 well, I think that this report included specific mention 9 of that new risk. 10 Q. I will come back to that shortly. But putting that risk 11 to one side, was that consistent with your understanding 12 at the time that there had been a crystallisation of the 13 risk transfer to the private sector as described in the 14 Final Business Case? 15 A. Yes. 16 Q. Did your views in that regard ever change, and if so, 17 when and why? 18 A. No, I don't think they ever changed. I think that was 19 the position that we reported to Council at financial 20 close. 21 Q. Did your position -- did your understanding, even after 22 financial close, ever change as to whether in fact there 23 had been a risk transferred to the private sector? 24 A. Well, considerably later, when we were going through the 25 dispute procedures with the consortium in relation to 25 1 who was taking responsibility for evolution of design, 2 it became clear that that was a very complex area at the 3 heart of the contract that was capable of, at the very 4 least, misinterpretation, and tie and the Council were 5 not successful in some of the disputes that were 6 referred for adjudication in relation to what was 7 a normal evolution of design, so that the position with 8 that became not as I understood it at contractual close. 9 Q. Thank you. Now, the next paragraph, paragraph 3.6 is to 10 do with the utility diversion works. In short, we can 11 see that the very last line of that paragraph sets out 12 that the utility works are progressing to programme and 13 budget. Was that consistent with your understanding at 14 the time? 15 A. Yes, that was consistent with what tie were reporting, 16 and what had been included in the close report. 17 Q. Were you aware of any difficulties or delays with the 18 MUDFA works at that time? 19 A. There had been delays in commencing the MUDFA works, 20 partly through design changes and partly through the 21 funding arrangements with the -- Transport Scotland. 22 But the -- as I said yesterday, I think with the 23 delay in the Infraco contracts as well, that gave 24 a window of opportunity to progress the MUDFA works in 25 advance of Infraco. 26 1 So although there had been difficulties, my 2 understanding was, as reported by tie, that at the stage 3 of contractual close for Infraco, they were reporting 4 that MUDFA were on time and on budget. 5 Q. What do you mean by the delay in the Infraco contracts 6 gave a window of opportunity to progress the MUDFA? 7 What's that a reference on? 8 A. Well, I -- the initial timetable for approval of Infraco 9 contracts was December 2007 or maybe even prior to that. 10 Clearly if they'd started in December 2007, there would 11 have been a significant overlap with the MUDFA works 12 because MUDFA works had been delayed. 13 But given that this was now May, the MUDFA works had 14 had that five months of opportunity for progression. So 15 there was less chance of an overlap. 16 Q. So you were relying on the delay in the award of the 17 Infraco contract in giving -- in reducing the risk of 18 there being an overlap between MUDFA and Infraco works? 19 A. No, I was relying on the information in the close 20 report, as supplied by tie. 21 Q. Move on, please, to the next page, page 3. We will see 22 a discussion on quantified risk allowance, starting at 23 paragraph 3.9. 24 We see: 25 "The QRA has reduced from GBP49 million at FBC to 27 1 GBP32 million. The material change in the QRA relates 2 to procurement risks for Tramco and Infraco closed out 3 at the signing of the contracts offset by allowance to 4 provide for risks and uncertainties to be managed by 5 tie Ltd during construction." 6 Do you recall what the risks and uncertainties were 7 that were to be managed by tie during construction? 8 A. Sorry, I was reading 3.10. I should have been reading 9 3.9. 10 Q. Sorry. Maybe my mistake. 3.9, please. Can you see in 11 3.9 a reference to "offset by allowance to provide for 12 risks and uncertainties to be managed by tie Ltd during 13 construction"; can you recall what were the risks and 14 uncertainties to be managed by tie during construction? 15 A. Not definitively, but certainly this new area of risk 16 was one that had to be managed by tie in terms of the 17 mitigation proposals. But in all of the risk areas 18 there were -- well, maybe not all, but most of the risk 19 areas there would be risk management and risk mitigation 20 measures that were the responsibility of tie. I mean, 21 MUDFA would be another example, whereby tie were under 22 a responsibility to manage the MUDFA contracts in a way 23 that would ensure that any impact on the Infraco works 24 was minimised. 25 Q. Now, in 3.10 it states: 28 1 "A number of the adjustments to risk allocation are 2 positive, reflected in the reduced QRA. As a result of 3 the overlapping period of design and construction a new 4 risk area has emerged which has been the subject of 5 extensive and difficult negotiation. tie Ltd advise 6 that the outcome is the best deal that is currently 7 available ..." 8 What was your understanding of the new risk area 9 that had emerged? 10 A. That was the risk area that we've been discussing about 11 the SDS delays impacting on the construction programme. 12 Q. So that's essentially the new risk area of the Council 13 accepting liability for SDS delay in these matters? 14 A. Yes. Yes. 15 Q. Why isn't that spelt out in the report? 16 A. I'm not sure I understand the question. 17 Q. Put it shortly. You were aware the new risk area was 18 that the Council had accepted risk arising from DLA 19 impacting upon the construction programme. How would 20 members be aware of that when the only reference is to 21 "a new risk area"? 22 A. It's a new risk area rising from the overlapping period 23 of design and construction. 24 Q. The report doesn't clearly say that the Council have 25 accepted liability for SDS delay, does it? 29 1 A. It doesn't use those words. 2 Q. Nor does the report say that is a departure from both 3 the procurement strategy and the Final Business Case 4 that members had approved? 5 A. No, I think that's correct because it's been rolled up 6 in the figure above, the movement from the 49 million to 7 32 million. But we do clearly state that a new risk 8 area has emerged, and that is since the approval of the 9 Final Business Case. 10 Q. So is it your position that this report adequately 11 explains to members that Council officers have decided 12 to accept liability on behalf of the Council for SDS 13 delay? 14 A. No, that's not the process. The process was that tie 15 tried to negotiate away this area of risk and were 16 unsuccessful. So now presenting members with a revised 17 position on risk, which included a new area of risk that 18 has emerged, and members are now being asked to move 19 forward with the project, given all the circumstances 20 relating to it, including this new area of risk. 21 Q. It would have been helpful to have clearly told them 22 what that new area of risk was? 23 A. Over the piece, and I think you can see this from the 24 report and from other reports, it was considered not 25 advisable to go into detail of each individual element 30 1 of risk. 2 Reporting the risk provision in total in the reports 3 to Council, it was felt, gave some indication to the 4 contractor about where potential areas for them to seek 5 to gain further sums under the contract would be. But 6 given the importance of the contract, it was felt that 7 that had to be reported at some level, but we agreed 8 that the appropriate level was at total level, rather 9 than having an individual risk against each element of 10 the contract. 11 If I can just give an example, MUDFA, I think, 12 carried a higher level of risk than other areas within 13 the overall project, because of the nature of the works 14 and what was known about them and what -- more 15 importantly, what wasn't known about them. 16 So MUDFA had a risk pot of 35 per cent at contract 17 close. But if we had detailed each of these out within 18 the reports to Council, then the MUDFA contractor would 19 have known that there was potentially up to that sum 20 included in the risk allowance, and that might have 21 impacted on commercial decisions. 22 CHAIR OF THE INQUIRY: I can understand that, but how would 23 that apply here, where presumably the contractor knew 24 which risk you're talking about, the SDS risk? And 25 you're not putting -- are you putting a figure on that? 31 1 A. Yes, my Lord. The contractor didn't know that we had 2 allowed GBP3.3 million in this total sum of 32 million 3 for that particular risk. 4 CHAIR OF THE INQUIRY: That's mentioned, is it? 5 A. The 3.3 million is not mentioned. That's -- that's the 6 point. 7 CHAIR OF THE INQUIRY: I think the point I'm trying to 8 clarify is: why could you not have specified that the 9 additional risk you're talking about here, without any 10 figures attached, was the SDS risk because the 11 contractor knew that you had to -- you were taking that 12 risk or were going to take that risk. 13 A. Well, yes, there wouldn't have been any difficulty in 14 that. I think my position is we thought we had detailed 15 what it was in respect of, by the words that were in the 16 report. 17 CHAIR OF THE INQUIRY: Thank you. 18 MR MACKENZIE: I'll just perhaps finish this line, 19 Mr McGougan, by suggesting that it may be self-evident 20 that a potentially significant new risk to the Council 21 arising from SDS delay, against a known history of 22 chronic design difficulties and delays, which in 23 addition represented a departure from the procurement 24 strategy and Final Business Case that members had 25 approved, that it's self-evident that is a risk that 32 1 should have been spelt out to members that the Council 2 had accepted? 3 A. Yes, and I thought it was. 4 Q. I understand that position. Can we move on to another 5 point, please. 6 There's no mention in this report of the fact that 7 the price was subject to a long list of Pricing 8 Assumptions, some of which were known to be untrue, and 9 would result in a Notified Departure or Notified 10 Departures after contract award with the resulting 11 increase in price. 12 What was your understanding of these matters at this 13 time? 14 A. My understanding of that was that, because of SDS delays 15 in the past, there would immediately be an impact on the 16 contractor's programme, and that that would be subject 17 to a Notified Departure, and tie had made an estimate of 18 what was required for that, and that was included and be 19 covered within the risk allowance. 20 Q. So you were aware of that at this time. I don't think 21 that's mentioned in the report to Council, is it? 22 A. No, it's not. 23 Q. Why not? 24 A. I couldn't be sure why not. Maybe it should have been. 25 I think if we had mentioned it and put a sum against it, 33 1 then that would have been difficult, but I think we 2 could maybe have qualified the report in that respect. 3 Q. With the benefit of hindsight, do you think the report 4 ought to have mentioned that? 5 A. I think so. I think I would agree with you on that. 6 Q. In order to enable members to come to a properly 7 informed decision? 8 A. Yes. 9 Q. Overall, read now, are there any other matters you 10 consider the report ought to have mentioned to enable 11 members to come to a properly informed decision? 12 A. No. 13 Q. Could we also then please look at page 3. Under 14 "Recommendations" at the bottom, we see under 6.1, first 15 bullet point: 16 "It is recommended that the Council: 17 note the imminent award of the two contracts with 18 a final price for the Edinburgh Tram Network of 19 GBP508 million ..." 20 Over the page, please, we see the first bullet point 21 also recommended to: 22 "Refresh the delegated powers already given, to 23 authorise me to instruct tie Ltd to enter the 24 contracts ... in light of recent changes noted in this 25 report." 34 1 Now, back to the previous page, please, we saw at 2 the bottom there the reference to a final price of 3 508 million. Now, were you aware that before this 4 meeting, the consortium had sought a significant further 5 price increase? 6 A. Yes, I was. 7 Q. Can you remember approximately when you first became 8 aware of that? 9 A. I think it would be the day before the -- the meeting. 10 Q. Can you remember approximately how much more money the 11 consortium were asking for? 12 A. I think in the headline figure might have been sort of 13 around GBP9 million or GBP10 million. But that may be 14 wrong. 15 Q. It was certainly several millions of pounds? 16 A. Yes. 17 Q. Now, we've heard from Mr Aitchison that members were -- 18 other than Councillor Dawe, not told of that price 19 increase request, either before or during the meeting on 20 1 May 2008. 21 Were you aware that members were not going to be 22 told about that? 23 A. Well, I was at the meeting, yes. I think that clearly 24 nothing had been known about that when the report was -- 25 was signed off. That's clear. 35 1 Very late, either the day before or the day this 2 further request came in from the consortium, it hadn't 3 been agreed at that stage, and no part of it had been 4 agreed, and tie were confident that there were -- they 5 were pushing back. So the position was in a state of 6 flux, and it certainly wasn't a satisfactory position 7 for the Council to be in. 8 I think, when I look at it now, certainly the 9 wording in the report is loose, and to say final price 10 was incorrect. It should have read at that stage 11 estimated or anticipated final price. 12 Q. So do you accept, looking back, that the report was 13 potentially misleading in representing to members that 14 this was a final price? 15 A. When it was considered, not when it was crafted and 16 signed off. But when it was considered, I accept that 17 it should have -- it should have been -- it should have 18 been estimated or anticipated final price. 19 Q. Now, if you were present at the meeting, why didn't you 20 flag up that problem to members? 21 A. Well, because it wasn't yet clear whether or not any 22 part of that price request, as it was, was going to be 23 agreed, and in the event subsequently that it might be 24 agreed, then it was accepted that we would have to 25 report back to members. 36 1 Q. But you have accepted today that that wording is 2 inaccurate, and I suggest potentially misleading. So if 3 you are sitting at the meeting, knowing members have 4 this report before them, with in your acceptance, an 5 inaccurate representation as to the final price, then 6 why not speak up and address that inaccuracy and correct 7 that matter? 8 A. Well, really because of what I've said, that there 9 was -- there was no decision at that time as to whether 10 any of that request was going to be granted, and if it 11 had subsequently been granted, there would have been 12 a route back to the members to explain what had happened 13 with the further movement in price. 14 Q. But if you accept what is said in the report is 15 inaccurate, you must have sat in the meeting and 16 knowingly allowed that inaccuracy to go to members. 17 A. No, the final price hadn't changed at that time. The 18 final price was still -- the expected final price was 19 still the expected final price, but I agree the wording 20 in the report is not correct. 21 Q. Yes, and you've had to put in the word "expected" before 22 "final price", to make it -- 23 A. Yes. 24 Q. -- more accurate. But the point in short, Mr McGougan, 25 you must have known at the meeting that members were 37 1 being told something that was inaccurate, on your own 2 admission today? 3 A. No, I didn't know that definitively, because that may 4 well still have been the final price. 5 Q. I'll move on, please, to the next report. It's 6 a meeting of the Policy and Strategy Committee on 7 13 May 2008. 8 Could we have the report, please. It's USB00000357. 9 Go, please, to page 3, we'll see again this is by 10 Mr Aitchison. We see his name there. 11 Back to the first page, please. I think this is 12 then the final report that goes to any member before 13 contract award. 14 Would you have been present at this meeting? 15 A. Yes, I was. 16 CHAIR OF THE INQUIRY: Can you just help me. I see it's 17 a B agenda, which is not in the public domain; is that 18 right? 19 A. That's correct, my Lord. 20 CHAIR OF THE INQUIRY: Could you help me why it says "tabled 21 item". What is a tabled item? 22 A. A tabled item is an item that's been prepared after the 23 circulation date and is put round the -- the table to 24 councillors on the date at the start of the meeting. 25 CHAIR OF THE INQUIRY: So this report was given to 38 1 councillors at the start of the meeting? 2 A. Yes, that's correct. 3 MR MACKENZIE: What I would like to do, Mr McGougan, is 4 simply quite shortly put some matters to you which the 5 report doesn't mention for your views. 6 Now, firstly, there's no mention in the report of 7 any difficulties or delay with design, the extent to 8 which design was incomplete, and the number of approvals 9 and consents that remained outstanding. Do you have any 10 comments on that? 11 A. No, the issue of design had been dealt with as far as 12 was required in previous reports to the Council. 13 Q. There's no mention of any difficulties or delays with 14 the MUDFA works. Do you have any comments on that? 15 A. No. 16 Q. Were you aware at this time of any difficulties and 17 delays with the MUDFA works? 18 A. No, this was two weeks after the previous report that 19 we'd discussed, Mr Mackenzie. 20 The purpose of this report, as I recall, was to -- 21 to rectify the issue that we had just been talking 22 about, that the final price was no longer the final 23 price and there was another -- another uplift. 24 Q. There's also no mention of the fact, again like the 25 previous report, that the price was subject to a long 39 1 list of Pricing Assumptions, some of which were known to 2 be untrue, and which resulted in Notified Departure or 3 departures after contract close, with the resulting 4 increase in price. Do you have any comment on why the 5 report doesn't mention that? 6 A. No, my comment would be the same as the -- the Council 7 report of 1 May. 8 Q. Looking back with the benefit of hindsight, do you 9 consider that this report supplied members with accurate 10 and sufficient information to enable them to come to an 11 informed decision? 12 A. Yes. They were being asked to deal with the matter of 13 the further uplift in price since consideration of the 14 matter at the Council meeting on 1 May and give 15 authorisation then to tie to enter into the contract. 16 Q. Also, I think on the same day, a further note to 17 Mr Aitchison was signed. If we can go to that, 18 please -- 19 CHAIR OF THE INQUIRY: Before doing that, this was a meeting 20 of the Policy and Strategy Committee which I think you 21 explained is a procedure that can be used in between 22 Council meetings; is that right? 23 A. The Policy and Strategy Committee had a -- a remit. It 24 was a very important standing committee of the Council, 25 and dealt with, as the name suggests, matters that were 40 1 of a policy and strategic nature. So it was the most 2 important committee of the Council, I would suggest, and 3 it met on a -- I think a monthly or a six-weekly basis. 4 CHAIR OF THE INQUIRY: Do you know what other business the 5 Policy and Strategy Committee were dealing with that 6 day, apart from the tram? 7 A. I can't recall, but that will be a matter of record. 8 CHAIR OF THE INQUIRY: Yes. I was just wondering why this 9 item was tabled. 10 A. I think it was tabled because we were coming to the 11 conclusion of these protracted contract negotiations, 12 and it was difficult to bring together the report until 13 after everything that we could have done was -- was 14 fully resolved. 15 We thought we were in that position on 1 May, but 16 clearly matters were raised thereafter. So it was -- it 17 was to allow tie to conclude negotiations again with the 18 contractor prior to submitting the final report to the 19 members; and we were more careful, I think, in the 20 wording here about what the cost represented, because 21 there was an allowance, something put in about if there 22 were any minor changes thereafter, then that could be 23 addressed. 24 CHAIR OF THE INQUIRY: But by tabling the report, you don't 25 really give councillors any real opportunity to consider 41 1 the contents before being asked to vote on them. 2 A. That's a difficulty certainly, but there were briefings 3 for all the political groups arranged in -- in advance 4 of this meeting, because we knew the report was going to 5 be tabled, and because it was a further change to what 6 had been advised to the Council on 1 May. 7 CHAIR OF THE INQUIRY: Thank you. 8 MR MACKENZIE: Now, if we look at another document, please, 9 CEC01244245. This is the note, I think you signed, 10 along with Mr Anderson who was the new Director of City 11 Development, and the Council Solicitor, to Mr Aitchison. 12 I think we can see, if we blow up the beginning, the 13 first few lines, we can see yourself, and the others: 14 "... hereby advise and confirm that, taking into 15 account all the circumstances, we consider it is 16 appropriate to support and agree with tie's 17 recommendation to you that there is now an imminent 18 financial close to this project." 19 Now, can you recall what steps, if any, you took to 20 satisfy yourself that it was appropriate to sign this 21 note? 22 A. Well, I was signing this note after considerable work 23 that had been undertaken in the period from the Final 24 Business Case report in December 2007 to this date in 25 May 2008. 42 1 So this is an accumulation of all the activity and 2 diligence that had gone in to the project in that 3 process, both within tie and from the Council side. 4 Q. Were you aware whether any members of your team 5 continued to have concerns about entering into the 6 contract? 7 A. I was aware that Ms Andrew still felt uncomfortable that 8 she didn't have 100 per cent understanding of the risks 9 related to the contract. 10 Q. Maybe she was right to be uncomfortable, given what 11 happened. 12 A. Yes, I think -- I think she was right to be 13 uncomfortable, given what happened. 14 Q. But you didn't share her concerns? 15 A. I had concerns about risk in relation to the project. 16 We'd been through a process of reviews of how risk was 17 being dealt with, and the OGC and Audit Scotland had 18 both confirmed that that was best practice in relation 19 to what they'd found. 20 Our own people had been involved in the review and 21 the build-up of the QRA over a period of time, but there 22 was a very complex set of contract documents and it was 23 a very complex project. So clearly there would have 24 been concerns about risk. 25 There were risk allowances made against that risk 43 1 which were felt to be adequate, and beyond that we were 2 now at a position where I think the total costs 3 including the risk allowance was 512 million. 4 That left 33 million between that sum and the 545 5 funding envelope that was available for the contract. 6 So that's the same again provision for risk that could 7 have been needed in what we thought might be extremis. 8 So my concerns about the risk were -- well, the 9 final -- the final position we'd arrived at, if you'd 10 said to me which are the two areas, one would have been 11 the new area, because it was new, but also the other one 12 would have been the figure that had been included for 13 value engineering in the contract, which was felt to be 14 challenging. 15 Now, tie and the contractor had had discussions on 16 that, and we'd got back a confirmation that that would 17 be capable of being secured over the time of the 18 contract. But it was by no means guaranteed. 19 But I felt that the risk allowance in total and the 20 headroom that was available beyond that should avoid any 21 significant financial problems for the Council in taking 22 the matter forward. 23 Clearly that wasn't the way that the project turned 24 out. 25 Q. When you mention that both the OGC and Audit Scotland 44 1 had both confirmed that best practice in relation to 2 risk was being followed, that presumably was based on 3 the statistical approach to quantifying risk we 4 discussed yesterday? 5 A. Not just the statistical approach, I think, but the 6 overall approach to risk, including risk management and 7 mitigation. Although the OGC had an earlier report, 8 I would say, and I think it was -- I think it was one of 9 the reports that Transport Scotland commissioned, that 10 they weren't -- they weren't fully content with the way 11 that risk management was being undertaken. You know, 12 once the risk had been identified. 13 But the Tram Project Board, I think, had, from that 14 date, a very clear focus on risk management, and used to 15 consider the risk register at every meeting. 16 Q. The fact that Audit Scotland and the OGC considered that 17 best practice was being followed in relation to risk 18 then included -- there may be other things, but it 19 included the fact that a statistical approach was being 20 implied to quantifying risk? 21 A. Oh yes, I was just trying to say it wasn't just the 22 statistical approach. It certainly did, yes. 23 Q. I understand. 24 Now, just so I can try and be quite clear, please, 25 we're now at financial close on 13 or 14 May 2008. Can 45 1 you recollect your understanding at that time of the 2 extent to which there were likely to be post contract 3 changes that would increase the cost of the project? 4 A. I think tie and CEC as client were very clear that they 5 would not initiate any post contract changes that were 6 going to impact on the programme or the cost. So the 7 areas where there would be post contract changes would 8 be in relation to the design where we had been assured 9 that normal design development from BDDI to issued for 10 construction was a risk for the contractor, and the 11 areas of potential delay in relation to approvals and in 12 planning and in the roads area, and the Council had 13 supplemented the staff in both those areas to ensure 14 that there was no delay once the contract drawings came 15 to the Council. 16 Q. We've heard a lot in the Inquiry about Schedule Part 4 17 of the Infraco contract which contained the pricing 18 provisions. Were you aware of Schedule 4 at the time of 19 contract award or just before it? Is that a term that 20 had been discussed at all with you or in your presence? 21 A. I certainly was never at a specific meeting that 22 discussed the point or importance of Schedule Part 4. 23 My understanding of that would be there had to be 24 some method of pricing, if there had been a change that 25 was down to the public sector. Something like, well, we 46 1 knew there was -- there wasn't a likelihood of tie or 2 CEC instituting a change, but if there had been, then 3 there had to be a way of setting prices for that. 4 There was three areas of the contract where we had 5 provisional sums, and those were in respect of areas 6 where design couldn't have been completed because there 7 were other major works scheduled round about. One was 8 at Forth Ports. One was at Picardy Place, and I think 9 the other one might have been Murrayfield, because of 10 flood prevention works. 11 But in those cases, when those provisional sums 12 moved to a design being available, and additions to the 13 programme being brought in, in respect of that, then we 14 needed a method of pricing changes like that. 15 Q. Now, you've mentioned before you were aware of 16 a Notified Departure, a likely Notified Departure in 17 relation to the design programme and construction 18 programme mismatch. You've also mentioned a reference 19 to the close report. Presumably it's correct to say you 20 would have been fully aware of all of the contents of 21 the close report and the other documents, company 22 documents produced by tie at that time? 23 A. Fully aware, there were schedules to the close report 24 that were over 100 pages long, and I think the extent of 25 the document was such that I was looking at the 47 1 executive summary, if that's correct title, of the close 2 report, and we were relying on tie for -- to draw to our 3 attention and they should have brought out in that 4 executive summary any material impact that was included 5 in all the appendices and the schedules. 6 Q. I think the actual close report from memory is something 7 like perhaps 50 or 60 pages. I may be wrong, but it's 8 of that magnitude, I think. 9 Presumably you would have been aware at least of the 10 main body of the close report -- 11 A. Yes. 12 Q. -- if I can put it that way? 13 A. Yes. 14 Q. You would have been aware of the matters within the main 15 body of the close report? 16 A. Yes. 17 Q. I think there was also a report on what had happened 18 around financial close. You may recall that was sent as 19 well. Presumably you were aware of that and had read 20 that as well? 21 A. Yes, the recent events report. 22 Q. Did you ever, at a later point, see a copy of Schedule 23 Part 4 of the Infraco contract? 24 A. No. 25 Q. So you've never read that? 48 1 A. No. 2 Q. So you've always been reliant on what others were 3 advising you as to its contents? 4 A. Yes. 5 Q. I won't ask you about that then. 6 I would like to move back to the risk allowance and 7 the question of the QRA. If I can start, please, with 8 an email, CEC01506052. 9 I don't think you'll have seen this before. It's an 10 email from Mark Hamill of tie, 3 March 2008, to 11 Duncan Fraser and to Alan Coyle. 12 Subject: Risk Allocation Summary Workbook, 13 attachment risk allocation summary. 14 I think we can see the text: 15 "Duncan/Alan 16 Stewart [McGarrity] asked me to send on the 17 attached document. 18 Please note that this document is strictly work in 19 progress at this moment and should be regarded as being 20 for information only." 21 Then reference to a meeting. 22 If we then go to the document, it's CEC01506053. 23 It's a spreadsheet, so bear with me. 24 If we go, I think, to the tab summary P80, no, it's 25 not that one. 49 1 Maybe it was the one we had opened. 2 If we can scroll to the right-hand page, please. 3 Now, I think we can see a figure, if we look at the 4 bottom, we see the totals row, and then at the far 5 right, the bottom right, we see a figure, I think, of 6 27.938, I'll round it up, 27.938 million. Do you see 7 that? 8 A. Yes. 9 Q. Now, I understand that to be the QRA figure for risk 10 produced by the statistical analysis at that time. 11 I think that is -- appears to be based on a P80. 12 What's the reference to P80? 13 A. Is P80 the probability that it's an 80 per cent chance 14 that the risk will come within that total? 15 Q. And I think the report to Council in October 2007 we 16 looked at before was based on a P90. Is that correct, 17 a higher probability? 18 A. I'll -- I think I remember that from yesterday. 19 Q. And what's the effect of using a lower probability 20 figure? Does that mean it reduces the risk allowance? 21 A. In total, I think it would. 22 Q. Yes. So that's the figure, the 27.938 million that the 23 statistical analysis is producing at this stage. We saw 24 the covering email, Mr Hamill explained that as being 25 a strictly work in progress. 50 1 We then please go to a different email. It's 2 CEC01245223. We can see the second half of the page, an 3 email from Stewart McGarrity of tie of 15 April 2008 to 4 Alan Coyle, copied in to others, including 5 Rebecca Andrew, and we see: 6 "Alan. 7 Attached are two files: 8 1. The cost analysis spreadsheet which you know 9 and love ..." 10 I won't pass any comment on that: 11 "... which I have updated to reflect the very last 12 knockings on Infraco price but which does not change the 13 budget." 14 If we go to the spreadsheet, it's CEC01245225. It's 15 not as bad as it looks. If we carry on going to the 16 very bottom, please, we'll take refuge in the nicely 17 coloured blue box at the bottom. We can see a summary 18 of the risk allowance analysis. 19 If we go to the right-hand column, do you see again 20 the figure appearing, the 27 -- I'll round it up -- the 21 27.938 million. 22 A. Yes. 23 Q. That's the outcome of the statistical analysis at this 24 stage. 25 In short, it's the same figure as we saw Mr Hamill 51 1 had sent with his email of 3 March 2008. That's 2 correct, isn't it? It's the same figure. I should just 3 explain there is an error in how this is presented. 4 Do you see in the right-hand column a zero? Do you 5 see -- 6 A. Yes, yes, I do. 7 Q. That should in fact be at the very top, and every number 8 above that, should drop down one, and if we look at the 9 left-hand column, do you see the reference to 10 Infraco/tram procurement? 11 A. Yes. 12 Q. There's a figure given there for the 6.872. 13 A. That should be zero. 14 Q. I think we have heard evidence in fact, that should be 15 zero, because at the time of contract close, those 16 risks -- 17 A. That had been closed down. 18 Q. -- procurement risks were being reduced to zero. Just 19 by way of explanation, in short, that zero should 20 migrate to the top of that column, and all the other 21 figures in that column should go down one. That's the 22 first thing to notice, that the outcome of the 23 statistical analysis is the same as before. It's still 24 the 27.938. 25 The second thing to notice is we see after the QRA 52 1 total certain additions, namely for non-delivery of VE 2 included in Infraco price, GBP2 million, and then extent 3 of road reinstatement, GBP2 million, and unspecified 4 risks (contingency), GBP409,769. 5 So we've heard evidence that these additional 6 allowances on top of the QRA total were essentially 7 added by human judgement, if I can put it that way? 8 A. Yes. 9 Q. Were you aware that was happening at the time? 10 A. I think there was reference to that in the close report, 11 that they were taking a QRA figure and adding a manual 12 adjustment. 13 Q. I understand. 14 A. So I've got some recollection of that. 15 Q. I see. We can check that for ourselves. 16 So that appears to be a departure from the previous 17 approach which I think OGC and Audit Scotland had looked 18 at and approved, and which had been reported to members 19 in the October 2007 report of using a statistical 20 analysis to arrive at this risk allowance. Do you agree 21 with that? 22 A. Yes, but I would point out the manual adjustments and -- 23 in an upward direction. So it's adding in further 24 provisions for risk, rather than reducing it. 25 Q. Why not put the items that have been added manually into 53 1 the statistical analysis to see what is produced? 2 A. I have no idea. I'm sorry. 3 Q. Would that not be a better approach; if it's considered 4 that there is a validity and good sense in using 5 a statistical approach, why not do that for all risks? 6 A. Well, I mean, I honestly don't know. I would imagine 7 that they would run this on a regular basis, but not 8 possibly run it every -- every day. But in the run-up 9 to contractual close, it would have been ideal practice 10 to stick to the arrangements that had been put in place 11 all the way through the project. 12 Q. Now, we have also, I think, noted that this is based on 13 a 80 per cent confidence level, rather than the 14 90 per cent confidence level reported to members in 15 October 2007. Can you recall whether members were ever 16 advised that an 80 per cent confidence level to risk was 17 now being used? 18 A. No, I can't recall that. I can't recall the -- the 19 advice and the change even coming to myself. I can't 20 recall us drawing that to the attention of members. 21 Q. From what you said, can you not recall yourself whether 22 you were aware that an 80 per cent confidence level was 23 now being used? 24 A. That's correct, I can't remember that. 25 Q. Sticking with the QRA total of 27.938 million, we've 54 1 seen that's the same QRA total that had been included in 2 the spreadsheet sent by Mr Hamill on 3 March which was 3 described as being a work in progress. 4 Does that give rise to any concerns, being told that 5 now? 6 A. No, I'm -- I'm -- I wasn't exposed to any of this 7 correspondence or any of these iterations, Mr Mackenzie. 8 So I'm -- I'm not really in a position sort of -- 9 I don't know how many years later, to start commenting 10 on the detail of it. 11 Q. Is your position in short you were reliant on tie on 12 these matters? 13 A. No, tie were sharing information with people in the 14 Council. 15 Q. Now, we've also heard evidence, I think, that the QRA 16 computer model was not in fact re-run between 17 approximately 1 March 2008 and financial close in 18 May 2008. Were you aware of that at the time? 19 A. Yes, I think I did -- well, I'm not sure -- I wasn't 20 aware of the dates. I thought that we'd got an updated 21 QRA some time in early April. And I'm really relying on 22 my memory of the close report in relation to all of 23 this, but as I said earlier, I knew that there were 24 manual adjustments to the risk allowance in the close 25 report, and that the QRA wasn't run at the last minute, 55 1 after everything that was known about the contract -- or 2 everything that could have been known about the contract 3 was known. 4 Q. If it is correct that the QRA, the statistical model 5 wasn't re-run between 1 March 2008 and contract close, 6 would that surprise you? To hear that? 7 A. I wasn't familiar enough with the mechanism of how the 8 QRA was updated and at what frequency to be surprised by 9 it. But I did say in response to an earlier question 10 I would have envisaged the QRA being updated certainly 11 closer to financial close. 12 Q. Closer to financial close than 1 March? 13 A. Yes. 14 Q. Thank you. I finish this line, please, with another 15 email, CEC01288043. 16 We can see this is an internal tie email from 17 Mark Hamill, dated 27 May 2008, to Steven Bell, 18 Stewart McGarrity, Susan Clark and Dennis Murray. We 19 see the subject is "Private - QRA at Financial Close", 20 sensitivity: confidential. 21 Mr Hamill states: 22 "Please see attached spreadsheet which I have 23 updated following our meeting last week. As agreed, 24 risk ID343 ..." 25 That's the one in relation to general programme 56 1 delay: 2 "... which allows for delays has been reduced by 3 GBP1.3 million which means we now have GBP5.187 million 4 against this risk and, accordingly, the overall risk 5 allocation has reduced by GBP1.3 million to 6 GBP26.637 million." 7 Then: 8 "One thing which we all need to be aware of is that 9 it is not possible to reduce the value of one risk in 10 the QRA without affecting all the others. This is 11 because the P80 allocation is driven by total mean sum. 12 Therefore, in order to get round this problem, I have 13 basically 'pockled' the spreadsheet and hard-entered 14 some values. This solves the problem and helps us get 15 the final result past CEC as I doubt they will notice 16 what I have done." 17 It goes on: 18 "I will revert to normal practice for future QRAs, 19 however in this instance I think this is the best way 20 to do it in order to avoid unnecessary scrutiny from our 21 'colleagues' at CEC." 22 "colleagues" in quotation marks. 23 "Please confirm you are content with this approach 24 or otherwise by close of play on Friday ... I will take 25 no response as acceptance." 57 1 I think in short this had been prompted by a request 2 after contract award from the Council for a version of 3 the QRA as at contract award. 4 What I think has happened is that Mr Hamill has used 5 the QRA spreadsheet we've looked at, and essentially has 6 manually entered the figure for programme delay, rather 7 than re-running the QRA software, and I think then that 8 QRA spreadsheet with that one figure manually entered is 9 then presented to CEC. 10 Now, I take it this is the first time you have been 11 aware of this matter; is that correct? 12 A. Yes, that's correct. 13 Q. So what are your views on having that explained to you 14 and reading this email yourself? 15 A. My first reaction is great surprise, maybe even shock. 16 I think if this is what it appears to be at first 17 reading, and I can't think it's anything else, I think 18 it's disgraceful. 19 I think, as well, the fact that Stewart McGarrity's 20 name is on the email is of concern to me because Stewart 21 was Finance Director, and a significant part of my 22 reliance on tie's expertise was in relation to him and 23 his background, and also Graeme Bissett as the 24 consultant to the tie Board who had very significant 25 commercial experience. 58 1 So I took great comfort from Stewart's 2 infrastructure and Financial Director background and 3 Graeme's commercial experience, and on the face of it, 4 this looks like sharp practice. 5 CHAIR OF THE INQUIRY: What do you mean by sharp practice? 6 A. Unprofessional misleading conduct. 7 MR MACKENZIE: Why do you say that? 8 A. Because on the face of it it appears that the QRA 9 element or aspect of calculating the risk allowance is 10 being -- "pockled" is the word that's used, but 11 certainly being artificially altered to change the 12 result that should come out to give a proper indication 13 of what the risk was at financial close on a P80 basis. 14 Q. Do you regard that as an honest approach? 15 A. No. 16 Q. Now, if you had been aware at the time that this had 17 happened, namely a QRA spreadsheet had been sent to the 18 Council with one of the figures entered manually, if 19 that had been explained to you at the time, what would 20 you have done, if anything? 21 A. Well, if -- this if that happened, and one of the 22 figures had been entered manually, and there was an 23 explanation given for it that I could understand and 24 appreciate and it was a proper explanation for 25 a reasonable purpose, then I would -- I would have had 59 1 to satisfy myself as to that. 2 If it wasn't, if it was to artificially change 3 a figure to appear to comply with, say, a figure that 4 had been disclosed in the close report, then, to be 5 honest, I would have had to think carefully about what 6 to do. I don't think I could give you an answer 7 immediately, but that would have very serious 8 consequences, I feel. 9 Q. But at the very least, you would have wanted CEC to be 10 told that this is what had been done? 11 A. Absolutely. 12 Q. Can you also see the reference to -- I think: 13 "... I think this is the best way to do it in order 14 to avoid unnecessary scrutiny from our 'colleagues' at 15 CEC." 16 Does that cause you any concern? 17 A. Yes, absolutely, and particularly with "colleagues" 18 being in inverted commas. I think that adds to the 19 concern. 20 Q. In what way? 21 A. Well, there's a suggestion there we weren't really 22 colleagues. 23 MR DUNLOP QC: My Lord, can I just, especially given the 24 content of the present discussion, if your Lordship has 25 on the screen a couple of answers ago. DLA have been 60 1 mentioned, I'm pretty sure inaccurately in terms of the 2 [draft] transcript. I want to make sure that's 3 clarified. 4 What's been recorded [draft transcript] is: 5 "If it wasn't, if it was to artificially change 6 a figure to appear to comply with, say, a figure DLA has 7 been disclosed in the close report..." 8 I'm pretty sure the witness had said "a figure that 9 had been disclosed in the close report". 10 CHAIR OF THE INQUIRY: I can't find -- can you give me the 11 number? 12 MR DUNLOP QC: It's [draft transcript] line 59:15, my Lord. 13 CHAIR OF THE INQUIRY: Yes. And what do you say was said? 14 MR DUNLOP QC: My understanding is the -- the witness said: 15 "If it wasn't, if it was to artificially change 16 a figure to appear to comply with, say, a figure that 17 had been disclosed in the close report ..." 18 CHAIR OF THE INQUIRY: I think that's right. 19 A. Yes, I didn't mention DLA. 20 MR DUNLOP QC: I'm obliged. 21 MR MACKENZIE: This may be a suitable point to pause. 22 CHAIR OF THE INQUIRY: Yes. Very well. We will adjourn and 23 resume again at 11.30. This is to give the shorthand 24 writers a break, but you will get a cup of tea or coffee 25 if you want. 61 1 (11.11 am) 2 (A short break) 3 (11.32 am) 4 CHAIR OF THE INQUIRY: You're still under oath, Mr McGougan. 5 MR MACKENZIE: Thank you, my Lord. 6 Mr McGougan, I've been asked to clarify one matter. 7 Do you recall before the break we had discussed an 8 email from Mr Hamill of 27 May 2008? I think in 9 providing the context I had said this had been prompted 10 by a request by the Council for an updated QRA after 11 contract award, or words to that effect. 12 Could we also please go to a document TIE00352326. 13 Now, just before we look at this, in giving my 14 understanding of the context, that was based on my 15 understanding of the evidence that as part of the 16 various Council deliverables for contract award, the 17 Council wished an updated version of the QRA, and in 18 fact that hadn't been produced before contract award. 19 Do you have any recollection of that, Mr McGougan? 20 A. Yes. There was -- there was a list of Council 21 deliverables which was a bit of a mixture of a list. 22 There were things that were required to be seen before 23 contract was closed and there were also things that 24 would only be available once contract was closed, but 25 the Council would need to secure a copy as a kind of 62 1 audit trail for the review of the contract award once it 2 had been made. 3 So an update it was -- I think it would have been 4 described as an updated QRA was there. What we got in 5 respect of that was -- was a QRA I'd thought about early 6 April some time, updated manually. 7 Q. Did you understand there to be a further version of the 8 QRA again to be provided before contract close? 9 A. No. Not before contract close. Instead of -- we'd 10 initially expected a re-run of the QRA immediately 11 before contract close. What we got was a QRA which 12 I thought was dated about early April, but I would take 13 correction on that, with a manual update. 14 Q. Just to be quite clear, what was your understanding 15 after financial close as to whether an updated QRA was 16 to be provided? 17 A. Well, we would have possibly for bureaucratic reasons, 18 and I don't mean that disparagingly, I think to have 19 a record of where we are at a particular date, was 20 a requirement for the audit trail. 21 So we would be seeking if we could to get -- to get 22 possibly the full QRA rather than the QRA with the 23 manual adjustment. I don't think that's an issue that 24 would have concerned me personally too much, I have to 25 say. 63 1 Q. Thank you. What I would like to do is just be quite 2 clear we have the proper context for the email from 3 Mark Hamill we looked at before the break. 4 If we could perhaps go on to page 2 of this email 5 chain. Yes, go back to page 1, please. At the bottom 6 can we see an email from Mr Bissett dated 15 May 2008 to 7 Steven Bell and others, we can see there? 8 A. Yes. 9 Q. Subject, risk contingency. Over to page 2, please. 10 Now, we can see Mr Bissett says: 11 "After all the twists and turns of the last 12 fortnight, we need to arrive at a final form settled 13 base cost and risk contingency. I think it's important 14 that the baseline is crystal before change orders start 15 to appear from all quarters. 16 I suggest a discussion on Monday with Stewart 17 back ... 18 There are two groups of information relevant to 19 this: 20 The final deal terms paper ... 21 The subsequent SDS deal involved ... In both cases 22 there are options as to how the changes to base and risk 23 are reflected, as long as the totals in each case return 24 to the totals notified to the Council PSC on 13 May ... 25 This shouldn't be a major exercise but we need it 64 1 done and communicated soon." 2 Back to page 1, please, we then see an email from 3 Stewart McGarrity dated 19 May 2008, reference to: 4 "Following our meeting today - the attached wee 5 summary lays out a simple recon of how I think we get 6 from the last reported estimate ... to our final control 7 budget ..." 8 Do we then see "Mark will adjust the QRA 9 accordingly"? 10 I think that's the point I'd been asked to point 11 out. That this is the context for, I think, Mr Hamill's 12 email we looked at before the break. Do you see that? 13 A. Yes. Yes. 14 Q. Now, having had that pointed out, does that change in 15 any way the evidence you gave before the break when you 16 commented on the email? 17 A. I think I would still be expressing serious concerns 18 about this. It still appears to me that there's a risk 19 allowance reduction of 1.1 million being introduced, 20 simply to come back to the figure that was reported to 21 the Council at financial close. 22 So that still seems to me to be an artificial 23 adjustment to the risk allowance. 24 Q. I'll move on, please. 25 Another document, if I may, CEC01246990. 65 1 We can see this is a report to the IPG on 2 11 June 2008. If we can go to page 3, please. 3 Paragraph 5, "tie's deliverables for Contract Award", 4 states: 5 "Although good efforts have been made to conclude 6 the major contracts, information is still awaited from 7 tie Ltd regarding their deliverables for contract award. 8 To ensure good administration and to protect the 9 Council's interest, it is recommended that pressure be 10 put on tie Ltd to resolve this." 11 Now, can you remember which deliverables were 12 outstanding? 13 A. I couldn't go through and give you a list, Mr Mackenzie, 14 but there were deliverables that had been arrived at 15 possibly after the December Council meeting, that we 16 would be looking to have in place at -- or just after 17 contract close, and as I just said, I think I took these 18 to be a mixture of issues. Some things that clearly we 19 would need to have exposure to before authorisation was 20 given to contract close, but other things like a copy of 21 the actual SDS novation and the Tramco novation, which 22 would only be available after contract close. 23 So this was to my mind two things becoming slightly 24 entangled. But there were some documents we needed to 25 see to be confident to -- to agree contract close, and 66 1 there were also documents that we wished to keep as an 2 audit trail and, as it says here, I think they're saying 3 for good administration. 4 Q. Now, moving on, we know that after contract close, 5 a dispute or disputes arose between tie and the 6 consortium. Can you recollect when you first became 7 aware that a fairly major dispute had arisen? 8 A. No, I'm sorry, I can't. The timeline is a thing that 9 I have great difficulty with in terms of the passage of 10 time, I'm afraid. 11 Q. Now, in terms of -- we've also heard evidence about the 12 Princes Street dispute which arose in approximately 13 February 2009, I think. 14 A. Yes. 15 Q. Can you remember how and when you first became aware of 16 that dispute? 17 A. Not how and when, but I think -- well, when, it would be 18 in February, about 2009, I think, about the time of the 19 dispute. 20 How, no, I can't remember. But I -- no, I would be 21 speculating. 22 Q. Can you remember what you were told about the cause or 23 causes of the dispute? 24 A. My understanding of the cause of the dispute were the 25 underground conditions related to Princes Street and the 67 1 discovery of significant chambers underneath the street 2 level. 3 Now, previous to that, there had been reports to the 4 Tram Project Board about the contractor, sorry, were to 5 be allowed unfettered access to the site, and then the 6 Council decided that they would prefer to have a bus 7 lane, I think, and there were discussions took place 8 with the contractor at that time, but from memory, that 9 was a very small issue. A figure in 2,000 or 3,000, 10 maybe, no more. 11 And also it's something that the contractor was 12 taking a very positive approach to. But the bigger 13 issue, and the main issue to my mind, were the 14 underground conditions, which was a public sector risk. 15 Q. We go to an report to Council around this time. It's 16 CEC02083772. We can see it's dated 30 April 2009, is 17 the date of the Council meeting, and at page 10, please, 18 we see, I think, both your name, Mr McGougan, and the 19 name of the new director -- 20 A. Sorry, can I just ask to see the contact officer as 21 well, please, just to help -- thank you. 22 Q. So we see Alan Coyle and Andy Conway? 23 A. Yes. 24 Q. Both yourself and Mr Anderson. 25 Go to page 2, please, in paragraph 3.3 we see: 68 1 "Following the commercial difficulties experienced 2 between tie Ltd and BSC in Princes Street 3 a supplementary agreement has been entered into between 4 tie Ltd and BSC to allow progression of Princes Street 5 infrastructure works on demonstrable cost. This allows 6 the contractor to be paid on this basis, for 7 Princes Street works only, should they discover 8 unforeseen ground conditions. This represents no 9 further transfer of risk to the public sector." 10 Did that reflect your view at the time that this 11 agreement reflected no further transfer of risk to the 12 public sector? 13 A. Yes, because it was -- it was containable -- it was 14 contained to Princes Street. It didn't extend. It 15 didn't change the contract across the whole tramline, 16 and underground -- the risk related to ground conditions 17 was always retained as a public sector risk. 18 Q. Did you understand the price in respect of 19 Princes Street was likely to go up as a result of this 20 agreement? 21 A. Well, we had -- we had -- we had different discussions 22 on that, but I understood that it was likely to go up, 23 and I think -- I think the whole of Edinburgh understood 24 that it was likely to go up because this was something 25 that was extensively covered in all the press and was 69 1 discussed within the Council. 2 So I think we -- we recognised that there would be 3 a price issue, and I might want to go on and speak about 4 that, if you're happy for me to do that. 5 But in terms of the risks that were taken on by the 6 public sector at contract close, this was 7 a manifestation of these risks. It wasn't a new risk 8 that was being introduced to the public sector. 9 Q. What did you mean by the price issue, you recognised 10 there would be a price issue? 11 A. Sorry -- 12 Q. You said: 13 "... we recognised that there would be a price issue 14 ... might want to go on and speak about that, if you're 15 happy for me to do that." 16 A. Yes. 17 Q. What was it? 18 A. Well, the price issue was that we move to an agreement 19 whereby the work in Princes Street would be undertaken 20 on demonstrable costs and that was different from what 21 had been envisaged in the contract, and that was because 22 the contractor refused to work under the contract 23 because of the nature of the ground conditions that 24 they'd formed. 25 So demonstrable cost means I think the rates for 70 1 working and for materials were agreed, but the time was 2 variable. And that meant that there was -- there was 3 perhaps an increased -- well, no perhaps about it. That 4 meant there was an increased requirement for close 5 supervision and management of the works in 6 Princes Street to ensure that the contractor was not 7 taking more time than they should have for works of that 8 nature, because the cost was now dependent on the time 9 it took for the contractor to finish the job. 10 Q. I would like, please, to go to another Council report 11 that year, CEC00823532. 12 We can see this is to Council on 20 August 2009. 13 Again, please, start at page 10, just to check who the 14 report is from. 15 We see it's both yourself and Mr Anderson? 16 A. Yes. 17 Q. Please go to page 3. In paragraph 3.11 we see it 18 states: 19 "The lack of an agreed commercial programme, arising 20 from difficulties with the BSC consortium, and the 21 decision to apply formal contractual measures to resolve 22 the outstanding issues will present potential further 23 risks in relation to the attribution of additional cost 24 and delay to implementation, now forecast at spring 25 2012. tie Ltd has taken extensive legal and technical 71 1 advice, including Counsel's opinion, and is confident of 2 its position on the key matters in dispute. However, 3 given the nature of the process and the complexity of 4 certain issues, it is unreasonable to expect that all 5 adjudication outcomes will be awarded in favour of 6 tie Ltd and it will also be open to the ... consortium 7 to use the contract formally to pursue their 8 objectives." 9 A. Yes, could you remind me of that date again, please? 10 Q. Yes. The report to Council is 20 August 2009. 11 A. Thank you. 12 Q. Then the next paragraph we see that: 13 "Given the above issues, it is now considered that 14 it will be very difficult to deliver the full scope of 15 Phase 1a within the available project envelope of 16 GBP545 million." 17 Do you remember approximately when you first came to 18 the view that it would be very difficult to deliver 19 phase 1 within that budget? 20 A. Well, clearly it would be in advance of this report, and 21 I have to say that that surprises me because I thought 22 that was later on in timeline process. So I'm sorry, 23 I can't -- I can't answer the question fully, but if 24 this report was in August, then I would speculate that 25 it was -- it was a month or two months before that. 72 1 Presumably there would be Tram Project Board records 2 that perhaps could throw some light on that. 3 Q. We can check that later. 4 Now, the other matter is, moving on: 5 "Until the key issues are resolved through the 6 contractual and legal process, it will not be possible 7 to forecast accurately a revised budget outturn." 8 To pause there, did that in short remain the 9 position up until the Mar Hall mediation? 10 A. Yes. 11 Q. So it was very difficult for anybody really to 12 accurately forecast a revised budget outturn while these 13 key issues remained in dispute? 14 A. Absolutely. There were -- there were fundamental flaws 15 at the heart of the contract, and until they were 16 resolved, it was -- it was very difficult, if not 17 impossible, to give accurate estimates of programme 18 and -- and cost. 19 Q. Please look at page 4, in paragraph 3.16, can we see: 20 "The contract with the ... consortium prescribes 21 a timetable for resolution of contractual disputes and 22 it is expected that the budget and programme 23 implications will become much clearer by January 2010." 24 Now, did the budget and programme implications 25 become much clearer around January 2010? 73 1 A. No, they didn't. The resolution of the contractual 2 disputes became very complex and confusing, and tie 3 weren't as successful all the way through that process 4 as had been envisaged from the legal advice available, 5 and we had to move on to other alternatives which, you 6 know, took us, exploring and exhausting those took us 7 right through to August/September 2010 and beyond, right 8 through to mediation. 9 Q. We'll come back to adjudications very shortly. 10 Can I go to another document, please, to ask you 11 about in passing. It's CEC00688908. 12 This is a report to the IPG on 27 July 2009. If we 13 go over the page, please, just to explain the different 14 format, if we see in the third paragraph it states: 15 "The normal format for this report has not been 16 followed. Instead it has been replaced with a note from 17 the Director of Finance and a list of decisions that are 18 required to be taken to allow the completion of the 19 Council Report." 20 I think text was to be inserted by Alan Coyle. 21 If we go over the next page, please, we'll see, 22 I think, at the top of this tabular format: 23 "3. Decisions required to be taken for the 24 finalisation of the Tram Council Report on 20 August." 25 The bit I'm interested in, please, is on page 5. In 74 1 the box under "Options/Comment", it starts off by 2 referring to: 3 "Question of whether any bonus should be payable at 4 all now funding envelope likely to be exceeded for 5 completion of 1A in full and there is now significant 6 delay to completion?" 7 It's the next bit: 8 "ie on one view tie has failed to deliver as 9 promised (on their own admission tie admit that 40- 10 80% of changes and delay are down to them, not 11 BSC) ..." 12 To pause there, do you have any recollection of tie 13 admitting anything along these lines? 14 A. No, I was -- I was surprised by this figure in this 15 report, and I think it was taken back to tie, and it was 16 disputed. And I don't know that there was any proper 17 foundation for the wording that was included in this 18 report at that stage. 19 Q. What was your understanding during the dispute phase, if 20 I can put it that way, between contract close and 21 Mar Hall, so during the dispute phase what was your 22 general understanding of the extent to which, if at all, 23 any changes and delay were down to tie and not the 24 consortium? 25 A. Well, I think this to me focused on the interpretation 75 1 of the contract conditions about who was responsible for 2 evolution of design. 3 I think I said earlier that my understanding at 4 contract close was that the consortium had taken 5 responsibility for developing the base date design to 6 construction design, but it became clear that the 7 consortium had a completely different view, and that the 8 exclusions that were attached to that clause in the 9 contract about excluding shape, form, specification and 10 scope was -- was everything. 11 So we were faced with the prospect that everything 12 was a tie change and was down to them. So that would be 13 more than 40 to 80 per cent. That would be 14 100 per cent. And I think I should say that 40 to 15 80 per cent of changes are down to them, to tie, would 16 be -- who were they attributable to under the contract 17 conditions? It didn't necessarily mean tie had done 18 something wrong. 19 So that's -- that's the answer to your question 20 which I have now forgotten what it was, Mr Mackenzie. 21 So my apologies if I have not answered it properly. 22 Q. That's okay. 23 Moving on then, please, to 2010, and we know various 24 adjudication decisions started coming in, I think, from 25 late 2009 and then all the way through 2010, did there 76 1 come a point when you felt that tie were starting to 2 lose the adjudications and, if so, when and why? 3 A. Yes, I think the -- the adjudication decisions from the 4 start were -- were mixed, and I think we were saying and 5 being advised and saying that in terms of legal 6 principles, they were mixed and they certainly weren't 7 consistent all the way through the adjudication process. 8 But it became clear that in terms of -- I think we'd 9 probably be well into 2010 by now, that things were not 10 improving in relation to the results of the adjudication 11 for tie, and also the delays that were occurring as 12 a result were certainly not helping in getting a tram 13 built. 14 So tie's legal activity had to move on to 15 alternative strategies in developing a case to try and 16 ensure that the contractor would actually undertake the 17 work, on the basis that the quantum of the costs and the 18 apportionment of the costs would be decided later, 19 through some form of mediation or adjudication, but the 20 contractor wasn't prepared to -- to agree with that 21 route. 22 Q. I would like to go to a report to Council on 23 14 October 2010. It's CEC02083124. If we can go, 24 please, to page 9, I think we'll see again this is by 25 both yourself and Mr Anderson. 77 1 Then please, if we can go to -- 2 A. Sorry, are there any contact officers? 3 Q. Yes. 4 A. For this, just to help me. 5 Q. Last page, page 10, we'll see Alan Coyle and Nick Smith. 6 A. Thanks. 7 Q. If we can please go to page 7. In paragraph 2.50 I'll 8 let you read for yourself the initial bit, and then 9 you'll see what's said in the final sentence. (Pause) 10 Do you see the final sentence states: 11 "The overall outcome of the DRPs, in terms of legal 12 principles, remains finely balanced and subject to debate 13 between the parties." 14 Can you recollect, did that represent your views at 15 the time? 16 A. I thought that they were still mixed but we were on 17 a trend that tie wasn't being as successful as we would 18 hope they would have been. 19 In terms of legal principles, I think particularly 20 in this audience, I'm very wary of giving my view in 21 relation to legal principles, but I would say that we 22 were still getting advice that in terms of legal 23 principles, there was an argument to be had. 24 But the overall view was by then that even if you 25 won the argument, it still wasn't getting a tram built 78 1 because there were other clauses in the contract that 2 meant that the contractor could submit estimates which 3 were outrageously high, which had been determined 4 through adjudication, or indeed not submit estimates at 5 all; and tie couldn't force them through the contract to 6 get the work done. 7 So the difficulty we had was although there was 8 maybe still a legal argument to be had about the terms 9 of the contract, and I don't think it was ever bottomed 10 out, or has been bottomed out to date, that wasn't -- 11 even success in that area wouldn't have got us a tram 12 built. 13 Q. Now, I think you said there that. 14 "I thought that they were still mixed but we were on 15 a trend that tie wasn't being as successful as we would 16 hope they would have been." 17 Can you recall whether members were told at this 18 time that there was a trend that tie wasn't being as 19 successful as you would have hoped they would have been? 20 A. Absolutely. I mean, I think that -- I'm not sure if it 21 is in the report somewhere, or in terms of the 22 briefings. If tie had been as successful as we'd hoped 23 it would have been, then there would have been a totally 24 different report to members. 25 I think -- I mean, there's legal input to this 79 1 report from the contact officer, from City of Edinburgh 2 Council. So I would have my view on legal principles, 3 and I would guess he might have a more informed view. 4 Q. I think the suggestion in short, Mr McGougan, is that 5 while in the report members are being told that the 6 overall outcome of the DRPs remains finely balanced, in 7 reality the officers were aware that overall tie were 8 losing, but that that wasn't being reported to members. 9 Do you have any comments on that? 10 A. Well, one, I'm not sure if that's the case or not. But 11 if it had been, I think it might have been damaging to 12 tie's further attempts to secure other legal routes with 13 the contractors, to place that into a public document. 14 Q. This particular wording, is it fair to say that that's 15 really a matter within the realm of the Legal Department 16 and you as the Finance Director would be relying on your 17 legal colleagues to come up with suitable wording. 18 Would that be fair? 19 A. In terms of drafting the report, but to be clear, I was 20 signing it off with the Director of City Development. 21 So I have to take responsibility for that. 22 Q. So is that sentence consistent with your understanding 23 at the time, which if I can paraphrase, it seemed to be 24 you did understand tie were generally losing? 25 A. No, I don't think I said that. I think I said that over 80 1 the course of these disputes, we were on a trend where 2 tie were becoming less successful. But I think the two 3 things can be reconciled. 4 Q. tie becoming less successful doesn't seem consistent 5 with the outcome remaining finely balanced. 6 A. Well, I mean, in all of these reports, I think -- 7 I think there were 15 reports to Council after contract 8 close, and I think -- I think if you look over the whole 9 suite of reports, some of which are reasonably extensive 10 in length, then I think that the reporting, given the 11 commercial situation that tie and the Council were in, 12 was fair and reasonable, and we could have -- we could 13 have discussions about many, many different sentences in 14 any or all of these reports, but I think that the 15 wording there is defensible, given the commercial 16 situation that we were in. 17 Q. To what extent did the commercial situation affect what 18 members were told and how much information members were 19 given? 20 A. Quite significantly. And it also meant that wording was 21 incredibly important to CEC officials, but also to 22 people in tie and their legal advisers. So -- but quite 23 significantly. We were in a position where, as we've 24 said already, it was becoming very difficult, if not 25 impossible, to accurately forecast programme and cost 81 1 issues, but we did have iterations of that going on 2 within tie and in consultation with Council officers. 3 But there would be significant health warnings against 4 all of these figures, but we felt it was important not 5 to put them into the public domain because they would 6 simply act as a new baseline for the contractor to take 7 and to argue on top of. 8 Q. Would it be fair to say that these commercial factors 9 affected reporting to members both before and after 10 contract close? 11 A. Yes, because before we were -- we were not detailing 12 the -- the make-up of the risk pot into its individual 13 components, and afterwards, certainly, when we were in 14 the dispute process, we were keen not to give any 15 comfort at all to the contractor that we weren't 16 absolutely forced to. 17 Q. Can I move on, please, to Mar Hall, and the mediation 18 that took place in March 2011. Can I ask, first, 19 please, what was your involvement, if any, in the run-up 20 to Mar Hall and the preparations for Mar Hall? 21 A. In the preparations, I was involved in discussions at 22 a strategic level within the Council in terms of where 23 we found ourselves and what the possible or the 24 preferred outcome from the mediation was. 25 And I can go into a fair bit of detail on that if 82 1 you wish, but -- 2 Q. Are you able to summarise or give an outline of what the 3 Council's position was going into Mar Hall, in 4 particular what outcome were they seeking to achieve? 5 A. Yes. I mean, the key thing for the Council going into 6 Mar Hall was to come out with a solution that would 7 deliver an asset for the public of Edinburgh. 8 Things were -- it was clearer by this stage that all 9 the legal avenues other than termination had been 10 pursued, and they weren't capable of getting a tram 11 built. I think the Lord Dervaird's dispute adjudication 12 was key to that. That meant in layman's terms we 13 couldn't force the contractor to carry out the work and 14 adjudicate on the apportionment and quantum of costs 15 thereafter. 16 So we couldn't get the tram built at that stage, and 17 it was also clear that we had been pursuing as an 18 alternative strategy termination and reprocurement. But 19 we then, before Mar Hall, got legal advice through CEC, 20 not through tie, that what had been done in preparation 21 for termination to date was perhaps not on a sound 22 basis, and we may have to go back and recommence that 23 process. 24 So termination and reprocurement was an option which 25 was kept on the table, but it was much less in strategic 83 1 terms desirable than a settlement with the contractor to 2 complete a tramline with the revised scope. By revised 3 scope, I mean stopping at -- well, York Place, I guess, 4 but people kept saying St Andrew Square. 5 So it was certainly preferable in strategic terms 6 for the Council to reach a settlement with the 7 contractor. Termination and reprocurement would have 8 carried longer delays, was our view, and significant 9 risks, particularly if it was a hostile termination 10 would have been very much, much worse than an amicable 11 separation, if you like. 12 But either way, there would have been the problem of 13 integrating what was to be done with what had been done 14 before in different systems and various other issues 15 that would have made that problematic. 16 Q. Now, I'm so sorry, are you finished? 17 A. Well, in strategic terms, yes. I'll pause there. 18 Q. Thank you. 19 Moving on to Mar Hall itself, could I ask, please, 20 what was your involvement? 21 A. Sorry, I could go back and say more about how we 22 prepared, but at Mar Hall I was one of the team. There 23 was Council officials there. There were tie officials 24 and there were advisers. And I was present at Mar Hall 25 throughout the -- I think it was three days of 84 1 mediation. 2 Events at Mar Hall were -- sort of straying off the 3 question here, that's why I'm hesitating, but we can 4 come back to events. 5 But anyway, as it turned out, from our side, if 6 I can call it that, there were three principals 7 established early on at Mar Hall, which was Sue Bruce, 8 the Council's Chief Executive, Vic Emery, who was chair 9 of tie, and Ainslie McLaughlin, who was a representative 10 from Transport Scotland. 11 They took the lead role in the discussions with the 12 representatives of the consortium over a three-day 13 period. 14 My role was involved with -- within the team room 15 for CEC and tie, discussing the various options as they 16 came back from the negotiations between the principals 17 from either side, examining the costs or the estimated 18 costs which had come with very considerable health 19 warnings prior to getting to Mar Hall, and also 20 advising, together with Alan Coyle, on what the total 21 cost of the project would be following potential 22 agreements with the contractor. 23 I was also indicating in the discussions that just 24 as important as the price that was to come from any 25 settlement agreement, if that was possible, were the 85 1 conditions, because if we simply moved on to a higher 2 price with the same conditions, we could have been 3 exposed to further risk between reaching agreement in 4 mediation and completing a tramline. 5 It was very damaging for the Council and tie's side 6 at the discussions at Mar Hall that in their opening 7 statement, the contractor was able to demonstrate the 8 presence of significant utilities still in 9 Shandwick Place, when these should have been cleared, 10 I think, a year or maybe even 18 months earlier. 11 That meant that in the discussions that followed, we 12 weren't able to get the conditions that we would have 13 wanted attached to a settlement agreement for the 14 on-street works. 15 Q. Why were the Council unaware of the unresolved utilities 16 in Shandwick Place? 17 A. Well, we'd been advised by tie that the utility contract 18 was finished, and all the utilities had been moved. 19 It's not something that -- if you're -- if you're giving 20 an assurance as bald as that, I don't think it was 21 checked by Council officials. 22 Q. I think, from recollection, during 2010 there was 23 reporting to the effect that there continued to be 24 unresolved utilities. Are you saying your understanding 25 come March 2011 was that there were no longer any 86 1 unresolved utilities? 2 A. Well, I mean, I'll -- I'll take -- I'll take your 3 comments on board for that, but in my own mind I was 4 very, very surprised that there were unresolved 5 utilities to the extent that there were in 6 Shandwick Place. 7 Q. Now, we'll come very shortly to the agreed key points of 8 principle we looked at before. But can you remember how 9 and when these key points of principle were agreed? 10 A. These are key points of principle in the mediation 11 settlement; yes? 12 Q. Yes. 13 A. Yes. Well, the process was -- it was new to me, and it 14 was -- it was interesting, but I think it was clear that 15 for the mediator, he was seeking to explore the options 16 for settlement first, rather than mutual termination and 17 reprocurement, and that tied in with the strategic view 18 of the Council. So that was helpful. 19 There was a series of meetings between the 20 principles with offers and counter-offers, and they were 21 brought back to the team rooms, if I can call them that, 22 for extensive discussion, and there was also at least 23 one meeting where the commercial teams from both sides 24 were in a meeting together with the principals 25 observing. 87 1 That was to look at, from memory, one of the 2 counter-offers from BSC, which we had Steven Bell, 3 Dennis Murray and Alan Coyle taking part in a discussion 4 with the BSC commercial team in front of the principals, 5 to seek to resolve the gap that lay between what our 6 estimate of a reasonable cost would be for completing 7 the line to St Andrew Square, if I can just use that, 8 and what the BSC submission was. So as part of this 9 process of reaching agreement -- sorry -- 10 Q. I'm sorry. 11 A. -- there were -- there was a series of meetings, and 12 only one of them included people other than the 13 principals. 14 Q. Can you remember what the gap was at that time between 15 the two sides' positions for the cost of completing to 16 St Andrew Square or York Place? 17 A. No, but I can remember it was very significant. 18 Q. Thank you. 19 Could I then please go to the document CEC02084685. 20 I think we can see, if we blow up the top, the heading, 21 "WITHOUT PREJUDICE MAR HALL. AGREED KEY POINTS OF 22 PRINCIPLE". 23 And 1, we can see the price for 362.5 million for 24 the Edinburgh Tram Network from the airport to 25 Haymarket, et cetera. 88 1 Then 2 we can see, I think, in short, a target price 2 for the on-street works from Haymarket to 3 St Andrew Square of GBP39 million. 4 Now, you mentioned just shortly there, there being 5 a gap between the two sides' positions. The two sums we 6 see here, were they closer to the consortium's figure or 7 closer to the Council's figure? 8 A. I couldn't be definitive on that, but, I mean, I was 9 disappointed with the final price outcome. I think they 10 were possibly closer to the consortium's figure, but 11 I -- I wouldn't sort of be 100 per cent sure on that. 12 Q. I understand. 13 Now, what involvement, if any, did you have in 14 arriving at the two figures we see at paragraphs 1 and 15 2? 16 A. Really just in terms of the discussion after offers and 17 counter-offers were reported back. People were properly 18 on our side discussing whether these kind of levels were 19 appropriate, and whether -- or whether or not we would 20 have to go to reject it completely, not do a deal on 21 settlement, and move to the other alternative of 22 termination and reprocurement. 23 In those -- in those discussions I was clearly 24 seeking to get to an agreement on settlement because the 25 risk of not having an asset at the end of this process, 89 1 after all that the city had been through, and all the 2 costs that had been incurred, was to my mind much 3 greater under termination and reprocurement than 4 reaching an agreement on settlement. 5 But obviously cost would be a factor in that as 6 well, but strategically settlement would have been 7 quicker and a better chance of securing an asset. 8 Q. Did you agree to the figures we see in paragraphs 1 and 9 2? 10 A. Yes, that was the best outcome that we could come to in 11 the mediation, and although I was disappointed in the 12 quantum, and I was also disappointed that we couldn't 13 get better conditions for the part of the tramline from 14 Haymarket to St Andrew Square, so these were the two 15 aspects that I was disappointed in, but I fully 16 supported the fact that we'd -- the principals had 17 managed to secure this agreement. 18 Q. Are you able to give any explanation for how these 19 figures are broken down, or were they simply compromise 20 figures? 21 A. Well, the best people to answer that question would be 22 the principals, but I would -- I would say they were 23 compromise figures after a series of commercial 24 discussions. 25 Q. Did you consider that the settlement figures were 90 1 reasonable? 2 A. In all the circumstances that we found ourselves in, 3 I was prepared to support the settlement figures. 4 I think -- I think the term "reasonable" and my view of 5 what had happened over the two and a half years prior to 6 that are difficult to reconcile. But they were 7 affordable. 8 Q. Does that mean in short you didn't consider the 9 settlement figures reasonable, but having regard to the 10 bigger picture, you thought it was a price worth paying? 11 A. Yes, absolutely. 12 Q. Now, I think tie's position before Mar Hall was that it 13 would have been cheaper to terminate and then reprocure 14 the works than settle at the sums agreed at Mar Hall. 15 Were you aware of tie's position in that regard? 16 A. Yes, I was, and there were discussions on that aspect 17 during the mediation, and before, indeed. But it was -- 18 it was very clear to me that the risks associated with 19 termination and reprocurement were not fully built into 20 tie's figures; and just as -- the prime example of that 21 is that we had -- we had had recent advice that the -- 22 the base for termination, the groundwork for termination 23 which had been carried out up until that date, or at 24 least until the end of 2010, was not sound. 25 So there would need to be another delay built into 91 1 termination and reprocurement there, and there were 2 a number of other issues raised by others, you know, 3 which highlighted the fact that it didn't take account 4 of issues about alignment of systems or about the delay 5 that reprocurement would take and the state of the 6 design, because I believe the design still wasn't 7 complete at this stage. 8 So we would have been -- we would have had to -- 9 certainly if we were reprocuring, we would absolutely 10 have had to have a final design and approvals before we 11 went back out to the market. So the cost of that delay 12 wasn't built in. 13 Q. I think we've heard evidence that on the first day of 14 the mediation, those negotiating for the Council came to 15 the view that approximately GBP150 million should be 16 added to the estimated cost of terminating and 17 reprocuring, which had the effect of making the Mar Hall 18 settlement figures less expensive than tie's favoured 19 terminating and reprocuring option. Is that correct? 20 A. There were discussions. I wouldn't have been able to 21 volunteer that it was 150 million at the end of it, and 22 there was significant health warnings against tie's 23 figures and tie -- tie were -- were agreeing that, that 24 there were a lot of risks that were difficult to 25 quantify. 92 1 There were a lot of big assumptions in the 2 alternative figures, if it was 150 million that was 3 added. I mean, I wasn't really experienced in the 4 concept of things like a toxic project risk, you know, 5 which it was argued that the market in responding to 6 a reprocurement would be very wary of it because of all 7 the things that had gone wrong in the past, and I don't 8 have any knowledge of how you would put a sum on that 9 kind of thing, Mr Mackenzie. 10 So I think there would be big health warnings 11 against the tie figures that they came in with, but also 12 perhaps the parameters we were trying to establish for 13 comparisons. 14 The key thing for me was, because of -- partly 15 because what the city has been through, as well as 16 anything else, was to go for the route with least 17 delay -- sorry, route is a bad word. For the option 18 with least delay and least risk, which was -- to my 19 mind, was clearly settlement, and if we paid more for 20 that through these prices than going out and 21 reprocuring, then that could still be better value for 22 money. 23 I'm reluctant to use the term, but better value for 24 money than termination and reprocurement because of all 25 the delays and all the risks attached to that second 93 1 option. 2 Q. Can you remember how and when members of the Council 3 were first informed of the Mar Hall Settlement 4 Agreement? 5 A. My understanding was that the Chief Executive met with 6 group leaders, I'm not sure whether individually or 7 together, on our return from Mar Hall, and notified them 8 of the principles of the agreement. 9 Q. On to a separate matter, please. We've heard some 10 evidence about a Minute of Variation 4 which I think was 11 signed in May 2011 in relation to certain priority 12 works, and included, I think, certain payments to be 13 made to the consortium, totalling, I think, 14 GBP49 million. 15 Was that something you were aware of? 16 A. Sorry, what did you say -- the figure was? 17 Q. Minute of variation -- 18 A. The figure. 19 Q. -- 4. Were you aware of that agreement? 20 A. Yes. That was considered by the Council in middle of 21 May. 22 Q. Yes. I think that's a report by Mr Anderson. I'll 23 explore that in more detail with him. 24 There's one aspect I would like to ask you about, 25 please. I think it's CEC02086879. 94 1 It's the email on the second half of the page. 2 I will come back to discuss that in more detail with 3 Mr Anderson, but we see it's from Steven Bell, dated 4 3 May 2011, to Dave Anderson, copied in to others, 5 including yourself. The email says: 6 "Dave, further to my email earlier this morning and 7 our conversation a few minutes ago, please find attached 8 a letter confirming the arrangements discussed at the 9 meeting held in Waverley Court on Thursday, 10 28 April." 11 Then go to page 3, please, to see the letter Mr Bell 12 sent to Mr Anderson. 13 We can see a letter, 3 May 2011, to Mr Anderson, who 14 at this stage is the tram project senior responsible 15 officer. The heading is "Planned Payment to Infraco 16 associated with Minute of Variation 4 ...". The first 17 paragraph states: 18 "We note that arrangements have been made by CEC to 19 enable payment solely based on the Hg Consulting 20 Certificate 1 for GBP27 million on Tuesday 3 May in line 21 with the agreed draft Minute of Variation 4 concluded 22 between CEC and Infraco on 16 April 2011." 23 As a point of detail, I think the actual parties to 24 that agreement may have been tie and the consortium, but 25 we can check. 95 1 Then it goes on: 2 "This payment is planned through the existing 3 process of CEC making funds available with it being paid 4 to Infraco through tie Ltd." 5 Then the paragraph down: 6 "This payment will be made on the basis of agreement 7 by CEC that they have the reasonable expectation that 8 MOV4 and the draft Certifier Agreement will be executed 9 as soon as they can convene a Council Meeting and that 10 the previously briefed risks are understood and accepted 11 for MOV4." 12 So on the face of it, I will explore this with 13 Mr Anderson, but on the face of it appears that 14 a payment of GBP27 million was made to the consortium on 15 3 May 2011, before the Minute of Variation 4 had been 16 signed. Were you aware of this matter? 17 A. Yes, I was -- I was aware of the matter at the time. 18 Q. So is it correct to say that that sum was paid before 19 the agreement was signed? 20 A. Yes. 21 Q. Why did that happen? 22 A. It happened because at Mar Hall, and this was one of the 23 conditions I should have mentioned that was also 24 important, the parties both decided to work in 25 a different manner, and to move towards these 96 1 agreements, but to show goodwill in the interim to 2 demonstrate that we were prepared to take a different 3 approach to executing the works and paying for the works 4 under the contract. 5 So the contractor initiated works in certain 6 priority areas in advance of MOV4 being signed, and it 7 was agreed that there would be a different approach to 8 certification in the future, with an independent 9 certifier, but that wasn't in place technically until 10 after MOV4 had been signed, but these payments were 11 payments that had been withheld by tie in the run-up to 12 the mediation and during the dispute process, because as 13 part of their levers for contract enforcement, there had 14 been work done that should have been payable under the 15 contract. 16 So it didn't have to wait for MOV4 because these 17 sums were due and payable under the existing contract. 18 MOV4 was in relation to different arrangements for 19 co-ordinating activity, but the revised approach to 20 contract delivery became in place immediately after we 21 came back from Mar Hall. 22 Q. So to be quite clear. Is it your position that the 23 payment of GBP27 million on 3 May 2011 was in relation 24 to work already done, and not work still to be done? 25 A. Yes. 97 1 Q. So on one view there was no need for that sum to be 2 included -- 3 A. Sorry, no, I'll just add something there, because, yes 4 is the answer, but in relation -- I think part of it 5 might have been in relation to Siemens' materials, and 6 that was the -- that was tie taking control of Siemens' 7 materials at this stage. 8 Q. So that perhaps wasn't work done so much as materials -- 9 A. That probably wasn't done before mediation, but had been 10 done since and was payable under the contract. 11 CHAIR OF THE INQUIRY: It hadn't been done at all, was it? 12 Siemens had pre-ordered materials and the Council were 13 paying for them. 14 A. Yes. I think the -- there were legal arrangements where 15 the Council were -- sorry, tie probably were taking 16 possession of the materials. 17 CHAIR OF THE INQUIRY: So it was not work. It's materials. 18 A. Yes. 19 MR MACKENZIE: Who was the officer in the Council who was 20 leading on this issue of Minute of Variation 4? 21 A. I would imagine it would have been Alastair Maclean, the 22 head of legal and administration. 23 Q. Can you recall whether members were told that this 24 payment of GBP27 million on 3 May was going to be made? 25 A. No, I can't -- I can't remember that. 98 1 CHAIR OF THE INQUIRY: Had councillors approved the deal by 2 then? 3 A. No. No, this was -- this was a payment made under the 4 previous contract arrangement, my Lord, which had been 5 approved by Council. 6 CHAIR OF THE INQUIRY: Yes. That's what the last paragraph 7 seems to suggest, that the payment wouldn't exceed the 8 authorised expenditure in terms of the original 9 arrangements. But once MOV4 is signed, it will exceed 10 the authorised expenditure; is that right? 11 A. It becomes a commitment to an amount in excess of the 12 authorised expenditure. But it wouldn't actually take 13 the expenditure over the limit, but becomes 14 a commitment, yes. 15 CHAIR OF THE INQUIRY: Now, does -- if this money related to 16 the purchase of the materials by the Council as a result 17 of the settlement, was that truly part of the original 18 contract? 19 A. No, it was -- technically the materials became the 20 possession of tie. So yes, it was part of the contract. 21 CHAIR OF THE INQUIRY: That tie would pay -- 22 A. Because we -- sorry, we had contracted to -- to build 23 a tramline to Newhaven. So tie would have been due to 24 pay that under the terms of the original contract. 25 CHAIR OF THE INQUIRY: Yes, but if the tramline had been 99 1 built to Newhaven, would tie have had to pay this 2 GBP90 million or whatever it was for that material until 3 the material was used? 4 A. That would have been a matter that would have been 5 resolved as the contract went forward. It would have 6 been -- yes, I think under the existing contract 7 conditions, tie may have been asked to -- to make that 8 payment in advance of it actually being used. But, 9 I mean, I think that's a top of the head answer, I'm 10 afraid, so ... 11 But it was certainly, to my mind, and I should have 12 perhaps said about mediation that the contractor was 13 adamant that the design to Newhaven had to be paid for 14 and the materials to Newhaven had to be paid for, 15 because effectively they were -- well, the design was 16 almost finished, and the materials had been ordered, and 17 produced. 18 CHAIR OF THE INQUIRY: I can understand that, and the 19 payment would then follow the Council's approval, if the 20 Council did approve the settlement. 21 A. These were matters that required to be paid under the 22 contract to build the tramline from the airport to 23 Newhaven in the initial stage. 24 CHAIR OF THE INQUIRY: Thank you. 25 MR MACKENZIE: What I don't perhaps understand, Mr McGougan, 100 1 is that if these sums were already due under the 2 contract, why then is there a need for Minute of 3 Variation 4? 4 A. Minute of Variation 4, I think, was documenting a range 5 of issues that had come out of the Mar Hall Agreement, 6 and was listing this one as well. 7 Now, I don't know what the actual terms and 8 conditions of MOV4 are, but there was a range of things 9 included in that, and also that this was -- this was 10 part of it. 11 But this was in response to the fact that MOV4 would 12 also deal with priority works, and the contractor was 13 demonstrating goodwill by executing them in advance of 14 MOV4 being signed. 15 So we were all trying to get to this revised sort of 16 method of working which would take -- was intended to 17 take the project forward to successful completion to, we 18 thought then, St Andrew Square. 19 Q. Presumably the sums totalling, I think, GBP49 million 20 paid under MOV4 were paid in the expectation that the 21 Council would approve the final Settlement Agreement; is 22 that correct? 23 A. These sums would have been due and payable anyway, 24 Mr Mackenzie. But they would definitely be partially 25 correct that this was a demonstration of goodwill to get 101 1 us to a position where we could build a tramline. 2 Q. To finish this line of questioning, if the Council at 3 the end of the day had rejected the overall Settlement 4 Agreement, what would have happened to the 5 GBP49 million? 6 A. Well, I'm not sure about the make-up of the 7 GBP49 million. This is 27 million we're talking about. 8 But these -- these materials would have rested with tie 9 and may or may not have been any use if we'd gone to 10 termination and reprocurement. 11 Q. Thank you. 12 Mr McGougan, the question of the tie bonus scheme, 13 could I ask which officer within the Council was 14 primarily responsible for oversight of tie's bonus 15 scheme? 16 A. The officer within the Council who was responsible for 17 the oversight of tie was the tie Monitoring Officer and 18 then subsequently the Tram Monitoring Officer. 19 So the bonus scheme would be part of that oversight. 20 Q. Did you have any oversight at all over tie's bonus 21 scheme or bonus payments? 22 A. No. 23 MR MACKENZIE: Thank you. 24 I think, Mr McGougan, you say in your statement that 25 you retired after the Council meeting on 30 June 2011. 102 1 So I'll pause matters there and I have no further 2 questions. 3 A. Thank you. 4 Questions by CHAIR OF THE INQUIRY 5 CHAIR OF THE INQUIRY: Could I just ask about utilities. 6 You said at one point that you understood that -- that 7 all of the utilities had all been moved at one point, 8 you said that. 9 A. Yes. 10 CHAIR OF THE INQUIRY: Could I just be quite clear, what's 11 your final position about that? Did you have 12 information or didn't you have information that all the 13 utilities had been moved? 14 A. My understanding -- my recollection of what my 15 understanding was at that time, going into mediation, is 16 that I thought all utilities had been moved. I may well 17 not have been correct. 18 CHAIR OF THE INQUIRY: When you say that was your 19 understanding, was that all the utilities between the 20 airport and York Place or was it all the utilities 21 between the airport and Newhaven? 22 A. I think it would be the former, my Lord. My mind had 23 stopped going anywhere near Newhaven some period before. 24 CHAIR OF THE INQUIRY: Do you have any understanding about 25 the utilities between York Place and Newhaven; when will 103 1 they have been moved, and if so, to what extent? 2 A. I have no understanding whatsoever of that issue. 3 CHAIR OF THE INQUIRY: Presumably you will be aware that 4 they haven't been moved at Picardy Place because 5 Picardy Place is something that has featured throughout 6 and is still a live issue as to what the final formation 7 of the junction will be. 8 A. Yes. 9 CHAIR OF THE INQUIRY: So there must be utilities there 10 which may require to be moved if there is an extension. 11 A. I -- I would leave that issue to others if I could, 12 my Lord. 13 CHAIR OF THE INQUIRY: Yes. Maybe Mr Anderson could help 14 us. 15 Were you aware or have you ever heard it suggested 16 that there are at least 1,200 conflicts in the utilities 17 in that section between York Place and Newhaven still? 18 A. No, I wasn't aware of that number, and it seems a very 19 high number to someone that's not an engineer. But I'm 20 not sure what kind of percentage of the total utilities 21 that would compromise. 22 But I wasn't aware of it. 23 CHAIR OF THE INQUIRY: Thank you. I don't think there 24 are -- sorry. 25 MR FAIRLEY: My Lord, I wonder if I might ask a couple of 104 1 questions arising from Mr McGarrity's email of 19 May 2 that was put to the witness? I don't anticipate being 3 very long with this. 4 CHAIR OF THE INQUIRY: Certainly. 5 Examination by MR FAIRLEY 6 MR FAIRLEY: Mr McGougan, the final price for phase 1a that 7 was put to the Policy and Strategy Committee on 8 13 May 2008 was 512 million. Is that right? 9 A. That's correct, yes. 10 Q. That was different from the figure that had been put 11 earlier that month of 508 million to, I think a meeting 12 of the Full Council; is that right? 13 A. That's right. 14 Q. So there had been an increase between the beginning of 15 May and 13 May of somewhere in the order of 16 GBP4 million -- 17 A. Yes. 18 Q. -- to the total cost for phase 1a? 19 A. Yes. 20 Q. That 512 million final figure comprised the base cost 21 for the project plus the risk allowance? 22 A. Correct. 23 Q. Together they made up the 512 million? 24 A. That's correct. 25 Q. Can we go back to Mr McGarrity's email, please, that you 105 1 were referred to earlier, which is TIE00352326. 2 Can we blow up the foot of that page, which is the 3 email from Mr McGarrity dated 19 May. 4 Now, you were referred to this earlier, Mr McGougan, 5 in the context of changes that were made or a change 6 that was made to the QRA at the behest of Mr McGarrity, 7 and you were referred briefly to this email. I wonder 8 if we can look at it in a little more detail. It's 9 dated 19 May 2008, and Mr McGarrity says: 10 "Following our meeting today - the attached wee 11 summary lays out a simple recon ..." 12 Which I think must mean reconciliation: 13 "... of how I think we get from the last reported 14 estimate (508 million) to our final control budget 15 (512 million) including the SDS increases." 16 Now, pausing there, the change from 508 million to 17 512 million was the change I referred to earlier that 18 had taken place between the start of May and the 13 May 19 report to the Policy and Strategy Committee; is that 20 right? 21 A. Correct. 22 Q. So one would expect the final control budget for the 23 project to be 512 million as Mr McGarrity is suggesting 24 here? 25 A. Correct, I agree. 106 1 Q. He says after that: 2 "... including the SDS increases." 3 Do you remember part of the GBP4 million increase 4 being something to do with monies being paid to SDS? 5 A. No, I don't remember that. I would need to refresh my 6 memory on that from base documentation. 7 Q. We'll no doubt hear from Mr McGarrity about this in due 8 course, but the reason I'm asking that is that there is 9 a schedule, which I'll take you on to shortly, that 10 suggests that somewhere in the region of GBP1.3 million 11 was paid in addition to SDS, and that that formed part 12 of the GBP4 million increase from 508 to 512. 13 Now, if I'm right about that, that payment to SDS 14 was presumably in return for something, one would 15 assume. 16 A. One would -- one would hope that that was the case. 17 Q. Yes. And if one of the things or if the thing that the 18 additional monies was being paid to SDS for was to push 19 design forward, that would potentially have an impact 20 upon the general delay risk built into the project cost, 21 wouldn't it? 22 A. It could have, yes. 23 Q. Now, I don't know in fairness what Mr McGarrity is going 24 to say about his rationale for this, but if I can just 25 take to you one final document before I close, and that 107 1 is CEC01295329. 2 Now, this, if I have understood earlier evidence to 3 the Inquiry correctly, is the "wee summary" that 4 Mr McGarrity referred to in his email of 19 May. If 5 I've understood this correctly, what we see from the 6 deltas analysis on the -- in columns I and J and the 7 annotation just to the right of those, is that 8 GBP1.35 million additional money was paid to SDS for 9 what's described as construction support. That's 10 1 million. And GBP350,000 for Picardy Place design 11 transferred from Infraco budget. 12 Do you see that? 13 A. Yes, I can see the figures that you're referring to. 14 Q. Yes. So presumably construction support from SDS was 15 something that was designed to reduce or mitigate 16 project -- general project delay. Would that be fair? 17 A. Well, I'm -- I'm not sure, to be honest. I think this 18 is -- this is new as the email was new to me, and I'm -- 19 it's -- it's not a spreadsheet I have seen before. 20 Q. I understand that. 21 A. I struggle to come to terms with your line of 22 questioning. 23 Q. Does the expression "construction support" mean anything 24 to you? 25 A. No. 108 1 Q. So we would really have to ask Mr McGarrity about what 2 these annotations mean to his spreadsheet? 3 A. Yes, and could I say that if there is a reasonable and 4 logical and professional explanation for this, I would 5 be delighted because I had a lot of time for 6 Mr McGarrity and his contribution. 7 Q. Yes, indeed. 8 A. To the project. 9 Q. Indeed. If at the time you had been aware that 10 Mr McGarrity had directed that there should be 11 a reduction to the general programme delay figure in the 12 QRA, you would have wanted to ask Mr McGarrity why he 13 had instructed that that be done; is that fair? 14 A. Yes, and I think I said in answer to the questions that 15 on the face of it, this appears to be a reduction in the 16 risk allocation without any justification. 17 Q. Yes. 18 A. If there is a proper justification for it, I would -- 19 I would be pleased. 20 Q. We would need to ask Mr McGarrity about that, as would 21 you have done at the time, had you known that this had 22 happened? 23 A. Yes. But, I mean, I would still be disappointed in, 24 I guess, the tone of the email that was -- the tone of 25 the emails going about within tie in respect of this 109 1 adjustment, but I might be misunderstanding it 2 completely. 3 MR FAIRLEY: I'm grateful to you, thank you. 4 MR DUNLOP QC: My Lord, I have a very limited question about 5 the provenance of some knowledge that Mr McGougan had 6 prior to contract close. I think probably three or four 7 questions. 8 Examination by MR DUNLOP QC 9 MR DUNLOP QC: Mr McGougan, you told my learned friend 10 Counsel to the Inquiry earlier, and just for the 11 reference it's page 33:1 of the transcript, about your 12 knowledge of the Notified Departure. You were asked 13 about the existence of Pricing Assumptions and the fact 14 that this would result in a Notified Departure with an 15 increase in the price. 16 You indicated that you were aware that SDS delays 17 meant that on contract close, there would be an 18 immediate impact on the Infraco programme with 19 a consequent Notified Departure? 20 A. Yes. 21 Q. I'm just interested, do you recall who it was that told 22 you about that? 23 A. I don't, but I think it was included in the close 24 report. 25 Q. Yes. If we could just -- two documents, please, on 110 1 screen. It's CEC01312358. 2 CHAIR OF THE INQUIRY: Do you want two documents on the 3 screen at the same time? 4 MR DUNLOP QC: No, sorry, one after the other. I apologise. 5 The first one is the one ... 6 If we see, Mr McGougan, if we can blow up the top 7 half of that page, is that an email from Mr Bissett at 8 tie to a number of people, including yourself, on 9 28 April 2008? 10 A. Yes. 11 Q. We see that it has a number of attachments, including 12 version 10 of the close report. I think we see at 13 paragraph 1, towards the bottom? 14 A. Yes. 15 Q. And also DLA letter? 16 A. Yes, I can see that. 17 Q. So you will have received all of those documents? 18 A. Yes. 19 Q. Then another document I would ask you to look at, 20 please. CEC01246045. 21 You will see, again, if we can expand it, this is 22 two days later. Do you see right at the foot of the 23 page, this is an email that's signed off by 24 Colin MacKenzie and Nick Smith, and it's dated 30 April. 25 This is not sent to you, Mr McGougan. 111 1 Do you recall, does this ring any bells? Have you 2 seen this before? 3 A. No. 4 Q. Okay. Just at the first paragraph, we see that the 5 authors say: 6 "Further to the meeting this morning Nick and I ..." 7 That's Nick Smith and Mr MacKenzie: 8 "... have considered the DLA letters [three of 9 them] ... You sought our views on this correspondence." 10 In the next paragraph they go on to indicate that 11 they are concerned about independence, the independence 12 of DLA. But if I can ask you just to look at the last 13 four lines of the next paragraph, please, where the 14 authors say: 15 "The most recent letter dated 28 April does little 16 to remove doubts and uncertainties. Specifically, that 17 letter appears to give no comfort on the risk profile 18 and acceptability in relation to the market norm. The 19 lengthy letter also narrates matters which appear to us 20 to be risky for the Council and are not fully covered by 21 the QRA." 22 Now, if we need to look back to the DLA letter, the 23 primary area that's identified there is SDS delay. 24 What is then said is: 25 "No doubt the Directors of Finance and City 112 1 Development, respectively, will be seeking confirmation 2 from the Council Solicitor as to the acceptability to 3 her of the DLA letter." 4 So I wonder if you can help us. Do you recall any 5 contact in this regard from Ms Lindsay or anyone at 6 CEC Legal with regard to these matters? 7 CHAIR OF THE INQUIRY: I think it may not come from 8 CEC Legal. I think it may come from either Mr Conway or 9 Mr Coyle. 10 MR DUNLOP QC: That's a fair point. Anyone from CEC. Do 11 you recall anyone at CEC contacting you with regard to 12 this, Mr McGougan? 13 A. No, I don't, and we had had over time at the IPG 14 a slightly different -- well, slightly different -- 15 divergence in views between Mr MacKenzie and Ms Lindsay 16 about DLA and their competence to give assurance to the 17 Council. 18 Q. Certainly. What I'm just trying to understand is when 19 you -- when you tell us that you were aware of the 20 immediacy of a Notified Departure, does that come solely 21 from the documents that were attached to the letter of 22 28 April, or did you receive any subsequent advice to 23 that email of 28 April? 24 A. No, in terms of the email of 28 April, I wouldn't have 25 read all the information about the DLA letters. That 113 1 would be a matter that I would allow the 2 Council Solicitor to lead on. And I would have been 3 looking at the close report, which, from memory, was the 4 first item, the item above. 5 Q. Okay. So again, if we think about your knowledge of the 6 immediacy of the Notified Departure, does that come 7 solely from you reading the close report, or has 8 somebody at CEC told you or given you advice about that? 9 A. I think there were discussions at the Tram Project Board 10 about the Notified Departure as well, and certainly my 11 memory is it was in the close report, but it was a few 12 years ago, and I couldn't be absolutely certain. 13 Q. At the Tram Project Board, do you remember who it was 14 that was giving advice regarding Notified Departures? 15 A. No. No. 16 Q. Would it have been someone from CEC Legal? 17 A. That would be doubtful. I would -- I would imagine it 18 would have been someone from tie. 19 MR DUNLOP QC: Someone from tie. Thank you very much. 20 I'm obliged, my Lord. 21 CHAIR OF THE INQUIRY: Thank you very much, Mr McGougan. 22 That concludes your evidence. You are still subject to 23 your citation and it would be possible to recall you if 24 that was necessary. Hopefully it won't prove necessary. 25 A. Hopefully. 114 1 CHAIR OF THE INQUIRY: Thank you for your attendance today 2 and yesterday. You're now free to go. 3 A. Thank you very much, my Lord. 4 (The witness withdrew) 5 115 1 INDEX 2 PAGE 3 MR DONALD MCGOUGAN (continued) .......................1 4 5 Examination by MR MACKENZIE (continued) .......1 6 7 Questions by CHAIR OF THE INQUIRY ...........103 8 9 Examination by MR FAIRLEY ...................105 10 11 Examination by MR DUNLOP QC .................110 12 13 MR DAVID ANDERSON (sworn) ..........................115 14 15 Examination by MR MACKENZIE .................115 16 17 18 19 20 21 22 23 24 25 212