1 Thursday, 21 September 2017 2 (9.30 am) 3 CHAIR OF THE INQUIRY: Good morning, Mr Mackenzie. 4 MR MACKENZIE: The next witness is Michael Heath. 5 MR MICHAEL HEATH (sworn) 6 Examination by MR MACKENZIE 7 CHAIR OF THE INQUIRY: Could I ask you to sit close to the 8 microphone and speak relatively steadily, not too 9 quickly, for the shorthand writers. 10 A. I'll try to. 11 MR MACKENZIE: Good morning. 12 A. Good morning. 13 Q. Can you state your full name, please? 14 A. Michael Gordon Heath. 15 Q. And your current occupation? 16 A. Retired. 17 Q. Thank you. You have helpfully provided a CV to the 18 Inquiry, Mr Heath. I'll take you to that first, please. 19 It will come up on the screen in a second. The 20 reference number is CVS00000039, and you can see that 21 now on the screen before you; is that correct? 22 A. That's correct. 23 Q. Thank you. We can see under "PROFILE/EXPERIENCE 24 SUMMARY", you list a number of areas of particular 25 expertise, including financial and business management, 1 1 project management of interdisciplinary projects around 2 the public sector, corporate governance in PPP-type 3 companies, and other matters. 4 We can also just, if you go down to the middle of 5 the page, we can see, under "PROFESSIONAL 6 QUALIFICATIONS", you were awarded an MBE for services to 7 Public Transport in London in 1996. If we can then 8 please go to page 3 of your CV, without taking too long 9 on this, we can see, I think, you had various roles in 10 London buses, including, at the top of the page, in 11 relation to bus privatisation; is that correct? 12 A. That's correct. 13 Q. Thank you. Over the page to page 2, please, we can see 14 of interest to us, I think, in particular between 1996 15 and 1998, you were Project Manager for Tramlink. The CV 16 states you took the Croydon Tramlink Act 1994: 17 "... and created a competition to design, build, 18 maintain, finance and operate a light rail system in 19 Croydon for 99 years." 20 Pausing there, it appears the procurement model 21 there was as stated, a design, build, maintain, finance 22 and operate model; is that correct? 23 A. That's absolutely correct. 24 Q. Just to read on in your CV, it states: 25 "Negotiated the public sector side of all agreements 2 1 with bidders ..." 2 You stated achievement: 3 "GBP250 million value project delivered at the 4 Government's financial target (GBP125 million)." 5 Can you explain the difference between the two 6 figures? 7 A. The 125 million was the government target for the costs 8 of the public sector side delivering the project and 9 a competition for grant. The competition -- the grant 10 amount was in the order of GBP100 million. And the 11 GBP250 million was effectively the total value of the -- 12 the total value of the project at that time, with the 13 estimate of the consortium's costs. 14 Q. Did that project involve private finance in the funding 15 of it? 16 A. It was one of the initial major projects of the 17 government at the time's private finance initiative. It 18 was the first project that had actually introduced major 19 shareholding and a 99-year concession term. 20 Q. Thank you. Were you employed by Tramlink? 21 A. No, I was employed by London Buses. 22 Q. I see. So your employer at this time was London Buses. 23 Was this a project that was delivered by London Buses? 24 A. It was a project that was delivered by London Buses, 25 yes. 3 1 Q. I understand. What was your title exactly? 2 A. It was actually called Project Manager Tramlink. 3 Q. I see. Just to be clear, were you involved in each of 4 the procurement, construction and operation phases? 5 A. No, I was involved in the procurement phase. I then 6 moved on to become Operations and Services Director for 7 London Buses. I then had a very high level overview of 8 progress and, as when things go wrong in these major 9 projects, I got involved in trying to resolve the issues 10 between the parties to bring the project to a successful 11 conclusion. And that was during the construction -- 12 that was during the construction phase. 13 Q. Yes. Was that tram project delivered on time and within 14 budget? 15 A. It wasn't delivered -- it wasn't delivered against the 16 original timescale. And the on-budget issue was clearly 17 a matter for the private sector. 18 Q. Because they bore the risk? 19 A. They took the construction risk. 20 Q. So do you know whether it was delivered on budget? 21 A. To the best of my knowledge, I think it cost more than 22 they estimated. 23 Q. I see. But we are aware that there had been various 24 problems with the various tramlines in the UK that had 25 been built in the 1990s in particular, not that many 4 1 were built. I'm just wondering if Croydon tram project 2 encountered these sorts of problems, whether in fact 3 everything was fine there? 4 A. It wasn't all fine. I think it's fair to say that most 5 tram projects underestimate the costs at the outset. 6 Q. Thank you. 7 Now, if we go back to your CV, please, and just 8 finish that. We see further up you made reference to 9 London Buses' Operations and Services Director until 10 2001. 11 Then please go to page 1, just to finish the CV off. 12 At the bottom of the page you say: 13 "Concurrently from September 2003 to date". 14 You say "to date". Are you actually retired now? 15 A. When I submitted my CV to the Inquiry, I pointed out 16 that it was a CV dated 2010. 17 Q. I understand. So we should read "to date" now as 18 being -- 19 A. To date was 2010 because when I was asked, I thought 20 that was the most relevant CV to send. 21 Q. Thank you. We can see what is stated here is that you 22 acted as Transaction Manager for Partnerships in Health, 23 et cetera. So is that essentially involvement in 24 procurement in the health sector? 25 A. Yes. 5 1 Q. And then above that, please, we see, between March 2001 2 to October 2007, you were the Chairman of the 3 Transportation Division of Schofield Lothian. I think 4 Schofield Lothian were construction and infrastructure 5 consultant; is that correct? 6 A. They were basically quantity surveyors, but that's 7 probably a good description. 8 Q. Thank you. Then just to complete that, we'll see from 9 April 2007 to 2010 -- was this your own consultancy 10 company, Mr Heath? 11 A. Yes. 12 Q. Thank you. We can see there that as part of that you 13 were involved in reviewing the Edinburgh tram project? 14 A. Correct. 15 Q. Thank you. We will put your CV to one side, please. 16 You have also helpfully provided a statement to the 17 Inquiry. I would like to bring that up, please. The 18 reference is TRI00000044. I would like please to go to 19 the last page, just for you to confirm this is your 20 signature. It's at page 35? 21 A. It is. 22 Q. Can you confirm, please, this is the written statement 23 you've prepared for the Inquiry? 24 A. I can confirm that. 25 Q. Mr Heath, your evidence to the Inquiry will comprise 6 1 both the written statement and the evidence you give 2 today. 3 Now, Mr Heath, you were involved in a number of 4 reviews of the Edinburgh tram project, but I think to 5 put that in context, it may be helpful to look at three 6 guidance documents so we can see what the review 7 procedure involved. 8 I'm not going to go into the details, but simply to 9 look at the overview of these matters. 10 The first guidance document is CEC02084815. We can 11 see this is published in the top right-hand corner by 12 the Office of Government Commerce, the OGC, and the 13 title is "Project procurement lifecycle, the integrated 14 process", and it's part of a series of guides in 15 relation to achieving excellence in construction 16 procurement. We can see this is guide 3 in that series. 17 If we can go over the page, we can see when it was 18 published. At the bottom of the page, under 19 "Acknowledgments", it's quite hard to see in the blow 20 up. We can see the Crown copyright 2007. So this guide 21 is published in 2007, and for the record, there was 22 guidance in 2003 in essentially the same terms, and I'll 23 provide the reference if anyone wants to look at it 24 later. It is GOV00000018. We don't have to go to that 25 because what is in the 2003 guidance is pretty much the 7 1 same as what appears in the 2007 guidance. 2 So sticking with the 2007 guidance, I would like, 3 please, to go to page 8, I think it is. If we blow up 4 the middle section, please, and scroll down a little 5 please and stop there. 6 So in short, Mr Heath, I'm taking you to this to 7 look at the OGC's Gateway Review process and the 8 different stages or gateways that the project should go 9 through. 10 We can see the paragraph commences: 11 "OGC's Gateway review process identifies points 12 along the project planning route, beyond which the 13 project should not proceed without specific management 14 and funding activities having been completed. At each 15 decision point, the investment decision-maker should 16 evaluate the business case and investment proposals and, 17 if justified, give approval for the project to proceed." 18 It's then stated: 19 "It is important to note that for construction 20 projects, there are two additional major decision points 21 between Gates 3 and 4. These are: Decision 22 point 1: Outline design, after which no client change 23 should be made; Decision point 2: Detailed design, when 24 the team must have reached time and cost certainty 25 against the required quality. At this point there is 8 1 a commitment to build. 2 In addition, there may be a requirement to repeat 3 Gate 3, if there is a two stage investment decision 4 (such as for contract award and then for the 5 construction price)." 6 Just to pause there, Mr Heath, I take it that at the 7 time you were undertaking these reviews, you were aware 8 of this sort of guidance and these Gateway review 9 stages? 10 A. I have not seen that guidance before. And in fact, 11 you've introduced something that I didn't know about 12 when you talked about the document in 2003. This is -- 13 I only saw this document, I think, two weeks ago. 14 In that sense, there was also an OGC Manager's 15 Guidance Note about these projects -- these reviews, 16 sorry. 17 We were committed to the OGC process, which is very 18 much driven by the Senior Responsible Officer. 19 So there is a risk that this conversation may become 20 a bit hypothetical, I think, but we carried out the 21 reviews in accordance with the terms of reference that 22 you have seen in the report. Those terms of reference 23 were consistent with the OGC guidelines. They don't 24 quite match what's said here. 25 Q. I see. I'll just continue with this document, just to 9 1 see if you're familiar with the different stages of the 2 Gateway review process. 3 So if we then -- 4 CHAIR OF THE INQUIRY: Mr Mackenzie, is there much point in 5 doing that? Because the witness has said he wasn't 6 aware of this until two weeks ago, and he operated in 7 accordance with the guidance at that time. So is there 8 something particular? 9 MR MACKENZIE: My Lord, what I simply wish to explore is 10 whether the witness is aware of the different stages of 11 the gateway review process, whether or not he's seen 12 this particular document. 13 CHAIR OF THE INQUIRY: Very well. 14 MR MACKENZIE: I can take it quite shortly. I think it may 15 also help inform the Inquiry in putting the different 16 reviews in context. 17 Please go to page 10. Under the coloured band at 18 the bottom, it states: 19 "Gate 0: Strategic assessment". 20 Then over the page, please. Again, the coloured 21 band is: 22 "Gate 1: Business justification". 23 Do any of these Gates appear familiar to you, 24 Mr Heath? 25 A. Well, the report -- the report, I think you've seen, 10 1 make it clear that there wasn't a Gateway 0 process, 2 that the project had gone beyond that already. The Gate 3 1 is very familiar because we produced two reports as if 4 it were Gateway -- as if it were Gateway 1, which I'm 5 sure you are going to be coming to. 6 Q. I will indeed. I think that's the point, Mr Heath, that 7 some of these reports were produced as if they were -- 8 A. Yes. 9 Q. Gateway reviews? 10 A. Absolutely. 11 Q. I'll just continue, if I may, just to identify the 12 different gateways. Then please, page 13. Let me see 13 the coloured band, Gate 2: Procurement strategy. So 14 that's a stage within a project at which a review ought 15 to take place; is that correct. 16 A. Yes. 17 Q. Over the page, please. Again, the coloured band states: 18 "Gate 3: Investment decision". 19 It's stated: 20 "Note that there could be more than one Gate 3 21 review depending on the procurement route eg two-stage 22 Design and Build. Where there is an investment 23 decision, there is a Gate 3 review." 24 Then at the bottom of the page, we see: 25 "Decision point 1: Outline design". 11 1 Over the page, please, again, the coloured band: 2 "Decision point 2: Detailed design". 3 The box under that states: 4 "Approval for detailed design and for project to 5 proceed to construction. Confirm affordability, 6 including provision of risk allowances. Commit funds 7 for construction." 8 Then two more gates to finish this document off, 9 please. 10 Over the page, Gate 4: 11 "Readiness for service." 12 Finally, please, the page after that: 13 "Gate 5: Benefits evaluation". 14 So I think you said you are familiar with the 15 general gateway process? 16 A. Yes. 17 Q. Thank you. Now, the next document by way of guidance 18 I would like to take you to, please, and it's because in 19 your reports, which we will come to, you touch on some 20 governance matters and use some terminology. Again 21 I think it's helpful just to put that -- these matters 22 in context. 23 So if we could please look at document GOV00000003. 24 This is again one of the OGC guides in the same 25 series, achieving excellence in construction 12 1 procurement. This is guide 2, entitled "Project 2 organisation roles and responsibilities". Again, this 3 particular document was published in 2007, but is 4 essentially the same terms as the guidance issues in 5 2003. Again I'll give the reference simply in passing 6 to the 2003 guidance. It is CEC02084819. 7 Pause here, Mr Heath. Had you seen this document -- 8 the 2007 guidance -- 9 A. The answer is exactly the same as the previous document. 10 Q. Yes. So the first time you saw this 2007 guidance was 11 when the Inquiry sent it to you a week or two back? 12 A. Yes. Can I add, I was actually on holiday for a week 13 between you sending me this document and you bringing it 14 to my attention here. 15 Q. I see. I'm grateful to you for looking at it, Mr Heath. 16 Now, again, while you may not have seen this 17 document, I would like to check if you are familiar with 18 the terminology used, if I may. 19 So if we could please start at page 4. This is 20 headed, "Project organisation: roles and 21 responsibilities". Just to pause, Mr Heath, what 22 I really -- part of the reason I'm putting it to you as 23 well is to see if these are the sorts of things you 24 would be considering, the criteria you would be 25 considering when reviewing a project, reviewing perhaps 13 1 the governance processes in particular. 2 So you see the guidance states: 3 "Projects should be organised in such a way that 4 everyone is committed and empowered to achieve 5 successful delivery. Roles and responsibilities should 6 be clearly defined; there must be short and effective 7 lines of communication to senior management so that they 8 can take prompt action when needed." 9 I take it you would have agreed with that at the 10 time you were conducting these reviews? 11 A. Absolutely. 12 Q. Then under "Introduction", the guide states: 13 "This guide explains the key roles and 14 responsibilities involved in construction procurement 15 projects. It provides a recommended framework for 16 project organisation that can be adapted to individual 17 circumstances." 18 Then under "Principles", please, it is stated: 19 "Critical factors for success." 20 I'm not going to read all the bullet points, but we 21 can see: 22 "The client organisation must ensure that:" 23 The third bullet point: 24 "The right people are given the roles of senior 25 responsible owner - SRO (that is, the individual 14 1 responsible for the success of the project) and project 2 sponsor (empowered to take decisions on behalf of the 3 SRO role) ..." 4 I take it you were familiar with these terms at the 5 time? 6 A. Yes, and I think if you read our reports, you can see 7 they refer to those principles on a regular basis. 8 Q. Thank you. Then the second last bullet point on the 9 page states: 10 "Everyone involved in the project works together as 11 an integrated team (client, designers, constructors, and 12 specialist suppliers), with effective communication and 13 co-ordination across the whole team." 14 Then over the page there's some more helpful 15 guidance. Page 5 from the top -- 16 A. Can I just stop you. When you talk about everybody 17 working together, because I think I just add a note of 18 caution that the everybody working together needs to be 19 thought -- and potentially co-locating needs to be given 20 an element of caution, because of the potential for 21 unwitting risk transfer by the client unwittingly 22 importing risk back to itself by giving well-meaning 23 instructions that can easily be misinterpreted. 24 This in my view, this document is rather aimed at 25 a traditional form of public sector purchasing where the 15 1 public sector has set out what it wants. It goes out to 2 contract and then it monitors how the product is being 3 delivered; whereas projects like tram projects require 4 much more system integration, much more integration of 5 various organisations, and in consequence, they create 6 much more complex relationships that are envisaged here. 7 Q. Yes. I think this guidance document is setting out 8 guidance, it does say it may require to be tailored in 9 individual circumstances. I'm interested in one thing, 10 you mentioned, Mr Heath, about the need for integration. 11 The document does come back to that in a second. We 12 will look at governance diagrams. I would like to 13 compare a diagram in this document in relation to 14 integration with the procurement of Edinburgh tram. 15 So the second bullet point on page 5 states: 16 "Levels of delegated authority for the project team 17 are clearly set out and understood and enable effective 18 and timely decision-making." 19 The next bullet point: 20 "Clear roles and responsibilities are defined and 21 understood, supported by an uncomplicated project 22 management structure that reflects good practice." 23 The next bullet point: 24 "The procurement route for the project supports and 25 facilitates integrated team working." 16 1 The next paragraph states: 2 "The client organisation undertaking each project 3 should have clearly identified responsibilities for 4 investment decisions, project ownership and project 5 sponsorship; the people concerned should have formal 6 statements of their responsibilities and be accountable 7 for them. The senior responsible owner role should be 8 a formal appointment in the part of the business that 9 requires the finished project, with sufficient seniority 10 to understand the business drivers and to make decisions 11 on behalf of the business. Priority should be given to 12 ensuring that project delivery teams are composed of 13 high quality individuals; there must also be 14 a commitment to continuity in key roles." 15 The next paragraph states: 16 "Wherever possible, the project should be delivered 17 by an integrated project team made up of the client 18 project team, consultants, contractors and specialist 19 suppliers working together as a single team. This 20 approach should be used on all construction projects 21 because it helps to encourage innovation and avoid an 22 adversarial culture; it encourages collective 23 responsibility for a successful outcome." 24 I'll leave that there. It may be helpful, I think, 25 to look at page 6. In the second bullet point -- this 17 1 is under "Essential roles and responsibilities", the 2 second bullet point states: 3 "Provision of independent advice to the client -- 4 independent advice may be required on a range of issues, 5 including business strategy, investment appraisal, 6 financial, legal, and technical aspects. This is the 7 role of independent client advisers ... they should be 8 independent from suppliers to avoid any conflict of 9 interest." 10 Do you agree with that as general guidance? 11 A. Yes. 12 Q. Why is there a need for independent advice? 13 A. I think it's relatively self-evident. On the basis that 14 these are very large complex projects which usually are 15 outside of the normal business experience of the client, 16 and so they need -- and they are normally public sector 17 bodies. So there is a natural desire to make sure that 18 there is some form of independent advice alongside the 19 advice that they may be getting from in-house. 20 Q. Thank you, Mr Heath. 21 Next, please, page 7. In the middle of the page we 22 see: 23 "There may also be a requirement for a project 24 board -- an advisory panel including a technical adviser 25 and business adviser, to address strategic issues and 18 1 ensure stakeholder buy-in at a high level." 2 I pause there, Mr Heath. The reason I'm mentioning 3 this is that I don't want us to be confused by the term 4 "Project Board" used in two different senses. This 5 document refers to it being an advisory panel to ensure 6 the buy-in stakeholders. I'm going to take you to the 7 PRINCE2 guidance where "Project Board" is used in the 8 term of being part of the project management team. 9 I think the term is used in two different ways; is that 10 correct? 11 A. It looks like that to me. 12 Q. Yes. Because I think if we go through the diagram over 13 the page, I think that will explain that for us. 14 Blow up the diagram, please. 15 So this is essentially the suggested governance 16 structure to ensure an integrated approach. 17 Just sticking with the Project Board, we can see, 18 I think, in this diagram, the top right-hand corner, it 19 states: 20 "Project board (advisory only) May not be required." 21 So that's the sense that "Project Board" is being 22 used in this guidance, that is to ensure the buy-in of 23 stakeholders, but not part of the decision-making tree, 24 if I can put it that way? 25 A. Yes, and I think for this project, it demonstrates how 19 1 this document would need some significant tailoring. 2 Q. Well, we will come on to that in a second, perhaps. 3 I think we can see essentially a linear decision-making 4 structure. Perhaps interestingly at the bottom, it 5 talks about an integrated supply team: 6 "The Integrated supply team comprises the lead 7 supplier and a number of integrated supply chains. 8 Examples of integrated supply chains include designers, 9 constructors, specialist suppliers, maintainers, 10 etc." 11 Pause there, Mr Heath. Presumably in the Croydon 12 project you were involved in, where the procurement 13 model was one of design and build and maintain and 14 finance and operate, presumably it's quite easy in that 15 model to have an integrated supply chain? 16 A. Exactly. Yes, you outsource the integrated supply 17 obtain. 18 Q. If we can finally in this document go to page 10. Read 19 the text at the top, please. It states: 20 "A traditional project structure is not integrated; 21 it separates out the responsibilities of each party (see 22 Figure 4). For this reason it should not be followed 23 unless it demonstrates significantly better value for 24 money than the recommended procurement routes. However, 25 even with this fragmented approach, it is possible to 20 1 aim for some level of integration." 2 Look then, please, at the diagram. We can see at 3 the bottom, I think, this is an example of what's been 4 referred to as a fragmented approach where we have 5 separate consultants, constructors and specialist 6 suppliers. I think, just to pause there, Mr Heath, 7 I think in the Edinburgh tram project, the procurement 8 model is more of this fragmented approach, because the 9 decision was taken to separately procure the design 10 contract, separately procure the utilities contract and 11 separately the infrastructure and tram vehicle 12 contracts; is that correct? 13 A. I believe that to be correct. 14 Q. Albeit there were reasons for that because of the other 15 problems with the UK tram schemes and this was a new 16 approach to try and avoid some of those problems, and 17 there was an attempt at some integration later on by 18 novation of the design contractor to the Infraco 19 contractor and also the tram vehicle manufacturer joined 20 the consortium with the Infraco contractor; is that 21 correct? 22 A. I believe that's correct, yes. 23 Q. Thank you. So that's really by way of overview of that 24 guidance. 25 One final guidance document, if I may I will take 21 1 you to shortly, but it's to do with -- back to the 2 question of the Project Board in the sense that I think 3 it was used for the Edinburgh Tram Project Board, and 4 this final document is GOV00000029. 5 This is PRINCE2 guidance. Again, we can see, 6 bottom left-hand corner, published by the OGC in 2005, 7 entitled, "Managing Successful Projects with PRINCE2". 8 Have you seen this document before, Mr Heath? 9 A. No. 10 Q. Were you familiar with the PRINCE2 management 11 principles? 12 A. Having read it in the same time frame as I have referred 13 to earlier, familiar with the principles, but for the 14 record, I can never remember a reference to PRINCE2 15 throughout discussions on this project. 16 Q. I see. 17 Now, there is some similar terminology in terms of 18 senior responsible owner. I think you were familiar 19 with that terminology? 20 A. Sorry, I missed that. 21 Q. I'm sorry. I think you had explained before, you were 22 familiar with the terminology such as senior responsible 23 owner? 24 A. Yes. 25 Q. We saw that in the OGC construction procurement 22 1 guidance. It also appears in this PRINCE2 guidance. 2 Perhaps I'll just take you to one page, the question 3 of Project Board. 4 Go to page 23, please. 5 Now, the heading, 14.1.1, Four layers. Blow that 6 up. Thank you. 7 The second paragraph states: 8 "A fundamental principle is that the project 9 management structure has four layers, illustrated in 10 [the figure below]." 11 We can see there, I think, that of the four layers, 12 the project management team comprises the Project Board, 13 the project manager and the team managers. 14 In short, Mr Heath, we'll look at the Edinburgh Tram 15 Project Board. Is it your understanding that when you 16 heard talk about the Project Board, that your 17 understanding was it was a Project Board which sat 18 within the project management team? 19 A. I think it sat outside it. We -- I think our -- I think 20 in my evidence I've said somewhere that we met 21 individual members of the Project Board, but we never 22 met the Project Board as an entity. 23 I believe, and having looked at the documents that 24 you sent me about -- from the Business Case reviews 25 about the Project Board, I believe that the Tram Project 23 1 Board sat outside of the project management, and was 2 largely expected to provide an overview of the 3 performance of the project management. 4 One thing I would say though. I think, again, to 5 make sure that there's no confusion. If you look at the 6 corporate or programme management at the top -- the 7 first bullet point in that, one of the issues in this 8 project, when you read through the evidence, is whose 9 programme was it. 10 Q. What was your understanding at the time? 11 A. I think if you read our reports, it was never clear 12 whose programme it was. One would have expected it to 13 have been the Infraco's programme which had been 14 approved at financial -- at contract close, and then any 15 variations to that programme would be agreed in 16 accordance with the contract provisions. 17 Q. I understand. This may be an appropriate time, 18 Mr Heath, to go through the various reports you were 19 involved in, if I may? 20 A. Yes. 21 Q. I think the first review was the May 2006. The document 22 will come up on the screen. It's CEC01793454. 23 We can blow up the first page, please. We can see 24 it's headed "tie Project Readiness Review". It's issued 25 to the Chief Executive of tie on 21 May 2006. Is that 24 1 because the review has been instructed by tie? 2 A. It should -- the terms of reference should be in the 3 report and that should tell you who instructed it. 4 Q. We will come to that in a second. We can see the review 5 dates were between 22 and 25 May, and we can also see 6 that the report was issued on 25 May. What happens? 7 Does the review team go up to Edinburgh? Can you talk 8 us through what happened? 9 A. The review team would go to Edinburgh, in this case 10 would have had two days to interview people, and again, 11 the methodology is set out in the report. Basically, 12 interviews, and referring the outcome of those 13 interviews to their own experience, and then effectively 14 putting together a report, probably on the morning of 15 the 25th, and taking the client through that report 16 to -- on the afternoon of the 25th to make sure that 17 there were no factual errors in the report. 18 Q. Thank you. We see the team comprised -- it was led by 19 Malcolm Hutchinson and you were one of the team members. 20 If we could then please look at Appendix A, page 10, you 21 can see the terms of reference are set out here. 22 Halfway down the page, it explains: 23 "The review will be high level and strategic and 24 will not be concerned with contract drafting or detailed 25 provisions of the ITN documentation and schedules, nor 25 1 with the economic case for the project, but will focus 2 on key issues which underpin successful procurements and 3 will take four full days." 4 We can see the paragraph after that. Some of the 5 people and documents the review team have access to. 6 I think the next appendix is helpful to list the 7 interviewees at page 12. Without dwelling on this, 8 I think this gives an idea of the variety of different 9 people you interviewed as part of this review. For 10 example, we see people from tie, from TEL, from the 11 design contractor, Parsons Brinckerhoff, 12 Transport Scotland, other consultants, and the Council. 13 So a real variety of people you interview as part of 14 the review; is that fair to say? 15 A. Yes. 16 Q. Thank you. If we then please go back to page 3, to look 17 at the conclusion at this time. We can blow up the 18 second half of the page, please. 19 So of course it's a very early stage of the project 20 and various things are said there. I'm not going to 21 read them out, other than the last bullet point states: 22 "The project would not currently satisfy the 23 criteria that would be assessed as part of an OGC 24 Gateway 2 review." 25 So presumably, Mr Heath, if that is one of the 26 1 conclusions, you must have been familiar at the time as 2 to the OGC Gateway 2 criteria? 3 A. Yes. Sorry, the team was. 4 I think we're talking about review team. We're 5 talking about the team, not just me. 6 Q. I see. So going back to page 1 of this document, and if 7 we blow up the second half, the members of the team, was 8 it the case, Mr Heath, that other members of this team 9 were more familiar with the OGC guidance and criteria 10 than you were? 11 A. I would have thought that Malcolm as the team leader had 12 had more experience in dealing with OGC reviews than 13 I had. This was the first OGC Review I'd done. 14 But this was, as I think I said in my written 15 statement, the -- these were a team effort. 16 Q. I understand. 17 CHAIR OF THE INQUIRY: I think also your statement sets out 18 the experience of the other team members. Yourself as 19 well, but it's apparent that they have all got 20 significant experience. 21 A. That's correct, my Lord. 22 MR MACKENZIE: Thank you. 23 At the top of page 4, please? It states: 24 "The review team has assessed the overall status of 25 the project as red as defined below." 27 1 It's defined as being: 2 "To achieve success the project should take action 3 immediately." 4 Just to pause there, it may be you can't answer 5 this, Mr Heath, if this was your first review, but one 6 assumes it's not particularly unusual for a project at 7 an early stage to get a red assessment? 8 A. I wouldn't have thought so. I think it's -- I would -- 9 one would hope in these projects that you'd start with 10 an amber. 11 Q. I understand. One point under "Procurement approach", 12 further down the page, under "Procurement approach", the 13 second paragraph, the point the team raise is that: 14 "We understand that some of the prequalified 15 bidders (for both Tramco and Infraco) have expressed 16 concern at the requirements to accept novation of 17 subcontractors. For example, there are reports that 18 potential Infracos may not want to take on designers or 19 charge a premium for full novation of the SDS contract." 20 In short, that's a potential concern the team are 21 raising at this stage so those responsible for the 22 project can take this on board and address it; is that 23 fair to say? 24 A. That's fair. 25 Q. Thank you. Page 13, please. Just to finish off with 28 1 the recommendations in Appendix C, I'm not going to read 2 each of them out. We can see a variety of reds and 3 ambers. No greens. 4 In paragraph 6 -- sorry, recommendation 6, halfway 5 down, it states: 6 "A project board is set up as a matter of urgency 7 and that there is clarity as to the identity of the SRO 8 for the project." 9 Now, pausing there, do you remember whether that was 10 a recommendation that another member of the review team 11 had led on, or is that something you agreed with as 12 well? 13 A. That was a collective -- that was a collective 14 recommendation. They all were collective 15 recommendations. 16 Q. Thank you. What did the review team mean by "a project 17 board"? 18 A. I think it meant -- and this is 11 years ago -- I think 19 it meant a board that was overseeing the -- very much 20 the project delivery, as opposed to the wider transport 21 issues. And that goes alongside the clarity as to the 22 identity of the senior responsible owner so that -- 23 going back to some of the principles that you were 24 taking me through earlier, there was very clear 25 responsibility for delivery within the project and 29 1 authorisation of various actions, which I believe at the 2 time we were not clear -- we were unclear as to how some 3 of these things were being taken forward. 4 Q. In fairness to you, I should also have taken you to 5 page 6, where the report sets out in a bit more detail 6 what is meant by that. 7 Page 6, please. Halfway down, under 3, "Governance 8 and related matters", the report states: 9 "The governance structure for the project appears 10 complicated compared to best practice." 11 To pause there, when the team referred to best 12 practice, is that a reference to OGC best practice or 13 something else? 14 A. I think it's -- it is not restricted to OGC best 15 practice. I think it's what one might describe as 16 common sense best practice. 17 Q. Okay. The report goes on: 18 "We acknowledge that it is in the process of 19 evolution and a number of key players have changed 20 recently. A best practice project governance structure 21 would consist of an empowered project team under the 22 direct control of an empowered and accountable project 23 director. The project director would report to 24 a project board chaired by the senior responsible owner 25 for the project on behalf of the project promoter." 30 1 Then: 2 "The Project Board and the project director would 3 have clear terms of reference in respect of their 4 respective responsibilities delegated from the project 5 stakeholders." 6 That was a bit more flesh, I think, on the 7 recommendation I took you to earlier? 8 A. Yes. 9 Q. Thank you. Then just going back, please, to page 13, to 10 look at two more recommendations in a similar vein. 11 Recommendation 7, it states: 12 "The project board is the only forum through which 13 key decisions in respect of the scope of the project are 14 determined." 15 Then 8, to finish this off, it's recommended: 16 "The operation of tie and its board is reviewed to 17 ensure it remains fit for purpose as a high quality 18 delivery organisation." 19 It may be you can't recollect, Mr Heath, but can you 20 recollect any concerns in relation to tie and its board 21 at that stage? 22 A. Other than those that are in the body of the report, no. 23 Q. Thank you. 24 There's one passage in your statement I should 25 clarify, please, at this stage. Go back to your 31 1 statement at page 8. You will see these are questions 2 in relation to this report and review. At the very 3 bottom of the page, we asked the question, c.: 4 "Did you have any concerns about the fact that TIE, 5 as an organisation, had no prior experience on project 6 managing, and delivering major infrastructure projects?" 7 You replied: 8 "In practice Tie was the nominated delivery agent 9 for the ultimate client CEC. The Gateway process and 10 peer reviews were a methodology to acknowledge a known 11 deficiency." 12 I just wondered what you meant by "a known 13 deficiency". 14 A. It was an answer to the question about having had no 15 prior experience on project managing and delivering 16 major infrastructure projects. 17 Q. So that was a deficiency on the part of tie and the 18 Gateway process and peer reviews were to try and address 19 that -- 20 A. They were a methodology. They were a methodology, not 21 the methodology. 22 Q. I understand. Thank you. 23 We can leave that review, please, and go to 24 a further review carried out later in 2006, in 25 September. This document is at CEC01629382. Again, we 32 1 can get some details from the title sheet, if we blow 2 that up, please. We can see date of issue to 3 Transport Scotland Head of Projects, 28 September 2006. 4 Now, we will go on to the terms of reference, but 5 I think that suggests this review was instructed by 6 Transport Scotland; is that correct? 7 A. Yes, I'm sure that's right. 8 Q. You see the review dates are 26 September to 9 28 September 2006. I think it's the same review team 10 led by Mr Hutchinson. 11 We should briefly look at the terms of reference. 12 Those are at page 11, please. We can see in the 13 paragraph under "Introduction": 14 "The Chief Executive of Transport Scotland requires 15 an independent Gateway assessment of the Edinburgh Trams 16 Project. The work will meet the requirements of the 17 Scottish Executive Gateway 2 (as set out on page 3 of 18 the OGC Gateway Review Guidance Version 1 2004). The 19 work will be undertaken ..." 20 So that's the terms of reference. Again, it's 21 helpful, I think, that the next page again, actually, 22 page 13, we will see a list of interviewees. Again, 23 without dwelling on it, I think there's a similar 24 variety of people from different organisations, 25 including tie, TEL, the design contractor, 33 1 Transport Scotland, DLA, KPMG and CEC. So again, an 2 impressively wide variety of people you interviewed? 3 A. I think you can notice that there is more of a bias 4 towards people from Transport Scotland this time than 5 there was the first time. 6 Q. Why was that? Does that suggest Transport Scotland were 7 taking a greater role or interest? 8 A. Because they commissioned it. 9 Q. So they could set the terms and say who you interview? 10 A. I don't think -- I think we -- we to some extent decided 11 who we'd interview, but clearly there were some very 12 clear steers who we ought to see. 13 Q. Yes. So while there wasn't an independent review, every 14 team was independent, you would discuss and listen to 15 what the party instructing said in terms of who they 16 thought you should speak to? 17 A. No, I think I've misled you there. 18 I can't -- actually thinking about it, I can't 19 remember how the list of interviewees was created. 20 I think we got to the stage of we turned up and 21 interviewed a group of people with a schedule of 22 interviews. So in that sense, I think, the first thing 23 is more likely that we -- it was decided in advance who 24 we were going to interview. 25 All I was saying here was that in terms of this 34 1 round, because it was commissioned by 2 Transport Scotland, it was not surprising that we saw 3 more people from Transport Scotland than we had the 4 first time. 5 Q. I understand, thank you. 6 Just to note in passing, we see at the top of the 7 page, this states Willie Gallagher, Chief Executive of 8 tie. 9 I'm not sure Mr Gallagher had been in that post in 10 the May review. I don't think he had been in 2006. 11 I'll come back to him in a second, but next, please, go 12 to page 3 to look at the conclusion. 13 We see under "Conclusion": 14 "The review team finds that:" 15 The first bullet point: 16 "There has been a considerable transformation in the 17 organisation, attitude and effectiveness of the tie team 18 since the readiness review with a common understanding 19 of the requirements of the procurement process and the 20 challenges faced. The majority of the recommendations 21 from the readiness review have been fully achieved with 22 a few being partially achieved." 23 Over the page, please, to see some of the other 24 bullet points. I'm not going to read them out. We can 25 see what they say for ourselves. But then under 35 1 "Status", we can see: 2 "The review team has assessed the overall status of 3 the project as amber as defined below." 4 Is that a step forward for the project? It's gone 5 from red to amber? 6 A. Yes. 7 Q. Amber is defined as: 8 "The project should go forward with actions on 9 recommendations to be carried out before the next review 10 of the project." 11 Then please go to the next page, to page 5. Here, 12 I think, the report is commenting on the steps taken to 13 address the previous recommendations. Go, please, to 14 paragraph (f). We have seen before the recommendation: 15 "A project board is set up as a matter of urgency 16 and that there is clarity as to the identity of the SRO 17 for the project." 18 The report goes on to say: 19 "A Tram Project Board has been set up and is meeting 20 regularly. Neil Renilson has been identified and 21 recognised as the SRO for the project. Board members we 22 have seen have commented that the board is now an 23 effective decision-making body which is appropriately 24 empowered." 25 To pause there, Mr Heath, what is your understanding 36 1 of the board being appropriately empowered? 2 A. I think we were reporting what we were told, and we were 3 given that information in good faith and we've reported 4 it there. 5 Q. So your understanding was that the board were given 6 powers to do what they needed to do? 7 A. Yes. 8 Q. And given powers by whom? 9 A. I can only presume. I can presume that it filtered -- 10 it would have come from the ultimate client, which was 11 the City Council, although I think at that stage 12 Transport Scotland were still involved in a role as the 13 involved with the governance of the project from 14 documents that you've sent me. 15 So I can only presume that that empowerment 16 fundamentally came from the City Council. 17 Q. Thank you. 18 CHAIR OF THE INQUIRY: Can I ask you, I think you said 19 earlier on the first review you saw members of the 20 board, but not the board. 21 A. Correct. 22 CHAIR OF THE INQUIRY: Is that the same position here? 23 A. That's right, my Lord. 24 CHAIR OF THE INQUIRY: Would it be normal to see the board 25 in its entirety? 37 1 A. At this stage I wouldn't have thought so. I think 2 I comment in my evidence later that we didn't, and in 3 terms of recommendations for the way forward, perhaps 4 it's a change that should be made. But at the time, 5 I don't think we saw anything unusual in that. 6 CHAIR OF THE INQUIRY: Thank you. 7 MR MACKENZIE: So in short, Mr Heath, the review team is 8 told that a project board has been set up with 9 appropriate powers, so that meets the recommendation 10 from the previous report. 11 A. Yes. And I think the key thing was the -- was actually 12 having a named SRO. 13 Q. Yes. Now, I'll come on to that. 14 We see that Mr Renilson was identified -- sorry, 15 before I ask the question, why was that key? 16 A. I think because, again from memory, it wasn't -- I think 17 our previous report had said it wasn't clear who the SRO 18 was. We were aware that Neil Renilson was a very 19 important figure in the planning and delivery of 20 transport -- of integrated transport in Edinburgh. So 21 we thought it was a particularly good appointment. 22 Q. Presumably the SRO was SRO for the project from the 23 procurement phase onwards? 24 A. I think that's what we'd expected. 25 Q. Now, the Inquiry might hear evidence from Mr Renilson 38 1 that he considered he was only the SRO for the 2 operational phase, not for the procurement phase. 3 If you had been told that at this time, would that 4 have caused any concern? 5 A. Yes. 6 Q. Why? 7 A. Because we'd made a recommendation -- at the previous 8 Gateway which we'd said as red, that the -- a clear 9 responsible SRO was vital to the project, and as you've 10 pointed out to me, all of the guidance that we've talked 11 about in the first half an hour of this discussion is 12 based on having a clear, responsible, accountable SRO. 13 The project at this stage is fundamentally about 14 delivery. And if you don't have somebody who is truly 15 accountable for delivery, then major projects like this 16 will find it difficult to succeed. 17 Q. Thank you. We will have to explore that further with 18 Mr Renilson in due course. 19 In relation to the next paragraph, please -- sorry, 20 it's paragraph (h), this was in relation to the 21 recommendation: 22 "The operation of tie and its board is reviewed to 23 ensure it remains fit for purpose as a high quality 24 delivery organisation." 25 The report then notes: 39 1 "There has been a radical change in personnel, 2 organisation and process within tie which is now acting 3 effectively as a project delivery and control 4 organisation." 5 This is achieved. 6 One point I should raise with you, Mr Heath. We saw 7 earlier in the appendix of interviewees that 8 Mr Willie Gallagher in this report was listed as 9 Chief Executive of tie. I think the Inquiry has heard 10 evidence that in fact Mr Gallagher acted in the dual 11 roles of Chief Executive of tie and Chair of tie between 12 May 2006 and his resignation in November 2008. 13 Do you consider that is consistent with good 14 corporate governance? 15 A. Not necessarily. 16 Q. Can you expand upon that? 17 A. Well, I have seen executive chairmen being very 18 effective and I have seen executive chairmen being very 19 ineffective. 20 Q. In terms of guidance on these matters, are you aware of 21 the Cadbury Code? 22 A. I was going to say, in corporate governance terms, you 23 would -- you would divide the roles and 24 responsibilities. 25 Q. I understand. 40 1 A. But, as I say, I have seen organisations where on 2 a needs must basis, an executive -- an Executive 3 Chairman is sometimes more effective than the Chairman 4 and the Chief Executive spending most of their time 5 squabbling with each other. 6 Q. I understand. 7 Also please go on to page 9. Under the heading, 8 "Readiness to issue Infraco ITN documentation", I'll try 9 not to spend too long on this, but I think in short tie 10 had asked the reviewing team to consider whether they 11 should issue their Infraco invitation to negotiate 12 documentation and whether they should hold off. I think 13 that was something that the review team considered and 14 the review team, towards the bottom, set out risks if 15 they issue too early, and then risks if they issue it 16 too late. 17 At the very bottom of the page, it's stated in the 18 report: 19 "On the basis of the work done by the team and their 20 advisers, we believe that the impact of the risks due to 21 delay outweigh those of an early issue." 22 Over the page, please: 23 "We also believe that the risks associated from 24 early issue could be mitigated as follows." 25 Various steps set out. 41 1 "This, combined with the stated commitment to close 2 bidder liaison and commitment to a phased approach, 3 would lead us to conclude that the Infraco ITN 4 documentation should not be delayed beyond the planned 5 date." 6 I don't know if you remember this issue at all, 7 Mr Heath, do you? 8 A. Yes, I do. 9 Q. Presumably you agreed with the team's view as set out in 10 the report? 11 A. It was a collective decision. 12 Q. Is there anything you wish to add to that, or does the 13 report set it out? 14 A. I think the report sets it out fairly clearly. I think 15 we said -- I can't remember in this report or one of the 16 others -- that one of the ways of making this effective 17 was to reduce the number of variant options and 18 introduce a baseline -- a baseline reference bid. 19 We thought that this was very much an on balance 20 recommendation, as you can see from the analysis. We 21 took the view that, with the appropriate mitigation 22 measures, that on balance it was the right thing to do. 23 Q. Thank you. Just to finish this report, please, with 24 Appendix C at page 14, we will see the Summary of 25 recommendations table again. I'm not going to read them 42 1 out, but you can see, I think there are two reds in the 2 right-hand column, one green has now appeared, and the 3 rest are ambers. So that's a step forward from before? 4 A. Yes. 5 Q. Thank you. 6 Put that to one side, please. 7 There was then a follow-up to this review in 8 November 2006. If we can go to that, please, it's 9 CEC01791014. We can see that you weren't involved in 10 this one, Mr Heath. If we look at the team members, we 11 can see Malcolm Hutchinson and Sian Dunstan were 12 involved, but not your name; is that correct? 13 A. It looks like it. 14 Q. I take it you've no recollection of being involved in 15 this, Mr Heath? 16 A. I can certainly recollect I wasn't involved in it. 17 Q. Thank you. Again, we can see from the title sheet, the 18 review date is 21 November and 22nd, and it's issued 19 again to Transport Scotland. 20 We should perhaps then go to page 3, just to see the 21 conclusion. In the middle of the page, the conclusion 22 states: 23 "The Review Team finds that: All of the 24 recommendations from the Gateway 2 review have been 25 fully or substantially achieved." 43 1 It's also perhaps of interest to note at the bottom 2 of the page: 3 "We understand that SDS are being better managed and 4 have delivered as requested in respect of the Infraco 5 ITN and are now engaging in a practical way to optimise 6 the deliverability of the Traffic management orders and 7 planning approvals. However, this contract will 8 continue to need active management by tie." 9 Just to pause there, Mr Heath, we will go on to see 10 other reference in the other reports about the question 11 of SDS and design delay and difficulties. 12 Just in general, what was your understanding at the 13 time of the reports as to any difficulties or delays in 14 the production of design? 15 A. I wasn't part of this review. So I can only -- I can 16 only speak from memory. 17 Clearly with the procurement strategy, the 18 management of timely design was going to be crucial to 19 the success of the project. So we would always be 20 saying you need to keep an eye on the design. So the 21 review team almost has a duty to the project to keep 22 reminding them that you keep -- you take your eye off 23 the ball with the design management at your peril. 24 Q. Thank you. Just for completeness, on this report we see 25 design is raised again at page 5, please, if we can go 44 1 to that. 2 At the bottom of the page, the last bullet point, 3 this is under Comment on the robustness of the 4 Project going forward, the last bullet point states: 5 "A number of interviewees have expressed concern 6 that the SDS performance to date could undermine bidder 7 confidence. We understand that the SDS contract 8 performance is now being actively and effectively 9 managed by tie but that additional engagement and 10 engineering leadership should prove beneficial." 11 Again, this is just an example of a concern the 12 review team are raising, saying it's for the project 13 team to address this? 14 A. Yes. It might be helpful just if I could see the list 15 of interviewees to get more of a flavour for that 16 comment. 17 Q. Of course. 18 A. As I say, because I wasn't there. 19 Q. It's at page 9. If we blow it up, it's a shorter list, 20 including tie, TEL, Transport Scotland and CEC. So we 21 don't see the design contractors here, for example. 22 A. No. If you look at that list, it does look like tie and 23 TEL confirming something that they knew already. 24 Q. Thank you. 25 Can I then go to your statement, please, again, to 45 1 clarify one answer you gave us. Page 12, please, of 2 your statement. 3 Now, about halfway up, under letter a. we asked: 4 "What was the purpose of the follow-up? Was 5 a follow-up conducted after every review?" 6 You answered: 7 "The purpose was set out in the report. A follow-up 8 was not conducted after every review, but 9 Transport Scotland would have been derelict in its duty 10 not to require a follow-up." 11 Can you explain what you meant by that, please? 12 A. Which -- which piece would you like me to explain? 13 Q. That Transport Scotland would have been derelict in its 14 duty not to require a follow-up. 15 A. I think I was simply making the point that 16 Transport Scotland was investing GBP500 million into 17 a project. The project at that stage was still only in 18 an amber status. And that's -- and from memory, 19 Transport Scotland -- one of Transport Scotland's 20 objectives was to make sure that it was getting value 21 for the public pound. 22 So I would have thought Transport Scotland would 23 have been heavily criticised if it didn't follow the 24 review that it had commissioned up, and it did so. 25 That's what I mean by derelict in its duty. 46 1 Q. Thank you. Just to pause there and step back a little, 2 I think I'm right in saying that of the reviews we've 3 looked at, and we will go on to look at, I think this 4 was the only one where the review team went back for 5 a follow-up? 6 A. Yes. 7 Q. I'm just wondering, was there a general practice, should 8 a follow-up by the review team always take place, or 9 what? 10 A. The reviews -- I think -- sorry, I'll start again. 11 The reviews are commissioned by the SRO and reviews 12 are client driven. I think I have said on more than one 13 occasion in my evidence that these were matters for the 14 client. 15 So the decision whether to follow up was very 16 much -- it would be very much a matter for the client, 17 in this case Transport Scotland took the decision to 18 follow-up. In other cases the client chose not to. 19 Q. Thank you. One question I should have asked earlier. 20 How were members of the review team chosen? Is there 21 a panel of reviewers that clients go to to choose or 22 what happens? 23 A. The review team -- my understanding, and I wasn't 24 part -- as I think I have said in my evidence, I wasn't 25 part of the selection process. I think the review -- 47 1 the review team had been created as a consequence of 2 a discussion, presumably between Transport Scotland and 3 Partnerships UK, which was then the Treasury sort of 4 quasi-consultancy organisation, in which it took people 5 it knew who were either in work or out of work at 6 a full-time occupation, with relevant experience, and 7 then put them to the client and said: look, this is the 8 sort of team that we can field. 9 I remember getting a phone call from Sian Dunstan 10 that said: would you like to be involved? Because in 11 that sense my experience was closer than most to the 12 circumstances, as was Malcolm's, and as was -- and 13 Willie's was because very much he'd successfully 14 delivered a major motorway project in Scotland. They 15 were all seen to be very relevant experiences. 16 So whether Partnerships UK at the time had a panel 17 or not, I couldn't tell you. 18 Q. Thank you. The next document, please, moving on to 2007 19 in September. The document is CEC01562064. We can blow 20 up the cover page. It's headed "tie Project Gateway 3 21 Review". Date of issue to -- this time is the Chief 22 Executive of City of Edinburgh Council on 23 9 October 2006. I think that year is wrong. It should 24 be 2007? 25 A. So do I in retrospect. 48 1 Q. Yes, thank you. 2 We can see a change here that I think this review 3 has been instructed by the City of Edinburgh Council, 4 rather than Transport Scotland. Are you aware why that 5 was? 6 A. No. 7 Q. I see. 8 Were you aware that in the summer of 2007, 9 Transport Scotland had decided to cap their contribution 10 to the project at GBP500 million with the result that 11 any overspend would be borne by the City of Edinburgh 12 Council? Were you aware of that? 13 A. Yes. 14 Q. Were you aware that at around that time, 15 Transport Scotland withdraw from the direct governance 16 arrangements for the project? 17 A. I'm not sure I was. 18 Q. So are you aware whether Transport Scotland withdrew 19 their representatives sitting on the Tram Project Board? 20 A. I couldn't say. 21 Q. Just for completeness, I take it you wouldn't be aware 22 of them also withdrawing their representatives from 23 sitting on any sub-committees of the Tram Project Board? 24 A. No. 25 Q. Thank you. Just the last point on this. Were you aware 49 1 whether Transport Scotland had changed their position to 2 they were now no longer going to review and approve the 3 Final Business Case? 4 A. I honestly can't remember. No, I can't remember. 5 Q. I understand. So sticking with the first sheet of this, 6 we can see the review dates are 25 September and 1 to 7 4 October 2007. It's the same review team, led by 8 Mr Hutchinson, including yourself, Mr Heath. 9 I should perhaps then go to the instruction Appendix 10 A at page 8. I'm not going to dwell on it, but, for 11 example, under "Purpose", it's to include: 12 "Confirm that the latest version of the full 13 business case shows that the benefits plan is still 14 valid ..." 15 There's a number of other things I'm not going to 16 read out. In short, it's to review the project again; 17 is that right? 18 A. Yes. But you'll notice it's a considerable number of 19 tasks relative to the amount of time available. 20 Q. Yes. Essentially it's -- we will go on to that when we 21 come back to the text. 22 Just sticking with this, the interviewees, I think, 23 are on page 10. We blow that Appendix B up again, 24 I think we'll find a similarly varied mixture of people. 25 Just to note, Mr Gallagher is now noted here as 50 1 Executive Chairman. So that's noted. But the other 2 organisations again, tie, TEL, the Council, DLA Piper, 3 Transport Scotland, but also, towards the bottom, we see 4 representatives from both the Tramco and Infraco bidders 5 towards the bottom there. So again it's a fairly wide 6 sample of people you're interviewing at the time you 7 have. 8 Also, please, the next appendix, Appendix C, 9 page 11. We see now this includes a list of documents 10 made available to the review team by tie. So as well as 11 interviewing quite a formidable list of people, you have 12 also quite a formidable list of documents available for 13 review. 14 If you go over the page, just to complete that 15 appendix, we will see there 48 documents, including some 16 fairly bulky things like number 33, STAG2 appraisal. 17 I remember looking at that. It's quite bulky. The 18 previous page mentioned the Final Business Case. So 19 some of these are quite lengthy documents? 20 A. Yes. 21 Q. Then if I can then go back to the body of the report, 22 please, and start at page 2, we should note under 23 "Procurement status", in the second bullet point, the 24 report notes: 25 "Our understanding of the position is as 51 1 follows: Designer appointed with preliminary designs 2 completed and 65 per cent of detailed designs 3 completed." 4 So it sounds as though that is a question of design 5 has remained on the review team's radar, and you are 6 asking about it? 7 A. Yes. 8 Q. If we then please go on to page 3. At the top of the 9 page it explains what happened. The first paragraph 10 states: 11 "This Gateway Review was carried out from 1 October 12 to 4 October 2007 ... with one interview held by video 13 conference on 25 September." 14 Then it states: 15 "The documents listed in Appendix C were made 16 available to the review team but these were not all 17 comprehensively reviewed." 18 I think for understandable reasons. We should then 19 look at the conclusion, please, and blow up the 20 conclusion and look at the three bullet points. Again, 21 I don't want to read them out, in the interests of time, 22 but perhaps I could paraphrase. Bullet point 1 refers 23 to continuing to make good progress. Bullet point 2 24 refers to a number of changes in the senior management 25 team, including project director, et cetera. And bullet 52 1 point 3 notes: 2 "The project faces a challenging period over the 3 next three months with the requirement to appoint 4 a preferred bidder; for due diligence and contract 5 novations ... all of these to be achieved alongside 6 MUDFA and mobilisation works and the maintenance of 7 a tight programme of planning and technical approvals." 8 So that's all been highlighted. Then under 9 "Status", the report states: 10 "The review team has assessed the overall status of 11 the Project as Green ..." 12 That's defined below as follows: 13 "The project is on target to succeed, provided that 14 the recommendations are acted upon." 15 So that's a qualified green, if I can put it that 16 way; is that correct? 17 A. Yes, but I think that's consistent with the OGC Gateway 18 colour code. 19 Q. Thank you. There are some other passages in the report 20 we should look at. If we look at page 4, please, under 21 "Findings and recommendations", about halfway down, 22 I will read out this paragraph which comments: 23 "We would also comment that the entire costs of the 24 project cannot be finalised until the due diligence 25 process with the preferred bidder, value engineering and 53 1 alignment of contract terms has been completed. We 2 understand that value engineering could lead to 3 a significant element of reduction, but that some of 4 this could be offset by the outcome of the due diligence 5 process. We understand that there is significant 6 contingency in the costings, so it may well be that 7 these effects will have a minimal impact on BCR." 8 Is that the benefit cost ratio, I think; is that 9 right? 10 A. It says so earlier in the document. 11 Q. Thank you. Now, just to pause on the question of the 12 due diligence process, I wondered, did that mean due 13 diligence by the bidder? 14 A. Yes. 15 Q. I see. 16 A. And if it's helpful, I would guess that one of the key 17 issues from due diligence for the bidder would be about 18 ground conditions. 19 Q. I understand. And presumably what information the 20 bidder is being provided with in relation to ground 21 condition, what reports and surveys have been carried 22 out and that sort of thing? 23 A. I think that's right, yes. 24 Q. On page 5, please, if I could please go to paragraph c. 25 and I'll read this out: 54 1 "The timeliness of project delivery is of concern. 2 Both bidders have raised the concern that the planned 3 preferred bidder period which will include due diligence 4 on the designs and the novated contracts is tight. 5 There is already a requirement for an overlap between 6 the due diligence process and the mobilisation 7 phase ..." 8 To take it up again later, it states: 9 "We believe that this would be very challenging to 10 achieve by the target date at the level of quality that 11 is expected and we recommend that the preferred bidder 12 is appointed as soon as possible and that the programme 13 during the preferred bidder period is monitored closely 14 at a senior level. We recommend that the tie team 15 should actively consider i. the levels of certainty 16 required to meet the CEC approval process and how this 17 will be achieved; and ii. the implications of contract 18 signature not being achieved by the target date of 19 28 January; and iii. the necessary consequences of any 20 areas which cannot be finalised by contract signature 21 and novation and how (and when) full certainty will be 22 established." 23 If I can lastly read out the paragraph below that, 24 it states: 25 "We understand that there is significant contingency 55 1 within the current costings and that the team expect 2 that the current budget will be more than adequate for 3 phase 1a and the majority of 1b. It will not be 4 possible to determine this precisely until the 5 infrastructure contract price is finalised after the due 6 diligence and value engineering work is complete." 7 And also: 8 "The MUDFA contract is not a fixed price contract so 9 there will always be uncertainty on outturn costs until 10 these works are complete." 11 Just to pause there, Mr Heath, I should first ask 12 you if you have anything to add to what's set out there? 13 A. No, I think that's pretty comprehensive. 14 Q. Is this again an example of, although the review team 15 have given the project a green light, you're still 16 raising a number of matters that require to be addressed 17 by the project team going forward? 18 A. But the green light, as you've seen is conditional. It 19 effectively imposes conditions. 20 Q. I understand. I should also then go on to page 6, 21 please. The paragraph at the top headed 5: 22 "Ensure that management controls are in place to 23 manage the project through to completion, including 24 contract management aspects." 25 I won't read out that paragraph. The paragraph 56 1 after that states: 2 "In addition, there is a recognition that, over the 3 construction period, the TEL management team will need 4 to be strengthened." 5 Then that continues: 6 "Continuity of resource is important within the 7 structure to ensure that the 'corporate memory' is 8 retained from the negotiating phase into the 9 implementation." 10 Why is it important to ensure the corporate memory 11 is retained between these two phases? 12 A. I think it's implicit that in any of these arrangements, 13 as time evolves, people's memories tend to get either 14 more specific or less specific, depending on which side 15 of the table they're on or which is to their commercial 16 advantage. 17 So it was important that tie, as the contractor 18 authority, retained knowledge to remind itself why it 19 was doing things, so that if there were disputes later 20 on, and I think it's perfectly reasonable to expect in 21 projects of this size there will be disputes, you can 22 remember why you did things and you can try and remember 23 what was the underlying agreement and what was the 24 position of the other side at the time, so that if 25 necessary, you can remind them. 57 1 Q. Thank you. If we then move on further down the page to 2 another matter. Under recommendation 7: 3 "Confirm that the approved delivery strategy has 4 been followed or understand why there have been 5 changes." 6 In the context of that we see then there have been 7 a number of key changes within this overall delivery 8 strategy. 9 There are three bullet points. The third bullet 10 point states: 11 "major change to the governance for the project 12 which has resulted in a more focused strategy whereby 13 CEC has sole responsibility for the procurement and risk 14 of any cost overruns and Transport Scotland being the 15 major funder." 16 To pause there, I think that brings back the 17 questions I asked before we looked at this report, about 18 your awareness of Transport Scotland having capped their 19 grant. 20 Is what I just read perhaps a reference back to 21 that? 22 A. Yes. 23 Q. So it looks as though the review team had some awareness 24 of that change? 25 A. We'd known about the numbers before, but not about the 58 1 change in the governance structure. 2 Q. I see. So when I referred you before to 3 Transport Scotland no longer sitting on the Tram Project 4 Board or its sub-committees, has this helped prompt your 5 memory or does your position remain you still don't 6 recollect being aware that they no longer sat on the 7 Tram Project Board or sub-committees? 8 A. Well, to the best of my memory, the two reviews are 9 nearly a year apart. So the opportunity to know that, 10 I think I'm absolutely sure that the first statement 11 I gave you was the correct one, in my mind. 12 Q. Yes. I don't want to confuse you, Mr Heath, but just in 13 terms of the chronology, it was in the summer of 2007 14 that Transport Scotland capped their grant and withdrew 15 from the direct governance of the project and this 16 report had taken place in October. So just a few months 17 after that? 18 A. Sorry, I thought we were talking in terms of the review 19 in 2006. So my misunderstanding. 20 Q. So just to clarify that because it did start with the 21 wrong date, I think, including in the letter to the 22 Council in 2006. 23 Put that to one side. This is the review in October 24 2007? 25 A. And in my view that's the first time we realised the 59 1 implications of Transport Scotland withdrawing from the 2 governance. 3 Q. Yes. Sorry for labouring this, but we've seen the 4 reference to the report, the major change for the 5 governance for the project was to result in a more 6 focused strategy whereby CEC has sole responsibility for 7 the procurement and risk of any cost overruns. So if we 8 pause there, that's pretty clear. The review team must 9 have been aware of that fact, that CEC had sole 10 responsibility for the risk of any cost overruns. 11 A. Yes. That would have come out during -- that would have 12 clearly come out during the discussion. 13 Q. Yes. But what is not obvious is whether the review team 14 were also aware of the governance changes whereby 15 Transport Scotland no longer sat on the Tram Project 16 Board or its sub-committees? 17 A. I don't believe we were until we did that review. 18 Q. When you did this review, do you know whether the review 19 team were also told that Transport Scotland no longer 20 sat on the Tram Project Board nor on any of the Tram 21 Project Board sub-committees? 22 A. I can't remember. I honestly can't remember. I guess 23 it's implicit from that last -- that last bullet point, 24 but I couldn't confirm that we absolutely knew that 25 they'd withdrawn from all of the committees. 60 1 Q. I understand. 2 Now, it's then said in the report that: 3 "The review team believes that all of the above 4 changes have been extremely positive and will contribute 5 to the likelihood of success of the project." 6 Looking at that, why did you consider that the 7 change to the governance of the project was extremely 8 positive and would contribute to the likelihood of 9 success of the project? 10 A. I think there's an answer to that question in my written 11 statement. If we deal with them point by point, I think 12 the criticality of the design -- managing the design is 13 the first bullet point, and the fact that tie had 14 said: we won't effectively subcontract that review and 15 we'll do it ourselves. We saw that as -- at the time as 16 a positive message on the basis that trying to manage 17 a process through a second body at this stage of the 18 project, when by then tie had got the necessary 19 experience and could buy in the necessary skills to do 20 it themselves, was positive. 21 I think we'd realised that the co-location of 22 planning officials at tie, from my experience within 23 Croydon, it's -- the traffic management works and the 24 stopping-up orders and those sort of things just work so 25 much better when everybody is sitting in the same room, 61 1 just the levels of detail that you have to deal with can 2 be dealt with there and then, rather than somebody 3 making a phone call or sending an email and waiting, you 4 know, two hours or longer to get a response. 5 So we saw that as very positive. 6 On the change to the governance, leaving aside when 7 we may or may not have known about it, we saw that 8 having one single body that was responsible for delivery 9 was absolutely a move in the right direction. 10 I think in my written evidence I have said that 11 I thought that Transport Scotland's withdrawal -- and 12 this is a personal opinion -- was positive for the 13 project because the risks of having a project reporting 14 to two different groups of people, with two potentially 15 diverging sets of objectives, I think I have said in my 16 written evidence that if you're not careful, people get 17 much better at reporting than they do at doing, and so 18 if you remove that risk by getting Transport Scotland to 19 behave as if it was an independent fund, overseeing the 20 project, overseeing its investment and having clearly 21 defined processes of an independent assessor to confirm 22 milestones for payment, produces some certainty that 23 wouldn't have been there if they were part of project 24 teams. 25 With their responsibility for the 500 million of the 62 1 public purse, their independence, I think, through an 2 independent assessor, would be extremely valuable. 3 I do understand that perhaps there was some 4 expertise that did reside within Transport Scotland that 5 could have assisted the project later on when it got 6 into difficulties. But I'm still firmly of the view 7 that that could have been done, as I have said in my 8 written evidence, off-line, but from a basic set of 9 arrangements between the parties, I thought 10 Transport Scotland taking a very clear clinical view as 11 a funder was the best thing that could have happened and 12 I think that was the view of the project team. 13 Q. It sounds, Mr Heath, as though your view in that regard 14 is dependent upon Transport Scotland, while not perhaps 15 being part of the formal governance arrangements, still 16 playing a role, whether it's off-line. 17 And I think you mentioned a role of independent 18 assessment; is that right? 19 A. They would have employed an independent assessor to 20 actually validate their stage payments to the project. 21 That's traditional in these type of projects. 22 Q. So what we'll have to examine, perhaps, is the precise 23 role that Transport Scotland did play after the summer 24 of 2007 when they withdrew from the formal governance 25 arrangements? 63 1 A. Yes. The reason I have said what I have said is because 2 my experience of working with Government in London was 3 that you dealt with them on a -- more than 4 a need-to-know basis. You dealt with them on an 5 informed basis, and that was what I meant by being -- by 6 being able to deal with issues of -- with issues 7 off-line. 8 There would be times when you would receive advice 9 and guidance that was particularly irrelevant, that you 10 didn't have, and you wouldn't have thought you needed. 11 That's what I mean by dealing with things off-line. 12 Q. I think just to finally, on this point, conclude, you 13 made reference to, when applying for staged payments, 14 you would expect there to be an independent assessment 15 by the funder as to whether -- 16 A. By somebody on behalf of the funder. It would normally 17 be an engineer -- it would normally be an engineering 18 consultant. 19 Q. I understand. 20 My Lord, it's maybe an appropriate time to pause. 21 CHAIR OF THE INQUIRY: Yes. Just one thing. I think you 22 were asked -- your attention was drawn to the passage in 23 the report where there's reference to your understanding 24 of the state of the design being 65 per cent or whatever 25 it was. 64 1 How did you get that understanding? Was that what 2 someone told you or did you do an examination? 3 A. It was -- we would have a presentation about the state 4 of the design from the then design co-ordinator. And it 5 was based -- basically what we were told. We had no 6 real -- you can see we'd had -- we had no real time or 7 actual opportunity to be able to validate that for 8 ourselves. I think I have said on a number of occasions 9 that we had to rely on the quality of the information 10 that we were given to make these high level strategic 11 recommendations. 12 CHAIR OF THE INQUIRY: Thank you very much. 13 We'll adjourn for 15 minutes to give the shorthand 14 writers a break. We will sit again at 11.25. 15 (11.10 am) 16 (A short break) 17 (11.26 am) 18 CHAIR OF THE INQUIRY: Mr Heath, you're still under oath. 19 A. Yes, my Lord. 20 MR MACKENZIE: Thank you, my Lord. Mr Heath, before we 21 leave the question of Transport Scotland's withdrawal in 22 the summer of 2007, I'll just run a series of 23 propositions by you. 24 I take it you would agree that Transport Scotland 25 have considerable experience and expertise in the 65 1 delivery of major transport infrastructure projects? 2 A. I've got no direct experience of that personally, but 3 I would assume so. 4 Q. And that would be of benefit to the tram project? 5 A. In certain circumstances, yes. 6 Q. By contrast, if we have heard evidence that the Council, 7 City of Edinburgh Council, at the time had little or no 8 expertise or experience in major transport 9 infrastructure projects, would that surprise you to hear 10 in a? 11 A. No. 12 Q. So could I suggest that whatever changes to the form of 13 governance arrangements took place, what you don't want 14 to do is to lose that experience and expertise in the 15 delivery of major transport infrastructure projects? 16 A. I think that's self-evident. However, I think that the 17 circumstances need to be taken into account and the -- 18 in those situations, the roles and responsibilities of 19 both parties would need to be very clearly identified. 20 Q. I can quite understand that. And I can quite understand 21 your position in relation to clear reporting lines, 22 clear responsibilities, only having one owner of the 23 project. The point in short I'm seeking to make is that 24 whatever the governance structure, if there is valuable 25 experience and expertise, one doesn't want to lose that 66 1 and it has to be fed into the project somehow? 2 A. I couldn't agree with you more. 3 Q. Thank you. 4 Now, if I could then go back, please, to the report 5 we were looking at before the break, this was the review 6 carried out in October 2007. 7 If we go to page 10, please. Sorry, it's page 7. 8 This is another matter under paragraph 10. The finding 9 or recommendation had been: 10 "Confirm that there are plans for risk 11 management ..." 12 In answer to that, the report states: 13 "We have met the risk manager who has explained the 14 tools that are being used to identify, monitor and 15 manage the risks in the project. These are impressive. 16 The registers are kept up to date and there is a process 17 for key risks to be highlighted at the Tram Project 18 Board and the tie Board. If there is any weakness, we 19 would note that discussions of these risks have not 20 always been reflected in specific actions in the Tram 21 Project Board minutes." 22 Now, what was the importance of ensuring that there 23 were specific actions noted in the board minutes? 24 A. I think it's basically good project management that if 25 risks -- if risks are being referred to an authorising 67 1 body, you would expect the authorising body to record 2 the actions that they've taken to mitigate or, more 3 importantly, to manage those risks. I think it's no 4 more than that. 5 Q. So it's not enough simply to recognise a risk. One also 6 has to think of ways to address those risks and reduce 7 them and manage them, and all of that should be 8 monitored and recorded? 9 A. That's the whole point of risk management. 10 Q. Thank you. This may tie into, if we can go back to your 11 statement, please, at page 5, at the top of the page we 12 had asked a number of questions in relation to risk, and 13 in letter d., we had asked: 14 "Do you consider that the risk management on the 15 tram project was effective and can you give reasons for 16 your view?" 17 You replied: 18 "I think there was a disconnect between the Risk 19 Manager and his process and effective management action 20 to mitigate risk. This was reflected in one of our 21 reports." 22 Is that a reference to the passage I just read out 23 in the -- 24 A. Yes. 25 Q. Thank you. 68 1 Mr Heath, maybe you can't recall this, but I should 2 ask. At this time in September 2007, do you have any 3 recollection of what the team was told in respect of the 4 progress of the utility diversion works? 5 A. Not in terms of a percentage of substantial completion, 6 no. 7 Q. Because in short, by this time the MUDFA programme, if 8 I can call it that, had been revised by five months, 9 which extended the completion date for the utility 10 diversion works from around May/June 2008 to 11 November 2008, while the Infraco works were planned to 12 start at the beginning of 2009. So quite a short gap 13 between the programmed end of the utility diversion 14 works and the commencement of the Infraco works. 15 Can you recollect if the review team were made aware 16 of these matters? 17 A. I don't think we were. 18 Q. If you had been, is that something that you may have 19 asked questions about and referred to in your report? 20 A. Yes. I think the qualification to that answer would be 21 it would be which of those works were very much on the 22 critical path for the whole of the project. I think 23 I have said in my evidence that in these project -- in 24 these type of projects, some works can be delayed 25 off-line, because they can be dealt with by agreement 69 1 with -- depending on mobilisation works. 2 But if we'd have known that some of them were on the 3 critical path, then clearly we would have had 4 a different view. 5 Q. Thank you. 6 Now, finally in relation to this report, we should 7 just look at the summary of recommendations at page 13. 8 I'm not going to read them all out, but we can see they 9 range between "urgent" to "as soon as possible" to 10 "ongoing". 11 Now, Mr Heath, in this report, which gives a green 12 light with conditions to the project, what would you 13 expect to happen next? 14 A. I would have expected that the recommendations would 15 have been acted on, on the basis at that that was the -- 16 effectively the relationship between that and the green 17 light. 18 Q. And -- 19 A. The green status -- it's very dangerous to call it 20 a green light, because it looks like that you could just 21 pass without anything else happening. It's very clear 22 from the documentation that green means almost proceed 23 with caution, rather than just off you go. 24 Q. I think that's a good point, Mr Heath, but it's perhaps 25 an unfortunate -- those three colours are used. One 70 1 does tend to think of a traffic light, where it's either 2 stop, go or amber? 3 A. Exactly. But I'm afraid that's the way the 4 documentation has been drafted. 5 Q. I understand. But essentially, once you issue your 6 report, it's a matter for the client and the project 7 managers to address the conditions and concerns set out 8 in the report? 9 A. Yes. 10 Q. Thank you. 11 Would you have expected a further review to have 12 taken place before signature of the infrastructure and 13 tram vehicle contracts? 14 A. I think that's hard to say. It didn't because the 15 client decided it didn't need to do -- to have a further 16 review. And I think because of our intermittent 17 involvement in the project, without having sort of 18 regular involvement and sometimes at quite a detailed 19 level, it would be very difficult to form a sensible 20 view about whether a further review was required or not. 21 Q. Is that essentially a matter for the client? 22 A. Yes. 23 Q. I think you did mention in your statement this question 24 of the regularity of review. My impression was you 25 would have expected there to be more regular reviews; is 71 1 that correct? 2 A. I think all I was doing was drawing attention to the 3 fact that the reviews were quite apart in time, and so 4 being able to form views on particular detailed matters, 5 some of which have been alluded to in your questioning, 6 was difficult to form a definitive opinion, 7 and I wouldn't want to mislead the Inquiry by 8 speculating. 9 Q. I understand. Just one final matter at this point. 10 It occurs to me that it's only once a contract is 11 signed that the rights, duties, liabilities, allocation 12 of risk is clear. 13 So it seems on one view, it's only once a contract 14 has been agreed that one can have -- one should have 15 a final review before actually signing the contract. 16 Do you have any views on that suggestion? 17 A. I think that's a sound suggestion. I think with the 18 benefit of hindsight, that is something that might well 19 have proved useful. 20 Q. Again, that's a matter for the client though? 21 A. Yes. 22 Q. Thank you. 23 Could we then please look at a separate review 24 carried out by the team in October 2007, please. The 25 document is CEC01496784. If we look at the first page, 72 1 again this tells us -- a different heading this time: 2 "tie Project Risk Review". 3 Issued to the Chief Executive of the Council, 4 15 October 2007. The review dates 10 to 5 12 October 2007. I think the same review team, but 6 without Ms Dunstan; is that correct? 7 A. Yes. 8 Q. Can you remember how this risk review came about? 9 A. I think that's spelled out in -- that's spelled out in 10 the report, in the terms of reference. 11 Q. So let's go to that, please. Page 14. We see Appendix 12 A, and the client again is the Council. The background 13 is set out there. 14 Then over the page, please, to page 15, we see under 15 "Assignment Objectives", first bullet point: 16 "To review the contract Risk Allocation Matrix for 17 the Infrastructure and Tram Vehicle contracts and 18 identify those risks that remain within the public 19 sector. DLA, the projects and CEC's legal 20 representatives have validated that the Risk Allocation 21 Matrix reflects the risk allocation in these contracts." 22 The next bullet point: 23 "To assess and quantify the level of public sector 24 risk in proposed contractual arrangement, by reference 25 to the Risk Allocation Matrix ..." 73 1 Thirdly: 2 "To provide a reasoned explanation of the adequacy 3 or otherwise of the available financial headroom, in 4 view of the identified risks retained by the public 5 sector." 6 So in short, it is a review of risks, if I can call 7 it that for shorthand? 8 A. Yes. 9 Q. One point which did occur is that why review the 10 contract Risk Allocation Matrix to see the risks, rather 11 than reviewing the contract itself? 12 A. I think it was fundamentally a matter of time. The 13 contract that was helpfully placed in my SteelNet was 14 289 pages long and we didn't get to the appendices. And 15 in that sense none of us -- none of us were lawyers. So 16 what we would have added to that was, I think -- 17 wouldn't have been good value for the client. I think 18 the important thing was to be assured that the risk 19 allocation matrix in the contracts matched what was 20 actually in the client's documentation, and that's 21 I think what you would expect at a high level review. 22 Q. To be fair to the team, perhaps two points. 23 Firstly, you're just doing what you're being asked 24 to do, and secondly, I think I read out that you were 25 being told that both DLA and CEC legal had validated 74 1 that the risk allocation matrix reflected the risk 2 allocation in these contracts? 3 A. I think that's what I was trying to say, however 4 clumsily. 5 Q. I'm sure the clumsiness was mine, Mr Heath. 6 If we then look at page 16, this may be a point of 7 detail, but can we see under "Programme", it says: 8 "The team will visit Edinburgh on 10 and 9 11 October ... the report will be provided on the 15th." 10 I wonder whether the review was two days or three 11 days, because this suggests it was two days. However, 12 the cover sheet said 10 to 12 October, which suggests 13 three days. It may be a point of detail, but do you 14 have any recollection of that? 15 A. No. 16 Q. But whether it's two or three days, either way it's by 17 necessity, given the time frame, going to be a very high 18 level review? 19 A. Exactly. 20 Q. Thank you. I should look at the interviewees, please, 21 at page 17, just to note in passing. Appendix B. It's 22 a shorter list than we saw before. I think essentially 23 it's restricted to tie and CEC representatives. Is that 24 correct? 25 A. Yes. 75 1 Q. This may not be within your knowledge, Mr Heath, but 2 I don't think there are no lawyers on that list, but 3 that may not matter because, as I say, we saw earlier 4 and you have been told in the brief that lawyers have 5 validated the risk allocation matrix? 6 A. Yes. 7 Q. Could we then please look at page 3 of the report. I'll 8 just go through what appear to be some relevant 9 passages, if I may. 10 Under "Conclusions", halfway down, it states: 11 "The review team finds that ..." 12 Firstly: 13 "The risks that remain with the public sector 14 are:" 15 I'll just read out the first few bullet points: 16 "The outturn price and delivery programme of 17 MUDFA works; the design and approvals processes delay 18 the programme; financial close is delayed and has knock 19 on effects on approvals and programme; the novation 20 process is not fully effective; changes of scope." 21 So these are risks identified. 22 Then the next major bullet point, I should read out. 23 It states: 24 "We endorse the assessment that the level of public 25 sector risk on the capital expenditure programme is 76 1 currently GBP49 million at a 90 per cent confidence 2 level. Further, our best estimate of the schedule risk 3 is currently 21 days also at a 90 per cent confidence 4 level ..." 5 Just to pause there, Mr Heath, I wondered when the 6 report states, "We endorse the assessment that the level 7 of public sector risk on the capital expenditure 8 programme is currently GBP49 million at a 90 per cent 9 confidence level", is the review team saying that that 10 risk figure is correct and sufficient, or is the review 11 team saying that you're satisfied correct procedures and 12 processes have been followed in arriving at that figure? 13 A. I think it's the second point. 14 Q. I see. 15 A. I think it's the second point. I couldn't be certain, 16 but I think it's more likely to be the second point than 17 the first. 18 Q. It might become clear if we read on in the report, 19 perhaps? 20 A. I think so. 21 Q. Page 4, please, of the report. The top bullet point 22 states: 23 "We believe that the overall headroom of 24 GBP49 million in the capital expenditure is a prudent 25 provision at this stage of the project's development." 77 1 We'll come back to that. Then, please, if we can go 2 to page 5, where I think the review team go through 3 certain risk areas and consider their positions. On 4 page 5, it's headed "UTILITIES AND MUDFA", and just we 5 note in passing, in paragraph 1.5, under the 6 recommendation: 7 "We recommend that there needs to be considerable 8 focus on the design preparation and design approval 9 mechanism to ensure that MUDFA works are commenced on 10 time and do not need to be revisited. The emphasis on 11 strong contract management must be continued." 12 So is that perhaps again in the category of 13 a concern or issue that the review team are flagging up 14 to the client and project manager to address? 15 A. It is. 16 Q. Thank you. 17 Page 6, please. Under the discussion of 18 infrastructure, look at paragraph 3.1. It's stated: 19 "Final Business Case cost equals GBP223 million." 20 So I think that is information the team is being 21 provided with -- 22 A. That's correct. 23 Q. -- for the estimated cost of infrastructure work? 24 A. I think that -- I think it's fair to say that was 25 probably taken from tender returns. 78 1 Q. I understand. I'll go on in a second to read out what 2 follows. But just to pause there, presumably the review 3 team's approach is obviously based on information you 4 were given, and if the information were to change, then 5 your conclusions may change as well? 6 A. That must be correct. 7 Q. Yes. So when you are assessing the adequacy of the risk 8 provision, one of the assumptions must be that that is 9 a correct estimate of the infrastructure costs? 10 A. Yes. That one should be the easiest one to look at, 11 because you should just be taking an estimate of the 12 fixed cost from the tender. Clearly, the issues that 13 may vary it are the contingency that you're applying. 14 So in that sense, our report then deals with, as you 15 can see in 3.3, the amount that's absolutely fixed and 16 the amount of that 223 that's potentially variable, 17 which is a much smaller number. 18 Q. The review team were proceeding on the important 19 assumption that the infrastructure contract was for 20 a fixed price sum? 21 A. Yes. 22 Q. If you had been told, well, it may not be entirely fixed 23 price, what might the review team have done in their 24 review of risks? 25 A. I think we would have probably wanted to look to 79 1 understand what -- "well, it might not be entirely" 2 meant. 3 Q. Thank you. So returning to the report, please, and 4 under 3.2, "Current Risk", it sets out: 5 "The InfraCo contract is the immediate focus of the 6 project. It is at risk to the possibility of delay in 7 confirming a preferred bidder and cost creep between 8 award of preferred bidder and final contract signature. 9 This risk has been exacerbated by the delays in design." 10 So we see that issue appearing again in the report. 11 Then in paragraph 3.3, please, it states: 12 "Estimated fixed costs equal GBP150 million. This 13 figure is based on the assurance from the tie commercial 14 team that 70 per cent of both of the InfraCo bidders' 15 costs are fixed." 16 So again, that's simply recording what you have been 17 told? 18 A. Yes. I mean, when you're producing a report like this, 19 it's crucial that you specify your assumptions. 20 Q. I understand. Over the page, please, to see 21 a continuation of the question of infrastructure. Under 22 paragraph 3.4.2, "Programme", in the second paragraph we 23 see it states: 24 "The programme will also be at risk to changes in 25 scope but more importantly, vulnerable to delays to 80 1 tasks for which CEC and tie are responsible, notably 2 MUDFA works and approvals. The alignment of the SDS 3 design going forward with the Infraco programme will 4 have a major effect on this aspect." 5 So again, these are simply matters that the review 6 team are flagging up as assumptions on which their 7 report is based, matters that the client and project 8 manager will have to address? 9 A. Yes. 10 Q. Thank you. 11 On page 8, please, if we go to the bottom of the 12 page, please, under paragraph 3.5.3, and I'll read this 13 out again: 14 "Given the financial impacts of delays to the 15 programme, we consider that the tie Programme management 16 function should be central to the Project's management. 17 The linkage between design/approval and InfraCo is 18 critical and will need serious attention." 19 So again, I'm not sure the review team could do more 20 to highlight this as a matter of importance; is that 21 correct? 22 A. I agree with you. 23 Q. Just to pause there, was this a matter that was causing 24 the review team serious concern? 25 A. At that stage, not -- it depends for how you look at the 81 1 word "serious", but sufficient concern to write 2 a recommendation like that. 3 Q. Presumably the review team are having to indulge 4 a little in crystal ball gazing, having to look at ahead 5 at what may happen, the risks that might eventualise. 6 A. I think so, but again, with hindsight, you can see that 7 the two critical factors in this project were the 8 control of the utilities diversion works and the ability 9 to deliver and novate design successfully. 10 And you've seen that every single report we've 11 written has gradually just -- I use the word ramped up, 12 I can't think of a better phrase -- the warnings 13 about: you really do need to keep an eye on design and 14 you do need to keep an eye on the MUDFA works. As you 15 said to me earlier, had we known that the MUDFA works 16 were only 60 per cent completed, we might have taken 17 a slightly different view about those as well. 18 Q. Yes. In relation to the design, I think you prefaced 19 that answer with the benefit of hindsight, but in fact 20 at the time the review team were putting in the reports, 21 they were concerned about design and the effect that 22 might have on the infrastructure contract? 23 A. Yes. 24 Q. Just to continue this passage, please, over the page, 25 page 9, in paragraph 3.5.4, it's stated: 82 1 "It is clear that the amount of design envisaged to 2 be delivered to support novation of the contract to 3 Infraco will not be achieved. We recommend that: tie and 4 CEC need to agree a package of work to deliver design 5 work to support novation and minimises risk." 6 To finish that, I would then like please to go to 7 another passage in the report -- 8 CHAIR OF THE INQUIRY: Before we do that, could you go back 9 to 3.5.3. I think you said that there was 10 a recommendation that you made in relation to that, and 11 can we just look at that recommendation. 12 So you're identifying that there are to be tie 13 organisational changes, but your recommendation is that 14 in those changes certain priorities should be given? 15 A. That's correct, my Lord. 16 CHAIR OF THE INQUIRY: And that's to put programme 17 management at the centre of the -- 18 A. That's absolutely correct. On the basis that the 19 programme will be at the centre of all the discussions 20 throughout the life of the project. 21 CHAIR OF THE INQUIRY: Thank you. 22 MR MACKENZIE: Thank you, my Lord. 23 Presumably, Mr Heath, that would be having realistic 24 programmes as to what can be achieved, rather than 25 aspirational or optimistic programmes? 83 1 A. That's correct. You'll remember that I said very early 2 on in our discussions: whose programme was it. 3 Q. So at this stage, when the review team are producing 4 this report, were the review team clear whose programme 5 it was? 6 A. The only programme we'd seen was the one that was being 7 provided by tie. We had to assume that that 8 incorporated the likely bidders' programme. 9 Q. I understand. 10 A. I'm trying to remember whether this report -- I think 11 this report was completed before financial close, wasn't 12 it? 13 Q. It was, Mr Heath. Financial close in the event was 14 May 2008. 15 A. So in that sense -- in that sense the programme we would 16 have seen probably was more influenced by tie than the 17 contractors on the basis of the -- it was seven months 18 later, when the contract was signed. 19 Q. Seven months later when the contract is signed, would 20 you expect to see alignment between the contractor's 21 construction programme and every other programme, 22 including for design and utility diversion works? 23 A. Yes. 24 Q. What are the risks that may arise if there isn't that 25 alignment? 84 1 A. The first risk is that the project is very unlikely to 2 be delivered on -- is very unlikely to be delivered on 3 time. If it's very unlikely to be delivered on time, 4 I think it's pretty likely to be delivered late, rather 5 than early. 6 If it's going to be delivered late rather than 7 early, it's almost certainly going to involve additional 8 cost, and also, given that this was a highly politicised 9 project, there would be some significant reputational 10 risk to both sides on the -- of the contract. 11 Q. Was it one of the assumptions on which the risk review 12 report was based that there would be alignment between 13 these various contracts by the time the contracts were 14 signed? 15 A. We haven't made that clear, but I think it's implicit 16 that we were basing our report on the programme that 17 we'd seen. We would expect the programme that we'd seen 18 to have done what you described to me, and we would 19 expect a future programme to do the same. 20 Q. Is it normal practice to ensure that all programmes are 21 aligned when a contract is signed? 22 A. Yes, in my experience. It's usually one of the issues 23 that may delay contract signature. 24 Q. Thank you. If we now move on to another matter, please, 25 at page 11. Under the heading, "Assessment and 85 1 quantification of Public Sector risk", it starts by 2 saying: 3 "QRA of the risk matrix produces an estimate of the 4 Public Sector Risk on capital expenditure of 5 GBP49 million. There is currently a matching risk 6 contingency of GBP49 million in the project budget. 7 As part of this risk review, we commissioned 8 a series of 'Monte Carlo' simulations on ..." 9 Various things set out. 10 Just to pause there, Mr Heath. When the report says 11 "we commissioned", does that suggest the review team 12 instructed or asked somebody else to do this? 13 A. I think so. I think it's fair to say that Malcolm was 14 the expert on this because he'd done it in his previous 15 life in defence procurement as well. So I'm pretty sure 16 that he actually just got those run. 17 I can't remember who by. 18 Q. Do you know what Monte Carlo simulations are? 19 A. Personally, I can remember talking about Monte Carlo 20 simulations but if you wanted me to describe them to 21 you, I wouldn't have a clue. 22 Q. I think does it involve a statistical analysis, usually 23 used by computer software, to produce a large variety of 24 different things or events or possibilities and one then 25 can, by running that software, undertake some sort of 86 1 analysis? That's a terrible way to describe it -- 2 A. I think it's better than mine. 3 Q. But something to do with using computers to try and 4 quantify in this case risk? 5 A. Yes. 6 Q. So presumably, like anything involving computers, or 7 indeed any calculation, the output is dependent on 8 inputs? 9 A. Yes. I think -- I think it -- but it also was designed 10 to just act as a reference on the calculations that had 11 already been done. So it was, if you like, a second 12 opinion on those. 13 Q. Do you remember, was it one of the tie individuals who 14 had been asked to run these simulations? 15 A. I don't know. 16 Q. I see. Thank you. I can see what else is said there. 17 Before we leave that, to what extent are these 18 Monte Carlo simulations based on the review team's own 19 figures or input and to what extent are they simulations 20 based on figures and input produced by tie? 21 A. The second. 22 Q. I understand. Over the page, please. I think we will 23 leave Monte Carlo simulations? 24 A. Thank you. 25 Q. Page 12. Under the heading, "The adequacy or otherwise 87 1 of the available financial headroom", it states: 2 "We have reviewed the individual elements of risk 3 and the total amount. We understand that the 4 consideration of risk by the project leaders is 5 a dynamic process and our view must therefore be very 6 much a 'snapshot' taken at this moment." 7 So in short, Mr Heath, your view was based on the -- 8 the team's view was based on that moment in time, but 9 clearly if the facts or information were to change, then 10 the team's views may have changed? 11 A. I think that's what we're saying, yes. 12 Q. I should perhaps just briefly, if I can, then mention 13 some of the conclusions. The report goes on to say: 14 "On this basis, we believe that the overall 15 portfolio amount of GBP49 million is a prudent estimate 16 at this stage of the project's development." 17 Then: 18 "Our review of the individual elements of risk has 19 concluded that we believe the quantum of risk is 20 well-founded. There may be questions whether the 21 assessments of the probability of the risk crystallising 22 and its likely cost are individually good forecasts but 23 it is our view that any variations to these are likely 24 to be very much self-compensating. The key risks at 25 this stage of the project relate to MUDFA, InfraCo cost, 88 1 Programme, Testing/Commissioning." 2 Pausing there, design isn't separately listed as 3 a key risk. Why is that? 4 A. I think it's incorporated in Infraco costs. 5 Q. I understand. It then states in the report: 6 "These risks are appropriately represented in the 7 ”Top 13" risks and we think the sums allocated to them are 8 of the right order at present ..." 9 And in bold text: 10 "... but will require regular review." 11 The report goes on: 12 "Although the Testing/Commissioning risks are not 13 yet individually specified in the risk Portfolio, we 14 consider their impact can be incorporated within the 15 amount envisaged for the overall programme risk." 16 Then: 17 "In our experience we would expect an overall 18 contingency for ”risk“ items of around 10 per cent to have 19 been included in budget estimates. This would equate to 20 a figure of GBP54.5 million. This figure would have 21 been the one-off for the project throughout its life." 22 Then: 23 "The Council should take comfort that the current 24 cost estimates, including risk, are for a total project 25 cost of GBP498 million compared with the budget of 89 1 GBP545 million. From a funding approval viewpoint in 2 late December, it should be recognised that there may be 3 some variation in the GBP498 million figure as the deal 4 is concluded." 5 I think I should finally read out the paragraph over 6 the page. There's a recommendation that the figure of 7 498 million is used as the budget ceiling for all 8 discussions through to financial close, and that the 9 infrastructure amount of GBP222 million remains the 10 focus for all parties through to financial close. 11 Finally, if I then read out, the next paragraph 12 states: 13 "This means that the current GBP49 million of risk 14 is set against a total project cost of GBP498 million. 15 We think GBP320 million of the GBP498 million is 16 fixed/certain through being spent already or subject to 17 agreed firm prices. This means that the GBP49 million 18 of risk is a contingency to a sum of GBP180 million (the 19 variable amount to completion at this stage), which is 20 an extremely healthy position for the project. If we 21 then take the project budget's outstanding GBP45 million 22 as additional contingency plus any amounts built into 23 individual cost estimates, then there is around 24 GBP90 million to GBP95 million of contingency to set up 25 against outstanding costs of GBP180 million to 90 1 GBP225 million. This position is extremely advantageous 2 compared with other tram projects, and should give the 3 Council considerable reassurance at this stage." 4 Mr Heath, looking back on these comments, do you 5 have any views? 6 A. No. 7 Q. So you're quite satisfied they correctly reflected the 8 views of the team at the time? 9 A. Yes. 10 Q. Based on the various assumptions we see set out in the 11 report? 12 A. Yes. I think it's fair to say that when the team looked 13 at that, the team thought that the project was in an 14 extremely good position. 15 Q. For the reasons set out in the report? 16 A. Yes. 17 Q. I understand. 18 Now, I think in relation to the previous report, the 19 September 2007 Gateway type review report, I think I had 20 asked if you would have expected any follow-up review. 21 So if I could ask the same question in relation to this 22 risk review report, would you have expected any 23 follow-up review of the risks? 24 A. I don't think so. I think it's fairly clear in the 25 recommendations what's expected to have been done. I'm 91 1 not sure that having us turning up and looking over 2 somebody's shoulder would have added very much to the 3 process. 4 The report is fairly clear that the governance 5 bodies needed to manage that risk and that was very 6 much -- was very much up to them. 7 They were going to make most of the critical 8 decisions that were -- that would affect the numbers. 9 And so it would have been of little value us trying to 10 second-guess them. 11 Q. You've also set out in the report very clearly the 12 various Final Business Case figures for the various 13 items that your report is based on. So the client and 14 project manager is aware that if any of these figures 15 are to change, then the views in the report may change? 16 A. Yes. 17 Q. If I can put that report to one side, please, another 18 issue, Mr Heath, I think we made you aware of when we 19 sent you some documents requesting your statement, we've 20 heard evidence that shortly before this, within the 21 Council, there was an intention to instruct 22 Turner & Townsend to carry out a review of the risks on 23 behalf of the Council, and that that didn't then take 24 place, and instead the OGC team were asked to produce 25 this review. 92 1 I think we asked you what were your views on whether 2 a review of the risks of a company such as 3 Turner & Townsend may have been a good idea. 4 What was your response to that? 5 A. I think I said that, with the benefit of hindsight -- 6 not with the benefit of hindsight, it may well have been 7 a good idea. The question would have been whether that 8 became burdensome in terms of time, and also what was 9 actually trying to be achieved. 10 The Turner & Townsend review probably would have 11 actually gone into much more detail than we had, and 12 I can only speculate that would have acted as some sort 13 of audit on the numbers, which clearly we were not able 14 to do. 15 In that sense it probably would have been 16 beneficial. But again, it would have been an on balance 17 issue about how long would it have taken relative to 18 importing another programme risk. 19 CHAIR OF THE INQUIRY: If the client had concerns about the 20 accuracy of the information it was receiving, would that 21 be -- would it be appropriate in those circumstances to 22 instruct a review by someone like Turner & Townsend? 23 A. My Lord, Turner & Townsend have got a very good 24 reputation for doing these sort of things. The 25 question -- I think I'd interpret your question would be 93 1 that the client would have had to have been satisfied 2 that they had concerns about the information. 3 CHAIR OF THE INQUIRY: Yes. 4 A. The employment of somebody like Turner & Townsend may 5 well have actually identified that, but it may not have 6 done. There was no guarantee that it would. I'm just 7 floating the possibility that it might have done. 8 MR MACKENZIE: Thank you. 9 Mr Heath, we know that the financial close took 10 place in May 2008. I think then there's one last 11 document I would like to take you to, please. This 12 concerns a peer review carried out in July 2008. The 13 document reference is CEC01327777. 14 We can see from the cover sheet, this is headed 15 "Edinburgh Tram Project Peer Review". The date of issue 16 to tie Project Director, 2 July 2008. Review dates 1 to 17 2 July 2008. 18 So this appears to have been instructed by tie's 19 Project Director; is that correct? 20 A. Yes. 21 Q. Is there something a bit different to the Gateway type 22 reviews we looked at earlier? 23 A. Yes. The Gateway -- the OGC guidance indicates that 24 when the formal Gateway Reviews have completed their 25 cycle, it's quite normal for what are called peer 94 1 reviews, for the people's independent experts to provide 2 a review capability to the client. 3 And this was the first -- I think this was the first 4 one. 5 Q. It was, I think, Mr Heath, yes. 6 Perhaps I can go again to the list of interviewees 7 at page 12, please. We can see you interviewed not only 8 people from tie and the Council, but also two 9 individuals from the infrastructure consortium, 10 Mr McFadzen and Colin Brady, of Bilfinger Berger 11 Siemens, you were able to get their view of things as 12 well. 13 If we then please go -- I'll take this quite 14 shortly. At page 3, firstly, I go to this because 15 I think you made this point yourself earlier, Mr Heath. 16 Under "Conclusion", in the second bullet point, we 17 see the MUDFA works have continued and are some 18 60 per cent complete. Did that cause the team any 19 concerns at that stage? 20 A. I think we were surprised. 21 Q. I see. Can you explain that a little more? 22 A. The presentations that we'd seen throughout the process 23 had been very present -- had been very professional and 24 very positive. I think we were quite surprised to see 25 that progress had been slower than we'd been led to 95 1 believe. 2 Q. Thank you. On to page 6, please. Under "MUDFA Lessons 3 Learned", we see the team received a presentation from 4 Graeme Barclay, and the report states: 5 "We believe that the exercise of the MUDFA works in 6 advance of Infraco is of major benefit to the project 7 and the lesson learned document is honest and open. 8 While the MUDFA contract has developed into a reasonably 9 successful operation with many of the lessons learned 10 being taken forward into the Infraco contract, the fact 11 that the completion date remains uncertain (Works 12 60% complete) will have an increasing impact on 13 the Infraco works. Recommendation 5: that prioritising 14 the remaining MUDFA works packages in order to minimise 15 the impact on the Infraco programme should be undertaken 16 as soon as possible." 17 I think that's self-evident, what that means. 18 Then, please, under "Contract Issues", there are two 19 other bullet points I would like to take you to. The 20 last two bullet points, the second last one states: 21 "SDS design was not complete at the point of 22 novation to BBS, the schedule of outstanding works is 23 captured in the BBS Contract. It is unclear to the 24 review team where risk lies for design development. BBS 25 and tie in interview considered risk lay with the other 96 1 party." 2 Did that surprise you? 3 A. I think from -- I think from the point of the contract, 4 yes. From behaviour, at that stage, yes, I think it did 5 surprise us. 6 Q. Because this is quite soon after contract signature. 7 I think the contracts were signed on 14 and 15 May 2008. 8 This review was 1 and 2 July. So within a matter of 9 weeks of contract signature, parties appear to be unable 10 to agree on where the risk lies for design development? 11 A. Exactly. 12 Q. Just to pause here, the Inquiry has heard reference to 13 something called Schedule Part 4 of the Infraco 14 contract, setting out the price and certain pricing 15 assumptions. 16 Do you remember whether you ever saw Schedule 4? 17 A. I don't believe that we saw Schedule 4 in any detail. 18 I think in my witness statement somewhere in the papers 19 I'd seen, it said we had seen Schedule 4, but I think we 20 might have seen Schedule 4 in passing in the same way as 21 we saw the major Infraco contract. 22 Again, when I -- sort of evidence the contract 23 document that I'd been sent, Schedule 4 isn't there, 24 which is perhaps unfortunate. 25 CHAIR OF THE INQUIRY: That was sent by ... 97 1 A. By -- this was the document that I was sent by the 2 Inquiry team. 3 MR MACKENZIE: I can take you to it now, Mr Heath, if that 4 would be helpful. Might it help to refresh your memory? 5 Give me a minute. 6 If we can go, please, to document USB00000032. We 7 can see this states this is Schedule Part 4, et cetera. 8 Next page, please. The next page again. 9 Now, if we can blow up this page, please, we can see 10 clause 1.1: 11 "The Infraco Construction Works Price is detailed in 12 Appendix A." 13 We then see 1.2: 14 "The Construction Works Price is on a lump sum basis 15 that is fixed ... and not subject to variation except in 16 accordance with the provisions of this Agreement." 17 If we can then please go to -- paragraphs 2.2 and 18 2.3 refer to certain base case assumptions. 2.3, the 19 ”Base Date Design Information” means the design 20 information drawings issued to Infraco up to and 21 including 25 November 2007. 22 If we go over the page, please, we can scroll down 23 that page, please, if we can stop at paragraph 2.8, we 24 see a ”Notified Departure“ is where 25 now or at any time the facts or circumstances 98 1 differ in any way from the Base Case Assumptions ..." 2 Then 2.9: 3 "Pricing Assumptions" means the assumptions in 4 respect of the Contract Price as noted in Section 3.4 5 below." 6 If we can go to the next page, please? 7 A. Is it possible that we could go back to the numbers 8 above? 9 Q. Sorry, yes? 10 A. They look a bit strange to me. 11 Q. Yes. So there we have a construction works price of 12 238,607,664. I think the construction works price in 13 the risk review were -- 14 A. 223. 15 Q. So that's gone up a little. But has gone up. Was that 16 the figure in particular that looks strange to you? 17 A. No, I just saw a figure of 304, and I wanted to see what 18 was -- just wanted to see what we'd already covered in 19 the risk review and the ones that we hadn't. That's 20 fine. 21 Q. Yes, I think that's explained mainly by the tram supply 22 price of the GBP55 million. 23 A. Yes. That's already elsewhere in the risk review. 24 I wouldn't like the figure to go past without me looking 25 at it. 99 1 Q. Next page, please. Top of the page, paragraph 3.1: 2 "The Construction Works Price is a lump sum, fixed 3 and firm price for all elements of work required as 4 specified in the Employer's Requirements as Schedule 5 Part 2 and the Infraco proposals and is not subject to 6 variation except in accordance with the provisions of 7 this Agreement." 8 I'll let you, Mr Heath, just read to yourself the 9 next paragraph. Take a minute to do that. 10 A. Can I look at 3.4 as well? 11 Q. Yes. 3.4 starts with pricing assumptions, and goes on 12 to list, I think, 40 Pricing Assumptions over -- 13 A. Oh, okay. 14 Q. -- the following pages. The first pricing assumption 15 relates to design. You may wish to take a minute to 16 read that, I think. 17 A. No, that's fine. 18 Q. If I may just put you over the page as well, just to 19 complete it, so we can see all of that. You can see, 20 just to complete the top of the page, a little bit more 21 is said about that Pricing Assumption. 22 I think, Mr Smith, I think when you read price 23 Assumption 1, I think you both grimaced and raised your 24 eyebrows. What was your impression? 25 A. I was reading the point about: for the avoidance of 100 1 doubt, normal development and completion of designs 2 means the evolution of design; which seems to me to 3 be -- having read some of your other witnesses' 4 statements, clearly a matter that became an issue. 5 Q. In short, Mr Heath, having just read that Pricing 6 Assumption 1 -- sorry, I should have asked you this, do 7 you recall, does this help jog your memory -- 8 A. No, I have never seen any of this before. 9 Q. I understand. So reading Price Assumption 1 for the 10 first time, what were your initial impressions? 11 A. Could you just go back to it because it's between 12 screens. 13 Q. Sorry. It might be possible to split the screen. Or it 14 may be sufficient just to show you the beginning part of 15 it again. 16 A. It's fine, I have read it now. 17 Q. Thank you. So what are your initial views on that? 18 A. I'm quite surprised. I probably, having read the 19 issue -- having read 3.4, I could see how the two 20 parties could have said something differently to us 21 when -- when we did that review, peer review. 22 And that's why I drew attention to -- I raised my 23 eyebrows about normal design development. 24 One person's normal design development might be 25 another person's major change. 101 1 Q. Did you understand Pricing Assumption 1 when you read 2 it? 3 A. I think so. 4 Q. What was your understanding? 5 A. That the original drawings were fixed and if you changed 6 anything, it was a variation. And I think was it 7 described as a notifiable departure? 8 Q. I understand. If I could go back to the other 9 paragraph, the page on the left-hand of this split 10 screen, page 5, and the paragraph 3.2.1, did you have 11 any views on this paragraph, having read it? 12 A. A personal opinion is I'm quite surprised at it. 13 Q. Why are you surprised? What causes you surprise? 14 A. It looks to be potentially quite open-ended. 15 Q. Why? 16 A. It talks about a developing factual background, which is 17 naturally going to be a cause for debate as it goes into 18 the future. 19 Q. How about the sentence: 20 "In order to fix the Contract Price at the date of 21 this Agreement, certain Pricing Assumptions represent 22 factual statements that the Parties acknowledge 23 represent facts and circumstances that are not 24 consistent with the actual facts and circumstances that 25 apply." 102 1 A. I think you having read it out like that, that's 2 particularly surprising. 3 Q. What does that say in terms of whether this is truly 4 a fixed price contract? 5 A. I think it throws considerable doubt to whether it's 6 a fixed price contract. 7 Q. Mr Heath, you have come to that view on reading this for 8 the first time in a few minutes and with no legal 9 qualifications; is that correct? 10 A. Yes. 11 Q. Thank you. 12 CHAIR OF THE INQUIRY: I think this also recognises that 13 there may be a notified departure literally seconds 14 after the contract is signed. 15 A. That's right, my Lord. 16 MR MACKENZIE: Thank you. Mr Heath, we got diverted a 17 little on to Schedule 4. 18 Can we just go back, please, and complete the report 19 we were looking at, which was CEC01327777. At page 7, 20 please, about halfway down, the top half under the 21 bullet point, "Change and Contract Management", it's 22 said: 23 "We have not reviewed the revised infrastructure 24 contract in detail. However, having listened to the 25 presentation on contract management, we believe there 103 1 are a number of issues that need tie to determine how it 2 will manage the contract and whether it intends to apply 3 the CMP ..." 4 What's that a reference to? 5 A. I wish I knew. I don't know. 6 Q. Yes. I think -- 7 A. It's referred above as a document. So I guess it's -- 8 it's a tie acronym for a document. 9 Q. But what it is, I'm sorry, Mr Heath, in the previous 10 page, which is off-screen, it is described as a change 11 management procedure? 12 A. Okay. 13 Q. As you say, that is a document called change management 14 procedure, you're quite correct. 15 The first bullet point is: 16 "Any outcome from the IFC drawings if they vary from 17 the frozen baseline design (design development)." 18 So it suggests at this time the team were told 19 something about there being a frozen baseline design? 20 A. Yes. I think we'd recommended that all the way through 21 the process, from the outset, we'd always talked about 22 a reference bid and at some stage freezing the baseline 23 design. 24 Q. Why was that recommended? 25 A. On the basis that providing certainty on cost and to 104 1 some extent certainty on programme. You needed to know 2 what you were building. You could then form a view 3 about how long it was going to take and how much it was 4 going to cost. 5 Q. Is that again standard practice? 6 A. Absolutely. 7 Q. Then finally, please, on this document, if I may look at 8 the recommendations on page 13. Look at number 7, if we 9 may. 10 It states, 7: 11 "That tie management should consider whether it has 12 sufficient legal skills to fully understand and execute 13 the contract on a daily basis." 14 I'll leave that document there, unless you have any 15 further comments on that matter, Mr Heath? 16 A. The only thing I would say to the reason for that 17 recommendation is that we've said earlier that we had 18 very little time to look at the Infraco contract. You 19 saw that we effectively had a day to do the work. 20 I can remember that Willie Gillan and I had a very, 21 very peremptory look at a couple of issues in the 22 contract, just to get a feel for it. There was no way 23 you could read the document that that was -- that long. 24 We'd asked the -- contract management whether they 25 were going to apply a light touch to the management of 105 1 the contract, and they said they were. Then we looked 2 at a couple of the provisions and they didn't exactly 3 lend themselves to a light touch. 4 And that sort of rather drove our recommendation 5 here that the people running the contract needed to 6 understand what the intention behind the contract 7 provisions meant, and then how they were going to 8 behave. 9 Q. Just for the avoidance of doubt, what you have just 10 referred to, this discussion where tie said they were 11 going to apply a light touch to the management of the 12 contract, is that in relation to this review in 13 July 2008, after financial close? 14 A. Yes. It was after we'd had the contract management -- 15 well, it was actually some questions that we'd asked the 16 person doing the contract management presentation. 17 Q. So that's after financial close? 18 A. Yes. 19 Q. Thank you. I would like now, please, just to finish 20 off, Mr Heath, but going back to your statement and 21 seeking clarification on one or two matters, if I may. 22 If we could go back to your statement, please, and 23 to page 31. In question 52, in relation to tie and 24 question (b), we asked: 25 "Did you have any concerns at any stage in relation 106 1 to TIE's reporting to the OGC or peer review teams?" 2 You replied: 3 "I think these were set out later in reports. We 4 did slowly reach the conclusion that bad news did not 5 necessarily travel upwards in Tie and beyond, but given 6 our reliance on Tie's information and its own audit and 7 governance procedures to ensure the accuracy of such 8 information we could not refer to hard and fast 9 examples. At the time I felt that the management we 10 interviewed were giving open and honest answers and 11 believed in the information they were providing." 12 Pause there, Mr Heath. I should have said that 13 while we looked at the peer review in July 2008, I think 14 there were some further reviews carried out, certainly 15 I think in 2009, and possibly also in 2010. 16 In short, they're all set out in your statement, 17 I intend to take that as read and not go to them. 18 Can you remember the last peer review that was 19 carried out? 20 A. Not with -- not without looking at the chronology that 21 is in my documents, no. 22 Q. Yes. Certainly if we can go to page 26 of your 23 statement. Question 43 refers to a further peer review 24 having been carried out in December 2009. There's 25 reference there to a report. I think also then if we go 107 1 also, please, to page 29 of your statement. In question 2 47, at the top is a reference to an email from 3 Susan Clark to others in tie in March 2010, and then 4 reference to a note of the meeting with the peer review 5 group on 4 March 2010. 6 Yes, over the page, please, page 30, in letter f., 7 we ask the question: 8 "Was March 2010 the end of the peer review team 9 involvement in the project?" 10 You reply: 11 "To the best of my knowledge that was the end of our 12 involvement." 13 A. That's correct. 14 Q. Thank you. So that was really to provide context for -- 15 going back to page 31, please. Again, if we blow up, 16 please, answer 52(b). 17 So when you say there that "We did slowly reach the 18 conclusion that bad news did not necessarily travel 19 upwards in Tie and beyond", I just wondered 20 approximately when was that? 21 A. I have said we did slowly reach the conclusion. So it 22 was -- it was a gradual -- it was a gradual process. 23 But given our intermittent engagement with the project, 24 it would be -- there wasn't -- there wasn't a critical 25 point that you could say: this has got to a stage where 108 1 we feel uncomfortable. I think in my statement I have 2 drawn attention to issues in an email to Susan Clark 3 indicating that I think we needed to be very clear about 4 the level of information we were getting. 5 So it was about at that stage we realised. 6 It's fair to say that, you know, if you wanted some 7 examples, the obvious example would be the MUDFA works 8 being -- us forming the impression that things were 9 going well, and not being disabused of that impression, 10 and it's also fair to say that when we were interviewing 11 the design people managing the design process, it was 12 hard to get concrete numbers out of them about what the 13 stage -- what the actual stages of progress were. They 14 seemed to vary between one report and another in a way 15 that -- in the time available, we couldn't really be 16 able to get to the bottom of. 17 But I think you just get a feel from experience that 18 things are not going quite as well as people want you to 19 think they are. 20 Q. Just for clarification, when you say interviewing people 21 responsible for managing the design process, do you mean 22 people from tie? 23 A. Yes. 24 Q. I understand. There are some other matters in your 25 statement, please, Mr Heath, I should also go through 109 1 for clarification. 2 Then please go to page 33. We had asked you here 3 for your certain final thoughts. In paragraph (b) of 4 question 57, we had asked you for any views that you had 5 on the main reasons for the failure of the project, and 6 you helpfully set out a number of matters. I would like 7 to ask you about one, please. 8 In paragraph 7 you say: 9 "The contractor was ill prepared for the task, and 10 had probably under-estimated the costs." 11 Could you explain that, please? 12 A. We learned that although -- I think in the review after 13 the contract had been signed, that some of the key 14 subcontractors hadn't been appointed and weren't in 15 place, which struck us as not a sign of preparation, 16 given that the contract signature was seven months later 17 than people had expected in the first place. 18 I think my comment about -- and I said a personal 19 view, they had probably underestimated the costs. 20 The adversarial approach may well have been driven 21 by somebody looking to get their money back. I don't 22 know. I couldn't -- but it's -- it wouldn't be unusual. 23 Q. Thank you. 24 Now, again, at the very bottom of this page, please, 25 if we may, we had also asked in the next subparagraph 110 1 c. whether you had any comments with the benefit of 2 hindsight on how the failures might have been avoided. 3 Again, you helpfully set out your opinions. Look at 4: 4 "Far tighter control of the Utilities Diversion 5 works. (In Croydon these were delivered on time and on 6 budget ... so it is achievable) ..." 7 I just wondered, how was that done in Croydon in 8 a successful way? 9 A. Interestingly enough, we left the utilities to do their 10 own works and agreed sums with them, and had 11 a project -- well, we had a consultant advising and 12 co-ordinating and we had literally just one of my staff 13 actually managing them -- managing the liaison and 14 dealing with all the health and safety matters. 15 I think that was about GBP25 million worth of work. 16 Interestingly enough, the person that was actually 17 helping oversee the utilities diversion works was 18 somebody who had done the similar job in Sheffield, and 19 in fact it was Bill Woolgar who became the Chairman of 20 Turner & Townsend. 21 Q. How were you able to ensure the utility companies did 22 the works on time as opposed to delaying and doing it in 23 their own time? 24 A. I think it was a man management skill. We learned very 25 early on that actually -- this may sound slightly 111 1 strange, but if you keep most of the management out of 2 the process, the guys on the ground are much more 3 effective at getting on with it than having a large 4 number of people turning up now and again and telling 5 them how to do it. 6 Q. Do you remember -- might there have been contracts 7 perhaps as well with the utility companies that may have 8 set out time limits? 9 A. In that sense, they were moving their equipment on their 10 terms. So basically we were persuading -- there was 11 clearly a local incentive because of the -- you know, 12 their relationship with Croydon Council. All I was 13 trying to make the point was that you could do it in 14 a different way with a lot less people, and potentially 15 a lot less project management costs. 16 CHAIR OF THE INQUIRY: How did you co-ordinate or how -- 17 what was the work co-ordinated? Because you've got 18 different utilities companies -- 19 A. Yes, we had a programme to -- a programme to co-ordinate 20 it, and we may have been a bit more lucky than 21 apparently in Edinburgh that actually we were able to, 22 you know, pretty much identify all the key utilities 23 that needed moving, and because we'd done the work 24 before the contractor started, you could make a couple 25 of design changes that were at no cost, so that you 112 1 didn't have to move a very expensive BT cable, for 2 example. 3 So you could work round things and -- by being able 4 to get the work done in good time before it started. 5 CHAIR OF THE INQUIRY: Were the records of utilities in 6 Croydon, were they quite good or did you have to use 7 ground penetrating radar or other -- 8 A. We -- and this is in 1996. So technology has clearly 9 moved on since then, but they used the best technical 10 equipment they could at the time, and I'm not saying 11 Croydon did it any better than Edinburgh would have 12 done, but all I was trying to allude to was that I was 13 quite surprised that the MUDFA works became so complex, 14 when I'd seen circumstances where it had been done 15 within budget and -- I mean, the interesting thing was 16 I think we ended up -- to give you an example, we ended 17 up organising a do for all the people that did the 18 works, and that was the nearest they got to a bonus. We 19 had an absolutely exemplary health and safety 20 relationship because they all just joined into the 21 project. It was very much about managing them as much 22 as anything else. 23 I think the moment you start talking about the 24 contractual process, you introduce, as they would 25 describe it, the men in suits, and once that happens, 113 1 then it's usually -- it doesn't usually speed things up. 2 CHAIR OF THE INQUIRY: Thank you. 3 MR MACKENZIE: Just to finish Croydon, Mr Heath, I take it 4 the Croydon tramline also runs along -- on street. 5 A. Yes. Yes. 6 Q. Is there anything different -- 7 A. The -- Croydon has probably -- I think the numbers were 8 something like 52 per cent were on street and 9 48 per cent were using former railway lines or segmented 10 pathway. 11 There was -- I mean, the centre of Croydon is not 12 anywhere near the same complexity as the centre of 13 Edinburgh. 14 Q. Thank you. Then returning, please, to your statement at 15 page 34, we see point 6 at the top of the page. You 16 say: 17 "Expecting a Claims culture from its contractor." 18 Is that comment particular to this contractor or is 19 that directed at any situation? 20 A. It's directed at any situation in -- after I -- after 21 we'd finished the Tramlink construction, and I was still 22 there, we had a series of -- we, London Transport, had 23 a series of claims to defend that we successfully 24 defended. 25 Q. Thank you. 114 1 CHAIR OF THE INQUIRY: Number 5 you say is: 2 "Better oversight of Tie with greater challenge from 3 above." 4 Who do you anticipate would be doing that? 5 A. I would have anticipated that the -- I suppose the first 6 place would -- having looked at the Business Case, which 7 counsel kindly sent me to look at, that the tie Board, 8 the Business Case indicated that the tie Board had the 9 necessary expertise and skills to challenge -- challenge 10 the delivery element of tie. 11 So that would be the first place. 12 The second place would be if the Council had 13 determined that the Tram Project Board effectively was 14 the controlling body for the project delivery, then it 15 would have been the Tram Project Board and the 16 tie Board. 17 I think my only concern is that those two, looking 18 at the documentation, seem to overlap in terms of 19 responsibility, which again had the potential for 20 confusion. 21 I have some sympathy for the tie project team that 22 working out who they were actually meant to be reporting 23 to at certain stages of the project, it wouldn't have 24 been easy for them. 25 MR MACKENZIE: Thank you. Finally, Mr Heath, I should take 115 1 you to paragraph (f). We asked: 2 "Are there any final comments you would like to make 3 that fall within the Inquiry's Terms of Reference ..." 4 You replied: 5 "I think the role of the contractor in this case 6 needs serious consideration. Was its leadership up to 7 the task in terms of experience?" 8 Pause there. Why do you say that? 9 A. I think -- I think the first point was that we'd 10 interviewed the BBS Project Manager and that was 11 relatively positive, but if you then saw the delivery of 12 the subcontractors, that positive impression was to some 13 extent dissipated. 14 Q. I understand. You also then said: 15 "I was always of the view that exchange rate 16 fluctuations with a subsidiary pricing in sterling and 17 declaring its profits to group in euro may have been 18 a contributory factor to its behaviour." 19 Can you explain that, please? 20 A. It's a personal kite I flew, but I've always found 21 multinational companies that are pricing to the client 22 in one currency and then reporting their profits in 23 another currency are clearly running the risk of 24 a currency fluctuation, and from memory, the pound and 25 the euro oscillated during that period. 116 1 So it would have been perfectly understandable to 2 suddenly find that, depending on the way the exchange 3 rate was fluctuating, the profits that were being 4 reported might have been significantly higher or 5 significantly lower than a group would have expected. 6 And in my experience in those situations, a group 7 would usually expect its subsidiary to do something 8 about it, especially if the profits are lower than they 9 thought they were going to be. 10 CHAIR OF THE INQUIRY: Do you know if Bilfinger Berger had 11 ever constructed a tram system through a city? 12 A. I'm not sure, my Lord. They certainly hadn't done one 13 in the UK. I think later on we asked -- we'd made some 14 enquiries and I think they'd done something in 15 Vancouver, but I don't think they've -- only they would 16 tell you their experience, and it wasn't something at 17 the time that we explored with tie. 18 CHAIR OF THE INQUIRY: Thank you. 19 MR MACKENZIE: Thank you. 20 You then say: 21 "Whilst Tie made a number of mistakes in the 22 process, many of them should have been mitigated by 23 a contractor properly participating in the partnering 24 relationship necessary for the project's success." 25 Can you explain that, please? 117 1 A. I think it -- I think the conversation we had about 2 Schedule 4 and the difference of opinion of the two 3 parties about who was responsible for design development 4 a month after we'd signed the contract was clearly not 5 going to bode well for the future. 6 The part -- in these type of contracts, partnering 7 is very important. It always struck me that both 8 parties had rushed to an adversarial approach rather 9 early on in the process; didn't really seem to explore 10 their options to at least work out what they'd agreed 11 about before they started working out what they've 12 disagreed about. 13 Q. Was that an impression you formed at the time? 14 A. It was certainly an impression that we formed later on 15 when we were doing peer reviews, and in 2010 when we 16 were effectively doing, in inverted commas, consultancy, 17 away from the peer review process to tie, that they were 18 in an adversarial position rather early in the day. 19 Q. Finally, when you stated, over the page, please -- at 20 the top of the page you stated: 21 "Unfortunately when Partnering breaks down 22 a number of people in construction on both client and 23 contractor sides revert to what they know best which is 24 claims and litigation." 25 Is that a final closing comment? 118 1 A. Yes. 2 MR MACKENZIE: Thank you, Mr Heath. I have no further 3 questions. 4 Questions by CHAIR OF THE INQUIRY 5 CHAIR OF THE INQUIRY: Before that sentence, you say 6 something to the effect it's ironic that they -- because 7 Bilfinger Berger had been chosen on the basis of their 8 partnership approach. Where did you get that 9 information? 10 A. That was something we drew from tie reporting to us when 11 they decided who the preferred bidder was, and on that 12 basis. 13 I think I ought to say in fairness to tie, I think 14 the actual negotiations to reach a preferred bidder 15 would have been very difficult because the market for 16 tram delivery in the sense of major projects had shrunk 17 quite appreciably, and so they were having to choose 18 between -- I think they only had two bidders by the end. 19 And I can remember in Tramlink, we were -- we were 20 advised by Ministers that they wanted us to have another 21 bidder for competition, even if the bidder wasn't 22 particularly strong, to keep the competitive pressure. 23 So when there's only two, that's quite -- that's 24 quite difficult. I think they -- in the circumstances, 25 they would have had to work hard to reach a conclusion. 119 1 From memory, I think the two bidders were quite 2 close together on price. So the partnering issue would 3 have probably been one of the factors that made the 4 decision easier for them. 5 I can't be certain, but I think that was the case. 6 CHAIR OF THE INQUIRY: Thank you. I don't think anyone has 7 given any indication of questions. So I presume there's 8 no matter. 9 Thank you very much, Mr Heath. You're free to go. 10 You will still be under your citation in the event 11 that it was necessary to recall you. I hope that's not 12 necessary, but thank you very much. 13 A. Thank you, my Lord. 14 (The witness withdrew) 15 CHAIR OF THE INQUIRY: We will adjourn until 2 o'clock. 16 (1.00 pm) 17 (The short adjournment) 18 (1.57 pm) 19 CHAIR OF THE INQUIRY: Good afternoon, Mr Mackenzie. 20 MR MACKENZIE: Thank you, my Lord. The next witness is 21 Graeme Greenhill. 22 MR GRAEME GREENHILL (affirmed) 23 Examination by MR MACKENZIE 24 CHAIR OF THE INQUIRY: If you could speak into the 25 microphone and not too quickly for the benefit of the 120 1 shorthand writers. 2 Mr Mackenzie. 3 MR MACKENZIE: Good afternoon. Could you state your full 4 name, please. 5 A. My name is Graeme James Greenhill. 6 Q. And your current occupation? 7 A. I'm a Senior Manager with Audit Scotland. 8 Q. You provided a CV, Mr Greenhill. If we could go to 9 that, please, the reference number is CVS00000026. It 10 should come up on the screen in front of you. 11 Now, we can see under "Profile" you explain you're 12 a qualified accountant. You have over 30 years' 13 experience in public sector audit with the National 14 Audit Office and Audit Scotland. I think in short in 15 the National Audit Office was between 1985 and 2000, and 16 Audit Scotland is 2000 to date; is that correct? 17 A. That's correct. 18 Q. Then you say your current job title with Audit Scotland 19 is Senior Manager Investment: 20 "As such I am expected to be Audit Scotland's policy 21 expert in all matters pertaining to public sector 22 investment, including the management and funding of 23 major capital projects and all matters transport. A key 24 part of my role is to identify and oversee performance 25 audits relevant to the investment portfolio." 121 1 When we come to your statement, we'll see the 2 difference between financial audits and performance 3 audits. 4 Sticking with your CV, you explain your involvement 5 in Edinburgh trams performance audits in both 2007 and 6 2011 flows from being, at the time of the 2007 audit, 7 Senior Manager for Transport, Enterprise and Lifelong 8 Learning. 9 If we can go, please, over the page to page 2, we 10 can see in particular about a third of the way down, 11 between the years 2003 to 2009, you were Senior Manager 12 at Transport, Enterprise and Lifelong Learning; and it 13 states you were responsible for being Audit Scotland's 14 policy expert in the Transport, Enterprise and Lifelong 15 Learning portfolio, identifying and overseeing 16 performance audits relevant to the portfolio. 17 If we could then, please, one down in respect of 18 your time at the National Audit Office, between 1985 and 19 2000, you say that between 1993 to 2000 you were 20 a principal auditor, and it states you were responsible 21 for undertaking performance audits of the Scottish 22 Office and other central government bodies. 23 Pause there, Mr Greenhill. In that period were you 24 responsible for undertaking any performance audits of 25 transport projects? 122 1 A. No, I wasn't. 2 Q. Thank you. If I could then please carry on over the 3 page to page 3. Now, we can see this is headed as an 4 annex, "Audit Scotland performance audits I have been 5 involved in". 6 Between 2000 onwards, we see the involvement in 7 a variety of different types of audits. In terms of 8 transport, we see under the year 2001/2002, we see the 9 new trunk roads contracts, "An examination of the 10 competition for the maintenance and management of the 11 trunk road network". 12 Can you explain what that involved, please? 13 A. That was an audit which was requested that the Auditor 14 General consider to undertake by the Transport Minister 15 at the time who -- I can't recall who that might have 16 been. 17 Basically, that was looking at how 18 Transport Scotland had managed the tendering and award 19 of the first generation of contracts for managing the 20 trunk road network. 21 Q. Thank you. So just for the avoidance of doubt, before 22 your 2007 performance audit of the Edinburgh tram 23 project, is it correct that the only prior 24 transport-related performance audit you had been 25 involved in was the trunk roads audit you've just 123 1 mentioned? 2 A. I think there ought to be reference in around about 2005 3 to an audit we did on the NorthLink ferry service. 4 I was involved in that. Perhaps I have missed that one 5 off. 6 Q. Thank you. The NorthLink ferry service, how far north 7 is that? 8 A. That's the ferry service that provides lifeline services 9 to the Orkney and Shetland islands. 10 Q. Thank you. What did that involve? 11 A. Again, that was a slightly different kind of audit. We 12 have a kind of planned programme of performance audits, 13 round about 11 or 12 each year, but there is flexibility 14 within that planned programme to undertake kind of 15 reactive audits, audits in the public interest, and in 16 this particular case, the organisation which was awarded 17 to provide these lifeline ferry services had got itself 18 into financial difficulties, such that 19 Transport Scotland had to -- eventually had to re-tender 20 the contract. 21 So that was looking -- that was one of those kind of 22 reactive audits which the Auditor General decided to 23 conduct in the public interest, looking at the 24 circumstances behind the initial award and what had 25 happened to the service provider. 124 1 Q. Thank you. At the bottom of this page we are looking 2 at, we can see the year 2006/2007. 3 If we go over the page then to the next page, we can 4 see the second item there is the NorthLink ferry 5 services. So was it perhaps in 2006/2007 you were 6 involved in that? 7 A. I think it probably was ten years ago. It probably was 8 2006/2007. That probably would have been my mistake. 9 Q. I also, please, ask at the top of this page a reference 10 to Scottish Executive, and overview of the performance 11 of transport in Scotland. 12 Is that a reference to your involvement in the 2008 13 guidance produced by Audit Scotland? 14 A. No, it's not. That was a separate performance audit. 15 It's -- basically was an overview of how the Scottish 16 Executive was performing against its transport 17 objectives and targets. 18 Q. I see. So that was a performance audit? 19 A. It was a performance audit, yes. 20 Q. And it was a performance audit of the Executive? 21 A. The Scottish Executive, yes. 22 Q. As opposed to a performance audit of any of their 23 particular projects? 24 A. Quite. 25 Q. Thank you. 125 1 If we could put the CV to one side, please, you have 2 provided a statement to the Inquiry, I would like please 3 next to go to. The reference number is TRI00000041_C. 4 It should come up on the screen before you, and you may 5 also have a hard copy as well? 6 A. I have, yes. 7 Q. Thank you. If we start, please, by just going to the 8 last page, page 52, I'll ask you to confirm that is your 9 signature? 10 A. It is. 11 Q. Thank you. So that is the written statement you have 12 provided to the Inquiry? 13 A. Correct. 14 Q. Thank you. Mr Greenhill, your evidence to the Inquiry 15 will comprise both the whole of the written statement 16 and the evidence you give today. 17 Now, sticking with your statement, please, going 18 back to page 1, and in paragraph 1 you helpfully explain 19 the different roles of the Auditor General of Scotland, 20 who you say are responsible for the audit of central 21 government bodies. Then you go on to explain the 22 Accounts Commission is responsible for the audit of 23 local government. 24 You then go on to explain that audit basically forms 25 two streams. There is the annual audit of public bodies 126 1 accounts called the audit of financial statements, and 2 there are performance audits which include best value 3 audits, and I think we will come on to it soon, but 4 I think the 2007 audit you carried out into the tram 5 project was a performance audit; is that -- 6 A. That's correct, yes. 7 Q. Thank you. 8 If we then, please, go to page 41 of the statement, 9 to clarify something here, I should perhaps start on 10 page 40 to put it in context. 11 At page 40 we see the word "guidance", and about 12 a third of the way down on that paragraph, there's 13 a reference to various guidance helped form the 2008 AGS 14 report on the 'Review of Major Capital Projects in 15 Scotland, How Government Works', dated June 2008: 16 "The guidance also helped inform our thinking 17 regarding the 2007 report on the trams project ... The 18 main guidance we have produced on managing major capital 19 projects is set out in a supplement to the 2008 report, 20 called 'Review of Major Capital Projects in Scotland, 21 Report Supplement: Good Practice Checklist for Public 22 Bodies'." 23 And a reference number is given. 24 Then to carry on this, please, on to page 41, it's 25 explained at the beginning of paragraph 92 that: 127 1 "The main report, 'Review of Major Capital Projects 2 in Scotland, How Government Works' came about as part of 3 our normal process for developing our performance audit 4 programme." 5 Then finally, a few sentences down, towards the 6 bottom of this paragraph: 7 "The 2008 report came about as part of that 8 performance audit programme, although I was not involved 9 in this particular audit." 10 So we pause there. What do you mean by "this 11 particular audit"? 12 A. I was not involved in the performance audit review of 13 major capital projects in Scotland. 14 Q. Thank you. Your statement goes on: 15 "We had not done a huge amount of work on major 16 capital projects as a whole and there was an awful lot 17 of money being spent on major capital projects, so we 18 felt this was an area which should be subject to audit 19 attention." 20 I should also ask, Mr Greenhill, there's a reference 21 to various guidance documents produced by Audit Scotland 22 in 2008 in respect of major capital projects. Did you 23 have any involvement into those guidance documents? 24 A. I did not. 25 Q. Thank you. 128 1 We can put that to one side, that issue. I would 2 like, please, now to very shortly come to the question 3 of the 2007 tram audit. 4 First, please, can we look at the question of 5 retention of documents. This is dealt with at page 3 of 6 your statement. In paragraph 3 you explain you have 7 provided a copy of Audit Scotland's retention policy, 8 et cetera. It goes on to say: 9 "Those standards do not require us to retain 10 documents beyond a six year period and so very little 11 remains of the audit information we collected as part of 12 the 2007 performance audit we conducted on the 13 Edinburgh Trams Project. We have a little more in 14 relation to the 2011 report which I have made available 15 to the Inquiry." 16 But on the question of any documents which Audit 17 Scotland have in relation to the 2007 report, 18 I understand any such documents have been made available 19 to the Inquiry? 20 A. What little remains has been made available to the 21 Inquiry, yes. 22 Q. Now, on the question of what remains, it sounds as 23 though there were -- there was a fuller set, most of 24 which have been destroyed; is that correct? 25 A. Correct. 129 1 Q. Do you know when those records relating to the 2007 2 audit were destroyed? 3 A. They would have been destroyed in accordance with our 4 retention policy. 5 Q. Do you know on whose authority those records were 6 destroyed? 7 A. I would have gone through the records and destroyed them 8 at that point. 9 Q. So you would have destroyed those records? 10 A. As a matter of course, yes. 11 Q. Now, come 2011, Audit Scotland produce another report 12 into the tram project. You were aware at that time, 13 probably earlier, of the various difficulties which 14 arose in the project. 15 Did you not stop and think, "Hang on, maybe I should 16 make an exception to the general policy and retain the 17 2007 records"? 18 A. I didn't think that was necessary. We didn't have an 19 awful lot of documents from 2007 that we had retained. 20 I think a lot of documents had been returned to tie. 21 The 2011 report was lodged as an interim report. 22 So -- because it was always our intention to come back 23 to the transport -- to the tram project once it had been 24 completed. So there was a few more documents remaining 25 in respect of the 2011 audit that we had. 130 1 These documents were kept largely for reasons of 2 continuity, such that I was involved in the 2011 audit 3 because I had been involved in the 2007 audit, but there 4 was always the chance that when we came back to the 5 trams project, then I might not be involved in 6 a subsequent audit. 7 Q. Now, you mentioned in respect of the 2007 audit records. 8 Did you say most had been returned to tie? 9 A. I recall returning a lot of tie documents to -- that we 10 had kept in respect of the 2007 audit back to tie at the 11 conclusion of that audit. 12 Q. I understand. So what documents were retained in 13 relation to that audit and why? 14 A. They would have been mainly internal documents, 15 covering, for example, drafts of the report. 16 Q. Those were destroyed? 17 A. They were destroyed in accordance with our document 18 retention policy. 19 Q. Come 2011, did it cross your mind that: I provided 20 a positive report in relation to the project in 2007, 21 but it's gone on to develop all sorts of problems; it 22 would be interesting just to look back and see what 23 I was told at the time of 2007, to see the information 24 on which I based my report? 25 A. I'm sorry, could you repeat that? I didn't catch that. 131 1 Q. Yes. Put it this way. I'm just wondering why you 2 destroyed the records in relation to the 2007 report and 3 why you didn't stop and think: well, these records might 4 be of some assistance. 5 A. Well, I explained that most of the tie documents that we 6 had kept for the purposes of 2000 audit had been 7 returned to tie. So if we needed them, I assumed that 8 we could have got them again in any kind of subsequent 9 audit. 10 Most of the documents that we retained in 2007, from 11 the 2007, were the kind of internal working papers that 12 we had. So I didn't think they were relevant for any 13 subsequent audit that we needed to retain. 14 Q. You mentioned drafts of the 2007 report that were 15 destroyed. Do you remember whether those drafts 16 included any -- were different in any way to the final 17 published report? 18 A. Yes, we have a process whereby once the Auditor General 19 in this case has agreed to the report, then that draft 20 report is provided to the bodies that we're auditing, to 21 allow them to comment on the factual accuracy of that -- 22 the draft report. 23 So we would have received comments from the likes of 24 tie and the Council and Transport Scotland commenting to 25 the draft that the Auditor General had originally 132 1 issued. Likewise we would have had draft reports 2 leading up to the point at which the Auditor General 3 agreed the final draft report for issue. 4 So all that kind of draft report material was 5 deleted. 6 Q. Do you remember what comments were made on the draft 7 report by the different bodies? 8 A. Not to any great extent, no. All I can say was that the 9 comments that were received were not substantial. 10 Q. Thank you. Do you remember what changes were made to 11 the draft report as a result of those comments? 12 A. I do not. 13 Q. Do you know whether any changes were of significance in 14 any way? 15 A. I don't recall there being any comments of significance. 16 The purpose of issuing the draft report and asking for 17 comments is to confirm factual accuracy. So generally 18 there are kind of three classes of comments, I would 19 say, that we do tend to receive. 20 There are comments on factual accuracy. If we've -- 21 say, for example, we have got a number wrong and we have 22 mistaken something, in such cases we will check our 23 evidence and correct the report if it's warranted. 24 Secondly, we can get comments which are perhaps 25 adding context and they can be quite helpful because it 133 1 aids the readers of the report's understanding. So we 2 tend to look quite sympathetically towards these kind of 3 comments and incorporate them when they are relevant. 4 And thirdly, there are comments which I would maybe 5 class as interpretation of the facts, and again, these 6 are considered. We will go back to check our evidence. 7 We might ask for additional evidence and we will change 8 the report as we think fit. 9 The point being that any of these changes that are 10 made are made by -- with the agreement of the Auditor 11 General and/or the Accounts Commission. 12 In the circumstances of the 2007 report, I cannot 13 recall any comment which gave us particular difficulty 14 or concern. So we would have changed the report as we 15 saw fit, but I don't recall it being a particularly 16 difficult task to do that. 17 Q. Thank you. I can quite understand, Mr Greenhill, why 18 you would send the draft report to other bodies to 19 ensure the facts are correct as set out in the report. 20 On the question of the interpretation of the facts, 21 isn't that entirely a matter for Audit Scotland as an 22 independent body? 23 A. Generally speaking, yes, but there are occasions whereby 24 we might have a kind of fundamental disagreement between 25 the interpretation of the facts between ourselves and 134 1 the auditor body, and in those kind of cases we often 2 kind of allow the public body to express its own views. 3 So we will say: here is our opinion and here is the 4 position of the other people that we're auditing. And 5 basically let the reader read into that what they will. 6 Q. In relation to the 2007 draft report, do you recall 7 whether there was any disagreement on the interpretation 8 of the facts between Audit Scotland and the other 9 parties? 10 A. Not that I recall, no. 11 Q. Thank you. Now, you've also described the process that 12 once that has all happened, you then send the final 13 draft, if I can call it that, or your final draft, 14 rather. Is it to the Auditor General for Scotland that 15 you mentioned? 16 A. Yes. Once we get the comments back from the audited 17 bodies, we will sit down with the draft report. We 18 will -- we being the team, I'm talking about, we will 19 agree what changes we think are necessary to make and 20 then we will meet with the Auditor General to discuss 21 what we think should be changed and at that point he 22 will -- he or she will finalise the report. 23 Q. In this case, in relation to the 2007 report on the tram 24 project, did the Auditor General for Scotland suggest or 25 request any changes to the draft report? 135 1 A. Not that I recall. He -- to the best of my 2 recollection, he accepted our suggestions. 3 Q. Thank you. I would like to move on from this point now, 4 please, on to the question of the instruction or 5 discussions, I should say, in relation to what brought 6 about the 2007 report. 7 If I can go to your statement, please, at page 3 and 8 paragraph 5, I think you mention this in different parts 9 of your statement. So I'll take you to each. 10 Page 3, paragraph 5, you start by saying you 11 conducted both audits reported in the 2007 and 2011 12 performance audit reports, et cetera. You go on to say: 13 "The 2007 report was conducted in a very short space 14 of time and because of that, we changed the normal way 15 in which we conducted that audit. As a senior manager, 16 my role was normally to oversee audits and not to 17 actually manage them. As the 2007 report was required 18 to be conducted in such a short space of time, I was 19 asked to carry out the audit and draft the report." 20 If we then, please, go on to page 10. It's page 7, 21 I'm sorry. In fact it's a page earlier than that. It's 22 page 5, in paragraph 8. Then a few lines down, you say: 23 "As I said earlier, the Cabinet Secretary asked the 24 Auditor General to conduct an inquiry into the Edinburgh 25 Trams Project in 2007, which is a very rare occurrence 136 1 and which has only happened on another two occasions. 2 One was on the trunk roads maintenance contracts, which 3 we undertook in 2001/2002, and ..." 4 To pause here, is that the audit I asked you about 5 earlier? 6 A. Correct, yes. 7 Q. To carry on: 8 "... and the other was on the Scottish Prison 9 Service prisoner escort services, conducted by Reliance, 10 in 2004/2005. It is not by accident that I was involved 11 in both of these projects, and I was involved in the 12 Trams project because I had that forensic 13 audit experience of doing things on a quick basis." 14 Then, please, at page 7, you explain at the top of 15 the page that the Auditor General for Scotland, 16 Robert Black, determined the scope of the 2007 review. 17 You go on to say: 18 "Reflecting his independence from Ministers and 19 Parliament, he decides what he is going to audit and how 20 he is going to audit." 21 In paragraph 11 you state: 22 "I understand that the Auditor General received 23 a phone call in June 2007 from the then Cabinet 24 Secretary for Finance and Sustainable Growth, 25 John Swinney MSP, asking if we could undertake a high 137 1 level review of the arrangements in place for estimating 2 the costs and managing the Edinburgh Tram and EARL 3 projects. This was the genesis of the 2007 review. 4 I was obviously not party to the discussion, but as 5 I understand it, on the back of that phone call, 6 Bob Black decided he would undertake the review which 7 resulted in the 2007 report. I think Ministers were 8 feeling a bit of political pressure elsewhere and so 9 they were looking for independent assurance." 10 Then also on this point still at page 8, please, if 11 we see the last few lines of the top paragraph, it 12 states: 13 "Normally, performance audits typically take around 14 nine months, and we have various stages to go through, 15 but we had a very short space of time for the 2007 16 audit." 17 When you say normally performance audits typically 18 take around nine months, can they take longer, depending 19 on the size and complexity of the project? 20 A. They can do. When I was referring to nine months, I was 21 referring to a planned programme of performance audits. 22 So they might typically last between -- say, between 23 six and 12 months, but with a normal duration of round 24 about nine months. 25 The reactive type of reports I referred to earlier 138 1 would tend to be a little shorter, perhaps two or three 2 months normally. 3 Q. I understand. Page -- 4 CHAIR OF THE INQUIRY: How long were you given for this one? 5 A. The Auditor General received the phone call from the 6 Cabinet Secretary on 4 June and we published our report 7 on 20 June. That was an unprecedented short period of 8 time. 9 CHAIR OF THE INQUIRY: And do you know -- did the Auditor 10 General decide that timescale or had the Cabinet 11 Secretary decided it? 12 A. I'm not entirely sure of the complete turn of events. 13 As I understand it, the Cabinet Secretary phoned the 14 Auditor General on the 4th. I'm not sure to what extent 15 any discussion was had over the duration of that report. 16 A day or so after the phone call, the Auditor General 17 met with the audit team to be doing that work, and we 18 discussed what might be doable within the kind of time 19 frame. And on that basis the Auditor General decided 20 that we should aim for a publication date of 20 June, 21 and I'm assuming, but I don't know for sure, that the 22 Auditor General got back in touch with the Cabinet 23 Secretary and spelt out what he was planning to do as 24 part of that audit, and when he was expecting to publish 25 the report. 139 1 MR MACKENZIE: Thank you. Page 11, we will see in 2 paragraph 20 you say, as you just explained, 3 Mr Greenhill: 4 "The review was instructed on 4 June 2007 and the 5 report was finished on 20 June. The short timescale was 6 definitely a challenge. Three weeks for a performance 7 audit is very fast going for Audit Scotland and as 8 I said earlier, normally performance audits can take up 9 to nine months." 10 Now, to pause there, it's not even three weeks, is 11 it? 12 A. It's somewhat less than three weeks. 13 Q. 16 days? 14 A. 16 days. 15 Q. Within that 16 days, just to think about what you had to 16 do, so you have to interview witnesses; is that correct? 17 You have to read documents and then draft -- produce 18 your first draft of the report, get to a stage of the 19 draft that you're happy enough with it to send it to the 20 parties for comment? 21 A. That is essentially correct. What it meant was that 22 a review was by necessity high level. It was very 23 focused mainly on management arrangements within tie. 24 We only looked at particular parts of the Edinburgh tram 25 project. And while I think we followed the basic 140 1 process that we use for all performance audits, it was 2 by necessity quite a compressed process. 3 Q. Just for the avoidance of doubt, what do you mean by it 4 being a high level review? 5 A. Well, where the project was at meant that if we were 6 going to be looking at, say, a capital project in its 7 entirety, we could clearly not do that in respect of the 8 Edinburgh Tram project, because, for example, one of the 9 things that we would look at if we were looking at 10 a major capital project in its entirety, was things like 11 tendering and tender evaluation, and the delivery of the 12 project itself. 13 Now, clearly in respect of Edinburgh Trams project, 14 the infrastructure contract had yet to be signed at that 15 stage, so that was an example of something we could not 16 have looked at for the Edinburgh Trams project at that 17 time. 18 Q. Thank you. 19 Now, I mentioned within those 16 days, you had to 20 interview witnesses, consider documents, and produce 21 a draft you were satisfied going to the other parties, 22 and then comments to come back, for you to consider the 23 comments, perhaps some revising of the draft, meeting 24 with the Auditor General, agreeing and finalising the 25 report, and presumably the editorial things like 141 1 a spellcheck, formatting -- 2 A. That's correct, yes. 3 Q. Is publication of these reports, is that done in-house 4 by Audit Scotland or do you send the report to 5 a printer? What happens? 6 A. We -- at that stage -- yes, we would have sent it to 7 a printer, I think. 8 No, hold on, sorry. That is essentially a Word 9 document. So we would not have -- we did not go through 10 the same procedures that we would normally do for 11 a performance audit. So we were able to cut back some 12 of the time associated with printing. 13 Q. I understand. 14 So within that 16-day period, Mr Greenhill, how many 15 days did you have on the substantive investigations? 16 A. We met with representatives from Transport Scotland -- 17 separate meetings with Transport Scotland, with the City 18 of Edinburgh Council and with tie on 7 June. 19 That principally was to get an update on where the 20 project was and to identify potential documents that we 21 might be interested in. 22 tie responded very promptly to our request for 23 documents. I would have thought five days actually, 24 looking at those documents. 25 Q. Now -- 142 1 A. Certainly no more than five. 2 Q. Yes. It may be suggested that seems a remarkably short 3 period of time to produce a performance audit for 4 a complex infrastructure project costing over half 5 a billion pounds of public money. 6 A. It reflected, as I said, we needed to keep the review 7 high level. And very focused. Looking at the 8 management arrangements within tie principally. 9 Q. Did you have any concerns at the time about conducting 10 an audit within such a short timescale? 11 A. I recognised that it was a challenge, but it was 12 something which I thought was achievable. 13 Q. Did you express any concerns within Audit Scotland about 14 that timescale? 15 A. No, I didn't. 16 Q. Are you aware whether anybody else within Audit Scotland 17 expressed any concerns about producing a performance 18 audit of this project within that timescale? 19 A. No. I mean, as I said earlier, we met with the Auditor 20 General to discuss what was possible within the time 21 frame, and there was common agreement that we should at 22 least endeavour to aim for 20 June as a publication 23 date. 24 Q. Was any consideration given to saying: okay, we will do 25 what we can within that short time period, but the size 143 1 and complexities of the project justified a longer, more 2 in-depth follow-up report. 3 A. Not specifically at that stage, no. Not that I recall 4 anyway. 5 Q. Can I then please come back to your statement. Go to 6 page 20. In paragraph 41, towards the bottom, you say: 7 "It is certainly unusual for us to be asked to 8 undertake a review by Ministers, bearing in mind the 9 Auditor General's independence. This kind of live 10 auditing can be awkward because we do not know what is 11 going to happen in the future." 12 To pause there, I understand from that usually Audit 13 Scotland would audit something that has happened and has 14 finished? 15 A. That's normally the situation, yes. 16 Q. I suppose in that situation you know the outcome? 17 A. Quite. 18 Q. Carrying on in that paragraph, towards the bottom, the 19 second line from the bottom, you say: 20 "I think that we would think seriously about the 21 timing of any similar audit in the future. We need 22 to ..." 23 Over the page: 24 "... be very careful about whether we can offer 25 assurances about something that is at such an early 144 1 stage." 2 Just to pause there, the question of needing to 3 think seriously about the timing of any similar audit in 4 the future, by that I take it to mean Audit Scotland 5 have to consider their future, whether it was 6 appropriate to undertake this sort of audit at all? 7 A. I think maybe my words didn't come out quite as much -- 8 quite as well as I intended them inasmuch that we would 9 always consider carefully any request to do an audit. 10 I think the general point I was trying to make is 11 that in any kind of audit of this nature, we would have 12 to be careful about what kind of assurances we could 13 offer about something which had yet to happen in the 14 future. 15 So we could not in this kind of -- in this kind of 16 case of the Edinburgh Trams project, we could not offer 17 any kind of assurances of guarantees that successful 18 delivery was likely, because there was still an awful 19 lot of things to happen in respect of the project before 20 any such assurances could be given. 21 Q. So rather than undertaking an audit of a live ongoing 22 project, it's better to wait until the project has been 23 completed and to undertake the audit at that stage? 24 A. If you're looking for a full audit of that project, then 25 yes. 145 1 Q. I just wonder whether what you have said in this 2 statement and explained in your evidence, whether these 3 considerations ought equally to have applied back in 4 June 2007 when Mr Black receives the phone call from 5 Mr Swinney. If it's obvious now that you would have to 6 think seriously about the timing of any similar audit in 7 the future, why was that not equally obvious back in 8 June 2007? 9 A. I think we did think carefully about just how much 10 assurance we could give, because it influenced how we 11 designed and undertook the audit and the objective set 12 for the audit. 13 Q. Just to sum up things at this point, if I may, so we 14 have, as at June 2007, we have firstly it is unusual for 15 Audit Scotland to undertake a live audit; is that 16 correct? 17 A. Correct. 18 Q. Secondly, I think we saw from your statement that Audit 19 Scotland didn't have a huge amount of experience in 20 large infrastructure projects; is that correct? 21 A. Not up until that point, I think that's fair, yes. 22 Q. I think we saw from your CV, Mr Greenhill, you yourself 23 had very little experience in large infrastructure 24 projects; is that correct? 25 A. That's correct. 146 1 Q. It appears at that time to have been restricted to 2 reviewing the contracts for the roads maintenance. 3 On top of that, the other factor, we have a 16-day 4 period within which to undertake this audit; is that 5 correct? 6 A. That's correct, yes. 7 Q. Listing the factors in that way, on the face of it, why 8 did Audit Scotland agree to do this? 9 A. I think we need to ask the Auditor General for his 10 opinion as to why he agreed to undertake that audit. 11 It certainly influenced the way in which we 12 conducted the audit and why we concentrated on 13 management arrangements within tie. Because management 14 arrangements is something that we are familiar with, and 15 in that context the nature of the project is of 16 secondary importance. 17 Q. Thank you. 18 CHAIR OF THE INQUIRY: Does the intervention of the Cabinet 19 Secretary maybe not explain why the Auditor General 20 decided that he should undertake this exercise -- 21 A. Well, the Auditor General -- 22 CHAIR OF THE INQUIRY: -- despite his independence from 23 Ministers? 24 A. Exactly. The Auditor General is independent. He would 25 have been within his powers to refuse the Cabinet 147 1 Secretary's request for him to consider undertaking the 2 audit. But for his reasons, he decided that we should 3 undertake an audit. 4 MR MACKENZIE: Would it be fair to say, Mr Greenhill, that 5 the circumstances surrounding this audit were highly 6 unusual? 7 A. I think it's fair to say that, yes. 8 Q. Thank you. Could we now, please, move on to what 9 happened in this audit. Starting with the documents, 10 please, you had available to you, page 7 of your 11 statement. In paragraph 13 you say: 12 "The material and evidence that the 2007 review was 13 based on comprised interviews and a review of key 14 papers, which is a normal part of the audit process. 15 These key papers included the Outline Business Case, 16 reports and minutes relating to meetings of the Tram 17 Project Board ..." 18 You also then mentioned: 19 "A standard audit process is triangulation." 20 Can you explain that, please, by reference to the 21 three points of the triangle? 22 A. It's a general point that when we're looking for -- 23 looking at one piece of evidence, we are effectively 24 seeking to corroborate that evidence through reference 25 to another source of evidence. 148 1 So while we might review papers and reports, we 2 would then corroborate the contents of those papers 3 through an interview with the relevant people. 4 Q. So are the three points of the triangle the auditor at 5 the top, and perhaps one bit of evidence, another point 6 of the triangle, another bit of evidence, the other bit 7 of the triangle? 8 A. Yes. 9 Q. So essentially it involves corroboration, as you put it? 10 A. Yes. 11 Q. So if perhaps a witness had spoken about something, you 12 may want to check if there's a document which confirms 13 that? 14 A. Yes. 15 Q. So if for example, a witness says we had a plan for 16 this, you might want to see a document setting out the 17 plans? 18 A. Exactly, yes. 19 Q. Thank you. I understand. 20 I should also ask: do you have a clear recollection 21 of the documents that were -- that you reviewed for the 22 2007 report? 23 A. I couldn't give you chapter and verse on every document 24 that we had access to. My written statement gives 25 a kind of flavour of the documents. So we had, as it 149 1 says there, access to Business Cases, access to reports 2 and minutes relating to the Tram Project Board, various 3 other documents like a project management plan, a risk 4 management plan and so forth. 5 Q. I think you also refer to having produced 6 an investigations matrix; is that correct? 7 A. Yes. The issues in an investigations matrix is 8 a standard document that we produce for every 9 performance audit. It basically sets out the aims and 10 objectives of the audit, the kind of key audit questions 11 we want to ask ourselves, and the sources of evidence 12 that we will look at to answer the questions that we've 13 asked ourselves. 14 Q. So it may be helpful to go to that matrix. The document 15 reference is ADS00066. 16 Does that look familiar, Mr Greenhill? 17 A. It does, yes. 18 Q. This is the investigation matrix you produced; is that 19 correct? 20 A. It is, yes. 21 Q. I think that we can see in the box on the right-hand 22 column, under "Methods", we can see interviews with 23 senior managers, but also then there's obviously 24 a review of records for each project. So these are the 25 sorts of records you would be looking for as part of 150 1 your review; is that correct? 2 A. That is in general, correct, yes. 3 Q. Then going back to the left-hand column, I'm not going 4 to read out each of the questions, but the first one, 5 for example, is: 6 "What are the current targets for delivery to time, 7 quality and cost?" 8 If we just go through the document fairly quickly, 9 we have an overview, on to the next page, we can see in 10 total there are seven questions or issues that you want 11 to look at. 12 On page 2, please, we can see on page 2 at issues 3 13 and 4. On to the next page, please. We see issues 5 14 and 6, and lastly, the last page, please, we'll see 15 issue 7. 16 Now, that's the question of documents. I would like 17 to go on to the question of interviews you conducted, 18 please. If we can go back to your statement, if I may, 19 to page 9. In paragraph 17 you explain that: 20 "The audit team had a number of meetings with CEC, 21 TIE and/or Transport Scotland in relation to the 2007 22 report, although any documents that we had relating to 23 2007 have been discarded ..." 24 You say: 25 "After a review of my Outlook calendar and that of 151 1 my colleague ... I can confirm the following meetings 2 took place, although this may not be a complete list." 3 You set out there meetings with certain individuals 4 in Transport Scotland on 7 June, the same day with 5 Tom Aitchison and Donald McGougan from the Council, and 6 again the same day with Willie Gallagher, 7 Stewart McGarrity and Graeme Bissett from tie. On 8 14 June, you also met with Bill Reeve. 9 Can you remember why you didn't meet with Mr Reeve 10 on 7 June? 11 A. I cannot. I cannot, sorry. 12 Q. I understand. You go on to say that: 13 "Dick Gill was responsible for looking at the EARL 14 aspect of the 2007 review." 15 So I take it within the 16 days, at least you were 16 able to concentrate on the tram project, because Mr Gill 17 was dealing with the EARL aspect? 18 A. That's correct, yes. 19 Q. You say: 20 "These were high level introductory meetings ..." 21 Over the page, please, top of page 10, you say: 22 "There were other meetings subsequent to 7 June with 23 members of TIE." 24 I just pause there. You explained that on 7 June 25 that you had high level introductory meetings with the 152 1 individuals we see. Did you have any further meetings 2 with anyone from the Council after 7 June? 3 A. No, we didn't. 4 Q. Presumably -- is it correct to say only -- sorry. 5 Start again. 6 On the list on the previous page, we had seen you'd 7 met with Bill Reeve on 14 June. Was that also a high 8 level introductory meeting, or that being a later 9 meeting, was that a more substantive meeting? 10 A. I can recall very little of that meeting. To the best 11 of my knowledge, it was a kind of follow-up based on -- 12 we obviously had been looking at papers within tie, and 13 there was a kind of opportunity to speak in greater 14 detail with Mr Reeve about Transport Scotland's 15 involvement in both projects. 16 Q. We will come back to their involvement when we come to 17 your report shortly, but sticking with this paragraph on 18 the top of page 10, you say: 19 "There were other meetings subsequent to 7 June with 20 members of TIE, but I do not have a full record of who 21 they were with. It was part of the process of 22 triangulation I spoke about earlier that we interviewed 23 people such as TIE's Project Director, Graeme Bissett, 24 and Stewart McGarrity, TIE's Director of Finance ..." 25 Just to pause there, I think tie's Project Director 153 1 was Matthew Crosse; is that correct? 2 A. I cannot remember. The reference to Graeme Bissett and, 3 Stewart McGarrity is because within my Outlook calendar, 4 I could see that we were due to meet with Graeme and 5 Stewart and also the Executive Chair, Willie Gallagher. 6 To my knowledge, I think all of tie's senior 7 management team were present at that initial meeting of 8 the 7th. But who was who and who did what after 9 a period of time, I have kind of forgotten. 10 Q. Thank you. Again, for the avoidance of doubt, are any 11 records available of those meetings? 12 A. No, there aren't, no. 13 Q. Now, Mr Greenhill, I would like to move on to another 14 matter. It's the question of design, and in particular 15 the issue of the project having experienced design 16 difficulties, delay and slippage. 17 Do you remember whether at any of these meetings, 18 anybody told you that there were difficulties and delays 19 in design? 20 A. No. No. 21 Q. If you had been told that, is that likely to be 22 something you would have referred to in your report? 23 A. Correct, yes. 24 Q. Why? 25 A. Because it was a significant issue that should not 154 1 have -- was of significant importance, that we would 2 have commented upon that in the report. 3 Q. If we go, please, to your statement at page 8, in 4 paragraph 15, at the very bottom of the paragraph, the 5 sentence commencing three lines from the bottom: 6 "Obviously as it was the early stages of the Trams 7 project in 2007, we could not look at execution in any 8 detail." 9 Now, to pause there, the design contract had been 10 let in September 2005. So you could perhaps have looked 11 at the execution of the design works and how they were 12 progressing? 13 A. We could have done had we had more time, yes. 14 Q. Just before I go to this next document, are you quite 15 sure that you were not told at the time about any 16 difficulties or delays in relation to design? 17 A. I -- I cannot recall if -- I cannot recall being -- 18 issues of design coming up, no. 19 Q. Thank you. 20 Do you remember during the meetings with tie being 21 given any sort of presentation in relation to design? 22 A. No. 23 Q. Is it possible you were given a presentation on design? 24 A. Do you mean some kind of PowerPoint presentation? 25 Q. Yes. 155 1 A. Not that I can recall, no. 2 Q. Is it possible that happened? 3 A. It is possible, I guess. But I can't recall being -- 4 seeing that. 5 Q. I would like now, please, to go to document CEC01674236. 6 Now, we'll see these appear to be slides with tie's 7 logo. The title is "Edinburgh Tram Project Engineering, 8 Assurance and Approvals" and we can see "Briefing Note 9 for Audit Scotland". Do you see that? 10 A. Indeed, yes. 11 Q. I'm just going to go through them, Mr Greenhill, to see 12 whether either the slides appear familiar or whether the 13 content appears familiar. 14 So slide 2, please. It's headed "Key functions". 15 If we can blow up that slide, I'll just give you 16 a minute to read through it. 17 Again, same with the next slide, please, page 3. 18 Blow it up. We can see it states under the second 19 bullet point: 20 "Phases. Requirements Definition - complete. 21 Preliminary Design - awaiting formal closure. Detailed 22 Design - under way." 23 I'll let you read the rest to yourself. 24 The next slide again, page 4, please. I'll let you 25 read that. 156 1 A. Okay. 2 Q. Again, please, the same for page 5. In the second main 3 bullet point, it states: 4 "19 Design Assured packages for delivery covering 5 whole tram system. 1st package due July 2007, last 6 due November 2007." 7 The next bullet point states: 8 "Each package contains [circa] 100 drawings, 25 9 documents and documentary evidence as above." 10 The last bullet point states: 11 "Key contributor to creation of Infraco confidence 12 and low price." 13 In relation to the last bullet point, did that 14 reflect your understanding at the time of the importance 15 of design? 16 A. My understanding of the importance of design was that 17 the intention was to do the design work early, which 18 would provide certainty and confidence to the Infraco 19 constructor, which would enable them to be able to 20 provide a firm price bid, yes. 21 Q. By firm price, do you mean a fixed price? 22 A. Fixed price, sorry, yes. 23 Q. We have seen other documents, that was part of the 24 procurement strategy. Is that how you understand it? 25 A. Indeed, yes, fixed price. 157 1 Q. The next slide, please, the next page. I'll let you 2 read that yourself. 3 A. Okay. 4 Q. And the next slide again, please. You can see it's 5 headed "Current progress and challenges". It states, 6 first bullet point: 7 "Management and measurement processes." 8 Indent: 9 "Critical issues (potential blockers) identified and 10 managed on a weekly basis." 11 The next indent: 12 "Dashboard showing whole-project progress and 13 forecasts." 14 The next indent: 15 "Critical Issues (blockers) understood, regularly 16 updated and being tackled by all stakeholders." 17 And various other matters set out. 18 Do any of these slides or the content of the slides 19 look familiar, Mr -- 20 A. Sorry, no. No. 21 Q. If you had seen the content so far, would it have raised 22 any concerns on the issues of design? 23 A. Not necessarily so far. I think what they're saying to 24 me is that there is a clear plan that tie is managing 25 the process of bringing forward design work, and that 158 1 whilst there were some challenges recognised, there was 2 nothing at that stage which was suggesting significant 3 problems. 4 Q. I think in the seven slides we have looked at thus far, 5 we haven't seen any reference to design slippage or 6 delay, have we? 7 A. Correct, yes. 8 Q. Let's look then, please, at slide 8. Now, this is 9 headed "Current progress and challenges". We do now see 10 the word "slippage". It says: 11 "Some design slippage to date, typical period view 12 shown below." 13 If we can blow this up a little, it's not, I think, 14 an easy slide to understand. If one looks at the 15 different coloured lines and what they're said to 16 represent, I'm not sure it's clear what they refer to. 17 But I think if we look at the horizontal axis, we 18 can see at least that says "date". Do we see that? 19 A. Indeed. 20 Q. If we can blow up the dates a little, just at the word 21 "date" -- I think we can't blow this up, but if we try 22 and squint? 23 A. Yes, indeed. 24 Q. Above the word "date", can we see, is it 30 April 2007? 25 Do you see that? 159 1 A. Indeed, that's the vertical line, yes. 2 Q. If we carry on to the right a few more months, when the 3 various blue and red lines hit where it appears they are 4 supposed to be achieving, if we at that point look down 5 at the date, we can see perhaps December 2007 and 6 January 2008, around then? 7 A. Yes, indeed. 8 Q. If we then look at the vertical axis, please, we can see 9 this is headed "Number of Milestones", and where the red 10 and blue lines plateau and level out, we see that's 11 about 6,000; is that correct? 12 A. Mm-hm. 13 Q. So on the face of it, it may be that this graph is meant 14 to represent the design milestones required to be 15 achieved by perhaps December 2007 or January 2008? 16 A. Quite. 17 Q. Does that seem reasonable? 18 A. I think that's my interpretation of that, yes. 19 Q. Now, is the other thing we can see from this graph that 20 both the red and blue lines are at a certain angle up 21 until the black vertical line entitled "V15 Reference", 22 and after that vertical line, we can see both the red 23 and blue lines steepen in order to plateau at about 24 6,000 milestones at about December 2007 and 25 January 2008; is that correct? 160 1 A. Yes. 2 Q. So on the face of it -- I appreciate you have no 3 recollection of this graph, Mr Greenhill, but on the 4 face of it, if one were to look at this, this would 5 suggest that something needs to happen in order for the 6 6,000 target to be met by those dates; is that correct? 7 A. Correct, yes. Yes. 8 Q. In short, what it appears to require to happen is an 9 increase in the design output? 10 A. In -- increase in the volume of output, yes. I don't 11 know about the complexity of the individual items 12 necessary to deliver the output. 13 Q. If there's no increase in the production of the 14 milestones, the 6,000 milestones, and if the red and 15 blue lines continue at the same angle as they are to the 16 left of the V15 reference linear black line, if they 17 continue at that angle, it's going to take longer to get 18 up to the 6,000 target, isn't it? 19 A. If you draw a straight line from -- extending the period 20 after April 2007, yes. 21 Q. Then the next slide, please -- 22 CHAIR OF THE INQUIRY: Sorry, go back to that last one. 23 Does the difference between the blue line and the red 24 line indicate delay? 25 A. I don't understand what V15 or baseline V14 actually 161 1 refers to. 2 MR MACKENZIE: Yes. Mr Greenhill, I suspect V refers to 3 version, and I suspect it refers to a version of the SDS 4 design programme. But even with that information, I'm 5 not sure one can properly interpret that graph. 6 A. I would need to think about it, yes. 7 Q. Okay. Over the page, please, is the final slide. It's 8 headed "Current progress and challenges". Slippage, 9 again, we see slippage, due to three reasons. One, 10 a logged critical issue, two, a tie Change Notice having 11 the effect of changing the scope, three, slippage within 12 the Parsons Brinckerhoff SDS contract performance: 13 "These issues are now well understood and the 14 principal blockers (critical issues) are being removed 15 systematically. 16 "All stakeholders represented. 17 "Managed in detail on a weekly basis. 18 "Demonstrable progress in their removal." 19 Now, to pause here, if you had seen the two slides 20 we have just looked at, or at least been told of the 21 information shown on these slides, is that likely to 22 have caused any concerns on your part? 23 A. I think if I could -- having seen this presentation ten 24 years after the event, I certainly would have followed 25 that up in discussion with the relevant tie person 162 1 responsible for managing the design contract and trying 2 to understand further what was going on. 3 Q. If you had been shown these slides? 4 A. If -- well, I can't remember if I had been shown those 5 slides. I can't remember if I did follow up with the 6 individual concerned. 7 Q. One last document, if I may, my Lord, go to, or I could 8 wait until later. There's one accompanying email chain 9 it might be helpful to look at before we -- thank you. 10 This is a document, CEC01670035. You won't have 11 seen this before, Mr Greenhill. We start on page 2, 12 please. We follow from the chain from the bottom. It 13 starts at the bottom with an email from Matthew Crosse 14 who was the Tram Project Director at tie, sent on 8 June 15 to David Crawley, who was tie's Engineering Director, 16 saying: 17 "Subject: briefing note. Dave, as requested 18 a template with headings. Aim is to summarise what 19 happens in your area and convey confidence that we have 20 a plan and achieving the plan, albeit with some 21 challenges." 22 If we then please look at the email above that, 23 Mr Crawley replies the same day, saying: 24 "Try this." 25 We don't have the attachment before us, 163 1 Mr Greenhill, but I have checked and the first version 2 produced by Mr Crawley has a slide 8, issues and 3 challenges. It doesn't have the two we have just looked 4 at at the end. 5 We then go up the email chain, please. 6 This is an email from Matthew Crosse to Mr Crawley 7 and others dated 8 June, the same date. Mr Crosse says: 8 "David, just the job, thanks. Have made a few 9 changes and taken out the last slide merging some of 10 the challenges with the previous slide." 11 Again, to pause, the attachment to this email, 12 I have checked, in short contains slides 1 to 7 we have 13 just looked at. It doesn't contain the last two slides 14 we looked at. 15 A. Okay. 16 Q. The next email, please, this is an email from 17 Stewart McGarrity, the Finance Manager, saying: 18 "The really direct questions that you need to 19 prepare for are: one, has the design gone according to 20 programme so far -- if not why not?" 21 Secondly: 22 "What has changed which gives you confidence the 23 design process will deliver to the procurement programme 24 now on the table?" 25 Over to page 1, please, in the middle section we see 164 1 an email from David Crawley, dated 10 June, to 2 Stewart McGarrity and Matthew Crosse. Mr Crawley 3 states: 4 "Dear all, I have updated the presentation with two 5 additional slides at the end which attempt to answer 6 Stewart's questions." 7 Mr Crawley says: 8 "Matthew, you need to take a view on what I have 9 offered." 10 The last email at the top, please, it's from 11 Matthew Crosse, dated 11 June to Mr Crawley, saying: 12 "I think we should stick with current pack. The 13 last 2 new slides beg a lot of questions. If they 14 want to understand more about current and past progress, 15 we can respond when asked." 16 So what appears to have happened, Mr Greenhill, is 17 that a series of slides were prepared to be shown to 18 you, or at least to be used at a briefing to you, and it 19 appears to be the case that Project Director Mr Crosse 20 has decided that the last two slides which address the 21 question of design slippage were not to be shown to you, 22 or at least the content were not to be disclosed unless 23 you asked. 24 Do you have any views on that, assuming that is what 25 happened? 165 1 A. I think that potentially is one interpretation of the 2 email traffic that you have shown. It's difficult to 3 offer more than that. 4 CHAIR OF THE INQUIRY: I think you were being asked, if that 5 is what happened, do you have any view about that event? 6 A. There is a requirement to provide information. If we 7 are conducting an audit, there is a requirement for 8 people that we are auditing to provide information that 9 we asked for. 10 Are you suggesting that tie have deliberately held 11 information? Well, yes, I think that could be one 12 interpretation of that email traffic. 13 CHAIR OF THE INQUIRY: If somebody deliberately withholds 14 information, if that's what we're looking at -- as 15 I say, if -- what is the position of the Auditor General 16 or -- in the context of an audit? Is that -- 17 A. We would obviously take a very dim of view of that. In my 18 experience I have never seen that happen or certainly 19 never been aware of it happening. 20 MR MACKENZIE: Presumably, Mr Greenhill, you both expect and 21 rely on people to be open and transparent with you. 22 A. Quite. 23 Q. In order that you can produce an accurate audit report? 24 A. Quite. 25 Q. Just finally on this point, before I leave it, we can 166 1 obviously explore this further with Mr Crosse and 2 perhaps other individuals from tie, but if nothing else, 3 does this perhaps reinforce what you told us earlier, 4 that you don't recollect being told anything about 5 design slippage or difficulties? 6 A. Yes. 7 MR MACKENZIE: Thank you. 8 CHAIR OF THE INQUIRY: We will have a break for the sake of 9 the shorthand writers. We will just take ten minutes so 10 that we can try and finish this witness. 11 Thank you. We will resume again at 3.25. 12 (3.15 pm) 13 (A short break) 14 (3.25 pm) 15 CHAIR OF THE INQUIRY: You are still under oath, 16 Mr Greenhill. 17 MR MACKENZIE: Thank you, my Lord. 18 Mr Greenhill, I would like to move on to the 19 question of utility diversions and the MUDFA contract we 20 know was let in October 2006. 21 Did you look -- as part of your review of the 22 execution of the MUDFA contract and how the works under 23 that contract were progressing? 24 A. I think when we published our June 2007 report utility 25 diversion had really just begun. So no, we didn't look 167 1 at the execution of that piece of work. 2 Q. Yes. I think we will come -- we will look at your 3 report to see a reference to the construction works for 4 utilities commencing in July. So just after your 5 report. 6 Did you consider at all what had been done since the 7 MUDFA contract had been entered into in October 2006, 8 and generally how the works under that contract were 9 progressing? 10 A. No, we didn't, no. 11 Q. Again, is that an example of something you may have done 12 if you had a longer time period for the review? 13 A. Had we been conducting a full audit of the trams 14 project, then yes, that is something we could have 15 considered looking at, yes. 16 Q. What, if anything, were you told about whether there had 17 been a slippage in the programme for the utility works? 18 A. I think the risk register flagged up utility diversions 19 as being one of the costliest risks that tie had 20 identified. But I wasn't aware of any specific concerns 21 about there being a delay in the works taking place. 22 Q. Were you aware of any problems and delays in the 23 production of utilities design? 24 A. No. 25 Q. Were you aware of any difficulties or delays in 168 1 receiving responses from the statutory utility 2 companies? 3 A. No. 4 Q. Were you aware that around May 2007, certainly prior to 5 your report, the MUDFA programme had been revised to 6 show a five-month slippage of the end date, ie to show 7 the utility diversion works completing in November 2008 8 rather than May/June 2008? 9 A. I don't think I did, no. 10 Q. Were you aware that, despite that revised programme for 11 the MUDFA works, the Infraco works were still due to 12 start at the beginning of 2009? 13 A. I can't recollect that either, no. 14 Q. If you had been aware of any of these matters, are you 15 likely to have mentioned it in your report? 16 A. I think if we were aware of the specifics that you would 17 have -- that you referred to, then we would have flagged 18 it up in the report. 19 As you'll recall, the report talks about the tram 20 project reaching a critical phase whereby Infraco 21 contracts had to be signed and business cases had to be 22 finalised and signed off. I think that's the kind of 23 thing we would have flagged up as being a critical issue 24 which had to be considered. 25 Q. If we could now, please, go to your report, it's 169 1 reference CEC00785541. 2 At page 4, please, under "Aims and objectives of the 3 review", we see paragraph 2, the first bullet point 4 states: 5 "The high level objectives of this review were to 6 assess:" 7 Firstly: 8 "Whether the Edinburgh Trams and EARL projects are 9 progressing in relation to time and cost targets." 10 Secondly: 11 "Whether appropriate management systems are in place 12 to promote successful completion of the Edinburgh Trams 13 and EARL projects." 14 Then in paragraph 4, under "Our review", it is 15 stated: 16 "The review examined the process for estimating 17 project costs and project management arrangements for 18 the two projects. It does not provide assurances on the 19 accuracy of the estimated project costs." 20 I think we understand the distinction you make 21 there, Mr Greenhill. 22 Then please look at page 5. I won't read out 23 paragraph 5. We can see what that says. 24 Other than I should perhaps just for the avoidance 25 of doubt check this. 170 1 In paragraph 5, when it's stated: 2 "In undertaking this review, we took account of the 3 earlier work that we carried out for our performance 4 overview of transport in Scotland published in 5 September 2006 ..." 6 Pausing there, had you played any part in that? 7 A. The performance overview of transport in Scotland I had 8 overseen, yes, in 2006. 9 Q. The other part of that: 10 "... our regular monitoring of the progress of major 11 transport projects ..." 12 Is this a reference back, I think you have told us 13 before, audit of Scottish Executive, of their projects? 14 A. Yes. 15 Q. I understand. We can see what else is set out there. 16 Again, just a point of detail perhaps. In 17 paragraph 6 where you say: 18 "In preparing this report, we have shown our 19 findings to all of the key players ... and taken their 20 comments into account, but due to our timescale, we have 21 not followed our usual formal clearance process." 22 What is the usual formal clearance process? 23 A. We normally give three weeks to allow audited bodies to 24 come back to us with comments on draft reports. Clearly 25 that wasn't possible in the timescale that we were 171 1 working to with this exercise. So I think we only gave 2 them a couple of days. 3 Q. Thank you. Under "Key messages", we see in paragraph 8 4 it states: 5 "There are three key players common to both 6 projects - Transport Scotland, CEC and tie - all of 7 which have satisfactory high level governance 8 arrangements in place." 9 What do you mean by "high level governance 10 arrangements"? 11 A. We were looking at the overriding process by which 12 information was made available to these bodies about the 13 projects to enable them to scrutinise the progress of 14 the tram and the EARL projects. 15 Q. Can you give any examples of high level governance 16 arrangements as compared to low level governance 17 arrangements? 18 A. One example might be Transport Scotland's overriding 19 arrangements whereby they have an investment decision 20 board, whereby reports are brought to that about the 21 progress of projects as a whole. 22 That might be a kind of high level governance 23 arrangement, whereby at a lower level example, we might 24 be talking about governance arrangements for individual 25 projects, being managed by Transport Scotland. 172 1 Q. Do you remember what the City of Edinburgh Council's 2 governance arrangements were, or is that something you 3 come back to later in your report? 4 A. I think -- I think there's probably reference in the 5 report to the Council's arrangements. 6 Q. Yes, okay. We will come back to that then shortly. 7 So I think the key messages here is essentially 8 a summary of matters you go on to say a little more 9 about; is that correct? 10 A. Yes. 11 Q. Yes. So in paragraph 10 it states: 12 "The current anticipated final cost of Phase 1 in 13 its entirety is GBP593.8 million and estimated project 14 costs have been subjected to robust testing." 15 You go on later in the report to explain that. 16 Paragraph 13: 17 "Some slippage in the project has occurred, but tie 18 is taking action to ensure that phase 1a can be 19 operational by early 2011." 20 We will come back to see what you mean by 21 "slippage". 22 Then page 6, please. Paragraph 14 states: 23 "Arrangements in place to manage the project appear 24 sound with: a clear corporate governance structure for 25 the project ... clearly defined project management and 173 1 organisation; sound financial management and reporting; 2 procedures in place to actively manage risks associated 3 with the project; a clear procurement strategy aimed at 4 minimising risk and delivering successful project 5 outcomes." 6 Paragraph 15 goes on to say: 7 "The project is approaching a critical phase leading 8 up to early 2008 when Cabinet Secretaries and CEC are 9 expected to be asked to approve tie's final business 10 case. This will allow infrastructure construction to 11 commence. A range of key tasks needs to be completed 12 before the final business case can be signed off, and 13 unless work progresses to plan, the cost and time 14 targets may not be met." 15 Go down, please, to page 15. I'm sorry, to page 9. 16 It's, I think -- this is in part 1 an introduction which 17 refers to both the tram and EARL projects, and then in 18 part 2 you go on to look at trams by itself, and then 19 part 3 is EARL. 20 So this is in part 1 in relation to both projects, 21 and we see the heading, "High level governance 22 arrangements are satisfactory". 23 Presumably, that must have been that conclusion 24 based on the governance arrangements in place at that 25 time. 174 1 A. Quite. 2 Q. If the governance procedures were to change, then it's 3 possible your conclusion may have changed? 4 A. Quite. 5 Q. Look then, please, at paragraph 27 in this page in 6 relation to Transport Scotland, where I think you set 7 out in these next paragraphs your understanding of 8 Transport Scotland's governance arrangements then in 9 place; is that correct? 10 A. Yes, it is, yes. 11 Q. In paragraph 28, it states: 12 "Transport Scotland's board meets on a monthly basis 13 and reviews, amongst other things: progress against its 14 business plan; major infrastructure projects; and 15 significant corporate risks." 16 In paragraph 29: 17 "The Chief Executive of Transport Scotland, as 18 Accountable Officer, has overall responsibility for 19 decisions affecting its capital investment programme. 20 A Major Investment Decision Making Board supports the 21 Chief Executive and meets monthly to consider major 22 project proposals and financial changes exceeding the 23 project owner's ... delegated authority." 24 Over the page, please, in paragraph 30, at the top 25 of the page: 175 1 "Separate to the MIDMB, Transport Scotland's Rail 2 Delivery Directorate operates a four-weekly review of 3 its own programme of major projects. All major rail 4 projects are subject to Gateway reviews where an 5 independent team reviews projects at key decision points 6 throughout the project cycle." 7 So you set out there your understanding of the 8 Transport Scotland governance arrangements. Go on to 9 the Council, paragraph 32, please. It states: 10 "CEC approves tie's annual business plan and 11 monitors its arrangements." 12 And a reference to draft business case and approve 13 the final business case. Do you know what is meant by 14 CEC "monitors its arrangements"? 15 A. tie was an arm's length organisation, and as such, there 16 should have been arrangements in place whereby the 17 relationship between the Council and tie are set out. 18 So there should have been an operating -- some kind of 19 operating statement which basically sets out things like 20 the aims and objectives of tie, how it was expected to 21 contribute to the Council's strategic objectives, 22 arrangements for covering things like finance, delegated 23 limits, accounting and auditing arrangements. 24 Also arrangements for how the Council should monitor 25 tie's performance and how tie should be reporting its 176 1 performance to the Council. 2 Q. Thank you. Is the reference to CEC monitors tie's 3 arrangements, is that a reference to CEC monitoring tie 4 and/or monitoring the tram project more generally? 5 A. I think it's referring to overall monitoring of tie. 6 Q. So focused on tie rather than more wider monitoring of 7 the project? 8 A. Yes, yes. 9 Q. Then the next paragraph it states, paragraph 33, in the 10 second sentence or perhaps third sentence: 11 "CEC conducts a quarterly reconciliation of 12 expenditure against the funds drawn down, and its 13 internal auditor certifies that spend has been properly 14 incurred in respect of the project." 15 Now, to pause there, Mr Greenhill, what is set out 16 in paragraphs 32 and 33 doesn't appear to amount to much 17 by way of monitoring on the part of the Council of the 18 tram project, in that you list CEC's monitoring of tie, 19 and it states that the Council were required to approve 20 the Final Business Case, and then there's the issue of 21 the quarterly reconciliation of expenditure. But in 22 terms of the Council monitoring the project more 23 generally, these steps don't appear to amount to very 24 much. Is that fair or unfair? 25 A. These are high level -- these are high level 177 1 arrangements, yes. 2 Q. Yes. 3 In short, what is set out in paragraphs 32 and 33, 4 is what is set out there, does that represent the 5 Council's governance arrangements for the tram project, 6 as you understood them at that time? 7 A. No, it doesn't, no. 8 Q. So what else is there? 9 A. In terms of ...? 10 Q. I'm sorry. So in your answer, by saying it doesn't, are 11 you really saying these relate to the Council's 12 monitoring of tie? 13 A. These are -- these relate to the Council's monitoring of 14 tie. Paragraph 32 really relates to the Council's 15 monitoring of tie. 33 is relating to the administration 16 of funding. That -- neither of these paragraphs relate 17 to how the Council monitors the trams project. 18 Q. I understand. Do we find that anywhere else in your 19 report? 20 A. The only reference to it would be the Council 21 representatives on the Tram Project Board, which comes 22 later on in the report. 23 Q. I understand. 24 In relation then to tie, we see in paragraph 34 -- 25 we can see: 178 1 "tie is overseen by a board which currently 2 comprises an Executive Chairman ..." 3 To pause there, do you consider that a company 4 having an Executive Chairman is good corporate 5 governance? 6 A. Normally you would have split the role between a Chair 7 and a Chief Executive. But it's not -- it's not unknown 8 to combine both roles, I don't think. 9 Q. This is a company responsible for spending over half 10 a billion pounds of public money. Does that not suggest 11 that it requires to be subject to the very highest 12 standards of corporate governance? 13 A. Yes. 14 Q. Now, you don't note in your report that Mr Gallagher 15 being an Executive Chair was a departure from the 16 standard of good corporate governance; why not? 17 A. I don't know. 18 Q. Is that something, with the benefit of hindsight, that 19 you perhaps should have noted? 20 A. With the benefit of hindsight, perhaps it is, yes. 21 Q. Because presumably Audit Scotland as an organisation, it 22 must be a central part to its role to ensure that good 23 standards of corporate governance are met by public 24 bodies? 25 A. Yes. 179 1 Q. You're nodding your head? 2 A. Yes, yes. 3 Q. Thank you. Again, sticking with tie, the second 4 sentence states: 5 "The board meets regularly to review the corporate 6 strategy, and governance arrangements within tie, and 7 oversees project delivery and financial performance." 8 Now, we have heard some evidence that it was the 9 Tram Project Board and not the tie Board that oversaw 10 project delivery. Would that have been inconsistent 11 with your understanding at the time? 12 A. The Tram Project Board had chief responsibility for 13 overseeing the delivery of the Tram Project Board -- the 14 trams project, but tie -- the tie Board had 15 a responsibility for overseeing the management and 16 performance of tie, which to some extent would have 17 included the delivery of the Tram Project Board. 18 So to some extent, I would say there was an element 19 of overlap between both bodies, but I think they would 20 have been coming out with tasks in slightly different 21 ways. 22 Q. Is having an overlap in responsibilities for 23 delivering -- sorry, for overseeing delivery of the tram 24 project, was that consistent with good governance? 25 A. I don't think it's impossible to have an overlap and be 180 1 consistent with good governance. 2 Q. What did you understand the Tram Project Board's 3 responsibilities to be for overseeing delivery of the 4 project, and what did you understand the tie Board's 5 responsibilities to be for overseeing delivery of the 6 project? 7 A. The Tram Project Board had a specific responsibility for 8 overseeing the delivery of the project. The tie Board's 9 responsibilities were wider than just reviewing and 10 overseeing the tram project, because at that time, tie 11 had more than just the tram project on its books, as it 12 were, that it was managing. 13 Q. But both bodies have responsibility for overseeing 14 delivery of the project? 15 A. From a slightly different perspective, I think. 16 Q. Can you explain clearly what the two different 17 perspectives are? 18 A. Well, the Tram Project Board had a specific 19 responsibility for overseeing delivery of the project. 20 Its membership included representatives from each of the 21 parties interested in the trams project. So each of the 22 representatives from the Council and TEL and 23 Transport Scotland could bring their own specific angle 24 to that oversight role. 25 I think the tie role was a more general role around 181 1 the overall management and performance of tie. 2 Q. I think we saw in the Final Business Case the governance 3 section, section 6, it seems to try to limit or narrow 4 the role of the board of tie to largely overseeing tie 5 as an organisation, with the Tram Project Board 6 responsible for overseeing delivery of the project. 7 One can understand that up to a point. What I find 8 a little harder to understand is in paragraph 34, the 9 reference to tie Board overseeing project delivery. It 10 doesn't say overseeing tie as an organisation. It says 11 overseeing project delivery. 12 A. Project delivery is not just tram project. It was 13 overall projects that tie was overseeing as part of 14 their overall responsibilities for overseeing the 15 management and performance of tie. 16 Q. So the reference in this part of the report to project 17 delivery, that means both the tie and the EARL projects? 18 A. Quite. 19 Q. Again, paragraph 35, we can see in the second line, tie 20 has made changes to its board membership, et cetera, in 21 providing a strong focus on project delivery. 22 So is that again both a reference to the tie Board 23 providing a strong focus to project delivery of both the 24 tram and EARL projects? 25 A. Yes. 182 1 Q. But again, it's not a reference to the tie Board 2 focusing on tie as an organisation. The wording is 3 "project delivery". 4 Over the page, please, page 11, in paragraph 37, it 5 states: 6 "There is evidence of regular and effective reviews 7 of progress within tie with the Executive Chairman, 8 non-executive directors and senior staff playing a very 9 active role in overseeing projects." 10 What was the evidence that reviews of progress were 11 effective? 12 A. From recollection, it would have been referring to the 13 fact that there was regular reporting of the progress of 14 the project to the tie Board, and with the tie Board 15 seeking additional information, and basically, you know, 16 asking -- holding the respective project directors to 17 account for what was going on within these projects. 18 Q. Then over the page, please, we get to part 2, which is 19 just to do with tram project at page 12. 20 Then we go on to page 14, please. We see the 21 headline: 22 "The cost and time targets for the Edinburgh Trams 23 project have been developed using robust systems." 24 Then go, please, to page 15. At paragraph 50 -- I'm 25 not going to read all of this out, but it sets out the 183 1 robust testing the Edinburgh tram project cost estimates 2 have gone through, and we can understand that, I think. 3 Simply one point of detail, perhaps. There's 4 a reference to, for example, in November 2006, it 5 compared estimates for infrastructure construction, 6 a significant element of the total project cost, with 7 those of a recently completed tram system, et cetera. 8 What was that system? 9 A. I don't recollect, and I think that was something which 10 came up in my written statement, where it was suggested 11 that it might have been the Merseyside tram system, 12 which I understand was not completed. 13 So I do not recall which specific completed tram 14 system we were talking to, if it wasn't Merseyside. 15 Q. Yes. I think Audit Scotland have provided the Inquiry 16 with a benchmarking document which tie had produced 17 to Audit Scotland at the time on 14 June 2007. I don't 18 think we have to go to it, but for the record, it's 19 CEC01567302. I think that benchmarking document refers 20 to the Mersey trams; is that correct? 21 A. It does, yes. 22 Q. If it's correct, that was the benchmarking system and it 23 hadn't actually been completed. Does that then suggest 24 that the reference in your report to a recently 25 completed tram system is inaccurate? 184 1 A. If we're talking about Merseyside, then this is 2 inaccurate, if we're talking about a recently completed 3 tram system. 4 I think what -- the first part of the sentence says 5 "in November 2006". 6 Now, in November 2006, that was the date that tie 7 received the report from the consultants who were 8 commissioned to look at costs. So I cannot recall, but 9 it's possible that the reference to November 2006 might 10 have also included the consultants doing some kind of 11 benchmarking work on tie's behalf as well. 12 Q. But it seems in short, Mr Greenhill, your position seems 13 to be that you're not -- you can't recall what this 14 other tram system was, nor can you recall whether it had 15 in fact been completed? 16 A. Correct, yes. 17 Q. Now, moving on, please, to page 16. Top of the page, 18 the question of slippage. The headline states: 19 "Some slippage in the project has occurred but 20 action is being taken to ensure that phase 1a can be 21 operational by early 2011." 22 I'll let you, if I may, just read paragraph 53 23 yourself. I won't read that out. 24 A. Okay. 25 Q. Then paragraph 54, I will read out. It states: 185 1 "These timescales have been amended as the project 2 has progressed. tie's draft final business case in 3 November 2006 indicated an operational start date for 4 phase 1a of December 2010 and for phase 1b of 5 December 2011. Since then, the estimated dates to sign 6 contracts for infrastructure construction and vehicle 7 delivery have slipped by four months to January 2008, to 8 allow sufficient time for negotiations. tie has 9 responded to this delay by bringing forward advance 10 works, including critical path works such as the 11 construction of the tram depot at Gogar, and now expects 12 phase 1a to be operational on 21 January 2011." 13 Paragraph 55: 14 "tie's strategy to deliver the programme on target 15 is to maintain sufficient time between utilities 16 diversion work and infrastructure work. Infrastructure 17 construction bidders provided their own draft work 18 programmes to tie in May 2007 and tie is currently 19 analysing these. The full extent of contingency within 20 the programme will be confirmed once the bidder 21 programme is negotiated and agreed." 22 Now, to pause there, Mr Greenhill, in this 23 discussion of slippage, there is mention of slippage in 24 the Infraco procurement timetable, but there's no 25 mention here of any slippage in relation to the design 186 1 programme or works, is there? 2 A. Correct. 3 Q. In fact, there's no mention anywhere in your report of 4 slippage in the design programme of works? 5 A. Correct. 6 Q. Can you explain that? 7 A. Because I was not aware that there was slippage. 8 Q. Thank you. 9 Now, again, in this section of the report, there is 10 no mention of any slippage in the utility diversion 11 programme of works; is that correct? 12 A. Indeed, yes. 13 Q. Again, I don't think there's mention anywhere in your 14 report to slippage in the utility diversion programme of 15 works; is that correct? 16 A. Indeed, yes. 17 Q. Again, are you able to explain that? 18 A. Because I wasn't aware that there was slippage. 19 Q. Thank you. 20 Then on to page 16, please. Coming back to the 21 question of governance. 22 We see the headline: 23 "Arrangements in place to manage the project appear 24 sound." 25 Beneath that, another headline: 187 1 "There is a clear corporate governance structure for 2 the project which involves all key stakeholders." 3 Paragraph 56 states: 4 "The Tram Project Board exercises overall governance 5 of the project." 6 It then goes on to say that it includes senior 7 representatives from tie, Transport Scotland, CEC and 8 TEL, and has full delegated authority from CEC, through 9 TEL and Transport Scotland, to take the actions needed 10 to deliver the project to agreed cost, timescale and 11 quality standards. 12 The reference to "full delegated authority", would 13 you expect such delegation to have been done in a formal 14 way? 15 A. I would have expected it to be in writing, yes. 16 Q. Would you expect powers to have been formally delegated 17 to the Tram Project Board to enable it to fulfil its 18 function? 19 A. Yes. 20 Q. Would it have caused you any concern or have been 21 a matter for comment in your report if you had been told 22 that in fact there had at this time been no formal 23 delegation of authority to the Tram Project Board? 24 A. Yes, I think it would have been, yes. 25 Q. There's also then -- the paragraph goes on to say: 188 1 "The Tram Project Board has a clear written 2 remit ..." 3 I'm sorry. The sentence before that, I'm sorry, 4 which states that the Tram Project Board having full 5 delegated authority to take the actions needed to 6 deliver the project to agreed cost, timescale and 7 quality standards; was your understanding that the role 8 and responsibility of the Tram Project Board was to 9 deliver and execute the project or rather was it to 10 monitor the delivery and execution of the project by 11 others? 12 A. It was the latter, yes. 13 Q. Over the page, please, to the diagram at page 17. If we 14 could blow up that diagram, please, and take a minute to 15 look at it. 16 Do you consider this shows a clear corporate 17 governance structure? 18 A. As it stood at the time, yes. 19 Q. Who does the Tram Project Board report to? 20 A. The Tram Project Board was a freestanding board. Its 21 role was really to bring together the different 22 representatives of the organisations with an interest in 23 delivery of the project, and really to support the -- 24 the Chief Executive of TEL as the senior responsible 25 owner to fulfil his functions for -- his 189 1 responsibilities for integrating the tram project with 2 the bus network. 3 Q. So who does the Tram Project Board report to? 4 A. In that context it doesn't have direct reporting lines. 5 Q. For there to be a clear corporate governance structure, 6 surely the Tram Project Board requires to have a clear 7 reporting line to somebody. 8 A. What I thought was happening was the bodies involved 9 were trying to take into account various guidance which 10 existed on roles and responsibilities for major project 11 delivery, whilst reflecting the specific circumstances 12 of the tram project. 13 Hence the involvement of all the different parties 14 within the Tram Project Board. 15 Q. So are you able to say who the Tram Project Board 16 reported to? 17 A. I don't think it reported to anyone in this context. 18 Q. You also mentioned the question of the Chief Executive 19 of TEL as -- forgive me -- either senior responsible 20 owner or senior responsible officer. Which was it you 21 mentioned? 22 A. Owner. 23 Q. Owner. Now, this is June 2007 during the procurement 24 stage of the tram project. Do you agree that's a very 25 important stage of the project? 190 1 A. Yes. Yes. 2 Q. And breaking things down into stages, there's perhaps 3 the procurement stage, construction and operational 4 phases? 5 A. Yes, indeed. 6 Q. Now, who did you understand to be the senior responsible 7 owner for the tram project during the procurement phase? 8 A. In this phase? The Chief Executive of TEL. 9 Q. Who was ... do you remember his name, I'm sorry? 10 A. Mr Renilson. 11 Q. Yes, I think it's Neil Renilson. Now, the Inquiry may 12 hear evidence in due course from Mr Renilson himself 13 that his position was that he was only the senior 14 responsible owner for the project for the operational 15 phase. 16 Now, if that is the evidence the Inquiry hears from 17 Mr Renilson, would that cause you any concern? 18 A. I think it would do, yes. 19 Q. Why? 20 A. Because it would suggest there wasn't any senior 21 responsible owner for the procurement phase. 22 Q. Presumably it must be self-evident that a project like 23 this needs a senior responsible owner during the 24 important procurement phase? 25 A. Yes. 191 1 Q. Thank you. 2 CHAIR OF THE INQUIRY: If he was only responsible for the 3 operational phase, would that mean that there was no 4 senior responsible owner of either the procurement stage 5 or the construction? 6 A. Unless the governance arrangements changed as the 7 project moved from procurement into construction, yes. 8 MR MACKENZIE: Now, Mr Greenhill, pausing to look at this 9 terminology of senior responsible owner, could you go 10 back, please, to your investigations matrix, which is 11 ADS00066. 12 Can we please go to page 2. In issue 4, you ask the 13 question: 14 "Is project organisation consistent with good 15 practice?" 16 The next column states: 17 "Are the following in place with demonstrated 18 qualifications, experience and competence?" 19 You then list: 20 "Investment decision-maker ...; Senior Responsible 21 Owner; Project Sponsor; and Project Manager." 22 I think is this familiar terminology from -- 23 A. It is, yes. 24 Q. From OGC? 25 A. Indeed, yes. 192 1 Q. If we could then go back, please, to your June report, 2 page 17. It was the June 2007 report which is 3 CEC00785541. 4 Now, we saw in your investigations matrix, you had 5 noted the need to confirm that there were these four 6 positions in place: investment decision-maker, senior 7 responsible owner, project sponsor and project manager. 8 Now, those terms don't appear anywhere in your 9 report. Why not? 10 A. The -- just to explain, the issues in the investigations 11 matrix that we produced there is normally the product of 12 several weeks' work. 13 For this particular project it was produced very 14 quickly, before we had a full understanding of the 15 project. To some extent it was a draft document and we 16 wouldn't necessarily have followed it in its entirety 17 from start to finish. 18 But again, it would -- I would accept that it might 19 have been better, had there been a paragraph which 20 spelled out who was who within that Tram Project Board 21 structure. 22 Q. I just wondered whether it may be the reason you didn't 23 refer to those roles was because it wasn't actually 24 clear at the time who did fulfil each of these roles. 25 A. Clear to me or clear to the bodies concerned? 193 1 Q. Well, you. 2 A. Perhaps, yes. Perhaps. After ten years it's kind of 3 difficult. 4 Q. Well, if we go back to the governance diagram we are 5 looking at, at page 17 of this document, if we could 6 blow up the top half of the page again, please. 7 Looking at that diagram, are you easily able to 8 identify each of the investment decision-maker, the 9 senior responsible owner, the project sponsor and 10 project manager? 11 A. The investment decision-maker would have been the Full 12 Council. So it wouldn't appear in that diagram. 13 Senior users would have been the Council. As 14 I understood it, the TEL Chief Exec was senior 15 responsible owner. The tie Executive Chair was 16 a position called the Senior Supplier. I don't think 17 there necessarily was a senior sponsor, a project 18 sponsor, as such. But my interpretation of the guidance 19 was that such role was not obligatory. 20 Q. And the project manager? 21 A. Project manager would have been the Director of -- the 22 Project Director within tie. 23 Q. Thank you. 24 Just sticking in this report, can we see the Tram 25 Project Director and his team in the bottom right-hand 194 1 corner. The Tram Project Director was a tie employee. 2 That's correct, isn't it? 3 A. Yes. 4 Q. Now, we can see for the Tram Project Director to report 5 to the tie Executive Chair, it appears to be he or she 6 has to do that through one of the Tram Project Board 7 sub-committees, and then through the Tram Project Board, 8 and then to the tie Executive Chair. Is that a fair 9 interpretation of this structure? 10 A. I think that's what that suggested, yes. 11 Q. Does that seem maybe a clear and simple reporting line? 12 A. It could have been simpler, certainly. I think it 13 depends how the relationship between the Tram Project 14 Board and the sub-committee worked in practice. But, 15 yes, it might have been better if the Tram Project 16 Director was reporting direct to the Tram Project Board. 17 CHAIR OF THE INQUIRY: How did you get to the tie Executive 18 Chair? It goes up to the sub-committee and the 19 sub-committee goes to the Tram Project Board. Then 20 there's no ... 21 MR MACKENZIE: There seems to be a line from the Tram 22 Project Board up to the left to tie Executive Chair. 23 CHAIR OF THE INQUIRY: Or to anyone. 24 MR MACKENZIE: Yes. 25 CHAIR OF THE INQUIRY: So it can't -- the Tram Project 195 1 Director on this diagram cannot report to the Executive 2 Chair of tie; is that right? Am I misreading it? 3 A. I would have expected the Tram Project Director to be 4 reporting to the tie Executive Chair within the overall 5 kind of management and governance of tie itself. Was 6 that what you were asking, sorry? The Tram Project 7 Board Director was a tie employee who I would have 8 imagined have been a direct report to the tie Executive 9 Chair. The tie Executive Chair would have sat on the 10 tie Board, and through that mechanism, the Tram Project 11 Director would have been reporting to the tie Board, and 12 as such, the tie Executive Chair. 13 MR MACKENZIE: Just two final questions, Mr Greenhill. 14 MR DUNLOP QC: I wonder, my Lord, just before we move from 15 that, can I ask a question that arises from 16 your Lordship's question before we pass from this. 17 I imagine your Lordship's question arises from the 18 direction of the arrow. 19 CHAIR OF THE INQUIRY: Yes. 20 MR DUNLOP QC: I'm not clear from my learned friend Counsel 21 to the Inquiry's approach as to what significance that 22 has, and I wonder before we pass on, could that be 23 clarified. 24 The direction of the arrow, does that mean that the 25 Executive Chair reports to the Tram Project Board, or is 196 1 it the other way round? 2 MR MACKENZIE: Yes, I'm happy to clarify that, my Lord. 3 Mr Greenhill, looking at the diagram, and asking the 4 question: does this help us in working out how the Tram 5 Project Director reported to the tie Executive Chair? 6 On the face of it, there is a line with an arrow going 7 up to sub-committee. There's another line, an arrow 8 going up to the Tram Project Board. There's then a line 9 going up to the tie Executive Chair, but with the arrow 10 pointing in the wrong direction. 11 Now, if one takes away the question of the direction 12 the arrows are pointing, and one just looks at the 13 lines, then on that interpretation, one can see on the 14 face of it a way in which the Tram Project Director can 15 report up to the tie Executive Chair. 16 Another interpretation, however, if one looks at the 17 direction in which the arrows are pointing, it seems to 18 be that any reporting by the Tram Project Director to 19 get to the tie Executive Chair stops at the Tram Project 20 Board. 21 Do you have any views on which interpretation is the 22 correct one? 23 A. The downward pointing arrows was intended to represent 24 who was on the Tram Project Board. The reporting lines 25 between the tram project director direct to the tie 197 1 Executive Chair are not exhibited on this diagram, 2 because it was talking about the Tram Project Board. 3 Q. I see. 4 A. The Tram Project Board Director reporting to the tie 5 Executive Chair would have taken place within tie's 6 arrangements. 7 Q. So if the diagram were to show that, we would see more 8 lines on the diagram? 9 A. Yes. 10 Q. By looking at this diagram, is it obvious who is in 11 charge of the project? 12 A. It sets out that the Tram Project Board could -- 13 comprised a number of different people from different 14 organisations, and collectively they had responsibility 15 for overseeing the project. 16 Q. So in short, the Tram Project Board were in charge of 17 the projects? 18 A. Well, they were responsible for overseeing the project 19 and supporting the TEL Chief Executive in his capacity 20 as senior responsible owner, as I understood it. 21 Q. Looking at matters now, Mr Greenhill, are you still of 22 the view that there was a clear corporate governance 23 structure for the project? 24 A. It could have been simpler. I think what we were -- 25 what I was looking at was whether there was appropriate 198 1 representation on the Tram Project Board, and whether or 2 not there was a regular line of reporting and a process 3 in place which allowed information to flow from the Tram 4 Project Director to the Tram Project Board to allow 5 the -- to exercise their role of scrutinising the 6 project and overseeing the project. 7 Q. Thank you. Mr Greenhill, that's the question of 8 governance. 9 I would like just to touch upon some other parts of 10 the report in that when it comes to your 2011 report, 11 I really only have one or two questions, but I think we 12 can finish this. 13 At page 18 in paragraph 62, this is under the 14 heading, "Procedures are in place to actively manage 15 risk associated with the project". 16 At the end of paragraph 62, there's reference to the 17 highest cost risks are currently utilities diversion 18 work, where the volume of work is uncertain until 19 digging starts and general delay with the programme, 20 et cetera. 21 The question of the volume of utility work being 22 uncertain until digging starts, is that something you 23 were aware of from your own general knowledge, or is 24 that something you were likely to have been told by tie 25 or one of the other people you spoke with? 199 1 A. The reference to the highest cost risks or the volume of 2 work on certain ... 3 I think I would have picked that up from discussion 4 with tie staff. 5 Q. I understand. Then beneath that, the headline of: 6 "A procurement strategy has been designed to 7 minimise risk and lead to successful delivery of the 8 project". 9 Over the page, on page 19, paragraph 64, the 10 procurement strategy is set out. Without going through 11 this in detail, one can see there are a number of 12 references to designs. For example, first bullet point, 13 in the last sentence states: 14 "Developing the design as far in advance of 15 procurement as possible helps reduce uncertainty and 16 improves cost estimating of the construction phase." 17 Then similarly the reference in bullet point 3, 18 a reference to the SDS contract being awarded in 19 September 2005 to facilitate the early identification of 20 utility diversion works, et cetera. 21 Then the next bullet point and the question of 22 utilities. It refers to, to paraphrase, the question of 23 trying to undertake these works in advance of the 24 infrastructure works. And essentially what you're 25 setting out here is your understanding of the 200 1 procurement strategy and the important parts of it; is 2 that correct? 3 A. Correct. 4 Q. Then again, paragraph 65, we can see the reference to 5 most of the large contracts are intended to be fixed 6 price. So again, we can see that reflects your 7 understanding at the time; is that correct? 8 A. Correct. 9 Q. I really refer to this, Mr Greenhill, in short, to 10 suggest that this perhaps reinforces the point that if 11 you had been aware of design and utility slippage, you 12 would have recognised that that was of importance to the 13 procurement strategy, including obtaining a fixed price? 14 A. If there had been slippage to design and utilities, it 15 could influence the signing of the contract and the 16 willingness of the infrastructure contractor to agree 17 a fixed price until he had greater certainty around 18 utilities diversion and design work, yes. 19 Q. Yes. Then in page 19, paragraph 66, again, reference to 20 the project entering a critical phase, and the key tasks 21 over the coming months including the commencement of 22 utilities diversion works. So I think you were aware at 23 this time that the works were still to commence, the 24 construction and utility works; et cetera. 25 Now, I already discussed with you the question of 201 1 the draft report and how that was sent to the parties, 2 and their response, and how that was factored in. 3 So that's all I wish to ask in relation to the 2007 4 report. Really finally, a very short question in 5 relation to the 2011 report. 6 If we could please go to that. I'm happy, 7 Mr Greenhill, to take your evidence on this as read as 8 based on what's in your written statement. But if 9 I could please go to document ADS00046, we can see this 10 is an interim report published in February 2011. We can 11 see just under the words "Audit Scotland" there, the 12 date. 13 If we could go, please, to page 4, in paragraph 1 it 14 is simply to see the background to this report. I'm not 15 going to read that out, but that explains why this 16 report was produced and why it is an interim report. 17 If we go over to page 7, please, under "Governance 18 arrangements", at bullet point 2, please, it is stated: 19 "CEC's governance arrangements for the project are 20 complex ..." 21 Go to a diagram, please, at page 36. If we blow 22 that diagram up, please, I'll give you a second look at 23 that, Mr Greenhill, but my question in short is whether 24 it's basically this. 25 Is this diagram any more complex or worse than the 202 1 one we looked at in the 2007 report, and really what had 2 changed in your mind so that you went from the 3 conclusion that the tram project had clear governance 4 structures to it now being complex? 5 A. The 2000 (sic) report and the reference to clarity was 6 aimed at the Tram Project Board. The 2011 report 7 reference to complexity was intended to consider all the 8 elements of the corporate governance structure. 9 So including the City Council's arrangements, via 10 the Tram Sub-Committee and the Tram Internal Planning 11 Group and whatnot. 12 Q. Are you saying, Mr Greenhill, that the reference to 13 clarity in the 2007 report was simply in relation to the 14 Tram Project Board? 15 A. Yes. 16 Q. I don't wish to go back to it, but the headline in your 17 report was: 18 "There is a clear corporate governance structure for 19 the project which involves all key stakeholders." 20 It didn't appear to be restricted to the Tram 21 Project Board governance structure. 22 A. That -- it was intended to refer just to the Tram 23 Project Board because that was the only element of the 24 governance structure that I looked at in 2007. 25 Q. I see. So I shouldn't ask you what were your views on 203 1 the whole governance structure of the tram project in 2 2007, because you only looked at the governance 3 structure in relation to the Tram Project Board? 4 A. Correct. 5 MR MACKENZIE: Thank you. I'm content to take the other 6 matters in your statement as read. So I have no further 7 questions. 8 CHAIR OF THE INQUIRY: I don't think anyone has indicated 9 any questions. So thank you very much, Mr Greenhill. 10 You're still subject to your citation, and you may be 11 recalled. Hopefully that won't be necessary. 12 A. Thank you. 13 (The witness withdrew) 14 CHAIR OF THE INQUIRY: We will adjourn until tomorrow at 15 9.30. 16 (4.30 pm) 17 (The hearing adjourned until Friday, 22 September 2017 at 18 9.30 am) 19 20 21 22 23 24 25 204 1 INDEX 2 PAGE 3 MR MICHAEL HEATH (sworn) .............................1 4 5 Examination by MR MACKENZIE ...................1 6 7 Questions by CHAIR OF THE INQUIRY ...........119 8 9 MR GRAEME GREENHILL (affirmed) .....................120 10 11 Examination by MR MACKENZIE .................120 12 13 14 15 16 17 18 19 20 21 22 23 24 25 205