1 Wednesday, 13 December 2017 2 (9.30 am) 3 CHAIR OF THE INQUIRY: Good morning. Mr Mackenzie? 4 MR MACKENZIE: Good morning, my Lord. The next witness is 5 John Connarty. 6 MR JOHN CONNARTY (affirmed) 7 CHAIR OF THE INQUIRY: You are going to be asked questions 8 in the first instance at least by Mr Mackenzie, one of 9 the Counsel to the Inquiry. If you just listen to the 10 and answer it as directly as you can. And if you speak 11 into the microphone so everyone can hear what you are 12 saying and speak at a measured pace to the shorthand 13 writers can keep up with you. 14 A. Thank you, my Lord. 15 MR MACKENZIE: Thank you, my Lord. 16 Examination by MR MACKENZIE 17 MR MACKENZIE: Good morning. 18 A. Good morning, Mr Mackenzie. 19 Q. Could you state your full name, please. 20 A. Yes, it's John Connarty. 21 Q. And your current occupation? 22 A. I'm the business support manager in finance in Edinburgh 23 Council. 24 Q. Thank you. You have provided a statement to the 25 Inquiry. We will go to that, please. It's TRI00000153. 1 1 It's a copy on the screen. I think there should be 2 a hard copy in front of you as well. 3 Can we go to page 8, please, just to confirm that 4 this is your signature and this is the statement you 5 provided to the Inquiry. 6 A. Yes, that's correct. 7 Q. Thank you. What I would like to do is just go through 8 your statement and some of the appendices to make sure 9 we understand everything that you say. 10 So starting at page 1, please, with the statement, 11 and we can see in paragraph 1.2, you say while you were 12 employed by the Council over the duration of the tram 13 project, you had no direct involvement in the project at 14 any time. 15 In paragraph 2.1 we see the statement has been 16 prepared in response to a request from the Inquiry for 17 an account of the tram project budget and final costs. 18 In paragraph 2.2 we see that in short, in preparing 19 the statement, you have relied heavily on reviewing 20 available public records -- reports rather -- together 21 with a review of the tram project financial management 22 records which were maintained by the Council following 23 handover of responsibility from tie during the financial 24 year 2011/2012. 25 Now, the next bit, please, in your statement, if we 2 1 scroll down a little on the page, we asked you about the 2 project budget at financial close in May 2008. We've 3 heard quite a lot about this, various spreadsheets. So 4 I won't take too long over this, but in paragraph 3.1 5 you explain that the estimated final cost for phase 1a 6 of the tram project at financial close on 14 May 2008 7 was GBP512 million, consisting of base costs of 8 481.8 million and a risk allowance of GBP30.2 million. 9 Then it was noted a further contingent payment of 10 GBP3.2 million would be due if phase 1b was not built. 11 You give a document reference at the end of that 12 paragraph. I won't go to it, but I'll note in passing 13 that that's a reference to a report by the Directors of 14 City Development and Finance to the Tram Committee of 15 the Council on 16 June 2008. 16 I think we'll see the relevant numbers at page 2 of 17 that report. 18 Then in the next paragraph, 3.2 of your statement, 19 you explain: 20 "A detailed project budget estimate of 21 GBP508 million was provided by tie Limited on 22 15 April 2008." 23 That analysis was prepared prior to final changes 24 agreed through contract negotiations which increased 25 estimated costs by GBP4 million to GBP512 million. You 3 1 say: 2 "It has not been possible to source a later version 3 of the tie Limited detailed spreadsheet reconciling to the 4 position at Financial Close." 5 I'll just note in passing, without going to them, 6 the two document references you give are documents we 7 have looked at previously. The first one is a reference 8 to an email by Stewart McGarrity of tie to Alan Coyle 9 dated 15 April 2008, which attached both a spreadsheet 10 and a copy of Schedule Part 4, and then the second 11 document reference you give is in fact to that 12 spreadsheet; and in fact I think yesterday we looked at 13 another copy of that, the same version, with 14 Mr McGarrity, which was a very detailed spreadsheet 15 giving the breakdown of the figure of 508 million. 16 I think you said you've not been able to find a similar 17 spreadsheet giving a breakdown of the final figure of 18 512 million; is that correct? 19 A. That's correct, yes. 20 Q. Thank you. 21 Over the page, please. Paragraph 3.3, you say you 22 have provided a summary of the detailed project budget 23 of GBP508 million at 15 April 2008 at Appendix 1. I'll 24 just note in passing that essentially is an extract from 25 Mr McGarrity's spreadsheet. We don't have to go to 4 1 that. 2 In paragraph 3.4 you say: 3 "The risk allowance at Financial Close was 4 GBP30.2 million." 5 You go on to say: 6 "A detailed analysis of the risk allowance of 7 GBP32.3 million at 15 April 2008 was included in the 8 project budget file supplied by tie Limited on 9 15 April 2008." 10 Pause there. That again is simply a reference to 11 the spreadsheet attached to Mr McGarrity's email to 12 Alan Coyle of 15 April, and it's the tab that shows the 13 breakdown of the risk allowance. 14 You go on to say in your statement: 15 "It has not been possible to identify a later 16 version of the tie Limited risk allocation reconciling to 17 the position at Financial Close." 18 What you have done, you say, a summary of the 19 estimated risk allowance of US$32.3 million at 20 15 April 2008 is included at Appendix 2. And also 21 a detailed breakdown of the quantified risk allowance of 22 GBP27.9 million is included as Appendix 2a. 23 So I think in short you, like us, have been able to 24 find Mr McGarrity's spreadsheet, which included the 25 breakdown of the risk allowance in a tab showing the QRA 5 1 as at 15 April, but you weren't able to find 2 a reconciliation of the final risk allowance at 3 financial close of GBP30.2 million; is that correct? 4 A. Yes, that's correct. 5 Q. I should also say we yesterday, with Mr McGarrity, 6 looked at a reconciliation document, I think, enclosed 7 the email of 19 May 2008. I'll give the reference 8 without going to it. CEC01295329. That, I think, shows 9 a risk allowance of 30.4 million or 30.441. So it's 10 still, I think, a slight discrepancy or further 11 reconciliation to get to the GBP30.2 million. But 12 I think essentially your position, Mr Connarty, is that 13 you have done what you can to try and reconcile it, but 14 you can't find a final reconciliation of the 15 30.2 million; is that correct? 16 A. Yes, that's correct. 17 Q. Paragraph 3.5 we can read for ourselves. Similarly, 18 3.6. 19 So that's all, thank you. The position at financial 20 close in May 2008. 21 We then asked you in paragraph 4 of your statement 22 about the project budget post mediation in 2011. In 23 paragraph 4.1 you explain that: 24 "Following on from mediation talks a revised project 25 budget of GBP776 million was approved, comprising a base 6 1 budget of GBP742 million and a risk/contingency budget 2 of GBP34 million." 3 You say: 4 "The revised budget provided for completion of the 5 tramline to York Place and confirmed a funding 6 requirement of GBP231 million in addition to the 7 previously approved funding of GBP545 million." 8 The document ID at the end of that paragraph is the 9 report to Council on 25 August 2011 by the Director of 10 City Development. We don't have to go to that. 11 Then in paragraph 4.2 you say: 12 "A summary of the detailed project budget of 13 GBP776 million is included at Appendix 5 ..." 14 We will go to that in a second: 15 "... and a summary of the risk allowance of 16 34.207 million (as at 3 November 2011) is included at 17 Appendix 5a." 18 We will go to that in a second. 19 So Appendix 5, please, should be at page 19. Blow 20 up the box. Thank you. So this in short is the budget 21 following the mediation and settlement in 2011. It 22 gives a fairly high level breakdown of the different 23 sums which arrive at the GBP776 million revised budget, 24 and we can note there the contingency of GBP34 million. 25 If we then go over the page, please, just to note 7 1 the contingency breakdown, page 20, thank you. We can 2 see this is headed, "Edinburgh Tram Project Risk Budget 3 at 3 November 2011". Various risks are set out. The 4 two I would like to draw attention to, if I may, please, 5 if we scroll further down, we can see under the 6 subcategory, "Other Risks", there's one, I think it says 7 FG Risk 12: 8 "Overall time delay impact (assessment of cumulative 9 effect of identified risks on this register)." 10 At GBP11.610 million. I simply note in passing, 11 Mr Connarty, we've heard evidence that I think the risk 12 allowance for general programme delay at contract close 13 in May 2008 was about GBP5.2 million. So we can see 14 that that is now doubled at the time of this revised 15 budget some three years after contract close. 16 Below that we also see a reference to general design 17 risk of GBP5.925 million. Again, I simply note in 18 passing that I think we've heard evidence that at the 19 time of the original contract close in May 2008, there 20 was an allowance for design risk of about 21 GBP3.3 million. So again, despite the project being 22 three years further down the line, that allowance 23 appears to have almost doubled. 24 So that's that, thank you. 25 Back to the main text of your statement. Back to 8 1 page 2, please. 2 We had also then in paragraph 5 asked about the 3 actual final cost of the project, and in paragraph 5.1, 4 you say: 5 "Project expenditure (net of contributions and 6 recharges) incurred against the revised approved budget 7 of GBP776 million is GBP776.7 million. A summary of 8 project costs and income as at 31 March 2017 is included 9 at Appendix 6 with further detail on project income 10 shown in Appendix 7." 11 Now, if we go to Appendix 6, please, it should be at 12 page 21. It's quite small print. So we'll have to blow 13 it up. Thank you. 14 We can see the very top of the page, it says -- if 15 we scroll back out or zoom back out, the heading at the 16 very top of the page, we can see, "Project Costs at 17 31 March 2017". And there's then a breakdown of the 18 various costs. I'll just highlight one or two. We can 19 see very roughly ten lines down the first row which is 20 shaded, if we blow that up, please. The very end of the 21 row, if we may. Thank you. 22 We can see the second line from the top of this 23 blow-up, we can see "total tie PM costs". That must be 24 project management costs; is that right? 25 A. Yes, that's right. 9 1 Q. If we look at the very far right of that -- is it 2 possible to blow up the figure again, please? The very 3 far right box? Thank you. We can see the total tie 4 project management costs have outturned at 5 GBP67,762,176. That's one I should draw attention to 6 for reasons I'll come back to later on. 7 Could we also look at the total SDS costs please. 8 It's about halfway down the page. We can see "Total 9 SDS" in the shaded row. Again, go to the end of that, 10 please, and perhaps we could blow up the figure again at 11 the very far right, the outturn cost. Thank you. 12 I think we can see the total SDS costs of GBP26,391,925. 13 That is, however, subject to one caveat. We should also 14 note in a separate document, I hope it's TRI00000248, 15 and go to that, please. 16 Now, if we can go over the page, please, to page 2, 17 the email -- this is fine. So this is essentially an 18 email from Mr Murdoch, assistant solicitor at the 19 Inquiry. We had asked you, Mr Connarty, we had said: 20 "We are trying to determine the total sum paid to 21 Parsons Brinckerhoff ... in particular after the SDS 22 contract was novated ..." 23 So in short, we wondered whether there may be 24 further sums that were paid to SDS via the consortium 25 and therefore showed up somewhere else in the total 10 1 accounts, and then go back to page 1 to see your 2 response, please. 3 The email at the bottom. Thank you. 4 You say: 5 "I have reviewed our records. My understanding is 6 that GBP6.032 million in respect of the SDS contract was 7 paid to the Bilfinger Berger Siemens consortium (and in 8 turn to Parsons Brinckerhoff). This sum is included in 9 the Infraco account and is accounted for through the 10 T19.01.20 code." 11 Then below that you say: 12 "Adjusting for the above, estimated final 13 expenditure on Design was GBP32.7 million ..." 14 We then leave that email and go back, please, to 15 Appendix 6 of your statement, and in particular if we 16 go, please, to page 22. 17 If we can go to -- we see the shaded line, subtotal 18 construction. If we go to four above that, if we could 19 blow up the line -- so we have got the subtotal 20 construction shaded line, and there are four entries 21 above that. The one, "Unallocated to section", I think 22 we can just see T19.01.20, unallocated to section. Go 23 to the far right of that, we see just over 24 GBP24 million. So I think in short, Mr Connarty, 25 am I right in thinking that just over GBP6 million paid 11 1 to SDS after novation of the SDS contract is found 2 within the sum there of just over GBP24 million? 3 A. Yes, that's my understanding. 4 Q. Thank you. Also on the same page here, we can see the 5 MUDFA outturn costs. We can see total MUDFA/utilities, 6 a shaded line. It's about halfway down the page we're 7 looking at. 8 If we blow up that, we can see at the end of this 9 line the total MUDFA/utilities of -- blow that figure 10 up, please -- GBP70,066,922. 11 Now, to pause there, does that include the utilities 12 works carried out after the settlement in 2011? 13 A. I'm not certain on that point. I think it does, but I'm 14 not certain. 15 Q. I might be able to clarify that when we come on to look 16 at some other figures very shortly. 17 Then please go to page 23, another of the main 18 items. 19 Infraco, if we keep on scrolling, please, we can see 20 there is a shaded row, "Total Infraco". If we can blow 21 up the figure at the very end of that row, please. 22 We can see the figure of GBP471,345,952. However, 23 we have to treat that with caution because if we then 24 zoom back out, please, in short, we'll see in a second 25 that figure includes non-Infraco works, non-Infraco 12 1 changes and non-Infraco provisional sums. 2 So if -- just reading up from the total Infraco, we 3 can also then see a row, subtotal non-Infraco works. 4 Perhaps we can blow up the figure on the bottom right, 5 please. Totals GBP49,079,278. We zoom back out. We 6 can see that figure is made up in the line above 7 subtotal non-Infraco works. We see a total for Infraco 8 non-provisional sums. We can see it's just over 9 GBP29 million. We can also note, for example, the 10 fourth item up from subtotal non-Infraco provisional 11 sums, we see a reference to McNicholas utilities works 12 totalling just over 20.5 million. 13 It's my understanding, Mr Connarty, those works 14 relate to the utilities works carried out after the 15 settlement in 2011; is that within your knowledge or 16 not? 17 A. Yes, that's my understanding, yes. 18 Q. I'm sorry? 19 A. That's my understanding, yes. 20 Q. Thank you. 21 Just to complete this, see the other things that 22 aren't -- they are non-Infraco. We can see at the top 23 of the screen, subtotal of non-Infraco changes, various 24 things set out above. 25 If we can zoom back out, please, then at the top of 13 1 the page we see a subtotal of non-Infraco works. There. 2 So the purpose of drawing attention to that was to 3 really say we must be wary of treating the total Infraco 4 figure of relating to payments to consortium, because it 5 does include these other non-Infraco matters; is that 6 correct? 7 A. That's correct. I think the information in Appendix 6 8 follows the accounting records structure set up by tie 9 in -- at the start of the project and that was 10 maintained through the project. 11 There's actually a full reconciliation at page 28, 12 back to the Infraco main contract sum within the 13 evidence. So that isolates the elements of the costings 14 which relate directly to the Infraco contract. 15 Q. Thank you. I think we'll just note that. We can find 16 it at page 28 if we wish to look at that in more detail. 17 I will come back to the final sum paid to the 18 consortium and look at that shortly. 19 If we now go back to your statement, please, at 20 page 2, and to pick up the second half of paragraph 5.1, 21 you went on to say: 22 "Contributions received totalling GBP7.447 million 23 are shown in Appendix 6 and these are represented by 24 items 1 to 12 in Appendix 7." 25 We will come to that in a second. You then go on: 14 1 "Revenue expenditure recharged to the Council 2 revenue account totalling GBP8.682 million is shown in 3 Appendix 6 and this is represented by items 13 to 15 in 4 Appendix 7." 5 Again, we'll come to that shortly. 6 So, firstly, please, the question of the 7 contributions received totalling 7.447 million are shown 8 in Appendix 6. We have looked at that appendix already. 9 I'm not going to go back to that. 10 But in Appendix 7, if we can go, please, to page 24, 11 I think in short -- blow up the box a little, please -- 12 items 1 through to 12 represent contributions; is that 13 correct? 14 A. That's correct, yes. 15 Q. They total GBP7.447 million. So are these 16 contributions, just reading through them, mostly from 17 third parties but also from other parts of Council 18 budget? 19 A. Yes, they're primarily from third parties, but from 20 lines 6 to 9, you see contributions from other parts of 21 the Council's capital investment programme. 22 Q. And these contributions, I think, don't include any 23 betterment payments received from utility companies; is 24 that correct? 25 A. That's correct. 15 1 Q. They are accounted for separately? 2 A. They are, yes. 3 Q. Thank you. Then items 13, 14 and 15, I think in your 4 statement, these were explained as items of revenue 5 expenditure recharged to the Council revenue account 6 totalling GBP8.684 million. Can you explain a little 7 what they relate to, please? 8 A. It largely relates to -- within the project, there's an 9 accounting requirement to review expenditure and to 10 identify whether it falls into the capital definition or 11 the revenue definition. So those costs, as they didn't 12 contribute to the actual creation of the asset, were 13 treated as revenue costs and charged through into the 14 Council's revenue account. 15 CHAIR OF THE INQUIRY: Is that a book exercise, transferring 16 stuff from capital to revenue? 17 A. It's essentially that. It's looking at the expenditure 18 at the end of each year and seeing how much of that is 19 capital and how much of it is revenue. 20 CHAIR OF THE INQUIRY: Could I ask about the items 6 to 8. 21 This is recharging to Edinburgh and you speak with the 22 public realm works at St Andrew Square. 23 Would these normally be part of the highways budget 24 or some other budget within the Council? 25 A. My understanding of these particular items is that they 16 1 relate to a higher specification of the materials used 2 in St Andrew Square. So I think it relates to the stone 3 setts between the lines and pavements. So my 4 understanding is that those relate to a higher 5 specification and that it would be correct to charge 6 those to the Council's capital programme. 7 CHAIR OF THE INQUIRY: So it's an additional charge because 8 of the higher specification. It's not the total cost of 9 the public realm works? 10 A. That's an additional charge relating to the higher 11 specification through St Andrew Square. 12 CHAIR OF THE INQUIRY: So that the other part of the public 13 realm works would be, what, attributed to the tram 14 project? 15 A. I'm not -- I'm not familiar with wider -- the treatment 16 of wider public realm works. This really just relates 17 to the specific higher specification. 18 CHAIR OF THE INQUIRY: Yes. If -- the public realm works 19 would include the improvements to the pavements, for 20 instance, adjacent to a road carrying the tram. Do you 21 understand that it would only be if there was a higher 22 specification requiring setts or particular granite 23 slabs or something like that, that is all that would be 24 recharged? 25 A. That's my understanding of the situation. 17 1 CHAIR OF THE INQUIRY: What about salaries of Council 2 employees? Were they recharged? 3 A. I'm not familiar with the detail throughout the period 4 of the project. I'm familiar with a period post 5 mediation when staff within Finance were involved 6 directly in the project and supporting the project and 7 their costs were initially recharged to the project. 8 CHAIR OF THE INQUIRY: Thank you. 9 A. We will maybe come on to that point at a later point in 10 my statement. 11 MR MACKENZIE: Thank you. If we could then go back to your 12 statement, please, to page 3. At the top of the page, 13 paragraph 5.2, you explain: 14 "Expenditure on Utilities is net of GBP3.824 million 15 of 'betterment' payments received from utility 16 companies." 17 Then paragraph 5.3, you explain: 18 "All project expenditure is net of Value Added Tax. 19 VAT incurred on the Tram project was recoverable from HM 20 Revenue and Customs." 21 Then in paragraph 5.4, you explain: 22 "There are a small number of ongoing matters 23 relating to the Tram project. Current estimates are 24 reflected in project expenditure in respect of these 25 matters. Outstanding issues include final settlement 18 1 with Scottish Water for utility diversions where 2 discussions are ongoing." 3 Are these discussions still ongoing or have they 4 been completed? 5 A. No, my understanding is they're still ongoing. 6 Q. Are they likely to result in a final adjustment to the 7 accounts for the tram project? 8 A. We've made a provision for our estimated cost of 9 settlement within the figures that are reported to the 10 Inquiry, and there will be a final adjustment once the 11 final settlement is confirmed. 12 Q. Thank you. Then paragraphs 5.5, 5.6, 5.7 and 5.8, 13 I think we'll just take as read. You explain really the 14 handover of the accounting documentation from tie to the 15 Council, and how tie undertook their accounting, and 16 then how the Council picked things up or took things 17 over. 18 Then pick up in paragraph 5.9. You explain: 19 "Reconciliations have been undertaken to show how 20 total expenditure certified in the final account 21 statements for the main project contracts has been 22 accounted for within project accounting. These 23 reconciliations are included at Appendix 8 (Tram 24 Vehicles), Appendix 9 (Infraco) and Appendix 10 25 (MUDFA)." 19 1 You say: 2 "It should be noted that the breakdowns of 3 expenditure in these reconciliations differs from the 4 breakdowns shown in the main project contracts. The 5 breakdown in the tie financial ledger (project 6 accounting) was based on the contract monitoring 7 structure adopted by tie Limited. By contrast, the final 8 account statements reflect the agreed contract sums 9 resulting from the mediation process, and the subsequent 10 changes agreed thereafter." 11 We should perhaps look at the Infraco final account 12 statement that represents the biggest sum -- a separate 13 document, please. WED00000101. We have looked at this 14 before with one of the Bilfinger witnesses. If we go to 15 page 3, please. So the final account for the Bilfinger 16 Siemens consortium as it became after the mediation is 17 for the sum of GBP427,206,309.52. Is that correct? 18 A. Yes, that's correct. 19 Q. So that's the final sum paid to that consortium. If we 20 go back, please, to your statement to page 28, I think 21 we will see in Appendix 9 a breakdown of that. 22 So this is Appendix 9 of your statement. If we see 23 at the very bottom right, the Infraco final contracts 24 summary. If we blow up that figure, please, I think 25 we'll see that ties in with the figure in the final 20 1 account statement, albeit you've rounded up the 52p to 2 GBP310 at the end. 3 Then if we zoom back out, we can see a fairly high 4 level breakdown of that sum, and perhaps we could just 5 again note one detail in the shaded row, subtotal 6 construction, we can see four items up from that, the 7 code we looked at before, the unallocated to section. 8 We can see at the far right of that, the sum of just 9 over GBP24 million. So I think again we should bear in 10 mind that includes the sum of just over GBP6 million 11 paid to SDS via the consortium after the settlement; is 12 that correct? 13 A. Yes, that's correct. 14 Q. We can leave that appendix, thank you. 15 Back to your statement, please, to page 4. 16 We'd also asked you about other items of 17 tram-related expenditure, and in paragraph 6.1 you say: 18 "The following tram-related expenditure was funded 19 outwith the GBP776 million budget for the construction 20 phase of the project." 21 Paragraph 6.2, in relation to the parliamentary 22 process, you explain that the costs to progress the 23 bills amounted to GBP16.852 million which was funded by 24 the Scottish Government by separate grant funding. So 25 that's outwith the GBP776 million budget; is that 21 1 correct? 2 A. Yes, that's correct. 3 Q. Then in the paragraph below that, in relation to 4 reinstatement works and public realm works, you explain: 5 "It is estimated that GBP5.38 million has been 6 incurred to date in relation to additional 7 infrastructure works which were directly related to the 8 Tram Project. This includes GBP3.953 million relating 9 to road and pavement reinstatement works at Leith Walk 10 and Constitution Street together with public realm works 11 at St Andrew Square and wider works. It is estimated 12 that further expenditure of GBP1.547 million will be 13 incurred to complete reinstatement works at Leith Walk 14 and Constitution Street and this would take additional 15 infrastructure investment to GBP6.927 million." 16 You go on: 17 "The reinstatement works on Leith Walk and 18 Constitution Street are being carried out as part of 19 a wider programme of public realm improvements. Given 20 the size and scope of the project, the works are being 21 carried out in phases with Phase 4 due to be completed 22 in October 2007." 23 Was it? 24 A. Yes. 25 Q. "If the extension of the tram to Newhaven takes place, 22 1 it is anticipated that the remainder of the 2 reinstatement works, phases 5 and 6, will be carried out 3 as part of the tram extension project. All of this 4 expenditure has been funded through the Council's 5 Capital Investment Programme and a summary of this 6 capital expenditure is included at Appendix 11." 7 If we can go to that -- 8 CHAIR OF THE INQUIRY: Sorry, what does that mean, the 9 Council's Capital Investment Programme? Is that not 10 part of the tram project? 11 A. It's not part of the tram project, no. That's the 12 Council's wider capital budget essentially covering its 13 capital works on roads, schools and wider assets. 14 CHAIR OF THE INQUIRY: So that where the pavement has been 15 reinstated at Leith Walk, say, that's been treated as 16 part of the general capital expenditure, whereas in fact 17 was it -- it may have been caused as a result of the 18 tram works. 19 A. Well, I think the -- the GBP4 million approximately 20 within this statement relating to the works at 21 Leith Walk is related to the -- effectively the 22 reinstatement following the decision to stop the tram at 23 York Place. So it was essentially that's the element, 24 the GBP4 million is the element of the additional cost 25 relating to reinstatement of works following that 23 1 decision. 2 CHAIR OF THE INQUIRY: So does that go into the tram budget 3 then? 4 A. It's charged against the Council's capital investment 5 programme. That was reported to Council, I think, in 6 2008, when the decision was taken to take the tram to 7 York Place. 8 CHAIR OF THE INQUIRY: Yes. If it was caused or due to the 9 tram works in Leith Walk, why shouldn't it go into the 10 tram budget? 11 A. Yes, the tram budget was -- was -- the GBP4 million was 12 reported to Council in terms of the cost of 13 reinstatement. So it was reported. 14 CHAIR OF THE INQUIRY: I'm not suggesting there's anything 15 improper, if the Council decided that. I'm just trying 16 to understand why it wasn't added to the GBP776 million. 17 A. As I understand it, the decision would be to take that 18 reinstatement works forward separately from the tram 19 project. So through the Council's capital investment 20 programme as part of a wider programme of improvements 21 in Leith Walk. But what this report -- what the Council 22 does recognise is that there is an additional cost which 23 is related to the decision not to -- to take the tram to 24 York Place. 25 CHAIR OF THE INQUIRY: Thank you. 24 1 MR MACKENZIE: Thank you. So if we can go, please, to 2 page 31 of your statement, which gives a breakdown of 3 the reinstatement works and public realm works costs, 4 perhaps start with the total. At the very bottom row, 5 if we can blow that up, please, we'll see two figures in 6 from the end, the grand total of 5.38 million, which 7 corresponds with the figure of 5.38 million in 8 paragraph 6.3 of your statement. 9 Then zoom back out, please, and see what that sum 10 relates to. Is it possible to blow up the whole box 11 a little, please? Thank you. 12 Perhaps we could blow up the whole box, but leaving 13 out the description boxes at the right, just to see the 14 main figures is what I'm trying to see. 15 Thank you. 16 So the first item we can see, I think, transport 17 Coates and Atholl Crescent, reinstatement, public realm, 18 capital investment programme, a total sum of -- total 19 spend GBP296,000. We can see then under "West End - 20 Traffic Management", some lower sums for signals and 21 vehicle management signs. 22 We then see Leith Walk and Constitution Street, we 23 see Leith Improvement Programme, Public Realm, Capital 24 Investment Programme, total of 9 -- then if we blow that 25 one up, it may be 8.963. Possibly actually 3.953, thank 25 1 you. 2 So fairly minor -- so that's the 3 -- blow that up 3 again, please. This is in hundreds of thousands. So if 4 we blow that figure up again, please, it's the Leith 5 Walk and Constitution Street, and Leith Improvement 6 Programme. So that is GBP3.953 million. I think that 7 is right? 8 A. That's right, yes. 9 Q. Thank you. Then we can just see, so that's the major 10 item. We can also see reference to St Andrew Square, 11 a sum for granite setts, and a sum for footways, 12 I think, and the figures there, if we can blow them up, 13 this is in the hundreds of thousands. I think one is 14 7 -- so the figure -- two figures at the bottom 15 right-hand corner. The total spends -- yes. 789,000 16 and 286,000 for those. 17 So that's a breakdown of the 5.380 for the 18 reinstatement works and public realm works. 19 If we can go back to the body of your statement, 20 please, at page 4, in paragraph 6.4, these again are 21 items which are not included in the GBP776 million tram 22 budget. In paragraph 6.4, you say: 23 "A rateable value reduction scheme was applied for 24 retail properties impacted during Tram construction." 25 Then reading this short, there was a reduction in 26 1 non-domestic, ie business rates payable under this 2 scheme of around GBP6.3 million. And that was something 3 that was met by the Scottish Government; is that 4 correct? 5 A. That's correct, yes. 6 Q. So a tram-related cost, but not included within the 7 budget of GBP776 million? 8 A. It's not included within the 776, no. 9 Q. The next paragraph, please, paragraph 6.5, there's 10 reference to a hardship relief scheme, and we see the 11 total value of that was GBP85,469, with GBP21,367 being 12 met by the Council. Over the page, please, page 5, in 13 paragraph 6.6 we see an additional support scheme was 14 also introduced for small businesses impacted during 15 tram construction, provided for one-off lump sum 16 payments. We can see the last sentence of this 17 paragraph, you say: 18 "GBP1.697 million of expenditure was incurred under 19 this scheme and this was accounted for within the 20 GBP776 million Tram Project budget." 21 In paragraph 6.8, another scheme, you say: 22 "In addition, a budget allowance of GBP0.545 million 23 in 2011/2012 and GBP0.445 million in 2012/2013 was 24 established by the Council to provide support for the 25 'Open for Business' scheme. This expenditure was funded 27 1 separately through the Council's Revenue budget." 2 Just totalling these two figures up, I think, come 3 to GBP0.99 million, and that would not be included 4 within the GBP776 million project budget; is that 5 correct? 6 A. That's correct, yes. 7 Q. Then again, just sticking with the question of sums not 8 included within the tram budget, in paragraph 6.9 we 9 come on to the costs of winding down tie Ltd. You 10 explain: 11 "Tie Limited Pension Fund cessation costs were 12 GBP4.798 million. These costs were outwith the 13 GBP776 million Tram project budget and were contained 14 within the Council's overall revenue budget for 15 2011/2012." 16 Then at paragraph 6.10, you say that: 17 "Revenue costs associated with tie voluntary 18 redundancies were GBP2.561 million. These costs are 19 included within the Tram project costs of 20 GBP776.7 million." 21 CHAIR OF THE INQUIRY: You may not know, but do you know why 22 the pension fund cessation costs weren't included in the 23 tram? 24 A. I don't know the detail of that. 25 CHAIR OF THE INQUIRY: It just seems that you're treating 28 1 these costs differently from the redundant payments. 2 A. Yes. I don't know -- I'm -- I don't know whether the 3 information -- the information around redundancy costs 4 would have been known, I assume, when they were 5 resetting the budget post mediation. I'm not sure 6 whether they had enough certainty around the pension 7 deficit liability. But ... 8 CHAIR OF THE INQUIRY: Thank you. 9 MR MACKENZIE: As a matter of accounting practice, is there 10 any reason for these sums to be treated differently or 11 is it simply a matter of choice? 12 A. Yes, I'm not aware of any reason for these to be treated 13 differently, no. 14 Q. Then under the next sub-heading, "Tram Project Revenue 15 Costs", paragraph 6.12, you explain: 16 "From 2012/2013, following a decision within the 17 Tram Project, project revenue expenditure, including CEC 18 tram-related staff costs previously funded through the 19 Tram project budget, was funded outwith the 20 GBP776 million project budget with this expenditure 21 being met through the Council's overall revenue budget." 22 You go on to explain in the next paragraph, 6.13, 23 that: 24 "GBP9.821 million of revenue expenditure was 25 incurred over three financial years, 2012/2013 to 29 1 2014/2015, comprising GBP8.682 million which was 2 recharged from the Tram project account to the Council's 3 revenue budget and GBP1.139 million of expenditure which 4 was charged directly to the Council revenue budget. 5 A summary of this revenue expenditure is included at 6 Appendix 15." 7 Now, to pause there, do you know why these sums were 8 originally charged to the tram project account but were 9 then recharged to the Council's revenue budget? 10 A. I don't know the detail of that. My understanding is 11 that there was a decision taken within the project team 12 around about the end of financial year 2012/2013 to 13 re-charge those costs out of the project budget, but I'm 14 not aware of the detail. But I understand it was 15 a policy decision within the tram project team. 16 CHAIR OF THE INQUIRY: So that's taking money out of the 17 project budget, as it were, and transferring it to the 18 Council so that they -- the Council meet that cost? 19 A. Yes. 20 CHAIR OF THE INQUIRY: One of my earlier questions was about 21 recharging before that. It was the other way about, 22 really. 23 If you had Council employees working within the tram 24 project, even for a few days a week or what have you, 25 I think you've indicated you don't know the answer to 30 1 this, but can I just confirm: do you know if those 2 salaries or partial salaries were recharged to the tram 3 project? From the Council? 4 A. Yes. My understanding is that -- I don't know the full 5 detail, but my understanding is that certainly some 6 staff costs were charged into the tram project, and up 7 to and including 2011/2012 financial year, those costs 8 remained within the tram project's accounts and then 9 from 2012/2013, there was a decision taken within the 10 project to effectively take those costs back out of the 11 project and put them back into the Council's main 12 revenue account. 13 CHAIR OF THE INQUIRY: Thank you. 14 MR MACKENZIE: Thank you. 15 So just to try to summarise this chapter, 16 Mr Connarty, of other tram-related expenditure, what 17 I have done is try to add up the various items we have 18 just discussed, and I come to a figure of just over 19 GBP44 million for items of expenditure which were 20 related to the tram project but not included within the 21 tram budget of GBP776 million. I should explain, I get 22 to that by adding up the parliamentary costs of 23 16.852 million, the additional works of 5.38 million, 24 the rates relief met by the Scottish Government of 25 GBP6.3 million, the open for business scheme figure of 31 1 GBP0.99 million, the tie pension fund costs of 2 GBP4.798 million and the tram project revenue costs of 3 GBP9.821 million. I'm not going to ask you to undertake 4 that calculation now. People can check that later. But 5 in short, if my calculation is right, then it would 6 appear that there are about GBP44 million of additional 7 tram-related costs. Would that seem right, if my 8 figures are correct? 9 A. I think, yes, I think these are tram-related costs. 10 I think -- possibly I think the only comment in terms of 11 the parliamentary process which was run before the 12 construction period, that wouldn't normally have been 13 built into the initial budget at financial close. So it 14 wouldn't be built into the tram construction project, 15 and the rateable value -- the rateable value reduction 16 scheme set out at paragraph 6.4 again, that's not 17 something which would normally sit within the project, 18 within the costing. But I accept everything as I have 19 set out in the statement. The costs there are not 20 within the 776 figure. 21 Q. Yes. So it could be said, at least from a lay 22 perspective, that if one adds these total additional 23 costs of GBP44 million to the project expenditure figure 24 of 776.7 million, one comes to a total of about 25 GBP820 million which on one view, and excluding the 32 1 interest payments for additional borrowing, could be 2 said to be the true cost of the tram project? 3 A. Yes, it could, yes. 4 CHAIR OF THE INQUIRY: That would be subject to your caveats 5 about whether it would be appropriate to include in that 6 the cost of the parliamentary process? 7 A. Yes. I think also to say that I think the -- the costs 8 have generally been set out within -- within separate 9 reports to the Council throughout. So I think that's -- 10 that is -- each of these items have generally been 11 reported separately to Council and the funding 12 arrangements have been explained throughout that 13 process. 14 CHAIR OF THE INQUIRY: I think what Mr Mackenzie is seeking 15 to get is some -- this may be a range of figures where 16 the public could then appreciate what the cost of the 17 project has been to date. 18 A. Yes. 19 CHAIR OF THE INQUIRY: Would that exercise that he's 20 undertaken be a reasonable one? 21 A. Yes. Well, certainly that's what I have tried to 22 support through this evidence, is to set out all of the 23 tram-related expenditure that is available, is known. 24 CHAIR OF THE INQUIRY: Thank you. 25 MR MACKENZIE: Thank you. I would like to move on to 33 1 another matter, please, over the page at page 6. We see 2 the heading here, "Funding of Tram Project Budget 3 Increase of GBP231 million, August 2011". We should 4 just go through each paragraph in turn again. 5 Paragraph 6.14, you explain that: 6 "As reported to Council on 25 August 2011 ... 7 a revised ... budget ... of GBP776 million was 8 established. On that basis, the additional funding 9 requirement over the previous budget sum of 10 GBP545 million was GBP231 million. Council agreed that 11 the additional GBP231 million budget requirement would 12 be funded by prudential borrowing." 13 Could you explain what prudential borrowing means? 14 A. Yes, prudential borrowing relates to prudential code, 15 which is a professional code which sets out its guidance 16 around decisions on capital investment and whether 17 borrowing can be undertaken to support that guidance, so 18 prudential borrowing effectively allows borrowing to go 19 ahead where the Council is satisfied that the plans are 20 affordable and sustainable and prudent. 21 Q. Is that a code which is issued or was issued by CIPFA? 22 A. It is, yes. 23 Q. Just for completeness, can you remember what 24 CIPFA stands for? 25 A. Chartered Institute of Public Finance and Accountancy. 34 1 Q. Paragraph 6.15. You explain that: 2 "Based on the assumptions set out within the report 3 to Council on 25 August 2011 (additional borrowing of 4 GBP231 million, repayment period of 30 years and 5 interest rate of 5.1 per cent), it was estimated that 6 the additional revenue cost arising from this additional 7 borrowing would be GBP15.3 million per annum (comprising 8 repayment of principal and interest) over a 30-year 9 period." 10 Then in paragraph 6.16 you say: 11 "Council borrowing is carried out on a programme 12 basis through a consolidated loans fund, and not on 13 a project-by-project basis. It is not therefore 14 possible to specify the actual cost directly associated 15 with the additional borrowing requirement of 16 GBP231 million. However, the marginal interest rate on 17 the Council's external borrowing in 2011/2012 and 18 2012/2013 was around 4 per cent compared to the prudent 19 estimate of 5.1 per cent which was assumed in the 20 Council report of August 2011. Based on a lower 21 marginal interest rate of 4 per cent, the annual revenue 22 cost arising from the additional borrowing requirement 23 of GBP231 million would equate to circa GBP13.4 million 24 per annum (comprising principal and interest) over 25 a 30-year period." 35 1 So am I correct in understanding that in short, at 2 the time of the report to Council in August 2011, the 3 additional borrowing was costed on the assumption the 4 interest rate would be 5.1 per cent, whereas in reality 5 the interest rates for borrowing have been lower? 6 A. Yes, that's right. 7 Q. In fact they have been, as you say, around 4 per cent. 8 Could that interest rate change in the future? Could it 9 go up or down, or is it an example where the Council has 10 a contract or an agreement where there's an interest 11 rate over the whole term of the 30 years? 12 A. The rates -- the pro-rate that the Council operates 13 could change over time. But 4 per cent is the prudent 14 rate that we are assuming just now, looking at our 15 projections going forward. 16 Q. So the rate could go up or down? 17 A. It could, yes. 18 Q. Thank you. Just sticking with the -- based on the lower 19 marginal interest rate of 4 per cent, the annual review 20 cost arising from the additional borrowing requirement 21 of GBP231 million would equate to circa GBP13.4 million 22 per annum over 30 years. I think by my calculations, 23 13.4 million times 30 years gives a total of 24 GBP402 million. If one deducts the 231 million in 25 relation to the principal, one is left with 36 1 GBP171 million for interest. So that's perhaps just 2 an indication based on those assumptions of what the 3 total interest payments may be. Does that seem 4 reasonable? 5 A. That is correct, yes. 6 CHAIR OF THE INQUIRY: Do you know what the current rate is? 7 A. The current rate that we're -- for capital investment 8 proposals that we are -- Council is looking at just now, 9 the current rate we are assuming is 4 per cent, in terms 10 of decision-making, it's 4 per cent. 11 MR LAKE: Thank you. 12 MR MACKENZIE: Thank you, then paragraph 6.17, there's 13 a slight wrinkle in those calculations, because you 14 explain in paragraph 6.17: 15 "Developer Contributions are within the Council 16 contribution of GBP45 million to the original budget of 17 GBP545 million. The Council budgeted to receive 18 GBP25 million in cash over 20 years. Developer 19 contributions received to date total GBP9.5 million with 20 the current shortfall in contributions of 21 GBP15.5 million managed through additional prudential 22 borrowing." 23 In short, I think the Council have had to borrow to 24 meet the shortfall in developer contributions; is that 25 correct? 37 1 A. That's correct. 2 Q. You go on to explain: 3 "Based on a lower marginal rate of interest of 4 4 per cent, the annual revenue cost arising from this 5 additional borrowing requirement of GBP15.5 million 6 would equate to GBP0.9 million per annum (comprising 7 principal and interest) over a 30-year period." 8 Then you sweep matters up and summarise in 9 paragraph 6.18. You explain: 10 "The annual costs (principal repayment and interest) 11 arising from additional prudential borrowing arising 12 from the Tram project are within the GBP15.3 million 13 estimate which was reported to Council in August 2011. 14 Although the level of borrowing is higher due to the 15 current shortfall in developer contributions, this has 16 been offset by lower marginal interest rates. Based on 17 a lower marginal interest rate of 4 per cent, the annual 18 revenue cost arising from the additional borrowing 19 requirement of GBP246.5 million ..." 20 You then explain: 21 "The additional borrowing of GBP231 million combined 22 with the current shortfall in developer contributions of 23 GBP15.5 million - would equate to GBP14.3 million per 24 annum (comprising principal and interest) over a 30-year 25 period." 38 1 Again, just to find out the interest part of that, 2 GBP14.3 million per year times 30 years, by my 3 calculations, comes to GBP429 million; if one deducts 4 the GBP246.5 million for capital payments, one is left 5 with interest payments of GBP182.5 million. Does that 6 seem broadly correct? 7 A. That seems correct, yes. 8 Q. What I've also done from at least a lay perspective, 9 coming back to the total cost of the project, and this 10 time adding on interest payments, if -- and based on the 11 various assumptions you set out in your statement, 12 interest rates may go up or down, more developers' 13 contributions may appear on the scene, or less, 14 whatever. But subject to these various caveats, if one 15 starts with the total cost of the project, as reported, 16 of GBP776.7 million, if one adds the interest payments 17 I have just mentioned of 182.5, one comes to a total sum 18 of GBP959.2 million, which on one view could be said to 19 be the true cost of the project, including interest; 20 does that seem fair? 21 A. Could you repeat that again just to go through those 22 numbers, sorry. 23 Q. I'm throwing all these numbers at you. 24 So what I had done, in paragraph 6.18 of your 25 statement, you had explained that the total annual cost 39 1 of the additional borrowing would equate to 2 GBP14.3 million a year. So I had just times-ed that by 3 30 years and got a figure of GBP429 million. 4 I then deducted the capital part of it, the 246.5, 5 and been left with a figure for interest of 182.5. So 6 it's that figure of interest of 182.5, and now seeking 7 to add back on to the previous sums. 8 So adding that figure of 182.5 for interest to the 9 total reported cost of the project of 776.7, I arrived 10 at a figure of just over GBP959 million? 11 A. Yes. 12 Q. My suggestion is that, at least from a lay perspective, 13 that could be said to be the total reported cost of the 14 project, including the anticipated interest payments. 15 A. No, I think that's reasonable. I think going back to 16 the August 2011 report to Council, that certainly set 17 out the -- the total cost including interest at that 18 point, yes. 19 CHAIR OF THE INQUIRY: Is 776 the correct base to be taking? 20 I thought, from the earlier parts of your evidence, you 21 had highlighted additional costs which I think 22 Mr Mackenzie worked out earlier, about 40 million or 23 something to be added to that. Should the base not be 24 the 776 plus additional cost plus the interest? 25 A. I think in terms of the project -- the project budget 40 1 that was established, it's the 776.7 plus the interest, 2 and then we have set out, my Lord, the additional tram 3 related expenditure that has been highlighted. 4 CHAIR OF THE INQUIRY: Should that be added on as well? 5 A. I think, if you're looking at it from a layman's 6 perspective, I think all of the information is there in 7 front of the Inquiry. 8 CHAIR OF THE INQUIRY: So if that were the position, you are 9 certainly over GBP1 billion? 10 MR MACKENZIE: I was coming on to that, my Lord, yes. 11 CHAIR OF THE INQUIRY: Oh, sorry. 12 MR MACKENZIE: Yes. So if one -- so that was one way of 13 looking at it, the 776.7 plus interest of 182, I think, 14 would come to the 959 million, but the other way of 15 looking at it is perhaps starting at 820 million, which 16 includes the additional tram-related sums which aren't 17 accounted for in the tram budget; and if one then adds 18 the 182 for interest on to the 820, one comes to over 19 GBP1 billion, which, from a lay perspective, may be said 20 to be the true cost of the tram project, including the 21 anticipated interest payments. Does that seem 22 reasonable? 23 A. Yes. I think all of the information within the 24 statement does come to the billion pounds area, yes. 25 Q. Thank you. We've also asked, please, going back to the 41 1 statement at page 7, we'd asked about -- this is under 2 the consequences chapter of the Inquiry's remit, to look 3 at where the additional money could have been spent. So 4 I think we'd asked you about details of the cuts that 5 the Council had had to make in recent years, and in 6 paragraph 6.19 you explained that: 7 "An analysis of revenue budget savings totalling 8 GBP145 million over financial years 2015/2016 to 9 2017/2018 is included in Appendix 16." 10 We will come to that in a second, but is that 11 essentially savings totalling 145 million over three 12 financial years? 13 A. That's correct, yes. 14 Q. So it's 2015/2016, and 2016/2017, and 2017/2018. Thank 15 you. 16 Appendix 16 starts at page 60. If we go to that, 17 please. 18 If we can perhaps blow up the very top, just to see 19 the heading, we see: approved savings for delivery, 20 2015/2016 to 2017/2018. I think then each of the 21 financial years is dealt with separately. So I think 22 what we're looking at are savings in the first financial 23 year, 2015/2016. This is just by way of comparison to 24 see where the additional funding for the tram could have 25 been spent instead. This is based on -- you had 42 1 mentioned in your statement at paragraph 6.18, the 2 annual payment of GBP14.3 million to meet the additional 3 expenditure including interest. So that is an ongoing 4 payment, or assumed payment of GBP14.3 million. 5 Just for comparison purposes, if we scroll down 6 a little on this page, keep on going, please, we can 7 see, for example, the shaded line, "Total Children and 8 Families". So in this financial year, there required to 9 be a saving of GBP11.917 million in the children and 10 families budget. So I just point to that as an example 11 of where the money could have been spent instead if 12 these additional sums hadn't been spent on the tram. 13 If we go to page 62, please, we can see, above the 14 heavy shaded row, we can see in 2015 and 2016 the total 15 Council savings were GBP38.816 million. That simply 16 provides some context for the additional sums being 17 spent on the tram, and then underneath the shaded row, 18 the heavy shaded row, it goes on to the next financial 19 year, 2016/2017. If we scroll down there, we can again 20 see by way of example the communities and families 21 budget, a similar saving of GBP12.586 million. On to 22 the next page, please. We can see the total savings in 23 this financial year, just above the heavily underlined 24 row, please. Carry on scrolling down, please. Thank 25 you. 43 1 We can see just above the heavily underlined row, in 2 the financial year 2016/2017, the Council required to 3 make total savings of GBP64.403 million. 4 Then the savings in the financial year 2017/2018 are 5 then set out beneath that. If we carry on to the next 6 page, please, page 64, we can just scroll all the way 7 down, please, to see the total savings in that year. 8 Thank you. Second figure from the bottom, total savings 9 in the financial year 2017/2018, of GBP41.623 million. 10 Thank you. That's all just by way of comparison. 11 Back to the statement, please, the main text? 12 CHAIR OF THE INQUIRY: Can I just clarify, was this exercise 13 undertaken specifically for you giving evidence, or were 14 these schedules prepared for some other purpose in the 15 Council when they're talking about reducing budgets? 16 A. The schedule is prepared each year as the Council sets 17 its budget and makes decisions around the budget. So 18 what I have done in this appendix is responded to the 19 request from the Inquiry team to look at savings over 20 a period of time. So really just consolidated the 21 detailed savings that had been approved by the Council 22 in each of the last three years. If we look back over 23 a longer period, I think over the last six years, the 24 savings would be round GBP240 million, and going 25 forwards, the projection is a further GBP160 million of 44 1 savings required by the Council over the next four to 2 five years. 3 CHAIR OF THE INQUIRY: As part of the exercise of the -- 4 presumably the Council budget, are the savings broken 5 down in this way, that each department then has to 6 find -- if it's got to find GBP10 million of savings, it 7 then has to allocate it within its internal budget? 8 A. Yes. We go through a process of political engagement 9 with the local members to decide what the priorities are 10 and where the -- where the savings can be found across 11 the organisation, and then there's an engagement with 12 the public as well through that process. 13 CHAIR OF THE INQUIRY: And the ultimate outturn is this 14 schedule which shows how it is -- 15 A. The ultimate outturn is a decision by the Council each 16 year. So each February, the Council sets its revenue 17 budget, and in that exercise it confirms the savings 18 that have to be delivered in the following year. 19 CHAIR OF THE INQUIRY: Thank you. 20 MR MACKENZIE: Thank you. 21 Back, please, to page 7 of your statement and 22 paragraph 7.1. We had also asked you to try and 23 undertake a comparison of the actual outturn costs of 24 the tram project compared to the budget at financial 25 close in May 2008. You say in paragraph 7.1: 45 1 "As requested by the Inquiry, a comparison of actual 2 costs with project budgets (at Financial Close and 3 following mediation) has been prepared, based on 4 available information. This is included at 5 Appendix 17." 6 If we can go to that, please, at page 65, we can see 7 the main items of expenditure on the left are listed. 8 We can see the different columns. Firstly, the bundle 9 at financial close. You've taken a figure of -- sorry, 10 the June 2008. We can see the total of that at the 11 bottom is at 5.15.2. Sorry, 515.2 million. The next 12 column looks at the budget post mediation in 2011. We 13 can see the total of 776 million. The next column, we 14 can see the estimated final expenditure as at March 2017 15 of GBP776.7 million. 16 I would simply like to look at three items which 17 appear to account for the main increases. 18 Firstly, Infraco. We can see the budget at 19 financial close of GBP238.5 million compared with the 20 estimated final cost of GBP419.8 million. In my 21 calculations that's an increase of just over 22 GBP181 million. The other big increase is utilities. 23 We can see they are listed in three rows: utilities 24 MUDFA; utilities other pre mediation; utilities post 25 mediation. 46 1 Taking all the utilities together, by my 2 calculations, the utilities budget at financial close 3 was 48.6 million compared with the final utilities cost 4 of 103.5 million. That resulted in a increase of 54.9 5 million. 6 I think the third big increase is under project 7 management. We see the budget at financial close of 8 54.1 million compared to the final cost of 9 GBP90.2 million, resulting in an increase of 10 GBP36.1 million, and again, by my calculations, those 11 three increases total GBP272.3 million and appear to 12 make up the bulk of the cost overrun. Does that seem 13 correct? 14 A. Yes, that seems reasonable. 15 Q. Thank you. I should just also mention the detail that 16 when we see design, the estimated final expenditure of 17 GBP26.7 million, we should bear in mind that a sum of 18 just over GBP6 million that was paid to SDS, albeit via 19 Infraco. 20 A. Yes. 21 Q. Thank you. 22 Put that to one side, please. 23 Then just finally, please, at page 7 of your 24 statement, again, in paragraph 8, 8.1, you explain: 25 "The final formal report to the Council on Tram 47 1 project costs was presented by the Council 2 Chief Executive at a Council meeting on 3 25 September 2014. At that time, final costs were 4 estimated to be GBP776 million." 5 In paragraph 8.2, you say: 6 "The current costs statement (Appendix 6) estimates 7 the final Tram project cost to be GBP776.7 million, 8 excluding those costs stated above which were met from 9 other budgets. There have been a small number of 10 adjustments to the position reported in September 2014 11 including an increase of GBP0.55 million in land and 12 property compensation expenditure." 13 So I take it that it's not possible to provide final 14 accounts yet; is that correct? 15 A. Yes. As it's referred to in the statement, there are 16 some issues outstanding and so until -- until those are 17 finally closed, we can't provide -- we've provided 18 an estimate within these numbers, but those matters are 19 still outstanding. So we continue to review those 20 matters until they are formally closed. 21 CHAIR OF THE INQUIRY: Do you have any idea when the account 22 will be closed? 23 A. I would hope during this financial year, but I can't 24 confirm that. 25 CHAIR OF THE INQUIRY: When it is closed, could it be 48 1 arranged that a copy of it be sent to the Inquiry? 2 A. Yes, of course. We could perhaps say we're not 3 anticipating a material change to the numbers shown, but 4 certainly we'll come back with the final statement. 5 CHAIR OF THE INQUIRY: Thank you. 6 MR MACKENZIE: Could I finally ask, Mr Connarty, you 7 mentioned Scottish Water was outstanding. Are there any 8 other outstanding items in addition to that? 9 A. I'm not aware precisely. I think there are perhaps two 10 items outstanding, but I can provide more information on 11 that if required. 12 CHAIR OF THE INQUIRY: Yes. I saw as we went through that 13 there's a question of VAT recovery of about GBP500 or 14 something which you won't get because tie had been -- 15 ceased to exist as a company by the time -- 16 A. Yes, that's correct. 17 MR MACKENZIE: Thank you. I have no further questions. 18 CHAIR OF THE INQUIRY: Does anyone else have questions? 19 Thank you, very much, Mr Connarty. Very helpful. 20 I'm very grateful to you for helping the Inquiry in 21 undertaking this exercise. You're still technically -- 22 you still are subject to your citation and could be 23 recalled. I think it's highly unlikely, but if that 24 happens, someone will get in touch with you. In the 25 meantime, thank you very much. 49 1 A. Thank you, my Lord. 2 (The witness withdrew) 3 MR MACKENZIE: Mr Lake is taking the next witness. I wonder 4 if we could take an early adjournment? 5 CHAIR OF THE INQUIRY: We will just have the normal break at 6 coffee time. So we'll resume at 11.10. 7 (10.52 am) 8 (A short break) 9 (11.12 am) 10 CHAIR OF THE INQUIRY: Yes, Mr Lake. 11 MR LAKE: My Lord, the next witness is Kenneth Hogg. 12 MR KENNETH HOGG (sworn) 13 CHAIR OF THE INQUIRY: You are going to be asked questions 14 initially at least by Mr Lake, Counsel to the Inquiry. 15 If you simply listen to the question and answer it as 16 directly as possible, and also if you keep your answers 17 at a measured speed, so the shorthand writers can keep 18 up with you, and finally, if you speak into the 19 microphones, so that everyone can hear what you are 20 saying. 21 Examination by MR LAKE 22 MR LAKE: Mr Hogg, could you state your full name, please. 23 A. Kenneth James Hogg. 24 Q. I would like to look at a document, please. You've got 25 a hard copy in front of you, but it will also be shown 50 1 on the screen to your right. It's TRI00000045_C. 2 That should be the same document on the screen as in 3 front of you. 4 Is that a copy of the statement that you provided to 5 this Inquiry? 6 A. Yes, it is. 7 Q. I think the paper copy will have your signature on the 8 final page? 9 A. Yes, it does. 10 Q. Are you content to adopt that as your evidence for the 11 purposes of this Inquiry? 12 A. Yes. 13 Q. I would like to ask you just a few additional questions 14 by way of clarity. 15 Looking at the time, moving towards the close of the 16 contracts at the end of 2007, I think at that time you 17 were a non-Executive Director at tie? 18 A. Yes. 19 Q. But not at that time at TEL? 20 A. Yes, that's correct. 21 Q. As at that time you had started attending the Tram 22 Project Board on some occasions? 23 A. Not at that stage. My recollection is that the tie 24 non-Executive Directors were invited to attend the Tram 25 Project Board at some point between 2007/2008. 51 1 I couldn't remember the -- I don't recall the exact 2 date. I thought it was 2008 when that happened. 3 Q. But where you have attended it's noted in the minutes? 4 A. Yes, that's correct. 5 Q. We can proceed on that basis. 6 The Final Business Case was issued around about the 7 end of 2007. Did you have a role in approving that? 8 A. No. 9 Q. Were you aware of the terms of it? 10 A. Yes. 11 Q. Perhaps just looking at the section on governance now, 12 could we have the Draft Final Business Case, please. 13 Sorry, the Final Business Case. It's reference 14 CEC01395434. 15 A. Could I clarify my earlier answer? 16 Q. Certainly. 17 A. The -- both the draft and Final Business Cases were 18 presented to the tie Board at the time when I was 19 a non-Executive Director. 20 Q. In that context, did you approve of or consider the 21 terms of them? 22 A. Yes. 23 Q. You recognise this version here is the version 2 of the 24 Final Business Case dated 7 December 2007. 25 A. Yes. 52 1 Q. Could we look within this, please, at page 84. We can 2 see the heading, the section 6, Governance. Then if we 3 look at the lower half of the page, under the heading, 4 "Governance structure - Period to mid-2007", you will see 5 paragraph 6.4 notes four key bodies were involved in 6 this period. Those bodies are then designated TEL, the 7 Tram Project Board, and the Tram Project Board 8 sub-committees, there were two of them. 9 It was apparent by this time that this is 10 representing that tie are not one of the key bodies. 11 Was that your understanding at the time while sitting as 12 a Director of tie? 13 A. No. That wasn't -- my understanding was that tie was 14 one of the key bodies. 15 Q. This gives rise to a tension I want to ask you about. 16 On the one hand you are sitting there and believing it's 17 one of the key bodies, but on the other hand you're 18 approving a business plan that says it wasn't. Was that 19 not causing confusion? 20 A. I agree that paragraph 6.4 is not a fully accurate 21 representation of who the key bodies were. I don't 22 recall a discussion at that time about that paragraph 23 around the tie Board table. tie was the contracting 24 party with the contractors, and so tie would have been 25 a key body. 53 1 Q. We can see that's the one going up to mid-2007. You 2 will be aware, of course -- the change in mid-2007 being 3 very much that Transport Scotland stood back from the 4 statement. You describe that in your statement. That 5 reflects your understanding, does it? 6 A. If you're asking whether Transport Scotland should also 7 be listed in here -- 8 Q. No, I'm asking, was that your understanding that, as of 9 summer 2007, Transport Scotland stood back? 10 A. They no longer attended the tie Board meetings, but they 11 were still involved. So, for example, they were still 12 in receipt of both written updates from tie staff and 13 also verbal updates. But it is true that from that 14 point on they no longer attended the tie Board, whereas 15 they had done previously. 16 Q. Can we look over the page, please, to page 85 of the 17 document. 18 Could we look at the lower part of the page, enlarge 19 the ... 20 We can see the heading "TEL Board" and underneath 21 it, paragraph 6.8 notes that: 22 "The role of the TEL Board was focused on its 23 statutory stewardship role and on its overall 24 responsibility to deliver an integrated tram and bus 25 network for Edinburgh, on behalf of CEC. It made the 54 1 formal recommendations to CEC on key aspects of the 2 project including Business Plan and Business Case 3 approval, contractual commitment and matters which have 4 a political dimension." 5 Now, that is squarely putting TEL as being the body 6 that's making recommendations to the Council. Again, 7 was that reflecting the reality as you understood it at 8 the time? 9 A. No. And indeed, in particular, reference to making 10 representations to the Council, the Council were members 11 of the tie Board, both as councillors, there were four 12 councillors at that point as members of the tie Board, 13 and senior Council officials also attended and 14 participated in every tie Board meeting. 15 Q. At this time, going back to leading up to mid-2007, tie 16 and TEL were separate companies. One was not the 17 subsidiary of the other? 18 A. That's correct, yes. 19 Q. But on the face of this, it seems to be presenting an 20 understanding of the Business Case that TEL was in fact 21 the adviser to the Council? 22 A. tie and TEL had separate purposes. TEL had been 23 established in order to oversee the integration of 24 Lothian Buses with the tram project. tie had been 25 established to oversee a suite of transport projects. 55 1 A portfolio of public transport projects, one of which 2 was the tram project, and in the reference to the tram 3 project, tie was the contracting party, not TEL. 4 Q. If you go over the page once again to page 86, in the 5 upper half of this, in paragraph 6.9, under the heading 6 "TPB", it says: 7 "The TPB was established as an independent body to 8 monitor the execution of the project. In doing so, the 9 TPB followed normal best practice in project 10 management." 11 Again, just at this time, up to mid-2007, was that 12 your understanding of how the TPB was functioning in 13 practice? 14 A. That's not a fully accurate statement. In particular, 15 I would take issue with the phrase "independent body". 16 The TPB was a committee of TEL. It was not an 17 independent company, for example. It did not have 18 a company board. 19 So it was a committee of TEL Limited, and it was 20 taking one of the detailed decisions around the 21 execution of the project. So that part of the statement 22 is correct, but I would take issue with the phrase 23 "independent body". It did not have a life of its own. 24 Q. We've mentioned tie, TEL and the Tram Project Board. 25 Which of those bodies had the principal responsibility 56 1 for producing the Final Business Case for delivery to 2 the Council? 3 A. The Business Case was produced by a combination of staff 4 who were employed by tie, and City of Edinburgh Council 5 officials, with inputs from other parties, including 6 consultants and Lothian Buses. 7 It was considered by the tie Board. I don't know 8 whether or not at that point it was also considered by 9 the TEL Board, before it was put to the Council for 10 final approval. 11 Q. Can we look now on to page 88 of this document. You 12 will see from the heading at the top of the page, moving 13 now to a different time period, this is the governance 14 structure mid-2007 to financial close. 15 If we scroll down so we get a full view of 16 paragraph 6.24, the note is made there that in this 17 period Transport Scotland withdrew from the formal 18 governance processes in favour of a monitoring regime 19 based on regular reporting and meetings with City of 20 Edinburgh Council, supported by audit processes and 21 issue of regular compliance certificates. Do you see 22 that? 23 A. Yes. 24 Q. You've already mentioned that. 25 It then goes on to consider some of the changes. If 57 1 we scroll further down the page, we can see 2 paragraph 6.26 refers to revisions in the Council 3 processes consisting of changes to the operating 4 agreements, and 6.27 notes a sub-committee of the 5 Council's Transport Infrastructure and Environment 6 Committee dedicated to the transport project being 7 established. Do you see that also? 8 A. Yes. 9 Q. Were you involved to any great extent in these changes 10 taking place within the Council? 11 A. No. 12 Q. Can we look over the page, please, then at 13 paragraph 6.28. We can see under the heading "Project 14 level", it says: 15 "The role of the TPB was confirmed and the delegated 16 authority arrangements (including the powers reserved to 17 CEC), previously enshrined in the approved remit of the 18 Tram Project Board, are contained in the revised 19 Operating Agreements being prepared by the Council and 20 which will be agreed with tie and TEL in advance of 21 Financial Close." 22 If I jump to the last sentence: 23 "In all other material respects the operation of 24 governance by the Tram Project Board continued as in the 25 period to mid-2007." 58 1 Does that accord with your understanding that as far 2 as the Tram Project Board and for that matter, tie and 3 TEL are concerned, there was no material change in this 4 period? 5 A. Yes. My understanding was that the Tram Project Board, 6 throughout this period, had particular responsibility 7 for the detailed operational execution of the project, 8 and that remained the case both before and after these 9 changes here. The tie Board were responsible for the 10 overall strategy being undertaken in relation to the 11 project. 12 Q. If we then go to page 91, we have got a heading 13 identifying another period that we're looking at now, 14 the governance structure, once termed the construction 15 period. 6.31: 16 "The further changes proposed to be implemented in 17 the period to Financial Close to prepare for the 18 construction period are as follows." 19 We can see in 6.32, it says: 20 "The TEL Board is focused on its overall 21 responsibility to deliver an integrated tram and bus 22 network for Edinburgh on behalf of the City of Edinburgh 23 Council. It will make formal recommendations to City of 24 Edinburgh Council on key aspects of the project and 25 matters which have a political dimension." 59 1 Now, did you understand this change in the role of 2 TEL was taking place at that time, that they would make 3 the formal recommendations to the Council on key aspects 4 of the project? 5 A. I can't remember whether at that time I was aware of 6 this, and certainly I don't have any recollection of 7 that now. In particular, I don't think it was the case 8 that reporting to the Council only went via TEL. It 9 went direct from tie. And indeed, that was part of the 10 reason for having the Council involvement on the 11 tie Board. Changes were made subsequently when TEL took 12 over ownership of tie. So that was a later change, but 13 at this point in time, it wasn't the case that TEL were 14 the only organisation reporting direct to the Council. 15 tie was too. 16 Q. Jumping down a bit then to look at paragraph 6.35, it's 17 talking about the composition of these two boards. 18 That's the tie Board and the TEL Board: 19 "... is re-visited to ensure the following objectives 20 are achieved." 21 The first bullet point is: 22 "Ensure the TEL Board has the composition necessary 23 to be the active arm of the Council in oversight of 24 project delivery and preparation for integrated 25 operations." 60 1 Once again that's giving the impression really 2 that -- it says quite bluntly TEL are the active arm in 3 oversight of project delivery. Would that have 4 represented a change from how things had been up to that 5 time? 6 A. At this point I wasn't a member of the TEL Board. So 7 I don't know what they did or didn't discuss or do. But 8 I don't agree that the TEL Board was the only active arm 9 of the Council at this point. And my understanding was 10 that whereas the TEL Board were particularly focused on 11 the future integration of the tram project as delivered 12 with Lothian Buses to create an integrated single public 13 transport scheme for Edinburgh, tie and tie Board was 14 the Board focusing on getting the tram project actually 15 built in the first place. And reporting to the Council 16 on those matters. 17 Q. In that vein, can we look down at paragraph 6.38, if we 18 scroll down a little bit further. It says: 19 "It is also envisaged that certain of the Elected 20 Members of the tie Board and its independent 21 non-Executive Directors ..." 22 That would include you, wouldn't it, that category? 23 A. Yes. 24 Q. "... will join (if not already members) the TEL Board or 25 the Tram Project Board (including specific 61 1 sub-Committees) to ensure consistency of approach and to 2 utilise relevant experience productively. The 3 re-deployment of the Elected Members and the independent 4 non-Executive Directors will reflect: 5 (i) The emphasis of the TEL Board on oversight (on 6 behalf of the Council) of matters of significance to the 7 Elected Members in relation to project delivery and 8 preparation for integrated operations; and 9 "(ii) the emphasis of the Tram Project Board on 10 delivery of the tram system to programme and budget and 11 the preparation for integrated operations." 12 Now, those two subparagraphs there, looking at what 13 would be done by TEL and Tram Project Board, would you 14 agree they leave very little for tie to do? 15 A. Can you remind me of the date of this document? Is this 16 mid-2007? 17 Q. It is December 2007. 18 A. My recollection is that what is described here did not 19 happen until later on. So at the point at which TEL 20 took over ownership of tie, at that point these changes 21 happened, and the non-Executive Directors of tie, 22 including myself, became non-Executive Directors of TEL, 23 along with the councillors who sat on tie. 24 My memory is that that did not happen in 2007. 25 I think that happened only later, if that's the case, if 62 1 I'm correct on those dates, this is inaccurate 2 description of what actually happened at that time. It 3 might have been an intention in writing this paper, but 4 it wasn't what was happening at that time. 5 Q. Was there any change apparent to you as a Director of 6 tie in the role being played by tie at this time, 7 December 2007? 8 A. No. I have no recollection of any change being made, 9 including to my own responsibilities, as a Director of 10 tie, at this time. 11 Q. Can we look over the page, please, to page 92 and 12 paragraph 6.45. 13 You will see this is considering the role of the 14 Tram Project Board. It says: 15 "The Tram Project Board maintains its role as the 16 pivotal oversight body in the governance structure." 17 First of all, just pausing there, would you have 18 said at that time that the Tram Project Board was the 19 pivotal oversight structure? 20 A. It was one of the pivotal bodies. I would take issue 21 again with the phrase "governance structure". So the 22 governance arrangements in place were a matter for the 23 City of Edinburgh Council. 24 The various company structures that existed, tie and 25 TEL and the existence of the TPB, was a system designed 63 1 by the City of Edinburgh Council and expressed through 2 the operating agreements that existed between the 3 Council and those two companies. 4 If this is a reference to project governance rather 5 than corporate governance, I would agree that the tram 6 project -- the Tram Project Board was an important body 7 in overseeing the execution of project governance, but 8 it wasn't the only pivotal oversight body, 9 and I would -- and I would have expected to see tie -- 10 the tie Board included in that description too. 11 Q. Would you agree that reading this, the description of 12 the Tram Project Board as the pivotal oversight body, 13 appears to give it primacy? 14 A. It's certainly an incomplete description. 15 Q. Reading on then, it goes on to say: 16 "The Tram Project Board is established as a formal 17 sub-committee of TEL with full delegated authority 18 through its Operating Agreement to execute the project 19 in line with the proposed remit set out in 20 Section 6.32." 21 Just pausing there, I think you have already said 22 your understanding was that the Tram Project Board was 23 a sub-committee of TEL? 24 A. Yes. 25 Q. It then continues: 64 1 "In summary, the Tram Project Board has full 2 delegated authority to take the actions needed to 3 deliver the project to the agreed standards of cost, 4 programme and quality." 5 Now, that gives the impression, would you agree, 6 that the Tram Project Board is actually going to deliver 7 the tram project? 8 A. In an operational sense, yes. The detailed decisions in 9 respect to managing the contract and making progress 10 were properly a matter for the Tram Project Board. And 11 it did have delegated authority to undertake those 12 actions. But it's not the case that the Tram Project 13 Board was responsible for the overall strategy being 14 taken to get the trams project delivered. So again, 15 I would say that's an incomplete description of the 16 situation that existed at that time. 17 Q. If we scroll back up to the top of this page to see 18 paragraph 6.41, it notes there that: 19 "It is recognised that there is inevitable 20 duplication between the scrutiny by the tie Board of its 21 Executive activities and the oversight role performed by 22 the Tram Project Board. However, in a large, complex 23 project, this seems a worthwhile price to pay for robust 24 governance." 25 Again, was that your understanding at the time, that 65 1 there was to be duplication, and that was accepted as 2 a fact of life? 3 A. It was accepted at the time that there was an element of 4 duplication of discussion, and that was a factor which 5 was addressed subsequently when the tie Board members 6 were invited to attend TPB meetings and also when they 7 then scheduled the Tram Project Board meetings to be 8 back-to-back with tie Board meetings, so that we could 9 hold crossover discussions once. So, for example, if 10 there was a discussion about a particular aspect of one 11 of the contracts, that rather than repeating that 12 discussion twice over, it would happen just the once, 13 with the different -- the different boards having 14 a different role in respect of that issue. 15 Q. From what you've said about what was being represented 16 here in the Final Business Case, and your understanding 17 of the factual position as it existed on the ground, 18 would you agree that in fact it is not really correct to 19 say that it was clear as to what the roles were and the 20 responsibilities? There appears to have been 21 considerable ambiguity and confusion about that? 22 A. I agree that what is written here is not an accurate 23 description. In practice, at the time, I did not feel 24 that there was that ambiguity in terms of who was doing 25 what in respect of the governance of the project. 66 1 I would agree that this is an incomplete and inaccurate 2 description of the respective responsibilities, but that 3 wasn't my -- but that doesn't reflect my feelings at the 4 time. My view at the time was that it was clear what 5 tie were being asked to do and what the Tram Project 6 Board were being asked to do. 7 Q. That's on the assumption that what tie were being asked 8 to do is not as stated in the Final Business Case. You 9 thought they were one of the key bodies and that's 10 why -- 11 A. Yes, that's correct. 12 Q. Could we look at your statement, please, at page 17, 13 paragraph 36. You note here: 14 "In an email dated 1 October 2007, Graeme Bissett 15 responded to my comments. Mr Bissett forwarded that 16 email to Colin McLauchlan and Steven Bell saying 17 "Predictably, the non-Executive Directors are seeking to 18 understand what exactly is the role of the tie Board'. 19 This comment refers to the proposed governance changes. 20 I understood the role of the tie Board at that time to 21 be to execute its responsibilities in line with its 22 memorandum and articles of association and the tram's 23 Operating Agreement. It was fundamentally a corporate 24 governance role. I believed that the tie Board was 25 effective in its role and provided effective oversight 67 1 of tie until the first few months of 2011, a matter 2 which I have commented on separately in this statement." 3 Just a couple of things arising out of that. It 4 seems that other of the non-Executive Directors were 5 raising queries as to precisely what role tie was to 6 have at this time. Were you involved in raising those 7 queries? 8 A. I believe this is a reference to an exchange of emails 9 which was happening around that time, commenting on 10 draft revisions to the Operating Agreement between the 11 Council and tie, and I and others had commented on some 12 of the proposed revisions to that Operating Agreement. 13 I think I had -- I have given those papers to the 14 Inquiry separately, and I think I refer to them 15 elsewhere in my written statement. 16 I don't believe that this comment here reflects 17 a more fundamental, why are we here question; that was 18 not a live discussion around the Board. 19 I think it reflects specific commenting about 20 proposed revisions to the Operating Agreement. 21 Q. In an earlier -- in an answer you gave to me earlier, 22 you differentiated corporate governance on the one hand 23 from project governance on the other, and it's notable 24 in this paragraph, you refer to the role of the 25 tie Board being to execute its responsibilities in line 68 1 with its memorandum and articles of association, and you 2 describe tie's role as being fundamentally a corporate 3 governance role. 4 Is that how it started to be seen at the time, that 5 tie's role was one of corporate governance and project 6 governance went elsewhere? 7 A. No, the distinction I'm making is that tie Board was 8 a Company Board. The Tram Project Board was not 9 a Company Board. And the two are quite different 10 things. 11 I had legal responsibilities as a Company Director 12 which did not apply to anybody else around that Tram 13 Project Board table. 14 Q. We read the Tram Project Board was a sub-committee of 15 TEL? 16 A. Yes. 17 Q. So it was effectively functioning as part of the 18 TEL Board, was that your understanding? 19 A. It derived its powers from the TEL Board but it was not 20 a Company Board. The distinction I'm making here is 21 that to take a concrete example, when the project ran 22 into difficulties, a decision was required about how 23 best to try and get the project back on track, and that 24 was a -- that was a question at a strategic level for 25 the tie Board about how to improve the relationship, and 69 1 improve performance from the contractor. 2 That was a longer-term strategic decision that fell 3 to the tie Board, given its responsibilities for the 4 project, rather than the Tram Project Board, which was 5 more concerned with the operational execution of that in 6 line with what the tie Board, and indeed the TEL Board, 7 were deciding to do. 8 Q. When you say -- I'll ask more generally. 9 What did you understand the status of the Tram 10 Project Board to be as a committee of TEL? 11 A. It was a committee which derived its authority and 12 purpose from TEL. It had a particular focus on the 13 detailed operational execution of the contract, and it 14 dealt with matters at a level of granularity which 15 wasn't the case regularly at the tie Board. Certainly 16 on occasions the tie Board drilled down into particular 17 matters, but the Tram Project Board was the place where 18 every detailed decision that met that required level of 19 engagement was carried out. 20 Q. If the Tram Project Board then is taking a decision, 21 detailed decision about the implementation of the 22 contracts, I'm just wondering how that took effect. If 23 the Tram Project Board took a decision, but tie were the 24 party to the contracts, how did the Tram Project Board 25 take decisions that were to bind tie? 70 1 A. The Tram Project Board was not authorised to depart from 2 what had been agreed in the contract, and any decision 3 where the contract itself was in doubt or was queried, 4 any discussion about that matter, to my knowledge, was 5 put to the tie Board. 6 Q. But discussions about what strategy to be pursued under 7 the contracts or what disputes to take would be taken at 8 the Tram Project Board, and I'm wondering in what 9 sense -- what consideration tie gave to those matters, 10 or did they simply follow whatever was decided by the 11 Tram Project Board? 12 A. You mentioned the example of disputes and in respect of 13 the dispute resolution process, those -- those were 14 discussed around the tie Board table. Clearly I wasn't 15 a member of the Tram Project Board at this time. So 16 I can't speak for -- I don't have first-hand experience 17 of what their discussions were, but it is not the case 18 that there were -- in my experience and my 19 understanding, it was not the case that there were two 20 disconnected discussions going on, one taking place at 21 the Tram Project Board and one taking place at the 22 tie Board, not least because the same officials were 23 participating in both, and reports were being made to 24 the tie Board from the Tram Project Board. 25 Q. Well, the discussions might be linked, but if the Tram 71 1 Project Board took a decision as to what was to happen 2 in relation to the contracts, be it trying to encourage 3 faster work, dealing with issues that arose, that, to 4 give effect, would have to be passed to employees of tie 5 for them to action; is that correct? 6 A. I think there's an important -- 7 Q. Can we just deal with that first of all? Was that 8 correct? If the Tram Project Board took a decision as 9 to what would be done in practice, that would have to be 10 implemented by tie's employees? 11 A. Well, that's an incorrect statement because everybody 12 there was a tie employee. There were no Tram Project 13 Board employees. 14 Q. Well -- is the answer to my question yes, if the Tram 15 Project Board decision was to be given effect, it would 16 have to be given effect by tie employees? 17 A. Yes. That's correct. 18 Q. So in terms of deciding any policy or approach in 19 relation to the contracts, the decision would be taken 20 by the Tram Project Board, but it would affect tie 21 because they were the party to the contract? 22 A. Yes, that's fair. 23 Q. Now, as a Director of tie, did that not place you in 24 a difficult position that decisions in relation to these 25 very substantial contracts were being taken by another 72 1 body of which you were not a member? 2 A. Only to some extent. The decisions that were being 3 taken were being taken about technical matters, about -- 4 I'm trying to recall at this point in time what would be 5 discussed. 6 For example, decisions about the execution of the 7 utilities diversion works would be ongoing at this time. 8 Q. Mm-hm. 9 A. And decisions taken about which sections of which 10 particular street work should take place with next, or 11 how to address problems that arose in particular streets 12 in terms of those utilities diversion works, those were 13 the sort of decisions which the Tram Project Board were 14 taking at the time. 15 That was quite a separate matter from taking 16 a strategic view on the -- on how the contract should or 17 should not be operating. 18 Q. But the Tram Project Board would also be taking 19 decisions as to the compromise if claims were arising 20 under the contracts, particularly the MUDFA and SDS 21 contracts? 22 A. I don't -- I don't know. I think that's the case, but 23 I can't be sure about it. 24 Q. The Tram Project Board might also be involved in taking 25 decisions as to agree the early termination of the MUDFA 73 1 contract? 2 A. I can't recall that. 3 Q. If you take it from me, just ask you to assume for the 4 moment that what I have said is correct, you've got 5 a situation where the Tram Project Board are taking 6 quite substantial and major decisions in relation to 7 contracts with a different company: what difficulties 8 did that cause you as a Director of tie, not being in 9 control of the decisions taken? 10 A. It wasn't ideal, and that was addressed subsequently by 11 changes that took place in terms of inviting the tie 12 directors to attend TPB meetings. I would agree with 13 that. 14 But equally, I would say that it was not the case 15 that you had two separate groups of people doing 16 different activities. Everybody in that building was 17 a tie employee. The fact that they were sitting around 18 a Board called the Tram Project Board, that -- I agree 19 that's a corporate governance distinction, but it's not 20 a distinction in terms of who was doing what work. 21 The same people, there was a single team working to 22 get the project delivered. They convened in some 23 instances as a Tram Project Board, and they supported 24 discussions in other instances at the tie Board. 25 There was strong cross-membership between both, and 74 1 there were reports between the two. So I was not 2 concerned at the time that things were happening in the 3 Tram Project Board that were out of line with the wishes 4 or the directions of the tie Board. 5 Q. Looking back to paragraph 36, which is still on screen, 6 the last sentence of it, you say: 7 "I believed that the TIE Board was effective in its 8 role and provided effective oversight of TIE until the 9 first few months of 2011, a matter which I have 10 commented on separately in this statement." 11 Elsewhere in the statement, you notice that the last 12 Board meeting for any practical purposes was actually in 13 2009. If really the tie Board stopped meeting for 14 practical purposes in 2009, how was it able to provide 15 effective oversight until 2011? 16 A. You're correct that that statement doesn't -- doesn't 17 include reference to the fact -- to the fact that after 18 2009, the tie -- when the ownership of tie shifted from 19 the Council to TEL, the tie Directors, including myself, 20 became TEL Directors. And the TEL Board met regularly. 21 So I should have maybe been clearer in that 22 statement that I meant tie until such point in time when 23 its role changed, and then the TEL Board became the -- 24 became the main Company Board. 25 The tie Board did meet twice after those changes 75 1 were made, but it was simply to approve the accounts in 2 the first instance, and to approve the appointment of 3 the new chair in the second instance. 4 Q. For fairness, I would refer you to page 10 of your 5 statement and paragraph 20 there. That's where you note 6 that: 7 "The minutes of the tie Board meeting on 8 16 December 2009 report this might be the last formal 9 tie Board meeting ..." 10 You do go on to note that it did meet on the two 11 occasions subsequently for the purposes you have just 12 narrated? 13 A. Yes, but the critical point here is that it's not the 14 case that the role which the tie Board had previously 15 performed then ceased. That role transferred to the 16 TEL Board which was configured differently, with a new 17 purpose, under a new Operating Agreement with the 18 Council. 19 Q. There was that transfer as a matter of the governance 20 structures, is what I understand you're telling me. Is 21 that -- 22 A. Yes. 23 Q. But it remained the case, I think, that tie had the 24 employees, and perhaps most significantly, tie was the 25 party to these very substantial construction contracts. 76 1 Is that correct? 2 A. That's correct. 3 Q. Yet this Board didn't meet for the following two years. 4 A. The Board -- 5 Q. For practical purposes. 6 A. Well, the Board did meet twice to fulfil its statutory 7 duties. But the functions of the Board were transferred 8 to the TEL Board. So all the -- all the discussions to 9 provide scrutiny of what was going on, to provide 10 independent challenge, those functions were transferred 11 from the tie Board to the TEL Board at the point at 12 which TEL became the owner of tie, rather than CEC. 13 The reason, as I recall it, why -- or one of the 14 reasons, as I recall it, why tie wasn't simply wound up 15 at that point was because tie had been the contracting 16 party, and to have wound up tie would have required an 17 additional amendment to the contracts which were already 18 at that time in dispute, and it was felt to be an 19 unhelpful thing to do. 20 So at the point at which this change was made, in 21 December 2009/January 2010, the functions which had been 22 carried out by the tie Board previously transferred to 23 the TEL Board, and whereas previously I had not 24 participated in the member of the TEL Board, I did then 25 going forwards. 77 1 Q. I understand. Could I ask you to look at the minutes of 2 a meeting, please. It's document reference CEC00988028. 3 CEC00988028. 4 You can see a front page here, with the heading, 5 "Tram Project Board Report on Period 10 Papers for 6 meeting 22 January 2008". Do you see that? 7 A. Yes. 8 Q. If you can take it from me, that year is an error. That 9 should be 2009. That becomes apparent when you're 10 looking at the documents after. 11 I say that to avoid confusion. 12 If we look, please, at page 5 of this document. 13 We're now looking at the minutes of the Tram Project 14 Board for 17 December 2008. Do you see that? 15 A. Yes. 16 Q. That year is correct. You can take that from me. 17 We can see here that on this occasion you're 18 listed -- in fact not even as someone in attendance, but 19 as a member of the Tram Project Board, in December 2008. 20 Do I understand from what you have said already, you 21 don't consider that you were actively a member, you were 22 simply a person in attendance from time to time? 23 A. I was first and foremost a Director of tie and TEL 24 Limited. I -- my recollection is that the non-Executive 25 Directors, and indeed the councillors, were invited to 78 1 attend some, but not at all, Transport Board -- Tram 2 Project Board meetings. This might have been the first. 3 I don't recall. 4 Q. You said you were invited to attend some and not others. 5 Elsewhere in your statement you make the point that if 6 the tie Board meeting was immediately before or 7 immediately after the Tram Project Board meeting, you 8 would attend and otherwise you wouldn't. Were there 9 occasions when the tie Board wasn't adjacent to the Tram 10 Project Board that you nonetheless attended the Tram 11 Project Board, or could you only attend the Tram Project 12 Board when you were invited to do so? 13 A. It wasn't really a matter of attending or not based on 14 the schedule. It was more a question of when there was 15 a discussion to be had in some detail in which -- would 16 need to have been gone into twice at both the TPB and 17 the tie Board, on those occasions they were organised 18 back-to-back. 19 What tended to happen from this point on was that 20 there was a scheduling of the two meetings back-to-back, 21 to facilitate that, but it is the case that I think 22 there were tie Board meetings which didn't happen 23 immediately following the TPB, both before and after 24 this date. 25 Q. So who decided which Tram Project Board meetings you 79 1 should attend? 2 A. An invitation would be put to the non-Executive 3 Directors of tie from the executive team in tie, 4 saying: there's a key issue we want to discuss on X 5 date. And at that point the invitation would be there 6 to attend the TPB. 7 If I had wanted to -- I don't -- I don't recall ever 8 wanting to attend a TPB and not being allowed to attend, 9 and none of this detracted from the specific 10 responsibilities of tie Board. 11 So I was quite clear that on some occasions I was 12 participating in a TPB discussion that had one set of 13 responsibilities, but that was a quite separate matter 14 from engaging as a non-Executive Director around the 15 tie Board table. 16 I had no concerns that discussions which ought 17 properly to have been discussed at the tie Board were in 18 fact -- were instead being discussed around the TPB. 19 Q. I'll come back to that in a little while, but what 20 I would like to ask you at the moment is: did you regard 21 it as a satisfactory position that you did not attend 22 all of the Tram Project Board meetings, but only some of 23 them, and that that was in the invitation of the 24 executive? 25 A. Yes. 80 1 Q. Because that would deprive you of a continuing oversight 2 and knowledge of what was happening at the Tram Project 3 Board? 4 A. I was a non-Executive Director, not an Executive 5 Director, and the issues which were discussed at the 6 Tram Project Board were issues which the executive team 7 were having to thrash out and discuss. 8 There were specific responsibilities that went with 9 the non-Executive Directorship which were quite properly 10 different from the executive team, and therefore 11 I didn't -- I did not feel that I needed to go beyond 12 those responsibilities and engage as an executive member 13 of the team, and therefore at times it was helpful, 14 certainly, to get more in-depth briefing and to be in 15 the room when more detailed issues were discussed in the 16 TPB. But, as I said before, I never felt that -- 17 I never felt anything other than the appropriate place 18 for me to exercise my duties as a non-Executive was 19 anywhere other than primarily the tie Board and then 20 latterly the TEL Board, once those governance changes 21 were made. 22 Q. One of the roles of a non-Executive Director would 23 usually be thought of providing oversight and challenge; 24 would you agree? 25 A. Independent scrutiny and challenge, yes. 81 1 Q. And that -- those two aspects of that role can only be 2 provided when the non-Executive Director has knowledge 3 of what's going on? 4 A. Yes. 5 Q. A good flow of information? 6 A. Yes. 7 Q. Would the information flow and understanding not have 8 been vastly improved had you been at all the Tram 9 Project Board meetings, so were aware of the decisions 10 that had been taken in relation to that contract -- 11 those contracts? 12 A. I don't believe that would have been appropriate because 13 the key role of a non-Executive Director is to operate 14 at the strategic level, and to -- and that was made 15 quite clear when these directors were recruited. It was 16 not to be fully informed about everything. This was 17 a very complex project, and the executive team were 18 spending many hours every week immersing themselves in 19 the detail. It would have been physically impossible 20 for non-Executive Directors to have matched that in any 21 way at all, and neither would it have been appropriate. 22 So no, I don't accept the basis of that. 23 Q. Whilst accepting a non-Executive Director can never in 24 practical terms immerse themselves in the level of 25 detail of an executive director, nor should they be 82 1 expected to do so, nonetheless, might the non-Executive 2 Director not attend four-weekly meetings of a board 3 charged as being the pivotal oversight body, to be aware 4 of what's happening? 5 A. They might have, and very often I did do, but that was 6 not a substitute for the scrutiny and challenge which I 7 brought amongst others around the tie and TEL Boards. 8 I never felt in those boards in any way inhibited from 9 seeking the information that I wanted in order to 10 participate in discussions and make decisions. 11 Q. Sticking with this document that's on screen, these are 12 the minutes of the Tram Project Board of 17 December. 13 Could we go to the following page. It's page 6. 14 Item 2.3. This is in relation to governance issues at 15 the end of 2008. We've got PS, who I think was 16 Peter Strachan, another of the non-Executive Directors 17 of tie, as it was then: 18 "... asked whether a change in governance is 19 perceived as being a problem in relation to the 20 contracts with Infraco. DA [Dave Anderson of the 21 Council] was also concerned over the timing and the 22 litigious nature of BSC. DJM and GB replied that it was 23 [I think it is Mr Mackay and Graeme Bissett] a challenge 24 the team had to face and that the opportunity to 25 streamline was now. KH [you] added that from his point 83 1 of view there are issues with the current structure. He 2 is concerned that at times the tie Board cannot 3 discharge their responsibilities fully." 4 Now, I wonder if you could explain what your concern 5 was and in what way tie could not discharge its 6 responsibilities fully. 7 A. I don't recall that specific discussion. As we 8 discussed earlier this morning, there had been work 9 undertaken to revise the Operating Agreement with tie 10 around this time which involved making changes to the 11 engagement of the Council with the project, and one of 12 the concerns I had raised, for example, when you 13 mentioned earlier this morning, the concerns I had made 14 about corporate governance, one of the changes that was 15 proposed involved which Council officials should 16 participate in tie Board meetings. 17 One of the comments that I made in my email response 18 was that I felt that the Council's Tram Monitoring 19 Officer should be a full member of the tie Board, and 20 that had not been provided for in the draft that I was 21 looking for. I was concerned that if the TMO were not 22 a full member or not attending all tie Board meetings, 23 they would open up the possibility for duplication in 24 lines of communication with CEC. 25 That may well have been what I was referring to in 84 1 saying there were issues with the current structure. 2 But I can't -- I can't remember more than that. 3 CHAIR OF THE INQUIRY: It seems to be something totally 4 different, isn't it? I mean, what you're speaking about 5 here is your concern that the Tram Monitoring Officer 6 wasn't an officer or attending the tie Board. What 7 you're talking about is the tie Board being unable to 8 discharge their responsibilities fully. That seems to 9 be a different point, isn't it? 10 A. Yes, sorry, I was commenting on the sentence before 11 about the current structure. I don't remember what the 12 point I was making at the time which has been recorded 13 in this way about the tie Board not discharging its 14 responsibilities fully. It's not my recollection that 15 I felt that. 16 MR LAKE: These were minutes from December 2008. I would 17 like to move on just a couple of months and look at the 18 Tram Project Board papers for February 2009. It's 19 reference CEC00988034. What we have here is a front 20 page which says "Tram Project Board Report on Period 11 21 Papers for meeting 11 February 2008". Once again, if 22 you could just take it from me that 2008 is an error. 23 They should still be 2009. 24 If you look through this to page 5, we can see here 25 we've got the minutes of the Tram Project Board from 85 1 22 January 2009. Do you see that? 2 A. Yes. 3 Q. This is one which you are noted as being in attendance 4 at. Do you see that? 5 A. Yes. 6 Q. What I would like to do is look at item 2.11, which is 7 on the following page. Can you see that you updated the 8 Board on the findings of the recent internal audit: 9 "They were asked to review the internal governance 10 within tie. They reported back with draft findings this 11 morning. We were given the 'green light' in terms of 12 controls in place but improvements need to be made. 13 The current governance framework gives ambiguity and we 14 should look to rationalise the structures." 15 Do you recall that? 16 A. Yes. 17 Q. Part of the ambiguity was about where the 18 decision-making powers lay and what the responsibilities 19 were; is that fair? 20 A. Yes. This had been one of the internal audit reports 21 which we had commissioned, and part of the ambiguity was 22 that by this point in time the broad portfolio of 23 transport projects which tie had initially been 24 established to undertake had been reduced to one, 25 essentially, the trams project, and there was ambiguity 86 1 about: why have TEL and tie? And this was the 2 discussion, including through the internal audit report, 3 which led to the subsequent changes to clarify that; TEL 4 became the owner of tie. 5 It also clarified the point which you've been asking 6 about, which was the relationship between the TPB and 7 TEL. 8 Q. tie had had only one project since shortly after the 9 Scottish general election in May 2007; is that correct? 10 A. At this point tie remained the authorised undertaker for 11 the Edinburgh Airport rail link. 12 Q. But that had been scrapped by the incoming government in 13 May 2007. 14 A. The decision -- well, that's not entirely correct. The 15 decision had been taken to not proceed with that 16 project. But there were various legal responsibilities 17 which remained in respect of that project, for example, 18 I think, land had been bought for that project. And tie 19 remained the authorised undertaker. 20 Work had -- work had diminished, but there were some 21 ongoing responsibilities in respect of that project. 22 I don't recall the other -- the dates when tie ended 23 its involvement with other projects. There was the 24 Stirling-Alloa-Kincardine railway, the fast link. It 25 was involved with the Forth Estuary Transport Authority 87 1 and other projects. 2 So part of the ambiguity was that by this point, tie 3 was now narrowing down to being a single project 4 company. 5 Q. In relation to that paragraph 2.11, you referred to it 6 in your statement and do refer to the internal audit 7 report, I would like to look at that, please. The 8 document reference is CEC01009902. 9 We can see there it is a set -- I think it looks 10 like a PowerPoint presentation that's been provided by 11 Deloitte, with a heading, "Internal Audit Project 12 2008-01: Review of Governance Arrangements". Is that 13 the document we are talking about? 14 A. Yes. 15 Q. Can we look at page 10, please. This comes after 16 a review of the framework that's in place. If we look 17 at the final paragraph on the page, I don't know if you 18 can highlight that out. It says: 19 "The current governance framework described above 20 gives rise to potential ambiguity as to where key 21 decisions are made and ratified. For example, key 22 stakeholders hold the tie Board accountable for 23 decisions made in respect of the Tram Project, when in 24 actual fact the Tram Project Board have delegated 25 authority for the delivery of an integrated Tram and Bus 88 1 network on behalf of City of Edinburgh Council and TEL." 2 Is that not recognition of the very issue we have 3 been discussing, that while some people regarded tie as 4 in charge, in terms of the written documents, it was 5 supposed to be the Tram Project Board that was in 6 charge? 7 A. Yes. 8 Q. That's going to give rise to ambiguity and confusion? 9 A. Yes, it did give rise to ambiguity, and it led to the 10 subsequent changes being made. 11 Q. You see, you've talked about the difficulty between tie 12 on the one hand and TEL on the other, but what was being 13 faced up to here by Deloittes was actually the ambiguity 14 was between tie on the one hand and the Tram Project 15 Board on the other, as to where the decisions were 16 actually being taken. 17 Where in your mind should the decisions have been 18 taken? 19 A. It depended on the nature of each individual decision. 20 So TPB had a set of delegated authorities to 21 undertake -- to execute the project and to make 22 decisions on that. tie was responsible for the overall 23 strategic approach and for -- and tie was the 24 contracting party. 25 I agree it was not ideal that TPB was a committee of 89 1 TEL Limited, and that's a separate company from tie Ltd. 2 But my experience was that in practice there was a clear 3 difference in terms of the focus of the activities and 4 the responsibilities between the two entities, the TPB 5 and the tie Board. 6 Q. That would be a clear focus in practice, rather than 7 established in terms of guidelines and rules structures? 8 A. I'm not aware of the guidelines, rules and structures 9 being incorrect for either of the two. My understanding 10 is that this is talking about -- this audit 11 recommendation is talking about the scope for ambiguity 12 and understanding of who is doing what and who is 13 responsible for what, and I agreed with that statement 14 at the time, and I was supportive of the changes that 15 were made subsequently to address this point. 16 That's a different matter from saying that in 17 practice, decisions were or were not made in the right 18 places. 19 Q. I think your concerns were recorded about over the time 20 that governance matters were taking to reach 21 a conclusion. Was it a concern that you had? 22 A. Yes, it was. This audit report, I think, was from 23 February 2009. Is that correct? 24 Q. Yes. 25 A. And it was not until later that year, the end of that 90 1 year, that the structural changes were made which 2 responded to this and other concerns that were raised 3 about this ambiguity. 4 Q. Which would be a full two years from the time, lead-up 5 to contract close, before they were addressed? 6 A. So contract close was in May 2008, and I think it was in 7 December 2009 that the changes were made. 8 Q. Two years after the Final Business Case being issued in 9 December 2007? 10 A. Two years after the Final Business Case, yes. 11 Q. I want to turn to ask you about a different matter now, 12 just in relation to bonuses. 13 You explained in your statement that bonuses were 14 dealt with by the Remuneration Committee and you didn't 15 sit on the Remuneration Committee? 16 A. That's correct. 17 Q. Nonetheless, not in terms of administering the bonus 18 schemes, but in terms of putting them in place, was that 19 something you considered in your role as a Director of 20 tie? 21 A. The arrangements for the bonus schemes were matters that 22 were decided upon by the Remuneration Committee, not by 23 the full tie Board. 24 I had -- I and the other non-Executive Directors had 25 a standing invitation if we wanted to, to participate or 91 1 to attend the Remuneration Committee, and I did on, 2 I think, two occasions. But -- and that's where my 3 understanding comes from about bonuses such as it is. 4 But my -- but I am sure that the issue of bonuses 5 was never discussed, certainly in my presence, at the 6 full tie Board meeting. 7 Q. By which I mean not just the giving of the bonuses, but 8 what the bonus scheme should be? 9 A. Yes. 10 Q. That wasn't discussed either? 11 A. Not to my knowledge, but one exception to that would be, 12 again, alluding to the exchange of emails I mentioned 13 earlier. One of the -- this is going back to 2007, 14 I think. One of the points of discussion was whether 15 the Council should both set the terms of any bonus 16 arrangements and make decisions about how much should be 17 paid in practice under those arrangements. And that was 18 a matter which was put to all the non-Executive 19 Directors to comment upon, as part of a wider set of 20 corporate governance changes. 21 Q. Were you individually happy with the bonus arrangements 22 that were put in place? 23 A. Beyond my two attendances at the meetings, I wasn't 24 fully aware of the arrangements that were being put in 25 place. I have a view, in retrospect, but at the time 92 1 I wasn't -- I wasn't fully part of those discussions, 2 and I -- 3 Q. It's -- sorry. 4 A. And I didn't -- I didn't know the full extent of 5 arrangements that existed. 6 Q. Accepting that your view is one in retrospect, what is 7 it? 8 A. In general terms, my view was then and is now that the 9 existence of performance-related bonuses was an accepted 10 part of industry practice, and in order to be an 11 attractive recruiter as an employer, it was right that 12 tie should use that. 13 I have subsequently learned or have been made aware 14 that the -- there have been questions asked about the 15 extent to which bonuses incentivised contract signature 16 inappropriately over and above project completion. 17 And I would share those concerns. 18 But I don't -- I didn't then, and I don't now, 19 believe that the right thing to do would have been to 20 have no bonus scheme, given the particular industry that 21 we were recruiting from. 22 Q. It appears that one element of the bonus scheme depended 23 on how much the total project cost would be at the time 24 the contracts were concluded, and that the payment to be 25 made depended on where in a band of 490 million to 93 1 530 million the estimated project cost would lie. 2 Were you aware of that? 3 A. No, I wasn't. 4 Q. So would you be in a position to offer any comment about 5 whether or not that was a satisfactory basis on which to 6 award bonuses? 7 A. I'm not really in a position to comment on that. 8 Q. Turning now to the question of contract close, the 9 Inquiry has heard evidence as to various elements of the 10 strategy for the contracts which involved transferring 11 risk to the contractors, reducing risk premium charged 12 by the contractors, having completed detailed designs at 13 the time of contract award, and also having the MUDFA 14 works completed prior to the commencement of the 15 infrastructure works. 16 Were you aware of these elements of the strategy? 17 A. Yes, in general terms. 18 Q. As matters drew to a close at the end of 2007, what was 19 your understanding of the state of the design? 20 A. My understanding was that design was incomplete. 21 I recall that the -- in reviewing my papers for this 22 evidence session today, I see that the design completion 23 as at April 2007 was deemed to be at around 50 per cent 24 complete. 25 I cannot recall now what the overall level of design 94 1 completions was at December 2007. 2 Q. Mm-hm. 3 A. Later -- later in the following year, I -- I see that 4 design completions around October 2007 were between 78 5 and 89 per cent complete. 6 So my assumption is that the state of completion 7 around December 2007 was a figure between 50 per cent 8 and 80 to 90 per cent. 9 Q. That meant the designs were not going to be complete at 10 the time. Did that cause you concerns about the 11 departure from the contract strategy? 12 A. Yes, it was a matter of concern to -- to me and to the 13 tie Board. Also in respect of the incompletion -- the 14 full incompletion of the utilities diversion works. And 15 that was a matter which was then taken into discussions 16 with the contractor and led to subsequent agreements 17 about who would be responsible for design and at what 18 cost. 19 Q. Was there consideration at tie of not proceeding to 20 award the contract in December? 2007 and then into 21 2008, on waiting until MUDFA and design caught up? 22 A. I don't recall any discussion about not proceeding in 23 December. I do recall a discussion about not proceeding 24 to award contract later, a few months beyond that, but 25 not in December 2007. 95 1 Q. Was it understood and expressed that this amounted to an 2 abandonment of the previous strategy? 3 A. Do you mean proceeding towards the contract? 4 Q. Yes. Abandoning the strategy of having design -- 5 detailed design in place and MUDFA complete, and instead 6 just proceeding anyway? 7 A. That's not -- that description doesn't accord with my 8 understanding. The intention had been to complete the 9 design and the utilities diversions before the contract 10 was awarded. It was clear at this point that that was 11 not going to happen. 12 The question then became how best to handle that 13 circumstance, and discussion was around what the options 14 were for that, recognising that it would be -- that we 15 would end up in a different position from that which we 16 had wanted to be in. 17 I don't think abandoning is the -- abandoning the 18 strategy would be a phrase that I would use. The 19 intention remained the same, to get it done as fast as 20 possible, and the question was then how that should best 21 be achieved. 22 Q. You say within your statement it was considered 23 appropriate to press on as the contractors knew the 24 position. Whether or not the contractors knew the 25 position, that doesn't change the fact there was quite 96 1 a substantial change from a position in which they were 2 being asked to price a completed design to reduce risk 3 and risk premium, to essentially taking on what could be 4 seen as a design and build contract? 5 A. I don't think that's correct description. The level of 6 design completions -- I should clarify. The information 7 that I was given as a non-Executive Director through 8 Board discussions was that the level of design 9 completion or lack of completion was a matter that was 10 discussed openly and fully with the -- with the 11 contractors during the preferred bidder period. So the 12 consortium which ended up signing the contract had seven 13 months as preferred bidder period before May 2008. 14 During that period they had full access to the state 15 of design approvals and completions, also on utility 16 diversions. 17 Therefore, they were, in firming up their best and 18 final offer beyond the initial bid, including through 19 what was termed, I think, the Wiesbaden deal 20 discussions, they were fully aware of the extent of 21 design completions, and one of the elements of that 22 Wiesbaden deal was that tie would pay GBP10 million more 23 to the infrastructure contractor in recognition of the 24 fact that they were with their eyes open willingly 25 taking on future performance risk around design along 97 1 with novation of the contract to them in order to let 2 them manage that with the same recourse to remedy that 3 tie had had previously. 4 Q. Is your understanding that the novation was brought in 5 as a means of dealing with the incomplete design? 6 A. Essentially, yes. I don't think -- my understanding is 7 that novation would not have been necessary had the 8 design all been completed in advance of contract 9 signature. I might be wrong in that if they required an 10 engagement with ongoing design subsequently, and that's 11 a detail I don't have. But the key point about novation 12 was along with buying out additional risk, as it was 13 presented to the Board, was to deal with the incomplete 14 design. 15 The key point I want to make is that in response to 16 your question, in no way could it be argued that that 17 was -- that that was something which the contractor was 18 not fully sighted on. The contractor, as far as I was 19 aware, was fully aware of the state of the design, and 20 the extra money which they were going to be given in 21 order to take on that risk going forward. 22 Q. By the time the contract came to close, what was your 23 understanding as to where the design risk lay? 24 A. My understanding was that the risk for what was termed 25 normal design development transferred from tie to the 98 1 consortium and specifically Bilfinger Berger within 2 that. 3 Q. Can I be clear, what do you mean by normal design 4 development? 5 A. I mean that the evolution of designs for the physical 6 infrastructure for the project became the responsibility 7 of the contractor with the exception of changes which 8 would be deemed to be beyond design development. 9 Excuse me, beyond normal design development. 10 So, for example, had tie decided to change the 11 fundamental design of station stops or had tie decided 12 that they wanted a different sort of bridge at the 13 airport, those would -- those would clearly be 14 developments beyond normal design, but normal design 15 development in line with the scheme proposed that 16 a signature would transfer -- my understanding was that 17 that would transfer to the contractor. 18 Q. Just to be sure we are not talking at cross-purposes, 19 they could be seen as two aspects of the risk of design 20 development. One is actually paying to do the design. 21 The other is the cost of construction in accordance with 22 the design. 23 Was there any differentiation between those two as 24 to who bore the risk? 25 A. The two are separate in my view, I agree. Part of the 99 1 rationale for novating the contract to the contractor 2 was that the contractor was the party best placed to 3 manage risk and to ensure integration between design and 4 construction; given that one had a bearing on the other. 5 So rather than tie continuing to hold a risk which 6 it was not best placed to manage, it was preferred that 7 the contractor, with the contractor's agreement, took on 8 that risk such that they could then directly manage the 9 design contract with recourse to the full range of 10 remedies that tie had had previously on any 11 non-performance. 12 Q. By the time it came to contract close, what was your 13 view as to whether or not tie had been successful in 14 that objective? 15 A. The information that I had at that time was that tie had 16 been successful in that -- in that respect. 17 Q. Where did your information come from? Who did it come 18 from? 19 A. The information came from discussions and papers at the 20 March, April and May tie Board meetings. Information 21 that was provided by both the tie executive team and by 22 the -- the lawyer involved in this from DLA Piper. 23 Q. Was the legal view provided directly to you as a Board 24 member? 25 A. Yes. In the March 2008 Board meeting, that was 100 1 a meeting which was expected to be the final meeting 2 before contract signature. In the event it wasn't. 3 There were two more meetings before contract signature. 4 But in that meeting there was a very thorough 5 examination of the -- the deal on the table which had 6 emerged from the Wiesbaden conversations and we 7 developed subsequently. Particularly around risk and 8 around the extent to which this was a fixed price 9 contract. 10 In that discussion I asked questions of both the 11 executive team and directly to the lawyer from 12 DLA Piper. 13 Q. Is that Mr Fitchie? 14 A. Yes, Andrew Fitchie. As did other non-Executive 15 Directors, about the -- about the matters which we're 16 discussing, including the extent to which this was 17 a fixed price contract, what was excluded from that, and 18 the extent to which design risk had been successfully 19 transferred through the contract as agreed and discussed 20 in the December discussions in Wiesbaden. 21 Q. Was it ever suggested to you, either by the Executive or 22 by legal advisers, that in fact the terms of Part 4 of 23 the Schedule to the Infraco contract, and in particular 24 the Pricing Assumptions that it contained, would have 25 the effect of transferring risk back to tie and creating 101 1 a very substantial liability? 2 A. No. That understanding was only made available to me in 3 January of 2011, when I was in receipt of other legal 4 advice which had re-examined those contractual 5 provisions: 6 CHAIR OF THE INQUIRY: Who was that from? 7 A. That was legal advice from the firm of 8 Anderson Strathern. 9 MR LAKE: Could I ask you to be sure about that, whether it 10 was Anderson Strathern. There's been another firm 11 involved, McGrigors. Was it advice from them that you 12 saw in January 2011? 13 A. I'm absolutely sure that the advice I'm referring to was 14 advice which was commissioned from Anderson Strathern in 15 December 2010, and was made available to me as 16 a non-Executive Director in January 2011. 17 Q. Who commissioned that? 18 A. I don't know specifically. It was informed -- I was 19 told about it by the Chief Executive of tie. I don't 20 know whether he personally commissioned it or whether 21 the chair of tie personally commissioned it. Certainly 22 both the Chair and the Chief Executive knew about its 23 commissioning, and I was told about it once it had been 24 commissioned, rather than in advance of it being 25 commissioned. I then received a copy of the written 102 1 advice in 2011. I have made that available to the 2 Inquiry. 3 Q. The Inquiry has heard evidence about a three-man 4 committee being established at the end of January 2008, 5 consisting of Mr Mackay, Mr Gallagher and Mr Renilson in 6 order to advise on the acceptability of whether the 7 contract should be entered into. Were you aware of 8 that? 9 A. I think this is what's referred to in the papers as an 10 approvals committee, yes. 11 Q. What did you understand the function of that approvals 12 committee to be? 13 A. I understood it to be a small group who would in reality 14 oversee the elements of the contract as they were firmed 15 up in advance of that being presented to the full Board. 16 Q. What were they to look out for or check for or examine? 17 A. My understanding is that they would be responsible for 18 ensuring that the key elements of the deal were 19 acceptable and that -- and were understood before the 20 contract was put forward for agreement, bearing in mind 21 that it would not be possible to, in a single meeting 22 lasting only a few hours in March, have the fullest 23 exploration that you would want to have of your 24 understanding of every page of the contract. 25 Q. In relation to the issue of risk which you've been 103 1 discussing a little while ago, what role, if any, did 2 they have in relation to that? 3 A. I don't know, but my assumption is that risk would -- 4 risk -- sorry. Did you ask about risk or about design? 5 Q. Just risk generally? 6 A. Sorry. In that case, then, my understanding is that 7 they would have wanted to be very clear about where risk 8 sat overall in the contract that was put forward for 9 signature. Indeed, that was the nature of the 10 discussions subsequently at the tie Board meetings. 11 Q. In relation to the design issue which you raised, which 12 was another -- what would the approvals committee's role 13 be in relation to design? 14 A. My assumption is that design, along with utilities 15 diversion and other matters, would be key elements to 16 have certainty about before the contract was signed, and 17 that therefore that small approvals committee would be 18 approving, would be making judgements upon the 19 acceptability of the contractual provisions in relation 20 to design and other elements. 21 Q. On the way to contract close, you will be aware that 22 there were a number of increases in the contract price 23 sought by the consortium. 24 A. Yes. 25 Q. Ultimately, after negotiation, they were agreed to. 104 1 What was your view about tie agreeing to these hikes 2 between December 2008 and May -- December 2007 and 3 May 2008? 4 A. My view was that the price increases were a consequence 5 of changes in the contract. So, for example, the GBP10 6 million increase in the price from GBP498 million to 7 GBP508 million, which resulted from the December 8 Wiesbaden discussions, delivered additional benefits to 9 tie. Specifically it increased -- my understanding was 10 it increased the fixed price element from 77 per cent of 11 the overall value of the contract to 96 per cent; 12 secondly, that it would provide for the transfer of 13 normal design development risk to the contractor. And 14 that therefore that GBP10 million increase was a price 15 to achieve those elements. 16 Subsequently there was a further, I think, 17 GBP3.2 million increase which arose from an 11th-hour 18 objection raised by the contractor pre contract 19 signature, and my understanding was that that again, 20 that GBP3.2 million increase bought out additional risk 21 to the public sector, which made an already, we thought, 22 95 per cent fixed price contract even less risky to the 23 public sector, and also provided for other 24 flexibilities, for example around whether or not to 25 proceed with what was called line 1b. 105 1 Q. Was there consideration of whether or not tie should 2 simply say: we're not accepting this, we'll walk away. 3 A. Yes, there was. There was a discussion specifically in 4 the May tie Board meeting about -- in the light of the 5 behaviour that had been exhibited and then represented 6 to the tie Board meeting by the contractor, in 7 particular one company within the contractor, whether 8 this was a company that we would want to proceed to 9 award the contract to, and there was discussion around 10 about the other options available. 11 For example, whether there would be an option not to 12 proceed with that contractor, but to have one of the 13 other contractors step into its place. Whether it was 14 an option to reprocure that element of the contract. 15 Those were -- those were options discussed in the May 16 meeting. And the decision was -- sorry, and a third 17 option was in fact to revert to the other bidder, who 18 had not achieved preferred bidder status. 19 The discussion concluded in favour of proceeding to 20 award the contract to the -- to the preferred bidder. 21 Q. When I asked you questions about proceeding in December 22 when design and MUDFA were not where it was hoped they 23 would be, what was the position come May 2008 for those 24 two elements? 25 A. My understanding is that the MUDFA works were around 106 1 77 per cent complete at that point, and I don't have 2 a figure for the extent of the design approvals. My 3 understanding is that they had progressed significantly 4 beyond the 50 per cent from the previous April, a year 5 earlier, but looking back at my papers, they must have 6 been less than the 78 to 89 per cent which they had -- 7 they had reached in the following October, 2007. 8 Q. Was there consideration given as to whether or not it 9 would be better not to proceed with the contract in that 10 state of MUDFA and design? 11 A. I don't recall the option being discussed of not 12 proceeding because of the design element, but that was 13 largely because that was felt to have been addressed 14 through what had been -- through what would be thought 15 to have been negotiated into the contract about the 16 transference of future exposure to delays in design, and 17 poor performance of quality in design to the contractor, 18 in return for -- partly in return for a GBP10 million 19 increase in price. 20 In respect of MUDFA, my recollection is that along 21 with contract signature, there was a mobilisation 22 schedule agreed which would see the infrastructure 23 contractor start work. 24 In the month following contract signature, and that 25 while there remained 23 per cent of the utilities 107 1 diversions still to be completed, those were on -- 2 largely on on-road sections of the track, and the 3 off-road sections of the tram scheme were not impeded by 4 either incomplete -- well, by incomplete utilities 5 diversions, and therefore what should have taken place 6 post contract signature for the first six to 12 months, 7 certainly the first six months, would not have been 8 impeded by the lack of complete utilities diversions. 9 Q. Although there was that element, and it's a question of 10 degree, there was nonetheless a discussion that 11 recognised that what was being proposed was a departure 12 from the strategy that had been outlined in the Draft 13 Final Business Case? 14 A. There wasn't discussion to my recollection of 15 a departure from the strategy. The strategy remained 16 wanting to get those prior works completed as quickly as 17 possible. 18 The position we were in was they'd not been 19 completed, and therefore there was specific discussion 20 around the tie Board about how the design element would 21 be treated under the contract, and we discussed that, in 22 terms of the novation and the increased payment, and 23 there was also discussion around the tie Board about 24 speeding up utilities diversion works, including the 25 change of contractor. 108 1 So, for example, I recall -- I forget the dates, but 2 I recall that at one point Farrans were brought in. 3 I think this was after the May, to take over some of the 4 utilities diversion works, and they performed far more 5 speedily than the previous contractor had done. 6 So both elements were under active management. 7 Q. Reverting back slightly to the question of dealing with 8 the requests for increases in money, could I ask you to 9 look at another set of Tram Project Board papers, 10 please. It's CEC00080738. 11 We're now looking at a pack of papers for the 12 meeting that took place on 4 June 2008; do you see that? 13 A. Yes. 14 Q. If we look firstly at page 5, we see what we have here 15 are the minutes for the previous Tram Project Board 16 meeting that took place on 7 May 2008. And that you 17 were present at. 18 A. Yes. 19 Q. If you look over to the following page then, in 20 paragraph 2.6, you will see there a note that you asked: 21 "... at what point will any increase in price not be 22 able to be agreed without having to legally return to 23 the reserve bidder." 24 I just want to pause there and what ask what did you 25 mean, without legally having to return to the reserve 109 1 bidder? 2 A. I meant that two initial bids had been received, and the 3 decision to appoint one of the two as the preferred 4 bidder had been taken in the previous October, partly in 5 respect of price offered. And it seemed to me to be 6 a relevant question as to at what point negotiations 7 with the preferred bidder could lead to increases in 8 price, which would lead to a significant price 9 differential between the preferred bidder and the other 10 bidder. 11 My understanding had been that the preferred bidder 12 was the less costly of the two back in the October. So 13 I was asking about the relevance of that in agreeing 14 subsequent increases in cost and in price. 15 Q. When you say having to legally return, did you 16 understand this would be a legal compulsion, an 17 obligation to go back? 18 A. I was asking -- well, my recollection is I was asking 19 what -- what legal provisions existed in this. So, for 20 example, from my previous experience of awarding 21 contracts, including in the transport sector, or at 22 least in my engagement with the awarding of contracts, 23 it's not simply a matter of going with the cheapest 24 bidder. There are a broader range of factors, and the 25 consortium of CAF, Siemens, Bilfinger Berger, were 110 1 appointed preferred bidder not only because their bid 2 cost less than the other bid, but also because of 3 quality elements as well. 4 So I think what I was doing here was asking to what 5 extent is there a legal obligation to consider returning 6 to the other bidder if we significantly agree to -- if 7 we agree to significantly increase price for the 8 contract. 9 I should say that I'm not a lawyer, and I was 10 probably asking for clarification from those present 11 rather than making a point that we should -- that there 12 was a legal compulsion to do so. 13 Q. I understand. I want to turn to a different matter now, 14 how disputes were dealt with once they arose under the 15 contract. The Inquiry has certainly heard evidence that 16 the contract works did not run smoothly post the 17 contract award. 18 Ultimately it became necessary to determine what the 19 strategy should be in relation to that; is that your 20 understanding? 21 A. Yes. The progress of mobilisation to implement the 22 contract became the single biggest issue in the 23 proceedings. I mentioned earlier that, for example, the 24 mobilisation schedule envisaged that the six months 25 after contract signature, a total of over 19 per cent of 111 1 the total infrastructure works should have been carried 2 out, when in fact actual process was 0 -- actual 3 progress was 0.7 per cent. 4 So very quickly it became apparent that the 5 infrastructure contractor was not mobilising, and that 6 from then on became the predominant discussion around 7 the tie Board table and the TEL Board table. 8 Q. If I could look in another pack of papers for a meeting, 9 please, it's CEC00843272. You can see here we're 10 looking at Tram Project Board papers for a meeting on 11 29 July 2009; do you see that? 12 A. Yes. 13 Q. If we go to page 5, as is usual, we see the minutes of 14 the previous meeting, which on this occasion were on 15 8 July. It was a meeting just of the Tram Project 16 Board, and you were present -- you were in attendance at 17 that one; do you see that? 18 A. Yes. 19 Q. If we look at page 7, and enlarge the lower half of the 20 page, we can see under "Relationship with BSC", it's 21 noted that: 22 "[Mr Jeffrey] summarised progress on the strategic 23 options work streams over the last three months, noting 24 that while the Princes Street Supplementary Agreement 25 had allowed the Princes Street works to get under way, 112 1 the process encompassing the Project Management Panel 2 has not been a success in resolving the core outstanding 3 issues of contention. This led to an intensive week of 4 mediated engagement which commenced on 30 June 2009. 5 The key focus of the mediation was commitment by all 6 parties towards the resolution of the core commercial 7 and delivery challenges. The key issues resolve around: 8 The interpretation of key clauses in the pricing 9 schedule; the pricing assumptions and differences 10 between Base Date Design Information and issue for 11 Construction drawings and what would be considered 12 'normal design development'; risk allocation and 13 substantiation of changes; assessment of Extension of 14 Time 2." 15 Now, firstly, did you have an understanding of what 16 was meant by each of these issues? 17 A. I had -- I had a high level understanding of the issues, 18 but not a detailed understanding. 19 Q. Were these issues explained to you by the Executive? 20 A. Issues about design were explained by the Executive. 21 I can't recall whether we had, for example, a discussion 22 about Assessment of Extension of Time 2. I don't know 23 what that refers to. 24 Q. Leaving aside perhaps the second two and focusing on the 25 first two for the moment, what did you understand the 113 1 issue to be between BDDI, as it's termed, and IFC 2 drawings? 3 A. I understood that to be the -- how -- I considered it to 4 be a discussion about the treatment of design changes 5 from the design that was known at the time of contract 6 signature and subsequent design evolution. 7 Q. What was the risk that it posed or the significance of 8 that to tie? 9 A. The significance was that at contract signature, our 10 understanding had been that normal design development 11 would be at the risk of -- at the financial risk of the 12 contractor in terms of what had been put into the 13 contract about that. 14 But that the -- the arguments from the contractor 15 were that that was not the case, and that this Project 16 Management Panel, for example, had been -- I recall that 17 being one mechanism to try to continue with the first 18 approach of working in partnership with the contractor 19 to build confidence in the project. I mentioned earlier 20 that we had a strategic role in guiding the project. 21 There were two broad phases. Our first response as 22 a tie Board to the problems that arose was to ask for 23 a partnership approach to build trust with the 24 contractor and trust between the contractor and the 25 project. The Project Management Panel was something 114 1 that was set up in order to develop more constructive 2 conversations. 3 Another example of that would have been the 4 Princes Street Agreement, where the tie Board agreed to 5 there being a Supplemental Agreement being developed for 6 Princes Street, in order to get works under way and 7 build trust and momentum in the project. 8 The second phase of that, when that didn't work, 9 over 12 to 18 months, was a more robust enforcement of 10 the contract. We can discuss that separately. 11 So this discussion and the mediation took place in 12 the context of the final stages of trying everything to 13 incentivise the contractor to undertake the works in 14 line with what -- what we believed they'd signed up for. 15 Q. In that light, if we can look at what it says over the 16 page, please, at the top of page 8. Enlarge the upper 17 half. 18 This is now under item 3.6. What it notes is: 19 "Richard Jeffrey outlined four options for 20 consideration by the Board, these being: 21 1. Negotiated settlement with BSC. 22 2. Formal contractual approach - DRP and other 23 contractual mechanisms. 24 3. Reduce/rephrase BSC scope. 25 4. End the BSC Contract. 115 1 The recommendation for the Board to consider was to 2 follow the Option (2) route and to enter formal Dispute 3 Resolution under the terms of the contract. The Board 4 agreed to the principle of Option (2), but would require 5 more information before the formal notices are issued to 6 BSC." 7 Do you recall that? 8 A. Yes. 9 Q. So this is perhaps one of the clearest examples of the 10 Tram Project Board taking a strategic decision as to 11 what is to be done in relation to the contracts to which 12 tie were a party; is that correct? 13 A. I don't know whether the same decision was put to the 14 tie Board separately for decision, but yes, I agree that 15 this is the Tram Project Board taking a view on 16 a strategic approach, yes. 17 MR LAKE: My Lord, I see it's about two minutes to one. If 18 we take a break, this would probably be the time to take 19 it. 20 CHAIR OF THE INQUIRY: We will adjourn for lunch and resume 21 again at 2 o'clock. 22 (12.59 pm) 23 (The short adjournment) 24 (2.00 pm) 25 CHAIR OF THE INQUIRY: Good afternoon, Mr Hogg. You're 116 1 still under oath. 2 MR LAKE: Mr Hogg, we were just looking at the decision to 3 pursue the Dispute Resolution Procedure. 4 I just want to ask you about one aspect in your 5 statement about this. If you could look at page 101 of 6 your statement. Could we enlarge paragraph 230. 7 You see towards the foot of that, five lines up, 8 there's a passage saying: 9 "The view of the tie Board was that, irrespective of 10 whether DRP decisions went for or against the position 11 that tie was taking, they would nevertheless help to 12 clarify definitively for all the parties involved the 13 deliverability of the project under the contract." 14 Now, what I wanted to ask was: was there 15 consideration as to the position that tie would be in if 16 the decisions went against it? 17 A. I don't remember whether at that time on that occasion, 18 on July 29 there was consideration of that, but there 19 was consideration more generally, particularly when the 20 outcome of the DRP adjudications became known about what 21 position tie was in. I don't recall whether at that 22 time there was consideration. 23 Q. I'll come to the time when the decisions came out in 24 a moment, but I was just wondering, if tie were anxious 25 to get resolution of these issues, it was presumably the 117 1 view they were likely to be decided in tie's favour or 2 they wouldn't have taken them -- 3 A. Yes, that was the view. 4 Q. But was there a plan B in mind as to what would be done 5 if the decisions went against them? 6 A. I don't remember there being a plan B, no. 7 Q. Turning now to the decisions, I think in relation to the 8 BDDI to IFC issue, the first two decisions we've heard 9 of are the ones relating to the Carrick Knowe Bridge and 10 the Gogarburn Bridge that came out at the end of 2009. 11 Were you aware of those two disputes? 12 A. Yes, in general terms I was, yes. 13 Q. Do you know why it was that those two disputes were 14 chosen to go to adjudication? 15 A. My recollection is that there was a process for deciding 16 which disputes to put into the DRP process by tie, and 17 that that process would take into account a number of 18 factors, including issues where it was helpful to 19 clarify the point of principle. So it wasn't simply 20 first come, first served, or a more random approach to 21 what went into dispute. 22 I can't remember what the Carrick Knowe issue was, 23 for example, but my memory is that that was totemic of 24 a particular sort of issue which wanted to be tested out 25 through the DRP process. 118 1 Q. Can you recall what the outcome was from tie's 2 perspective? 3 A. No, I cannot. Overall my recollection is that it was 4 a mixed picture. Adjudications went in favour of both 5 parties at different times. tie had maybe 50 per cent 6 or 40 per cent of the adjudications in its favour, and 7 the contractor had 50 per cent or more than that in its 8 favour. 9 Q. When you're talking about ones that go in their favour, 10 are you talking about the ultimate decision, sometimes 11 tie got what they wanted and sometimes the consortium 12 got what it wanted? 13 A. I mean the adjudications endorsed the point of view, or 14 endorsed the interpretation of the contract which the 15 parties were putting into the process. 16 Financially, the Audit Scotland 2011 report, I think 17 recorded that at the end of 2010, of the GBP24 million 18 claimed by the contractor through that DRP process, only 19 11 had been awarded. But I was referring there 20 previously to there being two different points of view 21 of interpretation of the contract that were being 22 tested, and on some occasions my information was that 23 tie's view was endorsed. In other occasions the 24 contractor's view and not tie's view was endorsed. 25 Q. When you say your information, from where did you get 119 1 your information? 2 A. From the Executive team making the reports about the 3 progress of the DRPs at the tie or TEL Board. 4 Q. Did you ever get copies of the adjudicator's decisions? 5 A. No. I don't believe I did. 6 Q. Did you ever seek them? 7 A. I don't think I did, no. 8 Q. You've referred to the Audit Scotland report where they 9 noted that the sums claimed were 20, and the sum 10 actually awarded much less. 11 In relation to the issue of whether or not something 12 was a Notified Departure -- I should ask, first of all, 13 do you understand the significance of that under the 14 contract, whether or not something was a Notified 15 Departure? 16 A. I understand that to mean something for which tie would 17 rightly be liable. 18 Q. If there was a dispute as to whether or not something 19 was a Notified Departure, was that issue ever determined 20 in tie's favour? 21 A. I don't know. 22 Q. Could we look at another set of papers, please. This is 23 reference CEC00416111. You see that we're now looking 24 at the papers for the Tram Project Board meeting on 25 16 December 2009? 120 1 A. Yes. 2 Q. If we look firstly at page 5, you will see as usual we 3 have got the minutes for the previous meeting, this time 4 it was the Tram Project Board and 18 November 2009? 5 A. Yes. 6 Q. I think we can see from the bottom of the left-hand 7 column there, you were in attendance? 8 A. Yes. 9 Q. If we could look, please, to the following page, page 6, 10 pick up right at the foot of the page, we can see in 11 3.2, strategic summary: 12 "Richard Jeffrey provided the Board with a report on 13 the outcome of the decisions from the Adjudicator on the 14 Carrick Knowe and Gogar Bridge (BDDI to IFC Design 15 Development) matters. 16 A full review of this determination is under way 17 and it was noted that a decision on the Russell Road DRP 18 item is scheduled for 17 December, and that papers are 19 due to be submitted to (a new) Adjudicator on 20 19 November 2009. 21 KH [you] asked if tie's interpretation of the 22 contract has changed through the evolution of this 23 process, and queried whether a review of the strategic 24 direction of the DRP is necessary. The Board discussed 25 at length a number of matters including interpretation 121 1 of the contract, both from a legal and technical 2 perspective as well as the strategic direction of 3 further submissions to the formal process. It was 4 reiterated that it is too early in the process (for 5 either party) to establish precedence at this stage in 6 the process, and it was agreed that the current 7 strategic direction should continue." 8 Do you recall this meeting? 9 A. Yes, in general terms, I do. 10 Q. Do you recall that discussion that we've just seen 11 narrated in the minutes there? 12 A. I do, yes. 13 Q. Can you recall in general what you were told about the 14 Carrick Knowe and Gogarburn Bridge decisions? 15 A. What I recall is what was being reported to the Board on 16 that day about the overall findings from any DRPs that 17 had happened until that point. I don't -- I don't know 18 now whether it was only the two that were available or 19 whether there were more, but the -- the overall position 20 was that tie were not being successful in having their 21 view of the effect of the contract upheld insofar as it 22 would have wanted it to be through that process. 23 That's what gave rise to my questioning. 24 Q. That's the one as to whether or not the 25 interpretation -- view of the interpretation had 122 1 changed? 2 A. Yes. I was -- I was asking, do we still believe as 3 a company -- do we still hold the interpretation of the 4 contract which we did before this process started today 5 in light of these decisions? 6 Q. It's recorded there that there was a discussion of 7 matters including interpretation of the contract from 8 a legal -- including from a legal and technical 9 perspective. Can you recall, had you seen any legal 10 advice that had been obtained by tie or the Tram Project 11 Board in relation to the contract? 12 A. I don't recall seeing any legal advice, and I don't 13 believe that I read legal advice in relation to this. 14 Q. At this time, am I right in saying from your earlier 15 answer, you hadn't actually seen the decisions of the 16 adjudicators? 17 A. That's correct. I had not read the actual decisions, 18 that's correct. 19 Q. Did that not rather frustrate any arguments that you 20 were trying to have, that you neither had the decisions 21 or any advice? On what basis were the Directors, in 22 particular the non-Executive Directors, in a position to 23 have an informed discussion? 24 A. They were asking for information about the outcome of 25 the adjudications. I can't recall whether there were 123 1 slides or other papers available on the day to provide 2 more information. We were relying on information given 3 to us by the Executive team, primarily, to relay the 4 outcome of the decisions so far, and any implications 5 for the contract going forward. 6 Q. Was there any discussion -- were you given any 7 information about the significance of those decisions 8 for tie's position, in the contracts? 9 A. Whether it was at this meeting or meetings shortly 10 thereafter, there was certainly discussion in relation 11 to the findings of the DRP process about whether it was 12 the right thing to do to -- to persist with the second 13 phase of the strategic approach of robustly enforcing 14 the contract. Questions were beginning to arise at this 15 point about was the contract -- the contract seemed to 16 be capable of being frustrated to a greater degree than 17 we had understood would be the case in advance. And 18 therefore, when we moved to that position early in 2009 19 about robustly enforcing the contract, we were basing 20 that on a view that if the contract were to be robustly 21 enforced, then progress would be made, hopefully. 22 The outcome of these decisions was to begin to query 23 the interpretation, our interpretation of that contract, 24 not -- I mean, I would add not as the only material 25 factor explaining the lack of progress, but as one of 124 1 the key factors. 2 It wouldn't, for example, have explained why -- 3 I mentioned earlier there was next to no mobilisation in 4 the six months following contract signature. Those six 5 months could not have been explained by things changing 6 only a matter of days from contract signature. So there 7 wasn't -- these were all -- these were all -- my 8 understanding is that what went into the DRP process was 9 testing the mechanisms to accommodate changes in the 10 contract. And as change occurred, the contractor was 11 entitled to be treated fairly under the terms of the 12 contract, potentially to get more money or time in 13 response to that, or equally, in areas where they had 14 accepted the risk, not to be entitled to more money or 15 time in response to those changes. 16 These DRP adjudication decisions were testing that 17 out. However, by definition, they could not have been 18 the key issues impeding progress in the early weeks and 19 months following contract signature, when there hadn't 20 been time for changes to materialise. Nothing -- 21 nothing had essentially changed. 22 Q. In relation to that matter, there not being time for 23 changes, I appreciate you were a non-Executive Director, 24 but in that capacity, was it made known to you that 25 there had been discussion between the consortium side 125 1 and the tie side in concluding the contract that there 2 would be changes or there could be changes as soon as 3 the contract was signed, and indeed there was a term 4 included in the contract which expressly recognised that 5 there could be changes as soon as the contract was 6 signed? 7 A. No, that was not made available to me. 8 Q. Would that have been material to you, to know that? 9 A. Absolutely. It would have fundamentally altered the 10 judgment about this being a 95 per cent fixed price 11 contract, and the adequacy of GBP33 million as the 12 contingency reserve to deal with the unexpected 13 5 per cent or the scope for the 5 per cent to be 14 crystallised. 15 Q. In terms of this decision and its effect on the 16 affordability or the cost of the contract, was there any 17 discussion as to the effect of these two decisions on 18 the cost? 19 A. If these were the first two decisions, my recollection 20 is that there was discussion about the material cost 21 specific to those decisions, which would have been 22 relatively small sums of money. 23 I don't think there was discussion on this day about 24 the potential full implications for the whole contract, 25 and indeed I'm -- I'm guided in that partly by the 126 1 statement saying that it was concluded that it was too 2 early in the process to establish precedence. 3 Q. I was going to ask, what did you take from that? What 4 did it mean? 5 A. At the time, what I took from that -- well, what I took 6 from the discussion was that there were a range of 7 issues which tie, for its part, wanted to put into the 8 DRP process in order to clarify understanding of how the 9 contract could work in practice. These were only two of 10 those. 11 I think tie ended up putting at least 20 of those 12 decisions, it might have been more, into that process. 13 As I said before, these decisions were taken, informed 14 by a judgement about which issues would help establish 15 which points of precedent. 16 So my view is that at this point in time, decisions 17 had gone either way or it was still too early to 18 establish overall direction. 19 Q. You've raised the point about were these the only two 20 decisions. I should make it clear these were not the 21 only two decisions that were available at the time, but 22 I think they were the two decisions which had been 23 chosen to determine the principle of the BDDI to IFC 24 changes. 25 So the point I'm really asking you to focus on 127 1 is: that having been the issue of principle, and there 2 having been a decision adverse to tie, was there 3 a concern that that would affect the affordability of 4 the contracts at this time? 5 A. I don't recall the specific discussion, but certainly 6 the overall affordability of the project was becoming 7 a concern and led to, a few months later, I think, maybe 8 four or five months later, the then Chairman of tie 9 writing to the Council, saying that it was no longer 10 likely to be -- possible to be affordable within the 11 GBP545 million budget to deliver the tram scheme 1a. 12 And that these decisions were part of what was informing 13 that judgement. 14 Q. If the Inquiry had heard evidence that someone viewed 15 these decisions as being a major disaster for tie, do 16 you recall any discussions along those lines? 17 A. My recollection is that is not how this was being 18 presented. It was being presented as being 19 disappointing and not as tie would have wished. It was 20 presented as being not one-sided either. So on some 21 points the adjudications were finding in favour of tie's 22 interpretation of the contract and point of view. 23 The other -- as I said, the other more fundamental 24 issue which was on the Board's mind was that the Board's 25 interpretation of what was going on with this contract 128 1 was not simply a technical matter of how changes were 2 being handled under the contract. It was about 3 a pattern of behaviour that was established at and 4 indeed before contract signature, which manifested 5 itself from day 1, post contract signature, and then led 6 through into this. 7 My view then, and my view now, is that the design 8 issues -- and I say this with the benefit of the 9 subsequent legal advice which made clear to me the 10 deficiencies in the contract in this respect. They're 11 only part of the explanation for what went wrong with 12 this project. They don't fully explain why it ended up 13 costing as much as it did and being as late as it was 14 and delivered as little as it did in terms of the -- 15 compared to the initial specification. 16 Q. That's something I will return to, because I do want to 17 discuss that with you, that aspect of your statement. 18 For the time being, if we just stick with this set 19 of papers for the Tram Project Board, if we could look 20 through, please, first of all, go to page 45. 21 We come to a section where there's a divider, and it 22 says "Period 9 Transport Scotland report Sections 2 to 23 7": 24 "On following pages are Sections 2 to 7 of the 25 Transport Scotland report (Section 1 is the Project 129 1 Directors report)." 2 Were you familiar with this format to the Tram 3 Project Board papers, that the Transport Scotland report 4 Sections 2 to 7 were always added to the back? 5 A. Yes. And that -- my recollection is that that was in 6 order that the Board members would see what was being 7 said to Transport Scotland in line with their ongoing 8 monitoring and awareness of the tram project. 9 Q. Did you have regard to those when you were sent the 10 papers, the Transport Scotland report? 11 A. Yes, certainly. And the information that was -- my 12 recollection is that the papers didn't repeat 13 unnecessarily the information that was there. So they 14 would give a full report to Transport Scotland and that 15 was where I looked for information about the project, 16 rather than in a duplicative set of papers up front. 17 Q. Could we turn on two pages to page 47, please, and look 18 under the heading, "Dispute Resolution". We can see 19 under that heading there's a table where it notes the 20 decisions for Gogarburn and Carrick Knowe, and says that 21 they have been made and are under review. 22 Do you know what that review consisted of, what sort 23 of review was being considered? 24 A. I don't recall at the time. My interpretation now is 25 that the statement in the far right box on that table 130 1 means that the implications of the decision were being 2 reviewed by the Executive team, presumably with legal 3 advice. 4 Q. Can we scroll up a bit to see the text underneath the 5 table, please. It says there: 6 "We continue in this report to reflect an outturn 7 estimate of GBP533.3 million (including Phase 1b). 8 However, given the commercial uncertainties with BSC and 9 continuing delays to the project, it is now considered 10 unlikely that the full scope of Phase 1a will be 11 completed within the available funding envelope of 12 GBP545 million. Until the key issues are resolved 13 through the contractual and legal process, it will not 14 be possible to forecast accurately a revised budget 15 outturn. It is also not possible at the present time to 16 predict the conclusions of reviews of contingency option 17 programme delivery options, including additional sources 18 of funding." 19 Now, this isn't the first time that statement is 20 made in these reports. It's simply the one we have 21 before us. 22 What did you understand that to be telling you? 23 A. I understood it to be telling me that the -- the 24 decisions being taken through the Dispute Resolution 25 Process were leading to financial awards being made to 131 1 the contractor which, if extrapolated forward, were 2 unlikely to be accommodated within the GBP545 million 3 budget. 4 Q. Was there discussion about what the consequences were of 5 that to tie and any action that tie had to take in 6 response? 7 A. I don't recall whether it was at this specific meeting, 8 I imagine it was, but generally there was discussion 9 continually about the financial affordability of the 10 project, including with the Council officials who were 11 round the Board table and the councillors, because they 12 needed to understand whether or not this was going to 13 be -- ended up being affordable. 14 Also, the tie Board was very aware that it did not 15 have authority to commit expenditure in excess of the 16 545 million, and therefore it needed -- it would have to 17 go back to the Council if there were any prospect of 18 more money being required to pay for the project. 19 So affordability was very much on the Board's mind 20 from that point of view. 21 Q. I should say for completeness, if we just look at 22 page 65 of the same report, under the heading, "Headline 23 cost report", if we look at the third bullet point, we 24 can see the same text that I referred to earlier in the 25 report. So it was a matter that was being specifically 132 1 considered in relation to the costs. Would you agree? 2 A. Yes. 3 Q. There being this uncertainty about the affordability of 4 the contract at that time, what effect did that have on 5 the approach to be taken to the contracts by tie or the 6 Tram Project Board? 7 A. My recollection is that it had several implications. 8 One was that there was increased discussion with the 9 Council about the affordability of this, and I remember 10 discussions involving Council officials at Board 11 meetings to that effect. 12 Another was that it informed the contractual 13 approach and the options that were considered 14 thereafter. So -- this was December 2009. 15 In 2010, for example, it led to consideration of 16 other options which were also discussed with the 17 contractor which would have involved either them 18 completing the project only to a particular stage and 19 then withdrawing, or them leaving the project 20 altogether, and the works then being re-procured under 21 a different contract. 22 Q. You noted in your statement the time came during 2010 23 when formal notice was given by Mr Mackay to 24 Marshall Poulton at the Council that the contract would 25 not or could not be delivered within the GBP545 million 133 1 funding envelope? 2 A. Yes. 3 Q. Can you recall what precipitated that being done then, 4 when there were already these reservations being noted 5 at the end of 2009? 6 A. No. I don't recall what -- whether a particular event 7 precipitated that, but I think the difference in 8 position is a move from unlikely to be to -- towards is 9 not possible to, and I wasn't -- I wasn't -- I don't -- 10 I don't recall discussions that led to that. 11 Q. The Inquiry has also heard evidence about another 12 adjudication decision by Mr Wilson that was given early 13 in January 2010 in relation to a dispute concerning the 14 Russell Road retaining wall. Do you recall that being 15 an issue? 16 A. I recall the name being mentioned but I'm sorry, I don't 17 recall -- 18 Q. You don't recall the substance of the dispute? 19 A. No. 20 Q. The Inquiry has also heard that legal advice was 21 obtained from November 2009 through to about March 2010 22 in relation to this issue, BDDI to IFC. Were you 23 provided with that advice? 24 A. No. The only legal advice I saw during my tenure 25 actually as a non-Executive Director was the one 134 1 I mentioned earlier from 2011. 2 Q. The Inquiry has also heard evidence about difficulties 3 that arose. You've already alluded to them. Making 4 progress with the works. Not the cost, just getting the 5 works done, and that finally, that particular matter, 6 certain clauses of the contract were taken to an 7 adjudication concerning works on the Murrayfield 8 underpass. Do you recall that issue? 9 A. No, I'm sorry, I don't. 10 Q. In the abstract, if I could ask you to look at papers in 11 relation to it, it's CEC00013703. 12 You can see this time we are looking at the papers 13 for the Tram Project Board meeting on 25 August 2010. 14 You are included amongst -- on the distribution list as 15 a member and attendee? 16 A. Yes. 17 Q. If you could go forward to page 34 of this, this once 18 again, I should say, is part of the report to 19 Transport Scotland. We can see a heading, "Dispute 20 Resolution (Infraco)". 21 Just above the table, we see a paragraph that says: 22 "The decision on the Murrayfield (Clause 80.13/34 23 instructions) DRP was also received. This gave some 24 useful interpretation of these clauses in respect of 25 known Notified Departures which tie has reviewed and is 135 1 issuing further instructions to BSC in respect of this 2 interpretation." 3 Does that ring -- raise any memories of what was in 4 dispute here and what the outcome of that adjudication 5 was? 6 A. I'm sorry, I just don't remember that conversation. 7 Q. Do you remember there coming a time when it was decided 8 that the Dispute Resolution Procedures and adjudications 9 would no longer be pursued? 10 A. Yes. 11 Q. What was the reason for that? 12 A. The reason was that -- the reason provided was that the 13 process of going through the DRP process was simply not 14 being successful in -- in -- resulting in the contractor 15 undertaking the works, and making up time in effect, and 16 getting the project to some degree back on track or at 17 least under way. 18 In fact, at this point, in 2010, my recollection is 19 that later that year, the contractor demobilised such 20 work as was existing. So it wasn't having the desired 21 effect on trying to get work under way. 22 Q. The Inquiry has also heard evidence about decisions 23 being made to serve Remediable Termination Notices under 24 the Infraco contract. Do you recall that? 25 A. Yes, I do. 136 1 Q. Why was that being done? 2 A. My recollection is that based apparently on legal 3 advice, tie, first of all, believed that the contractor 4 was in breach of contract. I'm talking here 5 specifically about the infrastructure provider, not CAF 6 who were building the trams or, I believe, Siemens, who 7 were doing the integration, but the infrastructure 8 company, and that in the first instance, it was 9 important that tie notified the company of that position 10 in order to give them an opportunity to remedy any 11 alleged breaches. 12 It was also at that time discussed that should we 13 end up in a situation where the contract were to be 14 terminated, it would have been necessary to have gone 15 through that proper process in advance of any 16 termination finally occurring. 17 Q. The Inquiry again has heard evidence that advice was 18 provided by a different firm, McGrigors, in 19 December 2010 in relation to the Remediable Termination 20 Notices. I take it from what you said about legal 21 advice that you haven't seen that? 22 A. No, I have not seen that advice. 23 Q. There's also been evidence as to Project Carlisle. What 24 was that and why was it being pursued? 25 A. Project Carlisle was one of two projects being pursued 137 1 in parallel. The other was called Project Notice, and 2 that was essentially terminating the contract. Project 3 Carlisle was a scenario in which the current consortium 4 and the current Infraco provider would complete the 5 infrastructure works to a truncated point from the 6 network. From memory it was either from the airport to 7 Haymarket or from the airport to St Andrew Square, 8 and -- and at that point would then leave the work. 9 I think actually -- sorry, I think it was Haymarket, 10 and the remaining stretch from Haymarket further on 11 would be re-procured. 12 Q. So if you've got Carlisle which is to some extent one 13 way or another truncating the project -- 14 A. Yes. 15 Q. -- and project Notice, the Remediable Termination Notice 16 bringing about an end of the project, had there been 17 a determination on the part of tie and/or the Tram 18 Project Board that simply the contract could not be or 19 would not be implemented in full, and you were now just 20 trying to find a way out in all or part? 21 A. There was certainly a determination and a view that 22 resting on efforts -- resting solely on efforts to 23 complete the project under the current contract was 24 inadvisable, and that in addition to that, we now needed 25 to consider other options. 138 1 Q. Can you recall why it was said to be inadvisable and who 2 gave that advice? 3 A. On the why question, it was because, despite, first of 4 all, a partnership approach and then a more robust 5 contractual enforcement approach, and despite the -- 6 despite the use of the DRP, nothing had worked in 7 getting the project to be delivered at anything like an 8 acceptable or expected level of pace and delivery. So 9 that's why it was advisable to look at other options. 10 Nothing seemed to be working with this current set-up. 11 In terms of who, these were discussions which 12 involved both the Senior Executive team and the tie 13 non-Executive Directors and the councillors, and the 14 senior Council officials at Board meetings. 15 Q. Were you getting discussions with the legal advisers at 16 that time? Perhaps not getting written legal advice, 17 but explanations from legal advisers? 18 A. I don't think legal advisers were in those rooms. There 19 was an occasion on 2009, I think, when DLA were back in 20 the room, but this is -- this is a later point in time. 21 I never had the opportunity, I don't think, to talk 22 directly to a lawyer or a QC about the advice that was 23 underpinning this. 24 Q. In terms of what you said, nothing was working in 25 getting the project to be delivered at an acceptable 139 1 pace, was there discussions or a conclusion reached 2 within tie or the Tram Project Board as to why that was 3 the case? 4 A. I mean, this was the -- this was the common theme of 5 discussion at probably every meeting that was had by the 6 tie or TEL Board when I was present. It was certainly 7 the common theme. 8 So yes to that question. There were lots of 9 discussions about why this was the case. 10 The theme that kept occurring was that in 11 particular, Bilfinger Berger had made it very clear very 12 early on that they simply wanted more money in order to 13 undertake the work. And by more money, they were 14 talking about figures of GBP80 million to GBP100 million 15 more. 16 This was information being relayed to me by the 17 Executive team. I never had a direct conversation with 18 Bilfinger Berger in my time. 19 Those -- and that their lack of mobilisation, for 20 example, even in the first six months, before these 21 subsequent design issues were more of a problem, was 22 indicative of an unwillingness to get involved until 23 they were confident that they would get a higher level 24 of financial return. 25 There was -- some of what was reported to the Board 140 1 was that some of the comments made by the Bilfinger 2 Berger employees to Senior Executives in tie was that it 3 was a -- a conscious process of frustrating the contract 4 to up the pressure on tie and those who were funding the 5 project to pay more. 6 Q. Who was saying that to you? 7 A. Those were views put to the non-Executives by, as 8 I recall the Chief Executive of tie, Richard Jeffrey, 9 and I think also by the Finance Director, 10 Stewart McGarrity. They were -- that they were in rooms 11 where they were being told this by Bilfinger Berger 12 employees. 13 Q. In that regard, just two passages in your statement 14 I would like you to look at, and then I'll ask you some 15 questions about them. 16 The first is on page 103. 17 A. Excuse me. I just wanted to add that in the 2009 18 mediation, from, I think, June 30 to July 6, I think, or 19 maybe a two-week period, that figure of GBP80 million to 20 GBP100 million was also tabled then during that 21 mediation; and that was one of the occasions when the 22 tie Executives came back to the non-Executives and the 23 councillors, saying: this is one of the key issues for 24 the contractor. 25 Q. Can you recall whether or not, staying with that figure, 141 1 what was being said was that: we want this additional 2 sum to do the works; or whether it was that: under the 3 current contract, doing the works is going to cost 4 another GBP80 million to GBP100 million? 5 A. All of those discussions in my recollection were in the 6 context of doing the work under the current contract. 7 There was never -- it was only much later on that 8 discussions were held about varying the contract or 9 indeed reprocuring, and those were discussions had with 10 the contractor. So you mentioned Project Notice and 11 Project Carlisle. Those would be two examples of where 12 there was an explicit discussion of a different 13 potential contractual arrangement. 14 So to answer your question, all of the GBP80 million 15 to GBP100 million figure was a figure which was being 16 asked to be paid somehow within the context of the 17 current contract, but without any reason being given 18 beyond they simply wanted it. 19 Q. That's what I'm really trying to get at. Was this 20 simply that they wanted more money, or was this then 21 saying that: if you apply our current contract terms, 22 don't change it, just apply it, that is what it's going 23 to cost you, another GBP80 million to GBP100 million. 24 A. My recollection is that it was the former, not the 25 latter. 142 1 Q. They wanted an extra? 2 A. It was simply -- and indeed I mentioned earlier that 3 there was a pattern of behaviour that went back pre 4 contract signature, and, for example, in May, there had 5 been an 11th-hour attempt to get more money, and the 6 explanation was simply that Bilfinger Berger had got 7 their sums wrong, and they asked for, I think, 8 GBP17 million more and then GBP12 million more, and that 9 was brought back to GBP3.2 million more. But this 10 wanting more was the common theme throughout the 11 process. 12 To be clear, my own position as a non-Executive 13 Director, who brought wider public sector experience and 14 knowledge to the Board, I was clear that this was public 15 money. And while it might be normal or acceptable 16 practice in private sector contexts to lubricate deals 17 to incentivise performance, that was not an option that 18 could happen legitimately within the context of public 19 expenditure, and in the context of the Scottish Public 20 Finance Manual and all the rules that govern public 21 expenditure. 22 So it was an issue that I was particularly concerned 23 with, and concerned -- and I indeed said to the Board, 24 we should not be -- we are not in a position, even if we 25 had the money, which we don't, we are not in a position 143 1 to offer it for no good reason. 2 Q. Would the situation be different if the position was 3 that justifying the current contract will result in an 4 increase of payment of GBP50 million to GBP80 million to 5 GBP100 million, without any change to the contract, not 6 asking for additional funds, but a warning that if you 7 apply the contract, it's going to cost you another 8 substantial sum of money? 9 A. That was never the position put to us as a Board. 10 The -- even -- even when it came to considering the 11 options under project Notice and Project Carlisle, it 12 was accepted that even under a termination scenario, 13 there would be costs which would arise simply in order 14 to pay for the exit, if you like. But it wasn't simply 15 a straightforward issue of somehow the cogs within the 16 contract automatically would ratchet up to generate 17 a figure of GBP80 million to GBP100 million. That 18 figure was around from the first months of post contract 19 signature. And didn't go away. 20 The last thing I would say about that in respect is 21 that that is what happened. 22 When more money was put on the table, significantly 23 more than GBP100 million, more than GBP200 million, at 24 that point work was restarted. 25 Q. Talking about the Mar Hall Mediation Settlement there? 144 1 A. Yes. 2 Q. Is it fair to say that as a non-Executive Director, you 3 were not in a position to form a view as to the 4 contractor's entitlement under the contract? 5 A. I don't think that's entirely fair to say. As 6 a non-Executive Director, I was able to ask questions of 7 the executive team as to what the contract provided for. 8 And I did that along with my colleagues. 9 Q. What did they say about the consortium's entitlement? 10 A. Initially, post contract signature, we were -- we were 11 in the position of this being a 95 per cent fixed price 12 contract, and the understanding that design risk had 13 been passed to the infrastructure provider. 14 Subsequently, in the light of the Dispute Resolution 15 Procedure adjudications, the position became less clear 16 about the contractual position, and then finally, in 17 January 2011, I received advice that said that the 18 contract was indeed too capable of being challenged with 19 requests for additional money and time by the 20 contractor. 21 Again, though, even -- I mean, I mentioned earlier 22 the extent of claims awarded under the DRP process. 23 I think also the Audit Scotland report noted that in 24 total, the amount of additional money claimed under the 25 contract either in or outside of the DRP process, was 145 1 around GBP44 million, of which only GBP24 million was 2 awarded. 3 So that is why those sums seemed to me to be 4 a relevant factor, but not the only factor in explaining 5 why this thing cost a lot more. Sums of GBP24 million 6 are nowhere near the sums that were either being asked 7 for or ended up getting paid. 8 MR LAKE: Thank you very much, Mr Hogg. I have no further 9 questions, my Lord. 10 Questions by CHAIR OF THE INQUIRY 11 CHAIR OF THE INQUIRY: I think you said earlier to Mr Lake 12 that you were unaware that there was a possibility of 13 changes the day after the contract was signed. And if 14 you had been aware of that, that would have affected 15 your judgement -- 16 A. Yes. 17 CHAIR OF THE INQUIRY: -- about the contract being a fixed 18 price contract. When did you first become aware of that 19 possibility of changes the day after the contract was 20 signed? 21 A. To an extent I don't think I ever became aware of that 22 during my time as a tie non-Executive Director. Even 23 the advice that I received or that I read in 24 January 2011, that advice was confirming that the 25 contract was more open than I had understood it to be, 146 1 to additional claims being -- for time or money being 2 sought in respect of changes. 3 But I can't remember ever being told that the 4 fundamental basis of our understanding for this 5 contract, which was that it was a 95 per cent fixed 6 price contract, negotiated through the Wiesbaden deal, 7 and indeed reinforced in the final May negotiation when 8 yet further risk was bought out, that that was 9 fundamentally wrong. 10 The view of tie throughout the period was that there 11 was a contract which they had faith in, which they 12 believed that a contractor working in good faith and 13 with an intent to build the project could do it. 14 Nothing was physically stopping them building the 15 contract. And the Dispute Resolution Procedure outcomes 16 certainly gave -- gave more cause to believe that the 17 contractor could -- could claim more, and that was then 18 backed up by the legal advice. But I don't think I ever 19 was told we have fundamentally got a contractual model 20 which -- which we've been misguided in or rather in 21 which we have misunderstood. 22 CHAIR OF THE INQUIRY: Thank you. Mr Fairley, do you 23 have -- 24 MR FAIRLEY: The issue I had raised has been dealt with, 25 thank you. 147 1 CHAIR OF THE INQUIRY: Mr Dunlop? 2 MR DUNLOP QC: My Lord, nothing from me, thank you. 3 CHAIR OF THE INQUIRY: I think Mr Martin -- no one else? 4 Thank you very much, Mr Hogg. That concludes your 5 evidence. You're still under citation, so it will be 6 possible to recall you if anything arose. Hopefully 7 that won't be necessary, but thank you for your 8 attendance. 9 A. Thank you. 10 (The witness withdrew) 11 MR LAKE: My Lord, the next witness I don't have available 12 to me until tomorrow and it is Mr Renilson coming in to 13 complete his evidence. I think also Mr McGarrity will 14 be in attendance tomorrow to complete his evidence from 15 yesterday. 16 CHAIR OF THE INQUIRY: Yes. The plan is to have Mr Renilson 17 first and then Mr McGarrity following on, in the hope 18 that Mr Dunlop can be accommodated. Presumably, if 19 Mr Dunlop is not here by the time we get to that stage, 20 we'll just carry on. 21 MR DUNLOP QC: My Lord, that should be fine. My commitment 22 is only in the Commercial Court from 9.00 until 10.00. 23 I understand Mr Renilson will be at least half an hour. 24 So it shouldn't be a difficulty. I'm obliged. 25 CHAIR OF THE INQUIRY: We will adjourn until tomorrow 148 1 morning at 9.30. 2 (2.51 pm) 3 (The hearing adjourned until Thursday, 14 December 2017 at 4 9.30 am) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 149 1 INDEX 2 PAGE 3 MR JOHN CONNARTY (affirmed) ..........................1 4 5 Examination by MR MACKENZIE ...................1 6 7 MR KENNETH HOGG (sworn) .............................50 8 9 Examination by MR LAKE .......................50 10 11 Questions by CHAIR OF THE INQUIRY ...........146 12 13 14 15 16 17 18 19 20 21 22 23 24 25 150