Chapter 1: Introduction and Overview

Introduction and Overview

1.1 The terms of reference of the Edinburgh Tram Inquiry (the “Inquiry”) are recorded in full in Chapter 2 (Establishment and Progress of the Inquiry). In short, they include an obligation to inquire into the delivery of the Edinburgh Tram project (the “project”), from proposals for the project emerging, to its completion, and they specify the particular issues to be considered by the Inquiry. The project should be seen in the policy context in which it emerged, commencing with the White Paper published in July 1998 by the Secretary of State for Scotland, which was entitled ‘Travel Choices for Scotland. The Scottish Integrated Transport White Paper’ [CEC02083841] (the “White Paper”) and the reaction of the City of Edinburgh Council (“CEC”) to it.

1.2 At the outset, it is useful to have an overview of the project, its components and the issues that arose. This is merely a summary and these various issues are developed in the chapters that follow.

Origin of the project

1.3 The genesis of the project can be found in the White Paper, which discussed various transport-related issues, including an integrated programme of action to address local transport circumstances. It was recognised that different solutions would be appropriate, depending upon the particular circumstances of any locality. For example, the demand for road space exceeded supply at certain times and in certain places in Scotland, resulting in traffic congestion, noise and increased air pollution. Particular problems existed in Scotland’s major cities, at key points on the trunk road network, and in certain rural areas, although issues relating to the latter tended to be seasonal and related to holiday periods. The problems in cities could often be addressed through the provision of alternatives to building additional road space. Such alternative solutions included scope for better public transport services through the provision of more road space for buses. Moreover, the White Paper noted that:

“There may … in the longer term, be a place for tram or rapid transit systems in some Scottish cities, although experience shows that the set up costs for these are very high.” [ibid, page 0031, paragraph 4.3.2.]

1.4 Local authorities were encouraged to develop Local Transport Strategies to set out their plans and priorities for the development of integrated transport policies in their areas, consistent with the overall objective of sustainable development. It was proposed that a Scottish Public Transport Fund should be set up to fund key projects. Legislation would be introduced to permit local authorities to introduce local road user charging schemes, which this Report will call “congestion charging”.

1.5 On 29 October 1998, CEC instructed its Director of City Development to prepare a draft Local Transport Strategy that would meet the criteria and guidance set out by central government, and on 31 May 1999 CEC approved phase 1 of a New Transport Initiative (“NTI”) to identify major improvements to the city’s transport system. The measures included a congestion charging scheme together
with a package of improvements to public and private transport, which, to a large extent, would be funded from the income derived from the charging scheme.

Development of proposals for a tram network

1.6 On 4 May 2000, as phase 2 of NTI, CEC decided to undertake further development and consultation on a transport investment package for the city, based on income from congestion charging and subject to detailed funding arrangements being agreed. On 19 October 2000, CEC approved its Local Transport Strategy, which identified 80 potential transport projects, including the development of an Edinburgh Tram Network (“ETN”), as noted in the “Vision for Edinburgh” [CEC01623145].

1.7 Waterfront Edinburgh Limited was a joint venture between CEC and Scottish Enterprise Edinburgh and Lothian, formed with the intention of promoting development and regeneration in the Granton waterfront area of the city, in collaboration with local businesses. In 2000/01 it commissioned a team of consultants consisting of Andersen, Steer Davies Gleave and Mott MacDonald to produce a preliminary technical and economic feasibility study of a rapid transit system in north Edinburgh, which would provide a link between the city centre and the proposed waterfront redevelopment at Granton. The report of that study, entitled ‘Feasibility Study for a North Edinburgh Rapid Transit Solution’ [CEC01916700], was produced in July 2001. The reason for commissioning the report was to support a bid for financial assistance from the Scottish Public Transport Fund called the Public Transport Fund in the report.

1.8 Although the original remit for the report was restricted to assessing the feasibility of a light rail link between the city centre and the waterfront at Granton,
following discussions with Forth Ports plc it was expanded to consider the feasibility of a north Edinburgh loop, running from Granton to Haymarket, St Andrew Square, Leith Walk, Ocean Terminal and back to Granton. The feasibility study concluded that such a loop would maximise a number of positive benefits for the area, including economic regeneration and improved accessibility. It was estimated that it could be built for a capital cost of £191.9 million and would have a Benefit to Cost Ratio (“BCR”) of 2.65. A BCR reflects the relationship between the anticipated financial benefit associated with a project and the cost of delivering it. A BCR greater than 1 indicates that the anticipated benefits of a project outweigh the costs of delivering it.

New Transport Initiative

1.9 In a report to CEC dated 11 September 2001, setting out progress on the NTI over the previous year and seeking approval to submit an application for “Approval in Principle” to the Scottish Ministers, the Director of City Development noted the need for major improvement to the city’s transport system, both to sustain the existing level of economic activity and to underpin the continuation of the growth in the south-east of Scotland’s economy. It was anticipated that the package of investment for the NTI would include a new tram network for the city. The first tram route, which would probably be built in north Edinburgh, could be in operation by 2009, and a second by 2011. On 18 October 2001, CEC agreed to submit an application to the Scottish Ministers, seeking approval in principle for its “Integrated Transport Initiative for Edinburgh and South East Scotland”, in furtherance of its NTI [USB00000228].

1.10 In his report, the Director of City Development explained that extensive consideration had been given to how the NTI, once agreed, could be delivered most effectively, and that a number of issues required to be addressed in establishing such a mechanism, leading to consideration of “innovative alternatives to a conventional local authority approach to project procurement” [ibid, page 19]. These issues were listed as including:

  • the major scale of the Initiative, which would involve a project package of £800 million or more and an innovative [congestion] charging system;
  • the wide range of skills and expertise that would be required for running the charging scheme and implementing the project package;
  • public and stakeholder views about the ability of the local authority to implement the Initiative;
  • demonstrating that key conditions for the Initiative had been met, namely –
    • ring fencing of charging revenue,
    • “additionality”, being a net positive difference arising from the economic development of the NTI, and
    • transparency of accounting;
  • a requirement to borrow in order to allow early implementation of the project package and to smooth out gaps between expenditure and income;
  • transfer of appropriate risks away from the local authority; and
  • tax efficiency and liability.

1.11 The report noted:

“Local government is not geared up to handle an operation of this scope and scale without major additional staff, accommodation and equipment resources. All these issues point to the need for a new approach to delivery that can provide greater operational flexibility than a local authority, that can marshal appropriate skills and resources, that can borrow money without public sector constraints, and that can provide independent accounts.” [ibid, page 20.]

1.12 The local authority, however, had to have a “significant direct involvement” [ibid], given that it was the only body that could introduce a congestion charging scheme, provide democratic accountability for overall policy, determine the priority and nature of downstream investment, and seek and receive certain types of grant funding from the Scottish Ministers.

1.13 With these factors in mind, the report proposed that a company (“ENTICO”) should be established, which would be wholly owned by CEC, within the framework of companies already in existence. It was anticipated that ENTICO would be a “procurement, project management and finance management organisation”.
Strategic direction and key policy decisions would remain within the control of CEC. Although the passage quoted in paragraph 1.11 identified the need for a new approach to delivery that could borrow money without public-sector constraints, the report recognised that, in the initial years, the company would be entirely dependent on the public sector to fund its activities and would be unable to act independently of CEC until it had the anticipated congestion charging revenue stream. It is axiomatic that a company could not borrow money without having capital assets and/or sufficient income to secure such borrowing.

Strategic Project Review

1.14 In September 2002, Turner & Townsend, management and construction consultants, produced a “Strategic Project Review” on the North Edinburgh Rapid Transit Scheme [CEC01868789]. The review considered the development of the scheme, lessons from other schemes, procurement and funding options, and specific scheme issues. It explained that while the North Edinburgh Rapid Transport Scheme was originally conceived as a linear route connecting the waterfront development site with the centre of Edinburgh, initial feasibility studies had ascertained that the optimum alignment would be a loop, which would utilise the former Crewe Toll-to-Roseburn railway corridor.

1.15 At that time, the development of rapid transit schemes in a modern urban environment was relativity mature, and many schemes were either in operation or at various stages of development. Turner & Townsend had reviewed many such schemes, identified fatal and potentially fatal flaws and suggested possible strategies for addressing them in the context of Edinburgh.


1.16 On 2 May 2002, the Director of City Development updated CEC on progress of the NTI and sought agreement for a number of steps to take it forward, including the legal framework and budget needed to finalise the establishment of an arm’s-length delivery company [USB00000232, Parts 1–6]. While the documents accompanying the Director’s report referred to “ENTICO” as the proposed name of the delivery company, he explained that that name was not available as a permanent company name as it was already registered for other purposes, and that the delivery company was, instead, being registered under the name “Transport Initiatives Edinburgh Limited”, which later changed its name to “TIE Limited” and is now known as “CEC Recovery Limited”. Throughout this Report, “tie” is used to refer to that company whatever its name was at the relevant time.

1.17 On 30 September 2002, tie produced a report entitled ‘A Vision for Edinburgh’ [CEC01623145]. It set out a programme for the development and implementation of £1.5 billion worth of transport improvements, using public and private sources of funding including congestion charging. The programme required the early support of the Scottish Ministers

“principally through agreement to provide £375 million of funding towards the development and construction of three tram lines, which form a key part of the improved transport infrastructure” [ibid, page 0004].

1.18 As indicated in ‘Building Better Transport’ [CEC02083844], the Scottish Ministers guaranteed the availability of that sum of money to ensure that funding for at least the first tram line was available as soon as CEC produced a robust Final Business Case (“FBC”). The funding was not conditional on the introduction of congestion charging.

1.19 Although, in the early stages of evolution of the ETN, three tram lines were envisaged, development of the project concentrated on lines 1 and 2, with the third line, to the south-east of the city, being deferred to a later date. Line 1 consisted of a northern route, running from St Andrew Square northwards down Leith Walk to Leith, then west to Granton, south to Haymarket and back to St Andrew Square via Princes Street. Line 2 was a linear route from Newbridge to St Andrew Square via Edinburgh Airport, Edinburgh Park, Haymarket and Princes Street.

1.20 tie elected to proceed under a Development Partnering and Operating Franchise Agreement (“DPOFA”) and on 20 April 2004 its board endorsed a recommendation to approve Transdev Edinburgh Tram Limited (“Transdev”) as the preferred bidder and tram operator under a DPOFA [USB00000023]. On 29 April 2004, CEC’s approval was sought and granted for tie to appoint Transdev as the tram operator for the project. In his report to CEC the Director of City Development explained that tie had pursued the selection of a private-sector operator to assist during the development phases of the project in order to anticipate and mitigate difficulties that other UK light rail schemes had encountered. This strategy had been endorsed by the Scottish Ministers and by Partnerships UK, a body funded by the United Kingdom Government that was intended to create a much greater involvement for the private sector in public projects. The report to CEC [CEC02083573] summarised the objectives of the DPOFA in paragraph 3.4. These were:

  • to provide support for the Private Bill process and the project development stage;
  • to assist in refining the system specification and developing durable cost- and revenue-sharing arrangements;
  • to engage a long-term partner early, to create ownership and a stable operating organisation;
  • to strengthen the capability to manage procurement of the network infrastructure and vehicles;
  • to facilitate the incremental construction of the core network;
  • to maximise the opportunity to integrate with bus operators; and
  • to deliver a fare-setting and through-ticketing regime.

1.21 In 2009, tie terminated its agreement with Transdev.

Ministerial and parliamentary consideration of the project

Response of Scottish Ministers prior to 2007

1.22 CEC submitted an application to the Scottish Ministers for approval in principle of its proposals, which reflected the matters discussed in the report by the Director of City Development mentioned in paragraph 1.9 above. In response, the Minister for Enterprise, Transport and Lifelong Learning (Ms Alexander) deferred a decision on the application, but:

  • indicated satisfaction with the progress to date on the congestion charging proposals;
  • strongly supported the principle of an arm’s-length company to deliver the NTI; and
  • asked that such a company be established immediately, with an initial remit to develop and refine the NTI proposals and produce a report by 30 September 2002.

1.23 It was proposed that CEC should then submit an updated application, identifying a single investment and charging package. The Minister emphasised the importance of improvements to public transport as part of the package and, to give effect to that, indicated a willingness to support the development work on a west Edinburgh tram line to be established in the context of an ETN. This was in addition to the proposals for a north Edinburgh tram line for which development funding had already been granted.

1.24 On 21 March 2002, the Minister made a statement to the Scottish Parliament on the Scottish Executive’s transport delivery plan [SCP00000027]. She explained that “[p]romoting high-quality, affordable public transport is vital to our determination to create a more sustainable Scotland”. Ten national transport priorities were announced, including the project. The Minister stated:

“we want to create an effective and modern 21st century public transport system for Edinburgh, worthy of a capital city, in partnership with City of Edinburgh Council and private sector partners through Entico. City of Edinburgh Council is doing preparatory work on a tramline for north Edinburgh and we have invited the council to seek further funding from the Executive for preparatory work on a west Edinburgh tramline.”

1.25 The first elements of the light rapid transport scheme were expected to be in place by 2004/05.

1.26 In March 2003, Scottish Ministers offered CEC a grant of £375 million for the project, subject to the production of an acceptable business case, and in February 2006 they announced an increase of the proposed grant to approximately £500 million, in line with indexation.

The Tram Acts

1.27 In January 2004, the Edinburgh Tram (Line 1) Bill and the Edinburgh Tram (Line 2) Bill were introduced in the Scottish Parliament, their purpose being to authorise the construction of lines 1 and 2. CEC was the promoter of this scheme, with tie acting on its behalf. Line 1 remained the proposed northern loop (described as a loop from St Andrew Square, along Leith Walk to Leith, west to Granton, south to Haymarket and back to St Andrew Square via Princes Street). It was proposed that line 2 would follow a western course from St Andrew Square, via Princes Street, Haymarket, Murrayfield and South Gyle to Edinburgh Airport and Newbridge.

1.28 On 29 March 2006, the Scottish Parliament passed the Edinburgh Tram (Line 1) Bill and the Edinburgh Tram (Line 2) Bill, with Royal Assent to the latter being granted on 27 April 2006, creating the Edinburgh Tram (Line 2) Act 2006. Royal Assent to the Bill for line 1 was granted on 8 May 2006, resulting in the Edinburgh Tram (Line 1) Act 2006. In this report these two Acts of the Scottish Parliament are referred to as the “Tram Acts”.

1.29 The Tram Acts authorised the construction of lines 1 and 2 of the proposed tram network. The two lines overlapped between Haymarket and St Andrew Square. Planned construction and financial appraisal were based upon a phased approach consisting of phase 1a (Edinburgh Airport to Newhaven) and phase 1b (Haymarket to Granton Square). The sections from Granton Square to Newhaven and from Newbridge to Edinburgh Airport were described as phases 2 and 3 respectively and were omitted from phase 1 of the project. The routes authorised by the Tram Acts and the planned phases are illustrated in Figure 1.1. References in this report to phases 1a and 1b relate to these routes as depicted in Figure 1.1.

1.30 While the Bills were still at the stage of being considered by a committee of the Scottish Parliament, tie had concluded the System Design Services contract (“SDS contract”) with Parsons Brinckerhoff (“PB”) for design and technical services in relation to both phases 1a and 1b on 19 September 2005. This was part of the procurement strategy of concluding separate contracts for design and technical services, diversion of utilities and the purchase of tram vehicles prior to entering into the main infrastructure contract for the construction of the route (the “Infraco contract”). The construction of the line from the Airport to Granton via Newhaven was planned to be completed in phases. Phase 1a was from the Airport to Newhaven; phase 1b was from a spur on phase 1a between Murrayfield and Haymarket at Roseburn to Granton; and phase 2 was from Granton to Newhaven. The proposed construction phases are shown in Figure 1.1.

Figure 1.1: Planned construction phases of lines 1 and 2

Planned construction for tram lines 1 and 2 as follows: phase 1a from Edinburgh Airport to Newhaven; phase 1b from Haymarket to Granton; phase 2 from Newhaven to Granton, and phase 3 from Ingliston Park and Ride to Newbribge North.

Source: “EDINBURGH TRAM NETWORK – Edinburgh Tram Network STAG 2[5] Appraisal Report – December 2006” [CEC01650279, page 0011]

Parliamentary and local government elections 2007

1.31 On 3 May 2007, there was an election for the new session of the Scottish Parliament, as well as local government elections. The result of those elections was that the Scottish National Party (“SNP”) formed a minority administration in the Scottish Parliament and the Scottish Liberal Democrats had the largest number of elected councillors, but no overall majority in CEC, so they entered into a coalition agreement with the SNP councillors in order to form an administration. Prior to the elections the SNP manifesto had included a commitment to abandon the project, and the coalition agreement permitted SNP councillors to maintain their opposition to it in accordance with their manifesto.[6]

1.32 The Scottish Ministers intended to fulfil their manifesto commitment of abandoning the project. On 4 June 2007, the Cabinet Secretary for Finance and Sustainable Growth (Mr Swinney) asked the Auditor General for Scotland to carry out a high-level review of the arrangements that were in place for estimating the costs and managing the project and the Edinburgh Airport Rail Link (“EARL”). On or about 20 June 2007, the Auditor General for Scotland published his findings in a report entitled ‘Edinburgh transport projects review’ [CEC00785541]. It was noted that:

“The review examined the process for estimating project costs and project management arrangements for the two projects. It does not provide assurances on the accuracy of the estimated project costs.” [ibid, page 0004.]

1.33 It was concluded that the arrangements in place to manage the Tram project appeared to be sound. It was also noted that:

“[a] range of key tasks needs to be completed before the final business case can be signed off and unless work progresses to plan, the cost and time targets may not be met.” [ibid, page 0006.]

1.34 On 27 June 2007, the Auditor General for Scotland gave evidence to the Audit Committee of the Scottish Parliament on the annual report and work programme of Audit Scotland. The Auditor General also gave evidence in relation to the project [SCP00000031]. Later that day, following a debate and a vote, the Scottish Parliament called on the SNP administration to proceed with the project within the budget set by the previous administration, subject to an absolute cap of £500 million. The Scottish Parliament noted that it was the responsibility of tie and CEC to meet the balance of the funding costs [SCP00000030].

1.35 Following that vote, the Scottish Ministers announced that the project funding from Transport Scotland was subject to an absolute cap of £500 million, with no allowance for inflation. Any additional costs had to be funded by CEC. In addition, changes were made to Transport Scotland’s involvement in the governance of the project, which resulted in its relinquishing its seat on the Tram Project Board, ceasing to attend meetings of that board in any capacity and instead receiving regular progress reports from CEC and meeting regularly with CEC officials to have confirmation that all grant conditions were being complied with.

1.36 After the ministerial announcement mentioned in paragraph 1.35, the changes to Transport Scotland’s involvement in the governance of the project remained the position until the settlement of disputes between tie and Bilfinger Berger Siemens (“BBS”) following the mediation at Mar Hall in 2011 discussed in Chapter 19 (Mediation and Settlement). Following that settlement, officials in Transport Scotland played an active role in securing the completion of the route as far as York Place.


1.37 On 21 September 2006, the Director of City Development sought the approval of CEC for tie to enter into the Multi-Utilities Diversion Framework Agreement (“MUDFA”) [CEC02083472]. While tie had already concluded the SDS contract that would result in the design of the route, the first stage in the physical construction of the ETN was the diversion and protection of the utility plant along the route of the tram, in advance of construction of the tram infrastructure. The objective of MUDFA was to appoint a contractor to act as a single point of responsibility for the utility diversion works in relation to the tram network (subject to utility companies reserving the right to carry out works associated with high-pressure gas mains, high-voltage power cables and certain telecommunication cabling works due to the technical complexity and sensitivity of these works).

1.38 MUDFA was in two stages. The first was the pre-construction phase, and involved the MUDFA contractor working with tie and its consultants to refine the scope and the costs of the second stage, which was the construction stage. Once these costs had been refined they would be fed into the business case that would be submitted to CEC for approval.

1.39 It was noted that it was not possible to finalise the scope of the work in the second stage prior to the tender process for MUDFA. The scope of work in the second stage would not be finalised until the MUDFA contractor had been appointed and the pre-construction stage had been completed. It was estimated, however, that the total value of the contract would be in the order of £50 million and that the value of the pre-construction stage would be in the order of £1 million.

1.40 In October 2006, tie appointed Alfred McAlpine Infrastructure Services Limited (“AMIS”) to carry out the utility diversion work along the tram route under MUDFA [CAR00000300, Parts 1–2]. The programme was set out in Schedule 8 to MUDFA [CAR00005833]. Certain pre-construction services were to be undertaken between October and December 2006, with MUDFA construction works to be undertaken between 2 March 2007 and 27 June 2008.

1.41 On 4 April 2007, tie’s Construction Director reported to a meeting of tie’s Utilities Sub-Committee that AMIS had issued a draft MUDFA Programme Revision 04 showing MUDFA works commencing three months later than the previous programme and showing the main MUDFA works in phase 1a being completed six months later than shown on the previous programme. The report also recognised that issuing utilities design at section levels was slowing the process of approvals from the utility companies.[7] It was anticipated that issuing drawings and SUC approvals in smaller batches that aligned with the MUDFA construction work sites would improve progress [CEC01638569, page 0010, paragraph 4.4].

1.42 A report to CEC’s Chief Executive’s Internal Planning Group (“IPG”) on 31 May 2007 noted that a pilot MUDFA site at Casino Square, Ocean Drive, Leith had been completed between 26 April and 4 May 2007 [CEC01566088]. Additional utilities were uncovered at the pilot site that had not been identified during the original survey works. It was further noted that the latest programme from AMIS, revision 05, showed a start date for the MUDFA works of 2 July 2007 (with works commencing in and around Forth Ports) and an end date for phase 1a of November 2008.

1.43 Following the debate in the Scottish Parliament mentioned above, and the subsequent ministerial decision to continue to support the project with a grant of £500 million, AMIS commenced utility diversions work under MUDFA in July 2007. In February 2008, Carillion plc acquired Alfred McAlpine plc, the parent company of AMIS, and its name was changed from AMIS to Carillion Utility Services Limited (”Carillion”). In 2009, Carillion reached an Exit Agreement with tie under which it was relieved of its obligations to complete the outstanding works. tie appointed Clancy Docwra and Farrans to complete the remaining utility diversion works.

Financial appraisal of the project

1.44 Various financial appraisals were undertaken prior to the commencement of the infrastructure works. In some of these appraisals mention was made of an allowance for optimism bias (“OB”), while in others the considered view was that no separate figure was necessary for OB as the contingency (allowances for risk) allowed in the financial appraisal was adequate because it had been “calculated in accordance with HM Treasury guidelines for consider [sic] the impact of Optimism Bias on required funding” [CEC01821403, page 0137, paragraph 9.6]. The Treasury requirement to address OB had arisen from a historical trend of underestimating the cost of public works in the UK [ibid]. By December 2007, when CEC took the decision whether to proceed with the project, no allowance for OB was made in the estimated costs of the project.

1.45 In December 2003, tie produced a preliminary financial case for line 1 [TRS00000054] that estimated its capital cost at £287.3 million, including a contingency sum of £23.7 million and £44.2 million for OB. The BCR was 1.51. At the same time, tie produced a preliminary financial case for line 2 [TRS00000016] that estimated the capital cost of that line at £336.3 million, including a contingency of £21.7 million and £57.7 million for OB. The BCR was 1.38.

1.46 In September 2004, at the request of the Private Bills Unit of the Scottish Parliament, tie produced an update of the above preliminary financial case for line 1 [CEC00630633] as well as an update of the appraisal for that line in accordance with the Scottish Transport Appraisal Guidance 2 (“STAG 2”) [CEC00551591]. The updated preliminary financial case estimated the total capital costs of line 1 at £274.1 million, including a contingency sum of £23.7 million and an allowance of £31.1 million for OB. The BCR was 1.21. tie’s approach to risk management was described as “rigorous” and had resulted in the “comprehensive mitigation strategy” [CEC00630633, page 0010] described in the STAG 2 Appraisal. In a discussion on procurement it was noted that, given its resources and experience, tie was “essentially a procuring body, rather than a major project management organisation” [ibid, page 0068]. The preferred procurement option included planning for anticipated initial packages of detail and design and advance works (principally land acquisition and utility diversion works).

1.47 In May 2005, tie produced a draft Interim Outline Business Case [CEC01875336, Parts 1–7] with Appendices [CEC01875335], which illustrated that lines 1 and 2 could not be constructed within the funding available from the Scottish Ministers. The estimated capital cost for line 1 (at 2003 prices) was £292.4 million, including a contingency of 10.8 per cent, but it did not include any separate allowance for OB.

1.48 In December 2006, Steer Davies Gleave and Mr Buchanan prepared a STAG 2 appraisal of phases 1a and 1b [CEC01650279]. Capital costs for phase 1 (i.e. for phases 1a and 1b) were estimated at £580 million (including an allowance of 16 per cent, or £81 million, for risk and OB). The estimated cost of phase 1a was £495 million if built alone.

1.49 On 21 December 2006, CEC was asked to approve the draft FBC for the ETN dated November 2006 [CEC02083464, page 0006; CEC01821403]. An accompanying report by the Director of Finance and the Director of City Development noted that the BCR of the whole of phase 1 was 1.63 and that that of phase 1a was 1.10 [CEC02083466]. The estimated cost of £569 million for the whole of phase 1 provided in January 2006 had increased to £592 million, mainly due to revisions in the programme. During the same period the estimated cost of phase 1a had increased from £484 million to £500 million and the estimated cost of phase 1b had increased from £85 million to £92 million.

1.50 The cost estimate of £484 million for phase 1a reported to CEC in January 2006 had included allowances for risk of 24 per cent. In November 2006, tie and its advisers had completed a further detailed review of the cost estimate for the project and, as stated in paragraph 1.49, the updated estimate for phase 1a was now £500 million. The levels of certainty and confidence associated with the updated estimate were considered to be relatively high. It was reported that nearly 98 per cent of the costs had been estimated based on rates and prices from firm bids received, known rates applied to quantities, or market rates applied to quantities derived from the Preliminary Design stage. The level of confidence was reinforced by the benchmarking exercises completed and the relatively high allowance for risk. The draft FBC referred to the application of a rigorous quantitative risk analysis (“QRA”) as a result of which it was considered that there was a 90 per cent chance that costs would be below the risk-adjusted level. The level of risk allowance included in the updated estimate represented 12 per cent of the underlying base cost estimates. It was considered to be a prudent allowance for cost uncertainty at that stage of the project and reflected the evolution of design and the increasing levels of certainty and confidence in the costs of phase 1 as procurement had progressed. tie had determined that no allowance for OB was required in addition to the 12 per cent risk allowance [CEC01821403, page 0138].

1.51 On 25 October 2007, CEC’s approval was sought for version 1 of the FBC in respect of phase 1a. A report was provided by the Director of Finance and the Director of City Development [CEC02083538]. The cost of phase 1a was forecast at £498 million and phase 1b at £87 million, based upon non-concurrent construction with phase 1a if a decision to construct phase 1b was made before March 2009. Tram operations on phase 1a were expected to commence in February 2011. The report acknowledged that a number of design-related matters were yet to be finalised but that allowances had been made for these in the estimate of £498 million. The BCR for phase 1a had improved to 1.77 due to the cancellation of EARL and, with the addition of phase 1b, improved to 2.31. The outcome of a detailed analysis of the risks of the project was summarised, noting that there was 90 per cent probability that the final cost for phase 1a would come in below the risk-adjusted level. Version 1 of the FBC would be updated for any material changes arising during the final period of negotiations up to contract close, and CEC’s approval would be sought on 20 December 2007 for the updated FBC and to proceed to contract award in January 2008.

1.52 As planned, on 20 December 2007, CEC’s approval was sought for version 2 of the FBC prepared by tie. A report was provided by the Director of Finance and the Director of City Development [CEC02083448]. It recommended staged approval for the award by tie of the contracts for the infrastructure works (the “Infraco contract”) and for tram vehicle supply and maintenance (“Tramco contract”)

“subject to price and terms being consistent with the Final Business Case, and subject to the Chief Executive being satisfied that all remaining due diligence is resolved to his satisfaction” [ibid, page 0001].

1.53 The approval sought was granted by CEC [CEC02083446, pages 0018–0021].

1.54 The preferred Infraco contractor was a consortium of Bilfinger Berger UK Limited and Siemens plc, known as Bilfinger Berger Siemens or Bilfinger Siemens Consortium (“BBS”), and the preferred Tramco contractor was Construcciones y Auxiliar de Ferrocarriles SA (“CAF”). It was reported that detailed negotiations between tie and BBS and CAF had progressed satisfactorily with a programmed financial close on 28 January 2008. The estimated cost of £498 million for phase 1a including a risk allowance, remained valid.

1.55 Although tie had reported that financial close was anticipated in January 2008, negotiations between tie and Infraco about the contract terms including price and risk allocation continued throughout February, March and April. On 1 May 2008, CEC was advised that a substantial amount of work had been undertaken to minimise its exposure to financial risk, with significant elements of risk having been transferred to the private sector. That had resulted in 95 per cent of the combined Tramco contract and Infraco contract costs being fixed, with the remainder being provisional sums that tie had confirmed as being adequate. The net result of the negotiations was a final estimate for phase 1a of £508 million. On 13 May, CEC’s Policy and Strategy Committee was advised that the estimated cost of phase 1a was now £512 million (with a further contingent payment of £3.2 million if phase 1b was not built).

1.56 Following that meeting of the Policy and Strategy Committee, the Infraco contract was signed in the expectation that phase 1a would be constructed within the budget of £545 million. The extent of the route of phase 1a is shown in Figure 1.2.

Figure 1.2: Tram route for phase 1a

Phase 1a tram route from Edinburgh Airport to Newhaven

Source: “Edinburgh Tram Network – Final Business Case Version 2 – 7 December 2007” [CEC01395434, Part 1, page 0008]

1.57 Ultimately, the route was constructed between Edinburgh Airport and York Place at a reported cost of £776 million. The terminus at York Place was located between the stops shown in Figure 2 for St Andrew Square and Picardy Place.


5. Scottish Transport Appraisal Guidance 2.

6. Throughout this Report the designation “councillor” means that the person referred to was a councillor for all or part of the period during which the project was being planned and constructed.

7. In the papers these entities are described variously as statutory utility companies or SUCs, utility companies, or statutory undertakers. In this Report, unless in text quoted from another document they are referred to as utility companies.