Rural Economy and Connectivity Committee

Meeting date: Wednesday, December 5, 2018

Official Report 949KB pdf

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Aberdeen Western Peripheral Route

Item 2 is the Aberdeen western peripheral route. I welcome to the committee Lewis Macdonald MSP and Mark MacDonald MSP, who are attending for this item. This evidence session follows an announcement that the opening of the Aberdeen western peripheral route will be delayed. The committee will take evidence from the principal contractors on the project. Written evidence from the contractors was received on Monday and has been published on the committee’s webpages.

I welcome Stephen Tarr, managing director of the major projects division at Balfour Beatty; Bill Hocking, chief executive officer for construction and investments at Galliford Try; and Brian Love, director of Aberdeen Roads Ltd.

I am not sure whether you have been to a committee before, so I will explain how it works. You do not need to push the buttons in front of you; I will indicate when it is your turn to speak. If you want to speak, try to catch my eye and I will bring you in. We need to get through a lot of questions, so if I think that your question is running on I will discreetly waggle my pen. The more frenetic that gets, the longer it means you have gone on and I am encouraging you to come to an end so that we can move on to the next question. It is purely a method of time management; I will not do it if I do not need to.

The first question is from Richard Lyle.

Good morning, gentlemen. Paragraph 22 of your written statement to the committee states:

“With regard to the final completion of the project, the remedial and finishing works to the River Don Crossing are progressing as quickly as possible, seven days a week. It is essential that they are carried out correctly and comprehensively, with safety being the utmost concern.”

I agree with that, but how did the defects in the River Don crossing occur?

I will answer that, Mr Lyle, but before I do I will update the committee, as we said we would, on the current situation with the road, which the convener referred to. We can confirm that, within the past 24 hours, we have secured lender consent to the contract variation, which paves the way for the road between Stonehaven, Charleston and Craibstone to be opened to traffic next week, and we are working to complete the works at the Don crossing—I will come back to that, but we hope to open those works later this month. That is a quick update to our written statement.

On the Don crossing, it is fair to say that the issue was unexpected and arose for the first time in May. To put it in context, we are talking about a complex structure. It is 300m long, crosses the River Don and has a surface area of about 5,000m², which is the size of a typical football pitch, so we are talking about a significant structure.

The crossing is a post-tensioned balanced cantilever structure, and the bridge is being constructed incrementally upwards by cantilevering out formwork on both sides, to balance the structure—about 75 segments have been cast to create the structure. The segments are post-tensioned, and longitudinal ducts are cast into the concrete structure through which steel tendons are installed. Those tendons are then stressed and grouted, which gives the structure rigidity.

To again put the size of the bridge into context, it is 25m across. Each segment is about 3.5m long and 3m high. You can stand up inside the structure—I am 6 feet tall and I can stand up inside it.

After we had cast all the segments and we started the stressing work, minor cracks appeared underneath the deck. On observing that, we stopped the stressing operation to closely inspect it. We were high up and we needed to get access, which we got. That led to a series of investigations. We then destressed the bridge. We got our designer to assess what he thought had gone wrong and to provide a diagnosis for repair. That led to intensive investigations to ascertain the alignment of the ducts.

I do not want to go on too long—I can see you looking at me, convener.

I have not picked up my pen yet—you are quite safe.

The alignment of the ducts through the structure is important. It became apparent that the alignment of the ducts had become displaced in some locations. Consequently, when we stressed it, unexpected pressure was placed on the concrete around the ducts.

We had to undertake a sequence of repair work. We literally broke out sections of the deck in those areas, to realign the ducts, recast them and then, ultimately, restressed the structure. That was quite painstaking, because of the sequence that was required, and took quite some time.

I hope that that explains in a nutshell the difficulties that we have had with the structure and in trying to predict precisely when the works will be complete. Although we thought that we had completed all those works, when we were stressing some of the final tendons in late October, we found another, similar issue where we had not repaired the ducts, because we had not thought it necessary to do so, and we had to go in and conclude those repairs.

I am pleased to say that, last Sunday, we completed the grouting. As of today, all the stressing and grouting is complete. That gives us greater confidence about completing the Don crossing, which is the one area of the site that is holding up the final opening of the road.

Thank you for your full explanation. You have answered my third question and I will tie up my other two questions together. Who is—or was—responsible for the defective work? What works are required to rectify the defects that you have mentioned?

I will take your last question first. The defects have been corrected. The issue was to do with the alignment of the ducts and we believe that why they became displaced probably comes down to inadequate provision in the structure to restrain the ducts. The problem with concrete is that, with ducts being a void, they can move. We probably did not tie down the ducts sufficiently in the concrete pouring operations, which necessitated the works.

As I have said, we are the design and build contractor. We accept that that is work that we have to do as part of our obligations.

Is this a new type of bridge? Have you done this type of bridge before?

No, it is not, and we have done this type of bridge before. In fact, for those who are familiar with the area, we have a similar bridge that crosses the River Dee further south. It is a similar construction, and it went without any issues.

One of the problems and complexities at the Don crossing is that there is vertical curvature and horizontal curvature, so it moves in three dimensions, which complicates the alignment and the geospacial characteristics of the structure.

Can you help me before we move on to the next question? Can you give me the timescale? When was the problem first identified?

The problem was first identified in mid-May.

When did the solution to the problem become apparent?

That probably took us about six to eight weeks after which, because the investigation work involved drilling holes to identify the location of the ducts, there was a rolling sequence of investigations, repairs and liaison with the designer. We also needed to satisfy ourselves that the repairs would in no way inhibit the integrity of the structure when it was complete, which is why we had to do it in that incremental way.

In effect, it has taken you five months to repair it—that is roughly what you are saying. When did you notify the Government that there was a problem—so that I understand? We did not hear about massive delays.

The nature of the governance on the contract and the oversight by the contracting authority means that it has engineers on site. It would have been aware of the emerging issue almost in real time, but it would not necessarily have had the same understanding that we were building up, as we were actually involved in the rectification process.

We can move on, but we are saying that, in May, a problem was identified that we knew was not going to need a two-minute fix; it would take a bit of time and there would be a substantial delay.

In fairness, at the time, we did not quite know the impact. We stopped the stressing operation and we knew that we had an issue in one particular area that we needed to address, but then we needed to ascertain whether the issue was more widespread with issues elsewhere. We did not want to continue the stressing and unnecessarily induce stresses in the concrete. That is why the diagnosis took some months. The true impact of the work was emerging as we were building a better understanding of the situation.

I have a brief question. Aberdeen City Council has oversight of this. Did you tell the council, or were you also communicating with Transport Scotland, and hence the Government?

We were liaising with the contracting authority, which is Transport Scotland, and with its engineer, Jacobs, so you are absolutely right, Mr Stevenson.

I will step in here. The contract is actually placed with Aberdeen City Council, which is acting as agent for the Scottish ministers, and Transport Scotland is heavily involved. Transport Scotland has individuals on site, supported by its engineering consultant, Jacobs.

That is fine. I just wanted to make sure who knew what when, and I think that that is now clear.

That adds a confusion, in that on 23 May we heard the Cabinet Secretary for Economy, Jobs and Fair Work say:

“Although I fully appreciate the contractor’s continued ambition to target a summer 2018 opening, Transport Scotland’s technical advisers on site remain of the view that a late autumn 2018 opening may be more realistic.”—[Official Report, Rural Economy and Connectivity Committee, 23 May 2018; c 2.]

Therefore, at that stage, we knew that there was a problem but we did not know how big the problem was.

I am interested in the contract and I want to follow the money, as it were. We were told that this was a fixed-price contract, costing the taxpayer £745 million in 2012 prices; the contract was signed in 2014. We were also told by the Government that there would be no further cost to the taxpayer because of all the delays.

Mr Tarr mentioned the contract variation. To a layman, such as myself, a contract variation means that more money will be exchanged. I am also aware that Galliford Try has told its shareholders that its costs have increased by £20 million, which is more than was expected, and that Balfour Beatty, in presenting its half-yearly results to its shareholders, has said that its costs have gone up by £15 million. If there is a fixed-price contract, what is the contract variation? How much more money are you receiving from the taxpayer?

09:15  

If I can—

Hold on. I see that you all want to answer, which is great. I will let Brian Love come in, then I will come back to Stephen Tarr.

It is worth explaining the financial structure of the contracts that are in place. There is a revenue finance structure, which means that the Government pays for the road once it has been built and is complete, so the Government will pay an annual unitary charge on a monthly basis; it does not pay Aberdeen Roads Ltd any money until sections of the road are open. The road is opening in four phases. Three of the phases have been completed and those sections of the road are open, so money is flowing for those phases.

The variation contract will become live next week. The section from Stonehaven up to Craibstone and, on the southern leg, to Charleston will become live, and the Government will pay a proportional unitary charge for the section of the road that will be open.

Under the fixed-price contract, the Government pays annually for the 30-year concession period. Aberdeen Roads Ltd enters into contracts with lenders to fund the construction works, and we enter into a fixed-price contract with the construction joint venture. That contract is financed by our debt, which is funded from markets.

I am concentrating on the cost to the taxpayer. Ministers have told the committee that the cost to the taxpayer of building the road is fixed at £745 million. I am interested in the contract variation. The contract has been signed, with a fixed price—we all know what the situation is. What is the contract variation? Are you receiving any more taxpayers’ money over and above the £745 million in the contract? I am not talking about the 30-year maintenance; I am talking about the build contract.

I apologise. The Government pays Aberdeen Roads Ltd only when sections of the road are open. We all predicted that the road would be open earlier than it will be, so there is a saving because the Government has paid less to date than was projected when we entered into the contract.

Yes, but—

Could I make an observation? The 30km section of road that will open next week was not contemplated at the time when the contract was structured. There were four sectional completions, three of which have been open to traffic since last summer, as we know; and the fourth section was the one across the Don. The contract variation is with regard to a fifth sectional completion, which is termed PTU2B in our written statement. That section required a legal change in order to bring it into effect, because it was not part of the original contract. We had to negotiate the terms of that with Transport Scotland because it involved, as Brian Love said, an earlier step-up in the unitary charge, which was not contemplated originally. When we talk about the variation, that is what we mean.

I am with you; I understand entirely what you are saying. I know that the money is released only as each section is opened, but my question is whether any more taxpayers’ money, over and above the £745 million, is going to your companies as a result of your opening the road early.

No.

I want to make sure that I fully understand this, because I am not sure that I do. The contract involved £745 million, which was for all the works on the project. You are saying that an extra bit was added into the contract. Are you getting extra money for that?

No. A subset has been added to the contract, which means that we get a proportion of the unitary charge a little earlier than we might otherwise have received it. That is what has happened.

I think that I understand what is going on here, but I want to make sure that we all fully understand the situation.

The road from Stonehaven to Westhill and Kingswells has been ready for traffic for two to three months, apart from the final sign-off and police sign-off and so on. It was part of the section that included the bridge over the Don. The reason why it has not been handed over and you have not had your money is the bridge. The contract variation is about the road from Stonehaven to Westhill and Kingswells. You had to have the contract variation so that you could hand the road over to the Government and the Government could pay its due to you for that road. The Government still owes you money for the bridge, which you will get when you finish the bridge. You have made it clear that there is no extra money over and above the £745 million of taxpayers’ money, and that you are taking the loss yourselves. Is that correct?

I think that there might be confusion with terminology here. With regard to that proportion of the road that will open next week, we get paid a proportional unitary charge as a percentage of the whole charge. That is the variation.

It is no secret that we have faced some significant challenges on this project: extremely inclement weather, which was the worst weather since records began; the demise of Carillion; and delays to utility diversions. In his statement, Mr Matheson mentioned that we have some commercial issues to discuss with Transport Scotland. That is not unusual for a project of this nature and size, and we will continue with those discussions. Does that address the point of your question?

I have one further question, now that you have confirmed that there will be no extra money. I am puzzled because, as I understand it, you have put in a claim to the Scottish Government for extra money even though you are telling us that there is no extra money over and above the taxpayer contribution of £745 million for a fixed-price contract—as a layman, I know what a fixed-price contract is. I keep going back to the same question, because what you were saying does not follow logically.

I understand what you are saying when you say that there is no money over and above the £745 million contract, but you have also put in a claim to the Scottish Government for more money. What is the explanation for that?

There is no change to the unitary charge over the 30 years. That is the first thing that we need to get secured. The second thing is that, yes, we have put forward a claim to Transport Scotland in respect of some of the issues that we faced in the project, where we believe that the risk lies with Transport Scotland. That is what we will be discussing with Transport Scotland. Those risks relate to relief events for weather and for delays in statutory utility diversions.

That is not a fixed-price contract, then.

Stewart Stevenson wants to ask a specific question about the claims. I want to see whether people want to ask some questions, and then we will come back to you.

I have dealt with a lot of contracts in my life, and I would like to understand the structure of the contract that we are talking about today. I am not asking you to open up the detail, because there are issues of commercial sensitivity.

Most contracts of this character that I have had to deal with have been structured in such a way that the works are described in a schedule. In any project, both sides of the contract will inevitably discover that there is a need for variation in the works that are described in the schedule. Is that the case with the contract that we are discussing? Is there a process whereby, if the parties agree that the works that are described in the schedule will change, there is an associated repricing? I see that Bill Hocking is nodding his head, so I think that my understanding, based on my experience, is correct in this context.

Have there been changes to the description of works? I would be astonished if the answer was no. I have never run a project in which there have not been changes to the schedule.

I can answer that. There have been a number of change orders and variations through the contract period, as you would expect and as you have outlined. I would say, though, that the value of those changes in the context of the project has been modest.

Indeed, it is perfectly possible for such changes to reduce the price.

That can happen, yes.

Have any changes done that in the case of this contract?

Yes, there have been changes both ways.

So there have been changes that have reduced the price and changes that have increased the price.

Are the commercial discussions that you are having with the Government related solely and in total to the changes to the schedule, or do they concern other matters in other parts of the contract?

The claim is on other matters.

Are you able to open up for us what those “other matters” are, to an extent that does not compromise your discussions, which I understand that you necessarily want to protect at this stage?

Let me pick up on something that Bill Hocking said about the issues that have frustrated the progress of the works. One of the most significant of those issues has been the early work with the utility providers. This contract is quite extreme in the number of utilities that criss-cross the scheme; something like 300 utility paths cross the scheme throughout its 58km length. You will understand that the diversion of those utilities, in concert with the sequence of our works, is a critical element in the efficient progress of the works.

The claim that we have with the contracting authority, that is, with Transport Scotland, stems from delays and underperformance in relation to the utility providers—in relation to electrics, underground and overground communications, water and so forth. It is those delays that have disrupted the progress of the works. Those issues lie at the heart of our claim against Transport Scotland.

I know that other members have questions, so I will make this my final one. Is the dispute, therefore, about how the contract allocates responsibility for utilities diversions? I have not seen the contract, which of course is a matter of negotiation, but I would have expected it to be the responsibility of the contractor to obtain permissions in that regard. Is the dispute about who carries the risk that is associated with the utilities diversions? Although the complexity might not have been known at the start, and indeed you could not commit on the timetable to which utility providers work, the contract ought to have made clear who had the responsibility. Whose responsibility was it?

I think that the nature of the contract has been characterised as broadly transferring significant risk to the private sector. Utilities are paid for by the public sector, and there are discussions with the utility companies that predate our involvement in the scheme—so there is this transfer, and obligations are placed on the contractor to manage the utility companies’ work and how their apparatus is co-ordinated with the design of the work that we do. We are getting into slightly finer points of risk allocation as to whether there are gaps for which others—in this case, Transport Scotland—carry some liability. It is those issues that lie at the heart of our commercial claim.

I am interested in the timelines. Can you confirm that March 2017, when the cabinet secretary came to the committee, was the time when you were having major problems with the utilities?

The issues with the utilities began before that. I think that what—

But that was when they were in a crescendo—

This is a little bit like the issue with the Don. We had the emerging impacts of those utilities issues. Some works were completed on time and others were almost 18 months late, so there was quite a spectrum of disruption.

In March 2017, the cabinet secretary came to the committee, and it was my understanding at that stage that there were major problems with the utilities that could cause the road to be delayed. March 2017 was the critical period. However, at that meeting, the cabinet secretary said that the road was still going to open on time, which suggested that the problem with the utilities had disappeared. Are you telling me that the utilities problem had not disappeared in March 2017, and that there were on-going problems that were going to delay the opening, about which we should have known?

09:30  

We were working hard to mitigate the effects of those utility diversion delays, which had been exacerbated by the extreme weather. The two remaining partners in the joint venture had been working tirelessly to mitigate those delays.

The cabinet secretary came to us on 14 December to tell us that there was a problem with the extreme weather conditions, and that it had been a very wet autumn in Aberdeenshire. Work was still going on on the A9 but not on the peripheral road. Digging had had to stop.

In March, he came to tell us that there was a problem, which everyone had heard about on the ground, but at that stage he still said that the road would open on time. That indicated to the committee and me that the road problems with the utilities had been resolved. You are saying that that is not the case.

The impact of the utilities has been far reaching. We had a programme that had us finishing round about the same time as the Don crossing. I forget the date off the top of my head, but I can look it up and write to the committee later, if you wish. Delays with the Don crossing pushed the end date out further.

It is worth putting context round the utilities in the project. In excess of 300 utility diversions were required to put the road in place. That is an average of one utility every 200m across a 58km stretch. To generalise and summarise all that enormous activity into a simple and concise statement is extremely difficult.

I understand that. Some of the utilities will be major, and some will be relatively minor, from individual telephone connections to possibly massive telephone connections.

We do not have time to push this, because I want to take other questions.

I am still interested in the delay to opening the Craibstone to Stonehaven part of the road. You have told us that you do not get paid any money until a section of road is open. We know that the Craibstone to Stonehaven stretch has been finished for several weeks if not months.

You have told us today that you have lender consent to open that piece of road. It seems to have taken many weeks to get lender consent. I cannot understand why that would be the case, given that, if the road had opened two months ago, you would have had the money in your pocket two months ago. Why has lender consent been so difficult to achieve? It seems to me that it would be easy to get lender consent, because you would get money into your bank account. Can you explain why it has taken several weeks or months?

As Stephen Tarr and Brian Love have mentioned, there was no contractual mechanism to open that section. It did not exist, and we could not have opened that section without wilfully breaching the contract. That is just a fact of the contract. That is why we needed the variation to the contract that we spoke about earlier to enable us to insert a new sectional completion, for want of a better description, and allow us to open that stretch. Along with the stretches that are already open, that constitutes about 90 per cent of the road by length.

There was no contractual mechanism to allow us to open the road until we had agreed how to go about that with the lender and Transport Scotland. Bear in mind that the contract is a huge complex document, with dozens of interrelated parties and different advisers. It takes a frustrating amount of time for all of us to get things done to amend it.

I hear what you say. My devious mind makes me think that perhaps you were holding off opening that part of the road as some sort of lever to try to get, for instance, some extra funds from the Scottish Government. You could say, “No, minister. We will not open that section until you agree to refund some of the extra costs for the bridge.”

That is definitely not the case. We had a strong vested interest in opening the road whenever we could. The delays in opening the stretch between Stonehaven, Charleston and Craibstone that will open next week will have cost us about £4 million. We have a strong interest in opening the road as soon as possible.

On that, can I ask—

No, you cannot. I am sorry—there are other people on the committee and I need to get round them. I will try to bring you in.

I am sorry to press you on the issue that Mr Rumbles raised, but it is an important point. I am still not 100 per cent clear on the numbers.

I will question the two organisations that are represented here separately, beginning with Galliford Try. In the statement to investors on the AWPR that was made a few weeks ago, it said that,

“owing to increased complexity and weather delays”

and

“higher than anticipated direct costs”,

its estimate of the final cost had increased by £20 million. Is it your presumption that you will absorb that increase or that Transport Scotland will do so? After Mr Hocking has answered, I will put a similar question to Balfour Beatty.

Galliford Try has raised £150 million in the market to cover the issues relating to the project. That is a statement of fact, which is in the public domain. That is the scale of the issues on this contract for Galliford Try.

The £20 million is cost, which will be paid by us as our share of the joint venture. It is totally separate from the commercial leases that we have with Transport Scotland. On one side, there is cost and, on the other, there is the claim or entitlement.

Will you seek to recover any of that from Transport Scotland?

There is a claim. The issue is whether it directly applies. If the additional costs were for the Don bridge, it will not apply—that is our cost. However, separately from that, there might be other costs as part of our claim, which we will seek to recover.

So you will seek to recover some of those losses.

If they are related to elements of our claim.

Do you know how much that will amount to?

No. Those discussions are commercially sensitive.

In August, Balfour Beatty made a statement on the AWPR in which it said:

“In the first six months of the year, Balfour Beatty recognised an additional £23 million loss on the AWPR project.”

My first question is what that £23 million loss comes on top of—in other words, what is the total loss? Given that that was in August and it is now December, could you give us an update on your estimated total loss on the AWPR project?

More worryingly, you went on to say:

“The AWPR loss represents a net charge made up of cost increases on the project partially offset by recovery positions that the Group believe are highly probable to be agreed.”

What are the “recovery positions” that your group believes it is highly probable will be agreed? Will you seek to recover any of that loss from Transport Scotland and, if so, how much of it?

The “highly probable” issue relates to an accounting standard. It is a test that a company has to satisfy in order to back the judgments that it is making.

If I may, I would like to unwind slightly, before coming back to Mr Greene’s question. There is no doubt—this is on record—that we have incurred significant additional costs on the contract in trying to mitigate the delays that have been caused. Although we recognise how important the route is to the people of north-east Scotland, if we had not taken some of the mitigation measures, the road would have been delayed for longer than it currently is. We have incurred significant costs that run into hundreds of millions of pounds. They are not small sums; they are material. They were not exclusively responsible for Carillion’s insolvency, but they contributed to it. An additional burden has been placed on Galliford Try and Balfour Beatty because of the joint and several obligations that we carry under the contract.

We have had to trade losses, as we foresaw them, within our financial statements. In the same way that Galliford Try had to go to the market to raise finance to fund its share of the losses, we have had to dispose of assets to fund our share of the losses on the contract. As of today, we are in a situation in which the joint venture partners are hundreds of millions of pounds out of pocket as a consequence of the work that we have done on the Aberdeen western peripheral route.

Separately from that, we have a claim for a not insignificant sum, over which we are in discussions with Transport Scotland. Those discussions are progressing in a consensual way in an effort to find a way of resolving the issues between us. Those discussions continue. We make judgments about where we think those discussions will finally sit. As you will understand, those judgments are commercially sensitive. I hope that that contextualises the situation.

It does, and I appreciate your forthcomingness, the situation that you are in and the fact that you are committed to opening the road as quickly as possible for the benefit of the people who will use it, which is welcome, but the committee has a duty as well. We were told that the project would cost £745 million. The panel is telling us that there are hundreds of millions of pounds-worth of overruns, but it is entirely unclear where the liability for those overruns lies and how much of it will rest with the public purse. It is a simple question, but I am afraid that we have not got any closer to concluding it.

We have not but, regrettably, I cannot answer the question in the way that you might like. All that I can say is that we are in a serious financial situation. There will be some things that are to our account. As we discussed earlier, we carry risks under the contract and, if we get those judgments wrong, that is to our account. Where there are legitimate risks that we believe are retained by the public sector, the contract provides for how those issues are addressed, which is done through various hierarchies. The situation is uncertain for us at the moment, because we do not know the outcome of the commercial discussions that we are in with Transport Scotland. I can tell you that it is not a very comfortable feeling on this side of the table.

Mr Tarr, can you simply indicate whether your claim against Transport Scotland is in the tens of millions or the hundreds of millions?

I would not want to answer that here, because of the commercial nature of the discussions that we are having.

If I put it to you that the total cost of the project will be over £1 billion, would you accept that that is broadly correct?

Yes. From what we have said, you could deduce that that is the area of the cost.

To follow on from points that colleagues have made, when the minister made a statement in Parliament on 1 November, he was very critical of Peter Truscott and said that ARL, or Mr Truscott, had indicated that the contract variation was with the lenders, but that a couple of days later he—the minister—received a letter saying that no such conversations had taken place. Since then, the contractors have been accused of holding the Government to ransom. Will you comment on those points, Mr Hocking?

The first thing to say is that Peter Truscott is an honourable and decent man, and he spoke in good faith when he spoke to the minister on, I think, 29 October. However, Peter was unaware that, over the weekend, we had had some issues again with the Don bridge, which meant that there was an undefined delay to that and, until we could understand the nature of that and assess the impact, we could not send anything off to the funders.

Peter then reported back to the joint venture and, as soon as we realised that that was the issue, we wrote to the minister the same day, or possibly the next day—I cannot remember—to set the record straight. Those are the facts of the matter.

Nonetheless, it has still taken a further month to agree a contract variation that, in principle, had been accepted before the end of October.

It had not been accepted at the end of October. We had got pretty close, to be fair, but there were small i’s to dot and t’s to cross. As I said, it is a hugely complex and interrelated document and every time anything small changes, it goes off in all directions to all sorts of advisers for their viewpoints and comeback. Regrettably, it takes longer than we all would like. As I said, we have a strong vested interest in getting the road open at the earliest opportunity, so we were going full steam to try to achieve that.

Can you say what concession the Government made that enabled you to reach that agreement?

I do not think that it was a concession. In fact, the Government held firm on some of the issues that we wanted to insert regarding various mechanisms. I have the dates here somewhere. On 19 November, we received the minister’s final stance on the documents; on 20 November, our legal advisers reviewed the documents; and, in a conference call at half past 8 on 21 November, we resolved to send the documents to the lenders.

So you are saying that Michael Matheson’s comment that the contractors have not been entirely straight on this matter is completely untrue. You have been entirely straight on this.

Absolutely. Peter Truscott spoke in good faith.

Okay. Mark McDonald has a question.

09:45  

I just want to get my head round the timelines. When was the contract variation that has now been agreed to enable the section to be opened first discussed? Was it in October?

It was prior to that. It is worth pointing out that the contract variation that has now been agreed—and which will be put into action today following the lenders’ consent last night—was proposed by the contractors when the delays in the Don crossing properly manifested themselves in the summer.

We are talking about a really complex contractual structure with a huge number of parties. For example, there are three shareholders in ARL; there are two parties in the construction joint venture and, on the other side of the contract, there is the Government, which comprises a number of parties. There are also five lenders, all of which must give their consent, the lenders’ technical adviser and so on. The suite of contracts runs to thousands of pages and many schedules—it is not straightforward. The first part of the process, which was completed in October, is a negotiation between the key parties—ARL, the contractors and the Government—and the last piece of the jigsaw is the consent of the lenders. Although we have been in continual dialogue with them, we cannot send the formal contracts until we reach commercial agreement at the top level. We are talking about a spider’s web of contracts and a very complex arrangement.

That leads nicely on to my next question, which is directed at Mr Tarr. In announcing Balfour Beatty’s half-yearly results to the end of June, the group chief executive’s review stated:

“Part of AWPR is already open to the public”—

the Balmedie to Parkhill section—

“with the majority of the route scheduled to open by the end of August. Completion of the one remaining bridge is expected in the autumn.”

In June, Balfour Beatty’s chief executive was advising shareholders that the piece of work that necessitated a contract variation was expected to be open in August. Therefore, my question is: if Mr Love’s point about the complexity of seeking a variation to the contract is widely accepted, why were Balfour Beatty shareholders advised to anticipate that this section would be open at the end of August when the likelihood was—and the reality is—that it would take three and a half months longer?

At the time, we anticipated reaching an agreement to allow PTU2B, as we term it, to be opened at, I think, the end of August. In fact, the certificate for the actual physical construction of the road was submitted on 16 August, so the road itself was physically complete in August. As Brian Love has described, the issue has been reaching a formal agreement with Transport Scotland on the terms of the variation.

As for the bridge, we did not know that we would face the further problems in October that I have described and which served to push the completion from November into this month. As I have said, we are still pushing to try to get this finished by the end of this month.

But you will understand that, when those comments were reported, it led to—

Expectation.

Yes, expectation. Do you regret that your expectation management has not been better—for example, through highlighting the issues that the project faced? I think that, as a result, we have had unhelpful speculation and a suggestion of major problems with the Don bridge—things that you have not successfully countered in your responses prior to today.

That was perhaps a statement more than a question.

That is how I interpreted it.

I was asking whether you feel that you could have done more to share information in advance of today’s meeting about the issues that you have been facing.

Before you answer that, I have to do some expectation management as well. We are still on question 1 and there may be more than one question. People are queueing up, so let us park that question and I will bring in Mike Rumbles with a question requiring a binary answer.

I would like a yes or no answer to this simple question. Have you been given any indication that your claims for more taxpayers’ money, over and above the fixed-term contract, would be looked on favourably if you would just open the road between Stonehaven and Westhill? Yes or no?

No.

No.

We have concentrated on the technical side so far, but you have also mentioned Carillion, so can you explain how much impact the collapse of Carillion had? Was it a minor hiccup or was it more major than that?

From a practical perspective it disrupted our operations, in so far as Carillion was one third of the joint venture and provided one third of the working capital to finance the joint venture and, broadly, one third of the staff. That is not an exact split, but it is broadly right. Since Carillion became insolvent, the remaining two parties, as Stephen Tarr said, are jointly and severally bound, so we have an obligation to continue the contract. We employed the vast majority of the Carillion staff to ensure continuity, and we took on the obligations to pay subcontractors between the two of us, as opposed to between the three of us, so we believe that we mitigated the effect of Carillion’s insolvency as best we could. There is inevitably some disruption when half the staff are suddenly concerned about their futures, but I think that we did a reasonable job of that.

Was it an unusual model to be jointly and severally liable for one another?

No, it is normal for joint ventures.

We got the impression that, down south, there were projects that just stopped when Carillion collapsed, but perhaps it was on its own with those projects.

Yes, it was on its own with those projects.

In all situations where Carillion was operating in joint ventures, the joint venture partners stepped in, just as we and Galliford Try stepped in to take on the staff. You will understand that it was quite a stressful time for the employees of Carillion, so our ability to offer them continued employment on the scheme served our purpose and resolved their uncertainty.

How does it work? Once a section is opened and the money starts flowing, does some of that money go to Carillion’s liquidators for the work that it did?

No, under the joint venture agreement, Carillion is excluded from the joint venture on insolvency. At that point in time, it just ceased to be a part of the joint venture, which regrettably means that it does not take its share of the losses.

Beyond that point.

Yes, I assumed that it would not take its share of the losses, but does anyone get paid for the work that it did?

It is an integrated team, so the way the joint venture works means that there is not work that Carillion does, that Balfour Beatty does and that Galliford Try does. It is one team delivering the whole of the works, and all the parties have a financial interest in the outcome of the project, which is a financial percentage interest in the outcome of the project. That is how the model works.

Sorry, but I do not understand that. Carillion had paid its staff up till whenever the date was and had not had any money for that, because it was only when the road section opened that money started flowing.

It was a non-profit distributing model, so the contract that the construction joint venture is undertaking is with Aberdeen Roads Ltd. ARL pays the construction joint venture and those payments are made monthly on milestones of works completed, and they are funded by debt that we raise. Once the road is opened, the unitary charge flows to ARL, which uses that money to repay the debt that it has borrowed to fund the construction.

Okay, I get that. Therefore, Carillion was paid for the work that it did up to the time of closure.

That is correct.

Can you confirm that, when Carillion went out of business, no delay was foreseen as a result of that? When Carillion ceased trading, were you happy that you would still open on time?

As I said, there was some disruption around Carillion’s insolvency. The second biggest contractor in the UK disappearing was not a small event, but I would not specifically pin that to any delay. It was a reality that we dealt with at the time.

So Carillion going bankrupt did not affect the opening time.

No, not significantly, because we took on most of its staff within a few weeks of it going bust.

The issue was more the uncertainty that was created in the supply chain, because there were firms that were owed money by Carillion, which was disrupting. The timing of Carillion’s insolvency was in the winter months of January and February when the project was not in full flow—as it would have been during the summer months—so we were able to mitigate the impact.

My constituency runs from Muchalls through Netherley, Maryculter and Peterculter, virtually right up to the Lang Stracht and right round to Wellington Road and the Dee. You can see that the majority of the road is in my constituency.

We have talked about the effect of Carillion and utility companies. I want to turn to storm Frank, because there was widespread flooding on the Dee around where the bridge is, and residents of Peterculter have continued concerns about how the bridge and its foundations have affected and will affect river flow. Did storm Frank make you revisit the issue of drainage on any of the works on the AWPR?

No, not that I am aware of. The bridge over the Dee would have been designed for a 100-year storm event, and the foundations are set well back from the river banks on very deep piles. The short answer is that the design stands as it is. I can check that, but I am pretty sure that that is the case.

The piles go into the rock in that area so whatever happens with the water level, they are not impacted. It was a very severe storm, as Maureen Watt’s constituents know, so it impacted our works, but we do not anticipate it impacting the design of the permanent works once constructed.

There is still some concern in those communities that they have not seen what the flood management system will be around that part of the Dee. As I understand it, all of you are feeding into this, and it would be helpful if we could reassure residents about that in the near future. Could you see to that?

A large number of my constituents have been affected by the road. Where you have taken over pieces of land and no longer require them, I urge you to ensure that they are handed back in the proper condition as quickly as possible, as the circumstances of many residents have changed and they might want to sell their houses. Will you give me a guarantee that that will be done as quickly as possible?

Certainly. We will take that back to the site team and make sure that that is done as soon as possible.

We are in the process of reinstating a lot of the areas that we have used as temporary standings and that sort of thing. If you have been made aware of any circumstances where you think that we have not delivered what you would expect us to deliver, we would be happy to hear about them.

I have written to you on umpteen occasions and I have had a good response when I have raised issues on behalf of constituents.

I understand that, once the whole road is open, anybody who is affected by noise or something that was not foreseen can put in a claim within a year and a day of the road opening. Is that correct?

I may be able to help with that. I think that that is a compensation claim, which is dealt with by Transport Scotland and not the contractor. You are entirely right—I am talking from my days as a surveyor—that there are statutory timescales, which are very important. Perhaps we can take that up with the cabinet secretary at our next evidence session.

10:00  

Okay, that is fine.

Colin Smyth has a brief question.

To be fair, it has probably been answered. However, so that we can put it on the record, you said that in the past 24 hours you have received permission from funders to open the last stretch of the road; are you giving a cast-iron guarantee to the committee that the road will be fully functioning by Christmas?

We cannot be categorical about the wording. We have received consent to it from the funders, which allows the process; in other words, there are no further issues with the drafting. All that remains, as Brian Love can confirm, is to append a covering letter to the agreed drafting and to get everybody to sign it. On that basis, we have a high degree of confidence—yes. We have already started conversations with Transport Scotland about the logistics of opening that section of the road.

To be quite clear about the Christmas date, the phase that we are talking about is from Stonehaven to Craibstone and Charleston; it is the sub-phase that is required through the variation. The lenders’ consent in principle has been achieved. We need to obtain a legal opinion around enforceability, which will be done this week—it is being done as we sit here—and then we will move into discussions with Transport Scotland and Police Scotland about the road opening.

The Christmas date relates to the Don bridge. Stephen Tarr has already covered the fact that the contractor is targeting a date prior to Christmas to open that. The construction programme is subject to many things, notably weather, and adverse weather could throw it out, so the date is not cast in stone, yet.

So you are not able to give a specific date by which the full road will be functioning.

What we are saying is that the section from Stonehaven to Craibstone and Charleston will be done by the end of next week. We are targeting before Christmas for the Don bridge and the rest of the road, which is from Craibstone to Goval. As Brian Love said, the final parts of the bridge construction are weather susceptible, so the date may be impacted by weather.

You indicated in previous questioning that you have not received anything from the Scottish Government to open part of the road next week, so what were your meetings with ministers about? What did you discuss?

I do not understand. We have been discussing opening part of that road next week.

In response to Mike Rumbles’s question, you indicated that you have not received anything from the Government to open that part of the road next week, but you have had discussions with Scottish Government ministers. What, specifically, were those discussions about?

My interpretation of Mr Rumbles’s question was that he was asking whether we had received any favourable view of our claim, on the back of opening the road, and the answer to that was no. However, next week, as soon as the road is open, we will start to get the unitary charge that Brian Love mentioned earlier—we will start to be paid for that section of the road.

Mr Love, does Aberdeen Roads Ltd currently have or plan to issue any claims against the Scottish Government?

The way that the claims structure works under the contracts is that we have the lead contract with the Government and the subcontract with the construction joint venture. The claim is what is referred to as a common-ground claim. It comes from the construction joint venture, through ARL, and on to the Government. It is all wrapped up in one claim process.

So the claims of the other two organisations represented here will go through your organisation.

That is correct.

Is it fair to say that all three members of the panel will have a claim against the Scottish Government?

Technically, the claim against the Scottish Government comes from ARL. The construction joint venture has a claim against ARL, but the way the contracts work is that it is a common-ground claim for equivalent project relief and it is wrapped up in one process.

Okay, and for commercial reasons we do not know the value of those claims at the moment. We can only estimate, given the conversations that we have had, that it is somewhere between £10 million and £300 million. How would you characterise your relationship with the Scottish Government at the moment?

The relationship with the Scottish Government has been professional throughout the process. I was involved in the project during the bid phase and have been involved in the construction phase. It is no secret that there have been some challenges and frank exchanges of view, as you would expect; both parties have protected their commercial positions, as far as they could do so. However, dialogue has continued throughout and the relationship has remained professional throughout.

A professional relationship is helpful, but we have a transport minister who has made serious comments in the public domain about some of the stakeholders who are represented here today, and there is the potential for legal cases in relation to cost recovery and overruns. The project is delayed by an undefined period and it is overbudget by an undefined amount. “Professional” is one word to describe the relationship, but realistically, how much comfort can the public take from your ability to have a 30-year management and maintenance relationship with the Scottish Government, given the current state of affairs?

The remaining two parties in the joint venture have diligently, professionally and honourably executed the project, under the very difficult circumstances that we have described, and next week we will hand over 37-odd kilometres of road to the people of the north-east. All the feedback that we have had so far on the stretches that are open is that the road is very good quality and people are delighted with the impact that it has on journey times, reliability and so on. We are therefore proud of what we have achieved in the face of such adversity. I know that there are difficulties, but I want to thank all the women and men—almost 15,000 of them—who have worked on the AWPR over the past few years for their tenacity and resilience in getting this job finished.

That is very welcome, and, at the end of the day, I think that many of us share that view of the people on the ground who are delivering the project. Equally, the employment opportunities are welcome.

The transport minister will give evidence to the committee after our evidence session with you has finished. When questions have been asked in the Parliament about the project, the blame has been put fairly and squarely on the three gentlemen who are in front of us today. What would you say to the transport minister in that regard, if you had the opportunity?

We cannot speak for Mr Matheson or his predecessor. All that I can do is echo Brian Love’s comment that our exchanges with the Government and with Transport Scotland have been professional. Yes, they have been robust at times, but they have been professional.

And I would—

I am sorry, but Mr Hocking’s comment is probably a good one on which to end that line of questioning, because other members have questions.

Will the witnesses confirm that the overruns in the construction are a matter for them and that the claims relate solely to utilities?

Yes, but the two are inextricably linked, because the issues with the utilities have led to delays and disruption to the execution of the works.

Let us be clear. If laying a kilometre of tarmac cost you—this is just an arbitrary figure—20 per cent more than you put in your original budget, that cost is for you to pay. However, if that increase was caused by utility diversion, that can be part of the discussion that you are having.

Yes.

I just want to be clear. The word “overruns” has the danger of suggesting something more comprehensive than is actually the case.

Let me take your example of the kilometre of tarmac. If we have to build that kilometre in three sections at different times, you will understand that that is more disruptive than doing one kilometre in one go. That probably characterises some of the issues that we are trying to resolve with Transport Scotland.

But it is solely about utilities.

The only claim that we have is related to the utilities and our ability to demonstrate the consequential impacts of that issue, and not to those things for which we carry and retain responsibility.

Thank you.

When I asked the witnesses whether they had been given any indication that their claim for more taxpayers’ money would be looked on favourably if they just opened the road, I heard Mr Hocking and Mr Tarr say no, but I did not hear what Mr Love said. Mr Love, will you answer the question for the record?

Yes. My answer to that question is also no.

Based on your experience of the AWPR project, do you have concerns about the Scottish Government’s non-profit-distributing model for financing projects? Would you be content to enter into a new contract under a similar regime?

Because Bill Hocking was smiling so profusely at that, he will have to answer first.

We will have to lick our wounds for a bit. The model is fundamentally sound and is used for schools and hospitals, for example, without any issues. That is because those projects are smaller, more defined and more manageable. That does not mean that the model is not the correct one for an AWPR type of scheme, but my personal view is that the model’s risk-reward balance is out of kilter. The model works, provided that risk versus reward is balanced.

Basically, you are saying that too much of the risk falls on your shoulders rather than on those of the Scottish Government. Is that what you mean?

It is up to every contractor to decide the amount of risk that it is prepared to stomach. I am not laying blame anywhere; I am saying that the contractors went into the contract willingly and no one forced them. However, I personally believe that the risk-reward balance is wrong. To put it simply, I would be much more risk averse for another scheme like the AWPR, which would mean that I would be unlikely to win the bid for the project in the first place.

You might put in a slightly higher bid in the first place and your costings might show that you were not very keen.

Absolutely.

We hope that the road will open before Christmas, but there will still be remedial works to carry out. Drainage works are among the main ones that farmers along the route regularly bring up with me, because a lot of them are still to be completed. Can my farmer friends have confidence that you will be around long enough to ensure that all drainage issues are sorted satisfactorily?

I am sorry, but before you answer that, Peter Chapman must declare an interest when he is talking about farming.

I declare an interest as a partner in a farming business in Aberdeenshire. However, it is not connected to the AWPR.

Many farmers have contacted me about many issues around the road, but one that is still very much outstanding is drainage, which is why I have asked a specific question about it.

The projected December date that we are working to is for the main road section to open. Some ancillary works will go on beyond that date, but they are not on the main road. We project a finish date of March 2019 for that work. As Mr Greene pointed out, Aberdeen Roads Ltd has a 30-year concession to operate the road. Our contractual structure means that, if a defect manifests, whether in drainage or ancillary works, we can seek the construction joint venture to make those corrections. I can therefore provide the assurance that Aberdeen Roads Ltd will be around for the foreseeable future.

I will park that issue there, because I want to get in two more questions from members before my final one.

I have experience of work in my constituency area that was similar to that on the AWPR. The work on the M8, M73 and M74 involved the same type of bundle. I found that the contract was too tight and that there was not enough flexibility. Have you had the same problem? Has there not been enough flexibility to amend some of the contracts, which has meant that you have had to go through a lot of people?

It is a very rigid form of contract—that is for sure. I was pleased to see a publication a couple of weeks ago that said that the Government was considering different forms of procurement for infrastructure schemes and building schemes, and having a slightly different form of contract, which would be good.

On the subject of upgrades or restoration, the company that is running the work will be there for the next 30 years anyway.

Yes.

Yes.

And it will be responsible for any problems. Is that correct?

Yes.

Yes.

Maureen Watt can ask a short question.

I, too, thank everybody who has worked on the project. I think that the road looks fantastic. What lessons have you learned from the project for future projects? Is it the case that you grossly underbid for the contract?

As Stephen Tarr said, where we have underpriced, that is for our account to bear. We have focused on finishing the job in its entirety—on finishing the section next week and the whole job, we hope, by Christmas. We will then review our shortcomings and the lessons to learn. I suggest that we also sit down with Transport Scotland and have a debate about the joint lessons that could be learned for future projects.

10:15  

On Maureen Watt’s question about whether we underbid, my understanding is that two bidders that went to what is called the best and final stage were quite close.

This question, which will be the final one, relates to the subcontractors that you have used. The problem is that the contract is programmed to cost £745 million but, from Stephen Tarr’s comment, it may well have cost over £1 billion by the time that it is complete. I have evidence of subcontractors not having been paid for the Dalraddy to Kincraig section of the A9 because the joint venture has said: “We’re not paying you the full amount. We will just pay you what we think it is worth.” A couple of cases are at arbitration. Can you give the committee a guarantee that the subcontractors that have done work in good faith and completed the work up to the required standard will be paid in full, despite the claims that you have against the Government?

Absolutely.

Our supply chain is important to us, and we treat it in the way that we expect to be treated by Transport Scotland. We have closed out over 60 per cent by value of the subcontract orders that we have placed. Those negotiations are consensual. We do not envisage any material issues with our supply chain in resolving our differences. Our issues with Transport Scotland are separate from the way in which we have contracted with our supply chain.

It is good to hear that. Often, the bigger organisation squeezes the smaller organisation. It is the smaller organisations that really feel the pinch.

Thank you very much for giving evidence. It has been very interesting for us to hear more pieces of the story.

I suspend the meeting briefly to allow a change of witnesses.

10:17 Meeting suspended.  

10:23 On resuming—