Agenda item 4 is on Audit Scotland's report, "Edinburgh transport projects review", the specific projects being the Edinburgh trams and the Edinburgh airport rail link. The committee has agreed to discuss in private any recommendations that we wish to make as a result of the report. We will do that later on, but now is the opportunity for Audit Scotland to set the scene and for committee members to ask questions. I welcome Margaret Smith to the committee for this agenda item. Margaret is an Edinburgh MSP whose interest in these transport projects has been clear and consistent; I will give her the opportunity to participate in the questioning once committee members have had their fill.
I am conscious that this is a live issue of great concern to the Parliament. The report has been around for only a short time, so I welcome the opportunity to take a few minutes to share some of its key messages and to set it in context.
Thank you, Mr Black.
In your view, Auditor General, was the trams project at any time financially out of control?
We reviewed only the current project arrangements. There is a degree of assurance in the fact that the movement between the first cost estimates and the current ones can be clearly explained—it relates to changes in the project design and the impact of inflation. Given the time that was available, however, we did not consider the history of the project in detail.
But what you considered showed that nothing was financially out of control.
As we find the project at the moment, the management and control systems are sound.
We should never entirely trust our friends in the media, but they characterised your report as giving trams
I can offer the committee and the Parliament a positive assurance about the strength of the management systems and control systems that are in place for the trams project. Because the Edinburgh airport rail link is at a comparatively early stage of development, the same assurance cannot be offered. There are significant issues in the lack of clarity about the roles that key players such as Network Rail, BAA and others will play in the EARL project.
So you are relatively satisfied with the trams project as it stands.
We are relatively satisfied with the controls that are in place.
The utilities part of the trams project has been put on hold. If there should be further delays, what are the risks to the overall project?
There are two main categories of risk. The first is that costs will continue to increase. We have not audited this number, but Transport Scotland advises me that the project currently costs the public purse about £4 million every month. It is possible that that cost will ramp up over the summer if the project is delayed. The second significant area of risk is that several tenders have been received for critical works and the project sponsor and project manager are concerned that some tenderers might lose interest and want to compete for other work elsewhere. That could cause a significant setback. In my opinion, those risks are real.
You said that approval of the final business case for trams is due in early 2008. Did you say that the cabinet secretary would give final approval?
The business plan would be submitted to the twin sponsor bodies, the local authority and Transport Scotland, which would scrutinise it carefully—particularly Transport Scotland, because it is concerned with Parliament's interests. Final approval would then be afforded by the cabinet secretaries.
How much is likely to be spent on the trams project between now and then? Is that what the figure of £4 million per month relates to?
That is a broad, indicative figure of how much money is being spent every month. Any further questions will probably have to be addressed to Transport Scotland.
It is inevitable that before final business case approval there will be some expenditure takes up-front that, in a cancellation scenario, are rendered abortive. Is that just in the nature of the beast?
You are absolutely right, convener. Transport Scotland has given a broad indication of the possible cancellation costs, and I think that I am correct in saying that it would cost between £27 million and £35 million to cancel the project sometime in the near future.
But it might be a larger sum than that if the final business case is not approved in 2008.
The £4 million per month is being spent on things like staff salaries and the construction of the depot at Gogar. That expenditure will go on. The £27 million to £35 million to which the Auditor General refers relates to things like penalty clauses for cancelling contracts and redundancy costs, for example. If this expenditure continues between now and January and the project is cancelled in January, that £4 million per month will be lost and the £27 million to £35 million will have to be paid on top of that.
There will be doubts about continuation and cancellation. Everyone is looking for clarity and certainty about the organisation and finance of both projects. Paragraph 4 on page 2 of the review shows the process by which the costs of both schemes have been estimated and managed, but not their accuracy or certainty. The review is not an evaluation of either project but is a review of the process by which costs have been estimated and how the project management has been arranged. Is it therefore true to say that the review provides greater clarity about the process, but that there is no certainty about the cost estimates?
It is certainly true that the report provides a clear assurance in relation to the processes that the trams project is going through. It is also true, however, that the cost estimates have been robustly prepared by project management. However, in any capital project of this scale and complexity there is no such thing as absolute certainty about what the outturn costs might eventually be.
Is it not also true that we cannot at this point be sure of the accuracy of the estimated project costs, the projected revenues or options appraisals or the benefits that are offered by the two projects?
As I said a moment ago, you can take assurance that the project costs have been robustly calculated to a standard commensurate with that of other major public programmes. We certainly have not looked at the numbers again; as I said, we have not reperformed any of the analysis. As I think that I might have mentioned in my introduction to the report, we have not looked at how the benefits are calculated.
It is unlikely that EARL will be delivered by 2011. There is no agreement over procurement strategy, no clear governance framework and so on. Surely all those doubts and uncertainties would have cost effects.
Andrew, can we dispose of the questioning on the tram before turning to EARL?
Sure. My general point, however, was about the doubts—
I appreciate that you were making a general point.
My question for Mr Black is related to Andrew Welsh's. Was the fact that you did not consider the accuracy of specific costings due to the scope of the audit that you were asked to carry out, or is that simply something that is difficult or impossible to predict?
I should be very clear about this. The scope of the audit work was determined by me. Some of the media appeared not to appreciate fully the relationship that I have to Parliament and the Executive. Normally, in reviewing projects such as this, we examine the systems and procedures that are in place. However, we are not qualified to take over the role of management; it is not appropriate for us to do that and we do not have the required expertise in house. We would not, as a matter of course, reperform expert calculations; we would leave that to others.
So the element that is of major interest to the public—the financial aspects of the project and its delivery—was outwith the scope of your examination.
Yes.
Considerable play has been made in Parliament about the massive increase in the cost of the Stirling-Alloa-Kincardine railway. However, your report suggests that that sort of cost escalation has not occurred in the case of the trams project.
It is true to say that the broad estimate of cancellation costs that we have been able to obtain is in the range that I mentioned earlier, which is £27 million to £35 million. That cost will be incurred if there is cancellation in the near future.
Those comments were helpful. Paragraph 48 of the report states that
It is correct to say that that order of money would have to be written off.
That is helpful.
As a new member representing the West of Scotland region, I was far removed from the transport plans for Edinburgh. The report answers some of my questions.
No. The current cost estimates fall within the indicative budget that has been provided. Value engineering is a well-established range of techniques that are designed to bring costs down from initial bid figures to the minimum that is absolutely necessary to deliver the project. We understand from Transport Scotland and TIE that the process is going reasonably well at the moment. Transport Scotland is incentivising the process, to ensure that phase 1a is delivered for the minimum cost. It hopes that that will free up resources that will allow phase 1b to be funded.
I do not know whether you can answer this, but why is BAA not a key stakeholder in the trams project? It is a key stakeholder in EARL.
I am not sure that I can answer that. It is clear that BAA has an interest, but the trams project is entirely separate from the EARL project.
We do not have a clear answer to that question.
There appear to have been four changes to TIE's board membership during the past 12 months, which seems excessive. I would hope—and expect—that any major project would benefit from an element of consistency. Did you consider that?
I understand that there might be concern about turnover, which is why I mentioned it in my introductory remarks. However, Transport Scotland and TIE acknowledge that, as a major construction project such as the trams project progresses, the skills that are required at board and non-executive level, in order to hold the project management to account, and the skills that are required in the project management, change. We have been given a reasonable assurance that the process is being managed well and that strong project management is in place as we speak.
I accept that point, but I still think that four changes in 12 months is excessive.
First, are remarks such as those in paragraph 4 fairly standard in an Audit Scotland report? Secondly, the Auditor General said that the financial benefit to Scotland would be greater than the cost of the project. What is the estimated financial benefit to Scotland?
Paragraph 4 is not untypical of what we put in reports, but—I am sure the committee appreciates this—it is a particularly important paragraph in this report because we have had an unusually short time to undertake the audit examination.
I presume that something that makes the costs rise will also make the benefits rise, because both will be inflationary.
It is important to take the numbers as being broadly indicative and no more. I am not expert in this area, but I know that it is a highly complex and specialised business. All tram projects around the country will have been subject to similar analyses, but the assumptions will vary according to the latest Treasury guidance and local circumstances.
I remind colleagues that we should be asking factual questions about the tram project at this stage. When we have finished that, we will go on to factual questions about the EARL project. Later, in private session, we will have the opportunity to debate among ourselves how we move forward to any recommendations.
I want to be clear on one point, Mr Black. "Doubt" may be too strong a word, but there is perhaps some concern in respect of your remit for the report. My understanding was that you were considering whether the processes and procedures were in place to allow the project board to make reasonable estimates. The report says—to paraphrase paragraphs 14 and 15—that arrangements to manage the project appear to be sound, but there is recognition that the project is approaching a critical phase. Is not that what you were looking at, rather than comparing estimates?
Yes, that is correct.
Thank you.
I will call Margaret Smith in a minute. She has been very patient, but I want to raise a couple of points of my own.
You are correct to assume that I would not be terribly keen to describe the report as "quick and dirty". It is an objective reality that it has been quick, but the important point is that I can offer the assurance to the committee that we have examined the procedures pretty thoroughly.
Yes—thank you.
Thank you, convener, for letting me speak at all. As an outgoing member of the committee, I wish colleagues who were on the Audit Committee with me in the previous session of Parliament, and the new members, all the best in their time on the committee—it is certainly an interesting one to be on.
The report identifies the loss of staff as a risk. Unfortunately, I cannot comment on how great the risk is. Transport Scotland is best placed to answer that question.
I will ask my governance question now, if I may. I share the concern of some colleagues about whether the relatively short time that you had to produce the report was adequate for your and our needs. I am reassured by what you have said, but I have a question on a more general governance issue that relates to Audit Scotland's approach to such projects. You will probably not be surprised to know that my question relates to the several questions that I asked you in the previous session's Audit Committee on 13 February about the potential for real-time monitoring of such capital projects. In your response, you expressed concerns about such a role for Audit Scotland, which related to resourcing and accountabilities. On about three or four occasions, you made it clear that you envisaged a role for Parliament if Audit Scotland was to carry out such monitoring. What dialogue did you enter with Parliament when you received the request from the Executive to undertake a very important—some would say controversial—short-term project?
I have had no direct dialogue with Parliament on that.
That lack of dialogue is absolutely different from the approach that you suggested you would take in response to my questioning on 13 February. Was your decision not to have a dialogue with Parliament—in direct contradiction to the approach that you set out—a result of the timing of the request and the lack of an Audit Committee? I believe that we had a Presiding Officer, who could be thought of as a representative of Parliament. Was there some other reason that led you to decide that you did not need to have a discussion?
The answer to that is comparatively straightforward and was, I think, implied in the question. This committee and the other committees of the Parliament were not formed at the time. You are right to say that it is a most unusual circumstance that I should be asked whether I could produce a piece of work in order to inform some important decisions that were being taken. The work had been planned earlier—the new timescale was undoubtedly tight, but it was in the public interest for us to do the work.
I do not have an issue with the fact that you are reporting to Parliament now; what I have an issue with is that, when I asked you the question on numerous previous occasions in the then Audit Committee, you said that if you were ever in such a situation again, there would be dialogue with Parliament. On this occasion, Parliament was in session. The Audit Committee may not have been constituted, but Parliament was in session. I am interested to know whether there was any dialogue—letters or an intimation to the Presiding Officer or to Parliament itself—to suggest that the work was being undertaken. From what you have said, I have my answer.
I do not think that we want to labour the point, but I will give Mr Black the chance to respond once more.
I have nothing to add, other than to say that I hope that the committee generally agrees that it has been in the public interest to have the analysis and information available to Parliament before key decisions were made. The alternative would have been for me to do nothing until the Audit Committee was properly constituted, in which case the analysis in the report would not have been available to you.
Another option would have been to write to the Presiding Officer, but I will say nothing more.
Margaret, do you want to ask any other questions about the trams project—preferably questions that the rest of us fully understand?
No, that is enough.
I can see that there is a history behind this.
Mr Black, in your report, you express clear concerns about the governance arrangements and the procurement strategy for EARL. In paragraph 85, you talk about the establishment of the EARL project board and about its record of meetings, which you also referred to in your opening comments. Who established the EARL project board? Who brings the partners together? Why did the regularity of meetings break down? There seems to be a 10-month period during which the board did not meet, and since February 2007 it has met only twice. What has been the problem with relationships on the board? The board is clearly critical to driving the project forwards.
Transport Scotland is the project sponsor for EARL and it has commissioned TIE to help it to progress the project. In other words, TIE's role is much more limited than it is in relation to the trams project. Transport Scotland and TIE were the key players in bringing together the original board. As we describe in paragraph 85, the board has not had many meetings—it did not meet between April 2006 and February 2007, and it has met only twice since then. That is a matter of fact. I am not able to help you with the reasons for that; Transport Scotland would be in a better position to explain.
When you compiled your report, did you speak to all the partners?
Personally, I did not. The team's main contact has been with the project sponsor, Transport Scotland, and with TIE. I invite Angela Cullen to tell the committee about the contacts that we have had with the other bodies, which have been fairly limited.
As the Auditor General said, we have spoken to Transport Scotland and TIE and have had limited discussions with Network Rail and BAA, just to clear the facts in the report and to ensure that what we were saying about them was accurate. We did not engage with Network Rail and BAA throughout the process to gather the facts; we gathered the facts from Transport Scotland and TIE and then cleared them with Network Rail and BAA.
So Network Rail and BAA did not take the opportunity to raise any concerns about the lack of meetings. Surely people in that position must have recognised that no progress was being made and that something needed to be done.
They did not. We did not ask them about that. When we asked Transport Scotland and TIE about the position, they clarified that the role and remit of the project board had not been agreed by all the partners and that Network Rail and BAA were not full members of the board but were on it merely in the capacity of observers.
It might also be worth noting that we mention TIE's attempts to advance the process in paragraph 87, in which we say:
Do you have any information on whether that will go ahead?
No.
I have a final, brief question. As the lead body, Transport Scotland needs to make progress. In your discussions with the organisation, did you get any indication that it recognised the urgency of the situation and wanted to do something about it?
We can give you an assurance that Transport Scotland has been very active in trying to move the process forward. There is no doubt about that. The same can be said of TIE. We reflect that in paragraph 87. They have been trying to work to an agreed framework, but so far that has not been achieved.
Why has it not been achieved?
I am sorry, but we do not have the answer to that.
Would it be correct to say that, instead of thrashing out the remit at board meetings, the partners have circulated draft remits to each other in correspondence?
I am not sure that I can help you with an answer to that.
The role and remit of the board and the partners were discussed at an earlier stage, but they could not be agreed on, which is why the board went into abeyance.
Paragraphs 84 to 91 of the report seem to be making serious criticisms of the governance process and the lack of a clear procurement strategy. I am new to the committee and do not have a great deal of experience of reading reports such as this. Could you indulge me with an idiot's guide to the degree of seriousness with which you view the failures in this project? In your experience of dealing with public sector projects of this scale, are the failures in this project very serious, serious or quite serious? How would you pitch this project and the failures that you have identified in comparison with other projects?
One of the fundamental differences between the trams project and EARL is that the trams project was primarily a sub-regional project centred on Edinburgh, so there was a clear role for the City of Edinburgh Council, supported by the Executive, to sponsor the project and, in effect, champion it. The council created TIE, with support from the Executive, to make the project happen, and that was all put in place appropriately.
That is very helpful. To clarify, you said that Network Rail and BAA were not fully signed up to the project.
I think that it is fair to say that at this stage. By that, I mean that they have not committed funding or agreed the specific role that each party will play in the project.
Is it therefore fair to say that, in your view, and from the point of view of public finances, it would be unsafe to proceed further with the project without resolution of the issues that your report identifies?
That is a matter for the cabinet secretaries and Parliament to determine, but I hope that the analysis that is presented in the report will inform that judgment.
Are the issues that you have identified resolvable? If so, what is a realistic timescale for their resolution?
I am sorry, but I would be speculating on the basis of inadequate knowledge about the extent to which the issues can be readily resolved and how long that might take.
So might they be irresolvable?
I have no view on that one way or another.
Good try, Murdo.
Earlier, you spoke about an immediate wind-up cost for the trams of between £27 million and £35 million and a cost of £4 million for every month that the project is delayed. What would the figures be for the EARL project?
The figures would be much lower because no contracts have been let. That is a significant difference. Perhaps one of my colleagues has some indicative numbers at this stage.
We do not have any numbers at this stage. As the Auditor General said, no contracts have been let, so there are no penalty clauses. Further, fewer staff are working on this project, which means that redundancy costs will be lower than they would be in relation to the trams project.
Paragraph 70 of the report says:
As you might imagine, my answer is that that is a question that is best put to BAA, possibly through Transport Scotland.
Certainly, some of the benefits will go to the public. They will also go to the likes of BAA and airlines. Have any airlines been contacted with a view to getting them to contribute to EARL or the trams project?
We have no knowledge of that. We would not have that information. Certainly, we have not made any contact.
In paragraph 43, you analyse nicely the benefits of the tram project in terms of jobs, homes, factory space and so on, all of which relate to the city. However, the economic appraisal of the project's benefits is not spelled out in your report. Can you give us figures on that, or is there a consultant's report that spells out the benefits in a great deal more detail, which we could get hold of very quickly?
The numbers in the economic appraisal are given in paragraph 70, and a footnote gives the source as the "Design Development Appraisal Final Report" on the airport link, which was produced by the consultant Scott Wilson Halcrow in December 2005.
We should be able to get hold of the Scott Wilson Halcrow report; it is a public document. Will it contain the analysis that I am asking about?
Yes. I am sure that you can have access to the report through Transport Scotland.
That would be helpful.
We will try to help members with that.
Is information available on risk assessment and management for EARL? Are issues to do with governance and procurement strategies, which are mentioned in the summary, actively being addressed by the partners? What progress has been made?
Given the uncertainty about all the analysis to do with the project, it is unfortunately not possible for us to say more than we have said. The cost estimates were well done at a high strategic level but, until the project is further developed, it will not be possible to give further assurances about the numbers. Likewise, although it is reasonable to conclude that the original deadline for completion will not be attained, we are not in a position to advise by how much the project will be delayed.
Are the risks that have been identified being addressed and corrected?
How the risks can be contained will not be clear until there is a procurement strategy and costs start being tested in the market, but it is not possible to agree and take forward a procurement strategy given wider uncertainty about the project. We are in a chicken-and-egg situation, because it is not feasible for Transport Scotland or TIE to move the project forward while there is a high level of uncertainty about the availability of funding for the scheme's progress. Given the current position, it is unlikely that much is being done to move the project forward.
Do you agree that for any major transport project the risk decreases over time? Is this too early a stage to review the project?
Yes. In essence, at the early stage of a project we expect to see a broad, indicative cost, a comparatively small amount of which is firm, because none of the contracts has gone to market. As a project proceeds and more of the cost is known because bids have been received and tested, the risk element of the indicative cost might reduce. That is the normal profile that we would expect. As I hope I have indicated, the trams project is well through that process, but EARL is well back in the process.
So you agree that this is an early stage to review the project.
Yes.
I want to pick up on a point that Caroline Gardner made about a procurement strategy. The two issues appear to be governance and procurement. Are those issues irrevocably linked? Caroline Gardner said that she could not see progress on a procurement strategy because of the other problems. Who takes decisions on the procurement strategy? Why can progress not be made on it, even if efforts are continuing to pull people together round the table with respect to governance? Are the two issues fundamentally linked?
Governance and procurement are closely linked. I will clarify what I hoped I said. It is difficult for either Transport Scotland or TIE to make progress on the procurement strategy because of the high level of uncertainty about the EARL project. That said, paragraph 20 of the review states that there is more uncertainty about the project than we would expect at this stage because of the uncertain governance arrangements and the lack of a clear procurement strategy. Over time, risks are managed down by getting more certainty about costs, about the way in which cost or time overruns will be managed and about who will bear the risks.
So we are back to the fundamental point about the key partners. The Auditor General said that there is no criticism of Transport Scotland and TIE, but I take it that there is at least an implied criticism of BAA and Network Rail. The fundamental issue is ensuring that people progress the project; if they do not do so, uncertainty and risk will remain and a procurement strategy cannot be implemented.
All the partners must agree the governance arrangements in the way that is set out from paragraph 79 onwards. Without agreement about who will play what role in the project, it is hard to work through how key decisions on the procurement strategy, for example, can be taken.
As colleagues have finished their questions on factual matters relating to EARL, we shall now have a five-minute comfort break.
Meeting suspended.
On resuming—