Edinburgh tram project ‘in trouble right from the start’

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THE tram project was destined for trouble right from the start, the final witness has told Lord Hardie’s inquiry into the fiasco.

Consultant Stuart Fair said the contract was signed too soon, risks were not properly costed and the council had problems communicating with its tram firm TIE.

Lord Hardie will now hear close submissions before producing his findings, Picture: Lisa Ferguson

Lord Hardie will now hear close submissions before producing his findings, Picture: Lisa Ferguson

He also said the council should have given more serious consideration to terminating the project when it ran into difficulty.

He calculated the cost of the overrun as the equivalent of a £75 per year increase in the average council tax.

And he criticised the lack of a proper appraisal system for payment of bonuses and noted that £2 million was handed out in termination payments when TIE was wound up, without the approval of the council’s finance or legal directors.

Mr Fair’s report on financial management of the project was commissioned by the inquiry from the Chartered Institute of Public Finance and Accountancy.

It said the case presented to councillors in May 2008 for approving the project “lacked appropriate rigour” and there was a failure to consider delaying the go-ahead “until a more measured strategy could be formulated”.

The report also concluded the council placed “undue reliance” on TIE managing risks and lacked an ability to deal with poor performance by TIE.

Mr Fair told the inquiry: “The project was beset by difficulties from the very start. Looking at the evidence it felt these initial difficulties set the scene and the die was cast for significant problems to arise.

“The most frustrating thing that comes across in the evidence is that there was certainly a will to employ good practice, there were frameworks in place that should have delivered a much better outcome, but they didn’t.”

He said the procurement arrangements also looked “pretty solid” initially but by the time the contract was agreed in May 2008 the seeds had been sown for “real problems ahead”.

“There is certainly evidence there was undue haste to enter into financial close and perhaps members were not given the correct information to make an informed decision and there was a lack of understanding about the contract and that contingency and risk was never properly evaluated. The council and TIE were locked into a contract that was insoluble effectively.”

Mr Fair also said he was “not wholly convinced” that the final £776m bill for the trams was the true cost of the project.

He said reinstatement works from St Andrew Square down Leith Walk and the legal costs of disputes over the contract had not been included and there were also questions about overheads. “Putting these together, we had some difficulty accepting £776m was the final cost of this project.”

And he claimed the option of terminating the project was not properly considered at various junctures.

The mediation deal agreed in March 2011 had “certainly saved the project” he said. “But still at that point there were opportunities to consider termination. We don’t think all the options were properly evaluated.”

The inquiry also heard from Professor Bent Flyvbjerg, an expert on megaprojects from Oxford University, who was commissioned to write a report on risk and optimism bias, a factor now built into cost estimates for major projects.

He explained: “When you assess risk, based on the subjective valuation of experts, there will be a bias in the outcome. We all tend to be basically optimistic.”

He said the best way to deal with bias was to use hard facts about how other comparable projects had gone.

The tram project had followed the recommendations made in the official guidance, but he said its estimate of risk had been too low.

When the contract was awarded the allowance for optimism bias had been set at zero per cent on the grounds all risks were known.

But Prof Flyvbjerg said: “Risks are never fully known in the sense that you can eliminate the optimism bias uplift. So the fact that this is set at zero is an indication that they don’t understand the nature of risk or the nature of optimism bias.”