Edinburgh Tram Inquiry Review of Financial
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EDINBURGH TRAM INQUIRY REVIEW OF FINANCIAL MANAGEMENT AND GOVERNANCE REPORT JANUARY 2018 CIPFA CIPFA FINANCE ADVISORY 77 Mansell Street London E1 8AN Phone: 0207 543 5600 Email: [email protected]. Certificate No. 5631/06 TRI00000264_0001 Contents Section Title Page 1 Executive Summary 3 2 Background 13 3 Financial Management 15 4 Governance 76 5 Concluding Comments 83 APPENDICES Appendix 1 Sources of evidence Appendix 2 Glossary/Terminology – Local Government Finance Appendix 3 CIPFA FM Model – Relevant Statements of Good Practice 2004, 2007,2010 Appendix 4 Estimate of Revenue Impact of additional spend on the Edinburgh Tram Project Appendix 5 CIPFA The Role of the CFO in Public Service Organisations Appendix 6 Good Governance CIPFA/OPM 2004 Appendix 7 Delivering good governance in Local Government Framework 2016 Edition 2 TRI00000264_0002 1. Executive Summary 1.1 In January 2017, the Edinburgh Tram Inquiry commissioned CIPFA Business – Finance Advisory (the commercial arm of the Chartered Institute of Public Finance and Accountancy) to provide a report on the financial management and governance of the Tram Project. 1.2 Whilst we express certain views in this report, on the basis of the evidence available to us, the purpose of this report is to avail Lord Hardie, as the ultimate fact finder and decision maker, in coming to his own views in these matters on the basis of all of the evidence before him. 1.3 This report outlines CIPFA’s position on this work to January 2018. Context 1.4 The Edinburgh Tram Project was one of Scotland’s largest capital projects. The City of Edinburgh Council (CEC) approved a new transport strategy in 2001 incorporating the reintroduction of trams. In 2002 a CEC wholly owned company Transport Initiatives Edinburgh (Tie) was formed to specifically deliver such a transport strategy. The Scottish Executive Transport Minister granted funding of some £375 million for the development of a Tram network and in 2006 Bills to construct a tram loop connecting Granton and Leith to the city centre as well as a link from the city centre and Edinburgh Airport at Turnhouse received Royal Assent. 1.5 In 2007 the Scottish Government approved a revised grant of £500 million with CEC agreeing to fund any additional expenditure. In 2008 contracts were agreed with Tie and a consortium of contractors. The first paying passengers boarded a route (substantially reduced from the original concept design) from York Place to Edinburgh Airport on 31 May 2014. The overall project capital cost has been established as £776.5 million (excluding revenue running costs and interest payments on additional borrowing) with CEC funding the balance of £276 million over and above the Scottish Government funding of £500 million. Approach 1.6 The scope of our assessment of evidence was made against Good Practice Standards on Governance, Financial Management and Financial Reporting in relation to: . Funding, Borrowing and analysis of Capital Expenditure . Contract Management . Financial Management Capability . Governance – Compliance . External Scrutiny 3 TRI00000264_0003 Best practice standards 1.7 In order to provide an in-depth desk top review we outlined a range of documents and data sources relevant to our analysis. The Edinburgh Tram Inquiry Team were able to provide CIPFA with full access to a wide range of relevant sources of written evidence in the form of project related documents and witness statements. Using such sources of evidence we were able to assess critical decisions and management practices against relevant standards of best practice that prevailed during the currency of the project. These standards were: . CIPFA Financial Management Model including prevailing legislative requirements on Prudential Borrowing and Best Value . The role of the chief financial officer (CFO)in Public Sector Organisations – CIPFA . CIPFA Governance Mark of Excellence Standard – The Good Governance Standard for Public Services – The Independent Commission on Good Governance in Public Services – CIPFA/Society of Local Authority Chief Executives (SOLACE) 1.8 Due to the integral nature of the role of the CFO within the overall CIPFA Financial Management Model we have outlined our assessment under the two headings of Financial Management and Governance. Evidence 1.9 Primary sources of evidence consisted of:- . Document Review . CIPFA data. 1.10 It should be recognised that this assessment work is carried out on a restricted set of evidence and should not be seen as an indicator of the overall strength of financial management and governance capability at CEC/Tie. The CIPFA Financial Management Model (FM) is the “gold standard” globally for best practice on Financial Management in the Public Services and is used extensively in North America, the Middle East and Australasia. CIPFA has developed the Statement on the Role of the CFO in Public Service Organisations setting out an overarching principles- based framework that is intended to apply to all public service organisations and their CFOs, irrespective of where they work. The Statement draws on established good practice and regulatory requirements, as well as the requirements of CIPFA and other professional accountancy bodies’ codes of ethics and professional standards. In order to assist with the assessment we formulated an approach applying the most relevant statements and supporting questions from the CIPFA FM Model and the Statement of the role of the CFO to various components of evidence in scope. 1.11 Applying the relevant standards of prevailing good practice we were able to identify twelve specific financial management related activities identified from available 4 TRI00000264_0004 inquiry evidence which potentially did not meet good practice. In terms of potential causal drivers some of these areas are inter linked. These areas mapped to specific good practice statements were as follows:- No Good Practice area 1 Procurement and Financial Management 2 Financial discipline and decision making 3 Funding and strategic financial planning 4 Budget setting 5 Financial and operational performance monitoring 6 Financial performance accountability 7 Risk Management and internal controls 8 Governance oversight 9 Value for Money 10 External Financial reporting 11 Asset Management 12 Financial skills 1.12 Comments on these headings are outlined below (and are discussed more fully later in the report): Procurement and Financial Management . Report to CEC Policy and Strategy Committee on 13 May 2008 seeking approval on Financial Close and approval of revised project budget within a financial envelope of £545m lacked appropriate rigour on the reasons for a ‘very late’ substantial cost increase and risk realignment back to the CEC/Tie client . Undue impetus to complete financial close – failure to consider delaying/aborting financial close until a more measured strategy could be formulated . There was a failure to appreciate that significant works were still to be designed and as a result there was an inability to properly deal with procurement issues and risk transfer at financial close . The ‘Benefits of the final deal’ put to members in reports to Policy and Strategy Committee on 13 May 2008 and Tram Sub-Committee on 16 June 2008 (“Immediate contract close on preferred terms”) were significantly overstated Financial Discipline and Decision Making . Failure to fully consider the option of abandonment and contract termination with the consortium at specific trigger points – including consideration of Audit Scotland advice “CEC and Tie will need to consider fully the consequences of alternatives including termination the contract with BBS”1. The total (historic cost) value of assets in the CEC balance sheet is £774,112,349. Expenditure up to 2008/09 (31 March 2009) totalled £221,581,646 some 29% of the final grand total. As it was evident in 08/09 that performance/contractual problems were 1 Edinburgh Trams – Interim Report – Audit Scotland – February 2011 – ADS00046_001 – Page 6 5 TRI00000264_0005 emerging there should have been appropriate focus on the option of termination (if, of course, there were good grounds for terminating the contract) . Lack of transparency around the precise costs of termination including compensation . Lack of rigour and transparency around the calculation of economic benefits payback per £1 of costs for final phasing . Potential undue impact on decision making arising from the accounting treatment of aborted assets and impairment under the statutory framework – Code of Local Authority code of practice on local authority accounting in the United Kingdom 2010/11 based on International Financial Reporting Standards (IFRS) – potentially incorrect assumption that termination would require a full one year charge to the Council’s General Fund to ‘de-capitalise’ expenditure incurred to date of termination . Potentially incorrect base assumption on £500m of Scottish Government grant funding received and impact on the Council’s General Fund due to termination Funding and strategic financial planning . Lack of rigour on decision on gap funding by borrowing beyond the original £45m commitment from CEC . Imprudent assumptions on capital receipts as a source of funding of the ‘over run’ . Lack of full transparency on the decision making around CEC financing of project costs beyond Scottish Government funding. Borrowing exposure of project ‘over run’ of £231.6m beyond revised project budget of £545m. On financing this additional spend there was a shortfall in developer contributions of some £15.5m. This required a total increase in borrowing of £247.2m and this equates to a revenue impact of some £14.3m per annum charged to the CEC General Fund and met by usual sources of Grant, Council Tax and Revenues. This £247.2m of ‘over run’ and funding deficiency equates to approximately some £429m over 30 years including interest of some £6.6m per annum . Lack of transparency over the opportunity cost of project strategy as CEC’s contribution grows from £45m to £276m- opportunity cost of overrun and project management costs would have had a negative impact on the financing of other CEC services – with a consequential impact on Council Tax payers and CEC service users .