Y Pwyllgor Cyfrifon Cyhoeddus - Y Bumed Senedd
Public Accounts Committee - Fifth Senedd28/09/2020
Aelodau'r Pwyllgor a oedd yn bresennol
Committee Members in Attendance
|Angela Burns MS|
|Delyth Jewell MS|
|Gareth Bennett MS|
|Jenny Rathbone MS|
|Nick Ramsay MS||Cadeirydd y Pwyllgor|
|Vikki Howells MS|
Y rhai eraill a oedd yn bresennol
Others in Attendance
|Adrian Crompton||Archwilydd Cyffredinol Cymru|
|Auditor General for Wales|
|Andrew Slade||Cyfarwyddwr Cyffredinol, Grŵp Economi, Sgiliau ac Adnoddau Naturiol, Llywodraeth Cymru|
|Director General, Economy, Skills and Natural Resources Group, Welsh Government|
|Andy Falleyn||Dirprwy Gyfarwyddwr, Cyflenwi Seilwaith, Llywodraeth Cymru|
|Deputy Director, Infrastructure Delivery, Welsh Government|
|Matthew Mortlock||Archwilio Cymru|
|Nick Selwyn||Archwilio Cymru|
|Simon Jones||Cyfarwyddwr, Seilwaith yr Economi, Llywodraeth Cymru|
|Director, Economic Infrastructure, Welsh Government|
|Stephen Lisle||Archwilio Cymru|
Swyddogion y Senedd a oedd yn bresennol
Senedd Officials in Attendance
|Claire Griffiths||Dirprwy Glerc|
|Tom Lewis-White||Ail Glerc|
Cofnodir y trafodion yn yr iaith y llefarwyd hwy ynddi yn y pwyllgor. Yn ogystal, cynhwysir trawsgrifiad o’r cyfieithu ar y pryd. Lle mae cyfranwyr wedi darparu cywiriadau i’w tystiolaeth, nodir y rheini yn y trawsgrifiad.
The proceedings are reported in the language in which they were spoken in the committee. In addition, a transcription of the simultaneous interpretation is included. Where contributors have supplied corrections to their evidence, these are noted in the transcript.
Cyfarfu'r pwyllgor drwy gynhadledd fideo.
Dechreuodd y cyfarfod am 09:32.
The committee met by video-conference.
The meeting began at 09:32.
Can I welcome members of the committee to today's meeting of the Public Accounts Committee? We've received one apology from Rhianon Passmore, and no substitutions. Do Members have any declarations of interest they'd like to make? Okay, as I've said in previous meetings with housekeeping, everyone will need to unmute their microphones once prompted to do so by AV/IT.
Item 2, papers to note, and following the evidence session with the Welsh Government on 3 August, when we considered the effect COVID-19 had on educational services, I wrote with a number of requests for additional information. The response has been received and is in your pack, pages 1 to 9. I'm mindful that, regardless of the responses given in this letter, Members may well have ongoing concerns and you've no doubt heard from constituents following the school restart. The COVID-19 landscape is rapidly developing and has changed since we wrote for information on this letter, with the start of the school term. I think that some of the issues raised in the response fall within the remit of the Children, Young People and Education Committee. I know that some Members may have comments they wish to make on this letter, so Jenny Rathbone.
I declare my interest in that I chair the cross-party group on Gypsies and Travellers. The letter is very revealing, but I'm afraid it reveals that people are not stepping up to the plate with their responsibilities, because the Housing (Wales) Act 2014 requires all local authorities to have a Gypsy and Traveller site, and we already know from this letter that that is not the case. And when they do surveys, only six local authorities bothered to reply; no response from eight local authorities. That is why we're in the situation we are in, which is that only half the sites, as we heard in Plenary, have any form of internet access at all. Given that most public services and, indeed, private services are now being delivered more online than on paper, this is a really serious matter. So, this is not just a matter of the lowest performing ethnic group of children in our country bar none, but it's also about the right to services of a particular section of the community. So, this is not a reassuring letter at all.
I was going to propose that, well, firstly, we note the letter, but also that we share it, I was going to say with the CYPE committee, but I suppose it could be shared with the local government committee as well, Jenny. How would you feel about that?
It's entirely appropriate, because the local government committee has got to chase what the Government is doing to ensure that local authorities are meeting their obligations under the planning Act.
Yes, okay, we shall do that then and ask them if they will consider keeping that under review.
Item 3, and the effectiveness of local planning authorities in Wales, consideration of the Welsh Government response. The committee's report on the effectiveness of local planning authorities in Wales was published in June 2020. The committee made eight recommendations, which have all been accepted. The Welsh Government have outlined some suggested actions to address these, but there are no timescales attached to a number of the actions. It's very unclear how long they intend to need to make progress. Recommendations 5, 6 and 7 are all accepted, but the committee may wish to seek further detail on how these actions will be implemented. Nick from the audit office, did you want to comment on this item?
Yes, thank you, Chair. I think you've pulled out the salient points, particularly the issues around recommendations 5, 6 and 7. As the committee will recall, two of the areas that you really focused on in your evidence gathering were around place planning and your expectation that this area needed further strengthening. I think you made a recommendation that really focused on making place planning a statutory requirement. The response from Welsh Government doesn't really address this particular issue. On recommendations 6 and 7, you took a lot of evidence on section 106 agreements and how they were not working at this time. Again, whilst the response from Welsh Government shows a willingness to accept the need to change, I think the actions don't really address the points that you made in the report.
Would it be fair to say that the response is a bit woolly?
I think it's both a bit woolly and a bit unclear in terms of timescales, but specifically on the section 106 agreements, recommendation 7. They passed the proposal for improvement back to local authorities to take forward under the local government Bill, which could be several years away when they set up regional committees and get new systems in place. On the other part of the section 106 agreements, there is a recognition that the current data is out of date and they don't really have the evidence to understand it, and whilst they said, 'Yes, we will update the information', it doesn't really clearly set out how they intend to use that information then to drive improvement.
Okay. So, I think, unless Members have—. Jenny, did you want to come in on this?
Yes, I share Nick Selwyn's concerns, because place making is becoming absolutely central to how we use our towns and cities in light of COVID, in light of the climate emergency. If we don't have these things properly embedded into the system, we are simply not going to get it right, and we're going to be making wrong decisions.
I think that to simply pass the buck on to local authorities in a way that will actually be years down the line isn't good enough, so I would agree with you there, Jenny. Are Members happy if I write to the Welsh Government and express our concerns and ask for greater clarity on the timescales and responsibilities? Yes, okay, we'll do that then.
Right, moving on to item 4 then, our substantive item today, and the A465 section 2 road improvement, an evidence session with the Welsh Government, who have just popped up magically on my screen now. Could I welcome the witnesses to our meeting today? Starting with Andrew today, would you like to give your name and position for the Record of Proceedings?
Morning, Chair, and morning, committee. I'm Andrew Slade, the director general for economy, skills and natural resources, and I'll ask Simon and Andy, in that order, to introduce themselves.
Morning, Chair. Morning, committee. My name's Simon Jones, I'm the director of economic infrastructure, which includes transport.
Morning, Chair. Morning, committee. I'm Andy Falleyn, I'm a deputy director in Welsh Government. I'm responsible for the strategic road network in Wales, including the enhancement of it.
Great. Thanks for being with us today. We've got a large number of questions, so if Members and witnesses could be succinct, that would be helpful. As you are aware, the second section will then be switching to the Microsoft Teams tool.
I'll kick off with the first questions then, and question 1. Following earlier delays, you had been expecting completion by spring 2021, but your paper says that you'll now be seeking further clarification from Costain about the final completion date. Why is this not already more certain, and what are the key risks and challenges that remain for the construction?
Well, Chair, I think you make an important point there, which is about the dialogue that is ongoing with Costain, the contractor. As we've agreed with you as a committee, we will pick up some issues outside of public session in a way that is appropriate. We can't say, on some topics, too much, because we are still effectively in an arbitration and mediation process with the company. The work is about 90 per cent complete. This is a key part of the dualling of the A465, a project that had its inception back in the 1980s, and is a key route that is seen as part of the trans-European network, so it's a key strategic route for us in Wales and in terms of what it provides at a local level and in terms of a boost to the economy and more generally to society in that part of Wales. We've got a lot of work still to do with the company. We hope that we can get to a point that, in principle, the work could be completed by next summer, but that requires all parties to work together to bring this to completion. One of the points that I expect we'll bring out during the course of this session is this very important question about where risk lies in complex and expensive capital projects where there are lots of challenges involved in delivery on the ground, and making sure that we have arrangements that work effectively to protect the public purse, but recognise the realities of getting jobs done in what can sometimes be tricky terrain. I daresay we'll pick those points up as we move forward through the session.
You previously anticipated that the eastern section of the scheme might be completed by the end of 2019, and, when this didn't happen, you were looking at whether it could still be completed earlier than the full completion date. Is that still a possibility, or are we looking at that being delayed further?
It is a possibility. We don't think it will necessarily make a huge amount of difference in operational terms. I might bring Andy in in a moment just to explain what that would and wouldn't necessarily facilitate. I don't think a great deal of additional work is needed for that portion of the route, but, equally, the contract that we have with Costain does not give us a particular lever to require that to be done first. So, I think, in making headway on that, we would need to be mindful of the impact on the whole process and not just that section. But am I right, Andy, in saying that that wouldn't make a vast difference in terms of operability of the route?
Yes, that's right, Andrew. We still have a major element of work to complete, especially for westbound traffic halfway up the gorge, if people know where that is. So, opening up to the eastern end would not achieve any significant operational benefits to the trunk road network; we still would need to retain traffic management in certain sections. So, from that viewpoint, you're absolutely right—whilst we were looking to bring that element of the work forward, it doesn't gain much as far as the trunk road network is concerned. Progress on that is linked, as you may have suggested, Andrew, to the commercial aspects around this project, and we can perhaps give a little bit more flesh on the bone in the private session.
You just mentioned the traffic management issue, and your paper refers to a major traffic management switch in mid August 2020 to facilitate completion of the final phase. Did that switch happen, and what did it entail?
I'll step in there, Andrew, if that's okay with you. Yes, it did. We refer to it as TM8. It was a significant change of the traffic arrangements, and it occurred at the western end of the scheme near Brynmawr. The reason that it was introduced was to move traffic. There's an elevated section of the scheme that's been completed now for traffic heading on an eastbound direction in order to effectively complete the scheme, that is, complete the works from Clydach—if people know where the scheme is, that's halfway along the scheme—up to Brynmawr. It was necessary to close off access to Brynmawr at that location. There are two elements of that—there's the construction of a slip road from Brynmawr roundabout for westbound traffic. That is currently closed at the moment. That is scheduled to take four months to complete. Then the remaining element, which is for traffic wishing to turn off the road, travelling in a westbound direction into Brynmawr from, shall we say, Abergavenny, that's been closed, and we anticipate that being closed till the end of the project. So, yes, that took place in August of this year.
Thanks. And finally from me, before I bring in other Members, could I just ask about the COVID-19 pandemic and the effect of that? Was there any benefit in terms of lower traffic volumes, allowing the contractors to actually get on with the scheme less hindered than they would otherwise have been? And are there any possibilities in the future that a second wave, or even a third wave, could impact the delivery time and the costs?
Fundamentally, in terms of taking advantage of, shall we say, lower traffic levels on the trunk road network, that didn't bring a fundamental advantage to the completion of this project, because access to the network is arranged through our trunk road agents anyway. The benefit it would have had, in inverted commas, is that, when road closures or weekend closures, of which there have been numerous, as I'm sure you're aware—the impact on the surrounding communities would have been reduced because of the reduced level of traffic diverting.
We have—. Sorry to interrupt. We have, on other parts of the network, where we are doing, shall we say, more maintenance work on the live trunk road, taken advantage of the lower traffic volumes, but in this specific location there wasn't a great advantage or benefit to be had.
And in the future, it's not anticipated that a second wave or a third wave of the virus—the pandemic—would have any significant impact either.
Well, I'll just mention on that, and I'll then let Andy come in. The trouble is, Chair, we don't really know. If we end up with areas in lockdown and it impacts on suppliers and on the supply chain, that will inevitably have a bearing on the completion of the project. We don't completely know what will happen in the context of the end of EU transition at the end of this year. Again, if that started to have an impact on particular supply routes, that again is something where we may see an impact. Andy, did you want to add to that?
Yes, I just wanted to add to that to reinforce what you've said, really, in some respects. We don't know. Obviously, the measures that were taking place—there was a two-week stand-down on the project when lockdown first started back in March to reappraise working methods so that they could be done in a safe manner. And work is proceeding on site with limited impact on productivity as a result of COVID-19. But, of course, depending on what happens in the future—. The issue is that, if a greater number of people are self-isolating, that could cause a problem in terms of resources—not so much resources on the site itself, but also in the supply chain. One of the early issues we had when people were self-isolating was supplies from quarries. One of the challenges we had, obviously, was that, even though most of the workforce are local, if specialist staff needed to come in, they were having difficulty arranging accommodation. So, that's the type of thing that could catch us out in the future. But most construction sites now have addressed the challenge of COVID-19; it's outside factors that could have a bigger impact on productivity.
Okay, thanks. I'm going to bring in the other Members now, and Gareth Bennett.
Thanks. I wasn't sure it was my section next, but—.
Oh, sorry, it's my mistake. It's Jenny Rathbone. I could see Jenny's hand going up. Jenny Rathbone. Sorry, Gareth.
Thank you very much. The costs on this project have yo-yoed all over the place over the last five years—£223 million in December 2014, £321 million in November 2019, which is what prompted the Wales Audit Office inquiry, I assume. Your current estimate is that it's now going to cost £308 million. On what basis are you putting forward this revised cost?
Well, again, this is a tricky area, because we are in the middle of a series of discussions with the contractor, Ms Rathbone, as you'll be aware, and this may be something that we can pick up in a little bit more detail in private session. The main thing at play here is this question that we have been testing, including through arbitration, around who owned the design of the project. This was a design and build, target cost contract. We are very clear that the design lay with the contractor—the works information—and that is what has been borne out through the arbitration process. You'll be aware that Costain made a statement to the market recently with regard to that, and that is going to have a major bearing on the final cost to the public purse. There's a limit to what we can say about that right now, and, indeed, we will need to go forward through the rest of the build process to get to a point where we can determine the final cost, but we're still in arbitration and discussion at the moment on some of these issues. I don't know—Andy, do you want to add any more? Is there anything we can safely say now in public?
I think you've picked up the main points. Just to point out, there are a number of elements that contribute to the overall cost of the project, and that's the cost of land, the cost of diverting statutory undertakers apparatus, the cost of our contract management team, but by far and away, obviously, is the cost of constructing the scheme. In determining or identifying what we consider to be the final cost to the public purse, we have to take into consideration the various dispute resolution processes that have taken place and the findings of those. I think, as Andrew said, at this present moment in time, because we are still in the situation of completing discussions on the outturn cost of the scheme, we probably can't say a lot more in a public section; we may be able to add a little bit more flesh on the bone privately.
Okay. I'll come back to that later, then. Could you just tell us whether you're budgeting for the possibility of increased expenditure on this over and above your current estimate?
Andrew, did you want to step in there, or—
Well, again, I think we need to be careful here because, if we're saying we've got particular things in mind in respect of budget, that will inevitably have a bearing on the dispute resolution process. We've made some adjustments already in relation to COVID-19 and that's set out in the target cost arrangements. We've adjusted the budget in light of what has happened in relation to the Anacomp adjudication, which was one where we agreed, ultimately, with the company's position. So, there is movement but I don't think I would want to get into too much more detail than that. Again, Andy's closer to the detail and he may be able to say more publicly, but I think that would generally be our position.
Okay. Thank you, Andrew. Obviously, these early contractor involvement frameworks are supposed to avoid disputes but, clearly, you've had to incur additional professional and legal costs as a result of all this to-ing and fro-ing. How have you balanced that expenditure against the risks associated with the outcome of this dispute resolution?
That is a good point. Fundamentally, the early contractor involvement arrangement—target cost, and so on, design and build—is one that we think is working well. This is an unusual case; it's not completely unprecedented, but in its scale it's been a significant departure from our general experience, and Andy might want to say a bit more about some of our other road-building projects to give you some sort of sense of context.
We've outlaid just over £2 million, I think, on legal and technical costs. That has certainly, I would argue, paid for itself in terms of money recouped from the company, the contractor, in terms of the adjudication and arbitration costs and also, as I mentioned a few minutes ago, we saw the company statement to the market very recently, a couple of weeks ago, in respect of the key finding in the arbitration process that the works information belonged to the contractor—that the design was theirs, it wasn't ours—and this is a very important point because we don't want to end up in any situation where we're muddying that position. We've got plenty of good examples where this contract model has worked really well and, of course, it's worth remembering that the Public Accounts Committee itself recommended this approach back in 2015. It's a good way to proceed, and it works in most cases. This one is unusual, for a range of reasons that we may want to explore through the rest of this session.
Okay. Just moving on, then, slightly, in light of the pandemic and the changing patterns of ways of working, how do you justify this now being value for money, given that more people will not be needing to travel to work?
Well, that is also a good question, although I don't yet know—. And Andy and Simon will have a view about this, because Simon is working hard on our remote working project; we talked a little about that previously. I think there is an opportunity for us, which the First Minister has set out very clearly, and Ministers, to do some resetting of the approach, and I think Wales has a strong offer in terms of being a great place to live and to work and you can do so remotely, and that will have an impact on travel-to-work patterns.
That being said, travel-to-work levels and general traffic levels have gone up to not far off pre-COVID amounts. At that particular point in our geography—the Heads of the Valleys—there's probably a bit more reliance on the private car than there might be in other more urban areas, where you've probably got greater access to public transport. I think, as I mentioned right at the outset, this is a strategic route that we've been working on for many years. It's a key part of the United Kingdom's infrastructure, from the midlands down into west and south-west Wales, and I don't think we can necessarily say that the value of this road or the work to dual it has been massively affected by what's gone on, but we will need to take it into account in terms of future use of our road space.
There's been a lot of work on the development of the local economy. The proportion of suppliers who come from Wales and the workforce—up around the 70 per cent mark. So, that's been an economic value to Wales as well. And, despite all, with this section of the A465, the work on the environmental impacts of the road and the work to engage the community has been pretty exemplary, including the work done by the contractor. So, there's lots of good stuff that's come from this in the midst of the delays and the cost uncertainties. I don't know whether Simon or Andy want to add to that in terms of the value.
Just to add to that, Andrew, clearly the benefit-cost ratio of this project, which looks at a very narrow area, in terms of traffic figures at the time of inception was in the order of 1.46, but this project—the A465 dualling programme as a whole—was never just about traffic congestion and safety, however important that is. Safety was a key element in improving this section of road, but there were also wider benefits.
This project was always seen as a great support in trying to address the economic challenges of the Heads of the Valleys area. As you quite rightly say, Andrew, this project, along with the other projects we've been delivering on the A465, had a significant impact on the economy. We've been working with Cardiff Business School to assess that, but, as you say, again this project with the others has been exemplary in working with the communities, not just building a project. Importantly, a significant element of the investment—in the order of 70 per cent—has gone into the Welsh economy, and the schemes have worked closely with the local schools and local businesses to bring those along.
So, yes, in specific terms, obviously an increase in costs, when you compare it to the very narrow benefit-cost, will have had an impact. But the wider consideration of this project, linked in to the overall dualling programme from Abergavenny all the way through to Hirwaun, was that the benefits would not come unless all of the projects were completed, or the benefits wouldn't be maximised. So, that's a fair point that's been raised.
I just want to emphasise that—. Would you agree that, were we to be commissioning this project today, we would have put a tram system alongside the road? Because clearly this project benefits those who have a vehicle, but probably 50 per cent of the local communities don't have a car, so, therefore, they can't benefit from this, and the public transport links across the Valleys are pretty abysmal.
It's absolutely something that could have been considered. On this specific section it would have been a real challenge, because of the narrowness of the gorge and the environmental impacts, but what can be considered in the future is reallocation of road space. We've increased road space; that road space doesn't necessarily have to be used for the private car. So, that is a resource that could be changed from private car use to public transport use. So, the infrastructure will be there; it's how the infrastructure is used.
Thanks, Jenny. Now Gareth Bennett.
Thanks, Chair. Andrew was saying earlier that the Welsh Government's now involved in an arbitration and mediation process with Costain. So, given that, how difficult has it been to maintain an effective working relationship with Costain, and how would you characterise that relationship at the moment?
I think, Mr Bennett—and Andy will come in on some of the detail, as appropriate—relations are very professional. This is a set of scenarios that nobody particularly wanted to be in, either the contractor or ourselves. We're working closely with them. Relations are, inevitably, a little bit tricky, difficult, because it's a fundamental question about who bears costs. As I mentioned—and it's worth repeating again—a couple of weeks ago, Costain accepted our view of how the contract works and that the works information, the detailed design work, rests with them as the design-and-build contractors. That has had an impact on their position in the market, and they've made a statement after that. But against that backdrop, we are continuing to have dialogue both at a strategic and a technical level with the company and working to get this resolved in everybody's interest, including those of the local community. They are professional discussions with a key contractor, an important company in the context of infrastructure projects across the UK and beyond. We're working things through in a sensible and a measured way. Andy, is that fair?
Yes. You're absolutely right. At the end of the day, when you have a project like this, that is under considerable commercial stress from the company's viewpoint, and also from Welsh Government's viewpoint in terms of protecting the public purse, clearly there are huge stresses and strains and a lot of resource input on the individuals involved in the project. But it is fair to say that both organisations and parts thereof have acted in a professional manner. You're quite right, Andrew; I've maintained contact with Costain at a strategic level throughout this project. We meet regularly to discuss how we can best mitigate this and how we can best take this forward. Yes, of course, there are stresses and strains, but it is being delivered in a professional manner. Welsh Government recently, in response to Costain's update to the market, welcomed Costain's commitments to deliver this project and maintain their contractual commitments. So, I think that's probably a reflection of, despite the stresses and strains, the fact we're all working together as professional organisations.
Okay. Thanks for that. Earlier on, Andy, I think, was going to give us some context by looking at other things—contracts that have occurred in the past. Obviously, this is on a big scale. But could you give us some of that historical context now, Andy?
Yes. Over the last 12 years, we've delivered somewhere in the order of 18 projects. The majority of those, certainly in recent years, as we've moved more towards the ECI delivery mode, have been successful. The costs, compared to the cost indicated at the construction contract award, have, generally speaking, been in single percentage figures. I can provide an updated table to the committee if they're interested. And importantly, we've had successful contracts both immediately before and after this particular project. So, I think that fundamentally suggests that the programme of procurement, in most circumstances, operates fairly well. But I can provide that information if the committee would be interested in that.
Thanks. A final question from me. There was some thought given earlier, I believe, to actually replacing Costain with a different contractor. Can you tell us any more about that, and anything about the deliberations and what was taken into account and why you decided to actually stick with Costain afterwards?
Andrew, shall I lead with that one?
I was going to say—you were a lot closer to all this at the time, Andy. These sort of considerations need to be very carefully weighed up, because you've got a load of risks in the system and you also need to prevent triggering compensation in a contractual arrangement. So, there's both costs and practical implications. But Andy can say a little bit more about the thought processes there.
Maybe I could broaden it out a little bit to start off with. Obviously, from the Welsh Government's perspective, we were starting to get increasingly concerned about progress and cost increases on this project back in 2017, and we were pressing from those early days onwards to, shall we say, bring the dispute to a head formally. Costain were not of the same opinion at the time, and were wanting to maintain discussions, which we did in parallel. The options we had were—do we stop the project altogether? By the time we were having those considerations, we were some two to two and a half years into construction. So, we had a major construction project running from Aberbaiden in the east to Brynmawr in the west. That wasn't a practical consideration. We thought about whether or not we could descope significant elements of the project, for example could we take out a grade-separated interchange. Again, we were faced with the fact that much of the major earthworks had already been well progressed as far as that's concerned. So, again, that wasn't practical.
One of the options was then do we consider terminating a contract with Costain, who in some regards were performing well, in other regards they weren't. The implications of that would be, as Andrew suggested—. If nothing else, that would have introduced at least a 12-month delay to the project, which I guess is slightly ironic in terms of the delays we've been experiencing to date, but it would be a minimum of a 12-month delay. We've experienced that on some of our other projects where the demise of Carillion came along; we had to rebid and retender those projects, and that took between 12 and 18 months. We'd be faced with that; we'd be faced with the potential of compensation payments to the contractor in terms of contractual clauses. Probably one of the more interesting and difficult challenges would be design liability. Anybody coming along at a later date would have had to accept liability for the design work that had taken place so far, and I suspect that would have been a major stumbling block in terms of agreeing it forward.
So, we did weigh those up along with our commercial and legal strategy for protecting the public purse along there, and as Andrew said right at the very beginning—and this continues to go back to risk and risk allocation—our belief was, which has been upheld by various court rulings, that our understanding of the contract and the way it should work was clear. So, we remained with that position. We did think long and hard about it, but we concluded the best way was to continue as we have done with Costain.
Thank you, Chair. So, there's been a recent arbitration decision, hasn't there, around the responsibility for the design, the scope and the specification that was set. What precedent do you think that that contains now for the Welsh Government and how will you ensure that any associated risks are managed in future?
Okay. Yes, I mean, as we've already described—and without wishing to sound like a broken record—this is all about risk and risk allocation as far as the contract is concerned. Welsh Government were quite clear in their interpretation of the contract that the design risk remained with the contractor. I mean, that's the way it's played out on ECI contracts before this one and it's the way that it's played out on ECI contracts after this one. Understandably, you might argue a commercial organisation under extreme commercial pressure starts to look at the contract and tests that to the extreme. The Welsh Government's contract has been tested to the extreme, to the highest courts in the UK, and has proven to be correct in terms of its interpretation.
So, moving forward, we have obviously identified lessons learned, of course—there have to be lessons learned out of projects like this, and ironically, often you learn more lessons from a challenge like this than you would have done otherwise. But what we're introducing into the next model document, the document based on the NEC conditions of contract—there's a new version come along, this was version 3 and then we're moving towards version 4, but the Welsh Government takes those and develops a model document—what we're doing in terms of learning lessons from those is making it clear, so we have points of clarification in terms of the risk around design ownership and the risk around ground conditions. They were clear in our contract and the decisions that have been upheld have made that point very clear. But for the avoidance of doubt, we provide clarity in the contract.
Now, that is not a significant shift in risk allocation from Welsh Government to contractors as far as those clauses are concerned. What we have done, going forward, is changed something called the pain/gain mechanism. So, without going into too much detail—although I'm happy to do that—as Andrew said earlier on, this is a target cost contract, so it's not a fixed price for the contract; there is a target that is agreed by both parties, but under the contract there are certain clauses that allow that target to be adjusted to take into consideration certain events that the contractor or the client could not have reasonably foreseen. So, that target can be adjusted. It can be adjusted up or down, but it probably comes as no great surprise that it tends to be adjusted upwards rather than downwards. But even so, the overall costs of completing the works might be greater than the target cost. In those circumstances, it's what's called a 'pain share', and the pain then is allocated between the Welsh Government and the contractor on a percentage basis, so the greater the cost increases above the target costs, eventually the percentage means that the contractor takes a greater share of that pain than Welsh Government. Sorry to go on; I'll get there in the end. So, on this particular project, once it got above a certain percentage—once it got above 30 per cent greater than the target cost, then 65 per cent of that pain cost lay with the contractor, and that's the root of this dispute. What we have done in future contracts—we've actually brought that figure down from the Welsh Government perspective such that the latest contracts we're running, once the contracts get above 15 per cent of the target cost, the pain share is all with the contractor. So, that does transfer some risk to the contractor, but we've got contracts running with that; it provides great cost certainty. But, of course, when it comes to risk allocation, again, as Andrew was saying, we could run contracts that were fixed-price contracts where the contractor has to price for everything, but, of course, then you could end up paying for risks that never come to fruition and sometimes they don't represent value for money. Does that help?
Yes, it does. In fact, I think it answers the next question I was going to ask you, which was whether there is a danger that some contractors who are looking at this and are bidding for Welsh Government work in the future might overprice, then, because they're concerned about this. So, the answer that you've given already addresses that, unless there is anything else you wanted to add.
No, I don't think so. I think I've probably gone on as much about that as I can, but, again, I'm happy to go on for another hour or two. But the reality is it's all about getting the balance right. Fixed-price contracts seem attractive in terms of cost certainty, but for value-for-money terms, they probably aren't.
Andy, as well, is it worth just saying: the contracts arrangement here has allowed us to make adjustments in live time. We haven't had to wait for a bill at the end of it all, and that's an important part of protecting the public purse, isn't it?
Yes, that is a very good point. Thank you, Andrew, for mentioning that. That was actually introduced on this contract where the pain-gain calculation is calculated as the scheme progresses. Historically, that would have been totted up at the end, shall we say, so we may well have paid out money and then had to try and recoup those from the contractor, or the contractor we were working with. On this occasion, the way the contract is written, we do that as we go along, and that's certainly helped in terms of how we can mitigate the impact on budgets and the public purse.
Okay, thank you. I've got a number of other questions, and the next one ties in nicely to—[Inaudible.]—now really, which is to ask you: regardless of where the responsibility may rest contractually, what action did the Welsh Government or its agents take to get assurance that enough ground exploration and understanding of the risks had been completed during part 1 of that contract?
Again, I think we need to be a little bit careful here not to move away from our central principle that the works information lay with the contractor. If we get to a position where we're saying it was the responsibility of Welsh Government to do different things, then that changes the nature of that apportionment, and I wouldn't want to be unclear on that point at all. Andy's mentioned lessons learned, Ms Howells, and I think one of the things we will look at is: did we get the right questions asked along the way, including by the employer's agents? There will be principles of that sort that we'll want to look at. But the fundamental position, that in an ECI contract, the design lies with the contractor—I think that's a very important point and I wouldn't want to move off that territory. I don't know whether there's any detail around that, Andy, that you can add, but I think that's our general position, isn't it?
I think you're absolutely right. Yes, of course, there are lessons to be learnt and sometimes questions could have been asked. But especially when you get into this position contractually, you have to be crystal clear about where the responsibility lies, and that's again coming back to the central message here in terms of risk allocation. It is worth recognising that, obviously, this was an ECI form of contract; the contractor and the design team were engaged before a construction contract was let. There was historic ground investigation information provided to all the tenderers that bid for this contract; additional work was—a ground investigation was carried out by the contractor to develop the contractor's design, which is necessary to be able to identify the land and be able to describe, at a public inquiry, how the scheme was going to be constructed. Historically and generally speaking, further site investigation does take place by the contractor, but that's more—it's hoped to be—confirmatory, in other words to confirm the design and to confirm elements of it, rather to fundamentally change it, which has been the issue on this project.
Thank you. The auditor general's report indicated that Costain had highlighted issues during the part 1 contract that had an impact, then, on the extent of outline design work undertaken. Are you able to tell us any more about the issues that Costain was pointing to there, and your position on them?
Well, again, I'll step in there, Andrew. It still relates to the core principle here of who had responsibility for what. There was a 24-month period leading up to the public inquiry, where a number of areas of the scheme were investigated; we looked at speed limits and we looked at other environmental areas. But from the contract's viewpoint, additional time was given to the contractor to accommodate those considerations. And then post-public inquiry, there was another, I think, 14-month period in order for the contractor to be able to reflect on their design. So, they were some of the issues. Obviously, our view is that the contractor had sufficient time and opportunity to develop the design sufficiently and accurately to be able to construct that. And I suppose, if we wanted to be a little bit brutally honest, at the end of the day, when it came to signing a construction contract for that, the two parties both had the opportunity of not signing up to this contract if they felt it couldn't be delivered, both Welsh Government without penalty, but also the contractor as well; if the contractor felt that the price and the programme that they had developed was unsustainable from their viewpoint, then they also had the opportunity of walking away from this project. So, I think it's probably fair to reflect on that.
I think that's a very important point from a strategic perspective, the way that these things are constructed, Andy. Part 1 is about getting to a point where you can go to construction and then you take things on, and there is a break point or an opportunity for people to walk away at that juncture. As you say, fairly, the opportunity was there for Costain to move away from the process and say, 'No, thank you, we won't proceed to delivery', but that didn't happen.
And one of the key problems was the original plan for a viaduct, wasn't it, which Costain, you said, then suggested a retaining wall instead, and I believe that's been a big part of the problems there? So, just wondering did other bidders propose a similar change to the design there, and if so, how did the Welsh Government weigh up any potential cost saving against additional construction risks with that?
Andy, are you able to pick up on that? Because I don't think anybody—well, I think Costain proposed more changes to the specimen contract than anybody else bidding. Is that right?
Yes, that's right. Well, through the tender process, obviously, in short, individual sections or individual proposals weren't analysed in detail, but it was a holistic approach to the bid that was taken into consideration as part of the procurement process. Confidence was given during that process. There was something called mid-tender clinics where contractors come along and present their proposals. Again, this took place some time ago, but I'm sure that the evidence provided and the confidence given by Costain and their team, bearing in mind that Costain are a national contractor that have constructed projects very successfully across Wales, and the design team they had were leaders in their field, in particular in terms of rock stability and slow stability in the Welsh Valleys—. So, confidence was taken from that.
Alongside the fact that, again, it was an ECI process, so the contractor wasn't going to be straight into construction—they had 24 months plus 14 months to be able to refine that design and identify it, and that design would be identified in sufficient detail to be able to present to the public inquiry. So, confidence was taken from that, and, again, it's the benefits that the contractor and the strengths the contractor did have and did offer at the tender stage. And to be fair to the contractor, it has performed very well in certain areas and done some incredibly good work in terms of addressing the environmental issues, working very closely with the public and the wider benefits. So, it was all taken into consideration.
Okay, thank you. I've got two more questions—I'm conscious of the time, so I'll try and wrap them all up into one if possible. So, this is about costs, just to finish, then. Despite the arbitration decision, the Government is still facing costs well in excess of estimates at the start of construction. Can you run us through some of the main reasons for those increases, including the cost implications of adjudication decisions in Costain's favour? And then finally, to close, outside of the disputed matters, what has the Welsh Government been doing, with input from its employer's agent and working with Costain, to try and manage the overall project cost and could you give us any examples of that?
Well, that's quite a question—
Sorry, maybe I shouldn't have tried to roll the two into one. I'm trying to assist the Chair in progress. I've also got a vested interest because I've got some of the questions right at the end of the session too.
Andy is the master of all of this. There's a fundamental difference, isn't there, Andy, between things associated with the target cost and then the pain-gain mechanism? And I think we've just got to be careful not to conflate those two things. That's a fair assessment, I think. So, can you help with those particular points?
Yes. Fundamentally, as we've already touched on, the target cost can be adjusted if certain events occur within the contract that relate to conditions within the contract that allow them to be considered as compensation events.
Just to link, perhaps, to the latter part of your question, the Welsh Government in these circumstances has commissioned an organisation called, on this occasion, Arcadis to act as employer's agent. They manage the contract on behalf of the Welsh Government, and as part of that role they appoint an independent project manager and that project manager has to act independently from Welsh Government and independently from the contractor. And whilst both the contractor and Welsh Government can challenge the decision that the project manager makes, they can't influence the decision that the project manager makes. So, if Costain, for example, believe, under the conditions of the contract, there's something called a compensation event, they advise the project manager and say, 'I think something's happened here that I couldn't foresee, and I think that's going to have a cost and programme implication', the project manager then asks for a quotation for what the contractor thinks that is, and either agrees it, disagrees it, or, if no agreement can be made, the project manager will make an independent assessment of what the impact of that change might be.
So, that is how the target cost is adjusted throughout the contract. And, of course, the dispute then arises if either the contractor or the client—. But, generally, either the contractor disagrees with the decision of the project manager—say the project manager says, 'No, I don't think that's a compensation event', and the contractor says, 'Well, I disagree with you, I'll challenge that'—or the quantum is assessed to that compensation event. Say there's a change to a retaining wall, for example, on the scheme, and the contractor believes that's costing in terms of time and materials, say, £5 million, and the independent project manager says, 'No, I think the actual impact is £1 million', that's another area of dispute.
So, there have been a number of arbitrations and adjudications, and again it's probably worth explaining—again without coming across as too technical, there are two levels of dispute resolution on this project. One is called adjudication, that's the initial one, that's under the auspices of the Institution of Civil Engineers, where if there's a dispute the first level of a dispute is adjudication. That is binding but it can be challenged, and it's challenged then by something called an arbitration, which then goes to a higher court and it's effectively heard in front of a judge. There have been a number of adjudications on this contract. I think Andrew mentioned one or two. Anacomp—that was a factory at the western end of the scheme at Brynmawr, and the issue around there was the discovery of asbestos on the ground and who had responsibility for that. Welsh Government adjudicated on that, but it was found in favour of the contractor on that occasion. Welsh Government has the opportunity of going back and challenging that and arbitration, but it hasn't done so yet. It could, but it may or may not.
On other disputes, you mentioned the retaining wall, and there's one that I'll not forget and that's retaining wall 14, because we've talked about that for many years. There was arbitration and an adjudication on that in terms of the decision and that was all around who owned the changes and who owned the design, and also about the quantum, the scale of the impact. But the recent arbitration decision, as you referred to earlier on, overruled all of that, saying that the responsibility of the design for that lay with the contractor and, therefore, any compensation events previously awarded for that have been made null, hence the advice to the market of Costain.
So, I haven't gone through the other ones. There are numerous ones through there. Allowances have been made, for example COVID. I mean, Welsh Government has accepted there's a compensation event around the impacts of COVID. The independent project manager has valued that at a certain figure. Costain may or may not dispute that figure.
Andy, can I just come in there before, well, either Vikki or the next speaker?
You've gone through some of the adjudications. It's been quite interesting looking through the issues with the retaining wall, et cetera. Is the number of adjudications and arbitrations involved in this scheme pretty in line with what you would expect for a scheme of this nature, or is it that this scheme has had particular issues, and really—? Because, just listening to what you were saying, it does seem to have been that, aside from the actual building of the road, the legal aspect seems to have been enormous.
Well, it is. As far as our experience in Welsh Government is concerned, we haven't gone through the adjudication and arbitration process we put in our other projects. This is exceptional, both in terms of the fact that we're doing it and that we, as client, instigated the dispute resolution process, because we wanted to bring it to a head. Historically, or generally, the contracting organisation tends to raise the dispute, not the client. But we, on this occasion—in the evidence, we referred to the fact that our concerns started to arise in 2017, two years into construction—wanted to start the dispute resolution sooner. Costain were minded not to do that and wanted to continue discussions, so we grasped the nettle in 2018 and started the dispute resolution processes and ended up where we are today.
So, in terms of the fact that we've implemented dispute resolutions, that's not normally what we do, and also the number. And I think it's just a reflection—obviously, the scale of the challenges, the commercial pressures and the quanta involved have probably exacerbated the situation.
Are there any capacity issues in the Welsh Government, do you think, or is it that you wouldn't necessarily have to have the capacity to deal with these things?
Well, we have had to bring in additional support to—I mean, I think one of the questions was possibly what we might've done with the employer's agent in terms of responding to this challenge. Again, in 2017, because of the information we were getting on this project, we got concerned and we asked for changes, both on the contractor's staff and also on our employer's agent staff to reinforce the level of resources on site to deal with the challenges. But also, we've had to establish a commercial and legal team to help us through the dispute process.
I think I'm treading into Angela Burns's territory. I can see her shouting at me through the screen, so I'll hand over quickly.
That's okay. It's my fault. Angela.
I would absolutely never dream of shouting at you, Chair. But you raise a very good point, which is about the capacity and capability of Welsh Government and that's what I want to discuss with you, as the Welsh Government oversight. Because one of the golden threads that seems to come through all the previous reports, including all the background reading on this particular contract, is whether or not Welsh Government actually have that capacity and capability to manage large-scale projects—and if I may just make a slightly larger comment, which is not necessarily just road projects, but huge multimillion-pound projects. So, I'd just like to have a real understanding from you about that.
Andy, in your response to Nick you said that you'd had to establish a commercial and legal team, and that kind of made my heart drop slightly, because I would have thought that Government would already have had a commercial and legal team looking at this kind of thing, because these big contracts are so key to the success of delivery of any projects within Wales, whether it's broadband or roads, and everything in between.
Well, yes, in terms of that, Welsh Government recognises the importance of having the resource to manage major infrastructure projects, and perhaps my language wasn't quite correct in terms of 'establishing' a team; it was reinforcing the existing resources we had to deal specifically with this project.
Within Welsh Government, we have procurement advice to help us through the procurement process. We have a legal services team, but that is a core and central resource. But as the level or volume of projects waxes and wanes, obviously it's important that we bring in resource to support the core team, and that's what we did on this project. Resources were available to support the project and the project manager advice was there. We generally contract to the supply chain to do the day-to-day project management for those, but the central procurement and legal services to support the delivery of infrastructure projects is available. But, of course, from time to time, as projects wax and wane, we need to reinforce that. So, it wasn't a case of having to establish a team—and perhaps I was not correct in the language there—it was reinforcing the team with specialist knowledge in this area. We can carry a general resource, but this is a very complex and specialist area that doesn't represent value for money to have that resource, at all times, within Welsh Government. We need to support and reinforce that resource as and when we require to deliver our projects and to manage our projects.
So, for example, specialist construction lawyers and QCs were brought in to help us through this process that we wouldn't ordinarily carry, and specialist advice on the assessment of programmes. We brought in specialist advice that can analyse, in great detail, the evidence that the contractor has brought. It wouldn't represent value for money for Welsh Government to carry that resource all the time, but we brought those. So, I understand the point you're making. Yes, of course, we—
I understand the point you're making, as well, because you've explained it very clearly, and I have absolutely no quarrel whatsoever with you bringing in specialists, because I think anybody should do that—any organisation, any business, Government or not, otherwise you end up being jack of all trades and master of none.
I think my concern is, and the Chair raised a comment about it, about whether this level of dispute was anticipated, or is it normal on a project of this size? Given you've brought in all these specialists, have you any sense of concern or disagreement with some of the specialists that you've brought in to write your contracts for you, to manage this for you, that, actually, perhaps, they weren't quite as good as they needed to be? And are these disputes constantly arising, and rightfully so by the sounds of it, because that contract simply was not clear enough at the very beginning?
I'll step in there. I think the outcome and the evidence that we have, taking us through the various dispute resolution processes, has proved that the Welsh Government contract, based on the Welsh Government's model and the work that was done by the organisation supporting us, was sound and has been tested at the very highest level. As in these situations, the contract is generally only tested to this level when there are significant commercial disputes, and it's not been found to be wanting. So, that is an area we are, and our advisers are, content with. The changes we are looking to make to the contract are more for clarification and not fundamental changes to the model document. I mean, clearly, that was something we considered as we went along, but we were confident in our commercial position and we were confident in our reading of the contract and that it had been put together appropriately. But, of course, when it comes under the spotlight as much as it has, clearly it's important that we built a strong team to support us through that, and the contract hasn't been found to be wanting, I suppose, in simple terms.
I was just going to say, and worth bearing in mind, Andy, and for Ms Burns, that there are six sections of this dualling programme, two to come at the western reaches, but three of the four done, and, as you were mentioning earlier, a number of other uses of the ECI model have gone through very successfully. Section 3, from memory, came in to programme and under budget.
So, can you just give the committee on overview of how many, or how large the project team is that's working on this? Within transport itself, what are your staffing levels and what kind of roles are they playing? Is Transport for Wales involved in any of this at all and have you had difficulties in recruiting and retaining the necessary expertise? I ask that, because, again, looking back at the 2015 report, the 2011 report and reports before that, one of the golden threads that keeps coming back is about capability and capacity.
Is it worth me just kicking off? We've had this conversation before, Ms Burns, in the context of where we were on procurement, and so on. There's a macro context to all of this, which is that we're facing the two biggest challenges the country's faced in peacetime since the second world war, and the context of EU transition and moving out from that—leaving the European Union and then C-19. So, the pressure of COVID and managing the pandemic on the organisation as a whole is very, very significant, and it would be a heroic assumption to assume that we could go through all of this stuff unruffled and unaffected. We've had to prioritise very hard, and the transport department has been affected by those pressures, just as others have—
That wasn't my question, though, Mr Slade. The question was about the capacity of the transport department.
So, within the transport department, we've got a number of vacancies, and we've had a number of colleagues leave to join organisations out in the marketplace. We could perhaps say a bit more about the challenges of retaining colleagues when we have got a very active market in the construction sector, and demand for engineers and project specialists is key.
But you also referred to Transport for Wales, and we've worked very closely with TfW on provision of expertise, and it is the plan in the longer run, although that has been affected by both Brexit work and COVID, to get to a point where we're putting our roads functions out into Transport for Wales so that we have an operational arm that covers all of those elements of transport, but Andy may want to add to that.
More specifically, the role of Welsh Government staff is very much as the figurehead of the delivery of projects of this nature. Their role is to ensure that Welsh Government policies and objectives are implemented in the project, and, obviously, their role is to ensure and manage the Welsh Government's expenditure and budget. But in order to do that, they work very closely with—. The first thing they do is award a contract to someone called an 'employer's agent', and they provide significant input in terms of contract management. All of that is done on a computer database system, and they appoint the independent project manager, again, which oversees the implementation of the contract.
So, in terms of Welsh Government core staff, that is and always has been a relatively narrow role, and then, as and when contracts come along, the correct resource in terms of project management and heavy lifting, shall we say, is always contracted in. As Andrew says, there have been challenges. There always are challenges when the construction market is buoyant. Obviously, there are times when retaining staff is more of a challenge than others, but when the construction market is less buoyant, it makes it easier.
We are working with Transport for Wales, and that does provide us with solutions. We have, for example, via Transport for Wales, brought extremely strong commercial advice into this team that, on a short-term basis, would have been difficult to recruit into the civil service anyway. But the flexibility of Transport for Wales has allowed us to do that and will continue to allow us to do it in the future. But it's never without its challenges, resources, and I guess none of us claim to have the right level of resources all of the time.
I do understand that, of course. So, to cut to the chase, the transport division is actually quite a slender organisation within Welsh Government, but as and when you require people to do the heavy lifting on any projects, you sub-contract them in, and you're hoping to sub-contract in the best and the brightest that you can get hold of at the time. The issue is whether or not the market has the best and the brightest available at that time.
Now, Vikki Howells raised the issue of cost overruns and moving that contract forward, and one of the things I noted in the 2015 report was that there'd been significant improvements in general on transport projects, in that on the issue of cost overruns, the Welsh Government managed to really batten that down and hold those cost overruns in. But do you think you've been able to capitalise on that improvement subsequently, or do you think the Heads of the Valleys project is actually going to really throw that improvement overboard?
Well, if you were to do percentages and averages, then it probably would give us a knock. But the reality is that the vast majority of our projects delivered through this form of procurement have performed well. As Andrew referred to earlier on, section 3, which was the one immediately prior to this, was on time and on budget. We currently have one on site at the moment in Caernarfon-Bontnewydd, which is running at about 4 per cent of the budget cost, and that's three quarters of the way through its construction. We completed projects improving junction 28 on the M4, the Brynglas tunnels refurbishment. The majority, ironically, have performed well and we have retained the benefits that we were able to demonstrate in 2015, but of course something like this quite rightly catches the eye.
And could you just give us a little bit more of an overview of the role of the employer's agent, and also the independent project manager? I noticed in the background reading that they're referred to in the singular, but I'm assuming they're companies.
Can you explain what element of this they take on? When you are looking to have your arbitration process with the main company, Costain, what element do the employer's agent and the project managers sit in within that? Do you ever look at them and think, 'Hang on a minute, you're not quite doing what we asked you to do'? Do you ever have to go after them for anything?
The employer's agent, as you quite rightly say, is not singular; it is an organisation. On this occasion, the company was originally commissioned in 2010, I believe, and it was a company called EC Harris. They've subsequently been taken over by a Dutch company called Arcadis, so Arcadis are our employer's agent. Their role is to ensure or provide assurance to the Welsh Government that Costain and their organisation design in accordance with the correct standards. They do look and see that the evidence that the contractor is submitting is appropriate in terms of, shall we say, programme and so on and so forth. And out of that organisation a project manager is not always, but generally appointed from the employer's agent. So, that project manager, within the world of civil engineering contracts, is a sacrosanct role and has to perform independently. As I mentioned earlier on, neither Welsh Government nor the contractor can influence the decisions of the project manager. They can challenge them in a dispute resolution process, but they cannot influence them, and that's a key tenet of the contractual arrangement.
In terms of day-to-day running of the contract, that's what the employer's agent does. As I mentioned earlier on, there's a communication system between the contractor and the employer's agent that is all computer based. All decisions are recorded on there, all financial decisions are recorded on that basis, so it's the employer's agent that does that role.
In terms of the role of the employer's agent in the dispute resolution process, what their role has been is to provide sufficient evidence of when decisions were made, and how those decisions were made, to the legal team that has been working on those disputes. Fundamentally the role of the employer's agent is to ensure that the contract is administered correctly and that all the necessary evidence of decisions being made is stored in a logical manner. So, as part of the dispute resolution process, our legal and commercial team would go to the employer's agent and say, 'When was this decision made? How was this decision made? Please can you provide me with the evidence?' And they also had to provide witness statements for cross-examination: when was this decision made, what evidence did the contractor provide, and so on and so forth. So, that will give you a flavour of the employer's agent in this role.
And you're quite right, as a client we want and demand the best people that are out there to do that work for us. Again, we expect that. As part of Welsh Government's role, when the commercial aspects of this project were starting to look concerning, as well as demanding changes to contractor staff, we also asked for the employer's agent team to be reinforced. Now, that wasn't necessarily a reflection of a poor job, but as I'm sure you may be aware, once there's a commercial dispute, there's a lot more evidence and information that needs to be collected that you then need to use to support your case going forward.
Yes, I understand that. We just wanted to be clear that there was real resilience in those roles and how those roles dovetail into the roles played by the main contractor and also by Welsh Government.
One of the things that has been referred to in previous evidence are financial penalties for late deliveries. I appreciate that some of this may be something you'd want to discuss in the private section, however, in order to have a financial penalty for late deliveries, you have to have something to measure them against, and one of the things we measure things against are key performance indicators. I think in the public section it would be fair for me to ask you a question about the KPIs on this contract, because I understand that the Welsh Government is reviewing the KPIs because they feel there are concerns that there may have been insufficient focus on the programme and on the financial performance. How can you change KPIs halfway through a signed-up project? Because if I was Costain or anybody else, I'd be saying, 'Hang on a minute, when we started this, you were going to judge me on A, B, C and D, and now you want to judge me on X, Y and Z. That is not fair business practice.' So can you perhaps just give us a little bit of an indication in general about the KPIs? Then I would like to explore with you in more detail the financial penalties for late delivery, under what circumstances they'd be payable, what would have to be payable, but I do appreciate that those questions might be more appropriate in the private section.
Okay. Well, you're quite correct, KPIs are established based on the scheme objectives that are set at the beginning of the contract, so fundamentally changing those part-way through is not the case. In reference to changing them, we're talking about changing them from contract to contract and, ironically, we do change the KPIs from contract to contract, (a) based on the effectiveness of the KPIs on the previous contract and (b) to reflect new objectives going forward. Our KPIs are not simply cost and programme, they go much wider than that: environmental measures, community benefits—they all measure those. In fact, we rely less on straight KPIs now; we produce dashboards now, which give us a snapshot of a project and are far more readily understandable for those who are, shall we say, a little bit more remote from the project, and you can also see trends as well. It's much easier to pick up trends looking at dashboards than it is with KPIs.
And again, as our objectives for Welsh Government projects move forward in accordance with new legislation, such as the Environment (Wales) Act 2016 or the Well-being of Future Generations (Wales) Act 2015, then obviously the KPIs that we align to our projects change as well. So it's an evolutionary rather than a revolutionary process, and we tend to adjust them going forward. So, as far as this contract is concerned, for example, one of the KPIs was that the contractor produces a programme promptly, which seemed entirely to make sense, that the contractor produces it promptly, but the challenge is that you need to go beyond that. The contractor may well produce a programme but the programme is of no value or is not accurate. So that's how we attempt to change the KPIs. Likewise with costs, a cost estimate is produced regularly, but that's no good to anybody if there's no accuracy in that cost estimate. So that's how we review the KPIs and then take them forward.
So, my absolute last question on this, then, on the KPIs is: it's really easy to put in a KPI for a hard target, like, 'You're going to deliver it by this time, or to this cost', but how do you measure the softer KPIs, for example, the contribution to well-being objectives and some of the wider benefits and achievements that have been claimed by the contractor? I would think that those softer objectives are much harder to measure in any meaningful way, particularly during the course of a contract, because most of those benefits may well occur subsequently.
Sure, and that's a really good question and a really good to challenge to us, and it is an ongoing challenge. At the end of the day, you do have to, effectively, contractualise your KPIs so that you can measure them, and we have done so on this project in terms of the number of apprenticeships, the number of jobs provided, et cetera, et cetera. And, again, this project has done a particularly good job as far as that's concerned. It's more the culture of the organisations and that is a less tangible way of assessing the organisations in the procurement process, their approach to that and also their record of doing it. Again, to be fair to Costain, they've worked incredibly well with local schools. That's not something that can be measured, how many times they go to a local school. They have ran Welsh baccalaureate courses within schools in the area; they've worked with youth. But you're absolutely right that it is difficult.
We're constantly attempting to do that, and in future projects we try and contractualise them, but, of course, it has to be the culture of the organisation as well. From a Welsh Government perspective, we have to emanate that culture ourselves to demand the responses we want from the supply chain, because public procurement is an incredibly powerful tool. In very simple terms, as I'm sure you'll appreciate, businesses will want to do what they need to do to win work, and they tend to do that. We must maximise that. But at the end of the day, they must also want to do that and, to be fair, organisations have come a long way in the last 10 years as far as that's concerned.
Andy, sorry, just briefly, is it worth, on late delivery penalties—Ms Burns's point there—just saying in public session—because I think she's right, we ought to come back to this in private session and discuss it in a bit more detail—that we have to weigh up, don't we, incentives in putting measures of that sort into contracts because we don't want to end up with a perverse incentive for people to rush work, and we end up with poor quality outcomes? This is back to the very fair point that all of you are making as committee members about how do you get this risk thing right in the contractual arrangements. Sorry, Andy, go on.
Yes, you're absolutely right and apologies that I missed that point. Yes, on this project and on our projects in general, Welsh Government do not award contracts to the lowest price contractor; we do not do that. On this project in particular, we were very conscious of the challenges in delivering this project in terms of, for example, the impact on the environment. This is a scheme that had three special areas of conservation and a number of sites of special scientific interest immediately alongside the scheme. What we didn't want on this project was to rush this project; this project had to be got right in terms of the ultimate design and the impact on the environment.
So, there are clauses in this contract for liquidated damages, but they weren't punitive because, as Andrew says, we didn't want to drive perverse behaviours on this. So, they will be taken into consideration as part of the overall commercial settlement on this project, but they weren't punitive because of the potential perverse behaviours that could lead to.
Okay. Moving on and Delyth Jewell.
Diolch, Gadeirydd. Morning.
Morning. Hi. The local community has been severely disrupted because of the delay. Do you think that they have a right to feel aggrieved because of that?
I think it's fair comment. As we've gone along with this scheme, we've tried to be as open and as honest with the community, and we set out what we thought would be the impacts at the public inquiry. Unfortunately, they have gone on for a lot longer than we all anticipated. It's not a position we want to be in and we want to work very closely with the local community because we understand, as best as we possibly can, that when we are in an area the local community, without any shadow of a doubt, know about that. But that having been said, as part of our projects, a key factor is the liaison with the local community. As far as that's concerned, we have a public liaison officer whose sole responsibility is to liaise with and communicate with the community. Costain, again, to the best of their ability, have done a very good job as far as that's concerned through social media, through exhibitions held at the main site offices just outside of Gilwern, but there's no doubt that, when you carry out a major construction project, it does have an impact on the local community.
One of the challenges we have had on this project, obviously, is the diversion of traffic when we've implemented traffic closures, which have been many more than Welsh Government certainly wanted, but we have arranged them, because we recognise, at the end of the day, without them the scheme won't get completed. We have worked with both Blaenau Gwent and Monmouthshire county borough councils, because the side roads there are under their ownership, and we have looked at and imposed weight limits on local roads. We've paid for additional police resources to direct traffic; we've paid for additional resources in the local authority. So, notwithstanding the challenges, we do, as a Government, recognise the impact on the local communities, but it is always our intention to mitigate those wherever we possibly can.
Thank you. In terms of the August 2020 traffic management switch, what do you think the impact of that was on the local community? And you've mentioned as well a number of closures that regrettably have had to take place. How many other closures do you anticipate will have to happen, that the local community will have to face?
Deal with, yes, sure. The number of closures are now much, much reduced. I haven't got the specific number. We do have that number; we can let you know—have that—but I think it is in single figures.
As far as TM8 goes, as we know it, the major traffic management that occurred at Brynmawr back in August, again, we did meet with local councillors back in February. We did hear their views on it and their concerns for the impact on Brynmawr and Beaufort as well. I know the area quite well. But, on balance, we felt that the right choice was made in terms of the traffic management changes. There is a clear diversion route that does use the new section of the A465. It's always a challenge when local people have local knowledge and believe they know local shortcuts, but perhaps they're not as short as they might imagine.
Unfortunately, the impacts were exacerbated by the closure of the A4046, I believe, south of Cwm, as a result of storm Dennis damage, back in February. Those two pieces of work were carrying on at the same time. Now, we could have made a decision to delay our traffic management whilst that work was being completed, but we felt, on balance, it was better to get on and finish the scheme and get away from the area, rather than delay it by a further three or four months. I have heard, and I've seen on Facebook, that the Cwm scheme has now been opened to traffic, so that should ease some of the issues on the traffic coming up the A4047 to Brynmawr and then going through Brynmawr and Beaufort.
Thank you. And if you could write to the committee with the single figure—I hope—the number of closures, that would be really useful.
I may just check on that figure now, if I can check. I understand there are four closures planned for the remainder of this year and two next year, so that's six more closures. I'm sure everybody will be pleased to hear that.
Thank you. You've mentioned some of the steps that you've taken to engage with the community and you also have mentioned some of the steps that Costain had taken in terms of community engagement. Do you feel that they, as a contractor, met the expectations that you would have expected of them, then, in terms of how they've been engaging with the community, particularly in light of how the delays have, sadly, accumulated?
In so much as their engagement with the community, I would say, on balance, yes. In so much as the time they've been delivering the project, then, I would suggest, no, because obviously the expectation was that this project was going to be completed two years ago and that hasn't taken place. So, on one side, they've been very good in terms of community benefits, as I said, working with the local schools in the area, working with local communities, but obviously the very fact that the scheme is still under construction that's undermined that to some extent. The site offices were opened to community use. There is some really good work that Costain has done. They've taken us a step forward in terms of using social media to keep people informed of what works are going on, but they very fact they're still informing them obviously is a bit of a negative.
Thank you. In terms of legacy projects that the local community can expect, specifically along the section 2 route, could you talk us through any objectives and timescales they could expect of any projects that you are considering?
Yes. In terms of great detail, the importance of this was recognised, both by the project team and recognised by the Minister. To manage expectations, obviously, we're not talking about spending millions and millions of pounds as far as that's concerned, but we do recognise the impact on the community. And what we wanted was to work with the communities to come up with their projects. So, we haven't imposed projects on them; we wanted the projects to emanate from the communities. I think some of them are quite modest and small scale, in terms of interpretation of Clydach ironworks and things like that, or providing a car park to serve the caves that are halfway up the Black Rock, as you probably know. So, it’s that sort of scale of project. But the important thing from the project's viewpoint was that they were community-owned projects, not projects being imposed on them. In terms of the delivery element of it, we probably thought it wise to take the delivery away from the main contract, for all sorts of reasons, to make sure we finish that, and come along later on and deliver them. So, we will be continuing to engage with the community on those projects.
Okay. Thank you. And finally—. Sorry, Andrew, were you going to say something?
No, no, it's fine.
You looked up expectantly.
Andy made the point I was going to make, so that's fine. Thank you.
Okay. And the final question from me then, in terms of those legacy projects, would the overall budget for them be dependent on the outturn of the main section 2 project?
Not directly. At the end of the day, there's only so much money that I will seek approval for from my Minister to spend, but there's not a direct link between the two that if the cost of this continues to go up, that means there's no community benefit. Our approach to them will be: if they are sensible, reasonable, modest projects that we can leave as a legacy from this project rather than the legacy that, obviously, some of the community have taken from it, then we will deliver those. But, as I said, we won't be spending a vast amount of money, but the important thing is they're projects that are important to the local community.
Okay. If, as and when those details become more developed, we'd be really interested—
Sure. We can provide that. No problem at all.
Diolch, Delyth. And thanks, if you could provide that information, that would be great. The last set of questions is from Vikki Howells.
Thank you, Chair. So, Andy, the last topic, really, which is to look at learning lessons to improve the procurement and delivery of road projects, and then I'll finish up with some questions on sections 5 and 6, which are of particular interest to me because they will go through my constituency.
So, to begin with, despite the problems, do you still consider that the early contractor involvement was the most appropriate procurement method?
I think I'll kick off on that one again, Andrew.
I think the committee, probably, know what we're going to say. [Laughter.]
In short, yes. The ECI contract model is designed to get organisations together at an early stage of the development of a project, and for those organisations that are best suited to manage elements of risk of that project to carry that risk. I know that's a text-book response, but that is the ethos and philosophy behind early contractor involvement.
I was involved—I'm showing my age now—in the first early contractor involvement, or one of the earlier ones, back in 2003. As a project deliverer I thought it was the perfect solution, where you bring the right organisations together in advance of a project to deliver that project. So, in principle, yes. The evidence that we have, in terms of the delivery of our projects, supports that—both schemes leading up to this particular project and schemes after this project.
This project, unfortunately for all involved, for the [Inaudible.], there will be some very positive things coming out of this. It may not feel like it now, but I'm convinced of this going forward. It simply didn't work as it should have done on this project, in terms of the understanding of risk and the distribution of risk. But, in principle, the answer to that question is 'yes', because it allocates risk where it should be best allocated.
And you've referred to the ECI model being used successfully on other road projects. What's been the overall picture then for completed projects since our predecessor committee reported in 2015, when comparing costs and timetable performance with earlier expectations, including, for example, for section 3 of the A465?
Well, I can provide the committee with a table that sets out the schemes that have taken place since then. Again, the overall performance of that form of procurement on projects, I think, has been at the very least satisfactory and in some areas very good. Andrew has already mentioned section 3 that came in under budget and most of the projects that have been delivered using ECI have varied within single percentage figures of the cost at the construction contract award stage.
Great, thank you. And with regard to future procurement, what have you identified as the key areas for involvement within the Welsh Government's model contract and the suite of documents used as templates within that project?
I think we've touched on those as we've gone along. What we're doing on the new suite of model documents is more points of clarification. I've mentioned clarification on ownership of design, to make that clear. The contract as written has stood the test of time and demonstrated where the line of responsibility is clear, but for the avoidance of doubt, we've changed the wording slightly to make it explicitly clear where the ownership of the design is.
Another area is control of the works carried out by the statutory undertakers. These have constantly, over the years, been a challenge in terms of managing when we have to divert gas mains and water mains and so on and so forth. Again, we've made it very clear in the new contracts going forward that it's the contractor's responsibility, again, not because we particularly want to wash our hands of it, but the contractor knows when they're programming the works when best suits their programme for gas mains to be diverted. So, again, they're some of the ideas were we're making it clear going forward where the responsibility lies.
So, they're more points of clarification rather than fundamental changes to the risk allocation within the contract. And I mentioned earlier on that the percentage share range has changed, where on a pain-gain mechanism we are now beyond 15 per cent of the cost, if it overruns the target, it's 100 per cent the contractors'. Again, that makes it clear where that responsibility lies.
Thank you. What lessons are there to improve community engagement in future projects, including on sections 5 and 6? Could you give me an undertaking that during that engagement Welsh Government will use accurate and up-to-date land maps? I say that because I'm still dealing with constituents who have been placed under considerable stress because of the use of inaccurate maps and that's something that's been going on for the last four years, really. So, I would like some assurances on that.
Okay. Well, as far as sections 5 and 6 are concerned, again, community engagement was a key pillar of the dialogue process we had with the potential bidders for that project going forward. In fact, some of the good lessons from section 2 have been transferred into the contract for sections 5 and 6. So, we want to build on that. Again, I know the preferred bidder has community engagement officers already appointed, even though we haven't finalised the contract yet. I understand they're already starting to engage with landowners on that project. In fact, I happen to know that the individual who did a very good job on the Heads of the Valleys section 3 has gone on there. So, there's good contact with the area. So, from a Welsh Government perspective, community engagement is very, very important. We have learned the lessons from and built upon some of the very good things, to be fair, that have been delivered on section 2 and we want those to happen on sections 5 and 6 as well.
In terms of the accuracy of land information, absolutely, the information should be as accurate as it possibly can be and strictly speaking there should not be any inaccuracies on a land area. That having been said, it can be challenging when you're trying to find out tenancies and who owns tenancies et cetera, et cetera, et cetera. But, from a Welsh Government perspective, we would absolutely strive to make sure the information is as accurate as possible to minimise the impact on any landowner because I appreciate it can be difficult, that if a letter lands on their doorstep talking about land acquisition and so on and so forth, it can be stressful. So, we would aim and strive to minimise any stress as far as that's concerned.
Will the nature of that community engagement need to change to reflect the circumstances of the coronavirus pandemic? Is there anything that you need to do differently as a result of that?
Well, I mean, clearly, normal methods of meeting people will have to change. We've learnt a lot digitally—to do things digitally, as we're all experiencing today. In some respects, there are advantages to that, but there are also disadvantages, because, I'm not sure, but I feel that sometimes there is something lost if you haven't got face-to-face contact and understanding. So, I mean, the community engagement will change to reflect that. We're also working within Welsh Government on virtual engagement anyway, and virtual consultation, as a Welsh Government as a whole, not just the transport sector, because, clearly, (a) there a positives out of this, but (b) we're having to live with the virus for as long as we need to. We can't not consult, we can't not engage, so we need to change things to match that.
Thank you. Sections 5 and 6 are very different in terms of the funding model, aren't they, because they will be funded with MIM—the mutual investment model? Was it the experience with section 2 that influenced that decision, or was that decision already made?
I think that decision was already made wasn't it, Andy? So, sections 5 and 6 on MIN—that predated the difficulties with—
It did, yes. The Welsh Government made a decision to explore the use of what, at the time, was called NPD, non-profit distribution, which is the Scottish model for private investment, and it was agreed on three pilot projects going forward: it would be Velindre hospital, the twenty-first century schools programme and the A465. That decision was made, I think, around 2014. So, we started off on this path before we'd actually started on site, believe it or not, on section 2.
I thought that was the case; just checking.
So, are you considering applying the mutual investment model to more road schemes in future and, if so, based on what sort of criteria?
There are no road schemes under active consideration. I think it's a case of, 'Let's get going on this pilot project and see what the outcome is,' as far as that's concerned. If MIM was to be considered for future investment projects, whether they'd be road or other infrastructure projects, scale is one issue, I think, to make it worth while for the private sector, and the scale is generally considered to be over £200 million-£250 million, so it would have to a project of that scale. And, generally speaking, there has be an element of maintenance as well—so build, operate and maintain. I mean, one of the things that will happen on sections 5 and 6 from Dowlais roundabout through to Hirwaun is that it will be maintained by the successful bidder for that organisation. So, they are the two key factors that would be considered in any future MIM investment.
And, of course, one of the reasons for investing in that from a Welsh Government perspective, obviously, was the dearth of capital. Should that be forthcoming, then there may not be a need to go down this route, but I think it's a case of, 'Let's see how we get on with the pilots first.'
Okay, thank you. And the final question from me, then: what's the latest position with the plans for sections 5 and 6 following the announcement of your preferred bidder?
Okay. So, both organisations are working very hard, frenetically probably, and there's an awful lot of dotting of i's and crossing of t's to get to financial close, but the target for that to take place is next month.
Thank you. And any idea when we could be looking at shovels in the ground?
Okay, so, the first aspect of work would be understanding environmental implications and doing site clearance. I would imagine, should everything to go plan, that we'll start work possibly this side of Christmas, but more likely in the new year things would ramp up. And, obviously, we'll be clearly communicating what we're doing, as far as that's concerned, when the time comes.
Thank you very much. That's it from me, Chair.
Thanks, Vikki. That brings our questions in the public session to a close, so can I thank our witnesses for the detail they've given today? We'll send you a transcript of the comments in the public section for finalising before it's issued.
bod y pwyllgor yn penderfynu gwahardd y cyhoedd o weddill y cyfarfod yn unol â Rheol Sefydlog 17.42.
that the committee resolves to exclude the public from the remainder of the meeting in accordance with Standing Order 17.42.
Cynigiwyd y cynnig.
Item 5 is for me to move Standing Order 17.42 to exclude the public from the meeting for item 6.
Derbyniwyd y cynnig.
Daeth rhan gyhoeddus y cyfarfod i ben am 11:15.
The public part of the meeting ended at 11:15.