£26m fail: Scot gov agency sues creators of shut Cairngorm railway for £14.5m

The publicly funded agency controlled by ministers faces the prospect of having to repay a further £2.6m of EU funding for the scheme if it the railway closes.

The decisions over the contracts for the funicular were hit with allegations of cronyism and financial mismanagement that led to an investigation after chief executive of Highlands and Island Enterprise (HIE), Iain Robertson, announced in 2000 that he would be leaving to become director for corporate development for Morrison plc, an Edinburgh-based construction company founded and once chaired by one of Scotland's wealthiest men Sir Fraser Morrison.

In five years HIE had awarded a number of Morrison contracts including that for the building of the controversial railway up Cairngorm which they eventually received more than £10m for.

Morrisons were awarded the funicular contract in 1999, a year after Sir Fraser left HIE.

Audit Scotland said there was no conflict of interest in either case.

Repairs have been ongoing with the world famous 1.3-mile funicular which was opened in 2001 but has been closed since September, 2018 began in November, last year.

Official financial documents seen by the Herald on Sunday shed further light on the background to the funicular failures.

We can reveal that as part of a cost-cutting measure as the scheme was being progressed, HIE agreed with the contractors at the time that proposed steel beams for the track would be replaced with concrete.

According to the Cairngorm National Park Authority strengthening works to the railway viaduct will involve reinforcing props and concrete bases beside 63 out of 94 piers.

It comes as it has been confirmed that HIE is proceeding with a claim for £14.5m damages plus interest and expenses against the now owners of Morrison Construction, Galliford Try Infrastructure Limited and Inverness-based AF Cruden Associates Limited, the civil and structural engineers for the scheme who have now been taken over by Glasgow-based Arch Henderson.

HIE which auditors say "faces significant financial pressures" have included a provision of £14.3m for the cost of reinstating the funicular which is expected to take two years.

The agency is making claims over defects in the design and construction of the railway and breaches of contracts which emerged after the funicular shut in October, 2018.

HIE has already commissioned expert reports for the action which is currently before Lord Ericht in the Court of Session.

An HIE source said: “The failure of key aspects of the Cairngorm funicular railway infrastructure after less than 17 years of operation raised serious questions about the quality of the original project.

"Reinstatement works require significant expenditure and we have a clear duty to do all we can to reduce the burden of these costs on the public purse. As legal proceedings are now under way, it would not be appropriate to comment further at this stage.”

Catherine MacColl for Galliford Try said HIE had not yet made clear what the breaches were.

Jonathan Brown for AF Cruden said the action was of "significant complexity" with a claim for "unspecified remedial works" which needed to be worked out on a contested basis "proactively and sensibly".

"Forgive the bad pun, but we are in the foothills of this action," he said. "There is a lot of working out to be done. It is by no means a straightforward situation...

He said: "It is a complicated exercise and a considerable degree of uncertainty about what the nature of the defect is and where responsibility for it lies."

The Scottish government has already pumped £16m towards the cost of fixing the railway which connects a base station with a restaurant and a ski area 1,097m (3,599ft) up Cairn Gorm mountain near Aviemore But it has also had to pay a penalty of £85,989 to the EU over flawed tendering procedures.

It has emerged that in 2003/04, the EU reviewed HIE’s procurement procedures for the Cairngorm funicular and after lengthy negotiations, ministers accepted an EU auditor’s decision that HIE did not follow some aspects of the EU’s procurement procedures.

According to documents seen by the HoS, the EU found that HIE "had not identified in its tender documentation" all the criteria to be used or detailed the weighting for the criteria. According to Audit Scotland documentation: "It also did not follow correct procedure when it used contractors’ experience as a criterion in the final stages of the competition."

It also reveals that shutting down of the funicular would result in a refund to the EU and that the 2007 cost of reinstatement and adjusted for inflation to 2020 prices, is at least £42.5m - £71m.

It also reveals that shutting down of the funicular would result in a refund to the EU and raises questions about whether any limited closure would result in reinstatement.

According to one audit document: The planning permission granted for the funicular requires HIE to reinstate the land if the facilities do not operate for any period of 12 months (or longer if agreed by SNH and the council)."

The 2007 costs of reinstatement and adjusted for inflation to 2020 prices, is at least £42.5m - £71m.

"In addition to the reinstatement costs, HIE would need to repay the EU funding of £2.6 million if the funicular ceased to operate and cover potential redundancy costs..," the document said.

An HIE spokesman said reinstatement will not apply in the event it is "out of operation for the purpose of maintenance and repair".

HIE, which also owns the ski centre, secured planning permission for the repairs from the Cairngorm National Park Authority last year and Scottish government funding.

Balfour Beatty was appointed to reinstate the railway in a £20.5m contract which also covers other works to turn the Highlands peak into a year-round tourist destination.

An engineering report from July 2018 noted that the structure's condition for it's age was "disappointing" with various defects identified.

A second report commissioned by HIE confirmed that work was needed to strengthen the railway's piers, beams and foundations.

Once up and running, the funicular is expected to attract thousands of visitors a year, generating benefits for the wider economy in Badenoch and Strathspey, where the tourism and hospitality sectors have been hit hard by Covid-19.

The Scottish Government said that the business case for reinstating the funicular made clear that repair and reinstatement was the preferred option.

Estimates on removing the funicular published by ministers had dropped to cost approximately £17m.

The Cairngorms are a major tourism attraction and centre for recreation with downhill hillwalking and rockclimbing a major draw for the 1.92m who visit the national park every year from around the world.

Skiing is seen as vital to the growth of the local area and led to the development of accommodation and other visitor attractions.

According to analysis by the public spending watchdog Audit Scotland £23m of £26.75m cost of the funicular came from public funds.

In 1995 consultants estimated the cost would be £16.3m, but three years later HIE revised the business case, creating a project that originally cost £14.8m and applied for European Regional Development funding (ERDF) which was approved.

In 2003, HIE agreed the final cost of the project at £19.5m - £4.7m above the 1997 target cost.

The decisions on funding were based on a series of risks including evidence that skiing in Scotland was in decline due to climate change.

Use of ski resorts in Scotland had peaked in 1988 at 654,000 skier days, with 60 per cent (391,000) of these at Cairngorm.

However, by 1997, the Scottish figure had fallen to 272,000, with 96,500 (35 per cent) at Cairngorm.

And the number of skiers continued to decline, both at Cairngorm and across Scotland.

The business case had assumed 186,000 ski visitors per year.

HIE had tried, but failed to persuade private sector investors to get involved.

Only the Bank of Scotland was willing to provide funding, through a commercial loan to now defunct CairnGorm Mountain Limited - which once operated the funicular on HIE's behalf - of £2.5 million.

CML, HIE and the project design team went on to review and change the project specification between 1996 and 1997.

Audit Scotland in an analysis in 2009 said the HIE tried to control costs "but the budget proved unrealistic".

It said: "The focus on project design and controlling costs appears to have drawn attention away from other important changes, affected the assumptions and short and long-term viability of the project and the operator".

HIE believed that the target cost could be achieved from savings after the contract tendering and used a competitive tendering process and followed its established contracting procedures.

The project managers received seven tenders for the civil engineering works on 15 June 1999 and, after evaluating them, recommended that Morrison Construction Limited be awarded the contract.

On 19 November 1999, HIE received tenders for the site buildings from three contractors, which were priced at between £6.5 million and £7.5 million. All exceeded HIE's £4.28 million budget.

HIE asked all three tenderers to find savings to meet its budget but according to auditors only one, Morrisons, fully accepted this request.

Following advice from the project managers, HIE then entered into negotiations with Morrisons for a combined tender for the civil engineering works and the buildings.

HIE agreed to changes to the project specification to reduce costs and stay within the budget of £14.6 million.

According to an audit, Morrisons cut the cost of the civil engineering work by £500,000 by, for example, changing the tunnel design and excavation method.

They identified further general savings of £300,000 and savings of £545,000 from the design of the bottom and top stations.

Keith Bryers, head of property and infrastructure at Highlands and Islands Enterprise said a major reason for a costs overrun was "probably" related to the replacement of the proposed steel beams on the rail track with concrete beams. Morrisons made that proposal with its tender.

HIE confirmed that this actually done "as part of a cost-saving exercise".

As work progressed, Morrisons notified the project managers that they were incurring additional expenditure due to the complexity of the project and the need to find ways to limit damage to the mountains.

The contractors transported materials across the site by helicopter because surface transport would cause too much damage and in May 2001, it was estimated that total costs had increased to £15.2m.

When HIE's chief executive left HIE in September 2000 to take up a post with Morrisons concerns surfaced about the probity of aspects of the funicular process.

The chair of HIE had been, and remained, the executive chair of Morrison plc.

After an investigation, Audit Scotland established that Sir Fraser Morrison, chair of HIE, was present at board meetings in 1996 and 1997 when the funicular project was discussed.

It said: "At this stage, Morrison plc had no involvement in the funicular project and the chair’s participation was in accordance with HIE’s procedures. The chair left HIE in 1998, before any of the tenders had been let, or contracts awarded.

"We understand that HIE’s chief executive was approached by Morrison plc in June 2000. The chief executive wrote to HIE’s head of property on July 19, stating that all property matters should be referred to the director of growing businesses at HIE, with immediate effect.

"The chief executive announced his resignation formally on July 20. An approach in June 2000 would have been almost three years after the initial appraisal and approval process and, in relation to this aspect of the process, there would have been no potential conflict of interest."

HIE indicated that the chief executive had no direct involvement in the funicular project or contracts.

Galliford Try said: "We don’t comment on ongoing legal matters."

Arch Henderson was approached for comment.