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Y Pwyllgor Cyfrifon Cyhoeddus

Public Accounts Committee

24/09/2018

Aelodau'r Pwyllgor a oedd yn bresennol

Committee Members in Attendance

Adam Price AM
Lee Waters AM
Mike Hedges AM Yn dirprwyo ar ran Rhianon Passmore
Substitute for Rhianon Passmore
Mohammad Asghar AM
Neil Hamilton AM
Nick Ramsay AM
Vikki Howells AM

Y rhai eraill a oedd yn bresennol

Others in Attendance

Adrian Crompton Archwilydd Cyffredinol Cymru
Auditor General for Wales
Clare Pillman Prif Weithredwr, Cyfoeth Naturiol Cymru
Chief Executive, Natural Resources Wales
Dave Rees Swyddfa Archwilio Cymru
Wales Audit Office
Derwyn Owen Swyddfa Archwilio Cymru
Wales Audit Office
Kevin Ingram Cyfarwyddwr Gweithredol Cyllid a Gwasanaethau Corfforaethol, Cyfoeth Naturiol Cymru
Executive Director for Finance and Corporate Services, Natural Resources Wales
Peter Garson Pennaeth Gweithrediadau Masnachol, Cyfoeth Naturiol Cymru
Head of Commercial Operations, Natural Resources Wales

Swyddogion Cynulliad Cenedlaethol Cymru a oedd yn bresennol

National Assembly for Wales Officials in Attendance

Claire Griffiths Dirprwy Glerc
Deputy Clerk
Fay Bowen Clerc
Clerk
Katie Wyatt Cynghorydd Cyfreithiol
Legal Adviser

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.

Dechreuodd y cyfarfod am 15:16.

The meeting began at 15:16.

1. Cyflwyniad, ymddiheuriadau, dirprwyon a datgan buddiannau
1. Introductions, apologies, substitutions and declarations of interest

I welcome Members of the committee to this afternoon's meeting of the Public Accounts Committee. Headsets are available in the room for translation and for sound amplification. Please ensure that any phones are on silent. In an emergency, follow the ushers. Can we welcome Mike Hedges to today's committee meeting, who is substituting? Thanks for helping out the committee, Mike. Do Members have any declarations of interest that they would like to make? No. Okay. 

2. Cyfoeth Naturiol Cymru: Craffu ar Adroddiad Blynyddol a Chyfrifon 2017-18
2. Natural Resources Wales: Scrutiny of Annual Report and Accounts 2017-18

Item 2. I welcome our witnesses to this afternoon's meeting. We do have a large number of questions for you this afternoon. So, if I can ask Members to be as succinct as possible with their questioning, and feel free to be succinct in the answers, and we'll get through as many as we can. Clare Pillman, I understand that you'd like to make a short opening statement before we kick off the questions.

Thank you very much, Chair, and for letting me make a short statement at the beginning. First of all, I'd like to say that I'm very sorry that I'm meeting you all for the first time on the basis of our accounts being qualified for the third year in a row. This latest qualification was for the transitional arrangements put in place to wind down the previous long-term contracts, which you heard evidence from my predecessor on last year. I'd like to apologise to the committee members, to other elected representatives, to all the people who work for NRW and to the public that we're proud to serve for the serious failings identified in the report regarding our timber sales.

We fully accept the auditor general's findings, which demonstrate that we fell far short of the high standards that we expect of ourselves and that you should rightly expect of us. I thank the previous auditor general and his staff for the work that they did in preparing this audit report, and I look forward to working with the new auditor general to put these matters right. 

Regrettably, the transitional arrangements had already been put in place before your scrutiny and subsequent report on our long-term contracts in May 2017, and many of the issues relating to these transitional arrangement relate directly back to the serious errors that were made in letting the long-term contracts in the first place. The transitional contracts were let in very difficult circumstances and with the best of intentions, although we entirely accept that there were serious errors and irregularities in the way that they were put in place. More fundamentally, we entirely accept the auditor general's conclusions about foreseeability, and we clearly want to avoid finding ourselves in that situation again.

We are very grateful for your scrutiny last year and your subsequent report. We have used that report as the basis for our action plan, on which I've been reporting progress to you regularly. My priority is to sort these issues out, and I have worked closely with my team, including Kevin and Peter, on actions to minimise the risk of this ever happening again. We have taken action in the following areas: developing an enterprise plan with clear principles that guide our commercial activities; reviewing processes and procedures, including our financial scheme of delegation; training staff, particularly in public law and state aid and extending this to the wider business; and improving governance, particularly with regard to strengthening the board and our scrutiny and challenge roles.

I can confirm that all the transitional contracts have ended and that we began remarketing timber on the open market last year. In our timber sales plan for the current year all of the volume that would have been supplied through the long-term contracts is being marketed on the open market and demand is very strong.

As a result of our actions, I believe we're in a much stronger position. However, as agreed with the Wales Audit Office, I've commissioned independent consultants to assess our current position and what further action may be necessary. They have already started work and I hope this will be completed and implemented this autumn. We welcome the opportunity today to give you further reassurance on the work we've already done to redress these serious issues. 

NRW is incredibly proud to manage the woodland estate on behalf of the Welsh Government and the people of Wales. Our forests make a significant contribution to our economy, but also to our environment, health, culture and heritage. The timber industry employs around 9,000 people in Wales and NRW supplies 60 per cent of the timber grown in Wales. Therefore, we take our responsibility to the industry very seriously. This issues has, undoubtedly, damaged our reputation within the industry and with the people of Wales and I am absolutely determined to do everything I can with my team to earn that trust back. 

Can I end by saying something about our staff? In the few months that I have been their CEO, I've been hugely impressed by the work that they do to help manage Wales's natural resources and to tackle some of the very challenging issues that are mentioned in this year's annual report and accounts. They work with integrity, professionalism and resilience and I value that highly. I'm personally committed to ensuring that we learn the lessons from this experience so that they can do their jobs to the best of their ability in a supportive and positive environment. Thank you very much. We are very happy to take your questions. 

15:20

Thank you, Clare Pillman. The committee does find itself in a certain sense of groundhog day today having looked at this issue—as you mentioned, scrutinising this issue when we looked at the 2015-16 accounts because of the same irregularity issues. We are in this situation, sadly, again. Were no lessons learned from the last scrutiny session by NRW? 

I think there were a lot of lessons learned. I think the issue, as I mentioned in the opening statement, was that the letting of the transitional contracts happened very much at the same time as the reports were being published and the PAC hearings were happening. But we absolutely, after that time, accepted the findings of the auditor general and the recommendations of the PAC, and put in place an action plan, on which we've reported to you regularly, and, of course, now we also have the WAO management letter and response. So, the areas in which we took action after your hearings last year were in improving the way that we let, mange and evaluate our contracts. We also improved our processes and procedures. For example, we have revised our financial scheme of delegation and given staff much clearer guidance on the definition of novel, contentious and repercussive, which was obviously an issue that came up during last year's hearings.

We've also done a considerable amount of training of staff, particularly in areas of public law and state aid, and we've done a lot of work to improve our governance at all levels from the board, ARAC—our audit and risk committee—and executive team, and have really sought to be very much in that, looking in and thinking what are the lessons that we have learned from this, and I think that, at every level, there has been a real sense of soul searching. 

Just before I bring in Lee Waters, this question was raised to the Cabinet Secretary for Energy, Planning and Rural Affairs in Plenary—can you assure the committee that there was no criminal activity in the award of the transitional contracts in 2017-18?

15:25

We can never be complacent, and no public body can be complacent, about the possibility of fraud, but our internal audit and the Wales Audit Office have been through these contracts; they have been looking at them for a long period of time now. We have put in place strong counter-fraud measures—we revised those in 2016—and we have two trained fraud investigators within NRW. So, I think we have done everything we can to assure ourselves that there was no fraud.

Sorry, I thought you were catching my eye. You've mentioned your staff. Is your view—? You say that you take the auditor general's report very seriously. Are you confident that that is a view that is shared by staff? Are they taking this seriously? Can we be sure that this will not happen again?  

I've, obviously, spent a lot of time since taking up post getting out and about and meeting as many staff as possible. I've visited all our offices, all across Wales. This is an issue that comes up pretty well everywhere I go. Staff want to talk about it, they are concerned about it, they're concerned about what it means for the reputation of NRW, and they want to be reassured that we're on top of it and making sure that it doesn't happen again. So, absolutely, and I've talked to a lot of the forestry team. They are people who are passionate about the woodlands of Wales and the timber industry in Wales, and they want to be able to operate in an environment that is safe for them to do so—that they have all those structures and processes in place that give them that confidence.   

Thank you, and thank you for your statement. It was a welcome change of tone from your predecessor's evidence the last time he was in front of us. Can I just clarify something that you've said? You've said a number of times now that the issues predate the report and these are already things in train. So, when we took evidence from your predecessor on 28 March, it was clear then that the sawmill, which was the key part of the contract, hadn't been installed, even though he wouldn't confirm that on the record. But the e-mails that we now see in the auditor general's most recent report show that, 12 days before that, on 15 March, your team were already corresponding with the Welsh Government to let them know that not only were they going to cancel this contract because they'd breached the terms, but they were already planning, at that stage, to re-let contracts to BSW Timber. How does that fit with what you've just told us about these things already being improved?

As I understand it—and I, obviously, wasn't part of these discussions—when my predecessor came before you last year, he did explain in a private session that the contracts were being brought to an end. I think that's right, wasn't it?

So, he did explain that. 

Not in public session. He couldn't, I think, in public session because it was still very much a commercial negotiation at that point.

Indeed, that's my point, and you weren't part of it, but Kevin Ingram was part of it. That's my point—it's negotiations. So, at the time when you were telling us that BSW Timber had pulled a fast one in not sticking to their contract, you were negotiating with them to give them extra contracts—not publicly advertised, not at market rate—and not being honest with us and straightforward about what you were up to. But we now know. So, I wonder if Mr Ingram could explain to us what was going on?

Well, to be fair, you weren't part of it. Mr Ingram was. He's here for a reason. I wonder if he could help shed some light on it.

I was here to support Emyr Roberts, obviously, at that Public Accounts Committee session as accounting officer. I think I'd support—you know, what Clare has just said to you is the correct recollection at the time, which is that there were detailed negotiations going on to decide how we put in place transitional arrangements to move away from the long-term contracts. You are correct; that was going on at that point in time.

Yes, so why weren't NRW upfront about what was going on?

I think—. So, the contract was being brought to an end—the long-term contract—and Peter and others within the team were looking, at that point, at how to manage that transition effectively from the long-term contract into the new way of working. There was obviously a very short time frame within which they had to do this, and I think we completely accept the auditor general's view that this should have been foreseeable. The problem was that it hadn't been anticipated, and, at the point at which Peter joined the team in early 2017, he then had to work out how, without significantly impacting on Wales's timber industry, we moved from no long-term contract to the future arrangements.

15:30

We'll return to each of these details in turn. I just wanted, just finally, to just press this issue again about—and, respect to you, Ms Pillman; you weren't there at the time—why NRW weren't more straightforward with the public about what was going on at that time, given that the shortcomings had been identified and given it was clear that BSW Timber were not going to meet their contract and there were behind-the-scenes negotiations going on that you weren't straightforward with us about. I just don't understand why that was. I accept you couldn't have gone into the detail, but you could have told us more than you told us.

Well, I can only apologise for what was told at the time, and I accept that. I think it does come back to the point that Clare's said—around that things were happening in a very short period of time because of the lack of monitoring of that contract. I think things were moving extremely quickly in deciding how we would exit ourselves from those contracts on 31 March. A lot was moving on a daily basis there. But I accept we should have told you more at that point in time.

I've been told—and you can tell me if I'm wrong—it takes 12 to 18 months to put a saw line in. How was it that, three days before the end date, your organisation was unable to tell us a saw line wasn't being prepared? Why didn't somebody know there was no saw line being built, and why didn't somebody tell us there was no saw line being built? And, equally as importantly, we didn't need a saw line. They carried on without this saw line that you thought was—[correction: necessary]. I say 'you', I mean NRW; you can't be blamed for things that happened before you were here. But, at the end of it, we discovered they didn't need a saw line. They carried on quite happily without this saw line. So, why did somebody think we needed a saw line, and why did somebody not see it wasn't being built? I mean, these are things that I think are relatively simple, and you'd expect an organisation that was well organised to have somebody who goes along to the sawmill and says, 'You're not building a new saw line, but you don't appear to need one.'

Yes. I think the issue of the need for the new saw line you—this committee—went into in great detail last time, and I accept that, clearly, history has demonstrated that it was not needed to deal with the high volumes of additional timber coming onto the market because of the felling of diseased larch trees. In terms of the contract with the sawmill operator, the sawmill operator provided assurances to NRW in the summer of 2016 that they still intended to build the saw line. Now, I think we all accept that that contract should have been better monitored and it would have been clear that the saw line wasn't going to be built. And, indeed, when Peter stepped into the role in the spring of 2017, it was one of the first things that he worked on, and that was what brought about the termination of that long-term contract.

Surely, it's basic competence in an organisation, if somebody tells you they intend building a sawmill, that three months later you say, 'Well, what stage have you got to now? Have you let the contract? Have you put the contract out?' If you had nothing, then another further three months, then, at the end of those six months, say, 'How are you going to build it now by the date, because you're intending building it faster than we believe it can be built?' But why—[correction: no question]? I mean, that's just basic competence inside an organisation.

I absolutely accept that monitoring of the contract should have been better, and it is something that, as part of the lessons learned from this episode, we're keen to do with every single contract we have.

15:35

Thank you, but I do think it comes down to basic competence rather than anything else.

The other question I've got: why did you think the timber market was so weak that you departed from the timber marketing plan by not openly marketing timber in the transitional arrangements? Why was the rationale for this not documented contemporaneously? And more importantly, you've had all these things being said, things going wrong, and yet, still, instead of saying, 'Well, let's just try and see—we might extend it for three months, but we'll try the market and see how much interest there is'—. We know that we import a lot at larch, don't we, from abroad, and we're not self-sufficient, so you're not competing with other parts of Britain. So, why didn't you actually do what the timber marketing plan said? 

Well, Peter has a huge amount of experience in this area, so I will ask him to take that one, if I may. 

Okay. Well, remarketing this volume of timber across lots of different sites takes many months, and would have impacted—. If we had stopped the supply of the contracts at the end of March, this would have had a big impact on the ability of timber processors to supply the crucial spring and summer markets, which are very important for the timber industry. The timber marketing plan makes many different commitments, in particular around the total quantity of timber that will come to the market and the way that we're going to supply that in different types of contract, whether in short-term, open-market contracts or through long-term contracts. This is really important, as Claire said: the public forest estate generates 60 per cent of the timber into the supply chain and, therefore, we try to avoid making any sudden changes in terms of how we're going to supply timber into the industry. The transitional contracts were the mechanism that most closely enabled us to deliver against the sales plan. The 2017-18 sales plan was published in January, and that laid out very clearly what was going to come to the open market, what would come through LTCs—the long-term contracts—and if we had ceased with the production of the long-term contract volume, it would have reduced our flow of timber into the supply chain significantly, by about 20 per cent. So, we needed to provide some mechanism to continue to meet the obligations set out in our market plan. 

Those are really interesting numbers. Have you got any evidence to support that 20 per cent reduction? And you said 60 per cent—you didn't say 60 per cent of what. 

Sixty per cent of the timber that's produced in Wales comes from the public forest estate. That's widely accepted in terms of industry figures, and on that basis, the long-term contracts comprise 30 per cent of our productions, so you're talking about approximately 20 per cent of the timber flowing into the supply chain at that time of year.

In Wales. Because Wales is not a major timber provider, is it? How much is that for the amount of timber that's being processed in Britain? 

It's a relatively small part of the timber in Britain, but our concern in Wales is around the forest industry in Wales and the borders.

I agree entirely, but if—. Single figure percentages I've seen for the amount of larch used in Britain being produced in Wales. You can tell me if those numbers are anywhere near right or wrong. An awful lot is imported from Scandinavia and other places. So, I'm just bemused by—[correction: by your decision]. We're not a huge player on the British market. 

We're not arguing that there would be no timber available for end users. What we are concerned about is the whole supply chain, including the timber processing industry in Wales. That's where the value is added in Wales. We would have disrupted the flow of timber through that supply chain. 

So, these are a lot of small businesses—

Can you clarify that all the timber is going into timber processing in Wales? Because, again, something I was told—and you can tell me if I'm wrong—is that a substantial amount of it goes to other places, including Scotland.

The vast majority of timber is processed in Wales and the borders. We don't determine—. We cannot control where timber is sent after it is sold from Wales, but the vast majority is processed in Wales or close to Wales.

15:40

Of the timber that we produce? Well, the processing industry in Wales has the capacity to process well over 1 million tonnes of timber a year. We generate about 600,000 tonnes from the public forest estate. But it's a complex supply chain. There are different products; they move in and out of that supply chain.

Last year, how much of the timber from Wales was processed in Wales?

I can't answer that question exactly, but we can supply a bit more information afterwards if you would like—

If you could send us a note telling us that, through you, Chair. That's me finished.

Okay. A couple of supplementaries. First, Adam Price.

Thank you. Just referring back to your earlier response to Nick Ramsay about fraud, are you saying that the explanation about these terrible failings is wholly to do with incompetence and nothing to do in any shape or form with corruption?

There's been no evidence of corruption—

I understand—. There is a distinction; the question isn't about evidence. Is it your view that these terrible failings are nothing to do with corruption and all to do with incompetence?

You will be aware in the definition of procurement fraud that one of the warning signs is unjustified contract extensions or unjustified closed tenders, both of which are relevant in this case. Would you accept that those warning signs that are generally referred to investigations of procurement fraud are both relevant in this case? I mean, they both define this case, really.

Right. Presumably, as an organisation, you keep a conflict of interest register.

Is there anything in that register that refers to the companies involved here: BSW, Tillhill or Euroforest?

I am not aware of the details, but everyone who was involved in this area would have had to have made a conflict of interest declaration as part of the normal course of events. Peter, are you aware of any?

No, I'm not. And we don't have, for example, staff who used to work for those companies or vice versa, so things like that are not—

And there are no social connections at all between the companies involved and employees at NRW.

The forestry industry is a small industry in Wales, so a lot of people will know each other, but there is no undue closeness in that respect, no. It is a small industry, so people are dealing with each other a lot, but only on a professional basis.

But therein lies the issue, doesn't it? The forestry industry is a small industry in a small country, and shouldn't that very fact mean that you have to be scrupulously transparent and avoid these kinds of situations? Do you think that—? I mean, BSW prides itself on being the largest company in its sector and, indeed, its subsidiary is the largest company in that subsector. Did they effectively bully you into these decisions?

I don't believe they did. We let contracts to a huge range of companies in this area, and they weren't actually—they were the second largest, I think, in terms of volume at that time. I think—

Could I just stop you there, though? I think the record shows that they did threaten to take legal action against you, and they also suggested that there would be extremely adverse political consequences if you didn't basically carry out their will. Isn't that a case of a private company bullying a public authority?

I think that—. Well, it didn't work, because we cancelled the long-term contracts.

Well, I mean, you cancelled the long-term contract and then you re-awarded the short-term contract to them and their subsidiary. I mean, it certainly worked for them in that regard, didn't it?

15:45

I think, as Peter has said, the concern we had was to ensure that the many small contractors who relied on this work were not disadvantaged. Now, we absolutely accept that there were failings in the way that we managed these contracts—they weren't signed off at the right level, they didn't follow our own policies and we didn't think about state aid. But I believe that the intention, which was to ensure that, actually, those huge numbers of small subcontractors who were working for these larger companies were not disadvantaged and didn't experience, effectively, a stop of business—that it was done with good intention.

What about the medium-sized companies, though, that would've liked to have had the opportunity to tender for the work? Aren't they also owed some degree of—?

I think we are now in a situation where companies of all different sizes can tender for and bid for work, and that's clearly a better way, I think, of doing it.

With 60 per cent of the market, you're almost a monopolist in Wales. You were dealing with a company that was the largest in its sector—BSW—so it's quite a cosy little situation you've got there. You rightly said a moment ago that, in future, things may be different because you have a different kind of tendering process, which will bring in smaller companies. BSW were in fundamental breach of this contract. It was a condition precedent to all the other benefits that they would get and they failed to fulfil that condition. Rather than them threatening you with legal action, you might've had legal remedies against them.

What I don't really understand here is that you made this condition about the saw line, regardless of whether we now, in retrospect, know whether it was needed or not, and they failed to fulfil that condition. They lost nothing under the contract because you awarded them the subsequent transitional contracts. If it's possible, in future, for a tendering process to be created to allow smaller operators to bid, why wasn't that possible in relation to the transitional contracts? I accept the policy decision that you want to keep the processes in business and you don't want to disrupt their economic plans, and so on, but why was it not possible for a multitude or a small number of medium-sized companies to substitute for BSW in this situation?

I think it would've been possible if we had had a longer lead-in time, and I think that goes to the nub of what the auditor general has described as 'foreseeability'. I think it's right that NRW should've been able to foresee this happening, and therefore should have been able to manage that transfer from the long-term contracts to a completely different way of operating. But the fact was it didn't happen, and at the point at which Peter came into this, he was faced with a very short time in which to get this timber to market—a matter of days—and that was what underpinned that decision to effectively replicate the long-term timber contract relationship on a tapering basis before moving on to a fully open market situation.

So, the other potential bidders for those contracts were fully employed—. Didn't you think, in the time that was available, that they would be able to gear themselves up to take this quantity of timber, collectively, between them?

The first thing I will clarify is that there are a lot of companies involved with the delivery of these long-term contracts; they weren't winner-takes-all contracts. The saw milling company took about half the volume. The rest was not sawmill-able material, and went into a variety of other markets. There were other companies involved with managing the operations and in undertaking the contracting work, so there's a large number of different companies involved with the delivery of them.

In terms of the other companies that might have liked to buy the timber, had we been able to remarket it quickly, then they clearly would have been able to bid for it. But, as I said before, remarketing is a slow process given the need to stop operations, remeasure and put all the details up for people to value and bid for. So, that wasn't an option. Other customers—and we did have a lot of dialogue with the sector at the time—were concerned that if we terminated the supply of timber immediately to the sawmilling operator, that would result in that operator coming into the market and bidding very aggressively on what was coming into the open market, and therefore they might be squeezed out. There might be excessive competition for what was being remarketed, and it would create quite a lot of disruption and anxiety in the supply chain. So, in the end, I think pragmatism said that actually some form of transitional arrangement with remarketing as soon as we practically could was the best way forward.

15:50

Can I just ask one more question? Did the threat to sue NRW by BSW play any part in the decision to award them the transitional contracts? Or did you dismiss that as a fanciful notion?

Our legal advice was very clear on this matter. We were in a strong position and by 17 March they had conceded that the contract would come to an end.

Thank you for giving us a brief. The auditor general believes that the necessity of constructing a new saw line was foreseeable up to 18 months before the contract was transferred. However, he further notes that a failure to properly monitor long-term contracts contributed to the urgency of the situation and a departure from your own timber marketing plan. Why, therefore, was it not communicated between NRW officials at an earlier stage? Secondly, which is more important, what levers are now in place to ensure that staff are monitoring NRW's contracts, and can you tell us how the culture at NRW has changed since the Public Accounts Committee made a recommendation last year?

Thank you. So, taking the first bit of the question around foreseeability, I think we fully accept that although the sawmill operator did provide assurances that the saw line would be constructed as late as July 2016, the contract should have been monitored more carefully, and it would therefore have been obvious that they were going to struggle to do that earlier. So I think we fully accept that.

In terms of what we have done to improve our contract management, we have tightened up the processes around monitoring and we have given staff support in working that through. I think it is absolutely about culture as well as process, so you can have very good processes and in some cases, in this instance, we had good processes, but people didn't follow them necessarily. I think that is about training, support and leadership of the team, and I think we have done a lot of work in terms of training people, particularly around public law and state-aid issues. We have also put in measures to monitor compliance within this and other teams, so ensuring that there is constant checking in terms of compliance, and clearly the leadership of the team in terms of setting those standards and providing staff with that demonstrable standard setting is really important.

Thank you. So, to recap, you accept that had the contracts been better managed, this situation would never have arisen in the first place. The situation having arisen, you then felt that you needed to—for reasons we may well want to challenge some more—go ahead with giving a transitional contract to this big firm that had threatened to sue you. You then agreed a series of contracts with them. It's not entirely clear to me why the contracts were structured in the way that they were, but there were five contracts that the auditor general could not find any evidence had been authorised. And, in a further number, a further eight were not signed off as required by the scheme of delegation. Have you been able to establish why that was?

15:55

Yes. I think, Peter, you were probably closer to that. 

Yes. We fully accept that we were not able to provide signed hard copies of all the contracts, and accept the auditor general's findings on that point. It was an oversight. The day-to-day controls for the implementation of the contracts would have been in place in terms of all the electronic systems that are used to govern the day-to-day handling of contracts and site management, but the hard copies of the contracts should have been signed with the appropriate— 

But you did have the contracts; you just didn't have the hard copies. 

The information is all embedded within the contract system, but we should have had signed hard copies. That would have been useful. If there'd been any sort of dispute, it's important to make sure you have the signed hard copies, and those should have been signed at the appropriate level of authority, so I apologise if that wasn't the case. We have since tightened up on the authorisation limits and placed a renewed emphasis on compliance with all that. 

So, those copies you did have embedded in the electronic system, those were actionable, were they? Had there been a dispute, that would have been good enough to enforce them, would it? 

No, you need a signed hard copy to be able to deal with any disputes, so that is why it is failing; it's important. Now, there wasn't a dispute, but that, nevertheless, isn't a reason not to sign hard copies. 

So, having failed to monitor the appropriate initial contract and spotted that they weren't going to deliver what they'd said they'd do, you then gave them another contract that, in fact, was not enforceable because you didn't have a copy of it. Is that right? 

Yes, you could say that it wouldn't be enforceable, the ones that were not signed, but not all the contracts would have been directly with the sawmilling company. It would have been in the interests of both parties to work those contracts, but I accept the point that if they're not signed, they're not enforceable. 

That's not necessarily true, is it, because you'd already agreed the terms of the contract?

You can argue that you are acting in accordance with the contract, but it is much better to have a contract signed in place. 

We all accept that it is not good practice not to have a signed copy of every contract. 

I've been involved with lots of different public sector organisations—councils, health boards, et cetera—and I've never known anybody not to have signed contracts. Is this the way that NRW works or is it something that, hopefully, you're going to put right? 

It is certainly not how we work, and as I think is clear, these were exceptional circumstances, a very difficult time for the organisation, and, yes, in these few instances, these 13 contracts were not properly signed in hard copy, and that's something that shouldn't happen. 

So, going back to that, as I understand it, the chief executive at the time said initially that he wanted to authorise or ratify the arrangements, but the auditor general didn't find any evidence he actually did. Can you explain that for us?  

Yes, that is correct. I had a mandate to put in place an orderly closure of the long-term contracts, and I was in correspondence with the chief executive on a regular basis about this to keep him informed, but I didn't seek his formal approval for the exact arrangements that we've put into place. They were within my overall level of authorisation, but I recognise that I should have sought his formal ratification for the contractual arrangements, and that was an oversight on my part.

16:00

Well, it was quite a fast-moving situation, and the contracts came into place quite quickly when we finalised our discussions with the companies. I should have, at that stage, gone back to the chief executive, but in the end—

Yes, he had. 

And you thought there was too much on, there was too much going on to trouble him.

I think it was a busy time, but that wasn't a conscious reason not to go to him. 

There wasn't a conscious reason: it was an oversight.

Okay. And did you seek the authorisation of the board?

Shall I—? It was clear that this did not come to the board or to the audit and risk committee. 

So, you've got a set of contracts that you have given to a firm that have breached this contract, that have threatened you with legal action and political fallout, you give them a series of contracts that you didn't have signed so they may not have been actionable, you didn't tell the chief executive about it and didn't get it signed off even though he'd asked you to, and you didn't give it to your own board, to your own audit committee or to the Welsh Government.

Under the scheme of delegation at that time, it would not, in terms of the size of the contracts, have triggered that level of sign-off, but—[Interruption.] But—. Sorry—

With respect, you weren't there. Mr Garson, who's unconsciously decided not to involve his own chief executive who'd asked him to be involved—. Your organisation had just, for the second time running, failed to have its accounts signed off by the Auditor General for Wales, you're about to have a tough session in front of the Public Accounts Committee, and you didn't feel it was prudent to have any of those checks in place to cover yourselves. 

I wouldn't say we didn't feel it was prudent. As I said—

I kept the chief exec informed in terms of the general progress that we were making on the issue, but I did not go to him formally to ratify all the individual contracts. 

And you didn't feel the need to tell the Welsh Government either. 

We worked very closely with the Welsh Government from the initial briefing that we provided following the meeting with the company in the middle of February until the middle of March, when we consulted with them quite closely on our final letter to the sawmill operator about the contract closure. And in that letter it was clear that we would be looking to bring the contracts to an orderly wind down. So, I think, in general terms, the Welsh Government were aware that we would be needing to put in some sort of transitional arrangements.

But you didn't go through the proper sign-off process. 

As Claire has just said, at that time, in terms of specific levels of authorisation, we were operating within our delegated limits, but we entirely recognise that this was contentious and we should have kept the Welsh Government much more closely informed.

What I'm struggling with is getting at the culture of the organisation. You've said several times that these were exceptional times, they were difficult times, they were busy times, so you should have been on alert, having failed to have had your accounts signed off. So, in that kind of environment, you would have thought that an executive body who are fleet of foot would be sensitive to the environment they were operating in, and you are falling back instead on your delegated authority. It seems also extraordinary that the chief executive did not have the power to amend lines of delegation. What kind of structure is this? You've got executives who are a law unto themselves against no oversight from the board, no formal intervention from the chief executive, and the Welsh Government none the wiser.

I think Peter has explained that the chief executive and the Welsh Government were aware of the work that was going on to put in place the transitional contracts. What should have happened was that they should have been identified as being novel, contentious and repercussive and that would have triggered the need to seek Welsh Government approval. 

At the time, when you last appeared before us, your chief executive was being very clever about what he thought was a definition of 'novel' and 'repercussive'. He said there was no agreed definition and it wasn't clear from the Welsh Government what was meant by that. So, you're now saying you've accepted it was novel, but, at the time, your organisation didn't accept that. They were trying to get clever and they were giving legal pushback to the auditor general for the action he took. There was legal challenge from within. So, this was a culture of the organisation at the time when, Mr Garson, you decided you didn't need to get formal authorisation. The cultural attitude of the organisation at that time did not accept any of these constraints.

16:05

We absolutely accept it now, and—

Well, indeed you do, but you have two colleagues beside you, which I'm very pleased to hear—Mr Ingram is very quiet—who were part of these decisions, who are part of the culture of this organisation. The chair and the chief executive have gone, but I'm not sure what the consequences are for the other people who had operational independence to do these things that have landed the organisation in this hot water. What's the consequence for it?

I think the consequences are very clear to see. I mean, we have got a third set of qualified accounts, which is not good—

That's for the organisation. Absolutely. But Mr Ingram and Mr Garson, who are culpable in these decisions as part of that culture—. The others have lost their heads around them, but what consequences are there beyond that?

I've spent a lot of time with both Kevin and Peter since starting this role, and, obviously, this has been an issue that, from the day I started, has been the No. 1 thing on my agenda. Kevin was acting chief executive for four months before I started, and what I have been impressed by has been his determination to get to the bottom of these issues, to put in place the action plan that we have reported to you on regularly, and to support staff at all levels, and the board and ARAC, in learning the lessons from this. I would also say—and he may not say it himself—that he is largely responsible for what was a hugely improved relationship between NRW and the Wales Audit Office during this period.

Peter, I think, has also been very clear that he has learnt an awful lot from this episode and has worked hard with his teams to ensure that both the processes and the culture in those teams are such that they minimise the risk of this ever happening again.

I just want to ask about, to finish, the contracts that were awarded, the transitional contracts, and why the packages were settled on. They amounted to something like 40 per cent of the original long-term contract volume. Why was that figure settled upon?

The 40 per cent was not a target. The quantity of timber in the transitional arrangements was determined really by the need to maintain some continuity of supply and avoid disrupting the immediate supply of timber, and also to allow the lead-in time for the remarketing of timber, which we started later that year.

So, in the memorandum that the auditor general has produced, he quotes the head of marketing saying,

'we used a swings and roundabouts approach to make the whole volume fit the ratio of the proportion of investment made by'

BSW—we have offered the 40 per cent. So, essentially, this was part of the negotiations with them, was it? They were threatening you with legal action, you did a rough-and-ready figure: 'This is the amount of money they've put in, we'll come up with contracts to make sure they're not out of pocket'—is that essentially how it worked?

No. I think there's more to it than that. We had a need to maintain mechanisms that would enable us to deliver our sales plan, as I said before, and we would have not been able to do that had we restricted the volume to very small amounts. But I accept that there is some ambiguity in the way in which these things are described, and it would have been very helpful had we fully documented the rationale behind our decisions. So, I apologise that that doubt has crept in, but we felt under no legal obligation to offer any particular amount of timber to the company. The legal advice was very clear on that front.

16:10

So, it's just a coincidence the figure roughly equates to the amount of money they put in.

I don't think it's a coincidence, I think there is reference to that, but that wasn't the driver for deriving that amount of timber. But, as I say, that isn't clear. The rationale behind our decisions is not well enough documented to give the audit office confidence around that. 

And how do you plan to rebuild their confidence in the organisation?

Well, by delivery. The sector is a very practical sector and actions speak louder than words. We are fully remarketing all of the timber that would have been supplied through these contracts using our open market sales this year. Demand is strong, we're working with the sector on a number of things—improving some of our methods of sale, working on health and safety issues. So, I think actions are the only practical way to regain the confidence of the sector.

And what about your relationship with BSW Timber now? 

We get on fine with them, as we do with all our companies. We treat them in the same way. We have quarterly liaison meetings with them. I don't have any separate dialogue with them.

Yes. They are on the open market; there are sales every couple of months.

Are they proving just as successful as they were before?

They are one of our largest customers. There is one customer that probably has slightly more contractor commitment than them, but they are a large operator.

They're getting less than 40 per cent now, are they?

They never had 40 per cent, previously, of our total sales.

Well, obviously, there's that particular contract. When any contract comes towards an end, then that volume is no longer guaranteed. You have to continue to compete, so—

They've never had 40 per cent of our total volume.

In terms of the fallout they threatened you with—employment opportunities falling and political difficulties of not going along with what they preferred—has that come to pass?

No. They've accepted the outcome of the situation and—  

It's not for me to say. We were clear on our position.

Well, they told you they were going to build a saw line if you gave them the contract. You gave them the contract; they didn't build a saw line. They told you, if you took the contract away from them, there'd be political fallout and economic losses. That hasn't happened, yet you still gave them the contract. And you're still giving them work and you still have a close relationship with them.

We didn't give them the contract purely to protect them. We put the transitional arrangements in place to protect the whole supply chain. In fact, BSW were only taking half the timber from these contracts. There's a lot of other timber products that come off these sites and there were a whole range of different companies involved. So, this was not just about protecting one company—it was about protecting the supply chain and making sure that the overall flow of timber into the market at that time of year did not suddenly drop at no notice. It would have significant unintended consequences, had we done so, on a number of other businesses.

Okay, I've really got to move things on, because I'm conscious Vikki hasn't had a chance yet to speak. So, Vikki Howells, over to you.

Thank you, Chair. Mr Garson, in his report the auditor general said that he's unable to confirm that the transitional contracts were awarded at market rates. Do you believe the contracts were awarded at market rates, and, if so, on what basis have you formed that view?

I accept the auditor general’s findings that they were not awarded at market rates. We did adjust the sawlog price on most of the contracts, taking into account changes in market values, but we didn't change all of the other timber values there. The overall effect of that was that the sawmill operator paid more for their timber than they had previously. All other parties continued on the same basis. The transitional contracts generated a higher level of income than would have been the case if the long-term contracts had continued, but I'm not claiming that they were maximised timber based on market values for all the products. 

Thank you. Mr Ingram, the committee has been provided with an e-mail dated 7 August 2018 that you sent to all NRW members of staff, and, in that e-mail, you state that the original long-term contracts were, quote, 'let at market value'. The auditor general’s original report on those contracts states that he was unable to satisfy himself that the original contracts had been awarded at market value. So, what is your evidence for concluding that they were awarded at market rates?

16:15

I remember sending out an e-mail around about that date. I can't remember the exact wording that I put in there, but certainly—. Yes, if I put that term in—which I did, if you've seen the e-mail—then that was an error within that e-mail. I fully accept the auditor general's findings on the original long-term contracts. We do not have the evidence, and they were not let at market rates. That was an oversight on my behalf. But I'd just like to stress—probably going back to the question of Mr Waters—that I do fully, firstly, agree with the findings of the auditor general, and am doing all I can, working with Clare and Peter, to ensure that we do not have a repeat of this issue.

Being as it's such a sensitive issue and one that's been in the news so often, it seems quite strange that you would make an error of that size in an e-mail to all NRW members of staff.

From my recollection of that e-mail, just to set it in context, both Clare and the former chair had sent out some e-mails to all the staff previously, a couple of weeks before, when our accounts were laid, explaining why they had been qualified, what we were doing about it, and the fact we accepted those. I think, from memory, there was an article on the BBC that day, and that was a message that I put out, I think, quite quickly, just alerting staff to: 'Oh, there was another article out here today; this is about the same timber contract issue, but it's coming out there.' So, it's to alert staff. I did the e-mail at very short notice.

Okay. So—to you, Mr Ingram, and Mr Garson—you both agree, then, that the contracts weren't awarded at market rates, but what about the auditor general's conclusion that the award of the transitional contracts was irregular? Do you agree with that finding?

Yes, I agree with all of the findings of the auditor general's report on the transitional arrangements.

Okay, thank you. The auditor general's report records that NRW's legal advisers highlighted that the proposal for transitional arrangements could have state-aid implications. What action did NRW take to address this advice?

I think that—. Just coming into NRW, I think it is clear that staff across NRW did not have a full appreciation of the issues that triggered state-aid considerations. State aid is a hugely complex area of law and casework, and something that I've worked with for a large chunk of my life, and you still need a lot of thought when you're addressing these issues. So, I think that it would be fair to say that NRW did not have a full appreciation of the state-aid issues, either for the original long-term contracts, or for these transitional contracts. We have put in place a considerable programme of training of staff in public law issues and state aid, not just in the timber marketing area, but across the organisation. So, I hope that awareness is much greater, and obviously we have specialists in our legal department and our finance department to whom people can turn if they need more advice.

Isn't it the case, though, that legal advisers at the time advised NRW that those transitional arrangements could have state-aid implications, but that NRW did not address this risk?

Yes, that is correct. I should have followed up that advice and I didn't. I didn't fully understand the implications of it. Having had some state-aid training now, I now better understand what the significance of that reference was.

And one final question to yourself, Mr Garson. Certainty regarding the price to be paid for any goods and services is clearly fundamental to any contract. The auditor general reported that, due to a lack of certainty regarding the pricing mechanism for the transitional arrangements, NRW lost, specifically, £186,232 in income. Who would you say is responsible for this loss?

As head of commercial operations, I am, and I accept the auditor general's findings that we did not maximise income on those contracts. As I said, the contracts were let to provide some continuity, but I accept that they did not meet market terms in all respects.

16:20

The general pattern, it seems to me, when things go awry with a public body in Wales is that the chair of the body resigns, the Minister stays there and so do the executives. Where do you think the responsibility lies for the serious failings that you've referred to, and what action have you taken to hold those responsible to account?

As accounting officer, I'm obviously accountable for everything that happens within NRW and I fully accept that responsibility and the responsibility for these failings. It is vital that we learn the lessons from what went wrong. I think that a lot has been done to improve the processes and procedures and cultures within the organisation since your first report on this some 18 months ago. We absolutely aren't complacent, which is why, in agreement with the WAO, after they had completed their audit, I commissioned Grant Thornton to undertake a review of this whole area to really look into every last bit of it, because for me it's just incredibly important that the staff working in this area can have the confidence in the systems and processes in place and that we create that culture that means that we really do minimise the risk of this ever happening again.

In addition to the Grant Thornton review, is it also the case that you had additional assistance from the Welsh Government centrally at a senior level? Could you say little bit about that assistance?

I've had a great deal of support from Welsh Government since taking up my role. We have regular conversations about a whole range of issues, including this one. And recently a member of Welsh Government staff has been seconded into my team.

So, presumably, if there were a reoccurrence in the future they couldn't feign ignorance. Just on that, to be serious for a second, this issue of regularity is a core concern because we've heard in previous comments by members of the committee that we were given cast-iron assurances by your predecessor that the very issues that the auditor general had identified would not reoccur; they then reoccurred. You're giving us now those same assurances. How can we be sure that we won't be having a groundhog day moment in a year's time?

Because we have taken all these actions. There is always a risk that something can go wrong within a public body, but what we can do, and what I can do as accounting officer, and what the board can do, and what the audit and risk committee can do, and what the executive team can do, and what Peter and Kevin can do is work as hard as we can to make sure that we have both the right systems and processes in place and the right culture that means that people are confident in operating those systems and processes and turning to the right people for advice and guidance if they have problems. I think that's, yes—.

And if—. I don't want to be the Jeremiah here, but are you able to say as well that you, as the chief executive, take personal responsibility—

—and if this were to reoccur the accountability would lie with you?

Absolutely. Totally. The accountability lies with me for the past as well as the future.

Your earlier answer for the reason for this repetition—or part of the reason—was because this was already in the system when we reported last.

16:25

Of course. Absolutely.

So, we wouldn't expect to see this happening again next year.

I can assure you that, though it is lovely to meet you all, I would definitely prefer not to have to do it again next year. [Laughter.]

Very briefly, three quick points. Firstly, I've been very impressed by your answers today, which have been much more forthcoming than your predecessor last year, and you've engaged with us rather than trying to find ways around it. However, what can you do if somebody doesn't tell you, which happened last year, when the chief executive said, 'I want to know these things', and he wasn't told? What can you do about that?

The second thing is just on an answer we had earlier. I was told I was right it takes 12 to 18 months to put a saw line in, yet we had it in July, which gives them 8 to 9 months, and no-one saw any red lines there: 'This can't be done now because it's too late.' These are the sort of things that you are not going to be dealing with on a daily basis, but how can you ensure that people working for you are doing things properly?

Well, a huge number of ways. Obviously, in terms of regular performance management systems, regular meetings with staff in this area—I meet regularly with Kevin and Peter and we look at where we're getting to on the action plan. Obviously, with the Grant Thornton thing I'm having regular meetings with them, they're reporting to Kevin, so there's all that regular conversation. I think there's something about just making sure that people feel they can tell you things and raise issues with you, and I hope that I am the sort of person who people do feel confident in coming to and going, 'Actually, I've got something a bit wrong and I need to talk to you about it', because that is the quickest way to fixing things.

Any other questions on this area before we move on to the wider accounts? Lee.

Could I just ask briefly—you mentioned that there have been changes in governance and broad scrutiny? Can you just tell us a little bit more about how the board's going to be constituted on a basis that allows them to scrutinise this better in the future?

Okay. So, the board in the spring of 2017 delegated responsibility for day-to-day oversight of the timber contracts issue to the audit and risk committee, and the audit and risk committee then discussed the issue around timber contracts, including the action plan, at every meeting since then. The board and the audit and risk committee have seriously considered what lessons there are for them, and they have been involved very closely in the reissuing of the financial scheme of delegation and their role within it—so, the level at which issues need to come to the board, which has been changed. They also have looked at the audit and risk committee's terms of reference to increase the level of scrutiny and challenge that the audit and risk committee can give. We are in the middle of a process at the moment. We've got five of our original board members coming to the end of their terms at the end of October, and we are in the middle of a—well, we aren't'—Welsh Government are in the middle of a process to recruit five new members, one of whom will be somebody with significant financial expertise who will join the audit and risk committee. We've also had a change of chair of that committee during this period, so we have a new chair of that committee who is extremely focused on continued monitoring in this area, and looking at the wider lessons to be learned for the organisation, including the board and the audit and risk committee.

Okay. Turning to the wider accounts now, and Neil Hamilton.

Just to refer back to what Adam Price said a moment ago, your predecessor gave us cast-iron assurances when he gave evidence to us; cast iron, of course, is a notoriously brittle material, easily broken, and so I don't regard that as perhaps the appropriate metaphor in these circumstances. In your current annual report and accounts, your internal auditor says that Natural Resources Wales can receive 'moderate' assurance over the overall adequacy and effectiveness of its internal control environment. That doesn't inspire us with a great deal of confidence, that he can only be moderately assured that it's fit for purpose.  

16:30

So, moderate assurance is across the whole organisation. The head of internal audit was very clear that she could only give an unsatisfactory view on the specific area of commercial governance and relationship to the timber contracts, obviously. Yes, I would very much like us to be in a position where we have substantial assurance across the breadth of NRW's work. That is where we should absolutely aim to be.    

So, when you say on page 6 of your accounts and report, 

'We have increased our focus on our internal governance to both protect our resources and ensure value for money for the Welsh taxpayer'—

what do you mean when you say you've increased your focus, building on what Lee Waters has just asked you? 

I think that's very much what we have been doing and what I described in the answer to Mr Waters. I think I've focused very much in response to your question on the board and the audit and risk committee, but, obviously, there are layers of governance throughout NRW. Financial scheme of delegation is one important factor of that, and we have made changes to that. We had a bit of a discussion earlier about novel, contentious and repercussive. One of the things we have done in that context is to provide clear guidance to staff. I'm hugely grateful to the audit office and to Welsh Government for their help in getting those definitions clear. We've also looked at terms of reference for our executive board, how regularly they meet, the way in which business comes forward to them, and we've completely overhauled our corporate risk processes. So, a large number of things in addition to the issues at board and audit and risk committee level.     

I'd just like to ask one question that picks up on earlier questions from Adam Price about the repercussions for individuals who make mistakes, or neglect to do something that should be done. I don't particularly want to to focus on your two unfortunate colleagues at the table today, but in what circumstances would there be real personal consequences for somebody? I presume you've taken an overall view that, in the case of Mr Ingram and Mr Garson, their undoubted merits in other ways outweigh whatever difficulties that they've been responsible for in this particular area. But there's nothing like somebody losing his job or being demoted, or whatever, to encourage everybody else in the organisation to sharpen up. Whilst I don't want to take a Victorian employer's view of this, to what extent within your organisation does this increased focus impose some greater level of personal responsibility upon other senior members of your staff?  

I think we have strong performance management systems. There's always more that we can do in that respect and, certainly, it's an area that I will be looking at over the coming year. We also have conduct processes, where if people have been doing things that they absolutely shouldn't, we can take action against them and, if appropriate, and with evidence, they can be managed out of the organisation. So, all that is part of our culture and our processes. I don't think that organisations learn best from people being singled out and given, I suppose, punishment for things that they have honestly tried to do to the best of their ability. I think that leaders need to take responsibility and support their staff and when things go wrong. If that member of staff has broken rules, broken law, then, absolutely, that should be dealt with. But where they have acted with good intentions and made mistakes, they should be helped to learn from those mistakes and to ensure that we don't do it again.

16:35

I fully accept there has to be a sense of proportion about this and, obviously, once you get to a senior level in an organisation, you're responsible for a multifarious collection of things. But NRW has been seriously embarrassed by this particular case. I fully accept the honesty of your colleagues, but there has, undoubtedly, as you've said in your evidence, been reputational damage to the organisation. In the private sector, and, indeed, even in politics, heads are put on blocks in these circumstances. I'm not calling for heads in this session, by any means—I don't like grandstanding politicians in organisations like the Public Accounts Committee—but it is important for the future health of an organisation to know that desperate diseases call for desperate remedies.

Yes. And should such problems arise again, I will absolutely deal with them firmly and within the limits of our policies. 

I'd just like to ask on a related theme. At the end of May last year, the BBC reported that Dr Emyr Roberts was to retire in October last year. Is that an accurate description of the circumstances in which he left the organisation? Did he retire?

Yes, he retired in October.

Okay. Because three months after the announcement, Aberystwyth University announced that he was taking up a role with them, and he received a tax-free lump sum. It's not entirely clear if that should be described as compensation for loss of office. Is it retirement or not?

The payment that is reported in the annual report and accounts was covered by a settlement agreement and it was agreed by the board on legal advice and with the approval of Welsh Government. 

And how was that figure come up with? Because it was between £35,000 and £40,000 under the terms of the settlement agreement. How was that figure arrived at?

Because it is subject to a settlement agreement, I'm afraid I can't say more about it in open session, but I am happy to write to the committee with Welsh Government to provide more details if you would like that. 

It was approved by the accounting officer.

I don't know.

But it would be for the accounting officer to approve.

Can you provide us with that information that the Member asked for?

I certainly can.

Thank you, Chair. I'd like to ask a question on the back of my colleague's previous question. In awarding NRW contracts without tendering on the open market, it has been estimated that £1 million has been lost. It was also clear that NRW already knew that the prices in previous deals were not good value for money, yet still awarded 17 new agreements, based on the same rates. Furthermore, Mr Ingram sent out an e-mail just last month stating that the original long-term contracts for larch wood were let at market value, and directly contradicts the auditor general's finding, who was unable to satisfy himself that they were awarded at market price. It is inconceivable that a private business would be able to turn a profit by behaving in this way. Therefore, how are you now ensuring that NRW is providing value for money for the taxpayers? And what evidence can you provide to the committee to support your conclusion that they were awarded at market rates?

16:40

Oscar, I think this is largely ground that we've covered. Is there anything else that you'd like to add?

Chair, I'm coming to the question now. Your action plan also notes that five state aid workshops were delivered to 81 NRW staff in September and October 2017. Will there be any refresher training courses for these identified staff, and how is NRW intending to keep staff fully informed of any new development in state aid rules, please?

Shall I take the state aid issue? And then I think there was an issue about the £1 million. So, if we take those two, Chair, is that all right? We've continued to train staff in state aid issues. I think we've now got up to nearly 300 staff who've received training, and, clearly, they receive refresher training as that goes through. But, Peter, do you want to just take the issue of the £1 million?

Yes. Just to clarify, that figure is something that I included in the briefing to our chief executive in February 2017 and it's a figure that had arisen during the initial period of the original long-term contracts. The reason for that shortfall is that the timber market improved dramatically from the point at which the contracts had been let, and the pricing mechanism within the contracts have not kept up with the changing market values.

Okay. Thank you. The accounts were produced, and the auditor general qualified the reports three times, three years running—one year, alarm bells; second year, screaming; and in the third year, virtually hands washed. People were going with golden handshakes out of it. And you just answered to Lee the question about this golden handshake that was so much money when he left—the Chair of NRW—and you couldn't do anything, and the Minister also agreed with it. You've just confirmed that. So, isn't it surprising how a reward is given for failures? Is it the right way to run the business, and the public properties?

I think we've discussed some elements of this, and I have given you my views, in terms of the team at NRW, and how focused we are on ensuring that the lessons are learnt from this, and that we minimise the risk of it ever happening again. I think, in terms of the people who were involved in the letting of the original long-term contracts, they have left on a mixture of retirement and resignation. So, there is a sort of—clearly, we have been very open in terms of responsibility for the transitional arrangements, but on the longer-term contracts that were the subject of the earlier report, I think, there were different people involved at that point.

And also, the report that is being printed now by NRW, even the auditor general was having a problem to understand, so we probably won't understand what it was talking about. And his words were that NRW does not appear to have used infographics to better communicate key messages that are lost in narratives. So, that shows itself that he couldn't understand probably where the money was coming and going, and where the money was—

 I think, Oscar, we're pretty much going now over ground that's been covered.

Sorry, Chair—the final question. What steps have you undertaken to ensure that your annual report and accounts are readily understandable for the public, please?

16:45

I think we are always keen, in every bit of communication that we make as an organisation, to be clear and transparent and to put things in a way that is readily accessible. Clearly, the annual report and accounts serves many different functions. It's a matter of record and, obviously, we report against our statutory duties. But it is also an important means of communicating widely on the work that we do. I've had some good discussions with the Wales Audit Office as to how we can improve the narrative sections in particular in next year's annual report. So, I hope that you will see some progress in this area when our next annual report lands. 

Can I ask about your organisational design programme and your review of senior management? Can you give us an update on that?

Yes. So, we are in the middle of a consultation with our staff at the moment on a new structure that will be, effectively, the point at which integration between the three legacy bodies is achieved. This is right from executive team level, right down through the organisation. So, it is a whole-organisation restructure. It is very much moving to a place-based approach—so, six areas within Wales with integrated service delivery in each place. We're out to consultation on that on the moment. That closes at the end of this week. We will then be taking heed of what our staff are telling us, making any changes to the model during October, and then moving into implementation phase from November with a view to having the whole thing ready to go and the new operating model from 1 April next year. 

If you're integrating together three organisations, you'd expect to have some cost reductions at the end of the day. Without wishing to prejudice the consultation, which is in process at the moment, can you share with us what you hope to gain in this respect in financial terms?

In terms of cost reductions, we have made considerable cost reductions since the organisation was created. Kevin will correct me, but I think that we have realised—

We will realise, I would say, in excess of what was in the original business case.

And the original business case was £158 million.

Over 10 years.

And we will realise over £171 million in terms of benefits. We've reduced the staff numbers by over 500 since the organisation was created. At present, that is affordable within our budgetary envelope for this year and next year.

Just to add, Mr Hamilton, with the organisational design that we're doing now, the main driver isn't actually to make further savings; it's about integration, it's about delivering our purpose in a much better way.

Which brings me on to my next question: what assurance can you give that NRW has sufficient expertise to deliver its work and services?

I mean, I have genuinely been blown away by the expertise and professionalism and knowledge that is wrapped up in the staff of NRW, whether it is in terms of their knowledge of climate change or ecology or water or forests. They are an extraordinary bunch of people. Now, clearly, you can't lose 500 colleagues without some expertise and, particularly, folk memory walking out of the door, and I think staff are concerned about loss of expertise. But what I see are people at all stages in their career with an absolute passion for Wales's natural environment and real expertise in every area of what we do. So, it is something that will remain on my worry list. We'll be looking to produce a workforce strategy over the next year, which will look at, effectively, what people can expect from NRW as an employer, what their career path might look like when they join NRW, and that whole sense of how we value and support people in maintaining and developing their expertise in particular areas.

16:50

We took evidence last year from a representative of the United Kingdom Forest Products Association on 22 May, and he said:

'we have very serious concerns about the very significant loss of forestry expertise
within'

NRW. I know that Natural Resources Wales is a much, much bigger organisation than merely the Welsh equivalent of the Forestry Commission, but just to focus on this one aspect of what you do: what have you got to say in response to that evidence, a year ago last May, about loss of expertise?

Forestry is an hugely important part of what NRW does and we have some very experienced foresters on our team—Peter among them, but also another member of the leadership team was a senior member of Forestry Commission Wales. I recognise that I think that the United Kingdom Forest Products Association—. I've met Mr Sulman quite recently, and he put those concerns to me again. I think that—.

So, a year and a half later he's still got those concerns? 

I think he feels that things have moved on and developed. I know that you're seeing him next week, probably, as I'm sure you'll be putting those questions to him.

We're working very hard in this area. I think that we have got some really good solid experience within our forestry team, and all parts of our forestry team. So, obviously, David is very much involved with the forest products end of it, but we have great experience from the land management side, from, obviously, around tree diseases, and the management of our forest estate for multiple benefits. So, whether it's for producing great timber onto the timber market or our forests as places of recreation and sustenance for all of us. But, Peter—. Do you mind if I ask Peter to come in? 

Because he is a forester through and through.

Well, I think it is important to acknowledge that we have lost quite a lot of knowledge from people leaving, and more recently the forest industry, being very buoyant, has been recruiting, so we have lost some staff to take up jobs in the private sector.

On a more positive note, however, we have got a very high proportion of our forestry staff working towards gaining chartered status within the Institute of Chartered Foresters. We had six new members in 2017; four of them gained standards of excellence in their accreditation to become ICF members. So, I think there is a younger generation of forestry staff who are very capable and keen to develop. And in the career structure that Clare referred to that's built into our organisational design, we are identifying technical specialist roles where people can become expert within their areas.

We're not wanting people to become generalists, we're wanting them to become expert, but within a structure that enables them to interact with other parts of NRW's business. So, we acknowledge that we've lost a lot of experience, but we're also keen to rebuild.

That's great, yes. We are virtually out of time. One final question from me: your reported sickness absence has been higher in the last two years than in 2015-16. Can you explain why this is the case and what action you are taking to deal with it?

Indeed. This is another legacy issue in that, when NRW was created, I think there were two legacy systems recording sick absence. We moved to a single reporting system 18 months to two years ago, so I think we have a much more accurate picture of our sickness absence now. It also helps us to break down in terms of long-term and short-term and also looking at causes of sickness absence.

One of the major increased areas—in common with, I think, just about every bit of the public and private sector—has been around issues around mental health. We are taking this very seriously in terms of providing support to our staff. We have introduced a system of mental health first aiders and we are also working towards the Welsh Government's corporate health standard, which has good lessons to be learned from other organisations in terms of how they look at their sickness absence.

16:55

I should never have said 'finally' because there is one final final question from Lee Waters.

So, your previous system under-reported sickness absence. Is that correct?

Your previous system under-reported sickness absence.

I think it is just that when you've got two different systems that probably don't work terribly well together—

That's been long understood, has it, that these systems produced this anomaly that wasn't quite capturing the picture?

I think it was not fully capturing the picture.

Because when Emyr Roberts appeared before us last time, he accepted the committee's congratulations for the below-average sickness rate you had and he would've known at the time that that wasn't fully capturing the picture, would he?

I don't know, but Kevin might.

I can't answer that. I think even last year—the year before this—our sickness rate was just over 3 per cent. I think Emyr, from recollection, we recognised even then the under-reporting previously, but the rate we reported last year—about 3 per cent—we were congratulated on that rate, on the actual rate we were achieving, and we were asked to share some lessons learned. So, no, the lessons learned we shared was on an accurate rate.

Great. Can I thank our witnesses for being with us this afternoon? 

We'll finalise a transcript of today's proceedings and send that to you for you to check for veracity. If, in the meantime, you could send us the information that you told committee you would provide, that would be great.

That's right. Thank you very much indeed, and thank you to all of you.

3. Cynnig o dan Reol Sefydlog 17.42 i benderfynu gwahardd y cyhoedd
3. Motion under Standing Order 17.42 to resolve to exclude the public

Cynnig:

bod y pwyllgor yn penderfynu gwahardd y cyhoedd o weddill y cyfarfod ac eitemau 1 a 2 y cyfarfod a gynhelir ar 1 Hydref 2018 yn unol â Rheol Sefydlog 17.42(vi).

Motion:

that the committee resolves to exclude the public from the remainder of the meeting and from items 1 and 2 of the meeting on 1 October 2018 in accordance with Standing Order 17.42(vi).

Cynigiwyd y cynnig.

Motion moved.

Thank you. I move a motion under Standing Order 17.42 to exclude the public from the remainder of today's business, item 4, and items 1 and 2 of the meeting on 1 October.

Derbyniwyd y cynnig.

Daeth rhan gyhoeddus y cyfarfod i ben am 16:58.

Motion agreed.

The public part of the meeting ended at 16:58.

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