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Y Pwyllgor Cyfrifon Cyhoeddus

Public Accounts Committee

01/10/2018

Aelodau'r Pwyllgor a oedd yn bresennol

Committee Members in Attendance

Jenny Rathbone AM
Mike Hedges AM Yn dirprwo ar ran Jack Sargeant
Substitute for Jack Sargeant
Mohammad Asghar AM
Neil Hamilton AM
Nick Ramsay AM Cadeirydd y Pwyllgor
Committee Chair
Rhianon Passmore AM

Y rhai eraill a oedd yn bresennol

Others in Attendance

Adrian Crompton Archwilydd Cyffredinol Cymru
Auditor General for Wales
Alastair McQuaid Swyddfa Archwilio Cymru
Wales Audit Office
Dave Rees Swyddfa Archwilio Cymru
Wales Audit Office
Dave Thomas Swyddfa Archwilio Cymru
Wales Audit Office
David Sulman UK Forest Products Association
UK Forest Products Association
Derwyn Owen Swyddfa Archwilio Cymru
Wales Audit Office
Mark Jeffs Swyddfa Archwilio Cymru
Wales Audit Office
Matthew Mortlock Swyddfa Archwilio Cymru
Wales Audit Office

Swyddogion Cynulliad Cenedlaethol Cymru a oedd yn bresennol

National Assembly for Wales Officials in Attendance

Fay Bowen Clerc
Clerk
Meriel Singleton Ail Glerc
Second Clerk

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 rhan gyhoeddus y pwyllgor am 14:08.

The public part of the meeting began at 14:08.

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

Welcome to this meeting of the Public Accounts Committee. Headsets are available, as usual, for translation and sound amplification. Please ensure phones are on silent. In an emergency, follow the ushers. We've had a number of changes on the committee during the last week. Can I welcome Jenny Rathbone to the Public Accounts Committee—or back to the Public Accounts Committee, I should say? Good to have you with us. I also welcome Jack Sargeant as well. Both were elected to the committee last week. I'd like to take this opportunity to thank Vikki Howells and Lee Waters for all their sterling work over the last months and couple of years, and for their contributions to the committee. We have received an apology today from Jack Sargeant, and can I thank Mike Hedges for substituting? I understand you have to leave by 4 o'clock, Mike. Do Members have any declarations of interest they'd like to make? Okay.

4. Papurau i'w nodi
4. Papers to note

Item 2—and we have a plethora of papers to note, mainly due to the recess. First of all, the minutes from the meeting held on 24 September. Happy to note those? So, they're duly noted.

Secondly, following the evidence session with Abertawe Bro Morgannwg University Local Health Board on 9 July, Tracy Myhill, the chief executive, has sent additional information, as requested. Andrew Davies, the board chair, has written regarding the remuneration arrangements for the previous chief executive. That was information we requested last time. Did the auditor general, or the audit office have any comments it wanted to make on the information received? No. It's pretty straightforward. Are Members happy to note the letters?

Okay, moving on, following the evidence sessions in the summer term, we've received correspondence from the Welsh Government and NHS Wales Informatics Services, and two health boards providing clarification and additional information on issues raised during the evidence sessions. We need to note that correspondence, the contents of which have been reflected in the preparation of the draft report, which Members are scheduled to consider on 15 October. That is noted.

Andrew Slade from the Welsh Government has written, clarifying the Welsh Government's position on a number of the recommendations in the committee's report on the initial funding of—'initial funding', that should be—the Circuit of Wales project. We had a letter from him, as I said. Are Members happy to note that letter? We'll continue to monitor the implementation of the recommendations relating to the initial funding of the Circuit of Wales.

Okay, medicines management, and we've had a letter from the Welsh Government, from Dr Andrew Goodall, clarifying the Welsh Government's position on recommendations in the committee's report. I'm happy with that letter—are you happy to note it? Yes.

I told you there was a plethora of papers to note. Did you want to comment, Mike?

14:10

I was just going to say, I was chairing my rural affairs committee last week, and I had far more than this. [Laughter.]

Did you? Okay. Well, there you are, you must be more efficient.

Again, another letter from Andrew Slade, clarifying further information on the intra-Wales air service, particularly regarding the subsidy, the temporary contract and the ongoing procurement exercise. That's noted.

Tracey Burke of the Welsh Government has written, following the evidence session back on 25 June with information on a number of action points that arose in the evidence sessions back then. We need to note that letter. And the Welsh Government have undertaken to send us a further update during January of next year. So, we'll revisit the subject then.

Supporting People, and Tracey Burke again has written, clarifying the Welsh Government's position on a number of the recommendations in our report. Happy to note that letter? Would Members be interested in undertaking any follow-up work in the latter part of this term, diary permitting, of course, to revisit it then? Yes? Okay.

In terms of the audit of Cardiff and Vale university health board's contractual relationships with RKC Associates Ltd and its owner, Len Richards, the chief exec of Cardiff and Vale university health board has provided a further update on the implementation of the remaining action points identified following the auditor general's report. I'm not sure whether you wanted to comment on that as the audit office.

No. We need to note that letter and also note that a closure report with a completed action plan will be presented to the board's audit committee in December, which will also be shared with this committee. I understand we'll be advised of the outcome of the internal audit review of the contracts and NHS Counter Fraud Service Wales investigation of the two contracts referred to once it's concluded. Yes? Okay, so that's noted.

Right, we've finished that—

Sorry, Chair, in terms of the report coming before public accounts, will that be in December as well?

I'm not sure. If the audit office complete their report at that point—I don't know the—. We can find that out for you.

It will, Chair.

6. Cynnig o dan Reol Sefydlog 17.42 i benderfynu gwahardd y cyhoedd o'r cyfarfod
6. Motion under Standing Order 17.42 to resolve to exclude the public from the meeting

Cynnig:

bod y pwyllgor yn penderfynu gwahardd y cyhoedd o eitemau 7, 8 a 9 yn unol â Rheol Sefydlog 17.42(iv).

Motion:

that the committee resolves to exclude the public from items 7, 8 a 9 in accordance with Standing Order 17.42(vi).

Cynigiwyd y cynnig.

Motion moved.

So, I propose now that we go back into private. So, I move 17.42. If everyone's happy with that, we'll go into private session so we can consider item 9, which we'll move forward, because we have a fair amount of time to do it.

Derbyniwyd y cynnig.

Daeth rhan gyhoeddus y cyfarfod i ben am 14:14.

Motion agreed.

The public part of the meeting ended at 14:14.

15:00

Ailymgynullodd y pwyllgor yn gyhoeddus am 15:02.

The committee reconvened in public at 15:02.

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

I welcome Members back to this afternoon's meeting of the Public Accounts Committee, and item 5 is continuing our scrutiny of the annual report and accounts of Natural Resources Wales. With that, I'd like to welcome our witness. I thank you for being with us this afternoon. Would you like to give your name and organisation for the record? 

Good afternoon. I'm David Sulman. I'm executive director of the UK Forest Products Association, which is the trade association that represents the technical and commercial interests of processors of British-grown timber. 

Great. As I said, thank you for being with us this afternoon. We've got a number of questions for you, and I'll kick off with the first one. In terms of the construction of saw lines, and the construction of the new saw line, which was at the heart of the issue with the accounts this time around, in your evidence to the committee back in May 2017, you stated that it would typically require 12 to 18 months to construct a new saw line. Given that the sawmill operator was required to construct the required saw line by 31 March 2017, do you find it surprising that NRW only seem to have become aware that the saw line was not being constructed a couple of months before the deadline?

Yes. As I reported to you last year, it would take at least 12 to 18 months to construct and install a saw line of the type that was being considered here, and that 12 to 18-month period would assume that the manufacturer didn't, in fact, have any sort of lead time. So, it's quite possible it could take even longer than that. We would certainly have expected NRW, in their regular meetings with the company. to have enquired about progress of the contract, and perhaps even to ask for evidence. And it seemed odd to us that it was felt necessary to extend the contract because construction hadn't proceeded. That seems to be a fundamental element of contract monitoring, and one would have thought that if that contract monitoring was in place and operating properly, then it would have been obvious if things were happening or not. 

I think I would say it's almost impossible to believe that NRW were apparently unaware of the status of the project, especially as we as an organisation had repeatedly asked NRW senior staff during the currency of that original long-term contract about what was happening, because it seemed to many people in the industry who are knowledgeable about these affairs that, as time went on, it seemed increasingly unlikely that the timescale for the installation and construction of the saw line would be met within that contract period.

15:05

Because their defence—sorry to interrupt—is that they were unaware, and that, up until May 2017, there was the possibility that that sawmill would be constructed. But, given what you've said about the length of time that it takes for that to happen—you say it's virtually impossible for them to have been unaware—what do you think could possibly have been going on that, even at the start of 2017, they were happy with the way things were going?

It's difficult to know. You would have thought that they might have requested, ordinarily, documentary evidence—you know, were contracts in place for the supply of the equipment—and one would have thought, even if they were visiting the site, evidence of construction should have been there for all to see. So, it does seem very strange that they claim to have been completely unaware.

And when you flagged the issue up to them, and people in the industry flagged it up, what sort of response did you get?

Well, sadly, every time we flagged it up to NRW staff, we were met with the same response, which was, 'We're unable to discuss this with you because it's commercially confidential', and that was the end of that. That was the story that was presented to us every time.

Even though you were simply pointing out that a sawmill hadn't been built, wasn't likely to be built, and that they needed to take action.

Exactly that. So, from us, and I can't believe ours was the only voice, the warning signs were there from early on in the arrangement.

Thank you very much, Chair, and good afternoon, David. My questions will be on transitional agreements in NRW. NRW officers have told the committee that NRW's failure to effectively monitor the contracts with the sawmill's operator meant that, by the time NRW realised that the long-term contracts would end on 31 March 2017, to avoid disruption to the supply chain, it had no option but to enter into transitional contracts with the sawmill operator without openly marketing the timber.

As far as the question of NRW's decision to enter into what has been shown to be seen as a 12-month transitional period—or transitional arrangements—frankly, I don't think that was the only option available to them. I'm quite certain there would have been other options, but, having said that, it may be considered that NRW perhaps took the easiest option available to them. Whether they'd explored other options, I wouldn't know, but it does look as though they took the easiest option, and it appears that NRW staff simply repeated their previous actions, which led to the award of the original long-term contract.

I certainly wouldn't call these actions mistakes or oversights, as has been claimed. And it seems to us that these actions were premeditated, deliberate, and made in the full knowledge of the facts and the existence of long-standing and well-understood official procedures around timber marketing. Talking to people in industry, some might even go so far as to say that, in view of the very serious concerns that the auditor general and his staff—and, indeed, this committee—had expressed about NRW's behaviour, their action might amount to almost being contemptuous. Similarly, the transitional arrangements appear to have been equally novel, contentious, and potentially repercussive as the original long-term contract arrangements were. And it seems to us that the alarm bells should have been ringing very loudly indeed in the corridors of NRW, and their staff should have taken appropriate action in response to that.

So, whilst there may well—and I'm quite sure there was a role for transitional arrangements—our view would be that those transitional arrangements should have been short-term, and I would emphasise short-term, and involving only a small proportion of the overall timber volume that was at stake here. I believe that NRW should then have focused on remarketing the balance of the timber on the open market, and in the period that we're looking at, those timber volumes would have been very keenly sought by industry, because the market was rising and the demand for wood products continued to be very strong.

Thank you very much. The thing is, on 28 March 2017, NRW agreed to give all the transitional contracts to the same sawmill operator. However, three days later, 38 of those contracts to another party. So, basically, it was all flawed everywhere. You just earlier mentioned that they took the easy option. So, was there any other option open to them?

15:10

Well, as I said, I think the option that seems to us that perhaps they should have pursued was to have entered into a very short-term arrangement via the open market to deal with the fallout from the closure of the original long-term contracts. And they should then have focused their attentions on offering the remainder of that timber to the open market. That, I think, would have been fair, reasonable, open and transparent.

I just want to explore why you think this was the easiest option, because I'm struggling to understand why anybody would want to reward an organisation that had simply failed to comply with the contractual commitment to construct a new saw line. Why would you put any business the way of that organisation?

Frankly, I think that's a mystery to all of us, because, as you say, why repeat the mistakes of the past? As I said earlier, the official procedures for the marketing and sale of timber from the public forest estate are very well established, everyone is familiar with them, and quite why the state organisation should decide to depart from those, other than expediency—and, frankly, that's possibly the only explanation one could—

Well, that's what I want to explore: why was it the easiest option? Is it that there's nobody else available to do this type of work? Is it a monopoly provider in your view?

The public forest estate in Wales probably supplies something in the region of about 60 per cent of the timber that's processed in Wales; the other 40 per cent comes from the private sector. That in itself is not an issue. That's well established, and the industry works well on that basis, as indeed it does in Scotland and England, where proportions, historically, have been very similar. So, yes, in answer to your question, NRW are responsible for the marketing and sale of their produce, and they have had, in the past, skilled and experienced staff to do that. Why those skills weren't used to explore more fully what options may have been available, I honestly don't know. I wouldn't know.

Okay, but I'm still trying to understand why it was the easiest option, because here we've got a non-compliant organisation that failed to build this saw line in time. Why would you have to continue to do business with an organisation that had just failed to meet its contractual obligations?

Frankly, you wouldn't. Frankly, you wouldn't. Why repeat the mistakes of the past when you have perfectly good and perfectly transparent arrangements that you should have been pursuing and could have picked up again to deliver the rest of the job?

Okay, so, they were perfectly good commercial alternatives.

Absolutely, yes, without a doubt.

Natural Resources Wales have claimed that, because of the volumes of timber that were in issue here, there wasn't anybody else who could have taken the load on, and a multiplicity of contracts with smaller firms was not feasible, but you don't agree with that.

No. I recall that comment and claim being made, and, no, frankly, it wasn't the option. The companies involved are some of the biggest players in the industry in Wales. So, therefore, in theory at least, their capability may have been greater than others, but there can be no doubt that many other companies, large, medium and small, throughout Wales and, potentially, further afield, would have been very interested had they been given the opportunity. And, in this case, obviously, that opportunity wasn't extended to others. The harvesting and marketing resource in the private sector, in terms of harvesting contractors, specialist timber hauliers and what have you, is very well established, and is ready and waiting to go. So, that resource, which had previously been occupied in the long-term contract volumes, could simply be redeployed to work for others. So, it seems to me that NRW probably overplayed the significance of their actions, and I think it was suggested that they did this in order to prevent chaos and people stopping work and businesses going under. That, frankly, doesn't stack up.

So, whichever way you look at this—. So, there was a sawmill that was never going to be built, even though they maintained it could be built. There was a load of wood that could have been disposed of by other companies, even though they maintained that it couldn't be disposed of. It's almost like they're living in an alternative universe. 

15:15

It would seem that way.

Whichever aspect you look at in this situation, their answers don't seem to tally with what other people have been telling them.

Thank you. With regard to the expediency point, I think one of the other additional comments was around the fact that, in regard to the larch disease issue, the spread was their main concern in terms of haste. So, have you got any comment on that? And also, in regard to the comment that NRW's own officers said that NRW failed to effectively monitor contracts, would you agree with that or would you tend to stick to your earlier comments, which was this was novel, contentious and premeditated?

Okay, in terms of the first part of that question, there is absolutely no doubt that all of this and the arrangements that we've now seen were brought about by the need to deal quickly and effectively with the significant disease of the larch crop in Wales, as we'd seen in England and subsequently in Scotland.

It was urgent, yes. Time is of the essence when dealing with this disease. It's important to fell diseased trees quickly, so that they don't continue to produce spores and spread the disease amongst other healthy crops. So, yes, time is an important factor. The disease has been reasonably well—in fact, very well managed elsewhere. Although, the disease is still with us and, unfortunately, it is still spreading, but nothing like at the rate we had seen. So, yes, time was of the essence, but that's still no excuse for taking the easy option and not seeking the assistance of a range of companies who could have assisted NRW in that process.

In terms of the contract monitoring, contract monitoring is a well-established part of any procurement process and it should not have been difficult. It's difficult to understand how and why NRW apparently failed to keep tabs on the status of this project, which after all was a condition of the contract.

So, would you put that down to incompetence? You've mentioned the word when it comes to the transitional arrangements. Premeditation—you've spoken very strongly in your language around that. So, could you shed a little bit more light on where you feel the failings were across the catalogue of different areas, whether it's the transitional arrangements or whether it's the sawmill contract evaluation?

As you'd expect, this is something we've given a great deal of thought to because it's really at the centre of all that concerns us at the moment. I think having assessed the matter as carefully as I can and having taken views and opinions from a variety of individuals, I think the conclusion that we come to is that we can say that the shortcomings and failures that have been admitted by NRW in this case were undoubtedly the actions of NRW staff.

Critically, all of those members of staff who were involved in this exercise were experienced people. They were well versed in the official procedures and routines of timber marketing and sales within NRW. As I said earlier, these routines that have been around for many years, both within NRW and in Forestry Commission Wales as its predecessor, are very well understood by staff and customers alike. Formality and, dare I say it, bureaucracy are characteristics of this process, which everyone is perfectly familiar with.

So, on that basis, we really cannot believe that the actions that we've seen and the consequences that we've seen can simply be explained away by incompetence. I think the word we would use is perhaps 'expediency' but certainly not 'incompetence'. And I would also make the point that, sadly, several members of NRW staff who were intimately involved in this matter in recent years are no longer in the employ of NRW, either having left or retired. As a consequence, we may never get to the bottom of this sorry and shameful state of affairs.

If I may interrupt through the Chair, in regard to in your view this is not incompetence and bearing in mind the seriousness of tendering processes and the frameworks that go with them, would you go far further than saying that it is not because of incompetence? Are you saying anything else?

No, I'm simply saying that we don't believe that the difficulties that we've seen here are simply the result of incompetence, because of the involvement of experienced people. 

15:20

Okay, and many of those are no longer working with NRW at the moment. 

Sadly, yes.  

With regard to the transitional arrangements, obviously the disruption was often used, and very understandably in terms of the scale of the no doubt, at one point, panic around how far this could spread and how quickly, and how it could decimate the industry across Wales and obviously the UK—. How long do you think—I think you've touched upon this—that the transitional arrangements should have lasted for, bearing in mind that they would have been sound of purpose in the first place? 

This is a key question, I think. We've seen that NRW decided that the transitional arrangements should have a 12-month duration. It seems to us that 12 months was excessively long, unnecessarily long, and I think we would suggest, even although NRW make the point that remarketing the timber would be very time-consuming, they were in the best position to do that:  they had all the information and apparently appropriately skilled staff. So, on that basis, it would seem to me that the transitional period should have perhaps been three months, four months at the most. That should have been sufficient time to get the act together, take stock of the situation, avoid any significant disruption to the timber harvesting and timber supply chain and then, at the same time, to be focusing their efforts on remarketing that timber. 

Okay, and with regard to the fact that almost 100 per cent of the volume was involved in that long transitional arrangement, do you believe that's the right amount of volume that should have been included? 

I think most people in industry are very surprised that that sort of volume should be involved and can see no justification for that. I would suggest that the short-term three months, four months at the most, should have been accompanied by a proportionately lower volume of timber, because that's all that would be required in that three or potentially four-month period. 

Okay, thank you. We've touched upon, and you've used some interesting language with regard to the auditor general's considerations upon this matter—. Do you accept his position that this is incompetence with regard to NRW's machinations around this situation? 

Incompetence may well have played a part in this. 

Well, I don't know what more it can be, but I think—

Just before you go on, for clarification, I don't recall the auditor general's report saying that it was due to incompetence. 

If I read this:

'NRW have told us that the failings identified by the Auditor General were
due to NRW incompetence'.

So, NRW has identified, the auditor general stated—. 

As I said earlier, it is difficult to accept the view that this can be simply attributed to incompetence alone, on the basis, as I said earlier, that the staff who were handling it were all experienced people who knew what they were doing. 

Okay, thank you. And finally, with regard to both the sawmill operator and the timber harvesting company—both major players—is it correct, in your view, that NRW's decision to award the contract to the sawmill operator was correctly overseen?   

If you're asking me whether I thought the contract was correctly overseen, that would appear not to be the case, for the reasons we discussed at the beginning of the session. 

Just before I bring in Neil Hamilton in the next set of questions, you mentioned there the level of experience within NRW. I recall in previous evidence sessions with them that they did cite that they were a new organisation or a newish organisation and, therefore, that would go part way to explain some of the issues with these contracts. But a lot of the staff had worked previously for the Forestry Commission as well, so they worked within the field of forestry for a considerable length of time, a number of them. 

That's absolutely the case, especially on the forest operational side, and equally so within the timber harvesting and marketing function. Most of the staff had transferred across from the former Forestry Commission Wales, hence my comment that people were experienced in this field. 

So, saying it's a new organisation doesn't really give the full picture of the level of experience that staff had. Neil Hamilton. 

Just to follow up what Rhianon said, if you can't think that it was just incompetence, and these were senior and experienced individuals in NRW charged with negotiating these contracts and ensuring that the terms were fulfilled, that doesn't really leave us much option but to think that there was something more sinister involved. Do you think, therefore, that this is a matter for the police?

15:25

I'm really not in a position to say. But the point we would make is that, clearly, significant decisions were taken about their actions and that these decisions were taken by skilled and experienced people. No-one can say they didn't know what they were doing and it was a mistake. Clearly, conscious decisions were taken based on whatever evidence was available to them. That's all we can see, and, frankly, I don't think I can answer much more than that, because I can only comment on what we've seen.

There were all sorts of administrative failings involved here.

The transitional contracts weren't let at market rates and, indeed, Natural Resources Wales doesn't seem even to have considered the issue in a state aid context, therefore, they were flying blind. A number of the transitional contracts were not signed and not authorised in conformity with NRW's scheme of delegation. And the auditor general's report records that most of the contracts were signed after forestry operations actually started. I presume this is not common practice in the industry.

It absolutely is not. As I said earlier, the whole official processes and procedures around timber sales and marketing are marked by their formality and bureaucracy. So, what we've seen here is a massive departure from processes and procedures that have been in place long before the advent of NRW. And furthermore, it would be true to say that it's almost unheard of that a company, having entered into a contract with the state forestry organistation—be it NRW here in Wales or the Forestry Commission in England or Scotland—would be allowed to commence work on site until the terms of the contract had been  agreed and the contract had been signed by both parties. Then, and only then, when, in effect, contracts have been exchanged, can works start on site. And, of course, the contract would be a very detailed document providing critical information in terms of volumes of timber, the area, the site, prices, of course, other constraints that might be present on site, and it is the most critical document in the process.

It may seem an obvious question to ask, but I'll ask it anyway: what are the implications of not having signed contracts in place before these operations begin?

I think what I would say here is that because the contract document is such a fundamental document in this whole process, it would be unusual in the extreme for there to be no contract in place. It defines what is to be undertaken, when it's to be undertaken, who it's to be undertaken by, in the form of a normal commercial contract. In the absence of a contract, it would complicate matters no end in the event of there being a dispute surrounding what might have been a regular part of that contract. There could also be issues, I guess, in terms of were there to be any sort of incident during the currency of that contract on site. As I said, it's such a critical document that provides a framework for all of the works, it is unheard of for it to be absent.

Of course, in the law of contract, it's possible to have an agreement even though it's not actually set out in writing, and particularly in an industry where the contracting parties have done business with one another for a very long time, you can have a contract by the conduct of the parties. So, there will be a scheme of behaviour of perhaps many years where common forms, standard clauses in a written contract might be presumed, even in the absence of a written agreement. Do you think that that would be sufficient to guard against some of the possible problems that you've just adumbrated?

Frankly, no, for the reasons that I've said earlier. The formality of the whole process is so well established in Wales, as it is in England and Scotland, that people would be wondering what on earth was going on if they tendered for a contract, had been awarded it, and were then not subject to the usual documentary procedures. 

I've muddled up the questions, and there are other questions, so you can halt there, Neil. It should have been Jenny Rathbone, but there we are—you had a good supplementary there. Jenny.

15:30

I don't understand how, if you don't have a contract in place, the sawmill operator, the individual, knows whether they're sawing into planks or into posts or whatever. You need to know what the end use of this piece of wood is going to be, really.

The important thing here—. Just to clarify, the purpose of the contract, and there may have been several contracts here, but in terms of the contract that NRW would award for the harvesting of the timber out in the forest—in essence, cutting down the trees; the trees are then transported to a sawmill for subsequent conversion—the prime focus of that contract, initially, would be on the operations that would take place in the forest: the location of the trees, the area of trees, the quality and what have you. And it would also determine who the buyer was, and then once those trees had been harvested, where they were then transported to. The wood processing company—the sawmill, in this case—would then decide how they were going to saw that timber, in terms of its specification, whether it was going to be into posts or planks, or what have you. But they would have bought that timber in the knowledge of a certain return for the crop they'd bought.

Okay, but I think—. Just going back to the transitional arrangements, I still don't understand why transitional arrangements are required. The contractor having miserably failed to comply with building the sawmill—why couldn't they just simply leave the trees uncut until they'd put the work out to tender to the market at large?

Yes, a perfectly reasonable question. As you've heard, NRW made the point that if they were to do that, they believe that it would run the risk of severely disrupting the industry, with the suggestion, I think, that contractors would be left high and dry waiting for more work.

Are we talking about the sawmill operator, or are we talking about the lorry drivers and the—?

Well, potentially, the suggestion was the whole supply chain. So, for the people working in the forest, carrying out the timber harvesting, for the hauliers, and, indeed, for the sawmill as well. They seem to think that by terminating those contracts, and not putting any sort of transitional arrangement in place, that everything would grind to a halt and there would be chaos. That seemed to be their justification for entering into the transitional arrangements.

I can see that they might have had concern about sole operators who rely on a regular flow of business, but there were 59 contracts involved, so that's not a transitional arrangement. You know, surely—. How many months does it take to put out a request for bids for X, Y or Z bits of work?

The bulk of the background work, if you like, leading up to a sale being announced, is actually people going out to survey and measure the crop so that they can then produce accurate what you might call 'sales particulars', so that people know what they're potentially buying and basing their price on.

Absolutely, you're correct, which gives further strength to our suggestion that the transition arrangements certainly need not have been of 12 months' duration, and three or possibly four months should have been perfectly adequate for that period.

Okay. Well, I think that does raise some really serious concerns, as far as I'm concerned.

Just before you go on, what do you make of the—? It's 59 contracts we're talking about here; what did you make of the number of contracts that were involved?

I think it would be true to say that the industry at large were absolutely astonished to learn of these so-called transitional arrangements, and then, of course, most recently the fact that there were 59 contracts can only really be described as truly beggaring belief.

Did you raise your concerns? Did anybody in the industry raise concerns with the Welsh Government? 

Concerns had been raised in relation to the early contract, but I should make the point: in terms of the 59 contracts and the transitional arrangements, nobody within the industry was aware of these transitional arrangements. I should maybe make the point that in terms of NRW's engagement, if we call it that, with the industry at large around this matter, all that the industry has been told by NRW staff—and this has been primarily transmitted via an annual meeting, which is known as NRW's customer liaison meeting, which in recent years they've held in January, and their timber marketing plan forms a major part of that meeting. At these meetings, senior NRW staff and operational staff come along, set out their stall to their customers in terms of historical reporting of their performance in the previous year, their timber marketing plans for the coming year, and it provides a useful forum for questions and answers.124

In terms of the closure of the original long-term contract to the sawmill operator, it can scarcely be called engagement, but I can describe to you what in our experience happened, and that was simply the case of NRW informing us, as the trade association, and their customers of the termination of the contract, and they said subsequently that the timber volumes associated with that LTC would be returned to the market. At no stage was there any comment on the transitional arrangements, not least in terms of their duration, and not least in terms of the number of contracts and the volumes of timber concerned. Had that information been made public, to put it mildly, there would have been considerable disquiet and calls for no end of action because, as I say, at that time, demand for timber was so strong, pretty well everyone's focus in the wood processing industry was to secure wood raw material to meet the demands from their customers.

15:35

So, if demand was so strong, how can you explain that the price that NRW agreed was actually below market rate? I mean, that's—.

I simply could not explain that. It is inexplicable to us why in those circumstances the state forest organisation should decide to sell significant volumes of timber, or, indeed, any volume of timber, at prices that they've admitted were significantly lower than the market rate.

Not at all. No, absolutely not. The wood—. It's important to make the point that, although larch trees may have suffered this infection, provided the trees are harvested relatively quickly, the wood is perfectly usable. As we've seen, the huge volumes of larch that have been infected here in Wales and in England and Scotland that have worked their way through the market have been readily sought. So, it's important to understand that the wood is in no way inferior.

Thank you, Chair. Just a follow-up to Jenny's questions. Certainty regarding the price to be paid for goods and services is a fundamental to any contract. The auditor general reported the lack of certainty regarding the pricing mechanism for the transitional arrangement has cost NRW nearly £200,000. So, do you think that NRW played fast and loose with public money in the way it dealt with these transitional contracts?

I think there can be absolutely no doubt that the best value for money was not achieved by the actions of NRW and, as a consequence, the public purse in Wales suffered. 

I think that's a way of saying 'fast and loose' in a restrained way. [Laughter.]

Well, yes, I think we ought to ask about—. Just one reflection on the evidence so far: in addition to all the other failings that have been identified, the sawmill wasn't built, but that wasn't a problem in the event. It looks as though the sawmill wasn't needed. So, could that have been forseen at the time when the contract was originally agreed, do you think, knowing the state of the market at the time and trends?

Certainly a very valid question, and I've been very interested to read the auditor general's views on forseeability, which I think are absolutely spot on. The processing capability of the sawmilling sector is pretty well understood. Sawmill surveys are carried out annually by Forest Research, the research arm of the Forestry Commission to which sawmills in Wales routinely respond. Experience has shown that, as you say, an additional new sawline wasn't required to process the additional volumes of larch that came forward as a consequence to the felling programme arising from the disease. I'm quite sure that, had the sawmill line been installed, it would have been a very useful asset for the company and would have enabled them to have probably improved productivity and efficiency. But you're absolutely right: the volumes of timber have been processed without the requirement to build an additional sawline.

15:40

When NRW gave evidence to us last week, they assured us that they'd learned lessons from the auditor general's report, and that they've taken steps to ensure that improvement will take place. Do you have confidence that NRW has the capability and capacity that it needs to make the necessary improvements? There's a new chief executive, of course, but—. Maybe a new broom can sweep clean.

I think I would have to say, initially, on the basis that we're actually meeting here again, just one year after the disclosure of terrible failings by NRW last year, that, almost inevitably, there have to be doubts about the capacity and capability of the organisation to, in effect, get its house in order and demonstrate its fitness for purpose. That's what we all want to see, I'm sure.

You're correct: the arrival of a new chief executive at NRW is certainly welcomed. But I think I would issue a caution that she should not underestimate the scale of the task facing her. Lessons, it would appear, plainly had not been learned from the previous episode, and we would certainly say that, today, urgent action is required to address those shortcomings to ensure that there can never be a repeat of such failings. But I seem to recall that we said that 12 months ago.

And, of course, urgently, we need to restore the public confidence and the confidence of the timber industry in Wales in NRW as the organisation. It's a huge task, and the new chief executive has told us, hasn't she, that she and her team are getting to grips with this task. And we sincerely hope that the lessons have been learned, and that, in future, NRW will be able to demonstrate by its actions that it is indeed fit for purpose and therefore will earn the confidence of its timber customers.

I think, furthermore, I would have to say that it's absolutely essential that the organisation has the appropriate skills to enable it to deliver its services in both a professional and an efficient manner. I think I would acknowledge that forestry is undoubtedly very different from NRW's other responsibilities, and it has already been acknowledged by NRW that a great deal of expertise in forestry, sadly, has been lost in recent times. That really is a great pity, and must not be overlooked, and needs to be actioned as soon as possible.

I think we would say that good forestry knowledge and experience, together with appropriate customer focus—and we shouldn't lose sight of that as well—are required throughout the organisation. It seems to me that all of these are an essential requirement for improvement within NRW. Sadly, unless we can see that, it seems to me that there is a significant risk that we'll continue to see substandard and unacceptable performance within the organisation. So, there remains much work to be done.

We've heard from Clare Pillman that there's likely to be further restructuring within the organisation, and I think she said last week that this was likely to result in a place-based approach, and that six areas will be led by persons with differing skill sets and expertise. I recall her telling us that this expertise might be in land management, flooding issues or possibly forestry. We continue to have concerns that this sort of generalist approach simply demonstrates further dilution of forestry within the single environment organisation. As I said earlier, it's essential that there's appropriate knowledge and expertise in each of these new regions, if they come to pass, as well as in the overall timber marketing and sales function, as well as in the senior management level and, indeed, the board.

Casting my mind back a few years, when it was announced that a new single environment body was going to be formed, I can well recall at industry meetings that people expressed serious concerns then that forestry would be further diluted and would become the poor relation within the new single body. Sadly, that's proved to be the case, and I think that is a desperate shame. But, in all honesty, I don't think anyone could have foreseen the severity of the terrible state of affairs that we now see. As I said earlier, it really does beggar belief. 

So, the chief executive did say to you that I'd stated to her in a recent meeting—and that was a meeting on 10 September this year—that matters had, quote, 'moved on and developed'. Close quote. I'd just like to make the point that that, to me, seems to be a potentially misleading statement, and that statement must be taken in context. Inevitably, as in life, things move on, but not always in the desired direction. So, in terms of things having moved on and developed, yes they have, but that doesn't necessarily mean for the better. And, on that basis, we are still looking forward keenly to evidence of sustained improvement within NRW, especially in its timber harvesting and marketing operations.

15:45

So, as you perceive it, there is no evidence that things have moved on. It's work in progress; we're waiting for results.

Very much so.

The logic of what you have just been saying is, I suppose, that the commercial arm of NRW ought to be hived off into some kind of quasi-autonomous body. NRW does have a large part of its work in functions that are very different from the commercial world—the world of regulation and management in the interests of the public. It's not impossible for an organisation to straddle these two areas, but is that what you think would be the best outcome—

No. I really don't believe so. I see absolutely no reason why NRW shouldn't continue to be responsible for the marketing and sale of its timber produce. It should be perfectly capable of doing that, given the right people being in the right place. It works extremely well across the border in England and in Scotland, from the state selling organisations, and I think that pretty well all of us would wish NRW to do that, provided that it does it professionally and efficiently. That's what we are hoping to see. I, for one, would not make a case for hiving it off.

I think we've got—. Just before you go on, Neil, did you have a supplementary question on that, Jenny? Then, I'll bring you in after, Rhianon.

Yes, please. Clearly, it's a positive that we have got a new chief executive who wasn't involved in any of this mess. But I am still puzzled why an organisation that—. They wouldn't all be experts in forestry, but you don't need to be an expert in forestry to understand that the sale of the wood is a key source of income—

So, I don't understand why the board, including the finance director, weren't completely focused on how we maximise our income from forestry sales in order to do all the other excellent tourism work, et cetera.

I absolutely agree. You are right. At a time when the market is so strong, the rising demand for timber and the consequent rise in price should potentially be filling the coffers of NRW with additional revenue, exactly as you say, to help defer the costs of providing what you might call non-market benefits from the public forest estate. There's never been a better time to maximise the income opportunity. 

Okay. So, there's a good deal more work to be done before we can be satisfied that the organisation as a whole is appropriately focused on maximising the forestry estate in order to support all the other things.

Yes, indeed. And, in fact, if we look at the traditional methods that NRW have used to market and sell their timber, which are replicated in England and Scotland, those open-market opportunities—which, of course, were not a feature of these arrangements and have given rise to such concern—ensure that the public purse gets the best possible benefit. You would be hard pressed to find a more competitive industry than the forest products sector at the moment. As I said earlier, the focus of all timber processors at the moment is on securing their wood raw material. So, whether the timber is offered via auctions, tenders, the traditional open-market methods, they would be assured—categorically assured—of the best possible price. But a feature of the episode that we have been looking at is that those volumes were not offered to the open market.

So, would you be in a position to make any sort of calculation as to how much money was lost by failing to agree a price at the market rate?

I couldn't, and the reason for that is that, as an organisation, we have never collated information [correction: collated price information]; that's not felt to be appropriate. There are price indices that are a matter of public record, but the market has been very, very strong, and looking at the information that was presented in the auditor general's report, comments I've heard from industry players are that the prices were very significantly lower than the prevailing market rates.

15:50

Yes, the last question from me. You referred a moment ago to public confidence in NRW and the management of the forestry estate. What action do you think NRW and/or the Welsh Government should take in order to re-establish public confidence? Clearly, your members don't have confidence in NRW or at least they haven't yet got the evidence on which they can justify such a conclusion, and it's a hope rather than an expectation.

Yes. I think that, surely, things can only get better. And, as you say, there is the question of hope or expectation—

We do sincerely hope that there will be a marked improvement in NRW's timber operations. Surely there has to be. I think the evidence has been very plain for the chief executive and her senior team to see, but, as has been said in this Chamber, there have been fundamental and systemic failings at various levels in the organisation, and that has to be a priority for action and improvement. So, yes, there needs to be change. I think there would be no harm in NRW frankly going back to basics in terms of its timber operations to ensure that it has the right people in the right places and, of course, as Clare Pillman said, the right procedures and the right processes.

I hope that the Welsh Government and NRW recognise that the forestry and forest products sector is a vitally important element of the rural economy in Wales, because it certainly is. And it deserves better recognition by both. Indeed, one really feels quite sorry for the many good employees with NRW who must be wondering what they're going to hear next, and they surely deserve better.

So, whilst there's been enormous reputational damage to NRW, sadly, and it's very worrying, this bad news could and may well reflect negatively on the sector as a whole, through no fault of its own, and I think that would be unhelpful in the extreme. As I've said before, the forestry sector has a good story to tell. It delivers on a whole range of different Government agendas by the provision of economic, social and environmental benefits, many of which are unique.

Rightly or wrongly, and perhaps inevitably, one cannot help but make comparisons with the situation in England and Scotland. In Scotland, we have a Government that clearly recognises the importance of forestry and forest products and, as a demonstration of that, has recently increased its woodland creation targets from 10,000 hectares a year to 15,000 hectares a year of new woodland creation. It's now developing a new forestry strategy, which has sustainable forest management at its heart, and this will help ensure that the sector continues to thrive. Interestingly, that strategy has a vision for 50 years, and that we consider to be a very important move that reflects the long-term nature of forestry itself. In England, the Government announced its very ambitious plans for woodland creation, with 11 million trees to be planted in the 2017-22 parliamentary session. And it's also recently appointed what it calls a 'tree champion' as part of the Government's 25-year environment plan. So, all of those measures are absolutely welcomed by the industry.

Sadly, if we contrast that with the situation here in Wales, we have a delivery body that's yet to prove its worth and, even more sadly, we've had very little interest and relatively little support from the succession of Welsh Government Ministers who have been responsible for forestry since devolution, and that really is a serious issue and a very serious shame. Frankly, if I may say so, I think Wales deserves better, and the Government and NRW, in terms of our wish, anyway, we would like to see both take urgent steps to dispel the widely held perception that Wales isn't open for business in forestry. Bad news gathers its own momentum, and that perception is quite widely held. So, I would make the point that industry representatives are ready and willing to work with the Government and with NRW officials to address this and hope that we can jointly see the improvements that we all wish to see and give forestry in Wales its rightful place.

As I said earlier, there's a lot of work to be done, and addressing tarnished reputations inevitably takes a considerable amount of effort. It's by no means impossible and I hope that, in the coming weeks, months and years, we see a dramatic improvement in the situation and that we move on from where we are today.

So, in summary, there continues to be much at stake. There's a big industry out there and time is certainly of the essence, as we've said before this afternoon—

15:55

Before you finally conclude, I think Rhianon Passmore has another question.

Thank you. You were coming to a conclusion there, so I do need to just butt in. Obviously—I say 'obviously' because it's the truth—there is great ambition from Welsh Government around the forestry sector and there is a lot of discussion at this moment in time, and you mentioned the strategy in Scotland. So, in terms of the actions that need to take place, you've touched upon the strengthening of the board, marketing, sales and senior management, and you've also touched upon the place-based approach now in terms of the NRW restructuring. So, there's a lot of work occurring at this moment in time to try and recalibrate and refine the situation and make it fit for purpose, which is everybody's aim and objective. So, further to that, what specifics can you share with this committee with regard to how best we can facilitate in particular the forestry industry in Wales around that restructuring organisation that will improve the current situation, and also with a particular emphasis on procurement around social benefits for Welsh-based forestry companies?

Well, I think perhaps one of the first things that NRW can do is to take up the offer from industry to work in genuine partnership and collaboration to address the concerns that exist, particularly around the harvesting and marketing function. It should not be difficult nor should it be time consuming to get that function back on the straight and narrow. The departure from the straight and narrow is a separate issue that you've jointly been addressing. I think it's an episode that none of us would wish to have seen, but we have and hindsight's a marvellous thing, so we must focus, now, jointly—industry, NRW and the Welsh Government—on addressing those concerns. It needn't be complicated and, in fact, it's best if it isn't complicated.

As I said earlier, the timber marketing routines are relatively simple, relatively straightforward and well understood. So, if people stick to those acknowledged processes and procedures, and provided that NRW have experienced and competent people in place, then there's no reason at all to think why the situation should not be improved relatively quickly. There's the bigger picture of where forestry is going in Wales. That's for the Welsh Government to address. And again, an effective dialogue with all of the players who have an interest in the many aspects and the many facets of forestry in Wales—

So, to interrupt you, because we're getting short of time, through the Chair, in terms of that dialogue, what does that look like, from your perspective, in being able to co-construct, potentially, the way forward?

It looks like NRW having a commitment to sit down and talk constructively with stakeholders and not just going through yet another tick-box exercise where they can turn around and say, 'Yes, we've discussed with stakeholders'. There needs to be effective communication, which is talking as well as listening.

Great. We are out of time, so can I thank David Sulman, our witness, for being back with us today? I should say that's been very helpful, as usual. Some interesting questions for us to mull over as a committee, but we do appreciate your time. We'll send you a transcript of today's proceedings before it's finalised for you to check.

 Thank you very much indeed.

I move Standing Order 17.42 to meet in private for the remainder of today's session.

Daeth rhan gyhoeddus y cyfarfod i ben am 15:59.

The public part of the meeting ended at 15:59.

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