Cynulliad Cenedlaethol Cymru

Item 2, the papers to note. Are Members happy to note the papers? Yes. Excellent.

We come to our substantive item this morning, which is the scrutiny of the estimate of 2026-27 and the interim report from Audit Wales. We're joined by our witnesses. Adrian, do you want to introduce yourself and your team, please? 

Diolch. Adrian Crompton, I'm the Auditor General for Wales.

Ann-Marie Harkin, executive director, audit delivery.

Kevin Thomas, executive director of corporate services. 

Croeso cynnes, a warm welcome, to you all this morning. We've had some supporting documents from you, so great, and we’ve been able to go through those documents. This morning we're going to go through what you're asking for from the Welsh consolidated fund.

If I can start, then, by looking at the overall cash and resource that you're asking for for 2026-27—you're requesting a 3.5 per cent baseline increase to the WCF element of your budget and a 4.6 per cent cash change, after taking account of the biennial increase in costs to the national fraud initiative and other non-cash adjustments. Can you briefly provide an overview of the proposed changes to your budget this year and what do they actually mean? So, if you could unpack it, really.

Sure, of course. I think if I concentrate on the 3.5 per cent resource increase—the cash change is affected by some accounting adjustments to do with international financial reporting standards, so I think that 3.5 per cent is the more relevant number. It's not a particularly exciting estimate for next year. Essentially it's an estimate that will enable us to stand still. There are no major proposals to expand areas of work or increase capacity in particular areas, so it's driven essentially by the inflationary costs that we anticipate. A large element of those, obviously, will be staff costs. As usual we would assume some kind of inflationary uplift for staff pay, but also we have the contractual entitlements to increments for a lot of our staff. That's the principal driver behind the uplift. You probably want to get on to our thinking around future developments and a programme that we've developed over the last 12 months called Audit Horizons. There is within that estimate a very small amount that we hope to be able to devote to that area of work, primarily to increase our capacity in respect of digital and also the evolving standards for audit.

So, that's the crux of what's driving the proposal to increase the estimate. Also, bigger picture, I'd point to the overall resource limit for the organisation. So, naturally in these sessions we tend to focus on the WCF ask, but that's only a third of our overall income. If you look at the entire resource package for Audit Wales for next year, it's an increase of just under 3 per cent, so that's more of an indicator of the kind of total draw on the public purse that we'd be placing.

You talked earlier about some of the things, I suppose, below the line, if you like—the IFRS provisions. Could you just talk briefly about that and what that actually means, because obviously it adds into it, but it's a non-cash element? So, is that to do with your offices or—?

On IFRS I'll defer to one of the accountants, but IFRS 16 relates to leasing arrangements and how those are accounted for, and, yes, the figures are driven, in particular for next year's estimate, by the recent change to our west Wales office, in particular. So, we have to account over time for the lease costs of that.

And that's why it's not in the baseline.

Exactly.

Okay. So, you're making reference there, then, to effectively a 3 per cent increase in—. Well, in the documentation you make reference to a 3 per cent increase in the Welsh Government budget for 2028-29 and the gross domestic product deflator of 1.7 per cent in 2026-27. The Welsh Government's outline budget for 2026-27 uses inflation at 2.2 per cent for pay and 2 per cent for non-pay. Why the discrepancy between that, the 3.5 per cent in the baseline and the 4.6 per cent in cash? I get the cash bit, but if Welsh Government are giving 2 per cent and 2.2 per cent for most of the budgets in the budget for the Welsh Government, why are you working to 3.5 per cent?

We set our own terms and conditions, as you know, and so we benchmark our remuneration arrangements for our staff not only across the Welsh Government, the wider Welsh public sector, but also to other audit organisations in the UK and the wider finance profession. Our assumption for pay uplift next year is not out of kilter with the numbers that you quoted for the Welsh Government's assumption. But, as I said, there are further elements involved for us in terms of incremental pay progression. And so we turn the handle and that's where the number comes out.

There is a gearing effect for us because of the split between fees and WCF funding that always comes through in this way for us. So, with only a third of our income derived from the WCF, relatively small changes in our WCF draw can translate into what appears to be quite a significant percentage uplift. To illustrate, the difference between a 3.5 per cent uplift for the WCF for us and a 3 per cent uplift is about £50,000. So, very small amounts, but they're meaningful for our budget.

Fine. What's driving those increases in—? You're saying it's stepping up pay increments. Is that because you've had lots of apprenticeships moving forward in their careers and not really getting to a steady state? Are those increments slightly higher, or what's driving it?

Any organisation will always have a degree of that. For us, in recent years, we have seen, as you know, quite a lot of staff turnover. And so, relatively speaking, we have got quite a lot of people who are not at top of grade who've been either relatively recently drawn into the organisation, or have progressed to new roles in the organisation. So, there is a slightly greater impact for us in this year and one or two years, I imagine, to come.

Thank you. Okay. In the estimate of cost, you recognise the pressure on the public finances. What are you doing to reflect that pressure to ensure that your organisation, then, operates as efficiently as possible, and that your costs are focused on the activity that you need to deliver? 

Absolutely—

It's shifted to the other side of things, really.

Absolutely, and I'm very aware of that, naturally, through the nature of our work. And also, some of the feedback that we've received from our audited bodies in respect of our fee consultation have asked exactly that question. Committee will be familiar that over the last few years we've done some significant things to control costs in the organisation, most obviously around our accommodation arrangements that are now saving about £0.25 million, recurring year on year, and a few years ago that very painful change we made to our travel and subsistence arrangements, which has saved significant sums.

For next year's estimate, we have set ourselves what will be an extremely challenging savings target on that WCF element of £300,000. That will apply to our non-audit costs within WCF, so our overheads, essentially, as an organisation. That equates to around about a 7 per cent reduction in our overheads. That will be challenging for us to deliver. I'm confident that we will be able to do it, but it won't be straightforward. But it does flag, I think, a longer term issue that ourselves and your successor committee, I suspect, will have to engage with, which is, because of our funding model and the interaction of the fee and the WCF elements, it becomes increasingly difficult over time to realise these kinds of savings on what is a very small proportion of non-audit WCF-funded work. We're constantly trying to drive efficiencies in our audit delivery, but of course those aren't numbers that you see reflected in the WCF ask because those benefits are passed on to our audited bodies in the shape of lower audit fees. So, it is becoming increasingly difficult for us to identify recurring savings from within that small element of the budget.

So, that £300,000 saving that you make, it's not going to be at the detriment of increasing fees on the other side. 

Correct.

It's going to be a pure saving, or efficiencies, rather than a—

That's right. As I've said, we've addressed what are the big non-staff budgets, around accommodation and travel and subsistence and so forth, already.

So, it's going to the next tier down, really, or where—

We will be squeezing really tightly on what are already quite small non-staff budgets. We will take every opportunity that arises, through staff churn and movement, to see if we can deliver the same or better with less. But it's tricky to do when you're dealing with such small numbers.

That leads me on to the final question from me before I bring Mike Hedges in. We're aware that there's media coverage, and we know with the numbers that there's a risk that the Welsh Government might not pass that budget, and, effectively, your budget might not be passed because it's part of the other part of the budget that doesn't pass. What are you doing to plan for that eventuality, and what would the impact be? I suppose the last question is would it impact on fees to individuals, because you have a statutory duty to do the work. So, could you unpack some of that for me, to understand what that means if the Welsh budget doesn't pass?

Yes, of course. We have put some thought into that. None of it is good, as you can imagine. But to start with the fees, from an Audit Wales perspective, we would still be able to charge full fees to our audited bodies to deliver our statutory work. But we would be charging those fees on organisations that are facing those restrictions themselves. So, I'd be very conscious of that. There would be things we could do short term to mitigate that—so, the timing of work and the balance between chargeable and non-chargeable work that we could undertake—that might help to mitigate that in the short term. But over the course of the longer term, we have to deliver our statutory programme, and we'd have to charge our fees for that.

What do you mean by 'short term' and 'long term'? So, what is the definition of 'short term' in that case?

Well, a matter of a couple of months. Otherwise, the window for delivery is just not there. In terms of the WCF element, if we did not have—. If we had 75 per cent or 95 per cent of our WCF ask, then, bluntly, what we would have to go to is some kind of recruitment moratorium, either on contracting staff, who we draw in to help with peaks and troughs, with vacancies as they arise—. Most significant of all would be a staff pay rise for next year. Bluntly, we would not be able to offer that, or it would be greatly constrained. So, those would be the practical things that we could do to manage within our means if that were the situation, as well as stopping or postponing small items of capital spend, programme spend, and so forth.

Thank you for that. I'll bring Mike Hedges in now. Can we unmute Mike? Diolch.

I've unmuted myself. Sometimes I unmute myself and you unmute me at the same time, so it doubles up. I've got a few questions. I think that what you said in answer to Peredur's question a few moments ago is something of great importance to what's going to happen to the Welsh public sector post April, but that's just an observation. You've set your savings target at £300,000, which is £100,000 higher than 2025-26. Apart from where you might have underspends during the year, what transformational activity contributes to the delivery of that target? 

Thanks, Mike. As I said to Peredur, it's going to be a difficult one for us to deliver. A couple of years ago, I established something called a financial sustainability group, which is populated by Kev, Ann-Marie and a third exec director in the team. Their task is specifically to identify and deliver the kinds of savings that we're talking about to deliver in-year, but also to look further ahead for things that we need to do to make ourselves sustainable over the longer term. That group will be focused at the moment on how we meet that £300,000 target. As I said to Peredur, that, I suspect, will be a combination of bearing down still further on any non-staff budgets that we have in the organisation and looking for opportunities within our non-audit delivery functions to restructure and reorganise and realise some recurring savings as a result.

Thank you. Your staffing is going down from 305 to 293, because, obviously, you had a backlog of delivery due to pandemic-related work. How confident are you that you will deliver that work by the end of 2026? On the basis that you do, are you confident in being able to reach 293 full-time equivalents in the timescales required, and in the right areas, to make the budget work?

Yes, we are very confident of that. We have set, as our top organisational priorities for the last couple of years, elimination of the backlogs of work that we have across our programmes. I'll ask Ann-Marie to come in shortly. We have made huge progress in respect of accounts work. There are still some backlogs that we need to address in some areas of our local performance programmes; those will be our focus for the coming year. But, Ann-Marie, maybe, do you just want to say a little about the ongoing challenge we have in respect of local government accounts delivery?

We do indeed. As Adrian has said, I think we're in a position where we are confident that we'll be able to deliver the backlog by the end of 2026. But, of course, that is all dependent, from an accounts perspective, on audited bodies submitting good-quality accounts to us on a timely basis, and then, during the audit process, responding promptly to queries that we raise. It'd be fair to say we've got some challenges in the local government sector in particular.

What we have got this year, in fact, for the 2024-25 accounts, was that we actually received by the agreed deadline fewer accounts than we did last year. So, we're heading in the wrong direction. If that trend continues, we would be struggling to actually meet, on the accounts side, the delivery of the backlog, which is clearly not a situation that any of us want to be in. It's a tough situation for local government in terms of capacity and the skills that they need. There's some complex technical accounting issues that they're trying to grapple with as well, and other priorities. So, I understand it's a challenge, but it does mean that we are less confident than we would like to be that we're gonna be able to deliver all of the backlog by the end of 2026 on the accounts side.

Peter, did you want to come in on that?

It was a question on what I was going to talk about later on. I think you've explained, Ann-Marie, some of the issues around why they might be struggling. But that will be in their risk registers, I would've thought, how are they going to get over that problem, because it can't be allowed to continue and escalate. So, what sort of challenges are you making, or what promises have they made to rectify things?

We're working really closely with them, as you'll appreciate, to try and support them as they get back on track. We've got, for example, two good-practice events in December—2 December and 4 December—to work with some of the local government bodies about what we need, when we need it, the importance of producing good-quality accounts—what we consider to be good-quality accounts—and we're hoping that that will help. And then, at a local level, the directors and the audit teams are working really closely with the finance teams to see what more we can do to support them. We're hoping that we can agree with all of the organisations that didn't produce accounts by the due deadline this year. We're thinking that we will agree individualised delivery plans for them—achievable delivery plans—which will help them to have clarity about what they're producing and when. But it's a difficult one. 

On the back of our recent fee consultation, I'll be writing, either this week or next, to chief executives of all our audited bodies to explain our fee uplift and so forth and address some of the questions that Peredur has already posed to me. But one of the points I'm making there is the importance of meeting the deadlines that we set. And it's important not so that Audit Wales can have a green key performance indicator, it's important because organisations need reliable, timely financial statements to take sensible decisions. And when some authorities in the local government space are so close to financial sustainability, that's even more important. So, for me, this year, we need to be supportive, as Ann-Marie has described, through the GPX—the good-practice events—and any support that we can provide. But, at the same time, I feel as though we need to up the pressure a little. This is not a 'nice to have', this is really, really important. And we've seen from experience in England how damaging it can be if these kinds of things slip too far.

Just before I bring Mike back in, you mentioned that numbers this year were less than you received last year; can you tell me what those numbers are?

Yes. I've got it written down. I think it was 23 accounts were delivered this year by 30 June; so 23 of the 40 that we should have had in. And last year, it was 31. So, you can see it's quite a significant drop.

So, it's not just one or two, it's a significant drop. 

Yes, it is. And of the 23 we received, we have only managed to audit 17 by the end of October, which was the deadline. There are reasons for that. In some cases, it's just that audit committees weren't timetabled until early November; in other cases, it's just that the issues that arose during the audit were significant enough to delay things.

And the conversations that you're having with those bodies, then, part of it is writing to them about the fees and the letter that you're doing, but are you in constant contact with them, then, to make sure that—?

We are. We're in constant contact with them. We meet regularly as well. Two of my directors meet regularly with the Society of Welsh Treasurers executive and Adrian and myself have been along to meetings with all of the treasurers in Wales when they've got together for a development day.

What are the typical reasons for that sort of—? Are they the same—? I suppose, are they the same people that have dropped from the 31 to the—? You know, is there a churn within that people are catching up and then falling back? What's the—? To understand what's going on, I suppose, in those authorities.

Absolutely. I think it is—as I said earlier—capacity in the main. A lot of these finance teams have been dependent maybe on one very good or two very good individuals that have held responsibility for delivering the accounts and they've done so for many, many years, but, of course, those people are retiring, they're moving on. I think what we see in those cases is that there can then sometimes be a change in the timely delivery. It's just that with those more senior, those more experienced people moving on, very often, they may be struggling to recruit to replace that person. And so, consequently, there may be not such good quality accounts being submitted for audit.

That is an important factor, but it's also about the priority that each individual organisation is attaching to that work. So, I can well understand if you’re an organisation under severe financial strain, tidying up last year’s numbers and getting it through the audit goes down the priority list as you look to the current year and how you’re going to manage your budget in-year. I can understand that, but it’s a slippery slope, as Peter said. And so, some of it, as well as operational capacity, comes down to the strength of leadership prioritisation within organisations, I would say.

Are elected members well enough—? Are they aware of this situation enough? Apart from the cabinet member, who might have an interest, it can go under the radar. I think whole cabinets need to understand the gravity of the situation and make sure that there is strong succession planning in the accountancy and treasury elements of the authorities. And if that's getting overlooked because they're prioritising other areas in difficult times, they need to be brought back up to speed on the importance of that.

Yes, and I think the plan would be that once we've got these local delivery plans agreed, that Adrian would then write out to the local government bodies, and we would make sure that the leader was sighted on that letter. I think you're absolutely right.

Okay. Yes. 

We'll come back to Mike. 

Thank you. That takes me onto a topic that I’ve thought about a lot. The rate of inflation in different bodies is different. The consumer prices index is meaningless when dealing with the rate of inflation facing an organisation like yours. I hope you agree with that. If you don’t, you can correct me.

Staff salaries are your biggest expense, and you’ve set a budget for those to increase by 3.8 per cent. Are you expecting that to be the figure at which you settle?

We haven’t even started conversations with our trade union partners yet, Mike, around next year’s pay settlement. So, I’m not going to say 'yes' to that, because I honestly don’t have a figure in mind. But I think the number you’re quoting there relates to our overall staff cost increase.

Yes. 

Yes, which, as I explained to Peredur, will reflect incremental uplifting in salaries, as well as the inflationary element that we reach. We’ve factored into our estimate proposal our working assumption, which is an uplift of 2.75 per cent for next year. That’s not saying that’s what we’re aiming to settle at; that’s just the assumption that we’ve factored in to drive the estimate. When we get into conversations with our TU partners, as I said, we benchmark extensively against other relevant sectors and organisations, and we look to see if there’s more that we can do from within our existing package of resource to put into the pay package.

Can I declare an interest that I may well belong to one of the unions you’re negotiating with? So, can I just put that on the record, as may others?

The question is, though, that people in trade unions will have seen today the 3.8 per cent figure being discussed, if only by me and you. If I was negotiating, I’d say, 'Ah, we can ask for a 3.8 per cent rise. They’ve already budgeted for it'. Can you explain how much of it is in there, dealing with all the other issues?

As I said, on the 3.8 per cent, we have not budgeted to uplift all our staff salaries by 3.8 per cent because a lot of that is driven by contractual entitlement to increments.

That's fine. I think that's got something useful on the record. 

In the estimate, you refer to the Audit Horizons programme. The narrative suggests that it's about responding to changes in technology, sustainability reporting, increasing regulatory requirements, and public expectations of audit. You require £150,000 for this programme. What will it actually deliver in practical terms over this year?

Thanks, Mike. I'm not sure that we've spoken about Audit Horizons in this committee before. It's a big piece of work that we've been taking forward in the last year. What it's about is trying to do exactly the kind of thing that I encourage other parts of the public sector to do, which is to look forward to the longer term and try to anticipate some of the pressures and forces that will be relevant to our organisation. So, it identifies four big themes, as you've alluded to: the digital transformation of the world at large, but the audit profession especially, we're very conscious is a major challenge coming down the line to us and that we need to engage with. Secondly, we're an organisation that operates within the framework of a myriad of internationally set standards that we have to keep up with and apply, and those change year on year, and the general direction of travel is to make them tighter and more demanding, bluntly, on organisations and, therefore, on us. And a big theme within them at the moment is the evolving thinking around how to account for and audit the sustainability agenda within organisations. The third area that Audit Horizons identifies is our workforce. So, what kind of workforce will we need in five, 10 years to deliver against all that? And the final force we describe as scope, which is slightly different. It's the kind of conversation we've had in this committee about the scope of responsibilities and duties on the auditor general. I think with some legislative change, the reach of the auditor general's authority could be greater within the public sector in Wales—so, into sectors, for instance, like the further education sector, where we don't operate at the moment at all. So, that's slightly longer term because it would require some legislative change. So, those are the big four forces we've identified in Audit Horizons and we're increasingly using that as a lens to help us shape our resourcing proposals and allocation within year.

To return to your specific question about what we are going to do next year with the £150,000 that we've identified in the budget, that will be prioritised into the first two of those areas. So, some strengthening of our technical quality team, in particular to make sure that we're on the front foot in that sustainability audit space, and some small input into our IT capacity. So, we have an ICT team currently of three people. Ideally, we'd like to supplement that with one relatively junior but more specialised post that is a software developer more focused on future development for us. But, over time, there's much more that we need to do. And so, Audit Horizons, I think, for the next auditor general and the next committee will be a theme that we return to.

Okay. Thank you for that. I think it's been very helpful.

Your budget for travel and subsistence decreases by around £135,000 compared to 2025-26. Can you explain why this budget is reducing? Is that because you're doing more online work?

I'm going to give my voice a rest now, Mike, and ask Kev to respond to that one, if I may.

Yes. Thank you, Mike. This very much reflects a long-term trend in terms of a reduction in our spend on travel and subsistence. You'll see from the estimate document that we've reduced that from about £1.2 million about five or six years ago to a level of just over £200,000 for next year. And that very much reflects the sort of level of activity that we've got in the current financial year. Obviously, alongside that reduction in costs, there are reductions in carbon emissions, and that very much links with our travel plan and our carbon reduction plan. As you rightly say, Mike, we've done a lot more online work using Teams, both internally and with clients, which I think has helped to not just reduce travel costs and emissions, but also to make more efficient and effective use of time. Having said that, going forward, I think there will be pressure on that budget. One thing that we are keen to do is to encourage a little more onsite working for our auditors. What we've seen is that there are direct benefits in terms of improved audit quality from that sort of onsite working, and we really need to get that balance right. Of course, if that does then lead to higher costs and puts pressure on that budget, we will need to look at other budget heads to see what sort of efficiencies we can generate to offset those costs.

It's also important to stress that, alongside any increased activity on travel and subsistence, there would be an impact on our carbon emissions, and, as you'll see from the interim report, we've got a specific target for that, and we're currently working through as an exec team how best we manage that balance.

Thank you very much. I think that we also have unexpected events in terms of travel, which I became an expert on this morning when I got as far as Baglan after 45 minutes, and decided that coming back to Swansea was much better than not getting to Cardiff, which I would not have reached, as things stood at that time, until about 11 o'clock. So, if you have people in traffic jams, and you've got somebody moving down here in that sort of jam, you're going to lose three hours of productive work. So, I think it is important that we do try and maximise what we can do online, if only to make sure people are working not travelling.

You include capital spending for office accommodation upgrades of £12,000, but you only recently completed your office rationalisation programme. So, why are these upgrades required? 

Thanks, Mike. You're absolutely right—we completed our office rationalisation programme earlier this year with the move of our west Wales office. So, over the past two-and-a-half years, we've relocated our three offices, here in Cardiff, in west Wales and also in north Wales. I think it's important to say that, for our Cardiff office, our largest office, that was the first move we did, and we did it on a really cost-efficient and cost-effective basis. So, for example, we used as many of the fixtures and fittings from our old office as we could and recycled those for use in the new premises.

I have to say that the feedback from staff has been extremely positive about the the new Cardiff office, and indeed all three of our offices, and we're really pleased with the way that that has worked. One thing that we have identified, though, is that there is a need for some additional investment in that Cardiff office. We have seven meeting rooms in the office. They're all equipped with video-conferencing facilities, which have helped to lead to those reductions in travel and subsistence costs that I just mentioned, but one of the things we found is that the sound quality in the largest of those meeting rooms isn't good enough for business purposes and so there's a need to invest in higher quality microphones and speakers to make sure that that room is fit for business use.

Okay. Thank you very much. The estimate also shows that external training costs increasing by £75,000, which is 20 per cent in 2026-27 compared to 2025-26. Some of this includes increased funding for organisational development and technical training. How much of this is attributable to the WCF? And what and why are these increases necessary? I'll put it another way: what happens if you don't do it? [Laughter.]

Okay, probably the best thing to say to start with is that the increase of £75,000 is actually offset by reductions in other parts of the budget. So, it's not actually a net increase in our budget or on our call on the WCF. To give you a flavour of what we're spending it on, which I think is what you're asking, you'll recall that, last year, you gave us £40,000 of the £75,000, which was new, and that was for performance audit training. What we've been doing with that money is we have used, or will be using, a fair amount of that on the new Chartered Institute of Public Finance and Accountancy performance audit qualification. It's the first qualification of its kind and it's a chartered qualification, which will allow some of our staff, who go through that qualification, which is, I think, going to be quite challenging, to get more experience under their belt. It's a great step forward for performance audit, I think, and for the further professionalisation of that work. We have also used an element of that funding for new starters who join the performance audit team—sometimes they come in directly from outside—to obtain the certificate in management and financial accounting, and that gives all new starters, really, a solid understanding of what performance audit's role is in the machinery of government, democratic accountability, that sort of thing as well.

And finally, we've been using the funding to support the rollout of performance audit training for all of our trainees. So, we bring in about 15, 16 trainees a year, and historically, they've mainly done—or have exclusively done, really—the associate chartered accountancy qualification. We think it's really important, going forward, to maximise agility in the organisation, if the staff have exposure to performance audit work as well. So, we've been developing training and supporting training for those individuals. So, we're putting it to good use, Mike, I promise.

Does it help with, especially, apprenticeships coming in?

Yes.

Is it better, from a professional point of view, to have that experience as a more junior role, to be able to develop both sides, going forward, rather than become an expert in one side and then start again, I suppose? Is that the thinking behind it?

I think so. I think it is beneficial for the individuals themselves, because I think getting broader experience, especially earlier in your career, is beneficial, isn't it, let's be honest. So, I think it benefits the individuals. It gives them early exposure to performance audit work, which a number of them would prefer, really, I suppose, in some respects, or like as much as accountancy. So, I think what it does is it enables us to be more attractive as an employer of trainees and apprentices. It's definitely beneficial for the individual. But I think, as an organisation, it gives us real benefits as well, because it means that, when those individuals qualify at the end of their training contract, they've got opportunities to work not only on the accounts part of audit delivery, but also on the performance audit part of audit delivery as well. And we've seen a number of people who've opted, actually—they've come through as accountancy trainees, but they've opted to go into performance audit, because they prefer that, and that's great as well.

And going back to the conversation we were having earlier about succession planning within local government and things—

Absolutely, yes.

—how many of your trainees are you retaining and how many are then going out to the wider local government family or wider group of Welsh audited bodies?

Well, in recent years, the vast majority of those that have qualified have chosen to stay with us, because of the turnover that we were having higher on. Historically, if I give you an example, off the top of my head, in 2015, we brought in 16, 15 trainees; we still have four of those working in the organisation. So, between a quarter and a third tend to stay with us over a 10-year period, and the vast majority of those that leave do go to other public bodies, sometimes in England, more often in Wales.

What we try to do as well is encourage—. As part of the training contract, they go out on secondment to another public body as well, and this year, for example, we'll be looking to have the trainees out at Anglesey and possibly other local government bodies, as well as to the health sector as well. And I think that really gives them an appetite and understanding of the broader public sector as well, and it means that some of them would prefer, when they qualify, to go and be an accountant rather than an auditor, and do that in one of the other public bodies in Wales, which is great as well.

Thank you for that. Mike, did you have any further questions?

No, I'm happy, thanks.

Okay. Diolch yn fawr. Peter.

I'd like to just talk a little bit about capital and perhaps how you show that. So, the capital requirement is £100,000 less in this estimate than in previous years, which is good, in that it doesn't make the increase in revenue look quite so bad, or—bad—large. Why is it appropriate, then, to present a figure of a 3.5 per cent increase that offsets revenue cost increases against capital cost reduction? Is that the right way of doing it?

Yes. [Laughter.] A couple of years ago we agreed with the committee that we would adopt this approach. So, we used to have separate resourcing limits for our capital and resource elements, but that was out of kilter with just about every other part of the public sector. So, we agreed with you that we would move to a single resource limit for the organisation, but we'd still report separately our capital budget and spend for transparency. So, that's what we're doing, but it's exactly in line with other organisations and perfectly proper.

We've obviously asked you that question before.

No, it's a perfectly—. It's fine to ask again.

Thanks, Adrian. And just in a similar vein, I know that there's been some one-off funding given for various projects and various things, and, where they fall away, that budget line remains empty, and that decreases the revenue requirement. Is that an appropriate way of doing things as well?

So, when we've asked for one-off—?

Yes. So, when there's a one-off payment come for—. Well, I don't know, we have one here for board evaluation work, which fell away then, and the budget line is empty. Should those budget lines actually be removed so that they don't have an influence on the wider picture?

Oh, I see what you mean. And sort of keep them below the line.

Yes.

We could do that. Last year, we asked you explicitly for some money to undertake the board evaluation. That was above the line. With hindsight, I suppose we could have put it under.

I just think, once it drops off, then how does it—? Would that remain as an empty budget line in another future estimate as well, or—?

I guess what you're looking for is assurance that we're not sort of quietly nudging £25,000 into the baseline, and we're absolutely not doing that.

Yes, I suppose that's what it is, really.

Anything you want to—?

No, not much to add. I just think that what we've done this year is consistent with what we did last year, treating it the same way, and it was added in last year and taken out this year. Presentation is something that my colleagues could consider, I think.

It's just a presentational issue.

And we talked about the board review the last time you were here.

Yes, we did touch on it last time, yes.

No problem. That's helpful. Thank you. Unlike last year, you haven't included a medium-term financial plan, and you've explained why that is, due to uncertainty and things. I wondered if you wanted to expand a little more on that.

Thanks, Peter. As you mentioned, in previous years, the estimate has included a medium-term financial plan. A plan is effectively an adjustment of the previous year's plan and rolling things forward. However, the board, as Adrian has touched on a little bit with what he's asking public sector bodies to do, the board has been thinking quite a bit about the future in Audit Wales, and how Audit Wales will look in the future. Adrian has touched on it, but, again, we're talking about the scope of the work, the quality, impact of technology, skills et cetera, et cetera. And so the board is of the opinion that, over the coming months, we will give quite a bit of consideration to those matters with the executive leadership team, so we can actually—. When we come back next time, there'll be a much better informed and more meaningful medium-term financial plan for you to consider, as opposed to just a stock one, which is moving forward. So, hopefully, that will be better for the committee and better for ourselves.

Great. Thanks for that. Just a quick question on increased fees. Obviously, you consulted on 5.5 per cent, you listened and you dropped it to 5.3 per cent, however, there are still audited bodies that feel that that's still too high, above inflation. I know you're writing to them to explain your position, I'm sure. What sorts of messages are you telling them, then?

Quite a lot. It's a great letter.

Well, you wrote it, so you're going to say that. [Laughter.]

I was going to say—self-praise is no praise, is it?

No, no, it's a serious matter. One thing I will be doing is reminding audited bodies of the situation last year. So, as you know, we, for the last few years, have been quite significantly over-establishment in order to tackle these backlogs of work, so to do more work in any given year than we ordinarily would. When we're over-establishment in that way, with staff who are earning fees, each one of them is making a small contribution to our overheads. And so, last year, although our inflationary costs were around about 4 per cent in-year, we increased our fee rates by only 1.7 per cent, because we and audited bodies were getting the benefit of that additional contribution. Now we're catching up with the backlog, we're bringing our staff numbers down. That's unravelling, and unfortunately, we're seeing the reverse effect. So, that unravelling of our additional staff is probably adding about 2 per cent to that number. So, one thing I'm doing is reminding audited bodies of last year as well as this. If you look across the two years, our fee rates will have gone up by around about 7 per cent, and inflation probably around 8 per cent. So, that's the first thing.

Secondly, I'll be explaining in quite some detail the steps that we're taking as an organisation to manage our own costs. But also, going back to the conversation we had about delivery of accounts, what we consult on are our fee rates. So, that's the hourly rate at which we charge our staff out. That's not the same as the fee bill that any given organisation pays. That is a combination of our charges, but also the amount of work that we have to put in. And so, to a considerable extent, organisations have it within their own gift to control the level of fee they have to pay. If they present to us in a timely manner, with good-quality accounts, good-quality working papers to support, if they're responsive to our queries and get the job done swiftly—and the same with our performance audit work, if they're responsive and timely, and provide us with good quality data in the first place—bluntly, we can deliver our work more swiftly, and we're statutorily obliged not to keep any profit. We make refunds to organisations when that's the case.

So, it's clearly a consequence of that earlier conversation, which is actually costing them, ironically, more. So, there's another reason for them to get up to speed. And of course, no organisation likes to look back on any benefit it might have benefited from some while ago—they like looking forward.

I can understand that.

Thank you for that. That was helpful. The final question from me, Chair, is: obviously, this is the last time you'll be before this committee to present an estimate or an interim report; we just wondered if there were any thoughts on how the process has been over the years.

I hope it's the last time. [Laughter.] As much as I love coming.

Thank you, Peter. On the process itself, firstly, I think, I'd like to thank the committee. Ann-Marie reminded me the other day, 'You're the auditor general, you embrace and welcome any scrutiny', and I genuinely do. But I've felt that the challenge and scrutiny I get from you has always been fair and constructive. I'm particularly grateful to you for the support that you gave us a few years ago as we went through that difficult time with the travel and subsistence changes, and also with our accommodation reviews. It required us to come to you with supplementary budgets and the like, which were not easy, but we could not have delivered it without your help. So, thank you very much for that.

If I could offer one recommendation that you might want to consider for your successor committee—we've touched on it today—it's that your focus on the WCF element alone gives a slightly misleading impression, to me, of the work that we do and what's important. So, when you see us for our annual retrospective scrutiny session, you ask us, rightly, about the performance of the whole organisation. I would have felt more tightly scrutinised if you'd been scrutinising our forward-looking estimate through that lens as well. 'What are you going to do with the £28 million or £29 million you're looking for?', not, 'Why do you need £12,000 to put some sound equipment in a meeting room?' You've got to pick up points of detail, I understand that, but I think a bigger picture perspective would be more challenging—and it's easy for me to say, as I won't be sitting here, but—would be more challenging and more fruitful.

Then, the third thought I would leave, again, is to register my appreciation of the support you've given for those legislative changes that we put forward. It was in my in-tray when I came in on day one, so I am disappointed that, when I leave, I've made no progress whatsoever, but it's not been for the want of trying, and the committee's been very supportive in that regard. As you know, quite a lot of the change that we think is necessary is irksome to Audit Wales and would be good to change, but I can understand why it's not a top priority for the Government or the Senedd. But more recently the proposals we put to you have actually been much more significant than that as well. I think the audit regime that you've got in Wales is excellent. It's got some real strengths that are not present in other parts of the UK. It’s really strong, and I'm very proud of that, but it could be even better, and if the next Senedd were able to pick up some of those proposals, I think it would serve Audit Wales well, but also the Senedd and the wider public sector.

That's really helpful and very constructive. I don't sit on the committee any more—only now and again. 

Fantastic. Well, thank you very much for that. That brings us to the end of this session. I know, Adrian, you're joining us for the next session, but I'd like to thank the rest of you for this session today. We'll now take a short break until a quarter to 11, when we'll have the second session of this morning. So, grab yourselves a cuppa and then we'll see you in about a quarter of an hour or so. Diolch yn fawr.

Adrian, you're back for this session. Could I ask your colleagues to introduce themselves for the record?

Morning. I'm Dave Thomas, audit director at Audit Wales.

Fantastic.

Bore da. Matthew Mortlock, audit director at Audit Wales.

Fantastic.

A warm welcome to you, and thank you for coming in. A slightly different aspect of what we're doing, looking more at the work that you do, how that feeds into scrutiny of the Welsh Government and how money is spent in public service around the country. I just wanted to start by asking whether you've got any insights into productivity in particular in the public sector, because that's something that we've decided as a committee, when looking at the budget this year, is one of the key elements. And with having a two-stage budget process, it gives us some of that space to be able to do that.

So, in your report on the 'Financial sustainability of local government', you echoed the view of the National Audit Office's Comptroller and Auditor General that

'promoting productivity and making public money work harder should be focuses for the whole public sector.'

Through your work, how much of a focus do you see in that area?

Diolch, Caderydd. Just to extend the introductions, Dave leads all of our performance audit work in the health sector, and Matt in the remainder of the central Government sector, so they're the two most expert people I know on the work that we undertake. So, I'll be drawing on their expertise a lot this morning, I suspect.

You're right: productivity, I think, is absolutely key to the situation that we face in the public service at the moment. Over the last few weeks, I've been recording some material and preparing some speeches that I hope to give over the next few weeks and months, reflecting on my experience over the last seven and a half years, and, at a headline level, I would say that our model of public service delivery is unsustainable on its current trajectory. Bluntly, demand across all areas is outstripping our ability to increase funding, and so increasing public sector productivity and getting better value for money from the resource that we do have is absolutely central to squaring that circle.

You'll have seen, from some of the examples of work that we provided in our submission, some of what is needed, I would say, from our perspective, is fairly unglamorous, but vitally important, a focus and investment in some of the building blocks that any public organisation requires. So, our investment and development in the digital space, and workforce—workforce issues come up time and time again through our work as a barrier to delivery—and also not only capital investment, but investment in routine maintenance and upkeep. My observation would be that over two decades of really tight budgetary settlements, these are areas that have been somewhat hollowed out and neglected, and, unfortunately, we're now paying the price of that. So, there is no simple fix, from my perspective at least, for the productivity question. It's going to require year-on-year investment and focus on some of those basic building blocks as a starting point.

Mike.

Diolch, Cadeirydd. In England, the health Minister has said he expects a 4 per cent productivity improvement in health during the next year, and areas that have been identified are artificial intelligence and improved technology. Do you have any views on that? Do you think we should have the same in Wales? 

I think it's perfectly fair for Ministers to set productivity targets. Essentially, they are doing that naturally through the budget-setting process. I think that the potential productivity gains from technology and artificial intelligence are undeniable. They are self-evidently there, and Audit Wales and every public organisation are starting to dip their toe into that water.

I would be wary, though, of viewing AI and digital as some magical solution that will solve the productivity question, because what we see repeatedly through our work is that many organisations are operating from a pretty antiquated position, in terms of their IT systems and so forth. We did some work in local government just last year that concluded that only around half of local authorities have an up-to-date and robust digital strategy in place, and many of them are not clear about how they are going to monitor, deliver or resource those. In the NHS, Dave could come in and give you some concrete examples of some of the challenges faced there.

So, going back to my opening point, unless we address the basic building blocks of the technological infrastructure of our public sector, and address some of the data challenges that come with that, then artificial intelligence will not go as far as it can in terms of improving productivity. But, Dave, you have a much closer grip on the NHS in particular.

Yes. Thanks, Adrian. I certainly endorse all that, Mike, and I think that it also depends on how you measure productivity as well. A 4 per cent increase could be in lots of different areas, but I think, undoubtedly, there are opportunities for technology and AI, in particular, to help. That's done jointly with the service and the patient, of course. It's not just about implanting a new bit of software, and instantaneously you get more productivity. It's about the whole system working differently.

It's also about ensuring that AI is safe to use as well. Actually, if we put too much reliance on it, you've got to quality assure it and make sure that it's actually doing the thing that it's supposed to be doing. I think it's worth noting, of course, that a ministerial advisory group reported earlier this year, in Wales, to the Cabinet Secretary on productivity and performance. It really identified, going back to Adrian's point, some quite basic issues.

So, before you get anywhere near the technology and AI, there are some basic care pathway, everyday routine NHS activities that need to be better: following recognised good practice; following evidence-based good practice; supported by stronger accountability and clarity around, if targets aren't being achieved, why. So, all those factors, I think, come into it when you look at productivity. It's not just about technology. 

If you look at the digital challenge facing the NHS in Wales, it is significant. There's a lot, as Adrian said, that needs to be done with a finite pot of money to support it. So, there's a very clear need for prioritisation, as well as building the skill set in the service to use that technology, which probably isn't there at the moment either. So, beyond that sort of statement, Mike, there are quite a lot of important things to unpack.

Based on what you're saying there as well, and you touched on it, and I'll come to Matthew in a second, and maybe more so in your field rather than yours, but I suspect it would be in both—. From a data point of view, one of those building blocks is getting data that is meaningful and consistent across the public sector, so that you're asking the right questions, but you're getting the accurate, meaningful data to be able to actually understand that.

So, setting a target is all well and good. I'm a fan of targets in general, because it's more about measuring where you're getting to, or trying to get to. But if it's based on flawed data, then you're flogging a dead horse. So, it's that aspect of it. Could you comment on that sort of data infrastructure that we have? Any of you, really. Matthew.

I think you're getting into the space of kind of evaluating value for money as well. Obviously, that's a lot of what we do through our work. A consistent theme through lots of our work over Adrian's tenure has been around whether public bodies are themselves able to tell a clear story about value for money, based on good data—not just quantitative data, but also service user experience, importantly, and that perspective of the person receiving services. So, it's a consistent theme throughout our work.

If we took an area like active travel, which Mike will be familiar with, which the Public Accounts and Public Administration Committee has been looking at, one of the themes there is, yes, increased investment from Government in active travel, but not at the same time putting in place the building blocks to be able to evaluate the impact of that funding, and to be confident that it's delivering value for money. Nobody would necessarily dispute the merits of investment. We know the potential benefits that might arise from active travel, but from our perspective, it's also important for Government and other public bodies to be able to tell that story themselves of what they're actually achieving with the money they're spending.

And there was a similar theme. You may have seen the report that we published last May on the Wales infrastructure investment strategy. Looking at the Welsh Government's capital investment, it was well over £3 billion every year of capital investment. In our view, there were some positives around that strategy, around a clearer focus on the well-being goals and the outcomes that Welsh Government and public service could realise from that capital investment, but there was still a message there from us around the level of ambition from Government in really thinking around how do we maximise all of the wider benefits that we could potentially get from this spending.

That theme has played into our—. We call it our 'No time to lose' report that we published in April, our statutory report under the Well-being of Future Generations (Wales) Act 2015. Again, a big theme in that report was around the assessment of performance and delivery under the Act. I think we made a recommendation in that report about the Welsh Government taking a fresh look at how it assesses and tracks performance in delivering against the wider well-being goals and the national indicators. We see quite a bit of inconsistency at present in how bodies are tracking their own delivery and performance against some of that wider agenda as well, when you come top-down from the well-being indicators.

That was exactly the point I was going to come on to, really. We see in all parts of the health service, local authorities, that the quality of performance management is not robust enough, perhaps, because when you've got fewer resources to do more, the need for good performance management and the measurement of targets is even more fundamental than it might have been. In my own experience, if one part of the performance management cog stops, it all tends to stop and then it gets behind.

One of the things I've been quite concerned about when I've been in this place for a few years is that, sometimes, it's very difficult to see targets and to be able to challenge targets. You don't get to see many Government delivery targets being scrutinised—it's done in-house—and I worry there's a lack of scrutiny, and certainly in health boards, a lack of political scrutiny of performance management and delivery plans. So, how do we know they're doing the best they can with the money they've got?

I completely agree with that, Peter. The data point that Matt identified is critical. We struggle to come to a conclusion on whether policies and programmes are delivering value for money because the data simply isn't there. Now, if we're struggling, that says that organisations can't tell that, can't answer that question either. When resources are tight, we've got to make choices about where we spend money, and you've got conflicting demands, both of which will carry merit, but you have to make some sort of choice. How do you make that choice from an informed position unless you can rely on the data that you have to hand?

I think your point about the NHS and more generally is an important one too. What are the sanctions for organisations when targets are missed? Dave and I were chatting yesterday about the NHS, where, for several years now, health boards have been failing to meet what is a statutory obligation for them to break even over three years, but I'm struggling to see what sanction is applied when organisations miss targets like that. If anything, the sanction is that some more support is put in. So, it risks encouraging a mentality where it doesn't matter if we miss a target and a dependency culture within some leaderships.

I see that.

Just thinking about that data sharing across the public sector in general, who do you think would be responsible for making sure, for trying to align some of that—the collection of data of what's asked for? Because there's possibly some data that's been asked for that is collected diligently and well, but never sees the light of day, or isn't meaningful enough, or is collected in so many different ways that it makes it unintelligible to be able to glean some of that information. Where do you think that responsibility lies? Does it lie with health boards? Does it lie with local authorities, Welsh Government? What are your thoughts on how some of that could be fixed?

I think it lies with Government, initially, to design the expectations that you're putting on local government, on health bodies, in terms of what they collect and how they use it. That can be in the actual data items or, indeed, how different systems talk to each other. There isn't a great track record in Wales of that happening, in terms of the systems in particular. I think there's also, then, the risk that you would just add on data request upon data request, so the system is awash with data but doesn't have the real management information it needs to know what's happening. So, sticking with the NHS example, in our report earlier on this year, on cancer services, we looked at what was examined in terms of performance information. Understandably, it focuses on the national target of treatment within 62 days, and that's fine, it needs to be focused on. But there's a whole raft of really important information on every stage of the pathway that will tell you an awful lot about how those services have been delivered, but which isn't routinely collected.

And then, if you add on the more outcome-focused performance information and data, which, again, is underdeveloped—. We've had some encouraging scenes recently in the NHS in terms of the changes in ambulance targets, where they're focusing more on the outcome for the patient, from an important call, rather than whether they got there in eight minutes or not. But as a rule, there isn't enough focus on actually what matters. So, you can do very transactional data monitoring, but it's actually the outcome. So, I think there's an awful lot—

It's that the 'so what' bit.

The 'so what' bit, Peredur, absolutely.

And I suppose the 'so what' bit then turns into what does it mean from a cost perspective.

Yes.

And if you're looking for more efficient systems and productivity improvements, that's the crux of the discussion—working out what are the meaningful questions. I suppose—. Is there a role for our universities to help in that, hand in hand with Audit Wales and other bodies who have a more, possibly, analytical aspect to looking in at organisations, or should the organisations themselves find that expertise within themselves?

There's undeniably a contribution—think tanks, organisations, higher education institutions, ourselves—that we can make. But none of us can make organisations behave in a particular way. Organisations need to take responsibility for this kind of thing themselves. It's just part and parcel of being a well-run organisation, I would say, that you need timely, accurate, complete management information. If you're going to invest money in a particular area, you need to think through to what end—what outcome am I hoping to achieve from this? Only if you can do that can you then assess whether programme A or programme B is delivering good value for money. So, yes, there are contributions that others can make, and, yes, the Welsh Government can send signals to the system, but, ultimately—

So, from a leadership point of view—

Yes. But, ultimately, a lot of this comes down to the individual leaderships, I would say, of organisations. Matt, you wanted to come in.

Yes, I was just going to touch on local government as well. Obviously, over the past five years, there have been changes in the local government performance regime as well. I think there are still some questions, perhaps, around whether we've now got gaps in intelligence, if you like, around how local government collectively is performing on a consistent basis, following some of the changes that have been made. If you went back five to 10 years, some of the data sets that existed back then are no longer in operation. That's not to say they're necessarily the right things to focus on, but I think there's been an evolution in local government, or a change in local government, that, potentially, there's a bit of baby with the bath water that's gone. So, there's perhaps opportunity in the local government space. But that gets you into all sorts of questions, I think, around the democratic accountability of the individual bodies and the ability of the Welsh Government to provide that top-down steer. And even from a funding perspective, the direction of travel on funding has been towards dehypothecation of money, and so less control, if you like, around simple things like grant terms and conditions, in terms of setting expectations that go with that. I talked about active travel earlier, obviously, where the Welsh Government, providing a specific pot of money, has that ability to lay fairly bare its expectations of what it wants to get back in terms of evidence and data. But that's different when you're talking about the big block of money to local government.

A quick point on that—it's funny, I was just challenging myself the other day, and I remember the realms of corporate assessments for local authorities to really do an in-depth challenge. We've moved away from that for a few years now, but from the outside looking in now, it looks like things are getting a bit slack in some ways. Do you think a regime of back to the corporate assessment days, to actually put the sanctions, to hold to account the organisations, might be—or one round of them—a good thing to get them back on course? I won't be popular for saying that. [Laughter.]

I guess, coming from Audit Wales, we naturally favour an analytical approach; we're interested in evidence. So, I wouldn't object to a regime that focuses on data and performance and holding to account. The latest iteration of the regime, as well as the governance work that we undertake, was around peer-review assessments in the local government sector. From the ones that I've seen, they're certainly taking a pretty thorough look at the entirety of the work of councils. The proof of the pudding will be in the eating as to whether that actually is effective in driving up standards. I feel as though there does need to be a bit of edge to any accountability regime, be it in local government, health, in respect of Audit Wales, anywhere.

Thank you.

So—

Sorry, Peredur, to cut across, but as Matt was talking, I think this theme links to the signals that get sent to the system. So, you might want to ask us questions about the whole prevention agenda and the future generations Act, which, of course, sets the framework in which the public service ought to be operating.

We're going to come on to that sort of aspect, yes.

Okay. I'll keep my mouth shut.

You're pre-empting some of the questions. But just on this theme, before I bring Peter in in a second now, thinking about the Welsh Government's budget and thinking there now about active travel, in one instance, but across that, in allocating funds—it goes to that point you were just making, giving signals—how the budget expenditure lines and the other aspects within those budgets are prioritised is how Welsh Government signals priorities from that. So, from your audit work, how much is the current Government, through the budget that we've got laid before us, giving an indication that you need to be better at collecting and analysing data to get better outcomes and productivity? Is that seen in any other documentation that you've seen, or any experience that you have, or is that something that Welsh Government should be looking at developing as part of a more holistic way of budgeting?

I'm not sure whether it plays through the budget documentation per se, but that's not to say it doesn't play through in other ways.

Where does it, I suppose?

So, I mean, I think we do, you know—. Again, I touched on the Wales infrastructure investment strategy as an example, and there are programmes in that space where we see the Welsh Government trying to press for better social value for money. So, when we talk about community benefits and that wider benefits agenda, we certainly see an ambition to do that and you see it play through in some of the design of those programmes. But even then, at the back end of those programmes, we're not necessarily seeing the data collection.

So, I think our work on affordable housing was another example of this, where—. No doubt that the Welsh Government is keen to leverage that wider kind of impact from the significant investment that it's putting into affordable housing, but our work on affordable housing, one of the messages was around, in our view, that they still hadn't done much again to actually tell that story back-end and set those expectations for local authorities and social housing providers in terms of what they expected to get back in terms of data and evidence of impact on the ground. So, sometimes I think we see the kind of implementation gap, if you like. There's no doubting that, from a kind of policy-setting, programme-setting perspective, some of the thinking is there, but it's not necessarily playing right the way through to kind of close—

So, you don't see it followed through?

Yes.

Dave.

Just to follow on from what Matt was saying, in the NHS, I think we do see a fair amount of focus on things at a national level from the Welsh Government through things like the national value and sustainability board, because they will identify opportunities for efficiency and productivity gains and they will say what they expect health bodies to do to achieve those. The question that comes then is, 'If they don't achieve them, what happens?' I think it goes back to the accountability and also the fact that a lot of these sort of scrutiny cycles are predicated on short-termism, of, 'What can you afford in a single year?', as opposed to, 'You might need a longer lead-in to achieve some of these productivity gains by some system redesign.' And digital is an example that we talked about earlier, but there are many others. The whole system at the moment is probably still in firefighting mode in terms of the challenges it's got to get over, whereas, what it needs is to, obviously, get those performance measures better, supported by good, intelligent data, but also to have the system redesign that makes it more sustainable, going right back to what Adrian said at the start of his address, which is that the system isn't sustainable at the moment and, unless something changes, it's only going to get worse.

Okay. Thank you very much. On that note, I'll bring Peter in.

Adrian, you'll be pleased I'm going to give you an opportunity to talk about prevention. It's absolutely fundamental to lots of things we've been talking about. And, actually, with the increased resource, for instance, into local authorities, it's a prime time to think about prevention. I know, from your 'From firefighting to future-proofing' report of February 2024, you said it was difficult to find any demonstration of local authorities—or public bodies, rather—moving their resources toward prevention. I just wondered, since then, have you seen any indicator—recognising there has been more money going into the system—of that shift yet?

We definitely see examples of preventative action and programmes, which are great. Are we seeing a fundamental system-wide shift? No. So, Matt mentioned a report we produced earlier this year called 'No time to lose.' So, that's our big, once-in-a-Senedd-term assessment of the application of the Well-being of Future Generations (Wales) Act 2015, where prevention is one of the core ways of working. We concluded in that that we're not seeing that system-wide change as a result and, in order to enable that kind of change, prevention seems to be the key, to me, to unlock it. In that report, I made four recommendations, all addressed to the Welsh Government. One of them focused on prevention. So, I think we included it in our submission to you. It was drawn in very broad terms. So, I recommended that the Government should work with public bodies to strengthen their understanding of the levels of investment in prevention that we have already—the basic question: how much are we spending on prevention? We don't know. What impact is it having?—work with others to embed prevention into the budget-setting process, and incentivise and protect prevention spending at a local level. So, to this point about conflicting signals, if we want you to act preventatively, but then hold you to account for a short-term target,  that’s a conflicting message to the system. So, that was my recommendation to the Welsh Government—to really build and enhance our understanding and focus on prevention.

We had the response from the Government to our report just this week. It’s coming to the Public Accounts and Public Administration Committee in a fortnight, I think, but that recommendation has been rejected and I don’t fully understand why. It’s disappointing that it’s been rejected, because it seems so fundamental, and we consciously drew up that recommendation in a way that I felt enabled it to be readily taken on board and acted on. Because it’s not just us saying this; this debate is taking place all across the country, and internationally as well. Everyone seems to agree that that’s where we need to focus our efforts, to square that circle I mentioned at the beginning. We’ve got to get more value for money from what we’re spending already, but we’ve got to be taking action further upstream to manage demand later in the system.

Thank you for that response. You’re quite right, and we hear it in many other committees I sit on—prevention should be the thing. Do you think that it needs a bold Government to say, 'Well, actually, we might need to frontload prevention whilst dealing with the reactive'? And, yet, there seems to be a difficulty in making that transition. And it’s really disturbing that that’s been rejected, because, at a time where—I’ll use local government because we’ve talked about the lump of money and we’ve seen this increase—. Well, no, let’s talk about all of the budget— £1.6 billion extra last year. Well, wouldn’t it have been a good idea to actually frontload the preventative agenda to get on top of this? If this doesn’t happen soon, we’re just never going to catch up.

Spot on. It is not easy to do. So, when you’re faced with the scale and range of the immediate demand pressures that every part of the public sector faces, of course I can understand the desire to address the immediate, to firefight, as Dave said. But you’re absolutely right, Peter. We all can identify this problem. We can also see the trajectory. The longer we delay, the bigger the problem becomes. So, it will take quite a significant shift of emphasis by individual leaderships within public organisations to prioritise this kind of agenda—by the Welsh Government, undoubtedly, to send a really strong signal to the system, both in its own decisions about spending and prioritisation, but also in the accountability framework, and so forth, that it sets for other parts of the system. And it will require support politically, not just within the Welsh Government, but across the Senedd, because this will not be a quick fix, and you may well see some price to pay in the short term in order to get to a better position for the medium term.

Thank you for that. 

Just to follow on from that, I suppose, the logical bit, again, there would be: do you think that the public are aware enough of these problems? Being aware of the problems, but taking that action—. How aware do you think the public are, and how forgiving would the public be if you would say, 'Actually, we’re not going to spend on anything else here. We’re just going to put it all on here'? Is there that awareness in the work that you do across the public sector, or an understanding? Obviously, everybody who works in the public sector actually lives in our communities as well, so they’d feel that aspect happening. Are there any thoughts around, if the Welsh Government was to take that drastic action, how it would manage the comms, I suppose, in that aspect?

Matt's itching to come in, so I'll just talk for a little bit and then hand over to Matt. I don't think we've got a particular evidence base ourselves for public opinion or appetite for that shift. But, from my seat, I would say that it is inevitable, I would say, if we are to put the public sector on a more sustainable footing—it has to be done. It requires leadership at lots of different levels: executive leadership to take some difficult decisions in individual organisations; political leadership, not only from within Government, but across the Chamber, because some of these things it would be very easy to criticise in a short-term, point-scoring way, because they're difficult. But some of this will come down to our ability to communicate the reality of the situation, the reality of the choices that we face and our capability in driving forward these changes as swiftly as we possibly can.

I was looking the other day at some data in respect of London and Paris, where both cities have put in place some quite onerous restrictions on car travel—bluntly, ULEZ and so forth. That is translating quite swiftly into improved air quality in those two cities, but it has come at a really significant political price for the leaderships there, and, of course, the benefits from improved air quality will be seen years down the line and in different parts of the public sector. So, this is a difficult thing to do, undeniably, but it needs political leadership to drive it through. Matt is itching to come in. 

Well, Adrian has said, I think, what I was going to say, but essentially this is the policy challenge for Government, and it's at the heart of the Well-being of Future Generations (Wales) Act 2015 as well: how do Government and public bodies make that balance between meeting the needs of the present while at the same time thinking about the long term and about future generations? Equally, it's not a binary choice in that sense between the next generation and the present. The onus is on Government and public bodies to strike that balance effectively. But I agree with Adrian that a lot of this comes down to communication with the public as well. But, picking up on what Dave was saying as well, if there are targets that drive a certain behaviour, the media will report on whether public bodies are meeting those targets, and that will be what people hear—a failure of public bodies to meet the targets that have been set for them in the present day. So, some of this all comes together, really, in how the system works, perhaps in a different way, going forward.

There are some real challenges, and just picking up on what Peter said in terms of whether things have changed—and Dave may touch on cancer services, as another example where our central message really was around the system not shifting in that arena towards prevention—we published a report on temporary accommodation in July that highlighted, and I think you've had evidence from WLGA on this as well, significant cost demands in responding to temporary accommodation needs. That's another prime example where, effectively, public bodies are in firefighting, reactive mode when actually there is a better way, potentially, through that challenge, if only they can get ahead of that demand and start staving it. So, as Adrian said, yes, we're seeing pockets, but I think the big drivers of demand that public services need to get on top of through prevention are still going along the wrong trajectory at the moment.

Yes. I think we've covered my questions, really, because you've articulated really well the importance of a shift towards prevention at all levels. So, I don't think I've got anything more I need to ask.

I just suppose, before I bring Mike in, it's more about, in that we have a budget-setting process and we're doing budget scrutiny now, what comments you would like to make around setting a budget in understanding what that preventative agenda looks like. Are there any recommendations from you as to how the Government should be thinking about this and are we seeing it in the current budget, or are we seeing pockets of it in the current budget, and what would you like to see, going forward?

One first step, I didn't complete my reading out of my recommendation. The final point that was recommended was that we should learn from others beyond Wales, for example taking account of work that the Chartered Institute of Public Finance and Accountancy is undertaking on understanding preventative spend. So, a basic first step that we need to understand is how much are we spending on preventative activity, and then we can start to assess what are we getting for that, what is its impact. We can judge over time whether we're putting more or less into those areas. But at the moment, we're having this conversation without being able to answer how much money we're spending.

We're not even measuring it.

No. CIPFA have been undertaking a big piece of work over the last year or so, and they reported just in the last fortnight. They've trialled in local authorities all across England and Wales an approach to identify and measure prevention spending. Their report is quite upbeat. It says, 'We think we can do it, and this is a methodology that could be developed and applied'. That would be one basic step that we could take: let's at least try to get to first base, and put some numbers around how much we're spending.

Because we might be spending quite a lot of money, but we're not necessarily measuring it to be able to understand how—

It all comes back to what we were discussing: you're spending this, and what are you getting for it? What are its impacts, and where is it being felt?

And I think that's the important point: actually, how well is the preventative money being used as well? So, if you're putting a screening out in health for one thing, are you using that data well enough to identify two or three things with that same pot of money? And so, we don't know. Until we know what the money is—.

I was going to say, to pick up something Adrian said earlier, the challenge here is across the whole of the policy breadth that the Welsh Government has, but also in terms of the cycles that we work to in terms of budget setting, and even political cycles. Because, to pick up Adrian's point, your goals for prevention are not going to be achieved often in one year or two years—they're longer term. So, you need that longer term view, that longer term strategy, which political parties have a common view on, otherwise you'll just get chopping and changing of strategy and policy every time there's a new cycle. So, you need that sort of consistency and threads.

There are some practical things that can be done in the interim. If you take the NHS allocations, the Welsh Government could stipulate, 'We expect a nominal amount of this to be ring-fenced for prevention', and hold NHS bodies to account for what they've done with that money, and what outcomes have been achieved or are being achieved as a result. And similarly in other sectors as well. So, there are some immediate things, but there's also the view that you've got to hold the line and realise that your end result here is going to take a little while to come through.

Peredur, you asked earlier around what would the population, the public, think. I suspect they'd want both: they'd expect that there's an investment in prevention, but they'd want their core services delivered as well. But there's a contract with the public as well, because lifestyle factors have a significant bearing on how NHS services and other services are used. Wales does well in some areas, but there's a lot further to go in terms of smoking cessation, alcohol consumption, healthy lifestyles. Obesity is a massive problem and the results it has for things like diabetes and other things—they all produce a massive impact here and now on services. It's about how you get that longer term view in place to tackle that. It's not an overnight solution.

Thank you for that. It's very interesting to understand that and to embed it into a budget-laying process, and beyond that work—all the policy work. I'll bring Mike in now with some further questions.

The first thing I'd like to say is that perhaps we need—and today is not the right time—to talk about prevention, performance and productivity within the public sector as either part of our role or part of the role of public accounts. So, I think that somebody needs to be looking at that.

But what I'm going to say to you is that, on the budget, and you're aware that Mark Drakeford has said it's a standstill budget, for health, for example, it's 2 per cent for prices, 2.2 per cent for wages and salaries. You also tell us that all seven health boards breached their duty to break even over a three-year period. What do you think the rate of inflation is for health bodies?

I'm looking to Dave, but he's carefully avoiding my gaze. [Laughter.]

Sorry, I was considering Mike's question, thinking, 'How on earth do I answer that?' They will be subject to the market forces as other bits of the public sector will be, but I'll have to come back to you with a more detailed answer than that, I suspect. There are cost inflation pressures that the NHS faces, and some of the Welsh Government additional allocations to the NHS in-year have reflected those cost inflationary pressures. But I suspect you may have some information behind your question, though, Mike. 

I don't believe CPI has any meaningful relationship to health expenditure—and later on, I'm going to mention local government, and leave you out, Dave. But I think what we need is figures of what inflation is for health and for local government. I'll just concentrate on health. We need to know what the expected pay increases are going to be, we need to know what the expected price increase is going to be, and we need to know what is needed to upgrade the kit in health. I think that you can stand up quite easily and say, 'Well, 2 per cent for prices, 2.2 per cent for pay, because that is what CPI is telling us.' I just say, again, I think CPI is a meaningless number in terms of health costs.

We're probably not the people to put the precise number on it, but I know you've had some evidence already from the IFS and Wales Fiscal Analysis on this. Seeing the submissions you've had from the NHS confed on behalf of the NHS, from the Welsh Local Government Association for local government, I think we would recognise that there is a demand profile to service provision in the NHS and local government that is driving costs beyond—that almost sits outside of any inflation calculation per se. The demand itself is driving costs. And then you've got the things that are more inflation-led, like energy costs or wage inflation. Obviously, a lot of that will come down to the Government's agreements with the big sectors that are driving the pay bill for public bodies. So, I don't think we can answer this specific question, but it is there.

And you touched on the maintenance cost; I think we've mentioned in our paper some of the latest figures for the NHS backlog maintenance bill, which gets ever more eye-watering in terms of its scale. So, to what extent is that going to just continue on an upward curve, or is there going to be an effort to do something about that and get it back into a more sensible position? Because it comes back to what Adrian said earlier around providing the facilities that support good productivity as well. If you looked at that metric, there's a kind of inflation on that metric going up all the time, quicker than general cost inflation, if you like.

I'll give you a question that is well within your purview: how much was the inflation in health for last year? What was the increase in expenditure of the health boards in 2024-25 as opposed to 2023-24, and what do you expect it to be in 2025-26? 

We'll have to come back and do some calculations on that. 

I don't have the numbers off the top of my head, Mike, but the point I would make is I completely agree with you. CPI is a measure of consumer price. It's a basket of goods that aren't particularly relevant to delivery of healthcare or local authority services. So, you're absolutely right: every organisation and individual faces their own particular inflationary measure. But I think it's important—going back to our earlier conversation—that at some point, we've got to break out of a cycle of the budget being driven by inflationary pressures alone, because we can't keep up with inflation alongside the increasing level of demand that we're seeing, not only in the NHS, but right across the public service. We need to somehow break out of that cycle and utilise the money that we do have in different ways. Dave could expand on some work that we we've been doing in the NHS recently, looking at where we've put a figure on the cost of delayed transfers out of hospital. Something like 17,500 people last year were kept in hospital when they were medically fit to be discharged. Keeping them in hospital cost the NHS something like £185 million. That is an example where that significant sum of money could be deployed in different ways, undoubtedly to deliver better outcomes for citizens and potentially to deliver that more efficiently and at lower cost, as well.

Surely the net cost is zero, because those beds will be filled by different people. It'll be good, because waiting lists will come down and more people will be being treated, but the net cost to the health boards will be zero, won't it?

Yes, it's not a cost saving, Mike, it's how you use your NHS capacity differently and how you should use it appropriately. You've got £184 million-worth of NHS bed capacity wrapped up in patients who are fit to be discharged. That bed capacity should be used for other stuff, as you say, to get the planned care throughput through, to allow A&E departments to discharge onto wards in a more timely fashion.

Just to pick up, Mike, on your point about NHS spending, I think in our NHS finances release in September, which comes after the end of our accounts work for 2024-25, we pointed to health services having received just under £11.6 billion of funding last financial year, and that was a cash uplift of £927 million. I think we calculated that that was equivalent to a 4.5 per cent real-terms increase in funding in health last year. So, I don't know whether that directly addresses your query on how we assessed the position for last year, but that was the outturn picture last year. I think we're still seeing NHS bodies under pressure in-year this year, even so. 

The month 6 position at the moment in the NHS is forecasting a £191 million deficit by the end of the year, mainly spread across three health boards in particular. You're seeing year after year the same picture—that the dial isn't turning, really, despite those inflationary or above inflationary increases in funding.

I could ask exactly the same questions I've just asked on local government and I'm sure I'd get very similar responses. What I will ask, though, is this. We've seen in England a number of local authorities fall over, they've become effectively bankrupt. What we also know is that size is no protector; the largest local authority in Europe, Birmingham, was one of those that have fallen over, but also you've got smaller authorities in the south of England that have fallen over. Political control in England has made no difference to local authorities falling over. It's happened in Liberal Democrat, Conservative and Labour-run authorities. So, there's no political point scoring in terms of what's happened in England. No local authority has fallen over in Wales yet and effectively become bankrupt. How close are we?

Close. I did a big piece of work last year that looked at financial sustainability across the LG sector, and looked at each authority individually as well. There are undoubtedly a few authorities that are very close to having to issue a section 114. Our assessment at the time of publishing our report was that none were about to, so they all had sufficient grip on their in-year position, so it wasn't imminent. But some are right at the edge, and they are all facing some very significant demand-led pressures in areas like children's services, additional learning needs, temporary accommodation, which are very hard to predict. But when you're right at the edge of financial sustainability, if you get hit with a couple of significant cases that you have to deliver against, that could be sufficient to tip authorities over the edge. And going back to the previous session, the obvious question is around the implications if the budget were not approved. Local government, I would suggest, is going to be the area most immediately and severely hit, because some of them are so close to going over the edge.

I mentioned our work on temporary accommodation, but also we're doing some work at the moment on children's services, which is set in the context of the Welsh Government's policy around eliminating profit. That will be focusing on some of the challenges and financial pressures there.

We're also doing some work on ALN at the moment, on additional learning needs as well, focused on whether public bodies—again, it comes back to some of the things we've been talking about—know enough about what they're spending, what's driving their costs, and how they're performing in terms of service delivery. So, just to make the point that, in local government and some of our studies work, we're definitely trying to shape our work programme as well around some of these pressure areas for bodies as well.

Thank you for that. You'll be pleased to know that we are coming to the end of my questions now. The last but one is: you talk about improving the information used by public bodies to get a better grip on resource implications and to make sure that they can understand impact. Can you outline some of the weaknesses that you've seen in this area, and what can be done to improve them?

We are probably in danger of rehearsing some of what we have covered, Mike, but, as we have been saying earlier in the session, there is a common theme from our work. I wouldn't just pick out one example; it is a recurring theme around lots of the value for money work that we do around bodies' ability to tell a clear story about what they are spending, and even to get to that picture easily is not always straightforward. Some of that comes back to what Adrian was talking about earlier, around financial and other kind of central corporate systems that public bodies have as the building blocks for everything that they do. So, even getting a picture of expenditure is not always straightforward, and then getting that picture of performance and outcomes and wider benefits as well—it's just a recurring theme throughout much of the work that we do.

As we've touched on, the concern would be that public bodies disinvest in that work, rather than investing in that work, in a kind of false economy, if you like, as they are under other financial pressures. From our perspective—we would say this, wouldn't we, as auditors and value for money auditors, but—we think that it is important for public bodies to know, for themselves, whether they are getting value for money. People often ask us the question: do we know? Well, we are not everywhere. We have got a big body of work that we do, and you've seen some of it laid out in our submission. But the onus is on public bodies themselves to be able to demonstrate, and to be held to account for, whether they are delivering value for money. That requires them to have a clear picture of what they're spending and what they're getting for it.

Finally from me, you've produced a lot of value for money reports—some on individual areas, some on individual authorities. Where will I see the effect of that in the savings made by some of these organisations?

The work that we've undertaken, Mike—is that your question?

Your value for money. How will I see your value for money coming through to, effectively, value for money?

Yes. We have a key performance indicator, which we report to you. Our target is to deliver savings of at least £30 million over a rolling three-year period. So, that, at a headline level, is exactly where you would see it. I guess that, at a more local level, you should look to the kind of feedback that we get from our stakeholders on the value that they place on our work, which is pretty consistently positive.

Okay. Thank you very much.

Diolch, Mike. That brings us nearly to the end. Obviously, before we conclude, this may be the last time that you—

You said that earlier.

I know. [Laughter.] But it may be the last time that you're giving evidence to this committee in your current role—who knows what you're going to do after that? It may well be. But I would just like to extend our thanks, as a committee, to you as the Auditor General for Wales, and thank you for the engagement that you've had with myself and the committee over the years, and for providing us with invaluable insights and information that has helped us in shaping our scrutiny. Obviously, we scrutinise you as well, from an organisation side of things. So, thank you for that. I just wanted to give you the opportunity, again, in this area, beyond looking at your budget and that aspect—. Is there anything that you would like to comment on, on the budget process or any scrutiny processes, or any other aspects of your work that you want to highlight to this committee before we bring this session to an end?

Thank you. It's kind to give me the opportunity. I think I said at the start of this session that I am going to be publishing some kind of legacy reflections between now and Christmas. If it would be helpful to the committee, I'd be very happy to put some of that in writing to you and the public accounts committee so that that's formalised and put on the public record. Much of what I'll be saying is reflected in the session we've had today, really.

I am concerned about the sustainability of the system on its current trajectory, but I'm not without hope and optimism. I think we can turn things around, but we will have to tackle many of the things that we've talked about today: improved productivity, and a much sharper lens on value for money. The shift towards prevention is key, and addressing some of those basic building blocks that have perhaps been neglected over time that are so crucial.

There is one other area that I think is really important that we've not explored today, and that's around governance. That's an obvious line of sight that we have as Audit Wales into just every part of the public service. By and large, our public sector is well governed, well managed, and money is spent sensibly. But, during my time in this role, I've had to publish reports on examples where that has not been the case, and, to Mike's point, really, it's not been specific to any area. It's been the Welsh Government itself, through parts of local government, parts of the NHS, arms-length Government bodies, right down to some of our town and community councils. Those come at a financial cost, in terms of settlement payments when there's dispute and so forth. Those are significant, but, for me, the damage is not really financial, so much as damaging the trust and the confidence that the public have in the whole system.

To your question really, Peredur, earlier, about the public's willingness to accept some of the transformation that might be necessary, if that transformation is painful, we need to find a way to bring everybody with us as best we can. Each time the auditor general publishes a report on something that's gone wrong in an organisation because of poor governance or poor behaviour by senior leaders, that chips away at that trust and confidence. I'm conscious, when I speak on this, that I sound a bit holier than thou, but I really do feel it's a really important aspect of the system that we need to maintain a constant focus on.

And lastly—again, we've touched on this through the course of the session—I think next year, with the election, is a real watershed moment. There's going to be a very different Senedd elected. To take forward much of what we've talked about today will require political leadership from all parties and a degree of consensus building, I would suggest, if we're to take the country through the change that's needed. So, the onus is on yourselves as well, I would suggest, to provide that leadership.

Thank you very much.

There will be a transcript available for you for this session and the previous session, just to check for accuracy. A fascinating session with you today. We really appreciate you making the time to come and talk to us.

We'll now, under Standing Order 17.42(ix), ask the committee to resolve to exclude the public from the remainder of the meeting. I see nods, nodding of heads, so we'll go into private now. Thank you very much. Diolch yn fawr iawn.