Y Pwyllgor Cyfrifon Cyhoeddus - Y Bumed Senedd
Public Accounts Committee - Fifth Senedd05/02/2018
Aelodau'r Pwyllgor a oedd yn bresennol
Committee Members in Attendance
|Adam Price AC|
|Lee Waters AC|
|Mohammad Asghar AC|
|Neil Hamilton AC|
|Nick Ramsay AC||Cadeirydd y Pwyllgor|
|Rhianon Passmore AC|
|Vikki Howells AC|
Y rhai eraill a oedd yn bresennol
Others in Attendance
|Andrew Jeffreys||Llywodraeth Cymru|
|Andrew Slade||Llywodraeth Cymru|
|Anthony Barrett||Swyddfa Archwilio Cymru|
|Wales Audit Office|
|Arwel Staples||Cyngor Sir Ddinbych|
|Denbighshire County Council|
|Eurgain Powell||Swyddfa Comisiynydd Cenedlaethau'r Dyfodol Cymru|
|Office of the Future Generations Commissioner for Wales|
|Liz Lucas||Cyngor Bwrdeistref Sirol Caerffili|
|Caerphilly County Borough Council|
|Matthew Mortlock||Swyddfa Archwilio Cymru|
|Wales Audit Office|
|Mike Halstead||Cyngor Bwrdeistref Sirol Conwy|
|Conwy County Borough Council|
|Mike Usher||Swyddfa Archwilio Cymru|
|Wales Audit Office|
|Shan Morgan||Ysgrifennydd Parhaol, Llywodraeth Cymru|
|Permanent Secretary, Welsh Government|
|Sophie Howe||Comisiynydd Cenedlaethau'r Dyfodol Cymru|
|Future Generations Commissioner for Wales|
|Steve Robinson||Cyngor Caerdydd|
Swyddogion y Senedd a oedd yn bresennol
Senedd Officials in Attendance
|Claire Griffiths||Dirprwy Glerc|
|Meriel Singleton||Ail Glerc|
Cofnodir y trafodion yn yr iaith y llefarwyd hwy ynddi yn y pwyllgor. Yn ogystal, cynhwysir trawsgrifiad o’r cyfieithu ar y pryd. Lle mae cyfranwyr wedi darparu cywiriadau i’w tystiolaeth, nodir y rheini yn y trawsgrifiad.
The proceedings are reported in the language in which they were spoken in the committee. In addition, a transcription of the simultaneous interpretation is included. Where contributors have supplied corrections to their evidence, these are noted in the transcript.
Dechreuodd y cyfarfod am 13:01.
The meeting began at 13:01.
I welcome Members and our witnesses to this afternoon's Public Accounts Committee meeting. Headsets are available for translation and for sound amplification as usual. Please ensure that phones are on silent. In an emergency, follow directions from the ushers.
No apologies have been received today. Do any Members have any declarations of interest they'd like to make?
Okay, item 2. We have some papers to note. Firstly, the minutes from the meeting held on 29 January. Happy to approve those? Good.
Item 3 relates to the Welsh Government's initial funding of the Circuit of Wales project. We have an evidence session with the Welsh Government. Would you like to give your name and position within the Welsh Government for our Record of Proceedings?
Shan Morgan, Permanent Secretary for the Welsh Government.
Andrew Slade, director general, economy, skills and natural resources.
And I'm Andrew Jeffreys, director of the Welsh Government's Treasury.
Great. Thank you for finding time to be with us today. This is, as you know, an issue that has been ongoing for some time, and the committee did still have a number of questions that we wanted to raise with the Welsh Government at this juncture, which we feel is appropriate.
We have a number of questions today. The first question is from Vikki Howells.
Thank you, Chair. My question is whether the Welsh Government met with the Heads of the Valleys Development Company during March, April, May and June of 2017 as the balance sheet issue emerged as a key question. So, was the balance sheet issue raised at any of those meetings?
Thank you very much. I've consulted colleagues and I've been informed that senior officials and external due diligence advisers did meet with the Heads of the Valleys Development Company regularly during the period of March to June 2017. Heads of the Valleys Development Company were aware that the balance sheet treatment would be important, and the company submitted evidence to support their view that the proposed structure would not cause any problems. The key aspect that differentiates balance sheet analysis from other matters such as state aid, for example, which was picked up, is that it can only be undertaken when the final financial structure is understood, and this final analysis did consider whether a solution would be possible but in fact identified that any solution would only be achievable if the Welsh Government guarantee were to be reduced by at least 50 per cent. Previous discussions that we'd had with the company had shown that the level of the guarantee was the minimum that the company required to secure the finance. So, officials concluded that something that would amount to a very radical change to the finance structure would not be possible, whereas, by contrast, the state aid advice that had been identified identified that there were only minor changes that were needed to the project and that they could relatively easily be addressed.
Was what you've just put on the record now, which I think is new information, communicated to any of the private sector partners—that you now felt that something around a £100 million guarantee would be necessary in order to move the project forward?
Andrew, can I invite you to respond on that? Personally, I've really got nothing to add to the points that have already been made by James Price quite extensively on this in his letter of 11 September to the Public Accounts Committee, but, Andrew, perhaps you'd like to build on that.
I wasn't personally involved in any discussions with the company on this particular issue prior to the decision that Cabinet made. I think the point about the size of the guarantee and what would be much lower risk in classification terms was certainly discussed amongst officials—that a guarantee of a much lower level would have been less risky, from a balance sheet perspective—and that was pretty well understood, I think.
Yes. My question's purely factual. Was that view put to the company or any of the private sector partners of Aviva so that they could respond?
My understanding is that the promoters were aware of the balance sheet issues, but I must say that, as you'll know, although I'm obviously accountable for the business of the Welsh Government, I can't add anything to the technical points made by the additional accounting officer who covered this, because I was not directly involved.
If I could just clarify the question—and if it's not possible to answer now, maybe, Permanent Secretary, you could write to us—we're aware, of course, that the company was aware of the general issue because it actually commissioned independent research in 2016 from Ernst and Young, I believe. The question is specifically to the view that you came to as a Government, that's just been expressed now, that the guarantee would need to be, in effect, 50 per cent less in quantum terms. I'm just seeking to ask the factual question: was that information imparted to the company prior to the Cabinet decision, to your knowledge?
'I don't know' is the short answer to the question. I think the general point was put to the company that the guarantee needed to be significantly lower to be lower risk from a classification perspective. That's not exactly the same as the point you're making, I think, but I think the general point was certainly discussed.
But it will be possible to find out if they were told, and you can come back to us on that.
We can come back to you on this, but my understanding is that the company were aware of the whole issue and the relative weighting.
But you don't know whether they were told about what you've told us now—that the guarantee of circa £100 million would be necessary, in your view, rather than the £210 million.
I will confirm that in writing.
Okay, thank you.
That's very dramatic: the moving of the goal posts at the fifty-ninth minute of the eleventh hour, because there had been a previous reduction in Welsh Government exposure from 80 per cent to, as the Heads of the Valleys development corporation thought, less than 50 per cent on the basis that the Welsh Government would be guaranteeing a loan from Aviva of £210 million. If you are now saying that, as a result of that Cabinet meeting just before it was announced that Government wouldn't support the project, they wanted that element of guarantee to be reduced to £100 million, that's a guarantee to undermine the entire project, isn't it?
Can I sort of take a step back and try and give a perspective of what happened? I think it's fair to say that Ministers gave the project promoters a great deal of time and support to try and make this project work. There were a number of very different iterations of that project, which required different amounts of funding from the Welsh Government, which responded to concerns that were raised between 2011 and, in fact, last summer. So, we're talking about a period of more than six years of considering this project. Why was that? Because we felt that there was a potentially huge opportunity—a major private sector investment in a part of Wales that's received very little private sector investment in recent years—therefore, the Welsh Government was prepared to put a great deal of time into trying to develop a successful project. We applied very comprehensive due diligence to the final proposal. A summary of some of that due diligence has been published.
It was assessed to be a very high-risk project with most of the risk, in fact, being borne by the Welsh Government. It was also assessed that the benefits of the project, in particular the estimate of jobs created by the initial circuit element of the proposal, were, at best, very uncertain. As Andrew has indicated, there was a very strong likelihood as well that the asset and the associated debt, which was around £370 million, would be classified to the Welsh Government.
This isn't relevant to the question.
Yes, Chair. Maybe if we could turn that, then, to the assessment—
Adam, before you do that, I think Rhianon Passmore had a question.
Thank you. With regard to the final business case and the due diligence exercise, which is obviously critical to this line of questioning, was there anything, in your view, outside of normal timing in terms of the application of the due diligence testing?
Sorry—in terms of timing?
Well, we've just had a comment in terms of it being the eleventh hour, but, just as a matter of clarification, at what point does that normal due diligence exercise take place in terms of large infrastructure projects?
It was undertaken at the point where our understanding was that a completed project had been presented. So, I wouldn't say at all that it was at the eleventh hour; it was at the point where we had a project proposal that had responded, in various iterations, to comments made by the Welsh Government. So, it was the standard comprehensive due diligence at the right moment in the development of the project.
Therefore, in terms of following that up, if it was applied at an earlier stage, that extensive, which we understand, as a Public Accounts Committee, took place at that point, if it had taken place at an earlier iteration, would that have been outside of normal practice?
It comes back to what I said at the beginning—that there were a number of very different iterations of this project. The auditor general looked at the first iteration, which was a very, very different and a much smaller scale project from the project as it was finally presented to Government and as it was finally considered by Cabinet. And, to be honest, the fact that it was considered by the Cabinet of the Welsh Government shows exactly how much resource and consideration was given to the project as a whole.
I just want to pursue this point about the £100 million guarantee that it appears the Welsh Government were prepared to give. Am I misunderstanding?
Could I, hopefully, clarify? I don't think, at any point, anybody said that £100 million would be okay from a classification perspective. What we were looking at was a project that had a £210 million guarantee, and crucially, also, the Welsh Government's guarantee was junior to the other financing elements in the project.
So, when you're looking at the classification of a scheme of this nature, the risk weighting of the capital is an important part of the consideration. So, a guarantee that's not junior to the other elements of the funding carries less weight than a guarantee that is junior to other elements of the funding. So, it's not only the size of the guarantee that's crucial; it's what the relative risk of that guarantee is in the overall capital structure. So, where a guarantee is more junior to other elements of funding, then the classification guidance suggests that you should weight that funding more heavily than other elements. And the kind of standard metric might be twice as high—the more junior debt weighted twice as high as the more senior debt.
Just to clarify on that specific point, is the weighting guidance that you just referred to the guidance on concessions or on public-private partnerships?
It's on public-private partnerships, but, by extension, it's assumed that it applies in the same kind of way to concessions.
Part of the problem with the guidance is that it's not very specific about some aspects, and that there's quite a lot of case-by-case consideration, not least because these projects, I suppose, are kind of unique in general.
Just for the record, you did come to the conclusion that this was more likely to be categorised as a concession, but you were using weight factors that, actually, are in the guidance for a public-private partnership, which this project most certainly is not according to you.
No, that's true. But the advice that we had was that that was an appropriate way to consider the weightings of the different capital elements in there, even in a concession.
Who advised you about that?
I understand that this is an emotive issue for a number of Members, at least, but can you go through the Chair, at least for part of the time, otherwise it just descends into chaos? Can I just come back on the answer you just gave to Adam? The advice you were given: can you just clarify for the record who that advice was from?
There's published and public guidance on consideration of these kinds of projects, so that's Office for National Statistics and Eurostat guidance, but then we consulted with colleagues in the classification branch in UK Treasury, HM Treasury, and also informally with ONS colleagues as well.
So, a wide range of the usual sources of advice. Adam Price.
This is a highly complex area, clearly. I'd just like to turn to the assessment rationale, and particularly the advice that you took from the UK Treasury. We have, through a freedom of information response from the Welsh Government, an extensive log, effectively, of e-mails back and forth from the Welsh Treasury to the UK Treasury. I'm presuming, Mr Jeffreys, that probably some of these e-mails, or most of them, may have come from you from the Welsh side, but you don't need to confirm that if it's not necessary. But the last e-mail in the log, just to clarify: so there's an acceptance that it's a concession and then the UK Treasury essentially clarify that the way in which you work out the proportion of the debt and, effectively, what is in the denominator, becomes the key issue, really, in deciding whether it's in balance sheet. And in the last e-mail from the UK Treasury to the Welsh Treasury they say this: 'I don't think it's really appropriate or possible for me to provide a view on whether the shareholding and re-financing debt can be included as part of the total funding to determine the level of the guarantee.' And they go on to suggest that you speak to the Infrastructure and Projects Authority, which is probably the leading centre of expertise in Government in the UK on this. You didn't arrange that discussion with the Infrastructure and Projects Authority; I think that's already on the record.
And so, there is a degree of ambiguity because they didn't answer—. They said they couldn't answer that question. Was that question key to working out the central question of the level of the guarantee? Was knowing the answer to the question that you'd actually put to them that they said they didn't know—was that a material question?
So, it's quite interesting to work through these e-mails, because it's a bit like seeing the way the thinking developed over time. It's kind of seeing your workings written out, I suppose. But I think the conclusion we eventually came to was that the issue of whether—. So, when you're looking at the numbers in this project, they're inevitably quite complicated and there are lots and lots of different elements, both in the sources of funding for the project and in the expenditure of the project. And the thing we were trying to work through with Treasury there, and with IPA advice at points, was how we could properly establish what the overall cost of this project was, and, hence, what proportion of the cost we were guaranteeing. In looking at all the different elements of the cost, we were trying to understand whether the published £430 million cost of the project was, as you say, the right thing to put on the bottom of the equation. And there were some elements of the costs where we weren't clear.
So, for example, some of the headline cost was repayment of funding that the Welsh Government had already provided to the project in the past. So, that was an element that we thought, 'Maybe we shouldn't include that, maybe that's not an appropriate element to include.' There are quite a lot of different types of disbursements from the project—developer profit, payments of tax, et cetera, things that it's not immediately clear which side of the equation you should be counting those things on.
So, we were working through all of those elements as we tried to estimate the overall cost of the project that we should be considering. But, when we came to the final advice on this, we concluded that because the £210 million was virtually 50 per cent even of the unadjusted total cost of the project, and because of this risk-weighting issue that we'd been advised was important to consider, it wasn't material really whether to include or exclude those elements, because you were at 49 per cent even if you included everything, and if you applied any kind of weighting to that 49 per cent, then clearly you were above 50 very, very quickly. You could argue that we should have doubled the weighting of the Government guarantee—that was certainly one possible model that we were considering for estimating the relative weight of the different elements of the financing. So, in the end, our judgment was that it wasn't material whether those things counted or not. So, we didn't follow up on that conversation before providing advice.
Just one specific factual question as well: I believe you provided your final advice—I don't know whether it was in a written form or not—on 20 June; is that correct?
I couldn't say exactly when. Around that time.
Okay. Maybe you could write. My question is this: were you aware at the time that you provided the advice that the guarantee only commenced when the project was effectively completed, when the construction was completed?
Yes, I think we were aware of that.
Were you aware? In writing the paper that you did, or in providing the advice, were you aware at the time that you gave that advice to the other officials? I know they were aware of it, the officials that were working on the project, the main paper. My question is: were you aware by 20 June that the guarantee only started when the project was completed?
I didn't write the final advice to Ministers on this. I assume—. That was a known fact, a known element of the project when the guarantee kicked in, I think.
But it does have, potentially, some material effect, doesn't it, on your calculation?
The timing of when the guarantee—
Yes. You've mentioned the impact of risk, for example, so the timing of when the guarantee kicks in surely has some material impact. But, I mean, you don't think you were aware at that point of that issue.
I'm not sure whether you're asking whether I personally was aware, or whether the people writing the advice were aware.
I'm asking if you were aware, when you provided your advice, that the guarantee did not commence until the completion of the project and, therefore, there was an asset there.
So, I'm pretty sure that was known as part of the overall awareness of what was in the project.
My question is—. I'm sorry to press you here, and if you're unable to tell us today, then you can certainly write to us, but the issue is whether the advice provided on the balance sheet classification issue was written in the knowledge that the guarantee—
Yes, I think it was.
Because you knew. You knew at that point, in writing that paper or providing advice.
Not me personally because I didn't write the final advice, but—
But you provided the advice. So, was that advice based on your knowledge and understanding that the guarantee did not commence until the completion of the project?
I think I've answered the question.
I'm afraid I'm still no clearer. I think it's a very—. If you don't know the answer, then just say you don't know.
I'm not sure whether you're asking about what I personally—.
I think Andrew Jeffreys said that his team were aware.
I'm asking specifically: as the Treasury official—you were the Treasury official, working in the Welsh Treasury—were you, as the person providing the advice from the Treasury on the balance sheet classification issue, aware that the guarantee only commenced when the project was completed?
So, was I personally aware of that at the time?
I think I was, yes. But, it's quite difficult—
If you'd like to have some more time to ponder that question, and to—
I think the assumption is that you read the advice.
Is it possible—? There was a meeting—a wash-up meeting—with the company, I believe, on 30 June, after the decision not to go forward. I'm told that this issue, this very issue that I've raised, about whether the Treasury official responsible for providing the balance sheet classification advice knew that this guarantee only commenced at the completion of the project, and I'm told that the developers and private sector partners were told that there wasn't that knowledge, at that time. I believe that you have notes of this meeting; perhaps you could share those notes with us, so that we can clarify this matter.
I think if you could do that, then that would be easier. I think that we're not going to get further with that line of questioning, Adam. Neil Hamilton, you had a supplementary.
Yes, I'd just like to follow up on what you said a moment ago, about removing the element of developer profit from the equity base of the project, which, in this case, amounted to the substantial sum of £45 million. Given that the guarantee that was being sought was a guarantee of £210 million, that's a very significant proportion, the denominator, which Adam has just referred to. But, as I understand it, the Welsh Government required the developers to keep that profit in the company, as equity. And so I wonder on what basis, therefore, you thought it was proper, advisable, to take it out of the calculation, which would then reduce the proportion of the total cost of the project, which the guarantee was supposed to cover, from 47.99 per cent, which is what £210 million is as a percentage of £437 million. As you rightly say, if you take out 20 per cent of that, then the guarantee that is being sought on the basis of your calculation goes way above 50 per cent, and that's therefore the justification, in effect, for torpedoing the project, whereas if you keep the developers' profit in the calculation, you get a very different result.
Just to clarify on that: we didn't take the developers' profit out in order to construct our advice. That was just one of the elements of the overall funding that we were looking at, as to whether you should keep it in or take it out. In the end, our advice was based on the full £430 million. If you took all of the elements that we were thinking about whether there was a case for taking them out, you would have got down—you'd possibly take out developer profit, possibly repayment of previous loans, possibly tax; there are quite a number of elements for which there is an argument for stripping out. Because the actual debt being raised was £370 million—.
Yes, but the part of the debt that was sought to be covered by the Welsh Government guarantee was only £210 million.
Yes. So, there was just this question about how you get from £370 million to £430 million, which was the stated cost of the project.
Yes, but that involves development profit as well.
So, I'm afraid I don't understand the basis of the calculation at all.
So, just to clarify, we didn't—. So, our classification advice was based on the full £430 million, and our £210 million as 48 per cent of that, and we should apply some weighting to that with regard to how junior it is in the structure, and that was enough for us to assess that that was a high-risk classification to the public sector balance sheet.
But that was the first time that this had been raised.
The weighting issue in those terms. As far as I'm aware, that was never put to the developers with a view to seeing what they could do to either argue the case away or to make further changes to the project financing structure, which could get around the difficulty, as indeed happened with the state aid problem. As a result of significant discussions and to-ing and fro-ing, that issue was resolved.
I think what we were doing was looking at the project that was in front of us and providing advice on that.
Well, that's obvious. That's what you're paid for. But that doesn't answer my question in any way, about how these weightings were arrived at and what the weighting percentages actually were and why they weren't shared with the company with a view to arguing whether they were justifiable or not.
Are you asking a specific question there, Neil?
Sorry, do you mind repeating it?
I'm asking, first of all, how these weightings were arrived at, what they were in relation to the individual compartments of the financing, and whether you didn't think it appropriate to share that analysis with the company. You may be right, you may be wrong, but surely, it would have been worth while, if you wanted this project to have a chance of success, before you finally pulled the plug on it, to argue the point. After all, the developers and, indeed, companies like Aviva took their own due diligence and advice on all the areas on which you were giving the Welsh Government advice, and if you saw this as a worthwhile project—which, clearly, you did; otherwise you wouldn't have put taxpayers' money into it at all, and, as the Permanent Secretary pointed out, this had been going on for over six years—wouldn't it have been worth while to go the extra mile at that point to see whether we could get around what you then thought was a difficulty, of which people weren't fully aware at the time?
I think, if I can intervene—
Andrew's explained some of the calculations. We'll make absolutely certain that we are responding to all your questions. A lot of attention has focused on the classification issue, but, as Mr Hamilton said, this project had been developing over a period of six years, during which time it had gone through a lot of iterations, each of which would have required significantly more funding from the Welsh Government. And it was a mix of factors that led to the decision by the Cabinet in June last year not to fund it. It wasn't simply the issue of classification; it was a set of criteria that meant that the decision was taken not to fund it.
Well, what were these other criteria?
Well, I wonder—perhaps I could read from the minutes of the Cabinet on 27 June, the day after the PAC hearing, when the decision was taken.
'Cabinet agreed that the potential impact on public finances was too great and it was not prudent to offer the financial guarantee. The company had failed to meet the objectives set by the Government and could walk away from the automotive technology park phase of the project, thereby failing to deliver the bulk of the job opportunities promised by the overall project. Furthermore, the potential for the ONS to reclassify the guarantee as on the Welsh Government’s balance sheet was too much of a risk.'
So, it's clear, I think, from the record that it wasn't simply the issue of the classification. That was one of a group of issues that led to the Cabinet decision not to fund it. And, I guess, there comes a point where you have to take stock of the development of a project, and, after six years, when they were encouraged to produce a final project, after repeated contact, it was fair to assess that final project and make a decision.
Can you confirm: did Welsh Government officials confirm to the principals of the company, Richard Parry-Jones and Martin Whitaker, the Friday prior to the Cabinet meeting that there were no outstanding issues and set up a meeting—? Well, let's deal with that one first. I understand that you regard the now famous, or infamous, 'no showstoppers' e-mail as referring to the state aid issue, but I'd just like to ask you specifically: did the officials confirm to the principals there were no outstanding issues the Friday previously?
I'm not aware of that. I agree with your assessment of the comment about 'no showstoppers' relating specifically to state aid—
That's not my assessment, that's your assessment. I understand that. I don't want to engage with—
That's my understanding of that. And then, I think you got a pretty full explanation of where things were from James Price at the PAC on 26 June, the day before the Cabinet took its decision on the twenty-seventh.
Would it be possible for you to check the record and speak to colleagues about this, because it is quite an important issue? I can understand reasons why you might not want to say anything, but to say, if it is true, that they were told there were no outstanding issues—and clearly there was a pretty big one—then that would be troubling. Could you confirm that either way?
I'll certainly include that in a response to the PAC.
Just before you go on, Adam and Neil, Rhianon Passmore has a supplementary question.
In relation to that point and the comment about the 'no showstoppers', I believe the text that we have had states:
'As we are drawing towards the close of our project appraisal process we had a conference with Counsel yesterday on state aid.'
That's pretty clear.
'The good news is that at the moment there does not appear to be any showstoppers but there is one point that I would like to discuss with you in relation to deal structure.'
So, we do have that text in terms of that narrative. Obviously, there's wider text to that, but that seems to me pretty unambiguous, Chair. I just wanted to point that out.
I'd like to pursue a different point.
I'd like to return, if I may, to this question of the risk assessment. To what extent did you share with UK Treasury—? You had an extensive back and forth discussion about the commercial risk to the project, and then there's the risk to the guarantee being called, I suppose. Did you share with them, for example, a different view of the credit rating or risk analysis of the project, and the fact that Aviva investors, for example—I think a fairly conservative financial institution—had assessed the risk profile of the entire project before determining their decision to lend, and indeed there were separate risk assessments by independent advisers like Ernst and Young and Oxera? So, it's fair to say, to summarise, that there were different views about the risk rating for the project. Were they shared with the UK Treasury? Were they aware of those?
I think the key point in the analysis was that the financial structure of the project that we were looking at, ahead of Cabinet in June, had a £210 million Government guarantee in it. That was the thing Aviva had been assessing and everybody else had been assessing. So, their view of the risk of the project—the prior issue was, 'Okay, well, the Government's standing behind the first £210 million for this', and that guarantee was at the bottom of the cash waterfall in the structure. And that was a very fundamental element of this project, that there was a £210 million Government guarantee in it, and everybody else's risk assessment would be based on that. So, that's not to say, without that guarantee in it, it was completely commercially impossible, but that guarantee was a very fundamental part of the project.
I'm just seeking a factual answer, really, because I note from the UK Treasury's e-mails to you that they refer to the paper that's been provided to them, and they're very careful in their language saying, on the basis of what you provided, then, 'We would categorise this potentially as high risk, commercially', and that has attendant consequences to the risk rating of the guarantee. But I'm just wondering: were these other sources of evidence, effectively, provided to the Treasury so that they could form a rounded view, if you like, of the true commercial position of the company? I note that the due diligence that you commissioned explicitly, actually, didn't have a view on the financial model et cetera. I'm told that the due diligence showed the risk of the guarantee being called was low. Was that shared with the UK Treasury?
So, the thing that we were talking to the Treasury about was—. We weren't seeking the Treasury's view about the commercial risk of the project; we were seeking the Treasury's advice about classification and how to assess the classification of the project. So, we were providing them with information relevant to that question.
But they do mention the commercial risk of the project—extensively, actually—so it would appear from that that it had some bearing upon the assessment that they made.
They were volunteering their own views about that. I think that's what they were doing. We weren't seeking their views on it.
Okay. So, that additional information, which gave it a more complete view, wasn't shared with them is my takeaway from what you've just said.
What I said was that we provided them with information relevant to the question we were asking them about classification, and to the capital structure of the—
Okay. Could I—? There's another source of advice that you did engage with, to some extent, which is the Office for National Statistics and the classifications forum. Now, I'd just like to ask you to clarify a couple of things. The Circuit of Wales had been on the priority list and the forward programme of this classification forum, and we know that because it was taken off those lists in April and January. I suppose my question is quite simple, really: why was it taken off, the closer it got to the Cabinet decision? Why was it placed on them in the first place?
This is a project that had been around for a while and we were thinking, at some point, may require a classification review from ONS at a point when Ministers, perhaps, had given agreements in principle to support the project to the next stage. So, we wanted that to be on ONS's radar. But a couple of points: we were putting it on their radar, saying this might be coming up, and then the question was asked, 'Well, is it coming up this time?', and at that point, it wasn't coming up for them to take an assessment, so it came off their list at those points. I think it went on and off a couple of times. I think it went on sometime in the back end of 2016, and then ONS asked the question, 'Is it ready? Are we going to do an assessment of this in the next few months? No, okay, well, let's take it off.' And then it came back on, I think—
Permanent Secretary, it is at least a little bit odd, isn't it, that actually as you get closer to a decision, and therefore execution and implementation, that you actually downgrade the project? If I were a conspiracy theorist, which I'm not, then I might think that this was a done deal, that the decision had already been made, and that's why it was being downgraded. I find it very, very strange.
But we kept putting it back on again, and I think that's the key thing. We took it off at the point where we felt that it was unlikely to move forward quickly, and we put it on again to put it back on the radar of the ONS at a point where we thought a decision might be taken. But our—
Is that a normal way to proceed in these sorts of situations?
The ONS like to know what's coming up to plan their work, so what you tend to do is to think about what things they might need to have a look at in the coming months or whatever the relevant period is that you're considering, but, as it comes to sort of setting their work plan for the immediate six months/year, then—and it's those things that are certain that will stay on, rather than—. At no point did we ask ONS for a formal view on this.
Adam, I think Neil is eager to—
Happy to do so after.
I just find that strange because the final proposal, which was rejected on 27 June, I think, came in in April, didn't it, and you'd set a deadline. So, you take it off in the month that, actually, the final proposal, which is imminently going to the Cabinet for a final decision—I just find that strange. But, look, when—. The final question about ONS: I understand that ONS only provides formal classification when contracts are signed and the rest of it. There is this mechanism for providing provisional guidance. You didn't ask for that provisional guidance, and the reason that you didn't ask for that provisional guidance is—.
That Ministers hadn't made a decision in principle to go ahead with supporting the project.
Okay, okay. Can I just read to you—very, very briefly, Chair, but it is highly relevant—? There's a section in the kind of bible of classification decisions by the ONS—under this section 'Government policy proposals', it refers to classification decisions based on near-final policy proposals where there has been a decision in principle in favour, and they would be deemed provisional. So, that's what you're talking about there. It goes on to say this:
'However, on rare occasions, government departments might seek a view on a proposal at an early stage of development. In such cases, ONS will provide provisional advice on the expected classification of the proposal, based on information available at the time.'
Why didn't you ask for that? Do you accept that, actually, that is there precisely for situations where there's an outline idea and you effectively want to test the waters with the bare bones of the principles of an idea? That is there for that purpose. Do you accept that that is the case?
My understanding is that it has to be a great deal more than the bare bones of a case.
Well, okay. Do you accept, as I've read it out to you,
'a proposal at an early stage of development'—
let's use their language, not mine—? Would, in your—? Did you regard the Circuit of Wales at this point when the proposal had gone in as a proposal at an early stage of development that would have met the criterion of the ONS?
I think the ONS are really generally talking there about Government projects or Government initiatives rather than private sector projects that Government is assessing, so—.
Which would suggest that it should be on balance sheet, with respect, shouldn't it? If that's the argument—that this wasn't a Government policy proposal, it wasn't a Government project, then—
Well, no. Private sector projects that have very significant Government subsidy do end up on—or Government support or Government guarantees—. So, just because it's a private sector project, doesn't mean it doesn't engage classification issues. The only point I'm trying to make is that what the ONS usually have in mind when they're talking about those kind of policy ideas are things that Government's intending to do and they want to shape that policy with advice from ONS rather than private sector projects that are looking for Government support. It's a slightly unusual arrangement, really, for them to be giving an opinion on.
Yes, but this was, though, a proposal that had substantial Government investment and, indeed, as the Permanent Secretary was referring to earlier, six or seven years of huge investment of time and effort and energy by the Government. Has the Welsh Government ever availed themselves of this early stage of development mechanism for testing the waters?
We certainly do involve the ONS in things. So, for example, in looking at our mutual investment model, we involved the ONS in that. And looking at the legislation around RSLs, registered social landlords, we've involved the ONS in that, but that's been on the basis of pretty well-developed contractual models or legislation as opposed to a kind of third party's project proposal. So, this is a different kind of case, I think, to the kinds of things that we tend to work with ONS on.
Okay. I'm going to have to—. We're into the last 10 minutes now—well into the last 10 minutes—and I know we've got a number of supplementary questions. First of all, Neil Hamilton.
I'd just like to explore what the Permanent Secretary said a moment ago about the various ingredients that went into your decision not to back this project, apart from the classification issue, where you said that it was regarded as a high-risk project, but, of course, it was no more speculative at this stage than it was at the beginning. In fact, to an extent, it was less speculative. I can't understand why you would think that the company would want to walk away from the automotive park, as you put it a moment ago, because that was a big part of the potential profitability of the project for the private sector investors and something from which the developer profit would be very significantly enhanced. So, I really don't see what had changed between the point at which you went to the company and said, 'You've got to reduce the Government guarantee to less than 50 per cent of the project costs', they having done that, but subject to the various items that Mr Jeffreys said they adjusted to the bottom lines, such as development profit or whatever—changing the denominator, as Adam Price put it—. I can't see what, in terms of the viability of the project as a commercial investment, had changed to give you the idea that this was now riskier than it was before.
I think the point I'd like to underline is that this wasn't a static project. Over the six years, it changed and developed very significantly and required a very much more significant contribution of funding from the Welsh Government. We took a great deal of due diligence into account in presenting the evidence to the Cabinet. We undertook financial due diligence, fit-and-proper person assessment—a wide range of due diligence. We supplemented that with internal expertise and also, as I mentioned in the letter to the committee, we set up an assurance group to make sure that the basis for, and benefits of, the project were challenged from across the Welsh Government. So, there was a very, very extensive process of due diligence.
Yes, there was, and each one of those steps actually reduced the element of risk, not enhanced it. This is the point I'm making, that, the more you knew about the project, therefore you were able to tick off certain items as 'items of risk that we have dealt with', for example, fit-and-proper person tests of the people involved in the project and so on and so forth. Bearing in mind here—. If you look at the financing structure of this in the final incarnation that was put before you in April 2017, the Government guarantee was being sought for 48 per cent of the project costs: 14 per cent was equity that was totally unsecured, only 19 per cent of the project costs was senior debt, which would be called on first if the project completely failed, made no profits at all after the construction costs had been incurred, and part of the—the land costs were about 18 per cent. So, I'm struggling to see where the extra risk that you saw at this final stage had come from. All these factors were known for at least a couple of years or so before that. What was new?
Well, I think what was new is the way that the project developed over time and—
But what was new—not the way it had developed, what was new at that point?
I think it's probably worth being clear that the information that was provided in, I think it was March last year, or whenever the final submission came in, that was the first time that version of the project had been presented.
But it reduced the risk, it didn't enhance it. If you were looking at it as an investor—.
The model had different elements from previous iterations of the project; that's definitely the case.
And they reduced the exposure of the Welsh Government, they didn't enhance it. So, why was it then, at that stage, when the company felt that it had fulfilled the extra requirements that you had placed upon them that you then decide, 'Oh, no, we now want—. It's still too risky'? You mentioned this figure of £100 million, which would have been a substantially lower level of exposure, which might have been acceptable. But the goalposts had been changing; every time the company comes to you and actually fulfils the obligation that you put upon it, you then say, 'Oh, no, no; now we want more.' And then, at the final stage, you said, 'Sorry, we're walking away from the project altogether'.
I think we are required to look very carefully at how we spend taxpayers' money. We went through a very, very extensive process—
Yes, I know all that, but what had changed?
—of due diligence, and it was—. As a result of that due diligence, it was assessed to be a high-risk project, with most of the risk being borne by the Welsh Government.
But you knew all that.
We didn't know all of it, because information was constantly coming in. But, once all the information was in for the final project iteration and all the due diligence had been carried out, that was the assessment. The assessment was also made that the benefits that were claimed for the project, and particularly the number of jobs created by the initial circuit element of the proposal, were, let's say, uncertain at best. So, the combination of all of those factors, plus the issue of classification, meant that the Cabinet took their decision, but, I must stress, on the basis of very, very extensive external due diligence and internal assessments, including across the whole of the Welsh Government.
I can't help contrasting that approach with the successor project of £100 million that has appeared to invest in what we might call the automotive park aspect of the original Heads of the Valleys proposal. So, if you can find £100 million for your own project without doing any due diligence, what I struggle to understand is why you weren't able to provide that portion of the guarantee to a company after doing proper due diligence and not only Government due diligence—Aviva and all the other major funders of this project clearly were at risk themselves, and of course they do their own due diligence. And, yes, the project did proceed over a long period of time, but you were putting more pieces of the jigsaw together, you weren't taking them away. This is what I can't understand. That's why I'm trying to get to the logic of this final decision.
I think that's your answer.
Well, there isn't any. Yes, I quite I agree—illogical.
Rhianon Passmore first of all wanted to ask a supplementary.
Very briefly, because we seem to be going around in circles. In terms of the line of questioning around forward work programme inclusion, or not, and what is acceptable, deemed normal practice, around such huge infrastructural determinations, predetermination is always an issue wherever there's a spend from the public purse and huge decision-making factors. So, in terms of this huge, important decision that was coming to Cabinet, is it normal practice that you would not predetermine that this is going ahead in terms of any inclusion, or not, on the forward work programme? I'm just trying to understand in terms of what is deemed to be normal practice for inclusion in that programme.
In terms of the ONS issue here, I think it's really difficult to talk in terms of normal practice here because—
It's dynamic, isn't it?
—these are very unusual things. Projects of this nature, there isn't really an established procedure for considering them, so—.
Okay. Thank you.
We're very short of time, so if Members can be succinct. First of all Oscar, then Adam Price.
Chair, I think it took a very long time to make the right decision in my book. My concern—. Actually, I'm concerned that the media was also helping the Government at the time. In the early stages of the whole project, my concerns were raised and I'm glad that the decision was made. But my question is: what lessons have you learnt on this project that will never happen again in this institution?
I think there are a number of lessons. There are lessons about what, personally, I believe we did well. So, as I said in the letter to you, Chair, we felt that the way that the assurance group operated across the Welsh Government was something that we should embed as standard practice for the future—that was important. The Wales Audit Office produced their report on the initial stages of the project and highlighted a number of areas where you felt that there were lessons to learn for the future. We accepted all of those recommendations from the Wales Audit Office. We've actually implemented four of the five recommendations. The fifth recommendation, which is about separation of duties, is being taken forward as part of a wider review that I've called for on finance structures and processes across the whole of the Welsh Government.
So, I think there are some good lessons that we are adopting about the value of challenge as part of the process of policy development and the development of new proposals. Obviously, as principal accounting officer, it's my job to make sure that we really do have very robust and proper procedures in place for the expenditure of public money, and I feel that we have learnt the lessons; that they have been embedded. The business finance guidance has now been strengthened to take account of the lessons that came out of this and from the recommendations from the Wales Audit Office, and we're spreading good practice in the challenge process that the assessment group brought in.
So, I think there are good practice lessons that we are spreading, there are lessons that we learnt about how to strengthen the guidance for the future, which we've already put in place, and the one final element—the issue of separation of duties—as I said, that's being taken forward as part of a wider review into our financial structures and processes. So, I think there has been a learning process in this.
One point, Chair, it's a very little one—
My point, which I haven't mentioned, Permanent Secretary, is basically the external influence of the media, which has never been mentioned in this whole affair. That was right from the beginning—big hype—and some political forces behind it, and I think that should be—
Thank you very much. I think you—
The Permanent Secretary is responsible for many things, but not for the media output in Wales. Adam Price.
Just a final set of questions. Can I place on record my thanks to officials for appearing here and answering questions and for agreeing to send us further information? Just in terms of the automotive technology park that Neil Hamilton referred to, can I just ask, has it been subject to the same sort of rigorous, robust assessment as the Circuit of Wales project? Is there a business plan? Has it been externally reviewed? Are there letters of support from industry? Are there external validated costings? Is there a planning consent? And has a private sector partner been appointed?
On the Tech Valleys announcement that Mr Skates made about the £100 million investment over 10 years, with the aim of achieving at least 1,500 sustainable jobs, the Cabinet Secretary has committed to publishing a business plan for that scheme, which has now been badged as Tech Valleys, by the end of this financial year. So, there will be a business plan coming forward. Part of the genesis of this project was the detailed external due diligence on the Circuit of Wales project itself, which actually showed us that the majority of jobs in that initiative would've been created through the proposed technology park development, which was obviously part of a later phase of the proposal after the circuit. So, there were elements of the due diligence that gave us evidence about where there was scope for job creation and those assessments pointed to a need for high-grade manufacturing and research and development facilities in the Ebbw Vale enterprise zone. And, in addition, obviously, the Welsh Government has been talking to the local authority concerned as well as to local business leaders in shaping that initiative. There will be very detailed and rigorous evaluation on each of the substantive projects that are coming forward, but I must say that, when I visited the area, I was struck by the evidence that existing buildings that were there were being taken on, so there clearly is a demand for this kind of project.
Just finally, prompted by what you just said, if it's the contention, really, that the idea of this technology park arose from the technology park that was proposed by the Circuit of Wales, don't they have, at least in principle, a claim on some of the intellectual property?
My understanding is not, and if you look at the figures they are very different indeed. The sorts of figures that were projected in the final iteration of the Circuit of Wales initiative—they were a great deal larger. Nonetheless, our external due diligence, and the discussions that we had in particular with business leaders in the area, showed that there was a demand for the kind of initiative that our Cabinet Secretary has announced.
A nice clear answer. Can't fault that. We're running out of time. Rhianon Passmore.
Very briefly, then, and to build on that in terms of systemic evaluation of these processes moving forward, and in your new role as accounting responsible officer, do you believe then that the enhanced strengthening of those business regulations and the whole challenge process that we've learned, and will continue to learn from as we move forward as an institution—are they optimum, and do you wish to see even more strengthening to those processes?
It's my job always to look for continuous improvement and to draw on best practice wherever we see it. So, I'm never going to say that it's perfect, but I do feel confident that we have taken the good practice lessons and we've learnt from the implementation issues identified by the Wales Audit Office. So, I feel that we've learnt a great deal from this. The guidance has changed—
Would you like to see even further changes?
I would always like to see further improvement. That's my job.
Okay, thank you.
On that positive point, can I thank the Permanent Secretary, Shan Morgan, and your officials for being with us today? We'll send you a transcript of today's proceedings for you to check before it's finalised. And if you could get us some of the information—provide the committee with the information that you said you would—that would be very helpful. Thank you.
On item 4, I wrote to a number of stakeholders seeking their views on the auditor general's report—the report on public procurement—and the responses from the organisations who have not been invited to give oral evidence to the committee have been provided as papers to note today. Are we happy? Is there anyone left to note those papers? Yes. We're still quorate to note them. Okay. I note the papers.
Item 5 will be our first evidence session—. We'll just wait for our witnesses to arrive—and our Members. Sorry that we're starting a little bit later than planned. The last session was getting interesting.
Okay. This is the first evidence session scheduled for this inquiry. Can I welcome our witnesses? Would you like to give your name and organisation for the Record of Proceedings?
Liz Lucas, head of procurement at Caerphilly County Borough Council.
Steve Robinson, head of commissioning and procurement for Cardiff Council.
Great. I'll kick off with the first question. The Welsh Government is planning to launch a programme for procurement to provide better support for public bodies' procurement activities. What would you like to see the programme include and prioritise? Who wants to take that? Liz. The mike should operate—you'll end up switching them off if you're not careful.
I think in terms of the programme for procurement going forward, we need some innovation, so how can procurement really change what we want to deliver in Wales? So, what I'd like to see in the programme is key areas of how we can change some things in terms of infrastructure and the future generations. So, for instance, the programme for procurement could bring about how we can influence electric cars, for instance, reduce our plastics, and look at how we can actually change people's lives, get more people into work, so social and economic regeneration, look at what is social value and actually identify how we measure social value to bring real impact and change. So, I think I'd like to see more innovation. I'd like it to address some digital solutions as well. And, for me, I think it needs to actually identify where the procurement professionals are, their training needs and how we can give them a secure future.
Obviously, I would support everything Liz has said. I think part of the—. Maybe one of the consequences of the introduction of the National Procurement Service has been that some of the other support that was available has kind of been allowed to dwindle a bit, diminish, particularly I think Value Wales, which, to be fair, have provided, particularly around policy—they've helped drive the agenda forward in Wales. I also act as a managing director for a local authority training company, so we do work with English authorities. And in areas such as the whole area around community benefits, for example, certainly what I see in Wales is far more in advance of what we see with English authorities that we work with. So, I think it's easy to beat ourselves up sometimes, but, actually, there's some really good practice here in Wales. But I think some really practical support—. You know, most of us have signed up to the code of practice for ethical employment, so it's about, okay, some practical support to help us with that, particularly for some of the smaller authorities who maybe haven't got the resources that some others have to help to try and embed that, and drive that consistency across Wales.
Can you tell us what you think the Welsh Government should do to strengthen its procurement policy statement, not to replace it with some sort of statutory guidance—but is there some informal way in which it can be fleshed out that you think would be advantageous in terms of the—?
I think certainly in terms of the procurement policy, we need policy that is practical and we're able to deliver on. I think the Welsh Government needs to acknowledge we haven't got large teams of procurement professionals. We haven't got the capability and the capacity, certainly in local government, that we may have had 10 years ago. That has been diminished because of, obviously, the financial pressures within organisations. So, the policy needs to be practical. We need to be able to deliver on the ground. It needs to be in partnership as well with our supply chain, because, don't forget, we've got to do this together. We cannot do this as individuals. So, it needs to be something that is working together for everybody. It needs to link in, obviously, with the future generations Act, and we need to look more long term.
We have been consulted on the statement as to how we'd feel about some of this being made statutory. I think, to be honest, our view has been to try and resist that. We feel that, actually, there's definitely a will, certainly within the procurement fraternity. You know, there's a real commitment to try and drive these. As Liz was saying, if there is ever an issue, it's often down to lack of capacity and resource.
I think as well, it's about—talking from a local government point of view—it's about us not trying to do things 22 times. You know, actually looking, whether it's on a national basis or on a regional basis, to try and share practice and share resources were we can. We did used to have the Welsh Purchasing Consortium, which acted as a good forum for sharing good practice and knowledge. We're looking to try and get something working better through the WLGA, but I think that's important as well—that we can share ideas, thoughts and practice, rather than each trying to tackle these things independently. But, again, it comes back to—. Personally, I feel, looking at the role of the policy support side within Welsh Government, which, like I said before, has kind of probably been allowed to diminish a little bit over the last two or three years.
Would you be able to sum up the overall impact of the current statement compared with its predecessor in 2012, insofar as it's affected you locally, and perhaps more widely if you can reflect on how it might have had an impact throughout Wales generally?
I think personally that the 2015 had very little impact, if I'm perfectly honest. I think the big impact came in 2012. It was the first policy statement that we had. It gave us something to try and achieve as local authorities. The 2015—personally, I felt it was just thrust upon us. There was very, very little consultation. I think, 2015, we sit here today, 2018, and we haven't got a new policy. Procurement is an evolving discipline. We need something that is actually evolving with the discipline and moving forward. I think to have these policies just dropped on us every two to three years is not sustainable, certainly with the way the markets change and our financial situation. So, for me, I see very, very little impact of 2015. The 2012 was a good policy that set us on a good road, but we need a very different policy today.
Right. So, you need more consultation and to be more involved in the development process.
Is there anything more you'd like to add to the comments you've given us in your written evidence about the Welsh Government's plans to merge the national procurement board and the National Procurement Service board, and how best to ensure that national governance arrangements provide effective leadership for wider procurement policy?
As I said in my statement, I think it's a very positive move, because I think, when we had the two boards, there was no consistency. I think, for me, I've actually represented the Welsh Local Government Association on those boards on several occasions, and it clearly lacks the procurement professional. For a procurement professional who needs to actually be able to influence at the highest possible level, they need to be on the board, but, unfortunately, in lots of local authorities, you haven't got the procurement professional that sits at the most senior level. We need to recognise the profession more within Wales and make sure that it is at the top table and represented on those boards.
And, lastly then, have you had any further communication from Welsh Government to explain in more detail the scope of its review of the NPS and Value Wales?
I haven't, no.
No. Both Liz and I sit on the NPS delivery group as well, and although that was initially focused predominantly on the workings and the operations of the National Procurement Service, because of Jonathan Hopkins's role as chair there, then what we've been encouraging is that, because you have a number of very senior levels present, we start actually using that to take on a kind of broader policy strategy kind of role. We have had some discussion, and I think we have been able to shape that and give very strong views. So, obviously, what we're hopeful of is that that engagement will continue going forward.
A supplementary from Rhianon Passmore.
Thank you. Apologies for coming a little bit late. In regard to the alignment of the NPS and the board, in terms of the impetus, the foot on the pedal, since 2012, obviously when that occurs, that's going to give a new, fresh approach, I would presume, and I take on board your point around the importance of that procurement professional being in the right place. What needs to happen at that strategic level, in terms of—? Right at the beginning, we picked up the point about the tensions between community benefit and then the large-scale procurement power of the NHS and the public sector across Wales. What needs to happen when those boards are merged, and what would be the optimum position for you both as procurement professionals in terms of Wales being at the front across Europe and beyond?
Well, firstly, I think we've got to recognise the procurement profession at the highest level. I think we need to recognise one size doesn't fit all. We had the best intentions with the National Procurement Service to say that they will buy once for Wales. Some of these contracts are far too big. So, for me, I think it's recognition of what is right to do as a national, and what needs to remain as a local, and make sure we have that dialogue at the board level.
We need to take away the emphasis on savings. Procurement can bring far more community benefits and more social value. I don't think we look at that. I don't think that we look at the future generations, and what changes we can actually bring about by working better with our supply chain and delivering procurements in a different way.
Mohammad Asghar. Sorry, Steve, I didn't realise you were going to answer. Go for it.
One of the first things, when they started talking about this programme for procurement, was that we felt that what we'd lost was the kind of overall sourcing strategy for Wales, in terms of—. I think, because of the targets that were given to the national procurement service from the start, which, actually, having been involved in the development of the business cases, we think were slightly misinterpreted, in terms of what had been put into that business case, that it probably is set at—it's meant that the focus, and the priorities, and the drivers have not necessarily worked in what we think would be best for working with local authorities. And, like I say, certainly, buying once for Wales—I think bringing together and working collaboratively to try and produce the best outcome for Wales, I can absolutely understand that. But I think, when it's translated literally into one contractual arrangement for Wales, then that's really where we've started to have issues, certainly around local economy but also, I think, around what is the best solution for those different areas. Because we're all very different, we've all got very different geographical areas. We're very different.
I think part of the problem as well, we would say, is that we've seen this kind of scope creep, where the National Procurement Service, in its need to try and find savings and try and get more spend through, is starting to move into areas that were probably never intended to come into the remit of the NPS at the start, and that's caused some frustration and confusion within the members. We've always said that just getting a clear strategy for Wales, and in terms of what is best for Wales, what's best regional, what's best local, we feel would be a really good starting point. And, actually, that is something that we did have probably seven, eight years ago. Don't get me wrong, it wasn't perfect then, but, rather than building on that, obviously, we seem to have moved away, and our suggestion, or our view, is that, really, we need to get back to that position.
And we've done a lot of work recently, as part of the WLGA, on actually identifying a strategy for Wales and a sourcing plan. And I think maybe that needs to be shared with Welsh Government and the NPS, and they could possibly build on that as part of the review, which is currently going to start.
Thank you. We have heard evidence that the lack of a Welsh public procurement policy statement—WPPPS—has, and the quote is:
'created some uncertainty about strategic emphasis and direction'.
Given the significant changes in the social and policy landscape since the last three years, as you mentioned, why has an updated statement not been issued, and when can we expect the next WPPPS to be issued in Wales?
Okay. Well, obviously, that would be Welsh Government and the Value Wales team that would—. From a practical point of view, the statement is useful. I think the point is, in 2015, it was nothing new. It kind of brought together, as did the original statement, a lot of initiatives that had been working for some time. But it is useful for heads of procurement. Certainly in our recent procurement strategy that we published, the WPPPS forms a part of the context for that, because it helps give us some focus and structure. And actually, really, to be honest, there's not a lot within that statement that wouldn't align very closely to what our members' aspirations are within Cardiff as well. And that is something we often have to remind, for example, the NPS about—that we are a member-led organisation. So, we obviously can't ignore our local context and priorities at the same time. But, in our recent strategy, like I said, what we were able to do is show a very clear and strong alignment between the two. And that's obviously helped to inform our direction of travel. But I think what we're hoping is this programme for procurement is actually going to help refocus on that. And I think it's echoing Liz's view that we just need to make sure that we are fully consulted on it in terms of the next iteration that comes along.
We’ve had no indication whatsoever of when the next policy statement is going to be issued. I think it’s interesting that we’ve got a number of documents coming out of Welsh Government in relation to delivering for Wales, the city deal, big infrastructure projects. What I’d like to see, before we issue any policy document going forward, is that we engage with the markets as well and understand what will help them, because, at the end of the day, we want what’s best for Wales, what’s best for our economy and our infrastructure. So, we need to speak to the supply chain, and we need to make sure that this policy works not only for local government and the public sector, but also for the businesses of Wales, because, otherwise, we are going to be cutting across what we are trying to deliver in other policies.
I heard you very clearly earlier when you said that procurement officials can also help to save money when they sit at the top table or whatever it is. In what areas? At the moment, are you telling us that there is no linkage between the top table and you?
Well, for instance, in Caerphilly, I’m head of procurement, so I report directly to a director, and I sit in the senior management team of Caerphilly County Borough Council. In other local authorities, the procurement officer is very low down; they would maybe report into finance or legal or audit. They wouldn’t be at the senior table. They wouldn’t go to the directors' meeting. They wouldn’t speak and report to the chief executives. So, they have very little impact and they have very little voice within an authority of how they can change things going forward.
I think that Steve and I are not shy, and we are quite happy to give our views on things, whereas other people may not have that confidence. So, it is a shame that we don’t have that voice right across each local authority.
You also mentioned the capacity issue there, and professionalism. You mentioned those two words.
So, where do you stand on those? Which capacity are you talking about?
Capacity in terms of numbers.
Because, when you look at the team in Caerphilly, many years ago, we were 28. We're down now to 14 in the team, and fewer than seven in procurement itself. Other organisations are down to one procurement officer. So, when you look at the policy statement and they start saying, 'You need a number of procurement officers to deal with x expenditure', that's not practically possible; we haven't physically got the numbers. We haven't got the expertise in procurement. They're not this commercial, strategic person who looks right across an organisation that can bring some of these benefits we've talked about. Because, when you talk about saving money, it's not only about saving a penny off a pen or a pint of milk; it's much more than that. So, if you give this work to a local business, it may be a penny more, actually, for your pint of milk, but the economic regeneration that that generates in and around Caerphilly will save a lot more money over a five-year period, if you look at that. And I think that we sometimes lose sight of that.
Can I just clarify something? You both said earlier that you thought it important that local authorities were consulted by the Welsh Government in developing a new strategy, which stands to reason. But I think that Liz Lucas said that the WLGA had been working on what should go into a strategy, and then I think you said, 'Perhaps we should share this with the Welsh Government'.
Have you not shared this with the Welsh Government?
Not yet, no. We haven't long finished it, actually; it was before Christmas. That document is coming together, and I understand that the WLGA will be sharing it with them.
But the message I took from all your evidence today is the importance of co-production.
Well, co-production works both ways, doesn't it? I do find it slightly perplexing that you've been working on a strategy in isolation from the Welsh Government.
I don't think it's in isolation. We've been working on it as a group of 22 local authorities. We've invited Jonathan to come to our meeting and talk about it, but it just hasn't happened as yet.
Sorry, but who's Jonathan?
Jonathan Hopkins is the representative for the NPS and Value Wales at the moment.
Yes, he is deputy director at Value Wales.
Yes. I think that, perhaps, when I say that we should share it, I think it is now in a state that we can share it with Welsh Government, rather than that we won't share it.
But it says something about the nature of the relationship both ways—
It does, yes.
—that there's isolated working going on.
Okay, thank you.
Thank you, Chair. I'm going to ask some questions around the National Procurement Service, and the first question I was going to ask was about how we can secure greater buy-in from public bodies, but you've generally answered that point already, unless there's anything else you wanted to add to that. So, what I was going to ask, as a supplementary to that, is regarding the opt-out processes: do you think anything needs to be done to strengthen those opt-out processes? Or, is it the case that, if we get the National Procurement Service right, we won't actually need that opt-out process?
Cardiff was the first authority to enact the opt-out process when the NPS first went live. That was because, at the time, we had two very specific areas where we felt, given where we were at with key contracts, that we weren't in a position to go forward with it. But, it was always on a view that we would, at the right time, look to consider those going forward.
To be honest, the problem with that was—and I think it kind of set a tone from the start of the NPS—it had a fairly adversarial approach to working. So, rather than trying to work collaboratively with us and trying to at least listen and understand what our reasons were—and actually I think they appreciated and understood the reasons why we wanted to do that, and we were able to demonstrate some clear facts on why we would want to look to do what we wanted to do. But, ultimately, the opt-out was denied. Actually, we still went ahead and did what we did, because at the end of the day I still have a responsibility to Cardiff to ensure we're doing what we think is good for Cardiff, albeit obviously what we want to try and make sure is that we can then support the National Procurement Service in what it's trying to do for wider Wales.
I think, if you look at what subsequently happened, our commitment to using National Procurement Service arrangements is proven. We're the largest user of the National Procurement Service, certainly larger than some of the other larger authorities as well. So, we always had that commitment there, but it was that, really, we always felt it should be a collaborative relationship, so we work together—
And this was when you were opting out of the framework for building materials in 2014, was it?
And we also opted out for short-term vehicle hire as well, at the same time.
With regard specifically to the building materials one, would you be able to give us some background as to why you took the decision to opt out for that?
Yes, well, that's going back a bit now, but in essence what we'd been doing is it had been part of a longer term programme of work we'd been doing around building materials. Actually, we'd already put in a series of other arrangements and we wanted to put in our final arrangement, which was complementary. Because, obviously, what you've got to bear in mind is, when we're looking at—it's a bit like Liz was saying with the pens, really—when you're looking at buying materials, you're not just looking at what's the cheapest price you can buy a particular component for; what sometimes will vary from one organisation to another is the service wrap that you want with that, in terms of access to local supply. So, you have to consider the opportunities to improve the way in which the service can be delivered. The materials is just one part of it. We've got the workforce and the planning and organisation of their work. So, really, for us, it was making sure we had our logistics right, and we were already so far down a programme of work there that we didn't want to disrupt it. That was, in essence, the justification we gave for that.
Thank you. And in Caerphilly, Liz, how do you feel about the opt-out process there?
Caerphilly opted out of the majority very early on, and that was because of our desire to use our third-party spend for more local supply, and we opt in when it's beneficial to us. I don't think the opt-out process is the problem; the funding model of the NPS is the issue. You've got to go back to root cause. So, why have we got a problem with opting out? Well, the reason is, once somebody says, 'We're in' and the funding model's going to be on retrospective rebate for that product, they go to market assuming they're going to have that expenditure back. So, it's the funding model of the NPS that needs to be looked at, rather than the opt-out clause, in my view. I think once people say, 'We're in', in all fairness what else could the people of the NPS do other than assume that expenditure would be going through? So, I think we need to be careful what we're looking at, to be honest.
Just one point to add to that is that the way we've approached it is to be open and upfront. I think the other option that people would have is not to use those arrangements. But, we've obviously always tried to be upfront and honest. If we don't think an arrangement's right for us, then—. And I guess the problem, probably—. I'm sure there were a number of authorities looking at the process we were put through, thinking, 'Well, actually, it's probably less painful just not to use the arrangement, rather than going through the formal opt-out process.'
And Steve, I notice that Cardiff council has established its own trading company, offering procurement services to other public bodies. Could you tell us a bit about that, and also to what extent you think that you may be competing here for business with the likes of NPS?
Okay. Well, we're definitely not competing with the NPS. We operate in completely different areas. The NPS is about looking to put collaborative procurement arrangements in place—contracts. That's not our role at all. Our role is effectively to be able to provide commercial and procurement expert knowledge to support other organisations that maybe either don't have that capability themselves, or maybe have a specialist project or something that they need to do.
Our driver for doing that was that—and it kind of picks up a little bit on the question around capacity—we'd invested in building the team over the last few years, and obviously, like every other service, we were facing pressures to deliver savings as part of the budget process. Obviously, we'd probably all been through the salami-slicing and losing posts gradually over time, and so the proposal was that we looked to form a trading company where we could go out and generate revenue. So, the council doesn't necessarily gain the number of hours of—. So, for example, it doesn't have five days of me, but the general principle was that it would rather have three days of me than me not at all, and two days that I'm out actually working for other clients. So, it doesn't give the council more capacity, but it does allow you to retain that capability in terms of that breadth of knowledge that a broader group of people would have. So, really, what that's allowed us to do is to retain the current posts we have, but it's also enabled us to attract some pretty good staff over the last three or four months, and part of the attraction is the opportunity to work with a company as well as working for Cardiff.
Thank you, and a final question from me, just briefly, to both of you. Have your councils been buying goods and services through the Crown Commercial Service frameworks that could potentially be provided for by NPS frameworks, and if so, why, and what sort of type and value?
Yes, we would buy through the crown commercial, but we would always do an evaluation first to see which is the best arrangement. I'm not aware that we've gone to the crown commercial over the NPS, okay? I wouldn't have the data with me today on the value. I could provide that if you required it.
But, yes, we would use the Crown Commercial Service when it's beneficial to Caerphilly.
Yes. I mean, I know we do use crown commercial, but we use other frameworks as well, so the Eastern Shires Purchasing Organisation, YPO—there's a range of different buying consortia across the UK. And obviously, we use those where we have a—. I think that's the challenge for any local authority. Being unitary authorities, what we're asked to procure is very diverse, and so, often, what we are looking for—. Often, we're having to work to very short timescales as well and, as you know, sometimes the way that funding comes through for projects and things can cause problems for us. So, often, we will look to use collaborative arrangements. Our default position would always be that we would look to use the National Procurement Service, unless we felt, for any specific reason, either there was no arrangement that covered that, or we felt that there was a specific need and requirement that we had that couldn't be addressed. In terms of any very specific examples—. I have seen the report, where it's stated that there is spend going through that could have gone through the National Procurement Service, but I'm not aware that we've ever been given any evidence to support exactly what that spend is that's going through, and how it contradicts arrangements that are in place with the NPS.
Yes, thank you. I'm just interested in the evidence that you've both submitted on the fitness checks—the procurement fitness checks. The evidence from Cardiff was very positive. It said that this has been a 'robust' process, it's been 'thorough':
'As a result of the Fitness Check we were successful in receiving some funding from WG'.
It was sunshine. The response from Caerphilly was noticeably more downbeat, saying that, despite being 'well intended', the review process lost credibility,
'the real benefits were lost. The possibilities for collaboration, sharing of best practice and innovation were never capitalized. This was a lost opportunity for the Welsh Public Sector.'
Sunshine and showers. Could you explore a little bit about your different perspectives on this same programme, please?
Yes. Caerphilly was the first local authority to have the fitness check. We spent a lot of time gathering all our data. In fact, I think I'd a room full of 20 files ready for the lady to come in and actually undertake the fitness check. Her opening comments to me were, 'Oh dear, I hope all those files are not for me to review. I certainly haven't got time to review them today.' Basically, the fitness check was undertaken by talking to a number of people within the organisation—a limited few. The framework for the fitness check was then revised after my feedback to Welsh Government. At the end of it, I found out that some people had a telephone conversation to assess their fitness check, whereas other people were actually visited and evidence looked at. So, it looked to me as though the consultants who were engaged to undertake the fitness check did them in a variety of different ways. There was no consistency with a set criteria for evaluation of each local authority. That was frustrating for me.
Even though Caerphilly came out as a mature organisation, I then addressed the question, 'Well, what's next?' I believe there were five local authorities that came out as being mature organisations moving towards advanced, and I wanted to know how I could become best in class, but there was no plan in place to take us to the next level to be best in class in Wales, and there was no plan in place to take Caerphilly's learning and the excellent work that was being done in the five authorities, to share that with the less mature organisations. That's what I mean by saying that I felt there was a lost opportunity, because no work came out of it. We had one meeting, but nothing more, and there was no plan of what they were going to do with the data from the fitness checks. What did we want to achieve out of doing those fitness checks?
Okay. Steve Robinson, you have a different perspective.
Yes. I suppose in terms of how we found the process ourselves—because I'm here representing Cardiff not the wider sector—we invested a lot of time ourselves in it, and we consciously pushed it out to a large number of people across the organisation. Actually, what we found was that it gave a reasonable assessment of what our maturity was. We felt that it reflected areas where we know we need to strengthen—contract management being one, which I think probably most local authorities would agree is not a strength and that we need to improve on it. But, we did feel that, ultimately, it did give a reasonable position, and like I say, it gave us an opportunity to kind of benchmark ourselves across the—I wasn't so much worried about Wales, but I think where we stood across the wider UK public sector, which I found was quite useful. Certainly, for us, it did give us some areas where we knew—like a plan for improvement, which we found was quite useful for us.
So, you don't recognise the picture in Caerphilly.
Well, no, I think—. I recognise some of the comments that Liz is making. We did have to spend a lot of time challenging some of the results that were coming through, yes. We had to invest time to say, 'Hang on a minute, this does not reflect at all.' So, we had to invest that time, yes.
I think we all did, though. I think we all had to invest time. What I'm trying to get at—. The process itself was not consistent across the board when they went in to do each individual—
I understand that. I'm just trying to understand, though, how Cardiff's experience differed from yours, if Steve can just continue.
It can only be what I've said, really. For me, there was a process and a methodology that they were adopting. It was very much based on, as I say, the discussions with key stakeholders across the organisation, where there was a questionnaire-based aspect to it, which, like I say, we did find was useful as a way of—
You were broadly positive.
And Caerphilly was not broadly positive. That's just an example of the inconsistencies that you were alluding to, Liz Lucas, I presume.
Yes, I think the problem was that Caerphilly was the first local authority they'd come into, and I think—
Okay. So, since then we've had evidence from the NHS Wales Shared Services Partnership that the programme
'appears to have stalled and little progress has been made over the last year in relation to taking them forward following the original tranche of assessments.'
We heard from the Welsh Local Government Association that there is some work going on with English local authority heads of procurement to consider an approach based on their business value codes. Can you tell us anything about that?
Yes, it has been brought up, but, from my own point of view, we've not really had an opportunity to look at that in any detail and to understand whether or not it would be an alternate basis. I know that there are other local authorities in Wales that are using their fitness check position, as it were, to continue to do self-assessments, and that's the opportunity that we've got as well. So, we are, at the moment, in the process of preparing to undertake that self-assessment in Cardiff because we feel that it provides an opportunity in areas where we know that we've made some improvements; we want to try and use that—use the initial fitness check as our base and to move it forward. Although I'm all sunshine—I try to be—I think we would accept the fact, and we would all agree, that, actually, the fitness check was done, there was a lot of time, effort and resource invested in doing it, probably more by the local authorities than anyone else, I would say, but I also do share Liz's disappointment, really, that it's almost withered a bit—you know, there was a lot of impetus. But I suppose, for me, though, that just reflects the comments I've already made today that the National Procurement Service coming along has almost detracted everyone's attention from a lot of the wider policy and strategic development work that's been going on.
And it's also had an impact, according to the evidence we've had, in terms of the capacity and, through unintended consequences, has taken some of the staff out of local authorities into central Government. As I understood it, the McClelland review of a few years back had a rough ready reckoner that there should be one member of procurement staff per £10 million procured. How do your organisations measure up in terms of that little ready reckoner?
Well, again, this ties back into the point we were making around capacity. I think—and as I've said in my report as well, and Liz mentioned earlier—we have seen a reduction in procurement professionals. Obviously, there were a number who were of a certain age and have retired, and they've just not been replaced, and I think particularly at that senior level, so—
Can you tell us, for your organisation, based on the McClelland test, how you fare?
Well, I think we have, and these are not all—. Within our team, we're quite fortunate. We've got about 28 members of staff on a third-party spend of around £390 million, but you wouldn't say that all of those are procurement professionals. So, you may be looking at around 17 or 18 that we would say are procurement professionals. Because, obviously, what we also do is look after a number of other functions that are more transactional in nature.
But, based on the McClelland test, you'd expect to have 39 procurement professionals, and you've got about half that.
But I don't think you would—. I'd be surprised if you found a local authority procurement team anywhere that would have that level of resource behind it.
Well, indeed, and that's my point. I'm asking you how you fare compared to that test. Do you think that the McClelland test is one we should be aiming for? Is that the right kind of ratio?
Well, personally, I don't—. A lot of—. I think one of the points that needs to be—. One of the things that needs to be understood is that procurement can mean very different things in different organisations. So, in some organisations, it is purely seen as a governance, transactional process type of thing, making sure you're compliant with the regulations. It's not—. Whereas, I suppose, to be fair, what I've tried to develop in Cardiff—and I know Liz has—is something that is much more strategic in nature. So, it's actually about taking a proactive role, looking to work with the organisation to try and move forward.
I understand the philosophy, I'm just trying to get my head around capacity. I'll come on to you in a second, if I might, Liz Lucas, but, specifically, do you think this one staff to £10 million procurement is something we should be aiming for?
I don't see how, if I doubled the number of staff within the procurement function, that that would necessarily have that material a benefit on Cardiff, because what you've got to bear in mind is that we don't work in isolation from the teams that run services within Cardiff. For us, it's about working with those professionals within those services as well.
I understand that. Forgive me, I just need to move on, because there are other questions I want to cover. Liz Lucas, in terms of Caerphilly, how do you measure up to that McClelland test?
We don't; we're under-resourced in relation to the McClelland test. I think we've got seven procurement professionals now, £170 million spend. To me, it's not about the spend, it's about the complexity of the project and the category area. So, we should be focusing on how we need to impact. In construction, for instance, you need a different type of procurement professional than you would for someone buying social care, and someone different again to buy education. The way we've set up in Caerphilly, we've moved on to directorate areas. So, we've got a social services professional, we've got an education, a construction and a corporate services—. So, we've got dedicated procurement officers who look after the category area, which I think is far more important than the value of the spend. So, I think—
Yes, but, 'Do you have enough of them?' is the question.
Do you have enough of them?
Okay. Can I just—?
Yes, but I will just point out we are virtually out of time. Rhianon, did you have any further questions you wanted to ask?
Can I just finish my question?
You can finish. I'm just making sure people are aware that we are running to a tight schedule, but go for it, Lee.
Okay, thank you. I just wanted to ask you briefly, if I could, about the Home Grown Talent programme that the Welsh Government invested in; it trained 28 people. The last information I had, as of last summer, only two of them were still remaining in post; they'd been poached elsewhere or left for other jobs. Can I just have your reflections on the success of that programme and whether or not it was well managed, a success, lessons learned?
It was an excellent programme. We had several students in Caerphilly, I think four or five in total. It was very good, but, like you said, they've all left us. I'm not sure how many are left in the public sector in Wales; I wouldn't know that. But it was an excellent programme and one I'd like to see repeated.
But how do we stop that haemorrhaging at the end of it?
Offer secure jobs. At the moment, we wouldn't employ a procurement officer in Caerphilly other than on a temporary contract.
Okay. Steve Robinson.
I think part of the problem with that programme was, talking with a number of the students, I wasn't really sure how committed they were to a career in procurement, if I'm really honest. That was from my experience. But I think as well—. We've been able to retain our posts and funding. So, okay, creation of the company, but we've been able to do this. But what we've done is work very closely with the University of South Wales, who run the CIPS programme. They focus on supply chain there, and so, over the last five years, we've been having student placements coming through from the university, and, actually, a number of those students either directly after university or when they've gone off—. We've just got two now who've come back to us who'd gone off to the Crown Commercial Service and now come back to us. So, there are other ways in which—.
And the beauty about those young people is that they've made a conscious decision at the end of their first year at university that, actually, they want to go and specialise in supply chain. So, whereas people who went into procurement, they went every single which way ever to get into procurement—it was never seen a career of choice at that age—I think there are some really good examples where that is, and I think—. Okay, the Home Grown Talent programme was good, but I think there are other ways in which we can still look to get that interest. But it is getting people much earlier. So, again, one of the other things that we've been talking about, particularly with our trade union colleagues—obviously, they're quite pleased that we're bringing in graduates, but they would like to see us do something more at apprentice level, so, kind of 16. So, that's something that we're looking at. But it's not very sexy, procurement, is it, you know?
Oh, I don't know. [Laughter.]
They're obviously referring to us, Liz. [Laughter.] But, no—. But I—. Sorry, just finally—. Because, even there, everyone wants to be a marketer. They do business management and they want to go into marketing. Obviously, there are one or two good people, particularly at the University of South Wales, who really sell the benefit of going into the supply chain, if nothing else because there is a shortage of good people there and therefore job opportunities exist.
Okay, thank you.
Final words—Rhianon Passmore.
Thank you. Before I briefly, because of the time, touch on the future generations and well-being Act, in regard to the up and coming local government reorganisation legislation, is it your view, if you have one, that that will really refocus the spotlight on the importance of procurement? Obviously, it is of concern if, at a university level, there isn't that professional concentration in terms of either courses or the ability to sell procurement across Wales.
Well, I think they do. I suppose that's what I was trying to say. I think the University of South Wales, as an example, they really do sell it, and they've been very successful.
So, where's the gap?
In terms of—.
In terms of procurement professionals coming forth. Is it the marketplace?
Well, I think, in part, it is the fact that—
Is it just an extremely boring subject?
I don't think it's that. I think, at the end of the day, it's having security in work, having secure jobs that pay good salaries. Procurement doesn't necessarily—. Again, across the board, there's not a standard pay scale—people are paid different levels in different organisations, dependent on which organisation, if they recognise the profession. I think that is one of the issues.