Cynulliad Cenedlaethol Cymru

So, our approach is set out through our Wales infrastructure investment plan, and we published, of course, the mid-point review in 2018. And in that we reinforced that it was more important than ever that we maximise all of the levers that are available to us, in terms of boosting capital and also prioritising our investment in ways that deliver the most benefit, in line with our wider priorities, which are set out in 'Prosperity for All'.

In terms of how Ministers will make decisions, you'll be familiar with the integrated impact assessments, and so on, which seek to ensure that consideration of the well-being of future generations Act is at the heart of decision making. We're now in the context of a climate emergency, so we expect Ministers to be making decisions that very much are within that context as well. I suppose an example of where we're using infrastructure investment to develop local communities in an integrated and collaborative way, as set out by the Well-being of Future Generations (Wales) Act 2015, would be our twenty-first century schools programme. So, that very much encourages and supports the community use of school assets, for example, and provides opportunities for services to be co-located. And, again, lots of good work going on through the integrated care fund, which had a capital boost of £105 million over a three-year period, to introduce schemes such as extra-care facilities, and to be able to co-locate health and social services as well. So, the future generations Act is very much at the heart of those decisions.

More strategically, though, we've got the first national development framework, which will be published in 2020, although it will be out for consultation very shortly. And that will be reviewed every five years, and that's really where we will set out those nationally important growth opportunities for infrastructure. And that will be over a 20-year horizon, and particularly will look at how the planning system can help deliver that as well. So that will give really long-term direction, within which the Wales infrastructure investment plan will sit and respond to in a shorter term way. And in terms of how we're prioritising these issues within our planning, you'll be aware that we're looking across the eight priority areas of Government, in terms of our budget setting for this year. And each member of the Cabinet has taken a responsibility to lead on a particular area—be it biodiversity, or decarbonisation, mental health, and so on—in order to ensure that we are maximising those opportunities across Government. And, of course, that will include maximising the capital opportunities.

Did you want to come in?

Yes. Probably just also to add, an additional element is the new National Infrastructure Commission for Wales, and I think they'll be publishing their first report next year. And that's another important strategic element in the picture, to help try and ensure that capital plans reflect broader strategic priorities.

And their deliberations are also subject to the future generations Act and other priorities.

Absolutely.

Okay. The climate emergency is something that I regularly raise in these kinds of fora. Could you tell us maybe how your strategic priorities for capital investment have changed, or are likely to change, as a result of declaring that climate emergency?

So, as I said, decarbonisation is one of those key areas that we're looking across Government at, both in terms of revenue and capital spend. But we're also now starting the development of the next iteration of the Wales infrastructure investment plan, and obviously we'll be doing so very much in the context of the climate emergency. And the national development framework, which Julie James is leading on, again, very much has sustainability at its heart.

At portfolio level, we'd expect Ministers to be making decisions within this context as well, exploring how they can maximise efforts in terms of decarbonisation. If Ken Skates were here, for example, he'd be talking to you about the economy futures fund, which has a specific stream there that looks at support for the environment, and then the economic contract, which prioritises decarbonisation, as one of the streams within that. In my own portfolio, looking at public procurement, we have developed a decarbonisation dashboard, and that's there to identify priorities for reducing emissions, but also sets out emissions by category. So, it includes emissions by food, construction, fleet and so on, right across the public sector. It enables us to benchmark against other organisations in order to reduce our carbon emissions in that way.

The next steps will be for WRAP UK and sustainability consultancy, Eunomia, to set out what they think will be the most effective interventions for the public sector to take. Because, as you know, there is £6 billion of public spending for procurement, so there are huge opportunities for us to make sure that we're doing the best we can in our spend, but also to lead the way across the public sector. 

Indeed, and it doesn't mean spending any more money; it's spending it more cleverly. I'm always intrigued by dashboards, I have to say. I know there's a TB dashboard somewhere as well in Welsh Government, but maybe that's something we can learn a bit more about at a later stage.

As a committee, we've heard evidence that capital funding projects could be matched to project risk rather than just going for the cheapest form of financing scheme, which I think is what you've told us in the past is your preference. So, I'm just wondering what your views on that are really, and your rationale for saying that you'd rather go for the cheapest option first and not maybe necessarily look at it in a slightly different way.

Well, when we borrow and do so through the national loans fund, it isn't dependent on the level of risk attached to a project. It's the same—that's not a consideration when we do access loans through the national loans fund. So, in that sense, there isn't that incentive there to attach the particular level of risk to the loan, because it doesn't impact on the deal that we will get. But we also need to consider the future impact on revenue of our capital programmes as well. So, inevitably, there will usually be revenue impacts from that. So, we need to bear that in mind when we think about the level of capital investment and the kind of capital investment that we make. 

In terms of private finance, our primary source there is through our mutual investment model, and we have used that to deliver comparatively low-risk projects. As more levers have become available to us and as we potentially think about more innovative ways of funding, then we'll do that through the context of the Wales infrastructure investment programme, and we can look at attaching different loans to different—

Because that is the point really, isn't it, that the lower risk stuff is the cheaper stuff really, so it's something that maybe you could look to others to fund, whereas the riskier stuff is more expensive in terms of getting others on board to invest? So, that is your policy, is it, to do that?

Yes.

Sorry, Andrew, did you want to come in?

Yes, I suppose I would think of this in two slightly different ways. So, the first question is: broadly speaking, how much money do we want to spend on capital investment over the next period? And I think the position that Ministers have set out is that, in an ideal world, we wouldn't have to borrow any money at all—we'd be able to deliver all of the things we wanted to deliver without having to borrow— but that’s not the world we're in. When you are looking to invest beyond your capital budget, then, yes, we should look at the cheapest forms of finance, but where you are using private finance, it’s absolutely right that you should be using that for low-risk projects, because if those projects have quite high levels of risk in them for one reason or another, then you'll have to pay a risk premium for that. So, yes, we should be using private finance for those kinds of projects, where we have relatively low risk involved, rather than those projects where either there’s a high risk in terms of cost overrun or uncertainty about whether the project will go ahead or other kinds of risk.

Yes, okay, I'm sure we'll pursue some of that later on as well.

The Wales infrastructure investment plan, which has been mentioned, currently only provides short-term projection for infrastructure projects. Clearly, there’s been a call for a longer term view of those kinds of investment opportunities. I know that the Scottish Government’s financial strategy also matches projects to sources of funding. So, is there more that could be done in that respect in terms of giving that longer term—five, 10, even beyond that, year—view, but also then identifying which of those projects would be amenable for private funding?

So, the Wales infrastructure investment plan is a 10-year project, but, of course, we're well into that 10 years now, which is why we're seeking to work on the next iteration of that, as I mentioned. Even when we do have a comprehensive spending review, it tends to only give us a three-to-four-year outlook for public spending there. But, nonetheless, we've set up the national infrastructure commission, and that does take a five to 30-year look ahead to the future, and that will very much be making recommendations in terms of longer term strategic economic and environmental infrastructure needs across Wales. When we have those recommendations, we'll be able to think of that in the context also of our next iteration of the WIIP, and also consider it against the national development framework, which will, as I mentioned, be published in 2020. The National Infrastructure Commission for Wales will be publishing its first annual report in November, followed by a 'state of the nation' report in 2021, so in developing our next infrastructure strategy we'll be certainly looking to respond to that work.

Rhianon wants to come in on this. 

It was just a point of information, really. So, if we're five years into the Wales infrastructure plan, and you mentioned 2020 for the national development framework, how are these aligned?

It's really important that those two documents, particularly, are aligned. I've been working closely with the Minister with responsibility for planning, Julie James, as she's been developing the national development framework. We've had a number of meetings, and both of us are very clear that it does have to align with and inform the work of the Wales infrastructure investment plan. So, these two pieces of work are very, very complementary, and they can't be allowed to develop separately. We've been very, very clear that we're working closely on that. 

One of the challenges I think we had when we published the first infrastructure investment plan was that we didn't have a national development framework to inform the investment plan. I think it's a really important piece of the jigsaw, and the National Infrastructure Commission for Wales is another important piece of the jigsaw. But you're absolutely right; the key then is you've got all these different elements and you need to make sure that they work together, rather than pull you in different or contradictory directions.

What about this point that the Scottish Government's financial strategy matches projects to sources of funding quite early on? Is that some kind of approach that Wales would consider emulating?

Yes, as Andrew said, we could look at those more risky projects and determine how we would fund those, but I think it's fair to say the Scottish Government does have a different basket of levers available to it, both in terms of financing models and the financial levers that it has in the way that it uses both private finance and local government finance. So, what makes sense in the Scottish context might not be right for us here in Wales. As I've mentioned, the MIM is our only live form of private financing at present, and that's utilised for comparatively low-risk projects at an appropriate scale. But the development of the next iteration of the WIIP will be a good opportunity for us to think about how we better align different sources of funding. 

Where we do have projects and programmes that have a high degree of certainty over a number of years ahead, we do commit to a form of finance for it. So, for example, we've been planning the next phase of the twenty-first century schools programme, which runs through to, I think, 2023. The mutual investment model will be used to fund part of that, and we're developing what that mutual investment model pipeline within the schools programme looks like. Similarly with the metro, we've kind of developed a funding package for that programme of investment, which involves Welsh Government funding and European funding. We do do that as far as we're able, but as the Minister says, we're in a slightly different position from Scotland in some regard, so that has an effect.

Okay. Thank you. Mike. 

I was going to say that the benefit of that, of course, is that you end up with capital allocation unused, and you're borrowing at the same time, which is the worst of both worlds.

Yes, you definitely don't want to borrow unless you need to.

I've got a couple of questions. How do you prioritise capital projects? Obviously, you have more capital projects than you've got money available. How do you use things like working out what the resource implications or the revenue implications of them are and what the cost-benefit analysis is?

We'll always look to prioritise those investments that deliver on 'Prosperity for All' and that are meeting our responsibilities under the well-being of future generations Act and so on. But one of the ways in which we prioritise capital spend within departments would be looking at how we could potentially reduce our revenue spend in future years. An example would be the additional £40 million that was provided to the education department, which then went on to local authorities in order to help them maintain their schools estates. We were very clear that those projects that are funded through that £40 million should be ones, in the first instance, that enable there to be revenue savings in the longer term, because, obviously, revenue’s more difficult to come by, and, particularly for local authorities, any revenue savings they can generate in future years are important. So, that’s one of the kind of lenses through which we look at prioritising different projects when you have a number to look at.

Following on from yesterday, can I talk about financial transaction capital—the use of it? I've got two questions on the use of it. The first one is about using it as a rolling loan facility for housing associations in order that they can keep on using the same money, pay it back, and use the money again. And secondly, on using it to replace capital loans given by the economy department—so, you could actually use transaction capital for those capital loans, and then you would free up capital that is currently held by the economy department for use in other ways.

So, in relation to the first question, which was about using financial transaction capital to support house building, particularly registered social landlords, we are currently considering how we can provide RSLs with a mix of grant funding and zero or low-rate interest loans, and that would help, because it would be an opportunity for a lower rate of interest to improve the viability of a project, and, therefore, they would require less grant funding from us. So, this is a project which Julie James and her team are currently working up at the moment. So, there’s certainly lots of opportunity. I think one of the good things about FTC is that it does encourage you and make you be innovative in the way in which we look to deploy that funding, because it’s obviously much more restrictive than traditional capital. But there are other housing developers who are benefiting also from financial transaction capital—so, the Wales property development fund and our Wales stalled sites fund are using financial transactions to provide loans of between £150,000 and £4 million, and they’re being used to deliver a mixture of residential, mixed-use and commercial projects across Wales as well. And on the second issue, I’ll ask Andrew to provide some detail.

So, where we are making loans or equity investments in business now, that is financial transactions, whether it’s done by the economy department or through the Development Bank of Wales. And, yes, that’s been one of the major areas that we’ve used financial transactions funding for over the last five or six years.

Last question from me on financial transactions capital. You were talking about charging interest rates to housing associations or registered social landlords. My understanding—correct me if I’m wrong—is what they actually have to pay, or rather the Welsh Government has to pay back, or the Welsh Assembly has to pay back, or somebody has to pay back, is only the exact amount or 80 percent or 90 per cent of the exact amount that was loaned. You don’t actually have to pay interest on what’s being loaned.

That's right. We have to pay back 80 per cent of what we’ve been allocated by the Treasury, so that’s why we’re able to look at, potentially, 0 per cent interest loans or very, very low-interest loans.

There are state aid considerations that need to be borne in mind in some aspects of using financial transactions, where you would be, arguably, unfairly competing with other providers of finance, for example.

Chair, would it be useful if, once the housing team have worked up a proposal, were it to come to fruition, for them to provide an update to committee on that piece of work?

Yes, that would be useful.

Sorry—coming back to something Andrew said there, unless you're going to charge a commercial rate, you are unfairly competing against the private sector. But the private sector is not desperate to invest in registered social landlords. It's not at the top-end of the banking industry's areas that they wish to invest in, is it? 

Social landlords do borrow from normal banks.

I know, but—

The stuff at the margins, I think, is what we're really interested in, which is where they're not fully commercially viable, but where a relatively modest subsidy from Government through the form of softer loans than perhaps the banks would be able to offer—that's where the interesting area is, potentially.

I know the housing department held an event in London for investors, and there was lots of interest, for example, from pension companies, because it was seen as a good, long-term investment. And the fact that Welsh Government is very supportive of our RSL sector here in Wales—we've got strong investment in the sector and huge ambitions in the sector. It's seen as a good place to put your money.

Okay. Thank you very much. Alun.

Yes—. I won't go after that. I hope that where there is significant market failure—you know, I represent an area where there is market failure in the housing market—the Welsh Government will be looking towards being quite agile in providing support for that.

In terms of your wider capital asset management strategy, I think you've answered some questions on this, Minister, in recent times, that you are developing a corporate asset management strategy. I assume that Ystadau Cymru still work on these sorts of matters. I'm interested in the purpose of that, and what your objectives are.

So, the objective of Ystadau Cymru is to ensure that we have more efficient use of our entire public estate. Chair, I've got the first conference of Ystadau Cymru coming up in October, so it might be of interest to committee members. At that particular event, we'll be launching a new piece of mapping work, which maps out all of the assets that are held across the public sector in Wales, with a view to encouraging better use—so, looking at opportunities for co-location, looking at opportunities potentially for new build in areas where you can rid of a number of less efficient buildings. I've met, just last week actually, with Ystadau Cymru, and I've looked at their objectives and their priorities, and I was keen that they add biodiversity to that, because I think there's huge opportunity across the public sector estate to ensure that we're maximising our opportunities there. But overall, the purpose of that body is to ensure efficiency across the public sector estate.

In terms of our own asset management within the Government, we've got our own corporate asset management strategy, but then every department will have its own departmental asset management plan as well. And I've recently established a new procedure within Welsh Government. So, if a department is seeking to dispose of an asset—for example, the economy department—for housing, then they will need to have conversations with the housing Minister. The housing Minister might feel that that particular land could be better used for social housing, and then there would be an obligation, then, to explore ways to try and ensure that happens, rather than selling it for the best price to a more commercial developer that doesn't have social housing as a priority.

I'm grateful to you for that. I certainly very much welcome the commitment you've made on biodiversity, and I trust that's part of a wider sustainability approach. But I'm interested in how the Government approaches this. The Government owns a block of flats in Ebbw Vale. It could well be described as a slum landlord, quite frankly, because there is very little asset management going on. I've been in correspondence with the economy department on this for some time, and I'm not really getting very far with it, if I'm quite frank with you. If that indicates—. And there's no reason to believe that this is just one shot in the dark that just happens to hit a poor target. But if that indicates the extent to which Welsh Government is actively and proactively managing its estate and doing so to deliver the objectives of Government, that's a very poor thing. It doesn't tell me that the overall property management, or estates management, or capital asset management, of the Government is very successful. I'm interested, therefore, in, first of all, how do you deliver on the highest possible standards—which we would expect from Government—how do you work alongside local government, and how do you work alongside the national health service, for example. Because, taken together, these are huge capital assets available to us, and I'm unsure—. I don't know, and I'm very happy to be convinced, if you're able to do so this morning, Minister—to say to us that there is in place a comprehensive management strategy that brings the national health service, local government and the Welsh Government together—at least those three areas—and does so in a proactive way to manage existing assets and to manage the overall assets in such a way as to deliver on public purpose, but also then to deliver a financial strategy, which the Government can then use in order to do other things.

Well, obviously I'm concerned to hear the example of the Ebbw Vale flats that you've given; clearly, I wouldn't be familiar with that, but—

No, I wouldn't expect you to be.

—if you do provide me with some further information, I'd be happy to have some conversations with the economy department, to see what we could do to improve the situation there.

In terms of the overall strategy, not just for Welsh Government, but across public sector, that is work that is undertaken by Ystadau Cymru, and the asset mapping work that we have going on is there to make sure that we're making best use of those assets and we're not holding on to assets that we don't need. So, that's another one of our principles, that we don't hold on to assets that are no longer of use to us and it's something that we would expect our colleagues across the public sector to also have as one of their principles as well. I'm happy to provide a more detailed briefing on a corporate asset management strategy that deals with our own Welsh Government assets, if that would be helpful to committee.

I'm sure it would be, but I'm also interested in that relationship between Welsh Government and other public bodies, and I identify the NHS and local government as the key ones, but you could go on to Natural Resources Wales, for example, and others. And I'm interested because I think it is important to look at those matters that you've described, Minister, in terms of Welsh Government, but Welsh Government manages governance in this country, and therefore I'm interested to ensure that there's a coherence across the whole of the public sector and not just the leading part of it. It's that linkage. And I'm uncomfortable that I feel that that is being done properly, if that makes sense. Shall I move on? If you're going to provide a briefing, Minister, then we don't need to pursue this this morning, and I think the committee would be very grateful for that.

We had a conversation in Aberystwyth about borrowing, and you feel very clear that the Government doesn't borrow against a specific project or scheme. The First Minister seemed to be telling the committee last Friday that the Government would be providing about £1 billion-worth of funding on the M4 issues, the commission. Is that the case? Is it borrowing?

I think the First Minister said—. I haven't seen the transcript yet of that meeting, but I will certainly do so, but what I've seen from the way in which it was reported is that the First Minister said that he will make available up to £1 billion of funding, which would've been what the M4 had the first call on. So, in terms of our profile for the spend for the M4 relief road, should it have gone forward, that was a mixture of borrowing and our normal capital allocation. So, I think, really, it depends what the commission comes forward with in terms of suggestions for ways in which we can alleviate the traffic issues around Newport, and then we'll be able to profile those projects as necessary, using our conventional capital, but then also looking to use borrowing if necessary over however many years the project needs.

So, you will be borrowing against that project.

For it to be a £1 billion project, then we would have to—

You would be borrowing against that specific project.

It wouldn't be against a specific project.

At the moment, we don't know what the Burns commission is going to come forward with. It could be a range of different interventions, some of which may not be capital at all, actually, it may in fact be revenue funding for public transport, for example. So, the kind of cost and profile and nature of funding required for the kind of stuff that might emerge from that process is very uncertain at the moment. 

Just to go back to the point about borrowing, the Minister has said a number of times that we don't borrow for specific projects, we borrow to finance, in general, our expenditure. So, we won't be attaching borrowing to particular projects.

I can understand what you're saying, but the answer still seems to be 'yes'. I don't really want to pursue it this morning, but the answer does seem to be 'yes', I have to say, but it is what it is.

What was the question exactly?

The question was about attaching borrowing to a particular project, about the M4. Now, you've either got £1 billion in your back pocket, which I suspect you haven't, or you will be borrowing to deliver that £1 billion. I don't have an issue with this, I'm just anxious to get to the bottom of it. So, if you are going to be spending £1 billion to sustain the Burns commission and its objectives, and you don't have that money, then clearly you're borrowing that money, and if you are borrowing that money on that basis, you're borrowing it to sustain that particular project. To me, it's a good use of borrowing. I don't understand why the Government is so reticent on this.

I think it's just that, without wishing to overcomplicate matters, we haven't got a budget set beyond 2021 at the moment, because the spending review hasn't happened, so we don't know how much money we've got even beyond next year. So, the level of borrowing that we would require in any given year in the next half-a-dozen years is hard to say at the moment, and so—

Well, the First Minister, it seemed to me, found it quite easy to say that last Friday. I welcome this; I don't know why the Government is turning this into a bad-news story. I think it’s a good thing. I wish you were borrowing a bit more to deliver on the M4 relief issues, but it is what it is.

It is what it is, yes, thank you, Alun.

But in terms of wider issues on borrowing, the Welsh Government is seeking to increase its borrowing limits at the moment, yes?

Yes, well, we would seek to do that through the comprehensive spending review. So, we've already made the UK Government aware that we will be seeking an increase in our borrowing limit as a result of the discussions that we'll have as we go through the comprehensive spending review, as and when that takes place.

What would you think is an appropriate limit then for Welsh Government, if you're asking for it to be increased? Or should there be a limit at all?

Well, I think that we would see an appropriate limit within the context of prudential borrowing. So, it should be for us to set that limit, but we would do so in discussion with the National Assembly. So, we'd have to have debates on that and so forth, and it would be in the context of our ambitions at the time, what the interest rates are and a whole range of economic and financial conditions. I think, putting an arbitrary number on what we would like to borrow is probably a bit of a sterile discussion; it needs to be a much richer one than that, which we would like to be in a position to have in the Chamber.

Okay, that’s fair enough. Thank you. Nick.

I think everything has been covered, hasn't it, including the M4? Maybe I'll just ask about the prudential borrowing that you just mentioned, Minister, and how you work with local government, which has obviously got its own borrowing powers. So, how do you work with them, delivering a strategy and using prudential borrowing powers?

We work with local authorities in order to help them explore their own borrowings, and we also don't want to, as a principle, add to local authority borrowing unnecessarily because we know the impact it has on their revenue budgets in future years. So, I think local authorities are already borrowing quite heavily—around £320 million across local authorities in Wales at the moment. So, we wouldn't want to look for funding models that would push that any further than necessary, which is why we're exploring things such as the mutual investment models and so on for projects that we can be delivering.

Mark wants to come in.

Minister, you say you want a richer rather than a sterile debate. You say in your notes that there's been a 'relentless pursuit of austerity' over the last decade. Isn't it the case, in terms of capital DEL, there was quite a sharp fall from 2010-11 to 2011-12, but generally, since then, the trend has been increasing in terms of the capital availability? For instance, could you tell us how much capital we've got available this year, compared to 2013-14?

Well, on a like-for-like basis, over the last decade, our capital budget has been cut by 10 per cent in real terms as a result of austerity in 2019-20. This means that we'll have £200 million less to spend than we did in 2010-11. But, obviously, our plans and our need for capital investment have continued to grow. So, over the last decade, it's an irrefutable fact that we are—

But you've picked one year for the cut and you haven't answered my question: compared to 2013-14, what's been the change in the capital DEL available? And looking at your graph, it looks like it's an increase of about £500 million—a rise of at least 30 per cent. Now, I don't particularly want to pick one number and focus on that, but if you want to avoid a sterile debate, can we look at these numbers in a rather richer way rather than just picking the one all the time, comparing back to that number? Let's look at the trend overall; let's look at the capital sources available, rather than simply going on about austerity. You're the finance Minister here and you have got some levers available yourself, haven't you?

We're using all of the levers that we do have available to us—we're using all of our capital funding; we're using our borrowing powers. So, this year, and next year, we intend to borrow £125 million of our £150 million maximum that we're able to borrow a year, and the other £25 million could be used as contingency. So, we're using all available levers. We've developed the mutual investment model to provide £1 billion-worth of investment, and we wouldn't do that if we had access to other forms of borrowing. But nonetheless, we have to use all the levers available to us and be creative and innovative in the ways in which we do so. 

Mike wants to come in, very briefly.

Very briefly. Of course, local authorities can borrow from their own reserves, and often do.

Yes.

Yes, quite substantial amounts. 

Which does cause problems when people look at how much reserves they've got. They hold their reserves, and when they borrow it, they hold it on both sides of the balance sheet, which confuses people.

Okay, thank you, Mike. Nick, back to you.

You mentioned the mutual investment model, can you tell us what the key differences are between the MIM and previous PFI models? How do they compare in terms of value for money? And how will costs incurred through MIM differ to PFI costs? We're not just talking semantics, are we, here? I imagine there are some very real differences in terms of the risk for the Welsh Government and the way that money is returned.

The mutual investment model is different to traditional PFI schemes for a number of reasons—one of which being that private partners are obliged to help us deliver on the objectives of the well-being of future generations Act. There are stretching community benefits attached to mutual investment model projects, and obviously there's a penalty if there's non delivery of those stretching community benefits. Community benefits might include jobs created, particularly for people who are not in employment, education or training at the moment, or people who have been long-term unemployed; training and apprenticeship opportunities, including graduate work placements, pupil placements; school engagement can take place; community initiatives; and supply chain initiatives to make sure that we're making the best opportunities available to our SMEs here in Wales. Social enterprises can be involved.

There's also work going on in terms of ensuring that the mutual investment model delivers on environmental priorities in a way in which traditional PFI contracts haven't done. An example would be that the key design principles for the Velindre cancer centre include the use of natural resources and that energy efficiency must be demonstrated in all possible areas. The A465, while improving safety, connectivity and congestion of the road in the local area, will also improve the resilience of other roads by being an alternative route during busy periods of congestion, maintenance or major incidents. But alongside that then, the local area should see improvement in terms of footways and cycleways and active travel opportunities as well. In terms of our schools programme, and as I say there are only these three programmes that are being funded through the mutual investment model, those must receive an energy performance certificate rating of A and BREEAM 'excellent'. So, we're able to ensure that the mutual investment model delivers on our priorities more widely.

It's also different because it won't be used to finance soft services, such as cleaning and catering. Those I think were things that led to inflexible contracts and those were areas of key concern and criticism in the traditional PFI model. 

Is that how you're ensuring the fair costing of equity? Is that part of how you're doing that to make sure that the Welsh Government isn't exposed to too much disproportionate risk?

Yes, do you want to talk about how we're working on that?

The equity would be tested in competition. That's the main way that you ensure you get a good price for the equity, as indeed with the other prices. So, as a matter of policy, we want to take three consortia through the procurement exercise and have competitive tension through those three consortia, as equity will be part of the consortia. In addition, we also as Welsh Government will be an investor in these schemes, and any equity investment that we make we will be doing due diligence on before we make the investment. 

Okay, I think Rhianon wants to pursue this. 

Thank you. In regard then to the mitigations and the differences between former public-private finance initiatives and the well-lauded disasters around the fiascos of Carillion et cetera falling onto the public purse, can you outline the mitigations between this new iteration in terms of the mutual investment model in terms of that potentiality?

I think one of the important things is because Welsh Government will be putting a small amount of risk capital into these projects, it does mean that we will have a representative then or a nominated representative to the board who will ensure greater oversight and a good level of transparency in the working and the delivery of these schemes, which I think will be really important in helping us understand any issues and risks early on. 

And the case of Carillion is interesting for a number of reasons, but one of the things that we would say is that, with Carillion, it wouldn't have mattered whether we were talking about a publicly-funded project or a privately-funded project, in a sense. Carillion's problems obviously affected both types of investment. 

Perhaps that's not the best example, but one of the most well known. 

But what we're saying with the mutual investment model scheme is that, through the model itself we'll be transferring cost risk, we'll be transferring the financing, the construction risk. So, if problems do arise during that phase of a project, through construction, those risks sit squarely with the project company, Carillion, or whoever that may be the case. So, the main way in which you manage those cost risks arising are actually by transferring them to your project company. 

So, in regard to being able to sit on the board, I see that as a key positive in safeguarding this issue. So, one of the things that came forward time and time again, in terms of evidence, is that there's a lack of handle in terms of being able to be knowledgeable about every step of the way along that journey to completion. So, how important do you think being able to sit on the board is, or is that just not a key positive? How do you scale that in terms of safeguarding?

Yes, it was fundamentally important. From the outset, we wanted to address some of the criticisms that had been raised by the National Audit Office, not just about equity—we've spoken about public equity already—but transparency was one of the key criticisms that we wanted to address. So, from the outset, it was important to Ministers that we had a public sector-nominated director on the board of these companies. And we've done that. And, by making the equity investment in the project as well, we have a shareholder representative, who will be, in a sense, the same person, but there will be clear conflict-of-interest provisions, and, through that shareholder representative, sitting on the board—

Sorry, can I just interrupt there? In terms of the conflict of interest mitigations, could you extrapolate what you mean by that?

So, you want to make sure that, when a board is doing its business, there is a difference between business that is for the board's directors and business that is for the shareholders. And you have to have clear provisions around who is voting on which particular issues. So, those conflict of interest provisions are set out very clearly, ex ante, in our standardised shareholders agreement. So, we've adopted a standard template. We don't have to look at this time and time again, because those are set out very clearly. And, just to finish, as a shareholder representative, we've secured a number of what are called 'reserve matters'. So, there is activity on which our shareholder representative can have a meaningful say, which is language that I would use, rather than say that they have a veto. But they, effectively, have a veto. 

I was going to ask really to what extent they really do have an influence, because 20 per cent is 20 per cent, isn't it, you know, it's—. 

Twenty per cent is 20 per cent, absolutely. But, in the shareholders agreement, there is a list of reserve matters, and these are matters over which any material shareholder, and not just simply the public sector-nominated one, but any material shareholder, can effectively exercise a veto in those reserve matters. 

Okay. Interesting. 

So, in that regard—you've gone into this, and I'm just wanting to just find out a little bit more—to that 20 per cent equity in terms of any cost overrun experienced, what you've already discussed, in terms of protections and safeguards for that risk, how would—? During the life cycle, how would that 20 per cent cost overrun potentiality coming back to the public purse be mitigated for? Anything further to what you've already said?

So, it's important to realise that any investment of equity is—it's risk capital. So, we are investing with an assumption that, if and when projects are successful, there will be a stream of capital flowing back to the public sector. If a project is in distress, that risk capital will be at risk. But I think it's important to remember that when we fund projects with capital—the vast majority of our investment is through capital—the capital is at risk during construction. So, with this model, we are talking about a relatively small sum of capital being used as equity that would be at risk. But it's not unique to the MIM that we have capital at risk; that's what happens when you invest in things. 

I'm just trying to scale up the mitigations that are inclusive within this model, compared to former iterations of PPI. So, further to what you've already said, that you think that's about as safe as it can be, is there anything further that you think optimally could have been stuffed into this to make it even—

We could have had no stake at all in the projects, and then you've got no money at risk at all, but there is a balance of upside and downside in doing that, and I think where Ministers got to eventually was that the advantages of taking that risk is a bit of a risk—[correction: taking that risk outweighed the disadvantages].

And, in terms of how attractive this is to outsiders, in terms of putting that money in, how successful do you feel it is?

There's been a really high level of market interest in our MIM schemes. Every market event that we've done in Wales has been very well attended. We've got an event tomorrow for the schools project, and we have more than 100 delegates expected at that bidders' day. And, obviously, the interest has turned into real bids. As Steven said earlier on, we're in dialogue currently with three consortia for the delivery of the A465 scheme. So, there's a great deal of interest in this. 

Okay. Finally, then—. Sorry, in terms of the—

Did you want to come in specifically on something, Alun?

There was something that—

Very briefly, then, please, because we're almost out of time.

—Mr Davies said in his evidence about transfer of costs in terms of construction. You did seem to indicate to me that you were, essentially, looking at the A465 contract, looking at almost a fixed-term contract—a fixed-cost contract. 

It's not a fixed-cost contract per se, no. 

It's not. So, you won't be able to completely transfer the risk to the construction business, then, because, if it's not a fixed-cost contract, then the risk is shared amongst all of the investors, including the Welsh Government, and you won't then be able to transfer the whole of the risk of construction costs to that business. 

I should say it's not fixed cost in the term of the traditional design and build contract. So, it will be a fixed cost at the point at which we reach financial close; we will know what we're actually paying over the 25 or 30-year period. 

Over 25 or 30 years. So, it's not—. So, you're not transferring the risk of construction, you're transferring the risks of construction and operation. 

Exactly. And financing. 

And financing. And our experience is, of course, that that risk transfer isn't really a risk transfer, because, if there was a significant issue with that contract, the Welsh Government would then have to step in to rescue the situation, because a half-completed or a non-completed road, I would have said, is not very attractive in the marketplace. 

We should be really clear about what kind of risks we're talking about transferring. So, we would agree absolutely that the Government cannot transfer continuity of service risk. If you're building a road or a hospital, at the end of the day, the Government needs to provide healthcare services, it needs to provide schools, it needs to provide a road. But the mutual investment model does not transfer continuity of service risk, because we can't. What it does is transfer construction, financing, maintenance and life-cycle risk, and those things you actually can transfer. If we're looking for examples, the case of Carillion is—

I'm sorry, if the term is 25 years, you're not really transferring that risk, are you? If the term was the term of the construction period, then I would agree with you, that risk is then successfully transferred, but, if that risk is then mitigated over 25 years, I'm less convinced by that—in real terms. 

Okay.

Do you mind if we come back—

No, that's fine. 

We'll move on to Mark now, if that's okay, and then if we've got time we'll come back to that last question, if that's okay. 

I was a little perplexed, Steven Davies, by your reference to the governance, and the key issue being to guard against the conflict of interest between the shareholders and the board of directors. I know, since the Companies Act 2006, we've some subsidiary duties that directors have regard to, but surely the primary duty of the directors is to represent the shareholders and maximise returns to them. So, why are you guarding against a conflict between Welsh Government as the shareholder and Welsh Government as the board of directors? Where's the conflict there?

Well, I think, as a director, you're absolutely right, that person is responsible to the company under the Companies Act. That's absolutely clear. But we want to make sure that, as a shareholder representative representing the Welsh Government, there are appropriate conflict of interest provisions around accountability. And those are actually required, those conflict of interest provisions. 

But the appropriate conflict of interest provisions are not between the role of Welsh Government as a shareholder and the role of the Welsh Government representative as a director; the conflict that is key, surely, is between the Welsh Government as the client, who wants to minimise cost or any sort of on-runs that the shareholders might like Welsh Government to pay. And the conflict you need to guard against is your director and the interests of Welsh Government in terms of minimising the cost, whereas, a director, he'll have a company law obligation towards the shareholders and maximising their return. That's the conflict you need to guard against, surely.

I may be misunderstanding. Are you talking about conflicts between the director's interest of the board and the shareholder representative's interest of the Welsh Government? Those are—. The potential for conflict in there is what we are guarding against.

The conflict isn't between Welsh Government as the shareholder. As a shareholder, its interests are aligned with the directors. The problem is Welsh Government not as a shareholder, but Welsh Government as the client. That's the one you need to guard against.

I think you're agreeing—

I think it's the same.

Well, it's not. There's a very important distinction.

Well, I'd be very, very happy—[Inaudible.]

Good. I certainly—. Can you do that? Can you also perhaps look at the transcript and clarify your remarks earlier? 

Absolutely.

Because it's quite—. I'm very interested in this idea that Welsh Government's got a 20 per cent stake and the fact that you'll get all the information and be treated equally as a shareholder. I think that of itself gives some mechanism for the other shareholders to consider the client's perspective and they have to be very careful about what the board's doing in light of that.

But what—? You spoke beforehand about undertaking due diligence before you invest. Now, is that due diligence intended to ensure that there's sufficiently high return to equity, or sufficiently low return to equity?

No, the equity—. We will be investing pari passu with any other investor. So, the due diligence exercise is to make sure that (1) the other investor's due diligence is sound, so we'll be marking the homework, in a sense, and (2) to make sure that it's an investable proposition that Ministers do want to spend money on.

But why? Surely, if you're undertaking due diligence, if the other shareholders are putting money in and haven't done their due diligence and aren't going to make the return they think they're going to, isn't that good news for Welsh Government, because you're paying less than you otherwise would?

It absolutely is good news. And we could—one option would have been to say, 'Well, let's not do due diligence, because others have done the due diligence; we can simply borrow that', but we think it's appropriate in terms of assurance to do our own due diligence.

But why? What's the purpose of the due diligence? What are you trying to do?

Assurance.

Assurance for what?

Our own assurance.

But your assurance that you need is surely different from the shareholders'. Their assurance is: are they getting a sufficiently high risk-adjusted equity return? Whereas Welsh Government interest is primarily aligned the other way.

I think you're getting at an important point here, which is that Government has two interests in these projects. It has the kind of client/public service public interest, as it were, i.e. delivering a piece of infrastructure for public use at the best possible price, et cetera. But it's also an investor in a project, and, where we invest public money in anything, we need to be sure that that investment, as an investment, is safe and secure and providing a reasonable return. So, that due diligence is primarily about that second—that Steve's referring to; it's about that second—

But I still want to ask why, because, if the return isn't sufficient, then the benefit to you, through the lower cost of the project is greater than the reduced return on your investment through your 20 per cent—

But maybe we don't want to be an investor in that project, then. We may still want the project to go ahead, but maybe we don't want to invest Government money in it in that sense.

Well, that would be a pretty obvious flag to the other partners that, you know, their—

Well, indeed. So, it's an interesting—potentially interesting situation.

I wonder if more consideration could be given to this whole area; I do think it is exciting as an opportunity, but I'm not convinced that we yet have the governance arrangements in place to understand the conflicts and manage them appropriately to ensure Welsh taxpayer benefits from this approach.

Okay. We've exhausted that quite extensively. Is there anything else you want to ask? We've got about a minute left if there's any one other question that you wish to ask.

The capability of the central Government, the central contracts team—are these issues going to be—? Are they the owner of these issues of conflicts? I mean, if you've got permanent people there who are doing central contracts and are capable and stay in the same place doing it, I mean, other things being equal, that would be good, but how do you ensure that they stay there, and are they the people who are looking at the issues for you?

Well, it is a challenge to ensure that we have the right skills. And, of course, different stages of the projects will require different resource complements. We have brought commercial experts into Welsh Government to ensure that we have the skills that we need to procure the MIM schemes, but, actually, to ensure that we get best value out of the schemes, it's managing the contracts over the longer term. It's challenging to ensure that we have those skills there, but we're considering different options in terms of how we manage contract management in future. But that's not to say it's not challenging, I think that's fair to say. 

A prudent approach would be to have contract managers in place before you reach financial close on a contract, so that they know the contract and so that we have a little more time to work through the options. There are different ways of doing it. You heard in the UK Chancellor's statement last year that they were creating a centre of excellence. That's one option we could choose to follow. The Scottish Futures Trust has its own commercial experts for contract management. That's another approach we could follow. So there are a number of options that we need to work through over the late summer and autumn. 

Thank you for your presence this morning. There may be a few other things that we'd like to ask as well, and we'll do that in letter form, if that's okay. So, thank you for your attendance. You will be sent, as always, a copy of the transcript to check for accuracy. So, diolch yn fawr iawn; thank you for joining us this morning. 

Of course. Diolch yn fawr. If I may, Cadeirydd, before I address the question, just say thank you very much to the committee for undertaking this piece of work. I appreciate that this is perhaps not the most headline-grabbing, high-profile issue under the sun. 

That's your opinion. 

It is, I assure you, important—certainly important to us as an organisation and the way we operate and, therefore, the audit regime that we can put in place. So, thank you very much indeed for that.

In terms of complaints that we receive in respect of fees, I think this was probably more of an issue a few years ago. Over the last few years, we've tried to bear down on fees very much, and we've reduced fees considerably in the last few years. I have spent a lot of time going around the country talking to chief executives and, hand on heart, none of those have raised fees as an issue with me. So, I wouldn't want to over-egg this at all. The few complaints that we have had in the year that I've been in post relate, in the main, to pieces of correspondence from small bodies—town and community councils in the main. Again, not a huge issue—single figures. 

I guess where it interacts with the legislation is that—. I don't want to underplay this; I appreciate for a small body on a very limited budget with very limited professional resource at their disposal, the audit fee is an issue. But the legislation drives us to investigate any such correspondence in considerable detail. So, I think in our submission to you, we gave an example where we deployed well over £1,000 of resource internally to respond to a piece of correspondence from a community council that resulted, at the end of it, in a refund of £6 or so, and that is not a sensible regime, I don't think, for a national audit body like ours to be operating within. So, a handful of complaints, but I really wouldn't want to overplay them. 

Rhianon, did you want to pick up on that? 

Basically, in terms of how routine that is—. Or how much of an anomaly is that in terms of being able to understand the scope of what you're talking about—that example?

How many do we receive? 

Of that ilk. Is that an extreme example or an everyday occurence?

As I said, we get a very small number of complaints. Martin, do you want to come in on that?

I think, taking 2017-18, we're talking about four of that ilk. Although it's a small number, it rather neatly illustrates the complexity that the 'no more than full cost' rule creates, in that what could be dealt with as a complaint where, yes, we see that there's been a mis-statement of a charge-out figure here, but it leads to a very small refund—. We've had to do a very detailed examination of what the auditor has done, and that is why the cost of that has built up. So, because of the stringency of the 'no more than full cost' rule, that drives us to have to apply very stringent investigations to relatively small issues.

Okay.

We've had clear messages from some audited bodies saying that, as far as they're concerned, they're pretty happy with things as they are. So, I suppose to characterise the situation, maybe, it's a case of them being more concerned or interested in the level of the fee, rather than the regime that governs the fee. So, clearly, this is an internal matter more than anything, isn't it, for you. Is that fair to say?

Yes. We agree that, for some audited bodies, the level of fee is concerning rather than a complaint. And that's why the board is always very vigilant when it sets the fee scheme, and tries to do our rates as tightly as possible. As Adrian hinted, since the board was formed, we've been able to reduce fee rates on average by 13 per cent, so that's in the six years that I've been chair. But the current legislation acts as a disincentive for in-year audit efficiency, and we bear the direct pain of the administrative burden of this 'no more than full cost' rule, which is why we brought forward these proposals, because it would allow us to be more efficient and incentivise that in-year efficiency.

If I may just add to that. So, as we explained in the written case for change, it is primarily this absence of an incentive to drive in-year efficiency. For me, coming in this last year, where I've really seen that as an issue is where I have, with the board, been encouraging the organisation to work more flexibly. So, we sit on an immense body of data, information and insight through our accounts work and through our performance work. Simply put—this is an oversimplification, but to illustrate the point—our accounts work largely is fee-funded, and much of our performance work is funded by the consolidated fund, where we have much more flexibility. I'm encouraging the organisation to see the synergies between those different parts of our work and bring them together to produce new and better audit products—for you in the Assembly, for the public at large. Administratively, when I try to take staff who are fee-funded away from that work, or encourage them to be more efficient, to free up some of their time to deliver something new and fresh, we're left in this vicious circle. Because I can't take them off there, because then we don't earn the fee that keeps them in that role. So, over time, of course, you can smooth those things and find a more sensible balance, and that's the sort of change that would be really beneficial for us. But at the moment we're locked into this straitjacket of the 'no more than cost' rule, keeping our resource locked in to particular areas of work, and not freeing it up, as I'd like to be able to do.

Okay. Thank you. Alun, you want to come in.

No, I think Mr Crompton has just answered my question, actually, in that final answer of his. 

Okay. Thank you. So, if the legislation was to change, then you would probably stop issuing—or you would issue fewer refunds. So, can you assure stakeholders that the same approach will be taken where the audit office utilises additional resources on an audit, and what mechanisms then would be there for audited bodies, maybe, to challenge fees under certain circumstances?

I'll ask Steve to come in with some detail. But the headline message is: yes, absolutely, I can give that assurance that the level of dialogue and transparency that we have at the moment will continue. Steve can expand on that.

Yes, absolutely. So, we'll still set a fee scheme. That will be linked to the estimate that the committee discusses every October. The fee scheme and the estimate go hand in hand, so it sets our cost base for the year, based on the audits we see undertaken, and then the fee rates that we need to recover in order to cover our cost base. We'll still have the transparency in fee-setting discussions with audit committees linked to the audit plan that we'll have in place for each of those. I think a strength will be the fixed fee approach. So, instead of a fee that can vary during the year, audit bodies will have the certainty that this is the fee that we're going to charge them for the year. And so a 'no surprises' approach is the term we've been using for that. I think also for us, we can't underplay the inefficiency that this causes our end. So, for me as a director of finance, it is about containing our costs and running ourselves as efficiently as we can. So, overcoming the barrier to some of that inefficiency will be very helpful for us. I think I'll leave it there, Chair.

Rhianon.

In regard to an ability to set your own fees, in regard to that transparency, and a leap from one system into something unknown for your audited bodies, how are you going to reassure those bodies and me that your fees are reasonable?

I think it's a really good question. Certainly, when I came in as director of finance five years ago, I couldn't have a conversation with any other director of finance without a fair degree of hassle about our fees and value for money at the Wales Audit Office, and I think the board's approach around increasing transparency in our estimate and fee scheme and consulting beyond what the legislation requires us to do and having conversations about, 'This is where we've been creating efficiencies and savings within the Wales Audit Office'—it's changed that conversation completely. And, as Adrian said, in his first six months of going across Wales, talking to all chief executives, no issues were raised then about the value for money that the Wales Audit Office represented, and I think that—

And you want to change that.

Yes, we do want to change the level of prescription that's in the Act, but in terms of transparency, and to address your question of, 'How can you be certain and how can an audited body be certain that we're not overcharging them?', the rest of the machinery would still be in place. So, the fees scheme would still be in place—we'd still be required to consult on that, and you'd be required to endorse and improve that, and the conversations that we have with each audited body would continue in just the same way. 

So, at the moment, if we identify the need to refund or re-bill an authority, that is coming from us, and that would remain exactly the same. So, we would still be monitoring the reality of the cost of delivery, but we'd just be able to manage the budgeting side of that over a longer period in a smoother way, and authorities and public bodies would still benefit from many efficiencies that we'd drive, but they would also benefit from having certainty, in-year, of the fee that we were charging them.

Thank you. That brings us on to Mike.

Yes. You've used a number of words and I'm going to try and understand what you mean by these. 'Broadly break even'—what do you mean by 'broadly break even'? Have you got a percentage around it or something—?

On anything involving the law, I'll turn to Martin in a moment. So, that wording mirrors the wording in the equivalent Scottish legislation. When parliamentary draughtspeople include words like 'broadly', I don't think they envisage there being a specific, precise measure; it envisages some degree of discretion and judgment being applied. But Martin can perhaps give you an illustration of how we are thinking it would need to be applied.

I think that what you've described is right, Adrian, in that the idea is not to create a particular figure, because then you lose discretion as to what 'broadly' means. But it relates to taking one year with another, and essentially it puts beyond doubt that we don't have to aim for a spurious level of accuracy in setting our fees. 

Clearly, at the end of the year, if we have over-recovered to a very great extent; the auditor will notice that and will take the view that actually—hopefully this won't come to pass—we've been setting the fees too high. So, that would be a reporting point that we would want to avoid. It doesn't affect the transparency, because we'd still be setting fees in advance and people would be open to discussion on them.

Rhianon, you wanted to just come in on this specifically.

How do you react to, and I understand the context and I understand everything that's in front of us, and I'm listening carefully to what you're saying and I listened to previous witnesses, although I am new to the Finance Committee—how do you react to the assertion that you are auditing bodies on every single penny, but as far as you're concerned, you're looking to be very broad-brush and you're looking to be as generalist and as easy on yourselves as possible?

'A spurious level of accuracy' is an interesting phrase. [Laughter.]

It is something that we apply in the audit of other bodies. We use the concepts of materiality and triviality. We don't look for the accounts to represent everything to the exact penny. There is no real point in doing that. If something is mis-stated by a few pounds, that's not really a problem. Materiality—the concept is that the accounts are right enough that you get the right impression of what the body is doing. So, in an investment situation, would you take a different decision if that figure there was mis-stated materially? We have to take that kind of view, because otherwise we'd be talking about 100 per cent audit, which would be hugely expensive.

To put it in context, in relation to Welsh Government's accounts, £15 million would apply a materiality level there of something like £150 million. Now, we could audit to a much tighter level and there would be an argument for doing that, but the cost of audit would spiral as a consequence of that.

Back to Mike. Thank you.

It says 'taking one year with another'—can I just put something to you? If you get it wrong one year and that the next year you hope to make the money back, there's a possibility that you actually spend more money than you get in. What happens then?

Shall I come in on that? Everything is governed by the estimate and the budget motions that are approved by this committee. If I give a feel for some of the figures we're talking about on refunds, just to give a clearer picture of this: for 2017-18, we refunded 19 bodies a total of £61,000. The lowest level of refund was £271.51, and you can imagine the kind of reaction from that particular body when they received that refund. The highest was mentioned by the director of finance for Swansea Bay last week, that was just over £11,600. But the highest percentage value was 16.17 per cent of the fee. Now, that, actually, in cash terms was very low—it was about £2,000. And of all of the 19 cases, only four of them were above 5 per cent of the fee. So, the context is very narrow. We're not talking huge sums here. So, our suggestion to take one year with another is about just correcting it from the one year where we found that experience into the next year, where again the audited body can have that certainty that that's going to be their fee for that year, and we don't need to generate any more than the cost that is in our estimate.

Thank you. Moving on, off words and the meaning of words, you suggested some of the money comes directly to you rather than from audited bodies. Doesn't that take away some of the advantage of, 'If I'm paying for it, I'm going to keep a close eye on it; if it comes out of the Welsh consolidated fund, well, that doesn't really affect me, and I'm less concerned about how much you're spending, because it isn't my money'? There's a feel amongst many people, and I don't exclude myself from that, that actually having people with a financial incentive when they're negotiating their fees and discussing their fees does actually put pressure on you to keep fees low, whereas if it came out of the Welsh consolidated fund no-one much would care.

Well, I can see the argument, Mike. I think, as Isobel has illustrated, we have been bearing down on fees consistently for the last few years and been successful in driving them down. The level of noise in the system about the absolute level of fees that we charge seems very low to me. As I said at the start, I think there are significant gains at the margin if we can drive efficiencies in-year in much of our fee-earning work in order to deliver valuable outputs to the Assembly and the wider public that are perfectly in keeping with the budget the Assembly approves. We would be reporting back to you annually on how we have been able to do that or not. So, I can see your argument, but I really don't think that the changes that we're suggesting to the legislation would take away the discipline of the current system and lead to any concerns from your perspective.

Thank you. Rhianon.

Thank you. Before I turn to my questions, so that I'm clear, you are actually stating that you would still be redistributing the wealth to those audited bodies if there was overpayment with your proposed system, or have I got that wrong? Because I thought you just said that you would still be doing what you’re concerned about now.

What we’d be looking to do is make the correction as we move into the following year.

So, the distinction would be that it would be at some point in the future.

Yes. So, the audited body has certainty in-year of its audit costs. We have certainty of our income for that year as well. But we take account of the experience of each audit in that year, and look to make any amendments as we're going into the next year. And that way—.

Okay, thank you for clarifying that.

The issues with the quorum arrangements are significant enough to discuss the change in legislation. So, to what extent do the governance arrangements that were established to ensure a non-executive majority at all times, for instance, to provide the oversight and the constructive challenge to the executive directors—? What are the reasons why this could be the case? Do you still think that’s necessary?

Yes. It's very important that we do protect the majority of non-executive members for the quorum for decision making. However, the current legislation says that other members cannot be present, and that is the phrase. We’ve taken extensive legal advice and, currently, I can’t even have them in the room as observers—they actually have to leave. So, what we actually need to do is to take that specific quorum rule off the face of the Act. Then, we can devise pragmatical rules and place them in our procedural rules, but still on the diversity of contributions from all members of the WAO board, particularly the employee members, and, if necessary, make one of the employee members an observer for a meeting in order to preserve the majority. They wouldn’t have to leave the room, they can fully contribute, but the actual decision making, and, if necessary, voting, would preserve the majority of non-executive members. So, the Act needs to remove the 'cannot be present' and then pragmatic rules will be placed in our procedural rules. I hope that’s clear.

Mike.

It is clear. Wouldn’t it be easier to change the Act in such a way that the majority of votes cast are by non-executive directors? Because the danger you’ve got with the auditor general’s office, which is different to a health board, for example, is that everybody who is present is directly responsible to the auditor general, and this has got to be futureproofed—this is nothing about Adrian, as the current auditor general, but any auditor general in future who’s there, but if they had a majority of their staff who could use influence to ensure that what they wanted happened over the views of non-executive directors. You’ve always got to be able to futureproof these things, not think, ‘We’ve got a nice, reasonable person there now. We may not have a nice, reasonable person in the future.' So, I think I’m happy with that, but I think it is important. And health boards have a majority of non-executive directors on the board, but they don’t have to have a majority there, because every member there is not responsible to the chief executive. For example, the medical director is not responsible to the chief executive. So, although they don’t have to have it—do you follow that line of thought?

There are many ways of doing it, I suppose. Is that one that would be amenable to you?

I believe it could be, but you could just entrust that the procedural rules cover it. But you could actually say that the votes cast have to—. Is that right?

Alun wants to come in on this as well, and then we'll respond to both together, if that's okay. 

I'm intrigued by this, actually. Have you just got really poor non-execs, quite frankly? Because if people aren't turning up to meetings, then it's not a reason to change the law—it's a reason to change personnel.

No, it's actually about sickness and things like that.

Is it? But, surely, you must have—. I'm sorry, I'm not familiar with the individuals, but I'm looking at this just for the purpose of legislation, and you seem to me to be asking us to change the law, not because the law is deficient, but because you are unable to operate it, and that's a different thing. I'm persuaded by one, if that were the case, but I'm not persuaded by the other.

Okay. In history—

Sorry. I would say, the way the law is cast, it puts it on a very fine basis, so you've got 5:4. So, you only need one absence, and that happens—

I'm sure it does happen—one absent, yes.

If you look at other bodies that have statutory quorum rules, they don't have that fine balance in play, so I do think it is an undesirable feature of the legislation, rather than a failing of the—.

You only need one non-exec not to be there, for good reason, and it then means that Isobel has to ask one of the exec members—that's me, or one of the two elected staff members, or the staff member who I appoint—to leave the room. And it's leaving the room.

Yes, I get that. Sorry, can I just—? I want to understand this. So, what you are looking at is a restructured board, rather than just diminishing one element of it.

No.

No, not all. I'm just saying that in the—. We wish to preserve that the majority—. There is a rule whereby the majority of non-executives have to take the vote. At the moment, the Act says that no other members can be present, so they simply have to leave the room, and we lose the diversity of opinion in the room. All we're asking for is that to be replaced from the Act into procedural rules, where I can make them an observer, should that situation apply, so we get the benefit of their perspective but they cannot vote.

So, you can get around the law.

Hm?

So you can get around it.

No.

No.

We can't.

You can't get around it, because they can't vote—

Yes, but you want to change it so you can get around it. 

Well, I think the point being made is that it is a practical issue.

That's essentially what you're saying, isn't it?

I think it's important, as well, to underline that this isn't something that happens every time you meet, is it? In case people get that impression. I've seen the figure; it's around about once in the last four, maybe, since the Act was passed—the figures are here somewhere. Six times out of 28 board meetings between when the Bill was enacted and through until whenever that figure was provided. Yes, so it's important to make that clear as well, I think. Okay. Back to Rhianon.

I suppose it's more of the—. Building on what has been stated, do you think it's correct that you design your own rules?

Yes, because you've appointed a board to give you confidence in the governance of the WAO, and you've scrutinised that board through the estimate, the annual report and accounts, and our annual plan. So, I personally believe you should entrust the board to—. As I say, we want to protect that majority of non-exec members for all the reasons that are good, but, yes, I think it is right.

And of course, the issue at hand here leads to a paradox that the Assembly put in place in the legislation as well. The Assembly wanted to see a strong employee representation in the board. The paradox is that this, on occasion, can drive us to diminish that input, and not get the value that those people are able to provide.

So, we're sort of covering previous ground. What changes would be required to your code of relationship practice should the quorum arrangements be altered? And to what extent do you think it's necessary that the Finance Committee is required to agree that code?

Okay. Well, first of all, can I actually say that both Adrian and I really believe that the relationship code is a valuable and important document? And as you know, we've recently worked together to refresh it, and it's recently been approved by the Assembly, or laid and agreed by you.

So, we work together well, and that has created a code that embodies the relationships to provide clarity to everybody as to their role. If we were to change the face of the legislation around that not present, that would not need to be reflected in the relationship code. It would be in our procedural rules. It doesn't need to go back into the relationship code. So—

Sorry, could you explain why?

Yes, I'll leave my lawyer to—.

The quorum rule would need to be covered in the procedural rules, and the procedural rules are statutory—we have to have those. The code governs the nature of the relationship, so it outlines the roles of different kinds of board members. The current code doesn't cover quorum. It certainly doesn't need to. It would be the wrong instrument to put the quorum rules in. I mean, you could put it in, but there is no necessity to do that. So, it's just—

But if you just put it into the code, you wouldn't need to change the legislation, would you?

That wouldn't work because the problems that the statutory quorum rule is creating are around public law and this issue of presence in the room. We can't use a code to change statute.

So, moving on to profit and the ability to generate that profit in terms of the context of what we've already discussed, do you feel that that's appropriate?

Okay. I'd like to emphasise that agreement work is very much at the margins of the work that the Wales Audit Office undertakes. And every year the board has to agree our approach to commissioned work, agreement work. One of our key tests is that it doesn't compromise our core statutory work, and we keep a very tight cap on how much agreement work we're prepared to tolerate. Agreement work is very beneficial because it provides great opportunities for our staff, both personal and professional development. And agreement work tends to be used when we have a capacity—so, not in our peak periods, but when we need to be able to provide worthwhile work for our staff.

I also want to give you reassurance that there are a number of safeguards in this, in that every piece of work has a risk assessment. Anything with a value of over £50,000 has to explicitly come to board for approval, but the board sets the tone every year around the level of agreement work we're prepared to go for. So, it's interesting that, should we win some agreement work to do, say, a grants claim for a university, and we've won it in full tender but, actually, we've done it well, we actually have to refund even on a competitive tender if we've done it more efficiently. So, if we did generate any surpluses—and they are likely to be quite small and quite infrequent—they would either be used within the budget ambit, as has already been spoken about, or go back into the Welsh consolidated fund. But I wanted to reassure you that there are some checks in place.

Okay. So I'd like to just ask a little bit more about those checks in a minute. I just want to get some clarity, then. In regard to the ability to seek profit, that is constrained purely to the agreement work—is that correct?

Yes, absolutely.

Yes. Okay. Thank you. And in terms of incentivisation or perverse incentivisation, would there be traction, particularly perhaps in a year of quiet activity for your staff, as you've alluded to—would there be more incentive to seek more agreement work in terms of the core of your current duties?

There could be. In our recent past, we've had a number of grants that were taken away from—the certification and auditing were taken away from us in-year; we suddenly had gaps. I would then expect them to come to board and say, 'We have some people that we can't recover our fees on; may we increase our look at agreement work?' I also want to give you assurance that the fee rates we would charge would still be in our fee scheme. So, it's not that we're going to go in on— 

Bespoke.

Yes. You would be able to see those. And we can't go in at less than those fee rates to be competitive either.

So, in regard to safeguards and those mechanisms of assurance to the committee, you would outline them as what? The fact that you've got that fee rate, the fact that this committee has that oversight. What other mechanisms are in place for us to be reassured that, suddenly, you're not going to have a proportion of work that takes over your—?

Okay. Well, you could always ask us questions around that when we come in front of you, but your assurance is that the board takes this very seriously, we have our annual report, we assess the risks of all those that come before us and we set an appropriate cap in-year. So, those are assurances that you can—

The bottom line is that we've got a raft of statutory duties on us, and that is what we do. So, as Isobel said, anything that we do around that is very much at the margins. It is not an income-generation arm of the WAO, or wouldn't be. And if it ever came close to looking like that, I'm sure you would be picking us up on that because it would be very visible every year in the accounts and the estimates that we brought forward.

So in regard to us as that safeguard, I mean, obviously, that is the concern. So, further to that, you can't think of any other mechanism that could be applied.

Well, you can review the annual report and accounts.

Absolutely. We could expand our narrative, but I think, as director of finance, the main driver for me here is to overcome the nonsensical position where we have to refund on a tendered piece of work. Even the client found that bizarre. So, if we can overcome that, that would be a big step forward.

So, in terms of any profit that might be generated, would you see that going back into the consolidated fund or would you wish to keep hold of that to utilise for other efficiencies?

It depends on its scale and timing, obviously, but, yes, it would either be deployed by us on other matters within the ambit or, if we were unable to do that, just as we do with any other underspends at the moment, we'd return that to the fund.

Okay, thank you. Mark.

I'm not sure why you would think we would be concerned if there is an increase in agreement work. Surely there is benefit for your staff from working for organisations outside Wales and a cross-fertilisation, particularly if we are bringing in income from other countries to employ more auditors in Wales—isn't that a good thing for the economy?

Well, your concern might be that we were being distracted from our core work of auditing Welsh public bodies. I think that would be the main concern that you might have.

I note that there have been a number of projects in the Caribbean. Are there particular governance issues with the small nations there where they like coming to the Wales Audit Office and having our support?

We currently undertake the audit of the accounts in Anguilla. My understanding is that, historically, that was a piece of work that the National Audit Office undertook but asked us to take on in place of them. I'm not aware that there are particular issues in the Caribbean where we have demonstrable special expertise, but there is a huge potential market out there, clearly, for the sort of expertise that we have. But, as Martin said, we've got to start from the premise that we are here to deliver the statutory duties upon us. If we are able, without distracting ourselves from that, to do some valuable work elsewhere that generates some small income stream for us then all to the good, in my view.

But you wouldn't consider looking to generate a more substantial income stream, particularly if you were able to make profits and reinvest them or give them back to the consolidated fund and sort of increase your footprint. Isn't that something you'd like to do?

We have debated that as a board when we get the annual commission strategy, and it is a fine line. At the moment, the board has decided that that is not in keeping with our organisational purpose, because we have debated pushing the boundaries and getting in a lot of commissioned work, but at the moment we are taking the view that it is there primarily for professional and personal development and for the effective utilisation of staff. So, that's the view of the board at the moment, but it is at the margins.

We've exhausted this—

I was just going to ask about the interim report.

Right, I was going to ask you to proceed to that—yes, there we are, okay, thank you.

You mentioned, chair, just now, various documents that we use to hold you to account, and I note you didn't mention the interim report as one of those. I just wonder if you believe there are any benefits in your preparing these interim reports.

Not as far as I can see.

Okay. The previous Auditor General for Wales expressed a concern that, if the interim reports statutory requirement were done away with, then it would be difficult for the AGW to refuse a request from this committee to produce a report. Is that a concern that you share as the AGW now?

It's not a concern; it's an assurance. My view is that the interim report is not particularly valuable for you as a committee in holding us to account. It generates an administrative burden on us, and I think that's wasteful. But I see myself as an officer of this Parliament, and I can't contemplate not furnishing you or other committees with information that you require to help assess our work—

So, if we asked for it, it would be provided whether or not you had an interim report.

Of course. And, taking Mike's point, the day you appoint an auditor general who is not as reasonable as me you have formidable powers to command documentation and information to be provided to you.

The annual accounts, I can understand that the external auditor—it would be more appropriate for them to lay them, in terms of the standard elsewhere and avoiding duplication, but I wonder why you've chosen this 'no later than five months' after the end of a relevant financial year.

The five-month deadline is to align the—we're suggesting it applies to the report, the annual report, and that's to align that with the deadline that applies to the accounts. There wouldn't be much point in having a different deadline—well, a difference between the two—because you really have to read one with the other; it's as simple as that.

Thank you.

Okay. Thank you. Nick.

I feel like I should declare an interest as Chair of the Public Accounts Committee. It's a bit like scrutinising your family, as I see you so much. I was going to say 'far more enjoyable', but I never said that. [Laughter.] Can I ask you a little bit about—? You've covered a lot of the questions I was going to ask in different ways, but two areas: do you think the—? In terms of room for improvement in the future, do you think the process for appointing the external auditors could be improved? And could you identify any issues in the way the board is appointed and how that could be improved? You've already mentioned the balance between the exec and the non-exec, I know.

Okay. You may be aware there are some current issues with the way the external auditors are appointed. I won't go into those, but, yes, we do believe that process could be streamlined. We would suggest you revisit the legislation and provide that the engagement of our external auditor be a contractual matter between the WAO and the external auditor, which would include their terms of appointment and monitoring of performance. But—here is the safeguard—that appointment is subject to the approval of the Assembly. I was interested to note that will save the Commission some £26,600 every four years. So, we believe it could be streamlined.

Would that be organisational or is that dedicated money?

You'll have to ask that to the Commission.

I was asking rhetorically, because it's just that—.

Okay. Well, you've asked it rhetorically, so there we are. [Laughter.]

So, just to—. So, this should be contractual, but there should be the Assembly oversight—

The Assembly approves the proposed appointment, yes.

—to keep control of it. So that the audit office is still Assembly orientated, basically.

I think I've got that.

Am I right in—?

Well, at the moment, the Assembly does the—we do the work for you and then you actually have to appoint. We would like to appoint but with your approval.

It's kind of symptomatic, I think, of everything that flows through this, which is, just having had several years practical experience of working with the Act, we think that all these issues, if made, would simplify and take away unnecessary prescription that is imposed on us and the Assembly Commission and the committee at the moment without, in any way, weakening the fundamental principles of governance that it rightly puts in place.

Because you—I mean, you jokingly said earlier—. There was a point in that, wasn't there, about, in the future, if there was another auditor general with a different way of doing things, then you think by having it more prescriptive in an Act, then you could actually futureproof—? Is that—?

No. The changes that we're making I don't think would prejudice that assurance that you can get. So, in this specific case, the important point is the Assembly, ultimately, would still be the body that appoints the auditors; it's just that the process for arriving at that would be more pragmatic and streamlined.

If I can take the point about appointment of the board, I want to thank the committee, and the Chairs in particular, for the pragmatic approach that has been taken. I really hope this continues as it is best practice to take on board the Chairs' views as to the complementary skills and experience that is needed within a board to ensure that it's well balanced and effective. The recruitment: it's vital that this process is led and overseen by the Finance Committee, but, as you know, the legislation doesn't recognise the role of the WAO chair at the moment.

My next question was going to be—. This is probably, well, a difficult one for you both to answer, but, in terms of your job and your job and the remuneration of non-executive members, the committee's required to consult on aspects of that. Do you have any views on the consultation provisions in the legislation, or do you think it's been—?

Would it be helpful if I take this one?

Yes.

Yes. [Laughter.]

The consultation provisions don't seem entirely appropriate. I don't think it's inappropriate for the Assembly to undertake consultation and research. I think it's perfectly capable of doing that, when needed, without requiring something on the face of statute. But what strikes me as rather unusual is that the First Minister is, essentially, part of an audited body and is having a say, uniquely among audited bodies, in the appointment of the chair who oversees the auditor. So, there is a— 

I think the Minister, in evidence, recognised that as well and recognised that the Government wouldn't see a problem in removing that provision.

Is that the same process in other parts of the UK? No. It's unique here.

Can I just ask, Chair—

Yes, sure.

It was suggested before that a rationale for the requirement to consult the First Minister may be that they could be aware of conflicts that the committee might not be aware of. Is that a sensible reason for having it, do you think?

In itself, I suppose, it would seem quite narrow given the broader, I suppose, ethical consideration.

And the chair would presumably tell us about any conflicts themselves, wouldn't they?

Well, through the selection process, those are the kinds of issues that you need to drill into.

Good. Okay. Okay, thank you. Alun.

I'm interested in whether you believe, through this potentially amending legislation, you'd want to amend other pieces of legislation, rather than just the audit Act.

Martin?

Yes, there are elements of other audit legislation or real audit legislation, as it were, that would benefit from some changes. So, thinking in terms of the Public Audit (Wales) Act 2004, which contains data matching provisions, those are falling behind a bit in terms of the way data matching is developing across the UK. So, for example, in England now, there is provision to do data matching for the purpose of detecting error and also for recovery of debt. So, most of our data matching, well, nearly all—the vast majority of it—is done in concert with other UK audit offices and the Cabinet Office as a single exercise, so we can share data across borders to detect fraud. But now the exercise is developing to address other things such as debt recovery, and there is a danger that we'll be left behind, initially to the extent that we won't be able to take part in certain aspects of the initiative. But, eventually, there's a danger that, because all these things interrelate, we won't be able to take part at all and that would be a great shame, because quite a lot of—it's quite a considerable financial benefit from the exercise.

Another area that affects a lot of central Government audit is the absence of a value-for-money conclusion and the absence of a consistent regularity opinion provision. Unlike the NHS and local government, there is no requirement as part of the audit to come to a VFM conclusion—that's being satisfied that there are appropriate arrangements for securing economy, efficiency and effectiveness. That strikes us as rather undesirable in that it means that there is, essentially, a lower standard applied in central Government than in the NHS and local government.

The regularity opinion—it would be good to have consistency across the piste there so that we don't have, for example, the risk of an auditor who has come into a central Government body, because they're not used to providing a regularity opinion, missing this out, because it's very important that, when the Assembly votes money for particular purposes, there's some sort of closing of the circle in terms of reporting on whether money has been expended as authorised. So, we think that would be a good thing to address. I think those are the main things, really.

Okay, I'm content with that.

Okay. What about the four-month rule in terms of reporting? Because, clearly, it's been highlighted as an issue here. We made provision for it in the public services ombudsman Bill. Could you just tell us a little bit about the issue there?

Sorry. I think, yes, that's a good—. I think you're raising a good point, which I've missed, which is the deadline issue.

Yes.

Yes, that is essentially something that affects central Government, AGSBs and the like. It's not an issue so much with local government because there are different deadline rules. But, as you know from Natural Resources Wales, we had an issue there where there were significant issues that arose on the audit and, although we could get the audit report done, we couldn't provide all the people that were affected by our, effectively, criticism of them—we couldn't give them the opportunity to comment. So, for reasons of natural justice, we missed the deadline.

Now, with the ombudsman, the 2019 ombudsman Act, I think the Assembly has put in a really good solution to that problem in that we've got provision for—if it becomes apparent that we can't meet the deadline, we have to report that fact, but we can still miss the deadline, so it's a very good solution, I think. 

The point the Minister made—was it last week or the week before—is that there is no punitive action in legislation, so what stops that happening anyway?

Well, having to report that we can't meet the deadline is, I think, punitive enough. We weren't comfortable at all about what happened, but we definitely thought that, uncomfortable as it was, as I said, natural justice was more important. So, yes, if we're going to have reform or a revisiting of central Government audit provisions, it would be really good to put that kind of provision into those.

Okay. In your evidence to us, you've told us that you're reconsidering the benefits associated with moving to a notional fee system. Could you just explain why?

Our original proposal was based on the legislation in Scotland and England and Northern Ireland, but I think we hadn't fully appreciated the complexity and difficulties we'd face in moving from where we are now, with hard fee charging in Wales, to one of notional fee charging, whereas, in the other parts of the UK, they had notional fee charges from the outset. As you heard from the other directors of finance last week, processing an invoice is not a big deal to them, but, if we changed to notional fee charging, they would have to do journal entries to create a notional charge and a notional credit on their balance sheet, and, as soon as we realised that, we thought it's worth a rethink and pulling back from that proposal. 

Okay. Thank you. I just want to pick up on another point as well that I think we skipped over earlier. You suggested the removal of the requirement for fees to be paid by the person to whom the function relates. Now, why is that necessary considering that there is a precedent for certain all-Wales costs to be included in your annual estimate and funded through the allocation from the consolidated fund?

It sits with the other changes around—[Inaudible.]

Yes, because we heard in Scotland about how they look at a sector-wide basis.

The way that section 24 of the 2013 Act is cast is that fees being paid by the person to which the function relates—. The requirement to restrict fees by function—so, we can't smooth things between functions—is a very hard restriction that we face, and it creates a lot of problems. It's very hard to deal with that, and you can't actually address that without also addressing the person issue at the same time. So, in order to get closer to the Scottish model that we'd like—taking one year with another, probably breaking even—you have to take that 'by the person' out, because otherwise it just won't work. 

At the same time, that does enable a sensible degree of flexibility between persons, so, as you probably know, with the Scottish model, the requirement is to break even between classes of audit rather than individual audits, so this really reflects that model. 

Yes. Okay. I think we've come to the end of the session, really, unless there's anything else that you want to add—any other bases that we haven't covered that you feel you need to address.

No.

Okay. Well, can I thank you very much for that evidence? It's really useful, and it brings together a lot of what we've been hearing from different stakeholders as we've interrogated them around the Bill. We'll now as a committee of course consider where we go on this, really. But it's been really valuable to have you here this morning with us, so diolch yn fawr iawn ichi—thank you very much.

Diolch yn fawr iawn. 

The committee will now move back into private session.