Cynulliad Cenedlaethol Cymru Y Pwyllgor Archwilio The National Assembly for Wales The Audit Committee

Dydd Iau, 15 Mawrth 2007 Thursday, 15 March 2007

Cynnwys Contents

Cyflwyniad, Ymddiheuriadau, Dirprwyon a Datgan Buddiannau Introduction, Apologies, Substitutions and Declaration of Interests

Adroddiad Dilynol ar Reoli’r Casgliadau yn Amgueddfa Cymru—National Museum Wales Follow-up Report on Collections Management at Amgueddfa Cymru—National Museum Wales

Diogelu Arian Cyhoeddus ym Mhrosiectau LG, Casnewydd Protecting Public Money in the LG Projects, Newport

Cymorth ar gyfer Prosiect LG, Casnewydd: Parhad Protecting Public Money in the LG Projects, Newport: Continued

Ymateb Llywodraeth Cynulliad Cymru i Adroddiad y Pwyllgor Archwilio, ‘A yw’r GIG yng Nghymru yn Ymdopi o fewn yr Adnoddau Ariannol sydd ar gael iddo?’ The Welsh Assembly Government’s Response to the Audit Committee Report, ‘Is the NHS in Wales Managing within its Available Financial Resources?’

Ymateb Llywodraeth Cynulliad Cymru i Adroddiad y Pwyllgor Archwilio ar Amseroedd Aros y GIG: Adroddiad Atodol The Welsh Assembly Government’s Response to the Audit Committee Report on NHS Waiting Times: Follow-up Report

Ymateb Llywodraeth Cynulliad Cymru i Adroddiad y Pwyllgor Archwilio ar Archwiliad Ariannol o Lywodraeth Ganolog a Chyrff y GIG yng Nghymru: 2006 The Welsh Assembly Government’s Response to the Audit Committee Report on Financial Audit of Central Government and NHS Bodies in Wales: 2006

Ymateb Llywodraeth Cynulliad Cymru a Phwyllgor y Ty i Adroddiad y Pwyllgor Archwilio ar Reoli Absenoldeb oherwydd Salwch yng Nghynulliad Cenedlaethol Cymru The Welsh Assembly Government and House Committee Responses to the Audit Committee Report on the Management of Sickness Absence in the National Assembly for Wales

Cofnodion y Cyfarfod Blaenorol Minutes of the Previous Meeting

Cynnig Trefniadol Procedural Motion

Cofnodir y trafodion hyn yn yr iaith y llefarwyd hwy ynddi yn y pwyllgor. Yn ogystal, cynhwysir cyfieithiad Saesneg o gyfraniadau yn y Gymraeg. These proceedings are reported in the language in which they were spoken in the committee. In addition, an English translation of Welsh speeches is included.

Aelodau Cynulliad yn bresennol Assembly Members in attendance Leighton Andrews Llafur Labour Mick Bates Democratiaid Rhyddfrydol Cymru Welsh Liberal Democrats Alun Cairns Ceidwadwyr Cymru Welsh Conservatives Janet Davies Plaid Cymru (Cadeirydd y Pwyllgor) The Party of Wales (Committee Chair) Jocelyn Davies Plaid Cymru The Party of Wales Mark Isherwood Ceidwadwyr Cymru Welsh Conservatives Irene James Llafur Labour Carl Sargeant Llafur Labour Swyddogion yn bresennol Officials in attendance Ian Gibson Dirprwy Swyddog Cydymffurfiaeth, Swyddfa Gydymffurfiaeth y Cynulliad Deputy Compliance Officer, Assembly Compliance Office Jeffrey Godfrey Cyfarwyddwr Gwasanaethau Cyfreithiol

Director of Legal Services Gareth Hall Cyfarwyddwr yr Adran Menter, Arloesi a Rhwydweithiau Head of Department for Enterprise, Innovation and Networks Sharon Linnard Cyfarwyddwr Gweithrediadau a Buddsoddi Cymru

Director, Operations and Invest Wales Ian Shuttleworth Pennaeth Monitro a Gwasanaethau Proffesiynol, Gweithrediadau a Buddsoddi Cymru

Head of Monitoring and Professional Services, Operations and Invest Wales Eraill yn bresennol Others in attendance Gillian Body Swyddfa Archwilio Cymru Wales Audit Office Jeremy Colman Archwilydd Cyffredinol Cymru Auditor General for Wales Michael Houlihan Cyfarwyddwr Cyffredinol, Amgueddfa Cymru

Director General, National Museum Wales Ben Robertson Swyddfa Archwilio Cymru Wales Audit Office David Tolley Swyddfa Archwilio Cymru Wales Audit Office James Verity Swyddfa Archwilio Cymru Wales Audit Office Dr Eurwyn Wiliam Dirprwy Gyfarwyddwr Cyffredinol, Amgueddfa Cymru

Deputy Director General, National Museum Wales Gwasanaeth y Pwyllgor Committee Service Dr Kathryn Jenkins Clerc Clerk Dan Collier Dirprwy Glerc Deputy Clerk Dechreuodd y cyfarfod am 9.32 a.m. The meeting began at 9.32 a.m.

Cyflwyniad, Ymddiheuriadau, Dirprwyon a Datgan Buddiannau Introduction, Apologies, Substitutions and Declaration of Interests

[1] Janet Davies: Bore da. Croeso i aelodau’r Janet Davies: Good morning. I welcome pwyllgor a’r cyhoedd i’r cyfarfod. committee members and the public to the meeting.

[2] I remind everyone that the committee operates bilingually, and that headsets are available for translation of Welsh into English, and also to amplify the sound.

[3] Atgoffaf bawb i ddiffodd ffonau symudol, I remind everyone to switch off mobile phones, pagers ac unrhyw ddyfais electronig arall, gan pagers or any other electronic device, as they eu bod yn ymyrryd â’r offer cyfieithu a interfere with the translation and broadcasting darlledu. Os bydd yn rhaid gadael yr ystafell equipment. If the room has to be vacated in an mewn argyfwng, dylid gadael drwy’r drws emergency, you should leave through the agosaf a dilyn cyfarwyddyd gan y tywysyddion. nearest door and follow the ushers’ instructions.

[4] Yr wyf wedi derbyn ymddiheuriad gan I have received apologies from Catherine Catherine Thomas. A oes gan Aelodau unrhyw Thomas. Do Members have any interests to fuddiannau i’w datgan? Gwelaf nad oes. declare? I see that you do not.

9.33 a.m.

Adroddiad Dilynol ar Reoli’r Casgliadau yn Amgueddfa Cymru—National Museum Wales Follow-up Report on Collections Management at Amgueddfa Cymru—National Museum Wales

[5] Janet Davies: You will remember that, in May 2004, the committee looked at the collections management at the National Museums and Galleries of Wales, which is now re-branded as Amgueddfa Cymru—National Museum Wales; that is a bit shorter too, is it not? We made 13 recommendations at that time to help the museum to improve its collections management, and we requested an update on progress, once the museum had adopted its strategic vision for the future. [6] The auditor general’s update provides us with the opportunity to follow up our earlier work, to seek direct assurance on the progress being made to implement our recommendations, and, where appropriate, to act as a spur for further action.

[7] Felly, croesawaf y tystion. A wnewch chi Therefore, I welcome the witnesses. Will you gyflwyno’ch hunan ar gyfer y Cofnod? introduce yourselves for the Record?

[8] Mr Houlihan: I am Michael Houlihan, the director general of National Museum Wales.

[9] Dr Wiliam: I am Eurwyn Wiliam, the deputy director general of National Museum Wales.

[10] Janet Davies: Thank you. I will start with the first question, which is very general, to set the scene. Could you explain a bit more about your new corporate vision—how it links into your strategy and what it means in general terms for how you intend to manage your collections for the future?

[11] Mr Houlihan: We spent, in total, two years developing the vision for the organisation and it is contained in a little booklet at the moment, which gives some of the headlines of the vision. Essentially, we are trying to create a world-class museum of learning. The museum is well on its way to achieving that, in a variety of different areas, through its international reputation and international loans. However, we also feel that we have further work to do in several areas.

[12] We have developed, following extensive conversation with the public, a series of seven key objectives. One of those is very much concerned with developing flourishing collections. Inevitably, there is an inter-linking of all these objectives, because we are quite a complex organisation and the relationships between the collections and our public programming are obviously extremely tight and interrelated. However, in terms of the collections, we have a specific objective that states that we want to develop flourishing collections. That is not only about growing the collections in ways that are relevant to the people of Wales, but is also about caring for the collections and managing them effectively. That is also about developing knowledge from the collections and making that available to the public. So, that is one key area in which we see a direct relationship between the vision and the collections management, particularly the core of this review.

[13] We also have an objective in relation to, not only being an organisation that delivers learning, but also one that tries to learn. That is important in terms of what we are trying to do to engage with the public. A product of the vision has been some amendments and changes to our royal charter, which has been directly designed to ensure that we are effectively engaging with the public in ways that are relevant to today’s society. So, instead of having a court-type consultation mechanism, we are currently piloting a number of ways in which we can engage with the public through, for example, youth panels and panels in relation to home learners, which is a very specific group. These are very much task and finish groups. [14] We would certainly envisage, in time—and we have already tested this with the public at the National Waterfront Museum—talking to the public about what we should collect in the future. That is how the public can play a part in determining the collections of the future. That is quite an interesting and difficult task. What would we collect today to reflect the world in which we now live that will still resonate in 200 or 300 years’ time, and have meaning for people then about what we are doing today? Try thinking of a few objects that you collect today that reflect that. We can do that by engaging with the public on that sort of discussion and entering into that debate. Again, that is another way in which we hope to bring the public into this whole arena of collections management.

[15] The report highlights other, more obvious areas such as partnerships, circulating the collections through Wales and looking at how we can work with a variety of different museums and art galleries throughout Wales to make our collections available, but also to support their work. So, it sees a collection for Wales—or a distributed national collection, if I can use that term—as being fundamentally important.

[16] Fine words and headlines are okay, but we have also done a great deal of work on a vision- based budgeting exercise, which looks at how we currently spend our money and how we can move that money into supporting the objectives that we have set out in the vision. That is an ongoing exercise, because it takes time to move money from one area to another. However, one can already see it starting to come through in terms of this particular report and how we, for example, have restructured our approach to collections management. For example, we now have a single director in Eurwyn, who is responsible for all of our collecting departments. Previously, a number of directors had such responsibilities.

9.40 a.m.

[17] We have created a post of keeper of collections services, which is referred to in the report, with responsibility for conservation and documentation—the core activities of collection management. We have reviewed our collection policy from the point of view of what we should be collecting, and we are putting a greater emphasis on collecting the contemporary, as I indicated earlier. Obviously, we need to match budgets to that, and we need to think through the impact of collecting the contemporary—whatever that is.

[18] Those are examples of the way that we are thinking about the vision, but it also comes through in the way that we present our collections. For example, our archaeologists and social historians will, this year, be re-displaying some of their collections for the first time in 30 years, and they are taking contemporary themes in order to contextualise those collections, taking issues such as what it means to live in Wales in the twenty-first century, right through to issues about the environment, conflict, and so on. We are making our collections relevant in that way, and that shows the importance of the intellectual vision underpinning this document, which is about how you manage the collections.

[19] Janet Davies: It is certainly very encouraging that you are more involved with the public. I think, Carl, that you want to take up the issue about the expansion of the collection. [20] Carl Sargeant: May I just refer you to paragraphs 10, 11, 23 and 24, which cover acquisition disposal and storage of artefacts. The projects at Nantgarw and St Fagans are set to increase storage, and that is most welcome. The storage space is intended to be enough for the next 10 to 15 years, but with the rate of acquisition, which is quite substantial, do you think that it will be sufficient? Might you fill the space before then, at the rate of current acquisition? What plans are you making for the future beyond that 10 to 15 year period? Given that this extra storage provision will not be available for another two years, what are you doing with all these things now? Where are they kept, is the provision secure, and are the conditions appropriate for the artefacts?

[21] Mr Houlihan: I will begin and then probably hand over to Eurwyn to add some information.

[22] The first point that I would make is that, in our view, this process of creating more space will cover us for the next 10 to 15 years. We are trying to anticipate some of the key changes in the nature of collecting. In art, for example, there are two key issues. The first is that art is getting bigger, in a strange sort of way—you have to deal with larger canvasses. Secondly, the media is becoming more varied, as there is a lot of digital media. This is a taxing issue for all museums, internationally, because none of us know how time will impact upon digital media, or how it can be conserved, and there are issues there. So, on the one hand you have some objects, like paintings, getting bigger, so we are trying to anticipate that, for example, by creating a large picture store within our own building and at Nantgarw.

[23] We have identified other areas where we will not be collecting such large objects in future. It is strange, talking about the size of objects, but it is a key factor in this. For example, in relation to industry, I predict that we will not be collecting large objects in the future, and that the type of collecting will change—if we were looking at the nature of industry in Wales today, I think that we would be coming at it from more of a social-history point of view: collecting, archiving and interviewing. There would be some collection of objects and so on, but we would not be collecting so many large lumps of steel, for example, and that is the way that industry is today, anyway. So, I think that the pattern of collecting will be different, and—this point is addressed in the report—there will be a more pro-active approach to disposal. We are supportive of the work that has come out of the national museum directors conference, of which we are a member; the report said that museums tend to keep too much stuff, and that they should adopt a pro-active approach to disposal. As we have indicated here, we are looking at two key areas, which again comes down to size. One is in relation to our industry collections, where there are some large objects, some of which are difficult to interpret. Some of those, both intellectually and from a financial point of view, are very low value and we should be taking a proactive approach to that. We will be starting that this year. Equally we need to approach some of our social history collections in the same sort of way.

[24] Science collections are a little more complex because of certain advances in scientific understanding and knowledge, such as DNA. What might look like a collection of old bones could provide valuable information in the future about the patterns of disease, or health patterns, in a particular area. So we have to be very careful about those sorts of things and we need to take a measured approach to them. However, I think that if we start with the large objects first, we will be getting an answer on that. [25] All of the collections are secure at present. Between now and next year, we will be moving the collections into better conditions and we would hope to complete a substantial part of that work by the end of this year, with all of the objects relocated at Nantgarw. That is a fundamental unlocking of many of the questions that you have asked because, at that point, we will know just how much space is required for these objects, because—

[26] Janet Davies: I ask for focused answers, because we have another hearing after this one. Thank you.

[27] Mr Houlihan: Okay.

[28] All the objects are secure, but once we have them out and into the new storage conditions, we will have a better idea of just how much space they are taking up and what the conservation and documentation needs are going to be.

[29] Carl Sargeant: Paragraphs 14 and 17 refer to the computerisation of your records. I note that most of the items without computerised records are in two departments: the biodiversity and systematic biology department and the social and cultural department. Why is that? Are you focusing on those departments and giving them resources to get these records computerised?

[30] Mr Houlihan: I will just give a headline answer to that. In volume terms, these collections are probably the largest. We have given priority to the high-quality, high-value collections, but these collections, in that respect, have been of a lower priority. I will ask Eurwyn to comment on that.

[31] Dr Wiliam: This is very much following Mike’s theme. We have adopted a strategic approach for some years to answering this question. We have identified those collections of the highest value and, correspondingly, those at the highest risk, and we are working our way down systematically. While scientifically highly important in many areas, in monetary terms the science collections represent a very low risk.

[32] As part of that process, over the next few months, as I think is picked up in the report, we will be looking afresh at the progress of our computerisation programme and we will try to work out finally how many items we will need to document on computer individually or by group. Many of the science collections, for example, are collected in groups and the only merit there is to note that there are, for example, 13 examples of something. So, that process will be happening over the next few months.

[33] Carl Sargeant: Do you have a date by when you will have all that done?

[34] Dr Wiliam: I cannot give you it now but, by the end of August of this year, we will have scoped this and we will have produced a programme. At that point, we will know exactly. [35] Mick Bates: Paragraphs 18 to 22 describe the museum’s approach to verifying items in its collections. It says that the museum’s current approach is ad-hoc and that it recognises that it needs to develop a more systematic, risk-based approach to verification. However, the museum believes that it is not cost-effective to verify large numbers of low-value items. The Auditor General reports that you recognise the need to develop a more systematic, risk-based approach to verification. Could you explain in more detail how you intend to go about making improvements and developing a more systematic approach?

9.50 a.m.

[36] Dr Wiliam: We already have a system in place, but it is not extensive. What we do centrally is picked up in paragraph 21. This year, we identified 3,000 items at random. That is not a big total, and, for the bulk of those, we would have computerised documentation. The thrust of the previous report was that we should be identifying and verifying more uncomputerised ones. However, as I hope comes through from the report, over the next year, we will have identified in detail what we want to computerise. So, in a sense, that removes the issue. We have been doing far more verification than we have been collecting statistics for centrally—and we readily accept the recommendations of the report on this. So, for example, all of our art collections are verified physically every month, but we do not collate those figures centrally—except by exception. So, we will take on the recommendations of the report and, henceforth, will do that. We verify far more than we have central records for. That will be our approach.

[37] Mick Bates: Moving on, the report states that you do not believe that it is cost effective to verify large numbers of low-value items. Would you explain what kind of items would be classed as ‘low-value’? How resource intensive would it be to verify them, and what risks are involved in not verifying them?

[38] Dr Wiliam: Again, harking back to an earlier response, we are talking here about items of low financial value. The overwhelming bulk of those items would be in our science collections. They are numerous; there are in excess of 2 million items. However, those will be individual shells and so on. So, they are of low financial value and there is a low risk in that sense. That is not to say that they are not adequately cared for—we believe that they are, under the same conditions as everything else. However, the whole thrust of our strategy has been to give priority to the high-risk areas, and we work our way down from that. The same applies to how these items are presented. Perhaps I should not be saying this, but, for example, high-value pictures will be individually alarmed; we progress down through case alarms to room alarms. So, it is a risk-based system.

[39] Irene James: I would like to look at paragraphs 28 and 29, which describe the museum’s strategy of preventative conservation. Last time you came before this committee, you estimated that there were 384 staff-years’ worth of remedial conservation work to be carried out. How confident are you that the new storage facilities will stabilise the condition of the collection, and is there a risk that some items will continue to deteriorate—eventually, beyond repair—because that work has not been carried out? [40] Mr Houlihan: There are two elements to this. First, we are confident that the new standards of storage meet national and international standards. So, the risk of deterioration to the objects is absolutely minimal. Secondly, the process of rehousing the objects gives us an opportunity to assess the condition of objects. We can identify those objects that would need immediate remedial attention and we can draw up a priority hit list. Those processes will enable us to ensure that the objects within the collections are properly maintained. Principally, though, because they are in the correct environment for their needs, this is internationally regarded as the best approach to strategies of this kind in caring for collections.

[41] Irene James: Thank you for that. Do you feel that that would have an impact on how items are exhibited and that they would not be prepared for remedial work unless they were required for exhibition?

[42] Mr Houlihan: Not necessarily. The exercise of assessing the conditions of the collections will enable us to identify key areas. If there are objects that require urgent remedial action, then those can be identified and addressed as part of a longer term programme of attention. The key driver for the museum in terms of remedial conservation is our exhibition programme. Since 2004, we have conserved almost 40,000 objects principally for the purposes of exhibition, but we have to move forward with a two-pronged approach. From the assessment, that would mean identifying objects that need urgent action and also our exhibitions programme.

[43] Irene James: My fear is that items would not be worked on unless they were required for an exhibition.

[44] Mr Houlihan: If the items are identified as part of the collections assessment programme, they can be identified and worked into a programme of remedial action that hangs independently from the exhibitions programme.

[45] Irene James: Would that have a knock-on effect that loan requests would take longer because the items may not have been identified until they were part of a programme that was required for a loan or exhibition?

[46] Mr Houlihan: In reality, that is probably not the case because the types of objects that we lend out tend to be in good condition—they do not have bits falling off or anything like that. There are approximately 40,000 objects out on loan at the moment, and while they all require inspection before they go out, and a certain amount of work at times, major remedial action does not tend to be required on those objects. On the basis of the statistics that other museums have produced, a very small number of objects within the collection will require urgent remedial attention. That information will emerge soon.

[47] Irene James: That can have a knock-on effect on the objects that are available.

[48] Mr Houlihan: I am not sure that it would, because it would be a very small number of objects and it can be programmed—they will not all need immediate attention. I am confident that we can still cope with our exhibition and loans programmes and tackle this backlog.

[49] Irene James: Of 384 staff-years? [50] Mr Houlihan: That is quite a distorting statistic, because the point is that by putting the objects into these environments, where there are international standards, it means that the objects are not deteriorating any further. So, in a sense, you are removing a substantial amount of that particular requirement—you will not require 384 staff-years of work. However, it is interesting that, since 2004, we have done 55 years of remedial work on objects which are going out on loan and to exhibition. Putting the collections into this environment reduces the need, because there will not be bits falling off the objects any more—people will not be banging up against them, or whatever. It makes that type of statistic redundant.

[51] Irene James: May I just go back to the issue of 384 staff-years? You estimated that that would be necessary.

[52] Mr Houlihan: Without good storage conditions.

[53] Irene James: Do you now feel that you have those conditions?

[54] Mr Houlihan: As indicated in the report, that figure will be more than 90 per cent.

[55] Janet Davies: So, how many staff do you have doing this work? We can then divide it by 384. [Laughter.]

[56] Dr Wiliam: Perhaps I should confess, Chair, that I was not the creator but the compiler of that original figure, and, as Mike suggested in his answer, the purpose for creating that figure was to make the case for new storage facilities. Had we not received the facilities, we would have needed that amount of work. As it happens, the new storage facilities have come through and we are extremely pleased that the figure in that sense is now redundant.

[57] Leighton Andrews: Why is the National Museum in Cardiff shut on Mondays?

[58] Dr Wiliam: Traditionally, many national museums throughout the world have been shut on Mondays. Why Monday? I do not know. Presumably because it is after the weekend. If you go anywhere—Spain, France or Italy—you will find that museums are closed on Mondays. So, that has been the traditional day.

10.00 a.m.

[59] Leighton Andrews: So, ‘I don’t like Mondays’, says the deputy director of the national museum.

[60] Irene James: Tell me why.

[61] Leighton Andrews: Tell me why, yes. [Laughter.] Thank you, Irene.

[62] Dr Wiliam: I will now transfer seamlessly to Michael, who will answer that. Upwards delegation is a wonderful thing.

[63] Jocelyn Davies: Chair, are hairdressers not generally closed on Mondays as well? [64] Janet Davies: Yes.

[65] Leighton Andrews: I had my hair cut this Monday.

[66] Jocelyn Davies: Did you? Perhaps barbers are not then.

[67] Leighton Andrews: I return to the question of why the museum is closed on Monday.

[68] Mr Houlihan: I hesitate to say, ‘Because it has always been closed on Mondays’. Where museums close on Mondays—and I had an experience of this in New York recently when I went to the new Museum of Modern Art on a Monday and found it closed—generally, it has been a staffing issue, in relation to staffing levels and particularly to getting the house in order. Reflecting on other museums, it tends not to happen at open-air museums for some reason, but in the case of museums that are in buildings that tend to be quite large, it is to do with cleaning and issues like that—getting the house in order. It has generally been felt that Monday is not such a busy day as the weekends and so on. Historically, one would probably find that it is a compensation for being open all weekend. So, museums close on Mondays.

[69] Leighton Andrews: So, basically, you are closed on Mondays because you have always been closed on Mondays. You have not yet convinced me that there is a good reason.

[70] Mr Houlihan: The good reason at the moment is that we do not have the money to open it on Mondays.

[71] Leighton Andrews: What is the impact on your visitor numbers of not being open on Mondays?

[72] Mr Houlihan: We have done a calculation on this, and it is certainly several thousand visitors at the Cathays park site. I do not know, it is hard to predict, because visitor patterns vary from day to day. The sorts of visitors that you get on Sunday are clearly different from some of the visitors that you get during the week. It is difficult to give a precise figure, but we have done an exercise on this, and I could—

[73] Leighton Andrews: What would be the additional cost of opening on Mondays?

[74] Mr Houlihan: It would be £150,000 a year.

[75] Leighton Andrews: In terms of your overall budget, that is not a huge sum, is it? [76] Mr Houlihan: No. There is a fundamental issue to this. Trying to set aside why museums are closed on Mondays, when one comes down to the budgetary issue, if one is looking at, as is recommended here, increasing the number of people visiting the museum, one has to be quite careful because it is not just about numbers. We could argue that we could take that £150,000, if we had it, and spend it in a different way to attract different audiences and working with different audiences, so that we increased the numbers of C2, D and E visitors that we get, increased the number of projects such as our On Common Ground project, which works outside of the museum’s walls in deprived areas, or worked with ethnic communities. So, there is an institutional issue and a policy issue in relation to the nature of the audience, as well as the numbers of the audience.

[77] Leighton Andrews: It seems to me, however, that those issues will remain true whether you are open six days a week or seven days a week. The mere fact of being closed on one day does not really affect that and the use of the money is the question. If you had £150,000 more, fine, but if you had £300,000 more, those issues would still be there.

[78] Mr Houlihan: I suppose that I am coming at it from the point of view that if I had £150,000 more, those are the sorts of questions that I would be looking at closely, rather than leaping in and saying, ‘Oh, let us open on Mondays because it is going to push the attendance figures up by an extra 50,000 or something’.

[79] Leighton Andrews: So, then you would have almost as many visitors as the new Assembly building had in its first year.

[80] Mr Houlihan: We have a total visitor number that is now approaching 1.5 million.

[81] Leighton Andrews: Okay. There were 70,000 fewer visitors to St Fagans last year. Do you have any specific reasons for that? Is it anything to do with parking charges, for example?

[82] Mr Houlihan: It does not appear to be parking charges, because there is no evidence that people have been upset by them. We have literally had only one or two complaints about it. Underpinning all of these arguments about visitor figures is the whole question of public programming. It is important that we continue to refresh and renew the exhibitions in our museums, because that will get in more visitors in the long term. You are only as good as your public programming as a public-facing institution. So, we are giving a lot of attention to St Fagans from the point of view of investing in the improvement of facilities. At the end of this month, we are opening a new exhibition, which is the first redisplay of the social history collection there for 30 years. It is about refreshing what we have on offer, and it is about putting up and opening new buildings, such as St Teilo’s church. Similarly, at Cathays park, I would argue that, rather than focusing too much on the Monday issue, it is about the public programming and about changing the exhibitions, which we are doing with the new social history collection and with new science and art exhibits. That is what will bring in the public at the end of the day. People come to see things and, given that a lot of our visitors are returning visitors, they expect to see something new.

[83] Leighton Andrews: If you see that you have had a drop of 70,000 visitors, it must give you cause for concern. You must ask why that is happening. So, what questions have you asked, and what are the answers? [84] Mr Houlihan: We asked the questions about the programming side, so we are now reinvigorating the programming side. It was true that visitors were coming to St Fagans, and the museum was looking tired, so we have invested in shop and café facilities, in improving signage and in improving the general presentation of the site. More importantly, we are putting on new displays, new events and new activities, and we are putting up and opening a new building this year, but, obviously, taking down and re-erecting buildings is quite a slow process. It is also implied that we are looking at the whole marketing of St Fagans and our other sites. For example, at the Swansea museum, despite the initial opening and high visitor figures, there was a slight downturn within nine months. So, we refocused the marketing away from the Swansea area and more towards Cardiff. It is these sorts of strategies that we are constantly reviewing and adapting, and these are the sorts of issues that we are looking at in St Fagans.

[85] Leighton Andrews: I am not convinced by those answers that we have a good reason as to why the numbers have dropped by 70,000. I would like, through you chair, to ask National Museum Wales to go away and undertake more research on that.

[86] Janet Davies: Yes, I think that that would be a good idea. It seems to me that you are saying that it is tradition, just as it was tradition that women did the washing on Mondays and could not go to museums, which is no longer relevant. However, I understand your argument about where you would spend that money.

[87] Leighton Andrews: I am more concerned about the 70,000 drop in the visitor numbers to St Fagans.

[88] Janet Davies: Right.

[89] Leighton Andrews: It is a big number and I do not feel that we understand why that has happened.

[90] Mr Houlihan: I think that it is true to say that the visitor figures are back up again this year at St Fagans.

[91] Leighton Andrews: That is helpful to know, but it would also be helpful to have more information in order to understand that better.

[92] Janet Davies: You said that visitor figures in the National Waterfront Museum have dropped. Has there been any attempt to market other attractions in that area, for example Plantasia and other attractions in Swansea, and perhaps market to tour operators?

[93] Mr Houlihan: I said that the figures at Swansea dropped a year ago, but the refocusing of our marketing activities has had a huge impact and brought the visitor figures back up. So, it has been corrected in Swansea, and we are now well over target. As part of that, to answer the second part of your question, a great deal of work has been done in the Swansea area and, in order to get the numbers up, in the Cardiff area, to generate interest and to get Swansea known, as it were. A lot of that has been focused on particular types of events, particularly outdoor event activities, and on working with quite segmented audience groups in order to get those visitor numbers back up. [94] Mark Isherwood: I refer you to paragraphs 38 to 40, which indicate falling income from customers, or from visitors to the museums and their retail outlets. Why is that? Are you maximising opportunities to sell? How do you intend to increase income in the future, noting that, since 2004 for example, income from visitors in your shops has fallen from an average of 97p to 76p?

[95] Mr Houlihan: I think that there might be a slight matter regarding that figure. I think that the figure that we originally provided for 2004 was inclusive of value added tax. The 76p figure discounts value added tax, so, comparing like with like, the 97p figure would be closer to 85p or something similar, which is still, obviously, a difference. To give you an example of how these figures vary, the 76p figure, which was taken earlier this year, as of December 2006, has crept up to 78.45p per visitor, and, over the past three months, we have seen a like-for-like increase in our retail activities over the past year. So, that, too, is coming up.

10.10 a.m.

[96] The other issue is that, to be frank, we have been disappointed by the performance of our shop at the National Waterfront Museum. As with the figures here for visitor numbers, if you were to take Swansea out of the equation, we can show an increase in sales at the non-Swansea sites. However, that still leaves us with the issue of Swansea, and our enterprises company is addressing that. There could possibly be an issue about the location of the shop at Swansea, which we have to deal with. The ideal location, one could argue, is at the entrance/exit to a museum, and this is under review. Also, recognising the shops’ and catering outlets’ performance, we have put a great deal of effort in the past year into improving those facilities. There is now a completely refurbished shop at St Fagans, and there is a new coffee bar. The cafe has been refurbished and, later this year, we will be refurbishing the shop at Cathays park and reducing it from a two-site operation to a single site, and that will give us a more economic operation. We have reviewed catering at those sites where we are responsible for catering; we only contract out at our larger sites. So, a great deal of work is going into this to ensure that we generate as much income as we can.

[97] Mark Isherwood: Thank you for explaining that. Of course, that is all capital investment, but in terms of revenue, you have not referred to issues such as sales, marketing, customer service training or performance management culture. Can you tell us what, if anything, you are doing in those revenue areas?

[98] Mr Houlihan: We now have as chief executive of our enterprises company someone who has come in from the commercial sector. He has started, in a number of areas, to work with staff that have come from the more public sector retail background. Staff receive training in specific areas. For example, we had several hundred suppliers of goods previously, and we have reduced that to fewer than 50, and that gives us greater economies and so on, and staff have been brought into that. We have staff training programmes in relation to customer-host activities. So, a great deal is going on to ensure that the staff have the training and the understanding financially and in terms of dealing with the public and so on. [99] That is supported by the work being undertaken by our visitor services side; we are trying to move some of our staff more from their security work into meeting and greeting the public, and providing interpretation, communication and storylines to the public. We know from the public surveys that we have conducted that the public likes interaction, and not necessarily computers and so on, as they like to talk to people and work with them. We are therefore undertaking a major communications review at the moment, looking at the resource that we can release from our visitor services side of the house into ensuring that the public has a better visit. It is not just about retail, but about the way in which we deliver our stories.

[100] Mark Isherwood: How are you managing that performance, having implemented the training?

[101] Mr Houlihan: That is handled by the HR department. We are working on a new series of performance indicators, which are looking towards a more qualitative approach to how we, as an organisation, can know that we are being successful. It is all very well having the spend per visitor head, but, ironically, the more visitors you get, the lower that becomes. What does that tell you about what children are spending and so on, and what children want? We are therefore doing a great deal of work on developing qualitative indicators, which ensure that not only are our shops greener, sourcing fairly traded products and so on, but also that they are appropriate to what a museum should be selling, as well as recognising the public need.

[102] Janet Davies: Thank you, both. This has been quite a short evidence-taking session, but it is a follow-up to a previous report, so it would, naturally, be short. Thank you for your answers. You will be sent a transcript, and, if you feel that there is anything incorrect in it, please come back to discuss any amendments, which will be corrected before the final report is published.

10.18 a.m.

Diogelu Arian Cyhoeddus ym Mhrosiectau LG, Casnewydd Protecting Public Money in the LG Projects, Newport

[103] Janet Davies: We will now discuss the findings of the auditor general’s report, ‘Protecting Public Money in the LG Projects, Newport’. This development was one of the biggest planned inward investments when it was announced in 1996. The Welsh authorities offered an aid package of £247 million to LG to bring the project to Wales. This was a huge commitment to secure a development that was expected to bring great benefits. However, sadly, the projects did not deliver the promised benefits, and no jobs remain from the original projects.

[104] In this session, we will all have an opportunity to look at how the aid package was managed, whether the authorities secured the best deal that they could get in the settlement agreements, whether there are any lessons to be learned for other projects, as well as what the future holds for the Imperial park site, now that the LG companies are no longer there.

[105] Croesawaf y tystion i’r cyfarfod. I welcome the witnesses to the meeting.

[106] Would you formally introduce yourselves for the Record, please? [107] Mr Hall: I am Gareth Hall, director of the Assembly Government’s Department for Enterprise, Innovation and Networks, DEIN. As director, I am sub-accounting officer for the department, and therefore responsible for its compliance, accountability and value for money. In this capacity, it is incumbent on me to ensure that the recommendations in this report are acted upon, and are embedded in our working methods and processes.

[108] Janet Davies: Right. I just want an introduction of who you are, please; otherwise, the Record will be totally messed up.

[109] Mr Godfrey: I am Jeff Godfrey, director of Legal Services.

[110] Ms Linnard: I am Sharon Linnard, director of Operations and Invest Wales.

[111] Mr Shuttleworth: I am Ian Shuttleworth, and I head up the monitoring and professional services team within Invest Wales.

10.20 a.m.

[112] Janet Davies: I will start with the first question. As you know, this company has no political role to play. We do not question policy; we take evidence to gain information that will give us an understanding of why particular actions were taken in order to deliver policies. Therefore, we need focused answers to the questions that are asked.

[113] In the case of LG, the then-Secretary of State for Wales in the Welsh Office achieved location of what was an ambitious and high-profile, large economic development in Wales. In your view, Gareth, did the need to make this enterprise successful take precedence over risk management and a well judged use of public funds?

[114] Mr Hall: The LG projects were secured by Wales and for the United Kingdom against very significant competition from other regions in the UK, Europe and Ireland. The company had a major track record in the semiconductor industry, in which Wales wanted to establish itself, particularly in south Wales. The scale of this project was very significant, and was not like anything Wales had experienced before. It is the largest inward investment project in Europe, and—given that you outlined potential rewards in your introduction—associated with such a project is risk. Calculated risks and assessments were made. There were risk management issues, which are referred to in the report, and those risk management techniques are currently being take on board right across the Department for Enterprise, Innovation and Networks. There were lessons to be learned and we are taking those on board.

[115] Janet Davies: We will get into more detail on much of this as we go along.

[116] Jocelyn Davies: I am sorry, Chair, but that does not seem to be the answer to your question. It was a very good answer, but you asked whether the desire to attract LG took precedence over other things.

[117] Janet Davies: Yes. [118] Mr Hall: We wanted to secure a long-term investment for Wales in a very important sector.

[119] Leighton Andrews: On that point, you said that you wanted to secure that for Wales—and we are going back to 1996—but some of the rather unique elements of the offer that was made to LG will come out in the detail. I assume, in preparing for this evidence-taking session, that you reviewed the internal papers in your department and in the Welsh Office.

[120] Mr Hall: Yes.

[121] Leighton Andrews: Was there unprecedented political pressure to deliver this deal?

[122] Mr Hall: No, I have not come across any unprecedented political pressure. Wales wanted the project; the United Kingdom wanted the project.

[123] Leighton Andrews: This has been described by a subsequent Secretary of State as ‘William Hague’s pre-election bonanza’, has it not?

[124] Janet Davies: I think that you have to be careful not to go into political issues on this, Leighton. I realise that it is a grey area, but please be careful.

[125] Leighton Andrews: Okay, but—and, with respect, Chair, I think that your opening question invited this—I am trying to elicit the fact that judgments have to be made about the value-for- money aspects of regional selective assistance and other grants. You can anticipate situations in which an inward investment approach may be deemed to be so attractive for political reasons by Ministers at a particular moment that they would want to spent their entire budget on that project in an unprecedented fashion, which is what I believe happened in this case. So, I am trying to elicit that information given the very public involvement of the Secretary of State for Wales at the time. I have a photograph here of seven blokes with shovels, including the then-Secretary of State and the then-Prime Minister, John Major, at the groundbreaking ceremony in January 1997. This was a hugely political judgment about that investment at the time, was it not?

[126] Mr Hall: Mr Andrews, you have asked me a direct question and so, in response, I say that, in reviewing the papers, I saw no evidence of any undue political pressure. The LG projects were in electronics and semiconductors, which were growth sectors for the economy of not just Wales but of Europe. Wales wanted an international company to have a base here as part of the restructuring of the economy, which was very important for south Wales at that time, and continues to be important. It was an opportunity to get a major international company to set up in Wales, as a bridgehead into a valuable European market.

[127] Janet Davies: I think, Leighton, that we will have to leave it at that point. As Mr Hall has said, there is nothing in the documentation, and you have your questions on the record now. Alun, did you say that you wanted to come in on that? [128] Alun Cairns: No, I am satisfied on that. I was just getting a bit concerned about the questioning, because you have rightly ruled me out of order in the past when I have swayed into some party-political questioning. This committee has been conducted for eight years on an absolutely non-partisan basis, and a non-party-political basis, and I would hope that that will continue.

[129] Jocelyn Davies: We have not always known exactly where the line is drawn, Alun, as you have just pointed out.

[130] Janet Davies: We will now move on to some questions from Mick Bates, looking at paragraphs 1.2 to 1.6 of the report.

[131] Mick Bates: I will start by looking at some of the facts in this report. In paragraphs 1.2 to 1.6, it is reported that phase 2 of the electronics project, which promised an additional 2,000 jobs, was essential in reaching the framework agreement on the aid package. However, there were ‘inherent structural risks’ in the agreement—assistance was front-loaded towards phase 1, and phase 2 was less certain than the rest of the development. The framework agreement for the aid package was the product of tough negotiations and depended, ultimately, on the inclusion of phase 2 of the electronics project. However, this phase was much less certain than the rest of the development, and funding was heavily loaded towards phase 1. To what extent was LG Electronics actually committed to phase 2, given that the products had yet to be selected, and there was no contractual requirement for it to undertake this phase of the project?

[132] Mr Hall: There were very detailed and long-term negotiations with LG. One of the things about dealing with companies from the far east is that they look to build personal and long-term relationships. There was an initial project proposal, and, as the discussions and negotiations evolved, phase 2 on the electronics component was introduced into the overall project. The company was looking not just to set up the semiconductor plant, the first phase of the project, but also to develop new products that would use the semiconductors. So, going back to my answer to the previous point, there was an opportunity for LG Electronics to expand on this site. There would have been economies of scale, and again, it was creating what would have been its European production centre.

[133] Mick Bates: What records exist of the meetings that resulted in the final agreement?

[134] Mr Hall: A lot of this was done on a personal basis. Certain correspondence was recorded on the files, and that was made available to the Wales Audit Office. Are you asking about any specific aspect?

[135] Mick Bates: I accept what you say about the way in which some companies operate, wishing to deal on a personal level; however, given the magnitude and the uniqueness of this particular project, as we discussed earlier, did you not think at some stage that good record-keeping of conversations and deals may have been good practice?

[136] Mr Hall: Yes, that would be good practice; I accept that. [137] Mick Bates: To return to the question that I was asking, what records did you keep of these negotiations?

[138] Mr Godfrey: There is correspondence on file, and there are the agreements themselves, which do not drop phase 2 of the LG development—it remains there as part of the defined project. It appears that, in negotiating the agreements, there was some uncertainty about the precise nature of the development. I think that there was a reluctance to commit to a particular form of development as part of phase 2, which is where the concessions that you are referring to came from.

10.30 a.m.

[139] So, the individuals who undertook the negotiations were clearly convinced that there was a commitment at a very senior level to proceeding with phase 2—land was being acquired for the purpose, and so on—but they recognised that, given the evolving market, the precise nature of what was going to be produced there may change.

[140] Mick Bates: Chair, I will leave it there, because I think that Leighton is anxious to come in.

[141] Janet Davies: Alun has asked to come in first. I will call Leighton afterwards.

[142] Mick Bates: I will continue for the moment then, if I may.

[143] The only agreement that specifically required LG Electronics to complete phases 1 and 2 was the regional selective assistance agreement. Why, then, did the Welsh Office agree to forgo its recovery powers for the RSA grant in respect of any shortfall in phase 2? This is reported in paragraph 1.21c.

[144] Mr Godfrey: While the RSA agreement was being negotiated, there was an acceptance of a clause that confined the recovery powers to phase 1 in relation to one of the recovery clauses in the RSA agreement , which did not affect the state-aid recovery clause that was in the agreement. One of the consequences of doing that was to tie recovery powers that related to capital investment and jobs to phase 1, but it was clear that, if phase 2 did not proceed—if the company did not invest the capital that was associated with that part of the development—the state-aid overpayment clause would be engaged, because the amount of front-loading aspects referred to in the report would mean that too much assistance had been given relative to the capital expenditure that had been incurred. So, there was an acceptance of tying recovery powers to phase 1 on one of the relevant clauses in the RSA agreement, but that amendment still left the state-aid recovery clause unaffected. In order for the company not to go into an overpayment situation, the capital investment would have been required.

[145] Mick Bates: You use the word ‘acceptance’ in terms of this agreement, but when the final agreement was made, LG lawyers removed the recovery of RSA on phase 2. Did you not think, at that stage, that it lacked commitment, given that it wanted to have a clause that excluded the recovery of grant moneys on phase 2? [146] Mr Godfrey: There was a commercial negotiation going on. The officials who were dealing with the agreement felt that they had the assurance, at a very senior level in LG, that there was an intention to proceed with phase 2. While the recovery provision was modified, the definition of the project still retained phase 2 and they thought that the risk was, to some extent, mitigated by the fact that the state-aid recovery clause was still intact and would be engaged if the capital investment associated with phase 2 was not incurred.

[147] Mick Bates: I am still a little hazy as to why that decision was accepted, given that it was the LG lawyers who insisted on inserting that into the agreement.

[148] Mr Godfrey: Documents of that nature pass to and fro as each party tries to secure the best bargain and there are risks associated with agreements of that nature. There was a concern, shown in the report, that the record of how the risks were evaluated may not have been expressed and left as a record. However, from looking at what does exist there, it is clear that there was a consideration of what could be given, in terms of what the LG companies wanted to put into the agreement, while leaving a level of protection in the event that that part of the development did not proceed.

[149] Mick Bates: You mentioned ‘the file’. Is there a record then? Did anyone record a statement saying that they were concerned about the LG lawyers’ insistence that there was no recovering RSA in phase 2?

[150] Mr Godfrey: No. It is an interpretation of the correspondence that is there: the suggested alteration and the way in which it was dealt with. What we would take as a learning point of this exercise, and what should happen now, is that you would have a fairly detailed evaluation of the consequences of accepting that clause and what the fall-back positions would have been. There is no record of that nature on the file.

[151] Alun Cairns: Mr Hall, the front-loading of projects on this basis is, according to the report, unprecedented. Can you tell us about the marketplace at the time? As you said, there was the potential that Europe’s largest inward investment project would come to Wales—and part of it obviously did come to Wales. What influence did the front-loading have, or what influence did negotiations that LG might have been conducting with other parts of Europe have on the front- loading of the project?

[152] Mr Hall: As you can see from the report, the front-loading was in the construction of the two facilities and the fitting out. So, the property development grant went into construction, the RSA went into the fitting out, and the nature of the proposed production for both of them is that you cannot get product out incrementally. You have to have the operation built and running whether it gets out one monitor or 1,000 monitors per week. Front-loading helps to get the facility up and running. It also helps with the cash flow of the business so that, once it is working, it can generate profits. [153] Alun Cairns: My question was in relation to the competition that Wales was up against in terms of attracting the project and the influence that the front-loading would have had on that. During these negotiations, LG was obviously keeping its options open at the early stages in terms of where it could go. Was the company’s decision influenced by front-loading, in that it made Wales more attractive for the company? There would have been a huge risk, but if everything went well, less money would have been paid out than may have been negotiated elsewhere. That is an example of the sort of thing that I am trying to explore. Was that the case, or not?

[154] Mr Hall: I have found no evidence that that was the case.

[155] Alun Cairns: Finally, when the negotiations highlighted by Mick Bates were ongoing, when the insertion of that clause was requested by LG’s lawyers, are we aware of whether LG was still, at that time, negotiating with other countries in Europe in considering where it should go?

[156] Mr Hall: That would have been confidential to the company. The agreement for the deletion of that clause was part of the cut and thrust of ongoing negotiation, which was, as Jeff just explained, a moving feast.

[157] Alun Cairns: At that stage, was LG’s options still open as to where it could go?

[158] Mr Hall: It would have been benchmarking our offer against offers from other regions and countries. That is part of the negotiation.

[159] Alun Cairns: Thank you.

[160] Leighton Andrews: I am conscious that we are referring to events that took place 11 years ago, and, therefore, these particular witnesses were not directly responsible for the activities of the time. We are, therefore, relying on written records, which we have not seen. I want to test some of that, if I may. First, could we have a chronology of the stages of negotiation on the agreement that Mr Godfrey referred to, in relation to LG making a particular request with regard to what should be in that contract? More importantly, you referred, Mr Godfrey, to documents that are lying on the files. Are there file notes of any conversations, for example between the Secretary of State and the chairman of the Welsh Development Agency, or between the chairman and the chief executive of the WDA at the time, or between the then Welsh Office and the Treasury?

[161] Mr Godfrey: I cannot say that I have seen any records or file notes relating to conversations at a political level. The files that I have looked at are those that involved the lawyer dealing with the negotiation and his correspondence with the officials who were leading the negotiations. All of the records that I have seen are at official level.

10.40 a.m. [162] In terms of the chronology that you asked about, I hesitate to be precise about it, but the framework agreement and memorandum of understanding were prepared in the summer of 1996. The initial draft agreement on the RSA grant was prepared around October 1996, at about the same time as the notification to the European Commission. It was amended during the course of October 1996—the agreement was not signed until the following spring, once the commission had cleared the notification. So, we had negotiations on the agreement going on at the same time that officials were also dealing with European Commission aspects.

[163] Leighton Andrews: So, when did the LG lawyers request that the clause to which you referred earlier be taken out?

[164] Mr Godfrey: I would have to check the precise date—it would be around October 1996

[165] Leighton Andrews: Of 1996?

[166] Mr Godfrey: Yes.

[167] Leighton Andrews: Okay, thank you. However, the fact that you have not seen any file notes of conversations that took place between the Secretary of State and the chairman or chief executive of the WDA does not mean that they do not exist. Mr Hall, are you aware of any such file notes?

[168] Mr Hall: I am not aware of any.

[169] Leighton Andrews: My first question to you earlier was whether or not you had looked at all the papers, but we now find that you have not, as far as I can see, seen file notes on any of the correspondence that might have existed between key players in this deal at the time.

[170] Mr Hall: We have looked at all the files and the papers and have made them available to the Wales Audit Office. I have looked through all of them, and I have not seen any of the correspondence—

[171] Leighton Andrews: I accept that you were not in the job at the time, but are you asking me to believe that there are no minutes of conversations between the Secretary of State and the chairman and chief executive of the WDA, despite the fact that the then Secretary of State said that the deal was unqualified good news for Wales. I am not sure how anyone can make a statement that something is unqualified good news if they have not had some involvement in the process of negotiation, and been in a position to observe the detail of that negotiation.

[172] Mr Hall: I must reiterate that I saw no record of any conversations in the file notes. If there are no records, that is not to say that there was not a conversation, but I cannot comment on that, as I was not party to it.

[173] Leighton Andrews: I accept and appreciate that. Chair, we must ask whether or not any such documents exist. Are there any file notes of such conversations?

[174] Janet Davies: We may address that to the auditor general in the first place. [175] Leighton Andrews: I think that some clarification is going on among the WAO officials.

[176] Mr Colman: The purpose of my little inquiry with my colleagues was to ask them whether or not there were any obvious gaps in the files. They have informed me that there were not; there were occasional references to the Secretary of State taking an interest in the negotiations, as you would expect. From my experience—not of this particular deal, in which he may not have been involved—there are not always notes of conversations, and, where there are notes, they are not always preserved. So, I am not entirely surprised to find that the paper trail is extremely thin. That seems to me to say almost nothing as to the extent to which there was political involvement in the negotiations. That is what I can offer to the committee, I am afraid.

[177] Janet Davies: Would such notes have been preserved at the Wales Office rather than at the Assembly?

[178] Mr Colman: It is possible. There was a period, 30 or so years ago, where it could be said confidently that there would always be a note of every conversation between the Prime Minister and others. That was a long time ago, and we are talking about the Prime Minister. In more recent times, note-taking has not always been as thorough as it once was. So, I am not wholly surprised by what has emerged from this line of questioning. However, what it signifies is difficult to interpret.

[179] Mr Hall: The practice in the Welsh Office at the time—you make the distinction of referring to the Secretary of State at Gwydyr House in London—was that if any notes were taken there, they would have been copied to officials in Cathays park and put on the file. So, logically, if there is nothing on file at Cathays park, there would not have been—

[180] Alun Cairns: We have asked the question and we have had the answer and we are, potentially, trying to torture the response that we have received. Mr Andrews has said that he will table a freedom of information question; that is fine, let us see what it says.

[181] Janet Davies: It is a reasonable line of questioning. We have had the answers, but Leighton has the floor at the moment.

[182] Leighton Andrews: I want to ask the auditor general about something that he said, because, having taken advice, he said that there are references in documents to the Secretary of State’s interest in the project at that time, in 1996. I would like, through you, to make a formal request for us to see those documents.

[183] Mr Colman: Perhaps my colleague, Ben Robertson, could explain what he said to me. [184] Mr Robertson: On the documents that we have seen, I looked at the Welsh Office files of the time and found no obvious gaps in the paperwork. The letters were mainly high-level correspondence between the chairman or senior officials at the Welsh Development Agency and senior officials in the Welsh Office at that time and they were pretty infrequent—every month or couple of months or so—explaining key stages of the negotiations. There was some correspondence with the Treasury about the limits for awarding regional selective assistance grant in Newport. At the time of the negotiations, in June 1996, there were some more detailed records. The senior official, in particular, made a kind of diary that was several pages long of the key negotiations in June 1996. There were references there to the Secretary of State and of him speaking to the Secretary of State, asking the Secretary of State if he was happy to go ahead with the deal at that value. Beyond that, there were no detailed records of conversations as such, it was more formal correspondence—at least, that is what I have seen. That is not to say that nothing exists on other files, but I believe that I had access to the most important files. The correspondence that I have seen bears out what we have said in the report.

[185] Leighton Andrews: This civil servant’s diary is very important.

[186] Janet Davies: At this point, we have had full answers. Would it be possible to give us a note on the diary or not?

[187] Leighton Andrews: Why can we not have a full copy of the diary?

[188] Janet Davies: Is that feasible? I do not know how long it is.

[189] Leighton Andrews: I am sure that it can be digitised, Chair.

[190] Mr Robertson: It is not a very detailed document; it is just a few pages long.

[191] Mick Bates: Further to that, could I ask for the release of any correspondence where the LG lawyers requested the exclusion of any repayment on the second-phase RSA so that we could see that too? It appears to me that a lawyer requesting the exclusion of a repayment would have required some comment from the people who were undertaking the negotiations.

[192] Jocelyn Davies: Why do we not do away with the WAO and we will do the investigation ourselves? [Laughter.] I can understand why we would want to see some of this, but we cannot redo the investigation.

[193] Janet Davies: If there is a request from a member of the committee and the auditor general says that it is possible to accede to that request, we should pursue it. However, if the auditor general feels that it is an unreasonable request, so be it.

[194] Mr Colman: I could not possibly call it an unreasonable request. I am grateful to Jocelyn Davies for her comment, because there is clearly a limit to the scope for this committee to review all the papers. However, we can certainly look up the specific papers that were asked for and present them, possibly with some further commentary. [195] Janet Davies: We will go on to Irene, looking at paragraphs 1.11 and 1.9. I do not know whether you want to ask about front-loading, because I do not know whether it has been answered or whether you wish to pursue it further.

10.50 a.m.

[196] Irene James: I think that part of it probably has. However, with the benefit of hindsight, do you think that making this announcement was the right decision? Is it realistic to undertake a project appraisal after a public announcement has been made?

[197] Mr Hall: There was an announcement by the Secretary of State and that afternoon, as it says in the report, a framework agreement was signed, but it was conditional. I think that Jeff can talk about the conditions.

[198] Mr Godfrey: The framework agreement was a non-legally binding agreement, that is, the legal agreements had to follow that. During that process, the relevant due diligence exercises were being undertaken. I am not sure that there is anything wrong in principle with an announcement that a proposal has been agreed in principle, subject to the legal documentation being provided and the relevant due diligence work being undertaken.

[199] Irene James: Does that not make it very difficult for someone to withdraw support after an announcement has been made?

[200] Mr Godfrey: It does. A very public statement that an agreement in principle has been reached attracts a great deal of attention. I think that it indicates a confidence on both sides that the deal can be secured, although, in this particular case, it ran into complications of state aid and reference to the European Commission. However, it is a process that has to be gone through. There is an expectation that the deal is capable of being delivered, and the detailed due diligence work, involving a wider number of officials, then follows on.

[201] Mr Hall: However, with the benefit of hindsight, and to directly answer your question, people listen to the headlines and the subject can be lost in the noise. I think that there is a lesson to be learned. For future announcements, I believe that it would be better practice to get the conditions resolved.

[202] Irene James: Dare I ask whether we have learned that lesson?

[203] Mr Hall: Yes.

[204] Leighton Andrews: It says in paragraph 1.9 that the Treasury was disappointed that the Welsh Office had requested its approval for the project at such a short notice—one week before the framework agreement was signed—and that the Treasury then withheld its full approval. At what stage would it have been normal for it to have been brought in? [205] Mr Shuttleworth: We contacted the Treasury late during the negotiations, when the level of support was being discussed and asked whether the UK Government and Treasury was content with our actions. The only thing that they were concerned about was the time that they had to look at the whole project, which was enormous. It started off in two distinct projects, as you know, which were then combined. They wanted to know the result of the economic efficiency test that was being undertaken at the time, and they were also questioning the value for money.

[206] Leighton Andrews: They were questioning the value for money?

[207] Mr Shuttleworth: Yes. They were questioning the amount of assistance that we had offered, and setting that against the capital investment that we were proposing and the jobs, and so on. So, those were their three questions mainly.

[208] Leighton Andrews: Paragraph 1.10 says that the Treasury had some doubts about the judgments made. Is that specifically in respect of the value for money issues?

[209] Mr Shuttleworth: It was questioning whether we needed to give that amount of support to the company to win both projects together.

[210] Leighton Andrews: But, ultimately, the Treasury signed it off?

[211] Mr Shuttleworth: Yes.

[212] Janet Davies: If we go on to look at the process—

[213] Jocelyn Davies: Before we go on to that, did the announcement that was made say, ‘this is the case if we pass the due diligence test and if the Treasury agrees’? Did the in-principle announcement say that?

[214] Mr Shuttleworth: The letter that we had on file did say that it was subject to full financial due diligence, and so on.

[215] Jocelyn Davies: However, the public announcement that was made—

[216] Mr Shuttleworth: That would have been the press announcement.

[217] Jocelyn Davies: But that would have referred to—

[218] Leighton Andrews: Do you have a copy of that for us?

[219] Mr Shuttleworth: Yes.

[220] Jocelyn Davies: If it is in the public domain, as a press notice, it should be given to us, should it not?

[221] Turning to paragraph 1.13 and so on, it is said that there was uncertainty at the time as to whether the projects would meet the EC state-aid requirements. Why did that uncertainty exist? [222] Mr Godfrey: At the time that the framework agreement was entered into, the officials dealing with it were confident that the project would not require individual notification to the commission. While this was on a grander scale than projects that they had dealt with before, they were still looking, effectively, to put together a range of different types of aid, some of which had been notified to the commission—that is, they were notified schemes. With others, they took the view that the assistance did not amount to state aid. One that I have mentioned particularly was the property development grant, which was to be provided by the WDA. At that point, the UK Government had a disagreement with the commission about what are called gap funding schemes, where the level of capital investment exceeds the market value that the building will have at the end of the process. There was a debate going on between the UK Government and the commission at that time as to whether that amounted to state aid or not. The difficulty for the project, while that debate was ongoing, was that—

[223] Jocelyn Davies: So, there was not any uncertainty; the officials, as it turned out, were wrong.

[224] Mr Godfrey: The conclusion on PDG being aid was not reached until 2001, so the debate went on for a considerable period. In order to get this particular project through, given that we needed an earlier timescale —the UK Government conceded, on a without-prejudice basis, that it would regard the PDG element of this particular scheme as aid purely for the purposes of its notification. So, without prejudice to its wider argument with the commission, it did notify the PDG elements and all the other elements to the commission as an ad hoc scheme.

[225] There were also some questions around training. There was a debate as to whether the training was of specific aid to the company or was a more general aid in terms of helping the unemployed. Some training schemes amount to state aid, while others do not. So, again, the view was that, in order to get this particular project through within an acceptable timetable and timescale, the UK Government would have to agree with the commission to treat it as an ad hoc notification, with all the elements treated as state aid.

[226] Jocelyn Davies: We are learning lessons from the past, and so would you have more certainty now, in handling bids, about exactly what the rules are?

[227] Mr Godfrey: Were a situation like that to happen now, we would certainly verify each of the elements as either being notified or requiring notification, and, if there were any doubt, we would have informal discussions through UK Representation and the commission to sort out any differences. You would not want to get into a situation of purporting to agree with a company only to find that the position may be unclear.

[228] Mr Hall: Since the establishment of the Department for Enterprise, Innovation and Networks, we have set up a state-aid unit to address the problems that Jocelyn Davies just outlined. Our practice with inward investment projects now is to involve the company in early discussions with Europe on a completely open basis.

[229] Janet Davies: Did that not happen before? [230] Mr Hall: No, and that is one of the lessons that we have learned, and it is now standard practice.

[231] Janet Davies: Mark, I understand that you are going to continue with the state-aid issue.

[232] Mark Isherwood: I refer you to paragraphs 1.15 to 1.17. The value of the LG Electronics investment notified to the commission was £96 million higher than the figures in LG’s business plan. Of this, £72 million was attributable to revised cost estimates, but £58 million of that may have been due to the double counting of building costs. How do you explain this?

11.00 a.m.

[233] Mr Hall: There was early engagement with the European Commission. The final detail of the exact LG projects had not been nailed down at that time. There was dialogue with commission officials. The information that had been provided initially from LG was updated, and the updating of those construction costs and professional fees was validated by a company called King Sturge, which was appointed by the WDA to do an independent assessment of the up-to-date value of those costs. They were then added into the equation. That explains part of it.

[234] The value of the land was also included, because it had been contributed free of charge, but the value had to be assessed, along with the site works. However, again, there is a lesson to be learned, with the £58 million, of what could be double counting of the building costs, which were for phase 2. The phase 2 information from LG talked about plant and machinery, and there is a grey area as to whether the construction costs were included in that figure provided by LG. That accounts for the possible double counting on the £58 million.

[235] Mark Isherwood: You started by saying that the final detail had not been nailed down. Would the European Commission normally expect to receive notification of figures that had not been nailed down?

[236] Mr Godfrey: Part of the problem is that it is different now. It is clear from the files that, at the time, officials, as part of the UK Government, were taking a fairly strict approach to confidentiality issues—the correspondence between the UK Government and the commission was regarded as confidential, as was the dialogue that took place with the commission. As the costs were being probed, that meant that officials were presenting further information to the commission. Therefore, as Gareth has stated, the value of the land was not included as it should have been in the total investment value, nor were off-site infrastructure works and professional fees. Officials therefore went with external consultants, engaged through the WDA, to verify to the commission’s satisfaction that these costs were costs that would have to be incurred in order to build out phase 2.

[237] However, all that dialogue took place without reference back to the company, because, I believe, of this confidentiality issue. While you can identify most of the costs as being substantiated, the difficulty comes when you get to the building costs, because it is not clear from the information that was presented to the commission about the building costs on phase 2, whether they were not already included in the plant and equipment figure, which LG itself had provided during the earlier negotiations. [238] Mark Isherwood: Paragraph 1.17 notes that Government officials state that record keeping may have been less thorough than normal, but that they were also confident that the investment figures notified to the commission were fair and accurate. How can that be, and are there any other plausible explanations for the apparent gap in the final capital costs of phase 2?

[239] Mr Godfrey: They were confident that they were fair and accurate, in the sense that they took the figure for plant and equipment as plant and equipment; they demonstrated to the commission the building cost that would have to be incurred, using consultants and professional data. Therefore, each of the elements was presented to the commission. I believe that, when we looked back at it in retrospect, there was a question mark about whether the building had been double counted. I do not believe that it has ever become clear that it was; it is just that it is not clear from what is left on the file whether the building cost was included in the plant and equipment figure that LG had given at the outset.

[240] Janet Davies: I had a request from Alun to come in at this point and then I will call Jocelyn.

[241] Alun Cairns: I want to go back to the confidentiality issue. Mr Hall highlighted a different approach in terms of the openness of negotiations with the European Commission. Can you offer a reason why there was a confidential culture at the time, bearing in mind that large inward investment projects were almost the norm at the time? They are quite unusual today, but at that time one felt that one was always hearing about some new investment of sorts.

[242] Mr Godfrey: You talk of the Welsh Office being in correspondence with the EC, but the source of the confidentiality comes from the fact that the correspondence passes through the UK’s permanent representation in Brussels, so, effectively, it is a form of diplomatic correspondence between the UK Government and the commission. That is where the idea of confidentiality comes from. Even now, correspondence which we would regard as being confidential is not disclosed. However, we would be much more flexible—even if the correspondence could not be disclosed to the company—in dealing with the data, and so on, included in the correspondence. So, that is where the confidentiality comes from. Looking at the file, a far stricter approach was applied to that than would be the case with a similar situation today.

[243] Alun Cairns: Looking at it objectively, I can see that there are pluses and minuses on both sides. On the one hand, it might be that the confidentiality, in terms of what is and is not eligible, helped the Welsh Office at the time negotiate potentially a better deal. However, on the other hand, paragraph 2.41 highlights the fact that LG Electronics might have considered legal proceedings for misrepresentation against the Assembly Government, as a successor of the Welsh Office, on the basis that it would not have proceeded with the investment had it been aware of the true position of state aid. So, it cuts both ways—you may well be able to squeeze out a better deal, but, on the other hand, it says that the confidentiality could have been used against it legally. [244] Mr Godfrey: Going back to the recommendations in the report and the practice, as it currently stands, we would accept that there is a need to be as open as possible with companies when negotiating projects of this nature. As Gareth mentioned, in more recent times, we have even looked to include the company as part of the dialogue with EC officials. At the time, because it was formal correspondence between the UK Government and the EC, the adopted view, which was a matter of fact, was that the officials felt that they could not disclose the contents of that correspondence to the company. That presented a problem further down the line, when it came to the recovery process, by virtue of the fact that the company was evidently unaware of the substance of that correspondence. Against that, the company was aware of the higher figure when the EC published its notice of the approval. So, it would see the figure at that stage, namely before the agreement was signed. However, we recognise that such a difficulty would be avoided today, by engaging the company in a dialogue about what the cost of its actual development would be.

[245] Mr Hall: Last summer, an inward investor was very interested in the Hynix building. That foreign-owned company accompanied officials to the EC for open negotiations with its officials. That was done on a totally transparent basis—an approach that was commended by the director general. So, lessons were definitely learned in that regard.

[246] Janet Davies: Thank you. Mark, have you finished asking all your questions?

[247] Mark Isherwood: I think that we have covered most of the subsequent questions. I just want to ask why the revised costs were not incorporated in the RSA agreement.

[248] Mr Hall: Again, looking through all of the papers, that can only be put down to administrative oversight. The Welsh Industrial Development Advisory Board, which considers all applications for RSA, was notified of the increased figure, but that was not translated into a revised offer letter.

11.10 a.m.

[249] Jocelyn Davies: The report says that the audit trail was deficient, that you do not have sufficient evidence to substantiate the investment figures, and that there is no evidence that the changes were ever agreed or discussed with the company. We have the RSA agreement, which has the old figures, therefore are you confident that the figures submitted to the European Commission were correct? Is it possible that they were artificially inflated so that there would be no breach of the state-aid rules?

[250] Mr Hall: They were not artificially inflated. The figures were discussed with the company, and there is no evidence or documentation supporting that.

[251] Jocelyn Davies: How do we know what happened, then?

[252] Mr Hall: This is what we have been told by our officials who were involved—

[253] Jocelyn Davies: Is there evidence on the file that there was a discussion?

[254] Mr Hall: No, there is not. [255] Jocelyn Davies: So you are prepared to come here and say that that happened, or did not happen, even though there is no evidence on the file?

[256] Mr Godfrey: The figures that were presented to the commission were not, so far as we can see, discussed with the company. Certainly, when we came to the negotiations for recovery, the company was very firm in the view that it had not been engaged in discussing those figures. The figures are not artificial, in the sense that they were the product of work that was undertaken within the WDA using external consultants, property surveyors, and so on. So, the figures presented to the commission had been verified. The consultants attended meetings with commission officials, but it was put to the commission on the basis that this was inevitably what you would have to incur in order to construct a building of that nature. To go back to the very clear example: land was being gifted to the company that had a value for state-aid purposes, but it was not included on the other side; state aid is a proportion of the total investment, but it was not included in the £424 million that was in the RSA agreement. It should have been, and the cost of off-site infrastructure work should also have been included. The cost of the building was calculated, and the professional fees associated with that were calculated, so everything was demonstrated to the commission’s satisfaction—it is not artificial in that sense—but the figures were derived from the WDA’s consultants rather than directly from the company itself.

[257] Jocelyn Davies: Yes, but the auditor general’s report, which you have agreed, says that you do not have sufficient evidence to substantiate the investment figures. There is no evidence at all that this was discussed or agreed with the company, and, in fact, the agreement with which they were involved contained the old figures. That leaves you open to the charge that these figures, although you say that you can substantiate them, just mean that we did not breach state-aid rules. Looking to the future—because that is what this committee is all about—could this happen again?

[258] Mr Hall: No, not in the circumstances here.

[259] Jocelyn Davies: So you would always discuss with the company, you would always have evidence if you did, and there would not be an oversight when you were drawing up the agreement, with someone not putting the new figures in, and so on.

[260] Mr Hall: This report has highlighted major weaknesses that we have now taken into account in the design of our operation. First of all, RSA and PDG are no longer separate, in two different organisations; they are part of one organisation. I have further redesigned the organisation so that it is wholly within the domain of Sharon’s department, Invest Wales, and we will be using this document as the reference document for how we proceed with projects like this in the future. This is not seen as some audit report than goes straight onto the shelf; it is very much a working document that provides a template and best working practices, which will be incorporated in our processes.

[261] Jocelyn Davies: I hope that none of the audit reports simply go onto the shelf.

[262] Mr Hall: That is the reassurance that I give you. [263] Janet Davies: I can also assure you, as Chair of the committee, that the Auditor General for Wales follows these things up.

[264] Leighton Andrews: I want to finally nail down this point. You said, as does the Auditor General for Wales’s report, that officials assured you that they had had conversations with the company, but Mr Godfrey, I think, said that the company said that it had not had those conversations. However, there is this point about what was understood about the figures in April 1997 when the European Commission press release came out. Essentially, that identified that the aid-intensity figures would have been 29 per cent in phase 1 and 22 per cent over both phases and, therefore, above the 20 per cent limit. So, in April 1997, the Welsh Office should have been clear that this project was likely to be in breach of state aid on that basis.

[265] Mr Godfrey: In April 1997, the European Commission’s public notice would have referred to the higher figure. On the difficulties that we experienced later, with LG claiming to be unaware of the figures, that was the public source of information that it would have had available to it, and the Welsh Office officials referred the company to that press notice, so it certainly had access to the higher figure, if not to how it had been made up. So, at the point that the commission gave its approval, the Welsh Office officials were satisfied that the state-aid limits would be complied with on that level of investment, which they had demonstrated to the commission in meetings and in correspondence, and that the aid intensity was compliant.

[266] To pick up one point that was raised about why the RSA agreement was not updated, which has not been answered, as Gareth has said, that appears to have been an oversight and this comes back to the chronology that the draft agreement had been prepared in the previous October. While the negotiations went on and amendments were made to it, the description of the development in the schedule, which is where those figures are contained, was not updated. Those figures were not material to the operation of the RSA agreement, in the sense that they did not need to change in order for the agreement to operate effectively, but they did leave a form of record of a lower level of investment being described than was intended to be the case by April the following year, based upon the evidence that the Welsh Office officials had taken to the commission.

[267] Leighton Andrews: What that meant, then, was that the figures that were contained in that annex put the agreement in breach of state aid in April 1997.

[268] Mr Godfrey: They would not mean that the agreement would be in breach of state aid. The agreement, effectively, promised payments by reference to investment levels and jobs, covering phase 1 and phase 2 of LG Electronics, so the figures themselves would not lead to a breach of state-aid rules. In any event, the agreement included a provision that talked about withholding and recovering funds if the state-aid limit were breached, which is, effectively, the clause that we used to recover the payments that we recovered.

[269] Leighton Andrews: I can see the importance for what happened later. The final RSA agreement did not reflect the cost changes; it included the figures originally agreed in the LG business plan nine months earlier.

[270] Mr Godfrey: Yes. [271] Leighton Andrews: The commission’s press release published figures in relation to what was allowable, essentially, as I understand it, and, on that basis, the aid-intensity figures would have been over 20 per cent.

[272] Mr Godfrey: The RSA grant did not increase as a result, in terms of the additional moneys that were being counted by the commission—

[273] Leighton Andrews: But what the Auditor General says is that the company would have had to invest more than it had originally included in its business plan to stay within the state-aid limit.

[274] Mr Godfrey: Yes, but remember that that was overall and that different forms of assistance were being given. Some were in the form of land and works; others were in the form of training grants and the property development grant. So, it did not make the RSA agreement invalid or bound to contravene state-aid limits; what you had was a situation in which, if the company did not invest, overall, the full £520 million that had been presented to the commission, there would be an overpayment of state aid. However, it is not the RSA agreement that committed them to that level of investment. It was not an operable part of it; it was a description of the development, which, by that stage, should have been updated.

11.20 a.m.

[275] Mr Shuttleworth: The RSA agreement committed the company to investing £420 million. Jeff is referring to the additional costs relating to the project—like the land, which was £14 million, like training aid, and like the infrastructure costs, which were part of the cost of the whole development and which were subsequently added on. It was not its commitment, but the total commitment of the entire project.

[276] Leighton Andrews: Was there a document, apart from the RSA agreement, which said what would be legal for Wales to invest in this, given a certain level of company support—other than what went to the European Commission?

[277] Mr Godfrey: One of the points that comes out of the audit report is the absence of any overarching document covering all of the different aid streams from the different bodies that were providing assistance, and the absence in some of the other agreements to any reference to state-aid recovery. So, the fact that the figures had not been updated was unfortunate, but it did not invalidate the RSA agreement itself. However, you lost the overarching perspective, which is part of the audit recommendation, that something needed to capture the totality of the investment and the totality of the aid being given in relation to it.

[278] Jocelyn Davies: May I come back on something that Mr Godfrey said about the company having a copy of the European press release?

[279] Janet Davies: Briefly, Jocelyn.

[280] Jocelyn Davies: It says in the report that it did not question the figures at the time. That is hardly evidence that it agreed with that. It did not agree the press release. [281] Mr Godfrey: I am not trying to suggest that. It would have been aware of the total investment figure. I accept that, because of the way in which the negotiations were conducted and the confidentiality attached to it, it did not know how that figure had been made up and what had been presented to the commission.

[282] Janet Davies: I think that you would expect it to ask questions at that point.

[283] Alun Cairns: Or would it not care what was being said, as long as it got its money?

[284] Jocelyn Davies: That is not the way to do business, is it?

[285] Janet Davies: Mr Hall, do you not think that a large international company would be aware of the need to keep to state-aid rules, and would ensure that it knew what it was committing itself to?

[286] Mr Hall: I think that it was not operating in isolation; it had some high-priced lawyers, accountants and advisers—both international and London-based—at every turn.

[287] Jocelyn Davies: However, it would already have built up this long-term relationship and trusted you, as you explained to us right at the beginning.

[288] Mr Godfrey: I have one point to add onto that. There is a clear obligation in European law on companies that receive assistance to ensure that the assistance is compliant. In terms of the company’s due diligence, there is a clear obligation, because, ultimately, if there is a state-aid overpayment, it is the company that would bear the consequence. Generally speaking, the commission would not be too concerned about what the member state may or may not have been doing in negotiations to bring the state-aid position back into compliance; it is the company that would have to repay the moneys. So, there is a clear obligation on any company that receives public assistance to ensure, from its own perspective, that it complies with state-aid law.

[289] Alun Cairns: As I have previously highlighted, in paragraph 2.41, it then used its naivety—not knowing what you have just said that it should know—as a reason not to pay it, or to take action against the Assembly Government.

[290] Janet Davies: I do not think that this is particularly fruitful.

[291] Jocelyn Davies: Especially if it does not have an accounting officer to come in front of us for us to question.

[292] Janet Davies: I do not think that we can pursue this any further. We will break for coffee now. Will you come back before 11.40 a.m.? I think that we will have to go on slightly longer today.

Gohiriwyd y cyfarfod rhwng 11.25 a.m. a 11.41 a.m. The meeting adjourned between 11.25 a.m. and 11.41 a.m. Cymorth ar gyfer Prosiect LG, Casnewydd: Parhad Protecting Public Money in the LG Projects, Newport: Continued

[293] Janet Davies: I thank everyone for getting back on time. We will go on to look at the front- loading of the aid package in more detail. Alun, I believe that you wish to take up this issue.

[294] Alun Cairns: Sorry, I missed your introduction.

[295] Janet Davies: If you have stopped talking, we will go on with the next part of the questioning to look at the front-loading of the aid package in detail.

[296] Alun Cairns: Gosh, have we got that far already? Right. I wish to refer to paragraph 1.21, which focuses on the risks of front-loading, which we touched on earlier. Were the risks created by the front-loading of the aid package, as described in paragraph 1.21, identified and assessed by the Welsh authorities when the projects were being appraised?

[297] Mr Shuttleworth: Yes, all of these areas were looked at. What we do differently now is that we have a complete and detailed risk assessment of all aspects of the projects. We cannot find evidence from the files that this was done in a formal way; there are notes on the file about the need to address the front-loading, and so on, but it is not strictly laid down in a proper risk assessment, as we would look to see. However, the aspects were thought about and addressed.

[298] Alun Cairns: Bearing in mind the relatively large numbers of inward investment projects that have taken place in the previous five or 10 years, some projects have been lost where companies have come for a short period of time and moved out, for whatever reason. Was this as a result of a lack of risk assessment in the formal process? I am paraphrasing your words, but was that normal in the other sorts of schemes that were handled at the time?

[299] Mr Shuttleworth: When you look back over the files, you see that the projects were dealt with individually and there was no formal process, so each project had assessed these issues. For example, one of the issues that came out of the discussions was about getting the parental guarantee, so we knew that whatever would happen to the projects, we had a commitment from Seoul that, in the event of failure or non-completion of all the conditions, we would go for the full recovery of the money, as we subsequently did. That came out of the risk assessment of that particular company. So, it was done on more of a company-by-company basis rather than having a formal procedure for every single company. [300] Alun Cairns: The strongest criticism in the report probably relates to the front-loading and the risk that the public purse was exposed to—which seems blindingly obvious if all your money goes into it in the early years or in a very short period, and there are no strict conditions stage after stage, although there was a promise of a possible or probable phase 2, whatever interpretation we want to give to the negotiations at the time. Mr Hall, are you surprised that there was no formal risk assessment, bearing in mind that, as we said at the outset, it was the biggest inward investment project to Europe? Yes, we were delighted, but every big project brings risks. Were you not surprised by that, bearing in mind that, to a layman such as me, the risk jumps out at you if we are giving all our money in year 1 and year 2? Although there was the possibility that we could get a lot more wealth down the road, we still gave all our money at the first stage, thinking, ‘If it does not happen, we may be able to claw some of it back, if we are lucky’.

[301] Mr Hall: I fully agree with the report and with the recommendations that it has highlighted. If we were doing this project now, I would go back to what Leighton Andrews said before the break. There would be an overarching agreement, tied into the different grants, there would be an overarching legal agreement that tied into and dealt with the money as it went out, and there would be a Gantt chart that would map how the money went out as well. There would be risk assessments alongside each of those major milestones. That is how we would do it now and that is how it would be incorporated. I agree with you that that is the big lesson learned from this experience.

[302] Alun Cairns: That is great. So, we have a reassurance that this would not happen now, as you have introduced changes in the department.

[303] Mr Hall: Yes; within the last 12 months.

[304] Alun Cairns: However, we need to try to assess whether the handling of this case was the norm for the time or whether it was different because of the scale of it and maybe because of the desire to win the project. Did that override any of the common-sense judgments that needed to be made at the time? I am trying to assess whether that was how it was done because that was standard practice and we may have improved since then, or whether our desire to win this so strong that common sense basically went out of the window.

[305] Mr Hall: Common sense was applied throughout, as explained by Ian Shuttleworth. On the question of scale, at that time, the authorities had not dealt with a project of that scale or sheer quantum. The lesson that I have learned is that it is not just a matter of scaling up previous practice—you must do new and bigger things. That gets to the heart of this report and we have now taken that on board, 100 per cent.

[306] Alun Cairns: That is useful; thank you. When you talked about how some risks were identified, but maybe not in a formal risk assessment, Mr Shuttleworth, how were those risks managed as the project developed and evolved? [307] Mr Shuttleworth: Taking it point by point, on RSA, the norm, as you know, is that there is an offer letter that includes milestones. The grant is paid out during the life of a project, based on capital expenditure and job creation. That was the case with this project. The risks were discussed and adjustments were made for the second phase, which we have already discussed, but there was still a commitment, to which the company signed up. So, in the RSA offer letter, the second phase, the capital expenditure and the jobs are present. It was committed to doing that, legally, so we knew that—

[308] Alun Cairns: That risk, in its interpretation, may have been lower than the risk that was spent on the property development element. How was that risk managed?

[309] Mr Shuttleworth: The property development risks included milestones, on capital expenditure more than anything else, namely property development. So, as Gareth Hall said earlier, in the property development grant scheme, most of it would have been paid out in the early years on the construction of the facility. In addition, in the front part, a lot of the spend identified in the report relates to the early-phase stuff, such as land and the infrastructure that had to be put in place, which was considerable, as we know from when we drive around the area. When I say infrastructure, I include water treatment plants and electricity supplies; we built one of the biggest electricity substations in the area, of around 13 MW, and we moved power lines. All of this was in the early part, when we and the company were incurring expenditure. That is why there was a lot of capital expenditure up front. We took the risk of aiding the company in the early stage, when a huge capital investment was going on, for the benefit of getting the rest of the capital expenditure and the jobs as the project progressed over three to five years.

[310] Alun Cairns: Moving on to paragraph 1.22 and figure 4, in particular, is it acceptable that LG Electronics and Hynix were able to exceed the planned aid intensity levels by large margins, which were well above the state-aid limits of LG Electronics, and to maintain them at that level for several years without being obliged to return the excess or to pay interest on it?

11.50 a.m.

[311] Mr Godfrey: Everyone is looking at me. Front-loading is not unusual in schemes of this nature, for the reasons that Ian gave. What is perhaps unusual in this case is the duration of the front-loading, and the fact that moneys that were attributable to phase 2 were paid out during phase 1. In terms of current practice, while front-loading may occur, there would be stages in the development that would attempt to bring the ratio back into its proper balance. So, even if the aid level is exceeded for a period, you would look to bring it back into proportion, as distinct from this particular instance where you ended up with very large public aid at the outset, which would only be brought back into balance as the project was completed. So, I would be very surprised if that happened now, or would be permitted to happen, with a major project. [312] Mr Hall: Looking at the graphs in figure 4, we have explained front-loading—you go above the line, but, ultimately, you want to end up bang on the line. The risk assessment, which was not included in this project, related to something happening that stopped it on the journey along that graph. That is what it all boils down to. There are recommendations about what we should be doing. Looking back, with the benefit of hindsight, a mix of RSA and PDG were used to pursue this project, and the evidence in the report quite rightly says that those grants were managed on an individual basis. Again, the learning experience from this, and what we now do, is to look at this in totality, so that you manage across both grants and do not see them in isolation. We are looking, over the next 12 months, to streamline things and to bring our capital grants together into one flexible grant, with one set of criteria, so that you can monitor it singly. So, again, that is one thing that we are looking to do in order to build on the lessons learned from this report and the experience with LG.

[313] Alun Cairns: I want to go back to the front-loading, because it is key to the whole report. Was there a habit of front-loading at that time, and what was the culture of front-loading? We appreciate the response that you have given, in that, if you frontload, you try to recover it over a gradual period of time, and maybe take into account the risks that Mr Hall highlighted. What was the experience of front-loading at that time? I repeat that there was much more inward investment and that time, so it was almost a habit.

[314] Mr Hall: Not on this scale.

[315] Mr Shuttleworth: No, I would not like to use the word habit, because it was done if a project required it, and it would be managed in a sensible way. So, it was not habit; it was only done in rare circumstances when the project required it. The scale and length of it was rather unusual, as Jeff has already identified. None of us at the time wanted to start recovery procedures too early, because we were having dialogue with LGS and LGE to ask how and when they would complete the project, because it was important that they did. We wanted to see the project completed exactly as we had set out to do so. Therefore, you gave the companies time and you brought new safeguards in, which were discussed later, but it was always with the view of completing the project exactly as we had set out. That would have covered the state-aid issue, because it would have come back into line as we mentioned. More importantly, we would have had our dream of securing the 6,000 jobs that we always wanted to see. So, being too proactive in rattling the cages, and trying to start recovery too early, would have been detrimental to the overall project. So, we tried to work with the company to get it to complete. We completed phase 1 and, even at that stage, the company was committed to phase 2. We dreamed that we would have it, because we went out and bought the extra land for phase 2, as you know, which is there for development today. So, there was always that desire to allow the company to complete. [316] Alun Cairns: Okay, thank you, Mr Shuttleworth. I want to go back to Mr Hall. I am encouraged by the answer that you gave about the changes put in place to prevent the same risks of front-loading. However, what is the habit of front-loading now? You have said that there have been changes, but does it still happen? What about large-scale inward investment projects? I hesitate to identify obvious choices, because I am not sure what the rules about commercial confidentiality are, but if a large-scale inward investment project were to come to Wales now, or a large-scale development that required RSA, what is our habit in terms of front-loading?

[317] Mr Hall: In more recent cases, we have learnt from this experience, and part of the instructions and guidelines for RSA identifies the need to conduct risk assessments against front- loading.

[318] Mr Shuttleworth: Clearly, there are some projects for which it would be helpful and useful. The other thing that I suppose we should have mentioned is that, with RSA and property development grant, as you know, the companies themselves were making huge investments at the time. It was not that we were paying ahead of what they were paying, like when RSA pays months later. They would have to have expended the money themselves. They were, therefore, expending hundreds of millions of pounds on construction, and we were, if you like, reimbursing them by a relatively small amount, while keeping an eye on the state-aid limits. Today, we treat each case individually, and we do it now if it is required, if the risk assessment is made and formally put on the files, and if the conditions exactly reflect what the front-loading would imply for us.

[319] Mr Godfrey: The RSA guidelines make reference to front-loading. These are guidelines that have been seen by the commission. So, it is not unusual in principle to have front-loading. To take an obvious example, if you were donating land for a building to be built on it, at the point of donation, it is 100 per cent public assistance. Front-loading is recognised as something that happens, inevitably so on occasions, but what was unusual with this particular project was the duration of the front-loading and the fact that you had to get to the end of phase 2 before it was brought back into ratio.

[320] To pick up on the other major projects that may have been considered, the experience with the one that Gareth referred to last year was that, in its presentation, an investment timetable was put before the commission. If there were any element of front-loading, at different stages, you would work to bring it back into balance as the development goes on—you would not have a high excess that would be brought back over a long time; you would go ahead, and then bring it back, and then go ahead again, and bring it back. So, your timetable is divided into sequences.

[321] Alun Cairns: As a comment to you, the committee or the auditor general, I think that there are two principles here. The first is that it is a must to stay within the European Commission rules. The second is the principle of protecting taxpayers’ money here in Wales. We do not want to focus just on commission rules and whether it finds it acceptable to frontload and then bring it back into play. We also want to protect Welsh taxpayers’ money that could be used for other projects if it does go wrong, as this one sadly did. [322] Mr Hall: The bottom line, Mr Cairns, is that if public bodies are going to frontload their support, you should have an agreement and a risk assessment for the lifetime of the project, so that there is back-loading in increased proportion by the investor. The two should go together.

[323] Jocelyn Davies: As a matter for clarification, I think that you said that there is no evidence of risk assessment on the files—

[324] Mr Shuttleworth: What I said was that there was no formal risk assessment form, which we now have. There is evidence that things were discussed during negotiations.

[325] Jocelyn Davies: There is evidence, or a note on the file, that says that there should be risk assessment and so on. Just for the record, then, no proper risk assessment was done, so the risks identified, which you describe in great detail, were not managed, were they?

[326] Mr Godfrey: I am not sure that it is the case that the risk assessment was not done; I do not think that it is recorded in the way that we would expect it to be recorded now. I think that the risk was identified, and protecting the public purse was ultimately by reference to the clause in the RSA agreement that provided for the recovery of any overpayment of state aid. The risk of front-loading was mitigated by the presence of that clause. In practical terms, of course, that leaves you with the difficulty that, if the development, going over a long period, does not materialise to the extent envisaged, you are left in a recovery situation, with all the difficulties that that brings. As a matter of current practice, we would not want to get into a situation like that again. However, at the time that this particular deal was negotiated, there was an awareness of that risk, and the individuals involved point to the continuing relevance of the state-aid overpayment clause as being the way in which that risk was mitigated.

12.00 p.m.

[327] Mr Shuttleworth: As I said earlier, many of these issues were discussed; you can see from the file that the evidence was there—the parental guarantee—and a condition came out of that risk assessment, whereby we locked in the parent company. Also, in the RSA offer letter, there is a string of conditions about how the project would be funded. It was up to the company to invest in equity, loans, and substantial support into the company, and those were monitored as each payment stage was made.

[328] Alun Cairns: Did WIDAB offer a view on the risks?

[329] Mr Shuttleworth: We took the case to WIDAB.

[330] Alun Cairns: Yes, I know that.

[331] Mr Shuttleworth: The whole area was covered. The other risks that we were concerned about, which WIDAB identified in these papers, were the products and the market—even those were identified. Therefore, every area of the project was discussed at the board.

[332] Jocelyn Davies: Can anyone tell me what WIDAB is? [333] Alun Cairns: It is the Welsh Industrial Development Advisory Board.

[334] Janet Davies: We will move on to recovery provisions now; you are first, Leighton.

[335] Leighton Andrews: We have covered some of this, so I will be brief. You have already accepted, I think, that having a single, overarching agreement would have been wise. I take it that you also accept the auditor general’s conclusion that recovery provisions could have been stronger in some respects.

[336] Mr Hall: Yes.

[337] Leighton Andrews: Okay. Was it appropriate not to include any recovery provisions for land and site infrastructure?

[338] Mr Hall: Again, you have to have a full appreciation of the scale of this project. There is a difference between making sites available to investors. Many sites on industrial estates are prepared, with all the services laid on. This was, to all intents and purposes, a greenfield site. There was substantial off-site infrastructure—laying on electricity, water and utilities, and we put in a dual carriageway, which was part of the PDR. The thinking at the time, which I can fully understand, was that that was a cost, not to the LG projects in particular, but one that would have to have been borne by the authorities to create business space at the Imperial park site.

[339] Leighton Andrews: Do you accept that it would have been easier to recover money from the companies had the recovery provisions been stronger?

[340] Mr Hall: Yes, and that is a recommendation in the report.

[341] Mr Godfrey: On the land, there was a provision that, if any part of the land remained undeveloped by 2005, there was an obligation to return it to the public sector.

[342] Mr Shuttleworth: The other thing is that we did not have recovery clauses, for obvious reasons, on the training aid. Our view on that then—and, presumably, now—is that, once you invest in training people, even if the project fails, those people would be upskilled, and so on, and we could utilise them in any other business that we had around. Training was a considerable expenditure on the LG side, in particularl, and one would not have got that back from the company, because it will have spent an equal amount, if not twice as much, on training the operators, and our aid was based on that. Therefore, there were quite a few elements where we got the benefit back, if you like—the infrastructure that we have today—and, therefore, recovery did not cover those areas.

[343] Leighton Andrews: Right.

[344] Janet Davies: Thank you, Leighton. We will move on now to part 2 of the report. Irene, are you taking up the first part of this?

[345] Irene James: Yes, I understand that I am. [346] Paragraphs 2.2 to 2.5 of the report state that the provision of the aid package, and associated support for the projects, was generally well managed. What were the main reasons for the successful aspects of the project delivery?

[347] Mr Hall: There was a history among the Welsh authorities of good project management. We were drawing on experience from the RSA team. The people in the WDA very much welcome this acknowledgement—this is the positive side. However, at the same time, the weaknesses have been highlighted, and this is a message to us in the EIN department not to rest on our laurels and to take on board these recommendations, bring in this good practice, build on it and eliminate those weaknesses. So, ultimately, we are looking for the new whole being greater than the sum of the parts—some were good and some were not so good. We need all of them to be at the same level.

[348] Irene James: That moves me on to my next question, on inadequate monitoring of the state- aid position. Why was the state aid not monitored given that LG was such a large and important project?

[349] Mr Hall: I think that we have answered that question. We were looking at it in its component parts when it would have been far better to have looked at it as a whole and, as the aid was given and the investment was made, to have done those risk assessments and followed it along the timeline right to completion. I am sure that Ian can add to that.

[350] Mr Shuttleworth: Gareth is absolutely right. There were many constituent parts, because there were different organisations such as the Welsh Development Agency and the Assembly Government, or the Welsh Office at the time. We, for example, looked after the RSA side. Subsequent to that and following lessons learned during the process—the names go back in history now—Invest Wales today takes full responsibility for state aids to all companies. That is covered, for example, in an application form, in which we ask companies to tell us what other financial assistance they get from any other public authority, even local authorities. When companies make an application for the money, we also go through that with them in the claim form. So, at each stage of the payment, we can keep a track of what they have spent and what aid they have received and we can ensure, at each step, that the state aids are not breached or that they are managed. Going back to the original thinking, in some instances there would be a front-loading. For example, a company would be in breach of state aids, but that is part of the risk assessment undertaken and we know that, over time, it would come back in line and that is an important question that we ask the company at the time, namely whether it is still on track to invest or create the jobs during the timescale and so on.

[351] Irene James: So, that system is ongoing and you will use it in future.

[352] Mr Shuttleworth: This happened many years ago, to be fair. During that process, we took responsibility for the management of state aids, whereas previously, even under the administrations, each area would be looking at its own patch and never pulling it together.

[353] Janet Davies: Thank you, Irene. Leighton is next, on initiating recovery action. [354] Leighton Andrews: The box on page 30 describes the lapse in communication between the WDA and the Assembly Government in respect of the legal commitment that the WDA made to Hynix on the aid package. Why did Assembly officials only seek advice on this after the WDA had entered the legal charge?

[355] Mr Godfrey: Advice was given informally that the commission would need to be notified of the change. The Assembly was not directly involved in negotiations that the WDA undertook with Hynix, because no RSA had been paid. However, those negotiations were going on at the same time as we were obtaining counsel’s advice on various aspects of the LG Electronics project. Therefore, we raised a point on the project timetable and by when the project timetable came to an end. The original decision letter from the commission included a timetable for investment that ran through to 2001, but it also included a long-stop date, which was the return of the undeveloped land at the end of 2005. So, different views were being formed during this period on the flexibility that was available to reconfigure when investments had to be made. The WDA had formed a view—and it was legally advised at the time—that the investment timetable could run to the end of 2005. During that period, we formed the view—based on having probed the LGE aspect of the deal—that the investment timetable came to 2001, and if you were going beyond that, then you had to consider further notification to the commission as a material alteration of the approved scheme. The two things came together, but not in sufficient time for the WDA not to have entered into that agreement.

12.10 p.m.

[356] The other aspect of the agreement that is slightly unusual is that the WDA undertook to procure the Assembly change to the RSA agreement, which was not strictly within its hands to do so; that is, it required a separate decision from the Assembly, and we felt that we could not make that decision without prior notification and agreement from the commission.

[357] Leighton Andrews: The auditor general has a slightly different emphasis, which is that the officials thought that the commission was unlikely to consider changes to be material.

[358] Mr Godfrey: That was because of the presence of the 2005 date in the original approval letter from the commission—it talked about what happened if parts of the land were undeveloped at the end of that year, and I think that that led to a view that the approved notification extended to a project that could last until 2005.

[359] Leighton Andrews: Here you have a situation where WDA officials are, effectively, making legal commitments that they cannot deliver, and which can only be delivered by the Assembly. Mr Hall, presumably, given the merger of the WDA and the Assembly Government, that could not happen again.

[360] Mr Hall: It could not happen again; it is now a single organisation, with single legal advice, so it could not happen again.

[361] Leighton Andrews: Okay, that is helpful. Did this lapse in communication have an impact on the ability of the different Welsh bodies to recover the funds as quickly as possible? [362] Mr Godfrey: It raised a question mark over the validity of the legal charge, because although Hynix ultimately did not comply with the milestones that had been set, it became open to Hynix to claim that the WDA had failed to honour its part of the bargain, namely to secure the amendment of the RSA agreement within the particular timescale. So, the legal charge created a difficultly, but, over time, it did not materially affect the settlement that was ultimately made, because the semiconductor market did not recover and Hynix was unable to make any further investment. There was also the original property development grant under which the funds had been paid, and there was still, based on the legal advice that the WDA took, an enforcement mechanism available within the legal charge, which was effectively to appoint a receiver, or to go into possession of the land. It was felt that that could be pursued without the potential impediment of the WDA’s obligation getting in the way. However, the negotiations, in a sense, overtook the legal charge, because, ultimately, the land was transferred back to the Welsh authorities.

[363] Leighton Andrews: However, if Hynix had decided to pursue this in a different way—shall we say, rather more robustly—and it had stood its ground, it would have been more difficult, would it not?

[364] Mr Godfrey: It created a difficulty, and it would have been better if it had not. The legal advice that the WDA took after the problem had come to light looked at the two enforcement mechanisms that were available to the WDA, and felt that one had much a lower risk of counter- claim than the other. So, it potentially affected one of the routes of enforcement, but not both.

[365] Leighton Andrews: It took, at the end of the day, six years between the suspension of the LG semiconductor project and the final settlement agreement with Hynix in 2005. Can you honestly say that the Welsh bodies acted as speedily as they should have done?

[366] Mr Godfrey: The original sale and purchase agreement and property development grant had a longer timetable from the outset, from my recollection of them. There was also the question that the Welsh Development Agency did quite a lot of legal work in relation to whether LGS Hyundai was in breach of the property development grant. Before the legal charge was entered into, there had been a long-running dialogue between the WDA and the company as to whether the agreements had been breached, because the development had started but it had effectively been suspended once the building was provided. Once the legal charge was executed, there was a lot of activity—I was not directly involved in this aspect—around looking for a buyer for the building. Clearly, there was a common interest on the part of Hynix, the WDA and the Assembly in terms of a buyer being found who would use the building for its intended purpose. That was the objective that everyone ultimately wanted to achieve - to see the development carried out. So, that affected the timescale.

[367] Leighton Andrews: Paragraph 2.17(b) refers to legal proceedings that might have needed to have taken place in Korea. I want to be clear about this. Presumably the legal agreements that were made with the company would have stated under which system of law they were to be interpreted, whether that was UK and European law or—

[368] Mr Godfrey: The agreements, as far as I can recall, were all entered into under England and Wales law. I was not directly— [369] Mr Shuttleworth: The RSA offer letter says that it would be under UK law.

[370] Mr Godfrey: I was not involved in the WDA-Hynix negotiations but, certainly as part of the LGE negotiations, we got to a point to do with the parental guarantee, namely that if you were unable to secure recovery from the companies that were based in Wales and had to go against the parent companies, the Korean courts would potentially have to be engaged.

[371] Mr Shuttleworth: The complication was that, during this period, as we can see from this report, the ownership changed. Due to the collapse of the chaebol, we started off with LG, then it was Hyundai, then it was Hynix, so different organisations were came into play. Largely, it was UK based, but the parental guarantee had been exercised in Korea.

[372] Alun Cairns: Part of what I wanted to ask about has been covered. I just wanted to underline the fact that the absence of specific milestones, which we talked about earlier, hampered effective monitoring and created the risk of drift. Is that fair to say?

[373] Mr Hall: Yes.

[374] Alun Cairns: Okay. Is it not the case that the LGE project was drifting once payments were suspended in 1999 and that the Welsh authorities had no clear idea of what to do when phase 1 failed to be completed as expected and to be established?

[375] Mr Hall: LGE went into the joint venture with Philips. Philips, a multinational company, would not have entered into that agreement without some sort of commitment and understanding of the market potential and there was confidence at the time that there would be an ongoing market for the cathode ray tubes and that the monitor assembly would ultimately incorporate flat-screen technology. We were monitoring all the time. This goes back to the points that Ian Shuttleworth made, namely that there was a judgment to be made about taking recovery action versus the question of whether we could deliver the ultimate, namely jobs. By taking recovery action early, the potential to create those jobs would be cut off.

[376] Alun Cairns: Absolutely. There is a tension, but the absence of those benchmarks would have created a drift and, arguably, that happened or did not happen, and the judgment had to be made at the time. However, what would have happened if LG Philips had not closed but had simply reduced in scale?

[377] Mr Shuttleworth: Under the RSA agreement, for example, we would still have had a recovery provision, because it would have been in breach of the state-aid limits and also the agreements that we had reached on cost per job, for example, which was a UK guideline rather than European legislation. That was UK based, but it was still a key part of our monitoring procedures.

12.20 p.m.

[378] Alun Cairns: The cost-per-job limit in RSA was lifted in the interim, was it not? It is not in the report, but this was the case. [379] Mr Shuttleworth: Yes, it was, when the Assembly was established.

[380] Alun Cairns: At this stage, the agreement depended on the previous one.

[381] Mr Shuttleworth: The issue that we concentrate on, in relation to monitoring, is value for money. We are looking to create the maximum number of jobs for the lowest cost. So, when we monitor projects, even though you could argue that there is no cost per job, it is part of our appraisal process today, and it is an important feature of the level of assistance and aid that we give. We monitor that; so much so that we monitor not only the number of jobs created, but the salaries and the—

[382] Mr Hall: It is a benchmark by which you continually monitor.

[383] Mr Shuttleworth: Yes, absolutely.

[384] Alun Cairns: However, the point is that, at the time, if it had reduced its scale, it would have been difficult to recover what the public purse would have lost.

[385] Mr Godfrey: When the LG Philips joint venture was announced, we restructured the RSA agreement so that it could recognise further investment by the joint venture as eligible under the notified scheme. That information went to the commission. While the obligation to repay overpayments of state aid remained with LG, we wanted to ensure that any investment that occurred under the joint venture was recognised. The aim of that was to try to bring the scheme back into compliance. That is, we were looking for further investment from the joint venture rather than going for the recovery option. So, to answer the question, if it had simply started to scale back—and ultimately, of course, it closed—the state-aid problem would not have gone away. There was a point at which we would have had to initiate some form of recovery proceedings. If we did not do that, the commission would have insisted that we did.

[386] Alun Cairns: Would that have been the case if phase 1 was completed satisfactorily but phase 2 did not materialise?

[387] Mr Godfrey: Yes.

[388] Alun Cairns: Was the company aware of that all along, despite the contents of the paragraph that I highlighted earlier?

[389] Mr Godfrey: I am not sure whether it was aware of that all along. By the time the joint venture came along, there was disagreement about the extent of the overpayment. However, our position at that point was to push to try to get an investment timetable out of them so that further capital investment could be incurred and the state-aid overpayment could be reduced as a consequence.

[390] Mick Bates: I would like to move on to paragraphs 2.29 to 2.32. In paragraph 2.30, there are various valuations of the land and property. Why do the valuations vary so much? [391] Mr Hall: It is because of the sheer scale and the specialist nature of the properties. The rules of the professional bodies on valuation state that comparisons should be made with the market value in similar transactions. There is very little direct comparison, so a proxy, which is other industrial uses, is used. So, you can never get a specific valuation, but rather you get a range.

[392] Mick Bates: So, these valuations never form part of any grant application?

[393] Mr Hall: A specific valuation, namely the King Sturge valuation, went into the calculations for the presentation to the European Commission, onto which it added the professional fees and the other costs.

[394] Mr Godfrey: The capital investment would have been calculated at the time of notification. At this point in time, we were looking at the valuation in terms of the recovery. There was a state- aid overpayment. Money that had gone from the WDA under the property development grant was repayable, it was looking at acceptance of the building as repayment of the debt that had been created. So, these valuations were not so much to support the application, but they were effectively trying to quantify the value of any repayment to the WDA if the building were transferred.

[395] Mick Bates: So, is that why it was reduced from the range of £67 million to £100 million in 2001 to £10 million to £21 million?

[396] Mr Godfrey: Because it is such a specialised building, with a specialised form of construction for semiconductor manufacture, the values change quite considerably. If you have a semiconductor operator that will use it for that purpose, it has a high value. If that market is not there, because the market for semiconductors has fallen, and you use it for some other purpose, its market value falls. I am sorry—I am straying outside my subject.

[397] Mick Bates: So, someone wrote off 500 per cent of the value just like that?

[398] Mr Hall: The valuations ranged from £67 million to £100 million in 2001 for the building as a semiconductor fabrication plant for Hynix. At the time of this valuation, with Hynix no longer about, you must look at the opportunity cost for the site, which is for other types of industrial uses, and recognise the physical limitations of the building.

[399] Mick Bates: Fine. A title in the report reads, ‘good settlements…in difficult circumstances’. If they were that good, why did you agree to forgo interest on the £30 million outstanding liability to which you were entitled under the May 2003 agreement?

[400] Mr Hall: From what I understand, that was part of the negotiation to weigh up all the different aspects of this, and it was considered to be, as you say, a good settlement.

[401] Mick Bates: Several million pounds in interest were legally due, so why did people not pursue their recovery?

[402] Mr Hall: That figure was part of the overall starting point, but, ultimately, there was a negotiated settlement at the figure. [403] Mick Bates: It does not give me much confidence that we got the best deal out of it. How confident are you that your predecessors got the best deal?

[404] Mr Hall: I am confident that my predecessors, in the circumstances, as the report says, got a good deal. That is quoting the report, not me.

[405] Alun Cairns: With LG Electronics, you recovered a much lower proportion of the total aid package than you did with Hynix, despite the fact that LG Electronics operated at a substantial level for a considerable period and, presumably, received a significant income from that. Although paragraph 2.46 identifies that it considers it to be a good deal overall and paragraph e focuses specifically on the point that I am making, how can you be sure, in relation to LG Electronics, that you did get the best deal?

[406] Mr Hall: I think that the report spells it out fairly succinctly. The opening negotiation stance was to try to recover all the money. We discussed earlier that certain elements of the support from the Welsh authorities, such as the off-site infrastructure and the training, were of wider benefit. While phase 1 was never at full capacity—at one stage it reached 2,000 jobs for a number of years—there was recognition of what that contributed to the economy, and the amount invested by the company not just in creating the development, but in paying the salaries, wages and all the supply chain expenditure. The report goes through that stage by stage. It started off with that recognition, and then, again in difficult circumstances, it came to the best possible settlement figure in the circumstances.

[407] Mr Shuttleworth: In the analysis, figure 7 states that we recovered about £34 million against £87 million. Looking at the breakdown—I will not go into too much detail as Gareth has already made this point—you could say that we got back all of the property development grant for site preparation and training. On the regional selective assistance grant, we paid out £34 million and we got almost £34 million back, including some cash, which was pleasant. So, in other words, although the site was valued at a particular figure, as Mr Bates said, the company had invested about £100 million in the site and buildings alone, not including the plant and equipment, and we recovered all of that money despite the fact that the valuation was much lower. So, in my view, the land, the infrastructure, the site and the buildings were recovered; it just happened to be at a valuation on a going-concern basis, when a resale basis for something completely different would be much lower. That is true of the LG semiconductor site, where we got absolutely everything back and cash.

12.30 p.m.

[408] Alun Cairns: I know that we have talked about the legal agreements, or the lack of them, which were signed in June 1997, incidentally. To what extent did the weakness of the legal case undermine your position in negotiations? [409] Mr Godfrey: There were two strands running through the settlement negotiations. First, there was the wider value-for-money aspect, which has been referred to, looking at the extent to which the aid that had been provided had provided a material benefit. Some of the elements arising from the agreements would never have had a recovery clause; the training element, for example, would not normally have a recovery clause in it. The other strand was what we could recover, legally, if we had to go through the courts to do it. As the report brings out, while we were confident about our ability under the RSA agreement to recover the RSA moneys, we had more concerns about the property development grant. While our position vis-à-vis negotiations with the company was that—

[410] Alun Cairns: What would you have done if state-aid payments had ultimately exceeded the amount of RSA? You obviously had a strong case to recover the RSA, as you said, but what would you have done if state-aid payments had exceeded the regulations without the RSA?

[411] Mr Godfrey: Ultimately, we had to recover the overpayment of state aid in the notified scheme. The notified scheme had domestic agreements that contained terms and conditions enabling recovery. As it turned out, they enabled us to recover all of the state-aid overpayments, so, as far as the commission was concerned, it was a lawful aid scheme that had been regularised within its own terms. In a hypothetical situation, if the overpayment had been beyond any of the contractual recovery provisions, and if the company would not voluntarily return the overpayment, that would inevitably lead to the commission launching an investigation, because it could not leave a state-aid overpayment intact, and it would go through the process in the commission leading, ultimately, to an order for recovery. However, that would effectively go outside the notified scheme, and the commission would use its powers to investigate and to order recovery. In this case, it was not necessary, because adequate domestic recovery powers were available to us for recovery of the overpayment as it was finally calculated.

[412] Mr Hall: To answer Mr Cairns’s specific question about whether the acknowledged weaknesses in the legal agreements undermined the negotiations—and it is important that you used the word ‘undermine’—I do not believe, and it is reinforced by the auditor general’s report, that the quantum of money recovered was not affected because of the clause in the overarching framework agreement. However, I fully accept the recommendations in the report, which say that the task may have been quicker and easier. That is fully acknowledged.

[413] Janet Davies: As LG was a South Korean company, if the European Commission had taken legal action and was then unable to get any of the recompense that it was awarded in the courts, would that have barred LG from operating within the European Union, effectively, because the European Commission would then be able to pursue the money? [414] Mr Godfrey: Effectively, the commission would have ordered the UK Government to recover the overpayment of state aid from LG Electronics Wales. I am not entirely sure whether that would have returned all that was owed—and LGEW’s assets were fairly restricted—and, if it did not, what the consequences for LG Electronics would be. It never happened. It would clearly affect LG’s standing as a major world player. As a company, I would have thought that that would be a serious consequence for LG, for it to be in the situation of having failed to pay back an overpayment under an order from the commission. However, I am not sure whether that would immediately translate into a remedy in the Korean courts, as it is not something that we ever really looked at.

[415] Janet Davies: Leighton, do you wish to ask a brief question on the future of these sites?

[416] Leighton Andrews: The only question that I want to ask is whether you will make a profit, ultimately, on the values used for the settlement agreement with LG Electronics on the property.

[417] Mr Hall: We have receipts that are due to come back, and, hopefully, we have people interested in the sites, and so we will get revenues from that. We are in negotiations to sell a number of the plots, and we are about to embark on a marketing campaign for the Hynix building, and we have spent a lot of money investing in the electricity supply there. There is a growing demand for data centres, and this building, in its existing physical state, is attractive to data centres, which is a growing market. Companies like to be close to where this information is held. We have an agreement with a company called Governets, which is promoting undeveloped parts of the sites for the relocation of Government offices. We have the route of the new M4 alongside it. We have this land back in our ownership, and so I believe that we will generate significant receipts over the coming years. When you add it all up, it could well be that that positive figure that you talked about will be arrived at.

[418] Mr Shuttleworth: We have had enough negotiations to know that we hope to make a profit on the LG site.

[419] Mr Hall: But I have just done a risk assessment and I would not—[Laughter.] Nothing is guaranteed.

[420] Janet Davies: Thank you to all the witnesses for their answers. As you know, you will be sent a transcript before the publication of the final Record, and if you feel that anything is incorrect in that, you can come back to negotiate possible amendments. Thank you very much.

12.38 p.m.

Ymateb Llywodraeth Cynulliad Cymru i Adroddiad y Pwyllgor Archwilio, ‘A yw’r GIG yng Nghymru yn Ymdopi o fewn yr Adnoddau Ariannol sydd ar gael iddo?’ The Welsh Assembly Government’s Response to the Audit Committee Report, ‘Is the NHS in Wales Managing within its Available Financial Resources?’

[421] Janet Davies: Jeremy, I ask you to comment on this item, because we have several papers on it. [422] Mr Colman: Certainly, Chair. At least one slip-up has occurred in this process. Normally, we would hope to see the proposed response of the Welsh Assembly Government to recommendations in reports from this committee, to check that, when it says it is rejecting something, it really means it, and so forth. That has been a problem on this occasion. It did, in fact, reject a recommendation that was to do with moving away from the very strong focus on annual performance in NHS bodies. It argued that the exact words that the committee used to make the recommendation were not consistent with the Treasury’s system. However, that is not actually a reason for not making the recommendation, because the Treasury’s systems have been known to change from time to time. In England, on this very issue, they got themselves in a considerable tangle with, in effect, double-counting penalties for overspending NHS bodies—that does not arise in Wales.

12.40 p.m.

[423] Subsequently, there has been a further letter from the Minister, which explains an approach to looking at this issue that we think is very constructive. On that basis, although the recommendation has technically been rejected, the Welsh Assembly Government will be seeking to observe the spirit of the recommendation in further work. This is a really tricky subject, and we expect to engage with it quite heavily in future years, and bring further reports to the committee.

[424] Janet Davies: Thank you, Jeremy. Does any member of the committee wish to make any comments on this? Are you content with the response plus the letter that has followed on? I see that you are.

12.40 p.m.

Ymateb Llywodraeth Cynulliad Cymru i Adroddiad y Pwyllgor Archwilio ar Amseroedd Aros y GIG: Adroddiad Atodol The Welsh Assembly Government’s Response to the Audit Committee Report on NHS Waiting Times: Follow-up Report

[425] Janet Davies: The Government has accepted all of our recommendations. Do you have any comments to make on this, Jeremy?

[426] Mr Colman: Not beyond what you have already said. It does not make it any easier for the Assembly Government to meet the targets that it has set, but we knew that all along.

[427] Janet Davies: Are Members content with that? I see that you are.

12.41 p.m.

Ymateb Llywodraeth Cynulliad Cymru i Adroddiad y Pwyllgor Archwilio ar Archwiliad Ariannol o Lywodraeth Ganolog a Chyrff y GIG yng Nghymru: 2006 The Welsh Assembly Government’s Response to the Audit Committee Report on Financial Audit of Central Government and NHS Bodies in Wales: 2006 [428] Janet Davies: Again, the Government has accepted our recommendations. Jeremy, do you have anything to add?

[429] Mr Colman: I have nothing to add to my letter, Chair.

[430] Janet Davies: Are Members content? I see that you are.

Ymateb Llywodraeth Cynulliad Cymru a Phwyllgor y Ty i Adroddiad y Pwyllgor Archwilio ar Reoli Absenoldeb oherwydd Salwch yng Nghynulliad Cenedlaethol Cymru The Welsh Assembly Government and House Committee Responses to the Audit Committee Report on the Management of Sickness Absence in the National Assembly for Wales

[431] Janet Davies: Jeremy, do you have anything to add?

[432] Mr Colman: If I may, I will depart slightly from this item for just a moment, Chair, though I know that we are running late. Since this is the last meeting of this committee in the current Assembly under the current constitution, I could not let this moment pass without saying that it has been a personal pleasure to serve this committee for the two years that I have done so. I know that I speak for my colleagues in the Wales Audit Office in saying that that is true for the whole of the life of this committee. I am occasionally asked—in fact, as recently as this week—by the new chairman of the Audit Commission in England whether we in Wales have anything equivalent to the Public Accounts Committee at Westminster. I am able to reply, as I invariably do, ‘Yes, we do’, and the Audit Committee of the National Assembly for Wales operates, in my opinion, more effectively than the Public Accounts Committee. It does so, of course, because of the quality of the members of the committee, but we all know, from our experience of committees, that no committee achieves anything unless it is chaired effectively. If I may say so respectfully, your chairmanship has been admirable, and it has been a pleasure to serve with you, Chair.

[433] Janet Davies: You are very kind, and probably overgenerous. [Laughter.]

[434] Alun Cairns: May I come in, Chair?

[435] Janet Davies: I will just say something else first, Alun. I wish to thank the WAO, and the NAO Wales before it, for the help that it has given to this committee—without which we could not operate. You have the knowledge. You are the independent body that investigates issues, and we rely on you. Over the years, a considerable trust has developed, and we know that we can rely on you for independent assessments.

[436] I also thank the present committee clerks, as well as the previous ones, of which there were an awful lot in the first few years. I began to wonder whether they took one look at the Audit Committee and went. However, I thank all the clerks whom we have had for their very great help. [437] Alun Cairns: I had planned to say this just before we went into private session, but this is an opportune time. On behalf of the committee members, I thank and congratulate you on the way in which you have chaired the committee, from the very first Audit Committee that you chaired to the last of the second Assembly, with only a few in between when your colleague, Dafydd Wigley, chaired for a short period. The committee is one of the tangible benefits of devolution, as we can actually point to savings and to the difference that has been made. I hope that you take an awful lot of personal satisfaction from that fact, and a lot of personal credit for the way in which this committee has been conducted from day one. Thanks very much.

[438] Janet Davies: Thank you very much.

[439] Leighton Andrews: As a new Member in 2003, I wanted to be on this committee, and I am pleased by how it has developed. I congratulate you on that, Janet, because you have played a role in ensuring that it has developed as it has. I echo what Alun said about how this committee has contributed, and how it has proven the importance of devolution. I also thank, as you have, the clerks and the Wales Audit Office for the support that they give us. I have said in the Chamber that one reason why it is such a pleasure to be a member of this committee is that there are no Ministers on it; I stand by that. [Laughter.]

[440] Janet Davies: Thank you. I thank you as Members, and all the other Members who have been on this committee from time to time.

[441] Mick Bates: I endorse everything that other Members have said. I thank you in particular, Chair, for the style in which you have conducted the affairs of this committee, which has been firm but relaxed. I also thank the clerks; all committees need a good team to function, and, through your leadership, there has been an excellent team here, with the audit office. There has been good value for money from this committee, and it has been very effective. So, thank you.

[442] Janet Davies: Thank you. After that, we still have some business, I am afraid, before we finish. We were looking at sickness absence.

[443] Mr Colman: The response is reasonably satisfactory. Sickness absence is a major thrust of development in the Wales Audit Office to promote the identification and adoption of good practice. The conversations that will flow from this committee’s report on the National Assembly for Wales will feed into that. It is a constructive development.

[444] Janet Davies: Thank you. Are all Members content? I see that you are.

12.47 p.m.

Cofnodion y Cyfarfod Blaenorol Minutes of the Previous Meeting

[445] Janet Davies: Is everyone content with the minutes? I see that you are. As you see, we have had a letter from Dr Emyr Roberts. There are some notes on this. Would you like to explain this, Kath? [446] Dr Jenkins: As I have been given the opportunity to speak, it has been an extreme privilege to try to support this committee, in partnership with the Wales Audit Office, and to be able to work so closely with the auditor general and senior officials from the Wales Audit Office. It has also been a great privilege to work with Members to achieve the aims of this committee. I especially wish to thank Janet; I have learned so much from sitting next to her as she chairs this committee—thank you very much. The Chair kindly invites Members and officials to a buffet luncheon following today’s committee meeting.

[447] Janet Davies: On this letter, we asked Dr Emyr Roberts about two issues. He has written to us, but he does not answer the questions that we raised, so I do not know what you want to do about that.

[448] Alun Cairns: I suggest that we go back to him, and remind him of the questions.

[449] Janet Davies: That would be a good idea. There is also a letter to note on the delegation of budgets for the Merlin contract.

Cadarnhawyd cofnodion y cyfarfod blaenorol. The minutes of the previous meeting were ratified.

12.48 p.m.

Cynnig Trefniadol Procedural Motion

[450] Janet Davies: At this point, we need to bring the public part of the meeting to an end. I ask a Member to propose the appropriate motion.

[451] Alun Cairns: I propose that the committee resolves to exclude the public from the remainder of the meeting in accordance with Standing Order No. 8.24 (vi).

[452] Janet Davies: I see that the committee is in agreement.

Derbyniwyd y cynnig. Motion carried.

Daeth rhan gyhoeddus y cyfarfod i ben am 12.48 p.m. The public part of the meeting ended at 12.48 p.m.