Natural Resources Wales' £39m timber deal criticised
A 10-year deal by Natural Resources Wales to sell timber to a sawmill was made without other companies being allowed to bid, the Auditor General for Wales has said.
For £39m, the firm is buying what is estimated to be up to a quarter of the timber released by NRW every year.
Auditor General Huw Vaughan Thomas said he was unable to satisfy himself on whether the decision to make the deal was lawful.
NRW disputed the findings.
The allegations have been made in a response to the 2015/16 accounts of NRW by Mr Thomas, who called the transactions related to the deal "irregular".
He said the decision-making process was not transparent and expressed "doubt" over whether it met EU state aid rules.
"I have not been able to satisfy myself that the decision to agree those contracts was lawful and did not involve the provision of state aid," he wrote.
The identity of the company has not been revealed because NRW said the matter was commercially sensitive.
As a condition of the contract, the company said it would construct and operate a new saw line at its Welsh premises by 31 March 2016 but NRW said that condition was not met and was extended by 12 months.
NRW would not say whether the condition had been met since last March.
A report by the auditor general said that in 2014, NRW entered into an agreement with a sawmill operator for eight connected timber sales contracts, in a bid to try to halt the spread of a disease.
The firm purchased both spruce and larch timber, the latter of which was from forests where a fungus disease - Phytophthora ramorum - that causes extensive damage was present.
But the report said no other potential purchasers were given the opportunity to bid for the timber.
The value of the contract was designed to enable the operator to make a major investment in the sawmill - the operator said four of the contracts for larch would not have been enough to invest in the new saw line.
NRW told auditors it had to act, that there was no alternative and that it was highly unlikely that any other operators would have been interested.
But Mr Thomas believed the 10-year-long deal would have been an opportunity other operators may have been interested in.
This, the lack of market testing and the fact NRW admitted in internal documents that the award of the contract gave rise to the risk of challenge by another company, led the auditor to believe it should have been referred to Welsh Government because it was contentious and could have repercussions on the wider market.
But it was not referred to the Welsh Government in that way, and as a result the transactions from the contracts were "irregular" in the auditor's view.
Mr Thomas also said that the awarding of contracts to the sawmill operator was neither "robust nor transparent", saying NRW was unable to provide "sufficient contemporaneous documentation" that demonstrated what it took into account when it decided to enter the contracts.
"In the absence of sufficient evidence, I have been unable to satisfy myself that NRW's decision to enter into these contracts with the sawmill operator was taken in accordance with public law principles," he wrote.
The auditor said his uncertainty did not mean the contracts should now be regarded as unlawful or represent poor value for money.
He added that NRW "failed to follow appropriate processes for ensuring that the outputs for which it contracted with the sawmill operator were obtained on market terms".
"This failure gives rise to doubt as to the compliance of the contracts with... state aid rules."
NRW has disputed his conclusions on both the issue of law and state aid.
It said it strongly believed the contracts were lawful and said it had legal advice that supported that view.
It said the spread of the Phytophthora ramorum disease, which happened within the first year of NRW's existence, gave rise to exceptional circumstances.
Kevin Ingram of NRW said: "We are disappointed with the WAO's findings regarding aspects of some long-term sales contracts.
"Nevertheless, we have an action plan to learn the lessons from this to ensure even stronger governance arrangements in future."
But he said the audit and other reports showed "NRW is a well-governed and managed organisation".
"We are pleased it has found our financial reporting is fair and accurate," he said.
Chairman of the assembly's Public Accounts Committee, Conservative AM Nick Ramsay, said he was "very concerned" by the report.
"It's now important that Public Accounts Committee questions officials from the body at the earliest opportunity," he said.
The matter was discussed at the assembly's finance committee on Wednesday - AMs quizzed Wales Audit Office officials about why the auditor general did not meet a statutory deadline to report on the accounts of 23 December.
The auditor has said it was important to complete the investigatory process.
Mr Thomas told AMs there is no means in Welsh audit legislation to delay cut off dates, unlike under Westminster rules.
He said the process of considering legal advice and comments received "inevitably means that you are going to miss the deadline".
Plaid Cymru AM Simon Thomas, chairman of the finance committee, said the Welsh Government needed to provide an explanation.
A Welsh Government spokesman said: "We will work with NRW to address the issues raised and to ensure stronger governance arrangements are in place for the future."