Digital transformation—the application of emerging technologies to improve organisations’ operations, resulting in new business models (and value propositions)—has attracted the attention of organisations across sectors and industries. Within the public sector, digital transformation enabled by such emerging technologies as artificial intelligence (AI) is gaining recognition as a means of improving effectiveness and efficiency as well as the creation of public value. However, only a few studies have explored the extent to which AI-driven digital transformation contributes to public value creation and the factors determining adoption of the technology in the public sector. The thematic analysis of semi-structured interviews from respondents in Swedish Municipalities reveals three interesting findings—(1) there is a positive but cautious trend in increased AI adoption in the public sector, (2) AI-driven digital transformation has resulted in improved efficiency in process automation and cost-saving but limited holistic public value creation, and (3) technological, organisational, and external or environmental issues hinder the adoption of AI in the public sector.