National Assembly for Wales

Can I welcome Members and our witnesses to this afternoon's meeting of the Public Accounts Committee? As usual, headsets are available for translation or for sound amplification. Please turn off or put into airplane mode any phones. In the event of an alarm, please follow the ushers. One apology has been received today, from Rhianon Passmore. Do Members have any declarations of interest they'd like to make? No. Okay.

Item 2 and Welsh Government financial support for business. We have our evidence session with our witnesses from the Development Bank of Wales. Would you like to give your name and position in the organisation for the Record of Proceedings? Who wants to start?

Good afternoon. Giles Thorley, chief executive, Development Bank of Wales.

I'm Rhian Elston. I'm the investment director for Wales.

I'm Mike Owen. I'm the group investment director.

Great. Thank you for being with us. We've got a number of questions for you. I'll kick off with the first couple. The auditor general's report identifies a broad and complex landscape of financial support, available to business through a range of mechanisms. Can you give us a brief overview of the key business finance-related activities of the development bank and set out how you see your position and role within that wider landscape?

Yes. Thank you, Chairman. So, the Development Bank of Wales was created about 18 months ago. It operates under what's called the MEOP principles—market economy operator principles—that are approved investment activities, approved under the state aid rules in the European Union. In that regard, we operate as a provider of finance for small and medium-sized businesses. The range of finance is from £1,000 right up to £5 million, and we have grown the business quite substantially over the course of the last few years. In total, we did £80 million-worth of investment last year and 420 transactions, an increase of 30 per cent in the number of transactions and an increase in the totality of the investment of about 18 per cent.

Our responsibility is to identify and address gaps in the market. Now, those gaps may be for a number of factors. They may be by reason of a lack of interest in a sector by the mainstream financial services sector. It might be geographical reasons that, for whatever reasons, financial services organisations have pulled out of a geographic region of the country and are not investing as much. It might be simply to support a transaction with other financial sponsors. So, we could be the junior investor alongside senior investors. And then, finally, obviously, our appetite to take a higher risk—we generally have a higher risk appetite than many others. If you take all of those into account, we provide a very important piece in the jigsaw for the Welsh economy.

But it's important to recognise that you're not what you might call a first port of call. Is that a fair—?

Certainly not. In fact, one of the criteria of our investment activity is that we have to—in fact, it's built into our responsibility to the Welsh Government—encourage and introduce third-party investment into the market. And, in fact, we're measured on this with a measure of what's called private sector leverage. So, for every pound that we invest, we are targeted with raising at least a pound of third-party money alongside us. In fact, on average, we achieve 1.2 times or more that level of investment.

How clear and coherent do you think the Welsh Government's approach to providing finance is, and where do you see, in the future, the development bank fitting in to that overall strategy? I'm thinking relative to maybe the Scottish experience or even England.

I think our position is very clear. Firstly, as I said, the area of the market that we operate in is very explicit—micro to medium. The size of the investments that we can make in any one business is also quite explicit and well tested. The sectors of the economy are very wide, but within the 18 or so funds that we operate, there are some that are very specific and targeted at a very small sector of the economy and others that have given us flexibility to target the rest.

As I said in an earlier response, it is filling the gap. I should stress, we're not the lender of last resort. I feel that that is where the Welsh Government operates in terms of its position. But the market is becoming increasingly fragmented and there are a lot of changes in the market, and that creates opportunities as well as problems. Our objective is to try and identify those problems and solve them.

Historically, the British Business Bank quotes that small businesses would have tried, on average, 1.2 financial services organisations to get a loan. That has improved since the financial crisis and the British Business Bank has been tasked with solving that, but it's still, woefully, well below 2. And now what you've got is a market that is fragmenting with the likes of the crowdfunding organisations, with the online banks, and you've got both retail and business banks. Most recently, the Nationwide Building Society mentioned that they're spending about £20 million developing an online business bank to try and address weakness in the business banking market. So, you can see the market's changing, and this is where the opportunity lies for us to help.

And finally from me, before I bring other Members in: is it only ever in instances of market failure that the bank intervenes? And when I was talking earlier about the last-resort situation, how do you ensure that any businesses coming to you have really exhausted all the other potential avenues of funding and that you are picking them up at the end when there's no alternative?

I'll give the general view and I may pass to my colleagues looking at the investment. So, when we are looking at an investment, there is quite a significant number of checks that we have to do to verify the viability of the business. So, in simple terms: for example, it has to be based in Wales or operating in Wales. That's one of the measures. In the case of some of the funds, it's even more specific to west Wales and the Valleys. We then have to verify that it's not a business in financial distress. We have to verify that it either has received finance from elsewhere, and what the basis of that finance is, and where we fit into the context of that finance, or that it has been turned down. So, we're very careful to make sure that we are filling a gap that is not otherwise provided.

The only thing to add to that, I guess, from my perspective is that every time somebody applies to us, they have to confirm on the application form that they have searched elsewhere for private sector funding and they're unable to find it in whole, or, what is more traditionally case, in part. So, one of our largest sources of introductions come from private sector funders, other private sector funders, including the banks, who quite often say it's too risky for them, but if we were to take the riskiest—usually the unsecured portion of it—they would come alongside, which comes back to the private sector point of leverage that Giles had mentioned earlier.

How do they get to you at that point? Do the other organisations signpost?

We provide—. One of the major features of the development bank's initiation was to relaunch and to really focus on marketing the business and the product that we offer. In third party research, we're now recognised by in excess of 40 per cent of the market. So, marketing is one piece. The origination of customers is coming from direct activity. The way we describe our operation is 'best-in-class service with a human face', so we actually want people on the ground, across the whole of Wales, to be business relationship staff. There are a number of financial intermediaries, whether they're accountancy firms or financial services companies or even solicitor firms, that refer transactions to us. The banks themselves often refer transactions to us that they may be unable to do or they may need a second supporter to get over the finish line.

That was one criticism of Finance Wales back in the day—that it didn't have that human face and that sort or interaction. It wasn't perceived to have it, anyway.

Yes, one of the key things for us to work on when we evolved from being Finance Wales was to make sure that our marketing and our messages got direct to businesses. So, we spent a lot of time explaining the role to the intermediary market, as Giles has mentioned, so the banks, the accountants, the corporate finance advisers. What we've done now is to ensure that we're also putting that message out to businesses as well, so that they're aware of the offering that DBW has. 

The other point to mention is, of course, Business Wales and the referrals that we get through from those. They've obviously got a far wider brief in terms of ensuring that the business is aware of all the different funding that is available to them, either through the advisers giving advice directly, or through their finance funder tool, which is on the Business Wales website.

It's also worth mentioning that 158 of our transactions last year were more microloans. The vast majority of those are now originated online, with an online application form, and we endeavour to give approval or to give an indication within 48 hours.

Great. Oscar, did you have a quick question before I bring Adam in?

Thank you very much, Chair. And thank you very much, Mr Thorley and Mr Owen. When you set up a new bank, it's always that you've got to have some top, experienced people on the sector. So, I find whether you've got something behind you that can put this bank into the right direction, and profitability—. Because your answerable to this Government, not to the public—you're not shareholders—so, basically, your responsibility and your way of running the business and profitability—. We're not here asking you who you're going to give the funding—. I need to know your background. Have you got the proper experience to make sure that the public of Wales—? I heard you saying that you're filling the gap. Yes, fair enough, a lot of banks are closing down, but that doesn't mean—. Because if they were a profitable business, those high-street banks would still be there. So, basically, that's my point: how are you going to put your business plan forward to make sure your bank is profitable in Wales?

A couple of things. Firstly—there's a number of pieces in that—in terms of experience, I started in the financial services sector in 1990. I have been investment director of a major international bank. I've then been a partner of two private equity funds and I've run a public company, a FTSE 100 company, for nine years. The chairman of the board was chief operating officer at Standard Chartered and has a 30-year career in financial services. I'll pass on to my colleagues to give their backgrounds as well.

In terms of the responsibility, I think we take our responsibility incredibly seriously. I'm the accounting officer for the business, so I have a personal responsibility for the money. To your point about profitability, one of the things that is absolutely critical to us is it's a very fine balance. If we were too profitable, there would be challenges from some in the sector that we were charging too much and we were making a profit at the cost of Welsh businesses. If we lose money, then we're wasting Welsh Government money. So, our objective is to make sure that we cover our costs. Unlike Finance Wales, the development bank is fully funded by its own fees, so we have to operate on the basis that, looking forward, we have enough fee income to generate and to pay our operating costs. And so, we're very, very cautious in the way we develop. But we have the advantage that, because we're not making a significant profit, we can pass back all of the investment proceeds and returns that we make back into further investments into the Welsh economy.

Maybe, Mike, do you want to give your background?

Yes. I've been with the development bank and then Finance Wales before that for 18 years. Prior to that, I was 18 years in a high-street bank. So, I'm quite used to working in a banking environment. I would say that there's a subtle distinction between what the banks do and what the development bank does, in that we don't operate bank accounts or maintain a presence in terms of branches as such. So, we are focused on—

No ATMs.

No, no ATMs, I'm afraid, although we do have a network, obviously, of offices right across Wales. Our role is to invest almost exclusively in small and medium-sized enterprises and businesses, so that is the experience within our team—not necessarily bankers, because around about a third of what we do is equity investing, which is very different to banking.

Rhian.

I'm the non-banker of the team, because I've been with Finance Wales and the development bank for 16 years, and actually joined from a completely different background. So, I've got a technical research and development background before I joined the development bank, but have trained with the organisation, and that's another source of where we get our people from—we take people on where they've been less experienced. And since my time with the development bank I've done my banking exams and various other qualifications to ensure that I've got the right level of experience—

I felt like I was giving you a job interview there—you've got the job. [Laughter.]

The only thing I would add is to Mike's point about equity investing. We are an exceptional equity investing house. We are in the top four equity investment houses in the UK by number of transactions, and that's been verified by Beauhurst. The first two are crowdfunders and they operate in a totally different model, which is—I wouldn't say 'fire and forget', but it is very much a whole-coverage type of model without any sophisticated analysis. No. 3 is in Scotland, the Scottish Investment Bank, and we're No. 4. That's now recognised by the British Business Bank and others—that we have been instrumental in creating an equity cluster in south Wales.

Great. Adam Price.

Thank you, Chair. What would be lost, if anything, if the Welsh Government didn't anymore provide its own direct financial support; if it basically channelled everything into the kind of activity that you just described through the development bank, so you only had one source of funding?

Well, I think there are a couple of things. Firstly, what the Welsh Government does—and I'm not here to talk in detail about the Welsh Government, because we're not directly involved in that—but generally what the Welsh Government is doing is identifying projects in line with the economic action plan that are situations where they need additional support that is over and above a purely economic return. We're looking at transactions where we expect to get our money back, and we expect to get our money back with a return. The vast majority of our funds are funded by financial transaction capital, and we therefore have to repay that funding. So, there is a difference in the risk profile between the two parties.

Now, it's interesting—your point is interesting in that we've sought to address that to a certain extent in the recent past. So, one of the most innovative things that we've developed as part of the development bank is three funds where there is a degree of shared risk: the Wales tourism fund, the stalled sites property fund and the Wales commercial property fund. Now, these are funds where we can provide finance in conjunction with a proportion of grant from the Welsh Government, and the criteria for the provision of that grant is predetermined with us. Essentially, what we're looking at there—I'll give a very simple example: a piece of land that is blighted by some form of—it could be structural blight, it could be contamination, it could be access or it could be lack of utilities, for example. And the reason for that blight means that the commercial sector is unable to fund that transaction. So, the land is potentially development land, but the cost, the additional cost, of developing that site is prohibitive in terms of making a return. So, that would be a piece of land that would be eligible under the stalled sites fund. We would fund the commercial element, which would be the construction of the site post-remediation, and the remediation bit would be funded by the Welsh Government as part of a combined transaction. Similar situations exist with the tourism transactions where, because of the nature of tourism and its volatility, it's very difficult to fund, so there may be an element in the tourism fund. And the final one, the commercial property—. Again, building commercial property outside certain key corridors—the value of the property post construction is lower than the cost, and that is just a factor of the market of supply and demand. It's not the factor of the need. 

So, it's that fusion, if you like, of a more commercially driven loan offering alongside more classic grant—Government grant. Are there instances where that kind of approach is used, for example, in an individual business that is in need of a rescue package, essentially? Would you also find yourself coming together alongside Government to look at putting a package of funding on the table that has elements of grant, but also to fund a management buy-out or whatever rescue is appropriate?

Occasionally, yes. We have, as a separate fund—. I should identify that we have 18 funds and they each have very specific criteria built into their fund management agreement. But one in particular, the rescue and restructure fund, is unique in that it has an approved status under the state aid rules, and that is targeted specifically at providing relatively short-term restructuring finance for businesses that are in genuine financial difficulty. In fact, that has to be verified. It's still only small and medium-sized businesses, so it is rare that there would be any instances where we would be working in conjunction with the Welsh Government, but it's often the case that the Welsh Government refers those businesses to us for us to provide assistance. There are a limited number of instances where we are working in conjunction with the Welsh Government, both strategically and financially. Any further thoughts on that?

Just to come back to your earlier point, Adam, I think the role that we fulfil is quite clear—at last, because it's taken us 17 or 18 years to get there. So, the private sector will take the lower risk deals, then the development bank sits second in that hierarchy, if you like, in terms of deals that are not—. In terms of loans, you would be looking at less security available, or maybe they would be forecast led, so they've not got a track record of 20 years' profitability. So, higher risk associated with them, but still viable. And then the Welsh Government, as I see it, would be, then, to use your phrase, the funder of last resort—so, the riskier-type proposals. 

You've started something with that phrase. 

Exactly. Yes, I referred back to that phrase. So, that's the way I see the landscape. Inevitably, there's some blurring around the edges there, because there are quite a lot of deals that get done. 

So there is that continuum, as you described it, although in a sense, I suppose, both classic grant finance, which effectively is free money, and you are both responding to market failure, yes? 

Yes.

But you would work with projects that at least have some level of viability, to use your phrase.

Yes. Maybe I can give you an example: residential property construction. There's a constant clarion call regarding the fact that we don't build enough houses in Britain, and yet small and medium-sized residential house builders have been pretty much excluded from the funding market since the financial crisis. We identified this as a problem about three years ago, and we created, with the homes and communities team, a property fund targeted at supporting residential house builders. These are small and medium-sized residential house builders building projects of up to 20 houses, generally in sustainable locations, either on the edges of towns and villages or on brownfield sites within towns. That fund was originally a £10 million fund. We invested, with the recycling of the fund, £25 million in that sector, and we've gone on to invest over £42 million in the residential property sector since that time. 

Now, the banks are just simply not prepared to lend to that space. For every single transaction that comes to the investment committee, which I sit on occasionally, we have to verify that alternative lending is not available, and it's still very much the case that the mainstream financial sector is not prepared to invest in that space. There's nothing financially wrong with the risk. All of the loans that we have made so far have paid back in full on or ahead of schedule. So, it's a great example where there is no real economic reason why there shouldn't be an opportunity there, but there is a definite lack of funding in the marketplace. 

Obviously, just focusing on jobs created or safeguarded is limiting in terms of other economic objectives; we all accept that. But if you're comparing like for like, your average cost per job seems considerably, significantly better than anything that is achieved by classic grant. The grant aid cost per job figure in terms of the Treasury Green Book, you're way below that—£3,000 per job is a figure that economic development agencies would have dreamed of. So, isn't that an argument in favour of saying that, actually, this kind of approach, which at least targets projects that are commercially viable, has a lot more going for it than the traditional approach, which is much more expensive, it would appear?

The piece of analysis was done, actually, by the Federation of Small Businesses on the cost of jobs. I would argue that, actually, the cost is significantly lower, because that looked at just the loan portfolio and made an assumption about our loan losses to come up to a cost. But as Mike said, over 25 per cent of our investments are equity. We have a relatively small number but a sufficient number of extremely successful equity investments that will more than compensate for any losses that we make in our risk book on the loan side, such that we expect and we work on the principle that we are going to recover all of the investments that we make, less our fee costs. So, on that basis, it's close to zero, and if you think you could reinvest the funds, then it could be even better than that. 

The problem is, though, and the challenge is—and this is my personal view, rather than any political statement—we are targeting a very small sector of the market, and even in a good year where we've invested £80 million, Government is able to make decisions where one transaction may be as much as that. And the type of activity or the type of resource and skill set that we would need to do those much larger transactions would be very different and, necessarily, the concentration makes them much riskier.  

I'd just like it if you could say a little bit about the degree of interaction between yourselves and the Welsh Government. So, for example, do you consult with them in relation to individual investments?  

No, not prior to the investment taking place. We have a very good liaison with—. So, the starting point—. Maybe it's worth just walking through the process for determining a fund. Now, that process comes from two directions. The Welsh Government may come up with an idea for a fund or a sector of the economy they would like us to look at, and they at that stage would ask us to do a piece of analysis to determine whether there is a gap in the market that exists, or we may have identified it. So, for example, in the case of the residential property builders that I've mentioned, we identified that as a problem and went to the Welsh Government and identified where we thought we could help. A fund management agreement is then written, and in that fund management agreement is a clear brief of the sector that we're targeting, the size of the investments, the likely losses, the performance that we expect, the life of the fund, et cetera. And then, at that stage, we will—. So, all of this is going very closely, liaising with our counterparts, the Welsh Government, in the economy department or in the homes and communities department—the two main departments that we work with. 

Thereafter, each fund has a quarterly report and we sit down with our counterparts at Welsh Government on a quarterly basis to review the performance of those. In some cases, it may be even more specific. So, in the case of the Wales business fund, the funder is actually European regional development funds, so we have to sit down on a quarterly basis with WEFO, the Welsh European Funding Office, to review performance there. And all aspects of those transactions are looked at in terms of whether they're compatible with the rules, whether there are any performance issues, and we report on that basis. Then separately, throughout the organisation, we effectively pair up with counterparts. So, I meet with the deputy permanent secretary Andrew Slade probably at least quarterly to update and discuss whether there are issues in that. It also then opens up opportunities where we can provide support or advice on other conundrums that the Government is dealing with. 

Do the relevant sector managers, if you structure it that way, meet with their counterparts in the sectors and business teams to compare notes and leads et cetera?

As far as I understand, yes. All of our relationship with the Welsh Government is covered by a framework agreement. That includes provision for a supervisory committee within the Welsh Government that sits parallel to the independent board of directors that I report to. But, within our teams, we have individuals who are responsible. So, the fund manager who's responsible for property investing meets on a regular basis with his counterparts at Welsh Government in the homes and communities team. The civil servants who are responsible for Economic Intelligence Wales also meet regularly with all of us informally and formally in terms of reporting. 

Most of our investment staff are regionally based, which works well with the structure within Welsh Government now as we move to the regional approach. So, we've got that relationship that you were talking about there with regular meetings between the people who are doing the investments in the development bank with their counterparts in Welsh Government in the regional teams. 

The only direct involvement is we have a Welsh Government representative on the board—but only as an observer—on the board of directors. The board of directors is independent and it adopts the 2016 code of conduct on business performance and corporate governance. 

Some of the executives, including yourself, Giles, have non-executive directorships outside. Are they approved by the board or by the Welsh Government?

They're approved by the board. In one case, where I was appointed to a business in Wales, it was approved by the Welsh Government as well.

Are they paid directorships?

In the case of—. I have three independent non-executive directorships, and one as a trustee. Two are paid, one isn't.

Okay. And in terms of any equity investments that you hold in companies, do you appoint, as a bank, representatives to the boards of those companies in relation to those equity stakes?

We do. Occasionally, we put independent—. Generally, we would have—if it was a member of staff of the development bank, they would be as observers. However, we do also have the responsibility—and occasionally we do appoint chairpeople or non-executive directors to the board, mainly to provide additional skill and support to the executive management team. And we have a portfolio of individuals that we are aware of and we can call upon, but they are independent of us, albeit that they are effectively our representative.

And usually, if there's a skills gap or a need for new experience, any appointments would be agreed by the board of those investee companies. It's not our direct appointment, if you like. 

In terms of this question of getting the balance right between financial support and other forms of support in terms of business support, it clearly is a matter for the Welsh Government, but it's a matter for yourself as well. Do you think that the Welsh Government is getting the balance right in terms of the mixture of financial support and other support in terms of the need in the business community?

One of the things that we were tasked with as part of the development bank creation was a much closer link to Business Wales in terms of the business support, and also we've worked very hard—. I'll ask Rhian to comment on that in a minute because she actually sits on the supervisory board of Business Wales now, so we do have a direct relationship. But, on top of that, we felt that it was essential to widen our stakeholder group. So, historically, I think Finance Wales looked up to its parent, and probably that's about it. We see our responsibilities much wider than that. We've developed a strong relationship with the Federation of Small Businesses, with the guilds, with a number of the other financial services organisations based in Wales, such that we are known as a place to come under any circumstances. And, within the Welsh Government, we provide a service across Government. So, we have an energy fund that is part of the natural resources team. We, obviously, have the property funds, and we have economy funds. So, we're looking at a much wider brief, and our objective is to make sure that we provide a service to all. But, specifically on your business support, maybe you can pick up.

Yes, absolutely. The relationship with Business Wales was one of the things that we set out to strengthen—both development bank and Business Wales, where we evolved from being Finance Wales previously. And we've tried to do that at different levels within the organisation, different seniorities, as well as pushing it out regionally to make sure that we've got these one-to-one relationships.

So, as Giles has mentioned, I joined the strategic board of Business Wales, and we have Duncan Hamer, who's the observer on our board, who also has responsibility for Business Wales at Welsh Government. So, there's good overlap at that level. But we need to make sure that that filters down throughout the organisation. So, we have these regular operational meetings with the Business Wales deliverers—so, the people out there delivering the one-to-four contract and the accelerated growth programme. And some of the initiatives that we've done—as well as those regular meetings, it would be training of each other's advisers. So, Business Wales have come in and given specific training to our team, particularly around some of the specialist support that they offer, like resource efficiency and diversity. We've trained their advisers, again, on sector-specific areas, such as management succession, which we did recently with them. We regularly attend joint meetings with Business Wales advisers, and what we try to also do is shorten the journey for a customer. You have a busy business owner, so, if they contact us and, actually, the best place for them would be with Business Wales, we've changed our process to try and make that as streamlined as possible, so that we find the right person in Business Wales to speak to them rather than just giving a number back to the busy business owner and letting them carry on.

So, we targeted the team this year to try and increase the amount of referrals back and fore between Business Wales—so, a particular target to the investment executives. And that's seen a really good increase. So, we've got a threefold increase in the amount of referrals between the development bank and Business Wales over the last 12 months—so, good foundations to build on going forward, in terms of how we continue to strengthen the relationship with our counterparties there.

I think, to go back to one of your points earlier, Adam, about the importance of business support—I think, for us, yes, we're providing the funding, but what we often find, and it came out in one of the FSB reports, is that funding can actually be quite low down in what a small and medium-sized enterprise is looking for. And a lot of that, in my opinion, is because they're not necessarily at that stage where they know they want growth investment—they're still looking for what are the opportunities that are out there. And that's where the business support can really add value, to get them to that position of thinking, 'How do we grow? How do we have that ambition? How do we strengthen our board to allow us to get to that next level?' And it's then that the finance can come in to help them do that. So, I think, inevitably, you need all elements of the puzzle to work well together to give the best chance of these small companies becoming the larger companies going forward.

I need to move things on, if that's okay, Adam. I want to bring Vikki in. Jenny, did you want to—? Very, very quickly, and then—.

I just had a quick question. How do you avoid duplication of effort? Because if Business Wales have already assessed the viability of the proposal or the company, if you then do it again, that seems a bit of a—.

I think that division of duties is actually quite important, in terms of the Business Wales adviser supporting the company in preparation of their business plan. The company writes the business plan themselves, but you have the business adviser supporting them on doing that. And, actually, I think it's quite good to have that division— that the person that is looking to provide the funding is a separate team and can come at it with a fresh pair of eyes, in terms of understanding that business plan. So, for me, it's a benefit of having somebody assessing it, with a—if it's a loan application, to look at, 'Right, does this make sense? Does this stack up, in terms of being able to repay the loan?'

Okay. Thank you.

Vikki Howells.

Thank you. So, building on the answers you've already given about your relationship with Business Wales, we've heard some mixed views in our previous evidence session about the way in which the two organisations work together. You've given some practical examples of how that works in practice, from your perspective. But how well would you say that relationship and communication is working as a whole?

I guess I just really have to reflect back to some of the results that we're seeing. For me, that was the dual approach. There were lots of practical things we could do to improve the relationship—like the training, like ensuring that new starters are fully aware of each other's offering—but what we wanted to measure was the impact of it, which is where we've recorded the number of referrals back and fore to the two organisations, so—.

You said there that there's been a threefold increase in the rate of referrals. Could you tell us what rate of referrals you're getting from Business Wales when compared with direct enquiries?

Yes, so if I do it percentage-wise, which is probably the easiest way to look at it—if you look at the last financial year for us, 2018-19, the biggest source of the referrals that come through, so around 27 per cent of our referrals, come in direct, so that's a company that will come in directly to our investment executives that are out in the regions. The next biggest would be from central enquiries, so that's people picking up the phone to us or coming through our website. Then you've got existing portfolio companies, and then the fourth biggest source of referral is Business Wales. So, of all of the applications that came in last year, about 9 per cent of them came in from Business Wales as a source of referrals. That was up from about 3 per cent the year before, so there's been a growth in that area, but still we are getting the larger percentage from other areas. Although, interestingly, it's larger than banks, which is a big change from where we were previously. We used to get a lot more enquiries directly through from bank managers, and that's moved slightly down, but I think part of the reason behind that is because we have the situation now where many businesses don't have a named bank manager; they don't necessarily have somebody to go and talk to about their funding needs, so it ends up coming to us through a different route. I think what we do see on the source of referrals from Business Wales is that the conversion rate is higher. So, if an application comes to us through a Business Wales source, we are more likely to carry on and invest in that business than compared to a source of enquiry that could just come through the website, which makes sense. You would expect, if it's gone through the Business Wales programme, there to be a higher likelihood of us investing in that company.

It's probably worth mentioning that we did some research—anecdotal research—of four other development banks around the world. In fact, Rhian led that, so perhaps you might want to give us some feedback, because we specifically focused on the provision of business advice and support.

Yes, absolutely. It was a really interesting piece of work, where we just took the opportunity, really, to have a look at what some of the other development banks across the world were doing. We focused the project in on looking at four—so, three other European banks and one, the development bank of Canada, that is significantly larger than what we do but has been around a long time, so we thought we could learn a lot of lessons there. What we found, out of the four—and appreciate it was only a sample of four, so we haven't looked at everybody, but we found, of those, two of those had business support as well as the funding offering under the same development bank, and the other two did not and had it separated out, so you just had the development bank providing the funding and somebody else providing the business support. So, there are different models out there. There are different ways of doing it effectively. But it was good to share common experience in terms of how best to have this relationship between the business support offering and the funding that we offer.

So, bearing all that in mind, then, what might be the advantages and disadvantages of Business Wales and the development bank actually coming together?

Dealing with the disadvantages, the key thing is to make sure that there is a seamless process, so if a business within Wales comes for advice but they start at the development bank, they get directed seamlessly to Business Wales and vice versa—if they come for financial support, they get directed to us if they go to Business Wales first. Beyond that, there is actually a general degree of difference, because, as Rhian said, finance is not necessarily the first need of a small business. They actually want—. And therefore, having a dedicated team who are dedicated to advice is actually a very good thing, and, as long as we can keep those links together, I think that we more than adequately cover the service. There would be some clear operational efficiencies if the two businesses were together, but I don't think they would be very significant, because they are very different functions.

Okay, thank you. Just some other questions on the same sort of theme, but moving into more precise areas, before I finish. Firstly, what work have you been doing to try and ensure that you promote the financial support you offer to as wide an audience as possible so as to target under-represented groups?

So, we commissioned a study, an equality impact study, which was back in February 2018. That looked at the data that we get in, which we record on all of the investments that we make. We record demographic monitoring forms, so this independent review looked at all of those results to see how well we were doing. We thought that was important to give us a benchmark—let us have a look at where we were at the moment and where did we need to improve. What that data has told us is that we do well in certain areas—so, we did well when considering gender or considering ethnicity—but there was probably more we could do in ensuring that our fund went to younger beneficiaries, so to more young people, and more disabled people, although it's worth noting that, in terms of the young people, it did highlight that our fund beneficiaries are pretty much in line with the SME make-up across Wales, but there's probably more that we could do in focusing in on that area. So, that was the starting point.

Things we've done to try and look to improve in this area—so, we've rolled out unconscious bias training across all of the organisation, we gender-lensed our marketing material and, on that, we need to make sure then that our marketing material is representative of all of Wales rather than just necessarily our portfolio. So, we try to make a conscious effort to make sure that that is as wide as possible. More specifically, we were involved with the Welsh Government initiative, which was the female entrepreneurs action plan, which was launched back in springtime. So, one of the members of the team was active on that panel. Then, in terms of trying to address more younger people, there's Big Ideas Wales—so, trying to link in with those—and, more recently, we've re-ignited discussions with the Prince's Trust. Coming up, we've got a meeting planned that is in conjunction with Business Wales and Disability Wales to, again, specifically look at what more we can do to understand in the first instance and then hopefully address some of those barriers for allowing disabled people to access more of our funding.

Thank you. And how would you describe the overall balance of support you offer in terms of the size of business and particularly your offering at the lower end of the loan size spectrum?

Do you want to do that one?

Yes, sure. So, in terms of the way that we support our businesses, as you can imagine, it will be segmented. So, larger investments would have a greater ratio of our staff involvement in dealing with those cases. So, equity: we'd have a portfolio size of 12 to 15 that would be looked after, but that would be very significant investments on our part. Every investment that we make will have a named member of staff that they can speak to and will help them. One thing that's interesting is that our portfolio sizes in terms of debt would be much less than you would see from a high street bank. It would be typically 20 to 30 loan cases per portfolio executive, and their primary target is not necessarily to sell—well, it's not to sell—other products, such as insurance and things like that that you would see in a banking environment. It is something that we call 'interventions', which is that we measure our colleagues in portfolio on how they make a difference to those businesses, how they support them and how they make those businesses better, whether it's bottom-line or whether it's introductions to new customers. That is the primary focus of our portfolio teams, and they are—. It's not business advice specifically; it is more of a support function—a critical friend is a good example. We're there to challenge them but support them and signpost them to appropriate advice.

Thank you. And one final question from me on this section, if I may, Chair. Just looking at the interest rates you charge, how do you keep them under review to ensure that the development bank continues to properly fulfil its role as a lender to small and medium-sized enterprises?

So, when I joined, we introduced an annual—. Well, it's actually a periodic interest rate review, but at least annually. The reason why it's periodic is because we need to be in a position to verify or revisit interest rates in the event of some form of financial change, financial crisis or liquidity event that takes place. So, that is done independently, externally, and we publish the output of that report on our website.

Actually, we're just going through this year's at the moment. It's sort of hot off the press; we haven't got it in any organised format, but this year's pricing review is similar to last year's in that around about 85 per cent of the sample are at or lower than an equivalent—if you could find an equivalent deal, which is a key point—in the market. And this is something, as Giles says, that we do every year, independently.

Thank you.

Great stuff. Oscar. Mohammad Asghar.

Thank you very much, Chair, and thank you, panel. My question is—

Oh, sorry. I've made an error there. It's Jenny. Jenny Rathbone. Sorry, because you spoke earlier, but it was an intervention, wasn't it? Sorry, Oscar.

You mentioned various funds in your earlier answers to Adam Price—the Wales tourism fund, the—is it the stalled sites?

Stalled sites, yes.

Yes. And the commercial property fund. How different are they to what your predecessor was doing—Finance Wales?

Well, these three funds are unique and very innovative in the sense that a proportion of the total fund size can be provided in grant. So, on average it's about 75 per cent of the fund is loan fund, and up to 25 per cent is available as grant, subject to the specific criteria I identified where we're providing a loan to cover the commercial element of the transaction, and the grant is providing the resources to finance the non-commercial element of the transaction. They work in conjunction, so they have to be seen together. 

So, an example, as I said, was the piece of land with blight of some sort, and that blight means it's not viable to develop. It's particularly important in old industrial areas, particularly important in areas like the Valleys with poor access or poor utilities, for example. 

So, when you're looking at that, how much attention do you pay to other issues like its connectivity? Because there's no use having a site and then generating huge quantities of new traffic. 

All of that will be factored in. We're not responsible, obviously, for the planning process. The planning process is done by the developer, but we're very much focused on identifying sites that, but for the blight, do have a viable future, because that's the bit we are lending against. 

Okay. So, connectivity will be part of your analysis.

Indeed, yes. 

Okay. I think the commercial property fund sounds very useful. Puffin Produce gave evidence to the Climate Change, Environment and Rural Affairs Committee talking about the undervaluation of some of the factories they've built simply because they're in Pembrokeshire.

Exactly. The anecdote that we fall into the trap of is anything north of the M4 and west of Bridgend, the construction of it is worth more than the value of the building. That is just a great example of an inefficiency in the marketplace, and that's one where we can provide assistance.

So, how do you plan to evaluate the performance of the development bank against the previous Finance Wales?

Adam mentioned jobs targets, and historically, I think,  Finance Wales was evaluated on a relatively narrow range of measures. In fact, unilaterally we have opted to increase that to become more inclusive, and I think they're in two categories. One category that I think is increasingly important is what's called impact investing, and impact investing is becoming a much more important element of the financial sector where investors want to know what difference their investment is making, and they're looking for measures about how our investing is improving the environment, how our investment is improving the pay and the welfare of the employees of the business—as examples. So, we decided last year to do a piece of work to understand what information we would need to create an investment impact report. Those have all been identified, including some of the examples that I've given, and our expectation is that we'll produce the first impact investment report of the development bank this time next year, with our annual results for 2019-20. 

So, it'll look quite different, then, to a standard bank analysis of—

Absolutely, very different. But, interestingly, there are a number of financial services institutions that are now targeting that as their raison d'être. They are actually targeting investors specifically because of the impact or the improvement they're making to the environment. 

Separately, there are financial measures, and, of course, as Mr Asghar mentioned, it's important that we show that we are financially viable. In the Economy, Infrastructure and Skills Committee we've been challenged to make sure that our accounts are as transparent as possible, and we're working very hard to do that in what is a very complicated business. But that, we felt, was insufficient, and so one of the organisations that we've helped create this year is an organisation called EIW, or Economic Intelligence Wales. Economic Intelligence Wales is a joint venture between the Office for National Statistics, Cardiff Business School and the development bank, and we've asked Cardiff Business School to evaluate the performance of the development bank on a GVA basis—so, how much our investment has impacted the GVA, what GVA improvement has been made.

So, it's a two-pillared approach. There will be normal key performance indicators, such as the jobs created, jobs safeguarded, the amount of investments made and the number of investments made; there will be impact-investing criteria, such as the environment, the pay, as an example; and then the third category will be an independent evaluation, a financial evaluation, of our performance. 

Okay. Sounds interesting. I look forward to it. 

Could we just talk about the housing-related funds that you're managing, because you mentioned earlier that small and medium-sized house builders simply can't get commercial funding, even though they seem to be producing far more of the type of housing we actually need that is fit for the twenty-first century? So, I wondered how significant your lending has been to create an alternative to the big house builders who continue to produce the same old boxes.

Well, the big house builders are still building significantly bigger volumes than we could possibly—

Yes, but stuff we're going to have to over-clad in future—[Inaudible.]

Again, I'm not here to comment on the house builders, but I probably privately agree with you. 

We're looking at builders that have a sustainable pipeline of developments. What we found was that the reason why it was an important issue to fund these builders is that they were funding their entire transactions with their own capital, and they could only buy or develop the next site once they'd finished and sold the first site. By providing the liquidity funding that we do, they can secure the second site and they can move their workforce and their tractors can move straight off one site on to the next. So, it's seamless, it provides continuity, and it means that more properties are being built. 

We've already invested over £40 million in the residential housing space. It's still not large, but they're a very wide range, and I think we've approved projects in 20 of the 22 local authorities already—everywhere from Anglesey right the way into the centre of Cardiff, in fact. The old bay station is a development that we're helping to fund, so as close as you can get. A stone's throw away, even.

Okay. And are you able to say how many housing units that is?

I haven't got the exact number in front of me. You were saying that and I thought, 'That's going to be your next question and I haven't got it.' But I can come back to you on the exact number that have been built to date. 

Okay. I'm sure we'd be interested. 

Could you just say how that fund works alongside, or in competition with, the innovative housing fund that the Welsh Government invites bids to?

It works alongside it. This was a fund that was developed very closely with the homes and communities fund, but the innovative housing fund is really targeting zero-emission or very low emission houses. It was felt that, at this stage, the market isn't ready for that basis, although we have had discussions with the homes and communities fund about how to incentivise builders to move to that type of building standard. And we certainly believe that that will happen over time. 

Okay, but clearly many of us are interested in accelerating that process, (a) because lots of people need good housing and they don't want to be living in fuel-poor homes.

No, indeed. There is provision in the fund, for example, where, if developers meet certain building regulation standards, then they're charged a lower interest rate, for example. So, there are incentives already built in, and I feel that that's going to become the feature, going forward, within the next few years. 

Okay. So you haven't, at the moment, had projects arising out of the innovative housing grant. They've all been awarded demonstrating that 'x' is a viable—

Those have been done directly by the Welsh Government, yes. 

Okay. But you haven't had people coming to you afterwards and saying, 'Right, now we've proved we can do it and this is what people want'—

There are projects that are more environmentally friendly. I can't remember—. There are a couple that we've done that are—

There's one in progress at the moment, but we've not got to the point where the investment's been approved. We've got one that we're looking at at the moment, which is a more innovative build, which hopefully we should get concluded and can talk more publicly about shortly. 

Okay. So, you're not acting like the next step up for—

We should do, absolutely; it's just getting to that point. The one that we're looking at at the moment is looking at a more innovative approach to house building, but it's not a completed deal yet, so we're not able to talk in any more detail about it. But, yes, that's the broad idea—it should be the Welsh Government intervening at the earlier stage, proving the concept, proving that it's commercially viable, and then we can get involved at a later stage.

Because in the context of the climate emergency, we urgently need to accelerate this process.

And we're involved with the decarbonisation steering group as part of the Welsh Government. We've got a representative there also looking to see what we do about existing home stock as well in terms of how we make those more energy efficient as well as the new-build side.

Thank you.

Mohammad Asghar.

Thank you, Chair. My question relates to the strategic approach to providing financial support to businesses in Wales by your bank. The Welsh Government launched a new vision, actually, for financial support to small businesses in Wales—the economic action plan. So, have you been working with Welsh Government to develop your priorities and objectives in this context?

Yes. I have my copy here that I received on the launch date in December almost two years ago now. We are not directly involved in the economic action plan measures, but it's very much part of the way we think about operating. The way I mentioned earlier about the impact investing, a lot of the criteria that the Welsh Government have set—for example, environmental criteria and quality of jobs criteria—are things that we are starting to take data on so that we can measure our performance on those targets.

Part of the reason why it's not directly applicable to everything we do is that, as I mentioned earlier, 158 of our loans last year were microloans to very, very small businesses. Some of the economic action criteria would be very difficult to measure for a very small or nascent business at this stage. I think it will become important over time. It will become ubiquitous, in a sense—everybody will be aspiring to achieve those types of standards, but we're not quite there yet.

All right. Through the economic action plan, again, the Welsh Government has also introduced a new operating model for providing financial support. In your view, has there been enough progress to articulate what the ambitions for the new approach mean in practice and what they mean for the approach of the development bank in this context?

We're obviously not involved in any discussions directly with Welsh Government about provision of funding through the economic action plan, so I can't give you a view on how it's marketed. However, from having sat through numerous meetings and discussed it, I think it's a very clear and, from a personal perspective, a perfectly rational approach of a government to say that, 'If we are going to provide you funding, whether that's repayable or direct grant, then we believe that you have to meet certain standards of ethicacy to achieve that'. And that's, essentially, the way it's broken down, whether that's aspiration to export or whether that's environmental aspiration. And I think, in its simplest terms, it works on that basis.

And as I said to you in the previous answer, our aspiration is to do broadly the same thing, albeit reflecting the fact that we're dealing with some very much smaller businesses and we have to tailor our solution to reflect the customer that we face.

Okay. Thank you. DBW will have to meet the same criteria in the financing as if they were receiving the finance directly from the Welsh Government.

Not entirely the same criteria, but, as I said, we are now taking measures that will meet the goal directly—so, their ability to export, the pay scales and the type of jobs that they're creating, the quality of the jobs created, as opposed to the sheer number of jobs created, the environmental outputs. We started collecting that data a year ago and we're starting to build that sort of profile.

The only other point I was going to note is we're obviously kept abreast of the developments as they move forward with the economic contracts. Reading the recent Fair Work Commission's report, in terms of how this can be brought into the economic contract, they talked in there about the development bank working with the companies, not to preclude them accessing support from the development bank but to then work with them to help the system on what companies can actually do to get themselves right up to the standard that we're looking for under the fair work. So, I think there are lots of interesting developments that we need to stay attuned to and continue to work on with our colleagues, with Welsh Government.

We've got the two funds that we mentioned that have got a commercial loan and grant alongside them. For them to benefit from the grant, they have to be compliant with the economic contract, so we'll get direct benefit and knowledge as we work through that process.

Thank you. The auditor general’s report identified the need for the Welsh Government to be clear with its risk appetite in relation to the financial support it provides to business. How would you describe the risk appetite of the Development Bank of Wales, recognising that this may vary across different funds?

This is a first world problem: we are a lot more complicated than we used to be, going back to 2008-9 when we had one fund. As Giles mentioned earlier, we have over 10 now in different sectors. So, the scale and the breadth have brought some complexity, but, fundamentally, where would I describe our risk appetite? We have a greater risk appetite, clearly, than the private sector. Otherwise, there would be no need for us. But we would then break it down by fund, as you suggest. So, each fund is created with our parent, the Welsh Government, so what parameters, what sectors we are targeting, what an investment looks like and whether or not it's equity or debt. So, that's not a global sort of strategic level. Then, operationally, the key thing there is for us to make good decisions, and we have very experienced individuals making those investment decisions in line with the operating guidelines of each of the funds.

Then, what we've found—something that Finance Wales didn't do very well in the early years—was, once you've made the investment, how much support and monitoring you give to those businesses—. So, we beefed up our investment teams a long time ago, and each investment is graded in terms of performance. Now, that wouldn't be graded like a bank, maybe, who are looking to intervene. We are looking to support those businesses and get to them if we see performance slipping—get to them early. And, unusually for an investment house, we do have a work-out team or a risk and restructure team, who are specifically experienced in helping underperforming businesses. So, we get in early on the demise curve before the business has gone too far, support them, make changes so we can bring those investments back to the good book, as we call it.

Now, in terms of oversight on that, obviously, we have management information that we use as a senior management team to monitor—we can monitor and we do monitor by individual investment, but, given the size of us now, more typically that would be done on a fund-by-fund basis. Going back to when I started this answer, at the start, when we launch a new fund, we will have an expected default rate based on our 18 years of experience. So, we monitor against that on a fund basis. In the case of—a good example is microloans. We anticipated a default level on that fund that we work significantly below so we can tweak our risk appetite. We can do more risky deals if we are under that expected benchmark.

So, it's quite a sophisticated and complex series and layers of activities to keep an eye on the book, each individual investment and even the type of investment. So, as you would expect, our debt investments are pretty stable. The cash is coming back; lower defaults because these are generally more experienced businesses of longer standing. And then the higher growth riskier area of equity. And, obviously, we get a bigger return on those equity investments, but it's a bigger level of risk. So, quite a complicated answer.

Thank you very much. I think you mentioned from one to 10 different pots of funding that you are now able to use to help with the financing of the business community in Wales. Have you got expertise to make sure that your lending of those funds is secure and done by qualified people? You just mentioned that you are involved at the—[Inaudible.]—looking into the development of the businesses. So, have you got expertise to make sure your funding is secure and that the business is also on the right track?

The answer is 'yes'. This is a risk and a challenge for the development bank, however, and we've said the growth, which has been fantastic—we've grown from about 120, I think, when we first became the development bank, and we're pushing up to 200 people now. So, recruitment is a constant challenge, particularly bringing in experienced expertise. 

It's a key sector, yes.

So, at the moment, yes, we do. The challenge specifically for us is not necessarily in debt, because there are quite a lot of ex-bankers around, but equity. An equity skill set is a challenge for us, and we have been successful, I think, in growing our own people, but you have to supplement that with experience. So, that is a constant challenge for us, absolutely. At the moment, yes, I'd say we're well skilled. We got lucky, actually, when we first started doing property funding, because, as I've said, I was in Barclays bank for 18 years and we didn't do any property deals, because it was a sector that they didn't touch then—I'm going back 18 years. So, we had a lot of ex-bankers in the investment teams with no real experience of property development funding, because even back then, the banks weren't doing the small stuff. But, luckily, we've recruited an individual from Principality Building Society who did, and that coincided, give or take a few months, with our first property fund. So, we had that experience and we've built on that now by attracting other individuals with property investment experience. But that was another challenge for us.

The word 'bank' is a huge word. It's lending, borrowing, stock, this and that, and shares and the money market. Are you fully equipped, or are you there yet to make sure your bank is already there to make some impact in the financial market?

Well, as I mentioned earlier, we're not a bank in the traditional sense of the word. As you say, it's a broad term. We don't take deposits, we don't have branches or ATMs, we're more of—and I use this term advisedly—an investment bank. So, we are investors. So, it's not really a bank in the traditional sense—

You're not providing residential mortgages. Not in the traditional sense.

Not in the traditional sense. We're not tasked with cross-selling insurance or—

I agree with you, but the thing is you use the word 'bank'.

Yes, absolutely. It is in the title, yes, but we don't have a banking licence.

It gives a different impression to the public.

True, but I think the virtue of that—. I mean, when I joined Finance Wales three and a half years ago, some people asked, 'Is it a car leasing company or is it an equipment leasing company based in Wales?' It wasn't entirely clear what the responsibility was. I think the Development Bank of Wales does exactly what it says on the tin, to coin a phrase.

I was going to ask you that. So, the actual use of the term 'bank'—you've seen a concrete difference in the way that the bank is used and approached.

Undoubtedly. When I joined, we did just over £40 million-worth of investment in a year in Wales—I think it was £45 million—and last year we did £80 million. And that's the first full year of the development bank, so, clearly, we've spent more on our marketing, we've had the benefit of the launch material and the launch razzmatazz of the bank. But we have a product that I think is better understood, is certainly, according to third party analysis, much better known. There's still a long way to go. I think in the Federation of Small Businesses report, they say that we have a 40 per cent recognition—we need to get much higher than that.

But the way—. Our aspiration is to be—. The British Business Bank produced a piece of research, which came out, I think, on Monday, about equity investing in the UK. They were very pleased to say that the total equity investment in the UK outside London now reached 56 per cent versus 55 per cent, and 54 per cent happened in London and the south-east—sorry, my maths is terrible, isn't it, as a banker—44 per cent. But the key point is that it is generally very, very hard to get investment outside of London other than in very limited pockets of activity, in Manchester, Oxford, Cambridge, for example, and Edinburgh, and what we want to be is in a position where we're at least as straightforward and at least as clear and at least as quick as anywhere else in the UK, if not better than anywhere else in the UK, to get funding, such that we actually add a reason for businesses to come to Wales—and that's the key difference—or for businesses that exist in Wales to stay in Wales. I think we're getting there. We are going a long way there—as I said, we're the fourth-largest equity investor in the UK by number of transactions and we're making a difference.

The thing is, you are coming back to this word 'bank', and you're talking about DBW. Basically, there are only 80 homes in London with the value of your bank. There's not a house less than £1 million in London. Eighty homes in London equal to your whole bank, but you just lend it, this money. The thing is, you're a microbank yourself.

Yes.

In terms of the banking sector. So, the auditor general's latest report did not focus on due diligence arrangements for individual investments. However, previous reports have raised concerns in this regard. What is the development bank—your bank—approach to due diligence and how do you ensure this is proportionate in your case?

In terms of our investment decisions?

Yes.

Rhian, do you want to—?

Yes. So, our approach to due diligence is really captured, firstly, in investment operating guidelines. We have one of these per fund, which really sets out what the remit of the fund is, and what we should be doing, and then overarching investment procedures, and we each have to comply with those in terms of our approach to diligence. So, it's the investment executive's role—that's that individual's role to assess the application that's come in and carry out various different levels of due diligence, which will cover management, financial, commercial, technical. More often than not we're doing that in house, so that's the individual that's doing that themselves. So, going back to the point that we've already talked quite a bit about, we have to ensure that we've got the right level of experience in that individual to assess that business plan fully.

On some occasions we do go external, so we will use external parties to carry out due diligence on our behalf, but what we've certainly evolved to do is ensure that that is done on a very bespoke basis. So, it tends to be for the larger, more complex deals where perhaps we're looking at a particular area. So, as an example, if a start-up approached us, we wouldn't commission external financial due diligence necessarily, because, actually, it's more about understanding the commercials on that. So, we've got the expertise to ensure that the financial forecast is robust, but what we want to understand is the assumptions that feed into that to drive the business forward.

So, that's the overall structure. It's important that we've got the right people to do it, important that the people are trained to do it properly, and what we find is the diligence that we do is more in depth than perhaps what you would see from a traditional high-street bank, because we're doing the unsecured lending, or we're doing an equity investment, so that we don't have the comfort of any security behind it. So, we absolutely have to make sure that our diligence is right, but it does need to be proportionate, as you've mentioned, and the way we tend to do that is through having different teams looking at a different size of investments. So, the microloans, which are less than £50,000, they are looked at by a distinct team to make sure they're doing the right level of diligence for that type of investment. It would be a different team that would look after a £1 million-plus equity investment and the amount of work that we would do there. The other thing worth mentioning is we have quarterly risk reviews, which is where we get feedback from the companies that have not gone to plan, from our risk team, and they will be reflecting to the investment executives around areas where we could have done better in our diligence, so what learnings can we take going forward for the next time that we look at an opportunity like this.

Probably the only other area—[Interruption.] Yes, so investment decisions are made independently, so an investment executive makes the recommendation, having to do all of the diligence, and that is then presented either to an individual or to investment committee to actually make the decision on the investment itself. The other area I was going to mention is audit. So, we're subject to audit in terms of ensuring that we're carrying out the appropriate level of due diligence and it is in line with those investment procedures and investment operating guidelines that I mentioned, and that's got various different tiers. So, firstly, we've got our quality assurance team, which is an independent team that doesn't report to me or to Mike—it reports separately to our director of risk, legal and compliance, and they are really there to sample our files and to make sure that we're carrying out the appropriate level of diligence. And then layered on top of—

Sorry, Rhian—how do you ensure that appropriate due diligence? Because, clearly, if they've come in, to use the expression, to the last port of call, then, clearly, they've been turned down for business and might have been turned down on the conventional tests. So, you obviously aren't applying the conventional type of due diligence, so it must be quite a difficult balancing act.

Yes, I think it goes back to what I said earlier about the banks' approach—if they decided not to do something, more often than not it's because there's inadequate security available for them. That is predominantly what they're driven by, so, yes, they will do due diligence on the business opportunity, but they would be very much driven by the security that's available to support their loan. So, when it comes to us, it's because there's insufficient security available, so we will do more detailed diligence because we absolutely have to be as confident as we can that the cash flow is there to support the loan or we believe the opportunity is there for an equity investment, but we aren't reliant on the security, which is often where the bank will say 'no' and it'll end up coming to us for further consideration. 

I think we're also in a space where automated underwriting criteria starts to apply. So, a lot of the big banks have reduced the support for small businesses to online banking with online decision making, and a lot of that is underwritten by online criteria. So they may be simply rejected for reasons that are 'The system says "no"', rather than anything academic. And we can do a personal and bespoke approach to each investment. 

Absolutely. 

Oscar.

Thank you very much, Chair. I've a couple of direct questions to you. Because you're a micro bank—it's not a big bank, in my book—how do you develop yourself? Your development—. At the moment, it's a public bank, it's public funding—forget Welsh Government. So, your development plan. I want to see the Welsh bank as a world-class bank and not just a development bank, but we haven't got there yet. Have you got any plans yet to make sure—? That can only be done with private funding or other money coming your way to make sure that there is room for you to develop in Wales. 

Well, there are a couple of things in that. Firstly, as Mike mentioned, there's always a need to bring in additional expertise, other than people—. So, we've done a very good job of developing people within. Both Mike and Rhian have been here much longer than I have, and they've developed their skills, in many cases, through the business. However, in addition to that, we need to bring high-calibre people into the business, and we work very hard to find anybody who, for whatever reason, wants to work in Wales and wants to—. And to do that, we can't necessarily pay as well as the private sector, so we have to offer more than that in terms of the fact that people are making a difference to their community and also as an employer that we're a very flexible employer that helps to support individuals. And it's certainly the case that, with the reduction in the number of staff in the major banks, we've been able to attract a number of very highly qualified people. So, that's a key thing.

In terms of our aspirations and our long-term vision, we worked on the principle, when we created the bank, that we would be self-financing and that we would be funded exclusively out of—. So we don't get any grant in aid from the Welsh Government. We fund ourselves directly. Therefore, we have to look quite a long way ahead to the longevity of the funds and constantly look to replace funds.

And I suppose the most—. And on your third point, which is a perfectly valid one, which is the ability to attract third-party investment funds, in a number of instances, we're working alongside other investors. As I said at the beginning, we have to attract third-party investment to work alongside us and we're constantly doing that in investments and we're working with other investment institutions. We're often selling businesses, once they've got to a certain size, to other financial sponsors and other financial organisations. But then probably the most pleasing, I suppose, or satisfying outcome of last year was that we attracted a £10 million investment from Clwyd pension fund. In my point earlier, I mentioned the aspiration of investors to look at their impact investing and social responsibility—corporate social responsibility-type investing. We were identified by Clwyd as a counter party that could invest their money safely in Wales on a targeted basis, and so they've invested £10 million, alongside the Welsh Government, in the Welsh management succession fund. So that's a nice vote of support. 

Thank you.

Okay. Vikki Howells.

Thank you, Chair. I've just got some questions around the auditor general's report, which questioned aspects of the way in which the Welsh Government's sectors and business team budgets for the financial support that it provides. So, given the uncertainty that comes with the recycling of money through loan repayments, can you give us a feel for your own approach to financial management and budgeting and how this actually links up with the management of your own project pipeline?

Yes. There are a number of points here. We look at the business on an overall portfolio basis, as well as each individual transaction. Mike has already mentioned that every single transaction has a responsible investment executive monitoring the performance of that business. And so, on an overall portfolio basis, we aspire to and we generally achieve a return of all of the money that we have received, net of our fees, and this reflects a whole gamut. We have over 1,100 investment businesses in Wales. So, everything from the defaults and failures compensated by a strong performance in some of our equity investments, and a more steady performance on the bulk of our core loan investments. So, if you add them all together, we aspire to get our money back plus a bit.

In most funds' cases, or in some funds' cases, we are able to automatically recycle the funds repaid and, in those cases, that is already built into the fund documentation. But any additional surpluses over and above that is not our money—we're a fund manager; it's the Welsh Government's money—and we then have to apply to the Welsh Government for approval to invest it elsewhere, either into another fund or to create a new fund.

I mentioned that a proportion of our funding comes from financial transaction capital. Clearly, once we receive the money back on those funds, that's repaid to Welsh Government, which is repaid to the Treasury.

So, it's a mixture of all of those things. We're constantly looking ahead at the profile of our funds. We had our staff review day on Thursday of last week, and we actually looked at the profile of all of our funds going out. And, for example, we know that from 2022-23, we're going to have to be starting to look at replacing some of the bigger funds that we have—the Wales business fund and then, in due course, the Wales flexible investment fund. And we have to work on that now, and look at that profile now. 

Okay, thank you. The report also identified some concerns over the Welsh Government's management information systems, and the fact that they don't easily provide clear and comprehensive information in relation to the financial support that's provided. What client management systems does the Development Bank of Wales use, and how would you say that they interact with financial systems to help provide that comprehensive and accurate management information?  

So, there are two main systems that we use operationally to manage our investments. So, we have a customer relationship management system, which helps us keep on top of the relationship with the individual businesses, from work in progress when we first start analysing them to when they become a portfolio business. So, that is all about the customer relationship. And then, the second system is a financial system that helps us monitor repayments, the direct debit run, if there are any arrears, calculating interest. So, those two systems are the bedrock for us in terms of managing that relationship.

We had those reviewed, actually, last year by our external/internal auditors who said, by and large, 'very good'. There's still a little bit too much of a reliance occasionally on spreadsheets in terms of producing reports, a hybrid of the two. So, we're embarking on a big project now, digitilisation, to really update all our systems and processes. So, whilst it's good for now, there's still a little bit too much manual intervention, and one of the new processes systems we will bringing in is something called Power BI, which will take the information from both of those systems and present it in a much more easy and quick format, much more bespoke. So, that is very much the future for us. 

So, the systems at the moment are good, they're fit for purpose, they give us everything we need. It could be a little bit easier, it could be a bit quicker, which is the direction of travel for us. 

Okay, thank you. 

And Jenny Rathbone. 

The economic environment is changing really rapidly. So, the decarbonisation agenda is much higher up, the automation of jobs and the way we deliver them to market. And then, the focus on the foundational economy, there's a much greater emphasis on that now than when the economic development action plan was written two years ago. How do you ensure that the decisions you're making are robust enough for this rapidly changing environment?   

Yes, it's a good point. We realised, or certainly I realised when I joined, that within 10 weeks of my joining, there was the Brexit vote, and we met—

We got so far without mentioning that word. [Laughter.]

I'm sorry; I won't mention it in any other context other than to say that it was, and is, unclear as to what the financial impact of that event will be. And we made a proposal to the Welsh Government, which has since been approved, to create a fund that gave much greater flexibility. So, some of our funds are very specific. So, we have a community energy fund, which is a very small-scale energy fund that targets community energy projects. But we wanted a degree of flexibility, to reflect the fact that we were in uncertain times, and we still are in uncertain times, in terms of where the financial impact will fall. Now, that fund can do very small loans; it can do slightly larger loans. It's quite a large fund. It can make longer term investments. And your points, Jenny, are equally as applicable to the B-word as they are to the environmental challenge, as they are to the foundation economies. And, therefore, it's very useful, alongside the very specific funds to target tech seed funds and tech start-ups and local energy, to have a fund that can adapt and evolve to reflect market conditions as they change.

So, that's the sort of, I would say, general answer, but maybe if I pass to Rhian to talk about how we see it at the coalface when we're looking at investment. 

Yes. The only thing I was going to add to what Giles has said is, for me, that's where EIW, Economic Intelligence Wales, really comes into its own for us, because that gives us something that we haven't had before, in terms of actual real-time information about what is going on within Wales, and where we need to perhaps flex what we've got at the moment, or develop new funds or products going forward. So, that is real tangible evidence that we can take going forward, which includes qualitative and quantitative information as to what the market is telling us. 

We do have a high degree of flexibility within our funds. So, the Wales flexible fund that Giles was talking about does have a lot of flexibility within it, as the name suggests, to support different types of businesses for different needs, and allows us to have longer term borrowing, which is something that we weren't able to do before. The other thing that we're able to do is to look at the remit of the particular funds. Our funds are quite long; they tend to be five, six, seven-year fund profile, but we are able to look at them within that profile to see if there are things that we need to change, need to tweak. So, the Wales business fund is one of our biggest European funds, which is now £180 million. We're just about to embark on our mid-term evaluation, which will be an opportunity—it's an independent review—to have a look at how that fund is performing, and see if there's anything that we can do there to change criteria, if we need to, to make sure that we are still fit for purpose in terms of the types of businesses that we're supporting, because you can imagine these business plans were written quite a while ago before the world moved on. 

Obviously, the whole of purpose of a development bank is to make the Welsh economy more resilient, and so, how do you measure your performance against that resilience or sustainability agenda?

Well, our role is to provide certainty in uncertain times, and we have 18 funds that have approximately just over £800 million to invest, spread over seven to 10 years. That is a significant amount of support that we can bring to bear, and it's directional, as Rhian and I have said, as and when challenges arise. It is very much focused on the micro to medium sector, but that is 97 per cent of all businesses in Wales. So, by number of businesses, it's targeting the largest sector, and by value, we've got more than enough funds to be going after. And what we have to do is constantly keep abreast of where the challenges are, where the gaps in the market are. 

And do you give money to co-operatives and social enterprises as well?

Yes, we do. We have a special arrangement. 

We do, yes. So, with the micro loan side of things—the less than £50,000 that we operate—we actually sub-contract that out to operators already very active in that social enterprise space, to ensure that we're not duplicating effort there and we're getting to the right people that are already actively engaged in that area. So, we're just actually going through a re-tender on that at the moment to secure more providers out in Wales on that area. 

Thank you for that. 

Any further questions from anyone? No. I think you've satisfied everyone's enquiries and curiosity and interest. Can I thank our witnesses, Giles Thorley, Mike Owen and Rhian Elston for being with us today? That's been really helpful. We'll send you copy of the transcript of today's proceedings for you to check for accuracy before it's published, but thanks for being with us. 

Thank you.

Diolch yn fawr. Thank you. 

I propose we take a short break for 10 minutes.

Great. May I welcome Members back? And can I welcome our second set of witnesses this afternoon, the Federation of Small Businesses, on the issue of Welsh Government financial support for business in Wales, and its effectiveness? Thanks for being with us today. Would you like to give your name and position for the Record of Proceedings?

Good afternoon, everyone. My name is Ben Cottam. I am head of external affairs at FSB Wales.

Hello. I am John Hurst. I am director of B2B IT Services, and we are members of the FSB.

Good. Welcome. We've got a number of questions for you, and I'll kick off with the first couple. The Auditor General for Wales's report identifies a broad and complex landscape of financial support available to business through a range of mechanisms. Overall, how clear and coherent do you think the Welsh Government's approach to financial support is—financial support for businesses, I should say?

I think, from our perspective, it's seen quite a lot of consolidation over recent years, so it's a lot easier to understand and for businesses to navigate than it was some years ago. And, actually, we've seen several iterations, obviously, of the business support infrastructure that has developed that, and delivered that, over the years. So, it is easier, but, nevertheless, it is quite a complex landscape. Obviously, it changes as the needs of the economy change. However, the articulation and quite often the communication of those new funds, whether they be new funds or whatever else they might be, often doesn't get out into the marketplace. So, that's where organisations like FSB obviously come in to amplify that, to help our members understand that landscape. But it is a particularly difficult area for businesses to understand. What I would say is that we need to remember that, actually, by our own assessment, 70 per cent of businesses don't access any publicly funded business support, whether financial or advice related. So, generally speaking, the landscape is not well understood. But even those who understand the landscape of publicly funded business support, only a small proportion of those will understand the funding mechanisms for it. So, it is necessarily complex.

And how do you see the role of the development bank, and Welsh Government by extension, fitting in with the overall picture of business finance? 

Our assessment of the development bank to date has been pretty positive. You'll see within the report there are promising signs about a pick-up in awareness of the brand, and that was always going to be one of the biggest challenges in the first instance—helping people understand the movement from Finance Wales to the development bank. Within that, though, our assessment, certainly in the year since we've produced our report, for instance, and anecdotally certainly, is that the awareness is beginning to pick up in the market that it's there. I'll let John talk in a minute about, maybe, the customer experience, but the sort of support and engagement the development bank is undertaking with organisations such as FSB is pretty comprehensive.

We will have lots of maybe tactical engagement, in terms of whether it be workshops or events with members who will raise awareness of the development bank and its facilities, but also even at a more strategic level, on a pseudo-policy level, such as looking at interventions for what we call missing middle firms or medium-sized enterprises, we will have those conversations with the development bank.

So, I think it's been a positive start. Our assessment of the return on investment of the development bank means that, if you look at the range of interventions that are in the marketplace, it actually fares relatively favourably.

John.

We recently raised money with development bank to complete an acquisition, and I suppose that's how I can speak as a customer of development bank, as a business that's operating in Wales. We approached a number of high-street banks, if you like, traditional lenders. I would say the feedback was there was a lack of interest because of the size of the opportunity. We either weren't big enough or the loan itself wasn't big enough to spark any interest. The result was we ended up speaking to the development bank. I think what's particularly interesting is the development bank took the time to understand our business. It definitely didn't seem as a business development opportunity for them; it was more, 'How do we support this business to achieve an acquisition that will create jobs?' As a result, even though the acquisition took a long time and there were some bumps along the way, they were very supportive throughout.

So, speaking as a customer, the development bank were absolutely superb in hand holding us through the process, helping us understand the process. And actually, without them, it would have been pretty onerous to actually achieve the acquisition overall. So, I think the development bank has come a long way in terms of perception within businesses within Wales. Certainly, from a personal experience, I think it's been superb for the business.

That's a pretty high accolade of the—

Well, if I can speak honestly, I was pretty shocked at the availability of finance outside of dev bank—for example, the punitive nature of actually borrowing from high-street lenders. So, my business partner and I were going to have to personally guarantee the full amount of the loan, even though we are a business that is very secure. We have annual contracts with our clients, so we never start a month on zero, we know what we're going to bill throughout the year, we have a very low cost base, we had no debt within the business at all, had been going for 14 years when we were looking to raise money, and, when I say 'punitive nature', to personally guarantee the full amount that we were looking to borrow just seemed a bit crazy to me. So, the interest rate was comparable to what was available out there in the marketplace as well. So, for me, it's a glowing reference, but I think it's because it's actually helped us as a business take a step change completely. So, we've grown over 100 per cent in the last three years and the development bank have really supported us in that process. So, I'm thankful it's there.

Big improvement on the previous financial arrangements—with Finance Wales. It escaped me for a moment.

I think, again, from a customer point of view, the perception has changed with dev bank now in terms of their position within the market and actually how they will support you. I don't think the brand had the kudos that dev bank Wales now has, certainly.

Okay. Adam Price. 

Good afternoon. One of the points that the auditor general made in his report was that there's a need for greater clarity in terms of when the Welsh Government supports directly through traditional grant money and when business is supported through the development bank. Do you think there is a clear rationale as to how the Government approaches this? We have, basically, the development bank using one model alongside very traditional grant in aid. Do you think there's still a role for both grant support and the development bank's more commercially driven approach?

To answer your last question first, I think there is a role for grant. However, that tends to be leveraged at the larger end of the market, for larger businesses, by our own analysis. I understand that, where we seek as a country to try and attract foreign direct investment—. We understand that is part of the landscape. The problem is that we know that that is where some of the toughest decisions are going to necessarily have to be made, should, for instance, there be a constriction of funding as a result of the shared prosperity fund. From our own analysis, support delivered through Business Wales and things like the development bank at, maybe, the smaller end of the market, for small and medium-sized enterprises, that is delivering a good return on investment, accepting that cost per job is a very, very blunt and arbitrary measure and imperfect in lots of ways.

However, if you look at some of the support work by way of—. An example we use in the report is the support delivered to Aldi, for instance, on their distribution centre in the south of Cardiff. That was around £10,000 per job. That is a facility that, although a distribution centre and, therefore, involved in the logistics and supply chain, has relatively little potential for a small business supply chain with it. So, it's about the value of the investment of grant money that we put out there in the market. I think we accept that there is a role for grant, but I think we would want grant to come with sufficient conditions, particularly for larger organisations—that there's a commitment to develop the supply chain and to develop the skills base locally.

I think it's not clear to our—. The decision making, at least, isn't clear. It's necessarily competitive—I get that. I get that there will be organisations and businesses that are considering sites all over the world, but it's not clear to us what the nature of the decision making is that leads to that, and that leads then to this sense in some quarters of an unfairness and an imbalance that, effectively, we are giving free money to larger organisations and for smaller grounded businesses we have repayable finance, albeit FSB's perspective is that we need to move to that regime of repayable finance because there is a sound question on that return on investment for public money. So, I think it is less clear. Some decisions are going to have to be made because it may well be that Wales gets less money in the future, albeit the FSB's perspective is that Wales should continue to get the same level of investment post Brexit as otherwise we would have expected.

So, there are a couple of things there, aren't there? I suppose, from your answer, you basically see traditional grant aid as primarily aimed at foreign direct investment, inward investment, as kind of an incentive to compete with other areas of the UK that are competing for that. And you see some degree of continuing need for that in the armoury of Government.

I think, pragmatically, there is going to have to be some element of that. If I look at something like Aston Martin, for instance, where there is a commitment to the development of a local supply chain and therefore there is a development potential, locally, for small and medium-sized enterprises, plus the skills base, where you can use that development to supercharge the skills base, that is a productive use of public money in that grant mechanism. However—well, it waits to be seen—the proportion of which is actually recoverable in the event of an exit of a firm can be really frustrating for smaller businesses. So, I think it is about the long-term value to the economy and how we sweat the assets—uncomfortable terminology, but how we sweat the asset of that investment. However, my gut is that that is going to have to shrink as an overall proportion of funding interventions by Welsh Government. It could well be that the post-Brexit landscape means that the uncertainty of our international competitors means that that will be harder to come by. We don't know. That might be the issue. So, it can't be that we seek to attract big businesses at any cost. I think we would like to see an increasing focus by Welsh Government on the development of Welsh-based businesses, whether they be large or small.

So, you'd want to see a shift in the emphasis from inward investment to developing indigenous businesses. Implicit in what you've said is that that greater emphasis on indigenous businesses should involve not the provision of grant aid to those businesses but greater investment in the financial firepower of the development bank—am I hearing you correctly?

Yes. 

Although you do, I think, in your evidence, refer to the possible use of some kind of tax rebate or tax incentives, which isn't used, really, by the Welsh Government at the moment, is it?

It isn't, no. I mean, if you look at the realm of the six interventions that our members, when we surveyed them, felt would be useful—. And we don't specify what that tax intervention might be, but it may well be—. I think we'd give an example where significant improvement is made to a premises and there is a business rates holiday of some description, for instance. So, it is using, where there is direct grant-focused support or subsidy—that we use in that way, we use it in a smarter way. I think we'd be open to see what that would look like. But if you look at that scale of where our members feel that the public support could best be used, actually direct finance doesn't really come to the highest level of the chart. So, I think the anticipation of business is that the best that Government can do through business support is concentrate on the improvement of infrastructure, the improvement of skills and the delivery of skills—things that create the landscape in which a successful business can thrive. The first thing they're looking for is not always directly money.

A great answer always anticipates the next question, so I wanted to ask you about whether they got the balance right in terms of the importance of financial support versus other things that can be done to help business, and you've kind of already answered that and referred to the evidence, which is quite compelling, really, isn't it, that actually, as you said, direct financial support is actually lower—well, it's right at the bottom for many of your members. Where do you think the particular gaps are that need to be filled in terms of the provision of those other forms of support the Government can provide? Where would you start?

The non-financial?

Non-financial, yes.

I think some of the—. There's that conversation around infrastructure. Obviously, we now have a national infrastructure commission, so we can have a strategic-level conversation around the provision of infrastructure and feed in more directly, maybe, a business-focused or, in my case, an SME-focused perspective as to what the priorities should be. But I think, certainly, when we talk to our members, things like the provision of skills, things like the provision of apprenticeships, which—. Relatively speaking, I think the perspective is that from those that do engage in apprenticeships, we have relatively positive feedback, albeit, again, that the vast majority of businesses don't necessarily access the apprenticeships regime. But I think it is more in those skills-focused interventions.

I think where it will come is particularly around helping businesses steer to things like AI and automation. So, there remains to be a conversation about the role of public money and Welsh Government or any other business support to helping futureproof businesses and helping them adapt to the possibilities and the opportunities or challenges of things like automation, because via our perspective most small businesses aren't engaging in that sort of futures conversation. So, one of the gaps that exists now is the extent to which we can help businesses seek to exploit that, whatever that new future might be. It'll be interesting to see what Professor Brown's review of digital innovation is going to come up with later this summer, because I hope that that will give us some sort of base of evidence as to what the possibilities are and where the challenges are, and then we can name public funding interventions, maybe, to helping businesses understand that.

And moving the lens back again to direct financial support, are there particular gaps there in terms of the kind of products or funds that are available? The FSB has talked previously very extensively of the problem of the missing middle, and we've heard some good stories in terms of acquisition here, but plenty of Welsh companies have been acquired by companies based outside of Wales and then seen all the problems to do with that. So, succession and how financial support can help that—is that still one of the areas where we need to do more? And are there other gaps as well in terms of the provision of direct financial support that need to be provided?

Just on that, that's interesting, because we heard earlier today how the development bank is very much involved in the residential property market, effectively, through supporting residential builders. There is a gap there you're saying in terms of the development of commercial real estate or industrial real estate.

Yes. So, our analysis when we undertook our 'Missing Middle' report was that there were several examples where businesses felt that they'd reached such a point in terms of the space that they occupied that the quality of space in that level above wasn't available locally. This manifested itself particularly in some Valleys communities and more rural areas where that market was less well developed, and certainly less well developed by private means. So, that is a tangible example of where the public sector can step in and provide that, provide that space, so we don't see the outflow of medium-sized enterprises, even within Wales, from more deprived areas to, for instance, Cardiff simply because that is where the private sector has developed that next level of business space. So, I think that's one example.

Obviously, yes, the development bank are helping to fill that space, particularly with small house builders, and Members may be aware that our policy chair, Ben Francis, runs a small house building company, and he's spoken on a number of occasions, including before the Economy, Infrastructure and Skills Committee, about the problems faced by smaller house builders and the fact that remote decision making can militate against those funding decisions made within Wales. So, for instance, the decision making for sites elsewhere, particularly in the south-east of England, looks and feels very different from some of the funding decisions by the mainstream investors in sites in Wales. So, we've identified that there is a gap, particularly within small house builders. And there is an opportunity by utilising public money to supercharge that space and to fill that gap. We are not only developing those companies and their capacity, but obviously we are hoping that that will start to address some of the housing challenges that Wales faces.

Finally, Chair, are there any other sectors like that where there is a need and an opportunity for a specific fund to unlock latent potential that isn't being supported currently by the private sector finance providers?

None that we've identified significantly. However, I do think—and this is where, I think, we will want to undertake a bit of work as FSB—that certainly it may not be sectoral but it may well be more process orientated, you know, around how we futureproof businesses. Because when we have conversations with our members, that futureproofing is not sufficiently high on the list of priorities. That doesn't mean it's not there, but the awareness of what that future state might look like, and therefore how you invest your own funds to answer that question, is not sufficiently well developed. So, I think it is more about processes, rather than sectors, per se.

Okay. Thank you.

Vikki Howells.

Thank you, Chair. What's your view on the performance of Business Wales and the Development Bank of Wales—I know that you've touched on that briefly—but also, then, the way in which the two organisations are working together in support of businesses?

I should declare an interest. I sit on the strategic board for Business Wales. So, I think it's worth Members understanding that. However, obviously, as part of this report, we assessed, from the best evidence that we could gather, the performance of Business Wales. Now, this is, I think, even in my working life, the fifth iteration of business support since devolution. So, what led up to this was a frustration among our membership and the wider business community that there was a very, very complicated marketplace for business support and signposting support, and you have multiple brands over short periods of time. That led to, I guess, a downgrading in the regard that businesses had for that measure of support.

I think the fact that Business Wales has now been with us, as a brand, for some time and there's been repeated commitment to maintain the brand of Business Wales is positive; it is relatively well understood as a brand among our membership. That doesn't mean necessarily that it has a high level of access. That proportion of our members who do access Business Wales report that, quite often, the level of support is better than probably they'd anticipated. I know that Business Wales has worked hard to increase, I guess, the competence of those front-facing staff who will come up against my members, and my members report, therefore, that they've had, relatively speaking, positive engagement.

In terms of the development bank and the interface of business support and the development bank, I think that's improving. You obviously have cross-fertilisation at a strategic level, with members sitting on each other's boards, which, I guess, at that strategic level, means that those conversations are—there is that cross-fertilisation. And we know that, generally speaking, the referring of a client from the Business Wales service to the development bank is relatively smooth, as far as we can understand.

Again, though, I think there are some big questions coming down the road for Business Wales as to the proportion of funding it can continue to draw in for its activities, and that's a concern for us, because just as we get to the point where businesses understand what Business Wales is and what it can do, we would be concerned to see any sort of constriction of funding that leads to that service falling back. 

Okay. John, is there anything you wanted to add to that?

We used to be involved in delivering the e-business programme—. This isn't a direct answer to the link between Business Wales and the Development Bank of Wales. We used to deliver the e-business programme, so we, as a business, would go into organisations and advise them on IT issues that they may have had. Since Superfast Business Wales came along, we've been completely cut out of that and an advice service has been delivered. I think what's interesting is that the feeling on the ground is that local businesses have been pushed to the side and then advice has been provided instead.

Now, through the FSB report, I think advice turning into action is one of the frustrations that people feel. So, the advice is there, but then, actually, how do they take that advice and act upon that advice? And that's why we always felt, as a company that was delivering a service, that we could say, 'Here is the advice we recommend. This is market-leading advice based on the skills that we've adopted within our business. This is now what you need to do about it. We can then also action that advice'. So, I think there's definitely a tension within the business community between what Business Wales is doing and Superfast Business Wales—that example exactly—what that's delivering versus what used to be available via small businesses in Wales or business providers within Wales.

So, there is a real tension there at the moment, and I think there's definitely a tension amongst our client base in terms of what they would go to Business Wales for—Superfast Business Wales—and what we're used for. So, there's definitely that tension. We don't have any engagement from Superfast Business Wales in terms of them signposting to us. We've met with them once, we delivered cyber security training to their team there, but they haven't actively come to us in three years and said, 'We're signposting people to you', or anything like that. So, we're not entirely sure in terms of how we would integrate with that service, and the benefits as a business ourselves of that service.

And what are your views, both of you—I'll start with you, John—on the detail of the advice? Is there specific advice for specific forms of business, or is it more generalised?

So, we aren't one of those that would go and actively approach Business Wales for advice, because our concern would be that it would be too generalised and not specific enough. So we—and I think the report highlights this—would go to our professional advisers first, and possibly use a service like that as a service of last resort, to a certain extent, if we weren't getting the answers. Where in a previous life I have accessed Business Wales service, I've actually accessed an individual rather than the service itself. So I've gone to an individual who had a great reputation who I knew would deliver the advice that I would need at that time, rather than accessing the service and going through the layers to get the advice I needed. Does that answer—?

Yes, it does. So that individual relationship is key, then, you think.

Yes, I think so, and actually, to come back to the development bank, what's been great there is the relationship. Someone has taken the time to get to know our business, know the challenges that we face in our business, and give appropriate advice to support our business objectives. And I think the danger of not having that relationship is someone isn't growing with you and helping you grow, they're providing advice as and when problems occur rather than maybe avoiding those issues and working with you on your journey, if you like.

And does that reflect the experiences of your members on a wider field there?

Yes, I think so. I think what we need to understand with Business Wales is it is best where it can signpost to authoritative or credible areas of support, whether they be public or private sector support. I think John raises an interesting point, which may well be part of some of the difficult questions to come: is it about understanding the landscape of private support and referencing people to support that may not be subsidised, may not be funded? But I guess the funded element is that referencing service, that signposting.

I know from work that we've undertaken from FSB, and work that I've undertaken with Business Wales, they do try to understand the landscape of business support. But even FSB, for instance, as part of our package of membership we administer support to our members; however, that doesn't form part of the signposting and referencing. So it's unlikely, much as I'd like it, that you'll go to Business Wales and they'll say, 'What you want to do is become a member of FSB, because actually with the membership comes this package of support.' So I think that conversation may well yet have to take place about how we cut the cloth, how we make sure that we get the best return possible for investment. It might well be that more work is needed to understand the wider landscape of private sector support that may well be, as a destination, the most appropriate destination for that business.

I know we've made very, very clear a concern in the early days of Business Wales that what we didn't want to see was displacement of a private sector marketplace. As John mentioned, the vast majority of advice that businesses seek they'll seek from professional advisers, they'll seek from accountants. That's always been the first port of call for everything from financial advice to marketing advice, so we need to recognise the role that that plays in the marketplace and not seek to displace that. We're relatively confident that neither Business Wales nor any public agency seeks to do that. Neither do I think, though, that we understand that landscape to the point where we're capitalising on it and maybe lessening the dependency, if there is a level of dependency that businesses have on publicly funded support, and then maybe releasing that area of investment.

Do you think that businesses are more aware of the development bank's role as being, to coin a phrase, the last resort bank than they were previously with Finance Wales? Do you think there's an awareness of how it fits into the whole funding jigsaw?

Yes. Certainly the approach of the development bank is far more proactive than possibly it was in the past, where Finance Wales will have waited for people to come to them in that role. We see the development bank as, effectively, plugging gaps in the marketplace, which is a slightly different role than lender of last resort, and I think there is an opportunity there. Certainly the bank is more proactive and the brand is much more visible. A lot of money has been spent on making sure that brand is visible. 

When we undertook our analysis, that was relatively in the early days of getting that brand up and running and pump-priming awareness of that brand. It would be interesting—we haven't, but it would be interesting to survey our members as to whether that has shifted significantly. But certainly there isn't—. In the conversations we have, so it is relatively anecdotal, the notion of the development bank being there as a lender of last resort is not there to the same level as it would have been in conversations about Finance Wales, if that makes sense.

I interrupted Vikki in full stride, so back to you, Vikki. 

That's okay. Going back to the issue of support, because I was very intrigued by what you said there, given that there is such a plethora of support from the private sector for businesses, is there really need or room for the Welsh Government to be offering business support advice through both the Development Bank of Wales, which it appears to be doing more and more now, as well as Business Wales, or would it be more sensible for the two bodies to actually join together?

In terms of joining the organisations together, I think it helps that they do different things. Business Wales is there as the one-stop—effectively, a signposting service. I think it helps to differentiate, then, the role of the development bank and focus it on being a more commercially driven conversation. I think there will always be gaps in the private sector landscape, and there will always be questions—dare I say it—about whether we have sufficient support at sufficient levels within the private sector landscape. So this is where Business Wales can (a) understand that landscape and reference it if necessary, or (b) ensure that we have available within our arsenal support at sufficient level that answers that customer need.

So, at the moment, our assessment is that those brands work quite comfortably side by side without actually combining them. They do, necessarily, at the moment to my visibility—they are different cultures. Necessarily, the development bank comes from a much more commercially driven background and will have a more commercial conversation. I think that's probably less the case for Business Wales, although that probably is changing. So whether or not, in years to come, it would be sensible to join the two, we haven't made that assessment at the moment. What we do understand at the moment is that the brands are relatively well understood and relatively well regarded, without being merged. 

Thank you. And one final question if I may, then. Your report emphasised a need for the development bank to keep interest rates under review to ensure that they continue to properly fulfil their role as a lender specifically to small and medium-sized enterprises, and to address that finance gap at the lower end of the loan-size spectrum. What specific concerns do you have with regard to the development bank's current practice in that area?

Within the work that we undertook when we asked members, a number of comments came that they felt that the rates that the development bank were deploying were higher than they would otherwise get. John mentioned that, certainly in his case, the rate was comparable. What we don't know is the extent to which that perception that came through that work was historic, rather than current. Clearly, years ago under Finance Wales, there were significant concerns that, for a publicly funded entity, the rates of interest that were being offered to businesses were very, very high. We don't get now—

But is that not in cases where a business going to the Development Bank of Wales wouldn't be able to access finance on the high street anyway? So isn't that why the interest rates are higher?

Yes. We accept that there is perhaps a level of risk, a level of attention that the development bank undertakes that means that that might balance out the need for higher interest rates. As I say, we don't now—. Certainly, if I think of the conversations we've had in the last year, the concern about high levels of interest on facilities from the development bank doesn't come up nearly as frequently as it has, which leads me to wonder whether or not this is historic and this is more about the transition from Finance Wales to the development bank than it is about current development bank operation. As I say, we haven't undertaken an as-is analysis for the development bank in the immediate past, so it will be interesting to undertake that now to say, 'Is that perception there now?', because if it is, then that is a perception that's current in the marketplace and probably isn't historic. But at the time when we undertook this work, I think we had to give a health check that that could be historic. 

Okay, that's very useful. Thank you.

Mohammad Asghar, I believe. I've got that right, yes. 

Thank you very much, Chair, and thank you to the witnesses here. A couple of questions to you. Looking through some of the graphics earlier, Business Wales is known to the business community, over 70 per cent, and DBW less than 60 per cent. So, that is very different; people are totally unaware that certain finance is available. Also a Ben Francis report is mentioned in this booklet, and he's more wary or more concerned about after 2020, when the funding from the other side of the channel will not be available. So, basically, how are you prepared for businesses to have benefits and for channels not to be disturbed for small businesses?  

I think that that point—. I guess the health check that we've put against the awareness is that that may have—. I think we would like to understand whether awareness of the development bank is higher now than it was when we undertook this work. Certainly, the development bank has been busy in raising its brand. Whether that has raised the level of access among my members to the development bank, we don't know that at the moment.

Don't you think it's your responsibility also to tell your—

Yes, absolutely. A lot of what we do is making—. We know that where these publicly funded services exist, there has to be a return on investment for public money, there has to be a value for public money. So, we spend a lot of time partnering with the likes of the development bank, Business Wales and others to signpost our members to it. So, if I think of Brexit as an example, a lot of the work that we're doing to prepare our members for whatever form of Brexit we get is actually pushing our members to the Business Wales portal, for instance, which we worked with Business Wales to help inform and develop, because we don't want to confuse the marketplace as well. So, we will partner in many ways with the development bank and Business Wales to let our members know that that is there.

However, as I mentioned earlier, any publicly funded business support in whatever way is still only a relatively small proportion of the marketplace that businesses will access. So, I think we need to be reasonable about our expectation of these services, because I think there will necessarily always be—. I remember—this is my second incarnation at FSB—many years ago when we undertook a compendium survey, even then—and this is 12 years ago—the number of our members that accessed any publicly funded support, whether it be local government or whether it be Welsh Government-funded business support, was relatively low. So, we have to understand that this is only going to be a certain portion of the marketplace, but FSB's assessment is that where that exists, our job is to inform it to make sure it's as relevant as possible and to signpost to it, to make sure that, where it is relevant, as many of our members are aware it's there.

So, I think understanding of what the development bank is and isn't there to do is really important. Understanding of its brand and awareness of its brand is really important as well, but we do try and seek to look for opportunities to raise the level of the brand and the profile of the brand. I guess the quid pro quo for us is that the development bank works for us and that means that we can have the confidence, if we are referring members, or at least encouraging members to access these services, they are services that are credible, which is why we do work with the organisations as closely as we can. Over the years, there were some hard truths that we've had to deliver to these services as to the level of quality of the support that's given, for instance, the level of expertise of advisors, which has been a concern in the past. So, we've had to work with those organisations to ensure that that increases. 

Okay, thank you. And your report suggests that budgets are under pressure and support for small and medium-sized enterprises provides a better return on investment in a broader set of contexts. Do you think there is enough evidence and analysis available to reach a fully informed view on value for money at different ends of the spectrum?

I think, by our own admission, the evidence that we used to produce that analysis wasn't easy to come across, and so some of it may well—. We do give a health check in our report that some of it might be quite blunt. I guess our perspective is that, where you're investing, in particular in multiple smaller enterprises—they don't have to be micro-enterprises—that are grounded within their communities, then that delivers a better benefit, a better return on investment for that community. Necessarily, where we are delivering large-scale, predominantly grant interventions for larger businesses, whether they be foreign direct investment, or even domestic investment, then, spatially, those are going to be less well distributed, and they're going to be—. There is a predominance, for instance, here in south-east Wales, or within the major conurbations. I think, where we have limited resource available through business support. There has to be that conversation about how do you use it to stimulate investment as far as you possibly can, to be sure that that investment has some impact in delivering into the communities and helps them grow and create healthier, wealthier communities.

So, I guess, the next stage conversation is: now that Welsh Government has its approach to the regions, how do we think differently as to how the available finance is deployed within the regions? I think one of the things, one of the possibilities, one of the potential benefits of the conversation about the shared prosperity fund is—let's say we derive the same level of funding that otherwise we would have had, we can have a new conversation about the criteria that we place against that funding, to say—. For instance, many rural areas of Wales are being exempt from some of the funding streams that had come to us through European funding, and necessarily, I think, there is a new conversation about how you stimulate economic development within rural communities, particularly economic development that's not land based, that's not farming and agriculture. There is, potentially—. If we were to redeploy money with a bit more freedom, we can think about how this sort of funding is used to develop economies more widely than west Wales and the Valleys. Nevertheless, those communities will continue to be very much in need of that funding. So, I think there's flexibility that we would like to see in the conversation coming down the line, but I think our perspective—we would say this, wouldn't we—is that relatively small interventions dispersed represents a better bang for your buck, if you like, for Welsh communities than large-scale interventions, predominantly, which will lead to our more populated areas. 

You're hitting the nail on the head there now. Small businesses in the Valleys—those areas are very poor areas in business in Wales. I don't think you've got that sort of success there rather than south-east Wales or north Wales or the west Wales area. You just mentioned also the regions. So, are your priorities on certain areas, or are you just looking to do patch-by-patch investment in different businesses?

I think what the regions, and we've yet to see what Welsh Government's approach to the regions will be, but what the regional approach helps us to do is drill down in a little bit more detail whether we have to develop more discrete areas of funding advice, support, whatever else it might be, to respond to local circumstance. And that analysis doesn't yet exist from our perspective, and we haven't undertaken that. We're quite keen to meet and work with the chief regional officers of the Welsh Government to undertake that work, although I have to say that, to date, our engagement with the chief regional officers has been quite limited. But that certainly is needed. 

You mentioned the Valleys—it's a really good example. When we look at the engagement with businesses across the Valleys—even as the FSB, we'll hold up our hands and say our own networks within the Valleys aren't particularly as well developed as we'd probably want them to be. Do we have to work harder in these areas, where the business connections are less ubiquitous and less self-sustaining and is there a role, therefore—a disproportionate role, maybe—for public funding to help bridge that gap, and help stimulate those networks? We undertook a piece of work on self-employment, for instance, which actually shows some really interesting patterns of self-employment in the Valleys, where they are more likely to employ, for instance. So, that being the case, it would be interesting to discern further, to dig down into that, and to say, 'Well, is that an area of work, then, working on the development of those that are self-employed?', and we might want to leverage in support, in whatever way, through things like the development bank or Business Wales. So, that is yet to be undertaken—that sort of next-stage work, from our perspective, is yet to be undertaken. But the regional approach, hopefully, helps us have a more localised emphasis on what the need might be for the regions, in a way that we haven't had in the past.

And my final question: what do you think that the various organisations involved need to do better to promote the financial and other support on offer across as wide an audience as possible, including under-represented groups? And do you think that the processes involved in securing financial support are proportionate, and, if not, how could these be streamlined?

Okay. In terms of, to use the example of under-represented groups, obviously, the Welsh Government has deployed a plan, a framework, for, for instance, female entrepreneurship, which is a really positive start. That is merely one under-represented group, though. And, again, it goes back to—there are areas in which our networks fail us, and FSB, I have to say—and we're trying to plug it—we're a part of that failure. If I look at, for instance, disabled entrepreneurship as an example, we are only starting to pick away at the very surface of the support that could and should, potentially, be delivered into supporting entrepreneurship for those that find themselves far from the workplace, or find themselves with some level of disability. And I think there's a very credible example of where, possibly, we need to use the funding available, and the support services available, to dig in much deeper into those cohorts. But necessarily, as I say, even FSB's own networks—we were very, very early on in recognising the need to increase that engagement. So, we would be keen to work with any agencies to undertake that, but it has to be a priority. And we do believe that that is an example of one of the priority areas—disabled enterprise and the employment of those with disabilities—because we know that the incidence of this is very, very low among SMEs. So, that's a really good, tangible example.

Sorry, I've forgotten the second part of your question.

So, the process of securing funding as well—if I may speak about that. We approached the process of securing funding, and, actually, we were slightly intimidated, I would say, by the process. So, for example, you have the high-street lenders, then the Development Bank of Wales, and then, obviously, there are things like the Funding Circle, which I know had a lot of PR recently, around the crowdfunding opportunity now. I think, for one, we approached Funding Circle, and we never had any return communication, which was quite interesting, but also in terms of trying to understand that, it's exceptionally difficult. So, it's hard enough, I think, as a small business—we're spinning so many plates, if you like—actually understanding the process of raising finance. We don't have a financial director with a team under them who can develop budgets and business plans and everything else—it's me and my business partner who are trying to do everything, and then, on top of that, raise finance. The traditional process of raising finance, I think, is challenging enough, in terms of absorption of time—and, actually, that is a process in itself—let alone looking at all these other opportunities, like the Funding Circle.

So, I think the process itself, without an organisation like the development bank partnering with us, and working with us, along with our professional advisors, I think is incredibly challenging for the standard SME, because there's so much to do on a day-to-day basis anyway. So, trying to grow your business, trying to go through the process of securing funding, whilst doing everything else, and maintaining quality and standards, I think is challenging. It probably should be challenging—it shouldn't be easy, in my view. But even though I've got experience in it before, it's still a challenging thing to undertake. And that's why I think—I'll keep going on about it—partnering with an organisation like development bank was so useful, because they worked with us and guided us through the process. It definitely wasn't a business development person just trying to sell us funding, if you like. So, that's my personal experience in terms of securing funding.

If I can just—as an addition to that, we know from our membership that a lot of our members will secure finance through other areas like credit cards, which is, I guess, easy to do, and it's quick to do, but the risks for individuals are really quite high in that, and the levels of interest that will be levied against that kind of facility. So, I think we do want to make it as easy as possible. As John said, this shouldn't be easy, this shouldn't be instant; there has to be, particularly when we need to be absolutely sure that the public is getting a good return on investment for the sort of funding and the support that's being delivered—. But necessarily, particularly in the early stages, it's quite an intimidating process applying for what are significant amounts of cash. Even what might seem to us as predominantly small amounts of cash are quite significant in the early stages of a business. What we want to make sure, though, is that we aren't inadvertently pushing people through the failure of the high-street banks, we're not inadvertently pushing people into other areas, such as credit card debt, that exposes them to a much higher level of—

Do you think there's a danger of that?

I think there is. I think the challenge needs to be made of the high-street banks. The development bank will get you so far, but I guess the more awareness there is, the more successful the development bank becomes, the more we take the heat off the main lenders. What we hear time and time again is that, for the smallest businesses, what might be actually quite significant sums, for the high-street banks are relatively insignificant sums—there's just a low level of interest, if you pardon the pun. There's a low level of interest by the banks—

[Inaudible.]

We wouldn't be inclined to let any of the main lenders off the hook from the fact that these, in certain circumstances, are the same organisations that talk about how they're ubiquitous within our communities and are the partner of business. Well, we do expect, therefore, that there is a level of understanding that they deliver, then, to business in terms of supporting them. But there is a danger that, the more successful publicly funded schemes become, we do sort of let the pressure off the high-street lenders.

I think we need to continue to apply pressure, and to say: is it right, for instance, that we see an outward migration of localised decision making with high-street lenders, and is it right that some of the lending decisions are spatially very, very variable depending on where you are in the UK? We would say absolutely not. So, we have to continue to have that conversation and be very clear about our level of expectation of those lenders in the future. 

John Hurst—did you want to come in?

To go back to our experience, we approached one high-street bank who, even though it was six figures we were looking to borrow, said, 'Because it's below £0.25 million, we're not interested', and wouldn't even engage with us at all. Our bank that we have banked with for 14 years wouldn't speak to us one-on-one about the borrowing that we wanted to undertake, even though there was 14 years' worth of relationship. And another bank would lend us the money at a comparable interest to the development bank, but we would have to fully personally guarantee that money. Now, I have a rule in business—I've never risked the roof over my head and my kids' heads, so that was a no-go straight away. So, actually, we were really in a position where, without the development bank stepping in, we wouldn't have been able to go ahead with the acquisition. It really is that stark a scenario.

I hear very often that money is available in high-street banks, and there's lots of talk of money being available and I see plenty of PR about investment from high-street banks into businesses. Unfortunately, it has to be at a threshold, you have to be above a certain value, and also it's very onerous. We're one business who flies under the radar, we're not out there in terms of actively publicising ourselves, going for awards and things like that, and this is just one experience, and I'm sure that's happening elsewhere. But to be turned away because, basically, the borrowing wasn't over £0.25 million—I was pretty surprised by that, I really was.

Great. Jenny Rathbone.

Thank you, and thank you for your very interesting paper, which highlights some of the distortions in the market, in which, despite a ban on state aid, here we have agents of the state giving money to supermarkets, which are not about to go out of business, and one of the big five audit companies. It's really quite surprising, really—where are the strategic objectives in this? So, thank you very much for your paper. How far do you think the Government has made progress in terms of translating its vision for financial support set out in the economic action plan into the way it operates in practice?

If I think of the EAP and some of the measures around, for instance, things like the economic contract, and therefore, maybe, the expectation of businesses in return for public investment, FSB is very relaxed—the something-for-something approach seems absolutely right. I think that we're still in the very, very early days, though, of businesses understanding and migrating that process of adhering to the economic contract, for instance. It's necessary there is a next-stage conversation—if I look at fair work, for instance, set out in the Fair Work Commission report is obviously the extension to fair work or adherence to fair-work practices for businesses seeking Business Wales support and development bank support—I think there's a lot of finding out be done there. We are at the very early stages of understanding what that is. Again, FSB's relatively relaxed about that, happy to work with Welsh Government to figure out how that can work and actually create a benefit back to that agenda around fair work. But these are very, very early stages.

The number of my members that—. Again, this is part of the problem, because this is only a relatively small portion of the marketplace, the publicly subsidised portion of the marketplace. There will only be a small proportion of my members that understand the, I guess, driving aspects of the economic action plan and things like the economic contracts. So, we're starting at a very low level anyway, and we are only ever going to penetrate a certain level of the marketplace. So, there will always be a limitation to that.

I think we understand what Welsh Government is seeking to do. It is fiendishly difficult for businesses to undertake, because what we have to do is create a new awareness of the need to gather information, intelligence, to inform that decision making by the development bank or whoever else. So, work is under way, and we are working with Welsh Government on that, but it's relatively early stages in that conversation. So, I think there is a long way to go before businesses understand that new landscape of the something-for-something approach.

How much do you think the emphasis on the foundational economy is reaching your members, because small businesses tend to be grounded in local communities?

Again, relatively early stages. This is a conversation that really has only gathered any significant pace in the last two or three years. With the best will in the world, do my members identify themselves, even those that are in that area, the foundational economy, as foundational economy businesses? No, and I think—

I agree, it's not a Daily Mirror phrase, but once you talk about housing, food—I can't remember the others. But housing, food—and I absolutely can't remember the others, I'm sure that you may remember them, but these are things that are tangible things everybody understands.

Yes. I tend to get a bit uncomfortable with the terminology of 'mundane', because many businesses in that area wouldn't see themselves as mundane, but it is the day-to-day, core businesses that keep our economies healthy and wealthy. I think, when we have that conversation with our members, and we explain in that more basic terminology, they absolutely get it.

Again, Welsh Government, in understanding what that portion of the economy is and the potential for the economy, it's very, very early days in terms of defining different levels of support through things like Business Wales and the development bank for foundational economy businesses. But, obviously, there are recent funding interventions that are now being pushed out into the marketplace.

So, we're trying to populate that among our members and to have a conversation with that proportion—and it is a proportion of our membership, it's not by all means all of our membership, but it's a proportion of a membership—to say what distinctly are their needs as distinct from any other businesses, and therefore how can we create suitable support and a mechanism that is relevant for them. So, we will necessarily have within our business support infrastructure a focus on fast-growth businesses—well, I mean, many of those within the foundational economy have the capacity to grow fast or have the ambition to grow, but it will look and feel, maybe, for some businesses, a little bit different. So, it may well be that there is a lot more work to do to understand those businesses, to differentiate what support is needed for them versus, for instance, maybe a fast-growth high-tech business. It's still relatively early days. The signs are positive insomuch as this institution is having these conversations. So, from our perspective, we're really pleased to see that these conversations are out there, about 'What does the foundational economy represent for Wales and how can we ensure that it's properly supported and actually grown?' But these are very, very early stages of that conversation. I don't think, realistically, my members will have seen that that's filtered through the support landscape yet.

Okay. All right. Clearly, there is a lot of uncertainty in all this, because, if we have a 'no deal' Brexit, then there will be lots of import substitution opportunities that it'll be hard for people to be able to identify today, but if they're not thinking about it then they won't be thinking, 'How could I do that better?'

Yes, and such is the landscape now, most of my members don't—. We don't know what's happening in the next two or three months—

Well, none of us know.

—so the capacity of businesses to plan—. We've always had this conversation with smaller businesses about the need to have a planning timescale to have a better developed approach to business planning. It's all a bit impossible to do at the moment. And so, as we've seen with the conversations around Brexit preparedness, generally that's just not happening because the future state is unknown, and, as I said in evidence to the External Affairs and Additional Legislation Committee recently, those businesses that prepared for a 'no deal' in the run-up to 29 March are at a competitive disadvantage to those businesses that didn't prepare, and it is going to be difficult to get businesses to that point of potentially having to prepare for the possibility of a 'no deal' Brexit going forward. So, conversations about how we develop businesses and what that next stage of business opportunity could be are very uncertain, and we see that then filtering through to pretty low levels of business confidence.

Okay. So, leaving that on one side, what about other really big drivers, which are things like decarbonisation, which will require all sorts of innovation, and also automation, which will put a lot of jobs out of—you know, will displace a lot of jobs but also create new jobs?

And there is a low level—as I mentioned earlier, a relatively low level—of understanding to our perspective among SMEs as to what that could or should be, and I think there is a—. Unfortunately, the conversations around automation have been very, very much within academia and policy circles, and we haven't got to the practical. So, we've been trying to inform Professor Brown's review of digital innovation and automation, to say, 'Well, what are the opportunities for small businesses around, for instance, the automation of administrative processes, or even new approaches to marketing, for instance? What does 'practical' look like and what does practical innovation look like?' By way of an example, I met with a business last week, a company called Carreg Construction—a construction company in Pembrokeshire dealing in bespoke builds, barn conversions, things like that. They've taken it upon themselves to develop in conjunction with a software company here in Cardiff a tool that allows clients to engage directly with them to bespoke the terms of the project, to negotiate price, for instance. It creates an entirely new interface, which dramatically reduces the time taken for the to-ing and fro-ing of conversation between contractor and customer, and that's the sort of conversation that I would like to get more out there, the sort of relatively—well, significant for that business, but relatively low level intervention that proportionally has that real value for that business. And that is the conversation about the possibilities of innovation and automation that are more relevant to smaller businesses that we'd like to see more of. That is where there is the potential to utilise some of this money through the business support or development bank system to help stimulate that thinking and fund it and obviously then send it out—commercialise it.

How are we going to stimulate this conversation? Because your question about future funding priorities in your article—No. 1 on top of your members' list of preferences is extended tax relief for small businesses. Well, that would be rewarding gambling shops the same way as a care service, something where the social benefit—the difference is huge.

Yes. And, clearly, you need—. Again, we've not been too prescriptive as to what we think. That is the perception from our membership. We haven't taken that to the next stages to say, well, if there is any tax relief, tax support, in the marketplace, what that should be leveraged to. I think we'd be the first to say that there should be—. Again, we have to assess the return on investment for both economy and society of that. It refers back, though, to that conversation about what Government can do, and what the public sector can do if it does nothing else is create the landscape in which businesses can thrive and survive, and it may well be that there are interventions to—.

I'll give you another example. I spoke to a member who, in light of Ford's decision to withdraw from Bridgend—. He had experience of having come into entrepreneurship from being made redundant in the past. One of his observations was that, whereas Government quite often offered subsidy and support for retraining, what he felt he really needed once he started up a business was a tax safety net to make sure that he got through those first three years. Now, that's anecdotal; we've not developed that. But that is maybe one of those conversations of where we leverage in support. If we help people into entrepreneurship in those kinds of situations, whether it be employees at Ford or otherwise, is one of the interventions using the tax system to create that safety net to ensure that that business is given a fair wind in the first instance? So, I think that's where you can start to develop these kinds of conversations as to how support can be used.

Okay. So, what do you think the Welsh Government should be focusing on in reviewing its performance monitoring arrangements in order to achieve its sustainable development objectives?

So, we have to—. One of the big—. Obviously, in our report, we've looked at a sort of cost-per-job analysis, which is blunt—

Well, that's hopeless.

It doesn't—. Yes. So, we need to come up with criteria that are more reflective of both what the business is seeking to do and the impact on the economy. So, for instance, decarbonisation is a very good example, and actually we will be bringing a paper around this, hopefully, later this year, and our policy unit is going to be considering this issue on Thursday when it meets. But I think that is an area where, again, part of the problem is the monitoring of that. So, if we are going to leverage support against the ability of business or the performance of business in decarbonising then we need to access that data from the businesses themselves and, in most cases, it won't be collected or understood.

Our challenge to Welsh Government on the declaration of a climate emergency is: 'What does that now look like for the landscape of business support? What will we be doing differently as a result of that?' And I think the answer at the moment is: 'We don't know.' But, clearly, we have to articulate that pretty quickly because that's the sort of question that's being asked by my membership: 'So what? What does this mean? How are we going to work differently? What is going to be asked of us? And what are the opportunities, then?'

Okay. Indeed. A lot of people are talking about the need for a green new deal, and you can see how small businesses would be just as able to deliver the sorts of things that would be needed, because, if we're talking about overcladding, retrofitting the existing homes, it doesn't have to be done by a large company; it can be done by a lot of small companies, so long as they have the right tools to do the job accurately. So, is that something that the Welsh Government ought to be driving forward, or should it be coming from you and your members?

I think where there is the opportunity, and I've not obviously thought up that example, but, off the front of my mind, where there is the opportunity to create a market advantage for smaller businesses in undertaking that sort of work but they wouldn't otherwise be able to do it without support in whatever way, whether it's direct grant support, or whether it be simply signposting to appropriate areas of business development support, for instance, I think that creates a good return on investment. In examples like that, what we do tend to find is that the biggest companies that are already doing it have the biggest capacity to sweep into the marketplace. Because there is a demand to do it with some urgency, it's very easy to turn to those sorts of businesses, rather than say, 'Where is this an opportunity, both to get a sustainability benefit and a carbon reduction benefit, but also to use it to capitalise the marketplace and create competence within smaller businesses?' So, it ticks a lot of boxes.

Okay. So, is it the role of Government, or is it the role of you and your members to ensure that we've got that focus?

I think it's a bit of both. I think there is going to have to be, naturally—. We know that on this issue of decarbonisation, there is consumer demand that we know our members are feeling around their own operations. So, that should come from the private marketplace, but whether it happens to the extent to which we would want to see it happen to implement any kind of change to Wales's carbon performance, I think is probably that next-stage question as to where you might use publicly funded bits of support to stimulate that marketplace or fill that gap. So, yes, the private marketplace absolutely could and should be—. And I think we do know, from conversations with our members, that they understand both their obligation, but also the market potential; the more consumers who are demanding this, the more a savvy business will be able to fill that space.

Okay. And what do you think the role of the development bank should be in all this? Because they have some of the wherewithal to have the expertise to be able to assess the viability of project A or project B.

It would look and feel, to my knowledge, something like the work that they're doing on small house builders—so, assessing where there is a gap in the market, understanding where access to the marketplace is most difficult for small house builders and then creating that bridge, that leg up. To use that example of cladding, that looks and feels very, very similar to that conversation with small house builders. So, I think there absolutely is a role for the development bank, but I don't have any great detailed knowledge, particularly in those sorts of examples, as to what that potential is. As I say, we will be looking at our own work around decarbonisation and some of the opportunities that come from that, plus, I guess, the expectation of business in decarbonising themselves. So, there will be more work that comes from FSB in the next few months on that.

Adam Price.

My question was going to be about the effects of the continuing uncertainty about Brexit and how that should guide the development of Government policy in terms of the provision of financial advice. I think you've touched on that already, unless there's anything in particular that you want to add.

No. I'm aware that it is such a—. Anything I say could become immediately irrelevant by the end of today, such is the marketplace. But I think the uncertainty—to make the point again—is very, very problematic for my members, many of whom find themselves least able to plan, least able to have the capacity to plan for what that future state might look like. So, whereas a larger organisation has the capacity to plan for any number of scenarios, we find that that's not the case with smaller businesses.

We've only got a couple of minutes, so maybe if I could ask you a different question. One of the other areas of concern recently has been the withdrawal of the mainstream banking sector from the provision of ordinary banking services to small and medium-sized enterprises. It's a different kind of question, but as that happens, would you like to see the development bank basically moving into the provision of ordinary bank lending, for example, not just the investment banking role that it currently performs?

Certainly, we have a real concern about the withdrawal of banking services from communities. And this is not just—. Our main areas of concern are the reduction of physical facilities for things like cash deposit and the availability of cash on the high streets and in communities throughout Wales. But also, the withdrawal of that architecture of local intelligence and decision making has been something that we've seen for many, many years. I think we're pragmatic; gone are the days when you have a bank manager for maybe 20 years who's understood you and your business and your family for that time. I think certainly there is a gap there to be filled. I think we'd be really interested to see the analysis that leads to any business case for the development bank filling that space.

I think the challenging aspect of that is the physical architecture of banking, which is necessarily difficult and expensive to fund. We haven't had any conversation with our members as to what the development bank's role might be within that, but I think we'd be quite keen to be part of that analysis and quite keen to work with the development bank and others so we can say what are the priorities as far as our members are concerned and what can be the market opportunity for the development bank to fill that space. But as I say, these are institutions that have riffed for many, many years about how embedded they are within our communities, and our members find that at the hour at which they need them most, these—.

If I think of Llandovery recently, the last bank has left, and I say it because I was part of the community for many, many years and remember there being four banks there. It represents the withdrawal, if nothing else, of a brand from the community, but also the withdrawal of that advice, support and intelligence that we know businesses find so valuable in informing decision making. At the same time, we are seeing from our perspective the decision making, albeit around the investment, being highly centralised, and therefore not responsive to the needs of communities. But in terms of that face-to-face service, I think we're quite pragmatic as to what that can be, because it's an expensive thing to do. But I think we'd like to work with the development bank and others to say, 'What, pragmatically, can that look like?' versus what the expectations might be of our members.

If I may, just to give you an example, when I bought into B2B IT, one of the founder directors was retiring; I bought in, and the process of just getting a credit card and a paying-in book with my name on it took over two and a half months with a high street bank, and the only way I got it in the end is I went into one of the banks, and it was a branch manager who took pity on me, and actually took me through the process. We're an IT company, we're relatively savvy with the online world, and I found it nigh on impossible navigating it, and navigating the call centres. It was incredibly difficult.

We moved office recently and moved into the old S4C building in Llanishen, and fortunately there are local branches there, because actually changing the address, trying to find a form online just to change the address, was very, very difficult indeed, and didn't make too much sense. So again, I went into the branch and they talked me through the whole process of what I needed to fill in and where I needed to sign. Without that support it would have been very difficult for me to get a credit card and a bank card and take the outgoing director's name off the accounts, but also just changing the office address would have been problematic.

That's a real-life experience, and I think we're pretty savvy when it comes to these things. We're fine with online banking, but actually it's the process that goes behind that where I think the local presence is needed. Where that comes from I'm not commenting on, but that's just an experience of a local high street bank that we're dealing with.

And there are other proposals out there, aren't there, for a community-owned local and business-facing bank as well, so there may be other ways of meeting the need.

I should say we are at a very, very early stage of any engagement on that, but we're interested to inform it, at least with the demand that we feel is out there within the market.

Other business membership organisations in other parts of the world have dipped their own toes into the water by setting up a business equivalent of a credit union—lending and funding circles of a variety of kinds. Is this something that the FSB has ever looked at—basically, looking to your own members, really, to see whether you could pool some of your resources in all kinds of ways? Is that something you've explored?

FSB has a raft of services that we deliver to our membership, and part of that—. You know, there have been conversations in the past about what should be our part of that marketplace. There is an opportunity in that for us, but it is obviously quite a sizeable obligation. So, we do work with third parties on things like business banking, but that tends to be through the high street banks. But I think what's important for FSB is to make sure that we have competitive advantage, that we have the best support services available, and part of that is driven where we see that there is market gap. So, that conversation isn't particularly well developed at the moment, but it is feasible that FSB may in the future see that there is a gap across the UK. It would be a UK service, because we are a UK-derived organisation; we don't have a level of support in Wales that's differential than anywhere else in the UK. But we do work with third parties to plug those gaps. Part of that might be, for instance, the fact that we offer a free legal 24-hour helpline, and that is largely there because it's a great safety net for small businesses that find it very difficult, or expensive, to access that kind of legal support in a timely way. So, a lot of our opportunities are born out of market—. Sorry, a lot of our services are born out of market opportunity and advantage. So, we haven't developed that yet, but it'll be interesting to see whether the landscape develops to such a point where organisations such as FSB feel the need or see an opportunity to develop it themselves. 

Okay. Thank you. 

You finished on a point about opportunity; that's always a good positive point. Unless any Members have got any further questions—. No? Great. Thanks. That's been really helpful. Thank you, Ben Cottam and John Hurst from the FSB.   

Thanks very much for the chance to talk to you. 

It's been very informative. We will reflect on today. We'll send you a transcript before it's published for you to check for accuracy. 

That's great. Thank you very much, all. Good afternoon. 

I move Standing Order 17.42 to move into private session for the rest of today's meeting—items 5 and 6.