National Assembly for Wales

Thank you very much, Llyr. It's a pleasure to be here in your committee. The purpose of the Bill is to further protect children's rights. As you know, there's a long history in the Welsh Government and the Welsh Assembly in protecting children's rights, and this is another step on that journey. If the Bill is successful, it will help end the physical punishment of children in Wales by abolishing the defence of reasonable punishment, and we have given careful and detailed consideration to the activities that are needed for the Bill to be successfully implemented. I think we would see success as a much greater awareness amongst the public that it was not acceptable to physically punish children, we'd see a reduction in reports of physical punishment, and we would see children's rights further protected. We know that legislating on physical punishment can contribute to the change in attitudes and the use of physical punishment if it is accompanied by a sustained information campaign and support to parents. So, I'm committed to resourcing those very important issues. 

And a big chunk of the funding, of course, is around the awareness raising, isn't it? I'm sure we'll come to that in more detail. 

Yes, very important. 

So, within the regulatory impact assessment, there are a number of areas where, of course, information couldn't be gathered and financial implications therefore remain uncosted. So, how do you think that might have impacted on the accuracy of the regulatory impact assessment, and could you tell us a bit about what resources were dedicated to costing the Bill throughout its development? 

Well, obviously, we're completely hampered, shall we say, because there is no precedent in the UK for removing the defence, and therefore data on reasonable punishment is not routinely collected. So, really, we've given our best estimate of the potential costs of the change in law, based on what we actually know. And we have worked extensively with stakeholders to try to establish the best estimates. We've worked with the police. The officials have worked very closely with the police, the Crown Prosecution Service we've worked with—I've had two meetings with the CPS—and with the Ministry of Justice, and with social services. We've also explored the published data that is available from other countries that have taken similar actions, and I've looked at any data that they've got. So, we've spoken to a range of stakeholders in Ireland, New Zealand and Malta, which are the three countries who have similar legal systems to ourselves, and who have removed the defence of reasonable punishment.

The main resource for this activity has been the Bill team, who've been working with a range of other specialists in Welsh Government—researchers, statisticians, lawyers, economists. There's been a big effort. And, obviously, these two are from the Bill team, so I don't know if there's anything you want to add about the work that you've been doing to try to assess the data.

I think you've covered it, Minister. As said, we've engaged with a wide range of stakeholders, as well as looking at the evidence and published data that is available. 

Okay, thank you. The draft RIA included in the consultation that was launched in January last year references the disbenefits associated with poor outcomes for children and anti-social behaviour, and there's reference as well to the troubled families cost savings calculator. But can you explain why the published RIA doesn't include any financial benefits, and maybe what analysis you might have undertaken to try and identify some potential benefits?

Well, as you understand, the RIA has been developed over a long period of time and has been revisited since the consultation was published in January 2018, and there are a number of reasons why we decided not to include costs and benefits associated with the link between physical punishment and anti-social behaviour. Because the research evidence is mixed, and although many researchers suggest physical punishment is linked to anti-social behaviour, the Wales Centre for Public Policy review published in July 2018, which we actually commissioned, did not present this finding as a causal relationship. And, so, I suppose, what we're being is very careful and cautious not to claim too much on the research. And in addition, of course, there's no single determining cause for anti-social behaviour, which may develop due to a number of factors, including alcohol, drug abuse, domestic violence; there are all those other factors often involved in any of these situations. 

So, in developing the RIA, we've done a thorough examination of the benefits of the impacts, including, through extensive stakeholder engagement, analysis of the nearly 1,900 consultation responses received, and through the commissioned research. Although the paper that we've commissioned says there is no actual causal link, the summary, really, is that the majority of researchers in the field make the judgment that the balance of evidence is sufficient to support the claim that all physical punishment, under all conditions, is potentially harmful to child development. 

So, you would expect there to be a benefit, but you're erring on the side of caution in trying not to claim too much on that. 

Of course, yes. I think we've been pretty certain there will be a benefit, but in terms of a child's behaviour and the future cost to the state—

And the consequential cost of that.

Yes. We feel that that will be there, but we haven't actually included that because of the way the evidence, the research, was presented. 

Okay, thank you. Mike. 

Can I just carry on with that for a second?

Yes, sure. 

I would pose the question, Chair, that if you stop parents engaging in mild physical punishment of children, you stop it progressing to more serious physical punishment of children. And I'm sure that most of the people who severely batter their children, and then children are being taken into care sometimes in the end, actually started off by mildly hitting them and the violence just increased. We've seen that with lots of other places, including assaults on women, where a lot of it starts off fairy mild, nothing is done, and it just gets worse and worse. I mean, don't you see that there's potential of—well, you might not put some money on it—savings taking place in terms of social services if fewer children end up having to be taken into care because the violence, which started off fairly mildly within the—this is reasonable punishment—eventually escalates?

Well, I definitely think there would be individual situations where that has happened, yes, but, obviously, we do accept that some parents do give mild punishment that doesn't go beyond that.

Yes, but the point I was making was: I don't think any parent who ends up taking punishment well beyond what we would describe as mild, and it actually moves on to serious assault, didn't start off with mild punishment in the beginning.

I think you make a good point.

Moving on, then. Rather than providing do-nothing costs associated with the current legislation situation, the RIA provides a list of grants and programmes that provide general support for parents, carers and families. Can you outline the specific activities in these programmes that are relevant to this Bill and where the resourcing of those programmes may need to change as the Bill is enacted?

Well, as we set out in the explanatory memorandum, this Bill is part of a wider package of measures that the Welsh Government is taking to support children and their parents. This includes the 'Parenting: Give it Time' campaign, access to parenting advice, and that's through the universal services, particularly the health visiting service, which is so important because it goes to so many—well, it goes to all children. And then the family support programmes—Flying Start and Families First—and all those programmes provide parenting support, information, advice, guidance. I'd like to make the point, really, that parenting is difficult, I think. I think everybody—we all need as much help as we can possibly get, and so we are committed to giving that help to everybody. We are particularly keen that the information about this Bill and the support that this will need is incorporated in those programmes.

One of the key things is communication and awareness and letting people know. I have to say this, because I was horrified when I heard it on the radio, when they were interviewing people over whether we should have this Bill, and this woman said, 'Well, when you smack a baby over its nappy, it doesn't feel very much, anyway.' Surely, we do need to develop awareness and understanding and communicate the benefits of taking this forward. What I'm really asking is: how much have you already committed to communication and awareness raising, and have you got a profile of its expenditure?

Well, to pick up your first point, I agree that this communication is absolutely essential because I think many people have a misguided view of, perhaps, what we're trying to do, which is to give a really positive best start in life to children. That's what we're out to do, and so the communications is absolutely essential. So, a communications contract was procured in the normal way that Welsh Government procures contracts to provide support for both the Bill and for the 'Parenting: Give it Time', the positive parenting campaign. Some costs have already been accrued under the contract in relation to the 'Parenting: Give it Time' campaign, but this is not directly related to the Bill and, therefore, it's not included in the regulatory impact assessment.

I was going to say that—just a final point—whether we have this Bill or not, we would want to stop people hitting babies.

Absolutely. I mean, we'd want to stop people hitting anybody, and we particularly want people not hitting children, and that is the purpose behind the Bill.

Rhianon wants to come in.

Yes. Following through on that particular point in regard to the financial expenditure around the Bill itself—I hope the Chair will indulge me—around that team around the family, Flying Start, the whole plethora and platform of initiatives, which will be looking at managing challenging behaviour, outside of this Bill, could you just give a little bit more information in regard to how we're strengthening those programmes to actually support, in parallel, the aims and objectives of this Bill? And I'm conscious that I'm slightly straying away from the financial expenditure on the Bill, so I might get told off.

Well, what we're going to do is we're going to have a mapping exercise with external bodies who are involved, external stakeholders, internal stakeholders. And what we'll try and scope is what is the additional parenting support and what additional advice and information is required beyond what we already give. So, I think you'll probably come on to ask about the implementation group we're going to set up later on, but that will be one of the key tasks for that group—to see what are the gaps and what do we need.

Okay, thank you.

Can I just pick up: you mentioned that you had procured a media company to support you in that work; what if the Bill didn't progress? I mean, can you get out of that contract?

Yes, it will be possible to bring the Bill-related element of the contract to an end, with minimal cost to Welsh Government—

There we are. But, of course, it's a wider piece of work anyway, isn't it? 

Yes, if the Bill doesn't proceed. It's quite difficult to know how much to do in anticipation and in the hope that we do get it through, but, obviously, it's the will of the Assembly, isn't it? So, we can't do too much before.

Indeed it is. Okay, thank you. Rhun.

Right. Well, just to comment at the beginning, there'd be an awful lot of countries that you wouldn't be able to visit in terms of this legislation, seeing that I think there are 54 countries now that have removed the defence of reasonable punishment. And, as you know, Scotland is doing it in parallel with us, and Ireland has already done it, so, it would be quite—. People would be very restricted in where they can go. But, obviously, the cross-border issues are important, and we're absolutely committed in trying to make the change in the law as accessible and available to as many people as possible, and that is internationally as well.

So, we do have to be realistic and say it is quite difficult to carry out an extensive awareness campaign outside of your own country to make sure that visitors are aware of any change in the law. So, that is very difficult to do, and, obviously, there is a level of obligation on people coming to Wales to find out what are the rules, what are the laws in Wales. But, as I say, both Scotland and Wales are taking similar legislation forward, and there has been considerable press coverage in the UK press. When we did launch the Bill, we were very pleased that the UK press was taking some notice of Wales and we did have a lot of publicity then, basically—The Guardian, The Sun, the Jeremy Vine show, Woman's Hour, the Shropshire Star—[Laughter.]—just to name a few. And they are taking a keen interest, and I hope that will continue, because, obviously, it's very important that we do get this over. And I think we are dependent, Rhun, to some extent, on the press taking it up. We will consider what more and to what extent we should take further actions. I know that one of our officials has recently met with the tourism industry just to make them aware of this, and we will look, when we've got the implementation group, at any more that we need to do. But I think the more we can get into the press, the better, about this, because it is the awareness of it. I don't know if you want to comment on your meeting with the tourism—

We had initial discussions and we've got further discussions planned before the summer. Obviously, it's early days in terms of talking with them, but I think the discussion that I had with the head of this area within Welsh Government actually felt that there was something that we could really champion in relation to our championing of children's rights, our support for children and the fact that we want all children to be treated with dignity and respect.

And I just want to say one thing. What's very important is social media, and there has been a lot of stuff on social media and we want to continue that.

Sorry if anyone else was going to ask this afterwards, but we laughed when you mentioned the Shropshire Star, but it got me thinking, of course, that this legislation, if and when it goes through, will apply to people from across the border visiting Wales as well.

Yes.

A significant number of people. So there must be a cost in terms of—'advertising' the law is the wrong word; you don't advertise the law, do you? But publicising awareness of the law across the border as well, and across the UK in general, has that been factored in? It's a difficult thing to factor in, but I just wondered if thought has been given to that. 

Well, we have got the awareness campaign that we are publishing, and an element of that, obviously, could be to advertise it over the border. 

Because it's often when people are on holiday that they're in quite stressful situations and you can get smacking and chastisement, can't you? So, yes, it's an interesting area.

Yes, it's something we are intending to pursue. 

Particularly for those areas like mine that are near the border, where there's a lot of cross-border interaction. 

Rhun.

We have done a lot of work on trying to obtain this data, and it's an absolute high priority to get the social services data. But, we are slightly in the situation that we are waiting for the Bill to develop. Referrals to social services are usually recorded on their systems, but they're not usually categorised into specific groups until later in the child protection process, and reasonable punishment isn't something that they categorise by itself at the moment. So that's why it's so difficult to easily get access to this data. But what we're doing is we're working very closely with five social services teams to see if it's possible to establish a meaningful estimate for current reports of reasonable punishment. And, again, we'll be working with the implementation group and with the relevant task and finish group under that implementation group to establish a method to collect much more specific and long-term data on the levels of reasonable punishment before and after the implementation of the Bill. Because we're not going to be able to measure whether the Bill has been a success unless we have something to measure it against. And, again, because this defence has always been there, we don't have anything to measure it against. So, we have been working quite extensively with social services to try to get this data, but now we're doing it with five teams in order to bore right down and see what we can do. 

And is that work with social services department also drilling down into elements such as the unit costs that they will have to take on? What detail are you able to give about the unit costs that have already been established for referrals—how many hours, and so on, and what resources will be needed for the different elements?

Yes, we've had extensive engagement with social services colleagues to try to establish what the unit costs were, and we've established a unit cost of £535, which is set out, as you've seen, probably, in the regulatory impact assessment. And this covers the cost of responding to a referral by children's services and other agencies involved in a child protection inquiry and then would include, where you need to, the hourly rate. So that's the best estimate we've made of the cost. 

The figure you've given us is a more global one. Is there more detail on how that is made up? What are the different elements?

I think, yes, there is more detail on that. Do you want to hear the detail, because we—

It's set out in the regulatory impact assessment, so it's broken down into £60 for the administrative costs—

And what about the resources required apart from the costs for delivering those, given the limited resources that local authorities have? 

Sorry, could you repeat the question, please? 

What about—? We're talking resources across the board, which might mean taking on more staff and that kind of thing as well, which would have cost implications for social services. 

Potentially, that could be the case. That's why we want to try to establish a really meaningful baseline, which, as the Minister said, will be part of the work of the implementation group. And we want to then be able to measure the numbers of referrals effectively with agreed, defined data definitions, so that we can actually work out ahead of the change in the law—if it's passed, of course—what that baseline will be, and then we will be able to compare that to what takes place post the change in the law.

So, the way that we've set this out in the regulatory impact assessment at the moment shows the breakdown of the costs and the numbers of individuals per case but, of course, for some of these cases this might only be one hour of work. For the full total cost, that could be anything up to 15 hours or more. So, there's variation even within this.

Before I bring Rhianon in, can I just pick up on that? So, you're saying that the baseline data will be in place before the Bill is enacted.   

Well, if you take the example of New Zealand, before New Zealand's Bill was commenced they spent a period of three months with the police—not social services, in terms of published data that we've been able to find—collecting information about the types of physical assaults that were taking place pre commencement. And the information that we have in the RIA, we were able to establish what happened beforehand and compare that to the period after commencement of the Bill. That is our intent: to actually work with colleagues and a range of our stakeholders to develop a way of collecting information pre commencement, should the Bill achieve Royal Assent, and then we can compare that effectively post commencement.

Okay, because you said earlier that the Bill has been a long time in gestation; I'm just wondering whether some of this could have happened to inform the RIA actually, and not just wait until we approve it here and then—

I think it's as I said earlier: how much you actually do before you're sure that the Bill will get agreement by the Assembly. I think an awful lot of this work has been done, but we're also anticipating a very long run-in after Royal Assent, assuming we get it. We are thinking of certainly up to two years before it actually would be enacted, so that does give us a long time. That's one of the reasons for giving us this long period; apart from being determined that we make as many people as aware of it as we possibly can, we think we do need that period to work out some of these issues. We want to have a baseline before it's actually enacted. 

Yes. And can I just fast forward then to the end—well, not the end, because it doesn't finish—but the post-implementation review? Clearly, that will need to then look at what the baseline was and where we're at as a consequence of the legislation. So, is there any cost or any resource allocated to that, or how will that happen?

Yes. Well, there certainly will be, because it's absolutely essential that we have the post—

But where is that in the RIA? 

It's not specifically mentioned in the RIA, because I think that would be part of our everyday work as the Bill team. As things progress, there will still be people dedicated within Welsh Government to look at these issues, and I think at that point then we'd have to look at—. I suppose it's possible we might need to get some external help, but we don't know that at the moment. We might be able to deal with it internally in terms of the review.  

But we know there's going to be a post-implementation review, but we don't know how that's going to happen or how much it's going to cost, and our job is to scrutinise the cost of adopting this legislation. So, I'm just—. Because I know in other pieces of legislation, there have been so many hours of a certain level of official—.

So, one of the things that we will do in terms of ensuring that we can test post implementation is to develop that requirement during the period between Royal Assent and implementation, so that we will be clear about the information that we want to collect, when we're going to collect it. Again, because we haven't—we planned in our programme of work to look at the development of the baseline, and therefore, using that information, we can then develop what the post-implementation review will need to collect. So that's part of our work plan, but we haven't reflected that in detail.

And you can understand our job is to scrutinise what the cost implications will be, and there's a bit of a gap there, really, as far as we're concerned, in our scrutiny. But I understand the point you're making about when is best to establish the baseline, et cetera; it just doesn't give us that assurance that we know exactly what this is going to mean. Sorry, Rhianon, we've gone a long way from where we were.

We've probably covered exactly where I was going to go. In regard to the work that's in progress—and I accept fully the conversation and discussion around that being looked at in depth with local authorities, with the social services departments that you're looking at, in terms of understanding potential impact on workload, and how much this is going to cost—have you got in your benchmarking a sort of timescale—and I accept that you don't know if the Bill is going to go ahead, as such, as of this moment in time—as to when you're going to have a clearer idea of the workload, for social services in particular, in terms of them already being overstretched? And that's not to say that this isn't a good idea. But have you got a timescale in mind, in terms of when you're going to have some sort of clear indication as to how much impact this is going to have on local authorities and their workload, and how much that's going to cost therefore?

Well, basically, the evidence from all other countries shows that it doesn't—there is not a flood of referrals, and that's true of all the countries that we've seen. We don't know; because we're doing something that is unknown up until now, we certainly don't know. But it is being very warmly welcomed by the social services. I know that Sally Jenkins, on behalf of the Association of Directors of Social Services, and the children's services, and social services, was saying:

'we really welcome this Bill and we welcome the proposed change for the clarity it would bring...for children, for parents and for professionals';

'our children deserve the best legislation';

'I don't think it will divert resources from children's services';

'it's not opening floodgates for a sudden sea of referrals to children's services'.

That's what they feel in social services, as the lead person—that there won't be this flood of referrals. So, we don't anticipate that there will be a huge impact, but we don't know.

Okay. Thank you.

Okay. Thank you. Mike.

While it's clear in the legislation that it's not aimed to criminalise parents, your assessment of the implementation of the Bill outlines there will be 274 more referrals to police. How confident are you in that number? How did you get to it? Because 274 sounds awfully precise—with 250 to 300, I might have been less critical, but 274—. And won't that cost fall on the police rather than on anything covered by the Welsh Assembly?

Well, I'm very confident that the figure provided by the police has been worked out in great detail, and they've come up with this 274 referrals per year. The police have explained to officials their methodology for arriving at this figure, and I know the officials are very satisfied that this has been done in a very appropriate way, and that it is as robust as it can be under the current circumstances. Because, of course, again, with the police, the data on reasonable punishment is not routinely collected. So we're in the same position with the police, but they have been able to go back over their records and have come forward with this figure, which, as I say, the officials have been through the methodology, and feel very satisfied that this 274 is an adequate figure.

As good as it can be.

Yes, as good as it can be, shall we say.

It's just that I might have thought that there might have been a confidence level there, and a plus or minus for a range. But, obviously, that's not the direction you have travelled.

I think it's that we worked with the police—they developed the methodology; they are the ones who gave us the figure. There probably is a range, but I think based on the information provided, that was strong enough.

Can I just push on this? Did they come up with a confidence level? Did they say. 'We've got a 95 per cent confidence level on it' or—? 

They haven't got that, but I think they've been very clear in terms of how they've caveated the data and the information.

From the days when I used to deal with statistical analysis, which is some time ago, we always used to generate both the range and a percentage degree of confidence: we had 95 per cent competence, 99 per cent confidence. I take it that you haven't got that level of confidence in the information provided—it's just a straight 274. 

Maybe we could ask you to provide a bit of background as to how that figure was arrived at, because I'm also interested in how the figures relate to the number of prosecutions that are expected as well, not just referrals, and how you've gone from one to the other, or how the police might have arrived at one figure, following the other.

Yes, well, obviously, I think the number that result in prosecution is very important.

It is indeed, yes.

Did you want to—?

I think it was just to say that the methodology, at least to an extent, is set out in annex 7 to the explanatory memorandum, and it explains the retrospective process they had to go through to get that figure. So, obviously, we can go back and ask if there is any more detail that they can give. There may be limited additional detail that they can give over and above that, actually, but obviously we can ask.

It would be interesting to have that if it's available.

It's a bit strange because I'm asking these questions to you and these aren't your figures. 

This has very much been a joint effort. We've had to work so closely with the police and social services and the CPS.

These are the police figures rather than yours, so it's pointless saying, in some respects, to you, 'Are you sure about these?', because all you've done is repeat figures you've already been given. So, apologies for that.

The other point is that the RIA suggests that there will be differences in the number of annual prosecutions at the commencement of the reporting period and at the end. However, the RIA's resources are allocated on a uniform basis rather than a tapering basis. Why?

Well, I think that's what we agreed with the Ministry of Justice, wasn't it? I think this is what the Ministry of Justice felt was the appropriate thing to do, rather than having different ones, that you would have—. 

And finally from me, the RIA suggests there may be transitional costs associated with updating guidance for relevant public and third-sector bodies. The question I've got is: are they actual costs or are they opportunity costs? Are they things that people will be doing rather than something else, or are you going to actually have to employ additional people to do it? Because there's a big difference in that, and if all you're losing is opportunity costs—. 

I don't see that we would be actually—. It would be opportunity costs, basically.

Fine. I have a simple view on life, as everybody knows, and I think opportunity costs are not real costs in the sense that you're not actually spending any more money, you're just spending it differently.

That's right, yes.

Thank you, Mike. Nick.

Thanks, Chair. Can I ask you about training activity? It's been identified multiple times in the EM and the RIA, but it doesn't seem to have been costed. Why hasn't there been more analysis undertaken of the cost of training?

First of all, I suppose we reiterate—I don't think we've said this here this morning so far—that by doing this, we're not creating a new offence, so there's no need to have any training on a new offence. We are removing a defence to an offence of common assault, which has been part of the common law of England and Wales for a very long time. Professionals already receive and investigate reports of children being assaulted and there are established procedures to determine on a case-by-case basis how best to proceed. And so, in nearly all of these cases, the professionals already receive safeguarding training to a certain level and at a frequency appropriate to their role, and we anticipate that any changes to legislation would be incorporated in the training that already takes place.

I hadn't thought of that. It's not creating an offence, is it—it's a different type of law, isn't it?

Yes.

Okay. And the RIA—you mentioned the development of similar legislation elsewhere—contains a section that outlines limitations to data collection that impacted on your ability to estimate the implications of the Bill. How have you dealt with the potential risks around these unknown factors?

We've already had some discussion about the limitations that do exist, but the RIA does clearly set out the difficulties of estimating the implications of the Bill when there is no precedent in the UK for removing the defence of reasonable punishment. So, we’re working with a huge range of stakeholders to establish the most appropriate and reliable data, as we’ve already discussed this morning—social services, police, CPS, Ministry of Justice—who are all supportive of the approach that we are taking. And we’ve spoken to Government officials, police, and leaders in Malta, Ireland and New Zealand—not visiting, I have to say—but we have been in touch and have had telephone conversations with them.

We can always investigate on your behalf. [Laughter.]

We can hand it over to you. [Laughter.] But, we haven’t received any indication that either police or social services were overwhelmed following law reform, which I think is a very important point.

And on that issue about how we can get over the fact that we haven’t got the data in terms of planning, it’s useful to look at what Irish Senator Jillian van Turnhout in Ireland said. She actually introduced the Bill that became law in Ireland—it was an amendment to a Bill—and she said that

‘the Office of the Director of Public Prosecutions…has checked and has found no evidence of any increase in the number of prosecutions'

in Ireland. I believe that was about three years ago, the Irish legislation. And then, in New Zealand, in 2009, two years after the law came into force, the deputy police commissioner said,

'I am confident in saying that this latest review again shows the amendment has had minimal impact on police activity. It continues to be "business as usual" for us and police continue to use their discretion and common sense in their decision making around child assault events.’

And we’ve also spoken to Malta. So, I think we’ve done as much as we can to mitigate the fact that we don’t have this data.

How appropriate is it to use—? I think you mentioned the Irish example. That's probably more relevant than New Zealand. How appropriate is it to use data from New Zealand? Because it's quite a different sort of country to the UK and Wales, isn't it?

It’s really trying to find something, some country, that is the nearest to us as we can. And, in Ireland, as I said, this legislation went through on an amendment to a Bill. So, there was none of the preparatory work, or all the work that this team and the Welsh Government have been doing for a considerable time now, and will do, until it becomes law.

I seem to remember that was a possible approach here once, wasn’t it?

It was. It certainly was a possibility. 

The little grey cells are remembering a lot of discussion around that.

Yes, well, I'm not criticising Ireland in any way. I’m just saying that we couldn’t use them as a comparison because they didn’t have any data and they hadn’t done any preparation. So, they had no baseline, whereas New Zealand was the only country that had actually gathered statistics for three months before they brought in the Bill and—

And probably a more robust way of doing it in its own right, rather than an alteration to another law.

Well, it makes it—. It means you have to think about all these issues and prepare as well as you possibly can. But, you know, I'm not criticising Ireland. And I know we did try to do it here as well.

If I—oh no, it's not my question, the next one. 

Rhianon, you've indicated you want to come in. 

Yes, just quickly following on, if I may. Because, obviously, there are two sides to this. Obviously, it could be deemed as welcome that this is an extra tool in the toolkit and there have been no further prosecutions evidenced in Ireland, or the fact that there's been a minimal impact. So, in terms of your understanding of the evaluation in Ireland of how useful the amendment has been, the feedback from them has been what?

The feedback—. Have we got any specific—

Because if there are no further prosecutions—. I mean, you could look at it like an anti-social behaviour order.

I think they’re doing all the work now, following the actual passing of the law. They’re now doing the work. But, obviously, just the pure changing of the law hasn’t resulted in a—. We don’t anticipate that there will be a huge impact in terms of prosecutions here, but we have to accept the fact that we are removing a defence, so the people who have relied on a defence before will now be liable to be prosecuted, but the numbers who actually end up being prosecuted are very, very small. We estimate, I think—what was the figure? About 38 over five years. That's using the New Zealand data as a base. That would be under 10 a year—that's correct, isn't it—prosecuted.

And that's ahead of us raising awareness and additional information and support. So, potentially, lower again. 

So, in regard, then, to the implementation group that we've mentioned a number of times already, can you give us a little bit more information as to the membership of that group and a bit of a heads-up in terms of the agenda for what it will be dealing with? 

Yes. I see this implementation group as absolutely crucial, because this is where we'll have the key agencies meeting together. The first meeting is going to be next week, actually, 14 May, so it's well in advance of the Bill coming through the Assembly and well in advance of any Royal Assent or implementation. We see this implementation group, as I say, as absolutely crucial.

We will be having representatives from the police. The police and crime commissioners, one of them is going to be on the group, because I've already had several meetings with them and they are supportive of how we're approaching this. The Crown Prosecution Service are going to be part of the group, and again we've already had meetings with them and they're very supportive. Then the ADSS, the Association of Directors of Education in Wales, Welsh Local Government Association, the legal profession and the third sector—that is the list of people who have been already invited to attend this group on 14 May.

In the first meeting, we see this group as setting their own timetable and their own issues about which are the key ones to deal with, because how this actually operates on the ground is the important thing. So, having those key agencies working it out between themselves is absolutely crucial. So, we are really leaving it to them to set their timetable and the way that they're going to approach this, and it's going to be absolutely collaborative work.

We have suggested some areas that we think the group will need to consider and looking at possible work streams and task and finish groups, but we do need the expertise of the group to finalise those decisions on what we think should be looked at. 

The terms of reference will be dealt with at that point.

Yes. I think that will be an absolutely key point. As I say, we have suggested some areas. For example, I'm very keen for them to look at a diversion scheme, for example, as one of the things that they should look at. 

Can you tell us a bit more about that? Because that caught our eye in terms of the community solutions and the approach to diversion schemes. Are there any costings? Any broader idea of what that could be?

We've already had—well, I had a discussion with the police about possible diversion schemes and what we're really relying on is the implementation group to look at the existing diversion schemes there are to see if there's anything that anybody who came into this area could be referred to. Because although we are removing a defence and there is the potential that more people will be prosecuted, prosecutions will only take place if it's in the public interest and in the child's interest. Really, we want them to be the minimum, and we want to divert people to community solutions or maybe we'll have to consider a special diversion scheme, which does take quite a long time to set up and to cost. So, we don't have those details. 

That was my next question. But there would be a cost to that, then, wouldn't there? If it happens, there would be a cost. 

The diversion schemes are actually carried out by the Ministry of Justice, so the cost would be there. So, we are at an early discussion about that. 

And in some cases you have to pay to attend as well—certainly for a driving one I was on a long time ago.

Yes, I know. That has been raised with me. But we certainly would not want anybody paying to go on a course. Definitely not. 

No, that's good to know. Okay. Rhianon—sorry. 

That's fine. In regard then to the actual implementation group itself and the cost of that group, that's not built into the Bill's costings itself. So, have you actually, bearing in mind you've already stated you've had many, many discussions among individuals and this is the coming together of the group to discuss these matters—. So, have you got a scoping of how much this group will cost over the interim period, as we discuss the Bill?

Yes. Basically, we see it as people doing their jobs as they are—they're opportunity costs. We see that as part of the ongoing work. We set up groups all the time that people do as part of the run of their jobs. So, we see that as part of that.

And in terms of—. You've already indicated that different agencies are very keen to participate in trying to get this absolutely optimum, so, obviously, in terms of attendance, it's in everybody's interest that they're involved in co-constructing that way forward.

Yes.

Okay, thank you. The RIA suggests that the implementation group will consider how the guidance will need to change and how awareness raising will be undertaken, so the question, really, is: why wasn't this work undertaken prior to the drafting of the RIA?

For the reasons that we've given already. There's only so much work that you actually are able to do before you bring in the Bill and the long lead-in before implementation. But in terms of any guidance change, the organisations that are involved change their guidance all the time, and we don't really see that this will have any financial impact on them at all—that they would, as a matter of routine, change the guidance, and that would be part of the run of the mill, their daily work.

So, in regard then, to the monitoring of the impact of the legislation now, obviously, moving forward, potentially, including the resource implications, what are the likely resource implications of the monitoring role and how is that reflected in the RIA, or is that, again, ongoing?

That is one of the streams that we're going to suggest to the implementation group—that that is one of the areas we'd like them to concentrate on so that we can work with them to establish the best way to monitor, and we're going to ask the group to consider data collection and the monitoring arrangements that will need to be put in place, again, to have a robust baseline before commencement, which, as you've heard, is not easy to achieve. And so, I think it's really important to do that with them, and we need to have those discussions before we can really be clear on resource implications.

And I accept that this is chicken and egg, but bearing in mind this is new, we are all aware of the challenges and the tensions around this type of direction of travel, and, obviously, the merits of that. But in regard, then, to the importance of monitoring and the importance, potentially, of this group, moving forward, you don't feel it was necessary to have built that into the costings previously.

Sorry, you were trying to come in, Karen.

So, I think it's important to say, because we're not creating a new offence, we're removing the defence for something that's already there, we wouldn't anticipate those organisations having to create a new system. What we would suggest is that they would be incorporating data collection into existing activities. So, if you take the social services data, where we've said at the moment they do collect data on physical abuse, but the sub-categories are limited and, at the moment, don't relate to physical punishment. So, potentially, this is a sub-category of something that they're already looking at and monitoring—

But, with respect, it sounds very easy to say it like that, but in regard to those systems across Wales and the everyday working capacity of social services across Wales, actually trying to get something on a consistent basis is going to be a major, major challenge. So, just because we want that to happen doesn't mean that's going to happen overnight and, therefore, in itself, that can cause an issue moving forward. So, I would suggest that that would cost financially for local authorities, and that will come up in that working group, and, therefore, in terms of the importance of the monitoring of this group, it may not be a difference in terms of the offence, in terms of the removal of that defence categorisation, but in terms of what this will do, in terms of moving systems forward, it's actually quite profound. So, I'll go back to the point: you feel that it's not going to be, in itself, onerous, then, to actually change the modus operandi for our agencies.

In terms of the conversations we've had so far, and the general principles around that, we have no indication that it would be onerous. Obviously, we will ensure—or we've asked those individual agencies to think about who would need to be on the particular task and finish groups. And so, in terms of the monitoring and data, you would anticipate having those that record information, but also those that need to change the system—so, some of the IT or technical expertise. And through that work—which, obviously, we've planned for this period of time, not earlier—we will be able to identify what that would look like, and therefore any anticipated costs as a result of that. But, as we've said, at this moment in time, the indications are this would not necessarily be creating something brand-new and therefore being onerous.

Okay.

Okay, thank you. Yes, go on, then, Nick.

Something I was going to ask earlier—you mentioned that the Scottish Parliament is doing this in tandem, with similar timescales. Is there much liaison going on between you and the Government and the Scottish Government on how to proceed? I notice that there are a couple of differences in the proposed legislation, in that the Scottish Ministers have more of a responsibility to promote public awareness upfront on the Bill—that's not in the Welsh Bill. So, I just wondered why there's not more of a similarity between the two Bills.

The Scottish Bill is a private Member's Bill. It started off as a private Member's Bill, but I think it's got the support of the Government, but the work is being done by the private Member. So, I don't think they've been able to do the range of investigation and working together that we've been able to do. But there has been contact with the Scottish Government. And in terms of the awareness, a duty to have an awareness campaign, which is absolutely crucial—we're totally committed to that—we don't really think it's necessary to have a clause, because I've given a commitment to the Children, Young People and Education Committee, and I repeat that commitment here, that there will be an awareness campaign. But we prefer to have a simple Bill, a simple Bill that just changes the legislation, and by saying that I am committed and will be carrying out an awareness campaign, I hope that may be enough. But the Scottish Bill, as I say, has progressed in a different way. But it's very interesting that it's being done at the same time, and I know that the evidence—they've actually got the committee's evidence going on in parallel. And I know that the officers have been looking, officials have been looking, at what evidence is being put forward in Scotland, and I think I quoted the Irish Senator—she's obviously given evidence to the Scottish committee.

I know that we're a sovereign, separate institution, but it seems to me that there are potential cost savings in the future; if the Scottish Parliament are doing a similar thing, at the same time, perhaps there's a way to keep costs down by working with them.

Yes, I think it's very interesting that both Scotland and Wales have reached this point at the same time. We'll have to see what happens in the other countries.

Indeed, and England particularly—

England especially.

—because we may not need to raise as much awareness, then, for people coming here.

Six months later.

On the awareness raising, and I've asked you about the post-implementation review stuff earlier, but it struck me that, as part of the post-implementation review, you talk about surveying awareness, and where we're at, and regular surveys. I'm just wondering who would be undertaking those surveys, and whether the cost of those are accounted for in the allocation for awareness raising.

Yes, the cost is in there, isn't it, for the awareness raising?

For the awareness raising, yes, but for surveying the levels of awareness subsequently.

Oh, for surveying the levels, right.

We haven't anticipated that cost at the moment—we expect it to be minimal. Obviously, we'll be thinking about how we procure an independent good practice review of that.

Because that will be an external partner.

Yes, so it's an external thing, it will be later on in the process. But, certainly, the sort of work we've done in that field previously—the costs are somewhere between £10,000 and £25,000. So, minimal costs overall is what we would anticipate, and obviously we could build that in to any refinements in the RIA going forward.

Sorry, but that is accounted for in the wider figure.

It's not accounted for in that wider figure.

It's not. Okay. But you know, broadly, what the cost will be.

Broadly.

So, it could have been in—

Well, it's learning as we go, isn't it? So, the things that we knew then, and the things that we know now—obviously, we can build things in and refine as we move along in terms of the development of the legislation. 

Okay. 

Look at that, Chair. 

Spot on: 10.20 a.m. was our allocated finishing time for this session. So, can I thank you very much for your attendance and the evidence that you've given us? We will as a committee, of course, be reporting in due course, and possibly bringing some recommendations of our own. And, obviously, we'll continue with that dialogue in the Chamber and here in committee as well, so diolch yn fawr iawn. You will be sent a copy of the transcript as well to check for accuracy, which is something we have to tell all witnesses.

Yes. Did we agree to follow up on one issue? 

One issue particularly, yes, but if there's anything else that you feel, following some of the comments or questions, that you wanted to add, then please feel free to feed that in as well. 

Thank you very much. Diolch yn fawr. 

Shall I start?

Yes, sure. 

Okay. So, Ely Bridge Development Company, which has since morphed into Tirion Homes, in its corporate structure, was set up through a collaboration between Welsh Government and the Principality Building Society back in 2012. And it was specifically set up to target institutional investment, pension fund investment, and it's a method for driving investment into affordable housing and mixed tenure housing in Wales. So, the design principle was to try and deliver large-scale, difficult regeneration projects, with a focus on affordable housing, which were struggling to get off the ground. 

So, Local Partnerships, we are 5 per cent owned by the Welsh Government. We're a public sector body, and our other owners are the Treasury and the Local Government Association. And our involvement in capital works within the Welsh Government is that you use us to support the Welsh Government on a number of programmes—the mutual investment model being one, which is a revenue-funded programme. We're also involved in the Welsh Government energy service, which involves the delivery of some capital, small-scale capital energy projects, and we're also involved in the waste infrastructure programme, which again has a combination of capital and revenue-funded elements to it. 

So, the Tirion group is set up as a closed charitable structure. We're a community benefit society in law, and the way the model works is that, for each project, a separate SPV, special purpose vehicle, is set up to deliver that project. They are then charged with securing loan finance to deliver the project. In the instance of the Welsh Government-sponsored projects, we then secured initial loans from Welsh Government, and these were for pre-construction works, effectively, so, for planning and design activities, and then site preparation and remediation.

An important point to note here is that we had a conditional land sale agreement in place for each project. Now, those loans are expended before the land is acquired. Now, if at the point we come to land acquisition the project's proven unviable, the loans offered by Welsh Government were not repayable because they were deemed to have added that same value to the site. So, remediation works, at however much, if they're carried out, add value to the site. Once we have acquired the sites we then secure development finance through the banking sector. The units are then constructed by the development companies, and then, once they're constructed, they're sold on to the charitable parent, who holds those units. At that point, we'll have entered into agreement with a management partner. So, in the case of the Mill in Cardiff, that's Cadwyn Housing Association. We then have a separate lease agreement with them to manage those in the long term, collect their rent, manage the tenancies, and manage the community engagement activities. At the point we have created enough critical mass in the housing stock we then transact with a pension fund in the first instance, hopefully, next month—this is going to be M&G, the pension fund—and we will then draw down long-term 50-year debt for those housing units. And then the idea is that then, as the projects roll over, each phase of about £50 million-worth of debt can be put into the long-term investment structure created by M&G.

So, in very simple terms, it’s a stage-by-stage process, with the end goal being Tirion holding the units for at least 50 years, M&G funding them for at least 50 years, a management partner being in place for 50 years and, at the end of that 50 years, the entire asset value is retained in a closed charitable structure, so it can’t be leaked out to any private equity or private shareholders in that sense.

Okay, that's very useful. Thank you for that. You mentioned the risk of a development not going ahead, of course, as being one, and I'm just wondering what other risks there might be in relation to this particular model and how we might be mitigating some of those.

So, the risks, I think—.  A very key point is that that early stage is—you know, the pre-construction risk—. Because an organisation such as ourselves, which is non-capitalised, couldn't secure any finance to do those works. So, I think it’s a very neat way of containing that risk and, because it adds value to a land asset, the risk is very minimal. The real risk to Welsh Government, where it’s sponsoring sites, starts once we’ve acquired the site and you get into construction phases. So, that’s all about standard risk associated with building houses, and that’s all to do with conditions in the market and being confident that, for us, the rented sector is going to continue to be stable. So, I think, if we can all persuade ourselves that that is the case, then the risk is relatively minimal. The issue is that, as we all know, the banking sector now, since 2008, will only take a certain amount of that risk.

The actual quantified risk to Welsh Government is that things go wrong, and we won’t be able to—we get liquidated and we can’t pay back the loan. So, in very simple terms, it’s a very traditional set-up in the development phases. I think, once the assets are built, the risk then diminishes significantly, because you’ve got an asset that has value and it seems very unlikely to me that any funder, whether it be a bank or Welsh Government or whatever, if we get distressed in market conditions, would ever do anything other than hold those assets until things improve. So, I think the real risk is contained in that construction phase.

Okay, thank you. That's very interesting, thank you. Rhianon, you want to come in.

Thank you. So, in terms of that construction phase and what seems to be the generic risk to Welsh Government, what protections in terms of this type of animal has it got, further to the normal market-loan scenario that you outline within a very much more complicated beast?

So, there are two potential scenarios here. In the current scenario, on the three sites that we’re delivering, the risk to Welsh Government is that, because there’s a senior debt provider, a development financier—in this case, Principality—on our schemes, they take the first charge on the land and Welsh Government takes the second charge. So, if things go badly wrong, you’re ranked behind them in terms of securing your investment back.

So, could you outline very briefly for me what that looks like when things go badly wrong? Are we just talking about, I don't know, a lack of bricks or—?

No, no, no, I think we're talking about a collapse in the housing market, I think. I think we're talking about a macro issue rather than a micro issue. And then you're obviously ranking second behind Principality in terms of getting your loan back, if things get very distressed.

And I realise that that's set, but are there any further protections in there in terms of the Government's—

Well, another way—. Another way it could be structured, of course, is if—. Well, there are two ways it could be structured: Welsh Government or another public organisation could retain ownership of the land for a longer period.

And is that happening?

Not in the three projects at the moment, but it could happen. 

Okay.

I believe the reason it didn't happen when we were first set up was there was a concern that Welsh Government would have perceived control of the entire model and that would cause balance-sheet issues for Welsh Government. So, I don't think that was, at that time—. The other way of looking at it is that Welsh Government could take the senior debt position, so it'd be the principal loan lender and then have a private junior debt. The risk there is you're lending more. However, you would have the first charge over the land. So, as far as we're concerned, we're inherently flexible in how these things get structured. It's about what works for whoever's taking the biggest risk, I guess. 

Okay, thank you. Mike.

What are the main barriers to securing investment in the housing sector—and perhaps I should add getting investment at a reasonable interest rate? Because I'm sure that, if you were offering 20, 25 per cent interest, you would probably find very little difficulty in getting it. At 3.5 to 4 per cent, which is what a lot of building societies—a lot of housing associations borrowing up to 4.5 per cent—you'd have more difficulty. It's risk versus reward for investors. So, apart from that, what are the other limitations?

I think the key limitation is trying to connect the various phases of financing in a development project, particularly a big development project. So, at the moment, we have the institutions who are offering debt at the sorts of levels—or lower, actually—that you've outlined. The problem is getting to the point where they will offer that investment. They're largely only interested in completed assets, where you can demonstrate that there is an existing cash flow. They're interested in what cash flow is coming out of the assets. It's getting to that point that's the biggest challenge. We learnt that. It's been quite a hard lesson for us, because we thought the pension fund money would be the most difficult thing to access, but it's only difficult because development finance and the warehouse finance elements of the project have been very difficult because of the constraints in the banking market. 

So, I think the real issue is how can Welsh Government or other public organisations, including local authorities, help make those connections by taking an element of risk in the construction and warehouse phases of those projects. The fact of the matter is, if that doesn't happen, there are only a few parts in Wales where, commercially, these big projects will be able to work, because we are working in relatively marginal markets from a UK perspective in much of Wales. So, I think for me it's about trying to allocate reasonable risk, but, in those early phases, up until you can transact with the capital markets. There are other issues in the housing market, which have been well rehearsed, around planning resources, capability of local authorities and statutory authorities to get proof, all those things, but I think those are well understood.

Actually, I would argue that the less capacity a local authority has the better the chance of it passing planning applications with limited variation. It's those who've got capacity that tend to go over planning applications in greater detail. But that's not for this bit. What I'm really asking about is, really, in two parts. If the Welsh Government were to make more of an investment, isn't there a serious danger of it being considered a public investment rather than a private investment and as such going on the Welsh Government books? And the second one is: what can the Welsh Government do to increase the supply of affordable housing in Wales, short of—well, including making more land available in non-marginal areas?

So, I think the first point is well made and it's some of those issues that we went through early on in our development. So, I think it's about the level of position for Welsh Government. I don't think Welsh Government would need to over-expose itself in any individual circumstance, such as with us. I think taking a 20 per cent to 30 per cent position on the overall would suffice for most situations in Wales. Now, whether that looks like equity or it looks like quasi-equity in junior debt, then that's for discussion, but I think it's that sort of level of underwriting that probably is required on very big, difficult sites in most parts of Wales. 

Once you go over 20 per cent, there's a serious danger of it being said to be more than—the public sector involvement to be such it should count against the public sector. Under 20 per cent, you're fairly safe. Once you start going above 20 per cent, isn't there a danger that at 30 per cent it would be seen as at least a partially public sector, rather than a private sector, investment?

Up until the transactions or exits to the institutions, I think you're talking about loan finance. So, as I understand it, that's not caught by the same rules necessarily. Loan finance can be used in those circumstances. If we're talking about a longer term equity position, then 10 per cent to 20 per cent would suffice in most circumstances.

My understanding is that 10 per cent to 20 per cent should be okay, above that— and a 30 per cent loan or a 40 per cent loan would probably also be okay. Again, going above that to become overextended. What about the land? The ability to make land available and to receive payment based upon the increased value of the land—so, you're making it available at a very low sum and then you get money back in terms of the beneficial use of that land at a later date. 

My view on public sector owned land is that the public sector should try and seek to control that land asset for as long as possible, going forward. There's been a trend whereby public sector organisations have all been selling land, and for me, it doesn't really work very well in most parts of Wales, because capital receipt comes in, it's often driven down in value for various reasons and the true value is not realised. So, for me, maintaining some control in the development and in the asset-holding process is important, and I think you could easily see a circumstance whereby, in exchange for immediate land value, public sector organisations can take a long-term revenue position, particularly where—. If we're looking at multitenure mixed schemes, which can have quite a lot of rented housing on them—social, intermediate, potentially shared ownership—then there will be a long-term revenue stream coming out of them, and that's where I think that public sector can build some value.

Thank you. 

Sorry, Rhianon, did you want to come in first and then we'll come to Nick?

In terms of building on that principle and building on that value, you've mentioned the two tensions in terms of the first charge for Welsh Government mitigated against the fact that they could actually take more of a holding but then balanced with the need. You said you've only got three sites of this mixed tenure across Wales, what would be the optimum model moving forward in terms of trying to shift this forward? 

Yes, so what we're looking at, and we've had some discussions with some local authorities who are trying to operate in this space on their bigger and more difficult—. We see multiple participants on these sites being required. If you're talking about anything above 200, 300 units, the risk is too high largely for a single organisation, quite often. The house builder sector is interested really only in a relatively small geographical part of Wales. It requires collaboration across the sector really. So, we would look at Welsh Government and, or, local authorities taking a position where they own land; the registered social landlord sector being involved; a house builder being involved, but at the scale at which they feel comfortable; and through that you can drive some capital by selling some land, probably obligation free or certainly affordable housing obligation free; and an organisation like ours that can deliver affordable tenures, not social rent necessarily, although we are delivering social rent on our sites at the moment, but without using grant, without drawing grant down.

So, you're trying to bolt together a model where each organisation is taking risk that they are comfortable with, they see the value to their own organisations in terms of delivering the product, and you could easily see a local authority taking a proportion of the site for social rent to tip into their long-term housing portfolio. We would have a long-term housing portfolio, the RSLs are doing lots of interesting things around shared ownership, and then the house builders would sell some. And what you could do then is wrap the entire site, which is what we're very keen on, in a long-term management regime to make sure that both the physical management of the estates and the community engagement are run properly over a prolonged period—something that M&G Investments, our funders, are very interested in. 

Okay, thank you. Nick. 

Diolch, Chair. Good morning. In previous sessions, the committee's heard that Scotland's looking at the potential of utilising rental income streams from affordable housing for future construction, future building. What do you think are the merits of this sort of financing happening in Wales?

It's a trade-off between taking revenue and then capitalising that at a point, or taking an equity position and taking a dividend at a point. I think it all makes sense in a way, because, as I said earlier, I think that's where the real value is driven out of these bigger regeneration projects.

So, as we're structured, each development company, any surplus that gets driven out of that automatically goes back to the charitable parent, and then gets recycled into projects that align with our charitable objectives, which is, essentially, affordable housing. So, we've already got that structure, in a sense, in that anything that gets driven out gets reinvested.

I think you have to be realistic about how that churns—when those returns get realised—because I think, quite often, there's an aspiration to churn investment on an 18-month to three-year period. These big regeneration projects take a long time to deliver, and you're probably talking about a longer churn in terms of reinvestment when the surpluses are actually delivered. But I think it's got to be part of the thinking for the future.

And are there any other alternative financing models that could be used?

I think financing is relatively straightforward. We know which organisations are operating in this space and we know what level of risk they're taking. So, we know what the construction risk is all about and we know there's less risk with warehouse financing and we know that once the assets are built and their value is proved, the institutions will invest. So, the structures can take a variety of forms, but they all sort of look a little bit like each other in that. We believe a closed, charitable structure has massive benefits because it keeps all the value in an existing structure. And I think, as long as you get the right advice on how the flows of finance work, the cost of finance, taxation exposure and all those things, then you can capture that value to its maximum extent. And we're very keen on exploring cross-subsidy from sites, and we're inherently able to do that, whereas if you're a private organisation that has shareholders, or even has private equity interests, that's almost impossible to do.

Are there any disadvantages you'd see in that closed, charitable status you just mentioned, in terms of accessing finance?

The big disadvantage that we have to our private sector colleagues is we're uncapitalised. We don't have a chunk of capital to go out there and do schemes. Therefore, our access to finance, which is primarily the purpose of this discussion, is difficult. So, again, I go back to how the public sector might be able to intervene to make that connection.

I think Rhianon's got a question.

Rhianon Passmore.

Just very briefly, if I may, Chair. So, in that regard—we're talking about disadvantages—you mentioned that longer term churn of investment being realised later on. Is there any downside in terms of the fact that the affordable housing, which is part of our agenda for Welsh Government, isn't getting realised quickly enough, and it's part of a 50-year plan that may happen at some point in the future?

So, I think the advantages of intervening are that you will deliver much more housing and much more housing of the type of tenure that you want to deliver in Wales—

But my point is, in a timely fashion.

In a timely fashion, if you intervene. My point about the churn is getting your money back rather than delivering housing. So, I think the physical realisation will happen much more quickly. Getting the loan finance back will happen more slowly.

Okay. Thank you.

In your written evidence, you provide an example of financial transaction capital and how that can be allocated across the life of a housing project. Can you elaborate on this, and what impact would a rolling loan facility through FTC have on the sector?

I think, for me, this is a loan finance that is currently available, so I think it's something that should be looked at, because it is available and the structures are already in place. In terms of a rolling programme, for me it's about identifying a specific project, rather than an organisation. And then it's about providing the loans for the pre-construction phases that enable that to happen, which would be very, very difficult to secure in the market for an organisation such as ourselves—well, for any organisation, actually. And then once the scheme is proved in terms of viability, that can get repaid. So, what I'm really talking about is recycling the same money through the various stages of the project. So, pre-construction, construction, warehouse and then we exit to the capital markets and everyone gets paid off. And as we've already talked about at length, there are different risk profiles at each of those stages. But, having said that, the quantity of exposure is less at the beginning, and it, sort of, builds as you go through the project. So, the quantity builds, but the risk gets lower, and if we had a very large regeneration project that we wanted to deliver in Wales, I think that sort of rolling facility and trying to set out how the security works for each of the participants in there is the way to go forward.

So, recycling the money at each point is the best way to—

And it's something the banking sector already does to a certain extent on projects. Principality Building Society are doing it with us at the Mill to a certain extent. It's about those other projects, how we get that sort of momentum, I guess. 

Great, thanks. 

Thank you, Nick. Mike. 

My understanding of financial transaction capital—please correct me if I'm wrong—is that it has to be used in non-public sector projects and it has to be most—. It doesn't all have to be paid back, but there's an expectation that most of it will be paid back to the Treasury. That's why the Treasury likes financial transaction capital, because it's off-the-books lending rather than on-the-books lending. 

Yes. I think most projects would benefit significantly and could become deliverable just by using loan finance, and I think—. I don't know a huge amount about financial transaction capital myself, but I think the attraction, potentially, is the pay-back periods can be a bit more extended than some of the other loan structures that are repaid.

And also the amount of money that has to be paid back to the Treasury—as far as my understanding—is exactly the same amount that you have. So, for £1 billion, you have to pay 90 per cent of £1 billion back with £900 million, and if you're paying that back in 10 years' time, its real value has reduced quite considerably. But a question to everybody, I think, is this: what else do you think financial transaction capital could be used for that would be beneficial?

Well, I can—. Just to finish on the housing point, given that potentially not all of it needs to be paid back, I think you could also use it via a loan mechanism to help support the social rented sector, because, I think, if you're delivering a bigger scheme, which is a public-private partnership, in a sense, and part of that is the social rented sector, if you've got very efficient finance going in there, it will help with that, which is going to be—. The social rented sector for me is the biggest challenge going forward in Wales, delivering the sorts of numbers we need. 

I think—. Again, my understanding is—. I think that although it doesn't all have to be paid back, the reason it doesn't is the expectation that some won't work. So, the risk is taken by the Treasury rather than the risk taken by the Welsh Government rather than you could actually invest it expecting not to have it back.

Yes, I understand that.

Again, that's my understanding. I'm happy to be corrected. But the other question, which I think others would probably want to answer, is: what else could it be being used for?

Just from Local Partnerships's perspective, even though, as I said, the Treasury are a part-owner of Local Partnerships, it's not an area we have had any involvement in at all, nor in Wales. So, it's not something I know enough about to be able to give you any answer.

But I think we are moving into an area now that you have a great deal of involvement with, which is the mutual investment model.

The mutual investment model. I put my cards on the table now: I'm highly critical of it and I once described it as 'PFI light'. And I have some concerns regarding the mutual investment model, which I'm sure you can allay. But using the mutual investment model, the cost of borrowing is substantially higher than if you borrowed from the Public Works Loan Board.

The cost of borrowing for the mutual investment model is competitive finance. It's not capital funded; it's not Public Works Loan Board funded. But the difference here or the rationale for a mutual investment model is that, actually, there isn't sufficient capital funding for Welsh Government to develop the infrastructure that's required. So, rather than saying, 'You have x amount of projects that need to be delivered, let's split them between capital and revenue', it's actually saying, 'In addition to the capital projects that you are currently delivering, you are able to provide more schools, another hospital and a roads project.' So, it's in addition to, rather than squeezing out the capital funding that's currently there.

The point I very inarticulately made was that cost of borrowing relating to the mutual investment model, that part of it, is substantially higher than that which you get from the Public Works Loan Board.

The cost of commercial finance will be higher.

Yes. I mean, the Public Works Loan Board lends at somewhere between 1.75 and about 2.2 per cent. Commercially, you'd struggle to get under 3.5 per cent and for projects at risk you're talking about nearer double figures. Would you agree with those figures, or would you disagree with them?

The cost of finance for these projects will depend at the time in terms of the competition, so I couldn't give you values of what their likely outcomes are, but what I would say is that, through the procurement process, there is a competition run for those financing options to make sure that they are competitive, and, ultimately, that the projects are within the affordability models that are produced for each individual project.