Economy, Trade, and Rural Affairs Committee

Fe symudwn ni ymlaen, felly, at eitem 3, sef ymchwiliad i Fanc Datblygu Cymru, ac mae ein sesiynau tystiolaeth heddiw yn cloi'r broses ffurfiol o gasglu tystiolaeth ar gyfer ein hymchwiliad i Fanc Datblygu Cymru, ac, ar gyfer y sesiwn olaf ond un hon, mae'n bleser gen i i groesawu cynrychiolwyr o'r banc datblygu. Croeso cynnes iddynt, a chyn ein bod ni'n symud yn syth i gwestiynau, gaf i ofyn iddyn nhw i gyflwyno eu hunain ar gyfer y record? Efallai y gallaf i ddechrau gyda Mike Owen.

Yes, I'm Mike Owen. I'm the group investment director at the development bank.

Giles Thorley. I'm the chief executive of the development bank. Bore da.

Gareth Bullock, chair.

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

Thank you very much indeed for those introductions, and perhaps I can just kick off this session with a couple of questions. Now, of course, as a bank you are wholly owned by the Welsh Government. In light of the recent news reports around political donations and businesses receiving loans from the development bank, can you reassure us that you operate independently from Government? And perhaps you could explain how you as a bank protect your independence? What checks and balances are actually in place to do just that?

Thank you, Chair. I'll take that question. Yes, I can absolutely assure you there's full independence. Maybe if I just walk through the process of a loan application in very simple terms, then you'd get an understanding. So, a loan application will come in from a customer. That process will be reviewed by teams—Rhian's or Mike's teams. They will then produce a preliminary indication of whether that's something that is good and, depending on the size of that loan, it will go to an investment committee that is chaired by a group of independent senior people, most of whom are directors, but they don't necessarily have to be. If that loan is approved, then the funding is made at that stage. None of the people are politically involved. There are no members of Welsh Government involved in the business. There are, on average, two observers at the company's board meetings, but that is—. And there are regular sessions where we look at performance, but none of them go to individual transactions or individual business cases.

Thank you for that response. Now, I'm sure you can understand that there will be people across Wales who are concerned that a company received a £400,000 loan and then, seemingly, had enough money to provide political donations. Now, my understanding is that the development bank is a lender of last resort. Therefore, can you tell us what criteria are used to determine whether a business should receive a loan or not?

The key thing is we're not a lender of last resort under any circumstances. We are a gap funder. So, we are the provider of finance in a marketplace. The lender of last resort in the UK is the UK Government, and in Wales it would be the Welsh Government. So, we provide finance where no other finance is available, and, in fact, we specifically require businesses to either provide evidence to us or at least confirm to us that they have sought alternative finance, and they've been unable to receive that finance.

But isn't that really a lender of last resort? If no other commercial bank will actually provide a loan to a business, then surely you're a lender of last resort, are you not?

No, I don't agree with that. A lender of last resort—. Because we're still making a loan on a commercial basis. There may be perfectly unfortunate reasons, but there may be commercial reasons why the market is not prepared to lend to a sector, or is not prepared to lend to a location. We have, for example, in the course of the last five years grown our property lending activity to small and medium-sized Welsh property developers, simply because there are no banks providing finance to that sector. Now, that is an unintended consequence of changes that were made to the banking capital adequacy regulations after the financial crisis, and that's a great example of where we've identified a need in the market and then we've provided that funding.

If I might just add a rider to the lender of last resort—

Yes, by all means.

One, we don't—. We say 'no' as well, so we're not a lender of last resort in the sense of saying, 'We will have to do it.' And a lender of last resort, when it's a Government, tends to involve political considerations. And I can say that I've been chair for nine years and not once has the board ever had an instruction or a direction to do anything of that ilk.

Okay, thank you for that. I know Jenny Rathbone would like to come in on this. Jenny.

Yes, I'm just trying to understand, if you're a gap funder, why Mr Dauson sought funding for something that should be fairly low risk. I understand it was for putting up an array of solar panels in the Cardiff area, which has not got a problem with the grid connection. So, that feels like a pretty plain and straightforward business proposition, so I'm struggling to understand why it wasn't possible for this company to have received alternative funding. I presume you have analysed that.

Yes.

And the second question I have is: what due diligence did you do, given that we all know that Mr Dauson had a criminal conviction for having dumped waste on a site of scientific interest?

Mr Dauson has had, including the loan you're talking about, four loans from the development bank. Two of the previous ones were fully repaid on a current basis. The third one is a COVID loan that is fully current; it's just being amortised over the life of the loan. And this fourth loan, as you say, for £400,000 was to purchase a solar farm. I believe the solar farm was already in existence, so it wasn't something that he was constructing; it was a farm. And I think one of the areas where there is a gap in funding is the size of loans. We find it increasingly the case that banks will only lend to businesses in excess of £0.5 million, in some cases even higher. And so, we're finding that there are large areas of the market with small loans and small finance, and our average loan size is at around £260,000. So, we're in a market space where we're dealing with very small companies that need relatively small amounts of finance, but that market is not catered for by the private sector. And to the extent it is, it's predicated on an extraordinarily plain-vanilla, cookie-cutter approach, through algorithmic bank lending, through an online portal, or through a telephone banking system. You won't have, at that level, a bank manager to go to talk to about a commercial enterprise.

As you said in your written evidence. Okay. So, the final question is on the due diligence that you did on the applicant, given that he had this criminal conviction for fly tipping.

I don't have enough detail on how much information was provided in relation to him specifically, but, as a customer, they had borrowed money from the development bank, and the predecessor, Finance Wales, in the past. Those funds have been repaid in full. But despite that, each loan is looked at on its merits.

Okay. I've got a number of Members who'd like to come in on this. First, Samuel Kurtz, and then, Hefin David. Samuel Kurtz.

Diolch, Cadeirydd. Good morning, panel. Just coming back to the due diligence element of this, and given that the Development Bank of Wales advertises a green business loans scheme, and knowing what Jenny Rathbone has just mentioned as well, are you confident that the due diligence is up to scratch in ensuring that those eligible for finance through yourselves aren't convicted for environmental offences, which seems to fly in the face of the idea of a green business loans scheme?

This wasn't a green business loan that he received, just to be clear. It's a perfectly valid point, but we do reasonably extensive due diligence. There are some limitations on what we're allowed to find. We don't do Criminal Records Bureau checks on the individuals, in most cases—in some cases, we might be pointed to. But as I say, the specific issue we're looking at is the lending to a business, and those businesses that Mr Dauson ran were businesses that had borrowed before and had successfully repaid the money before.

So, does this saga, then, make you want to look inward into your own system of due diligence, to ensure that something like this potentially doesn't happen again, or has this caused the Development Bank of Wales to potentially reassess how it approaches these things? If the example you give, Giles, is that, 'This business, or businesses, have previously had finance with us, therefore, in our mind, it's a business of sound mind and body, therefore we are in a place to lend', or is this giving you an opportunity to go, 'Actually, we need better due diligence on how we approach loaning'?

This situation has been in the public domain for several months. We had a long consideration about it, as to, for example, to what extent could we look at businesses, was there any way that we could check whether businesses had made political donations in the past, and to what extent we could restrict the use of the money. But, in this specific incidence, the use of the money was very specific. We have a charge over the solar farm as part of the package that we made when we lent the business, and we know that the farm exists. But we're always looking at an improvement in the way we operate. So, the organisation has grown very substantially, and it's grown substantially because we've been very careful in thinking about how we need to develop the business for Wales. And that would definitely include the level of due diligence we need to take.

Okay. Thank you. And just one final point. Do you think the integrity of the Development Bank of Wales has been called into question by what's happened in the last couple of weeks—what's been announced, and what's been happening?

No. The loan was approved in the summer of 2022. It was funded in 2023, and the piece of land was purchased well before there was even any inkling of a leadership campaign.

Thank you. I'll now bring in Hefin David. Hefin.

Can you confirm, Giles, just for the avoidance of doubt, that the Development Bank of Wales has absolute independence of Welsh Ministers, and that Ministers don't have any influence over individual loan decisions?

Absolutely.

Yes, absolutely. I repeat what my chair said, which is that under no—. In the time I've been at the organisation, for eight years, at no stage have I ever been contacted about or had any pressure put on in relation to a loan or any form of investment we've made.

And just a small addition to that: even when customers complain directly to the Welsh Government to exert influence on us, there's never been any pressure from the Welsh Government to do a deal that we've turned down.

So, it would be inconceivable for a Minister to have that kind of influence?

Yes.

Correct.

Okay. That's appreciated, thank you.

Thank you, Hefin. I'll now bring in Luke Fletcher. Luke.

Diolch, Cadeirydd. If I could look at the status of the development bank for a moment. There was a particular point of your written evidence that was really interesting, actually—. And just for the record as well, Chair, we've had a brief conversation outside of committee on this, Giles—

Yes.

—just around the classification of the bank and the reclassification of the bank by the Office for National Statistics, to a Government body, or central Government, actually, is the classification they give. Could you just explain that a bit more?

Yes. This is technical; I will try and keep it as simple as possible. I asked my chief finance officer to write a plain-English explanation of it; we're still writing that. [Laughter.] So, historically, the operating businesses within the organisation were classified, under the ONS classification, as public corporations. Under the term of public corporations, the way that the business operated was that we received commitments for project funds upfront, we invested those moneys, and, at the end of the term of that project or of that fund, we were in a position to return the money to the Welsh Government or to EU funds, as it was at the time, or we had to seek approval at that stage to use the funds for another purpose, either to extend the purpose they were originally funded for or to provide a new purpose. So, a fixed timescale—five, seven years—and that was the basis of the funding.

On the reclassification, we were not aware that there was need for a reclassification exercise. The reclassification process took place over the course of 2020-21. The reclassification in 2021 was that all but one part of the business was to be classified as central Government. Under the central Government rules, this requires expenditure capital to be approved annually. As most of the funds held are already budgeted, and we'd already received funds, the first risk is there is a risk of double counting, because the funds left the Welsh Government, say, five years ago, they were counted into the Welsh Government's budget five years ago, that money may still be sitting with us, and now we have to re-account for them on an annual basis. So, there's a severe risk of double counting. But it's also challenging because we have to predict, each year, how much business we are going to do. So, for example, in our loan book, where we spend between £60 million and £80 million a year, if there was excess demand and we were reaching the limit of that in January, February, we would effectively have to stop lending until the new financial year, in those circumstances.

So, that whole process, that notification was received in 2021, and since then, working with the Welsh Government, we've been working to agree a methodology for how the transition from one system to the second system should take place. That has not been agreed yet, and we are therefore in a state of flux until such time as that is agreed.

So, no matter the merits of any potential proposal that comes your way, if you've reached that limit, that's it.

In theory. I would say that is the worst-case scenario. Looking forward, in our budgets, that would mean that, although we have the cash within the development bank to spend the money, we would have a shortfall, over the next two to three years, of around £50 million, and that lowers to around £25 million the next two years after that, so over the next five years. Three years of £50 million, two years of £25 million.

Gareth, did you want to come in there?

No, not really, other than to say that what we would prefer, of course, is the status quo ante, because it does, in some ways, threaten the raison d'être, having set up the development bank and, indeed, given it investment cash, and we're sitting on several hundred millions of that—we invest at a rate of about £130 million, £140 million a year—to suddenly find for, essentially, a sort of bureaucratic fetish within a budgetary construct that we can't, it just seems to militate against what we've been set up to do. I think the encouragement we would give officials—because I think the answer to this lies in officialdom, and probably in London as well—is that if we could go back to the status quo ante that would really be very helpful.

And what are the odds then that you could return back that previous system? Representations, I assume, will be made to UK Government or the ONS, whoever we need to.

We hope so.

It's not our position. This is the Welsh Government's budget, so this is a Welsh Government matter with the Treasury.

We're not around the table.

There is a guiding principle that any change of classification should not adversely affect the organisation, and it is the extent to which that adversity is defined that is the subject of discussion.

Ultimately, then, this is going to restrict any ambitions to grow within the development bank. We've got questions later on about stuff like equity investment and other forms of investment. That's pretty much going to put a solid block on that, isn't it?

I think 'restrict' is probably too strong a word. The development bank has the cash resources. This is the oddity of this. This is an accounting issue. We have the cash. The way that the development bank was set up, that we would, on average—. We have a very wide portfolio of investments. Some are higher risk and some are lower risk, and the overall return is we expect a return of just over 100 per cent of the money that we've received, and that that can then be reinvested again and again and again. So, the whole purpose of a development bank is to take higher risks than the private sector, but not to be cavalier. So, it's not a cash problem. However, if the budgeting restrictions require budget cover from the Welsh Government, and if the Welsh Government, for other reasons, because of other commitments, has no budget cover, and cannot give that budget cover to the development bank, then, despite the fact we have the cash, we wouldn't technically be allowed to spend it.

Okay, that's very helpful. Just a final question from me, Chair, just before we pass on to another Member. In your written evidence, at least my impression of your written evidence, around putting the development bank on a legislative footing, it was quite favourable. Is that fair to say? Is that something the development bank would want to see?

From the board's point of view, this has not been discussed formally by the board, and there's no formal position of the board on this. I think what, certainly, I'd like to see and I'd recommend is that we and officials get together and do a proper review of the options and the implications of that, and then, armed with that sort of knowledge, I think a decision then could be taken. There are pros and cons, which would last longer than this committee, I suspect, today. But I think it is a complex area and I'd recommend that we have a taskforce that looks at that.

I would just add that I think the Development Bank of Canada's evidence was very compelling. They argued that it had definitely benefited them as an organisation, although they had gone through three iterations of the legislation to get to the right balance of flexibility and clarity. We've introduced, since the inception of the development bank, 16 new programmes for the Welsh economy. Now, I'm pretty sure we couldn't have anticipated that when we launched the development bank. It's testament to the extraordinary work of my team in working with the Welsh Government to find those challenges, but it does also highlight that the market is constantly evolving. Who would have predicted the need for urgent funding for COVID, for example, that we put in in three weeks?

So, just very quickly, if done right, then, could putting the bank on a legislative footing help with the classification issue, given the classification issue is about Government budget and things like that?

‘I don't know’ is the simple answer. The process we went through with ONS was rather unusual. We had a meeting, they told us what the answer was, we told them that that can't be right, and we gave them evidence. They then had another meeting, told us the answer. We gave them evidence to show that their analysis was wrong. And in the third meeting they told us, 'We've made the decision anyway.' So—.

I think that's the issue that I would expect in some kind of review to look at what would be possible, and, if that was something that came out of that review, we could change our classification back to the status quo ante. That would be quite a powerful element in the argument. But just a final word from me on that one is that, with putting something on a legislative footing, and thinking of what Giles has just said, the danger there is that you have to kind of make it such that you can foresee all the things that you might want to do. And that's quite hard, because it's the definition in the legislative framework that then creates boundaries. And one of the great things about the development bank today—I consider it to be the most advantaged model that there is around today—is that we have complete freedom, with Welsh Government, with Welsh Ministers, to respond to the needs of the economy and create structures and products that are not limited by language in some kind of legislative Bill. And I think that's a really major advantage.

The most successful development banks—KfW, the Development Bank of Canada, the Development Bank of Singapore—have been around since the 1950s. They're an integral part of the economy. The one thing that we spend—certainly I spend an enormous amount of my time concerning myself about—is, are other organisations, is the private sector, abrogating their responsibility because of us? And I have found no evidence of that. So, we are—. And the organisations like KfW, the Development Bank of Canada in particular, are an integral part of the financial system of their countries, and they fit that niche to provide support where support isn't available from the private sector. Now, that might be temporary, or it might be long term.

Good, diolch. Diolch.

Thank you, Luke. Before I bring in Vikki Howells, Jenny Rathbone would like to come in very quickly.

I just want to go back to the implications of the classification, or the reclassification. Because you say in your paper that, at the moment, this isn't a problem, because you aren't generating so much income that it starts to impact on the way the Welsh Government's budget is aligned. But am I right in thinking that were you to back a string of winners and suddenly have quite a lot of capital for reinvesting, this could be a way in which the Treasury says, 'Oh, well, in that case, Wales doesn't need so much capital, we will reduce the Welsh Government capital budget, and thereby redistribute your successes to the whole of the UK economy'?

Yes. In principle, yes, because that surplus would be a surplus in the Welsh Government's numbers, and would be counted on that year, and would then be factored into the future calculations.

Well, it is obviously something we need to raise with the Minister.

Yes.

Thank you. I'll now bring in Vikki Howells. Vikki.

Thank you, Chair, and good morning to our panel. I've got some general questions around the business support landscape. Firstly, if I can quote FinTech Wales, they said that the development bank's

'overall approach is risk averse which stifles innovation and the true potential of Welsh startups'.

So, how would the development bank respond to these comments?

Can I ask Rhian to deal with this, because Rhian is our regular point of contact with FinTech Wales?

Thanks, Giles, thanks, Vikki. Yes, obviously, we were aware of the feedback, and, thanks to FinTech Wales, we did have a very good round-table discussion with a number of their members a couple of weeks ago, which—. I regularly meet with FinTech Wales anyway, but this was a good opportunity to bring a number of their members together and have a really open discussion about some of the challenges that they have put forward.

I think when we hear comments such as that we are too risk averse, what often that stems from is businesses that we've said 'no' to. Inevitably, their initial response would be we're too risk averse because we've said 'no' to their business opportunity. And the reality is we do say 'no' to some businesses that approach us, as the chair mentioned earlier. But, if you put that to one side, we are still the most prolific equity investor in Wales by the number of deals that we do. We've actually invested and backed about 40 per cent of FinTech Wales Foundry members, and that percentage gets higher if you consider the companies that didn't stay in Wales, because some of them relocated back to England, and there was another where we did issue terms, but they were able to secure the money from the private sector. So, I feel that we play a very active role in the FinTech sector, and do actually support a number of the members that have been presented there.

I think when we look at whether we've set the right level of risk appetite, equity is the highest risk of investments that we do, and, as I've already mentioned, we do a lot of those deals to young and start-up companies. We're able to sort of balance our approach to risk through a portfolio approach. And what I mean by that is we do debt investments as well as equity investments. The debt is lower risk and, because we do a volume of those, it allows us to make more of these higher risk equity investments. But that's a portfolio we need to manage. We have capital that we need to return to Welsh Government, so we are constantly managing where we are across that risk profile. Currently, we're on schedule to return the money to Welsh Government. We're not under, but we're certainly not significantly over, so I feel we've got the right balance at the moment of the level of risk that we're taking on the opportunities that present to us.

Thank you, Rhian, for that clarification. That was really helpful. Can I ask, then, if DBW could set out the relationship that you have with Business Wales, and in particular how the process operates for referring businesses between the two organisations?

I'll carry on, because I've got the link with Business Wales. So, if I start—and I think I've talked about this before with some of you—we've got links with Business Wales at different levels, so, on a strategic level and on an operational level. I sit on the Business Wales task and finish group, and Duncan Hamer, who I think you're going to see later, is an observer on our board, and he's responsible for Business Wales within the Welsh Government organisation. So, we have good links there in terms of what both organisations are doing. But I think, more importantly, we've got very strong links operationally. Our teams work very closely with the Business Wales advisers. So, if a company comes into us and they need business support, they will get, quickly, the right referral to Business Wales, and vice versa, if somebody needs to access the development bank's services. We do just under about 500 referrals every year, back and forth, to the organisations. It's a very active and dynamic set-up between the two organisations. I think what it does is allows us to have independence in terms of who we're referring to. So, somebody approaching Business Wales for support, looking for funding, it might not be the best place to come to the development bank. It might be better for them to go straight to the bank as a first point of call. So, it does give Business Wales a bit more flexibility in terms of where they can send those initial referrals. And we've got examples of, perhaps, where it's worked more on a project basis. The green loan business scheme is a good example. We work closely with the advisers that they have there to be able to offer consultancy support to businesses, to get them on their net-zero journey. We can then provide the funding through the green business loan when they've identified a project. That's a tangible example of where we work very closely together.

Thank you. I've been following the green business loan scheme, actually.

Okay, good.

I'm really pleased to see that it's been extended. We referred earlier to the evidence we took from the Business Development Bank of Canada. One of the things that they raised with us is that they believe that businesses receiving advisory services alongside financial support show stronger results than those only accessing financial support. So, I wonder whether there are any opportunities for a greater degree of integration of services provided by the development bank and Business Wales, in order to try and plug that gap.

I think we'd all agree that if a business gets finance and business support it is likely to result in better outcomes, so I think we'd agree with what the development bank of Canada has to say there, and we can do that in Wales. They can get the business support from Business Wales or other support mechanisms, and they can get funding from us and other funders. So, I think we're all in agreement that companies should be able to benefit from both. How they get that and, if you like, how that is designed behind the scenes, I don't think companies are that interested in, as long as they get to the person that they need to get to quickly and efficiently, and I think that was something FSB talked about in their evidence.

Are there ways we can continue to integrate? Always. We continue to build the relationship with them. Business Wales have just gone through their retender process, so they've now got new contractors out in the market. Some are the old contractors, so we know them really well, but there's a new party delivering their accelerated growth programme, so we're building the relationship with those advisers, to make sure that we've got strong relationships there. The task and finish group that I mentioned earlier—. The task and finish group work has finished, if you like, because they've committed to the new contractors. So, there is work going on now at Welsh Government side, to work out how that advisory group carries on and in what format. So, that's another opportunity for us to sort of revisit that relationship.

A final question from me, then. The FSB, when they came before the committee, told us that one of the challenges that they perceive for the development bank is that it sits within a massively fragmented landscape of business support, and there is now a need to take stock of business support in Wales. So, can I ask the witnesses what their views are on that?

I think what I'd say is that there are lots of different opportunities for business support in Wales, and I would say that that landscape has increased over the years, and that's mainly as a result of some of the UK funding that's become available, because that's been distributed, as I'm sure you know, through the shared prosperity fund, through the local authorities. You've got things like the city and growth deals as well as the Business Wales offering. So, I would agree that there are more places that businesses can go to get business support nowadays than perhaps there was, you know, certainly, when I started in this role. But Business Wales's role has always been about providing that one-stop shop, and it's not always them or their adviser that's providing the support; so, that is the work that they do. I mean, their mantra is very much about this 'simple, visible, connected', and that's their job. So, regardless of where the support is coming from, you know, it's their job to keep across all of the new business supports that have come to Wales.

Thank you, Chair, and thank you, Rhian.

Thank you, Vikki. I'll now bring in Samuel Kurtz. Sam.

Diolch, Cadeirydd. When the Federation of Small Businesses came in and gave us evidence, they said that it was very difficult to point their members to an economic strategy from the Welsh Government, and I quote that they said

'that articulates what the aspiration for entrepreneurship is, what the aspiration for particular sectors is, and therefore what the development bank's role is in that.'

I was just wondering if you'd agree with the assessment of the FSB?

Well, I mean, it's really a question for the Welsh Government, but, specifically, the way we integrate with the Welsh Government's economic agenda is through our remit letter and through the programmes for government. And, actually, if you look at those—. And I think that they bear fairly well to activities that were targeted.

So, the remit letter, that's the primary mechanism by which the Minister aligns the priorities with the development bank. The core mission to provide finance for viable businesses that might otherwise be unable to raise capital is unchanged. The themes in the remit letter cover much wider Government activity, so we created a tourism fund to support that sector. We created—. We now have two major programmes on decarbonisation, as an example. The activities that stimulate market demand are equity investments, as Rhian said earlier. You know, we're in the top five direct-equity investors in the UK and we've done over 300 equity investments in Wales. And we've changed our investment process to encourage applicants from new and younger entrepreneurs, and we've seen a significant increase in younger entrepreneurs coming in. And then in the programme for government, we have a number of activities. Building new homes: we've provided finance to 40 per cent of the homes that were built by small and medium-sized house builders in Wales. Stimulating job creation: we're measured on jobs protected and jobs created. We monitor financial inclusion and under-represented groups, and we can provide data on that. Decarbonisation, we've already talked about; and we also manage a fund to provide community and renewable energy schemes. And if we went further, patient capital: we've extended patient capital from £30 million per annum at the beginning of our term of government to over £46 million. So, that's—. And we now have funding for loans of up to 15 years.

So, just coming back to the initial point you mentioned around the economic strategy being a question for the Welsh Government. Do you believe that if there was a Welsh Government economic strategy, that would help in delivering better what you've just listed, which is programme for government, more piecemeal? Would an economic strategy help the development bank?

Well, I was at the meeting when the last economic strategy was presented and we integrated that into the process, so, yes, indeed.

Okay. Thank you. And then ensuring that the development bank has the necessary staff with the expertise to give confidence to the business sector, how do you ensure that you do have that expertise on your books?

I mean, I'll just talk generally and then Rhian will talk specifically. You know, we are an unusual organisation in that we are owned by Welsh Ministers and we are competing for jobs in the private sector, so we always have a challenge of hiring people of the right calibre. However, I believe we've got an extraordinary group of individuals and we hire people who generally have a passion about what they do because they can see that the investments and the work they're doing is actually benefiting communities that they're involved with and across the whole of Wales. There are specific challenges, particularly in equity investment, but we have a very active programme of bringing in younger individuals and developing them, and perhaps Rhian could give some more details on that.

Yes. We've recruited really heavily into our equity team over the last couple of years. That's certainly the area that's the most difficult for us to attract people, from the private sector, mainly because salary expectations don't align. But we're a very good training ground. So, we bring people in that have got, perhaps, a technical background or a finance background, and they get a lot of training within the development bank. We see a huge volume of deals, so they can get up to speed quite quickly. But we have a range. As well as the people that have come in and are more in training, we have a lot of experience with the team. We have people with PhDs, people with technical backgrounds, corporate finance, an equity background. It's quite a mix.

To give you a couple of external examples that spring to mind, one of the things that the team identified last year was that we were missing an opportunity with Innovate UK to become one of their investor partners. And they're effectively checking that we meet the right criteria to allow us to become an investment partner. So, they will be looking at not just our processes but also our people: have we got the right expertise to assess applications on their behalf. We did get it, which was great news, because there is an £80 million scheme that is currently being run by Innovate UK. If we didn't have that investment partner status, none of those grants would have got to Wales at all. Because we have got it now, that money is flowing to Wales and we've had a good success rate in that area.

So, on the equity element of it, and I take the point on board that that's where you're recruited heavily, in terms of sector-specific skills, then, in being able to understand fintech, for example, which is a developing opportunity, does the Development Bank of Wales lack skills in specific industries and knowledge, or is it such a broad spectrum that people are expected to be a bit of a jack of all trades when it comes to analysing potential opportunities?

What I would say is that we are a generalist investor. So, we do invest across all of the sectors in Wales, and that means inevitably people in the team have to have a level of expertise across different areas. We have people in the technology teams that will have a particular interest. So, we've got people that will do more on the fintech, we've got people that will do more on the life sciences because of their background, but you are right that the people will have to have a reasonable appreciation across a lot of different sectors.

What I would say, though, is that, with the businesses that we're backing, we're backing the management team to have that in-depth technical knowledge. It's not necessarily what we are bringing to the table. What we are bringing is expertise around investing, expertise around starting and scaling up a business. We're not running the business—that's what we're looking to the management team to bring. So, they should have the in-depth technical knowledge. I think we need to have a wider experience that covers investing as well.

Okay. [Interruption.] Yes, sorry. Go ahead. Sorry, Gareth.

I've just something to add on your questioning so far. One of the things I'd certainly like stakeholders to look to the development bank for is inherent in our title: development. When I started as chair in 2015, there were 140 people in the bank; there are now double that, and more of them are the type, the profile that Rhian has just described. So, one of the things that we've been doing, and it's a role that we play, is actually developing Wales, and particularly Cardiff and Wrexham, as a financial centre of excellence and building an expertise infrastructure that wasn't there before. And I think that that's an aspect of our activity that often is overlooked.

And I think, to that, we lose people, which can be disappointing to us but has wider benefits. For the recent British Business Bank equity fund that is being delivered, two of the three individuals there worked with us. So, they've gone on elsewhere, and that has happened with the likes of Maven and Mercia. It's an initial hit to us, but they go on and continue to sing the praises of the development bank and the opportunities in Wales.

Okay. That's interesting. Just moving on, then, to FW Capital's fund management activities in England and how they benefit us in Wales, can I ask about the support, the development bank's role in delivering on the Welsh Government's economic strategy, as in, is there a conflict of interest here? I'm not sure who wants to pick that up. Giles.

Mike actually runs the FW Capital arm of the business, so I'll give it to him in terms of the operational side, but one of the things that Mr Fletcher's question didn't really get to is that FW Capital is our regulated business. Now, some of the activities that we do are regulated by the Financial Conduct Authority—not the majority, but in particular funds that are funded by third parties. So, we have a fund that has funding from Clwyd Pension Fund, we have a fund in Wales that is funded by the British Business Bank, and those funds have to be funded through a regulated entity.

The other advantage of FW Capital as a regulated entity is that it's the one company that the Office for National Statistics did not reclassify. So, this is a public corporation. So, there are particular, I wouldn't say advantages, but we have a certain degree of flexibility in some of the things we can do out of FW Capital. So, it's not just an English operation—it's England and Wales; there are two funds that operate in Wales. But with that in mind, I'll now pass on to Mike in terms of how it operates.

Yes, thanks, Giles. So, FW Capital is really something of a Welsh export success story, really, in terms of expertise. This is fund-management expertise and ability—experience within the Welsh team that we've developed and exported, and we've won funds in Wales and outside of Wales based on our ability. That's fantastic from my perspective.

As Giles says, just to echo the point, it's the only FCA-authorised vehicle that we have within the group, and that is vital and necessary to even apply for British Business Bank funds to raise and deliver third party finance, such as the pension fund that Giles has mentioned. And in the future, pressure on public finances, our budgetary constraints—hopefully we'll get that resolved, but winning third party funds is going to be a key part of our strategy. You can't do that without an FCA-authorised vehicle.

So, in terms of the tangible, operational benefits, though, it was initially set up—FW Capital—many years ago really just to export our skill set and bring in some profits to Wales. So, that's a job that it has done exceedingly well. It makes a £1 million contribution to the overheads of the development bank—partially that is individuals who spend time supporting FW Capital. They're all based in Wales—the back office. We think there are about six full-time equivalent people who work, supporting FW Capital in Wales, getting a salary in Wales, and, as I said, there's about £1 million coming in every year to the development bank, so it's certainly profitable. Some of the profits have been used to seed and supplement a Welsh fund—the risk and restructuring fund, which is a fund we have dedicated specifically to support Welsh businesses in distress. There's £1 million that's gone into that fund from profits in FW Capital and, no doubt, we'll do that again in the future.

So, those are the financial aspects, but beyond that, what it does for us—and there have been a few discussions today and some evidence around comparisons and how do we know how good we are—is that we get to benchmark ourselves against other fund managers, compete directly against other fund managers to win fund mandates, and I'm sure the panel's aware that we've won three funds from the British Business Bank's latest nations fund across the UK, including one in Wales. We couldn't have even bid for that if we didn't have an FCA-authorised vehicle. That's a £30 million fund in Wales. But there were two other funds that we won in England against competition from other fund managers. So, that's how we benchmark our offering, if you like.

The relationship with the British Business Bank has been important, and we get feedback from them regularly in terms of how we compare with our peers—what's our back office like? And they particularly do like the admin and the back office for FW Capital, which is in Wales, as I've already said. Importantly, we also get market intelligence: so, what our SMEs are seeing in other parts of the UK; how deals are being structured in other parts of the UK; pricing, which we'll probably come on to later. So, it really gives us a wider outlook.

Okay. Thank you. Chair.

Thanks, Sam. I'm very conscious of time, so if you could keep your answers pretty succinct, we've got a lot to get through. I'll now bring in Hefin David. Hefin.

Diolch. Excuse me, I seem to have developed a cold this morning. Could I ask about the process of the tailored review? The Welsh Government said in 2001 that they would want to see a full-scale tailored review, but that seemed to change in 2003. So, what are the development bank's insights into why that change was made, first of all?

I'm not quite sure we have any insights into that. I think that's a decision that I think is taken within the boundaries of officialdom, and I'm not sure the aspects of the argument one way or the other on that.

You weren't given any reasons as to why there wouldn't be a tailored review.

No, no. I would say, Hefin, if I might, I welcome the absence of a tailored review, not because I don't want to be reviewed and measured—quite the opposite, in fact. I know from experience elsewhere over the last 10 years, and I've been through two of these in another place, that they can be very disruptive, and also I might question value when these things were done without a very clear objective of what is the review, the purpose of the review, and done by people who are not experienced in the sector and its related issues.

The one thing I think is really important about us that I think can give the committee assurance and the Welsh Government, in general, assurance, about the purposes that a tailored review would seek to achieve is that the development bank is structured really like a listed public company and has a governance regime that is in line with the UK governance code. So, I think you should take comfort from the fact that we have an independent, very experienced board. So, I sit as chair, and I have a number of non-executive directors with a broad array of business experience. We have an internal audit function, and we actually have that externally measured and tested—ditto for external audit, as well. And we have an audit and risk committee that goes into the absolute detail of all the things that we do around risk and around operational processes and operational risk. And I would just say, in terms of a tailored review, our annual report and accounts, I'd commend it as a repository of all of the assurances that any tailored review would seek to want to have, and I commend it; it's very thorough, and we fulfil our code obligations by setting that out in a very structured and detailed way.

And you will be undertaking a self-assessment model, a risk assessment, as an alternative, which seems to be more internal and less rigorous than a tailored review. Is that in addition to those things that you've just mentioned?

It would be, yes. If we were asked and obliged to do that kind of review, yes, our annual report and accounts, that process is a statutory one, and we do it like any sort of listed public company that's on the London stock exchange. So, yes.

Can I just ask, are you expecting to be asked to do a self-assessment?

I haven't heard anything. Have you?

We haven't been told, but happy to do so if we are asked.

Okay. I'm just looking at the 2003 statement from the Welsh Government and they said they would move from a tailored review to a self-assessment model, so perhaps we can get some clarity from the Minister later on that.

Okay.

But you're not aware of any intention to do that imminently.

No.

No.

Okay. Would you welcome that, or would you find that cumbersome as well?

We welcome any review and analysis. It's a very open organisation. We're very happy to attend these meetings and any further follow-ups that you wish to hold, and we're happy to be evaluated. So, it's a question of how best to evaluate, rather than avoiding.

The reason we're raising this as an issue is that the evidence we got from Scotland was that they do take that kind of more structured approach, and we're just wondering why would that be absent in Wales and present in Scotland.

That's entirely a decision for the Welsh or Scottish Governments, but the Scottish National Investment Bank is very different to the development bank, so, in that respect, it might be more relevant to them. But, as I said, there's no attempt here to sort of obfuscate or avoid any review; happy to do any review. It's just simply a question of making sure you get best value for that.

Yes, sure. And I think you've clearly made that—

Sorry, Hefin, my rider on that is that, in any review, what would be helpful to us is to have complete clarity of purpose and objective, so that we know what we have to provide.

I think you've given us some really helpful questions to develop with the Minister later, so I'll stop there.

Thank you, Hefin. I'll now bring back Luke Fletcher. Luke.

Diolch, Cadeirydd. If I could come back to equity investments—I know we've touched on this quite a bit—I do have a number of questions around process, but I think it'd be worth doing that in the form of a written question, it's then just based on time. But what I'm interested in understanding is, within the written evidence you provided to us, you said

'There are rare occasions when a consensus regarding appointment'

of a director to a board

'is not reached, but the Development Bank has enacted the right of appointment in any case.'

What would be the reason for adopting that approach? I think this comes from some of the evidence we had from the Scottish development bank that ultimately said that they would, obviously, prefer to have one of their people on the board of directors of a company receiving support, but they wouldn't force someone on them. So, what's the difference in approach there with the Scottish development bank?

What I'll say is a couple of things, firstly. The documentation that allows for us to appoint investment directors is standard from the British venture capital association. We use the standard template documentation, so it's the same as the 350 other members of BVCA in the main—

Would the Scottish development bank be the—

I'm not sure. The Scottish National Investment Bank—. So, this was the difference: SNIB's average loan size is £2.6 million, ours is £260,000. They're doing a small number of large investments, generally as part of a syndicate, so they will be a minority member of a large syndicate, and, therefore, it might not be appropriate in the structure of the way that they invest for them to be the specific organisation, but it might well be that the syndicate has the right to appoint an investment director. So, two things, (1), we are using industry standard documentation, (2), I don't think the Scottish National Investment Bank example in this regard is very similar. But, specifically in terms of the examples, maybe Rhian could talk about why we would want to appoint.

Yes, certainly. Maybe if I just expand a little bit, an investor director, when we look to appoint in the normal course of business, just to give you a little bit of context, would go in as a non-exec director of that board. That is their primary role—they're a director of that board, so their responsibilities are aligned to the Companies Act and the directors' duties to put the interests of the company and the shareholders first. Typically, we would appoint an investor director on our more established equity investments, so when they're certainly in turnover, in profit, and more established companies there. It would be very unusual for us to appoint in the really early stage—tech seed businesses. To give you an idea, we've got about 130 in our live equity portfolio at the moment, and we've got investment directors appointed on about 30 to 35 of those, so it's certainly not across the board, just to help paint that picture for you.

A circumstance such as that you've described there, where we are putting an investor director in without the consensus of the board, would be very rare, but where I could see that potential is where there's been a breakdown of the existing board, and that could be related to governance. So, it could be that we've got concerns that correct governance processes aren't being applied, and we have a responsibility in terms of protecting Welsh Government money. So, it may be that we insist on an investor director being appointed to get to the bottom of those governance issues, or it could just be down to a breakdown with the existing board members. It could be that there's a relationship problem there, and we need to put an investor director in there to try and sort that out, ultimately, and pull things back together again.

So, in that scenario—because you've mentioned just now that the non-exec director isn't necessarily DBW's person on the board, but that they're for the interest of the business—in that particular situation, then, is there a bit of a conflict with the new loyalty? It's not a strong word, but maybe not the right word to use, but their loyalty to the development bank over the business collides—

Their primary interest is to the company. So, they're a director of the business, they need to follow that, that their responsibility lies to the company and the shareholders of that company.

Which is ultimately our interest too.

And we should be aligned. We're also a shareholder, so I absolutely agree we should be aligned with the common interest there.

How would the development bank then deal with a situation where relationships break down, then, between the development bank and the board of directors, or the founder of a business? How would you handle that situation?

It depends on the situation, I guess. I think that the point I'd mention is an investor director typically isn't an employee of the development bank. That's an external individual that we would find, or the company would find, and we would appoint that individual. But development bank employees will still stay involved. We observe the board, so a member of the development bank would be at those board meetings. So, the point of that is that we would be aware if there were issues starting to arise at the board; we wouldn't be reliant on an investor director or somebody else coming to tell us that, for our actively managed funds. And the starting point would obviously be to try and resolve those issues at the board, depending on what they were and who they were between.

There have been situations where we've changed an investor director—so, perhaps there has been a breakdown between an investor director and the rest of the board. That's usually more down to, or, the cases when we've done that have been down to the investor director, perhaps, not adding the value that everybody had hoped at the beginning. Because when we appoint an ID, it is about them adding value to the business—again, back to alignment; we all benefit if the company grows. So, we've had circumstances where we've had to change the investment director because, perhaps, the company has outgrown them, they've moved on, the expertise that they need now will be different. There will have been circumstances where, perhaps, one of the exec members of the board is underperforming and needs to be removed and replaced, but that is a decision for the board. So, the board will make that decision. It comes to us for a consent matter, but that is the role that we play—we can't remove directors of the board; it's a consent matter for what the board recommends to us and we, as you can imagine, will look at how they present that to us carefully. They will, inevitably, take external legal advice to support them through that process.

Okay. Good. Diolch. Thank you.

I'll now bring in Jenny Rathbone. Jenny.

Thank you very much. I wanted to look at how you handle complaints, so going on from what Luke has touched on. Looking specifically at the case of Andrew Ling, who wrote to us about the breakdown of his relationship with the bank, he obtained a £0.5 million investment from the bank in the form of a convertible loan note, and the condition was that somebody had to be employed on a salary of £150,000 a year. That was for a full-time position, or a part-time position on the board.

Unfortunately, Mr Ling has made a formal complaint to the development bank, so we're not in a position to answer these questions at the moment, I'm afraid. I did write to the Chair to explain that we wouldn't be able to deal with it because he's made a formal complaint and he's also issued a subject access request. Sorry.

Okay. Fine. I've only recently joined the committee, so I didn't know that.

No, no. Apologies.

I'll have to rephrase my questions, really. It's really about—. I mean, we all, in our constituencies, get people who are not happy with the outcome of a particular body who has decided against them, and it's out job to ensure that they have been treated fairly, as far as possible. But, if you're the judge and the jury, it's quite difficult for an individual who may not have a business plan that stacks up to be able to—. Well, who is going to decide whether this is somebody who doesn't have a business plan that stacks up and, therefore, 'Sorry', but, alternatively, that they have a valid complaint that they want to be heard? At the moment, there's no mechanism for a complaint to be heard by somebody who hasn't been involved in the decisions that are being contested.

There definitely is. So, if I could just put the overall complaints position into context, in the 17,065 applications that we had in the last year, 3,700 businesses that we have as customers, we received 11 complaints. Complaints that come to me directly, I respond directly to those complaints. We have an organisation where three members or the senior management team are not directly involved in investing, and, to the extent that there is a complaint, initially it would go to the investment team to provide information on their views on the complaint, and we will try and address it that way first. And that is resolved in many, many cases. That's the first point of resolution.

If they want to take the complaint further, it can go to one of the directors who is not involved in the situation. So, in the case of Mr Ling, that is exactly what's happening; the person who is involved in the assessment of his complaint is completely separate from the investment teams. We also have recourse to the non-executive directors and, in fact, in one instance, several years ago, the chairman was asked to get involved, again, completely independent from the investment process. And then, in regulated activities and certain other elements and in our complaints procedure, there is recourse to the financial services ombudsman, which is completely independent.

We were thinking about this in the context of the questions and the submissions to the hearing, and there was a suggestion that there was a need for independence. We believe that that's provided by the financial services ombudsman. But there's also a question about to what extent somebody wants to make a confidential allegation, because one person made a completely unsubstantiated suggestion that people were afraid to complain to us, which is clearly not the case. However, we also are going to strengthen our processes, so there will be a direct e-mail to our group counsel. She's a qualified solicitor and, again, independent from us. So, she can receive confidential complaints away from the investment team or even from me, if that is what they wish to do.

Obviously, the number of complaints that you have received is, I acknowledge, quite small, but, clearly, Professor Jones-Evans asserted that some founders were afraid to come forward to complain about their treatment, in case they're blacklisted for future funding. So, you can see there is quite a tension there between somebody's right to have their case reviewed against, 'Will this affect my ability to get funding in future?'

I understand his comment, but there's no basis of evidence to suggest that that is remotely true. It is a statement that has just been made off the cuff. We do not have any organisation, as far as I'm aware, that's blacklisted. We look at individual investment decisions on the basis of merit. There are individuals and companies that have failed, and that might determine—. If we've lost money out of that investment, and that company's failed or that investment has failed, that might change your view as to whether we would support that individual again, but merely complaining does not blacklist anybody.

Finally, I just wanted to go back to the comparator organisations. Could you just set out the development bank's links with the Montreal Group, who seem to be the best game in town?

The Montreal Group is a consortium. It was set up by the Business Development Bank of Canada as a meeting point for nationally owned banks, predominantly development banks. We are not a direct member of the Montreal Group, although we are investigating becoming a direct member, but we were kindly invited to two of their most recent events. I attended the CEO forum in Amsterdam with the Montreal Group and, then, my colleague Rhian Elston and I attended a two-day event in London. The Amsterdam event was pre COVID and the London event was after COVID. And that has resulted in our ability to meet some of the banks that we've recommended. We had dialogue with Bpifrance, with KfW in Germany, with the Business Development Bank of Canada, and many other development banks. Some of those discussions are extremely helpful. In the case of KfW, they have a scheme to support retrofit housing, and so we've used information that they provided in a scheme that we've proposed to the Welsh Government, which we hope to launch this year. Bpifrance is one of the most advanced in terms of their climate plan development. But, equally, when we attended the hearing in London, we had two green schemes in the offing. It turns out we were significantly further ahead than many of the other organisations in our decarbonisation funding strategy. So, it's a really useful organisation in terms of getting feedback and testing our ideas.

But it's also a way, surely, of counteracting the dominant culture of short-termist investment decision making that dominates the City of London, which is why the British economy is in such a fragile state. Do you not see these sorts of links as a way of getting together with other like-minded approaches to combat what is a global business?

Absolutely. I'm just giving examples of things that have come out of that dialogue. The investment strategy and structure of the UK market is a different topic—

It is. We haven't got time for that today.

—and my colleague and I would have plenty of views on that. I think it is extraordinarily disappointing, and I see it a lot in terms of the way that UK investors operate. It's a great shame. And it's being reflected in the stock exchange now.

As Giles has demonstrated, we look, listen and learn with developments. We're a new development bank, so this has been a very effective thing. I would just like to turn it around the other way and actually just let you know that there are a lot of people looking at us. I've said in this committee today that I think ours is a very advantaged model and there are a lot of people who are very interested in what Wales has created here, which is something that has a simple and clear remit, it can do equity and debt in all sectors and all regions, it manages and develops its own professional skilled resource, and it's helping develop the geography as a centre of excellence in its particular areas. We know, and Giles too, and others, and people who we rub shoulders with, that there are a number of people, if I can put it in the vernacular, who say, 'Why can't we have one?' I think that's a great compliment to what we have been able to achieve in Wales.

Thank you.

Thank you, Jenny. Can I just very quickly come back to the issue of appointing investor directors? Can you just very, very briefly explain to us how are those people chosen and who decides on their remuneration?

Shall I take that? The process that we go through to identify an investor director is to understand what's needed for the company. It goes back to what I talked about earlier, that we won't appoint in every circumstance. So, it's trying to understand where are the gaps in the board, where do we feel an investor director is needed and what value can they bring—that's the key part. As well as the investor director responsibilities, we want them to be able to bring value to that business. We run a database of individuals who are interested in non-exec, chairman and investor director roles. There are about 160 individuals on that database. It's constantly evolving, and that's something that the team do, look for new people there, look for new individuals, because often they're very busy as well. Good non-execs or good chairs will be busy, and we need to make sure they've got sufficient bandwidth to be able to give to the business. So, we will look to try and identify candidates, often the company themselves could identify candidates as well, and they will all be put into the mix. Then, we jointly interview to have a look if there's the right fit for the company, because we do want this to be a consensual appointment. We want everybody to be on board and to see the value that the investor director can bring. The remuneration is a discussion between the company and the investor director. They make the decision there around how much that individual should be paid.

Thank you very much for that. I'm afraid time has beaten us, so our session has come to an end, but thank you very much for being with us today. Your evidence will be very important for our inquiry. A copy of today's transcript will be sent to you in due course, so if there are any issues with that then please let us know. Once again, thank you for being with us this morning. We'll now take a short break to prepare for the next session.

Croeso'n ôl i gyfarfod Pwyllgor yr Economi, Masnach a Materion Gwledig. Fe symudwn ni ymlaen nawr i eitem 4 ar ein hagenda, sef ein hymchwiliad i mewn i Fanc Datblygu Cymru. Dyma'r sesiwn dystiolaeth olaf ar gyfer ein hymchwiliad, a dyma'r tro cyntaf hefyd i Ysgrifennydd y Cabinet dros yr Economi, Ynni a'r Gymraeg fod yn bresennol yng nghyfarfod y pwyllgor yn ei rôl newydd. Felly, ar ran y pwyllgor, dwi'n estyn croeso cynnes iddo, ynghyd â swyddogion o Lywodraeth Cymru. Cyn ein bod ni'n symud yn syth i gwestiynau, gaf i ofyn i'r Ysgrifennydd Cabinet a'i swyddogion gyflwyno eu hunain ar gyfer y record?

Diolch yn fawr, Gadeirydd. Diolch am y croeso i fod yma heddiw. Jeremy Miles, Ysgrifennydd y Cabinet dros yr Economi, Ynni a’r Gymraeg.

Bore da. Duncan Hamer. I'm director of business and economic operations.

Bore da. I'm Jo Banks. I'm head of access to finance, in which capacity I head up the sponsorship of the Development Bank of Wales.

Thank you very much indeed for those introductions. Perhaps I can just kick off the session with a few questions. Of course, your department is responsible for the Development Bank of Wales. Perhaps you could tell us what your relationship is with the bank, and how that operates.

It's an arm's-length relationship, and so the framework document that governs the relationship with the bank provides for the foundation of the relationship. In general terms, that provides that Ministers are not involved in the day-to-day running of the bank, as you would expect, and that investment decisions and the operation of the bank are something that is in the gift and control of the bank itself, rather than the Welsh Government. So, it operates at arm's length. There is a remit letter that sets out priorities, and we are currently operating through, I think, the first whole Senedd term remit letter. We're about halfway through it.

So, it's wholly independent of Government.

Yes, it is.

Can you tell us how the development bank's reclassification as 'central government' is likely to affect the way it operates in the future, and what difficulties do you think it presents to both the development bank and, indeed, to the Welsh Government, in your view?

This is, on one level, a complex question and a technical question, but it does have real consequences. It is to do, as I'm sure the committee is aware, with how the operations of the bank are classified for the purpose of the national accounts, how they’re treated. It doesn’t change how the bank operates on the ground, if you like, but it does create the current state of discussions, as it were, between the ONS and the Treasury and the Welsh Government, does create a practical challenge.

The short answer to your question is, as a consequence of the reclassification by the ONS, we are seeking from the Treasury additional budget cover to deal with how the bank operates. In 2021, the development bank was reclassified by the ONS, and that’s backdated to 2017, and it creates a requirement in the Welsh Government’s accounts for the funds that the bank has received to be treated—. There’s a double-counting issue that arises, essentially. Previously, once the bank had received funding from the Welsh Government, it was treated as spent; now it’s only treated as spent when it’s invested. So, we have to account for that money having been passed over, but we also now have to account, under the new treatment, for the difference between the capital spent and the capital received by the bank in any one year. We are trying to find a solution to that with the Treasury at the moment. We haven’t yet found a solution. It is important that we do, because it creates a double exposure in our accounts.

My officials have developed an appropriate short-term solution pending overall resolution, but, if we can’t find that long-term resolution, I think the current impact on the capital budget is around £50 million. It hasn’t actually been particularly an issue to date, although it has been a classification question that was, obviously, backdated. The reason for that is that the receipts that have come in have more or less covered the investments made, but going forward there will be, because of the pattern of investment of the bank, a gap that arises, and that will create a pressure in our accounts if we can’t resolve it. So, I’m very hopeful that the Treasury will be able to find a solution with us for it.

And are you confident that this will be resolved in the very near future? Are we talking weeks, months—?

I'm not sure I can give you that level of confidence, Chair, I'm afraid. It has been a challenging discussion. I believe there is a solution that has been found either to an identical problem or a similar problem with the British Business Bank, but I'm not able to give you any confidence that we are looking at a speedy resolution to this, unfortunately.

Okay. I'll now bring in Luke Fletcher. Luke.

Diolch, Gadeirydd. I think the reclassification issue is a complicated issue, but quite an interesting one as well. But my questions aren't going to go so much on the reclassification—we covered that quite a bit with the development bank itself, and I think that was just a matter of waiting for word down from the Treasury as to what they're going to do with that.

But I'm interested in one bit of evidence we've gathered throughout this inquiry, and that's the proposal of putting the development bank on a legislative footing. There are pros and cons to that, but, given that you're new to your role now, I'd be really interested to understand or learn from you what your view would be on putting the development bank on a legislative footing.

Okay, well, I think the big point is that that’s, I think, a positive thing for people to be asking for, because it suggests that the development bank is really valued as a fundamental part of the business finance ecosystem in Wales. So, I think the fact the request is being made is actually positive. My own reflection on it is that it’s probably something to consider at some point, but it doesn’t feel to me like the most important priority at this point in time, not least because it’s still quite early days, isn’t it? The bank has only been established since 2017 and really has established itself, as I was saying, as part of the fundamental finance ecosystem in Wales. But I think there’s some scope for flexibility in the meantime, provided, as we have got in place, the kind of stability and security of the support from the Welsh Government that we are committed to. So, I think it’s probably something to look at. I don’t it’s something that is particularly urgent, but I do take it as a good signal that people are raising it as something that we should consider.

I am mindful as well, by the way, that other development banks elsewhere do have a statutory footing, so I can absolutely see the rationale for the request, but I don’t think it’s particularly an urgent question.

The point that, obviously, the FSB have raised with us, was just to give a bit of clarity on the direction the Government would want to take with something like the development bank, then. So, if that wouldn't be the priority for the development bank, then, from your perspective, what would be your No. 1 priority to focus on?

There's a range of things that we're going to discuss, I think, in today's committee, which I think you touched on with the bank themselves. I want to make sure the bank continues to do the work that it is doing—providing finance to start-ups, providing finance to businesses that want to grow, and taking on those transactions that mainstream lenders might find sometimes a little too high risk. I think it's important within the bounds of appropriate metrics and an appropriate lending policy, of course, that the bank is able to support those higher-risk businesses so that we can see the growth in sectors that are important for the future, which sometimes mainstream banks are a little more wary of. I think that's fundamental.

Great. Diolch, Cadeirydd.

I'll now bring in Vikki Howells. Vikki.

Good morning, Minister. I've got some questions on the business support landscape quite generally. Firstly, I'd like to ask where you see the development bank's role within that business support landscape, and to what extent you might agree with the FSB's view that a stock take of business support is needed due to the massively fragmented landscape of business support, as they see it, in Wales at the moment?

It's a really interesting question. I do think that, from a business point of view, I imagine having the most streamlined offer is probably the most convenient offer, and I do think it is fair to say that there is a level of fragmentation. Business support comes from a number of different providers, some offered at a local government level, some at a Welsh Government level, some at a UK Government level, often, obviously, operating in the same place. And then you also have the development bank as well. So, there's a range of different support available from different bodies in government, and I do think that that can fairly be described as fragmented. So, I think that—. I think you used the words 'stock take'. I think that is a sensible thing to do.

I think there is a value in having services integrated and working effectively together. I think there is good working practice, for example, between the development bank and Business Wales; there are protocols between the two that govern the way they work with each other. We've just put in place, from the start of this month, the last of the three major contracts for Business Wales. So, there's a point in time now that seems to me to make sense for there to be very close working between the two.

When the bank was originally formed, there was, of course, a debate about the extent to which business support should be part of the bank's remit at that time. Obviously, that was not the decision that was taken then. I think that we do, however, see, with the work that the bank has been doing in particular on the green business loan scheme, the value of integrating business support offer together with finance around decarbonisation, around energy efficiency, and the more of that we see I think the better.

I think the fact that Business Wales draws on the economic intelligence Wales unit within the bank is really very positive. And I think probably there's a point in time that we've reached now. The bank has established itself. It's mature, it's got a good track record, it's well respected. I think there is a sensible point at which to say: is there more we can do to integrate business support and the functions of the bank? I think it's important probably not to fixate too much on structures; at the end of the day, what really matters is is there is a streamlined offer that businesses are able to take good advantage of. But I think it probably is a sensible point in time to have that discussion again.

Thank you. That leads me really nicely into my second question, actually, Chair, which I think you've just started answering. So, we took some really interesting evidence from the Business Development Bank of Canada recently, and they told us in quite good detail, actually, about their evidence that businesses receiving those advisory services alongside their financial support show stronger results than those who'd only accessed the financial support itself. So, is there anything else you'd like to add to what you've said already about the relationship between Business Wales and the development bank, and whether you feel there are any opportunities for a greater degree of collaboration or integration of the services that they both provide?

Well, I think, just on the question of the service rather than the structure, for a moment, I do think there is good evidence that, whether you start from the point of view of getting business support and business advice and then graduate or move towards taking on finance—. In a sense, that's part of the role of Business Wales currently, isn't it, to prepare businesses so that they're ready for lending, to do the business planning, to do the horizon scanning, the assessment of their needs. That's part of the service that Business Wales and others provide at the moment. And then you can see that moving on, as I say, to finance. But, equally, I think it can work the other way—businesses who go to the bank for finance support are then in a world where they're understanding the need for business support around productivity or leadership and management, or other needs, in order to grow their business. So, I think it's a sort of organic relationship, really. And I think the way the development bank in Canada has developed its model is an interesting approach. So, I think these things are worthy of further exploration, certainly.

Okay. Thank you. And how would you respond to the assertion from FinTech Wales who say that the development bank's

'overall approach is risk averse which stifles innovation and the true potential of Welsh startups'?

Well, I think the context for this question, I guess, is that there is, to some extent, a tension, isn't there? On the one hand, as I was saying earlier to Luke Fletcher, is the need for the bank, in order to fulfil its remit, to take more risk on the one hand than mainstream lenders would perhaps typically want to take, but, on the other, we're developing an evergreen model, aren't we, where pretty fundamental to the model is the ability for those investments to make a return, which can then be reinvested in the future. And we've seen the bank do that very successfully. So, in a sense, those two priorities are, in some sense, in tension, and the task is to strike the right balance between the two.

As I said earlier, I want to see the bank taking risks to support Welsh businesses. So, I don't think it's entirely fair to say what FinTech Wales has said. I do think there is evidence, and we can see in the discussion around interest rates and so on, that the bank has to make decisions to reflect the higher risk profile that it takes on. The way that we contract with the bank assumes that some investments will generate a greater return than others, and those where the return is envisaged to be less are those, I think, where the risk is likely to be higher. In fact, some of the capital that we use to fund the bank, certainly to date, is financial transactions capital, where the need to return the funding provided is at a lower rate than 100 per cent. So, it provides a margin within which the bank can take decisions that reflect that higher risk profile. But, at the end of the day, these are not grants. The bank operates on the basis of a repayable finance model. So, it is important, clearly, that, in making those judgments, it is foreseeing that the lending is repayable. So, I think you have to see the model in its entirety, really.

Thank you. We've taken some other evidence that suggested that the bank isn't big enough and that a lot of its £2 billion-worth of assets are tied up in real estate and aren't active in the Welsh economy. So, could I ask what your view is on the scale of funds at the bank's disposal and the proportion of total funds directed at providing finance for businesses?

I'm not sure I recognise that point about not being active in the economy. I'm sure there'll be lots of small house builders who'd probably take issue with that characterisation. I think it's an important part of the work of the bank to support development in the house building sector in particular, and that helps in many ways to drive the economy, as we understand. But the larger point you're making, about the scale, if you like, of the bank—I think it's currently the case that about £1.2 billion of funds are under management for businesses. That £2 billion figure that you gave, by the way, is equivalent to 10 per cent of the Welsh Government's entire budget, so I think that gives a bit of a sense of scale of it. I think as well, actually, that we should recognise the impact that the bank's investment decisions have in terms of the leveraging in of other funding into the economy. So, I think that, since 2017, the direct investment is just shy of £700 million, and the co-investment, the funding leveraged in by that, is just a little over £0.5 billion. So, those sums are significant, I think. I'm not sure, in fact, that we are properly able to capture, if I'm candid, the full extent of the impact of the private funding brought in to the economy as a consequence of that. And if the committee had any reflections on that during its inquiry, I'd be very keen to hear.

Thank you. And one final question from me. Professor Dylan Jones-Evans has suggested that increasing the support to start-ups, which of course create jobs, develop innovation, disrupt markets and support communities, should be a key objective for the development bank. So, Cabinet Secretary, what's your view on this?

Well, I do think it is important. I agree that it is an important function for the bank to support entrepreneurs, to support start-ups. That's pretty core to what the bank does, and I want to see that happening at scale. I don't think I agree that the entire focus of the bank can be on start-ups, because, clearly, we want the bank to be there to provide funding for already established businesses to grow and to take on more employees. I don't think it's a binary question; I think it's a question of the mix between the two. There are specific funds that the bank has to target microbusiness lending, and I think that around 80 per cent of the businesses supported are microbusinesses, so it's probably a slightly more nuanced picture than the question suggests.

Thank you, Cabinet Secretary. Thank you, Chair.

Thank you, Vikki. I'll now bring in Samuel Kurtz. Sam.

Diolch, Cadeirydd. Bore da, Ysgrifennydd Cabinet.

Bore da.

Just coming back to a question from the Chair at the beginning, can I ask if you're satisfied with DBW's due diligence process when they look at granting loans?

Well, those are operational questions, so I think it's important that the bank operates as a bank, at arm's length from the Government, and it will have processes in place to undertake diligence in relation to the loans that it provides, and I think that's in the hands of the bank's executive, answerable to its board.

So, from your perspective, you're content with the due diligence process from the Development Bank of Wales, because it's something for their remit.

Well, the point I'm making to you is that it isn't for me to be in the detail of the due diligence process; that's a matter for the bank itself. We have a framework document, which provides, very importantly, that Ministers aren't involved in the operations of the bank in the way that question would require them to be.

Okay. Thank you. So, in terms of the FSB, they suggested to the committee that there is a need for greater clarity and detail regarding the Welsh Government's economic strategy and that, following the election of a new First Minister, they would like to see, and I quote,

'clear articulation, of economic strategy'.

I was just wondering about the Cabinet Secretary's response to this.

Well, it's obviously important to align the interventions that we as a Government either do ourselves or support with the broader economic strategy of the Government. I think that probably goes without saying. I gave a statement yesterday, which I know you will remember, which tried to outline an initial approach that I hope to be able to bring to my responsibilities.

So, we have the economic mission, which describes, in broad terms, the objective of the policy in Wales, and the three things I've been focusing on is: we must do everything we can to increase productivity, which is a significant challenge for us, historically, in Wales, but also the dynamism of our economy more broadly; secondly, to make sure that we're attracting investment both within Wales and from outside; and thirdly, the skills and employability offer. So, those are really important dimensions about how we deliver the broad aims of our policy. We've talked a little bit about taking a fresh look at business support, what's provided and by whom. I think that's really important. I also want to see us doing as much as we possibly can to support entrepreneurs, including young entrepreneurs. I know the bank does good work in that. I think there's probably more we can all do to support young entrepreneurs. We talked yesterday about aligning, didn't we, the investor community, entrepreneurs, business, Government, university research, and, fundamentally, making sure that, within the Government and between different layers of Government, there is a very joined-up, very can-do approach to how we support sustainable growth in the economy in Wales, and I think the development bank has a fundamental part to play in probably all of those.

Okay. So, can I take from your answer that you think there is good alignment between the Development Bank of Wales's businesses that they're supporting, and how they're going about that, with the economic strategy of the Welsh Government?

I do think, yes. I mentioned at the start that I'm keen to press to make sure the risk is taken and that we are supporting more start-ups. There is absolutely no room for complacency here; I think we need to always be pushing to make sure we're doing absolutely as much as we can. My own view, for what it's worth, is I'm not entirely clear that any of us understands fully the exact relationship between different kinds of investment, on the one hand, and what that means in terms of the impact on GVA and a growing economy. So, again, if there's anything in the committee's deliberations or evidence that can help us with that, I'd be very keen to hear.

Okay, thank you. And then, coming back on the staff element that you mentioned, or skills element and ensuring expertise, I'm just wondering what role the Welsh Government has in ensuring development bank staff have the necessary skill set and expertise to give confidence to the businesses that they're working with in specific sectors.

This is very important, obviously, and equity investment is a very skilled role, and I think the bank itself would say it had to manage some short-term challenges, thankfully, in relation to this, which may have had an impact on pace at various points. Those have been resolved. But I think it does just go to show how important it is to have the right mix of skills. The bank’s executive is tasked with making sure this is the case, under the direction of the board, making sure the organisation is appropriately staffed, and I think the way the bank is plugged into the broader finance ecosystem in Wales means that it can draw on expertise from elsewhere. Where there's a sectoral question, or where you see a cross-sectoral priority—decarbonisation would be a good area—you can recruit in for skills in that particular space. But there's a remit letter that sets the priority and, within that, it's for the bank to make sure it's appropriately staffed.

Fab, and I'll come on to the remit letter in a second. But I'm just wondering, then, on that being an operational element of the Development Bank of Wales, how is that fed back to you and your ministerial team, your Cabinet Secretary team? Are there quarterly meetings, annual meetings? How is that fed back to you so your department is aware of what's happening?

Sure. So, ministerially, there are meetings twice a year—they've tended to be twice a year and it's my plan to continue that—with the chair and the chief executive. Officials meet more regularly. I'll ask perhaps Duncan or perhaps Jo—I don't know which of you is best placed—to give a sense of the rhythm of those meetings. But, on particular funds, there are meetings midway through the fund and when the fund is exited. But there's also a rhythm of meetings at official level.

So, I think, from my perspective, strategically, I sit as an observer representing the shareholder on the board of the development bank. So, we're able to directly feed from the meetings that happen regularly. We also meet with Rhian Elston, for example, who gave evidence this morning—we would have active discussions around the tasks and actions, and with Mike Owen on investment. So, we're able then to respond in our framework and, basically, support the bank in its objectives. And I'd add, in terms of equity specialists, for example, that's not a unique thing to the development bank; that is a broad skills requirement across the private and public sectors. So, we recognise and we're therefore able to feed directly back to the shareholder in this case, as the Cabinet Secretary, on response. Operationally, Jo—.

I sit on the audit and risk committee as an observer. We have a regular rhythm of review meetings for all the different funds managed by the bank. We receive quarterly performance reports on all of those funds, and we meet with the fund managers within the bank to review those on a biannual basis. We certainly have full annual reviews of all of the funds. Obviously, we're a customer on behalf of the Minister for those funds, so we seek to be challenging, looking at the key performance metrics, performance, et cetera, and they provide also an opportunity for the bank to tell us about any issues and trends. We also have that information available to us through the board packs and board reports, which we also have the opportunity to see.

Okay, helpful, thank you. Thank you, both, for that. We talked about the remit letter, and I was just wondering if I could come back to that, briefly, Cabinet Secretary, because Cwmpas have suggested that the language in the development bank’s remit letter could, I quote,

'arguably be strengthened, with greater compulsion to act, especially in relation to worker buy-outs at the point of business failure.'

I'm just wondering if this is something that you've thought about, considered or would look into in the future.

The bank is already supporting the Government's ambition to increase employee-owed businesses, so that's positive, and has brought in expertise at a board level, specifically in relation to employee buy-outs, so I think that's very positive. In some senses, it's a subset of the broader succession management investments that the bank runs. It does that very successfully. It's brought in external investments through the Clwyd pension fund as well, so this is an area where there is significant activity already.

I suppose there are some limitations on the ambition that I think Cwmpas is asking us to take on. Firstly, I'm not sure it's particularly appropriate, actually, to direct the bank in that very specific way, not least because there are practical limitations. Firstly, given that the bank's purpose is as a lender, and a lender where the funds are expected to be repaid, I'm not sure that directing intervention at the point of business failure makes sense, because that would be in tension with the bank’s broader purpose. But, more practically, perhaps, I think there's a limit on the number of employee buy-outs that would come to the bank. There are other sources of finance that they would probably go to. But I do want to say that the bank is already working on this agenda and supporting our broader ambitions.

Okay, that's helpful. So, no changes around the remit letter, around these purchases, worker buy-outs, at the point of business failure. But is there anything else in the remit letter that you're considering looking at at any point?

Well, the next remit letter will be issued at the start of the next Senedd term. So, there are some things that we will want to do during this Senedd term to prepare for that new remit letter. So, there are some reviews that we might consider doing in order to have further insight into some areas in advance of that. But the next remit letter is at least a couple of years away.

Okay, thank you. Diolch. Diolch, Cadeirydd.

Diolch, Sam. I'll now bring in Hefin David. Hefin.

Diolch, Cadeirydd. Why was there a change of heart on a tailored review?

I didn't catch that.

Why was there a change of heart from the Welsh Government on a tailored review of the development bank?

Well, it's not so much a change of heart; it's that the process that has been put in place since we wrote the remit letter has, I think, introduced a new assessment stage before a tailored review is undertaken. So, the context for this is that the body that the Welsh Government has to devise and apply its policy for reviews of arm's-length bodies generally has introduced a new stage, so that there's a sort of interim assessment of which bodies should be prioritised for a review. So, I'm absolutely not ruling out doing a tailored review; it's just that we are in that process of doing that gateway first.

I think Jo's just touched on the review work that's already happening. We had a review in 2021. My current thinking is that the point about classification, which we started on, when that is resolved we will have a clear picture of the basis on which the bank is operating from an accounting perspective. And I think, also, on the point that you were making about the statutory footing, it feels to me that once we've resolved the point about classification, there will then be a natural point at which a tailored review makes sense, and that will probably quite neatly lead into the next remit letter and be a useful point in time, perhaps, to consider the statutory question that you were asking me about, Luke.

So, just to understand that, in 2001 there were plans to go ahead with a tailored review, and in 2003 there was an announcement that tailored reviews would be temporarily paused. You're now telling us that pause is likely to end and there will be a tailored review in the future.

I'm telling you that the pause was there to make sure we introduced the self-assessment model, which is that interim stage of assessment before we do a tailored review. That's in place at the moment, as I understand it. Once that's complete, we'll have a prioritisation, then, for what bodies get reviewed, and I'm saying to you I think that will be a sensible point in time for us to do a review, taking into account the point that Luke Fletcher was making, provided that we've resolved the classification question, because I do think that's an important prior question.

So, at what point might there be a tailored review in the future?

After we've done the classification resolution.

Okay. Can you give us a timescale?

Well, as I said to the Chair earlier, I can't give confidence of that being resolved immediately, but we are working as hard as we can. We hope the Treasury will help us find a solution to it.

Okay. And how many independent reviews have there been of the development bank?

Well, we had two reviews leading up to the development bank being established—one in 2013, and then the task and finish group, which Professor Dylan Jones-Evans himself led, in 2014, which led to the establishment of the bank in 2017. Since the establishment of the bank, we had a project assessment review in 2021, at the start of this remit letter period, and that made some recommendations. And that's where we are in terms of the number of reviews that have been undertaken.

Okay. So, one of the concerns I'd have is that the evidence that the development bank gave us earlier is that they weren't able to articulate any of that. So, do you think that there needs to be some communication with the development bank so they can understand that that might be happening in future?

Well, I'm sure that would be helpful if that is the position.

And what will you be doing?

When we have clarity around when a thematic review might take place, we'll discuss that with the bank. But I think it's clear to all of us that the prior question is resolving the classification question, which is obviously quite a significant question in accounting and operational terms.

Okay. Thanks, Chair.

Thank you, Hefin. I'll now bring back Luke Fletcher. Luke.

Diolch, Cadeirydd. If I could touch on equity investments, what's your view on the bank's current operations in terms of its equity investments?

My understanding is that the bank is the biggest equity investor in Welsh businesses. The level of equity investment is going up. It's around £15.5 million a year at the moment. There are some good examples of successful equity investment. It's a more recent area, I think, in chronological terms, than the debt lending, which the bank has been doing for a very long time, and I think the attitude in Wales to equity investment might be slightly more conservative, perhaps, than elsewhere. So, I think there is a discussion, not just for the bank, but for economic and business development more broadly, about understanding the benefits that equity investment can have, both from the business point of view but also from the bank's point of view. You need to strike a balance, don't you, because the equity stake can enable the business to access more funding, but, clearly, there is, in some quarters, a bit of a cultural resistance, perhaps, to giving up part of your company, which is absolutely understandable, but I think that discussion is perhaps better developed elsewhere.

That's something that we've cottoned on to throughout the inquiry. The FSB raised it as an issue as well, just in terms of that feeling around somebody else from outside of a company coming in. And of course, it's not always going to be suitable for every business, but how do we go about, then, actually changing that culture around it, because we also need that variety of finance within the Welsh financial landscape, don't we?

Yes, we do. I think it's important to have the mix, and, as you absolutely rightly say, it isn't something that is suitable for every business that wants support. Not every business is a company. I think it obviously will not be applicable in every case. I do think there is good experience from elsewhere. So, I think, in Northern Ireland, for example, the approach in the business community, I think, is slightly different and probably more open, as I understand it, to discussions around equity share. And I think, as a consequence, the development bank in Northern Ireland has probably done more at an earlier stage. So, I think there is a sort of interdependency, if you like.

I suppose one of the reservations that we've picked up on through the inquiry has been the perception, essentially, that by taking on an equity investment and thereby having a non-exec member of your company's board that you have—. I'll use the development bank as an example here, because, obviously, this is what we're talking about, but you have the development bank's person in the board, potentially trying to influence the way things were going. The development bank were very clear in the evidence session that that isn't the case. Do you think that there's the right balance, then, in terms of the ability of that non-exec director, or the priority of that non-exec director, to be more in tune with the business rather than the development bank? Is the balance right there, in terms of safeguarding, then, the bank's own investment and Welsh Government's money?

It's a really interesting and complex question, that, isn't it, because it's about human expectation and perception as much as anything else. I know from my own experience; in my prior life before coming here, I worked for a company that did take investment from outside, and there was a non-executive director on the board, and it's quite a big step, especially if you've got a company where there may be two or three owner-managers and suddenly there's a fourth person who they obviously haven't worked with in the past. It's a big cultural question for a company, taking on investment in that way. Obviously, the ideal is that you have a non-executive director coming in who is able to really add value to the plans of that business to grow and to expand in the way that all the parties to that transaction will want, and that there's a good fit. I mean, that's the ideal. I dare say that isn't always the case, but that's a feature, not just of the development bank, that's a feature more broadly, isn't it? But, just to say, that director's obligations are actually to the company as a director of the company. I think that's pretty fundamental.

And you think that is right, yes.

Well, it's a matter of company law as much as anything, but it's also right.

So, looking at, then, the way that the development bank appoints its non-exec directors, are you happy with the way that that happens?

Well, I'm not aware of specific concerns around that. It is really important that we always make sure that the people who are appointed as non-executive directors are really adding value to that company. That's when it works at its best. Sometimes that may not be the case; I don't have direct information about that myself. But that's obviously what is the ideal, and we need to make sure that's always the case as far as possible.

Diolch.

Diolch, Luke. I'll now bring in Jenny Rathbone. Jenny.

Thank you. Just to follow on from that, latterly, the development bank has got involved in sort of mortgage lending for—you know, in the context of COVID and the cost of living and people who are at risk of losing their homes.

Yes.

Is that an appropriate place, initiative, for the development bank to be involved in, given that this is not—? This is important socially for individuals, but it's not really about developing the economy as such.

Well, I'll ask Jo, perhaps, to come in on some of this, but I think it is important to bear in mind that one of the tasks that we task the bank with, if you like, is to provide support to the Government's broader objectives, so, in any number of ways, actually—around the regional investment model, around Help to Buy, Help to Stay, but also, in other ways where the Government is, you know, doing transactions, the bank plays sometimes quite a significant role in supporting that work. And I do think that is important so that we have that broader value, if I can put it like that, from a cross-Government point of view. But, perhaps, Jo, you can give some more specifics.

Thank you. Yes. Obviously, the bank has been delivering the Help to Buy service on behalf of the Welsh Government for a number of years, helping individuals buy their first home, for example. The Help to Stay initiative, which I think is what you're referring to, that's a service delivered by the development bank for the Government, as opposed to a fund managed by the bank. So, it's a slightly different relationship; it's sort of a contractual relationship for a service that's being provided. And I think the success of the bank in delivering the Help to Buy service consistently over many years demonstrates their credibility to deliver that service. I know that was looked into very hard when those arrangements were put in place.

Okay. So, that gave you the confidence to ask them to do what is a service.

Yes.

If you were the housing Minister, you'd obviously be thinking, 'I don't want these people to be ending up in homelessness services; there's an alternative way of doing it.' So, I can see, from that policy objective, there's a clear remit, but it is taking the bank into more traditional areas of investment, where there's too much money tied up in bricks and mortar as it is, from an economic perspective.

The bank does increasingly operate in support of a number of different ministerial portfolios, undertaking activities in support of infrastructure, housing, obviously, cost of living, as well as the economy.

I should say, probably, just in defence of the bank, that it is a policy choice on the part of Ministers to make that support available. The question then is, 'What's the best way of doing that?' And I think it's clear the bank has the expertise to do that in a way that perhaps the Government itself would find more challenging.

Fine. Thank you very much. So, I just want to move on, really, to how the bank handles complaints. Professor Dylan Jones-Evans has said that he thought it would be beneficial if there was a more independent panel to handle complaints. This was dismissed by the development bank, saying, 'That's not needed; we already have another mechanism for ensuring that the people who make initial decisions aren't the ones who are reviewing them.' But, nevertheless, Professor Dylan Jones-Evans has been around this block for a very long time, as he was involved in looking at the role that the bank ought to have before it was set up.

Yes. So, I guess my take on it is, my understanding is, that the bank has refreshed its complaints procedure anyway over the last 12 months or so, complies with the UK-wide financial ombudsman's requirements, so I think that's important for us to note. What I struggle with, really, is understanding what problem that is intended to solve. So, if that was articulated to me more clearly, I might have a clearer view on the answer to it. I suppose my starting point is that it's probably not ideal to create a separate body, which will inevitably be, I guess, drawn into second guessing what, at the end of the day, is a set of evaluated commercial decisions. I'm not saying there isn't a need for that to be reviewed and kept—. There needs to be oversight of that policy, obviously. It isn't clear to me that the best way of doing that is a separate group of people trying to recreate the decision, really. But, most fundamentally, I'm not sure what that would fix that isn't currently being addressed, and, if I understand that better, then perhaps I'd have a clearer view.

Okay. Some of the evidence that we had in writing was from a Mr Andrew Ling, who was given £500,000 on the basis that he would have, then, somebody independently appointed to the board, and his remuneration was £150,000—I don't know if it's a 'he' or a 'her', but the person was remunerated with £150,000, which feels quite a lot to me, but I appreciate that there's a commercial market out there. He was then very unhappy, because he was accused of stealing £250,000. Now, the board wasn't able to answer any questions today, because they're still in the process of reviewing this, but it is to be noted that, in Swansea, he went to court accused of this, following the intervention of the Crown Prosecution Service, and the court found there was nothing to answer. This was dismissed. So, you can see how the failure to have a discourse earlier on has led to some quite serious problems in a particular case. So, it's really whether or not this couldn't have been dealt with in a different way that didn't lead to Mr Ling losing his own start-up business.

Well, my understanding is that that case is the subject of an existing complaint to the bank, so, obviously, in light of that, it's not appropriate for me to comment.

Okay. Fine. Thank you. So, I think we've probably come as far as we can on this, unless there's anything further you want to add, because it seems to me that you're keen to understand the bank's current processes and then you'll take a view as to whether or not there is any change that might—. This is something that your officials would discuss or—.

Just to be clear, I don't have a confusion about the bank's current processes; the point I'm really making is that it isn't clear to me that they are not sufficient to address the point that the independent panel is being proposed as a solution to. And if there were examples of this working successfully elsewhere, it's probably worth looking at, isn't it, but, ultimately, I can't see the case for it personally at the moment.

Okay. Thank you. Just turning to—. There are, obviously, successes in the Development Bank of Wales, and we've heard that a lot of organisations are looking at what the development bank is doing, which is all very interesting, because what we're trying to do here is to counter the appalling short-termism of the City of London, which plagues the UK economy. Clearly, one of the weaknesses of the UK economy is that we're really, really bad at helping small and medium-sized businesses grow into larger businesses, and, as a result, they tend to go elsewhere, where they're going to get a better hearing. Are you able, at this stage, to have a view as to how successfully we can say the development bank model is addressing that, in light of your other, wider objectives that we talked about yesterday?

Yes. So, I think one of the things at the heart of that is that idea of patient capital, isn't it, which I think is the point you're alluding to—

Yes.

—in terms of other financing available elsewhere, if I can put it like that. So, I think that's really important, that we continue to make as much patient capital available through the bank as possible. We've increased that quite significantly. From memory, it's gone from about £30 million a year to about £46 million a year recently. So, you're looking at 15-year terms, quite often, in relation to that kind of support—so, the kind of support that gives the kind of businesses that we're talking about the breathing space to grow without that external pressure. So, I think that's really important.

There are lots of successes, and we've touched on some this morning, but I do think it is really important that we're constantly looking at what more we can do. That's obviously important, both from the point of view of the mix between start-ups and more established businesses, the mix of debt to equity—we've talked a bit about doing more in the equity space. So, I think we've always got to be constantly looking at what more we can do. At the end of the day, the bank is a bank, isn't it? It's about lending that will be repaid. But it also has a broader remit—an economic development remit, in short hand—and I'm really interested to make sure that the bank continues to push at that as well, in the way that it is doing.

Okay. We heard earlier from the development bank that there really is a gap in funding anything that's under £0.5 million, that traditional lenders—

In the mainstream market, yes, absolutely.

Yes, in the mainstream market, and there's nobody to speak to, because they've all left the high street. So, how could we engage a wider audience available for filling that gap, particularly in the context of our need to grow our renewable energy sector, particularly around our pension funds, for example, which ought to be looking for long-term investment, because that's their remit? And yet we know that a lot of pension funds have just become infected with the private equity 'you can make your funds grow quicker' et cetera, which seems to me against everything we're trying to do in Wales to have a more stable and Wales-based economy.

Yes. Well, I think that's really important. And I do think that the bank's success in taking on part of the British Business Bank investment in Wales is an important way of bringing funding into Wales as well, which is part of that. But I think, on the point about pension funds, the bank's already attracted the Clwyd pension scheme to support the managed succession fund that it runs, which I think is great, and we would all probably want to see as much of that as we possibly can, really. But I do think you're right to say that it's partly about the signal that the bank sends about a different way of lending, isn't it? And I think it is really important that an algorithm-based model, which it seems to me that mainstream lending is increasingly using, and certainly a remote model, as you say, where that face-to-face presence isn't part of the deal, if you like—. And I think the third arm to that is a regional approach, an approach that has a very clear perspective on investing in proportion to where businesses are in Wales. And I think there is—my understanding at least is—that there is a broad correlation in that sense, and I think that's obviously a feature that isn't provided for by mainstream lending.

So, in the context of trying to strengthen our foundational economy, to what extent does the Welsh Government seek to learn from other Governments that own a development bank or similar institution, such as Scotland or Canada?

Well, I think Scotland is a little bit behind us, as it happens, but I think there are some interesting things we can learn from Northern Ireland, who have a development bank. In particular—I touched on the equity point earlier; I think there are some things to learn from the approach they've had. As I say, that's probably because there's a slightly different culture in the business community, as I understand it, but that's certainly worthy of exploration. And I also think that what's happening in Canada is rather exciting, actually, and the model that they have there has things to learn from for sure.

Okay. And what about Germany and France? Because we know that Germany has much stronger regional banks that are more invested in their regions.

I think Baden-Württemberg is quite a good example, actually, because there's a very strategic approach there, which is around aligning the work of the Government with investors, with higher education institutions and their development bank, which I think is a really good model. One of the things that I was touching on earlier was the importance of aligning all the key players in an economy around those key priorities, and I think they do that very well there.

But we also—. As well as the specific examples in particular countries, we're also part of the European-wide Vanguard Initiative, which really helps us to plug into what's happening right across Europe in terms of innovation in particular. So, I think there's a good network, if you like, which we are part of, and I know that the bank is in contact with its own counterparts elsewhere. When the bank was established in 2017, it was, I think, the first regional bank of its kind in the UK. So, as well as learning from others, we can sometimes lead the way, which is very reassuring.

Very good. And just lastly, the Montreal Group, which the Development Bank of Wales has had some dealings with, but isn't, if you like, completely wedded into it—is this something that you'd be keen to explore?

Sorry, was it the Montreal—?

The Montreal Group.

I didn't see Giles's evidence earlier, but there have been lots of active discussions and I think, picking up on the Cabinet Secretary's theme, we're keen to learn from wherever we can pick up best practice. The development bank is a major piece of economic infrastructure in Wales and I know, led by Gareth and Giles, as chair and chief executive, they are very keen to develop wherever possible. We talked earlier and touched earlier about business support and the importance—you know, simple things, that we know a supported start-up is twice as likely to be still there after five years, and, if we can marry that up with good finance, that is a model we should adopt and develop. So, I think there's very much a continuous improvement ethos across the whole of the bank, that we're keen to explore and learn different lessons from wherever they come, including Canada.

Great. Thank you.

Thank you, Jenny. Our session has come to an end, so, Cabinet Secretary, thank you to you and your officials for being with us this morning. Your evidence obviously will be very important for our inquiry. A copy of today's transcript will be sent to you in due course, so, if there are any issues that, then please let us know. But, once again, thank you for being with us.

Diolch yn fawr.

Thank you.

Fe symudwn ni ymlaen nawr i eitem 5, a dwi'n cynnig o dan Reol Sefydlog 17.42 i benderfynu gwahardd y cyhoedd o weddill y cyfarfod hwn. A yw'r Aelodau i gyd yn fodlon? Ydyn, dwi'n gweld bod yr Aelodau i gyd yn fodlon, felly mae'r cynnig wedi'i dderbyn, ac fe symudwn ni i’n sesiwn breifat ni.