Finance Committee

Okay, we come to our first substantive item today.

Croeso cynnes i chi, Mark Drakeford. A fyddech chi'n gallu cyflwyno eich hun a'ch swyddogion, os gwelwch yn dda?

Bore da, Cadeirydd, a diolch yn fawr am y cyfle i fod yma. Gyda fi y bore yma mae Andrew Jeffreys a Sharon Bounds, sy’n gweithio yn y tîm tu ôl ar gyllid ac yma i helpu fi ar y pwnc o flaen y pwyllgor.

A warm welcome to your new role, and the first time for you to appear before this committee in this Senedd, I think. It's great to see you here.

It’s good to have you here, and thank you very much for the written evidence that you’ve already provided for us. That was circulated to Members before the meeting today. As you’re aware, we carried out some evidence sessions around our financial transactions capital short inquiry before the summer break, and this is the final session of that inquiry that will try and inform us of how financial transactions capital works and the way the Welsh Government uses that.

Can I start, then, by asking if you could outline how the Welsh Government utilises the financial transactions capital and what those rules are around them, and how have those rules probably evolved over time? You’re probably in a very good place to be able to explain that to us from the mists of time in the time that you’ve been here. There we are, diolch.

Cadeirydd, diolch yn fawr. I should say at the outset that I am refamiliarising myself with the intricacies of FTC. But I think the basic answer to the question is that the Welsh Government operates very much within the rules for financial transactions capital set by the UK Government. It’s not an area in which there is a great deal of discretion afforded to the Welsh Government. FTCs were an invention of one of the previous Conservative Governments. My memory at the time was that they were essentially a device to allow the Treasury to avoid declaring capital expenditure in a way that scored against the deficit. So, this is in the era of George Osborne as Chancellor, where the size of the deficit was a political preoccupation and FTCs were a way of providing capital in a way that didn’t score against it. The result is that it operates in what I would describe as a straitjacket of rules, because financial transactions capital can only be used for particular purposes, can only be used with particular organisations, and the fundamental underlying rule is that these are loans or equity investments that have to be paid back. So, it’s not like conventional capital in that way. Any loan you make, you have to have confidence that the money will come back, because the Welsh Government has to repay the money to the Treasury. A minimum of 80 per cent of what we are provided has to be returned to the Treasury against the schedule of repayments agreed with them. So, I don't think it has changed very much over time. I think that, as the Welsh Government has become more used to deploying FTCs, we are now deploying them for a slightly wider range of purposes. But FTCs are not easy to use. There is no great appetite out there in Wales for them. By and large, those organisations who take financial transactions capital only do so after they've exhausted every other preferable source of funding. So, I don't want to say to you that we're not glad to have it, because without it we would not be able to do some of the things that we do. I don't want to say that I don't think that there are sometimes very good reasons why you would wish to provide money of this sort on a loan basis, because, when the money comes back, you can recycle it and use it again. So, there are purposes for which it is a sensible device, but, overall, the narrowness of the rules, and the fact that these are rules not set at all in Wales but we have to operate within, limits its usefulness, and that has been the story of the whole period in which it's been available.

We've heard in some evidence sessions that the future of FTCs is uncertain. Do you have a view? Do you think they will eventually go? Are they going to be around for a while? Are they going to evolve under a new administration now in London? Any thoughts around that uncertainty—whether or not they're going to be around, and how they can be used? Is there scope to change, or to lobby Treasury to change some rules?

Well, I think the future is inherently uncertain in this area, and for two reasons. One is that there is a new Government and there will be new preoccupations. This Government is much more, understandably, focused on the debt, rather than the deficit, and FTCs count against debt calculations. So, I think they may want to take a more fundamental look at whether this is a device that they wish to continue to use. I don't think it will be top of the list of the Treasury team. I think they'll have other more pressing things that they're going to be dealing with in the next period, through to the comprehensive spending review, but I think it's quite possible that it will be something they will want to look at, as to whether or not they think it's a fit-for-the-future way of doing things. But even if they do decide to keep it, and it continues on the previous basis, then that's inherently uncertain as well because we are entirely dependent, for the amount of FTC we have in Wales, on decisions that are made for spending purposes in England. And given that this originated and continues to be dominated by money provided for Help to Buy, and the Conservative Government in England decided that they weren't going to proceed with Help to Buy, well, that would have a very destabilising impact upon the amount of financial transactions capital that would come to Wales. So, we are left in that inherently uncertain world of not knowing whether the quantum we will have to manage is of the sort we've become used to, or whether it could suddenly be radically reduced because of a policy decision made in a different context and for different purposes.

With that line of thought, then, with the loans that are currently under FTCs, if that step change changed and those policy decisions were made in Westminster, what would be the challenges for the Welsh Government and the arm's-length bodies that use this, and the private sector that uses this? How would you manage that potential cliff edge, if you like?

I'll probably ask Andrew, because he's had to manage it over the period. But every year there is uncertainty, because we don't hear until the autumn statement how much financial transactions capital is coming our way, and we have that short gap between the autumn statement and our own draft and final budget in order to show how we are going to use the quantum that we now have. So, the risk is always that we suddenly get more than we're expecting and we have to go and try to find new ways in which the money can be used, because it's a use-it-or-lose-it form of money. So, if you can't find a way of using it, you can't keep it and use it in the future; it goes. Or the risk is that you put a lot of effort into encouraging a pipeline and you have to work quite hard with people who are new to all of this to explain the rules, to get people through the process and things, only to find that, having done all of that, the sum of money you were maybe anticipating doesn't materialise. So, in either way—too much, too little—the risks are real, and the amount of time you have to manage that risk isn't really sufficient for the purpose, I’d say.

So, maybe it's—. To Andrew: how have you managed that in the past, and how do you foresee it going forward?

Yes, it's probably worth just differentiating between—. A lot of the problems that the Cabinet Secretary is referring to there are to do with uncertainty over the flow of financial transactions capital. So, the amount of additional financial transactions capital we're going to get each year is very unpredictable, and fluctuates a lot, up and down. It's not like, for example, resource budgets, which go up and down, but on a relatively gradual trajectory. Similarly, with our core capital budget, we have a pretty good idea a year, two years, three years ahead of—. Even if the Treasury hasn't set our budget in that period, you've got an idea of what your budget is going to be that's reasonably—. The error tends to be relatively small. But, financial transactions, it can be a few hundred million or a few tens of millions; you really don't know. So, I think that's part of the problem, the unpredictability of the flow of it into our budget, and so it makes it very difficult to plan how many projects do we want to commission here, how hard do we try to find projects to allocate funding to. That's the bit that's really difficult with this.

I think that, yes, there is uncertainty about whether it's going to carry on. It really depends, as the Cab Sec says, on what UK departments come forward with in the next spending review period. So, yes, if there is going to be a big housing intervention that requires financial transactions capital then we'll get a big consequential from that. If that doesn't come forward then we won't get anything, and that will have—. We just receive the outcome of that, which is quite uncomfortable.

The point about the—. So, we have now, in addition to those issues about the flow, we have a large stock of financial transactions capital that we're managing over time. We've paid some of the financial transactions back to Treasury, but we've still got a large stock, some of which is invested in ongoing projects, some of which is still to invest. So, I think we're going to have that management of the stock issue for many years, whether or not we get any more coming in in the future, so we're going to continue to need to deploy all of that as effectively as we can, with the best possible returns in terms of social value as well as financial returns. So, yes, it's a kind of ongoing issue. And it's probably worth also adding that this has always been a feature of the public finances, that Governments make loans and equity investments. That bit's not new. It wasn't introduced in 2013. But it's the bit where there's a specific ring fence in the public finances for Wales that we—. You have this specific amount that you have to use—

And to have ring-fenced for—? You talk about housing; it was housing policy, say, in England that created the Barnett, effectively, consequential. It's not hypothesised for here, is it?

No.

I just wanted to check that.

It's ring-fenced in the sense it can only be used for loans and equity investments. It can't be used for other forms of capital investment, or other purposes, for that matter.

I know that Rhianon and Peter want to come in, so I'll bring Rhianon in.

Yes, in regard to the Chancellor's intention to provide two-yearly spending reviews, and, obviously, the generic nature of FTC uncertainty that's always been since its conception. Has there been any sounding or any indication from the Treasury as to the future of whether this will continue, or a new scheme that will be put into place?

Not that I've seen, Chair. At the moment, the Treasury and the Chancellor are focused on 30 October, which will be a one-year budget. So, I guess most of their time is taken in trying to prepare and plan for that. Work is going on in the background, and work is going on in the background in the Welsh Government as well to prepare for the comprehensive spending review, but I don't think we have had any very strong senses of what they will focus on there.

Yes, I absolutely accept that that list may not be an immediate priority, but perhaps something they will look to. I just wondered: do we assess the benefits that have been gained through financial transactions capital, or does the UK Government do that, to see if it is working, because that will obviously strengthen our view of how, perhaps, we might want a different vehicle that could achieve much more? I don't know if we've tracked—. I can see it's a situation where we have a pipeline of things that aren't particularly ready, might not be that worthwhile, but we have to get the money out the door and they go to it. I just wonder what sort of follow-up assessment we do on it.

Again, I'll ask others to help, but the place where I've seen this most clearly is in the way that the Development Bank of Wales can tell you how much money in the Help to Buy scheme—so, the original costs, they can tell you how much money they've had back in, how they've recycled it, how that's enabled them to make further loans in that area. So, as I said at the outset, Chair, I'm not wanting to argue that there isn't a role for that sort of revolving fund, and they've got some very impressive figures that they can show of how using this sort of capital has enabled them to cycle and recycle and do more and more. Whether there are broader measures that we deploy to know how successful it's been, Andrew will let us know.

I think it really makes sense to evaluate, really, at the level of the programme or project, rather than the more generic level of equity investments or loans, as such. So, as the Cab Sec's highlighted, Help to Buy is a very large scheme where you can assess the number of new homes that have been built as a result, and the financial aspects of it are very clear and transparent. But there's such a range of things that we've used financial transactions for over the years. They're quite different interventions, and, yes, I think you need to, really, evaluate them on their own merits rather than those broad financial transactions interventions.

I know, when we spoke to the Development Bank of Wales, I was pulled up because I said they were almost a bank of last resort, and they didn't like me referring to things in that way. But, very clearly, it seems that might be the case—what you said earlier, Mark.

Yes, that is our experience, isn't it, that organisations will use FTC, but it's only when they have exhausted other more straightforward, or sometimes cheaper—. Because we have to charge interest on these loans in order to cover the repayments and the fact that not everybody will repay in the end. And some of those rates of interest are greater than they might be able to secure in the marketplace. I see why they're not keen to be called a bank of last resort, but, as I said, FTCs are not that easy to deploy because of the specific—

Just going on from there, we've talked about housing and the way Government uses this in specific areas. You talked a little bit earlier about the investment of time and energy in explaining how it works, what the rules are. How much of that has been going on from a Welsh Government point of view, possibly across Cabinet or across different departments, to maybe think a little bit outside the box, within the rules? So, it's a little bit of a mixed metaphor there. But how have you engaged with different departments to see how could this be used? Is it a vehicle to be able to drive some of your policy areas forward? Has any of that gone on?

Look, that happens every year. Because when we know in the autumn statement how much new FTC we've got, a commission goes round the whole of the Government to say, 'Have you got purposes that this could be useful to you in being able to secure funding for them?', and—

And how good is the knowledge in those departments of how it works, so that they're able to identify those areas?

I think maybe the point, Chair, you're making is a fair one, that knowledge will be different depending on the extent to which departments have used this in the past. So, a department that has made good use of it will be in a better position than departments that are less familiar, although, as I said in opening, over time, more parts of the Welsh Government have become familiar with FTC. So, as well as housing and the economy, which have been the biggest users, the community assets fund—it's a small fund, but it means that our social justice colleagues have now got experience of using it there. The higher education and further education fund, £20 million set aside last time for decarbonisation, means that education colleagues have got some experience now of how this works. The Menter Môn investment in Morlais means that people in renewable energy have—. So, over time, a wider range of Welsh Government portfolios have come to use FTC. And in this sense, we do have the advantage of being a small Government, so people are able to talk to each other and get advice from people who have done this more than they have themselves.

Before I bring Mike in, my final question, really, to take it beyond Government and then onto those loan users and the people who have had these loans: is that pool of people getting bigger as well as a result, so that, not the general public, but the people who would access this funding—? Is that knowledge base within that cohort? How are you engaging with those to make sure that people are aware that those opportunities are there and might fill a gap where commercial lenders won't lend or a mezzanine finance aspect could work, or something a bit more creative could happen?

I'll ask Andrew or Sharon to have a view on whether that pool is growing. But I think the experience of using FTC is that a sort of general advertising of it doesn't get you a big result. You've got to be prepared to invest quite a lot of time and effort in taking individual companies, organisations, whatever, through the process. And even then, the result often is that, having learnt more about it, they decide it's not for them. So, it's not even an investment where you can be sure that there'll be a return in terms of—. But doing it that way has, in our experience, been more successful than just relying on a sort of general advertising of the scheme, or better information on the website and things. It takes you so far, but then you've got to get into quite some significant detail of how all this will work.

Is that where the Development Bank of Wales comes in useful, because they—

Yes, absolutely.

—do that sort of middle man bit, that, effectively, the people who are getting the loans don't necessarily need to know how that loan is funded, it's just that they know what the terms and conditions of that loan are?

Yes, that's exactly right. For the recipient of the funding, in a way, this is just like any other loan or equity investment, with some very specific requirements, I suppose, by virtue of it coming from Government, ultimately. The Development Bank of Wales has been the key, I suppose, interface between the Welsh Government and recipients of funding in—. I'm not sure of the exact proportions, but a very large proportion of the financial transactions capital that we've deployed over the years has gone through the development bank. There have been other transactions that have been direct between the Welsh Government and funding recipients, but the volumes have generally been via the Development Bank of Wales, because they've got that expertise in working with customers for loans and equity investments in a way that the Welsh Government really doesn't. But, having said that, there is a range now of partners that we've worked with over the years, as the Cab Sec mentioned now, FE and HE institutions, where they're not used to getting loans from the Welsh Government for things; they are used to getting investment from other sources. So, they have bits of their organisations that are used to that kind of thing, but not necessarily used to dealing with us on it, and the special requirements of financial transactions capital funding. So, I think that pool has grown a bit over time, but there are limits on, I think, how far that can go.

Okay. Rhianon, briefly, because I'm conscious I want to bring Mike in as well.

Yes, thank you. With regard, then, to your comments, which is that this is an 'ordinary' loan to the applicant, after that process has been fulfilled, what is the risk in terms of default so far to date? I mean, I realise it's a longer term scenario.

Yes. And, yes, to say something very obvious, I suppose, but there is always a risk of loss. When any investment is made—and I can't remember, Sharon, when those new rules on expected credit losses were introduced—we have to do an assessment before any investment is made on the likelihood of repayment. Is it worth saying a little bit about expected credit loss?

Well, I'm happy to. It's a new accounting standard that came in, I believe, three or four years ago now. So, it's where an assessment of each portfolio of loans or loans themselves need to be assessed for the risk of default, and that needs to be recognised upfront. So, that, I suppose, has brought an additional challenge to the use of FTCs as well, because that brings with it an additional resource departmental expenditure limit [correction: RDEL charge] from any of the loans that we're putting through, of financial transactions, and that needs to be assessed as well. It's reassessed every year, so if it was too cautious an approach upfront and it turns out that these loans are being repaid, then that RDEL will come back in. But it is another element to the way that FTCs have evolved that has needed to have been taken into account.

And I assume you price for risk, then, as well.

Sorry?

You price for risk, then, as well.

Yes.

Okay, but that doesn't answer my question. I understand what you said; I'll defer.

I'll bring Mike in.

But isn't the advantage to the Treasury of FTC that it doesn't count against public sector borrowing requirement, because it's both on the debit and credit side of their accounts?

So, I think it scores against the debt, but it doesn't score against the annual deficit. So, yes, that's why they favoured it back in 2013.

Yes. So, just to clarify: it doesn't count against a public sector borrowing requirement.

Correct.

Thank you very much. The Welsh Government allocated £1.4 billion of financial transactions capital, as of 2023-24, with the Development Bank of Wales having £1.1 billion of it. What's the other £300 million being spent on?

It'll be a range of direct investments the Welsh Government has made mainly with businesses, I would've thought. But, for example, the £20 million for the higher education and further education energy efficiency programme, that would be in there, and there's a list of those. We could maybe give the committee a list of what those other direct investments are.

Okay. Can I just say that it would help the committee and, I'm sure, the greater Welsh public with an interest in this if there's disaggregated data on allocation, both by the development bank and others, so they can be seeing what good it was doing?

Well, Chair, there's certainly a list of all the projects that have been funded in this way since the start, which the committee is very welcome to have; data is disaggregated to that extent. I once had a discussion of some of this, quite a while ago now, up in Wrexham, with the Development Bank of Wales, and their view at the time was that, from the user's point of view—it's a different point of view to the one Mike is talking about, the view of the citizen—they'd never been asked for disaggregation in that way, and they weren't sure that it would have encouraged more applications to come forward, if it had been available in that way. But at the project level, so that people understand how this money is being deployed, there's quite a lengthy list that we can make available.

Thank you, that would be very helpful. At project level, I don't think we want to know that company X has had £10,000. I think we perhaps want to know the companies in the green energy sector who've had £200 million. I think that's the sort of information that, I think, I and perhaps other colleagues would find helpful.

What does the success look like? You've had this now, it's been going for some time, lots of money has gone out—what does the success look like?

Well, for me, the first criterion of success is that we're using the money, because, as I say, this is money that, if you don't use it, then it's lost for public purposes in Wales, and getting it used at all has not been easy. So, my first criterion of success is: are we actually able to deploy it?

My second criterion of success, because we have to live within the rules that we have set for us, is that it is being used with projects that then demonstrate that they are able to make repayments, because, investing this sort of money, your recipient has to have an income stream that they can demonstrate will allow them to repay. So, my second criterion would be: can it be repaid?

But then, it's not—. We focused a bit on repayment. I wanted to say a bit earlier: repayment is not the only criterion. Is there a social purpose that is being fulfilled through the investments that are being made? This isn't just any old investment. So, I think, as well as the financial viability of the investment that's a success, you need to be able to demonstrate the social purpose for which the investment is being made. And if you can, then I think that's a criterion for success.

And then I think, quite often, there is a future financial sustainability aspect to it. So, the reason why we have a decarbonisation fund with HE and FE is that it will allow them to do things now that will make them more financially viable and sustainable in the future when those investments lower their bills and reduce the energy that you're using. So, I think future sustainability will be another success criteria.

And in how many of the investments have the companies failed?

Failed?

Yes. Have companies failed, as in they've ceased to exist and that they've gone into receivership and they've not been taken out of receivership?

I don't know.

We haven't got the detail of that.

We can see. If there is any example, we can—. But I think it's the sort of thing Ministers would certainly know about had that happened, and I don't know of any immediately.

But it would be useful. You've got to pay 80 per cent back. If 25 per cent were failing, then you're not going to be able to pay the 80 per cent back. I don't want to know that company X has failed, but I think knowing what level of failure is there. And what level of failure have you put into your predictions?

So, I think, in that respect, this is where the development bank come into play quite substantially, because we've seen the amount that has gone through the development bank. They obviously have far more skill and experience in this area to manage the risk across the broad portfolio of investments that they are making, and the expectation with the bank is that the agreed repayment from them through the FTC vehicle will be repaid. There's, at the moment, no understanding that any of that is at risk because of the way they manage and the values that we're talking about.

With the things that don't go through the development bank, so they are more isolated, things like the loan to the Wales Rugby Union was one, and the loan to Cardiff Airport—they are obviously done on a more isolated basis, and the due diligence that goes into those have to be assessed in a far more rigid way. So, I think that's the way that we try to manage the broad level. Help-to-buy being such a large part of this, the gains that have been made in that in the past have obviously derisked the overall programme of repayment. So, at the moment, we're not working on a basis that there is a risk that repayments couldn't be made.

Will you lengthen the time? It's well known, it's in the public domain, that Carmarthenshire council, for example, have lengthened the length of time over which the Scarlets rugby team have got to pay back their loan. Do you do similar things?

Yes.

Certainly, yes. There have been examples of that. Each of these loans is monitored very closely and, if there are any issues out there, all of those options are explored, with the risk obviously assessed at the time.

Sorry, with the development bank—and you talked there about the development bank helping to de-risk a little bit of the decision making and things, and, Cabinet Secretary, you talked about a straightjacket of rules when we started—being designated differently now by His Majesty's Revenue and Customs, is that tightening the straightjacket, so it means that it’s not going to be as agile, or the bank isn’t going to be as agile as it used to be, because of that new designation?

A change of classification of DBW does affect our ability to manage the annualised nature of financial transactions capital. Under the previous classification, it was possible for money to leave the Welsh Government’s accounts and be used by DBW, not on an annual basis, but over a longer time frame. We can’t do that now because of the reclassification, so it’s just introduced another constraint on the way in which we can deploy.

And is that something that, as a Government, you’d be talking to your counterparts in Treasury and saying, ‘This is really hampering what—’? Have you any sense of why they’ve done it, and whether or not there’d be an appetite to change the designation back?

So, it’s the Office for National Statistics that classifies bodies rather than the Treasury—

Oh, right, okay, sorry. Fair enough.

—but the Treasury applies the rules [correction: budgeting rules]. But I think it's fair to say, Chair, that we’re still kind of working through what the new rules are now around how this is going to work with DBW. So, that’s kind of where we are at the moment; it’s just trying to work through with Treasury exactly how or what the implications of the classification are for both the sort of future flow of financial transactions and also the stock that DBW are managing.

Was there any consultation with Welsh Government before that classification was changed?

Lots of discussion, yes.

It was a—

It was a very long process—

Right, okay.

It started off because DBW hadn’t officially been classified. It was Finance Wales on a previous classification, so it had been some time and was ready for review. So, that’s why the ONS did then undertake—. They do classifications all the time; it’s part of their remit. So, they agreed, or they chose to do a classification of the development bank. It was a very long process, a lot of engagement with members of the ONS, the development bank themselves, and Welsh Government, and it was—. It mainly came about—. It was borderline the whole time that we thought that it was still going to come out as a public corporation. But the assessment process is all done against the European system of accounts—ESA 2010—and MGDD, the manual on government deficit and debt guidance, which had changed over time. And against that guidance, the final decision of the ONS was that the development bank was a central Government body.

And is there a way of asking for a change, or to challenge that decision?

Well, to be fair, we did at the time.

Okay.

So, it went back to the committee a couple of times, based on the information that had been provided. And we exhausted every single avenue we could find to look at that.

Sorry, for clarification, what committee?

Sorry, I don’t think it’s actually there at the moment, or there any longer, because things have changed since we’ve left the EU, but it’s a committee within the ONS—

Right.

—where a panel of experts come together with the evidence that make a decision on the classification of entities.

Sorry, Mike.

The good news is, this is finally from me: we’ve had people tell us—and, as we all know, when people tell you things, they’re not necessarily true, so I’ll start off with that—that the timescale was longer in accessing FTC loans through the development bank compared to other loans.

That's a fair thing for people to say, because the development bank is having to operate within the rules that are provided to us, and it is a lengthy process. It's not an easy process. It's a fairly off-putting process, we know, for some potential applicants. DBW has moved to try to streamline that process in a number of ways, but there are limits to how far it can go, because it itself is operating within that structure.

Thank you.

Before I bring Peter in, would you be able to outline why the Welsh Government hasn't provided clarity on the full FTC allocations as part of the budget? And what assurances can you give us that you'll be able to provide us with regular updates with regard to the future FTC allocations, going forward?

I'm not quite certain I'm following the question exactly, because we do identify at the budget the quantum of financial transactions capital—

But maybe more towards what Mike was saying, the allocations below that.

Yes, the disaggregation of it.

Probably over the years we've published all of the information, but it's probably not—

Okay. It's just probably bringing it all together.

It's just pulling it together. So that's something that we can look at.

Yes, maybe when you're developing the budget documentation, it's something that we'd be interested in particularly. Peter.

Thank you. We've talked a lot about the constraints of financial transactions capital, and I understand that the Welsh Government is looking at the reform of the allocation and management of it. I think we've got a fair flavour of why you might be wanting to do that, because of the constraints and the reasons we've highlighted. I wonder if there was any update on current progress or some of the things, Cabinet Secretary, you said about what success looks like—a social purpose; are we going to start applying a weighting to value, to currency of social purpose, because I think that's something that is always underdeveloped in many areas, when you weigh it against financial currency. So, is there anything further on why you might want to do the reform, and what might your thinking be around it?

Chair, I think there are two different avenues of reform. There's how can we make the current system, if the current system stays as it is, work better, and Andrew will say a bit about that, and there's what sort of reform would we look for if there was more fundamental reform. If there was more fundamental reform, I think there are three things that I would be looking for. The first, and the most important, is the removal of the ring fence, that we had more flexibility to use this money in a way that matches Welsh needs and circumstances, rather than operating within a model that doesn't allow us any flexibility to do that. That would be the main thing. The second thing that I would look for in a reformed system would be the stability of flow of money. Andrew described the great oscillations year by year; it would help us a great deal if we had a more predictable sense of how that money was to come to us. And then the third thing: I think if there was less constraint, that would help us to be less bureaucratic in the way that we use the money, because we would be able to devise a system that matched those new flexibilities. So, if we were looking at more fundamental reform—. Of course, I'd much rather that we just had conventional capital; that's the most useful thing we would get, without an invented form of capital to meet an artificial avoidance of the rules, which is what this really, at base, is.

Your wish list there of three things, would that then involve looking at a different vehicle, other than DBW, or would it be, then, a lobbying exercise to change the classification of it to be able to do some of this more flexibly?

We think DBW is actually very useful to us and would continue to be. It has that expertise. I think it's got lots of demonstrated success in being able to get the money back through the door and reuse it again, so I don't think that—

It's just that the classification now means that it's hampered, in a way. What would be the way of moving forward if they're dead set on that being what it is? You'd have to rethink a vehicle to be able to do something else within those rules.

The issue with the classification is that it doesn’t change the nature of what we want DBW to do; it changes the timing of when expenditure is scored through our budget. So, it becomes part of the same issues and constraints that we have around annuality. It just means that more time needs to go into that to understand how do we manage that volatility in the activity that DBW is doing that previously they would have been able to do themselves because we would have been able to give them money upfront, if I put it that way, and they would manage any variances over however many years they were going to deploy it. All of that becomes a Welsh Government issue. It’s about just trying to manage that within the overall portfolio within the Welsh Government. That’s what we’re working on and trying to get some help from the UK Treasury. Because in this transition of going from one way of budgeting to another way, that’s what’s caused these issues. So far, we’ve not been successful in getting the UK Government to help with some of that reprofiling, but working on that, going forward, should lessen some of those challenges that we’ve seen.

Sorry, there's the second part of the question as well—of your question.

Yes, I just wondered where we are on progress with reform. Are we on the journey yet or are we still scoping that?

I'd say we're at the start of such a journey with the new Government. I think the previous Government probably wasn't much open to—. It had a system, it had its pluses and its minuses and they were going to continue with it. I’ll try and answer one other point that Peter made, Chair. Just to say that I’m at the outer edges of my understanding of what I’m about to say, so my colleagues will correct me if I’m about to say something that is clearly not the case. But on Peter’s question about whether we can differentially distinguish projects that have a higher social value from others, I think that is how the system works—we have to repay 80 per cent in the round, but you can charge different rates of interest, depending on the purpose for which the loan is being made. So, you can sometimes take higher risks in one part, because you’ve covered that by a different rate of interest in another part. This is what I’m checking I’ve understood correctly. It isn’t just that there’s one measure for everything. Sometimes, you can, for a purpose that has a strong social return, charge less for this money than you might in another part. So, it is possible to differentiate in the way that you suggested.

That is kind of how we operate it at the moment. I guess the thing to add, though, is that the bottom line is this money has to be—. It’s not financial transactions if you don’t think you’re going to get it back. You have to actually use this money for things where you expect repayment. And that rules out a lot of things with a high social value. But those things are what you'd use your grant funding for.

I think there's a whole debate outside of financial transactions capital about what value we put on social value and how we weight that and bring it into our forward planning and budget allocation—invest-to-save and things. But that's outside the scope of what we're talking about. I thank you for that.

Moving on, I just wonder, and we've probably touched on it a bit, can you outline the current process by which the Welsh Government repays financial transactions capital to the Treasury?

Sharon has told me that this is very simple. [Laughter.] Even though she told me it was very simple, she will give you a more reliable account than I would.

It's very simple. It's not a physical payment transaction, so to speak. Essentially, what we do is—. This was the mechanism agreed with the Treasury in the very early days of the financial transactions ring fence coming into play. Simply, all we do is we report to the Treasury what our outturn is of any particular financial year against that ring fence. Whatever the difference is—. So, you expect it to be an underspend. Any that we don't want to, of that underspend, carry forward using our Wales reserve facility is essentially the repayment to the Treasury. It's as simple as that. That's how we kind of manage it year on year. It does help with some of the volatility. If we find that there are things that we can't use the money on, we can use that as a higher down payment on the amount that is outstanding to be repaid. But that's how the mechanism works.

There's no relationship, for example, to specific projects or programmes. It's kind of just an undifferentiated sort of transfer.

And it sits there outside any other normal capital and revenue as well. It's a clear, straight, like-for-like sort of—

So, no cash changes hands as such, but there's an opportunity cost for not allocating it, because you lose out on a project, really, on a potential project.

Absolutely, yes.

Great. Thank you for that—

I suppose in theory—. I'm just trying to think this through. Over time, unless the Treasury continues to give us more financial transactions, the stock will start to whittle down over time, and in theory, we'll get to a point where we've repaid it. It really depends on how much the flow continues.

Sorry, I should know this. The 20 per cent that doesn't get repaid, is that written off? I can't remember what the rules are on it.

Well, in theory, we retain—. If we actually get that back—

Ah, we can retain that.

We can retain it.

And can that be used for anything other than FTC?

It kind of stays financial transactions for ever.

So, say you invested in something, it was a massive success, you had a stake in it, you got the money back, you could only use it—. It can't be a vehicle for supplementing capital or supplementing revenue elsewhere.

That's certainly the rule that we work to. There is the opportunity to have a discussion with the UK Treasury about, potentially, because we've essentially increased the ring fence of FTC, could any of it be moved into our general capital. We've not got to that point, but it would be a discussion that we could go into. But that's not the starting point.

That would be a good way forward, I think.

Peter, if we can have one more question, and then I'll bring Rhianon in.

Sorry, I've been fussing around. I've got three to choose from; which one do you want?

Barnett, maybe?

Yes, okay, Barnett. The application of the Barnett formula has been raised as having an impact on the FTC funding mechanism. Can you expand on how the Barnett formula impacts the financial transactions capital funding made available to the Welsh Government and the allocations made available to the Treasury?

Barnett applies in this area in exactly the way that it applies to everything else. English departments, for this purpose, make decisions about the extent to which they are going to use financial transactions capital, and we get a Barnett consequential of that. It's why the volatility is such a characteristic of the scheme, because what might be quite a small decision for an English department, given their scale, can have quite a big impact on us, because we are much smaller and that amount of volatility matters more. So, I think Barnett is applied just in the absolutely ordinary way it would be to any other form of expenditure to FTC.

Okay, thank you.

Thank you, Peter. Rhianon.

I just wanted to clarify. It says that the Welsh Government has allocated £1.4 billion of the financial transactions capital, but is that the total entirety, or can it be more than that? Because it says it's an allocation.

I think we've allocated more than that. We've had about £1.4 billion from Treasury, gross total.

So, that's my question: is that the ceiling?

Because it's recyclable, yes. We have £1.4 billion, but because it's coming in and out of the door, actually, the amount that we've deployed will be larger than that initial quantum.

Thank you. And then, obviously, some of these questions have been answered, so I'm not going to ask them, but I did want to ask this: in terms of the caveats of both the ONS classification and the constraints that's given to the development bank, and then, also, the uncertainty over the financial transactions capital, where we are right now, in terms of whether it's going to be sustainable in future, and you've mentioned the flexibility, the lack of reliability of the flow of that, and then the actual accessibility of it, it isn't a perfect scheme for Wales in that regard. So, if you had to do it from scratch, as you said, in your wish list there would be amendments to that. So, bearing that in mind, we've mentioned higher education and, obviously, the right to buy, but what other areas on the current system that we are operating within now would be considered or are being considered?

I think we consider every—. There's no part of Government that's excluded from FTCs. Any part of the Government that can put forward a scheme that operates within the rules is entitled to do that, and over time, as I said, we have had more parts of the Welsh Government using FTCs. So, nobody is excluded. It's the rules, the complexity of the rules and the fact that there's got to be an absolutely legitimate expectation that that money will come back. You can't have a fictional expectation; it's got to be a genuine expectation that that organisation will be able to make those repayments, and that's where the fall-out of applications to final success is quite high.

And that would be expected, I would presume.

Yes.

I'm going to move on to this question. It has been suggested by the users, our citizens who apply for this, that the Welsh Government needs a more strategic way of applying this in terms of capital loans being deployed. So, how are we ensuring that Welsh Government is maximising this, whilst taking that strategic approach to the decision making around—?

I'm often told that you need a more strategic approach to something. I'm not often sure what the person saying that has in mind by that, because I think I've explained our strategy this morning as best I can. When I was preparing to come in front of the committee and talking to my colleagues, I used a phrase that they said they wouldn't, but I'll use it. I think, in a way, our strategy is to make the best of a bad job. That's our basic strategy. These are not rules that we think are helpful to us in Wales, but we still want to make the most of the opportunity that comes with it. If you wanted me to summarise what I think our strategic intent is, it is, despite the reservations, to make the best use of it, and I think we can demonstrate even to a sceptic like me that there are some very good success stories of using FTCs, and we're grateful, in that sense, to be able to use it. Within the current system, I don't know that there is something obvious missing from the way that we set out to use it that we could put right. I don't think the people we work with, despite their frustrations at the system, the length of time it takes, and the complexity involved in it, have ever suggested a strategic difference, rather than wishing that it could be simpler and more straightforward.

I think the one thing that would really help in the next spending review period is having that longer term view of how much of this money we've got over the next few years, because not knowing how much you've got really gets in the way of being strategic. So, if, in the next spending review period, we have a three or four-year, or even a five-year view of our financial transactions capital budget, that will enable us to do planning in a way that we've not been able to.

I was just thinking in terms of Welsh Government priorities, but I understand fully what's been said.

I think Mike wanted to just come in.

One priority is providing housing. Registered social landlords do fall into the financial transactions capital, yet they haven't been a major recipient of it, as far as I can understand. I'm happy for you to tell me I'm wrong. And also, it fulfils a social benefit. Do we need more social housing? I think there's not a person in this room or in the Senedd who wouldn't say 'yes'. How do you decide that that is not a priority, or do you think it's a priority, because I don't think the Development Bank of Wales give money to registered social landlords? Again, I'm happy to be corrected.

Well, Mike, looking at the list in front of me, I've definitely got social landlords on the list, so they have benefited from it. My guess would be that there are more straightforward ways in which they are able to raise the capital that they need, because in this sense of you have to have an organisation that can pay you back, registered social landlords are one of the most straightforward examples of that, because they're building houses and they get rent and they can service the loans they've taken out. So, it may be that they just have more straightforward ways in which they can fund their programmes.

That's a question for us to ask to them not to you.

It would be interesting to see if they thought the same.

I'm just going to ask one more question, Chair, out of these, because we've touched upon them previously. Witnesses have been positive in their interactions around the involvement with Welsh Government officials in regard to the actual process, despite its issues that we've discussed. I'm going to move on to this: the recycling of funds is considered to be a key successful feature of FTC. Not all of these funds, as you know, can be recycled. So, I think the committee would be interested in finding out examples of funds or loan pathways that are not eligible for recycling, and if you could just give us a bit of a reason as to why not.

Well, by definition, Chair, any purpose that is pursued through financial transactions capital has to be recyclable. If it can't be repaid and, therefore, recycled, then it can't enter the scheme. There are lots and lots of things that the Welsh Government pays conventional capital for because they can't be repaid. But if that's the case, you don't get through the door of FTC. So, there is no purpose that FTCs are used for which that money cannot be recycled, because if that was the case, you wouldn't get to the starting point.

Is the constraint now with a different classification, that if the money—. Say you had a nine-month loan, for example. It was loaned out, came back in; would you have to then wait three months before you could resend it out, because of the way that you'd have to account for it? Or is it that you could do two six-month loans within a 12-month period of the same capital, if you like? So, with that rolling facility, do the rule changes mean that it constrains how quickly that money potentially, or that capital, could be—?

Yes, under the new rule, or the rules that now apply for the Development Bank of Wales, and to us, for that matter, as the Welsh Government, you have to score the income when you receive the income, and you have to score the expenditure when you want to make the expenditure. So, in the year the repayment comes in, you've got a credit in that year, and you can either use that to fund expenditure that year or you can use it to finance your repayment to Treasury.

So, you can do it in-year. So, you could roll it over within the year.

Yes. Most of these projects, obviously, repay over a number of years, and you have to plan that into your future.

But, with some housing developments and that sort of thing, you could have a fairly swift turnaround.

Yes, some things do work like that, yes, including in the social housing space, actually, where the Land for Housing programme has basically acted a bit like a bridging facility for RSLs, who've then been able to finance further investment in a different way and repaid the financial transactions quite quickly.

But, just quickly on this point on recycling, I think part of the question maybe is about the extent to which you recycle within that actual programme, rather than the money coming back for Ministers to make another choice then about how that funding is deployed. There's quite a lot of debate about that at times, about whether, for example, money that comes back in to Help to Buy should then be used for purposes other than housing. So, that's something that is quite an important policy choice about, ‘Okay, what's our priority for use of financial transactions now? Is it continuing to be housing or is it other areas of activity, like business investment?’

If I can just come in on that, in terms of the question about strategic usage, do you work to any guidelines around that? If it's been used once in housing and then there's another pressing area, say within HE, is there any guide framework around that, or a framework around it? Or is it just bespoke to what's in front of you, bearing in mind the uniqueness?

It's mainly programme by programme.

Okay. Thank you.

Peter, did you just want to—?

Just a little one. Is there a period of time that recycled money has to go back into the same sort of cause, or can we hold it—it's not money that then ends up having to be sent back if we don't allocate it straight away? It's not like the original sum, if you like.

It depends on the—. Some investments are very specific, so it's a loan for a particular purpose, and then the money comes back and that's done. So, Help to Buy is an ongoing programme that's been running over a number of years.

But if you want to recycle it, obviously, it would be in your domain to recycle it back into—. If it's defined, it has to go into a certain area to get it back into that area. Is there a time constraint on how fast that has to be done before it gets taken away from you, or the opportunity gets taken away?

It's more case by case, rather than a blanket—.

I think the constraints there are just around the annuality of the budget; you could enable within that overall space.

Yes, makes sense.

Diolch yn fawr iawn. Rydym ni wedi rhedeg drosodd ychydig bach, ond mae wedi bod yn ddifyr iawn.

I'd like to thank everybody for their engagement in that; it's particularly interesting and, obviously, it helps with our deliberations, when we're looking at the Welsh Government budget, to understand a bit more about the intricacies of this, because I've described it in the past as a bit of a dark art, I suppose, in how it works. So, that's put some light on it to understand how it works and the challenges the Government have around it. So, it's always good to have that. Obviously, the record will be sent over to you for clarification afterwards just to make sure that everything is okay.

Diolch yn fawr iawn i chi am y bore yma. Mae wedi bod yn ddifyr iawn.

Diolch yn fawr, Cadeirydd. If I could make one very final point, because I don't think I made it at all, we focus a lot on the constraints, but the Welsh Government is absolutely interested in whether there are any ways it can be improved, and, in that sense, we look forward to the committee's report. And if there are proposals coming out from other witnesses as to how we could do it better, then, of course, that is something we would always be interested in.

Thank you very much.

Felly, o dan Reol Sefydlog 17.42(ix), a gawn ni benderfynu i wahardd y cyhoedd o weddill y cyfarfod hwn a dechrau'r cyfarfod ar 25 Medi? A ydy pawb yn cydsynio? Gwych, diolch yn fawr. Fe awn ni'n breifat.