Finance Committee

So, we'll move on to our fourth item this morning. It's our first evidence session on financial transactions capital—that interesting beast that is within Welsh Government funding. So, we're very grateful to the Development Bank of Wales for coming in. As our witnesses, would you be able to introduce yourselves and what your roles are within the bank? Thank you.

Yes, of course. I'm Rob Hunter. I'm the director of strategy, people and development in the development bank.

Thank you very much.

Good morning, Chair. My name's David Staziker. I'm the chief financial officer at the development bank.

Wonderful. Thank you very much. Diolch yn fawr iawn for coming in.

We've decided to do this financial transactions capital one-day inquiry just to try and understand a bit more about the positives and the negatives and how it's used, and how Government deploys it, and then, you as a bank, how it affects what you do. I'd like to start. I don't know if you want to just briefly outline what your role is within the use of FTC, and then we'll come on to some questions, if that's okay.

Okay. Do you want me to go? So, we receive FTC from the Welsh Government and lend or invest that into companies within Wales. They're usually private sector companies, and actually it's used to pass on to individuals in certain housing schemes, so, for example, Help to Buy. All of the arrangements are commercial, so we're trying to get back the original capital we've given, and then we repay that money back to Welsh Government according to the timescales that we've agreed. We run about 25 different funds, so it's quite big. Of the financial transactions capital, we've deployed £1.1 billion. So, I guess we're a very big portion of the, I think, £1.4 billion in total that Welsh Government have. We track, we measure all those funds in terms of our repayment ability and our deployment ability, and feed that back on a regular basis to Welsh Government, so they understand how it's performing, because this money all has to be, obviously, repaid back to HM Treasury.

Okay, well thank you for that brief outline, and I'm sure we'll tease out some of this as we're going through. So, when you're talking to your clients out in the Welsh economy, how easily is FTC understood, and how are you promoting it? Do you talk about it in those terms or do you talk about it as your own funds, and do people understand?

We don't talk about the source of funds. In general, we get money from Welsh Government either in the form of capital departmental expenditure limit general or capital departmental expenditure limit financial transactions. That's the money that we receive for—. But the bulk of it, about 65 per cent overall, is CDEL FT. Customers don't really want to know about the source of that money from Welsh Government. They just want to know whether they can borrow some money or whether they can obtain an investment, and on what terms. So, it's very much how we market the money best to customers and to provide them with a service. Is there anything you want to add on that?

No. And the only funding we've ever had to make customers aware of is European funding. So, within their offer letters it will clearly state that this contains European funding—or it did. The rest of the mix, as Dave said, could be capital CDEL or it could be FTC or a mixture of all of them, but the customer doesn't need to know that. And it's quite interesting, because I know from the Welsh Government's perspective they would perceive there to be—and there are—heavy restrictions on the uses of financial transactions capital, but from our point of view, it's what we do. So, it's as flexible as any other form of finance that we have.

So, just for me to understand, does all your funding come from Welsh Government through this means, or do you have other funds that you manage? Where does the rest of your portfolio come from?

So, 65 per cent, roughly, of our portfolio of money that's invested in companies in Wales is financial transactions capital. The remaining 35 per cent is mostly made up of CDEL general, if you like—so, core capital in other words. We also run funds then for the British Business Bank. They've recently launched a fund in Wales, so we run part of that, and then we also run funds in England using other funders' money. Oh, and the pension funds.

Yes, we do have some pension fund money in our management succession fund.

So, from Clwyd pension—

So, there's a mix there.

There's a mixture.

And then, obviously, we've been doing a little bit of research on how FTC works, and there are certain guidelines as to what can be used and what they can be used for and not. How does that form part of your marketing? Or how do you with your business development managers, or whoever goes out to speak to these businesses, how do you go through the process of working out, 'Well, that could be FTC or we'd be better off—'?

We do it at a higher level, actually, Chair. So, usually, when we approach Welsh Government to put money into a fund, we agree what the eligibility criteria will be for the fund overall. So, we know exactly then, once the fund has been agreed, what we're looking for in terms of customers. Generally, it doesn't cause any restrictions if we want to make loans or equity investments into Welsh businesses. It is perfect for that. So, we're lucky in that it matches nicely our business model.

And then, from a loan profile, what size of loan do you target? I know you've got 25 funds, so you'll have lots of different things, but your average loan size as loan-to-value ratio if it's secured, and what sort of margin are you looking at?

It's become more and more flexible as Welsh Government has got more confident in using financial transactions capital. So, let me start off. So, if I deal with the Help to Buy scheme to start off with, that money is available over 25 years. So, that's at the longer end, shall we say, of the use. We've then been using it in business investment funds and, in general, we're using repayment terms, initially around five years. That's been really widened to 10 years and, actually, on some of the newer schemes, it's up to 15. So, you've heard of the saying 'patient capital', and we're trying to get to that position, so it's really helpful, particularly in the current economic climate, to actually extend the repayment terms and utilise the period that Welsh Government can take the FTC over from Treasury. So, yes, it's been great. It's very flexible.

What then happens is for shorter term investments on the property side that get repaid over two to three years, we then recycle the investment, so you get a much bigger bang for your buck, if you like. So, if I take our property fund 2, that's a £54.5 million fund, but we think we'll invest it seven-and-a-half times in the 15-year period we've got. So, you effectively get a much bigger bang for your buck, if you like, so we can build a lot more houses. I can look at the details for you now. So, on the housing front, each cycle will create about 450 new homes, but because we can repeat, that builds it up then, effectively, on that particular fund, to 3,500 homes that you can build. So, you can see you can have a much bigger impact.

Because you're working on tranches and you're working on recycling.

Yes, and it works perfectly with the budgets: as the receipts are coming back in, it then matches the budget cover to make another investment. So, it's really flexible.

Mike Hedges wanted to come in, so you might need to—. There you are—you're unmuted, Mike.

As you know, I've been interested in the extending periods, from discussions we've had earlier. Two questions on that. How easy is it for somebody to say, 'Look, we're paying this back, we're having difficulty paying it back in five years, can we move it to 10?' And we've been told that it can be extended to 25 years. Have you got any at that length?

Hi, Mike. So, managing the portfolio is our daily challenge, and you can imagine with 25 funds we've got a lot of things that work on plan, that don't work to plan or are ahead of plan, and it's taking that portfolio approach. So, yes, we do end up with companies that struggle and then we have to extend the terms of their loans. But when you look at it in an overall portfolio piece, that can be dealt with.

We've usually got longer repayment terms back to Welsh Government on these loans. Most of our funds only get invested once; it's only our property funds, effectively, that we're recycling, and they self-generate their exits, because they build the property, they then sell the property and the cash comes back in to us. So, that cycle is pretty safe, so I call that a low-risk fund. For companies, then, where we invest and they struggle, our remit is to try and help them, not to, if you like, enforce security and put the companies under. So, we are patient investors and we try and work with them, and we have the flexibility to extend their repayment times, when you take a portfolio approach and then still manage to track our repayments back to Welsh Government.

In terms of 25 years, Mike, no, we've not agreed a loan at that length of time yet; there hasn't been the demand for it. It may be somewhere where people want us to go to. Mostly you associate that with mortgage-type products and, I guess, we don't really see there's a failure in that market. We're trying to work in areas where there's market failure and there's more challenge to funding. Does that help?

Did you know you could extend it to 25 years, because we've been told by the Welsh Government that 25 years is the maximum?

Yes.

I'll move on to Rhianon in a second, now, to ask some questions. So, what criteria do the individual organisations have to fulfil to get into some of these funds? So, I suppose, the restrictions on the fund are probably tighter than they would be for FTC, to make sure that you don't lend outside of the criteria. So, how do you set up your funds, basically? How do you have that negotiation with Welsh Government to say, 'Well, you can only lend to x, y, and z within this envelope, but that, actually, FTC, you would be able to lend to a wider envelope'? I'm assuming that you narrow it a bit, so that you make sure that you don't stray into bits that you can't do.

Well, I think it goes to what Dave was saying about the actual funding fits exactly with our business model anyway, so we have no restrictions. The only restrictions, if you like—the big restrictions that sit above this—are, 'You must lend it to a private sector entity or individuals.' Well, we can do that. You need to lend it on commercial terms; it needs to be in accordance with subsidy control rules—all of those things we already had in place, and that's where we do our business. So, effectively, once the FTC comes in to us—. I can't think of any area where we've got a specific restriction, because we don't lend to the public sector.

We have normal sector restrictions that we don't get involved in, in helping companies that are manufacturing weaponry, you know—

So, there is an ethical lending test—

So, there are ethical, but they were there with the original European funds. So, we've agreed that in advance of all the funds with Welsh Government, in terms of eligibility criteria, and they're quite clearly labelled on our website. But I would say they're fairly mainstream, so you won't find many banks going there either. But, really, our key test that we're asking the companies, in terms of can they take a loan, for example, is whether they service then, the ability. And I guess you could call us an ethical investor on that point; we're not trying to push money onto them that they can't afford, we're trying to push the right products—not trying to 'push', that's the wrong word—we're trying to lend them the right product.

And those interest margins or terms, are they comparable to high-street banks, or do you price for risk, because—?

So, we do price for risk. We're tasked with not displacing the private sector; the whole point is trying to be additional. So, therefore, it's difficult for us to try and think about—. Ignoring the subsidy rules, if we were doing 0 per cent loans, for example, we'd then be displacing the private sector, so that's not the idea. And that doesn't then satisfy the Subsidy Control Act 2022 either. So, we price similarly to the private sector; it's usually slightly higher than them, because it's more risk and so that we don't displace them.

Because why come to you if they can go to a high-street bank and get better commercial terms, I suppose?

We're very careful on that, and it doesn't help anyone if we're displacing them, because that's not a great use of Welsh Government money. We should be—

Does the transparency around that it is Government funds—? Sixty-five per cent of your business is Government funds coming in. Is that transparency there for the people you're lending to so that they—

It's all—. The bulk of our money is Government money, so not—. Sixty-five per cent is FTC.

Is the FTC—sorry, yes. But are people aware of that? Are your customers aware of that, and therefore they understand? They might not understand the intricacies of FTC, but they understand that the money—.

They understand the source.

The source, where it comes from. Okay. Thank you very much. I'm going to bring Rhianon Passmore in with some questions now. Rhianon, over to you.

Thank you very much. I'm afraid I've had a laptop disappear on me, but it's come back again now. In regard, then, to following on from the Chair's question around the knowledge base, can you explain how much guidance is given to businesses not only in how to apply for an FTC-based loan, but the financial mechanisms that underpin that?

Sorry, I didn't quite understand that. Did you catch that?

Yes. In essence, I think it goes back to the way we market our loans generally. It's absolutely no different. So, from a customer's point of view, a customer will not know whether it's an FTC loan or whether it's coming from general capital or whether in the past it was coming from European funds. So, from that point of view, we don't specifically ask for that. The interesting point—because it's going back to the previous question—is, actually, the negotiation we have on rates. We do have our rates independently verified, so we do have an external look at our rates, just to make sure that they are reasonable.

Who does that?

We contract that each year.

Fair enough.

Yes. So, we look at that. The other thing is, about the actual rates themselves, we deal with this portfolio of individual funds. Some of them are low risk and some of them are very high risk. So, our management succession fund, for example, is very low risk—existing businesses, existing management structure, customers, revenue, it's all good, and, on the other end, you've got microfinance loans up to £50,000, or start-up loans, where it's very, very high risk. Now, we do have quite in-depth conversations and discussions. We model each fund, we look at the risk of each fund, we establish what percentage of the FT this fund will deliver in terms of repayment back with the Welsh Government at business case stage, and we then—they and us—manage that as a portfolio. So, there are some funds that we anticipate will return less than the FT we're given, but that's balanced off by other funds that will deliver a little bit more. So, we look at that sort of portfolio level when we're actually defining each fund, and at the back of each business case there's a table that shows all FT that's with us, the latest forecast and what impact this new fund will have on the percentage of repayment. And then, once that goes into Welsh Government, then they can look at the portfolio at a higher level, if that makes sense. So, that's how we manage the finance.

That does make sense; it's clarified it. In regard, then, to the advantages of coming to you rather than a high-street bank, at perhaps a different or even a lower rate, is it because you are more speculative in terms of those very high-risk start-ups, bearing in mind our mandate to create and nurture business development? The advantages would be that you are prepared to do that type of lending, and, if so—and you've said about the very high-risk stuff—how financially equitable is that in regard to the losses that could occur? Because I hear what you say in terms of supporting businesses and not being punitive, but, equally, in terms of the finances available—I'm sorry if this is going off FTC, but it's really interesting—could you give me just a brief overview in that regard?

Yes, sure, Rhianon. It's a balance—. Sorry, the headphones are feeding back. It's a real balance in terms of how we manage this. So, in general, where an investment has, shall we say, a higher risk, then we'll usually look to cover some of those additional losses, or potential additional losses, by charging either a higher interest rate or taking a more significant portion of the equity in that business if we were doing equity investment. So, you're trying to price, individually, for that risk on each deal, and then overall, on that particular fund, you come to an average position, if you like. But you won't find us charging extremely high interest rates. Usually, if we can't get to a position that's sensible with the company, then that's one that we'll probably turn down, because it's got to work for the company as well. If you were charging them punitive rates of interest, which you find with certain lenders, then that's not helpful either. So, it's walking a tight rope, it really is, to try and find the right solution and, genuinely, we think we generally manage that. I think, if you look at the complaints level that we have, over a 3,000 portfolio of businesses, we end up with around 10 a year, so it's not significant, I would argue, although we need to deal with each complaint as it arises.

Sorry, just on some of those higher risk elements, do you then take—? Obviously, you might take a slightly larger equity stake or you might increase the interest rate. Do you secure any of that against assets at all, or against property?

We do, but, usually, one of the reasons they come to us is they haven't got much security, because, if they have security, they can usually source that funding from the banks. So, what you'll find with us then is that we're usually into more service-type businesses, where there's a pretty low asset base. The only difference to that is our property funds, which are secured on the actual properties, in general, and there that's more—. We're more active in that area because the banks have withdrawn, so you won't find them, really, investing in property deals now, certainly speculative residential deals, for less than £10 million. It used to be less than £5 million, but that's grown.

And what's your average?

So, we're averaging—. Certainly, for larger sites now, they're getting up to the £5 million space. We started at £1 million to £2 million, to give you an idea. So, that's for the larger deals. But we still do smaller developers as well. It's trying to find, again, the right balance. What we're really trying to do is to grow the developer base in Wales so that there's less reliance on the large builders, and we can build these companies up.

And what is your minimum and maximum loan size?

Well, we start at doing £1,000 loans, to give you an idea. So, we are a very, very wide church. So, our biggest equity cheques are in the £5 million space, and our largest deal we've done on the green finance scheme was to Bluestone—I think it's been in the press—which is over £10 million. So, it is a wide church.

Yes, and it's just—. When you're looking at the structure of the deal, Dave touched on something quite important. If you take—. It's not always the customer that's going to come to us for the whole finance package. Quite often, they will come to us—. They've gone to the bank, the bank will lend up to the security that they can offer, and then they'll come to us and we'll fill that risk space to make the deal happen. So, we often—. I think it's in the majority of deals we're partnering with other lenders where they take the lower risk element, and we take the higher risk to enable that deal to go forward.

So, you're doing some mezzanine financing with that type of—

We can do. It's harder for the banks at the moment, just because of the economic climate. So, there's less appetite they’ve got for riskier businesses—no real surprise. So, we're finding we're getting less leverage at the moment because of the economic climate. Once that changes again, though, then I expect us to be working more closely with more and more other co-funders.

And just finally, sorry, because it is directly answering the question, 'Why would they come to us?', the other reason is because we do offer a face-to-face service across Wales. Now, you'll know, with the closure of bank branches, actually businesses getting in touch with their bank and having someone on hand is really difficult. We do offer face-to-face contact with our customers right across Wales. We also offer support to the businesses to generate—. If their business case isn't strong enough, we'll help them to lift it up to that level, and we work closely with Business Wales as well.

Rhianon, I took over there. And even Mike's got his hand up now, so I don't know—

Go on, Mike.

Shall we bring Mike in? There we are. There we are, Mike.

It follows on from the question Rhianon asked, so, thank you, Rhianon. But, if it's a low-risk investment, why wouldn't you go to a high-street bank, if they were lending at a lower rate? And I'm well aware of your being used as a top-up after high-street bank lending, but doesn't that give you less of a claim if a company goes through?

Yes. You're right, Mike. I guess it would give us less of a claim. Those are some of the risks we have to work with. At some of the banks, they may have sector restrictions that mean they don't want—. So, for example, in Wales at the moment the banks don't like funding care homes, so we're finding ourselves doing a lot more funding to care homes, which we view as relatively low risk. So, it's still coming to us, because they can't actually get through the door at the bank because of the sector restrictions that they've got there. So, we do find that happening. It's the same on our property fund. We're doing a lot of work there because the banks have, effectively, withdrawn from the sector at a certain deal size, where we operate. So, we can still find lower risk stuff, which balances, then, as Rob said, our higher risk early-stage equity type dealing and microfinance, which is more where the defaults occur. And then you get this overall balanced picture, then, that still fits within the repayment requirements that HMT require. Hopefully, that answers your question, Mike.

Yes.

Rhianon.

Thank you very much, and I suppose the wider question, really, would be, then, a point in terms of your very fine monitoring and evaluation, I am sure: do you know if the fund is in deficit? I'm sure there is a really complex argument or a response to that. But I'm going to move forward. So, in terms of the Development Bank of Wales data, do you include the disaggregated FTC data in your annual report and accounts? Obviously, that's the topic of today.

Hi, Rhianon. No, we don't disaggregate in the annual report and accounts.

And is there a reason why, or—?

I guess it's all about complexity, so trying to make—. Our business is already very, very complex, and trying to explain the various accounting rules that we have to follow and then trying—. If we were to go into more detail about the sources of funding we manage, it just—. I don't know if you've tried to read our annual report and accounts, but it's not a straightforward read. The feedback from the ETRA committee is that they still find it a challenge. So, I think, if we went into more detail, I'm not sure that would help the reader. But it's certainly something we can consider. The detail is given, obviously, to Welsh Government, who are more interested in that, whereas I'm not sure that the wider public is interested, and it's certainly not something that we need to do, statutory wise.

Yes. I mean, the committee is obviously interested in this in terms of its mechanism and its impact and effect around that, but I take your point in terms of the document—

We certainly do provide that information to Welsh Government, though. It's just not in our annual accounts.

And it's worth saying, because the first part of your question was, 'Are we on track to repay?', that, yes, we are, and we're on track to repay the full amount, as has been agreed with Welsh Government, across the entire portfolio. So, we track that regularly. We track that to inform new funds, as they're coming along. So, that will determine what level of risk we're willing to take in another fund, because it will affect that number, and we report that annually to the Welsh Government. And probably more often, actually, we have conversations with the various departments. When we're doing that, we're doing that by department, so each department we have a target to deliver for, and then we look. We then consolidate.

For each Welsh Government department.

Each Welsh Government department, yes, and then we look at it at a global level. At the moment, we are on track to fully repay. One of the other things we do—. This is probably a bit technical, but, within the modelling, we never model a payment above 100 per cent of the FT we've received, and it's for prudence, really. It's just to make sure that we're not getting carried away with ourselves and that that doesn't skew the numbers. So, we're comfortably in a position to fully repay all commitments we have to the Welsh Government for financial transactions capital.

But there is an opportunity that you might overpay, if you like.

Absolutely, yes.

So, certain funds could overpay. To be fair, Rhianon, you're right. Certain funds—it's only a couple—are under what we originally estimated in terms of what we'd hit for repayment, but other funds are over, and other funds are on target. But, overall, we are on track to repay, at the moment, the full balance we've agreed with WG.

Rob's right, we do update Welsh Government quarterly, basically, in terms of the fund performance. Some numbers don't get updated as regularly. So, for example, if you're doing—a really difficult thing—expected credit losses or equity valuations, they're done more half-yearly, and then that information all falls back through into the information that will go to the Welsh Government. All of these numbers are estimates of what will happen in the future, so there is a health warning with those. So, it's quite different to the grant situation, where you put the grant in and it's a done deal and it's all over and done with, whereas it's far more challenging with us. And certainly, over the five, 10, 15-year periods that we manage, there are lots of ups and downs for these businesses to manage.

Yes, and those mechanisms, interestingly, that we have to manage that we already had. They're essential to manage financial transactions capital, because unlike grant money, it goes out and it comes back in again and you need to monitor that. But, thankfully, our organisation was already absolutely geared up; that's how we manage any other fund.

Great.

Okay. Thank you. That was very interesting.

I think you've got one last question, haven't you, Rhianon?

I've got one more, yes, in terms of how much is repaid to the Treasury each financial year, regarding financial tax loans. So, how much would be repaid?

So, we're not close enough to that information, I'm afraid. We just have our repayment obligations to Welsh Government. I don't know what's going on, then, from Welsh Government back to HM Treasury and that mechanism. So, I can just talk about us. So, I think we've repaid £136 million-worth of our financial transactions—all on time. Actually, some tranches of that are ahead of time on Help to Buy, just because we got money back earlier than expected, and Welsh Government have requested that back.

They can see what cash we've received back in advance, and we're quite open to the conversations with them in terms of if they want us to either reuse it somehow or to repay them, so that they can use the capital elsewhere, or repay back to HMT. So, I'm sorry, I don't know what they're paying on an annual basis.

No. Okay. That's something else we can inquire about. Thank you very much, both.

Thanks, Rhianon. Peter.

Yes, thank you. It's really interesting. It's a really interesting subject. So, just for clarity—and I think I've got this right—financial transactions capital is a great tool for you. The rules only really sit above you and behind you; the customer doesn't have to worry about that at all. They don't need to know where the money comes from. I suppose one might suggest that you might be a bank of last resort, in many ways, to help some things go forward. You're in an enabling position, in many ways. Those are takes that I took from that. They're not my specified question, but I just really wanted to just contextualise things for myself.

Peter, I'd agree with that, other than just to say that we try not to call ourselves a bank of last resort, because it's not helpful. We're a gap funder. That's how we like to see it. We fit in the middle, rather than just being something that takes the cases that nobody else will do and never work.

Okay. That's really important, actually, that we know that. That's a good message. I'm glad you clarified that. So, that's great.

On to my questions, and some of them we've touched on already around risk, so apologies for duplicating if I come back to it. But, first of all, I just wondered if you can describe how much of the financial transactions capital that Welsh Government uses is recycled. And what criteria are in place to decide if a project or fund will be recycled, or doesn't that really make much difference from your perspective?

So, recycling is something that we've moved on to, because of the long length of the financial transactions that can be out there. So, we actually have really created the property fund. We started off with a £10 million property fund 1 and tried to prove the model, and then we moved, after that fund finished and had all its capital back, onto our Wales property fund 2 and the Wales stalled sites fund. And they're both £54.5 million each. So, £110 million. And those are the two main funds that are recycling.

We've also, in our Wales flexible fund, got a small amount of recycling—£30 million. But the main one there is property. The reason that's chosen is that the property deals have a short time frame. They usually get repaid within two years, let's just say. The stalled sites fund has a slightly larger time of sort of three to four years on more complex property deals—they've usually got land issues, contamination, shall we say, or build challenges. And the reason then, when you've got a repayment time frame of up to £25 million [correction: 25 years], if you know you're getting your money back within two to three years, then there's obviously opportunity for recycling.

These deals are low risk, so our defaults are—well, they have historically been nil, although we've got a couple of cases at the moment that are more challenging, so it's no surprise. But even so, it's a very, very low risk for us, so in terms of recycling, because we're getting effectively, in general, all our money back, then you're starting back at zero, if you like, again. So, it works from a recycling point of view. If you were only getting, say, 80 per cent of your money back, and the next time you went and you only got 80 per cent back again, it wouldn't work for FTC. So, this is why it's a really good model for a low-risk fund, when you're getting back all of your capital. It then works then from a recycling basis. So, I think it's more unusual. I think the evidence that Welsh Government will give you will probably say the same thing, so I'd say it's rarer, but it does give you, as I've explained earlier to you, Chair, a much bigger bang for your buck when you recycle.

It's worth saying that the idea of recycling was developed here in Wales, and it was actually suggested by one of our staff, and it's gone on to a whole range of funds. I think that just under half of all of the funds we administer have come directly from suggestions that have come up from people on the front line, the investment managers, which I think is really good.

The thing about this that I personally think is amazing—. And I've got to say, there are commentators out there who almost suggest that the development bank doing property is somehow a negative thing, but if you just take the raw numbers of this, £54.6 million is coming in to us through FTC—. The figure that's in the paper, I'm afraid, is incorrect—it was an older figure—and it says that would generate £272 million of investment. That needs to be corrected. The figure is actually £415 million. It was actually based on a smaller fund, so apologies for that. So, you've got £54.6 million of financial transactions money coming in. Over a number of years, that's going to deliver £415 million of investment in Wales. It's going to generate over 3,400 homes in Wales and, at the end of that period, we're going to pay back the full amount of £54.6 million, which will then repay the original loan we had at the beginning. Personally, I think that's an amazing use of money, and I can't think of a business case that's better than that in terms of the use of public money.

And how much profit would you make out of that?

Well, we make enough to pay our, if you like, our salaries; we don't get grants in aid, so interest rates and equity profits matched against losses as well, and actually then allow our operating costs to be paid. So, we charge each fund a fund management fee, and effectively, if you like, that's a cost to each fund, and the income to those funds are the interest rates and equity profits, and the other charges to the funds are losses, if you like, and those funds, from a profit and loss perspective, we try and obviously make sure they break even. In our fund management business, we try and run just the right side of the line so that we're a going concern, so it's generally break even. There's no point taking more money out of the funds for management fees than we need, because that profit's not useful; it's better to leave it in the fund so that we can invest it into companies.

So, it goes on salaries. Do any of your staff then receive any bonuses?

So, we don't get grants in aid, so unlike any of the other departments—

But from a staff and sales staff—

Staff, occupancy costs.

But would they be getting bonuses and that sort of thing, or is it more of a salary-based type of thing? How does—

We pay a small bonus, so we have to try and reflect some of the private sector in order to attract staff, but it is very challenging for us to retain staff, particularly on our equity side, where competitors pay much larger salaries. So, there is a tension there.

I'm conscious of the time and if you're okay to stay a few minutes longer, then that would be great, and then we'll get through some questions. Sorry, it's usually me talking to much, so I apologise to my colleagues, but there we are. I'll come back to Peter, anyway.

It's really interesting, and thanks, and it is a great return on the investment, those additional houses and everything. That's good news. I just want to pick up a couple of final things. We know that you are deploying financial capital to really quite high-risk areas at times, and I just wondered how do you assess which high-risk area you might invest in. What are your deciding factors to decide where you’re going to put the money?

Okay, I’ll take that, Rob, if you like. Thanks, Peter. So, this is the day job now. Within our organisation, you have various delegations of sanction. Depending on the size of the deal, it depends who would sanction it. It can be individuals, all the way up to an investment committee once you get on to larger deals. In general, that’s over about £750,000. The paper that gets written for each sanction, if you like, contains a complete analysis of the company and the risks and mitigations of the investment. There are various stages before you get to that point where it’s reviewed by peers to say, 'Is this the right fit?' So, we have various stages where there’s basically a preliminary note written where the headline ideas of the company and the terms of the deal are presented. So, you can get an early-stage feel for it. The idea is, if it’s too risky, Peter, we’d need to give them the news quickly that we don’t want to do the deal. A slow ‘no’ is no use to anyone. So, we assess every deal that comes in honestly and try and make sure we can find a way to do it if we can. But if we can’t, we need to tell the company quickly, so they can get on and try and find other solutions to their problem. So, that’s a constant challenge. Obviously, when we’re giving bad news, companies will disagree and not be happy and you’re trying to manage that side of life, but that’s normal for us. It’s just something that you’ve got to do and deal with. We try and deal with it professionally and have honest conversations with people. But we don’t want to invest in them or lend them money if they can’t actually afford it or deliver what they’re supposed to.

That’s really helpful, it’s good to have that reassurance of that diligence around it. I did expect that to be there. Linked to that, how do you balance the nature of your portfolio between low and high-risk projects? Have you got an internal ring-fenced amount that you put towards high risk, with the bulk perhaps going towards safer investments?

No. What we tend to do is we look—. As I think I said earlier, what we do is, first off, it’s looking at the policy context, because it depends on what’s going on in the environment and where the gap actually is. This market gap for finance is constantly moving, it’s not a static thing. Also, we work across a number of policy areas. So, we’ll address policy issues as the Welsh Government officials and Cabinet Secretaries come to us and say, ‘We have an issue in that particular area’—green finance, for example—and then we’ll work up a proposal for a fund. It’s at that stage that we look at what impact that particular fund would have on the totality of the FT that we’ve already had. Is it going to mean we can repay more, or is it going to mean we can repay less? Then, we have a discussion with the Welsh Government to say, ‘Are you happy, if it’s less, to take that additional risk?’, or the other way around. So, there isn’t a fixed amount. Funds come at us from all sides, so we’re always developing and coming up with new ideas.

Peter, just to expand on that, our regular monitoring, then, we then monitor the returns that we’re getting in on these funds and the investments made. And if it turns out that some of those companies are failing in terms of their performance and can’t afford repayments, for example, we have to give them holidays, then we may decide to review our investment strategy and move that more to taking lower risk deals, if we go off track. So, a normal part of our day job is constantly watching where the portfolio’s performing. Because, for example, you could view a company initially as fairly low risk, and then something could happen to it and it switches to being very, very high risk because something’s happened. So, it’s live, it’s just not static at the point you make the investment.

So, really, the vulnerability doesn't sit with the development bank. It'll ultimately sit with the Government. If the Government want you to invest in certain areas, they've got to carry the risk of that, I suppose.

We've just got to try and manage that within the parameters that they set.

That's really helpful. Thank you, Chair.

I'll bring Mike in for a couple of final questions. Thank you, Mike.

I'll do my best to be quick on this. The committee also suggested that the money was recycled and suggested that to the Minister some time ago. So, I'm glad lots of people are saying the same thing. You gave the impression to me—maybe I've got it wrong—that the payback date to the Government was the same for all the schemes, despite the fact they've come in at different times. Did I misunderstand that?

Each fund has a different payback date. It just depends on the negotiation that the Welsh Government has had on the FTC that they've received. They do that differently for each tranche they receive, as far as I'm aware. Again, I'm sorry, you'd have to go and ask them for the detail, because we're not close enough to that.

I just wanted the clarification, because it did sound as if you'd said that it was all paid back at the same time. But not to worry about that, there's been a clarification now.

On company failures, if I start off by saying I'd be very upset if there weren't company failures, because you can avoid company failures by only doing very—

Being low risk, yes.

How many company failures have you had?

I don't have that number to hand, to be honest, but there are frequent—. It depends what you mean by failure as well. Companies can get into trouble, they cannot service their loan repayments, so you then go into a negotiation with them where you may reschedule the loan and give them more time. And then, if that doesn't work and the company starts to fail even more, then, effectively, that company will go into administration and liquidation. Sadly, it happens more often than not, usually, in the microfinance area, rather than larger loans, which are, generally, to more established companies and are more predictable. But when you're doing start-up companies on microfinance, it's super high risk, and yes, we do get a number that fail, as you'd expect. I think the default rate on our micro funds assumes a range between 10 per cent and 20 per cent in total of the fund defaulting. And if we weren't taking a risk, you're right, we'd be doing the wrong thing, Mike. We're there to try and go where the existing private sector lenders won't go, so take more risk. The funds are set up to give us that ability to do it. Something would be wrong, Mike, if we didn't have defaults, I completely agree.

Yes, and I think it's the—

Sorry, can I just say this, and you can come in? Before you existed, the Welsh Government invested money in Admiral and lent money to Admiral. I don't think anybody would describe that as anything but a brilliant job.

Yes. I was just going to say on that that you will get individual company failures, business failures, within any fund, and if we didn't, as we said, we wouldn't be doing our job properly. But that's around the points we were making about managing the fund as a portfolio and actually addressing that. So, if we see a fund is underperforming as a whole, we'll look at the investment strategy and try to get that fund back on track. But then, if we take it another level up and we look at all of the funds we have, some of the funds, overall, Mike, perform poorly, but once again, we look at the overall portfolio to make sure that we bring that back in balance. This is why we are always confident that we can fully meet the obligations we have with the Welsh Government.

But I assume your targets would be for those funds, on average, to overachieve so that you cover your overhead and the costs and things. But it's managing the risks, so it's finding that blended average across, then.

Yes. For each fund, we have what's called an R number, which is a multiple of the original financial transaction—let's just call it the original capital that the Welsh Government has given—and we compare that against what we said we'd repay. If the R number is positive, then we're over what we said we'd originally pay, and, obviously, if it's below one, then we're under it. That's constantly monitored with our Welsh Government colleagues on an individual fund basis and overall. This is the game that we're in, trying to manage that portfolio so that it comes in certainly above the 80 per cent that the Welsh Government—. We're midway, if you like, in terms of where we are between that and 100 per cent repayment. So, we're taking some risk, but we're not pushing the boundaries, because if we get below the targets that WG have to repay to HMT, then that's going to affect, I guess, our block grant.

I think we've got time for one more question, Mike, and then we'll have to wrap this—. Sorry, Rhianon's got her hand up, so I'll bring Rhianon in very quickly.

Just very briefly. Obviously, in terms of verifying this default, there will always be a percentage around this in their portfolio. What mechanism is there to stop the same person, or persons as a company, resetting themselves up and constantly defaulting in a high-risk scenario? Would you have that sort of safety check and balance?

Thanks, Rhianon. Yes, when each company applies, there's a full assessment done. If, for example, they were an investor or an owner of multiple companies, then we link together which companies they do as part of our assessment. So, yes, it's built in, so we can see what their track record is. If they've borrowed money from us before in a different entity and that's failed, then we're certainly aware of that and that would form a view. It wouldn't necessarily mean that we wouldn't lend to them, but it would certainly form a view as to whether we'd want to go again.

And what about criminal convictions?

We're expanding on that, as you've seen from the recent Dauson issue. So, we're trying to get better. Some of them aren't freely available in the public arena, so it is a challenge, but we are relooking at our diligence programmes to make sure that we're getting as much information as we can.

Mike, I'll bring you in now.

A very quick final question: do you use all the financial transactions capital you're given? And do you need it all? Do you get given it, or do you have to draw it down as you need it?

Life has changed, Mike, since we got reclassified. A lot of the time, historically, we may have got some of the money in advance, whereas now, on an ongoing basis, financial transactions are drawn on a quarterly basis in advance. Do we use it? Well, you can see we've deployed £1.1 billion of it. There are some circumstances where some of the historic money, particularly on Help to Buy, has not been fully used, so we're working with the Welsh Government as to how we repay that to them. But in general, yes, it's all used. The business cases are quite strong and we've got a strong track record, now, of over 20 years of making investment, so I think it's a relatively straightforward assessment for the Welsh Government to make in terms of demand.

Thank you.

Thank you very much. We've gone over time, but I appreciate you coming in, and I appreciate your candour and your answers this morning. There will be a transcript available for you to check for accuracy, and if some of those figures that you suggested need altering, then we'll alter them, as well. Diolch yn fawr iawn. We'll take a short, five-minute break just to reset the room. Thank you very much. Diolch yn fawr.

Welcome back to the second session of this morning with our witnesses.

I'd just like to welcome our witnesses here—we've got one on screen and two in the room. Would you be kind enough to give your names and who you're representing here today? I'm going to start with Richard.

I'm Richard Mann, and I'm group chief executive of United Welsh housing association.

I'm David Ward. I'm chief executive of Tirion Homes Ltd.

I'm Kate Pender, deputy chief executive officer of Fair4All Finance.

Fantastic. Thank you so much for coming. Obviously, there will be a transcript of this for you at the end, just to check that we've captured this correctly. Thank you, all, for the written evidence that we've received from you; it's been helpful in forming some questions that we have. I think we've got about 40-odd minutes with you today, hopefully. I'll stop talking, because I tend to do that a lot and then we run out of time. If I could start, could you describe the experiences that you’ve had as businesses applying for FTC and the strengths and weaknesses of that process? Who wants to go first? David can go first.

I’m happy to go first. Thank you. I think the first thing to say is we don’t really have any experience of directly applying for FTC. We have applied for loans and been successful in applying for loans with the Welsh Government and, actually, as of yesterday, with the Development Bank of Wales, but it’s only actually become apparent after the fact that some of the financing has been FTC in the loan package that we secured. I think there’s a bit of a lack of clarity about FTC, where it comes from. We’ve largely done our own research in the past about how it’s structured and how it might be used. In my experience, it’s been very helpful. We’ve had some direct loan extensions from the Welsh Government, which have helped us on the big regeneration projects we do when we’ve come across some difficult issues around remediation or whatever they might be. They've been used very effectively in those circumstances. I understand, but again I’m not absolutely certain, that there’s FTC in the recent Development Bank of Wales construction loan we’ve secured as of yesterday for the next phases of the Parc Eirin development.

You could have asked them; they were just here. [Laughter.]

We did actually see them. As far as that's been concerned, it's been a positive but quite a lengthy process.

Richard, do you have any thoughts?

From our experience, we come at it probably from a slightly different angle in the sense that we’re traditionally funded by the social housing grant, which is effectively a grant that’s given to us in perpetuity. Our application came through the development of an innovative model in terms of youth homelessness and recognising that there was potential funding within the Welsh Government. So, we approached the Welsh Government with our ideas, our proposals, if you like, in terms of the model that we wanted to deliver, and ultimately then they directed us to the FTC funding, which we received in two tranches. Timing with us is always an issue that causes a challenge. We were towards the end of the financial year; I think we took a £5 million tranche in the first phase and £10 million in the second phase. From a practical point of view, there are no major challenges that we would face. We felt the support from officers at the Welsh Government was really positive, particularly from the lawyers and the finance guys within the Welsh Government. There were the usual kind of nuances that we needed to iron out with any funding packages, crossing the t’s and dotting the i’s, but that's not necessarily a major problem for us.

Thank you. And Kate, what's been your experience?

Very positive, although some similar comments. It wasn’t so much an application process for us, it was liaising with Charlotte Anscombe and officials. I think the construct that the funding is being used for for us is slightly different and that would have made an application process slightly odd. The funding that we’ve had here is for the no-interest loan scheme, which Fair4All Finance is managing across England, Scotland and Wales. The advice was that, although Fair4All Finance could provide lending capital in England, the Treasury was prepared to fund a bad debt guarantee and admin costs across all of the regions. It wasn’t possible for other parties to put up the lending capital, so that’s the source and the reason for the FTC in the no-interest-loan scheme. I’d just say we’ve been really delighted with the engagement with the Welsh Government on this. Charlotte’s been incredibly adaptable and flexible and recognising that it’s a slightly unusual construct, because we were trying to make sure that this pilot could be in place across all the nations.

And Charlotte is an official within the Welsh Government.

Indeed. Charlotte Anscombe, yes.

Thank you. Great, okay. So, when you were applying for funding in different ways, either through the development bank or directly with Government, what sort of guidance had you had regarding the sort of application, or those conversations to understand what an FTC loan was, or what that funding mechanism was like? Or, maybe, from your point of view, David, that didn't really come into that at all, really, it was just more about, 'Well, there's a pot of money, or a loan, available, and this is how we apply for it', you know.

Yes, we didn't have any guidance around FTC itself, and so the direct additional charges of a loan from Welsh Government officials were dealt with in a traditional five-point business plan way, which most of us are generally familiar with. The Development Bank of Wales construction finance was a very traditional construction finance application process.

That you'd go through with any high-street bank, or any other—

Yes. There are some subtle differences, which I'll touch on later, but, yes, something again that we are familiar with, and the same sort of parameters, really. So, no real discussion around FTC being the source of finding finance or what that meant.

No, you just—. The bank had money, and then you had to go through their normal application process.

Correct, yes.

So, it wasn't badged up as anything.

No.

Similar sort of—?

Yes, a similar experience for us. The principals for us were that the model required a 25-year zero-rate finance package. That's what we were looking for from Welsh Government. In many respects our hands were held, really, through Welsh Government officials, to where the funding came from. In many respects, from our point of view, it was academic where the actual finance came from. Again, I go back to the process. I don't think there was anything materially different in terms of the process that we would have with any other funding arrangement: the usual conversations around securitisation, the terms of the loan agreement and all of those kinds of things that we iron out generally between the various lawyers, but nothing that was untoward or—

And that was directly with the department.

Yes, that was directly with Welsh Government officers and our own finance team. We have our own legal team in the association that deals with those as well.

Okay. And then, I'm interested, with fair funding—. It's a little bit different, as you said, isn't it, Kate, with—. You had the guarantee as well as—. There's a bit of matching stuff together, then, for you. So, what was that process like, and what sort of guidance were you given around how this works?

So, a really positive process from our perspective, and the starting point was a commitment from Treasury to fund the pilot in terms of putting up a bad debt guarantee and covering significant administration costs, Fair4allFinance covering lending capital in England. And the purpose of the no-interest loan scheme is really to connect people in vulnerable financial circumstances with a small loan in a crisis. And that means that, for the lenders involved, the bad debt risk can be quite scary. That's one of the reasons why this lending doesn't happen. So, the Treasury guarantee was really helpful on that front.

The second reason that this lending often doesn't happen is that the cost of capital is very high. Lenders who are helping these customers tend not to be able to get attractive rates in the market. And that was a real challenge. So, we were committing to make sure that the capital could go in at zero interest itself, so that it wasn't driving up costs for those lenders, particularly given—the clue is in the title—they weren't then going to be charging interest to cover their own costs. And one of the great points of adaptability that the Welsh Government officials, Charlotte Anscombe and others, really adapted to was flexibility about who those lenders would be. So, we were running a procurement supported through a steering group, including Welsh Government officials on that. And that procurement was intended to appoint lenders across the country. Because of those procurement rules, we were agnostic about whether the lenders would be credit unions, community development, finance institutions and so forth. And I think the Welsh Government team were very adaptable in coming to that need for flexibility about who was appointed, whereas I think at the outset they were very keen that it could and should be Welsh credit unions doing the delivery. And they adapted their position on that during the process because of the need for us to be neutral during that procurement about who it could be. And I'm very grateful to them for that, because we didn't in the end get bids from credit unions to deliver in Wales; we got bids from community development finance institutions to do so. So, I think that pragmatism was tremendously helpful, and, just in terms of the contracting process, again, trying to keep what was already quite a complicated pilot as simple as possible, and I think a lot of willingness to be flexible and realistic about how the loan agreement itself was structured and so forth. So, we were very grateful for that too.

So, the payback term on that loan from the Government is quite short, then, is it, or—?

It's relatively short in comparison to the other witnesses that you're hearing from this morning, because these are small loans to individuals, with an average term of between 12 and 18 months. So, the total loan capital provided by the Welsh Government is due to come back in a relatively short time frame, because we're, essentially, ensuring that that the lenders can get the money out to those who need it and have some flexibility about, for example, providing payment holidays, if someone needs slightly longer to pay, without that impairing their credit file. So, it's not a perfect 12 months in, 12 months out, but it's certainly not a long-term deployment of capital. And that's very specific to this pilot, which is small value, short-term loans. On some of our other work, which we haven't yet partnered with the Welsh Government on, but, for example, consolidation lending tends to involve consumers needing a three to five-year term, and that would have necessitated a much longer loan agreement.

Okay, thank you very much. I'll bring Peter Fox in, please. There we are, Peter.

Good morning, all. It's great to have you with us. I've got a couple of questions. I'm conscious that, as David pointed out, you wouldn't necessarily know if financial transactions capital for you was being lent, but perhaps I could ask, then: could you outline the timescale from your initial application, for whatever you thought you were getting, to the initial release of funds following that decision? And have you encountered any obstacles in obtaining the funding, following that positive decision that you had been given? I'm not sure who wants to start on that; perhaps David.

Yes, happy to start. Well, in terms of timescales, because the direct loans from Welsh Government through the officials were, basically, extensions of existing loan agreements that had already been through all the legal rigour and due diligence, they were really very quick. We were in receipt of funds three or four months after the requirement was identified. So, that was extremely helpful, because I'm sure you'll understand that, if we're on site on a project and an issue emerges, you need to deal with it as quickly as possible. Otherwise, it becomes more expensive the longer it goes on. So, that's very positive.

The Development Bank of Wales process has been somewhat longer than we would normally expect with a retail bank, if I'm honest. Now, the Parc Eirin project is a marginal project. Viability has been testing all the way through, so that is a main reason, which can't be put at the door of the development bank. But, nevertheless, I think our first discussion around funding for Parc Eirin was probably two-and-a-half years ago, and we've been working hard with them ever since to try and get the project over the line, which, thankfully, we now have. So, like a lot of things—I'm sure Richard would agree—in development, timescales are a huge issue, and the longer it takes to get something ready to start on site, the more expensive it is. So, these are big factors, I think.

Was that more legal problems, or was it—? Two-and-a-half years is a rather long time to be involved. What were the barriers? Was it from the lender or was it more of the—?

So, just to clarify, we didn't actually make the application until summer last year, so it's been about 12 months. And a lot of the issues are trying to deal with viability, but they do play back to many of the requirements around meeting loan-to-value criteria, the security package—you know, the things you would normally expect a retail bank to be concerned about. And when you're dealing with marginal schemes in the Valleys or west Wales, wherever it is, these are really quite difficult things to overcome, and it takes time and it takes a lot of modelling, a lot of agreements to be made, and construction cost inflation was very unhelpful in all of that. So, yes, we're definitely not blaming the Development Bank of Wales, but, if they're going to operate in a similar way to a retail bank, you're going to have to expect those sorts of delays.

I think that's really helpful feedback, David, and I think it's something that perhaps this committee can help feed back out of this inquiry, really, to the development bank, because their intentions are extremely well-meaning in wanting to help and accelerate, as we've just heard in the previous session, but, if there are barriers to that happening, that's not quite so good. Richard, did you have any similar issues, or was it quite smooth?

We had some challenges, but they're slightly divorced, in a way, in a sense that we had a long conversation, or a longer conversation, developing the idea with Welsh Government. So, our model—. Basically, we're buying properties at 100 per cent using the loan funding, which means we don't pay interest and we use the money that we would have paid in interest to provide support for young homeless people. The outcome of that—. We did some modelling in Cardiff; we think, providing, say, 100 units of accommodation for young people is costing Cardiff around £2.1 million a year. We're delivering a very similar model now for around £0.5 million, so there are significant revenue savings in the model; we're demonstrating that at the moment. These are rough estimate figures, to give you a feel.

The challenge for us was, when we were developing the idea, we looked at property types in Cardiff and took an average acquisition value. By the time we developed the actual model itself, got the funding application in, got the funding approved—. It was a very tight housing market at the time and we saw property values increase. One of the conversations we had with the officers at Welsh Government was: is this a scalable model? Well, of course it is; it can operate in any area. But it balances the relationship between your revenue income and, effectively, your capital debt. Now, what we can do, of course, is seek to acquire properties in other areas where the average cost is lower, because, in reality, the rental value remains consistent across all of the properties. But there are a number of constraints that were placed upon the loan around geographical area of operation and also some of the design standards.

So, we work to the Welsh Government's design standards, the development quality requirements, so we might look at an existing—. And it's great; DQRs are fine when you build a new build, because you get an architect to design it. When you're trying to convert an existing property, 0.5 sq m less in a bedroom, which many people will go, 'That's okay', could be a deal breaker for us being able to buy that property. So, there are some restrictions within the loan agreement that prohibit us from doing that. And we did spend a bit of time trying to work on some properties to try and get them across the line that were not technically approved, during which time property values are going up and it makes the model more challenging. But we got some dispensation, through the team at Welsh Government, to allow us to maybe acquire a couple of properties in Newport and other areas where we can balance the portfolio of properties that we're buying. But the actual—

And—

Sorry.

No, that's really helpful, and, yes, I can see how you needed some flexibility, especially with unstable markets; yes, I can see that that—. Kate, from your perspective, anything you want to add?

I think the timetable in terms of us working on this agreement was very reasonable. As you'd appreciate, when you're running a pilot, the list of what you don't know is sometimes longer than what you know, and I think that Welsh officials were very attuned to that. One of the uncertainties was, 'How many loans is this going to buy, what's the average principal really going to be in practice, how bad is the bad debt going to be and, therefore, how wide can we stretch the Treasury budget on admin costs and things like that?' I think that the timetable around resolving those sorts of things and coming to sensible parameters and so forth was all very fair and reasonable, so, again, that's a slightly different example because it is a pilot, but I think it's been a good experience for all of us.

Thanks for that, it was really helpful. I've got two questions I'll perhaps wrap into one. Kate, you've had great communications, and perhaps the process was not so clear, David—I may have misinterpreted that, I don't know. I just wondered, perhaps—it's a general question: would you, or would businesses welcome more clarity or more guidance around financial transaction capital? Could that be improved? Would it help with your decision making? And perhaps to link with that question: what have been the real benefits, if you can define them, or disadvantages, of going down the path you've gone? I'm not sure who wants to start. Kate, do you want to start with that one?

Yes, happy to. So, to take the second part of it first, I think the great advantage of this working collaboratively across England, Wales and Scotland—and, by the way, we were very keen to also work in Northern Ireland but the hiatus of a Government there created a bit of a challenge—the advantage has been the ability to try and test out slightly different versions of a no-interest loan scheme to meet the needs of vulnerable people in slightly different circumstances, but also to get enough scale. So, I think the advantage to the officials in Wales was that this capital provided through FTC was then able to leverage Treasury's commitment for £3.8 million spread across admin funds and a bad-debt guarantee. Fair4allFinance then spent lots of time also getting support from J. P. Morgan, so we've kind of been able to grow the pot in a way that I think enabled things to be much bigger and with a greater degree of impact, and the story is good thus far. So, 94 per cent of customers are delighted with the loan that they received, most of them report it being a life-saver and something that they wouldn't otherwise have had access to. There are some extremely tear-wrenching case studies about exactly that sort of impact on the individuals. For lenders, it's been incredibly positive because it's enabled them to say 'yes'. For many lenders, they would have had the acquisition cost of trying to find customers only for the loan to be declined, so a 7 per cent change from declines to approvals makes a big difference in small businesses, and those are the sorts of headlines in terms of the benefits. So, I hope that covers that aspect.

Yes, fine. And from your perspective, the communication side of things has been good. You had all that information—

Absolutely.

—guidance and support. Yes. Great, thank you. Richard, any perspectives?

Our model deals with young people, many of whom have come through the care system. When they turn 18, they're effectively treated as an adult and the transition in terms of care is significant for them. What we're doing is—. And the other thing that we have is, as a supported housing provider we're very dependent and at risk of supporting people with revenue funding coming in. The idea of this model, of course, was to effectively take that support out of fluctuations of supported revenue funding and give us a long-term opportunity to provide that support, and this is about intervention, it's about making sure that young people get the support, that they don't fall off a cliff edge, that we can provide that support to them.

Some of the figures I was quoting earlier on identify the cost of providing that support into adulthood, and they can be considered quite conservative, in a way, if you look at some people that may fall into alcohol or drug dependency, and the cost to the public purse for that is extraordinary.

What we're finding—I have some pictures if you want to see some of the accommodation that we provide—it's really high-quality accommodation, some not too far from here. It gives people a real chance, and the rents that we charge are well below market rents. It enables young people to get into work, and a number of our tenants now are in work, and they're given a kind of—. I classify it as a high level of parental support, if you like, to give them the best chance of making their live a success. At this point in time, it's working well. We are still making our way through the criteria that causes a bit of a barrier, as I mentioned earlier on, around design standards and the like, but it is working well and we believe it's scalable.

The challenge for us, of course, is, as a scalable option, how do we take it further forward? It is, fundamentally, dependent upon the zero-rate debt. For the Welsh Government, of course, the money’s secured against the asset, and it's there for 25 years, so from a risk point of view, it's very little risk, because, ultimately, in 25 years' time, it's underwritten by the housing association—we pay it back. But we pay it back against an asset value that, conservatively, is going to be double what the loan debt it. If you look at the last 25 years, it's four times. So, at a worst-case scenario, we're refinancing against that, and we still keep the properties, but the Welsh Government get their funding back.

So, really, our plea, if there's anything coming out of this, is to see whether we can develop this and scale it up, because we all know what the homelessness crisis is that's facing us, that we're dealing with at the moment. It's extraordinary, certainly in Cardiff—hotel accommodation and the like. We have to be able to address this at scale and pace somehow, and we just see this as being one of the pieces of the jigsaw to do that.

Thanks, Richard. And have you found communication good between the development bank or with Welsh Government? Any messages in that regard?

Nothing from—. The actual process of getting the funding, to be honest with you, was very positive. I've nothing really negative to say about that. As I say, the time frame from when we made the application to receiving the funding—three to four months, I think, similar to—

And was it dealing with officials, or did you deal with Ministers at all?

It was predominantly with officials. We tend to present our ideas to the housing division within Welsh Government, and then they work the networks, if you like, within Welsh Government, to get us the appropriate routes, in terms of securing that funding.

Anything from you, David?

Well, the first thing to say is we don't have any issues with communication. Communication is strong with officials and the development bank. I think decision making can be the delaying factor rather than communication. I think we've always had a good relationship, so that's not a problem.

I think, in terms of benefits, where we started, as Tirion, we had a very elegant way of using loan capital. So, we actually did the first phases of all our developments whilst Welsh Government still owned the sites. So, what that enabled us to do was to draw down loan capital from Welsh Government, some of which was FTC as I understand it. And then we would expend that on remediation, site servicing and infrastructure works, up until the point where we got planning consent for the wider development.

Now, Welsh Government, at the time, took the view that all that expenditure was adding the equivalent value to the site. So, the loan capital was adding value to the site, and even if we got to the point of planning and we couldn't proceed and take ownership of the site, that value was encapsulated in the land, so there was no real risk to the loan capital. Now, I've always said that that's a very elegant way of dealing with loan capital, because it enables you to get some momentum into big projects, which are always difficult to start. Once you start, they find their own life, and they roll through, and our developments are being considered to be very successful.

So, just to put some numbers on that, across our three sites, it's about £17 million of loan capital gone into those sites. But that's actually going to draw down around £150 million investment from M&G Investments. It's going to deliver 1,500 new homes, 750 of which will be mixed tenure affordable, including significant proportions of social rent. And they are big regeneration projects that are being delivered, and, frankly, in Wales, we don't have a great track record of delivering big projects. So, I think there's a lesson about how you don't really look at loan capital as a ring-fenced risk in its own right, because it's a bigger issue. There's a more macro thing going on about what you're delivering, how you're addressing objectives and outcomes that align with Welsh Government policy, and, of course, we’re an organisation that’s not eligible for the social housing grant, and, by any calculation, the grant that would have gone into these three schemes would have been between £50 million and £60 million, which has not been expended.

So, I think we just need a more strategic way of looking at how we deploy loan capital, and many of the issues we see in front of us in affordable housing are all about pipeline. So, they’re about pipeline delivering against construction skills, the construction sector itself in terms of its robustness, the modern methods of construction agenda, the affordable housing agenda, securing institutional investment into affordable housing. They’re all interconnected, and loan capital can be a really powerful way of making that happen.

Thank you. Thank you, Chair.

Great. I'll bring in Mike Hedges.

Diolch, Cadeirydd. I think Kate has answered this question, and David has answered it in part. How important has FTC been in filling gaps in the money you’ve required in order to carry out the work you wanted to carry out?

To David, or—

To me? Yes, it has been important, and, certainly, the big projects would have stalled at least if we hadn't had those additional charges of FTC. I think the original loans, as I’ve just said, were critical in enabling those projects to move forward. In terms of the Development Bank of Wales, to their credit, I don’t think the retail banks would have funded the last phases of Parc Eirin, and there is some flexibility that they have that the retail banks generally don’t have. So, it took us a long time to get there, but I think it’s important to note that I don’t think that project would have proceeded without that.

Obviously, Kate, you’ve answered this quite a bit, haven’t you, but maybe you wanted to come in with a bit more.

Yes, I think there’s just one other point to make. So, the loan in FTC here has been to provide lending capital to lenders. The alternative would have been for credit unions, had they come forward to do this pilot with us in Wales, to provide their own lending capital. And when we look at the credit union sector in Wales, roughly 60 per cent of their lending capital, in the form of member shares and deposits, is lent out. So, there is something like £20 million that could be used by those credit unions if they wanted to deploy it differently.

So, to give you a very honest answer, Mike, to your question about was this absolutely binary, and without it it wouldn't have happened—yes, because of the way that that procurement ran. But had we got bids from credit unions, there would have been a different scenario. And I’m just sharing that, because, in thinking about how the no-interest loan scheme might be scaled up, and to continue beyond the pilot, the choices about where Welsh Government funding goes do need to resolve is it lending capital that’s absolutely essential, or is it supporting in a bad debt guarantee or other types of costs that are incurred.

Anything else, Richard?

From our perspective, it’s essential for us that it underpins, effectively, the saving that we make on covering the loan debt, which is effectively injected into the support. And without it, we would not be able to deliver the model.

The only thing I would like to add is there’s a conversation here about where the money comes from, and there’s a conversation around whether interest-free debt helps us. We do have another interest-free debt loan from Welsh Government, and that is supporting a modern methods of construction factory that we established in Caerphilly, which is now producing, I think, around 200 homes a year to EPC A, off-gas. That was more, I guess, alongside Tirion, in a way, an enabler for us. It allows us—United Welsh and all RSLs are not-for-profits, and we need to appraise the business risk around investment in this, but recognising that we need to move forward in terms of the way that we construct homes, and the fuel poverty agenda, and the speed and skill base and everything else that comes with it. Without that funding, it’s quite probable that the risk of investing in that would have been a bit too far for us. It wasn’t a huge amount of money—I think about £2.5 million—in terms of underpinning the business plan when we put that together, but it did enable us to take that leap of faith, if you like, to make that investment in the plant machinery and the job creation, and everything else that comes behind that. So, I wasn’t sure if you were aware of that loan that we’d received as well, but I think it was worth a mention.

And that loan was a zero-interest—

Again at 0 per cent, yes. And it was predicated on what we call peak debt within the business plan, so it basically underwrote the peak debt. We're three years into that business plan at the moment, and we are literally on the button in terms of where we are, going into profitability last year. And all of the profit that will come out of that MMC unit goes into our optimise, so we're decarbonising our existing housing stock with the profit that we make out of that as well. So, I just wanted to mention that.

It's nearly a tiding-over sort of loan, in very, very much layman's terms.

In essence, yes. So, over the next 10 to 12 years, we'll create a set of reserves that will pay back the £2.5 million. But, ultimately, what it does is it acts as a facilitator, a catalyst, if you like, to bring MMC back into Wales, and we're working with the likes of Woodknowledge Wales in terms of the sustainable supply of timber et cetera, et cetera. But we're really starting to feel the benefits as a house builder as well, in terms of the quality of what's coming out of that factory and the speed that we're able to deliver with it as well.

Back to Mike.

Just to go back now, we've talked about the lending—let's talk about the repayment. We were told—I was going to say, 'a few moments ago'; it's probably about an hour ago now—by the Development Bank of Wales that they don't lend over the 25-year period that is allowed. What periods have you borrowed over, and are you confident that you'll be able to repay?

I'm happy to go. So, they differ between the Welsh Government direct loans and the development bank loans. As you quite rightly say, the development bank has a pretty traditional retail bank approach—short-term financing for the construction period only. So, in our case, that's two and a half years or so. The Welsh Government direct loans are much more flexible, predicated to be paid on completion of the developments, with interest. So, that's a difference here; they are interest bearing. It would be extremely helpful if that time period was extended to a longer timescale, because our financing through M&G is 50-year senior debt financing. And to align better with that, a 10, 15, 20-year would be extremely helpful from a cash-flow and a value perspective.

In terms of repayment, we are on target to repay with interest at the moment. We have had some issues because our financing, or our refinancing, is pegged to the gilt market, which has been extremely volatile since the mini-budget of autumn 2022. So, we are in the hands of the global financial markets to a certain extent. But, as I say, we are on target to repay. And a key message is that, even if we couldn't repay one of the loans on the repayment date, it would be relatively easy to restructure that over a longer period and repay the loan from the income that is coming from the homes.

From our perspective, we're probably one of the most secure receivers of this debt. In essence, we're borrowing £15 million, which is secured against £15 million-worth of property acquisitions. The repayment is a bullet payment in 25 years' time. As I mentioned earlier on, if you look at historic house price growth, it's around four times over a similar kind of period. But we conservatively—. When we took the paper to our board to get consent for this, we took a pragmatic view that, even if we doubled the value, then, essentially, one of two things will happen: we'll either refinance the existing properties through a more commercial market and then pay the loan back that way, or we will end up disposing of around, arguably, half the units, to, effectively, pay back the loan. But, either way, what we're left with is a minimum of 50 per cent of the housing stock that will carry this service forever and a day. In reality, we'll end up refinancing it, in essence, based on what the loan-to-value is at that point in time. But you've got the security of the property asset there for that period, so I'm very confident we'll pay it back.

And because it's a 0 per cent loan, there's no incentive to pay that back early.

No. That's not the driver, though. The driver—I go back to the broader thing here—is that we're providing a critical service to young people at a cost that is far less than if you had to provide it anyway, because it has to be provided for.

Kate, then.

I feel rather inadequate in the duration that I've got to talk about, in contrast. Ours is a four-year term for the pilot, and mostly that is about accommodating phases of lending so that we could iterate and improve things as we went. We're in a discussion with Welsh Government, Treasury, JP Morgan and other co-funders at the moment about extending the length of the pilot. And, subject to all of those pieces of the puzzle coming together, that seems very feasible. So, very short in comparison.

Any further questions, Mike?

No, that's me done.

That's you done. Okay, I'll come over to Rhianon Passmore. Thank you, Rhianon.

Thank you very much. I think some of my questions to conclude you've actually touched upon in some of your earlier answers. So, I don't know who would like to take any of these questions. So, in terms of your respective sectors—. We've just heard how it's been utilised, but I think the wider question is: how common a source of funding is this for you? We've also touched upon some of the impact it's had, but, if anybody wants to elucidate the impact that it's had in terms of your areas of work, that would be good, and also what successes you've had as a result of securing this particular type of funding. Obviously, in terms of the different types of funding that you've all spoken to, it can be quite difficult to unpick. But I don't know who would like to go first.

We've heard a little bit, but David—. Yes.

Yes. So, I think I touched on the successes of the three schemes, which we've just—. Funnily enough, we've just handed over the last unit at the mill, and we will be handing over the last units at Whitehead early next year. So, I think there is an evidence base about what you can do with loan capital. To be honest, I don't know how commonly it is used in our sector. And, of course, our sector, rather than specialised housing, is affordable housing, effectively, and housing regeneration. But what I believe is that, if we took a more strategic approach by having some form of revolving fund where the terms were somewhat softer than the retail market—so more leeway on loan-to-value, slightly lower interest rates, longer repayment terms, those sorts of issues—if we had that and there was a fund available, then we would have a much better chance of attacking these big regeneration projects with a focus on affordable housing. And it would really help us to accelerate the delivery of that as well, because funding provides all the certainty we need. We know there is huge demand, we know that all of this plays back into the homelessness problem and various other crises in the housing market. So, from our perspective, pipeline is everything, and loan capital should be used to deliver that.

Okay. Thank you.

And we've heard some good stories from Richard and from Kate. But if I take it, if Rhianon will allow me, one step further, I suppose, and you've touched on it there in your answer, David: if we were making recommendations as to what could you do or how much more innovation could you do using this sort of funding, have you got any thoughts on what's the potential of it and are we fulfilling that potential, or is it fairly narrow at the moment in what we're able to do? Because, obviously, your fund and what Kate's talking about are quite revolutionary in some of that stuff. If, you know, the sky was the limit, what would be the next step of the development of the way that these funds would be used? Any thoughts?

Yes, we have been talking to officials around this agenda, actually. So, what we're not short of in Wales are large brownfield sites in public ownership, but what we haven't been good at, particularly—and, I would say this, with some notable exceptions—we haven't been very good at delivering them. Now, my view is that the public sector should maintain control of that land and then instigate collaborations between organisations like ourselves, the RSL sector, local authorities and private developers, and then using FTC as a real tool to drive additional private sector investment into these big projects. Because what that then does is allow social housing grant to be targeted very clearly at those most in need. It takes away a burden from the overall development appraisal, which allows the scheme to move forward more quickly, and it allows the collaboration between the parties to have comfort that this is the most efficient way of delivering any given project. I firmly believe that a combination of loan capital and more innovative use of guarantees could accelerate our housing programme, particularly with a focus on affordable housing, no end, and I think it’s something that we should be pursuing together.

I'd echo that. I think, what I'm hearing, when David describes that, is a co-ordinated approach—it's not just the funding; the funding is just one piece of the jigsaw. I need to be careful, because we are actually procuring, or seeking to procure, some public sector land at the moment, but we work very closely with our local authority partners and Welsh Government in bringing those kinds of schemes forward, and the funding can act as an enabler. And part of it just comes down to the risk appetite, I guess, from Welsh Government in terms of how they want to be a partner within that about bringing those sites forward as well.

The principle about the zero-rate debt, though, I think, is a really, really interesting one, and what can it do in terms of acting as an enabler for us. We’ve come forward with one scheme, on which we’ve provided you with a load of information around the kinds of groups it’s affecting, the kinds of cost savings. And we’ve described very briefly the work that we’re doing on the factory, as a housing association, and it’s very much a Welsh Government agenda around decarbonisation of our existing homes. There’s a relationship between fuel poverty and the cost of running your home, and that kind of investment where you have that financial tie—there’s modelling to do behind that. So, the potential for use of it, yes, of course, there’s going to be a lot, and we’re really up for that discussion. I’m just unclear at the moment whether it can be done or not going forward.

And, Kate, you're in a slightly different sector, obviously, but, for vulnerable people and people who are struggling, how innovative can you be?

It's a great question. I think capital like this is really important, hence my earlier comments about driving down the cost of capital, driving down the cost of delivery, and it’s not the only thing that’s needed. So, that point about also having access to a guarantee is important.

On this specific pilot, some of the other ingredients that we added into the mix also really helped. So, for example, for the no-interest loan scheme, we are inside the FCA’s regulatory sandbox, and working alongside the regulator changed lenders' risk appetite, because it gave them confidence to innovate and try something different.

To Rhianon’s question about the potential scale and the gap and where it could go, Fair4allFinance published this week an update to our segmentation study, which, essentially, shows that there are more than 20 million people across the UK in financially vulnerable circumstances. And, for a very large chunk of them, the shape of the market has changed radically in the last 10 years. So, more than 150 lenders no longer exist and are no longer offering loans to individuals who desperately need them.

For some of them, part of the alternative solution is connecting them with benefits that they are entitled to; there are £18 billion of unclaimed benefits every year. For others, when a lender is not available, or where they’re declined, that gap in supply is driving them into the arms of illegal money lenders, loan sharks. And work that we published earlier this year essentially showed that the number of people now using those providers, who are unregulated and at times resorting to threats and violence to enforce lending, is in the region of 2 million to 3 million people. These are very scary sums. So, for me, I think it’s the combination of capital guarantees and wider innovation support that’s needed to change this market and to give people confidence to do this differently.

Great. Well, I think that brings us to time. Well, we're a little bit over time, but thank you so much for your evidence this morning. It's been fascinating, and the differences between your different models helps to bring alive how FTC can and does help, and it gives us a lot to think about as we conclude our short inquiry on this, and some questions that we can ask the Cabinet Secretary when she comes in to talk to us in September. But thank you very much. Diolch yn fawr iawn.

So, I propose in accordance with Standing Order 17.42(ix) that the committee resolves to exclude the public from the remainder of this meeting. Is everyone happy with that? Yes. We'll go into private. Thank you.