Economy, Trade, and Rural Affairs Committee

So, we'll move on, therefore, to item 3, namely the Development Bank of Wales inquiry. This is the first panel in our inquiry, and today we're looking at the work of the bank from a Welsh perspective. May I welcome the witnesses to this session? Before we move straight to questions, may I ask them to introduce themselves for the record, and perhaps I could start with Dylan Jones-Evans?

My name is Dylan Jones-Evans. I've been a professor of enterprise for nearly 25 years and have worked with businesses in Wales during that period. I would think the reason I'm here today is because I was an adviser to the economy Minister, Edwina Hart, looking into the finance needs of small businesses in Wales. And from that, the strategy and the proposal to create the Development Bank of Wales arose. I would think that's why I'm here today to talk about what's happened since we came up with the idea of having this bank in Wales.

Thank you very much. And Tegid Roberts.

Hello, I'm Tegid Roberts. I'm a businessman. My background is research and development at Sony, and then I worked for various venture capital businesses, particularly in the semiconductor area, so venture capital-backed businesses as well. More recently, moving back to Wales, I've been working with a video games company up in north Wales and I have an interest in a manufacturing business in Wrexham. And I've also produced various economic papers for the Institute of Welsh Affairs with Gerry Holtham and personally, myself, as well. I was chair of a research institute at Swansea University until fairly recently, and I continue to be active in investing as well.

There we are. Thank you very much indeed for those introductions, and perhaps I can kick off this session with a few questions. Perhaps you could set out the nature of your relationship or the degree of interaction you've had with the development bank over the last few years, and perhaps I can start with Dylan.

Yes, by all means. Obviously, like I mentioned, in 2013 I was tasked by the then Minister, Edwina Hart, to undertake this access to finance review on small and medium-sized enterprises. It led to two reports that looked at this gap, and the conclusion of the second report was that that a development bank for Wales should be established. Following that, I was then asked to be the chair of the task and finish group that brought together a number of experts in the different aspects of finance to look, essentially, at creating a strategy for the new development bank. That reported at the end of 2014 and from that, obviously, it went to the then Assembly, the now Senedd, and I believe it was voted on unanimously that a development bank for Wales should be created, and then it was established then in 2016-17.

My interaction since—I occasionally have lunch with the chairman, and that's about it, really. They do support some of the other activities, like the awards I do, as sponsors, and I'm chairman of a company that has received funding from the development bank, although I was not involved in any of the decision making for that as the chairman.

And could you tell us a little bit more about the task and finish group that you were involved in?

Yes. So, like I said, it brought together a group of individuals to essentially look at the form, feasibility and function of a new development bank. And more importantly, I think, what it was about was looking to see if we could create something that was quite different to not only its predecessor, but what was different to what currently existed in the UK, and to look at best practice of other development banks across the rest of the world. And it took a year for us to come up with this, but we looked at different options at the end to the form, as I say, and function of the development bank, and we made our recommendations.

I can honestly say that the main recommendation we made wasn't accepted at the time, but one of the other recommendations was, and that included, and we may talk about this later—. We felt quite strongly that the business support function of the Welsh Government and the finance function should come together, because we'd seen excellent examples of that, particularly in Canada, of how both functions worked together. And what we found was that, for example, if you give out finance alone, companies grow by a certain amount. If you give out business support, they grow by a certain amount. If you bring them together, it actually grows by a far higher level. So, that was quite interesting to find that, but at this stage, of course—and, as I say, we can talk about it—. There may have been some politics involved in that at the time, that it had to be separate.

Tegid Roberts.

My interaction with the bank is relatively minimal. I have sat down with the chief executive fairly recently. Lee Waters asked me to go and do that and I spent a couple of hours with him discussing how the bank was structured, and there are some aspects of the bank, which we'll come on to later, that I think should be improved.

I think Dylan's point about business services is actually quite important. Merchant banking in the traditional sense would be finance, investment, but also business services as well. So, I think that’s a key thing that we should discuss today.

One of the businesses that I am a director of in north Wales, a video games company, did make an application to the Development Bank of Wales a few years ago now, but was unsuccessful because the development bank said that they didn’t have the due diligence resources to be able to deal in the digital space, and I think that’s a weakness. Not everybody wants to run a café and a restaurant in Wales; some of the more high-tech businesses in Wales need consideration as well. And bringing the business services into the business would help that, I think, because you would then have more sectoral expertise within the bank.

Alun Davies would like to come in on this. Alun.

Yes, thank you, Chair. I was interested in what you were saying, Dylan, about the relationship between finance and the business support work by Welsh Government. I take it that the relationship between the Government and the bank is an extremely important one. And we're discussing the bank this morning, but I want to hear what you have to say about the role of Welsh Government and the relationship between Welsh Government and the bank. Do you think that it's a successful relationship? Do you think that the culture of the Government promotes the work of the bank, or do you see some sort of perhaps clash or lack of potential in the relationship?

I'll come on to talk about this when we're talking about microbusinesses, and there's something interesting there. I've had the statistics from the development bank—well, at the beginning of this week, and I haven't gone through them all—about their performance, and I'll come back to this, but what's important is that—. With so much money going out to businesses—and the fact is that Welsh Government is providing this funding through the financial transaction grants they receive from the UK Government—what's important is that the development bank's strategy reflects the economic strategy of the Government, and sometimes you look—. Does this reflect that?

I want to move on; I'll speak about this with the economic development role of the bank, because that's where the difference is, I think, between Finance Wales, as it was—it was more of an investment fund—and what the role of the development bank was supposed to be. It's called a development bank because it's supposed to play a greater role in developing the economy than Finance Wales, and I'm not sure that that has happened. I have points here, then, having gone through the statistics about their performance over the five years and what their targets were, and to see whether they have hit those targets.

But the relationship between the two is the question.

Well, yes, but it depends, doesn't it? Because, from what I understand, there is a representative from Welsh Government sitting on the board. That is easy enough. I think the question to ask the development bank and the Government is how regularly—. For example, when there is a new economic strategy published, is there any sort of contact or discussion with the development bank to make sure that what they want to do reflects what the Welsh Government wants out of it?

My experience as a constituency Member is that there is a gap between the two. The Government says one thing about supporting a business or businesses in Blaenau Gwent, and then the bank says something different. And I see a clash there from an individual Member's perspective.

But, remember, in the end, it's the Welsh Government, or Welsh taxpayers, who are the 100 per cent shareholder in the bank.

Yes—I understand the structure. I'm talking about how they work together.

Well, in the end, I would say that the only way to get them working together, if they're not, is to bring both of them under one organisation, but perhaps people would say that we're recreating the Welsh Development Agency then, and maybe that's not the best thing. But if you could have much more—. If you had some sort of umbrella organisation, where Finance Wales is here, and Business Wales is here, and there is more co-operation under one umbrella, I think it would be much more effective.

So, there needs to be more co-operation, or am I—?

Well, you can ask that question when the development bank is here, but, in my view, that co-operation isn't working.

Well, I'm asking you what is your view.

In my view, the co-operation isn't there, and it could be much better.

Tegid Roberts, would you like to come in on this?

I've no real knowledge whether they do work well together—that would be an operational matter. My understanding is that Business Wales typically gives out grants and also expertise via pots of money, and involvement with Finance Wales—sorry, the Development Bank of Wales—is relatively minimal. But, as I said earlier, a traditional merchant bank system would work better, I think, if there were in-house services that were available for people who required help with marketing, required help with business development and sales and all the other things that are required to take an SME forward. A traditional merchant bank, as I've said, would have those services in-house, particularly in America—not in Europe, but in America. The UK merchant bank is a different entity—that's an investment bank. But, in America, merchant banks typically have in-house expertise that would help you with the things that you need to do, whether its logistics, whether its marketing, whether it's sales or whatever—research and development. Business services within Business Wales do provide help with that sort of thing, but they're typically grant led and you've got to apply for them, and it takes time and it's not part of the package.

Okay. Thank you for that. Dylan, you were talking about the relationship, obviously, between the development bank and the Welsh Government. Can you just clarify for the committee? Obviously, you'd want to see changes there, then. Can you just clarify for us exactly what you mean by that? And in terms of its operations, is there anything you'd want to see the bank do differently as well?

Well, we're going to spend the next 50 minutes probably talking about what the bank could do differently. In terms of the relationship, I think it's very much a hands-off relationship at the moment. I think there should be greater co-ordination. For example, if you look at the key sectors that the Welsh Government are targeting, you'd naturally think there would be subject expertise within the development bank on those areas in terms of funding those areas. That doesn't currently exist. So, at the moment, they're quite generalist in terms of the expertise within. If you talked about, say, for example, the creative industries, which is clearly a growing and important part of the economy, particularly here in south-east Wales, you'd expect there to be a specialist arm in that and, of course, to look very carefully at the type of funding. The funding that you have in creative industries—. Because they technically don't have any assets, but they have intellectual property assets, or copyright assets, the type of funding you need is very, very different to your traditional business, and the way it is funded. So, my view is that there should be a mirror. Basically, if this is what Welsh Government is doing here in terms of business support, this should be a mirror within the development bank, so that sort of reflects. So, if you're saying, 'This is our priority', 'This is what we should be doing internally to support that as a finance function', because that's what they essentially are, they're the finance function of business support in Wales—.

So, the priorities don't match up between the two at the moment.

No.

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

Thank you, Chair. I think the conversation so far has been quite interesting, because I think the question about the relationship is important here. Just to pick up on something that you've said in terms of the development role of the bank, was I right in hearing that you didn't think that element is happening as it should at the moment?

Yes. As I was saying, if you look at—. These statistics, I've had them all—I don't have the time to do it, but I've taken two days to go through all the data. I had asked the bank for the data, and I'll show—. It's easy enough for me to send the data to the committee afterwards.

But I think that what was important was to look—. The bank had a strategic plan, and it was worth looking—. There are five elements to that strategic plan. So, the first was, say, that there was more than £1 billion-worth of support being invested—'tick', they've done that, great. The second one was that they wanted to invest more than £80 million a year in small businesses—'tick'. But, remember, this money is in these large funds. Then, they were looking at the microfinance—funding for very, very small businesses. And they were saying that it needed to go from £6 million to £40 million; it's only increased to £8 million—only £27 million of support has been given over five years, so nowhere near enough to help the smallest businesses in our economy. Helping businesses, creating and safeguarding jobs—they have said more than 5,000 a year. They've reached only 67 per cent of the target. So, the point about the economic development role, that's what's important. And then, with bringing in private funding, as match funding with the development bank money, they haven't reached that target either—about 86 per cent of the target.

But the point to be made I think that is more important about this is—and I'll jump to this; I was going to talk about this later on—that if we look at how much funding is provided to help the smallest businesses in the economy, those that are in our local communities, about 6 per cent of the money that is provided by the development bank every year goes to those businesses. They create 42 per cent of the new jobs. So, the balance isn't there at all. And to go back to look at the business support for small businesses, most of the money for business support in Wales by Welsh Government goes to the smallest businesses, but only 6 per cent of the Development Bank of Wales funding goes to the smallest businesses, and they're creating most of the jobs. So, it shows that there's no balance at all there between the business support strategy and the funding strategy of the Development Bank of Wales.

So, I suppose the core question for me then is, thinking about what you originally set out, the original vision for the bank—is it meeting that vision? Is it what you envisaged?

Well, the whole point was to have this evolution about what it should be. And the question is: what is the role of Government funding? And the role of Government funding is to meet a market failure. And we all know that market failure occurs in the smallest businesses and the newest businesses, because those are the ones that can't get funding from traditional sources such as banks. So, when you see that only 6 per cent of the entire, shall we say, funds under the control of the development bank go to support microbusinesses, and they create 42 per cent of the jobs, you ask the question: is their strategy correct? Now, to be fair, the vast majority of the businesses they support are microbusinesses, but, if I was looking at that as the board of the development bank, I'd be saying, 'Look, is our role'—and this is up to Welsh Government—'is one of our roles to drive forward employment creation? If it is, then surely we should be changing our strategy to focus very much on supporting microbusinesses. That may mean employing more people, putting more funding into it, but, clearly, if that is the main objective, or one of the main objectives, we're actually failing in that objective by not supporting the smallest businesses, which really need that support.'

I'm wondering—. I'm conscious that other colleagues will have questions that are maybe dipping into a lot of what we're talking about here, but I'm conscious that there's been a recent reclassification of the development bank by the Office for National Statistics to being a part of central Government—effectively, being just another department within Government. So, I'm just wondering, with the ambitions that we set out around the development bank, how do we meet a lot of those ambitions when that sort of limitation has been put on it? So, ultimately, the development bank is unable to make any real investment because it's limited by however much budget the Government gives it, and it can't go beyond that.

But it doesn't have, technically, a budget from the Government. The development bank stopped getting a grant in about 2017. So, its main sources of income are, (a) management fees, so it manages funds for the Welsh Government. So, all these funds you have, including help to buy, there's a management fee associated with that as you would have with any fund that needs to be managed, although, obviously, it's the development bank that's doing this rather than any external body. And I think they receive something like £44 million a year from managing those funds according to their sources. They also make money from interest charges on the loans, which varies, obviously, but it's about £15 million, £16 million a year. So, to be honest with you, there isn't any money that comes in directly, as a grant in aid, to the development bank in the same way, shall we say, that Finance Wales had previously. This is all money that they get from managing funds on behalf of the Welsh Government.

Thank you. Before we move on, I think Hefin would like to come in on this particular point as well. Hefin.

Thank you. May I ask whether there should be a good relationship with Business Wales—maybe Business Wales as a bridge for SMEs to the development bank?

Sorry, I didn't hear that. Hefin, will you say that again? I'm not sure what you said there.

Sorry, Hefin, can you just repeat that?

As regards SMEs, what role should Business Wales have with the development bank? Does it have a good role and does it act as a bridge for SMEs to access the development bank?

Again, you'd have to see where the referrals come from. But, naturally, if Business Wales is the first point of contact for many businesses in Wales, there should be that referral role for Business Wales on to the development bank. But, like I said, what the data shows—and you'd have to look at this more qualitatively—is that—. The Business Wales contract was recently renewed, and if you look at where most of that support is going, the vast majority of that support will be going to smaller businesses, microbusinesses with under 10 employees. At the moment, obviously, only a small amount of money of the entire funds from the development bank goes to support those businesses. So, the challenge there, I think, is that if you have business support on one side saying, 'We're here to support the smallest businesses in our communities across Wales', and on the other side you have, basically, a limited amount of funding available to them, you have to wonder whether that strategy needs to change and whether that message is getting through from the Welsh Government to the development bank that these businesses need more funding, especially at this particular time when it's very difficult to get funding from traditional sources.

There's certainly a link on the Business Wales website to the development bank, but I'm wondering how effective the relationship is and whether there is that route through. So, you're saying we need to do some more research on that.

I think you do, yes.

Okay. Before I bring Luke back in, I know Alun would just like to come in on this point. Alun.

I was interested in the point that you made, Dylan, about the greatest area of market failure about microbusinesses, small businesses, new businesses, and the proportion of overall funding going to address that market failure, and then the financial model structure of the development bank. And I'm wondering if there's a link there. As the development bank becomes more conservative, potentially, in its approach because of the way it's financed and structured, then its appetite for risk is diminished as well. The purpose of establishing it, as you know from the report that you wrote, was to address market failure. Then, is it the case, potentially, that it may be failing to address market failure because of its financial structures?

Well, one of the worries we had when we did the first two reports and then looked at the structure of Finance Wales was that, essentially, Finance Wales was becoming another bank. It was operating in the same market space. It was essentially, shall we say, in inverted commas, 'competing' with the other banks for, shall we say, the middle market. So, you would argue that those businesses it was focusing on were those businesses that potentially weren't prepared or couldn't get the funding from traditional high-street banks, but there was no market failure there. The market failure was that the businesses weren't good enough to be funded.

At this end, what we have is that we have businesses that are good enough to be funded, but because of the structure of the banking sector, they will not fund them. It’s very much now that any business with a turnover less than £1 million, they’re treated as a personal account. They’re not treated as a corporate account. So, the real challenge there is that—and I know Tegid will have something to say about this, as I will—what you have is that you have two extremes in terms of the market failure. You have new businesses and microbusinesses, and we did countless research on this, using all the data we could, and it verified that Wales was, at least 10 years ago, in the worst position to get that sort of funding of any of the UK nations and regions. But, at the other side, you have a problem with equity. So, for example, only 10 per cent of the funds given out—

Yes, I get all of that. I get all of that.

So, you've got that. So, the problem is it's essentially trading where other businesses are trading, and therefore not meeting that.

But my question was a lot more direct than that. I understand all of that. My question was: is, potentially, the financial structure of the development bank inhibiting its appetite for risk and its appetite to address the market failure that exists in the sectors you've described?

In terms of the funds and the amount of resource going into those funds, yes, it is.

Thank you.

Tegid Roberts, anything to add to this?

If we're talking about the general points of what areas the development bank is not hitting, I think the big area is succession. There are a number of businesses that grow for 30, 40 years and then the founders want to retire and they need some form of pension to work from. My father did this a number of years ago, and there are many businesses. The succession funding in Development Bank of Wales is £50 million, and £50 million doesn't come anywhere near what's required in order to help businesses in Wales be passed on to the next generation. Whether that next generation is family or whether it is a management buy-out or to turn a lot of the businesses into co-operatives, we don’t have the capacity within the development bank to be able to do that. I think that this is something that Cwmpas looked at, and my experience has been similar. I think that a succession fund within the development bank would be a good thing to do. The development bank has got assets of £2 billion. It’s not a very big bank in comparison to other development banks in Europe. The development bank of Saxony, for instance, is comparatively twice the size. The economy in Saxony is twice the size of the Welsh economy, but the development bank is four times the size, for instance.

Another area that I’m bothered about regarding the development bank is that it doesn’t really have the capacity to raise money. It can’t borrow money on the markets because of its structure, because it’s seen as a Government department, effectively. It doesn’t have the capacity to grow to £4 million. I don’t know how it would do that.

I think we need to maybe get the discussion on to broader areas rather than getting, in my opinion, a bit bogged down in SMEs and microbusinesses.

Yes, we'll come on to that later. I'll bring back Luke.

The direction I was going with some of the questions was covered by Alun in terms of the structures of the bank. I think the point around reclassification of the bank is something we should explore with the bank further because they've identified that as a limitation on them. Tegid mentioned, as well, the capacity of the bank to do certain things through, for example, being able to borrow money. I’d be interested just to hear from you both around what further powers—let’s call them ‘powers’—should be given, really, to the bank to allow it to operate further than SMEs and microbusinesses, and to go into some of the sectors, for example, that Tegid has talked about—the semiconductor sector, the high-tech sector. So, I’d just be interested finally in where the development bank needs to go in terms of empowering it.

Tegid.

If you wanted to double the size of the bank, how would you currently go about doing that? At the moment, it would rely on UK and Welsh Government funding in order to do that. So, we need a conversation, I think, about where is the bank best placed to increase its size. You could float the bank. You could float the bank with the Welsh Government having a controlling share of the bank—so, not more than 20 per cent of the shares, perhaps. You could have two different types of shares. So, you'd have voting shares and you'd have non-voting shares. That's one option. Another option is that you could turn the bank into a mutual, or you could decide, with certain amounts of pressure on the UK Government, to allow the bank to have considerably more resources. But, in an £80 billion economy per year, GDP, a £2 billion fund, a large chunk of that fund is Help to Buy. We have to remember that a good part of that fund is Help to Buy. Other funds that the bank look after are outside of Wales as well—the bank manages funds outside of Wales. That is money not active in Wales, arguably competing with Wales. So, if I manage a chunk of money in the north-east of England, I'm competing with Wales, aren't I? There does seem to be a soft conflict of interest there. How you would actually grow the bank at the moment is foxing me. I don't know how it would be done without significant interaction with the UK Government, in particular.

One of the primary ways in which the bank uses its funds is through recycling a lot of the funds—so, essentially, putting the loans out and waiting for those loans to come back. I'm thinking a bit about some of the work that Mariana Mazzucato has done around the entrepreneurial state, and the state or development banks of the state taking stakes in the companies that they invest in. Is that something that you think would be a goer in the sense of being able to grow the bank and the size of the funds it has at its disposal?

If the bank was a proper bank—an FCA, properly regulated bank—then it could take deposits, for instance. You could say, 'Well, Welsh people, with all your savings, give us your savings and we will look after the savings, but a proportion of that will be reinvested into the Welsh economy.' You could do that. The Welsh pension funds have somewhere between £12 billion and £14 billion. You could say, 'Could the pension funds in Wales put some of their money to be invested by the Development Bank of Wales?' Maybe you could do that. On the pension funds in Wales, roughly 5 per cent of that could be invested in private equity in venture capital in Wales and that could be managed by the development bank. There's a whole load of things that could be done, but they need discussing and modelling out. I'm just spitballing here, to be honest. I think we need a much wider discussion, rather than just discussing the status quo.

In many ways, the Development Bank of Wales was a rebranding of Finance Wales—that's how it seems to me. If I'm being really quite ruthless in my assessment, it just looks like a rebranding of Finance Wales. It's headquartered in Wrexham, but I don't see much activity in Wrexham. The vast majority of staff who work for the bank are based in Cardiff still. It's a bit of a brass plate in Wrexham. It would be good to see the bank have proper regional representation so that you have staff and expertise up in north Wales, as well as in west Wales and in mid Wales—a good chunk of people there, not just three or four just to tick boxes. There's a lot to be done, I think, and a lot that could be achieved if it was given a stronger mandate.

Okay. Thank you for that. Dylan, anything to add?

Not really. I think the most important thing is for it to get its current functions right before it considers whether it needs more funding or not. One of the things that came out in our report, which it's started to implement, is about this market failure issue. Should it just be another bank? Was the issue affordability? Affordability was a key part of small businesses' complaints, because most banks will give you a five-year loan, and obviously a lot of businesses get into a position where they can't cash flow their business based on that. So, one of the recommendations we made was to look to extend that. And to be fair to the development bank, I think 40 per cent of their loans now are for more than five years. But, taking the patient capital argument, not for equity but particularly for debt funding, that could be extended even further. And then it's up to the small business when it wants to repay that, obviously, during that period. That would release a lot of capital into the system, if small businesses had the option of going up to, say, 10 years, which is very different from what you find with the high street banks. And it makes the development bank very different and differentiates them from what's available.

Okay. Diolch, Luke. I'll now bring in Sam Kurtz. Sam.

Thanks, Chair. Yes, Alun.

Yes, of course.

Dylan said, in answer to that question, that it needs to get its current functions right before doing other things. Perhaps it would be useful if Dylan wrote to the committee, sketching out what the development bank is getting wrong in its current functions, because I know this could take the rest of the day. [Laughter.] But if he could just sketch that out for the committee, I think it would be quite useful in the committee's considerations.

That would be very helpful, yes, if Dylan can do that.

It took me two years to do it previously, so I'll try and do it as succinctly as possible.

See if you can do it next week. [Laughter.] And if I could be copied into that correspondence, I'd be grateful.

Yes, of course. Absolutely.

That was inevitably what I was going to be asking, in terms of whether there's anything that the Development Bank of Wales could streamline, cut, to ensure that its core services were delivered more strongly. But I'm happy for that to be included in future correspondence.

I suppose, to use the classic academic phrase from Morecambe and Wise, 'It's all the right notes, not necessarily in the right order.' And I think most of the areas that it could and should be doing, it's doing them, but in some places not doing as well as it could. Certainly, the biggest complaints that I've had are in terms of—. And I think this is really important to say because, obviously, the development bank is seen as two things: it's seen, obviously, as a funding mechanism, as a bank on its own, but it is owned—100 per cent owned—by the Welsh Government and therefore it's responsible to the Welsh taxpayer.

And what we always wanted was for the bank to be different. We didn't want it, shall we say, to have all the bad elements of what Finance Wales was about, which was quite secretive—it had high interest rates and it dealt with companies not in a way that any company should expect to be dealt with. And there have been over 2,000 businesses that have been supported by the development bank. But when I put a note out on LinkedIn, as you do, to say, 'I'm doing this today, anybody want to give any comments that I can pass on to the committee?', what was interesting about that was that I did have a lot of comments, but nobody was prepared to do it publicly. Now, why is that? Wales is a small place. The most significant thing that was said was, 'Well, if I say anything bad, I won't get any funding in the future.' Now isn't that a terrible indictment of what the perception of a development bank is, if that's what they feel?

And I think a range of businesses have come—. And I've heard this over the last six, seven years, that valuations are too low, decisions are taking far too long and terms are unacceptable with a 'take it or leave it' attitude. Now, that may be a minority of businesses that have faced that, but that shouldn't happen to any business that comes to the Government for support, which is what we're doing here.

I've also seen instances—and I know this because I've had to intervene on a number of occasions to help these businesses—where directors have been imposed on businesses, where they feel they've been bullied by those directors, where there have been moves to basically get rid of the original founders. And the development bank as a funder has just stood there and done nothing, and I think that is quite an important element of the way that the bank is perceived. And if that does happen, and I know it does happen—. But, again, if I asked those people to come in front of the committee today, they'd say, 'Oh, I'm not putting my head above the parapet, why would I do that?' But I know, because I have documented evidence on all of this.

And to be fair, that is really unacceptable, because if this is supposed to be something different—. And I know that there are two sides to every story and I know this is a commercial world, but I think every individual who approaches the bank and then subsequently gets funding has the right to be treated with the respect that they do when setting up that business. And that hasn't happened, on a number of occasions, to—and this is what I've found strangest of all—individuals who, shall we say, have quite a considerable business reputation in Wales.

Alun, would you like to come in on this?

From our point of view, that's very unsatisfactory evidence.

Of course it is. And like I said, seriously, Alun, I can absolutely assure you, when you have somebody—

Sure. I get that. But we're not having a conversation in the City Arms, you're giving evidence on the record to a parliamentary committee—

I know I am.

—and it is difficult for a committee of this sort to take that evidence at face value, unless you can, in any way, demonstrate the veracity of it. And without being able to demonstrate the veracity of it, then, as you say, every story has two sides—exactly—but what this committee needs is evidence.

I understand that.

Evidence. And it cannot base any conclusions on assertions.

I understand that. But the point I'm trying to make is that if that is happening—and I assert that it is—then that should be investigated by the development bank in detail.

Well, this committee, I'm sure, and others would be very content to investigate it, but it has to have a basis upon which to establish that investigation. And if you wish to write confidentially to the committee, I'm sure that the committee clerks will treat that with due confidentiality.

Okay.

Okay. Sam.

Just parking that, then, and moving on to a point that Tegid made with regard to succession and the role of the bank in that. I know that Cwmpas have suggested to the committee in their evidence that the language should be strengthened. I just wonder, Dylan, about your thoughts around succession, or in relation to worker buy-outs, whether the bank has a strong enough role in that. And we've taken Tegid's view on this, so just yours.

Obviously, when we did our report, we felt that the new development bank should play an important role in funding social enterprise in Wales, for example. That was one element, and also, obviously, workers' co-operatives and employee buy-outs form part of that. There's no reason, if it was the wish of the Welsh Government to set up a larger fund, why the development bank couldn't manage that.

Okay.

It's about the funding they have available. So, if the Welsh Government were to say, 'We're happy to set up a £100 million fund in association with, maybe, another fund to do this', there's no reason why the development bank shouldn't actually do it, because they do have—. To be fair, one of the areas in which they, shall we say, have an expertise is in management buy-outs, and there's a thin line between management buy-outs and employee buy-outs, so that is something they certainly could play a role in.

Thank you. You've mentioned the analogy of holding up a mirror to what Welsh Government's priorities are and the bank reflecting that. On Welsh Government's drive towards net-zero carbon in Wales, the development bank have spoken at length, when they've previously given evidence in this session on their annual updates, about relative success in this realm. Is that something that you, Dylan, would think is correct?

Yes, but they could go further. I wrote something about this four years ago, before the fund was set up by Welsh Government, and I think it's important that, if you look at what competitive advantage the Welsh economy can have, it's certainly in this area. The two candidates for the leadership of the Labour Party and the next First Minister have both made it absolutely clear that green industries, green technologies will form a major part of their agenda for their Government going forward. But if you're going to do that, the question that I want to ask is: why not do it better than anybody else? How do we get more businesses to start up here in Wales in those areas? How do we attract more businesses? And the way to have done that would be, for example, to have offered 0 per cent interest on any loan that actually went into that particular industry or enhanced the net-zero capabilities of a business. That doesn't currently happen, and that's where I'd want the development bank to be different. That's what we always wanted.

If you want to give out loans at a certain pace and make the market case for it, that's fine. But if you want to really drive a sector, don't give them grants, enhance their financial capabilities. That's one way that I feel hasn't happened, but could have happened. If you did it on that level, imagine the message that would send out to the rest of the UK in particular, to say, 'If you want to actually start up a business, we can fund that in the best way possible here in Wales.'

Tegid, your thoughts.

Some years ago, I ran the Sony financial services UK and Irish arm, and the two parts of the business, one was to provide 0 per cent finance for customers to purchase expensive televisions on the consumer side, but we also had a similar scheme for professional equipment as well. And then, the cost of providing the 0 per cent finance was covered by Sony, and the managing of that loan was done by Black Horse Finance, HBOS, HSBC and various other banks across UK and Ireland. In order for Wales to encourage businesses to move to net zero, you could decide for the Welsh Government to cover the cost of providing 0 per cent finance, and then for the banks themselves to provide the loans and deal with the management of the loan. I think that's a perfectly valid thing to do.

Now, when it comes to providing equity finance to businesses that are working in and developing research and development into net zero, new products, new materials, new services, et cetera, that's an entirely different thing, and you need specialist expertise within a bank, then, so that you're not relying so heavily on external expensive due diligence. The large venture capital funds in Silicon Valley have in-house expertise in all market areas. They don't tend to deal with external due diligence providers. So, in order for Wales to build capacity in net-zero research and development businesses, then we need to have more expertise within the development bank itself, in my opinion.

Okay, thank you, Tegid. Dylan, coming back to you, you mentioned in your introduction, 2013, former Minister Hart's there at the beginning, looking at a development bank for Wales or what could come to support business in Wales. A decade on, what's happened along the way, in that there are, rightly or wrongly, criticisms about how the bank is operating? Is it changes in the market or market failure? Is it changes to the business landscape in Wales? Is it changes to the Welsh Government's remit for the Development Bank of Wales? What's caused it to potentially move away from some of its core values from a decade ago?

I suppose it hasn't, really—. I suppose the point that Tegid made was a fair one, in that, when you inherit—. We wanted to set up a completely new bank, but when you inherit and, shall we say, Finance Wales morphs into the development bank, a lot of the organisational culture of the previous body will inherently move over as well. Now, like I said, one of the problems that you have, I think, is the term 'bank'. Maybe we used it in the wrong way. But this is about how a body like this can make a real difference to Wales.

I remember being in a session, just before it was announced that the bank was going to be created, and I was presenting some of the main objectives behind it. As usual, academics have too many PowerPoints. Basically, they asked me, 'What would you want from this? What would you think is the most important thing?' I said, 'If things are to change, the most important thing is that the development bank asks itself one question every time, which is, basically, "Are we helping Welsh business?"' That's it. That is the main thing that anybody asks, for any decision they make: 'Is Welsh business benefiting from this decision?' Because it's easy when you're running a large organisation to start thinking about the organisational needs rather than the actual needs of the clients that you have, particularly when you have a captive audience per se in that. You don't have to go out and get the money, because the money's already given to you by the Welsh Government. Unlike venture capitalists, you don't have to actually wait for those businesses to become successful to get your bonuses, because most bonuses are paid on investment and not on exit, which is very unusual for any sort of fund. So, you have to actually put that at the heart of anything that you do. Because let's be fair; this is great to have a development bank in Wales. It's the first of its type. I went up to Scotland to talk to the execs of the Scottish investment bank, and they've done it quite differently. It hasn't done as well, to be honest with you. But it is an asset for Wales; it's just how that asset is used to grow the economy. That, to me, is always the key issue.

Thank you. Diolch, Cadeirydd.

Diolch, Sam. I'll now bring back Alun Davies.

Diolch. Tegid, you've said in answer to a number of questions that there are major issues, or wider issues, you wished to discuss with the committee this morning. I was wondering if you could outline what those are, and whether the committee's covered them in any way.

We haven't covered the question the Federation of Small Businesses posed, which is about statutory footing. The UK Infrastructure Bank is supposed to be moving to a statutory footing fairly soon, so I think maybe we should discuss whether the Development Bank of Wales should similarly go in that direction. The FSB haven't put any detail at all to what they think that footing would look like, and I think that is probably a huge topic, but maybe we should discuss whether that is something the development bank should go to, whether it's actually desirable. My question really is who would decide and where would the law be passed to do that—is that something within the devolved powers, or whether that would be a UK Government thing.

I'm sure it could be within devolved competence. It depends how the legislation is worded. But tell us what you think.

I don't think it should; I think it should remain external. If you want this bank to grow, it's going to probably require significant UK Government investment, because the Welsh Government can't borrow much money itself, so how can it possibly expect the development bank to have substantially larger funds, and the UK Government doesn't seem to be particularly interested in increasing substantial funding to Wales in this regard anyway. So, I think keeping the bank outside would make sense.

I do wonder what the future structure of the bank and ownership of the bank should look like. I've mentioned it already—whether it's a partial flotation, or whether it should be turned into some form of mutual; I don't really know. But it does need discussing, because the bank, in my opinion, isn't big enough. A lot of its £2 billion assets are tied up in real estate and not active in the Welsh economy. If the function of the development bank is to support house builders in Wales, then yes, okay, fine, but if the function of the bank is to support in a meaningful way SMEs, micros, succession planning, generating co-operatives, then it currently doesn't have the firepower to do that.

I agree with you that £2 billion isn't a great deal of firepower. So, just for clarity and for the record, the major issues you were referring to in earlier questions are the statutory basis—or non-statutory basis—of the bank, and the size of the fund available to it.

Yes, and whether one would be in conflict with the other. Wales does need to be able to make these decisions itself, but at the moment, if we wanted to double the size of the bank, I don't know how we would. And I don't think statutory powers are going to help that at all.

And Dylan, what is your view on this?

I think a trick has been missed, essentially, when the bank was initially set up. Because in its formative years, obviously, the British Business Bank had been established out of a considerable amount of funds, and what we’ve seen is that—. One of the things that we did ask for is a specific equity fund to be set up here in Wales. And it’s finally happened—it took 10 years for that to happen, but it finally happened. But at the time, I think the Welsh Government could have made a very strong case for the British Business Bank to essentially fund a new development bank and to Barnettise that. So, we wouldn’t be talking about £100 million; we’d be talking about billions of money coming in. But it never happened. And I think that was a particular opportunity lost at the time. And, of course, what happened is that, quite rightly, the British Business Bank now has taken on this view that it should do more in terms of supporting equity funding outside London and the south-east, and has set up all these different funds.

But again, if you look at one of the weaknesses of the current development bank, we now have in south-east Wales—and I’m using south-east Wales as an example—two other equity funds operating against the bank, both of which are funded by the public purse. So, we have the British Business Bank operating a £130 million fund, which gave its first investment today to a great business—Hefin will be glad that it’s in Caerphilly—called EverTrek. But the question I would ask is why hasn’t the development bank funded that business if another fund, funded by the public, has. And the other one, of course, is the £50 million fund set up by the Cardiff capital region, which, again, has made two investments into local businesses. That asks the question why weren’t they invested in. So, what we have at the moment is this really odd situation where we have three publicly owned equity funds competing against each other in the same small pool here in south-east Wales.

It's not unique. Wales has always been in the situation whereby one part of the public sector is being funded to fight against another part of the public sector. But it's never good.

Never good, no.

I'm interested in the example you quote. You touched briefly in an earlier answer, Dylan, on the structure and the role of different elements of the wider public sector. Do you think that the way that the development bank is developing itself means that there is a requirement for a review of its place, means of operation and relationship with the Welsh Government? Because with all of these three entities that you describe, essentially there is a gate, if you like, where Welsh Government sits.

Yes, I do, but also I think part of that review should include how the Welsh Government can access the range of different funding. For example, it has taken probably 24 years for the Welsh Government to sign a memorandum of understanding with Innovate UK, which actually funds an enormous amount of the early stage. So, it actually works in that way. And, yes, I think there should be a review now of what the development bank is doing. Because, in the end, we've had 25 years, this year, of devolution, and we have something that is—if I can use the term—relatively unique in a development bank. And the question is whether that development bank is doing what it should be doing for Wales, and is there anything else that it could be doing in association and in partnership with the Welsh Government.

Of course, but part of the reason you're here is to answer those questions, Dylan. You said it's unique; I've heard enough Ministers tell me that this is the only place were this happens in the world, and I ask why. I don't want to be unique. Sometimes, I just want to be beige. Is this unique body, in the development bank, working? What is your prescription if the answer is 'no'?

The prescription is essentially to—. What we wanted initially was for it to utilise all the funding that was available to businesses and putting it in one direction, but more importantly, to work more coherently and effectively with a range of external bodies. Because, you know, you can't have a development bank on its own solving all the issues—

Okay. We're coming to the end of our time here. Is there also an issue with culture? You've been in and around the economic development field for, I think, longer than 25 years, I'm afraid—a considerable period of time—is there an issue with culture here in Wales? Because we seem to enjoy failure more than success. And my experience over the years is that the various public sector pots, in all their different guises, have invested in a number of businesses. Some have been successful, others have not been. And my experience—certainly when I was managing some of these areas—is that in Wales, there's an appetite to almost celebrate failure. You know, in the media and sometimes in academia, quite honestly, and elsewhere, what you see is people who leap on areas where an investment has not succeeded. The reason you've got the development bank and those other funds, of course, is to address market failure. Because there's market failure, it indicates there's a high level of risk. So, therefore, there will be more elements of failure. We spoke earlier about American merchant banks and investment banks. Should we be more American in our approach and celebrate failure as well as celebrate success, in the sense of recognising it?

I think what there has to be is not celebrating, but an acceptance. So, even the best venture capital—

I know, but not leaping on people's backs who have failed.

No, exactly. So, you have to have this acceptance that failure will happen. Even the best venture capital businesses in the world, if they invest in 10 businesses, they will fail with seven, may break even with two, and hopefully, that one business will cover all the losses on others. Can you imagine coming in front of a committee, where I'd be here as chief exec of the development bank and I have to come to you and say, 'Nine Welsh businesses have failed out of 10, but one did well'? Somebody would say, 'Oh'—

Well, we know, because we've got opposition parties who do that every week.

But it's not that, it's that—

Is it a sense of that culture inhibiting investment in—

I don't think that culture exists. Because I work, and I've worked for 25 years this year, with the fastest growing companies in Wales—you know, 720 companies, created thousands of jobs, whatever; we have great businesses in Wales. Unfortunately, they're not always supported and backed in the way they should be. So, that's another question probably for another debate and another day. But if we are good at something, why not support that? It's not about picking winners, it's about backing winners, and we rarely do that very well in Wales.

I'm not sure I understand the difference between backing and picking, but let me just say this, because we are running short of time—

Yes, we are short of time.

You mentioned the Welsh Development Agency. Is there a sense that, in abolishing the WDA, the Welsh Government wanted to infuse the Welsh public sector and the Welsh Government, which was growing at the time, with this entrepreneurial sense of business support and the rest of it, so what we did was just abolish the WDA?

Yes, that's true. And remember, it's the people that make up an organisation—those people couldn't fit into the civil service culture of the time and many left. And therefore, you lost that experience and expertise. It wasn't the WDA you lost, it was the people who worked in the WDA with that experience and expertise who brought that to the table.

So, going back to my original point about culture within the public sector, there is that need for a more entrepreneurial—I don't want to put words in your mouth—culture within the public sector to actually deliver on the ambition and potential of the development bank.

Absolutely. But if you do that, then Ministers as well, in particular—because Ministers are ultimately responsible, and it is the role of the opposition parties to hold them to account—must also accept that there will be failure.

And so must opposition parties and the media.

Well, I can't speak for any of you, but that's very true, yes. But that will happen, inevitably.

Thank you very much. Very quickly from me, you obviously mentioned that the development bank isn't unique, and, I think at the start of this session, Dylan, that when you were involved with the task and finish group you did actually look at similar organisations across the world. Are there any similar organisations across the world that the development bank can actually learn from?

I've spoken far too much. Do you want to ask Tegid first, and then I can come in afterwards?

Yes, sure. Tegid.

There are dozens of development banks around the world that they can look at. There's a development bank in Bangladesh and a development bank in Saxony, as I said. There are development banks all over Germany, actually, and in Switzerland as well. There are many, many banks around the world that have this function. You've got Temasek in Singapore as well, which is an absolutely enormous investment bank, which is funded by the enforced savings system that they have in Singapore. That has huge, huge firepower in comparison, and that is a wholly owned subsidiary of the Singapore Government. I would have a really good look at Temasek in Singapore, if I was—. That would give you a really good handle on how large and how powerful a development bank could be if it was funded properly.

That's very helpful. Dylan.

Yes, briefly. That was part of our job. I must have visited several European banks and funds, in Germany, in Sweden and in Finland—even in Luxembourg, believe it or not, the European reconstruction bank. We implemented that, but we also looked at all the development banks across the world. In our original paper, we looked at all the principles and applied those into what the development bank should be. But I would say, coming back to it, I don't know if it's an old favourite, but I still think the development bank of Canada, which was one of the original models for Finance Wales but it lost its way, where money with management went alongside each other—. That was still, I think, going back to the original discussion we had about business support and financial support—get that working together, and I think, obviously, if a business comes in and says it wants a bit of support, then it may need a bit of finance. If it needs a bit of finance, then you say, 'Right, what support do you need to go alongside it?' Doing them separately doesn't make any sense in any way whatsoever. Look to the success of the development bank of Canada and how they've done that.

Time has beaten us, so our session has come to an end. Thank you to you both for being with us this morning. It's been very, very useful in our inquiry. A copy of today's transcript will be sent to you in due course, so if there are any issues with that, then please let us know. But, once again, thank you very much indeed for being with us.

We'll move on now to item 4 on our agenda, which is the legislative consent on the Trade (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) Bill. We will as Members be discussing the legislative consent memorandum in private session today, but are there any comments that Members would wish to make on this memorandum for the public record? I see that there are none.

We'll move on to item 5, therefore, and I now propose, in accordance with Standing Order 17.42, that we resolve to exclude the public from the remainder of the meeting. Are Members content? I see that Members are indeed content, so the motion is agreed and we'll move into private session.