Ten years ago, I was asked by then Economy Minister Edwina Hart to chair a task and finish group to outline the terms for a new development bank for Wales which had been the recommendation of the access to finance review I had undertaken for the Welsh Government a year earlier.
Given that a decade has passed since we put together the strategy for what was to become the Development of Wales - which was launched in 2017 out of what was Finance Wales - it is good to see Senedd’s Economy, Trade and Rural Affairs Committee undertaking an inquiry into its operations. And, as its architect, I was recently asked to provide a short review of its performance since it was set up.
Unfortunately, I didn’t have the same time to do this as I did for the original brief in 2014, but the Development of Wales - which was launched in 2017 out of what was Finance Wales - did provide me with considerable detail on their funds which has enabled me to do some analysis of its performance against the strategic goals set for the period 2017-2022.
Read More: The latest equity deals in Wales
Read More: Trade sales dominate Welsh business exit deals
One of the key goals for the development bank was to generate over £1bn in investment support for Wales excluding the Help to Buy scheme which it also manages for the Welsh Government. This goal was surpassed, with £1.1bn achieved and 29% above the target.
Additionally, the bank set a target to invest over £80m per annum in SMEs within five years, and in 2022, it exceeded this target by investing £110m. However, its plan to increase microfinance support from £6m to over £40m was not fully realised, with only £27m achieved over five years and annual support only rising to £8m.
Another objective was to create and safeguard more than 5,550 jobs per annum, but the bank only achieved 18,365 jobs over the five years, which is 67% of the target and it has only met 86% of its target to attract over £460m in private finance.
Most Read
So whilst the bank has effectively invested funds from the Welsh Government,it has not fully met its key targets related to employment, private sector funding, and microbusiness support.
One of the key concerns of the approach by Finance Wales, the bank’s predecessor, was the high interest rates it was charging to Welsh businesses. Whilst interest rates for development bank loans have decreased from an average of 10.4% under Finance Wales to 8%, this reduction is partly due to borrowing from the 海角视频 Government at 0% interest.
This suggest that such savings have not been fully passed on to businesses, with only 9% of businesses receiving loans at less than 6% interest and 39% charged over 9% which remains a surprising facet of the approach by the bank as lower interest rates could provide Welsh businesses and the Welsh economy with a competitive edge.
Another key issue which I addressed in my review was that of loan affordability and whilst under Finance Wales, loans were repaid over similar periods as high street banks (five years), which posed challenges for businesses with initial cash flow issues. As a result, I recommended extending repayment periods to improve affordability and it is good to see that 39% of current development bank loans have repayment periods longer than five years although further improvements are necessary to a more flexible funding regime to support businesses.
Another key recommendation, given the growing importance of innovation in driving forward competitive economies, was to have a more active equity finance role for the bank, particularly in supporting technology-based firms. However, only 12% of total investments have gone into tech businesses, with job creation per firm being 40% below the bank’s average.
Similarly, there is concern over the commitment of bank to supporting new businesses even though access to finance is a major barrier for start-ups. While over 20,000 businesses are created annually in Wales, the bank supported only 96 new firms in 2022-23, investing £3m. On the other hand, microbusinesses with less than ten employees received significant support from the bank although its own strategic target for microfinance was not met.
One of the challenges is increasing the flow of additional funds into Wales is in relation to equity funds and only 10% of the firms supported in the last six years have received equity investments. Yet those that do get equity investments attract more co-financing than those receiving debt funding which suggests that a greater focus on equity could attract more additional funding - eg for every £1 of development bank equity funding into a Welsh business, it attracted a further £3.40 from other funders. In contrast, for every £1 of debt funding, only 30p of external funding was provided.
Don’t miss
To create demand for such funds, there must greater equity education by the bank to encourage more businesses to take on this type of funding, something which I recommended to the minister and which, as far as I am aware, has not been taken forward.
Finally, one of the biggest challenges is that, like its predecessor Finance Wales, there is a general perception amongst some in the marketplace that the development bank is the ‘lender of last resort” rather than a proactive player in supporting Welsh businesses that can grow. Indeed, it is especially worrying that, according to the data from the bank, over one in four of its assets are at risk of failing That perception needs addressing if the right type of business is to be attracted as potential clients in the future.
Therefore as I stated to the committee, Wales is fortunate to have the Development Bank of Wales, the first of its type in the 海角视频. It is an important asset for the economy and has made significant strides in meeting its strategic targets. However, there remain significant challenges in relation to job creation, investing in technology firms, and supporting more new businesses which need to be addressed if the bank is to better fulfil its mission of supporting Welsh businesses and driving economic growth.