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DEVELOPMENT BANK FOR WALES FEASIBILITY STUDY


The Development Bank for Wales feasibility study has been published today and a full copy of the report is available here.

It raises key points about the methods to close the funding gap and help deliver finance to Welsh SMEs including charitable, community and social enterprises. It also raises questions about some of the principles which underpin the provision of finance and the role of government funding for SMEs in economic development.

Background

  • A Task and Finish Group was appointed by the Minister for Economy, Science and Transport in June 2014 to produce a report on the possible form, function and feasibility of a Development Bank for Wales (DBW).
  • It identified that a number of market gaps need to be addressed in the provision of finance to Welsh SMEs and that there is a geographic bias regarding the availability of bank credit, informal investment and venture capital to businesses in Wales. 
  • Unfortunately, the public sector response within Wales has been undertaken largely in isolation from the private sector and has not taken account of market changes that has led to limited funding from the banks to SMEs. There is also room to improve the utilisation of private funding in the form of informal investors and venture capital to boost high growth firms that can have a disproportionate effect on the economy.
  • Therefore, it was concluded that not only is government involvement warranted to support SMEs but also the existing intervention in Wales needs to be reviewed and its efficiency improved. 


What is the Development Bank for Wales?

  • A range of different options has been examined as to how the Welsh Government could deliver this intervention. It has concluded that the current provider – Finance Wales – should not take this role in the future. 
  • Instead, it is proposed that a new institution - the DBW - should be created with some of the functions of Finance Wales integrated into this organisation. This would be the first regional development bank in the UK and could have a significant impact on the Welsh SME sector.
  • The DBW will follow a hybrid model where the primary focus will be on addressing market failure in key sectors of the SME community by working more closely in partnership with key stakeholders to deliver a wider range of financial products and services to Welsh SMEs. However, the DBW will also be able to manage its own funds including those currently under management by Finance Wales or developed in partnership with other organisations. 
  • It will therefore focus on closing the funding gap and help deliver finance to Welsh SMEs including charitable, community and social enterprises in a cost effective manner. It will directly address the supply and demand dynamics of the Welsh SME finance market, will be flexible in developing solutions that address market needs, is able to mobilise Welsh and external financial sources, and is aligned with business support providers. 
  • This will require an organisation that is built around a business model, structure and culture that needs to respond to a very different set of market dynamics when compared to the challenges that were faced by Finance Wales. It will also provide a more holistic approach and thus enhance the capability of the Welsh Government to support SMEs in Wales.


What are the principles behind the Development Bank for Wales? 

  • The public sector should not displace the private sector but address a market failure in the provision of finance to SMEs.
  • Viable businesses in Wales, including those in the social sector, should have access to appropriate and affordable funding. 
  • The primary role of government-backed funding for SMEs is to drive forward economic development.
  • Business support should be offered alongside financial support to businesses rather than as separate elements. 
  • Funding solutions should be customer-oriented and reflect the needs of SMEs at different stages of growth.
  • There should be stimulation of demand for business finance within the SME community. 


What will the Development Bank for Wales do?


  • Focus on the provision of finance to microbusinesses (0-9 employees) in Wales given the growing importance of this sector for employment in Wales. 
  • Work with private sector to fill the funding gap by providing the finance that will enable the banks to overcome collateral, or affordability issues and lend to Welsh SMEs. 
  • Address gaps in the awareness and provision of invoice financing to SMEs in Wales. 
  • Create a Welsh Angel Capital Association to act as an umbrella organisation to encourage the development of multiple angel groups and networks.
  • Boost investment into high growth and innovative firms by outsourcing venture capital to a network of specialist funds and establishing a network of micro-venture capital funds with regional and sector focus.
  • Ensure that the products of UK Export Finance are marketed effectively within Wales so as to drive forward internationalisation in the economy and the benefits of higher efficiency that exporters competing in a wider market can obtain. 
  • Support the use of alternative finance as well as encouraging public finance providers to seek investment opportunities in Wales.
  • Give social sector organisations guidance and sign-posting support to providers of advice on how to become ‘investment-ready’ and work with other funding providers to address any market gaps. 
  • Ensure that financial support through the DBW is fully aligned with Welsh Government business support functions.
  • Develop a strategic research and development function that will enable the DBW and the Welsh Government to understand the SME sector in Wales and to deliver the products and services required.
  • Have an active outreach programme that will build relationships with key stakeholders in the business, finance and social sector community, including the provision of financial training and support for businesses and intermediaries. 
  • Provide subsidised consultancy support to supplement existing programmes, especially to those businesses that have been identified as needing to strengthen their management team if the funding they receive is to be fully maximised for the benefit of the business.
  • Stimulate business demand in the marketplace by acting as a catalyst in promoting new business development and growth in Wales as well as supporting businesses through acting as a signpost to different types of funding mechanisms.
  • Ensure there is positive engagement with key stakeholders through connecting positively with politicians, civil society, the media and others as well as ensuring there is growing Welsh visibility with external financial providers and public bodies. 


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