Four years ago, I published a report on access to finance for SMEs, commissioned for the Welsh Government, which recommended that Finance Wales should be incorporated into a new one-stop-shop operation called “the Development Bank of Wales”.
The report had concluded that Finance Wales was not fit for purpose because there was confusion over its actual remit i.e. was it aiming to be the best investment fund in the UK as its vision stated or should it be focusing on its economic development role?
The Minister for the Economy backed the latter view and in 2014, I was asked to chair a task and finish group to examine how this Development Bank could be established to better support Welsh businesses.
After considerable work by a group of fantastic individuals, the final recommendations were accepted by the Minister in 2015 and a member of that group was tasked with developing a business case to examine whether Finance Wales could take these on board and evolve into a new Development Bank over the next two years.
To kick start the process, the experienced banker Gareth Bullock was appointed as chair of Finance Wales and he was followed quickly by a new chief executive, Giles Thorley.
Whilst this seemed like a long overdue new beginning, there was still concern that the new Development Bank would essentially remain a Finance Wales Mk 2, albeit with more money.
In particular, would it continue to try and justify the high cost of borrowing to Welsh firms which had been one of the biggest criticisms from organisations such as the Federation of Small Businesses? Indeed, the access to finance review had shown that Finance Wales had been charging an eye-watering average interest rate of 11 per cent at a time when the cost of borrowing was at a record low of 0.25 per cent.
More disappointing was the constant rollcall of Finance Wales executives stubbornly defending their high interest rates with excuses ranging from “breach of state aid” to “it’s what the market would charge” when there was really no reason why they could not have offered cheaper loans to help Welsh firms if they had really wanted to.
So would the new Development Bank of Wales that was launched last month be any different to Finance Wales, especially in terms of its lending policies?
In 2016-17, Finance Wales provided 198 loans with a total value of £26.7 million at an average interest rate of 7.3 per cent. Whilst this is clearly good news, it may surprise some of Finance Wales’ existing borrowers who were previously charged extortionate interest rates and who may well now think that they have a case for renegotiating a lower rate under the new bank.
It also does not excuse the lack of mea culpa by senior executives over the previous high cost of borrowing or the fact that they have been slow to publicise this change of policy since the Development Bank was launched.
Naturally, many will welcome this volte face which really should have happened years ago but surely the Development Bank of Wales should make itself even more relevant by reducing its rates even further?
I have been pressing the bank about this but have been categorically told that this is not possible to do, which sounds more like the excuses of the old Finance Wales than a brand new bank established to help Welsh firms get the affordable finance they need to grow.
The question is why they would continue to support this stance especially given Innovate UK (the UK Government’s technology arm) has just launched an innovation loans programme where firms will be charged an interest rate of only 3.7 per cent on borrowing of up to £1million for a term of ten years.
That is more attractive than anything the Development Bank currently offers and the glaringly obvious question is why one government-owned body can do this for high risk innovative firms whilst another in Wales cannot (or will not)?
If I were on the board of the Development Bank of Wales, I would be asking my executives to urgently examine how they could at least match this offer from Innovate UK and come up with something better for Welsh firms.
Another key concern highlighted by the Task and Finish Group was the lack of focus on those microbusinesses (employing less than ten people) that have created the most jobs since the recession. Indeed, I remember a former senior executive of Finance Wales telling me that if he had his way, the organisation wouldn’t touch such firms “with a bargepole”.
Fortunately, the amount of funding specifically allocated to micro-loans (up to £50k) last year has increased three-fold, although much more needs to be done in this area if the new bank is to increase its impact to Welsh business beyond 200 loans per annum.
So on face value, the new Development Bank of Wales may yet turn out to be the organisation that was recommended in the report by the Task and Finish Group rather than a revamped Finance Wales, although more also needs to be done to support greater informal investment (by business angels) and venture capital provision.
Yes, Rome was not built in a day and clearly some cultural hangovers from Finance Wales remain, most notably with the establishment of new “headquarters” in Wrexham (that will not have any senior executives permanently based there) and the constant excuses by a Welsh Government owned bank that is actually managing funds that benefit English companies.
But having spent three years of my life on developing a case to reform access to finance, I can only be proud of the fact that the first ever Development Bank in the UK has finally been established here in Wales and hope that, over time, it will evolve to make a real difference to the Welsh economy by ensuring our home-grown businesses get the affordable funding and support they deserve.