Dylan Jones-Evans says Finance Wales is not fit for purpose in providing loans to Welsh SMEs
In January the Minister for Economy, Science and Transport Edwina Hart asked me to lead an independent review into access to finance for small to medium sized enterprises (SMEs) in Wales.
Supported by a voluntary advisory panel of experts from academia and business, the aim of the review has been to examine how effectively SMEs in Wales are served by existing sources of funding and identify areas of particular challenge. More importantly, it would provide recommendations for action by the Welsh Government as to what it could and should do to help Welsh SMEs in accessing finance to develop and grow.
During the last ten months, I have undertaken an extensive and detailed consultation through meetings with over 140 representatives of the banking sector, other financial institutions, the Welsh and UK Governments, intermediaries, academia and businesses. This has been supported by a substantial amount of data collated from various sources and interviews undertaken with a range of other publicly funded bodies in other countries, including Canada, Finland, Germany, Scotland, Sweden and the USA. In addition, the Welsh Conservatives and Plaid Cymru have submitted their own solutions to supporting funding for SMEs in Wales to the review, some elements of which have been considered and integrated into the final conclusions.
The report for the first stage of the review, published in June 2013, analysed the situation regarding the access to finance of SMEs in Wales and focused specifically on the role of banks. It also presented information on other forms of alternative finance that are available to SMEs. As part of the review, a number of recommendations regarding access to finance in Wales were made and the Welsh Government has already moved quickly to implement a number of these during the last five months.
So what does the second part of the review tell us?
Very little seems to have changed in terms of the amount of lending by the banks to Welsh SMEs in the last six months. Despite the cost of borrowing being at historically low levels, the British Bankers’ Association’s own statistics show that lending to SMEs in Wales remains stagnant. The report also estimates that there is a funding gap of around £500 million in Wales between the demand from SMEs and the current supply by the banking sector.
In terms of alternative finance, there has been increased use of invoice discounting, leasing and other forms of non-bank finance during the last 12 months, although this has not been sufficient enough to alleviate the demand from the SME sector for funding. However, there have been positive discussions with peer-to-peer lenders and crowdfunding firms and there is an opportunity for the Welsh Government, through working in partnership with such organisations, to stimulate greater use of these sources of finance in the future.
With regard to supporting growth businesses via informal investment and venture capital, there remains a need to ensure that there is funding at all stages of the life cycle of such businesses and that every effort is made to leverage greater amounts of private sector investment funding into Wales, which lags behind other parts of the UK.
As part of the second stage of the report, Edwina Hart also requested that a specific analysis should be made of the cost of loans by Finance Wales as this may be an impediment to the availability of debt funding by Welsh SMEs. The evidence gathered suggests that not only have the interest rates charged by Finance Wales to Welsh SMEs been higher than the European Commission’s reference rates, which provide guidelines to the cost of loans by state banks, but there has also been a failure to fully utilise other state aid regulations to support lower interest rates to SMEs.
For example, with two thirds of Wales classified as qualifying for the highest level of aid, the review has been given expert advice that General Block Exemption Regulation (GBER) could have been used to subsidise the interest rates on loans to hundreds of SMEs and been a significant policy tool for the Welsh Government. In addition, there is clear evidence that there is no state aid impediment to Finance Wales offering cheaper loans to the vast majority of micro-enterprises under de minimis regulations if it so wished.
One possible explanation for this approach is the recent mission of Finance Wales to become an independent and self-funded investment fund. However, is this is a strategy which should have taken precedence over a role that, during the difficult years of the economic downturn, should have focused on supporting SMEs in Wales as part of the Welsh Government’s economic development remit?
Therefore, the Welsh economy is in position where SMEs are still facing difficulties in accessing funding from the banks and, as yet, there is no significant increase in alternative sources of funding. Public sector financial support seems to be fragmented. More relevantly, the Welsh Government’s own body tasked with providing debt and equity finance to SMEs is not fit for purpose in what many would consider its primary role, namely developing the Welsh economy.
Given this evidence, the review has concluded that the Welsh Government needs to develop an approach where public funding for SMEs is affordable, focused on economic development, is supplemented by business support and is oriented towards the needs of the business customer. It is also critical that the public sector does not displace the private sector but, as in other countries, works alongside the banks and other stakeholders to address a market failure in the provision of finance to SMEs.
Therefore, the review recommends the establishment of a Development Bank for Wales that will be created by bringing together all the financial support schemes for SMEs within the Welsh Government, the funds managed by Finance Wales and elements of Business Wales as well as UK Government schemes such as UK Export Finance and the Business Growth Fund. It will:
- Act as a gateway for business and financial support to ensure that access to the right type of support is provided to SMEs.
- Work in partnership with the banks and other public and private sector partners to provide loans, guarantees, grants and other financial instruments, all of which will maximise the state aid exemptions available to provide affordable debt finance to Welsh business.
- Develop specific consultancy and business support services for Welsh SMEs as found in exemplar organisations around the World.
- Gather, collate and provide detailed information on the SME sector in Wales to enable the Welsh Government and other partners to understand the dynamics of the Welsh economy.
- Establish close relationships with Welsh Government economic bodies including the sector panels, the enterprise zone boards, city regions and Industry Wales.
- Ensure a focused approach to the provision of financial and business services to micro-enterprises, regional SMEs and high growth firms.
Following careful consideration, the review believes this is the most pragmatic and immediate response to get funding flowing into the SME sector to enable it to grow and develop its potential.
Wales remains the poorest region of the United Kingdom and the future success of its economy will be determined by the ability of its businesses to become more competitive and innovative. To achieve this, the public and private sectors must work together and take advantage of every available tool that the nation has at its disposal to provide the funding the business community requires for growth.
The creation of the Development Bank for Wales would be the first step towards achieving this. The Welsh Government is urged to examine the feasibility of this approach urgently to ensure that a viable and coherent approach to supporting SMEs in Wales is put into place as quickly as possible.
10 thoughts on “Why Wales needs its own Development Bank”
Dylan, I applaud your recommendation for the creation of a Development Bank for Wales, but what are the options for locating the bank in the overall scheme of things? Does it have to be part of the government machine? Would it not be better as a stand alone entity, albeit working to a clear remit endorsed by Government? Does that argue for a reform of Finance Wales? How would the Development Bank best draw in private capital? What value could be extracted for good productive use from the billions invested through public sector pension funds in Wales? A legal vehicle is already available in the deeds of the defunct Bank of Wales, now sitting in a draw in the nationalised Lloyd’s Bank. Why not get these deeds transferred to the Welsh Government as part of any post Silk deal on borrowing powers? Danny Alexander please note.
I don’t disagree with this or the previous comment, However, getting SMEs off the ground is one thing sustaining them is another.
With the closer relationship being negotiated between North American and the EU should we not be looking to Easter Canada and the Eastern USA to establish closer trade links and cut out the “Middle Men” (places like London and New York) as much as possible.
I understand that Maratime Canada and NE USA are trying to do much the same as we are. So, work together.
Some of the problems identified in this article go back a very long time. The hard fact is that whether we have Finance Wales or a new Development Bank will be largely irrelevant to most Welsh SMEs, which remain, and will remain, largely or wholly dependant on the commercial banking sector. Here the particular long-term problems of Wales coincide with the general post-2008 problems of the whole world. As an experienced SME proprietor – and therefore with personal experience of some of the tricks that have made bankers so unpopular – it grates to have to be fair to the banks but they are currently in an impossible position, under pressure to lend more to SMEs at the same time that they are being told, quite rightly, to strengthen their balance sheets. How can they be expected to do both simultaneously to any significant degree, especially at a time of global restriction of capital? The low interest rates, combined with declining trust in the banks, makes those with money less likely to deposit it with them. So the banks have less to lend and less to beef up their asset bases at a time when they are being told to do both. Although few will cry for the bankers, one of the lessons of 2008 is that the health of the SME sector still depends on a healthy banking sector. The government are therefore right to insist that banks prioritise building stronger asset bases, even at the price of leaving less to lend to SMEs. If that makes them more cautious in their lending, it may be no bad thing: it might frustrate SMEs but is still preferable to another pre-2008 bubble. Of course this is not an easy line for politicians to sell to the public, who want to go back to maximum growth, even if it is illusory.
That said, in principle a Welsh Development Bank, if properly organised, could do some good: it could co-ordinate existing efforts, and, although it cannot really increase the overall investment pool, it might indeed leverage a bit more of it towards Wales. However, it would be totally counter-productive if, like so many previous soft loan and grant schemes, it leverages the money towards those who are good at filling in forms or who have ‘friends at court’ rather than those with the best business ideas. Wales being Wales, there is a danger this could be turned into another ‘jobs for the boys’ organisation: it has to be run by disinterested professionals or it is better not done at all.
I wish to congratulate mon cher Professor Jones-Evans on an excellent piece of work. His report is cogent and articulate in identifying significant structural and institutional barriers to Welsh economic growth.
We do though need to be clear about quite what we mean by a development bank. In particular the reaction to Monsieur Geraint’s question concerning the attraction of private capital. The prospect of a new institution acting in the traditional role of a bank as a licensed deposit taker is a non-starter. This is for the simple reason the regulatory barriers are just too great. The biggest impediment comes in the guise of Basel 3, which governs the shape of banking institution’s balance sheets and particularly the scale of liquid assets. In short it will too expensive for Welsh Government or any other body for that matter to capitalise a new bank of this type. Equally the existence of a legal title to Bank of Wales is neither here nor there when it comes to the establishment of a new institution, other than access to the use of the name.
An easier regulatory route would be to establish an institution that does not have recourse to personal and institutional deposits, but acts as a fund manager. Not unlike Finace Wales now, but with a sound strategic and operational remit that reflects the requirements of the Welsh economy and executives and non-executives alike are held accountable for adhering to. Plus ca change!
It’s time the private sector in Wales grew a spine and started telling the failed political and academic classes to get out of their airspace – they have done enough damage by wrecking the public sector without dragging the private sector down as well. Public and private sector mindsets are almost mutually exclusive. Public-private partnerships invariably gravitate to the bottom. When it comes to skills and efficiency the Welsh public sector is very close to the bottom and a Welsh investment bank is unlikely to be any different based on the likes of disasters like WEFO and Finance Wales.
One of the most damaging aspects of the Wales’ economy is the way the inefficient public sector has set up numerous not-for-profit companies which compete unfairly with the private sector for contracts. If you want to make a difference then move this unfair state-aided competition from the back of the private sector then, maybe, they will be able to grow organically and not have to be victims of the banking system quite so often.
The banking crisis has actually done the private sector a favour. A growing number of companies which used to borrow because they could have now discovered that they can achieve the same bottom line results by not propping up banksters’ bonuses. There’s a lot of pointless talk about businesses not borrowing but not much realisation that a lot no longer wish to. Many who do wish to borrow have abandoned the banks for the emerging non-bank sources like P2P. Now the banks are on the defensive ‘cos a lot of their traditional ‘easy money’ has dried up and they don’t like the business that’s left. Well tough – let’s hope it stays that way!
All of which is good reason why we don’t need yet another so-called investment bank. Especially one with the failed Cymru brand stamped on it.
“I’m from the Welsh government and I’m here to help.” Be afraid – be very afraid!
Prof Jones-Evans is to be commended for identifying the need for a new bank in Wales, but the question remains as to what form this bank will take. We at Arian Cymru have consistently argued that what is required is a public bank modelled on examples such as the sparkasse/landesbank system and LgE in Germany or the Bank of North Dakota in the US. To institute another private entity would run the risk of simply perpetuating the extractive system currently in operation and will not be sufficiently different to bring about real change. The fact is that a properly instituted public bank, with a sufficiently substantial deposit base could do much more than provide affordable finance to SMEs, but could also provide an alternative to PFIs for a Welsh Government with borrowing powers – allowing infrastructure to be funded by self-liquidating loans from its own financial institution, in the same way that Germany is now funding a wholesale move to renewable energy. I would recommend anyone interested in this idea to view the recording of Marc Armstrong’s presentation on our website http://www.ariancymru.EU in which he explains the potential of such a system. Now is a time for boldness in our approach to the Welsh economy – the debate on the form a Welsh bank should take is just beginning.
Arian Cymru will be hosting an event at Chapter Arts Center on 4th December in which some of these issues – particularly relating to legal and regulatory aspects of chartering a bank – will be debated by a panel including Dr Nicholas Ryder (an expert in banking law and white collar crime from UWE), Robin Brownsell (TUSMOR) and Akmal Hanuk (Islamic Banking and Finance Centre). I encourage IWA members and readers of ClickonWales to come along and join in the conversation.
Apology – in my above comment for LgE read KfW
In Jean-Claude Trichet’s comment above he states that:
“The prospect of a new institution acting in the traditional role of a bank as a licensed deposit taker is a non-starter. This is for the simple reason the regulatory barriers are just too great. The biggest impediment comes in the guise of Basel 3, which governs the shape of banking institution’s balance sheets and particularly the scale of liquid assets. In short it will too expensive for Welsh Government or any other body for that matter to capitalise a new bank of this type.”
This is as cogent a statement of the anti-competitive nature of current regulation as I have read in recent times. There is no point in the ongoing statements setting out the desirability of increased competition in banking as long as such restrictions remain in place: such rules are a council of despair guaranteeing the ongoing existence of the current oligopoly.
John R Walker
For the sake of clarity, I trust that Glas Cymru Cyf does not fall under the definition of a ‘not for profit’ in this context. I had the pleasure of serving as one of their ‘Members’ for a decade prior to my statutory retirement and as an ex ‘City’ chap (a long, long time ago), water consultant and now SME, their brand of capitalism is a very efficient and attractive one.
Your point about the smothering state in all forms is of course too true. It is also the way that politics infests this that hampers innovation and enterprise. A Welsh Investment Bank would have to be truly non-party to work and that is a very big ask right now.
Meanwhile, I do rather like the idea of a not for profit energy distributor. Some people sneered when the Glas concept was floated in 2000-01. Cheers have long replaced the sneers.
Private banks are already in the process of adapting to the new financial climate meaning they are deliberately shrinking to fit a more sustainable model. The question is whether there is enough competition in the banking sector in Wales as it is and whether a not for profit bank could compensate for market failure.
As they had brought themselves to the brink of disaster, commercial banks turned to us to rescue them form their folly, and now we have to endure the restraints and sacrifices imposed to restore the principles of sound finance.
One of the first principles of the free market economist tell us with earnest dogmatism, “that money will always flow to the area of highest profitability. So if you have a need for finance in the public
sector, it has to be offered on terms which are comparable with what can be obtained elsewhere.”
So where does that leave public investment, social enterprise, cultural initiatives or other community services? We Private Finance Initiative, right?
We do indeed, and that’s a truly monstrous abuse of the common weal, The state should never borrow for the financing of public works. It imposes a debt which can never be repaid, since structures and institutions created for the public good are not conceived as profit-making enterprises. That’s why we
need a source of public finance, so self liquidating loans can be offered.
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