24 May 2016
Article by Gareth Thomas, National Assembly for Wales Research Service
This article is taken from ‘Key issues for the Fifth Assembly’, published on 12 May 2016.
A development bank to improve access to finance for Welsh businesses has been discussed for a number of years. Now that one will be established in the Fifth Assembly, what will it do and could it make Welsh businesses more competitive?
Access to finance for Welsh businesses has been a key issue during recent years. Debate has focussed on finance for small and medium-sized enterprises (SMEs), and the degree to which they are able to access funding from both public and private sector sources. The compact agreed by Welsh Labour and Plaid Cymru included a commitment to establish a development bank.
Why might Wales need a development bank?
While the markets for SME finance are improving, some argue that increased availability of finance is required across the UK to rebalance economic growth. This is shown by the fact that 71% of total SME equity investment is accounted for by companies based in London and south-east England.
According to Professor Dylan Jones-Evans, businesses in Wales face particular disadvantages when trying to access finance compared to those in England and Scotland. He argues that the funding gap between the finance that Welsh SMEs need, and what they can access from the private sector, may be as large as £500 million per financial year.
While government interventions such as Finance Wales and the British Business Bank help to fill some of this gap, those calling for establishing a development bank state that SMEs could be more competitive and contribute more strongly to growing the Welsh economy if this gap were reduced further.
However, work done by the Centre for Research on Socio-Cultural Change (CRESC) for FSB Wales cautions that better access to finance is not a ‘silver bullet’ for SMEs, highlighting that demand for finance may not rise until businesses have greater supply chain security. A further unintended consequence of increased access to finance may be earlier sales of SMEs, hindering the development of long-established medium-sized firms in Wales.
Who would require support from a development bank?
The development bank feasibility study undertaken for the previous Welsh Government highlighted the difficulties that many smaller firms face in accessing finance. Microbusinesses employing less than 10 people have much greater demand for relatively small amounts of money than the private sector is able to offer them.
What are the current arrangements for business support in Wales?
Financial support for micro to medium-sized enterprises via the Welsh public sector is mainly provided by Finance Wales. Business Wales helps businesses to access finance and provides general guidance and information
CBI Wales considers the needs of medium-sized businesses currently fall between existing support aimed at either small businesses or large corporations. Access to finance is a key issue for these businesses, particularly equity financing through business angels and venture capital.
Chwarae Teg has called for female-specific business support, including access to finance. This is in response to what it sees as gender specific needs in this area. Female entrepreneurs are said to have negative perceptions about their ability to access finance, which can be a barrier to them setting up their own business. This is seen as a key reason why SMEs led by women are less likely to use external finance than those led by men.
How might a development bank work?
Many of the final decisions on the structure of the bank and what exactly it could do remain to be taken. However the previous Welsh Government and Finance Wales have looked at potential solutions and started to develop a costed business plan. There are a number of potential models that could be adopted for a development bank. These include the previous Welsh Government’s preferred ‘hybrid model’, where the development bank would work in partnership with other stakeholders to address finance market failures in key sectors.
The new functions of a development bank could include:
- delivering a wider range of debt and equity financing products and services to Welsh SMEs to address the funding gap;
- targeting particular sectors and types of business that have particular difficulties accessing finance, such as microbusinesses and new businesses;
- being self-financing, by not requiring Welsh Government grant-in-aid funding or support to finance the funds it operates;
- working with academia to improve business data and understanding of the sector; and
- ensuring that businesses receive the right mix of financial and non-financial support, taking into account the recommendations of the Lending Ready review.
What is a development bank and what does it do?
A public development bank is a state-owned institution that works in areas of market failure to add to the amount of finance small businesses can obtain from the private sector. It addresses issues that small businesses face in accessing finance, as it can be riskier for private sector funders to provide this and they may not be willing to do so.
What would be a development bank’s goals?
There is hope that the development bank could double Finance Wales’s current annual investment levels in SMEs; significantly increase additional investment from the private sector; and increase the number of jobs created and safeguarded as a result of investments. This would be a major step forward in the financial support available to Welsh businesses.
With businesses facing a funding gap, how the new Welsh Government responds will play a major role in determining what impact SMEs can have on the Welsh economy. It will also be a key factor in how competitive these businesses can be. Will the development bank achieve these aims and help to drive economic growth?
- BDRC Continental, SME Finance Monitor (2011-15)
- British Bankers Association, SME Statistics: Banking support for UK small and medium-sized enterprises
- British Business Bank, Small Business Finance Markets Report 2015-16
- Centre for Research on Socio-Cultural Change for Federation of Small Businesses Wales, What Wales Could Be (2015)
- Development Bank for Wales Task and Finish Group, A feasibility study into the creation of a Development Bank for Wales (2015)
- Finance Committee, Finance Wales (2014)
- Finance Wales, Annual Report and Accounts 2014-15 (2015)
- Finance Wales, A guide to investment terms (webpage)
- Jones-Evans, Professor Dylan for Welsh Government, Access to Finance Reviews (2013)
- Lloyd-Griffiths, Robert for Welsh Government, Lending Ready: Aligning Business Support and Finance Review (2015)