Cynulliad Cenedlaethol Cymru

Yn ôl i Chwilio

Pwyllgor yr Economi, Seilwaith a Sgiliau

Economy, Infrastructure and Skills Committee

06/02/2019

Aelodau'r Pwyllgor a oedd yn bresennol

Committee Members in Attendance

David J Rowlands AC
Hefin David AC
Jack Sargeant AC
Joyce Watson AC
Mark Reckless AC
Russell George AC Cadeirydd y Pwyllgor
Committee Chair
Vikki Howells AC

Y rhai eraill a oedd yn bresennol

Others in Attendance

David Staziker Prif Swyddog Cyllid, Banc Datblygu Cymru
Chief Financial Officer, Development Bank of Wales
Gareth Bullock Cadeirydd Bwrdd Banc Datblygu Cymru
Chair of Development Bank of Wales Board
Giles Thorley Prif Weithredwr, Banc Datblygu Cymru
Chief Executive, Development Bank of Wales
Huw Francis Prif Weithredwr, Hygrove Homes Group
Chief Executive, Hygrove Homes Group
Ifan Glyn Cyfarwyddwr, Ffederasiwn y Meistri Adeiladu Cymru
Director, Federation of Master Builders Wales
Joshua Miles Rheolwr Polisi, Ffederasiwn Busnesau Bach Cymru
Policy Manager, Federation of Small Businesses Wales
Rhian Elston Cyfarwyddwr Buddsoddi, Banc Datblygu Cymru
Investment Director, Development Bank of Wales

Swyddogion Cynulliad Cenedlaethol Cymru a oedd yn bresennol

National Assembly for Wales Officials in Attendance

Ben Stokes Ymchwilydd
Researcher
Gareth Price Clerc
Clerk
Lara Date Ail Glerc
Second Clerk
Robert Lloyd-Williams Dirprwy Glerc
Deputy Clerk

Cofnodir y trafodion yn yr iaith y llefarwyd hwy ynddi yn y pwyllgor. Yn ogystal, cynhwysir trawsgrifiad o’r cyfieithu ar y pryd. Lle mae cyfranwyr wedi darparu cywiriadau i’w tystiolaeth, nodir y rheini yn y trawsgrifiad.

The proceedings are reported in the language in which they were spoken in the committee. In addition, a transcription of the simultaneous interpretation is included. Where contributors have supplied corrections to their evidence, these are noted in the transcript.

Dechreuodd y cyfarfod am 09:33.

The meeting began at 09:33.

1. Cyflwyniad, ymddiheuriadau, dirprwyon a datgan buddiannau
1. Introductions, apologies, substitutions and declarations of interest

Bore da. I'd like to welcome Members to the Economy, Infrastructure, and Skills Committee this morning. I move to item 1, and we have apologies from Bethan Sayed this morning. We don't have a substitution, and I'm sure Hefin David will join us shortly. 

2. Papurau i'w nodi
2. Papers to note

We move to item 2, and we have a paper to note, if Members are happy to note that paper. Thank you. 

3. Craffu ar adroddiad blynyddol gyda Banc Datblygu Cymru
3. Annual report scrutiny with the Development Bank of Wales

In that case, I move to item 3, in regard to our annual report scrutiny with the Development Bank of Wales. I should say, if there are any declarations of interest, please do say so now as well. No.

So, in regard to our session this morning, we'd like to welcome colleagues from the Development Bank of Wales. I apologise that it's taken longer than we wanted to get you here, because we understand that, at the back of last year, you were due to be with us and we had to reorganise our agenda and it's been difficult to find a date. So, thank you for your patience with that as well. Perhaps it would be useful if I just asked you to introduce yourselves, and then I'll go on with the first, very open question. 

Okay. Gareth Bullock, chair of the development bank. 

Bore da. Good morning. Giles Thorley, chief executive of the Development Bank of Wales. 

Good morning. I'm Rhian Elston. I'm the investment director at the Development Bank of Wales. 

Good morning. David Staziker, I'm the chief financial officer at the development bank.

Lovely, thank you. 

Members will have detailed questions, but if I could ask a very open question to start with: I wonder if you could outline your main achievements for 2017 and 2018, as an opening comment, and perhaps you would like just to expand on any opening comments that you have as well.

09:35

Chair, thank you very much indeed. Let me do that. I appreciate that the last time we sat before you was 15 months ago and it was a week after we launched the development bank, and I do appreciate that the annual report and accounts that you've been looking at are pretty much nine months out of date as well, and we are well advanced in this financial year. So, by way of update and context, just let me make a few short points before you ask questions.

We've made very good progress in the first full year of operation. Our Wrexham headquarters is open. It has now 30 people in it. It's ahead of forecast on its establishment and we are, as a bank, present in all the regions of Wales. Our head count was 148 last time we sat before you; it's now 201 as of January. We've restructured and relaunched the Angel Invest Wales, that's the Angel investor network. That was in May, and the first three Angel deals have been successfully syndicated. We also founded, in June 2018, Economic Intelligence Wales. That's in partnership with Cardiff Business School and the Office for National Statistics. It's published its first two statistical reports, and its first piece of long form research will very soon be published too. We see that as a crucial element of building an objective data-led series of analyses of parts of the Welsh economy, which can be available to and inform all participants and policy makers.

On inception, the development bank received very substantial investment funds from the Welsh Government: £233 million. In this financial year we've already received a further £88 million. If you combine that with our current balance sheet, what's currently invested through us into the Welsh economy—about £0.25 billion—you can say that we've got well over £0.5 billion either in or able to be deployed into the Welsh economy.

We've been working with Welsh Government colleagues since the Brexit referendum result and are helping with advice and other support in that regard. We agreed with Welsh Government to launch the Welsh flexible investment fund. That's £130 million, which should have, as the name suggests, the sufficient flexibility to meet whatever challenges our departure from the EU will throw up.

In the development bank, Chair, I think we have an advantage, a unique model. We can both make loans and invest equity, and we do this directly through our own home-grown professionals within the development bank. The challenge we have is to retain and attract experienced and skilled staff to do those jobs. We are experiencing some pressure on losing people to competitors and in attracting new talent to replace them. Pay will become a bigger factor in the future, we feel.

Lastly, we are delighted that in, what, 15 months of operation, we've now engaged with many parts of the Welsh Government, not just with our sponsoring department of economy and transport. It's certainly the intention of the board of the development bank that we are and are seen to be a full partner and colleague in making Government policies effective and successful. I just wanted to set that context prior to your questions, Chair.

Thank you, and we appreciate your paper and your update report as well. Can I just ask you about your—in the 2017-18 year that we're looking at, you exceeded many of your targets: so I'm looking at Welsh businesses, investment in Welsh businesses, 113 per cent of targets; private sector leverage at 108 per cent; jobs created or safeguarded, 120 per cent. So, that would be welcome news for you to have exceeded your targets. How has that informed your target setting for this financial year, the 2018-19 financial year?

Okay. I'll let Giles pick that up.

Yes. Just to be clear, the financial targets—each of the funds that we operate, and we operate over 10 now, have specific targets that are agreed with the Welsh Government in advance. The culmination of those is all added together and that is our cumulative target for each year. Because, as the chairman said, we received additional funds last year and new funds initiated, actually the targets have gone up quite substantially to reflect the fact that we're investing more money. At the third quarter, we were ahead of the revised targets on almost all of those categories—at or about. So—

09:40

When you say 'revised', do you revise them throughout the financial year?

They're revised every year. Every year they are revised and agreed with out counterparts in the Welsh Government, and then, in addition to that, to the extent that a fund is introduced midway through the year, which has specific targets, they're added on. So, it's a constantly evolving number. And then there are some secondary objectives. So, for example, in the most recent remit letter from the Welsh Government, there was a particular requirement. It was felt that there was a need to invest in a much larger number of businesses. So, one of the criteria that was put into the arrangement, over and above the normal investment criteria, was to invest in over 400—I think it was 425—businesses across Wales, up from 270 last year, and around 320 this year. So, a very significant uptake in the spread of investments that we're making. 

So, just so I can understand: say, for example, your target in 2017-18 for investment in Welsh businesses, which you exceed by 113 per cent—what was the physical target for that?

Last year—oh, I've got the number here, actually, sorry. 

What I'm trying to get to is: is your target for this year 13 per cent higher than that? That's what I'm trying to get at. 

Oh, no, it's well in excess of that. So, for example, last year's target was, I think it was £60 million, sorry, £55 million and we achieved £57 million. This year's target is— . Can you remember—?

For total investment in Wales.

It's £68 million, yes. 

So, it's substantially higher than—. You're above the targeted—

Indeed. And, in fact, if you remember back to the launch of the development bank, one of the targets was to invest £80 million in Wales within five years. I feel reasonably confident we'll do that within 18 months. 

Okay, thank you. I'll come to some specific questions now from Members. David Rowlands. 

Obviously, your predecessor was the Finance Wales organisation. So, can we just have a little look at how you feel the specific differences in the way in which the Development Bank of Wales operates, as opposed to Finance Wales—?

Yes, I'll give you an overview, and then I'll ask Rhian, possibly, to talk about some of the details. So, firstly, there was a very significant piece of transition work that was done. In April of last year, we got the Financial Conduct Authority approval for the DBW name. That was quite a complicated process in itself. The business plan was approved in July of last year, and in October we had the launch just prior to our last meeting here in front of the committee, and then in February we signed the lease on the Wrexham office, and that headquarters was opened by the Minister for Economy and Transport in September.

The chairman has already mentioned that we raised in excess of £200 million—£233 million—of new funds. We did a very large-scale launch programme, which has resulted in a much higher level of recognition of the organisation, because one of the things we felt we needed to do was to get better recognition coverage. And we've also looked very closely at making sure that we cover every single unitary authority in Wales, and, in fact, we've done investments in every unitary authority this year. 

The office footprint has been viewed carefully. We mentioned Wrexham, so we now have 30 staff in the Wrexham office. We have a drop-in office being set up in Llandudno Junction. We have an office in Newtown, and then in Llanelli. So, we have offices across the entirety of Wales, making sure that we have the coverage, and we have provision to set up a small office in Aberystwyth, if that's required. 

Okay. So, could you outline the benefits of having the Development Bank of Wales, as opposed to Finance Wales? The benefits to business. 

Indeed. I think, firstly, when I joined Finance Wales almost three years ago, and I was asked, 'What is that business?'—somebody thought it was a car leasing company. So, clearly, I think there was a degree of misunderstanding of what the role of the organisation was. So, clarity of—. The name has made a significant difference. We have greater scope to do more more investments, both in terms of the type of investments we can do, the sectors we can invest in, and also the length of the loans, so we've done a number of loans of 10 years now. In addition to that, we have launched the Angel network in Wales—Angels Invest Wales—and they've already done three transactions out of the Angel network. And, as the chairman mentioned, Economic Intelligence Wales has provided us with the platform to do some economic research on where we need to provide support.

Probably the last thing, which is the most significant and very pertinent today given that you're seeing the Federation of Master Builders later, is that we have materially increased our focus on the property sector, and particularly the smaller residential house builders. And we have now, in the last two to three years, almost £50 million-worth of funding of smaller residential house builders across Wales. In fact, yesterday, I signed off on a project, as chairman, sitting on an investment committee, for 22 houses just outside Wrexham.

09:45

Okay. Was your remit letter significantly different, then, to Finance Wales's, do you believe?

In truth, there wasn't a remit letter before, so we drafted a—[Interruption.] The remit letter is very comprehensive, yes. So, very much so, yes.

Okay. So, are there any plans to independently evaluate the differences? Because, obviously, you have to have structures in place so that you can make comparisons of how you're operating and the success of your operation, as opposed to Finance Wales. So, do you have those structures in place?

Yes, I do. I'll introduce one, which is hot off the press. Yesterday, Beauhurst, which is an independent research organisation, published a piece of research on equity investment in the UK, and equity investment in start-ups in the UK is down over the last four years quite substantially. The only two areas of the country where that is not the case is Wales and the north-west of England. In Wales, in fact, we are the fourth largest equity investor in the UK, according to Beauhurst. The first two are crowdfunding organisations, the third is Scottish Enterprise and then the Development Bank of Wales. And we have grown the equity investments. Last year, it was 71 equity investments; we have grown those equity investments consistently over the last number of years. So, in fact, direct performance against other regions of Britain and we're definitely exceeding. Rhian, you might want to talk about some other guides.

Yes. Just linked to the Beauhurst report, the other important point to note with our equity investing is that we co-invest on every deal we do with equity investing, so we bring in other private sector equity investors, so it's great news that we're in the top four, but it also demonstrates that we're bringing in new equity partners into Wales as well, be that an Angel investor or an institutional investor, alongside the work we do.

Some of the other areas that we've looked at to really assess how we're doing as the Development Bank of Wales—we ran a brand awareness survey around 12 months after launching the bank to understand how well the name was out there and how well people were recognising it and understanding it. The result that we got back from that was that 28 per cent of the people that they spoke to—the businesses that they spoke to—recognised the name. So, that gives us a benchmark, gives us something to continue to improve on, and we have plans in 2019-20 to commission another brand perception report, where, again, we're looking to understand what people's perceptions are of the development bank and whether they understand our role and remit.

In terms of external reports, the Federation of Small Businesses ran a report back last year that predominantly looked at business support, but as part of the discussions and the questionnaires that they sent to their members, they asked about the Development Bank of Wales. We actually had a higher level of awareness there, so it was at 40 per cent with the FSB members, which is really encouraging for us, and goes back to Giles's point that we've worked hard to make sure that we are educating our stakeholders and we're educating the businesses about what the development bank can do. And there's been a marked changed in how we've pushed that message out to companies, and, hopefully, many of the Members will have noticed the work that we're doing on the marketing campaigns—the bus backs, the billboards, the tv adverts that we're doing to really get the message out there to Welsh businesses.

I think the name, 'Development Bank of Wales', is much more indicative of what you actually do than 'Finance Wales', so, I think—.

Yes. The last thing that's probably most important is that, as I said, at the last hearing, we would be self-announcing and we are no longer in receipt of any direct Government funding. All of the funding that we—. Our operating costs are met from the fund management fees that we charge.

09:50

Yes. My six-year-old picked up your annual report at breakfast this morning and said, 'Daddy, is that the sign at the end of the road?' and then observed, 'They've got lots of money'. [Laughter.] Can I ask you about the angel investors and the co-investing? So, it's 71 investments in equity last year, and I think three angel investors. I infer from that that the others were institutional co-investors.

Yes, sorry. The three angel investors was a very specific fund, and they're actually this year, so they're in this calendar year. So, the angel co-investment fund was a fund that we only launched in 2018-19, and that is a very specific fund, and it's remit is to bring new angels into the market and to encourage them to make investments. So, just to clarify, those three investments are this financial year.

Can I ask—? I'm trying to find out a bit more about how you ensure that co-investors, whether angel investors or institutional, have an appropriate division of risk and reward with the public sector money going in.

Yes, well, on a general basis, firstly it's a requirement of all of our funds that we encourage what we call private sector leverage, so, third party funding. In general, that funding, certainly on the equity transactions, is pari passu. So, there is little doubt that they're taking the same risk that we are. But there are occasions when we are at different elements—so, they're providing debt funding or mezzanine finance and we're providing equity finance. But in all of those transactions we have to verify—. We do the same sort of customer checks that we would do, that any financial services organisation would do. Do you want to add to the details?

We just have to satisfy ourselves that we're not giving state aid. That's a requirement of all our funds.

The pari passu is the most important point, so we aren't disadvantaged when we're making the investment. We invest alongside, on equal terms to, whether it's an angel investor or an institutional equity investor.

Have you done any analysis, despite the pari passu basis, as to whether the private investors may on average be putting in a higher proportion of the overall participation for particular types of investment, and whether there's any degree of cherry picking through that from the private sector?

Our overall target is to generate private sector leverage of 115 per cent of what we invest, so, in other words, we are always seeking to get a disproportionate amount of private investment funding than we're putting in. We don't hold majority positions in businesses, and so therefore, inevitably, there is a higher risk being taken by the third parties.

And when the—. The non-angel investors coming in, I was saying before I think I had an inference that that was going to be institutional, but actually, just considering that, is it actually the small business itself who are, in many of those circumstances, going to be the private sector—

Well, we're not allowed to—. Curiously, in the measure, we're not allowed to include the entrepreneur's own individual investment. That doesn't count. So, it's actually third party investment alongside us. That's the key difference.

One thing I would add at this point—and we can talk about it in more detail later—is we are regarded, partly by reason of some of the work done by Beauhurst, but some of the work that we've done ourselves, as a particular specialist in financing small businesses, and that was endorsed yesterday when we managed to secure our first private sector investment from Clwyd Pension Fund, who are putting £10 million into one of our investment funds alongside the Welsh Government. And they chose—. Clwyd chose us because they have a responsible investing department, and they specifically wanted to target investing to Wales, where the majority of their retirees and beneficiaries are based, and they did their own research and concluded that we were the best people to invest alongside.

How reliant are you on property to give security to your loans? I was looking through some of the examples and saw the first few; there was a café, there was a care home and there was a hotel, and I saw several that weren't in that category afterwards. But how significant is that in terms of giving you security for your lending?

Security isn't a decision as to whether we make—isn't a factor in the decision as to whether we make the loan or not. So, we—

It isn't. So, we make an assessment of the business plan, and that assessment is all around whether they can service the borrowing, if we're just talking about debt. So, if the company owns a property and there is security available, then we may take a secondary position, but usually the banks will the take the first charge on those. We can take a secondary position, but we don't have to. We certainly don't take any personal assets as security. So, we take personal guarantees, but we don't take supported personal guarantees, with an asset behind that.

Good morning. One of the aims of setting up this Development Bank of Wales was to change the way that business might be done, and the outcomes as a consequence. And some of those outcomes are within our understanding, so we want to explore those, and want to know what the impact of any of the investments has on the key performance indicators, like carbon reduction emissions, employment in deprived areas, underrepresented groups, and what sort of progress you could demonstrate that's been made in those particular areas.

09:55

Yes. So, there are a couple of things there. So, firstly, we do take our social responsibility equally as important, and we do take measures on those criteria. So, for example, we do do analysis of ethnicity, of gender, and also, in terms of jobs created, to a certain extent, we try to get pay data for the levels of pay for the jobs created, and we'll talk about those in a little bit more detail. And then, in relation to energy and carbon measures, we don't have a comprehensive analysis of those for individual transactions, but we do actually have a community energy fund as well that supports local energy projects; in fact, we were talking in the taxi on the way here that we've got five projects that we're looking at right at the moment, so maybe Rhian can talk about that in a bit more detail. 

I can, yes, absolutely. It's also worth noting that in the information that we give you in the annual review that talks about the overall job numbers—so, as an example, for 2017-18, it talks about approximately 4,000 jobs—we can break that down by where the jobs are. So, to give you that further analysis, around 67 per cent of those jobs were in the west Wales and the Valleys region, so the more deprived areas. So, I think that's important additional information in terms of where we are creating the jobs in the areas that need them most. And, similarly, when you look at the 2,000 homes that we talk about, just over 60 per cent of those were in, again, that west Wales and the Valleys region. So, we collect a lot of data to ensure that we're having an impact in the most deprived areas. 

Giles has already mentioned the local energy fund, which is a very specific fund that is designed to help community groups develop renewable energy projects, and there we will be recording renewable energy generation and community benefits back to the groups there. 

I think we've made a lot of progress on how we address the underrepresented groups. We carried out an equality impact assessment back in February to look at where we performing. We already collect this data from our companies. What that showed us is that, looking at the data, we do reasonably well in terms of ensuring that our investment is going to the ethnic minority groups and female-led businesses. So, we seem to be performing above the Welsh SME benchmark there. Where there's potentially more work to do is ensuring that our funding gets to young people running businesses and gets to entrepreneurs with disabilities. So, there's more work to be done in those areas. 

Thankfully, certainly on the young people, there's a lot of support out there in Wales. So, we have Big Ideas Wales, we have Prince's Trust, so we have organisations that we've already tied into on those areas. But it is fair to say how we measure impact is a longer term plan; it's probably a five-year plan in terms of how we can fully access that, and this year we've done a lot of work in benchmarking, so understanding how do others do it, how do others talk about it, and that's in the private sector in terms of other institutional investors and other development banks. 

So, the plan at the moment is that we'd like to publish an impact report in 2019-20 to go alongside the other information that you see. 

That's the plan at the moment. 

But, in the next annual report, will you have those breakdowns that you say you have, and I'm sure we'd be interested in having those anyway as a first port of call, so that we can then benchmark, as well as yourselves? In terms of your thinking when you're investing, are you thinking that you might make a difference when you're looking at those projects at the starting point, rather than finding afterwards that you have? 

Yes, it's a really interesting point, and I think that the way, for me, it impacts on our investment process is, firstly, if you take the deprived areas, a big part of the way we operate is to ensure that we have regionally spread investment executives, as has already been mentioned, and teams that are targeted on ensuring that our money goes into the areas that we need it to go—that's indicative of the funds that we manage. So, that is at the front end of their thought process in terms of the business development that we do to look for deals. And also, when we're working on business development plans and marketing plans, it is thinking about what we can do to address these under-representated groups. We're running unconscious bias training at the moment in the teams, where—. We've plans to gender lens our marketing material. And we've already tried to make a lot of effort to ensure that marketing material really reflects the diversity in the SME businesses and we aren't hamstrung by the portfolio of companies that we've got.

In terms of the jobs, our approach is to make these commercially viable investments. So, our approach is to do that, and what we have found, and what our experience has showed us, is that we create and safeguard the jobs as a result of the viable investments that we look to make.

10:00

Thank you, Chair. I wanted to ask some questions around regional activity and dealings with the economic action plan. I think you've probably covered most of this in your answers to Joyce. But, first of all, I wanted to focus on inclusive growth and to what extent the activities of the development bank align with the Welsh Government's ambition to achieve inclusive growth, in line with the economic action plan. Is there anything else you'd like to add to what you've said already to Joyce?

Yes. Thank you. I think that—. So, we've been actively involved in the economic action plan from the launch—was it December the year before last? And, although our funds have different, specific targets that are not necessarily exactly the same as the economic action plan, the overall effect is broadly the same. So, the first thing that we did was immediately aligned our teams with the three directors who are responsible for each of the three regions—north, mid and south-west Wales, and south-east Wales. And so each of the three directors has a person at the development bank who they can talk to directly, who's in that region. By way of example, I think, historically, we probably were under-represented in north Wales. But, when we did the analysis in the last year, after putting in considerable effort, and also the creation of the north Wales headquarters, we're now broadly in track. So, in the third quarter of this year, we'd invested £59 million across Wales—£12 million of which was in north Wales, £23 million in south-west Wales and mid Wales, and £24 million in south-east Wales. And, actually, if you look at that in the context of the number of businesses in the region, it compares very, very evenly to the spread of businesses across the country. So, we're not perfect, but we're doing quite a lot of work on that. And, as we said in the previous question, some of the other data—or some of the other targets, such as the carbon footprint, are items that we're picking up over time as well.

That's great. Thank you. I'm also thinking about the quality of jobs that you're able to support. I know, in your strategic asset document, it says that the development bank will have a clear focus on delivering higher quality jobs, which is something that we very much need within Wales. How does this guide specific investment decisions, and how will the quality of jobs actually be assessed and reported as well?

Yes. Do you want to talk about some of the measures?

Yes. In terms of the measures that we have so far—I think Joyce has already mentioned that we get salary data as one of the indications of qualities of jobs. And, if you look at the information that we've got to date, around 40 per cent of the jobs that we create are above the average Welsh salary. So, that's one measure in terms of what we look at, and we'll continue to measure that going forward. For me, again, it's back a little bit to the sustainability point. So, we want to make commercially viable investments in companies that are going to be around for a long time. So, we want those jobs to be secure, which is another measure of quality, and we want that job to be there for the long term. And we invest in companies that we want to grow, be that an equity investment— and the amount of money that we're making in equity investment has increased substantially, and particularly in the tech side of things. So, we're investing in these fast-growing companies—so, great job opportunities, job satisfaction, and, hopefully, the potential for those salaries to grow in line with the growth of those companies.

Yes. Can I just ask around the house building—first, on the Help to Buy—Wales, which I know you administer? What proportion of those loans are going to support small house building, and are you able to take any initiatives to try and support or increase that number?

10:05

In overall terms, the largest proportion of the money for Help to Buy goes to the larger house builders, but we are doing some projects, and I'll just pass on to David to talk about what we're doing to try and encourage some of the smaller house builders to take advantage of the Help to Buy scheme.

Thanks, Giles. Mark, to answer your question, it's important to understand what we call a 'small house builder'. So, we use the Welsh Government measures and those are: what is classified as a small builder is people who've only built up to 10 residential houses. That's the measure that Government use for the Help to Buy scheme. It's slightly different to what you'll hear, probably, from the Federation of Master Builders coming in later, who'll probably talk about up to 100 houses as 'smaller'. 

So, on the statistics then for Help to Buy, it's about 3 per cent of the total funds invested, which are about £300 million at the moment, that has only gone to the small builder, so up to 10; 7 per cent has gone to builders up to 50—between 10 and 50; and then the remaining 90 per cent has gone to builders who build between 50 houses and above in total. So, that's all the large builders in there. So, there are 18 builders in that category and there are 112 builders in the lower category, to give you a feel. But you can see that it's the same in England—it's highly weighted towards the builders who are building on scale.

So, from our perspective, we have a far bigger impact on smaller builders in the property funds we deal with. So, if you—. And I'm sure you'll see the reports that are coming up next, where they talked about the number of small builders on their scale—up to 100—having fallen from about 28 per cent of the market in 2008. I think it's dropped to about 12 per cent now. If you look at the amount of money we're putting out to small builders—so, people who are building sites of up to 10 houses—at the moment, it lies at around 30 per cent of the money that we're putting out or just over 30 per cent. So, we're dealing with a far higher proportion of smaller builders than you'll actually see in the market at 12 per cent. So, that's really encouraging. What we then do is cross-refer, so all the builders on there who we fund through the property development fund are fed back into the Help to Buy scheme to help them sell. So, we help them build and we also help them sell. And it's a nice symbiotic relationship there. We've got 22 builders who are on both schemes at the moment and most of those are on the small side. So, that's where I think we're really helping on the small builder side.

Could you update us on both the property development fund and the stalled sites fund, in terms of how much money you've committed under each of those to date and how many properties that assisted them to build?

So, Giles mentioned briefly earlier that we've committed about £50 million to date from the property development funds. These funds are quite strange compared to the other ones because they recycle. So, we invest the money, we get it back and then we put it out again. So, our first fund was only £10 million and it's coming to its end now, but we've actually invested that three and a half times. So, it's quite strange for these funds. So, it's had a £35 million impact and all the money is now about to be repaid to Welsh Government as well. So, it's quite unique in that sense. And then we've been propped up by another fund, replacing that, which has been made bigger—so, it's a £30 million fund now—and we've got that for 15 years to invest that and we think that over 15 years, we'll invest it nine times. So, it will have a £270 million impact.

But, to date then, from those two funds, we've invested £50 million. We've invested that and created 700 houses. So, those are either built or in the process of being built. So, that's roughly at a cost of around £70,000 per house. So, that's had an interesting impact. It was a fund that we set up at the start; it was information that we saw from the marketplace was missing—smaller builders were struggling to find funds; the banks had pulled out. So, we came up with a fund to just test the market and what we found is that there is definitely, clearly, a need. The Welsh Government has agreed to top those funds back up and keep us going, and then they've looked to us to find more risky deals—ones that are struggling—which is why the stalled sites fund came along.

So, the stalled sites fund is where developers are struggling. They've got a number of opportunities, usually, and because of the section 106 requirements, sometimes, the profit that they can then make on those sites becomes less because of the section 106 requirements, and then they have another site that they can develop because it's got better profitability. So, what we try to look to do, with the stalled sites fund, is to help get that to a more market-level profitability to enable those sites to then proceed and get built out. So, the stalled sites fund, effectively, allows us to do that. It's got a grant element in there that allows us to do it; you don't quite know at the start whether they're going to need the grant, so there are clawback provisions—such that if the costs are less or if the sales prices of the houses are greater then we can claw back the grant. The developer can't make any excess profit, if you like. So, we've done the first three deals out of that fund already, and again that's ramping up. Those deals take longer, so we only think that fund—it's £40 million over 15 years, we are only assuming that that will be invested four times. But again, we're developing these models. So, as we find faults in the market, we're working with Welsh Government colleagues to try and fill those gaps and help build—

10:10

Clearly, with the stalled sites fund, there's very much a market gap. Can I just clarify, with the property development fund, the 65 per cent of gross development value, are you clear there is a market gap there and the banks aren't lending even after 65 per cent?

Absolutely. I think you'll probably hear that from the Federation of Master Builders this morning. Every investment approval has to verify whether there have been bank alternatives. In all of these cases, there has been little or no alternative. In fact, we verify that in a different way, because we've met with nearly all of the major banks' commercial property teams—certainly RBS, Barclays, HSBC. All of them have confirmed to us that they are not lending below—between £2 million to £5 million is their minimum threshold at the moment, or to long-standing relationships with slightly larger builders. So, that misses out a very significant proportion of the market for people building sustainable development of two to five properties on the edge of a town or village. 

Most of the people we've recruited have left these teams in the bank because they didn't have a role. Again, it's confirming it, that the people who were doing these sorts of things in the bank are being made redundant and leaving, so that's where we've recruited from.

And, on a loan up to 65 per cent of GDV, what would be a typical interest rate you would charge, and do you have any entry or exit fees?

Yes, between 5 per cent and 7 per cent. 

It depends on how many transactions. With some of the developers, we're onto the third or fourth transaction. We were driving down today and we saw the old station building at Cardiff Bay station, that's a development that's been funded by the Development Bank of Wales. 

That's an example of a developer we've worked with a number of times. 

And do interest rates go down or up for more familiar developers?

The interest rate would go down because we get better experience, we know the person and we know what the turnaround of their sales are. These loans are relatively short. There is a fee. The fee is normally 1.5 per cent—between 1 per cent and 1.5 per cent. 

Finally from me, can I just ask around some of the planning issues? One of the complaints we hear is that's the stage when developers really need support, they feel they can't get access to funding and, perhaps, if they don't get planning, the security may then be worth less. What do you do to support? I know about the stalled sites fund, but, generally, do you support developers in that early stage when they've yet to get planning permission?

On the property front, generally, the planning has been achieved, but the key thing is the liquidity that we're providing helps the developer. The biggest problem with no liquidity in the property market for the small developers is, if essentially what they were doing was funding the entire transaction through their own equity, they could only fund one project at a time and couldn't go on to look for the second piece of land, the third and so on. By providing them the funding to build out scheme one, that gives them the time and the resources to then go and buy scheme two and get the planning up on scheme two. So, whilst we're not directly supporting that planning application, we are indirectly by providing the liquidity that makes that happen.

Again, I think it's more we started with the lower hanging fruit, so the next question is: is that where Welsh Government would like us to look? There are some companies where we invest in them to give them general working capital across the whole business, which again has allowed them to use some of that money towards planning, but those are generally larger businesses at the moment. What we haven't done is set one up to deal with the very small-sized builders. The risk is much greater with that, so it's just trying to work out the risk and reward return, because in the end Welsh Government still want their money back, and it's trying to tread that line. 

And the capital is tied up for longer. That's bringing in Dave's point at the end. The property fund we can recycle quickly because it's short-term money, we have a big impact, we can recycle it three or four times. Money used for planning is tied up for longer, inevitably, which is why, typically, it tends to be the developer using their own money, their own profit to invest in the planning side, and we come in to provide the liquidity for the build. 

It's probably a balance between funding for that and simplifying planning, shortening those times.

10:15

Thank you, Chair. I'd just like to take us back to the very start, really, where you mentioned the role of Economic Intelligence Wales. You mentioned, again, about reports being published and so on, but could you help the committee understand what new intelligence has actually been made available as a result of this collaboration and how that actually affects, informs and influences your decision making and investment decision making and/or overall strategy?

Thank you. Well, firstly, I should just say that, when I joined, and as part of the plans for the development bank, we always had the objective of creating an economic analysis team. However, given the size of the organisation and the resources available, it was unrealistic to be able to set that up internally, not least of which, it wouldn't have been independent. So, I met with all of the major universities across Wales to talk about the best way to achieve the stated goal, and concluded that the way to create it was to effectively create an umbrella organisation, working with ONS and Cardiff Business School. We've created a team that sets the agenda for the pieces of research done and also has set the criteria and the layout.

So, what's happened since then? First of all, we set five strategic objectives which were: to track the supply and demand of finance across Wales; to improve understanding of small and medium-sized enterprises and their role in the Welsh economy; to create innovative ways of measuring, interpreting and tracking SME performance; identifying and addressing Welsh SME data gaps; and to improve the understanding of the development bank’s economic impact in Wales. So, those were the core activities. So, that agreement was signed in December 2017, and Economic Intelligence Wales was formally launched by the Cabinet Secretary for Economy and Transport in June of last year.

Since then, we've produced two quarterly reports. Here's the November quarterly report, which provides a lot of data and analysis on the Welsh SME economy. And then, in addition to that, we have said that we will produce bespoke reports biannually. The first bespoke report, I think—timely, for various reasons—is on export finance, and that will be due to be published towards the end of February.

So, to your point about how does that influence our decision making, we have a view that there may be a need for some sort of export liquidity, working, possibly, with UK export guarantee. So, part of the work of the export finance review is to determine to what extent the export support that's available is being made available or is known by the SME community. And, hopefully, it will inform us on that and that will determine whether we need to do something to provide support in that sector of the economy.

The next report, due in April/May time, is on equity clusters, This is a very interesting concept that was first identified by the British Business Bank in their small business survey this time last year. And the British Business Bank did a piece of research that identified the significant benefit of when equity clusters take place. So, when a large number of businesses start forming in one place, because you get the entrepreneurs, your get the investors coming into the frame. You also get the support services that are needed to support those businesses. Interestingly, their view was that an equity cluster would form at around 25 to 30 transactions in a year. Well, on that basis, Cardiff and south-east Wales is already one of the largest equity clusters in the UK, and compares favourably with the likes of Bristol, Oxford, Cambridge, London, Manchester and Edinburgh, which are regarded as the other centres of excellence for equity clusters. And there, they're looking at more than just the economic circumstances, they're looking at the built environment. Do they need the right type of accommodations? Do they benefit from large quantities of graduates or students, et cetera? So, again, another interesting piece of work that will be coming out. 

The last bit I would say about it is the committee is also tasked with commissioning the work, so, the work doers not get done just by Cardiff or ONS—it can actually be farmed out to other universities. And in due course—in fact, we've made a commitment that the next piece of research will be tendered out to different research groups across the country. 

Thank you. Just finally from me, Chair, you've mentioned a lot of the core activities—all the reports you get have a significant amount of information. Would it be fair to say, before this group was set up, Finance Wales wouldn't necessarily have all this information available, and now you have got a lot more information available? And, just very finally, I appreciate it's only been going a short amount of time, but is it your view that it's actually meeting the initial aims or exceeding the initial aims of the group?

10:20

Yes. Firstly, on the information, I think the information was probably there, but it had never been used in an analytical sense to show—. So, for example, one of the tasks that I was set was to try and encourage third-party investment into a fund, as I said we managed to achieve with Clwyd yesterday. My experience in the past of being involved in private equity is that fund investors want to know about track record. So, how has the organisation—? What has the organisation achieved and, cumulatively, what is the outcome of that? We didn't really have that information in Finance Wales, and we've done a lot of work to actually provide that information, and what that showed was actually we've done pretty well and, in fact, in some areas, we underplay our hand, and we used that information to great effect when we were in discussions with the Clwyd pension fund about what we can achieve for them. We hope to use that information going forward to inform both where we invest but also how we use it to attract other investors into the Welsh market. 

In terms of have we achieved everything, I think we've certainly worked very hard to make sure that we achieve all the targets. We're ahead of the expectations. Having said that, we also raised more funds than was originally planned. So, to a certain extent, the expectations continue to go up. 

I think it's fair to say, if I may, Chair, that the board has been very clear for some years now that we want to see a flow of information on which the key performance indicators and our performance against those KPIs are measured that we can have faith in. That's not to say that we didn't before, but this has become a much bigger organisation, actually with a greater degree of complexity as well. So, there has to be—and, again, the board has insisted on this—much greater investment in systems as well, and in finance staff and finance systems and IT systems to make sure that we get that information that's accurate and reliable, and indeed scalable because you want to be using that at five years' time when we're going to be, I hope, even bigger. So, it's a big strategic commitment from the group. 

EU funds are coming to an end. How is that going to impact you? 

Well, first, I don't know whether we were lucky enough or we were just in the right place at the right time, but the chairman and I met with the Minister for Economy and Transport on the Friday after the Brexit vote, back in 2016. We were able to tell him at the time that we didn't feel that Brexit was going to have the same impact as, say, for example, the financial crisis, but that we felt that we needed to be prepared for whatever eventuality befell us. 

A number of things that we were able to do almost immediately—. We also met with the Welsh European Funding Office, and since then we've secured an additional £45 million-worth of funding from the EU funds, primarily because we had the infrastructure in place to put funds into place before the cut-off that everybody is now aware of. So, we got £45 million additional funding, which has gone into the Wales business fund, and then in addition to that we've done a significant job with the Welsh Government to replace that fund or to create additional funds, such as the Wales flexible investment fund—a £130 million fund—to address Brexit. We're in a position now where our funding from sources other than the EU exceeds the EU funding, and we're working to make sure that the EU funding that we have is protected and can be rolled over into further investments in the future. So, we feel pretty comfortable that we have addressed at least the short-term challenge.

Longer term, it will depend on the UK's position on regional aid and regional support. We're obviously in discussion with the British Business Bank, through the Welsh Government, in relation to the shared prosperity fund, and we like to think that we're putting ourselves, our house, into a position where we're seen as a logical place for people to invest for regional support, if that's the way they wish to do so.

10:25

Yes. I think we all have to be aware, or we should be aware, of the fact that you're operating in areas where the high-street banks have singularly failed to provide funds. I think, then, that obviously means that you operate with a higher risk factor, perhaps, than—. Well, we recognise that, anyway. Do you feel that you have feedback from the Welsh Government that they understand that? Because, I think the last thing we would want—. I mean, obviously, whatever due diligence you use, there will be investments that you make that may not work out in the way that you would anticipate. So, the last thing I think we would want is to see the bank become risk averse, because that would be the worst thing for the economy and your lending operations. Do you feel there's an understanding of that from the Welsh Government?

If I could just, before Giles says anything—. Absolutely. It's why, in my chair's statement in the annual report every year, I just like to remind stakeholders precisely that point. Our job is to do what—. I think the technical term, which I rather love, is where there's 'market failure', it's called, which means that the private sector isn't able to do something. That is our role, and that is our role only. So, where the private sector can do it, we will step back. You've heard from Rhian and from Giles about how rigorous we are, at the point of investment or lending, that we absolutely clarify that. So, yes, I'm absolutely sure that we do that.

Just to remind committee as well, and often to remind myself as well, we operate in what I call quite a narrow band. If you imagine it like a zone, this side of the zone is where the private sector does deals and there's no room for us because the market works. And then there's this zone in which we operate, and the other side of that zone is where the deals are just not doable at all. They're just not sensible deals, either for the Welsh Government or for us or for anyone—they just don't work. So, we have to try and identify in that zone that that's where we operate, and I think our model, as you've seen—I refer to it as advantaged and unique—is that the Welsh Government give us taxpayers' money, which we deploy into the economy, and get, in some funds, all of it back after, say, five, seven, 10 years. With most of our funds—and that's the data and the information that Giles has put together—we've found that actually we get a lot of that money back—not 100p in the pound, but sometimes just a bit less than that. And I think that's a fair loss, because we've had all of those economic multipliers at work during that time, and so I think, yes, that model is working at the moment, and we're very rigorous about that point.

Yes, so, all I would like to add is that there are transactions where we do lose money and where the transaction fails. Given the nature of the investments that we make and the spread of the investments that we make, that is inevitable. However, I think where businesses get into difficulties, we try to make sure that we're far more pragmatic and objective—sorry, subjective, in fact—in the way that we address the specific needs of that company. So, on occasions when a business is—. We've actually put more money into the business because we see that there's still an opportunity but there is a shortfall that cannot be resolved in any other way. We're often the party leading the solution where other banks have, effectively, walked away. But on the other hand, we have four businesses where we were foundation investors, AIM-listed. We've done four exits, year to date, achieving a multiple of two and a half times our money. So, we only need a relatively small number of really big home runs of that nature to compensate for the smaller transactions that fail. As the chairman says, my objective is to protect and maintain the Welsh Government investment, so that that can be returned or recycled as many times as possible.

10:30

It's a very brief question and it follows on quite nicely: what would be the lowest or do you have a minimum amount that people might ask you to invest in their business?

There we are—that's a brief question and a brief answer. That brings our session to an end.  I would normally say we'll see you in 12 months, but I hope we'll pull back that cycle a bit and see you later this year, all being well. Thank you for your time this morning.

Thank you very much indeed.

Thank you very much. Diolch yn fawr. See you all. Thank you. We'll take a 15-minute break, and if we can be back just before 10:45, just for our pre-meeting.

Gohiriwyd y cyfarfod rhwng 10:30 a 10:46.

The meeting adjourned between 10:30 and 10:46.

10:45
4. Rhwystrau sy'n wynebu cwmnïau bach sy'n adeiladu cartefi: Sesiwn dystiolaeth ragarweiniol
4. Barriers facing small home building firms: Introductory evidence session

Bore da, good morning. I'd like to welcome Members back to committee and move to item 4, in regard to our start of evidence taking in regard to barriers facing small home builder firms, and we've got a session this morning, and I'd perhaps just like the panel to introduce themselves for the record, if I start from my left.

I'm Josh Miles, policy manager at the Federation of Small Businesses Wales.

Ifan Glyn, director of the Federation of Master Builders Cymru. We represent small construction companies.

Huw Francis from Hygrove Homes.

Thank you. Please feel free to use either English or Welsh in your answers to committee as well. If I could start with the first question, the house building industry is facing a crisis like it's never faced before. That's written in your evidence, so I'd be grateful if you could expand on that.

Yes, fine. Basically, through talking to other people within the industry to see how they feel about it, the consensus is that the process now takes far too long, it's far too complicated, it's very uncertain, very costly and very frustrating. And as a consequence of that, most of the small house builders have called it a day. Now, I thought it might be sensible to give you an idea as to the increasing costs that we face in, to start with, planning. Is that in order? Shall I explain it to you?

Now, the planning cost is all upfront, so no bank will lend on that. So, the first thing that you do as a developer is locate a potential site, investigate it to see if it's got a potential for planning and then you launch on the planning role. Now, in terms of the local authority fee, we used to pay £380 per house. So, if you've got 100 houses, obviously it's a significant amount of cost. Now, they then introduced the pre-app system, which was meant to simplify the process and to add certainty to it, and that's introduced a new level of cost, which isn't taken off the main cost, which, as far as we we're concerned, is totally unacceptable. Now, on top of all that, there's a feeling that all the national companies have got an advantage in that they've got a very large war chest for any parcel of land that they want to buy.

For the small house builder, the increase in the number of reports that are now required for a planning application has basically caused a lot of people to shy away from the business entirely. I'll give you an example of those. We are faced on a normal, average site, with a site investigation report, which would cost you normally about £15,000. Then, a geotechnical report would cost roughly about £10,000. Flood consequence assessments would be anywhere up to £20,000, ecological £10,000, bat surveys £5,000, mining surveys £10,000, archaeology £5,000, asbestos £5,000. So, on an average site, over and above the cost of the planning application, it's nothing to spend up to about £100,000 purely on reports that are demanded. Now, we find with Natural Resources Wales in particular that they've increased considerably the number of reports that they want, to the extent that our professional advisers say, 'Well, look, this just isn't needed; it's not necessary.' And the concern is that these reports are just asked for to safeguard jobs. So, the costs can escalate. On a quarry that I own, recently the cost was close on £250,000. 

And, again, none of that is bankable. You can't get funding for it, so that has to come out of your personal resource. Now, once you've done all that, the tendency that we find is that the local authority, because they're short of funds, seems to think that the developer is a soft target to try and get increased funding for the council. So, the affordable housing requirement is very expensive, and on top of that, then, you've got education contributions, highway contributions, leisure contributions and open-space contributions. So, on a small site I'm doing in a very small village in west Wales called Pontarddulais, the education requirement was £400,000, and the planning officer said, 'Look, I'm sure that it won't end up at this, but that’s the starting point'. So, we then wasted months negotiating just that one aspect of it.

So, as far as small house builders are concerned, that's a daunting task—you know, you're talking about very significant sums with no guarantee that you're actually going to get the planning at the end of it, and, even if you get the planning, you don't know what your contribution's going to be, and all of that reflects on the amount that you want to pay, or need to pay, the landowner. So, that's then led to a separate problem, which is that the landowners, when they see what they are eventually going to get, when all the abnormal costs have gone, tend to say, 'Well, perhaps we won't sell that land', so there's a shortage of land.

But, over and above that, you've then got the cost of borrowing. So, the cost of borrowing currently in the market requires you to put 40 per cent of the total cost of the development down. Interest is about 6 to 7 per cent from the non-high street banks; there's a 2 per cent fee in and out. Your due diligence today, where you have to pay the bank's legal fees, can be anything from £10,000 to £50,000—in October, I actually paid £120,000 for the due diligence. On top of that you've got your surveys, fees and your monitoring.

Now, those costs are costs that you've got to have the cash for before you can even start. So, very quickly then, on top—

10:50

I'll just stop you there, because some Members may dive into that a bit later on if that's all right.

That's fine. But you answered my—. You were very clear in answering the question, by the way, so I appreciate that.

Okay. Well, I haven't quite finished yet.

Can I ask Ifan Glyn: do you also think that the house building industry is facing a crisis like never before?

Yes, so—. I'm going to say this in Welsh.

I wneud pwynt mwy cyffredinol o ran—. Mi wnaeth gwaith ymchwil gan Lywodraeth Cymru a gafodd ei gyhoeddi wythnos diwethaf ddynodi bod angen inni adeiladu rhwng 6,700 a 9,700 o dai dros y pum mlynedd nesaf. Felly, ar gyfartaledd, mae hynny'n ryw 8,300 o dai yn flynyddol, a dros y degawd diwethaf, ar gyfartaledd dŷn ni wedi bod yn adeiladu rhyw 6,400. Felly, os ydy fy mathemateg yn gywir, mae yna fwlch rhwng y tai dŷn ni eu hangen a'r cyflenwad o ryw 20 y cant. Felly, y rheswm pam mae mor bwysig ein bod ni'n gwneud mwy i alluogi cwmnïau adeiladu bach i adeiladu tai ydy'r ffaith mai rhyw tri chwarter y tai sy'n cael eu hadeiladu heddiw yn cael eu hadeiladu gan bum cwmni mawr iawn, ond, yn y bôn, dim ond mewn ardaloedd mwy ffyniannus y maen nhw'n adeiladu. Mae ganddyn nhw ddiddordeb mewn llefydd fel de-dwyrain Cymru, ond, os ewch chi i gefn gwlad, a llefydd sydd, yn gyffredinol, yn llai ffyniannus, mae ganddyn nhw lai o ddiddordeb adeiladu yn yr ardaloedd yma.

Felly, mae yna fwlch amlwg y gall adeiladwyr bach yng Nghymru ei lenwi yn fanna, ond, yn anffodus, o achos problemau efo'r broses gynllunio a'r ffaith ei bod hi'n broses hirhoedlog, y ffaith ei bod hi'n broses gymhleth iawn ac yn broses gostus iawn, y diffyg plotiau bach o dir yn y cynlluniau lleol, a hefyd nad oes modd benthyg arian ar ddechrau'r project—. Felly, mae'r tri phrif broblemau yna yn rhwystrau mawr i adeiladwyr bach, a tan ein bod ni'n cael gwared â'r rhwystrau yma, mi fydd gan y cwmnïau mawr yma fonopoli dros y sefyllfa, ac mi fyddan nhw'n adeiladu mewn rhai ardaloedd ffyniannus, ond dim mewn ardaloedd eraill.

To make a more general point in terms of—. There was research work undertaken by the Welsh Government that was published last week stating that we need to build between 6,700 and 9,700 houses over the next five years, so, on average, that's about 8,300 homes annually, and, over the past decade, on average we've been building around 6,400. So, if my maths are correct, there's a deficit between the housing needed and the supply of about 20 per cent. So, the reason why it's so important that we do more to enable small companies to build homes is that about three quarters of the houses are built by five very large companies these days, but, essentially, only in more prosperous areas. They have an interest in places like south-east Wales, but, if you go to rural areas and less prosperous areas, they have less interest in building in those areas.

So there's a clear gap that smaller builders in Wales could fill. But, unfortunately, due to problems with the planning process, the fact that it's a very long process and very complex and very expensive, the lack of small plots of land in local plans, and the fact that money can't be borrowed at the start of a project—. So, those three main problems are great hurdles for small builders, and, until we get rid of these hurdles, then these large companies will have an monopoly and they will be building in some areas that are prosperous, but not in other areas.

Thank you, Ifan. Can I ask Joshua Miles: is there anything that's been said you don't agree with, and is there anything you can add that's not already been said?

So, yes, without wanting to go over the same ground again, I think the main bit for me is, in any kind of market, you want a diversity of suppliers. You look at banking and the dominance of a small number of banks, you look at energy markets—there's always quite a lot of attention on trying to bring new entrants into that market. It's quite clear, looking at the NHBC's statistics, that we've gone from 28 per cent of houses in 2008 built by SME house builders to 12 per cent. There's been a contraction there, so, just in terms of economic diversity, I think it's worthwhile us pursuing options to try and improve the number of SME house builders in the sector. 

And, again, just to reiterate Ifan's point about the geographical spread of this, the fact that we have quite a concentrated market means only certain parts of Wales are having houses built on them at the moment, and that's something we need to address if we want to make sure we're providing the housing people need across Wales. 

10:55

Can I say to Mr Francis, if you don't get a chance to draw out what you wanted to say in your second point in answers to questions, I'll come back to you at the end as well—

—but they may well be drawn out during the course of the discussion? Mark Reckless. 

Yes. Mr Francis, first can I thank you very much for your written evidence, which I found very valuable—and these guys also, but it is their job, but you've also given us some very valuable evidence from the front? I wanted just to pick you up on your comments about the non-high street banks, alternative lenders or some of the smaller banks. The 6 to 7 per cent interest rate, plus 2 per cent of fees, is that really so different from what you were getting from the high-street banks pre 2008? 

Yes, it was. We were paying sometimes between 1 and 2 per cent because of the value, perhaps, of our personal guarantees. That was recognised by the high-street banks. That's changed now, and I suspect that, when they get back into the market, they will recognise the fact that the market was prepared to pay the 6 to 7 per cent, and I suspect that they then would be looking to get similar rates when they do eventually come back. But funding is a major problem, and it's a problem that needs to be addressed. 

When were the high-street banks lending at 1 or 2 per cent to developers? 

We were borrowing at that rate up to about 2006, 2007. 

Okay. And the planning process—is it realistic, really, to expect banks to lend on a pre-planning basis when they don't know if you're going to get planning permission, and the security might be worth less if you don't? I'm not sure whether you were talking about a situation when you own the land, or whether you'd got—

But I think that's a separate issue. I'm talking about the facts on the ground as they stand. A small house builder is going to come in and he has to have the cash to be able to get that planning consent. Whether it's right or wrong is a different issue. 

I agree with a lot of what you say about there being far too many reports and far too much bureaucracy and regulation around the planning process, and I'd like to see that reduced. What I'm less clear on is can anything can be done in terms of the finance for that. Why would you expect a bank to lend on that— 

But I don't think that I do expect the bank to. What I think needs to be addressed is that the cost of the planning process needs to come down. And, if that were to happen, smaller house builders would come back into the market. They would still be faced with the fact that the banks wouldn't support them on borrowing for that purpose, but at least they'd have less to find going forward after that process. 

Doesn't the planning system allow some reduction in those requirements for the smallest house builders? 

No, all that—. I think you're aiming at the fact that your 106 obligation is less on 10 houses than it would be for more than that. But the cost of the planning application itself, the process itself, is the same. It's just a question of arguing subsequent to that that your contribution should be less. 

Okay. So, there's a site report, £15,000, a flood report, £20,000, geo report, £10,000, and then several others. You wouldn't be paying those if you were putting in an application just to build two or three houses, would you? 

Yes, you may well—not perhaps as much as that, but you still have to go through that process. I think what the committee needs to understand is that the small house builder now has been pushed to the margins. So, the land that's available to the small house builder tends to be small infill sites, which are brownfield sites. So, the cost of developing those is considerably more. One of our grievances is that the 106 contributions that are expected are still the same as what they'd expect on a greenfield site. So, if you're building only four houses, you've still got to check out whether there are any mines underneath it, whether there's any contamination there; there may be demolition costs, asbestos costs. So, the costs don't go away. They may be somewhat less than the figures I've given. Those are the figures that I tend to experience, because I tend to build more than 10 houses, but the cost is still there. 

And what do you think of the Wesh Government's proposals around local development plans and the suggestion that local authorities put land within those aside for smaller house builders? 

11:00

Sorry. I mustn't forget about your representative organisations, who are also here.

Right. Okay. It's a wonderful intention, but, in practice, it's not working. I withdrew from a bidding process last week on a parcel of land that Swansea's selling, and have been selling, for the best part of two years. They eventually put it on the market; it's taken 10 weeks to decide who the successful bidder is, and they've decided that no-one's successful. The reason for that is that the estates department simply put this on the market with limited information. So, you're in a situation that you've got to say, 'Okay, well, my offer's conditional', and my conditions were two pages; some of the colleagues I spoke to afterwards, they'd put in 10 pages of conditions, which you've got to cover yourself on, you know. They hadn't done their homework properly, and this happens regularly.

I spoke to Martin Nicholls, the director of place, at the end of last week and said, 'Look, you've got another parcel of land there that small house builders would really welcome. It's been on the market with you for two years, so we must take it that it's not really on the market, despite the fact it's on your website'. He said, 'Well, we've got a few issues to sort out'. I asked what those were—now, as a lawyer, I knew that those issues are issues I would be able to resolve in, perhaps, 28 days; it's taken them two years. So, if we are hanging our hat on the fact that the local authorities are going to bring these small parcels forward, then—it's a bit of a dodgy ground to hang your hat on.

I just wanted to come back to the point on the 10-home threshold. So, once you build 10 homes or more, it's classed as a major development, and then the planning requirements—even though they are still very burdensome if you build two or three, once you hit that 10, they get a lot more burdensome. So, as an example, you've got the pre-application community consultation, which takes a long time and can be very costly. So, one of the things we'd call for would be to increase that threshold of 10, because the Plcs are not particularly interested in building anything less than sites for 50 homes or more, really. So, that threshold of 10, in our view as the Federation of Master Builders, is a bit low.

Yes. I just wanted to pick up on the finance bit as well. We did some work as FSB with the UK Parliament's all-party group on SMEs, and they looked at the issue of finance and took evidence in quite a bit of depth. And one of the other bits that's changed post 2008 that hasn't been mentioned is the loan-to-cost ratios. Quite often in the past, they had examples of 70, 80 per cent loan to cost for a scheme, whereas now—

Yes, to the gross development value. So, you've reached a point now where, essentially, you're getting less of that funded. I suppose our concern as FSB would be: if you wanted new entrants into the market, for example, to change that 12 per cent, then the barriers have become that much bigger in terms of the finances you'd need to have—the cash upfront. So, that's one of the changes we've seen.

Thank you. And, finally from me, the Self Build Wales programme, I was quite encouraged to hear the Minister announce that a week or two ago. Do you think that can provide opportunities for the smaller builders to do more?

The Self Build Wales programme, as announced by the Minister I think two weeks ago, at least on the face of it seemed to give new opportunities, potentially, for smaller builders.

I'm going to say this in Welsh, sorry, so—.

Mae’r prosiect Hunanadeiladu Cymru yn rhywbeth—dŷn ni wedi cael ein calonogi efo’r ffaith ei fod wedi cael ei ddatblygu. Mae o’n ateb rhai o’r problemau sy’n bodoli i gwmnïau adeiladu bach. Hynny yw, mi wnaeth o gymryd y broses gynllunio allan ohoni. O ran cyllideb, mae’r banc datblygu’n fodlon rhoi benthyg arian i bobl, ond mae’n rhaid cofio bod rhan o’r diwydiant adeiladu—rhan cymharol fach o’r diwydiant adeiladu—ydy’r sector hunanadeiladu, ac, er bod yna fodd inni dyfu hynny yng Nghymru, dydy o ddim yn silver bullet, fel petai. Ond, ie, ar y cyfan, dŷn ni’n gweld y prosiect fel rhywbeth positif.

The Self Build Wales project is something that—we're encouraged that it's been developed. It does answer some of the problems that exist for small house builders—namely, it will take the planning process out of that. In terms of finance, the development bank is willing to lend money to people, but you have to remember that just part of the house building industry—a relatively small part of the industry—is what the self-build sector is, and even though it would be possible for us to grow that in Wales, it's not a silver bullet, as it were. But, yes, on the whole, we see the project as being a positive thing.

Two things I'd like to pick up: the pre-app, or pre-application. Do all local authorities, or unitary authorities, see that as an additional cost, or are there any that are taking that off the final cost of application for planning? That was one question I wanted to know. So, is it the same right across Wales? And the other one was the 106 agreements, and the issue of brownfield sites, obviously, being more onerous, which we all will understand. Is there room for considering putting a 106 in terms of a brownfield site, bringing that back into usability, as fulfilling the 106 agreement in and of itself? And, if there is, have you asked?

11:05

In terms of the 106 obligations, what we've suggested to Swansea, and what we've been successful in doing, is we've pushed for a forum in Swansea that was not welcome to begin with—the officers were very much against it. But it's started to work well; it's taken the sting out of it—so, it's taken the 'us' and 'them' out of it. And there's been a kind of a consensus of opinion that people can talk and rationalise things, whereas, before, it was, 'This is what you're going to do, and that's the end of it'. So, looking at the 106, what we've tried to suggest to them there is that what's needed, I think, in Wales—because I think, in England, it works slightly better—is transparency, so that, when you look at a project at the very start, you're able to asses what the likely cost of your 106 obligations are going to be. Now, that means that you can feed that back to the landlord at the very start, and say, 'Look, I know your expectation is this, but the abnormal cost that we are faced with is this, and therefore we can only pay you that'. Now, it's better to get that out of the way at the start of the process than to wait for several months, spend a lot of cash on the planning, only to find that the landowner then isn't happy with the price that you eventually come back with. So, transparency is really very important. I think that's what I would direct at your second question.

As far as the first question is concerned, it works right across Wales, in that the pre-app fee is in addition to the normal fee of £380 per unit. And what's happened is that they've encouraged you to have a pre-app. And my point is, on large sites now, as our large sites—some of them—are, say, 300 houses, we may not go for planning on the entire site in detail; we might go for outline, because tastes change. If we're doing 40 houses a year, in three years' time, the demand might be for four bedrooms, whereas, currently, it's three bedrooms. So, in the situation, as far as we are concerned, we are very mindful of the fact that the council can change its mind half way through, which can really have an impact on the costs of the scheme overall. So, 106s are a major problem, and transparency is really something that they need to accept. In England, you've got the SILs, and you've got a rough idea as to where you're going to end up before you make your planning application.

Thank you, Chair. I wanted to ask you some questions about the support available from the public sector, including the Development Bank of Wales. Firstly, I'd like to take the panel's views on the operation of two funds—that's the property development fund and the stalled sites fund.

O ran y ddwy ffrwd yna, dwi'n ymwybodol bod rhai o'n haelodau ni wedi gwneud defnydd o'r ffrwd gyntaf—y ffrwd datblygu eiddo. Ac o ran adborth gan ein haelodau ni, mae'r adborth wedi bod yn eithaf positif. Mae'r cyfraddau llog dipyn bach yn uwch nag y buasen nhw'n licio, ond, ar y cyfan, mae'n nhw'n eithaf positif. O ran y ffrwd ffyniant ar gyfer sites segur, yn bur ddiweddar y daeth hwnna i mewn, felly does gennym ni ddim cymaint o adborth gan yr aelodau o ran sut mae hwnna'n gweithio.

In terms of those two funding streams, I'm aware that some of our members have made use of the first stream—the property development fund. And in terms of feedback from our members, the feedback has been quite positive. The interest rates are slightly higher than they'd like, but, on the whole, they're quite positive. In terms of the stalled sites fund, that only came in very recently, so we don't have so much feedback from our members in terms of how that's been working.

I think, as a general point, the development bank has been quite proactive in this area. So, I absolutely welcome the work that they've done there. As Ifan said, there are always questions about costs, and maybe Huw can elaborate a little bit more on that as well. But the fact that there is this gap there, and the development bank has moved into that space, is a really good intervention, and hopefully they'll continue to do that.

One additional point is that the assistance provided by the Development Bank of Wales really is there to help companies that are already building to grow, and to keep on building more and more. It can't help entrants into the industry—that's the big issue. Because the planning process is such a costly one, the Development Bank of Wales can't help with that upfront cost.

11:10

I'd want to add to that that they've been a huge help to us and we would have welcomed it had they got a bigger fund to lend because the amount that they had previously wasn't a huge amount. One aspect of what they're not able to do, and we've asked them to reconsider, is bonds, which are a huge problem for small house builders and, ultimately, as far as DBW are concerned, they've been very helpful to us in providing the cash for the bonds, but they can't provide the paper. So, what that means is that you've got to take the cash, put it in escrow or deposit it with a London insurance company, and there is inevitably then considerable cost attached to that from a legal point of view.

Bonds are a major issue and, especially with Dŵr Cymru, which won't accept cash, if you've got a small bond, rather than incur the legal cost, we would deposit money, but from their point of view, they can only accept £2,000. So, the whole issue of bonds needs to be looked at, but, as far as DBW are concerned, we found them very helpful.

Thank you. Any comments from any of you on the extent to which wider business support available under Welsh Government's economic action plan might adequately address the specific needs of the sector?

I don't think we've got there yet to be honest. I think EAP is starting its roll-out now. The focus has been quite a lot on the economic contract and those elements of it. Business Wales is continuing to do what Business Wales did before, and, as you'll be aware, that's a general business support service. It's been quite focused around job creation figures in the past, so a lot of the focus there will be on the number of jobs that will grow and not necessarily on the type of activity a firm would do. So, you will know from things we've said in the past that we're very supportive of Business Wales, but, from a house building perspective, I think it's not necessarily a bespoke service in that respect. 

There was a question around local government support as well. It's been discussed quite a lot already that capacity in local government is a major issue for the planning process, but there's also the economic development side of local authorities, and, again, we just see that as being really patchy in parts of Wales. Some large local authorities have quite a lot of capacity, but they've been under severe financial pressure, so perhaps aren't able to do a lot of the hand-holding that perhaps they might have done in the past.

I'll come back to that issue in a moment. That's my next question.

Do you mind if I just bring Mark in on a point, and come back to you? Mark.

I just wanted to follow up on onepoint. You were saying that the development bank is of no use for new entrants to house building, and I understand the challenges on planning, but surely a new entrant could come and find a site with planning permission for a couple of houses or perhaps put some savings into getting planning permission and then getting funding. It is a realistic option for new entrants, isn't it?

Probably a fund will lend once you have planning in place, but, obviously, if you're a new entrant into the market, you need to find that upfront cash to get yourself to that stage where you've got planning—

What sort of sum is that? What would someone have to have as a minimum amount of money before they could start—?

If you're building two or three houses, you're talking £20,000 to £30,000 potentially, and there are risks involved in that. I appreciate that, obviously, business is all about risk and reward, and you can expect companies to take certain risks if they want their rewards at the end of it, but at the same time, construction companies have options. It's not like during the monopolisation of the food-selling market in the 1990s, where you had fishmongers, butchers et cetera going out of business because of monopolisation; construction companies can work in home improvements—they can work in all different sectors. So, house building needs to become an attractive proposition to them. If they can't access that finance upfront, why would they, I suppose, take that risk with that upfront cost?

But isn't it reasonable to expect someone who's wanting to make money in business—say, somebody who's got trade skills and has ambition to go further, who should be working for a few years or perhaps with someone else, partnering—to save £20,000 or £30,000? Isn't that a reasonable expectation before you put taxpayers' money on the line to back them?

I guess that's open to debate, but what I would say is that it's not happening.

And that's the important point. The fact is that there are fewer house builders and the question that ought to be asked is: how many houses are needed in various areas and how many are actually being built? The proof of the pudding is that there are fewer and fewer houses being built. So, the point you make is a reasonable point, but the fact on the ground is that those houses that are needed aren't being delivered.

And the people who might do that, it is suggested, are going to alternative things. For instance, you mentioned housing refurbishment, where the financing of that is easier, and the barriers to entry fewer.

11:15

It's more certain, because you know that you've got the job. There's no uncertainty, which is what you get when you get the planning process involved. 

Thank you. My final question is around local authority support. Huw, you provided some anecdotal evidence around this already. I was wondering what your feelings are about the picture around Wales. The Residential Landlords Association have told us that there's something of a postcode lottery, where some builders have greater support from the local authority depending on which area they operate in, whereas some have no support. Crucially, do you think that there's a pattern between that and where the big five house builders are building? So, would local authorities support SME house builders more in those areas that aren't currently the targets of those big house builders?

If you look at the number of small sites in local plans at the moment—if we were to classify a small site as 25 dwellings or less—there are two local plans that have over 16 per cent of their sites that fall into that category, five between 12 per cent and 16 per cent, four between 8 per cent and 12 per cent, seven between 4 per cent and 8 per cent, and four between 0.1 per cent and 4 per cent. If I could show you a map now, you'd see that the general pattern is that the local authorities where there's a lower number of smaller sites are in the south-east, and then the local authorities with a larger percentage of smaller sites would be in the more rural areas. That's mainly because that's where the public limited companies are interested in—the more affluent areas. 

What's disappointing, though, is that the support and proactiveness of local authorities to engage with SMEs in terms of their needs, in terms of releasing smaller plots of land, seems to be at the moment dependent on how interested the plcs are in developing there. So, if they are interested, they don't seem to be that interested in working with the SMEs. It should be something they do anyway. 

It's driven by necessity, not the general feeling across the board, I suppose. I think the other thing that's worth pointing out is there are some local authorities that want to engage in this kind of area. FMB held a conference and we heard from Rhondda Cynon Taf local authority, and, do you know what, they were really proactive, they really wanted to create smaller plots, they wanted to engage their local SMEs, because they knew they were never going to get the large companies there to fulfil the housing need that they have.

So, I suppose the question for us is: how do we get the other 21 local authorities in Wales to start thinking like that? How do you get the LDP process to be a conversation not just between a small number of very large companies around large plots of land but actually to be a much more granular thing? That's probably going to be quite challenging for a lot of local authorities because of resource issues, but it's the kind of thing we need to unpick, I think.

Isn't one of the answers that Rhondda Cynon Taf are looking to roll that out across the Cardiff capital region, as we learned at your conference? That's surely a really significant thing given what you say about south-east Wales and the difficulties there. 

Yes, I think that's a really positive thing, and I'm sure colleagues here would agree. It's just how we do more of that and how we scale up the ambition a little bit, so there's a lot of focus there around self-build? How do we parcel things up into three or four plots so that a small builder can come along and a lot of the planning hurdles will already have been overcome, and then it becomes a much more viable prospect? So, that's definitely the proactive approach. 

Given the controversy around large house builders building on big plots of land, isn't it in the local authority's interest to encourage the smaller firms, as RCT are doing? Surely that's a better way of doing business and getting things done.

I suppose we would agree with that, but we have a perspective on these things. Ultimately—

In your conversations with local authorities, wouldn't they say to you, 'We could get this done'?

I think it's a resource issue. I think it's just easier for them to go to a small number of big firms, get a large number of houses done and fulfil that particular housing exercise. It is hard—

That's the attitude acrosss the board, isn't it? Large firms will build and they'll do it cheap.

Yes, I would agree with that. Ultimately, in the ideal world, all local authorities would want SMEs to be building their homes, so that more of that money spent is kept in the local economy. But there is a kind of attitude of—. But it is a resource issue, as Josh touched on. To deal with four or five builders as opposed to 25 requires less resource, and, in terms of planning departments, if you look at the amount of resources being pulled out of planning departments within local authorities over the last few years, that's a major issue as well.  

11:20

Ifan, from your perspective, would you say the amount of objections from communities are higher with the small number of large firms, rather than the large number of small firms? 

So, you're more likely to have fewer planning objections with small firms than large ones? 

Right, we've got about 25 minutes left, and we've got five subject areas we want to cover, so can I ask Members to be succinct with your questions? It's likely we're not going to be able to get a view from every panel member to get through all the subject areas we want to cover. Joyce, did you indicate that you wanted to come in or not? 

Well, I'm just thinking on that, on planning, you've identified development plans in local authorities, have all local authorities got LDPs? 

Off the top of my head, I don't know the answer, but I know, from some of the content from the FMB conference, that there were quite a lot of maps that I'm sure we could share with you later on after today, that show that even where there are LDPs there is a lack of supply and some of the issues. As a general rule, I think the LDP process is quite a slow one, and isn't always as on the pulse as we'd like it to be. 

The current round of LDPs started in 2005, and there are a number of local authorities that still don't have them in place yet. 

Thank you, Chair. I'd just like to move on to the Help to Buy—Wales scheme, really. Ifan, I believe the Federation of Master Builders have pointed out that although large firms have a greater use of the scheme, actually, plenty of smaller businesses also have good use of that scheme, and I've noticed on the Hygrove website there's a link there, so they must have some benefits. I guess my question is, really: is there scope to increase the involvement of smaller businesses, and if so, how would you like to see that happen?

So, I think there are roughly about 100 house building companies involved in the Help to Buy scheme. Generally speaking, there's this threshold of 300,000. There are a lot of small businesses, especially when building two or three homes, that will be building above that threshold, so that could be one of the reasons. So, in terms of involvement, I can't see any obvious barriers as to why SME construction firms can't get involved in it, it's just at the moment that the reasons why the numbers are so small, of SME developers involved, is the number of SME developers is so low. 

It's been a huge help to us. 

That's good, that's a perfect answer. Jack, do you have any further questions? 

First of all, can I echo what Mark said about your submissions? Thanks very much. They're very comprehensive, particularly yours, Huw, which could be used as a guide to any potential developer, to be quite honest, or a disincentive to any potential developer. 

I know we've talked about planning extensively so I don't know whether there's enough room for you to comment, Joshua, on the FSB's comments that the planning process currently acts

'as a significant disincentive to small house builders from entering the market due to the time and costs involved.'

So, we have discussed it, but is there anything you'd like to add to that? 

Again, we've discussed that at length, so I think we're all aware of the problems, but just for me, if we're going to get that 12 per cent figure higher and we want to have a more diverse sector, we need to think about how we get new entrants into that market, and they are, as Ifan mentioned, the kind of firms that are perhaps doing repair and maintenance jobs at the moment. How do we get those to start thinking about, 'Okay, maybe I'll build one or two houses here and start to scale up'? So, I think there's an open question there, but it's perhaps a challenge we need to reflect back into policy. 

Well, I think it begs the question now, doesn't it, really, of what specific actions could or indeed should be taken by the Welsh Government and our local authorities to improve the planning system for small house builders. It's desperately needed, isn't it, some actual steps? 

I'm going to say this in Welsh. 

Fel imi grybwyll yn gynharach, dwi'n meddwl bod y trothwy yna o 10 o dai ar gyfer site o faint felly—bod angen codi'r trothwy yna o 10 dai i lawer agosach at 50. Dwi'n meddwl hefyd fod angen ei gwneud hi'n orfodol bod awdurdodau cynllunio'n rhyddhau darnau o dir, darnau o plots bach sydd yn weddus i gwmnïau adeiladu bach, ac nid yn unig gofyn iddyn nhw wneud hynny, ond hefyd bod yna ryw fath o fanteision—neu gosb os nad ydyn nhw'n gwneud hynny. Dydy hi ddim yn ddigon da i ofyn iddyn nhw wneud hynny a dibynnu ar eu hewyllys da i wneud hynny. Dŷn ni wedi gweld yn barod efo'r broses o greu'r cynlluniau lleol, dydy gofyn iddyn nhw wneud hynny ddim yn ddigon, mae'n rhaid inni fod yn fwy strict i sicrhau eu bod nhw'n gwneud hynny.

As I mentioned earlier, I think in terms of that threshold of 10 homes for that size a site—that threshold needs to come up from 10 to much closer to 50. I think also that it must be a requirement that planning authorities release small plots of land that are suitable for small home builders, and not only ask for them to do so, but also that there are some kind of benefits—or a penalty if they don't do that. It's not good enough to ask them to do that and then to rely on their goodwill to do so. We've already seen with the process of creating local plans that asking them to do that isn't enough, we have to be more strict to ensure that they do so.

11:25

I suppose, just two things, really, and, again, we've touched on these already, but one is how do we introduce proportionality to the system. There is already an element of proportionality with the 10 houses cut-off. I know some of the regulations—. I was reading that sustainable drainage systems, for example, come into play with two houses. So, some of those areas are different, but maybe we need to just go back and look at that and work out where the proportionality element comes into the planning process to make it more attractive.

And the other bit for me, and again, we've mentioned this already, the rules and regulations are one thing, the actual people who are implementing it are another. And if they're under a lot of pressure in terms of capacity, then that's obviously going to slow things up. I draw a parallel with procurement. We've got excellent procurement policy in Wales, but quite often, where it falls down is in implementation, and that's because we haven't got a lot of the staff and the capacity and the skills to do it. So, for me, going back and having a look at that capacity and seeing how we can make it better would have a big impact, I think.

There's been some criticism of NRW. You're not the first, obviously, with regard to that. Is there any specific thing that we ought to be saying to the Government with regard to NRW and what they're up to?

I'm sure Huw will pick up on this, because it's an area you've come across quite a bit.

That would take up several hours to—[Inaudible.] But the system's, as far as we—. Sorry, Joshua.

Just very quickly, one of the key things in the planning process is it's not just the planning authority—there are quite a number of statutory consultees. You will quite often hear Welsh Water come into the mix as well—Dŵr Cymru, and you're quite reliant on those being prompt in their response to things, to help the process go forward. So, yes, absolutely, that's the kind of area where those kinds of response times and the capacity there need to be looked at, I think. Huw, sorry, do you want to—?

The experiences we've had have all been, unfortunately, bad with NRW. Several times, they've come back literally at the last hour with a query to extend the amount of time that they've got to answer the questions. We've recently had a very bad experience with them in a little village called Penclawdd where they were desperate for affordable housing. It was a pre-start condition that we build a bat house. The officer dealing with that, as I've explained in my statement, was part time and her boss was part time. That process was particularly important to us because there is a cut-off date after which you wouldn't be able to start the development until the following seasons, because the bats were going to roost. We spent a month trying to get some officer in NRW to address that issue. We got through it by the skin of our teeth.

But what's expected—'proportionality' is a word that they don't understand. So, previously, these bats were roosting in a derelict building with no roof. The building that we've built is totally secure and they wanted a solid door. We provided them with a very expensive hardwood door. When they came down they said, 'Look, we've changed our mind—we want a steel door.' Now, that doesn't seem great, but that was an extra £350. Now, these things add up in a development, especially when you're building affordable housing, where the margins are very slim.

I've got to deal with them, unfortunately, on the quarry as well, and you tend to find a duplication of roles. So, you deal with them on all ecological matters, they're satisfied, and then you go to the local council and deal with another officer on exactly the same things as you dealt with with NRW. So, it's a total waste of time. In Swansea, that officer is a part-timer, and only works every other Thursday and Friday. So, the system's broken and it needs fixing.

Yes, the point about—. If you go back to the beginning of planning, you could literally put a red line around a piece of land and develop it, and what's happened over time is, obviously, there have been increasing considerations from communities, the environment, et cetera. Now, we're not complaining about that at all as small building firms. In fact, it's probably a sign of progress as people, but the problem is the burden of proving or disproving the impact of housing on these different elements always falls on the private sector, so whether that's ecology, hydrology, archaeology, et cetera. Now, that's all well and good up to a point, but what's going to happen, and what's already happened is that burden's got to the point where only a very small number of very large firms can cope with that. So, we'd like to see more of that burden being taken in-house by the public sector—you know, surveys, consultation fees, et cetera. Are there more ways that the public sector could possibly assist with this for developments of 20 or less or something?

11:30

I just want to talk about the diversity of the workforce. We all know that the building industry at the moment is run by people who are mostly over the age of 55 and that, for the large-scale builders, certainly, and it might be the case with small, a lot of that labour within the market is foreign labour and that things might and will change in the very near future. So, I suppose the first question is: is that a specific challenge that you see and, if it is, in terms of building the next tranche of labour—a skilled workforce in other words, apprenticeships—what do you suggest that we suggest to do something about it?

First of all, yes, it is absolutely a challenge. I think there's a lot of change coming when we have changes in rules around migration. A lot of the surveys we've done of SMEs across the board, so not just in construction, show that there are two potential responses. One is to train their workers more, which is a positive thing. The other is to accept that there are going to be some sort of costs to bringing migrants to work in the UK. I think that, if we have a lot more people wanting to train, that's going to put a lot of pressure on the education system as we've currently got it constituted, and for me the main route into sectors like construction is apprenticeships. At the moment, we've got a good, solid apprenticeship programme in Wales with a good number of people, but fundamentally there's still a gap that we're going to have to sort out at some point. So, it might be that we need more resources going into that area.

Joyce, you'll know from work we've done together in the past that there's quite a small number of women in construction, for example. There's a lot more that could be done in that area. I think we've probably got to push training providers a little bit to push the field there, but fundamentally if we want to replace those skills we're going to have to invest in it and that's something that needs to be thought about quite significantly, I think.

Can I ask—? Because you know about Carmarthenshire Construction Training Association Ltd and other schemes that help to join up small builders so they're not taking the hit, if you like, and they don't have the capacity—. And that's working very well in Neath Port Talbot. Do we need to expand that now more widely, and especially the mid Wales bit, which I cover, so that we can grow potential in those areas that you've just focused on?

I would say so, absolutely. You look at some of the shared apprenticeship schemes, like Cyfle Cymru and some of the things going on, and they're great, but the problem you've got is that you're reliant on an element of public support to make that happen because, otherwise, the firms themselves can't manage the time. So, if we're going to accept that, for lots of areas of Wales, this is the best model we've got for training those people up, then, yes, we're going to have to invest in it and broaden it out, I think. It's a major, major issue, the lack of skills, and the replacement of those skills is going to take a lot of time and a lot of investment, and it's something we really need to consider, I think.

Again—sorry, Joyce, just very quickly—it's something I'm not entirely sure we've caught in the post-compulsory training and education process yet. A lot of the conversation there has been an argument, for me, between the different sectors of higher education, further education and work-based learning, about who gets how much of the pie, but, actually, what that process needs to do is look through areas like those you've just mentioned and work out how we're going to solve these problems. So, hopefully, as that sort of develops, we can throw these challenges back into that organisation, but we're not quite there yet, I don't think.

If I can, the one question that I can't see here and that hasn't been addressed is the different types of buildings that are coming in in the near future. Lots of buildings or construction might be done off-site rather than on-site. So, have you looked at that, as small house builders, whether that would be a help or a hindrance? If you haven't, then you haven't. Also, of course, it's linked to the training needs, but also the potential that could exist that doesn't currently exist in rural areas in terms of manufacturing those types of properties.

11:35

Qualifications Wales are currently at the tail end of the process of reviewing qualifications in construction, and that's one of the points they identified, which is the big gap in qualifications in terms of future skills needs and modern methods construction. That review—a lot of what's been pinpointed in that review is something that we very much support. It identified that the needs of small construction firms and large construction firms are often very different. The larger the firm, more often than not, they want specific skills, because they've got enough work for that, whereas the smaller firms need a more general skill set in different trades. So, in terms of the qualifications review, they're talking about doing a foundational year at the beginning, where those skills will be inputted into the qualification so that what comes out at the other end is a person that's got a more varied skill set. So, yes, that's very much a positive from our end.

What we tend to find is one of the most important people on our site is totally ignored in all these skills classes and all the rest of it, and that's the ground worker. From the slab up, I can tell you how much a house is going to cost, to the nearest penny; it's under the ground where the problems start. So, one of the most valuable people to me is my ground worker. It's a very unglamorous job, no-one takes any notice of them and that's wrong, that needs to change; the perception of the ground worker needs to be elevated, along with the brickies and the carpenters, because, from my point of view, if he gets it wrong, the whole thing is a waste of time and a waste of money. So, there is a massive shortage of ground workers. The average age on our site is about 45 to 50. There are no young people coming into it and the sad thing is that if I want somebody to go into a ditch, or whatever, it's going to be a Romanian or a Bulgarian, or whatever—there are very few British people that are actually carrying out that type of work, and that needs to change. 

—very quick question? You mentioned SuDS very briefly—the ground worker would be, as I understand it, a key person in delivering some of the new sustainable drainage systems. Is that right? And if that is right, then there's—

Well, the answer to that is 'yes'.

Thank you, Chair. Just to comment on what Ifan said there, I do agree with you on the fact about the foundational year within the apprenticeship sector, but I think we have to be very careful that we don't just have a more rounded apprenticeship, because don't forget, we've got the skills gap of the experience of 40-plus years, haven't we? We've got to be very careful that we don't just ignore that—have a rounded group of apprentices come out the other end who are jacks of all trades but actually masters of nothing. I just think that's a comment that we do need to be careful with when we make it, really.

Thank you, Jack. We've got about 12 minutes left, if you're happy for us to run over by five minutes. I'm going to come to Hefin David in a moment for the last block of questions, but then, if I can just prepare you now, I will come to you all. I did promise Huw Francis at the beginning—

Don't worry about—[Inaudible.]

I was going to say, if you want to make any final comments at the end, I think particularly address those comments about what you would like to see our committee recommend to Government to overcome the barriers that the industry is facing. Tell us what you would like us to be recommending, in your view, when I come to you at the end of the session. But for the next five or 10 minutes, I go to Hefin David.

Chair, I didn't get the chance to come in earlier on this concept of viability. How is viability different for a small builder compared to a large builder when you talk about viable land? Viability means profitability, doesn't it?

The position as far as the small builder is concerned is that it's pushed to the margin, as we said earlier on, so it tends to pick up the sites that have got the most problems. So, we're picking up brownfield sites that have got, perhaps, demolition issues, asbestos issues, contamination issues, so viability in terms of that is a very critical aspect of the whole operation.

So, is it true to say you're willing to live with lower profit margins than the larger companies?

It's not a question of willing to, we have to. That's the—.

11:40

So, in principle, there's a slightly lesser profit motive, but at the same time the cost of remediation falls on you.

The cost of remediation falls on us. The point's already been made to the local authority. You're benefitting twofold here—one from the obligations that we're having to meet, and, secondly, the land that was derelict, that was contaminated, is being remediated. Can one offset part of the other?

Have we got a national understanding of brownfield land and the cost of remediation per site?

No. That's the point I made earlier on. There needs to be transparency, and I think, from that point of view, if a person goes into a project and knows upfront what the cost is likely to be, then the decision as to whether to proceed or not can be made at that stage rather than after it's incurred a considerable cost.

But just to be clear, that data isn't held anywhere—there's no data that says, 'This is the amount of brownfield land we've got in Wales, and this is the cost per site for remediation.'

No, and we've already put it to Swansea, for example, that if you're carrying out a mining survey and you submit that to the local authority, they ought to be obligated to put that on a website so the next person who comes up in that vicinity can benefit from the cost that the previous guy has incurred. That would help enormously, rather than a duplication of effort, because the results on the next-door parcel of land are going to be identical, normally, to the ones on this parcel.

But there's a significant proportion of brownfield sites that are beyond the scope of remediation, even for large companies.

On the whole, our experience is that you can get round it. We've got a massive site in Swansea of 14 acres that was very, very heavily contaminated, and we're managing okay.

One of the things that's been put to me by Caerphilly council—I've spoken to them at length over these issues—is that we've got brownfield sites that have been in the local development plan and available for development since 1996, in the previous unitary development plan, and are still in it, and no-one is interested in remediating this land.

Well, that may well be because of the point that we're discussing here. The small house builders who would be interested have just left the industry. I've got a site starting shortly now that I've not been able to start for 10 years because I've been building the best part of £2 million-worth of road to get to that site. So, it takes time.

So, is it more of a market capacity issue than a viability issue? So, the fact that, if you had a greater capacity of small firms in the market, those non-remediated brownfield sites that have been in LDPs for generations would start to see development.

Yes, it's chicken and egg. They're not doing it because they're not there, and they're not there because of the fact it's not viable. So, there needs to be recognition within the planning system that the cost of the remediation ought to offset part of the 106 obligations, and if that were to happen, and if there was transparency from the start, then I think you'd see a lot of these brownfield sites getting snapped up, provided the authority—. The local authority in the one I just spoke about earlier on could have granted itself planning permission and that would have taken off the table a huge cost and a huge uncertainty, and we would know what the obligations were. Now, I've pulled out of that process because I'm fed up with it. It's taken such a long time. So, other people that I've spoken to, they're pulling out as well, so the council's going to be left with that brownfield site because it approached it in the wrong way.

But didn't the Welsh Government used to provide funding for remediation and reduce the amount of funding they provided for remediation because of the perceived spiralling costs of remediation?

Well, from our point of view, we take the line that, if you need a grant, it's best to leave the project alone, because the length of time it takes to get the grant, and the cost of going for that—

Well, it didn't work for us.

Okay. Can I ask, Ifan, is that the case? From a policy point of view, would money for remediation from Welsh Government be helpful, and was it reduced in the past, as I understand it was?

I don't know, to be completely honest with you.

I was just going to say that that mapping element is probably quite important, because, again, it goes back to the point Huw made around transparency. It's the uncertainty that puts a lot of people off becoming a small house building firm in the first place. So, anything we can do to reduce that—if you're approaching a parcel of land, but you know it needs to remediated, people estimate the costs, then even if the costs are significant, if it's viable, you'll make it work. It's just removing that uncertainty I think is the problem.

Okay. It was quite interesting—I asked the previous First Minister a question some time ago, and he said there was land in Cardiff where the cost of remediation was £2 million. We just can't provide that kind of money from a Government point of view. But I suppose that land would never be developed because it wouldn't be in the interests of small firms to develop it either, if it cost that amount of money to develop. So, I would suggest that, actually, you may look at all this land that's open for remediation, that you could build on, but actually there may be, if we carry out that research, a relatively smaller proportion of it that would actually be developed through the market. 

11:45

You could think about it like the project in Rhondda Cynon Taf at the moment. If the local authority is being proactive and if Welsh Government is being proactive, they're able to go part of the way in terms of providing clarity as to what the site will look like and what the viability of it is. It's a lot easier, then, for a smaller firm to come in and do the rest of the job, I suppose. It's how much local authorities and Welsh Government want to go down that route, I suppose.   

Okay. Because it's quite interesting you said that grant money is less helpful. What about land banking? You mentioned land banking, Huw, in your submission, only in passing, actually, and if I can just get to it. You said,  

'developers are frequently accused of "landbanking", however the points set out in this paper highlight the difficulties experienced by SHBs in preparing a site for development. We would therefore urge that these points be considered given the proposed future introduction of Vacant Land Tax.'

What did you mean by that? 

What I mean by it is that there's a tendency to think that a developer is land banking when there's a good reason for them not developing that. In our case, we've got perhaps 400 plots, which I've bought over the last 30-odd years. One, we wouldn't have the funding to develop them all at the same time and, secondly, as far as we are concerned, there's a restraint on the resource that we've got to develop them. 

So, why did you buy them, then, if you weren't able to develop them straight away? 

Well, we acquired—. We bought a lot of land in Berkshire—farms and whatever—and over the years we've gained planning consent on them. I've built perhaps 100 up there already, and I've just had another 15 acres put into the structural plan. So, it evolves at different times, if you like. 

Yes, I may well be, yes. 

Right, and why—? I suppose the reason you're buying it is because you're worried that if you don't buy it now, the value of the land might increase— 

I bought it 30-odd years ago. Most of the holdings that we've got we've held for a very long time. 

Right. So, a vacant land tax for you, then, would actually disincentivise building on land that you already own. 

Well, we feel it was a penalty for an investment that was made several years ago which has turned out to be a good investment and, from our point of view, we will be bringing it forward as soon as we possibly can. We've upped our build currently to just under 100 houses a year. Previously, we were doing about 50 to 60, which would have meant that we would have been taking longer to get to those parcels of land.  

Would the cost of vacant land tax encourage you to build quicker on that land? 

I think it would penalise us as small companies. I'm not sure that it would encourage the national companies to come forward because they face, to a large extent, the same type of problems that we face. 

But it wouldn't cause you to think, 'Oh, God, there's a vacant land tax being introduced here, we'd better build on it quickly and sell.' 

Well, I don't think that we'd be able to build on it and sell. We'd have to build it as part of a process, and all the issues that we've said and described today come into that. So, funding would come into it, and we're not going to overstretch ourselves. I can tell you that recently we were offered by a bank £25 million to go out and develop land, and we've said we can't do that. At the end of it, we can focus on what we can actually control, and we can't control that level of it. So, we were fortunate to buy land that's had planning permission on it, but, at the end of it, we couldn't think of developing it all at the same time. 

But what you're telling me is that the intention of the vacant land tax is to encourage developers not to hold land but to build, but, actually, it won't have that consequence for you, for a small firm developer. 

It certainly won't for us. It may well for other people. 

Just in terms of vacant land tax, I think what you'd see is there would be a small number of plots of land where it's very clear that land has been banked for financial gain, and it'll be very clear that other plots of land aren't being developed in a timely manner for very legitimate reasons, just planning et cetera, and then you're going to have this gigantic grey area where the authorities will say, 'You should be developing that and you should be taxed on it', and the developer will deny that. So, that's my fear. If we can develop a system where it's black and white between land that isn't being developed for legitimate reasons and land that isn't being developed for financial gain, then we'd support such a scheme, because it would mean more land potentially coming through. But at the moment—. There's a similar scheme operating in the Republic of Ireland, but it's quite a complex scheme by the looks of it. I'm not sure how it's working, but until we can differentiate between those two and create a system like that, then we can't support it.    

Okay, and I'll move on very quickly if I can. Chair, do you mind if I move on to—? Yes. So, you say in your submission, Ifan, that,

'Although the sector is dominated by a small number of large firms, we don't believe that this is at the expense of smaller firms.'

However, just sticking with the theme of land banking, Oliver Letwin produced a report on housing, and focused on land banking, and said, actually, some of the reasons large firms do keep land is to prevent—is to create barriers to entry. But you disagree with that.

11:50

Well, from our end, I think, directly, if large house builders—if the plcs left Wales tomorrow, the barriers that exist to small builders would still exist. I guess, indirectly, if there were no plcs operating in Wales, it would focus the minds of policy makers, because politics after all is about priorities, isn't it? And prioritising opening that market up for SMEs would go higher up the ladder, I suppose.

And one of the things you say, in the Hygrove submission, is that

'SHBs are usually local to the communities in which they build, resulting in profits made remaining within the locality'.

And I've also heard that SME builders build more sensitively to the communities in which they operate. Is it fair to say that that's the case?

From my point of view it is. I tend to get a call at the house in the evening if I've upset somebody, or if one of my workmen have. I think there's a tendency that, because it's a very competitive market, we have to build—and forgive me for saying this—to a higher standard than the national companies. We've got to sell those houses cheaper, we've got to make sure that, for example, we sell the freehold, rather than the leasehold. And we've got to make sure that the roads are adopted, and there's a tendency currently with the national companies that they're shying away from that. So, from our perspective, we've got to take a different path to the large, national companies.

And what you wouldn't do is sell on green spaces and some roads, perhaps, to an estate management company to look after, and charge residents for—you wouldn't do that.

Well, that's a bit of a separate issue, because one of the big weaknesses with the local authorities at the moment is that they are reluctant to adopt things. So, if part of the 106 obligation is that you provide an open space, then that open space has to go somewhere—you know, the builder's not going to retain there. So, normally, the local authority would take that, and you'd pay a commuted sum, and then you'd crack on with it. If they won't take it, then the only way, in the interests of the householders, is that a management company be set up, and that's complicated, because then you have to have a leasehold, you have to have shares in the company, and there has to be an obligation, and money has to be taken from each household to pay for that. So, our point, to Swansea in particular, has been, 'Look, a lot of large companies today won't be in existence in 100 years' time, but the local authority, hopefully, will be.' So, on that basis, it's better that the local authority adopt these things, and avoid the need for the householders to have to enter into these shareholder agreements, and maintenance agreements and all the rest of it. So, I agree with what you say—we would prefer not to do that, and we don't do it; we persuade our local authority to adopt.

So, if there was an increase—if the 75 per cent dominated by the large firms was reduced to, say, 50 per cent, and you had a 25 per cent increase in small firms, would we therefore see small firms start to use the estate management companies? Is that—?

No, well, certainly from our perspective, and, as a lawyer, having done a lot of conveyancing, I think that most small firms would prefer to work with the council, for the council to adopt. And I think your question ought to be directed to the local authorities, to persuade them that it's their obligation to adopt. Even if they charge a nominal fee for it, so everyone knows where they're going, it's far safer to leave that in the hands of a local authority than in those of management companies.

Okay. I did say at the beginning I would let Huw Francis—and I offer the other witnesses as well, if you would like to—make a final, closing comment. But please do focus in on what you think that our committee should be recommending to Government. So, if I come to Huw Francis in the first instance.

I think that funding is a critical issue, which the Assembly ought to address. We've made this point in Westminster as well. My view is that the high-street banks prefer customers in England to customers in Wales. And we've got information from them that suggests that, no, they are looking to expand their operations in Wales, and yet, on the ground, locally, that isn't the case. So, I think it would be in everyone's interest if you invited, perhaps, some of the directors of these high-street banks to come and explain what their lending policy in Wales actually is. And once they've tabled that, it's then more difficult for them to go back on that. But I think that is important.

The planning we've discussed at length: common sense needs to come in, and proportionality. And I think only you can enforce that.

With regard to something that we haven't discussed, we are very sore about utility companies. Dŵr Cymru, in particular, we regard almost as legal pirates. The amount of money that is spent with Dŵr Cymru, from our perspective, and the service that's provided, is shocking. And I think the slogan, 'For Wales. Not for Profit', when you consider the salaries that are there—that's something that needs to be looked at—

11:55

Perhaps we'll ask Dŵr Cymru to come in and speak to the committee on that point. 

We've asked several times that they attend the forum in Swansea. They're a monopoly. There's no way we can pretend that they're not and that needs to be addressed. That is a big anchor around the small house builder's neck.

We may well invite them to the committee, then, to address that point. Thank you. Ifan.

Dwi'n mynd i ddweud hyn yn Gymraeg. So, fy mhwyntiau i ydy: dŷn ni angen codi'r trothwy o ran beth sy'n cael ei ystyried fel datblygiad mawr o 10 yn agosach at 50. Dŷn ni angen i awdurdodau cynllunio gymryd mwy o'r baich o ran rhai o'r arolygon yma sydd angen eu gwneud o fewn y broses gynllunio reit ar y dechrau, achos mae'n rhy gostus ac yn rhy gymhleth ar hyn o bryd i gwmnïau adeiladu bach. Ac roeddwn i jest eisiau dweud ein bod ni wedi siarad lot heddiw am y rhwystrau sy'n bodoli i gwmnïau bach, ond hefyd mae yna gymaint o gyfleoedd yn fan hyn. Os gallem ni adeiladu mwy o'n tai trwy gwmnïau adeiladu bach, dŷn ni'n credu y buasen ni'n adeiladu mwy o dai a buasen ni'n cau'r bwlch yna rhwng yr angen a faint o dai sydd yn cael eu hadeiladu, ac yn hytrach na bod yr elw mawr yma i gyd yn mynd dros Glawdd Offa, buasai'r elw yn aros yng Nghymru. Mae effaith hynny ar yr economi, ar iechyd pobl ac ar addysg pobl yn bellgyrhaeddol.

I'm going to say this in Welsh. So, my points are: we need to raise the threshold of what is considered to be a large development from 10 closer to 50. We need planning authorities to take more of the burden in terms of some of these surveys that need to be undertaken within the planning process right at the start, because it is far too costly and too complex currently for small house builders. And I wanted to say also that we've talked a lot today about the hurdles facing small companies, but there are so many opportunities here. If we could build more of our houses through smaller companies, then we think that we would build more houses and we would close that gap between the need and the number of houses that are built, and rather than that huge profit going across Offa's Dyke, the profits would remain in Wales. The impact of that on the economy, on health and on the education of people is far-reaching.

I think a lot of ground has been covered already, so I won't reiterate those points, but for me the main thing that you could recommend that Government looks at is this idea of customer service standards through the planning process. They exist already, but that needs to be looked at again, I think. The response you get quite often from local planning authorities is that 97 per cent of applications are processed within the eight-week window, or whatever it is, but I think that's just a very narrow snapshot of the actual experience for a lot of developers, and it may well be that a lot of these examples are falling into that small percentage that aren't happy with the process. So, for me, it would be about going back to look at that issue and having a conservation with local government about how they can build that capacity to be able to process things better. We understand that there are reasons why they're struggling with particular financial issues at the moment, but somehow, if we're going to make that better, we need to understand that and look for a solution.

Thank you all, and diolch yn fawr for your evidence this morning. We will be taking evidence from others, so by all means follow the proceedings of our committee work, and if you want to come back with further comments on what's been said, then we'd welcome that as well. We appreciate that you're all really busy people, so we really thank you for your time and your evidence papers as well. Thank you very much. Diolch yn fawr.

That brings our public meeting to an end this morning.

Daeth y cyfarfod i ben am 11:58.

The meeting ended at 11:58.

Archwilio Cynulliad Cenedlaethol Cymru