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Report on the Cross-border Broadband Initiative: The Bytel project

Session: 2014/2015

Date: 03 June 2015

Reference: NIA 253/11-16

ISBN: 978-0-339-60585-5

Mandate Number: Mandate 2011/16 Twenty Ninth Report

Report-on-the-Cross-Border-broadband-initiative-Bytel-Project.pdf (4.14 mb)

Executive Summary

Introduction

1. The Bytel project aimed to provide high-speed broadband connectivity between Belfast, Craigavon, Armagh, Dundalk and Dublin. The project promoter was Bytel Ltd and a subsidiary, Bytel Networks Ltd, was established to deliver the project. The project received funding from the European Union (EU) Interreg III programme. The Special EU Programmes Body (SEUPB) was accountable to the European Commission, the Northern Ireland Executive and the Irish Government for managing and delivering this programme. Departmental responsibility for SEUPB lies with the Department of Finance and Personnel (DFP) in Northern Ireland and the Department of Public Expenditure and Reform in the Republic of Ireland. SEUPB appointed the Department of Enterprise, Trade and Investment (DETI) in Northern Ireland and the Department of Communications, Energy and Natural Resources (DCENR) in the Republic of Ireland as Joint Implementing Agents (JIAs) for the project.

2. As a cross-border project, effective co-operation was required between the departments in Northern Ireland and the Republic of Ireland and SEUPB. However, from the outset there were serious failings in the handling of the project, with a catalogue of mismanagement, poor communication and inadequate responses to warnings. As a result, the project delivered very poor value for money.

3. In October 2004, the JIAs offered funding of €4.3 million to Bytel against estimated total project costs of €12.4 million. Actual project costs were significantly lower. Bytel incurred eligible costs of only €0.9 million but was paid all of the €4.3 million assistance between December 2004 and December 2005. It is clear that grants were hugely overpaid.

4. On a number of occasions during his evidence to the Committee, the DETI Permanent Secretary stated that he has grave concerns in relation to both his own Department’s handling of this project and over aspects of the work of its advisers. This frankness is welcome, but it is only belatedly that the Department appears to have recognised the gravity of what has occurred. From 2006 onwards there were numerous warning signs that there were serious problems with the project. These signs were effectively ignored by DETI and, for far too long, the Department behaved as if nothing was wrong. The Committee is left with the impression that DETI hoped that silence and inaction would make these issues disappear.

5. Although DETI was aware of serious concerns with the project as early as 2006, it did not inform the Department of Communications, Energy and Natural Resources or SEUPB of these issues until early 2011. This delay was unacceptable. The failure to share information on a timely basis prevented these concerns from being addressed properly. A subsequent forensic review of the project concluded that 97% of the €4.3 million grant paid to Bytel was irregular and the project was then withdrawn from the Interreg programme. Because of the delays in identifying and dealing with these concerns, €2 million of EU funding which should have been available to DETI was lost.

6. The failings are similar to those reported by the Committee in 2012 in relation to the Bioscience and Technology Institute. This was another DETI project from around the same time as the Bytel project. The Committee is very concerned that poor project management and disregard for value for money appear to have been endemic within the Department at that time.

7. The Committee notes the assurances from both DETI and SEUPB that improvements in systems and processes in recent years should substantially reduce the risk of similar failings in future. However, DETI provided unsubstantiated assurances over many years in relation to the Bytel project. Important as systems and processes are, it is vital that these work in practice. It is clear that this case only came under proper scrutiny because of the allegations made by whistleblowers. It is essential that the culture within DETI is changed and the Department must recognise the need to take decisive and prompt action to address problems such as those which arose in the Bytel case.

8. During the evidence session, the DETI Permanent Secretary openly acknowledged on many occasions that he was unable to provide satisfactory answers to the Committee’s questions. As a result, the Committee still has concerns about: why the project was approved for funding in the first place; why it was not re-appraised when it changed fundamentally within a few months of the offer of assistance; why grant claims for ineligible or non-existent expenditure were paid; inadequate responses to whistleblower allegations; DETI’s failure to inform SEUPB and DCENR of major concerns about the project; and why a decision was taken to shelve a proper investigation of the project to PACE standards. The Committee considers that a rigorous, independent PACE investigation is needed to get to the root of these issues.

Conclusions

9. The assessment and appraisal of the project was seriously flawed, and it is likely that with due diligence and more robust probing of the proposal, the project would not have had funding approved. The Committee believes that the Joint Implementing Agents’ overwhelming focus was to ensure that the Bytel project was approved for funding, rather than applying proper scrutiny to confirm that it was viable and would deliver value for money. There was a failure to accurately identify the costs required to deliver the project before issuing the letter of offer and steps were not taken to confirm the key partner’s commitment to the project.

10. The Department admits that it did not have sufficient technical expertise to understand the project. The failure to re-appraise the project when it changed significantly was a fundamental shortcoming which contributed significantly to the problems which followed. This was a critical lost opportunity to re-assess costs and to ensure that the level of grant payable was reduced accordingly.

11. The pressures within DETI to meet grant expenditure targets within tight deadlines overtook the need to ensure that grant claims were properly scrutinised. The Committee is convinced that DETI’s main concern in approving grant claims for the project was to ensure that available EU funding was spent. The Department’s primary responsibility was to scrutinise claims properly to ensure that they were valid. The Committee concludes that DETI failed fundamentally to meet this responsibility.

12. The Department knowingly agreed to fund €1.3 million of ineligible expenditure in respect of the Nortel equipment. It is a major concern that DETI failed to carry out basic checks on the value of the equipment and whether it was required for the project. Subsequent investigations have shown that the equipment, which was purchased by Bytel from a sister company, was worth only €30,000 and it was never used in the project.

13. It is beyond comprehension that over €2 million of grant was paid for the final claim on the basis of a single-page statement from Bytel that contained no substantive information to justify the payment. In the Committee’s view, this claim had no validity whatsoever.

14. The investigations into concerns raised about the project were completely mishandled and a detailed review was unacceptably delayed. The Committee regard the investigation of 2006 allegations by the DETI branch which had managed the project and checked the grant claims as a totally unacceptable arrangement. Unsurprisingly, this investigation failed to identify the main concerns with the project. The failure to carry out a meaningful investigation at this stage was another lost opportunity to identify and address concerns with the project.

15. The excessive delay to commence a meaningful investigation was deplorable. Following more whistle-blower allegations in 2008, DETI identified the main concerns with the project in early 2009. However, plans to undertake a PACE investigation were inexplicably shelved. The Department was unable to offer any satisfactory explanation to the Committee for this investigation not proceeding. In 2011, when SEUPB had become aware of the problems with the project, a forensic review was finally commissioned. However, this review was not conducted under PACE requirements.

16. The Committee is gravely concerned that DETI withheld vital information about the project from key stakeholders, including SEUPB and DCENR, for far too long. In fact, SEUPB only learned of some aspects of the 2006 whistle-blower allegations on the day of the Committee’s evidence session. In view of DETI’s failure to properly investigate the project and share key information with stakeholders, the Committee suspects that it was attempting to cover up the problems.

17. The Committee is incredulous that no-one within the Department has faced any disciplinary action for the many serious shortcomings in this project. DETI takes the view that as responsibility for key decisions on the project involved a number of people, staff actions had amounted to “collective misjudgement” rather than individual misconduct. The Committee does not accept this argument and is of the view that DETI has used the unsatisfactory concept of “collective responsibility” as a way of absolving individuals from their responsibilities at that time.

18. As a result of the mismanagement of the project, it delivered very poor value for money. The only redeeming feature of this debacle is that a broadband network was actually provided in return for the public funds invested in it. However, the grant paid exceeded project costs. Bytel incurred eligible expenditure of €0.9 million on the project. On this basis, grant should have been restricted to €0.3 million (35% of costs) but assistance of €4.3 million was actually paid, representing an effective grant rate of 462%. This was a totally unacceptable outcome.

19. The withdrawal of the project from the EU Interreg programme meant that DETI had to fund €2 million from its own budget and that a further €2 million of available EU funding was lost to the Northern Ireland block. Had a proper investigation of the concerns raised been completed sooner and SEUPB informed of the irregularities, it is very likely that a replacement project could have been identified to utilise the €2 million of EU funding.

Recommendations

Recommendation 1

Where a project is heavily dependent on the support of a partner, the Committee recommends that the strength of the partner’s commitment is fully tested before funding is approved. Furthermore, where the proposed specification or costs of a project are subject to change, it should be re-appraised immediately to confirm that it remains viable and represents value for money. Eligible grant assistance levels should also be re-assessed where appropriate.

Recommendation 2

For all complex technical projects, the Committee recommends that independent and reliable technical expertise is engaged at the outset to provide advice on appraising and managing such projects.

Recommendation 3

The Committee recommends that grant checking and vouching procedures are reviewed within six months to determine whether these are sufficiently robust to ensure that only valid and eligible expenditure is approved for payment. Specifically, checks must determine whether: items claimed for are eligible for support; the existence and valuation of assisted items is properly verified; and reliable third party evidence is obtained to show the valuation and source of items which have been supplied by related companies. The risks created by the submission of claims close to payment deadlines must be recognised and managed effectively.

Recommendation 4

The Committee has stated previously that fraud investigations can only be effective where investigators have an appropriate level of expertise and understanding of the law. Public bodies should ensure that only suitably qualified and experienced staff lead fraud investigations. All investigations should be commenced on a timely basis.

Recommendation 5

The Committee recommends that all key stakeholders are notified immediately when serious allegations are received or concerns arise over the conduct of public business. An action plan for investigating such concerns should be established as a matter of priority.

Recommendation 6

Too much reliance was placed on whistleblowers to identify concerns over the mismanagement of public money in this case. The Committee recommends annual ‘test drilling’ on a small number of funded projects to provide assurance that all expenditure incurred is valid and eligible. This work should be undertaken by individuals independent of the management and oversight of projects.

Recommendation 7

The Committee recommends that DETI commissions a PACE investigation of the Bytel project as a matter of urgency. This investigation should focus on establishing whether any individuals bear responsibility for the shortcomings within the project and whether there is any evidence of misconduct or criminal activity either inside or outside the Department.

Recommendation 8

The Committee recommends that DETI improves its systems for tracking the ownership status of grant-funded assets to facilitate the exercise of clawback.

 

Download the full report here.

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