News: Auditors publish review into failed Digital Region project
Key council decisions regarding the failed £90m Digital Region broadband project in South Yorkshire were based on a business case full of assumptions with a lack of a robust sales and marketing plan.
Auditors, KPMG, have published an independent review into the local authority involvement in the project, which was switched off last year, and also found that the business case did not fully show value for money, board members put forward by councils did not include any IT specialists, council reports failed to fully show the importance of achieving rapid take-up of services to the financial success of the project, and that there did not seem to be a clear exit strategy as the project became more problematic and a positive outcome became more unlikely.
Rotherham Council, along with the other three authorities in South Yorkshire joined with the now defunct regional development agency Yorkshire Forward in 2006 to progress plans to bring continuous 25mb+ broadband to over 97% of South Yorkshire. At the time it was clear that BT had no plans to upgrade its own network in the region.
The project was financed by contributions from local authorities and included £30m from the European Regional Development Fund (ERDF). Work on installing the Digital Region network started in 2009, and by 2012, completion of phase one of the project saw 80% of homes and businesses within South Yorkshire able to be linked to the network.
A combination of delays in appointing a contractor to build and run the network, failing to adjust as necessary in a fast-moving business sector and zero income risk being allocated to the network operator made the business hopelessly uncompetitive. In 2013, shareholders agreed to halt their search for a private sector partner and begin a managed closure of the fibre optic network.
KPMG was commissioned by the councils to review the whole project cycle, from initial decision to invest to the decision to close the company. It comes after another broadband project was signed off by the same councils which will see BT deliver superfast broadband to 97.9% of South Yorkshire by the end of 2017.
The independent review's observations highlighted that the external reviews of the business case, which was drawn up by external consultants, carried out as part of the original due diligence raised concerns and issues, "which would be expected from such reviews." The business case included assumptions and projections of income that never came close to being realised. The review states: "There were many assumptions in the business case, for example around the technology developments and the financial projections. With the benefit of hindsight, a significant number of these fundamental assumptions were not realistic and did not come to reality."
Another issue was the lack of a robust and coherent sales and marketing plan, especially early in the process. Reports show that Thales, the contractor procured in 2009 to build and operate the network, would also provide sales and marketing services. Thales disputed this and by 2010 contractual notices were issued and Digital Region re-negotiated the contract in 2011 with Thales, reducing costs and transferring sales and marketing responsibility to Digital Region.
KPMG stated that "the lack of a robust sales and marketing plan earlier in the process did not help the Councils and DRL to demonstrate the achievability of the business plan."
When the Government were forced to step in and provide at least 45% of the funding to cover a significant proportion of the repayment of the European grant, it was revealed that Digital Region had only secured 3,000 of the 100,000 customers it needed.
Advertisement There is evidence that the aims of the project, including more people accessing high speed broadband, have to some degree been achieved – albeit not necessarily by Digital Region itself.
The key findings from the review report have been accepted by the leaders of the four South Yorkshire local authorities. Meeting minutes state that Sheffield Council admits that it "knowingly entered into considerable commercial risks. However, technological advances, market conditions and delays in obtaining European approvals all contributed to making the project fail commercially."
It adds: "It is true to say that if this project (and many others which Councils consider on a daily basis) were low risk from the outset, then they would likely be delivered by the market without there being a case for public sector intervention. We were trying to make a step change well ahead of a private sector solution and in doing so, knowingly entered into considerable commercial risk."
Assets were sold to Geo Networks, part of the American Zayo Group, and the cost of closing down the network was estimated to be £83m. Costs to date are thought to be lower than the worst case budget.
Rotherham Council set aside £9.58m to cover its share of the costs of the failed project. KPMG identified issues over value for money and a residual audit risk with the arrangements for the closure of Digital Region Ltd in 2014, later concluding that the authority "made proper arrangements to secure economy, efficiency and effectiveness in the closure of Digital Region Ltd."
Images: Digital Region
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Auditors, KPMG, have published an independent review into the local authority involvement in the project, which was switched off last year, and also found that the business case did not fully show value for money, board members put forward by councils did not include any IT specialists, council reports failed to fully show the importance of achieving rapid take-up of services to the financial success of the project, and that there did not seem to be a clear exit strategy as the project became more problematic and a positive outcome became more unlikely.
Rotherham Council, along with the other three authorities in South Yorkshire joined with the now defunct regional development agency Yorkshire Forward in 2006 to progress plans to bring continuous 25mb+ broadband to over 97% of South Yorkshire. At the time it was clear that BT had no plans to upgrade its own network in the region.
The project was financed by contributions from local authorities and included £30m from the European Regional Development Fund (ERDF). Work on installing the Digital Region network started in 2009, and by 2012, completion of phase one of the project saw 80% of homes and businesses within South Yorkshire able to be linked to the network.
A combination of delays in appointing a contractor to build and run the network, failing to adjust as necessary in a fast-moving business sector and zero income risk being allocated to the network operator made the business hopelessly uncompetitive. In 2013, shareholders agreed to halt their search for a private sector partner and begin a managed closure of the fibre optic network.
KPMG was commissioned by the councils to review the whole project cycle, from initial decision to invest to the decision to close the company. It comes after another broadband project was signed off by the same councils which will see BT deliver superfast broadband to 97.9% of South Yorkshire by the end of 2017.
The independent review's observations highlighted that the external reviews of the business case, which was drawn up by external consultants, carried out as part of the original due diligence raised concerns and issues, "which would be expected from such reviews." The business case included assumptions and projections of income that never came close to being realised. The review states: "There were many assumptions in the business case, for example around the technology developments and the financial projections. With the benefit of hindsight, a significant number of these fundamental assumptions were not realistic and did not come to reality."
Another issue was the lack of a robust and coherent sales and marketing plan, especially early in the process. Reports show that Thales, the contractor procured in 2009 to build and operate the network, would also provide sales and marketing services. Thales disputed this and by 2010 contractual notices were issued and Digital Region re-negotiated the contract in 2011 with Thales, reducing costs and transferring sales and marketing responsibility to Digital Region.
KPMG stated that "the lack of a robust sales and marketing plan earlier in the process did not help the Councils and DRL to demonstrate the achievability of the business plan."
When the Government were forced to step in and provide at least 45% of the funding to cover a significant proportion of the repayment of the European grant, it was revealed that Digital Region had only secured 3,000 of the 100,000 customers it needed.
Advertisement There is evidence that the aims of the project, including more people accessing high speed broadband, have to some degree been achieved – albeit not necessarily by Digital Region itself.
The key findings from the review report have been accepted by the leaders of the four South Yorkshire local authorities. Meeting minutes state that Sheffield Council admits that it "knowingly entered into considerable commercial risks. However, technological advances, market conditions and delays in obtaining European approvals all contributed to making the project fail commercially."
It adds: "It is true to say that if this project (and many others which Councils consider on a daily basis) were low risk from the outset, then they would likely be delivered by the market without there being a case for public sector intervention. We were trying to make a step change well ahead of a private sector solution and in doing so, knowingly entered into considerable commercial risk."
Assets were sold to Geo Networks, part of the American Zayo Group, and the cost of closing down the network was estimated to be £83m. Costs to date are thought to be lower than the worst case budget.
Rotherham Council set aside £9.58m to cover its share of the costs of the failed project. KPMG identified issues over value for money and a residual audit risk with the arrangements for the closure of Digital Region Ltd in 2014, later concluding that the authority "made proper arrangements to secure economy, efficiency and effectiveness in the closure of Digital Region Ltd."
Images: Digital Region
Rotherham
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