Special Report 90 - Management of Cross-Border Initiative : the Bytel Project

Published on 03 March 2015

The Comptroller and Auditor General has completed a special report on the management of a cross-border broadband initiative (the Bytel Project). The Bytel project was undertaken to provide high-speed broadband connectivity linking Belfast, Craigavon, Armagh, Dundalk and Dublin.  It was intended that the project would be funded under Intereg III, with around three-quarters of the funding to be provided by the EU and the balance through co-financing provided by the member states.

This report examines the role of the Department of Communications, Energy and Natural Resources in the management of the project. The report is the result of a co-ordinated examination between the Office of Comptroller and Auditor General and the Northern Ireland Audit Office.

Summary

The Special European Union Programmes Body (SEUPB) is one of six cross-border bodies set up as part of the Good Friday Agreement. The main role of SEUPB is to manage cross-border European Union (EU) structural funds programmes in the border region of Ireland and in Northern Ireland. SEUPB is audited jointly by the Comptrollers and Auditors General in Ireland and Northern Ireland.

Interreg is an EU programme whose objective is to stimulate co-operation between EU regions through measures carried out on a cross-border basis. It is financed through the European Regional Development Fund (ERDF), with co-financing provided by member states. As the designated managing authority, SEUPB was responsible for the management and delivery of the Interreg III programme in Ireland.

Interreg III ran from 2000 to 2006 and all projects funded under the programme had to be finalised by the end of 2008 (later extended to June 2009). 74% of the Interreg III funding was provided by the EU, with the balance (26%) provided by the two member states (referred to as co-financing). The proportion of co-financing varied for different projects. The co-financing provided by member states is referred to as matching funds.

This report examines a project (the Bytel project) that aimed to provide high-speed broadband connectivity linking Belfast, Craigavon, Armagh, Dundalk and Dublin. It was intended that this project would be funded under Interreg III, but due to an irregularity, it was withdrawn from the programme. The project’s withdrawal after the June 2009 deadline for expenditure to be committed to Interreg III meant that the €3.79 million which it was expected would be recovered under the Interreg programme could not be recouped, and could not be replaced by other eligible projects.

The report is the result of a co-ordinated examination between the Office of the Comptroller and Auditor General and the Northern Ireland Audit Office (NIAO).

The Bytel Project

The Bytel project received funding under a specific Interreg III measure that aimed to improve inter-regional economic infrastructure, including broadband communications. SEUPB appointed the Department of Communications, Energy and Natural Resources (DCENR) in Ireland and the Department of Enterprise, Trade and Investment (DETI) in Northern Ireland, as joint implementing agents for that measure.

In October 2004, Bytel Networks Limited (Bytel), a Belfast-based company, was offered funding of €4.3 million for the project against estimated total project costs of €12.4 million – the maximum potential grant funding based on the 35% upper limit grant rate. The grant offered comprised €3.79 million of ERDF funding and €0.51 million in matching funding. €2.27 million was provided by DCENR, including all of the matching funding, and €2.03 million by DETI.

Grants totalling €4.3 million were paid to Bytel between December 2004 and December 2005. However, a consultant’s review in 2013 concluded that the cost of delivering the project was considerably lower than €12.4 million, on which the €4.3 million grant was based. The consultant concluded that Bytel had incurred total costs of €3.93 million and on this basis the maximum grant payable would have been just under €1.4 million.

EU funding for Interreg III was recouped through claims for payment from the ERDF. In 2012, the Bytel project was withdrawn from the final payment claim following a detailed review by consultants commissioned by SEUPB who concluded that 97% of the expenditure claimed by Bytel was not eligible for grant aid under the Interreg programme.

The total loss to the Irish Exchequer from the Bytel project is €2.27 million. This comprises €1.76 million in Exchequer funding to Bytel on the understanding that it would be eligible for reclaiming under Interreg III and €0.51 million in matching State funding that was also paid to Bytel.

A forensic review by consultants in 2011 identified serious weaknesses in the management and oversight of the project by the joint implementing agents. However, an evaluation in 2013 found that the project had achieved its objectives.

Roles of joint implementing agents

The two Departments disagree about the responsibilities each had in relation to the project.

Both Departments had equal responsibility for administering the programme under the terms of the service level agreements that each had with SEUPB. However, DCENR has stated that, in practice, either it or DETI took the lead role in the day-to-day handling and processing of payment claims for individual projects, and that the Department exercising the lead role was referred to as the 'lead implementing agent'. DCENR stated that, in its view, DETI was the lead implementing agent for the Bytel project.

DETI, on the other hand, states that the role of lead implementing agent was not defined for Interreg III and that each Department had equal responsibility as joint implementing agents.

While there are indications that an informal arrangement was in place making DETI the lead implementing agent, DCENR had clear responsibilities under its agreement with SEUPB. Controls over project payments were further complicated by the appointment by DETI and DCENR of a managing agent, Western Connect, to provide technical, legal and financial expertise on the appraisal, selection and implementation of the measure.

Project assessment and appraisal

In June 2004, the first proposal submitted by Bytel was rejected for support. A revised application was assessed in July 2004 and narrowly passed the threshold required for funding of projects. There were a number of shortcomings in the appraisal.

  • There were weaknesses in the definition of what was to be delivered by Bytel and a lack of clarity over the source and ownership of the assets required to deliver the project.
  • There was little evidence in the appraisal to support project costs.
  • A partnership between Bytel and a company called Aurora Telecom (Aurora), which the project proposal indicated was to contribute €7.8 million of value to the project, was viewed as critical to the project’s success. However, neither of the two Departments appear to have engaged with Aurora to confirm that a partnership existed between it and Bytel.
Change to project specification

Under the terms of the letter of offer from DETI and DCENR, Bytel was required to get approval from the two Departments for any significant project changes.

In December 2004, two months after the Departments issued their letter of offer, Aurora withdrew its offer of support from the project. By this time, €1.6 million had already been paid to Bytel. In September 2005, Bytel entered into an agreement with a company called Eircom UK under which Eircom UK would provide access to its existing infrastructure in Northern Ireland and, in exchange, Bytel would undertake to complete additional fibre cable laying in Northern Ireland.

This agreement changed the nature of the project from building a network on existing cables (infrastructure) to a project where Eircom UK delivered bandwidth (service). The effect of the agreement was also to reduce the total costs of the Bytel project by €4.8 million or 39%. Despite these changes, no review of the project or of the offer of grant support was carried out and no written approval was issued to proceed with the revised project.

Checking and authorising of grant claims

Service level agreements between SEUPB and the two Departments required that grant payments made by SEUPB to the project were based on claims that had been verified by the joint implementing agents and approved by them as eligible expenditure.

Between November 2004 and November 2005, Bytel submitted four grant claims totalling €4.3 million. The final claim — for €2.07 million — contained no back-up or verification evidence. Despite this, the claims were paid in full.

DCENR relied on DETI and on other advisors for assurance that expenditure claimed by the project promoter was valid, and considered that it had no role in this area. The approach taken by DCENR showed a lack of awareness of the risks in circumstances where it was placing reliance on others for assurance about the validity of payments and there was no evidence to show that it had put appropriate controls or checks in place.

Handling of allegations about the Bytel project

In June 2006, a director of Bytel made allegations to DETI regarding false accounting practices and withdrawal of funds which should have been ring fenced for the Bytel project. DETI conducted an internal investigation and concluded that no further action was necessary. However, DETI’s investigation was not sufficiently rigorous and independent and its finding was not supported by adequate evidence or supporting documentation.

DCENR was made aware of the allegations by email from DETI in June 2006 and was encouraged by DETI to attend a meeting with the person who had made the allegations. No representative from DCENR attended the meeting, but it was provided with minutes of the meeting. Internal DCENR documents indicate that it was satisfied that DETI had checked that the Bytel claims were legitimate and that the project would deliver in accordance with the letter of offer.

In 2008, a whistleblower made further allegations about the project to the NIAO, which passed the allegations on to DETI for investigation. DETI commissioned an external review of the project which was completed in September 2009. The consultant found that DETI would probably be required to declare an irregularity to the EU in relation to the project. However, DCENR was only informed of an alleged irregularity in December 2010.

Subsequently, a further review of the project, commissioned by SEUPB on behalf of a committee of representatives of relevant departments, was carried out. The report, in March 2012, found that

  • 97% (€4.2 million) of the €4.3 million paid to Bytel should not have been paid as it was based on ineligible expenditure
  • the management of the project was inadequate in a number of respects including the authorisation of grant payments against expenditure which was clearly ineligible, or which became ineligible once the project changed or about which serious questions should have been asked
  • there had been a failure to properly investigate the 2006 allegations and a failure to act in a timely way on the issues raised by the whistleblower in June 2008.
Communications between the implementing agents

Communications between DCENR and DETI, as joint implementing agents, were carried out on an ad hoc basis. This was inappropriate for an important inter-regional infrastructural project which was in receipt of grants of €4.3 million and for a sub-measure with an €8 million overall spend. The failure to put appropriate communication arrangements in place may have been a contributory factor to the poor sharing of information with DCENR by DETI.