Internet fiasco leaves taxpayer facing £10m bill

The Digital Region project involved laying new cable across South Yorkshire
The Digital Region project involved laying new cable across South Yorkshire
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AROUND £10m of public money is to be pumped into a flagship internet project in Yorkshire to stave off complete financial collapse, the Yorkshire Post has learnt.

Digital Region has already received around £100m from the public purse to deliver a superfast broadband system to almost every home and business in South Yorkshire.

But the project has turned into a financial and logistical nightmare. As well as the bailout, the councils behind the scheme now also find themselves in the embarrassing position of having to pay an experienced broadband supplier to operate the new system.

A large chunk of the financial burden will also fall on the Government which has assumed ownership of the Digital Region shareholding held by regeneration agency Yorkshire Forward, which is closing down.

Despite the scale of public money being pledged at a time of unprecedented public spending cuts, none of the four South Yorkshire councils or the Government were prepared to discuss the stark financial picture. Only Doncaster Council has produced a report which provides any indication of Digital Region’s future.

Doncaster, Rotherham and Barnsley councils each own just under 9 per cent of the shares in Digital Region Ltd, while Sheffield Council owns around 17.5 per cent. The remainder is owned by the Department for Business, Innovation and Skills (BIS) which acquired Yorkshire Forward’s shareholding.

Under the terms of the company’s set-up, each shareholder becomes proportionately liable for financial shortfalls, which have been rapidly increasing.

The councils now have little option but to go for the ‘least-worst scenario’, which is to pump more money in and find a private sector company to operate the system.

The plan is to put the operation out to tender, inviting the likes of BT and Virgin to bid to run Digital Region – and be paid for doing so. In the short-term at least, the company would remain publicly-owned.

If Digital Region failed completely or continued with its current business model, the cost to the public purse would be even higher. The councils are unable to continue funding the current level of losses and opting to shut down altogether would result in heavy contractual penalties and potential clawback of the public funding used to lay many miles of fibre-optic cables beneath the streets of South Yorkshire.

In theory, hundreds of thousands of people are now able to sign up for the service which offers internet speeds five times faster than the national average.

The project, funded by a variety of public loans and grants from Yorkshire Forward, the councils and the EU, was supposed to begin making sizeable profits during the last financial year following its launch in 2010. Councils were hoping to lead a “digital revolution” in South Yorkshire, driving huge economic growth.

But Digital Region is not a well-known brand name and it has also struggled with a key logistical problem involving the service’s reliance upon BT’s existing telephone network at the point of entry into homes and business. BT has also been rolling out its own fibre optic network in South Yorkshire.

Digital Region’s last set of accounts showed the scheme had only brought in £167,000, an amount dwarfed by operating costs which contributed to year end losses in 2010/11 of £9.2m. It now appears unlikely that any of the public loans, running into many millions, will be repaid.

The scale of the councils’ financial exposure was made clear in a Sheffield City Council report in 2008 – the year before construction work began. It warned that if Digital Region was unable to repay its £4m loan to that council, Sheffield would have to finance the loan itself – resulting in payments of £530,000 a year from 2010/11, plus 17 per cent of any shortfall in operating costs.

A Doncaster Council report to a private meeting of the authority’s cabinet this week reveals it has earmarked £630,000 to keep Digital Region afloat in the coming financial year. This is in addition to a further £270,000 of support already set aside. Doncaster’s £900,000 commitment will have to be supported by the other councils and BIS at a level proportionate to shareholding – meaning around £10m will be made available.

The report says the preferred way ahead is to “procure a supplier to takeover operations and management of the Digital Region network...”

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