Taxpayer faces huge bill to save ‘digital revolution’

Digital Region, the flagship council-led scheme designed to make next-generation broadband available to almost every home and business in South Yorkshire, appears close to collapse after failing to attract either national internet companies such as Sky or TalkTalk to sell its “superfast” service, or sufficient residents who actually want to use it.

With many miles of fibre-optic cables laid beneath the streets of South Yorkshire and hundreds of thousands of people now able to sign up for the service – which offers internet speeds five times faster than the national average – the £92m project was supposed to begin making sizeable profits during the last financial year following its launch in 2010.

Council bosses had spoken of leading a “digital revolution” in South Yorkshire, with the construction of one of Europe’s most advanced internet networks driving huge economic growth.

But with building work almost complete, accounts filed with Companies House this week reveal the publicly-owned company overseeing the scheme has brought in just £167,000 so far – dwarfed by the millions of pounds it is spending on operating costs.

Year-end losses for 2010-11 totalled £9.2m, and the accounts state for the second year running that a “material uncertainty” exists over Digital Region’s ability to continue as a going concern.

Now regional development agency Yorkshire Forward, underwritten by the Government, has been forced to pledge a further £4m of public funds which the scheme can draw upon if required to stop itself going bust this year.

Yorkshire Forward chief executive Thea Stein said: “The decision was made with the local authorities that Digital Region might need more money. Clearly the discussion has been had with central Government, as all Yorkshire Forward’s funding ultimately comes through them.

“We are committed to seeing Digital Region flourish, but like all start-up businesses it needs support.

“It’s important to state this is a guarantee – the hope is they will not need to draw it down.”

Yorkshire Forward loaned the scheme £30m of public funds when construction work began in 2009, with Sheffield, Doncaster, Rotherham and Barnsley Councils lending a further £10m towards start-up costs. Other funding came via EU and Yorkshire Forward grants.

Councillors were assured that repayment of the taxpayer-funded loans would begin by 2011, once customers began signing up.

But managers have failed to attract a single large internet firm to sell the service, meaning it can only be accessed via a handful of small, local start-up companies with little capacity or marketing clout.

Huge losses are being posted as a result, calling into question when the loans will ever be repaid.

Indeed, the four councils now look set to pour in hundreds of thousands of pounds more themselves, at the very time each is being forced to make sweeping cuts to front-line services.

The scale of the authorities’ financial exposure was made clear in a Sheffield City Council report in 2008 – the year before construction work began – which warned of a “worst-case scenario” in which Digital Region was unable to repay its £4m loan to that council. The report stated that if forced to finance the loan itself, Sheffield would have to pay out £530,000 a year from 2010/11. The council would also be liable for 17 per cent of any shortfall in Digital Region’s operating costs.

The four authorities said in a joint statement that they are “providing flexibility” to Digital Region around the repayment of loans.

They also confirmed they are assessing exactly how much “additional financial support could be made from each of the councils, in the light of the current position.”

A spokeswoman for Rotherham said Digital Region has not yet defaulted on its loans, and that the councils have not yet put any additional money into the project – but “would consider doing so if this made best financial sense”.

She confirmed Rotherham could now make up to £270,000 available “in the short term”.

The scheme’s financial difficulties also call into question the likelihood of the superfast service being extended to more rural parts of South Yorkshire – a key part of the scheme’s original remit.

Project managers had initially promised the new fibre-optic network would reach 97 per cent of homes and businesses by 2012.

However, this target had to be scaled back to 80 per cent last year due to a shortage of funds, with Digital Region’s then chief executive David Carr admitting that initial revenue forecasts had been “over-emphasised”.

He said the network would still eventually be extended to rural areas – but only once it has earned sufficient profits to do so.

Leadership issues continue to beset the project, meanwhile, with Mr Carr having departed his £100,000-a-year post last month.

It means Digital Region is now hunting its third chief executive inside two years, following original chief David Holt’s abrupt departure in May 2010.

Newly-appointed chief operating officer David Cowell issued a statement on behalf of the firm, saying it had made “considerable progress” in a “competitive market” over recent years, and its focus “will now shift to promoting the network and meeting its operational needs”.