Mr. Seamus McCarthy:

I thank the Chairman.

Special Report No. 90 is the result of a co-ordinated examination between my office and the Northern Ireland Audit Office, NIAO. It concerns a cross-Border broadband project which aimed to provide high-speed connectivity on a line between Belfast and Dublin. The project promoter was Bytel Networks Limited. The Bytel project was grant-aided by the EU-funded INTERREG III programme under a measure designed to improve inter-regional economic infrastructure. The Special EU Programme Body, SEUPB, was accountable to the Government, the European Commission and the Northern Ireland Executive for the management and delivery of the INTERREG III programme, which ran from 2000 to 2006. SEUPB appointed the Department of Enterprise, Trade and Investment, DETI, in Northern Ireland and the Department of Communications, Energy and Natural Resources as joint implementing agents for the measure.

In October 2004, the two Departments offered grant funding of €4.3 million to Bytel, based on estimated total project costs of €12.4 million. At just under 35% of the project cost, the grant offered was almost the maximum payable, and the grant was paid in full between November 2004 and November 2005. Subsequently, it was found that almost none of the project spend was eligible for EU grant assistance, and that the actual project costs were significantly lower than the projected €12.4 million. There were major failings at each stage in the handling of the project. The project proposal only narrowly passed the assessment for entry to the EU programme. There were weaknesses in the project appraisal, including weaknesses in the definition of what was to be delivered by Bytel. There was little evidence to support the projected project costs. The strength of a proposed partnership between Bytel and a company called Aurora Telecom was also not probed adequately. When Aurora withdrew from the project and was replaced by another service provider, the nature of the project changed significantly and the project costs fell. This should have led the Departments to reappraise the project and recalculate the grant payable, but this did not happen.

The two Departments were responsible for checking and approving Bytel’s claims for grant payments. The first such payment included €1.3 million for the purchase of equipment that was to have been paid for from Bytel’s resources. That equipment, bought from a sister company in the Bytel group, was not ultimately used in the project. There is a doubt as to the market value of the equipment. The final claim for €2.07 million contained no backup or verification evidence but, despite this, was paid in full. The Department of Communications, Energy and Natural Resources considered that it had no direct role in this area and it relied on DETI and on other advisers for assurance that expenditure claimed by the project promoter was valid. In circumstances in which it was relying on others for assurance about the validity of payments, the approach taken by the Department of Communications, Energy and Natural Resources showed, in my view, a lack of awareness of the risks. There was no evidence to show that it had put appropriate controls or checks in place.

The Departments missed an early opportunity to identify problems with the project. Whistleblowing allegations were made to DETI by a director of the Bytel company in June 2006. An internal investigation was conducted by DETI and concluded that no further action was necessary. However, its investigation was later found not to have been sufficiently rigorous or independent and its findings were not supported by adequate evidence. The Department of Communications, Energy and Natural Resources was made aware of the allegations by DETI but decided not to attend a meeting with the person who had made them. Further allegations about the project were made to the NIAO in June 2008 and were referred to DETI, which commissioned a review of the project. By September 2009 it found there had been irregularities. DETI only informed the SEUPB that there was a possible irregularity in May 2010, and informed the Department of Communications, Energy and Natural Resources in December 2010. Details of the irregularity were only forwarded to both in February 2011. A further review of the project was then commissioned by SEUPB, which found that 97% of the €4.3 million paid to Bytel was based on ineligible expenditure and should not have been paid.

My primary interest, and that of my counterpart in Northern Ireland, was to identify any lessons to be learned from the management of this project which could improve the administration of EU-funded projects in a cross-Border context and more generally. The very complex arrangements put in place for the administration and funding of the INTERREG III programme contributed to the delay within the bodies concerned in recognising that a financial loss had occurred, in reporting the loss and in accepting the appropriate degree of responsibility for its occurrence. We have tried to summarise the complexity of arrangements in Figure 2.2 of the special report. As members will see, there is nothing simple about the relationships. The illustration shows the funding flows and the number of agents involved in the project. Almost inevitably, the complexity of the arrangements and the number of actors involved led to a lack of clarity about roles in the oversight of the grant. The outcome in this case points to a need for more straightforward accountability arrangements for future cross-Border projects, with a reduced number of layers and clearer definitions of each agency’s responsibilities.

A key feature of the management of grant administration for the project was the poor sharing of information between the Department of Communications, Energy and Natural Resources and DETI. Formally, as joint implementing agents, both Departments had equal responsibility for the measure. Each had the same agreement with SEUPB but, significantly, they had no formal agreement between themselves. The communication arrangements between the Departments were informal or ad hoc. In my view, they were inappropriate for important inter-regional infrastructure funding worth almost €8 million. They were also ineffective. This project highlights the need for formal arrangements to be put in place to ensure that key decisions are agreed and recorded, and that important issues arising in the course of a project are communicated in a timely way to the relevant bodies.

The Departments did not put in place adequate processes to manage basic project risks arising from the Bytel project, including the risk of failure to deliver the project as planned, and risks arising from changes to the scope of the project. In addition, they did not operate effective controls over validation and authorisation of payment claims, particularly in circumstances in which grant claims were submitted close to payment deadlines.

In general, the arrangements and criteria for funding projects and recoupment of associated EU grant funding are complex. Funding and recoupment can be spread over a number of years. Due to the number of projects and programmes, the multi-annual nature of the funding and the summary nature of the financial reporting by Departments and agencies, it is generally not easy to see in any set of financial statements what has happened when a claim for funding is withdrawn or is disallowed by the EU. For example, the loss to Irish taxpayers of €1.76 million in potential EU funding as a result of the late recognition of problems with the Bytel project was not clearly accounted for by the Department of Communications, Energy and Natural Resources or by the Department of Public Expenditure and Reform. Neither of those Departments reported that the grant of €2.3 million paid to Bytel from Irish Exchequer sources was to no good effect. In my view, it would provide greater transparency if relevant Government Departments and agencies published a note to their accounts setting out, by programme, the value of EU funding requested in a year, the amounts received from the EU, the value of claims withdrawn or disallowed and the balance outstanding at year end. My office will discuss the development of an appropriate format with the Department of Public Expenditure and Reform.