A local authority conceived a partnership project to regenerate a former mining area. The objective was to establish a centre of excellence for advanced digital technology, provide training and assistance in the use and application of information technology and act as a spur to further inward investment.
The project involved a range of partners - including the local Training and Enterprise Council (TEC) and a major international ICT company. It was successful in attracting European Regional Development Funding (ERDF). The council was the accountable body for the project, responsible for the delivery of agreed outputs in accordance with funding requirements. As accountable body, the council was liable to repay grant funding of up to £3.3 million if the conditions of grant were not met. The total investment in the project including infrastructure development amounted to £7 million.
The centre was launched as a limited company, but soon got into trading difficulties and was liquidated 18 months later. The council acquired the company's net assets for £0.7 million, including the centre premises, where it established a business centre. It also met other liabilities totalling £0.2 million. The council's total financial support for the project, including the initial £1.1 million investment, therefore amounted to £2 million. The council's subsequent attempts to deliver the original project outputs have not proved successful.
The project was an ambitious attempt to tackle some of the area's deep-seated problems using the sort of innovative approach encouraged by the Regional Challenge regime. However, the auditor identified significant failings in the planning and management of this project. His conclusions were as follows:
• As accountable body, the council was liable to repay grant funding if the conditions of grant were not met. Therefore, the council had a duty to minimise any risk to council taxpayers by ensuring that robust arrangements to manage the project were implemented, and to provide a strong lead to the partnership to ensure that the project met grant requirements. The council failed to do this.
• While the [government regional office's] consultants considered the project to be deliverable - a judgement on which the council placed great reliance - it was high-risk. The principal financial risk, of grant clawback, lay with the council. The council did not properly evaluate its own risks at the outset. Moreover, the outputs that the council had established for the project, and as accountable body was responsible for delivering, were very ambitious and ill-defined. The council argues that the output figures were accepted by [the government regional office].
• The council failed, at the outset, to establish the likely demand for the high-tech facilities proposed by the project. The bid document, which the council prepared with the aid of consultants, was unclear about the target market and how the project would be delivered. These were key weaknesses, given that the company had to find a market in a sector where the failure rate of new firms was high.
• The council did not make its own assessment of the company's business plan - by obtaining its own independent expert advice, for instance - to ensure that the project's risks were mitigated by robust arrangements. The council placed significant reliance on the expertise of the council's partners. A number of business plans were produced, involving input from the council's officers. Successive plans contained major changes in business assumptions and increasingly ambitious income projections. None of the plans set out how the outputs required for ERDF funding would be delivered - a key concern of the council as accountable body. The council did not properly assess its risks and consequently did not provide adequate information to members to enable the project's viability to be judged.
• The council failed to establish a monitoring and governance framework for the project. For instance, the council did not draw up procedures recognising the different roles of the partnership and [project] boards and their relationship to the council's responsibilities for the project. The council also failed to agree a protocol with [the company] to enable key financial and business information to be reported to the council's members, to overcome problems of commercial confidentiality. …national guidance on protocols in this area was lacking at the time. However, as a result, the council's members did not always get a sufficiently full or timely picture of the company's problems and activities. Moreover, the outputs that were relevant to the ERDF grant were not effectively monitored.
• [The project] failed for a number of reasons. The company was unable to balance its commercial ethos with its public service objectives. In consequence it generated neither adequate sales nor the agreed outputs. Consultants concluded that the company was not well managed and lacked leadership. The council also failed to lead and coordinate the efforts of the various partners…
• …the council bore most of the risk as accountable body, but did not implement arrangements to ensure its risk was minimised. In consequence, the council did not adequately protect the interests of council taxpayers.