Financial Assistance to Industry

The Committee consisted of the following Members:

Chair: Mr David Crausby 

Anderson, Mr David (Blaydon) (Lab) 

Baron, Mr John (Basildon and Billericay) (Con) 

Bingham, Andrew (High Peak) (Con) 

Burns, Conor (Bournemouth West) (Con) 

Coffey, Dr Thérèse (Suffolk Coastal) (Con) 

Cooper, Rosie (West Lancashire) (Lab) 

Dakin, Nic (Scunthorpe) (Lab) 

Fallon, Michael (Minister of State, Department for Business, Innovation and Skills)  

Kaufman, Sir Gerald (Manchester, Gorton) (Lab) 

McDonagh, Siobhain (Mitcham and Morden) (Lab) 

Morgan, Nicky (Loughborough) (Con) 

O’Donnell, Fiona (East Lothian) (Lab) 

Reevell, Simon (Dewsbury) (Con) 

Reid, Mr Alan (Argyll and Bute) (LD) 

Russell, Sir Bob (Colchester) (LD) 

Simpson, David (Upper Bann) (DUP) 

Wright, Mr Iain (Hartlepool) (Lab) 

Zahawi, Nadhim (Stratford-on-Avon) (Con) 

Mark Etherton, Committee Clerk

† attended the Committee

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Seventh Delegated Legislation Committee 

Monday 15 July 2013  

[Mr David Crausby in the Chair] 

Financial Assistance to Industry

4.30 pm 

The Minister of State, Department for Business, Innovation and Skills (Michael Fallon):  I beg to move, 

That the Committee has considered the motion, That this House authorises the Secretary of State to undertake to pay, and to pay by way of financial assistance under section 8 of the Industrial Development Act 1982, in respect of Digital Region Limited, sums exceeding £10 million and up to a cumulative total of £45 million. 

May I start by saying—I hope that this will be relatively uncontroversial—that we all welcome you to the Chair today, Mr Crausby? It is a great pleasure to serve under your chairmanship. The motion for which the Committee’s approval is sought was laid before the House on 8 July and is being made under the Industrial Development Act 1982. It arises from our determination to preserve as much value as possible from the former regional development agencies and to ensure that we properly protect taxpayers’ interests. The motion relates to a broadband company, Digital Region Ltd, which was set up by Yorkshire Forward and four south Yorkshire local authorities: Sheffield city council and Barnsley, Doncaster and Rotherham metropolitan borough councils. My Department inherited Yorkshire Forward’s 50% shareholding in March 2012, and the four councils retained the remaining shares. 

DRL’s purpose was to provide high-speed broadband in a disadvantaged area to support growth and job creation. However laudable the motive, the project was deeply flawed. A combination of delays in appointing a contractor to build and run the network, failing to adjust as necessary in a fast-moving business sector and insufficient—in fact, zero—income risk being allocated to the network operator made the business hopelessly uncompetitive. I could go into how Yorkshire Forward should have been more agile and responsive as business conditions changed radically in the south Yorkshire broadband market while the DRL network was being commissioned, but doing so would sadly serve no purpose now. 

My Department inherited a difficult situation from Yorkshire Forward, because we were faced with a technically advanced broadband network that was financially unsustainable. Contractual arrangements allocated all financial risk to the shareholders, providing no incentive at all for the operator to compete with the market leaders that entered the south Yorkshire broadband market. Simply to close the network was expensive, because severance costs had to be paid to existing contractors and the European regional development fund grant of £27 million that part-funded the construction had to be repaid. 

A new operator for the network could still bring the economic benefits that were originally anticipated to an area that suffers significant disadvantages, thus preserving some value from the almost £100 million that has been

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invested. My predecessor therefore authorised officials to investigate the possibility of placing the project on a sustainable financial footing by engaging a new network operator to market the potential of the network and to assume the commercial and income risk. A procurement exercise was launched in May last year and DRL is in the final stages of negotiations with a new network operator. Negotiations are also under way with the European competition authorities to formulate a model to ensure that any future contributions to a new network operator are consistent with state aid laws. That process is continuing as we speak, and the Committee will understand that I would prefer not to comment further for fear of prejudicing the outcome of those discussions. 

As required by the 1982 Act, the Secretary of State took advice from the Industrial Development Advisory Board, which made a valuable contribution to our thinking and our conclusions. The board was concerned about the prospect of an open-ended commitment to DRL. When it considered the matter in February, there was no certain end or fixed price solution in sight; hence, it preferred closure. Since then, the costs of continuing with the procurement, as well as those relevant to closure, have been confirmed to within approximately 5%. 

Although my Department is now the largest shareholder, the arrangements inherited from Yorkshire Forward require unanimity on decisions such as closure. Therefore, the Government are unable, acting alone, to wind down the company in an orderly manner, as recommended by the advisory board, but are bound to take account of the other shareholders’ wishes. The solution enabled by the motion—capping the Government’s financial contribution and ending the shareholder role of the Department for Business, Innovation and Skills—heeds the essence of the advisory board’s advice by limiting our open-ended commitment to DRL, while benefiting the local economies by avoiding the disruptive consequences of a disorderly closure. 

Allowing the local authority shareholders to make arrangements for a more orderly transition or re-procurement will be beneficial to the local economies as it follows the spirit of the advisory board’s recommendation while avoiding the economic damage of immediate disorderly closure. Furthermore, the Government do not believe that it is appropriate for us to play a long-term and decisive part in this regional asset. Our exit at this stage and on these terms follows the advisory board’s advice by limiting further Government expenditure, but allows local authorities to take the venture forward without further unnecessary disruption. 

I am content that the financial assistance outlined in the motion will be of benefit to this part of the UK economy and that section 8 of the Industrial Development Act is the appropriate means by which to make such payments. In my view, it is in the interests of the local economies concerned that the Department should surrender its shareholding without triggering disorderly closure, allowing the local authorities of the regions affected to make the judgment on closure or on procuring a new network operator. 

It is thus in the national interest that on exiting the company, the Secretary of State, as a shareholder in the venture, should pay our share of the costs associated with procuring a new operator or closing the company as they are assessed today. It is appropriate that the

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Secretary of State should make that payment under the 1982 Act. That will serve one of two possible purposes, both of which are approved purposes under the Act and have similar costs. The first is to fund the procurement of a new operator, thus promoting the efficiency of the broadband provision in the relevant regions and reorganising DRL so that it is able to contribute effectively to broadband provision and to the well-being and potential of the local economy. 

Should the local authorities decide to complete the procurement process and continue with DRL, the potential benefits to the economy are apparent. My right hon. Friend the Chancellor of the Exchequer has made clear his strong support for high-speed broadband networks as an enabling factor for enterprise zones, in this instance the Sheffield City Region enterprise zone. 

However, the local authorities may find in due course that procurement of a new network operator is not possible. Contract discussions continue with the potential network operator and there is ongoing contact with the competition authorities within the European Commission to ensure that future arrangements are state aid compliant. If the local authorities decide in due course that closure is the only option, the Department’s payments will be used towards that second possible purpose, namely encouraging orderly arrangements for closure and transmission of the services and customers now hosted by DRL to other broadband providers. 

The Government, guided by the Industrial Development Advisory Board, do not believe it appropriate to play a long-term and, in view of the 50% shareholding we inherited, decisive part in this regional asset, nor to provide from additional taxpayers’ money support that in the long run cannot be sustainable. Through constructive engagement with the company management and the remainder of the shareholders, we have helped to bring DRL to a situation where there are major strategic decisions to be taken on its future. We strongly believe that the manner of our exit should not trigger disorderly closure and should preserve the local economy. 

The Government will not shirk our responsibilities. We seek these powers to benefit the local economy by facilitating either orderly closure or re-procurement, both of which are approved purposes under the 1982 Act. We will not seek to predetermine the future of DRL or to override the wishes of the other shareholders who are based in the region. I would welcome comments from members of the Committee before I seek support formally for the motion. 

4.40 pm 

Mr Iain Wright (Hartlepool) (Lab):  Mr Crausby, may I join the Minister in welcoming you to the Chair and in saying what a pleasure it is to serve under you? 

As the Minister has alluded to, we are discussing an incredibly important policy agenda. Broader and faster digital networks can facilitate the creation of new businesses and new jobs. The CBI’s recent report, “Let’s Get Digital”, states that more than 6,500 jobs could be created or safeguarded in the region of Yorkshire and the Humber through the use of 4G long-term evolution technology. Every £1 invested in digital connectivity generates £5-worth of added activity in the wider economy. Broadband improves our competitiveness and may act

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as a tool to help to rebalance the economy towards regions such as my own—the north-east—or south Yorkshire. 

It is clear from what the Minister has said that the Department wishes to exit its interest from this company. As he has said, the Department seeks approval under section 8 of the Industrial Development Act 1982 to meet that objective. 

I have a number of questions to put to the Minister. First, £45 million seems an excessive amount of money to request in these circumstances. Will £45 million be used? Will the Minister give us an idea, within the range of £10 million to £45 million, of what he anticipates the actual sum will be? Will he provide a further breakdown of how he imagines that sum will be spent? Given that the memo that we received late this morning states that Digital Region Ltd’s costs are currently about £900,000 a month, the notion that the Department needs £45 million at this point seems somewhat excessive and disproportionate. 

I know that the long-term objective of the Department is to extricate itself from this interest, but will he say how close a new provider actually is? According to the memo that we received today, shareholders agreed to continue jointly funding DRL for an extra four months from February 2013 to allow the procurement exercise to be completed. Reading between the lines, it seems that those might be only short-term formalities to ensure that a new provider is in place. Indeed, I understand that a French company, Bouygues Energies & Services—I hope that I have pronounced that correctly—has beaten BT to be the preferred bidder. Given the circumstances, will the Minister outline why he thinks it is necessary to extricate himself from the interests now? 

On the subject of shareholding and ownership structure, I understand that the special purpose vehicle is jointly owned by the four south Yorkshire local authorities and the Department, which took over its share from Yorkshire Forward. Grant funding from the ERDF and Yorkshire Forward totalled £44 million; loan funding from the local authorities and Yorkshire Forward totalled an extra £40 million; and Thales provided an additional £10 million of loan funding. For clarification, will the Minister say what the new shareholder model is? Will each local authority have 25% of the special purpose vehicle? How much funding from his Department has been written off, either through the ending of the regional development agency or since that time? 

In addition to the £45 million that is requested today, will the Minister confirm what the total cost of this project has been for his Department? How successful has the project been in providing superfast broadband to south Yorkshire? What proportion of the region has been provided with such a facility, and has the project been to time and to budget? 

I understand that the project reported “exceptional costs” of £62.9 million for the 2011-12 financial year. Is the request for payment that we are considering today linked to that? I ask that because a local newspaper report states: 

“Digital Region Limited said the exceptional costs are a result of the accounts being prepared ahead of transfer of the network to a private operator and that they will not have to be paid by Digital Region.” 

That just does not seem plausible. Advance preparation of accounts does not cost nearly £63 million, and the notion that the company in question will not have to

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pay those costs, even though they are provided for in the accounts, defies rationality. Will the Minister therefore say what was the precise nature of those “exceptional costs” of £62.9 million? If Digital Region Ltd did not pay them, who did? How does that link in with the request for additional funding that we are considering today? 

I would like clarification on one point that the Minister highlighted. Given that the project in south Yorkshire was funded in part through European moneys, what is the risk of the clawback of regeneration funds because the project might have failed to meet its objectives? I think that the Minister mentioned a sum of £27 million, but have I understood that correctly? 

What reassurances can the Minister provide that no further liabilities will be incurred by his Department in respect of Digital Region Ltd? From reading between the lines, the sum in the motion seems to be the pay-off for policy failure in that it will either settle the closure of the company or help to procure a new operator. 

The memo states that the costings of either option are similar. Again, that seems somewhat fanciful. What liabilities has Digital Region Ltd incurred that mean that its closure would cost the Government an additional £45 million? Similarly, why on earth should it cost such an excessive sum to bring in a new operator? Could we have a costs breakdown for both options to reassure the Committee that the most appropriate option is being taken in respect of public money and public policy? 

I said earlier that the request for moneys was because of policy failure. I said that because a change in Government policy has clearly placed immovable obstacles in the project’s way. A Sheffield city council audit committee report of September 2012 stated that 

“DRL now cannot continue to trade based upon current operating models. The critical issues are that the market is increasingly competitive and dominated by a few key players, the economic outlook has fundamentally changed” 

and—this is the key point— 

“the model for national public support to roll out broadband has changed”. 

Given that assessment, to what extend does the Minister accept that Government policy caused that failure and the subsequent need for additional public money under the 1982 Act? Given the circumstances, has he carried out a review across the country on other broadband initiatives to see whether similar projects may request additional moneys from this House? How can the Committee be reassured that the change in policy on broadband, which has been cited as one of the key reasons why Digital Region’s business model has not worked, will not incur additional costs? 

In the past fortnight, we heard an extremely critical report from the National Audit Office in respect of the rollout of rural broadband, which states that the project has been delayed in terms of output by two years, does not provide value for money and lacks appropriate competition. Given that policy environment, how can the Minister reassure us that results similar to those in south Yorkshire will not occur elsewhere? 

There are serious policy issues and cost implications before us today. I hope that the Minister can satisfactorily answer my points before we support his request. 

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4.48 pm 

Mr David Anderson (Blaydon) (Lab):  I echo my hon. Friend’s comments about serving under you this afternoon, Mr Crausby. The issues he raised were in line with some that I wanted to raise, and I will be interested to hear from the Minister on those, but I would also like some more background information. 

Will the Minister give us some idea of the time scales—from when the scheme started to where we are now? What, if anything, will be the impact on the local authorities of Digital Region Ltd continuing or closing? Does he believe that the apparent failure of that business was affected by the decision to do away with Yorkshire Forward? Would it have been more effective if Yorkshire Forward was still operating? 

4.49 pm 

Michael Fallon:  I will try to answer both of the hon. Gentlemen’s questions, but I will start with the hon. Member for Hartlepool. If I may say so, I think that he will later realise that the thrust of his remarks was extremely unwise. 

This project, which was set up in 2006, had started to go very badly wrong by 2009. That had nothing to do with any broadband policy decisions taken by this Government. I remind the hon. Gentleman that the project cost £100 million to build. By about this point—seven years later—it was intended to have attracted 20% of households in south Yorkshire, which would equate to 108,000 customers. It actually has 3,000 customers. He and his colleagues can do the maths. Perhaps they ought to ask themselves who authorised the £100 million spend for only 3,000 customers. I am sure hon. Members can do the division calculation. The hon. Gentleman himself has noted that in order to continue with this project, we are spending more than £10 million each year to service those 3,000 customers. I am sure he can do the maths. 

I have described the background to the project. The hon. Gentleman asked me some detailed questions and if I may, I will get back to him on the more technical ones. He wanted to know why we are having to spend £45 million clearing up this mess. The answer is simple. We now have to assume all the liabilities of Yorkshire Forward, the regional development agency that signed up to this nonsense. As it was 50% of the cost, we will have to provide at least 45% of the funding, including a significant proportion of the repayment of the European regional development fund grant of £27 million, which rightly has to be paid back to Brussels, because the original conditions were not fulfilled. We have to pay, as a 50% shareholder, our proportion of the contract due to the original operator, which has now been suspended, even though the terms agreed by Yorkshire Forward and the four councils with that original operator were hopelessly inadequate, in that they did not transfer any income risk whatever to the operator. 

I could go on, but let me leave it there. This is not a happy story. It has nothing to do with current Government policy. We are inheriting regional development assets all around the country, but we are also having to clear up some of the liabilities. The contract was very poor and extremely badly negotiated. It has not been managed successfully, and the marketplace has moved on. We have to clear up the mess, but I am determined to limit the exposure of the Government, and indeed of our

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taxpayers and our constituents, to any further cost. It will now be up to the remaining shareholders to decide whether to go on with the re-procurement exercise and find another operator to come in and take the place of the first operator, or whether they too will be content to close down this rather sad exercise. 

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Question put and agreed to.  

4.53 pm 

Committee rose.  

Prepared 16th July 2013