SCOTLAND’S DIGITAL FUTURE – INFRASTRUCTURE ACTION PLAN

STEP CHANGE 2015 PROGRAMME BOARD

RISK SUMMARY

For Discussion

Purpose

Risk Update [to be inserted in correct format]

RED RISKS

  1. To enable the Step Change 2015 Programme Board to explore the key risks around the Rest of Scotland project and understand how they are being managed and any residual risk.

Background

2.A programme level risk register, summarising the programme level risks to Step Change 2015 is presented to each meeting of the Step Change 2015 Programme Board. As with the October meeting, the project team is providing more information in relation to each of the risks to allow Board members to exercise appropriate governance.

3.The programme is being managed through PRINCE methodology and therefore such risks are only notified to the Board by exception (i.e. when the relevant project team assesses the risk to be “red” in terms of its current status). The risks discussed below are ranked “red” in the current version of the risk register. It should be noted, however, that these are all live risks and information is changing on a regular basis. For that reason, it is possible that some of the risks will have been re-scored or changed to issues by the time Board meeting takes place. Nevertheless, each of the risks discussed are significant and it is important that Board members are aware of them.

Risks

  1. Procurement Timetable to Award in June 2013

1.4.There is very little contingency within the procurement timetable to allow for any slippages and still award the contract in the first half of 2013.

2.5.The timetable was scheduled along standard BDUK framework timescales, including the requisite period for supplier engagement. This period is of particular importance because of the “right first time” issue discussed later. However, it has become clear that the bidders will need longer than the standard timescales in order to submit their bids. There are two reasons for this: scale and complexity.

3.6.The RoS project is understood to be around six times larger than any other project going through the BDUK framework. The RoS projectIt also places additional requirements on bidders because of the hierarchy of priorities, which requires a different approach to modelling. In standard projects, the bidders would model to deliver the highest coverage possible using the an Authority’sies evaluation model as a means of prioritising. The RoS project does not allow the bidders to put all of the money into the modelling ‘system’ until certain outcomes have been achieved. Thereafter, there will be significant manual amendments to the model to deliver the outcomes requirements. All of this takes time and places unusual requirements on the bidders modelling and governance, which means that RoS needs to allow a longer period of time for the bidders to submit their tenders.

4.7.There is time within the timetable to evaluate and award contract even with this lengthened tendering stage. However, achieving this is dependent upon the bid being right first time and the project team being able to secure smooth and extremely efficient passage through the various governance levels. For a project of this scale and complexity, such efficiency is unlikely and may deliver longer-term risks to due compromises likely to be required in terms of due diligence and bidder challenge.

5.8.To mitigate this overall risk, the project team intends to use the tendering period as effectively as possible to prepare the steps required post-tender. This will involve working on a “no surprises” principle. The project teams intends to receive updates from the suppliers as they move through their modelling and governance so as to understand the extent to which the tenders are likely to meet the project objectives and any key risks. The handling of these discussions will depend on whether there is one or two tenderers as this needs to be handled sensitively from a procurement law perspective.

  1. Infrastructure Provider Resource to Deliver (2015)

6.9.Both bidders have indicated during “supplier warming” that they will not be able to complete the roll-out by 2015. This is in line with what BDUK is seeing on smaller projects going through the framework pipeline in England, and they are negotiating with Treasury to allow them draw down monies in 2016 and 2017.

7.10.There is little to suggest that we can affect this issue to the extent that the entire roll-out will be completed by 2015. We can however help ensure that as much as of the infrastructure as possible in place by the end of 2015. This is an important issue in terms of political commitments and availability of funding.

8.11.Given that the finance package is not variable, the project team has at its only disposal limiteda few options that will help speed up the roll-out:

8.111.1During the Supplier Warming phase, the team has been clear that the policy objective is to complete the roll-out by 2015.

8.211.2The Invitation to Tender will confirm this position and, more significant from a bidder perspective, show explain the limitations on availability of funding. Bidders will use this information to inform their model, which will ensure that necessary monies are spend within applicable funding timescales. The project team will be able to use BDUK benchmarks and conduct its own financial due diligence to ensure that this does not result in unreasonable front loading of expenditure.

8.311.3The evaluation criteria is designed to place as few constraints as possible on the infrastructure provider’s implementation so as to allow them to maximise roll-out speeds and NGA coverage. The main constraint is the need to spend ERDF monies first to ensure that this can be drawn down.

8.411.4There will be a planning protocol agreed with local authorities to ensure that the implementation is efficient as possible.

  1. Ability to Demonstrate VFM

9.12.As discussed in the previous note to the Programme Board, the concern about lack of competition and transparency means that demonstrating value for money is not straightforward. This is common across all of the broadband projects currently being procured.

10.13.The project team intends on drawing on BDUK and its own benchmarking to determine value for money. Some of the inherent and specific mechanisms are shown in the diagram below.

11.14.It is important to note that the purpose of this procurement is to support an investment decision. This has is a crucial in point when assessingdetermining value for money. The policy statements for coverage are important in terms of a hard assessment, but, from a public sector investment perspective, value for money will needs to be assessed in terms of the economic and other benefits achieved through the infrastructure. To this end, a key part of the value for money assessment will relate to benchmarks against the possible economic ROI against other possible investments.

  1. Delay Resulting from Volume of Data in Public Consultation

12.15.The data received through the Public Consultation process has resulted in a significant change to the Intervention Area and we are currently undertaking the necessary analysis to determine the overall impact.

13.16.The project team approached the National Competency Centre at BDUK for advice on how we deal with this in order to maintain momentum and comply with State Aid. The NCC has now given a verbal response based on advice from Pinsent Masons, their legal advisor. In theory, we the project could progress on the basis of the substantially revised intervention area without further market engagement, but take the view that we are simply responding to the consultation and acting accordingly. However, there is a risk that we couldof face a challenge from other providers who may have infrastructure in a previous grey or black area that has now turned white. Similarly, providers who did respond may wish choose to challenge our revised interpretation of their response.

14.17.We The project team isare taking its our own legal advice on whether we the consultation should be replublished should republish the consultation with with the revised intervention area and mapping methodology or publish a formal response to the Consultation. Both of whether which would give a short period of time for further comment from the market and. This will result in a slight delay to the procurement timescales.

  1. Funding Envelope Insufficient to Secure Policy Targets on Speed and Coverage

15.18.Both bidders have indicated that the current national funding package is unlikely to be sufficient to achieve either the 75% across all Local Authorities or 85% National coverage. This will not be formally confirmed until the bids are submitted.

16.19.The project team is working with suppliers to get an idea of the projected level of shortfall and where the greatest difficulties may exist. They are ensuring that the contract has sufficient flexibility to allow additional funding should it become available, whilst noting that these changes would take place after contract award and need to be managed in accordance with procurement and state aid law.

20.The team is also trying to agree a structured form of engagement with bidders at key points during their modelling process so as to have as good an understanding as possible in relation to the likely coverage levels. This also needs to be handled carefully to accord with procurement law. The information gathered at these stages will be subject to change as the bidders’ own governance appliesand checks, but it will give an early understanding of what the funding is expected to deliver and will allow the managing of expectations and key messages.

  1. Non-Compliant Bid as Suppliers cannot meet Speed and Coverage Targets, or Completion Date

18.21.In light of feedback from bidders around what is possible with the available funding and timescales, the project team is wary of setting minimum requirements that could result in non-compliant bids. Should there be no compliant bids as a result of the tender, the project could be subject to legal challenge if it we move to award contract or change the thresholds after the event. As the RoS project is through the BDUK framework, it does not have the flexibility of an iterative bid process permitted by a Competitive Dialogue procedure; therefore, the tenders cannot be substantially reworked and need to be compliant.

22.Accordingly, the project team has decided to be clear on the project targets and aspirations, but not set a minimum criteria in respect of coverage or timescales. As noted above, this is an investment project not a standard procurement. The approach at the moment is to make best use of the process to maximise the investment potential whilst also delivering as far as possible on the policy ambitions.

23.The team has worked to design evaluation criteria, including a speed coverage template, to ensure that bidders focus on maximising NGA coverage. This means a bid will not be deemed non-compliant if it fails to deliver the policy targets, and will allow the Programme Board to decide whether the proposed level of coverage represents an acceptable investment. As mentioned above, the engagement with bidders during the tender process will provide early indications on progress and ensure that the coverage levels in the eventual bids do not come as a complete surprise.

  1. Insufficient Flexibility in Funding/Profiling/End Dates to allow roll-out

20.24.The current profiling of expenditure is predicated on the roll-out of infrastructure being complete by 2015. As discussed earlier, this does not appear likely. The project team is therefore working with finance teams to understand the level of flexibility around the funding to enable spend to take place beyond 2015. BDUK is also negotiating with Treasury as they require flexibility to fund the English projects that will not now be delivered by 2015.

  1. Supplier Unable to Draw Down ERDF Monies

21.25.The national funding assumes the use of £20.5m of ERDF monies. The BDUK framework was not designed to deal with ERDF idiosyncrasies. It does not prevent them, but the detail of how this could work was not been built into the call-off contract or other templates. No ERDF projects have yet gone through the framework although there are eight, including RoS, in the pipeline. All projects need to draw down the ERDF monies within the period of the Operational Programmes, the latest of which, including Scotland’s, ends in 2015.

22.26.The RoS project is only one of two going through the framework that are large enough to be subject to the EC Major Projects Notification process. All other ERDF applications can be approved by the regional programme management committee. The RoS stage 1 application has been completed and approved by the Programme Management Committee. The stage 2 application has been drafted and shared for comment, and will be before being submitted to the PMC this month. The intention is to have the Major Projects Notification submitted in spring. The timescale for receiving EC approval depends on the number of questions that the EC chooses to raise. All ging well, this approval processIt should be completed early in infrastructure project, but not before the contract starts.

BDUK recognises that ERDF presents a major risks to all project relying on that type of funding. The main risk is ensuring that the projects can progress quickly enough to spend eligible monies before the Operational Programmes end. To give these projects the best chance of success, BDUK has put a halt on any new non-ERDF projects entering the pipeline.

24.27.ERDF monies have to be match funded to a value of at least 55%. This means that around half of the national contribution to the RoS project needs to meet bethe eligibility treated as ERDF criteria and be considered as supported ERDF outcomes. This means the money must be shown to be supporting SMEs ineligible rural areas. According to the Application Guidance, the match funding has to be used as the first priority funding. This could isbe important when considering estimate the eligibility in terms of completing the application for ERDF. For example, if we consider apply on the basis that there is £1070m eligible spend (thus our match is £49.5m), but only manage to spend claim £9055m within the term of the Programme we would only be able to use £5.510mof the ERDF monies. We therefore need to be confident that our eligible ERDF spend is close to what we expect to spend during the Programme term.

28.The issues around ERDF have been discussed with bidders and will be discussed in more detail. The advice from BDUK is that we engage with suppliers around the “art of the possible” in terms of ERDF. This means encouraging them to front-load their modelling with ERDF eligible spend (including match) to ensure that it can be claimed within the Programme period. It also means being clear and realistic pre-ITT on the amount of money that will be able to be drawn down so as to ensure that the values in the application are as close to the actual amounts as possible.

29.BDUK recognises that ERDF presents a major risks to all project relying on that type of funding. To give these projects the best chance of success, BDUK has put a halt on any new non-ERDF projects entering the pipeline.

25.30.The other risk to drawing down monies relates to what constitutes an output in ERDF terms. BDUK has been working with Department of Communities and Local Government to help introduce commonality in approaches for ERDF applications for English local authorities. They are also using the ERDF funded Cheshire project to work through the ERDF issues with DCLG and BT. Although the issues have not been worked through yet, it is apparent that whilst there will be some standard provisions agreed, there will still be a significant role for local authorities to make their own amendments to address specific ERDF issues. The reason for this is that each ERDF project will have its own objectives and each ERDF regional management committee will have its own views on the level of reporting etc. required. Accordingly, there appears to be no standard ERDF approach.

26.31.Scotland has its own Programme and the project team is working with Structural Funds advisers to ensure that the proposed outputs will be accepted. From a practical perspective, the project team considers that the output has to be the number of SMEs provided with access to the infrastructure. This is likely to allow sufficient eligible expenditure to be claimed within the required timescales. Any other outputs are likely to be problematic and may reduce or remove our ability to draw down the ERDF monies. A video-conference is being arranged with the European Commission to get a sense of whether the proposed approach will be acceptable.

The issues around ERDF have been discussed with bidders and will be discussed in more detail. The advice from BDUK is that we engage with suppliers around the “art of the possible” in terms of ERDF. This means encouraging them to front-load their modelling with ERDF eligible spend to ensure that it can be claimed within the Programme period. It also means being clear and realistic pre-ITT on the amount of money that will be able to be drawn down so as to ensure that the values in the application are as close to the actual amounts as possible.

Conclusion

32.The Board is invited to consider and comment upon the risks discussed in this paper.