The Pop Factory is set in the former home of a soft drinks factory

The Welsh Assembly Government has asked the European Commission to look at the Pop Centre MP3 Caf� in Rhondda.

The former education body Elwa provided �4m in 2002 to Avanti Media Group to set it up, but half the money was not spent and the company paid it back.

The company said it had always been entirely open and was surprised there could be a further investigation.

Even though half of the money has been handed back, the European Commission could decide more of the cash should be returned if funding rules have been broken.

The Pop Factory describes itself as a venue with comprehensive studio and post-production facilities, set in the former home of a soft drinks factory in Porth.

Six years ago it received the money from the education and training quango Elwa, to transform an old supermarket into a new music and television training centre in the Rhondda.

'Significant shortcomings'

In 2003 Elwa was accused of serious management failings in a damning report by the Welsh assembly's audit committee.

Elwa was one of several quangos - quasi-autonomous non-governmental organisations - abolished and brought under direct control by the assembly government in 2006.

The committee said it was guilty of significant shortcomings in projects, including the Pop Centre MP3 Caf�.

Now a report for the assembly government has found a "number of issues" and has recommended it should be referred to the European Commission.

In a statement, Avanti Media Group (AMG) said it found out about the referral to the European Commission only on Thursday.

It said it had been working with the assembly government "to bring any issues raised by them to a satisfactory conclusion and the company was therefore surprised to receive notification of the proposed referral".

It had "hoped and remains hopeful that a resolution to the issues can be reached without the need of a referral to take place".

The statement said Avanti had "always been entirely open" with the assembly government about dealings with Elwa and the conduct of the contract.

The company has asked to meet the assembly government next week.