Examination of Witnesses (Questions 120
- 139)
MONDAY 22 APRIL 2002
MR JOHN
GIEVE, MR
VAUGHAN ASQUE
MR PHILLIP
WEBB AND
MR JEFF
PARRIS
120. Were others being developed across Europe
in these other countries which are taking on TETRA systems which
could have been considered and if so, why were they not included
in this instance?
(Mr Webb) We had no control over what the consortia
were. Over 70 people had originally responded expressing interest
from all over Europe. In fact these were the three consortia which
were formed to provide effective bids.
121. Coming back for a moment to the question
of whether the system can be sold elsewhere—we already know
that it may be sold to the Ambulance and the Fire Services in
future—the decision was taken that a 17% profit level was
a reasonable one. To what extent was the fact that there might
be a lot more profit in it for the company because of the possibility
of selling on without having to pay back any of that to the original
buyer included in that decision that that was a reasonable profit
level?
(Mr Webb) At the time we should have liked more people
to have signed up but the only people we could deliver at the
time were the Police Service. Any risk associated with selling
on to any other authorities was down to O2 so it was a commercial
decision as far as we were concerned.
122. But any profit was going to them as well.
(Mr Webb) Yes.
123. So in a sense there was no downside for
them. All that could possibly happen was that the profit level
would go up if they did manage to sell on either to foreign countries
or to other emergency services in this country. It is only an
upside.
(Mr Webb) Not necessarily. They did take a significant
risk in the sense of the 17% return is assuming they actually
get paid for it. At this moment, because there is a delay in the
project and it is taking longer in some areas than necessary,
they are not being paid, they are not earning revenue. There has
been some retention of revenue as far as we are concerned, so
they are not getting the full amount at this time.
124. The 17% was the profit they were expected
to make if they concluded a successful system and sold it simply
to the Police Service in this country.
(Mr Webb) Yes, that was what the plan was; 17%.
125. And 17% was considered to be reasonable.
If that had been the end of it and they had sold to nobody else
it would have been considered a reasonable profit to make.
(Mr Webb) That was the advice from our advisers at
the time.
126. Yet we allowed them also to take on all
the potential profit for selling to any other service within this
country or indeed abroad without insisting on any sort of a clawback.
(Mr Webb) I am corrected here. An element of shares
was an assumption which O2 made in terms of determining that profit
was actually built into that 17%. They were taking the risk of
assuming they would actually sell some shares to other people.
127. I am delighted to have that change of answer,
if I may say so. If that had not been the new answer, I should
have been seriously worried about the way that negotiation had
been carried out. How much of the 17% is the risk, whatever risk,
which has been transferred to the company from the public sector?
This is a PFI deal after all.
(Mr Webb) It is a PFI deal so we have transferred
the bulk of this to O2 in that they are responsible for providing
the whole service, they are responsible for developing the service
and a full capital investment is down to them.
128. To date my understanding is that they have
spent in excess of £100 million in putting in the infrastructure,
they have received nothing like £100 million in terms of
revenue. If they say in a year or two's time that they are very
sorry but they cannot actually produce the system without getting
a bit more money, do you say you are walking away and going back
to your old system, picking up your hand-held mobile phones again?
(Mr Webb) We would not necessarily do that. The first
thing we would do is endeavour to ensure that they do deliver.
They have a contract with us. There are liabilities associated
with that contract in terms of delivery. We would also automatically
try to negotiate a situation where they did deliver.
129. What you are saying effectively is that
you are prepared to do something more for them in order to make
sure they do deliver.
(Mr Webb) As far as we are concerned they are contractually
obliged to deliver therefore our first recourse would be to ensure
that they did do under contract. In terms of returning to our
existing systems, by that time most of the analogue systems would
have been withdrawn in the sense that they would have been replaced
by the Airwave system so returning to an analogue system would
be far more difficult. Almost certainly if TETRA did fail we would
have to procure an alternative system and that may have to be
done on a local basis if we could not do another national procurement.
130. That might then become very expensive.
(Mr Webb) That could become expensive.
131. So not all the risk has been transferred.
(Mr Webb) You could not ever mitigate risk against
companies failing to deliver and going bankrupt. Quite frankly
we would be looking to get a significant return on any investment
we had made as a result of that.
(Mr Gieve) What risks are O2 taking? One risk is that
they cannot produce the required level of performance for the
investment they had assumed at the outset. For example, they may
need to put in more masts than they had planned in order to provide
the coverage and quality of performance. That will cost them a
lot of money and that will reduce the 17%. They only get the 17%
if they deliver the service to their cost.
132. I understand that they only get 17% profit
if they do that. What I am asking is if they do not manage to
do that and come back to you and say sorry they need more money
whether in practice you are then over a barrel and have to say
you cannot afford to go back to the old system. It would cost
you a huge amount to ask somebody else to set up a new TETRA system
now for us and therefore effectively you would be in a position
where you were going to have to pay a little bit more to Airwave
to make sure they do remedy the problems they still have.
(Mr Gieve) I certainly would not accept that if Jeff
comes back and says he needs to change the contract we would just
do so because we are over a barrel. We would force them to deliver
on their contract and if they did not, there would be dire consequences.
You then ask what happens if they are actually driven out of business
and you have to find someone new. In that sense there is always
a residual risk because we have to provide the service or at least
the police authorities have to supply the service. That is true
whether it is a PFI or an normal contract. There will be severe
consequences for O2 if they cannot deliver.
133. Let me come back, if I may, to the £300
million extra. I do not quite understand about the £300 million
extra that Airwave has cost us compared with a whole series of
local systems. Is that £300 million over the total time life
of the project, in other words is it £300 million out of
the £1.5 billion?
(Mr Webb) Yes.
134. Effectively local systems would have cost
£1.2 billion over 19 years.
(Mr Webb) That would be the estimate. If they actually
went out and bought the systems. These would not necessarily be
joined up, they would be local systems.
135. Sure. As I understand it, the advantage
from that is that we are expecting to get the equivalent of about
another 1,200 police officers.
(Mr Webb) That is the comparison the report made.
As far as we are concerned, what we would actually get would be
significant efficiencies in terms of how the police could operate
and as a result of that it may generate income for 1,200 more
officers.
(Mr Gieve) The NAO would be much more cautious than
that. I do not think they were saying that it would. It was a
classic NAO illustrative figure. We think we are going to get
value for money for this.
136. How do you know?
(Mr Gieve) We have assessed what sort of service this
will provide against the costs. We think that the extra service
—
137. How have you valued the extra service?
I can understand if it is going to save you 1,200 officers; there
is a value to 1,200 officers. They cost £40,000 each a year
or whatever. One could actually have a value on that. I am not
quite clear how you have valued —
(Mr Webb) I do not know whether we have valued it.
The pure cost saving from not requiring police time to be spent
on X, Y and Z nugatory work is not the full benefit of this system,
that is the point I was making. There are benefits in terms of
the quality of service the police can provide.
138. So how have you valued that.
(Mr Webb) There has been some valuation but the greater
extent was the additional functionality and capability of the
police force and there was a general recognition that this was
actually something which would provide significant benefit in
terms of operational policing.
139. I am sure it does but I do not understand
quite how you say that you have seen there are operational benefits
and you believe that is worth £300 million. How do you decide
that £300 million is the right cost for those operational
benefits? Is it just a figure plucked out of the air or do you
think about it for a bit and there is a majority vote within the
committee which says £300 million is about right?
(Mr Webb) No, it was not plucked out of the air, it
was a figure which came up during our analysis, £300 million
extra. There is a long list of additional functionality including
providing a national service and allowing interoperability between
police forces which was a key requirement of the original ACPO
need and the fact that we offer a service here which could exploit
digital technology in terms of how they use that technology to
download, therefore police officers could spend more time on the
streets, plus the fact that we were able to offer a far range
of additional safety measures for police officers, that they knew
where they were, all these things.
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