Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 120 - 139)



  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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Prepared 28 November 2002