112. May I start by asking what systems are in use for communications between emergency services in other countries in Europe?
(Mr Gieve) I do not know the answer to that in terms of the existing systems. I do know that TETRA is the agreed European standard and agreed by the EU. Over a period I am expecting many of those countries to adopt TETRA-based technology for their emergency services. There are other standards. The French have one called TETRAPOL, which also meets that standard.
113. Had the other countries decided to go with TETRA before us? Was that taken into account when we decided to go in for the TETRA system?
(Mr Gieve) I do not know.
(Mr Webb) There were examples, not on such a large scale by any means, in Europe before we finally placed the order. They were all doing that in parallel to us at the time but nothing as large as us, no.
114. It was not therefore one of the factors in choosing TETRA that there were other countries.
(Mr Webb) No, it was not a major factor but it was the technology which was emerging and was beginning to be taken up by other people so that did influence us at the time.
(Mr Gieve) It was a factor in that it was the European standard for emergency radio systems, but I think you are asking whether successful experience abroad was a factor in adopting Airwave.
115. Either successful experience or the fact that you might be able to come in line with other countries' systems in some way. That might be useful.
(Mr Gieve) Yes; absolutely.
(Mr Webb) Interoperability is an issue and in fact there are more people taking up TETRA than there are the French standard of TETRAPOL.
116. Does this mean there is some chance some other countries might buy into our way?
(Mr Parris) The approach I am taking with Airwave and indeed O2 is taking with Airwave is to deliver the service here in the UK and to establish our credibility and track record and then look to expand our geographies into other areas. A number of countries in Europe have committed to the TETRA standard but have not yet chosen a particular service provider and indeed that is also the case in other geographies further afield, Africa and Australasia included. From my perspective, it is a possibility but only once we have successfully delivered here in the UK.
117. Figure 9 on page 23 shows the consortia which were considered in the first instance before two of them sadly dropped out. There do not seem to be any foreign suppliers here. Were people not supplying similar systems in Europe which could have been considered as potential suppliers in this country?
(Mr Webb) Ericsson, Nokia and Philips are all foreign companies.
118. But producing in this country, are they not, or are they not?
(Mr Webb) Yes, they have manufacturing plants here.
119. I was assuming that the systems we have been talking about here were being developed in this country. Is that wrong?
(Mr Webb) Some of them are being developed abroad. Motorola for instance is an American company.
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 s 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, f 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.
140. What you are doing is listing the various advantages there are going to be out of the system. I understand that there are going to be advantages. My question is: how did you decide that those advantages were worth £300 million?
(Mr Gieve) We did not look at it as £300 million extra, we looked at it as the full cost of Airwave. This is not a different question from asking whether if we let the Airwave contract at £1.5 billion over ten years that is going to produce a service worth £1.5 billion. It is the same judgement. I do not think we did.
141. It is not necessarily the same judgement, is it? You might find that there was another potential service which you could get for £1.4 billion which you knew was a slightly worse service, but actually better value for money. It is not just a question of whether Airwave is worth £1.5 billion but it is a question of whether this is best value for money.
(Mr Gieve) Yes, it is a comparative judgement. The ACPO review was done on a different basis which did not have a national requirement, did not have right to roam. It was one among a different set of options. I suppose my answer to how we decide whether this is good value for money if we have not priced the benefits is that it is a political judgement, it is a judgement shared with the Police Service on what sort of services are worth doing. Is this a reasonable use of money compared with the other uses we could make of the police's money in terms of the benefits, in terms of public order and crime and the service they provide?
142. What you seem to be telling me is that before you took this decision you had not actually priced the benefits at all.
(Mr Webb) I think that is stated in the report. In fact we are doing a benefits realisation exercise: we did start late in the day; it is now going on; we are putting in place measures to identify how current policing is done prior to Airwave going in and the benefits which are approved subsequent to its being delivered.
143. Is there anything in the contract which says if one of these benefits is not delivered a certain sum will come back to the Police Service?
(Mr Webb) The contract is not determined in terms of benefits: the contract is determined in terms of delivery of functionality.