Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 20-39)



Mrs Lawrence

  20. Can I ask you a question on the implications of Chapter 7 of the White Paper specially about third party liability and insurance. I looked at your website yesterday and you made great play about the commercial factors involved in insurance of the industry and obviously, after September 11, in terms of waste management and terrorism, I think that is another element of concern to us all here. I noted on a Department of Trade and Industry minute of 10 June that where previously third party liability insurance has been a commercial undertaking, the British Nuclear Insurance Board have now refused to take on third party liability insurance and the Secretary of State is effectively underwriting that. Bearing in mind that, on your website, you indicate that the nuclear industry is very keen to put forward its commercial aspects and not in this respect be a burden on the taxpayer, is that another concern for the taxpayer that they could be burdened, if you like, if the commercial pool will not take liability for this potential risk?
  (Mr Ham) I think the point we have been making, as you know, is that the commercial insurance does carry quite a substantial amount of insurance for, if you like, nuclear risk and, as you point out, where you are talking about virtually acts of war and acts of aggression by terrorism, clearly those issues cannot be carried entirely inside this private insurance system.

  21. Does that not constitute a further subsidy, if you like, for the British taxpayer?
  (Mr Ham) I would say that the British taxpayer of course in the final event carries a risk of all kinds of incidents in lots of different industries where it comes down to acts of terrorism and in fact acts which have long-term effects on the environment. There is no insurance policy against damage created by the extreme weather events of global warming; those are not carried by coal or oil or any or the other fuels which create that. Clearly there is a point at which industries cannot cover or do not cover at the moment certain types of risk and other industries, such as, as I say, the fossil fuel, is not covering the full environmental costs or risks that their own activities generate.

  22. Can I just ask you another question because that relates to third party liability and not being covered by the commercial side of things, but there has been a massive increase from £140 million to £430 million per incident in commercial insurance for non-terrorist activities. I understand that the Secretary of State will be underpinning potential third party liabilities up to £140 million. I have had great concern about that and I would like your comment in light of the Sea Empress incident, an oil incident in my constituency in 1996 where the clean-up cost for that one incident alone was £60 million. So, do you not also feel that the underwriting for terrorist acts of £140 million is way, way too low and, looked at sensibly, could again cost the taxpayer a lot more to underwrite any potential terrorist incident?
  (Mr Ham) Again, we are going into the area of potential quasi acts of war and the fact is that, as I understand it, essentially the Government do cover the bill for that in any event.


  23. Perhaps you might like to consult with your insurers and send us a letter on that point.
  (Mr Ham) If we may, Chairman, I think we would like to make a written submission to your Committee on that specific point.

  Chairman: The only point that I will make now and I will make it repeatedly today is that we would like written submissions in supplement but we do need to have them quickly because we are up against a deadline of about 11 days from now at the very latest and we really need to get it in sooner rather than later.

Mrs Lawrence

  24. How does that fit in with the State Aid rules in terms of the Government then stepping in and providing what was a commercial facility?
  (Mr Ham) You are going to be talking to the DTI later today. We would wish to try and cover that point as best we can in a submission in writing within the 11 days, if that is acceptable.

Dr Kumar

  25. May I explore the organisation that the Government are thinking of setting up, the Liabilities Management Authority. Do you think there are sufficient technical and management skills which exist out there to set up this body and do you have any thoughts on how it should be set up?
  (Mr Ham) I know that our industry view is that, at the moment in Britain, there are substantial nuclear skills available and one of the issues of concern is the longer run, that things are left too long and their skills will start to erode unless progress is made in some areas. Over the specific issue of skills for the Authority to be created within reasonable time, I think there is a lot of confidence and I would like to turn for some further comments from my colleagues on this.
  (Mr Ingham) I do not see that as an issue that troubles us. I think there are a large number of skills and experience available within our industry and within related industries which can be brought to bear to make a very successful department.
  (Dr Mills) I would comment that the size of the LMA which is indicated within the White Paper we believe is an appropriate size—I believe about 200 is the number quoted—and, in that context, I am very confident that there are sufficient technical and management skills to resource that albeit that I think the LMA would benefit from the introduction of skills from industry as part of that complement.

  26. What about the Government's customer contractor model of operation to deal with this particular task? Given the difficulties we have had in other areas, do you think this is the right model?
  (Mr Ham) I think we have a lot of confidence in that model as a way of introducing more transparency and a more efficient way of dealing with issues. There are quite specific safeguards we believe that exist inside the nuclear industry to guarantee that the use of these types of models can be quite effective and I can give some examples where that works.
  (Dr Mills) I am just wondering which examples you feel have failed, if you can help us with clarification of your question.


  27. Sellafield and Dounreay prior to 1998 and this Committee's inquiries and reports that resulted in a change as people were running around like headless chickens not knowing what the hell was going on.
  (Dr Mills) I think we would refer you to a number of publications, which we can give you in writing, which relate to principally the Nuclear Installations Inspectorate's examination of the improvements which have occurred since that date and I think the best way of dealing with that is to give you the references to those publications.

Dr Kumar

  28. Perhaps you will want to reflect on this in your written submission.
  (Dr Mills) Yes, thank you.


  29. Our concern is that past experience showed that where there was not a good grip on subcontracting, then anarchy prevailed and that was reinforced by the Walker report, which you may recall, which suggested that there was a degree of regulatory capture, that some people came rather closer to the people they were supposed to be regulating than perhaps they should have done although, in retrospect, I think that has now been corrected and the NII is very sensitive to such charges, but I think what we are worried about is that a new successor fledgling organisation might be taken to the cleaners by cynical contracting, but maybe we are just being cynical politicians on this matter.
  (Dr Mills) I would hesitate to agree!
  (Mr Ingham) May I give more information. To some extent, this is perhaps not a customer contractor relationship question but how well these things are managed and certainly one of the lessons that have been learned from the history at Sellafield and at Dounreay which has been incorporated by the Nuclear Installations Inspectorate is the specific inclusion of licence condition 36, management of change, which ensures that management arrangements and responsibilities for safety are very carefully defined and maintained in whatever arrangements follow. I think the subsequent history of Dounreay since then has been very good in terms of managing safety and I think there are other examples, for instance the change in the management contractor for AWE Aldermaston has been successfully put in place to the satisfaction of the Nuclear Installations Inspectorate. It is the management of those things which are important, not so much the customer/contractor issue and so on.

  30. Can I move on to how you view the New BNFL and the activities that are not going to fall within the LMA because we are talking here about quite substantial changes. What is your view of what the BNFL is going to be responsible for? How do you see this and how do you see your role as potential contractors? There may well be work for you there but do you think there is also going to be profit for the taxpayer in a general sense?
  (Mr Ham) We do speak on behalf of the whole industry which of course includes BNFL, so although it was most appropriate for our team today in front of you to bring a representative from the contractors, we do still speak on behalf of BNFL, and I think that BNFL has welcomed the changes as they have been announced so far. Of course you will be talking to them later. Clearly we see in the innovations—and it is pretty early days in the sense to digest everything about this and we have yet to see what the legislation itself might bring—a clarity of focusing of roles inside the whole area of BNFL as it currently stands prior to this as being desirable, focus on particular jobs and focusing funds towards solving some of those problems, the historic liabilities. These are the principal benefits we see as an association coming out of this White Paper. So, I would not really like to go into the details of aspects of BNFL and its structure in this post-LMA world. I feel it is up to them and still it is unclear quite what some of those things might be; we might know better once draft legislation is published.

Linda Perham

  31. I would like to ask you about the White Paper which says that competition will be central to the LMA's approach and initially I think it is assumed the contracts would go to BNFL and UKAEA, but are you happy to think about competition coming from elsewhere? Would there be perhaps the oil and gas industries wanting to come in with management expertise or with contracts?
  (Mr Ham) We see this as an opening up of markets. In other words, the opportunities for other companies which hitherto may not have been able to bid in, companies which are well qualified in the UK area and have suitably qualified and experienced personnel on their staff. The entry of those companies to bidding for chunks of work which hitherto would not have been perhaps open to them we see as welcome and we feel can only be to the good of the industry as a whole, as well of course to the good of our members. Of course, some of these contracts will be open to companies from overseas as well where they can offer the suitably qualified and experienced teams necessary to carry out the work. So, that is welcomed as a whole.

Mr Lansley

  32. Some of the assets from BNFL which were transferred to the LMA will be continued to be run on a commercial basis and part of the funding arrangements of course are that surpluses from the commercial operations would be credited towards the fund of the account in order to meet liabilities costs in the future. From your knowledge of the industry, do you anticipate that there will be an insignificant sum by way of commercial benefit to the fund from the operation of those assets?
  (Mr Ham) I have to say that personally I am not sure; we have not seen, if you like, financial modelling of those parts of the BNFL business, so I would not be able to put a . . . I will ask my colleagues if they have any ideas.
  (Dr Mills) I would not be able to put a figure to that. There will be surpluses but on what scale I cannot say.
  (Mr Ingham) Indeed.
  (Mr Ham) We welcome transparency which we hope is going to follow!

  33. I know it is true to say that we will be able to speak to other witnesses but sometimes it is useful to speak to those who have a less direct interest in the issue to see what the views of those knowledgeable about the industry might be. So, at this stage in pursuit of transparency, we cannot actually see what might be that third strand of funding for clean-up costs.
  (Mr Ham) That is a very fair observation.

  34. Turning to funding overall, the White Paper presents two mechanisms: one is of a segregated fund, the other is a segregated account which no doubt you have seen. Do you have any view about the respective merits of these two mechanisms?
  (Mr Ham) The industry's view after considering the White Paper for, as you know, a relatively short period of time certainly at this point in time is that a segregated fund would be much more desirable. We welcome nonetheless the fact that, in the White Paper, it makes it clear that either segregated fund or segregated account will imply a much more substantial long-run commitment from Government towards funding the clean-up. We feel that, from the point of view of our members, a clearly identified segregated fund would give them more confidence that there would be proper funding for longer term programmes of work which would not be somehow cut or changed almost year by year as might be the case if you were looking at funded operations, if you like, under normal public sector rules. I know that the White Paper does make it clear that even a segregated account gives perhaps more security, but I think our membership feel that a segregated fund with an identified cushion of funding which could last and fund projects lasting five years plus would be the desirable way we would like to see things go.

  35. You are aware that the Government, although they are consulting on both options, do not take your view. They prefer a segregated account because of the preference for that as being in keeping with normal government accounting rules where all the normal government accounting rules therefore apply.
  (Mr Ham) Yes, we were aware of that Government view.

  36. To put it in a nutshell, from your point of view, is it that a segregated fund actually does create greater transparency about the level of contribution that is required from Government on a three year rolling basis looking forward in order to meet the obligations of the fund?
  (Mr Ham) We would hope to see funding which would allow much longer than a three year rolling programme available and earmarked, definitely earmarked, for those purposes and that is the benefit we see and, if it facilitates funding over five years or so more preferably, then it would clearly be proof against the changes in funding policy which occur on the economic cycle and also perhaps the political cycle; it would be proof against those and I think that is seen as very desirable for the industry, that it has that degree of certainty which allows planning of intake of personnel and planning of R&D to improve techniques in particular areas and investment in R&D. You have to look at five years plus planning to really get the best out of, if you like, the industrial sector and out of, if you like, this opening up of the competition. If it is opened up and only very short contracts are available, we would say it is not going to be tremendously helpful. I ask my colleagues whether they would like to make any comments.
  (Mr Ingham) That would indeed be very important to us because although I have said that there are resources available to the industry now, this activity will take several/many years and it is important that, I think, industry sees a consistent and committed approach to it in order that we can recruit, train and keep the experienced number of personnel that will be needed all this time.
  (Dr Mills) Just to observe that the type of funding is an indicator of the commitment to the programme and that is what the industry needs to see.

  37. Of course, the principal initial contribution to the fund or to the account is from the nuclear liabilities investment portfolio transferred from BNFL. At the time of the Secretary of State's statement, we were not, so far as I am aware, given an account of what that was but it is now estimated at the end of March as £4 billion. Does that strike you, with what you knew about provision that ought to have been made for BNFL's liabilities, as an appropriate sum to be set aside for those future liabilities or an inadequate sum?
  (Mr Ham) Clearly it depends on the pace at which work is likely to be carried out and what the Government appear to be saying as we read the White Paper is that they would be looking forward to a "ramping up" of the expenditure and the work progress year by year. There are suggestions that it might go up to the 1.2 type of level within a year. So, the sort of fund you are talking about would initially give you say three years' guarantee of programmes, but it—

  38. It is thought no more than is required really to get to the point where the Magnox undertaking comes in but, even then, the Magnox undertaking may rise to what is presently paid and granted to UKAEA is some several hundred, maybe £400 or £500 million short of what is now estimated to be required on an annual basis. So, the BNFL provision is transparently only adequate really for the first two or three years.
  (Mr Ham) If I can just come back to the original comments, we would like to see funding which gave the industry, which is going to compete for and work in this area, a clear signal that there is going to be the opportunity for the LMA to let out tender contracts which are five years plus. All of them are not going to be that, but we would like to see adequacy for that type of activity by the LMA and that does mean and the implication of that is a very substantial funding. So, one would imagine that the fund would be added to year by year by Government anyway as time progressed, though what scale of cushion of funding is required really financial experts and so on probably need to think about. What the industry certainly would like to see is funding a fund which is segregated and which gives clear opportunity for the LMA to let contracts in this five years plus time in this area of work. I would not like to in the end hear it said, "This initial £4 billion, yes, that is right" and "that is not right." One would like to see the figures worked through much more fully and some iterations of potential packages of prioritised work run through those. So, it really is the principle that I am trying to make here. The industry wants to see adequate funding which is clearly allocated, ring-fenced and protected from the other vicissitudes of Government funding and so on for allowing/letting of contracts of a long-term nature. That we see as really key to getting effective solutions and creating inside the British industry as a whole a very effective and self-modernising technologically innovative industry which is capable not just of dealing with their own problems but competing abroad effectively in a lot of the clean-up projects that we see coming up abroad as well. I would not really like to comment specifically on the £4 billion you mentioned, but clearly a large segregated fund is needed for that.

  39. Given that the purposes of the White Paper not least is to give transparency and a degree of certainty to what has previously been not transparent and deeply uncertain, do you not think at this stage it would have been helpful, even though there is consultation about the funding arrangements which is a separate question, if the nature of the size of liabilities and what is presently available and what is the net present value of dealing with those liabilities could have been more clearly expressed? Because, as far as I can see, potentially we are dealing with a £48 billion and rising undiscounted stream of clean-up costs as compared with a £4 billion current fund but have no estimate of what the net present value in the light of the distribution of those clean-up costs is and the uncertainties or what the probability is of a fund required at this moment with a net present value sufficient to deal with clean-up costs, which presumably is not £4 billion but £10 or £15 billion, some figure.
  (Mr Ham) I take the point you are making. It seems to us that the important issue is to have a centralised point which is capable of taking on the role of deciding on an overall prioritisation and, if you like, an overall optimum programme from the point of view of both the technology that exists, the existing skills and potential future skills and that really has not existed inside the whole nuclear scene in Britain as yet and I think that is one of the reasons why we welcome the White Paper because it promises to set up an authority with the capability to define that type of strategy.

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