Examination of Witnesses (Questions 20-39)|
TUESDAY 9 JULY 2002
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
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
(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
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
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.
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
sizeI believe about 200 is the number quotedand,
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
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.
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 innovationsand it is pretty early days in the
sense to digest everything about this and we have yet to see what
the legislation itself might bringa 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.
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
(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
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
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,
(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.