Select Committee on Trade and Industry Minutes of Evidence


Examination of Witness (Questions 149-159)

MR GORDON MACKERRON

TUESDAY 9 JULY 2002

Chairman

  149. Good afternoon, Mr MacKerron. I am very pleased to welcome you back here. You have been involved with this Committee in a number of guises over the years as adviser and witness and we are very happy that you have been able to join us at short notice. You perhaps as much as anyone have been tracking these issues for a number of years; and after the Secretary of State's announcement in November the only surprise was that the White Paper took so long to come out. I wondered what you felt about the White Paper and whether or not you think that it is going to hit the targets that it is setting.

  (Mr MacKerron) I very much welcome the broad thrust of arguments within the White Paper. There is a commitment both to a greater openness and transparency which will help everybody inside and outside the industry and, to echo what some of the people from the UKAEA have just been saying, it does seem to me that there is a commitment now to concerted action for clean-up of liabilities such as we have not seen before. In particular the establishment of what I would call a proper funding system in either of the two variants that are proposed is a radical step and a real move forward. Also important is the clear attempt to as it were come clean over the financial and physical scale of the total problem. For some years there have been under-estimates for various good institutional reasons. I think now there is a real incentive to get the full extent of the liability out into the open so that it can be managed in a more effective way without hopefully too many more shocks about increases in the total size of the bill. That would be my general reaction to it.

  150. Your general welcome for it I imagine implies that you think that it will generate the necessary public confidence in the Government's ability to deal with the problem. Is that a conclusion that you would draw from it?
  (Mr MacKerron) I think it is too early to draw that conclusion. I think you are absolutely right, that it needs to gain that level of public confidence. It will have to start out and do that from now on. It has the opportunity to do it. I think it needs to engage more than it has been able to in its shadow form currently as the Liabilities Management Unit with a much wider range of stakeholder opinion than it has yet or has been characteristic in the past. The overall framework and the clear political commitment to doing something more systematic will help it gain that level of trust but it is a long process and not always easily won.

Dr Kumar

  151. Can we stick with the issue of the cost of clean-up? The Government estimate for this clean-up stands at £48 billion and has gone up by six billion since November when the Secretary of State first made the announcement. First of all, do you believe the figures—because I notice that you made a comment in the New Scientist that competitive nuclear power is still at best an untested proposition, so it seems that you may be a bit of a sceptic when it comes to figures that the Government may be churning out; or maybe I am reading too much into your statements. I wonder if you can say first of all do you believe the figures and what do you think of the cost of the clean-up?
  (Mr MacKerron) Let us take one element of that first. The quote I have in New Scientist actually refers to the cost of the construction of new reactors which is broadly a separate issue from the one we are dealing with today, so my comments there are not necessarily relevant to this. I do not think it is easy to say that anyone believes a number, whether it is £48 billion or any other, because you know the Government has itself said in the White Paper that the expectation is that that number will go up somewhat further. I have been working on this for some years. There was some work I did a while ago on this which you are very welcome to have if that is of some use, which actually tries to explain why I think the numbers will continue to go up for a while. The problem in the past has been that in some ways it is almost a replay of what happened when the Government failed to privatise nuclear power generation in 1990. We have not had a historical situation where institutions have had a strong interest in doing a full reckoning of the total physical scale of the problem and its cost. It is only when there is an institutional interest in doing that that one tends to get close to as it were the right number and conclude that there is not a single right number; there is going to be a range because of uncertainty. I am not surprised that the number has risen again by six billion. It rose by seven billion the year before. Obviously one hopes that it does not go up much further but it is likely that it will.

  152. What do you think the figure will be? Can I draw you out on that?
  (Mr MacKerron) It is very difficult to be precise. I am not trying to evade the question at all. I made a prediction some five years ago with another author that there might be at least another £22 billion worth of liabilities to come and my back of the envelope calculation is that we have got £18 billion worth of them already so it was probably optimistic saying only a £22 billion escalation at that time. A lot depends upon the future of regulatory standards and practice as they continue to escalate so any given task is likely to become dearer. A real problem for the industry is the full physical characterisation of the liability problem. Until that is fully done it is very hard to attach cost numbers to it. I would hope that there was not very much more to come but I am not in a position of knowing enough from inside the industry to be sure. I have more confidence that there is a commitment to get to the bottom of the problem, to get to the highest number that we can now reasonably find cause for and that I very much welcome.

Mr Lansley

  153. Can I follow up a particular point made about the previous year's change? I am wrestling with the last set of BNFL's accounts which, in terms of the provision they made at the end of March 2000 as compared to the end of March 2001, changed on a discounted basis from £15.8 billion to £16.1 billion, so as at 31 March 2001 things were not changing rapidly but we know from the Secretary of State's statement last November that things began to change quite rapidly thereafter and have changed quite clearly by a significant amount since then. I am slightly surprised that you should have said that the rate of change of apparent liabilities was occurring prior to March 2001.
  (Mr MacKerron) The difficulty always is that one deals either in undiscounted terms, which is the scale of the physical problem, or for financial and accounting purposes in discounted terms. That very small increase in discounted terms to which you rightly refer did reflect an upward change of seven billion in undiscounted terms and that was not mainly a consequence of change in discounting practice. It is mostly a consequence of the fact that there was an assumption that some work that was expected earlier, so it would have been done in the relatively near future, was going to be postponed into the more distant future, thus making the discounted total roughly as before but still the importance is to look at the undiscounted number because it gives you a notion of the scale of the problem. I do not think it is a matter of dispute that there was a seven billion increase in the period up to March 2001 in those terms. I am sorry; I am getting rather technical in numbers. I am very happy to supply a brief note to try and unravel some of that.

  154. Can I confess that I would find it helpful because unless they re-base the 2001 accounts when I do not have the 2000 accounts in front of me, the comparison on an undiscounted basis is still £34.2 billion rising to £34.8 billion, so in the 2001 accounts, unless they have been re-written to be comparable and therefore not comparable to previous years' accounts, something has gone on.
  (Mr MacKerron) If I could briefly clear up a little bit of that, I may just have dropped a year out. It must perhaps be the previous year that there was the seven billion increase because there was an increase from £27 billion to £34 billion. It may well be one year earlier.

  155. So it will be 1999 to 2000?
  (Mr MacKerron) It is very likely.

Linda Perham

  156. Just talking about the different costs which my colleague raised, we heard from Friends of the Earth this morning that they thought the setting up of the LMA could be an administrative gambit to take away the burden of debt. That is not your view of it presumably?
  (Mr MacKerron) The total liability has always been in the public sector, that part of it which the White Paper discusses, and will always remain in the public sector. There is no realistic possibility that BNFL can earn income such as to defray £40 billion worth of liabilities. In realistic appreciation of that the Government has sought to find some long term and stable way of meeting those liabilities, hopefully more efficiently, and combining them in this one body, the LMA, with those liabilities about which you have just heard from the UKAEA. I regard that as a positive move. There are very large liabilities. There is not any other way other than having the public sector to deal with them and this particular mechanism I think has the promise of dealing with those more effectively than we had in the past.

  157. You think the costs will inevitably rise?
  (Mr MacKerron) In the White Paper itself it suggests that the costs will inevitably rise to some extent. That has been our experience over several years. I have no reason to suppose that that process will stop now. We just hope it will stop reasonably soon once the liabilities are fully characterised.

Chairman

  158. In your definition of the liabilities of BNFL, BNFL was established in 1970. The inherited liabilities, should they be a burden on its commercial activities now? There seem to be those who would argue that everything that has happened is BNFL's fault, they slap it on them in the hope that that will make it bankrupt and it will go out of business. I am maybe over-simplifying it but I think I am putting it reasonably fairly. Where would you realistically start if you were going to have a base line for your view of the BNFL liabilities?
  (Mr MacKerron) It is very difficult to answer that precisely. I agree entirely that there is a difference between what we might call legacy accounting and operational accounting. They have not been adequately separated in the past. There is not any logic at all in saddling any current given organisation with financial responsibility for liabilities that stretch back a long way and where there is no realistic chance of generating the surpluses to meet those liabilities. There is no point in pretending that it could. The reason why I find it difficult is that BNFL was required to take over Magnox Electric in 1998. Magnox Electric itself had very large liabilities which historically had nothing at all to do with BNFL and although BNFL was given some cash and some promises from the Secretary of State to help it that did not quite meet the full bill. It is a complicated story and there is simply no point in trying to lay on one public sector organisation with limited income earning opportunities full financial responsibility for a very long history. It is not going to work.

Sir Robert Smith

  159. Earlier I was talking about trying to get a grip on what is the liability and there was something that came up this morning. Is there an obvious reason why the Ministry of Defence nuclear liability is treated separately from the civil liability?
  (Mr MacKerron) I am not really the best person to answer that. I know it historically has always been true. As to the decision that has been taken to maintain that, you would have to ask other people.


 
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