Select Committee on Trade and Industry Minutes of Evidence


Examination of Witness (Questions 160-179)

MR GORDON MACKERRON

TUESDAY 9 JULY 2002

  160. It just seems that if we were trying finally to get a grip on it, you are now aware of any scientific reason why there is such a difference?
  (Mr MacKerron) I would imagine it is something to do with security and defence related matters rather than the science or the technology but I am not an authority on that point. I would not like you to rely on any answer I gave on it.

Chairman

  161. I take it that it is one headache you are happy not to have given the problems you have had to wrestle with in the past.
  (Mr MacKerron) It is.

Dr Kumar

  162. Can I move you on to the role of the LMA? You spoke warmly of this paper, but how confident are you that the LMA will have sufficient technical management skills to deliver its remit of clean-up and other particular concerns?
  (Mr MacKerron) I think there is, within the UK and a wider community, necessary relevant skills that can be recruited. In order to be sure that they can be recruited the LMA will need to have greater freedom than most public sector organisations in setting the way in which it remunerates its people and gives them packages that incentivise them. The Nuclear Installations Inspectorate for some years has been saying that it could recruit enough people to do its full job and meet its full complement of people but is constrained by public sector rules about pay not to do so. I do not think there is any problem about the pool of skills. The question is, will it be allowed to be organised in such a way as to recruit them effectively? We do not know that yet. I hope it will be true.

  163. You have mentioned about cultural change, how the managerial structure has operated. Do you think there needs to be any managerial cultural change?
  (Mr MacKerron) The very fact that the LMA is to be set up with this relatively radical and secure funding base compared to any historical arrangement is itself part of a culture change. I think the need is to persuade people and for this to be a genuine commitment, that there is a commitment to open, transparent and straightforward clean-up process. I think the LMA announcement in the White Paper is one step in that. There are many steps still to go but I regard it as a step in the right direction.

  164. Can I move you on to the question of the LMA models? You have mentioned page 27 of the document and the customer/contractor model. How far do you think this is the appropriate model that is going to deliver?
  (Mr MacKerron) Again, it is something that we shall have to see. Obviously, there are elements of it that have already been tried at AWE and to a degree already in UKAEA. It has to be managed carefully. I think it is a perfectly good model to go forward provided it is made to work well. There are obviously some other public sector examples that have worked less well. I do not think that is an inherent problem and I do not think there is anything inherently wrong with this model. It seems to me a perfectly fair starting point.

Chairman

  165. Coming back to the accounts, it has been suggested that the proposed arrangements are a way of getting BNFL over its financial problems and particularly the difficult stuff, so that they are then able to become a profit making body more attractive for a public/private partnership or part privatisation. Do you think that is an over-simplistic way of looking at this?
  (Mr MacKerron) There is no doubt that it is an objective of Government and of BNFL to make itself in a condition so that parts of it can be made fit for a public/private partnership and those parts that have good long term business prospects probably should be made into that form. I cannot do much more than re-visit the previous answer and say that the scale of the liabilities is so gigantic that even a very profitable company where the world nuclear market was extremely bullish would find great difficulty in private, public or mixed ownership in meeting such a liability. I think it was inevitable that we had to re-arrange the liabilities in such a way that they could be managed better.

  166. You have been studying the accounts of BNFL, such as they are, for some time. It has been suggested that the accounts have improved, that they are more transparent, that you are able to work your way through them more easily than before. Would you say that is true and, if it was on a 1-5 rating, where would you put it?
  (Mr MacKerron) I think it is true they have become somewhat more transparent. The difficulty of course is that as one improves and changes accounts it becomes more and more difficult to make comparisons from year to year. One of the difficulties is that although we might now have in some ways a fairer record of the company's current activities, getting a consistent record and comparing it with past performance becomes more difficult, and because there is a huge inherent complexity in accounting for liabilities and for the funding thereof, it is not an easy matter. I would say that the formal presentation of the accounts has been improving, yes.

  167. Would you say in that context, therefore, that if we are moving towards what you might call a post LMA situation for BNFL, there would be some requirement to have greater explanatory notes, more comprehensive explanatory notes, for the accounts? We are talking about going from darkness or opacity to transparency or near transparency, and then going on to what would be a full and fair view if we have any hope of being quoted on the Stock Exchanges of the world. Do you think that such an exercise could be done in a way that would make it attractive to potential investors?
  (Mr MacKerron) I think there are parts of BNFL—quite how large they are is a matter of debate and future practice—which could be made attractive to private investors which are potentially long term sustainable businesses. They are the minority of the total turnover of BNFL as it is currently constituted. To go back to the specific accounting point, once the liabilities are removed from BNFL and put into the ownership of the LMA it should enormously simplify the question of how the accounts are prepared and how easy it would be to make BNFL's activities transparent. So I would expect a change in accounts and would expect it to be possible in time for some part of BNFL's business to become attractive to private sector investors, but probably a small part.

  168. I have one last question in this area on the Magnox stations which BNFL inherited in 1998. There has been an accelerated closure programme, decommissioning, some people have suggested to us that it is not fast enough—what views do you have on that? Do you think that it would help matters if they closed the whole lot tomorrow or do you think that would be too traumatic both for the United Kingdom generating capacity and other matters?
  (Mr MacKerron) I think it would not help at times of winter peak if we suddenly switched off all the Magnox stations overnight. There is now a commitment, as you say, to decommissioning them, to at least defuelling them, turning them off, in a much more rapid timescale than once seemed likely. I would have thought it is fairly marginal whether that is accelerated or not. It has to take account of the impact on the electricity system as a whole. Given the present plan I do not think there is much more than a marginal difference between relatively rapid closure and the closure plan that is now being proposed. I would not think of it as a major issue any more.

  169. The decision has been taken, there is not going to be any prolongation or anything like that?
  (Mr MacKerron) As we understand it, that is right, yes.

Mr Lansley

  170. I just want to come back to the funding aspects, if I may. I do not know if they are areas on which you have taken views—some of our other witnesses have found it too early to take a view on it—but the Government offers two mechanisms for funding which are similar but may have appreciable differences from the point of view of industry. Have you reached a view on those?
  (Mr MacKerron) I will resort to the same argument to a degree that others have made. I have for a long time been a strong advocate of a segregated system of funding and as the Chairman of UKAEA says, rightly I think, both of these alternatives are radical and do offer much greater security for long term funding than anything we have ever seen before in the public sector, so in that sense we are going to do quite well in either system. There is clear preference I suspect in the Treasury for the system that is the segregated account and not the fund, because it will probably make things easier for the Treasury and save them a bit of money—at least at the margin. What we have to set in the balance is whether or not the greater confidence that might be engendered in the industry (which would be the completing of contracts) of having a fund will be sufficient to outweigh that preference that Government and the Treasury probably have for the segregated account; and because I am not yet clear given that this has emerged only a few days ago whether such confidence will be greater using a fund rather than an account, I cannot give you a definitive answer. My expectation is that a fund will gave greater confidence, which will probably be enough to outweigh the Treasury's objections, if that is what they are, to the account.

  171. And that may manifest itself in terms of responses by the end of October?
  (Mr MacKerron) I think that is what we need to wait for to be sure.

  172. Another difference between the two is that, of course, the segregated account is essentially one which is determined by negotiation between the Secretary of State and the Treasury; with a segregated fund at least there is a separate distinct function for the trustees in expressing what they regard as their prospective liabilities and the nature of the fund's commitments, so that would introduce a degree of traditional transparency, if that is what we are aiming for. Would you agree?
  (Mr MacKerron) Quite strongly, yes.

  173. In terms of the transferring to LMA and the creation of a fund, from your own reading of BNFL's accounts hitherto, and we are waiting to see another set of annual accounts, do you regard the transfer of the Nuclear Liabilities Investment Portfolio and the Secretary of State's undertaking as sufficient in itself, or should there be some other additional transfer out of BNFL, current or future?
  (Mr MacKerron) No. I do not think there is any point in trying to get an additional transfer out of BNFL. One of the issues we have not heard about is if the Nuclear Liabilities Investment Portfolio, which is real money, is transferred out of BNFL and there is not a segregated fund, one wonders what will happen to the cash—whether the Treasury will have some other plan to use it elsewhere.

  174. Most of it will simply be absorbed by way of gilts?
  (Mr MacKerron) I imagine. I do not think there is any argument for transferring more money out of BNFL. I do not think there is a very strong argument for transferring more money in the short term into the segregated fund or account. I think what we need in such a fund or account is sufficient guarantee that there will be long term funding up to about a ten year horizon, and there is no particular point in endowing such a fund with money that will not be used until year 11, 12 or 13 because it has no practical impact and one could in the short term find some other uses for the money, so it is a matter of developing enough confidence that there will be secure long term funding and I do not think there is any practical need to transfer more money—

  175. Does that mean, where the White Paper talks in terms of setting target levels for the fund—X per cent of years A to C; X, Y, Z percentages for future years—those should be set not on a rolling basis but when you get to the bill in terms of what is on the face of the bill so that there is explicit funding commitments?
  (Mr MacKerron) We need some kind of explicit funding commitments. Whether there are as it were set proportions and so on that should be specified and in what way is a detail I think people need to work on, and I would be pleased to join in that process. But I think the fundamental point is that the commitment of the NLIP and the Secretary of State's undertaking and of these two new mechanisms is quite radical enough for us not at this stage to worry too much about that kind of detail.

  176. I asked the Nuclear Industry Forum this morning about the commercial aspects of transfer to LMA because if those were to generate a surplus then that would be a contribution towards clean-up costs, and they had no reason to be able to say whether there would be any such surplus. From your knowledge do you think there is any prospect of a surplus from that source?
  (Mr MacKerron) BNFL's accounts have never been presented in such a way that it is very easy to know that definitively. What is clear is that the commercial activities of reprocessing and mixed oxide fuel production are in decline. There is not likely to be much new business—there may be some. I do not think it will be very great. It is possible there will be some financial surplus from existing business and that would be a welcome contribution, but I would be very surprised if over ten or fifteen years into the future that was a large contribution because I just do not think there is much commercial future in those activities such as would make much money for BNFL or any successor company.

Chairman

  177. We had criticism this morning of a store of money—not a fund or an account but that there was £4 billion available to look after £40 billion of liabilities, but you are saying that these two figures do not really relate to each other because at the moment, although there is £48 billion and perhaps more in the way of liabilities, in terms of the immediate short term, £4 billion is probably more than is required and there might be better ways of using that £4 billion in the short term but what is required, either on the face of the Bill or by some ministerial statement of reassurance, letter of comfort or whatever, is that there will be a commitment given by government that money will be made available as and when required. Am I summarising what you are saying on this issue of liabilities and funds being made available to meet the medium to long-term?
  (Mr MacKerron) I think that is reasonably fair. The context is that we currently spend about one and one third billion pounds a year between BNFL and UKAEA according to the White Paper on liabilities, so that is about three and a bit years if £4 billion was all it was. £4 billion will not last that long, but there is no point upfront in taking cash from somewhere else and putting it in a pot where it sits and does not do very much unless the confidence in the industry was so poor that it was necessary. I think it is very unlikely. There is absolutely no point in trying to pre-fund a great deal more than is available through that portfolio and the commitment the Secretary of State has made for what is now up to £4.5 billion or so for specifically Magnox liabilities.

  178. Discounting was mentioned by UKAEA—that they discounted 6 per cent, BNFL 2.5 per cent. Can you give reasons why there is this discrepancy? Have you stumbled over the answer?
  (Mr MacKerron) It is a matter of great incoherence in terms of running a unified national policy for managing liabilities. I am sure that Dr McKeown was correct that the 6 per cent rate is a standard Treasury rate for the public sector where there are no income earning opportunities. BNFL's practice reflects a relatively conservative and appropriate approach to long term liabilities where we are not so certain that money will accumulate so rapidly in the long term and a conservative rate like 2.5 per cent is more appropriate. Certainly under the LMA I would expect some uniform practice to be developed so there were not, as it were, a perverse incentive to do some clean-up earlier in one place because a discount rate seems to imply it is better to do it early, and not in another place because a different discount rate tells you something else.

  179. There is a history of exceptionalism, you might say, for BNFL financial practices. One remembers when they were in and out, and I think they are now back in, of the public sector borrowing requirement in days gone by.
  (Mr MacKerron) In fairness to BNFL they are a plc and are following a practice which was initially established in the old CEGB which used a 2 per cent rate before it vanished in 1989, when it was also trying to get a system going for liabilities—not that it funded them but in accounting terms it was using 2 per cent—so there is a continuity in BNFL's practice.


 
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