Examination of Witness (Questions 160-179)|
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.
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.
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.
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 BNFLquite
how large they are is a matter of debate and future practicewhich
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 enoughwhat 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,
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 viewssome of our other witnesses have found
it too early to take a view on itbut 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 moneyat 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 cashwhether the Treasury will have some other plan
to use it elsewhere.
174. Most of it will simply be absorbed by way
(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 fundX per cent
of years A to C; X, Y, Z percentages for future yearsthose
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
(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 businessthere 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.
177. We had criticism this morning of a store
of moneynot 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
(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
178. Discounting was mentioned by UKAEAthat
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 liabilitiesnot
that it funded them but in accounting terms it was using 2 per
centso there is a continuity in BNFL's practice.