Select Committee on Public Accounts Fifth Report


The Committee of Public Accounts has agreed to the following Report:—



1. On 15 July 1996, the Department of Trade and Industry (the Department) sold 88.5 per cent of their shares in British Energy plc through a stock market flotation. They had intended to sell all of their shares. British Energy own and operate the more modern nuclear power stations in the United Kingdom. The older nuclear power stations were retained in the state sector as part of Magnox Electric plc, which was 100 per cent Government-owned, and has now been merged with British Nuclear Fuels plc (BNFL).

2. The sale raised immediate proceeds of £1.26 billion, representing 619 million (88.5%) of the shares, at 203 pence a share. The Treasury sold the remaining shares at a price of 244 pence a share in December 1996, raising a further £198 million, and obtaining some £33 million more than would have been realised had the Department succeeded in selling all of the shares at flotation. At the time of the flotation, the Treasury also owned marketable debt worth £600 million due to the Treasury from British Energy. As British Energy repay the debt (£265 million had been repaid by November 1998), or if it is sold, the amounts received by the Treasury become further proceeds of the privatisation.

3. The sale brought about the partial privatisation of the nuclear power generating industry, which had been withdrawn from the 1991 privatisation of the rest of the electricity generating industry because of uncertainty about the size of future nuclear liabilities. The arrangements made to demonstrate that British Energy's nuclear liabilities were under control therefore formed a vital part of this sale. To ensure that enough money would be available at the right time to pay for decommissioning British Energy's nuclear power stations, the Department and British Energy established an independent trust fund, called the Nuclear Decommissioning Fund. This Fund is financed by annual contributions from British Energy, which will be invested predominantly in equities. When British Energy incur the costs of decommissioning their nuclear power stations and of returning them to a green field state, the Fund will reimburse the company for most of their costs. In addition to the costs of decommissioning the power stations, British Energy have to incur costs relating to the reprocessing of used nuclear fuel and the disposal of nuclear waste. The company have contracted with BNFL at fixed prices for most of their future fuel reprocessing.

4. On the basis of a report by the Comptroller and Auditor General[1] the Committee took evidence from the Department on the taxpayer's financial exposure to British Energy's nuclear liabilities, on the arrangements to ensure that finances are in place to meet British Energy's long-term nuclear liabilities as they fall due, and on the proceeds obtained from the sale.

5. The key findings to emerge from our examination of these questions are:

The taxpayer's financial exposure to British Energy's nuclear liabilities

Although the Department made great efforts to ensure that they transferred all the relevant nuclear liabilities along with the nuclear assets owned by British Energy, the taxpayer is still open to some financial liabilities relating to British Energy's nuclear power stations. This arises from several causes. First, the contracts for fuel re-processing between British Energy and BNFL, a Government-owned company, are at fixed prices. So, if fuel re-processing is more costly than BNFL estimated, the taxpayer may have to meet the extra cost. Second, there is currently no strategy for the disposal of nuclear waste in the UK. Third, there is a residual risk that, in certain circumstances in the long term, the Nuclear De-commissioning Fund, British Energy, or the two combined might not be able to finance all the de-commissioning costs as they arise.

Arrangements to ensure that finances are in place to meet British Energy's long-term nuclear liabilities

The institutional relationship between the Trustees of the Nuclear Decommissioning Fund, the Nuclear Installations Inspectorate, and British Energy is fundamental to ensure that the company meets its long-term nuclear liabilities. We look to the Department to secure the smooth working of this relationship.

Obtaining better proceeds for the taxpayer

This sale provides yet further evidence that a flotation offering 100% of a company's shares to the market, even if it is well-conducted, is likely to result in lower overall proceeds than a privatisation undertaken in stages. In this sale, the Department were unable to sell 11.5 per cent of their shareholding at the price of 203 pence and these shares were sold only 5 months later for a 20 per cent higher price. Subsequently, the share price has moved higher still. A planned staged sale, commencing with 60 per cent sold in the initial flotation and the rest later, would have permitted the taxpayer to share in the market's improving valuation of the company. We strongly urge departments to adopt the partial sale approach in future flotations unless they are confident that they can get full value in a sale of 100% of their shares.

6. The Committee's detailed conclusions and recommendations are:

On the taxpayer's financial exposure to British Energy's nuclear liabilities

  (i)  We welcome the Department's view that the taxpayer is less exposed to the risk of having to meet nuclear liabilities because of this privatisation. However, because of the nature of the nuclear liabilities, there are some inevitable uncertainties, especially in the very long term, surrounding British Energy's ability to finance them. We therefore recommend that the Department monitor carefully the company's ongoing ability to meet their liabilities without recourse to the taxpayer. (Para 19)

  (ii)  We note the Department did the best they could to obtain assurances that British Energy would be able to meet their financial liabilities in future on the basis of information available at the time of the sale. (Para 20)

  (iii)  We are concerned that there remains uncertainty about the size of nuclear liabilities in the future. This uncertainty arises because the technologies for dealing with longer-term decommissioning are untried and because there is currently no costed strategy for the disposal of certain kinds of nuclear waste. We note the Department's recognition that there are no 100 per cent guarantees or room for complacency in the monitoring and managing of these risks in the future and we recommend that they should monitor the progress of the nuclear industry in developing its technologies for undertaking these tasks. (Para 21)

  (iv)  We are also concerned about the taxpayer's exposure to increases in the cost of reprocessing spent nuclear fuel, which results from the fixed-price nature of the contracts struck by British Energy with BNFL. We therefore welcome assurances given by both BNFL and the Department that these contracts were entered into on a fully commercial basis and do not represent an implicit subsidy by the taxpayer to British Energy. We recommend that the Department continue to take this risk carefully into account when exercising their sponsorship and oversight role in relation to BNFL. (Para 22)

On the arrangements to ensure that finances are in place to meet British Energy's long-term nuclear liabilities

  (v)  We are not convinced that, in agreeing with British Energy that the Fund should receive an initial endowment of £228 million, the Department fully explored alternative methods of financing the Fund, such as higher contributions in British Energy's first years in the private sector or some element of the contributions linked to the company's profitability. We consider that the Department should have been clearer about their options and should have more fully evaluated their eventual course of action. (Para 41)

  (vi)  We recommend that in any future sales where departments seek to establish segregated funds to meet certain defined liabilities, they should give careful consideration to all possible options and the best balance of such factors as levels of endowment, initial contribution from the privatised entity, and shares of any residual surpluses at the end of the life of the fund. (Para 42)

  (vii)  We recommend that the Department maintains communication with the key parties responsible for monitoring the level and financing of nuclear liabilities: British Energy, the Nuclear Installations Inspectorate and the Nuclear Decommissioning Fund's Trustees. In this way, the Department can assure themselves that all parties are focussed closely on the best means of managing nuclear uncertainties and financial risks. (Para 43)

  (viii)  We recommend in particular that the Department monitors whether any significant dispute arises between the Trustees and British Energy, because such a dispute may provide an early warning of impending problems. (Para 44)

  (ix)  The Department retain important powers through their ownership of Special Shares in British Energy, for example to veto the sale of any of the company's existing nuclear power stations. We therefore recommend that the Department consider carefully the need to retain Special Shares beyond 2006 as, at that date, it is still likely that many uncertainties and risks about the ability of the company to finance their long-term liabilities will remain. (Para 45)

On the level of proceeds obtained from the sale

  (x)  Despite evidence that the sale was well conducted and that the Department sought to maximise proceeds, we consider that the proceeds from this sale were disappointing. At just over £2.0 billion, they fell short of the £2.6-£3.3 billion level initially advised to the Department by their financial adviser, and they were also less than the cost of construction of just one of British Energy's assets, its newest power station, Sizewell B. (Para 55)

  (xi)  We note that the Department privatised British Energy with £600 million in debt owed to the Treasury and that £265 million of this debt has since been repaid. The Treasury have announced their intention to sell the remaining debt in the course of 1999-2000. Given the disappointing proceeds on the initial flotation, we look to the Treasury to do all they can to maximise the price they get on the sale of this residual debt. (Para 56)

  (xii)  Given the disappointing level of proceeds, the higher proceeds obtained from the sale of the Department's retained 11.5 per cent, and the continued rise in the company's share price since flotation, this sale once again demonstrates the merits of selling only part of the Government's shareholding in a company on initial flotation. We note the Department's view that, with hindsight, it might have been better to undertake the sale in stages. We recommend that, in future, departments start with the presumption that a partial sale will lead to higher proceeds for the taxpayer. (Para 57)

  (xiii)  The Committee recommend that, in future sales, departments give careful consideration to negotiating a clawback on future unanticipated increases in the profitability of the company being sold. (Para 58)

1  C&AG's Report (HC 694 (97-98)) Back

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Prepared 25 February 1999