Select Committee on European Scrutiny Thirty-Seventh Report


12 Chernobyl Nuclear Power Plant

(a)

(25839)

11544/04

+ ADD 1

COM(04) 481

(b)

(27610)

10669/06

COM(06) 305


Third Progress Report on the implementation of the Chernobyl Shelter Fund December 2003 and Working Document


Draft Council Decision on the First Instalment of the Third Community Contribution to the European Bank for Reconstruction and Development for the Chernobyl Shelter Fund

Legal base(a) —

(b) Article 308 EC together with Article 203 of the Euratom Treaty; unanimity

Document originated(b) 15 June 2006
Deposited in Parliament(b) 23 June 2006
Department(a) Trade and Industry

(b) International Development

Basis of consideration(a) Minister's letter of 18 July 2006

(b) Explanatory Memorandum of 4 July 2006

Previous Committee ReportHC 38-iv (2004-05), para 4 (19 January 2005) and HC 42-xxx (2003-04), para 5 (9 September 2004)
To be discussed in CouncilTo be determined
Committee's assessmentPolitically important
Committee's decision(a) Not cleared; further information requested

(b) Cleared

Background

12.1 Following the accident of 26 April 1986, the shelter enclosing the remains of the Chernobyl Nuclear Power Plant Unit 4 was constructed rapidly and under extremely hazardous conditions. It was not intended to be a permanent solution, is increasingly unstable and has deteriorated such that rainwater gets in. There is a risk of collapse, which would lead to further radioactive contamination of the surrounding area.

12.2 In 1997 international experts finalised a multidisciplinary construction management programme, designated the Shelter Implementation Plan (SIP). The SIP envisaged remedial work directed towards making the Shelter physically stable and environmentally safe. Under the management of the European Bank for Reconstruction and Development (EBRD), the Chernobyl Shelter Fund (CSF) was constituted to finance and implement the SIP. The SIP project started effectively in 1998 with the setting up of the Project Management Unit. There are five major goals:

  • reduce the potential for collapse of the Shelter;
  • reduce the consequences of the Shelter's collapse, should one occur;
  • improve the nuclear safety of the Shelter;
  • improve the safety of workers and environmental protection at the Shelter; and
  • make the site environmentally safe.

12.3 The Commission presented a first progress report in October 1999. A second report was presented in September 2001, which the then Committee cleared on 17 October 2001.[26] A third report updated the information provided in the previous ones, based mainly on the progress communicated by the EBRD at the December 2003 CSF Contributors Assembly in London. There, the EBRD reviewed the current situation and presented revised cost estimates for the New Safe Confinement (NSC), as the final project is called. The estimated $1059 million cost ($995 million plus $64 million for potential additional work) was the first to be based on actual design work, and replaced the original SIP estimate (approximately $768 million). This was due to the inclusion of necessary works not foreseen in the initial budget, the potential additional works and what the EBRD regarded as conservative escalation, risk and contingency assumptions, rather than increases in baseline costs. A better cost estimate would only become available once bids for the largest element — the NSC — had been received.

12.4 The two previous reports illustrated steady progress in the early stages of a costly long-term programme. But this third progress report (which our predecessors considered on 15 January 2005) highlighted some major challenges at what was clearly a crucial stage — significant cost increases, funding uncertainties and suggestions of inadequate responses on the part of the Ukrainian authorities. Nor was it clear from the Explanatory Memorandum from the then Parliamentary Under-Secretary for Construction, Small Business and Enterprise at the DTI (Nigel Griffiths) what the prospects were for their successful resolution. While, as he pointed out, the UK would not have to contribute further to the Chernobyl Shelter Fund when the next pledging round took place, it was clear that others would not be free of such obligations. Our predecessors wondered, especially if the final estimates were, as intimated in the report, even higher, whether they would be likely to fulfil them, once potential suppliers had actually quoted for the NSC. It was also unclear what steps were being taken to ensure that the authorities in Ukraine played their part, without which, as the Minister made clear, successful completion of the project — which on best estimates was four years away — would be jeopardised. They therefore asked the Minister to provide his views on these unresolved issues, and continued to hold the document under scrutiny.[27]

The then Minister's letter

12.5 In his letter of 11 October 2004 (which did not reach the Committee until 10 January 2005) the then Minister said that, the CSP being a unique civil engineering project involving untried processes on an unprecedented scale, a number of major challenges were inevitable at this stage, and the "apparent significant increase" in the final costing had occurred due to the inclusion of additional work, not identified as necessary in the original 1997 SIP estimate. In addition, the EBRD's "deliberately conservative approach" of including a sizable contingency provision had been adopted to ensure that, as far as possible, this was the last time donors would need to be asked for additional funding. The G7 countries had agreed to increase their funding to that which was necessary for the EBRD to sign contracts and were committed to completing the project, especially since failure to fulfil their obligations "would have a strongly adverse impact on the reputation of the international community". The UK had led the way in persuading other donors to address the funding shortfall, and was also working closely with the rest of the Chernobyl donor community and the EBRD in order to keep the (then) Ukrainian Government co-operating "as efficiently and transparently as possible". There had been a number of direct demarches to then President Kuchma, including from President Chirac and Dr Hans Blix, Chairman of the Chernobyl Shelter Assembly of Donors. While he still had concerns, the Minister believed that with the international community working together to maintain pressure on the Ukraine Government, these difficulties could be overcome and a successful conclusion to this highly important project achieved.

12.6 Although reassured on the costing and funding issues and noting the high-level representations made to former President Kuchma, our predecessors also noted that, since the Minister wrote, there had been the subsequent turbulence of the presidential elections. This meant that the current status of the then Ukrainian Parliament's "Temporary Investigation Commission" into control of the project, and precisely which individuals and which Ministry was in charge, was unclear. They therefore asked the Minister to report again when these uncertainties had been clarified and, they hoped, his concerns had been allayed, and in the meantime continued to keep the document under scrutiny.[28]

The Minister's further letter

12.7 This report has finally been provided by the Minister for Energy (Malcolm Wicks) in his letter of 18 July 2006, in which he says, regretfully, that "the New Safe Confinement at the Chernobyl site has encountered serious delays and setbacks". Recalling the establishment of the Chernobyl Shelter Fund at the G7 1997 Denver Summit and its structure (managed by the EBRD, 28 national Donors and the European Commission), he says that last year Russia was persuaded to re-engage in Chernobyl and join the Fund, which currently stands at €850m, of which €250m was raised at a third pledging event co-chaired by the UK last year. A re-evaluation of the expected out-turn costs made during 2005 by the Programme Management Unit indicated a figure for completion of $1.1bn (€850m), after which the EBRD, with the consent of the Donors and Ukraine, launched an open international competitive tender to identify a contractor to design and construct the New Safe Confinement over the existing Chernobyl sarcophagus.

12.8 Two compliant bids were received — from a French Joint Venture called Novarka and a US/Ukrainian consortium led by CH2MHill — which, he says, were evaluated against the tender requirements and subjected to due diligence and technical reviews under EBRD procurement procedures, and a preferred contractor identified. Donors thus expected to receive a considered recommendation from the EBRD as to the preferred contractor at the Donor Assembly held on 14 February 2006, and to be able to approve the proposed grant agreement with the Ukrainian authorities shortly thereafter. "However, the process was derailed as a result of three separate but linked problems":

—  the losing contractor has challenged the tender process claiming that the EBRD has breached its own rules, which has led to a formal investigation under established EBRD procedures. The Minister expects the report on the handling of the tender process to issue shortly;

—   the Ukrainian Government have indicated dissatisfaction with the management of the EBRD Project Management Unit and requested a series of amendments to fundamental aspects of the proposed project management. In the Minister's view, these proposals "seriously adversely impact on the ability of the EBRD to manage the project and of the donors to ensure sufficient oversight is maintained for international funds";

—   both bids turned out to be between €50m and €70m more expensive than estimated by experts prior to the tender process, which "means previous international pledging events have not raised enough money, and that there is every likelihood that further international funding will be required".

12.9 He concludes his letter as follows:

"As you will appreciate, the situation remains deeply unsatisfactory and very turbulent. Negotiations on the way forward have not been helped by the fact they have been held against the backdrop of a caretaker Government in Ukraine, with the possibility that there will be a reorganisation of roles and responsibilities for the project within Ukraine once the new Government is in place. My officials are remaining in close touch with the Ukrainian authorities, the EBRD and other donors in the hope that we can overcome these difficulties and achieve a successful conclusion to this highly important project. The G8 group of nations issued a statement on Chernobyl at the recent Summit in St Petersburg both reasserting international commitment to pledges made in respect of the Chernobyl site and calling on the Ukrainian authorities to ensure effective and sustainable mechanisms are put in place for satisfactory implementation of the project."

The draft Council Decision

12.10 It is against the background that this proposal asks for a Council Decision to pay the first instalment of the €49.1 (£33.6) Third Community Contribution to the CSF, amounting to €14.4 (£9.8) million. In his 4 July 2006 Explanatory Memorandum, the Parliamentary Under-Secretary of State at the Department for International Development (Mr Gareth Thomas) says that the Community pledge forms part of a further €173 (£118.6) million that major donors have so far pledged and is intended to be paid over 2006-09. He explains that it would be committed and paid from the dedicated CSF line in the 2006 EU budget; that the balance (€34.7, £23.8 million) would be paid over 2007-09 and would be subject to a new Council Decision; and that the UK share of the Community contributions is 17.5%.

The Government's view

12.11 The Minister says that the Government is an important donor to the CSF and strongly supports this proposal for Community funding. He describes work funded by the CSF as essential, new and extremely challenging and says that implementation of the range of tasks to be executed over a period of approximately 10 years under the SIP "will require tight management to prevent further cost and time over-runs". He describes the EBRD as "a strongly performing organisation that works to high environmental standards" and is "confident that it is well placed to manage funding for this complex issue". He ends by noting that the EBRD keeps donor countries informed through the CSF Assembly of Contributors.

Conclusion

12.12 It is disturbing that, 18 months after the Minister's predecessor wrote to us, the picture remains very much as it was then, with continuing uncertainties about costs, funding and the contribution of the Ukrainian authorities.

12.13 We nonetheless accept the importance of upholding the Community's commitments towards a self-evidently important project, and accordingly clear the decision.

12.14 But we should also like the Minister to let us know, before the end of this year, the outcome of the three "separate but linked problems" that he has outlined, and the consequences for costs and funding, both generally and for the UK, and for his assessment then of the contribution of the Ukrainian authorities. In the meantime, we shall keep the Third Progress Report under scrutiny.


26   HC 152-ii (2001-02), 17 October 2001, page cxxxvii. Back

27   HC 42-xxx (2003-04), para 5 (9 September 2004). Back

28   HC 38-iv (2004-05), para 4 (19 January 2005). Back


 
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