UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 394-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

Business, Enterprise & Regulatory Reform COMMITTEE

 

 

BERR SPRING SUPPLEMENTARY ESTIMATE

 

 

Tuesday 4 March 2008

SIR BRIAN BENDER, MR MARK CLARKE and MR WILLIAM ROBERTS

Evidence heard in Public Questions 1 - 80

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Business, Enterprise & Regulatory Reform Committee

on Tuesday 4 March 2008

Members present

Peter Luff, in the Chair

Mr Adrian Bailey

Mr Michael Clapham

Miss Julie Kirkbride

Mr Mike Weir

Mr Anthony Wright

________________

Examination of Witnesses

 

Witnesses: Sir Brian Bender, Permanent Secretary BERR, Mr Mark Clarke, Director General Finance and Strategy BERR, Mr William Roberts, Direct of Finance and Resources, Nuclear Decommissioning Authority, gave evidence.

Q1 Chairman: Sir Brian, I am sorry to have kept you waiting a few minutes. I apologise. We had some thinking to do about the questions to ask you. Can I begin by asking you to introduce yourselves and your colleagues for the record?

Sir Brian Bender: I am Brian Bender. I am the Permanent Secretary of the Department of Business Enterprise and Regulatory Reform. On my right is Mark Clarke who, in his previous guise, this Committee met two years ago. He is the finance director in BERR. On my left is William Roberts, whose official title is chief financial officer of the Nuclear Decommissioning Authority. I should add that the chief executive, Dr Roxborough, apologises for not being able to clear his diary to be hear today but he is very well represented. If I may, and I do not know if this was part of your plan, I would not mind making a very brief introductory statement.

Q2 Chairman: Can I make my introductory statement first and then you can make yours? I want to put in context the overall inquiry and what we are doing. First, and most obviously, this Committee is concerned about the NDA. It is a very large proportion of the department's budget. It has a very important job on its hands and we have expressed views in the past which the government has and has not heeded and it is something to which I suspect we will return on many occasions. We do have an overarching concern about the work of the NDA and the rapidly escalating scale of nuclear liabilities. Committees are responsible for looking at the estimates, not something we always do very well, of the departments they scrutinise. This session has been prompted by one particular supplementary estimate from your department. It may well be we discover that the essential issue which drew this matter to our attention is simply a matter of accounting conventions and indeed there is no suggestion that anything improper has happened. Nevertheless, in the context of your overall budget this is an extremely large request, some 10% of your budget in round terms, and I think it is vital that we hold this session to understand exactly what happened in this unusually large sum of money and the consequences for your department. That is what I want to say.

Sir Brian Bender: That gives a natural lead-in and no doubt the Committee will come, if it wishes, to the more general points about the Decommissioning Authority but the comments I wanted to make by way of introduction were intended to try and elucidate what is not the clearest and simplest document that the department submits to Select Committees, in other words the memorandum that accompanies the spring supplementaries.

Q3 Chairman: It is worth saying we do welcome the attempts made by the department to make things as clear as they can. We do understand the constraints under which you operate.

Sir Brian Bender: We are a learning organisation and are happy to take further constructive criticism on how we can try and do it better. There were two issues in that document and I will allude to both but I suspect you may want to concentrate primarily on the first. The first is the treatment of one form of the NDA's income and the second is the accounting treatment for leases on buildings the department has got out of, which is good financial management, but we sub-let them at a lower rate than the initial lease that was negotiated many years ago and how we account for that in our budget. The second gave rise to a shortfall and, therefore, a claim on the reserve for what is called an onerous lease. I am very happy to elaborate on that but I suspect it is primarily the first.

Q4 Chairman: It is the intention of the Committee, if we have time, to take those leases at the end.

Sir Brian Bender: On the first, the issue relates to both the budgeting and accounting treatment of one form of NDA income, waste substitution income. As the Committee will know, the NDA gets its income from two primary sets of sources: one is the taxpayer, and the other is a series of commercial incomes and the waste substitution is one of those streams. It is large, it is exceptional and lumpy, and it relates to highly complex contracts and the details of those were not finalised until December of last year, December 2007, when the invoices to customers were raised. The question then arose of how we account for this. How does the NDA account for it? The consequence is that once the accounting is decided and agreed upon the budgeting follows that. The long and short of it is no final decision has been made on the accounting treatment but there was a ticking clock because this was a large sum of money, as you said, and therefore we needed to take the precautionary view of how to ensure the department did not exceed its estimates. The ticking clock was the spring supplementaries and the likelihood, at the time we had to make the decision, that this lumpy income would not be treated as cash but would be treated as something that accrued over the life time of the contract. If that was the final decision then that would leave a rather large hole. Therefore, the decision that the department took, in discussion with the Treasury and the NDA, was we needed to plug that gap with the spring supplementaries. What we then did is set out in the Memorandum with a mixture of using underspend from year-end flexibility and a claim on the reserve.

Q5 Chairman: Your letter to the Public Accounts Committee said the treatment of waste substitution income contributed in large part to the £400 million shortfall. Can you give us a breakdown of the shortfall in some detail?

Mr Roberts: In our budget for 2007/08, as Brian said, the expenditure that we have of about £2.8 billion was funded by grant-in-aid and commercial incomes. In that commercial income there was a component of waste substantiation income of £160 million.

Q6 Chairman: Can I ask you to take it slowly because you are familiar with it but we are not.

Mr Roberts: I apologise. This is the first time I have been to a Select Committee. When it came to setting the control budget we realised the income figures - and you must understand a feature of the NDA is that income forecast moved considerably - had a larger shortfall in it, so in addition to the £160 million of waste substitution income we had budgeted for we also realised that we needed an extra is £143 million as well to deal with income shortfalls caused by plant failures and less production than we had expected, primarily at the Thorp and SNP plants. The overall budgetary reliance we have on waste substitution income in 2007/08 was £160 million and £143 million, a sum total of £303 million. We are relying on this year's 2007/08 budget in order to fund the expenditures.

Q7 Chairman: That still leaves £97 million adrift.

Mr Roberts: The answer to that is in the budget we had considered that we would draw dawn the EYF that the NDA had accumulated up to the start and that is effectively the component in the £400 million.

Q8 Chairman: A requirement for an additional budget in respect of the NDA amounted to a total £400 million: £353 million near cash and £47 million capital. The basis upon which the NDA has been recognising income has not been appropriate since April 2006.

Sir Brian Bender: With hindsight, to clarify one point in that letter, the question of "appropriate" refers only to the waste substitution income not other income and with hindsight I should have made that clearer in that letter; nonetheless the rest of it stands.

Q9 Chairman: The other element of the £400 million is the kind of year on year variance that a commercially operating company like NDA is going to experience, which is still a very large chunk of your department's income. About half of this relates to the waste substitution contracts.

Mr Roberts: In terms of the £400 million, £303 million relates to waste substitution contracts and the other £100 million we were expecting to draw down EYF, end-year flexibility, anyway.

Mr Clarke: Can I explain what end-year flexibility is?

Q10 Chairman: It sounds self-explanatory but may not be.

Mr Clarke: It is quite an important concept. As a department we have budgets, and you expect that, but in addition, as there is a concept of end-year flexibility which is not part of our budget and is not something we are of right entitled to, it is at Treasury discretion. This money represents underspends of previous years which Treasury allows under certain circumstances for departments to use in subsequent years. If we have an underspend in one year, we get the opportunity potentially to spend that money in subsequent years and that is called end-year flexibility. As a department, as BERR, we have about £588 million of that which has built up over the years. That money is classified under three headings. You will be aware that under government accounting our budget is split into three wordings: what is called near cash, what is called non-cash and what is called capital. We have £588 million that is split £266 million near cash, £72 million non-cash and £250 million or so capital. That is the context of what end-year flexibility is. For us it is very important, and has been important in the context of this reserve claim which we have made, because the Treasury norms are that reserve claim is a last resort. Normally Treasury would look to departments to draw down all there end-year flexibility before making a reserve claim. In our case the issue which we had, in terms of the NDA, primarily related to near cash which is why we have, through this supplementary, drawn down £256 million of this money. It is not our budget per se but it is this pot which is accumulated underspends in previous years.

Sir Brian Bender: That applies to all government departments. The idea of end-year flexibility was firmed up in the 1998 comprehensive spending review.

Q11 Miss Kirkbride: I can understand that your problem was that the income was not coming in on the commercial contracts that you wanted but why do you budget £100 million of end of year flexibility? What was it that had not happened that caused you to ask for that money in the first place? Whatever it is called, why did it happen?

Mr Roberts: In terms of what had happened, we had in 2007/08 a large increase in our expenditure required to meet regulatory requirements for legacy ponds and silos work at Sellafield. This gave an increase in our expenditure of about £320 million for 2007/08 compared to what was in the original SRO for the three year settlement in the spending review from 2004. We applied to the department as to how to fund this increase in expenditure and the resolution we came to is we would utilise the end-year flexibility and have waste substitution income in order to meet these high levels of expenditure. The waste substitution income, therefore, in the original planning was £160 million. As income fell away from the other plants, and given that we generated far more waste substitution, our reliance on waste substitution is therefore £303 million and not £160 million.

Q12 Chairman: What would be helpful is if you explained to us waste substitution contracts.

Mr Roberts: The waste substitution contract is actually, in essence, very simple. It is the contractual form which is the complication; the physical reality is quite straight forward. The UK since the 1970s has been undertaking contracts with overseas customers to reprocess spent fuels coming from their nuclear electricity generation. That reprocessing gives rise to new nuclear materials, uranium and plutonium, recovered from the old spent fuel and gives rise to a series of waste treatments which are classed as low, intermediate and high level waste. The amount of intermediate and low level waste take an awful lot of volume and the high level waste are at much higher levels so they are much, much lower in volume. The substitution agreement basically says that instead of sending back huge shipments of low and intermediate level waste to the overseas customers we would send them back a much fewer number of much less volume of high level waste. An analogy might be instead of giving them back 100 pennies we gave them a pound coin instead. It is much easier on the pocket. The benefit of that waste substitution arrangements were consulted in 2004 by the department. That consultation recognised that it had some benefits: the first was an environment benefit; the second one was the number of nuclear transports would be significantly reduced; and the third was that the proceeds from waste substitution could be applied to nuclear clean-up. Those proceeds were estimated at between £250 million and £500 million at the time of the public consultation in 2004.

Q13 Mike Weir: I understand what you are saying. I understand the principle behind this but what is the impact on the cost of storing the waste in the UK? Presumably if you are sending back smaller amounts of high level waste you are left with larger amounts of low and intermediate level waste. Given much of the cost is going to be storing this for God knows how long, what impact does that have on your budget, the greater volume?

Mr Roberts: In terms of the overall volume, the UK has, from its own nuclear generation over the past few decades, accumulated a large stock of low and intermediate level waste. The amount of intermediate and low level waste from overseas customers adds about 1.5% - I am sure one of my colleagues might correct me if I am wrong in that - in terms of the overall volume. The marginal cost in truth is not that great. We already have, and have planned, for the facilities to store these low and intermediate level wastes. The additional marginal cost of the overseas customers is a very low amount. To put it in context, we believe, and the cost estimate we have, is that whilst the income from these waste substitutions would be in the order of this year £450 million, the costs associated with that would be in the order of £12 million to £20 million for the marginal costs of storage.

Q14 Chairman: The £143 million shortfall, can you break that down for us at all?

Mr Roberts: I can in a note. I can tell you in general terms. When we originally thought of the 2007/08 budget in the preliminary budgets, we had a firm view that Thorp would be fully operational for the year and that SNP, whose production was increasing at that time, would also be on track to deliver. When it came to setting the control budget for 2007/08, which was in March 2007, it was clear that Thorp was not coming back into production in 2007/08 and it was also clear we had reduced expectations for SNP as well.

Q15 Chairman: What is the relation of income shortfall of £143 million and the waste substitution contracts?

Mr Roberts: There is no relation at all in contractual or physical space. There is a third contributing factor to the shortfall and that is electricity prices have come off the boil substantially after a peak in late 2006 and spring 2007. That also caused us to revise our income generation down. The shortfall essentially gave rise to an income shortfall. In the controlled budget we believed we could get more waste substitution and indeed we have.

Sir Brian Bender: One of the inherent issues, as the Committee is well aware, of the NDA is the volatility of its commercial income, whether it is from electricity generation, waste substitution or whatever. That may be something you come back to later or subsequently.

Q16 Chairman: That is a bigger question but also with climbing trends as well and rising liabilities. This £400 million figure, I always get nervous with round figures. You are damned if you do and damned if you do not. If it had been £390,276,000 I would be equally suspicious. £400 million, why such a round figure? Are you happy that is really the gap? Has the National Audit Office audited that figure?

Sir Brian Bender: The National Audit Office has not because this will be something that happens at the end of the year on the basis of the closure of the accounts. Indeed, that is the time when we will be certain about the accounting treatment. It will be for the NAO to reach the final judgment on that. It was because, as I said earlier, there was doubt about what that was that we thought it was prudent to do what we did with the spring supplementary.

Mr Roberts: The NAO have looked at the £400 million and they know the extent to which we were relying on waste substitution. In fact, they drew attention to it in their recent value for money report, I believe on page 26, paragraph 320. Although it is not the subject of this hearing, the National Audit Office drew attention to our reliance on this income flow in their value for money report. They have not audited the figure but they have seen our budgets and have understood that is the figure we are looking for. Sir Brian is quite correct in saying that the accounting treatment for the waste substitution income will only be determined by the National Audit Office in the process of finalising our annual report and accounts for 2007/08.

Q17 Chairman: Can I be clear about the definitive figure of how much you have raised from the sale of waste substitution contracts? What is the sum?

Mr Roberts: In this financial year we expect to have invoiced £601 million worth of waste substitution income, so considerably higher than expectation. Can I also mention that we have actually received the proceeds for the vast majority of that £430 million. We received those proceeds in January and they have been passed through to the Treasury.

Q18 Chairman: Before I pass on to my colleagues to ask detailed questions, you have said a second time you still have not settled the accounting procedures for this money. I have to say this sounds really extraordinary. You have known about this money for a very long time. I am not blaming you; it may be your colleagues at the Treasury expressing alarm about it. I find it quite bizarre that with these huge sums of money washing around in your department's accounts you do not know how to treat the money is extraordinary.

Sir Brian Bender: These are very complex contracts. About 12 or 13 months ago we knew that there would be issues around how we treat them, how the income would come in. February 2007 we notified the NDA of their budgetary allocation for financial year 2007/08 but the detailed terms of the contracts were not finalised until December 2007, therefore the nitty-gritty discussion of how they would be handled in a budgeting accounting treatment, and whether prior assumptions may or may not have been correct, could not get properly under way until very recently. That is how we got to the situation we have. I repeat, as Bill Roberts said, the money has arrived for £430 million so the Exchequer has benefited from that. The question, in terms of the complexity and length of these contracts, is how they are accounted for and whether they are accounted for over the lifetime of the contract or accounted for on a cash basis. Obviously that has profound implications on the way the NDA's and department's accounts and then budgets are presented.

Q19 Mr Wright: The department's Memorandum to the Committee says that the NDA's method of recognising income has not been appropriate since April 2006. Could you tell us what was inappropriate?

Sir Brian Bender: I said earlier that the inappropriateness relates to the treatment of waste substitution income. It is just that one area where probably a more diplomatic phrasing would be that the appropriate budgetary treatment has not yet been agreed with the auditors, the Treasury, the NDA and the department. It simply relates to that aspect and therefore the thing we have been focusing on this morning; it is not any other aspect of the NDA's accounting.

Q20 Mr Wright: You mentioned it was not agreed with the Treasury. Has it been agreed yet?

Sir Brian Bender: No. The position is indeed, as I said earlier, that the final decision will be for the accountants and auditors and will almost certainly not be reached until after the year end. I would expect the NAO to reach a view and for that then to be discussed with the NDA, with the department and with the Treasury. I do not expect closure on this issue for a few weeks yet.

Q21 Mr Wright: You mentioned the NAO and the report also says that subject to departmental and HM Treasury oversight the authority can either use such income, that being commercial income, as it arises to bring planned work forward from future years or it can carry over year-end surpluses which remain ring fenced to meet the Authority's spending in future years. Is that no longer the case?

Sir Brian Bender: The principle is still there. The issue is, as both Mark Clarke and Bill Roberts mentioned - and one of them can correct me if I do not get this right - that in order to deal with the current point we have used end-year flexibility underspends and therefore until it is resolved there is limited future flexibility because we have used that cushion up. Is that a fair statement?

Mr Clarke: Yes.

Mr Roberts: I need to be very clear as well that there is nothing inappropriate about our accounting which has been signed off for two years by the NAO without any qualification or substantial restatement of any figures within it, nor is there anything improper or irregular about any of our budgeting. It really relates to what is the appropriate budgetary treatment for this waste substitution income, just to re-emphasise that point.

Sir Brian Bender: The Fifth Cavalry have passed me a note to correct something I have said in answer to your question, Mr Wright, about what is not appropriate. My advice is it is long-term contract income which is primarily WSI but may involve others. That is what the debate is about. If I said, as I did, it is only waste substitution income then I may have been misleading.

Mr Roberts: In truth, that may be factually correct. In discussion of the waste substitution income we have looked at other contracts as well. We have determined a very small difference in the budgeting for long-term contracts. Let me tell you how much that is to set your minds at rest. In 2006/07 and 2007/08 there is a total difference of £2 million over the income in that period of £2.5 billion. The other long-term contracts are 0.08% of our income. It has to be said that technically that is quite correct, it does relate to some other long-term contracts but materially and overwhelmingly it is the waste substitution income. We did not mean to try and cover up the other small albeit still an error on the budgeting of those other contracts.

Mr Clarke: If I may add an additional comment, it is important to note that budgets are set at the start of the year and the understanding at that time for budget purposes and for estimates was that the income from these WSI contracts could be recognised on the basis of cash received, in other words on a cash basis. This was thought, at that time, which is going back many, many months, to be an appropriate basis in the light of the expected nature of the contracts that would prevail which were finally finalised in December, a month or two ago. As I think Brian mentioned earlier, it became clear in December and January, just very recently when the contracts were finalised, that the income recognised for budget purposes should be on the same accruals basis as that used for actuals correctly in the statutory reporting. It was because of the precise nature of the contracts that we ended up with, which were finalised in December, that we had this change in budgeting basis. There was a lot of hard thought at the time as to whether we need to make that change. The advice was that on the balance of probabilities those receipts could not score on a cash basis as income and would need to be more gradually recognised over the years to come. That is what created the £400 million shortfall which, by the way, is not just a round sum number; it happens to be £400 million. What we had to do, as Brian mentioned, was we had to provide for this in the spring supplementaries otherwise we ran the risk of our vote being exceeded come the end of March but it is still work in proceeding that treatment. These are contracts which are exceptionally complicated. They run into dozens and hundreds of volumes these. They almost fill the room as they are of that scale and it is not a straight forward matter to say this is how we do the accounting.

Q22 Mr Wright: Can you give to this Committee an assurance that the NDA income was treated appropriately in the NDA resource account for 2006/07?

Sir Brian Bender: I will ask Bill Roberts to say so but I would give that assurance not least on the basis that NAO audited and did not qualify the accounts.

Mr Roberts: That is entirely correct. Indeed, the very small issue we found is immaterial in budgeting. In terms of the accounts, they have been signed off by the NAO without determination of any such error in them. I am quite confident there is nothing wrong with the accounts for 2006/07 or for 2005/06 for that matter.

Mr Clarke: The issue has not been the published account but the way we do the budgeting. That is a different matter. Of course, you expect in an ideal world the budgeting to reflect the way the accounting works but we thought it was not appropriate in that case.

Q23 Mr Clapham: Could you or your colleagues tell us about the Treasury derogation? What does it allow the NDA to do and why was it needed?

Sir Brian Bender: The first thing I would like to say on this is that I was - and I need to chose my words carefully - as struck as I think the Committee was when I first learned about this issue. I have asked the head of my internal audit to look into how these issues arose and whether there are any lessons for the future and I am expecting him to report. I said I want findings that are agreed across the Treasury, the NDA and the department soon after Easter. Anything I say about the history is in that context. The Treasury's budgeting guidance requires income for budget purposes to be in accordance with the standing manual unless there are specific derogations put in place. There was one put in place for 2005/06 that covered a number of areas. It did not expressly cover waste substitution because that had not, at that stage, reached maturity. One of the things we are still trying to work through in terms of understanding how we got to where we did is indeed what the understanding was at the time and whether looking forward there are any lessons where things have not been crystal clear because they have not been properly developed by that stage. The derogation you refer to that was put in place for 2005/06 which allowed things to be treated as cash rather than accrued for a period were reprocessing income from Thorp, Magnox reprocessing income and MOX income. That is my response to that question.

Q24 Mr Clapham: Could it have been extended? If this had been raised with the Treasury surely there could have been an extension of that derogation which would presumably have then eliminated the need to go for £400 million.

Sir Brian Bender: It was put in place originally to give the Authority and the NDA time to understand the accounting treatment of the particular issues. As I say, one of the things I have asked this internal audit review to look at is, in effect, the answer to your question. Admittedly this is rather a one-off but are there things that if we get into this situation again, either with the NDA or any other organisation elsewhere in government, not just my department, there are questions that can be asked at an earlier stage which can provide answers. Hindsight is a great thing but actually if you are looking at something which has caused questions like this, then you need to show 2020 hindsight to find out if there are lessons for the future. The short answer is I do not know and that is partly one of the purposes of this review I have asked to be done.

Q25 Mr Clapham: Hindsight is a great thing but could it be that the derogation was overlooked?

Sir Brian Bender: I prefer not to answer that question because I do not know the answer and that is one of the things I have asked the review to look at.

Q26 Chairman: Just say once again, to understood clearly, why the derogation was put in place first time around?

Sir Brian Bender: As I understand it, and this is something Mark may want to say something more about, in 2005/06, which was the first full year of the Nuclear Decommissioning Authority, a derogation was put in place between the Treasury and the department and NDA to give the NDA time to be able to understand the accounting treatment of particular items given their magnitude, complexity and unpredictable nature. That derogation allowed the income to be recognised when the cash was received allowing for NDA accruals. The areas specifically subject to it were Thorp reprocessing, Magnox reprocessing and MOX. The waste substitution area, which is obviously the primary issue we are discussing today, had not been proposed as part of the commercial activities at the time the derogation was prepared. Without wanting to be facetious, we are dealing with Rumsfeld's known unknowns in this territory which is why I am a bit reluctant to get drawn too far down the direction of Mr Clapham's questions until I have a proper report that sets out some of these things and works out, as I say I fervently hope in full agreement with the Treasury and the NDA, whether or not there are issues here that are lessons for the future.

Q27 Mr Clapham: It does seem there are lessons for the future. I hear what you say about not wanting to get drawn on this particular question but could you say how it was then that the problem first came to light, particularly in relation to the fact there was a derogation?

Sir Brian Bender: It first came to light, as I mentioned earlier, in its full glory, if I can put it that way, when the contracts for waste substitution income were finalised last December, so we are talking about December 2007. As they were being finalised we, by which I mean the department and the NDA, looked then at the detail of the budgetary and accounting treatment and, at that stage, these broader issues came into play. As we have said a couple of times in this hearing, there were then doubts and questions about how this income should be accounted for in the NDA's accounts.

Q28 Mr Clapham: Given what you have said, it is quite clear that the issue had not arisen earlier otherwise you would have been aware, particularly in relation to the derogation, that it could have been dealt with in that framework. You are waiting on your report and there are likely to be changes for the future. One may well expect that report is going to suggest that the derogation aspect is looked at for the future and becomes part and parcel of the way these matters are accounted for. Would that be fair?

Sir Brian Bender: It may, but plainly there are issues about the financial arrangements for the NDA and they have to dovetail into government accounting generally. The Treasury, quite rightly, have a legitimate set of concerns about how various odd and complex bits of income or expenditure impact on the government accounts which the Chancellor plainly has in mind when he is looking at the fiscal position for the budget. There will be lessons about how to handle things like this in the future as far as the department and the Treasury are concerned. There may be lessons how to handle issues around derogations but I would expect the Treasury to want to look rather hard at that because they will also want to take into account the overall impact. If they agree that in this case, what does that imply for anything similar across government looking at the public accounts overall?

Q29 Mr Clapham: It does seem to me, given this situation, the £400 million, that derogation, and the way in which the Treasury take the view with regard to the use of the derogation, is a way of dealing with these matters without having this kind of problem arising. Do you not agree with that?

Sir Brian Bender: I would agree with that but they have to look at it from the point of view of the overall impact on government accounts in this area and in others.

Q30 Chairman: Can we just be clear? Did the NDA just forget this derogation was no longer in place or did it assume it applied for waste substitution contracts?

Mr Roberts: We believed that the waste substitution contract would be recognised when received and in truth, Mr Chairman, we still have the view that that is the proper way of accounting for them but there is a risk, and a very substantial risk, which has been pointed out after the agreements and the arrangements were concluded in December 2007, that they may be associated with the lifetime of all the reprocessing contracts, which is a stack of contracts entered into since the mid-'70s, in which case the proceeds we have now received would be profiled up to 2050 and that would not give us the authority to spend those under the budgetary control mechanism. In terms of the inclusion in our budget, we have assumed in our budget, and we are still making the case and believe it to be the correct accounting policy, that these receipts should be recognised on receipt because of the nature of the waste substitution arrangement, which is that effectively title to the high level waste from the low level waste and the intermediate level waste transfers on that agreement and that then is the end of the service and, therefore, the life of the contract is instantaneous rather than right up to 2050. In terms of that basis, we still maintain and are maintaining that we will recognise these receipts this year. However, in discussions with the department and with the Treasury we also recognise that there is a risk that that accounting approach is not necessarily the right one. It is certainly not the only accounting approach and it may well be that because this arrangement is not an entirely separate contract, because it is within the umbrella of the overall reprocessing contract, that the income may have to be re-profiled over the life of those contracts. Because the accounting and budgetary treatment is uncertain, that is why we are here today because the NDA, as an NDPB, has to have absolute certainty over its funding in order to commit to expenditures. We also asked this time last year for a supplemental estimate as well because of income uncertainties in the last few weeks of the year.

Q31 Chairman: It was significant but not the same scale.

Mr Roberts: It was only £60 million.

Sir Brian Bender: At the risk of stating the obvious, there are therefore two separate bits of work in train: one is the fundamental one of what is the correct accounting treatment, which I am afraid I confidently predict will not be resolved until after the year end; and the second is are there any pointers in response to Mr Clapham from any findings and recommendations from how we got to this position.

Q32 Chairman: The answer I got from Mr Roberts is that he disagrees with the Treasury. I think we might return to some of your questions about how one should ideally treat this money. We will not pursue that now. You had assumed the derogation remained in place. You had a perfectly reasonable mind set that the derogation was still there effectively for waste substitution contracts.

Mr Roberts: In terms of setting the budget for 2007/08 we did not refer at all to the derogation. I think there was an assumption overall that income could be treated on a cash basis and this waste substitution income was one way of a service it provided on receipt. We do not think that is inappropriate. Indeed, the budgetary mechanism at the time for 2007/08 did contain a facility within it for recognising that if the income was not received in 2007/08 we would come back to government to ask for it. At the time the 2007/08 budget was out, the uncertain nature of our income profiling was catered for.

Q33 Mr Bailey: To a certain extent it would appear that the situation has arisen because you prejudged Treasury accounting procedure. Is that a fair comment?

Sir Brian Bender: The answer is - and forgive me because I may be largely repeating what I said earlier - it was only in December that we really had a chance to get to grips with the complexity and we have not worked out that complexity and therefore while that discussion is going on there are different views. The prudent thing to do in that circumstance is to make sure the department does not exceed its vote. I would not like to predict at the moment how this will come out because I think the Treasury has very legitimate concerns and interests about how this sort of income and treatment will impact more broadly on public accounts, as I said earlier in relation to Mr Clapham. Essentially this is a field day for accountancy professionals to understand what the right treatment is, reach a view and then things will flow from that in terms of the budgeting.

Q34 Mr Bailey: The derogation only lasted a year. Was this, shall we say, known or assumed? Did it actually say that when the decision was made?

Mr Clarke: Yes, it did say that. After that there was a continuing stream of discussions with the Treasury which were unresolved on this matter as to what the right form of treatment should be and those discussions encompass the whole issue of the waste substitution income which Bill has talked much about. The issue has been, in the context of this very complex contractual situation, what should be the right budgeting basis and that has been an ongoing discussion and as yet not fully resolved. As I mentioned earlier, it is only the crystallization of the contracts in December which has crystallized the whole situation to be closed down.

Sir Brian Bender: I may regret saying this but I will say it all the same. I think it appropriate to offer the Committee a note but not until after the internal audit report has happened, if that is helpful to the Committee. I have not set a binding deadline because I prefer to get a good report and one where findings are agreed across the various players so it may not be convenient in terms of the Committee's thinking on timing. The Committee may feel we are being a bit evasive on some of the last questions but that is because we actually do not know the answers specifically and that is why I have asked for this review to take place. I am happy to offer a note that will address some of these questions in the context of actually having had the review done but it probably realistically will not be until April.

Chairman: I am very grateful for the offer and accept it unreservedly.

Q35 Mr Bailey: It would seem that the final accounts are predicated on assumptions that were not realised. What was the nature of the contracts and how did they differ from what had been expected?

Mr Roberts: The nature of the contracts are essentially service contracts which were started in the mid-'70s where numerary processing methods where different methods of waste storage and so forth were agreed where different components or different agreements were made. They were not new contracts issued for that, separate ones, but essentially what happened was the original contract had stacked on top of a new arrangement under the same contractual umbrella and so the contract now comprises the original contract with, as Mark said, a large number of amending agreements which then interact with each other. In the waste substitution arrangements we were, in the latter half of 2007, expecting a completely separate stand-alone contract which would make the accounting very simple, because physically it is quite a simple transaction, but the agreement was still within the body of the maxim of contracts and therefore this accounting treatment, which says it therefore should be associated with the lifetime of those contracts, has come up as the alternative accounting treatment for this other than instant recognition. That is the change that happened. As Brian said quite rightly, the final nature of these arrangements were not around until December 2007. The laws of accounting are not like the laws of physics. They have a substantial amount of subjectivity involved in them and opinion forming and therefore quite a lot of opinion is being formed at the moment as to whether indeed the income can be separable or therefore realised or whether the income has to be spread right over to 2050 when the last bit of plant in this arrangement is decommissioned. Clearly the policy intent was that proceeds would be applied to nuclear clean-up. Our accounting arrangement is based on substance over form but whilst the legal form of the contract is that this arrangement is part of a mass of contracts, we believe the substance of it is that the waste substitution agreement is a separable component and should be accounted for as a separable component.

Q36 Mr Bailey: Given the issues that have arisen and the complexity of them, how many BERR officials work with the NDA?

Sir Brian Bender: I do not know if someone in the Fifth Cavalry can answer that but we have changed the arrangements in the last few months. This was actually alluded to in the recent National Audit Office report so the governance relationship is now run with a bigger team and a more high-powered team from the shareholder executive part of the department. We have increased the resource and shifted it from the nuclear energy part of the department to the shareholder executive. The energy group part of the department still deals with the overall policy in relation to nuclear, particularly new nuclear build, so we, in the autumn, both increased the resource and put it in a place that I feel is more appropriate for the government's relationship because the shareholder executive understands and does this sort of thing as part of its day job. It is fair to say that this area was not resourced as strongly as it should be a year ago and that is something that emerges in the National Audit Office report.

Q37 Mr Bailey: I was going to ask how many finance officials work for BERR in the NDA but I appreciate you may not be able to give an exact figure.

Sir Brian Bender: The Fifth Cavalry has come to the rescue. The current position is that there are five people plus about half of a head of management unit's time in the shareholder executive dealing with this now, as well as a number of people, I think it adds up to about three in total including parts of time, inside energy group. The resource did increase as part of the switch so it was not simply moving deck chairs around. I think my general view of it, and something I discussed a lot in the department over the summer and into the early autumn, was that for a start-up phase of the NDA the department have got it right, but as it was getting into some of the complex issues and what brought it to a particular crystallisation in my mind was the competitions. Did we have the right resource in the department to have a relationship with the NDA as they were finalising the first competition and also beginning to go out for competition for the big one, Sellafield. The conclusion I came to having thought about it, talked about it in the department, talked about it in the Treasury, was that actually we needed to raise our game on it. It is a rather long-winded answer saying we, therefore, in the autumn increased the resource that tracks, if I can put it that, or relates to the NDA.

Q38 Mr Bailey: Horses and stable doors come to mind. Do you think some of these problems could have been resolved had there been more resources?

Sir Brian Bender: The primary reason for the change was in relation to the really important phase the NDA are now going through of the contracts. Coming back to the central raison d'etre of the NDA, it is to complete the sites, bring in world-class companies to run the clean-up and therefore carry out the clean-up in a more cost effective way. We are only now over the current period, with the completion of the low level waste contract at Drigg, that the first of those contracts are concluded. The Sellafield one, the pre-tender stage is out there and there are four major companies competing. Maybe it should have happened earlier but it seems to me the real crunch was to have the right people in place in the department to help central government's relationship with the NDA at this crucial stage. In this current issue the Committee is looking at, we are really talking about, important though the numbers are, an issue of accounting and budgeting. The fundamental question is the extent to which the NDA have competitions in place and the results of those competition is that will drive down the cost of decommissioning and make sure it actually happens in the way that this Committee wanted when the NDA was set up and the way the government wants.

Q39 Mr Bailey: My feeling is I do not think anybody would dispute what you have said about the NDA policy's development priorities. The issue is really why was there not enough consultation with an appropriate number of officials to work out the accounting procedures beforehand or at least at the same time as this policy was implemented?

Sir Brian Bender: There are two answers to that and one is, if you will forgive me, I did want to wait and see whether my internal audit report covers any of this ground. The second is that the detail of the contract, as we said a couple of times, was not available until December so if I had 100 people looking at it a year ago it might not have helped.

Q40 Chairman: Can I be clear what advice you are taking and giving to each other and who is involved in that process? What advice did BERR give to NDA? How is the NAO involved now in working out a better treatment? Who has been talking to whom?

Mr Roberts: In terms of the advice over the budget setting, we took very substantial advice from a number of advisers, Deloittes and AD Little, to understand the cost estimations and the budgets in more detail. We have worked very closely with the department and their financial and resources team and with the shareholder executive who have, as Brian said, considerable commercial experience for us. We have worked very closely throughout. In terms of bringing these contracts in, there has been a lot of discussion about it. I do not feel that we have not shared advice and that we have not had access to plenty of advice. I think the difficulty is that the alternative accounting treatment that might be adopted for this still gives us this income as recognised profit in the NDA's statutory accounts but does not trigger the government's ability to allow us to spend it under the budgetary control framework. We are operating our accounts under two separate frameworks: the first one is a statutory accounting basis, which is essentially UK GAAP and the second one is a budget control framework.

Q41 Chairman: It is very important what you are saying and what advice BERR took from the Treasury.

Sir Brian Bender: Let my try and explain. There have been three main phases. The first was about this time last year setting the NDA budget for 2007/2008 where the department was involved in intensive discussions. I do recall that we had an external adviser involved as well - I think that was Deloittes - with the Treasury about what the NDA's budget should be for 2007/2008. The second stage was through the spring, how to settle a spending review envelope for the NDA for the three years beginning April this year. Again, there was some external advice. The NDA were obviously heavily involved in those discussions. The then Secretary of State for Trade and Industry, Alastair Darling, was personally involved. I recall at least three meetings where he ran through what the assumptions were, what the questions were, and how to balance affordability and risk in what has to be a finite envelope. The third stage, which I do want to keep coming back to, is the contracts where there is a new body that the Treasury have set up called the Major Projects Review Group which is chaired either by John Kingman of the Treasury or by Nigel Smith who has come in as the new chief executive of the office of government commerce. They set up a process to look at any very big project that is pre-agreed to try and ensure that it stands maximum prospects of success. They called in, so to speak, and quite rightly given its importance, the Sellafield contract. That body had a couple of meetings in the autumn which culminated in confirmation that the conditions seemed right for NDA to proceed to the next stage, which it did in November/December for the Sellafield contract. There is a lot of discussion inside government. There are various independent advisers, and Deloittes and Ernst & Young certainly play a role in this, advising the department on these issues and advising the NDA.

Q42 Mike Weir: You are talking about the contracts and you mentioned that the service contracts started in the mid-'70s and there have been changes every since. Do I take it that most of the contracts are now waste substitution contracts or do you still have original waste reprocessing contracts and what is the balance between the two as regards your income from waste processing?

Mr Roberts: I can say that the waste substitution contracts are exceptional and are essentially contracts which we are entering in this year over a period of a few months with the reprocessing customers. Those contracts when executed are completed, as I said in my earlier answer. In terms of the reprocessing, yes, we still have reprocessing contracts which are live and ongoing. Most of the reprocessing for overseas customers has been completed. I cannot give you the exact figures. Someone may send me a note if they know it, otherwise I may have to send you a note afterwards to answer the specific question.

Q43 Mike Weir: Where does the bulk of your income from waste processing come? Is it from the original contracts or from these new contracts?

Mr Roberts: From the original contracts absolutely. There has been no doubt. Our total commercial income is £1.2 billion and the bulk of that comes from the reprocessing, waste management storage and decommissioning contracts.

Q44 Miss Kirkbride: Listening to the argument are we meant to assume there is something very different, and possibly even unique, about the NDA as a non-departmental public body that has given rise to this? After all, there are other NDPBs who have commercial income and who presumably have already sorted out the way they operate their finance with the Treasury and yet this confusion has arisen with you. Is that because you are unique and complicated?

Sir Brian Bender: No doubt Bill will think they are and I agree. First of all, nothing like it had been done before. As the Committee will recall from its earlier report, it was set up to deal with the fact that no part of a public authority had really focused its time on dealing with the legacy and clean-up. There was a brand new body set up and the complexity of some of its issues is pretty unique. The recent NAO report comments on some of the questions that gives rise to. Indeed, I think the NAO report questions whether the funding mechanism is right. This is one of the NAOs recommendations in their recent report, and this is something we will be discussing with the Treasury before we get into the next spending review, that had we set up something which was OK for 2005 onwards but actually as we get down the track towards 2010, 2012, for the very reasons the Chairman alluded to earlier that the commercial income is coming down have we got the right funding model. It is something unique in government. Personally my view is having it constrained by three year spending review settlements does not help although I understand why that has to happen at the moment. This is something we are looking at with the Treasury with a view to getting some sort of decision before we get into the negotiations for the next spending review.

Q45 Miss Kirkbride: It would be remain as an NDPB.

Sir Brian Bender: I would not like to speculate on what the answer might be but I do not see a need to change the legal form. The question, as I say, links back to the Chairman's earlier question, there is a fundamental model here that assumes a slug of public money roughly half its income and a slug of commercial income. The commercial income is (a) volatile and (b) over time will decline. The question must be what the long-term answer is and whether that is an answer, and for 2008, 2010, 2015 it is hard to see it remaining the same in 2015. It is a discussion I would like to get under way, and perhaps more importantly the National Audit Office have put it on the table as part of their recent report, but I would not want to pre-judge, and the Treasury would not allow me, what the answer is. I do not think the issue is the legal form of the NDA. I think that is fundamentally absolutely agreed; it is whether the funding mechanism as set up can survive in the long term and, if not, what are the alternatives given generally the need for prudence in public finances.

Q46 Miss Kirkbride: Given that it has to survive on public subsidy and it has to be in a different form, were it the case this could have been a commercial entity and operate its budget on a commercial basis, what difference would it have made to the issues we have been talking about today?

Mr Roberts: The point is that the nuclear estate under BNFL has largely operated as a commercial entity and has 25 years or more experience of operating on that basis. With the increasing need for public subsidy what we have got in addition to the normal accounting framework that a commercial company has, framework in the statutory accounting, we have overlaid on top budgetary controls from the Treasury. I do not think that is necessarily a bad thing to be quite honest if it means that spending decisions have to be agreed through the department where large amounts of taxpayers' money is committed. In terms of the legal form of the NDA, if it was a plc, part of the problem we have is that we do have the nuclear liability estimates on our balance sheet. A plc would have to comply absolutely with the Companies Act and we would not be able to do that with such a large liability on our balance sheet. I think as part of government is the right way to treat these nuclear liabilities.

Mr Clarke: The thing that is really special about the NDA is its scale, its complexity and the nature of what it does but the framework of NDPBs it is just another NDPB in that sense so the issues which Bill is referring to actually prevail in all NDPBs as well. You have the government framework of departmental expenditure limits, how do you manage expenditure, end-of year flexibility that we talked about before, estimates processes which has been the subject of why this Committee is meeting today, and all of that is absolutely in addition to what you would have in a private sector environment. There is no doubt that environment, of its very design and nature, adds complexity to the management of finances in NDPBs but, on the other hand, it also, as Bill refers to, adds additional control over the public purse, granularity and all the rest of it so you get a bit of both worlds in that.

Q47 Chairman: The way you have answered the questions almost leads us on to some of the implications that have happened. To summarise as I see it, what happened was the NDA made a perfectly reasonable assumption on how to treat income received. In the normal commercial accountancy practice any plc would treat the money as it was originally treated but the Treasury behaved like the Treasury.

Sir Brian Bender: I would not agree with that. I think it raises difficult issues and needs to be worked through.

Q48 Chairman: Julie is right to explore the unique status of the NDA itself. These contracts are also rather unusual. It cannot be very often that there is a dispute about when you actually delivered the service.

Mr Roberts: Indeed not. Indeed there is no dispute about when we delivered the specific service under waste substitution. The range of accounting treatment stems from whether that service is associated, and how deeply, with the rest of the reprocessing storage and decommissioning.

Q49 Mike Weir: When the consultation on substitution of intermediate level waste was concluded, I understand the department gave an undertaking that income from such substitution would be spent on nuclear clean-up. Will this undertaking be endangered if the income is paid into the consolidated fund and can only be spent by the NDA over the lifetime of the contract.

Sir Brian Bender: Mr Roberts or Mr Clarke may want to answer that. There is no inherent reason why that should be the case. The reason we took the action we did is that protects the position while these issues are worked through. Clearly if the final decision is that it does have to be accrued over the lifetime of the contract, the money will still go in, the original commitment will not be altered, but the profile of when we will be able to spend the money would be altered. We, at the NDA, would have to look at what the consequence of that would be and then, as appropriate, discuss it with the Treasury but the fundamental commitment is not changed. On the worst assumptions, the timing of being able to implement that commitment might be but if that is the case we want to discuss that with the Treasury and obviously the minister would be heavily involved with that.

Q50 Mike Weir: You mentioned earlier the introduction of competition at some of the sites. Presumably that will change the way the NDA operates a considerable amount. How is that going to affect the contracts that are currently being entered into? Is it the case the NDA will still enter into the contract an in effect subcontract somebody else to carry them out or is that going to introduce further changes in accounting processes in the NDA itself?

Mr Roberts: The NDA under the Energy Act are charged with generating as much commercial income from its assets as it can in order to support nuclear decommissioning and clean-up. It is certainly the case that the estate will enter into new contracts with customers both in the UK and overseas as to the extent that it can gain commercial advantage from that which fits in with public policy. Those contracts will be entered into either by the existing operators, BNG Sellafield Limited, Magnox Electric Limited and Springfield Fuels Limited. That is how I anticipate they will be entered into or by the NDA directly depending on the nature of the customer and the service provided. In terms of the operation of those contracts, there is no question that the contracts where they require nuclear operations to be carried out will be carried out by the site licensees. They are regulated by the NII under the Nuclear Installations Act and they are the licence holder and are responsible for the conduct of all nuclear operations at our sites. The NGA will not be reprocessing but the site licensee companies will be.

Q51 Mike Weir: It sounds like a recipe for yet more complex accounting changes in the future. Given half of the income is from grant-in-aid and half from commercial activities, and given you already said there have been problems with the commercial income, what challenges does it give the NDA in terms of funding its decommissioning activities? Given the introduction of competition in the future, how is that going to impact further on it? It seems to me you have got a very large amount of decommissioning that has to be carried out, no doubt about that it is very expensive, but half your income is unsure and variable from year to year.

Mr Roberts: If I could take your question in two parts. First of all, in terms of simplifying the arrangements the NDA have, with the department's agreement, agreed to take on a subsidiary of BNFL called INS, International Nuclear Services so the contracting vehicle for many of the more complex contracts will go through an NDA subsidiary which should remove the complexity alluded to in your earlier question. In terms of how competition will affect it, we intend to bring in contractors who are able to make more effective use of the asset base the nuclear estate has within it. I have to say that whilst a number of the plans are unreliable it certainly is the case we have already seen where we have contractors involved, for example Magnox Electric now owned by Energy Solutions, where we have a private owner. They have managed to get more generation out of the electricity stations that we have at Wilfa and Albury by a better preventative maintenance regime and by taking advantage of market conditions on the electricity markets to trade those energies more profitably for us. I do believe that bringing in competition and hopefully the best managers we can find into the estate we will actually improve the return we are getting on our commercial infrastructure.

Q52 Mike Weir: You did say yourself earlier that one of the reasons there was a downturn was because of the uncertainties of the electricity market when prices went down earlier in the year. It is a very uncertain way of bringing in income for an important process like decommissioning. You have to rely on drawdowns from end-year flexibilities to fund your activity. That seems a very uncertain way. How long will the department allow to you come back and go for end-year flexibilities and drawdowns from reserve if this situation arises again?

Sir Brian Bender: First of all, we will, as I said several times, need to and will bottom out the accounting treatment issue I hope in the not too distant future and that will clarify this particular lumpiness and how to handle it. There is then the broader question about the volatility but that is built into what you might call the normal planning assumptions of the NDA. They had a spending review settlement with a set of planning assumptions within it and that is the basis on which they will make their contracts. We have a bit to get through on the current issue but subject to that we have an envelope and a broadly agreed set of priorities between the NDA and the department which they will then be proceeding with, and obviously safety is top of the list.

Q53 Mike Weir: Coming back to Julie's point, it is not a normal commercial activity in the sense that that money has to be found from somewhere to ensure the activities continue. An ordinary commercial enterprise may cut or trim to meet the finance available but that is not an option that is really available to the NDA to make sure this is done properly. Unless the commercial stream is certain, there is always going to be a difficulty at year end, or a potential difficulty, where you have to go to year-end flexibility and back to government for more money. Is that not the case?

Sir Brian Bender: First of all, the NDA has re-prioritised within its envelope and did, in the context of the spending review settlement, particularly prioritise Sellafield more highly than other areas. That caused its own controversy for some of the other areas but in terms of public policy that was strongly backed by ministers. Secondly, picking up a point Mark Clarke made earlier, I do not think there is anything inherently wrong in using end-year flexibility; it is there as a cushion. In other words, if the volatility of the NDA's income is such that the plans require us to use that cushion, then let us have this discussion with the Treasury. I do not think that is an inherent problem. There is obviously a particular question when something as lumpy and difficult as arose in January/February over the WSI income. The whole purpose of managing this is, step one, have the NDA got the money; step two is somewhere in the department's books, including the end-year flexibility cushion, have we got the money; step three, if neither of us have got it can the Treasury find it from the reserve. That is a series of steps we have just been through in relation to the odd situation we found ourselves over the WSI income.

Mr Clarke: If I may emphasise that the source of income that the NDA has is much more than just commercial income. It gets its main core stream funding from government. In the CSR settlement for the next three years, that total spend over that three year period in that settlement from government has been approximately 20% higher than in the three-year period running up to around about now. That is more in the nature of more certain funding. We have a solid base but then, if you like, a layer on top which is going to be reducing over time. There will come some point in the long run when the balance will change even further. It is worth noting that there is a very substantial amount of solid income which amounts to more than half of the NDA's total spend and that has been rising very strongly in real terms. If you look at the CSR settlement, that amounts to about 5% per annum in real terms increase.

Q54 Mike Weir: That is true but the costs of decommissioning are also very uncertain and no-one can really say what they are going to be in the long term. The NDA takes 44% of BERR's budget. You have in this year-end flexibility something like £100 million which is a large part of the year-end flexibility that BERR has built up. Surely this is not a situation that could be repeated in the future. What is the long term? How is going to sort it itself out?

Sir Brian Bender: I do believe we have something that is getting a solution to the immediate issue. We have something that is credible and sustainable for the CRS period, the next three financial years. I accept, as I was implying earlier, there is an issue that we need to work through about what might be the right funding mechanism and if it is the same mechanism what the level of public subsidy will need to be for the subsequent period. The sort of issues that you are asking about now will become real. They are real but I believe them to be manageable during the present CRS period and that was really the discussion we had through last spring and summer involving the Treasury, ministers and the NDA and the department.

Q55 Chairman: Can I come back to the issue of how the money is treated? This Committee five years ago, during the preliminary scrutiny of the Bill, recommended you have a segregated fund rather than a segregated account but the government opted for the account not the fund. Does that seem retrospectively the right decision? Did we not get it right five years ago?

Sir Brian Bender: I could not possibly say that the Committee was wrong. I read the report and I read the government's response. What we now have is a nuclear decommissioning funding account. I guess my response is simply to repeat the point I have made that the funding mechanism needs looking at after this spending review period. Whether it is the Committee's previous idea, I could not disagree with during this hearing or any other one. We do not have something that looks to me to be sustainable over ten years. The question is whether it is OK for the next spending review period with, almost by definition, an increased public subsidy or not.

Q56 Chairman: What the Treasury has been doing consistently with the NDA is taking the money today and storing up paying for the future. It is not making prudent provision for the future decommissioning.

Sir Brian Bender: One of the questions in all this is do you have a contingency that is held in different pockets or is it held in the centre. The government has proceeded by holding it in the centre rather than in different places.

Q57 Chairman: What is the nuclear decommissioning funding account? It has no cash. It is at the mercy of the Treasury. How does it give greater assurance to stakeholders of the government's funding intentions? No-one wants to answer that question which is interesting in itself.

Mr Roberts: Clearly it just an account through which we keep track of how much cash has been spent on decommissioning. It is not used as a funding pot or an investment fund to fund decommissioning. Sir Brian spoke about the funding model and we entirely concur. The NAO have mentioned the funding model needs addressing. The MPR, the Major Projects Review Group at Treasury, have come to the same conclusion. Indeed, there is a consensus that it needs to be looked at. I have to say the funding model has worked on this occasion, as it did last year. The funding model drives us to ask each year for a supplemental estimate.

Q58 Chairman: I have no doubt Sir Brian is right that the current spending settlement period is not going to be a short term issue. It is 2008 that Albury comes off line, 2010 Wilfa, Sellafield around 2020, Springfield around 2022, and that is the end of the commercial income then, is it not?

Mr Roberts: It is the end of all the income we have from the commercial assets.

Q59 Chairman: That is only 14 years away. I know in Treasury terms and political animals four years is a long time never mind a week but this is quite soon in terms of the very serious issues that the NDA is grappling with. That huge legacy is increasing in valuation terms every year. The liability is growing and the funding stream is dying. We are facing quite a crisis. It is a car crash waiting to happen.

Sir Brian Bender: I would argue with your last words but I would not argue with anything you have said. The saving grace is I do not think there is a car crash in the next two or three years and therefore we have time to plan the avoidance strategy.

Q60 Chairman: That planning needs to start very, very soon.

Mr Clarke: It is a challenge which government has risen to in the past. I mentioned earlier about the CRS settlement for the next three years compared to the previous three years. It is a 20% increase three years compared to three years. The spending level in terms of the expenditure which the NDA has is now operating at a much higher plane that has been the case in prior years. One cannot say it is going to be straight forward funding going forward, because the sums of money are so large they will always be at the core of the government's agenda in some way but it will need to be addressed appropriately in the next spending round.

Q61 Miss Kirkbride: What are the implications depending on how the Treasury decide after the end of your review on this? What are the two alternative ways forward for BERR's budget and the NDA budget given how they decide to treat this income?

Mr Roberts: In terms of 2007/08, for our statutory accounting purposes it will still be recognised profit. Either it goes through turnover if we separate, as I am arguing that the WSI is a separate service that should be accounted for separately, or it passes through a contract loss provision against the other contracts and causes a release of provision into the accounts. In our statutory accounts either way it goes through to the bottom line. The difficulty is in the government accounting. In the one case if it is separate, the accounting for it goes to P&L and we are allowed to use those proceeds to match the expenditures. In that approach it will then restore the EYF and because we have generated far more than budgeted we will go through to the next year with a very substantial surplus and we may not have to come back to this Committee next year in this case. If the alternative approach is adopted, then although it is recognised profit we are not allowed to apply it to our expenditures unless Treasury agree to give us a derogation. The Treasury cannot simply give us a derogation because they have to understand its impact on all the departmental bodies, in which case we then rely on this process to give us the funding to meet the expenditures. In either case, the funding levels on the expenditure levels are maintained and the programme is not in any way affected by how we actually paddle under water to keep the funding at the right levels. We are having a very public debate about funding which does tend to create uncertainty in the minds of stakeholders. The NDA relies very much on being able to give certainty to communities, to businesses, to employees and pensioners that our funding model actually works to support the decommissioning. For the past three years the decommissioning has been very well supported by our commercial incomes and by government grant. As Mark said earlier, the amount of the grant has been raised significantly and the amount we are spending on decommissioning has increased in real terms. The NDA have been set up by government to tackle the decommissioning problem and we are doing so. For the past two years we have balanced the commercial volatilities within the funding envelope. I hope, if the accounting treatment is ratified, to do so again this year.

Q62 Miss Kirkbride: It could have quite significant implications on short-term public spending depending on how they do it.

Sir Brian Bender: At the least there is a profiling issue. Either this is sorted out in plan A, that earlier in the next financial year the NAO authorise treating it on a cash basis in which case the problem completely disappears, the cushioning is reimbursed, or we have to work through, in discussion with the NDA and the Treasury, how to manage the fact that it is being treated in a different way. 2007/08 is sorted but we have begun discussions with the Treasury against the contingency that it comes down the wrong way how do we manage this through the three subsequent years. That is one possibility. The others we will be looking at.

Q63 Miss Kirkbride: You must be quite worried about your budget, Sir Brian.

Sir Brian Bender: What the Treasury have accepted is that we insulate the department's budget for 2008/09 and subsequent years from the NDA. I have been very keen, for reasons I guess this Committee would understand, to avoid a planning blight that if we get into the second scenario does that mean I cannot allocate any budget in the department because it might get hit. Having discussed it with the Treasury, the Treasury has supported us allocating budgets. Other programmes in the budget are proceeding. We are finalising this month our business plan for 2008/09 and indeed, subject to the Minister's views, that was something I would like us to publish and the Committee may well want to look at. We are not letting this issue create planning blight over of rest of the department otherwise it would have all the repercussions you are implying.

Q64 Miss Kirkbride: You have completely ring fenced. You must have special status in the Treasury if that is the case. That is not the normal view taken.

Sir Brian Bender: There is a profiling issue looking forward that none of that need affect the 2008/09 BERR non-NDA planning assumptions because the large amount of income was for 2007/08. What we did in the spring supplementaries on the worst assumption was remove some cushioning from the department because its departmental end-year flexibility was lost but it does not affect departmental budgets for 2008/09 and therefore we are proceeding with caution.

Q65 Chairman: This Committee will be very pleased with what you said in that regard about the protection for the other departmental activities. I anticipate we welcome that unreservedly. That is very encouraging. Before we move on to the onerous lease issue, can I ask you about the value for money delivery agreement December 2007 in relation to the NDA. Is there any assumption in departmental budgeting that the value for money agreement with the NDA would accrue to the department's budget or is it being contained within the NDA activity?

Sir Brian Bender: Within the NDA. The aim is basically to recycle it for the benefit of its primary objective, decommissioning.

Q66 Chairman: I tried to read this document with some care. Paragraph 63, how the savings are being made: "Gains will make funds available for the purposes of accelerating work from out years or funding emergent scope." What does that mean, funding emergent scope? I could not work that out.

Sir Brian Bender: I think what it refers to is an increasing decommissioning scope. It probably could have been expressed more clearly.

Q67 Chairman: It does fall into jargon and it was a particularly challenging sentence. The important issue is that the NAO report says, and we have said it in the past as a Committee, that the estimates of decommissioning costs are weak and likely to increase so these savings are rather arbitrary and a strange figure because they are a small thing in the balance but a huge increase in costs. It is a difficult exercise this value for money business.

Mr Roberts: Value for money is obviously very difficult and a lot of the reasons we are bringing in competition is to bring in contractors who can extract more value for money than the spend we have got. I have to say that in our three years of existence so far we have been very successful in extracting efficiencies out of the spend. Over the two years we have over £300 million of efficiencies extracted from the spend and that has been used to bring forward decommissioning work, to do it faster, and also to deal with the increasing scope that manifest themselves. As we start to decommission new buildings we find more problems in them and so the extra spend often goes to deal with those scope issues.

Q68 Chairman: I am going to turn the small matter of the £194 million for onerous property leases over to my colleagues unless there are any other issues they want to raise in relation the NDA. Mr Roberts, I thank you at this stage for your contribution. I do not think you have a view on the property leases. The Estimates Memorandum, we discussed this, explains that BERR need to make a provision of £194 million for onerous property leases. Does this mean you are paying more for long-term leases than the rental income you are getting for sub-letting the properties?

Sir Brian Bender: Yes. This is fundamentally an issue of accounting treatment for what is a good news story. It is emphatically a good news story because the department has vacated properties, a very deliberate policy that went alongside its restructuring. We have better space utilisation. We are now in Central London entirely in 1 Victoria Street and some of Kingsgate House and we are letting the properties we have come out of. That is good. That is sensible and financial organisation and budgeting management. However, we have leases here that in one case were concluded in 1986, a building 10 Victoria Street, the other side of the road from our main headquarters, and the other in Buckingham Palace Road, which is just the other side of Victoria station, concluded in 1993 both of which run up to the 2020s where the head lease, because of the way possibly the initial contract was concluded, the property market is not the property market now. The income from sub-letting does not cover the cost of the principal lease. What we therefore have to do - this is another arcane accounting issue that I have learned about - we have to make provision for that difference that reflects the sub-letting at less than the head lease and the period during which we would not be utilising it. I come back to the point that I still believe this is fundamentally good news about efficient use of space. Although I am not sure I have had a clear answer to it, I cannot believe we are the only department in this situation. That is the background and that led to this element of the supplementary estimates.

Q69 Mr Wright: In short, the two properties that you mentioned do they come up to the total £194 million?

Sir Brian Bender: That is if you take the period over until one case 2021 and the other case to 2026: rent, rates, services charges, electricity, cleaning, minus inflow. In the case of Buckingham Palace Road, which is now largely occupied by the National Audit Office, and they like it a lot better than their original building I might say, the net cash outflow discounted to present value is £161 million and in the case of 1 Victoria Street the parallel figure is £33 million. In the case of 1 Victoria Street the Home Office are the primary user. That is the context; that is how the numbers add up.

Mr Wright: You say this is a good news story.

Q70 Chairman: You say other government departments. Are you subsidising other government departments now?

Sir Brian Bender: We are the head leaseholder. We negotiate a contract, as I said - in one case in the 1980s and the other case in the 1990s - over 20 years or so looking at what the property is at that time. We then sublet, whether it is to private sector or public sector. We get income so from the point of view of financial management of the department I do repeat I think this is good news. However, there is an accounting issue question of how you account for this difference. This is a one off.

Mr Clarke: The income we are talking about is at a market rent so it is not a notion of subsidising another department.

Sir Brian Bender: The Home Office or NAO are paying the current market rent. The problem is that the rent at which the original lease was negotiated is a higher level and this is what we have to account for. The Home Office and NAO I can assure you are not getting a subsidy.

Q71 Chairman: They are benefiting from commercial judgments that in retrospect do not seem so good.

Mr Clarke: No, they are not benefiting. They had a choice as to whether to take up that lease and they decided to do so. They could have gone down the road and taken up another one for no doubt a similar market rental so it is neutral. It is fair to say that because they chose to use our building there has been a benefit in respect of optimising the overall use of the government estate. I detect there have been a couple of frowns around the table at the notion this was fundamentally a good news story. I want to say, from my perspective, why it is because it absolutely is in many ways. What we have done is reflected the technical accounting consequences of what was fundamentally a good business decision: the business decision being to minimise the number of properties we have and save money in cash terms. What we have had to do in terms of making this technical accounting adjustment is because we are no longer occupying that property in accounting terms, under the accounting Conventions which exist, we have to provide for that. The reason the sum of money is a large one is because it goes right through to 2021 and 2026. We are talking about 15 years in one case and 19 or so in another, so more modest sums of money multiply up. What we have had to do is create a provision in the balance sheet for that accumulated liability in all those years ahead for the difference between the cost which we are incurring and the market value and an expectation of that in future once these initial subleases with the Home Office and the National Audit Office stop in about three years' time. We have had to provide for that in full. It sits on our balance sheet. It has no impact as a provision. It has no impact on our so-called near cash budget which is properly provided for and we have built that in already. The issue is we have had to account for the other side of the accounting entry in the balance sheet so we have put a provision in the balance sheet of liability and we have had to put through our budget and non-cash entry of an equivalent amount. It does not have any cash consequence for our budgets at all.

Sir Brian Bender: The reason why it is a good news story is because we have squeezed up better on space and are letting it our near cash position is better and therefore basically we can live more within our means without having a budget settlement.

Q72 Mike Weir: Surely if you are paying the head lease you are still paying more than you are getting in.

Sir Brian Bender: We are. Obviously a better position would be not paying for it in the first place but given we have the head lease it is surely better still to use our property more effectively and sublet it, albeit at a loss, than to keep occupying it. That is the only point I am making. I am not pretending this is a good place to be. This is no doubt a reflection of the property market over a period. I cannot believe there are not other government departments in the same position.

Q73 Chairman: It is not good news but making the best use of a bad job is the phrase I would use.

Sir Brian Bender: I still think in terms of financial management and budgeting we are doing the right thing but clearly it is an undesirable position to have a lease where we are paying out more than the market rent. I completely accept that.

Mr Clarke: If we had stayed in the building our budget would have been tighter this year. We would have been under severe pressure this year. In terms of the value for money for government more broadly, it would have been much diminished. It is a difficult argument to pursue, the one that we should occupy a property which we do not need and incur a cost in that regard. This is a technical accounting adjustment that has no impact on the cash flows per se, in fact at all, of government. It is purely an accounting double entry to recognise the technical nature of the liability looking many years down the line.

Q74 Mr Wright: I can understand that argument. If the National Audit Office was to rent that property today, it would be paying more for that same space than what it is.

Mr Clarke: If they were to rent the property today at the full amount of our head lease, and that was going to continue right through to 2021 in that particular property, we would not need a provision.

Sir Brian Bender: They rent at the market rate and the market rate is less than the original lease.

Q75 Mr Wright: The National Audit Office has got good value for money.

Sir Brian Bender: No, they are renting at the market rate so if we tried to charge them the rate we were paying originally then they would not have moved in because they would have got poor value. It comes back to the point of the prudence or misfortune of those who negotiated the original contract whether they were wise to have a 20 year contract at that level. With hindsight clearly it would be nice to get out of this altogether.

Q76 Chairman: I presume you looked at that option.

Sir Brian Bender: We have looked at it. We have not completely ruled out buying our way out of it but it would require a lump sum which would count as near cash and therefore would have to come off our salaried costs or whatever. We have not absolutely ruled out, particularly for Buckingham Palace Road, getting out of it.

Mr Clarke: The National Audit Office would be fairly neutral to this idea. They are paying market rent in this building and had they not chosen this building they would be paying market rental in another building. It is neutral to them but for us it makes a big, big difference in terms of benefit. We have a whole income stream which we would not have had before.

Q77 Chairman: If you disengage from the head lease, the NAO could stay there and pay the market rent and their bill would probably be the same.

Sir Brian Bender: Exactly. Their plan is to move in only while the other building is being refurbished so we will have a decision point, can we break the head lease affordably or do we sublet, in a couple of years' time.

Q78 Chairman: The real question is that we would not be having this discussion at all if you put these figures in the main estimates. Why did you realise this so late in the day?

Mr Clarke: It was a question of timing. We had not moved out of Buckingham Palace Road at the time of the estimates. In fact, I think I am correct in saying the decision was taken afterwards actually. I may need to check on that. Once we recognised that the accounting adjustment needed to be made, and we recognised that in the last few months, we decided to book that. We picked it up at the time of doing our interim accounts which is the time when balance sheet considerations are normally addressed. You look at it carefully and make the precise provision at that time and so we had to make provision for it in the supplementary as a result. It would be purely a question of timing. Given the decision to exit the buildings, we would have had to have this adjustment at some point through an estimate of one form or another.

Q79 Chairman: You can give me assurance, Sir Brian, if you did decide that an ordinary commercial organisation would buy you out of the head lease that is the best thing to do.

Sir Brian Bender: The answer to that is I think so, yes.

Q80 Chairman: If that were the case, the Treasury rules would not get in the way of making an intelligent decision about the way you treat it.

Sir Brian Bender: I hope not.

Mr Clarke: No. They would come at it from the question of value for money and look at it in the round, probably one would hope across all government departments, and so they would, in this particular case, look at the NAO's particular situation and ours together and any other property ourselves and the Home Office perhaps. They would look at that but I think the bottom line is if, for the sums of money we are talking about, an external body was able to offer the full head lease cost I am sure that would be an unanswerable benefit.

Chairman: We will look with interest at supplementary estimates in the future. Sir Brian and your colleagues, we are enormously grateful to you for this. It has been an informed session for the Committee. The NDA is a subject to which we return on a reasonably regular basis because it is such an important part of the working of the department and such a huge potential liability for the whole public sector and particularly for your department. We are grateful and we thank you very much indeed.