Examination of Witnesses (Questions 1-19)
DR IAN
ROXBURGH, MR
JAMES MORSE
AND MR
MARK HIGSON
25 FEBRUARY 2008
Q1 Chairman: Good afternoon. Welcome
to the Public Accounts Committee. Today we are considering the
Comptroller and Auditor General's Report, Nuclear Decommissioning
Authority: Taking forward decommissioning, and we welcome
Dr Ian Roxburgh who is the Chief Executive of the Nuclear Decommissioning
Authority. Would you like to introduce your two colleagues on
either side of you, please?
Dr Roxburgh: Thank you, Chairman.
On my right is Jim Morse who is the NDA's Divisional Director
Assurance; he is the cement that links the NDA to its 19 sites.
On my left is Mark Higson who is Head of the Nuclear Unit within
the Department of Business, Enterprise and Regulatory Reform.
Q2 Chairman: Shall we start off by
looking at the estimates and a useful guide to this, Dr Roxburgh,
you will find on page 18, figure 8, which is a: "Growth in
estimated remaining lifetimes costs of the Authority's sites".
Am I right in thinking that in 2007 the latest estimate for decommissioning
these sites is £73 billion?
Dr Roxburgh: Yes.
Q3 Chairman: We are talking about
serious amounts of public money. This is now the fifth attempt,
Dr Roxburgh. The estimates are still growing rapidly; should they
not have stabilised by now?
Dr Roxburgh: There are three elements
to a lifetime plan, Chairman. The first is that we need an agreed
process which can apply equally to all of our 19 sites so that
the numbers emerging from each of those sites are comparable one
with the other. I am confident that that process is now robust.
It has been subject to significant external assurance. That makes
us unique in the world in the sense that we are the only country,
as far as I know, that can actually roll up its costs individually
into a national figure. The second element of a lifetime plan
is to actually understand what it is we have inherited at each
site—the inventory of challenge—and then to schedule
it in a logical way. The third element relates to cost. At one
level what you say is absolutely right but at another level there
is a slightly contradictory position. As the Report recognises
it was always going to take a number of years to get to the final
figure and in effect we have a process that everybody always recognised
from the start would take four or five years. We are only part
of the way through that process. In the normal course of events
if somebody asks you to do something over five years you run the
course and give them the figure at the end of it. However, because
of our obligation under the FRS, we have to publish a number each
year. It looks as though the number is rising; it was always going
to rise. That is the explanation.
Q4 Chairman: That sounds fine but,
for instance, in 2005 to 2007 the costs have risen again by £11.7
billion. I think the public would understand if we were talking
about something which was over a long period of time and difficult
technology—we all know the difficulties you are facing—but
look, for instance, at paragraph 2.8 at that first bullet point
at the top of page 19. It is not rocket science; there are costs
which you would expect: engineering support, human resources,
financial services which are also increasing rapidly. This worries
me because it suggests that perhaps you are not really in control
of what is going on. This is not very difficult stuff; this is
all human resources really.
Dr Roxburgh: We share your concern
and if I go back to the White Paper in 2002 the Government clearly
took a view then that whilst the sites we have inherited were
good in the context of winning a cold war or developing new methods
of generating electricity, they were not the right vehicle to
manage hazard reduction and decommissioning or indeed the management
of the numbers attached thereto. At the same time the strategy
said that it would not be until you brought in world class management
that you would get absolutely world class numbers. I need to be
quite clear, this is not a case in terms of "two legs bad,
four legs good"; we have significant problems with the supply
chain on the private sector side producing sound numbers as well.
We have evidence of first class management already with our first
competition, the low level waste repository contract; I will not
give you the exact figure, but I can assure you that the figure
that is formed into the contract shows a double digit decline
in the lifetime figure of the low level waste repository.
Q5 Chairman: One would expect there
to be quite significant variations when you are talking about
this very difficult technology over a long period of time, but
if you look at the next bullet point you can see that even costs
incurred in the near term, where you would have thought there
would be much more certainty, it says here, "Costs expected
to be incurred in the near-term had been subject to significant
revision. We compared the size of the 2005, 2006 and 2007 lifetime
plans over the first five-year period covered by each of these
plans. For this period, the latest lifetime plan had aggregate
costs 41% higher than the 2005 plan." This leads me to suggest
to you that you are not really in control of what is going on
and these estimates actually mean very little indeed. If we were
to reconvene this inquiry in three or four years' time we might
not be talking about £73 billion but a figure far in excess
of that. There is no credence that we can give to any of these
figures.
Dr Roxburgh: I have explained
to you that we are on our way through a process; I have explained
to you that the supply chain has its weaknesses. One of the things
that a world class management will bring is better management
of the supply chain.
Q6 Chairman: When we return to this
at the end of this Parliament or the beginning of the next we
will not see near term revisions of this order, we will not see
this sort of increase in human recourses; all this will be under
control will it? Can you give us that commitment?
Dr Roxburgh: What I can give you
is a rendition of the issues. We have 18 million cubic metres
of contaminated land that we know of.
Q7 Chairman: Can I just stop you
there. "What I can give you is a rendition of the issues",
what does that mean?
Dr Roxburgh: What it means is
that until you actually get into certain of the waste streams
that we have inherited, for example we have a shaft at Dounreay
which is tens of metres deep; it is back filled with waste, the
exact nature of which is not known; until you get in there you
cannot with certainty describe the cost of dealing with it.
Q8 Chairman: That is fair enough;
it is much better to tell the truth. The fact is that you are
dealing with such difficult technology or circumstances that you
simply do not know at this stage.
Dr Roxburgh: That is not the case.
Q9 Chairman: This figure of £73
billion is reliable, is it?
Dr Roxburgh: Against where we
are for the moment it is, yes, but as our understanding increases
so the figure will.
Q10 Chairman: Could it be £10
billion out or £5 billion out? Give me a ball park figure.
We are the Public Accounts Committee and would like to have some
idea. That is a staggering amount of money. We are already faced
with this bill of £73 billion. We would like, as the Public
Accounts Committee which is supposed to protect the interests
of the tax payer, to have some idea of what this is going to cost
us. I think, from what you have said so far, we have no idea because
you simply do not have enough information at your fingertips yet.
Dr Roxburgh: I have indicated
to you that this is a four or five year process. We are not through
it yet. I have indicated with the LLWR that the strategy is working.
I have already seen serious evidence that at Dounreay, for example,
we might also see that same model. The model that has been imported
from the States is this, that over a period of four or five years,
as you understand more, your costs increase. The remit is to turn
every stone, if you turn every stone you discover more by definition.
The costs then plateau and then as you apply innovation and world
class management they start to come down. If you ask me for confidence,
I am confident that model is actually working in the UK.
Q11 Chairman: Can you help us at
all about this figure of £73 billion? I am sorry to press
you about this, but you can understand our concern; we would like
to have some sort of idea as to whether this £73 billion
bears any relation to reality.
Dr Roxburgh: We are in the middle
of a process and that is the figure we have at the moment.
Q12 Chairman: Fair enough. That is
an honest answer; it is much better to be honest. Would you like
to look at paragraph 2.11, please? You have put a lot of time
into these lifetime plans. Paragraph 2.11 says, "We found
less evidence of challenge to the nature of the work content".
That of course is NAO speak for saying that you are not actually
being sufficiently robust in challenging these site licensees.
Is that fair?
Dr Roxburgh: At one level it is.
As I say, we focussed on getting process right; we have now committed
ourselves to much greater assurance over the next three years
of the CSR. Could I explain the thinking behind that? If we are
turning over approaching £2.8 billion a year and if we were
engaged in a £2.8 billion take over then it would not be
unreasonable to spend £30 million or £40 million on
doing due diligence on that. You will be aware, I know, that for
want of £25 million elsewhere in our estate we are having
to slow decommissioning down. I have had to strike a balance between
what it is reasonable to spend, given that there are alternative
dispositions for that money where that money can really deal with
hazard and decommissioning, and I have judged that over the next
three years £5 million per year is about right.
Q13 Chairman: So let us look at what
we can now spend on decommissioning. We have had a discussion
about the total bill so if we now turn to paragraphs 3.11 onwards
on page 24 it says in the chapter heading—which is usually
a good way of summing up the argument—"Significant
resources have been allocated to decommissioning. But the progress
at some sites has been hampered by emerging pressures on the Authority's
financial position." Further on, at paragraph 3.12 at the
top of page 25, we read, "So to the extent reductions are
required these tend to fall on decommissioning Magnox". So
lack of money has mainly hit decommissioning projects has it not?
That is the problem we face.
Dr Roxburgh: The budget that the
NDA has has gone up year on year. The CSR settlement that we have
negotiated with government sees a £671 million increase in
hard cash and a 21% increase in grant in aid. In our strategy
on pages 20 and 21 there is a very clear statement that our number
one priority is hazard reduction. I very much regret that I am
not able to satisfy all the demands upon our budget. The Government
inevitably has that tough choice between affordability and desirability.
Q14 Chairman: You have not answered
my question. You have a worsening financial position; that is
now hitting your ability to deal with decommissioning Magnox which
is what you are supposed to be doing.
Dr Roxburgh: The answer to that
is yes, we are doing less Magnox decommissioning, potentially.
Q15 Chairman: Why did you cut support
costs first then?
Mr Morse: You will see elsewhere
in the Report a note that NDA have initiated a review of fixed
costs across the estate out of that £2.5 billion that we
applied to decommissioning, commercial operations and site support.
During the course of next month that plan will come to fruition
and we will be able to review plans across the estate to reduce
fixed costs we hope upwards of 10%.
Q16 Chairman: Are you going to continue
to use costs plus contracts? How can you justify doing so?
Dr Roxburgh: In general no we
are not. In the competitions that we are currently running we
are moving very much away from cost plus; they will still be cost
reimbursable. At the moment the sites are paid on a performance
based incentive which is a percentage of turnover assuming they
deliver particular outputs. The competitions that we are currently
running contractualise the winning bidders to actually deliver
the figures against the lifetime plan improvements that they have
proposed as part of the bidding process. If you will bear with
me a moment I can take you through a schedule which I think illustrates
the point very well, of how we are moving to a much more competitive
environment.
Q17 Chairman: This is dealt with
in paragraphs 4.24 and 4.25 of the Report. Do you want to refer
me to something else?
Dr Roxburgh: No, I do not. What
I want to do is share with you the incentivisation in the new
form of contracts that we are currently in the process of letting.
Initially we are offering a base fee because we want to attract
world class teams; they come at a cost. It is part of the competitive
tension when people bid in to win our contracts to let us know
for how long they would want the base fee and what amount of base
fee they would require. We take the view that by year four there
should be no more base fee. At the same time, we are inviting
the companies to rapidly move away from the current performance
based incentive mechanism and move onto an efficiency fee target
cost share basis. If I could put some flesh around that, again
there is competitive tension; we are inviting the companies to
tell us what proportion of the money saved they would want to
take as part of the competitive dialogue process. At the moment
if you looked at the PBI arrangement the fee paid in Sellafield,
for example, in 2006/2007 was £53 million. We believe the
minimum sum you might bid in at on the competition is about £30
million, the maximum will be £62 million. They have to decide
whether they want to bid against that. Bearing in mind its efficiency
fees which are funding the fee they should be self-funding.
Q18 Chairman: You mentioned Sellafield
but you are letting the Sellafield contract first and then you
are trying to get a better contract. Is that right?
Dr Roxburgh: Sorry, I do not quite
understand the question.
Q19 Chairman: How are you going to
do the Sellafield contract? This is dealt with at paragraph 4.25
on page 34. Are you going to try to get a firmer, more robust
contract and then let Sellafield? How are you going to do it?
Dr Roxburgh: As part of the competitive
dialogue process the bidders have to interrogate the current lifetime
plan 2007 through something called an initiative cost base model.
They have to show how they will improve on that existing lifetime
plan and that forms the new base line that we will measure them
against.
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