2 The financial aspects of the sale
7. The Government received £4.4 billion for
its 36% interest in British Energy. It sold its interest when
energy prices were at a peak, and this was reflected in the sale
price. The Shareholder Executive told us that since the completion
of the sale, the share price of British Energy's closest comparator
had dropped by 47%.[18]
8. The sale proceeds were transferred to the Nuclear
Liabilities Fund, which was responsible for meeting the future
cost of decommissioning British Energy's existing nuclear power
stations. The income from the sale had increased the value of
the Fund more than two-fold, to £8.3 billion. This significantly
exceeded the current estimate of £3.6 billion for decommissioning
British Energy's existing power stations.[19]
9. The Nuclear Liabilities Fund deposited the proceeds
of the sale in the National Loans Fund. This was in line with
the investment policy set by the Treasury.[20]
National Loans Fund deposits carry a lower risk of capital losses
than equity investments but, in the longer term, may offer lower
returns. There is therefore a risk that any increases in the value
of the Fund's assets could be outstripped by future increases
in the liabilities estimate, which relates to costs that will
be incurred over many decades. Although the investment approach
to meeting the cost of decommissioning new power stations had
not yet been established, the Department told us it was likely
to be different from the approach it had used when investing funds
for decommissioning of existing power stations.[21]
10. This Committee has, on three previous occasions,
recommended improvements to strengthen departmental oversight
of British Energy.[22]
We were therefore surprised to find the Shareholder Executive
had not, before the sale was concluded, assessed the possible
longer-term impact of the sale on taxpayers' exposure to British
Energy's nuclear liabilities. It had, instead, relied on an undertaking
from British Energy to be 'reasonable and prudent'. The Shareholder
Executive only prepared a formal risk assessment after the sale
was completed in response to a request from the National Audit
Office. The Shareholder Executive and the Department then took
10 months after the completion of the sale to establish new risk
monitoring arrangements.[23]
11. The Shareholder Executive's financial advisors,
UBS, received a success fee of £4 million, which was equivalent
to a monthly payment for their work of around £400,000. The
Shareholder Executive told us that UBS had played a central role
in negotiations and developing tactics, and had provided numerous
valuations.[24] The success
fee that UBS received was not, however, directly linked to the
amount of work they actually carried out. The Committee is not
convinced by the Shareholder Executive's explanation of why it
needed to spend so much on external financial advice when it already
employed a number of investment bankers, or that its financial
advisor's targets were sufficiently stretching.[25]
12. One of the main tasks carried out by the financial
advisors was to provide the Shareholder Executive with a valuation
of British Energy. UBS valued the Company at 703 pence per share.[26]
This proved to be 10% less than EDF was willing to pay, because
it did not take into account the specific value of British Energy
to EDF.[27] Acquiring
British Energy had, for example, moved EDF from a relatively weak
position in the UK electricity generation market to owning nearly
one-fifth of generating capacity, and given it a central position
in the market for new nuclear power stations in the UK.[28]
The Government ultimately received a higher price as the other
main shareholders were able to increase EDF's offer to 774 pence
per share because of their views on the strategic value of British
Energy to EDF and future energy prices.[29]
18 Qq 95 and 100 Back
19
Q 75; C&AG's Report, para 2.26 Back
20
Qq 29-31 Back
21
Qq 162-165 Back
22
Committee of Public Accounts, Forty-third Report of Session 2006-07,The
Restructuring of British Energy, HC 892; Committee of Public
Accounts, Thirty-seventh Report of Session 2003-04, Risk management:
the nuclear liabilities of British Energy plc, HC 354; Committee
of Public Accounts, Fifth Report of Session 1998-09, The Sale
of British Energy, HC 242 Back
23
Qq 64, 70, 93 and 94 Back
24
Q 2 Back
25
Qq 2-8, 115 and 118 Back
26
Q 115 Back
27
Qq 116, 118; C&AG's Report, para 2.11 Back
28
C&AG's Report, para 2.11 Back
29
Q 118 Back
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