Public Accounts Committee - Minutes of Evidencehc 708

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Oral Evidence

Taken before the Committee of Public Accounts

on Monday 4 November 2013

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Stephen Barclay

Guto Bebb

Jackie Doyle-Price

Chris Heaton-Harris

Meg Hillier

Mr Stewart Jackson

Austin Mitchell

Nick Smith

Justin Tomlinson

________________

Amyas Morse, Comptroller and Auditor General, Gabrielle Cohen, Assistant Auditor General, Jill Goldsmith, Director, National Audit Office, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

Examination of Witnesses

Witnesses: John Clarke, Chief Executive, Nuclear Decommissioning Authority, Stephen Lovegrove, Permanent Secretary, Department of Energy and Climate Change, and Mark Higson, Chief Executive, Office for Nuclear Development, Department of Energy and Climate Change, gave evidence.

Q1 Chair: Good afternoon. This is probably the first appearance for a few of you. I am going to ask you the opening question, Mr Lovegrove. Why did you renew the contract with NMP?

Stephen Lovegrove: The formal position with the contract renewal is that it is a decision for the board of the NDA, because the contract was given for 17 years in the first place. The Secretary of State and the Department get involved formally if there is a decision to make a break in the contract.

Q2 Chair: So you were involved in the decision to renew.

Stephen Lovegrove: We were consulted and we endorsed the decision.

Q3 Chair: Why did you agree to renew the contract?

Stephen Lovegrove: We felt that, despite the poor performance on a number of the projects on the Sellafield site, there is a lot of other good work going on in Sellafield. Looking at the alternative courses that we could have taken in discussion with the NDA, we felt that the best likelihood of achieving our outcomes and value for money was to renew the contract.

Q4 Chair: What were the alternatives you looked at?

Stephen Lovegrove: The basic alternatives are twofold. One is to re-let the contract. The other is effectively to absorb Sellafield within the NDA and have it sit there for a while, and review what the right thing to do might be. We went through a very full process of looking at the various alternatives open to us. There was a very full KPMG report on the performance of NMP. A lot of work was done by the Shareholder Executive, which is the official unit that looks at this for the Department. That took a whole year to do. We were convinced ultimately by the recommendation of the NDA board that neither the market nor, necessarily, given the amount of management bandwidth that it had, the NDA was right, and that the right course was not to change course at this point.

Q5 Chair: Can you assure the Committee that it was not your view? I am trying to see who took the decision. My understanding is that the NDA wanted to change course. My further understanding is that you prevented that. Are you telling me that it was not the Department that took the view and stopped the NDA from changing course and looking at an alternative? Was the Department’s decision or the NDA’s?

Stephen Lovegrove: The Department received advice from the NDA board, which recommended that we continue with the contract with NMP as it stands at the moment, and we endorsed that advice.

Q6Chair: And the Department did not overrule in any way at any stage during these negotiations any view by the NDA that it could go differently? The Department never overrode that? You are absolutely sure?

Stephen Lovegrove: Yes, I am absolutely sure. We certainly never overruled them. We had very vigorous-

Q7Chair: And you never had an influence that led them towards renewing the contract?

Stephen Lovegrove: There were lots of detailed debates about the various courses that could be taken. There was a very shared view as to the pros and cons of each of the various routes.

Q8 Chair: Does "shared view" mean the Department’s view or the NDA’s view?

Stephen Lovegrove: The NDA’s view and the Department’s view. It was a dialogue.

Q9 Chair: On the KPMG report, which we only got this morning, my understanding is that that was never shared with the NAO. Why not?

John Clarke: The KPMG report was only completed very recently.

Chair: No, you had a copy of it in September.

John Clarke: We had a draft copy of it in September.

Q10 Chair: Well, we only got it this morning because of a freedom of information request. The final copy has a September date.

John Clarke: We have spent a considerable period of time redacting what we believe was commercially sensitive information.

Q11 Chair: That information was absolutely pertinent as to whether or not you took the view on whether to renew the contract. Why was that not shared with the NAO, even in draft form? I do not know whether you want to comment, Amyas.

Amyas Morse: It would have been illuminating, knowing that we were producing a follow-up report. It certainly would have been illuminating to know of the existence of this report. I have carefully checked with my staff. As far as we know, we did not know of its existence, let alone having seen it.

John Clarke: There was certainly no intent to keep it secret. There was a lot of talk about the fact that we were producing it. It is worth pointing out that KPMG’s report assessed the performance of the site over a wide period of time. It was not advising us on the right course of action.

Q12 Chair: I understand that. The report, which I have only just shared with my colleagues on the Committee, is a terrible indictment of the contract: it says that progress on major projects within legacy ponds and silos, which no doubt we will come to, "is behind schedule and has exceeded…cost estimates. It appears this is principally attributable to SL", Sellafield Ltd, "often as a result of poor project management…whilst savings have been made, overall schedule progress has not met PP11 targets, which over time risks costing more than efficiency savings generated."

On Sellafield Ltd’s capability, it says that "there remain continued deficiencies in project management, supply chain management and resource allocation". We then go on to leadership, where there has been a "high turnover of SL executive secondees and a predominantly reactive response to issues." Governance "does not appear to be effective or unified." On alignment, "parties in the PBO model are not aligned in their objectives, with fractures evident in many relationships due to complexity, competing priority and contractual tensions". Interfaces "do not deliver", incentives do not work, there is no appetite for risk and there is no stakeholder confidence. I cannot see anything good in that.

John Clarke: Essentially, the comments about performance fall into three categories. There is the inherent nature of Sellafield itself, with the complexities that it presents. The Major Projects Authority came in to review it recently, and their conclusion was that Sellafield presents unique technological project management and leadership challenges unparalleled anywhere. So there is the inherent nature of the beast that is Sellafield. Many of the comments you related there relate to the capability of Sellafield Ltd itself. Sellafield Ltd is the enduring entity, the site licence company, the licence holder and the environmental-

Chair: It is wholly owned by NMP.

John Clarke: Yes it is, for the duration of the contract. But the 10,000 people work for Sellafield Ltd. One of the things we have asked NMP to do-

Chair: NMP is responsible.

John Clarke: We have asked NMP to improve the capability for Sellafield Ltd.

Q13 Chair: What have you been doing for the last four to five years?

John Clarke: I would say that the rate of improvement in that capability has been less than we would have wished. There have been improvements in capability, but not as much as we would have wished for.

Q14 Stephen Barclay: On the point of why it was not shared with the NAO, could you be quite specific? Was it that you did not think it was relevant, or that you forgot? Why was it not shared with the NAO?

John Clarke: I don’t believe that it was a deliberate decision not to share it.

Q15 Mr Bacon: You mentioned earlier that it was a draft, but the KPMG report says, "Final Report", and is dated 11 September 2013. Indeed, there is a letter from KPMG on KPMG-headed paper to the board of the NDA dated 11 September. Plainly, this was the final report. Do you know when the NAO Report was published?

John Clarke: It was published two weeks ago.

Mr Bacon: It was 29 October, so there was plenty of time between the final report-

Jill Goldsmith: The NAO Report was on savings calculation and assurance around the savings approach rather than on the NDA’s decision making associated with the extension of the contract. In the context of our work on the savings, it was not necessary to ask the NDA-

Chair: But in the context of preparing for this hearing?

Jill Goldsmith: For the purpose of preparing for this, we were obviously providing you with some support on that.

Q16 Mr Bacon: But no one at the NDA thought it necessary to tell the NAO about this report. It is germane. The report is about the performance of Sellafield.

John Clarke: As I said, we have not made a conscious decision not to share it.

Stephen Barclay: So you made an unconscious decision.

John Clarke: I believe that we did not think about sharing it with the NAO. I have to accept that. But it was absolutely not a conscious decision not to share it.

Q17 Chair: The last report we saw as bad as this-the Department clearly saw it as well-was the report on universal credit. The reason we are taking an interest arose out of our looking at the assets and liabilities of Government over time. We will come to it again, but this is a saga of constantly escalating costs and changing deadlines, always justified simply by the difficulty of the project.

I know that it is a difficult project, and we all care passionately about dealing with nuclear waste safely, but that does not provide a sufficient excuse for you, Mr Clarke, or you, Mr Lovegrove, for the absolutely appalling waste of public money we are seeing here. It is like scattering confetti. That is what it feels like to me every time I think about it.

Stephen Lovegrove: May I make a comment about the rise in the cost? I do not wish to tread over old ground, because I know that you have heard many times that Sellafield is a uniquely challenging environment, and it is. I think it is widely accepted, certainly by the NAO in the first Report and by the Treasury in its minutes to the first Report earlier on this year, that the costs associated with Sellafield, because it is of an order of magnitude more difficult and complex than any of the sites in the NDA, are going to continue to rise over time.

Chair: Widely accepted? I don’t accept it.

Stephen Lovegrove: May I read you the two parts of it?

Q18 Chair: No, I don’t want to divert from the KMPG report. Can I take us back? Otherwise we will get into a muddle. Let’s get back on to this report.

The report says that the failure on the major projects, which we looked at, is principally attributable to Sellafield Ltd, often as a result of poor project management. It talks about leadership, ineffective governance, the three companies not being aligned and interfaces that do not deliver incentives. I have read just the summary; I haven’t had time to read all 200 pages. It is just hopeless.

John Clarke: As the report says in several places-you have highlighted some of them there-there are issues around the inherent capability and capacity of Sellafield Ltd. The question is by what mechanism we best achieve improvements to that capability and capacity to bring about the improvements in performance that we want.

Q19 Chair: You brought in NMP in 2008 to do that. That is why the NDA brought in NMP. You brought them in because the capability was not there. That was the whole point: to transfer the risk and to improve the capability. Those were the two objectives.

John Clarke: We brought them in to improve capability. We did not bring them in to transfer risk-

Chair: You did.

John Clarke: It is a fully cost-reimbursable, no-risk transfer contract.

Q20 Chair: Excuse me, but I am going to stop you there. We have minutes of your board meeting on 25 September 2013 where you talk about why you brought them in. This is the strategic direction: "The private sector is brought in as part of the delivery of the mission for two reasons. First, to provide capability that the SLC does not have and secondly, based on this, to transfer risk." It goes on in these minutes: "Meaningful risk transfer at the enterprise level is not possible-"

John Clarke: Correct.

Chair: -"in the face of significant uncertainty targets", blah, blah, blah. So you are not transferring risk. Then there is redacted page upon page which I assume describe, in less than flattering terms, the capability. You then decide, even on that basis, to give the contract to a company which KPMG, in a very recent analysis, found to be appallingly badly lacking.

John Clarke: In our board paper we say that we generally bring in the private sector for the purposes of risk transfer and capability improvement, as you say. Elsewhere in the estate, where we have a good grip on scope, we can invite the private sector to bid, schedule and cost against that scope, as we have seen at Dounreay, and as I anticipate we will see at Magnox and the research reactor sites for which we are competing at the moment. Then we will see an element of risk transfer to the private sector.

Q21 Chair: Just remind me, what proportion of your business is Sellafield?

John Clarke: Just over 50%. It dominates it completely.

Q22 Chair: So while we accept that it may be working elsewhere, this is really the big one.

John Clarke: It is. But it is really informative to look at the rest of the estate. Where you have clarity of scope and stability of plans you can invite the private sector to bid, schedule and cost against that. At Dounreay we saw that very successfully. As a result of the competition, the estimated cost of completion came down by £1 billion; the estimated time scale to complete came in by 15 years. We anticipate something perhaps not quite as large as that, but none the less significant, at Magnox. We have already seen £1.3 billion taken out of the cost to complete at Magnox as a result of work that has gone on.

The Dounreay example is germane on another level. Dounreay ceased being an operating site in the early 1990s and it has taken the best part of 20 years to get to a position of having real stability and to make the transition from operations into decommissioning. Sellafield is still an operational site for a large part of it. That transition is ongoing. What we are seeing in the rest of the estate is that the nuclear provision has gone up. It has peaked and it is coming down. We have a good grip on scope. We have good, firm plans and we are able to innovate and bring about improvements. The nuclear liability is dropping on every one of the rest of the sites. At Sellafield, unfortunately, we are still on the rise. As Mr Lovegrove said, and as was acknowledged by the NAO, we have to accept that for the big, tricky projects-14 fall into that category-there is the likelihood that there will be a further rise in cost and a further increase in schedule.

Q23 Chair: We will come later to another report I have on how well, or not, you are doing on the commercial operations. We are here looking specifically at Sellafield. I accept your comment that things are going better, I just find it extraordinary that you renewed this. Did the Treasury approve the renewal of contract? Can we be helped there, please?

Marius Gallaher: I am afraid I cannot help you on that one. I am not sure whether we were involved in the final decision.

Stephen Lovegrove: I can help, if you would like; there were conversations with senior Treasury officials, who were fully sighted on what the NDA board had recommended and also endorsed it.

John Clarke: We also have a competition programme board that the Treasury and the Department sit on.

Q24 Chair: Let me take it further for you. What is extraordinary is that you have an absolutely rotten performance. In Sellafield, you sign a contract that does not meet your specifications on either risk transfer or competence and, despite all that, you are given £200 million extra a year. The budget increases from £1.6 billion to £1.8 billion a year, which is a 12% increase at a time when everywhere else in the public sector is expected to reduce spending, and you increase the share of efficiency savings. It is mind-boggling-how can you get there?

I will add in a third-perhaps even worse-ingredient. Publicly, one of you-somebody-said, "We’re going to improve the performance". And in the board minutes it says, "The combination of procurement risk arising from any change conferring a material benefit to NMP, together with the absence of any offer from NMP"-you are waiting for them to offer you something-"that offers improved performance compared to that currently being experienced, means that arguments in favour of extending on any terms, other than the current contract terms, are lacking." So you did not even try to change the terms of a contract that, as we heard in our hearing last year, led to massive fees being given to the companies, no risk transfer and no real handle on performance and cost control. And because NMP did not come forward with proposals, you decided not to toughen up the contract terms.

John Clarke: I am not sure that that is quite what happened. We looked very seriously-

Chair: I am reading your board paper.

John Clarke: Which is a summary of where we are. We looked very closely at modifying the contract and we chose not to modify the basic terms. The reasons for that were summarised in the board paper, but, essentially, were as follows: first, we would need to see clear evidence that it is the contract that is getting in the way of performance at Sellafield-

Q25 Chair: What does "clear evidence" mean? They get a lot of money. How much did they get last year in dividends?

John Clarke: That has not been finalised yet, but very significant-

Chair: How much?

John Clarke: As I said, it has not been finalised yet-

Chair: It is very convenient that it has not been finalised. Here we are in November and the financial year ended in March.

John Clarke: It did, and that shows the great thoroughness that we are going through in terms of checking efficiencies-

Q26 Chair: What have they asked for?

John Clarke: It is likely to be some £20 million less than it was in previous years-nearer £30 million than £50 million-but we have not finalised that yet.

We looked very seriously at what was getting in the way of performance, and whether it was the nature of the contract. Our conclusion was that you can modify the contract to some extent, and we did, to make a change, which I think you have already referred to, of taking legacy ponds and silos out of a purely efficiency-driven mechanism, which effectively incentivised cost, and into a schedule-driven mechanism. However, what we actually want in legacy ponds and silos is progress on the ground. That is not to say that cost is of no interest, but schedule is of greater interest.

Value for money is best represented by progressing these projects and making the hazard go away. So we did make a change to the contract in December 2012 to take that part of the site out of the efficiency payment, and that is referenced in the NAO Report.

Q27 Chair: I accept that there might be good arguments for taking parts out, but you took out the most difficult area, you did not seek efficiency savings and you did not put in anything else. You are living in the public sector-

John Clarke: Oh no, we did-

Chair: Where else are the efficiency savings?

John Clarke: The efficiency savings are applied in the mechanism in the existing contract across the rest of the estate. The prime-

Q28 Chair: Why did you not up it, though? If you were losing an efficiency saving in one area because you did not think that was viable, the logical thing for the rest of Government would be to up it elsewhere so that you get the same cash out.

John Clarke: What we have actually done is to incentivise schedule performance. They are still incentivised not to overspend in legacy ponds and silos-

Chair: Big deal.

John Clarke: Well, it is the nature of the beast. We are looking to ensure that we get schedule delivered. Your comment on the extra £200 million reflects the seriousness with which the NDA and Government as a whole take getting these high-hazard facilities dealt with, and making sure that sufficient money-

Chair: So scatter more money; scatter the confetti.

John Clarke: I do not accept that statement. I believe it is putting money on these high-hazard facilities where the tasks are non-discretionary. They need to be tackled. It is in the national interest that they are progressed in the best way-

Q29 Chair: And you have no idea how much money is for what. All you are doing is shovelling in more money without a clear plan for it.

John Clarke: I do not accept that.

Chair: Does anyone else want to come in on the contract business?

Q30 Guto Bebb: Just to clarify, to what extent did the Department have any knowledge of the KPMG report before the decision was made to renew the contract?

Stephen Lovegrove: The Department knew of the KPMG report. I did not personally, but officials had sight of it and read it.

Q31 Guto Bebb: And were any concerns raised by officials at this point?

Stephen Lovegrove: I want to be very clear. For DECC, the NDA is 60% of its expenditure, and Sellafield is 60% of the NDA’s. It is a very big and material part of the Department’s expenditure, so we look at it very closely. Am I happy where there is poor performance in terms of either letting contracts or contract management? No, I am absolutely not. I am reasonably confident that poor performance as poor performance is being addressed throughout this process. Where I want to make a distinction is between the costs that are going up because of unforeseen, unknowable factors on the ground at this very complicated site and those that could have been foreseen. It is those that we want to concentrate on for the purposes of the KPMG report.

It is important to bear in mind that the KPMG report reflects performance across the whole of the contract-the five years, effectively, since the NDA was set up. I do not recognise all of the Chair’s quotes, but I would imagine that a lot of them refer to some of the earlier performance of Sellafield and NMP. Clearly, performance was not acceptable, but it is getting better. It is not perfect-

Q32 Chair: I don’t think that’s right. I have not had a chance to read the report, which I’d hoped you had. All I am doing is quoting from the executive summary, where there is no suggestion that it is talking about earlier performance. "As at 31st May 2013, SL does not appear to have benefited from injection of strong leadership through PBO constructs, with high turnover of SL executive secondees and a predominantly reactive response to issues." That was in May 2013, so do not try to raise a side issue. This is the executive summary that I am reading from. If the NAO had had sight of it, we might have been able to digest it in a more credible way.

Q33 Guto Bebb: There are similar comments about 2013 as well, so that is worth consideration. Time and again we are told that this is a uniquely challenging site, and nobody would doubt that. How unique is the contract compared with contracts offered in other sites that the NDA operate?

John Clarke: It is a similar contract to that which we started with in 2005 for all the sites. We have progressively managed on the other sites to move from a fully cost-reimbursable contract to a target-cost contract where the contractor bids schedule and cost against scope defined by ourselves. Dounreay we have already achieved, and Magnox and the research and weapons sites are to be completed by the early part of next year Then we have a pain-gain share arrangement, where the benefits of an underspend are shared, and the pain of an overspend is shared.

We were not in a situation in 2006 and 2007 when this contract was being constructed and the competition run, we were not in a situation in 2007 and 2008 when the contract was let, and we are not in a situation today to let a contract at Sellafield at a parent body level for anything other than a cost-reimbursable nature. When we ran the competition in 2006 and 2007, all four bidders were clear that they would only accept a fully cost-reimbursable contract, because of the nature of the unknowns and the unpredictabilities. You can only transfer risk to the private sector where you have some reasonable expectation that they can bear that risk and manage it.

Q34 Guto Bebb: That is the point that I am trying to get at. Clearly, one of the advantages of having these sorts of contract is the transfer of risk. What you are clearly saying is that there is no possibility of transferring risk in relation to Sellafield-

John Clarke: At the parent body level.

Guto Bebb: -so therefore the added value should be bringing in the expertise and leadership, which, according to the KPMG report, is clearly lacking. I fail to see how we can justify having this contract in place. If the risk transfer does not exist, the question therefore is: do you get the other added value items that you would be looking for? From the KPMG report, you are not getting those added value items through the contract.

John Clarke: Well, we are not getting as much as we would wish to have. There have undoubtedly been and continue to be improvements in capability. The management team at Sellafield has recently changed again. On the one hand-

Q35 Mr Bacon: Can you just remind us how many times in total in the five years?

John Clarke: This is the fourth managing director. The first had to leave very early on for family reasons.

Chair: Four in five years?

John Clarke: But it is really three. The first one was a genuine-

Q36 Mr Bacon: We had this on universal credit-there was a death. Sometimes tragedies happen, and sometimes family things happen, but the fact is there have been four managing directors in five years.

John Clarke: There have, and there has been a substantial refreshing of the entire team and structure in recent months.

Q37 Guto Bebb: That was one of the concerns I had. You said there were four bidders in the original competition. To what extent do you think the market is operating in an acceptable fashion in terms of the competition for these contracts?

John Clarke: There has been a very healthy interest in all the competitions we have run. We have had multinational consortia and international companies bidding. We have, as it happens, four consortia bidding for the Magnox and research reactor sites, and each contains two or three international companies, so there is a healthy market there.

Q38 Guto Bebb: In view of the fact you say it is a healthy market, why was no consideration given to going out to the market again in relation to the renewal? It appears that you are renewing this contract despite the fact there has been no delivery on the added value you are looking for.

John Clarke: We did consider going back to the market. As Mr Lovegrove said, we did consider dispensing with the parent body organisation and operating with Sellafield Ltd as a direct subsidiary of the NDA, which is the default position in the event of a failure of a parent body organisation. One of the key issues is that, no matter how dissatisfied we are with aspects of performance-I have to say that we are not dissatisfied with all aspects of performance; there are some areas of good performance, but there are clearly some areas of disappointing performance-if you are going to make a change, you have to have confidence that the change you make is going to bring about a greater likelihood of delivering the outcomes you want. Our conclusion at this time is that the best option, which gives the greatest likelihood of delivering the outcomes we want at Sellafield and thereby represents value for money, is to extend this contract into a second term. It was a difficult decision; it was not a slam-dunk decision. By contrast, at the risk of going elsewhere into the estate again-

Q39 Guto Bebb: Just to stick on this point, the question I would ask is this. Looking at the Magnox competition, we are regularly dealing with consortia, and it seems to me that the same names appear in different consortia, depending on the contract being offered. You describe this as a healthy market, but if the Sellafield contract was lost, some of the contractors working in Sellafield might then be part of another consortium. In other words, consortia are being put together, but they seem to be made up of individuals companies that turn up time and again in various consortia. Is this really a competitive market, or is it slightly less healthy than it first appears?

John Clarke: A number of firms have bid in several competitions, and a number of firms have specific expertise and experience in working in a nuclear environment, but new players come in all the time. In the Magnox competition, there are firms bidding that have not previously played in any of our competitions.

Q40 Stephen Barclay: On that point, are there any firms you have said you did not want to be part of a consortium, to keep competitive tension?

John Clarke: No, we have not interfered with the market in that way. We carry out a pre-qualification exercise to make sure that firms are fit and proper and capable of bidding. Thereafter, we leave it to the market to decide how firms come together in consortia to bid for our competition.

Q41 Stephen Barclay: So you just leave it if they want to divvy up the cake among themselves to reduce competition moving forward?

John Clarke: We have seen no evidence of a reduction in competition-quite the opposite. We originally had five bidders for Magnox and RSRL, but one dropped out for a variety of reasons, so we have four very keen bidders, some of whom have played before in our competitions, and some of whom have not played before in our competitions.

Q42 Guto Bebb: Just to finish on this point, obviously, the decision was made to renew for five years; I think I am right in saying that you could have renewed for two years, but the minutes that appeared in the inbox this morning imply that it was decided to go for the five-year period because of the comparatively low cost of breaking the contract, which is about £430,000. Given the value of the contract, the cost to yourselves of breaking it is very low. Why is the consortium so comfortable with such a low break cost?

John Clarke: That was the figure negotiated in 2008, when the contract was let.

Q43 Guto Bebb: What is the value of the contract for the consortia?

John Clarke: In past years, they have made £50 million in fees. For the year just completed, it is likely to be rather less than that.

Q44 Guto Bebb: The point I am getting at is that £430,000 seems a remarkably low figure for breaking such a high-value contract. Was the consortium happy to accept that figure because they were confident that the competition does not exist out there?

John Clarke: We negotiated quite a high penalty for breaking the contract in the first couple of years, because significant bid costs were incurred; then it drops off. We were keen to ensure that we had the option to do other things if we needed to. The termination for convenience clause is important. We can terminate at any time for any reason. The reason we extended for five years rather than two is that the two years is there to enable us to run a competition to do something different. We have not made the decision at this point that that is what we wish to do. Therefore extending into a five-year contract term was the right thing to do. It gives NMP the opportunity to make improvements, and gives us the opportunity to monitor those improvements and develop alternatives. If at any stage we feel that the path we are pursuing is not the most likely to deliver the outcomes we want then we will change and do something different.

Q45 Guto Bebb: Can you assure the Committee that if you decided to break the contract somebody else-another consortium-would be willing to step in?

John Clarke: In the first instance, if we break the contract it is likely that the NDA would have to act as the parent for a period of time-that is how the contract is configured-but I would have high expectations that we would be able to run a successful competition for Sellafield.

Q46 Austin Mitchell: Which of the minimum performance standards has NMP met?

John Clarke: At the moment, we are predicting which will be met. The minimum performance standards all require work to have been done by the end of next March-the end of the first five-year term. We currently predict that the minimum performance standard on efficiency will be almost met-the data provided to the NAO show it is possibly a few million pounds short on efficiency. We are confident that a number of them will be met. One or two-people plans and supply chain plans-are qualitative measures, which have a degree of subjectivity to them, so there is some work to be done around that. But by and large the majority of the minimum performance standards will be met. The important thing-

Q47 Austin Mitchell: Which is it failing to meet?

John Clarke: I think the majority of them will be met. The important thing is to understand what the minimum performance standards are for. They place an obligation on the NDA. If the minimum performance standards are all met, the NDA is obliged to roll the contract forward into a second five-year term. If any one of them is not met, the NDA is under no such obligation.

Q48 Chair: So where do the major projects lie in the performance standards?

John Clarke: There is not a specific major project-

Q49 Chair: So the most important thing is not measured and does not become a minimum standard.

John Clarke: A range of activities contributing to it are measured. My point is that there is no negative, in effect. We are obliged to roll the contract forward if all the minimum standards are met; we are not obliged to not roll it forward if any of them are missed. We have the option to terminate at any time.

Q50 Chair: Why aren’t the major projects in there?

John Clarke: When the contract was let we picked a set of-

Q51 Chair: Why didn’t you change it when you renewed the contract to incorporate the most important, most worrying, most expensive feature?

John Clarke: We are currently reviewing what the minimum performance standards for the second term will be, and we are discussing them with NMP.

Q52 Chair: Are we expecting to see something on the major projects?

John Clarke: There will certainly be things about project management and programme management capability. Again, though, the issue is what the role of NMP is and what the role of Sellafield Ltd is. Sellafield Ltd delivers the projects on the ground; the role of NMP is to improve the capability. There are clear measures of the capability improvements required for project, programme and commercial management.

Q53 Chair: One of the things I wondered about over the weekend is why on earth we have an NMP. I don’t see what value it can add. If it doesn’t transfer risk or bring in capability, which it clearly has not done, why have it? If you are telling me that the way in which you will measure its performance for deciding its bonuses-you don’t call them bonuses. What do you call them? Dividends?

John Clarke: Performance fees.

Q54 Chair: Whatever they are. The 53 million quid they got in 2011-12-it may come down in 2012-13, which is welcome. But if you don’t have that measurement in there, I don’t see the point in it. You could do this.

John Clarke: It does bring about capability improvement. It has injected executives into the team, and it has brought in capability. There are several examples of bringing in capability that is delivering performance on the ground. The major programme director is clearly making a difference in terms of the capability that is being brought in. The chief decommissioning officer, who has experience from Three Mile Island and elsewhere in the United States, has unique capabilities that have been brought in and, I believe, is making a real difference.

I agree that we have not seen the level and rate of improvement that we would wish to have seen, but I do not accept that we have seen no capability improvement-far from it.

Q55 Austin Mitchell: But it just looks to me, as a pure layman in these matters, as if the contract with NMP was extended because you’re stuck with them; there was no alternative.

John Clarke: No. We looked-

Q56 Austin Mitchell: Could you have changed it?

John Clarke: Yes, we could. We looked at-

Q57 Austin Mitchell: There was an alternative?

John Clarke: Yes, we looked at other options, including going back to the market; modifying the contract itself; and taking the parent body out of the-

Q58 Austin Mitchell: Did you review the alternatives as to what they could offer?

John Clarke: Yes, we did. We carried out 12 months’ worth of analysis and review of those options, and our conclusion was that, at this time, the option that presents the best likelihood of success going forward is extending into a second five-year contract term.

Q59 Austin Mitchell: Mr Lovegrove, did you demand any assurances or guarantees from the authority when the contract was extended? You presumably agreed to the extension. Did you make any conditions?

Stephen Lovegrove: We did agree to the extension; that’s absolutely right. We endorsed it, as did other parts of Government. The conditions that we had discussed with the NDA were really about improving the project management and the value-for-money outcomes that we are seeing from the management at Sellafield at the moment, so that is, I think, no different from the-

Q60 Chair: Are you going to measure that, Mr Lovegrove? We’re really interested there. The record doesn’t show you’ve achieved anything between you all. How are you going to measure that? What are your measurements in the next year or two, while you’re considering whether to carry it on for five years, that will demonstrate, rather than weaselly words-

Stephen Lovegrove: As I said on a couple of occasions, the difficulty with Sellafield is that it is not particularly susceptible to being able to measure value for money in an orthodox-

Chair: So how are you going to measure it?

Stephen Lovegrove: In an orthodox way by being able to compete on a target-cost basis, so the kind of work that we are looking for the NDA, NMP and Sellafield to do is this additional work on assurance or benchmarking, which will allow us to feel more confident that, to the extent that we can in what are often inherently very complex and unknowable situations, we are getting the best value-for-money result.

Q61 Guto Bebb: How much does NMP earn from this contract in the first period?

John Clarke: About £230 million.

Q62 Guto Bebb: According to KPMG, in terms of capacity there is barely any change, in terms of leadership and management there is not really a significant difference and in terms of governance-failing. If the aim is to add those skills to the contract-to Sellafield-for £230 million they seem to have done very little, yet they have had a contract enhancement.

John Clarke: I do not accept that they have done very little. I accept that they have not done as much as we would have wished them to do.

Q63 Guto Bebb: Well, the report was commissioned by yourself and is pretty hard-hitting, I would argue. We have only just had this report, so maybe the executive summary is sensationalist; I don’t know. But it appears from the executive summary that they have done very little for a huge return. I accept your point that this is a uniquely difficult site, but the point you are making is that we should measure the added value that they can bring. That added value is clearly not there, according to KPMG.

John Clarke: It is not as much as we would wish to have seen. We have set demanding targets-

Q64 Guto Bebb: But then why enhance their contract? Why is it an improved contract moving forward?

John Clarke: Because when we look at the range of options open to us-we considered nine variants of what we could do, but it fell into the main options that we have described previously-our conclusion is that the greatest likelihood of delivering success comes from extending the contract into a second term. We have laid out very clearly our expectations of Sellafield Ltd. We have laid out more clearly our expectations of Nuclear Management Partners, in terms of eight improvement themes, captured under what is called the excellence plan. We have specific measures and targets in place for those, which we will be monitoring. Most of them are not directly financially incentivised.

Q65 Chair: Can you let us have on a sheet of paper what you have changed, because your directors’ meeting says you did not change anything?

John Clarke: We haven’t-

Chair: You have just said, in answer to Guto, that you have created tougher requirements for SL-Sellafield Ltd-and for NMP. What are they? They are not in the contract. You are still developing. What have you actually asked that is tougher? Mr Lovegrove talks about value for money; then he says, "Actually we can’t deliver value for money." For the £230 million-plus, what are you going to change? Can you do it on a sheet of paper?

John Clarke: I can. I would be happy to provide you with a note, but I can run through them quickly now. We have not changed the construct of the contract, other than the change that was referred to in the NAO Report around efficiency, around the legacy ponds and silos area. The contract does not preclude us from setting clear expectations and requirements of NMP.

Q66 Chair: What?

John Clarke: Whether they are incentivised or not, we still set them.

Q67 Chair: What are you expecting?

John Clarke: Eight themes are covered in the excellence plan: organisation and leadership; project and programme management; commercial improvement; site integration; site logistics; nuclear safety and operations-I will have to refer to my notes for the final two. I would be happy to give a note covering what they are. Each of them is encapsulated in great detail in the excellence plan, which has targets and milestones for the coming year, the year after that and the year after that.

Q68 Guto Bebb: On that point, I think it has to be said that regarding these minutes of the board meeting on 25 September, you have admitted that for £230 million, the contract has not performed as well as you expected-far from it, indeed. Yet, when we are analysing the risks and opportunities moving forward, I think you spend four lines talking about the risks that the contract will still not improve. Then you spend 12 lines talking about the PR implications of the announcement, not least the fact that some parliamentary Committees will be less than impressed.

I don’t think that gives me any confidence that the new contract is going to be particularly harsh. You seem to be more concerned about the tone that NMP will strike moving forward than with actually looking at the change in performance.

John Clarke: What you see is a summary paper that finally went to our board. It was my recommendation to the board. The board approved that recommendation and subsequently Government endorsed that recommendation. A whole raft of analysis underpins the final conclusion. I would not read too much into the fact that there were four lines and 12 lines. There are huge amounts of information.

Chair: That your board saw.

John Clarke: For the avoidance of doubt, our board has seen huge amounts of information, I can assure you.

Q69 Meg Hillier: Others have gone on about other providers, but I am interested in the issue around changes of contract, Mr Clarke and, to a degree, Mr Lovegrove, because I think there is an important role for Whitehall to play.

Are there any requirements on transparency with NMP? Because it is public-they are entirely spending the British tax pound and making profits from it. Are there any requirements in the contract on leadership, given that there has been this number of chief execs? It seems extraordinary that £1.8 billion now a year is going on this contact. Yet, in a way it is cocking a snook at the British taxpayer that the chief executive is allowed to change that often. If this was any other part of the business in DECC, Mr Lovegrove, I am sure you wouldn’t be having any of it. So why are you in this case? Have you tried to do anything to solve those two issues?

John Clarke: We have spoken very clearly about the rate of change of senior executives. We feel that the rate of change has been more rapid than we would wish to see.

Q70 Meg Hillier: That is very diplomatically put, if I may say. Do you not feel more strongly than that?

John Clarke: The important thing is to have the right person at the right time, but I do think that generally speaking the rate of change has been higher than we would wish to see. We have had that discussion with NMP, and it forms part of the leadership and organisation theme in the excellence plan.

Q71 Meg Hillier: You say it forms part of this plan. What are they going to do, now that you have expressed your displeasure? And I hope you have done that in stronger terms privately than you did just now.

John Clarke: We have had some very frank discussions privately. There is a raft of issues in how they organise, how they staff the positions, and how they make sure they appropriately use what we call reachback. That is bringing in expertise from the parent companies to come in for a defined period of time, either to carry out a short-term task that takes only a short period, or come in to develop the in-house capability. I think over the first period of the contract we have seen examples of reachback people coming in and being used to fill substantive posts. That is not the optimum way to do it, so we have made changes in that area.

On your point about transparency of spending the taxpayer’s pound, in the second term, we will be moving away from direct reimbursement of the executive pay of NMP. Instead, we will be using a benchmark level of payment for an executive team. We have done benchmarking and, interestingly, it shows that we pay at about the median rate for executives of this sort of scale, but we will pay a benchmark rate, not actual salaries-

Q72 Meg Hillier: That is interesting. Who are you benchmarking against?

John Clarke: We used an independent, Aon Hewitt, and they have benchmarked against 70 companies in the UK and internationally, in the public and the private sectors.

Q73 Meg Hillier: Doing?

John Clarke: Doing a whole range-energy infrastructure, major projects, chemical plants and nuclear, where appropriate-of what they believe, and it is their business, to be the best comparators for the nature of the work.

Q74 Meg Hillier: Have you had any reaction from NMP to that approach? Does this mean that you are going to have another change in chief operating or chief executive officers, if they are going to see their pay decrease?

John Clarke: I do not think that we will see pay decrease-what we are saying is that we are paying, currently, at about median rates as determined by benchmarking. We are happy to pay at median rates-we want good people. We do not want to pay over the odds, but we certainly do not want to pay under the odds, because we want to get the right people there. So, again, we have had a very robust discussion with NMP, and I am sure that we will land on an appropriate level of remuneration.

Q75 Meg Hillier: In those robust discussions, the stick that you have is that you can take the contract away in future, although you have not done so now. Is that a real stick? It seems to me that you have these high-level nuclear executives who come and spend a couple of years in the pleasant area of West Cumbria, before going away again, and meanwhile they earn big bucks and add to their CV. We have seen this in other bits of the civil service: people come into the public sector, boost their CV and then disappear, but leave the taxpayer-in your case, the Nuclear Decommissioning Authority-in debt and holding the problems at the end. How are you really going to stop that happening?

John Clarke: From an individual point of view, there will undoubtedly be movement of people, and I am sure that to some extent people will enhance their CV as they move around. From the corporation’s point of view-URS, Amec and Areva-not losing this contract is a big incentive. We have made it very clear that this was a difficult and close-run decision; we very seriously considered alternatives to continuing with this contract, and they know that. Equally, they know that we have a 12-month termination clause. We have expressed that in no uncertain terms. My chairman has spoken to the chief executive of URS, the lead in the consortium, and Mr Lovegrove met him-

Stephen Lovegrove: Last week.

John Clarke: Last week. My chairman and I are meeting the chief executives of the three parent body organisations at the end of this month, to make sure that, from the top of the organisations down, our areas of dissatisfaction-

Q76 Chair: Why did you not meet them two or three years ago and express that?

John Clarke: We have-we’ve met them periodically.

Q77 Chair: Then why have they not improved?

John Clarke: They have improved in a number of areas, but they have not improved at the rate we would wish to see.

Q78 Chair: Did you feel under any pressure from the Department to continue the contract?

John Clarke: No.

Chair: It was your decision?

John Clarke: I made the recommendation to the board.

Chair: It was your decision-you were not pressurised in any way by the Department to continue the contract?

John Clarke: No.

Q79 Chair: You are telling me that absolutely and categorically-it is just that I have heard completely otherwise outside. So absolutely and categorically?

John Clarke: The Department, Shareholder Executive, the Treasury and others have all, of course, inputted, but at the end of the day this was my recommendation, that at this time the right thing to do was to extend the contract.

Q80 Chair: Would you have preferred to go down another route?

John Clarke: No, at this time-

Q81 Chair: When does "this time" finish?

John Clarke: What I would expect to see now is that we will put everything we can behind making this a success. We will get behind the managing director of Sellafield Ltd and behind NMP-

Q82 Chair: How long will you give them?

John Clarke: We will drive to get the best performance we can-

Chair: How long will you give them to improve performance?

John Clarke: There are two things that we have to do: we have to monitor performance against-

Q83 Chair: Sorry. How long are you going to give them? They have had four years-since ’08, so getting on for five years actually.

John Clarke: They will have had five years.

Q84 Chair: Okay, five years-you say that they have improved a bit, but I think that KPMG says that the situation is pretty abysmal. How long are you now going to give them, assuming that you felt that this time it was the right thing? How long are you going to give them until you actually say, "Enough is enough", unless they really improve?

John Clarke: I am not sure that I have a fixed time scale. What I am saying is that we will continually monitor performance and continually review the options-

Q85 Chair: You have not told them or given them a time-I would give them a time scale. Why have you not given them a time scale?

John Clarke: Because the right thing to do is to lay out the expectations that we have of them-to make sure that there are clear milestones along the way.

Chair: You had those expectations five years ago-and four, three and two years ago.

Q86 Mr Bacon: Did you wait until you had spent £230 million before you decided it was a good idea to tell them clearly what your expectations were?

John Clarke: We have had expectations of them, and many, although not all, of them have been delivered. We are now reviewing those expectations to ensure that there is absolute clarity. I think that all of us have learned, over this first-

Q87 Chair: Was it unclear three years ago, two years ago or one year ago? Four years ago?

John Clarke: At the risk of going back five years, when this was first set up, there was a real sensitivity, particularly with the regulators, to protect the sanctity of the licensed company to make decisions. In other words, there were concerns about the potential for interference with the operation of a licensed company by the parent, the NMP, and ourselves, the NDA. There was a concern that we should both step back a little. Over the past five years, we have learned how that balance sits, and we can respect the essential requirements of the nuclear site licence and the Nuclear Installations Act, which underpins that. At the same time, we can bring appropriate direction and appropriate assistance and guidance to the licensed company.

Q88 Mr Bacon: Can I be clear? You said that you were sensitive and stepping back. Were you saying that the NMP was sensitive and was stepping back?

John Clarke: Yes, indeed.

Mr Bacon: Hence the hands-off approach.

John Clarke: Yes, very much so. In the early days, they were wary of intruding into the-

Q89 Mr Bacon: That begs the question, as the Chair said earlier, why have them in the first place? There is you, the NDA, and the company. Why have this extra layer with the NMP, which will supposedly inject leadership, expertise and all the rest, if they too will be hands-off? What is the point?

John Clarke: They injected leadership and expertise by placing-

Mr Bacon: No, they didn’t. That is the whole point.

John Clarke: They did. It may not have met everyone’s expectations, but they did put in-

Q90 Mr Bacon: "SL does not appear to have benefitted from the injection of strong leadership". That is what the KPMG report said.

John Clarke: But a leadership team has been put in place. They were seconded into Sellafield Ltd. Under that arrangement, they make decisions in the best interests of Sellafield Ltd, as required by the site licence-

Q91 Mr Bacon: "There was no clear evidence of leadership translating into improved performance." That is what the report says.

John Clarke: It has not been all we would wish it to have been.

Q92 Chair: Can I just ask why you commissioned this KPMG report?

John Clarke: Because we wanted an independent view of performance across the piece to help inform our decision on how to go forward.

Q93 Chair: How much did it cost you?

John Clarke: I do not have that information.

Q94 Chair: Perhaps you will let us know. Why did you choose to ignore what I think was a pretty strong report, which would have steered you in a different direction?

John Clarke: I do not believe we have ignored it. We did not ask KPMG to direct or advise us on what the recommendation would be, and they have not directed or advised us. We have taken the decision.

Q95 Chair: You had it to inform you, but you ignored it.

John Clarke: No, we haven’t ignored it. Absolutely not. We have taken it very seriously indeed.

Q96 Stephen Barclay: Would you say it wasn’t damning enough? In other words, it has informed you, but it was not damning enough to change your mind.

John Clarke: I am not sure that I would use those words. It clearly identifies areas that have not met our satisfaction, and we have been open about those areas. To make a change, you have to have confidence that the change you will make has a greater likelihood of bringing about the benefits you want. At this stage, my belief, my recommendation to the board and the board’s decision, which is endorsed by the Government, is that extending the contract into a second term represents the greatest likelihood of achieving the outcomes that we want.

Q97 Meg Hillier: It seems that the report was used as a tool by you to show that it was not only you who had concerns, but that there were ample other concerns, and so to up the performance.

John Clarke: I am not sure that it was done deliberately for that purpose, but it has had that impact.

Q98 Meg Hillier: So there was some possible benefit to whatever money it cost, although we will wait and see.

Can I just return to the point about transparency? In particular, this question goes to Mr Lovegrove, who, as permanent secretary of the Department, has a protected budget because of this challenge. What do you expect to see in terms of openness? Is the SMP FOI-able? Is it subject to the Freedom of Information Act?

Stephen Lovegrove: The NMP.

Meg Hillier: Sorry, the NMP.

Stephen Lovegrove: The NMP is not directly subject to it.

Q99 Meg Hillier: Not directly-that is pertinent to my point. How do we know- how do you know on our behalf, if we cannot know-how public money is being spent by this body? Every single pound it spends and every single pound of profit is from the taxpayer.

Stephen Lovegrove: Accountability is extremely important. Clearly, the NDA’s reporting accounts are very full. Repeated recommendations from yourselves, the NAO and the MPA are to make the accountability, visibility and transparency of what we are doing-and what John and his colleagues are doing up at Sellafield and elsewhere-greater. We are working on that at the moment, particularly around some of the projects.

Q100 Meg Hillier: I can FOI anything I want from DECC or the NDA, but it is about NMP in particular: there is a budget amount in the NDA’s accounts that will tell us what is being spent, but how do we know and how can we be sure about taxpayers’ money? We have other bodies in front of us that spend only taxpayers’ money and make their profits only out of British taxpayers’ money, and we are on a bit of a mission as a Committee to try to make sure that better light is shone on that. Are you doing anything in particular? You have a contract that you are looking to renew, possibly. Is that something that you could push with NMP, to try to get them to be more open about how they are spending our money?

Stephen Lovegrove: There is obviously a balance, particularly when you have a private company-both Sellafield and NMP are private companies-in observing and respecting confidential information in a commercial context.

Chair: Public money, Mr Lovegrove.

Meg Hillier: It is all public money.

Stephen Lovegrove: But I very much hear the point and very much understand the point about public money. Our first point of call is the NDA board, which obviously has fiduciary responsibilities and public responsibilities to spend the money wisely and sensibly. That is the first point that we would go to, but, as I say, we take the transparency point very much on board, and we take the accountability point very much on board, and we are looking particularly at the recommendations of the MPA as to how we can improve matters on that front.

Q101 Meg Hillier: Do you have the tools or levers you need to make NMP do this through the contract? Can you, when you renew it-if you do renew it-or when you have another contractor come in, insist on transparency clauses? It seems to me that you can if you want to. If you can, why aren’t you, and if you can’t, what levers do you need to do that?

John Clarke: I think there is great transparency about the money that is being spent by Sellafield Ltd. Although it is a private company, it operates entirely with public money. We make clear where that money has gone, and we are very happy to expose-

Q102 Meg Hillier: You have the layer that is between you and them, with NMP.

John Clarke: We do, but the only aspect that is not directly declared is that spent by NMP themselves, which is effectively the fee money. Everything else is spent by Sellafield Ltd, and therefore-

Q103 Meg Hillier: What percentage is that of the total, roughly?

John Clarke: The entire budget that we give to Sellafield Ltd, of almost £1.7 billion per year, is spent by Sellafield Ltd. The only money spent directly by NMP is their own money, effectively-money that they have earned from fees-and what they do with that is their business. They are transparent about some of it in terms of the money they spend in the West Cumbrian community-about £4.5 million per year.

Q104 Meg Hillier: That brings me to the West Cumbrian community. If you recall, when we were up at Sellafield, I was keen to hear how money is spent in the supply chain. I have visited and met businesses and trade unions in the wider West Cumbrian community in the past. We know that 8.5% of the supply chain money is going on the SME supply chain locally, compared with the target of 20%. There is a big shortfall there. Where does the buck stop with that-is that you or NMP? And what is being done to improve that? It is shocking: less than half of what should be spent locally is being spent locally.

John Clarke: It is low. The target of 20% was set only earlier this year. There was no target around-

Meg Hillier: It is a very welcome target.

John Clarke: Indeed, and one that we absolutely support, but at the time the contract was let, there was no target for that and the contract requires no obligations on that. That said, all of our licensed companies, including Sellafield Ltd have accepted the 20% target by 2015-

Q105 Chair: It is one of the criticisms in the KPMG report. I am trying to find the reference. One of the criticisms is that they had not a clue about the target; they did not know what they were doing on trying to use local labour. I can’t find it, but you must know it better than I do. As I was going through it, it said that they were not taking seriously the demand to do it.

Meg Hillier: They certainly weren’t.

John Clarke: We know that of the approximately £1 billion of the £1.7 billion spent at Sellafield that is spent in the supply chain, approximately 30% is spent in the Cumbrian supply chain. Analysis has been done independently that will verify that. Sellafield Ltd did not have a specific measure of how much goes to SMEs. As I say, the contract did not specify that. Once the 20% target had been agreed through the Cabinet Office, and once we had passed that target through to the licensed companies, the first thing that the licensed companies did was to measure the proportion that is being spent with SMEs.

The second thing is that they have all committed to meeting the 20% target by 2015. We have established a national SME forum and a set of regional SME forums. As it happens, we have a supply chain conference next week that the Minister is attending and opening, and she is actually chairing the national SME forum as well. The Department and ourselves have taken this very seriously. I must say that the licensed companies and the supply chain-in particular the tier 2 supply chain, because most of Sellafield’s money is directly spent with the big tier 2s, and it is from that that you get the flow into the SMEs-have absolutely signed up to it. I met the chief executives and finance directors of many of the tier 2s some months ago and I am seeing them again in January to reinforce the importance of this.

Q106 Meg Hillier: This is good news if it happens, so I have a couple of questions-

Chair: But it is not happening, Meg.

Meg Hillier: Chair, let me finish. What would success look like? Having conferences is all very well, but what does success look like if what you have laid out is going to achieve what you want to see?

John Clarke: In the first instance, it would be the achievement of 20%-£200 million in round numbers-being spent with SMEs. Beyond that, Sellafield Ltd is working hard, with our assistance, to ensure that we provide the maximum opportunity for the local supply chain to benefit from the work at Sellafield. We clearly have to comply with public contracting regulations, but within those limits we have to ensure that the local supply chain is well equipped to compete and to deliver value.

Q107 Meg Hillier: That is great. So they can take the crumbs from the Sellafield table, which is a lot when you are spending £1.7 billion a year.

John Clarke: £300 million has already been spent in Cumbria. That is more than crumbs.

Q108 Meg Hillier: It is. The supply chain can take up that business, but what about growing new business and new job opportunities? As someone who represents an inner-London constituency that received a lot of investment from the Olympics, it strikes me that the amount of money that goes into Sellafield could fund regeneration projects, such as new rail lines and all sorts of things, up and down the country. We have this task at Sellafield, but we should be seeing a spin-off from that money that is of much bigger benefit to growing new business.

John Clarke: We should.

Meg Hillier: In all your plans, what focus is there on growing new business? That is probably a question for Mr Lovegrove as well, because it is not just about Sellafield; it is actually about businesses that could create green industries and green or other energy solutions that could be exported around the world.

John Clarke: There are specific plans at Sellafield-Mr Lovegrove can speak about the national situation. We have something called Britain’s Energy Coast, which is a consortium of the public and private sectors looking to achieve low-carbon growth that has had some real successes. We are learning from the Olympic Delivery Authority. The NDA has recruited a senior ex-member of the ODA and Sellafield Ltd has engaged Mace, which was one of the key delivery partners of the ODA, to ensure that we are taking the learning as to how we can best do that. There are a whole stack of examples of where local firms have grown on the back of Sellafield and are now exporting elsewhere. We have West Cumbrian firms operating at Fukushima at the moment on the back of work that they have done at Sellafield and the skills and expertise that they have developed. West Cumbrian firms are operating in Eastern Europe at Chernobyl, for example. There are real examples of where growth has been achieved. Is it sufficient? No, it is not. Do we wish to see more? Yes, we do.

Q109 Meg Hillier: Mr Lovegrove, what are you doing to ensure-

Chair: Can we move on? I have given you a really good go at this.

Meg Hillier: This is an issue that I have been following for some years.

Chair: It is slightly off the point.

Meg Hillier: It is a lot of money.

Stephen Lovegrove: It is something that we take very seriously. It is an area that we need to get right, because we obviously want to ensure that as much of the supply chain activity on new nuclear build occurs within the UK as well. The nuclear industry strategy is at the heart of this.

Q110 Guto Bebb: I have several questions on that specific issue, but I would first like clarification on something. Is the 20% target included in the renewed contract?

John Clarke: We have not placed it in yet, but we will consider it.

Q111 Guto Bebb: If the contract has been renewed, when would that be possible? It is a key point from a parochial, North Wales point of view with the decommissioning of Trawsfynydd and the new building, so 20% would obviously be a great target. However, if that is not in the contract, you can have a lot of warm words, but that does not necessarily mean that it would be delivering.

John Clarke: It doesn’t, but even if it is not in the contract, we have made clear that a number of the activities that I outlined before are not explicitly in the contract but are very clear requirements. On your point about North Wales, typically about 17% of the Magnox spend is already with SMEs, so they are starting from a higher base point.

Q112 Stephen Barclay: I may have missed this in your earlier answer to Guto, Mr Lovegrove, but can you clarify the date at which you were first aware of the KPMG report?

Stephen Lovegrove: I was aware of the KPMG report-I would have to go back to be absolutely clear-around late August or early September, I think.

Stephen Barclay: Late August or early September.

Stephen Lovegrove: Probably, yes.

Q113 Stephen Barclay: It deals with 60% of 60% of your budget.

Stephen Lovegrove: That is correct, yes.

Q114 Stephen Barclay: So it is quite an important issue for you.

Stephen Lovegrove: It is an important issue for me, yes.

Q115 Stephen Barclay: But again, like Mr Clarke, you did not think it was relevant until today’s hearing.

Stephen Lovegrove: I’m afraid that there was no intention of keeping that report from today’s hearing; we assumed that the-

Q116 Stephen Barclay: There never is, whether on universal credit, HS2 or any of the others. I am just saying that from your point of view, you did not think it was relevant to the NAO.

Stephen Lovegrove: I will confess that the question did not arise to me. The KPMG report had not been first and foremost in my mind for a while. I was really thinking about the NAO’s work on the assurance of the reported savings at Sellafield as a focus.

Q117 Stephen Barclay: It is not a report you read as part of your preparation for today.

Stephen Lovegrove: It is not a report that I reread in preparation for today, that is right.

Q118 Stephen Barclay: We have heard quite a bit about the serious consideration ahead of renewing the contract. Although I fully accept that Sellafield as a whole is unique, many of the elements of the work it undertakes are not. Could you talk us through the reports on international benchmarking that you have undertaken?

Stephen Lovegrove: I might pass over to John, if that is all right.

John Clarke: There are many aspects of the site where it is possible to draw direct analogies with elsewhere. We have spoken at great length with the United States Department of Energy, which conducts nuclear decommissioning, largely from the weapons programme. There are some considerable differences, but there are things you can learn from that. We have also looked within the UK at other areas engaged with major public sector work that engages the private sector. We have looked at the MOD, for example. We are looking at some of the major infrastructure issues around Crossrail and the like. We have spoken at length with the Major Projects Authority-indeed, we play a major part in its reviews of other Government projects. We get two things from that-

Q119 Stephen Barclay: With respect, and correct me by all means, but we have a list of major projects in the annexe to the brief-which of those has the Major Projects Authority looked at from the point of view of benchmarking?

John Clarke: When I was talking about benchmarking, I meant the approach to contracting with the private sector.

Q120 Stephen Barclay: Could we go back, please? I am particularly interested in the international benchmarking on the specific types of projects that you are undertaking.

John Clarke: The MPA looked at three as a result of our previous hearing before your Committee. We invited the MPA in to look at our projects and programmes and our means of managing them. In doing that, they looked at three projects: BEP, MSSS retrievals and Evaporator D.

Chair: Can you say those again?

John Clarke: BEP-

Chair: Which is which one on our list?

Stephen Lovegrove: It is the box encapsulation plant.

Chair: Okay, I have found it. Go on.

John Clarke: The box encapsulation plant; and what was the combined import-export facility is now the direct import facility.

Q121 Stephen Barclay: And which countries did they compare with?

John Clarke: The MPA looked specifically at our approach.

Q122 Stephen Barclay: Sorry, Mr Clarke, I have asked twice already. I am really interested in international benchmarking. Can you talk me through the international benchmarking?

John Clarke: We have looked at how the US DoE operates and, where we can, looked to get benchmarks on performance. For things like-

Q123 Stephen Barclay: Which of these projects have you benchmarked with the US?

John Clarke: We have not directly benchmarked these projects because they do not lend themselves to direct comparators. They lend themselves to a general approach.

Q124 Stephen Barclay: Do any of these major projects lend themselves to international comparators?

John Clarke: EPS3 lends itself to comparators. Interestingly, that is one where we let a fixed-priced contract to the market. As you will see from that, the cost has been essentially held.

Q125 Stephen Barclay: Which country did we compare with them on that?

John Clarke: We did not compare internationally on that. We had a comparator from within the UK.

Q126 Stephen Barclay: Are there any of these major projects that you have compared internationally?

John Clarke: Of the 14, directly, no. They do not have direct international comparators.

Stephen Barclay: Not one of them?

John Clarke: Not of those, no. You can compare elements of them, which we have done. I have done that particularly with the United States Department of Energy.

Q127 Stephen Barclay: Okay. Could you explain this? If we take, as an example, the Magnox swarf storage silos, the design gate was passed in March 2007 with an estimated cost of £243 million. Five years later, that had increased by £144 million to £387 million. One further year later, it had jumped a further £342 million, which is a massive increase in a year. Could you talk us through that, please?

John Clarke: The Magnox swarf storage silo is a building that dates back to the 1950s. It has a whole range of highly radioactive miscellaneous nuclear waste tipped into it through a hole in the top of 21 compartments. It was not designed for the waste to be retrieved from it at all. What has been going on over many years is the design of extremely large machines to sit on top of the silo, which is not designed to take such weight on top of it, and dig down into the silo, grab waste from it and bring it out to process it. What we are learning as we go on is the extent of the complexity of that, particularly given the less than perfectly characterised waste inventory there and the concern to make sure that safety is maintained all the time-operating in an inert environment, for example.

Q128 Stephen Barclay: That explains, possibly, why it has gone up more than 50% and why it is seven years later than originally planned. What it does not explain is why, just in the last year alone, the cost has almost doubled. Could you talk us through the last 12 months? What is it that we did not know in the first five years, when it increased by £144 million, but then has suddenly become known in the last 12 months?

John Clarke: We have seen issues with the safety analysis of dealing with the pyrophoricity of this material-the likelihood of it spontaneously combusting in air. The nature of the material is such that, in air, it can spontaneously combust. The understanding of that has been improved considerably, which has led to extensive modifications and changes to the design of the plant required to deal with it. There have also been issues with the supplier of this kit-there is a single supplier that has been in existence for a long period of time. They have had difficulties with the manufacture of that, and that has resulted in a significant cost increase as well. Because projects are taking longer to resolve some of these problems, the annual ongoing cost of maintaining the site until they are ready to retrieve has been over a longer period of time.

Q129 Stephen Barclay: But it is not just about major projects, is it, Mr Clarke? If we turn, for example, to the pile fuel cladding silo-and I do fully accept that these must be incredibly complex projects to deal with-at the project initiation date, 2005, the range was from £150 million to an absolute maximum of £495 million; and yet in the last year alone, the estimated cost has gone from £341 million to £750 million. That is a £409 million increase in one year-more than double-yet the estimated delivery time is not until January 2023, so there is significant risk of further escalation. Again, why, in the last year alone, has that increased so significantly?

John Clarke: On this silo, we have been building very complex civil engineering structures over existing highly active facilities. In parallel with that, the teams have been designing the equipment to sit on that civil structure to remove waste.

The starting point with all of these is that we operate in accordance with standard engineering design codes and practices-

Stephen Barclay: But this has been running since 2005.

John Clarke: It has, but-

Stephen Barclay: I am talking about the last year. Something significantly changed in the last year compared to 2005.

John Clarke: Absolutely, and what has happened is that, as the design has progressed, we have identified that the complexity of the equipment, in order to meet standard codes, is such that there is a real risk that this equipment may not function at anything like the rate we want it to operate at.

So what is happening now is as you take a step, you do some further review and you have to step back. What we are finding on the pile fuel cladding silo is that we-Sellafield Ltd-are actually now looking at a so-called plan B, a somewhat simplified approach that removes some of the interlocks and some of the features that you would normally have associated with discretionary plant, and saying, "This is non-discretionary plant. We would apply some slightly different standards."

We are pushing at all times the boundaries of safety case here, working with regulators, working with ourselves, working with SL, to try to make sure that we have the optimum solution, but to some extent these are-I was going to say, "Suck it and see". That is probably not quite accurate, but we are very much at the boundaries of what is possible here, and as you run up against something in detailed design and find that it is not going to operate as you thought it would, then you have to go through extensive review and revalidation.

I think there is the prospect of a simpler, better solution emerging-

Q130 Stephen Barclay: I was just going to come on to that, but before doing so, these sudden jumps in cost were booked or listed as September 2013, so presumably you were not fully aware of these increases as of March 2013. Would that be fair?

John Clarke: Yes, that is fair.

Q131 Stephen Barclay: Right. So when your provisions increased from £36.6 billion to £42.7 billion, presumably that was not including these massive increases.

John Clarke: That is correct.

Q132 Stephen Barclay: So what is your current revised estimate?

John Clarke: We are revising that at the moment. There will be another estimate next year. We have not yet completed the review of all the projects for the update of the performance plan. That will be completed at the end of the financial year, and we will be in a better position then to assess the impact on the nuclear provision-

Q133 Stephen Barclay: Sure, but in terms of the working estimate, do you have a figure?

John Clarke: I don’t have a precise figure, but I have-

Chair: You must have a ballpark figure.

John Clarke: I think it will go up by possibly a handful of billions. I know that sounds a bit casual, but I wouldn’t want to be more specific at this point, when we have not concluded the detailed work.

Q134 Stephen Barclay: It just seems we have got a contract where we pay £230 million in fees; we haven’t transferred the risk; the KPMG report shows we haven’t got the expertise; and we are writing off more and more billions. It is not really value for money.

John Clarke: Whatever option we took in terms of the contract decision, we would still be faced with the inherent complexity and uncertainties of these projects. So the cost of these projects is going to be what the cost of these projects is, to some extent.

Q135 Stephen Barclay: Mr Clarke, no one is disputing the complexity of the projects and the challenge of that, but some of these projects are projects that have been running since 2005 and these cost increases are massively going up in the past 12 months-in fact, being booked as of September-at the same time as you are rolling the contract over for a further five years, and so they could go on increasing. That is the issue.

John Clarke: I take that, but I think we have to differentiate those costs that have gone up as a result of the nature of the work and those costs that have gone up as a result of performance. When we spoke at the Committee last November, we spoke specifically around evaporator D and I acknowledged there that evaporator D was primarily a performance issue, and as a result of that Nuclear Management Partners have had a significant reduction in their fee. If you look at one of the other projects that was looked at by the NAO in their Report-the separation area ventilation project-you will see that there are two elements drawn out in the NAO Report.

Stephen Barclay: We will just focus on today’s report; that is a different Report.

John Clarke: Well, this was the NAO Report for this Committee, the one published last week. It states there are two aspects to why the cost of the separation area ventilation went up. One is down to ground conditions. There is a whole raft of equipment that needs to be installed, and as you get into looking at the ground conditions you find that they are not as they are expected to be. We reviewed that, and because that is about the nature of the site, we have given relief to Nuclear Management Partners; they will not be penalised for that. It would be wholly inappropriate to penalise them for something that exists inherently on the site. By contrast, where the increase in cost has been down to performance, while we have had to pay that, because it is a cost reimbursement contract, they have suffered a negative efficiency and as a consequence they will take a hit on their fee for that. So I think you will find-I think the NAO concurred-that we take appropriate action to differentiate between inherent conditions and performance. Where it is inherent conditions, it is what we get. Where it is performance, we take appropriate action in accordance with the contract.

Q136 Stephen Barclay: What builds on that, if we are going to deliver the savings, is using technical innovation. What is the current budget for technical innovation? Is there anything specifically set aside for that, or is it just merged in the wider budget?

John Clarke: No. Sellafield Ltd has a budget. I do not know exactly what that budget is, but the NDA itself has an extensive technology budget, which also leverages other national and international moneys available for that. We optimise that across the estate to make sure that we are doing appropriate research that will be of benefit. We work with the National Nuclear Laboratory; we work with the Nuclear Advanced Manufacturing Research Centre; we work with the skills academies; we work with the university of Manchester Dalton facility. There is a range of activities looking at things that would directly benefit the mission of the NDA.

Q137 Stephen Barclay: Is that going up or staying the same? What is happening to that?

John Clarke: The NDA budget itself-

Stephen Barclay: No-on technical innovation.

John Clarke: Yes, the NDA technical innovation budget has remained stable, despite considerable pressures during the last spending round.

Q138 Chair: Can I switch tack a little bit? Is Sellafield an asset or a liability?

Stephen Lovegrove: It is a liability.

Chair: In your accounting it comes as a liability.

Stephen Lovegrove: In the national account it is a liability, yes.

Q139 Chair: Right. Let me just take two other areas. We have a report, which was given to us, about the commercial operations. Even if we leave aside the really difficult projects that Steve has been discussing, let’s look at the commercial operations. This is a report from no doubt not your favourite people: Cumbrians Opposed to a Radioactive Environment. They looked at three: the THORP reprocessing, Magnox, and the waste vitrification canisters. What is again noticeable is that hardly any of them ever meet the targets.

At THORP: in 2012-13, the target was 408 tonnes for reprocessing. That would be something they would make money out of. They actually got 228. I accept the year before they had gone over target. At Magnox, they have never met their target since 2004 and they are at about half of their target of 695, at 383. If you look at the waste vitrification canisters, they have hardly ever met their target. Out of 197 tonnes they are producing 148. I assume that is tonnes, is it: it won’t be, for the canisters, will it?

John Clarke: That is containers.

Chair: Leaving aside the really complex things that we looked at when we came up and visited you, this is stuff that would minimise your liability if they simply performed to target.

John Clarke: These operations are very different, as you say, from the major projects; but they are not simple operations, and, again, they are fairly unique in the world. There are really only the French who carry out-

Q140 Chair: They are your targets.

John Clarke: They absolutely are our targets. What I am saying is these are not operations done by dozens of people. They are done by a very small community of people. Operational performance has basically followed-I think it is shown in the KPMG report; it is something of a sore tooth-we tend to have quite a good year, followed by quite a bad year. What it reflects is the inherent fragility of those plants. If we take the Magnox-

Q141 Chair: What is going well? We dealt with the very difficult ones. I hear that, and I am sure you have got good explanations, but on THORP, the table is for 2000 to 2013: it met its target five times. Magnox in the same period, it met it twice; and waste vitrification, it was three times. I accept it is difficult; I accept it is unique, but these reprocessing capabilities have been going for well over 10 years now, so you would have thought that somehow they would have got closer to meeting their targets a bit more often than they do.

John Clarke: It is considerably longer than 10 years; in the case of Magnox, it is 49 years. That is one of the issues. We have old and fragile plant.

We set stretching and demanding targets and we incentivise NMP to achieve those targets. When they do not, they do not receive the level of fee. A way of hitting targets all the time is to set lower targets, but I don’t think you are suggesting that.

Q142 Chair: I accept that, but this is quite a lot out: 408 to 228, 695 to 383 and the other one, which is the closest, is 197 to 148.

John Clarke: My statement in last year’s annual report and accounts referred to disappointing performance in the operating plants. The previous year was a good year. I do not have the figures-

Q143 Chair: No. It was a better year on THORP, but it was not a good year on the two, although they were closer.

John Clarke: From memory, it was 602 tonnes of Magnox reprocessing, which is a very good level of performance. We set a very stretching target of 800 tonnes and that was not achieved, but 602 was a good level of performance and we would be happy to get that this year.

Amyas Morse: Going back, but on targets and performance measuring, you were saying that without changing the contract going forward you would be able to set clearer expectations for improved performance. Would it be possible for you to share with us the actual metrics you are likely to use to know whether they have been attained?

John Clarke: Absolutely.

Amyas Morse: Good. Thank you.

John Clarke: I am very happy to do that.

Q144 Austin Mitchell: I just want to give Mr Higson a chance to sing an aria for the Office of Nuclear Development as he has had to remain silent throughout. This is important because of the lessons learned and the effect on future developments. What lessons have been learned when it comes to a contract with Electricité de France and future contracts to be negotiated about the costs of decommissioning and waste disposal? Cumbria council said when we were there that it would accept nuclear waste, but it will not now accept it. Is any account taken of that in Electricité de France’s contract and the costs? On the difficulties of decommissioning, will the French be allowed to sit back and say, "Thank you for the money, which is some compensation for the hundred years’ war, but we’re off now, so over to the Nuclear Decommissioning Authority"? That’s the question.

Mark Higson: I would make three points. Clearly, it is important that we learn from experience. My first point is that there needs to be a clear plan to decommission new-build power stations. That distinguishes us from the past when facilities were built with no clarity about how they would be decommissioned. There needs to be a plan, and it needs to be approved by the Secretary of State before construction of a nuclear power station can start.

Secondly, there needs to be a clear plan to cover the funding of the decommissioning of new build. Again, the plan must be approved by the Secretary of State. It must be based on a prudent assessment of costs, and will be subject to approval only if the risk to the taxpayer of picking up the tab is remote.

Thirdly, there is inherent uncertainty in the costs of waste management and the geological disposal facility, so we have a mechanism for constantly assessing and reassessing those costs. It is a bit like a pension fund where the liabilities and assets building up in a fund are to some degree uncertain. You constantly assess them and to the extent that there is a gap, contributions to the fund may need to be increased. Conversely, if costs have come down, money into the fund may be reduced.

Q145 Austin Mitchell: Is it expected that the costs of dealing with pressure water reactors will be less or greater? Sellafield grew like Topsy, and is higgledy-piggledy where all sorts of things came together. I was impressed by the efforts to deal with it, but depressed by the scale of the problem. Will the advanced heavy water reactors be more difficult to deal with than Sellafield, or is Sellafield a one-off?

Mark Higson: The thing that distinguishes Sellafield is that it is a closed-fuel cycle involving reprocessing. The plans for nuclear new build are quite different. We expect it simply to be a once-through fuel cycle. That means that fuel goes into the reactor, comes out as spent fuel and is stored in ponds at the reactor site for a number of decades. When the geological disposal facility is available, it is encapsulated and put there. You will not get any of the reprocessing difficulties or facilities that we have at Sellafield, many of which relate to past history, including military activities.

Q146 Guto Bebb: I hope my hearing is not letting me down. Have we examined why the ponds and silos have been excluded from the mechanisms for the performance enhancements for the contractor in relation to the efficiency savings available? Can you clarify that?

John Clarke: We decided that the pursuit of efficiencies as the prime incentivisation mechanism was inappropriate for legacy ponds and silos, where our prime concern is the pursuit of schedule-getting the job done as quickly as we can. That does not mean that money is no object, but it does mean that schedule is more important in an overall value for money sense than saving money in the short term. We felt that a modification to the contract in that area was appropriate so that we could explicitly and primarily incentivise schedule ahead of cost. There is a cost incentive for them as well, but it is dominated by schedule in that area. For the rest of the site, it is dominated by cost rather than schedule.

Q147 Guto Bebb: What specifically happened over the past five years to change how you looked at the ponds and silos?

John Clarke: We had seen examples where-I suspect subconsciously-decisions were being taken to focus on saving costs in-year rather than making schedule over the slightly longer term. Our view on balance was that that was driving shorter-term rather than longer-term focus, and that a focus on schedule was likely to give the longer-term focus required for these specific projects.

Q148 Guto Bebb: The Report has raised concerns that the fact that those are now excluded from how the rewards to the contractor are calculated might result in the temptation to load cost on to that specific area of activity. Your own internal auditors are claiming that that is not the case, and clearly you are very aware of the risk. As yet, however, I understand that there has not been any independent assessment of the procedures that you have in place to ensure that costs are not disproportionately loaded on to this particular area of activity.

John Clarke: There is always a risk, if you have two parts of a site operating different systems, but we measure the level of overall efficiency across the whole site. The NAO Report says that by doing that, we avoid the risk of claiming efficiencies and then having costs appear in a different pot. We will certainly be aware of that, and I am sure it is something that the NAO will look at when it does its end-of-year accounts, and no doubt when it comes back to look in future. It is something to be aware of, certainly, but I do not think it is insurmountable at all.

Q149 Guto Bebb: The NAO Report specifically says that there has not been an independent assessment of this. Are there any plans to undertake such an independent assessment? Clearly, it is a concern that you are well aware of, but would an independent assessment help the management of the site?

John Clarke: To some extent, the assessment of efficiencies and the assessment of performance on the site are our job. That is what we do. We are subject to oversight by the Department and the Shareholder Executive on their behalf, and we are subject to oversight by the National Audit Office, but we have not specifically commissioned an independent audit of that.

Q150 Guto Bebb: A local Member has highlighted that there are concerns that having that different approach within the site might be difficult in terms of ensuring a cross-site approach that would work more effectively. What steps have been taken to ensure that the decision to change the way that the ponds and silos are treated does not detrimentally affect the overall management of the site?

John Clarke: I don’t think it really has the potential to cause a problem in that area. I think the prime driver for that-

Q151 Guto Bebb: Just on that, are there any risks whatsoever in the decision you have made? Does it create any risks to have a different approach across the site?

John Clarke: I don’t believe it does. The prime driver for making progress in legacy ponds and silos isn’t the incentivisation driver, but the safety and environmental imperative required by legislation. That sits there for Sellafield Ltd above anything we do by way of incentivisation.

We are trying to ensure that we have alignment behind that. Moving to a schedule-based focus rather than a cost-based focus in this critical area enhances that alignment and therefore gives us a greater likelihood of achieving the outcomes we want.

Q152 Chair: Can I ask you a few more questions, which I think will tidy up the other issues that we’ve got to cover?

We have never covered plutonium with you. Is the plutonium an asset or a liability?

Stephen Lovegrove: I will pass to Mark, if I may, but that is a difficult question to answer conclusively and in the long term, outside final decisions about what we are going to be able to do with the plutonium.

Mark Higson: Our currently preferred option for dealing with the plutonium is to build a MOX plant and use the fuel in new-build power stations in the United Kingdom. The value of the fuel will be less than the cost of building and running a plant on current assumptions. On that basis, it will be a liability.

Chair: Say that again?

Mark Higson: The value of the fuel, we would expect to be less than the cost of operating and building the MOX plant.

Q153 Chair: But you still want to build it?

Mark Higson: Because it is a route for disposing of plutonium and putting it beyond access.

Q154 Chair: My goodness. Just tell us so far, on the MOX plants you have had, how much that has cost us to date? What is the total cost of building and running them-without much success-and now closing and, presumably, having to dismantle them? How much have we spent so far?

Mark Higson: That is clearly a separate question from what we do with the plutonium that we already have.

Chair: I understand that.

Mark Higson: The answer is about £1 billion.

Chair: I think we have spent £1.4 billion so far.

John Clarke: Yes, we did, on a previous MOX plant that had significant problems with it.

Q155 Chair: Which we could not get to operate properly. How much are we spending a year just keeping the stuff safe?

John Clarke: I don’t have that information.

Q156 Chair: I have it down as £80 million. Is that massively out?

John Clarke: I would be happy to confirm that outside the Committee.

Q157 Chair: How much are we paying to look after other countries’ plutonium?

John Clarke: We are paid to look after other countries’ plutonium. The contracts are quite explicit that we are paid for the receipt of spent fuel, its processing, the storage of wastes-uranium and plutonium-and the eventual repatriation of it.

Q158 Chair: Okay. Sugar. We are considering building a new one, although the cost of building one would be more than the benefit of the fuel. Am I right in thinking that Sizewell is the only place that can currently use this MOX fuel?

Mark Higson: We expect MOX fuel to be utilised in new PWRs built on a new plant.

Chair: But it is not being utilised in the EDF one.

Mark Higson: Sorry?

Q159 Chair: You are expecting it to be utilised where?

Mark Higson: In power stations yet to be built. The EPR reactor at Hinkley, for example.

Chair: Oh my goodness. We have spent £1.4 billion so far. We don’t have the power stations that can utilise MOX, but we are still considering building one, although it will cost more than the fuel that we get from it in the power stations that are yet to be built.

Mark Higson: Clearly, it would be unwise to start building a new MOX plant unless we were reasonably satisfied that there was a market for the fuel produced.

Q160 Chair: When are you taking the decision, given that we are paying not just to look after our tonnage, but to look after Japanese and German tonnage?

John Clarke: We are paid to look after foreign material.

Chair: Still paid now?

John Clarke: Correct.

Q161 Chair: When are we taking the decision?

Mark Higson: There will need to be a pause for at least a couple of years. During that period, we will work with the NDA to assess alternative routes, including PRISM reactor and the possible use of CANDU reactors.

Q162 Chair: That is another one going up on your upward curve.

I am almost at an end, although I do not know if other Members want to ask anything else. The only other thing I wanted to ask about-this question is probably to you, Mr Clarke-was this unacceptable practice of NMP charging on this sample of expenses claims. Six hundred and six expenses claims were looked at, and they charged over a quarter of a million pounds that could not be justified, including-I cannot believe this-a £714 bill for a cab to take a cat. [Interruption.] "Where to?" I am being asked.

John Clarke: It was a range of people, including a cat. The point is that the NDA initiated an audit of expenses incurred by the Sellafield executive team, particularly those who were implanted by Nuclear Management Partners. We found that there was substantial and wholesale misallocation of expenses to a Sellafield Ltd account and to a Nuclear Management Partners account. I do not believe that there was anything other than a mistake in that. I do not think it was a deliberate intent. As soon as it was pointed out, the very morning that we discovered it, the managing director and the finance director of Sellafield Ltd were in my office in West Cumbria. They were clearly shocked by what we had found. They took very swift action; they reimbursed the money immediately and they switched their system to make sure that all management expenses are defaulted into an NMP account until such time as it is demonstrated that they are legitimate Sellafield Ltd claims, in which case they are put over. What we saw was that a range of expenses that should have been borne by NMP had inadvertently been-

Q163 Chair: The US Masters golf tournament being one, presumably.

John Clarke: It should have been borne by NMP and has been paid for by NMP. The system was clearly not operating with appropriate governance. It has been improved, and I believe everything has been put right.

Q164 Chair: Are you now keeping a better eye on it?

John Clarke: We will keep a better eye on it. We operate on an audit basis. We are a relatively small organisation of 200 or so people, and there are 17,000 people on the estate. We audit a range of activities, and it was as part of that audit that we found this situation. NMP and Sellafield Ltd rapidly put it right, and we will, of course, keep an eye on it going forward.

Q165 Chair: Okay. Last year when we saw you, we expressed concern about Sellafield Ltd awarding contracts worth £54 million to the constituent companies of NMP. Have you taken any action to control that?

John Clarke: We have behaved exactly as we said we did last year. The contract allows affiliate companies to bid for work at tier 2 at Sellafield. We make sure that all contracts that are let at Sellafield are reviewed at an appropriate level by ourselves, and we are content that contracts have been achieving-

Q166 Chair: So what proportion of contracts are now being executed by the three? NMP, through Sellafield, awards a contract to a constituent company of NMP, which I do not think is on. What is the proportion now? We were at £54 million last year, but what are we at now?

John Clarke: I do not have a number in terms of millions, but I believe that it is about 6% of the contract.

Q167 Chair: It was 6% last year. Has it gone up?

John Clarke: No, I believe it is still about 6%.

Q168 Chair: Can you send us a detailed note on that? I do have concerns, and I think people should choose.

John Clarke: Yes, we can.

Chair: I would also like a detailed note on the KPMG costs.

Q169 Stephen Barclay: On that, just to be clear, Mr Clarke, are you saying that you see no objection and, therefore, regardless of what the note says, nothing will change on that?

John Clarke: When we let the contract, we specifically did not preclude affiliate companies from bidding. Indeed, if you take Areva as an example, Areva have specific expertise that we would wish to be accessible at tier 2. If the very act of having them at tier 1 precludes us from having access to them at tier 2, we suffer from that. We want Areva, as an example-

Q170 Stephen Barclay: Just to be clear, when you renewed, you did not vary the contract to preclude that based on the discussion last year?

John Clarke: We did not.

Q171 Stephen Barclay: So, regardless of what the note says, in essence the practice will continue as per previous years, for the reasons you have set out?

John Clarke: Because we think that that gives us the best outcome. What we do do is make sure that all contracts are let following proper, appropriate and fair competition.

Chair: We will be inviting NMP and Sellafield Ltd to give us further evidence at a hearing we have scheduled for December. We decided too late to have them today, but we expect to see both of them here at an evidence session in December. Thank you for your attendance.

Prepared 10th February 2014