Public Accounts CommitteeWritten evidence from the Nuclear Management Partners
We write to thank you for the opportunity to appear before the Public Accounts Committee and give evidence on Progress at Sellafield on 4th December 2013, and to provide additional information on points of factual accuracy and clarification.
I would like to offer the following information.
The Respective Roles of NDA, Sellafield Ltd and NMP (Q221& Q273)
The Nuclear Decommissioning Authority (NDA) owns the sites, competes the site management contracts, sets strategic requirements, approves plans, allocates funding and incentivises delivery through the contract.
Sellafield Ltd (SL), as the Site Licence Company (SLC), holds and is responsible for the site licence and tactical delivery. It is therefore responsible for safety, all operations and management of the full annual budget provided by NDA (currently in the order of £1.7 billion).
Nuclear Management Partners (NMP) holds a 100% share of the SLC and provides reachback and management expertise to increase the capability of the SLC, driving improved performance and exercising appropriate governance.
The regulators (Office of Nuclear Regulation, Environment Agency etc) hold the SLC to account for compliance with the Site Licence and other Environment, Health and Safety related legislation.
The Management and Operations contract is between NDA and SL. It is this contract that governs the fee payment schedule and milestones.
Under the Parent Body Agreement between NMP and NDA, NMP draws dividend from SL in accordance with fees earned after tax.
Clarification of wording in Response to Q228
In my response to Q228, I referred to “storage conditions that are extraordinarily vulnerable, and in facilities that are well past their designated life”.
I am not suggesting the storage conditions pose an immediate threat to the workforce or the public as long as they are actively managed. However, as noted by the regulator, they do present intolerable risk over time. This is what drives our focus on the safe stewardship and resilience, the rapid retrieval and processing of waste and, ultimately, the decommissioning of these facilities.
Achievements over the first Contract Period (Q228—Q237)
There have of course been a number of very significant achievements at Sellafield under the management of NMP. The following list is a sample of just some of the highlights:
Provided the NDA and Government with a much greater understanding of the true extent of the challenges and risks associated with the site, as detailed in the Sellafield Plan.
Generated substantial efficiency savings (in the region of £650 million).
Achieved the site’s best ever industrial safety performance.
Made the first retrieval in 50 years of spent fuel from a legacy storage pond.
Completed the first returns of High Active Waste to their countries of origin.
Implemented a passive safety system in one of the highest risk legacy facilities.
Completed the first decommissioning of a power producing nuclear reactor.
Safely completed Europe’s largest asbestos removal project.
Invested £22.5 million in socio-economic projects and charitable organisations in West Cumbria.
Doubled the annual intake of apprentices to a record level of 121.
Increased annual expenditure in the local supply chain by approximately £100 million (50%).
Changes of Managing Director (Q239—Q242, Q245, Q247)
As noted by the Committee, Mr Price is our fourth MD in five years, having been appointed in May of this year. However I do not believe that the discussion on 4 December adequately put the reasons behind this in appropriate context..
Our first MD only held the job for around three months, being forced to resign as a direct result of a serious medical condition of a close family member. Our second MD, as stated in the PAC, was forced to retire because of a serious personal medical condition. Whilst we made reference to both on 4 December, I am sure that the Committee will understand why we did not wish to elaborate on their personal circumstances in the full public hearing.
As you would expect, NMP and SL treat the health and wellbeing of our employees very seriously. This should be a high priority for any responsible employer.
These circumstances were unavoidable and unanticipated, but in spite of the exigent circumstances in both cases, we provided overlap and an orderly transition of responsibilities. Also, due to the substantial resources of the parent companies, we immediately assigned leaders of sufficient calibre, with analogous experience and commonality of approach to maintain continuity and momentum.
Our third MD took up the role in February 2011 and remained in post until May 2013. It is important to note, however, that he had been the Deputy MD since the start of the contract in 2008, therefore providing the continuity of leadership that we and the Committee expect.
Award of Sub-contracts to Affiliates (Q244)
I would like to clarify the difference between reachback and sub-contract arrangements.
Reachback is one of the fundamental benefits gained through the Parent Body Organisation (PBO). The arrangements and advantages of reachback were established by the NDA and were included in its Sellafield PBO competition. It is one of the principle means of providing world-class expertise to Sellafield, through the provision of Parent Body employees who bring with them best practices, processes and initiatives to Sellafield. The terms of the PBO contract do not permit NMP or its parent companies to apply any direct profit to the assignment of reachback personnel.
The skills and capabilities offered by reachback are much more targeted, specific and specialist in nature than those addressed through general supply chain contracts. Individuals are carefully selected from their parent organisations to provide specific skills and expertise against well defined site requirements. As stated previously, NMP and the parent companies have no commercial incentive to use reachback in circumstances where supply chain contracts could meet the requirements. Indeed, it could justifiably be argued that there is a disincentive since resources used as reachback would otherwise be deployed on other commercial activities where direct fee earning would apply.
By nature of the early stages of the contract, when NMP was carrying out its initial assessment of the needs of the site, the levels of reachback were of course higher than would be expected as time progressed. As we gained a greater understanding of the true challenges of the site through this process and through real-time issues, predominantly in the major projects area, the need for additional levels of reachback became apparent.
The Committee has, in this and in previous hearings, raised concerns about the level and cost of reachback being deployed at Sellafield. We are sensitive to this and, as Mr Price explained, we are applying governance arrangements and strict time limits for the utilisation of all reachback resources. We have in fact now been able to significantly reduce the numbers of reachback personnel on site.
In the specific case of the response to Q243 and Q244, Mr Price was referring to the reachback provided by one of our parent companies, Areva, on the Vitrification Plant to demonstrate how this resource had recently achieved a significant operational improvement. This was not delivered under a sub-contract arrangement.
[For clarity, the operational targets in the Vitrification Plant have not been met in recent years, however, following the improvements implemented by this reachback resource, we are hopeful of achieving this year’s target.]
With regard to sub-contract trading with affiliates, our contract award process is strictly controlled and audited to ensure a level playing field for the supply chain. SL is legally obliged to conduct its sub-contract competitions in accordance with the Public Contracts Regulations. This regime ensures transparency and equal treatment/opportunity for all bidders.
Underpinning these legal obligations, our procedure for managing conflict of interest also ensures that parent body personnel (including those working inside SL) can exert no influence over procurement decisions. Assurance of the process for awarding contracts is provided by the Commercial Governance Committee, whose role is to ensure that commercial relationships are appropriately controlled and that decision making is fair and transparent.
The Commercial Governance Committee is chaired by a SL senior manager and the internal audit process is delivered by SL personnel.
The 2012–13 Sellafield Ltd Annual Report and Accounts notes that SL traded with URS, Amec and Areva in the ordinary course of business with total purchases during 2013 of £53 million (2012: £54 million). This is a cumulative figure that includes reachback costs, which the Committee noted was £17 million in 2011–12 and £25 million in 2012–13.
Therefore, in 2012–13, SL spent in the order of £29 million on sub-contracts with parent organisations, equivalent to around 3% of the total supply chain spend.
Review of the KPMG Report by NMP and SL (Q250, Q251 & Q256)
For clarity, as Mr Clarke noted at the hearing, neither NMP nor Sellafield Ltd has been provided with an un-redacted version of the KPMG report and Mr Price and I were therefore unaware of some of the details that the Committee raised at the hearing.
NMP and SL’s participation in the KPMG report was limited to the provision of written responses to a relatively small number of questions asked of us, followed by a common teleconference interview with several of our executives for follow-up. NMP and SL were also asked for a check on certain facts, for which we provided a response. Neither NMP nor SL was called upon to comment on KPMG’s methods, conclusions or opinions.
Assessing the True Challenge of Sellafield (Q258)
Due to the nature of the Sellafield competition and the M&O and PBA contracts, NMP was not given the opportunity to carry out full due diligence on the site conditions.
The competition process did not allow for a visit or inspection prior to share transfer on 24 November 2008. We were limited to reviewing documents provided by the NDA. We could request other documents when we were prescient enough to ask for them. Consequently, asset conditions and site performance characteristics could not be appraised until mobilisation to the site was well under way.
Early after arrival we formed a comprehensive review team comprising experts from our parent companies, along with experienced SL employees, to conduct first hand, in-depth reviews and assessments of site conditions. This team identified over 4,700 conditions or gaps in need of attention. We utilised this to shape and form an Integrated Change Programme to address site level issues in a systematic and prioritised way.
Following this initial review and further Peer Reviews associated with our membership of WANO (World Association of Nuclear Operations), we embarked on a three-pronged approach to address immediate, near and long term needs.
However, due to the scale and complexity of the site and the sheer magnitude of the improvements, we are still driving this programme forward and finding further issues that we are tackling on an ongoing basis.
Evaporator D Project (Q260 & Q261)
As I indicated in the hearing, the start of the Evaporator D project pre-dated NMP’s arrival at Sellafield, with major contracts already having been placed before share transfer.
In 2009, the Evaporator D project was sanctioned funding of £397 million by DECC and was to be ready for active commissioning in July 2014. By 2011, however, it was clear that progress on the project was not consistent with the agreed estimate and schedule and in May 2012, the project completed a comprehensive review. This review indicated the sanctioned funds would be breached and concluded that the funding would need to be increased to £641 million (including standard levels of project contingency funding) and the schedule for completion of the project would now be February 2016.
The two fundamental issues that had the main detrimental effects on the project were:
Overly complex seismic design leading to increased material costs and construction complications.
Supply chain quality issues ranging from basic materials not meeting specification to manufacturing flaws.
Additionally, contractor and site reporting was inaccurate and project change tracking and predictive performance methodologies were found to be inadequate for a programme of this complexity. This compelled a complete bottom-up, detailed re-programming of the project.
Consequently, we now have a thorough understanding of the issues that needed correction and we have taken rapid and decisive steps to address them. This has included a newly constituted project delivery directorate, under the leadership of a very senior Director of Major Projects with more than 30 years’ experience in the most complex project management environments.
Consequently, performance on this project has improved over the past year. We have successfully shipped the final 500 Te module from Ellesmere Port to the site by barge. This was the last of 11 modules for the project and their successful safe delivery and installation into the plant represents a significant achievement and reduction of risk for the project. Since the last PAC review, the project has also completed the plant design and bulk procurement activities, with the last major fabrications being delivered to site in December. Again, this represents a significant reduction in risk to the project cost and schedule.
Atrophy of Project Capability (Q263)
BNFL had a strong project management capability, as did the supply chain, through the 1980s and the early 1990s while building and commissioning a wide range of effluent treatment plants and the Thermal Oxide Reprocessing Plant (THORP). While there have been a number of individual projects delivered on the site since then, they have not been of an equivalent level in terms of complexity or intensity. To complicate matters, BNFL sold its project services division prior to share transfer.
We are now rebuilding the engineering and project management capability with contemporary practices and tools and full integration and enhancement of skills in the supply chain.
Minimum Performance Standards (Q284 & Q285)
There are 14 Minimum Performance Categories. NMP has met, or is currently forecasting to meet, all of these by 31 March 2014.
The original minimum performance standard for site-wide savings was £796 million over the initial period of the parent body agreement (from 2009 to 2014) at 2012 prices. On a like for like basis, the current forecast is £652 million.
However, NDA is looking to focus on the incentivisation of progress on the ground rather than cost efficiency in legacy ponds and silos. Therefore, the legacy ponds and silos were removed from the minimum performance standard assessment from April 2012. Removal of legacy ponds and silos from the minimum performance standard reduces target savings to £612 million at 2012 prices (versus the latest forecast of £665 million against the revised basis).
Therefore, the current forecast savings exceed the revised target.
These figures differ from those reported by NAO, because SL and NMP maintain that the legacy ponds and silos were removed from the efficiency target from April 2012, rather than December 2012.
Clarification on Reachback and Secondees (Q320—Q323)
There is a distinction between reachback personnel and secondees and the costs are captured separately.
Reachback personnel are requested by the site management team on a short term basis (generally between three and twenty four months) to mentor and coach SL personnel and help SL implement key improvements and complete projects that will make the company and site more successful in meeting its long term goals and objectives.
[Just a few examples of this include a Magnox throughput improvement plan; reduction in risk to evaporator capacity through lifetime extension of Evaporator B; declassification of radiological controlled areas to allow for more efficient working and implementation of a Performance Evaluation Board, modelled after our own best practices to provide cross cutting reviews of operations].
Secondees are provided to fill key managerial posts (generally on the site Executive Team) to provide strategic and tactical direction to the SL workforce. The average tenure of our secondees has been somewhere between two and a half and three years.
Reachback Costs (Q349—Q351)
The reachback costs referred to by the Committee were related to financial years 2011–12 and 2012–13. Tony Price was appointed as Managing Director in May 2013, after the period in question.
An internal review of reachback engagement revealed opportunities to strengthen the governance process. Implemented improvements include consistent request protocols, formalised assessment of alternative sourcing options and the realignment of a senior level governance panel.
Reachback personnel numbers have been reduced from 120 in 2012 to 88 in 2013. The original 2013–14 forecast of 168k hours has been revised to an estimate at year end of 139k hours. Benefits accrued in site functional performance are measured and reported.
Use of Reachback Resources (Q352—Q356)
The redacted version of the KPMG report provided to SL and NMP has all of page 149 redacted. We have not had sight of the un-redacted version so are unable to comment on the details, but we can assure the Committee that all reachback personnel are recruited for their specific skills, capabilities and experience.
Reachback provides urgent expertise not immediately available in the supply chain or through local hires, and this has been our ground rule from the start.
The use of the term “backroom staff” is misleading if interpreted as commonly available administrative resources. The staff this refers to have all been engaged in the site’s change programme as experts in their technical and professional fields.
Sub-contracting with Parent Companies (Q386)
As noted above, our procedure for managing conflict of interest ensures that parent body personnel have no influence over procurement decisions. Assurance of the process for awarding contracts is provided by the Commercial Governance Committee, whose role is to ensure that commercial relationships are appropriately controlled and that decision making is fair and transparent.
The Commercial Governance Committee is chaired by a SL senior manager and the internal audit process is delivered by SL personnel.
As independently assessed, SL currently spends 34% (approximately £300 million) of its total supply chain spend in the local area, and we want to further improve this through closer working with the supply chain to help them compete successfully for work, but this must also be done in compliance with Sellafield’s public procurement legal obligations. We have engaged an external company that helped develop and implement the Olympic Delivery Authority’s supply chain strategy to gain learning we can apply to our approach.
While we are consistently seeking to improve, it should be noted that in 2007–08, prior to NMP’s arrival at Sellafield, the local supply chain spend was 28% (of a total £660 million). So over NMP’s first five years, the overall percentage of local supply chain spend has increased by 6% and in absolute terms the local supply chain expenditure has increased by over £100 million (50%).
As additional information, SL is currently working towards NDA’s 20% SME target by 2015 (including all direct and in-direct spend). Our current figures are already around 20% with SMEs, direct and in-direct, but we have an agreed action plan that we expect will take us to 21% and beyond. The Government’s SME targets and growth agenda are important to us and we have been proactive in working with the NDA to look at how we can make improvements in this area.
I trust that the information contained in this letter is of help to the Committee. NMP is committed to open and transparent communications and we are pleased to assist and respond to the Public Accounts Committee as you undertake your important responsibilities.
Tom Zarges
Chairman
12 December 2013