COMMONS

Sellafield contract extended despite spiralling costs and poor performance

11 February 2014

Public Accounts Committee publishes its 43rd Report of Session 2013-14 on clean up and decommissioning at Sellafield.

A consortium of private sector companies brought in in 2008 to help Sellafield Ltd improve its performance on decommissioning and reprocessing had its contract extended last October despite spiralling costs and poor performance.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"We have seen big delays and huge cost overruns on a number of major projects on the Sellafield site. But, despite this, the consortium Nuclear Management Partners (NMP) had its contract to clean up the UK’s largest and most hazardous site extended for five more years. Re-competing the contract was rejected as an option.

We are seeing costs rising to astonishing levels - for example, the estimated cost of the ‘Magnox swarf storage silos retrievals’ project nearly doubled from £387 million in March 2012 to £729 million in September 2013.
“Cleaning up the nuclear waste on this hazardous site is estimated to cost more than £70 billion in cash terms. What’s worse is that the cost is likely to continue to rise.

The Nuclear Decommissioning Authority, which owns Sellafield and which appointed NMP, said itself that it did not expect NMP to meet its savings target for the first five years – despite NMP being on course to earn £230 million for the job.

Time-scales have slipped and reprocessing targets have been missed. For example, in the 18 months since we last considered Sellafield, the delivery date of the ‘Pile fuel cladding silo’ project had been put back by six years from August 2017 to January 2023.

NMP has failed to provide the clear leadership, strong management and improved capabilities for the job. There has been a high turnover of executives and NMP has failed to train staff with the right skills and experience. Instead it used expensive NMP staff – at an average cost of £300,000 per expert in 2012-2013.

The Authority must monitor progress and terminate the contract if NMP’s performance does not improve quickly. We want the National Audit Office to review the Authority’s approach and report back to us on performance at Sellafield one year into the extended contract.

We are not confident that taxpayers’ interests are being protected in the contractual relationships between the private companies involved in managing and operating the Sellafield site.

The Authority has also not properly explained how it is going to deal with the large stock of plutonium stored at Sellafield at a cost of around £40 million a year.  It wants to build a ‘MOX’ plant for converting plutonium into fuel for nuclear power stations – but no UK power stations can use this kind of fuel. Even if they could, the cost of building and operating a MOX plant would be more than the value of the fuel produced. It just doesn’t make sense.

The Authority now has to learn from past mistakes and make sure that that there is a comprehensive and robust business case before any decision is taken on dealing with the plutonium stockpile."

Margaret Hodge was speaking as the Committee published its 43rd Report of this Session which, on the basis of evidence from the Nuclear Decommissioning Authority, the Department of Energy and Climate Change, Nuclear Management Partners and Sellafield Limited, examined the progress made at Sellafield since the previous Committee report in February 2013.

Sellafield is the largest and most hazardous of the nuclear sites owned by the Authority. Sellafield Limited is the licensed operator of the site and manages the site under a contract with the Authority, which reimburses its costs of around £1.6 billion a year. In 2008, the Authority appointed NMP, a consortium of private sector companies, as the ‘parent body organisation’ (PBO) of Sellafield Limited to improve performance using its expertise. NMP receives fees earned by Sellafield Limited for improved performance in the form of dividends, receiving some £50 million in 2011-12, totalling £230 million over the 5 years of the initial contract. A report from consultants KMPG commissioned by the Authority in 2013 was very critical of key features of NMP’s performance over the initial contract term. Despite these criticisms, the Authority announced in October 2013 that it had decided to extend its contract with NMP for a further five years.
 
The Authority has extended its contract with NMP despite the company’s poor performance at Sellafield. There have been significant delays and cost overruns on a number of major projects on the site. For example, the estimated cost of the ‘Magnox swarf storage silos retrievals’ project increased from £387 million in March 2012 to £729 million in September 2013. In the 18 months since we last considered progress the estimated delivery date of the ‘Pile fuel cladding silo’ project had been put back by six years from August 2017 to January 2023. The Authority did not expect NMP to meet its savings target for managing and operating the site over the first five year contract period. The Authority recognised that performance at Sellafield has been worse than expected but justified extending the contract with NMP on the grounds that it had been the best option available and that it could use a clause in the contract to terminate it at any time if poor performance persisted.

Recommendation: The Authority should set out how, and when, it will review what progress NMP is making in improving performance at the site. The National Audit Office should review the Authority’s approach and report back to us on performance at Sellafield one year into the extended contract.

NMP has not provided the leadership and strong contract management skills that are critical for the success of the major projects at Sellafield and the running of such a large and complicated site. NMP was brought in as the parent body to provide Sellafield Limited with the leadership and skills it needs to manage and operate the site. But there has been a high turnover of executives provided by NMP to provide leadership and NMP has failed to train staff with specific skills, capabilities and experience. NMP accepted that there are still capacity problems in a number of areas at Sellafield which it is seeking to address, including project management skills, cost estimation, procurement strategy, supply chain management, design capability and engineering.

Recommendation: The Authority should monitor, and challenge where appropriate, the use made of NMP-appointed executives and experts and the terms on which they are employed. NMP should publicly report its costs, progress and the value it has brought to the site.

The Authority has not demonstrated why, given the lack of risk transferred to NMP, this ‘parent body’ arrangement at Sellafield provides value for money.  NMP is likely to earn some £230 million over the first five years of the contract but because of uncertainties regarding the scope of the plans for the site it had not been possible to agree a contract that transferred risk to a parent body organisation and that as a result the contract was on the basis of cost-reimbursement. The Authority extended NMP’s contract rejecting other options which include re-competing the contract and dispensing with a PBO and managing Sellafield Limited as a subsidiary. The Authority said it believed extending the current contract to be the best option available. The Authority is required by the Nuclear Installations Act to be prepared to step in should the parent body fail.
 
Recommendation: The Authority should set out how it might transfer more of the delivery risk to contractors under its existing arrangements and how it will ensure that its alternative arrangements are viable to enable it to terminate the current contract should performance continue to prove unsatisfactory.

It is not clear whether there are adequate safeguards to protect taxpayers’ interests in the contractual relationships between the private companies involved in managing and operating the Sellafield site. KPMG concluded that NMP’s objectives were not aligned with the aim of securing value for money for the taxpayer. NMP recognised it had a role in challenging Sellafield Limited and supporting it to deliver value for taxpayers’ money. But NMP owns Sellafield Limited and the private companies that own NMP can bid for, and be awarded, contracts by Sellafield Limited. The Authority reviews the letting of such contracts to ensure that contract awards are “clean and fair”.

Recommendation: The Authority, Sellafield Limited and NMP should report publicly on the safeguards in place to protect taxpayers’ interests and manage potential conflicts of interest in transactions between each party, their operation and their roles in securing value for money for public funds.

The Authority unduly restricted the information it made available to the public on performance at Sellafield. The Authority’s redactions of information in the KPMG report on performance at Sellafield released under Freedom of Information legislation appeared to go well beyond the stated reasons of commercial confidentiality and data protection. For example, the Authority redacted not only the names of organisations expressing views, but also the views themselves, on subjects such as failures in NMP’s leadership and whether contracts had been met.

Recommendation: The Authority should revisit its approach to disclosing information to ensure that it does not use grounds such as commercial confidentiality inappropriately to withhold information on performance on its sites and by its contractors.

The Authority has not set out clearly its strategy for dealing with the plutonium stored at Sellafield. The Department’s preferred option is to process the plutonium to form a mixed oxide fuel for civilian use which would reduce the security concerns associated with its storage. However, a previous plant to reprocess plutonium into fuel for civilian purposes, which cost some £1 billion, proved to be problematic and is now closed. The value of the fuel produced in a new project would be lower than the cost of building, maintaining and operating a new plant and there are currently no nuclear power stations in the UK which could use the fuel.

Recommendation: The Authority must learn from past mistakes and ensure that there is a comprehensive, robust business case before any decision is taken on dealing with the plutonium stockpile.

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Image: PA

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