PAC: Costly mistakes have caused untold reputational damage to NDA

The Nuclear Decommissioning Authority (NDA) completely failed in both the procurement and management of the contract to clean up the Magnox nuclear reactor and research sites – one of the highest value and most important contracts let by Government.

Not only did this disrupt an important component of vital nuclear decommissioning work, but it also cost the taxpayer upwards of £122 million.

The NDA ran an overly complex procurement process, resulting in it awarding the contract to the wrong bidder, and subsequently settling legal claims from a losing consortium to the tune of nearly £100 million.

The NDA also drastically under-estimated the scale of the work needed to decommission the sites at the time it let the contract – another failure which ultimately led to the termination of the Magnox contract 9 years early.

The NDA will now have to spend even more effort and money to find a suitable way of managing these sites after the contract comes to an official end in September 2019.

If it is to be trusted with letting future contracts to clean up nuclear sites, it must have a proper understanding of the state of the sites before committing taxpayers’ money to a contract, and then it must also monitor progress closely.

These failures have caused untold reputational damage to the NDA and raise serious questions about its credibility as a strategic contracting authority.

But central government must also share the blame. Not only did HM Treasury and the Department approve the NDA’s approaches to procurement and contract management, but there are clear failings in the Department’s subsequent challenge and oversight of the NDA, through UK Government Investments.  

COMMENT FROM GEOFFREY CLIFTON-BROWN MP – PAC DEPUTY CHAIR

“The Nuclear Decommissioning Authority is entrusted with some of the most important work affecting health and safety matters in the nuclear industry but this sorry affair casts serious doubt on its ability to perform its role effectively. 

“From the design and execution of the procurement process onwards, the handling of the Magnox contract has been an appalling piece of mismanagement and financial waste.

“It is wholly unacceptable that some details of what took place should remain so murky – not least the NDA’s inability to fully account for some £500 million of taxpayers’ money paid to its previous contractor. 

“We expect the NDA to be open with us about what it is doing to address this and other failings identified in our Report, such as shortcomings in the skills and expertise of its staff.

“But central government is also culpable. Having signed off the NDA’s needlessly complicated procurement plan, it then failed in its duty to taxpayers as issues emerged and costs grew.

“We accept a balance must be struck but oversight structures are there for a reason and, for a significant and critical period, UK Government Investments was simply too hands-off.

“An independent inquiry examining the Magnox contract is under way and both the NDA and central government say they are acting on its interim recommendations.

“Given the scale and implications of the failings set out in our Report, we are not prepared simply to take their word for it. In the coming months we expect to be shown concrete evidence of the progress being made.”

CONCLUSIONS AND RECOMMENDATIONS

The NDA designed – and HM Treasury and the Department for Business, Energy & Industrial Strategy approved – an overly complex and opaque procurement process. The evaluation process included over 700 evaluation criteria against which bids were scored. The NDA now acknowledges this was more complex than it should have been. Worryingly, the NDA could not confirm to us whether it had complied fully with the advice provided by its legal team on the evaluation process, but said that its evaluators believed they had the leeway to change bidders’ scores against the evaluation criteria. The High Court found that evaluators knew that without changing those scores, CFP would have been excluded from the competition, but had manipulated the evaluation to avoid that outcome.  This resulted in the NDA awarding the contract to the wrong supplier and subsequently losing a court case brought against it by one of the losing bidders, Energy Solutions. These failures occurred despite six internal and external assurance and audit reviews of the process. These reviews only scrutinised parts of the process because the NDA had deliberately limited access to the evaluation proceedings to help ensure that bidders remained anonymous. 

Recommendation: The Cabinet Office, NDA and the Department should each set out how they have changed advice and guidance, as a result of the lessons from the Magnox procurement, on how best to evaluate bids to ensure that future procurements are fair, transparent and open to effective scrutiny.

The NDA may have further wasted taxpayers’ money by paying its previous contractor for work that was not done. The NDA cannot fully account for £0.5 billion of the £2.2 billion increase in the cost of the contract between September 2014 and March 2017.  In particular, it does not know whether the £0.5 billion cost increase was due to its incorrect assumptions about the state of the sites when it let the contract or underperformance by the previous contractor. Indeed, the NDA’s internal audit team reported in March 2017 that there was a possibility that the NDA had paid its previous contractor for work that was not completed on the sites. This is very concerning given the scale of the potential losses to the taxpayer. It also shows that the NDA does not adequately understand or monitor progress on its sites in the way that it should to account for the public money that is uses to pay its contractors. The NDA has started an independent investigation into this, and told us it has the legal rights to claw back funds from its previous contractor if it identifies work paid for but not completed.

Recommendation: Within three months, the NDA should update us on its independent investigation into whether it overpaid its previous contractor and, if so, how it will seek to recover this money.

The NDA dramatically under-estimated the scale and cost of decommissioning the Magnox sites, which ultimately led to the early termination of the contract. The NDA wanted to deliver savings to the taxpayer by using a target-cost incentive fee contract to decommission the sites. But this commercial strategy – approved by the Government’s Major Projects Review Group – required the NDA to have a very good grasp of the state of the 12 sites before it let the contract. Instead, the NDA had a staggeringly inaccurate understanding of the state of its sites, with work on half of the sites significantly behind schedule at the time it let the contract. Furthermore, the NDA did not independently assure the information it had before it tendered the contract. It instead relied on the new contractor - Cavendish Fluor Partnership (CFP) – to review and fill the gaps in its understanding of what work needed to take place. There is an inherent conflict of interest in this approach. We are concerned about the NDA’s lack of due diligence and apparent disregard for the need to independently assure itself of the state of the sites before committing taxpayer’s money to a contract. CFP ultimately submitted nearly 100 requests to change the contract, resulting in the costs of decommissioning increasing from £3.8 billion in September 2014 to £6.0 billion in March 2017. This cost increase was beyond the limit that was legally defensible in court, leaving the NDA with no choice but to terminate the contract with CFP 9 years early. 

Recommendation: To address our concerns about NDA’s oversight of taxpayers’ money on existing and future contracts, the NDA should set out clearly to us how it will develop and maintain the right information on the state of its sites. It should do so within 6 months of the publication of the government’s Independent Inquiry.

The NDA did not have sufficient capability to manage the procurement or the complex process of resolving differences between what the contractor was told to expect on the sites and what it actually found. In early 2014, the NDA decided to rid itself of the vital post of commercial director despite a cross-government review of the management of major contracts that supported the expansion of the scope of the commercial director role. The gap in the NDA’s capability was then exacerbated by its lack of capacity to manage the contract after it was awarded. CFP had over 300 people in place to manage changes to the contract after it was let, vastly outweighing the resources and expertise of the NDA, which did not have the ability to review and agree CFP’s requested changes to the contract. The process to agree changes suffered continuous delays and remained unresolved by the time the NDA terminated the contract in March 2017. The NDA’s Board did not have the required expertise in place, including experience of managing nuclear operations and complex public procurement, despite it being the job of UK Government Investments (UKGI) to assess and advise on NDA Board capability on behalf of the Department.

Recommendation: In 12 months, the NDA should report back to us on its work to improve the skills and expertise of its executive team and operational staff; and, in conjunction with the Department, work to ensure the NDA Board has the right combination of expertise.

The Department’s oversight, through UKGI, failed to challenge and escalate issues as they emerged or to ensure that appropriate governance was in place at the NDA. UKGI knew that the process to agree changes to the contract had been repeatedly delayed. It told us that it did not know the scale of the cost increases to the contract until August 2016 – nearly two years after the contract was let. It is very concerning that, despite the size of the contract and the ongoing legal challenge, UKGI were not proactive in challenging the NDA on its failure to agree the changes, nor pressing for an understanding of the magnitude of cost increases sooner. The Department now acknowledges that a simplification and clarification of the governance structure surrounding the NDA is required. It must guard against the risk of reacting to the failures of the Magnox contract by simply adding more layers of oversight; central government must strike a balance between effective oversight and ensuring the NDA is not so restricted that it cannot function effectively.

Recommendation: The Department should report back to us by July 2018 on its work to review and strengthen its oversight of the NDA, ensuring it addresses the issue of having appropriate procurement and contracting expertise. 

The catalogue of failures throughout the Magnox contract highlights key lessons to be learned by both the NDA and central government. The NDA and the Department accept responsibility for the failure of the Magnox contract and say they have begun to implement the recommendations of the Independent Inquiry’s interim report that was published in October 2017.

Recommendation: Within 6 months of its publication, the NDA and the Department should submit a report to us on what progress they have made on implementing the recommendations of the Independent Inquiry.

The full text of the Committee’s Conclusions and Recommendations is included in the Report attached to this email.