2 The extension of the Authority's contract with NMP

10. The Authority commissioned KPMG to provide an independent review of the performance of NMP and Sellafield Limited to help inform its decision whether to extend its contract with NMP. A redacted version of the report, The Parent Body Organisation (PBO) model at Sellafield: Performance to 31st May 2013, was released by the Authority on 1 November 2013, shortly before our first hearing on this subject, in response to a Freedom of Information request. Shortly before our second hearing, the Authority provided us with an unredacted version of the report.

11. The Authority's redactions from the KMPG report appeared to go beyond its stated grounds of commercial and personal data protection. 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, whether contracts had been met, and a summary of the low annual reprocessing output. The Authority told us that it had made redactions to protect individuals or the organisations they represented who had provided comments on the understanding that they would remain confidential. But the Authority accepted that some redactions might not have been appropriate and might have gone beyond its legal grounds for making them. The Authority told us that it had not revisited the redactions it had made to the KPMG report.[18]

12. The Authority extended its contract with NMP despite the poor performance to date and the fact that the contract does not transfer risk to NMP. The Authority told us that it had used contracting approaches which transfer risk to private companies acting as parent bodies on its other sites, such as Dounreay. In these cases there is more certainty over the scope of the work and what needs to be delivered and the private sector can therefore bid based on a firmer understanding of schedules and costs. But at Sellafield this had not been possible because of the unpredictability on the site. As a result, the private sector would only accept a fully cost-reimbursable contract.[19]

13. The Authority explained that with the Department's agreement it had extended the contract with NMP because it considered this was the best option available at the time. The Authority told us that in reaching this decision it had explored two alternatives: to re-let the contract; or to dispense with the parent body and operate with Sellafield Limited as a subsidiary of the Authority.[20] Under the Nuclear Installations Act the Authority is required to be in a position to operate without a parent body in case the need arises, for example if the parent body went into insolvency, in order to ensure the site's safety, security and environmental compliance.[21] The Authority told us it was continuing to maintain and further develop the two alternatives to the current parent body arrangement.[22] It would use one of these options if the arrangement with NMP did not continue to give the best chance of successful performance, a judgement it would need to make in the context of the significant uncertainty of the task at Sellafield.[23] The Authority noted that it had extended the contract on the basis that it could terminate it at any stage, which it said it had highlighted in recent meetings with NMP.[24]

14. The contract with NMP includes minimum performance standards, but they do not cover all key areas, such as performance on major projects, which is clearly unacceptable. The Authority told us that it had not changed the terms of the contract before renewing it because to have done so would have risked a legal challenge under EU procurement rules. The Authority told us that the contract does not preclude it from setting clear expectations and requirements of NMP and it was discussing revised minimum performance standards for the second contract term with NMP.[25] However NMP has failed to meet the original and revised minimum performance standard on efficiency in the first contract.

15. The Authority intends to monitor NMP's performance against the updated 2014 performance plan and an 'excellence plan' which it had developed with NMP and Sellafield Limited setting out the Authority's expectations for NMP.[26] The excellence plan consists of eight improvement themes and contains specific measures and targets for the coming year and the following two years.[27] The Authority told us that it would give particular focus to six priority areas in determining whether the contract with NMP should continue or be terminated covering: schedule and cost performance on projects; operational performance; safety performance; savings against targets; capability improvement in engineering, commercial, and programme and project management; and behaviours for governance, leadership and management, alignment of action between NMP and the Authority and socio economics, stakeholder and industrial relations. The Authority also told us that it expected to see incremental rather than dramatic changes in performance at Sellafield over the next 12 to 24 months on the grounds that NMP's leadership and capability improvements would take time to have an impact.[28] The Authority has not given NMP a fixed timescale for achieving improvement, but plans to continually monitor performance and review its options.[29]

16. Whilst the work at Sellafield is unique, the Authority told us it has extended its use of benchmarking and is using its benchmarking tool to support the assurance of the 2014 performance plan and the planned completion dates and costs for the major projects. The Authority benchmarked its approach to contracting with the private sector to the approaches employed by the United States Department of Energy, the Ministry of Defence, and the contracting approach of major infrastructure projects such as Crossrail.[30] We were concerned that the Authority had not done enough to use independent benchmarks to assess Sellafield Limited's project costs and schedules. The Authority told us that it had developed its benchmarking tool and cost model on its other sites and was in the first instance using it to benchmark projects at Sellafield and was about to start applying it to other areas, such as operations and asset maintenance. [31]

17. The report by KPMG found that there was a mis-alignment between the objectives of NMP and the Authority's commitment to deliver value for money for the taxpayer, and there were potential conflicts of interest associated with contracting by Sellafield Limited with NMP's affiliate companies.[32] The Authority intentionally allowed NMP companies to bid for supply chain contracts because it wanted Sellafield Limited to have access to those companies' expertise. The Authority told us that some 6% of Sellafield Limited's trade was with the three companies which form NMP.[33] NMP told us that, after discounting trade associated with "reachback" (which we note costs some £26 million a year), Sellafield Limited spent around 3% of its total expenditure on the supply chain with NMP companies, worth £29 million in 2012-13.[34] NMP and Sellafield Limited recognised their responsibilities to spend taxpayers' money wisely and their accountability for it.[35] Sellafield Limited is legally obliged to operate its procurement under public contracts regulations and it maintained that its contract award process was strictly controlled and ensured transparency and equal treatment for all bidders. It has a Commercial Governance Committee to address its obligations to manage potential conflicts of interest and its procedures are subject to its internal audit process, which is delivered by Sellafield Limited personnel.[36] The Authority told us that where Sellafield Limited awards contracts to NMP companies, its staff reviewed those contracts to ensure that they were run with a "clean and fair process".[37]