A botched procurement process has left the government with a hefty bill and a fresh decommissioning headache.
Energy secretary Greg Clark today announced that the Nuclear Decommissioning Authority would give notice to cancel its £6.1bn contract with Cavendish Fluor to clean up 12 nuclear sites.
The minister revealed that almost £100m of taxpayers’ cash was to be used to settle a case with unsuccessful bid team Bechtel and Energy Solutions.
Former National Grid chief executive Steve Holliday will lead a government-commissioned inquiry into the contract and its procurement.
So what do we know about the botched deal and what are the main takeaways?
What is the Magnox contract?
Magnox is a site licence company (SLC) overseeing decommissioning work at 10 nuclear sites across the UK that have ceased nuclear power production, including Bradwell, Hinkley Point A and Trawsfynydd.
Magnox is one of four SLCs setup by the NDA to cover nuclear power decommissioning.
The Magnox contract was first tendered in 2012 by the government to find a firm that could handle the complex process of decommissioning the nuclear plants and two nuclear research sites over a 14-year period.
The contract would have seen Cavendish Fluor Partnership (CFP) – a JV between Babcock subsidiary Cavendish Nuclear and US firm Fluor – deliver a decommissioning programme worth £4bn-£5bn in the first seven years, with a further £2bn of work in the following seven-year term. The contract began in September 2014 and was due to run until 2028.
What went wrong with the procurement process?
For a minister to admit that a procurement process was both defective and came with “significant financial consequences” reflects just how badly things have gone wrong.
To get to the bottom of the issue, the government has launched the Holliday inquiry to review the conduct of the NDA and any government departments also involved.
A legal dispute brought by Bechtel and Energy Solutions revolved around how CFP won the tender process. In his verdict, High Court judge Justice Peter Fraser concluded that the selection process had been manipulated.
Finding against the government, Mr Fraser said the NDA had wrongly awarded the contract to CFP. He said CFP should have been disqualified from the tender if the NDA had followed the terms of its own tender process correctly.
He said the selection process had been fudged. “By the word ‘fudging’, I mean choosing an outcome, and manipulating the evaluation to reach that outcome,” the judge said.
“This was by choosing a score high enough to avoid that undesirable outcome, rather than arriving at a score by properly considering the content of the tender against the scoring criteria.”
Why settle now?
As the legal dispute rumbled on it became clear to the government that the cost of work under the original £6.1bn contract was higher and larger in scope than first thought.
To draw a line under the issue, the original 14-year contract has been terminated by mutual consent and, allowing for a two-year notice period, will come to a close nine years earlier than originally planned, with CFP now finishing work on the contract in 2019.
The government made clear its concern that if allowed to continue, the contract could expose the government to even higher legal costs.
Energy Solutions originally sought damages of up to £200m. The NDA has agreed settlement payments of £76.5m to Energy Solutions, plus £8.5m in costs, and $14.8m (£11.8m) to Bechtel, plus costs of around £462,000.
What does it mean for Cavendish Fluor?
Babcock International – which owns Cavendish Nuclear – said it would not be “materially” affected by the decision, although analysts Shore Capital said it would remove about £800m from the firm’s order book.
Babcock said: ”The change to the contract will create an annual step down in revenue of around £100m. This contract change is not expected to have any negative financial impacts over the next three years and we do not expect this announcement to change the financial guidance we expect to give at the group’s full-year results in May.”
US firm Fluor has been contacted for comment.
What happens next?
According to the NDA, the Cavendish Fluor Partnership will continue to manage the contract until 1 September 2019. In the meantime the authority will consider how the Magnox sites will be managed in the future.
No decision has been taken to retender.
Magnox meltdown: How blunders cost taxpayer £100m