HL Deb 19 November 1985 vol 468 cc526-41

5 p.m.

The Minister of State, Scottish Office (Lord Gray of Contin)

My Lords, the objective of this Bill is to put the finances of the United Kingdom Atomic Energy Authority onto a trading-fund basis; and for connected purposes. Your Lordships will recall that I indicated that legislation would come forward on these matters when I reported the Government's decisions on the AEA review on 11 th February.

As is customary, I should like to start by explaining the background to this measure. As your Lordships will know, the United Kingdom Atomic Energy Authority was created by the Atomic Energy Authority Act 1954 with a wide range of responsibilities for nuclear matters. It was initially almost entirely funded by the Government. Since then, the authority has undergone a number of significant changes. The Science and Technology Act 1965 gave it the power to carry out non-nuclear research and development as required by the Secretary of State. The Atomic Energy Authority Act 1971 "hived off' the radiochemical activities of the authority to what is now Amersham International, and the fuel manufacture, enrichment and reprocessing work to British Nuclear Fuels plc. And in 1973, under the Atomic Energy Authority (Weapons Group) Act, the weapons group of the authority was transferred to the Ministry of Defence.

The context in which the authority operates has also significantly changed. In 1954, the authority effectively was the nuclear industry. With the design, construction and operation of the nuclear power stations which are now supplying about 20 per cent. of our electricity needs, and the growth of reprocessing, other centres of expertise have grown up. But the authority's role as a research and development organisation underpinning the nuclear industry and exploring ways in which it might develop in the future remains a key one. Today the authority employs some 14,000 staff, 2,800 being qualified scientists and engineers. It has 10 sites in widely separated parts of the country. Its gross expenditure is around £400 million per annum. About half its income has in recent years come in the form of a grant-in-aid from the Department of Energy for nuclear research and development. The remainder comes mainly from contract work on nuclear research and development for other United Kingdom customers; for example the electricity supply industry and British Nuclear Fuels plc; and from customers for non-nuclear R&D. Thus, a large part of the authority's work is already under contract and is held in very high regard for its scientific and technical excellence.

It is against this background that my right honourable friend the Secretary of State for Energy set in hand last year a wide-ranging overall review of the role and activities of the authority, including whether its present relationship with the Department of Energy remained appropriate. The terms of reference were, first, to examine the main programmes of the authority, with reference to the character, funding and accountability for these programmes and their bearing on the role of the authority; secondly, to consider, in the light of this review and of other factors, whether changes were required in the role and accountability of the authority, and in its relationship with the Government; and to make recommendations to the Secretary of State for Energy.

Following consultations with the various interested parties, the decisions reached by the Government in the light of the review were announced on 11th February. The Government endorsed the two guiding principles recommended by the review team—that the authority should move to a fully commercial basis of operation as a further spur to efficiency; and that defined customer-contractor relationships should be applied as far as possible to its work. They therefore decided that more of the authority's work should be funded by the nuclear industry, that the Department of Energy's funding of nuclear research and development should move on to a customer-contractor footing, and that the authority's operations should be placed on a trading fund basis from 1 st April 1986. Your Lordships may find it helpful at this point to be reminded of the key features of Government trading funds. These are: a capital structure including a commencing debt; a profit and loss account and ability to carry surpluses or deficits forward from one year to the next; powers to borrow, subject to a limit on total indebtedness; and a duty to achieve, to the extent possible, financial objectives set by the responsible Minister, with the agreement of the Treasury.

In reaching decisions on the review's recommendations, the Government also recognised the authority's crucial contribution to the development of civil nuclear power and high nuclear-safety standards in this country; and endorsed the continuing need for it to act as a source of high quality, independent advice in these areas. The Department of Energy will therefore continue to fund a substantial programme of thermal reactor and general safety research by the authority. The authority's customers will also contribute to the continued funding of a vigorous and independent underlying research programme.

Privatisation of the authority is not a realistic option at this stage. Nor, however, is continued reliance on grant aid. Putting the authority's operations on a trading-fund basis will, we believe, bring increased market and commercial pressures for efficiency and for continued technical excellence. Clear financial objectives will aid the measurement of success. The authority will have increased end-year flexibility and greater discretion over the use of internally generated funds.

The Department of Energy will, as well as remaining the authority's sponsor in Whitehall terms, become accountable as a customer in a way it was not before. It will in future provide funding against "programme letters" covering such research and development areas as the fast reactor, advanced gas-cooled reactors, pressurised water reactors, general safety issues, fusion, radioactive waste management, radiological protection and suchlike. These programme letters will be settled following discussion between the authority and the department, who will be assisted by outside technical advisers. They will set out Government policy objectives relevant to the programme, and relate these to the objectives of the work programme, the proposed budget, the longer-term trends and a detailed description of the research and development, including milestones. The Department will of course monitor the work done and the money spent against the milestones and estimates in the programme letters with the objective of ensuring that the taxpayer obtains value for money. But the Government have decided not to build up an unnecessary apparatus for control and monitoring within the department to duplicate the resources of the authority. They will remain accountable to Parliament for their technical advice and efficiency of programme execution and also subject to inspection by the Comptroller and Auditor General.

One of the operational areas also covered by the programme letters is the authority's existing waste management and decommissioning operations. The Government have in the past accepted that they would pay the costs of meeting future waste treatment and decommissioning liabilities at the time they arise. Although the authority's operations are being placed on a trading fund basis, the Government will continue to accept responsibility in principle for the costs which the authority will incur arising from programmes carried out before 1st April 1986, and from future departmentally-funded programmes. Expenditure will be monitored and controlled through the appropriate programme letters.

Many of these changes—important though they are—do not require legislation. But placing the authority on a trading-fund basis with powers to borrow does: because under the 1954 Act the authority has no such powers, and as an already established body the provisions of the Government Trading Funds Act of 1973 cannot apply to it. The nine clauses of this Bill therefore provide for the main structure of a trading fund, without affecting the legislative bedrock of the 1954 Act. In brief, their purpose is as follows.

Clause 1 provides for the assumption by the authority of a commencing debt. This will be a debt related to the value of the authority's net assets at the start of the trading fund. The commencing debt will take the form of a notional loan from the National Loans Fund, deemed to be made on 1st April 1986, and repayable with interest. The period of repayment will be agreed between the authority and the Secretary of State. As I have already indicated, a commencing capital debt is a standard feature of trading funds. It reflects the fact that the Government have, in the past, grant-aided the authority so that it has been able to build up its asset base to its present levels. The commencing debt (and the interest on it) is to be repaid by the authority out of its trading profits.

Clause 2 defines the authority's borrowing powers. As a trading fund, it is intended that it should fund its capital requirements, including working capital, from internally-generated funds and borrowing. The amount the authority can borrow will be subject to the overall limits set in Clause 3 and to an annual external financing limit set by the Secretary of State with the approval of the Treasury, after consultation with the authority.

Clause 3 imposes a borrowing limit on the authority, prescribes what is to count towards the borrowing limit, and allows for the limit to be increased by order if Parliament approves. Clause 4 empowers the Secretary of State to lend to the authority and sets out the procedures governing such loans. Clause 5 permits the Treasury to guarantee borrowing by the authority from non-government sources, and sets out the arrangements to be followed if any such guarantee is called. Clause 6 provides that the authority carry out capital investment and other developments only within plans approved by the Secretary of State.

Clause 7 provides that compensation may be paid to members of the authority for loss of office, for which there is no provision in the 1954 Act. This clause also repeals, as anachronistic, a section of the 1954 Act which requires the Secretary of State to lay a statement before Parliament when the salaries of members of the authority are altered. Current practice is for Her Majesty's Stationery Office to publish annually a booklet which covers the salaries of members of all public bodies, including the authority.

This is a small Bill, but it is also a significant one. The effect will be to make the authority more like a nationalised industry, and to give it a greater scope for development than grant-in-aid arrangements can provide. The Government consider it to be the logical outcome of the evolution in the role and activities of the authority over the past 30 years. It should provide a sound basis from which the authority can contribute still further to the development of civil nuclear power and non-nuclear technologies, while continuing to provide a source of expert advice to Government on a wide range of issues. I believe that the proposals provide an incentive for all concerned and I commend them to your Lordships' House. My Lords, I beg to move that the Bill be now read a second time.

Moved, That the Bill be now read a second time.—(Lord Gray of Contin.)

5.13 p.m.

Lord Stoddart of Swindon

My Lords, I should like first of all to thank the noble Lord, Lord Gray of Contin, for explaining the Bill, for doing it so well and, indeed, for explaining the background of the nuclear industry itself. I am sure the House will have found that most helpful: I certainly did. But I hope the noble Lord will forgive me if I say that the Opposition is rather suspicious of this Bill. It is quite true that it is a small Bill, but it is a very important one, as the noble Lord said. The Bill itself seems innocent and innocuous enough; yet, so far as the Opposition is concerned, behind its seemingly mundane provisions there could lurk serious problems and dangers for the continued existence of the AEA as an independent body advising the Government on a wide range of nuclear matters, ensuring safety in nuclear matters and keeping Britain in the forefront of underlying research.

I was glad to hear the noble Lord say that privatisation was not a realistic option. What worried me a little was that he added, "at this stage". We do not think it is a realistic option at any stage, and we feel that evil intent can often be masked by an innocent countenance. Our fear really is that this Bill, with its provisions for putting the authority on a trading fund basis, is simply paving the way for future privatisation. It is true, as I have said, that the noble Lord stated that that was not a realistic option—he said that this afternoon—and, indeed, the Parliamentary Under-Secretary of State, Mr. Alastair Goodlad, gave the assurance in another place on 11 th February this year that there are no plans to privatise the AEA. Nevertheless, the trading fund concept is clearly a step in the direction of privatisation.

The Manley Report, to which the noble Lord referred, certainly considered privatisation as an option; and suspicion of the Government's motives and future intentions has been heightened by the failure to publish the report in full. That has heightened suspicion, not only by the Opposition but also, I understand, by staff working for the authority. It seems to indicate that the Government have something to hide; and I would ask the noble Lord whether he will now arrange for the publication of the report in full as an indication of the Government's good faith in this matter. I would ask him to state firmly and clearly that the Government have no intention to privatise the AEA, not only during the lifetime of this Parliament but for all time, or at least for the foreseeable future. Can he go that much further than he did in his opening remarks?

Perhaps it would be as well if I asked him at this stage, and indeed in connection with privatisation, what is meant by Clause 3(3) of the Bill, which states: If a body corporate ceases to be a wholly owned subsidiary ot the Authority, the Secretary of State may, having regard to the extent to which the amounts taken into account for the purposes of subsection (1)", and so on. Clause 3(3) relates to the possible denationalisation of a subsidary of the AEA. Does it mean that the authority can be privatised piecemeal; and, if so, by what means? The clause certainly gives the impression that the authority may dispose of a wholly owned subsidiary without further reference to Parliament, but I cannot see how this can be so. Yet, if Parliamentary approval is necessary, I cannot see the need for the provision in Clause 3(3), since that matter could be dealt with when Parliament was dealing with the question of the disposal of a wholly owned subsidiary. I recognise that I may be misreading the clause, and I should therefore be grateful if the noble Lord, Lord Gray, could deal with the point when he winds up the debate.

I should like now to turn briefly to the question of accountability to Parliament. When the Parliamentary Under-Secretary made his statement in another place on 11th February, he was asked specifically by my honourable friend Mr. Alexander Eadie whether this move to a commercial basis would weaken parliamentary accountability. Mr. Goodlad's reply, in col. 32, was quite specific. He said (and I quote): On the hon. Gentleman's third point, there will be no reduction in accountability to this House because of the change to the trading fund." [Official Report, Commons, 11/2/85.] That reply was absolute. There was no equivocation; no "ifs" or "buts". There is to be no change. Will the noble Lord now confirm that statement? Indeed, will he underline it? Will he state categorically that commercial confidentiality, for example, about which we heard a good deal during the passage of the Oil and Pipelines Bill, will not be increasingly used as an excuse for weakening Parliament's role in nuclear matters and keeping from them information which is necessary and vital for their oversight of the authority's affairs?

There is certainly one sense—and the noble Lord mentioned it in his opening remarks—in which parliamentary control will be affected by the Bill. In Clause 7(2) the duty to lay statements of remuneration, etc., of members of the authority is repealed. Will the noble Lord please explain this clause further and say why this does not weaken parliamentary accountability? Members of Parliament, particularly in the other place, often glean a good deal from the salaries and conditions of service of members of the board, and the noble Lord himself will know that very well.

I should now like to discuss the main part of the Bill concerning the authority's finances, and certainly there are a number of important questions which arise. First, in Clause 3 the authority's borrowing limit is set at £150 million, which may by order be increased to £200 million. The borrowing limit is, as the noble Lord mentioned, to include the authority's commencing capital debt, but there is no indication of what that entails. Is the commencing capital debt to be £50 million, £100 million, or what is the figure?

The Bill refers in Clause 1 to consultation with the authority and to the approval of the Treasury. What does this mean? Is consultation with the authority to be real and meaningful, or perfunctory? Will the Treasury have the last word, and, if so, does this not give them an arbitrary power over the authority's finances right from the start? I sincerely hope that the noble Lord will comment on that.

Perhaps the noble Lord will also say if consultations are now in progress and whether there is agreement on the commencing capital debt; and, if so, what that figure is. The noble Lord will appreciate that without knowledge of the commencing capital debt it is difficult to assess whether the borrowing limits will be adequate for the authority's needs. This information is also vital in order to assess the authority's ability to meet the targets which will be set by the Government.

We are also entitled to have an indication of the rate of return expected of the authority. I have heard a rate of 5 per cent. mentioned, and if this is correct I should have thought it was a high figure, particularly during the early years of the new arrangements. Will the noble Lord give some information today of the likely rate of return which the Government will expect? The noble Lord may very well say that it is too early at this stage to give such information, but he will appreciate that there are worries that, if the rate of return is set too high, this could have an effect on staffing levels and, indeed, on salaries, which would be squeezed by the authority's straining to meet an unrealistic rate of return.

The other element which could be at risk in the event of an unrealistic rate of return is underlying research, which will be particularly vulnerable during the transition period, since the pressure on costs will be at a maximum and the return on investment a long way off. The noble Lord will, I feel sure, understand the point and, I hope, sympathise with it. I wonder whether consideration has been given to phasing the transfer of the underlying research programme to the trading fund over a period of years, bearing in mind the importance of underlying research for the future. Do the Government intend to apply some underpinning, by means of contracting directly for a proportion of the underlying programme? That would certainly be helpful, particularly in the early years of the trading fund arrangements.

Clearly, the authority should not be burdened by unreasonable demands and commitments, but also it should not be at the mercy of Treasury diktat and raids on its earnings, which will be needed to finance future investment and to expand worthwhile programmes. I sincerely hope that the noble Lord can give emphatic reassurance on these matters.

I notice that the overall effects of the transition to a trading account basis on the PSBR are expected to be broadly neutral, and, of course, we must accept that as the Government's best assessment of the position. However, what is the likely effect on the authority's non-departmental customers? Are the Government sure that their proposals will not put the authority in a worse competitive position in relation to these customers, and are they confident that the authority will be able to cope with the situation unless sufficient time is allowed it to adjust to the new arrangements?

May I now ask about the fusion programme? The noble Lord will recall that on 15 th October we had a long and interesting debate on that matter and fears were expressed—indeed, they were expressed by myself and by other noble Lords—that the Government may in the future not be as committed to the fusion programme as they have been in the past. May I ask the noble Lord how these new arrangements will affect the fusion programme and the Government's commitment to it? Can he also give some attention to the question of the fast breeder reactor? How, in fact, will the CEGB be involved in the future with the fast breeder reactor programme? I understand that it will be expected to meet a greater part of the cost of the programme. Can he say to what extent this will be, how control of the programme will be managed and whether a greater control of the programme will pass from the AEA to the CEGB itself?

May I now turn to the composition of the authority board? The noble Lord will accept, I feel sure, that it is essential that the board should be seen to be completely independent and free of pressure from commercial interests. It should be completely committed to the objectives of the organisation and to no other. That being so, part-time members who have a beneficial interest in the organisations which have formal contractual arrangements with the authority should not, surely, be permitted to serve on the new board. I hope I shall be told that the Government are in agreement with this view.

Another important aspect concerns the people who work for the AEA. They undoubtedly feel that their jobs and conditions of service could be at risk from commercialisation. When the UKAEA was established in 1954 and when British Nuclear Fuels was hived off in 1971, employees were guaranteed that their pay and terms and conditions of service would be no worse than those of civil servants. Indeed, the 1953 White Paper even promised salaries not seriously out of line with those paid by other public corporations. That promise in the White Paper has certainly not been kept. Indeed, Government pay policy has held salaries down, with the result that the Atomic Energy Authority is losing professional and scientific staff and is unable to recruit replacements. The assurance that the people working for the authority need is that their terms and conditions of employment are maintained and that salaries should be at a level where staff of all grades can be recruited and, indeed, retained.

Furthermore, they need the assurance that the Department of Energy will not impose cash limits on the authority's wages and salaries bill that will lead to distortions in wage and salary patterns and to unjustified reductions in staffing levels. The staff certainly do not want to be the sacrificial lambs on the Government's commercialisation altar. I should welcome the noble Lord's comments and assurances. There are aspects of the commercial approach which are, of course, beneficial, and we accept that. But it is misguided to believe that every area of human endeavour is necessarily improved by the commercial approach. Nuclear safety, for example, is a matter which cannot and must not be jeopardised by this approach. The public are entitled to expect that the AEA's contribution to nuclear safety is in no way compromised or affected by the Government's preoccupation with commercialism or the new customer/contractor relationship between the authority and the CEGB. The noble Lord will, I trust, give an absolute assurance that nuclear safety will not be in any way affected, and, indeed, I hope he will outline the safeguards intended to see that nuclear safety will not suffer as a result of this Bill.

I want to say in conclusion that our attitude to this Bill in its later stages in this House will depend very much on the answers which the noble Lord gives to the many questions I have asked. I make no secret of the fact that the Opposition do not trust this Bill. I was going to say that we do not like the Bill. We do not trust the Bill and we think it is possibly unnecessary for the proper development of the AEA. As I said at the beginning of my speech, the Opposition suspect that it is a paving measure for full-scale privatisation. Nevertheless, in so far as the provisions of the Bill are concerned, we do not wish to be obstructive but we shall require firm assurances about the matters I have raised, and perhaps others, between now and Committee stage.

5.31 p.m.

Viscount Thurso

My Lords, it is no secret that my colleagues on these Benches do not entirely share my enthusiasm for atomic energy; nor are they so well aware of its usefulness to us as a nation and in the future. However, this does not mean to say that they are in any way against atomic energy; nor indeed that they are against the work which has been done by the Atomic Energy Authority in the past. I know that certainly two of my colleagues, the noble Lords, Lord Ezra and Lord Lloyd of Kilgerran, would have liked to have been here to speak in this debate. Unfortunately both are prevented from doing so. They tend to agree with the move that is being made to put the Atomic Energy Authority's finances on a trading basis. However, I find myself rather more critical of this measure than they are, and I find that many queries arise in my mind, some of which the noble Lord, Lord Gray of Contin, has been able to answer, some of which will remain in my mind until we see how the Bill progresses, particularly through the Committee stage, and some of which I may be able to ask the noble Lord now.

The Atomic Energy Authority was originally set up in 1954 with the primary responsibility of advising the Government on nuclear power. In the mind of the public this is still the principal function of the Atomic Energy Authority. The noble Lord, Lord Gray of Contin, as a Ross-shire man, will be perfectly well aware of the high regard in which Caithness holds the establishment at Dounreay and of the high regard in which those who are close to atomic energy hold the authority in so far as they are not solely commercially minded. They are scientifically and professionally interested in the reputation of the plant, and they are people of integrity whose word can be broadly relied upon. Any erosion of the high standing in which they are held is bound to be harmful to the interests of the country.

It is important that the body which is responsible for advising the Department of Energy upon the dangers or the desirable avenues to be explored and so forth in an industry so obviously subject to hazard should clearly be as independent as possible of the normal commercial pressures. For instance, before this country decided to pursue the pressurised water reactors, the authority had to be in a position to assess the safety of this particular form of reactor and to carry out assessments to advise the Government on the relevant merits of these reactors, as compared with the gas cooled reactors. It is no secret that in the process of doing so, and in carrying out that work, it was found that there were some possible safety limitations on the performance of the fuel. Then research and development work was carried out and the original assessment of the authority was proved to have some foundation in fact. Work was then carried out to find how these limitations could be made acceptable. Similarly, work has been carried out to improve the performance of gas cooled reactors. This again has involved first class staff reviewing the situation and carrying out research and development work to reach conclusions which were and still are of considerable importance to this country.

On a trading fund basis the limitations on the use of staff and equipment in this way might become very difficult if the work has to be solely commercially supported. After all, the results of research and development are never totally predictable and they may produce results which commercial organisations might not want to know about and for which they might not be very willing to produce funds because of the danger of showing that their plans might be unacceptable. I am certainly looking for assurances that this method of funding is not in any way going to affect the independence of the authority as the main adviser to the Government. I hope I received this reassurance in the speech of the noble Lord, Lord Gray of Contin, in which he said that the Government would still be looking to the Atomic Energy Authority for high quality independent advice and that they would not build up another organisation. That would be a ridiculous and foolish thing to do when they already have an organisation which is perfectly capable of doing the kind of job which the Department of Energy requires to be done and which they only have to keep in being in order to get that kind of high quality advice.

I too was slightly puzzled by the phrase, privatisation of the authority is not a realistic option at this stage". I hope that in giving reassurances the noble Lord, Lord Gray, will reassure us that privatisation is not at all envisaged. It would be quite wrong if one were to privatise one's advisers as a department of government. I hope that the privatisation of this function of the Atomic Energy Authority will never be envisaged.

While I see the importance to the country of obtaining a return through the authority on the investment in atomic energy, in setting up the commencing capital debt of the authority the Government intend to use a figure based upon the expenditure and the investment which has taken place so far in plant and equipment.

I believe that I heard the noble Lord, Lord Gray, correctly when he said that the Government intended that the commencing debt should be repaid. That seems a rather curious thing to do when presumably that equipment has been acquired while the authority was not on any kind of trading fund basis. Therefore, the profits out of which the authority might have been expected to repay the debt were not made under the original contracts. A little more explanation from the Minister as to what is meant and where the money is to come from in order to repay the commencing debt is called for. It sounds as though when the authority borrow money in the future they will not only have to make a profit on the money that they have borrowed but also make another profit in order to repay the money which theoretically they borrowed, although they did not borrow it—if the noble Lord follows my reasoning.

Another facet of the work of the authority to which the noble Lord referred was waste management and decommissioning. Those are two extremely important aspects of the work of the Atomic Energy Authority. They are very important in the minds of the general public. First, I hope that we have received a full reassurance—although it would do no harm to reiterate it—that there will be no shortage of funds for the management of the waste created by work that has already taken place, and that there will be no shortage of funds either for proper decommissioning of plant that has already served its function and is in the process of being decommissioned. It is very important to the public to be reassured on those points. It would do no harm if the noble Lord the Minister were to give the House such a reassurance.

While he is dealing with that point, perhaps the Minister can give the House some information about the state of play—an update perhaps—with regard to the European reprocessing plant which it is proposed might come up to Dounreay. Again, the local welcome for that is quite reasonable as these things go, but I wonder how strong the welcome would be if it were thought that the plant will be too highly commercial. The way in which the public regard the Atomic Energy Authority is very different from the way in which they regard, for instance, British Nuclear Fuels. It is felt that one has a commercial outlook and that the other has a more scientific outlook. The Minister should be aware of that. It would be interesting if the Minister could give the House some indication of the present state of play with regard to that project and to the management of nuclear waste in the future.

We give qualified support to this Bill. We are not totally against it but we are not totally for it. We feel that the independence of the Atomic Energy Authority as an advisory body must be ensured. If we see any point at which that is being threatened by the Bill as we examine it in Committee, then we shall certainly reserve our right to criticise the Bill and try to amend it. Meanwhile, we on these Benches give the Bill our qualified support.

5.45 p.m.

The Duke of Portland

My Lords, I welcome this Bill, which will place the operations of the Atomic Energy Authority on a trading fund basis and thus give it greater freedom of action. While the Central Electricity Board may well be a very big customer of the authority, I trust that the authority will not be regarded as an appendage of the Central Electricity Board. I hope that the authority will not only be free but also encouraged to undertake such research, development and other activities as its management may think fit.

I feel confident that this Bill will give the authority, and in particular the establishment at Harwell, a fresh and vigorous lease of life.

5.46 p.m.

The Earl of Kintore

My Lords, although I do not have my name down to speak, I should like to ask my noble friend a question in general terms. Can he tell the House what is the modern equivalent of beating the spear into a ploughshare? How does one beat a nuclear weapon into a ploughshare? It appears to me that one method would be to convert those weapons into fuel rods for nuclear plants. I should like to know what the Government's thoughts are on this matter, and whether they are making any proper provision.

We all hope that disarmament will lead to a large number of redundant or surplus nuclear weapons. But merely stockpiling them in another place without dismantling them will not answer anything. One is merely no longer pointing the weapon. One cannot just leave them lying about, nor can they be burnt except in a nuclear furnace.

5.47 p.m.

Lord Gray of Contin

My Lords, we have had a very useful debate on the occasion of the Second Reading of this Bill. I am most grateful to the noble Lord, Lord Stoddart of Swindon, and to the noble Viscount, Lord Thurso, for the constructive approach they have taken to this Bill from their respective Front Benches. I will do my best to answer some of the questions they raised and to give the reassurances which they asked of me. I should also like to thank my noble friend the Duke of Portland for his welcome for the Bill.

I must thank too my noble friend Lord Kintore for his contribution, and perhaps I may begin by explaining to him that the Bill is in no way connected with nuclear weapons. Indeed, one of the problems which the nuclear industry has constantly to face is that of making the distinction between nuclear power for civil purposes and nuclear weapons. This Bill, relating as it does to the nuclear industry as far as its civil aspects is concerned, is not related to nuclear weapons. Therefore I hope that my noble friend will forgive me if I do not take up his challenge to state the equivalent of beating spears into ploughshares. However, I wanted to make that distinciton clear and I am grateful to my noble friend Lord Kintore for giving me the opportunity of doing so.

The noble Lord, Lord Stoddart, and the noble Viscount, Lord Thurso, both raised at the very outset the question of what difference the measures we are taking will make to the attitude and performance of the authority. I can assure them that what we are seeking today is to place the Atomic Energy Authority on a trading fund basis with a revised capital structure and powers to borrow. We believe that this will encourage a more commercial approach and greater efficiency. I am sure that both noble Lords will certainly agree with me that it is very important, in whatever industry we are talking about, to encourage efficiency and to ensure that the AEA carries out its operation in as efficient a manner as possible.

I made it absolutely clear—and again I give this assurance to both noble Lords who asked me to do so—that the Government have no plans for the privatisation of the authority. I mentioned this in my opening speech and it was clearly stated also by my honourable friend the Parliamentary Under-Secretary of State in another place. I confirm for a third time that privatisation is not the intention of the Government.

I was pressed to give that assurance for ever. I am afraid that "ever" is a very long time, and noble Lords will realise that it is simply not in my gift to give assurances for ever and ever. What I can say is that the Government have no plans for the privatisation of the AEA.

Lord Stoddart of Swindon

My Lords, it is true that I asked the noble Lord to give an assurance that the AEA would never be privatised. However, I asked whether he would give the assurance specifically that it would not be privatised during the lifetime of this Parliament or for the foreseeable future. Can the noble Lord give that assurance?

Lord Gray of Contin

My Lords, I can certainly give the assurance to the noble Lord as far as the lifetime of this Parliament is concerned, but no Minister, and no Government, is in a position to commit successors. Therefore I can merely reiterate what has been said by energy Ministers elsewhere—that the Government have no plans for the privatisation of the Atomic Energy Authority.

The noble Lord, Lord Stoddart, also asked about accountability. The change to a trading fund will not bring about any reduction in accountability to Parliament for expenditure on nuclear research and development. The department's permanent secretary and the AEA chairman will continue to appear before the Public Accounts Committee. The department will answer on policy and overall programme specification. The AEA will answer on its technical advice and efficiency of programme execution. As regards commercial confidentiality, the transfer to a trading fund basis will make no difference whatever.

The noble Lord also asked whether the review can be published. I remind him of the very full summary of the report which was published on 3rd October last year, copies of which were placed in the Libraries of Parliament. The report itself is a classified internal departmental document, and it is not normal practice to publish confidential advice to Ministers. However, I trust that the noble Lord will accept what I have said about the very full summary that has been made available.

The noble Lord, Lord Stoddart, also asked about the financial return. In setting the financial target for the AEA trading fund for the first three years we have taken into account the likely earning power of the AEA, bearing in mind the nature of its business and the market situation. In the light of financial projections for the first few years of the trading fund's operations the Government believe that a 5 per cent. target return on current cost assets will be a realistic challenge for the authority. The noble Lord cast some doubt on this, but we have looked at it very carefully and we believe that it is a realistic challenge. That is why the figure of 5 per cent. has been taken.

Viscount Thurso

My Lords, before the noble Lord leaves that point, he mentioned that the Department of Energy will be giving contracts to the authority. Can he say what sort of margin there will be on these contracts?

Lord Gray of Contin

No, my Lords. With respect, I cannot do so, because these are obviously matters which will be negotiated between the authority and the department. It is not for me at this stage to assess what might be the margin the authority would look for in a contract with one of its customers. We are interested in what the authority can achieve at the end of the day in its accountability—what its bottom line is at the end of its financial year.

Viscount Thurso

My Lords, but will there be a margin in these contracts?

Lord Gray of Contin

My Lords, I presume that when contracts of such a nature are being discussed the authority is bound to have a figure in mind. However, that figure is not one which it would necessarily publicise, because on certain matters where it is giving advice such information might be useful elsewhere. Therefore I would hot think that the authority would necessarily wish to make known the figure on which it is working.

Lord Mackie of Benshie

My Lords, may I add to the noble Lord's troubles and ask whether he can tell us how the Government are to value the assets on which the authority will be charged to make a 5 per cent. return? Will they go back on all the money that has been spent and all the grants that have been given? This is very important, because it would appear that the Government will be placing a considerable burden on the authority and that they are going to fund the past expenditure, charge interest and charge the authority also with repayment of the capital and the interest. Therefore the valuation of the assets would appear to be very important.

Lord Gray of Contin

My Lords, the noble Lord, Lord Mackie of Benshie, has asked about the valuation and revaluation of assets. The authority is carrying out a full-scale asset revaluation exercise. All its assets are being revalued to current cost, so that the assets shown on the opening balance sheet of the trading fund will represent as realistically as possible their current value to the business. Does that satisfy the noble Lord?

Lord Mackie of Benshie

It informs me, my Lords.

Lord Stoddart of Swindon

My Lords, I am obliged to the noble Lord for giving way again, and I am sorry to have to pursue this. Nevertheless, as far as I can see at a quick glance the present assets amount to about £273 million. Is that the kind of figure that is to be used; or is it to be higher or lower? Indeed, if that is the figure that is to be used, does it not mean, on a 5 per cent. return, that the authority will virtually have a surcharge of £ 13 million from the outset?

Lord Gray of Contin

My Lords, I do not completely agree with the noble Lord's figures, though his opening figure of £273 million was not too different from mine. It seems likely that the opening capital employed will be around £250 million—that is, £185 million of fixed assets and £65 million of net current assets. The exact figures will not be known until the 31st March 1986 balance sheet is produced. Within this, the breakdown will be approximately a commencing capital debt of £80 million, a revaluation reserve of £105 million, a general reserve of £62.5 million and insurance provision of £2.5 million. However, as I explained, these are at this stage approximate figures which we obviously cannot finalise until the 31 st March balance sheet is produced.

The noble Viscount, Lord Thurso, asked me particularly about the question of Dounreay, and I should like to take this opportunity—and I emphasise to your Lordships that I take the opportunity as a representative of the Government's energy interest in this House rather than as a Scottish Office Minister—to comment on the proposed reprocessing plant at Dounreay.

Your Lordships may recall the open letter which my right honourable friend the Secretary of State for Energy wrote to the chairman of the authority on 21 st May. The Secretary of State indicated that the Government considers that the fast reactor, which is 50 times more efficient in the use of uranium than thermal reactors, will be of major strategic significance for the United Kingdom's and the world's future energy supplies. The United Kingdom is among the world's leaders in this technology as a result of the successful programme of research and development undertaken by the Atomic Energy Authority and centred at Dounreay, but the Government also recognised that substantial financial resources are needed to achieve commercialisation and that some international sharing of the costs is desirable. It is against this background that in January 1984 my right honourable friend the Secretary of State for Energy signed an inter-governmental memorandum of understanding to develop the fast reactor and its fuel cycle with his counterparts in France, Germany, Italy and Belgium.

We believe that research and development work will be done more effectively and economically by working together rather than by each country duplicating effort. The inter-governmental memorandum of understanding has paved the way for a number of implementing agreements drawn up by the respective nuclear industries of the partner countries. Some have been signed; others are in course of negotiation. At the working level, detailed collaboration is already taking place. It is envisaged that the collaboration will come to focus on a sequence of three demonstration fast reactors. These will be built in France, the Federal Republic of Germany and the United Kingdom, but decisions have not yet been taken on their specific timing, siting or financing.

All this is relevant to the Dounreay proposal because, to achieve the fast reactor's full potential, commercial demonstration is required not only of the reactor itself but also of the fuel cycle. At intervals the fuel in the fast reactor has to be changed. The spent fuel is reprocessed so that unconsumed and newly created plutonium can be recycled and fabricated into new fuel. The collaborating electrical utilities, which, subject to Government approval, will finance the reactors through cross-investment, regard it as essential that the demonstration reactors should be backed by fuel fabrication and reprocessing facilities. While there are prototype reprocessing facilities at Dounreay and Marcoule in France, they are insufficient for the demonstration programme and a further plant is required. The United Kingdom is a strong contender for this plant and the Government see advantages in siting it here, subject to the necessary planning, safety and environmental consents being granted.

This would enable British Nuclear Fuels and the authority to build on their long experience in this field. The authority has been reprocessing at Dounreay for over 25 years and the present small-scale reprocessing plant in support of the prototype fast reactor has been operating successfully since 1979. British Nuclear Fuels plc already plays a world role in the commercial reprocessing of thermal reactor fuels and wishes to be in a position to extend its business into the fast reactor field when series ordering of fast reactors begins. Thus, if built here, the project would provide job opportunities both during construction and operation and potentially for the longer term. The financing of the United Kingdom share of the project would be provided by British Nuclear Fuels supported by contractual commitments from the utilities, and there would be no call on public expenditure.

I have given that information—indeed, I have had it prepared for me—because I thought it almost inevitable that I would be asked by somebody what was the latest state of play at Dounreay and I am glad to have this opportunity of bringing the House up to date on this matter on behalf of energy Ministers in the Department of Energy.

A question was asked about the effect on fusion of the measure which we are discussing tonight, and I can assure your Lordships that the move to a trading fund in no way affects the authority's fusion programme.

The noble Lord, Lord Stoddart, also raised with me the question of membership of the board. So far as part-time members of the board are concerned, it is expected that there will no longer be part-time members holding executive responsibility in the CEGB, BNFL or the department.

I have tried to answer as many as possible of the points raised, but in the short debate which we have had your Lordships will agree that a great many points were raised and I think it likely that I may have missed a few of them. I shall have my officials carefully read what I have said, and perhaps I may write to noble Lords who have raised any issues with which I have not specifically dealt.

I am most appreciative of the qualified welcome—and, after all, at Second Reading one would not expect more than a qualified welcome—from Members opposite. I am grateful for that qualified welcome and look forward to the further stages of the Bill, when we will have an opportunity to discuss some of the aspects in more detail. My Lords, I beg to move that the Bill be read a second time.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

House adjourned at seven minutes past six o'clock.