Ministers shelved the £1.5bn part-privatisation of British Nuclear Fuels last night because of the continuing safety fears surrounding the company.
The controversy about the business was fuelled by a subsequent announcement that, despite the concerns, a consortium to which it belongs will be allowed to run the Ministry of Defence's atomic weapons establishment at Aldermaston.
The consortium, AWE Management, was awarded the £2.2bn contract from the Ministry of Defence last December to run the site in Berkshire but a review was ordered after the damning safety criticisms of BNFL prompted by an investigation by The Independent.
The Energy minister, Helen Liddell, admitted to MPs yesterday that events at the Sellafield plant in Cumbria, which the firm operates, had been "a setback" to the privatisation scheme.
Any sale would have to be delayed until BNFL had had time to respond to Health and Safety Executive reports on the Sellafield site by improving its safety and commercial performance, she said.
The earliest possible date for the introduction of any element of public-private partnership would now be late 2002 - coincidentally after the latest possible date for the election of May 2002 - Mrs Liddell said.
The Conservative Energy spokesman Nick Gibb condemned the sell-off delay, which he said would jeopardise jobs and "postpone the development of effective management at BNFL".
BNFL has been at the centre of a string of controversies over recent months, after The Independent revealed that workers had falsified documentation for reprocessed fuel destined for Japan.
Japan, Germany, Sweden and Switzerland have all suspended deliveries of fuel.
And a Nuclear Installations Inspectorate report condemned "serious management failures" at BNFL and threatened to shut Sellafield down unless a raft of 28 safety improvements was pushed through.
The Irish and Danish governments began moves earlier this week to have Sellafield closed under international treaties on marine pollution.
Yesterday's announcements were seen as a move by the Government to shore up international confidence in the company.
The Government admitted that the falsification of safety records at Sellafield had damaged the company.
During Prime Minister's Questions, Mr Blair told the Commons: "Ministers have made it very clear to the chairman of BNFL that we want to see big changes in the way BNFL is run and managed."
But, he added: "I do think it's important to emphasise to people the Health and Safety Executive have given safety clearance to reprocessing."
BNFL's new chairman was due to report back to Trade and Industry ministers in early April on how safety would be further improved, Mr Blair added.
The decision to hand the contract to BNFL to run Aldermaston, where Britain's nuclear warheads are assembled, was immediately condemned by local MPs, who said it raised fresh fears about safety at the plant.
Aldermaston has suffered a series of safety failures under its present management. MPs warned that BNFL should not have been given control of the plants at Aldermaston and Burghfield as part of a consortium with the US company, Lockheed Martin.
David Rendel, Liberal Democrat MP for Newbury, attacked the decision as the worst thing the Government could have done. He said people living near Aldermaston would be worried and angry to learn that BNFL would be part of the management team running Britain's most sensitive nuclear site.
"As a company, BNFL is nearing collapse. Since revelations about the falsification of [nuclear fuel] data, many of the company's big contracts have been withdrawn or cancelled," Mr Rendel said.
"There is no way that people in Berkshire should be forced to accept BNFL as a member of the new management team," he said.
Mark Johnston, energy campaigner for Friends of the Earth, said: "It's the wrong decision in the present climate because BNFL still has a lot of work to do to restore confidence. The company doesn't deserve it until it can operate on a sound basis. It lets them off the hook."
Martin Salter, the Labour MP for Reading West, said he was "mystified and disappointed" by the decision.
The MPs had called for a three-month delay to allow the Department of Trade and Industry to complete its report on the falsification of records at BNFL's plant at Sellafield. The decision to give the go-ahead was seen at Westminster as a move to reassure BNFL's overseas customers that it has the confidence of the Government to handle its nuclear weapons, including the warheads for Trident missiles.
Hugh Collum, BNFL's chairman, told the Ministry of Defence that nothing in his review could be seen to be detrimental to the safe operation of Aldermaston.
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