Kimberly A. Chaney and John J. Mocknick
Department of Energy
Office of Waste Management
Washington DC 20585

Privatization, as it is being interpreted in the DOE Office of Environmental Management, and the criteria that must be met are reviewed. The current status of privatization projects will be summarized, in terms of contracts in place, and those anticipated. The central focus of the paper is on several key problems in sustaining this strategic initiative, and how they are being received and addressed in light of skepticism from a number of stakeholders including Congress and the General Accounting Office.

The U.S. Department of Energy (DOE) Office of Environmental Management (EM) was created in 1989 to manage waste and cleanup contamination produced as a result of 50 years of nuclear weapons production and research at 137 DOE sites in 33 states and 1 territory. These sites comprise a combined area of approximately 3,300 square miles. DOE continues to face the enormous task of addressing nearly 10,000 individual remediation challenges throughout the entire complex. Major responsibilities include compliance with environmental regulations, waste management, environmental restoration, technology development, nuclear material and facilities stabilization, safety and health, and public accountability.

In a period when EM is continuously being challenged with limited budgets and at the same time facing a vigorous 2006 Planning effort with high congressional and stakeholder expectations, privatization is emerging as a powerful management procurement tool for improving productivity.

The U.S. DOE EM Privatization Program is based on an acquisition strategy which provides alternative methods for accelerating cleanup and reducing cost through competition, private sector financing, and the application of proven private sector technology and experience. The Program substitutes private market mechanisms for the traditional DOE roles of employer, financier, owner, operator, and regulator of a product or service. It allows the government to access highly-specialized resources and personnel within the private sector. Privatization is a management tool that can be used to reduce the project risk to the government and achieve cleanup more cost-effectively.

Privatization allows the acceleration of key projects as it lowers long-term site maintenance and operating costs through the application of private sector expertise in a competitive environment. The expected results are significant cost savings to the taxpayer, reduced budget outlay requirements in the near-term, and measurable management efficiencies. EM expects cost savings of 25%-50% on average through the use of privatization when compared to its traditional management and operating contractor approach. Although privatization offers an approach that is potentially very positive; numerous aspects of the program have been under siege as is discussed later in this paper.

The principles underpinning the Privatization Program are:

• Open competition for fixed price contracts.
• Balance of risk between DOE and the private sector contractor.
• Project approaches and practices that ensure the safety and health of workers and the public, as well as the protection and restoration of the environment, and reduce the risks to workers, the public, and the environment.
• Project approaches that are more cost-effective when compared to traditional M&O contractor approaches.
• Performance specification-based contracts.
• A clearly defined regulatory framework.
• Private sector contractors design, finance, build, own, operate, decontaminate, deactivate, and/or decommission the facilities necessary to provide services that meet DOE specifications and requirements.
• Private sector contractors receive payment for the delivery of products or services in accordance with contract requirements.
• Mitigate the impact of privatization on employees by providing a preferences in hiring consistent with Section 3161 of the FY 1993 National Defense Authorization Act and ensure that contractors comply with applicable labor laws and successorship principles where appropriate.

DOE is the U.S. government's largest non-military contracting agency. Traditional contracting practices in DOE date from World War II. Over the years contractors at government-owned, contractor-operated facilities across the country conducted technically complex activities. These activities have included developing and producing nuclear weapons; designing and operating nuclear reactors, uranium enrichment plants, and plutonium production plants; and more recently environmental cleanup of contamination resulting from its past operations. These activities, for the most part, have involved large-scale, first-of-a-kind projects requiring substantial amounts of construction, relatively high costs, and significant technical and environmental risks.

The traditional contracting arrangement, the management and operating (M&O) contract, contained a very general work scope under which essentially all contractor costs were reimbursed plus paying the contractor an additional performance fee. This arrangement was necessary for the urgent and top-secret efforts during the Manhattan Project and the Cold War. After the Cold War ended, a different approach was needed to encourage the infusion of best management practices, work process improvements, and technology breakthroughs into contractor performance.

The 1994 Report of the Contract Reform Team called for a reform of DOE contracting practices that had resulted over the years in such deficiencies as insufficient accountability of the contractors that manage DOE facilities, inadequate competition for the award of major contracts and subcontracts, weak financial controls, excessive reliance on cost-reimbursement methods, and an overall emphasis on process rather than results.

Contract reform efforts seek to transfer greater risk to private contractors and to develop incentives to align contractor performance with specific DOE objectives. Under DOE's Contract Reform Initiative, the Department has introduced reforms seeking to remove the agency from those activities which are not inherently governmental functions or core business lines; improve the management of remaining activities; reduce the cost of doing business; and shift greater performance and financial risk to the private sector.

The January 1997 Report to the Secretary, "Harnessing the Market," defines privatization as the transfer of ownership and control of a good or service currently provided by the government to a private (commercial) sector firm. The report states that DOE will emphasize three major types of privatization:

EM has focused on contracting out/outsourcing to reach its programmatic goals, and has selected, as its privatization method, the purchase of an end product or service through a fixed-price competition. The selected contractor is responsible for delivering the product or service and is paid when the product or service is delivered to the government in accordance with contract specification requirements. This is a departure from DOE's traditional use of cost-plus award fee contracts.

Four privatization projects are currently underway in EM's Waste Management program: Richland Tank Waste Remediation System Phase I, Idaho Advanced Mixed Waste Treatment Project, Oak Ridge Transuranic Waste Treatment, and Carlsbad Contact Handled Transuranic Waste Transportation. In fiscal years 1997 and 1998, a total of $490 million has been appropriated by Congress to support the initial cost portion of these four privatization projects. Additional funding will be required in future years. The scope and status of each of these projects is provided below.

• Phase I scope is to demonstrate technical and business viability of using privatized facilities to treat Hanford tank waste; define and maintain required levels of nuclear, radiological, and occupational safety; maintain environmental protection and compliance.
• In September 1996, DOE awarded contracts to two teams, British Nuclear Fuels Limited, Inc., and Lockheed Martin Advanced Environmental Services, for Phase I.
• During Phase I the contractor(s) will finance, design, construct, operate, and deactivate waste treatment facilities, and separate and immobilize to contract performance specifications, 6 to 13% of the 55 million gallons of highly radioactive waste stored in underground tanks at the Hanford site.
• Phase IA will end in May 1998, and a decision on whether to proceed with Phase IB with one or both contractors will be made at that time.
• Facilities will be constructed on site and owned by the contractor(s); wastes will be retrieved from the tanks and delivered to the privatization contractor(s) by the site management and integration contractor.
• DOE will retain oversight responsibility for radiological and nuclear safety during Phase I activities. The Nuclear Regulatory Commission is supporting the Department and preparing to regulate the next phase of the project.
• Authorization to proceed decision: Spring 1998
  Construction start: FY 2000
  First delivery of treated waste: FY 2003
  Projected end date (Phase I for 13% of waste): FY 2010

• British Nuclear Fuels Limited, Inc. has a fixed price contract with the Department for the retrieval, sorting, characterization, storage, pre-treatment, treatment, certification, and loading for transportation of 65,000 cubic meters of mixed low level waste and mixed transuranic waste currently in storage at the Idaho National Engineering and Environmental Laboratory.
• Waste shall be treated to meet Resource Conservation and Recovery Act Land Disposal Restrictions. Meeting this requirement will also fulfill Waste Isolation Pilot Plant Waste Acceptance Criteria and Toxic Substances Control Act requirements.
• Facilities will be constructed on site and owned by the contractor.
• DOE will retain oversight responsibility for radiological and nuclear safety.
• Construction start: FY 1999
  First delivery of treated waste: FY 2004
  Projected end date: FY 2018

• A private contractor will, under a fixed price contract, retrieve and treat 700 cubic meters of remote handled transuranic sludge; 1,600 cubic meters of low-level supernate; 500 cubic meters of remote handled solids; and 1,100 cubic meters of contact handled solids, to meet Resource Conservation and Recovery Act Land Disposal Restrictions and Waste Isolation Pilot Plant or Nevada Test Site waste acceptance criteria.
• Facilities will be constructed on site and owned by the contractor.
• DOE will retain oversight responsibility for radiological and nuclear safety.
• Contract award: Spring 1998
  Construction start: FY 2000
  First delivery of treated waste: FY 2002
  Projected end date: FY 2009

• A private contractor will, under a fixed price contract, acquire additional transuranic waste transporters; design, fabricate, license, and procure new packaging; maintain trucks, trailers, and packaging equipment; provide educational programs and emergency response training; and transport contact handled transuranic waste from up to ten major and 15 smaller DOE sites to the Waste Isolation Pilot Plant.
• The contractor will be responsible for all regulatory requirements such as maintaining Nuclear Regulatory Commission certification of containers.
• DOE will retain the role of coordinator of the transportation system. Carlsbad Area Office will track and report transportation performance and costs, provide information to contractors and sites concerning transportation needs and contractor capabilities.
• Contract award: Spring/summer 1998
  First scheduled delivery: FY 1998
  Projected end date: FY 2035

Three other projects with total estimated costs of $560 million are planned in EM. One privatization project is in the Environmental Restoration program for waste disposal services at the Oak Ridge, Tennessee site. Two privatization projects are planned in the Nuclear Materials program for spent fuel storage at the Savannah River Site, South Carolina, and the Idaho Falls, Idaho site.

The primary objective of the EM Privatization Program is to draw upon the private sector to perform work more cost-effectively through reliance on competition that reduces costs, shares risks, and leads to more innovative solutions. Under privatization, DOE specifies the required end products and services, and leaves the methods and technologies used to achieve those requirements to the discretion of the contractors.

Numerous issues have arisen relative to the EM privatization program. A discussion of these issues and how they are being addressed follows.

The EM definition of privatization has been under siege. The Department remains ultimately responsible for meeting regulatory commitments for cleaning up our former defense production sites, and in fact continues to "own" the wastes. For these reasons many do not believe the term privatization is appropriate for this form of contracting out.

The term is being used because the contractor is required to back the project's budget, schedule and performance with its own funds. The private contractors will design, build, own, and operate the waste treatment or disposal facilities. The federal government generally does not pay for services until they are actually completed and the contractor has met contract performance specifications.

The dialogue continues on use of the term privatization for this alternate contracting method. A common understanding of the approach is necessary, and terminology is important. However, DOE and its stakeholders must not lose sight of the fact that the privatization program, whatever it is named, offers many advantages.

The Department's management capabilities have been under siege. During the review of the fiscal year 1998 Presidential budget request in fiscal year 1997, the EM privatization program was the subject of intense public and Congressional scrutiny. The program has been the subject of two reviews by the General Accounting Office (GAO) which found that privatization has the potential to save several hundred million dollars compared to the current management and operating contracting approach. However, the reports reflected a lack of confidence in the Department's ability to successfully manage a privatization program.

Management of fixed-price contracts requires specific skills, knowledge, abilities, and processes that are relatively scarce in DOE. Use of fixed-price contracts requires knowledge of when fixed-price contracts are appropriate (and not appropriate), cost and pricing expertise, ability to develop detailed statements of work with clearly defined deliverables and acceptance criteria, and adequate resources for pre-award and post-award activities, e.g., preparing Requests for Proposals, and negotiating and issuing change orders. The DOE and Congress must assure that necessary funding is available to support DOE in-house expertise in these areas. Without addressing these needs, it may be difficult for DOE to realize the full benefits of fixed-price contracting, particularly in complex areas such as waste management and environmental restoration.

Prior to contract reform, DOE contracting and technical staff generally did business under contractual arrangements where DOE was free both to request the contractor to perform tasks, and to direct the manner in which such tasks would be performed. Contracting on a fixed-price basis requires a new way of thinking by DOE staff who no longer can assign tasks or make work changes without being subject to stringent administrative controls. Fixed-price contracting also requires more focus on results and less focus on process.

Competent reviews on requests for proposals and contracts are critical in light of our aggressive pursuit of large, complex, long-term fixed-price contracts. This concern is being addressed in several ways. All requests for proposals and contracts are reviewed by a team of experts led by the Office of Procurement and Assistance Management prior to release. This review ensures that the critical instruments of the process are sound and will result in a deal with proper allocation of risks, contract language that properly defines the scope of work and performance specifications, and incorporates lessons learned from earlier procurements. The teaming approach maximizes utilization of expert resources within the Department.

For each privatization project a training plan is required. This forces the identification of project and support personnel, an analysis of skills, and identification of training needed or additional staffing needs. The Private Sector Working Group (comprised of Departmental and contractor personnel) is working with the DOE Office of Human Resources to develop a training program by mid-1998 to fill existing gaps.

The Secretary is in the process of naming an experienced person to head the Office of Contract Reform and Privatization in Headquarters. This office is being provided additional resources to enable it to provide programmatic support to EM privatization efforts. Skills such as financing, insurance, and investment banking, will be acquired from the private sector as needed.

It became clear during the fiscal year 1997 budget meetings with Congress, and interactions with the GAO, that there was a lack of trust and confidence in the Department's cost analyses. The GAO reported findings of understated costs, incorrect cost data, and cost comparisons of projects with different scopes that affected the accuracy of cost estimates provided in our fiscal year 1997 congressional budget request. There were weaknesses and inconsistencies in cost estimate reporting, however, the Department believed the tone of the report was imbalanced and presented a biased view which could mislead the reader regarding the cost effectiveness of the program.

Continuing dialogue between the GAO and the Department has resulted in improved communications and common understandings of various aspects of the privatization program. For example, at a November 1997 meeting, GAO representatives acknowledged that simply comparing cost estimates of carrying out the scope of work under a privatized approach versus the traditional approach is not enough. It was recognized that regulatory environment, indemnification, funding availability, and other issues can impact cost just as much as the selected financing approach. This common understanding promotes a healthier discussion with the GAO and other external stakeholders, and helps to build trust and confidence.

A Round Table of Privatization of DOE EM Programs was held in April 1997 to bring together Members of Congress, DOE, GAO, contractors and their financiers, organized labor, and others. This forum was helpful in identification and discussion of several areas of concern, and promoted the trust-building that is essential to the stability of the program.

Most of the EM privatization projects require investment of large amounts of capital. Historically, the Department funded capital-intensive projects as needed. The management and operating contractor assumed little or no budget or performance risk. Under the privatization approach, the contractor is required to back the project's budget, schedule and performance with its own funds, and is not paid until contract performance specifications are met.

Private companies will generally turn to a project financing approach instead of corporate borrowing to finance facilities constructed under a privatized contract. The presence of third-party lenders and investors adds additional perspectives and interests to the project. Additional project oversight is introduced and very specific terms and conditions are required in contract documents. The presence of third-party financing sources imposes added structure into the project's planning, construction and operation.

The question of how privatized services should be financed is being debated. Proponents of government financing argue that the cost of private sector equity and debt is so much larger than government financing, that government progress payments or other form of government financing will result in lower project costs.

Comparisons of the cost of money ignore the principal objective of privatization: shifting risk to the private sector. The ideal solution in some instances may be to have a mixture of private and government financing to maximize the project's efficiency. Some government participation in financing may be necessary for financial feasibility and result in allocation of risks between the contractor and the government that is optimal for contractor competition and for project performance.

Evaluating financing sources requires considerations well beyond simple comparisons of interest rates. The allocation of risk, which includes financing type, must be analyzed and balanced for each project to maximize a project's efficiency and to ensure objectives for privatization are achieved. This is a complex process which has been at issue with DOE stakeholders, and internally. DOE must continue to strengthen knowledge and communications on financing approaches and how alternative approaches effect the success of projects. Additionally, the EM needs to remain flexible enough in the definition of privatization to allow alternate financing approaches to be pursued when it is in the Government's best interest to do so.

In summary, privatization is a substantial departure from the DOE traditional approach to conducting environmental management work. It is a management tool, a means to an end, and a pivotal component to reaching 2006 Plan goals. The Department is committed to making contracting "work better and cost less". The significant opportunity for reduced costs and schedules makes the privatization approach worth maintaining.

The issues identified herein reflect some of the areas needing continued attention. The program definition, the Department's management, building trust, and putting in place optimal financing approaches are areas that have been under siege, and are essential for sustenance and growth of the privatization program.

1. Office of Environmental Management Privatization Program Management Plan, January 1998
2. Contract Reform and Self Assessment Report, Office of Contract Reform and Privatization, U.S. Department of Energy, September 1997
3. Department of Energy: Improving Management of Major System Acquisitions, General Accounting Office, T-RCED-97-92, March 1997
4. DOE's Estimates of Potential Savings from Privatizing Cleanup Projects, GAO/RCED-97-49R, January 1997
5. Harnessing the Market: The Opportunities & Challenges of Privatization, U.S. Department of Energy, DOE/S-0120, January 1997
6. Making Contracting Work Better and Cost Less, Report of the Contract Reform Team, U.S. Department of Energy, DOE/S-0107, February 1994

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