7. Privatization Opportunities

This chapter summarizes a survey of potential privatization opportunities throughout the Department of Energy. These opportunities were identified through a questionnaire provided to all major departmental offices. The survey was not intended to be comprehensive, but rather to illustrate the types of projects that are possible candidates for privatization. Although costs and benefits are not well defined and certain information will change as further analyses are performed, these data are a useful “snapshot” of privatization actions already undertaken or under consideration.

Although some privatization projects included in this inventory are mature enough to justify discussions with industry, labor, and other stakeholders, many others are simply ideas that may never materialize. For all potential privatization efforts, it is the Department’s position that the perspectives of industry, labor, and other stakeholders be solicited early in the planning process. To that end, the entire list of potential and actual privatization opportunities identified as a result of this survey are included as Appendix A.

Survey Data

The field and Headquarters identified 234 potential privatization opportunities. These proposals were grouped by privatization type (Asset Transfer, Divestiture of Function, and Contracting Out) and by functional area. These areas include:

• Facility operations, such as buildings and grounds maintenance

• Emergency services, such as firefighting, ambulance, and certain security functions

• Personnel support, such as cafeteria management and healthcare units

• Administrative support, such as payroll

• Environmental management, including remediation of contaminated sites and provision of waste-management facilities and operations

• Other missions, such as isotope production

• Alternative financing

• Asset management, primarily asset sales

• Other functions

Figure 7–1 summarizes the types of privatization opportunities included within the survey. As the resultsshow, opportunities for contracting out far outnumber other privatization opportunities. This result was not unexpected because DOE has a long history of purchasing goods and services from the private sector. Expanding procurements from outside sources is a logical near-term privatization activity. Further, the survey followed on the heels of the Contract Reform Initiative, which underscored the importance of make-or-buy analyses to facilitate least-cost provision of goods and services.

Figure 7–2 shows the survey results by functional area. For clarity, the functional areas related to maintaining a facility (that is, facility operations, administrative support, emergency services, and personnel support) were grouped under the heading “Landlord” in the pie chart on the left. The breakout for these functions is provided in the pie chart on the right. The landlord functions, primarily related to facility operations and administrative support, dominate the privatization proposals in the survey. Most of the rest of the proposals are involved with environmental management or asset-management functions, reflecting recent major privatization efforts in those two fields.

Benefits of Privatization

DOE personnel were asked to estimate the financial benefits that could be derived from their privatization efforts; however, less than one-third of all submissions provided an estimate of any benefit. The survey captured four types of financial benefits:

• Annual cost savings—Reductions in annual expenditures or annual costs from levels previously identified in budgets, programs, or other fiscal plans.

• Avoided costs—Unbudgeted expenditures that are avoided as a consequence of some privatization action. For example, eliminating the need to plan, design, and construct a new warehouse to store weapon components that are identified as excess and subsequently disposed of would yield a cost avoidance.

• Life-cycle cost savings—Reductions in the total price of an item over its life cycle from previously identified life-cycle cost estimates. Includes reductions in costs for maintenance and repair, operations, utilities, and disposal.

• Receipts—Gross revenues generated by the sale or lease of real or personal property.

These four types of financial benefits are discussed in the following subsections.

Annual Cost Savings

Although only limited financial data were provided, the survey results indicated that the majority of thetotal savings from privatization would be derived from contracting out (outweighing the savings derived from asset transfer and divestiture of functions combined). The result is due primarily to the preponderance of contracting-out proposals in the survey. Savings from contracting out come through competition and reduced M&O overhead expenses which, in turn, reduce the DOE cost for goods or services. For example, the Richland Operations Office identified 12 opportunities for contracting out environmental management functions that could reduce annual expenditures or permit additional work with no additional appropriation of funds.

Avoided Costs

These benefits were projected to result from not having to perform a task, usually construction related, that would have been necessary if that task were not privatized. Such tasks often involve replacing extensive decontamination and decommissioning of a facility with appropriate reuse by the private sector. The Paducah Area Office suggested this approach for its vacant Metal Reduction Facility. This would relieve the office of estimated decontamination and decommissioning costs well in excess of $100 million. In other cases, such as an opportunity suggested by the Rocky Flats Field Office, the disposal of personal property and nonnuclear material will reduce landlord expenditures. Rocky Flats and Oak Ridge are now working to allow private firms to “mine” the site for used metals to decontaminate, reform, and reuse, thereby removing them from costly waste management. Another suggestion for avoiding costs is to contract out projects that require a vendor to build or buy facilities and equipment, relieving DOE of that responsibility. For example, the Savannah River Site negotiated to purchase its electrical power from the local public utility (see case study on page 5–24). This will eliminate the need for DOE to build the onsite generating facility that would have been needed within the next 10 years.

Life-Cycle Cost Savings

Estimates of life-cycle cost savings were sought to determine how expenditures over the long term would decline as a result of privatization. However, the results provided limited insight because few estimates were made and, where they were made, the approaches were often inconsistent.

Receipts

Most projected monetary receipts stem from selling and leasing DOE’s currently unneeded real and personal property. Each site’s excess personal property is now publicized through the Reportable Electronic Automated Property System (REAPS). Items of insufficient value to be included in REAPS, or those not claimed by other sites after being publicized through this vehicle, are available for sale or donation to other government agencies and to the public. By law, DOE may also sell personal property and lease real property to community-based organizations at less than fair market value. Like otherFederal departments, DOE continues to sell most of its unneeded property under the auspices of the Federal Property and Administration Services Act of 1949, as amended. DOE has established a target for the annual amount of receipts for use in reducing the Federal budget deficit. DOE-sponsored legislation to require such contributions from the Department is pending.

Additional Benefits

The survey results also identified four other benefits that may be derived from privatization activities:

• Enhanced economic benefits to the nearby community.

• Better response time in the provision of goods and services, as well as increased options to DOE managers in obtaining those goods and services.

• Potential for privatized entities to obtain commercial work beyond DOE, with resulting employment opportunities for former M&O employees.

• Cost savings that will permit the reapplication of already appropriated funds to additional mission-related work.

Obstacles to Privatization

About one-quarter of the respondents mentioned at least one substantial obstacle to privatization; many offered three or four. These responses fell into four broad groupings: (1) financial, (2) internal requirements, (3) external requirements, and (4) labor issues. These four groups are discussed in the following subsections.

Financial Obstacles

The most often cited obstacle to privatization was found in the area of asset transfer—namely the lack of dedicated or “seed” money to prepare, analyze, market, package, or otherwise prepare assets for disposition. Under current law, all proceeds are to be returned to the Treasury, thus eliminating proceeds as a source of seed money. There is also the difficulty in redirecting funds from one budget account to another for use in financing this preparatory work (see case study on precious metals sales on page

6–4). Finally, there is some reluctance to privatize services now performed by existing contractors because of potential contract termination payments that may need to be made to these contractors and their employees.

Internal DOE Requirements

Many respondents cited relatively short term limits on DOE contracts as a serious obstacle to attract qualified substitute contractors to perform mission work. They also cited term limits on property leases as a major deterrent to generating receipts from leasing vacant and developed real property. The Rocky Flats Field Office suggests that it could accomplish many of its missions through the private financing of facilities, but is concerned that this approach may be stifled because the relatively short term nature of DOE contracting may not provide a sufficient payback period for the investors. Although confident of long-term benefits, some sites were concerned about inefficiencies during the transition phase, as work passes from incumbents to newly selected contractors. A related concern was that outside purchases would permanently lengthen the accustomed vendor response time to requests for goods or services. Another concern, although apparently difficult to determine and subject to additional analysis, was that increases in the internal contract administration costs for a vendor might actually be larger than the savings produced when comparing only the new and former gross contract prices.

External Requirements

All respondents who proposed contracting out environmental and other highly technical program work cited Environmental Protection Agency (EPA) or Nuclear Regulatory Commission (NRC) permitting and other regulations. The Richland Operations Office saw these requirements as well as DOE’s inability to ensure long-term funding support for contracts as the key obstacles to contracting out its expensive long-term environmental cleanup projects.

Labor Issues

The most widely cited concerns about contracting out and, to a lesser extent, asset transfers involve potential impacts on organized labor. Many respondents raised a concern that new DOE contractors may employ non-union labor. At a minimum, they felt that this could be construed as DOE undermining the collective-bargaining rights of workers. This concern also was raised with regard to leasing DOE facilities to non-union entities.

Summary and Next Steps

The responses to the privatization survey provide insight to potential methods by which DOE can restructure its programs in efficient and cost-effective ways. The Department’s familiarity with contract procurement may explain the dominance of contracting out in the list of privatization opportunities. A sizable minority of the proposals involve asset transfers, which may be a reflection of the recent attention given to disposal of surplus assets within the Department. Divestiture of functions tend to be highly complex undertakings, which may explain the relative paucity of these types of proposals.

Due to the preliminary nature of many of these proposals, the estimates of costs and benefits are not uniform. For projects where financial analyses were more fully developed, there was a diversity in approaches to estimation. This suggests that a common, or at least a comparable, approach to cost accounting would enhance the Department’s ability to make better estimates of cost savings. The Make-or-Buy Decision Tree (see Appendix B) is the first major step in this regard. Similarly, DOE needs well-crafted guidelines concerning cost avoidance that will capture only those costs that the Department can reasonably be expected to incur if the proposed privatization initiative does not go forward. DOE has initiated a benchmarking study of cost accounting methodologies and cost avoidance estimation practices. The Department will use the results of these studies to develop appropriate guidance that will allow consistent application across the complex.