1. Introduction:
Privatization in the DOE Context

The decision to privatize comes from a policy determination that the Government no longer needs particular assets or no longer needs to be in control of all the means by which products or services are obtained or delivered. Most broadly defined, privatization substitutes, in whole or in part, private market mechanisms for the traditional Government role as employer, financier, owner, operator, and/or regulator of a product or service (see Figure 1–1, Privatization Continuum for Goods and Services). This definition admits a wide variety of actions, from innovative contractual arrangements to outright divestiture of activities or assets. But all of these actions share common objectives: To remove the agency from those activities that are not inherently governmental functions or core business lines; to improve the management of remaining activities; to reduce the costs of doing business; and to shift greater performance and financial risk to the private sector.

Three Major Types of Privatization Initiatives

This report divides privatization initiatives at the Department of Energy (DOE) into three major types: divestiture of functions, contracting out, and asset transfers. This taxonomy recognizes that the three types of privatization actions differ along several important dimensions. They include the residual level of government involvement, the impacts on Federal or contract employees, and the statutory and regulatory basis for action. It should be noted that some of the more complex privatization efforts can include aspects of all three types. Each type of privatization is discussed in greater detail in the following chapters and includes case studies from ongoing or completed DOE privatization efforts. (This report does not directly address the commercialization of DOE technologies or employee spinoff companies.)

Divestiture of Functions

Divestiture of functions involves eliminating from the Department those functions for which a Federal role is no longer required. Divestiture of functions that have been performed by the Federal Government is usually more complicated than an asset transfer (although asset transfers are often a component of a functional divestiture). In a divestiture, the Government transfers to private-sector control an entire ongoing enterprise, such as the Elk Hills Petroleum Reserve (see case study on page 4–2). Although the resulting private entity may still include the Government as a customer, the focus and scope of the enterprise are likely to change. Divestiture of functions can have a substantial impact on a community if the resulting private-sector entity changes the terms of employment for former government or contractor workers, relocates, or curtails its operations (see Chapter 4).

Contracting Out

The majority of DOE’s privatization efforts to date have involved contracting out activities. In the DOE context, contracting out can involve management and operating contractors subcontracting out specific tasks or the Department directly contracting for services previously provided by Federal employees or management and operating contractors. Contracting out introduces a host of legal and contractual issues that surround the contract award and its continued governance. Contracting out can take many forms, from traditional service contracts to private financing and leaseback arrangements. It can range from relatively simple tasks such as lawnmowing and custodial services to the complex and multifaceted Hanford Tank Waste Remediation effort (see case study on page 5–12; also see Appendix A, which lists potential privatization opportunities in DOE). Community impacts can range widely depending on the contractor chosen to perform the task and the extent to which affected workers are transferred to other jobs at the site or retained by the contractor when subject to reductions-in-force (see Chapter 5).

Asset Transfers

An asset transfer involves the sale or other transfer of real property or personal property, such as the sale of precious metals in DOE’s inventory. An asset sale, lease or donation implies little or no government involvement after transfer and affects property more than people (although employees engaged in maintaining assets may be affected). Nevertheless, the disposition of surplus assets presents a unique set of legal, procedural, and management challenges (see Chapter 6).

Privatization as a Management Tool

Privatization serves two primary purposes as a management tool. First, at a strategic level, it helps an organization focus on those work activities that represent its core expertise, skill, or value-added offering. For example, by contracting out non-core functions, the organization can better focus its management attention on critical matters and at the same time bring world-class performance to peripheral functions. Second, at a tactical level, privatization is a means of reducing costs by ensuring that work activities are performed by the most productive, cost-effective means.

For governmental activities, application of privatization as a management tool requires active and continual examination of functions to determine whether they are necessary and, if so, whether they are more appropriately or more effectively performed by private parties at some level of the activity. As with private organizations, the Government must differentiate between “core” or “inherent” governmental activities and those that are the appropriate subjects for private performance.

Privatization is a means used to achieve the important objectives of removing the Department from those activities that are not inherently governmental functions or core business lines, improving the management of remaining activities, reducing the costs of doing business, and shifting greater performance and financial risk to the private sector. This important fact is often lost in rhetoric surrounding the appropriate role of government, which tends to obscure the more practical question of how to adapt government to changing needs. It is important to understand that privatization is not an objective itself.

Privatization can take many forms. In the Department of Energy context, it can range from selling off surplus inventories or contracting out relatively simple services, to transferring to the private sector functions traditionally performed by the Department or its management and operating contractors. Whatever the form that privatization takes, it represents an attempt by the Department to take advantage of the benefits of competitive markets. Market incentives can help minimize costs, spur innovation, and reward successful adaptation to change. When harnessed by government managers, competitive markets can become useful tools to accomplish missions at reduced costs to taxpayers. Managers can use privatization to optimize the in-house and contract workload mix and more effectively focus management attention on core functions.

Privatization is not a cure-all for every management problem. When pursued purely for its own sake or otherwise misapplied, privatization can significantly impair management efficiency and effectiveness. Privatization is not suitable for many situations where core missions, inherently governmental functions, or other essential requirements dictate the retention of a more traditional government role, and in cases where functions are more cost-effectively provided by in-house personnel. Successful privatization requires careful analysis of opportunities and painstaking attention to process details. Privatization is a management tool, not a substitute for management.

Finally, while privatization in the Government often resembles downsizing, outsourcing, or divestiture in the private sector, there are fundamental differences. Corporate entities typically decide to reduce their scope of operation in reaction to the imperatives of the marketplace or the demands of shareholders. The actions of the Federal Government are held to a different standard; government accountability exceeds the narrower scope of corporate responsibility. Thus, while privatization actions help the Government to become more businesslike, it is neither possible nor desirable to completely mirror private sector decisionmaking. The social contract between government and the people most affected by government actions—individual government workers, communities dependent on government employment, and entire regions affected by the environmental legacy of national defense activities—is rightly considered more binding than the relationship between private sector entities and consumers. Congress recognized this “special relationship” through Public Law 102–484, the National Defense Authorization Act for FY 1993, Section 3161.

Privatization Supports Other Key Reform Initiatives

The Privatization Initiative represents one of several key reform efforts initiated by Secretary O’Leary. The first such effort was the Contract Reform Initiative, which identified new ways to manage the work of the Department. Completed in February 1994, the Contract Reform Team’s report, Making Contracting Work Better and Cost Less, outlined how performance-based contracting could result in dramatic savings to the taxpayer and increased productivity within the Department. This report set the stage for an ongoing contract reform effort that is now pervasive throughout the Department. The Secretary also commissioned a new strategic planning process designed to refocus the Department on the new challenges facing the Nation. Completed in April 1994, the Department of Energy’s Strategic Plan identified five business lines: Industrial Competitiveness, National Security, Energy Resources, Environmental Quality, and Science and Technology.

Finally, the Strategic Alignment Initiative, announced in May 1995, provided a roadmap to a leaner Department by reducing duplication and aligning our activities to the business lines set out in the Strategic Plan. These planning and reform efforts, which complemented and extended Vice President Gore’s National Performance Review, are redirecting Departmental resources to better meet core mission functions.

The Contract Reform Initiative, the Strategic Plan, and the Strategic Alignment Initiative all recognized the potential for increased use of privatization as one means of reducing the cost of meeting core mission objectives. In many cases, privatization can enable the Department to reduce the cost of doing business while assisting our employees and local communities make the transition to a leaner, more efficient Department.

The Privatization Initiative is one of a number of key DOE reform initiatives
complementing Vice President Gore's National Performance Review

Significant privatization efforts already have begun in DOE (Figure 1–2), with the total value of projects to date exceeding $4 billion. The Department projects actual savings from privatization to be upwards of 25 percent (and in some cases higher) relative to the cost of activities performed under a traditional M&O contract arrangement.

The Department’s Materials and Asset Management Program is facilitating the divestiture of surplus physical assets. The Department sold the Pinellas electronic component manufacturing plant at Largo, Florida, as a result of reconfiguring the nuclear weapons complex. The Department also has begun the process of divesting entire operations, such as the Naval Petroleum Reserve Number One (Elk Hills, in Kern County, California) and the National Institute for Petroleum and Energy Research in Bartlesville, Oklahoma. Laundry services have also been privatized at Hanford and the Idaho National Engineering Laboratory. Finally, many functions traditionally performed by large management and operating contractors on a cost-reimbursable basis at former weapons facilities have been contracted out to privatesector companies on a fixed-price basis—for example, the power generation services at the Savannah River Site.

The Privatization Working Group

To date, the Department has been meeting privatization-related challenges on an ad hoc basis. Recognizing the need to employ a more comprehensive approach, Secretary O’Leary formed the Privatization Working Group in October 1995, chaired by then Acting Assistant Secretary for Policy, and now Chief of Staff, Dan Reicher. The Secretary directed the Working Group to develop a Departmentwide privatization policy, compile an initial inventory of privatization opportunities, describe how to overcome the challenges associated with privatization, and provide implementation support for key privatization initiatives.

The Working Group first analyzed current privatization initiatives at DOE and other agencies to identify issues associated with privatizing assets, services, and facilities. It consulted with other Federal agencies, labor unions, the private sector, investment bankers, and representatives from the National Performance Review and the U.S. Enrichment Corporation. From this effort, the Working Group then developed the Department’s guiding principles for privatization and developed a number of recommendations and action items to establish privatization as an ongoing management imperative. The Working Group also conducted a survey of potential privatization opportunities.