The Opportunities and Challanges of Privatization

4. Divestiture of Functions

As a result of Vice President Gore’s Reinventing Government Initiative, many Federal agencies have been reviewing their functions to determine the appropriate Federal role. At DOE, this review has resulted in a number of proposals to divest the Federal Government of functions for which a Federal role is no longer required.

Through the Strategic Alignment Initiative, the Secretary also has focused the Department’s planning on the most efficient ways to meet DOE’s core business goals. These planning efforts ultimately can be expected to result in a number of proposals at local DOE sites to divest certain functions. Those planning efforts are just beginning to bear fruit as potential opportunities are being identified and discussions with local officials are being initiated.

Although the distinction is blurry in some circumstances, divestiture of functions differs from simple asset transfers in both scope and impact. A functional divestment strategy involves transfer of the operation as a whole to the private sector as opposed to a simple transfer of real or personal property. More specifically, it represents an effort to transfer an entire ongoing operation to private-sector ownership and management in those cases where the operation’s potential value in the private marketplace depends on maintaining the operation as a coherent commercial entity. Thus, while the operation may include assets such as real estate, equipment, and materials, it also may include both managerial and wage employees who operate within a recognized managerial system.

In contrast with contracting out, divestiture of functions is not premised upon the Government being a customer for the newly privatized concern. While the new commercial entity may count the Government among its customers in some cases, the intent of functional divestiture is weighted more toward removing the Government from an activity altogether rather than procuring the same level of services from private sources to increase efficiency and reduce cost.

There is no single description of privatization efforts involving the divestiture of DOE functions because of the significant differences that exist among the functions that are candidates for privatization. Many DOE functions have significant national and even global importance; others have a more regional or local nature. Privatization of functions with national significance, such as the Power Marketing Administrations, the Naval Petroleum Reserve, or the United States Enrichment Corporation, would be conducted differently than the privatization of a support function at a local assembly plant. The constituency for the former would be national in scope, necessitating broad discussions of economic and social impacts, or even debates about the legitimacy of the Government’s role. The constituency for the latter would be more clearly defined, allowing more focused discussions.

Identification and Analysis of Opportunities

Identifying and evaluating proposals for the divestiture of DOE functions requires strong coordination between the relevant Headquarters program office and the field implementation offices. The Headquarters program office is in the best position to objectively assess the impact on achieving planned mission goals. The Headquarters and field offices are essential to providing the cost/benefit analyses and assessment of prospective business information required for decisionmaking. The field offices must be careful to avoid situations creating conflicts of interest for the contractors assisting with the Department’s privatization efforts.

In considering privatization opportunities, program officials must ensure that the Department’s core mission goals of national security, science and technology, industrial competitiveness, energy resources, and environmental quality continue to be met. During the 50 years of the Department’s research, testing, and production of nuclear weapons, many sites and facilities have developed unique and technically complex proficiencies with special equipment and facilities not generally available in the private sector. While many privatization decisions can be made using current data, the decisions on retention or disposal of national defense infrastructure must be made with an eye to long-range implications involving the availability of these assets, should the world political situation change. In evaluating some divestiture proposals, maintaining the core competency of the Department to carry on its national security missions may override interest in short-term efficiency or productivity gains. Decisions should be supported by thorough analysis with clear delineation of future impacts on the Department’s capabilities.

Assessment of divestiture options will also have to consider export control and nuclear nonproliferation issues relating to certain DOE technologies and property. The Department has established policies and procedures for the control of property disposition, which are described in Personal Property Letter Issue No. PPL–970, dated March 25, 1996, issued by the Deputy Assistant Secretary for Procurement and Assistance Management. These requirements are discussed more fully in Chapter 6. Obviously, each privatization opportunity will present its own unique set of possibilities, and the circumstances of each privatization opportunity will demand tailored decisionmaking.

Community Impact and Stakeholder Involvement

In considering potential privatization through divestiture of functions, the Department must actively solicit and clearly address stakeholder concerns. These concerns will vary depending on where the proposal stands on the national-local interest spectrum. Divestiture of a function can have a significant impact on the community in which the DOE facility is located. Substantial efforts by DOE early in the privatization process are required to determine applicable legal requirements and to mitigate potential adverse employment, economic, and environmental effects.

Once a potential privatization opportunity has been identified, public outreach to DOE internal and external stakeholders will allow the Department to gather the information necessary to ensure a gooddecision and can help tailor a successful project. Stakeholders include workers and affected labor unions, local elected officials, institutions of higher education, financial institutions, prospective business investors, industry consultants, current management and operating contractors, citizen organizations, and the general public. Early consultation with these stakeholders helps DOE ensure that privatization efforts proceed in the best interests of DOE, the Federal Government, and the taxpayers. Many communities have benefitted from the formation of DOE-supported community reuse organizations or economic transition groups. These efforts can have measurable benefits in mitigating negative impacts on the local economy. In addition, employment training and placement services should be made available to help find alternative uses for the DOE facilities. Reapplication by the private sector of under-used or unused DOE facilities is a valuable tool for communities to transform themselves from Federal employment-based economies into independent and innovative private business centers.

Occupational Safety and Health

The safety and health of workers and the public are fundamental responsibilities of the Department and its contractors. Where issues arise regarding regulatory jurisdiction, the Department must be prepared to maintain an ongoing role in environmental, safety, and health oversight to ensure the continuity of protection until external regulation is in place. In the transition of privatized sites, facilities, and operations to external regulation of safety and health, a number of important issues may arise. This section discusses those issues.

Regulatory authorities must be advised of any jurisdictional change for safety regulation and the rights of employees to report regulatory violations to those authorities. As DOE learned during the privatization of the Portsmouth, Ohio, and Paducah, Kentucky, gaseous diffusion plants, the Department is liable for correcting significant Occupational Safety and Health Administration (OSHA)-based noncompliances identified prior to the transition to OSHA jurisdiction.

For OSHA to assume jurisdiction of a privatized facility, regulatory authority must be transferred from DOE to OSHA in a clear and definitive way. DOE and OSHA must provide public notice in the Federal Register that regulatory authority is being transferred. The vehicle used to transfer authority is an addendum to the Memorandum of Understanding (MOU) entered into between DOE and OSHA in 1992, which delineates their respective regulatory authorities. The DOE Office of Worker Health and Safety has developed a process to modify the MOU and develop the Federal Register notice. This office must be involved early in privatization initiatives to ensure that these important transition activities occur in a timely manner.

OSHA has been concerned that the pace and scope of DOE privatizations will strain OSHA’s limited resources. As a result, DOE and OSHA have formed an ad hoc working group to review interagency issues surrounding privatization. In addition, the National Academy of Public Administration (NAPA), under a DOE grant, is analyzing privatization issues in its broader review of DOE transition to external regulation. NAPA expects to publish its report in January 1997. Both efforts will identify resource impacts and the legal and jurisdictional issues associated with privatization and external regulation, and will support a smooth transition to external regulation.

Environmental Issues

The protection and restoration of the environment is a fundamental responsibility of the Department and its contractors. DOE is committed to maintaining and enhancing environmental quality when considering proposals for divestiture of functions. Since the components of a divestiture of function can include the transfer of real property or the leasing of facilities to the private sector, any proposed action must comply with applicable environmental laws, including the National Environmental Policy Act (NEPA), as appropriate. Conditions should be imposed to ensure that potential transferees, grantees, and lessees have the responsibility and capability to carry out appropriate environmental protection requirements effectively.

In addition, real-estate disposal actions involving DOE land or facilities will be conducted under GSA regulations and procedures, unless otherwise authorized. When reporting property excess to GSA for disposal, GSA will meet with DOE representatives to assess the environmental remediation needed before GSA can accept the property for disposal. With respect to the outleasing of DOE land and facilities to the private sector, appropriate conditions must be in the lease to identify the environmental liability of both the Government and the private entity, including the establishment of a baseline inventory and condition report on the land or facility to be leased, and notice of any existing commitments with regulatory authorities.

Continuing Government Support

The continuing success of a private activity should not be dependent on indefinite Federal economic subsidization—that is, support in the form of reduced or no rent, transfer at less than fair market value, or continued presence on Federal lands where such presence is not vital to the activity, in order to maintain private performance of the function.

Since several of the currently proposed privatization activities involve ongoing financial support from the Government as a step toward complete privatization at some later date, the negotiations should include a specific date after which the Government will no longer subsidize the contractor. Such incentives as free or reduced rent while the contractor seeks private-sector clients should be done on a sliding scale, with the intent to force total and open competition at some specified endpoint. It is important for DOE to stay focused on the ultimate goal, which is divestiture. Negotiations must address the length of commitment by the Government to support onsite activity.

Alternative Divestiture Mechanisms

DOE intends to explore various alternative mechanisms for divestiture of functions, including competitive requests for proposals, cooperative agreements, and sole-source contracts. In addition, certain divestitures may be legislatively mandated (see Elk Hills case study on page 4–2).

Key Legal Authorities

The following charts represent the key legal authorities governing the divestiture of functions by the Department of Energy. They should not, however, be construed as a comprehensive listing of all legal authorities that may be applicable to a particular privatization activity.

Case Study 1: Divestiture of the Elk Hills Naval Petroleum Reserve

Background

Since 1912, the Federal Government has managed the Elk Hills Naval Petroleum Reserve (NPR) in Kern County, California. The original purpose of the NPR was to ensure a supply of oil for the U.S. Navy. In 1976, in response to the 1974 oil embargo, Congress directed the NPR to be put into production and operation. DOE has managed the NPR for the Federal Government since 1977. It is operated under a Unit Plant Contract with Chevron U.S.A.

The Effort

With the enactment of Title XXXIV of the National Defense Authorization Act for fiscal year 1996, DOE was directed to sell the U.S. interest in NPR 1, Elk Hills, California, by February 10, 1998. The Elk Hills initiative revealed bipartisan congressional support to divest what historically had been considered a strategic national asset.

However, the legislation also evidenced caution in disposing of such a large Government asset. The statute contains numerous procedural safeguards designed to ensure that the Government receives full value for Elk Hills and that the sale is competitive. For example, the law requires that the Government retain eight outside consultants to help conduct the sale and sets out specific schedules and deliverables for each consultant:

• An investment banker or financial adviser to administer the sale to be retained within 2 months

• Five independent experts to assess the value of the reserve to be retained in 7 months and to complete their work in 11 months

• An independent petroleum engineer to prepare a Reserve Report on the remaining recoverable oil and gas reserves within 11 months

• An independent petroleum engineer to make recommendations for the finalization of equity within 8 months.

Additionally, the Secretary is required to establish a minimum price which, under the Act, may not be below the higher of the average of the five independent assessments or the average of the middle three independent assessments. Further, the Secretary is required to consult with a number of other agencies (OMB, the Treasury Department, and the General Services Administration) at various points in the sales process. Contract(s) of sale are subject to a 31-day “report and wait” requirement, and the sale may be suspended if the Secretary and the Director of OMB jointly determine that the sale is proceeding in a manner inconsistent with achievement of a sale price that reflects full value or that some course of action other than immediate sale is in the best interests of the United States. Finally, the Comptroller General is tasked under the Act to “monitor” the Secretary’s sales activities.

Lessons Learned

A detailed elaboration of lessons learned is premature at this point because the Department is in the early stages of the Elk Hills divestiture. However, we have learned that the establishment of a dedicated DOE team to internally administer the sale has proven to be critical to the successful accomplishment of the ambitious schedule of the Defense Authorization Act. This Divestiture Administration Team consists of a project manager, procurement specialists, attorneys, and technical experts from DOE’s Naval Petroleum and Oil Shale Reserve office and a representative from OMB.

Case Study 2: Divestiture of the National Institute for Petroleum and Energy Research

Background

The DOE National Institute for Petroleum and Energy Research (NIPER) is located in Bartlesville, Oklahoma. NIPER has been the Government’s principal petroleum research facility and has supported DOE’s fossil energy research and development efforts by providing project administration assistance to oil technology projects. The Secretary’s Strategic Alignment announcement in August 1995 required DOE to explore opportunities to privatize this research laboratory, with a target date of June 1996. At that time, BDM-Oklahoma, Inc., was the management and operating (M&O) contractor at the site.

The Effort

The objectives of the privatization include reducing DOE oil program costs, allowing for the disposition of the federally owned buildings (some of which are more than 50 years old) and real estate in Bartlesville, and minimizing the impact on the Bartlesville community. The privatization will be accomplished in two steps.

First, BDM-Oklahoma’s parent company is establishing a state-of-the-art commercial petroleum research facility—named BDM-Petroleum Technologies, a subsidiary of BDM-Federal—at another location in Bartlesville. The purpose of the new facility is to provide research on a competitive basis for a wide variety of private-sector and government customers.

Second, BDM-Oklahoma and DOE have modified their existing M&O contract to provide for the performance of specified oil research activities previously planned for performance under the M&O contract to be performed at the new commercial facility. The term of the new contract arrangement is the 2-year period that was remaining in the term of DOE’s contract with BDM-Oklahoma. During these two years, some BDM-Oklahoma personnel at the Federal site will be transferred to the new research center and become employees of BDM-Federal. BDM-Oklahoma personnel remaining at the Federal site will perform environmental restoration and other activities needed to allow DOE to declare the site “excess” and transfer it to the General Services Administration for disposal. Finally, upon expiration of the M&O contract, the new commercial research center is not guaranteed any work from DOE, but it is eligible to compete for new work from DOE.

As a result, DOE will privatize its oil research functions, dispose of unnecessary facilities and their associated costs, and minimize the cost of workforce transition and economic impact on the community.

Current Status

On August 1, 1996, Secretary O’Leary announced that the Department had reached an agreement with BDM-Oklahoma and BDM-Federal, leading to the privatization of the NIPER research, development, and demonstration activities. This action will save taxpayers an estimated $25 million over the next 5 years.

Lessons Learned

At DOE, there often are numerous offices, both in the field and at Headquarters, that have a stake in a proposed privatization action. This was the situation with NIPER. Due to a coordinated team effort, actions leading to the signing of the contract modification were completed on an accelerated basis. The early buy-in and active participation of all groups with a stake in the stated objectives expedited the process and led to a far better resolution.

Case Study 3: Privatization of the Western Environmental Technology Office

Background

The DOE Western Environmental Technology Office (WETO), located in Butte, Montana, has been used as a test center in the development of waste management technology. MSE, Inc., a wholly owned subsidiary of the Montana Energy Research and Development Institute (MERDI), a nonprofit organization, currently operates the facility

The Effort

DOE has recently completed privatizing the WETO facility. The purpose of this privatization was to eliminate DOE’s financial and management obligations, to reduce the Federal Government’s costs of contracting for services to be performed at the site, and to facilitate technology transfer and commercialization activities by attracting greater private sector, university, and other technical support activities.

The DOE privatization proposal for WETO was governed by agreements included within the original land purchase. In 1976, DOE’s predecessor agency, the Energy Research and Development Administration, executed a real-estate agreement with the Butte Local Development Corporation, a nonprofit corporation organized under the laws of the State of Montana. Generally, the agreement provides that the Butte Local Development Corporation would offer a 53.15-acre tract of land to the Government for energy-related projects in exchange for a “right of first refusal” that would allow the Butte Local Development Corporation to purchase the real estate and improvements for approximately the fair market value when DOE no longer needed the land. In early 1996, MERDI initiated a proposal to purchase WETO, in conjunction with the Butte Local Development Corporation, under the right of first refusal. This MERDI proposal was the impetus for DOE’s efforts to determine the feasibility of privatizing WETO.

Current Status

In late 1995, DOE established an intradepartmental group consisting of various Headquarters and field divisions to evaluate privatization possibilities. The DOE Pittsburgh Energy Technology Center (PETC), which administers the site, engaged the Army Corps of Engineers to perform an environmental assessment of the site as well as a real-estate appraisal to determine the fair market value of facilities and improvements. Additionally, PETC hired a contractor to assess the value of real and personal property and fixtures. DOE and the Butte Local Development Corporation began negotiations on the site’s value based upon the result of these efforts.

A second part of the privatization agreement calls for DOE to award a 5-year research program to MSE Technology Applications, Inc., a Butte firm that will operate the facility. DOE intends to provide sufficient funding to ensure a continuing robust environmental program at the facility.

On September 30, 1996, a signing ceremony took place at WETO. The signed agreements transferred financial responsibility for the facility from DOE to the Butte Local Development Corporation and provided for 5 years of research and development effort to be performed by MSE, Inc., at the site.

The Butte facility privatization plan will accomplish key departmental objectives, including immediate fair market value sale of a facility that no longer needs to be owned by the Federal Government (the site was purchased from DOE for $3.4 million), 5-year cost savings to taxpayers (estimated conservatively at $5 million), the minimization of adverse impacts on the local workforce (and the potential for expansion of high-technology jobs in the Butte area), and continuity of existing government research and development programs at the facility.

Lessons Learned

This project underscores the extensive time necessary for real-estate appraisals. For future projects, it would be prudent to factor in additional lead time for receipt of appraisals.