NUCLEAR WASTE

Observations on DOE’s

Privatization Initiative

for Complex Cleanup

Projects

Statement of Ms. Gary L. Jones, Associate Director,

Energy, Resources, and Science Issues,

Resources, Community, and Economic Development Division

United States General Accounting Office

GAO Testimony

Before the Subcommittee on Oversight and Investigations,

Committee on Commerce, House of Representatives

For Release on Delivery

Expected at

10:00 am EDT

Thursday

June 22, 2000

GAO/T-RCED-00-215
1

Mr. Chairman and Members of the Subcommittee:

We are here today to discuss the Department of Energy’s (DOE) privatization initiative as

it has been applied to DOE’s nuclear waste cleanup program. DOE oversees some of the

most highly radioactive and polluted sites in the United States, primarily the

consequence of over 50 years of producing nuclear materials for weapons. Cleaning up

radioactively contaminated buildings, soil, and groundwater within the weapons

complex and safely storing wastes is a major mission for DOE. The Department

estimates that for the years 2000 through 2070, it will cost between about $150 billion

and $195 billion (1999 dollars) to complete this mission and provide long-term

monitoring of the remaining sites. DOE primarily contracts with private companies to

accomplish the cleanup. In the past, this effort was generally performed under costreimbursement contracts by contractors that managed and operated many of DOE’s

facilities. DOE financed the operations, owned the facilities, and paid the contractors

regardless of what was accomplished.

DOE started its privatization initiative in 1995 as a way to reduce the cost and speed the

cleanup of its contaminated sites and to improve contractors’ performance. The

initiative was primarily an alternative contracting and financing strategy to foster open

competition for fixed-price contracts; require the contractors to design, finance, build,

own, and operate the facilities necessary to meet treatment requirements; and pay the

contractors only for products or services delivered in accordance with the contracts.

Since the initiative began, DOE has managed several of its complex and expensive

cleanup activities as privatization projects.

Concerns have surfaced about whether DOE’s privatization initiative has yielded

significant results when applied to the Department’s more complex cleanup projects.

Our testimony discusses (1) what DOE has accomplished by privatizing such projects

and (2) our observations on the lessons that can be learned from these efforts. It is

based on our past reviews of DOE’s privatization initiative, including reviews of three
2

complex cleanup projects requested by this Committee—two at DOE’s Idaho Falls Site

and one at the Hanford Site in Washington State. Collectively, the estimated contract

prices for these three projects were about $8 billion. We have included a list of products

at the end of this statement that we have issued on various aspects of DOE’s

privatization initiative.

In summary:

• For the complex cleanup projects we reviewed, DOE’s privatization initiative has had

little success in achieving cost savings, keeping the projects moving forward on

schedule, or getting improvements in contractors’ performance. For example, on the

Hanford tank waste project, DOE estimated savings of from $2.1 billion to $3.5 billion

by using the privatization approach. However, after dramatic growth in the project’s

estimated cost and concerns about the contractor’s performance, DOE decided to

terminate the contract. Similar problems on the Pit 9 project in Idaho led DOE to

terminate that contract without achieving expected cost savings. Although DOE

adopted privatization as a solution to its past contracting difficulties, recurring cost,

schedule, and performance problems demonstrate that privatization has not been a

successful alternative for complex cleanup projects.

• Several lessons can be learned from DOE’s privatization efforts. DOE cannot rely on

privatization alone to fix its past contracting problems; instead, it must carefully

evaluate privatization as just one of the many contracting and financing strategies

that it can use to get the most out of federal cleanup dollars. DOE’s experience

indicates that the two strategies that underpin the privatization initiative—fixed-price

contracting and full private financing—will not work effectively for all cleanup

projects. Rather, a complex matrix of decision factors must be analyzed before

deciding how to contract for and finance a cleanup. These factors include how much

is known about the characteristics of the waste, the number of contractors willing to

compete, the financing options, and the risks posed by the project and the entity that

is best prepared to assume them. Our review of the Hanford project indicates that
3

future analyses of financing options need to (1) use more realistic assumptions about

cost growth for various types of contracts and (2) better reflect the actual risks

assumed by the government. Because effective DOE management and oversight are

critical to selecting the appropriate type of contract and financing mechanism, as

well as to implementing the contract successfully, DOE needs to continue improving

its technical, financial, and managerial oversight capabilities.

Background

DOE spends nearly $6 billion each year to clean up the weapons complex and provide

long-term monitoring of the remaining sites. In the past, DOE primarily approached this

mission by signing cost-reimbursement contracts, telling contractors how to perform

waste cleanup activities, and paying them for the amount of effort that was expended,

regardless of what was accomplished. Under this arrangement, DOE financed the

contractors’ activities and owned the facilities. As part of a broader contract reform

effort, and in an attempt to reduce costs and speed the progress of cleanup, DOE

developed its privatization initiative.

DOE’s privatization initiative is primarily an alternative contracting and financing

strategy. For cleanup projects, privatization means using competitively awarded, fixedprice contracts to purchase cleanup services. The contractor agrees to design, finance,

build, own, and operate treatment facilities. DOE specifies the required end products or

services—for example, treating waste to meet disposal requirements—and generally

leaves the methods and technologies used to achieve those requirements to the

discretion of the contractor. The contractor is expected to finance the project with

private money instead of using federal appropriations. This means that the contractor

must either use its own funds (equity) or borrow money (debt) in order to proceed with

design, construction, and related activities until the project is operational and the

contractor begins receiving payments from DOE for successfully treating units of waste.

DOE expected that the competitive award process, the use of fixed-price contracts, and

the requirement for private financing would bring contractors of a “best in class” caliber
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to its projects. With the contractors’ own equity and/or debt funding the projects, DOE

also expected that the contractors would have significant incentives to complete the

projects on schedule and within budget. Finally, DOE expected that privatization would

allow cleanup to move forward while deferring the government’s own budget outlays for

several years until the contractors constructed facilities and prepared them for

operations.

The three cleanup projects we reviewed involved constructing and operating treatment

facilities.1 (See table 1). The largest, a project at Hanford with an estimated contract

price of $6.9 billion, involves treating highly radioactive liquid wastes. The two contracts

at Idaho Falls, totaling about $1 billion, involve treating less radioactive solid wastes,

some of which are mixed with sludges and other hazardous materials, that are buried in

the ground or stored in drums or boxes. DOE has approved a total of eight privatization

projects involving the construction and operation of facilities to treat wastes, although

none have been approved since 1998. The eight projects are listed in appendix I.

1

In its January 1997 report on privatization (Harnessing the Market: The Opportunities & Challenges of

Privatization), DOE identified three different types of privatization initiatives that the Department would

implement—eliminating functions, transferring assets, and contracting out. Eliminating functions involves

eliminating from the Department those activities for which a federal role is no longer required—such as

the transfer of the Elk Hills Petroleum Reserve to the private sector. Transferring assets involves the sale

or transfer of real property or personal property, including disposing of surplus assets such as precious

metals in DOE’s inventory. Contracting out involves either the Department’s directly contracting for

services previously provided by federal employees or site operating contractors, or site operating

contractors’ subcontracting specific tasks to other companies instead of performing the tasks themselves.

The majority of DOE’s privatization efforts have involved contracting out. These projects take three main

forms—treating wastes at contractor-owned and -operated facilities, removing existing contaminated

facilities and structures, and providing services using existing DOE facilities.
5

Table I: DOE Privatization Cleanup Projects Reviewed by GAO

Idaho Pit 9

Idaho advanced mixed

waste Hanford tank waste

Date of contract award Oct. 1994 Dec. 1996 Aug. 1998c

Contractor Lockheed Martin

Advanced Environmental

Systems

BNFL Inc. BNFL Inc.

Wastes to be treated 250,000 cubic feet of

buried transuranica

and

hazardous wastes and

contaminated soil

65,000 cubic meters of

mixed wasteb

stored above

ground in drums and

boxes

About 5 million gallons of

highly radioactive wastes

stored in underground

tanks

Contract price $200 million $876 million $6.9 billion (est.)

a

Transuranic waste contains man-made radioactive elements with atomic numbers higher than uranium, such as

plutonium.

b

Mixed waste is a combination of radiological contaminants, such as plutonium, and hazardous but nonradiological

contaminants, such as degreasing agents or acids.

C

The original contract was awarded in September 1996. The contract was modified in August 1998 to reflect DOE’s

revised approach to the project.

Source: GAO’s presentation of data from DOE.

DOE’s Objectives in Privatizing Complex Cleanup Projects Have Not Been Met

DOE has not achieved the cost savings or the schedule and performance improvements

that it expected privatization would provide. Specifically, DOE estimated significant

cost savings for each of the three projects. To date, however, none of these projects

have achieved savings. (See table 2.) Instead, DOE terminated the contract on the Pit 9

project, and intends to terminate the contract on the Hanford tank waste project, after

the contractors estimated significant cost increases and experienced management

problems. Savings on the advanced mixed waste project are too early to determine,

since construction has not yet started. However, delays in starting construction are

likely to increase the estimated contract price.
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Table 2: DOE’s Estimated and Actual Savings to Date on Three Complex Privatization Cleanup Projects

Idaho Pit 9

Idaho advanced mixed

waste Hanford tank waste

DOE savings estimate $134 million

(1996 dollars)

$670 million

(1996 dollars)

$2.1 billion -$3.5 billion

(1997 dollars)

Actual savings achieved None—project terminated None to date—

construction has not

started; construction

delays will likely affect

costs and potential

savings

None—contract is being

terminated and

recompeted after

significant growth in cost

estimate

Source: GAO’s presentation of data from DOE.

Contrary to DOE’s expectations that privatization projects would stay on schedule, all

three of the projects we reviewed experienced delays in meeting schedule milestones. In

addition, a key feature of DOE’s privatization initiative was that contractors would

receive payments only for successfully treating waste. For two of the projects, DOE was

dissatisfied with the contractors’ performance, but it is unclear if DOE’s dissatisfaction

will prevent the contractors from being paid.

• The Idaho Pit 9 project was to start waste treatment operations in August 1996 and

complete treating the waste by February 1999. However, the contract was terminated

in June 1998 because of problems with the contractor’s performance. Treatment of

the waste is now being considered as part of a future project at the site. Although

Lockheed Martin Advanced Environmental Systems (Lockheed Martin) provided a

corporate guarantee of performance under the contract, the case is now in litigation.

DOE is trying to recover the $54 million already paid to Lockheed Martin, and

Lockheed Martin is seeking additional payments of $271 million for its work on the

failed project. DOE project officials said that it is unclear how the issues will be

resolved or how responsibility for the costs incurred on the project will be assigned

to the parties involved.
7

• The Hanford tank waste project was initially to start waste treatment operations in

December 2002 and complete processing about 6 percent of the waste by 2007. In

1998, DOE changed its approach to the project and revised the schedule to start

waste treatment operations in February 2007 and complete processing about 10

percent of the waste by 2018. In May 2000, DOE directed BNFL2to stop work, and it

is now in the process of terminating the contract because of dramatically escalating

costs and concerns about BNFL’s performance. DOE expects to pay BNFL for the

allowable costs it incurred on the project as well as negotiated termination costs.

DOE has abandoned privatization for this project and plans to recompete a contract

for the design/construction phase and compete a separate contract for the operations

phase. DOE hopes to keep the project moving forward in accordance with the

revised schedule, but DOE officials expect some delays to occur as these changes are

implemented.

• The Idaho advanced mixed waste project was to start waste treatment operations in

March 2003 and complete waste treatment by December 2018. BNFL’s February 2000

estimate shows that waste treatment operations will begin in November 2003 and are

to be completed as scheduled in December 2018. However, several uncertainties may

affect the achievement of these milestones. First, the start of construction has been

delayed because BNFL has not obtained the construction permits from the state and

the Environmental Protection Agency. Second, to resolve a lawsuit, DOE has agreed

to pursue technical or regulatory alternatives to incineration for up to 22 percent of

the waste to be treated. It is unclear how long the search for alternatives will take or

whether it will be successful. Finally, it is unclear if the flexibility built into the

operational phase of the project will be sufficient to absorb these potential delays

and allow the project to be completed on time. However, at this early stage of the

project, there are no signs that DOE is dissatisfied with BNFL’s performance.

2

BNFL Inc. is the U.S. subsidiary of British Nuclear Fuels plc, a public limited company in the United

Kingdom. The British government is the sole stockholder of British Nuclear Fuels plc.
8

The cost, schedule, and performance problems we found on privatization projects are

similar to problems found on other DOE cleanup projects that involved more traditional

contracting and financing approaches. For example, our 1996 report on DOE’s major

system acquisition projects (generally projects costing $100 million or more), none of

which were privatization projects, disclosed that at least half of the ongoing projects and

most of the completed ones had cost overruns and/or schedule delays.3Reasons for

these problems included inadequate project oversight and insufficient attention to

technical, institutional, and management issues. Although privatization was an attempt

to address these types of problems, it has not yielded the desired results.

Observations on DOE’s Privatization of Complex Cleanup Projects

We have the following observations based on our past and current reviews of DOE’s

privatization projects:

• Fixed-price contracts may not work effectively in all situations. DOE has had a

strong preference for using fixed-price contracts as a key component of its

privatization program. Federal Acquisition Regulation (FAR) guidelines note that the

conditions most conducive to fixed-price contracting include a clearly defined scope

of work, a low probability of major changes to the work scope, the existence of

proven technologies, sufficient price information to determine a fair price, and an

appropriate allocation and sharing of risks. In contrast, the three projects we

reviewed had changes in scope, uncertainties about waste constituents and technical

approaches, unrealistic project schedules, or unresolved regulatory issues that ended

up affecting schedules or costs after the contracts were awarded. For example, on

the Pit 9 project, the contractor changed the design of the chemical treatment system,

a major component of the project, after construction of the building had started.

Eventually, the chemical treatment system was modified so much that it no longer fit

in the building as constructed. These inconsistencies with the FAR guidelines make

3

See Department of Energy: Opportunity to Improve Management of Major System Acquisitions

(GAO/RCED-97-17, Nov. 26, 1996).
9

it more likely that significant changes will occur during the life of the contracts.

Therefore, these projects may not have been good candidates for fixed-price

contracts.

DOE’s guidance on privatization encourages the use of fixed-price contracts for

cleanup projects. In contrast, the U.S. Army Corps of Engineers has guidance that

appears to be more consistent with the FAR guidelines for using fixed-price

contracts. The Corps’ general contracting guidance for hazardous, toxic, and

radioactive cleanup projects states that fixed-price contracts are not the best

contracting vehicle for complex radioactive waste cleanup projects. The guidance

further states that the Corps increasingly relies on cost-reimbursement contracts for

the design and operations phases of such projects. The primary reason the Corps has

taken this position is that projects to clean up radioactive wastes can have significant

uncertainties, including undefined amounts and concentrations of contaminants,

which can affect costs and schedules. These conditions are similar to the

uncertainties DOE has faced on its complex nuclear waste cleanup projects.

DOE has been more successful using fixed-price contracts for projects whose

conditions have more closely matched those specified in the FAR guidelines.

Generally, those projects were not complex cleanup projects that involved

constructing and operating treatment facilities. For example, DOE has used fixedprice contracts at Idaho Falls and Hanford to purchase laundry services for such

items as contaminated workers’ uniforms. DOE’s operating experience under these

contracts has confirmed savings of several million dollars each year.

• Full private financing for complex cleanup projects may not be a viable approach. It

is not clear whether full private financing for complex projects is achievable or

whether it will provide needed assurance that contractors will perform effectively.

According to DOE officials, including the Director of the Office of Contract Reform

and Privatization, none of these privatized cleanup projects have secured commercial

financing to date, although a few have been financed internally by the contractors.
10

For example, on the Pit 9 project, Lockheed Martin financed project design and

construction activities from its own equity funds and government progress payments.

On the Hanford project, BNFL planned to use both equity and debt financing.

However, in order to make commercial financing viable, DOE agreed to pay BNFL’s

commercial debt in the event of contract termination. DOE decided it would

terminate the contract before BNFL obtained commercial financing. On the

advanced mixed waste project, BNFL is currently funding activities using its equity.

However, in the unlikely event that BNFL’s financing is not sufficient for the entire

project, DOE may need to consider other options, such as making progress payments

or changing the contract to make financing the project more attractive to lenders.

These potential changes would also affect the allocation of risk between the two

parties.

Full private financing also has not ensured that contractors perform satisfactorily.

For example, the Pit 9 contract was terminated and the Hanford contract is being

terminated because of concerns about the contractors’ abilities to successfully

complete the projects. On the advanced mixed waste project, it is too early to tell if

BNFL can perform successfully.

Overall, full private financing of cleanup projects is only one of several ways that

DOE can encourage its contractors to perform. In addition to using different mixes

of public and private financing, DOE could use an incentive fee structure in its

contracts to tie a contractor’s performance more closely to its potential profits.

• A thorough analysis of financial alternatives and risks is an important part of

structuring a successful cleanup project. When DOE initiated each of the three

projects we reviewed, it limited its analysis of contracting and financing alternatives

primarily to a comparison between a privatized approach and a cost-reimbursement

contract without performance incentives. In our previous work on privatization, we

have criticized such a narrow approach to making important contracting decisions.
11

On the Hanford project, after this Committee raised questions about the contract,

DOE agreed to conduct a more comprehensive analysis of its financial alternatives.

We are encouraged that DOE is considering a broader range of alternatives, but we

have some concerns about DOE’s analysis, particularly its assumptions about cost

growth and its analysis of financial risks. These assumptions led DOE to conclude

that privatization would be the least-cost alternative for the project.

In its March 2000 draft report, Hanford Tank Waste Treatment Alternatives, DOE

concluded that cost growth on federally financed projects would more than offset the

higher costs associated with private financing. We have several concerns about this

conclusion. For example, DOE assumed that with the privatization approach, there

would be no cost growth once the project started because the contractor would have

incentives to control its costs. In contrast, DOE assumed that with other options,

cost growth would more than offset the higher cost of private financing. However,

DOE had no convincing evidence to support the assumption that the privatization

approach would have no cost growth. In fact, its experiences contradict this

assumption. We also are concerned about DOE’s use of point estimates of cost

growth rates. Since estimates of cost growth under the various options considered

are not precise, using one cost growth rate can lead to a misleading conclusion about

the most cost-effective approach. To clearly show the uncertainty associated with

the cost growth estimated for various contracting and financing options, we believe it

would be more appropriate to represent the cost growth as a range of values instead

of a single point estimate.

DOE did not fully analyze or disclose the financial risks it incurred when it assumed

responsibility, in the event of the Hanford contract’s termination, for a large portion

of BNFL’s debt on the project. With this action, which DOE took so that BNFL could

obtain private financing, significant performance risk shifted from BNFL to DOE. By

contrast, under a more typical privatization project, the performance risk remains

predominately with the contractor. Had the Hanford contract continued, it is not
12

clear that DOE would have reflected this shifting of the risk in its cost analysis of

financial alternatives, as we suggested in our October 1998 report on this project.4

A

more complete evaluation of the actual risks assumed by the government on this

project could have shown that a significant portion of the potential cost of the project

shifted to the government, since the government’s liability for BNFL’s debt has a cost

associated with it. Such an evaluation might have found a different financing

alternative more cost-effective for the government.

• Regardless of the contracting and financing mechanisms used, effective oversight is

essential to a project’s success. In our past work, we have raised concerns about the

adequacy of DOE’s technical, financial, and managerial oversight capabilities, since

DOE’s oversight has not been sufficient to prevent schedule slippages or cost

increases. For example, on the Pit 9 project, DOE was unable to ensure that

Lockheed Martin was addressing significant design, safety, and performance

problems, and the contract was finally terminated. On the Hanford project, we

reported in 1998 that effective oversight by DOE, especially in the areas of project

administration, technical issues, and support activities, would be critical to the

project’s success. DOE has invested considerable effort in establishing oversight

mechanisms for technical, health and safety, risk management, and business and

financial aspects of the project. Even so, DOE officials said in April 2000 that they

were not aware of the extent of the cost increases that BNFL was estimating for the

project until shortly before BNFL submitted its proposal on April 24, 2000. This lack

of awareness raises questions about the adequacy of DOE’s expertise to oversee this

aspect of the project. As DOE continues to explore ways to improve the performance

of its cleanup program, it will be especially important to ensure the effectiveness of

its technical, financial, and managerial oversight capabilities, both in structuring

contracts and in overseeing them. DOE has an initiative under way to strengthen its

capabilities in this area. This initiative involves improved coordination and

4

See Nuclear Waste: Department of Energy’s Hanford Tank Waste Project—Schedule, Cost, and

Management Issues (GAO/RCED-99-13, Oct. 8, 1998).
13

accountability for project management teams and increased oversight of critical

projects by senior DOE management.

In summary, Mr. Chairman, privatization has not been a successful approach for the

complex cleanup projects we reviewed. In our view, DOE has not given sufficient

attention to a number of factors when deciding how to contract for and finance such

projects. These include (1) the type of waste and how well its constituents are

understood, (2) the degree of competition available among private companies with the

necessary cleanup expertise, (3) the financing options available, (4) the risks involved in

the project and the entity that is best prepared to assume them, and (5) the capabilities

of DOE’s project oversight staff. In the future, DOE needs to more carefully evaluate

these factors when making decisions about some of its most challenging cleanup

responsibilities.

-----

Thank you, Mr. Chairman and Members of the Subcommittee. That concludes our

testimony. We would be pleased to respond to any questions that you may have.

Contact and Acknowledgments

For further information on this testimony, please contact Ms. Gary L. Jones at (202) 512-

3841. Individuals making key contributions to this testimony included Carole Blackwell,

Dwayne Curry, Doreen Feldman, Nancy Kintner-Meyer, Mehrzad Nadji, Tom Perry, and

Bill Swick.
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Appendix I

Approved DOE Privatization Cleanup Projects That

Involved Constructing and Operating Facilities

Project Location Status as of June 2000

Tank waste remediation system Hanford Contract terminated during design;

project to be recompeted

Pit 9 Idaho Falls Contract terminated; parties in

litigation

Advanced mixed waste treatment Idaho Falls Ongoing—preconstruction

Low activity waste treatment Idaho Falls Project cancelled

Spent nuclear fuel dry storage Idaho Falls Ongoing—preconstruction

Transuranic waste treatment Oak Ridge Ongoing—preconstruction

Environmental management waste

management facility

Oak Ridge Ongoing—preconstruction

Spent nuclear fuel transfer and

storage

Savannah River No longer a privatization project—

converted from private to federal

financing
15

Related GAO Products

Nuclear Waste: DOE’s Advanced Mixed Waste Treatment Project—Uncertainties May

Affect Performance, Schedule, and Price (GAO/RCED-00-106, Apr. 28, 2000).

Nuclear Waste: Department of Energy’s Hanford Tank Waste Project—Schedule, Cost,

and Management Issues (GAO/RCED-99-13, Oct. 8, 1998).

Department of Energy: Alternative Financing and Contracting Strategies for Cleanup

Projects (GAO/RCED-98-169, May 29, 1998).

Nuclear Waste: Department of Energy’s Project to Clean Up Pit 9 at Idaho Falls Is

Experiencing Problems (GAO/RCED-97-180, July 28, 1997).

Nuclear Waste: DOE’s Estimates of Potential Savings From Privatizing Cleanup Projects

(GAO/RCED-97-49R, Jan. 31, 1997).

Hanford Waste Privatization (GAO/RCED-96-213R, Aug. 2, 1996).

(141444)
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