Since 1989, DOE has spent about $3.5 billion on this effort. On August 24, 1998, DOE signed a fixed-price contract with BNFL to continue with phase I by developing an approach that would process at least 10 percent of Hanford’s tank waste by 2017. Instead of requiring the contractor to obtain all needed financing without recovery from DOE if the project fails, DOE is now planning to repay BNFL’s debts above its equity, insurance, and other limited funds if BNFL defaults on its loans and DOE terminates the contract. Government backing of the private debt is an unusual feature for a fixed-price contract because the government normally does not agree to pay a contractor’s debt as an allowable cost. The August 1998 contract identified a target price and set August 2000 as the date at which the unit price will be fixed and BNFL’s funding commitments will be established. Schedule Revision

In addition to more permanent, costly facilities, the new contract extends the design period and delays the start of construction about 19 months beyond what was originally planned. BNFL proposed this approach, and DOE agreed to it, because (1) BNFL said that nuclear and worker safety requirements could not be efficiently incorporated into the demonstration facilities initially proposed and (2) permanent facilities provided advantages in processing the tank waste that would remain after phase I. The total project costs for phase I, including DOE’s support costs, increased from $4.3 billion in the original estimate to process 6 percent of the waste to $8.9 billion in the current estimate to process 10 percent of the waste, as measured in constant fiscal year 1997 dollars. This is not the first time DOE has based cost savings on questionable analytical practices. Revised Approach Shifts Significant Financial Risk to the Government

Under the revised contract approach, DOE faces a substantial financial risk that could be in the billions of dollars. This risk comes mainly in the form of an agreement to pay BNFL for much of the debt incurred in constructing and operating the waste treatment facilities if BNFL defaults on its loan payments and DOE terminates the contract. DOE officials told us they agreed to back BNFL’s loans because lenders told DOE that BNFL would not be able to obtain affordable financing without it. DOE’s financial risks hinge on a number of factors that could potentially affect the project. This scoring is of consequence because it affects how much funding DOE will have to have on hand for the project, and when. Therefore, the Congress may wish to require DOE to include in its annual status report on privatization contracts (1) the results of BNFL’s technology demonstration and testing using Hanford’s waste, (2) a reassessment of the cost-effectiveness of the proposed approach including the results of DOE’s analysis of different financing alternatives, and (3) DOE’s overall preparedness to effectively oversee the project. To determine the steps that DOE is taking to carry out its responsibilities for overseeing the project, we reviewed DOE’s report to the Congress describing how the Department is organized to manage the project, as well as Department and contractor plans for managing the project. Additional copies are $2 each. A recorded menu will provide information on how to obtain these lists.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the Department of Energy's (DOE) revised contracting approach for its Hanford Tank Waste Project, focusing on: (1) how DOE's current approach has changed from its original privatization strategy; (2) how this change has affected the project's schedule, cost, and estimated savings over conventional DOE approaches; (3) what risks DOE is now assuming with this change in approach; and (4) what steps DOE is taking to carry out its project oversight responsibilities. DOE contracted with BNFL, Inc. to treat about 10 percent of Hanford's tank waste.

What GAO Found

GAO noted that: (1) the project as currently envisioned is substantially different from DOE's 1996 initial privatization strategy; (2) although the project award was made on the basis of a fixed-price contract, further competition between contractors and short-term demonstration facilities has been eliminated in favor of more permanent facilities that could operate for 30 years or more and, therefore, would be available to treat additional tank waste; (3) the design phase as well as the date when DOE and BNFL are to reach agreement on final contract price have been extended by 2 years to August 2000; (4) BNFL's specific project financing arrangements, which were to be established in May 1998, have been deferred until August 2000; (5) to ensure that BNFL can obtain affordable private financing, DOE has agreed to repay much of the project debt if BNFL defaults on its loans and DOE terminates the contract; (6) this is an unusual feature of a fixed-price contract because the government normally does not agree to pay a contractor's debt as an allowable cost; (7) the revised approach extends the completion date for processing the first portion of the waste from 2007 to 2017, and total costs rise from $4.3 billion to $8.9 billion; (8) the increased costs are mainly the result of DOE's decision to build permanent facilities that will take longer and cost more to design and build, and the higher financing costs and contractor profits involved in operating these facilities over a longer period of time; (9) DOE estimated that this approach would save 26 to 36 percent over contracting approaches it has used in the past; (10) because of questions about DOE's methodology for estimating savings, considerable caution is needed in assuming how much the revised approach will save; (11) the contract now calls for DOE to pay BNFL for most of the debt incurred in building and operating the facility if BNFL should default on its loans; (12) thus, DOE faces a financial risk not initially contemplated on the project that could be in the billions of dollars; (13) DOE agreed to assume this risk because it did not think BNFL would be able to obtain affordable financing unless the government provided some assurance that the loans would be repaid; (14) given that the project still has a number of technical uncertainties, DOE's financial risks are significant; (15) DOE has identified additional expertise it needs and has developed several management tools to strengthen its oversight of the project; and (16) the success of the project will depend on how well DOE implements these plans.