Economic Scene; Selling uranium plants to enrich the private sector?
By Peter Passell
Published: July 2, 1998
THE Treasury's announcement on Monday that it would soon privatize the Government's half-century-old uranium enrichment plants made waves largely because of the proposed method of sale. While an initial public offering of shares in a Government-owned corporation is not unprecedented, it is certainly a novelty in keeping with the spirit of the high-flying stock market.
But the more important news is that the Treasury is moving forward in spite of years of warnings that the sale would undermine a key initiative for containing nuclear proliferation. For once the United States Enrichment Corporation is privatized, the company will have powerful financial incentives to find a means to back away from an agreement to import 500 tons of bomb-grade uranium from Russia.
''Privatization is a foreign policy disaster waiting to happen,'' argued Richard Falkenrath, an economist at Harvard's Kennedy School of Government.
When the cold war ended and Russia was left with a potent nuclear arsenal, Tom Neff, a physicist at M.I.T., had a brainstorm. Why not buy a chunk of Russia's stockpile of bomb-grade uranium, blend it with natural uranium to make fuel for commercial power reactors and resell it?
Why not, indeed: With much fanfare, Vice President Al Gore struck the swords-to-plowshares deal with President Boris N. Yeltsin in 1993. Russia would manufacture the reactor fuel from its bombs, and Washington would sell the fuel on world markets. Minatom, the Russian nuclear authority, with an estimated one million employees, would get cash to cover the wages of its impoverished nuclear scientists. Far less bomb-grade uranium would be left lying around Russia for someone to steal. And all this would happen without a dime from taxpayers.
The United States Enrichment Corporation, the Federal operator of the plants in Ohio and Kentucky that enrich natural uranium to commercial reactor fuel, was assigned to put the agreement in effect. That seemed the obvious way to go, save for one fact: In an entirely unrelated burst of enthusiasm for privatizing Government assets, Congress had earlier decreed that the public corporation should be sold to the highest responsible bidder.
Joseph Stiglitz, then the chairman of the President's Council of Economic Advisers, pointed to the conflict of interest. A privatized, profit-maximizing United States Energy Corporation, he argued, would have an incentive to buy as little Russian enriched uranium as possible -- at least as long as the price paid to the Russians was higher than the corporation's own (heavily subsidized) cost of producing each extra bit of reactor fuel.
But in a curious role reversal, the Government's national security establishment put the cause of reinventing government ahead of keeping nuclear weapons out of the hands of malefactors. The State Department, Energy Department and the President's National Security Council all insisted that the corporation would do the right thing because Federal watchdogs would otherwise intervene.
Mr. Stiglitz was outgunned, but not outargued: There was already tangible evidence that the business conflict was real. For even as public servants, the corporation's managers had been caught secretly asking the Russians to slow deliveries to allow the corporation to sell more from its own inventory. And by Mr. Neff's analysis, the Government's will to keep the corporation on the straight and narrow is likely to be strained again.
As long as the price paid to Russia is less than the prevailing world price, the fuel can always be resold without cost to the Government. But Mr. Neff notes that the uranium fuel market is weak -- and will probably get weaker unless the Asian economies soon recover from their funk. Thus it would hardly be a surprise if the Government were someday forced to choose between turning a blind eye toward the United States Energy Corporation's machinations or buying up surplus Russian uranium fuel at the taxpayers' risk.
Would Washington invest billions of dollars to keep the fissionable material flowing out of Russia? In a letter to Senator John Glenn, Treasury Secretary Robert E. Rubin and Energy Secretary Federico F. Pena assured him that ''if problems arise the Administration will not hesitate to add or replace executive agents'' -- longhand for ''yes.''
But Mr. Falkenrath is skeptical. ''How likely is Congress to appropriate money to buy Russian uranium that had, in effect, been dumped by a privatized U.S.E.C.,'' he asked?
If economists believe there is trouble looming down the road, so apparently do the Energy Corporation's investment bankers. After subtracting the value of uranium inventories that the corporation will retain and adding debts it will carry, the corporation's advisers estimated that the Government would realize between $1.15 and $1.45 billion from the public offering -- just four or five years' profit, projecting from the corporation's fiscal performance in recent years.
Just how would the taxpayers be better off selling U.S.E.C. at five times earnings rather than banking the cash flow? ''It beats me,'' said a frustrated Representative Ted Strickland, a Democrat who represents the Ohio district where one of the corporation's two plants is situated.
Drawing. (Niculae Asciu)