NSIA Environmental Outsourcing and Privatization White Papers

Environmental Outsourcing and Privatization White Papers

The attached "White Papers" regarding environmental outsourcing and privatization (Proposed Environmental Indemnification, Proposed Elimination of Misconstrued False Claims Act Civil Liability, and Proposed Extending DoD Environmental Initiatives to Active Installations) have been derived from the proceedings at the National Security Industrial Association Logistics and Management Committee's (LoMC) Outsourcing and Privatization Workshop, held October 2-4, 1996, in Fredericksburg, Virginia. We were pleased with the interest and keen insight of the workshop's participants and the environmental implications confronting DoD's outsourcing and privatization initiatives.

The objectives of the environmental panel were to identify current impediments to environmental outsourcing and privatization, and to develop industry recommendations for fair and equitable solutions to those problems. In order to contribute to a more effective and balanced policy, we also solicited input from knowledgeable individuals throughout the government on their beliefs on the critical issues affecting environmental outsourcing and privatization. The attached White Papers concern (1) the need to readjust liabilities in environmental indemnification, (2) the elimination of misconstrued False Claims Act civil liability, and (3) the extension of benefits derived from environmental protections at closing bases to active installations.

Industry believes that an environmental outsourcing or privatization project must provide a reasonable profit opportunity for private industry. One suitable option to incentivize contractor investment is multi-year (e.g., 7-10 years) periods of performance to permit industry's recovery of initial investments. Industry may well be willing to accept "share-of savings" income if the current cost base is properly established and a multi-year agreement is accordingly negotiated. Industry further believes that, to generate real savings, it is essential that industry be given the flexibility to manage the incumbent civil service being outsourced, in a fair and efficient manner.

These core beliefs, as well as the attached "White Papers," identify issues which industry believes is critical to the success of future DoD policy on all outsourcing and privatization. We genuinely support accelerated outsourcing, as we see this as a unique opportunity for the Department of Defense to generate substantial net savings from MilPer and O&M accounts. These net savings then can be re-invested into the RDA accounts to recapitalize our platforms for continued battlefield dominance. We are available to discuss any aspect of these issues with you or your staff. Please contact me if I can provide you with any additional information

ENVIRONMENTAL OUTSOURCING AND PRIVATIZATION WHITE PAPER

(Proposed Environmental Indemnification)

Issue: The Department of Defense (DoD) must clearly affirm that it will assume immediate liability for pre-existing environmental damage to soil, groundwater, and other resources that impede with private development on military land being converted to civilian use or for conversion to privatization-in-place.

Background: Once DoD decides to privatize a federal facility, complex issues of environmental liability arise immediately. Because of the years, frequently decades, it takes to clean up environmental contamination sufficiently, contractors are often willing to take possession of the property prior to the completion of the necessary clean-up with reasonable assurances of indemnification from the government. Consequently, definitive allocations of liability need to be made, so as to represent the obligations of each of the parties in a fair and equitable manner at the time of privatization. However, DoD often maintains that it will grant indemnification for environmental conditions and clean-up only to the extent provided by statute. This confuses legitimate risk allocation and increases the probability of disputes and litigation in the outlying years.

This position adversely affects DoD's privatization efforts. For example, in both base closure and redevelopment of housing, utilities, and other functions, there is real potential that soil and groundwater contamination can interrupt excavation required for the installation of utility lines and laying of new foundations. Such interruption necessarily delays the completion of the project; thus, slowing the transition of the facility to the private sector and realization of valuable savings by DoD. If DoD insists on shifting liability to the private sector, and addressing these problems without adequate pre-contract consultation with its contractors, the savings objectives of privatization and redevelopment will not be achieved. Specifically, DoD's vital base reuse and housing revitalization programs will prove unsuccessful, as contractors will be increasingly unwilling to risk significant investment in particular projects due to the potentially severe environmental liabilities and financing costs. The difficulties at Norton Air Force Base in San Bernardino, California illustrate this problem. A Lockheed tenant operation was closed for lack of profitability, after the task of laying new flooring for a jumbo jet aircraft repair hanger was delayed for over a year due to environmental concerns at the site.

Industry Recommendation: Since DoD is already liable for cleanup under current statute, it should be willing to adapt and reprioritize its clean-up expenditures and activities to accommodate the mutual interests of DoD, contractors, and the Local Redevelopment Authorities (LRA). This will enable DoD to achieve timely completion of privately financed construction projects on installations, both active and closing. If the private sector is injudiciously forced to bear the cost of clean-up in order to complete its projects, there is a substantial risk that it will file claims and lawsuits against DoD for resultant clean-up costs. The implications of lost profits, lost time, needlessly expended legal fees, and dissipated customer goodwill are obvious.

There are several readily available solutions that enable the parties to avoid this problem. First, although DoD has been reluctant to expand its liabilities beyond the statutory grants of indemnification, there is no restriction on DoD from assuming responsibility by contract for the condition of the property it once owned or occupied. The government's environmental record while on the land could be properly assessed through its environmental baseline survey. The purpose of the survey would be to reveal any pre-existing contamination to the property and environmental threats to the community's health and safety, prior to the contractor taking control of the property. Global indemnifications for environmental liability already are standard in the commercial world, and are critical in negotiations for the transfer of commercial property. There is no reason why government agencies should be held to a lesser standard of responsibility than their commercial counterparts when transferring property. A global indemnification for environmental liabilities does not increase the government's statutory liabilities for pre-existing contamination. Rather, it avoids the inherent difficulties the government faces with the Anti-Deficiency Act when executing indemnification agreements with privatizing contractors and LRAs. Moreover, global indemnifications also can be applied in the context of privatization-in place, as well as outsourcing. However, these global indemnifications must be intricately tied to rigorous transition plans performed by legal counsel once on-site to confirm the accuracy of, and to identify any inconsistencies in, the government's initial baseline survey.

Second, DoD should consider using Public Law (PL) 85-804 to indemnify contractors for pre-existing environmental liabilities. DoD already has used PL 85-804 to cover contractor activities at Lake City and the Newport Army Ammunition Plants. In such actions, the term "unusually hazardous activities" was defined to encompass both sudden and non sudden environmental damages. Third, DoD should implement a policy that, where feasible, it will take possession of the contaminated soil and expedite its removal from the site so that contractor excavation and construction can continue without interference. The parties then can determine the most appropriate method of remediating the removed contamination with minimal delay of the privatization efforts (e.g., soil treatment in-place).

The implementation of these solutions should enable DoD to profit over the long term by increasing the value of its land at closing bases, realizing increased rental revenues, and speeding the transfer of property at closing bases. This will also encourage the private sector to partner with DoD in privatization activities requiring the investment of private funds on DoD premises. If utilized in the proper manner, such reasonable policy will result ultimately in lower transition costs, and reduced long term liability to DoD. Those net savings can then be shifted to modernization accounts so critical to maintaining an Armed Forces which can deter aggression by its technological ability to dominate the battlespace.

ENVIRONMENTAL OUTSOURCING AND PRIVATIZATION WHITE PAPER

(Proposed Elimination of Misconstrued False Claims Act Civil Liability)

Issue: The standard FAR environmental clause should be revised to eliminate the inadvertent risk of unjustified False Claims Act (FCA) claims against contractors.

Background: One of the most unique characteristics of the civil FCA is the ability of private citizens to bring civil actions (qui tam suits) against government contractors on behalf of the United States Government. The sheer number of qui tam actions has increased over the past several years. With continued emphasis on privatization and outsourcing, the increase may well continue, rather than decline. As defense contractors decrease the historic size of their work forces, and more work is shifted to the private sector from ongoing government depots, former employees and other individuals will use the FCA, in combination with other environmental laws, to file qui tam civil actions against federal contractors. Investigations and legal proceedings based on the FCA have arisen because of the current FAR clause mandating that all federal contracts require contractors to "comply with all Federal, state, and local environmental laws." Because it is nearly impossible for contractors, as well as for the Department of Defense (DoD) itself, to achieve "perfect" compliance with all environmental standards, potential plaintiffs, or "relators," can allege that the contractor made a false claim to the government in that it failed to "comply with all Federal, state, and local environmental laws."

Additionally, acts avoiding an obligation to pay or transmit money or property to the government also are subject to FCA jurisdiction ("reverse false claims") (see 31 U.S.C. º 3729(a)(7)). Contractors must avoid knowingly subjecting the government to financial loss, whether it be from submitting fraudulent requests for equitable adjustments or engineering change proposals, or not furnishing the property in the contractually obligated condition (e.g., not contaminated). In the civil context, contractors "knowingly" submit a false claim when they (1) have actual knowledge of the (false) information, (2) act in "deliberate ignorance" of the truth or falsity of the information, or (3) act in "reckless disregard" of the truth of falsity of the information. No specific intent to defraud is required. Knowingly submitting a false claim will subject contractors to severe civil liability under the FCA as well as diminished customer goodwill. Such civil liability includes being fined $5,000 to $10,000 per false claim, in addition to treble damages of the actual false claim, or amount of penalty or fine in case of reverse false claim.

Industry Recommendation: Defense contractors that perform clean-up activities at contaminated sites clearly recognize that they must continue to scrutinize their technical processes and administrative procedures to ensure that (1) the work they are obligated contractually to perform is carried out in a satisfactory manner, and (2) their billing procedures employ the necessary safeguards to prevent the contractor from "knowingly" incorrectly billing the government. Additionally, contractors must understand the need to work with the government and its employees to institute prophylactic measures to ensure that transitioning the workforce to the private sector will not lead to their organizations expending substantial resources to defend against unfounded qui tam actions. As such, contractors' well-defined transition plans and compliance programs, developed in advance of the privatization or outsourcing and with the assistance of in-house/outside counsel, are critical in ensuring that the contractor's protections are maximized, and potential liabilities.

The government can implement several measures to eliminate this unnecessary risk to contractors. First, the standard FAR environmental clause could be modified to read: "compliance with all Federal, state, and local environmental laws to the reasonable satisfaction of the relevant environmental regulatory agencies." This simple revision makes it clear that the standard of compliance is established by the Environmental Protection Agency, state, and local regulatory agencies. The current regulatory language demands a strict liability standard of compliance, leaving environmental determinations solely in the hands of the Federal courts, which have less inherent expertise, or training, in technical environmental matters and the practicalities of environmental enforcement. Second, all of the contractor's environmental compliance records and defense costs could be periodically made available to the EPA, other regulatory agency, or contracting officer for inspection. In many instances, this could preclude a relator from proceeding with a qui tam action, because the information already would have been publicly disclosed and in the public domain. Once a contractor then corrects any noncompliance problems, the appropriate government personnel could incorporate the relevant documentation or amended environmental clause into the contract. This level of "clean hands" and proactive approach would eliminate any allegations of contractor concealment of noncompliance by potential qui tam plaintiffs. In sum, these provisions would greatly protect contractors from inadvertently incurring liability. Implementation of these, or similar, measures ultimately would reduce DoD costs, because contractors would no longer have to calculate the costs of this risk and "bake" that liability into their contract proposals.

ENVIRONMENTAL OUTSOURCING AND PRIVATIZATION WHITE PAPER

(Proposed Extending DoD Environmental Initiatives to Active Installations)

Issue: The Department of Defense (DoD) must extend environmental protections available at closing bases to those active and operating bases with privatization projects.

Background: As DoD seeks to privatize activities on military installations, such as military housing and the operation of utility systems, contractors will be exposed increasingly to potential liability and the risk for the environmental condition of the premises they use, and for environmental compliance and natural resource protection in the vicinity of those premises.

Industry Recommendation: These risks and liabilities have been addressed forcefully in the Base Realignment and Closure Act and follow-on redevelopment programs. Moreover, significant amendments to environmental laws have given protection to private entities which lease or purchase military real estate and buildings. These protections include, such examples as a permanent right of indemnification from the government against toxic tort claims, a warranty by the government that an environmental clean-up of the installation or particular piece of property has been completed, detailed Environmental Baseline Survey and Findings of Suitability to Lease or Transfer that has been approved by the Environmental Protection Agency (EPA), and a short sixty (60) day statute of limitations for challenges under the National Environmental Policy Act (NEPA).

Industry believes that there is no reason why these safeguards cannot be extended to contractors which participate in DoD privatization projects at military facilities that are not subject to closure. These provisions could be added as an omnibus provision to the Fiscal Year 1998 Defense Authorization Act, which would apply statutory language already incorporated in the BRAC Act's laws to all military privatization projects. Alternatively, such protections could be included in the significant Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) reform legislation scheduled to be enacted during the 105th Congress.

This information is offered only for general informational and educational purposes. It is not offered as and does not constitute legal advice or legal opinions. You should not act or rely upon this information without seeking the advice of an attorney.

Last modified: May 2, 2001