Reason Foundation

Reason Foundation

Privatizing Federal Research and Development Laboratories

Joseph P. Martino
November 1, 1996

Executive Summary

Members of Congress and presidential candidates have proposed abolishing various federal agencies and cabinet departments. A number of federal agencies, including some of those proposed for abolition, possess important research and development (R&D) capabilities. It is possible to preserve much of this capability—even if the parent agency is abolished—by privatizing the R&D labs.

This study reviews the civilian R&D capabilities of five agencies: the National Aeronautics & Space Administration (NASA) aeronautics labs, the Department of Agriculture (USDA), the Department of Energy (DOE), the U.S. Geological Survey (USGS), and the National Institute of Standards & Technology (NIST). Drawing on successful privatization of comparable R&D labs in Britain, the study proposes potentially feasible privatization modes on a caseby- case basis.

The NASA aeronautical labs could be privatized separately, using any of three possible methods: sale to a consortium of aerospace user firms, management-employee buyout, or sale to a nonindustry third party (e.g., a university). USDA's Agricultural Research Centers could be privatized individually, either to their host universities or to user cooperatives. USDA specimen collections could be sold either to a user consortium or via a management-employee buyout. Similar options are presented for the DOE, USGS, and NIST laboratories.

Based on their estimated replacement costs, the R&D labs of these five agencies might be worth as much as $17 billion. Ultimately, of course, actual purchase prices would be based on potential buyers' best estimate of the net present value (NPV) of future revenues minus costs of these labs, which could be considerably less, if the government agencies have made poor investments in the labs' capabilities.

Taxpayers would benefit from these privatizations in several ways. First, the sales proceeds could be applied to reducing the national debt (or to helping balance upcoming budgets). Second, annual appropriations for these labs would be eliminated (except to the extent that government customers, such as the Defense Department, continued to purchase certain services from some of these labs). Third, those labs converted to for-profit enterprises (e.g., USGS data provision) would begin paying corporate income taxes. More broadly, privatization would end subsidies to major industries (such as aerospace and petroleum) which would have to pay for research now funded by taxpayers for their benefit. It would also free these labs from the constraints of shrinking federal budgets, cumbersome procurement rules, civil service rules, and the inability to sell their valuable outputs at market prices.

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