    Nuclear Nonproliferation: DOE's Efforts to Assist Weapons
    Scientists in Russia's Nuclear Cities Face Challenges (03-MAY-01,
    GAO-01-429).

    In September 1998, the United States and Russia launched an
    ambitious nonproliferation program--the Nuclear Cities Initiative
    (NCI)--to create sustainable job opportunities for weapons
    scientists in Russia's closed nuclear cities and to help Russia
    accelerate the downsizing of its nuclear weapons complex. This
    report reviews NCI's activities, which are being implemented by
    the Department of Energy (DOE) and its national laboratories, to
    determine their impact on meeting the program's goals and
    objectives. GAO discusses the (1) costs to implement NCI,
    including the amount of program funds spent in the United States
    and Russia, as well as planned expenditures; (2) impact of DOE's
    NCI projects; and (3) status of the European Nuclear Cities
    Initiative (ENCI). GAO found that expenditures for NCI	totaled
    about $15.9 million for fiscal year 1999 through December 2000.
    Of that amount, about 70 percent had been spent in the United
    States and about 30 percent in Russia. DOE has developed neither
    a plan that addresses future program costs nor a time frame with
    quantifiable performance measures to determine how effectively
    the program is meeting its goals and when and if the program
    should expand beyond the three nuclear cities. NCI has had
    limited success in meeting the program's principal objectives.
    During its first two years, NCI has funded 26 projects that
    employ 370 people, including many weapons scientists who are
    working primarily part-time on research projects sponsored by the
    U.S. national laboratories. Most of the scientists receiving
    program funds, however, continue to work on Russia's weapons of
    mass destruction program and are also receiving a salary paid for
    by the Russian government. ENCI is a proposed program supported
    by the Italian Ministry of Foreign Affairs that is expected to be
    smaller in scope than the U.S. NCI and would try to use weapons
    scientists' skills to help develop environmental
    energy-efficiency-related technologies that can be used by
    European communities. The funding for ENCI has not yet been
    determined, but Italian officials estimate that $50 million would
    be needed over the next five years to implement the program.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-01-429
        ACCNO:   A00982
      TITLE:     Nuclear Nonproliferation: DOE's Efforts to Assist Weapons
                 Scientists in Russia's Nuclear Cities Face Challenges
         DATE:   05/03/2001
      SUBJECT:   Nuclear proliferation
    	     Nuclear weapons plant security
    	     Foreign aid programs
    	     Program evaluation
    	     Fund audits
    	     Audit oversight
    	     DOE Initiatives for Proliferation
    	     Prevention Program
    	     DOE Nuclear Cities Initiative
    	     European Bank for Reconstruction and
    	     Development
    	     Russian Ministry of Atomic Energy
    	     U.S. Agency for International
    	     Development
    	     U.S. Civilian Research and Development
    	     Foundation

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    GAO-01-429

    Report to Congressional Requesters

    United States General Accounting Office

    GAO

    May 2001 NUCLEAR NONPROLIFERATION

    DOE's Efforts to Assist Weapons Scientists in Russia's Nuclear Cities Face
    Challenges

    GAO- 01- 429

    Page i GAO- 01- 429 Nuclear Nonproliferation Letter 1

    Appendix I Role of Russia?s Nuclear Cities in Weapons Design and Development
    39

    Appendix II NCI?s Cumulative Expenditures as of December 2000 40

    Appendix III DOE?s Small Business Loan Program in Russia?s Nuclear Cities 42

    Appendix IV Successful Commercial Venture Established in Sarov Without U. S.
    Government Assistance 44

    Appendix V Denials of Access Requests to Three of Russia?s Nuclear Cities 45

    Appendix VI NCI Projects Reviewed by GAO 46

    Appendix VII Comments From the Department of Energy 48

    Tables

    Table 1: Role of Russia?s Nuclear Cities in Weapons Design and Development
    39 Table 2: NCI?s Cumulative Expenditures by DOE and National

    Laboratories as of December 2000 40 Table 3: Denials of Access Requests to
    Russia?s Nuclear Cities 45 Table 4: NCI Projects Reviewed by GAO 46 Contents

    Page ii GAO- 01- 429 Nuclear Nonproliferation Figures

    Figure 1: Russia?s Nuclear Cities 6 Figure 2: Breakout of NCI Program
    Expenditures Totaling $15.9

    Million as of December 2000 9 Figure 3: Breakout of the National
    Laboratories? Expenditures in

    the United States Totaling $10.7 Million as of December 2000 10 Figure 4:
    Breakout of NCI Program Expenditures in Russia

    Totaling $4.7 Million as of December 2000 12 Figure 5: Russian Weapons
    Scientists Employed at the Sarov Open

    Computing Center 17 Figure 6: Office Building in Which Sarov Open Computing
    Center Is

    Located 18

    Abbreviations

    DOE Department of Energy EBRD European Bank for Reconstruction and
    Development ENCI European Nuclear Cities Initiative GAO General Accounting
    Office IPP Initiatives for Proliferation Prevention MINATOM Russian Ministry
    of Atomic Energy NCI Nuclear Cities Initiative VNIIEF All- Russian
    Scientific Research Institute of Experimental

    Physics

    Page 1 GAO- 01- 429 Nuclear Nonproliferation

    May 3, 2001 The Honorable John W. Warner Chairman Committee on Armed
    Services United States Senate

    The Honorable Pat Roberts Chairman, Subcommittee on

    Emerging Threats and Capabilities Committee on Armed Services United States
    Senate

    In September 1998, the United States and Russia embarked on an ambitious
    nonproliferation program, known as the Nuclear Cities Initiative (NCI), to
    create sustainable job opportunities for weapons scientists in Russia?s
    closed nuclear cities and to help Russia accelerate the downsizing of its
    nuclear weapons complex. Ten of these cities formed the core of the former
    Soviet Union?s nuclear weapons complex. Many are located in geographically
    remote locations and were so secret that they did not appear on any publicly
    available maps until 1992. Behind their walls, thousands of scientists and
    engineers worked on the design, assembly, and production of the Soviet
    nuclear arsenal. These Russian cities remain high- security areas, and
    access to them is limited. Russia?s Ministry of Atomic Energy (MINATOM)
    manages the nuclear facilities that are located within the cities. MINATOM
    estimates that about 760,000 people live in the nuclear cities, including
    the family members of the nuclear workers as well as teachers and various
    support personnel. Approximately 122,000 inhabitants are employed in key
    nuclear enterprises.

    The Russian government has announced its intention to reduce the size of its
    nuclear weapons complex and asked for U. S. assistance in this endeavor. A
    critical component of this effort includes finding new employment
    opportunities for weapons scientists, engineers, technicians, and support
    staff who will lose their jobs from the complex?s downsizing. The U. S.
    government has also been concerned that Russian weapons scientists in need
    of money may sell sensitive information to countries or

    United States General Accounting Office Washington, DC 20548

    Page 2 GAO- 01- 429 Nuclear Nonproliferation

    terrorist groups trying to develop weapons of mass destruction. NCI, which
    is being implemented by the Department of Energy (DOE) and its national
    laboratories, 1 seeks to assist Russia in downsizing its weapons complex by
    employing weapons scientists and other residents of the cities in
    nonmilitary scientific or commercial activities. NCI works in conjunction
    with another DOE program- the Initiatives for Proliferation Prevention
    (IPP)- which also seeks to employ weapons scientists and is implemented
    throughout all of Russia, including several nuclear cities, as well as
    Ukraine, Belarus, and Kazakhstan.

    In early 1999, we issued a report addressing both programs, identified a
    number of management weaknesses, and recommended several corrective actions.
    2 Regarding NCI, we pointed out that the program faced impediments to
    success, including restrictions on access to the cities and poor prospects
    for foreign investment. We recommended that NCI not expand beyond three
    pilot cities in Russia- Sarov, Snezhinsk, and Zheleznogorsk- until DOE had
    demonstrated that its efforts were achieving the program?s objectives of
    creating jobs for weapons scientists. Currently, the program is operating in
    these cities, plus Avangard- a nuclear weapons assembly/ disassembly
    facility located in Sarov. This report discusses the (1) costs to implement
    NCI, including the amount of program funds spent in the United States and
    Russia, as well as planned expenditures; (2) impact of the Department?s NCI
    projects; and (3) status of the European Nuclear Cities Initiative (ENCI).

    To develop this information, we obtained cost data from DOE?s headquarters
    and the national laboratories. We reviewed all of DOE?s NCI projects to
    determine their impact on meeting the program?s goals and objectives. We
    also met with MINATOM officials in Russia and visited the closed nuclear
    city of Sarov. In addition, we met with, among others, officials of Italy?s
    Ministry of Foreign Affairs who are major proponents of the proposed ENCI.

    1 The Department manages the largest laboratory system of its kind in the
    world. The mission of DOE?s 23 laboratories has evolved. Originally created
    to design and build atomic bombs, these laboratories have since expanded to
    conduct research in many disciplines- from high- energy physics to advanced
    computing.

    2 See Nuclear Nonproliferation: Concerns With DOE?s Efforts to Reduce the
    Risks Posed by Russia?s Unemployed Weapons Scientists (GAO/ RCED- 99- 54,
    Feb. 19, 1999).

    Page 3 GAO- 01- 429 Nuclear Nonproliferation

    From fiscal year 1999 through December 2000, the expenditures for the
    Nuclear Cities Initiative totaled about $15.9 million. Of that amount, about
    $11.2 million (or 70 percent) had been spent in the United States, and about
    $4.7 million (or 30 percent) had been spent for projects and activities in
    Russia. The U. S. national laboratories? costs to implement the program
    represented the bulk of the funds spent in the United States for such items
    as overhead, labor, equipment, and travel. Department of Energy officials
    told us that these expenditures, although significant, were part of startup
    costs for the program. These officials told us that laboratory costs will be
    reduced and that the laboratories? role will diminish as commercial
    investors develop business contacts in the nuclear cities as a result of the
    program. Officials from Russia?s Ministry of Atomic Energy told us that they
    are dissatisfied with the amount of program funds that have been spent in
    Russia and that if the Department is serious about creating jobs for Russian
    weapons scientists, more funds must be spent in Russia. Expenditures for
    Russia included contracts with Russian organizations to buy computers and
    other equipment, a small business bank loan program, and various community
    development projects. In response to direction provided in a conference
    report on its fiscal year 2001 appropriations, the Department of Energy
    stated that its goal is to spend at least 51 percent of its program funds
    for fiscal year 2001 in Russia. Regarding planned expenditures, the
    Department has not developed (1) a plan that addresses future program costs
    and (2) a time frame with quantifiable performance measures to determine how
    effectively the program is meeting its goals and when and if the program
    should expand beyond the three nuclear cities. This report recommends that
    the Department develop a plan with clearly defined goals that serves as a
    basis for determining the program?s future scope and direction and
    strengthen its efforts to reduce national laboratory costs in order to place
    more program funds in Russia.

    During its first 2 years, the Nuclear Cities Initiative has funded 26
    projects that have had limited success in meeting the program?s principal
    objectives- creating jobs for weapons scientists and helping to downsize
    Russia?s weapons complex. Many of the projects were not carefully reviewed
    for their commercial potential, as the Department wanted to implement the
    program quickly and engage the Russians. According to the Department, the
    projects are employing about 370 people, including many weapons scientists
    who are working primarily on a part- time basis through research projects
    sponsored by the U. S. national laboratories. However, according to Russian
    officials, most of the scientists receiving program funds continue to work
    on Russia?s weapons of mass destruction program and are also receiving a
    salary paid for by the Russian government. One Results in Brief

    Page 4 GAO- 01- 429 Nuclear Nonproliferation

    project has helped create commercial space in several buildings previously
    used for nuclear weapons assembly work in the city of Sarov. About onehalf
    of the projects are not designed to create jobs for weapons scientists and
    instead focus on, among other things, such activities as the delivery of
    medical equipment and school exchange programs. While Department officials
    told us that these projects are needed to make the nuclear cities more
    attractive to business investment, Russian officials have criticized them
    because they do not create jobs for weapons scientists. Furthermore, none of
    the industry officials we spoke with said that they would more likely invest
    in the nuclear cities because of municipal and social improvements. The
    Department has two programs- the Nuclear Cities Initiative and the
    Initiatives for Proliferation Prevention- operating in Russia?s nuclear
    cities that share a common underlying goal and, in some cases, the same
    types of projects. The operation of these two very similar programs in
    Russia?s nuclear cities has caused duplication of effort. This report
    contains a recommendation that the Department evaluate all of the Nuclear
    Cities Initiative projects, particularly community development activities,
    and eliminate those that do not meet the program?s basic objectives of
    creating jobs and assisting with the downsizing of Russia?s nuclear weapons
    complex. The report also recommends that the Department determine whether
    the Nuclear Cities Initiative and the Initiatives for Proliferation
    Prevention should be consolidated into one effort in order to achieve
    potential cost savings and other efficiencies.

    The European Nuclear Cities Initiative is a proposed program that is being
    supported by the Italian Ministry of Foreign Affairs. The European program
    is expected to be smaller in scope than the U. S. Nuclear Cities Initiative
    and to differ in some respects from the U. S. program. For example, the
    European Nuclear Cities Initiative is expected to (1) target older
    scientists, who are considered to pose a greater proliferation risk than
    younger Russian scientists; (2) initially be limited to two Russian nuclear
    cities; and (3) emphasize environmental and energy- efficiency projects.
    Furthermore, officials responsible for developing the European Nuclear
    Cities Initiative told us that their program will not focus on establishing
    sustainable commercial businesses in the cities. Instead, the European
    program plans to fund projects that utilize weapons scientists? skills to
    help develop environmental and energy- efficiency- related technologies that
    can be used by European companies. The funding for the European Nuclear
    Cities Initiative has not yet been determined, but Italian officials
    estimated that $50 million would be needed over the next 5 years to
    implement the program.

    Page 5 GAO- 01- 429 Nuclear Nonproliferation

    We presented a draft of this report to the Department for comment, and it
    concurred with our recommendations. The Department also provided technical
    clarifications, which we incorporated where appropriate.

    In July 1998, then Vice President Gore and the former Prime Minister of
    Russia issued a joint statement noting that nuclear disarmament is
    associated with several socioeconomic factors, including the problem of
    finding worthwhile civilian- sector employment for Russian personnel
    formerly employed in the nuclear weapons complex. In September 1998, both
    countries signed an agreement- the Nuclear Cities Initiative- to create jobs
    for people in the nuclear weapons complex. Russian officials have identified
    the need to create 30,000 to 50,000 jobs in its nuclear cities over the next
    several years. Under the terms of the agreement, the United States will seek
    to assist in creating new jobs by

     sharing its experience in downsizing the U. S. nuclear weapons production
    complex;

     facilitating the selection of promising commercial projects that will lead
    to employment opportunities for workers;

     developing entrepreneurial skills for displaced workers, including
    training in how to write business plans;

     facilitating the search for potential investors, market analysis, and
    marketing for products and services; and

     facilitating access to existing investment mechanisms, including
    investment funds.

    NCI is limited to working in the municipal areas of each city. Beyond these
    areas are various secret nuclear institutes or technical areas. DOE?s
    strategy is to encourage investment in commercial enterprises in the
    municipal areas of the cities thus shrinking, over time, the size of the
    restricted areas in accordance with the plans of the Russian government. DOE
    officials believe that if commercial efforts are successful, not only will
    those employed in weapons manufacturing remain in the city but so will their
    relatives and friends and there will be less reason for weapons scientists,
    technicians, and engineers to leave the area. Figure 1 shows the location of
    Russia?s 10 nuclear cities, and appendix I provides additional information
    about each city. Background

    Page 6 GAO- 01- 429 Nuclear Nonproliferation

    Figure 1: Russia?s Nuclear Cities

    Note: The Avangard plant is not a separate nuclear city. It is a major
    weapons assembly/ disassembly facility located in the city of Sarov.

    Source: GAO?s presentation of information from DOE and MINATOM.

    The day- to- day management of NCI resides within DOE?s Office of Defense
    Nuclear Nonproliferation, National Nuclear Security Administration. DOE and
    its national laboratories have long- standing relationships with MINATOM and
    several closed cities as well as experience in the downsizing of the U. S.
    weapons complex. The NCI program is managed by an office director with a
    headquarters staff of seven employees who provide technical, budget, and
    procurement support. DOE headquarters is

    Nuclear cities

    Kazakhstan

    Moscow

    Ukraine Zheleznogorsk

    Seversk Ozersk

    Russia

    Zelenogorsk Novouralsk

    Lesnoy Sarov/ Avangard

    Zarechnyy Trekhornyy St. Petersburg

    Snezhinsk

    Barents Sea Arctic Sea

    Bering Sea Sea of Okhotsk

    Sea of Japan

    Page 7 GAO- 01- 429 Nuclear Nonproliferation

    responsible for, among other things, setting overall program policy,
    providing oversight and guidance for the national laboratories, and
    allocating program funds. DOE has tasked the national laboratories to play a
    major role in the program.

    DOE, under the same general authority under which it operates the NCI
    program, also operates the Initiatives for Proliferation Prevention program.
    3 IPP seeks to employ weapons scientists in several countries of the former
    Soviet Union, including Russia and some of its nuclear cities. According to
    DOE, IPP is designed to commercialize technologies that utilize the
    expertise of the scientists who work at the various nuclear weapons
    institutes. Although the IPP program focuses on employing nuclear weapons
    scientists, it also has a component that seeks to employ scientists in the
    former Soviet Union?s chemical and biological weapons institutes. In our
    1999 report, we recommended that the Secretary of Energy take steps to
    maximize the impact of IPP?s funding and improve oversight of the program.
    Specifically, we recommended, among other things, that the Secretary (1)
    reexamine the role and costs of the national laboratories? involvement with
    a view toward maximizing the amount of program funds going to the former
    Soviet Union, and (2) eliminate those IPP projects that did not have
    commercial potential. DOE subsequently implemented our recommendations.

    The U. S. government has supported other programs that have directed money
    to scientists working in the closed cities. For example, since 1994, the U.
    S. Departments of State and Defense have spent over $40 million on
    scientific research projects in which one or more of the weapons institutes
    in Sarov, Snezhinsk, or Zheleznogorsk have participated. 4 These projects
    are administered under the auspices of the State Department?s International
    Science and Technology Center program. The Center was established by
    international agreement in November 1992 as a nonproliferation program to
    provide peaceful research opportunities for weapons scientists and engineers
    in countries of the former Soviet Union. The scientists working with the
    Center conduct research and development

    3 See 42 U. S. C. 5817( a), 42 U. S. C. 7112( 10), and 42 U. S. C. 5813( 9).
    DOE?s fiscal year 2001 expenditures for both programs are authorized under
    separate provisions of the National Defense Authorization Act for Fiscal
    Year 2001 and are subject to different requirements and restrictions under
    this and other authorization acts.

    4 Other institutes throughout Russia and other countries of the former
    Soviet Union also participate in some of these projects.

    Page 8 GAO- 01- 429 Nuclear Nonproliferation

    in a variety of scientific fields, such as environmental remediation and
    monitoring, nuclear reactor safety, vaccines and other medical treatment,
    and energy production.

    The U. S. government has also undertaken efforts in the nuclear cities
    through the U. S. Civilian Research and Development Foundation. Established
    by the U. S. government in 1995, the Foundation is a nonprofit charitable
    organization designed to promote scientific and technical collaboration
    between the United States and the countries of the former Soviet Union. From
    October 1996 through December 2000, the Foundation awarded 19 grants
    totaling about $275,000 to support projects in Sarov and Snezhinsk. The
    Foundation receives funding from the Department of State, the National
    Science Foundation, the National Institutes of Health, the Department of
    Defense, and several private organizations.

    From fiscal year 1999 through December 2000, NCI?s expenditures totaled
    about $15.9 million. Of that amount, about $11.2 million (or 70 percent) had
    been spent in the United States by the national laboratories and DOE?s
    headquarters, and about $4.7 million (or 30 percent) had been spent for
    projects and activities in Russia as shown in figure 2. The U. S. national
    laboratories? costs to implement the program for such items as overhead,
    labor, equipment, and travel represented the bulk of the funds spent in the
    United States. DOE officials told us that these expenditures were
    significant but were part of the program?s start up costs. These officials
    told us that laboratory costs will be reduced and that the laboratories?
    role will diminish as commercial investors develop business contacts in the
    nuclear cities as a result of the program. The expenditures for Russia
    included contracts with Russian organizations to buy computers and other
    equipment, a small business bank loan program, and various community
    development projects. MINATOM officials told us that they were dissatisfied
    with the amount of program funds that had been spent in their country. In
    response to direction provided in a conference report on its fiscal year
    2001 appropriations, DOE stated in its program guidance that its goal is to
    spend at least 51 percent of fiscal year 2001 program funds in Russia. NCI
    Program

    Expenditures

    Page 9 GAO- 01- 429 Nuclear Nonproliferation

    Figure 2: Breakout of NCI Program Expenditures Totaling $15.9 Million as of
    December 2000

    Source: GAO?s presentation of data based on information provided by DOE.

    Of the $11.2 million that was spent in the United States for the program,
    the national laboratories? expenditures made up $10. 7 million, or about 96
    percent of that amount. DOE?s headquarters? expenditures, totaling about
    $500, 000, comprise the remainder of the program funds spent in the United
    States. DOE?s headquarters? expenditures covered, among other things,
    obtaining studies related to Russia?s defense conversion activities and
    establishing a Website for the program. Regarding the laboratories?
    expenditures in the United States, these costs were incurred primarily to
    develop and monitor various NCI projects and activities. According to DOE
    officials, the laboratories? expenditures represent program startup costs.
    They noted that the program has taken longer to start up because of the
    economic problems facing Russia and the barriers involved in trying to start
    new businesses and related activities in the nuclear cities. Figure 3 shows
    a breakout of the national laboratories? costs in the United States as of
    December 2000, and appendix II provides more details about the NCI program?s
    cumulative expenditures. U. S. National Laboratories?

    Expenditures Comprise Majority of U. S. Program Costs to Date

    30%  Russia

     3%

    DOE headquarters

    67%

    National Laboratories

    Page 10 GAO- 01- 429 Nuclear Nonproliferation

    Figure 3: Breakout of the National Laboratories? Expenditures in the United
    States Totaling $10. 7 Million as of December 2000

    Note1: Does not include DOE?s headquarters? expenditures. Note 2: Travel
    includes travel of U. S. personnel within the United States and Russia.
    Source: GAO?s presentation of data based on information provided by DOE.

    As indicated in figure 3, 75 percent of the funds spent by the laboratories
    were for overhead and labor costs. Overhead costs comprised the greatest
    percentage of costs (about 41 percent) and were charged for various
    activities, such as contract/ procurement support and other activities
    related to the program?s implementation. For example, some laboratories
    charge an overhead fee for administering travel services for both U. S. and
    Russian officials. The next highest cost was for labor- 34 percent. The
    laboratories have assigned a principal investigator to manage each NCI
    project. The principal investigators from the laboratories told us that they
    spent from 5 to 75 percent of their time on monitoring NCI projects.
    Additionally, they told us they spent most of this time during the early
    stages of the project to establish contacts with their Russian counterparts
    and to help develop contracts with Russian organizations in the nuclear
    cities. As the figure shows, the remaining 25 percent of the U. S.
    expenditures included travel (airfare and per diem) of laboratory personnel
    within the United States and to Russia; costs to purchase

    10%  Travel

    41%  Overhead 34%

    Labor

    4%

    Miscellaneous costs

    11%

    Materials/ services in the United States

    Page 11 GAO- 01- 429 Nuclear Nonproliferation

    materials and services for the program, such as U. S.- based consultants;
    and other miscellaneous costs, such as training, videoconferences, and
    translation services.

    DOE officials told us that they were concerned about the amount of funds
    spent by the laboratories to administer the program- particularly, the
    overhead costs. However, these officials believe that the laboratories play
    an important role in the start up of the NCI program. Some DOE officials,
    including the program director, stated that laboratory costs would be
    reduced over time as businesses invest their own capital in the nuclear
    cities. However, the program director was not sure when the laboratories?
    role in the program would be reduced.

    DOE has taken some steps to reduce laboratory costs as shown in the
    following examples:

     One laboratory official from the Savannah River Site told us that, in
    general, overhead for contracts at his site is about 37 percent of the total
    cost of NCI- related contracts. He subsequently negotiated with DOE an 11-
    percent overhead rate in fiscal year 2000 for Russian- related programs to
    include NCI- related contracts. He said this was done to increase the amount
    of funds going to Russia.

     Some of the NCI projects are being managed directly by DOE?s headquarters
    in an effort to limit national laboratories? overhead expenditures.

     DOE recently took over from a national laboratory the management of a U.
    S. firm that is responsible for monitoring the day- to- day operations of
    International Development Centers. 5 NCI program funds were used to pay the
    laboratory for this supervisory function. According to DOE and laboratory
    officials, DOE?s headquarters assumed this responsibility to reduce the
    laboratory?s costs.

    As of December 2000, NCI program expenditures for projects and activities in
    Russia totaled $4.7 million, or 30 percent of the $15.9 million spent by the
    NCI program. As figure 4 shows, the largest category of expenditures (about
    58 percent) was for contracts. The contracts were

    5 These centers are funded by the NCI program and operate in two of the
    nuclear cities. They provide local business owners with training and
    counseling on preparing business plans and finding sources of capital and
    work to attract foreign investors to the cities. Thirty Percent of NCI

    Program Funds Spent for Activities in Russia

    Page 12 GAO- 01- 429 Nuclear Nonproliferation

    used to establish, among other things, the Sarov Open Computing Center. The
    Center was established in 1999 with NCI funds to help Russian scientists
    develop commercial skills. According to Center?s officials, a portion of
    these funds was used to supplement the salaries of the Russian scientists.
    In addition, some of these funds were used to (1) finance the European Bank
    for Reconstruction and Development?s (EBRD) activities to establish a small
    business bank loan program in the cities and (2) support various community
    development activities. The materials purchased by DOE and the national
    laboratories for use in Russia comprised 36 percent of the expenditures and
    included such things as medical equipment, computers, and payments to
    Russian consultants/ trainers. The remaining expenditures (about 6 percent
    of the total) were for Russian personnel traveling to the United States.

    Figure 4: Breakout of NCI Program Expenditures in Russia Totaling $4.7
    Million as of December 2000

    Source: GAO?s presentation of data based on information provided by DOE.

    MINATOM officials told us that they were dissatisfied with the amount of NCI
    funds that had been spent in Russia. The First Deputy Minister of MINATOM
    told us that Russia should have received about 65 percent of the funds
    programmed for NCI, as it was his understanding that DOE had planned to
    spend that percentage of program funds in Russia. He

    58%  Contracts 20%

    DOE purchased materials

    16%

    Lab purchased materials

    6%

    Travel

    Page 13 GAO- 01- 429 Nuclear Nonproliferation

    questioned why Russia had not received the amount he had expected and wanted
    to know what happened to these funds. The First Deputy Minister also noted
    that Russia needs help in creating about 1,500 jobs per year in the nuclear
    cities and that DOE?s funding for the program has been insufficient to meet
    this goal. He concluded that when MINATOM officials review NCI?s progress to
    date, the picture is not optimistic. In his opinion, the lack of progress in
    the program increases the negative views of the program held by various
    Russian government officials who allege that the program is a way for the
    United States to gain access to weapons data in Russia?s nuclear cities.

    The Congress and DOE have set goals for increasing the amount of NCI program
    funds spent in Russia. An October 2000 conference report on DOE?s
    appropriations for fiscal year 2001 stated that the conferees were concerned
    about the amount of funding for Russian assistance programs that remain in
    the United States for DOE contractors and laboratories rather than going to
    the facilities in Russia. The conferees directed that not more than 49
    percent of NCI program funding be spent in the United States in fiscal year
    2001. The conferees expect DOE to continue to increase the level of funding
    (beyond 51 percent) for Russia in each subsequent year but did not establish
    a ceiling for the amount of funds that should ultimately be spent in Russia.
    DOE?s NCI Program Guidance, issued in January 2001, noted that in order to
    meet the spending target established by the conference report, U. S. project
    managers will spend or commit at least 65 percent of the funds for each
    project in Russia. DOE officials said they expect overall program
    expenditures to reach the congressional target of 51 percent if 65 percent
    of each NCI- project?s funds are spent in Russia.

    DOE did not have systematic financial management procedures in place for
    reporting and tracking NCI?s program expenditures. DOE?s initial financial
    guidance for the program, which was issued in May 1999, only noted that an
    accounting procedure overseen by an experienced budget and fiscal official
    will include regular monthly reports by the laboratories on individual NCI
    projects. The guidance was silent on the issue of specific reporting
    requirements, including how expenditures for U. S. and Russian activities
    should be identified. Although the national laboratories were generally
    providing cost information on a monthly basis, a DOE budget official told us
    that this information lacked consistency and uniformity. As a result, the
    budget official was not confident that the cost information was accurately
    depicting the breakout of expenditures between U. S. and Russian activities.
    For example, in May 2000, DOE developed a breakout of the costs and
    concluded that 65 percent of the DOE?s Lack of

    Standardized Reporting Procedures Affected Its Ability to Monitor NCI?s
    Expenditures

    Page 14 GAO- 01- 429 Nuclear Nonproliferation

    funds had been spent in the United States and 35 percent had been spent in
    Russia. However, the analysis of Russian expenditures included the funds
    that were obligated 6 as well as actual expenditures. According to one DOE
    official, this analysis overstated expenditures in Russia.

    Some national laboratory officials told us that the lack of standardized
    reporting guidance made it difficult to determine how to account for program
    expenditures in the United States and Russia or what to include in these
    cost categories. During the course of our review- and, in part, as a result
    of our work- DOE established a standardized monthly and quarterly financial
    report for the NCI program. In January 2001, DOE?s NCI budget official
    distributed guidance directing all of the national laboratories to report
    NCI project costs by using a standard format for identifying expenditures.
    Furthermore, in its January 2001 program guidance, DOE defined how funds
    were to be categorized.

     Expenditures in Russia include the costs of Russian officials traveling to
    the United States, contract payments to Russian organizations, payments to
    Russian consultants and trainers in Russia, and equipment and materials
    bought in the United States for Russia or equipment and material bought in
    Russia.

     Expenditures in the United States include U. S. labor, U. S. travel to
    Russia, all laboratory overhead, payments to U. S. consultants and trainers
    in Russia, payments to all interpreters and/ or translator services, and
    equipment and materials bought in the United States for use in the United
    States.

    According to DOE program officials, the Department has exercised limited
    oversight over the national laboratories' use of NCI program funds. Initial
    DOE program guidance for the NCI program, dated May 1999, did not
    specifically address financial management procedures for funds disbursed by
    DOE to the national laboratories and instead relied on existing reporting
    mechanisms between DOE and the laboratories. According to DOE officials,
    once funds are transferred to a laboratory, they can be redirected by the
    laboratory from one project to another. One national laboratory redirected
    approximately $130,000 from two projects dealing with fiber optics and
    telecommunications to another project. The NCI

    6 An obligation occurs when a definite commitment has been made or a legal
    liability is incurred. Funds that have been obligated are not actually spent
    until the agency makes a payment for goods or services. DOE Has Limited

    Oversight Over Laboratories? Expenditures

    Page 15 GAO- 01- 429 Nuclear Nonproliferation

    program director was not made aware of this transfer until the laboratory
    requested additional funding from DOE to replenish these projects? funding.
    On the basis of these experiences, in January 2001, DOE established new
    guidance stating that the NCI program director must approve the reallocation
    of funds to other projects.

    DOE has not developed a plan, including projected future costs, to gauge the
    extent to which NCI is meeting its program goals to determine when and under
    what circumstances it would be appropriate to expand the program beyond the
    three pilot nuclear cities. In 1999, DOE officials believed the total
    funding level for NCI could reach $600 million over a 5- year period.
    However, the Director of the NCI program told us that because the program
    had not received expected funding levels during its first years of
    operation, he is uncertain about future program costs and time frames. DOE?s
    former Assistant Deputy Administrator for Arms Control and Nonproliferation
    told us that each of the pilot cities is expected to receive funding for
    several years and that the Department needs to develop an ?end point? when
    assistance is completed for each city. NCI is focusing its initial efforts
    in these three cities plus a weapons assembly plant that is located at
    Avangard (in the city of Sarov). 7

    DOE has worked jointly with MINATOM and the nuclear cities to develop
    strategic plans for each pilot city, which include lists of jointly
    developed project proposals. However, DOE has not developed performance
    targets that map out its specific contributions to this downsizing effort
    over time. DOE has stated that key measurements include the number of
    civilian jobs created, businesses established or expanded, investment in the
    closed cities, training for Russians, and percentage of funds spent in
    Russia. While these performance measures are appropriate in a general sense,
    DOE has not indicated what it hopes to specifically accomplish in these
    areas over what period of time. Without such targets, it is difficult to
    determine whether or not the program is on track to meet its long- term
    objectives. The deputy director of the NCI program told us that DOE is aware
    of the number of weapons scientists that Russia needs to find jobs for in
    the nuclear cities but there is no mutually agreed upon number of scientists
    that DOE plans to help find jobs for. The NCI program director said that DOE
    would be better able to plan and leverage its own resources

    7 According to DOE, Zarechnyy, another weapons assembly facility, is the
    next logical city to be added to the NCI program. However, expanding the
    program to that city has always been predicated upon congressional
    authorization, available funding, and MINATOM?s concurrence. DOE Has Not
    Developed a

    Cost Estimate or Time Frame for the Program?s Future Scope and Direction

    Page 16 GAO- 01- 429 Nuclear Nonproliferation

    if it had more information about how MINATOM is budgeting funds for its own
    specific defense conversion projects.

    The NCI program has had limited success during its first 2 years. According
    to DOE, NCI?s projects are employing about 370 people, including many
    weapons scientists, primarily on a part- time basis through research
    sponsored by the U. S. national laboratories. One project has helped create
    commercial space in several buildings previously used for nuclear weapons
    assembly work in the city of Sarov. About half of the NCI projects are not
    designed to directly lead to employment opportunities for weapons
    scientists, and Russian officials have criticized DOE?s funding decisions.
    The Department has two programs- NCI and the Initiatives for Proliferation
    Prevention- operating in Russia?s nuclear cities that have a common goal.
    Having two such programs has caused duplication of effort, such as two sets
    of project review procedures and several similar types of projects.

    According to DOE, NCI?s projects have generated employment for about 370
    people, including weapons scientists, in the nuclear cities. About 40
    percent of the work has been generated through the Open Computing Center in
    Sarov. The purpose of the computing center is to help scientists,
    mathematicians, and software engineers develop self- sustaining civilian
    activities, including commercial and contract research. 8 The computing
    center?s director told us that the part- time employees were also working at
    the weapons design institute in Sarov on weapons- related activities and are
    receiving salaries from the institute. The employees are working on contract
    research for the Los Alamos National Laboratory. This work includes several
    areas of research such as (1) computing and system software development, (2)
    computer modeling for the oil and gas industry, (3) computer modeling for
    the strength of materials related to molecular dynamics, and (4)
    biomolecular modeling. According to a Los Alamos official, while the
    laboratory has not benefited directly from the research, it has helped
    enhance the computer- related skills of the center?s employees and is making
    them more attractive to Western businesses.

    8 The Open Computing Center was established in 1999 with support from the
    NCI program to solve a security problem that arose when a Western computer
    manufacturer sold 16 high- speed computers to Russia in violation of U. S.
    export control laws. MINATOM agreed to disassemble the computers and move
    them from the VNIIEF Institute in Sarov to the Open Computing Center in
    exchange for financial support for the center from DOE through the NCI
    program. See Export Controls: Sales of High Performance Computers to
    Russia?s Nuclear Weapons Laboratories (GAO/ T- NSIAD- 97- 128). DOE?s NCI
    Projects

    Have Had Limited Impact

    Most of the Work Created by NCI Projects for Weapons Scientists Is PartTime
    Contract Research for National Laboratories

    Page 17 GAO- 01- 429 Nuclear Nonproliferation

    Figure 5: Russian Weapons Scientists Employed at the Sarov Open Computing
    Center

    The center?s director said he hopes that the center will become self-
    sufficient within 7 years. DOE officials have estimated that, with
    successful marketing to commercial businesses, the center will be able to
    employ more than 500 people by 2005. As of December 31, 2000, the NCI
    program had spent about $1.2 million on computers, site preparation,
    contracts with the employees of the center, and other expenses. The center
    has had some success in attracting business investment. For example, an
    international bank has contracted with the center to develop electronic
    banking software on a pilot basis. The bank may contract with the center for
    additional work if the pilot project proves successful. The bank official
    responsible for this project said he is optimistic that the bank will be
    able to develop future work for the scientists. The program also introduced
    programmers at the Open Computing Center to an engineering software company
    in the United States that was looking for people to help develop software to
    analyze fluid dynamics in automobile engines and turbines. The software
    company worked with NCI and national laboratory staff on a pilot project to
    test the skills of programmers from the center. The NCI program allocated
    $40,000 to pay the salaries of four Russian scientists working on non-
    defense- related test problems as well as for the national laboratory?s
    expenses. In early 2001, the software company

    Page 18 GAO- 01- 429 Nuclear Nonproliferation

    hosted the scientists in the United States for training. As a result of the
    training, a commercial contract was signed on March 30, 2001.

    Figure 6: Office Building in Which Sarov Open Computing Center Is Located

    According to DOE, one of the most successful projects involves the
    conversion of weapons assembly buildings at Avangard into production space
    for commercial ventures, including the proposed establishment of a kidney
    dialysis manufacturing facility. DOE has helped facilitate the relationship
    between a Western business and Avangard and has allocated about $1.5 million
    to support this effort. For example, DOE said it has One NCI Project Has

    Helped Open Commercial Space at Russian Weapons Facilities

    Page 19 GAO- 01- 429 Nuclear Nonproliferation

    spent several hundred thousand dollars to make commercial space available to
    potential Western businesses. In August 2000, the Secretary of Energy
    traveled to Sarov to dedicate the newly established commercial space as part
    of a new ?technopark.? In addition, the NCI program has continued to help
    Avangard, MINATOM, and the Western company work together to develop a
    sustainable commercial relationship. The Western company has been looking
    for a business partner to help it enter into new promising markets, such as
    Russia. Avangard has manufactured dialysis machines for several years, and
    the Western company is hoping to take advantage of those skills while
    expanding into Russia and parts of Europe. According to DOE, Avangard would
    devote the majority of its initial efforts to manufacture disposable
    products that are used for various dialysis treatments.

    The NCI program plans to use the remaining project funding to help prepare
    the buildings for producing the dialysis components, but those funds have
    not yet been spent. DOE has also allocated $1.25 million from the
    Initiatives for Proliferation Prevention program to support production
    development at the site. In January 2001, an official of the Western company
    said that he was optimistic about starting production by the end of the
    year. He expected his company to begin installing manufacturing equipment
    during the summer of 2001. If the project progresses as planned, the company
    expects to employ about 150 Avangard weapons assembly employees on a full-
    time basis. The official said that the number of employees could grow to
    1,000 over time.

    About one- half of the NCI projects have been established to fund a variety
    of activities in the nuclear cities. These projects include infrastructure
    improvements, cooperation with the European Bank for Reconstruction and
    Development to provide small business loans that are available to city
    residents, business training, marketing, and feasibility studies. In
    addition, these projects include community development efforts, such as
    youth exchange programs and health care services. According to DOE, while
    these projects may increase the potential for job creation in the closed
    cities, they are not all designed to directly lead to new jobs for weapons
    scientists. DOE officials believe that community development projects are
    needed to improve the economic and social conditions in the cities in order
    to make them more attractive to commercial investors. However, MINATOM and
    weapons institute officials have criticized DOE?s decision to fund community
    development activities and small business loans, claiming that they do not
    lead directly to employment opportunities or provide sustainable jobs for
    weapons scientists. About One- Half of the NCI

    Projects Are Not Designed to Provide Jobs for Weapons Scientists

    Page 20 GAO- 01- 429 Nuclear Nonproliferation

    DOE has allocated about $1 million through December 2000 to a dozen separate
    activities that fall into the category of community development. The
    activities include school exchange programs, Sister Cities exchange
    programs, and health care services. According to DOE, community development
    activities are needed to bolster the cities? ability to provide self-
    sufficient services, develop municipal capabilities and strengthen citizen
    and entrepreneurial networks, and build political and economic ties. In
    addition, DOE officials told us that community development activities are
    needed to help make the cities more attractive to potential Western
    investors. However, none of the industry officials whom we talked to during
    the course of our audit indicated that they would be more likely to invest
    in the nuclear cities because of municipal and social improvements.

    MINATOM officials have stated in the past that while these activities may be
    worthwhile, they do not support them as part of the NCI program because they
    will not create jobs. In the May 2000 Joint Steering Committee meeting, 9 a
    MINATOM official stated that job creation was the primary goal of the NCI
    program and the 1998 NCI government- togovernment agreement. He noted that
    MINATOM believed that only activities that create real jobs should be
    included under the NCI agreement and that community development activities,
    should they continue, need to be covered by a separate agreement. According
    to DOE officials, the community development component of NCI was considered
    by the former DOE Assistant Secretary responsible for the program to be a
    vital activity.

    A July 1999 House Appropriations Committee report accompanying the Energy
    and Water Development Appropriations Bill, 2000, raised concerns about DOE?s
    expertise in implementing the NCI program. The report stated that DOE should
    work with other federal agencies that are implementing similar programs in
    Russia. As a result, DOE has attempted to include other agencies in the
    program?s implementation. For example, DOE?s community development
    activities have worked in tandem with other U. S. government agencies. The
    U. S. Agency for International Development has granted about $387,000 to a
    U. S. nongovernmental organization to carry out community health care
    projects in Sarov and Snezhinsk. NCI has also given a grant to this
    organization to implement

    9 The U. S./ Russian Joint Steering Committee, which is made up of senior
    officials from U. S. and Russian agencies, oversees the NCI program. The
    Steering Committee meets twice a year to review recent activities and map
    out future strategies and priorities.

    Page 21 GAO- 01- 429 Nuclear Nonproliferation

    the community health care project in Snezhinsk. These projects are not
    intended to directly support work by weapons scientists or engineers but to
    improve the level of health care service in the cities.

    One of the NCI program?s other major projects has been to enter into a
    cooperative arrangement with EBRD to extend the bank?s Russia Small Business
    Fund to the nuclear cities. DOE believes that the loan programs are
    important to diversify the economies of the cities, although the loans are
    not necessarily assisting weapons scientists. The Department awarded $1.5
    million to EBRD in February 2000 for the bank to set up the programs. As of
    December 2000, the bank had spent over $438,000 of the $1.5 million on
    salaries for its own staff consultants, to train new loan officers in the
    cities, and to cover operating expenses. According to the bank, as of
    February 2001, it had made about 280 loans to businesses in the cities. DOE
    routinely receives information on the loan program, but that information
    does not provide details about the background of the loan recipients.
    However, according to information from EBRD on loans made in Snezhinsk, the
    recipients are typically not current employees of the weapons institutes and
    the loans are not necessarily used to start new businesses. Furthermore, the
    businesses that receive loans are mostly in the retail trading sector, such
    as clothing and household goods stores. Some MINATOM officials told us that
    they question the value of the loan programs, noting that the loans are not
    going to the types of businesses that are appropriate for highly educated
    weapons scientists. Officials from the weapons institute in Sarov told us
    that they did not request the loan program and objected to DOE?s using NCI
    funds to start it because it does not play a role in restructuring the
    workforce. (See app. III for more details about the loan program.)

    Eight, or about one- third, of the NCI projects we reviewed are designed to
    develop sustainable commercial ventures. To date, only one of these has had
    success in creating jobs; it involves a small company started in Snezhinsk
    to market and service bar- code technology and other automated devices that
    are used to identify and inventory property. The Russian company was formed
    in February 2000 by six former weapons institute employees. According to a
    national laboratory official, these employees left the institute to form the
    company. The NCI program allocated $395,000 to the project in fiscal years
    1999 and 2000. According to a national laboratory official, the Russian
    company has used the funds to pay for office space, equipment, and salaries.
    It also used NCI funds to enter into one contract to receive training and
    has entered into agreements to distribute and service bar- code and auto-
    identification technologies manufactured by three U. S. companies. About
    One- Third of the

    NCI Projects Are Designed to Develop Sustainable Commercial Ventures

    Page 22 GAO- 01- 429 Nuclear Nonproliferation

    DOE has canceled several NCI projects that were intended to create jobs for
    weapons scientists for a variety of reasons. According to DOE, many projects
    were designed to ?jump- start? the program with the expectation that not all
    would evolve into large- scale jobs creation projects. Furthermore, several
    of these projects were subsequently determined to not be viable, have run
    into difficulties, and have either been canceled or stalled. For example,
    the program funded one project in Zheleznogorsk to expand the capacity for
    recycling luminescent tubes that contain mercury. DOE allocated $250,000 to
    this project but spent only $2,000. The national laboratory official
    responsible for overseeing the project said that MINATOM was not willing to
    bring the recycling technology out of the restricted part of the city.
    Because access restrictions prevented DOE from working to expand the
    recycling capacity within the secure area of the institute, the Department
    canceled the project.

    DOE funded another project to determine the viability of producing canola
    oil in the Zheleznogorsk region. The oil can be used for cooking and animal
    feed and can be used industrially to make lubricants, fuels, and soaps.
    Initial work under the project would have been to determine whether or not
    the crop could be successfully grown in the area. According to the national
    laboratory official responsible for overseeing the project, DOE and
    officials from the weapons institute in Zheleznogorsk were interested in the
    idea, but the city?s mayor was not. The national laboratory official told us
    that the mayor was more interested in promoting the production of barley for
    livestock that could also be used to make beer and vodka to bring in tax
    revenues for the city. The national laboratory official was denied access to
    the city when she tried to promote the project. DOE allocated $302,000 to
    the project and spent about $114,000 before canceling it.

    Other NCI projects have been canceled or delayed due to a lack of Russian
    support and cooperation. For example, in the case of one approved project,
    Russian officials have not provided DOE with business and marketing plans
    and other financial information, claiming that the information is
    proprietary or includes trade secrets. According to DOE officials, NCI
    projects would more likely succeed if Russia demonstrated its support by
    contributing funds to the projects.

    The most successful commercial effort we observed in the nuclear cities
    involved a major U. S. computer company that employs former weapons
    scientists in Sarov. This effort, which began about 7 years ago, has been
    undertaken without U. S. government assistance and now employs about

    Page 23 GAO- 01- 429 Nuclear Nonproliferation

    100 scientists. This commercial venture is discussed in more detail in
    appendix IV.

    In addition to the lack of Russian support for some projects, there are
    numerous other reasons for the limited initial success of the NCI program.
    These include poor economic conditions in Russia, the remote location and
    restricted status of the nuclear cities, the lack of an entrepreneurial
    culture among weapons scientists, and the inadequacy of the NCI program?s
    project selection process. As we reported in November 2000, international
    aid efforts have had difficulty in promoting economic growth in Russia. The
    country appears to be a long way from having a competitive market economy,
    and its transition over the past decade has been more difficult than
    expected. 10 DOE faces even greater problems in trying to promote economic
    development in the nuclear cities. The cities are geographically and
    economically remote. Although the cities have a skilled and well- educated
    workforce, those residents have depended upon government support for their
    livelihood and do not generally have experience in business or
    entrepreneurial ventures.

    According to DOE and industry officials, access to the nuclear cities has
    been a major impediment. The Russian government requires that all visitors
    apply for an access permit at least 45 days before arriving but does not
    always grant those requests. DOE provided us with a list of 25 instances
    since 1999 in which the Russian government denied requests from DOE
    headquarters staff, national laboratory staff, U. S. embassy personnel, and
    Members of Congress for access to one or more of the three cities. (See app.
    V for more detail.) Complications over a request for access even led to the
    cancellation of a scheduled Joint Steering Committee meeting in November
    2000, which the NCI program director considered a major setback to the
    program. A MINATOM official told us that the access problem is greatly
    exaggerated, further noting that

    ?hundreds? of officials have visited Russia on behalf of the NCI program.
    The MINATOM official also told us that access would be even better as more
    NCI funds reach the nuclear cities.

    Notwithstanding the views of MINATOM officials, industry officials told us
    that the difficulties in obtaining access were a detriment to doing business
    in the nuclear cities. Several industry representatives told us that the

    10 See Foreign Assistance: International Efforts to Aid Russia?s Transition
    Have Had Mixed Results (GAO- 01- 8, Nov. 1, 2000). NCI Program Faces

    Numerous Impediments to Success

    Page 24 GAO- 01- 429 Nuclear Nonproliferation

    45- day waiting period would cause serious problems for their commercial
    ventures in the cities. The EBRD official responsible for managing the loan
    programs also told us that access problems are an impediment to doing
    business. Because of access problems, EBRD consultants have had to bring
    people outside of the cities for training. The official also told us that
    difficulties with access would make it harder to oversee the loans.

    The success of NCI projects has also been limited by the program?s failure
    to rigorously screen projects before approving them. In May 1999, DOE issued
    a program plan that included a project selection and approval process. NCI
    program staff were to screen project proposals to determine their
    suitability with respect to the program?s objectives by using a list of
    criteria developed by the Joint Steering Committee. The criteria included
    such factors as the number, cost, and sustainability of created jobs, the
    involvement of industry, and whether the project could enhance Russian
    weapons technology. The process then called for proposals to be reviewed by
    (1) one or more of three types of working groups; 11 (2) a technical
    committee comprising government and nongovernment officials; and (3) other
    U. S. government agencies and offices within DOE with an interest in aid to
    Russia.

    DOE and national laboratory officials have told us, however, that the
    implementation of the project approval process to date has been inconsistent
    and ?ad- hoc.? DOE officials told us that the program did not have
    documentation to show how approved projects had moved through the review
    process. According to the NCI program director, projects were approved for
    funding without a comprehensive review process in order to implement the
    program quickly and engage the Russians. In addition, although projects are
    reviewed by DOE and MINATOM through the workings of the Joint Steering
    Committee, MINATOM officials have not supported several of the major NCI
    projects, including the EBRD small business loan programs and the community
    development projects because they did not directly lead to sustainable jobs
    for weapons scientists. According to DOE officials, DOE and MINATOM have
    differing views about what the NCI program should be funding. MINATOM
    believes that only projects that lead directly to jobs creation should be
    funded while

    11 DOE envisioned three types of working groups: city working groups that
    focus on activities particular to individual cities, functional working
    groups that focus on functional areas (such as business training) relevant
    to more than one of the cities, and task groups that concentrate on specific
    projects. NCI?s Projects Were Not

    Adequately Screened

    Page 25 GAO- 01- 429 Nuclear Nonproliferation

    DOE has asserted that many different activities- in addition to jobs
    creation- need to be addressed as part of the program.

    In the National Defense Authorization Act for Fiscal Year 2001, the Congress
    directed that DOE establish and implement project review procedures for the
    NCI program before DOE would be allowed to obligate or expend all of its
    fiscal year 2001 appropriation. The act specified that the procedures shall
    ensure that any scientific, technical, or commercial NCI project (1) will
    not enhance Russia?s military or weapons of mass destruction capabilities;
    (2) will not result in the inadvertent transfer or utilization of products
    or activities under such project for military purposes; (3) will be
    commercially viable within 3 years; and (4) will be carried out in
    conjunction with an appropriate commercial, industrial, or nonprofit entity
    as partner. In response, in January 2001, DOE issued new guidance for the
    NCI program that includes more detail on the project selection and approval
    process. For example, the guidelines spell out the process by which DOE will
    review projects- internally and with interagency assistance- for any
    military application. The review process is also supposed to confirm that
    scientific, technical, and commercial projects will have a partner and that
    they are commercially viable. It is too early to tell how closely DOE will
    adhere to this project- approval process. In addition, the new guidance
    states that DOE will give preference, to the extent possible, to those
    projects with the strongest prospects for early commercial viability and
    those in which start- up costs are shared with other U. S. government
    agencies, Russian partners, and/ or private entities.

    The Nuclear Cities Initiative and the IPP program share a common underlying
    goal- to employ Russia?s weapons scientists in nonmilitary work. Unlike the
    IPP program, NCI has a community development component that is designed to
    create conditions necessary for attracting investment in the nuclear cities.
    The operation of these two similar programs in Russia?s nuclear cities has
    led to some duplication of effort, such as two sets of project review
    procedures and several similar types of projects.

    Both the IPP program and NCI operate in and provide funds to Russia?s
    nuclear cities. Since 1994, DOE has spent over $13 million on about 100 IPP
    projects in five nuclear cities, including the three nuclear cities
    participating in the NCI program- Sarov, Snezhinsk, and Zheleznogorsk.
    According to IPP?s Deputy Director, several of the projects have funded the
    development of promising technologies, such as prosthetic devices and
    medical implants, nuclear waste clean up technology, and portable monitoring
    devices to detect nuclear material. He told us that these Duplication Has
    Occurred

    in the Operation of DOE?s Two Programs in Russia?s Nuclear Cities

    Page 26 GAO- 01- 429 Nuclear Nonproliferation

    projects might be commercialized in the next few years. One U. S. national
    laboratory official told us that there was not a clear distinction between
    the two programs, and other laboratory officials noted that some projects
    have been proposed for funding under both programs, shifted from one program
    to another, or have received funding from both programs. For example, in the
    case of the kidney dialysis equipment project, NCI has funded infrastructure
    improvements, and IPP has funded a small planning effort and also plans to
    fund some activities related to the manufacture of disposable products.

    Both the NCI and IPP programs reside within DOE?s Office of Defense Nuclear
    Nonproliferation, National Nuclear Security Administration. In addition, the
    programs have adjoining offices and share staff to perform budget, travel,
    and secretarial functions. The Directors of the NCI and IPP program told us
    that, in their opinion, there was nothing wrong with some overlap in
    projects or in sharing administrative functions. The IPP program director
    told us that although he did not believe that the two programs were
    duplicative, there is potential for duplication to occur because both have a
    common approach for creating jobs in the nuclear cities.

    Some of the failures of the NCI commercial development projects may have
    been avoided if DOE had a common project approval process and had
    incorporated some of the elements of the IPP project selection process from
    the outset of the program. In 1999, we recommended that DOE eliminate those
    IPP projects that did not have commercial potential. Subsequently, DOE
    implemented our recommendation and strengthened its project selection
    process. IPP requires that all proposed projects have an industry partner to
    help ensure the commercial viability of each project. The IPP program has
    also relied on the U. S. Industry Coalition 12 to help evaluate and develop
    commercial projects. In contrast, the NCI program has not established a
    similar relationship with the Coalition or any other industry group nor has
    it required an industry partner for its projects. On March 21, 2001, DOE
    solicited the Coalition?s support in disseminating information among its
    members about the Nuclear Cities Initiative.

    12 The U. S. Industry Coalition, Inc., is a nonprofit association of U. S.
    companies and universities dedicated to the nonproliferation of weapons of
    mass destruction through the commercialization of technologies for peaceful
    purposes. The council receives funding from DOE to carry out its
    responsibilities with respect to the IPP program.

    Page 27 GAO- 01- 429 Nuclear Nonproliferation

    Most of NCI?s initial commercial development projects would not likely have
    been approved under the IPP program?s more rigorous approval process. This
    is because unlike the IPP program, the NCI program did not require that
    projects have industry partners or demonstrate commercial viability until
    January 2001, when program guidance on the subject was issued. In addition,
    the program has only recently begun to develop a more systematic process, as
    IPP has, for obtaining the views of business or industry experts on the
    commercial viability of projects. According to the Deputy Director of the
    NCI program, DOE is now developing a contract with a consulting firm that
    will review proposed projects for commercial viability.

    In addition, the NCI program has recently adopted practices established
    under the IPP program regarding the funding of projects. In January 2001,
    the NCI program required that 65 percent of all project funds be spent in
    Russia. The guidance is similar to a congressional restriction on the IPP
    program, which mandates that no more than 35 percent of IPP funds may be
    obligated or spent by the national laboratories to carry out or provide
    oversight of any program activities. Moreover, the IPP program has allocated
    funds to the national laboratories accompanied by approval letters that
    specify the exact amount of funding to be allocated (and spent) at the
    laboratories and in Russia. A similar approval letter procedure has only
    recently been adopted for the NCI program.

    Although the programs have many similarities, the level of access to the
    nuclear cities granted to DOE officials is strikingly different, depending
    on which program they are representing. For example, officials of the
    nuclear city of Snezhinsk do not allow DOE and national laboratory officials
    access to the restricted weapons institutes under NCI. This restriction has
    impeded the implementation of a few NCI projects. For example, a U. S.
    national laboratory official told us that he was not granted access to visit
    a weapons institute in Snezhinsk to observe the equipment being considered
    for use in an NCI project related to the development of fiber optics. As a
    result, this project has been canceled. However, the same U. S. official was
    allowed access to observe this same equipment 2 years earlier when he
    visited the site under an IPP- sponsored visit.

    Page 28 GAO- 01- 429 Nuclear Nonproliferation

    The European Nuclear Cities Initiative, a proposed program that is being
    supported by the Italian Ministry of Foreign Affairs, is designed to create
    jobs in Russia?s nuclear cities. This proposal is expected to be smaller in
    scope than DOE?s NCI, but officials responsible for the effort told us that
    ENCI should complement and support the U. S. program. We found some
    significant differences between the two programs. For example, ENCI is
    expected to (1) target older weapons scientists who are considered to pose a
    greater proliferation risk than younger scientists who could be more easily
    assimilated into the Russian economy; (2) start in two nuclear cities; and
    (3) emphasize environmental and energy- efficiency projects. Furthermore,
    officials responsible for ENCI told us that it will not emphasize
    establishing sustainable commercial ventures in the cities. Instead, ENCI
    proposes to fund projects that utilize Russian weapons scientists? skills to
    help develop environmental and energy- related technologies that can be used
    by European companies.

    The ENCI proposal is expected to complement DOE?s program. It has been
    developed and promoted primarily by an Italian nongovernmental organization
    known as the Landau Network- Centro Volta 13 and by the Italian National
    Agency for New Technology, Energy and Environment. It has received support
    from the Italian Ministry of Foreign Affairs. According to a Landau Network-
    Centro Volta official, ENCI shares the same basic nonproliferation
    objectives as DOE?s program but will be significantly smaller in scope and
    size. Furthermore, the European proposal has developed an overall approach
    and set of proposed activities that differ from the DOE program in several
    ways. For example, ENCI plans to focus on environmental cleanup and energy-
    efficiency technology projects that Landau officials believe tap into the
    strengths of the weapons scientists in the two nuclear cities. Italian
    officials do not believe that the cities possess sufficient commercial
    potential to develop sustainable business enterprises in the foreseeable
    future. As a result, they believe that it makes more sense to develop
    projects that employ nuclear city weapons scientists as contractors to
    provide technical assistance to help solve environmental and energy problems
    in Europe. They also believe that over time, it might be possible to attract
    Western business partners to enter into commercial relationships with the
    city if the initial projects prove successful.

    13 The Landau Network- Centro Volta seeks to promote scientific cooperation
    with institutions and researchers from the former Soviet Union, Eastern
    Europe, and Asia. European Nuclear

    Cities Initiative Focuses on Employing Scientists in Russia?s Nuclear Cities

    Page 29 GAO- 01- 429 Nuclear Nonproliferation

    According to officials from Italy and the European Commission, 14 ENCI will
    start in two cities- Sarov and Snezhinsk. However, funding for ENCI is
    uncertain. Italian officials estimated that $50 million will be needed to
    implement the program over the next 5 years from various donors, including
    individual countries as well as the European Commission. An Italian Ministry
    of Foreign Affairs official told us that Italy is considering funding one
    project in 2001 at a cost of between $500,000 and $800, 000.

    A European Commission official told us that funding levels would probably be
    modest because some member states do not perceive that unemployed Russian
    weapons scientists pose a serious proliferation threat. He noted that many
    European countries were more concerned about the threat posed by nuclear
    materials in Russia and are more inclined to fund programs that would ensure
    greater accountability and control over these materials. Furthermore, this
    official said that member states of the European Commission want more
    details about the ENCI proposal before they are willing to make a decision
    about funding for the program.

    In December 2000, the Italian Ministry of Foreign Affairs- in collaboration
    with the Landau Network- Centro Volta and the Italian National Agency for
    New Technology, Energy and the Environment- prepared a list of 34 projects
    proposed by representatives from Sarov and Snezhinsk. These projects are
    focused on innovative technologies and energy and environmental issues. Some
    of these proposed projects are designed to

     develop environmental centers in Sarov and Snezhinsk,

     develop renewable energy sources,

     investigate advanced technological components for fuel cells, and

     create energy- efficiency centers in Sarov and Snezhinsk. The projects are
    expected to last from 1 to 3 years with costs ranging from about $69,000 to
    over $1.8 million. Each proposed project assumes that Russia will fund part
    of the project. Job creation estimates are included in each project proposal
    and range from 20 to 50 per project. These projects will be submitted to
    European Commission members for review and are expected to be discussed at
    an April 2001 ENCI working group meeting.

    14 The European Commission is an organization that, among other things,
    manages foreign assistance programs for its 15 member states. Program
    Funding Levels

    Are Uncertain

    Page 30 GAO- 01- 429 Nuclear Nonproliferation

    Italian officials told us that they hope that the Commission would provide
    funding for some of these projects after the meeting takes place.

    DOE officials believe that ENCI will support the goals of the Nuclear Cities
    Initiative. DOE?s NCI program director said that it is important to increase
    other countries? participation in this effort and believes that both
    programs can work together in the nuclear cities. Although the director
    noted that the programs have different strategies for creating jobs for
    weapons scientists, he believes that both are complementary.

    The U. S. government and the European Commission have started to coordinate
    their assistance efforts in the nuclear cities. In June 2000, the State
    Department and DOE jointly sent a letter to the Commission encouraging
    initiatives that (1) complement efforts to promote nuclear nonproliferation,
    (2) help downsize Russia?s nuclear weapons complex, and (3) enhance
    scientific and technical cooperation with scientists in the closed nuclear
    cities. The Departments noted that in December 1999, several U. S.
    government representatives participated in an international forum to discuss
    ENCI. ENCI was viewed as potentially augmenting ongoing U. S. and other
    international activities, including the Initiatives for Proliferation
    Prevention program and the International Science and Technology Center?s
    activities focused on the nuclear cities.

    MINATOM officials told us they would welcome assistance through ENCI. They
    stated that the effort to employ weapons scientists in the nuclear cities is
    a great challenge and believe that ENCI can contribute to accelerating the
    pace of Russia?s downsizing effort. In a July 2000 letter addressed to the
    European Commission, MINATOM?s first deputy minister stated that Russia
    supports the efforts of the Commission to help find jobs for weapons
    scientists. He noted that Russia was ready to begin taking steps to pave the
    way so that ENCI could begin working in the nuclear cities.

    DOE?s effort to help Russia create sustainable commercial jobs for its
    weapons scientists and help downsize its nuclear weapons complex is clearly
    in our national security interests. It also poses a daunting challenge. The
    nuclear cities are geographically and economically isolated, access is
    restricted for security reasons, and weapons scientists are not accustomed
    to working for commercial businesses. Thus, Western businesses are reluctant
    to invest in the nuclear cities. However, the successful collaboration of a
    major U. S. computer firm in the Russian nuclear city of Sarov, without U.
    S. government assistance, is an example DOE and Russian Officials

    Express Support for ENCI Conclusions

    Page 31 GAO- 01- 429 Nuclear Nonproliferation

    of what can be accomplished over time if the skills of Russia?s weapons
    scientists are properly matched with the needs of business.

    Although DOE has had some modest successes with helping Russia create jobs
    for its weapons scientists and downsize its nuclear weapons complex, we
    believe that DOE needs to rethink its strategy. A disproportionate
    percentage of program funds is being spent in the United States- about 70
    percent- most of which are going to the U. S. national laboratories instead
    of to Russia. This is also a major irritant to Russian officials who told us
    that if DOE is serious about creating jobs in the nuclear cities, a larger
    percentage of program funds should be spent in Russia. A conference report
    on DOE?s fiscal year 2001 appropriations has directed that no more than 49
    percent of Nuclear Cities Initiative funds be spent in the United States and
    DOE has incorporated this goal into its program guidance. DOE will have to
    more effectively monitor and control program spending to meet this goal. We
    are encouraged that one U. S. national laboratory has negotiated lower
    overhead rates in order to put more resources in Russia and that DOE has
    taken steps, as a result of our review, to systematically track U. S. and
    Russian program expenditures. However, DOE has not developed the
    quantifiable program goals and milestones that are needed to track progress
    and make decisions about future program expansion to other nuclear cities
    and the level of resources needed to continue the program.

    About one- half of the NCI projects are not designed to create businesses or
    lead to sustainable employment but rather focus on infrastructure, community
    development, and other activities. In our view, DOE needs to concentrate its
    limited program funding on those activities that will most realistically
    lead to sustainable employment for weapons scientists. Attempting to change
    the social fabric of the nuclear cities through community development
    projects, thereby making the cities more attractive to potential investors,
    may not be a realistic or affordable goal. Furthermore, industry
    representatives told us that the outcome of these types of projects would
    have little impact on a company?s decision to invest in the nuclear cities.
    Indeed, MINATOM and weapons institute officials from Sarov have questioned
    the value of community development projects because they do not create
    sustainable jobs in the nuclear cities.

    While we believe that the above changes are necessary to improve the
    implementation of NCI, in our view, a more fundamental question needs to be
    addressed by DOE. Does the Department need two separate programs operating
    in Russia?s nuclear cities with the same underlying goals and, in some
    cases, the same types of projects? The IPP program and NCI share a

    Page 32 GAO- 01- 429 Nuclear Nonproliferation

    common goal- the employment of Russian weapons scientists in alternative,
    nonmilitary scientific or commercial activities. Combining the two programs
    could alleviate many of the concerns we have with the implementation of NCI.
    For example, the IPP program already has established limits on the amount of
    funds to be spent in the United States and Russia as well as a strengthened
    project review and selection process that focuses on the commercialization
    of projects and jobs creation. Furthermore, efficiencies might be gained by
    combining the administrative structures of both programs, particularly given
    that the overhead rates at most national laboratories are relatively high.
    While we are encouraged that DOE has already taken some steps to reduce
    laboratory costs, there may be additional opportunities for cost savings in
    this area. Ultimately, the success of DOE?s efforts to create jobs for
    Russia?s weapons scientists depends on industry?s willingness to invest in
    the nuclear cities and elsewhere throughout Russia. We believe that there is
    a limit to what U. S. government assistance can do in this regard. It is
    instructive to note that the proposed ENCI limits and targets its assistance
    because of the difficulty involved in creating sustainable commercial
    businesses in the nuclear cities. We also believe that this is an
    appropriate time for the Department to take a closer look at the operations
    of both its programs and determine how they could work more efficiently and
    effectively as part of a more consolidated effort. This determination should
    include an analysis of what changes in both programs? authorizing
    legislation would be required.

    We recommend that the Administrator, National Nuclear Security
    Administration, improve efforts targeted at the nuclear cities by

     evaluating all of the ongoing NCI projects, particularly those that focus
    on community development activities, and eliminate those that do not support
    DOE?s stated objectives of creating jobs in the nuclear cities and
    downsizing the Russian nuclear weapons complex;

     establishing quantifiable goals and milestones for jobs creation and
    downsizing the weapons complex that will more clearly gauge progress in the
    nuclear cities and use this information to help assess future program
    expansion plans and potential costs; and

     strengthening efforts to reduce national laboratories? costs to implement
    the program in an effort to place more NCI funds in Russia.

    In addition, the Nuclear Cities Initiative and the Initiatives for
    Proliferation Prevention program share a common goal and, in many cases, are
    implementing similar types of projects. In order to maximize limited program
    resources, we also recommend that the Administrator Recommendations for

    Executive Action

    Page 33 GAO- 01- 429 Nuclear Nonproliferation

     determine whether the two programs should be consolidated into one effort-
    including a determination of what changes in authorizing legislation would
    be necessary- with a view toward achieving potential cost savings and other
    programmatic and administrative efficiencies.

    We provided the Department of Energy with copies of a draft of this report
    for review and comment. DOE?s written comments are presented in appendix
    VII. DOE concurred with our recommendations and provided technical comments
    that were incorporated in the report as appropriate. DOE provided additional
    comments on the following issues: (1) job creation and complex downsizing,
    (2) economic diversification, (3) the similarities between NCI and the IPP
    program, and (4) program metrics and project review.

    DOE noted that our report focused on job creation as the primary measure of
    NCI success or as the metric for individual activities. In DOE?s view, this
    reflects an inadequate appreciation of the goals of the program. The
    program?s goal is not simply funding the employment of weapons scientists
    but also downsizing Russia?s weapons complex through economic
    diversification. The outcome of this approach, DOE contends, is sustainable
    alternative nonweapons jobs that ultimately move scientists out of the
    weapons facilities. We recognize that Congress has identified the objectives
    of the NCI program as being both job creation and downsizing Russia?s
    nuclear weapons complex. Although this report focuses more on job creation,
    we have identified, where appropriate, the downsizing of Russia?s weapons
    complex as another objective of the program. We have focused on the job
    creation objective for a number of reasons. First, it is highlighted in the
    government- to- government agreement between the United States and Russia
    which states that the purpose of the NCI program is to create a framework
    for cooperation in facilitating civilian production that will provide new
    jobs for displaced workers in the nuclear cities. Second, the Russian
    officials we met with told us that they are judging the NCI program by one
    standard- the creation of sustainable jobs. These Russian officials have
    criticized community development projects because these projects do not lead
    directly to employment opportunities or provide sustainable jobs for weapons
    scientists. In addition, the industry representatives we talked to said that
    the outcomes of the community development projects would have little impact
    on their company?s decision to invest in the nuclear cities. We continue to
    believe that DOE needs to concentrate its limited program funding on those
    projects that will most realistically lead to sustainable employment for
    weapons scientists. Agency Comments

    and Our Evaluation

    Page 34 GAO- 01- 429 Nuclear Nonproliferation

    Regarding economic diversification, DOE stated that MINATOM would prefer
    that funding be provided directly for major projects through a top down
    approach that reflects central planning. According to DOE, successful
    economic diversification efforts in the United States have occurred based on
    active partnerships among government, industry, and the community, which
    support entrepreneurship and ?growth from below?- a goal endorsed by the NCI
    program. In our view, DOE?s premise that economic diversification approaches
    in Russia can be modeled after U. S. experiences may be misleading. The
    economies and social and political structures of the two countries are not
    comparable. As we noted in our report (1) international aid efforts have had
    difficulty promoting economic growth in Russia, (2) the country appears to
    be a long way from having a competitive market economy, and (3) Russia?s
    transition experience over the past decade has been more difficult than
    expected. Regardless of the approach that is taken to stimulate economic
    development in the nuclear cities, we continue to believe that DOE faces a
    daunting challenge in meeting the ambitious goals of the NCI program. We
    also continue to question, as we did in our 1999 report, whether DOE
    possesses the expertise needed to develop market- based economies in a
    formerly closed society.

    DOE also noted that our discussion of duplication between NCI and IPP
    reflects an incomplete understanding of the differing, but complementary,
    goals of the program. DOE noted that IPP is an older program that focuses on
    the commercialization of technology inside the weapons institutes of the
    nuclear cities, while NCI focuses only in the municipal areas of the nuclear
    cities. In DOE?s view, it is not surprising that program managers at the
    national laboratories might seek funding for the same proposed activity from
    NCI and IPP. According to DOE, scientists all over the world try to maximize
    their chances of receiving grants by applying to multiple sources, and such
    activity does not make NCI and IPP duplicative or automatic candidates for
    administrative consolidation. While we recognize that differences exist in
    the implementation of both programs, both programs share a common underlying
    goal- the employment of Russian weapons scientists in sustainable,
    alternative, nonmilitary scientific or commercial activities. Therefore, we
    continue to question whether DOE needs two separate programs with two sets
    of similar project review procedures funding numerous similar types of
    projects in the nuclear cities. As noted in the report, we found that some
    NCI projects have (1) been proposed for funding under both programs, (2)
    shifted from one program to another, or (3) received funding from both
    programs. Combining the two programs could also alleviate many of the
    concerns we have with NCI?s implementation such as strengthening the project

    Page 35 GAO- 01- 429 Nuclear Nonproliferation

    selection and review process. Furthermore, we continue to believe that
    efficiencies might be gained by combining both programs.

    Finally, DOE noted that the Nuclear Cities Initiative is less than 2- 1/ 2
    years old and that project review processes and program metrics need time to
    mature and be fully implemented. DOE stated that new project review
    procedures have been instituted to ensure effective coordination and that
    the program?s performance is being measured. While we recognize in the
    report that new procedures have recently been put into place, it is unclear
    to us why it took DOE over 2 years to develop and implement these procedures
    when similar procedures already existed under the IPP program. As noted in
    the report, some of the failures of the NCI commercial development projects
    might have been avoided if DOE had a common project approval process and had
    incorporated some of the elements of the IPP project selection process from
    the outset of the program. Concerning NCI?s program metrics, we recognize in
    the report that DOE has performance measures, but we continue to believe
    that these measures require greater specificity. For example, without
    specific targets, such as the number of scientists that DOE plans to help
    find jobs for, it is difficult to determine whether the program is on track
    to meets its long- term objectives. DOE has concurred with our
    recommendation to establish quantifiable milestones that will more clearly
    gauge the NCI program?s progress in the nuclear cities.

    To determine the amount of NCI program funds spent in the United States and
    Russia, we obtained data from DOE?s headquarters and the U. S. national
    laboratories. Our task was complicated because DOE and the national
    laboratories were not systematically tracking these types of data. As a
    result, we developed, in cooperation with DOE?s Nuclear Cities Initiative
    budget officer, a standardized format and agreed- upon definitions for
    capturing this information for each laboratory by various cost components,
    such as salary and benefits, overhead, and travel. The format also was used
    to help identify program expenditures in the United States and Russia. We
    reviewed the data submissions from the laboratories to ensure that the
    program expenditures were grouped by the appropriate expenditure categories.
    We had numerous discussions with DOE and several national laboratories?
    financial officers to ensure that the data were consistent and conformed
    with agreed- upon definitions of what comprised U. S. and Russian costs. In
    cooperation with the NCI program office, we reviewed all of the cost data
    submitted by the national laboratories to ensure that expenditures were
    consistently categorized. In several instances, we worked directly with
    national laboratory program Scope and

    Methodology

    Page 36 GAO- 01- 429 Nuclear Nonproliferation

    and finance officials to clarify and/ or supplement cost data they had
    provided us with.

    To assess the NCI projects and their impact, we reviewed all of the projects
    that had been implemented by DOE. We developed a list of projects from
    information provided by DOE and the U. S. national laboratories. We made
    some judgments in order to arrive at a final list of projects to review. For
    example, we excluded activities involving the development of strategic
    plans, workshops, and other support activities because, while these efforts
    support the program, we did not consider them to be projects in their own
    right. In addition, we decided to consider all of the community development
    activities as one project because those activities involved relatively small
    expenditures of funds. The NCI program staff concurred with these and other
    judgments we made about the projects. (See app. VI for a list of projects
    reviewed.)

    To assess the impact of the NCI projects, we used, whenever possible, the
    information contained in DOE?s NCI database to determine the extent to which
    each project focused on critical nonproliferation objectives, such as the
    number of weapons scientists engaged in the project and its potential
    commercialization benefits. However, we found that the database did not
    always contain current information. We also met or spoke with the principal
    investigator for each project or a representative who was familiar with the
    project. We discussed how projects were meeting these objectives and what
    role the investigator played in meeting these objectives. We met or spoke
    with officials from the following national laboratories to discuss NCI
    projects: Argonne National Laboratory, Oak Ridge National Laboratory,
    Pacific Northwest National Laboratory, Sandia National Laboratory, Lawrence
    Livermore National Laboratory, Los Alamos National Laboratory, National
    Energy Technology Laboratory, Westinghouse Savannah River Company, and the
    Kansas City Plant. We also met with representatives from DOE to discuss
    those projects that were being managed by DOE?s headquarters. During the
    course of our work, we also met with or had discussions with officials from
    the Department of Commerce, the Department of State, the U. S. Agency for
    International Development, the U. S. Industry Coalition, Inc., the U. S.
    Civilian Research and Development Foundation, and the European Bank for
    Reconstruction and Development.

    In several instances, we contacted industry officials to follow up on the
    status of commercialization activities and obtain their views about trying
    to start businesses in the nuclear cities. For example, we discussed
    selected projects and related commercial activities with officials from

    Page 37 GAO- 01- 429 Nuclear Nonproliferation

    ADAPCO, Fresenius Medical Care, Credit Suisse First Boston (Europe),
    Motorola, Oracle, Intel Corporation, and Delphi Automotive Systems. We
    toured the All- Russian Scientific Research Institute of Experimental
    Physics (VNIIEF) Software Technology Laboratory in Sarov, which is the
    company that a Western firm contracts with for software development.

    We visited Russia in September 2000 to meet with MINATOM officials in
    Moscow, including the first deputy minister. We traveled to Sarov to meet
    with representatives from VNIIEF and Avangard, the weapons assembly facility
    that is located in Sarov. During our visit to Sarov, we asked to visit the
    Avangard facility, but our request was denied. While in Sarov, we visited
    the Open Computing Center and met with numerous weapons scientists who were
    working there. We also visited the Analytical Center for Nonproliferation
    (one of the projects) and VNIIEF Conversia, the organization that seeks to
    develop commercial ventures in the city. We also met with the deputy mayor
    of Sarov to learn more about the economic and social conditions in that
    city. We also met with representatives from the nuclear city of Snezhinsk
    during our visit to Moscow.

    To obtain information about the status of the European Nuclear Cities
    Initiative, we visited Rome, Italy, and Brussels, Belgium, in January 2001.
    While in Rome, we met with officials from Italy?s Ministry of Foreign
    Affairs, the Landau Network- Centro Volta, and the Italian National Agency
    for New Technology, Energy and the Environment. In Brussels, we met with
    representatives from the European Commission?s Security Policy and External
    Relations Directorate. We conducted our work from August 2000 through April
    2001 in accordance with generally accepted government auditing standards.

    As agreed with your offices, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 30 days after
    the date of this letter. At that time, we will send copies of this report to
    the Honorable Spencer Abraham, Secretary of Energy; John A. Gordon,
    Administrator, National Nuclear Security Administration, the Honorable
    Mitchell E. Daniels, Director, Office of Management and Budget; and
    interested congressional committees. We will make copies available to others
    upon request.

    Page 38 GAO- 01- 429 Nuclear Nonproliferation

    If you have any questions concerning this report, I can be reached at (202)
    512- 3841. Major contributors to this report include Gene Aloise, Ross
    Campbell, Glen Levis, and Joseph O. McBride.

    (Ms.) Gary Jones Director, Natural Resources

    and Environment

    Appendix I: Role of Russia?s Nuclear Cities in Weapons Design and
    Development

    Page 39 GAO- 01- 429 Nuclear Nonproliferation

    This appendix provides information on Russia?s nuclear cities and their role
    in developing nuclear weapons.

    Table 1: Role of Russia?s Nuclear Cities in Weapons Design and Development
    Name Nuclear role

    Sarov a Nuclear weapons design and assembly, plutonium storage Zarechnyy
    Nuclear weapons assembly and disassembly, plutonium and highly

    enriched uranium storage Novouralsk Uranium enrichment, highly enriched
    uranium storage and blending Lesnoy Nuclear weapons assembly and
    disassembly, plutonium storage Ozersk Mayak Fuel Storage Site: fuel
    fabrication, mixed oxide fuel, plutonium

    production reactors, reprocessing, waste management Snezhinsk Nuclear
    weapons design, plutonium and highly enriched uranium

    storage Trekhgornyy Nuclear weapons assembly and disassembly, plutonium and
    highly

    enriched uranium storage Seversk Uranium enrichment and reprocessing,
    plutonium production reactors,

    waste management Zheleznogorsk Reprocessing, plutonium production reactors,
    waste management Zelenogorsk Fuel fabrication (military), uranium enrichment
    a Avangard, a weapons assembly and disassembly facility, is located in
    Sarov.

    Source: Department of Energy.

    Appendix I: Role of Russia?s Nuclear Cities in Weapons Design and
    Development

    Appendix II: NCI?s Cumulative Expenditures as of December 2000

    Page 40 GAO- 01- 429 Nuclear Nonproliferation

    This appendix presents detailed information about the cumulative costs
    incurred, as of December 2000, by the national laboratories and the
    Department of Energy?s headquarters, to implement the Nuclear Cities
    Initiative program.

    Table 2: NCI?s Cumulative Expenditures by DOE and National Laboratories as
    of December 2000 Organizations Labor a Travel b

    Material purchased

    in the United States c

    Material purchased for Russia c Other

    costs d Overhead e Total Percentage of total

    ANL $107, 409 $19, 031 $25,461 $0 $81 $40, 716 $192,698 1 BNL 40, 000 9, 500
    1,700 0 14,500 46, 200 111,900 1 KCP 7, 323 11, 595 19, 145 0 0 30, 215
    68,278 f LANL 560, 756 246, 180 52, 298 1,794,965 69,545 599, 367 3,323,111
    21 LLNL 1,273, 729 448, 027 84, 811 646,117 231,721 2,023, 487 4,707,892 29
    NETL 0 27, 680 285,680 0 0 0 313,360 2 ORNL 560, 300 223, 900 21, 200
    110,000 0 90, 600 1,006,000 6 PNNL 796, 200 124, 400 504,300 767,400 14,200
    1,174, 400 3,380,900 21 SNL 253, 000 108, 200 117,500 0 66,900 327,100
    872,700 5 WSRC 18, 595 121, 789 113,787 171,747 22,250 79, 061 527,229 3 DOE
    HQ 0 0 495,612 966,406 0 0 1,462,018 9

    Total $3,617,312 $1,340,302 $1,721,494 $4,456,635 $419,197 $4,411,146
    $15,966,086 98 g

    Legend: ANL = Argonne National Laboratory BNL = Brookhaven National
    Laboratory DOE HQ = Department of Energy's headquarters KCP = Kansas City
    Plant LANL = Los Alamos National Laboratory LLNL = Lawrence Livermore
    National Laboratory NETL = National Energy Technology Laboratory ORNL = Oak
    Ridge National Laboratory PNNL = Pacific Northwest National Laboratory SNL =
    Sandia National Laboratories WSRC = Westinghouse Savannah River Company
    Note: This table provides information on total expenditures associated with
    the NCI program through December 31, 2000. This table breaks out costs
    differently than figures 3 and 4 in the report. For example, this table
    combines all travel costs and does not break these costs out by expenditures
    in the United States or Russia. Furthermore, all overhead charges for labor,
    travel, contracts, and materials purchased are combined as one figure for
    each organization.

    Appendix II: NCI?s Cumulative Expenditures as of December 2000

    Appendix II: NCI?s Cumulative Expenditures as of December 2000

    Page 41 GAO- 01- 429 Nuclear Nonproliferation

    a Includes salaries, wages, fringe benefits, and pensions that are directly
    chargeable to the NCI program. DOE?s headquarters employees' salaries are
    not charged directly to the program but are funded through DOE's Office of
    Nonproliferation and National Security's program direction account. DOE
    estimated that salaries and expenses for headquarters employees, including
    contractors, assigned to the NCI program totaled $1,245,322 for fiscal year
    2000. b Includes both travel and per diem costs- foreign and domestic- of
    laboratory officials and travel of

    Russian officials to the United States. DOE's headquarters? travel costs are
    funded through DOE's Office of Nonproliferation and National Security's
    program direction account and totaled $106,330 in fiscal year 2000. c
    Includes directly applicable purchase orders, contracts (both foreign and
    domestic), and consulting services. d Includes the costs of certain
    centralized services, such as document translation,

    translators/ interpreters, in- country support, videoconferences, training,
    publications, and the costs of hosting delegations. e Includes charges for
    organizational overhead, general and administrative expenses, and service

    assessments. Overhead costs are also allocated for processing travel
    arrangements for both U. S. and Russian personnel. f Less than 1 percent.

    g Total does not equal 100 percent because of rounding. Source: GAO's
    presentation of data from DOE.

    Appendix III: DOE?s Small Business Loan Program in Russia?s Nuclear Cities

    Page 42 GAO- 01- 429 Nuclear Nonproliferation

    In February 2000, DOE granted $1.5 million to the European Bank for
    Reconstruction and Development (EBRD) to establish small- loan programs in
    the three nuclear cities. EBRD is using local branches of Sberbank, which is
    the largest commercial bank in Russia, to implement the loan program in the
    cities. As of the end of December 2000, EBRD had spent about $440,000 of the
    $1.5 million. About 74 percent of those expenditures paid for the salaries
    of the EBRD employees who set up the loan programs and act as consultants.
    The remaining expenditures were used to train and employ 10 new loan
    officers hired from within the cities, train other potential loan officers,
    and cover standard operating expenses, such as office rent, communications,
    and travel.

    EBRD requested NCI funds to cover the administrative costs of the loan
    programs for the first 18 months of operation. Thereafter, the expectation
    is that the programs will be self- sustaining on the basis of the proceeds
    from loan repayments. According to the EBRD representative responsible for
    overseeing the loan programs, the bank is likely to request an extension
    from DOE if it has not spent the $1.5 million by the end of the 18- month
    period.

    The new loan departments in the Sberbank branches may borrow from EBRD?s
    existing $300 million Russian Small Business Fund. While EBRD has not set
    aside loan capital specifically for the three cities, business owners in
    Sarov, Snezhinsk, and Zheleznogorsk are now able to work with local loan
    officers to compete with other Russian businesses for micro loans (up to
    $30,000) and small loans (up to $125,000) from EBRD. Applicants can receive
    both a micro and small loan at the same time.

    As of the end of February 2001, EBRD had issued 279 loans totaling over
    $1,080,000. Nearly all of the loans were micro loans, and the average size
    was $3,879. EBRD reported that none of the loans were in arrears more than
    30 days. The EBRD representative responsible for the program has projected
    that the level of loan activity will increase from about 30 loans per month
    in late 2000 to 130 per month by June 2002. If that level of activity is
    reached, the bank estimates that it will have issued over 1,600 loans
    totaling about $9 million by June 2002. The representative also told us in
    February 2001 that she expected a total of 18 loan officers to be employed
    in the cities in the near future.

    DOE does not have good information on whether loan recipients were former
    weapons institute employees. What the Department has learned about the loan
    recipients in Snezhinsk- which it believes is representative of the three
    cities- suggests that most of the loans have gone to small Appendix III:
    DOE?s Small Business Loan

    Program in Russia?s Nuclear Cities

    Appendix III: DOE?s Small Business Loan Program in Russia?s Nuclear Cities

    Page 43 GAO- 01- 429 Nuclear Nonproliferation

    retail and wholesale businesses, including food and household goods
    merchants. Information supplied by EBRD for loans in Snezhinsk through July
    2000 showed that about one- third of the recipients were former institute
    engineers, physicists, or computer specialists, including some who left the
    institute in the early 1990s. According to the EBRD representative, the bank
    does not target loans to specific types of businesses, nor is EBRD concerned
    about placing limits on who is employed in the businesses that receive
    loans. The bank is interested in helping to create a sound economy in the
    cities that will include businesses that might employ spouses or children of
    weapons scientists and not just weapons scientists themselves. As EBRD has
    sufficient loan funds, it does not see any reason to ration these funds to a
    specific group while denying access to others, given that any economic
    activity in the cities is a benefit. The representative also said that EBRD
    probably would not have gone into Sarov, Snezhinsk, or Zheleznogorsk without
    NCI support.

    A former NCI staff person who was responsible for overseeing the grant to
    EBRD wrote that because virtually all inhabitants of the cities are
    employees of the institutes or dependents of employees, loans to small
    retail businesses are helping to foster entrepreneurial skills among
    institute employees or their dependents. In addition, the loan programs are
    helping to diversify the economy of the cities. Russian officials were
    critical of the loan program. According to a Deputy Director at VNIIEF,
    there was no coordination with the institute on the decision for NCI to
    support the loan program. He also said that the EBRD loans do not play a
    role in restructuring the VNIIEF workforce.

    The First Deputy Director of MINATOM told us that in his view, the EBRD loan
    program is inefficient. He noted that the loans are small and the interest
    rates high (about 38 percent). The bank loans result in a very fast turnover
    of capital and do not result in production facilities that create self-
    sustaining enterprises. In his view, butcher shops and flower shops are
    good, but they do not resolve the fundamental problem of promoting self-
    sufficiency for weapons scientists.

    Appendix IV: Successful Commercial Venture Established in Sarov Without U.
    S. Government Assistance

    Page 44 GAO- 01- 429 Nuclear Nonproliferation

    During the course of our review, we found that a major U. S. computer
    company employs former weapons scientists in Sarov and has done so without
    U. S. government assistance. According to the company official responsible
    for the work in Sarov, in the early 1990s, a Russian- speaking employee of
    the company who was familiar with the skills available in the nuclear cities
    pursued the idea of starting an operation in Russia. A representative of the
    U. S. company met with officials from Sarov and determined that the company
    could benefit by taking advantage of the scientists? skills in mathematics
    and attractive salary scale. Over the past 7 years, the number of former
    weapons scientists under contract to the U. S. company has grown from less
    than 10 to about 100. Although the software operation in Sarov is partly
    owned by the weapons institute in that city- the All- Russian Scientific
    Research Institute of Experimental Physics- the scientists are no longer
    employed by the weapons institute. When we visited the software operation in
    September 2000, we were told that the employees work full time and that
    their salaries are up to three times what they had been paid at the weapons
    institute.

    The official who oversees the work in Sarov also told us that other
    technology firms have expressed an interest in working in the closed cities
    but have not made the commitment. He said that, while his company has been
    very pleased with the productivity of the operation in Sarov, it is
    difficult for Western companies to work in Russia because of language
    problems, restricted access, and the lack of a relationship with the Russian
    government. For example, gaining access to Sarov on a regular basis has been
    difficult for his company, although it has become easier. He believes that
    the NCI program can help Western businesses overcome these obstacles by,
    among other things, keeping channels of communication open with MINATOM and
    nuclear city officials. At the same time, he suggested that the program
    should concentrate its efforts on projects that will play to the strengths
    of the Russians. For example, he believes that projects that attempt to link
    the research and analytical skills of the scientists with the needs of
    Western companies will be more likely to succeed than projects that attempt
    to start new commercial ventures in the closed cities. Appendix IV:
    Successful Commercial

    Venture Established in Sarov Without U. S. Government Assistance

    Appendix V: Denials of Access Requests to Three of Russia?s Nuclear Cities

    Page 45 GAO- 01- 429 Nuclear Nonproliferation

    This appendix presents information on 25 instances since 1999 in which the
    Russian government denied requests for access to nuclear cities made by DOE
    staff and others. According to DOE officials, some requests were denied more
    than once, while a significant number of requests were approved at a later
    date.

    Table 3: Denials of Access Requests to Russia?s Nuclear Cities Proposed
    departure dates Destination Traveler( s)

    Feb. 2001 Sarov NCI and national laboratory staff Feb. 2001 Zheleznogorsk
    NCI and national laboratory staff Nov. 2000 Snezhinsk Senior DOE managers
    Nov. 2000 Sarov NCI and national laboratory staff Nov. 2000 Zheleznogorsk U.
    S. Embassy official Oct. 2000 Sarov National laboratory staff Aug. 2000
    Sarov NCI and national laboratory staff, U. S. Embassy staff, and press

    reporter June 2000 Zheleznogorsk NCI and national laboratory staff and a
    subcontractor June 2000 Snezhinsk National laboratory staff June 2000 Sarov
    Representative of American Association for the Advancement of

    Science June 2000 Zheleznogorsk NCI and national laboratory staff May 2000
    Zheleznogorsk DOE headquarters and national laboratory staff Mar. 2000
    Zheleznogorsk DOE headquarters and national laboratory staff and members of
    the

    Zheleznogorsk Strategic Planning Team Mar. 2000 Zheleznogorsk NCI and
    national laboratory staff and a subcontractor Feb. 2000 Sarov Commander- in-
    Chief of Strategic Command, DOE senior managers Feb. 2000 Zheleznogorsk NCI
    and national laboratory staff and a subcontractor Jan. 2000 Zheleznogorsk
    and Snezhinsk National laboratory staff Jan. 2000 Zheleznogorsk
    International Development Center Working Group members from

    national laboratory and its subcontractors Nov. 1999 Sarov NCI Sarov Working
    Group members and university professor Oct. 1999 Zheleznogorsk NCI and
    national laboratory staff and press members Oct. 1999 Zheleznogorsk NCI
    Zheleznogorsk Working Group members Oct. 1999 Snezhinsk NCI Snezhinsk
    Working Group members and private company

    representative Sept. 1999 Snezhinsk National laboratory staff Fall 1999
    Sarov U. S. Senator Spring 1999 Snezhinsk U. S. Member of House of
    Representatives

    Note: Working Groups may include staff from the NCI program, national
    laboratories, and nongovernmental entities, such as industry
    representatives.

    Source: DOE.

    Appendix V: Denials of Access Requests to Three of Russia?s Nuclear Cities

    Appendix VI: NCI Projects Reviewed by GAO Page 46 GAO- 01- 429 Nuclear
    Nonproliferation

    Table 4: NCI Projects Reviewed by GAO Purpose Status Location

    Allocated funding through December 2000 a Responsible DOE

    entity

    Demonstrate programming skills of Open Computing Center staff to potential
    private customer

    Active Sarov $40,000 Argonne Develop analytical centers to conduct research
    on nonproliferation issues Active Sarov/ Snezhinsk 439,100 DOE headquarters
    Implement numerous community development projects b Active All three cities
    1,077,159 DOE headquarters Establish small business loan programs through
    the European Bank for Reconstruction and Development

    Active All three cities 1,500,000 DOE headquarters Attempt to match Western
    businesses with production staff from Avangard assembly plant

    Active Sarov/ Avangard 100,000 Kansas City Plant Prepare public information
    documents and presentations on nuclear cities Active All three cities
    150,000 Kansas City Plant Establish Sarov Open Computing Center Active Sarov
    4, 338,000 Los Alamos Develop infrastructure for production of kidney
    dialysis equipment Active Sarov/ Avangard 1, 530,000 Lawrence Livermore
    Modernize fiber optic production to meet international standards Canceled
    Snezhinsk 120,000 Lawrence Livermore Develop oil well perforators for
    potential commercialization Active Snezhinsk 167,000 Lawrence Livermore
    Establish Snezhinsk Open Computing Center Active Snezhinsk 2, 621,500
    Lawrence Livermore Upgrade telecommunications service Active All three
    cities 820,000 Lawrence

    Livermore/ Sandia Prepare ?roadmap? that explores viability of fuel cell
    industry in Russia Completed Sarov and Snezhinsk 263,000 National Energy

    Technology Establish self- supporting company for barcoding and other
    automated technologies

    Active Snezhinsk 395,000 Oak Ridge Develop agricultural products from canola
    oil Canceled Zheleznogorsk 302,000 Oak Ridge Expand the local capacity for
    recycling mercury lamps to meet Russian environmental laws

    Canceled Zheleznogorsk 250,000 Oak Ridge Assess skills and training needed
    to improve employment opportunities for residents

    Completed Zheleznogorsk 150,000 Oak Ridge Market analysis for a bottle
    manufacturing plant Canceled Snezhinsk 200,000 Pacific Northwest Establish
    International Development Centers to promote business opportunities in
    cities

    Active Snezhinsk/ Zheleznogorsk 2,000,000 Pacific Northwest

    Develop commercial production of medical bandages Active Zheleznogorsk
    275,000 Sandia Explore feasibility of establishing rare Active Zheleznogorsk
    300,000 Sandia

    Appendix VI: NCI Projects Reviewed by GAO

    Appendix VI: NCI Projects Reviewed by GAO Page 47 GAO- 01- 429 Nuclear
    Nonproliferation

    Purpose Status Location Allocated

    funding through December 2000 a Responsible DOE

    entity

    earth metals foundry Provide business management training to institute
    employees and city residents Active Sarov 17,850 Savannah River Site Work
    with U. S. university to develop Telemedicine Center in Russia Active Sarov
    269,600 Savannah River Site Provide laparoscopy equipment for Telemedicine
    Center Active Sarov 281,300 Savannah River Site Staff from Open Computing
    Center will perform contract research for national laboratory

    Active Sarov 20,000 Savannah River Site

    Total allocated funding $17,626,509

    Note: According to DOE, the allocated amounts for each project include an
    estimate of overhead costs. a The amount of funds allocated refers to the
    NCI funds designated for each project, not

    the amount of funds spent. b The community development projects include such
    activities as school exchange

    programs, health care services, and Sister Cities exchange programs.

    Appendix VII: Comments From the Department of Energy

    Page 48 GAO- 01- 429 Nuclear Nonproliferation

    Appendix VII: Comments From the Department of Energy

    Appendix VII: Comments From the Department of Energy

    Page 49 GAO- 01- 429 Nuclear Nonproliferation

    Appendix VII: Comments From the Department of Energy

    Page 50 GAO- 01- 429 Nuclear Nonproliferation

    Appendix VII: Comments From the Department of Energy

    Page 51 GAO- 01- 429 Nuclear Nonproliferation

    Appendix VII: Comments From the Department of Energy

    Page 52 GAO- 01- 429 Nuclear Nonproliferation

    Appendix VII: Comments From the Department of Energy

    Page 53 GAO- 01- 429 Nuclear Nonproliferation (141481)

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