Capital Financing:

Partnerships and Energy Savings Performance Contracts Raise Budgeting and Monitoring Concerns

GAO-05-55: Published: Dec 16, 2004. Publicly Released: Jan 18, 2005.

Additional Materials:

Contact:

Susan J. Irving
(202) 512-9142
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

ESPCs finance energy-saving capital improvements, such as lighting retrofits for federal facilities, without the government incurring the full cost up front. Partnerships tap the capital and expertise of the private sector to develop real property. This report describes (1) what specific attributes of ESPCs and partnerships contributed to budget scoring decisions, (2) the costs of financing through ESPCs compared to the costs of financing via timely, full, and up-front appropriations, and (3) how ESPCs and partnerships are monitored. Using case studies, GAO reviewed GSA and Navy ESPCs and DOE and VA partnerships.

Energy savings performance contracts (ESPC) and public/private partnership arrangements we examined were authorized by Congress and did not require reporting of the full, long-term costs up front in the budget. ESPCs are financed over time through annual cost savings from energy conservation measures (ECM) and only their initial-year costs must be recognized up front. OMB policy determined how agencies obligated ESPCs in their budgets. With partnerships, agencies sometimes used short-term leases to acquire assets constructed for the government's long-term use and benefit. As a result, budgetary decisions may favor alternatively financed assets. However, spreading costs over time enabled agencies to acquire capital that might not have been obtainable if full, up-front appropriations were required. A number of factors may cause third-party financing to be more expensive than timely, full, and up-front appropriations. For example, a higher rate of interest is incurred by using ESPCs and partnerships than if the same capital is acquired through timely, full, and up-front appropriations. For our six ESPC case studies, the government's costs of acquiring assets increased 8 to 56 percent by using ESPCs rather than timely, full, and up-front appropriations. However, officials noted that there are opportunity costs, such as foregone energy and maintenance savings, associated with delayed appropriations, but there are insufficient data to measure this effect. For ESPC and partnership case studies, agency officials said they did not specifically consider or request full up-front appropriations because they did not believe funds would be available in a timely manner and because alternative mechanisms were authorized. An evaluation of funding alternatives on a present value basis could have helped agencies determine the most appropriate way of funding capital projects. Implementation and monitoring of ESPCs is a relatively uniform process. Since partnerships take a variety of forms, their implementation and monitoring is more complex. Although third-party financing can make it easier for agencies to manage within a given amount of budget authority, it also increases the need for effective implementation and monitoring by agencies to ensure the government's interests are protected.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress has not taken action on this recommendation. However, GAO is currently conducting additional work and will assess whether the recommendation is still necessary.

    Matter: Given the competing pressures faced by Congress to support energy saving investments while at the same time seeking to ensure budgetary transparency of full program costs, Congress may wish to consider requiring agencies that use ESPCs to present Congress with an annual analysis comparing the total contract cycle costs of ESPCs entered into during the fiscal year with estimated up-front funding costs for the same ECMs. Congress could use this information in evaluating whether to further extend ESPC authority beyond its current expiration date.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: As recommended, on June 13, 2005, the Deputy Secretary of Energy issued interim guidance requiring a business case analysis for proposed financing arrangements with third-party financing and lease arrangements valued above $5 million. In comments on our report, DOE stated that the new policy, which it had started drafting, would put DOE in compliance with GAO's recommendation.

    Recommendation: The Secretaries of Energy, VA, and the Navy and the GSA Administrator should perform business case analyses and ensure that the full range of funding alternatives, including the technical feasibility of useful segments, are analyzed when making capital financing decisions.

    Agency Affected: General Services Administration

  2. Status: Closed - Implemented

    Comments: In a May 12, 2005, letter to the Comptroller General, the GSA Administrator wrote that, in response to GAO's recommendation, GSA will develop a pro forma business case analysis for ESPCs similar to that used for projects using appropriated funds. In addition, GSA has promulgated supplemental internal procedures to be followed when entering into an ESPC. The procedures require the performance of a life cycle cost analysis as part of the energy savings performance contracts (ESPC) evaluation process.

    Recommendation: The Secretaries of Energy, VA, and the Navy and the GSA Administrator should perform business case analyses and ensure that the full range of funding alternatives, including the technical feasibility of useful segments, are analyzed when making capital financing decisions.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  3. Status: Closed - Not Implemented

    Comments: As of February 2008, DOD has not taken any action to implement GAO's recommendation. Moreover, in comments on GAO's draft report and again in a subsequent letter to GAO, the Deputy Under Secretary of Defense (Installations and Environment) wrote that a business case analysis suggested by the report would only translate to an increased administrative cost to the Department in the absence of a viable option to directly finance energy conservation projects.

    Recommendation: The Secretaries of Energy, VA, and the Navy and the GSA Administrator should perform business case analyses and ensure that the full range of funding alternatives, including the technical feasibility of useful segments, are analyzed when making capital financing decisions.

    Agency Affected: Department of Defense: Department of the Navy

  4. Status: Closed - Implemented

    Comments: FY 2005 Changes to OMB Circular A-11 guidance did tighten scorekeeping rules to help ensure that the full cost of partnerships were reflected in the budget, considering the underlying agreements. Also, in response to our recommendations, OMB changed criteria in the 2006 A-11 guidance about operating leases to ensure that the total costs of the underlying transaction, not just those immediately applied to the government, are considered.

    Recommendation: The Director of OMB should work with the scorekeepers to develop a scorekeeping rule for the acquisition of capital assets to ensure that the budget reflects the full commitment of the government for partnerships, considering the substance of all underlying agreements, when third-party financing is employed.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  5. Status: Closed - Not Implemented

    Comments: As of 2/22/08, OMB has elected not to require such an analysis.

    Recommendation: The Director of OMB should instruct agencies that use ESPCs to report to OMB and to their committees of jurisdiction an annual analysis comparing the total contract cycle costs of ESPCs entered into during the fiscal year with estimated up-front funding costs for the same ECMs. Congress could use this information in evaluating whether to further extend ESPC authority beyond its current expiration date.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  6. Status: Closed - Implemented

    Comments: In fiscal year 2006, VA issued a Capital Investment Methodology Guide that emphasized the formulation phase, as well as the planning and acquisition applications. In this Guide, approval thresholds were included covering enhanced-use leases. Decision criteria for capital investment specifically included analyses of financial priorities such as alternatives identified, cost effectiveness, savings and cost avoidance, and risk.

    Recommendation: The Secretaries of Energy, VA, and the Navy and the GSA Administrator should perform business case analyses and ensure that the full range of funding alternatives, including the technical feasibility of useful segments, are analyzed when making capital financing decisions.

    Agency Affected: Department of Veterans Affairs

 

Explore the full database of GAO's Open Recommendations »

Dec 12, 2014

Dec 9, 2014

Nov 17, 2014

Nov 12, 2014

Nov 10, 2014

Nov 7, 2014

Nov 6, 2014

Looking for more? Browse all our products here