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Third-Party Financing of Federal Projects 1 (June 2005)

handle is hein.congrec/cbo8325 and id is 1 raw text is: A series of issue summaries from the Congressional Budget Office JUNE 1, 2005 Third-Party Financing of Federal Projects Budgetary pressures have spawned a new approach to financing federal projects. Rather than relying on regular appropriations or other traditional forms of federal financing, agencies have arranged for private parties to fund various infrastructure projects, such as housing on military bases, government office buildings, and electric- power facilities. Agencies have been able to arrange such financing by making long-term commitments, either ex- plicit or implicit, to use the resulting facilities (or related services, such as electric power). Since 1998, third parties have borrowed roughly $12 billion to fund federal proj- ects, the Congressional Budget Office (CBO) estimates. Third-party transactions are generally structured in such a way as to try to justify recording investment costs in the federal budget over the life of a project instead of in full when the investment is made-as would be the case with normal appropriations. Treating investment costs as an annual operating expense may make it easier to get projects funded by eliminating the need for substantial up-front appropriations. However, such budgetary treat- ment is at odds with established principles of federal bud- geting, which require agencies to record the costs of gov- ernment investments when they are made. Third-party financing arrangements have a number of negative consequences. In general, projects are more costly to the government when they use such financing. In addition, if agencies do not initially record the full cost of governmental activities, the budget understates the size of the federal government and its obligations at the time when those obligations are made. Third-party arrange- ments may also skew decisions about how to allocate budgetary resources by giving preferential treatment to investment projects on the basis of their method of fi- nancing rather than their relative merits. Finally, third- party financing allows agencies to raise capital in private markets without the full scrutiny of the Congressional appropriation process and without reference to the statu- tory limits on borrowing that exist for some agencies (such as the Tennessee Valley Authority and the Bonne- This brief describes some of the financing methods that agencies use to raise capital through third parties and dis- cusses why, in most cases, the costs of the projects should be included in the budget when they are undertaken. What Is Third-Party Financing? The idea behind third-party financing is that an interme- diary other than the U.S. Treasury can raise money in pri- vate capital markets on behalf of a federal program as long as private financiers are confident that they will be repaid-on the basis of some kind of long-term federal commitment. Agencies have used at least three different third-party methods, which provide different forms of security for investors: Proj.ect financing, which is based on the creditworthi- ness of a program's cash flows and assets rather than on the backing of a company or the full faith and credit of the U.S. government (for example, when bonds are issued to raise capital to build military family housing or government office buildings); Contractor financing, in which a contractor arranges financing backed by firm contracts from a government agency (as when contractors fund energy-conservation improvements in federal buildings); and Custom er financing, in which entities that buy services from an agency use the proceeds of tax-exempt bonds to pay for services in advance and then recoup that prepayment by receiving a credit on future purchases (as happens when municipal utilities prepay the Ten- nessee Valley Authority for electricity). Such financing arrangements involve multiple parties. Sponsors usually create a special-purpose entity (SPE) for each project to serve as the locus of the agreements sup- porting the financing. Major investment firms typically manage the financing on behalf of the SPE, and various other firms-consultants, insurers, develop ers-p rovide

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