Energy Savings Performance Contracts

ESPCs finance energy-saving capital improvements such as lighting  retrofits and ventilation systems for federal facilities without the  government recording the full cost up-front. Various Features Enabled Agencies to Delay Recognition in the Budget

ESPCs and partnership arrangements were authorized by Congress. As a result, the full cost of the assets were  not required to be reflected in the budget. Although these arrangements represent long-term commitments, funds for  ESPCs are obligated on an annual basis. For example, case study  agencies incurred a higher rate of interest by using ESPCs and partnerships  than if they had obtained that same capital through timely, full, and up-front  appropriations. In our six ESPC case studies, use of  ESPCs increased the government’s costs of acquiring ECMs by 8 to 56  percent compared to the use of timely, full, and up-front appropriations. For both ESPCs and partnerships, agency  officials said they did not request full, up-front appropriations to finance  the specific capital projects we reviewed. However, there are insufficient data to measure this effect. Acquiring Capital through ESPCs Is More Expensive Than Acquiring the Same Capital through Timely, Full, and Up-Front Appropriations in Our Case Studies

Since the federal government’s cost of capital is lower than that of the  private sector, alternative financing mechanisms may be more expensive  than timely, full, and up-front appropriations. In these  cases, agencies sometimes incurred higher interest costs by using  partnership financing rather than timely, full, and up-front appropriations. Different Financing Alternatives Present Different Implementation and Monitoring Challenges

Third-party financing can make it easier for agencies to manage in the short  term within a given amount of budget authority but may have additional  long-term costs. Such relationships increase the need for effective implementation  and monitoring by agencies to ensure the government’s interests are  protected. An evaluation of funding  alternatives was not always done to determine the most appropriate way of  funding capital projects. Officials explained that their agencies did not request full, up-front  appropriations since appropriations might not have been made available in  a timely manner and the use of ESPCs had been authorized. Implementation and monitoring of ESPCs is a relatively uniform process. Since partnerships take a variety of forms, their implementation and  monitoring is more complex. Objectives, Scope, and Methodology

The objectives of this study were to determine (1) what specific attributes  of energy savings performance contracts (ESPC) and public/private  partnerships (partnerships) contributed to budget scoring decisions,   (2) the costs of financing through ESPCs and partnerships compared to the  costs of financing via timely, full, and up-front appropriations, and (3) how  ESPCs and partnerships are implemented and monitored.
Why GAO Did This Study

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.

What GAO Found

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.