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The Congressional Budget Office (CBO) undertook this analysis of the budgetary treatment of selected options to attract private financing for developing new space-launch systems at the request of the House Committee on Science (formerly the Committee on Science, Space, and Technology). David Moore of CBO's Natural Resources and Commerce Division prepared the memorandum under the supervision of Elliot Schwartz and Jan Paul Acton. Janet Airis, Pete Fontaine, Kathleen Gramp, and Robert Sunshine of CBO's Budget Analysis Division reviewed the document and provided guidance and comments. Gail Del Balzo, CBO's General Counsel, also provided a helpful critique. The memorandum was edited by Leah Mazade. Christian Spoor provided editorial assistance, and Angela Z. McCollough prepared the memorandum for production.
 
 

SUMMARY AND INTRODUCTION

THE REUSABLE LAUNCH VEHICLE PROGRAM

BUDGETARY TREATMENT OF ADVANCE COMMITMENTS TO PURCHASE LAUNCH SERVICES

• Lease-Purchase Scoring
• Who Bears the Risk?

THE LOAN GUARANTEE APPROACH AND ITS BUDGETARY TREATMENT

OTHER ISSUES

• Can Private Financing Be Cost-Effective?
• Termination Liability

SUMMARY AND INTRODUCTION

The National Aeronautics and Space Administration (NASA) has initiated the Reusable Launch Vehicle (RLV) program to develop new space-launch systems that will reduce the cost of putting people and cargo into space. According to the program's rationale, the new systems will provide less costly launch services because they will use new technology and be operated by the private rather than the public sector. To lessen the demands on the federal budget and to draw private operators into providing launch services, NASA is exploring funding options for developing the new systems that depart from the traditional approach of direct government financing.

A prominent feature of some of the proposals for private financing of such development is offering the prospective private developer an advance commitment by the government to purchase launch services after the system has been built. The House Committee on Science (formerly the Committee on Science, Space, and Technology) asked the Congressional Budget Office (CBO) to analyze the budgetary treatment of advance commitment proposals. The Committee also asked CBO to consider using unobligated balances to cover termination liabilities incurred by the government.

This memorandum examines the budgetary treatment of two private financing options. In the first, the "advance commitment" option, NASA would agree to purchase launch services in the future with the expectation that a selected private contractor could use that commitment to attract private capital. In the second, the "loan guarantee"option, the government would guarantee the private debt necessary to develop a new launch system. Neither of those options has been presented to CBO as a legislative proposal; accordingly, CBO is not providing a definitive answer as to how either option would be shown in the budget. The discussion below should be considered preliminary: it indicates what factors are important in determining the budgetary treatment of options that encourage private financing rather than how any specific proposal would be treated.

The current rules for determining the budgetary effects of pending and enacted legislation were adopted as a result of the Budget Enforcement Act of 1990. CBO believes that the rules governing lease-purchases-transactions in which the government purchases an asset by making lease payments--should apply to the advance commitment option. Specifically, NASA's advance commitment to purchase launch services would be treated as a lease-purchase in which the government bears substantial risk. That treatment would require NASA's budget to record the budget authority and outlays necessary to fulfill the advance commitment as if the government were funding development of the launch system directly but did not enjoy its usual relatively low cost of borrowing. The rules governing lease-purchases are explicitly intended to discourage expensive "buy now/pay later" financing schemes by displaying the true cost of those arrangements in the budget.

CBO's conclusion that the advance commitment option to finance the development of a new launch system should be treated as a lease-purchase with substantial governmental risk is based largely on the assumption that NASA's advance commitment would cover all or almost all of the cost of developing the system. That large a purchase would allow the system's private owner, as it provided launch services to the government, to depreciate fully the cost (or a very large part of the cost) of acquiring the system. In an accounting sense, the government would consume all or almost all of the value of the asset. If NASA's advance commitment covered a significantly smaller portion of the cost of developing the system (for example, only 60 percent) and all other aspects of the option remained the same, a different budgetary treatment would be appropriate. Such a treatment would still require that budget authority be recorded at the time the commitment was made but would allow outlays to be recorded over the extended period of the service-purchase commitment.

The loan guarantee option for funding the development of a new launch system accomplishes the major objectives of the RLV program using a federal loan guarantee of private debt. Under the rules for budgetary treatment of the extension of federal credit to a private borrower, NASA's budget would reflect only the subsidy cost-that is, the present value of the expected net cost to the government. (The present value is a single number that expresses a flow of current and future income or payments in terms of an equivalent lump sum received or paid today.) The actual amount of budget authority and outlays that NASA's budget would require under the loan guarantee option is uncertain because the chance of default is difficult to assess without additional details regarding the loan guarantee contract. The likelihood of default would have to be estimated under the assumption that no future appropriations would be available to purchase services from the RLV contractor. That assumption implies a high probability of default that would probably require levels of budget authority and outlays approaching those needed for direct financing by the government.

Relying on private financing to acquire a capital asset that is entirely consumed by the government--all other things being equal--will cost the government more than acquiring the same asset directly. The reason is that the government's cost of borrowing is always lower than the private sector's, even if a loan to a private party is guaranteed by the government either directly or indirectly through an advance commitment to purchase. The reasoning behind NASA's emphasis on private financing, however, holds that all other things are not equal. NASA maintains that only through private development and operation of a new launch system can launch costs be driven down to their lowest possible level. Accordingly, to justify private financing on the grounds of cost, the savings uniquely attributable to private ownership and operation must be sufficient to offset the higher cost of private financing.

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