Benefit-Cost Analysis of Reclamation Loan Guarantee Program Under Proposed Rulemaking

BENEFIT-COST ANALYSIS OF RECLAMATION LOAN GUARANTEE
PROGRAM UNDER PROPOSED RULEMAKING

1.

Introduction
The following benefit-cost analysis is provided to fulfill the requirements of

Executive Order 12866. This analysis consists of a statement of need for a Bureau of
Reclamation (Reclamation) guaranteed loan program, a summary of the provisions of the
proposed rules for the program, and an analysis of the benefits and costs of the program. The
cost of work financed under the program is not the subject of this analysis; in most cases,
Reclamation’s stewardship responsibilities for federal assets require that the work be
performed. A loan guarantee program will assist water users with the statutory requirement
that they pay for extraordinary maintenance and rehabilitation work as it is incurred.
Much of the analysis is necessarily descriptive of the anticipated effects of the
program under the proposed rule. The benefits of loan guarantees under the program are very
difficult to measure given readily available data. Such data may become easier to obtain as
projects to be financed are identified with greater certainty and detailed plans and costs
estimates are prepared for them. Given the data limitations, benefits are described
qualitatively, with an example Reclamation project serving as a proxy to indicate what the
potential magnitude of benefits could be.
Many of the costs are quantified. Assuming that loan guarantee authority will be
exercised to facilitate the financing of extraordinary maintenance and rehabilitation work, the
costs of accomplishing the given benefits are compared for two alternative approaches.
Consequently, this analysis is most useful as a cost effectiveness illustration.

Loan Guarantees under the proposed rules would be made for projects in the 17
western Reclamation states. The period of analysis covers Fiscal Years 2008 through 2011.
While Reclamation’s authority to issue loan guarantees extends through 2016, potential
program activities for the period beyond 2011 are of sufficient uncertainty as to render their
inclusion in the analysis unwarranted.
As a part of activities during 2006 associated with its Managing for Excellence
activities, Reclamation met with a number of its customers to gauge the level of interest in a
potential loan guarantee program, and discuss alternatives used presently by these customers.
Some of the information received during these meetings has been incorporated into this
analysis.
2.

Statement of Need
Projects built by Reclamation during the past century represent a Federal investment

of approximately $250 billion, and make Reclamation the largest wholesaler of water in the
country. These projects bring water to more than 31 million people, and provide one out of
five Western farmers (140,000) with irrigation water for 10 million acres of farmland that
produce 60 percent of the nation's vegetables and 25 percent of its fruits and nuts.
Collectively, Reclamation projects are also the second largest producer of
hydroelectric power in the western United States. The 58 project power plants annually
provide more than 40 billion kilowatt hours, generating nearly a billion dollars in power
revenues and producing enough electricity to serve 6 million homes.
Much of this critical infrastructure was built in the early 1900s and is at or nearing its
design life. Routine, annual operation and maintenance is conducted thoroughly and
efficiently for most Reclamation projects. The loan guarantee program will not assist in

2

performing routine maintenance; no such assistance is needed. However, due to their age,
even with the excellent routine maintenance they have received, many Reclamation project
facilities are currently in need of extraordinary maintenance work, rehabilitation, or
replacement. Although Reclamation law assigns responsibility for these costs to project
beneficiaries before or as they are incurred, many are smaller entities with limited cash flow
relative to the magnitude of costs associated with extraordinary maintenance and
rehabilitation of project facilities.
It is of paramount interest to Reclamation and the public that these facilities be
properly and safely maintained, and that this critical infrastructure not be allowed to
deteriorate. However, the agency has no authorization to expend funds for extraordinary
maintenance and rehabilitation needs of these facilities without advance payment from the
appropriate project beneficiaries. These requirements are established in various Reclamation
laws, beginning with the Fact Finders Act of 1924. From 1949 until the early 1990s,
Reclamation water users were able to obtain financing for this extraordinary maintenance and
rehabilitation work under Reclamation’s Rehabilitation and Betterment Program. During the
early 1990s, reviews of the program’s cost effectiveness, and the belief of many parties in the
Federal government that project beneficiaries should seek private capital to fund this type of
work, led the Department of Interior to discontinue the program and the supporting
appropriations requests. The water users are currently expected to seek private funding
sources. However, in most cases, private lenders are unwilling to lend to the water users,
even at higher rates of interest. One reason for this is because they have no physical
collateral; the United States holds title to the facilities. Reclamation has sought to transfer
title to some of these facilities. The effort was recently the focus of a team involved with

3

Reclamation’s Managing for Excellence initiative, which has recommended ways to facilitate
additional title transfers. However, it is anticipated that title to a significant number of these
facilities will remain with Reclamation for some time.
In addition to the title issue, some water user organizations also face uncertain future
revenue streams, due to significant, unpredictable variations in water supply. While this
affects only a subset of Reclamation water users, substantial, readily available data on
fluctuating crop prices, rising farm input costs, and the effects of drought on water supplies
attest to the uncertainty of farm revenues as a viable repayment source. An effort by
Reclamation to shoulder some of the risk of lending to project beneficiaries is expected to
greatly facilitate the ability of these entities to obtain private capital to finance the needed
work.
Public Law 109-451 grants the Secretary of the Interior authority to provide loan
guarantees to assist in the financing of (A) rural water projects, (B) extraordinary
maintenance, rehabilitation and replacement of Reclamation project facilities, and (C)
improvements to water infrastructure directly associated with Reclamation projects. These
will hereafter be referred to as Type A, B, and C projects, respectively. The proposed rules
contemplate all three project types. However, specific eligibility criteria, application
requirements, prioritization and oversight of project execution may differ substantially for
Type A projects as compared to Type B and C projects.
Many of the specific details regarding Type A projects will be developed in the future as
supplements to the proposed rules. This benefit-cost analysis contemplates only
Reclamation’s estimates regarding Type B and C projects. When the details for Type A
projects are added as supplements to the proposed rules, a benefit-cost analysis for those

4

types of projects will be developed at that time. Reclamation has prepared a 4-year
projection of the need for Type B projects, and this benefit-cost analysis is based on those
estimates of need. It is anticipated that some Type C projects could fit within this cost
estimate, and that the costs of financing such projects would be similar to those for Type B
projects, which were the basis for the benefit and cost estimates in this analysis.
3.

Proposed Rule Summary
a.

Organization

The proposed rule is divided into six subparts. Subpart A is an overview of the
program, describing the purpose, definition of terms, types of entities and projects eligible for
participation, steps and requirements for program participation, and contact information.
Subparts B, C, and D discuss borrower, Reclamation, and lender roles and responsibilities,
respectively. Subpart E provides loan terms and details, and Subpart F covers default
procedures. Where more detailed provisions on Type A projects are to be provided in the
future, sections have been reserved for this purpose.
b.

Delivery

The following paragraphs summarize the rule by its four primary delivery mechanisms.
i.

Eligibility

Under the proposed rule, three basic types of eligibility are identified -- project
eligibility, borrower eligibility, and lender eligibility. Project eligibility is based on the
nature of the activity and whether it meets the requirements set forth in The Twenty First
Century Water Works Act (Title II of Pub L. 109-451). In addition, the project will be
evaluated based upon other criteria set forth in more detail in Section 403.10 of the proposed
rule.

5

Borrower eligibility is based on the borrower meeting two common requirements: it
must be an entity authorized to borrow under the Act, and must not have outstanding
delinquent debts with the United States.
Lender eligibility is based on whether or not the lender is a regulated or supervised
lender meeting the definitions given in the Act and the proposed rule. A lender must be
approved by Reclamation to participate in the program. If an eligible lender has an existing
guaranteed loan portfolio with Reclamation, it will be considered “approved” for
participation and would not be required to submit an application to Reclamation for approval
to participate. However, prior to receiving additional loan guarantees from Reclamation, the
lender would be required to submit certification showing it is in “good standing” with its
regulator. If a regulated or supervised lender does not have an existing portfolio with the
Agency, it must submit an application for lender approval to Reclamation.
ii.

Guaranteed Loan Approval

If a project and the associated borrower and lender are determined to be eligible, and
the lender has approved the borrower’s loan request, an application package will be
submitted to Reclamation for determination of whether Reclamation will guarantee the loan.
This determination will be based on the availability of required appropriations for the
guarantees, and upon an evaluation of the proposed project’s merits relative to other projects
based on the criteria set forth in Section 403.10 of the proposed rule.
iii.

Servicing

Once the loan has been approved, the lender will continue to be responsible for
servicing the entire loan. The activities included under loan servicing are those that take
place once the loan note guarantee has been issued. This includes such activities as

6

processing payments, assessing any appropriate late fees, submitting notifications and status
reports, reorganizations, transfers and assumptions, liquidations, litigation, and termination of
the loan guarantee.
iv.

Oversight and Monitoring

Under the proposed rule, Reclamation will conduct any and all oversight and
monitoring activities necessary to ensure that lenders are originating and servicing
guaranteed loans in a manner consistent with both Reclamation and lender standards. These
tools include, but are not limited to, conducting lender visits and meetings and requiring
various reports and notifications. The Agency will also use this oversight and monitoring to
ensure that lenders maintain the qualification criteria for being an approved lender.
4.

Baseline
The baseline against which the net economic benefits of Reclamation’s loan program is

evaluated is the status quo, that is, the state of the world absent the loan guarantee program.
Absent the availability of the loan guarantee program, some water districts would seek
congressional funding for their rehabilitation projects, some would seek private financing,
and some might choose to simply implement patchwork solutions. Districts that seek
congressional funding or private funding would be likely to implement patchwork solutions
during the time they are seeking this funding and after if such funding is not available. The
material below provides further characterization of the baseline.
a.

Private Funding/Financing – Yuma Example

Water users are legally required to pay for extraordinary maintenance work in
advance of its performance. Thus, the net benefits of the loan guarantee program would be
evaluated relative to the situation where water users obtained private financing to undertake

7

rehabilitation projects. Such financing could be obtained via capital markets, from reserve
funds, or raised via districts’ taxing authorities.
Reserve funds are required in many of Reclamation’s contracts with project water
users. However, while Reclamation is attempting to increase the amounts contractually
required for these reserved funds, currently the funds are often insufficient to cover the
extraordinary repair and rehabilitation to be financed under the proposed loan guarantee
rules.
Financing is potentially available via capital markets. The extent to which districts
are able to access these markets without loan guarantees depends on the strength of their
balance sheets, credit rating, magnitude of capital needs, etc. Some districts have
successfully raised capital to undertake rehabilitation projects, but for many districts this
might prove difficult. It should also be pointed out that a number of western states have
established “bond banks” for the purpose of assisting public entities that may not have credit
ratings sufficient to obtain capital. The extent to which these bond banks are available to
water districts that rely on federally constructed facilities is unclear. It should be noted that
the strength of the incentive to seek private financing may be reduced with the potential
availability of the loan guarantee program.
An example of which Reclamation is aware where an irrigation district obtained
private financing is associated with the Yuma Project. In this case, the irrigation district also
had a power plant on its facilities, revenues from which (as opposed to the power plant itself)
were sufficient to pledge as loan security. For many of Reclamation’s smaller project
beneficiaries, this would not be an available option.

8

One of the explanations for why private lending institutions may be generally
unwilling to finance the work is that water users often have no collateral to pledge for
repayment because Reclamation holds title to the facilities.
The extent to which districts choose to use their taxing authority may depend on the
individual water users’ willingness to pay to undertake the rehabilitation activities. It could
also depend on water users’ ability to pay additional taxes. At least in concept, if an entity is
not willing to pay for an activity, the activity may not be associated with net economic
benefits.
Therefore, absent a loan guarantee program, it is assumed that only a limited amount
of private capital would be available to the water users, due to the lack of substantial capital
markets for these types of activities.
b.

Direct Loan Funding/Special Legislation – Arrowrock

Under the baseline of a world absent the loan guarantee program, water users could
seek special legislation that would fund extraordinary maintenance and rehabilitation work in
a way that would either re-instate, or provide similar repayment terms to, a direct loan
program. Reclamation’s Rehabilitation and Betterment program, as well as the funding of
the outlet works replacement at Arrowrock Dam are examples.
Given the limited information available, it is difficult to determine the number of
water districts that might seek such legislation. In any event, the water users would incur
costs in seeking such legislation, which may or may not be offset by avoiding the application
costs associated with obtaining a loan guarantee under the program. As illustrated in the
Costs section below, the Federal government would incur greater costs in direct financing of
potential projects than in administering loan guarantees. However, these are financial, not

9

economic costs. Therefore, while the loan guarantee program would likely result in less
direct financing, it is difficult to determine whether the loan guarantee program would result
in any avoided economic costs compared to this aspect of the baseline.
Postponement of Necessary Work.
The baseline also encompasses the situation where water districts simply postpone,
extend over a longer period, or even recast, rehabilitation work. . Reclamation does not have
authority to expend funds for these major repairs and rehabilitation without advance funding
for the district’s share of the obligation. The end result is a continued deterioration of the
associated facilities, or a piecemeal or stopgap approach to major repair and rehabilitation
work. The extent to which this approach has net benefits that are lower than other
approaches is uncertain. There are benefits to be realized from facilitating the timely
performance of needed major repair and rehabilitation work and in some situations these can
be substantial, as illustrated below.
5.

Benefits
The benefits of the loan guarantee program encompass several categories. In concept,

the benefits are closely associated with project outputs – agricultural products, hydropower,
recreation, etc. The availability of the loan guarantee program could assist in restoring the
level of benefits to what they may have been in the past, potentially could assist in restoring
the benefits in a more timely fashion than what have might otherwise been the case, provide
“insurance” that the level of benefits would remain at a given level (and not decline), and
reduce the transaction costs associated with financing the rehabilitation activities.
However, quantifying the benefits is difficult because it is difficult to estimate the
number of projects that would seek to use loan guarantees, project specific information is not

10

available to assist in quantifying the benefits, and the extent to which private capital might be
more readily available is difficult to forecast.
If the most common aspect of the assumed baseline condition without a loan
guarantee program is that needed major repair and rehabilitation work is inevitably
postponed or delayed, then an appropriate measure of the benefits of the program is the cost
of such postponement. As stated previously, the postponement or delay is not of routine
O&M work; such work is currently being performed in a timely manner. However, delay of
needed major repair and rehabilitation work due to lack of financing capability could result in
further deterioration of the facilities. This could lead to higher routine operation and
maintenance costs, and potentially significant reductions in project benefits.
While it is difficult to precisely estimate the nature and magnitude of the benefit
losses that could occur due to postponement of needed repairs and rehabilitation an example
of the potential benefits associated with accomplishing repair work in a timely manner is
provided by the Boise Project’s, Arrowrock Dam.. In preparing an Environmental Impact
Statement, “Arrowrock Dam Outlet Works Rehabilitation Final Environmental Impact
Statement” March 2001, covering the alternatives for addressing the repair needs,
Reclamation determined impacts of three different scenarios. The No Action alternative
consisted of a gradual, piecemeal approach to performing needed repairs of the outlet works
at the dam, which was more within the ability of the water users’ annual operation and
maintenance budgets to absorb the costs. One of the action alternatives was to perform all
needed repairs of the outlet works at once. Under the No Action alternative, it was
envisioned that the water levels in reservoir would be drawn down annually to effect

11

necessary repairs over a 4 year period. Under the Preferred Alternative, the reservoir would
be drawn down once and the required repairs completed within one year.
For an average 4-year period, water shortages under the No Action alternative
amounted to 121,000 acre-feet, while no shortages occurred under the alternative of
performing all of the needed repairs at once. Based on a value of $22.50 per acre-foot for
irrigation water on the Boise Project (Deadwood Dam Modification Report, December
2002), this represented a cumulative benefit of approximately $2,722,500 for the four-year
period resulting from timely performance of major repair and rehabilitation work on this one
project. Assuming these benefits accrued uniformly throughout the 4 year period, at an
annual rate of $680,625, and using a discount rate of 7 percent, the net present value of these
benefits is approximately $2,305,421. This does not take into account other benefits
generated by the project and affected by postponing the repair, such as those accruing from
recreation use and power development. In the case of Arrowrock Dam, annual recreation
benefits would be significantly reduced under the No Action alternative (assuming there were
no substitutes for the recreation services provided by the reservoir available), based on a need
to repeatedly lower the reservoir elevation to conduct maintenance and repair activities.
While the released water could still be used for power generation, the reduced flexibility in
timing the releases could cause potential reductions in the value of the power generated.
While the repair and replacement of Arrowrock Dam’s outlet works is representative
of the types of extraordinary maintenance and rehabilitation that would be funded under the
program, the extent to which the Arrowrock case can be generalized to the universe of
Reclamation projects or districts that might participate in a loan guarantee program is
unclear. As discussed in the introduction, the analysis does not address the costs and benefits

12

of performing the work itself, but rather the costs and benefits of providing financing
assistance to facilitate the performance of the work in a timely manner.
Given the lack of project specific information, it is not possible to quantify the net
benefits associated with the loan guarantee program.
6.

Costs
The proposed rule will impose costs on lenders, borrowers, and the Federal

government. Quantitative estimates of these costs have been made and are presented below,
first for lenders and borrowers and then for the Federal government. Some of the costs
associated with the loan guarantee program are considered financial costs and would not be
evaluated in the context of a benefit-cost analysis. For example, potential default costs are
financial and not economic costs. Financial costs may be important to decision makers and
thus some information on these costs is presented below.
For purposes of the analysis, the interest rate on the un-guaranteed portion of the loan
is assumed to sufficiently cover the expected default costs to the lender associated with that
un-guaranteed portion. Interest rates on the guaranteed portion of the loan do not cover
expected default rates, and these costs are therefore included in the analysis of Federal
government costs. Costs which would be required regardless of whether Reclamation
provides financing assistance, such as environmental compliance costs, are not included in
the analysis. Unless specifically indicated otherwise, costs given are the total for the 4-year
period of analysis.
a.

Borrower and Lender Costs

For lenders and borrowers, the costs are broken down by various phases or steps
associated with the rule – lender eligibility, loan application, loan origination, and loan

13

servicing. For the Federal government, costs are broken down by activities associated with
reviewing lender eligibility, reviewing applications for loan guarantees, loan origination
activities, loan servicing activities, conducting oversight and monitoring activities during the
life of the loan, and administrative activities.
Estimated costs of the proposed rule were made based on the anticipated number of
loan applications and approvals over Fiscal Years 2008 - 2011. During this period, it is
estimated that approximately 72 potential borrowers will submit applications through 26
lending institutions. This is based on expressions of interest from water users and lending
institutions during discussions with these entities in 2006.
Without going through the actual application process for these potential applicants, it
is not possible to determine precisely how many applicants would be approved. However,
for purposes of this analysis, it is estimated that one in four applicants would be approved.
Therefore, eighteen of these applications are estimated to be approved for guaranteed loans
through nine approved lenders. A rate of $75 per hour was used to calculate borrower,
lender, and Reclamation costs. While this rate may vary by location, it is roughly
representative of a GS-12 salary. Estimated hours required to complete the form and nonform requirements were derived by a comparison to the United States Department of
Agriculture’s (USDA) experience in administering loan guarantees. The forms to be used
were adapted from USDA’S existing forms.
To be eligible, lenders must submit evidence of eligibility, as well as a copy of their
loan origination and servicing policies. This must only be done for the first approved
application for a loan guarantee; any lender with an existing guaranteed loan portfolio is
considered an approved lender. However, since the program is new, and no lenders are

14

currently approved, the analysis assumes that this cost will be incurred once for each lender
involved. It is also assumed that each lender will request and receive approval for one
additional loan guarantee. The basis for this assumption is that a successful application by a
lender will lead the lender to seek repeat participation, and will lead potential borrowers to
choose those lenders who have successfully requested Reclamation guaranteed loans. It is
also assumed that each lender assigns the guarantee to another party (generally as a holder of
a portion of the debt) once for each loan approved. While such assignments could happen
multiple times or not at all, this is considered the most reasonable estimate. Given these
assumptions, and estimates of applications and approvals, Reclamation anticipates that
lenders will incur a cost of approximately $19,500 in establishing eligibility for approved
lender status, as shown in Table I.
Application costs are those associated with the application form, financial reports,
and other documentation associated with submittal of the application for a guaranteed loan,
as described in Section 403.7 of the proposed rule. Only the preparation costs of those
documents which are prepared solely for purposes of obtaining the loan guarantee are
included in the estimate.
While costs associated with the loan application would initially be borne by both the
lender and the borrower, they have all been recorded for purposes of this analysis as
borrower costs. This is justified by the assumption that all costs incurred by the lender will
in fact be captured in the interest and fees assessed by the lender on the borrower and
therefore, any distinctions are more appropriate to a financial analysis rather than an
economic analysis such as this one. However, it should be noted that the majority of the
initial outlays required of the borrower would occur during preparation of the application for

15

loan guarantee.

Reclamation estimates that costs for preparation and submittal of

applications for loan guarantees would be approximately $86,400 as shown in Table I below.
There are a number of activities associated with loan origination. Most of the costs of
these activities are initially borne by the lender. These costs include obtaining guarantees
from principals of the borrower, various Reclamation approvals, and preparation of the
various loan documents, such as the Lender’s Agreement, and the Conditional Commitment
for Guarantee. Estimated costs for Loan Origination functions, itemized in Table I below,
are $48,600.
The activities included under loan servicing are those that take place once the loan
note guarantee has been issued. These include activities such as submitting notifications and
status reports, reorganizations, transfers and assumptions, liquidations, litigation, and
termination of the loan guarantee. For purposes of the borrower/lender cost calculation, two
of the 18 loans are assumed to default. This is based roughly on a ten percent default rate
which Reclamation has estimated for the program, as discussed in more detail under (b)
below. (This default rate could potentially be reduced, depending on the success of
mechanisms such as guarantee fees charged to the lender.) Total costs associated with loan
servicing are estimated to be approximately $259,500. Total borrower and lender costs for
all associated activities for the 4-year period of analysis are $414,000. Assuming these costs
are incurred uniformly throughout the 4 year period, at an annual rate of $103,500, and using
a discount rate of 7 percent, the net present value costs incurred by Borrowers and Lenders
are expected to be $350,576. Table I below displays the breakdown of these cost
components.

16

Table I – Cumulative Borrower and Lender Costs: 2008 - 2011

Item
Establishment of Eligibility
Application for Loan
Guarantee
Loan Origination
Reclamation Approvals
Conditional Commitment
Lender’s Agreement
Assignment of Guarantee
Obtaining Personal & Corporate
Guarantees
Loan Servicing
Loan status
Default
Notifications
Report of loss
Other servicing
Total Lender & Borrower Cost
Present Value costs over the 4year period (evaluated at 7%)

b.

Hours
Number of
per
respondents
Incidence
26
10
72
16

Hours

Cost

260
1,152

$19,500
$86,400

18
18
18
18
18
18

4
4
16
8
4

72
72
288
144
72

$5,400
$5,400
$21,600
$10,800
$5,400

18
18
2
18
2
18

120
104
8
24
50

2,160
208
144
48
900
5,520

$162,000
$15,600
$10,800
$3,600
$67,500
$414,000
350,576

Reclamation Costs

Estimated costs to Reclamation would be incurred in administration of the program,
review of applications, issuance of guarantees, and loan oversight. These costs are estimated
for the same 4-year period, using the assumptions regarding numbers of applicants,
approvals, and defaults described in the section on borrower and lender costs.
Reclamation would incur costs in reviewing and approving lender eligibility, and
applications for loan guarantees. Costs for these activities are estimated to be $11,700 and
$216,000 respectively, as shown in Table II below.
Reclamation would also interact with the lender during the loan origination period.
These activities would include reviewing and approving closing documents, obligating

17

necessary funds from budget accounts to financing accounts, and issuing the Conditional
Commitment, the Lender’s Agreement and the Loan Note Guarantee, where applicable. The
cost for conducting these activities is estimated to total $54,000.
Reclamation would also interact with the lender during the loan servicing period in
such instances as subordinations, transfers and assumptions, and, in cases of default,
litigation and appeals and release of collateral, The cost for conducting these and other
activities during the loan servicing period is estimated to be $43,200.
Once a loan is guaranteed, Reclamation would perform various oversight and
monitoring activities, including conducting lender visits and/or audits as necessary, and
reviewing loan status reports, default reports, and notifications. Costs incurred in these
activities are estimated to be $405,000.
Finally, Reclamation will incur costs associated with program development and the
preparation of various materials (e.g., handbooks, forms, instructions) and their distribution.
These costs are estimated to be approximately $225,000. Total cumulative costs incurred by
Reclamation for program administration, implementation and oversight are $954,900.
Assuming these costs are incurred uniformly throughout the 4 year period, at an annual rate
of $238,725, and using a discount rate of 7 percent, the net present costs incurred by
Reclamation are expected to be $808,612. The breakdown of these costs is summarized in
Table II below.
Table II – Cumulative Reclamation Costs – 2008 - 2011
Item
Review of Lender Eligibility
Application for Loan Guarantee
Loan Origination
Loan Servicing

Number of
Cases
26
72
18
18

18

Hours

Cost

156
2,880
720
576

$11,700
$216,000
$54,000
$43,200

Oversight and Monitoring
Program Administration
Total Reclamation Cost
Present Value of Costs Over the
4-Year period (evaluated at 7%)

18

5,400
3,000
12,732

$405,000
$225,000
$954,900
$808,612

Costs would also be incurred by Reclamation in paying the remaining balances of
guaranteed portions of any defaulted loans. While default costs in this context are not true
economic costs in terms of the National Economic Development Account, they do present a
potentially significant financial implication which should be considered in any assessment of
a loan guarantee program.
For purposes of estimating default payments for this analysis, Reclamation
anticipated that, as an upper bound, 10 percent of the 18 loans would default over a 15 year
period, starting in fiscal year 2011. This default rate is based on a survey of agricultural loan
defaults, representing borrowers similar to those which would be receiving guaranteed loans
from Reclamation.
Assuming a discount rate of 7 percent, the net present value cost to Reclamation of
these defaults at the 10 percent rate would be $8,518,463 for loans guaranteed during the 4year period of analysis. Table III demonstrates how this value was calculated. Column 1
represents the total private loans expected to be made available for each year. This is based
on an evaluation by Reclamation staff of projects with extraordinary maintenance and
rehabilitation projects which need to be accomplished within the period of analysis. Column
2 represents the 80 percent of the total loan amount for which Reclamation would be liable.
Columns 3 and 4 represent the cumulative totals. Column 5 shows the amount of loan
defaults given the assumptions above, and Column 6 represents the 80 percent liability of the

19

Federal government for these defaults as they occur. Finally, Column 7 discounts these
default payment obligations to Year 1.
Table III – Default Costs (assumes 10 percent default rate)
Annual Federal
Loan
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
TOTAL

Cumulative
Private

Cumulative
Federal Loan

Defaulting

Federal
Guarantee

Annual Private
Guarantee
Loans
Guarantee
Loans
Payments
Loans Made
6,900,000
5,520,000
6,900,000
5,520,000
0
0
27,030,000
21,624,000
33,930,000
27,144,000
0
0
54,200,000
43,360,000
88,130,000
70,504,000
0
0
126,700,000
101,360,000
214,830,000
171,864,000
1,432,200
1,145,760
0
214,830,000
171,864,000
1,432,200
1,145,760
0
171,864,000
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
0
1,432,200
1,145,760
$214,830,000
$171,864,000 $214,830,000 $171,864,000 $21,483,000 $17,186,400

Net Present
Cost of
Defaults
(evaluated at
7%)

Reclamation’s experience with defaults and deferrals on obligations from
project beneficiaries indicates that a 10 percent default rate may be higher than what would
actually result under the program. USDA has not experienced any actual defaults in its loan
guarantee programs, either. Deferrals have been granted on a number of Reclamation
repayment obligations, and an analysis of the present value of the costs of such deferrals
indicates that they have resulted in a reduction in net present value of the repayment
obligations of approximately 2.73 percent. This percentage was derived by calculating the
reductions in net present value of the repayment obligations for which deferrals were granted
since 2000, a period for which data was readily available. Data is not readily available to

20

0
0
0
874,095
816,911
763,468
713,522
666,843
623,218
582,446
544,342
508,731
475,450
444,345
415,276
388,109
362,718
338,989
$8,518,463

evaluate the extent to which this period is similar to earlier periods. The total reduction in
net present value as a percentage of the total loan volume yielded the result given.
The calculation of deferral costs does not include debt forgiveness specifically
authorized by the Congress or reallocations to other non-reimbursable project purposes,
which have occurred on several occasions. Due to the many complex factors which often
enter into decisions on such actions, an attempt to quantify the costs associated with them
would not yield particularly meaningful results.
Total present value costs (noting that these costs include the potential costs associated
with defaults which in a benefit-cost context are financial, not economic costs) over the 4year period of analysis associated with a loan guarantee program under the proposed rule,
including information collection, submission, and evaluation, administration, and default
costs are therefore estimated to range from $1,159,188 to $9,677,651. The lower figure
assumes no defaults, following USDA’s and Reclamation’s past experiences. It includes
only the $350,576 in borrower and lender costs and $808,612 in Reclamation costs shown in
Tables I and II above. The higher figure includes the $8,518,463 resulting from a 10 percent
rate of default. In order to ensure a conservative analysis, the 10 percent default rate and
resulting cost figure of $9,677,651 will be used to measure costs of the program and compare
to program benefits and to the cost of alternative solutions. Assuming 18 projects take
advantage of the loan guarantee program, the estimated average present value cost per project
ranges from $64,400 to $537,700
The cost of the Loan Guarantee Program compared to both the benefits of the
program and the Direct Loan Alternative presented below, is not unduly sensitive to the
discount rate used. A rate of 5 percent would result in an upper bound estimate of program

21

costs of approximately $11.4 million. The cost of the Direct Loan Alternative presented
below would decrease to approximately $116 million using a 5 percent discount rate.
c.

Alternative Costs

By comparison, the costs associated with financing a similar amount of work using an
interest-free, direct loan approach such as occurred during Reclamation’s Rehabilitation and
Betterment Program and on the Arrowrock Outlet Works Repair is given below.
Reclamation’s Rehabilitation and Betterment program consisted of direct, interestfree loans, generally with a 40-year term. Actual defaults were not experienced.
Administrative costs were incurred throughout the life of the loan. Given these assumptions,
the net present value cost of financing work similar to the estimates used for the loan
guarantee program costs calculated above, would be approximately $123,812,857. The
method used to reach this estimate is illustrated in Table IV below. Column 1 represents the
total funding required for projects in each year, and corresponds to Column 1 in Table III.
Columns 2 and 3 represent cumulative project costs and annual administrative costs,
respectively. Columns 4, 5, and 6 show the total program expenditures and revenues by year,
and the difference between these. Column 7 discounts the annual net expenditures or
revenues to Year 1.

22

Table IV – Direct Loan Costs (R&B)

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
TOTAL

Annual
Federal
Loans

Cumulative
Federal
Loans

$6,900,000
$27,030,000
$54,200,000
$126,700,000

6,900,000
33,930,000
88,130,000
214,830,000
214,830,000

$214,830,000

$214,830,000

Annual
Administrative
Costs
448,000
461,440
475,283
489,542
300,000
309,000
318,270
327,818
337,653
347,782
358,216
368,962
380,031
391,432
403,175
415,270
427,728
440,560
453,777
467,390
481,412
495,854
510,730
526,052
541,833
558,088
574,831
592,076
609,838
628,133
646,977
666,387
686,378
706,970
728,179
750,024
772,525
795,701
819,572
844,159
869,483
895,568
922,435
950,108
978,611
$25,473,254

Present Value Cost of Baseline R&B Program

Total
Annual
Costs
7,348,000
27,491,440
54,675,283
127,189,542
300,000
309,000
318,270
327,818
337,653
347,782
358,216
368,962
380,031
391,432
403,175
415,270
427,728
440,560
453,777
467,390
481,412
495,854
510,730
526,052
541,833
558,088
574,831
592,076
609,838
628,133
646,977
666,387
686,378
706,970
728,179
750,024
772,525
795,701
819,572
844,159
869,483
895,568
922,435
950,108
978,611
$240,303,254

Annual
Repayment
Revenue
0
0
172,500
848,250
2,203,250
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,370,750
5,198,250
4,522,500
3,167,500
$214,830,000

Annual Costs
Minus Repay
Revenue
$7,348,000
$27,491,440
$54,502,783
$126,341,292
-$1,903,250
-$5,061,750
-$5,052,480
-$5,042,932
-$5,033,097
-$5,022,968
-$5,012,534
-$5,001,788
-$4,990,719
-$4,979,318
-$4,967,575
-$4,955,480
-$4,943,022
-$4,930,190
-$4,916,973
-$4,903,360
-$4,889,338
-$4,874,896
-$4,860,020
-$4,844,698
-$4,828,917
-$4,812,662
-$4,795,919
-$4,778,674
-$4,760,912
-$4,742,617
-$4,723,773
-$4,704,363
-$4,684,372
-$4,663,780
-$4,642,571
-$4,620,726
-$4,598,225
-$4,575,049
-$4,551,178
-$4,526,591
-$4,501,267
-$4,475,182
-$4,275,815
-$3,572,392
-$2,188,889
$25,473,254

Present Value
of Column 7
at 7% discount
6,867,290
24,012,088
44,490,506
96,385,167
-1,356,991
-3,372,858
-3,146,431
-2,935,032
-2,737,671
-2,553,422
-2,381,419
-2,220,854
-2,070,971
-1,931,065
-1,800,478
-1,678,592
-1,564,834
-1,458,665
-1,359,584
-1,267,121
-1,180,839
-1,100,328
-1,025,206
-955,116
-889,724
-828,719
-771,809
-718,723
-669,207
-623,024
-579,952
-539,784
-502,327
-467,401
-434,837
-404,477
-376,175
-349,794
-325,204
-302,287
-280,931
-261,031
-233,086
-182,001
-104,221

$123,812,857.78

Another comparison which illustrates the potential difference in costs to the United States
associated with a loan guarantee program compared to other potential alternatives involves the
Arrowrock Dam outlet works repair mentioned in the benefit section of this analysis. This repair
work was actually financed using essentially a similar direct loan type of approach, though with
different terms. Faced with an inability to finance the costs of these repairs upfront, the water
users on this project sought and obtained special legislation from Congress authorizing
Reclamation to proceed with the repairs; capping the water users’ financial obligation for
repayment of the costs at $6,900,000 of the total $9,200,000 in expenses which would otherwise
have been reimbursable by the water users; and allowing interest-free repayment of this amount
over 15 years. This represents a net present value cost to the United States of $4,983,514, as
shown in Table V below.

Table V – Arrowrock Outlet Works Repair Legislation
Payment

Interest Principal
0

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000
460,000

Loan Balance Present Value
6,900,000
7.00%

6,440,000
5,980,000
5,520,000
5,060,000
4,600,000
4,140,000
3,680,000
3,220,000
2,760,000
2,300,000
1,840,000
1,380,000
920,000
460,000
0

Arrowrock - Present Value Costs
Construction OAdmin CoTotal Costs
1
4,600,000
4,600,000
2
4,600,000
4,600,000

Net Present Cost - Arrowrock Legislation

401,782
375,497
350,932
327,974
306,517
286,465
267,724
250,210
233,841
218,543
204,246
190,884
178,396
166,725
155,818
3,915,552

7% Discount Rate
No default
9.2 Million of work is performed over years 1 and 2
Repayment begins in Year 3, Total Obligation capped
at $6.9 Million
Admin Costs are assumed to be included in the
construction outlays or repaid separately by the water
users as O&M
Appropriations Requests
Year
1
2
Total

4,600,000
4,600,000
9,200,000

4,600,000
4,299,065
$8,899,065
$4,983,514

This amount compares to an average cost per project of the loan guarantee program as
proposed of approximately $537,647.
7.

Net Economic Benefits

The present value of the net economic benefits is total benefits less total costs discounted
appropriately. In the context of the loan guarantee program, benefits can be characterized as
project outputs that would be provided at higher levels relative to the baseline or restored to
previous baseline levels in a more timely manner. Economic costs are the costs associated with
receiving these benefits. These costs involve the transaction costs associated with establishing
the loan guarantee program and the annual ongoing costs associated with each guarantee.
Economic costs do not include potential default costs. Given the lack of project specific

25

information it is not possible to estimate the net economic benefits associated with the loan
guarantee program.
In a financial sense, and from a cost effectiveness perspective, for a given amount
of rehabilitation work, the loan guarantee program appears to offer the possibility of cost savings
to the US. This is because the transaction costs associated with financing rehabilitation work are
reduced for both the US and water districts.
8. Summary
The Reclamation Loan Guarantee program under the proposed rules may represent a
cost-effective means of ensuring the timely accomplishment of needed extraordinary
maintenance and rehabilitation work on Reclamation projects. This is true in comparison to the
‘no action’ baseline, and to other potential financing assistance alternatives. The estimated
program costs are small in comparison to the significant benefits generated by the Reclamation
project facilities whose service life they would help to extend. The proposed rule is expected to
provide net benefits compared to the current situation.

26