3

Mr.

studies; 10 percent for the Defense Department; and an implicit 1/ 20 percent for the Veterans Administration. Dr. Daniel Rathbun, who worked on the GAO report and accompanied Mr. Staats, next testified with Staats that the difference between the cost-of-capital and borrowing approaches was not as great as sometimes thought because "if you approach the cost to the Treasury of borrowing in a realistic way and include taxes 8/ foregone...," you end up with a 7.5 or 8 percent rate. Staats reiterated that "as a minimum [the discount rate] ought 9/ to be the cost of money plus a factor for taxes foregone.

Mr.

Fred Hoffman, Assistant Director, Bureau of the Budget also advocated that where a Government investment corresponds to those of a particular sector of the private market, the discount rate should be the rate of return in that particular sector of the economy and that a 4 5/8 percent rate would be appropriate if risk was appropriately considered in 10/ calculating costs and benefits.

Another witness,

Otto

Eckstein, Professor of

Economics, Harvard University, stated that there is no logic which would support the use of a 3 percent discount rate and that the waste resulting from the use of such a rate

(specifically in the water resources area) could no longer be

Hearings of January 29, 1968, at 4, 5, 13, 19, discussing report reprinted at 33-67.

7/

8/

Id. at 10.

10/ Hearings of July 30, 1968, at 21, 27, 31.

afforded.

11/

He stated that although the Government borrowing rate is the interest rate at which the Government as an enterprise is able to obtain capital by borrowing and is a measure of the risk-free long-term interest rate, it is not an appropriate discount rate because public investments are financed not only by debt, but by taxes and therefore that the opportunity costs in the private or public sectors exceeds the 12/ long-term Federal borrowing rate. He also stated that if

the Government borrowing rate was used, a risk premium must be added, either in the interest rate or elsewhere in the calculation, if it is to be used as a discount rate. He also concluded that the Federal borrowing cost for long-term capital was then 5 1/2 percent and that the opportunity cost for taxraised capital was about 8 percent. He stated that a combination of both rates, weighted toward tax financing, should be used, resulting in a 7 to 7 1/2 percent discount 13/ rate.

Arnold C.

Harberger, Professor of Economics,

University of Chicago was the next witness. He stated that the taxes lost as a result of displaced private investment should be added to interest paid by the Government. He criticized

14/

the position taken by the Comptroller General (at the hearing

5

on January 29, 1968) on the grounds that it concentrated on the cost of incremental borrowings rather than on the costs to the economy, which would include state and local sales and property taxes that would have been paid on displaced private investment. He concluded that the discount rate should be about 10.7 percent, and that something in the range of 8.5 to 15/ 12 percent was plausible.

Harberger then examined the entire spectrum of plausible discount rates, the roughly 5 percent rate of longterm Government borrowing and the 15 percent yield on a corporate investment and suggested that the 15 percent corporate yield could be separated into 5 percent of pure risk free interest, 2 percent of risk premium, and 8 percent of taxes. If so, the opportunity cost to the Government is 13 percent: the 5 percent of interest plus the 8 percent of 16/ foregone taxes.

of

The next witness, Alain Enthoven, Assistant Secretary Defense, Office .of Systems Analysis, testified that "available evidence suggests that the opportunity cost of resources used by the Government in our economy is in the 5-10 percent range..." and that the 10 percent used by the Defense 17/ Department included a modest allowance for risk.

15/ Id. at 65.

16/ Id. at 66.

17/ Hearings of August 1, 1968 at 136.

6

The next witness, Laurence E. Lynn, Jr., Deputy

Assistant Secretary of Defense

(Economics and Resource

Analysis), testified that using either the opportunity cost of capital obtained through taxation or through borrowing results in a discount rate in the 7-10 percent range.

18/

The next

witness, M. Cecil

Mackey,

Assistant

Secretary for Policy Development, Department of Transportation, testified that Federal Highway Administration and the Bureau of Public Roads used a sensitivity analysis with discount rates of 19/ 7.5, 10, and 12.5 percent.

The last witness,

Robert A. Levine, Assistant Director for Research, Plans, Programs, and Evaluation, Office of Economic Opportunity, testified that OEO used discount rates of 5 and 7 percent in evaluating its human resource 20/

programs.

18 Id. at 144. 19/ Id. at 152.

20/ Id. at 163.

Mr. YOUNG. Please proceed.

TESTIMONY OF A PANEL INCLUDING JOHN E. AKRIDGE III, PRESIDENT, JOHN E. AKRIDGE CO., WASHINGTON, D.C., REPRESENTING APARTMENT & OFFICE BUILDING ASSOCIATION OF WASHINGTON, D.C., AND CHARLES F. FELDEWERT, PRESIDENT, FINANCIAL SERVICES GROUP, V. TURLEY-MARTIN, INC., ST. LOUIS, MO., REPRESENTING BUILDING OWNERS & MANAGERS ASSOCIATION INTERNATIONAL

Mr. AKRIDGE. Good afternoon, gentlemen.

I am John E. Akridge III, president of the John Akridge Co., a real estate development firm based in Washington, D.C. I have developed and own with others over 1 million square feet of office space in the Washington area over the last 10 years and leased none of it to the Federal Government. Therefore, I am not here out of self-interest, but rather, a real concern for H.R. 630.

I am testifying on behalf of the Apartment & Office Building Association of Washington, D.C., the local affiliate organization of the Building Owners & Managers Association International.

AOBA is interested in a number of specific issues raised by the Public Buildings Act bills pending in both Houses of Congress. My remarks, this morning, however, will focus on what I believe are the central issues of this legislation.

First, as has been discussed many times this morning, the method by which the Government should decide whether to satisfy its space needs by leasing, acquisition, or Federal construction; and second, the relative advantages or disadvantages of each method of providing space.

AOBA believes that the decision on the method of satisfying the space needs of the Federal agencies should be on a case-by-case basis and should be made by the most unbiased and accurate means possible. We believe such an analysis will show that leasing is very often the most cost-effective method of providing space for the Federal Government.

There may be temptations to bias the analysis in favor of construction, for reasons not based on cost effectiveness-use of an inappropriately low discount rate, the exclusion of interest cost, the exclusion of the cost of the risk of ownership, exclusion of operating costs and future repair costs, and the inclusion of fictitious costs of leasing space, would all tend to create such a bias. All such efforts should be resisted, and a method for an honest comparison must be developed.

As to the relative advantages and disadvantages of leasing, acquisition and Federal construction, we believe there are four factors which should be considered in evaluating these alternative methods for providing office space for Federal employees: Cost, risk, flexibility, and accountability. An examination of these factors shows that leasing provides substantial advantages over Federal construction and that it will often be more advantageous than acquisition as well.

The major advantages of leasing over Federal construction stems from the private sector's ability to build office space at a substantially lower cost than GSA. It is well-documented that Federal