Repayment Interest Rates for Water Projects

In the absence of a uniform federal interest rate policy for reimbursable costs of water projects, federal agencies generally have determined repayment interest rates administratively. For some specific projects, however, Congress has stipulated the interest rate to be used in the authorizing legislation. The rates used have varied among agencies and with different purposes of development. The repayment interest rate is of particular significance to the financial feasibility of proposed projects. An increase in this rate can substantially increase the cost of projects to local government or other entities responsible for repaying reimbursable costs. The current use of repayment interest rates lower than discount rates for project evaluaion also raises questions about the distribution of benefits. Although the U.S. Water Resources Council recently increased the evaluation interest rate and initiated studies of water project evaluation procedures in general, relatively little attention has been given to achieving a consistent policy for repayment interest rates and other aspects of cost allocation and cost sharing. This situation needs to be changed; these important aspects of water project development should not be neglected.