Rural Utilities Service

The Rural Utilities Service (RUS) has successfully used its loan programs to finance the development of electricity and telecommunications infrastructure in rural areas for many years. RUS loans are intended to help develop sparsely populated rural areas. Recently, the agency wrote off more than $1.7 billion on electricity loans held by a handful of borrowers that did not repay them. More write-offs are expected. In April 1997, GAO reported that at the end of fiscal year 1996, about $8 billion of the $37.5 billion in outstanding principal on electricity and telecommunications loans was held by borrowers with financial problems. (See GAO/RCED-97-82.) This follow-up study identifies ways to (1) make the electricity and telecommunications loan programs more effective and less costly for the government and (2) decrease RUS' vulnerability to loan losses. GAO also presents loan information on commercial lenders with a significant level of lending for rural electricity and telecommunications purposes. GAO found that RUS' current lending practices sometimes lead to electricity and telecommunications loans to borrowers who serve heavily populated areas. Targeting loans to borrowers who serve more sparsely populated areas could result in more efficient use of the agency's limited loan funds.

GAO noted that: (1) because loan programs are intended to assist in the development of the nation's rural areas, targeting loans to borrowers that provide services to areas with low populations could result in the more effective use of the agency's limited loan funds; (2) current lending practices sometimes result in loans to borrowers serving areas that are heavily populated; (3) targeting subsidized direct loans to borrowers that need the agency's assistance to fund their utility projects could result in the more effective use of the loan funds and reduce the level of subsidized loans and program costs; (4) the agency sometimes makes its subsidized direct loans to borrowers capable of using their own resources or of obtaining loans from the private sector to fund their utility projects; (5) graduating the agency's financially viable borrowers from direct loans to commercial credit could also reduce program costs; (6) opportunities also exist to decrease the Rural Utilities Service's vulnerability to losses; (7) the agency's vulnerability could be lessened if loan and indebtedness limits were established; (8) borrowers have been able to obtain large-dollar loans and accumulate large amounts of debt because such limits are generally lacking; (9) the repayment guarantee that the agency places on loans made by other lenders could be reduced so that lenders holding the guaranteed loans bear some portion of the financial risk; (10) the agency guarantees the repayment of loans made by other lenders at 100 percent; (11) because all guaranteed loans in recent years have been made by the Treasury's Federal Financing Bank, the risk to the federal government as a whole would not be reduced if the Federal Financing Bank continues to be the sole source of loan funds; (12) although the agency did not make or guarantee loans to such borrowers during the period covered by GAO's review, there are no policies prohibiting additional loans to such borrowers; (13) the Rural Utilities Service is not the only provider of credit to rural utilities; (14) two commercial lenders are actively involved in lending to rural electricity and telecommunications providers; and (15) these two lenders had approximately $13.1 billion in outstanding principal on loans for rural electricity and telecommunication purposes.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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