    [Analytical Perspectives]
    [Crosscutting Programs]
    [6. Federal Investment]
    [From the U.S. Government Printing Office, www.gpo.gov]

    [[Page 63]]

                             6.  FEDERAL INVESTMENT

      Investment spending is spending that yields long-term benefits. Its
    purpose may be to improve the efficiency of internal Federal agency
    operations or to increase the Nation's overall stock of capital for
    economic growth. The spending can be direct Federal spending or grants
    to State and local governments. It can be for physical capital, which
    yields a stream of services over a period of years, or for research and
    development or education and training, which are intangible but also
    increase income in the future or provide other long-term benefits.
      Most presentations in the Federal budget combine investment spending
    with spending for current use. This chapter focuses solely on Federal
    and federally financed investment.
      In this chapter, investment is discussed in the following sections:
        a description of the size and composition of Federal
              investment spending;
        a discussion of the performance of selected Federal
              investment programs; and
        a presentation of trends in the stock of federally financed
              physical capital, research and development, and education.
      Two sections that appeared in this chapter last year, ``Alternative
    Capital Budget and Capital Expenditure Presentations'' and
    ``Supplemental Physical Capital Information'', are not included this
    year, primarily because the information in these sections changes little
    from year to year, and the reader may refer to earlier budgets for this
    information or analysis.

                   PART I.  DESCRIPTION OF FEDERAL INVESTMENT

      For more than fifty years, the Federal budget has included a chapter
    on Federal investment--defined as those outlays that yield long-term
    benefits--separately from outlays for current use. In recent years the
    discussion of the composition of investment has displayed estimates of
    budget authority as well as outlays.
      The classification of spending between investment and current outlays
    is a matter of judgment. The budget has historically employed a
    relatively broad classification, encompassing physical investment,
    research, development, education, and training. The budget further
    classifies investments into those that are grants to State and local
    governments, such as grants for highways or education, and all other
    investments, called ``direct Federal programs,'' in this analysis. This
    ``direct Federal'' category consists primarily of spending for assets
    owned by the Federal Government, such as defense weapons systems and
    general purpose office buildings, but also includes grants to private
    organizations and individuals for investment, such as capital grants to
    Amtrak or higher education loans directly to individuals.
      Presentations for particular purposes could adopt different
    definitions of investment:
        To suit the purposes of a traditional balance sheet,
              investment might include only those physical assets owned by
              the Federal Government, excluding capital financed through
              grants and intangible assets such as research and education.
        Focusing on the role of investment in improving national
              productivity and enhancing economic growth would exclude items
              such as national defense assets, the direct benefits of which
              enhance national security rather than economic growth.
        Concern with the efficiency of Federal operations would
              confine the coverage to investments that reduce costs or
              improve the effectiveness of internal Federal agency
              operations, such as computer systems.
        A ``social investment'' perspective might broaden the
              coverage of investment beyond what is included in this chapter
              to include programs such as childhood immunization, maternal
              health, certain nutrition programs, and substance abuse
              treatment, which are designed in part to prevent more costly
              health problems in future years.
      The relatively broad definition of investment used in this section
    provides consistency over time--historical figures on investment outlays
    back to 1940 can be found in the separate Historical Tables volume.
    Table 6-2 at the end of this section allows disaggregation of the data
    to focus on those investment outlays that best suit a particular
    purpose.
      In addition to this basic issue of definition, there are two technical
    problems in the classification of investment data involving the
    treatment of grants to State and local governments and the
    classification of spending that could be shown in more than one
    category.
      First, for some grants to State and local governments it is the
    recipient jurisdiction, not the Federal Government, that ultimately
    determines whether the money is used to finance investment or current
    purposes. This analysis classifies all of the outlays in the category
    where the recipient jurisdictions are expected to spend most of the
    money. Hence, the community development block grants are classified as
    physical investment, although some may be spent for current purposes.
    Gen

    [[Page 64]]

    eral purpose fiscal assistance is classified as current spending,
    although some may be spent by recipient jurisdictions on physical
    investment.
      Second, some spending could be classified in more than one category of
    investment. For example, outlays for construction of research facilities
    finance the acquisition of physical assets, but they also contribute to
    research and development. To avoid double counting, the outlays are
    classified in the category that is most commonly recognized as
    investment. Consequently outlays for the conduct of research and
    development do not include outlays for research facilities, because
    these outlays are included in the category for physical investment.
    Similarly, physical investment and research and development related to
    education and training are included in the categories of physical assets
    and the conduct of research and development.
      When direct loans and loan guarantees are used to fund investment, the
    subsidy value is included as investment. The subsidies are classified
    according to their program purpose, such as construction or education
    and training. For more information about the treatment of Federal credit
    programs, refer to Chapter 25, ``The Budget System and Concepts,'' in
    this volume.
      This section presents spending for gross investment, without adjusting
    for depreciation.

                    Composition of Federal Investment Outlays

    Major Federal Investment

      The composition of major Federal investment outlays is summarized in
    Table 6-1. They include major public physical investment, the conduct of
    research and development, and the conduct of education and training.
    Defense and nondefense investment outlays were $345.2 billion in 2003.
    They are estimated to increase to $376.7 billion in 2004 and are
    projected to increase further to $390.0 billion in 2005. Major Federal
    investment outlays will comprise an estimated 16 percent of total
    Federal outlays in 2005 and 3.2 percent of the Nation's gross domestic
    product (GDP). Greater detail on Federal investment is available in
    Table 6-2 at the end of this section. That table includes both budget
    authority and outlays.
      Physical investment. Outlays for major public physical capital
    investment (hereafter referred to as physical investment outlays) are
    estimated to be $179.8 billion in 2005. Physical investment outlays are
    for construction and rehabilitation, the purchase of major equipment,
    and the purchase or sale of land and structures. More than three-fifths
    of these outlays are for direct physical investment by the Federal
    Government, with the remainder being grants to State and local
    governments for physical investment.
      Direct physical investment outlays by the Federal Government are
    primarily for national defense. Defense outlays for physical investment
    are estimated to be $85.6 billion 2005. Almost all of these outlays, or
    an estimated $78.4 billion, are for the procurement of weapons and other
    defense equipment, and the remainder is primarily for construction on
    military bases, family housing for military personnel, and Department of
    Energy defense facilities.

                                  Table 6-1.  COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                       Estimate
                                                                                           2003  -------------------
                                                                                         Actual     2004      2005
    ----------------------------------------------------------------------------------------------------------------
                                    Federal Investment
    Major public physical capital investment:
      Direct Federal:
        National defense..............................................................      74.7      85.2      85.6
        Nondefense....................................................................      29.5      31.0      31.1
                                                                                       -----------------------------
          Subtotal, direct major public physical capital investment...................     104.2     116.3     116.7

      Grants to State and local governments...........................................      59.8      61.3      63.1
                                                                                       -----------------------------
        Subtotal, major public physical capital investment............................     164.1     177.6     179.8

    Conduct of research and development:
      National defense................................................................      57.3      65.8      71.4
      Nondefense......................................................................      44.1      49.2      52.6
                                                                                       -----------------------------
        Subtotal, conduct of research and development.................................     101.4     115.0     124.0

    Conduct of education and training:
      Grants to State and local governments...........................................      45.2      50.6      51.4
      Direct Federal..................................................................      34.5      33.6      34.8
                                                                                       -----------------------------
        Subtotal, conduct of education and training...................................      79.7      84.2      86.2
                                                                                       -----------------------------
          Total, major Federal investment outlays.....................................     345.2     376.7     390.0

                                        MEMORANDUM

    Major Federal investment outlays:
      National defense................................................................     132.0     151.0     157.0
      Nondefense......................................................................     213.1     225.7     233.0
                                                                                       -----------------------------
        Total, major Federal investment outlays.......................................     345.2     376.7     390.0

    Miscellaneous physical investment:
      Commodity inventories...........................................................      -0.6      -1.1      -0.4
      Other physical investment (direct)..............................................       5.7       4.2       3.7
                                                                                       -----------------------------
      Total, miscellaneous physical investment........................................       5.1       3.1       3.3
                                                                                       -----------------------------
    Total, Federal investment outlays, including
      miscellaneous physical investment...............................................     350.3     379.8     393.3
    ----------------------------------------------------------------------------------------------------------------

      Outlays for direct physical investment for nondefense purposes are
    estimated to be $31.1 billion in 2005. These outlays include $16.4
    billion for construction and rehabilitation. This amount includes funds
    for water, power, and natural resources projects of the Corps of
    Engineers, the Bureau of Reclamation within the Department of the
    Interior, and the Tennessee Valley Authority; construction and
    rehabilitation of veterans hospitals and Postal Service facilities;
    facilities for space and science programs, and Indian Health Service
    hospitals and clinics. Outlays for the acquisition of major equipment
    are estimated to be $14.1 billion in 2005. The largest amounts are for
    the air traffic control system. For the purchase or sale of land and
    structures, disbursements are estimated to exceed collections by $0.6
    billion in 2005. These purchases are largely for buildings and land for
    parks and other recreation purposes.
      Grants to State and local governments for physical investment are
    estimated to be $63.1 billion in 2005. More than two-thirds of these
    outlays, or $43.8 billion, are to assist States and localities with
    transportation infrastructure, primarily highways. Other major grants
    for physical investment fund sewage treatment plants, community
    development, and public housing.
      Conduct of research and development. Outlays for the conduct of
    research and development are estimated to be $124.0 billion in 2005.
    These outlays are devoted to increasing basic scientific knowledge and
    promoting research and development. They increase the Nation's security,
    improve the productivity of capital and labor for both public and
    private purposes, and enhance the quality of life. More than half of
    these outlays, an estimated $71.4 billion, are for national defense.
    Physical investment for research and development facilities and
    equipment is included in the physical investment category.
      Nondefense outlays for the conduct of research and development are
    estimated to be $52.6 billion in 2005. These are largely for the
    National Aeronautics and Space Administration, the National Science
    Foundation, the National Institutes of Health, and research for nuclear
    and non-nuclear energy programs.
      A more complete and detailed discussion of research and development
    funding appears in Chapter 5, ``Research and Development'' in this
    volume.
      Conduct of education and training. Outlays for the conduct of
    education and training are estimated to be $86.2 billion in 2005. These
    outlays add to the stock of human capital by developing a more skilled
    and productive labor force. Grants to State and local governments for
    this category are estimated to be $51.4 billion in 2005, three-fifths of
    the total. They include education programs for the disadvantaged and the
    disabled, vocational and adult education programs, training programs in
    the Department of Labor, and Head Start. Direct Federal education and
    training outlays are estimated

    [[Page 65]]

    to be $34.8 billion in 2005. Programs in this category are primarily aid
    for higher education through student financial assistance, loan
    subsidies, the veterans GI bill, and health training programs.
      This category does not include outlays for education and training of
    Federal civilian and military employees. Outlays for education and
    training that are for physical investment and for research and
    development are in the categories for physical investment and the
    conduct of research and development.

    Miscellaneous Physical Investment Outlays

      In addition to the categories of major Federal investment, several
    miscellaneous categories of investment outlays are shown at the bottom
    of Table 6-1. These items, all for physical investment, are generally
    unrelated to improving Government operations or enhancing economic
    activity.
      Outlays for commodity inventories are primarily for the purchase or
    sale of agricultural products pursuant to farm price support programs.
    Sales are estimated to exceed purchases by $0.4 billion in 2005.
      Outlays for other miscellaneous physical investment are estimated to
    be $3.7 billion in 2005. This category includes primarily conservation
    programs. These are entirely direct Federal outlays.

    Detailed Table on Investment Spending

      The following table provides data on budget authority as well as
    outlays for major Federal investment divided according to grants to
    State and local governments and direct Federal spending. Miscellaneous
    investment is not included because it is generally unrelated to
    improving Government operations or enhancing economic activity.

    [[Page 66]]

              Table 6-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                Budget Authority                             Outlays
                                   ---------------------------------------------------------------------------------
              Description               2003         2004          2005          2003         2004          2005
                                      Actual      Estimate      Estimate       Actual      Estimate      Estimate
    ----------------------------------------------------------------------------------------------------------------
       GRANTS TO STATE AND LOCAL
              GOVERNMENTS

    Major public physical
     investments:
      Construction and
       rehabilitation:
        Transportation:
          Highways................      29,518        33,763   33,517            30,379        31,089        32,710
          Mass transportation.....      10,629         6,939    7,017             7,336         8,228         7,666
          Air transportation......       3,379         3,381    3,501             2,681         3,395         3,471
                                   ---------------------------------------------------------------------------------
            Subtotal,                   43,526        44,083   44,035            40,396        42,712        43,847
             transportation.......
                                   ---------------------------------------------------------------------------------
        Other construction and
         rehabilitation:
          Pollution control and          2,499         2,511    2,348             2,883         1,037         2,359
           abatement..............
          Community development          4,905         4,934    4,618             5,569         5,990         5,586
           block grants...........
          Other community and            1,481         1,203      901             1,379         1,532         1,456
           regional development...
          Housing assistance......       7,250         6,845    6,711             7,827         8,133         8,384
          Other construction......         255           402      139               715           704           204
                                   ---------------------------------------------------------------------------------
            Subtotal, other             16,390        15,895   14,717            18,373        17,396        17,989
             construction and
             rehabilitation.......
                                   ---------------------------------------------------------------------------------
          Subtotal, construction        59,916        59,978   58,752            58,769        60,108        61,836
           and rehabilitation.....
                                   ---------------------------------------------------------------------------------
      Other physical assets.......       1,247         1,265    1,189             1,074         1,195         1,290
                                   ---------------------------------------------------------------------------------
        Subtotal, major public          61,163        61,243   59,941            59,843        61,303        63,126
         physical capital.........
                                   ---------------------------------------------------------------------------------
    Conduct of research and
     development:
      Agriculture.................         254           264      283               251           260           261
      Other.......................         553           574      830               319           495           870
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of               807           838    1,113               570           755         1,131
         research and development.
                                   ---------------------------------------------------------------------------------
    Conduct of education and
     training:
      Elementary, secondary, and        34,392        36,527   37,971            29,004        34,903        35,967
       vocational education.......
      Higher education............         458           461      395               487           594           487
      Research and general                 696           742      693               782           819           683
       education aids.............
      Training and employment.....       3,531         3,350    4,337             4,603         3,837         3,625
      Social services.............       9,775         9,929   10,145             9,607         9,726         9,946
      Agriculture.................         455           439      420               423           436           421
      Other.......................         911           269      249               282           236           267
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of            50,218        51,717   54,210            45,188        50,551        51,396
         education and training...
                                   ---------------------------------------------------------------------------------
      Subtotal, grants for             112,188       113,798   115,264          105,601       112,609       115,653
       investment.................
                                   =================================================================================
        DIRECT FEDERAL PROGRAMS

    Major public physical
     investment:
      Construction and
       rehabilitation:
        National defense:
          Military construction          7,283         6,357    6,416             5,917         6,560         6,451
           and family housing.....
          Atomic energy defense            835           883      489               795           834           714
           activities and other...
                                   ---------------------------------------------------------------------------------
            Subtotal, national           8,118         7,240    6,905             6,712         7,394         7,165
             defense..............
                                   ---------------------------------------------------------------------------------
        Nondefense:
          International affairs...       1,101         1,098    1,100               656         1,000           987
          General science, space,        2,318         2,065    2,418             2,436         2,137         2,287
           and technology.........
          Water resources projects       3,035         2,906    2,330             3,104         2,583         2,654
          Other natural resources        1,728         2,106    1,756             1,905         1,662         2,030
           and environment........
          Energy..................       1,685         1,598    1,586             1,685         1,600         1,580
          Postal Service..........         442           637      714               307           409           530
          Transportation..........         345           426      546               342           389           564
          Veterans hospitals and         2,542         1,646    1,791             2,187         1,675         1,581
           other health facilities
          Federal Prison System...         263           178   ............         533           275           390
          GSA real property              1,720         1,748    1,636             1,298         1,926         1,872
           activities.............
          Other construction......       3,297         2,349    1,765             2,919         2,582         1,905
                                   ---------------------------------------------------------------------------------
            Subtotal, nondefense..      18,476        16,757   15,642            17,372        16,238        16,380
                                   ---------------------------------------------------------------------------------
          Subtotal, construction        26,594        23,997   22,547            24,084        23,632        23,545
           and rehabilitation.....
                                   ---------------------------------------------------------------------------------

    [[Page 67]]

      Acquisition of major
       equipment:
        National defense:
          Department of Defense...      78,484        80,918   74,986            67,890        77,705        78,246
          Atomic energy defense            128           202      142               128           157           182
           activities.............
                                   ---------------------------------------------------------------------------------
            Subtotal, national          78,612        81,120   75,128            68,018        77,862        78,428
             defense..............
                                   ---------------------------------------------------------------------------------
        Nondefense:
          General science and              545           562      608               463           601           568
           basic research.........
          Space flight, research,          485           670      681               411           544           667
           and supporting
           activities.............
          Postal Service..........         803         1,267      730               470           602           927
          Air transportation......       3,654         2,879    3,536             2,763         3,970         3,725
          Water transportation             433           557      571               436           433           483
           (Coast Guard)..........
          Other transportation           1,043         1,218      900             1,001         1,334           900
           (railroads)............
          Hospital and medical           1,034         1,019    1,020             1,949         1,936         1,936
           care for veterans......
          Law enforcement                1,488         1,890    1,829             1,187         1,832         1,876
           activities.............
          Department of the                492           591      498               547           577           576
           Treasury (fiscal
           operations)............
          Department of Commerce           779           773      852               681           645           768
           (NOAA).................
          GSA general supply fund.         676           750      724               626           750           724
          Other...................         856           749      930               935           936           998
                                   ---------------------------------------------------------------------------------
            Subtotal, nondefense..      12,288        12,925   12,879            11,469        14,160        14,148
                                   ---------------------------------------------------------------------------------
          Subtotal, acquisition of      90,900        94,045   88,007            79,487        92,022        92,576
           major equipment........
                                   ---------------------------------------------------------------------------------
      Purchase or sale of land and
       structures:
        National defense..........         -23           -33      -33               -23           -33           -33
        Natural resources and              434           296      223               458           343           296
         environment..............
        General government........         179           170      161               200           265           214
        Other.....................          28            42      117                16            32            89
                                   ---------------------------------------------------------------------------------
          Subtotal, purchase or            618           475      468               651           607           566
           sale of land and
           structures.............
                                   ---------------------------------------------------------------------------------
        Subtotal, major public         118,112       118,517   111,022          104,222       116,261       116,687
         physical investment......
                                   ---------------------------------------------------------------------------------
    Conduct of research and
     development:
      National defense:
        Defense military..........      58,793        65,432   69,791            53,778        61,347        67,041
        Atomic energy and other...       3,836         3,968    4,315             3,550         4,449         4,363
                                   ---------------------------------------------------------------------------------
          Subtotal, national            62,629        69,400   74,106            57,328        65,796        71,404
           defense................
                                   ---------------------------------------------------------------------------------
      Nondefense:
        International affairs.....         269           269      255               229           260           258
        General science, space and
         technology
          NASA....................       7,369         7,596    7,774             6,002         7,148         7,921
          National Science               3,640         3,762    3,862             3,235         3,473         3,727
           Foundation.............
          Department of Energy....       2,509         2,712    2,624             2,480         2,718         2,624
                                   ---------------------------------------------------------------------------------
            Subtotal, general           13,787        14,339   14,515            11,946        13,599        14,530
             science, space and
             technology...........
                                   ---------------------------------------------------------------------------------
        Energy....................       1,275         1,435    1,468             1,325         1,504         1,621
        Transportation:
          Department of                    547           531      566               483           546           599
           Transportation.........
          NASA....................         999         1,034      919             1,663         1,026         1,000
          Other...................         181           181      229                49           293           228
                                   ---------------------------------------------------------------------------------
            Subtotal,                    3,002         3,181    3,182             3,520         3,369         3,448
             transportation.......
                                   ---------------------------------------------------------------------------------
        Health:
          National Institutes of        25,178        27,021   27,681            21,835        24,559        26,698
           Health.................
          All other health........         725           652      719               927           652           688
                                   ---------------------------------------------------------------------------------
            Subtotal, health......      25,903        27,673   28,400            22,762        25,211        27,386
                                   ---------------------------------------------------------------------------------

    [[Page 68]]

        Agriculture...............       1,432         1,538    1,216             1,377         1,391         1,306
        Natural resources and            2,018         2,049    2,040             1,839         1,791         1,953
         environment..............
        National Institute of              421           410      326               433           449           488
         Standards and Technology.
        Hospital and medical care          817           822      770               783           812           770
         for veterans.............
        All other research and           1,097         1,346    1,329               882         1,833         1,575
         development..............
                                   ---------------------------------------------------------------------------------
          Subtotal, nondefense....      48,477        51,358   51,778            43,542        48,455        51,456
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of           111,106       120,758   125,884          100,870       114,251       122,860
         research and development.
                                   ---------------------------------------------------------------------------------
    Conduct of education and
     training:
      Elementary, secondary, and         1,902         1,648    1,341             1,858         2,063         1,754
       vocational education.......
      Higher education............      23,872        22,105   23,260            23,875        21,642        23,118
      Research and general               1,789         1,856    1,882             1,699         1,838         1,887
       education aids.............
      Training and employment.....       1,563         1,576    1,661             1,514         1,528         1,611
      Health......................       1,634         1,575    1,297             1,500         1,704         1,568
      Veterans education,                2,227         2,479    2,502             2,295         2,633         2,795
       training, and
       rehabilitation.............
      General science and basic            935           930      864               775           953           901
       research...................
      National defense............           8             8        8                 9             8             8
      International affairs.......         405           349      376               393           352           373
      Other.......................         619           763      643               567           886           774
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of            34,954        33,289   33,834            34,485        33,607        34,789
         education and training...
                                   ---------------------------------------------------------------------------------
      Subtotal, direct Federal         264,172       272,564   270,740          239,577       264,119       274,336
       investment.................
                                   =================================================================================
    Total, Federal investment.....     376,360       386,362   386,004          345,178       376,728       389,989
    ----------------------------------------------------------------------------------------------------------------

                   PART II:  PERFORMANCE OF FEDERAL INVESTMENT

      Introduction. In recent years there has been increased emphasis on the
    performance of Government programs. The Congress mandated in the
    Government Performance and Results Act of 1993 that performance plans be
    developed and that the agencies report annual progress against these
    plans.
      In addition, this Administration began in the 2004 Budget to assess
    every Federal program over a five year period by a method known as the
    Program Assessment Rating Tool, or PART. With this budget, the second
    year of using the PART, the Administration has assessed about two-fifths
    of the programs of the Federal Government The PART system assesses each
    program on four components (purpose, planning, management, and results/
    accountability) and gives a score for each of the components. The scores
    for each component are then weighted--results/accountability carries the
    greatest weight--and the program is given an overall score. A program is
    rated effective if it receives an overall score of 85 percent or more,
    moderately effective if the score is 70 to 85 percent, adequate if the
    score is 50 to 70 percent, and inadequate if the score is 49 percent or
    lower. The program is given a rating ``Results Not Demonstrated'' if the
    program does not have a good performance measure or does not have data
    for that measure. Chapter 2 of this volume discusses the PART concepts
    in more detail.
      This section summarizes the results of the PART for direct investment
    programs, defined to include capital assets, research and development,
    and education. Because an entire program is assessed, not just the
    investment portion of the program, the assessments for some programs may
    cover more than just the investment spending. PART assessments of
    programs that are grants to State and local governments are not
    summarized in this chapter but are summarized in Chapter 8, ``Aid to
    State and Local Governments'', in this volume.
      This section covers the following 119 programs.
        Programs for capital assets are those identified in the PART
              system as ``capital assets and service acquisition'' (44
              programs);
        Programs for research and development are essentially those
              identified in the PART system as ``research and development''
              (59 programs); and
        Programs for education (16 programs) are primarily programs
              in the Department of Education that are not grants to State
              and local governments (e.g., Federal Pell grants to
              individuals). This category also includes a few education
              programs in other agencies, such as the Montgomery GI Bill in
              the Department of Veterans Affairs and the Health Professions
              program in the Department of Health and Human Services.

    [[Page 69]]

      Information on these and other programs assessed by PART is on the CD
    ROM that accompanies this volume.

      Summary of ratings. Table 6-3 shows that the average weighted score
    for the 119 investment programs that have been rated by PART was 66
    percent, which is a rating of ``adequate''. These programs had total
    spending of $132.0 billion in 2003. Of these programs:
        39 were rated ``results not demonstrated'' ($42.1 billion);
        23 were rated effective ($8.8 billion);
        31 were rated moderately effective ($34.6 billion);
        19 were rated adequate ($39.4 billion); and
        7 were rated ineffective ($7.1 billion).

                  Table 6-3.  SUMMARY OF PART RATINGS AND SCORES FOR DIRECT FEDERAL INVESTMENT PROGRAMS
                             (excludes grants to State and local governments for investment)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Type of Investment
                                                             -------------------------------------------------------
                            Criteria                                                      Education
                                                               Physical   Research and       and      All investment
                                                               capital     development     training      programs
    ----------------------------------------------------------------------------------------------------------------
                                                            Average Scores

    Purpose.................................................        80%             91%          76%             85%
    Planning................................................        74%             76%          74%             75%
    Management..............................................        81%             84%          64%             80%
    Results/Accountability..................................        49%             58%          35%             51%
    Weighted Average \1\....................................        64%             71%          53%             66%
    Average Rating..........................................   Adequate      Moderately     Adequate        Adequate
                                                                              effective

                                                            Number of Programs

                           Ratings \2\
    Results not demonstrated................................         19              15            5              39
    Effective...............................................          6              16            1              23
    Moderately effective....................................         10              20            1              31
    Adequate................................................          7               6            6              19
    Ineffective.............................................          2               2            3               7
                                                             -------------------------------------------------------
      Total number of investment programs rated.............         44              59           16             119

                                                            In millions of dollars (2003)

    Results not demonstrated................................    $36,114          $2,842       $3,116         $42,072
    Effective...............................................      1,005           7,736           49           8,790
    Moderately effective....................................     29,140           5,337          171          34,648
    Adequate................................................     19,500             570       19,361          39,431
    Ineffective.............................................      6,215              89          779           7,083
                                                             -------------------------------------------------------
      All investment programs that were rated in PART.......    $91,974         $16,574      $23,476        $132,024
    ----------------------------------------------------------------------------------------------------------------
    \1\ Weighted as follows: Purpose (20%), Planning (10%), Management (20%), Results/Accountability (50%).
    \2\ The rating of effective indicates a score of 85 percent or more; moderately effective, 70-85 percent;
      adequate, 50-70 percent; and ineffective, 49 percent or less.

      Assessments of individual programs. The ratings of the ten physical
    capital and education and training investment programs with the largest
    funding are summarized here. Information on research and development is
    in Chapter 5, ``Research and Development'' in this volume.

    Capital Assets

      Department of Defense. Air Combat Program ($15.1 billion in 2003).
    Rating: Moderately Effective. This program consists of a number of
    individual aircraft and helicopter research, development and procurement
    programs that, taken together, comprise DOD's investment in air combat
    capabilities. The PART analysis showed that the program purpose is clear
    owing to the unique military requirement for these systems.
      Department of Defense. Shipbuilding ($9.5 billion). Rating: Adequate.
    This program buys new ships and overhauls older ships for the Navy. The
    assessment shows that the program has a clear purpose, and the Navy has
    specific cost, schedule, and performance goals for each shipbuilding
    program. The program has experi

    [[Page 70]]

    enced cost increases and schedule slips on some ship construction
    programs.
      Tennessee Valley Authority (TVA) ($7.6 billion in 2003). Rating:
    Moderately Effective. TVA is the fifth largest electric utility in the
    country, generating power at 48 coal-fired, hydropower, nuclear, and
    other power plants that it operates to meet the electricity needs of 8.3
    million people (3 percent of the U. S. market). The PART assessment gave
    TVA mixed reviews. TVA does an excellent job generating power at its
    existing power plants. A decade ago TVA's nuclear power plants posed
    serious technical and safety problems but it has overcome these problems
    and today its nuclear power plants set industry standards.
      However, TVA has a high level of debt compared to many of its
    competitors in the electricity industry. It has recently issued a
    strategic plan that includes a debt reduction target of $3 billion to $5
    billion over the next 10 to 12 years, which is incorporated into the
    budget estimates for TVA and will be a basis on which TVA's annual
    performance plans are developed.
      Department of Defense. Missile Defense ($7.5 billion in 2003). Rating:
    Results Not Demonstrated. This program consists of multiple systems and
    capabilities developed by the Missile Defense Agency (MDA) or military
    services. This program fields active defenses against short, medium, and
    long-range missiles in a multi-layered global system.
      The assessment found that: a) the Department of Defense continues to
    design, engineer, and develop extensive missile defense capabilities,
    but has not programmed adequate funds to procure and operate newly
    developed capabilities; b) technical progress continues, but there have
    been challenges. Some missiles have operated effectively, but also
    experienced command and control problems; some tests have failed, but
    some were a success.
      Department of Energy. Environmental Management ($7.6 billion in 2003).
    Rating: Adequate. This program protects human health and the environment
    by cleaning up waste and contamination resulting from more than 50 years
    of nuclear weapons production and energy research at 114 Department of
    Energy sites in the United States and its territories. The assessment
    found that managers are implementing reforms that are improving program
    performance. The program needs to develop annual cost and schedule
    performance measures.
      General Services Administration. GSA's Regional IT Solutions Program
    ($5.8 billion in 2003). Rating: Results Not Demonstrated. This program
    provides expert technical, acquisition, and information technology
    products and services to Federal clients. This assessment found that the
    program is useful to Federal agencies that do not have in-house
    expertise to acquire IT products or services. The assessment also found
    that the program does not have long-term outcome goals that relate to
    other government agencies or the private sector.
      Department of Defense. Communications Infrastructure ($5.6 billion in
    2003). Rating: Results Not Demonstrated. This program includes all
    networks and systems for transmission of voice, data, and video
    information for the Department. This assessment revealed that DOD does
    not manage its communications infrastructure on an enterprise or
    department-wide basis. The assessment also suggested that DOD should
    develop common performance measures to be used across the entire
    department for this program.
      Department of Defense. Airlift Program ($5.3 billion in 2003). Rating:
    Moderately Effective. This program consists of a number of individual
    Air Force tactical and strategic airlift aircraft research, development
    and procurement programs that, taken together, comprise DOD's investment
    in airlift capabilities. The analysis showed that this is a coherent
    program with a clear and basic long-term goal, namely to be able to move
    military forces and their equipment from the U.S. to anywhere in the
    world whenever required. DOD must aggressively examine possible trade-
    offs within the program that could lower the cost of meeting the airlift
    requirement without sacrificing military readiness or combat
    capabilities.
      Department of Housing and Urban Development. Project-Based Rental
    Assistance ($4.8 billion in 2003). Rating:  Ineffective. This program
    provides funding to landlords who rent a certain number of affordable
    apartments to low-income families or individuals. Assistance is tied
    directly to the properties--tenants cannot move without losing their
    assistance. The program receives low performance scores in part because
    there is confusion over program objectives, the program lacks strong
    financial accountability, and it produces poor results relative to
    alternative forms of housing assistance.

    Education

      Department of Education. Federal Pell Grants ($11.4 billion in 2003).
    Rating: Adequate. This program provides grant aid to nearly five million
    needy students to help them pay for an undergraduate education. The
    assessment found that the program helps ensure that low-income students
    can afford a college education. However, the Department of Education has
    only been minimally successful in achieving its long-term and annual
    performance goals for its main student aid programs. In addition, Pell
    grants, like other student aid, are prone to abuse, where students who
    under-report family income receive more aid than they should. The
    Department estimates that net overawards in Pell total more than $350
    million annually.

    [[Page 71]]

                  PART III:  FEDERALLY FINANCED CAPITAL STOCKS

      Federal investment spending creates a ``stock'' of capital that is
    available in the future for productive use. Each year, Federal
    investment outlays add to this stock of capital. At the same time,
    however, wear and tear and obsolescence reduce it. This section presents
    very rough measures over time of three different kinds of capital stocks
    financed by the Federal Government: public physical capital, research
    and development (R&D), and education.
      Federal spending for physical assets adds to the Nation's capital
    stock of tangible assets, such as roads, buildings, and aircraft
    carriers. These assets deliver a flow of services over their lifetime.
    The capital depreciates as the asset ages, wears out, is accidentally
    damaged, or becomes obsolete.
      Federal spending for the conduct of research and development adds to
    an ``intangible'' asset, the Nation's stock of knowledge. Spending for
    education adds to the stock of human capital by providing skills that
    help make people more productive. Although financed by the Federal
    Government, the research and development or education can be carried out
    by Federal or State government laboratories, universities and other
    nonprofit organizations, local governments, or private industry.
    Research and development covers a wide range of activities, from the
    investigation of subatomic particles to the exploration of outer space;
    it can be ``basic'' research without particular applications in mind, or
    it can have a highly specific practical use. Similarly, education
    includes a wide variety of programs, assisting people of all ages
    beginning with pre-school education and extending through graduate
    studies and adult education. Like physical assets, the capital stocks of
    R&D and education provide services over a number of years and depreciate
    as they become outdated.
      For this analysis, physical and R&D capital stocks are estimated using
    the perpetual inventory method. Each year's Federal outlays are treated
    as gross investment, adding to the capital stock; depreciation reduces
    the capital stock. Gross investment less depreciation is net investment.
    The estimates of the capital stock are equal to the sum of net
    investment in the current and prior years. A limitation of the perpetual
    inventory method is that the original investment spending may not
    accurately measure the current value of the asset created, even after
    adjusting for inflation, because the value of existing capital changes
    over time due to changing market conditions. However, alternative
    methods for measuring asset value, such as direct surveys of current
    market worth or indirect estimation based on an expected rate of return,
    are especially difficult to apply to assets that do not have a private
    market, such as highways or weapons systems.
      In contrast to physical and R&D stocks, the estimate of the education
    stock is based on the replacement cost method. Data on the total years
    of education of the U.S. population are combined with data on the
    current cost of education and the Federal share of education spending to
    yield the cost of replacing the Federal share of the Nation's stock of
    education.
      It should be stressed that these estimates are rough approximations,
    and provide a basis only for making broad generalizations. Errors may
    arise from uncertainty about the useful lives and depreciation rates of
    different types of assets, incomplete data for historical outlays, and
    imprecision in the deflators used to express costs in constant dollars.
    The methods used to estimate capital stocks are discussed further in the
    technical note at the end of Chapter 12, ``Stewardship,'' in this
    volume. Additional detail about these methods appeared in a
    methodological note in the Chapter 7, ``Federal Investment Spending and
    Capital Budgeting,'' in the Analytical Perspectives volume of the 2004
    Budget.

                          The Stock of Physical Capital

      This section presents data on stocks of physical capital assets and
    estimates of the depreciation of these assets.
      Trends.--Table 6-4 shows the value of the net federally financed
    physical capital stock since 1960, in constant fiscal year 2000 dollars.
    \1\ The total stock grew at a 2.2 percent average annual rate from 1960
    to 2003, with periods of faster growth during the late 1960s and the
    1980s. The stock amounted to $2,137 billion in 2003 and is estimated to
    increase to $2,266 billion by 2005. In 2003, the national defense
    capital stock accounted for $646 billion, or 30 percent of the total,
    and nondefense stocks for $1,491 billion, or 70 percent of the total.
    ---------------------------------------------------------------------------
      \1\ Constant dollar stock estimates are expressed in chained 2000
    dollars, consistent with the December 2003 revisions to the National
    Income and Product Accounts. The shift to a more recent base year
    changes the reported level of real stocks, but leaves the year-to-year
    trends largely the same.

    [[Page 72]]

                                                                      Table 6-4.  NET STOCK OF FEDERALLY FINANCED PHYSICAL CAPITAL
                                                                                      (In billions of 2000 dollars)
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                 Nondefense
                                                                                                      ----------------------------------------------------------------------------------------------
                                                                                                                     Direct Federal Capital             Capital Financed by Federal Grants
                                      Fiscal Year                                    Total   National             ----------------------------------------------------------------------------------
                                                                                              Defense     Total              Water                                     Community
                                                                                                       Nondefense   Total     and     Other    Total   Transportation     and      Natural    Other
                                                                                                                             Power                                      Regional  Resources
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Five year intervals:
      1960........................................................................      849       608        242        95       59       36      146           89           27         21        10
      1965........................................................................      937       589        348       123       74       49      225          158           32         22        13
      1970........................................................................    1,101       630        470       146       88       58      324          230           47         26        21
      1975........................................................................    1,137       545        592       166      102       64      426          282           76         42        25
      1980........................................................................    1,258       494        763       195      123       72      568          342          121         79        27
      1985........................................................................    1,462       572        890       222      136       86      668          397          146        100        26
      1990........................................................................    1,740       722      1,018       256      147      109      762          462          158        113        28
      1995........................................................................    1,882       714      1,168       297      157      141      871          534          168        123        46
    Annual data:
      2000........................................................................    1,979       635      1,345       337      160      178    1,007          618          183        131        75
      2001........................................................................    2,022       631      1,391       351      163      188    1,040          640          186        132        81
      2002........................................................................    2,078       636      1,442       366      165      201    1,076          666          189        134        87
      2003........................................................................    2,137       646      1,491       379      166      213    1,112          690          193        135        94
      2004 est....................................................................    2,204       663      1,541       393      167      226    1,148          716          196        135       100
      2005 est....................................................................    2,266       677      1,588       405      168      237    1,183          741          199        136       106
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

      Real stocks of defense and nondefense capital show very different
    trends. Nondefense stocks have grown consistently since 1970, increasing
    from $470 billion in 1970 to $1,491 billion in 2003. With the
    investments proposed in the budget, nondefense stocks are estimated to
    grow to $1,588 billion in 2005. During the 1970s, the nondefense capital
    stock grew at an average annual rate of 5.0 percent. In the 1980s,
    however, the growth rate slowed to 2.9 percent annually, with growth
    continuing at about that rate since then.
      Real national defense stocks began in 1970 at a relatively high level,
    and declined steadily throughout the decade as depreciation from
    investment in the Vietnam era exceeded new investment in military
    construction and weapons procurement. Starting in the early 1980s, a
    large defense buildup began to increase the stock of defense capital. By
    1987, the defense stock exceeded its earlier Vietnam-era peak. In the
    early 1990s, however, depreciation on the increased stocks and a slower
    pace of defense physical capital investment began to reduce the stock
    from its previous levels. The increased defense investment in the last
    few years has reversed this decline, increasing the stock from an
    estimated $646 billion in 2003 to $677 billion in 2005.
      Another trend in the Federal physical capital stocks is the shift from
    direct Federal assets to grant-financed assets. In 1960, 39 percent of
    federally financed nondefense capital was owned by the Federal
    Government, and 61 percent was owned by State and local governments but
    financed by Federal grants. Expansion in Federal grants for highways and
    other State and local capital, coupled with slower growth in direct
    Federal investment for water resources, for example, shifted the
    composition of the stock substantially. In 2003, 25 percent of the
    nondefense stock was owned by the Federal Government and 75 percent by
    State and local governments.
      The growth in the stock of physical capital financed by grants has
    come in several areas. The growth in the stock for transportation is
    largely grants for highways, including the Interstate Highway System.
    The growth in community and regional development stocks occurred largely
    following the enactment of the community development block grant in the
    early 1970s. The value of this capital stock has grown only slowly in
    the past few years. The growth in the natural resources area occurred
    primarily because of construction grants for sewage treatment
    facilities. The value of this federally financed stock has increased
    about 35 percent since the mid-1980s.

                  The Stock of Research and Development Capital

      This section presents data on the stock of research and development
    capital, taking into account adjustments for its depreciation.
      Trends.--As shown in Table 6-5, the R&D capital stock financed by
    Federal outlays is estimated to be $1,054 billion in 2003 in constant
    2000 dollars. Roughly half is the stock of basic research knowledge; the
    remainder is the stock of applied research and development.
      The nondefense stock accounted for about three-fifths of the total
    federally financed R&D stock in 2003. Although investment in defense R&D
    has exceeded that of nondefense R&D in nearly every year since 1981, the
    nondefense R&D stock is actually the larger of the two, because of the
    different emphasis on basic research and applied research and
    development. Defense R&D spending is heavily concentrated in applied
    research and development, which depreciates much more quickly than basic
    research. The stock of applied research and

    [[Page 73]]

    development is assumed to depreciate at a ten percent geometric rate,
    while basic research is assumed not to depreciate at all.
      The defense R&D stock rose slowly during the 1970s, as gross outlays
    for R&D trended down in constant dollars and the stock created in the
    1960s depreciated. Increased defense R&D spending from 1980 through 1990
    led to a more rapid growth of the R&D stock. Subsequently, real defense
    R&D outlays tapered off, depreciation grew, and, as a result, the real
    net defense R&D stock stabilized at around $420 billion. Renewed
    spending for defense R&D in this budget is projected to increase the
    stock to $513 billion in 2005.
      The growth of the nondefense R&D stock slowed from the 1970s to the
    1980s, from an annual rate of 3.8 percent in the 1970s to a rate of 2.1
    percent in the 1980s. Gross investment in real terms fell during much of
    the 1980s, and about three-fourths of new outlays went to replacing
    depreciated R&D. Since 1988, however, nondefense R&D outlays have been
    on an upward trend while depreciation has edged down. As a result, the
    net nondefense R&D capital stock has grown more rapidly.

                                            Table 6-5.  NET STOCK OF FEDERALLY FINANCED RESEARCH AND DEVELOPMENT \1\
                                                                  (In billions of 2000 dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         National Defense                        Nondefense                         Total Federal
                                              --------------------------------------------------------------------------------------------------------------
                                                                         Applied                              Applied                              Applied
                   Fiscal Year                                Basic      Research                  Basic      Research                  Basic      Research
                                                  Total     Research       and         Total     Research       and         Total     Research       and
                                                                       Development                          Development                          Development
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Five year intervals:
      1970...................................         261          16          245         215          67          148         475          82          393
      1975...................................         276          21          256         262          97          165         538         118          421
      1980...................................         279          25          255         311         131          179         590         156          434
      1985...................................         321          30          291         339         174          165         659         204          455
      1990...................................         403          36          367         382         229          154         785         265          520
      1995...................................         418          40          378         428         268          161         846         308          539
    Annual data:
      2000...................................         423          48          375         543         368          175         966         416          549
      2001...................................         421          50          371         563         386          177         984         436          548
      2002...................................         435          52          383         579         405          175       1,014         457          557
      2003...................................         456          54          402         598         424          174       1,054         478          577
      2004 est...............................         483          55          428         621         445          176       1,104         501          604
      2005 est...............................         513          57          456         646         467          178       1,159         524          634
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Excludes stock of physical capital for research and development, which is included in Table 6-4.

                         The Stock of Education Capital

      This section presents estimates of the stock of education capital
    financed by the Federal Government.
      As shown in Table 6-6, the federally financed education stock is
    estimated at $1,292 billion in 2003 in constant 2000 dollars. The vast
    majority of the Nation's education stock is financed by State and local
    governments, and by students and their families themselves. This
    federally financed portion of the stock represents about 3 percent of
    the Nation's total education stock. \2\ Nearly three-quarters is for
    elementary and secondary education, while the remaining one quarter is
    for higher education.
    ---------------------------------------------------------------------------
      \2\ For estimates of the total education stock, see table 12-4 in
    Chapter 12, ``Stewardship.''
    ---------------------------------------------------------------------------
      The federally financed education stock has grown steadily in the last
    few decades, with an average annual growth rate of 5.4 percent from 1970
    to 2003. The expansion of the education stock is projected to continue
    under this budget, with the stock rising to $1,465 billion in 2005.

    [[Page 74]]

          Table 6-6.  NET STOCK OF FEDERALLY FINANCED EDUCATION CAPITAL
                          (In billions of 2000 dollars)
    ------------------------------------------------------------------------
                                                      Elementary
                                            Total         and        Higher
                Fiscal Year               Education    Secondary   Education
                                            Stock      Education
    ------------------------------------------------------------------------
    Five year intervals:
      1960.............................          70            51         20
      1965.............................          98            71         27
      1970.............................         225           176         49
      1975.............................         324           260         64
      1980.............................         458           356        102
      1985.............................         565           421        144
      1990.............................         745           550        195
      1995.............................         853           619        234
    Annual data:
      2000.............................       1,121           819        302
      2001.............................       1,174           847        327
      2002.............................       1,221           879        342
      2003.............................       1,292           932        360
      2004 est.........................       1,378         1,004        374
      2005 est.........................       1,465         1,073        391
    ------------------------------------------------------------------------