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  • Loan Guarantee Report Neglects Central Question: Why Loan Guarantees?

    The White House released its much-awaited Report of the Independent Consultant’s Review with Respect to the Department of Energy’s Loan and Loan Guarantee Portfolio. Unfortunately, the report’s conclusions were doomed from the beginning, because it fails to ask an important, fundamental question: Why do we have the loan guarantee program in the first place?

    Instead of asking the Independent Consultant (IC) to look at whether government-backed loans actually worked, the White House simply asked the IC to report on the status of current loans and provide recommendations to improve risk-assessment activities. The report did not even analyze the failed loans of Solyndra and Beacon Power, both of which filed for bankruptcy.

    However, given what the IC was asked to do, no one should be surprised by its conclusions. Essentially, it lays out a series of recommendations that essentially provide indefinite life support for an unjustifiable subsidy to the energy industry. In keeping with the priorities of most needless, unjustifiable bureaucracies, the first recommendation from the IC is to ensure long-term funding for the program.

    It also provides some organizational recommendations, all of which are laughable. It recommends assigning decision-making authority with individuals and not committees. The implication is that if the government could only act as a real venture capitalist, it could have real venture capitalist successes. Of course, governments cannot act as venture capitalist, which is precisely the reason it should not be in the venture capital business. A better recommendation would be for the government bureaucrats making investment decision to be personally liable for the losses. Then we might have something.

    Now, however, is when the report’s recommendations go from comical to scary. In an effort to “Proactively Protect the Taxpayer’s Interest,” the IC praises efforts to increase the conditions of loans and guarantees closed after mid-2010. But then it oddly recognizes that these efforts increase the bureaucratic frustration among loan/loan guarantee recipients to the point that they may ask for relief. Their answer: nationalize the company that needs bureaucratic relief. So, the answer to too much red tape is allowing the Department of Energy (DOE) to buy shares in the company in exchange for regulatory relief?

    Really?

    The other big recommendation from the report is to establish a comprehensive early warning system to help identify and mitigate concerns with loan/loan guarantee recipients. They don’t recognize that an early warning system is already in place. It’s called the market test. There’s a clear reason why venture capitalists have stayed away from these projects. They have the knowledge and the expertise to determine if full-scale commercialization is profitable. Yes, private investors took a chance on Solyndra—but only after the DOE announced that the company qualified to be a loan recipient.

    The report does answer one question once and for all about whether loan guarantees are subsidies. The report estimates that the value of the loan programs is $5 billion to $6.8 billion. This means that loan/guarantee recipients were able to invest at a $5 billion to $6.8 billion discount compared to their competitors. That is a multi-billion-dollar subsidy by any clear-thinking person’s standard. The review of the 30 government-backed loans also estimates about $2.7 billion in losses from the program.

    The most critical question from the Solyndra saga is still largely unanswered. The White House, Members of Congress, and the DOE need to answer why we have the loan guarantee program in the first place.

    In the end, loan guarantee supporters likely understood that there is no justification for the program and thus chose not to even ask the question.

    More stringent oversight and risk assessment may marginally improve the protection of the taxpayers’ money, but the best option is to get rid of the loan program altogether and allow free-market competition to drive energy investment. This protects taxpayer money and will ensure that only the most promising new energy technologies move forward.

    The market system will work for new energy technologies if Washington could just get out of the way.

    Posted in Energy [slideshow_deploy]

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