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Independent Analysis Proves the Effectiveness of Federal Loan Guarantees

Independent Analysis Proves the Effectiveness of Federal Loan Guarantees

Take a deep breath, because what I’m about to tell you may be shocking: Federal loan guarantees for energy projects have been successful, cost-effective investments—contrary to what some conservatives insist is the case. Don’t take my word for it. That’s the message from Herb Allison, former national finance chairman for Sen. John McCain (R-AZ), who led a team of accountants and auditors in conducting an independent analysis of the Department of Energy’s Loan Guarantee Program.

Allison and his team found that, despite the hysteria around the now-bankrupt solar-panel maker Solyndra LLC, this program will cost $2 billion less than initially expected. When the Department of Energy first issued these guarantees starting in 2009, they expected that they would cost the government more than $5 billion. At their most recent internal analysis in 2011, DOE concluded that the loans were performing better than expected, and that they would not cost less than $3 billion. Now, Allison and his team of independent consultants find that even DOE’s most recent projections were too high, and that the guarantees would only cost $2.7 billion.

To put that in perspective, the fossil-fuel industry got a whopping $70 billion in government subsidies from 2002 to 2008. Many of these subsidies have been in place for nearly 100 years. The nuclear industry, too, has benefited from billions of dollars in subsidies, including loan guarantees, over the last half-century.

The White House today released Allison’s review, which includes an analysis of every loan guarantee issued from Department of Energy, as well as recommendations for managing this portfolio of federal guarantees going forward. This independent review was requested by the White House in late 2011 to make sure that the DOE loan guarantee portfolio was cost-effective for taxpayers.

The Allison review confirms what we already know, thanks to the Congressional Research Service and Bloomberg Government. Instead of looking at individual investments, CRS examined the entire DOE portfolio, concluding that the overwhelming majority of the portfolio was in electrical generation projects, which DOE structured to have very low risk. Bloomberg Government took that a step forward, and concluded that the media’s incessant focus on Solyndra was “not proportional to its impact.”

There are multiple reasons why the risks to taxpayers from this program are so low. First, most of the guarantees went to support projects that have very secure contracts to sell their power to investment-grade rated utilities. Allison and his team of independent auditors endorsed the methodology that DOE initially used to evaluate these types of projects:

The Independent Consultant used the same Nine Criteria as did DOE because, in the opinion of the Independent Consultant, they comprise the salient factors for evaluating the credits and are substantially similar to the criteria that would be employed by private sector credit analysts for these types of loans.

Second, even in the event that something does go wrong with an investment, there is almost always someone willing to buy the project at a discount. Beacon Power Corp., for example, declared bankruptcy after getting a loan guarantee for $43 million. But this wasn’t a $43 million loss for taxpayers, because the energy investment firm Rockland Capital agreed to buy the project for $30.5 million. Obviously, this is not the perfect outcome, but it helps to understand why Beacon’s bankruptcy won’t cost taxpayers the full amount of the guarantee.

Allison’s report includes two types of accounting methods. One is the method mandated by the Federal Credit Reform Act of 1990, which instructs DOE to record these guarantees in the budget at their expected cost to the government. The other is a method called “fair value” reporting, which would attempt to force guarantees to be recorded in the budget at the market value of these guarantees in the private market.

Fair value” reporting of costs is simply an accounting gimmick designed to artificially—and arbitrarily—increase the cost of credit programs, which will have the effect of limiting the government’s ability to extend valuable loans and loan guarantees. In this case, Allison concludes that “fair value” reporting would find that these guarantees cost the government somewhere between $4.9 billion and $6.8 billion—at least $2 billion more than the actually accurate FCRA method.

“Fair value” reporting is nothing more than a tool to limit the role that government plays in making higher education affordable for students, helping manufacturers export their goods, and keeping middle-class families in their homes. DOE rightly calculated costs based on the methodology prescribed by the Federal Credit Reform Act, which has been the law of the land since 1990. Doing anything else than following FCRA would have been not just a mistake but also illegal.

It’s important to remember why the Loan Guarantee Program exists. Innovative companies—key to our future competitiveness and economic prosperity—risk getting caught in the “valley of death,” where nascent but promising companies often languish as they strive to accumulate the necessary funds. Bringing new clean energy technologies to commercial scale for the first time can require hundreds of millions, even billions, of dollars. Private investors are either unable to fund projects that require this much capital, as is the case with many venture capitalists, too. Both kinds of investors or are unwilling to lend money to projects that use first-of-a-kind technology not fully proven at commercial scale, as is the case with most banks.

The DOE’s Loan Guarantee Program brought companies across the “valley of death” by providing these businesses with loan guarantees that made it possible to raise the necessary capital and jumpstart the economy. By fixing the “valley of death” problem, DOE has allowed extremely important projects to move forward, including the world’s largest wind farm, the first commercial cellulosic ethanol plant, and our country’s largest concentrating solar power project. In total, the program will support nearly 40 projects, which will employ 60,000 people.

The Loan Guarantee Program helped America compete in the global economy. In 2011 the United States invested more in renewable energy than any other country in the world, helping us capture our share of this trillion-dollar opportunity. Why were we able to do this? As Michael Liebreich, CEO of Bloomberg New Energy Finance, puts it:

The news that the United States jumped back into the lead in clean energy investment last year will reassure those who worried that it was falling behind other countries. However before anyone in Washington celebrates too much, the U.S figure was achieved thanks in large part to support initiatives such as the federal loan guarantee program and a Treasury grant program, which have now expired.

In short, the DOE Loan Guarantee Program is helping move our country forward, and it’s doing it by responsibly managing taxpayer money.

While the Loan Guarantee Program has undoubtedly been cost-effective for taxpayers, it would be a shame not to learn any lessons about the program’s management. Allison and his team of independent consultants recommend several actions, such as refining oversight boards and filling certain job vacancies. Congress should act on these lessons when creating a Clean Energy Deployment Administration, which would also be a cost-effective investment program.

In fact, a Clean Energy Deployment Administration would be a stronger program than the DOE Loan Guarantee Program. It would boast more independence from the political process, a fuller set of financial tools at its disposal, and the ability to view its investments as a comprehensive portfolio. This proposal has been slowed by the focus on Solyndra, which should no longer be a factor.

Allison’s independent review tells us everything we need to know about the DOE Loan Guarantee Program: It’s a good deal for taxpayers, and DOE staff have avoided exposing taxpayers to unacceptable risks. Now, Congress should focus on finding new ways to replicate the success of this program to put Americans back to work.

By. Richard Caperton

Source: Science Progress

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