Testimony Before the House Committee on Oversight and Government Reform, Subcommittee on Regulatory Affairs
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In 2009, renewable energy company Solyndra received
$535 million through the federally backed 1705 loan guarantee program of
the Department of Energy (DOE). Two years later, the firm filed for
bankruptcy and had to lay off its 1,100 employees, leaving taxpayers to
bear the cost of the loan. For obvious reasons, more than any other
recent events, this waste of taxpayer money has attracted much
attention.
But Solyndra isn’t the only company to fail
after receiving a loan through this particular program. Back in
October, Beacon Power Corp., an energy-storage company that received $43
million in backing from the 1705 loan program, filed for bankruptcy.
More recently, Abound Solar, Inc, a U.S. solar manufacturer that was
awarded $400 million through the program, announced that it would
suspend operations and file for bankruptcy. Abound borrowed about $70
million against the guarantee, which is likely to result in a cost of
$40 million to $60 million to U.S. taxpayers after Abound’s assets are
sold and the bankruptcy proceeding is completed.
In
addition, there are signs that other companies may follow in the steps
of Solyndra and Abound. First Solar’s Antelope Valley project, which
received a $646 million 1705 loan in 2011 through its partner Exelon, is
one likely casualty; SunPower’s California Valley Solar Ranch— now
owned by NRG Solar—is another. The ranch received a $1.2 billion loan
guarantee last September. Whether these companies will fail or not is
not yet clear, and the potential cost to taxpayers is not known.
However, the precarious situation of these companies exemplifies the
risk faced by taxpayers when the government extends loan guarantees to
high-risk companies.
Now, the important question is
whether or not these examples are representative of the 1705 loan
program. What we find is that loan guarantees in this program go to two
types of projects:
• Projects that would not have been funded in the open market without a government guarantee because they are too risky, and
•
Projects that could have gotten a loan but were happy to benefit from
the lower interest rate available through a DOE loan guarantee.
The
failure of Solyndra has attracted much attention, but the problems with
loan guarantees are much more fundamental than the cost of one or more
failed projects. In fact, the economic literature shows that every loan
guarantee program (a) transfers the risk from lenders to taxpayers, (b)
is likely to inhibit innovation, and (c) increases the overall cost of
borrowing. At a minimum, such guarantees distort crucial market signals
that determine where capital should be invested, resulting in lower
interest rates that are unmerited and a reduction of capital for more
worthy projects. At their worst, these guarantees introduce political
incentives into business decisions, creating the conditions for
businesses to seek financial rewards by pleasing political interests
rather than customers. This is called cronyism, and it entails real
economic costs.[1]
Yet these loan programs remain
popular with Congress and the executive branch. That’s because in
general most of the financial cost of these guaranteed loans will not
surface for many years. Consequently, Congress can approve billions of
dollars to benefit special interests with little or no immediate impact
to federal appropriations, because these dollars are almost entirely off
budget.
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