Commercially Viable = Can’t Get Financing?
David Kreutzer /
Maybe the Department of Energy (DOE) would lend me money to buy lottery tickets. For the tickets that win, I’ll pay them back their dollar (plus $0.001 for a week’s interest). For those that lose, well, that just happens in this sort of business. They have to expect losses.
That’s the argument we now hear from the Solyndra apologists: “Hey, it’s a risky business.” But venture capitalists get equity positions so that they get the big rewards when a risky venture pays off. Nobody should be making loans to high-risk businesses at Treasury-bond rates.
Even if Solyndra offered equity to the DOE for the $528 million, it would still be a bad idea. Government investments are made according to political rates of return and not economic ones.
Indeed, two of the criteria for the loan program show how silly it is to have government run a bank. One is that the loan must be for a commercially viable project. Another is that the applicants have to demonstrate that they could not get private financing. By definition, the second criterion rules out the first.
Solyndra illustrates that the inability to get private financing was because it was not commercially viable. However, two other examples should raise eyebrows even though they may well repay their loans.
For instance, NextEra Energy received a $682 million loan guarantee for its Genesis Solar Project. NextEra has a market capitalization of over $20 billion. If it could not get private financing, the project must be a real dog. Or it is a dog compared to other investment opportunities, or it could get private financing but (big surprise here) it would rather pay the lower interest that comes with the government guarantee.
A second example is a $1.4 billion loan guarantee to BrightSource Energy for a solar-thermal project where two utilities have already signed up to buy the entire electric output (passing the high cost on to the ratepayers). The investors in BrightSource include subsidiaries of Statoil (market capitalization of over $220 billion), Chevron (market capitalization of nearly $200 billion), and BP (market capitalization of over $120 billion).
Again, it would seem that Chevron, BP, and Statoil could have scraped together $1.4 billion if they thought it was the best use of their capital. They didn’t. So we are making the investment for them.
In the cases of BrightSource and NextEra, the suboptimal allocation of capital is just as real—but not so clear as it is in the case of Solyndra. With Solyndra, the political/special interest aspects of government loans are as obvious as they can ever be. E-mails imply that the process was rushed to help with a photo-op. The company never made a profit, and independent analysts warned of Solyndra’s weak prospects. The DOE subordinated its loan to another made by original, politically well-connected investors. The FBI executed search warrants. The President, Vice President, and Secretary of Energy went out of their way to make Solyndra the green-energy poster child. They painted the project in the public relations equivalent of Day-Glo orange.
Whether or not there turns out to be any criminal activity, Solyndra offers a spectacular object lesson on why the government should not be in the loan guarantee or venture capital business. If this lesson helps put an end to the billions and billions of dollars that would otherwise fly under the radar, then the Solyndra case may be the best $528 million the government ever wasted.
Cross-posted at NationalJournal.com