Government Is A Poor Investor
July 28, 2016 at 4:25 p.m.
By Gary [email protected]
Basically, the government does a pretty poor job of picking winners and losers when it comes to investing in private sector ventures.
And I think there is a good reason for that. It’s because the government isn’t worried about risk. Bureaucrats are investing tax money. They don’t really care if the venture they’re throwing money at is profitable. They just care that it supports their policy agenda.
Venture capital firms are investing money entrusted to them by investors. They care – deeply – about a return on their investments.
Nothing illustrates this phenomenon better than the energy market initiative loan guarantees offered up during the past four years.
The Heritage Foundation, a conservative think tank, recently posted a list of green energy failures funded by the government.
Certainly there has been some press coverage of some of the bigger ones – Solyndra, Fisker Automotive, BrightSource – but overall, the press has been fairly mum about the program taken as a whole.
But so far, 34 companies that were offered federal grants are laying people off, have gone bankrupt or are on the way to bankruptcy.
Following is a list of those companies and the amount of their federal loan guarantees. It must be noted that not all of the money in every case has been spent. In other words, a company may have been given a $250 million loan guarantee and went belly up after spending only $175 million.
The list: (an asterisk denotes companies that have filed for bankruptcy.)
1. Evergreen Solar ($25 million)*
2. SpectraWatt ($500,000)*
3. Solyndra ($535 million)*
4. Beacon Power ($43 million)*
5. Nevada Geothermal ($98.5 million)
6. SunPower ($1.2 billion)
7. First Solar ($1.46 billion)
8. Babcock and Brown ($178 million)
9. EnerDel’s subsidiary Ener1 ($118.5 million)*
10. Amonix ($5.9 million)
11. Fisker Automotive ($529 million)
12. Abound Solar ($400 million)*
13. A123 Systems ($279 million)*
14. Willard and Kelsey Solar Group ($6 million)*
15. Johnson Controls ($299 million)
16. Schneider Electric ($86 million)
17. Brightsource ($1.6 billion)
18. ECOtality ($126.2 million)
19. Raser Technologies ($33 million)*
20. Energy Conversion Devices ($13.3 million)*
21. Mountain Plaza Inc. ($2 million)*
22. Olsen’s Crop Service and Olsen’s Mills Acquisition Company ($10 million)*
23. Range Fuels ($80 million)*
24. Thompson River Power ($6.5 million)*
25. Stirling Energy Systems ($7 million)*
26. Azure Dynamics ($5.4 million)*
27. GreenVolts ($500,000)
28. Vestas ($50 million)
29. LG Chem’s subsidiary Compact Power ($151 million)
30. Nordic Windpower ($16 million)*
31. Navistar ($39 million)
32. Satcon [30] ($3 million)*
33. Konarka Technologies Inc. ($20 million)*
34. Mascoma Corp. ($100 million)[[In-content Ad]]Obviously, this is a widespread problem and it’s costing taxpayers literally billions of dollars.
Supporters of this type of government policy point to the fact that not all the companies involved in green energy are going bankrupt.
But I don’t think that makes the policy a success. To me, that just means those companies would have been targeted by venture capitalists in the private sector.
Remember, venture capitalists are pretty good at picking winners and losers. They study companies. They study business plans. They study balance sheets. And they don’t care how much money the companies directors give to certain political campaigns.
The government is more likely to pick “winners” because the company is connected or because it fits the policy narrative.
In the case of green energy, the policy narrative was that investing in these companies would create jobs and move the country toward energy independence.
But as anyone can clearly see, it isn’t working out that way. Even with giant government subsidies, lots of these companies simply can’t make it.
And there are problems beyond finance. According to the Heritage Foundation:
“The 2009 stimulus set aside $80 billion to subsidize politically preferred energy projects. Since that time, 1,900 investigations have been opened to look into stimulus waste, fraud, and abuse (although not all are linked to the green-energy funds), and nearly 600 convictions have been made. Of that $80 billion in clean energy loans, grants, and tax credits, at least 10 percent has gone to companies that have since either gone bankrupt or are circling the drain.”
So now let’s talk about those jobs for a minute.
One portion of the 2009 stimulus was known as the 1705 program (1705 is where Solyndra got its funds).
According to U.S. News,
• 26 projects were funded under 1705, and guaranteed roughly $16 billion in total.
• Some 2,378 permanent jobs were claimed to be created under the program. This works out to a potential cost per job of $6.7 million.
That’s right – $6.7 million per job.
Of course, as we well know, some of these firms already have gone bankrupt and lots of those pricey jobs no longer exist.
What private-sector investment firm wouldn’t love to have that kind of capital? And if it did, it would spend money on ventures that would create tens of thousands of jobs.
The fact that taxpayers are on the hook for this is almost unconscionable.
Even worse, it’s not just the cash up front that’s squandered. Since the money to fund this policy initiative was borrowed, future investment potential gets drained as capital is redirected from the private sector to pay the interest.
So not only are these policies a dumb idea in the present, they’re a dumb idea in the future, too.
If we ever want to get our economic house in order in this country, we’ve got to get away from this notion that the government is a shrewd venture capitalist.
It just isn’t.
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Basically, the government does a pretty poor job of picking winners and losers when it comes to investing in private sector ventures.
And I think there is a good reason for that. It’s because the government isn’t worried about risk. Bureaucrats are investing tax money. They don’t really care if the venture they’re throwing money at is profitable. They just care that it supports their policy agenda.
Venture capital firms are investing money entrusted to them by investors. They care – deeply – about a return on their investments.
Nothing illustrates this phenomenon better than the energy market initiative loan guarantees offered up during the past four years.
The Heritage Foundation, a conservative think tank, recently posted a list of green energy failures funded by the government.
Certainly there has been some press coverage of some of the bigger ones – Solyndra, Fisker Automotive, BrightSource – but overall, the press has been fairly mum about the program taken as a whole.
But so far, 34 companies that were offered federal grants are laying people off, have gone bankrupt or are on the way to bankruptcy.
Following is a list of those companies and the amount of their federal loan guarantees. It must be noted that not all of the money in every case has been spent. In other words, a company may have been given a $250 million loan guarantee and went belly up after spending only $175 million.
The list: (an asterisk denotes companies that have filed for bankruptcy.)
1. Evergreen Solar ($25 million)*
2. SpectraWatt ($500,000)*
3. Solyndra ($535 million)*
4. Beacon Power ($43 million)*
5. Nevada Geothermal ($98.5 million)
6. SunPower ($1.2 billion)
7. First Solar ($1.46 billion)
8. Babcock and Brown ($178 million)
9. EnerDel’s subsidiary Ener1 ($118.5 million)*
10. Amonix ($5.9 million)
11. Fisker Automotive ($529 million)
12. Abound Solar ($400 million)*
13. A123 Systems ($279 million)*
14. Willard and Kelsey Solar Group ($6 million)*
15. Johnson Controls ($299 million)
16. Schneider Electric ($86 million)
17. Brightsource ($1.6 billion)
18. ECOtality ($126.2 million)
19. Raser Technologies ($33 million)*
20. Energy Conversion Devices ($13.3 million)*
21. Mountain Plaza Inc. ($2 million)*
22. Olsen’s Crop Service and Olsen’s Mills Acquisition Company ($10 million)*
23. Range Fuels ($80 million)*
24. Thompson River Power ($6.5 million)*
25. Stirling Energy Systems ($7 million)*
26. Azure Dynamics ($5.4 million)*
27. GreenVolts ($500,000)
28. Vestas ($50 million)
29. LG Chem’s subsidiary Compact Power ($151 million)
30. Nordic Windpower ($16 million)*
31. Navistar ($39 million)
32. Satcon [30] ($3 million)*
33. Konarka Technologies Inc. ($20 million)*
34. Mascoma Corp. ($100 million)[[In-content Ad]]Obviously, this is a widespread problem and it’s costing taxpayers literally billions of dollars.
Supporters of this type of government policy point to the fact that not all the companies involved in green energy are going bankrupt.
But I don’t think that makes the policy a success. To me, that just means those companies would have been targeted by venture capitalists in the private sector.
Remember, venture capitalists are pretty good at picking winners and losers. They study companies. They study business plans. They study balance sheets. And they don’t care how much money the companies directors give to certain political campaigns.
The government is more likely to pick “winners” because the company is connected or because it fits the policy narrative.
In the case of green energy, the policy narrative was that investing in these companies would create jobs and move the country toward energy independence.
But as anyone can clearly see, it isn’t working out that way. Even with giant government subsidies, lots of these companies simply can’t make it.
And there are problems beyond finance. According to the Heritage Foundation:
“The 2009 stimulus set aside $80 billion to subsidize politically preferred energy projects. Since that time, 1,900 investigations have been opened to look into stimulus waste, fraud, and abuse (although not all are linked to the green-energy funds), and nearly 600 convictions have been made. Of that $80 billion in clean energy loans, grants, and tax credits, at least 10 percent has gone to companies that have since either gone bankrupt or are circling the drain.”
So now let’s talk about those jobs for a minute.
One portion of the 2009 stimulus was known as the 1705 program (1705 is where Solyndra got its funds).
According to U.S. News,
• 26 projects were funded under 1705, and guaranteed roughly $16 billion in total.
• Some 2,378 permanent jobs were claimed to be created under the program. This works out to a potential cost per job of $6.7 million.
That’s right – $6.7 million per job.
Of course, as we well know, some of these firms already have gone bankrupt and lots of those pricey jobs no longer exist.
What private-sector investment firm wouldn’t love to have that kind of capital? And if it did, it would spend money on ventures that would create tens of thousands of jobs.
The fact that taxpayers are on the hook for this is almost unconscionable.
Even worse, it’s not just the cash up front that’s squandered. Since the money to fund this policy initiative was borrowed, future investment potential gets drained as capital is redirected from the private sector to pay the interest.
So not only are these policies a dumb idea in the present, they’re a dumb idea in the future, too.
If we ever want to get our economic house in order in this country, we’ve got to get away from this notion that the government is a shrewd venture capitalist.
It just isn’t.
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