President Barack Obama
recently named business consultant Jeffrey Zients as head of a new
performance office tasked with reducing government waste. The irony of
creating a bureaucracy to trim federal fat aside, we suggest an obvious
first target for the incoming performance czar: The Department of
Energy’s (DOE) “clean energy” development bank.
This environmentalist boondoggle is likely to leave taxpayers holding the bag for billions in bad debt. Here’s why.
The Department of Energy took up banking at the behest of
Congress, which in 2005 created a Loan Guarantee Program (LGP) for
“innovative” clean energy technologies. The LGP makes easy credit
available for politically favored industries, such as wind and solar
power. It does this by promising to cover privately held debt with
taxpayer money in case the borrower defaults.
Congress put the Department of Energy in charge of the LGP, even
though risk assessment and lending are well outside its core
competencies. Furthermore, the department and its predecessor agencies
have an awful history of picking among energy technologies.
Case in point: The government has thrown billions of dollars at
dead-end startups, like the Clinch River Breeder Reactor and the
Synthetic Fuels Corporation.
In a 2007 report, the Government Accountability Office (GAO)
questioned, “whether this program [LGP] and its financial risks will be
well managed.” And in a July 2008 follow-up study, GAO said that the
“Department of Energy is not well positioned to manage the LGP
effectively and maintain accountability.”
In addition to being poorly run, the LGP is also pulling in more
money than it could possibly need. Congress authorized $38.5 billion in
LGP loans for 2008 and 2009—four times what the Department of Energy
had requested. That’s a recipe for waste.
Congress made a bad deal worse last February, when it removed the
only taxpayer protection from high-risk LGP loans. To hedge against the
possibility of default, borrowers had been required to pay a “credit
subsidy cost”—a fee roughly equivalent to the value of the risk that
the government takes in making the loan.
But the 2009 stimulus bill appropriates $6 billion to cover the
credit subsidy for eligible “green” projects. Now the public is fully
on the hook.
According to federal estimates, there is a 50-percent chance that
any given LGP borrower will default, so the odds for taxpayers are not
good. If Obama and Zients are truly serious about cutting government
waste, the LGP is a good place to start.
Fred Smith is founder and president of the Competitive
Enterprise Institute (CEI). William Yeatman is an energy policy analyst