The loan guarantee program should be retired permanently. The path to commercialization requires brains, discipline and grit. It is rarely aided, and often impeded, by government involvement. Our government should trust the free market forces that have made America great.
The government’s green energy policy includes two parts: (1) supporting basic research, with the aim of developing new green energy technologies; and (2) making loan guarantees that promote the adoption of green energy technologies. Supporting basic research is an important role of government, but the loan guarantee program is a wasteful mistake because it doesn’t work.
The Department of Energy’s loan guarantee to Solyndra was an embarrassing example of the malfunction of the current system. The investment was undoubtedly scrutinized and rejected by the Silicon Valley-based venture capital firms — organizations abundantly more qualified to identify good investments than government committees. There was no urgent strategic need for the U.S. to have Solyndra rush its product to market. The decision to fund Solyndra’s attempt to commercialize did not stand up to reason.
However, politics ultimately trumped reason. The bureaucrats awarding the financial aid were beholden to political masters, who had promised Americans that they were going to fix the U.S. economy by creating green jobs — something that could not possibly happen in any timeframe worthy of consideration. The price of the Solyndra failure was borne by the American people.
It would be interesting, but probably undiscoverable at this point, to know how many projects that are currently funded with loan guarantees would be funded privately if loan guarantees did not exist. After technology is proven, good investments should be able to get private funding and negate the need for government support. Bad investments shouldn’t be funded at all.
Government has a legitimate role in supporting basic research. ARPA-e, the program that awards small tranches of money for basic research and development in alternative energy, will receive $250 million in federal funding in 2012 (half the amount lost at Solyndra alone). This program can and should be expanded. Its objective is to fund innovative technologies that will improve the economics of alternative energy — which is ultimately the only path to widespread adoption of renewable power.
Simply stated, there are three stages to introducing new technology into the market:
- Innovation. Universities, government labs and some companies willingly and energetically take the technology risk of exploring new ways of doing things, and work on proving a concept. In this specific situation, we are talking about creating energy.
- Go To Market. When a specific technology has been developed and its concept proven, the focus moves to figuring out the best way to develop a prototype that can be manufactured and sold in the marketplace. Angel investors and venture capitalists typically fund this stage.
- Expansion. Once a specific technology has reached the market, it needs to be developed into a real, growing product that is both used and useful, thus crossing over into adoption by the public. Venture capitalists and private equity provide investment for growth in these stages.
One of the greatest strengths in America is innovation. It is a long and rich tradition for the U.S. to lead the world in innovation. Government currently plays a key role in providing funds to many companies in the proof-of-concept stage, as well as to national labs and universities developing new technologies. Steps two and three should be left to private investors.
It is time to make a change, and to restructure the government’s broken system that currently funds agenda-driven enterprises that have little or no chance of a successful early development stage. The intent of such agenda-driven grants is to create jobs. But when taxpayer money is invested, spent and lost, the company fails and the jobs are lost. Government dabbling in investments beyond technology development is competitive with private funding or it involves making investments that private investors wouldn’t make — both are bad ideas.
I suggest the following:
- Government immediately get out of the loan guarantee program and stop investing in companies at stages beyond technology development.
- Making the decisions to guarantee loans is essentially making an investment decision that government bureaucracies are not equipped to make.
- Bureaucracy’s agenda-driven analysts do not have necessary training, proper incentives or appropriate reporting structure to make investment grade decisions.
- ARPA-E should become a public/private partnership, with the mandate to invest in game-changing energy technology research.
- It will be staffed with professionals accustomed to making these types of investments, and qualified to evaluate projects on their economic potential and practicality.
- Government should provide the funding to the entity, but the partnership should be consistent with the long-term strategic plan of the government.
- The partnership should be evaluated on the basis of the success of their investments and investment strategy.
- The professional investors should be told to make the focus of their investing broader than typical venture investing in order to encourage other innovative ideas. Moreover, they should hand off their portfolio entities to private equity as they mature to ensure commercial viability.
- Placed in the right hands this concept could be implemented in the first quarter of 2013.
These are tangible, realistic and relatively easy changes to make. Let the private sector do what it does best, help the economy grow and eventually thrive again. It is that success that will bring jobs.
Lead image: Definition of Invest via Shutterstock