Why the government makes a poor investor

A chronicle of the failure of Solyndra–a “green energy” company that received half a billion dollars worth of government “investment”–demonstrates the larger point that government bureaucracies are just too ponderous to function as venture capitalists:

The Obama administration’s vaunted initiative to catalyze the U.S. clean-energy industry — under attack for betting half a billion dollars on the solar-panel manufacturer Solyndra, which closed last month — has become a case study of what can go wrong when a rigid government bureaucracy tries to play venture capitalist and jump-start a nascent, fast-changing market.

[Uwe] Schmidt [whose company scored a similar loan but turned it down] concluded in early 2011 that the influx of inexpensive flat solar panels was undercutting his company’s year-old proposal to use a field of mirrors that concentrated sunlight on a thermal tower. Despite market changes, however, the terms of the federal loan guarantee wouldn’t let Solar Trust switch in midstream to flat panels. So Solar Trust sought private financing.

“We look at a lot of technologies, and I don’t care which one we build — I want to build the one that makes the most financial sense,” Schmidt said.

The inflexibility of the terms for Schmidt’s project was just one of the troubles that have plagued the Energy Department’s $38.5 billion loan-guarantee program from its beginning in 2009. . . .

Solyndra, a solar-panel maker that went bankrupt in August with $535 million in federally backed loans, was riskier than many other proposals, industry executives say. Its cylindrical tubes captured a high percentage of the sun’s energy and its panels were easy to install, but they were expensive to make.

Silicon prices hurt, too. When Solyndra first sought financing during the Bush administration, which picked its proposal as one of 16 finalists, the price of silicon was soaring. Solyndra’s tubes didn’t use silicon, an advantage then. Since 2008, however, silicon prices have collapsed and Solyndra’s costs haven’t come down as much.

“The Solyndra project . . . assumed that the cost of materials, silicon, would remain high and that the cost of panels would not go down as fast as they did,” said a senior executive at a renewable-energy financing fund. “In the end, those assumptions were wrong.”

Many industry experts said the Energy Department should have anticipated that because projects were underway to bring more silicon onto world markets.

via Some clean-energy firms found U.S. loan guarantee program a bad bet – The Washington Post.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • WebMonk

    There were also lots of private investors in Solyndra that made the same investment as the government and lost their investments as well. It’s not a government-only thing to make unwise investments in companies that go bankrupt.

    That said though, it is a much worse idea for the government to try to do this sort of investment than it is for private investors. Venture capitalists have an incredibly complex and uncertain situation in which they are working, and it’s not uncommon that they get it wrong and lose lots of money. However, it’s much worse for a government to try to do that sort of thing for several reasons.

    First the government is SLOW. React quickly to use opportunities or avoid risks? Pfft! Get real. Government is fundamentally incapable of doing something like that.

    Second, they have lots of competing goals which can cloud decisions or are even opposing to making a profit. In this situation a big goal was to promote a certain type of technology. That goal overshadowed some of the goals, such as making sure the company was a viable company.

    And I could go on, but you get the picture. Venture capitalists with a lot more experience, who have only one goal, and can move quickly have a very hard time of it – it’s no surprise that the government which doesn’t have experience in the field, has multiple competing goals, and moves at a snail’s pace fails miserably.

  • WebMonk

    There were also lots of private investors in Solyndra that made the same investment as the government and lost their investments as well. It’s not a government-only thing to make unwise investments in companies that go bankrupt.

    That said though, it is a much worse idea for the government to try to do this sort of investment than it is for private investors. Venture capitalists have an incredibly complex and uncertain situation in which they are working, and it’s not uncommon that they get it wrong and lose lots of money. However, it’s much worse for a government to try to do that sort of thing for several reasons.

    First the government is SLOW. React quickly to use opportunities or avoid risks? Pfft! Get real. Government is fundamentally incapable of doing something like that.

    Second, they have lots of competing goals which can cloud decisions or are even opposing to making a profit. In this situation a big goal was to promote a certain type of technology. That goal overshadowed some of the goals, such as making sure the company was a viable company.

    And I could go on, but you get the picture. Venture capitalists with a lot more experience, who have only one goal, and can move quickly have a very hard time of it – it’s no surprise that the government which doesn’t have experience in the field, has multiple competing goals, and moves at a snail’s pace fails miserably.

  • http://facebook.com/mesamike Mike Westfall

    The taxpayers’ wealth has been redistributed. Primary goal of the government “investment” achieved.

  • http://facebook.com/mesamike Mike Westfall

    The taxpayers’ wealth has been redistributed. Primary goal of the government “investment” achieved.

  • Tom Hering

    “Schmidt concluded in early 2011 that the influx of inexpensive flat solar panels was undercutting his company’s year-old proposal …”

    China.

    http://www.renewableenergyworld.com/rea/news/article/2011/09/u-s-senator-to-obama-hike-tariffs-on-chinese-panels

  • Tom Hering

    “Schmidt concluded in early 2011 that the influx of inexpensive flat solar panels was undercutting his company’s year-old proposal …”

    China.

    http://www.renewableenergyworld.com/rea/news/article/2011/09/u-s-senator-to-obama-hike-tariffs-on-chinese-panels

  • WebMonk

    Tom @3,
    An effect of Senator Wyden’s proposal is higher costs for solar power which means more consumption of oil, largely from the Middle East, which is something I suspect Wyden would generally oppose. A tariff on Chinese solar panels would also hurt all the US companies which are using those panels. It might eventually result in more solar panel manufacturing jobs, but at the loss of many other jobs right now and in the future.

    Bad idea on many, many, many levels. I haven’t even begun to list all the badness of Wyden’s proposal.

  • WebMonk

    Tom @3,
    An effect of Senator Wyden’s proposal is higher costs for solar power which means more consumption of oil, largely from the Middle East, which is something I suspect Wyden would generally oppose. A tariff on Chinese solar panels would also hurt all the US companies which are using those panels. It might eventually result in more solar panel manufacturing jobs, but at the loss of many other jobs right now and in the future.

    Bad idea on many, many, many levels. I haven’t even begun to list all the badness of Wyden’s proposal.

  • Purple Koolaid

    Democrat or republican, it’s just more fun to spend other people’s money!

  • Purple Koolaid

    Democrat or republican, it’s just more fun to spend other people’s money!

  • DonS

    This isn’t just a “government investment”. It is a scandal, since it involves special interest funding to a company in which a major Obama donor, George Kaiser, has a significant interest.

    Government’s role is to provide government services. It is a steward of taxpayers’ hard-earned dollars for that sole purpose. It should not be picking winners and losers in the private economy for special favors. This is the inevitable result — certain projects are picked for political, rather than economic reasons, whether those reasons be to favor a friend or to favor a pet industry. It is a failure of stewardship, and an utter waste of taxpayer dollars on something that had no chance of success.

  • DonS

    This isn’t just a “government investment”. It is a scandal, since it involves special interest funding to a company in which a major Obama donor, George Kaiser, has a significant interest.

    Government’s role is to provide government services. It is a steward of taxpayers’ hard-earned dollars for that sole purpose. It should not be picking winners and losers in the private economy for special favors. This is the inevitable result — certain projects are picked for political, rather than economic reasons, whether those reasons be to favor a friend or to favor a pet industry. It is a failure of stewardship, and an utter waste of taxpayer dollars on something that had no chance of success.

  • http://www.bikebubba.blogspot.com bike bubba

    You mean when one makes investments with someone else’s money with no recourse for those whose money is lost, bad investments tend to be made? Really?

    Next thing, you’re going to tell me it’s not smart to give whiskey and car keys to teenage boys!

  • http://www.bikebubba.blogspot.com bike bubba

    You mean when one makes investments with someone else’s money with no recourse for those whose money is lost, bad investments tend to be made? Really?

    Next thing, you’re going to tell me it’s not smart to give whiskey and car keys to teenage boys!


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