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Intellect

BYU prof breaks down Uncle Sam’s loans to automakers

Trend of government investment in private companies is increasing

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The U.S. government grants loans to students seeking higher education and entrepreneurs launching small businesses, but did you know they’re also in the business of lending billions to automakers like Ford, Nissan and Tesla?

That blurring of the boundaries between public and private sectors is something the public should be more aware of, says Eva Witesman, associate professor of public service and ethics in BYU’s Marriott School. A new study coauthored by Witesman in Public Administration Review — the top journal in the field of public administration — shows just how much taxpayer money is being gambled in potentially risky investments.

“Typically, government regulates markets, taxes markets or corrects market failures,” Witesman said. “Now government is inserting itself directly into high-risk markets and basically playing roulette with taxpayer money. This isn’t isolated to one program or even to the federal government; we are seeing government investment as a trend at all levels of government.”

The study examines the direct government investment development by breaking down a federal program that provides loans to private companies for projects that produce more fuel-efficient vehicles. The $25 billion Advanced Technology Vehicles Manufacturing Loan Program (ATVM) has so far resulted in loans to five companies:

  • $5.9 billion to Ford to develop EcoBoost engine
    • Status: Repaid
  • $1.4 billion to Nissan to expand electric vehicle factory
    • Status: Repaid
  • $465 million to Tesla to develop Model S
    • Status: Repaid
  • $529 million to Fisker (only $192 authorized) to produce hybrid vehicle
    • Status: Defaulted on loan; $139 million lost
  • $50 million to VHG for natural-gas powered wheelchair accessible vehicle
    • Status: Defaulted on loan; $42 million lost

Five applicants — Carbon Motors Corp., Aptera Motors, Brammo, Local Motors and Bright Automotive had their applications denied. Interestingly, General Motors applied for a $14.4 billion ATVM loan in 2010 but withdrew its application after a year of waiting for a decision. GM announced this week cuts to 14,000 jobs and the shuttering of five U.S.-based factories.
The Bad

The failures of Fisker and Vehicle Production Group, both now out of business, cost the government $181 million in taxpayer money. And while Ford, Nissan and Tesla were able to use the money and pay back their loans, the paper suggests that neither Ford nor Nissan actually needed the money because they had clear access to cash assets and private capital markets.

According to the analysis by Witesman and lead author Charles Wise of the University of Arizona, the subjective process of loan approval is also problematic. A federal audit of the program found that applicants had been treated inconsistently, favoring some and disadvantaging others. Part of the problem was that several factors outside of technical merit were include in the loan criteria, such as geographic location and priority for facilities that are 20 years old.

“Usually government has a level field and if you apply and meet criterion, then you get benefits or access to programs,” Witesman said. “In this case, the government is picking who benefits and who doesn’t.”

Other concerns with the program include the lack of control over the end products, the unfair advantages to beneficiaries of the program and the high financial risk. Wise and Witesman believe acknowledging these pitfalls at the outset of the program might have helped mitigate the losses incurred by failed loans.

The Good

The ATVM program concerns aside, Witesman said direct government investments still has its merits — especially when you consider the alternatives within the context of government involvement, such as increased regulation.

“People who are tempted to judge government harshly for using investment as a tool would do well to think about other tools government has,” she said. “Investment is better than a subsidy because at least there is a chance for return. As opposed to government options like regulation—putting limits on how vehicles must perform or how we use them — people are probably going to like the investment option the best.”

And, in the case of the auto loan program, it should be noted that it has succeeded in incentivizing innovation and speeding up the process for at least three automakers. As a result, Ford has a more fuel-efficient engine, Tesla has produced a popular all-electric vehicle and Nissan has retooled a factory to assemble its electric LEAF vehicle. According to Nissan, the ATVM helped Nissan save 13.5 million gallons of gasoline and prevent 120,000 metric tons of carbon dioxide emissions annually.

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