GAO report highlights loan guarantee flaws

June 10, 2010

By Kris Bevill
Ethanol Producer Magazine

In response to a Congressional mandate requiring it to conduct a review of the U.S. DOE’s loan guarantee program, the Government Accountability Office has completed an evaluation of the program and released a report outlining its findings. Several serious flaws were identified with the program, including evidence that the loan process is being implemented inconsistently and that nuclear projects are favored over other proposals.

"The department is implementing the program in a way that treats applicants inconsistently, lacks systematic mechanisms for applicants to appeal its decisions or for applicants to provide feedback to DOE, and risks excluding some potential applicants unnecessarily," the GAO stated in its report.

Specifically, the GAO found that in at least five of 10 cases in which the DOE made conditional commitments, it did so before obtaining final reports from external reviewers. In one instance, the agency appears to have made a conditional commitment to a project before receiving any external reports. The program procedures typically require applicants to pay for external reviews. Therefore, projects that were allowed to advance without being required to conduct external reports also were not required to invest the same amount of capital as other projects.

Additionally, the GAO found that the DOE allowed nuclear projects not selected for due diligence to remain in a queue, while applicants proposing projects using other technologies were rejected. This finding is particularly significant, because rejected applicants that reapply for the program are required to pay application fees of up to $800,000. Projects that are held in a queue are not required to pay additional application fees and are also first in line for funding if the program receives additional loan guarantee authority.

The DOE also provided nuclear project applicants with information on how their projects ranked compared to other applicants, but did not provide rankings to any other types of projects, according to the GAO report. By providing this information to nuclear projects, the applicants were able to size up their competition and determine their chances of receiving funding before investing 75 percent of the application fees. Finally, it was determined that the DOE allowed one nuclear applicant additional time to meet technical and financial requirements, including requirements to prove the technology is commercially ready.

The DOE was provided a draft of the GAO’s report and admitted that the loan guarantee program is in need of improvement, but denied the allegations that it treats applicants inconsistently.

Growth Energy CEO Tom Buis said the report provides proof that the program needs to be improved in order to provide financial assistance for emerging technologies such as cellulosic ethanol. "With tight credit markets, the government must help early stage cellulosic ethanol producers secure the financing they need to prove their revolutionary technology," he said. "Yet, as the GAO has clearly identified, the energy department’s loan guarantee program is not working properly and that is especially true for cellulosic ethanol. Since the [DOE] began administering this program six years ago, there is yet to be a single loan guarantee issued to a producer of cellulosic ethanol."

The GAO recommended that the DOE’s program leaders develop performance goals for the program that reflect its policy goals and activities, revise the process so that applicants are treated consistently, and develop mechanisms for applicants to appeal decisions and provide feedback on the program. The DOE said it is taking steps to address the issues raised in the GAO’s report.

Read the GOA review of the U.S. DOE’s loan guarantee program.

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