Should the United States Government be Permitted to Play the Role of a Venture Capitalist?

  

The United States government has made some very risky investments in areas such as green energy and electric vehicles.  As time as shown, the government’s ability to pick winners and losers has cost the United States taxpayers billions of dollars.

Green Energy, also known as renewable or sustainable energy, is energy that comes from resources which are continually replenished such as sunlight, wind, rain, tides, waves and geothermal heat.  According to Wikipedia, About 16% of global final energy consumption comes from renewable sources, with 10% of all energy from traditional biomass, mainly used for heating, and 3.4% from hydroelectricity.

 

These investments have instead provided a string of bankruptcies: Solyndra ($528 million in federal loans), Abound Solar ($400 million), A123 Systems ($279 million) and Fisker Automotive ($529 million), to name the most prominent examples.

Let’s begin with Solyndra, originally founded by Chris Gronet as Gronet Technologies in May of 2005.  The Company changed its name eight (8) months later to Solyndra and quietly began developing a solar module consisting of one glass tube nested inside of another.  Wrapped around the inner tube were 150 solar cells made from copper, indium, gallium and diselenide, rather than silicon.

In September of 2009, the Department of Energy (DOE) provided a $535 million loan guarantee to the Company so that it could build a factory to manufacture the tube shaped solar modules.  This investment represented the Obama Administration’s first significant bet with taxpayer money on green technology.

Two years later, Solyndra filed for bankruptcy and shut its factory and laying off most of its 1,179 employees.  The company was facing fierce competition from several low priced solar panel manufacturers in China.
On September 8, 2011, the FBI and the Energy Department’s Office of the Inspector General raided Solyndra’s offices and took away boxes of documents. It was believed that an investigation would be conducted into the government loan.
In January of 2012, CBS 5 News caught the Company destroying millions of dollars of the glass solar panels.  The video below contains footage of Solyndra employees destroying company property after Solyndra had filed for bankruptcy leaving taxpayers on the hook for in excess of $500 million.

Meanwhile we are no closer to the miraculous changes that these investments were supposed to bring about. The touted breakthrough in renewable power is always just over the horizon, as its advocates have been telling us for nearly four decades.

The next Green Energy Company was Abound Solar, a Colorado based manufacturer of solar panels that received a $400 million Department of Energy loan guarantee.  The company was incorporated as AVA Solar in 2007 and was rebranded as Abound Solar in March 2009.

In 2010, Abound received the $400 million loan guarantee from the U.S. government and in 2012 the company laid off almost half its employees before suspending operations and filing for bankruptcy.  Recent filings by a customer of bankrupt solar panel manufacturer Abound Solar allege the company knew its panels were defective before the company collapsed in 2012.

Abound Solar has been ordered to remove and bury in cement thousands of leftover solar panels which were deemed to be unsellable by the Colorado Department of Public Health and Environment (CDPHE). The company will also be required to clean up other hazardous waste at a number of facilities statewide. The cleanup is expected to cost at least $2.2 million.

Following the company’s bankruptcy, an investigation by the Environmental Protection Agency (EPA) revealed that the warehouse in Denver storing the unsold panels did not have a hazardous waste permit.

The video below contains the questioning of a Department of Energy (DOE) official as to why the DOE guaranteed the $400 million loan to Abound Solar despite serious concerns that had been raised prior to the loan being made.

 The next government failure in the Green Energy space is called A123 Systems. The Company’s website reports:

On January 29, 2013, Wanxiang America acquired nearly all the business interests of A123 Systems. The company continues to operate its engineering and manufacturing centers around the world while retaining the A123 name and logo. With the ongoing support of its customers, partners and suppliers, A123 is committed to its revolutionary NanophosphateTM chemistry and the future of energy storage technology.

 A123 Systems, Inc. was founded in 2001 by Dr. Yet-Ming Chiang, Dr. Bart Riley and Ric Fulop. The Company manufactured lithiuom-ion (lithium iron phosphate) batteries and battery systems for the transportation, electric grid and commercial markets. The company’s nanophosphate technology is built on nanoscale materials initially developed at the Massachusetts Institute of Technology.

On August 5, 2009, a Press Release announced that A123 Systems received a $249 Million grant from the Department of Energy for building battery production facilities.  The DOE grant required A123 systems to build facilities that could make at least 500 megawatt-hours of lithium-ion battery capacity a year by November 2012. That amount of capacity would supply the equivalent of 21,000 Nissan Leaf electric-cars, much more than the current demand for those vehicles. A123 also supplied plug-in car batteries to General Motors Co., Bayerische Motoren Werke (BMW) AG, truck maker Navistar International Corp., SAIC Motor Corp., China’s largest domestic car maker, and Fisker Automotive Inc.

The company ran into trouble after producing defective battery packs that caused Fisker to recall its expensive Karma sedans. In August, A123 reported a loss of $82.9 million in the second quarter, up from a loss of $55 million a year earlier.

To deal with its financial losses, in August 2012, A123 struck a deal with Chinese auto parts manufacturer, Wanxiang, to provide $25 million immediately and to invest a total of $465 million over time, ultimately gaining an 80 percent ownership interest in the Company.  In October, A123 Systems filed for bankruptcy protection due to a $2.8 million debt payment coming due that it was unable to pay.

To add insult to injury for the American Taxpayers, A123 Systems received the latest installment of $946,830 from the federal government’s grant on the same day that the Company filed for bankruptcy.

 

 Our final company to present as the Government’s track record as a venture capitalist is Fisker Automotive who received a $529 million loan in 2009 from the Department of Energy.  The Detroit News, in an article entitled: Exec: Fisker May File for Bankruptcy, reported:

Fisker has laid off three quarters of its staff, hasn’t built a car since July and has been searching for a buyer or new investor. Fisker’s co-founder and a top official, Bernhard Koehler, said Fisker was working “day and night” to find a solution to keep the firm out of bankruptcy.

“I do not know exactly what the future holds for Fisker Automotive, including whether the company will be able to find new investors or whether the company may be obliged to seek bankruptcy protection to facilitate its continued efforts to preserve value for all stakeholders,” he told the House Oversight and Government Reform’s panel on economic growth, job creation and regulatory affairs.

The Anaheim, Calif., company lost $198 million in 2010 and then lost $321 million in the first 10 months of 2011, internal documents show.

Fisker had raised more than $1 billion from private investors but on several occasions nearly ran out of money. In late 2011, Fisker warned the Energy Department on several occasions it would run out of money by November or December 2011, but it won $37 million in additional private funding to keep the lights on.

At one point, Fisker was owed $200 million in unpaid bills and had racked up too much unsold vehicles, parts and equipment.

“Poor oversight of complex supply chain,” said the December 2011 report by Energy Department consultant Grant Thornton LLP. “Fisker had significant accounting and payables management lapses.”

To keep the company from defaulting on its loan agreements, the Energy Department in late 2011 secretly agreed to give the company another year to meet required milestones.

The following Bloomberg West video provides some very interesting insights into what went wrong with Fisker Automotive:

CONCLUSIONS REGARDING GOVERNMENT INVESTMENTS:

Perhaps the question that should be answered for the American Taxpayers is were the actions taken by the United States Government when investing taxpayer funds Malfeasance or Misfeasance?

Malfeasance combines the English prefix mal (bad) with Middle English feasance which was from Middle French faisance.

Definitions of malfeasance:

• wrongdoing, misconduct, misbehavior
• specifically, the misuse of authority by a public officer – called also malpractice
• an act or instance of wrongdoing especially by a public officer under color of authority of his office

Misfeasance is from Middle French mesfaisance. The mes part is a negative and faisance is from faire “to do” or “to make.” The person guilty of misfeasance is literally “making bad.”

Here are some definitions of misfeasance:

• a wrong action
• the performance of a lawful action in an illegal or improper manner
• wrong or improper conduct in public office

We will leave this decision for the readers to decide for themselves. Our conclusion is that the government is ill equipped to play the role of a venture capitalist and that despite many obvious warning signs that these investments were highly risky and speculative,  engaged in the practice of making what it felt were fashionable investments.  Had the government imposed any of the basic rules used by experienced venture capital firms such as the size of the addressable market; domestic and foreign competition analysis; concentration risk in any one investment or any portfolio company in any one client; and held the companies accountable to meet performance milestones before releasing additional funds, billions of taxpayer losses could have been averted.


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