An article by Todd Wallack and Andrea Estes in today's Boston Globe demonstrates the risks inherent in direct governmental participation in private corporations.
Here, the Commonwealth of Massachusetts decided to put money into a solar energy company:
The incentive package from the state included nearly $21 million in direct grants to the company, $22.6 million in tax incentives, $13 million in grants to build roads, upgrade electrical transmission lines, and upgrade other infrastructure to support the 450,000-square-foot Devens plant, a $1-per-year lease for 23 acres at Devens worth $2.3 million, and $17.5 million in loans.
There are two types of risk associated with this kind of investment. The first is that the firm might fail, taking with it millions of dollars in state assets. That is particularly likely in the energy field, where changes in world oil prices and advances in technology or unexpected competition can quickly make mincemeat of a firm's business plan.
In this case: A big problem is the price of solar panels, which keeps dropping, in part because of sinking demand and competition from China. The U.S. Synthetic Fuels Corporation, staked with billions of dollars in federal support, was another casualty of these kinds of market forces.
The second risk is that political bodies have trouble with the concept of sunk costs. Private firms consider past investments as fiscally "gone" for purposes of evaluating future investments. But the government often behaves as if investments have a carry-forward risk of embarrassment, so it is more likely to throw good money after bad.
This part of the story demonstrates the latter point:
...After its efforts to borrow elsewhere failed, the company recently asked MassDevelopment for a new $5 million loan. ...MassDevelopment staff members warned last month that the company does not currently generate enough cash to pay it back, and gave it the highest score possible for risk, 6 out of 6. The $5 million request is also double the $2.5 million limit allowed under MassDevelopment’s own guidelines. Nevertheless, MassDevelopment’s board unanimously approved the loan at a board meeting Sept. 17.
Some Governors and Presidents like to believe that they are more able than the private markets to evaluate and support technologies and companies consistent with their policy agendas. The problem is that they use our money in support of their hunches, changing the private sector's risk-reward calculus that is essential for a proper evaluation of the investment's value.