CHAPTER 12 GOVERNMENT PROGRAMS OF POTENTIAL ASSISTANCE IN FINANCING MINERAL PROJECTS
| Jurisdiction | United States |
(Nov 1982)
GOVERNMENT PROGRAMS OF POTENTIAL ASSISTANCE IN FINANCING MINERAL PROJECTS *
Davis, Graham & Stubbs
Washington, D.C. *
TABLE OF CONTENTS
INTRODUCTION
I. THE UNITED STATES SYNTHETIC FUELS CORPORATION
A. Eligible Projects
B. Forms and Amount of Assistance Available
1. Loan Guarantees
2. Price Guarantees
3. Purchase Guarantees
4. Loans
5. Joint Ventures
C. Statutorily Required Considerations
D. Practical Ramifications of Dealing with the Synthetic Fuels Corporation
E. Brief History of the Program to Date
II. SMALL BUSINESS ADMINISTRATION PROGRAMS
A. Small Business Size Standards
B. Small Business Administration Loans
C. Small Business Investment Companies
D. State and Local Development Companies
III. DEPARTMENT OF ENERGY PROGRAMS
A. Coal Loan Guarantee Program
B. Geothermal Loan and Loan Guarantee Programs
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INTRODUCTION
This paper is a survey of the Federal government programs which might provide financing assistance to a firm considering the development of a mineral project in the United States. As so defined, it does not include programs of substantial assistance to those seeking to develop mineral projects outside the United States, or to sell equipment for such foreign mineral development on long-term credit.1 Nor
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does this paper include government research and development programs, which were considered too tangential to the financing of project execution, particularly in light of President Reagan's re-focusing of those R&D programs on long-term, high-risk, basic research.2 Individual, ad hoc arrangements for
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Federal funding assistance provided pursuant to legislation keyed to a particular project were not included because they are not generally available.
A number of programs not specifically related to minerals were omitted. For example, the Commerce Department's Economic Development Administration has provided business assistance in specified areas of high unemployment and low median income of up to $10,000 per job created or saved. Programs included direct loans for fixed asset acquisition and working capital, and loan and lease guarantees.3 Similarly, the Farmers Home Administration of the U.S. Department of Agriculture has in the past guaranteed loans to assist economic development in rural areas, including towns with populations under 5,000 persons. While funding of these
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programs has been substantially reduced, they do present opportunities which may be explored if these threshold criteria are satisfied. On the other hand, programs of general availability not specifically keyed to minerals development but of potential interest to some in the audience, such as Small Business Administration programs, were included.
Within these parameters, this paper is substantially shorter than it would have been two years ago, or even one year ago. President Reagan's efforts to reduce the size of the Federal government, and specifically to remove its influence from the energy markets, have been dramatically successful in cutting many programs which previously presented opportunities for assistance in financing mineral projects. The "moral equivalent of war" on the energy problem has been turned over to the marketplace almost entirely, without significant government financial encouragement or direction.
Moreover, the continued availability of even those programs which exist today is not free from doubt. As this paper was finalized in mid-October, 1982, Congress had not acted on appropriations for fiscal year 1983. When Congress does act, some of the Administration budget cuts may not prevail and funds will be made available in now-dormant programs. On the other hand, programs for which the Administration proposes funding may be cut or eliminated.
For example, by far the largest program, and the one on which I will spend the most time today, is that of the United States Synthetic Fuels Corporation ("SFC"). It was established pursuant to 1980 legislation to provide financial aid to private firms to develop the synthetic fuels industry more promptly than would occur through reliance on the existing marketplace (both for energy and capital). It had not, as of October 10, 1982, provided one cent of financial assistance.4 Yet there is an active movement to abolish the Corporation. In fact, Senator William Armstrong and Congressmen Hank Brown, both from here in Colorado, are among the leaders of the group arguing that, if the market will not justify development of an oil shale project by a company the size of Exxon, for example, then the American taxpayer should not undertake the risk of such a potentially uneconomic
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project.5 Interestingly, others in Congress who originally supported the Synthetic Fuels Corporation now favor its dismantlement solely as a matter of priorities — if the SFC's $17 billion dollar appropriation can be recaptured, then even further budget cuts in social welfare programs may not be necessary.
The counter-arguments in favor of a governmental role in encouraging the development of the synthetic fuels industry focus on the national security benefits resulting from a reduction in our dependence on imported petroleum, and improvements in the balance of payments and economic stability. I mention this dispute only to point out that the public policy issues raised by government assistance to mineral projects are of current interest and debate. Therefore, in addition to being up to date on the statutes passed by Congress authorizing such assistance, one must also be aware of the budget process, both within the executive branch — will the Administration seek appropriations for a particular program for the next fiscal year — and within the Congress, including both the Budget and Appropriations Committee views concerning this program. While the Administration has correctly been viewed as the initiator and driving force behind the general budget cutting movement, in the last budget resolution the balance between funding cuts and tax increases, and the priorities among programs to be funded, were largely a Congressional product. Thus, even if the Administration seeks funding for a particular program of interest, that funding may nonetheless fall victim to a perceived need to cut or control the budget deficit.
There are several programs of direct interest to this group which have been authorized for this year and the next few fiscal years, but for which the Administration has sought no money for new projects. Unless Congress overrides that budget determination, it is unlikely that any money will be available immediately, but funds might become available in the next few years. These are briefly discussed in Section III. Significantly, for these programs the legal and policy judgments have been made by Congress (and the prior president) that it is appropriate to expend public funds to assist private development of such projects. Therefore a legislative campaign to provide appropriations to fund the program for the explicit purpose of aiding a particular project would have a substantial head start toward success.
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However, overall, I believe the Reagan Administration policy of non-intervention will prevail for an extended period of time. There is now a generally accepted view in both parties that the recent budget cuts were necessary and that there is simply not very much money available to Congress, wholly apart from the priorities issues which arise over any "discretionary" residuum, after debt service, defense, Social Security, and other necessity programs are funded. Even in the face of a major disruption in the flow of petroleum from the Middle East, with recent indications of excess production capacity of natural gas and the time cushion provided by the Strategic Petroleum Reserve, policy would probably be slow to change. Moreover, if there were a shortage with rapidly escalating prices for gasoline and other petroleum products, the Reagan Administration's refusal even to consider the imposition of controls would render politically difficult, if not impossible, any attempt to alter policy to provide financial assistance for the development of mineral projects.
The most likely exception to this scenario is the Synthetic Fuels Corporation. While, as noted above, SFC is hardly immune to budget-cutting pressures, it has thus far survived the Reagan Administration cuts and enjoys substantial support in Congress. While the primary thrust of the SFC program is demonstration, commercialization, and actual production of synthetic fuels, the program nonetheless benefits from an aura that these projects are pioneering efforts involving great uncertainty. As such it arguably does not represent a drastic departure from the Administration's view of an appropriate role for the government in energy.
There are also substantial long-term national security arguments supporting a government role in encouraging synthetic fuels. While the country's present 30+% petroleum import dependence is a substantial improvement over the 50% dependence of a few years ago, even that 30+% dependence remains a concern which many do not believe will be solved by normal market forces.
Moreover, there is a substantial body of opinion that, if a few of these plants can be brought onstream, the production capability they represent will act as a cap on future OPEC pricing actions, at least to prevent a doubling of prices as occurred as a result of the Iranian embargo in 1979, providing substantial benefits in economic stability and the balance of payments. It is argued that the hard information gained from construction and operation of a few synfuels
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plants will render their potential competition a more effective brake on OPEC pricing than the unproven potential of the technology. There are also those who believe that the oil...
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