Innovative Manufacturing: Commerce Should Target Program Outreach to Address Capital Access Gaps
Released: 2016-02-04T00:00:00

Letter

Background

A federal loan guarantee is a binding agreement between an agency and a lender. If a borrower defaults on a guaranteed loan, the lender is to be reimbursed by the agency for the balance of the guaranteed portion of the loan. The guaranteed portion of a loan may vary across federal loan guarantee programs. A loan guarantee gives lenders an incentive to make loans that, due to the perceived risk of default, they otherwise might not make without requiring, for example, higher interest rates or additional collateral. For each of their loan guarantee portfolios, agencies are required to estimate the long-term cost to the government, which is referred to as the credit subsidy cost. The credit subsidy cost for each loan guarantee is equal to the amount of the estimated losses or gains to the federal government over the life of the loan. As part of the agreement, lenders may be required to pay fees to the agency to offset administrative expenses and credit subsidy costs.

Part of EDA’s mission is to support economic development by promoting innovation, global competitiveness, and regional collaboration. In addition to developing the ITM program, EDA’s activities include providing funding through a number of investment programs, as well as offering a variety of services that include technical assistance, postdisaster recovery assistance, trade adjustment support, strategic planning, and research and evaluation. EDA does not currently administer any loan guarantee programs besides the pending ITM program.

In directing the establishment of the ITM program, COMPETES 2010 provided for three types of eligible projects—ones that reequip, expand, or establish a manufacturing facility in the United States to use an innovative technology or an innovative process in manufacture an innovative technology product or an integral component of such a product; or commercialize an innovative product, process, or idea that was developed by research funded in whole or in part by a grant from the federal government.

As it has designed the ITM program, EDA has drafted the following definitions to help determine project eligibility: innovative—defined as representing a significant improvement in function, performance, reliability, or quality of a product or service in comparison to commercial technologies currently in use, and technological—defined as relying on the principles of one of the following sciences: engineering, physical sciences, computer sciences, or biological sciences.

The ITM program will provide a guarantee for up to 80 percent of a loan, with a maximum loan size of $10 million, or up to $15 million in certain circumstances, according to EDA officials. Through fiscal year 2015, Congress has appropriated $19 million for the ITM program. Credit subsidy costs are based on the assumption that the government will only need to reimburse lenders for a percentage of the loan guarantees made. In this case, according to EDA estimates, the agency will need to reserve about 7 percent of the value of loans guaranteed to cover the cost of future defaults. The program may support a total of up to $70 million in guaranteed loans for each $5 million in appropriations. This $5 million can be used to support $70 million in guaranteed loans because costs to the government are only incurred when a borrower defaults on a loan.

Although Commerce’s EDA was given the task of implementing the ITM program, COMPETES 2010 stated that Commerce may use its NIST MEP centers to provide information about the ITM program and conduct outreach to potential borrowers. NIST MEP’s goals are to enhance U.S. productivity and technological performance, as well as to strengthen the global competitiveness of manufacturing firms. Under the program, NIST partners with 60 nonfederal organizations called MEP centers, which are located in each of the 50 states and Puerto Rico. MEP centers provide services aimed at helping small and medium-sized U.S.-based firms grow and enhance their competitiveness.

EDA Has Taken A Number of Steps to Implement the ITM Program, but Key Tasks Remain Before Loan Guarantees Can Be Issued

Since our 2013 report on the ITM program, EDA has made progress on implementing the program, but several key tasks remain to be completed before EDA can issue loan guarantees.

EDA has made progress on a number of tasks. For example, to help develop the program, EDA hired a contractor—FI Consulting. With FI Consulting’s assistance, EDA developed a credit subsidy model and drafted program regulations and forms, among other efforts.

As of November 2015, key tasks remain in developing the program, and EDA officials expect they could begin issuing loan guarantees for the ITM program as early as July 2016. This was delayed from December 2015, EDA officials said, because of the complexity of building a loan guarantee program and promulgating regulations. EDA officials stated that the most significant of the remaining key tasks are finalizing the ITM program regulations, manuals, and forms. According to EDA’s project plan, they expect to have program manuals and draft program regulations completed in March 2016; the regulations are to be sent to OMB for review and revised by EDA in June 2016. Other remaining key tasks include finalizing the requirements for the ITM program information technology support systems, which will be used for functions such as accounting and credit subsidy cost estimation, as well as developing marketing materials and conducting outreach.

Table 1 shows the status of key tasks for the ITM program.

EDA Has Coordinated with Other Agencies on Some Issues, but Has Not Clearly Differentiated ITM from Other Programs

EDA has coordinated with other federal agencies to learn from their experiences with loan guarantee programs, but as currently designed, EDA has not clearly differentiated the ITM program from other comparable programs that we identified.

EDA officials said they reached out to officials from SBA, USDA, and DOE—agencies that have loan guarantee programs comparable to the ITM program—to learn from their experiences and identify practices that could be incorporated into the ITM program. In particular, EDA officials highlighted the information they learned about SBA’s loan guarantee programs. Based on what they learned, EDA officials said they decided to largely model the ITM program after the 7(a) program. Specifically, EDA has adapted or plans to adapt SBA’s application forms, loan performance data, staff position descriptions, regulations, and manuals to fit ITM program parameters and statutory requirements. EDA also hired contractor FI Consulting, which told us its consultants previously worked on the 7(a) program. In addition, EDA officials said they coordinated with USDA and DOE officials to gather information to help design the ITM program. Table 2 provides examples of practices suggested by other agencies with loan guarantee programs and how EDA plans to use those practices.

EDA’s coordination with other agencies has helped avoid duplication of the effort those agencies have already expended in designing loan guarantee programs. However, as currently designed, the ITM program does not clearly differentiate its potential applicants from those of the comparable federal loan guarantee programs we identified. SBA’s 7(a) program, USDA’s Business and Industry Loans program, USDA’s Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance program, and DOE’s Federal Loan Guarantees for Innovative Energy Technologies program already provide loan guarantees to a similar pool of borrowers as those eligible for the ITM program, with roughly equivalent limitations. Areas of overlap between these four programs and the ITM program include the following:

Business size. As required by COMPETES 2010, small and medium- sized manufacturers are to be eligible for the ITM program. Those businesses are also eligible for three of the four comparable programs. One program, SBA 7(a), is available only to small businesses.

Business type. EDA officials expect that the ITM program will be open to only manufacturers producing, using, or commercializing innovative technologies. All four comparable programs allow such manufacturers to participate, and two of the programs—the USDA Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance program and the DOE Loan Guarantees for Innovative Energy Technologies program—are intended to support specific types of innovative technologies. According to an EDA analysis of SBA 7(a) loan data, roughly 11 percent of the loans made under SBA’s 7(a) program from October 1991 through March 2014 were to manufacturers in subsectors identified as innovative. USDA officials estimated that about 25 percent of the agency’s Business and Industry program loan guarantees are issued to manufacturers.

Maximum allowable loan amount. According to EDA officials, the ITM program will guarantee loans of up to $15 million. Three of the four comparable programs are able to guarantee loans of at least $15 million.

Maximum guaranteed portion of loan. The maximum loan guarantee percentage allowed under the ITM program is 80 percent. Each of the four comparable programs also allows for a loan guarantee percentage of 80 percent, but the percentages can vary depending on loan amounts or total project costs.

Permitted uses of funds. The ITM program, according to EDA officials and program documents, will allow funds to be used to purchase land, buildings, and equipment, just like the four comparable programs we examined, but permissible uses of funds vary somewhat across programs. All four of the other programs also allow funds to be used for working capital or startup costs, though the ITM program will not, according to EDA officials and program documents.

Table 3 provides a more detailed comparison of the ITM program, as currently designed, and the SBA 7(a) program on which the ITM program is largely modelled. Appendix I provides a comparison of the ITM program to all four comparable programs we examined.

EDA officials acknowledged that the ITM program is potentially duplicative with other federal loan guarantee programs in a number of respects. In addition, EDA officials said that it is possible that loan guarantees ultimately issued under the ITM program could be similar to those issued by another agency, such as SBA or USDA. However, as discussed, COMPETES 2010 directs the Secretary of Commerce to ensure, to the maximum extent practicable, that the activities carried out under the ITM program are coordinated with, and do not duplicate, the efforts of other federal loan guarantee programs. GAO’s fragmentation, overlap, and duplication analysis guide states that one way to help minimize duplication among government programs is to identify and target service gaps that the programs could fill. Targeting can be accomplished by using program eligibility parameters and marketing and outreach to aim the program at more specific segments of a potentially eligible population in need of access to capital that might not be served or are underserved by other federal programs.

While EDA officials coordinated with other agencies to design the ITM program, they did not work with agencies specifically to target service gaps—in this case, capital access gaps—because they have not yet developed a marketing and outreach strategy for the program. A 2011 study commissioned by MEP about the capital access needs of small and medium-sized manufacturers identified several capital access gaps resulting in potentially underserved populations for federal loan guarantees. Specifically, the report, which NIST provided to EDA, identified gaps in capital access based on several characteristics, for example, as follows:

Size: The report specifically identifies gaps in the availability of capital for manufacturers with less than 200 employees, restricting their ability to grow and compete. In addition, MEP reported that there are 38 federal government programs that specifically target manufacturing, but many are not fully accessible to small manufacturers or do not target funds directly for small and medium- sized companies. The MEP report further identified a gap in small manufacturers’ awareness of sources of capital.

Growth stage: According to the MEP report, early-stage companies may experience larger gaps in capital access than businesses in advanced stages of growth, hindering their ability to fund activities such as product design and improvement. One reason early-stage companies may have a harder time obtaining funding is that lenders and investors see them as more risky. For example, early-stage companies may not be able to demonstrate financial strength by providing a consistent history of profitability.

SBA officials stated that EDA did not specifically seek information from them on how to target the ITM program so as not to duplicate the efforts of SBA’s loan guarantee programs. As a result, EDA has not taken full advantage of SBA officials’ expertise regarding the types of small manufacturers that receive support through the 7(a) program and those that do not, to help identify potential capital access gaps. SBA officials said that they spend a significant amount of time trying to determine potential applicants not being served by their loan guarantee programs. Officials said they use internal SBA data and information gathered from industry representatives to inform discussions on the topic. SBA officials said that new and early-stage businesses are the most challenged in terms of capital access.

EDA also coordinated with NIST on some aspects of the ITM program, but its coordination was not focused on targeting capital access gaps. According to a NIST official, EDA officials coordinated with NIST about relevant topics such as the optimal loan sizes and loan guarantee percentages to support small and medium-sized manufacturers. In addition, a NIST official said that he discussed how to define innovative technologies with EDA officials. EDA officials said they reviewed the MEP report in order to determine demand for the ITM program and inform its design. However, EDA did not specifically coordinate with NIST about how to help address the capital access gaps identified in the report, according to a NIST MEP official. EDA officials stated that they intend to work with NIST by using its MEP centers to conduct ITM program marketing and outreach to borrowers and manufacturers. However, according to a NIST MEP program official, as of November 2015, EDA had not worked with NIST to develop marketing materials or an outreach strategy, or discussed other ways to ensure that the ITM program addresses capital access gaps. As a result, EDA has not taken full advantage of NIST’s and its MEP centers’ expertise regarding the capital needs of small and medium-sized manufacturers. Coordinating more extensively on targeting marketing materials and outreach efforts to potential applicants in need of access to capital could give EDA greater assurance that ITM program loan guarantees will not duplicate the efforts of other federal loan guarantee programs.

Conclusions

Technological innovation drives the development of new products and improved processes, allows the U.S. manufacturing sector to remain competitive in the global marketplace, and stimulates economic growth. COMPETES 2010 directed the establishment of the ITM program to help small and medium-sized manufacturers gain access to the capital they need for the use or production of innovative technologies. While EDA has taken a number of steps to implement the program, key tasks remain before loan guarantees can be issued, such as finalizing program regulations and developing marketing materials and outreach plans. EDA has coordinated with several agencies on program design, but coordination on targeting the program through, for example, developing marketing materials and a strategy to conduct outreach to potential applicants in need of access to capital has been limited. The result is that, as currently designed, the ITM program does not clearly differentiate its potential applicants from those already served by other federal loan guarantee programs. Working with SBA and NIST to examine how the ITM program could fill capital access gaps not filled by other federal programs, and then marketing the program to target those gaps could help EDA ensure, as COMPETES 2010 directs, that ITM program activities do not duplicate the efforts of other federal loan guarantee programs.

Recommendation for Executive Action

To better ensure that the activities carried out under the ITM program do not duplicate the efforts of other federal loan guarantee programs, such as SBA’s 7(a) program, the Secretary of Commerce should direct EDA to work with SBA and NIST to further identify any gaps in capital access that may be present that the program could fill, and then develop marketing materials and conduct outreach to help target those gaps.

Agency Comments and Our Evaluation

We provided a draft of this report for review and comment to the Secretaries of Agriculture, Commerce, and Energy; Director of the Office of Management and Budget; and Administrator of the Small Business Administration. In its written comments, reproduced in appendix II, Commerce concurred with our recommendation and said that EDA will work with SBA and NIST to further identify capital access gaps that can be filled by the ITM program. Commerce also noted that there can be no assurance that loan guarantees provided by the ITM program will never duplicate the efforts of other agencies’ programs. However, our recommendation to work with SBA and NIST to identify capital access gaps and then target those gaps in marketing the program would better ensure that the activities carried out under the ITM program do not duplicate the efforts of other federal loan guarantee programs, not eliminate the possibility of duplication completely. In addition to Commerce’s written comments, EDA provided technical comments, which we incorporated as appropriate. EDA also included a more general comment suggesting that GAO emphasize that EDA has taken significant steps to implement the program. In our report, we note that EDA has taken a number of steps to implement the program. However, as outlined in table 1, several key steps remain before EDA can provide loan guarantees. DOE and SBA also provided technical comments that we incorporated, as appropriate. USDA and OMB indicated they had no comments on the report.

We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Commerce, and Energy; the Director of the Office of Management and Budget; and the Administrator of the Small Business Administration. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or neumannj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to the report are listed in appendix III.

Appendix I: Comparison of Economic Development Administration (EDA) Prospective Innovative Technologies in Manufacturing (ITM) Program and Four Comparable Programs

Table 4 below shows how the Economic Development Administration’s Innovative Technologies in Manufacturing loan guarantee program compares to the four comparable programs we examined.

Appendix II: Comments from the Department of Commerce

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Chris Murray (Assistant Director), Natalie Block, Kevin Bray, Mark Braza, Marcia Carlsen, Emily Eischen, Ellen Fried, Cole Haase, Steve Komadina, Gerald Leverich, Cody Raysinger, and Jack Wang made key contributions to this report.