DOE Loan Guarantees: Further Actions Are Needed to Improve Tracking and Review of Applications
Released: 2012-03-12T00:00:00

Letter

Background

DOE’s LGP was designed to address the fundamental impediment for investors that stems from the high risks of clean energy projects, including technology risk—the risk that the new technology will not perform as expected—and execution risk—the risk that the borrower will not perform as expected. Companies can face obstacles in securing enough affordable financing to survive the “valley of death” between developing innovative technologies and commercializing them. Because the risks that lenders must assume to support new technologies can put private financing out of reach, companies may not be able to commercialize innovative technologies without the federal government’s financial support. According to the DOE loan program’s Executive Director, DOE loan guarantees lower the cost of capital for projects using innovative energy technologies, making them more competitive with conventional technologies and thus more attractive to lenders and equity investors. Moreover, according to the DOE loan programs Executive Director, the program takes advantage of DOE’s expertise in analyzing the technical aspects of proposed projects, which can be difficult for private sector lenders without that expertise.

Until February 2009, the LGP was working exclusively under section 1703 of the Energy Policy Act of 2005, which authorized loan guarantees for new or innovative energy technologies that had not yet been commercialized. Congress had authorized DOE to guarantee approximately $34 billion in section 1703 loans by fiscal year 2009, after accounting for rescissions, but it did not appropriate funds to pay the “credit subsidy costs” of these guarantees. For section 1703 loan guarantees, each applicant was to pay the credit subsidy cost of its own project. These costs are defined as the estimated long-term cost, in net present value terms, over the entire period the loans are outstanding to cover interest subsidies, defaults, and delinquencies (not including administrative costs). Under the Federal Credit Reform Act of 1990, the credit subsidy cost for any guaranteed loan must be provided prior to a loan guarantee commitment.

In past reports, we found several issues with the LGP’s implementation of section 1703. For example, in our July 2008 report, we stated that risks inherent to the program make it difficult for DOE to estimate credit subsidy costs it charges to borrowers. If DOE underestimates these costs, taxpayers will ultimately bear the costs of defaults or other shortfalls not covered by the borrowers’ payments into a cost-subsidy pool that is to cover section 1703’s program-wide costs of default. In addition, we reported that, to the extent that certain types of projects or technologies are more likely than others to have fees that are too high to remain economically viable, the projects that do accept guarantees may be more heavily weighted toward lower-risk technologies and may not represent the full range of technologies targeted by the section 1703 program.

In February 2009, the Recovery Act amended the Energy Policy Act of 2005, authorizing the LGP to guarantee loans under section 1705. This section also provided $2.5 billion to pay applicants’ credit subsidy costs. This credit subsidy funding was available only to projects that began construction by September 30, 2011, among other requirements. DOE estimated that the funding would be sufficient to provide about $18 billion in guarantees under section 1705. Section 1705 authorized guarantees for commercial energy projects that employ renewable energy systems, electric power transmission systems, or leading-edge biofuels that meet certain criteria. Some of these are the same types of projects eligible under section 1703, which authorizes guarantees only for projects that Consequently, many use new or significantly improved technologies.projects that had applied under section 1703 became eligible to have their credit subsidy costs paid under section 1705.

Because authority for the section 1705 loan guarantees expired on September 30, 2011, section 1703 is now the only remaining authority for the LGP. In April 2011, Congress appropriated $170 million to pay credit subsidy costs for section 1703 projects. Previously, these costs were to be paid exclusively by the applicants and were not federally funded. Congress also authorized DOE to extend eligibility under section 1703 to certain projects that had applied under section 1705 but did not receive a loan guarantee prior to the September 30, 2011, deadline.

DOE has issued nine calls for applications to the LGP. Each of these nine “solicitations” has specified the energy technologies it targets and provided criteria for the LGP to determine project eligibility and the likelihood of applicants repaying their loans (see table 1).

To help ensure that that these criteria were applied consistently and that each selected project provided a reasonable prospect of repayment, in March 2009, the LGP issued a credit policies and procedures manual for the program, outlining its policies and procedures for reviewing loan guarantee applications. As shown in figure 1, this review process is divided into three stages: intake, due diligence, and “conditional commitment to closing.” We use the term “review process” to refer to the entire process.

During the intake stage, the LGP assesses applications in a two-part process for most applicants. In part I, the LGP considers a project’s eligibility based on the requirements in the solicitation and relevant laws and regulations. Nuclear solicitation applications are also evaluated against programmatic, technical, and financial criteria during the part I review. Based on the LGP’s eligibility determination during part I review, qualifying applicants are invited to submit a part II application. Generally, LGP evaluates this application against programmatic, technical, and financial criteria to form a basis for ranking applications within each solicitation. Based on these initial rankings, the LGP selects certain applications for the due diligence stage. During due diligence, the LGP performs a detailed examination of the project’s financial, technical, legal, and other qualifications to ensure that the LGP has identified and mitigated any risks that might affect the applicant’s ability to repay the loan guarantee. Key to identifying risks during due diligence are required reports by independent consultants on the technical and legal aspects of the project and others, such as marketing reports, that the LGP uses when needed. The LGP also negotiates the terms of the loan guarantee with the applicant during due diligence.

The proposed loan guarantee transaction is then submitted for review and/or approval by the following entities:

DOE’s Credit Committee, consisting of senior executive service DOE officials, most of whom are not part of the LGP.

DOE’s Credit Review Board (CRB), which consists of senior-level officials such as the deputy and undersecretaries of Energy.

The Office of Management and Budget (OMB), which reviews the LGP’s estimated credit subsidy range for each transaction.

Department of the Treasury.

The Secretary of Energy, who has final approval authority.

Following the Secretary’s approval, the LGP offers the applicant a “conditional commitment” for a loan guarantee. If the applicant signs and returns the conditional commitment offer with the required fee, the offer becomes a conditional commitment, contingent on the applicant meeting conditions prior to closing. During the conditional commitment to closing stage, LGP officials and outside counsel prepare the final financing documents and ensure that the applicant has met all conditions required for closing, and the LGP obtains formal approval of the final credit subsidy cost from OMB. Prior to closing, applications may be rejected by the LGP. Similarly, applicants can withdraw at any point during the review process. Once these steps have been completed, the LGP “closes” the loan guarantee and, subject to the terms and conditions of the loan guarantee agreement, begins to disburse funds to the project. For further detail on the review process, see appendix III.

DOE Has Made $15.1 Billion in Loan Guarantees but Does Not Maintain Consolidated Data on Status of Applications

For 460 applications to the LGP from its nine solicitations, DOE has made $15.1 billion in loan guarantees and conditionally committed to an additional $15 billion, representing $30 billion of the $34 billion in loan guarantees authorized for the LGP. However, when we requested data from the LGP on the status of the applications to its nine solicitations, the LGP did not have consolidated data readily available but had to assemble them from various sources.

DOE Has Made $15.1 Billion in Loan Guarantees and Committed to Another $15 Billion

As of September 30, 2011, the LGP had received 460 applications and made (closed) $15.1 billion in loan guarantees in response to 30 applications (7 percent of all applications), all under section 1705. It had not closed any guarantees under section 1703. In addition, the LGP had conditionally committed another $15 billion for 10 more applications (2 percent of all applications)—4 under section 1705 and 6 under section 1703. The closed loan guarantees obligated $1.9 billion of the $2.5 billion in credit subsidy appropriations funded by the Recovery Act for section 1705, leaving $600 million of the funds unused before the program expired. For section 1703 credit subsidy costs, the $170 million that Congress appropriated in April 2011 to pay such costs is available, but it may not cover all such costs because the legislation makes the funds available only for renewable energy or efficient end-use energy technologies.covered by the appropriation must pay their own credit subsidy costs. To date, credit subsidy costs for loan guarantees that DOE has closed have, on average, been about 12.5 percent of the guaranteed loan amounts.

Applicants whose projects’ credit subsidy costs are not The median loan guarantee requested for all applications was $141 million. Applications for nuclear power projects requested significantly larger loan amounts—a median of $7 billion—and requested the largest total dollar amount by type of technology—$117 billion. Applications for energy efficiency and renewable energy solicitations requested the second-largest dollar amount—$74 billion. Table 2 provides further details on the applications by solicitation and the resulting closed loan guarantees and conditional commitments. Appendix II provides further details on the individual committed and closed loan guarantees.

For all 460 LGP applications submitted, figure 2 shows the total loan guarantee amounts requested by type of energy technology.

Table 3 provides an overview, as of September 30, 2011, of the status of the 460 loan guarantee applications that the LGP received in response to its nine solicitations. Of the 460 applications, 66 were still in various stages of the approval process (intake and due diligence), 40 had received conditional commitment or were closed, and 354 had been withdrawn or rejected. DOE documents list a wide range of reasons for application withdrawals, including inability to submit application material in a timely manner, inability to secure feedstock, project faced many hurdles, applicant did not pursue project, and applicant switched to another program. Solicitations that primarily targeted efficiency and renewable energy received the most applications, while those targeting nuclear front-end technologies (for the beginning of the nuclear fuel cycle), manufacturing, and fossil fuels received the fewest. The rejection rate was highest for applications submitted for two of the earlier solicitations and much lower for DOE’s FIPP, a more recent solicitation involving applications sponsored by private financial institutions. Since we began our review, two of the borrowers with closed loan guarantees have declared bankruptcy—Solyndra, Inc., with a $535 million loan guarantee for manufacturing cylindrical solar cells, and Beacon Power Corporation, with a $43 million loan guarantee for an energy storage technology.

The elapsed time for LGP to process loan applications generally decreased over the course of the program, according to LGP data. LGP officials noted that the elapsed time between review stages includes the time the LGP waited for the applicants to prepare required documents for each stage. The process was longest for applications to the earlier solicitations, issued solely under section 1703, from start to closing.review process was shorter for applications under the four more recent solicitations, issued after the passage of section 1705. For example, the The first solicitation, known as Mixed 06, had the longest overall time frames from intake to closing—a median of 1,442 days—and the FIPP solicitation had the shortest time frames—a median of 422 days. Applications to the FIPP solicitation had the shortest elapsed time because this program was carried out in conjunction with private lenders, who conducted their own Table 4 shows reviews before submitting loan applications to the LGP.the median number of days elapsed during each review stage, by solicitation, as of September 30, 2011.

From September 4, 2009, to July 29, 2011—a period of nearly 2 years— the LGP closed $5.8 billion in loan guarantees for 13 applications under section 1705. In the last few months before the authority for section 1705 loan guarantees expired, the LGP accelerated its closings of section 1705 applications that had reached the conditional commitment stage. Thus, over the last 2 months before the authority for section 1705 expired, the LPG closed an additional $9.3 billion in loan guarantees for 17 applications under section 1705. The program did not use about $600 million of the $2.5 billion that Congress appropriated to pay credit subsidy costs before the section 1705 authority expired, and these funds were no longer available for use by LGP.

The LGP Does Not Maintain Consolidated Information on Application Status

When we requested data from the LGP on the identity of applicants, status, and key dates for review of all the applications to its nine solicitations, the LGP did not have consolidated information on application status readily available. Instead, it had to assemble these data from various sources.

To respond to our initial data request, LGP staff provided information from the following five sources: “Origination portfolio” spreadsheets, which contain information for applications that are in the due diligence stage of the review process. These spreadsheets contain identifying information, the solicitation applied under, commitment or closing status, type of technology, overall cost, proposed or closed loan amount, and expected or actual approval dates. Information in these spreadsheets is limited. For example, they do not contain dates that the applicant completed each stage and do not have information on applications that have been rejected or withdrawn. “Tear sheet” summaries for each application, which give current status and basic facts about the project and its technology, cost, finances, and strengths and weaknesses. Tear sheets are updated periodically, or as needed, but LGP officials could not easily consolidate them because they were kept in word processing software that does not have analysis or summarization capabilities. “Application trackers,” which are spreadsheets that give basic descriptive information and status of applications for some solicitations. LGP staff said they were maintained for most, but not all, solicitations. “Project Tracking Information” documents showing graphic presentations of application status summaries, loan guarantee amounts requested, technology type, planned processing dates, and procurement schedules for technical reports. These documents were updated manually through December 20, 2010. “Credit subsidy forecasts,” which are documents that track the actual or projected credit subsidy costs of the section 1705 projects in various stages of the review process and the cumulative utilization of credit subsidy funding.

LGP staff needed over 3 months to assemble the data and fully resolve all the errors and omissions we identified. LGP staff also made further changes to some of these data when we presented our analysis of the data to the LGP in October 2011. According to LGP officials in 2010, the program had not maintained up-to-date and consolidated documents and data. An LGP official said at the time that LGP considered it more important to process loan guarantee applications than to update records. Because it took months to assemble the information required for our review, it is also clear that the LGP could not be conducting timely oversight of the program. Federal regulations require that records be kept to facilitate an effective and accurate audit and performance evaluation. These regulations—along with guidance from the Department of the Treasury and OMB—provide that maintaining adequate and proper records of agency activities is essential to oversight of the management of public resources.

In addition, under federal internal control standards, federal agencies are to employ control activities, such as accurately and promptly recording transactions and events to maintain their relevance and value to management on controlling operations and making decisions. Under these standards, managers are to compare actual program performance to planned or expected results and analyze significant differences. Managers cannot readily conduct such analysis of the LGP if the agency does not maintain consolidated information on applications to the program and their status. Moreover, the fact that it took the LGP 3 months to aggregate data on the status of applications for us suggests that its managers have not had readily accessible and up-to-date information and have not been doing such analysis on an ongoing basis. This is not consistent with one of the fundamental concepts of internal control, in which such control is not a single event but a series of actions and activities that occur throughout an entity’s operations and on an ongoing basis. Thus, providing managers with access to aggregated, updated data could facilitate more efficient management of the LGP.

Furthermore, without consolidated data about applicants, LGP actions, and application status, LGP staff may not be able to identify weaknesses, if any, in the program’s application review process and approval procedures. For example, consolidated data on application status would provide a comprehensive snapshot of which steps of the review process are taking longer than expected and may need to be addressed. If program data were consolidated in an electronic tracking system, program managers could quickly access information important to managing the LGP, such as the current amount of credit subsidy obligated, as well as whether the agency is consistently complying with certain procedural requirements under its policies and regulations that govern the program. In addition, the program cannot quickly respond to requests for information about the program as a whole from Congress or program auditors.

In March 2011, the LGP acknowledged the need for such a system. According to the March 2011 LGP summary of its proposed data management project, as the number of applications, volume of data and records, and number of employees increased, the existing method for storing and organizing program data and documents had become inadequate, and needed to be replaced. In October 2011, LGP officials stated that while the LGP has not maintained a consolidated application tracking database across all solicitations, the program has started to develop a more comprehensive business management system that includes a records management system called “iPortal” that also could be used to track the status of applications. Officials did not provide a timetable for using iPortal to track the status of applications but said that work is under way on it. However, until iPortal or some other system can track applications’ status, the LGP staff cannot be assured that consolidated information on application status necessary to better manage the program will be available.

The LGP Did Not Always Adhere to Its Review Process, Which May Pose Risks and Result in Inconsistent Treatment

We identified 43 key steps in the LGP’s guidance establishing its review process for assessing and approving loan guarantee applications. The LGP followed most of its established review process, but the LGP’s actual process differed from this established process at least once on 11 of the 13 applications we reviewed, in part because the process was outdated. In some cases, LGP did not perform applicable review steps and in other cases we could not determine whether the LGP had completed review steps. Furthermore, we identified more than 80 instances of deficiencies in documentation of the LGP’s reviews of the 13 applications, such as missing signatures or dates. It is too early to evaluate the impact of the specific differences we identified on achieving program goals, but we and the DOE Inspector General have reported that omitting or poorly documenting review steps may pose increased financial risk to the taxpayer and result in inconsistent treatment of applications.

The LGP Did Not Consistently Follow Its Established Review Process, in Part Because the Process Was Outdated

We identified 43 key steps in the LGP credit policies and procedures manual and its other guidance that establish the LGP’s review process for assessing and approving loan guarantee applications. Not all 43 steps are necessary for every application, since the LGP’s guidance lets officials tailor aspects of the review process on an ad hoc basis to reflect the specific needs of the solicitation. For example, under the EERE 08 solicitation, the LGP required two parts of intake review for applications involving large projects that integrate multiple types of technologies, but it required only one part for small projects. Furthermore, according to LGP officials, they have changed the review process over time to improve efficiency and transparency, so the number of relevant steps also depends on when the LGP started reviewing a given application. LGP guidance recognizes the need for such flexibility and maintains that program standards and internal control need to be applied transparently and uniformly to protect the financial interests of the government. For more information on the key steps we identified, see appendix III.

According to private lenders we contacted who finance energy projects, the LGP’s established review process is generally as stringent as or more stringent than those lenders’ own due diligence processes. For example, like the LGP, private lenders evaluate a project’s proposed expenses and income in detail to determine whether it will generate sufficient funds to support its debt payments. In addition, private lenders and the LGP both rely on third-party expertise to evaluate the technical, legal, and marketing risks that might affect the payments. Lenders who were not participating in the LGP generally agreed that the LGP’s process, if followed, should provide reasonable management of risk. Some lenders that sponsored applications under the FIPP solicitation said that the LGP’s review process was more rigorous than their own. They said this level of rigor was not warranted for the FIPP solicitation because it covered commercial technology, which is inherently less risky than the innovative technologies covered by other solicitations. Some private lenders we spoke with also noted that financing an innovative energy project involves a certain amount of risk that cannot be eliminated, and one lender said that a failure rate of 2 or 3 percent is common, even for the most experienced loan officers.

However, we found that the LGP did not always follow the review process in its guidance. The LGP completed most of the applicable review steps for the 6 applications that we reviewed in full, but its actual process differed from the established process at least once on 5 of the 6 applications we reviewed. We also conducted a more limited examination of 7 additional applications, in which we examined the steps where the actual process differed from the established process for the first 6 applications. We again found that the LGP’s actual process differed from its established process at least once on 6 of the 7 applications. Table 4 summarizes review steps for which we either identified differences or could not determine whether the LGP completed a particular review step across all 13 applications. The 13 applications we reviewed represent all of the applications that had reached conditional commitment or closing, as of December 31, 2010, excluding 3 applications that had applied under the earliest solicitation, since the LGP’s review process was substantially different for these 3 applications.

For the 13 applications we examined, we found 19 differences between the actual reviews the LGP conducted and the applicable review process steps established in LGP guidance. In most of these instances, according to LGP officials, the LGP did not perform an applicable review step because it had made changes intended to improve the process but had not updated the program’s credit policies and procedures manual or other guidance governing the review process.

The following describes the 19 differences we identified, along with the LGP’s explanations: In six cases, the LGP did not obtain CRB approval prior to due diligence, contrary to the March 2009 version of its credit policies and procedures manual. This version states that CRB approval is an important internal check to ensure only the most promising projects proceed to due diligence. LGP officials explained that this step was not necessary for these applications because the CRB had verbally delegated to the LGP its authority to approve applications before these projects proceeded to due diligence. However, LGP documents indicate that CRB delegated approval authority after these projects According to an LGP official, the had proceeded to due diligence.delegation of authority was not retroactive.

In seven cases, the LGP did not obtain final due diligence reports from independent consultants prior to conditional commitment, as required by its credit policies and procedures manual. Through their reporting, these independent third parties provide key input to the LGP’s loan underwriting and credit subsidy analyses in technical, legal, and other areas such as marketing, as necessary. LGP officials said that it was a preferable practice to proceed to conditional commitment with drafts of these reports and obtain a final report just prior to closing. They said this practice helps the LGP reduce financial risk, since it allows the LGP to base its decision to close the loan guarantee on final reports rather than reports completed 1 to several months earlier. An LGP official explained that this part of the review process had evolved to meet the program’s needs, but that these changes were not yet reflected in the manual. However, the LGP does not appear to have implemented this change consistently. Specifically, over the course of several months in 2009 and 2010, the LGP alternated between the old and the new process concerning final due diligence reports from independent consultants. In commenting on a draft of this report, LGP officials said that in all cases they received final independent consultant reports before the closing of the loan guarantees. Because the LGP’s policies and procedures manual at the time required final reports at the conditional commitment stage, we reviewed the reports available at conditional commitment and did not review whether LGP received final reports before closing.

In three cases, the LGP conditionally committed to a loan guarantee before OMB had completed its informal review of the LGP’s credit subsidy cost estimate. According to the credit policies and procedures manual, OMB should be notified each time the LGP estimates the credit subsidy cost range, and informal discussions between OMB and LGP should ensue about the LGP estimate. This cost is to be paid by the borrower for all section 1703 projects to date and by the federal government for section 1705 projects. LGP officials explained that, in two of these cases, the LGP had provided OMB with their credit subsidy estimates, but that OMB had not completed its review because there were unresolved issues with the LGP estimates. LGP officials did not provide an explanation for the third case. Contrary to the manual, LGP officials said that OMB’s informal review of the credit subsidy estimates for these applications was not a necessary prerequisite to conditional commitment because the actual credit subsidy cost is calculated just prior to closing and is formally approved by OMB. Furthermore, under section 1705, the government rather than the borrower, was to pay credit subsidy costs. Accordingly, the LGP used these credit subsidy estimates for internal planning purposes rather than for calculating a fee to the applicant. In contrast, the LGP completed OMB’s informal review prior to conditionally committing to at least three of the other loan guarantees we reviewed—including one section 1705 project—and thus the LGP did not perform this step consistently across all projects. In its October 2011 update of its credit policies and procedures manual, the LGP retained the requirement that OMB review the LGP’s credit subsidy cost estimate prior to conditional commitment. Further, the updated guidance added that formal discussions with OMB may be required each time OMB reviews LGP’s credit subsidy cost estimate and should result with their approval.

In two cases, the LGP did not complete its required background check for project participants. The documents provided indicate that LGP did not determine whether the applicants had any delinquent federal debt prior to conditional commitment. In one of these cases, LGP officials said that the delinquent federal debt check was completed after conditional commitment. In the other case, the documents indicate that the sponsor did not provide a statement on delinquent debt, and LGP officials confirmed that LGP did not perform the delinquent debt check prior to conditional commitment.

In one case, the LGP did not collect the full fee from an applicant at conditional commitment as required by the EERE 08 solicitation. According to a LGP official, the LGP changed its policy to require 20 percent of this fee at conditional commitment instead of the full fee specified in the solicitation, in response to applicant feedback. This official said the policy change was documented in the EERE 09 solicitation, which was published on July 29, 2009. However, this particular application moved to conditional commitment on July 10, 2009, prior to the formal policy change.

As outlined in these cases, the LGP departed from its established procedures because, in part, the procedures had not been updated to reflect all current review practices. The version of the manual in use at the time of GAO’s review was dated March 5, 2009, even though the manual states that it was meant to be updated at least on an annual basis and more frequently if needed. The LGP issued its first update of its credit policies and procedures manual on October 6, 2011,2009 manual states that it was meant to be updated at least annually and more frequently if needed. We reviewed the revised manual and found that the revisions addressed many of the differences that we identified between the LGP’s established and actual review processes. The revised manual also states that LGP analyses should be properly documented and stored in the new LGP electronic records management system. However, the revised guidance applies to loan guarantee applications processed after October 6, 2011, but not to the 13 applications we reviewed or to any of the 30 loan guarantees the LGP has closed to date.

The LGP Did Not Always Fully Document Review Steps

In addition to the differences between the actual and established review processes, in another 18 cases, we could not determine whether the LGP had performed a given review step. In some of these cases, the documentation did not demonstrate that the LGP had applied the required criteria. In other cases, the documentation the LGP provided did not show that the step had been performed. The following discusses these cases: In one case, we could not determine whether LGP guidance calls for separate part I and part II technical reviews for a nuclear front-end application or allows for a combined part I and part II technical review. The LGP performed a combined part I and part II technical review.

In eight cases, we could not determine the extent to which the LGP applied the required criteria for ranking applications to the EERE 08 solicitation. The LGP’s guidance for this solicitation requires this step to identify “early mover” projects for expedited due diligence. The LGP expedited four such applications but the documentation neither demonstrated how the LGP used the required criteria to select applications to expedite nor why other applications were not selected.

In one case, we could not determine whether the LGP completed its required background check for project participants. The documents provided indicated there were unresolved questions involving one participant’s involvement in a $17 billion bankruptcy and another’s pending civil suit.

In one case, we could not determine whether the LGP had received a draft or final marketing report prior to conditional commitment in accordance with its guidance. The LGP provided a copy of the report prepared before closing but did not provide reports prepared before conditional commitment.

In seven cases, LGP either did not provide documents supporting OMB’s completion of its informal review of the LGP’s estimated credit subsidy range before conditional commitment, or the documentation the LGP provided was inconclusive.

We also found 82 additional documentation deficiencies in the 13 applications we reviewed. For example, in some cases, there were no dates or authors on the LGP documents. The documentation deficiencies make it difficult to determine, for example, whether steps occurred in the correct order or were executed by the appropriate official. The review stage with the fewest documentation deficiencies was conditional commitment to closing, when 1 of the 82 deficiencies occurred. Table 6 shows the instances of deficient documentation that we identified.

During our review, the LGP did not have a central paper or electronic file containing all the documents supporting the key review steps we identified as being part of the review process. Instead, these documents were stored separately by various LGP staff and contractors in paper files and various electronic storage media. As a result, the documents were neither readily available for us to examine, nor could the LGP provide us with complete documentation in a timely manner. For example, we requested documents supporting the LGP’s review for six applicants in January 2011. For one of the applications, we did not receive any of the requested documents supporting the LGP’s intake application reviews until April 2011. Furthermore, for some of the review steps, we did not receive documents responsive to our request until November 2011 and, as we discussed earlier, in 18 cases we did not receive sufficient documentation to determine whether the LGP performed a given review step. Federal regulations and guidance from Treasury and OMB provide that maintaining adequate and proper records of agency activities is essential to accountability in the management of public resources and the protection of the legal and financial rights of the government and the public.agencies are to clearly document internal control, and the documentation is to be readily available for examination in paper or electronic form.

Furthermore, under the federal standards for internal control, Moreover, the standards state that all documentation and records should be properly managed and maintained.

As stated above, the LGP recognized the need for a recordkeeping system to properly manage and maintain documentation supporting project reviews. In March 2011, the LGP adopted a new records management system called “iPortal” to electronically store documents related to each loan application and issued guidance for using this system. As of November 1, 2011, LGP officials told us that the system was populated with data or records relevant to conditionally committed and closed loan guarantees and that they plan to fully populate it with documentation of the remaining applications in a few months. The LGP was able to provide us with some additional documents from its new system in response to an early draft of this report, but the LGP did not provide additional documentation sufficient to respond to all of the issues we identified. Accordingly, other oversight efforts may encounter similar problems with documentation despite the new system.

Differences Between the Actual and Established Processes and Incomplete Documentation May Pose Risks

It is too early in the loan guarantees’ terms to assess whether skipping or poorly documenting review steps will result in problems with the guarantees or the program. However, we and the DOE Inspector General have reported that omitting or poorly documenting review steps may lead to a risk of default or other serious consequences. Skipping or poorly documenting steps of the process during intake can lead to several problems. First, it reduces the LGP’s assurance that it has treated applications consistently and equitably. This, in turn, raises the risk that the LGP will not select the projects most likely to meet its goals, which include deploying new energy technologies and ensuring a reasonable prospect of repayment. In July 2010, we reported that the inconsistent treatment of applicants to the LGP could also undermine public confidence in the legitimacy of the LGP’s decisions. Furthermore, DOE’s Inspector General reported in March 2011 that incomplete records may impede the LGP’s ability to ensure consistency in the administration of the program, make informed decisions, and provide information to Congress, OMB, and other oversight bodies. The Inspector General also stated that, in the event of legal action related to an application, poor documentation of the LGP’s decisions may hurt its ability to prove that it applied its procedures consistently and treated applicants equitably. Moreover, incomplete records may leave DOE open to criticism that it exposed taxpayers to unacceptable financial risks.

Differences between the actual and established review processes that occur during or after due diligence may also lead to serious consequences. These stages of the review process were established to help the LGP identify and mitigate risks. Omitting or poorly documenting its decisions during these stages may affect the LGP’s ability to fully assess and communicate the technical, financial, and other risks associated with projects. This could lead the program to issue guarantees to projects that pose an unacceptable risk of default. Complete and thorough documentation of decisions would further enable DOE to monitor the loan guarantees as projects are developed and implemented. Furthermore, without consistent documentation, the LGP may not be able to fully measure its performance and identify any weaknesses in its implementation of internal procedures.

Conclusions

Through the over $30 billion in loan guarantees and loan guarantee commitments for new and commercial energy technologies that DOE has made to date, the agency has set in motion a substantial federal effort to promote energy technology innovation and create jobs. DOE has also demonstrated its ability to make section 1705 of the program functional by closing on 30 loan guarantees. It has also improved the speed at which it was able to move section 1705 applications through its review process. To date, DOE has committed to six loan guarantees under section 1703 of the program, but it has not closed any section 1703 loan guarantees or otherwise demonstrated that the program is fully functional. Many of the section 1703 applications have been in process since 2008 or before. As DOE continues to implement section 1703 of the LGP, it is even more important that it fully implement a consolidated system for overseeing the application review process and that LGP adhere to its review process and document decisions made under updated policies and procedures. It is noteworthy that the process LGP developed for performing due diligence on loan guarantee applications may equal or exceed those used by private lenders to assess and mitigate project risks. However, DOE does not have a consolidated system for documenting and tracking its progress in reviewing applications fully implemented at this time. As a result, DOE may not readily access the information needed to manage the program effectively and to help ensure accountability for federal resources. Proper recordkeeping and documentation of program actions is essential to effective program management. The absence of such documentation may have prevented LGP managers, DOE, and Congress from having access to the timely and accurate information on applications necessary to manage the program, mitigate risk, report progress, and measure program performance. DOE began to implement a new records management system in 2011, and LGP staff stated that the new system will enable them to determine the status of loan guarantee applications and to document review decisions. However, the LGP has neither fully populated the system with data or records on all applications it has received nor its decisions on them. Nor has DOE committed to a timetable to complete the implementation of the new records management system. Until the system has been fully implemented, it is unclear whether the system will enable the LGP to both track applications and adequately document its review decisions.

In addition, DOE did not always follow its own process for reviewing applications and documenting its analysis and decisions, potentially increasing the taxpayer’s exposure to financial risk from an applicant’s default. DOE has not promptly updated its credit policies and procedures manual to reflect its changes in program practices, which has resulted in inconsistent application of those policies and procedures. It also has not completely documented its analysis and decisions made during reviews, which may undermine applicants’ and the public’s confidence in the legitimacy of its decisions. Furthermore, the absence of adequate documentation may make it difficult for DOE to defend its decisions on loan guarantees as sound and fair if it is questioned about the justification for and equity of those decisions. DOE has recently updated its credit policies and procedures manual, which, if followed and kept up to date, should help the agency address this issue.

Recommendations for Executive Action

To better ensure that LGP managers, DOE, and Congress have access to timely and accurate information on applications and reviews necessary to manage the program effectively and to mitigate risks, we recommend that the Secretary of Energy direct the Executive Director of the Loan Programs Office to take the following three actions:

Commit to a timetable to fully implement a consolidated system that enables the tracking of the status of applications and that measures overall program performance.

Ensure that the new records management system contains documents supporting past decisions, as well as those in the future.

Regularly update the LGP’s credit policies and procedures manual to reflect current program practices to help ensure consistent treatment for applications to the program.

Agency Comments and Our Evaluation

We provided a copy of our draft report to DOE for review and comment. In written comments signed by the Acting Executive Director of the Loan Programs Office, it was unclear whether DOE generally agreed with our recommendations. The Acting Executive Director stated subsequently to the comment letter that DOE disagreed with the first recommendation and agreed with second and third recommendations. In its written comments, DOE also provided technical and editorial comments, which were incorporated as appropriate. DOE’s comments and our responses to specific points can be found in appendix IV of this report.

Concerning our first recommendation that LGP commit to a timetable to fully implement a consolidated system that enables the tracking of the status of applications and that measures overall program performance, in its written comments, DOE states that the LGP believes that it is important that our report distinguish between application tracking and records management. We believe we have adequately distinguished the need for application tracking and management of documentation. These are addressed in separate sections of our report and in separate recommendations. DOE also states that LGP has placed a high priority on records management and is currently implementing a consolidated state-of-the-art records management system. In the statement subsequent to DOE’s written comments, the Acting Executive Director stated the office did not agree to a hard timetable for implementing our first recommendation. As stated in the report draft, under federal internal control standards, agencies are to employ control activities, such as accurately and promptly recording transactions and events to maintain their relevance and value to management on controlling operations and making decisions. Because LGP had to manually assemble the application status information we needed for this review, and because this process took over 3 months to accomplish, we continue to believe DOE should develop a consolidated system that enables the tracking of the status of applications and that measures overall program performance. This type of information will help LGP better manage the program and respond to requests for information from Congress, auditors, or other interested parties.

Concerning our second recommendation that LGP ensure that its new records management system contains documents supporting past decisions as well as those in the future, subsequent to DOE’s written comments, the Acting Executive Director stated that DOE agreed.

Concerning our third recommendation that LGP regularly update the credit policies and procedures manual to reflect current program practices, subsequent to DOE’s written comments, the Acting Executive Director stated that DOE agreed.

We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, and other interested parties. In addition, this report also 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 ruscof@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 that made major contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

This appendix details the methods we used to examine the Department of Energy’s (DOE) Loan Guarantee Program (LGP). We have reported four times and testified three times on this program, including two previous reports in response to the mandate in the 2007 Revised Continuing Appropriations Resolution to review DOE’s execution of the LGP and to report our findings to the House and Senate Committees on Appropriations. (See Related GAO Products.) Because of questions regarding inconsistent treatment of applications raised by the most recent report in this mandated series, this report, also in response to the mandate, assesses (1) the status of the applications to the LGP’s nine solicitations and (2) the extent to which the LGP has adhered to its process for reviewing applications for loans that the LGP has committed to or closed.

To gather information on the program, we met with the LGP’s management and staff from each of the program’s divisions involved with the LGP’s review of loan guarantee applications from intake to closing. In general, we reviewed the laws, regulations, policies and procedures governing the program and pertinent agency documents, such as solicitations announcing loan guarantee opportunities. We reviewed prior GAO and DOE Inspector General reports performed under or related to our mandate to audit the LGP. In addition, we gathered agency data and documents on the loan guarantee applications in process, those that had received a DOE commitment, and those that had been closed.

To determine the status of the applications to all nine of the solicitations for our first objective, we explored the LGP’s available sources to see what data the program had compiled on the applications received and their current status in the review process. Because the LGP did not have comprehensive or complete application status data, we tailored a data request to collect data on the status of all 460 applications to the program. In consultation with agency officials, we prepared a data collection form requesting basic information on the identity, authority, amount requested, status, key milestone dates, and type of energy technology for all of the applications to date. These data were to provide a current snapshot of the program by solicitation and allow analysis of various characteristics. To ease the data collection burden, we populated the spreadsheets for each solicitation with the limited data from available sources. LGP staff or contractors familiar with each solicitation completed the spreadsheets, and these spreadsheets were reviewed by managers before they were forwarded to GAO. We assessed the reliability of the data the LGP provided by reviewing these data, comparing them to other sources, and following up repeatedly with the agency to clarify questions and inconsistencies, and obtain missing data. This process enabled us to develop up-to-date program-wide information on the status of applications. This process resulted in data that were complete enough to describe the status of the program. Once we collected these data, we found them to be sufficiently reliable for our purposes. The LGP updated its March 2011 applicant status data as of July 29, 2011, and we obtained additional data on the conditional commitments and closings made by the September 30, 2011, expiration of the section 1705 authority for loan guarantees with a credit subsidy. To maintain consistency between the application status data initially provided by the LGP and later data updates, we use the terms application and project interchangeably, although in some cases multiple applications were submitted for a single project.

To assess the LGP’s execution of its review process for our second objective, we first analyzed the law, regulations, policies, procedures, and published solicitations for the program and interviewed agency staff to identify the criteria and the key review process steps for loan guarantees, as well as the documents that supported the process. We provided a list of the key review steps we identified to LGP officials, and incorporated their feedback as appropriate. Based on the key review steps and supporting documentation identified by LGP staff, we developed a data collection instrument to analyze LGP documents and determine whether the LGP followed its review process for the applications reviewed. Since the LGP’s review process varied across solicitations, we tailored the data collection instrument to meet the needs of the individual solicitations. We then selected a nonprobability sample of 6 applications from the 13 that had received conditional commitments from DOE or had progressed to closing by December 31, 2010, and had not applied under the Mixed 2006 solicitation, since the LGP’s review process was substantially different for this solicitation and not directly comparable to later solicitations. We requested documentation for these 6 applications representing a range of solicitations and project types. We selected our initial sample to represent each of the five solicitations where applications had reached conditional commitment and different LGP investment officers to reduce the burden on LGP staff. We requested the documents supporting the LGP’s review process from intake to closing and examined them to determine whether the applicable review steps were carried out. While we examined whether the applicable review steps were carried out, we did not examine the content of the documents and the quality of work supporting them. Where the documents were not clear about completion of the process, showed potential differences from the review process, or raised questions, we followed up with program officials to obtain an explanation and, as applicable, documentation supporting the explanation. On key questions where we identified differences from the review process for the initial sample of 6, we conducted a targeted review of documents for the 7 remaining applications that had reached conditional commitment or closed prior to December 31, 2010, excluding Mixed 2006 applicants. The six loan guarantee application files reviewed in full and the seven files reviewed in part were a nongeneralizable sample of applications.

To identify the initial universe of private lenders with experience financing energy projects, we reviewed the list of financial institutions that had submitted applications to the LGP under the Financial Institution Partnership Program (FIPP) solicitation. We used these firms as a starting point because of their knowledge about DOE’s program and processes. To identify financial institutions involved in energy sector project finance outside of FIPP, we searched or contacted industry associations, industry conferences, and other industry groups in the same energy sectors that LGP solicitations to date have targeted. We interviewed seven private lenders identified through this process using a set of standard questions and the outline of the DOE’s review process to gain insights on its comparability to the review process for underwriting loans in the private sector.

We conducted this performance audit from September 2010 to February 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Tables of Loan Guarantees Conditionally Committed or Closed

The following tables provide basic details on the loan guarantee applications that received a conditional commitment by September 30, 2011, or had proceeded to closing by that date. Table 7 lists applications under section 1703 with conditional commitments. Table 8 lists section 1705-eligible applications with conditional commitments that did not reach closing by the expiration of the section 1705 authority on September 30, 2011. Table 9 lists the section 1705 applications with conditional commitments that reached closing by the expiration of the section of the 1705 authority on September 30, 2011.

Appendix III: Key Tasks in the LGP’s Review and Approval Process for Loan Guarantee Applications

Table 10 provides basic details about key review tasks in LGP’s process for reviewing and approving loan guarantee applications, as identified from our review of relevant laws, regulations, LGP guidance, published solicitations and interviews with LGP officials. These tasks formed the basis for our examination of LGP files to determine if LGP followed its review process for each of the 13 applications that had received conditional commitments from DOE or had progressed to closing by December 31, 2010, and had not applied under the Mixed 2006 solicitation. Accordingly, the tasks listed below reflect LGP’s review process for the applications we reviewed and do not reflect LGP’s review process for applicants to the Mixed 2006 solicitation, which was substantially different and not directly comparable to later solicitations. Additionally, since we found minor variations in LGP’s review process across the solicitations, we have noted below which tasks are only applicable under certain solicitations. If no exceptions are listed, then the particular task is applicable across all the relevant solicitations.

Appendix IV: Comments from the Department of Energy

GAO Comments

1. We disagree with DOE’s assertion that our findings relate only to procedures that LGP had in place in 2009 and early 2010. We compared LGP’s actual process to its established process for each of the applications that reached closing or conditional commitment by December 31, 2010. As we note in the report, LGP did not revise its policies and procedures manual until October 2011, so the same established procedures were in place for all of the applications that closed by September 30, 2011. We did not review any of the applications that were committed or closed during 2011 in depth, in part because it took through November 2011 for LGP to respond to our repeated requests for available documentation for the applications closed or committed to through 2010. Our 2010 report on LGP (GAO- 10-627) and this report had information on five of the same applications. We examined DOE’s review process for these applications in much more depth for this report than in the previous one. We did take into account changes in LGP procedures, systems, and other improvements as part of our review, as noted by the references to LGP’s new records management system and its updated policies and procedures manual. We also took into account changes in LGP policies and procedures that affected the 13 files that we reviewed, when LGP was able to document that these changes had occurred. 2. As noted in the report, these systems were not fully implemented at the time we were gathering data for our review and this is still the case, according to DOE’s written comments, dated February 23, 2012. 3. As stated above, we disagree with LGP’s statement that our findings relate only to procedures that LGP had in place in 2009 and early 2010. As we note in the report, LGP did not revise its policies and procedures manual until October 2011, so the same established procedures were in place for all of the applications that closed by September 30, 2011. The report describes LGP’s efforts to update its documentation management and tracking systems and notes that none of these were fully implemented at the time of our review. 4. DOE disagrees with the recommendation to implement an application tracking system. However, as noted in our report and DOE’s comments, LGP is in the process of implementing a consolidated state of the art business management system that DOE believes may address this need. As we stated in the draft report, under federal internal control standards, federal agencies are to employ control activities, such as accurately and promptly recording transactions and events to maintain their relevance and value to management on controlling operations and making decisions. Because LGP had to manually assemble the application status information we needed for this review, and because this process took the program over three months to accomplish, we continue to believe DOE should develop a consolidated system that enables the tracking of the status of applications and that measures overall program performance. This type of information will help LGP better manage the program and respond to requests for information from Congress, auditors, or other interested parties.

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Karla Springer, Assistant Director; Marcia Carlsen; Cindy Gilbert; Cathy Hurley; Emily Owens; John Scott; Ben Shouse; Carol Shulman; Barbara Timmerman; and Lisa Van Arsdale made key contributions to this report.

Related GAO Products

Recovery Act: Status of Department of Energy’s Obligations and Spending. GAO-11-483T. Washington, D.C.: March 17, 2011.

Department Of Energy: Further Actions Are Needed to Improve DOE’s Ability to Evaluate and Implement the Loan Guarantee Program. GAO-10-627. July 12, 2010.

Recovery Act: Factors Affecting the Department of Energy’s Program Implementation. GAO-10-497T. March 4, 2010.

American Recovery and Reinvestment Act: GAO’s Role in Helping to Ensure Accountability and Transparency for Science Funding. GAO-09-515T. March 19, 2009.

Department Of Energy: New Loan Guarantee Program Should Complete Activities Necessary For Effective and Accountable Program Management. GAO-08-750. July 7, 2008.

Department Of Energy: Observations On Actions To Implement The New Loan Guarantee Program For Innovative Technologies. GAO-07-798T. September 24, 2007.

The Department of Energy: Key Steps Needed to Help Ensure the Success of the New Loan Guarantee Program for Innovative Technologies by Better Managing Its Financial Risk. GAO-07-339R. February 28, 2007.