Probe demanded on $730 million Energy Dept loan to Russian-owned steel company in MI

In June, the Department of Energy gave a “conditional commitment” to a firm called Severstal Dearborn LLC for a $730 million loan to help boost development of Advanced High Strength Steel (AHSS), which the Obama administration believes will be key to developing lighter and more fuel-efficient vehicles.  However, two Republican Senators want an investigation of the decision to hand this much money to a firm that is a wholly-owned subsidiary of a foreign firm (OAO Severstal is based in Russia), for a product already available on the market from other manufacturers — and which Severstal already produces:

Two GOP senators want the Energy Department’s (DOE) internal watchdog to investigate a planned $730 million loan for a company to manufacture high-strength automotive steel in Michigan.

Sens. Dan Coats (R-Ind.) and Pat Toomey (R-Pa.) are asking DOE Inspector General Gregory Friedman to probe whether Severstal North America — a subsidiary of Russian steel giant OAO Severstal — should receive public financing to retool and expand facilities in Dearborn, Mich. …

Severstal won a conditional commitment from DOE in June to receive a loan through DOE’s Advanced Technology Vehicle Manufacturing program.

The senators’ letter asks a series of questions about the planned funding, such as whether DOE undertook a “market analysis” to determine whether the loan was needed, and whether the project is even eligible under the program.

The letter to the DoE IG makes the concern very plain:

Did the Department conduct any type of market analysis before making this award to determine what AHSS products are already in the marketplace and whether a taxpayer loan was even needed?  Did the Department make any estimates of current and future capacity in the United States for the production of AHSS? Did the Department estimate the future demand for AHSS from automakers? Evidence shows that the AHSS market is strong and robust in the United States with multiple producers manufacturing high technology products. In fact, we are told that AHSS has been manufactured in the United States since the 1980s and there is substantial excess capacity today. In the case of hot dipped galvanized AHSS, the most popular product, current or soon to come on line factories in the United States have a capacity to supply twice the expected demand in 2020, even with increased CAFE standards. To date, the Department refuses to answer how it determined that a product with excess capacity now needs a federal loan. …

Did the Department determine whether Severstal would use the loan to produce AHSS that is appreciably different from other AHSS products in the market? If not, how does subsidizing one company over other companies in a competitive market further the goals of the ATVM program?

This looks suspiciously like the federal government intervening in a market to favor one participant over others, if this is true.  Not only is that an inappropriate exercise of power, it’s destructive toward the very end it ostensibly seeks.  By giving Severstal an unfair advantage over its competitors, it will discourage private investment in the market with the other manufacturers, which will curtail competition.  That will drive up prices and allow for greater inefficiencies in both quantity and quality of product.

Why did the Department fund a project that was near completion and already had been paid for by the loan recipient? According to Severstal’s own documents, two of the three required lines will be finished by December 2011. Only an annealing line valued at one-third of the amount of the loan at best is awaiting the final approval. Additionally, the Department’s website states, “Loans will not be available on a retroactive basis.” Is it proper to give a company more than half a billion dollars for facilities that they have already built?

Short answer: no.  Obviously, Severstal doesn’t need the money to build the facilities for which this loan was approved.  Did anyone at the DoE even bother to check whether Severstal had a need for this cash at all?  By the time they get the money, most of the construction will be over — which brings us to the next point:

Did the Department accurately portray the job impacts of this loan? In its press release the Department claimed that “over 2,500 construction jobs” would be created by the issuance of this loan. We find that claim dubious on the merits, since most of the plant is already finished.  Further, the Department estimated the project would create 260 permanent jobs. Given the state of supply and demand, any new jobs created at Severstal would come at a cost to other producers—creating at best a net zero job gain nationwide. Did the Department calculate job losses at other non-subsidized producers?

In an emerging market, one might be able to claim that a loan like this could create some jobs on a long-term basis — even though we should still remember that by the DoE’s claim, the permanent jobs created would cost taxpayers $2.8 million each.  In a mature market where several manufacturers compete to sell the same product, most of the jobs “created” will come at the expense of other competitors.  That’s perfectly fine when private investors make those decisions, but government should not conduct interventions in mature markets to pick their own preferred winner.

This kind of action would be unacceptable even in economic boom times and budget surpluses.  We’re far from those times now, and proposing to spend nearly three-quarters of a billion dollars on facilities that would already be built anyway for a manufacturer whose product is already produced by other American firms is either insanity or corruption at work.