Loan Guarantees

It has been an exciting week in loan guarantees. Last Thursday, the U.S. Export-Import Bank decided not to provide loan guarantees to support the sale of $310 million in mining machinery by Bucyrus International, Inc., to Reliance Power Ltd., of India. The sale was contingent upon the Indian firm receiving Ex-Im Bank-supported financing. The Ex-Im Bank said its decision was based on consideration of environmental impacts of the deal, as mandated by a carbon-intensity policy implemented this spring. The machinery was to be used to mine coal for a 3,960 megawatt power plant coming on line in 2012 and the Bank did not wish to promote the use of coal. The coal-fired plant would emit about 27,000 tonnes of carbon dioxide each year.

Howls went up across the land citing negative impacts on the economy of Milwaukee and the U.S. The Metropolitan Milwaukee Association of Commerce estimated that the Bucyrus sale would support over 300 jobs in the Milwaukee region and more than 650 jobs among suppliers outside the region. Politicians local and national weighed in with the Obama Administration, urging reconsideration, noting that Reliance Power would bring the coal plant online no matter what Ex-Im decided and that international competitors stood ready to supply mining equipment to the Indians if Bucyrus could not.

According to a Wall Street Journal report yesterday, the Bank said it would reconsider its decision and "...take into account Reliance's plans to build renewable energy plants in India and their potential to offset environmental damage from the coal project." This morning the Indian press is reporting that the Ex-Im Bank has agreed to reverse last week's decision and will extend $600 million in loan guarantees to support the Bucyrus equipment sale.

World-wide, government involvement in large industrial transactions is common practice. In this instance, a U.S. equipment manufacturer, its employees and suppliers, and the communities in which they live and work will benefit from a three-year contract the company would not have won without government support.

A similar story is unfolding as new nuclear power plants begin construction in the U.S. Federal loan guarantees will help move these projects forward, supporting thousands of direct construction jobs for four to five years and thousands more jobs among suppliers and local businesses involved. Loan guarantees will lower the cost of financing these massive projects and reduce the cost to consumers for the electricity generated by the finished plant. Finally, the electricity produced will help avoid the carbon emissions of fossil fueled sources which now dominate our generation sources. All in all, a good deal for the nation.