Last night, the Dept. of Energy released a preliminary rule which gives the details of the $25 billion government program offered to automakers to help meet the new CAFE standards. The official name is "Advanced Technology Vehicle Manufacturer Assistance Program". I spent some time reading the paper over, and thought I'd share some details, many of which are not widely reported. The rule paper is located here.
First, the program has two parts: a direct loan program, and a grant program.
The money in either case is intended only to fund plant upgrades or engineering work for a future product, not ongoing operations. In fact, companies are explicitly prohibited from investing the money, and any investment income from the loans must be returned to the government (611.102, 611.105).
Loan Program:
- To qualify for a loan, a company must be working on an Advanced Technology Vehicle. An ATV is defined as a vehicle which has at least EPA Tier II Bin 5 emissions levels, and will have fuel economy that is at least 125% of a "substantially similar" vehicle from 2005. (611.2)
Here is an excerpt of their examples:
This is the table that shows the fuel economy improvement requirement to be considered an ATV:
So for a Compact Sedan, to qualify as an ATV, the proposed vehicle would have to attain at least 42.2 MPG; a Compact Performance Sedan would have to have fuel economy of at least 29.5 MPG.- For purposes of calculating the ATV's fuel economy improvement, if it is a flex fuel vehicle, its fuel economy must be calculated without credit for flexible fuel operation. That means that if burns E85, the ATV fuel economy is miles per gallon of E85, not gasoline equivalent. This would appear to penalize flex fuel vehicles compared to how they are treated currently.
- A loan applicant must be "financially viable", such that it does not require the government ATV loan to survive (611.100).
- Automakers and parts suppliers are eligible, as long as the the plant improvements or engineering is done in the U.S. So domestic arms of foreign based companies such as Honda could qualify.
- To qualify for a loan, an automaker's fleet average fuel economy (volume weighted) from the most recent year of data must be no worse than their fleet fuel economy in 2005. (611.100)
- Applicants must file environmental impact studies and economic impact studies to document how their plant changes will impact the community, both positive and negatively (611.106).
- Projects will be selected for approval based on technical merit, such as amount of fuel economy improvement, as well as other factors such as "economic diversity", and financial health. Older facilities will be given higher priority.
- Applicants must pay any workers that it hires to do the plant renovations a "prevailing wage" in the area the work is being done. This is probably a bone for the unions (611.101).
- A borrower can only borrow up to 80% of a project's projected cost (611.105).
- The loan terms are for 25 years, and the borrower may defer repayment for up to 5 years after the project is complete. The interest rate is to be based on "outstanding marketable obligations of the United States of comparable maturity", which I think means 25 year treasury bonds. (611.107) A 30 year U.S. bond currently pays 4.5%.
- The U.S. government gets a lein on any property which is acquired with loan funds, and any assets which are pledged as collateral for the loans.
Grant Program:
- If a grant is requested, the grant can be for no more than 30% of a project's cost. (611.204)
- Grants will be given preferentially for projects that re-tool facilities that are at least 20 years old. (611.206)
- 10% of the money used for grants (not loans) each year is set aside for small companies of 500 employees or less, or a consortium of such small companies (611.207).
Some observations.
This is not a "bail-out". The money can only be used for specific projects which are tied to fuel economy improvements. There are some significant strings attached to this program, and though the loans are cheap, they are expected to be repaid, or the government will be able to sieze the collateral of the borrowing company.
The program seems to be somewhat targeted towards unionized labor. There is a bias in the program to older plants (20 years), and plants which are shut down. There is a prevailing wage rule. There is also a carve-out for small suppliers.
This is not a quick fix. To apply for a grant or loan, a company has to generate a large amount of application paperwork, including environmental impact studies, economic studies, financial status information. A company also has to show with computer modelling or prototypes that their proposed project will improve fuel economy by a very significant 25%, and flexible fuels get no advantage in this calculation. The application and review process is likely to take many months if not years.
That is why, even with this program in place, the Domestic 3 are asking the government for direct aid right away.
The financial strength requirement could be a deal-killer for some or all of the Domestic 3 auto makers. If the DOE uses more stringent requirements for financial health, such as low debt/equity ratios, neither GM, Ford, nor Chrysler may qualify.
