Editorial | NewSat’s Failure and the Ex-Im Bank
Allowing Institution To Lapse Would Undermine U.S. Industry
To no one’s surprise, congressional critics of the U.S. Export-Import Bank have seized on the opportunity afforded by the bankruptcy of startup Australian satellite operator NewSat to hammer the institution, which faces a July 1 shutdown unless lawmakers act to keep it open.
The Ex-Im Bank, which backs overseas projects that provide export business for U.S. companies, has become a major player in the space industry, as have its counterpart agencies in France, Russia, China and elsewhere. The organization is under fire from free-market advocates in Congress, who deride Ex-Im financing as corporate welfare that artificially bolsters business projects that otherwise wouldn’t be viable.
NewSat’s failure does fit that narrative. The company invested some $193 in the construction of its Jabiru-1 satellite by Lockheed Martin Space Systems, with most of that funding coming in the form of an Ex-Im Bank loan. Well over $100 million had been disbursed by the time a U.S. bankruptcy court voided the construction contract due to NewSat’s inability to pay the bills, leaving Lockheed Martin in sole possession of the more than half-built satellite, and Ex-Im poorly positioned to recover its money.
With the current legislation authorizing Ex-Im’s activities set to expire June 30, the timing of its first major space-related failure could not have been worse. NewSat’s collapse provided fresh ammunition to opponents of reauthorization, who let loose during a June 3 House Financial Services Committee hearing on the subject.
“This is more evidence that we’re beyond broken here at the Export-Import Bank,” said Rep. Bill Huizenga (R-Mich.), a longtime critic of the institution. “At this point, [NewSat] appears to be handing you a $100 million loss.”
Rep. Mick Mulvaney (R-S.C.) said NewSat’s failure provided a windfall to Lockheed Martin at taxpayer expense.
In his testimony, Ex-Im President Fred Hochberg suggested the possibility of recovering at least some of the money, although it was far from clear how that might be accomplished.
But that’s largely beside the point. The point is that making business loans entails risk, whether the lending institution is government-backed or private. The Ex-Im Bank does its due diligence just like any other bank but the process is not infallible — inevitably, some business ventures will fail.
Free market advocates understandably recoil at the notion of taxpayers underwriting business risks, but in recent years at least, the Ex-Im Bank has been a net contributor to the U.S. Treasury. According to Mr. Hochberg, the bank cleared $675 million in 2014, has a default rate of just .167 percent through March 2015 and is sitting on $5 billion in reserves.
NewSat’s bankruptcy does highlight some Ex-Im practices that bear closer examination. For example, the bank apparently has no legal claim to the Jabiru-1 satellite hardware — which presumably has some resale value — because it is not considered a completed asset, at which point the bank would have it as collateral. This, according to Mr. Hochberg, is typical of Ex-Im arrangements.
Some also might also question the bank’s decision to deny additional financing to help NewSat complete the project when the only other alternative appears to have been conceding the $100 million-plus loss. Mr. Hochberg said the bank declined to reopen its wallet absent the emergence of buyer willing to take ownership of the satellite. The bank asked for a short extension of the deadline for finding a solution that would keep the contract in force, but Lockheed Martin refused to go along, he said.
Lockheed Martin’s apparent hard line is understandable in one sense — a company cannot be expected to continue devoting resources to a project for which it isn’t being paid. But even if it has no legal obligation to do so, Lockheed Martin might want to consider some sort of reimbursement to the bank if it ultimately manages to sell the satellite hardware. After all, the company is a direct beneficiary of the Ex-Im loans and makes its living in large part on U.S. taxpayer dollars.
But these issues, while making a case for reforming Ex-Im practices, are hardly grounds for letting the bank expire. For all their principled objections, congressional critics must look at the bigger picture, notably the fact that the bank’s demise would not remove export credit agency financing from the global industrial landscape. One need look no further than the NewSat project — where France’s Coface agency agreed to back loans for Jabiru-1’s launch on an Ariane 5 rocket — to see the prevalence of export credit agency financing.
Like it or not, declining to reauthorize the Ex-Im Bank would amount to unilateral disarmament, putting U.S. industry at a competitive disadvantage in many important global export markets, notably including space.