What the Solyndra Scandal Can Tell Us about Fixing Our Broken Aid System (Hint: Be More Like OPIC & MCC)

November 22, 2011

As the troubling details of the Department of Energy's loan program continue to roll out, I can’t help but think of another beleaguered agency…USAID.  And, I also wonder if, in thinking how to generate new clean energy technology at home, we might also find insights to better promote development abroad?  Here’s how:

Congressional inquiries into Solyndra's collapse are asking about how half a billion dollars of public money was lost, focusing on potential conflicts of interest, how political influence may have contaminated the loan decision, and how bureaucrats within one agency (DoE, which ran the program and was under massive pressure to show progress on clean energy and to push money out the door) ignored red flags and concerns from other agencies (Treasury, OMB). Anger from Capitol Hill is understandable, but the charges of cronyism or mistakes by civil servants aren't, to my mind, the real story here -- these problems were utterly predictable given the nature of the solar panel market and the structure of the loan program. The real worry is why such difficult investment decisions were in the hands of DoE in the first place.

The clean energy loan program was: (a) tasking civil servants to use public money to create something totally new in a complex highly unpredictable environment; (b) under intense pressure to show rapid results; and (c) highly scrutinized for any specific mistakes. If this isn’t a perfect recipe for failure, I don’t know what is. In fact, given these three conditions, it’s shocking that we would even expect any other outcome.

What’s worse, we often use a similar recipe-for-failure in international development. Let’s take another controversy, the difficult USAID program in Afghanistan, which is under tremendous pressure to show quick results and at the same time push money out the door. The Afghan aid program has come repeatedly under fire from Congress and the Inspector General for how it spent huge sums of public money, with hard questions about failed canal and road projects, contractor scandals, corruption within the Afghan government, and infighting between USAID and State. Sound familiar?

Ventures like creating new energy technology or trying to build things in a broken war-torn country are fraught with risk. Most experiments should be expected to fail.  In both cases, the technologies themselves are unclear, the markets are evolving quickly and unpredictably, and we cannot even be sure who will be the key players a few months from now, much less further into the future.  Asking mid-level government officials to pick winners and be right every time is a fool's errand.

One option is to accept that government cannot pick winners and leave this stuff to others. But if packing up and going home isn’t an option (politics often demands intervention) then we have to find a better way.  If we want to encourage risk-taking, innovation, and creativity to tackle some of the toughest and most pressing national challenges—promoting clean energy and fixing Afghanistan seem pretty high on the list—then we need to give decision makers more space for trial and error and change the incentive structure. 

For a start we need (1) different decision makers and (2) sensible timing and metrics for success.  Government bureaucracies are simply not suited for handling this kind of risk—especially those under the thumb of what Andrew Natsios calls the counter-bureaucracy. Instead, clean energy investments could be run by a private fund manager selected through an open process and their performance judged based on the overall portfolio over, say, 5 or 10 years.  This seems eminently better than having career bureaucrats making choices on a short-term horizon and getting nitpicked for every mistake.  It would also allow fund managers to take risks because, even if many of the individual investments fail, a few big winners would allow the overall portfolio to show success. This approach could also leverage public money and risk guarantees to bring in even more private capital.

If this sounds familiar, it should: it’s the venture capital model.  And fortunately, the U.S. government already has an agency that does this kind of fund creation pretty well, the Overseas Private Investment Corporation.  OPIC has launched dozens of venture and private equity funds targeting specific sectors and regions in poor countries of the world.  And OPIC costs the taxpayers less than nothing—it serves U.S. foreign policy and it makes moneyfor the government.  This kind of arm’s length-plus-guarantee structure makes eminently more sense for a domestic clean energy fund than the current DoE program. 

An enhanced OPIC with new tools and mandates (see my proposal with Ben Leo here) could be helpful in places like Afghanistan too. But even where OPIC’s venture approach might not be enough and more traditional foreign aid is needed, there is a model better suited for delivering it than through USAID’s risk-averse bureaucracy: the Millennium Challenge Corporation.  The MCC develops five-year compacts with specific indicators for success and the projects are managed like a portfolio. (To be clear: I’m not saying that USAID should cede Afghanistan to the MCC or that the current MCC should tackle fragile states. But I do believe that the space and structure of the multi-year compact-portfolio approach has clear advantages in such circumstances.)

For both venture capital and development there are lots of poorly understood and rapidly changing dynamics, making it impossible to know what will work in the design stage. It's exactly the wrong environment to put decision-making in the hands of bureaucrats with an anxious Congress looking over their shoulders. If we hope to avoid more Solyndras and poorly-built Afghan roads in the future, then we should be learning more from the likes of OPIC and MCC.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.