Jessica Hill/AP Photo
The Industrial Finance Corporation would target critical industries with shaky supply chains, like synthetic biology and semiconductors, as well as green sectors with international growth potential.
Maurizio Cattaneo is exasperated. A chemical engineer, Cattaneo patented a filter for virus harvesting that helps scale up the production of viral vector vaccines, like those used to prevent COVID-19. Right now, business is booming.
But instead of inking new deals for his virus filter supply company, Cattaneo has just had to tell a dozen clients to wait six months.
Cattaneo usually orders $10,000 worth of membranes for his startup, Artemis Biosystems, but his ordinary supplier now won’t fill an order under $300,000. Finding a contractor who can fit a special casing around the membrane is even trickier, though he thinks he could find a work-around, given enough cash.
But he can’t find a line of credit, he told the Prospect. His bank has been unhelpful, and venture capital firms expect sale potential in the billions of dollars, they have told him. He estimates his total market—the drug developers buying his lab equipment—at around $100 million.
“Even though it’s amazing equipment, and you can increase manufacturing and yield, it’s not as attractive, from the point of view of market size,” Cattaneo said he has been told. VC firms have eyes only for his clients. Drug developers boast exponentially bigger potential market shares if they seize on a breakthrough formula, even though, Cattaneo said, “a lot of it is hype.”
Now, Cattaneo is reluctantly looking to contractors in Taiwan and China for membranes and other parts. Even though supplies are cheaper, he has been wary of the Asian market ever since he ordered DNA from China and received a contaminated shipment. Despite his quality concerns, he may have no choice but to go abroad for contractors to assemble his product.
Artemis is not the only biotech startup fed up with capital constraints.
Venture capital firms expect sale potential in the billions of dollars.
Take Metalytics, a company that analyzes live cells grown in labs across sectors ranging from biologic drugs to chemical manufacturing, biofuels, and agricultural applications.
Cells grown in a lab are fed a steady “media” diet—a mix of sugars, amino acids, and vitamins. Like a person, you can overfeed a cell. Empty calories will make it grow without expressing the right protein, or producing the intended product. Metalytics helps firms analyze their cells’ metabolisms, and determine how much energy is being wasted on excess growth.
Right now, the firm offers a made-to-order service. CEO Eric Cumming wants to scale up, standardize Metalytics’ software, and sell their tool to more clients. Although they’re in talks with trendy firms, like makers of lab-grown meat, they have struggled to attract venture capital.
Metalytics has fallen into a trap that plagues firms in applied science. The firm is based out of North Carolina’s Research Triangle Park, the largest science hub in the country, but Cumming prefers to say that they live in the “valley of death,” the notorious zone after the research stage where investment falls off.
A PROPOSED NEW GOVERNMENT investment arm would give manufacturers like Artemis and Metalytics access to capital specifically targeted at projects with long time horizons, big up-front costs, or low-to-moderate returns.
Typically, venture capital firms clustered in Silicon Valley, Boston, and New York pick a handful of lightweight internet companies and hope one will blow up in the next few years.
The Industrial Finance Corporation (IFC), introduced by a group of moderate senators, flips that logic, giving companies a long runway to invest in capital stock. The IFC would target critical industries with shaky supply chains, like synthetic biology and semiconductors, as well as green sectors with international growth potential, such as superconducting cable for transmission lines and battery production.
The bill’s backers highlight cutting-edge materials science, like robotics and cleaner steel production. Sen. Chris Coons (D-DE), who is sponsoring the legislation, worked for years at a company that makes Gore-Tex fabrics and medical devices. But the authority would also seek out firms in more traditional sectors that struggle to obtain capital, a Senate aide said.
Auto parts manufacturers, for example, often opt not to build a new factory due to the huge up-front capital expense, and the long time horizon to pay it down. Firms once were able to draw on personal relationships with regional banks to fund major undertakings. But as the banking sector has consolidated, that source of so-called “patient capital” has dried up.
“This is basically a soft investment planning authority,” one commenter gleefully announced on r/Social Democracy, a Reddit forum. “The US moderates are actually doing some cool stuff.”
Whether Coons and Sen. Amy Klobuchar (D-MN), a co-sponsor, are quietly designing a Soviet Gosplan for green energy is debatable. The bill’s boosters underscore the independence of the authority, which would be structured as a government-owned corporation and led by a CEO, partly to avoid the bureaucratic hurdles of the federal hiring process.
Still, it’s a vehicle for central planning. The IFC would not hew to politically neutral or technical selection criteria, but would actively seek out projects aligned with public-policy priorities, like improving export competitiveness. The executive board would be appointed by the president and seeded with $50 billion to purchase equity stakes, make loans, and coax additional financing from the private sector.
Lawmakers are pushing for the IFC to be included in the reconciliation bill. Whether or not it makes the cut, the proposal signals a growing recognition that sluggish domestic development does not follow inevitably from the China shock or high wages for American factory workers. Wealthy countries with sophisticated manufacturing sectors, like Germany and Japan, accommodate greater investor patience and pay workers well.
In fact, the second-largest bank in Germany is a publicly owned development authority that lends to manufacturing and clean-energy sectors. KfW’s more than half a trillion euros in assets were originally capitalized by the U.S. government, in funding provided after World War II.
The U.S. struggles to compete in high-end manufacturing, meanwhile, because of misinvestment. Government supports universities and research institutions, but when companies turn to bring new products to market, there are few financing options to help build manufacturing capacity. So many look overseas.
Industrial-policy researchers say manufacturing support can help earlier-stage R&D, too. If prototyping and product development take place near the lab, rather than abroad, there are more opportunities for tweaking design.
THE IFC IS PART of a broader acceptance that state spending is no longer a dirty word, and it’s not the only proposal for a new national development authority.
Barack Obama and Donald Trump both unsuccessfully floated the idea of a national infrastructure bank to finance spending on persistently underfunded public works, smoothing out the feast-and-famine cycle that plagues public infrastructure, when Congress occasionally gets around to refilling state coffers.
At least five proposals for some form of national infrastructure authority have been introduced this year. But after lawmakers briefly contemplated including a version in the bipartisan bill, talks broke down.
“Republicans would prefer that a financing authority be able to subsidize fossil fuels, as well,” Sen. Chris Van Hollen (D-MD) told the Prospect.
With Sen. Ed Markey (D-MA) and Rep. Debbie Dingell (D-MI), Van Hollen has designed a new green bank that would provide lending for solar installations, home upgrades, and other green infrastructure.
The “clean energy accelerator” in President Biden’s jobs plan, with an initial federal input of $100 billion, was inspired by their bill. The sponsors say that one-time appropriation could produce as much as $880 billion of total investment over ten years.
As fiscal hawks place an artificial cap on the size of the overall bill, the ability to pull in private-sector dollars looks especially attractive. And it’s been done before.
The IFC would not hew to politically neutral or technical selection criteria, but would actively seek out projects aligned with public-policy priorities.
THE FIRST GENERATION of American green banks aimed to usher private Wall Street capital into clean-energy projects by demonstrating that returns on green investment were viable. They took off a decade ago, in cities and states. “The orientation was towards proof of concept,” said Adam Zurofsky, who helped found Rewiring America, a nonprofit advocating for mass electrification, “showing that this new type of public entity using public dollars could do meaningful projects and be viable.”
Around $2 billion spent by existing green banks in states like Connecticut and New York has already leveraged around $7 billion, according to the Coalition for Green Capital, a nonprofit group advocating for the banks. These examples of “Green Banking 1.0” quickly reached self-sustaining returns—an achievement that, at a closer look, sometimes meant they fell short of their mission to seek out market gaps. Critics say they’ve sometimes been redundant with the private market, becoming solvent by picking safer companies where their help is less needed.
Now, analysts like Zurofsky want green banks to be more patient, selecting projects further out from commercialization. More traditional backers of the public-private partnership model retort that public banks should fund products on the verge of market viability, helping speed along their takeoff. The unique value of a public bank is leveraging private dollars, not providing direct grants and subsidies.
The bill’s sponsors have avoided committing to any one investment strategy as they push for its inclusion in a reconciliation bill whose future is not guaranteed.
“With creative approaches, there are substantial greenhouse gas emission reductions to be had by focusing dollars on communities that have been left behind, as well as investing in breakthrough companies and startups that can bring about transformational changes,” Van Hollen told the Prospect.
The clean-energy accelerator backed by Biden emphasizes investments reserved for poorer areas and people of color. That emphasis isn’t just social justice signaling, but an investment proposition. The same faction urging more patient portfolio selection argues that development banks should direct funding to projects in lower-income neighborhoods where state investment is already lacking, like affordable housing and transit.
Even in sectors that are notoriously hard to marketize, such as affordable housing, public banks may already be competing with private ones. Donnel Baird, who heads a startup focused on housing electrification, pitches heat pumps as part of a new asset class with “bondlike returns” over a 10- or 15-year time horizon.
Policymakers recognize the need to force owners of capital to be more patient. Even some owners of that capital are being accommodating. Or at least, they sense the shifting mood in the room.
Kamran Jebreili/AP Photo
The Industrial Finance Corporation was introduced by a group of moderate senators, including Sen. Chris Coons (D-DE), who is sponsoring the legislation.
“The power of our permanent capital model is that we can think about things like a strategic rather than a financial investor,” the head of Blackstone Infrastructure Partners told a trade publication earlier this month. That attitude, he said, allows the world’s largest landowner to “stick with high-conviction themes and to really think about what a business could become in 10, 15, 20 years.”
Even as elites launch a new era of dirigisme, they’ve retained the all-American spirit of ad-hocracy.
Van Hollen underscored the importance of giving the green bank maximum flexibility and autonomy. That insistence might raise some eyebrows among those who would prefer a more predictable and policy-aligned approach to green investment.
Others have proposed a green ratings agency, like an FDA for green bonds, to guard against “greenwashing,” or exaggerated claims about the environmental friendliness of investments.
Asked about the public ratings agency proposal, Van Hollen was unconvinced: “I don’t want this to become mired in bureaucracy.”
IF AND WHEN these new public-financing authorities are capitalized, the question becomes: Are lawmakers really prepared to champion long-termism? Can the U.S. political system accommodate patient capital?
Solyndra, a solar panel maker that filed for bankruptcy after receiving federal subsidies, has become a catchword for green boondoggles, even though the same round of Obama-era green loans helped vault Tesla to success.
But Solyndra continues to cast a long shadow. American media is unforgiving of companies that receive public support, and fail.
One worrying sign is the fate of a new technology directorate first introduced as the Endless Frontier Act. That bill was also meant to aim capital at applied science through a technology directorate with wide autonomy.
In logrolling the bill, though, the budget for that directorate was gutted and redirected toward the National Science Foundation, replacing some existing funding for that agency. The Niskanen Center reports that the legislation was pared back over concerns that the bill would detract from “inquiry‐oriented science in favor of applied research and technology.” But the “valley of death” exists in the first place because policymakers are gun-shy about applied science.
Americans are not everywhere so impatient as in civilian science and manufacturing.
Twenty years of “strategic patience” in Afghanistan led nowhere, yet the same press that excoriated Solyndra took up calls for military forbearance in the face of obvious defeat. The defense budget has historically been an unrivaled motor of industrial development, with other sectors annually shoehorning in their priorities to the untouchable, enormous spending authorization.
FDR’s Reconstruction Finance Corporation, the loan-making authority that financed railroads and propped up a failing banking sector, has lately served as an example to new proposals for government corporations with lending capacity.
Too often forgotten is the rival engine of Rooseveltian industrial policy: the “arsenal of democracy” that heaved reluctant business interests behind the war effort. The task of supplying Allied forces set in motion a major phase of industrialization in the Pacific West spanning hydropower, electronics, and aluminum, with downstream effects as far-reaching as computing power and the mass production of penicillin. Public financing of green manufacturing will require government to call forth, or coerce, equally strenuous mobilization from industry.
