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April 2, 2009 10:52 AM

Why Are Grants Easier To Distribute Than Loans Or Guarantees?

I just got a chance to read the first couple pages of the FTTH Council's comments to the RUS on how they should spend their stimulus dollars and I ran across this troubling statement:

"...grants can be awarded more expeditiously, requiring fewer resources and expenditures by the applicants and the agency...because the agency incurs the risk of default with a loan, it must engage in substantial, time consuming, and costly due diligence in advance of any award (as well as engaging in strict post-award audits and reporting over the life of the loan)."

My question isn't "Does the system work this way?" it's "Why does the system work this way?"

Why is it easier/faster to vet and award a $100 million grant than a $100 million loan?

This doesn't make sense to me as why should incurring $100 million in risk be worse and require more due diligence than writing a $100 million check and walking away?

If anything I'd think the opposite would be true. In the case of giving out a grant don't we want to do everything possible to insure that the dollars are spent wisely, that they're given to qualified projects, that they don't lead to unjust enrichment?

Of course the variable in this equation is that it's easy to score grants as they count dollar-for-dollar against the budget whereas loans require being able to gauge how risky a project is to know how to score it against the budget.

But consider this, what if you just count the loans dollar-for-dollar against the budget? Then the only difference between it and a grant is that you'd have a chance of eventually getting the money back.

And guarantees are even better as government doesn't actually have to write a check to get capital flowing and so long as the guaranteed loan doesn't default guarantees won't cost anything.

Let me reiterate that this is not an anti-grant screed. I think grants are an essential tool in our toolbox for wiring all of America. But so are loans and loan guarantees. Each mechanism has its own pros and cons.

So because of this I think it's a mistake to take an approach that only uses one mechanism over another. It'd be like trying to build a house using only a hammer and leaving the saw and screwdriver in the toolbox.

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