Biorefinery Guarantee Program

Client:

U.S. Department of Agriculture

Challenge:
The 2008 farm bill created a new program within the U.S. Department of Agriculture (USDA) to guarantee loans to construct advanced biofuel refineries. Within this effort, FI Consulting was responsible to develop estimates of the program’s subsidy costs and to advise on the cost impact of various policy decisions. The project’s critical challenge was to develop reasonable estimates of future credit performance for an industry with no historical track record and no clear proxies, and to obtain Office of Management and Budget (OMB) approval of the estimates and underlying model.

FI Solution:

FI researched the biofuels industry, including its competitive structure, typical project financing arrangements, risk drivers, and industry standard financial modeling practices. Our team developed several alternatives to estimate defaults and recoveries and presented them to USDA; we recommended and USDA agreed with a methodology based on proxy credit ratings. After finalizing model design, we supported USDA’s presentation to OMB, including subsequent comments and questions, explained and advocated for the model methodology and assumptions, and developed supporting analyses to substantiate our approach. The discussions with OMB concluded in agreement on the model, proxy credit ratings-based default rates, and on a final budget formulation subsidy rate for the program.

FI Impact:

FI’s work helped USDA shape the final parameters of the new advanced biorefinery guarantee program and resulted in a subsidy cost estimate that was justifiable and supportable under USDA’s budget.