An article yesterday about federal financing of purchases of stock in private businesses erroneously reported that the federal government held stock in the Communications Satellite Corp. It does not. The article also said that legislation pending in the House Banking Committee would allow the Economic Development Administration to use up to 10 percent of an authorization for direct loans to make equity investments. The bill would not give EDA that authority. Instead, up to 10 percent of grants made to state or nonprofit development organizations could be used by those groups for direct investments.
With little notice and no fanfare, the federal government has begun to finance the purchase of stock in private businesses in economically distressed parts of the country.
And the Senate has passed, and the House is expected to pass soon, a bill that would greatly expand this activity. The bill, designed to boost federally funded assistance to small and medium-sized businesses, including millions of dollars that could be used to buy stock.
Traditionally, the federal government has provided some direct loans, loan guarantees and other types of assistance, but only rarely has it bought stock in a private business.
Even now, the federal government avoids direct ownership of stock by making grants to state development corporations or nonprofit groups which in turn make and oversee the actual investments.
During the Depression and World War II, the Reconstruction Finance Corp., an independent federal agency, made some equity investments. In other specific cases, such as the Communications Satellite Corp. (Comsat), a company was created with the federal government holding a share, because of the nature of the business.
But the whole notion of investment risk, and an assumed line between the public and private sectors of the economy, have severely limited public ownership in private profit-making corporations.
Now the federally sponsored Kentucky Highlands Investment Corp. is just one of a number of entities making direct investments using federal money -- from, in this instance, the Community Services Administration, the successor to the Office of Economic Opportunity.
Kentucky Highlands, in an effort to lift people's incomes in poverty-stricken eastern Kentucky, has sought would-be entrepreneurs in other parts of the country and encouraged them to set up new businesses there. So far, it has invested up to $100,000 in the companies, though more of its assistance has been with loans and loan guarantees.
Groups in other states have similar programs using federal money. In addition, so-called small business investment corporations, funded partly with money from the Small Business Administration, have been making equity investments.
The legislation pending on Capitol Hill, amendments to the Public Works and Economic Development Act, would sharply increase the authority of the Economic Development Administration (EDA) in the Commerce Department to assist private businesses in economically depressed areas.
The bill passed by the Senate would authorize EDA to: make $150 million worth of direct loans to businesses in eligible parts of the country, spend another $50 million subsidizing interest rates on some loans, and guarantee up to $1.8 billion of loans made by banks to private businesses.
This year, in contrast, EDA has been authorized to lend or guarantee $325 million worth of loans, and none was subsidized.
The Senate also directed the secretary of commerce to "conduct a demonstration program to test the feasibility of establishing an equity financing program" to generate and retain private sector employment opportunities in distressed areas. The Senate authorized $10 million for that part of the legislation, which also includes some other activities.
The House Banking Committee's economic stabilization subcommittee has approved a version of this bill apparently with the backing of the Carter administration, that would go much further.
It would allow EDA to use up the 10 percent of its total authorization for direct loans to make equity investments, or $15 million a year. Also, state or nonprofit development organizations receiving grants to create revolving loan funds could use a portion of that money to buy stock instead.
The reason for the movement toward equity funding along with more traditional forms of financial assistance is a growing belief in Congress that smaller businesses no longer have access to either the normal equity markets or to long-term debt financing, such as the issuance of corporate bonds.
One group pushing both the large expansion in EDA authority and the equity idea is the Northeast-Midwest Congressional Coalition, a group of senators and congressmen seeking more federal help to stem the economic decline in their older industrial areas.
Tom Cochran, director of research for the group, acknowledges that the pending legislation would be "a significant departure" from past practices but by no means unprecedented.
"I think that is healthy and necessary when you look at the financing need of firms in distressed areas," said Cochran.
Cochran also defended equity investments as being in some cases a more straightforward way of doing what is sometimes done through "subordinated" loans that rank so low on the list of claims on a business' assets that they resemble common stock.
With any sort of public or quasipublic ownership in a private business, one question is what to do with the stock if the business becomes successful. Some of the Kentucky Highlands investments were made with the provision that the companies could buy back the stock after a number of years, but none has yet been in business long enough for that.
A larger question, however, is whether any type of government funding can be sufficiently risky to boost the type of enterprise that can produce the biggest payoff. Naturally, there would be a tendency to avoid losses of public funds, and this could lead to only "safe" investments that would not create many new jobs, critics of this approach say.