More Trouble for KiOR

On these pages, we have been chronicling the sad saga of alternative-fuel company KiOR, which is facing class action lawsuits and an SEC investigation because it allegedly misled investors about the plausibility of its biofuel production targets. In the present post we’ll summarize the latest developments, which show that KiOR is teetering on the edge of collapse but has gotten a last-minute stay of execution.

Last month, KiOR stock fell 39 percent (the biggest drop on record since the company went public in 2011) when its management announced. As Bloomberg reported at the time:

The company needs additional capital by April 1 and its only potential source of near-term financing is a March 16 commitment letter from billionaire investor [Vinod] Khosla, according to a filing with the Securities and Exchange Commission yesterday.

…

If the company doesn’t receive additional financing, it will “likely” default on its debts and may file for bankruptcy. “We have substantial doubts about our ability to continue as a going concern,” the Pasadena, Texas-based company said in the filing.

It turns out that Khosla did come through in the nick of time, and now has enough funding to stay in business through August, as the Sacramento Bee reports: “KiOR… had completed a deal to borrow $25 million from an entity controlled by Vinod Khosla, who also owns 64 percent of the company’s stock.”

If this were just a matter of a biofuel company getting a new lease on life from a big investor, it would be unremarkable; wealthy people can sometimes take risks on an idea that takes a while to prove itself.

The problem here is that it’s not just Khosla’s money that’s on the hook. As the SacBee article goes on to explain:

KiOR had warned that without the money it would default on nearly $280 million in debt, including $69.4 million it owes to the state of Mississippi.

The state loaned KiOR $75 million to help its startup, one of a number of investments made by Gov. Haley Barbour’s administration in alternative-energy companies. KiOR has been making scheduled payments on the loan, but still owes $69.4 million. If the company were to file bankruptcy or default, the state would be the first creditor in line, and could seize the company’s plant.

Governments—whether at the state or federal level—have no business picking winners and losers in the energy sector and KiOR shows exactly why. If a business needs government loans to get off the ground, it means the business is not promising enough to attract money from people who are willing to bet their own money. This means that company is not efficient and can’t stand the market test.

Even if we concede the “negative externality” and “market failure” arguments regarding fossil fuels and climate change, it would still be ludicrous for the states and feds to be acting as venture capitalists. It would be difficult to dream up a worse idea than letting political officials lend taxpayer money to companies that can’t raise private funding. These alternative energy loan programs are just asking for corruption and inefficiency.

In order to protect taxpayers, as well as promote efficiency in the energy sector, governments should leave company financing up to the private sector.

IER Senior Economist Robert P. Murphy authored this post.