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the small business community, the manufacturing sector. They are not used to dealing with the SBA and by bringing the private financing institutions into it, banks, et cetera, who have direct contact, not only leverages personnel and reduces costs to the Federal Government but you are also creating a positive action program, one of going out and working with these companies. This is because you work with them on a daily basis and solicit this kind of financing vehicle and are able to get out to them rather than taking the passive approach of responding if they have needs, which in many cases, as in the apple orchard case, it is too late.
Mr. Smith. You spoke of several businesses. The tanners in Massachusetts, those in Ohio, the nonferrous metal, where you said it took 30 to 40 percent of their sales dollars
Mr. ALDRICH. That is right, sir.
Mr. ALDRICH. I use this method of calculating. I take the total sales dollar figure—say the sales dollar for a small company is $3 million-rather than try to estimate the net worth of the company, or the capitalization, which is frequently difficult to estimate for small businesses. The capital requirements to put in the pollution control equipment for that small business is $132 million, or 50 percent of sales dollar.
Mr. Smith. You did not mean annual cost?
Mr. ALDRICH. No. It depends on how you look at it. The 5- to 7year annual cost would be $200,000, or something like that, which would be expensive-versus being able to spread it over a 20-year period.
Mr. Smith. I am a little confused by some of the things that were said here. We speak, such as in the dairy farmers' case and some others, of solving their problem by several of them merging together or forming a co-op, or somehow getting together so that they have one pollution control facility.
Mr. ALDRICH. A single pollution control facility, in the case of the Chino Valley dairy farmers, theirs is the problem of manure and removing the manure from the land sites in order to process it. The Chino Valley group is experimenting with the concept of taking the manure from each individual farm and putting it into a single processing facility. Maybe 30 to 50 farmers would utilize this single processing facility, similar to what went on in your State relative to the meatpackers putting in a single facility. This facility would operate and process the manure, and return it as a viable feed to the farmers.
Mr. Suith. If these farmers go together and establish a co-op, and they take care of this problem, then the next step is that someone comes in and buys out their respective shares. Then you have 1 business where you had 20 before. Are we not
Mr. ALDRICH. It is just a processing unit, like a cannery.
Mr. Smith. In a honey wagon?
Mr. ALDRICH. A modern honey wagon. A single processing facility is always desirable.
Mr. Smith. Maybe they are desirable from one standpoint. I am thinking that this inevitably is leading to a merging of all those operations. The next thing you know, they are going to think that it is too much trouble hauling their honey around. They will just move the cows over there, and have a bigger barn. Then, we lose the economic advantages of individual family operations, where they have flexible time schedules and so forth within the family. There are disadvantages that way, too.
Now you said, in the case of the tanners, for example, that in Massachusetts they could not afford the facility. Is that right?
Mr. ALDRICH. Yes, in this one case. In the case of Red Wing, Minn., with the S. B. Foote tannery out there, they were very fortunate to be able to get a Federal grant from the EPA to put in a test facility for water pollution in a tannery, and that worked out very successfully. And that set a pattern for other tanneries. In order to meet that, they would have to spend an equivalent amount of money. So it has forced out a number of businesses.
Mr. Suith. If we have the same law applying to all tanneries, some may go out of business. But then, the price will go up, will it not? In other words, why does not the economic system take care of this problem one way or another through a higher price?
Mr. ALDRICH. In the area of the tanneries?
Mr. ALDRICH. Of course, the economics are complex within the tanneries, due to the overseas imports and exports, as I am sure Mr. Conte and Mr. Bergland recognize in their States, as well as yourself. The economy is reasonably complex-the closing down of tanneries does not necessarily reflect a sales price in an upward fashion.
Mr. Smith. What I mean is this, really. I am getting back to if all tanneries had to do this
Mr. ALDRICH. All tanneries do.
Mr. Smith. If all tanneries have to do this and if all tanneries were forced to close, the price of the product would be so high it would encourage people to get back in to pay for pollution control equipment, would it not? Are there some that are big enough that they can afford to finance this while the small ones cannot?
Mr. ALDRICH. Yes. Mr. Smith. That is really the problem, then. Mr. ALDRICH. Big is one measure within the tannery operation. Of course, there are some that are economically viable because of the particular line that makes them economically viable. Bigness is a major factor in antipollution control, because of the cost scale.
Mr. Smith. The ones that get forced out here are the small Mr. ALDRICH. Generally, that would be the trend, yes.
Mr. Smith. Would you give us some additional information on the surveys to which you referred? How large a sample was it?
Mr. ALDRICH. The cases I gave here are examples of particular ones which, through the SBA or the EPA, or ourselves or the Bank
of America, or others that we have come in contact with, I just recorded them for the record.
Mr. Smith. Those are individual ones?
Mr. ALDRICH. The other, our survey, was put together by EPA and the CEQ over a period of years, starting in 1972. I happened to be involved with some of the studies in my background, and have been in constant touch with the SBA and EPA relative to the development of these economic figures.
Mr. Smith. How large of a sample were these? How representative was it?
Mr. ALDRICH. Each industry is studied separately. They do it on a statistically valid formula, using up to 10-percent contact with the particular industry.
Mr. Smith. Scientifically and statistically?
Mr. ALDRICH. These were well thought-through studies. Interestingly, they study more the impact on the industry as a total. The net conclusion of the EPA nd the CEQ was that the industries themselves would be viable even after meeting pollution control regulations. These studies did not wrestle with the problems of the small business or the change in the structure of the businesses due to the problem. The studies now are going on within the SBA to come up with these particular answers. They have two studies that are out now being worked.
Mr. Smith. One of the problems that we are going to run into with this kind of legislation, if it is proposed, is the argument that we are increasing the number of revenue exemptions and the loss of income to the Treasury. First of all, as I understand it, you say that the IRS is already permitting big business to get what amounts to this kind of an advantage anyway, because they have approved the revenue issues.
Mr. ALDRICH. Pollution control is one of those exempted activities, and you can borrow, as you see in the schedule that was presented by the Bank of America, up to any amount provided it is good for pollution control.
Mr. SMITH. In spite of that, the second question is, How important is that part of the proposal to the proposal?
Mr. ALDRICH. The tax exemption feature of this type of loan, which would be competitive with the large businesses, would be a net savings to the small businesses in not having the tax exemption feature of roughly 2 to 3 percent.
Mr. Smith. 22 to 3 percent?
Mr. CONTE. I have several paper and pulp firms in my district. We used to be the No. 1 paper producers in the United States at one time. I guess Wisconsin is now. I am concerned over your cost per employee estimate for pollution control. You stated that for a small paper and pulp firm, the cost could be as high as $18,000 per employee.
Mr. ALDRICH. As a matter of fact, a study came out of the Connecticut River Valley Basin
Mr. CONTE. That is my district.
Mr. ALDRICH. I know. We worked with some of your people in the development of this. It was done at the Chase Manhattan Bank. It
was a study of the economic impact on the Connecticut River Basin. A number of these figures were developed as the result of that. The high end of the scale is accurate relative to the $5,000 per employee. The low end of the scale falls off, because as you get into the smaller operations, you are no longer into a total system. Hence, it could be more, it could be less. Your accuracy drops off on the low end.
Mr. CONTE. The point I want to make is that all of this is nonproductive expenditure for the firm.
Mr. Aldrich. It certainly is.
Mr. Conte. Of course, the general public is going to benefit but the productivity of the plant is not going to increase an iota by all this. I agree with you that the cost is $18,000; it is a pretty heavy incentive to do something in a hurry. Do you know if there are any other industries facing this kind of cost per employee, or is this unique?
Mr. ALDRICH. As you go through the industries, most of them turn out to be on the same order of magnitude relative to sales. I have not done it on an employee basis. It would be easy to translate that. Most of it is running in the magnitude of 35 to 40 percent of sales, or interestingly, out of the replacement value of the equipment. It is always a significant number for small businesses. Relatively few have an insignificant problem.
Mr. CONTE. From your banking and investment experience, do you believe that the SBA guarantee of lease payments would make the bond issues attractive enough for the investors?
Mr. ALDRICH. It would make them very attractive. We have already talked to them. We went through a pilot program in the State of Ohio and in your State of Massachusetts; we went through the whole thing, carried it through like it was going to be a real transaction-indeed, took it to our own people that would be responsible for sale of these bonds, and to rating agencies. Obviously, it could not be formal, because we did not have a real case. But the SBA guarantee will carry with it a triple-A credit, and would provide for the small businesses access to tax-exempt funds at a very good rate. At the time we made this study, the net cost to small business would be, including the SBA insurance, and the cost of financing it, in the range of 5% percent. Today, that would be higher, because the bond market is significantly off.
Mr. CONTE. Who would be buying these?
Mr. ALDRICH. They would be bought by the normal institutions buying tax-exempt issues today. Indeed, insurance companies, banks, et cetera, that do buy tax-exempt type of bonds. For the small business, one could predict that the local institutions that are familiar with the area and the region would be involved. The pollution control bonds, particularly for small business, are getting a great deal of response from the institutions within their own area responding to the needs of their own community.
Back to the Connecticut River Basin study. The whole purpose of that study was to develop a financing mechanism within that regionthe regional banks and institutions—to solve their own problems within their own sector. The cost of pollution control provide positive economic benefits to the community, even though they may be negative economic benefits to the individuals who must go from the economy of old to the economy of new. They have trouble meeting their obligations.
Mr. CONTE. This may be a leading question. As an investor, is it your conviction that these bonds would not sell unless you had SBA backing?
Mr. ALDRICH. There is no doubt in 90 percent of the cases.
Mr. CONTE. What about the State and local governments? Do you think that they are going to participate?
Mr. ALDRICH. We have some State people here. Indeed, the State people are interested, so far as this kind of mechanism can be applied to the industry within their area. Again, in your area, Mr. McGlenson is very interested in developing this kind of process to he p him in his
P enforcement proc aure,
Mr. CONTE. I thought, after listening to your statement, we would write to our Governor today and explain this to him, and hope he would agree to participate to get this bill through.
Mr. ALDRICH. In Massachusetts, of course, you have authority by counties. The authorities in the county are interested in this, and we have explained it to them. In other States, it is sometimes a State authority, sometimes actual local municipal authorities. Generally, they are interested in solving their local problems. This is why they were established.
Mr. CONTE. I think this is a great idea. Minority counsel and myself have had a lot of experience in my own district with paper companies and tanneries. We had a tannery in North Adams just about ready to close because of the water pollution standards, and all of our industries up there are built on rivers. All of them could take advantage of this; all small business. Very good.
Mr. MAZOTTI. May I add one thing? Bank of America is a leading national underwriter of U.S. Government securities and State and local bonds. In the tax-exempt area, we look at anywhere between $800 million to $1 billion in offerings per week. There is absolutely no question whatsoever that with the Federal guarantee these bonds could be sold.
Mr. CONTE. You could not sell them?
Mr. MAZOTTI. We could not sell them without that Federal guarantee. The institutional investors, and people who purchase these bonds for various bond funds, will not buy unrated bonds. We have an extremely difficult time, for example, in marketing the unrated bonds of little municipalities. We have to buy them for our own portfolio, or offer them to friends of the district who are located in that particular area. We have to make a very strong case in order to market bonds which do not have a rating. Without the Federal guarantee, the unrated bonds of a small business would be unmarketable.
Someone mentioned the survey. We have 1,000 offices in the State of California. We sent our branch managers out to talk to the people about the program, and their ability to get financing. All of them said the same thing; they only want equal treatment under the law. H.R. 78 will give them the same privilege of coming together as pool to get financing on a long-term basis that exists to these highprofile companies; that you can look in Forbes and say, OK, this is the General Motors offering, it is AAA. They get their money for pollution control. This is the cannery. Nobody heard of them, nobody rates them. They cannot get their money. They are not asking for