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OSHA required him to make some immediate improvements or he could not continue to operate, all the while the apple season was on. According to Mr. O'Connell, he spent the $50,000 to clean up the plant and paint it. After he painted it, he went back to OSHA and asked for a release of their objection. They denied the release on the basis that the plant was painted the wrong color.
Mr. CONTE. That sounds like OSHA.
Mr. MAZOTTI. So now at the end of the apple season he had generated enough cash flow from the sale of the apples that were processed through the plant to cover his overdraft. He has been unable to arrange long-term financing. The 150 apple growers in the area, small co-ops, that furnished the apples are unpaid. He has just barely enough money to continue to operate, but he has his liability hanging over him. He has $125,000 additional financing which he must put in before next year. If any of the apple growers come back to him and attempt to collect, they can force him into bankruptcy.
So he applied to the SBA for a direct loan. They asked for an EPA certificate, which was denied on the basis that it was an existing facility and he was ineligible for a loan. So he has come to our bank. We have been trying to work this out now.
Mr. CONTE. We apologize, Mr. Mazotti. There is a vote on the floor. We will come right back.
[A brief recess was taken.]
Mr. SMITH. Please proceed.
Mr. ALDRICH. Thank you, Mr. Chairman.
My name is Bob Aldrich of L. F. Rothschild & Co. For the last 2%2 years, we have worked with the Bank of America and the Small Business Administration and the Environmental Protection Agency in developing an understanding of the economic problems of small business as it relates to pollution control, and in developing viable financial alternatives for this sector of the economy.
Much credit for the development of a basic understanding of the problem of small business in the environment and the development of this meaningful solution must go to Mr. Addison Parris, senior economist at the SBA, who, unfortunately and sorrowfully, passed away this last weekend. I have been called on today to cite, through examples, economic problems that small businessmen face in meeting their pollution control enforcement requirements.
First, I would like to take a look at the industries most affected by pollution control regulations, those small businesses in the United States that have the largest single impact. We are all familiar with the problems of gray iron foundries, metal platers, leather tanners, nonferrous metal processors such as secondary aluminum smelters, papermills and wood processing plants, special chemicals, asphalt and cement manufacturers, furniture companies, agricultural processors such as the dairy industry, the apple industry, which was a new one to me just now, the vegetable processing in the State of California,
fruit processing, and in the area of general grain and meat production, small petroleum refineries and coal mine operators in trying to meet the new environmental regulations.
We have had contact in one way or another either directly or through the SBA with most of the industries that I have mentioned above and throughout most of the 50 States in the United States today.
These small business sectors do represent a significant point source of air and water pollutants and will be forced by Federal, State, and local legislation to comply with environmental quality standards.
As indicated by other speakers today, the aggregate total of this nonprofit investment for the small business sector will be on the order of magnitude of $7 billion to $10 billion over the next 10 years, out of an estimated $30 billion worth of total pollution control equipment which must be installed upon existing facilities in the United States to meet environmental regulations.
I would like to give some quick examples. Gray iron foundriesthis is one of the hardest hit of all industrial small business sectors. The cost of solving the problem for these small businesses generally runs in the order of magnitude of 35 to 50 percent of the gross sales of a corporation in a single year.
For example, in New Jersey, a small foundry, 95 employees, had forecast a cost of meeting controls of $1.5 million more than the total value of this small gray iron foundry. Hence, he was forced out of business. We see in the gray iron foundry industry a rapid decline in the number of foundries of small size available in the country today. This has an impact on the economy. The metal platers in New York City, there are 50 or more of these small metal platers in New York City with employees in the thousands, all of which do not meet New York State and Federal environmental regulations. The SBA worked with this group, through EPA and others, trying to come up with a solution to this problem. To this date they have not solved the problem of the metal platers in New York City forcing a serious decline in this portion of the employment in the New York City area.
I do not have to state what kind of problem that will cause for New York City.
The leather tanners have tough environmental problems. Again to point to an example. In Ohio, a tannery employing 95 people, the cost of installing pollution control equipment was $1.3 million or 20 percent of the net worth of this facility. This plant was forced to close down because of the marginal profitability connected with leather tanning and the inability to borrow funds for a long enough term to handle their cash flow problems.
We ran a pilot program or attempted to run a pilot program in Massachusetts relative to a group of tanners, and I will get into a discussion of the pilot program later. Again, we were unable to come up with the financing mechanism for the small businesses. The leather tanner has seriously been impacted and this has an effect upon, not only the gross national product of the United States, but on the balance of trade because of an inability to tan our own natural resources, the hides of this country, due primarily to our high pollution control requirements. In the area of nonferrous metal production we developed a pilot financing program put together at the request of the Small Business Administration.
In the State of Ohio we worked with three secondary aluminum producers who are facing court action by the State of Ohio and set up a mechanism for financing, utilizing tax exempt loans and the guarantee program of the SBA. This was done to determine the viability of the program and to attempt to work out the details of how this program should be operated. It was done in cooperation with the SBA and the financing was presented to the IRS for approval as a test case. The IRS did approve this type of financing. They did approve the tax exemption under section 103 and under this approval allowed for the SBA to insure a tax exempt bond with a multiple number of companies under a single authority or single bond issue.
I repeat, we did get positive approval from the IRS, which is extremely important to the viability of H.R. 78.
We felt, and the SBA felt, that this program was viable under existing SBA legislation, but they felt they must have OMB approval to go ahead and fund this program. The OMB was not enthusiastic about this approach to financing small business and hence the need to gain some response on the legislative side relative to the utilization of this kind of financing vehicle.
The nonferrous metal producers must spend some 30 to 40 percent of their total dollar sales dollar volume for pollution control equipment. You will find this running true through most of the cases of small business. You can see the heavy impact that pollution control needs on small businesses. Short term financing, not readily available, causes serious cash flow problems and impairs their earnings and ability to finance more profitable ventures for themselves.
Papermills-we worked with several papermills in the United States. There are a large number of papermills that are being forced out of business due to the high required pollution control expenditures. Again, 35 to 40 percent of their sales dollar or net worth having to go into pollution control.
For example, in the State of Maine a paper company with $25 million in sales-still within the SBA size category-faced a cost of pollution control of about $5 million. The cost of pollution control, when we started this program with the SBA was $3 million. Inflation plus the moving target aspect that you hear so much about in the environment, increased this to a total of $5 million which they now must spend and now must finance. The original cost of their total plant was roughly $8 million, so you can see the significance of the $5 million relative to the value that was placed upon this plant.
Specialty chemical areas-we have involved in this industry with a successful financing. A small company with sales of roughly $5 to $6 million had a water pollution control requirement of $12 million. This was a small business, but it was a small business that had a successful record. We were fortunate in being able to work with local banks and, based upon a history of successful performance, we were able to provide tax-exempt financing without going the SBA route for this particular corporation.
I think this case adds to the strength of H.R. 78 because the private investment community must look at the small business and its ability to float bonds itself prior to looking to the SBA for security. In this case we were able to place it. In most of the cases, 90 percent or more, we are not able to place a long-term debt without some help and support from such an agency as SBA.
We talked about dairy farmers in Chino Valley, Calif. The dairy farmers have a real problem relative to salt contamination of the river in the Chino Valley. They have no real solution to develop by themselves. Each individual small businessman, small dairy farmer, is unable to come up with a solution to his own problem. A viable solution to the problem was developed by coming up with a plan for a single facility to be put in to solve the multiple dairy farmer problems.
The problem here, of course, is that the basic security of multiple farms to support a single facility is so complex that you need a single credit in order to support such a facility. In Massachusetts there are multiple examples of this in the loft type of industrial activity. We have textile mills and leather processors all in single facilities where you can put in a single pollution control facility supported by each individual small company within the loft or within the industrial area. This type of financing vehicle permits the investment community to combine with the engineering community and come in and provide a single solution to multiple small businesses. This makes great economic sense and we have calculated that the savings to small business to utilize central facilities is about 30-40 percent, exclusive of the financing vehicle.
It is difficult to project loss in employment within the small business area. The EPA and the SBA have set up their advance warning system and have come up with an estimate that 69 companies have closed down and 12,000 jobs were lost in the last 2 years due to pollution control requirements.
My personal estimate of this is that I think that we see a lot of companies die silently and rather than make a loud noise going down, which I think the 69 companies represent, slowly closed down, very quietly, and disappeared from the scene.
It was estimated by the Council of Environmental Quality after study by Chase Manhattan Bank and others in the development of economic projections that the loss to the small business sector would be 100,000 to 120,000 jobs in the next 5 years because of the need to meet pollution control requirements. They said this was a net loss in jobs because the job loss would be significantly higher than that but there would be a shift of employment from the small business sector to the large business sector.
I think we are seeing a shift that may or may not be desirable from small business to large business. As a result of this kind of thinking in today's economy where unemployment is high and the viability of small businesses is significant, I think you would find this 100,000 job level, particularly in today's economic climate, to be a gross underestimation of the number of jobs that will be lost as a result of environmental legislation unless we can come up with a financing vehicle. Mr. Smith, you talked about the viability of the direct loan program, and the loans outstanding in the direct 7(b) (5) and the 7(g) programs roughly $5 million each. These are authorizations, you will find, and not loans. We happen to be involved in these types of loans with a couple of them when we were running our pilot program. We had to come up with a viable solution and put them into the long term direct loan programs. These loans have yet to be floated because of the difficulties in getting them through.
I think the problem with the direct loan, and the key problem, is you do not have enough leverage on the part of the SBA to get into