By Joe Anglin
The Alberta government has spent tens of millions of taxpayer’s dollars subsidizing bio-mass ethanol plant projects. As a business model, bio-mass ethanol plants are a prime example of corporate welfare that has so far proven to be uneconomical. Most every bio-mass ethanol plant in operation relies heavily on perpetual taxpayer subsidies in one form or another. Now Florida based Dominion Energy Services LLC is proposing to build an ethanol plant in Innisfail, and Aspen Bio-Energy Corp is proposing to build an ethanol plant in Rimbey. What makes them different? Can they change the current model and succeed without continuous government subsidies?
To arrive at an answer it helps to understand how the industry currently operates today. As major investors in ethanol plants, British Petroleum (BP) and Agri-business conglomerates Archer Daniels Midland (ADM) and Cargill are skilled at obtaining taxpayer subsidies to facilitate structured deals designed to eliminate or reduce their risk in bio-mass ethanol production. Unfortunately risk is never reduced. In these types of deals, risk is transferred from the investor (owner) to the taxpayers and the unsuspecting farmers who are lulled into investing in the plant believing this is a great opportunity to establish a new market.
Typically, structured deals for these ventures consist of leveraging the borrowing capacity of the owner with a large taxpayer cash grant to finance construction and begin operations. It is not uncommon for the plant’s primary owner to demand reimbursement of their equity before any other funds are disbursed or distributed. Deals structured this way generally allow the owner to default on obligations while still drawing a profit. Most all the risk in these types of structured deals is transferred to the unrepresented, uninformed and unsuspecting taxpayers and farmers.
A good example of the transfer of risk recently surfaced in Billings Montana. The bio-mass plant in Billings reportedly failed to pay farmers $1.2 million dollars, while investors enjoyed the protection of $1.9 million dollars in taxpayer grants.
In contrast to BP, Cargill, and ADM who have extremely large balance sheets and lots of experience, Dominion Energy Services and Aspen Bio-Energy have little resources and even less experience to build or manage a bio-mass ethanol plant. Dominion is owned by a Florida based hedge fund and has said it can only proceed if subsidies continue. As a former hedge fund manager, I can say with some confidence, hedge funds have been successful in making money for their hedge fund, but there is little evidence to support they succeed in any other discipline.
Aspen Bio-Energy Corp appears to have less resources and less experience than Dominion. Aspen appears to only have two employees: Onkar Dhaliwal (CEO) and Sandip K. Lalli (VP and CFO). To date they have received a $5 million dollar grant from the province, and another $400,000 from a grant obtained by the town of Rimbey. Rimbey has also contributed an additional $70,000 above the designated $400,000 grant, and has collected over $138,000 in an account called “Investor Contributions”. This account is disturbing because it portrays the town as a broker (the mayor has charged taxpayers over $18,000 in related expenses) for Aspen. Under normal accounting procedures, investor contributions should be listed on Aspen’s balance sheet -- not the town of Rimbey’s. I have formally requested clarification from Rimbey’s town manager, but so far there has been no explanation provided. In summary, Aspen has not disclosed any financial records to the public. I cannot find a prospectus, a website or any evidence that Aspen is actually searching for potential investors, but I am told they are searching.
It is difficult to believe that Dominion and Aspen can succeed where BP, Cargill, and ADM have not. After all BP, Cargill, and ADM employ thousands of scientists and engineers that can research these matters. Confidence is further shattered when Rimbey’s officials claim Aspen’s new secret technology will allow them to succeed without perpetual taxpayer subsidies. Ironically this claim is being made about a company that appears to be solely capitalized by government grants, and has its investor contributions posted to a municipality’s balance sheet.
Bio-mass ethanol plants may work or may not work without massive government subsidies. There seems to be no end to the debate surrounding this matter and little in the way of answers. Without answers it would be wise to transparently structure the deals for a bio-mass ethanol plant to advance the interests of the true risk takers – the taxpayers and farmers. Then again, we might be even wiser if the government directed its subsidies to invest in research and development in the sciences at the university level, rather than giving millions of taxpayer dollars to private companies that are skilled at filling out grant applications.