What will attract international investors to the biofuels industry in South Africa? Gregor Paterson-Jones of Sterling Waterford Holdings, an investor in SA’s Ethanol Africa, explains that South Africa has to overcome competition from attractive biofuels deals internationally and an unsophisticated investor base. But pending legislation is one of the biggest drawbacks for potential biofuels investors. Wilma den Hartigh reports.
Gregor Paterson-Jones, CEO of Sterling Waterford Holdings, a major shareholder in Ethanol Africa, is concerned that although government has released the draft biofuels industrial strategy, there is still no certainty about the levels of government support for the industry. “In SA significant international investment in biofuels will be contingent on the finalisation of the biofuels strategy,” Paterson-Jones says, quoting the US biofuels industry as an example. “In the US, subsidies have supported the industry under difficult conditions of high feedstock prices and low oil prices,” he says.
When seeking funding it is important to remember that a local biofuels facility is competing with 20 to 30 other investment propositions in the world. “To fund a biofuels facility you have to convince an international investor that your investment will produce better and more secure returns than 20 other facilities in the US,” Paterson-Jones says. He points out that international investors are attracted to projects with a proven track record of off-take, blending and management expertise. “You can’t go to an international investor without assured off-take and feedstock supply and until you have a robust and fundable entity,” he says. This cannot be achieved until one can predict future cash flow, which in turn is dependent on the level of legislative support in SA. “It is very unlikely an international investor will enter the market until the draft strategy is no longer a draft,” Paterson-Jones says. International investment will probably be secured if there is a higher subsidy in the fuel levy rebate. “We are simply not competitive with investment propositions in the US if the biofuels strategy does not address this.”
Thomas Funke, a biofuels expert at the Bureau for Agricultural Policy at the University of Pretoria, agrees that investors will look for a substantial return. “We are currently working with a 15% return on investment. I think that this is a reasonable figure,” Funke says, although he feels that feedstock supply is more problematic. The contracts that investors would enter into with farmers will depend on how risk-averse the investors are, and at what price level they believe they can break even. Funke agrees that the policies laid out by government will also be one of the key factors. “If they [the policies] favour foreign investors, then that will definitely spur them on, but if the policies are not that favourable they might have the opposite effect,” he says. As deal terms and expectations are standardised internationally, ethanol deals will have to compete for funds with countries such as Brazil, the US and Europe. He says investors will compare operating costs per gallon with those of US and Brazilian deals.
Another issue is that has no precedent for biofuels investment, and as it is an emerging economy there is greater risk to investors than in a mature industry such as the ones in Brazil or the US. At present does not have enough knowledge about this type of investment, the associated risks and the return profiles, so it is important for the country to attract foreign investment in a biofuels production environment. “The first and most sophisticated investors are those with experience in investing in biofuels elsewhere in the world,” Paterson-Jones says. Investors will also consider yield advantage and how much ethanol can be produced from a ton of feedstock. “You must make sure your feedstock has a high enough average yield. An investor doesn’t look at what they expect a facility to produce, they look at what is guaranteed.”
There are many reasons why should develop its biofuels industry.
Reducing its reliance on fossil fuels, climate change concerns and rising oil prices are but some of the driving forces. The industry has socio-economic benefits and is one of the few with a potential solution for viable land acquisition by previously disadvantaged people. But Funke questions if it would be wise for SA to allow many foreign investors to invest in the SA biofuels industry. “Will the investors, especially companies contracted to foreign governments, not try and source biofuels for their own private use?” he asks, voicing a suspicion that the EU is already looking for foreign sources of biofuels from least-developed countries, particularly in Africa. He warns that SA could in some years struggle to fulfil its own biofuels quotas, and that if not enough care is taken SA could find itself in a situation similar to the EU: a forced demand for biofuels but not enough potential to meet the local demand. On the one hand, this situation would be beneficial for the local producers as such a demand will drive up the local biofuels prices, but on the other it could lead to imports which could have a negative impact on smaller producers in the local industry. Funke reiterates that government policy on its investment in the industry, and the protection it will offer to the local industry, will play the deciding role. “A B5 blend is almost beyond our reach and it is unlikely that we will ever be able to produce sufficient amounts of sunflower or soya to satisfy local demand for both the food and fuel sectors,” he says, adding that the ethanol scenario could be more promising. “When looking at quantities of raw materials produced we should not have a problem with ethanol. On average we produce a surplus of maize and sugar.” For this reason government is even considering a higher fuel blend such as E8 and E10.
Is it all bad news?
Paterson-Jones says SA has advances in cultivation technology and local maize has higher average starch content than maize produced in the US. Furthermore there will also be cost savings when building and operating plants in this country, as land costs in SA are lower and power costs are cheaper. “In the US the cost of energy is a big deterrent,” he says. A big plus for SA is its mature maize farming industry, which many other emerging markets do not have. Most importantly, the maize market is liquidly traded. “No international investor is likely to invest in a facility that doesn’t have access to a liquidly traded feedstock,” Paterson-Jones says. He cautions that in the event of weather problems or a regional crisis, producers must be able to secure feedstock to continue production, especially while paying off their plant. Contact Gregor Paterson-Jones on 083 459 7272. |fw