The Sunday Mail
Business Desk
Green Fuel “is the first large-scale ethanol factory” in Zimbabwe, producing high-quality anhydrous ethanol to world-class specifications. Media reports have given different figures for the amount invested in this important project that has significant benefits to the country in terms of job creation and reduction of reliance on imported petroleum products, amongst others.
The significant variance in the amounts invested has resulted in lack of focus at the benefits of this project. In some quarters, it has been reported that “US$320 million was invested” and, at times, it has been referred to as the “US$600 million project”.
Considering that this is a public private partnership, this project should be treated as such and in that regard, there should be no misunderstandings and Government should be knowledgeable of how much was invested.
When Arda entered into the Build, Own, Operate and Transfer arrangements on the Chisumbanje and Middle Sabi estates, where the sugarcane for Green Fuel comes from, amounts earmarked for investment should have been clearly spelt out and verification of what was invested would have followed when the investment was being done.
The ethanol plant that Green Fuel invested in was reportedly imported from Brazil and to commission the plant, that importation and payment thereof would have been registered by the Reserve Bank of Zimbabwe Exchange Control Department as well as Zimbabwe Investment Authority.
At both RBZ and Zia, specific monetary amounts based on verified import documents in foreign currency would have been filed and recorded. In that regard, for the Government of Zimbabwe to verify how much was invested, this should be possible by merely getting the numbers from Zia and RBZ.
Also, the investment in the project should be easily verifiable from the balance sheet of Green Fuel excluding any revaluations of assets. The figures will then be corroborated with records of the investment at Zia and/or RBZ. A methodical undertaking of the above will remove the “confusion that is potentially paralysing this opportunity” of how much was invested by Green Fuel investors – is it US$320 million or US$600 million?
To further remove the confusion around the various amounts which are occasionally thrown around, it is important to understand and verify the funding structure that was adopted in establishing Green Fuel.
Specifically, it is important to understand the exact equity amount injected into the project and the debt injected in the project. For instance, it could be that the US$600 million includes debt while the US$320 million does not and is pure equity or permanent capital that Green Fuel investors injected.
Furthermore, any debt that could have been injected in the project should be easily verifiable through the respective loan agreements and if the debt came from offshore, this would have been further registered with Reserve Bank of Zimbabwe External Loans Co-ordinating Committee, thereby justifying its authenticity and existence should be feasible.
In valuing a company like Green Fuel or the investment that has been made by its investors, the initial natural way of doing this is to ascertain the equity value on the basis of what was actually invested as equity.
Any investment that has been made as debt in the project should not be included in the determination of this equity value since it has a clear path to repayment and is contractual.
Taking into account that the investor would have spent a couple of years building the project and investment, his or her equity, either compensation through a certain annual percentage if agreed as the opportunity cost that the investor would have suffered, would be calculated and added to the original equity investment to come up with a value of the business.
In the event of a Government partnership of this nature, the investor might be given special concessions in lieu of a financial opportunity cost being included in the valuation and in the case of Green Fuel; a “monopoly” for supply of ethanol for a specific period of time could be that.
It could also be tax breaks or anything equivalent. To best understand the investment made in the creation of Green Fuel, it is best to segment the various pieces that make up an ethanol producing business like the one at Chisumbanje:
Agriculture
This involves the actual planting of the sugarcane in the Chisumbanje (45 000ha) and Middle Sabi Estates (10 000ha). The land that Green Fuel’s sugarcane is cultivated on belongs to the Agricultural Rural Development Authority of Zimbabwe (Arda).
In 2008, Arda entered into a Build, Operate and Transfer arrangement with private investors Macdom (Pvt) Limited and Rating (Pvt) Limited on the Chisumbanje and Middle Sabi Estates in Chipinge, Zimbabwe.
As a result, Macdom and Rating supply sugarcane to Green Fuel. The investment that Macdom and Rating would have made will relate to upgrading of the land and putting irrigation systems and verifying this investment.
Milling
This is whereby stalks of sugarcane are washed, crushed and shredded at the mill using revolving knives and rollers.
The shredded cane is repeatedly mixed with water, with collected juices containing 10 to 15 percent sucrose.
Boiler
This involves the burning of remaining fibrous solids called bagasse for fuel, making a sugar mill more than energy self-sufficient as surplus bagasse goes into animal feed, paper, chipboard and energy briquettes or electricity generation for re-sale.
Distillery
This involves the removal of water from the ethanol so that it is usable as energy.
Storage and distribution
When ethanol is produced as energy ready for blending, it has to be stored in specialised storage facilities that avoid or minimise evaporation. The same applies to the actual transportation to service stations where it is blended with petroleum products.
As demonstrated by the five components above, building an ethanol producing business involves the integration of a number of “plants” or processes, thereby demonstrating the sophistication and complexity of the technology.
Possibly the milling, boiler, distillery and storage distribution parts of the overall plant were imported from Brazil. Therefore, how much was invested can easily be verified with the company, Zia and/or RBZ.
Comparable valuations
On September 14, 2011, BP announced that it had agreed to increase its share in Brazilian bio-fuel company Tropical BioEnergia SA to 100 percent by acquiring the remaining 50 percent of the company from its joint venture local partners for a total cash consideration of approximately US$71 million.
This valued the ethanol from sugarcane producers at US$142 million (equity value) and at that stage, Tropical BioEnergia SA was producing approximately 225 million litres per year. Considering that Green Fuel is currently producing about 10 million litres per month as has been reported in various sections of the media, which translates to 120 million per year, a comparable equity valuation of 100 percent of Green Fuel would thus be approximately US$76 million.
It is important to note that any debt that could have been injected in Green Fuel by investors will need to be repaid as per existing contracts and this is excluded from the comparable equity value above.
To further demonstrate what an ideal investment could be for what Green Fuel has done, in the Tropical BioEnergia SA transaction with BP above, BP committed to investing and eventually did invest US$350 million to double the size of the operations at Tropical BioEnergia to a capacity of five million tonnes of crushed cane, or 450 million litres of ethanol equivalent, per year.
This would imply that to be producing approximately 225 million litres of ethanol per year, one is looking at an investment of approximately US$350 million. If you extrapolate this on what Green Fuel is producing, its investment to date would have to be approximately US$187 million and this could have been funded through equity and debt.
The above is a basic reasonableness check and a more detailed exercise can be done by financial experts with more detailed information from Green Fuel on their operations, RBZ and Zia and formal completion of this exercise is considered value-creative for investors in Green Fuel, Government of Zimbabwe in its capacity as a strategic partner and also for the people of Zimbabwe.
World’s search for alternative sources of energy — ethanol as an alternative
There have been numerous initiatives by companies across the world to develop the potential of different alternatives to crude oil such as natural gas and ethanol. In the bid for the world’s search for alternative sources of energy, ethanol has played a prominent role.
Given the supply and demand factors of crude oil, time is running out to develop suitable alternative energy sources.
Investors who are optimistic on the future of these alternative energy companies believe that the technology just requires longer waiting. Even with new production discoveries, the infrastructure and distribution of energy products produced from alternative energy sources like ethanol will probably still be more costly than energy produced in other ways like coal or hydroelectric power.
Ethanol will also not necessarily be competitive at its initial stages of introduction, unless governments introduce incentives for investors in this area which has significant long-term benefits that include security amongst other economic considerations. While the wait for the availability of alternative energy sources to the public may still be long and initially costly, the world will have to push forward the development of alternative energy sources as the world reserves of fossil fuels are depleting.
Sooner or later, alternative sources of energy will have to be much more of a priority not only for companies engaged in their development but also for the general public. The creation of Green Fuel by the Government of Zimbabwe through a public private partnership is an important milestone and achievement that should now be fully exploited rather than stalled because of misunderstandings that seem to have affected this project from various angles, including levels of investment and valuation. Zimbabwe has a unique opportunity to be a leader on the African continent in the production of renewable energy like ethanol, which is the future energy in the world for generations to come. With the use of financial professionals, resolving issues that have dogged this project can be done expeditiously and the country can focus on developing this project for the betterment of our country.
