AFRICAN BIOENERGY AND BIOFUELS BUSINESS ASSESSMENT
RENEWABLE ENERGY, BIOFUELS, ECO-TOURISM... HOW DO WE SPEED UP THE CHANGE? LESSONS LEARNED AND THE WAY FORWARD
BO GÖRANSSON MATTIAS GOLDMANN TOVE STRAUSS HANNA BEGLER MAY 2015
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RENEWABLE ENERGY, BIOFUELS, ECO-TOURISM... HOW DO WE SPEED UP THE CHANGE? LESSONS LEARNED AND THE WAY FORWARD
African Bioenergy and Biofuels Business Assessment
AUTHORS: BO GÖRANSSON MATTIAS GOLDMANN TOVE STRAUSS HANNA BEGLER
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BACKGROUND ABBBA – African Bioenergy and Biofuels Business Assessment – is a three-year explorative pilot project mainly funded by Sida and managed by the Swedish think-tank Global Utmaning. The project objectives are: • To contribute to increasing investment in the African biomass and bioenergy sectors, including nature conservation and ecotourism, • To raise awareness about opportunities in the African bioenergy sector, • To help African stakeholders develop and present their projects for potential investors. At the time of writing, ABBBA is on the verge of fulfilling its tasks, including a pathway forward for projects that will not become operational within the project timeframe. This is despite that during the project period 2013-2015 investments in Eastern Africa has been hampered by political turmoil in Kenya, while in Western Africa the Ebola outbreak has deterred business operations. In addition, all bioenergy investments in Africa has become less interesting due to an oil price about half of what it was when ABBBA was established. This report presents the experiences of the ABBBA project, focusing on what may be relevant and replicable for other actors working within the development of renewable energy and adjacent sectors in Africa. The report is not a summary of what ABBBA has done, but rather a review of some of our experiences when trying to facilitate investments.
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PARTNER RELATIONS At the outset of the project, it was envisaged that ABBBA would act as a mediator between African actors/projects and Nordic companies with an interest in developing businesses in Africa in biomass and sustainable forestry.
1) Co-operation Arena for Sustainable Development in Africa 2) African Wildlife Foundation 3) Subsequently, the B4D initiative has been scaled-down
A network in the Nordic region (such as the Nordic Action Group on Energy and Climate, Södra Skogsägarna, SCA, Vattenfall, etc.) would help identify relevant partners and stakeholders in Sweden and the Nordic countries while partners based in Africa (such as B4D, Business Sweden, CASDA 1, and AWF2), would help identify potential projects and collaboration possibilities in Sub-Saharan Africa. Fairly soon it became evident that the large Swedish companies in the energy and forestry sectors had limited interests in expanding their businesses to the African continent. They have proven to be quite risk averse, both from an economic and reputational angle. The same pattern has held true for Swedish pension funds, even though they were urged by the previous government to invest in Africa. Furthermore, none of the partners have been willing to support ABBBA’s business model through their CSR spending. Our collaboration with the Sida B4D initiative and Business Sweden representatives in various African countries has also been less fruitful than originally anticipated. The B4D representatives had limited budgets and decision power and lacked extensive in-country networks that could be useful to ABBBA3. Business Sweden’s focus has mainly been on traditional Swedish businesses such as the telecom and manufacturing industries, rather than the innovative renewable energy sector. We have also found that very few consultancy firms actually have the relevant experience of working in an African context. Moreover,
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the consultancy firms often charge fee rates that are beyond what most African projects can initially afford. In our quest for an African partner, CASDA has become a useful affiliate when it comes to identifying new projects, following up on project developments, and arranging seminars/meetings in Kenya. However, working with a relatively small partner such as CASDA has sometimes limited our ability to tap into larger networks. At the other end of the scale, the large African organizations that we have contacted, have typically seen our project, budget and timeframe as too limited to warrant their interest.
FINANCE: MONEY IS AVAILABLE, ACCESS IS RESTRAINED There are plenty of financing instruments for climate and energy related projects, as illustrated by an independent website that provides information on the growing number of international climate finance initiatives designed to help developing countries address the challenges of climate change4. Given the number of financing options, we decided early on in the project period that our efforts should focus on identifying suitable projects and only thereafter look for relevant funding instruments. Our experience is that many of the funds available are currently underutilized, in part due to that the projects are often not adequately developed and thereby not “bankable�. This is also true for accessing the so-called challenge funds, as even many of these application procedures require substantive administrative capacity from the project owners/entrepreneurs. (See more below.) A recurring obstacle to accessing initial finance, whether from a challenge fund or other sources of seed funding, is the requirement of equity/self-financing. As many entrepreneurs have already invested most of their own resources in their project, and may come from a research or entrepreneur background with limited funds to
4) www.climatefundsupdate. org
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tap into, they often have limited resources available to match the requirements of the external investor. As an example, the African Enterprise Challenge Fund (AECF) noted two particular obstacles to increased investments: 1. Project proposals were not properly pulled together for funding, and were hence far from being “bankable�. 2. Project developer lacked sufficient resources, both for project development and financing equity. When it comes to private funding, the banking sector in Africa seems to be highly risk averse and not particularly prone to lend to the renewable energy sector, and interest rates are often higher than the expected return on investment.
Within this context, our main recommendation is: 1) Allocate funds for the preparatory phase of a project (i.e. the phase where project proposals and business plans are developed). Be prepared to take calculated risks!
FINANCIAL MECHANISMS: CREATING DEMAND BY REDUCING EMISSIONS In the ABBBA portfolio, the Kasigau and LifeStraw projects are linked to the financial mechanisms for carbon emissions reductions, focusing on REDD+, CDM and VCS. These mechanisms have provided a reasonably secure revenue stream for ecological services, while at the same time establishing standards for third party verified social engagement, biodiversity protection and quantifiable emissions reductions. However, demand for these mechanisms has failed to take off,
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illustrated by the price fall of CER/CDM, from a peak of €25 to current prices of below €1. It is thus understandable that investor appetite for new projects has been limited. In addition, there is a low level of understanding of the mechanisms, with some project developers expecting unrealistic levels of climate funding, while others do not even consider this potential revenue stream. To help mitigate this, ABBBA has held several seminars, provided individual guidance to several project developers and will launch a REDD-guide.
Within this context, our main recommendations are: 1) Provide information about financial mechanisms from government agencies, ODA’s, MFI’s and other funding opportunities. 2) Help create demand for emissions reductions through increased offsets using financial mechanisms such as REDD+ and CDM.
IF LEGISLATION IS IN PLACE, INVESTMENTS WILL BE MATERIALIZED: THE CASE OF BIOFUELS Several African countries have decided to reduce the dependency on imported oil, petrol, and diesel through a - at least partial switch to locally produced biofuels. This initiative has several benefits, such as creating jobs in the agricultural/rural sector, improving air quality in the cities, combatting climate change, and alleviating poverty. Where there are clear, detailed, and legally binding long-term blending mandates for biofuels, investments actually occur. Zambia and South Africa recently presented blending mandates for ethanol
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5) See for instance http:// lusakavoice.com/2014/09/08/ zambia-invites-ethanol-suppliers-to-blend-with-petroland-diesel/ 6) http://www.bio-invest. be/en/portfolio/details/93. html?mn=4. See also ABBBA’s study visit description, http:// www.globalutmaning.se/ abbba 7) https://ec.europa.eu/ energy/en/topics/renewable-energy/renewable-energy-directive 8) http://www.businessdailyafrica.com/-/539552/679148//59flfw/-/index.html
in petrol and biodiesel in diesel, with detailed technical and financial information, including a guaranteed ex factory uptake price5. The result – also within the ABBBA portfolio – is the beginning of a thriving business sector. Where host country governments are unwilling or unable to create markets, large export markets can act as a pull-factor. An example is Addax Bioenergy’s ethanol and electricity plant in Sierra Leone, a country too small to create the volume necessary for investments in new production capacity6. The investment rational is the EU market, where the Renewable Energy Directive (RED) provides a reasonably secure and long-term source of demand7. However, such investments often miss the opportunity to help reduce dependency on imported fuels. The Kenyan government in 2009 proposed a blending mandate for ethanol in petrol and biodiesel in diesel8, but the lack of relevant by-laws and follow-up of actual practices, means that it is insufficient for the market, as shown by two examples from the ABBBA portfolio: A) WEBCO: The production of ethanol from tropical sugar beet, with fertilizer and fodder as by-products, has been favourably reviewed by an external assessor, but the lack of clarity on Kenyan legislation has meant investors are wary. B) Help Self Help Centre (HSHC): Having for several years produced and locally sold biodiesel, using local crops croton and castor, HSHC wants to offer the fuel in other regions. This initiative is hampered by a lack of clarity about fuel standards and warranties for vehicles and engines.
Within this context, our main recommendations are: 1) Ensure that funding includes the opportunity to influence decision makers to promulgate and follow-up the relevant
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legislation for long-term local demand. 2) Clarify to relevant entities that the facilitation of enhanced legislation is a central and imperative part of bioenergy promotion. 3) Develop and continuously update a Biofuel Legal Best Practice, as a basis for government-to-government cooperation.
FROM MATCHMAKER TO MIDWIFE: ADDRESSING THE LACK OF BUSINESS PLANS AND PROJECT MANAGEMENT ABBBA’s initial aim was to act as a matchmaker between existing projects in the African region in need of funding, and Nordic investors looking for bankable projects. The challenge was to combine these two groups by matching projects with potential funders. This model has been applicable for projects funded by climate financing mechanisms such as REDD and CDM/VCS. However, as explained above, our experience is that these assumptions were unrealistic for several of the projects that we have engaged with: Proposals were far from bankable and investors were risk averse, not least the Swedish ones. It became obvious that there was a need to support projects by making them “bankable” in order to enhance their prospects to be granted funding. Several of the projects in our portfolio lack clear project descriptions, including fully developed business plans. Beyond the lack of presentable business plans, many projects lack a clear organizational structure and a well-functioning project management. This has even been confirmed by some of the project partners themselves. E.g.: A) Help Self Help Centre: Apart from lack of clear policies (see above), HSHC has identified the lack of a competent project manager as a main hindrance for project execution.
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B) Webco: This project has been hampered by requirements for equity financing and the need for (small) seed money to finalize project preparation. C) Dagoretti slaughterhouse: Lack of competent business developer coupled with unclear ownership of structures are obstacles to project development. D) EzyStove: Again, lack of competent project management and a fully developed business plan hampers project development.
Within this context, our main recommendations are: 1) Assist project partners to develop effective business plans through consultancy services. 2) Enhance project partners’ capacity when it comes to project management and delivery through e.g., training and exposure to established enterprises.
RELUCTANCE TO COMMIT: THE EXPERIENCE OF THE INTERNATIONAL DONOR & ENVIRONMENTAL ORGANIZATIONS ABBBA has engaged with many international donor and environmental organizations. The aim has been: • To help ensure that stringent safeguards are applied for societal and environmental protection, also in cases when relevant legislation is lacking. • To better understand the local situation in communities, biodiversity, etc. • To muster support that will help convince potential investors that the proposed project is viable.
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Some of the projects that we have worked with have, despite prominent certifications by international standards, been heavily criticized by INGOs without a prior in-depth analysis, sometimes in conflict with a more positive local community. In some cases - particularly in the field of biofuels - organizations have been reluctant to commit, citing reputation risk for the organization. Obviously, scrutiny leading to criticism is relevant and important for project development, but our overall experience is unfortunately not that the critics appear interested in creating sustainable development, reduced dependency on imported fuels, and lowered climate impact, but rather to bolster the INGO’s own profile with the effect of maintaining an impression that Sub Saharan Africa cannot support itself.
Within this context, our main recommendations are: 1) When supporting bioenergy development, include a strong communication component, to make it possible to participate in debates and counteract the criticism that support in most cases will lead to. 2) Help establish neutral meeting arenas for investors and INGOs, and facilitate the discussion between the parties, to avoid the black/white framing that has characterized investments in the bioenergy’s sector.
QUO VADIS? ABBBA is a pilot exploratory attempt to find new ways to spur investments in renewable energy. The starting point has been that increased investments in bio energy are needed and the issue has thus not been “if” but “how”. Our main conclusion is that the pilot project has been successful. It has generated scalable and replicable investments, legislative and market-wise know-how and experiences that could be utilized in future efforts to support increased funding. We have not seen other actors with the same or similar mandate and role such as ours.
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Seven issues for further discussion:
1. The main need is often support to projects (or project ideas) at their initial stages. The bottleneck is not just the actual access to funds, but measures that gives access to financial resources such as support to project planning and development or prefeasibility knowhow. How can that be achieved? 2. Project or policy? It is sometimes necessary to work at the policy level in order to have impact. How is this best combined with the work at project level? Who does what? 3. How to select interventions? Based on formal procedures such as application systems? These require resources that are not available, but can be the result of an initial and strategic intervention. How do we ensure that the actors we want to reach, even start-ups, are given information about the funding opportunities - and how do we best use the existing networks and contacts? 4. Integrated or stand-alone: Sida and other ODA’s have largely run instruments such as B4D and financed projects such as ABBBA as stand-alones, separated from the core institutional work. Is this the way ahead, or should a �green funding� component be integrated into all development assistance? 5. A clear presence in Africa is a sine qua non for efficient and relevant networking, for contacts and for operations. Lodged with/within which institution? 6. The task of providing lessons learned is of continued importance. Whatever future attempts must to a certain extent continue to be an experiment, a trial and error endeavour. How is this best combined with a long-term commitment? 7. How do we measure and make sure that efforts and investments are in line with sustainable development goals, in the host country, in the home country of the ODA and in the global context?
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