Switzerland-based Addax Bioenergy’s signing in June of the Eu133 million ($180 million) debt financing for an ethanol plant in Makeni, in northern Sierra Leone, could influence both forthcoming African project financings and future biofuels deals globally. The project lenders, a diverse group of development finance institutions, have laid reservations about the war-ravaged country to rest, in its single largest investment outside the mining sector. It is also Africa’s first ever project financing of a greenfield, sugarcane ethanol development. It demonstrates that commercially viable projects can deal with the constraints of the International Finance Corporation’s per­formance standards and sustainability criteria.

Comforting and co-ordinating

Such projects have the potential to create reputational risk, given the criticism that biofuels projects in emerging markets can attract. The deal is also notable for comfortably combining seven African and European development banks. “It has taken quite some time to get here,” admits Nikolai Germann, managing director at Addax Bioenergy, a subsidiary of oil trader Addax and Oryx Group. “It has not been the easiest project to coordinate.”

The project involves the development of a greenfield sugar­cane plantation and construction of an ethanol refinery and biomass-fuelled power plant. The Eu133 million in debt has 12-year tenor and a four-year disbursement period to allow for construction of the ethanol factory, power plant and the first wave of sugarcane production. FMO and the Emerging Africa Infrastructure Fund were co-lead arrangers for the debt, which breaks down into a Eu19 million loan from EAIF, a Eu19 million loan from the Cordiant-managed and IFC-inspired Infrastructure Crisis Facility Debt Pool, a Eu24 million loan from the African Development Bank, a Eu24 million loan from FMO, a Euro 10 million loan from Belgium’s BIO, a Eu20 million loan from DEG and a $29 million loan from South Africa’s IDC. The IDC debt benefits from a guarantee from South African export credit agency ECIC, because the project uses South African content, including cooling towers.

Addax has provided a capped completion guarantee and part of a capped standby equity facility to cover any cost overruns. FMO and Swedfund have stepped in as investors alongside Addax, contributing between the three of them a total of Eu105 million in equity to the project. Both Swedfund and FMO nominate board members and have a blocking minority. The total Eu257 million project costs will be divided 60/40 between the factory and agricultural investment, respectively. The total project cost is more than the combined debt and equity because of predicted revenue streams of Eu19 million during the disbursement period.

There are two revenue streams. On one hand the project will export ethanol via Freetown to Europe. On the other, an integrated power plant fired by sugarcane’s fibre by-product will supply Sierra Leone’s grid with electricity, accounting for 20% of the country’s installed capacity. Addax has signed a power purchase agreement and will sell about 100,000 MWh per year to Sierra Leone’s national grid. The plant’s output will complement Sierra Leone’s predominantly hydroelectricity generation fleet. During the wet season, when water levels and production from hydro sources are highest, the cane will be growing and the biomass plant’s production limited. The cane is harvested during the dry season when Sierra Leone’s hydro generation is lowest.

Managing commercial and reputational risks

The project is unusual in that it is a pure ethanol play. Unlike operations in other ethanol producing countries like Brazil none of the sugarcane will go towards sugar production and switching the plant would involve growing a different type of cane. The project is most remarkable for managing to meet onerous restrictions designed to mitigate the effects of land being used for energy production rather than food, a debate that carries extra resonance in Africa where food is sometimes scarce. “The extensive dialogue over more than two years with landowners, local chiefdom councils, national authorities, civil society, NGOs and others has been at the heart of a series of breakthrough solutions that we hope will set a good example for further sustainable investments in the future,” said Germann.

Social and environmental concerns have blighted other biofuel ventures as the fuel versus food debate intensifies, but Addax says that by adhering to a stringent and long list of social and environmental standards it was able to close the deal. These included the AfDB’s environmental and social safeguard policies, the IFC’s performance standards, the EU bioenergy environmental and social sustainability standards, industry guidelines developed by the Roundtable for Sustainable Biofuels and the Bonsucro Better Sugarcane Initiative, plus other local environmental and social laws.

There is minimal displacement of local residents. In a development encompassing 14,000 hectares, only an esti­mated 80 people have had to be re-settled and rather than farm the sugarcane in a single block the fields will be spread out to avoid further displacement. The deal includes a transparent land lease, compensation for land owners and farmer training schemes to increase mechanised agricultural production in the area. Environmental criteria include no deforestation and protection of biodiversity. Water for the thirsty crop has come from Sierra Leone’s first commercial water extraction deal.

Addax says it has countered market risk around ethanol production through an export strategy that rests on sustainable biofuels increasingly replacing fossil fuels to reduce greenhouse gas emissions in the European Union. The EU renewable energy directive mandates the use of 10% renewable energy in the transport sector by 2020, most of which will come from biofuels. Only biofuels that meet the stringent EU sustainability criteria to which Addax has adhered will count towards these targets.

Another market advantage comes from African biofuels entering the EU duty-free, unlike exports from rival producer Brazil, which are taxed. The project also hopes to qualify for carbon credits under the clean development mechanism, en­sur­ing additional long-term euro revenues. “Overall, ethanol follows a basket of commodities including oil, sugar and wheat, which tend to move more or less along the same trends. The only thing that could get commodity prices down would be that productivity gains outweigh growing demand and we do not see that happening, at least not in the short and medium term,” says Germann.

Followers and furrows

It’s difficult to predict if the Addax deal is a one-off or heralds the beginning of other large-scale biofuel project financings in Africa. Pressure to develop new production may increasingly shift attention to Africa’s vast and untapped potential as global demand grows. The US and Brazil are already seeking fresh import sources as domestic ethanol producers struggle to meet demand and Sierra Leone is an obvious source, with its warm, wet climate. The country’s government is working to diversify the economy away from mining, targeting tourism and agriculture development particularly. It has put in place a dedicated investor framework and estimates about 2 million hectares of arable land could be developed for cash crops such as sugarcane.

Some experts believe the reputational hazards investors and project lenders face because of accusations of land-grabbing will push projects further north towards the Sahara where biofuels won’t compete with agricultural crops. Maple Energy’s $148.5 million debt financing for a $254 million ethanol project on the remote northern coast of Peru in March 2010 is a case in point. Here the sugarcane will be grown in a remote and arid region where the climate is too harsh for most other types of crop. “The issue of food versus fuel is not a concern. Sugarcane is a resilient crop. As long as it is irrigated it can adapt where other crops can’t,” said one banker close to this deal.

The Maple financing consists of $140 million in 12.5-year construction and term debt and an $8.5 million VAT facility. The senior debt broke down into a $65 million loan from the Corporacion Andina de Fomento, a $25 million loan from FMO, a $25 million loan from the Inter-American Development Bank and a $25 million loan from Peruvian commercial lender Interbank.

Other African countries like Kenya, Tanzania, Mali and Mozambique have biofuels developments underway, yet most are small-scale projects at the initial developmental stage. Those developers would struggle to raise the equity portion needed in any project financing; and their small projects will only lead to project financings if larger operators come in as investors with a track record in the sector, say critics.

This is the main reason why Addax’s Africa project may not open the floodgates to others. The deal only closed because of the sponsor’s deep pockets meant it could spend a huge amount even before taking the deal to the banks. Spending ranged from independent studies with specialist consultants to assuaging lenders’ concerns around production risk with pre-nursery and nursery investment in sugar­cane to test which varieties best suited the region. And Addax was also prepared to commit to a project with the knowledge that it would attract NGO scrutiny.

“The track record of more speculative, less well-funded projects has made it difficult for the good ones,” said Howard Barrie, partner in the project and infrastructure group at Eversheds, which advised the sponsor. The project lenders also point to Addax’ 20-year presence in Africa and its operation of an oil terminal in Freetown for 10 years. Much of the project’s export infrastructure, which involves storage and transportation facilities to transport the ethanol to Freetown Port, is already in place.

Chinese developers are also pursuing projects in the region, and, in a familiar complaint for the region, are not jumping through similar regulatory hoops. “Western-based developers wanting to access western finance for this kind of project need to spend a lot of time getting lenders comfortable with its environmental and social impact, partly to enable lenders to accept the reputational risks. Chinese developers will not face such high hurdles,” says Eversheds’ Barrie.

Nor is African biofuels likely to attract commercial banks just yet. Apart from Addax there are only a handful of sponsors able to develop a project of sufficient size or scale to make it financially attractive. Commercial banks naturally steer away from challenging projects with onerous conditions attached to food-versus-fuel sensitivities, land displacement or social impacts. Nor do biofuel projects fall neatly into a banks’ industry groups, but demand expertise from the groups focusing on agriculture, oil and gas and power. “To finance a combined agricultural and industrial project in a post-conflict country you are looking outside the commercial banks,” says Barrie. Commercial project finance activity in Africa still mostly centres on mining and conventional oil deals. ■