Should the Alberta government be subsidizing ethanol plants?

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.

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.

Joe Anglin

Rimbey

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