In January of 2015, Abengoa was able to raise $328 million by selling shares in its US division. In spite of reduced Spanish subsidies for renewables and crude oil prices that had cratered in November, 2014, it appeared that Abengoa was still flying high. Then, in November 2015, after Gonvarri announced it would not be investing 350 million Euros in Abengoa. In November, 2015, Abengoa announced serious cash problems and initiated insolvency proceedings. This has led some to speculate that this is another Solyndra.
Although this is yet another government subsidized, alternative energy company that has gotten into financial trouble, that is about where the similarities between the two stories end. Many months ago I did a piece on Solyndra. You may want to review that (click here). I was not even remotely sympathetic toward Solyndra, citing a plethora of stupidity and very shady dealings. I do not see Abengoa being of the same nature. If we could do an omniscient audit we would likely see some major blunders, a few dashes of hubris here and there, but, unlike Solydra, Abengoa actually delivered on many of its promises and can point to some pretty impressive accomplishments.
Among those many accomplishments is the Solana Generating Station near Phoenix, AZ. Although not without its detractors, Solana has achieved about 30% of its production goals and has not defaulted on payments of its $1.4 billion in DOE loan guarantees. The jury remains out on a final judgement, but this is nothing like the Solyndra debacle.
So what happened to Abengoa? Why are the sharks circling and many predicting its demise? Why has KPMG recently said that Abengoa needs $496 million in equity very soon to avoid bankruptcy and $100 million Euros before December 30 just to stay in business?
It will take some time for the dust to settle on this story, but it appears to me that Abengoa may be the victim of several conspiring factors that hound subsidized industries. Developing new technologies is an expensive undertaking, fraught with many risks – not the least of which are government fickle in the face economic uncertainty. Abengoa was relying substantially on subsidies from the Spanish government. In 2013 the Spanish economy was in shambles. The economy had never recovered from the collapse of the international real estate market in 2008 – yet another government subsidized debacle. In late 2012, Spain was forced into austerity measures by the international banking community. By 2013 the Rajoy Government felt that they could no longer afford to support renewables with subsidies and ended the program. This dramatically changed Abengoa’s cash flow. The situation was further exacerbated by an increase in taxes on renewables that went into effect in October 2015. And don’t forget the collapse of oil prices that have hit new lows in late 2015.
Instead of taking corrective action back in 2008 or even 2013, Abengoa continued an aggressive strategy of development in the face of weakened cash flows. In order to continue its work on some 250 international projects, the company increased its debt and aggressively sought equity funding. This “doubling down” on financing growth increased their risk – especially of economic collapse if strong cash flows did not materialize soon enough. That seems to be the situation that Abengoa is in today. They have some interesting and potentially profitable projects, but it looks like they will probably have to sell off some of their best opportunities just to stay afloat.
Some are blaming Abengoa management and two CEO’s have stepped down since 2010. Some blame the government of Spain and talk about suing the Spanish government for failing to continue its support for alternative fuels. One could hold that the US initiated scam on the world – the real estate mortgage bubble – set in motion irresistible economic woes that worked itself out in many, unpredictable ways. There is some merit to all these positions, but I think this overlooks the powerful, corrosive forces of government intervention. When governments get involved the whole process of balancing risks and rewards is skewed. I wrote about this extensively in my eBook: Oil Shale, Treasure Trove or Pandora’s Box? (click here to see at Amazon.com).
When governments get involved in subsidies, supports, grants and loans for industrial processes, clear thinking about profitability versus costs and risks goes out the window. The whole calculus on ROI is skewed toward making lousy bets on harebrained schemes. A few of these bets miraculously workout and become enshrined on bookshelves across the globe. Some can be “forced” into looking like they will work for a while, but, in the long run they are like playing the slot machines. The stats catch up with the players and the house wins. Because many of the schemes are not economically sustainable, many bankrupt the supporters and impoverish those who are not nimble enough to get in and get out quick – especially the taxpayer. It is little wonder that our world is littered with the derelicts of government backed failures. That is just sort of the nature of things
Is Abenegoa another Solyndra? Not in the sense of being another scam. That would be a totally unfair assessment. Nevertheless, in some sense it is another Solyndra. The same powerful forces that cloud vision and judgement were probably at work. These forces tend to drive management to make poor decisions and take inordinate risks. I’m in favor of governments and non-profits investing in basic and even applied research that can be the basis of new industries. These should be those basic technologies that can be shared widely. They should be funded at moderate, sustainable rates and NOT be associated with the madness of financial frenzies. Governments should refrain from subsidizing industrial and commercial entities and stay away from the craziness of the financial casinos. Rarely does anything good come of that and frequently taxpayers end up being bilked by the financially shrewd.