Mississippi gambles on technology developments some deem to be too risky
Published: January 18,2013
For years, Mississippi has placed a priority on providing assistance to technology companies to create jobs that pay more than average and help improve the economy of the state. But the failure of some of those start-up companies to get off the ground despite major incentive packages from the state raises concerns.
Under the administration of Gov. Haley Barbour, the State of Mississippi approved loans and other financial incentives totaling hundreds of millions to six start-up companies involved in green or alternative energy. Whether the state will recoup all that money has been questioned. Harvard Business School senior lecturer Shikhar Ghosh has published research showing that three out of four venture-backed firms in the U.S. don’t return investors’ capital.
Solar panel manufacturer Twin Creeks Technology Inc., a firm that was based in San Jose, Calif., and built a plant in Senatobia, has gone out of business after receiving $26 million in incentives from the State of Mississippi. Twin Creeks had promised to invest $132 million and create 500 jobs, but employment never got above 25.
Silicor Materials was approved for a loan and grant package totaling $94 million for a proposed silicon metal purification facility in Columbus that was to employ 200 in its initial stage and 750 in a second stage. That incentive package was nullified when the company failed to put $150,000 in an escrow account by Jan. 1 as required in its agreement.
Another technology development in the state, GreenTech Automotive, said it was going to invest $1 billion in an automobile plant that would produce two-seater, electric hybrid cars about the size of golf carts. The State of Mississippi loaned $5 million for startup costs.
The Virginia Economic Development Partnership (VEDP) had earlier vied with Mississippi for landing the GreenTech manufacturing plant.
“This is an ongoing saga, so only time will tell if Virginia or Mississippi made the right decision with regards to GreenTech Automotive,” said a blog at www.economicdevelopmenthg.com dated Dec. 27, 2012. “At the moment, though, VEDP is taking some flak for letting a Chinese company based in McLean, Va., open its first U.S. automobile plant for making tiny and cheap electric cars in Tunica County. GreenTech approached the VEDP in Aug 2009 and asked for assistance in opening a plant in Virginia. The economic development project was code named Project GCG (for go clean green).
“What happened next is disputed, but the VEDP says GreenTech did not provide enough documentation, and was a startup where the principals had no previous background in automotive manufacturing, no demonstration models, no EPA permits, and so on — a lot of questions raised about the project’s viability and financing.”
HCL CleanTech, which received $100 million in loan guarantees during a special session of the Mississippi Legislature in September 2011, had said it was going to invest $1 billion in five locations in the state creating 800 jobs averaging $67,000 in salaries and benefits using technology developed by the Nazis in World War II to turn biomass into sugars to be used to make industrial and food products.
HCL CleanTech has since changed its name to Virdia, and says it may not locate any facilities in the state. The HCL CleanTech\Virdia projects did not progress to the point of receiving loan funds.
Another technology company that has received the state’s backing is KiOR, a publicly traded company. The Mississippi Legislature approved a $75-million loan package for KiOR in August 2010 in return for the company’s promise to invest $500 million in five manufacturing plants creating 1,000 direct jobs.
In November 2012, KiOR in Columbus produced its first oil made from wood biomass. KiOR president and CEO Fred Cannon said when the Columbus plant is fully operational, the facility plans to take in 500 tons of biomass a day and transform it into 40,000 gallons a day of oil refined into gasoline and diesel.
Cannon said a lot has been learned in the early production process.
“While we have developed and tested our technology in our pilot and demonstration facilities, real-time performance in a commercial scale facility such as in Columbus provides new insight that will be invaluable as we work toward getting this facility fully lined out (up to 100 percent operation) and begin construction on future facilities including our next facility in Natchez,” he said.
KiOR had customers lined up for the fuel to be produced at the plant in Columbus before even breaking ground.
“Before construction was commenced at Columbus, KiOR had contracted all of the fuel produced from the facility to Catchlight Energy (a joint venture between subsidiaries of Chevron and Weyerhaeuser), Hunt Refining and the FedEx Corporation,” Cannon said. “KiOR fuels are attractive because they are cellulosic biofuels–renewable hydrocarbon fuels that are made from non-food feedstocks, with a significant reduction in greenhouse gas emissions compared to fossil fuels, and because they have the ability to ‘drop-in’ to our nation’s fuel transportation system, unlike ethanol.”
Cannon said KiOR focuses on non-food feedstocks that are abundantly available with supplies that can be sustained at a relatively consistent level for the long-term.
“We have successfully tested about 20 different varieties of feedstock. In addition to wood, we can use agricultural and process residues (i.e. stalks, stems and leaves, or husks), and a number of different energy crops grown expressly for biofuels such as switchgrass or sorghum,” Cannon said. “Mississippi is a terrific location for KiOR. The key attributes we have found here are an abundance of biomass, the forestry infrastructure for processing and transporting the biomass, an outstanding workforce and a positive business environment.”
Cannon said the company is planning to break ground on a second plant during the first half of 2013 that is to be located in a greenfield site just to the north of the former International Paper plant in Natchez.
KiOR’s stock prices have declined from its initial offering of $15 per share when the company went public in mid 2011 to $6.88 in early January. The company reported a third quarter 2012 net loss of $27 million, and a net loss of $23 million in the second quarter.
In an interview with Bloomberg.com in November 2012, Cannon was asked about KiOR’s stock price having declined, along with those of other biofuel companies. When asked why that was, Cannon said, “I don’t really know. The whole sector is down, some more than others. That’s why I think we need some success… It obviously takes time to develop potentially game changing technologies, and I think we’re at that inflection.”
Pete Walley, director of the Bureau of Long-Range Economic Development Planning for the Mississippi Institutions of Higher Learning, has long been a proponent of a “green” economy.
“Alternative energy efforts, in my opinion, are important not only to help improve the quality of our environment, but to provide alternatives to the more familiar hydrocarbon based fuels, hopefully with equal or better convenience and cost,” Walley said. “The dilemma is renewable energy sources are not as mature as conventional energy sources and require more development in order to be cost competitive and more readily accepted by energy users. If the expected rewards for developing and marketing an alternative fuel are lower compared to conventional fuels and/or the risks for developing and marketing an alternative fuel are greater compared to conventional fuels, someone has to decide whether to proceed with an alternative energy project.”
Walley said normally a private investment group would provide funds to start a business if they believe that they will get their investment funds back plus some additional payments for the use of their investment funds. If the private sector investors think the risk of failure is too great and/or the expected return from the project is too small, they will seek help from some other “investor” whether it is another private investor, or some local, state or federal government entity.
“Some people support the idea that developing alternative energy sources in addition to traditional forms of energy are in the best long-term interest of the public and in the development of the economy,” Walley said. “The problem then becomes that of which projects a government entity is to support with funds provided by the taxpayers of that government entity. There is a rich history of government picks that have produced positive results and an equally rich history of government-supported projects that have failed miserably.”
In his long-time observations, Walley has seen that government entities have no more insight or special knowledge into which project to support than the private sector does.
“The government entity, however they make a decision to ‘invest’ in an alternative energy project, takes a chance that the project will be successful and will provide a return on its investment,” Walley said. “Obviously, no investor, public or private, is successful on all of its investments. As a taxpayer (‘stockholder’) in the government investment, I must have hope that due diligence has been done for a project and that over the long run, more successes than failures occur.”
Another major energy development in the state that has generated a lot of controversy is Mississippi Power Company’s $2.8-billion Kemper Plant that proposes to turn coal into a gas fuel to generate electricity with fewer carbon emissions than coal. But some engineering experts monitoring the construction question whether the technology will work.
Walley said similar to other “green” technologies the state has invested in, the government involvement in the Kemper project is spreading the risk of an uncertain technology for an energy project to the ratepayers of Mississippi Power.
“I do hope the Kemper plant works, but it is uncertain at this point and the total cost is certainly unknown,” Walley said. “One could argue that we (our economy, etc.) must try projects like this, while others would argue strongly that it is not needed and will be a huge waste of resources. Only time will tell.”
Gov. Phil Bryant has said he would prefer that the state not invest in startup companies and that he is steering the Mississippi Development Authority (MDA) away from loaning or giving other incentives to such companies.
For information on a public records search regarding green energy startup deals in Mississippi, see the website. www.biggerpieforum.org/topic/public-records-mda-green-energy-startup-deals. The information was made available by the Bigger Pie Forum through a public records’ request from MDA.
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