SA BIOFUELS – No meeting ground
from the Fiancal Mail (FM) By Stephan Hofstätter State incentives are insufficient to launch a large biofuels industry …   29 June 2007 BIOFUELSNo meeting ground By Stephan Hofstätter State incentives are insufficient to launch a large biofuels industry   Creating an investment climate conducive to establishing a biofuels industry in SA has left government […]

from the Fiancal Mail (FM)

By Stephan Hofstätter

State incentives are insufficient to launch a large biofuels industry …


29 June 2007
BIOFUELSNo meeting ground

By Stephan Hofstätter

State incentives are insufficient to launch a large biofuels industry


Creating an investment climate conducive to establishing a biofuels industry in SA has left government facing a dilemma.

In line with fiscal policy it wants to keep subsidies to a minimum. But as government finalised its biofuels strategy this month, the incentive package aimed at luring investment to ensure the industry’s long-term survival and prosperity is nowhere near sufficient for investors and fuel crop growers alike.

There is enormous political enthusiasm for the project. It promises increased energy security in a time of rising fuel prices and demand. Biofuels are expected to meet 75% of SA’s renewable energy targets while reducing greenhouse gas emissions per unit of economic activity. Most important for Pretoria, the industry could stimulate commercial agriculture in the former homelands.

Detractors point out that sponsoring biofuels is hardly the most efficient use of state resources for achieving these objectives. But even its promoters are becoming concerned that the state wants to impose conditions that would lock in market inefficiencies through a new licensing process.


Industry wants more state incentives
Government wants biofuel plants in former homelands

When discussions began in 2005 on the incentives needed to launch the industry, licensing was not on the agenda. Since then the Southern African Biofuels Association (Saba), whose members include major banks, biofuel producers, technology suppliers and agricultural commodity groups, has successfully lobbied for its inclusion in the national strategy.

Saba argues that without a licensing regime that grants a limited number of producers exclusive rights to supply biofuels to meet mandatory national blending targets, and access to the bulk of state subsidies until initial outlays are recovered, there would be little appetite for making the large, high-risk investments required.

Factories converting maize or sugar into ethanol or soya and sunflower into diesel cost up to R1bn each.

The licences, argues Saba, should set technical and financial criteria to ensure consistent supply of fuel, require plants to source 30% of feedstock from emerging farmers and offer shares to black entrepreneurs, but also be linked to contracts with bulk fuel buyers.

Where Saba and government look set to differ is the criteria used for locating biofuels factories. Saba wants logistical efficiencies and agricultural potential for growing energy crops to be determining factors in deciding how licences are distributed among the provinces.

It is worried about political interference, though. After a presidential working group meeting on agriculture earlier this year, land & agriculture minister Lulama Xingwana announced 2m ha of underutilised land in the former homelands was available for biofuel crop production, based on a study by the Agricultural Research Council. This represents 65% of total land needed to grow 10 Mt of energy crops to meet government’s target of producing 1bn litres of biofuels a year – almost 5% of total liquid road transport fuel consumption – by 2013.

Andrew Makenete, Absa executive and president of Saba, says the remark sparked fears that political pressure would be brought to bear to make the awarding of licences conditional on building processing plants in or near former homelands.

“You’ll be putting it up in the most inefficient place. It’s a romantic way of looking at the industry but not practical,” he says. “It will just drive up costs and end up undermining the very process you are trying to promote.&quo

He says investors would want the “nightmare” of insecure and overlapping tenure and property rights and crumbling transport infrastructure sorted out first to ensure security of feedstock supply and logistical efficiency.

Another area of disagreement is government’s proposed incentive package.

Last December government’s biofuels task team released its final report for public comment. The report concluded that the industry would be economically feasible with “a moderate level of support” until 2013, a mandatory bioethanol target of 8% (E8) and biodiesel blend of 2% (B2), and an average oil price of US$55. This would add R1,7bn or 0,11% to GDP every year, create 55 000 jobs and net annual forex savings of R3,7bn.

Saba insists support offered, and its proposed duration, is woefully inadequate to kickstart the industry and out of step with international norms.

It also believes the 8% mandatory blending targets for ethanol fail to take SA’s potential to produce major maize and sugar surpluses into account, and the 2% biodiesel blend target will result in one or two players dominating the market. Only 162m litres would be needed to meet the B2 target – insufficient for two plants in SA. Saba wants an initial mandatory target of 10% for ethanol and 5% for biodiesel, to be raised further as the industry matures.

Pricing is another sticking point. Government wants bioethanol prices to be set at the basic fuel price (BFP) – the import parity price used by SA oil companies – less 5% to compensate the fuel industry for additional costs.

The oil industry believes decisions are being based on superficial data. Fuel producers will lose 3%-4% of petrol volumes during the blending process, says SA Petroleum Industry Association (Sapia) representative Anton Moldan. Paying 5% less for biofuels will not cover this, or the billions needed to convert refinery processes and storage facilities.

He believes specialist working groups that include motor and fuel industry representatives must be set up to determine what the real costs are, and how they should be shared.

The biofuels lobby argues that the BFP does not reflect special advantages biofuels have over fossil fuels, particularly social, environmental and rural development benefits. They want the real cost of producing ethanol taken into account when determining a fixed price set for the start-up period, and the state to foot the bill for upgrading fuel industry infrastructure costs.

Saba has a backer in national treasury, whose February 2007 windfall tax report on the syn fuel industry recommends government should prioritise support for biofuels over construction of new synfuels plant and that an incentive package should remain in force for 10-15 years.

Though asking significantly more than government was initially prepared to offer, Saba believes its targets are minimum requirements to attract sizeable investments.

Tellingly, the only significant commitment to investment in the sector to date has been by the state-owned Industrial Development Corp (IDC).

This despite last year’s hype surrounding plans by Ethanol Africa to build eight plants in the heart of SA’s maize belt in the Free State and North West. Construction was apparently put on hold because of the company’s failure to secure finance. In February this year an empowerment deal was announced with a consortium led by Valli Moosa’s Lereko Holdings, and a month later the company announced it had secured funding of $110m for its first plant in Bothaville – $55m from three investors and the rest from borrowings.

But earlier this month Ethanol Africa CE Johan Hoffman told Business Report that offers to invest were on hold until policy was finalised. This is understood to mean a more investor-friendly incentive framework.

The IDC, in partnership with the Central Energy Fund, has so far funded full feasibility studies for two plants, one processing sweet sorghum on the Blyde River irrigation scheme in Mpumalanga, and the other sugar beet on the Fish River scheme in the Eastern Cape. If approved, construction could start early next year.

Preliminary results of both studies were “encouraging”, but viability depends on the level of government support, says the IDC’s head of agriculture, Rian Coetzee. He refused to be pinned down on the IDC’s position on incentives needed but conceded it was common cause biofuels would never take off at current proposed support levels.

The IDC has also identified several other suitable sites, including Pondoland in the Eastern Cape for cane sugar processing, and Makhathini in KwaZulu Natal for cassava. “We hope to see five to eight projects,” he says, but adds that “if the risks are too high, we won’t invest.”

Still, as Absa – SA’s biggest bank in commercial agriculture, with 50% of market share – has pointed out, the IDC is a state-funded institution able to offer loans at lower interest rates, and with longer repayment terms and less stringent security requirements than private lenders. This allows the IDC to be less stringent in assessing the impact of location on profit margins.

Absa says the cheapest location would be Sasolburg because it is closest to a refinery, rail and road networks and major maize growing areas, followed by Secunda for the same reasons.

Government and green lobbyists don’t favour maize as a biofuel feedstock because of food security sensitivities and its poor energy balance.

But the maize industry believes its case has been misrepresented. GrainSA general manager John Purchase points out technology advances have led to an increase of more than 10% in ethanol yields per ton of maize, and that the starch content of SA maize is 8% higher than in the US, which translates into a higher ethanol yield. Food security concerns are overstated because SA plants more maize than it consumes, says Purchase.

SA’s R6bn sugar cane industry, potentially a major player in the biofuels game, says it cannot produce ethanol economically at current support levels. ” With what’s on the table at the moment, we’d be better off selling our sugar overseas,” says Bruce Galloway, chairman of the SA Cane Growers’ Association.

Right now it’s unclear how much closer to the private-sector position government has moved. “We’ve come up with something better,” says biofuels task team leader Sandile Tyatya of the final report submitted to a ministerial committee earlier this month. T he task team expects to submit it to cabinet for approval at the end of June.

Tyatya refuses to concede whether the task team has budged on key sticking points, but does hint that the treasury report recommendations have not gone unnoticed. He regards prioritising biofuel over synfuel support “very favourably” and concedes five years could be too short for incentives to be felt. “We are in the biofuels industry for the long

He denies political pressures would play a role in granting licences. The special needs of the industry would be catered for, with due regard to viability, reliability of feedstock supply, food security and job creation in rural areas.

“We’ve struck a balance and believe cabinet will give it a stamp of approval. But there will still be room for interaction afterwards.”

Sandile Tyatya Homeland policy



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