NOT AN OFFICIAL UNCTAD DOCUMENT
Financial Tools for
the Promotion of
Biofuels
For: Accra Conference
By: Winfried Rijssenbeek,
FACT foundation
Date: 06/11/06
Content
1. Introduction
2. Market considerations for Jatropha
plantations and biofuels
3. Development path for biofuels and
Jatropha plantations
4. Models and arrangements between the
actors
5. Financing
6. Conclusions
1. Introduction
n
Biofuels: vital element for global
sustainable energy supply,
n
Fossil fuel expensive and unreliable in
many rural areas,
n
Alternative: local bio-fuel production for
modern energy supply.
What is the FACT Foundation
n
FACT - Fuels from Agriculture in Communal Technology (May
2005)
promote potential of biofuel production for farmers in developing
countries, to generate cash income and improve quality of life.
n
FACT´s mission: to assist local organisations and companies
delivering:
accurate information and know-how on biofuels (production to
application)
n
FACT activities:
¨
¨
¨
n
FACT is a knowledge and expertise centre,
Implements field projects with local counterparts,
FACT has also started its own research programme.
Financially supported by donor organisations in the
Netherlands
About the presentation
n
n
n
First: Market considerations for Jatropha
plantations and bio-fuels.
Then, show models of collaboration between
big and small entrepreneurs in the sector
Finish with financing aspects
2. Market considerations for Jatropha
plantations and biofuels
The international market
n National markets
n Local market
n
International Markets
Bio energy market: cannot be satisfied in volume and
expanding continuously,
¨ Drivers: Energy security, Kyoto Climate concerns, high oil
prices and depletion,
¨
Indust. Countries Government policies: EU 2010, 5.75 %, Sweden
100%, 2020
Risks for biofuels: prices fossil fuels volatile; economies of
scale in Brazil and Malaysia, with lower production prices,
¨ Risks with Jatropha are agronomic: variety, best
practices, economics.
¨
NOTE: energy crops will make food crops more expensive:
Urban poor compensated by subsidized staple food?
The Economist, October,25th,2003
Guatamala, Octagon
National markets
Food production in Asia: lessons learned:
Provide with good and stable crop prices. (temporary
subsidies for urban poor for basic food)
¨ Agro-processing industries are to be developed;
¨ Provide farmers targeted loans (providing better seed,
nutrient inputs, etc.) to invest;
¨ Train farmers on how to produce more effectively with
the new inputs, like seeds and nutrients.
¨
National markets
For Biofuels a national policy might include:
n Providing a solid minimum price to farmers (intervention
price) for energy crops, to reduce farmer’s risk (new
crop new market);
n Reduce taxation on nationally produced biofuels;
n Provide training and agricultural extension services for
the production of biofuels;
n Provide loans for plantations of Jatropha;
n Support processing units with good prices of bio-oils.
Note: policy instruments are to be measured on their effectiveness
National markets
What can be learned from the EU countries
national energy policies:
stable (20 years) and good prices provided for
production of renewable energy (kWh) of
Germany and Spain have had much bigger
impact on deployment of renewable energy
than complicated temporary investment
support measures.
Local market
Definition: for a minor city, village, for a
agro-processing industry,
n Applications: electricity, local transport,
local agro-equipment.
n
Local market
Requirements
n Land and time availability: availability of land and time to
invest in the establishment of the bio-oil crop;
n The bio-oil should have direct use: i.e. clear need for
agro-processing or other productive or consumptive
energy (market for processed food products, or buying
power for consumptive energy);
n Other basic needs of village, like drinking water,
diseases control, etc. should have been covered;
n Village community: good track-record in
organising/managing other social purpose systems, like
drinking water; health, etc.;
n The bio-oil should be more competitive than other
energy solutions that might be available
3. Development path for biofuels and
Jatropha plantations
Traditional crops can become export crops:
¨ Small
and Medium Size Farmers producing
for local market,
¨ Companies or estates producing for export.
Both ways have their own dynamics
Development path for biofuels and
Jatropha plantations: actors
Parameter
Small
holders
alone
Small
holders & oil
boards [1] or
bio-oil
cooperative
s
Estates[2]
Estates with
larger
contract
farmers
Estates with
small
holders
Local
production[3]
X
X
X
X
X
Domestic
production
X
X
X
X
Production
for export
X
X
X
X
4. Models arrangements between actors
Characteristics of Jatropha biofuel sector:
n Jatropha is a new perennial crop for many regions.
n Its production methods and yields are not fully
understood and therefore pose a risk to small farmers.
n Price development is uncertain because it competes
directly with the volatile oil market.
n
Special attention should be given to the way the
introduction is financed. Three standard models to
finance the Jatropha introduction among farmers.
¨
¨
¨
n
Buying agreement between promoter and farmer
Joint venture between promoter and farmer
Loan from promoter to farmer
As we will see, choosing a finance model is highly
dependent on the local context.
4. Models and arrangements
between the actors
Assumption for all models:
n The Jatropha plant starts producing from year 3
onwards;
n The promoter of the system is also (co-)owner of
the oil processing facility (press) and can be an
estate, cooperative or entrepreneur;
n The promoter has sufficient demand to sell all oil
produced.
Buy-back agreement at fixed price
n
n
n
n
Farmers contribute their land and labor,
Promoter contributes seeds, initial fertilizer and
technical assistance. All contributions are in kind
so no money flows take place between the
promoter and the farmer until year 3,
The farmer sells Jatropha beans to the promoter
at fixed price.
The press cake is preferably returned to the farmers, in order to
close the production cycle as much as possible.
Buy-back Agreement (over time)
Input
Land
Labor
Seed
Fertilizer
Techn.
Ass.
Output
Beans
Oil
Press
cake
Year 1
Year 2
Year 3
Contribution of
Contribution
Contribution
Promoter Farmer
Promoter Farmer
Promoter Farmer
X
X
X
X
X
X
X
X
X
X
X
X
X
Year 1
Year 2
Year 3
Income for
Income for
Income for
Promoter Farmer
Promoter Farmer
Promoter Farmer
X(1)
X
X(2)
The advantages/disadvantages
Advantages:
n Its simplicity: no financial flows take place until year 3.
n This is useful when working with a large number of small farmers.
n This is a model frequently encountered with other perennial cash
crops that are managed by cooperatives of product boards
n Risk for the farmer is small: the promoter guarantees to buy at a fixed
price any quantity produced. Subsistence farmers, who are often
resistant to loans, may find this an acceptable model.
Disadvantages are:
n Risk lays mainly with the promoter;
n Compensation for the work of farmers during first 2 years negotiated;
n Farmers may not have a clear idea of the market price of their
product.
Joint venture (JV)
n
n
n
The promoter and farmers sign an agreement in
which the results of the investment (beans, oil,
press cake and the income generated with their
sales) are distributed among the investors,
according to their respective contribution.
In order to do this, the contribution of the parties
involved has to be valued.
In the following a numeric example will be
presented (numbers are fictitious).
Input
Land
Labour
Seed
Fertilizer
Te. Ass.
Processor
Total
Year 1
Year 2
Year 3
Contribution of
Contribution
Contribution
Promoter
Promoter
Promoter
Farmer
1
10
1
3
donation
7
4
18
Output
Farmer
Total
1
5
3
donation
3
7
13
Farmer
Promoter
1
5
22
30
8
donation
15
30
15
33
29
40
60
3
Year 2
Year 3
Income for
Income for
Income for
Farmer
Promoter
Farmer
3
20
1
9
Year 1
Promoter
Farmer
Total
Promoter
Farmer
Promoter
Farmer
Beans
Oil,
Press cake
30
10
45
15
30
10
45
15
Total
40
60
40
60
Advantages/Disadvantages
Advantages of this model are:
n Risk is more equally shared between farmers and promoter
n More interesting for farmers with entrepreneurial spirit and reserves
because possible rewards are higher.
Disadvantages are:
n More intensive in-field follow-up is necessary in order to prevent
farmers from reporting less harvest than they actually have. This risk
is less eminent, if the promoter is the only buyer of Jatropha beans
in the region
n Administratively more complex than model 1.
n No compensation for the work of the farmers in the first 2 years.
Loans
n
n
n
In this model, the promoter issues loans to the
farmers. The loans should preferably be limited
to inputs (seeds and fertilizer), while farmers
contribute land and labor
Also a grace period of at least 2 years can be
considered, until the plantation becomes
productive.
There is no fixed buy back rate for the seeds
Loan Model
Advantages of the loan model are:
n More price transparency: farmers receive market price for their product;
n No need for intensive monitoring in the field;
n Possibility to give transitional consumptive loans during the first 2 years;
n Less financial risk for the promoter.
Disadvantages are:
n Administrative capacity to administrate loans must be created, if inexistent;
n The loan administration has cost, which reduces the yields for the farmers;
n Subsistence farmers may be resistant to loans;
n More loss for farmers in case of bad harvest.
Analysis
Risk to Farmers range from 0 to 100 %
depending on the model:
¨ If
no small farmers policy of government, and
small farmers: we recommend model 1
¨ If good small farmers policy and
entrepreneurial farmers model 2 or 3 can be
adhered to.
5. Financing
¨ Financial
tools
¨ Financiers and sources
¨ ODA and CDM
Financial tools: example FACT model
Seed to oil conversion model
Seed processing to oil
units
Technical
value
Jatropha
Processing capacity
kg/hr of seed
28,00
Capacity of e-motor
kW
Operation hrs
hr/day
Operation
days/annum
day/annum
312,00
Processed seeds
kg/annum
104832
1,88
12,00
Oil yield
of seed kg/annum
25%
Cake yield
of seed kg/annum
70%
Residue
of seed kg/annum
5%
From seed to biodiesel
Presses: oil cake can also
be used to produce biogas
Financiers and sources
International and bi-lateral agencies
n Private charity funds
n Private equity (funds)
n
Financiers
The international and bi-lateral agencies:
n These traditional agencies are more and more cautious in accepting
smaller innovative projects.
n Tendency to out-contract large sums to few reliable partners who
manage the smaller projects and support the institutions and
organisations in developing countries.
n Example DGIS:
¨
¨
for the energy sector, GTZ has obtained several millions of Euros,
NUON/EDF, World Bank, etc..
a general MFS (co-financing system) programme allocating funds to
applicants under very strict conditions. (E.g. Strohalm, a relatively small
NGO from the Netherlands, has obtained a 3.2 Million Euro, o.a. for biooil production for local development in Honduras; HIVOS, which was
allocated 260 million Euro, which aims to move in the sustainable
energy sector.
Financiers
Private charity funds:
n These funds in Europe cover all sorts of good thematic
goals and many focus on rural development.
n Quite a number of these are interested in energy so to
assist the improvement of the living conditions of the
rural poor.
n Some of these, especially those of companies with a
high sustainability profile, follow the line of People Planet
Profit, and support poverty projects.
Financiers
Private equity (funds):
n There is a list of at least 50 of such funds for the
renewable energy sector, which basically aim to
invest in projects with a minimum of risk and a
maximum of return.
n The projects that such funds are interested in,
are large scale.
n At the same time quite some private equity
companies today involved in Jatropha
production in Africa. ( sun biofuels, etc.)
ODA and CDM
n
n
n
n
n
n
ODA Official Development: stimulating
development.
CDM is extra to make a system viable
CDM applicability: highly complicated
CDM costs: 50 to 300.000 Euro
CDM ownership rights: beneficiaries or investors
CDM and its temporary nature: for how long?
6. Conclusions
1.
The International market in biofuels for West Africa = big
opportunity, prices are however dependent on fossil fuels, and
bio-fuels produced by countries on large scale (Brazil, Malaysia)
also provide a reference for investors.
2.
For large scale export production Jatropha = a high promise,
but stability of production an issue to be tackled still. Further
R&D needed.
3.
For National market development important lessons to be
learned from Asia and EU: a policy package of relatively high
and stable prices at the start, provision of loans and provision of
training will assist farmers to take-on these new energy crops.
4.
Local biofuels markets in village power and use in agroprocessing are attractive to poor small holders.
Continued
1.
Actors in biofuel production have different levels of risk
acceptance: need national policy and different arrangements
between promoters and farmers
2.
Financial world: changes positive for biofuels: the equity
funds, private investors and charity funds demonstrate
increasing interest in this area.
3.
The international and bilateral agencies out-contract their
programs more and more, and this makes funding directed to
local NGO’s and business parties.
4.
CDM will be an important source in the future: however it
requires 50.000 to 300.000 to have the CDM certified (only
with large projects >10000 ha).
5.
The CDM is also very complicated to comply with, and will not
be lasting. It is the cream on the pudding.
The End
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