Lance Mambondiani

Lance Mambondiani is an Investment Executive at Coronation Financial

Government should support ethanol production

RECENT news that Green Fuel, a pioneering Zimbabwean ethanol processing company, is currently sitting on 8 million litres of ethanol (E10) in their storage facilities due to a slow uptake by the market sounds like irresponsible economic suicide.

By all accounts, the Zimbabwe’s economic recovery will require innovative, sustainable and inward looking projects. Ethanol production is one such, with the potential to provide economic development opportunities, stimulate job creation, tax base diversification and new capital investments.

Domestic ethanol production can aid economic recovery and provide a domestic, cost effective alternative to imported oil. Ethanol production can stimulate economic activity at the local and national level.

Figures submitted to government authorities suggest that Green Fuel’s Chisumbanje project recently featured on ‘Talking Business’ by Supa Mandiwanzira has a daily ethanol production of 700 000 litres and 18 Megawatts of electricity which can be pumped back into the national grid.

The project has created 4 500, largely local, jobs and is estimated to create 10 000 more jobs by 2014. With an unemployment rate above 75 percent, a significant handicap to Zimbabwe’s recovery is a briefcase economy with fewer tangible job creation opportunities at this scale.

Despite the political scepticism which may or may not surround such a gigantic project, capacitating the ethanol industry can potentially benefit every sector of the economy, from the technological sector which provides software for sophisticated plant operations, to the manufacturing sector which provides plant components.

Ethanol production can provide an excellent domestic market for sugar cane, providing opportunities for the farming communities around Chisumbanje to diversify and earn a decent living.

To its credit, the coalition government has accorded the ethanol project National Project Status and recently gazetted Statutory Instrument 144 of 2011 legally allowing the sale, and giving guidance on the product specification of E10 (90% petroleum and 10% ethanol).

Nonetheless, since fuel importation is ‘big business’ it follows that a blending strategy despite its obvious economic benefit will naturally be resisted by entrenched players.

Consumers and suppliers will also be justifiably apprehensive of the technical issues regarding the smooth integration of ethanol into the country’s fuel mix. It is therefore unlikely that progress in ethanol integration would be resolved without blending policy directives.
Still, there are a number of approaches which the government can adopt to support the emerging ethanol market.

Compulsory Blending

A mandatory blending policy is one such approach which can directly reduce the $6 million monthly fuel importation bill and create more top-end jobs.

The USA is the world’s biggest user of mandatory blending. The Energy Policy Act of 2005 (EPAct 2005, P.L. 110-58), established the first-ever Renewable Fuels Standard (RFS) in federal law, requiring increasing volumes of ethanol and biodiesel to be blended with the U.S. fuel supply between 2006 and 2012.

The Energy Independence and Security Act of 2007 (P.L. 110-140, H.R. 6) amended and increased the RFS, requiring 9 billion gallons of renewable fuel use in 2008, stepping up to 36 billion gallons by 2022.

Besides the USA, in 2006 India introduced a 5 percent mandatory blending policy to reduce its reliance on imported oil. The Zimbabwean government can consider similar mandatory blending legislation.

For such a policy to be effective, the Energy Ministry may consider establishing a technical committee comprised leading experts in the ethanol industry to actively engage parliament and other regulatory bodies to develop specifications that allow for the maximum amount of ethanol use in the market.

Such a committee would also need to independently analyse whether there is adequate long term supply of ethanol to justify a mandatory approach. One of the biggest criticism of blending internationally is its effect on food prices due to increased demand for raw materials. The impact of this on the local economy though unlikely to be significant would need to be assessed.

Tax Incentives

A second option would be for the Finance Minister to consider tax incentives for the ethanol industry. Stakeholders would need to lobby for the extension of key tax policies that help ensure developing technologies like ethanol can compete with entrenched interests for Zimbabwe’s energy future.

An example of this could be 20 to 40 cents per litre exemption for ethanol from excise taxes on motor fuel similar to the Volumetric Ethanol Excise Tax Credit (VEETC) in the USA. This would award blenders an exemption or a refund per litre on each litre of ethanol blended. The tax incentive would eventually be offset by an increase in local ethanol uptake and export possibilities, creating a new tax revenue stream.

Without a tax incentive, ethanol blenders would have little or no economic incentive other than the octane value especially when there is price parity between ethanol and imported fuel.

Justifiably, the price of E10 on the market is still high considering the billion dollar investment in the Chisumbanje plant. A mandatory blending policy or tax relief would assist in adjusting the price of a litre of E10 down, making it more competitive.

There are fewer projects in the country with the same ability to create new jobs especially in the rural areas and generate electricity as Green Fuel. Despite the legislative and political minefield, the country can derive far greater economic advantages from the success of such a project.

Dr Lance Mambondiani is an Investment Executive at Coronation Financial. He is also a Teaching Assistant in International Finance for Development and Financial Markets and Corporate Governance at the University of Manchester. The views expressed in this articles are personal and do not necessarily reflect the position of Coronation Financial.