Biofuels and Development

For arable land-rich developing countries, the arguments behind creating a biofuels sector are hard to ignore.  Import substitution and reduced dependence on foreign oil and petrol.  Local employment up and down the biofuel value chain.  The potential to develop a comparative advantage in a nascent industry that  potentially could provide export opportunities and foreign exchange earnings.

The Realities

But practice has shown a number of flaws in this thinking, in many cases leading to disastrous consequences.  For a variety of factors, both exogenous and indigenous, have resulted in dozens of failed projects, with the costs of failure landing squarely on local communities.

Sugar cane fields in Kwa-Zulu Natal province RSA

One of the chief contributors of failure is the is the nature of the biofuels industry itself, and the vagaries of world markets.  The biofuels industry is in a unique place where the selling price is dictated by the price of oil -- which itself is tied to geopolitics and acts of terrorism -- and the cost structure is dictated by the price of food -- tied to climate/rainfall and demand fluctuations.

Those realities make the industry ripe for speculation.  Investors jump in when oil prices are high and food supply is abundant.  But when oil prices moderate and food supplies are tight project IRRs turn negative.

This scenario is exacerbated in markets where local conditions are not predictable.  Jatropha has been a popular crop introduced into Africa, for example [1], but experience has shown that productivity levels have not come close to expectations [2].

Attempts to achieve improved productivity generally involve building large-scale energy-crop plantations.  The result has been substantial dislocations in several African countries, with forced relocation of communities and, even more harmful, displacing the subsistence agriculture that the communities depended on.

With the global recession of 2008-2011 project economics for most biofuels endeavors have soured substantially, and investors have walked away from the majority of these projects.  What is left behind are displaced communities with no longer any means to feed themselves and no jobs available, and a continuing battle over land ownership and land rights.

    Source: GEXSI

Impact of Biofuels Land Grab in Africa






















Sources:
1. GEXSI study
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