PERU: Investment Opportunities

In Biofuels

Biofuels: Guide to Investments and Lessons Learnt

April 2008

PERU: Investment Opportunities

In Biofuels Extraordinary resources There is a growing international concern due to the high oil prices, the possibility of exhausting the existing reserves and the polluting impact of its intensive use. For these reasons, various countries and regions have approved legislation to require or foment the increasing use of renewable fuels, which raises projections for the worldwide demand of biofuels. Peru’s extraordinary climate and soil conditions allow it to have one of the world’s highest sugar-cane production yields (more than 100 tons per hectare in several of its producing areas), with the additional advantage of being able to program harvests throughout the 12 months of the year. Peruvian productivity in palm oil is also very high. Sugar cane and palm oil are the principal crops for the production of ethanol and biodiesel, respectively. In addition Peru has a great potential for other crops used in the production of ethanol, such as sorghum and sweet potato, as well as jatropha (pinion), higuerilla (castor oil) and canola for biodiesel. The projected development of these crops is extremely encouraging.

World sugar cane yields per hectare

0 20 40 60 80 100 120

India

Argentina

China

Mexico

Brazil

Colombia

Burkina Faso

Senegal

Peru

tons/hectare

Source: The FAO (2003)

Concrete advances Peruvian law also promotes the production and use of biofuels. Supreme Decree 021-2007, Regulation of Biofuels Commercialization, provides for the mandatory use of blends with the following chronogram: Diesel with 2% biodiesel

January 1st, 2009

Gasoline with 7.8% ethanol

January 1st, 2010

Diesel with 5% biodiesel

January 1st, 2011

The mandatory use of these blends in the Peruvian market will require the production from 12,000 hectares of sugar cane and 60,000 hectares of palm oil in order to produce ethanol and biodiesel, respectively.

• MAPLE-Etanol will construct an

ethanol plant with a projected investment of US $ 100 million, and will grow 11,000 hectares of sugar cane in Piura.

PERU: Investment Opportunities

In Biofuels • Local company Agroenergía is in

the process of developing 4,000 hectares of sugar cane crops in Piura and 10,000 hectares of palm oil in San Martin for the production of ethanol and biodiesel, respectively.

• Two biodiesel production plants

have already been set up in Lima, under Heaven Petroleum Operators and Biodiesel Peru.

• The company Pure Biofuels is in the

process of constructing a biodiesel production plant in Lima, linked to its development of 14,000 hectares of palm oil in Huánuco.

Opportunities for ethanol investments Around 80,000 hectares of sugar cane are grown along the Peruvian coast for sugar production in ten major agro-industrial complexes. • Several sugar companies are

indicating their interest in devoting part of their cane production to producing ethanol; while agro-industrial company Cartavio already has this capacity.

• In turn, the Peruvian State has been

promoting strategic partnerships for investment in the agribusinesses of Pomalca, Tumán and Cayaltí, along the Northern coast.

Idle land and innovative solutions The Peruvian coast has more than 100,000 hectares of idle land, which can have access to water by means of investment in innovative solutions such as:

• Use of underground water1,

• Application of efficient water use technologies,

• Conversion of crops towards varieties with less water consumption,

• Crops such as sweet sorghum with short growing seasons, to use the water available in rainy periods,

• Treatment and reusability of sewage from cities,

• Water channeling and storage projects,

• Joint ventures with associations of small producers, among others.

The conversion of crops offers farmers in the country’s coast, sierra and northeastern departments an opportunity to migrate their present production of rice or alfalfa towards more profitable crops such as sugar cane, cotton or banana trees. This process is being implemented progressively.

1 Natural Resources Institute (INRENA)

“Reserves of underground water in Peruvian coast” (Spanish) http://www.inrena.gob.pe/irh/irh_proy_asubterraneas.htm INRENA “Studies on underground water reserves per valley” http://www.inrena.gob.pe/irh/irh_estmanuales_estudios_asubt.htm

PERU: Investment Opportunities

In Biofuels

Approximately 350,000 hectares of rice are grown in Peru’s departments of Tumbes, Piura and Lambayeque on the coast, and San Martin in the northeast.

Opportunities for investments in biodiesel Palm oil, produced in deforested areas of the Peruvian rainforest, has great potential for the profitable production of biodiesel. Private Peruvian companies such as Industrias del Espino (Agroenergía) and Pure Biofuels are undertaking large developments. Likewise, producer associations are being formed in the departments of San Martin, Loreto, Ucayali and Huánuco with clusters of more than 5,000 hectares each and the capacity of being strategically associated with investors and buyers: Region Agricultural

Association

San Martin Caynarachi Tocache Rioja

Loreto Yurimaguas Iquitos – Nauta Axis

Ucayali Aguaytia Neshuya

Huánuco Honoria Aucayacu

The Development Financing Corporation (COFIDE) offers a Structured Financial Product (PFE) that is a line of financing for associations of agriculturists and productive chains. Further information on the PFE can be found at: http://www.cofide.com.pe/pfe/index.htm

The development of new energy crops such as sweet sorghum and sweet potato to produce ethanol, and jatropha (pinion), higuerilla (castor oil) and

canola for the production of biodiesel, are extremely encouraging.

Peru: Map of biofuels production

ExperimentalCrops

SUGAR CANE

SUGAR

CANE

SWEETSORGHUM

SWEET POTATO

OIL PALM

JATROPHA

HIGUERILLA(CASTOR)

ExperimentalCrops

SUGAR

CANE

JATROPHA

IndustrialCrops

CANOLA

ExperimentalCrops

SUGAR CANE

SUGAR

CANE

SWEETSORGHUM

SWEET POTATO

OIL PALM

JATROPHA

HIGUERILLA(CASTOR)

ExperimentalCrops

SUGAR CANE

SUGAR

CANE

SWEETSORGHUM

SWEET POTATO

OIL PALM

JATROPHA

HIGUERILLA(CASTOR)

ExperimentalCrops

SUGAR CANE

SUGAR

CANE

SWEETSORGHUM

SWEET POTATO

OIL PALM

JATROPHA

HIGUERILLA(CASTOR)

ExperimentalCrops

SUGAR

CANE

JATROPHA

IndustrialCrops

CANOLA

Impacts on investment and employment: According to the statistics of investment in sugar cane and palm oil, an investment of US $ 2,000 to US $ 3,000 per-hectare is estimated for agricultural production. In addition, the creation of one (1) direct or indirect job is expected for each three (3) hectares cultivated. Guidelines for the promotion of biofuels The Peruvian State is promoting the cultivation and production of biofuels with the following principles:

1. Not to affect woodlands or protected areas, while contributing to reforestation.

2. Not to affect the environment’s biodiversity, nor generate polluting waste.

3. Not to compete with the food supply.

PERU: Investment Opportunities

In Biofuels

4. To promote joint ventures with agriculturists and to contribute to improving the quality of life for rural families.

5. To use efficient technologies in the use of the water.

6. To contribute to territorial ordering and economic ecological zoning.

7. To contribute to technological development and technical assistance.

Lessons learnt and policymaking An integrated policy of public-private partnerships is being conducted to promote investment with technological content in agriculture sector and its services. The items of the policy are: a) An ambitious plan of concessions of

Peru-Brazil corridors, ports, airports and telecommunication infrastructure oriented to increase agricultural land usage and efficiency in sierra and Amazon regions.

b) An innovative credit program for

farmers associations implemented by Peruvian Development Bank (COFIDE), which is allowing them to export coffee, cacao, cotton, and others, and will be extended to biofuels crops such as oil palm or jatropha.

c) Promotion of investment in

agribusiness projects associated to new ideas. Private initiatives are blossoming in water recycling and water saving technologies, underground water use, crop conversion from rice, as well as, reforestation and partnership with small-size farmers. Multisectorial coordination between land, water, and catastro authorities is facilitated through the identification of specific zones called Agricultural Parks.

d) Development of new and improved crops to take advantage of biodiversity and exceptional climate and soil conditions in Peru. There is potential for sweet sorghum, jatropha, canola, and ricino (castor), as alternative crops for ethanol and biodiesel.

Strategic location and business climate The country’s central location on the western coast of South America makes possible its projection as a regional production and commercial hub. Numerous ports, airports and a system of Peru – Brazil highways are being consolidated in order to enable Peru to serve as an efficient bridge for connecting the markets of South America, Asia and the United States. - Highly skilled, low cost - Peru

has highly skilled human resources at low cost, which gives it a competitive advantage on an international level. For an 8-hour work day, the average salary for a farmer in Peru is 5.9 dollars, which makes the cost of manual labor much lower than its principal competitors like Mexico and Chile (costs of 2 to 1 compared to Peru), South Africa (4 to 1), Israel and France (9 to 1), Spain (11 to 1) and the United States (16 to 1) (Source ILO).

- Trade agreements with the

leading world markets - Peru enjoys preferential access to the principal international markets. Peru has concluded negotiations for an FTA with the United States, is a member of the Andean Community (CAN), enjoys an SGP with the

PERU: Investment Opportunities

In Biofuels

European Union, maintains Economic Supplementation Agreements with most Latin American countries, including the MERCOSUR nations, and has been negotiating FTAs with Canada, Thailand and Singapore. In addition, it should be indicated that Peru is a member of the Asia-Pacific Economic Cooperation Agreement (APEC).

- Tax advantages - Exports from

Peru are not subject to VAT. In addition, other taxes such as tariffs on intermediate imports are fully refunded.

- Legal framework - Both Peruvian

and foreign investors can pursue their agrarian and agro-industrial activities with total guarantees, thanks to the legal framework offered by Peru.

Private initiatives are of the utmost importance for PROINVERSION. This mechanism is governed by Law 28059 (Framework for Promotion of Decentralized Investment) and regulated by Supreme Decrees 015-2004-PCM and 013-2007-PCM, allowing the private sector to develop investment projects based on the State’s assets or services, such as idle land.

Contact us: www.proinversion.gob.pe Antonio Castillo. Director of Investment Promotion acastillo@proinversion.gob.pe Ricardo A. Diaz. Biofuels Project Coordinator rdiaz@proinversion.gob.pe

DOCUMENTS

Biofuels Market Law – No. 28054

Regulation of Biofuel Commercialization, DS-021-2007

PROBIOCOM Program Guidelines