Getting the Chisumbanje Ethanol Project Back on Track
Press
Statement
Prof.
Arthur G.O. Mutambara
Deputy Prime Minister, Republic of Zimbabwe
Chairman Inter-Ministerial Committee
19th September 2012
1. Introduction
1.1 The Chisumbanje Ethanol Project is a national
project of great strategic importance where ethanol is produced from sugarcane.
The project consists of sugarcane plantations in Chisumbanje and Middle Sabi,
with the Ethanol plant being located in Chisumbanje. World class irrigation
infrastructure has been put in place, and an outstanding ethanol producing
plant constructed. The Project has potential to radically improve our fuel
security and economics, introduce efficient irrigation schemes, support
smallholder out-grower schemes, create jobs, generate large amounts of electric
power, and stimulate major downstream industries.
1.2 However, several issues and problems at the
Chisumbanje Ethanol Project have resulted in the stoppage of production
activities at the ethanol plant. To address these matters,
there is need for a common understanding of the challenges the project faces.
It is within this context that this Inter-Ministerial Committee has done its
work and produced the current report. The objective is to provide a holistic
solution to the project’s challenges in a way that allows production to resume
and for the project to realize its full potential in contributing to the
economic development of Zimbabwe.
1.3 Committee members visited Chisumbanje on the
22nd and 26th of August, 2012 on a fact finding mission,
and met in Harare on the 3rd and 17th of September 2012
to discuss their findings and to start the process of building a portfolio of
solutions that will put the project back on its course.
1.4 The Chisumbanje Ethanol Project is an
enterprise of strategic and national importance, which has the potential to be
the nucleus for the development of an ethanol industrial cluster. The project
currently has issues and problems in two broad areas, which are: social and community related, and, technical and business related. Long
term and sustainable solutions should be found to these issues based on a
thorough and technical analysis of the problems instead of politicizing the
issue. The solutions should balance between three buckets of interests, that
is, community,
private and national. The solutions should provide a win-win scenario
for these three potentially conflicting areas of interests. The resolution of
the challenges should be proffered in ways that protect the integrity of the
government while engaging all the stakeholders involved and affected.
Summary of Key
Recommendations
There are two sets of problems that the
project faces. Firstly, there are community and social issues that have emerged
in the course of the establishment of the project and as a result of its
operation. Secondly, there are technical and business related issues and
problems which have led to low uptake of ethanol fuel blends. All these issues require
immediate solutions and action in order for the Chisumbanje Ethanol Project to
get back on track.
2. Social and Community Issues:
Recommendations
With regard to the Social and Community
issues, the key suggestion is that all households that were displaced or
mishandled must be compensated and resettled. Lessons must be learnt, and going
forward an inclusive and consultative approach must be adopted. The following specific
actions are recommended for the issues and problems that have been identified:
2.1 The Chipinge Rural District Council should
immediately regularise all land acquisitions to the project in accordance with
the law by completing the appropriate lease agreement with ARDA in compliance
with the Communal Land Act (Chapter 20:04).
Specifically, the outstanding lease agreement for 2663 hectares that have
already been ceded to the Ethanol Project, together with Council decisions
enabling this particular land acquisition, should be reviewed and harmonized in
order to align them to the recommendations contained in this report.
Thereafter, the lease agreement must be completed and signed.
2.2 Out of the total 1754 households displaced
from their communal lands in Chisumbanje (1060) and Chinyamukwakwa (694)
communal lands, only 516 have been resettled. The Company should immediately
relocate the outstanding 1238 households who have not been relocated on
irrigated land. The 0.5 ha one size fits
all is inadequate. An asset audit (i.e., land, livestock, crops, buildings, equipment and family size) for
each displaced household must be conducted so that the compensation and
resettlement is meaningful. Consequently, the size of irrigated land provided
must range from 0.5 ha to 2 ha. Where the household becomes an out-grower the
irrigated land will be much more. In addition it must be ensured that each
household has land for housing and livestock. Certainly 619 ha of irrigated land
will be inadequate to accommodate the 1238 households. Furthermore some of the
displaced households must be accommodated as sugarcane out-growers, and
producers of other products and services, to the Ethanol Project. These
adjustments to the resettlement strategy must be applied retroactively to the
resettled 516 households. Other social safety nets and facilities designed to
accord the displaced households sustainable means of livelihood must be developed
and provided. These should include feedstock schemes, general infrastructure
provision, schools, and clinics. The Ministry of Agriculture in consultation
with other relevant ministries must develop a detailed smallholder resettlement
model that takes into account the elements articulated above.
2.3 The Company should immediately compensate and
resettle the 117 households that had offer letters and were displaced from ARDA
estates. With Government and ARDA supervision, the Company should engage the
farmers directly and pay the compensation in lieu of the land user rights that
were lost, and negotiate terms for the farmers to continue to live on the
estates as out-growers and producers to the Ethanol Project. Of the 117 farmers
who held sub-leases in ARDA estates, 116 have stayed on as out-growers of
sugarcane to the Project. Their major grievances have been non-payment of
compensation for land user rights and slow payment for cane delivered to the
project in the 2010/2011 season. Of the total, US$196,800 due to the farmers
for that season, US$161,800.00 had been paid and US $35,000 was outstanding and
was only paid on 14th September, 2012. All payments to these farmers are
effected through ARDA. With Government and ARDA supervision, the Company should
go into direct arrangements for payment of these farmers, and should avoid
delays in paying for crop deliveries.
2.4 In addition to enabling displaced households
to be sugar cane out-growers and producers of subsistence crops on irrigated
land, they must also be enabled to grow other cash crops such as cotton and
wheat, which were the bed-rock of commercial agriculture in Chisumbanje area.
The Company must play a facilitative role in this extra endeavor, which is not
part of the sugarcane out-grower scheme, but rather an effort to address the
broader social and commercial concerns of the community.
2.5 The company should immediately compensate
households that lost crops in the process of developing the Project’s dams and
canals in accordance with the assessments of crop damages that were carried out
by Agritex officials and further enhanced and adjusted by information obtained
directly from the affected communities. It is unfortunate that some of these
crops were insensitively ploughed down by the Company. This is completely
unacceptable. A total of US$80 500.00 is due to these households according to
the combined reports from Agritex, traditional leaders and the victims. This
compensation must be paid immediately. So far, only US$39,142 has been paid as
compensation for crop damages broken down follows: (1) US$19,419 for crop
damages to number of households whose land was taken from an area under Headman
Chisumbanje known as DRC. (2) US$9,690 that has been paid in lieu of crops that
were destroyed from among another set of households displaced from Headman Chisumbanje’s area,
and (3) US$10,033 for crops destroyed from a few village households displaced from
Chinyamukwakwa communal lands. The rest of the compensation that has not been
provided must be paid immediately.
2.6 Verified reports from the displaced
communities indicate that livestock was lost through being shot, drinking
contaminated water, or by the levying of undue and oppressive fees for
trespassing. A total compensation of US20 000.00 must be advanced to the
affected communities.
2.7 There are few individuals who were victims of
violence, contaminated water, and unsafe working conditions. Rehabilitation of,
and compensation to, these people amounts to about US15 500.00 must be
immediately effected. The Company must swiftly install a water purification
system for the contaminated water from the plant before it is recycled for
human and livestock consumption. Care must be taken that drinking sources for
people and livestock are not linked or exposed to the fertilizer rich
by-product water from the ethanol plant, which is recycled for irrigation. The
Project must take cognizance of the fact that households will have livestock and
thus mechanism of coexistence with this reality must be put in place.
2.8 In
order to avoid future acrimonious community relations, Government and ARDA should
maintain an effective oversight of the implementation of the Project. Specifically,
the current Inter-Ministerial committee should continue to supervise and
monitor the process assisted by its Working Party of officials. At the local
level, the District Joint Implementation Committee should be broadened to
include the Council Chairperson, all local chiefs, the local Member of Parliament,
two Councilors, two workers union representatives and four representatives of the
displaced and affected households (two from Chisumbanje and two from Chinyamukwakwa).
2.9 The grievance that not enough local people
are being employed must be addressed. As illustration Greenfuels employs a
total of 975 workers. Out of that number 202 workers are from the Chipinge
District translating into 20.7 %. This is too low. Out of an overall employment
of 3237 people only 1099 are from the Chipinge District, meaning 34%, which is
clearly unacceptable. The company must strive to raise their overall local
employment equity. In particular, all the low skill jobs must go to locals. Of
course we need to balance our resolution of this grievance with desire to
promote national cohesion and integration.
2.10 The
allegations of racism at the Company were not fully substantiated. However, the
fact that they were made by a number of stakeholders is sufficient basis to
encourage the Company to improve its racial harmony by treating all employees
with equality and dignity, irrespective of race. This must be reflected in all
employment and management practices including hiring, pay, benefits,
appraisals, promotion, and shop-floor treatment
2.11 The
disputed figures on the numbers of workers (4500 vs. 3237) that the project
employs notwithstanding, it is clear that the project has a substantial number
of employees and has a potential to employ even more as it expands. Going by
the minimum number as reflected in NSSA records, the 3237 jobs at stake
requires that Government takes urgent action to save the Project.
3. Technical and Business
Issues: Recommendations
In terms of the
technical and business related issues and problems, the solution matrix
consists of converting the entire project into a JV, making the pricing of
ethanol competitive, engaging in comprehensive marketing of ethanol blends,
while gradually adopting mandatory blending. The following specific solutions
and actions are recommended in order to enable resumption of the Ethanol plant operations
in as short a period as possible:
3.1
The Cabinet decision to convert
the Project from a BOT to a JV must be upheld and implemented within the
proposed timeline of two months. It must be noted that Ethanol plant is not on
ARDA land, and was not part of the BOT, which means this BOT arrangement was
actually detrimental to the national interest. In doing the BOT conversion to
JV due diligence and investment/project valuation there is need for rigour and
creativity. The veracity of the claim that US$600m has been invested must be
established, including the source of the financing. There must be robust and
creative valuation of the State’s asset contributions to the Project, such as
the land (40 000ha), equipment, intellectual property, institutional memory, other
state assets usable as security for loans, the partnership with government as
an asset, and value enhancing instruments such as mandatory blending. In fact, the
State can easily bring to the Project assets that will enable it to achieve 51%
ownership of if not higher. The work on converting the Project from a BOT to a
JV must proceed speedily. In fact once concluded this conversion to a JV will
make most of the other technical and business issues easily resolvable.
3.2 Mandatory
blending should only be considered within the context of a JV. We cannot have
mandatory blending for one private producer of ethanol. If there were several
producers it might make sense. As a starting point, the mandatory blending should
be at the 5% level. This should be implemented immediately, on the assumption
that the conversion from the BOT to a JV is now irreversible. The legal
instrument required and other supportive measures must be put in place. This
mandatory E5 fuel specification would increase the uptake of ethanol fourfold
to 2.3 million from the current 0.6 million litres and result in 3% lower
carbon emissions. E5 is also the ideal starting point because none of the car
manufacturers and sellers has a problem with that level of ethanol, whereas
there were complaints about certain vehicles’s compatibility with E10. For the
abundance of caution, Greenfuels design an acceptable insurance policy
framework that will compensate motorists in the event of any damage to vehicles
due to the use of E5.
3.3 For
now blending at 10%, i.e., E10 should continue as voluntary and optional until
measures to mitigate adverse impact on non-compatible vehicles are in place.
Once this is achieved, the mandatory blending can graduate to 10%.
3.4 As
mentioned in the National Energy Policy launched recently the government
targets to reach levels of mandatory blending of 20% by 2015. To achieve this,
research work should start now. Government, through its various agencies, can
start engaging experts on bio-fuels to look into the best ways to achieve the
20% level of blending. In summary we are proposing a gradual adoption of
mandatory blending from 5%, through 10%, right up to 20%.
3.5 For
now, the blends E10, E20, E85 and E100 must continue as optional products on
the market for vehicles that are compatible with them.
3.6 The
logistics and infrastructure for all the blending levels must be developed
quickly. Blending should be done from Msasa and at oil companies’ outlets until
alternative sights are in place, in particular modifications at Feruka. In
fact, blending logistics must be rapidly developed for fuel coming through all
the different entrance points into the country, be it by road, rail or
pipeline.
3.7 The
government should direct car manufacturers/ assemblers/ dealers/ agencies to
immediately start importing vehicles which take ethanol blends. Policies should
be developed that encourage individuals to import vehicles which take ethanol
blends. Such policies can take different forms but Government should be the
main driver of the efforts to increase the fleet size so that there will be
increased uptake of ethanol blends. In addition, where feasible, gadgets which
adjust vehicles and make them compatible with high levels of ethanol must be
procured.
3.8 The
issue of pricing of ethanol should be based on the best practice formulae and
be regulated. It must reflect regional and global pricing of ethanol, and take
cognizance of the low caloric value of ethanol. It must take into the cost
build up involved in producing a litre
of ethanol in Zimbabwe (Greenfuels and Triangle) and the landed cost build of
landed fossil fuel (unleaded petrol). On the basis of the analysis done, with the
motivation to encourage consumers to use ethanol blends, while jump-starting
the Company, the generous price of 85 cents per litre of ethanol is suggested.
The actual price should be 69.2 cents per litre. The price of 85 cents a litre,
will mean the prices of the blends will be as follows; E5 (US1.47), E10
(US$1.43), E20 (US$1.37), E85 (US$0.95), E100 (US$0.85), as compared to
unleaded fuel going at the rate of US1.50 a litre.
3.9 From
the analysis of the impact of the price of ethanol on the price of the blends
it is clear that only competitive pricing will make the blends attractive. In
fact, with the correct pricing of ethanol and effective marketing there might
be no need for mandatory blending. Consequently, the price of 85c a litre of
ethanol being suggested is just a starting point. The objective is to
eventually adjust the price to 70c a litre. This will be possible as the
company will now be enjoying volume driven economics, while the different
ethanol blends will be very attractive at E5 (US1.46), E10 (US$1.42), E20 (US$1.34),
E85 (US$0.82), E100 (US$0.7) compared to unleaded fuel going at the rate of
US1.50 per litre.
3.10 Fuel prices will not
remain at the current levels. They could
rise, in which case the ethanol company would have a windfall in profits; but
prices could equally fall and that would make the production of ethanol
uneconomic and hurt sugarcane farmers. There is need to consider the idea of a
'cushion fund'/other mechanism to take advantage of high crude oil prices and
to establish a floor price/other mechanism for ethanol prices were
international crude oil prices to drop drastically. This would require the
involvement of Treasury in these discussions given the linkage with duties and
other taxes that can be used as incentives.
3.11 Once all these
technical and business decisions are made and the community issues are
resolved, it is important for the Company and the government to carry massive
marketing campaigns for Ethanol fuel blends. Some of the consumers’ negative
attitudes to ethanol are based on sheer ignorance and fear of the unknown. In
fact, from a review of the history of fuel blending before independence up to
1992, there is no evidence of vehicle damage due to the use of ethanol blends.
Furthermore ethanol technology and quality has improved since then, and so has
car technology towards compatibility with ethanol blends. The benefits of
ethanol blends and the associated personal, community, national and
environmental advantages must be clearly articulated in a massive branding and
marketing campaign.
4. Concluding Remarks
4.1 The
two sets of recommendations must be implemented concurrently and immediately.
All the recommendations to resolve the social and community issues must be
implemented with urgency. The Committee rejects the conditional approach that
says these challenges can only be addressed when the plant is running, after
the business and technical issues are resolved. This is completely
unacceptable. In fact, some of the community issues were supposed to have been
addressed before the Project started. Furthermore, the quantum of resources
required to address these concerns are quite insignificant compared to the
financial scale of the project. While we appreciate that resolving the business
issues leading to the running of the plant will make it easier, and less
financially burdensome for the Company to address the social concerns, it is
our unyielding conviction that not only has the company got the requisite
resources, it has a legal and moral obligation to address the concerns of the
communities, immediately. Community buy-in and ownership are critical for such
an important national and strategic project.
4.2 In
embracing the redress to communities, beyond compensation for assets/land lost,
it is important to leave them with an arrangement that secures their incomes as
out-growers and sellers of produce to the company. It is also possible here to
revisit the BOT so that its terms are reworked/revised in such a way that the
company hands over the assets to a Community Trust rather than to ARDA, and it
should be possible for the Community Trust to enter into management contract
with the Company or any other competent management entity.
4.3 The
government must quickly mobilise all the concerned stakeholders in order to
expeditiously implement the technical and business recommendations presented in
this report. This will enable the Chisumbanje Ethanol Project, a national and
strategic project to start running.
4.4 Once
the issues raised in this report are addressed, and the plant is fully
operational it might be possible for Government to explore the possibility of a
motor manufacturing plant using Brazilian technology so that a few models that
use high ethanol content can be assembled locally. In fact, we can think in
terms of an ethanol industrial cluster, with many products and services driven
by ethanol. As we address the problems that have led to the derailment of the
Ethanol Project, we must not miss the forest for the trees. This Project is a
national and strategic asset with a potentially huge impact on our economy,
through radically changing our fuel economics, power generation (supplying the
entirety of Manicaland), multiple downstream industries, new dependent projects
such as Kondo Dam, and a potential car manufacturing industry, alluded to
above.
4.5 This
full report outlining the work and recommendations of the Inter-Ministerial
Committee was adopted by Cabinet on the 18th of September 2012. This
presentation encapsulates the collective and considered position of an
inclusive set of Ministers who set out to address some tough matters. In doing
its work the Committee consulted and involved all the stakeholders and engaged the
entire ethanol ecosystem. The two sets of recommendations, seek to balance
between community, private and national interests, as we strive to bring this
strategic project back on course.
