RESPONSE TO LAC BIOFUELS INITIATIVE

UNCLAS LA PAZ 002730 SIPDIS SIPDIS STATE FOR WHA/AND, WHA/EPSC/CORNEILLE, EB/ESC/IEC/IZZO, S/P/MANUEL, OES/STC/BATES ENERGY FOR CDAY AND SLADISLAW E.O. 12958: N/A TAGS: ECON EINV ENRG PREL PGOV BL SUBJECT: RESPONSE TO LAC BIOFUELS INITIATIVE REF: SECSTATE 164558 ¶1. (U) Summary: This cable responds to the questions posed in reftel on the investment climate, the energy sector and the sugar industry in Bolivia. The investment climate, particularly in natural resource industries, is poor due to legal uncertainty and increasing governmental interference. Bolivia's biodiesel and ethanol production is minimal, but a few investors are looking to expand production in Santa Cruz. Bolivia has a framework biofuels law, but has not issued implementing regulations. The law aims to have the automobile fleet operating on a 20 percent ethanol blend within ten years, but does not mandate such use. Land reform proposed by the GOB is a barrier to increased investment in sugar production. End summary. General Overview -------------- ¶2. (U) Bolivia holds South America's second largest natural gas reserves. Bolivia produces enough natural gas, petroleum, gasoline and liquid petroleum gas to supply its domestic market and exports approximately 30 million cubic meters of natural gas per day to Brazil and Argentina. Bolivia imports diesel. The government spends around USD 100 million per year on diesel subsidies to maintain a low domestic price. Electricity generators use natural gas and hydro-power. Automobiles run on gasoline, natural gas, and liquid petroleum gas. The general investment climate is poor, particularly in the hydrocarbons sector, due to legal uncertainty and increasing governmental interference in key sectors. Land reform proposed by the GOB has created uncertainty for large farms, and increased the difficulty farmers face in obtaining credit to finance investments. Investment Climate -------------- ¶3. (U) The general investment climate in Bolivia is poor due to legal uncertainty, GOB attempts to nationalize natural resource industries, and government efforts to exert stronger state control over key sectors. Bolivia has a general environmental protection law, but no specific regulations for bio-refineries. The Oil Seed Producers Association (ANAPO) in Santa Cruz is running a pilot bio-diesel project using soy. Ethanol production is currently minimal, but a Santa Cruz business, Bethanol LLC, is seeking investment for three ethanol plants it hopes to build in the next four years to produce a total of 160 million gallons of ethanol per year. For more information on the projects, see www.bethanol.net. Although the manager of Bethanol told us that he does not know of other ethanol initiatives, according to a report by the Worldwatch Institute, 15 sugar cane distilleries are being constructed in Bolivia. Exports of biodiesel and ethanol are minimal. ¶4. (U) Automobiles generally run on gasoline, diesel, or liquid petroleum gas (LPG). Many vehicles have been illegally converted to run on LPG, because the government maintains an artificially low LPG price. Newer vehicles could use a 10 percent ethanol/90 percent gasoline blend, but many of the vehicles on the road in Bolivia would not be able to use an ethanol blend due to age. Few flex fuel cars are contained in the fleet. Bolivia lacks adequate distribution infrastructure for transporting and blending ethanol. Private operators distributed gasoline, diesel, and LPG from Bolivian refineries to gas stations until July 1, when the state-owned oil company YPFB assumed control of distribution. ¶5. (U) Foreigners currently have the right to own land in Bolivia; however, Bolivia is in the process of rewriting its constitution, and land reform is a main issue. Approximately 60 percent of Bolivia's soy is produced by Brazilian-owned farms. Owners of industrialized farms are concerned that the GOB will take their land to distribute to landless peasants or grant community property titles to indigenous groups. The government has stated, in accordance with the current law, that land which is not deemed to be fulfilling an economic and social function will be taken by the state and redistributed. Although the current law allows for this, redistribution has not occurred in the past. The land titling process can take several years to complete, but the government plans to streamline this process. Legal uncertainty has hindered farmers' ability to obtain credit. ¶6. (U) Bolivia is landlocked, but does have access to port facilities in Arica, Chile and on the Paraguay River leading into Brazil. Bolivia has road access to Chile, Argentina, and Brazil. Bolivia's transportation infrastructure in general is poor, and transportation costs add significantly to its export costs. Bolivia lacks support services for industrial infrastructure, as it lacks industry. Skilled workers are migrating in large numbers to other countries due to the lack of opportunities in Bolivia. The government does not offer concessional financing or tax breaks for energy investments. In fact, the GOB tax scheme for hydrocarbons producers is a disincentive for investment. Royalties are currently 18 percent, taxes 32 percent, with an additional 32 percent temporary tax on the largest producers. Potential investors in biodiesel and ethanol are currently seeking to clarify if the GOB would consider such fuels to be hydrocarbons. They argue that they should be considered fuel additives, and thus the hydrocarbons law (and tax regime) should not apply. This debate is critical for the future of the industry, as the industry is not likely to flourish if it is forced to pay the same taxes as gas producers. According to ANAPO, producers of biodiesel for export would be exempt from import duties on machinery inputs for five years under import tariff regulations. Producers in general, not for export, would pay a 5 percent tariff on all capital goods imported. Energy Sector -------------- ¶7. (U) During the late 1990s, the GOB partially privatized state-owned industries in the electricity and hydrocarbons sectors. At that time, the government also passed investor-friendly legislation, promoting significant private investment in both sectors. However, a backlash between 1999 and 2003 caused by an economic downturn and continued high poverty rates has resulted in a push to nationalize these sectors and revitalize the diminished state industries. In May 2005, the GOB passed a new hydrocarbons law which increased taxes and took commercialization control away from private investors. In May 2006, the government issued a supreme decree which partially nationalized hydrocarbons in line with the 2005 law and required hydrocarbons producers to sign new contracts by October 31, 2006. The decree mandated the restructuring of the state-owned hydrocarbons firm YPFB, but to date YPFB remains largely a shell which lacks human and financial resources. According to the law, the domestic price of natural gas can be no more than 50 percent of the export price. Domestic LPG prices are capped by the government, with producers effectively subsidizing consumers. The government imports diesel and spends approximately USD 100 million per year on subsidies, which benefit soy producers in Santa Cruz who are the main users. ¶8. (U) The government plans to revitalize the state-owned electricity company, ENDE, but the sector is currently dominated by private generators. Electricity is generated using hydro-power and natural gas. The GOB established an electricity "dignity tariff" on March 21, introducing a 25 percent reduction in rates for consumers who use fewer than 70 kilowatt hours of electricity per month. The 16 companies comprising Bolivia's national electricity network agreed to accept the rates and to bear an estimated $4.5 million in annual costs, but only under heavy government pressure. The companies are essentially subsidizing consumers. Electricity demand is predicted to grow significantly in the next decade, but investment prospects in the sector have been dampened by the uncertain legal environment and the GOB's actions which have diminished company profits. The private electricity producers supply electricity to the national electricity grid and to isolated rural systems. According to ANAPO contacts, there is a framework biofuels law in place, but no implementing regulations have been issued. The biofuels law aims to have the automobile fleet using a 20 percent ethanol blend within ten years, but does not mandate such use. Sugar Industry -------------- ¶9. (U) Bolivia has been self-sufficient in sugar since 1963. The sugar industry is concentrated in Santa Cruz department and is not highly mechanized. Bolivia has been criticized by human rights organizations for employing child labor in sugar cane cultivation. Harvesting methods do include burning in the field. This practice is forbidden by Bolivia's environmental law, but restrictions are not enforced. The total area cultivated for sugar cane is 107,000 hectares, producing 5 million metric tons of sugar cane and 420,000 metric tons of sugar in the last year. Each hectare yields around 47,000 kilograms of sugar cane. GOB statistics indicate that Bolivia exported 83,911 metric tons of sugar in 2003, while USDA estimates that Bolivia will export 175,000 metric tons of raw cane sugar in 2006. During fiscal year 2006, Bolivia utilized all of its granted tariff rate quota to export 14,375 metric tons of raw cane sugar to the U.S. The bagasse is not used for electrical power generation. The industry is privately-owned. GOLDBERG