Document of

The World Bank E C.,FILE COPY

FOR OFFICIAL USE ONLY

Report No. 3214-BE

STAFF APPRAISAL REPORT

BRAZIL

ALCOHOL AND BIOMASS ENERGY

DEVELOPMENT PROJECT

April 22, 1981

Industrial Projects Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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FISCAL YEAR

July 1 to June 30

CURRENCY EQUIVALENTS WEIGHTS AND MEASURES

(As of June 30, 1980) 1 Hectare (ha) = 2.47105 Acres1 Liter = 0.2642 U.S. Gallon

Cr$1.00 = US$0.02 1 Barrel = 159 LitersCr$50.00 = US$1.00 1 Metric Ton (t) = 1,000 Kilograms (kg)

or 2,204.6 poundsI Vol. of Gasoline = 0.899 Vol. of Crude Oil

(thermal equivalence)1 Vol. of Anhydrous

Alcohol = 1 Vol. of Gasoline(as Gasohol Fuel)

1 Vol. of HydrousAlcohol = 0.86 Vol. of Gasoline

(as Alcohol Fuel)

NOTE: Alcohol and ethanol are usedinterchangeably in this report.

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BNDE Banco Nacional de Desenvolvimento EconomicoCDI Industrial Development CouncilCENAL Executive Secretariat of the National Alcohol CommissionCNAL National Alcohol CommissionCMN National Monetary CouncilCNP National Petroleum CouncilCNPq National Science CouncilEMBRAPA Empresa Brasileira de Pesquisa AgropecuaciaEMBRATER Empresa de Asistencia Tecnica e Extencao RuralFINEP Financiadora de Estudos e ProjetosIAA Institute of Sugar and AlcoholIBDF Instituto Brasileiro de Desenvolvimento FlorestalIDB Inter-American Development BankMIC Ministry of Industry and CommerceORTN Obrigacaes Reajustaveis do Tesouro NacionalPETROBRAS Petroleo Brasileiro S.A.PROALCOOL National Alcohol ProgramSTI Secretariat of Industrial Technology

bpd barrels per daylpd liters per daytpe metric tons of petroleum equivalenttpy metric tons per year

BRAZIL FOR OFFICIAL USE ONLY

ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page Number

I. INTRODUCTION 1

II. BRAZIL'S ENERGY STRATEGY AND PETROLEUMAND ALCOHOL SECTORS 2

A. Energy Situation .................................... 2B. Energy Strategy. 3C. Petroleum Demand. 3D. Gasoline Demand and Ethanol Substitution 4E. Diesel Oil Substitution. 5F. Brazilian Automotive Vehicle Fleet. 5G. Vehicle Conversion ................................... 6H. Ethanol for Chemicals ................................ 6

III. FUEL ALCOHOL MARKET AND MARKETING 7

A. Historical Supply/Consumption of Ethanol 7B. Projected Supply/Demand of Ethanol. 8C. Regional Ethanol Consumption and Production 8D. Storage and Distribution of Ethanol. 9

IV. PRODUCTION TECHNOLOGY 10

A. Main Biomass Raw Materials .10B. Current Technology .11C. Disposal of Byproducts and Environmental Impact 12D. Future of Alcohol Technology .13

V. THE 1981-85 ALCOHOL PROGRAM AND INVESTMENT COSTS 14

A. Overall Sector Program .14B. Production Facilities .15C. Technology Development .16D. Program Investment Cost .17

VI. ORGANIZATION, MANAGEMENT AND APPRAISALPROCEDURES OF THE ALCOHOL PROGRAM 17

A. Organization .17B. Management .19C. PROALCOOL Appraisal Procedures .20

This report was prepared by Messrs. Don Brown, N.C. Krishnamurthy, Pierre Larroqueand Isaac Sam of the Industrial Projects Department, and Dr. Norman Rask (Consultant).

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without IFC authorization.

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Page Number

VII. IMPACT OF ALCOHOL PROGRAM ON AGRICULTURE 22

A. Opportunities and Challenges ............................. 22B. Alcohol Production and Land Requirements .... ............. 23C. Agricultural Production Costs ............................ 24D. Impact on Land Use ....................................... 25E. Ownership Concentration .................................. 27F. Alternative Crops ........................................ 28G. Agricultural Policy and Alcohol Production .... ........... 28

VIII. THE PROJECT 30

A. Project Objectives ....................................... 30B. Project Scope ............................................ 30C. Implementation ........................................... 32D. Environmental Safeguards ................................. 34E. Reporting Requirements ................................... 34F. Major Risks ............................................... 34

IX. PROJECT COSTS AND FINANCING PLAN 36

A. Project Costs ............................................ 36B. Financing Plan ........................................... 37C. On-Lending Arrangements .................................. 38D. Procurement .........I ...................................... 39E. Disbursements ............................................ 41F. Accounts and Audits ...................................... 42

X. FINANCIAL ANALYSIS 42

A. General Approach ......................................... 42B. Rate of Return on Equity ................................. 43C. Government Pricing Policy ................................ 44D. Fiscal Impact on Government Budget ....................... 45

XI. ECONOMIC ANALYSIS 46

A. Key Assumptions .......................................... 46B. Economic Capital and Operating Costs ........... .. ........ 47C. Economic Rate of Return and Sensitivity Analysis ......... 49

1. Alcohol Production from Sugarcane ....... ............. 492. Alcohol Production from Cassava ...................... 50

D. Is the Government Subsidizing the Alcohol Consumer? ...... 51E. Project Benefits ....... ................ .................. 51

XII. AGREEMENTS 52

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ANNEXES

1 Glossary of Terms Used in the Report

4 Flow Diagrams of Alcohol Production from Sugarcane and Cassava

5-1 Estimated Balance of Additional Alcohol Facilities to MeetAnnual Targets to 1987

5-2 Detailed Capital Cost Estimates of Producing Units

7-1 Land Use by State and Regions, 19757-2 Alternative Energy Crops

8-1 Terms of Reference for Monitoring System8-2 Outline of Terms of Reference for Evaluation System8-3 Standard Formats for Production and Technology Development

Sub-Projects

9 Sources and Application of Funds

10-1 Principal Assumptions Made in the Financial Analysis10-2 Return on Owner's Equity under Prior PROALCOOL Interest Rates10-3 Return on Equity under Current PROALCOOL Interest Rates10-4 Project Fiscal Impact

11-1 Ethanol Economic Price11-2 Economic Capital and Production Costs11-3 Ethanol From Sugarcane - Economic Analysis11-4 Ethanol From Cassava - Economic Analysis

MAPS

IBRD 15334 Major Alcohol Producing Areas (June 30, 1980)IBRD 15335 Land Use Ratios - State of Sao Paulo

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DOCUMENTS AVAILABLE IN PROJECT FILE

Reference Title, Date and Authors

A. Gasoline Use, Alcohol Production, Sugarcane andCassava Production by State and Region, Brazil;October 1980, Industrial Projects Department, IBRD.

B. Evaluation of Goals of the National Alcohol Program;May 1979, Ministry of Industry and Commerce.

C. Destilaria Autonoma de 120 Mil l/Dia UtilizandoCana-de-Acucar, of May 1980, by M. Dedini S.A.Metalurgica, Piracicaba, Sao Paulo State, Brazil.

D. Benchmark Cost Data for Acohol Projects as ofJuly 1980; CENAL.

E. Legislacao National Sobre Alcool; 1978, ConselhoNacional do Petroleo.

F. Resolution Number 02/79 Concerning Policy and GeneralGuidelines for Implementation of PROALCOOL; July 12, 1979,National Alcohol Commission (CNAL).

G. Alcohol and Sugarcane Production, 1970-86;October 1980, Industrial Projects Department, IBRD.

H. Estimated Farm Level Production Costs for Sugarcaneand Cassava; October 1980, Industrial ProjectsDepartment; Basic Data Sources - Copersucar,Instituto de Economia Agricola, IAA, Associacao dosForaecedores de Cana de Pernambuco, and Commissao deFinanciamento da Producao and Departamento deEconomia Rural.

I. Various draft land use and zoning studies for keystates in Brazil, prepared by State Ministries ofAgriculture, and Industry and Commerce in collaborationwith the Institute of Alcohol and Sugar (IAA).

J. Bank Project - Incremental Working Capital Require-ments Calculations; October 1980, Industrial ProjectsDepartment, IBRD.

K. Bank Project - Interest During Construction Calcula-tions; April 1981, Industrial Projects Department,IBRD.

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DOCUMENTS AVAILABLE IN PROJECT FILE

Reference Title, Date and Authors

L. Alcohol From Cassava - Technical-Economic Feasibility,Plant Implementation Schedule and TechnologicalSensitivity; June 1977, Centro de Tecnologia Promon,Rio de Janeiro, Brazil.

M. Stillage--Technical-Economic Evaluation of Procesesfor Stillage Recovery as Distillery By-Product;July 12, 1979, Centro de Tecnologia Promon,Rio de Janeiro, Brazil.

N. Brazilian Alcohol Program Study (Draft); August 25, 1980,Ford Brasil, S.A., Sao Bernardo, Sao Paulo State, Brazil.

BRAZIL -. ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

I. INTRODUCTION

1.01 The Government of Brazil has requested Bank financing for its1981-85 Nati.onal Alcohol Program (PROALCOOL), consisting of (i) approximately350 alcohol producing facilities of an average capacity of 120,000 liters/dayeach, and (ii) a technology development program to improve biomass energy rawmaterials and processing technologies. The capital investment requirementsof the 1981-85 program, including physical and price contingencies, workingcapital and interest during construction, are estimated at US$7.4 billionequivalent in current terms, of which US$2.3 billion would be in foreignexchange.

1.02 The Alcohol Program is a unique effort by Brazil to take advantageof its vast agricultural resources, ready availability of local technology andrural labor to create usable premium energy (alcohol.) to substitute forimported energy. The Program is an integral part of Brazil's comprehensivestrategy to reduce the mounting cost of imported petroleum which in 1980reached US$10.2 billion, the equivalent of 50% of the country's exportearnings. Brazil's goal is to produce 10.7 billion liters of alcohol fromsugarcane and cassava by 1985 to substitute for 45% of the projected gaso-line consumption, equivalent to about 148,000 barrels of petroleum per dayor 5% of the forecast 1985 national energy requirements. Brazilian automobileusers have already accepted alcohol as a satisfactory fuel. Since the AlcoholProgram's inception in late 1975, Brazil's alcohol production has increasedsevenfold and the average alcohol-gasoline blend has increased from 1% in 1975to about 19% in 1980; future emphasis will be on pure alcohol as automotivefuel with the objective of meeting all of Brazil's future incremental gasolinedemand by alcohol. The overall scope and direction of the Program through 1985is well conceived and reasonable, and the production of alcohol from sugarcane(and molasses) is economically attractive. Retail alcohol sales in Brazil nowgenerate substantial net revenues to the Government, wi.th future investmentsto increase capacity being financed mainly by contributions from alcoholconisumers and investors. PROALCOOL is also generating jobs in the economy,increasing capacity utilization of the domestic equipment manufacturingindustry and will put Brazil in the forefront of renewable energy technologyproviding a basis for a new export industry in that country.

1.03 The proposed Bank project (the Project) was identified in November1979 by a mission consisting of Messrs. Harinder S. Kohli, Don Brown, PierreLarroque and James Goering, Bank staff, and Messrs. Norman Rask and WilliamBeatty, consultants, which reviewed the Alcohol and Biomass Energy sector aspart of a comprehensive Bank review of the Brazilian energy sector. TheProject will take a sector approach to support the 1981-83 time slice of theAlcohol Program and consists of (i) an Alcohol Production Component of approx-imately 250 units each of about 120,000 liters/day capacity equivalent toincrease Brazil's alcohol production from 3.4 billion liters in 1980 to10.7 billion liters by 1985; (ii) a Technology Development Component toimprove raw material yields and processing technologies; and (iii) creation ofa Monitoring and Evaluation System to provide Brazil with an effective toolfor planning the future development of the Alcohol 'Program taking into accountits impact on the energy, industry and agriculture sectors.

1.04 The financing requirements of the Project, including physical andprice contingencies, interest during construction and working capital, areestimated at US$5.1 billion equivalent in current terms, of which US$1.6 billion

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is in foreign exchange. The proposed Bank loan of US$250.0 million would coverabout 6% of the long term financing requirements or about 16% of the foreignexchange need. The Government has indicated its intention to seek foreign privateco-financing of at least US$250.0 million equivalent to meet part of the foreignexchange requirements; the balance of US$1,099.0 million foreign exchange requirementwill be provided from Government resources. The local currency requirements ofUS$3.5 billion equivalent would be provided by (i) alcohol sub-project sponsors'equity (US$764.0 million); (ii) consumer contributions generated by alcohol salesand taxes on automobile owners/users (US$1,810.0)and (iii) short-term borrowingsfrom local banks (US$942.0 million). The Government is the borrower of theproposed Bank loan and will bear the foreign exchange risk.

1.05 The physical implementation of the alcohol producing facilities, i.e.,the Alcohol Production Component, will be undertaken by the private sector, whowill own them. Each sub-project would be appraised in accordance with appraisalcriteria agreed between the Government, Banco Central do Brasil, Brazil's CentralBank, and the Executive Secretariat of the National Alcohol Commission (CENAL),the government agency responsible for the implementation of PROALCOOL and theBank. The Technology Development Component will be coordinated by Financiadora deEstudos e Projetos (FINEP), a financial institution specializing in financing ofthe basic and applied research activities of Brazilian enterprises, andSecretaria de Technologia Industrial (STI), a unit under the Ministry of Industryand Commerce (MIC) with responsibility for promoting the development of allindustrial technology in Brazil. The actual technology development work will beundertaken by various private and public sector organizations and institutes. TheMonitoring and Evaluation System will be developed and implemented by the ExecutiveSecretariat of the National Alcohol Commission (CENAL), with the assistance ofother Government agencies and independent research institutions.

II. BRAZIL'S ENERGY STRATEGY AND PETROLEUM AND ALCOHOL SECTORS

A. Energy Situation

2.01 A detailed analysis of the Brazilian energy sector is given in theBank's report, "Petroleum Sector in Brazil," currently under finalization.Brazil's energy consumption is dominated by petroleum products as shown below:

Brazil - Ener,gy Consumption Pattern - 1978(in million tons of oil)

Source Equivalent % of Total

Hydropower 28.1 25.6Wood 20.7 18.9Fuel Oil 16.7 15.2Diesel Oil 13.0 11.9Gasoline 11.3 10.3LPG 2.4 2.2Kerosene 2.1 1.9Bagasse 5.0 4.6Coal 4.8 4.4Charcoal 2.6 2.4Alcohol 1.5 1.3Others 1.5 1.3

Total 109.7 100.0

Source: Ministry of Industry and Commerce, Brasilia

Petroleum products account for 41.5% of energy consumption, about 85% of whichis imported. In 1979, the cost of petroleum imports amounted to about US$7.0billion, equivalent to about 45% of total export revenue. The petroleumimport bi-Ll for 1980 was US$10.2 billion, or about 50% of the export earnings.The large and growing cost of oil imports is a major cause of the country'ssevere balance of payments difficulties and a principal rationale for Brazil'sAlcohol Program.

B. Energy Strategy

2.02 Brazil's consumption of petroleum products grew from 19 billionliters in 1965 to 58 billion liters in 1979, at an average rate of 8.1%(para 2.03). To restrict petroleum imports, Brazil has instituted a compre-hensive national energy strategy to (i) promote conservation by sharplyincreasing petroleum product prices; (ii) increase domestic crude oil productionfrom the 171,000 barrels per day (bpd) level in 1979 to 300,000 bpd in 1983;(iii) modify the production profile of its refineries to better balancedomestic petroleum products demand and supply pattern by reducing gasolineand increasing diesel production; (iv) increase coal production from thepresent 4.5 million tons per year (tpy) of usable coal to 12 million tons peryear (tpy) by 1985; (v) increase hydroelectric capacity by 80% by 1985 fromthe current capacity of 24,240 MW; (vi) increase fuelwood and charcoal productionfrom 23 million tons of petroleum equivalent (tpe) in 1979 to 29 million tpeby 1985; and (vii) increase alcohol production from 2.4 billion liters in 1979to 10.7 billion liters by 1985 (equivalent to 148,000 bpd of petroleum). Thecoal, charcoal and hydroelectric power programs are aimed at substituting fueloil, while the Alcohol Program will substantially reduce gasoline requirements.The refinery modifications will at the same time increase diesel availabilitywith the same crude oil supplies. The goal of all these complementary effortsis to substitute as far as possible with domestic supplies all major componentsof the (imported) petroleum barrel.

C. Petroleum Demand

2.03 Demand for petroleum, taking into account the above programs, isexpected to grow to 69 billion liters in 1985, or only at a rate of 3.1% peryear compared to the 8.1% rate between 1965-79, as shown below:

Brazil - Petroleum Product Consumption and Demand Profile, 1965-1985(in billion liters)

Average Annual1965 1979 1985 Growth Rate (%)

Billion Billion BillionLiters % Liters % Liters % 1965-79 1979-85

Gasoline 6.1 31.6 13.1 22.7 11.3 16.3 5.6 -2.5Diesel 4.2 21.8 16.9 29.3 25.6 36.9 10.5 7.5Fuel Oil 5.8 30.0 19.1 33.1 20.7 29.9 9.0 1.3Others 3.2 16.6 8.6 14.9 11.7 16.9 7.3 5.3

Total 19.3 100.0 57.7 100.0 69.3 100.0 8.1 3.1

Source: PETROBRAS and Staff Estimates

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The Alcohol Program is basically on target; so the forecast reduction ingasoline consumption is considered achievable, particularly since any minordelays in alcohol production buildup would most likely be offset by a slowerthan projected alcohol demand for chemical use (para 2.13). The timelyachievement of the coal and charcoal programs is questionable; it affectsprimarily fuel oil. The proportions of gasoline and fuel oil in the totalpetroleum demand profile are expected to drop with a consequent increase inthe proportion of diesel oil whose demand growth is unlikely to be substantiallyaffected by the Alcohol Program (para 2.07).

2.04 Refinery output and demand patterns have been reasonably in balancein recent years due to relaxation of diesel oil specifications thereby increasingdiesel production at the expense of gasoline. However, the domestic refiningprofile may have to be reoriented in the coming years by installation ofadditional secondary processing facilities to convert excess fuel oil intodiesel oil. Development work for diesel blending with ethanol, as well asreplacement of diesel oil by vegetable oils, are being undertaken by automobilemanufacturers and research institutions. However, such efforts are likely tohave very little impact prior to 1985. The impact of the Alcohol Programwill, therefore, be felt more in the reduction in gasoline requirementscompared to that for diesel, leading to the large shift in demand profileshown in para 2.03. While over the medium to long-term PETROBRAS' refiningprogram can be adjusted to the new demand profile, it is likely that Brazil willhave to export some quantities of naphtha/gasoline in the short term. Therefore,continued close coordination is needed between the Executive Secretariat of theNational Alcohol Commission (CENAL), the National Petroleum Council (CNP) andPETROBRAS, regarding the impact of increased alcohol production on totalimports/exports of petroleum and on refinery operations. Also, since petroleumimports can be reduced significantly only by substituting all major petroleumfractions, complementary efforts to increase diesel supplies and find economicsubstitutes for it should continue to receive high priority.

D. Gasoline Demand and Ethanol Substitution

2.05 Consumption of automobile fuel, i.e., gasoline and ethanol (alcohol),increased at 3% p.a. from 13.0 billion liters in 1973 to 16.3 billion litersin 1980. The demand is projected to increase at a rate of 4.6% p.a. through1985 to 20.4 billion liters, with more than an average growth rate in theSoutheast as shown below:

Brazil - Automobile (Otto-Cycle Engine) Fuel Consumption 1980-85(in millions liters)

Growth RateRegion 1980 1982 1985 1980-85

(in millions liters) (% p.a.)

North 317 329 347 1.8North East 2,026 2,171 2,463 4.0South East 9,880 10,418 12,562 4.9South 3,052 3,146 3,808 4.5Center West 1,024 1,092 1,188 3.0

Total Brazil 16,299 17,156 20,368 4.6

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2.06 The share of gasoline in the total automobile fuel will progressivelydecrease with the increased use of hydrous alcohol f'or all-alcohol fuelledautomobiles. The 1985 automobile fuel requirements are, as noted in para 2.05,estimated at 20.4 billion liters, including 11.3 billion liters of gasoline(55%), 6.5 billion liters of hydrous alcohol (32%) and 2.7 billion liters ofanhydrous alcohol in gasohol (13%). 1/ Technical aspects concerning substi-tution of ethanol for automotive fuel are discussed in the report "AlcoholProduction from Biomass: Potential and Prospects in the Developing Countries"(Report No.3021, dated June 4,1980).

E. Diesel Oil Substitution

2.07 At present, the Alcohol Program does not envisage any appreciablesubstitution of diesel oil with ethanol during the '1981-85 period. Unlike inthe case of ethanol addition to gasoline, where the lower heat value ofethanol is compensated by its higher octane number and combustion efficiency,there are apparently no compensating characteristics in ethanol used incompression-ignition (diesel) engines. In fact, ethanol addition worsensthe combustion in diesel engines. However, considerable development'work hasbeen initiated in Brazil and elsewhere towards diesel oil extension withethanol and replacing diesel oil by a variety of vegetable oils. Earlierattempts in the direction of simple addition of anhydrous alcohol to dieseloil in proportion up to 10% ethanol were not effective due to problems ofphase separation in the presence of small quantities of water and moreimportantly, the reduction in the diesel quality to below acceptable limits.Present work is oriented towards developing additivess which improve toleranceof ethanol addition on diesel quality.

2.08 Automobile manufacturers in Brazil are currently evaluating theuse of vegetable oils as diesel engine fuel. The major oils under consider-ation are peanut, soybean, rapeseed, cotton seed, a-nd palm oils. Althoughthese oils possess heating value and diesel index levels comparable to normaldiesel oil, they contain unsaturated compounds which cause polymer and cokeformation in engines. Development is directed towards improvements in fuelinjection equipment and pretreatment of the oils by hydrogenation. Vegetableoil substitution for diesel will have no direct impact on the Alcohol Programbut will on the petroleum refinery production profile (para 2.04). The economiccost of production of vegetable oils must also be investigated along with theimpact on agriculture if large scale diesel substitution is anticipated.

F. Brazilian Automotive Vehicle Fleet

2.09 In 1979, gasohol-powered automotive fleet (virtually all otto-enginevehicles in Brazil use gasohol) totalled 7.7 million vehicles. One estimate(Ford Brasil) places the vehicle population in 1985 at about 12 million, agrowth rate of 7.7% p.a. On the basis of the projected automobile fuel con-sumption growth rate of 4.6% p.a. through 1985 (para. 2.05), the vehiclepopulation is more likely to grow to about 10 million by 1985. About 2.5million or 25% of the 1985 vehicle population is expected to be all-alcoholvehicles. Production of all-alcohol cars in 1980 is estimated at 250,000;

1/ Anhydrous alcohol (99.8% purity) is blended with gasoline to make gasoholup to a mixture of 20% alcohol and 80% gasoline. Hydrous alcohol (94% purity)is used to fuel all-alcohol engines.

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the production level is planned to increase to 450,000 - 500,000 by 1983 to keeppace with the availability of hydrous alcohol.

G. Vehicle Conversion

2.10 In addition to the production of new all-alcohol powered automobiles,the Alcohol Program is encouraging the conversion of existing gasoline/gasohol-powered cars to use hydrous alcohol. Such conversion consists primarily of minorcylinder head modifications, addition of a fuel preheating system and cold-startfacilities, and calibration of carburetor as well as changes in the ignition systemand of the materials of construction of the fuel system.

2.11 The Secretaria de Tecnologia Industrial (STI), a unit under the Ministryof Industry and Commerce (MIC), administers the program of automobile conversionto all-ethanol fueling through its Technological Control Centers which in turnutilize the services of 13 institutes/university research stations for deter-mining the extent of modifications for individual automobile models, qualifyentrepreneurs for undertaking conversion work, approve convertors' prototypeincorporating the modifications and provide continued technical advice andservices to convertors. At June-end 1980, 156 convertors with conversioncapacity of 15,600 per month had been approved by STI. About 80,000 cars hadbeen converted for hydrous alcohol fuel use by June 30, 1980. CENAL estimatesthat the conversion rate will increase to about 110,000 cars/year in 1981,bringing the number of cars converted by 1985 to approximately 660,000.

H. Ethanol for Chemicals

2.12 Existing capacities for chemicals based on ethanol feedstock are:

Brazil - Existing Ethanol-Based ChemiqalNCapacity

Product Product Capacity Ethanol Required(tpy) (million liters per year)

Ethylene 14,000 32.1Acetaldehyde 44,560 68.2Ethyl Acetate 25,000 17.8Octanol 3,300 8.9Butanol 6,480 13.0Ethylene Glycols 3,200 1.9Ethyl Ether 1,400 2.6Ethyl Chloride 60 0.1

144.6

In addition to the above, Union Carbide's ethylene plant (23,000 tpy) whichceased operations in 1969 is being reactivated, and the Coperbo polybutadieneplant (30,000 tpy) is being revamped to produce 30,000 tpy ethylene by 1982.Both of these plants are located in Sao Paulo. A new 60,000 tpy ethylene plantby Salgema Industries in Alagoas is also expected to commence operations in1982. These additional ethylene capacities would require about 260 millionliters of alcohol per year (lpy). Coperbo's acetaldehyde plant of 50,000 tpycapacity which ceased operations in 1971 is also being reactivated, which whenoperated will require about 76 million lpy of alcohol feedstock. Thus, by1982 the total demand for ethanol for currently operating plants and thoseforeseen in the near future is expected to approach 500 million lpy.

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2.13 No new large volume chemical manufacture based on ethanol has beenannounced. Alcohol demand for chemicals beyond 0.5 billion lpy in 1985 willdepend on development of new industrial projects which would take 3-4 years toplan and implement. No more than 1-2 new projects with total ethanol consumptionof 0.2 billion lpy would appear likely. Thus a consumption of 0.5 to 0.7 billionliters of ethanol for chemical uses by 1985 is a more likely consumption targetthan the Government estimate of 1.5 billion liters by 1985. However, any ethanolnot consumed by the chemical industry can be absorbed in the automotive fuelmarket.

III. FUEL ALCOHOL MARKET AND MARtKETING

A. Historical Supply/Consumption of Ethanol

3.01 Recent trends in alcohol production and consumption and theirrelationship with gasoline use are shown below:

Brazil - Alcohol Production and Consumption 1967-80(in million liters)

AverageProduc- Alcohol intion Produc- Local Consumption Gasoline Gasoline

Year a/ tion Export Total Chemicals Fuel Consumption Blend

1967 780 NA NA NA 437 7,247 5.71970 600 NA NA NA 184 9,705 1.91973 643 44 609 300 309 13,928 2.21977 1,010 4 1,006 367 639 14,139 4.31978 1,500 0 2,500 355 1,145 13,700 7.71979 2,400 87 2,300 200 2,100 13,100 13.81980 3,400 NA 3,400 300 3,100 13,325 18.9

a/ Sugarcane and alcohol year ends April 30.

Ethanol has been used as a gasoline additive in Brazil for more than 40 yearsand ranged from 1-6% through the mid-1970s, depending largely on availability.Between 1970-75, domestic alcohol production fluctuated around 600 million lpyrepresenting an average distillery operating rate oE only 48% as the Instituteof Sugar and Alcohol (IAA) opted to maximize sugar exports during the periodof high international sugar prices. With the subsequent drop in sugar prices,the limitations imposed on sugar exports by Brazil's quota under the Interna-tional Sugar Agreement (about 2 million tons in 1978) and the sharp rise inpetroleum prices and the resultant creation of PROA:LCOOL in 1975, alcoholproduction has been increasing sharply since 1977. In 1980, about 25-30% ofBrazil's total sugarcane production of 121 million tons were converted intosugar for export, another 35-40% into sugar for the domestic market and theremainder into alcohol. The recent production increases were achievedprimarily through full utilization of existing agricultural and industrialproduction capacity and an increasing number of alcohol distilleries set upunder PROALCOOL after 1975.

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3.02 Annual alcohol production has increased from 1.0 billion liters in1977 to 3.4 billion liters in 1980, and is estimated to have reached 4.1 billionliters in the crop season ending March 1981. Capacity utilization increasedsharply during 1975-1978 as idle capacity was quickly utilized. In each ofthe future years a large number of new distilleries will come on stream socapacity utilization will fluctuate in the 70-80% range overall during the1981-85 period. Projects approved by CENAL until June 1980 will raise ethanolcapacity to 6.3 billion liters, in a total of 263 distilleries, of which 156are "annexes" to sugar mills and 107 are "autonomous", i.e., produce no sugar.Distilleries located in the Southeast will have an annual capacity of 4.0billion liters (63% of total). While the Southeast still retains a major shareof total distilling capacity, there has been a shift in the recent past towardsthe Northeast, which by 1985 could increase its share of total production to 28%from only 17% in 1974, if the recent trends of new plant locations continue (para3.05). Location (by State) of alcohol capacity approved through June 1980 isshown in Map IBRD-15334.

B. Projected Supply/Demand of Ethanol

3.03 PROALCOOL targets for alcohol production during 1980-85 are shown below:

Brazil - Alcohol Production and Consumption Targets 1980-85(in billion liters)

ConsumptionGasoline Substitute

Year Production Chemicals Hydrous Anhydrous Total

1980 3.4 0.3 0.2 2.9 3.11981 4.1 0.4 0.7 3.0 3.71982 5.5 0.8 1.8 2.9 4.71983 6.7 1.0 2.8 2.9 5.71984 8.5 1.2 4.5 2.8 7.31985 10.7 1.5 6.5 2.7 9.2

Of the 10.7 billion liters for 1985, 9.2 billion would substitute for gasolineand 1.5 has been targeted for use as chemical feedstocks. Of the 9.2 billionliters that will substitute for gasoline, 2.7 billion or 29% would be producedas anhydrous alcohol and will be blended with gasoline at a concentration ofup to 20%. The remaining 71% (6.5 billion liters) will be produced as straight(94%) alcohol and be used as the fuel in cars with all-alcohol engines. Pro-duction targets are ambitious and it is likely that the actual 1985 productionlevel may be slightly below targets due to delays in bringing the planned newagricultural facilities into production. Overall, there is no significantadverse impact if targets were not met by 10-15% which would correspond to onlyabout one year delay in achieving targets and are likely to be offset by a slowerbuildup in demand for chemical use. Therefore, the Alcohol Program is analyzedon the basis of achieving targets, although, as noted, this level is consideredsomewhat optimistic.

C. Regional Ethanol Consumption and Production

3.04 Consumption of ethanol is gradually shifting to regions otherthan the Southeast as shown in the following table:

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Brazil - Regional Alcohol Demand 1973-1985(in million liters)

Region 1973 1974 1975 1976 1977 1978 1980 1985

North - - - - - - 64 69Northeast 3 - - 20 58 156 497 1,709

Southeast 305 190 162 152 560 1,238 2,599 6,626South - - - - 21 52 654 1,220Center West - - _ - - 58 241 582

Total 308 190 162 172 6393 1,504 4,055 10,206

The Southeast's share of consumption has dropped from about 100% in 1973 to about82% in 1978 and is projected to decrease to about 65% in 1985. A regional andstatewise breakdown of gasoline use, sugarcane, cassava and alcohol productionis available in Project File, Exhibit A. The current and projected regionalsupply/demand balance for ethanol based on current production and consumptiontrends is summarized in the table below:

Brazil - Regional Alcohol Demand and Supply Balance 1980-85(in billion liters)

1980 1983 1985Supply Sulpply SupplySurplus Surplus Surplus

Demand Supply (Deficit) Demand Supply (Deficit) Demand Supply (Deficit)

North 0.06 0.01 (0.05) 0.07 0.04 (0.03) 0.07 0.12 0.05Northeast 0.50 0.94 0.44 1.46 1.78 0.32 1.71 3.02 1.31Southeast 2.60 2.82 0.22 5.05 4.09 (0.96) 6.63 6.16 (0.47)South 0.65 0.14 (0.51) 0.99 0.50 (0.49) 1.22 0.73 (0.49)Central 0.24 0.08 (0.16) 0.46 0.29 (0.17) 0.58 0.66 0.08Total 4.05 3.99 (0.06) 8.03 6.70 (1.33) 10.21 10.69 0.48

3.05 If alcohol production in the Northeast maintains the pace experienced inrecent past, the region would develop an increasingly large surplus since it has arelatively low automobile population. The supply surplus could reach 1.3 billionliters by 1985. The South (with little alcohol production) and the Southeast wouldremain deficit even though a large alcohol production increase is planned for SaoPaulo and Parana. Additional emphasis would need to be given to production increasesin Mato Grosso, Minas Gerais and Parana to minimize regional imbalances. CENAL isaware of this emerging problem as well as the potential for land use conflict andhas planned steps to slow down the future expansion of alcohol capacity in the North-east, while encouraging its location in the projected deficit areas. Proposals fornew alcohol projects reviewed since late 1980 already show impact of these effortsand the share of new projects from Northeast has come down substantially. Regionaldistribution of alcohol will be carefully assessed by the Monitoring and EvaluationSystem to plan future distillery locations (para 8.06-8.10).

D. Storage and Distribution of Ethanol

3.06 Individual alcohol distilleries are required to have product storage capa-cities sufficient to permit alcohol sale at a uniform rate throughout the year. Forsugarcane-based and cassava-based distilleries the storage represents an average ofthree months' and one month's production respectively. In addition, regional bulkstorage capacities for alcohol are being established by the petroleum industry by

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modification of existing petroleum product tankage and by building new tanks ata number of locations for subsequent distribution to consumption centers andretail outlets. New storage capacity totalling 1.1 billion liters will be estab-lished mainly by PETROBRAS, corresponding to about two months of the anticipated1985 hydrous alcohol demand of 6.5 billion liters.

3.07 At present, PETROBRAS is receiving and blending into "gasohol" about3 billion liters per year of anhydrous alcohol. PETROBRAS and other oilcompanies have started, since late-1979, to develop the storage and distributionsystem of hydrous alcohol with initial emphasis on major metropolitan centers.As of mid-1980, 1,780 retail outlets for hydrous alcohol had been establishedof which 1,536 or 86% were in Sao Paulo (990), Minas Gerais (209), Rio deJaneiro (198) and Parana (139). The petroleum industry is expected to have nomajor difficulty in achieving a satisfactory alcohol (both anhydrous andhydrous) distribution system by 1985, which by then will also have started toreach into more distant areas.

IV. PRODUCTION TECHNOLOGY

A. Main Biomass Raw Materials

4.01 Ethanol (or alcohol) can be produced from three main types of biomassraw materials: (a) sugar-bearing materials (such as sugarcane, molasses, sweetsorghum, etc.) which contain carbohydrates in sugar form; (b) starches (such ascassava, corn, babassu, potatoes, etc.), which contain carbohydrates instarch form; and (c) celluloses (such as wood, agricultural residues, etc.) forwhich the carbohydrate molecular form is more complex. Production of ethanolfrom these materials includes first (except in the case of sugars) conversionof carbohydrates into water soluble sugars (since yeast can ferment only simpler--6 or 12 carbon--sugars), then fermentation of these sugars into ethanol, andfinally separation of ethanol from water and other fermentation products bydistillation. The main attraction of sugar-bearing raw materials for alcoholproduction lies in the fact that their carbohydrate content is already in thefermentable, simpler sugar form such as glucose or fructose. Starches containcarbohydrates of greater molecular complexity, which have to be broken down tosimpler sugars by a saccharification process, which adds another process stepand increases capital and operating costs. Carbohydrates in cellulosic materialshave an even greater molecular complexity and have to be converted to fermentablesugars by acid hydrolysis. However, some of the sugars so produced are notfermentable to alcohol by yeast, reducing the overall carbohydrate-to-alcoholconversion efficiency.

4.02 The table on page 11 shows ethanol yield per ton of the major potentialbiomass raw materials, as well as estimated ethanol yields per hectare ofland for the average Brazilian situation.

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Ethanol Yields of Main Biomass Raw Materials

Raw Material Ethanol Yield Raw Material Yield a/ Ethanol Yield(liters/ton) (ton/ha) (Liters/ha/yr)

Sugarcane 70 50.0 3,500Molasses 280 NA NACassava 180 12.0 2,160

(20.0) b/ (3,010) b/Sweet Sorghum 86 35.0 c/ 3,010Sweet Potatoes 125 15.0 1,875Babassu 80 2.5 200Wood 160 20.0 3,200

a/ Based on current average yields in Brazil.b/ Potential with improved production technology.c/ Tons of stalks/ha/crop. Two crops per year may be possible in some locations.

B. Current Technology

4.03 Flow diagrams for ethanol production from sugarcane and cassava,which are the main raw materials for conversion to ethanol to meet the targetsto 1985, are shown in Annex 4. Any sugar or starch, respectively, would beprocessed in a similar way. Ethanol production from cellulose (wood), whichis not yet commercially proven and is not discussed here, is also a potentialsource. Material and utility, and energy balances for sugarcane (based onexisting plants) and cassava (based on design parameters) are discussed inChapter VI of the report "Alcohol Production from Biomass: Potential andProspects in the Developing Countries", Report No. 3021 dated June 4, 1980.

4.04 Sugarcane, which is expected to provide 95% of the 1985 PROALCOOL target,contains cellulose fiber intermixed with sugar in the sugarcane stalk. The caneis washed and crushed, and filtered to separate the celullose ("bagasse") from sugarjuice. Bagasse is dried and burned to generate steam and power to supply all theplant's utility requirements. The sugar juice is concentrated and sterilized andthen fermented in a batch fermentation system with yeast. The yeast is removed bycentrifuging, treated (to grow additional yeast) and recycled to the fermentationstep. Conventional alcohol technology uses batch fermentation with common strainsof yeast to produce an 8-10% alcohol solution, after 24-72 hours of fermenting.The yeast is gradually rendered ineffective (due to the increasing alcohol concen-tration) and 8-10% ethanol is the maximum practical concentration attainable inbatch systems. The fermented mash is sent to a stripping column to separateethanol (plus some water) from the fermentation solids and the bulk of the waterin the 8-10% alcohol solution. The waste stream, called stillage, contains about10% solids, including 2-3% fertilizer nutrients, which must be disposed of pro-perly to avoid potential environmental problems. The stream containing ethanolis ther. distilled in a multistage distillation column to a concentration of about94% ethanol. (Water and ethanol form an azeotrope or constant boiling mixture,at 95% ethanol.) Anhydrous ethanol is produced in a third distillation column byadding benzene (which eliminates the constant boiling mix at 95% ethanol) and thenfurther distillation permits production of anhydrous alcohol (99.8% purity).Benzene is separated from anhydrous alcohol and is recycled. Anhydrous alcohol issent to storage and subsequently blended with gasoline or to other end-uses. Ifhydrous or straight alcohol (94% ethanol) is the desired product, processing simplyeliminates the third distillation column with a resultant reduction in steamand elimination of benzene requirements.

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4.05 The basic process for other sugar materials is the same, though thesizing of the fermentation and distillation units may be somewhat different depend-ing on material balances and the raw material. Fermentation of molasses to 8-10%alcohol solution normally takes 4-5 times longer than in the case of sugarcane.Thus, to produce the same volume of alcohol, molasses-based plants require a muchlarger number of fermentation tanks. This difference does not, however, lead toany significant increase in the plant costs since such tanks represent a relativelysmall proportion of total costs.

4.06 Starch-based plants are similar in design. Cassava roots, whichcontain 25-30% starch, are washed, peeled and liquefied in a cooker. Theliquefied starch is broken down into fermentable sugars by addition of enzymes,amylase, and gluco-amylase. Once the fermentable sugars are formed, processingis identical to the above-described steps for sugarcane beginning with fer-mentation. Since cassava roots contain virtually no cellulose, there is no"bagasse" formed and the heating requirements for a cassava-based alcohol plant,which are slightly higher than for a sugarcane-based plant, must be suppliedfrom external sources. Other starch-bearing materials require essentially thesame processing equipment, although the plant front-end facilities must bedesigned to meet requirements of particular crops.

4.07 The cellulosic materials of main interest for ethanol production inBrazil are wood and agricultural crop residues. In general, processes involvedin alcohol production from them are more complex and larger scale than thosefrom sugars and starches. There are also no demonstrated processes availableyet for commercial scale plants. However, considerable development work is underwayin Brazil and it is possible that during the next decade cellulosic materials canbecome an important biomass source of alcohol. Continued R & D in this area isrequired to realize this potential.

C. Disposal of Byproducts and Environmental Impact

4.08 During the fermentation and distillation of ethanol, a numberof byproducts are produced. These are (i) carbon dioxide, which is producedduring fermentation; (ii) fusel oils, which are collected in the rectificationcolumn; and (iii) stillage. Due to high recuperation costs, carbon dioxide isusually not collected for sale and is normally discharged into the atmospherewithout any problem. Fusel oils (about 5 kg/l,O00 liters of ethanol) can becollected for sale or blended into ethanol as fuel denaturant. 1/

4.09. Stillage, the liquid effluent from the distillation system, canpotentially pose a major disposal problem. It is produced in large quantities,about 10-13 times the volume of the alcohol produced, and if dischargedstraight into waterways can be a serious pollution hazard (e.g., kill aquaticlife). It, however, does have economic uses since it contains protein as well asfertilizer nutrients. The two main potential uses for stillage are: (i) animalfeed, and (ii) fertilizer. Stillage can be evaporated to about 50% solids andmixed with feed concentrates, but the evaporation costs are relatively high andthe attractiveness of stillage as animal feed depends on the relative cost ofalternative feeds. In Brazil where the market for animal feed is small, thisend-use is normally not attractive. Stillage as fertilizer can be applied directlyon the soil by trucks or through an irrigation system. Since stillage is verydilute (1% nitrogen, 0.2% phosphate and 1.5% potash) the volume to be transported

1/ Denaturant is an additive to alcohol which is difficult to separate and makesmixture unfit for human consumption.

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is large and use as fertilizer is viable in agricultural fields close to thedistillery. In many plantations, stillage is pumped to the top of neighboringhills and gravity-fed to irrigation systems for surrounding fields. Surplussteam from bagasse is used to power the pumps. Plant operators believe that itis economical to use such a system in a radius of about 3 km around the distillery.Excess stillage is trucked to fields further away and sprayed on the ground.Apart from the trucks, this system does not require any supplementary equipment.Cane yields are reported to have increased substantially on this land, due toboth the fertilizing and irrigation effects. Neither of the above two approachesis likely to be a universal solution and additional technical development isnecessary to arrive at an optimum disposal technique in each case to minimizeenvironmental problems. Before approving any alcohol project, CENAL now requiressponsors to incorporate satisfactory stillage disposal measures. The appraisalcriteria to be used for Bank financed alcohol projects will ensure that theyconform to adequate pollution control standards. The Technology DevelopmentComponent of the Project will also support further development of stillagedisposal technology (para 8.04).

D. Future of Alcohol Technology

4.10 At present, alcohol production from biomass (mainly molasses andsugarcane) is based on an old technology since the demand for ethanol forpotable and chemical uses is not very sensitive to processing costs. Therefore,process and equipment design have not benefited from the recent advances inthe design and engineering of other chemical plants. However, with theincreasing interest in ethanol as a fuel, a large number of major engineeringcompanies, equipment manufacturers and other parties in Brazil and elswhere,have initiated efforts to improve the technology base and design of alcoholplants to improve their efficiency. Most of these efforts are focusing onfive major areas:

(a) Recent technical work has developed continuous fermentation tech-nology (although not fully commercially demonstrated) to yield upto 12% alcohol content liquor. Additional microbiological researchand development work is underway on improving the yeast strains toyield even higher alcohol concentration in the fermentation step.This improved technology should ultimately result in substantialreductions in energy requirements for ethanol production, since itcould yield up to 50% saving in the energy used in distillationand at the same time decrease stillage volume by half at substan-tially the same (or lower) capital costs than for conventionalplants. Another area being investigated is vacuum fermentationwhich, by mutation of temperature-insensitive organisms, willallow continuous withdrawal of alcohol in vapor form thereby re-ducing equipment and energy requirements.

(b) It is also possible to improve the energy efficiency of ethanolproduction through more efficient distillation and heat recoverydesign, using engineering concepts commercially proven in otherchemical engineering industries. In addition, ethanol concentrationcould be increased through absorption, vapor recompression, and/ormultiple effect evaporators, but these techniques would requireconsiderably more R&D efforts to develop into commercial practice.These latter improvements would generally lead to added capital costs.Other methods of separation being investigated include crystallization,use of molecular sieves and reverse osmosis, all of which will haveadvantages of reduced energy requirements.

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(c) A third area of future technology development is utilization ofagricultural wastes for feedstock and/or fuel purposes, and develop-ment of additional (and/or improved) crops as raw material. A majorconstraint in cassava utilization is the need for an external fuelsource. Agricultural waste products could be used for fuel inmodified boiler designs. The boiler modifications would be rela-tively simple (the steam system itself is simple with low pressure,low capacity) but gathering and drying of most agricultural wastes,which will be labor intensive, would require low cost labor and anorganization system similar to sugarcane harvesting.

(d) Alternative energy crops is a promising area for futuredevelopment of alcohol production from biomass. Typical cropswould be sweet sorghum, wood, babassu and other crops which pro-duce a high yield of starch or sugar per hectare and alsoproduce a usable cellulose component for fuel. Considerableindustrial development and demonstration work, in addition tosignificant technology development effort in the agriculturalresearch area to improve their yields and their rotation patterns,is needed in order to make them commercially viable.

(e) Multi-crop and mini plants are being developed to use a combinationof biomass feedstocks (e.g., sugarcane and cassava or sweet sorghum)to extend the alcohol production season and reduce the feedstockcost; mini plants are of interest for remote locations and smallerfarmers (paras 5.05 and 5.06).

4.11 At present, there are more than 250 sugarcane-based distilleries inBrazil ranging in size up to one million liters/day (in several trains) andage ranging to pre-1950. The majority (in terms of capacity), however, havebeen erected since 1975 and typically are of about 120,000 liters/day capacity,and attached to sugar mills. These alcohol units were supplied by Brazilianengineering and equipment manufacturers. Technology offered is conventional,batch fermentation units. The major companies have the ability to upgrade thetechnology. PROALCOOL has designed a technology development program toencourage these and other public and private institutions to increase theirR&D effort in the above and other areas of alcohol technology. Specific areasof the Brazilian R&D effort during the 1981-85 period are discussed in paras5.01, 5.05, and 8.04.

V. THE 1981-85 ALCOHOL PROGRAM AND INVESTMENT COSTS

A. Overall Sector Program

5.01 The 1981-85 National Alcohol Program (Project File, Exhibit B) consistsof: (i) construction of production facilities and related agricultural infrastruc-ture to meet the 1985 alcohol production target of 10.7 billion liters, and tolay the ground for the tentative target of 13.2 billion liters set for 1987; (ii)technology development to (a) improve sugarcane and cassava-based as well as multiple-feestock processing technologies; (b) improve agricultural yields, particularly ofcrops complementary or alternative to sugarcane, such as cassava, sweet sorghum andwood; (c) investigate vegetable oils as substitute for diesel; and (d) developalternative biomass energy forms such as charcoal, bagasse and agricultural wastes;and (iii) building of demonstration plants to commercialize and adapt to Brazilianconditions technologies for alternative biomass energy sources which are expectedto lead to substantial alcohol production in the post-1985 period (e.g., ethanolfrom wood hydrolysis).

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B. Production Facilities

5.02 As of June 30,1980, Brazil's annual alcohol production capacity totalled4.7 billion liters or about 44% of the 1985 production target of 10.7 billionliters. In addition, about 1.6 billion liters of capacity (in 75 units with anaverage capacity of 120,000 liters/day), already approved and currently underimplementation, is expected to be completed by the end of 1981. Due to theharvesting pattern of the associated agricultural facilities, full utilizationof this total capacity (4.7 + 1.6 = 6.3 billion liters) will not be reachedtill 1984. Generally, for new land and distillery, the optimum harvestingpattern limits raw material availability to 60% the first year and 90% thesecond year of operation, and 100% from the third year onwards. Annexeddistilleries can, however, operate at higher capacities because of availabilityof molasses. The production build-up of the 6.3 billion liters capacitytaking into account production from annexed distilleries as well as thelimitations imposed by the agricultural system on autonomous distilleries isexpected to yield actual alcohol production levels somewhat below the targetset for 1982. The annual on-stream requirements to meet annual targets to 1985are summarized below and detailed in Annex 5-1:

Brazil - Additional Facilities Required to Meet Targets Through 1985(Average capacity per unit: 120,000 lpd )

Project Sugarcane-based Cassava-based TotalApproval On Stream Distil- Agricul- Distil- Agricul- Distil- Agricul-Year Year leries ture leries ture leries ture

(No.) (000 ha) (No.) T000 ha) (No.) (000 ha)

1981 1983 53 323 2 30 55 3531982 1984 80 488 3 45 83 5331983 1985 111 677 4 60 115 737

244 1,488 a/ 9 135 253 1,623 a/

a/ Autonomous distilleries which do not have surplus molasses will requirean additional 20% land area (298,000 ha) for planting cane for the nextyear's production, bringing total land requirements to 1.8 million ha.

To meet the production targets from 1983 through 1985 (i.e., beyond 1982),Brazil will need to bring on stream an additional 253 distilleries with anaverage capacity of 120,000 lpd. These units (in volume of alcohol produced)are scheduled to be 95% sugarcane-based and 5% cassava-based.

5.03 The above facilities are assumed to be autonomous, i.e., independentdistilleries devoted exclusively to alcohol production. While a few sugar mills inBrazil still have the opportunity to attach distilleries to use the molasses fromtheir sugar operation for alcohol production, their contribution to future alcoholoutput will be marginal. The average implementation period for new, autonomousalcohol facilities is conservatively estimated at 24 months; actual experience hasranged between 14-28 months. Implementation of the additional 55 facilities andtheir associated raw material supply base for the 1983 target will, therefore, needto start by 1981, the 83 additional units required on-stream in 1984 by 1982, andthe 115 units needed for 1985 by 1983, to meet the annual targets.

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5.04 Beyond 1985, the Government has indicated a tentative target of 13.2billion liters of alcohol by 1987 (i.e., 2.5 billion liters more) with imple-mentation of facilities needed to meet the additional requirements to be partlyincluded in the 1984-85 slice of the program. It is assumed in this reportthat the additional 2.5 billion liters will be spread evenly over the twoyears, thus setting annual alcohol production targets of 11.9 billion in 1986and 13.2 billion in 1987. The additional facilities required to meet thesetargets have also been included in the 1981-85 program, as shown below.

Brazil - Additional Facilities Required to Meet Targets Beyond 1985(Average capacity per unit: 120,000 1/day)

Project Sugarcane-based Cassava-based TotalApproval On Stream Distil- Agricul- Distil- Agricul- Distil- Agricul-Year Year leries ture leries ture leries ture

(No.) (000 ha) TINTo (000 ha) (No.) (000 ha)

1984 1986 18 110 1 15 19 1251985 1987 74 451 2 30 76 481

Total 92 561 3 45 95 606

C. Technology Development

5.05 Brazil needs to improve existing and develop new agricultural andindustrial technologies to diversify the geographic and raw material base ofalcohol production and to reduce its economic and social cost. Since sugarcaneis primarily grown on good agricultural land, it is highly desirable to developalternative biomass feedstocks such as cassava and wood which can be suitablygrown on marginal agricultural land. On the agriculture side, there is a needto (i) improve yield and varieties of sugarcane; (ii) develop suitable varietiesof sweet sorghum; (iii) develop multiple cropping systems involving sugarcaneto increase the annual production period of alcohol above the present averageof 180 days/year; (iv) improve yield and varieties of cassava which can begrown on commercial scale in various parts of the country; and (v) developknow-how and technologies needed for commercial production of alcohol fromwood. While some work is being done, there is a need to accelerate this workto provide raw materials, at acceptable economic and social cost for theAlcohol Program in the late 1980s and beyond. On the industrial side, thereis scope for developing more energy-efficient alcohol plants based on existingprocesses, for improving the technology (e.g., higher alcohol concentrationduring fermentation, continuous fermentation and more efficient distillation),and for developing plants capable of using more than one raw material (e.g.,sugarcane plus cassava or sorghum). For cassava-based units, improvements areneeded to reduce capital costs and substantially improve energy balance.Additional demonstration plants are needed before many investors would buildcommercial cassava-based alcohol plants. There is need for a closer associationof experienced engineering firms and equipment manufacturers to develop adequatedesigns and equipment for demonstration plants, including the import of sometechnology (e.g., for wood-based alcohol). Overall, a slow build up of adequateagricultural and industrial technology in Brazil could become a major constraintto the long-term development of the Alcohol Program and to the efforts to reducethe current virtual exclusive dependence on sugarcane as the raw material. Tech-nology development is being promoted pricipally through two organizations--STIand FINEP. These organizations and their programs are described in para 8.13.

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BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

1981-85 INVESTMENT PRCGRAM - CAPITAL COST ESTIMATE

Sugarcane-Based Cassava-liased TOTALNumber of Cr$ millions Number of Cr$ millions Cr9 millions US m$ ilions_

Facilities local Foreign Facilities Local Poreign Local Foreign Local Foreign Total

A. Production Componenta/ a/

1981-82 Estimated Investment-Ongoing Facilities 68 9,264.3 5,299.2 7 456.9 271.3 9,721.2 5,570.5 194.4 111.4 305.8Additional Facilities - 1983 53 20,051.5 11,492.0 2 751.7 444.6 20,803.2 11,936.6 416.1 238.7 654.8

- 1984 80 30,266.4 17,346.4 3 1,127.6 666.8 31,394.0 18,013.2 627.9 360.2 988.1

- 1985 111 41,994.6 24,068.1 4 1,503.3 889.2 43,497.9 24,957.3 869.9 499.2 1,369.1- 1986 18 6,809.9 3,902.9 1 375.9 222.3 7,185.8 4,125.2 143.7 82.5 226.2- 1987 74 27,996.5 16,045.4 2 751.7 444.6 28,748.2 16,2 490.0 374.9 329.8 904.7

Base Cost Estimate - mid-1980 Prices 136,383.2 78,154.0 4,967.1 2938.8 141,350.3 81,092.8 2,826.9 1,621.8 4,448.7

Physical Contingencies

Additional Facilities - 1983 1,259.8 698.0 75.2 44.5 1,335.0 742.5 26.7 14.9 41.6- 1984 1,901.6 1,053.6 112.8 66.7 2,014.4 1,120.3 40.3 22.4 62.7- 1985. 2,638.5 1,461.9 150.3 88.9 2,788.8 1,550.8 55.8 31.1 86.9

1986 427.9 237.1 37.6 22.2 465.5 259.3 9.3 5.2 14.5- 1987 1,759.0 974.6 75.2 44.5 1,832 1,019.1 36.9 20.4 57.1

Sub-total - Physical Contingencies 7,986.8 4,425.2 451.1 266.8 8,437.9 4,692.0 169.0 94.0 262.8

Installed Cost - mid-1980 Prices 144A370.0 82579L2 1,418 2 3,205.6 149,788.2 85,784.8 2,995.9 1,715.8 4,711.5

B. Technology Development b/ 3,750.0 3,750.0 75.0 75.0 150.0

Base Cost 153,538.0 89,535.0 3,071.0 1,791.0 4,862.0

Price Escalation 33.950.0 19,64.8.0. 679.0 393.0 1,072.0

187,495.0 109,183.0 3,750.0 2,184.0 5,934.0Total Capital Cost 68,556.0 - 1,371.0 - 1,371.0Working Capitald/ - 4,520.0 - 86,0 86.0

Interest During Construction-256,051.0 113,503.0 5,121.0 2,270.0 7,391.0

TOTAL 1981-85 Program Costs ==

a/ There are some 120 facilities of varying capacities onder implementation, the total additional capacities of these facilities were converted to 120,000 1/day equivalentto estimate their capital cost in 1980 prices. The above cost excludes expenditures made on them in 1980 (about 37%).

b/ Based on STI and PINEP's R and D budget over 3 years.

c/ Based on disbursement profile of 37% the first year, 55% the second year and 8% the third year for each year's facilities and expected international inflation rates of 97 in 1981,

- 8.5% in 1982, 7.5% in 1983-85 and 6% thereafter. ,

d/ Based on incremental working capital to meet annual production targets.

e/ IDC on World Bank loan and foreign private cofinancing - see para. 9.01 for termsf/ At June end 1980 exchange rate of Cr$50 = us$1.0.

Source: CENAL; Bank Staff Estimates.

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6.02 The policy-making body for the National Alcohol Program is theNational Alcohol Commission (CNAL), comprising the Minister of Industry andCommerce (Chairman), the Secretary-Generals of the Ministries of Agriculture,Finance, Interior, Labor, Mines and Energy, and Planning, the Deputy Chief ofTechnology of the Armed Forces General Staff and representatives from theprivate sector (agriculture, commerce and industry).

6.03 Implementation of CNAL's policy decisions, as well as the planning,regulation, approval for financing and monitoring of alcohol productionprojects are carried out by the Executive Secretariat of the National AlcoholCommission (CENAL). CENAL is headed by the Secretary-General of the Ministry ofIndustry and Commerce (MIC), and includes the Chairm,en of the National PetroleumCouncil (CNP) and the Institute of Alcohol and Sugar (IAA),the Secretary of theSecretariat of Industrial Technology (STI) and the Executive Secretary of theIndustrial Development Council (CDI)--agencies that have day-to-day responsi-bilities for the physical implementation of PROALCOOL. CENAL has a professionalstaff of about 20 drawn mostly from MIC.

B. Management

6.04 In carrying out its functions, CENAL relies heavily on the technicalexpertise of the organizations represented on the Commission as well as othergovernment agencies. For the technical evaluation of sugarcane-based alcoholprojects, CENAL draws on the expertise of IAA, a well-developed institutionwith local branches throughout the sugarcane-producirig regions of Brazil.IAA has controlled the production, distribution and export of sugar in Brazilover the last nine decades. Its current role in the Alcohol Program is anatural extension of its past experience and responsibilities in the Braziliansugar industry. The technical evaluation of non-sugarcane-based alcoholprojects is carried out by the STI, a unit under MIC with responsibility forpromoting the development of all industrial technology in Brazil. Its principalrole in the Alcohol Program is to coordinate and finance the development oftechnology for alcohol production from raw materials other than sugarcane anddevelop uses other than for gasoline substitution. STI also finances andmonitors research undertaken by various public and private institutions on thedevelopment of industrial processes and equipment, and on effluent treatment.The Ministry of Agriculture, through its extension services agency (EMBRATER)is charged with responsibility for ensuring that expansion of sugarcane plan-tations for alcohol production does not displace food crops in accordancewith existing government policy (Article 9, CENAL Resolution 02/79, Policy andGeneral Guidelines for Implementation of PROALCOOL), which requires theproposed alcohol plant owner to demonstrate to EMBRATER that land to be usedfor producing raw materials for alcohol "does not displace other basic cropsgrown for domestic and/or export market unless substantial comparative advantagemeasured in terms of productivity can be established." Environmental andpollution control guidelines are set by the Special Environmental Secretariat(SEMA), which belongs to the Ministry of the Interior. The financial appraisal,financing and supervision of alcohol projects are the responsibility of thefinancial agents (national and regional banks). Their loans are in turnrefinanced by Banco Central do Brasil, the Central Bank of Brazil, from fundsearmarked for the Alcohol Program by the National Monetary Council (CMN).

6.05 Other public and private organizations are also indirectly involved,particularly in the production of alcohol from sugarcane/molasses. Theseare the well-funded public and private organizations such as PLANASUCAR (the

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R & D arm of IAA) and COPERSUCAR (the most important private sugar producers'organization). Research to improve the yields and sugar content is alsoundertaken by EMBRAPA and the agricultural departments of local universities.The functions of and relationships between the various organizations involvedin the management of the Alcohol Program are summarized on the following page.

6.06 As the Alcohol Program becomes more complex and as the raw materialbase expands beyond sugarcane, a much closer coordination would be requiredamong the various government agencies that are involved in the program. At thepolicy making level, the Ministry of Agriculture has a major role to play notonly in questions of land use and participation of small farmers as part of theGovernment's efforts to slow the rural-urban migration, but also in relationto its research and extension efforts, through EMBRAPA and EMBRATER, to improveyields of current and potential future alcohol feedstocks such as cassava, sweetsorghum, and babassu. Similarly, the Instituto Brasileiro do DesenvolvimentoFlorestal (IBDF), the national agency responsible for forestry development, hasa role in the development of wood as a potential alcohol feedstock. The currentorganizational structure of CNAL provides for this greater coordination since itincludes the Secretary General of Agriculture, and the Government is aware ofthe need to ensure that all concerned agencies actively participate in theformulation of policies for the Program.

6.07 At the implementation level, the increasing complexity of the Pro-gram requires broadening of the composition of CENAL and its staff to enlargethe present experience pool to include expertise that would develop and/orsynthesize and review policy options relating to long-term issues of theProgram such as the alternative uses of the land devoted to sugarcane, croppingpatterns, land ownership concentration, participation of small farmers anddispersal of new facilities to match potential local alcohol demand. Such abroadening of CENAL's staff would also reduce the Secretariat's present heavydependence on IAA and STI--agencies, which while qualified to evaluate thetechnical viability of projects submitted to the Commission for approval,could, because of their stake in CENAL decisions, face increasing conflicts ofinterest in the future. The envisaged size and mix of CENAL staff would haveto reflect the overall monitoring and evaluation requirements for the Program(paras 8.05-8.10).

C. PROALCOOL Appraisal Procedures

6.08 Project proposals with feasibility studies are submitted by theprivate sponsors to CENAL, which in turn passes them on simultaneously to IAA(or STI) for technical review, to SEMA for approval of effluent treatment/utili-zation plans and to the sponsor's chosen financial agent for financial review.In the past year, CENAL has improved its appraisal criteria and procedures,though adequate economic analysis is not yet done for individual projects; butCENAL is currently developing a set of coefficients which will be used to betterjudge the economic viability of projects, particularly in the Northeast. TheIAA or STI technical review consists of an appraisal of the project's agri-cultural parameters (climatic and agronomic conditions, current land useand yields, land availability and estimated production schedule) and of itsindustrial parameters (adequate infrastructure and utilities, proper stillagedisposal system, satisfactory selection of industrial process and equipment,and competitive capital costs). The IAA consults its field agents concernedin evaluating the agricultural aspects of sugarcane-based facilities; sincelate-1980, CENAL also submits all subprojects to the state authorities fortheir comments. The STI uses the Ministry of Agriculture staff in evaluating

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

Institutional Involvement in PROALCOOL

--- -PUBLIC SECTOR…- -------- PRIVATE SECTOR------

MIC 1U-iE MA tMINTER SEPLAN Alc. Alc.

Petro- Dev. Planta- Pro- Equip. Distr:CNAL IAA STI CNP brus L1 RAPA EHBRATER SEMA BNDE CNH Banks tions ducers Mianuf. butor,

RAIJ MATERIAL PRODUCTION

Regulations x XPlanning/Coordination XCollection/Transportation

X XR&D X X XFinancing

XTechnical Assiatance X X XSupervision X X

ALCOIIOL PRODUCTION

Regulations X X X X XPlanning/Coordination X X .Production X XR&D X X XFinancing x XTechlnical Assistance X X XSupervision X X X

ALCOIII), DISTRIBUTION

Regulations X XPlanning/Coordination XTransportation

xR&D xSupervision X X

Quality Control X

ALCOIIOL UTILIZATION

Regulatiolns x X X.Planning/Coordination X xProduction . XSupervision xRLD _ XX _ _ _ _ _ X

Industrial Projects DepartmentApril 1981

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agricultural aspects of the non-sugarcane-based facilities. SEMA uses itsstate agencies to review effluent treatment/utilization aspects of projects.Under Brazilian law (Portaria No. 153 of 1980), all alcohol projects must havetheir effluent treatment/utilization plans approved, and inspected from timeto time by SEMA after implementation. Penalties for non-compliance includerescission of loans and plant closure. The financial agents, which take fullresponsibility for project financing, apply the same appraisal criteria as forother investment proposals. They study in particular the project owners'creditworthiness (assessment of current financial situation and outstandinglong-term debt), and the experience and technical competence of the proposedproject management team. If the project is to obtain some of its raw materialsfrom independent farmers, they (the financial agents) require in addition thatadequate supply contracts be provided. After they receive CENAL's projectapproval and authorization for financing, the financial agents finalize theirevaluation, provide the initial disbursement on the loan and submit the projectproposal, a summary of their appraisal and disbursement documentation to BancoCentral for reimbursement from PROALCOOL funds. The two major financial agentsinvolved in the Alcohol Program--Banco do Brasil and Banco National de Desen-volvimento Economico (BNDE)--now generally approve alcohol projects in about 120days. The appraisal procedures and approval criteria (Project File, Exhibits Eand F) are considered adequate to ensure that (i) alcohol projects are approvedafter a thorough review of their managerial, technical and financial parameters;and (ii) the Alcohol Program is not delayed by unduly lengthy approval proce-dures. Under the Project, the appraisal procedures will be further strengthenedto incorporate economic analysis and a more detailed assessment of land use,social and environmental factors (paras 7.21, and 8.11).

VII. IMPACT OF ALCOHOL PROGRAM ON AGRICULTURE

A. Opportunities and Challenges

7.01 Alcohol production from biomass presents significant opportunitiesand challenges for Brazilian agriculture. Simultaneous with a rapid build-upof biomass feedstock for alcohol, continued attention would need to be givento expanding agricultural output for providing adequate and reasonably priceddomestic food supplies and for exports. Decisions concerning the agriculturalland allocations for meeting the 1985 alcohol production target of 10.7 billionliters must be taken during the next two years or so, considering the lead timerequired to develop new sugarcane production. Present policy is to approve alco-hol projects only if they do not divert cultivated land from other crops intosugar/alcohol production (Project File, Exhibit F). This policy is designed toprevent "food vs fuel" from becoming a serious problem in Brazil in the mediumterm. The appraisal procedures to be adopted for the proposed Project will assistin the enforcement of this policy. However, since the 1985 target requires about1.8 million additional hectares of sugarcane land and could lead to changes incropping patterns (paras 7.07 and 7.14), it is important that the Governmentcarefully monitor the impact of PROALCOOL on the agriculture sector.

7.02 Considering that major concerns about the impact of the Alcohol Programon the agricultural sector relate to much higher alcohol production targets likelyto be set for the period beyond 1985 and that the actions needed in the agriculturalsector to mitigate such concerns must be taken now, this chapter after reviewingthe capabilities to meet the 1985 target also focuses on the longer term policyimplications of such likely higher alcohol production targets.

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B. Alcohol Production and Land Requirements

7.03 The alcohol production target of 10.7 biLlion liters for 1985 representsa tripling of the 1980 production level of 3.4 billion liters, which will requirea substantial increase in the land area devoted to sugarcane, as summarized on thefollowing page and detailed in Project File, Exhibit G:

Brazil - Alcohol and Sugarcane Production 1970-85(in million units)

SugarcaneProduction Sugar Alcohol Total For AlcoholYear a/ (tons) (liters) Tons lIectares Tons Hectares

1976 5.0 600 57 1.4 0 b/ 01978 8.3 1,500 96 2.2 6 0.31980 6.6 3,400 108 2.6 36 1.11981 7.0 4,100 121 2.9 45 1.31982 8.0 5,500 156 3.7 70 1.91985 c/ 9.6 10,700 235 4.7 134 2.7

Source: CENAL

a/ Sugarcane and alcohol year ends April 30.b! All alcohol up to 1975 was from molasses, thus land allocation was zero.

Land requirements for subsequent years take into account increased availa-bility of molasses for alcohol production due to increased sugar production.

c/ Excludes additional area under cultivation in 1985 for additional alcoholto be produced in 1986. Data for 1978-1982 include the additional areaunder cultivation for the next years' incremental alcohol production.

In 1980, sugarcane occupied 2.9 million ha, with 1.6 million ha devoted to sugarproduction and 1.3 million ha to alcohol (including 0.3 million ha in new plantingarea for increased 1981 alcohol production). The amount of additional cane arearequired to meet the 1985 alcohol target depends on several key assumptions. CENALestimates the required area increase to be 1.4 million ha, assuming yields increasefrom a current level of 55 tons per ha per year to 60 tons on existing sugarcaneplantations (new areas are estimated at 50 tons per ha) and processing efficiencyfrom 70 to 80 liters of alcohol per ton of sugarcane. These combined productivityincreases would result in an increase in alcohol production per ha of 25% over1979/80 levels (from 3,850 to 4,800 liters/ha). Thiese estimates appear to besomewhat optimistic. Land needs are further underestimated by not includingthe 20-25% of the total area under cane that is not harvested during theplanting year. Assuming that alcohol productivity increases of 8-9% by 1985are more likely, the additional land required to meet 1985 total productiontargets for alcohol would be about 1.8 million ha over and above the currentsugarcane area (para 5.02).

7.04 This additional land area for sugarcane production is expected tocome from: (i) expansion of sugarcane area already cropped by existing sugarmills; (ii) new autonomous distillery projects already approved; and (iii) pro-jects yet to be approved. Limited availability of land (in part throughrestrictions on land use patterns and ownership) and limitations on haulingdistance are expected to restrict expansion by existing mills to about150,000 ha; for most of this area, management and most of the infrastructure

- 24 -

investments are already in place. An additional 800,000 ha would come fromnew projects that are to be implemented in the next two years. The remainingrequired area of about 850,000 ha are yet to be incorporated in individualprojects.

7.05 Development of these 1.8 million ha in the 1981-85 time period wouldbe a formidable task. Harvest is only possible during the second year followingplanting, and four years are needed for complete use of total area. If landmust first be cleared, then an additional year must be added to the developmentperiod. Therefore, about 400,000-500,000 ha of new sugarcane production mustbe established each year in 1981-84 to meet the target, compared with a growthin sugarcane area during 1979 and 1980 of about 300,000 ha/year. Still,considering Brazil's total available land area and previous experience, the1981-84 expansion rate is not an unusually high growth rate. Brazil hasaccommodated rapid transformation in agricultural areas before. During1973-78, the soybean area increased by 4.2 million ha, an annual rate of833,000 ha/yr, which is twice the annual increase in sugarcane needed to meetthe 1985 target.

C. Agricultural Production Costs

7.06 The costs of expanding the cane area will vary for each region,depending on the needed land development activities and existing farm infra-structure. An investment level in machinery and other installations of aboutUS$500/ha is estimated for Sao Paulo. Assuming that some farms will alreadyhave machinery and other equipment, a range from a few dollars to overUS$500/ha may apply to any given situation. Development costs in new areasare likely to be considerably greater. Farm gate economic production costs(August 1980 prices and exchange rates) for sugarcane are estimated to rangefrom about US$7.50 to 12.25/ton of cane produced. Estimates of US$7.50-8.50/tonapply in the Southeast and the South and US$12.25/ton in the Northeast. Costestimates are detailed in Project File, Exhibit H and summarized in the tablebelow:

Brazil - Sugarcane Economic Production Costs(in August 1980 Cr $)

SugarcaneNorth-Northeast

Center-South Medium to SoutheastLarge Scale Large Scale Small Scale

Agricultural Production Costs/Hectare Cultivated/Year

Labor 6,500 12,400 9,900Fertilizer 4,800 6,400 4,200Pesticide 900 600 900Machinery 6,400 4,000 2,100Other 900 1,400 700Land (Rental Value) 3,000 1,100 1,900

Total 22,500 25,900 19,700

Per Ton (Cr$) 450 648 394(US$ Equivalent) 8.50 12.25 7.50

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D. Impact on Land Use

7.07 Brazil has one of the most favorable man-land ratios in the world.Still, concerns exist about the future impact of the Alcohol Program on landuse, and in particular, the effects on production arnd costs of food crops,particularly after 1985. Production of some basic food crops (beans, cassava,rice) in Brazil appear to have lagged behind population growth in recentyears. These effects, however, cannot be attributed to sugarcane productiononly, since crops such as soybeans have also demonst:rated spectacular growthand adverse weather has affected production. Clearly, if major increaseddemands are put on the land resources by the alcohol and other agriculturalprograms, some adjustments in cropping patterns will be required. Theseadaustments should be viewed within the overall potential for expansion ofland use at both the intensive and extensive margins. Also, the regionaldistribution of future alcohol facilities will be iriportant in determining theadjustments in land use patterns.

7.08 The Government has so far played a limitecd role in the location ofalcohol production plants. Strong investment incentives, coupled with industrialknow-how and capital production capacity has resulted in initial alcohol pro-duction emphasis on sugarcane as an energy feedstock in traditional sugar productionareas, and in association with existing sugar mills. This has allowed a rapidbuild-up of alcohol production capacity, but has simultaneously raised issuesof proper long-run land use, especially in terms of food and export crop compe-tition in the central Sao Paulo state and the Northeast.

7.09 Brazil has vast land resources, so it is helpful to put the AlcoholProgram's needs in perspective to the availability and present use of theland resource. The 1975 census is the latest data source for estimatingthe use of land in Brazil. The area in temporary and permanent cropsincreased from 34 million ha in 1970 to 40 million ha in 1975, an increaseof 18%. There was also an increase of 18% between 1960 and 1970. Expansionof land area has been proceeding in the late 1970s, especially for soybeans andsugarcane. Thus, present land use in crops is estimated around 46 million ha.Of this, about 6% (2.9 million ha) was under sugarcane in 1980. An additional1.8 million ha would, as mentioned, need to be incorporated into sugarcane duringthe next four years to meet PROALCOOL targets.

7.10 The impact of the Alcohol Program on land use will vary from stateto state depending on the current use of the land suitable for sugarcane; suchpotential land includes land currently under crops, planted pastures andnatural pastures. A breakdown of land use by state and region is presented inAnnex 7-1. One-half of the total crop land is in four states: Rio Grande doSul, Parana, Sao Paulo, and Minas Gerais. In the context of the present concernsover food and export crop substitution in Sao Paulo, it is interesting to note thatSao Paulo is only third in total crop land. Furthermore, planted pasture, a lessintensive use of potential crop land, actually exceeds crop land area in SaoPaulo, indicating that substantial expansion of crop land area in Sao Paulo isstill possible. Minas Gerais and Parana have somewhat less expansion possibil-ities through substitution of planted pasture and Rio Grande do Sul has largelyexhausted this potential. On a national basis, planted pasture area equals cropland area, a substantial resource for further crop expansion. The availabilityis greater in the Center West, about average in the Southeast and below averagein the South. In addition, another 126 million ha of natural pasture is available.This cattle land resource is of varying quality and while some is undoubtedlysuitable for cultivation, no estimate of this potential is available.

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7.11 Land requirements for all alcohol projects approved through June 30,1980 (5.6 billion liters) are 1.6 million hectares or 2% of the crop andplanted pasture land or about 4% of crop land. This percentage is higher inthe Northeast and Southeast where most of the early projects have been approved.Historically, sugarcane cultivation has largely been confined to four coastalstates in the Northeast (Alagoas, Bahia, Ceara and Pernambuco) and three statesin the Southeast (Minas Gerais, Rio de Janeiro and Sao Paulo) due to theirfavourable soil and climatic conditions. These seven states account for about93% of sugarcane growing in Brazil; during 1975-77 when the total area undersugarcane in Brazil expanded by about 15%, the Northeast accounted for 55% and theSoutheast 45% of the increase. With sugarcane currently as the primary feedstockfor alcohol, the distribution of the estimated 1.6 million land area required foralcohol projects approved to June 30, 1980 has conformed to this historical pattern.About 75% of the land requirements (1.2 million ha) for these approved projects arelocated in these seven states: 458,000 ha in the four Northeastern states and 700,000ha in the Southeastern states. The impact of PROALCOOL on land use, land tenure andcrop production in the two regions could therefore be substantial and will thus needto be closely monitored by CENAL.

7.12 The total land requirements of 2.7 million ha for meeting the 1985alcohol production target are equivalent to 6% of the current crop landand 3% of the current crop and planted pasture land. A detailed analysis ofland use patterns by states, given in Annex 7-1, shows that overall, exceptfor the two smaller states of Amapa and Alagoas, the Alcohol Program's landrequirements are manageable compared to total agricultural land availability,provided careful monitoring of the requirements within each state is undertakento avoid over-concentration in a few areas. Towards this end, the Governmenthas initiated land use studies for each state; these studies discuss in detailthe current land use pattern and the potential use for various crops, and identifyareas where alcohol-related agricultural crops can be grown without any adverseimpact on food and/or export crop production (Project File, Exhibit I). Eight ofthese studies have already been completed; the rest are due for completion by end-1981. As an outgrowth of these studies, the state Governments now also examineland use implications of alcohol projects within their states and forward theircomments to CENAL within 30 days of receipt of such proposals (para 6.C08). Theappraisal procedures agreed under the Project will require an adequate review ofthe present land use implications prior to approval of the projects by CENAL.

7.13 The likely effect of Brazil's Alcohol Program on land use in the mediumterm can be summarized as follows. In the immediate future the concentration ofsugarcane production in the vicinity of the alcohol distilleries would most likelychange existing land use patterns. In the traditional sugarcane producing areasof Sao Paulo, the expansion of cane would displace food and export crops which willmove to other parts of the region, while cane expansion in the newer areas inwestern Sao Paulo and northern Parana will be more in traditional livestock areasand would displace pasture land. Since CENAL and state authorities are authorizingnew alcohol plants mainly in these newer areas, they are not expected to adverselyaffect food crop production. In the Northeast, however, where it is less likely thatexpansion could utilize pasture land, the potential impact on food production couldbe considerable, and projects proposed there will be subjected to a particularly

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careful analysis. As mentioned, CENAL is aware of this conflict and has started tode-emphasize projects in the Northeast (para 3.05).

7.14 Overall, since Brazil has considerable underutilized agricultural land,the increase in alcohol production to 1985 should not necessarily result in a netreduction in production of traditional crops, but will most likely cause changesin cropping patterns in some areas with some marginal increases in the cost ofproduction for displaced agricultural activities that move to new and more distantareas. Thus, the 1985 alcohol production target of 10.7 billion liters, if properlyadministered, could be achieved without materially affecting food or export cropproduction. Careful monitoring by CENAL will, however, be required in the expansionin sugarcane land to assure that food/export crop production is not adverselyaffected. Early identification and minimization of such adverse effects wouldbe key objectives of the proposed Monitoring and Evaluation System.

7.15 Beyond 1985, as higher alcohol targets are established and new feed-stocks become more important, the impact of the Alcohol Program is likely to be morewidely dispersed geographically and will potentially have relatively more positiveemployment and income effects in other regions. This situation would force greatercompetition for agricultural resource uses in all areas and more clearly focus thefood-fuel issues. The technical and economic feasibility of using productively thevast cerrado in central Brazil and the frontier areas of Mato Grosso and the Northfor further food or energy crop production then become key determinants of thelonger-run potential of Brazil's biomass program. The need becomes apparent foreffective agricultural research to permit development of these areas, including soilconservation, analysis of changing cropping patterns as well as required agriculturalpolicy to promote these areas. In this context, the Bank is supporting Brazil'sagricultural research efforts under the ongoing Agricultural Research I project(Loan 1249-BR); it is proposed to expand this assistance under a second agriculturalresearch project expected to be presented to the Board of Executive Directors incalendar 1981. This proposed project will have among its objectives (i) thedevelopment of a national inventory of biomass energy raw materials which can beconverted into usable premium energy; (ii) improvement of biomass energy raw materialyields; and (iii) development of appropriate agricultural systems in and expansionof the agricultural frontier areas.

E. Ownership Concentration

7.16 Another question associated with PROALCOOL is the extent to which theProgram encourages further concentration of ownership in the sugar industry.Sugarcane has been produced traditionally within a tightly controlled, verticallyintegrated production-processing industry. Sugar mills are required by law topurchase one-half of their cane from owners of private sugarcane farms althoughthis has not always occurred in practice. While the tonnage of cane providedby outside suppliers has increased, the proportion of the total which theysupply continues to fall. In 1977-78, only 14% was purchased from independentsuppliers. The number of sugar mills declined from 276 to 206 between 1966 and1978 while the tonnage of cane processed at each mill rose from an average ofabout 180,000 tons/yr to 490,000 tons/yr during this peariod.

7.17 Census data indicates a relationship between sugarcane productionand large farms (Annex 7-1, page 4). It also demonstrates that cassava, theprimary alternative crop for future alcohol expansion, is concentrated onsmall farms. However, cassava production for alcohol may not necessarilyfollow the present farm structure of small size and predominantly hand labor.

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In 1975, 81% of the cassava area was found on farms of less than 50 hectares.For all crops the level was 45% and for sugarcane only 15%. Most sugarcanearea (70%) was found on farms with more than 200 hectares. Small-scaledistilleries that can serve isolated locations and the smaller farm structurein most areas of Brazil is one alternative which will receive support underthe Technology Development Component of the Project.

7.18 Data on the specific impact of the Alcohol Program on land ownershipconcentration does not exist since the Program was started only in 1975 andits effective implementation began only in 1978. However, during the 1970-75period in which the crop area expanded by 18%, largely as a result of the soy-bean program, it is evident that farm size was not changing. The number offarms in all size categories remained relatively constant (Annex 7-1, page 4).The expansion occurred through larger crop acreages on the larger farms,presumably as a result of crop land being substituted for pasture land. Thecropped area did not change for farms under 50 hectares in size, but it in-creased 20% for farms between 50 and 200 hectares, 40% for those between 200and 1,000 hectares and 80% for those over 1,000 hectares. Thus, concentrationin production during this period was more from intensification of croppingactivities on large farms, rather than by acquisition of smaller farms.

7.19 Both cane production equipment and refining and distilling equipmentare designed and produced in Brazil by a small number of firms concentratedin the Sao Paulo area. The cane production structure is protected and sus-tained by a price support and production quota system. This combination ofpolicies and large firm vertical integration has given considerable stabilityto the sugar industry in Brazil. Geographical distribution of sugarcaneproduction has also been restricted largely to two areas, Sao Paulo and theNortheast. These developments were necessary for quickly increasing alcoholproduction. However, in the future, greater attention would need to be givento alternative crop and combination cropping systems, to varied sizedistilleries and to the matching of regional alcohol production with liquidfuel demand and with land and labor availability.

F. Alternative Crops

7.20 Several crops other than sugarcane are being investigated as poten-tial feedstocks for Brazil's Alcohol Program, but much of this work is at anearly stage of development. Each alternative has particular characteristicsthat may allow (i) competitive substitution for sugarcane; (ii) complementaryuse together with sugarcane; and (iii) regional production in non-sugarcaneareas. The principal crops now being considered are cassava, sweet sorghum,wood and babassu, which are briefly described in Annex 7-2. Current planscall for an increasing portion of the additional alcohol production beyond1985 to come from cassava, though yields must be increased substantially ifcassava is to compete economically with sugarcane. Sweet sorghum holdspotentially great promise in areas where multiple cropping is possible andas an off-season complementary input to sugarcane distilleries. Babassu isalso a potential source but requires additional technical work before its econo-mic viability can be assessed. The Project will assist in the development ofthese alternative energy crops (para 8.04).

G. Agricultural Policy and Alcohol Production

7.21 As discussed several key agricultural policy issues relate to the over-all Alcohol Program. They include determination of regional production possi-bilities and need to balance regional alcohol supply and demand, impact on land

- 29 -

use and crop displacement, reduction in the cost of production of energy feed-stock, source and region, and development of appropriate scale technologyto best suit regional conditions. Perhaps the most important is the need toincrease crop yields and identify new raw material sources to maximize thepotential alcohol yield from several feedstocks while minimizing the impacton food and export crops. Since Brazil has widely different regional possi-bilities and needs in alcohol production and use, most policies and programswill have a regional focus. The Monitoring and Evaluation System being developedas part of the Project will address these issues and allow more specificregional and alternative crop planning (paras 8.05 -- 8.10). With respect to theconcerns regarding land use, food crop production, ownership concentration, ruralemployment and the environment, the appraisal criteria under the Project arebeing strengthened to explicitly take these into account in approving alcoholproduction projects. Agreement has been obtained from the Government that, underthe Project, (i) alcohol projects will not be located in traditional sugarcanegrowing areas except when sponsored by small-farmer cooperatives, and (ii) shouldthe Bank determine that a production sub-project would have, or is having amaterial and adverse impact on employment, land ownership by small farmers orrights of tenant farmers to land, food crop production or the environment, Bankfinancing would be suspended.

7.22 The principal challenge is to look beyond the existing sugarcaneindustry to incorporate alcohol deficient areas in the Alcohol Program and todefine more clearly the economic and other trade-offs in terms of transpor-tation costs, food production, resource use, and regional income distribu-tional and employment impacts. This assessment must include a consideration ofalternative energy crops, such as cassava, wood and sweet sorghum, that are morewidely adapted to regional soil, moisture and climatic conditions, the adaptationof sugarcane varieties to new area conditions, the development of differentscale processing plants to reflect the supply characteristics of differentcrops and regions, increase the participation of smaller farmers, and thedesign of processing plants to permit multiple feedstocks in combination toallow a longer processing season. Of the alternative crops, cassava may be oneof the more immediate possibilities, although its reLative importance willremain small for the next several years. Cassava can be harvested year roundin some areas or chipped, dried and stored for off-season processing. Sincecassava is grown principally as a subsistence crop on small plots with littleimproved technology, the potential productivity under commercial conditionsis unknown. With appropriate research, the probable expansion areas in whichcassava could potentially serve as a principal energy feedstock are the Northeastin the agreste or semi-arid region, the Center West on the cerrado soils andthe South where considerable cassava is now produced on small farms. It isunlikely that cassava will compete successfully with sugarcane as an energyfeedstock in traditional sugar areas in the near future.

7.23 Expanded efforts in research and development in both raw materialproduction and processing will be required to meet regional needs and promotenational development objectives for PROALCOOL. In the next several years, leadtimes between investment and output growth will be longer and results some-what slower than in the past five yars. However, with success in theseefforts, regional income disparities can be lessened, pressure on food cropproduction reduced, and incomes and employment in the! poorer agriculturalareas increased. In the broadest perspective, the challenge to agricultural

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policy vis-a-vis the Alcohol Program is to develop technologies and productionsystems that can accommodate the rising energy costs on the production sideyet provide greatly expanded output to meet the multiple demands for energyfeedstocks, domestic food and export crops within the context of productiveefficiency and distributional equity.

VIII. THE PROJECT

A. Project Objectives

8.01 The Project is designed to support the Government in its effortsto develop an economic renewable source of energy as a substitute to importedpetroleum products. The basic objectives of the Project are to help (i) fi-nance agricultural and industrial production facilities to meet the 1985alcohol production target; (ii) improve existing technology and commercializenew technology necessary to expand the geographic and biomass raw materials basefor alcohol production in the late 1980's; (iii) develop new biomass energy pro-duction and consumption technology; and (iv) initiate studies, on an ongoing basis,to analyze the broader impact of PROALCOOL on the agricultural, industrial,transportation and energy sectors. During its involvement in the Project, theBank will continue its policy dialogue with the Government initiated duringProject identification and appraisal. Finally, by participation in PROALCOOL,the Bank can help transfer the Brazilian experience to other member countries.

B. Project Scope

8.02 The Project comprises the 1981-83 time slice of the 1981-85Alcohol Program and consists of three major components:

(a) Production Component which includes about 250 alcohol productionunits which are expected to be approved by CENAL during 1981-83.In addition to these units which will be based on commerciallyproven technology, this component will also include a few demon-stration units for commercialization of new technology, such asalcohol production from wood and cellulose residues, or charcoaland chemicals from wood;

(b) Technology Development Component to support the biomass technologydevelopment program now underway in Brazil and being coordinatedby STI and FINEP; and

(c) Monitoring and Evaluation System being developed by CENAL, forsystematically monitoring and evaluating the impact of the AlcoholProgram, particularly on the agriculture, transport and energysectors, and for planning its future development.

8.03 The units in the Production Component will provide about 5.6 billionliters or 52% of the 10.7 billion target of 1985. About 95% of these newunits are expected to be sugarcane-based and the remaining cassava-based.The typical size of a unit will be 120,000 lpd of alcohol, although some couldbe as large as 800,000 lpd and as small as 10,000 lpd. The locations of theunits are not yet identified, but the Government will continue to emphasize ashift away from the concentration of alcohol production in the Northeast tothe Center West and the Southeast.

8.04 The demonstration units and Technology Development Component willsupport development of technology necessary to (i) reduce the current heavydependence of PROALCOOL on sugarcane and good agriculture land, by developingalcohol production from alternative biomass sources; (ii) diversify the

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geographic base of alcohol production; (iii) involve smaller farmers andentrepreneurs; and (iv) further improve the efficiency of existing alcoholproduction and use. Demonstration units will prove new technologies on acommercial scale. One wood-to-ethanol sub-project, with a minimum capacityof 30,000 lpd is already in the feasibility stage and has received initialapproval from CENAL. Additional demonstration units involving also otherraw materials, such as cassava and sweet sorghum, are expected to be approvedduring the 1981-83 period. All the demonstration tnits are expected to involvesome imported technology. The sub-projects in the Technology DevelopmentComponent will emphasize (i) development of alternative energy sources (e.g.,vegetable oils) as substitute for diesel; (ii) improved biomass productiontechnology and yields; (iii) improved conversion of biomass into useful energyforms (including mini-distilleries suited to small farmer participation); (iv)conversion of industrial residues into useful energy forms and improved pollutioncontrol; (v) utilization of biomass products (e.g. tests on use of ethanol instationary engines); and (vi) technical assistance to industry. About 50-60sub-projects ranging from basic research to specifi'c technical improvements inproduction technology are expected to be approved cluring the 1981-83 time slice.The projected annual programs of STI and FINEP for technology development will bereviewed and agreed with the Bank each year on the basis of the previous year'sperformance.

8.05 The present Alcohol Program has a loosely defined Evaluation andMonitoring System which in some areas is insufficient for proper assessmentof the broader socio-economic aspects and for long--range planning. The AlcoholProgram is based on private sector initiative, with financial incentives andprice controls, and emphasizes rapid production increases. Specific projectsare promoted by private sponsors based on their own considerations regardingsuch factors as location, experience, profit expectations, etc. As discussedin para 6.08, each project proposal is reviewed by CENAL with the assistanceof other organizations. While this system is satisf'actory for approving individualprojects and for ensuring rapid production expansicin with only technically andfinancially viable projects being approved, it does not provide for a thoroughreview of the project's broader economic and social impact. The current systemalso does not allow for an evaluation of the macro impact of the Alcohol Programon the agricultural, industrial and energy sectors, and on broader socio-econo-mic issues such as food and export crop production, and employment and incomedistribution. Equally important, it does not provide an appropriate frameworkfor long-term planning and periodic objective evaluation of the impact ofthe Program on other parts of the economy and on broader socio-economicissues.

8.06 The Bank is assisting CENAL in the develcpment of a Monitoring andEvaluation System that will allow a continuous monitoring and evaluation ofthe overall impact of the Alcohol Program. The monitoring component of thesystem is to provide the Government, on an ongoing basis, with a comprehensiveanalysis of the following areas as they relate to the Alcohol Program: (i) energyand alcohol supply and demand; (ii) alcohol input and output pricing; (iii) em-ployment effects; (iv) location of new distilleries; (v) impact on agricultureand land use; (vi) distributional impact; and (vii) environmental impact.

8.07 The evaluation component of the system will provide the Governmentwith an in-depth assessment of broader issues such as whether the Program'sobjectives are being achieved, the effectivenes of implementation strategies,resource allocation, long-term impact on land use, rural employment, food and

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export crop production, energy and alcohol demand, technology development, feas-ibility of incorporating new biomass energy raw materials into the Program,risks, etc., with policy recommendations for the future direction of theAlcohol Program.

8.08 The monitoring function of the Monitoring and Evaluation System willbe set up under CENAL with the full cooperation of the Ministries of Agriculture,Mines and Energy and Industry and Commerce, and other agencies. A detaileddescription of the underlying needs for the establishment of the monitoringfunction and the terms of reference for the variables to be monitored, which havebeen agreed on with the Government and CENAL, are presented in Annex 8-1. CENALdoes not currently have the capacity to execute this function, and has agreed toretain a consulting organization whose qualifications are acceptable to the Bankto assist it to carry out the exercise during the Project implementation period;the Government has further agreed to take all necessary measures to enable CENALto continue this activity beyond the Project implementation period. Presentationof a satisfactory monitoring design an d contracting of a suitable organizationto assist CENAL to carry out this function is a condition of loan effectiveness.The evaluation activity will be a biennial exercise to be carried out by anindependent consulting organization whose qualifications are acceptable to theBank. The first evaluation exercise is planned to be completed by December 31,1982; its terms of reference (Annex 8-2) have been agreed on with the Governmentand CENAL; presentation to the Bank by CENAL of a satisfactory design of andcontract for its execution is a condition of loan effectiveness.

8.09 The information generated by the system would be used to prepareperiodic overall evaluations of the Alcohol Program including recommendationson future policies, production targets, and on any corrective measures neededregarding the impact on agriculture and energy sectors and the environment.Assurances have been received from the Government that CENAL will design andimplement a Monitoring and Evaluation System, furnish the Bank with copies ofthe reports and periodically discuss the findings with the Bank.

8.10 In addition to the on-going work on monitoring and evaluation describedabove, there is an urgent need to carry out a review of the impact of theAlcohol Program to date on land use, food and export crop production, employ-ment, environment and land ownership concentration within the influence areaof PROALCOOL distilleries as a basis for policy decisions since very littlesubstantive data is currently available on the agricultural and social impactof the Program. The Government has already contracted a suitably quaLlifiedindependent consulting organization to carry out this impact study, theresults of which are expected by December 31, 1981. The results will be usedto prepare recommendations for policies designed to minimize any possiblenegative impact of the Alcohol Program. The Government has agreed to furnishcopies of the study to the Bank when completed, and to exchange views on thefindings thereof.

C. Implementation

8.11 The general approach to implementing the Project will be to utilizeto the extent feasible the existing Brazilian institutions and proceduresdescribed in Chapter IV. The Production Component will be implemented inaccordance with the PROALCOOL approval system described in para 6.04. Pro-duction sub-projects for Bank financing will be submitted to the Bank by BancoCentral and will be appraised in accordance with the existing criteriaestablished by CENAL and Banco Central. The first ten production sub-projectsusing conventional technology and all demonstration units to commercialise new

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technology to be financed by the Bank will be subject to prior Bank review andapproval; authorization for Bank financing of remaining sub-projects in thiscomponent will be subject to satisfactory appraisal by Banco Central and ex postereview by the Bank. A standard format for presentation to the Bank of Banco Centralappraisal and documentation of production sub-projects is presented in Annex 8-3.As discussed in para 6.08, the existing appraisal criteria are adequate for en-suring that production sub-projects are approved after a thorough review of theirmanagerial, technical and financial parameters, but do not incorporate adequateeconomic evaluation and detailed assessment of land use, and environmentaland social factors. Assurances have been received from the Government andBanco Central that the existing criteria will be modified to include evaluationof the opportunity value of land proposed to be used for alcohol production aswell as the economic viability of the sub-project indicated by an economic rateof return; these modifications will become effective by December 31,1981.Production sub-projects with economic -rates of return of less than 11% will notbe eligible for financing under the Bank loan. In addition to the economicevaluation, Banco Central and the financial agents will take into account suchsocial factors as the impact of the sub-project on employment, land ownershipby small farmers or rights of tenant farmers to land, food crop production, andthe environment (para 7.21). The Government has agreed to inform the Bank ofany significant changes in the appraisal criteria, and to exchange views withthe Bank annually on their adequacy.

8.12 To ensure that the broad objectives for the Bank's participation in theAlcohol Program are met, in selecting production sub-projects for Bank financing,preference will be given to (i) sub-projects sponsored by small-farmer cooper-atives, small producers' associations and small-scale entrepreneurs; (ii) sub-projects proposing to use agricultural raw materials other than sugarcane forfeedstock; (iii) sugarcane-based sub-projects purchasing 50% or more of theirsugarcane from independent suppliers; (iv) sub-projects enabling regionaldispersion of alcohol facilities; (v) sub-projects whose proposed locationswould tend to reduce alcohol transport costs; and (vi) sub-projects involvingthe use of non-conventional technology.

8.13 Technology development sub-projects will be evaluated by STI andFINEP in accordance with appraisal criteria agreed on with the Bank.Any technology development sub-project with a cost larger than US$1.0 millionwill require prior approval by the Bank. A standard format for presentationof appraisal and documentation for technology sub-projects is presented inAnnex 8-3, page 2. STI and FINEP are considered suitable agencies for promotingand evaluating technology sub-projects and for channelling Bank funds for theTechnology Development Component. As discussed in Chapter VI, STI is a unitunder the Ministry of Industry and Commerce. Within the Alcohol Program, STI isresponsible for the development of policy options, technology extension services,standards and quality control, and coordination of the industrial research andtechnology relating to crops other than sugarcane (e.g., cassava, sweet sorghumand babassu). FINEP is a public financial institution supervised by the Secreta-riat of Planning of Brazil (SEPLAN). Its main activities are financing of pre-investment studies, basic and applied research, transfer of foreign technologyto Brazil, and the development of new technologies by Brazilian enterprises.FINEP is the main source of foreign and local currency funds for these types ofactivities for both public and private enterprises in Brazil. FINEP is also thedesignated administrator of the Fundo Nacional de Desenvolvimento Cientifico e

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Tecnologico (FNDCT), the annually-funded principal instrument of the BrazilianGovernment for increasing Brazilian enterprises' capacity for developingand adapting technologies to Brazilian conditions; and, together with theNational Science Council, Conselho Nacional de Desenvolvimento Cientifico eTecnologia (CNPq) is also responsible for the planning of the Federal Govern-ment's science and technology program. FINEP was established in July, 1967, bySEPLAN, with assistance from the Inter American Development Bank (IDB). Over theyears, the IDB has provided FINEP with eight loans amounting to US$145.0 millionequivalent. Three of the loans (US$34.0 million equivalent) supported FINEP'spre-investment activities; the remaining five (US$111.0 million equivalent) werein support of FINEP's operations in foreign technology transfer to Brazil andbasic and adaptive research by Brazilian enterprises 1/. Under the Project, FINEPwill be primarily responsible for the non-alcohol-related technology development,e.g., the research program to identify suitable biomass-based substitutes fordiesel oil, and technology for production of charcoal to substitute for fuel oil.

D. Environmental Safeguards

8.14 As discussed in para 6.08, the Government has established guidelinesfor effluent treatment/utilization to be followed by all alcohol facilities;these guidelines and the institutional arrangements for their enforcement areconsidered satisfactory. The Government has agreed that these regulations andthe institutional arrangements for their enforcement will be maintained and thatthe Bank will be advised of any significant change in the regulations and thearrangements for their enforcement.

E. Reporting Requirements

8.15 Quarterly progress reports will be prepared by the principalimplementing institutions--CENAL, STI and FINEP. In addition, CENAL willprepare in-depth annual reports on the entire Alcohol Program based on theresults of the annual monitoring activities . STI and FINEP will provide theBank with their proposed annual programs of technology development sub-projectsfor approval; such approval to be conditioned on satisfactory prior year per-formance.

F. Major Risks

8.16 Clearly, a project this complex, involving a major strategic initia-tive to be implemented by a large number of institutions and with varyingsectoral objectives and constraints, has a number of risks associated withit. By far, the biggest risk to the Project, and indeed the entire AlcoholProgram, is the balancing of the fuel demand profile, which by nature isinflexible and intolerant of any but the most minimal variations in supplyagainst a supply profile dependent on raw materials which are subject to thevagaries of nature (weather, disease, ecological conditions, etc.). The supplyrisk would be especially pronounced in the 1981-85 period when 95% of thealcohol supply is expected to come from one crop (sugarcane) while the demand,as a proportion of automotive fuel, is increasing from 18.9% in 1980 to 45.1%in 1985, with a parallel increase in the population of all-alcohol carswhich cannot use any other fuel but alcohol. Specific measures have beendesigned to minimize this risk. CENAL requires all alcohol producers toconstruct storage for three to five months of alcohol supplies and PETROBRASis establishing regional hydrous alcohol storage facilities of up to two

1/ FINEP financed the technology import component of the Bank-assisted CopesulPetrochemical Project (Report No. 1842-BR, dated April 12, 1978).

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months' demand (para 3.06). In the short-to-medium term, should this riskoccur, these storage facilities will provide Brazil with the necessary lead timeto adjust supply and demand patterns through (i) shifting of alcohol targetedfor chemical industry uses and reduction of alcohol for blending into gasoline(these uses represent about two-thirds of total hydrous alcohol demand) for theuse of all-alcohol cars; and (ii) making arrangements to meet (import) anyresulting short-fall in gasoline supply. Over the long term, the efforts tominimize dependence on one crop (sugarcane) is focused on speeding up theincorporation of other known energy crops--cassava, wood, sweet sorghum andbabassu--into the raw material base. The Technology Development Component ofthe Project will support these efforts, as will the proposed agriculturalresearch project (para 7.15).

8.17 To minimize (during the transition period) and eventually avoidlocalized supply-demand imbalances, the Monitoring and Evaluation SystemComponent of the Project will provide CENAL with detailed information at thestate level and on regular basis, on energy consumption projections brokendown by type, alcohol transportation costs, alcohol production possibilitiesbased on the land zoning studies (para 7.12) and optimum location of newalcohol distilleries. The information generated by the system will enableCENAL, in consultation with the National Petroleum Council and PETROBRAS, tobalance regional alcohol supply and demand.

8.18 A more general risk relating to the Project concerns potentialcompetition between food, export and energy crops. While Brazil has vastagricultural land resources and the land requirements of the Alcohol Programare about 6% of the total crop land or about 3% of the existing crop and plantedpasture land, most of the land requirements for the Alcohol Program must be drawnfrom among Brazil's better land resources. The land needs of the Project (and theentire Alcohol Program), therefore, must be managed carefully to avoid/minimizecompetition between food and energy crops. The measures currently being imple-mented by the Government--(a) requirement that land for energy crops cannotdisplace food and/or export crops unless substantial real advantages in pro-ductivity can be demonstrated (para 6.04); (b) land zoning studies identifyingareas for energy crop production and which take into account the requirements ofother crops (para 7.12); (c) participation of the state authorities in landuse decisions vis-a-vis the Alcohol Program (para 7.12); and (d) strengtheningof the appraisal criteria unde the Project (paras 7.21 and 8.11)--are suitablydirected to minimizing competition between food and energy crops for land use,and would need to be strictly enforced. All sub-projects to be financed out ofthe loan proceeds will meet these requirements. Additionally, the Monitoring andEvaluation Component of the Project will provide comprehensive analysis andinformation on these and other variables on a continuing basis in the decision-making on land use. The above arrangements are considered reasonable safeguardsin reducing the risk of competition for land use between energy and food/exportcrops.

8.19 Given the multiplicity of institutions involved in the implementationof the Project, there is always a risk of not achieving the desirable level ofcoordination among and the active participation of the agencies involved.CENAL's record to date in seeking the active participation of all the criticalagencies has been satisfactory. The structures of both CNAL and CENAL areconsidered adequate to bring together the various objectives and constraintsin the sectors involved in the execution of the Alcohol Program. A majorcatalyst to mTnimizing this risk is the everpresent national consciousness

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that a shift away from fossil fuel to biomass-based fuel is a necessarystrategic initiative for Brazil in order to reduce the impact of increasingprices of imported petroleum on the economy.

IX. PROJECT COSTS AND FINANCING PLAN

A. Project Costs

9.01 The total financing requirements of the Bank Project (i.e., the1981-83 time slice of the Alcohol Program), including physical contingenciesand price escalation, working capital and interest during construction areestimated at US$5.1 billion equivalent, or Cr$ 255.7 billion as shown in thetable below:

Project - Total Financing Requirements

Cr$ Billions US$ Millions(Cr$50 = US$1.0)

Local Foreign Total Local Foreign Total %Production ComponentAdditional Facilities

- 1983 20.8 11.9 32.7 416 239 655 20.7- 1984 31.4 18.0 49.4 628 360 988 31.3

- 1985 43.4 25.0 68.4 869 499 L,368 43.3Sub-total 95.6 54.9 150.5 1,913 1,098 :3,011 95.3

Technology DevelopmentComponent 3.8 3.7 7.5 75 75 150 4.7

Monitoring & EvaluationSystem 0.1 - 0.1 1 - 1 -Base Costs 99.5 58.6 158.1 1,989 1,173 3,162 100.0

Physical Contingency 6.1 3.4 9.5 123 68 191 6.0Price Escalation 23.1 13.6 36.7 462 272 734 23.2Total Capital Cost 128.7 75.6 204.3 2,574 1,513 4,087 129.2

Working Capital 47.1 - 47.1 942 - 942 29.8Interest DuringConstruction - 4.3 4.3 - 86 86 2.7

Total FinancingRequired 175.8 79.9 255.7 3,516 1,599 5,115 161.7

The base cost estimates are in 1980 prices and have been calculated on the basisof assumptions described in paragraph 5.08. The price escalation estimate isbased on international inflation rates, in US Dollar terms, of 9% in 1981, 8.5%in 1982, 7.5% in 1983-85 and 6% thereafter. The working capital requirements,which are all in local currency, were calculated on an incremental basis(Project File, Exhibit J). Interest during construction (Project File, ExhibitKT on foreign loans were calculated on (i) the proposed Bank loan of US$250.0million for 15 years, including 3 years of grace period at 9.6% p.a. interest rateplus a commitment fee of 0.75% p.a. on the undisbursed balance; and (ii) privateforeign borrowing of at least US$250.0 million the Government has indicated to theBank it plans to secure, in association with the proposed Bank loan, terms forwhich have been assumed at 11% p.a. interest rate and 8 years repayment period,including 3 years of grace.- Interest during construction on long-term localcurrency funds have been excluded since these funds are provided by the Governmentfrom tax revenues from alcohol consumers and road users (para 9.03) at no costto the Program.

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B. Financing Plan

9.02 The financing plan for the Project, based on understandings reachedwith the Government, is presented below:

Alcohol and Biomass Energy Development Projject - Financing Plan

Cr$ billions US$ millions a/Local Foreign Percent

Currency Currency Total Total of TotalLong-Term Financing

Equity

Alcohol ProjectInvestors 38.2 - 38.2 764 18.3

Long-Term PROALCOOLFunds

Energy MobilizationFund- 51.6 - 51.6 1,032 24.7

Net Revenues toGovernment fromAlcohol Sales 38.9 - 38.9 778 18.7

Other GovernmentResources - 54.9 54.9 1,099 26.3

Proposed Bank Loan - 12.5 12.5 250 6.0Private ForeignBorrowing - 12.5 12.5 250 6.0

Sub-Total: Long-TermPROALCOOL Funds 90.5 79.9 170.4 3,409 81.7

Total Long-TermFinancing 128.7 79.9 208.6 4,173 100.0

Short-Term Borrowings 47.1 - 47.1 942

Total Financing Required 175.8 79.9 255.7 5,115

a/ At June-end 1980 exchange rate of Cr$50 US$1.0.

9.03 The Project's long-term financing need is estimated at US$4,173.0million equivalent, of which US$2,574.0 million (Cr$128.7 billion) is in localcurrency. The local currency portion will be met by (i) equity contributionsfrom production sub-project sponsors totalling US$764.0 million equivalent or 18.3%of the total long-term financing requirements; and (ii) consumer contributions ofabout US$1,810.0 million equivalent (43.4% of total long-term financing) to beprovided by (a) the Energy Mobilization Fund, whose resources are generatedthrough road taxes on automobile owners and users (US$1,032 million or 24.7%),and (b) net revenue accruing to the Government from alcohol sales, i.e., thedifferential between the ex-distillery price of alcohol paid by the Governmentand the pump price of anhydrous alcohol blended in gasohol and hydrous alcohol,less distribution costs and dealers' margin (US$778 million or 18.7%). Theequity contribution estimate is based on current Government policy which requiresproduction sub-project sponsors to provide 20% of the long-term financing

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(excluding land) in equity funds, except in the case of farmers' cooperativesor producers' association where the requirement is 10%. It is expected thatabout 10% of the production sub-projects will be sponsored by farmers' coopera-tives or producers' associations. Energy Mobilization Fund resources madeavailable to PROALCOOL in 1980 amounted to the equivalent of US$272.0 million;annual contributions from this source is assumed not to exceed the 1980 equiva-lent. As shown on page 2 of the Detailed Sources and Application of Fundspresented in Annex 9, the estimated net revenue accruing to the Government fromalcohol sales may far exceed the contributions from this source given the currentrelationship between the ex-distillery price of alcohol and the pump price whichis expected to be maintained during the project implementation period 1/. Theforeign currency portion of the Project's long-term needs will be met by(i) contributions from Government resources equivalent to US$1,099.0 million (26.3%of long-term financing); (ii) the proposed Bank loan of US$250.0 million equiva-lent (6%); and (iii) the foreign private borrowing of at least US$250.0million (6%), which the Government proposes to secure in association withthe Bank loan. In addition, there will be a need for short-term loans of aboutUS$942.0 million equivalent for working capital requirements which will be metby local banks. The Government has provided satisfactory assurances that itwill provide or cause to be provided, promptly as needed, all necessary fundsto complete the Project.

C. On-Lending Arrangements

9.04 The proposed Bank loan of US$250.0 million will be made to the Govern-ment, at the standard Bank interest rate, for 15 years, including 3 years ofgrace. The Borrower will pass on to Banco Central do Brasil US$220.0 millionequivalent of the proposed loan to finance a part of the 1981-83 alcohol producingfacilities, including demonstration units approved by CENAL. The remaining US$30.0million will be passed on to FINEP (US$15.0 million equivalent), and STI (US$15.0million equivalent), for financing of biomass energy technology research anddevelopment. US$1.0 million of the funds channeled through Banco Central will beused to finance CENAL's Monitoring and Evaluation System. The Government will bearthe foreign exchange risk on the proposed Bank loan.

9.05 The US$219.0 million equivalent for the Production Component and demon-stration units will be used by Banco Central to refinance loans provided bycommercial and development banks to alcohol production sub-project sponsors onPROALCOOL terms. PROALCOOL loan terms are reviewed at least once a year by theGovernment. The terms for sub-projects to be approved in 1981, which were announcedby the Government in January 1981, are: (i) 90% financing for farmers' cooperativesor producers' associations and 80% for all other sponsors; and (ii) 12-year repay-ment period, including four years of grace for autonomous distilleries and threeyears of grace for annex distilleries. The interest rates are set by the NationalMonetary Council (CMN) taking into account the prevailing level of inflation inthe country and location of sub-project. PROALCOOL lending operations for 1981 areoperating under two interest rate regimes: (a) fixed interest rates, and (b) anominal interest rate of 5% p.a. plus monetary correction of the principal out-standing linked to percentages of the annual variation of the ObrigacoesReajustaveis do Tesouro Nacional (ORTN), an index of Government bonds adjustedregularly to reflect inflation. Details of the two regimes are shown below:

I/ See para 10.07 for anlaysis of the relationship.

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PROALCOOL Interest Rates for Sub-Projects Approved in 1981

(a) Fixed Interest Rates LocationNorth, Center-West, South,

Northeast Regions Southeast Regions

Distillery Unit 45% p.a. 55% p.a.Associated Agricultural Facility 35% p.a. 45% p.a.Weighted Average 44% p.a. 54% p.a.

(b) 5% p.a. Nominal Interest Rate plus Monetary Correction at% of ORTN Variation

Annex Distillery 60% 70%Autonomous Distillery 55% 65%

Sponsors whose sub-projects are approved in 1981 will be charged the lower ofthe two. At the current inflation level of about 100%, interest rates on sub-loans approved in 1981 will effectively be under the fixed regime. While theseinterest rates are still negative, they amount to an effective increase of about100% in the rates prevailing for PROALCOOL loans at the time of the Project'sappraisal in July, 1980 Interest rates for PROALC()OL at that time were monetarycorrection at 40% of the annual variation in the ORTN plus nominal interest rateaveraging 4% p.a., resulting in an effective interest rate of about 27%. The1981 PROALCOOL interest rates compare with the current effective interest ratesof 35% p.a. for long-term financing for production of manufactured exports, and35% p.a. for agricultural production credits in the North/Northeast and'45% inother regions. The Government has agreed to exchange views with the Bank fromtime to time, and at least once a year, on the adequacy of the interest ratesapplicable to PROALCOOL lending operations. The Government has further assuredthe Bank that it is its policy to reduce, and gradually eliminate, interest ratesubsidies for lending operations under PROALCOOL pari passu with reduction andelimination of interest rate subsidies for lending operations in other relatedsectors such as agriculture and agro-industry.

9.06 The US$30.0 million to be passed on to FItEP and STI for the TechnologyDevelopment Component sub-projects will be re-lent to Brazilian enterprisesengaged in biomass energy technology development on terms consistent withprevailing terms for technology development financing, which are: (i) loansof up to 80% of the sub-project's financing requirements, 12-year repaymentperiod, including 3 years of grace, and 8% per annum interest rate with 40-100%monetary correction; and (ii) grants which are primarily for basic R & D work.Terms for each technology development sub-project in the Project will be deter-mined by STI and FINEP on a case-by-case basis depending on risk factors,value to the Brazilian economy and sub-project sponsoring organization.

D. Procurement

9.07 Procurement arrangements for the Production Component and demonstrationunits of the Project are designed to permit international firms to compete ona fair basis with local enterprises. The procedures for advertising andprequalification will include: (i) advertisements published in the Development

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Forum each year during the Project period; (ii) notification to embassies;(iii) advertisements published in the local press and trade journals; (iv) a60-day period for pre-registration by CENAL of foreign and local firmson the basis of the criteria agreed with the Bank; and (v) periodic publicationof the pre-registered list in local press and trade journals. All subsequentbusiness development will be by individual suppliers and advertising for indi-vidual sub-projects will not be required. Individual sub-projects to beeligible for Bank funds will invite at least two local and two foreign suppliersof their choice from above pre-registration list. Bidders will be allowed 45days within which to submit their bids. The buyer will evaluate offers receivedusing his business judgement which would be largely based on price, but couldinclude operating efficiency, plant reliability, and after-sales service.Foreign components in any offer will not be subject to customs duties in excessof 15%. If the successful bidder is foreign, the Government, through itsappropriate agencies, will then freely and promptly issue any import licensenecessary. Foreign component for this purpose will be defined as a separableand readily identifiable item of a significant size and of a character thatwould have led to separate procurement but for the need for single responsi-bility for supply and erection of the alcohol production unit on a turnkeybasis. To facilitate its application, the borrower has indicated that it willrequest bidders to break down their bids into eight components: (i) engineeringand supervision; (ii) civil works, including materials and erection; (iii) rawmaterial reception machinery, crushers, etc., up to juice preparation; (iv)juice treatment and fermentation equipment; (v) electricals, steam generation,utilities; (vi) distillation equipment; (vii) support facilities--laboratory,maintenance shop, etc.; and (viii) effluent treatment and miscellaneous equipment.The arrangements, which will open the Alcohol Program to foreign suppliers for thefirst time and which have been agreed to by the Government, represent a majormodification of the current Brazilian procurement procedures, which reserve allalcohol facility supply to local firms.

9.08 The proposed approach takes into consideration that (a) the alcoholplant owner is a profit-oriented private investor, who is strongly motivatedto purchase the plants under the most attractive (normally least cost) tech-nical and commercial terms; (b) local suppliers are expected to mount a majormarketing effort to obtain business particularly considering the current sub-stantial underutilization of industrial plant capacity; and (c) procurementwould be readily open to any qualified non-Brazilian supplier who can demonstrateto a local investor that the supplier's total package, including capital costs,alcohol production costs and commercial and technical risks, is superior to thatoffered by local suppliers. Procurement decisions for the Production Componentwill be carefully monitored during project implementation to ensure that projectapproval, procurement and disbursement procedures of CENAL and Banco Central areconsistent with the agreed procedures.

9.09 Technology Development Component sub-projects below US$1.0 millionwill be procured in accordance with sound commercial and technical considerationsacceptable to the Bank. Sub-projects above US$1.0 million, which will besubject to prior Bank approval (para 8.13), will be procured under limitedinternational tendering or prudent commercial practice to the satisfaction ofthe Bank as dictated by the kinds of goods and services to be obtained.

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It is anticipated that the bulk of the procurement for the Technology Develop-ment sub-projects will be on the basis of prudent commercial practice; about 5-10out of the 50-60 sub-projects expected for this component are likely to exceedUS$1.0 million. Procurement for consultant services for the Monitoring andEvaluation System Component will be by negotiation with independent consultingorganizations to be selected by CENAL whose qualifications and conditions ofemployment will be satisfactory to the Bank.

E. Disbursements

9.10 Proposed allocations for the various components of the Project areas follows:

Allocation of Bank Loan

Number of Bank Loan % ofCategory Sub-Projects Allocation Loan

Production ComponentProduction Units Approx. 30-40 a/)Demonstration Units 2-4 ) 219.0 87.6

Technology Development Component 50-60STI Sub-projects ) 15.0 6.0FINEP Sub-projects ) 15.0 6.0

Monitoring and Evaluation System NA 1.0 0.4

Total 250.0 100.0

a/ Expected number of sub-projects to be financed from Bank loan based on costsharing arrangements discussed in para 9.11 below.

9.11 Estimated quarterly disbursements of the Bank loan are presentedbelow:

Estimated Disbursement Schedule for Bank Loan

Quarterly CumulativePeriod Disbursements Disbursements

(US$ million) (US$ million)

1981 October-December 10.0 10.0

1982 January-March 10.0 20.0April-June 10.0 30.0June-September 15.0 45.0October-December 20.0 65.0

1983 January-March 30.0 95.0April-June 40.0 135.0July-September 40.0 175.0October-December 40.0 215.0

1984 January-March 25.0 240.0April-June 10.0 250.0

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Bank funds will be disbursed to cover 55% of the installed cost or 100% offoreign expenditures for each production sub-project, whichever shall behigher, and 50% of the total cost of each technology sub-project. Disburse-ments in respect of local currency expenditures for production unit sub-pro-jects and FINEP technology sub-projects will be made against Statements ofExpenditures certified by Banco Central and FINEP, respectively. The State-ments of Expenditures will be broken down by sub-project and will discriminateamounts disbursed during reporting period, total amount disbursed to date, andamount claimed for reimbursement. The Statements of Expenditures will beaccompanied by a form letter submitted by the financial agent to Banco Centralor FINEP, certifying all expenditures. Detailed documentation supporting theStatements of Expenditures will be maintained by Banco Central and FINEP andbe made available for review by Bank supervision missions. The Bank willdisburse, against complete documentation, 100% of total costs of consultantsemployed by CENAL in respect of the Monitoring and Evaluation System. Dis-bursements in respect of foreign expenditures and STI technology sub-projectswill be fully documented.

F. Accounts and Audits

9.12 Not later than six months after the close of each fiscal year, theBank will be provided with the results of an audit of the Statements of Ex-penditures carried out by independent auditors acceptable to the Bank. Theauditors' reports should express an opinion as to the reliability of theStatements of Expenditures supporting claims for disbursements (i.e., whetherclaims are supported by adequate documentation and reflect properly incurredexpenditures for legitimate Project purposes) and the adequacy of BancoCentral's, FINEP's and STI's internal controls regarding Project funds aswell as those of CENAL with respect to funds for consultant services.Assurances to this effect have been obtained from the Government. In addi-tion, it is agreed that Banco Central will cause the accounts of financialagents whose PROALCOOL loans are reimbursed from the proceeds of the Bankloan to have their accounts audited, in accordance with appropriateauditing principles, by independent auditors acceptable to Banco Centraland the Bank. The report of such audit will include opinions expressed bythe auditors on expenditures and procedures relating to the sub-projectsfinanced by the Bank and the reliability of Statements of Expenditures toBanco Central requesting reimbursement for such expenditures. Such auditswill be made available to Banco Central no later than five months after theclose of the fiscal year of the financial agent, and be subject to reviewby the Bank.

X. FINANCIAL ANALYSIS

A. General Approach

10.01 The Alcohol Program is being implemented by private investorsin a high inflation environment and under a package of Government poli-cies which sets limits on the loan amounts available for alcohol investments,determine the terms of these loans and control sugarcane input and alcoholoutput prices. The four major financial issues identified as being cTitical

in this area are: (i) the ability of the PROALCOOL loans and terms to continueto attract private investors to the Alcohol Program; (ii) Government alcoholpricing policy; (iii) the fiscal impact of the Project on Government budget;

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and (iv) whether the Government is subsidizing the alcohol consumer. Thefocus of this chapter is on the first three issues; the issue of whether thealcohol consumer is being subsidized by the Government is discussed in thenext chapter.

B. Rate of Return on Equity

10.02 New PROALCOOL loan terms and interest rates introduced in January 1981are discussed in para 9.05. The key indicator to measure the continued attractive-ness of investment in alcohol projects to the private investor is the return onequity using PROALCOOL loan facility under current terms compared to termsexisting prior to January 1981. The base case for the comparison of return onowner's equity is the "standard" 120,000 lpd autonomous sugarcane-based facility,assumed to be located in the Southeast region. The key assumptions used in theanalysis, including capital costs for the industrial and agricultural componentsand operating costs, are presented in Annex 10-1. A 20-year operating life forthe distillery, which is consistent with Brazilian experience, has been assumed.Inflation is assumed to decline from 100% in 1981 to 75% in 1982, 60% in 1983,50% in 1984, and to stabilize at 40% in 1985 and thereafter, consistent withcurrent expectations. It is assumed that the sugarcane and ex-distillery alco-hol prices will be adjusted twice yearly in line with inflation.

10.03 The detailed financial analysis for an autonomous 120,000 lpddistillery in the Southeast under PROALCOOL loan terms prevailing beforeJanuary 1981, is given in Annex 10-2. The analysis based on theexisting terms is given in Annex 10-3. The results are presented below:

Investor Return on Equity for Sugarcane-Based Alcohol Sub-Project(7 return in constant terms)

PROALCOOL FinancingPROALCOOL Financing under Prior Termsunder Present Terms (40% ORTN)

Base Case 14 24

Sensitivity Tests

Quarterly Adjustment of Prices a/ 16 27Annual Adjustment of Prices a/ 10 18

a/ Assuming the price increase is equivalent to the inflationary costincreases during the intervening period.

10.04 The return on equity is a function of (i) financial leverage; (ii) in-terest rates; (iii) assumed inflation; (iv) frequency of adjustments on sugar-cane/ alcohol prices; and (v) a number of project related factors affecting eachindividual investor differently (e.g., efficiency in project implementation andoperation including agricultural operations, percentage of cane purchased and taxconsiderations). Thus, the returns in the above table apply to a common set ofassumptions for the "typical" base case, before taxes though in practice, indrivdual

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investor return could vary significantly; also the above returns are for idealperformance of the project and the actual returns obtained by the investorscould be lower due to business risks (e.g., implementation delays, adverseweather). The return on equity to the alcohol investor under the currentPROALCOOL terms in a high inflation scenario, even with the Government adjustingex-distillery alcohol prices twice a year in line with inflation (a practicewhich the Government had followed since the inception of PROALCOOL except in1980) is substantially less than under the previous financing terms.

10.05 The principal reason for the lower return on owner's equity underthe current interest rates is the sharp upward adjustment (almost 100%) of theinterest on PROALCOOL loans paid by the alcohol investor (para 9.05) without acorresponding adjustment in real terms of the ex-distillery price of alcoholpaid by the Government to the investor. Assuming all other factors beingthe same, since the Government controls both the input and output prices, theserecent changes in PROALCOOL interest rates need to be accompanied by corres-ponding changes in real terms in the ex-distillery price of alcohol in orderto maintain the attractiveness of the Alcohol Program at the level that has cometo be expected by private investors. The table below presents the results ofan analysis of the real increase in the ex-distillery price of alcohol requiredto maintain the owner's return on equity at the estimated "typical" levelprevailing prior to January 1981.

Estimated Real Increase in Ex-Distillery Price of AlcoholTo Maintain Attractiveness of Investment

Real PriceIncrease to Ex-Distillery

Return on Equity Provide 24% AlcoholInterest Without Real Return on Price InRates (p.a.) Price Increase Equity Real Terms

(7) M(%) (Cr$/l) (Cr$/l)

Pre-Jan. 1981 29% 24 - 14.75Post-Jan. 1981 54% 14 2.0 16.75

C. Government Pricing Policy

10.06. Of equal significance to the alcohol investor is the frequency ofalcohol/cane price adjustments considering the current high inflation rateand that the investor keeps up to 6 months alcohol inventory. As shown inthe sensitivity analysis in para 10.03, if alcohol prices are fixed in currentterms for one year, the return on investor's equity under current PROALCOOLinterest rates drops from about 14% to about 10%. If, on the other hand, theGovernment were to adjust prices on a quarterly basis, the return on owner'sequity increases by two percentage points to 16%. To bring the return onowner's equity to the same level as in the pre-January 1981 base case whileadjusting ex-distillery alcohol prices on a quarterly basis would need onlyCr$1.45/liter real increase compared to the Cr$2.0/liter estimated in para 10.05above on the basis of twice-yearly price adjustments. The required increasein real terms will not represent a subsidy to the alcohol investor, since, asshown in para 10.07, the ex-distillery price of alcohol is well belowr the re-tail price, and Government pricing policy results in substantial net revenues

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to the budget. The Government has agreed to establish a pricing policy thatwill maintain the ex-factory price of alcohol at levels that will enable spon-sors of production sub-projects operating efficiently, to generate fundssufficient to service their debt, cover all their other costs and earn a reason-able return on their equity; such prices to be adjusted periodically to reflectchanges in the valuation of the sponsors' assets and production costs, and ininterest rates on loans under PROALCOOL. For this purpose, a reasonable returnis considered to be approximately 20% return before taxes determined on a dis-counted cash flow basis; and periodic adjustment is understood to be at leasttwice a year.

D. Fiscal Impact on Government Budget

10.07 As indicated, the Government controls alcohol prices, both ex-distilleryand retail. At June 30, 1980, the ex-distillery price of alcohol was Cr$14.75/liter,while the retail price of anhydrous alcohol blended into gasoline was Cr$34.50;retail hydrous alcohol price is established at 65% of the pump price of gasohol. Asshown below, for each liter of anhydrous alcohol in gasoline sold to the consumer atthe pump, the Government received a net revenue of Cr$15.21, and for straight orhydrous alcohol Cr$3.11/liter:

Government Revenues from Alcohol Sales(Cr$/liter, June 1980 prices)

Alcohol TypeAnhydrous Hydrous

Pump Selling Price 34.50 22.40Less: (i) Ex-disillery Price 14.75 14.75

(ii) Distribution costs a! 4.54 4.54

Net Government Revenues 15.21 3.11

a/ Based on CNP and PETROBRAS estimates including retailers' margin.

Annex 10-4 presents an analysis of the fiscal impact of the alcoholfacilities included in the Bank Project, i.e., a present value comparisonof PROALCOOL loans to be provided for these facilities and Governmentreceipts from alcohol consumers 1/. The differential between ex-distilleryalcohol price and retail price to the consumers, is assumed to stay at presentlevels in constant terms. In the first four years of the Project, the disburse-ment of PROALCOOL loans constitutes a sizeable budgetary outflow, reachingabout US$760 million equivalent in 1983. By the fifth year, the loans are fullydisbursed and start being repaid, and receipts from the net Government revenuefrom alcohol sales to budgetary resources due to these financial inflows from theProject, average about US$350 million equivalent per annum. Over the 20-yearuseful life of the Project, the present value of the net cash flows to theGovernment due to the Project, estimated at 11% opportunity cost of capital, isabout US$960 million equivalent. The above analysis illustrates that the AlcoholProgram results in a substantial net positive contribution to the Governmentbudget.

1/ This analysis is on an incremental basis, i.e., Government revenues fromalcohol sales in gasohol, which are attributed to investments prior to1981, are not considered.

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XI. ECONOMIC ANALYSIS

A. Key Assumptions

11.01 The economic viability of alcohol production from biomass hasbeen analyzed on the basis of standardized plants. For sugarcane-based facili-ties, which would provide about 95% of total alcohol production in 1985, theanalysis is based on "autonomous" plants of an average size of 120,000 lpdcapacity in the three regions of the country which will account for most ofthe cane production under the Alcohol Program: (i) Southeast; (ii) Northeast;and (iii) South. For cassava-based facilities which would be providing 5% ofthe 1985 alcohol target, the economic analysis is also based on 120,000 lpdplants. Input/output prices have been based on average economic costs applicablefor the three regions. Since also in practice most new distilleries are beingbuilt with 120,000 1/day capacity, the economic return for one standard projectis a reasonable approximation of the benefits of the overall program. "Annexed"distilleries would have a substantially higher return but there are limitedopportunities to build them in the future.

11.02 The economic viability of ethanol production is critically dependenton the economic values attributed to raw materials and to the alcohol product.Sugarcane has been valued at its average economic cost of production, cassavaat its selling price, and alcohol at its opportunity value (gasoline equivalent).

11.03 Since sugarcane to be used for alcohol production can also beprocessed into sugar which is an internationally traded commodity, it can bea priori argued that cane opportunity value is related to that of sugarexports, and that sugarcane economic value should be linked to world sugarprices. For Brazil, however, the economic value of the additional sugarcanegrown for alcohol production cannot be directly linked to sugar export prices,because it will be grown on additional land and if diverted to sugar exportson a permanent basis would seriously disrupt world markets. The additionalproduction of sugarcane requirements to meet the 1985 alcohol productiontarget represents about 110 million tpy of sugarcane, and would correspond toan incremental production of 11 million tons of sugar (40% of present worldsugar trade). To dispose of this sugar surplus, Brazil would have to in-crease its share of world sugar trade from its current 9% to about 45% by.1985. Additional exports of this magnitude, even if it were allowed under theInternational Sugar Agreement export quotas (which is unlikely), would seriouslydisrupt the world sugar market, and its primary effect likely to be a sharpreduction in world sugar prices. Although some of the high cost producers suchas the Ivory Coast and South Africa could be driven out of the market, many ofthe major exporting producers can be expected to continue to stay in the market.The European Economic Community which now has about 14% of the world marketand guarantees its exporters a minimum return regardless of world prices isunlikely to cut back production significantly; and many of the remaining majorexporters are either mono-crop economies (Cuba, Dominican Republic, otherCentral American countries and Mauritius) or depend on sugar exports sosignificantly (Jamaica, Thailand and the Philippines) that they would notreadily have the option of cutting back on their production in such an eventu-ality; past experience confirms this tendency. The Bank's sugar commoditymodel indicates that the world 1985 sugar prices would decrease by about 50%from their projected long-term equilibrium level were Brazil to export thisadditional sugar quantity. On the basis of this analysis, the economic value ofthe additional cane grown for the Alcohol Program has been estimated to equalthe full economic cost of production, including land rent, land preparation,

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agricultural equipment, and planting and harvesting costs. The above valua-tion approach results in a higher economic value of sugarcane used for alcoholproduction than the economic value of sugarcane were Brazil to divert theadditional sugar production for export.

11.04 Ethanol can be used as automobile fuel either as "gasohol" in whichcase anhydrous ethanol (99.8%) is mixed with gasoline up to 20% ratio, or ashydrous or straight alcohol, in which case 94% ethanol (6% water) is usedalone. The economic value of alcohol as gasoline substitute is different inthese two applications Existing internal combustion automobile engines donot require any modifications to run on "gasohol". Cars obtain substantiallythe same mileage performance whether they are run OTI gasohol or on regulargasoline. Different factors including octane rating, fuel value, thermalefficiency, individually affect mileage performance but, in total, do notsignificantly modify performance. Thus, the opportunity value of anhydrousethanol is assumed to be equivalent to the economic cost of gasoline in"gasohol". The economic value of straight ethanol is estimated at 86% ofanhydrous ethanol after adjusting for (i) increase in car production costs(about 5%); (ii) loss of fuel efficiency as indicated by lower mileage (about20%); (iii) increased volume of ethanol production by volume (6%) from the sameraw materials; and (iv) savings in straight (94%) ethanol production costs(about 5%) as described in Annex 11-1. The economic value of gasoline inBrazil is estimated at US$0.274/liter in mid-1980 terms (based on an averagecrude oil price of US$31.2 per barrel fob Middle East). Gasoline and crude oilvalues are assumed to increase at 3.0% p.a. in real terms over the next 20years.

B. Economic Capital and Operating Costs

11.05 The Brazilian alcohol industry, which has built some 250 distilleries,has developed into an efficient competitive supplier of conventional sugarcanealcohol technology. Available data suggest that the Brazilian industry iscompetitive with international suppliers. Economic capital costs in mid-1980prices (excluding taxes, price escalation, working capital, and interestduring construction) for a 120,000 lpd sugarcane-based alcohol sub-projectlocated in the Southeast and the South of Brazil are estimated at US$10.8million equivalent (Annex 11-2). Transport and other location factors (suchas higher construction costs) add approximately 10% to these costs for adistillery located in the Northeast. These costs ares for autonomous distil-leries built on turnkey lump-sum contracts and include facilities for canereception, crushing, fermentation, distillation, storage, steam and power gener-ation from bagasse, and all other in-plant and transport facilities. Cassavaor other starch-based alcohol plants are technically similar to sugarcane-based plants, except for additional equipment for the saccharification of starchinto sugar. It is estimated that cassava-based alcohol plants would cost 20%more than similar sugarcane-based plants.

11.06 Brazilian equipment manufacturers quote a normal supply-cum-erectiontime of 10-14 months for a distillery. However, for the economic analysisincluded in this report, a more conservative assumption of 18 months in theSoutheast and South and 24 months in the Northeast has been taken. The distil-leries are assumed to operate at 60% capacity in the third year after projectinitiation (i.e., first year of operation), 90% in the fourth year and 100%thereafter. Distilleries are relatively simple chemical plants which normallyoperate at 100% capacity during the 6-month cane cropping season. Maintenance

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is carried out during the off-season. The economic life of the plants hasbeen assumed at 20 years.

11.07 Economic production costs are shown in Annex 11-2. The principalcosts in producing alcohol are fuel and feedstock. A sugarcane distillery isenergy self-sufficient (it uses bagasse from sugarcane to fuel its boilersand generate power) and other variable production costs are not as significantas in other chemical plants. The opportunity value for bagasse has beenassumed to be zero since there is no alternative economic use for bagassein most distilleries. For a standard-sized distillery, yearly economicvariable costs amount to about US$0.015/liter and fixed costs to US$0.023/liter.It is assumed that stillage is recycled back to nearby agricultural fields asfertilizer and that no by-product credit or debit is given to stillage. Forcassava plants which have to purchase outside energy, operating costs are moresignificant, and excluding cassava cost, are estimated to average US$0.18/literif fuel oil is used (75% is attributable to fuel). If coal or wood were to beused, outside energy costs would substantially be reduced, which would improvethe economics of cassava-based plants.

11.08 The two major components of the working capital for an alcoholplant are finished product inventory and accounts receivable. Sugarcanedistilleries operate between 165 and 200 days per year, whereas alcoholoff-take is spread evenly throughout the year. Finished product is storedfor deliveries in the off-season, and on a yearly basis, averages about 90days of production. Cassava plants operate for an estimated 300 days per yearwith an average product inventory of about 30 days of production. Accountsreceivable are assumed to average 45 days of sales. Sugarcane and other materialinventories are very small and are assumed to be offset by accounts payable.

11.09 Sugarcane. Agricultural production costs are calculated separatelyfor the different regions: (i) the Southeast, which is a rich agriculturalregion with intensively farmed and highly mechanized large plantations; (ii) theNortheast where cane production is less mechanized and more labor intensivethan in the Southeast and land value, labor productivity and cane yields arelower than in the Southeast; and (iii) the South where the yields are compara-ble to those of the Southeast. The average cropping season in Northeast (200days per year) is, however, longer than in both the Southeast (180 days) andthe South (165 days). Labor is in oversupply in the Northeast and its economiccost is lower than in the Southeast and South. Large plantations are not ascommon in the South as in the Southeast region and the typical distillery islikely to obtain its cane supply from dispersed small cane producers.

11.10 The economic sugarcane production costs were estimated on the basisof detailed data on current yields, labor and agricultural input costs and thecost of production per ha prepared by a number of Government and private sectorinstitutes on the basis of actual farm surveys in all major producing areas.The financial costs were adjusted for distortions in fertilizer prices, landrental value and for the depreciation charges on machinery to derive the eco-nomic cost of production. Labor in the Northeast has been shadow-priced at0.7 of its market rate, but for the other parts of the country, no shadowpricing of labor has been used. It has been assumed that most new planta-tions would be on clear land, primarily unimproved pasture land, and wouldnot require extensive deforestation, with about six months needed for landpreparation before the first planting. Fertilizer and pesticide costs wereassumed to increase at 1.5% and 1% p.a.in real terms, respectively. Landrental value is assumed to increase at 1% p.a. in real terms in the base case,

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with sensitivity test for 5% p.a. increase throughout the sub-project's life.Annual economic agricultural costs for a 120,000 lpd sugarcane distillery inthe three regions estimated on the basis of these assumptions, are summarizedbelow:

Brazil - Typical Sugarcane-Based Distiller, (120,000 lpd)Annual Agricultural Economic Production Costs

(in mid-1980 US$ million per year)

Southeast Northeast South

Land .27 .14 .16Fertilizer .50 .87 .40Pesticides .08 .07 .07Machinery .34 .30 .10Labor .58 1.08 .81Others .08 .17 .06Cane Transport .27 .39 .36

Total, US$ million/year 2.12 3.02 1.96

(US$/liter) 0.098 0.126 0.099

11L.11 Cassava: Cassava is primarily a subsistence crop, with retailprices in June 1980 in the range of Cr$ 1,625-1,950/ton, equivalent to aboutUS$25.0-30.0/ton at 30% shadow-pricing of the Cr$. As detailed in Annex 7-2,considerable research work to improve the cultural practices and yields of thecrop is being carried out by the Ministry of Agriculture's research unit(EMBRAPA), the results of which are expected to be ready for transfer intocommercial production in two-three years. The future economic production costfor cassava using improved cultural practices and cultivars of higher yields,particularly in a well-organized system developed specifically for alcoholproduction, would very likely be well below the current retail market prices.Due to uncertainties involved in projecting the likely reduction in the economicproduction cost by the results of EMBRAPA's research efforts, the economic priceof cassava in this analysis is assumed to be at the low end of the presentmarket price, i.e., US$25.0/ton as the base case with sensitivity tests forprices ranging from US$20.0/ton to US$30.0/ton. It: has been assumed furtherthat since cassava is a starch crop which in poor regions may be substituted forfood crops such as wheat and corn, its price woulcl increase in real terms at 1%p.a., in line with the Bank's estimates for increases in real price of thesefood crops.

D. Economic Rate of Return and Sensitivity Analysis

1. Alcohol Production from Sugarcane

11.12 Based on the above assumptions, alcohol production from sugarcane iseconomically viable in all three major sugarcane growing regions of Brazil. Theeconomic rate of return for anhydrous production from sugarcane for gasohol in astandard 120,000 l/d plant is calculated between 22-26% and for hydrous alcoholproduction between 17-21%. Since the Brazilian market for "gasohol" is vir-tually saturated in 1980 any future analysis should be based on hydrous alcoholproduction. The results of the economic return calcuIations for a typicalsugarcane-based distillery together with sensitivity tests are summarized inthe table below; the detailed analysis is presented in Annex 11-3.

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Brazil - Ethanol from Sugarcane: Economic Rate of Return t%)(for 120,000 lpd capacity distillery)

Southeast Northeast South

Base Case (hydrous alcohol) 19.6 16.6 20.5

Sensitivity testsLand Rental Value up 30% 19.1 16.3 20.2Land Rental Value increasing

at 5% p.a. in real terms 19.0 16.3 20.2Yield Down 20% 17.0 13.6 18.8Alcohol at Anhydrous Value 24.5 21.5 25.5Capacity 240,000 lpd 20.1 16.7 21.1Capacity 20,000 lpd 13.0 10.7 13.2

The economic viability of alcohol production from sugarcane varies onlymarginally with location, largely due to offsetting factors. The Southeastis the most efficient producer. The Northeast shows a slightly lower return,largely because of longer cropping seasons, lower land costs and shadowpricing of agriculture labor compensate for lower productivity. The economicreturn is slightly higher in the South, largely because agricultural produc-tivity is equivalent to the Southeast but costs are lower. The economicreturn is not very sensitive to land value but a 20% decrease in agriculturalyield lowers the return by 2-3 percentage points.

2. Alcohol Production from Cassava

11.13 The economics of cassava-based ethanol plants are less attractivecompared to sugarcane, due to higher capital cost (para 11.05) and the need topurchase (or develop) outside energy sources (para 11.07). To compensate,cassava-based plants must obtain their raw materials and energy at a relativelylow cost. The economic rate of return calculations for cassava-based ethanolplants are summarized below, the detailed analysis is shown in Annex 11-4:

Brazil - Ethanol From Cassava: Economic Rate of Return (%)(120,000 lpd Distillery)

Anhydrous Alcohol Hydrous AlcoholEnergy Cost Energy Cost

Cassava Fuel-oil Wood or Fuel-oil Wood orPrice ($/t) Equivalent Coal a/ Equivalent Coal

Base Case 25 2 19 Neg. 10

Sensitivity Tests 20 9 26 Neg. 1630 Neg. 13 Neg. 3

a! Calculated at 5Q7% oi iuel-oil value.

11.14 Even after assuming that cassava units would be more energy effi-cient without a significant capital cost penalty compared to sugar-based units,cassava units that produce hydrous ethanol would be economic at the mid-1980 oilprices only if cassava is US$25/ton or lower and if the energy cost of these

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plants can be cut in half for the same capital costs, which could be achievedwith efficient tree plantations or with low-cost coal. It should be possibleto reduce cassava production cost to below current levels once the results ofEMBRAPA's research work have been translated into commercial practice.

E. Is the Government Subsidizing the Alcohol Consumer?

11.15 The issue of whether the Brazilian alcohol consumer, primarily theautomobile driver, is paying the full economic cost of alcohol production hasbeen discussed extensively. As the following analysis shows, the automobileuser in Brazil is paying more than the full economic cost:

Anhydrous Hydrous(US$/liter)Y

Economic Retail Price a/ 0.483 0.314

Economic Production Costs

Agricultural Production Costs b/ 0.086 0.086Transport Costs b/ 0.013 0.013Industrial Production Costs b/ 0.038 0.038

Extra Steam/Benzene Requirementsfor Anhydrous Alcohol c/ 0.014

Distribution Costs a/ 0.064 0.064

Total Economic Production Cost 0.215 0.201

a/ Financial prices at exchange rates of Cr$50 US$1.0(para 10.07) shadow-priced by 30%.

b/ See Annex 11-3; cost/liter in first full year of production.cl Anhydrous alcohol requires extra steam and benzene to bring it

to the required concentration (para 4.04). The cost/liter ofthe extra steam and benzene is estimated at US$0.014.

Brazilian Government policy in recent years has been to pass on all increases ingasoline cost immediately to the consumer. As retail alcohol prices are tied togasoline prices, it is expected that the Brazilian alcohol consumer will con-tinue to pay more than the full economic cost of alcohol. Assurances have beenobtained from the Government that it will maintain an alcohol pricing policythat will establish retail alcohol prices to the consumer at levels not belowthe full economic production cost.

F. Project Benefits

11.16 Since the alcohol facilities in the Project are expected to be basedon the same standard technologies (Chapter IV) and since the predominant capa-city being erected is 120,000 lpd (paras 8.03 and 11.01), the economic ratesof return calculated in the Chapter for the standard sub-projects are con-sidered reasonable approximations of the rates of return on the ProductionComponent of the Project. On this basis, 95% (in volume of alcohol production

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from the 244 sugarcane-based facilities) of the component is expected to yieldan estimated economic rate of return of between 17-21% while the remaining9 cassava-based units combined would have an estimated 10-16% rate of returnusing wood or coal as distillery fuel source with the economic cost of cassavabetween US$20-25/ton. On the basis of gasoline prices based on mid-1980 crudeoil values and on the assumption of 3.0% p.a. increase in gasoline and petro-leum prices in real terms (para 11.04), the output of the Production Componentwill save Brazil, on the average, an estimated US$1.3 billion per annum net ofthe foreign exchange production costs (fertilizer, insecticides, lubricants,etc., used in the agricultural production) and servicing of the Project's foreignexchange debt. Over the 20-year economic life of the Production Component, thetotal net foreign exchange savings is estimated at about US$32 billion inmid-1980 prices.

11.17 In addition to the above benefits, the Production Component willgenerate employment both in the agricultural and industrial/services sectors.Net incremental employment in agriculture cannot be estimated accurately untilproposals for the siting of the new distilleries are known. Where the new sugar-cane areas are mechanized and in areas where they might eventually compete withfoodcrops and agricultural small enterprises on flat lands, the net agriculturalemployment impact would be neutral or negative. If, on the contrary, they arenon-mechanized and are established on pastureland, job creation may be substan-tial. Due to the nature of the Project, data available at this time does notpermit judging yet what mix of land sources is likely for the agriculturalfacilities included in the Project. In the industrial sector, some 57,000 directpermanent jobs are expected to be created in the operation of the 253 distil-leries in the Project; an estimated 130,000 indirect jobs are also expected to becreated through (i) production of agricultural and distillery equipment to meetthe Project's requirements, (ii) conversion of some 500,000 cars to operate onhydrous alcohol; and (iii) production of new automobile parts unique to all-alcohol cars (e.g., tin-plated fuel tank, fuel pre-heating system) by automobileindustry suppliers. In addition, the Technology Development Component is ex-pected to create net professional jobs of about 1,500 while another 2,000-3,000jobs would be created in other services related to the Project (e.g., distribu-tion, regulation enforcement, quality control, banking services).

11.18 The Project will also generate substantial non-quantifiable benefits.Brazil's equipment manufacturing industry is currently underutilized. Theindustry, which is quite competitive, is expected to supply substantialportions of the Project's equipment requirements (alcohol distilleries,agricultural equipment, alcohol storage tanks, etc.) thus increasing itscapacity utilization. The Technology Development Component of the Project willhelp put Brazil in the forefront of biomass renewable energy technology, thusenhancing Brazil's opportunities for exporting its knowhow in this area toother countries. Finally, the Monitoring and Evaluation System will provideBrazil with an effective tool for planning the future development of theAlcohol Program by taking into consideration its impact on the agriculture andenergy sectors.

XII. AGREEMENTS

12.01 The following major agreements and assurances have been obtained fromthe Government, Banco Central, CENAL, STI and FINEP:

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A. From the Government that it will

(a) ensure that under the Project, (i) alcohol projects will not belocated in traditional sugarcane growing areas except when sponsoredby small-farmer cooperatives; and (ii) should the Bank determine thata production sub-project under would have, or is having a materialand adverse impact on employment, land ownership by small farmersor rights of tenant farmers to land, food crop production or theenvironment, Bank financing would be suspended (para 7.21);

(b) cause CENAL to design and implement a Monitoring andEvaluation System for the National Alcohol Program (PROALCOOL),furnish copies of the system's reports to and periodically discussthe findings with the Bank (paras 8.09 and 8.10);

(c) (i) cause its agencies to appraise Project sub-projects in accordancewith agreed appraisal criteria and in accordance with relevantBrazilian legislation; (ii) introduce economic evaluation in theappraisal criteria for production sub-projects by December 31, 1981;and (iii) inform the Bank of any significant changes in the criteriaand exchange views with the Bank at least once a year on their adequacy(paras 6.08 and 8.11);

(d) ensure that sub-projects included in the Project conform to satis-factory environmental standards and regulations and that the institu-tional arrangements for their enforcement will be maintained andadvise the Bank of any significant change in the regulations and thearrangements for their enforcement (para 8.14);

(e) provide or cause to be provided, as promptly as needed, all necessaryresources to complete the Project (para 9.03);

(f) exchange views with the Bank from time to time, and at least oncea year, on the adequacy of interest rates applicable to PROALCOOLlending operations and reduce, and gradually eliminate, interestrate subsidies on PROALCOOL loans pari passu with reduction andelimination of interest rate subsidies on similar long-term loans(para 9.05);

(g) cause its agencies to employ agreed procurement procedures for sub-projects financed under the Bank loan (paras 9.07 and 9.09); and

(h) establish an alcohol pricing policy that will (i) maintain ex-distillery alcohol prices paid to the producer at levels that willenable sub-project sponsors operating efficiently, to generatefunds sufficient to service their debt, cover all their other costsand earn a reasonable return on their equity, such prices to beadjusted periodically to reflect changes in the valuation of thesponsors' assets and production costs, and in interest rates onPROALCOOL loans; and (ii) establish retail alcohol prices to theconsumer at levels not below the full economic production cost(paras 10.06 and 11.15).

B. From Banco Central do Brasil that it will

(a) finance sub-projects under the Project approved in accordancewith appraisal criteria agreed between the Government and theBank (para 6.08, 8.11 and 8.14).

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C. From CENAL that it will

(a) appraise each sub-project in the Project in accordance withappraisal criteria agreed between the Government and the Bank(paras 6.08, and 8.11);

(b) design and implement a Monitoring and Evaluation System for theAlcohol Program, furnish copies of the system's reports to andperiodically discuss their findings with the Bank (paras 8.09 and8.10);

(c) prepare quarterly progress reports on the Project and in-depthannual reports on the entire Alcohol Program based on the findingsof the annual monitoring activities (para 8.15); and

(d) ensure that procurement for items for sub-projects to be financedby the Bank under the Project follow arrangements agreed on with theBank (paras 9.07 and 9.09).

D. From STI and FINEP that each will

(a) present to the Bank for review its projected annual program oftechnology development sub-projects (paras 8.04 and 8.15);

(b) appraise technology development sub-projects in accordance withcriteria agreed with the Bank (para 8.13);

(c) seek prior Bank approval for any individual technology sub-projectwith a cost larger than US$1.0 million (para 8.13);

(d) prepare quarterly progress report on the Technology DevelopmentComponent of the Project (para 8.15); and

(e) follow procurement arrangements (for technology development sub-projects) agreed on with the Bank (pare 9.09).

12.02 Presentation of satisfactory designs, and conclusion of satisfactorycontracts with suitably qualified independent consulting organizations forcarrying out the monitoring and evaluation activities are conditions of loaneffectiveness (para 8.08).

12.03 The Project is suitable for a Bank loan of US$250.0 million equivalentfor 15 years, including three years of grace, at the standard interest rate tothe Federative Republic of Brazil.

Industrial Projects DepartmentApril 22, 1981

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ANNEX 1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

GLOSSARY OF TERMS USED IN THE REPORT

Anhydrous: Dry, without any contained water in physical orchemical combination. However, anhydrous ethanol(also called absolute alcohol) usually contains upto 0.7% water in physical combination.

Hydrous: Contains water in physical or chemical combination.Hydrous ethanol (also called rectified spirit) containsusually about 6% water.

Ethanol: Ethyl alcohol, or alcohol in common parlance. Producedby fermentation of simpler ;sugars (glucose and canesugar); it can also be produced by conversion ofcarbohydrates (starch) or cellulose materials intosimpler sugars followed by fermentation. Fermentationin this context is the process in which a particularstrain of yeast is introduced into the glucose baseto convert it into ethanol. Ethanol can also be pro-duced synthetically from certain chemical feedstocks.

Saccharification: The process whereby certain carbohydrates and complexsugar molecules (e.g., cellulose) are broken down tosimpler sugar (glucose) molecules.

Denaturant: Additive to prevent or discourage use of product otherthan intended. Methanol or fusel oil, for example, areused to denature ethanol to make it unfit for humanconsumption by imparting a disagreeable odor to theethanol.

Fusel Oil: Heavy, acrid,oily residue left after final separationof ethanol from water.

Stillage: Residue left after initial concentration of alcoholfrom fermented mash. Contains water, fibrous and mineralmatter.

Combustion Efficiency: Measure of the extent of thermal energy (contained inthe fuel) converted into useful heat or work. Ininternal combustion engines, efficiency depends on theextent of conversion of fuel to work as affected bythe temperature, pressure, and amount of oxygen presentin the engine cylinder.

Hydrogenation: The process of treatment with hydrogen for removal ofundesirable impurities such as sulfur, oxygen and nitrogencompounds or for saturating certain reactive moleculesin the product for better stability.

Industrial Projects DepartmentApril 1981

lb -

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

FLOW DIAGRAMS OF ALCOHOL PRODUCTION FROM SUGARCANE AND MANDIOC

SUGARCANE MANDIWH Q HOOTS L

DccA ^tlON _TLAIIOL 94

ANHYDROUS ETurANOL cooILLAG FS NL Ot LIICI

JUICE~~~~~~~~~~~~~~ tlOH C A1OHIOttc

INTAATIOA _fOU I * O r - P|ODUCTION OF ALcOHOL

i OM |UOARCANE PRUIIOM MAtJDIOC j PARATIO

.~~~~L STIPNI

SOURCE: Cento De Tech o (Bra)ANIYDROU IT TILLAE

t _ X fi @ * _ - - 0~~~~~~~~ ETHANOL 94I

| | - * 0 ANHIYDROUS ETIA.U0L S TILLA4EfSOIL

0 *Q ~~ETHANOL 94X1'

l t ~~~FU9fL OIL

FIGURE A - PtlODUCtION OFrAICOlOL 111OURE A- PAODUCTIOII Of ALCOHOL

fRO no UOARCANE .FROM MAIIDIOCSOURE: Centro De Technologia Promon (Brazil)

Industrial Projects DepartmentApril 1981

BRAZ0TI - AlCO0110, .900 diO11AS E81003 1D1ELOP1E8 PROJECT-

-sti--eed Ba9-e of Addti-tnl Alcobel y -oy11on Facilitiesto Ileet A,,,,oc Tergets to 1987

-------- 1981-85 P o o1- --------- 1986-88 1'oogra--

190O 1961 L982 1983 1984 1985 1986 1987 1988

A. A-,val Alcohol 2110-. 1, lI03c f 190to- 3,800 9,700 5,5790 6,700 8,500 10700 11, .079 13,300 14,500

9 ttodoootloo 7990 9

-o,2

(') 8y,,8,,ooit,, to,, frme ltay eoosto.,goC 801,, 4100hol 1-0g9.9 oooo.od .o - pe-d t 1000) 903 903 903 903 903 909 q03 03l 903991) ' opproted 1975 9nd 197L 9bv 1 ,-TdA hOWI (70.,--d otoop-el9 100019 1,582 1,582 1,582 1,582 1,582 1,582 1,582 1,582 1.382

70013 "a 1971 ' sy ho BO/bo 0081 taso,ed op9reti.g 891, In bO1, tOor. 8499.,o00 862 1,231 1,231 1 ,231 72301 IZ31,23 1 1,00 ,31 1.23'13) " ' " " " !576 '',o ' (.OebUld Up'99bi008 715 19 0190, 95Y ip1 0581. 10OL 8499 09.29) 755 950 0,007 1 .9997 1,90 17 1,7077 007 1.007 1,907

(97 0l , 71973 9assoooqd lyoratiog 570 7,, 0980, 800 9 1982 tod 10001 tbe0elOtefl - 326 591 699 h50 890 657 857-1 6(oil ' " 198071109,1 Jol 0 hy PdOAi CL01 Oasotd operotiolg 391 to 1982, 75X, 0in 19WI, eod

1708her7afer) - - 470 705 940 949 949 942 940

09t600tedtoupply ftom, tofetiogi.Opprovo 9 PoOl Otto7 4,002 4,988 2,174 6,089 8.313 0.315 6,315 6,315 66315

0. Soplueeo (tOloftoitct 09 be 4,1 -0 +3,2 4+9=8 927=;- 940 940

0. 01999802 Sumber of 0acil!Li-S b; oooad to ho 0,80tr,1m LooNt 09001019-

(il 2Octi091999t, gZ22SL'9 9801,_9.08-90ug99099-99e95s 53 80 101 18 04s-oce .o.o-haeed 2 9 4 0 2

2T91 Ab-nIe LIo9e9eot53 9mmber nf oooo 1l29,0001207 00119000.09 Ooc-io.9 29 93 71 0-9 76

lii) 09001,199t090 Land7 Areq0 Rooo±99 to Otodool Roo 9009900.90 79997799 7907

- 9l 0t1h99n 7-t99 8ed ,17 _ he 7e 4 7/day d-0ci1-10y9 923.3 488.0 87. 009.6 031.1-ocessveo (Rss med 05,920 9., 799 120,90C 11d79 7o.1011oto9 30.0 450 0 802 1. 0 30 0

T9081 009-9) 19r -d'e9t92 Lsnd ArR 39q9019d a23. 58280 677_= 7A9: 4441±4

19 bolgarooeodee1od 0109899 19 expeoted 89 prooode choot 10.2 hoIl,oo liters (915.97 toogeol bvo1985, ood leseete e9 535 rillioon Approocle fqq dheoillelee heced 91 eeoh of 09 e raw maottlerb er ct expeoted I-e5e3 tn the Ptoge, m_

Yheoot,be ofdteritoetoerech it - -teOaIol -d -od-oOo- b-ld-lp isoOoeh this ,,Ilgool b1099g9,c99.haeed dhettler RecaASc.d toeyertee lS8dco-eoyeoe which he theeveecte forthe 01oOgeo-ptoOooing9cgioeeof OteefO. fhoeeoo,ol prodoothoo of - 020o,090 19t9097.9y logo,ooot-10997 (colLily mt thtt boase to 21. 6omllte iqttliers Wo cadocaV dietil

tlry Os aperAoinSon 00 cmmearoll 9001009s yet. thec,1oooeal eopeoetltoe, based mnc, eooetnteiR

oocohabil ity cod picot erganieotlon, is that tlooy ooold tT900t 898 393 Ocyt o 9990. It tOOt aralyste, they eye ae909e90 10 Iotrate 89 3699 dcye 9 7890, 180191 99 99,1991 prodottioo olpoolty of 36 0101699 160,1,1 Lot a 120,900 Aittee/dey 'lecOltey. The900999e99t9t I 184081099r09700890both egarcaoe-bse9d cod tee,aoa-hcaod

9dOe 9000999 8 ltoeopeae at 601 the fleet yeao. 90/0 ohe seolod Oeer eod 0202 thereeftet, cc ehoet, be09,1 Ic lite wtett 849 0Oo,tttiooe 0epote7 hy Ohe

9i9b0 Led Ogrolodl ..ol h,-ol- ',b-r

booberof 0700cO9leO9ee 8a,o,hedoa be Ln Stre=m 998 P,196000069 Bothd-Lt(120,009 OlOcy equoiv )

1989 W,,eboo 19g93 _984 0983 1988 1967 99886 6aLtalit 53 {6}-LtOt) 696 7807.7 0,030 100001 1,844 9)00,7} 7,144 (19991.9 1,144 00008,7 1,1844

C35sL va s {h()/ )~ ~ ~ 5, 79879 ) 5 bS 0, (IOX 7Z1007,) 72 910991 72 (000OX7 72Totcl 35,, 123 A.O9S,2 - 1td-§ -Pi6 722i6

1984890990909. 90 96977 0.038 79097,1 1.593 (100X2 1.728 998091 1,028 900170 1.328Ocaeoooa 74999 65 9980) 97 (1008,) 106 912007 138 IIDO~7 108D

Tolal d3 1 101 1 852 1 836 1 836 1 36

St8dro- 531 (609,7 0,493 1999.9 2,057 910917 2.397 19079.1 2.397C,1ee999, 0 7h071 86 (9029 030 (12027 1L44 (1005, 1144

To-l 1M 1.924 % __ A,47 0,541

Soh-tolaR total New tooolobooo.19008807 00 eoteL 00 7 bollionlotettl 0 985

9,,0

ateo,,e 044

25q7 iJ~~~~~~~~~~~439f2 3A334 4e423 _____

1986Oogaoooe- 19 (60X) 099 (990X) 350 91009.1 588

Ta-co0 1 (60X) 09 (9077 32 (1007, 38

Total~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~lo 195 1252 1,236 1,836

tooci ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~(..) L48 ( 1. 2, 5 7 2 37 404-) 2,~

1,524 ~~~2,287 2±244254

1987 Pogcooeo.e . 04 96091 9S9 (9.0X) 1,438

10987 76 1090 1,50Tvtsl (60v r.cli9e in0% 1,438 Pow

motelan 336otbtSe,o410 Tooc

3gR8 60077 7,520

April Z981

- 58 - ANNEX 5-2

Page 1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

DETAILED CAPITAL COST ESTIMATES OF

PRODUCING UNITS

1. The detailed capital cost estimates of the producing units are basedon 120,000 liters/day autonomous facility. The capital cost estimates exclude thecost of land, consistent with PROALCOOL requirements.

I. Detailed Installed Cost Estimate - 120,000 liters/day Sugarcane-Based Facility

2. Distillery Unit. The installed cost of a 120,000 liters/day sugarcane-based distillery unit, including physical contingency but excluding interest duringconstruction, is estimated at US$9.48 million equivaLent (Cr$474 million) inmid-1980 prices. Distillery units in Brazil are supplied on a lumpsum-turnkey basisand the estimate is based on this assumption; however, a 5% physical contingencyhas been added for possible variation in costs for p:Lants located in relativelyremote areas. The detailed cost estimates are presented below. They are basedon a review of a sample of recent alcohol project proposals submitted to CENALfor approval,and extensive discussions with Brazilian engineering firms and equip-ment manufacturers involved in alcohol systems supply. The estimates were alsochecked against the June-July CENAL investment matrix used for project approvalsand other data available to the Bank.

Distillery Unit (120,000 liters/day) - Detailed Cost Estimates

--------- Mid-1980 Prices ---------Cr$000s US$OOOs

(Cr$50.0 = US$1.00)Local Foreign Total Local Foreign Total %

Project Preparation 2,000 - 2,000 40.0 - 40.0 0.4

Engineering & Management 20,000 - 20,000 400.0 - 400.0 4.4Civil Works (incl. Housing) 43,890 18,890 62,700 877.8 376.2 1,254.0 13.9Machinery & Equipment

(incl. Installation) 178,320 138,900 317,220 3,566.4 2,778.0 6,344.4 70.3Equipment Freight 4,293 1,007 5,300 85.9 20.1 106.0 1.2

Effluent Treatment Equipment 22,620 6,380 29,000 452.4 127.6 580.0 6.4Laboratory 5,130 3,420 8,550 102.6 68.4 171.0 1.9Maintenance Workshop 2,905 1,245 4,150 58.6 24.9 83.0 0.9Complementary Utilities 2,132 468 2,600 _ 42.6 9.4 52.0 0.6

Base Cost Estimates (BCE)mid-1980 281,290 170,230 451,520 5,626.6 3,404.6 9,030.4 1=0.0

Physical Contingencies(5% of BCE) 14,065 8,511 22,576 281.3 170.2 451.5

Total Installed Cost 295A=35 178A7A1 4744096 5,9 07.9 31574.8 94481.2

I

- 59 - ANNEX 5-2Page 2

3. The Brazilian alcohol equipment manufacturing industry which has builtover 250 distilleries, most of them since PROALCOOL, has been expanding itscapacity in anticipation of the increased investments in the Alcohol Program.It is expected that most,if not all,of the distilleries included in the 1981-85program will therefore be manufactured in Brazil. The estimated foreign exchangecomponent (38% of total installed cost) has been based on the imported materials con-tained in the installed distillery unit. The percentage of foreign component and thesignificant imported items in each of the categories are summarized below:

% of Foreign SignificantCategory Exchange Component Imported Items

Civil Works 30% Fuel, cement, indirect importedequipment.

Equipment & Machinery 44% Stainless steel, indirect imported(manufacturing equipment),components.

Equipment Freight 19% Fuel, indirect imported equipment(haulage truck).

Effluent Treatment Equipment 22% Components, indirect importedequipment (manufacturing equipment).

Laboratory 40% Glass, stainless steel, instruments.

Maintenance Workshop 30% Components, instruments.

Complementary Utilities 18% Components.

4. Sugarcane Agricultural Facility. The capital cost for the associatedagricultural facility for a 120,000 liters/day distillery is based on the averageyield per hectare and an average of 70 liters of alcohol per ton of sugarcane.Due to differences in labor and soil productivity and harvesting regimes in thedifferent agricultural regions of Brazil, the average land area required to supporta 120,000 liters per day, based on current yields, varies between 5,657 ha in theSouth to 8,571 ha in the Northeast, as shown below:

120,000 liters/day Sugarcane-Based Distillery

Associated Sugarcane Plantation

AverageAverage Alcohol Alcohol Yield Cropping Total LandYield Yield per ha Season Requirements

(tons/ha) (l/ton) (liters) (days/yr) (ha/yr)

Southeast 50 70 3,500 180 6,171Northeast 40 70 2,800 200 8,571South 50 70 3,500 165 5,657

Source: IBRD and EMBRAPA.

- 60 -

ANNEX 5-2Page 3

Although the land area requirement varies from region to region, based on dis-cussions with the Sugar and Alcohol Institute (IAA) and CENAL, it was establishedthat the variations in the total capital investment, excluding land, are marginal.A sample of recent project proposals submitted to CENAL for approval confirmedthis. For estimating the investment cost of the 1981-85 program, an average of6,100 ha per 120,000 liters/day distillery has been assumed, with a 10% physicalcontingency to cover possible variations. The total capital cost, includingphysical contingency but excluding the cost of land, is estimated at US$3.2 million(Cr$158.0 million) in mid-1980 prices. The estimate is consistent with theestimates of COPERSUCAR, the largest sugar cooperative in Brazil, and that ofInstituto do Economica Agricola (IEA), an organization specializing in agriculturalproduction costs. The detailed estimates are presented below:

Agricultural Investments Associated with 120,000 liters/day Distillery Unit(in mid-1980 prices)

Cr$000s US$OOOs(Cr$50.0 = US$1.00)

Local Foreign Total Local Foreign Total %

Land Preparation 25,100 6,275 31,375 502.0 125.5 627.5 21.8Housing 14,720 3,680 18,400 294.4 73.6 368.0 12.8Civil Works 6,300 2,700 9,000 126.0 54.0 180.0 6.3Heavy Equipment (Tractors.

Canecutters, etc.) 17,340 11,560 28,900 346.8 231.2 578.0 20.1Trucks 22,020 14,680 36,700 440.4 293.6 734.0 25.5Light Equipment 7,200 4,800 12,000 144.0 96.0 240.0 8.3Implements & Tools

(Sprayers, etc.) 3,702 2,468 6,170 74.0 49.4 123.4 4.3Laboratory 660 440 1,100 13.2 8.8 22.0 0.9

Base Cost Estimates (BCE)mid-1980 97,042 46,603 143,645 1,940.8 932.1 2,872.9 100.0

Physical Contingencies(10% of BCE) 9,704 4,660 14,364 194.1 93.2 287.3

Total IQ6.746 51.263 158,009 2_134.9 1-025.3 3,160.2

The foreign exchange cost represents 32% of total cost and consists of indirectimported items. The estimate is consistent with estimates of components withcomparable features in rural development, projects in Brazil. The percentage offoreign component and the significant imported items in each category aresummarized below:

- 61 ANNEX 5-2Page 4

% of Foreign SignificantCategory Exchange Component Imported Items

Land Preparation 20% Fertilizer, fuel, insecticidesHousing 20% Cement, indirect imported inputsCivil Works 30% Fuel, cement, indirect imported

equipmentHeavy Equipment 40% Indirect imported equipment, componentsTrucks 40% Components, indirect imported equipmentLight Equipment 40% ii if It

Implements & Tools 40%Laboratory 40% Instruments, indirect imported equipment

II. Detailed Installed Cost Estimate - 120,000 litersJday Cassava-Based Facility

5. Distillery Unit. Considerably less informatjion is available on cassava-based distilleryunits than for sugarcane-basedunits because of the relative newnessof the technology in the Alcohol Program. Eleven cassava-based alcohol producingfacilities have been approved by CENAL as of June 1980. All are still in implemen-tation. Like the sugarcane-based unit, cassava-based distilleries in Brazil arealso offered on lumpsum-turnkey basis. Capital cost data are based on discussionswith equipment manufacturers, owners of cassava-based facilities in implementationand review of CENAL's June-July, 1980 investment cost matrix used for proposalapproval. The mid-1980 base cost of a 120,000 liters/day cassava distillery isestimated at US$10.84 million (about Cr$542 million), about 20% more than for asugarcane-based facility of similar capacity. The 20% base cost differential isdue to additional front-end equipment needed in cassava distilleries to accommodatethe washing, peeling and liquefying of the starch to break it down to fermentablesugars before entering the point where sugarcane-based plants begin. The percentageof indirect foreign exchange cost is assumed to be the same (38%) as for a sugarcane-based distillery. Physical contingency is estimated at 10% in view of the processtechnology's relative newness in Brazil.

120,000 I/day Cassava-Based Distillery Unit(mid-1980 Prices - OOs)

Cr$ US$Local Foreign Total Local Foreign Total

Base Cost - mid-1980 337,584 204,276 541,860 6,751.7 4,085.5 10,837.2

Physical Contingency (10%) 33,758 20,428 54,186 675.2 408.5 1,083.7

Total Installed Cost - mid-1980 371;362 224,704 596.046 71246.9 4.494.0 11_920.9

- 62 -

ANNEX 5-2Page 5

6. Cassava Agricultural Facility. The estimated investment cost of theagricultural facility, excluding land, is based on mission estimates of US$75.0/haand the current average alcohol yield of 2,400 liters per hectare. Based onexperience with the agricultural system and the expected plant and raw materialorganization, owners of facilities currently in implementation expect to operatethe distillery 330 days a year. For this analysis, 300 operating days/year or36 million liters per 120,000 liters/day plant has been assumed. The total landrequirement on this basis is estimated at 15,000 ha per 120,000 1/day distillery.A 10% physical contingency has been assumed to take account of possible variations incost. The foreign exchange component is on the same basis as for a sugarcaneplantation for a similar capacity distillery (32%).

Cassava Plantation - 15,000 ha/120,000 1/day Distillery(mid-1980 Prices - OOOs)

Cr$ US$Local Foreign Total Local Foreign Total

Base Cost - Mid-1980 (US$75.0/ha) 38,250 18,000 56,250 765.0 360.0 1,125.0Physical Contingency 3,825 1,800 5,625 76.5 36.0 112.5

Total 42aO5 1i9=800 61.=875 841.5 396.0 1,237.L5

Industrial Projects DepartmentApril 1981

BRAZIL - ALCOHOL, AND BIOMASS ENERGY DEVELOPNENT PROJECT

Lard Use by States and Regions, 1275

Cropland Pasture Cropland andPlanted

Region States Permanent Annual Total Natural Planted Total Pasture(1+2] [4+5] (3+51

(1) (2) (3) (4) (5) (6) (7)(has 000)

North Rondonia 46 148 194 60 164 224 358Acre 3 38 41 54 70 124 111Amazonas 38 167 205 121 72 193 277Roraima 9 18 27 1,325 28 1,353 55Para 137 567 704 1,807 1,230 3,037 1,934Amapa 6 19 25 341 9 350 34

239 957 1,196 3,708 1,573 5,281 2,769

Northeast Maranhao 42 1,014 1,056 2,591 1,218 3,809 2,274Piaui 157 530 687 3,526 172 3,700 859Ceara 1,227 914 2,141 3,522 81 3,603 2,222Rio Grande do N. 517 309 826 1,638 30 1,668 856Paraiba 613 528 1,141 1,866 104 1,970 1,245Pernambuco 307 1,254 1,561 2,385 333 2,718 1,894Alagoas 42 677 719 445 325 770 1,044Sergipe 83 156 239 559 609 1,168 848Bahia 972 1.691 2,663 7,248 3.970 11,218 6.633 a

3,960 7,073 11,033 23,782 6,842 30,624 17,875 w

Southeast Minas Gerais 655 3,325 3,980 27,784 4,147 31,931 8,127Espiritu Santo 334 320 654 1,573 558 2,131 1,212Rio de Janeiro 166 451 617 1,581 278 1,859 895Sao Paulo 1.441 3,739 5,180 4.780 6,576 11.356 11.756

2,596 7,835 10,431 35,718 11,559 47,277 21,990

South Parana 1,180 4,448 5,628 1,684 3,299 4,983 8,927Santa Catarina 42 1,392 1,434 1,977 427 2,404 1,861Rio Grande do Sul 179 5,750 5.929 13,061 712 13,773 6,641

1,401 11,590 12,991 16,722 4,438 21,160 17,429

Center West Mato Grosso do Sul 66 1,209 1,275 15,580 5,213 20,793 6,488Mato Grosso 42 459 501 8,641 2,602 11,243 3,103Goias 77 2,484 2,561 21,713 7,452 29,165 10,013Distrito Federal 4 9 13 87 22 109 35

189 4,161 4,350 46,021 15,289 61,310 19,639

Brazil 8,385 31,616 40,001 125,951 39,701 165,652 79,702

Source: 1975 Census

Industrial Projects DepartmentApril 1981

- 64 - ANNEX 7-1Page 2

BRAZIL - Land Availability and Needs for ApprovedAlcohol Sub-Projects by State and Region - June 30, 1980

Cropland and Alcohol ProjectsCropland Planted Pasture' Approved 6-30-80

State and Region (1975) 1/ (1975) Land Needed 2_(1) (2) (3) 3/1 3/2

(has 000) %North

- Rondonia 194 385 6 .03 .02- Acre 41 111 - - -- Amazonas 205 277- Roraima 27 55 - -- Para 704 1,934 7 .01 -- Amapa 25 34 7 .28 .21

1,196 2,769 20 .017 .007

Northeast- Maranhao 1,056 2,274 20 .02 .01- Piaui -687 859 32 .05 .04- Ceara 2,141 2,222 21 .01 .01- Rio Grande do N. 826 856 29 .04 .03- Paraiba 1,141 1,245 54 .05 .04- Pernambuco 1,561 1,894 93 .06 .05- Alagoas 719 1,044 235 .33 .23- Sergipe 239 848 11 .05 .01-Bahia 2,663 6,633 109 .04 .02

11,033 17,875 604 .055 .034

Southeast- Minas Gerais 3,980 8,127 75 .02 .01- Espiritu Santo 654 1,212 19 .03 .02- Rio de Janeiro 617 895 64 .10 .07- Sao Paulo 5,180 11,756 561 .11 .05

10,431 21,990 719 .069 .033

South- Parana 5,628 8,927 86 .02 .01- Santa Catarina 1,434 1,861 .19 .01 .01- Rio Grande do S. 5,929 6,641 1 - -

12,991 17,429 106 .008 .006

Center West- Mato Grosso do S. 1,275 6,488 49 .04 .01- Mato Grosso 501 3,103 15 .03 -- Goias 2,561 10,013 40 .02 -

- Distrito Federal 13 35 - - -

4,350 19,639 104 .024 .005

Brazil 40,001 79,702 1,553 .039 .020

1/ See Table 12/ Based on yields of 44 ton/hectares in the North, Northeast, and 54 elsewhere.

Industrial Projects DepartmentApril 1981

BRAZIL - Alcohol Production Levels and Proalcool Approved CapacityThrough June. 1980 by States and Regions

Pre-P,roalcool Proalcool Pre-Proalcool Proalcool

Pre-Proalcool Alcohol Plus Pronlcool Approved Pre-Proalcool Alcohol Plus Proalcool Approved

Production Production Approved Capacity Production Production Approved CapacityRegion State Capacity 1979/80 Capacity (6-30-80) Capacity 1979/80 Capacity (6-30-80)

(1) (2) .3) (4) (5) (6) (7) (8)

-------------------- 106 liters ------------- ^------ ---------------------- Percent -----------------------

North Rondonia - _ 18 - 18 - -

Amazona - - 21 21 - - -

Para 2 3 23 21 - _ _

2 3 62 60 ---

Northeast Maranhao - 3 61 61 - - 1 1

Piaui 1 1 100 99 - - 2 2

Ceara - 3 66 66 - - 1 1

Rio Grande do N. - 25 88 88 - 1 1 2

Paraiba - 67 165 165 - 2 2 3

Pernambuco 102 227 388 286 12 7 6 5

Alagoas 36 223 761 725 4 6 12, 13

S,ergipe - 3 34 34 - - -

Bahia - 2 380 380 - - 6 7

139 554 2,043 1,904 16 16 31 34

Southeast Minas Gerais 21 76 303 282 2 2 5 5 U!

Espiritu Santo 10 10 81 71 1 1 1 1

Rio de Janeiro 65 140 307 242 7 4 5 5Sao Paulo 639 2,472 2,816 2.177 71 73 43 39

735 2,698 3,507 2,772 81 80 54 50

South Parana 20 92 404 384 2 3 6 7

Santa Catarina 5 6 77 72 1 - i i

Rio Grande do Sul - - 3 3 - - -

25 98 484 49 3 3 7 8

Center West Mato Grosso do Sul - 14 186 186 1 3 3

Mato Grosso - 10 58 58 - 1 1

Goias 3 7 154 151 - - 2 3

3 31 398 395 - 1 6 7

Brazil 904 3,384 6,494 5,590 100 100 100 100

-J

Industrial Projects DepartmentApril 1981

BRAZIL - Land Use Changes by Farm Size and Area in Crops

(1970-75)

Area in Crops (000 ha)__Number of Farmis (000) %_Ae_i_rps_Oh.

Farm Size (hectares) 1970 1975 1970 1975 1970 1975 1970 1975

Less than 10 2,520 260,2 51 52 599i 5834 18 15

10-49 1,593 1545 33 31 11708 11749 34 29

50-199 557 591 11 12 7439 9039 22 23

200-999 199 209 4 4 6115 8478 18 21

1000+ 37 4]. 1 1 2731 _4901 8 12

All farms 4,906 4,988 100 100 33,984 40,001 100 100

BRAZIL - Sugarcane, Cassava and Annual Crop Area by Farm Size - 1975

All All

Farm Size Sugar Annual Sugar Annual

(hectares) Cassala Cane Crops Cassava Cane Crops

(000 hiectares) percent

Less than 10 584 72 4859 45 4 16

10-49 464 209 9273 36 11 29

50-199 187 275 6801 14 15 21

200-999 59 735 6718 4 39 21

1000+ 13 570 3965 1 31 13

All :ar:ns 1307 1860 31,616 100 100 100 4 X

Source: 1975 Census

Industrial Projects DepartmentApril 1981

- 67 -ANNEX 7-1

Page 5

Distribution of Approved Alcohol Production Capacityin State of Sao Paulo by Sub-Region, June 30, 1980

Region Annex Autonomous Total X

…_________(106 liters)-----------;uiLL Carntral

Campinas 567 10 577 18Ribarao Preto 11.14 171 1285 39

1.681 181 1862 (57)

Western

S..R.P. I 1.75 134 309 10Aracatuba 47 94 141 4P. Prudent --- 158 158 5

222 386 608 (19)

Soutlh Central

Bauru 449 18 467 14Marilia 135 150 285 9

584 168 752 (23)

South East

Sorocaba 32 9 41 1

State 2519 744 3263;/ 100

77 23 100

1/ Substantial cancellations of approved projects in Sao Pauloreduced effective approved capacity by one third to 2,177 (106 liters)as of June 30, 1980. Information did not exist to allocatecancellations among regions of Sao Paulo.

Industrial Projects DepartmentApril 1981

- 68 -ANNEX 7-4Page 6

BRAZIL - Land Use - Sao Paulo by Major Regions - 1978

RegionNorth South SouthCentral Western Central East State

Hectares (000)

Area well adapted tosugarcane 1,823 3,390 1,549 104 6,866

1978 Land Use

,gar cane 802 68 215 58 1,143 7Expcrt at d industrialcropi/ 2/ 728. 554 476 112 1,870 11

-ood crops-/ 183 267 147 417 1,014 62tler cropscorn 301 294 135 242 972 6oranges 263 53 5 13 334 2other 26 33 12 22 93 1

TOTAL CROPS 2,303 1,269 990 864 5,426 (33)

Seeded pasture 1,224 4,228 1, 181 976 46

TOTAL LAND CULTIVATFD 3,527 5,497 2,171 1,840 13,035 (79)

"1atural :-,asture 957- 451 342 1,632 3,382 21

T'GTAL LAND FARMED 4,484 C,943 2,513 3,472 16,417 100

1/ Coffee, soybeans, cotton

2/ Rice, beans, cassava, peanuts

Source: "Rezoneamento das Areas para Implantacao de Distilarias" - Secretaria daIndustria, Comerc'o, Ciencia a Tecnologia Sao Poaulo-l9 7 9

"Substituicao e Deslocumento de Culturas no Estado de Sao Paulo."CEFER/IPT-Sao Paulo

3/ When all alcohol projects approved as of 6/30/80 are considered, the committedarea for present and future sugarcane production in the State of Sao Paulo isincreased from 1,143,000 to 1,363,000 hectares, an increase of 20 percent overthe area planted in 1978.

Industrial Projects DepartmentApril 1981

Land Use - Sao Paulo by Major Regions - 1978

Area Well Land Use - 1978Adapted to Sugar All Seeded Native

Region Sugar Cane Cane Crops Pasture Pasture 2/1 3/3 6 4 2/3

(1) (2) (3) (4) (5)(hectares 000)

North Central

Campinas 510 31.5 805 298 526 .62 .73 .39Ribarao Preto 1313 487 1498 926 431 .37 .62 .33

1823 802 2303 1224 957 .44 .62 .33

Western

Sao Jose doRibarao Preto 1464 42 657 1168 239 .03 .36 .06Aracatuba 710 13 216 1486 22 .02 .13 .06President Prudent 1216 13 396 1574 190 .01 .20 .03 a

3390 68 1269 4228 451 .02 .23 .05

Sout't Central

Bauru 5,86 159 335 498 144 .27 .40 .47Marilia 963 56 (655 683 198 .06 .49 .09

1549 215 990 1181 342 .14 .46 .22

South East

Sorocaba 104 54 741 609 797 .52 .55 .07Sao Paulo -- 2 53 49 303 1.0+ .52 .04Vale do Paraiba -- 2 70 318 532 1.0+ .18 .03

104 58 864 976 1632 .56 .47 .07

Sao Paulo 6866 1143 5426 7609 3382 .17 .42 .21 O

Source: Adapted from - Substituicao e Deslocumento de Culturas No Estudo de Sao Paulo - CEFER/IPT - 1979 andRezoneamento das Areas Para Impantacao de Distilarias - Coverno do Estudo de Sao Paulo - 1979.

Industrial Projects DepartmentApril 1981

- 70 -

ANNEX 7-2Page 1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

ALTERNATIVE ENERGY CROPS

1. Cassava is indigenous to Brazil, and Brazil today is the world'slargest producer of fresh cassava roots. Official government statistics,which must be interpreted with great caution for this largely subsistencecrop, indicate production in 1978 of about 25 million tons on just over twomillion ha. About one-half of this total is produced in the Northeast whileanother quarter is grown in the South. Most of the production in the Northand Northeast is consumed as food for subsistence producers and medium- andlower-income urban dwellers. In the South and Southeast, cassava is alsoconsumed largely as human food, although substantial quantities are convertedto industrial starch or used as a carbohydrate source in animal feed. Asmuch as 20% of total national production may go to non-food uses.

2. The national average cassava yield in Brazil is about 12 tons ha/year,but displays wide variation among states as shown in following table. Esti-mates of average yields at the state level indicate that yields tend to behigher in the Southeast (15.5 tons/ha) and lowest in the Northeast (10.1tons/ha). National average yields appear to have declined marginally inrecent years. Major constraints to higher yields include the presence ofserious diseases (particularly bacterial blight and anthracnose), poorcultural practices and the subsistence nature of the crop which militatesagainst the use of purchased inputs such as fertilizer.

3. Well-focused research on cassava is in its infancy in Brazil,dating essentially from about 1975 when the National Cassava and FruitResearch Station was established at Cruz das Almas (Bahia) under the auspicesof the Ministry of Agriculture's research unit (EMBRAPA). Today some 17scientists are involved in the cassava research program at this center ineight research areas. Some promising results are beginning to emerge,although another two-three years will be required before EMBRAPA will bein a position to release for commercial planting a variety (or varieties) withproven resistance to bacterial blight and which also demonstrates acceptablecharacteristics of yield, starch content and maturation period. Researchstaff are also making progress in identification of cultural practices whichcan improve yields from cultivars which are already widely planted. Fourcultural practices (careful selection of healthy planting material, treatmentof the planting stake with fungicide, planting at the recommended time,planting with appropriate plant spacing), when employed simultaneously, havethe potential of increasing yields from traditional cultivars by up to 30%from existing levels. These practices need little additional cash outlay byfarmers, but do require an intensive extension effort if they are to be widelyadopted. At Cruz das Almas these four practices, used with traditionalvarieties, but without fertilizer, have produced yields of 22-28 tons/ha/year.'Using modern inputs, particularly fertilizer, yields of 30-42 tons/ha/yearhave been realized.

4. Sweet sorghum, a crop relatively new to Brazil, is attractive asa biomass energy source because of: (i) its relatively short vegetativecycle (4-4.5 months), (ii) its amenability to mechanized production andharvesting, (iii) the presence of directly fermentable sugars in the stalks

- 71 -

ANNEX 7-2Page 2

and (iv) the production of sorghum bagasse which can be used as an energysource in processing and distillation. The crop shows adaptability to awider range of soils than does sugarcane and is resistant to moisturestress. Sweet sorghum also produces some grain by-products which couldbe used to offset partly the problems of land substitution by releasing aportion of land currently used for corn production.

5. Because of its short production cycle, three promising options forthe use of sweet sorghum in alcohol production are: (i) the cultivation ofthe crop in sugarcane areas, using lands which are temporarily idle duringcane renovation; (ii) growing sorghum on lands adjacent to sugarcane forprocessing during the off-season when sugarcane is not harvested; or (iii)substituting sorghum for corn to permit sorghum grain to displace corn grainfor animal feed and use the (sugar) stalk for alcohol production. Systematicagronomic research on sweet sorghum began in Brazil only in 1977 at EMBRAPA'sNational Research Center for Corn and Sorghum at Sete Lagoas, in the State ofMinas Gerais. Even less work has been done in cropping systems researchinvolving sweet sorghum in association with sugarcane or other crops and onthe commercial utilization of the crop for alcohol production. In Brazil'sNational Trials for Sweet Sorghum, 1977-78, stalk yields averaging about 45tons were registered at 5 locations, with grain yie:Lds of nearly 2.5 tons/ha/crop.

6. Under present yields in Brazil, sweet sorghum, with two crops peryear, could produce considerably more alcohol per year than sugarcane andalmost twice as much as cassava. If the sorghum grain (starch) was alsoconverted to alcohol, these yield advantages would be even treater. Evidencesuggests that the energy balance for sweet sorghum may be more favorable thanfor sugarcane. Expanded research is required to realize more fully theenergy potential of this crop. In addition to EMBRAPA's work in varietytrials and cultural practices, there is need to focus more effort on crop-ping systems to determine the feasibility of growing sweet sorghum in asso-ciation with other alcohol and food crops to intensify land use and extend thesugarcane milling season.

7. The Babassu Palm is indigenous to North-Central Brazil and is foundin nine States where it grows in uncultivated stands of varying densities. Thepalm covers some 15 million ha in Brazil, of which about 10 million ha are inMaranhao State. Because of its extensive area and its location in some of thepoorest regions of the country, the babassu palm is frequently viewed as a cropwith considerable potential for generating socio-economic benefits in more dis-advantaged areas. Despite these promises, relatively little is known of boththe agronomy of the crop and its economic potential. It grows best in a warm,humid climate on deep, heavy clay soils, although it demonstrates considerableadaptability to other agro-climatic conditions.

8 Brazil's large quantities of agricultural wastes and residues containan energy potential equivalent to 40-50 million tons of petroleum equivalent(tpe) per annum, although the portion which can be utilized commercially is verymuch smaller. A major difficulty with many of these materials is the high costof aggregating supplies for conversion relative to their energy content. Thethree most promising waste materials are forest industry residues, alcoholstillage, and sugarcane bagasse, with an energy content of about 17 million tpe.In addition, livestock wastes represent a large energy potential, principallythrough conversion to methane (biogas).

Agriculture and Rural Development DepartmentDecember 1981

- 72 - ANNEX 8-1

Page 1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

TERMS OF REFERENCE FOR MONITORING SYSTEM

A. Introduction

1. At present, Brazil's National Alcohol Program (PROALCOOL) hasa loosely defined monitoring system which in some areas is insufficientfor Program management decision-making and for properly feeding intoProgram evaluation work or long range planning. This Annex describesthe present PROALCOOL system and suggests ways for further improvements.

B. Existing Situation

2. The present Alcohol Program is characterized by:

(i) Private sector initiative, with:

- financial subsidies and price controls;

- controls against excessive substitution of sugarcane forfeed crops; and

- demonstrated financial viability of company and project;

(ii) Uniform alcohol pricing throughout the country;

(iii) No Government effort to control or influence regional dispersionof alcohol production;

(iv) Principal focus on rapid production increase;

(v) CENAL operates only as coordinating body; and

(vi) No systematic monitoring of effects of the Program on the agri-cultural, energy and transport sectors.

3. In practice, specific sub-projects are promoted by private companiesbased on their situations of location, experience, profit expectations, etc.Each proposed sub-project is reviewed by CENAL (and IAA or STI) for technicalaspects with simultaneous appraisal by local banks (and the Central Bank)for financial aspects. The local bank has responsibility for final projectapproval largely based on financial factors. This system is efficient forindividual projects and for rapid production expansion with only technicaland financially viable projects and sponsors being approved. The procedures,however, do not provide for a thorough review of the project's impact onenvironment, land use, cropping pattern and land ownership concentrationissues. They also do not allow for a true economic calculation of the

- 73 - ANNEX 8-1Page 2

sub-project, since no assessment is made of (i) alternative usesof the land devoted to cane, (ii) alcohol distribution and transportcosts for the crops that have been displaced, and (iii) other economicand social costs.

4. Indeed, since the Government sets financial prices foralcohol uniformly across major regions, guarantees the off-take ofalcohol and bears alcohol transportation costs, the investors (and theauthorities) respond to artificial financial signals when deciding aparticular project. They ignore the economic costs of distributingthe alcohol and displacing alternative crops.

5. Under the present situation, it is also very difficult tomonitor PROALCOOL's impact on land use. Because of land availability(particularly pasture land), it has beer assumed that most of thedisplacement will, at the margin, be that of cattle. But again, theonly possible monitoring is ex-post, and by then measurements ofPROALCOOL's impact on supply and price for competing crops are blurredby various exogenous factors such as weather, world markets, etc.

6. Given the above environment, the Alcohol Program tends toresult in:

(i) emphasis on sugarcane produced on large (and annexed)systems;

(ii) expansion by existing sugar/alcohol firms;

(iii) expansion in areas with reasonably fertile low-costland available in large tracts;

(iv) minimum concern for regional dispersion in develop-ing alcohol production capacities to correspondto local gasoline consumption or minimum concernfor regional income disparities. Therefore, someareas are not served by local production. Thisproblem is not yet serious since each area can, atpresent, absorb the level of production in theregion through a combination of mixed (gasohol)and pure alcohol;

(v) inadequate attention to land use patterns andpossible effects on food and export crop productionespecially in the highly productive crop areas of theNorth Central area of Sao Paulo State and to theemployment problems associated with the Northeast.In the long-run, the present system may well resultin misallocation of land resource use, substantialsocial subsidies for transport of alcohol and/orpetroleum and under-production of other agricul-tural crops; and

(vi) superficial attention to proper methods and policingof disposal of effluents.

- 74- ANNEX 8-1

Page 3

C. Monitoring Proposal

7. The Bank, as part of its loan, is assisting CENAL in thedevelopment of a Monitoring System (as well as independent evaluationstudies--see Annex 8-2) that would help address the above

issues on an ongoing basis and provide the Government with a system thatwould serve as a more effective planning tool for future development of theAlcohol Program and as it relates to other sectors.

8. The scope of the monitoring system would includea determination of land use by region considering productivity andneeds for both energy and food and export crops and reflect relativetransportation costs to connect deficit and surplus regions withalcohol, vegetable oil (diesel substitute), petroleum products andmajor agricultural commodities.

9. The system would require information in the following areas:

(i) Historical Analysis

An analysis of historical data showing, on regionalbasis, petroleum product consumption, alcohol productionand consumption, location of distilleries, sugarcane pro-duction and area, other energy crops such as cassava,food and export crop production and prices;

(ii) Energy Consumption Projections

A breakdown of future yearly consumption of petroleumproducts and alcohol on regional basis and total majorregional consumption centers, and gasoline/alcohol dis-tribution costs from refineries/distilleries to theseconsumption centers. Analysis of resulting petroleumproduct mix on refineries, oil imports/exports, statusof diesel/fuel oil substituion program;

(iii) Energy Pricing Analysis

An analysis of pricing of petroleum/alcohol productsand the relationship to consumption/production, con-servation level desired, subsidies (and overallimpact on energy and agricultural sectors);

(iv) Alcohol Production Possibilities

State by state land utilization patterns. Transporta-tion and production economics of major agriculturalproducts, including cane and alcohol;

- 75 -ANNEX 8-1Page 4

(v) Optimal Location of New Distilleries

State by state number of proposed new distilleries andpotentially resulting relocation of food and exportcrops (including across state lines) so as to minimizeoverall production and transport costs for petroleumproducts, vegetable oils, alcohol and agriculturalproducts. Also potential impact of proposed newdistilleries on land and income concentration as aresult of employment (both permanent and seasonal),food crop production and the land tenure systemsassociated with the small peasant economy, particu-larly that of the precarious tenants (sharecroppers,"posseiros", etc.);

(vi) Environmental Impact

Analysis of effluent treatment of existing and pro-posed distilleries, including assessment of impacton environment of production facilities. Developmentof new programs/investments for efficient controland utilization of waste products as may be needed;and

(vii) Recommendations

The data collected by the system would be used toformulate specific recommendations on policy, AlcoholProgram targets and on any corrective measures neededregarding impact on agriculture and petroleum and trans-port sectors and the environrent.

10. The initial study should help enabLe the authorities toevaluate ex-ante the impact of new distilleries on the energy andagricultural sectors, and the associated alcohol transportation costs.It would indicate to the authorities the overa:ll benefits or costsassociated with approving each additional alcohol project in a particu-lar state, and the likely response of farmers ias they are confrontedwith new markets and prices for different crops, including cane.

II. Such a system would also help the authorities in settingappropriate alcohol and cane prices for autonomnous distilleries indifferent regions, especially those serving isolated markets. Alcoholand cane prices are now uniformly linked to sugar prices. The pro-posed study could indicate alcohol economic values, based on localgasoline opportunity values.

12. By helping set up explicit alcohol consumption targetsstate by state, and by linking them to agricull:ural production poten-tials (including cane) in the different regions, this study wouldhelp the authorities to orient the implementation of the AlcoholProgram and minimize unnecessary agriculture and transport economic

- 76 - ANNEX 8-1

Page 5

costs. Finally, although it would help the Government monitor thedevelopment of the Program, it would not a priori, lead to a reduction

of the private sector's central role in implementing the Program.

13. A report would be prepared under the sponsorship of CENAL

but initially should be largely executed by an independent consulting

group with the full cooperation of the Ministries of Agriculture, Mines

and Energy and Industry and Commerce, STI, IAA, CNP, PETROBRAS and other

agencies. A quarterly progress report would be prepared (largely along

the lines of the existing CENAL monthly report but with more analysis

including crop production and petroleum product data). A full updating

report would be prepared annually. Monitoring data would also be made

available to independent consultants or agencies contracted to carry out

evaluations of various aspects of the Program.

D. Suggested Operational Structure

14. The agricultural part, which should rely highly on theMinistry of Agriculture and IAA, would include the following areas:

(i) Determination of manageable sub-regions of Brazil

based on broad soil, climate, rainfall, and topo-graphy criteria, to allow specification of homogenousagricultural production activities for major crops

in each region;

(ii) Determination of land capability (productivity) andquantity in each region. There is also a need to

include set-aside acreage to account for minor cropsand subsistence production;

(iii) Determination of appropriate demand functions formajor agricultural products;

(iv) Determination of regional needs for specific agri-cultural products and liquid fuels;

(v) Determination of alcohol processing costs and asso-ciated input needs by feedstock source (or combination)and processing plant size;

(vi) Determination of net employment effects based onsources of land to energy crop production and

productivity indices.

E. Petroleum Energy

15. This section would rely on CNP and PETROBRAS for most of thedata generation and analysis. Information needed would be:

77 - ANNEX 8-1

Page 6

(i) Future supply/demand of petroleum products by region;

(ii) Distribution costs on regional basis;

(iii) Analysis of fuel oil, gasoline and diesel substitutionprograms, and impact on Alcohol Program:, and

(iv) Impact of prices on domestic consumption of petroleum,level of substitution, and costs of imports.

F. Environmental

16. This section should rely, in part, on fe!deral and statelevel environmental agencies. Data collected would include:

(i) Audit of effluent disposal practices and environ-mental impact of existing distilleries;

(ii) Assessment of future projects in regard to effluenttreatment;

(iii) Development and evaluation of alternative disposalsystems and/or recycling into useful by-products; and

(iv) Overall assessment of environmental impact of theAlcohol Program.

Industrial Projects Department/LAC Projects Agriculture Division 3April 1981

- 78 - ANNEX 8-2

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

OUTLINE OF TERMS OF REFERENCE FOR EVALUATION SYSTEM

1. An Evaluation System, independent from Project Management,should be in charge of on-going and ex-post-facto evaluation of theAlcohol Program. Successful operation of the evaluation activity willdepend on: ti) high-caliber, imaginative professional staff who haveempathy with the Government decision-making process, rural populationsand experience in applied socio-economic development research; (ii) accessto and frequent use of unencumbered communications with the AlcoholProgram management and executing agencies staff; and (iii) emphasis onanalysis and evaluation (rather than data collection) and use of quali-tative as much as quantitative information basis.

2. On-going evaluation results would serve primarily as a con-tinuing advisory source on implementatioh progress of the AlcoholProgram, and its impact on the agriculture, energy and industrialsectors. It should also provide rapid isolation of present or potentialimplementation difficulties. However, the evaluation system wouldalso be concerned more with broader Program impact and issues with aview to policy formulation. On-going evaluation output would comprise:(i) reports of specific evaluation studies, (ii) evaluation of Programmanagement, (iii) a major mid-Project evaluation report (during Pro-ject year 2), as well as (iv) an end-Project evaluation report thatwill be required by the Bank upon Project completion.

3. On-going evaluation studies would be conducted primarilyon a study-by-study basis. They will consist of an expanded analysisof the Impact Study (Annex 8-5) carried out at the beginning of theProject on a sample of completed alcohol facilities; and short-termstudies evaluating particular aspects of the Alcohol Program Studieswould be conducted and reported independently of one another butthe evaluation system would be responsible for unified reports ofstudy findings. Output of the evaluation exercises would go to allbodies involved in the Alcohol Program, including the World Bank.

4. Evaluation studies would be qualitative as much asquantitative. Suggestions of study topics would come from theevaluation system, project management and technical staff, executingagencies (CENAL, STI, IAA, CNP, PETROBRAS and other agencies), andthe Bank. A comprehensive plan for evaluation as well as the detailedterms of reference for the evaluation system and contract with a suita-bly qualified consulting organization to carryout the initial evaluationshould be presented to the Bank for approval as a condition of effective-ness of the Bank loan. The main types of study that could be undertakenwould include:

(a) Evaluation of the effectiveness of particular Govern-ment policies such as pricing, location of newdistilleries, introduction of alternative biomassfeedstocks, and research and development of rawmaterial production and processing;

(b) The effectiveness of executing agencies (CENAL, STI,IAA and PETROBRAS, etc.) in carrying out projectactivities: e.g., appraising and financing of agri-cultural and industrial production facilities,improving technology and diffusing it;

(c) Detailed examination of the effects of PROALCOOL onland and income distribution, employment, food cropproduction and environmental conditions (expandedanalyses similar to those in the initial Impapt Studydescribed in Annex 8-5); and

(d) Sociological studies of a small number of participantand non-participant communities. These studies wouldbe qualitative and interpretive in design.

LAC Projects Agriculture Division 3April 1981

- 79 - ANNEX 8-3Page 1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

STANDARD FORMAT FOR PRODUCTION SUB-PROJECT PROPOSALS

This outline provides a standard format for CENAL (or Banco Central)appraisal and documentation of production sub-projects to the Bank for approvaland financing.

I. Summary and Conclusions

- Brief description of sub-project.- Project cost and financing summary.- Project appraisal (technical, financial and economic) conclusions.

- CENAL, Banco Central and financial agent's approval.

II. The Borrower

1. General References

- Basic data (name, address, operational purpose, year of establish-ment, legal status, etc.).

- Distribution and analysis of ownership.- Business and banking references.- Past business relationship with the Financial Agent.

2. Organization and Management

- Directorship and top executives (assessment of businiess experienceand professional capacity).

- Administrative and organizational diagnosis.- Experience in distillery management.

3. Past Financial Performance

- Brief analysis of borrower's past and current financial statements.- Assessment of evolution of the borrower profitability, financial

performance and leverage.

III. The Project

1. Agriculture

a) Cane (or other Crop) Grown on Borrower's Land

- Total land area owned by borrower around distillery (ha).- % of presently cropped land (major crops), pasture land.- Land under cane (relevant raw material) after project implementationt,

acreage and yield.- Conformity with rural labor legislation (including Lei dos Sitios).- Area of crops and pasture displaced.- When WAS land houel,t? From how many farmers?- (Number of parcels, number of properties).

b) Cane (or other Crop) Supplied by Private Farms

- Number of suppliers and volumes (tonnage) to be supplied.- Major existing crops grown by suppliers.- Estimate of crops and pasture displaced by cane (or other relevant

raw material).- Reliability of cane (relevant raw material) supply.

2. Distillery

a) Current Facilities

b) Project Description

- Capacity.- Capital cost, broken down by major items.- Process description.- Major equipment suppliers.- Output (anhydrous or hydrous alcohol).- How far from mixing points?

c) Environmental Aspects

- Conformity with environmental laws- Stillage disposal/utilization.

3. Forecast Financial Performance

- Analysis of the enterprise forecast profitability, financial position,leverage and other key financial and related operat:ional indicators.

- Assessment of the borrower's future debt/service coverage.- Analysis of guarantees offered by borrower.- Analvsis of overall credit worthiness of borrower.- Financial rate o' return.

- 80 -ANNEX 8-3Page 2

4. Economic Evaluation

- Economic evaluation of the opportunity value of land to beused for growing sub-project's raw materials.

- Determination of sub-project's economic rate of return- Employment impact of sub-project.- Other benefits to be derived from sub-project.

Standard Format for Technology Sub-Project Proposals

This outline provides a standard format for STI and FINEP to appraiseand present technology sub-projects to the Bank for approval.

I. Title Page

1. Title of proposal.2. Name of organization that will do the research.3. Name of principal investigator/sub-project coordinator.4. Investigator's/coordinator's department and immediate supervisor.5. Estimated project period, beginning and estimated ending dates

of research or development project.6. Location of research or development.7. Signature of principal investigator with date.8. Signature of STI or FINEP with date.9. Authorization by funding agency with date.

II. Introduction

Brief overview of the problem and scope of proposed approach.

III. Literature Review

Review of relevant research/development previously done by others.

1. Name of authors, titles and dates of relevant research fromnationally and internationally recognized publications/sources.

2. Discuss and evaluate the above in relation to the proposed research/development.

IV. Research Objectives

Specific aims and goals of proposed research/development, how itadds to knowledge in this field, and how it will benefit biomass energydevelopment.

V. Plan of Study

1. Parameters to be studied.2. Special instrumentations needed.3. Method of data handling and analysis.4. Applicabilities of results.5. Cost of applying research results.6. Describe scope and content of final report including draft table of

contents.

VI. Significance of Proposed Research/Development

Need, importance, value and expected benefits.

VII. Promotion of Research/Development

How will the results of the research/development be promoted andtransferred within the Brazilian public sectors? Mechanisms by which newtechnologies will be transferred to private sector and implemented.

VIII. Relevant Facilities Available

List available resources - laboratories, special instruments,computation facilities, libraries, etc.

IX. Resumes

Curriculum Vitae of principal investigator, previous research andpublication - CV of support, professional staff.

X. Budget

Broken down by major items or activities.

Xl. Time Schedule

Including chronogram of important sub-project activities.

Industrial Projects DepartmentApril 1981

ANNEX 9Page 1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOP[ENT PROJECT

SOURCES AND APPLICATION OF FUNDIS

1981 1982 1983 1984 1985 1986 1987 Total(In millions Cr$)

A. Sources

I. Local Currency

Sponsors' Equity 2,641 8,584 14,021 11,326 1,628 - - 38,236Energy Mobilization

Fund 7,225 13,600 13,600 13,600 3,591 - - 51,616Net Rev. from Alcohol

Sales - 7,117 19,643 12,178 _ - - - 38,938

Subtotal 9,866 29,301 47,264 37,104 5,219 - - 128,754

Short-term Borrowings - - 3,905 9,458 17I 10,244 6,311 _47089

Total LocalCurrency Funds __ §66 29 .301 51, 169 46§.5 62 22.390 10,24 4 6.311 175.843

II. Foreig_ Currency

Govt. Rasources 5,740 3,090 22,315 20,750 3,075 - - 57,970World Bank Loan 500 2,750 7,500 1,750 - - - 12,500Private Foreign Loan - 12,500 - - - - - 12,500

Total Foreign 1/Currency Funds 2981 22.500 3A07 = - 79- ==0

B. Application

I. Local Costs

Production Component 8,560 27,880 45,731 37,104 5,219 - - 124,494Technology Dev. 1,306 1,421 1,533 - - - - 4,260

9,866 29,301 47,264 37,104 5,,219 - - 128,754

Working Capital - - 3,905 9458 L,17 1 10,244 6,311 47,089

Total Local Costs 9,866 29,301 51,169 46,562 22,390 10,244 6,311 175,843

II. FEoregn Costs

Production Component 4,902 15,967 26,190 21,249 3,009 71,383Technology Dev. 1,306 1,421 1,533 - - 4,260

6,208 17,388 27,723 21,249 3,075 75,643

Interest During Construction

(a) W.B. Loan 30 260 715 560 - - - 1,565(b) Cofinancing Loan - 690 1,375 690 - _ - 2,7SS

Sub-Total (IDC) 30 950 2,090 1,250 _ - - - -

Total Foreign Costs 6,238 18X338 29.813 22X499 3l.075 7= =96-1/

1/ Totals do not match, due to rounding.

Industrial Projects DepartmentApril 1981

82 ANNEX 9Page 2

BRAZIL - Alcohol and Biomass Energy Development Project

NET REVENUE ACCRUING TO GOVERNMENT FROM ALCOHOL SALES

1980 1981 1982 1983 1984 1985

A. Planned Alcohol Uses(in million liters)

Forecast Alcohol Production 3,400 4,700 5,500 6,700 8,500 10,700Chemical Industry Allocation 300 600 800 1,000 1,200 1,500

Balance Available forGasoline Substitution 3,100 4,100 4,700 5,700 6,300 9,200

Portion to be used for 20%Gasoline Blend (anhydrous) 2,900 3,000 2,900 2,900 2,800 2,700

Portion to be used asStraight Fuel (hydrous) 200 i1.0o 18_00 2_800 4_500 6.500

B. Revenue from Alcohol (Gasoline Substitute) Sales(Cr$ millions - June, 1980)

Retail Value of Alcohol usedas Gasoline Blend 1/ 100,050 103,500 100,050 100,050 96,600 93,150

Retail Value of Alcoholused as Straight Fuel 2/ 4,486 24,673 40,374 62,804 100,935 145,795

Gross Revenue from Alcoholused as GasolineSubstitute 104,536 128,173 140,424 162,854 197,534 238,945

Less: Ex-DistilleryPurchase Value 3/ 45,725 60,475 69,325 84,075 92,925 135,700

58,811 67,698 71,099 78,779 104,609 103,245Less Estimated DistributionCosts & Dealers' Margin 4/ 14,074 18,614 21,338 25,878 28,602 41,768

Net Revenue Available for1981-85 Program Financing 44,232 4=9*08A4 49L761 52.L9P1 7..007 =61477

1/ Cr$ 34.50/liter.

2/ 65% of alcohol-blended gasoline price--Cr$22.43/liter.

3I/ Cr$14.75.

4/ CNP and PETROBRAS estimates.

Industrial Projects DepartmentApril 1981

- 83 -ANNEX 10-1Page 1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

PRINCIPAL ASSUMPTIONS MADE IN THE FINANCIAL ANALYSIS

A. General

1. Financial projections have been done in current Cruzeiros, withyearly inflation rates of 100% in 1981, 75% in 1982, 60% in 1983, 50% in 1984and stabilizing at 40% in 1985 and thereafter.

2. Disbursements for the agricultural investments have been assumedat 75% the first year after investment decision and 25% the second year, whilethose for the industrial investments have been assumed at 30%, 60% and 10%during the first, second and third years after investment decisions, respec-tively.

3. The distillery has been assumed to start up production the thirdyear after investment decision and operate at 60% and 90% capacity the firstand second years of commercial production and 100% thereafter. The plant'seconomic life has been assumed at 20 years.

B. Capital Costs - Sugarcane-based Distillery

4. The capital costs are based on the detailed estimates presented inAnnex 5-2 for 120,000 liters/day autonomous facility and summarized below:

Distillery Unit (120,000 liters/day)

…----Mid-1980 Prices-----

Cr$000s_ us$ooos_/ _(Cr$50.0 = US$1.00)

Local Foreign Total Local Foreign Total

Base Cost Estimates(BCE) mid-1980 281,290 170,230 451,520 5,626.6 3,404.6 9,030.4

Physical Contingencies(5% of BCE) 14,065 8,511 22,576 281.3 170.2 451.5

Total Installed Cost 295,355 178.741 474.096 5 907.9 3.574.8 9,=48l.9

Associated Sugarcane Plantation - 6,17]- Hectares

Base Cost Estimates(BCE) mid-1980 97,042 46,603 143,645 1,940.8 932.1 2,872.9

Physical Contingencies(10% of BCE) 9,704 4,660 14,364 194.1 93.2 287.3

Total AgriculturalInvestments 106,746 51 263 158.009 2,134.9 1.025.3 3l160.2

1/ At June-end 1980 exchange rate of Cr$50.0 = US$1.00.

- 84 -ANNEX 10-1Page 2

C. Production Costs - Sugarcane-based Distillery

5. Production costs, excluding sugarcane,are based on a !'typical"120,000 liters/day plant located in the Southeast operating at 100% capacitywith a yearly operating period of 180 days. The data presented below werederived from a review of a sample of recent sub-project proposals submitted toCENAL for approval and extensive discussions with the managements of a number ofoperating facilities as well as with equipment manufacturers and engineeringfirms involved in alcohol systems supply.

US$000FIXED COSTS (mid 1980 US$000)1/

Labor 290.0Maintenance 120.0Administrative 150.0Insurance 60.0Miscellaneous 30.0

Total Fixed Production Cost 650.0

VARIABLE COSTS

Chemicals 60.0Lubricants 10.0Electricity 10.0Combustibles 10.0Other Supplies 20.0Labor & Social Benefits 250.0Contingencies 20.0

Total Variable Production Cost(excluding Sugarcane) 380.0

6. It is assumed that 50% of the distillery's cane requirement is grown onthe distillery owner's plantation, consistent with current administrative lawsrequiring mill/distillery owners to purchase 50% of their cane from owners ofprivate sugarcane farms unassociated with mills/distilleries. The production costof the cane produced on the plantation associated with the distillery has beenestimated at US$8.50 per ton, as detailed below, based on the assumptions dis-cussed in para 7.08 of the text.

Sugarcane Production Costs - Southeast Region

US$/ha/yr US$/ton

Labor 123.0 2.46Fertilizer 91.0 1.81Pesticide 17.0 0.34Machinery 121.0 2.41Other 17.0 0.34Land 57.0 1.14

Total 426.0 8.50

- 85 -ANNEX 10-1Page 3

The remainlng 50% of the cane requirement was assumed to be purchased fromindependent farmers at the government-controlled price of US$12.0/ton. Thisprice is assumed to be fixed in current terms for the length of the cuttingseason consistent with the current practice.

,jio, ~km_Capital

7. Ihe main components of alcohol productts working capital are finishedproduct inventory and accounts receivable. As cane is cropped only during sixmonths while alcohol is sold evenly during the year, alcohol has to be stockedfor sale in the off-season; average alcohol stocks have been assumed at 3 monthsof production. Accounts receivable have been assumed at 45 days of sales. Inline with Brazilian practice, working capital requirements have been assumed tobe 90% financed by short-term debt. Different working capital loans are usuallyavailable for inventories and receivables; their yearly interest rates averaged33% in 1980, and it has been assumed that they will st:ay at comparable levels in

L. PROALCOOL Loan Facility

8. assumptions to PROALCOOL loans are described in para 9.05 of the text.

F. ~Ralysis

9. The detailed analysis based on the above assumptions using PROALCOOLinte:.est terms of prevailing before January 1981 is presented in Annex 10-2;the analysis based on the same assumptions under current PROALCOOL interestterms is presented in Annex 10-3.

Mndustrial Projects Department

ApriL 1981

- 86 --

ALCOHOL PROJECTS - SOUTHEAST BRAZIL ANNEX 10-2-----------------------------------

PROALCOOL FINANCING - DECLINING INFLATION

INTEREST ADJUSTED FOR 40% OF ORTN VARIATION

RETURN ON EGUITY

1 2 3 4 5 6 7 8 9 2

PLANT CAPACITY (000 LII') 120 120 120 120 120 120 120 120 120l1oOPERATING DAYS PER YEAR (DYS) 180 180 1s0 180 180 180 180 180 180 18B

CASH FLOW (CURRENT CR5 MLN)

AGRICULTURAL INVESTMENT 83.8 52.3 - - 23,941.6)INDUSTRIAL INVESTMENT 201.1 752.7 209.9 - - - - - - (143,69.1)INTEREST DURING CONSTRUCTION 50.1 200.6 323.8 - - - - - -

TOTAL INVESTMENT 335.0 1i005.6 533.7 - - - (167,621,4

DEBT (80%) 268.0 804.5 427.0 - - - - - -EQUITY (20%l 67.0 201.1 106.7 - - - - - - -

TOTAL L.T. FINANCING 335.0 1,005.6 533.7 - - - - - - -

WORKING CAPITAL REGUIREMENTS - 255.2 294.3 338.1 355.2 497.1 696.0 974,1 (270,662.6)SHORT TERM DEBT - - 229.7 264.9 304.3 319.7 447.4 626.4 876.7SHORT TERM DEBT SERVICE - - - 268.7 299.3 343.9 361.3 505.6 707.B 56,176.4

INVESTOR CASH FLOW FOR W.C. - - 25.5 298.1 333.1 379.4 411.0 575.2 805.2 (214,48t,5)

CAFACITY UTILIZATION (Zi - - 60 90 100 100 100 100 100 100ETHANOL PRODUCTION (MLN. L) - - 13.0 19.4 21.6 21.6 21.6 21.6 21.6 21.6

AGR. PRODUCTION COSTS 32.6 60,9 203.8 405.9 653.5 914,9 1,280.9 1793.2 2.510.5 199.260,7ADD. CANE UNIT COST (CR$/T) - - 2,372 3,707 5,471 7,660 10,724 15,013 21,017 1,668,210ADD. CANE COSTS - - 220.3 513.7 844.1 1.181.8 1,654.6 2r316.3 3.242.6 257,381.0IND. VAR. FRODUCTION COSTS - - 50.5 117.3 188.8 264.4 370.1 518.2 725.5 57,581.0IND. FIX. PRODUCTION COSlS - - 143.9 222.9 323.0 452.2 633.1 886.4 1,240.9 98,493.9DEBT SERJICE - - - 526.5 433.2 399.8 366.5 333.2 299.9

TOTAL PRODUCTION COSTS 32.6 60.9 618.5 1,786.3 2,442.6 3,213.1 4,305.2 5,847.3 8.019.4 612.716.6

ETHANOL PRICE (CR$/L) - - 61.9 96.7 142.7 199.8 279.7 391.6 548.2 43.512.5SALES - - 804.7 1,876.0 3.082.3 4,315.7 6,041.5 8P458.6 11,041.1 939,870.0

INVESTOR CASH FLOW BEF. TAXES (99,6) (262.0) 54.0 (208.4) 306.6 723.2 1,325.3 2,036.1 3,016.5 709,261.3

DEBT SERVICE CALCULATION

INFLATION FACTOR 1.414 2.646 4.428 6.859 9.939 13.915 19.481 27.273 38.182 3,030.S81ORTN VARIATION 1.414 2.646 4.428 6.859 9.939 13.915 19.481 27.273 38.182 3,030.581

OUTSTG BEG YR - 268.0 1,072.5 1,499.4 1,332.8 1,166.2 999.6 833.0 666.4 -WITHDRAWALS 227.9 644.0 167.9 - - - - - - -FINANCED INT. DUR. CONST. 40.1 160.5 259.0 -- - - - - - -

FRINCIPAL REFAYMENT - - - 166.6 166.6 166.6 166.6 166.6 166.6OUTSTG END YR 268.0 1,072.5 1,499.4 1,332.8 1,166.2 999.6 833.0 666.4 499.8

NON FINANCED INT. DUR. CONST. 10.0 40.1 64.8 - - - - - --INTEREST - - - 359.9 266.6 233.2 199.9 166.6 133.3

RETURN ON INVESTMENT = 23,898%

INDUSTRIAL PROJECTS DEPARTEMENTREPORT PREPARED:04/06/81

ALCOHOL PROJECTS - SOUTHEAST DRAZIL

RETURN ON EQUITY UNDER CURRENT PROALCOOL INTEREST RATESINTEREST AT 54%

RETURN ON EQUITY

1 2 3 4 5 6 7 8 9 22

PLANT CAPACITY (000 L/D) 120 120 120 120 120 120 120 120 120 120OPERATING DAYS PER YEAR (DYS) 180 180 180 180 180 180 180 180 180 180

CASH FLOW (CURRENT CR$ MLN)_ _________________________

AGRICULTURAL INVESTMENT 67.0 83,6 - (23,941#6)INDUSTRIAL INVESTMENT 201.1 752,7 209.9 - - - - - - (143,679.8)IN1EREST DURING CONSTRUCTION 57,9 321.5 686.4 - - - - - - -

TOTAL INVESTMENT 326,0 1,157.8 896.3 - - - (167,621.4)

DEBT (80%) 260.8 926.2 717.0 - - - - - - -EOUITY (20X) 65.2 231.6 179.3 - - - - - - -

TOTAL L.T. FINANCING 326.0 1,157,8 896.3 - - - - - -

WORKING CAPITAL REQUIREMENTS - - 255,2 294.3 338.1 355.2 497.1 696.0 974,1 (270,662.9)SH RT TERM DEBT - - 229.7 264.9 304.3 319.7 447,4 626.4 876.7SHORT TERM DEBT SERVICE - - - 268.7 299.3 343.9 361,3 505.6 707.8 56,176.4

INVESTOR CASH FLOW FOR W.C. - - 25,5 298.1 333.1 379.4 411.0 575.2 805.2 (214v486.5)

CAPACITY UTILIZATION (%) - _ 60 90 100 100 100 100 100 100ETHANOL PRODUCTION (MLN. L) - - 13.0 19.4 21,6 21.6 21.6 21.6 21.6 21.6 0

AGR. PRODUCTION COSTS 32.6 60,9 203.8 405.9 653.5 914.9 1,280.9 1,793.2 2,510.5 199,260.7ADD, CANE UNIT COST (C6$/T) -- 2,372 3,707 5,471 7,660 10,724 15,013 21,017 1,668,210

ADD. CANE COSTS - - 220.3 513.7 844.1 1,181.8 1,654.6 2,316.3 3,242.6 257,381.0IND. VAR. PRODUCTION COSTS - - 50.5 117.3 188.8 264.4 370.1 518.2 725.5 57,581.0IND. FIX. PRODUCTION COSTS - - 143.9 222,9 323.0 452.2 633.1 886.4 1,240.9 98,493.9DEBT SERVICE - - - t,239.8 1,125.5 1,O11.2 897.0 782.7 668.4

TOTAL PRODUCTION COSTS 32.6 60.9 618,5 2,499.6 3,134.9 3,824.5 4,835.7 6,296.8 8,387.9 612,716.6

ETHANOL PRICE (CRS/L) - - 61.9 96.7 142.7 199.8 279.7 391,6 548.2 43,512.5SALES - - 804.7 14776,0 3,082.3 4P3i5,7 6,041.S 8,458.6 11,841.1 939,870.0

INVESTOR CASH FLOW BEF. TAXES (97.8) (292.5) (18.6) (921.7) (385.7) 111.8 794.8 1,586.6 2,648.0 709,261.3

DEBT SERVICE CALCULATIONINFLATI_N FACTOR 1,44 2 6 4 8 6 9 9 9 1 5 1 8 2 3 31 3INFLATION FACTOR 1.414 2.646 4.428 6.859 9.939 13.915 19.481 27.273 38.182 3,030.581ESCALATION FACTOR 1.414 2.646 4.428 6.859 9.S39 13.915 19.481 27.273 38.182 3,030.581

OUTSTG BEG YR - 260.8 1,187.0 1,904.0 1,692.4 1,480.8 1,269.2 1057,6 846.0 -WITHDRAWALS 214.5 669.0 167.9 - - - - - - -FINANCED INT. DUR. CONST. 46.3 257.2 549.1 - - - - - _ XPRINCIPAL REPAYMENT - - - 211.6 211.6 211.6 211.6 211.6 211,6OUTSTG END YR 260.8 1w187.0 10904.0 1.692,4 1.480.8 1.269.2 1,057.6 846,0 634.4 _ l

NON FINANCED INT. DUR. CONST. 11.6 64.3 137.3 - - - - - - wINTEREST (54%) - - - 1,028.2 913.9 799.6 685.4 571.1 456.8

RETURN ON INVESTMENT = 14.365X

INDUSTRIAL PROJECTS DEPARTENENTApril 1981

BRAZIL - ALCOBOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

PROJECT FISCAL IMPACT{th mid 1980 cruzeiros millions

(Cr$ 50.00=US$1.00)

---------------------- GOVERFvENT LOANS ----------------------- --------- RECEIPTS FROM §/LES TAX-/ -----------

Sugarcane Distilleries- Cassava Distilleries Sugarcane Distilleries- Cassava Distilleries

Projects approved in 1981 1982 1983 1981 1982 1983 1981 1982 1983 1981 1982 1983 Net Government

Number of projects 53 80 111 2 3 4 53 80 '111 2 3 4 Cash Flow due

Government Cash Flow to the Project

1981 (8,495.9) _ _ (314.0) - - (8,809

1982 (12,757.1) (12,824.0) - (604.0) (471.0) - (26,656.1)

1983 (1,812.6) (19,256.0) (17,793.3) (38.0) (906.0) (628.0) 2,136.2 134.4 (38,163.1)

1984 185.5 (2,736.1) (26,717.7) 384.2 (57.0) (1,208.0) 3,204.3 3,224.8 201.5 201.5 (23,316.9)

1985 2,989.2 280.0 (3,796.2) 245.0 576.3 (76-0) 3,560.3 4,837.1 4,474.3 223.9 102.3 768.7 14,384.9

1986 2,591.7 4,512.0 388.5 173.0 367.5 768.4 3,506.3 5,374.6 6,711.5 223.9 336.9 403.1 25,357.9

1987 2,247.7 3,912.0 6,260.4 109.4 259.5 590.0 3,506.3 5,374.6 7,457.3 223.9 336.9 447.5 30,725.0

1988 1,945.1 3,392.0 5,427.9 68.4 164.1 346.0 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 28,689.5

1989 1,680.1 2,936.0 4,706.4 41.6 102.6 218.8 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 27,030.8

1990 1,446.9 2,536.0 4,073.7 24.8 62.4 136.8 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 25,676.6

1991 1,245.5 7,184.0 3,518.7 14.0 37.2 82.2 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 24,477.6

1992 1,070.6 1,880.0 3,030.3 7.4 21.0 49.6 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 23,404.9

1993 1,616.0 2,608.5 11.1 28.0 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 21.609.6 o

1994 2,242.2 14.8 ',506.3 5,374.6 7,457.3 223.9 336.9 447.9 19,603.0

1995 ,506.3 5,374.6 7,457.3 223.9 336.9 447.9 17,346.0

1996 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 17,346.0

1997 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 17,346.0

1998 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 17,346.0

1999 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 17,346.0

2000 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 17,346.0

2001 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 17,346.0

2002 3,506.3 5,374.6 7,457.3 223.9 336.9 447.9 17,346.0

2003 5,374.6 7,457.3 336.9 447.9 13,615.8

2004 7,457.3 447.9 7,905.2

304,202.1

I/ It has been assumed that (a) all alcohol projects will produce hydrous alcohol to be sold for straight alcohol cars and (b) the price relationship

between ex-distillery and pump stays at the present level in constant terms over the life of the project.

2/ For simplicity, it has been assumed in this table that all new alcohol projects will operate and be financed as if they were located in the Southeast

region. Due to different lengths of cropping seasons and to different interest rates on government loans according to regions, annual alcohol

output and debt service schedule would be somewhat different. This is not expected to alter significantly the net overall government cash flow due

to the Project.

Industrial Projects DepartmentApril 1981

- 89 - ANNEX 11-1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

ETHANOL ECONOMIC PRICE

1980 1935 199u1. Anhydrous Ethanol - Gasoline Value (US$/bbl) (US$/bbl) (US$/bbl)

11id 1980 Average OPEC oil price-/ 31.2 36.2 41.9Ex-Caribbean refinery gasoline priy (x1.33)-/ 41.5 48.1 55.8Transport cost to Brazil ($18/ton)- 2.1 2.5 3.0Gasoline opportunity value cif Brazil (US$/bbl) 43.6 50.6 58.8

Gasoline opportunity value cif Brazil (USq/l) 27.4 31.3 37.0

1/ Assumed to increase at 3% p.a. in real terms.2/ Assumed to increase at 3.5% p.a. in real terms.

II. Hydrous Ethanol Value

Anhydrous Ethanol Base Value 27.4 ¢/l

(i) 20% mileage penalty: 22.7 ¢/J

(ii) Increase in car cost:Car average economic cost $3,0005% increase in car cost dueto new materials $ 150-100Average car life 200,000 kmFuel consumption rate 12 liters/100 kmTotal fuel consumptionduring car life 24,000 liters-.:Increase car cost/litre ofethanol +0.6, ¢/l

(iii) Saving in production cost., .in steam/benzene $0.3 mln/yr - 0.2 ¢tl

( iv) Volume increase in productiondue to 6% additional watercontent: x 1.06

Hydrous ethanol base value(22.7 ---0.6 + 0.2) x 1.06 = 23.7 ¢/l

(or about 14% penalty)The same formula has been used to derive hydrous ethanol value for differentvalu_s of gasoline

Industrial Projects DepartmentApril 1981

_90 - ANNEX 11-2Page 1

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

ECONOMIC CAPITAL AND PRODUCTION COSTS

I. AUTONOMOUS SUGARCANE-BASE SUB-PROJECT

A. Economic Capital Costs

1. Economic capital costs for 120,000 liters/day production sub-projectwas dervied on the basis of the detailed financial capital costs presented inAnnex 5-2; the local cost component was shadow-priced by 30%.

Capital Costs - 120,000 lpd Production Sub-project(mid-1980 US$ 000s)_/

------ Financial ----- EconomicAgricultural Unit Local Foreign Total Local Foreign Total

Land Preparation 502.0 125.5 627.5 386.2 125.5 511.7Housing 294.4 73.6 368.0 226.5 73.6 300.1Civil Works 126.0 54.0 180.0 96.9 54.0 150.9Heavy Equipment (Tractors,Canecutters, etc.) 346.8 231.2 578.0 266.8 231.2 498.0Trucks 440.4 293.6 734.0 338.8 293.6 632.4Light Equipment 144.0 96.0 240.0 110.8 96.0 206.8Implements & Tools(Sprayers, etc.) 74.0 49.4 123.4 56.9 49.4 106.3

Laboratory 13.2 8.8 22.0 10.2 8.8 19.0

Base Cost Estimates (BCE)mid-1980 1,940.8 932.1 2,872.9 1,493.1 932.1 2,425.2

Physical Contingencies(10% of BCE) 194.1 93.2 287.3 149.3 93.2 242.5

Sub-total (Agric. Unit) 2,134.9 1,025.2 3,160.2 1,642.4 1,025.3 2,667.7

Distillery Unit

Project Preparation 40.0 - 40.0 30.8 - 30.8Engineering & Management 400.0 - 400.0 307.7 - 307.7Civil Works 877.8 376.2 1,254.0 677.2 376.2 1,053.4Machinery & Equipment 3,566.4 2,778.0 6,344.4 2,745.4 2,778.0 5,523.4Freight 85.9 20.1 106.0 66.1 20.1 86.2Effluent Treatment Equip-ment 452.4 127.6 580.0 349.0 127.6 476.6Laboratory 102.6 68.4 171.0 78.9 68.4 147.3Maintenance Workshop 58.6 24.9 83.0 45.1 24.9 70.0Complementary Utilities 42.6 9.4 52.0 32.8 9.4 42.2

Base Cost Estimates (BCE) 5,626.6 3,404.6 9,030.4 4,333.0 3,404.6 7,737.6Physical Contingencies(5% of BCE) 781.3 170.2 451.5 216.7 170.2 386.9

Sub-total (Industrial Unit) 5,907.9 3,574.8 9,481.9 4,569.7 3,574.8 8,124.5

Total Installed CapitalCosts 8,042.8 4,600.1 12,642.9 6,212.1 4,600.110,812.1

== ======= ======= ====== =======

1/ Cr$50.0 =US$1.00.

-91- Page 2

2. Disbursements for the agricultural investments have been assumed at75% the first year and 25% the second year; those of the distillery unithave been assumed at 30% the first year, 60% the second year and 10% in thethird year. The economic life of the agricultural equipment (tractors, sprayers,trucks, etc.) has been assumed at 8 years and is replaced by equivalent invest-went; the distillery unit's economic life is assumed to be 20 years. Aresidual value of US$0.5 million is estimated for the balance of 2 years onthe second (final) replacement investment for agricultural equipment; residualvalue on the industrial unit (mostly scrapped stainless steel) is estimated at10% of the initial investment (or US$0.8 million) at the end of the sub-project'slife.

B. Annual Economic Operating Costs

3. Distillery Unit: Distillery operating costs, except for the caneraw materials, are based on the financial operating costs presented inAnnex 10-1 and shadow-priced by 30% to derive the economic equivalent, asshown below:

=--- Financial ---- --- Economic ------Variable Costs (Southeast) (mid-1980 US$ 000) (mid-1980 US$ 000)

Chemicals 60.0 46.0Lubricants 10.0 8.0Electricity 10.0 8.0Combustibles 10.0 8.0Other Supplies 20.0 16.0Labor & Social Benefits 250.0 192.0Contingencies 20.0 8.0

Total Variable Production Costs 380.0 286.0

Variable costs for the Northeast and South were derived from these afteradjustment for the difference in yearly operating periods (200 days and 165days respectively vs. 180 days for the Southeast). Fixed operating costspresented below are assumed to be the same irrespective of location.

---- Financial ---- ---- Economic ------Fixed Costs (mid-1980 US$ 000) (mid-1980 US$ 000)

Labor 290.0 223.0Maintenance 120.0 93.0Administrative Overheads 150.0 115.0Insurance 60.0 46.0Miscellaneous 30.0 23.0

Total Fixed Production Costs 650.0 500.0

4. Sugarcane Raw Material Costs: The economic cost of sugarcane isderived on the basis of the assumptions discussed in para. 11.12. Detailedcalculations, presented below, are based on regional yields and the utilizationpattersn of the various inputs required for sugarcane growing.

- 92 - ANNEX 11-2Page 3

(a) Agricultural Yield Assumptions. The yields of sugarcane for each yearare as follows (in tons per ha per year).

Southeast Northeast South

Year 1 P1 -

Year 2 Cl 86 69 86

Year 3 C2 65 52 65

Year 4 C3 49 39 49

Annual 4-year average: 50 40 50

(b) Land Utilization Schedule. Generally, the agricultural system willlimit production buildup when the project involves new land and new distillery.To obtain enough cane to enable the plant to run at 60% capacity, 90% capacityand 100% capacity the first, second and third years of operation, the followingland utilization schedule is required. This land utilization schedule isdictated by the fact that it takes 6 months to clear and prepare the land, thatit takes 18 months for the cane to grow after planting and 12 months aftercutting, and that cane can only be cut during six months of the year.

BRAZIL - Sugarcane Plantation

Land Utilization Schedule

--- Year l--4--Year 2- --i--Year 3-- -- -Year 4 ------Year 5- ----Year 6---x

Pr PI +Gr (35%) 1 Gr C2 Gr(25%) C3 Pl+ Gr

Pr P1&Gr (?6%) Cl ;Gr(254 C2 Gr C3 Gr

Pr Pl+Gr (: %) Cl Gr C2 Gr-4-

Pr (25%) Pl+Gr C1 Gr

Stabilized Production

Note: Pr - land preparation (full development)P1 = planting

. Gr = growing

2*C3 = cuttings

_ 93 ANNEX 11-2Page 4

The above described schedule will yield the following land utilization and caneproduction buildups:

Land Utilization Pattern

Total Landunder Cultivation Cane Productior

Year 1 Pr/Pl 35% 35%Year 2 Pr/PI 26% Gr 35% 61% -Year 3 Pr/Pl 25% Gr 26% Cl 35% 86% 60%Year 4 Pr/Pl 75% Gr 25% Cl 26% C2 35% 1/ 100% 90%Year 5 (stabilized) Pl/Gr 25% Cl 25% C2 25% C3 25% 100% 100%

- 10% of C2 land and 1% of Cl land are double counted: they will be planted againso that the plantation achieves stabilized production by year 5.

(e) aTnd !rotal Value: Following Bank practkce for agricultural pro1ectsland has been valued at the corresponding economic return from the opportunity crop.On this basis, average land values are calculated at US$44.0, US$16.0 and US$28.0Der ha Der year for the Southeast, Northeast and South, respectivelv. They arederived from the financial rental values presented in para. 7.06 of the text,shadow-priced by 30% to obtain their economic equivalents. These values are usedin the base case because there is still sufficient land in the regions considered sothat sugarcane for ethanol should not displace food crops and affect significantlyland and food prices until 1985. Since one ton of cane yields on average 70 litersof ethanol, the cost of the land necessary to support a 120,000 l/d distillery canbe calculated as below:

BRAZIL - 120,000 l/d Distillery

Sugarcane Plantation - Economic Land Costs

Average Cropping Total Land Land Land Cost atYield Season Needed Value Full DevelopmentCt/ha) (d/vr) (hafyr) ($/ha) (US$ milllon/yr)

South East 50 180 6,170 43.7 .27North East 40 200 8,570 16.0 .14South 50 165 5.657 27.7 .16

:- QI -94 ANNEX 11-2

Page 5

(d) Fertilizer Costs: Fertilizer utilization pattern is thesame in the three regions considered and is assumed as follows:

Fertilizer Utilization Profile Fertilizer Application Rate

(% of total yearly nutrient use) (kg/ha/yr )

p 33 South East 400

1 20 North East 500C1 South 350

C2 23

c3 24Total 100

The type and value of fertilizer used vary with the different phases of thecane production cycle. A 5/20/20/ NPK coumpound is generally applied for planting,whereas a 10/10/10 NPK compound is used for the three cuttings. Fertilizerapplication rates for sugarcane plantations differ between regions: in theSoutheast and average of 400 kg of fertilizer is applied per ha per year, inthe Northeast 500 kg and in the South 350 kg (in the South the distillery isassumed to obtain its cane from small farmers with low use of agriculturalinputs). Since Brazil is a net importer of each nutrient, economic costs oftehe 5f20f20 and 10/10710 compounds are derived from international prices.These costs have been assumed to Increase at 1.5% p.a. as per the assumptionstated in para. 11 H.

Coq,upound Fertilizer HcQnomic Price

Nutrient Price PerProduct Content Nutrient Ton

Urea $196/t 46% $426/tTSP $162/t 46% 8352/tPotash , 941t 60% .9157/t

i) 5/20/20 CompoundProduct $123/t ($273/nutrient ton)Granul. & Bagging $45/tSea Transport & Unloading $35/tInland Distribution $20/t

$223/t ($496/nutrient ton)

il) 10/10/10 CompoundProduct $94/t ($313/nutrient ton)Granul. & Bagging $45/tSea Transport & Unloading $35/tInland Distribution $20/t

$194/t ($647/nutrient ton)

_ 95 _ ANNEX 11-2Page 6

(e) Pesticide Costs: Pesticides are assumed to have the same utilizationprofile as fertilizers: 33% of total yearly use of pesticides is devoted to theplanting area and 20%, 23% and 24% to the first, second and third cutting areasrespectively. The table below presents pesticide costs for a plantation atstabilized production.

Pesticide Utilization Pattern Pesticide Costs at FullDevelopment

Pi 33% Gas tC1 20% (US$/ha/yr)C1 23% South East 13.1c2 24% North East 8.7

3 South 13.1

Total Yearly use 100%

When related to the land utilization schedule, the buildup of pesticipde use is asfollows. The costs are assumed to increase at 1% D.a. as per para 11.11 of thetext:

Pesticide Utilization Buildup,(in % of Use at Stabilized Production)

Year 1 Year 2 Year 3 Year 4 Year 5 (stabilizedthereafter)

- 46% 62% 86% 100%

(f) Equipment Operating Costs: Agricultural equipment utilization patternand unit cost are as follows:

Agricultural Yearly Equipwent Machinery Operating CostsUtilization Pattern at Full Development

P1i - 30% Cost per haCl 23% (Mid 1980 US$/ha/yr)C2 23% Southeast 55.9C3 23% lNortheast 34.9

S;outh 18.3Total 100%

When adjusted for the land utilization schedule, the buildup of agriculturalequipment and machinery utilization is as follows:

Agricultural Equipment and Machinery Utiliz.ation Buildup(in % of Use at Full Development)

Year 1 Year 2 Year 3 Year 4 Year 5 (stabilized42% 31% 62% 86% 100% thereafter)

- 96 - ANNEX 11-2Page 7

(g) Labor Costs: Labor productivity and labor cost vary significantly

between regions, as the table below indicates:

Sugarcane Plantation

Economic Labor Costs

Labor Productivity Labor Cost Cost/ha Yearly Cost(man day/ha) ($/man day) ($/ha) (US$ milLion/yr)

South East 24 93a/ .58North East 55 2.29- 126.2 1.08South 48 2.98 143.2 .81

a/ Labor in the North East has been shadow priced 30%.

Labor is mainly used for cutting. This is reflected in the table belowwhich presents utilization profile; the decline in labor intensity reflects the

decline in sugarcane yield.

Sugarcane Plantation

Yearly Labor Utilization Pattern

P1 15%C1 36%C2 26%C3 23%

Total yearly use 100%

Based on the land utilization schedule, the buildup of agricultural labor costis as follows:

Sugarcane PlantationLabor Utilization Buildup

(in % of Use at Stabilized Production)

Year 1 Year 2 Year 3 Year 4 Year 5 (stabilized

21% 16% 65% 89% 100% thereafter)

(h) Miscellaneous Costs: These are principally seed costs and lime costs(about 400 kg per ha of lime is needed for planting). The table below presentsthe utilization profile for these miscellaneous items and the yearly costs for aplantation at stabilized production:

- 97 ANNEX 11-2Page 8

Sugarcane Plantation

Cost/haUtilization Pattern (Mid 1980 US$/ha)

P1 70% Sout:heast 13.1Cl 10% Nort:heast 20.4C2 10% South 10.2C3 10%

Total 100%

Sugarcane PlantationMiscellaneous Items Utilization Buildup(in % of Use at Stabilized Production)

Year 1 Year 2 Year 3 Year 4 Year 5 (stabilized

68% 73% 84% 94% 100% thereafter)

Mi) Cane Collection Costs: Estimates of cane collection costare based on visits to cane plantations and cooperatives. These estimatesindicate that the unit economic cane transport cost is about US$0.12 perton per km, stemming in equal amounts from truck rental, maintenance andfuel consumption. The fuel component of this cost has been assumed toincrease in parallel with gasoline cost, i.e., 3.5% p.a. Land use patternis different in each region. In the Southeast, 65% of the land around thedistillery is devoted to cane growing for the distillery, in the Northeastabout 55%, and in the South only 30% (since it has been assumed that thecane will come from small dispersed landowners). The cane collection costsfor 120,000 lpd distillery in the different regions are as follows:

120,000 lpd DistilleryYearly Cane Collection Cost

Southeast Northeast South

Cropped area (ha) 6,170 8,570 5,656Land use concentra2tion (%) 65 55 30Catchment area (km ) 95 156 189Average distance (km) 7.3 9.4 10-4Cane requirement (1,000 tpy) 309 343 283Cane unit ransport cost

(US$/t/km) 0.121 0.121 0.121Cane transport cost($ million/year) 27.3 39.0 35.6

Industrial Projects DepartmentApril 1981

- 98 -

ANNEX 11-3BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT Page 1

ETHANOL FROM1 SUGARCANE - ECONOMIC ANALYSIS

Base CaRe: Strp$oht Alcohol. Sputhewst BrazLi

VK 1 2 3 4 5 6 7 B 9 10 22

KEY SYSTEM PARAMETERS

OIL PRICE IN/BOLl 31.2 32.1 33.1 34.1 35.1 1312 37.3 38,4 39.6 40.7 E8.1GASOLINE VALUE (US C/Li 27.4 28.3 29.1 30.0 30,9 31.8 - 32.8 33.8 34,8 32.? S]._SHADOI EXCHANGE RATE FACTOR 1-) 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1,3 1.3 .iAGRICULTURAL YIELD (T/HA) 50 50 50 SD 50 50 50 50 50 0 :ODAYS OF OPERATION (DS/YR) 080 180 180 180 180 181 I80 180 0i80 180 1°0PLANT CAPACITY (000 L/D) 120 120 120 120 120 120 120 120 120 120 120INDUSTRIAL YIELD (L/T) 70 70 70 70 70 70 70 70 70 70 70OUTSIDE ENERGY REQUIREMENT (US C/L) - - - - - - - - - - -

AGRICULTURAL SYSTEM

TOTAL FEEDSTOCK PRODUCTION ( OOOT) - - 185 278 309 309 309 309 309 309 309TOTAL CULTIVATED LAND (HA) 2,160 3,764 5.307 6,171 6,171 6,171 6,171 6,171 6,171 6,171 6,171

AGRICULTURAL INVESTNENTYRLY INFRASTRUCTURE INVST. ($000) 722 241 - - - - _ _ _YRLY EGUIPMENT INVST, (8000) 1,277 426 - - - - - - 1,277 426 (5111

YEARLY INVESTNENT (N 000) 1,999 667 - - - ; - - 1,277 426 (51li

UNIT ECONOMIC COSTSLAND (N/HA) 43.7 44,1 44.6 45.0 45.5 46.0 46.1 47.0 47.3 48.1 06.1FERTILIZER ($/NA) 81.4 82.6 83,8 01.1 86.4 87.7 89.0 90.3 91,7 93.0 100,2PESTICIDE (S/HA) 13.1 13.2 13.3 13.4 13.5 13.7 13.8 13. 14.0 14.2 16.0MACHINERY (N/HA) 55.9 56.7 57.6 58.5 59.4 60.4 61.4 62.4 63.4 64.5 80.0OTHERS (N/HA) 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13,1LABOR PRODUCTIUOVITY 1ANDAY/HA) 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24,0 24,0 24,70 24,2CLABOR SHADOW PRICING (-) 0.0 1.0 0.0 1.0 1,0 1.0 0.0 1.0 1,0 1.3 1.0LABOR FIN. COST (1/MANDAY) 5.11 5.11 5.11 5.01 1.11 15.11 S.11 5.11 511 5.;) 5.11UNIT LAB. FIN. COST (I/HA) 122.6 122.6 122.6 122.6 122.6 122.6 122.6 122.6 122,6 122.6 1o2.6UNIT LAB. ECO. COST (N/HA) 94.3 94.3 94.3 94.3 94.3 94.3 94.3 94,3 94.3 94,3 W43

UTILIZATION BUILD UPLAND (I) 35 61 86 100 100 100 100 100 100 100 100FERTILIZER 1s.o1 37 63 88 100 100 100 100 100 100 100PESTICIDE ;- 46 62 86 100 100 100 100 100 100 100MACHINERY (Z) 42 31 62 86 100 100 100 100 100 IO IVYOTHERS 10) 98 73 84 94 100 100 100 100 100 100 100LABOR (X) 21 16 65 B9 100 100 100 100 100 100 IOG

PRODUCTION COSTSLAND ($000) 94 166 237 270 283 204 207 290 294 297 346FERTILIZER 18OO0) 251 189 326 462 533 541 549 557 566 574 686PESTICIDES (SOOO) - 37 51 70 83 85 85 86 86 80 9MACHINERY 18000) 145 108 220 310 367 373 379 385 390 398 494OTHERS iN 000) 79 59 68 76 81 81 81 81 S1 81 81LABOR (S 000) 122 93 378 518 582 582 582 582 582 582 5R2

TOTAL AGRIC. PROD. COSTS (1 000) 691 652 1,280 1,715 1,927 1,946 1,963 1.981 2,000 2,020 2.288

TRANSPORT SYSTEM

LAND USEOUNCENTATOON 7) 65 65 61 65 65 65 61 65 65 65 A5CATCHMENT AREA IKM2( 33 58 82 95 95 955 5 9 95 915 95AVERAGE DISTANCE COVERED (KM1 4.32 5.73 6.81 7.33 7.33 7.33 7.33 7.33 7.33 7.33 7.33UNIT ECON. TRANSPORT COST (US C/T/Kf) 12.1 12.2 12.4 12.5 12,7 12.8 13.0 13.2 13.4 13.5 16,3

TRANSPORT COST (N 000) - - 156 255 288 290 294 299 304 306 369

INDUSTRIAL SYSTEM

I5NDUSTRIA 1600 TMENTSCAPITAL INVESTMENT IN OVOI 9,482 9,482 9,482 9,482 9,482 9,482 9,482 9.482 9,482 9,4q 9.4PORAN. EXCHG. COMPHYT. ('I) 38 38 38 38 38 38 38 3 8ECONOMIC INVESTMENTIS 000) 8,121 8,125 8,125 8,125 8,125 8,125 8,125 8,125 8,125 8.125 8,125BISBUSEMENT PATTERN Ill 30 60 10 - - - - - - - -

YEARLY INVESTMENTS (I 000) 2.438 4,875 813 - - 3 - 183

PRODUCTION COSTSUNIT OUTS. ENERGY (US C/L) - - - - - - - - I - -

UNIT OTHER VAR. COSTS (US C/LI 1 .48 1.48 1,48 1.48 1.48 1,48 1,48 1,48 1.48ETHANOL PRODOCTION IML.LN I - - 12.96 19.44 21,60 21,60 21.60. 21,60 21.60 21.60 21.60CAPACITY UTILIZATION I - - 60 90 100 100 100 100 100 100 100

VARIABLE COSTS (I 000) - - 115 259 320 320 320 320 320 320 320FIXED COSTS (8 0001 - - 500 500 500 500 500 500 100 500 500

TOTAL INDUSTRIAL PROD, COSTS (1 0001 - 605 759 820 820 820 820 820 __820 020

WORKING CAPITALWORKING CAPITAL (8 000) 9 921 1,314 1,482 1,509 10536 1,566 13196 0.629 2,076WORK. CAP. BUILD UP 10 0001 - 921 393 168 27 27 30 30 33 12,076)

UNIT PROD. COST (US C/L) - - 15.8 14.0 14.1 14.1 14.2 14.4 14.5 14.6 16.1

REVENUES

ETHANOL VALUE (US C/L) 23.7 24.1 25.2 26.0 26.8 27.6 28.4 29,3 30.2 31.2 44.7BY-PRODUCT CREDIT/DEBIT (US C/LI - - - - - - - - - -EHTANOL PRODUCTION(M LN L) - _ 12.96 19.44 21.60 21.60 21.60 21.60 21.60 21.60 21.60

TOTAL REVENUES (8 000) - 3,266 5,054 5,709 5,962 6,134 6,329 6,523 6,73? 9,655

NET CASH FLOUW 1 000) (5,128) (6,194) (5191 1,932 2,1586 2,879 3,030 3,199 2,092 3,134 9,578

RETURN ON INVESTMENT = 19.550X

INrAUSTRIAL FROJECTS DEPARTMENTAPRIL 1981

BAAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

ETHANOL FROM CASSAVA - ECONOMIC ANALYSIS

OIL AT US$31.2/BBL - CASSAVA AT US$25.0/TOUTSIDE ENERGY AT HALF FUEL COST

1 2 3 4 5 6 7 8 9 10 22ASSUMPTIONS

OIL PRICE ($/BBL) 31.2 32.1 33.1 34.1 35.1 36.2 37.3 38.4 39.6 40.7 58.1GASOLINE VALUE (US C/L) 27.4 28.3 29.1 30.0 30.9 31.8 32.8 33.8 34.8 35.9 51.3CASSAVA PRICE (/TON) 25. 25.5 25.8 26.0 26.3 26. 26.8 27 1 27.4 30.8YIELD (L/TON) 180 1180 18 180 18 0 180 180 180 180 180 180PLANT CAPACITY (000 L/DYS) 120 120 120 120 120 120 120 120 120 120 120PLANT COST (t 000) 10,068 10,068 10,068 10O,068 10O,068 10,068 10,069 10,069 10i068 iO,068 1i.068OUTSIDE ENERG Y REQU REMENTS/(R C/L) fi 6 b 6 Z6Q j6j Z64 7.1 6 7.9 5WORKING AYS PER YE R (DYS/y 300 0 3 00 0

COSTS AND BENEFITS STREAMS____________________________

DISBURSEMENT PATTERN ( 30 60 10 - -CAPITAL EXPEND,TURES (S 000) 3,020 6,041 1,007 - - - (1.007)

=== ======= ======== ==========… ====== =…_= ==========

PRODUCTION COSTSCAPACITY BUILD-UP (%) - - 60 90 100 100 100 100 100 100 100ETHANOL PRODUCTION (MILN. .L) - - 21.60 32,40 36.00 36100 36.00 36.00 36.00 36.00 36o00CASSAVA REQUIREMENT (000 T) - - 120 180 200 200 200 200 200 200 200CASSAVA COST (S 000) - - 3,060 4,644 5,200 5,260 59300 5,360 5,420 5,480 6,160OUTSIDE ENERGY COST (S 000) - - 1,426 2,203 2,520 2,592 2.664 2,736 2,844 2,916 4,140 1UNIT OTHER VAR. COST (US C/L) - - 2.14 2.14 2.14 2.14 2.14 2,14 2.14 2.14 2.14OTHER VARIABLE COSTS ($000) - - 462 693 770 770 770 770 770 770 770 '0

VARIABLE COSTS (S 000) - - 4,948 7,540 8,490 8,622 8,734 8,866 9,034 9.166 11,070FIXED COSTS (S 000) - - 700 700 700 700 700 700 700 700 700

TOTAL PRODUCTION COSTS (S 000) - - 5,648 8,240 9,190 9,322 9,434 9,566 9,734 9.866 119770

WORKING CAPITALWORKING CAPITAL (S 000) - - 1.018 i,526 1,723 1,760 1,795 1,836 1,879 1,923 2,518

WORKING CAPITAL BUILD UP (S 000) - - 1,018 508 197 37 35 41 43 44 (2,518)

REVENUESETHANOL PRODUCTION (MLN. L) - - 21.60 32.40 36.00 36.00 36.00 36.00 36.00 36.00 36.00ETHANOL VALUE (US C/L) 23.7 24.5 25.2 26.0 26,8 27.6 28.4 29.3 30.2 31.2 44.7BY PRODUCT CREDIT/DEBIT (US C/L) - - - - - - - - - - -

TOTAL REVENUES (S 000) - - 5,443 8,424 9,648 9,936 10.224 10,548 10,872 11,232 16.092

NET CASH FLOW (S 000) (3,020) (6,041) (2,230) (324) 261 577 755 941 1,095 1,322 7,847

Economic Rateof Return = 9.771Z

rD MOQX

(DH

x

ANNEX 11-4- 100 - Page 2

BRAZIL - ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

ETHANOL FROM CASSAVA - ECONOMIC ANALYSIS

120,000 lpd Distillery - Economic Return (%)

Anhydrous Alcoholl/ Straight Alcohol"/Energy Cost ----- ----- Energy Cost ----

Fuel Oil Wood or Fuel Oil Wood orOil'Price-US$31.2/bbl Equivalent Coal Equivalent Coal-/

Cassava price ($/t)

15 16 32 5 2320 9 26 Neg 1625 - 2 19 Neg 1030 Neg 13 Neg 335 Neg 7 Neg Neg

Oil Price US$35.0/bbl

Cassava price ($/t)

15 21 38 10 2920 15 32 2 2225 8 26 Neg 1630 1 20 Neg 1035 Neg 14 Neg 3

1/ At gasoline import substitution value.2/ Calculated at 50% of fuel oil value.

Industrial Projects DepartmentApril 1981

IBRD 1533470 ( / 50 4i 3N NOVEMEER T980

VENEZUELA C BRAZIL1' kF~RENCH

k> SURINAME ,GUIANA. ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECTBoa,Visa MAOR Ct9,3

COLOMBIA !GUYANA MAJOR ALCOHOL PRODUCING AREAS (JUNE 30,1980)

< 8 < \ kOiA/MA >5 r I Jr AMAIP i .M Major alcohol producing areos1,-lAlcohol production capacity by state -

- \ t g _ j lJ / AMaccpa million liters per year as of June,1980

P RIO GR/ANVE

j A JPO. N -, ,oNORTEn. s' PA-A - 9 I /, [ N 0Na aI

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ARGENTINA lor p6on i -State boundariesAll ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~--International boundaries

DO SUL Por. Aer

.0- i,,-. Rt ff x g 2 aMLOMEES 0 200 400 600 500

3n~~~~~~~~ ( 'P 'N ~~~~~~~~~~~~~~~~~~~MILE$ 100 200 300 400 600

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IBRD 15335VENEZUELA % . e"4FR GUIANA B4R A3Z 4 0 I NOVEMBER 19B0

cOLOMBIA -SURINAME COLOMBIA <J , GNsA ALCOHOL AND BIOMASS ENERGY DEVELOPMENT PROJECT

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R0( A MA I L State boundaries 02 * ? PRET

%B- i-S Z~ (K F~. 1 PA~I8A *-*PAU International boundaries J-J .04 I ' f(,PARAtVd t ' - e -/ 11 Area >vell adapfa.nAGOAS PRESIDENT .J sAo .

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V \PARAGUAY-o 0 _ r .ArecO CiLE crops a Of JANE/O O /\iea IRin croted to 97ne g SAO PAULO A1978

- , PSA RA CVATA/A Areu well adapted to caneJ

/~~~~~~~~o r ARGENTIN At10-ti, /00

AR GE N T I N A/ 0 1000 2000 0 100 200

RUGAY K KILOMETERS KILOMETERS

_,6- 42 3_0 r /

/ '~\ -.- ~AN JOSE DO 6 -- ~SN OE-

ARACATUBA> / ~~~~~~~~~~~~~~~~~ARACATUBA(ARACATUBA 36 \ B06 L.0Ž 6~ )R 01

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MARILIA .03 ~~~~~~~~~~~~~* MARILIA ~~ ~

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reG ~ ~ ~ ~ ~~?'** --~~~~~~~~52 - re i Sgrcne-]/

lb. Area in crops-1 roi rp-]197 8 ~AO PAULO~~--~~d postur"SeOPAULO,Pain crops and seeded posture- Atan,c Oc,,

1 /00o 200 ~- ~0 100 200

KILOMETERS KILOmETERS