Date: July 22nd, 2008

Author: Richard Lapper

Source: Financial Times

Latin America’s biggest development institution is prepared to defy growing environmental concern about biofuels by lending money to a $1bn-plus Brazilian ethanol project.

The board of the Inter-American Development Bank is set on Wednesday to approve proposals to provide a 15-year loan of $260m (€164m, £130m) to three new ethanol plants being built by Santa Elisa Vale do Rosario, a Brazilian company, and US private equity groups.

The facility - which will sit alongside a $360m commercial bank credit - would be the biggest ever by a multilateral institution for a green fuel initiative. But it may not be popular among the IADB’s European minority shareholders. “It is a hard project for the IADB,” said Sylvia Larrea, the executive managing the project at the bank. “There are heated debates in the market.”

Steady rises in the international oil price have spurred interest in green fuels such as ethanol and biodiesel, but initiatives have become increasingly controversial in recent months as a result of steep rises in the prices of grains and other basic foods.

Ban Ki-Moon, United Nations secretary-general, last week warned about the impact of growing crops for biofuels, suggesting that it was contributing to increased food prices.

Latin American supporters of biofuels such as Ms Larrea, however, argue that Brazil produces its ethanol from sugar cane rather than edible grains such as maize, a process widely regarded as being more energy-efficient.

They also reject accusations from environmental critics that Brazilian ethanol-related sugar production is contributing to deforestation of the Amazon, saying sugar is grown largely in the south and centre of the country, thousands of miles from the rainforest.

“The choice isn’t really between food and fuel,” said Luis Alberto Moreno, president of the IADB. “The choice is between sustainable and unsustainable biofuels. We’re convinced that certain Latin American countries have ideal conditions for producing biofuels in a sustainable way.”

Ms Larrea noted that interest in the new fuels was growing in Colombia, and sugar growers in Central America and the Caribbean had also invested in alternative fuels.

She justified the bank’s support for the project by arguing that offering longer-term finance on more flexible terms would allow the project’s managers to invest more in rapidly evolving new technologies.

The plant will include a facility to convert into energy the waste material produced after sugar cane is crushed, helping to increase overall efficiency.