Research and Innovation Inc.

Embrapa and private enterprise want to create a technology firm for ethanol

eduardo cesarBrazilian alcohol technology may be replicated in the Caribbeaneduardo cesar

Embrapa – Empresa Brasileira de Pesquisa Agropecuária (the Brazilian Company for Research into Crop and Livestock Farming) is preparing to lead a consortium that will carry out research into the field of agroenergy together with privately-owned enterprises. The partnership model will be that of a Specific Purpose Firm (Empresa de Propósito Específico), according to the  Innovation Law. “This is a new research arrangement whose purpose is to expand the volume of scientific investigation resources and enhance the competitiveness of Brazilian agribusiness, generating employment and income”, explains Embrapa’s president, Silvio Crestana. “And this will only happen if there is investment in knowledge.”

The project is being developed by FIESP – Federação das Indústrias do Estado de São Paulo (the São Paulo State Federation of Industries), with the specific objective to research and develop technologies in the field of ethanol. It is expected that the undertaking will be announced on June 6, during the 2007 Ethanol Summit organized by the Sugarcane Industry Union (Única – União da Indústria de Cana-de-Açúcar) in São Paulo, according to Roberto Rodrigues, former minister of Agriculture and Livestock Farming, chairman of the FIESP Higher Agribusiness Council and coordinator of the Fundação Getúlio Vargas Agribusiness Center (GVagro). “For the time being, Brazil is ahead of the rest of the world. But in five or ten years we could lose this position”, Rodrigues explains.

The new firm, according to Crestana, wants to combine two sets of know-how: Embrapa’s, which produces knowledge, and that of the private sector, which knows how to transform technology into a product, multiply it on an industrial scale and place it in the market. However, he recognizes that the chief advantage is the speed of action and flexibility  provided  when operating under the rules of private business law .”We have to the make the most of business opportunities and produce research that is free from the public sector’s constraints, such as the Law of Public Bids”, Crestana exemplifies.

The announcement of the establishment of the Specific Purpose Firm is subject to the completion of a complicated and unprecedented partnership model between the government and the private sectors, given that they are governed by different legal systems. “We have little tradition of working together. It’s a new arrangement and our legal advisory services have been working hard at it”, the head of Embrapa highlights.

Legal security
The creation of these new Specific Purpose Firms is seen in Article 5 of the Innovation Law, which authorizes the federal government and its entities to “be a minority holder of the capital of privately-owned specific purpose firms established to  develop scientific or technological projects to obtain innovative products or processes”. The royalties or profits will belong to the firm and will be pro-rated among its stockholders. In the case of a governmental partner, these funds may be used in aid of research, in the form of equipment, inputs, laboratory infrastructure and technological productivity grants, among others.

embrapaJatropha plant: 400 liters of oil per hectareembrapa

Despite the parameters established in the Innovation Law for the creation of Specific Purpose Firms, it was necessary to choose the type of firm to be established. “We are working with the corporation model, which, as we see it, provides the interests of the minority shareholder better, which in this case would be Embrapa, with a 49% stake in the new firm’s capital”, explains Crestana.

Choosing the right partnership model is crucial to consolidate the association, based, as he says, on “a good agreement”, i.e., one that protects the partners’ independence. “Embrapa cannot run the risk of putting public interests at the service of private interests”, he stresses. This rule also applies the other way around: the interests of privately owned businesses cannot be subject to the same control mechanisms that apply to government institutions, which are audited by the Court of Public Finance and by the Federal Government’s General Legal Office. “We won’t attract any partners if there’s any legal insecurity”, says Crestana.

The second challenge is to prepare a business plan that indicates the resources the investment demands and defines the partners’ roles and responsibilities, among the other measures required in the Agreement. “Research institutes don’t know how to do this and we’re discussing this proposal with the partners”, Crestana explains.

The third challenge is management. Embrapa, with a 49% stake in the company, will be the minority partner and have one seat on the Specific Purpose Firm’s board of directors. “We have to have answers for situations in which conflicting interests may arise. In the public sector, the choices are settled through competition. But that wouldn’t apply to a Specific Purpose Firm. The minority partner will be very important in such circumstances.”  Also under debate is the degree of autonomy of the Embrapa representative on the board of directors, as well as his/her stability, in the case of changes in government. “The person should have stability, in order to make decisions in an enterprise that is a long-term concern with assured prerogatives”, stresses Crestana.

Some major issues have been overcome, according to Crestana. “At first, we thought that to merge the company we would require congressional approval. It has now become clear that what is needed is an act signed by the President of the Republic”, he explains. “The partners establish the operating conditions from the management point of view, define the business plan and the legal issues, prepare the agreements and submit them to the president, who has the authority to make a decision.”

Another problem that has been resolved  concerns the firm’s capital structure. “We will provide intellectual capital, rather than funds. Embrapa’s contribution to the Specific Purpose Firm’s assets will be its knowledge base, its talent, its staff, its competence and its national research network. This is an advantage that is of interest to partners”, states Crestana. The difficulty is how to put a value on this intangible asset. “It’s a difficult calculation, since no universal methodology for doing this exists”. The inspiration came from the experience with Agroceres, which, when it was sold, also appraised its intellectual capital. “We can err neither on the downside, for fear of being accused of delivering state resources cheaply, nor on the upside, in which case we wouldn’t find any investors.”

Roberto Rodrigues expects the Specific Purpose Firm (EPE) to obtain sufficient resources to face US investments in biofuel research and to help consolidate Brazil’s leadership internationally. “The United States is going to earmark US$ 1.6 billion for corn ethanol research”, he warns us.

Conquering new ground
Embrapa did not engage in sugarcane related research up to 2005, when Roberto Rodrigues, the minister of Agriculture and Livestock Farming at the time, created Embrapa Agroenergia. “We recently entered the sugarcane field, but not to compete with private enterprise, such as CanaVialis (a Votorantim group venture capital firm  that focuses on sugarcane improvement through classic genetics), the Sugarcane Technology Center (CTC – Centro de Tecnologia Canavieira) or the Campinas Agronomical Institute (Instituto Agronômico de Campinas)”, stresses Crestana. “We are working towards complementarity.”

Indeed, Brazil has achieved major progress in sugarcane technology research. CanaVialis, mentioned by Crestana, tests some two million clones a year, according to Fernando Reinach, president of Alellyx. The purpose of the research, he stresses, is to increase sucrose content and to find varieties that are more precocious and that adapt better to poor soil. “Since 2006, the best clones are being planted by our clients”, states Reinach, referring to 43 mills that account for a total of one million hectares. Alellyx, another company sponsored by Votorantim Ventures, does research into the sugarcane genome. Alellyx developed a plant with sucrose content per hectare 80% greater than the average and that is already undergoing field trials. “In six years it will be in the market”, he forecasts.

embrapaDende oil: five thousand liters of oil per hectareembrapa

Embrapa’s contribution, according to Crestana, will be to conquer new agricultural ground and ensure the viability of plantations on dry terrain, for instance. “We have to create planting conditions  in the states of Minas Gerais, Goiás, in the Cerrado savannas and even in Maranhão, all of which are regions with interesting logistics and where land is cheaper than around Ribeirão Preto”, he compares.

If the Specific Purpose Firm model for ethanol is successful, Crestana expects to replicate it in other firms, always with privately-owned partners. “Biodiesel may also become a major business. The problem is that annual oil-producing crops such as soy, the castor-oil plant and the jatropha plant have a short cycle, becoming decadent in ten years. We have to replace them with perennial plants, such as dende-oil palms.”

New commodity
While it mobilizes the domestic private sector around Specific Purpose Firms, Roberto Rodrigues also articulates market alternatives for Brazilian biofuel. He is part of the Interamerican Ethanol Commission, a private non-governmental organization created last December. John Ellis Bush, the US president’s brother, Luiz Alberto Moreno, president of the Interamerican Development Bank (IDB), and Homishiro Koyzumi, former prime-minister of Japan, are also on this Commission.

The commission’s mission, explains Rodrigues, is to encourage ethanol production in Central American countries and the Caribbean, transforming this fuel into a commodity. “IDB will play a fundamental role in this undertaking”, he stresses. The bank is completing an assessment of state-of-the-art sugarcane production in Latin America and the Caribbean, in order to evaluate the areas available for planting and to define support for new investments.

Rodrigues holds a view at once enthusiastic and pragmatic about the future of agroenergy and the business outlook for Brazil. “Agroenergy will change world agricultural geoeconomics dramatically”, he foresees. And he explains: “In the 20th century, Europe’s challenge was  the food supply. They had to produce food at any cost and this included a subsidies policy that remains in place to this day, accounting for 34% of the European agricultural GDP. In the 21st century the challenge will be energy supply.” Rodrigues has no doubt that the USA – as was the case of Europe in the 20th century – will produce corn alcohol, “regardless of cost”. They are unlikely to import alcohol. Therefore, it will be up to Brazil to lead a raw materials and ethanol producers’ market formed by tropical countries in the Americas and Africa. “We will sell technology, ethanol production mills, and flex-fuel cars, among other products.”

However, research calls for funds. Therefore, on another battle front, the Interamerican Ethanol Commission plans to ask President George W. Bush to use the money from the surtax on Brazilian alcohol to finance biofuel research in this country. “It amounts to US$250 million. It may not sound like much, but it’s four times Embrapa’s US$ 40 million budget”, he calculates.

Brazilian leadership will also depend on human resources to manage new enterprises in the ethanol economy. At the same seminar at which Rodrigues plans to announce Embrapa’s partnership with the private sector, he also wants to launch an agribusiness Master’s Degree program organized by Embrapa, FGV and the University of São Paulo. The Coordinating Office for Improvement of People with Higher Education (Capes – Coordenação de Aperfeiçoamento de Pessoal do Ensino Superior) is evaluating the proposal of such a course. If approved, it should be implemented next year.