Energy Policy 39 (2011) 69436950

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Energy Policy
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The Honduran palm oil industry: Employing lessons from Malaysia in the search for economically and environmentally sustainable energy solutions
Catherine Craven
Latin American Studies Program, Simon Fraser University, Burnaby, British Columbia, Canada

a r t i c l e in fo
Article history: Received 26 March 2010 Accepted 20 September 2010 Available online 8 October 2010 Keywords: Malaysia Biofuels Honduras

abstract
Honduras is actively seeking ways to expand its palm oil industry for the purpose of processing biofuels for both internal consumption and export. This would be a critical juncture for Honduras, presenting an opportunity to move beyond the export of basic agricultural commodities and a history of path dependency and weak economic indicators. In order to glean lessons on how to approach palm oil expansion in the most effective manner, I turn to the Malaysian case. Once impoverished, Malaysia expanded plantations, promoted technological innovation, and provided nancial incentives and tax structures to develop one of the most sophisticated palm oil industries in the world. In this paper, the insights to be gleaned from the Malaysian case are organized into three key themes: Governance, Investing in Research and Human Capital, and The Environment. Recommendations for Honduras include: increased collaboration with funding bodies, NGOs and universities to foster research; scal policies that support the development of a domestic market; and key environmental controls to ensure sustainability in the long term. These insights offer practical and pragmatic solutions not only for Honduras, but also the wider community of small, tropical, developing nations seeking to develop a viable biofuels sector. & 2010 Elsevier Ltd. All rights reserved.

1. Introduction As demand for biofuel products throughout the world continues to rise, opportunities exist for select developing nations to embrace their natural resource endowments and engage in biofuel crop cultivation and, ideally, processing. Honduras is one developing nation that is actively seeking ways to expand its palm oil industry for the purposes of processing and exporting biofuels. The biofuels sector holds notable promise as it presents an opportunity to move beyond the export of basic agricultural commodities and a history of path dependency and weak economic indicators. In addition, a protable and sustainable biofuels industry would lessen Hondurass vulnerability to world petroleum prices and reduce the need for costly petroleum subsidy programs. Between 2004 and 2006 the price of gasoline and diesel imported to Honduras increased by 58.4% and 69.1%, respectively. While rising petroleum prices have signicant implications for every nation (UNDP, 2007), Hondurass experience with rising petroleum prices is particularly problematic. Rising prices have been shown to disproportionately affect the worlds poor (UNDP, 2007), and Honduras is the third-poorest nation in the western hemisphere (USAID, 2009). Furthermore, as a net importer of oil,

E-mail addresses: cec6@sfu.ca, cecraven@interchange.ubc.ca 0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.09.028

it is even more vulnerable to price uctuations (Gupta, 2008). Finally, as Table 1 demonstrates, rising oil prices in 2005 were shown to negatively impact Hondurass GDP more than any other Latin American nation. In an attempt to limit oil price pass-through to its electorate, the Honduran government has implemented a series of ad hoc oil subsidies (Baig et al., 2007). In 2006 the International Monetary Fund projected that Honduras would spend approximately 0.6% of its limited GDP on fuel subsidies (Baig et al., 2007). However, as oil prices continue to rise, it has become increasingly difcult for governments, especially in poor countries, to rein in subsidy spending while simultaneously trying to protect the interests of their impoverished populations (UNDP, 2007). The unsustainable nature of these subsidies is highlighted by the 2007 PetroCaribe agreement that former Honduran president, Manuel Zelaya, signed with regional OPEC member Venezuela. The PetroCaribe agreement offered Honduras daily shipments of 20,000 barrels of oil in exchange for agricultural products, including grains and dairy. Although the PetroCaribe agreement was initially lauded as the answer to the growing energy demands in Honduras, as I discuss later in this paper, it has also proven to be an unsustainable solution. Hondurass reliance on imports and heavy subsidies cannot be maintained. While governments may implement short-term solutions to buffer the impact of oil price uctuations, a long-term solution must seek alternative means to achieve energy security (UNDP, 2007). For Honduras, part of the

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Table 1 Rising oil prices and net impact on GDP in Latin America. Source: UNDP/ESMAP (2005). Nation Impact on GDP with a $10.00 USD increase/bbl in oil prices (% change) 0.5 0.2 1.1 2.1 1.0 1.1 0.8 3.4 3.0 0.8 0.8 2.4 0.9 7.8

Argentina Bolivia Chile Colombia Costa Rica El Salvador Guatemala Honduras Nicaragua Mexico Panama Paraguay Uruguay Venezuela

n Dinant Corporations palm oil processing plant in the state of Colo were able to produce biodiesel at $0.61 USD/litre and sell it at $0.67 USD/litre, while the price of imported diesel was approximately $0.75 USD/litre (Ribiero Gallo, 2007). While Honduran ethanol production is currently in a holding pattern, the cultivation of African and Malaysian palms surges forward in hopes of developing a sophisticated biofuels sector. The Honduran case demonstrates that, when any nation seeks to create or fortify a biofuels sector, a careful review of the available land, crops, technology, human resource capacity, and physical infrastructure is an essential rst step. Recognizing the economic potential of palm oil and palmbased biodiesel, the Honduran government began to forge relationships with producers, investors, and experts in 2005. However, technological, economic, political, and legislative weaknesses threaten to impede the development of the industry.

2. Purpose and methodology This article aims to identify policies which would enable Honduras to minimize or mitigate the aforementioned weaknesses which threaten the development of a viable palm oil sector. In order to determine key policies and best practices, it is essential that we look to successful examples in parallel sectors and contexts. For these lessons, I look to one of the most effective palm oil expansion initiatives in the world: Malaysia. Data for the Honduran case were collected in two phases. First, data were collected through a scan of the academic literature, and NGO and government publications. Given the paucity of literature pertaining to Honduran biofuels development, supplementary data were then collected in a second phase of eld research between June and August 2008. Field research was conducted in two of the four states earmarked for biofuels development in ntida and Colo n, both located on the northern Honduras: Atla coast. This research was aided and guided by my previous work in the region as an agricultural technician in 20062007. Data were collected by reviewing media releases (radio and print), reports, and publications available at the local level. Data for the Malaysian case were collected through an extensive review and synthesis of academic literature, government websites, NGO publications, and industry reports between February 2008 and June 2010.

Data not available for French Guiana, Guyana, or Suriname.No Caribbean Island nations included.

move towards domestic energy security is the development of a biofuels sector. Among the possible commodities that can be processed into biofuels, palm oil stands out as a strong contender. As will be shown in subsequent sections, agricultural land, expertise, and processing facilities for palm oil already exist in Honduras, obviating the need for expensive infrastructure development of alternative fuel sources. Research and development in the eld of alternative energies has identied a plethora of renewable resources suitable for conversion to biofuels. In Honduras, a wide variety of materials are being cultivated or reused for the production of both biodiesel and ethanol, including tilapia sh waste, sugarcane, jatropha oil, and palm oil (see Gomez, 2009). Although small-scale enterprises are experimenting with a variety of raw materials, palm oil is dominant. Honduran legislation provides equal tax benets for producers of biodiesel and ethanol products. However, palm oil biodiesel benets from an existing palm oil industry which has been manufacturing food products and cleaning agents for decades. The palm oil industry continues to expand as current demand for inexpensive food products and projected demand for biodiesel rises. Between 2000 and 2008 total land area of palm oil plantations nearly doubled, expanding from 62,000 to 115,000 ha (Gomez, 2009). In addition to increased hectares, improvements in irrigation and processing during this time have also doubled the harvest of fresh palm fruit from 665,000 metric tonnes in 2000 to 1.3 million in 2008 (Gomez, 2009). It is the combination of existing infrastructure and large, established rms that has pushed palm oil production to the forefront of alternative energy production, investment, and research and development in Honduras. In the short term, existing plantations and production facilities also drive down the price of biodiesel when compared to the price of sugarcane ethanol. For sugarcane ethanol to be economically viable in Honduras, the price of petroleum must be sustained at over $100 per barrel for an extended period of time (El Tiempo, August 24, 2008a). A new sugar mill with ethanol processing capabilities would cost approximately USD $170 million to construct in Honduras. According to the USDA Foreign Agricultural Service, the sugar mills are waiting for an improvement in the global nancial crisis, as well as biodiesel prices (Gomez, 2009). In Honduras, the production of palm-based biodiesel is also costly, but it has already been demonstrated to have an economic advantage over imported diesel. Trials conducted in 2006 at the

3. Background 3.1. Country selections: Malaysia and Honduras The Malaysian case, with more than four decades of experience, offers many lessons for developing nations wishing to not only expand their palm oil sector, but also to move palm oil products up the value-added chain. In particular, the Malaysian case offers insight into the key leadership role that government plays in implementing policies and fostering relationships and networks with members of the private sector and research communities. Similar to contemporary Honduras, when Malaysia began developing a palm oil sector in the early 1960s, it was a relatively small, tropical nation with a largely impoverished rural population (see Table 2). While both countries possess a similarly ample percentage of available agricultural land, Honduras does possess signicantly less land area. Thus, it is even more imperative that Honduras develops its biofuels industry using the most technologically efcient and environmentally responsible practices; it does not have land to spare. Encouragingly, present-day Honduras

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Table 2 Honduras and Malaysia at a glance. Data sources: World Bank (2010), UNICEF (2010a, 2010b), FAO (2010a, 2010b) and UN Ofce of Public Information (1969). Honduras 2008 Size (km2) Population (million) GDP (billion $USD) GDP/capita ($USD) GNP (billion $USD) GNP/capita ($USD) Available agricultural land Climate HDI Elementary enrolment Secondary enrolment # of Universities Year of independence 111,189 7.47 13.3 1780 31,280 km2 28% Tropical 0.732 (112th) Male: 96% Female: 97% Male: 55% Female: 68% 24 1821 Malaysia 1967 328,550 9.7 3.03 312 Tropical 5 1957 Malaysia 2008 328,550 27.5 221.77 8064 78,700 km2 24% Tropical 0.829 (66th) Male: 100% Female: 100% Male: 66% Female: 72% 46 1957

has more universities and tertiary education opportunities than Malaysia did when it rst established the palm oil industry. Honduras also benets from previously developed palm oil infrastructure, and an established, although not necessarily more stable, government and legal system. 3.2. Malaysia: global leader in the palm oil sector The Malaysian palm oil industry continues to dominate the global supply of palm oil; Malaysia has maintained its position as the global leader for more than three decades and has regularly strengthened the industry by producing value-added palm oil products. The most recent manifestation of this national commitment to the fortication of the palm oil sector has been the domestic production of biofuels, primarily for export. Today the palm oil sector accounts for nearly seven per cent of Malaysias GDP and provides more than 1.4 million jobs (MPOB, 2010). The successes of the Malaysian palm oil industry are often credited to the state, which has played an integral role in spearheading the development of the industry since the 1960s. In recent years the Malaysian palm oil production model has been adopted and applied in a variety of other small (either physically or economically, or both) and tropical nations, including Indonesia. Central American nations are also intrigued by the Malaysian process and palm oil technology, as the market for biofuels continues to expand. Oil palms were introduced to Malaysia in the late 19th century, but it was not until the 1960s that the government intervened to strengthen and expand this sector. In 1968, when the Malaysian state had been independent for just over a decade, the government launched a comprehensive strategy to establish the foundations necessary for a productive palm oil sector. Although the early set of strategies facilitated the expansion of an export industry centered on basic commodities, the Malaysian state was not complacent. Subsequent initiatives were focused on developing, producing, and exporting value-added products; these palm oil products have become increasingly sophisticated over the years. Moving palm oil products up the value-added chain required an integrated state-led plan; in the Malaysian case these are known as the Industrial Master Plans 1 and 2 (IMP 1 and IMP 2). IMP 1 was introduced in 1986 and set specic targets and provided institutional support to improve renery technology, stimulate palm oil R&D, and develop complementary domestic industries (Rasiah, 2006). As the industrial capacity to process palm oil products within Malaysia increased, the country actually began importing crude palm oil (CPO) from neighbouring Indonesia. The industrial and economic ability to process

imported CPO indicates a notable shift in the Malaysian palm oil industry, a shift which has moved the CPO up the value-added chain signicantly with the development of palm-based biodiesel. The advent of biofuel production in Malaysia is another critical juncture in the development of the palm oil sector; it is here we see the full shift away from basic agricultural commodities and a decisive step towards a sophisticated and valuable product. The Malaysian government began experimenting with biofuel production in 1982. However, it was not until 2006 that the Ministry of Plantation Industries and Commodities launched the National Biofuel Policy, which aims to continue the expansion of Malaysian biofuel exports. Currently, the majority of these biofuels are destined for the European market; the demand for biofuels in the EU is estimated to jump from 3 million tonnes in 2005 to 10 million by 2010. This brief outline of the Malaysian case demonstrates the farreaching and highly coordinated efforts of the government to not only develop an industry, but also to push their products up the value-added chain. While experts such as Fold (1994) and Rasiah (2006) acknowledge that the Malaysian case has several implicit lessons for other developing nations (they both mention Africa), the information is assumed to be easily transferable to a variety of settings with relatively little context-specic analysis. I have organized the paper around three themes that highlight the key lessons for technology transfer: Governance, Investing in Research and Human Capital, and the Environment. The rst two themes, governance and investing in research and human capital, were selected because they best demonstrate what the nationally led Malaysian case got right. These two sections provide examples of legislation, policies, and practices which may serve as a template for other nations. Conversely, the nal section on the environment largely serves as a cautionary tale, highlighting practices and problems that should be avoided. By looking at not only the major successes but also the most signicant challenge of the Malaysian case, a more complete set of lessons and recommendations can be extracted.

4. Findings 4.1. Governance Good governance is the single most important factor that contributed to palm oil success in Malaysia (Chandra, 2006; Rasiah, 2006). Comprehensive, multi-level, multi-ministry 30-year plans were implemented by the Malaysian government to incorporate legislation, research, education policy, nancing and investment, legal frameworks, taxation schemes, infrastructure, rural

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development, and land distribution. For a relatively new nation to implement these sweeping reforms and emerge successfully required strong institutions capable of overseeing the political, nancial, and practical implementation of these plans. Malaysian expertise in this area is widely recognized in the governance literature. As Moreno-Dodson of the World Bank states in reference to Malaysia, the idea that development is about getting good governance and institutions right is now widely acceptedydevelopment and solid institutions are closely linked (2005, 29). Furthermore, the Transparency International Corporation ranks Malaysia as cleaner, in governance terms, than some industrialized nations, and Kaufmann (1997) of the World Bank acknowledges the signicant improvements made since the 1980s. 4.1.1. Malaysia From the onset of the Malaysian industrialization of the palm sector, the government has worked closely with the private sector to encourage investment and technological improvements. One of the initial concerns was motivating national entrepreneurs and companies to move beyond the production of basic commodities. The Pioneer Industries Ordinance of 1958 provided tariff protection and shelter from income tax for both domestic and foreign rms in the manufacturing sector, including those processing palm oil. Depending on the level of investment, these incentives were available for two to ve years. Within ten years, rms with pioneer status increased from 18 to 148 (Sivalingam, 1994). The Investment Incentives Act of 1968 followed, allowing rms similar provisions. Although both of these laws proved viable, the Malaysian electorate demanded more jobs in these growing sectors. To facilitate job and industry expansion the government also subsidized factory/processing plant space, and established free trade zones/export processing zones (EPZs) near major freeways and ports. Specic provisions for palm oil products were also introduced in this period. Processed palm oil products (PPOs) were exempt from export duties and taxes, while export duties for crude palm oil products (CPOs) were increased. These types of export policies, argues Rasiah (2006), encouraged PPO production and helped the Malaysian industry move palm oil up the value-added chain at a critical point. Although foreign direct investment (FDI) in the palm oil sector was relatively low in the 1960s and 1970s, the 1986 Promotion of Investment Act is credited with attracting the necessary foreign capital required for key technological investments. FDI increased dramatically following the 1986 act and, consistent with many of the Southeast Asian Tigers, the Malaysian government was capable of guiding this FDI to ensure sufcient technology transfer and domestic benet (Sivalingam, 1994). As Hira (2007) points out, FDI is subject in part to the conditions that the host government sets up for it. The Malaysian government was able to guide FDI, via state-sanctioned restrictions, to export-oriented sectors, including palm oil. Furthermore, increasing levels of FDI throughout the 1960s to 1990s corresponded to increased domestic investments. Domestic investment as a percentage of GDP doubled, from 14% to 28% in roughly the same period (Wade, 1990). The Malaysian government was able to tailor these acts and strategies to simultaneously meet the needs of both national and foreign investors; this political dexterity is the product of an invested government, capable of balancing its relationships with a variety of actors, including both domestic entrepreneurs and FDI. 4.1.2. Honduras Unlike Malaysia, Honduras does not currently demonstrate the political experience or dexterity required to simultaneously balance the demands of multinational corporations (MNCs) and

local stakeholders. Furthermore, present-day Honduras does not offer international investors and MNCs the stable environment which one would expect in order to attract private foreign capital (Rasiah, 2004). The instability that I am referring to is typied by the Honduran political crisis of 2009. On June 28, 2009, democratically elected President Manuel Zelaya was unconstitutionally forced into exile by the Honduran military (Seligson and Both, 2009). This military coup has been condemned worldwide, and has resulted in strained international relations and the suspension of key foreign aid to the country (Main and Johnson, 2009). The coup also had immediate repercussions for the energy sector, as the aforementioned PetroCaribe oil shipments from Venezuela were suspended (El Universal, July 3, 2009). In the ensuing months an interim government was installed and elections were held on November 29, 2009. In January 2010 the government, led by newly elected president Porrio Lobo, shufed political positions and congress hastily put together a strategic national plan for 20102038 (Gobierno de Honduras, 2010). The events of 2009 have potentially serious, and not yet fully understood, ramications for the energy sector. The Ministry of Agriculture and Livestock, the ministry principally responsible for biofuels development, is now under new leadership, and has also embarked on its own strategic plan for 20102014 (Secretaria de a (SAG), 2010). While the ministry states a Agricultura y Ganader continued commitment to biofuels development, it has also expressed a growing interest in alternative biofuels, specically the Jatropha plant (SAG, personal communication, June 28, 2010). The policies surrounding palm oil production in the post-2009 era is undoubtedly a key area for future research. Given this tumultuous and uncertain context, the policies that I describe in the following section have been selected with a focus on developing a strong domestic market, rather than focusing on a viable export sector or attracting MNCs, neither of which I believe would be feasible at this particular juncture. Here I focus specically on policies that will (a) support local rms and entrepreneurs and (b) restrain those MNCs which continue to view Honduras as the quintessential banana republic, a source country for low-value, minimally processed goods. Latin America in general does not have a good history of guiding incoming capital, FDI in particular (Hira, 2007). Honduras, as a relatively weak and politically unstable state, runs the risks of MNCs usurping its power as well as economic and technological benets in the palm oil sector (for an excellent discussion on political stability and MNCs in Latin America see Biglaiser and DeRouen, 2006). As Fieldhouse (1999) asserts, the MNC will only be as useful or as dangerous as the country allows it to be (1999, 285). Despite key differences in political stability and state strength, much can be learned from the Malaysian example, which demonstrated a commitment to supporting domestic rms, entrepreneurs and small-scale producers, while simultaneously bargaining with MNCs. As in Malaysia, it is essential to grant income tax exemption schemes and pioneering status to domestic entities, and create export processing zones for industry expansion. These policies can be applied to foreign rms, as they may be useful in garnering capital in the initial phases. However, this must be accompanied by policies that support and encourage local producers (for example, subsidizing processing plants, supporting small-scale cooperatives, and granting even greater nancial incentives). Finally, implementing a policy in which PPOs are tax-exempt and CPOs are subject to higher export taxes used successfully in Malaysia would directly encourage local entrepreneurs and corporations to invest in PPO production in lieu of CPOs. This would also prevent the country from slipping into a banana

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republic-style scheme in which palm oil fruits nd their way to the old banana ports, to be exported and processed elsewhere. There is already a risk of international corporations utilizing Honduras as a palm oil supplier rather than a biofuels supplier. In 2008, a team of Italian investors arrived in Honduras to assess the availability of palm oil, which they intended to convert to biofuels for European consumption (El Tiempo, October 3, 2008b). To secure their earning potential, local palm oil entrepreneurs require government tax incentives, domestic technology, and R&D, and a certain level of government protection from overbearing FDI. As Lundvall (1995) warns, The on-going process of innovation changes the social conditions of citizens and regions some for the better and some for the worse. The most important role of the nation state in this context has been to compensate for the weak and put some restraint on the strong (7). The Honduran government has the ability to put some restraint on the strong, notably the MNCs, via taxation and export strategies similar to those utilized by Malaysia. Indeed, Honduras does offer investors tax and tariff benets under the Ley de Biocombustibles/Biofuels Law (2007); however, no stipulations are outlined pertaining to the use of these biofuels. Currently, relatively strong corporations are able to reap the benets of the Ley de Biocombustibles, even when production is strictly limited to internal corporate usage. Furthermore, unlike the taxation schemes in Malaysia, the current Honduran tax and tariff benets are the same for domestic entrepreneurs and large multinational corporations. 4.2. Investing in research and human capital The aforementioned series of government policies implemented in Malaysia created scal incentives that facilitated the growth and expansion of both domestic and international companies capable of processing crude palm oil into higher value processed palm oil products. However, scal incentives would have rendered few results without readily available and increasingly sophisticated palm oil processing technology. Of the 50 palm oil processing rms interviewed by Rasiah (2006), more than 35 credit their success to government-led investments in palm oil research and development. Again, the Malaysian case highlights the need for a variety of working relationships, not only with the private sector, but also with universities and research institutes. Nationally focused development literature, such as National Innovations Systems (NIS), is replete with data highlighting the need for key investments in research (see Lundvall, 1995; Malecki, 1991). What Malaysian planners understood, however, is that investments in research and innovation are incomplete and inefcient if they are not coupled with investments in human capital. For more than half a century the Malaysian government has provided key investments in research, education, skills training, and job provision for its citizens. 4.2.1. Malaysia Complementary to the relationships forged with rms, the Malaysian state also began to actively invest in palm oil research and development in the mid-1970s. Of particular note is the creation of PORIM, the Palm Oil Research Institute of Malaysia, in 1979. PORIM was further fortied under the auspices of the 1986 and 1996 Industrial Master Plans. During this period the institute expanded to include R&D and technician training in a variety of palm oil products, including oleochemicals, specialty fats, processed palm kernel oil, and biofuels. In both IMPs, nancial

incentives for rms remained relatively similar to the acts and policies of previous decades (Rasiah, 2006), while the research and development arena underwent notable changes. Malaysia exemplies the NIS literatures call for publicly funded R&D and key investments in human capital, especially in developing nations (see Lundvall, 1995; Malecki, 1991). During IMP 1 and 2, PORIM, the Malaysian Agricultural Research and Development Institute, and universities received signicantly increased funds for palm oil R&D, which domestic rms had open access to. In 1991, the Intensication of Research Priority Areas (IRPA) established a ve-year palm oil research fund of more than 1 billion RM (Malaysian Ringgit, or $370 million USD) for universities and research institutes. The IRPA was extended for an additional ve years (to 2001) given its proven successes in the initial period (Rasiah, 2006). In 2000 the PORIM was incorporated into the Malaysian Palm Oil Board (MPOB). The current organizational structure of the MPOB demonstrates the efcacy of the IMP university investments; more than half of the MPOB managers and leaders have obtained their PhDs (MPOB, 2008). During this period, specic provisions were also made for human capital investments in the palm oil sector. In 1993 the IMP implemented the Human Resource Development Fund, which provided double tax deductions for approved skills training expenses to rms with at least 50 employees (Rasiah, 2006). The sophisticated functioning of the MPOB today is a direct result of the key investments that the state made in previous decades. The long-term benet of investment in research and human capital is one of the most important lessons to be gleaned from the Malaysian case.

4.2.2. Honduras As we see in the Malaysian case, key investments made in universities, research institutes and individual researchers were, and continue to be, essential for the development and maintenance of a thriving industry. Honduras is home to one of the foremost agricultural research universities in Latin America, El Zamorano. The Zamorano is a technologically advanced university undoubtedly capable of undertaking palm oil/biofuel research. In 2005, the Zamorano identied investing and biofuel research as one of its key priorities in its ve-year strategic plan (Zamorano Board of Trustees, 2005). Research, student training, and community engagement activities related to biofuels development are currently underway. The Zamorano has a limited relationship with the Honduran state, in part because it is a nonprot university funded primarily by USAID and the German government; however, other state-funded universities also have potential for involvement in the biofuels sector, notably the noma de Honduras (UNAH) and the Universidad Nacional Auto gica de Honduras (UTH), which both have Universidad Tecnolo ntida. Furthermore, campuses in the key port city of La Ceiba, Atla universities other that Zamorano will be able to provide key training in related elds, such as industrial engineering, resource management, administration, and marketing. The real issue here is not lack of interest or potential, but lack of available nancial capital for university and research investments, especially for those post-secondary educational institutions that rely solely on state funding. One of the most encouraging biofuels developments in the educational sector has been the partnership between the Colombian and Honduran governments and the La Ceiba campus of the UNAH, the Centro Universitario Regional ntico (CURLA). With a donation from the Columbia del Litoral Atla government, a biodiesel plant capable of processing up to 7500 litres per day was established in 2008 at the CURLA campus. It was designed as a centre for instructional and research pur-

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poses as well as commercial production (El Heraldo, August 27, 2008c). While limited advances are being made in the educational sector, as innovation expert Malecki notes, the greatest weakness in S&T [science and technology] in developing countries is the fact that little industrial R&D takes place (1997). Fortunately for Honduras, there appears to be international and NGO interest in investing in biofuel R&D in developing countries. Examples of this at the industry level are the International Finance Corporation (IFC) and Inter-American Development Bank (IADB) loans secured by the Dinant corporation and the Honduran government, respectively, for investments in equipment and improved-yield seeds (IFC, 2009). Now the issue becomes securing funds for investments that will allow those seeds and their fruits to move up the value-added chain for Honduran benet.

4.3. The environment While the Malaysian case effectively demonstrates how to develop a palm oil sector, move products up the value-added chain and invest in human capital and innovation, it also highlights environmental concerns and challenges, and the potential damage this industry may inict if not properly managed. In recent years the Malaysian government has acknowledged, and in some cases, improved upon its environmental track record. Notable improvements have also been achieved by local and international NGOs and companies seeking sustainability certication as demand for their product rises in other parts of the world, including the European Union. As United Nations Environmental Programme (UNEP) Executive Director Klaus Topfer reminds us: Industry is a key partner for sustainable development. We rely on industry not only for reducing the environmental impacts of the products and services it provides us with; we also increasingly depend upon industry for the innovative and entrepreneurial skills that are needed to help meet sustainability challenges. More than ever before, this will require more integrated approaches and partnerships with governments and civil society (UNEP, 2002, 11, emphasis mine). Looking at both the environmental failures of the Malaysian case, as well as its more recent improvements, provides a unique set of lessons, and warnings, for other nations currently developing and expanding their palm oil sectors.

4.3.1. Malaysia The environmental concerns centered on the Malaysian palm oil industry are plentiful, and should not be overlooked. It is notable that in some of the most comprehensive documents pertaining to the development of the Malaysian palm oil industry (Fold, 2000; Moreno-Dodson, 2005; Rasiah, 2006), there is virtually no mention of the environment. As sustainability certication discussions and environmental awareness increase, these issues can no longer be excluded from studies of the Malaysian palm oil success story. The international NGO community and environmental activists have been the most vociferous opponents of palm oil expansion in Malaysia (see Tauli-Corpuz and Tamang, 2007; Lord and Clay, 2007; Friends of the Earth International, 2008; Painter, 2007). Members of the academic community have also outlined legitimate concerns (see Mol, 2007; Perry and Singh, 2002). Cited concerns include deforestation, monopolistic monocultures, reduced habitats for endangered wildlife, slash-and-burn practices for land-clearing, and compromised air quality on account of burn practices.

Although palm oil plantations have the potential to serve as effective carbon sinks, and can theoretically be traded for carbon credits under the Kyoto protocol (Sumathi et al., 2008), burns used to clear land for palm oil plantations quickly negate these potential carbon benets. Burns not only contribute to rapid deforestation, reduced carbon sinks, and compromised habitats for wildlife, but they are also a detriment to soil integrity and air quality. They also contribute to regional haze, which has been demonstrated to directly reduce plantation efciencies and prots by reducing photosynthesis (Lord and Clay, 2007). While concerns related to palm oil expansion are recognized as a national problem, several researchers have made specic reference to environmental practices in the state of Sarawak (Fitzherbert et al., 2008; Lopez and Laan, 2008; Othman, 2006). The fact that there is variance across Malaysian states is crucial. Under federal legislation, the Sarawak state manages its own environmental regulations and thus may not operate in the same manner that other states do. In other situations the federal government continues to exercise power in Sarawak, including the management of protected forests and land reserves. Lopez and Laan (2008) note that federally controlled reserve lands are generally better managed and protected than those administered by individual states. However, just as there are localized environmental challenges and failures, so too are there localized successes. In response to growing environmental concerns, the economic potential of sustainability certication, and a dose of bad press, the Malaysian government as well as individual organizations and companies have introduced a variety of sustainability initiatives. In 2006 the Malaysian government and industry representatives each contributed $3.2 million USD for start-up funds for the Malaysian Palm Oil Wildlife Conservation Fund (MPOWCF). Since its inception the MPOWCF has provided funds for a Jungle Patrol, which works in conjunction with the Forestry Department to monitor and protect animals living in forest reserves that border plantations. It has also provided funding to the University Malaysia Sabah to conduct biodiversity studies. While $6.4 million can be considered a paltry sum compared to the multibillion-dollar palm oil industry, it is a step in the right direction. Another promising initiative occurring at the industry level is the international corporation United Plantations. United Plantations operates in several states throughout Malaysia, and has recently been recognized by the Roundtable on Sustainable Palm Oil (RSPO) as an innovative leader in this eld. In its Malaysian operations, United Plantations has created a lagoon nature reserve for rare and endangered species, implemented a zero-burn policy on its plantations, and funded seed research to increase the productivity of land already in use. Although the arena of sustainability certication remains highly contested, the achievements of United Plantations should not be wholly negated. While organizations such as United Plantations have voluntarily implemented a zero-burn policy, Lord and Clay note that some RSPO principles would be superseded if national laws already banned burning (2007, 11). They also state that this type of policy is easy to enforce with readily available technology; for example, burn scars are visible on satellite images for up to three years (Lord and Clay, 2007). The careful study of a wide variety of sustainability initiatives in Malaysia, both voluntary and enforced, is another potential area for future research. This research could provide useful data for the sustainability certication debate and help inform future sustainability efforts both in Malaysia and abroad. The discussion of biofuel sustainability has become increasingly pertinent as the European Union is currently considering a variety of bills pertaining to fuel quality and the incorporation of biofuels. These bills, not yet fully developed or implemented, include proposals for sustainability criteria and certication standards for biofuel producers. There are

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concerns that Malaysian biofuels will not meet these proposed standards. Closer examination of the biofuel organizations that do measure up to these standards, such as United Plantations, could provide useful models for policy makers and producers in other countries that are establishing a biofuel sector. 4.3.2. Honduras Honduran policy makers would be wise to heed the warnings highlighted in the Malaysian case. Failure to do so would be a costly mistake, both in environmental and economic terms. Many of the initial palm oil plantations in Honduras were developed on plantations formerly used for banana cultivation, but if the initial investments prove to be successful there will likely be a desire to expand onto other lands, including habitat for a variety of native plants and animals. In one of the poorest nations in the western hemisphere, the drive for economic progress could quite easily, and understandably, trump other valid issues, including environmental preservation and equitable development. Similar concerns have been raised with other industries in Honduras, including shrimp mariculture and cattle raising in the south, extensive banana and pineapple plantations in the north and forestry practices in the pristine Mosquito Coast region (see Stonich, 1992, 1995). It was pressure from environmental groups concerned with forestry practices in the Mosquito Coast region that served as the impetus for the Honduran government to introduce its rst environmental law in 1993. Similar to Malaysia, the ability of the government to enforce environmental laws on a national scale is a signicant issue. While working as an environmental technician n, I observed the challenges that in the Honduran state of Colo ofcials face in implementing these laws. In the extensive, rural, isolated municipality where I worked, one government representative was charged with overseeing all issues related to the environment, sheries, forestry, and agriculture. He worked on horseback. For that same municipality, more than a dozen NGO employees were also working on projects related to environmental preservation and sustainability with funding from a variety of Honduran and international donors. This highlights the astute observation of UNEP Executive Director Klaus Topfer that governments, industry, and civil society must work together in pursuit of environmentally sustainable policies and practices. One of the most promising partners for the Honduran government would be the Zamorano University, which has a strong history of conducting sustainability research, training agricultural and environmental experts, and engaging in community outreach activities with small-scale farmers and agricultural entrepreneurs. While it took Malaysia more than four decades to develop a fund for conservation, Honduras would be wise to implement this lesson from the start. This would be benecial from an economic as well as an environmental perspective. As biofuel competition increases, palm oil producers will be required to demonstrate environmental sustainability and net carbon benets in order to remain competitive in the long term. The increasing importance of environmental concerns on political agendas around the world means that sustainability will continue to be a key issue in the quest for alternative energy sources.

 

substantial fund specically for students, researchers and faculty undertaking palm oil/biofuel R&D. Work with these post-secondary institutions and collaborate with NGOs to fund and conduct environmental research, including studies of land use, conservation, biodiversity, pre- and post-environmental assessments, and habitat studies for regions bordering plantations. Develop national legislation pertaining specically to environmental conservation in palm oil intensied regions and work with local politicians, leaders, NGOs, indigenous groups, and citizens to collectively develop mechanisms to preserve the environmental integrity of these areas. Rather than relying on voluntary industry standards, implement a mandatory zero-burn policy, which can be tracked with readily available satellite imagery. Solicit funds from international nancial bodies (IMF, IADB, IFC) for loans (with a reasonable amortization period) for investments in palm oil R&D, particularly loans for enterprises wishing to produce biofuels for both internal use and commercial consumption. Implement additional income tax incentives, export taxes and factory subsidization schemes to primarily benet domestic rms and entrepreneurs. Large corporations beneting from the highest levels of incentives must demonstrate a production plan capable of supplying biofuels for domestic consumption. Implement taxation schemes which allow for sizeable tax deductions for companies that provide their staff with approved training activities in order to build human capital on the job, not just in universities and classrooms. The government, NGOs and local chambers of commerce should develop regional plans in conjunction with small-scale producers to improve their viability in an expanding and potentially competitive industry. Create a government-led body (comprised of politicians, economists, palm oil experts, and businessmen) to guide FDI. While actively pursuing appropriate levels of FDI, this body should also develop the necessary restrictions to guide FDI and ensure maximum benet for local citizens and entrepreneurs.

It would be lofty and impractical to assume that the Honduran government, or any government for that matter, could immediately and effectively implement all of these recommendations. This is particularly true within the context of the Honduran political crisis of 2009 and ensuing uncertainty. Although the long-term goal for Honduras might be to develop a protable biofuels export sector, supporting a strong domestic market in the interim, thereby potentially reducing the heavy reliance on imported energy and costly subsidies, is a step in the right direction. While the Honduran government may not be able to control world petroleum and biofuel prices or impending natural disasters, it does have the tools to improve upon its own internal policies and investments. It is imperative that the Honduran government begin to undertake controlled and measurable steps to ensure the longevity and sustainability of this budding industry.

5. Recommendations The following recommendations have been gleaned from the Malaysian case in order to pinpoint feasible actions that other governments taking leadership in the biofuels sector can commence immediately:

Acknowledgements This paper was presented in Fall 2009 at Simon Fraser Universitys workshop on a global market for biofuels, sponsored by SFU, the AUCC-IRDC, and the Government of Canada. My deepest thanks to Dr. Andy Hira for organization the workshop and inviting me to participate. I would also like to thank Dr. Hira and two anonymous reviewers for their constructive feedback on this manuscript.

 Work with post-secondary institutions to lobby funding

agencies (for example, USAID) for the establishment of a

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