Promoting Biofuels: Implications for Developing Countries

Jörg Peters and Sascha Thielmann

#38

R

uhr

Ec

onomic

P

apers

RWI

ESSEN

Ruhr Economic Papers

Published by

Ruhr-Universität Bochum (RUB), Department of Economics Universitätsstraße 150, 44801 Bochum, Germany

Technische Universität Dortmund, Department of Economic and Social Sciences Vogelpothsweg 87, 44227 Dortmund, Germany

Universität Duisburg-Essen, Department of Economics Universitätsstraße 12, 45117 Essen, Germany

Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI Essen) Hohenzollernstrasse 1/3, 45128 Essen, Germany

Editors:

Prof. Dr. Thomas K. Bauer RUB, Department of Economics Empirical Economics

Phone: +49 (0) 234/3 22 83 41, e-mail: [email protected] Prof. Dr. Wolfgang Leininger

Technische Universität Dortmund, Department of Economic and Social Sciences Economics – Microeconomics

Phone: +49 (0) 231 /7 55-32 97, email: [email protected] Prof. Dr. Volker Clausen

University of Duisburg-Essen, Department of Economics International Economics

Phone: +49 (0) 201/1 83-36 55, e-mail: [email protected] Prof. Dr. Christoph M. Schmidt

RWI Essen

Phone: +49 (0) 201/81 49-227, e-mail: [email protected]

Editorial Office:

Joachim Schmidt

RWI Essen, Phone: +49 (0) 201/81 49-292, e-mail: [email protected]

Ruhr Economic Papers #38

Responsible Editor: Christoph M. Schmidt

All rights reserved. Bochum, Dortmund, Duisburg, Essen, Germany, 2007 ISSN 1864-4872 (online) – ISBN 978-3-86788-036-7

The working papers published in the Series constitute work in progress circulated to stimulate discussion and critical comments. Views expressed represent exclusively the authors’ own opinions and do not necessarily reflect those of the editors.

Ruhr Economic Papers

#38

Jörg Peters and Sascha Thielmann

RWI

ESSEN

Bibliografische Information der Deutschen Nationalbibliothek

Die Deutsche Nationalbibliothek verzeichnet diese Publikation in

der Deutschen Nationalbibliografie; detaillierte bibliografische Daten

sind im Internet über http://dnb.d-nb.de abrufbar.

ISSN 1864-4872 (online)

ISBN 978-3-86788-036-7

Jörg Peters and Sascha Thielmann*

Promoting Biofuels: Implications for Developing Countries

Abstract

Interest in biofuels is growing worldwide as concerns about the security of

en-ergy supply and climate change are moving into the focus of policy makers.

With the exception of bioethanol from Brazil, however, production costs of

biofuels are typically much higher than those of fossil fuels. As a result,

promo-tion measures such as tax exemppromo-tions or blending quotas are indispensable for

ascertaining substantial biofuel demand. With particular focus on developing

countries, this paper discusses the economic justification of biofuel promotion

instruments and investigates their implications. Based on data from India and

Tanzania, we find that substantial biofuel usage induces significant financial

costs. Furthermore, acreage availability is a binding natural limitation that

could also lead to conflicts with food production. Yet, if carefully implemented

under the appropriate conditions, biofuel programs might present

opportuni-ties for certain developing countries.

JEL Classification: O38, Q42, Q56

Keywords: Renewable energy, environmental policy, government policy,

economic development

January 2008

* Jörg Peters, RWI Essen; Sascha Thielmann, Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ), Eschborn, Germany. – We are grateful for valuable comments and sug-gestions by two anonymous referees as well as Christoph M. Schmidt, Colin Vance, Sven Neelsen, and in particular Manuel Frondel. – All correspondence to Jörg Peters, Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI Essen), Hohenzollernstr. 1-3, 45128 Essen, Germany, e-mail: [email protected].







 ,QWURGXFWLRQ



%LRIXHOV DUH HQMR\LQJ JURZLQJ ZRUOGZLGH LQWHUHVW DV FRQFHUQV DERXW WKH VHFXULW\ RI HQHUJ\ VXSSO\ DQG FOLPDWH FKDQJH DUH PRYLQJ LQWR WKH IRFXV RI SROLF\ PDNHUV 0DQ\ REVHUYHUV FRQVLGHU ELRIXHOV WR EH WKH RQO\ IHDVLEOH RSWLRQ IRU WKH VXEVWLWXWLRQ RI IRVVLO IXHOV LQ WKH WUDQVSRUW VHFWRU &XUUHQWO\ WKH PRVW LPSRUWDQW ELRIXHOV DUH ELRGLHVHO DQG ELRHWKDQRO ± FRPPRQO\UHIHUUHGWRDVILUVWJHQHUDWLRQELRIXHOV%RWKFDQEHXVHGHLWKHULQQHDWRUEOHQGHG IRUPWKRXJKQHDWXVDJHUHTXLUHVFRPSDWLEOHHQJLQHV:KLOHELRGLHVHOLVEDVHGRQRLOFURSV OLNH UDSHVHHG VXQIORZHU RU VR\ ELRHWKDQRO LV PDGH RXW RI VWDUFK FURSV OLNH VXJDU FDQH ZKHDWRUFRUQ,QPRVWFDVHVWKHVHELRIXHOVRQO\XVHSDUWRIWKHIHHGVWRFNFURS,QFRQWUDVW WKHVRFDOOHGVHFRQGJHQHUDWLRQELRIXHOV±HJ%LRPDVVWR/LTXLG%W/±WDNHDGYDQWDJHRI WKHZKROHFURS  :LWKIHZH[FHSWLRQV±ELRHWKDQROLQ%UD]LORUELRGLHVHOIURPZDVWHRLO±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%HWZHHQDQG %UD]LOH[SDQGHGLWVELRHWKDQROSURGXFWLRQIURPWR0LRW6FKPLW]ZKLOHWKH(8 WULSOHGELRGLHVHOSURGXFWLRQIURP0LRWLQWR0LRWLQ(%%



*LYHQ WKHVH WUHQGV DQG SHUVLVWHQWO\ KLJK FUXGH RLO SULFHV PRUH DQG PRUH GHYHORSLQJ FRXQWULHV DUH H[DPLQLQJ SRVVLELOLWLHV WR VXEVWLWXWH IRVVLO IXHOV LQ WKH WUDQVSRUW VHFWRU ZLWK ORFDOO\SURGXFHGELRIXHOV7KLVVHHPVDOOWKHPRUHVHQVLEOHDVFOLPDWLFFRQGLWLRQVLQPDQ\ GHYHORSLQJ FRXQWULHV DUH EHQHILFLDO IRU ELRPDVV SURGXFWLRQ DQG ELRIXHO IHHGVWRFN FURSV LQ SDUWLFXODU ,Q IDFW WKH ,QWHUQDWLRQDO (QHUJ\ $JHQF\ H[SHFWV WKH SURGXFWLRQ RI ELRIXHOV LQ GHYHORSLQJ FRXQWULHV WR LQFUHDVH VXEVWDQWLDOO\ LQ WKH IROORZLQJ \HDUV ,($ D +RZHYHU LQFUHDVLQJ ELRIXHO SURGXFWLRQ QRW RQO\ IDFLOLWDWHV IXHO LPSRUW VXEVWLWXWLRQ DQG FRQVHTXHQWO\ WKH DEDWHPHQW RI JUHHQKRXVH JDVHV 7KHUH LV D GRZQVLGH DV ZHOO 0RVW LPSRUWDQWO\ SURPRWLRQ SROLFLHV WKDW XVH WD[ H[HPSWLRQV DQG EOHQGLQJ TXRWDV ZLOO EXUGHQ HLWKHUWKHQDWLRQDOEXGJHWVRUWKHIXHOFRQVXPLQJKRXVHKROGVDQGILUPV)XUWKHUPRUHFURS SURGXFWLRQ RIWHQ UHTXLUHV PDVVLYH DFUHDJH DQG PD\ OHDG WR ODQGXVH FRQIOLFWV LQ IRRG





SURGXFWLRQ(YHQWKHHQYLURQPHQWDOHIIHFWVKDYHWREHUHJDUGHGDVDPELJXRXV7KHUHIRUH ELRIXHOSURJUDPVLPSOHPHQWHGE\GHYHORSLQJFRXQWULHVPXVWEHVFUXWLQLVHGFDUHIXOO\LQRUGHU WRDYRLGZHOIDUHORVVHV



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



6LQFH H[HPSWLRQ IURP PLQHUDO RLO WD[DWLRQ LV WKH PRVW IUHTXHQWO\ DSSOLHG SURPRWLRQ LQVWUXPHQW WKH VXEVHTXHQW VHFWLRQ H[DPLQHV WKH HFRQRPLF MXVWLILFDWLRQ RI PLQHUDO RLO WD[DWLRQZKLOH6HFWLRQGLVFXVVHVWKHDSSURSULDWHQHVVRIWD[FUHGLWVIRUELRIXHOV6HFWLRQ JDXJHV WKH ILQDQFLDO FRQVHTXHQFHV RI ELRIXHO XVDJH LQ ,QGLD DQG 7DQ]DQLD 6HFWLRQ  UHDSSUDLVHVWKHOLPLWVDQGRSSRUWXQLWLHVRIELRIXHOVDQGFRQFOXGHVE\VXJJHVWLQJFULWHULDIRU WKHVXFFHVVIXOVHWXSRISURJUDPVLQGHYHORSLQJFRXQWULHV



 7KHRUHWLFDO-XVWLILFDWLRQIRU)XHO7D[DWLRQ



7KH HFRQRPLF MXVWLILFDWLRQV RI H[FLVH IXHO WD[HV DUH VXPPDUL]HG E\ 1HZEHU\  ZKR HQXPHUDWHVIRXUPDLQDUJXPHQWV)XHOWD[DWLRQFDQEHUDWLRQDOL]HG

• DVDVHFRQGEHVWLQVWUXPHQWIRUFKDUJLQJIRUURDGLQIUDVWUXFWXUH • WRLQWHUQDOL]HH[WHUQDOFRVWVWKDWDUHPDLQO\FDXVHGE\SROOXWLRQ

• DV SDUW RI D VHFRQGEHVW WD[ VWUXFWXUH WR LPSURYH WKH HIILFLHQF\ SURSHUWLHV RI WKH UHPDLQLQJWD[HVDQG •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





7KH LQWHUQDOL]DWLRQ RI H[WHUQDO FRVWV FDXVHG E\ YHKLFOH XVDJH LV D IUHTXHQWO\ FLWHG MXVWLILFDWLRQIRUIXHOWD[DWLRQ([WHUQDOFRVWVDUHLQFXUUHGE\DVRFLHW\RUWKLUGSDUWLHVWKURXJK WKH FRQVXPSWLRQ RI D JRRG IRU ZKLFK QR FRPSHQVDWLRQ LV UHFHLYHG $ FODVVLF H[DPSOH LV SROOXWLRQ IURP DXWRPRELOH XVH :LWKRXW WDNLQJ DFFRXQW RI WKH FRVWV FDU GULYHUV LPSRVH RQ RWKHUV YLD DLU DQG QRLVH SROOXWLRQ DXWRPRELOHV DUH XVHG H[FHVVLYHO\ 7KLV W\SH RI PDUNHW IDLOXUHZDVRULJLQDOO\DGGUHVVHGE\3LJRXZKRSURSRVHGWKHLQWHUQDOL]DWLRQRIH[WHUQDO FRVWVE\LPSRVLQJDWD[WKHUHE\UHGXFLQJWKHFRQVXPSWLRQRIWKHSROOXWLQJJRRG7KHIXHOWD[ LQFUHDVHVFRQVXPHUSULFHVZKLFKFUHDWHVLPPHGLDWHILQDQFLDOLQFHQWLYHVWRHFRQRPL]HIXHO XVDJH DQG FRQVHTXHQWO\ DEDWH HPLVVLRQV ± EH LW YLD PRUH HIILFLHQW HQJLQHV IXHOVDYLQJ GULYLQJRUWKHUHGXFWLRQRIFDUXVH  5HYHQXHVIURPIXHOWD[HVFDQEHXVHGWRORZHUWKHUDWHRIRWKHUWD[HVWKHUHE\UHGXFLQJWKH GLVWRUWLRQRIWKHWD[V\VWHPDVDZKROH7KLVLVGXHWRWKHIDFWWKDWWKHGLVWRUWLRQDU\HIIHFW RIDQ\WD[LQFUHDVHVGLVSURSRUWLRQDWHO\ZLWKWKHWD[UDWH7KXVPDUJLQDOLQFUHDVHVLQORZRU QRQH[LVWHQWIXHOWD[HVSURGXFHUHYHQXHVWKDWHQDEOHPDUJLQDOGHFUHDVHVLQUHODWLYHO\KLJK WD[UDWHVRIRWKHUJRRGV+HQFHVXFKDSROLF\PD\LQFUHDVHWKHHIILFLHQF\RIWKHWD[V\VWHP 1HZEHU\ 

7KH DUJXPHQW RI IXHO WD[HV DV RSWLPDO LPSRUW WDULIIV DULVHV IURP LQWHUQDWLRQDO WUDGH HFRQRPLFVDQGDSSOLHVWRWKHFDVHRIDODUJHFRXQWU\RUIUHHWUDGHDUHDWKDWLPSRUWVPLQHUDO RLOEDVHGIXHOVIURPFRPSHWLQJRLOSURGXFLQJFRXQWULHV,QWKLVIUDPHZRUNIXHOWD[HVFDQEH XVHGWRVKLIWSDUWVRIWKHVFDUFLW\UHQWLQGXFHGE\WKHH[KDXVWLEOHFKDUDFWHURIWKHUHVRXUFH IURP WKH H[SRUWLQJ WR WKH LPSRUWLQJ FRXQWU\ 7KH ORJLF EHKLQG WKLV WDNHV +RWHOOLQJ¶V WKHRUHWLFDO FRQVLGHUDWLRQV LQWR DFFRXQW ZKLFK VWDWH WKDW RZQHUV RI H[KDXVWLEOH UHVRXUFHV GHILQHWKHWLPHSDWKRIGHSOHWLRQLQDGYDQFH7KHUHIRUHWKHDPRXQWRIWKHUHVRXUFHVROGLQ HDFK\HDULVIL[HGDQGVXSSOLHUVGRQRWDGMXVWWKHLUSURGXFWLRQLIWD[HVRUWDULIIVDUHLPSRVHG 7KLVLQIOH[LELOLW\DIIRUGVWKHRSSRUWXQLW\IRULPSRUWLQJFRXQWULHVWROHY\WDULIIVZLWKRXWWULJJHULQJ FXWEDFNVLQVXSSO\WKHUHE\LQFUHDVLQJJRYHUQPHQWUHYHQXHVDQGVKLIWLQJWKHWD[EXUGHQWR WKHRLOSURGXFLQJFRXQWU\1HZEHU\%HUJVWURP_  )LQDOO\IXHOWD[HVDUHRIWHQUDWLRQDOLVHGDVDPDMRUVRXUFHRIJRYHUQPHQWUHYHQXH3DUU\ DQG6PDOO7KLVDUJXPHQWLVHFRQRPLFDOO\MXVWLILHGE\5DPVH\ZKRVWDWHVWKDW WD[HV IRU UDLVLQJ UHYHQXH VKRXOG EH KLJKHU RQ JRRGV ZLWK VPDOOHU SULFH HODVWLFLWLHV 7KH UDWLRQDOH EHKLQG WKLV LV WKDW WKH H[FHVV EXUGHQ RI WD[DWLRQ LV VPDOOHU LI FRQVXPHUV RU SURGXFHUVUHDFWOHVVWRWKHSULFHLQFUHDVHVWKURXJKWKHLQWURGXFWLRQRIDWD[,QOLJKWRIWKHVH



_{7KHWZRLVVXHV±UHGXFLQJWKHGLVWRUWLRQRIWKHWD[V\VWHPDQGIXHOWD[HVDVDQRSWLPDOLPSRUWWDULII±}

DUH UDWKHU DFDGHPLF DUJXPHQWV $V VXFK WKH\ DUH FHUWDLQO\ QRW WKH PRWLYDWLRQ IRU WD[LQJ IXHOV LQ GHYHORSLQJFRXQWULHVDQGDUHWKHUHIRUHQRWFRQVLGHUHGIXUWKHULQWKHVXEVHTXHQWGLVFXVVLRQ





DUJXPHQWVIRUIXHOWD[DWLRQWKHVXEVHTXHQWVHFWLRQGLVFXVVHVWKHH[WHQWWRZKLFK ELRIXHOV VKRXOGDOVREHVXEMHFWWRWD[DWLRQDQGDVVHVVHVSRWHQWLDOUHDVRQVZK\WKH\FRXOGTXDOLI\IRU UHFHLYLQJWD[FUHGLWV 

 3UHIHUHQWLDO7D[DWLRQRI%LRIXHOV



%HFDXVH WUDQVSRUW LQIUDVWUXFWXUH LV RQH RI WKH PRVW LPSRUWDQW SUHUHTXLVLWHV IRU HFRQRPLF GHYHORSPHQWFKDUJLQJIRUURDGXVHRUDOWHUQDWLYHO\OHY\LQJWUDQVSRUWWD[HVLVRIWHQFUXFLDO LQRUGHUWRILQDQFHWKHPDLQWHQDQFHDQGH[WHQVLRQRIURDGV*LYHQWKDWGLUHFWURDGSULFLQJLV IUHTXHQWO\DQLPSUDFWLFDEOHRSWLRQDQGWKDWIXHOWD[HVDUHDQREYLRXVDQGLPSRUWDQWVHFRQG EHVW LQVWUXPHQW WKHUH LV FOHDUO\ QR UHDVRQ IRU D SUHIHUHQWLDO WD[DWLRQ RI ELRIXHOV_{ 6XFK D}

VXEVLGLVDWLRQZRXOGHQFRXUDJHWKHXVHRIELRIXHOVEXWZRXOGDOVRHURGHWKHWD[UHYHQXHV $VDFRQVHTXHQFHSUHIHUHQWLDOWD[DWLRQRIELRIXHOVFRXOGHQGDQJHUURDGILQDQFLQJDOWRJHWKHU 

0DQ\ GHYHORSLQJ FRXQWULHV UDLVH IXHO WD[HV WR FUHDWH UHYHQXH IRU WKH QDWLRQDO EXGJHW WKRXJK UDWKHU WKDQ IRU WUDIILFUHODWHG SXUSRVHV )XHO WD[DWLRQ LV DQ DWWUDFWLYH VRXUFH RI JRYHUQPHQW UHYHQXH IURP D SUDJPDWLF SRLQW RI YLHZ &RPSDUHG ZLWK DQ LQFRPH WD[ IRU LQVWDQFHDIXHOWD[LVUDWKHUHDV\WRLPSOHPHQWVLQFHLWFDQEHFROOHFWHGDWDIHZUHILQHULHVRU ZKROHVDOHSRLQWV,QIDFWIXHOWD[DWLRQFRQWULEXWHVXSWRRQHIRXUWKRIRYHUDOOWD[UHYHQXHLQ PDQ\GHYHORSLQJFRXQWULHV0HWVFKLHV&RXQWULHVVXFKDV&{WHG¶,YRLUH5ZDQGDRU 6RXWK$IULFDZKHUHEHWZHHQDQGRIWRWDOWD[LQFRPHVWHPVIURPIXHOWD[DWLRQZRXOG HDVLO\ ORVH PRUH WKDQ  RI WKHLU QDWLRQDO WD[ LQFRPH LI WD[ H[HPSWHG ELRIXHOV ZHUH WR VXEVWLWXWHIRURIFRQYHQWLRQDOIXHOV



$VLGHIURPDGPLQLVWUDWLYHUHDVRQVWD[LQJIXHOVDVDVRXUFHRIJRYHUQPHQWUHYHQXHVHHPVWR EH UDWLRQDOH IURP D WKHRUHWLFDO SRLQW RI YLHZ :RUOG %DQN  UHSRUWV SULFH HODVWLFLWLHV EHWZHHQDQGIRUPRVWFRXQWULHV7KLVLQGLFDWHVWKDWSHRSOHGRQRWUHDFWVWURQJO\WR WKH LQWURGXFWLRQ RI IXHO WD[HV ZKLFK UHGXFHV WKH H[FHVV EXUGHQ LQGXFHG E\ WKH WD[ 6LQFH WKHVH FRQVLGHUDWLRQV DSSO\ WR ERWK ELR DQG IRVVLO IXHOV H[HPSWLQJ ELRIXHOV IURP WD[DWLRQ GRHVQRWVHHPMXVWLILHG  <HWWKHUHPD\EHLPSRUWDQWH[WHUQDOLWLHVWKDWPRWLYDWHWKHSUHIHUHQWLDOWUHDWPHQWRIELRIXHOV $PRQJHQYLURQPHQWDOH[WHUQDOLWLHVWKHDEDWHPHQWRIJUHHQKRXVHJDVHV*+*LVWKHPRVW IUHTXHQWO\FLWHGDUJXPHQWIRUWKHSURPRWLRQRIELRIXHOV$OWKRXJKWKHFRPEXVWLRQRIELRIXHOV LVFRQVLGHUHGWREH*+*QHXWUDOLQIDFWOHVVWKDQRIWKH*+*HPLVVLRQVDUHVDYHG



_{5HODWLQJWRELRGLHVHOWD[FUHGLWVDUHHYHQOHVVMXVWLILHGZLWKUHVSHFWWRURDGSULFLQJVLQFHWKHVKDUHRI}

ELRGLHVHO XVHG E\ KHDY\ JRRGV YHKLFOHV LV ODUJH DQG WKHLU FRQWULEXWLRQ WR URDG DEUDVLRQ LV GLVSURSRUWLRQDWHO\KLJK





FRPSDUHG ZLWK IRVVLO IXHO XVDJH 7KLV LV EHFDXVH LW XVXDOO\ UHTXLUHV PXFK PRUH HQHUJ\ WR SURYLGHELRIXHOVWKDQIRVVLOIXHOV)URQGHODQG3HWHUV5\DQHWDO0RUHRYHULWLV KLJKO\ XQOLNHO\ WKDW XVLQJ ELRIXHOV ZLOO SUHVHQW DQ HFRQRPLFDOO\ YLDEOH RSWLRQ IRU WKH LQWHUQDOL]DWLRQ RI *+* HPLVVLRQ FRVWV LQ WKH QHDU IXWXUH 7KLV EHFRPHV FOHDU ZKHQ ZH DVVXPHIRUWKHVDNHRIWKHDUJXPHQWWKDWWKH*+*DEDWHPHQWJHQHUDWHGE\ELRIXHOVFRXOG EHWUDGHGWKURXJKWKH(XURSHDQ(PLVVLRQV7UDGLQJ6FKHPH(76%|KULQJHUDQG/|VFKHO  IRU LQVWDQFH FDOFXODWH D ORQJWHUP SUHGLFWLRQ RI _{ SHU WRQ RI *+* LQ WKH (76}

$FFRUGLQJ WR 5\DQ HW DO   O RI (XURSHDQ ELRGLHVHO VDYHV  WRQV RI *+*_

0XOWLSO\LQJ WKLV ILJXUH E\ WKH (76 SULFH RI  SHU WRQ \LHOGV D WRWDO RI   ZRUWK RI DEDWHPHQWVDYLQJV,IWKHWD[FUHGLWJUDQWHGWRELRGLHVHOZHUHWRUHIOHFWWKHYDOXHRIDEDWHG *+* HPLVVLRQV RQH OLWUH ZRXOG TXDOLI\ IRU DQ H[HPSWLRQ RI DURXQG  86&HQWV 7KH SURGXFWLRQFRVW GLIIHUHQWLDO EHWZHHQ ELRGLHVHO DQG LWV IRVVLO FRXQWHUSDUW LV PXFK KLJKHU ± DFFRUGLQJ WR 5\DQ HW DO  WKLV DPRXQWV WR DW OHDVW  86&HQWVO IRU ELRGLHVHO LQ (XURSH_



,Q DGGLWLRQ WR JOREDOO\ KDUPIXO *+* HPLVVLRQV ORFDO HPLVVLRQV VXFK DV SDUWLFXODWHV RU FDUERQPRQR[LGHKDUPWKHLPPHGLDWHHQYLURQPHQWRIKLJKO\IUHTXHQWHGURDGV,QIDFWQHDW ELRHWKDQRO GRHV QRW HPLW ORFDOO\ KDUPIXO SROOXWDQWV ZKHUHDV XVLQJ ELRGLHVHO RQO\ VOLJKWO\ UHGXFHVVXFKHPLVVLRQVFRPSDUHGWRIRVVLOGLHVHO(60$3,QPRVWFDVHVLQWHQVLYH XVDJHRIIHUWLOL]HUVLVUHTXLUHGIRUWKHFXOWLYDWLRQRIELRIXHOIHHGVWRFNVLQIOLFWLQJVXFKGDPDJH RQWKHORFDOHQYLURQPHQWDVWKHHXWURSKLFDWLRQDQGDFLGLILFDWLRQRIVXUIDFHZDWHU,UULJDWLRQ LIUHTXLUHGFDQOHDGWRQXWULHQWORVVHVGHFUHDVLQJWKHTXDOLW\RIVRLOV7KHVHSUREOHPVSRVH DVHULRXVWKUHDWIRUGHYHORSLQJFRXQWULHVVLQFHDVXIILFLHQWVXSSO\RISRWDEOHZDWHUDQGVRLO IHUWLOLW\IUHTXHQWO\DUHPDMRUFRQFHUQV(60$37KHIUHTXHQWO\FLWHGORVVRIUDLQIRUHVW REVHUYHGLQ6RXWKHDVW$VLDGXHWRSDOPRLOSURGXFWLRQLVFHUWDLQO\QRWQHJOLJLEOHIURPHLWKHUD ORFDORUJOREDOHQYLURQPHQWDOSHUVSHFWLYH,($D$OWRJHWKHUDOWKRXJKELRIXHOVDUH FOHDUO\ EHQLJQ ZLWK UHVSHFW WR *+* FKHDSHU DEDWHPHQW RSWLRQV H[LVW DQG ORFDO HQYLURQPHQWDOSUREOHPVPD\DULVH7KLVQHFHVVLWDWHVDFDUHIXOFKHFNRIWKHHQYLURQPHQWDO EDODQFHPDLQO\LQWKHDUHDRILUULJDWLRQDVZHOODVIHUWLOL]HUDQGSHVWLFLGHXVDJH$‰PDQQDQG 6LHEHU



7ZRPRUHHFRQRPLFH[WHUQDOLWLHVPD\IDYRXUWKHSURPRWLRQRIELRIXHOV(60$35XUDO GHYHORSPHQW DQG HQHUJ\ VXSSO\ GLYHUVLILFDWLRQ 5HJDUGLQJ WKH ODWWHU ,($ D HVWLPDWHVWKDWELRIXHOVZLOOVXEVWLWXWHIRURIWRWDOZRUOGIRVVLOIXHOFRQVXPSWLRQLQ



_{8QGHUO\LQJH[FKDQJHUDWH(XUR 860D\} _{,WEHDUVQRWLQJKRZHYHUWKDW*+*HPLVVLRQVRIDSDUWLFXODUELRIXHOVWURQJO\GHSHQGRQWKHVSHFLILF} FKDUDFWHULVWLFVRIWKHFXOWLYDWLRQDQGSURFHVVLQJRIIHHGVWRFNV _{7KHSURGXFWLRQFRVWGLIIHUHQWLDOVWDNHLQWRDFFRXQWGLIIHUHQWHQHUJ\FRQWHQWV%LRGLHVHOFRQWDLQV} DVPXFKHQHUJ\FRPSDUHGZLWKGLHVHOVHH6HFWLRQ





:KLOHWKLVVKDUHLVFHUWDLQO\QRWQHJOLJLEOHLWDOVRUHYHDOVWKHOLPLWDWLRQRIELRIXHOSRWHQWLDOV ,($ D GRHV QRW H[SHFW D QHZ ELRIXHO SOD\HU FRPSDUDEOH WR %UD]LO WR HPHUJH DPRQJ GHYHORSLQJDQGHPHUJLQJFRXQWULHV&KLQDDQG$IULFDDVDZKROHDUHSURMHFWHGWRVXEVWLWXWH OHVV WKDQ  DQG  RI WKHLU WRWDO WUDQVSRUW IXHO FRQVXPSWLRQ UHVSHFWLYHO\ ZKLOH $VLDQ GHYHORSLQJFRXQWULHVRWKHUWKDQ&KLQDDUHH[SHFWHGWRVXSSODQWXSWR



5HJDUGLQJ WKH IRUPHU LW FDQ LQGHHG EH H[SHFWHG WKDW ELRIXHO SURPRWLRQ ZLOO LQFUHDVH WKH YDOXH DGGHG LQ WKH DJULFXOWXUDO VHFWRU WKHUHE\ FRQWULEXWLQJ WR UXUDO HPSOR\PHQW DQG

GHYHORSPHQW 3URYLGLQJ ELRIXHOV RU ELRIXHO IHHGVWRFNV ZLOO HQDEOH UXUDO IDUPHUV DQG

SURFHVVLQJ ILUPV WR DFFHVV ± DW OHDVW LQGLUHFWO\ ± UHJLRQDO RU HYHQ LQWHUQDWLRQDO PDUNHWV /DFNLQJDFFHVVWRPDUNHWVLVIUHTXHQWO\FLWHGDVDFUXFLDOEDUULHUWRUXUDOHFRQRPLFDFWLYLW\ %DUQHV,)$'



,QIDFWERWKHPSOR\PHQWDQGDGGHGYDOXHDUHOLNHO\WRLPSURYHLQWKHIHHGVWRFNSURGXFLQJ UHJLRQ SDUWLFXODUO\ LI WKH ORFDO VKDUH LQ WKH SURGXFWLRQ FKDLQ LV KLJK +RZHYHU WKH QHW HPSOR\PHQWHIIHFWRQWKHFRXQWU\OHYHOUHPDLQVXQFOHDU_{7KHUHDVRQLVWKDWVLPSO\FRXQWLQJ}

WKH QXPEHU RI ZRUNHUV HPSOR\HG LQ WKH ELRIXHO VHFWRU LV QRW VXIILFLHQW WR GHWHUPLQH QHW HPSOR\PHQWHIIHFWV,QGLUHFWHIIHFWV±QDPHO\FURZGLQJRXWDQGEXGJHWHIIHFWV±KDYHWREH WDNHQLQWRDFFRXQW)LUVWWKHFURZGLQJRXWHIIHFWDFFRXQWVIRUMREORVVHVLQWKHULYDOU\PLQHUDO RLOLQGXVWU\6LQFHPLQHUDORLOLVW\SLFDOO\LPSRUWHGWKHFURZGLQJRXWHIIHFWLVUHVWULFWHGWRWKH SURFHVVLQJDQGORJLVWLFLQGXVWU\LHUHILQHULHVSRUWVDQGWUDQVSRUW,QDGGLWLRQMREVLQWKH IRRG LQGXVWU\ FRXOG EH FURZGHG RXW LI ELRIXHO IHHGVWRFNV DQG IRRG FRPSHWHG IRU VFDUFH DFUHDJH 6HFRQG WKH LQFUHDVHG IXHO DQG IRRG SULFHV LQFXUUHG E\ ELRIXHO SURPRWLRQ ZLOO UHGXFH WKH FRQVXPHUV¶ EXGJHW DYDLODEOH IRU RWKHU JRRGV 7KH UHVXOWLQJ GHFUHDVH RI WKH FRQVXPSWLRQ RI QRQIXHO DQG QRQIRRG JRRGV VKULQNV HPSOR\PHQW LQ RWKHU LQGXVWULHV DV D

EXGJHW HIIHFW <HW SURYLGHG WKDW WKH UHGXFWLRQ RI HPSOR\PHQW RFFXUV PDLQO\ LQ QRQUXUDO

DUHDVH[HPSWLQJELRIXHOVIURPWD[DWLRQLQRUGHUWRFRQWULEXWHWRUXUDOHPSOR\PHQWPLJKWVWLOO EHMXVWLILHGDVDUHJLRQDOGHYHORSPHQWVWUDWHJ\



)XUWKHUPRUH WKH DUWLILFLDO GHPDQG IRU DJULFXOWXUDO ELRIXHO IHHGVWRFNV LQFUHDVHV DFUHDJH UHTXLUHPHQWV $V D UHVXOW ELRIXHO SURGXFWLRQ EDVHG RQ DFUHDJHLQWHQVLYH IHHGVWRFNV PD\ FURZGRXWFURSVIRURWKHUSXUSRVHVOHDGLQJWRULVLQJSULFHVIRUDJULFXOWXUDOSURGXFWVEDVHGRQ WKHVHFURSV0F'RQDOGHWDO(60$3$OWKRXJKWKLVLQGXFHVDGGLWLRQDOLQFRPH IRUUXUDODUHDVLWDOVRKDVQHJDWLYHLPSDFWVRQWKHDYDLODELOLW\DQGDIIRUGDELOLW\RIIRRG 



_{ 6HH 3IDIIHQEHUJHU  IRU D GLVFXVVLRQ RI HPSOR\PHQW HIIHFWV RI UHQHZDEOH HQHUJLHV LQ}

LQGXVWULDOLVHGFRXQWULHV'DQQHQEHUJHWDODVVHVVWKHHPSOR\PHQWHIIHFWVRIUHQHZDEOHHQHUJ\ SURPRWLRQLQ(XURSH





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



 3RWHQWLDO3URPRWLRQ&RVWVLQ,QGLDDQG7DQ]DQLD



3URGXFWLRQFRVWILJXUHVDUHSDUWLFXODUO\VFDUFHLQGHYHORSLQJFRXQWULHV7KLVVHFWLRQWKXVRQO\ H[HPSOLILHV WKH GLUHFW SURPRWLRQ FRVWV_{ WKDW DUH SRWHQWLDOO\ LQGXFHG LQ ,QGLD DQG 7DQ]DQLD}

WKHUHE\QHJOHFWLQJLQGLUHFWFRVWVRUEHQHILWVDVGLVFXVVHGLQ6HFWLRQ

 &XUUHQWDQG)XWXUH3URGXFWLRQ&RVWV



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:KLOH FXUUHQWSURGXFWLRQFRVWVIRU7DQ]DQLDQELRHWKDQRODUHQRWDYDLODEOHFXUUHQWSURGXFWLRQFRVWV RI 7DQ]DQLDQ ELRGLHVHO DUH HVWLPDWHG XVLQJ MDWURSKD RLO_{ SULFHV FLWHG LQ *7= E DQG}

ELRGLHVHO SURFHVVLQJ FRVWV EDVHG RQ ,($  7KH UHSRUWHG IRVVLO IXHO SULFHSURGXFWLRQ FRVWGLIIHUHQFHVDUHVXEVWDQWLDOLQSDUWLFXODUIRU7DQ]DQLD      



7KLVEXUGHQZRXOGEHFRPHPRVWQRWLFHDEOHLIDWD[H[HPSWLRQRUGLUHFWVXEVLG\ZDVLPSOHPHQWHG <HWLQWKHFDVHRIPDQGDWRU\EOHQGLQJTXRWDVDVZHOOWKHVHFRVWVZRXOGDULVHKLGGHQDVUHGXFHG FRQVXPHUV¶DQGSURGXFHUV¶VXUSOXVDVZHOODVDGHDGZHLJKWORVVVHH3HWHUVDQG7KLHOPDQQ _{-DWURSKDLVDSODQWWKDWJURZVRQORZTXDOLW\VRLOVLQWURSLFDORUVXEWURSLFDODUHDVDQGSURGXFHVRLO} FRQWDLQLQJVHHGV,WLVIUHTXHQWO\QDPHGDVDSRWHQWLDOO\LGHDOVRXUFHRIELRGLHVHO





7DEOH&XUUHQW%LRIXHO3URGXFWLRQ&RVWVLQ86SULFHV   &XUUHQWSURGXFWLRQ FRVWV>O@ 6SRWPDUNHWSULFHV RIIRVVLOIXHO FRXQWHUSDUW>O@ 'LIIHUHQFH>O@ %LRHWKDQRO ±  ± ,QGLD %LRGLHVHO ±  ± 7DQ]DQLD %LRGLHVHO ±  ±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 %RWK VWXGLHV DVVXPHG ODUJHVFDOH SURGXFWLRQ OHDGLQJ WR VXEVWDQWLDO GLIIHUHQFHV EHWZHHQ FXUUHQW DQG SURMHFWHG SURGXFWLRQ FRVWV IRU ERWK ,QGLDQDQG7DQ]DQLDQELRGLHVHO([SHULHQFHVIURPLQGXVWULDOLVHGFRXQWULHVKRZHYHULQGLFDWH WKDWFRVWSURMHFWLRQVVKRXOGEHKDQGOHGZLWKFDXWLRQVLQFHSURGXFWLRQFRVWVFRXOGUHPDLQDW DKLJKOHYHOLQVSLWHRIODUJHVFDOHSURGXFWLRQ5\DQHWDO)XUWKHUFUXFLDOFRVWIDFWRUV DUHWKHW\SHRIHPSOR\HGIHHGVWRFNDQGUHVSHFWLYH\LHOGVWKDWFOHDUO\GHSHQGRQVRLOTXDOLW\ FOLPDWLFFRQGLWLRQVDQGUHVHDUFKVXFFHVVHV7KHIHHGVWRFNFRQVLGHUHGLQ7DEOHLVMDWURSKD DSULQFLSDOO\SURPLVLQJFURSZLWKUHVSHFWWRHQYLURQPHQWDOLVVXHVDQGDFUHDJHUHTXLUHPHQWV <HWGHVSLWHVLJQLILFDQWUHVHDUFKHIIRUWVLWKDVQRW\HWEHHQSRVVLEOHWRSURGXFHVHHGVZLWK UHOLDEO\ KLJK \LHOGV )DLUOHVV  )LHOG UHVHDUFK LQGLFDWHV WKDW MDWURSKD \LHOGV FDQ YDU\ EHWZHHQDQGNJSHUWUHH  7DEOH3URMHFWHG%LRIXHO3URGXFWLRQ&RVWVLQ86SULFHV   3URMHFWHGSURGXFWLRQ FRVWV>O@ 6SRWPDUNHWSULFHV RIIRVVLOIXHO FRXQWHUSDUW>O@ 'LIIHUHQFH>O@ %LRHWKDQRO ±  ± ,QGLD %LRGLHVHO ±  ± %LRHWKDQRO ±  ± 7DQ]DQLD %LRGLHVHO ±  ± 





7ZRUHVXOWVVWDQGRXW)LUVWWKHFRVWUDQJHRIELRGLHVHOLVZLGHPRVWQRWDEO\IRU,QGLDGXHWR WKHKLJKYDULDELOLW\RIMDWURSKD\LHOGV6HFRQGSURGXFWLRQFRVWHVWLPDWHVDUHUDWKHURSWLPLVWLF 7KLV EHFRPHV PRVW DSSDUHQW ZLWK ,QGLDQ ELRGLHVHO IRU ZKLFK IXWXUH FRVWV PD\ HYHQ EH VOLJKWO\ ORZHU WKDQ WKRVH RI GLHVHO ± QRWH WKH QHJDWLYH VLJQ LQ WKH WKLUG FROXPQ ,Q IDFW IDYRXUDEOHFOLPDWLFFRQGLWLRQVDQGORZODERXUFRVWVPLJKWHQDEOHFHUWDLQGHYHORSLQJFRXQWULHV WRSURGXFHELRIXHOVDWUHDVRQDEOHFRVWV



'LUHFWFRVWVRI3URPRWLRQ



*LYHQ WKDW D SRVLWLYH GLIIHUHQFH EHWZHHQ ELRIXHO SURGXFWLRQ FRVWV DQG IRVVLO IXHO SULFHV FKDUDFWHULVHV WKH VLWXDWLRQ IRU VRPH WLPH WR FRPH WKH SURPRWLRQ RI ELRIXHOV QHFHVVDULO\ LPSRVHVFRVWVRQWKHHFRQRP\XQGHUDQDO\VLV,QRXUFDOFXODWLRQSUHVHQWHGLQ7DEOHZH DVVXPHWKDWERWKELRHWKDQRODQGELRGLHVHOVXEVWLWXWHIRURIJDVROLQHDQGIRVVLOGLHVHOLQ HQHUJHWLFWHUPVUHVSHFWLYHO\%DVHGRQWKHVHILJXUHVZHWKHQFDOFXODWHWKHSRWHQWLDOILQDQFLDO EXUGHQWKDWPD\UHVXOWLQVXFKDVFHQDULR7DEOH



7DNLQJ WKH H[DPSOH RI 7DQ]DQLD WKH VXEVWLWXWLRQ RI ELRGLHVHO IRU IRVVLO GLHVHO DW FXUUHQW SURGXFWLRQFRVWVLPSOLHVDILQDQFLDOEXUGHQRIDURXQG0LR,WZRXOGGHFUHDVHWRDURXQG 0LRLIWKHSURMHFWHGFRVWGHFOLQHUHSRUWHGLQ7DEOHZHUHWREHUHDOLVHG<HWLWLVPRVW OLNHO\ WKDW VRPH ILQDQFLDO EXUGHQ UHPDLQV 7KHVH ILJXUHV PLJKW EH FRQVLGHUHG WR EH RI DFFHSWDEOHPDJQLWXGHLIWKHSRWHQWLDOEHQHILWVHJUXUDOLQFRPHJHQHUDWLRQDUHDVVHVVHGWR EH VXIILFLHQWO\ KLJK 1HYHUWKHOHVV LW KDV WR EH DFNQRZOHGJHG WKDW WKH ILQDQFLDO EXUGHQ RI SURPRWLQJELRIXHOVLVQRWQHJOLJLEOHIRUDFRXQWU\OLNH7DQ]DQLD  7DEOH5HTXLUHG$PRXQWVRI%LRIXHOVWRVXEVWLWXWHIRURI)RVVLO)XHO&RXQWHUSDUW_  )XHOFRQVXPSWLRQLQ LQ0LRO:5, 5HTXLUHGDPRXQWRIELRIXHO FRXQWHUSDUWLQ0LRO

 *DVROLQH )RVVLO'LHVHO %LRHWKDQRO %LRGLHVHO

,QGLD    

7DQ]DQLD    



7KLV EHFRPHV HYLGHQW ZKHQ LW LV SODFHG LQWR SHUVSHFWLYH E\ FRPSDULQJ LW WR WKH DPRXQW RI WRWDO WD[ UHYHQXHV RI %Q LQ  :',  (YHQ WKH ORZHU FRVW HVWLPDWHV ZRXOG DPRXQWWR±RIWRWDOWD[UHYHQXHLIWKHVXEVWLWXWLRQRIERWKGLHVHODQGJDVROLQH ZDVUHDOLVHG,ISURGXFWLRQFRVWVUHPDLQHGDWWKHFXUUHQWOHYHOFRVWVIRUVXEVWLWXWLRQRIERWK



_{ &XUUHQW IXHO FRQVXPSWLRQ LV EDVHG RQ :5,  7KH :5, ILJXUHV FRUUHVSRQG ZLWK ,($ GDWD LQ}





IRVVLOIXHOVFRXOGHDVLO\H[FHHGRIWRWDOWD[UHYHQXH:LWK,QGLD¶VWRWDOWD[UHYHQXHEHLQJ %Q D  VXEVWLWXWLRQ SROLF\ FDXVHV D ILQDQFLDO LPSDFW RI  LQ WKH SURMHFWHG FRVWVVFHQDULRDQGLQWKHFXUUHQWFRVWVVFHQDULR,QVXPWKHVHFRQVLGHUDWLRQVVKRZ WKDW UHVHDUFK HIIRUWV PXVW EH LQWHQVLILHG LQ RUGHU WR UHGXFH ERWK WKH FRVWV RI ODUJH ELRIXHO SURJUDPVDQGXQFHUWDLQWLHVDERXWFRVWSURMHFWLRQV



7DEOH &RVWV RI VXEVWLWXWLQJ %LRIXHOV IRU  RI UHVSHFWLYH )RVVLO )XHO &RQVXPSWLRQ (QHUJ\&RQWHQW    &XUUHQWSURGXFWLRQFRVWV 3URMHFWHGSURGXFWLRQ FRVWV %LRHWKDQRO ±0LR86 ±0LR86 ,QGLD %LRGLHVHO ±0LR86 ±0LR86 %LRHWKDQRO QD ±0LR86 7DQ]DQLD %LRGLHVHO ±0LR86 ±0LR86





&RQFOXVLRQ



0RUH DQG PRUH FRXQWULHV FRQVLGHU ELRIXHOV DV RQH HOHPHQW RI WKHLU VWUDWHJ\ RI DGGUHVVLQJ HQYLURQPHQWDOSUREOHPVDQGWKHGHSHQGHQFHRQHQHUJ\LPSRUWV$VELRIXHOVDUHXVXDOO\QRW FRPSHWLWLYH WKRXJK SURPRWLRQ PHDVXUHV DUH UHTXLUHG IRU VWLPXODWLQJ GHPDQG 7KH PRVW IUHTXHQWO\ XVHG LQVWUXPHQWV DUH WD[ H[HPSWLRQV DQG PDQGDWRU\ EOHQGLQJ TXRWDV :LWK SDUWLFXODUUHJDUGWRGHYHORSLQJFRXQWULHVWKLVSDSHUKDVLQYHVWLJDWHGERWKWKHMXVWLILFDWLRQRI ELRIXHOSURPRWLRQDQGLWVLPSOLFDWLRQV



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



*LYHQWKDWWKHSROLWLFDOIRFXVLVRQHPSOR\PHQWHIIHFWVLQUXUDODUHDVWKHXVHRIVWDWLRQDU\ ELRPDVV IRU HOHFWULFLW\ SURGXFWLRQ VKRXOG DOVR EH WDNHQ LQWR DFFRXQW 7KLV RSWLRQ GHVHUYHV SDUWLFXODU FRQVLGHUDWLRQ EHFDXVH HOHFWULFLW\ GHPDQG LV FXUUHQWO\ RXWSDFLQJ VXSSO\ LQ PDQ\ GHYHORSLQJ FRXQWULHV WKDW SDUWO\ UHO\ RQ GLHVHO JHQHUDWRUV (FRQRPLVW  0DQ\ IDVW JURZLQJFURSVWKDWFDQSUHVHQWO\QRWEHXVHGIRUELRIXHOSURGXFWLRQSHUIRUPPXFKEHWWHUZLWK UHVSHFWWRSURGXFWLRQFRVWVHQYLURQPHQWDOLPSDFWVDQGODQGXVH)URQGHODQG3HWHUV +HQNHHWDO



,ISURPRWLRQRIELRIXHOVLVGHHPHGDSSURSULDWHLWPXVWEHWDNHQLQWRDFFRXQWWKDWWKHPRVW LPSRUWDQW SURPRWLRQ LQVWUXPHQWV ± PDQGDWRU\ EOHQGLQJ TXRWDV DQG WD[ H[HPSWLRQV ±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*LYHQVLJQLILFDQWSRVLWLYHH[WHUQDOHIIHFWVRI 5 '±HJVHFXULW\RIHQHUJ\VXSSO\DQGHQYLURQPHQWDOEHQHILWV±LWPLJKWEHUHDVRQDEOHWR SURPRWH 5 ' RI ELRIXHOV WKURXJK SXEOLF IXQGLQJ 7KHUHIRUH EHIRUH ODXQFKLQJ LQVWUXPHQWV WKDWHQYLVDJHDQLQFUHDVHLQGHPDQGWKHDYDLODELOLW\RIDFHUWDLQVWRFNRIWHFKQRORJLFDONQRZ KRZPXVWEHHQVXUHG



7R VXPPDUL]H D FRPSUHKHQVLYH DVVHVVPHQW RI WKH SRWHQWLDO RI ELRIXHOV UHTXLUHV WKDW GHYHORSLQJFRXQWULHVFDUHIXOO\H[DPLQHDYDULHW\RIIDFWRUVHJ

 ([SHFWHGFRVWGLIIHUHQFHVEHWZHHQELRDQGIRVVLOIXHOV





 $JULFXOWXUDO DQG HQYLURQPHQWDO FRQGLWLRQV VXFK DV DYDLODELOLW\ RI ZDWHU IHUWLOL]HU UHTXLUHPHQWVDQGVRLOTXDOLW\

 7HFKQRORJLFDONQRZKRZDQGSRWHQWLDOWRIRFXVRQVHFRQGJHQHUDWLRQELRIXHOV  5HOHYDQFHRIPLQHUDORLOWD[DWLRQIRUWKHQDWLRQDOEXGJHW



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

  





5HIHUHQFHV



$‰PDQQ ' DQG 1 6LHEHU  7UDQVSRUW LQ 'HYHORSLQJ &RXQWULHV 5HQHZDEOH (QHUJ\ YHUVXV(QHUJ\5HGXFWLRQ"7UDQVSRUW5HYLHZV9RO



%DUQHV')(OHFWULF3RZHUIRU5XUDO*URZWK:HVWYLHZ3UHVV%RXOGHU 

%HUJVWURP 7&  2Q &DSWXULQJ 2LO 5HQWV ZLWK 1DWLRQDO ([FLVH 7D[ $PHULFDQ

(FRQRPLF5HYLHZ9RO



%|KULQJHU & DQG $ /|VFKHO  $VVHVVLQJ WKH &RVWV RI &RPSOLDQFH 7KH .\RWR 3URWRFRO(XURSHDQ(QYLURQPHQW9RO



'DQQHQEHUJ $ 0HQQHO 7 DQG 8 0RVOHQHU  :KDW GRHV (XURSH SD\ IRU &OHDQ (QHUJ\"5HYLHZRI0DFURHFRQRPLF6LPXODWLRQ6WXGLHV=(:'LVFXVVLRQ3DSHU1R 

(%%(XURSHDQ%LRGLHVHO%RDUG±6WDWLVWLFVKWWSZZZHEEHXRUJVWDWVSKS 

(FRQRPLVW  (OHFWULFLW\ LQ $IULFD ± 7KH 'DUN &RQWLQHQW 7KH (FRQRPLVW $XJXVW WK_

 

(60$3  3RWHQWLDO IRU %LRIXHOV IRU 7UDQVSRUW LQ 'HYHORSLQJ &RXQWULHV -RLQW 81'3:RUOG %DQN (QHUJ\ 6HFWRU 0DQDJHPHQW $VVLVWDQFH 3URJUDPPH (60$3 :DVKLQJWRQ  )DLUOHVV'%LRIXHO7KHOLWWOHVKUXEWKDWFRXOGPD\EH1DWXUH  )URQGHO0DQG-3HWHUV%LRGLHVHO$QHZ2LOGRUDGR"(QHUJ\3ROLF\9RO  

*7= D /LTXLG %LRIXHOV IRU 7UDQVSRUWDWLRQ ,QGLD FRXQWU\ VWXG\ RQ SRWHQWLDO DQG LPSOLFDWLRQV IRU VXVWDLQDEOH DJULFXOWXUH DQG HQHUJ\ 7KH (QHUJ\ DQG 5HVRXUFHV ,QVWLWXWH 7(5,'HXWVFKH*HVHOOVFKDIWIU7HFKQLVFKH=XVDPPHQDUEHLW*7=*HUPDQ0LQLVWU\IRU )RRG $JULFXOWXUHDQG &RQVXPHU 3URWHFWLRQ %0(/9 *HUPDQ $JHQF\ IRU 5HQHZDEOH 5HVRXUFHV)15





*7=E/LTXLG%LRIXHOVIRU7UDQVSRUWDWLRQLQ7DQ]DQLD3RWHQWLDODQG,PSOLFDWLRQVIRU 6XVWDLQDEOH $JULFXOWXUH DQG (QHUJ\ LQ WKH VW &HQWXU\ 'HXWVFKH *HVHOOVFKDIW IU 7HFKQLVFKH =XVDPPHQDUEHLW *7= *HUPDQ 0LQLVWU\ IRU )RRG $JULFXOWXUHDQG &RQVXPHU 3URWHFWLRQ%0(/9*HUPDQ$JHQF\IRU5HQHZDEOH5HVRXUFHV)15  +HQNH-*.OHSSHUDQG16FKPLW]7D[H[HPSWLRQVIRUELRIXHOV,VELRHWKDQROUHDOO\ DQRSWLRQIRUFOLPDWHSROLF\"(QHUJ\9RO  +RWHOOLQJ+7KH(FRQRPLFVRI([KDXVWLEOH5HVRXUFHV-RXUQDORI3ROLWLFDO(FRQRP\ 9RO  ,($%LRIXHOVIRU7UDQVSRUW,QWHUQDWLRQDO(QHUJ\$JHQF\3DULV  ,($D:RUOG(QHUJ\2XWORRN,QWHUQDWLRQDO(QHUJ\$JHQF\3DULV 

,($ E (QHUJ\ %DODQFHV RI 1RQ2(&' &RXQWULHV  ,QWHUQDWLRQDO (QHUJ\ $JHQF\3DULV



,)$'3URPRWLQJ0DUNHW$FFHVV,QWHUQDWLRQDO)XQGIRU$JULFXOWXUDO'HYHORSPHQW 

.DYDORY %  %LRIXHO 3RWHQWLDO LQ WKH (8 -RLQW 5HVHDUFK &HQWHU RI WKH (XURSHDQ &RPPLVVLRQ



0F'RQDOG 6 6 5RELQVRQ DQG . 7KLHUIHOGHU  ,PSDFW RI VZLWFKLQJ SURGXFWLRQ WR ELRHQHUJ\FURSV7KHVZLWFKJUDVVH[DPSOH(QHUJ\(FRQRPLFV9RO  0HWVFKLHV*3,QWHUQDWLRQDO)XHO3ULFHV'HXWVFKH*HVHOOVFKDIWIU7HFKQLVFKH =XVDPPHQDUEHLW(VFKERUQ  1HZEHU\'0:K\7D[(QHUJ\"7RZDUGVD0RUH5DWLRQDO3ROLF\(QHUJ\-RXUQDO 9RO  3DUU\,:+.$6PDOO'RHV%ULWDLQRUWKH8QLWHG6WDWHVKDYHWKH5LJKW*DVROLQH 7D["$PHULFDQ(FRQRPLF5HYLHZ9RO 





3HWHUV - DQG 6 7KLHOPDQQ  7KH &RVW RI 3URPRWLQJ %LRIXHOV LQ ,QWHUQDWLRQDO )XHO 3ULFHV  HGLWHG E\ 'HXWVFKH *HVHOOVFKDIW IU 7HFKQLVFKH =XVDPPHQDUEHLW *7= DQG )HGHUDO0LQLVWU\IRU(FRQRPLF&RRSHUDWLRQDQG'HYHORSPHQW



3IDIIHQEHUJHU :  :HUWVFK|SIXQJ XQG %HVFKlIWLJXQJ GXUFK JUQH (QHUJLHSURGXN WLRQ"(QHUJLHZLUWVFKDIWOLFKH7DJHVIUDJHQ9RO  3LJRX$7KH(FRQRPLFVRI:HOIDUH0DFPLOODQ/RQGRQ  5DPVH\)3$FRQWULEXWLRQWRWKHWKHRU\RIWD[DWLRQ(FRQRPLF-RXUQDO9RO   5\DQ/)&RQYHU\DQG6)HUUHLUD6WLPXODWLQJWKH8VHRI%LRIXHOVLQWKH(XURSHDQ 8QLRQ,PSOLFDWLRQVIRU&OLPDWH&KDQJH3ROLF\(QHUJ\3ROLF\9RO 

6FKPLW] 1  ,QQRYDWLRQHQ EHL GHU %LRHWKDQROHU]HXJXQJ 6FKULIWHQUHLKH 1DFKZDFKVHQGH5RKVWRIIH%DQG/DQGZLUWVFKDIWVYHUODJ0QVWHU



:',:RUOG'HYHORSPHQW,QGLFDWRUV:RUOG%DQN

ZZZZRUOGEDQNRUJGDWDZGLLQGH[KWP



:RUOG %DQN  7KH 'HPDQG IRU 2LO 3URGXFWV LQ 'HYHORSLQJ &RXQWULHV :RUOG %DQN 'LVFXVVLRQ3DSHU1R



:5,:RUOG5HVRXUFH,QVWLWXWH(DUWK7UHQGV(QYLURQPHQWDO,QIRUPDWLRQ