A source close to the investors said they had planned to spend an additional $30 million on the project's expansion, but decided to drop this proposal because of the red tape. They now intend to approach InvestHK, the government's investment promotion office, for help.

The investors, who have links to the American manufacturers of the fuel, plan to export bio-diesel or sell it to industrial consumers in Hong Kong. They did not plan to sell it for use by private vehicles in Hong Kong because of the lack of policy support and refilling outlets, even though the fuel was cleaner than the ultra-low-sulfur diesel used in the city, the source said.

The source said the investors, who did not want to speak publicly to protect their commercial interests, did not expect the red tape and other hurdles they faced in setting up their manufacturing facility in Hong Kong.

The process of turning used cooking oil into bio-diesel is not complex and some companies have expressed interest in it before, but none has fully implemented the project. The sole licensed producer in Hong Kong, lubricant and industrial equipment-maker Dunwell Group, makes the fuel only for its own use.

Soaring oil prices, however, have led to increasing production of the fuel across the globe as the price gap between the more expensive fuel and conventional, petroleum-based diesel has narrowed.

The source said among the government's requirements was that methanol recovered in the production process had to be incinerated on site. This requirement was scrapped after negotiation. Investors also complained about the environmental watchdog's arbitrary and fragmented approach to possible underground fuel tank leakage.

'[The investors] are fed up with all this bureaucracy and administrative hurdles. The facility would have been running for months now if it had been set up overseas,' said the source, who wondered whether the government wanted to stall the project for unspecified motives.

Under their plan, proposed early last year, the raw material for the fuel would be collected from restaurants and fast-food chains, which generate thousands of tonnes of used cooking oil a year.

An Environmental Protection Department spokeswoman said it supported the use of clean fuel as far as it was practicable, but added that the overall performance of bio-diesel was 'roughly on a par' with its ultra-low-sulfur counterpart.

While there was no legal restriction against using bio-diesel in vehicles and the fuel was not subject to any tax at present, she said the high cost was a major obstacle to its acceptability on the market.

She added that the fuel had a potentially harmful 'corroding' effect on vehicle components, which was being investigated in Japan, a major exporter of vehicles to Hong Kong. This effect might have consequences for vehicle warranties and insurance.

'The Japanese Automobile Manufacturers' Association has requested us to take into account the study findings when working out how to promote the use of the fuel in Hong Kong,' she said.

But Dennis Leung Yiu-cheung, a professor in the University of Hong Kong's mechanical engineering department, said an earlier departmental study had shown that bio-diesel did not harm car engines and that emissions could be cut.

'The warranty issue is not an issue at all as the fuel is also widely popular in Europe and America and we don't see any problems arising from it there,' he said.

A spokeswoman for ExxonMobil said the company did not import bio-diesel since there was little market demand and it was not financially feasible without a government subsidy.

A spokeswoman for oil giant Shell said: 'We recognise the positive contribution that biofuel components can make towards the diversity of energy supplies and advocate sourcing by open, fair and competitive market mechanisms on a global basis.'

Shell said it sold nearly 3 billion litres of fuel containing biocomponents last year, mainly to the US and Brazil, where legislators favoured the use of ethanol.

A customs spokeswoman said bio-diesel was not covered under the relevant ordinance on duty.