Document of THE WORLD BANK

Report No.: 39767-CO

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED PURCHASE OF EMISSION REDUCTIONS BY THE COMMUNITY DEVELOPMENT CARBON FUND

IN THE AMOUNT OF UP TO US$1.1 MILLION

FOR THE

COLOMBIA: FURATENA ENERGY EFFICIENCY PROJECT

May 29, 2007

Sustainable Development Department Colombia and Mexico Country Management Unit Latin America and the Caribbean Region

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

2

CURRENCY EQUIVALENT (Exchange Rate Effective June, 2007)

Currency Unit = Pesos Colombianos

1950 Pesos Colombianos = US$1

Fiscal Year January 1 – December 31

ABBREVIATIONS AND ACRONYMS

BCF BioCarbon Fund CAS Country Assistance Strategy CDCF Community Development Carbon Fund CDM Clean Development Mechanism CEA Country Environmental Analysis CER Certified Emission Reduction CF Carbon Finance CO2e Carbon Dioxide Equivalent DNA Designated National Authority DOE Designated Operational Entity EIA Environmental Impact Assessment EMP Environmental Management Plan EPMF Empresa Procesadora de Mieles Furatena ER Emission Reduction(s) ERPA Emission Reduction Purchase Agreement GHG Greenhouse Gas GOC Government of Colombia GWP Global Warming Potential IPCC Intergovernmental Panel on Climate Change LULUCF Land Use, Land Use Change and Forestry MP Monitoring Plan NCCP National Climate Change Plan NDP National Development Plan NGO Non-governmental Organization NPV Net Present Value NSS National Strategy Study PAD Project Appraisal Document PDD Project Design Document UBN Unmet Basic Needs UNFCCC United Nations Framework Convention on Climate Change

Vice President: Pamela Cox Country Manager/Director: Makhtar Diop

Sector Director: Laura Tuck Sector Manager: Susan G. Goldmark

Task Team Leader: Walter Vergara

3

COLOMBIA: FURATENA ENERGY EFFICIENCY PROJECT

CONTENTS

A. STRATEGIC CONTEXT AND RATIONALE..................................................................... 6

1. KEY DEVELOPMENT ISSUES AND GOVERNMENT STRATEGY.................................................. 6 2. RATIONALE FOR BANK INVOLVEMENT ................................................................................. 9 3. SECTOR ISSUES TO BE ADDRESSED BY THE PROJECT AND STRATEGIC CHOICES................... 10 4. HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES.................................... 11

B. PROJECT DESCRIPTION................................................................................................... 13

1. PROJECT DEVELOPMENT OBJECTIVE................................................................................... 14 2. PERFORMANCE INDICATORS............................................................................................... 14 3. PROJECT COMPONENTS....................................................................................................... 14 4. SUSTAINABILITY AND REPLICABILITY ................................................................................ 15 5. ALTERNATIVES CONSIDERED AND REASONS FOR REJECTION.............................................. 16 6. MAJOR RELATED PROJECTS SUPPORTED BY THE BANK AND/OR OTHER DEVELOPMENT

AGENCIES........................................................................................................................... 16 7. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN............................................. 17

C. IMPLEMENTATION............................................................................................................ 18

1. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS................................................... 18 2. MONITORING AND EVALUATION OF OUTCOMES/RESULTS................................................... 19 3. CRITICAL RISKS AND POSSIBLE CONTROVERSIAL ASPECTS................................................. 20 4. ERPA CONDITIONS AND COVENANTS................................................................................. 21

D. APPRAISAL SUMMARY..................................................................................................... 21

1. FINANCIAL ANALYSIS ......................................................................................................... 21 2. TECHNICAL ........................................................................................................................ 22 3. ECONOMIC ......................................................................................................................... 23 4. SOCIAL ............................................................................................................................... 23 5. ENVIRONMENT ................................................................................................................... 24 6. SAFEGUARD POLICIES........................................................................................................ 25

E. COMPLIANCE WITH BANK POLICIES ......................................................................... 26

ANNEX 1: DETAILED PROJECT DESCRIPTION.............................................................. 27

ANNEX 2: IMPLEMENTATION ARRANGEMENTS.......................................................... 34

ANNEX 3: FINANCIAL ANALYSIS ....................................................................................... 40

ANNEX 4: PROJECT PREPARATION AND SUPERVISION ............................................ 44

ANNEX 5: EMISSION REDUCTION PURCHASE AGREEMENT/TERM SHEET ........ 45

ANNEX 6: THE PANELA INDUSTRY IN COLOMBIA ...................................................... 46

4

ANNEX 7: FURATENA: SOCIAL IMPACTS ASSESSMENT AND SOCIAL MONITORING ........................................................................................................................... 50

ANNEX 8: BARRIER ANALYSIS AND ADDITIONALITY................................................ 56

ANNEX 9: BASELINE ANALYSIS.......................................................................................... 59

ANNEX 10: CALCULATION OF EMISSION REDUCTION .............................................. 64

ANNEX 11: ENVIRONMENTAL MANAGEMENT AND SANITATION PLAN.............. 69

ANNEX 12: TECHNICAL AND SANITARY STANDARDS FOR THE PANELA PROCESSING SECTOR ........................................................................................................... 75

ANNEX 13: FINANCIAL ANALYSIS FROM SMALL PRODUCER’S PERSPECTIVE. 80

ANNEX 14: CDM APPROVED METHODOLOGY FOR SMALL SCALE ENERGY EFFICIENCY ACTIVITIES ..................................................................................................... 85

5

PROJECT APPRAISAL DOCUMENT

Latin America and Caribbean Region Sustainable Development Department

Date: May 23, 2007 Country Director: Makhtar Diop Sector Director: Laura Tuck Project ID: P086455

Team Leader: Walter Vergara Sectors: Agro-Industry (100%) Themes: Climate Change (P), Other environmental management (S)

Project Financing Data: [ ] Loan [ ] Credit [ ] Grant [ ] Guarantee [X] Other: Carbon Finance For Loans/Credits/Others: This project does not involve Bank financing. Total Carbon Revenues amounts to US$ 1.13 million; The CDCF has agreed to purchase 60,000 t CO2e by 2014 with an option to purchase an additional 40,000 t CO2e upon delivery. Proposed terms: $ 8.5 per ton CO2eFinancing Plan (US$m.) Source Local Foreign Total Net CDCF revenues 0.7 Other carbon revenues 0.3 EPMF 3.3 Total 1.0 4.3 Borrower: Not applicable Implementing agency: EPMF “La Empresa Procesadora de Mieles Furatena” Address: Cll169 No 67- 81 Int 2 Oficina 304, Utica Contact person: Jorge Eduardo Angel Riveros Estimated emission reductions in t CO2e/year and in USD

PY 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual (in tCO2e)

0 2809 6041 8396 12917 12917 12917 19375 19375 19375 19375

Cumulative 0 2809 8850 17246 30163 43080 55997 75372 94748 114123 133499

Annual (in m USD)

0 0.02 0.05 0.07 0.11 0.11 0.11 0.16 0.16 0.16 0.16

Cumulative 0 0.02 0.75 0.15 0.26 0.37 0.48 0.64 0.81 0.97 1.1

Project implementation period: 2007–2017 Expected effectiveness date: June 5, 2007 Expected closing date: December 2017 Does the project depart from the CAS in content or other significant respects?

Yes X No

Does the project require any exceptions from Bank policies? Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

Yes X NoYes X NoYes X No

Does the project include any critical risks rated “substantial” or “high”?

Yes X No

Does the project meet the Regional criteria for readiness for implementation?

X Yes No

6

A. STRATEGIC CONTEXT AND RATIONALE

1. Key development issues and government strategy Climate is changing rapidly at a global scale. There is no scientific doubt that the main cause of global warming is the atmospheric accumulation of greenhouse gas emissions from anthropogenic activities. The Fourth Assessment Report, Summary for Policymakers of the Intergovernmental Panel for Climate Change (IPCC-SPM, 2007) concluded that, the global average surface warming following a two-fold of carbon dioxide concentrations over pre-industrial levels, is likely to be in the range 2 to 4.5°C with a best estimate of about 3°C, and is very unlikely to be less than 1.5°C. A temperature increase of this magnitude is unprecedented. The report also indicates that CO2 concentration in the atmosphere in 2005 exceeds by far the natural range during the last 650,000 years. The doubling of CO2 is now expected to occur within this century.

Emissions from agricultural activities account for about 15 percent of global GHG emissions (WRI, 2006). This amount is divided roughly evenly between CH4 and N2O (about 45 percent each), with CO2 from fossil fuel combustion and electricity use in agro-activities accounting for the remaining share. At the activity level, the largest agricultural source is soil management (40 percent of the sector total), where emissions result from tillage and cropping practices, and the use of synthetic fertilizers. Other important agriculture sources of methane are wetlands rice cultivation and manure management. Agriculture also contributes to CO2 through land clearing and the burning of biomass. (WRI, 2006) Colombia’s emissions of GHG are very modest (0.2% of global, with 0.6% of global population). However, within these low intensity emissions, opportunities for GHG mitigation are already being actively pursued in Colombia in the renewable energy, wastewater treatment and carbon sink sectors (Jepirachi, Amoya, Rio Frio and Caribbean Savannah projects). Opportunities do exist to mitigate emissions in other sectors such as in agro-industry (National Strategy Study (NSS), 2002). According to the NSS, the Panela (raw brown sugar) processing sector has a good potential for GHG abatement through energy efficiency measures that could also result in significant social and environmental benefits.

In Colombia the agriculture sector was responsible for 41% of national carbon dioxide equivalent emissions in 1994. Activities related to agriculture emitted about 61,000 Gg in 1994. While no recent estimates have been reported, it s believed that the contribution of agriculture continues to account for a sizable share of the total emissions of CO2 in the nation.

Table 1 – Carbon dioxide equivalent emissions – 1994 (Gg) (Source: IDEAM) Sectors CO2 CH4 N2O Total

Energy 55.351,7 5.972,4 476,6 61.800,7 Industrial Processes 5.212,3 8,2 77,5 5.298,0 Agriculture 34.319,5 27.126,6 61.445,1 Land Use Change and forestry

16.540,0 88,7 9,0 16.637,7

Waste 4.061,4 625,0 4.686,4 Total Country (Gg) 77.103,9 44.450,1 28.313,7 149.867,8

7

Rural Colombia is characterized by high poverty and low agricultural competitiveness. Colombia’s rural poverty rate is 68% (2005) and affects 8 million people, most of them small farm families. Rural poverty represents 36.5% of national poverty and 49% of the national extreme poverty. Colombia’s rural poverty is rooted in structural elements: limited access to resources and information, and low productivity.1 Agriculture can be a source of substantial rural growth and an effective tool to reduce rural poverty particularly amongst small producers. To achieve this, there is a need to address barriers that prevent advances in agricultural productivity, limit access to financial mechanisms (land tenure, irrigation) and to new technologies.2

The Panela industry is characterized by inefficient use of energy. Colombia has become the second largest panela (processing sugar cane juice to manufacture brown sugar paste) producer in the World, after India. Production takes place mostly through “family owned facilities”, trapiches y entables, which serve few dozen hectares of sugar cane. In the nearly 15,000 small processing units in Colombia, efficiency varies widely. There is consensus on the very low thermal efficiency (20 to 30%) in traditional processing systems. These very low efficiencies translate into great demand for fuels. GHG emissions caused by Panela processing in Colombia can be reduced through improvements in energy use. Colombia produces 1.2 million tons of panela per year, with an estimated emission of GHG of nearly 3.0 million tons CO2 equivalent per year. It is estimated that panela production in a well designed, medium size, industrial facility could cut CO2 emission by more than 80%. Panela manufacture is a major source of rural employment and income. Panela production is the second largest source of employment in the rural sector (350,000 direct jobs). The average sugar cane unit is 3.0 hectares. Only 5% of all the panela produced in Colombia comes from facilities with 50 hectares or more (61 facilities). The remaining 15,000 units are either small or very small. This industry faces strong competition and poor quality of product. While new emphasis on the production of bio-fuels and the commissioning of a large facility to process panela molasses in the Suarez basin is expected to divert sugarcane production away from the household market, panela prices remain deprived and thus small farmers and producers are unable to introduce improvements in the manufacturing facilities or obtain economies of scale that could reduce unit manufacturing costs.

1 Pobreza y Desigualdad en Colombia. Diagnóstico y Estrategias. Informe final. Misión para la Reducción de la Pobreza y la Desigualdad. Bogotá, Junio de 2006. 2 Colombia, Rural Policy Notes, 2006

Figure 1. Dehydration basins in a traditional

8

Panela production is an attractive rural industry, if the scale and technology are adequately selected and product quality improves. Panela manufacture benefits from economies of scale. Modern processing facilities are frequently more environmentally friendly and cost effective. Good quality products, with the potential to assure volume and quantity to selected buyers, can command good prices in the market. Government Strategy Colombia is a party to the Framework Convention on Climate Change and has also signed and ratified the Kyoto Protocol (Law 629 enacted November 30, 2001). Colombia has been a

leading participant in the discussions on the provisions and regulations of the Clean Development Mechanism (CDM), in the context of the international negotiations under the auspices of the UNFCCC, and has developed a detailed negotiations agenda on items leading to the definition of the rules for the CDM. As part of these activities, the Government completed, with Bank support, a national assessment for the optimal use of the CDM (NSS, 2002) and has since become the country with the largest number of Bank-supported CDM projects in Latin America. The Government has, likewise, taken steps leading to the further development of institutional capacity through: a) the organization of an inter-institutional committee under the aegis of the Vice-president’s office to ensure full coordination on climate change issues; and b) the set up of a climate change office, which has now been in operation for the last five years. The government is now in the planning stages of a national policy on climate change. National Development Plan (NDP). The government of Colombia (GoC) has adopted, through Congress (Law 788 of December 2002), the NDP after a long and participative process of consultations and negotiations. For the social management of rural areas the NDP defines four strategies as follows:

• Promote food security by facilitating producers’ access to factors of production, technical assistance and financial markets. Also by implementing strategies to improve market structure in key products and give transparency to price formation;

• Support productive rural associations, through the development of product chains, building regional competitiveness agreements, integrating national markets and reducing transaction costs;

• Develop technical and scientific support for selected agriculture products by strengthening the National System of Science and Technology, implementing strategic plans of action and promoting the National Information System of Agricultural Products; and,

• Facilitate access to productive and financial services benefiting rural associative initiatives.

C h i m e n e a s d e l a s h o r n i l la s e n lo s e n ta b le s d e l o s p r o d u c t o r e s .

9

Rural development strategy. A main thrust of the government rural development strategy is ensuring that recent free trade agreements provide conditions conducive to the development of a more competitive agricultural and agro-industrial sector and that rural activities generate employment and wealth in rural poor areas. This thrust is supported amongst others by the Agro, Ingreso Seguro (AIS) program designed to strengthen and guarantee agricultural incomes. A main component of this strategy is to assist smallholders to become full-fledged entrepreneurs (‘empresarios’) by enhancing their competitiveness and equipping them with skills and knowledge to confront the challenge of the global economy. The Furatena Project is aligned with this latter thrust of the AIS program as it will create and strengthen the capacity of an association of small producers to prepare them to respond to the requirements of the national and international markets where adhering to strict phytosanitary norms, product quality and regular supply is a key determinant. National Climate Change Plan (NCCP). On the basis of the National Strategy Study (NSS), for Implementation of CDM in Colombia, other inputs and its growing technical and institutional capacity, the GoC has defined the main trust of a NCCP that includes the following goals:

• Strengthen the capacity to adapt to the anticipated impacts of climate change; • Promote the reduction of greenhouse gas emissions through mitigation and sequestration; • Minimize adverse impacts on the nation’s export of fossil fuels; • Promote scientific capacity and disseminate information on the impacts of climate change

on the country’s economy and ecosystems; • Support awareness and dissemination of information; and, • Promote financial mechanisms for the adoption and funding of response actions.

Project eligibility The proposed project meets the selection criteria of the Community Development Carbon Fund (CDCF) and represents the first CO2 (carbon dioxide) emission reduction project in the energy efficiency sector developed under the CDCF in Colombia. The project is in line with the CDCF’s objectives to reduce GHG emission reductions “from small-scale projects which reduce poverty and improve the quality of life of local communities”. On a global level the project will reduce GHG emissions. The project will also contribute to the adoption of organic-farming practices, and protect natural habitats. On a local level the project will benefit the farming community of Utica by improving the quality of their product and by increasing their income. In addition the project will reduce pollution levels in the local air-shed, avoid the use of firewood from conservation and protection areas, and implement soil and water conservation practices.

Colombia ratified the Kyoto Protocol in 2000 and established a Designated National Authority, DNA, which enables the country to participate in the Clean Development Mechanism. This allows the development of energy efficiency activities, which can generate Emission Reductions (ERs) to be traded in the international market, once certified.

2. Rationale for Bank involvement The Bank, through the CF+ facility, played a catalytic role in enabling this project. Resources were made available to strengthen the business plan, to socialize the project, to define the organizational structure to implement the project and to advance the design of the new facility. As result of the above interventions the scope and quality business plan improved. The

10

business plan became an excellent presentation letter to seek more resources and to attract donors. The presence of the Bank facilitated access to financial institutions, as well as to government offices, in search for support. Although the Bank played a subdued role, its participation was critical for project financial closure. The World Bank/Community Development Carbon Fund (CDCF). Carbon Finance is a product of the World Bank designed to demonstrate how market-based emissions transactions can mitigate global climate change and pioneer emission reduction purchase transactions. The Bank’s involvement helps to ensure quality of the carbon projects, their poverty focus, while providing project due diligence and other fiduciary responsibilities, and contributing with its country knowledge and country context. The Bank provides considerable expertise in technical support for project preparation, supervision capacity, and development of linkages with other sources of knowledge and funding. The Bank also brings the ability to serve as a catalyst for promoting environmental services as well as knowledge of climate change mitigation programs both regionally and globally. Finally, Bank involvement links the expertise and lessons of its sector work (National Strategic Study, NSS), institutional development (support to the Office of Climate Change, OCC) and development of a CDM portfolio in Colombia. Through Carbon Finance the governments of Canada, Italy and The Netherlands, with seven large multinational corporations, established the Community Development Carbon Fund (CDCF). It intends to purchase and facilitate GHG emission reductions “from small-scale projects which reduce poverty and improve the quality of life of local communities” in developing countries. The CDCF, a public/private initiative designed in cooperation with the International Emissions Trading Association and the United Nations Framework Convention on Climate Change, became operational in March 2003. The first tranche of the CDCF is capitalized at $128.6 million with nine governments and 15 corporations/organizations participating in it and is closed to further subscriptions. The CDCF supports projects that combine community development attributes with emission reductions to create "development plus carbon" credits, that would significantly improve the lives of the poor and their local environment. The CDCF was patterned after the successful experience of the Jepirachi project in Colombia.

3. Sector issues to be addressed by the project and strategic choices The project contributes to the reduction of transaction cost faced by small producers while searching for energy efficient and sustainable options. Acting individually, panela manufacturers do not have access to information regarding the opportunity that the CDM represents nor to the methodology for formulation, development and commercialization of CDM projects. Acting alone, the costs faced by small producers searching for partners, negotiating, documenting project formulation, baseline generation, monitoring and certification quickly overcome the benefits of CER generation. Project outcomes would help disseminate the experience gained, building understanding and capacity among producers in other areas in Colombia. It is expected that entities/agencies promoting CDM projects would use lessons learned from this pilot to promote similar initiatives. Success in the modernization of panela production has been difficult and elusive. GoC’s modernization efforts of the panela sector have been of limited impact. The GoC offers technical

11

assistance through municipal agencies, develops new technologies through CORPOICA, strengthens producers associations, facilitates investments, invests in communal processing facilities, supports industry standardization, and has developed financial incentives. Programs have been top down in nature, with little or no saying by the individual farmers. Also, economies of scale dictate the need for association, a cultural trait that is uncommon among small farmers. The project seeks to empower individual cane farmers and panela producers as major stakeholders of a new panela processing company. Also, the project includes the provision of training to farmers in order to increase entrepreneurial skills as well as in organic farming practices. Efficient use of a renewable energy. Panela production is mostly fueled with bagasse from sugar cane, but the very low energy conversion efficiency of the traditional manufacturing facilities (ca. 20%) requires of supplemental fossil fuels. The project seeks to minimize the requirements for fossil fuels, therefore reducing GHG emissions. The proposed project illustrates how the CDM might create strong incentives to guide technology choices that reduce the generation of GHG and improve energy efficiency. The project will address poverty in the project area. Panela production in Colombia is in the hands of small poor farmers. The project will contribute to the improvement of the production process of panela as well as to the quality of the product. As a consequence the production cost will decrease and the value of the product will increase. The farmers will benefit directly from the value added to their product including the revenues from emission reductions. Reduction of environmental impacts. The project would promote the use of organic practices in the production of its raw material. The additional costs associated to organic production of sugar cane will be absorbed by the expected increase in the commercial price of the “organic” certified product and by the increased efficiency in the panela manufacturing. If successful, reduction of pesticide and fertilizer applications may have long term benefits for biodiversity and quality of surface waters. An environmental management plan was developed and formally presented to the municipality for its adoption. Participants in the project have adhered to it and have pledged to comply with its recommendations. The project contributes to reducing the release of GHG from agriculture. The Panela (raw sugar) processing sector has good potential to contribute to reductions of GHG emissions with energy efficiency options that could also result in significant social and environmental benefits. The massive conversion of inefficient processing ovens could eliminate the burning of firewood and used tires, reducing or eliminating indiscriminate deforestation and noxious emissions. Given the large number of family – run units, this should reduce existing pressure on surrounding forests, biodiversity and air quality.

4. Higher level objectives to which the project contributes The project is consistent with the Country Assistance Strategy (CAS). The last full CAS for Colombia (December 2002) considers three priorities: (i) achieving fast and sustainable growth; (ii) ensuring that all Colombians benefit from growth, particularly those living in poverty; (iii) and building an efficient, accountable and transparent governance. To reach sustainable growth, the CAS will support initiatives and operations to support the following areas: Fiscal reforms;

12

Economic policy - aimed at reducing poverty and inequalities; Financial sector - to ensure the health and financial sustainability of the banking system; Infrastructure - to foster competitiveness and improve services to the poor, particularly potable water supply, sewerage and waste-water treatment for least well served areas; Private sector - to foster a business environment; Rural development - to increase productivity in rural areas, creation of work opportunities and provision of social services to vulnerable groups; and Natural resource management - to ensure environmental sustainability. The project is in line with the priorities of the CAS. First, at a wider level, the project contributes to global sustainability by reducing GHG emissions from the Panela sector in Colombia. Domestically, the project contributes to sustainable development by reducing the environmental impact of panela production. It may play a catalytic role in enabling similar investments in the panela sector in the country. The project also contributes to the use of renewable energy by using biomass for the energy needed in the production process. Locally, the project makes an important contribution to increase the productivity in the rural area of Cundinamarca and to increase the income of poor local farmers.

The project is also in line with the CAS progress report from 2005. With regards to rural development, the CAS progress report indicates the lack of integration in supply and marketing chains to and from rural areas. It also points out the lack of off-farm opportunities in rural areas. The project contributes to improving the marketing chain of panela with the small producers directly benefiting from an improved product and price. The project will also create more qualified employment opportunities through the newly created company. The WBG assistance with regard to rural development is targeted towards strengthening local leadership and organizations in rural areas. One of the main outcomes of the project is the creation of a company of which 51% of the main shareholders are the small producers. The Country Environmental Analysis (CEA) for Colombia from 2006 (Republic of Colombia: Mitigating Environmental Degradation to Foster Growth and Reduce Inequality) mentions “the Furatena project” under the specific actions undertaken by Colombia to reduce GHG emissions. It indicates that there are many opportunities to advance the twin objectives of economic development and GHG mitigation in Colombia and recommends to enhance the support offered to project developers in order to continue activities in this area. Colombia’s strategy for the use of the CDM. In 1998 Colombia initiated the formulation of the National Strategy Study (NSS) for the implementation of the CDM in the country. The study was realized between June 1999 and April 2000, with the objective of analyzing the domestic potential of the carbon market and of formulating the strategies required to maximize the potential benefits for Colombia. The study identified the economic sectors in the country with the highest potential to develop CDM projects and determined a reduction potential of 22.9 million tons CO2 per year in the electric, cement, sugar cane and agro-forestry sectors. The NSS

study indicates that Panela manufacturing has a good potential to reduce GHG emissions with the incorporation of energy efficiency options that could produce significant social and environmental benefits.

13

The study also established an action plan for the implementation of the CDM in the country and defined activities to develop the institutional capacity in order to manage the CDM. Finally, the study developed a proposal that focused on institutional management of the CDM at a national level. The main objectives were to fulfill the function of national approval in an efficient and flexible way and to promote the development of the CDM program. In order to implement the recommendations of the NSS at the end of 2000, the Ministry of Environment (now Ministry of Environment, Housing, and Territorial Development) created the climate change office. B. PROJECT DESCRIPTION Project location. The project is located in the municipality of Utica in Colombia. The municipality of Utica is a small rural community, with a total population, rural and urban, not exceeding 5,500 inhabitants. It has high indexes of unmet basic needs (UBN) which exceed 58% with an absolute poverty index above 27% (source: Anuario Estadístico de Cundinamarca 1998). In the rural areas poverty and UBN are even more pronounced; 43.5% and 83.6% respectively. T he sugar cane sector represents 90% of the municipality’s gross domestic product. The municipality has to deal with a permanent exodus of its younger population.

Typical landscape in the project area of influence

Utica

14

1. Project development objective The development objective is to contribute to the reduction of greenhouse gas (GHG) emissions from the “panela” (brown sugar) sector, the second largest source of rural employment in the country. The project would make viable improvements in energy efficiency, quality of product and rural income as well as overall environmental performance of this agro-industry. Once in operation, the project is expected to displace an estimated 133,000 tons of carbon dioxide equivalent (CO2e) by 2017. This will be done through the development of a modern, energy efficient and centralized manufacturing facility that will replace small, artisan manufacture. The facility will be owned by a company with the participation of small farmers. The project would also contribute to: (i) increase the income of small family owned farms through increases in land productivity and the proceeds from their participation in the molasses processing plant; (ii) training of at least 300 farmers on improved sugar cane production practices; (iii) basic managerial training to 120 small rural farms; (iv) use of 300 ha to pilot organic production, improving soil conservation cultural practices and creating social links among the participants; and, (v) implementation of a land use environmental plan with farmers participation, and township support; (vi) planting of additional biomass as the plant’s main fuel to reach zero emissions as of the third project year.

2. Performance indicators The primary performance indicators include:

• The Emission Reductions (ERs) for the estimated amount of 133,000 t CO2e are produced by 2017.

• The purchase of ERs by the Community Development Carbon Fund (CDCF) of at least 60,000 t CO2e takes place by 2014.

• 300 ha are converted into organic agriculture by 2010. • Energy efficiency of the Panela process increases; it eliminates the need for fuels

different from bagasse in the production of molasses and energy efficiency in the industrial facility is at least 30% higher than in the baseline.

• Small producers’ incomes increased by at least 25% • 300 farmers trained on improved sugar cane production practices • Zero GHG emissions as of the third project year

3. Project components Component A: Energy efficient panela manufacture.The project will purchase the emissions reductions resulting from the operation of the proposed centralized panela manufacture unit to be set up by the Empresa Procesadora de Mieles Furatena (a commercial enterprise with 51% of its stock in the hands of an association of small Panel manufacturers). The reduction in emissions is caused by gains in economies of scale and in energy efficiency during manufacture. This process involves three steps: (a) at the farm level cane production will switch from traditional practices to “organic” certified processes; (b) at the farm processing facility molasses will be produced, with a water content in the range of 50oB to 60oB and with bagasse as the only energy source; (c) Molasses will then be transformed into high quality panela products in a central facility that will dehydrate the molasses to 92oB to 98oB.

15

State of the art water-tube boiler technology will be used. The whole process is expected to generate zero GHG emissions by the third year of plant operation by using only biomass as energy source. The plant will start with a production capacity of 5000 t of panela per year. In 2011 the capacity is expected to increase to 10,000 t per year. The maximum capacity of 15,000 t per year is intended to be achieved by 2014. Component B: Community Training.The Project will support training to all participants and technical support to small producers to increase management skills and change traditional agricultural practices to “organic” certified production methods from the proceeds of sale of VERS. Component C: Project Management.The project will also support management of the plant and coordination with its suppliers. CORPOANDINA, acting as a strategic partner, would manage the operation. CORPOANDINA has the technical knowledge and the skills required for this partnership.

4. Sustainability and Replicability Sustainability: The project contributes to improvements in energy efficiency in the Panela sector and creates an incentive to maintain a sustainable production system. At the same time the improved production system will increase the quality and the value of the final product thus generating additional income to the farmers. The institutional arrangements include PROCAMPO, an association of small panela producers in the region. PROCAMPO is the main stockholder of the newly created commercial enterprise, EPMF, and will participate with 51% of the capital. The active participation of the panela producers in the new commercial plant enhances their ownership of the project. The project is expected to increase the income and quality of life of the small producers. As long as their lives improve they will continue to support the operation of the centralized molasses processing plant. Success of the project will open the door to use of the Kyoto protocol for purposes of energy efficiency in small production plants and will demonstrate a scheme to overcome transaction cost in this process. Carbon Finance provides long term revenues for project execution and monitoring which ensures the sustainability of project activities. Replicability: The Panela sector is one of the principal agricultural activities in Colombia and contributes with an important fraction of agricultural GDP (estimated at 6%). In addition, the sector is second after coffee in terms of number of productive units and rural employments (REDAR – Colombia, 1990). There is a large potential for replication, given the large number of panela producing units (approximately 15,000), most of which are family businesses. Individually these sugar producers would have no access to information on the opportunities CDM offers, or on the methodology for developing and registration projects. For an individual producer the costs of searching for Annex I partners and negotiating, formulating, executing, monitoring and certifying—all necessary activities for a CDM project--would be impossible to overcome. The project shows how to bring together many small manufacturing units under a single CDM project. Once successful, this model could also be useful for other sectors with similar conditions. The project will serve as a demonstration pilot to exemplify a new approach to panela production and commercialization. The combination of “organic” production and

16

industrial processing of molasses with a high end consumers marketing in the international market, is expected to attract other communities to duplicate the model and thus improve the living conditions of small panela producers in Colombia. The project illustrates:

(a) the potential of the CDM as a mechanism to develop socially and environmentally sustainable initiatives in rural areas. The Ministry of Environment, Housing and Territorial Planning has created an office to disseminate, promote and facilitate the benefits of CDM in a variety of sectors. This project will support their stated goals, attract foreign resources, support sustainable development, and serve as example for future initiatives benefiting the rural sector.

(b) a rural development initiative, in which the community, under the leadership of a local NGO, gets together to implement a productive investment. The bottom up approach is new to the Colombia rural sector, especially in areas characterized by small landholdings of highly independent farmers.

(c) a community effort to change long held tradition of individual production of low quality goods for the local market for a collective processing plant to offer high quality “organic” products for the national and international markets.

5. Alternatives considered and reasons for rejection CORPOANDINA is a local NGO. Through project preparation, and with resources from CF+, its operating capabilities were strengthened. The alternative of creating a PIU staffed with a capable project manager was discarded. It was argued that for replication purposes, and for real ownership of the project, it was better to develop local capacity to plan, examine, seek funds, manage, and finally operate their project. An alternative option, not selected, consisted in the gradual implementation of technological changes of the existing small and inefficient production facilities. This option would have prevented the achievement of high quality products, reduced the potential increase in bargaining power for the commercialization of their products and limited the sale of their products in the international market.

6. Major related Projects supported by the Bank and/or other development agencies

Linkages with the Jepirachi and Rio Frio project. The project will take advantage of lessons learned in the Jepirachi Carbon Offset Project (JCP or Jepirachi Project) which contributes to the reduction of greenhouse gas (GHG) emissions from the power sector in Colombia through the promotion of a 19.5 MW wind-based electricity generation facility. The Jepirachi project also supports a social program that contributes to improvements in the welfare of the local indigenous community. The Jepirachi project was the template for the CDCF. Technically, the project will also benefit from the Rio Frio Carbon Offset Project which reduces greenhouse gas emissions from the wastewater treatment sector in Colombia through the modernization of the Río Frío wastewater treatment plant, located in Girón (metropolitan area of Bucaramanga), Colombia. The Furatena Project also builds on the lessons arising from the Bank-financed Productive Partnerships Support Project, (PP) [P041642/ FY02, closing date Sept. 2007]. The PP project is supporting the development of agricultural and agro-industrial partnerships between

17

smallholders on one hand and agro-industrial and marketing partners on the other hand. Its major thrust is to strengthen small producers and equip them technically and commercially so that they can become full-fledged partners of agri-business and marketing firms. One prerequisite for such a support is that small farmers regroup into associations. Given the success of the PP project, a follow-up project is being prepared that would involve financing at least 250 additional productive partnerships at a total cost estimated at $40 million. The upcoming project will includes similar agro-business partnerships (panela and others) that given their features would qualify for Community Development Carbon Fund financing thus creating the enabling conditions for scaling up the Furatena initiative. 7. Lessons learned and reflected in the project design The project has benefited from the growing experience with other CF projects that are being conducted in Latin America. Nevertheless, the proposed project pioneers bringing CDM benefits to small rural producers in Colombia. The Productive Partnership Project implementation has provided several lessons that guided the Furatena project design and implementation strategy. These lessons include: (i) Length of thesubproject cycle. The PP subproject’s cycle has proven to be long, complex and costly in terms of transaction costs. This has sometimes discouraged the participants resulting in no compliance with the agreements reached during preparation, and in the need to restructure the partnerships due to changes in market conditions. (ii) Quality of the pre-investment studies. The quality of the pre-investment studies ensures a greater probability of success and sustainability of the partnerships between small panela producers with NGOs and other partners. (iii) Strengthening technical capabilities of participants. Experience has indicated that it is difficult to find the skill mix required for project preparation, promotion and management while working with NGOs and consulting firms at the sub-national level. In consequence, the project has trained and strengthened the capacities of the project promoters and participants, resulting in an important investment in human and social capital favoring the preparation, management and supervision of the initiative.

Other lessons included in project design include:

(i) The possible success of rural projects depends, mostly, on the ability of the promoter in creating the conditions for small rural producers to accept an associative initiative. The socialization and cultural change requires long time and adequate flow of resources. These resources represent a sizable part of the budget, and constitute an insurmountable barrier for the small producers;

(ii) Community commitment is essential for project success. Under the proposed project, PROCAMPO, the association of small panela growers is committed to raise 51% of the capital required;

(iii) Raising venture capital for rural farmers is very difficult or impossible. The project promoters have identified a parallel finance mechanism to provide bridge financing to those committed to participate but which lack the savings or the cash flow required. The adopted financial tool uses rules that take into account the size and income of the farmers and accepts future panela production as collateral.

18

C. IMPLEMENTATION

1. Institutional and implementation arrangements The project will be implemented by a new commercial company, “La Empresa Procesadora de Mieles Furatena” (EPMF). This company is the final result of a long process (See Annex 1 for details). Fifty one percent of EPMF stock is in hands of the primary producers, organized in a single entity, PROCAMPO. Participation in PROCAMPO is voluntary, and implies a commitment to provide molasses to the plant and actively participate in the governance of EPMF. To facilitate their contribution to the investment capital required, PROCAMPO received a loan and provided as collateral the individual contracts to guarantee the provision of molasses to the plant. The loan will be paid back through distributed profits (financial analysis shows a repayment schedule providing some incentives to the small producers [cash profit distribution] and a repayment period of 5 to 6 years. CORPOANDINA, the project promoter, is a local (Utica) NGO with experience on community training and in the promotion of social productive initiatives. It developed the project concept and organized the partners and investors. CORPOANDINA has 28 % of EPMF stock. MERCANDINOS is a private local (Utica) marketing and distribution company, specialized in panela commercialization to Bogota, the closest and largest national market. MERCANDINOS will provide the know-how required to integrate commercialization and production. MERCANDINOS has 5% of EPMF stock. INTERESA is a private sector society promoting technological change in agro-industry. It designs, builds and trains in the operation of industrial plants for transforming agricultural products. Based on its knowledge of the project, as technical advisor and designer of the plant, INTERESA decided to participate as private investor. This stockholder (4 %) brings the technical expertise required to secure adequate technical operating conditions. It will supervise plant operation and maintenance. The Stockholders also include Fundación Educacional Nuevo Retiro, a NGO (3 %); Carlos Leiva Ortiz (5 %, private investor); and Willenspad Investment S.L. (4 %). Willenspad is the intermediary for the provision of the first loan, signed and under execution, and a strategic partner for the commercialization of panela products to European markets. The regional environmental authority, CAR, has committed to support the project implementation with its considerable experience in project socialization and technical assistance for the implementation of environmental friendly, organic, agricultural practices. The Ministry of Environment, Housing and Territorial Development, through its climate change office has coordinated the participation of several institutions and introduced the CDM as a potential catalytic to remove the many barriers faced by the promoters. The promoters are continuously seeking support from other institutions.

19

Stock composition in EPMF

2. Monitoring and evaluation of outcomes/results Project supervision will be carried out by the Bank and an independent Designated Operational Entity (DOE).

Bank supervision As a Carbon Finance operation the Bank will supervise technical and safeguard issues for the project implementation period from the time of ERPA signature. Should any issue arise during supervision, such as, Bank safeguard policies are violated by the project, carbon payments would be halted immediately and the necessary actions would be taken to reinstate them. The costs would be covered by the Bank’s Carbon Finance Unit (ENVCF). This is unlikely to happen given the nature of the project.

DOE validation, registration and certification The Bank Carbon Finance Unit will assign a CDM–accredited Designated Operational Entity, DOE and will pay directly for the validation of the project. Alternatively, the CDCF may pay and deduct the cost from future carbon fund payments. Once the project is validated the DOE verifies emission reductions, certifies them as appropriate, and requests the CDM Executive Board to issue Certified Emission Reductions accordingly. The verification will be performed periodically until the end of payments. These costs are considered part of the supervision costs and will be paid directly by the project sponsor or by the CDCF and deducted from carbon fund payments.

20

Monitoring arrangements As a small scale CDM project activity the project will be subjected to a rigorous monitoring system in relation to GHG emission reductions. The simplified procedures for small scale projects are applicable, as the project will result in emission reductions less than 15,000 tCO2e/year. The project is classified as Type II F, energy efficiency and fuel switching measures for agricultural facilities and activities (see Annex 13 for the baseline and monitoring approved methodology, version 8). As indicated in the approved methodology monitoring should encompass (i) documenting the specification of the equipment replaced and the new equipment installed; (ii) metering the energy used of the agricultural facility, processes or the equipment affected by the project activity; (iii) calculating the energy savings due to equipment installed; and (iv) monitoring the scale of the agriculture activities in terms of cultivated area and crop yield, to ensure that reduced energy consumption is not due to downscaling of activities. This monitoring arrangement would be validated and verified by the selected Designated Operational Entity, DOE.

Monitoring protocol Performance indicator Baseline Goal Monitoring protocol Emission reductions None 133,000 by 2017 Monitoring

methodology as per UNFCCC guidelines (Type II-F)

Quality No organic certification 300 ha of cane under organic certification by 2010

Certification by international accredited agency (ICONTEC)

Energy efficiency below 25% Above 60% in new facility

Reported in energy balance by CORPOANDINA

3. Critical risks and possible controversial aspects Risk Mitigation Weak institutional Capacity Carbon finance has supported the development of institutional capacity.

The new company has experienced partners and will be assisted by PROCAMPO and CORPOANDINA. Stockholders now include organizations and agents with adequate management capabilities that complement the core project team.

Uncertain market conditions The product (organic panela) will fill an underexploited market niche providing a measure of stability to otherwise uncertain market conditions.

CDM baseline and monitoring procedures

No new methodology is required.

Continuous long-term support from small panela producers is required

Special emphasis has been made to socialize the project concept among small panela producers. The financial analysis conducted at the farm level shows that this group will be the main beneficiary of the project activity. Bridge financing has been provided to facilitate their access to the project.

Employment could be The project incorporates activities that demand more labor, like organic

21

negatively affected practices, as well as those that are less labor intensive, molasses and panela processing. The increased income for those small farmers participating in the project will create demand for additional services from the local market, promoting additional jobs creation and economic development.

Social unrest As most projects in Colombia this initiative confronts the generalized risk of violence. To reduce this risk the project has been socialized (wide dissemination in the area of influence) for several years, has been inclusive (accepting participants from many “corregimientos” and targeting small land holders) and has seek governmental support at all level. No major opposition has been identified.

No controversial issues are raised by the project. The overall risk to the project has been assessed as moderate.

4. ERPA conditions and covenants Carbon finance is not part of the World Bank’s lending program. There will be no regular loan or grant disbursement. The Bank as trustee of the CDCF will make direct payments in accordance with the ERPA. The generic ERPA table of contents is included as Annex 7.

D. APPRAISAL SUMMARY

1. Financial analysis Considering the estimated emission reductions up to 2017 with a VER price of USD 8.5 per tCO2e, the project has an internal rate of return of 17.03% and a NPV of US$ 1.4 million. With ERs, the project shows improved ratios and returns. The IRR goes up to 19.44 % and the NPV increases to US$ 2 million.

IRR (with Ers) 19.44%

IRR (without Ers) 17.03%

NPV (with Ers) 1,970,081

NPV (without Ers) $1,408,646

Taking into consideration the agreed purchase of VERs by the CDCF including the transaction cost the project demonstrates an IRR of 17.03% without VERs and of 17.91% with VERs. The NPVs amount to US$1.4 million and US$1.6 million respectively.

IRR (with Ers) 17.91%

IRR (without Ers) 17.03%

NPV (with Ers) 1,595,326

NPV (without Ers) $1,408,646

As the emission reduction estimates are very conservative an option to purchase 40,000 additional tons from 2008-2012 at the same price was agreed with the CDCF. By considering this option the IRR increases to 18.44% and the NPV to US$1.7 million.

22

IRR (with Ers) 18.44%

IRR (without Ers) 17.03%

NPV (with Ers) 1,739,519

NPV (without Ers) $1,408,646

Analysis from small producer’s perspective: A financial analysis has been conducted (see Annex 12) comparing the current situation of a panela producer in Cundinamarca to the project scenario. In the baseline scenario the analysis assumed the production of 50 tons of sugar cane rendering 5 tons of panela per hectare per year. In the project case the producer is able to increase its production by 20% (due to better juice extraction) and receives revenues (profit distribution) from the company. At the same time the analysis considers the contribution to the initial investment in the company (bridge financing) and the corresponding debt service by the small producers. The analysis assumes equal sugar cane establishment and maintenance cost as well as the same establishment period. An interest rate of 10% is used for the analysis. Financial Indicators. The NPV of the baseline scenario is around 1 million Colombian Pesos (USD 365) per ha for a period of 8 years. The cost benefit ratio is 1.1. With the project, the NPV increases tenfold without considering the investment and revenues from the EPMF and has a cost benefit ratio of 1.5. By considering the EPMF investments and revenues the NPV of the project amounts to 7 million Colombian Pesos per ha for an 8 years period. The net revenues are expected to increase in time once the debt service is completed. Also the project seeks the organic certification of the panela which will further increase its price. The project scenario will not only lead to reduced production cost based on energy savings and improved production techniques, but will also generate increased revenues due to increased panela production and improved product quality. The small producers will also benefit from being the owners of 51% of the company’s (EPMF) stock. The project also brings health benefits by reducing local pollutants. The analysis shows that the project increases the net revenues of the small producers by a factor of 7 to 10 in contrast to the current situation.

2. Technical Panela productive chain. The new panela production chain consists basically of three main links: (i) the supply link, (ii) the transformation link, and (iii) the distribution link. Each one of these links has specific functions throughout the production chain: Supply link: This link will be managed by PROCAMPO and its objective is to assure the production of semi-processed molasses with a maximum Brix of 55°- 65° obtained through specific technological adjustments. Transformation link: This link will be managed by EPMF and its objective is to manage and monitor industrial processing and panela molasses transformation into optimal quality products that respond to market’s needs. Distribution link: This link will be managed by EMPF Comercializadora and its objective is to strategically place the output products in the national and international markets. The project’s operational and administrative arrangements described above have been designed to go in accordance with this production model, in which EPMF is the new link in the production

23

chain. The chart shows two key features: (i) an ordered and linked structure starting from an operator/advisor agent and (ii) the inclusion of a new transformation’s link, EPMF, which will allow the project to achieve higher technical and financial levels.

3. Economic Not applicable.

4. Social Direct Social Benefits and Beneficiaries The FURATENA project is social by nature and provides numerous direct and indirect benefits. These benefits include: improving the producer's health by reducing local pollutants during the production process, generating direct and indirect employment in the municipality, improving the local and the global environment, increasing the incomes of producers and improving their quality of life, raising the educational and cultural level of workers, associates, and the region in general, and bearing a strong replication potential being a pilot project that may transform the country’s entire panela production sector. The project has executed a well defined social awareness campaign. During project formulation, meetings were held with the participation of all stakeholders, local and state authorities, NGO’s and small producers. Town meetings were followed by small gatherings. More than 40 such meetings took place over a period of nearly three years. Small farmers interested in participating in the project received additional information on the project, and a special effort was made to explain the scope of rights and responsibilities of joining PROCAMPO. Local leaders were initially targeted to get their support and mobilize other farmers. As indicated, the difficulties in obtaining the required credit moved many panela producers to exercise the option of joining at a second stage (the wait and see strategy). The project has the potential to threat jobs in the farms associated with the new plant. Further analysis indicate that the quality of the jobs potentially displaced is very low: given the cultural tradition of concentrating the tasks of cutting cane, transporting and processing in short bursts of activity (in some areas owners work non-stopping for 48 hr while the entire cane cut is processed; in many cases they expect that temporal workers follow such pace.) Temporal workers tend to be family members (in that way they capture the employment opportunities) that temporally divert their activities to contribute to the family labor revenues. Temporal workers are difficult to find, due to the discontinuous nature of the job offer and the very low wages it normally pays. The project will reduce labor intensity in the first stage of the manufacturing process, will increase labor intensity during the cultivation activities (organic farming is more labor than the traditional cultivation practice) and will create regular full time jobs (with fringe benefits –vacations, health, recreation and stability.) It is estimated that employment will improve with the project with some additional benefits for school age children that will no longer be needed for the very hard bursts of labor intensive activities during panela production.

24

5. Environment Through the anticipated improvements in energy efficiency, reductions in emissions of local airborne pollutants will be obtained. The adoption of organic practices will eliminate the use of synthetic fertilizers and pesticides in the project area. An environmental management and sanitation plan has been completed (Annex 10).

Source of emission reduction: The project is expected to generate emission reductions of 133,000 tCO2e in the initial 10 year period as result of improvements in energy efficiency. The traditional production process requires (net energy inflow) 12.20 MJ per ton of panela produced. This energy is delivered through low efficiency furnaces (efficiency estimated at 0.23) fueled mostly with bagasse (79%) and complemented with other fuels (firewood, old-tires, etc.) The traditional production process utilizes all the bagasse from the cane plus the equivalent of 400Kgrms of firewood per ton of panela, emitting 2.56 t CO2e/tpanela. The project baseline scenario is defined as by the traditional panela manufacturing process utilizing a reasonable fuel mix that minimizes GHG emission; in this case the complementary energy is provided by a combination of coal and used tires (rubber) in a 2:1 proportion energy wise, for an emission factor of 1.29 t CO2e/tpanela. In the project scenario the industrial process will emit 0.47 t CO2e/tpanela thereby reducing GHG emissions by 0.82 t CO2e per produced ton of panela. The table below summarizes the GHG emissions in the Baseline and project scenario. Scenario Moderate project expansion

Baseline scenario with minimum GHG emissions

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 TOTALPanela ton 3,250 6,000 6,500 10,000 10,000 10,000 15,000 15,000 15,000 15,000 105,750Other fuels (fw)ton 5,391 9,953 10,782 16,588 16,588 16,588 24,882 24,882 24,882 24,882 175,419CO2 emittedton 4,198 7,750 8,396 12,917 12,917 12,917 19,375 19,375 19,375 19,375 136,597

Proposed CDM project activity (panela production process)

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 TOTALPanela ton 3,250 6,000 6,500 10,000 10,000 10,000 15,000 15,000 15,000 15,000 105,750Coal % 90% 60% 0 0 0 0 0 0 0 0CO2 emittedton 1,389 1,709 0 0 0 0 0 0 0 0 3,098

GHG emission reduction generated by new process

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 TOTALPanela ton 3,250 6,000 6,500 10,000 10,000 10,000 15,000 15,000 15,000 15,000 105,750CO2 reductionton 2,809 6,041 8,396 12,917 12,917 12,917 19,375 19,375 19,375 19,375 133,499

2,809 8,850 17,246 30,163 43,080 55,997 75,372 94,748 114,123 133,499

The following table summarizes the emissions reductions to be purchased by the CDCF according to the ERPA which amounts to 60,000 t CO2e. Given the very conservative emission reduction estimates the CDCF agreed on an option to purchase an additional 40,000 t CO2e upon delivery.

25

$8.50 2008 2009 2010 2011 2012 Subtotal 2013 2014 Subtotal TotalProject ER 2,809 6,041 8,396 12,917 12,917 43,080 12,917 19,375 32,292 75,372Contract VER 2,000 6,000 8,000 12,000 12,000 40,000 10,000 10,000 20,000 60,000Revenues $17,000 $51,000 $68,000 $102,000 $102,000 $340,000 $85,000 $85,000 $170,000 $510,00050% renevues 8,500 25,500 34,000 51,000 51,000 170,000 42,500 42,500 85,000 255,000PP cost recovery $8,500 $25,500 $34,000 $32,000 $100,000PS/V cost recovery $20,000 $20,000 $20,000 $20,000Net Income $8,500 $5,500 $34,000 $50,000 $102,000 $200,000 $65,000 $65,000 $130,000 $330,000

Option VER 40,000 40,000Revenues with Option $340,000 $340,000Net Income with Option $540,000 $540,000

6. Safeguard Policies No adverse impacts are expected as a direct consequence of the project. The project supports an environmental program. The program consists of enabling activities to support “sustainable organic agricultural production” in the area. Project promoters and leaders from the small producers association have committed resources to support the implementation of a municipal environmental plan, already embraced by the local government. The plan calls for the adoption of sustainable agricultural practices (land set asides and elimination of biocides). The project will support the implementation of the plan amongst the participating farmers.

OP 4.01 is triggered by the project, and an environmental assessment has been completed. Construction of the central facility will follow environmental guidelines for this kind of facility. An annual environmental summary will be made available. Social – The project does not trigger the Bank’s social safeguards. A field visit confirmed that (i) there are no indigenous communities and (ii) no resettlement is needed. In addition, the project will strongly benefit the local community, and to achieve its objectives the project will necessarily be participatory. During preparation project sponsors have developed a series of consultations and project dissemination among the local producers.

Table 1: Applicability of Safeguard Policies Policy Applicability

Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Yes

Natural Habitats (OP 4.04, BP 4.04, GP 4.04) No

Forestry (OP 4.36, GP 4.36) No

Pest Management (OP 4.09) No

Cultural Property (OPN 11.03) No

Indigenous Peoples (OD 4.20) No

Involuntary Resettlement (OP/BP 4.12) No

Safety Dams (OP 4.37, BP 4.37) No

Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) No

Project in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) No

OP = Operational Policy, BP = Best Practice, GP = Good Practice, OPN = Operational Policy Note, OD = Operational Directive

26

E. COMPLIANCE WITH BANK POLICIES This project complies with all World Bank policies.

__________________ Walter Vergara Task Manager

__________________ Laura Tuck Sector Director

__________________ Makhtar Diop Acting Country Director

27

ANNEX 1: DETAILED PROJECT DESCRIPTION Panela is manufactured through the gradual dehydration of sugar cane juice. Several additives are used to facilitate the crystallization of the final product. Small producers use traditional facilities to conduct the entire manufacturing process. The Furatena project seeks a reduction of GHG emission by dividing the panela manufacture in two stages. In the first stage the small farmers will produce molasses, an intermediate product, which corresponds to a hydration point of 60oBrix. The molasses will then be transported to an industrial facility in which the production process continues, under constant and technical supervision and control, until achieving 92oBrix. The final product is panela of high quality that gets better prices in local markets and is amenable to export to Europe and other international markets. Broadly, the Furatena Project is an effort to integrate the panela supply chain (Figure 1). The project seeks to coordinate the production of raw materials, its transformation and commercialization. The newly created Empresa Procesadora de Mieles Furatena (EPMF), is the commercial entity operating the proposed new panela manufacturing facility, and will also assure the adequate supply of raw materials to elaborate the products demanded through its commercialization unit. Providing oversight and strategic vision the Board offers guidance to management on major decisions, assess the need for additional investments and exercise management oversight. As indicated in Annex 2 the Board composition mixes expertise in all key areas for the implementation of a successes project in agro-industry. Supply Link The supply of molasses to the manufacturing facility will be done through a combination of activities, including: (i) gradually changing traditional cultivation practices to “organic” certified production. Initially 300 hectares will be transformed to organic cultivation with the project providing training and resources for crop establishment as well as subject these areas to the process of certification (preliminary agreement exist with a certification agency). The extension of organic certified areas is expected to increase in response to market signals. (ii) Molasses production will mostly use new compact mobile units that will be servicing farmers associated with the project. These compact units offer improved equipment, are easily moved from farm to farm, and offer higher productivity (more juice is extracted from the cane, less labor is required and energy efficiency is enhanced) than the traditional entables. (iii) Production scheduling. In the future molasses production will closely respond to production needs, reducing price seasonality and storage requirements. To date panela production is normally scheduled, in the small farms, as response to cash needs. Although this strategy provides great flexibility to the owner, it is also causes inefficiency, lower yields and unstable incomes.

28

Figure 1. Business components Manufacturing Panela Energy efficiency gains are the result of breaking the panela manufacturing process in two stages. In the first stage molasses will be produced (500Brix to 600Brix) in processing facilities near the cultivation area, using mobile units or traditional facilities (entables). This stage will also eliminate the need for non-bagasse fuels in the entables. Molasses are then transported and processed in a new industrial facility.

EPMF

SUPPLYLINK

PROCAMPO

STRATEGIC OVERSIGHTBOARD EPMFF

“CORPOANDINA”

TRANSFORMATIONLINK

EPMF

COMMERCIALIZATION LINKEPMF

COMERCIALIZADORA

Provides strategic guidance, oversight and controls on major investments. It is mandated to promote business attitude, and the generation and distribution of profits.

Industrial processing and transformation of

molasses into high quality, homogenous products. This unit

will be in charge of the transformation

process. It will also

The main responsibilities of this unit are to maintain

updated information on market behavior and to provide timely guidance

to production. The marketing unit will be in

charge of sales in the

Production of high quality molasses through organic “in farm production”. Strict quality control systems will be

implemented to obtain the characteristics required for producing panela for the international markets.

It is the productive component of the project. It has a coordinating role to play, by service as scheduler for the supply link, operating the transformation link and overseeing the commercialization of its products. Quality control is of outmost importance as the market strategy calls for product differentiation based on quality, quantity and attention to select market niches.

29

The new manufacturing plant3 will use advanced proven technologies for the production of panela. Similar facilities already exist in the country. It will use high pressure boilers to generate the heat required for dehydration. The molasses will flow through gravity connected heated basins that allow excellent control of the process. The new facility has been designed with adequate space for all process needs, a panela quality control laboratory and administrative and storage areas. During the first two years of plant operation coal has been selected as the fuel of choice given its availability and relatively low price. The use of coal will amount to 90% of the fuel used in 2008 and to 60% in 2009. As of 2010, the plant will only use biomass for energy needs purposes. The project is expected to cut GHG emission by two thirds, eliminating the need for non-bagasse fuels in the entables.

Commercialization The project is expected to produce 5,000 tons of high quality panela per year. This volume allows direct marketing. Without Project, the small producer will continue to transport their product to the local market, where intermediaries set the price (due to asymmetry of information). The project promoters have devised a strategy to sell directly their production to wholesalers or market chains. They have also opened the possibility to sell their products in Europe; some agreements are already well defined, conditional on the timely delivery of a high quality product. As should be expected the prices paid in the international markets are substantially higher than the local price, but quality, volume and business attitudes are much more stringent. The project promoters have already commissioned two market research studies, and will continue to update them as they have come to understand and value the information they provide.

The Furatena Story The Furatena project is the result of a long and difficult journey. The goal of developing a productive project in their province rallying farmers to build a better and peaceful community

3 The molasses transformation plant would be commissioned as a turnkey contract to a well-established supplier with specific knowledge and experience in this kind of facilities. Civil works are included as well as the development of an environmental management plan, specific to the plant, its inputs and wastes. The productive component also includes hiring additional consultancies to provide updated information on commercialization channels and market opportunities. Consultant fees are also contemplated to plan for possible capacity expansions.

30

was conceived in the 1990’s by a group of successful professionals from Utica. In their view, Colombia required an increase in its social capital through education, trust building, and fundamentally through the creation of “Comunidades Constructoras de Paz”. The early concept of Peace Building Communities evolved from the work of Colombia’s environmental groups (ECOMUNDO 92 and Corporación BIOMA) seeking to introduce ecological friendly practices in the agro sector in Colombia. The leaders of these NGOs promoted the idea of working with a “futuristic mind” and in the long term protection of mankind by caring for the environment. Ecological agriculture in Colombia dates from the early 1990’s from the work of these pioneers. By 1998, under the intellectual direction of Dr. Gabriel Guet, advisor from the EU to the Minister of Agriculture, the promoters of the Furatena project decided to devote their time to the design and promotion of a strategic program to revitalize the rural areas of province of Gualiva, where Utica is located. The program aimed to create awareness on environmental issues, promote profitable productive projects, increase local income and the level of education, and promote better relations among all members of the community. The implementation strategy was conceived as a process to create awareness, educate and change behaviors geared towards more productive activities and greater social responsibilities. In other words, CORPOANDINA decided to work to increase social capital, improve incomes and, therefore, social wellbeing. Given the recently history of violence in the province their goal centered on building peace, as a social construct. In 2002 they formally established CORPOANDINA as the vehicle to make their dream a reality. CORPOANDINA decided focusing on panela production, given the founder members direct knowledge of the production process (they or their immediate family are middle size panela producers), the tradition of panela production in the province and the large number of poor and very poor small producers that live in the rural areas of Utica. Also, they had access to information through their active participation in the State and National Federation of Panela Producers, FEDEPANELA. CORPOANDINA prepared a project profile, which with time developed into a good technical and complete business plan, and set to implement a strategy seeking to interest potential allies and to attract resources to develop one of several initiatives they identified. The dissemination efforts by the Office of Climate Change of the Ministry of the Environment in Colombia opened the opportunity to inscribe the Furatena project profile as a potential CDM project. The Ministry formally requested the Bank to support such initiative in recognition of its high potential for replication, the social relevance of panela production as source of rural employment, and the Presidential commitment to support agro-industry initiatives. The initial proposition of allocating 51% of the stock to small producers turned out much more difficult than anticipated. A lthough the strategy called for social training and awareness creation activities, resources were always short for these soft activities. The experience of small rural producer forming associations to pursue a larger goal has been paved with innumerable difficulties in Colombia, and elsewhere, due in part to lack of trust and to the great dependence small farmers have on their land and its meager production. After more than 3 years of work, and the creation of special finance instrument tailored to the local conditions, it was possible to obtain the commitment of 98 small farmers with a production capacity estimated around 5,000 tons of panela per year. The participation of these small farmers is voluntary. The Furatena

31

project has always been open to all panela producers in the Gualiva province. Workshops, meetings and gatherings were open for everyone to participate. Meetings were normally publicly announced various days in advance, and were convened to coincide with days commonly use in the region to go to the “town” (Utica) for market. More than 40 meetings took place in the process of attracting and committing the minimum number of small producers defined as necessary for project success. A protracted process creating awareness to the benefits of boiler technology and the need to join efforts to create the conditions for a successful industrial initiative in the province was carried out over a period of nearly three years. Initial difficulties obtaining financial closure increased the mistrust of many small producers, who opted for a strategy of wait and see. Several models of participation were sought. At the end all the small farmers became members of a single association of small producers, whose leaders represent the farmers rights and responsibilities, PROCAMPO. They have agreed to commit the production of a fraction of their fields to the newly created Empresa Procesadora de Mieles Furatena ( EPMF), as condition to access a credit line to participate in PROCAMPO. By facilitating the access of small farmers to PROCAMPO, through the special line of credit, the project promoters found a mechanism for PROCAMPO to obtain the resources required to invest its due in the EPMF. The association of small farmers, PROCAMPO, purchased 51% of the stock of the newly created company. The credit will be paid with the proceeds of the sale of high quality panela produced in the new processing facility. (Each small producer will be responsible for the value of his/her share in EPMF, and the credit will be paid during the first production cycle, with a grace period –only interests- of up to 3 years.) Until 2003, the government of the municipality of Utica played an important role disseminating information and promoting the project. It was considered, at that time, that the municipality should become a stockholder in EPMF. A change in political wind proved the idea to formally engaging the Government of the Municipality to have high risks. New demands were made and conditions of control were set for the municipality participation. After a protracted negotiation the project promoters voted out the participation of the municipality as a strategic (political) stockholder. The Bank, through the CF+ facility, played a catalytic role. Resources were made available to strengthen the business plan, to socialize the project, to define the organizational structure to implement the project and to advance the design of the new facility. As result of the above interventions the scope and quality business plan improved. The business plan became an excellent presentation letter to seek more resources and to attract donors. The presence of the Bank facilitated access to financial institutions, as well as to government offices, in search for support. Although the Bank played a subdued role, its participation was critical for project financial closure. The partners of the new enterprise are the result of a well defined strategy of institutional strengthening. For each key to success in an agro industry project, as defined in lessons learned from previous government interventions, the promoters sought a partner with such expertise. For example, the need to have a good technical advisor, with experience in implementing new production facilities for panela and other agro industries, moved the promoters to ask

32

INTERESA for its participation as stockholder. INTERESA is a private group with specific technical experience in the design and implementation of advanced boiler technology for agro industry in Colombia. Its expertise was tested through its work in the technical design of the new facility, which sailed well the multiple technical reviews by other potential partners, financial institutions and by the Bank due diligence team. As described in Figure 1, the composition of EPMF stockholders closely matches the ideal set of “keys to succeed”. Financial closure proved to be very difficult, as the financial strength of the participants fell short of financial institutions expectations. Persistence and the continuous search for option concluded in an initial agreement with Willenspad Investment S.L., an investment group from the European Union, who agreed to lend up to one million euros, � 1.0 million. Once a major investor committed to the project, other financing sources defined their willingness to participate. Nonetheless, the participation of the first lender was achieved only with personal collateral by the project promoters. Their productive lands are the guarantee to the initial loan. As of March 2007, after more than 5 years of persistence, the initial project promoters have received the first major disbursement, are in the process of negotiating two complementary financial operations, and have defined June 2008 as the target day to initiate production in the new facility. Technologically the project has three components: (a) at the farm level cane production will switch from traditional practices to “organic” certified processes. Panela production will be split in two. (b) At the farm processing facility molasses will be produced, with a water content defined in degrees Brix, in the range from 50oB to 60oB. (c) Molasses will be transformed into high quality panela products in a central facility that will dehydrate the molasses to 92oB to 98oB. Organic production: “Organic food” is produced by farmers who emphasize the use of renewable resources and the conservation of soil and water. Organic food is produced without using most conventional pesticides; fertilizers made with synthetic ingredients or sewage sludge; bioengineering; or ionizing radiation. Before a product can be labeled "organic" a Government-approved certifier inspects the farm where the food is grown to make sure the farmer is following all the rules necessary to meet national and international organic standards. Companies that handle or process organic food before it gets to the final consumer must be certified, too. Molasses production: Investments at this level are geared to assure the adequate quality and handling of the molasses. Existing facilities will be modified to include pre-cleaning processes, and molasses handling and storage. Since the transformation process is simplified adjustments will be made to improve energy efficiency. Panela production: An industrial, state of the art, plant is envisioned. A simple, but efficient, boiler technology will be used to drive the dehydration process. The ability to manage vapor heat transfer provides the control needed to manufacture high quality panela products. Technology to be employed: State of the art water-tube boiler technology will be used. The boiler will be fueled by coal, bagasse and other agricultural residues as relative prices dictate the

33

day to day operation. The coal share in the plant’s energy mix will be of 90% in 2008, 60% in 2009, and zero as of 2010.

The two basic boiler designs are fire-tube and water-tube. Fire-tube boilers force hot combustion gases through tubes submerged in water. Water-tube boilers, circulate water in tubes within a furnace enclosure. Hot flue gases pass over the tubes, heat the water, and then exit through a stack. While both boiler designs offer comparable efficiencies, they are not interchangeable, due primarily to structural considerations. Water-tube boilers are usually specified in all situations where operating pressures of 250 pounds per square inch gauge or greater are required because of their greater structural integrity.

Boiler Technical Specifications

Type Water-tube Fuel Coal, bagasse, biomass etc. Operating Pressure (psi) 150

Design Pressure (psi) 250

Capacity (B.H.P.) 150

Capacity (BTU / h) 3’000,000

Capacity (lb de vapor / h) 3,000

Power (kW) 12 Estimated coal load (kg/ h) 130 - 150 Efficiency (expected average) 70%

34

ANNEX 2: IMPLEMENTATION ARRANGEMENTS A. Project’s operational and administrative arrangements 1. The project’s administrative and operational structure has been defined in a simple scheme and consists basically of four entities, CORPOANDINA, EPMF, the Project Manager (Gerente Gestor), and the Advisory Committee (Comite Asesor) as shown below in figure 1. As it has been mentioned before, CORPOANDINA is a local NGO with experience on community training and in the promotion of social productive initiatives. At first term, it will be responsible for the selection and appointment of the Project Manager (Gerente Gestor), who will be in charge of the general coordination of the Project’s Action Plan execution. This includes the selection and hiring of the required human resources to operate the Project’s Action Plan. Moreover, CORPOANINA will be responsible for: (i) project’s strategic management, (ii) management of necessary funds for Action Plan’s implementation, which will be defined for the first stage of the Project, and (iii) execution of the first phase of Project’s first stage. 2. EPMF S.A., the project implementing agency will be working in close coordination with CORPOANDINA and the Project Manager and will be responsible for the execution and monitoring of the development of the products/activities defined at the Action Plan for the second and third phases of the first project stage. (Please see figure 2).

Figure 1. Project’s administrative and operational structure

CORPOANDINA EPMF S.A.

MANAGING DIRECTOR

AdvisoryCommittee

- Strategic Management -Management of necessary funds for Action’s Plan implementation. - Execution of the first phase ofProject’s first stage.

Execution and monitoring of the development of the products/activities defined at the Action Plan for the second and third phases of the first project stage

- Verification and monitoring of the development of the strategic programs defined for the installation, Assembly and plant’s start-up stages - Project funds management and their efficient and effective use.

Support to the Action Plan’s

35

The Project Manager will be responsible for the following activities: (i) verification and monitoring of the development of the strategic programs defined for the installation, assembly and plant’s start-up stages, and (ii) project funds management and their efficient and effective use.

Figure 2. Organizational chart showing CORPOANDINA and EPMF interaction in the projects’s operational and administrative structure

The Advisory Committee (Comite Asesor) will give support to the Action Plan’s execution process. The Committee consists of the following entities: (i) Finance group committee with veto rights, (ii) Members of the Board of Directors and CORPOANDINA & EMPF legal representatives, (iii) Field person or Technical/operational Manager, (iv) committee group of project’s stakeholders.

Administrative and financial

manager

Accountant

Managing Director

Advisory committee

Phase 2 and 3 – First Stage

Aux. Secretary

General manager

Members meeting

EPMF S.A.

Members meeting

Financial reviewer

Board of Directors

President

General director

CORPOANDINA

Pre-operative Phase – First Stage

Secretary

Field Staff

Board of Directors

Financial reviewer

Administrative and financial

manager

Accountant

36

Figure 3. Organization chart of the Advisory committee

37

COMITE GRUPODE ACTORES RESPONSABLES ACTIVIDADES

PROFESIONAL DECAMPO Y/O GERENTETECNICO OPERATIVO

MIEMBROS JUNTADIRECTIVA YREPRESENTANTESLEGALES CORPOANDINAY EPMF

COMITE GRUPOFINANCIADORES CON DERECHO A VETO

EPMF S.A.CORPOANDINA

GERENTEGESTOR

COMITEASESOR

38

Panela productive chain The new panela production chain consists basically of three main links: (i) the supply link, (ii) the transformation link, and (iii) the distribution link. Each one of these links has specific functions throughout the production chain: Supply link: This link will be managed by PROCAMPO and its objective is to assure the production of semi-processed molasses with a maximum Brix of 55°- 65° obtained through specific technological adjustments. Transformation link: This link will be managed by EPMF and its objective is to manage and monitor industrial processing and panela molasses transformation into optimal quality products that respond to market’s needs. Distribution link: This link will be managed by EMPF Comercializadora and its objective is to strategically place the output products in the national and international markets. The project’s operational and administrative arrangements described above have been designed to go in accordance with this production model, in which EPMF is the new link in the production chain. The chart shows two key features: (i) an ordered and linked structure starting from an operator/advisor agent and (ii) the inclusion of a new transformation’s link, EPMF, which will allow the project to achieve higher technical and financial levels. The Empresa Procesara de Mieles Furatena EPMF, a commercial enterprise, will oversee the execution of the project and to manage the operation and commercialization of the panela industrial production. This entity, Empresa Procesadora Mieles Furatena, EPMF, is a private for profit organization, with PROCAMPO as the main stockholder, and CORPOANDINA as the strategic partner (project promoters and leaders). PROCAMPO is an association of small panela producers in the region, created specially for the project, with a short history of 4 years of service in the Gualiva province. As of late January 2004 the association has 96 inscribed members interested in participating in the project, representing 690 ha of cultivated land. PROCAMPO will participate with 51% of the capital. PROCAMPO is the selected vehicle to associate all small participating producers, drawn from the Municipality of Utica. Participation is voluntary, and implies a commitment to provide

39

molasses to the plant and actively participate in the governance of EPMF. To facilitate their contribution to the investment capital required, PROCAMPO received a loan (from the other participants) and provided as collateral the individual contracts to guarantee the provision of molasses to the plant. The loan will be pay back through distributed profits (financial analysis show a repayment schedule providing some incentives to the small producers [cash profit distribution] and a repayment period of 5 to 6 years as function of market prices and the proportion of the production sold in international markets.) CORPOANDINA is a local NGO, created by progressive panela growers from Utica. It is a non-for-profit organization working to create a new social sustainable development model. CORPOANDINA has been the leading force behind the project. It will participate with 28% of the capital. It has shown capacity to convene government agencies, social foundations and investors to join in their effort to provide a better future for the Municipality of Utica . CORPOANDINA developed this project as part of their long-term goal of creating Comunidades Constructoras de Paz (peace building communities). This NGO is working following an agriculture sustainable development comprehensive strategy through productive pilot projects which foster private investment; improve cultural practices; eliminate the roots of the social conflict seated in the region; increase small farmers’ income, and improves social welfare. MERCANDINOS is a private local (Utica) marketing and distribution company, specialized in panela commercialization in Bogota, the closest and largest national market. Its participation is considered strategic as it will provide the know-how required to integrate commercialization and production. MERCANDINOS has 5% of EPMF stock. INTERESA is a private sector society promoting technological change in agro-industry. It designs, builds and trains in the operation of industrial plants for transforming agricultural products. Based on its knowledge of the project, as technical advisor and designer of the plant, INTERESA decided to participate as private investor. This stockholder (4 %) brings the technical expertise required to secure adequate technical operating conditions.

40

ANNEX 3: FINANCIAL ANALYSIS The cost structure of the proposed investment includes all expenditures required to gain small farmers acceptance of new agricultural practices, the design at farm level for the implementation of the new technology, agricultural and basic business training specially targeted to the small producers, and continuous update of commercial-marketing information. The financial analysis differentiates between two kinds of initial investment costs: the pre-investment cost includes the “soft” components that enable the successful set up and management of the plant. The “hard” costs include the in-farm improvements and the construction of the central processing plant. Total estimated initial investment amounts to approximately US$ 3.3 million. On the revenue side the project will produce different panela products, revenues from sugar cane and emission reduction units. These revenues more than outbalance the annual production and financing cost as of the third project year. The financial analysis doesn’t consider inflation and taxes. The financial analysis has been developed for a period of 10 years. The interest rate is 10%. The considered exchange rate is 2200 Colombian Pesos per USD. The VER price is US$ 8.5 per t of CO2e as agreed in the ERPA. The financial analysis reflects a reference scenario that assumes a production of 5,000 ton/year and does not incorporate possible expansions in order to be conservative. Financial Summary: Scenario 1: Totality of emission reductions up to 2017 at a price of USD 8.5 per tCO2e

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017 Investment (2,945,387) (184,761) (148,415) - - - - - - - -

Panela revenues - 2,547,348 3,805,634 4,744,223 6,034,801 6,772,727 6,875,000 6,875,000 6,875,000 6,875,000 6,875,000

NET VERs - 23,877 51,349 71,366 109,795 109,795 109,795 164,688 164,688 164,688 164,688

Liabilities (140,257) (128,435) (141,143) (149,701) (184,441) (192,333) (192,333) (192,333) (192,333) (192,333) (192,333) Production costs (sale, operation, administration) - (2,512,368) (2,815,582) (2,994,018) (3,688,814) (3,846,655) (3,846,655) (3,846,655) (3,846,655) (3,846,655) (3,846,655)

Financial costs (9,091) (459,732) (283,531) (749,279) (1,069,504) (1,376,651) (1,602,074) (1,774,365) (1,828,203) (1,861,265) (1,234,150)

Net flow (3,094,734) (714,070) 468,311 922,591 1,201,837 1,466,883 1,343,733 1,226,335 1,172,497 1,139,435 1,766,550 Net flow (without Ers) (3,094,734) (737,947) 416,963 851,225 1,092,042 1,357,089 1,233,939 1,061,647 1,007,810 974,748 1,601,862

41

Scenario 2: Net emission reduction revenues as agreed per ERPA with option to purchase additional 40,000 tCO2e

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017 Investment (2,945,387) (184,761) (148,415) - - - - - - - -

Panela revenues - 2,547,348 3,805,634 4,744,223 6,034,801 6,772,727 6,875,000 6,875,000 6,875,000 6,875,000 6,875,000

NET VERs - 8,500 5,500 34,000 50,000 102,000 65,000 65,000 340,000

Liabilities (140,257) (128,435) (141,143) (149,701) (184,441) (192,333) (192,333) (192,333) (192,333) (192,333) (192,333) Production costs (sale, operation, administration) - (2,512,368) (2,815,582) (2,994,018) (3,688,814) (3,846,655) (3,846,655) (3,846,655) (3,846,655) (3,846,655) (3,846,655)

Financial costs (9,091) (459,732) (283,531) (749,279) (1,069,504) (1,376,651) (1,602,074) (1,774,365) (1,828,203) (1,861,265) (1,234,150)

Net flow (3,094,734) (729,447) 422,463 885,225 1,142,042 1,459,089 1,298,939 1,126,647 1,347,810 974,748 1,601,862 Net flow (without Ers) (3,094,734) (737,947) 416,963 851,225 1,092,042 1,357,089 1,233,939 1,061,647 1,007,810 974,748 1,601,862

Scenario 3: Net emission reduction revenues as agreed per ERPA without option

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017 Investment (2,945,387) (184,761) (148,415) - - - - - - - -

Panela revenues - 2,547,348 3,805,634 4,744,223 6,034,801 6,772,727 6,875,000 6,875,000 6,875,000 6,875,000 6,875,000

NET VERs - 8,500 5,500 34,000 50,000 102,000 65,000 65,000 -

Liabilities (140,257) (128,435) (141,143) (149,701) (184,441) (192,333) (192,333) (192,333) (192,333) (192,333) (192,333) Production costs (sale, operation, administration) - (2,512,368) (2,815,582) (2,994,018) (3,688,814) (3,846,655) (3,846,655) (3,846,655) (3,846,655) (3,846,655) (3,846,655)

Financial costs (9,091) (459,732) (283,531) (749,279) (1,069,504) (1,376,651) (1,602,074) (1,774,365) (1,828,203) (1,861,265) (1,234,150)

Net flow (3,094,734) (729,447) 422,463 885,225 1,142,042 1,459,089 1,298,939 1,126,647 1,007,810 974,748 1,601,862 Net flow (without Ers) (3,094,734) (737,947) 416,963 851,225 1,092,042 1,357,089 1,233,939 1,061,647 1,007,810 974,748 1,601,862

Project costs

Initial Investment: The required initial investment occurring during the first three years of the project is estimated at US$ 3.3 million in the first stage of the project. Production cost. The production and financing cost are estimated at approximately USD 19 million (NPV, 10%) up to 2017 which corresponds to approximately US$ $3 million yearly and includes costs related to sale of the final product, operation and administration of the plant. The production cost include the cost of the raw material, the cost for “inventario utilizado”, the fixed and variable labor cost, the fixed production cost and the depreciation cost. VER transaction costs. The VER preparation costs of US$100,000 will be recovered in maximum five years, with 50% of revenues limit per year. In addition, a cumulative amount of US$ 80,000 is estimated for supervision and verification cost until 2014 which will be also recovered through discounts in the annual payments for the VERs produced. Project verification and supervision will be held every two year. Financing costs and financing arrangements. A financial mechanism was designed to lend to PROCAMPO the venture capital required to represent the small farmers, supported with contracts for the provision of molasses by the participating farmers as collateral. In this way the small farmers will “pay” their contribution

42

with profits; they are required to produce molasses for the Plant from a fraction of their holding (freely selected) and to pay the bridge loan in a period of up to five years. The initial investments will be covered through three loans, including one loan in the amount of 1 million Euros from Swiss Credit, 1.8 million Euros from Cruz del Sur, and a loan from Finagro. The carbon revenues will also cover part of the initial investments and the annual production and operation cost.

Project Income

Panela revenues: The project will result in the production of different panela products as summarized in the production schedule below, with the corresponding expected prices. Table 2: Panela revenues

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017 Panela revenues - 2,547,348 3,805,634 4,744,223 6,034,801 6,772,727 6,875,000 6,875,000 6,875,000 6,875,000 6,875,000

ERs Revenues: The CDCF will purchase 40,000 tons by 2012 and additionally 20,000 tons by 2014. As estimation is very conservative an option to purchase 40,000 additional tons from 2008-2012 at the same price was agreed. The following table summarizes the total amount of expected ERs as well as the carbon revenues expected for the first 10 years assuming a price of US$ 8.5 per t CO2e.

Table 3: Emission Reductions (in US$)

PY 2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017

Annual

(in tons CO2e)

Cumulative - 2,809 8,850 17,246 30,163 43,080 55,997 75,372 94,748 114,123 133,499

Annual(in millionEuros)

Cumulative - 23,877 75,225 146,591 256,386 366,180 475,975 640,662 805,358 970,046 1,134,742

164,688 164,688 164,688 164,688

19,375 19,375 19,375

- 23,877 51,349 71,366 109,795 109,795 109,795

12,917 12,917 12,917 19,375 - 2,809 6,041 8,396

The following table represents the project emission reductions, the amount purchased by the CDCF discounting the Project Preparation as well as the Project Supervision and Verification cost.

43

$8.50 2008 2009 2010 2011 2012 Subtotal 2013 2014 Subtotal TotalProject ER 2,809 6,041 8,396 12,917 12,917 43,080 12,917 19,375 32,292 75,372Contract VER 2,000 6,000 8,000 12,000 12,000 40,000 10,000 10,000 20,000 60,000Revenues $17,000 $51,000 $68,000 $102,000 $102,000 $340,000 $85,000 $85,000 $170,000 $510,00050% renevues 8,500 25,500 34,000 51,000 51,000 170,000 42,500 42,500 85,000 255,000PP cost recovery $8,500 $25,500 $34,000 $32,000 $100,000PS/V cost recovery $20,000 $20,000 $20,000 $20,000Net Income $8,500 $5,500 $34,000 $50,000 $102,000 $200,000 $65,000 $65,000 $130,000 $330,000

Option VER 40,000 40,000Revenues with Option $340,000 $340,000Net Income with Option $540,000 $540,000

Financial Indicators (NPV and IRR).

Considering the estimated emission reductions up to 2017 with a VER price of USD 8.5 per t CO2e, the project has an internal rate of return of 17.03% and a NPV of US$ 1.4 million. With carbon finance, the project shows improved ratios and returns. The IRR goes up to 19.44 % and the NPV increases to US$ 2 million.

IRR (with Ers) 19.44%

IRR (without Ers) 17.03%

NPV (with Ers) 1,970,081 NPV (without Ers) $1,408,646

Taking into consideration the agreed purchase of VERs by the CDCF the project demonstrates an IRR of 17.03% without VERs and of 17.91% with VERs. The NPVs amount to US$1.4 million and US$1.6 million respectively. IRR (with Ers) 17.91%

IRR (without Ers) 17.03%

NPV (with Ers) 1,595,326

NPV (without Ers) $1,408,646

As the emission reduction estimates are very conservative an option to purchase 40,000 additional tons from 2008-2012 at the same price was agreed with the CDCF. By considering this option the IRR increases to 18.44% and the NPV to US$1.7 million. IRR (with Ers) 18.44%

IRR (without Ers) 17.03%

NPV (with Ers) 1,739,519

NPV (without Ers) $1,408,646

44

ANNEX 4: PROJECT PREPARATION AND SUPERVISION

Planned Actual PCN review February 17, 2004 June 20, 2003 Initial PID to PIC Initial ISDS to PIC Appraisal April 2, 2007 April 19, 2007 Negotiations April 3, 2007 April 3, 2007 Sign ERPA June 5, 2007 June 5, 2007

Bank staff and consultants who worked on the project included: Name Title Unit Walter Vergara Lead Engineer and TTL

/Environmental Spec. LCSEN

Pedro Huarte-Mendicoa Deal Manager ENVCF Alejandro Deeb Hydrologist LCSEN Seraphine Heussling Economist LCSEN Flavia Rosembuj Senior Counsel LEGCF Rama Chandra Reddy Carbon sinks/forestry specialist ENVCF Gerardo Segura Forestry specialist LCSAR Alonso Zarzar Social specialist LCSSO Natalia Gomez Rural specialist LCSAR

45

ANNEX 5: EMISSION REDUCTION PURCHASE AGREEMENT/TERM SHEET

A generic ERPA table of contents is shown below. Thee actual document is expected to be signed by December 2005. ARTICLE I: APPLICATION OF GENERAL CONDITIONS Section 1.01 Application of General Conditions Section 1.02 Inconsistency with General Conditions ARTICLE II: PROJECT DETAILS Section 2.01 Description of the Project ARTICLE III: CONDITIONS FOR SALE AND PURCHASE Section 3.01 Preconditions to be fulfilled Section 3.02 Conditions for benefit of Trustee Section 3.03 Termination of the Agreement ARTICLE IV: PURCHASE AND SALE OF EMISSION REDUCTIONS Section 4.01 Contract ER Volume and Unit Price Section 4.02 Transfer of Contract ERs Section 4.03 Advance Payment Section 4.04 Annual Payment ARTICLE V: CALL OPTION Section 5.01 Call Option provisions do not apply Section 5.01 Call Option Volume and Exercise Price ARTICLE VI: PROJECT DEVELOPMENT AND MONITORING Section 6.01 Project Development Section 6.02 Monitoring Plan ARTICLE VII: REPRESENTATIONS AND WARRANTIES Section 7.01 Additional Project Entity Warranties Section 7.02 Notices ARTICLE VII: TERM Section 8.01 Term ARTICLE IX: NOTICES Section 9.01 Notices SCHEDULE 1: CONDITIONS FOR SALE AND PURCHASE SCHEDULE 2: ANNUAL AMOUNTS SCHEDULE 3: MONITORING PLAN

46

ANNEX 6: THE PANELA INDUSTRY IN COLOMBIA

Production of brown sugar dates back to 3000 BC in India, where it is known as Gur Jaggery. Its arrival to South America was as a result of Columbus’ second expedition in 1495 when he founded the first sugar cane plantations in Santo Domingo. Panela is the result of the dehydration of sugar cane juice and the subsequent crystallization of saccharose, contains minerals and vitamins as indicated in Table 1. Panela is an ingredient to prepare cold and hot beverages, including Baby Bottle; meat sauces pastry and baked goods, canned fruits and vegetables, jam and typical meals. It is also used to sweeten juices, aiding in the formation of scar tissue and indisposition of Flu or cold Colombia is the second largest world producer of panela, after India, with a market share of 9.2%. At the same time Colombia has the highest consumption per capita, with an estimated 31.2 kilograms per person and per year (for 2000), as depicted in Table No.2. World production of panela has been growing, slowly, during the past decade at an annual rate of 1.1% between 1990 and 1999. Of the 25 producer countries only six countries have had increments above the average. Those countries are Myanmar, Panama, Uganda, Colombia and India. Colombia exhibited an annual production growth of 2,4%. Panela is an important agribusiness in Colombia. It is the eighth most important industry contributing to the formation of the Agricultural Gross Domestic Product. For year 2000 it participated with 3.6% of the value of national gross agricultural product excluding coffee and accounted for 1.7% of the overall rural national product. Panela producers farm 9.3% of all the area with permanent crops and represent 5.5% of all the cultivated land in Colombia. As shown in Figure 1 the area dedicated to grow panela cane has been growing during the past decade, and its average productivity has increased from 5.5 ton/ha in 1990 to 6.5 ton/ha by 2001; a 18.2% rise. Panela production is labor intense. Annually it generates over 25 million salaries, remunerating over 350,000 people. It is a large source of rural employment, second only to coffee. 12% of the rural labor force is used in the production of over 1.3 million metric tons of final product.

Figure No.1 Panela in Colombia: Cultivated Area and Yield

47

As of year 2000, reports indicate the presence of 70,000 small panela farms utilizing 15,000 processing facilities. Since the total cultivated area in panela cane was reported to be 214,967 ha, the average farm size was 3.07 ha confirming the general believe that panela is the product of hard working, poor, small peasants. This picture is reinforced by the information displayed in Figure 2 where a time series is depicted of the ratio of the final sale price to the consumer divided by the producers’ sale price to market intermediaries. The price to the final consumer is twice the price the producer receives. With little or no value added, the commercialization costs equal, or are superior to, the production costs, including the producer return on his/hers investment. The small producers, a vast majority, do not have bargaining power to negotiate and improve income and act as price takers. At the extreme of the production chain the large supermarket stores act as price fixers, defining financial conditions and minimum quality conditions. The small tiendas, neighborhood markets, are small retailers that buy their products from large intermediaries. This market structure acts against the small producers.

Figure 2 Ratio of price to final consumer to price paid to producers (1991-2002)

48

Although panela has many uses most of it is consumed directly by household. According to data published by CIMPA and taken form ASOPAFROM “Panela Feasibility Study”, Colombians are large consumers of whole brown sugar. On average, data from six cities, average per capita consumption amounts to 18.2 Kg/year. Data from DANE (1989) indicate the household expenditures in panela have a regional distribution. Low income families in coffee growing areas expend as much as 4.0% of their income in panela, while middle income families in Bogotá allocate less than 0.18% of their income for purchases of whole brown sugar. The CIMPA data also highlights the relation of panela consumption and income and its relation with its close substitute sugar. Whole brown sugar is an inferior economic good; as income increases the demand, in the local market, diminishes.

Table No. 2 Per-capita Consumption of Panela and Sugar (Six cities) in Kg/year

Income Level Panela Sugar Low income 20.92 18.44 Middle income 17.30 21.40 High income 13.64 34.91 Weighted average 18.22 21.69

Panela has close substitutes, including sugar, honey, syrups and artificial sweeteners. In Colombia sugar presents a major threat. Econometric studies have found that the elasticity of substitution from sugar to panela is -0.65. That is, a reduction in the price of sugar of 1% induces a reduction of 0.65% in the demand for panela. In addition to the above mentioned characteristics panela producers face competition from sugar through “derretideros”, sugar-melting facilities that transform sugar into panela. When sugar international prices are below local panela prices it is profitable to transform sugar into panela, increasing the supply and deflating the price paid to producers. Panela is a risky business. Pioneer efforts to open international markets have being under way since at least 1990. Studies conducted for the Ministry of Agriculture indicate that, for the decade between 1991 and 2000, panela presents “acceptable international competitiveness indicators”, although nearly all the production is to satisfy internal demand. Nevertheless, there are several examples of successful attempts that have being able to open reliable market niches for high quality, organic, reliable production. Panela produced in Colombia has opened markets in the United States, Venezuela and Europe (based in Italy.) To support this growing trend the GoC has indicated that up to 20% of the sugars quote to the US market might be use for panela. It is important to note that production for exportation offer high prices to producers.

Table 3 Prices and Packing: Quotes by Panela International Sugar Corporation4

Panela Type 500g No Label

500g Label 1Kg Block 25Kg Bags

4 Quotes for January 14 2004, from www,sugarweb.co.uk

49

Organic Fine Ground £1.16 £1.26 £41.50Medium Ground

£1.16 £1.26 £41.50

Coarse Ground

£1.16 £1.26 £41.50

Block £1.04 £2.00

50

ANNEX 7: FURATENA: SOCIAL IMPACTS ASSESSMENT AND SOCIAL MONITORING

The FURATENA project is of a social nature and provides numerous direct and indirect benefits. It has positive impacts on the general population of the municipality and the country, but especially on the entire municipal sugar trade. These impacts include: improving the health of consumers, generating direct and indirect employment in the municipality, improving the environment for municipal residents, increasing the incomes of producers—whether or not they are associated with the project—and improving their quality of life, raising the educational and cultural level of workers, associates, and the region in general, and being a replicable pilot project that may contribute to modernize the country’s entire panela production sector. Currently, the municipality’s economy is characterized by small-scale agricultural and livestock production systems including corn, banana, sugar cane, and manioc crops, bovine cattle and fisheries, with a spontaneous local market and some participation in the regional market, which generate very little added value and a strong environmental impact, particularly due to the spread of the agricultural and livestock frontier along steep slopes, logging, and destruction of ecosystems. The economy is also characterized by a wide variety of natural resources which are not used properly, thus creating an ecosystem imbalance and decreasing their future availability. The zone has various degrees of deforestation due to indiscriminate logging and burning; its water resources are contaminated due to the absence of proper methods for managing solid and liquid waste, the use of pesticides and other agrochemicals which in many cases are highly toxic, thus affecting plants and wildlife. Furthermore, although the zone shows some aptitude for the implementation of environmental, agrarian, and recreational tourism projects, it is limited by inadequate infrastructure in terms of roads, public services, communications, and hotel capacity. 95% of peasants in the Útica region produce sugar cane on smallholdings with inappropriate sugar production technologies (outdated sugar mills; furnaces that burn tires and firewood; use of Clarol [sodium hyposulfite or sodium hydrosulfite]; and poor management of sugar cane crops. The consequences are: high levels of environmental contamination, inefficiency in production processes, poor product quality, poverty and marginalization of the population, high levels of violence, and high rates of migration and displacement. Added to this is the problem of low levels of community organization, little internal communication, poor management skills, little interaction between the sector and institutions, lack of political empowerment, and limited leadership capacity. The processes described above are reflected in high indexes of unmet basic needs (UBN) in the municipality, which exceed 58% of its population; of this, 83.6% is rural with an absolute poverty index above 27% (source: Anuario Estadístico de Cundinamarca 1998). The municipality has no other sources of employment than that generated by the sugar sector (90% of its gross domestic product derives from sugar), the institutional sector (mayor’s office, Banco Agrario, and teaching), and a handful of bars and small hotels or lodgings, thus causing a permanent exodus of its younger population who also leave ill-prepared and with a standard

51

education and become unskilled or unemployed workers in large cities. Likewise, all the above factors have caused the region to become a “red zone” where the different parties in the conflict converge. Although it is true that the sugar sector’s strength is having brought together agricultural, industrial, and commercial activity into a single chain of production, its limitation is that production is carried out on a very small scale and cannot be efficient in the various stages. Furthermore, these small farmers cannot obtain the new technologies and credits they need to modernize, much less to establish clean production methods, due to their lack of associations and the prevalence of individual management. Thus, without this project, it will not be possible to modify the current sugar cane growing and sugar production system by implementing clean systems whose end-results would bring about an improvement to the system and to the quality of life of residents of Útica, Gualivá, and ultimately all zones where the project could be replicated.

The following are the project’s individual direct socioeconomic impacts: 1. The project will bring together small-scale producers and sugar cane farmers through an association which in turn will be a member of the processing plant, buying their semi processed molasses. The proposed scheme helps the farmer to be the owner of his own crop and of processing sugar cane into molasses, subject to several agro-industrial parameters predetermined by the processing company and very closely advised and controlled by it. The farmer benefits not only by selling his product under better conditions and at a better price, but also through his association, in programs for improving the quality of life or of his product, subsidy bonuses or incentives to sell his molasses to the association. In the pre-operational phase, this will create the necessary socio-cultural conditions for producers to change from rustic traditional panela production to molasses production (an intermediate input for the processing plant); this will allow them to continue being part of the regional chain of production in an efficient and sustainable manner through the training and organization of microenterprise producers, family farmers, EATs, etc., in some 1,000 hectares of sugar cane, thus creating a general association of molasses producers which in turn will be a member and represent producers in the FURATENA Project. 2. It will become a source of skilled jobs for a group of residents, both directly and indirectly, ensuring that plant workers have all labor rights and benefits, i.e.: • Mandatory Health Plan • Pension Fund • Workplace Safety Insurance • Unemployment Fund These benefits presently are not enjoyed by all workers in the current panela mills, and few belong to the subsidized health system. 3. A code of ethics will be created to govern the company and will be distributed to employees in order to improve their relations and ensure that everyone is working for mutual benefit. It also calls for respecting workers’ rights to participatory organization at all levels. This code will bring about an improvement in the ethical behavior of employees, both among themselves and toward the population in general.

52

4. The company agrees to carry out training programs for workers and/or suppliers of molasses on aspects directly related to the production cycle. This will help to improve the level of labor used during production and promote the quality of rural employment. 5. It will generate better income to producers associated with the project by improving their quality of life and incorporating them in new production processes; this in turn will guarantee their food security and free them from abuse by middlemen. During the development of the project, the aim is to improve the primary production process for molasses from approximately 80 mills corresponding to 24 associated enterprises and individual producers from different districts covered by the project, thereby improving the final quality of the product, the efficiency of the process, and their income. The improvement of production structures and the economic situation is also improving the economic conditions and the standard of living (nutritional, educational, and housing levels, etc.) of the rural population most of whom live in extreme poverty or have high levels of UBN. This is an important factor that will also help to decrease the high rates of violence in rural areas.

6. Producers who initially are not associated, and while other stages of the project are carried out, allowing them to become associated, will benefit from the project because removing a portion of production from the local market decreases the surplus and the prices of traditional sugar will improve. 7. It will generate direct taxes and income for the municipality; these will contribute to its development, aiding its economic reactivation and that of its population. 8. Benefits go beyond the direct sphere of the pilot project, extending to the region and the country. It will serve as a pilot project for all hillside sugar cane producers in the country and can be implemented in any similar region. Particularly for the Gualivá region, it represents the real possibility of developing—after having set up different molasses processing plants in its municipalities—an ethyl alcohol distillery or a fuel plant that would take in a large volume of the entire region’s molasses production, thus helping to relieve the current sugar surplus in the country and to reactivate the sector. Moreover, a strong economic impact is expected on the entire region with the development of the FURATENA Molasses Processing Plant pilot project. (Industrial processing of molasses generates large amounts of high-quality product that may go to international markets, thereby generating better income for producers, the municipality, and the state.) 9. Low risk of worsening employment losses. The project is expected to have limited impacts on employment opportunities in the Gualiva province. The final outcome remains uncertain as some activities will increase the demand for unskilled workers, while others will increase it or demand some additional level of specialization. The project is expected to impact employment opportunities for activities associated with the traditional processing sugar cane. The activities are divided in three areas: (a) at the farm; (b) in the processing facility; and (c) transport and marketing. As indicated in the table below some project actions will increase the demand for labor, while others will reduce it. It is clear, from the

53

table below that some unskilled labor will be lost, but more reliable and specialized opportunities will emerge. In this process some people will loose access to temporary jobs. The expected change will give young adults and school age children more opportunity to be able to attend school and complete their basic education.

Activity location

Existing system

With project activities

At the farm Most labor is kin related or unskilled workers are hired from nearby farms.

Increased demands for low specialized labor as “organic” practices are implemented. Family labor might need nearly permanent complement from hired labor.

Traditional manufacturing facility

Most labor is kin related or unskilled workers are hired from nearby farms. Work is characterized by bursts of intense activity followed by long periods of inactivity.

The amount of work conducted at the traditional facilities will be reduced, decreasing the number of workers required.

Industrial processing facility Nearly 150 employees will be hired with access to social services and fringe benefits.

Transport and marketing Depends on middlemen, who negotiate product prize to their advantage.

EPMF will have market professionals conducting product sales to internal and external markets.

Social Monitoring Plan

Project Description and Baseline for Monitoring Project Social Impacts Project contributions that will form the basis for social monitoring are the following: (i) income increase of small family owned farms through increases in land productivity and the proceeds from their participation in the molasses processing plant; (ii) training of at least 300 farmers on improved sugar cane production practices; (iii) basic managerial training to 120 small rural farms; and (iv) use of 100 ha to pilot organic production, improving soil conservation cultural practices and creating social links among the participants. 1. The project will address poverty in the project area. Panela production in Colombia is in the

hands of small poor farmers. The project will contribute to the improvement of the production process of panela as well as to the quality of the product. As a consequence the production cost will decrease and the value of the product will increase. The farmers will benefit directly from the value added to their product including the revenues from the VERs (verified emission reductions).

54

2. Panela producers are expected to increase their net income by a factor that might be as large as 7 to 10. A financial analysis has been conducted comparing the current situation of a panela producer in Cundinamarca to the project scenario, per hectare of cultivated sugar cane basis. In the baseline scenario the analysis assumed the production of 50 tons of sugar cane rendering 5 tons of panela per hectare per year. In the project case the producer is able to increase its production by 20% (due to better juice extraction) and receives revenues (profit distribution) from the company. At the same time the analysis considers the contribution to the initial investment in the company (bridge financing) and the corresponding debt service by the small producers. The analysis assumes equal sugar cane establishment and maintenance cost as well as the same establishment period. An interest rate of 10% is used for the analysis.

3. The project scenario will not only lead to reduced production cost based on energy savings

and improved production techniques, but will also generate increased revenues due to increased panela production and improved product quality. The small producers will also benefit from being the owners of 51% of the company’s (EPMF) stock. The analysis shows that the project increases the net revenues of the small producers by a factor of 7 to 10 in contrast to the current situation.

4. The project will support with the proceeds of the sale of VERS, training to all participants

and technical support to small producers to increase management skills and change traditional agricultural practices to “organic” certified production methods.

Monitoring Process and Social Impact Indicators Social monitoring will be carried out every year during the lifetime of the project. The following are the economic and social impact indicators to be used for monitoring the project: 1. At least a twenty five percentage increase of income per participating productive unit.

Additional income will be measured as increased revenues plus savings due to cost reductions. It will be monitored in the first verification; once the 25% increased is attained monitoring activities will verify that this level is maintained, through Table 1.

2. Number of farmers trained in improved sugar cane production practices 3. Number of farmers trained in basic management 4. At least one person in each productive unit trained in improved production practices 5. Number of hectares used for piloting organic production and improving soil conservation

practices Targets: By the last day of the indicated month the following targets shall be met or exceed:

Item May 2009 May 2011 May 2013 May 2014 No. farmers trained in improved production 100(1) 200 250 300 No. farmers trained in basic managerial 60(1) 120No. hectares with organic production 100(2) 100 (1) At least one person from each productive unit included in the Program will be trained (2) Under a Certification Plan initially; Certificates will have to be provided once issued

55

Table 1. Social Monitoring Plan

2,009 2,011 2,013 2,014

1 Extension (area) with certified organic practices

Number of farms and hectares under cultivation with organic practices

Areas under a certification program; certified areas

30 farms and at least 200 hectares inscribed in a certification program

All participating farms inscribed in a certification program. At least 30 farms and 200 hectares certified

All participating farms certified

2

Productive units trained in "produccion limpia" and in sugar cane improved production practices

Number of farms with training program and number of workers trained per unit

certification from training institution

All farms and at least 2 workers per farm inscribed in a training program, or already trained

All farms included in the expansion program and at least 2 workers per farm inscribed in a training program, or already trained

3Farmers trained in basic management

Number of farmers trained in basic management

certification from training institution

All willing farmers associated with the project trained or inscribed in a training program.

All willing farmers associated with the project expansion trained or inscribed in a training program.

4

Revenues associated with sales of molasses

Revenues from sales of molasses for producers associated with EPMF and revenues from ther sale of traditional panela from non-participating producers. Sales slips should indicate premium received by "organic" labeled molasses.

1) Molasses sale slips from producers and payments from EPMF, indicating quantity, quality and if "organic"; 2) Juice volumes from records from mobile extraction units signed by producers (for comparison with baseline juice production; 3) Acreage abd yiel

Farmers associated with EPMF earn at least 10% more than non-participants. Farmers with "organic" products receive a premium.

Farmers associated with EPMF earn 17% more than non-participants. Farmers with "organic" products receive a premium.

Farmers associated with EPMF earn 25% more than non-participants. Farmers with "organic" products receive a premium.

Farmers associated with EPMF earn 35% more than non-participants. Farmers with "organic" products receive a premium.

5 Distributed profits from EPMF to participant farmers.

Revenues received by participant farmers as profit distribution from EPMF.

1) Profit distribution payment slips to EPMF stockholders. 2) Payment slips from Procampo to participating farmers

Small farmers associted in PROCAMPO defined use of profits from EPMF

Small farmers associted in PROCAMPO defined use of profits from EPMF

Small farmers associted in PROCAMPO defined use of profits from EPMF

Small farmers associted in PROCAMPO defined use of profits from EPMF

6

Costs reduction associated with project activities

Cost reduction associated with limited processing of sugar juices (labor and fuel), no packing, no transportation to local market. Also additional costs incurred on "organic" production (labor, inputs, equipment)

1)Yearly survey of unskilled labor costs, packing and local transportation to Utica’s market. 2) Records collected from farmers during molasses production and sale to EPMF.

7

Estimation of total revenue increase for participating farmers.

Increased revenues due to sale of molasses, plus premium for "organic" production, plus distributed profits, plus reduction in manufacturing costs, minus additional costs of "organic" production.

Estimation from data in 4,5 and 6

Expected increase in net revenues no less than 25%. Target for this period 15%

Expected increase in net revenues no less than 25%. Target for this period 25%

Expected increase in net revenues no less than 25%. Target for this period 25%

Expected increase in net revenues no less than 25%. Target for this period 25%

ITEM INDICATORS DATA SOURCE

TARGETS

56

ANNEX 8: BARRIER ANALYSIS AND ADDITIONALITY The CDM is one of the mechanisms developed under the Kyoto Protocol to fight anthropogenic induced global climate change. Its provisions require that “reductions in emissions […] be additional to any that would occur in the absence of the certified project activity.” This is the additionality criterion and constitutes the foundation for generating Certified Emission Reductions, CERs, through CDM projects. Furatena Energy Efficiency Project falls within the category of Small Scale CDM projects, and as such specific rules have been devised to guide its approvals. The additionality principle applied in the following paragraphs follows the simplified modalities and procedures for small-scale CDM projects as described in Appendix B, contained in Appendix II to the decision 21/CP.8, 2002. (Relevant portions are presented in Appendix 1 to this Annex) The presentation shows:

• The project is classified as Type II F, energy efficiency and fuel switching measures for agricultural facilities;

• The project is small scale, as the aggregated energy savings do not exceed the established limit;

• No leakage calculations are required, since existing equipment is not going to be transferred to another activity;

• Additionality is assessed through a barrier analysis.

Barrier Analysis: Following the methodology suggested by CDM the barriers faced by the Furatena project are analyzed in four main groups: investment barriers, technology barriers, barriers due to prevailing practices, and other barriers. Investment barriers: Financial analyses indicate that the Furatena project is financially sound. Its IRR is relatively high, and sensitivity analysis indicated resilience. The financial analyses also show that the project has pre-operation activities that are strictly necessary and represent a heavy burden on the promoters5. These activities are needed to attract small independent producers to join efforts and pool resources to build a new way of working. It is estimated that 24% of all resources needed in the first phase are allocated for pre-operative activities. These pre-operative tasks are estimated to cost more than twice the expected equity, or 4 times what the small producers have indicated is the maximum contribution (equity participation) they can reasonably commit. These activities are scheduled for implementation during the first year. Potential investors need to fund these activities earlier than in other alternative projects, and production in the new facility is delayed. Given these conditions, and the project preparation costs, raising the initial resources is a major hurdle, beyond the financial capabilities of potential shareholders. The specific financial barriers identified are: a) High pre-investment costs; as already indicated activities for project socialization and small producers training are required prior to initiate plant

5 As previous experience has indicated, in an area where few associative initiatives had been successful and small producers distrust outsiders, and where the national social conflict (guerrilla) has presence, project socialization and social capacity building are essential.

57

production. These resources are beyond the financial capabilities of the promoters, and state financial institutions for the agriculture sector do not have a line of credit to support these activities. b) Guarantees; a 20% minimum in real guarantees is demanded by financial institutions to cover the requested credit. For the new enterprise this requirement represents a major barrier, as mortgaging the processing plant might no be admissible. c) Raising equity is a major challenge; PROCAMPO, the associative entity that groups the small panela producers and whose leaders represent the farmers rights and responsibilities, has indicated the inability of many of its members to raise the equity required for their participation. Several models of participation were sought. At the end all the small farmers agreed to commit the production of a fraction of their fields to the newly created Empresa Procesadora de Mieles Furatena, EPMF, as condition to access a credit line to participate in PROCAMPO. By facilitating the access of small farmers to PROCAMPO, through the special line of credit, the project promoters found a mechanism for PROCAMPO to obtain the resources required to invest its due in the EPMF. PROCAMPO, purchased 51% of the stock of the newly created company. The credit will be paid with the proceeds of the sale of high quality panela produced in the new processing facility. (Each small producer will be responsible for the value of his/her share in EPMF, and the credit will be paid during the first production cycle, with a grace period –only interests- of up to 3 years). These barriers limit the ability of the project to get the financial resources required for project implementation. From the financial point of view, the project also faces uncertainties that ought to be taken into account in the analysis. Market uncertainty is a pressing concern. As already indicated during the past decade supply has increased while demand has had a downward trend. Prices are decreasing. Investing in this industry poses high market risks. Nevertheless, project promoters are opening new international markets that demand high quality products, and offer higher prices. Investors also assess small producers’ lack of early commitment as a risk that should be properly managed. The cultural characteristics in the project location and of panela production favor individualistic, independent small-scale production facilities, over associative initiatives. The project has to overcome this long held tradition and demonstrate the advantages of the selected model. To reduce this risk the promoters indicated their commitment not to reduce the small farmers’ revenues at any time, by buying their intermediate product, molasses, above the market price for panela. Technology barriers: Traditional practice has found low efficiency equilibrium in the production of panela. Small, independent panela producers transform their cane in small family own facilities. Stagnant yields and falling prices combined with small family own facilities prevent new investments to improve energy efficiency. In the business as usual scenario no additional investments are expected in existing facilities and new ones do not offer financial feasibility. Changing the existing production process, incorporating boiler technology as it is proposed, does not make economic sense for small productive units. The proposed technology is characterized by large economies of scale. Doubling the production (to two units) costs less than 2.0 times the cost for one unit. Only very large producers, or an association of many small producers, can take advantage of the large economies of scale offered by the selected technology. It is estimated that around 1000 ha of cane justify the implementation of a molasses processing plant. No panela producer in the Gualiva region, where

58

the project is located, has this extension of cane cultivated land. The economies of scale that characterizes the boiler technology prevents its adoption by small or medium panela producers. Barriers due to prevailing practices: As already indicated the traditional cultural practice of panela production in the Gualiva region is distributed over a large number of very small farms and low technology transformation facilities. Existing market conditions do not favor opportunities for change or innovation. Only a new social compact among many small producers can produce the cultural change required for the implementation of an associative initiative, which could take advantage of the economies of scale associated with the selected technology. To build such social consensus takes resources and time beyond the financial capabilities of promoters and beneficiaries.

Other barriers: The project faces many other hurdles making its progress towards financial closure rather slow. Cultural and institutional constraints abound Small producers play the leading role in project operation: 51% of the equity comes from small, poor, rural agricultural workers, with low formal education and poor access to information. Historically, these agricultural producers are individualistic, disconnected from the power centers and many with failed experiences with associative initiatives. Some specific hurdles are: (i) Managerial capacity, traditional farming do not use basic management tools, nor captures the minimum information required to identify production costs or factors’ productivity. Training is required for these small producers to better manage their farms and to proactively participate in guiding and monitoring their new enterprise; (ii) Successful associative initiatives are not common. Panela producers are individualistic, independent and normally poor. Failed past attempts at building associative enterprises are frequently mentioned. Project’s socialization is a key activity, as well as the production and dissemination of good quality information; (iii) Most all-small panela producers lack the financial resources to participate with their equity share. As mentioned previously, a large fraction of the potential shareholders are classified as poor or very poor. Their ability to raise the cash for their equity participation is very low. And, (iv) TA is required during several years to introduce new cultural practices. And many new cultural practices are to be introduced by the Furatena project: New agricultural practices; new production practices; new forms of participation in the guidance and management of the new industrial facility; new emphasis of the producers in understanding and guiding commercialization; new concerns around quality in the production process; new market opportunities abroad; and, a new role in the community as promoters of social and environmental well-being.

59

ANNEX 9: BASELINE ANALYSIS According to the approved methodology for small scale project activities II.F “Energy efficiency and fuel switching measures for agricultural facilities and activities”, the energy baseline consists of the energy use of: (a) The existing activity that is reduced in the case of retrofit measures; or (b) The facility that would otherwise be installed in the case of a new facility. Definition: If the energy displaced is a fossil fuel, the energy baseline is the existing fuel consumption or the amount of fuel that would be used by the practice that would have been implemented otherwise, i.e. total fuel consumption in the project area per year for field operations and average fuel consumption per unit area (ha), crop yield and year. Project participants are to demonstrate the baseline and project scenarios of fuel consumption against reference agricultural activities, including cultivated acreage and crop yield from the project land.

The project baseline analysis looks at the production of CO2 under two different conditions. The first condition describes the existing production activity, which includes the utilization of supplemental fuels to the bagasse obtained from the extraction of the cane juices. Some of these supplemental fuels are firewood, crop residues, coal and used tires, combined in different weight proportions to produce the required heat for the panela manufacturing process. The second condition describes the baseline scenario, which has been identified from a list of realistic and credible alternatives. Each of these alternatives consists of a specific fuel mix in which used tires is not considered as an alternate fuel. The burning of used tires is not permitted by the Colombian environmental regulations and therefore should not be considered as part of the baseline. The baseline has been identified as the scenario in which a specific fuels mix consisting of bagasse, coal and other biomass is burnt, producing the lowest possible CO2e emissions, 1.29 t CO2e/tpanela. This is supported by an assessment of fuels used in the region. The analysis conducted to define the baseline, the development and study of different realistic scenarios, is summarized as follows: (i) The existing condition Under the prevalent conditions in Utica the energy sources include bagasse, additional biomass (firewood and crop residues), used tires and to a lesser extent coal. Used tires are not allowed in the existing environmental regulations although little or no governmental control is exerted. Firewood has been an important source of local energy supply but it is considered a scarce resource in the Gualiva province since decades of panela production have devastated forests, increasing the distance to forests and costs. Coal is the economic fuel of choice (minimum cost per unit of energy delivery), but implies cash payments. This characteristic severely restricts its use among small panela producers. The amount of CO2 produced in the panela manufacturing process is the direct result of the fuels mix used: following the conservative guidelines of CDM the baseline scenario should be the reasonable combination of fuels that minimize CO2

emissions. The existing condition is a combination of biomass, mostly bagasse, coal and used tires (rubber). Reliable statistics are difficult to collect on the proportion of rubber used. A cap of

60

no more than one third of the complementary energy needs was adopted. The resulting current GHG emission factor is 1.29 t CO2e/tpanela

Table 1. Fuels mix under the current conditions, EF = 1.29 tCO2/Ton of panela

Energy supplied (MJ) Mass of fuel (Kgr) CO2e (Kgr) % of fuel used Bagasse & other Biomass

42.18 4.71 0 79.44 %

coal 7.43 0.27 1.00 13.99 % Rubber (used tires) 3.48 0.10 0.29 6.55 % Total Energy (MJ) 53.09 1.29

(ii) The Baseline scenario The traditional panela production process, which uses bagasse as the primary source of energy, requires additional 10.95 MJ per kilogram of panela from alternate sources of energy- that is, additional to the 42.12 MJ given by bagasse. This energy is delivered through low efficiency furnaces (efficiency estimated at 0.23) fueled with bagasse (79%) and complemented with other fuels (different types of biomass such as crop residues, firewood, and old-tires). In order to define the baseline, the used tires fuel-mix-component has to be replaced. As indicated in Table 2, if rubber is replaced by coal, delivering the extra 10.95 MJ needed for the process, bagasse and other biomass remain the main sources of energy. This new fuels mix distribution results in ahigher CO2 emission factor, namely, 1.47 t CO2e/tpanela.

Table 2. Fuels mix without used tires, EF = 1.47 tCO2/Ton of panela

Energy supplied (MJ) Mass of fuel (Kgr) CO2e (Kgr) % of fuel used Bagasse & other Biomass

42.19 4.71 0 79.49 %

Coal 10.88 0.40 1.47 20.50 % Total Energy (MJ) 53.07 1.47

The baseline has been defined as the scenario that uses a realistic fuels mix producing the lowest possible CO2e emissions. For this reason and to be on the conservative side, Table 2 is not considered the fuel mix for the baseline. In order to comply with the condition of “lowest possible CO2 emissions”, the fuels mix composition was modified. The resulting fuel mix combination, which is realistic, credible and minimizes GHG emissions is summarized as follows:

Table 3. Fuels mix in the Baseline, EF = 1.29 tCO2/Ton of panela

Energy supplied (MJ) Mass of fuel (Kgr) CO2e (Kgr) % of fuel used Bagasse & other biomass

43.51 4.71 0 81.95 %

Coal 9.58 0.35 1.29 18.05% Total Energy (MJ) 53.09 1.29

The baseline scenario, the fuels mix necessary to produce 1.0 Kgr of panela, is defined as: bagasse & other biomass + coal in the approximate proportions shown in Table 3. This fuels mix

61

has an estimated CO2 emission factor of 1.29 t CO2e/tpanela. The required type of fuel is calculated utilizing the net calorific values suggested in Greenhouse Gas Assessment Handbook, World Bank 1998. The methodology used to calculate the CO2 emission factor for the Panela manufacturing process follows the approved methodology for small scale projects: II.F - Energy efficiency and fuel switching measures for agricultural facilities and activities. The three main steps followed under the methodology are summarized as follows: 1. Estimation of the required energy (MJ) to produce 1 Kgr of Panela under both, the

current practice and the proposed project activity: This first step uses the caloric potential of sugar cane components and the energy required (latent heat) to change their phases to come up to a required amount of energy to produce 1 Kgr of panela. It is estimated that, one sugar cane is approximately 55% juice and 45% bagasse by weight. As a result, it has been estimated that, the energy required under the traditional process to produce 1 Kgr of panela is 12.20 MJ or 2913 Kcal. However, due to the actual low trapiche’s efficiency ( =0.23), the required energy increases up to 53.06 MJ/Kgr of panela. On the other hand, the amount of energy required to produce 1 Kgr of panela using the new proposed process is 46.03 MJ.

2. Determination of the materials used to supply the required energy: Following step 1

above, the second step uses a list of the available fuels in the region to produce the required energy (53.06 MJ/Kgr of panela) by the panela manufacturing process. The available fuels are all those elements such as bagasse, crop residues, used tires, coal and firewood that have been historically employed by the project activity to produce heat. A throughout assessment of the group of fuels that had been used in the past has shown that, the current condition is represented by a combination of fuels such as bagasse and other biomass, used tires, and coal. However, and due to the fact that used tires do not represent an authorized combustible, this fuel mix cannot be used as a baseline scenario. Consequently, a common fuels composition that represents a valid alternative is defined as: bagasse & other biomass + coal. This composition has been established as the baseline and it represents the allowed, most realistic, lowest possible GHG emitting scenario. Under the new project scenario the fuel mix will contain different proportions of coal only during the first two years. During the remainder of the project’s time (8 years), a combination of biomass fuel will be used (e.g. cane bagasse, firewood, crop residues among others) and no coal.

3. Estimation of the fuel mix’s emission factor under the baseline and proposed project activity: This third step uses the fuels’ mass to be burnt, their caloric potential and the amount of CO2 emitted in order to estimate the CO2 emission factor of the fuel mix. As a result, it has been found that, the fuel mix under the baseline scenario will produce 1.29 Kgr of CO2e/Kgr of panela. This is summarized in the following table:

Table 4. Total amount of C02 emitted in the baseline to manufacture 1 kg of panela

Energy supplied (MJ) Mass of fuel (Kgr) CO2e (Kgr) % of fuel used Bagasse & other biomass

43.51 4.71 0 81.95 %

62

Coal 9.58 0.35 1.29 18.05% Total Energy (MJ) 53.08 1.29

The same operation was developed for the proposed new process. During the first year of operation the additional fuel mix that is additional to bagasse will consist of 90% of coal. The presence of coal in the fuel mix during the second year will be decreased to 60 %. The CO2 emission factor for the type of coal normally used in this region is 3.67 tC02/ton. Moreover, it has been estimated that under the new proposed process, the mass of coal required to produce one kilogram of panela is approximately equal to 0.144 kg in the first year and 0.086 kg in the second year of operation, assuming that coal has a caloric potential of 27.21 MJ/Kgr following guidance of the Greenhouse Gas Assessment Handbook, World Bank 1998. This information is summarized in the following tables. The emission factor under the new proposed process has been estimated to be 0.47 tCO2e/ton of panela. The total reduction in emissions will be 133,499 tCO2e over a period of 10 years.

Table 5. Summary of coal consumption during the next 10 years of project’s operation

1st year of operation

Energy required to produce 1 Kgr of

panela

% Mass to be burnt

Bagasse 42.12 MJ 91.50% Additional fuel

Coal Biomass

3.91 MJ 3.51 MJ 0.40 MJ

8.50% 90% 10%

Total Energy 46.03 MJ 100%

2nd year of operation

Energy required to produce 1 Kgr of

panela

% Mass to be burnt

Bagasse 42.12 MJ 91.50% Additional fuel

Coal Biomass

3.91 MJ 2.34 MJ 1.57 MJ

8.50% 60% 40%

Total Energy 46.03 MJ 100%

63

3rd -10th year of

operation

Energy required to produce 1 Kgr of

panela

% Mass to be burnt

Other biomass 46.03 MJ 91.50% Additional fuel

Coal Biomass

3.91 MJ .0 MJ

3.91 MJ

8.50% 0%

100%

Total Energy 46.03 MJ 100%

64

ANNEX 10: CALCULATION OF EMISSION REDUCTION The calculation of the CO2 emission reductions due to the proposed CDM project activity follows a very simple procedure. Initially the baseline fuels mix is determined using historical data of fuels used in the region in the last 10 years. Once this information is known, the gross caloric potential of each type of fuel present in the fuels mix is used to calculate the amount of energy that the specific fuel is delivering to the process. As has been said before, the actual process under the current operation conditions needs 53.06 MJ/Kgr of panela produced. 1. Estimation of the required energy to produce 1 Kgr of panela

1.1 Baseline scenario (traditional process) It is estimated that one sugar cane contains approximately by weight 55% of juice and 45% of bagasse. Following this proportion 10 Kgr of sugar cane contains 5.5 Kgr of juice and 4.5 Kgr of bagasse. Moreover, it is observed from field operations that 10 Kgr of sugar cane produce 1 Kgr of panela. The manufacturing process of panela implies the evaporation of most all the water contained in the sugar cane to obtain the desired Brix number (B). Once the water is evaporated, the remainder is crystallized juice, which represents the so-called panela. The formulas used to estimate the energy required are presented below, (i) Energy required to bring 5.5 Kgr of juice from ambient temperature (16 °C) to 100 °C E = m * T * shc

Where, m: refers to the mass of juice (including its water content), expressed in Kgr

T: refers to the change in temperature expressed in °C shc: specific heat capacity expressed in Kcal/kg. This variable represents the amount of energy required to bring up the temperature of 1kg by 1 °C.

(ii) Energy required to evaporate 4.5 Kgr of water present in 5.5 Kg of cane juice E = m * T * lh

Where, m: refers to the mass water to evaporate, expressed in Kgr

T: refers to the change in temperature, expressed in °C lh: latent heat of vaporization and it is expressed in Kcal/kg. The value used is 539 Kcal/kg of water (iii) Energy required to bring cane juice (molasses) to 125 °C to obtain desired Brix number. This operation is require to promote the crystallization process. E = m * T * shc

65

Where, m: refers to the mass of juice, expressed in Kgr

T: refers to the change in temperature, expressed in °C shc: represent the specific heat capacity expressed in Kcal/kg. This variable represents the amount of energy required to bring up the temperature of 1kg in 1 °C.

The above calculations are summarized in the following table,

Operations during panela manufacturing to obtain

desired Brix number

Energy required for the panela manufacturing operation

Bring the Juice from 16 °C to 100 °C

(5.5 Kgr)*(84 °C)*(1 Kcal/ Kgr * °C)

462 Kcal

Evaporation of 4.5 Kgr of water (4.5 Kgr)*(539 Kcal/ Kgr) 2425.5 Kcal Molasses to 125 °C (1 Kgr)*(25 °C)*(1 Kcal/ Kgr *

°C) 25 Kcal

Total net energy required 2912.5 Kcal = 12.20 MJ

Entable’s efficiency 0.23 Gross energy required 53.06 MJ

1.2 Project scenario (new proposed process) The reduction in emissions under the CDM Project scenario is caused by gains in economies of scale and in energy efficiency during manufacture. This process involves three steps: (a) at the farm level cane production will switch from traditional practices to “organic” certified processes; (b) at the farm (in the traditional processing facilities) molasses will be produced, with a water content in the range of 50oB to 60oB and with biomass as the only energy source; (c) Molasses will then be transformed into high quality panela products in a central facility that will dehydrate the molasses to 92oB to 98oB. State of the art water-tube boiler technology will be used. The whole process is expected to generate zero GHG emissions by the third year of plant operation by using only biomass as energy source. The procedure used to calculate the energy required under the new proposed process follows the same steps as in the baseline,

(i) Energy required to bring 5.5 Kgr of juice from ambient temperature (16 °C) to 100 °C (using the existing traditional facilities.) E = m * T * shc

Where, m: refers to the mass of juice (including its water content), expressed in Kgr

T: refers to the change in temperature, expressed in °C shc: specific heat capacity, expressed in Kcal/kg. This variable represents the amount of energy required to bring up the temperature of 1kg in 1 °C.

66

(ii) Energy required to evaporate the water present in 5.5 Kg of cane juice to 50 Brix (in the traditional facilities.) E = m * T * lh

Where, m: refers to the mass of water to evaporate, expressed in Kgr

T: refers to the change in temperature, expressed in °C lh: latent heat of vaporization and it is expressed in Kcal/kg. The value used is 539 Kcal/kg of water (iii) Energy required to bring cane juice (melasses) from 40 °C to 100 °C (This process occurs in the new industrial facility.) E = m * T * shc

Where, m: refers to the mass of juice, expressed in Kgr

T: refers to the change in temperature, expressed in °C shc: specific heat capacity, expressed in Kcal/kg. This variable represents the amount of energy required to bring up the temperature of 1kg in 1 °C. (iv) Energy required to evaporate the present water to 92 Brix (in the new industrial facility.) E = m * T * lh

Where, m: refers to the mass of water to evaporate, expressed in Kgr

T: refers to the change in temperature, expressed in °C lh: latent heat of vaporization and it is expressed in Kcal/kg. The value used is 539 Kcal/kg of water (v) Energy required to bring cane juice (melasses) to 125 °C (in the new industrial facility.) E = m * T * shc

Where, m: refers to the mass of juice, expressed in Kgr

T: refers to the change in temperature, expressed in °C shc: specific heat capacity, expressed in Kcal/kg. This variable represents the amount of energy required to bring up the temperature of 1kg in 1 °C. The above calculations are summarized in the following table,

67

Operations during panela manufacturing to obtain

desired Brix number

Energy required for the panela manufacturing operation

Juice from 16 C° to 100 °C (5.5 Kgr)*(84 C°)*(1 Kcal/ Kgr * °C)

462 Kcal

Evaporation of water to 50 Brix

(3.66 Kgr)*(539 Kcal/ Kgr) 1,927.7 Kcal

Molasses from 40 C° to 100 °C (1.84 Kgr)*(60 °C)*( 1 Kcal/ Kgr * °C)

110.4 Kcal

Evaporation of water to 92 Brix

(0.84 Kgr)*(539 Kcal/ Kgr) 452.8 Kcal

Melasses to 125 °C (1 Kgr)*(25 °C)*(1 Kcal/ Kgr * °C) 25.0 Kcal Total net energy in the entable 2,434.7 Kcal = 10.20

MJ Total net energy at melasses plant 588.2 Kcal = 2.46 MJ

Efficiency Entable’s / Industrial facility 0.24 0.70 Gross energy required 42.51 MJ

The gross energy required to produce 1 Kgr of panela under the new proposed process is only 42.51 MJ. This means that all the energy required could be delivered by bagasse and some other available bio-fuel to obtain a green fuels mix with zero CO2 emissions from the third year of operation. 2. Determination of the materials used to supply the required energy

2.1 Baseline fuels mix The baseline fuels mix has been determined as the combination of available and allowed fuels in the region that result in the lowest CO2 emissions factor and that provide the required 53.06 MJ to produce 1 Kgr of panela. Based on regional (several municipalities around the project site) historical data, the baseline fuels mix is defined by three components: (i) bagasse (when available), which delivers 79.3 % of the energy required, (ii) coal, which represents 18% of the required energy and (iii) Firewood, which accounts up to 2.5 %. 2.2 Project activity fuels mix The project scenario is characterized by the implementation of an up-graded panela manufacturing process. This new proposed process will employ less energy to produce 1Kgr of panela, allowing herewith a decrease in the amount of fuel required. Step 1.2 above has shown that under the new conditions, the amount of energy required to produce 1 Kgr of panela is 42.5 MJ, from which 42.11 is covered by the energy extracted from available bagasse. This energy saving will allow the plant’s operator not to have to rely on coal or other CO2 intensive fuel to produce additional energy. Consequently, under the proposed CDM project scenario, the fuels mix consists of (i) bagasse and (coal) for the first two years and bagasse and other biomass from the third year until 2017.

68

3. Estimation of the fuel mix’s emission factor under the baseline and proposed project activity

3.1 Baseline CO2 Emission Factor, EFBaseline

The table below presents a summary of the fuels mix established in the baseline. It has been estimated that this blend of fuels generate 1.29 Kgr of CO2e by Kgr of panela produced.

Energy supplied (MJ) Mass of fuel (Kgr) CO2e (Kgr) % of fuel used Bagasse & other biomass

43.51 4.71 0 81.95 %

Coal 9.58 0.35 1.29 18.05% Total Energy (MJ) 53.08 1.29

3.2 Project activity CO2 Emission Factor, EFproject

Under the new proposed CDM project the fuels mix consists of bagasse in a proportion of 95% to 99% with the exception of the first two years. The first year 90% of the additional fuels other than bagasse will be coal. The second year of operation, this percentage is decreased to a 60%. Finally on the third year of operation, no coal will be used as an alternate source of energy.

The total amount of CO2 emission reduced amounts to 133,499 ton of CO2 in a period of ten years.

Coal to be used 0.129 Kgr of coal/Kgr of

panela Emission factor for coal 3.67 tCO2/t of coal CO2 emissions factor/ton of panela

0.47 tCO2/ton of panela

69

ANNEX 11: ENVIRONMENTAL MANAGEMENT AND SANITATION PLAN

Panela cane production will shift from traditional to “organic” production process, with important benefits to the environment. Small inefficient mills will be replaced by state of the art mobile units, reducing wastes, improving efficiencies, enhancing hygienic practices. Industrial processing of molasses will follow an environmental management plan that is briefly summarized in the annex. The accompanying Annex 10 presents the technical and sanitary specification recently adopted by the Ministry of Labor, Social Security and Health, and that guides the future operation of EPMF. A brief introduction is made of the legal basis for the use and application of Environmental Impact Assessments and Environmental Management Plans in Colombia. This is followed by the summary of the EMP adopted for the Molasses Processing Plant, presented in the form of a table describing each process, its interaction with the environment, potential impacts and adopted environmental measures.

LEGAL FRAMEWORK FOR ENVIRONMENTAL ISSUES

The legal framework of an industrial and food processing plant may be summarized as follows:

1) Political Constitution—Title II, Chapter 3, of the 1991 Political Constitution establishes the rights and duties of the State, individuals, and institutions with regard to the environment and sustainable development.

2) Law 99 of December 22, 1993 created the Ministry of Environment and regulates the functions and responsibilities of regional environmental authorities and entities.

3) Ministry of Health Decree 02 of 1982 is in effect and sets the standards for the control of atmospheric emissions produced by fixed sources such as kilns, boilers, and mills, and establishes air quality parameters and standards.

4) Ministry of Health Decree 1994 of June 26, 1984 sets quality standards and criteria for permits to dump and re-use domestic and industrial waste volumes. It specifies the maximum substances permitted in water for different productive activities and those that may present a danger for consumption and aquatic life.

5) Decree 1753 of August 3, 1994 regulates those activities that require environmental licenses and whether such licenses are issued by the regional environmental authority or the Ministry of Environment.

6) Ministry of Environment Decree 948 of June 5, 1995 regulates, prevents, and controls atmospheric pollution by prohibiting the burning of tires, batteries, and other toxic elements, regulates engine emissions, and regulates the noise generated. It establishes those cases for which special permits are required for emission-generating processes.

7) Ministry of Environment Decree 901 of April 1, 1977 regulates fees for the use of water and establishes the procedure to calculate the value of the

70

contaminating load and the fees to be charged.

In accordance with this legal framework, in the following table we will identify the Environmental Impact by Activity and the Control Measures to be taken.

71

ENVIRONMENTAL MANAGEMENT GUIDEStages of the

ProcessUse of

ResourcesLiquid

EffluentsSolidWaste

AtmosphericEmissions

Environmental Risk Prevention Measure

1. CLARIFICATION OF MOLASSES1.1 De-scumming of molasses Natural

flocculantScum Water vapor 1. Improper handling or final disposal of

scum.2. Burns suffered by workers from hotmolasses.

1. Heat and dehydrate molasses,transforming it into melote to prolong itsstorage and use it as animal feed.2. Design and height of containers toprevent accidents and provision ofprotective gear for workers.

1.2 Reduction of acidity Lime Stirring in lime or other low-quality input thatlessens the panela’s quality.

Use good quality calcium carbonate.

2. CONCENTRATION OF MOLASSES2.1 Reduction of foam Anti-foaming

agentWater vapor Contaminating the panela through the use of

an improper anti-foaming agent.Use laurel or a similar wax to conserve itnaturally, with no traces of grease on thesurface of the panela water.

3. BEATING OF MOLASSES3.1 Washing of tubs and other

toolsWater Waste water Dumping of waste water that contaminates

sources of surface water or the soil withfermented liquids.

Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, withgrease trap, septic tank, anaerobic filter,and absorption well.

4. MOLDING4.1 Washing of brick molds and

tablesWater Waste water Dumping of waste water that contaminates

sources of surface water or the soil withfermented liquids.

Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, withgrease trap, septic tank, anaerobic filter,and absorption well.

5. GRANULATION

72

5.1 Washing of utensils Water Waste water Dumping of waste water that contaminatessources of surface water or the soil withfermented liquids.

Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, withgrease trap, septic tank, anaerobic filter,and absorption well.

Stages of the Process Use ofresources

Liquid effluents Solid waste Atmosphericemissions

Environmental risk Prevention measure

6. SHRINK-WRAPPED PACKAGING6.1 Storage in container Packaging

materialDamagedpackaging

Environmental pollution due to improperfinal disposal of solid waste.

Place trash cans near the place where thewaste is generated and ensure propertemporary disposal in an isolated, protectedplace.

6.2 Heat sealing Leftoverpackagingmaterial

Environmental pollution due to improperfinal disposal of solid waste.

Place trash cans near the place where thewaste is generated and ensure propertemporary disposal in an isolated, protectedplace.

6.3 Packing in boxes Cardboardboxes

Damagedpackaging

Environmental pollution due to improperfinal disposal of solid waste.

Place trash cans near the place where thewaste is generated and ensure propertemporary disposal in an isolated, protectedplace.

7. PACKAGING OF GRANULATED PANELA7.1 Filling of container Packaging

materialDamagedpackaging

Environmental pollution due to improperfinal disposal of solid waste.

Place trash cans near the place where thewaste is generated and ensure propertemporary disposal in an isolated, protectedplace.

7.2 Packing in boxes Cardboardboxes

Damagedpackaging

Environmental pollution due to improperfinal disposal of solid waste.

Place trash cans near the place where thewaste is generated and ensure propertemporary disposal in an isolated, protectedplace.

8. GENERATION OF VAPOR8.1 Boiler operation Coal and

treated waterAshes Gases from boiler

combustion.Pollution due to emissions of solid particlesand gases with sulfur, carbon dioxide,carbon monoxide, and other contaminants.

Seek complete combustion and trap thecontaminating elements present incombustion gases before they exit thechimney, through the use of properequipment such as multicyclones and gasfilters.

73

9. AUXILIARY WORKS9.1 Preparation of lime Water and lime

9.2 Preparation of flocculant Naturalflocculant

Pieces ofpanela canerind

Contamination due to improper wastedisposal.

Place trash cans near the place where thewaste is generated and ensure properdisposal together with other waste andresidue generated by the industrialprocess.

10. MISCELLANEOUS SERVICES10.1 Workers’ bathrooms Water and

personalhygienematerial

Waste water Personal hygiene material and humanwaste

Contamination due to improper disposal ofwaste water and human waste.

Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, with greasetrap, septic tank, anaerobic filter, andabsorption well.

Stages of theProcess

Use of Re-sources

LiquidEffluents

SolidWaste

AtmosphericEmissions Environmental Risk Prevention Measure

10.2 Office bathrooms Water andpersonalhygienematerial

Waste water Personal hygiene material and humanwaste

Contamination due to improper disposal ofwaste water and human waste.

Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, with greasetrap, septic tank, anaerobic filter, andabsorption well.

10.3 Food and refreshments Food and water Waste water Miscellaneouswaste

1. Contamination due to improper disposalof food waste and packaging material.2. Contamination from waste water used incleaning the kitchen and its utensils.

Place trash cans near the place where thewaste is generated and ensure properdisposal together with other waste andresidue generated by the industrialprocess.Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, with greasetrap, septic tank, anaerobic filter, andabsorption well.

10.4 Maintenance ofequipment

Oils, grease Used oil Packingmaterial

Contamination due to improper disposal ofoils and grease used in motors andmachinery.

Place trash cans near the place where thewaste is generated and ensure properdisposal together with other waste andresidue generated by the industrialprocess.

74

10.5 Washing of workimplements

Water Waste water Dumping of waste water that contaminatessources of surface water or the soil withfermented liquids.

Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, with greasetrap, septic tank, anaerobic filter, andabsorption well.

10.6 Cleaning of containers Water Waste water Dumping of waste water that contaminatessources of surface water or the soil withfermented liquids.

Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, with greasetrap, septic tank, anaerobic filter, andabsorption well.

10.7 Cleaning of plant Water Waste water Packingmaterial

Dumping of waste water that contaminatessources of surface water or the soil withfermented liquids.

Properly handle waste water, preferablywith biological treatment on a scale that isin line with the volume of water, with greasetrap, septic tank, anaerobic filter, andabsorption well.

75

ANNEX 12: TECHNICAL AND SANITARY STANDARDS FOR THE PANELA PROCESSING SECTOR

Resolution 779 of March 17, 2006, recently issued by the Ministry of Labor, Social Security and Health, defines the legal framework governing the panela processing sector. This regulation establishes the sanitary requirements for panela production and serves as the guideline for future production in this sector. The FURATENA Project and its molasses collection centers and panela manufacturing plant are regulated by this Resolution and the project has incorporated these sanitary requirements in its design. A. OBJECTIVE OF THE RESOLUTION: To establish the technical regulation indicating the sanitary requirements to be met by panela cane mills and collection centers for molasses from mills, in order to protect human health and safety and prevent practices that may be harmful to consumers. B. BASIC DEFINITIONS: Collection center for pure cane juice used to process panela: Establishment used to collect

pure molasses from panela cane mills in order to prepare panela under hygienic conditions and adjusted to current regulations.

Pure molasses: Natural product that results from the concentration of clarified panela cane juice,

prepared in panela cane mills. Sugar (Panela): Product obtained from the extraction and evaporation of panela cane juice,

prepared in establishments called panela cane mills or in collection centers for pure molasses, regardless of its form and presentation.

Flavored panela: Obtained from panela cane, with the addition of flavorings, regardless of its

form and presentation. Panela processor: A person who is not the panela cane grower and who purchases the panela

cane, extracts the juice, evaporates it and prepares panela or molasses. Panela cane mill: Establishment where panela cane juice is extracted and evaporated and panela

is prepared. Packaging: Bag or cardboard box in which 24 bundles or kilos of panela are packed. Container: The packaging of each bundle or kilo of panela (for example, plastic shrink-wrap).

C. TECHNICAL STANDARDS FOR PANELA

76

1. Physical-chemical requirements of block PANELA:

Requirements Minimum Maximum

Invert sugars, expressed in glucose, in % 5.5% -

Non-invert sugars, expressed in sucrose, in % - 83%

Proteins, in % (N x 6.25) 0.2% -

Ashes, in % 0.8% -

Moisture, in % - 9.0%

Lead expressed as Pb in mg/kg - 0.2

Arsenic expressed as As in mg/kg - 0.1

SO2 NEGATIVE

Colorants NEGATIVE

2. Physical-chemical requirements of granulated or powdered panela

Requirements Minimum Maximum

Invert sugars, expressed in glucose, in % 5.74% -

Non-invert sugars, expressed in sucrose, in % - 90%

Proteins, in % (N x 6.25) 0.2% -

Ashes, in % 1.0% -

Moisture, in % - 5.0%

Lead expressed as Pb in mg/kg - 0.2

Arsenic expressed as As in mg/kg - 0.1

SO2 NEGATIVE

Colorants NEGATIVE

Additives permitted in the preparation of panela.

In the preparation of panela, the following additives may be used: 1. pH regulators:

a. Bicarbonate of soda b. Phosphoric acid c. Calcium carbonate d. Citric acid, food grade;

2. Anti-foaming agents: a. Vegetable grease and oils, food grade;

3. Clarifiers a. Polyacrylamides

77

b. Balso c. Guásimo d. Cadillo.

Substances prohibited in panela production:

a. Sodium hydrosulphite (Clarol) or other toxic chemical substances with bleaching properties

b. Colorants or toxic substances c. Saturated fat or tallow d. Sugar, molasses from sugar mills, corn syrup, other sweeteners and

returned panelas that have an affect on the panela’s safety and quality e. Any other chemical substance that alters its physical-chemical

characteristics, its nutritional value, or that may possibly affect health. 3. Requirements for panela production based on pure molasses at collection and

processing centers: For panela production, only the pure molasses from authorized panela cane mills may be used as raw material provided these mills meet the following requirements:

1. Molasses collection and processing centers must be authorized by the corresponding territorial health agency;

2. The pure molasses must come from panela cane mills authorized by the corresponding territorial health agency;

3. The molasses must be transported from panela cane mills to collection and processing centers in vehicles authorized by the corresponding territorial agency;

4. Molasses collection and processing centers must ensure the safety of molasses used in panela processing.

4. Sanitary conditions of panela cane mills and of collection centers for pure molasses:

1. Panela cane mills and molasses collection centers should be located far from points of contamination.

2. No solid waste and waste water should be present near panela processing establishments. 3. Panela processing establishments should be apart from any type of housing. 4. No animals and people, except for workers, should be present in production areas. 5. There should be a physical boundary between areas of reception, production, storage, and

sanitary services. 6. The operation of the panela cane mill should not endanger the health and well-being of

the community. 7. Milled molasses, panela, clarol, colorants, etc. may not be stored in panela cane mills or

adjacent areas.

78

8. Toilets with hand-washing sinks connected to a waste treatment or disposal system must be available.

9. All persons who handle panela must receive training in hygienic food handling practices. 10. A tank must be available with the capacity to store the minimum amount of water needed

for one day of milling, and this water must be of potable quality or easy to disinfect. 11. The establishment must have containers for trash or solid waste. 12. A written pest and rodent control program must be available and implemented, and the

products to be used for this purpose (poisons or toxic bait) should be clearly labeled and may not remain in the panela cane mill.

13. A program to clean and disinfect the different areas, equipment, and utensils must be available and implemented.

14. The mills and molasses collection centers must use equipment, utensils, etc. that are easy to disinfect and have everything needed to ensure proper sanitary conditions for panela preparation.

15. The walls must be clean and in good condition. 16. The floors of the production room must be washable, easily disinfected, nonporous,

nonabsorbent, without cracks or holes, and siphons must have proper grates. 17. The roof must be in good condition and easy to clean. 18. The panela cane mill areas must have proper lighting and ventilation. 19. Dangerous areas must be clearly identified.

5. Standards of Good Manufacturing Practices (GMP) that regulate this activity:

1. The activities of manufacturing, processing, packaging, storing, transporting, distributing, and marketing panela in centers for the collection and processing of pure molasses from panela cane mills, shall abide by the Good Manufacturing Practices (GMP) principles stipulated in Title II of Decree 3075 of 1997 or the regulations that modify, add to, or replace these principles.

6. Panela packaging:

1. Raw materials and inputs must be stored in good sanitary conditions and in independent, identified areas.

2. Panela should be packaged under proper, sanitary, hygienic conditions to avoid contamination.

3. Panela must be packed individually or in units, for example, in shrink-wrap. 4. Panela should be packaged in brand-new, sanitary material (for example, paper bags,

boxes). The use of rusque and sacks or unsanitary material is prohibited. 5. Packages should be stored in good conditions throughout the marketing chain. 6. The place where panela is repackaged should have the authorization of the territorial

health agency, and the panela should come from panela cane mills that meet current sanitary requirements.

7. The material used for packaging should ensure the panela’s quality and safety. 8. For producers who currently use containers and packaging, the following information

must be included on the label: a. Complete name of the product

79

b.Detail of ingredients c. Brand name d.Name and location of panela cane mill e. Lot number or production date f. Storage conditions g.Declaration of content or net weight according to standards of weights and

measures. 9. When the panela’s lot number or production date cannot be identified, the person who

stores, transports, repackages, distributes, or markets it must have a purchasing invoice that indicates the place of origin, the panela cane mill where it was produced, and the amount of the product. These documents must be available to the relevant health authorities.

10. The packaging material must be labeled (for example, bag or box). 11. The container material must be labeled (for example, shrink-wrap). 12. In packages of panela labeled (100% Natural Product,” there should be no permitted

additives that regulate pH during the panela preparation process. 7. Panela storage:

1. Packaged panela (for example, bag or box) must be stored in an orderly manner in piles or on racks with adequate separation between walls and floors and under proper temperature, humidity, and air circulation conditions.

8. Personnel working in panela cane mills and molasses collection centers:

1. Operators must wear clean uniforms, not wear jewelry, wash their hands with soap and water, keep their nails short and unpolished, and not smoke, eat, or drink in panela processing areas.

2. Personnel must have protective gear in compliance with industrial safety regulations. 9. Inspection, surveillance, control, safety measures, and penalties

1. The health authority should make at least two inspection visits per year to panela establishments and/or molasses collection centers and verify the sanitary conditions established in Resolution 779/2006. During each visit, a report shall be prepared on the sanitary conditions encountered, and a favorable or unfavorable opinion shall be issued, as the case may be. If necessary, the necessary sanitary requirements will be issued together with deadlines for their compliance.

80

ANNEX 13: FINANCIAL ANALYSIS FROM SMALL PRODUCER’S PERSPECTIVE

Overview The project contributes to the reduction of greenhouse gas (GHG) emissions from the “panela”, (whole brown sugar), sector by improving its the energy efficiency. Once in operation, the project is expected to displace an estimated 133,000 tons of carbon dioxide equivalent (CO2e) by 2017. The project will be implemented by a new commercial company, “La Empresa Procesadora de Mieles Furatena”, EPMF. This company is the final result of a long discussion on the selection of key partners to the initiative. The final arrangements highlight the importance of the small panela producers: 51% of EPMF stock is in hands of the primary producers, organized in a single entity, PROCAMPO. PROCAMPO is the selected vehicle to associate all small participating producers, drawn from the Municipality of Utica. Participation is voluntary, and implies a commitment to provide molasses to the plant and actively participate in the governance of EPMF. To facilitate their contribution to the investment capital required, PROCAMPO received a loan (from the other participants) and provided as collateral the individual contracts to guarantee the provision of molasses to the plant. The loan will be paid back through distributed profits (financial analysis show a repayment schedule providing some incentives to the small producers [cash profit distribution] and a repayment period of 5 to 6 years as function of market prices and the proportion of the production sold in international markets.) Financial analysis:

Assumptions: The analysis from the perspective of the small producer compares the current situation of a reference panela producer in the department of Cundinamarca to the project scenario. In the baseline scenario one hectare generates 50 tons of sugar cane per year which produces 5 tons of panela per year (representative data for project area). The analysis includes the costs for crop establishment (see table 1) and maintenance costs (see table 2) of the sugar cane fields into consideration as well as the panela production process (see table 3). The establishment of sugar cane cultivation requires a period of 18 months. T he analysis covers a period of 8 years which represents the time during which sugar cane can be harvested on a yearly basis. An interest rate of 10% is used in the analysis. The data used for the baseline analysis is based on data generated by FEDEPANELA, the national association for panela producers.

81

Table 1 (in Colombian pesos):

ITEM QUANTITY UNIT UNIT PRICE TOTALA. LABORLand clearing 15 Workday $ 12,000 $ 180,000Cleaning 5 Workday $ 12,000 $ 60,000Plowing 5 Workday $ 12,000 $ 60,000Cruzada 3 Workday $ 12,000 $ 36,000Furrowing 10 Workday $ 12,000 $ 120,000Drain construction 5 Workday $ 12,000 $ 60,000Seed preparation 5 Workday $ 12,000 $ 60,000Planting 18 Workday $ 12,000 $ 216,000

Calphos application * 2 Workday $ 12,000 $ 24,000

Fertilizer application 4 Workday $ 12,000 $ 48,000Weed control (Q) * 4 Workday $ 21,000 $ 84,000Weed control (Q) * 25 Workday $ 12,000 $ 300,000SUBTOTAL A 101 Workdays $ 1,248,000

B. INPUTS AND SERVICESPlowing 2 Oxen/day $ 17,000 $ 34,000Cruzada 2 Oxen/day $ 17,000 $ 34,000Seed 7 Tons $ 80,000 $ 560,000Calphos 800 Kilograms $ 125 $ 100,000Compound fertilizers 350 Kilograms $ 420 $ 147,000Anikilamine 3.78 Liters $ 12,000 $ 45,360Karmex 4 Kilograms $ 16,500 $ 66,000Adhesive (Triton) * 1 Liters $ 6,000 $ 6,000

Transportation of inputs 1 Freight $ 13,000 $ 13,000SUBTOTAL B $ 1,005,360

TOTAL ESTABLISHMENT COSTS A+B $ 2,253,360

ESTABLISHMENT COST PER CUTTING 5 Cuttings $ 450,672

COSTS OF ESTABLISHING ONE HECTARE OF SUGAR CANE IN THE SUAREZ SEMESTER A-99 (175 Loads of Sugar weighing 73 kg each)

Source: FEDEPANELA.

Table 2 (in Colombian pesos):

ITEM QUANTITY UNIT UNIT PRICE TOTALA. LABOREncalle 15 Workday $ 12,000 $ 180,000Cepillado 8 Workday $ 12,000 $ 96,000 Replanting 2 Workday $ 12,000 $ 24,000 Fertilizer application 4 Workday $ 12,000 $ 48,000 1st. Chemical control of weeds 4 Workday $ 21,000 $ 84,000 2nd. Manual control 25 Workday $ 12,000 $ 300,000SUBTOTAL A 58 $ 732,000

B. INPUTS AND SERVICES Seed 0.5 Ton $ 80,000 $ 40,000 Urea 200 Kilograms $ 410 $ 82,000Potassium chloride 150 Kilograms $ 420 $ 63,000 Anikilamine 1 Gallon $ 31,000 $ 31,000 Karmex 4 Kilograms $ 16,500 $ 66,000 Adhesive soap powder 0.5 Kilograms $ 6,000 $ 3,000 Transportation of inputs 1 Freight $ 13,000 $ 13,000SUBTOTAL B $ 298,000TOTAL MAINTENANCE COST A+B $ 1,030,000Source: FEDEPANELA.

MAINTENANCE COSTS OF ONE HECTARE OF SUGAR CANE IN THE SUAREZ RIVER BASIN

SEMESTER A-99 (175 Loads of Sugar weighing 73 kg each)

82

Table 3 (in Colombian pesos):

ITEM QUANTITY UNIT UNIT PRICE TOTAL

A. LABOR

Cutting 48 Workday $ 12,000 $ 576,000

Gathering and transportation 48 Workday $ 12,000 $ 576,000

Silleros 22 Workday $ 12,000 $ 264,000

Cocina en apronte 3 Workday $ 12,000 $ 36,000

Bojoteros en apronte 2 Workday $ 12,000 $ 24,000

SUBTOTAL A 123 $ 1,476,000

B. MILLING PERSONNEL

Press operators (4) 700 Loads $ 600 $ 420,000

Sugar pre-cleaner (1) 175 Loads $ 700 $ 122,500

Furnace operator (1) 175 Loads $ 700 $ 122,500

Bojotero Seco (2) 350 Loads $ 600 $ 210,000

Gaverero (1) 175 Loads $ 600 $ 105,000

Packer (1) 175 Loads $ 600 $ 105,000

Assistant (1) 175 Loads $ 600 $ 105,000

Administrador (1) 175 Loads $ 600 $ 105,000

Kitchen (1) 175 Loads $ 700 $ 122,500

Food

(12 persons * 6 days) 72 Days $ 6,000 $ 432,000

Sugar (12 persons * 6 days)+ 187 Units $ 250 $ 46,750

Labor (CAT)

SUBTOTAL B $ 1,896,250

SUBTOTAL A+B $ 3,372,250

C. INPUTS AND SERVICES

Transportation 48 Days/mule $ 4,000 $ 192,000

Balso 74 Kilograms $ 150 $ 11,100

Lime 26 Kilograms $ 350 $ 9,100

Castor oil 7 Liters $ 3,000 $ 21,000

Firewood for Cooking 1200 Kilograms $ 60 $ 72,000

Manioc Flour 1 Kilograms $ 3,500 $ 3,500

Rental of Sugar Mill 175 Loads $ 5,000 $ 875,000

Transportation of sugar 175 Loads $ 500 $ 87,500

Transportation of sugar 175 Loads $ 500 $ 87,500

TOTAL PREPARATION COSTS A+B+C $ 4,643,450Source: FEDEPANELA.

COSTS OF PREPARING 175 LOADS OF SUGAR WEIGHING 73 Kg EACH IN THE SUAREZ RIVER BASIN

In the baseline scenario the small producer sells panela at a price of 695 Colombian Pesos per kilo. The NPV of the net revenues per ha for a period of 8 years amounts to approximately 1 million Colombian Pesos per ha which represents an average annual net revenue of 0.3 million Colombian Pesos per ha.

Table 4: Baseline Summary (in thousand Colombian Pesos)

83

YearCrop

establishmentCrop

maintenancePanela

process Total cost Revenues Net revenues

Average annual net revenues

1 2253 2253 0 -2253

2 515 1814 2329 3425 1096

3 1030 1814 2844 3425 581

4 1030 1814 2844 3425 581

5 1030 1814 2844 3425 581

6 1030 1814 2844 3425 581

7 1030 1814 2844 3425 581

8 1030 1814 2844 3425 581

NPV $14,208 $15,158 $950 $291

The project scenario considers the same establishment and maintenance cost for the sugar cane cultivation. The establishment period is also 18 months and the lifecycle is 8 years. Through the improved production process the project produces more panela with the same quantity of sugar cane. The analysis assumes an increase of 20% in the panela production (the local sugar cane juice production is very low, estimated at 40% of the cane weight, with new equipment this percentage may increase to 60%. For the purpose of this analysis a value circa 50% was selected.), leading to a production of 6 tons of panela per hectare with 50 tons of sugar cane per ha per year. In addition to producing more panela with the same sugar cane quantity, the process saves on production cost due to a more efficient production process that requires less labor. In terms of revenues the small producer receives incomes from selling the preliminary product (molasses) at the same price to the company as well as from its 51% shares in the company. The utilities of the company take the carbon revenues and the expected panela price increase into consideration. The company is expected to generate a surplus as of the 4th year after its start up once the loan has been repaid. In the first year the small producer will be compensated for the investment cost through a grant. As of the second year the net revenues per hectare are considerably higher than in the baseline case. In addition to the establishment, maintenance and production cost, the project scenario considers also the debt service. On the revenue side, the small producer benefit from an increased output sold at the same price to the company, from a 51% share in the company’s utilities, and from a more energy efficient and economic production process. The following tables summarize the baseline and the project scenario:

Table 5: Project summary (in thousand Colombian Pesos)

YearCrop

establishmentCrop

maintenancePanela

process Total cost Revenues Net revenuesInvestment in

EPMFRevenue

from EPMFNet revenue with EPMF

Average annual net

revenues with EPMF

1 2253 2253 0 ($2,253) 50 -2303

2 515 1480 1995 4110 $2,115 50 2065

3 1030 1480 2510 4110 $1,600 50 1550

4 1030 1480 2510 4110 $1,600 150 517 1967

5 1030 1480 2510 4110 $1,600 140 560 2020

6 1030 1480 2510 4110 $1,600 130 561 2031

7 1030 1480 2510 4110 $1,600 120 1080 2560

8 1030 1480 2510 4110 $1,600 110 1055 2545

NPV $19,308 $28,770 $9,462 $7,023 1,554$

Financial Indicators The NPV of the baseline scenario is around 1 million Colombian Pesos (USD 365) per ha for a period of 8 years. The cost benefit ratio is 1.1. With the project the NPV increases tenfold without considering the investment and revenues from the EPMF and has a cost benefit ratio of 1.5. By considering the EPMF investments and revenues the NPV of the project amounts to 7

84

million Colombian Pesos per ha for an 8 years period. The net revenues are expected to increase in time once the debt service is completed. Also the project seeks the organic certification of the panela which will further increase its price. CONCLUSIONS The analysis shows that the project increases the net revenues of the small producers by a factor of 7 to 10 in contrast to the actual situation. The project scenario will not only lead to reduced production cost based on energy savings and improved production techniques, but will also generate increased revenues due to increased panela production with the same sugar cane quantity and due to an improved product quality. The small producers benefit in addition from being the owners of 51% of the company’s (EPMF) stock. In addition, the project benefits the small producer’s health by reducing local pollutants.

85

ANNEX 14: CDM APPROVED METHODOLOGY FOR SMALL SCALE ENERGY EFFICIENCY ACTIVITIES

________________________________________________________________________________ CDM – Executive Board II.F./Version 8

Sectoral Scope: 3 23 December 2006

Indicative simplified baseline and monitoring methodologies for selected small-scale CDM project activity categories

TYPE II - ENERGY EFFICIENCY IMPROVEMENT PROJECTS

Project participants shall take into account the general guidance to the methodologies, information on additionality, abbreviations and general guidance on leakage provided at http://cdm.unfccc.int/methodologies/SSCmethodologies/approved.html .

II.F. Energy efficiency and fuel switching measures for agricultural facilities and activities Technology/Measure 1. This category comprises any energy efficiency and/or fuel switching measure implemented in agricultural activities of facilities or processes. This category covers project activities that encourage energy efficiency or involves fuel switching. Examples of energy-efficient practices include efficiency measures for specific agricultural processes (such as less irrigation, etc.), and measures leading to a reduced requirement of farm power per unit area of land, reflected in less and smaller tractors, longer lifetime of tractors and less farm equipment. Further energy efficient measures would be reducing fuel use in agriculture, such as reduced machinery use through, e.g. the elimination of tillage operations, reduction of irrigation, use of lighter machinery, etc. 2. The measures may be a replacement on existing equipment or equipment being installed in a new facility. The aggregate energy savings of a single project may not exceed the equivalent of 60 GWh per year. Boundary 3. The physical, geographical location of the farming operations or measure (each agricultural practice) being implemented. Project activities might apply to single facilities (farms), or activities using similar processes on different farms may be bundled together, as long as the combined total energy savings do not exceed the equivalent of 60 GWh per year. Baseline 4. The energy baseline consists of the energy use of:

(a) the existing activity that is reduced in the case of retrofit measures; or (b) the facility that would otherwise be installed in the case of a new facility.

86

5. If the energy displaced is a fossil fuel, the energy baseline is the existing fuel consumption or the amount of fuel that would be used by the practice that would have been implemented otherwise, i.e. total fuel consumption in the project area per year for field operations and average fuel consumption per unit area (ha), crop yield and year. 6. Project participants are to demonstrate the baseline and project scenarios of fuel consumption against reference agricultural activities, including cultivated acreage and crop yield from the project land. 7. The demonstration of additionality is necessary especially with respect to some financial indicators. Project participants shall demonstrate that reduced energy consumption is not prompted by financial constraints leading to downscaled operations, but rather CDM-driven. 8. Each energy form in the emission baseline is multiplied by an emission coefficient (in kg CO2e/kWh). For the electricity displaced, the emission coefficient is calculated in accordance with provisions under category I.D. For fossil fuels, the IPCC default values for emission coefficients may be used. Leakage 9. If the energy-efficiency technology is equipment transferred to another activity or if the existing equipment is transferred to another activity, leakage calculation is required. Monitoring 10. In the case of retrofit measures (includes fuel switch measures), monitoring shall consist of:

(a) Documenting the specifications of the equipment replaced; (b) Metering the energy use of the agricultural facility, processes or the equipment affected by the project activity; (c) Calculating the energy savings using the metered energy obtained from subparagraph (b).

11. In the case of a new facility, monitoring shall consist of:

(a) Metering the energy use of the equipment installed; (b) Calculating the energy savings due to the equipment installed.

12. Monitoring will also involve the scale (e.g. number of ha cultivated, crop yield) of agricultural activities, in order to ensure that reduced energy consumption is not due to downscaling of activities. Energy use must be for equivalent services.

wb235281 C:\Documents and Settings\wb235281\My Documents\Colombia Furatena\draft PAD.doc 05/25/2007 6:38:00 PM