Initial Project Information Document (PID)

PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE 46804

Project Name Philippines: Ethanol Plant Wastewater Biogas Project Region East Asia and Pacific Sector Agro-Industry, Environment, Rural Development Project ID P106732 Borrower(s) Not Applicable (CFO Project Entity: Roxol Bioenergy Corporation) Implementing Agency Roxol Bioenergy Corporation Environment Category [ x ]A [ ]B [ ]C [ ]FI [ ]TBD (to be determined) Date PID Prepared October 27, 2008 Date of Appraisal November 24, 2008 Authorization Estimated Date of Not Applicable (Estimated date of RVP Approval: December Board Approval 15, 2008)

1. Country and Sector Background

The Philippines is one of the signatories of the United Nation Framework Convention on Climate Change (UNFCCC) and has ratified the Kyoto Protocol on November 20, 2003. In the same year, it also started its cooperation with the World Bank to avail of the Clean Development Mechanism (CDM) of the Kyoto Protocol resulting in the signing of the country’s first Emission Reduction Purchase Agreement (ERPA) in 2004 under the Bank’s Prototype Carbon Fund. Since then, a number of ERPAs have been signed in the Philippines, the greatest bulk of which comes from renewable energy projects.

Due to the high prices and unstable supply of imported petroleum products, the Philippines has actively pursued an energy plan which aims for energy independence through aggressive exploration and development of clean and renewable indigenous energy sources. It joined the growing number of countries that are taking significant measures to promote the use of biofuels through the passage of the Philippines Biofuels Act (RA 9367) of 2006 which mandates the energy sector to supplement fossil fuels with biofuels. The 10-year Philippine Energy Plan (PEP) aims to, among others, achieve up to 5% biodiesel and 10% ethanol blends on diesel and gasoline vehicle fuels, respectively, by 20101. Private sector investments on biodiesel and fuel grade ethanol production are anticipated to meet these requirements.

The enactment of the Biofuels Act is expected to increase investment on biofuels to meet the demand of the market to comply with the requirement of the law. As a consequence, it is expected that there will be increase generation of wastewaters from the biofuels plants which, in turn, could increase pollution levels of water sources, if wastes are not and/or improperly treated prior to discharge. The traditional practice for the treatment of

1 Updated 2005-2014 Philippine Energy Plan, Philippine Department of Energy (2006) wastewater from distilleries, breweries and sugar milling in the Philippines is through aerobic lagoons which release methane, a known greenhouse gas (GHG) which is 21 times more potent than carbon dioxide. Wastewater discharges are regulated under the Philippine Clean Water Act (RA 9275) of 2004. However, full enforcement of these laws is hampered by lack of investment and lack of funds for the regulatory agencies2 and slow development of necessary implementing mechanisms. Technical and financial barriers are the main reasons for lack of investments in wastewater systems. Most industrial plants in the country either do not have treatment systems or have primitive or poorly maintained systems that do not work effectively. Currently, less than half of Philippine rivers meet water quality standards for their intended uses and industrial wastewater is estimated to account for 15% of the organic waste loads in these rivers (the rests are produced by domestic and agricultural activities)3. Increased investments in biofuels plants could worsen water pollution, if current industry practice continues. The Biofuels Act is estimated to result to an ethanol demand of around 309 and 664 million liters by 2009 and 2011, respectively. Vinasse, the wastewater effluent of ethanol plants, is approximately 12-15 times by volume of the product alcohol. It is also one of the most troublesome and strongest organic industrial effluents, having extremely high chemical oxygen demand (COD) and biochemical oxygen demand (BOD) values. Moreover, the methane emissions from the traditional wastewater lagoons could offset a significant portion GHG reduction from the use of biofuels. The carbon finance operation provides the opportunity and/or incentive for improving existing systems and/or adopting new technologies that are more effective in preventing water pollution while also compelling the plant owners to address methane emissions.

2. Objective

The project development objective is to reduce GHG emissions through: (i) the avoidance of methane emission from the ethanol plant’s wastewater treatment system; and (ii) the displacement of bunker fuel with the methane collected from the wastewater treatment system and bagasse mixed with concentrated vinasse for the plant boiler’s fuel requirements.

3. Rationale for Bank Involvement

Climate change is one of the greatest challenges facing the global community today. Its impacts promises to be wide-ranging, affecting agriculture and food production, sea-level rise and the accelerated erosion of coastal zones, increasing intensity of natural disasters, species extinction and the spread of vector-borne diseases. As a trustee of various Carbon Funds, the World Bank is leading the efforts in mitigating climate change via market- based initiatives. Through its Carbon Finance Unit, the Bank has been helping catalyze market for GHG emission reductions under the CDM of the Kyoto Protocol of the UNFCCC. A vital element of this is ensuring that developing countries like the Philippines are key players in the emerging carbon market for greenhouse gas emission

2 National Water Quality Status Report for 2001-2005, Environmental Management Bureau, Department of Environment and Natural Resources, 2006 3 Philippine Environment Monitor 2001, The World Bank and Department of Environment and Natural Resources, 2002 reductions. The role of the Bank's Carbon Finance Unit is to catalyze a global carbon market that reduces transaction costs, supports sustainable development and reaches and benefits the poorer communities of the developing world.

Consistency with CAS. This project is fully consistent with the private sector platform and the sustainable growth objective of the Bank’s Country Assistance Strategy (CAS) for the Philippines4. The private sector platform intends to improve the lackluster investment climate in the country. Carbon finance and its growing market could be a significant source of foreign denominated income and investment for developing and implementing clean technologies by the private sector in the Philippines. Moreover, the project complements the Bank’s ongoing engagement with the Department of Natural Resources and Environment (DENR) and the Laguna Lake Development Authority (LLDA) on improving environment and natural resource management. Sector studies (e.g., Natural Resources Management Way Forward Action Plan for the Philippines) and the Philippines Environment Monitor series have identified key issues relevant to water quality in the country, including the need for an integrated approach to address water management, establishment of accountability mechanisms to improve natural resource and environmental governance, and market-based incentives. It also complements the Bank’s program on the use of clean fuels and renewable energy with the Department of Energy. Finally, the proposed Carbon Finance support is in line with the Bank’s strategy of partnering to achieve greater impacts. Global partnerships on the environment are an emerging and important business line for the Philippines program such as the Multilateral Fund for the Montreal Protocol and the Global Environmental Facility5.

Contributing to local sustainable development. Besides providing initial push to the fledgling biofuel industry and support to efforts to improve water quality, World Bank’s involvement will also ensure local benefits accrue through the project. The many carbon finance operations undertaken by the Bank have provided a source of revenue for projects in developing countries that both demonstrate low carbon technologies and contribute to sustainable development. The Bank-managed Community Development Carbon Fund (CDCF) which is proposed to be tapped for this project has a unique mechanism that ensures benefits accrue to local communities. One of the main objectives of the CDCF is to ensure that communities are empowered to play an active role in the delivery of services (basic social services and economic infrastructure) that help improve their livelihoods and thus help reduce poverty. Within this process, communities actively take part in the identification, prioritization, implementation, and monitoring, of those services - in this case measurable and verifiable benefits derived from this project. Another critical goal of the CDCF is to ensure that all the different stakeholders within a community have equal access, and that the benefits provided by this project yield maximum and sustainable results.

Providing employment and alleviating poverty: It is expected that the increased demand for bioethanol production will translate into improved income of small farmers in Negros Occidental who are beneficiaries of the government’s Comprehensive Agrarian Reform Program. Aside from providing local employment, the project will result in increased

4 World Bank’s 2006-2009 Country Assistance Strategy for the Philippines 5 2006-2009 Philippine Country Assistance Strategy, Paragraph 136. demand for materials and equipment and other inputs as well as services such as provision of labor and transportation to support the ethanol plant’s operation. An estimated 100,000 farmers, suppliers, drivers, laborers and their dependents are expected to benefit from this project.

4. Description

The project involves the construction and operation of a 100,000 liters/day molasses-fed ethanol production plant with waste-to-energy recovery. The project is owned and will be operated by Roxol Bioenergy Corporation, a newly organized, fully-owned subsidiary of Roxas Holdings Inc. (RHI) and a member of the Central Azucarera de Don Pedro Group (CADPG) of companies. The plant will produce anhydrous or fuel grade alcohol and potable alcohol for the domestic market. It will comprise of the following components:

Component A. Construction and Operation of the Ethanol Plant and Support Facilities. This component involves the construction and operation of a 100,000 liters/day ethanol production plant with waste-to-energy recovery using molasses, a by-product of sugar mills, as feedstock. Molasses will be sourced from the nearby Central Azucarera de la Carlota, Inc. (CACI) sugar mill, a member of the Central Azucarera de Don Pedro Group (CADPG) and from other sugar mills of the CADPG. The plant will produce anhydrous or fuel grade alcohol and potable alcohol for the domestic market. It will comprise of the following subcomponents:

Ethanol Manufacturing/Production Plant. The main production plant will consist of the following facilities: (i) a fermentation facility; (ii) a distillation unit consisting of several distillation columns; (iii) a dehydration facility to produce fuel grade ethanol; (iv) several handling and storage facilities for molasses, bagasse fuel and the final ethanol product; and (v) an office building.

Wastewater Treatment Facility and Disposal System. The ethanol plant will adopt a zero- discharge system for all its liquid waste. The plant’s estimated 1,000m3/day distillery slops or raw wastewater will undergo primary treatment through thermophilic anaerobic digestion (TAD) with the treated wastewater or vinasse concentrated through an evaporation process. The concentrated vinasse will be mixed with bagasse and burn as fuel for the plant’s boiler. The system will consist of: (i) an anaerobic biodigester tank; (ii) an evaporator unit to concentrate the treated vinasse; and (iii) a 5,000m3-capacity emergency holding pond to contain the treated vinasse in case of failure of the evaporator unit. All excess sludge is included in the concentrated vinasse/bagasse mixture for burning. For its process water, consisting mostly of steam condensates and cooling tower blowdown, the plant will employ a closed loop system wherein low-BOD wastewater will be treated and, together with zero-BOD water, recycled back into the system.

Waste-to-Energy Recovery. The waste-to-energy recovery will involve the utilization of the collected methane and the concentrated vinasse mixed with bagasse, as fuel for plant’s boiler and power generator system. It will consist of (i) a methane gas scrubbing/collection and storage system; (ii) a bagasse shed and conveyor system; (iii) bagasse-vinasse concentrate mixer/dryer unit; (iv) a 40 ton/hr-capacity boiler that accepts methane, concentrated vinasse-bagasse mixture or bunker oil as fuel; and (v) a 4.0MW- capacity steam turbine generator. This subcomponent will supply the plant’s mechanical energy and power requirements.

Component B: Carbon Finance Transaction. This component involves the creation and eventual purchase by the Bank of the carbon emission reduction (CER) assets from the ethanol plant and support facilities under the CDM of the Kyoto Protocol. In creating the asset, the World Bank will assist, the project entity, Roxol Bioenergy Corporation in: (i) preparing the PDD based on the new CDM methodology (ACM00014); (ii) having the project validated by a Designated Operational Entity (DOE), an independent firm accredited by the UNFCCC, leading to the project’s registration with the UNFCCC; and, (iii) during project operation, having the ERs verified by a DOE leading to their certification by the UNFCCC. The purchase of the CER assets which will be generated annually by the CFO will be governed by the ERPA, a performance-based contract under which payments are triggered by successful verification of avoided GHG generation by a DOE. The quantity of ERs to be contracted, the length of time over which the purchase will be made, and the price paid will be agreed between the World Bank and the project entity and recorded in the ERPA.

The ERs which will be subject to Carbon Finance Transaction will come from the operation of the Wastewater Treatment Facility and Disposal System and the Waste-to- Energy Recovery System of the ethanol plant, as described above. The amount of ERs to be generated is reckoned against the GHG emissions of a conventional or “business as usual” ethanol plant design which uses an open lagoon system for treating wastewater and bunker fuel to power its boiler. A conventional ethanol plant releases GHGs in the form of methane produced from its open wastewater lagoons and anthropogenic carbon dioxide (CO2) from the combustion of bunker fuel. These emissions will be avoided in the proposed CFO. Hence, the total amount of ERs to be generated is equal to the amount of GHG emissions that will be avoided due to the adoption of an advanced wastewater treatment system and the use of collected methane and bagasse-concentrated vinasse mixture as boiler fuel in lieu of bunker oil. Initial calculations indicate that the CFO will avoid up to 68,151 tCO2e per year. The ER amount which will be used in the ERPA will be determined in the PDD based on the application of a UNFCCC Secretariat-approved CDM methodology.

Component C: Community Benefits. To meet the CDCF objectives, the CFO will support activities to improve the quality of life of the local communities. A CBP has been prepared to address the priority needs of the three communities immediately surrounding the project. These priority needs were identified through a social assessment and validated through a series of consultations with the surrounding communities. The CBP will complement the ongoing community development and extension services of CADPG in the area through its corporate social arm, the Roxas Gargollo Foundation, Inc. (RGFI), and will include the following activities: (i) community organizing, focusing on the formation and strengthening of people’s organization and/or cooperatives; (ii) livelihood and entrepreneurial support through a micro-lending scheme for various productive activities; (iii) health services in the form of quarterly medical outreach to communities and assistance in availment of health insurance; and, (iv) education services such as vocational skills training for out-of-school youths, scholarship grants, a reading program and rehabilitation of the existing pre-school/day care center. These activities will be funded from a premium equal to US$1.0 for every CER actually purchased by the CDCF from the project with CADPG providing staff and equipment as counterpart.

5. Financing

The capital cost requirement of the project, including the wastewater treatment and energy recovery system is estimated at US$34.52 million. It will be financed through a 75% loan and a 25% equity infusion from the project entity’s parent company, RHI. The World Bank, on behalf of the CDCF, will purchase the CERs generated during the first four years of the ethanol plant operation. The terms and conditions of the purchase will be spelled out in the ERPA between the World Bank and the project entity. The CER proceeds, estimated to amount to US$13.86 million, will accrue as part of the annual revenue of the project entity.

Source Amount Total Capital Cost US$34.52M Loan from parent company Roxas Holdings Inc. 75% Equity from parent company Roxas Holdings Inc. 25% Estimated Carbon Emission Proceeds from IBRD CDCF US$4.36M

6. Implementation

The CFO will be implemented in accordance with the ERPA to be concluded between the project entity, Roxol Bioenergy Corporation and the Bank, acting as trustee of the CDCF. A Monitoring Plan (MP) which will define the quantity, price and other delivery conditions for CERs to be purchased by CDCF as well as monitoring and verification systems and methods, as well as the final versions of the CBP and the EMP will be agreed by the parties and recorded in the ERPA.

As required by the Kyoto Protocol, the project will undergo a validation process to be conducted by an accredited DOE. Based on its findings, the DOE will submit the project for registration to the CDM Executive Board. The Government of the Philippines through the Designated National Authority (DNA) will issue a Letter of Approval and operate a registry to manage the transfer of CERs generated by the Project.

Eligibility of the ERs for purchase by CDCF will require verification and certification following the CDM rules. Another accredited DOE will be engaged by the Bank to conduct periodic verification of ERs generated by the project. The verification report will be the basis for the certification of the ERs, effectively converting the ERs into CER asset.

The project entity will be responsible for implementation of the project, including the following:  Secure a Letter of Approval from the CDM DNA;  Undertake all reasonable efforts, including project documentation, to ensure eligibility of ERs under Art.12 of the Kyoto Protocol;  Undertake actions as agreed in the EMP and the CBP to comply with the CDCF requirements and Bank’s safeguard policies; and,  Notify the Bank of anything that may have an impact on the project or its capacity to deliver ERs, including delays, material adverse changes and force majeure.

During project operations, the project entity will:  Maintain and operate the project in accordance with sound business practices, proper due diligence and high efficiency;  Monitor the parameters specified in the MP and the ERPA;  Prepare a consolidated Annual Monitoring Report on the required parameters of the MP; the CBP and the EMP; and,  Organize, in coordination with the CDCF and the Bank, periodic auditing of the project and verification that emission reductions have been achieved in compliance with relevant project criteria.

7. Sustainability

Institutional and technical sustainability. The newly organized project entity, Roxol Bioenergy Corporation has a corporate life of 50 years. It is backed by more than 75 years of corporate management experience of RHI, the manufacturing experience of CADPG corporate social responsibility program experience of the RGFI. In terms of technical expertise of operating the ethanol plant, the turnkey contractor, KBK Chem Engineering will provide the initial technical and managerial expertise during the first year of the plant operation during which key Roxol personnel will receive on-the-job training to run the plant.

Financial sustainability. The project will have an internal rate of return of 16% with main source of revenue coming from the sales of anhydrous alcohol. The ER credits will also contribute to the cash flows. The project is very sensitive to the price of ethanol but a low ethanol price scenario however is highly unlikely given the increasing demand for fuel. The analysis also shows annual net cash flows from the project of more than PhP200 million which indicate that project is expected to meet this annual amortization obligation of PhP105 million without difficulty.

8. Lessons learned and reflected in the project design

The World Bank has developed five other Carbon Finance operations in the Philippines, three of which are already operating. Lessons learned from these projects have been incorporated in the Bank’s due diligence work, in the following:  The need to engage the DNA earlier in the project preparation to avoid delay of the issuance of the Letter of Approval and possible duplication of consultation process.  The need to carefully assess the available resource, particularly the raw materials (i.e. molasses as feedstock and bagasse for fuel.  Availability of turnkey supplier - The appraisal makes sure that suitable turnkey supplier of the chosen technology is available within the feasible cost range, taken into consideration the cost escalation due to potential increase in global demand of the technology.

9. Safeguard Policies that might apply

The project is categorized as an Environmental Category A project given the complex nature of ethanol production and the associated wastewater treatment and disposal. Of the 10 World Bank Safeguards Policies only OP/BP 4.01 (Environmental Assessment) has been triggered. An Environmental Impact Assessment (EIA) was conducted for the project and an EMP was developed as part of the EIA and agreed with the project entity. The EMP contains the built-in measures in the project design which the project entity has committed to undertake such as “zero discharge system” for distillery slops, “close loop system” for the process water and installation of wet scrubber for the plant boiler. It also includes additional measures such as the installation of a good drainage system, provision of ash stockpiling area and the adoption of occupation health and safety policies and procedures. An environmental monitoring plan was also developed to monitor project impacts on the environment.

Based on the socio-economic impact assessment as part of the EIA and the final location and configuration of the project, the plant and other project facilities will not directly affect any indigenous peoples or result to any displacement of homes and livelihood and acquisition of land.

Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment (OP/BP 4.01)  Natural Habitats (OP/BP 4.04)  Pest Management (OP 4.09)  Physical Cultural Resources (OP/BP 4.11)  Involuntary Resettlement (OP/BP 4.12)  Indigenous Peoples ( OP/BP 4.10)  Forests (OP/BP 4.36)  Safety of Dams (OP/BP 4.37)  Projects in Disputed Areas (OP/BP 7.60)*  Projects on International Waterways (OP/BP 7.50) 

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

10. List of Technical Factual Documents

1. Project Design Document (PDD) 2. Environmental Impact Statement (EIS) 3. Integrated Safeguards Data Sheet (ISDS) 11. Contact Point

Contact: Josefo Tuyor Title: Senior Operations Officer Tel: (632) 9173086 Fax: (632) 6375860 Email: [email protected] Location: World Bank Office in Manila 23/F, Taipan Place, Emerald Avenue, Ortigas Center, Pasig City Philippines