Document of The World Bank

Public Disclosure Authorized FOR OFFICIAL USE ONLY

Report No: 43548 - MY

PROJECT APPRAISAL DOCUMENT

Public Disclosure Authorized : COMPOSTING PROJECT

FOR A CARBON FUND FOR EUROPE EMISSIONS REDUCTION PURCHASE AGREEMENT

IN THE AMOUNT OF APPROXIMATELY US$5.0 MILLION

WITH

MS SMART RECYCLING (M) SDN. BHD, MALAYSIA

Public Disclosure Authorized June 11,2008

Rural Development, Natural Resources and Environment Sector Unit Sustainable Development Department East Asia and Pacific Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties, Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

Exchange Rate Effective Currency Unit = Malaysian Ringget (RM) US$l = 3.45RM

ABBREVIATIONS AND ACRONYMS CDM Clean Development Mechanism CER Certified Emission Reduction CFE Carbon Fund for Europe co2 Carbon Dioxide C02-e COz equivalent DNA Designated National Authority DOE Designated Operating Entity EA Environmental Assessment EB Executive Board ECARU Egyptian Company for Solid Waste Utilization EIA Environmental Impact Assessment EIB European Investment Bank EMP Environmental Management Plan ER Emission Reduction ENTAG Engineering Tasks Groups ERPA Emissions Reduction Purchase Agreement FY Fiscal Year GHG ICR Implementation Completion Report IRR Internal Rate of Return kg Kilogram km Kilometer LO1 Letter of Intent MSW Municipal Solid Waste NPV Net Present Value NSP National Strategic Plan for Solid Waste Management PDD Project Design Document UNFCCC United Nations Framework Conventions on

Vice President: James W. Adams, EAPVP Country Director: Ian Porter, EACTF Sector Director: Christian Delvoie, EASSD Sector Manager: Rahul Raturi, EASRE Task Team Leader: Bekir Onursal, EASRE MALAYSIA

KOTA KINABALU COMPOSTING PROJECT

TABLE OF CONTENTS

A . STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country and Sector Issues...... 1 2 . Rationale for Bank Involvement ...... 2 3 . Higher Level Objectives to which the Project Contributes ...... 4 B. PROJECT DESCRIPTION...... 4 1. Lending Instrument...... 4 2 . Project Background...... 4 3 . Project Development Objective and Key Indicators...... 7 4 . Project Components ...... 9 5 . Lessons Learned and Reflected in the Project Design ...... 12 6 . Alternatives Considered and Reasons for Rejection...... 12 C. IMPLEMENTATION ...... 14 1. Institutional and Implementation Arrangements ...... 14 2 . Monitoring and Evaluation of Outcomes and Results ...... 14 3 . Sustainability...... 15 4 . Critical Risks and Possible Controversial Aspects ...... 16 D. APPRAISAL SUMMARY ...... 18 1. Economic and Financial Analysis ...... 18 2 . Fiduciary Aspects ...... 19 3 . Technical Analysis ...... 20 4 . Environmental Analysis ...... 22 5 . Social Analysis ...... 23 6 . Safeguard Policies.,...... 24 7 . Policy Exceptions and Readiness ...... 25 Annex 1: Country and Sector Background...... 26

Annex 2: Detailed Project Description ...... 33

Annex 3: Implementation Arrangements ...... 46

Annex 4: Financial Management and Fiduciary Issues ...... 49

Annex 5: Safeguards Issues ...... 55

Annex 6: Documents in the Project File ...... 69

Annex 7: Project Preparation and Supervision ...... 70

Annex 8: Country at a Glance ...... 71

Annex 9: Map...... 72 MALAYSIA

KOTA KINABALU COMPOSTING PROJECT

PROJECT APPRAISAL DOCUMENT

EASRE

Date: June 4,2008 Team Leader: Bekir Onursal Country Director: Ian Porter Sectors: Solid Waste Management Sector ManagerDirector: Rahul Raturi/ Themes: Climate Change Christian Delvoie

Project ID: P106857 Environmental screening category: B Lending Instrument: Carbon Finance

[ ] Loan [ ] Credit [ ] Grant [ ] Guarantee [ X ] Other:

For Loans/Credits/Others: Carbon Fund for Europe, approximately US$ 5 .O million Total Bank financing. N/A Proposed terms: In negotiated prices designated in Euros per ton for Certified Emission

Borrower: N/A. The Bank, as trustee for the Carbon Fund for Europe, will sign the emission reduction purchase agreement with MS Smart Recycling (M) Sdn. Bhd.

Responsible Agency: MS Smart Recycling (M) Sdn. Bhd.

Annual 0.585 0.534 0.736 0.847 0.911 0.950 0.444 Cumulative 0.585 1.119 1.855 2.702 3.613 4.562 5.006 Project implementation period: September 1, 2008 - December 3 1,2014 Expected effectiveness date: September 1,2008 Expected closing date: December 31, 2014 Does the project depart from the CAS in content or other significant respects? Ref. Section A.2 [ ]Yes [XINO There is no CAS for Malaysia. However, this project complies with the Bank strategy for middle-income countries (MIC). Does the project require any exceptions from Bank policies? Ref. Section 0.7 [ ]Yes [XI No Have these been approved by Bank management? []Yes [IN0 Is approval for any policy exception sought from the Board? [ ]Yes[X]No Does the project include any critical risks rated “substantial” or “high”? []Yes [ X]No Ref. Section C.4 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ No Ref. Section 0.7 and Annex 3 1. Project development objective; Ref. Section B.3 The project development objective is to avoid methane (a greenhouse gas) emissions from the Kay Madang Sanitary Landfill in , Malaysia by diverting the Municipal Solid Waste (MSW) to a sorting and composting plant, which will recover the recyclable portion of the waste and convert the highly biodegradable portion of the waste into marketable compost. This objective will be facilitated through a Carbon Finance transaction between the World Bank and the project sponsor. The key indicators will be: (i)the amount of compost produced (tondyear), and the CER credits created and traded annually (tons of C02-e).

Project description; Ref. Section B.4 and Annex 2 The project consists of two components: (a) construction and operation of sorting and composting plant that will result in emission reductions (ERs), and (b) a carbon finance transaction that will facilitate the purchase of ERs.

Which safeguard policies are triggered, if any? Ref. Section 0.6 and Annex 5

Environmental Assessment Policy (OP/BP 4.01)

Covenants applicable to project implementation: 1. Registration of the Project with the CDM Executive Board; 2. Approval of the environmental impact assessment (EIA) of the Project by the Department of Environment, , under the Ministry of Natural Resources and the Environment; 3. Annual certification of ERs; 4. Implementation of the Environmental Management Plan. A. STRATEGIC CONTEXT AND RATIONALE

1. Country and Sector Issues

1. Malaysia, as a party to the United Nations Framework on Climate Change Convention (UNFCCC), ratified the (September 4, 2002), which entered into force on February 16, 2005. UNFCCC has set an overall framework for intergovernmental efforts to limit or reduce emissions of greenhouse gases (GHG) that affect the stability of the climate system, which is a shared global resource. The Kyoto Protocol then commits industrialized (Annex 1) countries to individual, legally-binding targets in curbing their GHG emissions. To meet these targets in the most cost-effective manner, the Kyoto Protocol has also established a Clean Development Mechanism (CDM) that allows industrialized countries to implement projects in developing (host or non-Annex 1) countries permitting them to receive emission reductions (ERs). While this scheme helps the industrialized countries meet their own GHG ER commitments, host countries achieve their sustainable development goals through access to cleaner technology and financial resources for specific projects. The Bank, as a trustee of various Carbon Funds, aims to help developing countries contribute to climate change mitigation and sustainable development via market-based ER purchase transactions under CDM.

2. As a non-Article 1 Party to the Kyoto Protocol, Malaysia has been benefiting from investments in CDM projects that contribute to the country’s sustainable development goals and environmental improvement, while earning additional financial flows to the country. The National Committee on CDM has formulated some preliminary national criteria for CDM implementation and has identified several priority areas, one of which is waste management. The has also agreed to collaborate with the World Bank in the emerging market for GHG ER credits under CDM. As such, Malaysia has strong interests and is well positioned to undertake the subject project which is intended to avoid emissions of methane (a potent GHG) from municipal solid waste (MSW) disposal at a landfill.

3. The 8th Malaysian Plan (2001-2005) listed MSW management as a priority area and set actions for the development of a National Strategic Plan (NSP) for strengthening of the legal framework, reactivation of the solid waste privatization program, improvement of implementation at local government level, and establishment for a long-term target for recycling. However, MSW management continued to be a growing problem and gained increasing political attention over the years. Under the 9th Malaysia Plan (2006-2010), in early 2006, the Government endorsed a National Solid Waste Management Policy that aimed to put in place a MSW management system that would be holistic, integrated, cost effective, sustainable and acceptable to the community, and that would also emphasize conservation of the environment, selection of affordable technology and concern of public health. Measures were undertaken to review the existing institutions, legislation and regulations pertaining to the management of MSW and to improve MSW management infrastructure and facilities. Following the Solid Waste and Public Cleansing Management Bill and its Corporation Bill (establishing a corporation with powers to administer and enforce the first bill) enacted in July 2007, the Government of Malaysia has been in the process of bringing the MSW management responsibility under the direct supervision of Federal Government with the ultimate aim of

1 upgrading the related services through an integrated planning process in the entire country. These bills have resulted in the establishment of a National Solid Waste Management Department as the regulatory body and the Solid Waste Management Corporation as the operational entity. The Corporation has taken over the role of managing MSW from the local authorities. As the States of Sabah and enjoy special privileges under the Malaysian Constitution, the 2007 bills are not enforceable in these states.' However, it is expected that the autonomous Malaysian States of Sabah and Sarawak will also adopt these bills.

4. As of 2007, Malaysia generated approximately 21,500 tons/day of MSW based on an average generation rate of 0.8 kg/person/day.* The average MSW consisted of approximately 63% food waste, 25% recyclables (plastics, paper, glass, ferrous and non-ferrous metals), and 12% other wastes. About 76% of MSW generated were collected. Of the collected MSW, approximately 5% was sent to incinerators, 4% was recycled and the remaining 91% was land disposed. Most land disposal sites are either controlled or uncontrolled open dumps that are mostly owned and operated by the respective local government^.^ As about 50% of the 180 land disposal sites were to reach their full capacities by 2008, there are risks of exceeding the permitted landfill capacities at these sites or illegal dumping at other sites. In addition, there has been dissatisfaction with service provision at the local government level, growing environmental problems, and financial pressures to resolve the acute problems. The lack of policy, complexities in the institutional and legal framework and inadequate skills have hindered identification of new sites by state governments. Illegal dumping has also become a major problem. As such, MSW management has become an important issue and gained increasing political attention over the years. Details on MSW management in Malaysia and the project area are presented in Annex 1 of this report.

5. To solve the shortages of land to accommodate landfills, alternative waste disposal schemes such as waste-to-energy are being demonstrated in Malaysia. However, aerobic decomposition of the organic portion of MSW into reusable compost has not been commercially used in this country.

2. Rationale for Bank Involvement 6. The World Bank's overall mission of reducing poverty and promoting longer-term sustainable development is now inextricably linked to the effects of climate change and efforts to manage these effects. The potential impacts of climate change jeopardize many of the development gains of recent decades. Moreover, billions of dollars in additional investments are required to mitigate and adapt to the impacts of climate change.

Prior to the formation of Malaysia on September 16, 1963, a 20-point agreement was made between the State of Sabah (then ) with what would be the Federal Government of Malaysia. This agreement was written for the main purpose of safeguarding the interests, rights, and the autonomy of the people of Sabah upon entering the Federation of Malaysia. This agreement provides privileges to the State of Sabah in such areas as land and forest management and local administration. The MSW generation rate increases to 1.5-1.8 kg/person/day in urban areas. In addition, the operation and maintenance of a few large landfills are contracted to private companies by local authorities for sizeable concession periods (15-25 years).

2 7. For decades, the World Bank has been supporting client countries to address their environmental challenges and has been at the forefront of activities to reduce GHGs and mitigate effects of climate change. These activities are spread across a wide spectrum of interventions including projects in urban, energy, transport and forestry sectors as well as Analytical and Advisory Activities (AAA). Client countries also benefit from global environmental programs administered by the World Bank such as the Global Environment Facility (GEF) and carbon revenues through the Carbon Finance program.

8. Beginning with the establishment of the Prototype Carbon Fund (PCF) in 1999 as a pilot program to combat climate change through public-private partnership, the World Bank’s Carbon Finance program has developed a number of carbon funds to support a diverse portfolio of projects that reduce GHG emissions. In March 2007, the World Bank, in cooperation with the European Investment Bank (EIB), announced establishment of the trust fund “Carbon Fund for Europe” (CFE) to help European countries meet their commitments to the Kyoto Protocol and the European Union’s Emissions Trading Scheme (EU ETS). The CFE, which is directed towards the European Union Member States and the European private sector, purchases GHG ERs through the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation (JI) from climate-friendly investment projects from either World Bank’s portfolio or self-standing projects. Under this CDM project, on behalf of CFE, the World Bank will purchase from the project sponsor (a private company in Malaysia) the ER credits associated with the avoidance of methane gas emissions from MSW landfilling by MSW composting.

9. This project is consistent with the Bank’s strategy for middle-income countries (MIC),4 which supports global programs such as the GHG emission reduction initiatives under the Kyoto Protocol. By generating carbon dioxide through aerobic decomposition of MSW during the composting process instead of generating methane (a much more potent GHG) through the anaerobic decomposition process at a landfill, this project will contribute to a reduction in the impact on climate change and is, therefore, eligible to receive carbon credits from CFE. With the prior experience of developing other carbon finance projects in East Asia and a similar composting project in Chile, the Bank is well positioned to facilitate the carbon finance transactions for the purchase of ERs from the Kota Kinabalu Composting Project.

10. As the only CDM project that the Bank has been engaged in this country, the ER transactions from this project are expected to assist Malaysia in improving its MSW management practices and providing economic benefits (in terms of recovery of recyclables and production of compost for the market), environmental benefits (at the local level), and social benefits (in terms of providing employment and reducing poverty at the local level). This project will also provide the Bank and Malaysia an opportunity to identify additional cooperation opportunities for sustainable management of MSW in the country. 11. This project is the first carbon finance municipal solid waste (MSW) composting project in Malaysia, which has environmental, economic, social and technological benefits.

“Strengthening the World Bank’s Engagement with IBRD Partner Countries,” The World Bank, Washington D.C., September 7,2006.

3 3. Higher Level Objectives to which the Project Contributes 12. In addition to help Malaysia gain access to and benefit from the carbon market, this project will support Malaysia to develop its capacity of addressing the objectives of international environmental conventions on climate change. Revenues from carbon finance will provide a means of leveraging new private and public investment into projects that reduce GHG emissions, thereby mitigating climate change. By doing so, this project will contribute towards achieving sustainable waste management in the City of Kota Kinabalu, as well as result in positive public health benefits and other outcomes for the city’s poor. 13. As the first commercial-scale MSW composting initiative in Malaysia, this project will also help Malaysia demonstrate a new waste management approach that can minimize the amount of MSW to be disposed of through recycling of metals, paperkardboards, and plastics and composting of organic portions of MSW. This demonstration will serve as an example to be replicated by many other urban areas in the country that are facing similar waste management challenges.

B. PROJECT DESCRIPTION

1. Lending Instrument 14. On behalf of CFE, the World Bank will purchase from the project sponsor MS Smart Recycling (M) Sdn. Bhd. (hereinafter Smart Recycling) the Certified Emission Reduction (CER) credits resulting from the project. ERs from this project are estimated to be 737,380 tons of COz-equivalent (C02-e) for the entire April 1, 2009-March 31, 2019 period or an average of 73,738 tons of C02-e annually. Carbon Fund for Europe (CFE) will purchase approximately 350,000 tons of C02-e of CERs from 2009 to 2014. Emissions Reduction Purchase Agreement (ERPA) payments will. be made periodically subject to verification by an independent Designated Operating Entity (DOE) accredited by the UNFCCC CDM Executive Board (EB) that was established under the Kyoto Protocol. CFE will coordinate verification and certification of ERs generated periodically by the project sponsor. The total amount of CERs under this project between the period of April 1, 2009-March 2014 is estimated to be approximately $US 5.0 million.

2. Project Background 15. The project site is located is located at the Madang Sanitary Landfill site, which is owned and operated by the . It is located near the town of Telipok, approximately 30 km northeast the City of Kota Kinabalu in the State of Sabah, Malaysia and about 2 km inland from the nearest coastline to the .6 A map of the project site is presented in Annex 9.

DOE has two functions: (1) to validate and subsequently request registration of a proposed CDM project activity; and (2) to verify emission reduction of a registered CDM project, to certify it as appropriate, and to request the UNFCCC’s CDM Executive Board to issue CERs. See Annex 9 of this PAD for a map of the project site and layout of the planned sortingkomposting facility.

4 16. The Kayu Madang Sanitary Landfill was commissioned in September 1977 as a sanitary landfill to receive MSW from residential, institutional, commercial, and industrial (non- hazardous) areas of the City of Kota Kinabalu as well as three nearby districts of , and . The overall size of the entire landfill property is 115 acres, whereas the first cell within this landfill covers an area of 22 acres to receive approximately 1.55 million m3 of waste. As this cell is planned to close by end 2010, a second cell is currently under construction. This new cell, which covers a land area of approximately 12 acres and has a capacity to hold 1 million m3 of waste, is expected to serve 15 years, and this will easily accommodate disposal of rejects from the subject project. The treated leachate from the landfill is out of compliance with the national discharge requirements, and the groundwater wells are non-functional as a result of vandalism. As the permit for the landfill’s operation expired in 2005 and as the original design of the landfill has been modified through construction of a second cell, the (Federal) Department of Environment, Sabah is expecting a new Environmental Impact Assessment (EIA) for the landfill from the City Hall.

17. Approximately 20 scavengers are reported to be working at the Kayu Madang Sanitary Landfill under poor hygienic conditions (e.g. without use of any personal protection equipment). The City Hall has provided 18 housing units for landfill workers and their families within the landfill site. These housing units are located about 150 meters from the nearest point of the active landfill area and about 100 meters from the sorting plant. Only 11 units are occupied by the staff. There are four villages located within 0.5 to 1.5 km distance from the landfill site. The total population of these villages is about 500.

Project Sponsor - Smart Recycling 18. The project sponsor MS Smart Recycling (M) Sdn. Bhd. (hereinafter Smart Recycling) was incorporated on June 16,2003, as a private Malaysian company to build and operate the 500 tonshour capacity sorting and composting plant at the Kayu Madang Sanitary Landfill site in Telipok, Sabah. Besides sorting and composting operations, Smart Recycling is engaged in trading of recyclable materials. Smart Recycling has a business association with SPM Holding Bhd., the largest waste recycler in Malaysia, in that a director of SPM Holding is an investor in Smart Recycling and that all recyclables recovered from sorting operations or purchased from the local market are sold to one of the following subsidiaries of SPM Holding:

SPM Metal Recycling Sdn. Bhd. specializing in recycling and processing of ferrous and non-ferrous metals; SPM Plastic Recycling Sdn. Bhd. specializing in recycling and processing of plastics; SPM Cable Recycling Sdn. Bhd. specializing in recycling and processing of cables and wires; 0 SPM Paper Recycling Sdn. Bhd. specializing in recycling and processing of paper.

19. On December 3, 2004, the Kota Kinabalu City Hall authorized Smart Recycling to set up a “municipal solid waste plant complete with tire recycling facility at the Kayu Madang Sanitary Landfill site”. On November 16, 2005, the Kota Kinabalu City Hall approved the technology provider’s Engineering Tasks Group (ENTAG) proposal for the sorting and composting plant. In April 2006, the sorting plant was commissioned. On August 1, 2006, Smart Recycling and

5 ENTAG signed a cooperative agreement for the subject composting plant. Accordingly, Smart Recycling will bear all costs of the project except for the operation of the composting plant, whereas ENTAG will carry out the operating, technical supervision and training of the Smart Recycling personnel at the composting plant, and promotion and marketing of the compost inside and outside of Malaysia. The parties also agreed to share the operating cost of the composting plant at a ratio to be decided at a later date and the profit (set as the difference between the selling price of the compost and operating cost) equally. On August 14, 2006, Smart Recycling obtained an operating license for the sorting and composting plant from the Ministry of International Trade and Industry of Malaysia. On June 20, 2007, the Kota Kinabalu City Hall authorized Smart Recycling to enter into carbon finance negotiations under this CDM project. The same communication informed Smart Recycling that there would be no tipping fees for MSW delivered to Smart Recycling’s sorting and composting plant.7 On May 5, 2008, Smart Recycling submitted the environmental impact assessment (EIA) report for its sorting and composting plant to the (Federal) Department of Environment, Sabah for approval.

20. Currently, Smart Recycling has 99 employees, of which 10 employees have administrative responsibilities and 89 are workers at the sorting plant. The current labor force will be expanded by 19 employees with the commissioning of the composting plant, which is expected to be April 2009.

Technology Provider - ENTAG and Egyptian Company for Solid Waste Utilization (ECARU) 21. The delivery, erection, commissioning of the equipment and the design of the civil works of the MSW sorting and composting plant is provided by Engineering Tasks Group (ENTAG) and its associate Egyptian Company for Solid Waste Utilization (ECARU). ENTAG is a private Egyptian firm established in 1992, specializing in the design and supply of solid waste treatment systems. ECARU was established in 1997 to produce organic fertilizers, and provide services for the operation and maintenance of recycling facilities and landfills.

22. ENTAG and ECARU support nearly 50 full-time staff members, including chemical engineers specialized in treatment processes for municipal, industrial, and agricultural wastes; and other branches of engineers specialized in mechanical, electrical, and civil engineering design. ENTAG has built over 33 waste recovery facilities in Egypt and 7 waste recovery facilities in Libya, and ECARU has provided services as construction oversight contractor for some of these facilities and as operator for some other facilities. As of August 31, 2006, ECARU had total assets of US$ 1 million, total revenues of US$ 1.9 million, and a net profit of US$0.52 million.

23. On March 5, 2005, Smart Recycling signed a Memorandum of Understanding (MoU) with ENTAG for constructing a 500 tons/day sorting and composting facility, using the windrow composting technology. In a subsequent agreement dated August 1, 2006, ENTAG has also agreed to provide operating, technical supervision and training of the Smart Recycling personnel at the composting plant, and promotion and marketing of the compost.

Therefore, Smart Recycling’s revenues will be derived from the sale of recyclables and compost and emission reductions (ER) only.

6 24. The construction of the sorting plant started on July 26, 2005 and was completed on April 15, 2006. The sorting plant has been in operation since May 2007 and the composting plant is expected to be constructed and operational in April 2009.

Approvals by Relevant Authorities 25. On May 31, 2007, the World Bank and the project sponsor Smart Recycling signed a Letter of Intent (LOI) for the Kota Kinabalu Composting Project. In the LOI, Smart Recycling agreed to sell ERs generated from the project to the Carbon Finance Unit (CFU) of the World Bank on behalf of Carbon Fund for Europe (CFE). The LO1 also includes an umbrella agreement of purchasing up to 3 million tons of C02-e from Smart Recycling.

26. On June 20, 2007, the Kota Kinabalu City Hall informed Smart Recycling that Smart Recycling is entitled to negotiate and enter into a contract for the selling of credits obtained from emission reductions (ERs) associated with CDM project with CFU of the World Bank and to receive all the corresponding revenues derived from the composting activities.

27. On October 27 2007, the Kota Kinabalu City Hall acknowledged Smart Recycling’s October 7, 2007 offer for providing, free of charge, the total quantity of the compost from the subject project, which the City Hall may require for the first year. In addition, the City Hall expressed its intention to purchase the compost at an agreeable price for the subsequent years, and to assist Smart Recycling in promoting use of the compost.

28. CFU of the World Bank has prepared the final Project Design Document (PDD), which is submitted through the Project Sponsor to Malaysia’s Designated National Authority (DNA) for review and approval.* Malaysia’s DNA is expected to confirm its commitment to the project in September 2008 through a Letter of Approval (LOA), indicating its approval of this project being registered by the UNFCCC CDMExecutive Board (EB).

3. Project Development Objective and Key Indicators

29. The project objective is to avoid methane (a greenhouse gas) emissions from the Kayu Madang Sanitary Landfill in Telipok, Malaysia by diverting the MSW to a sorting and composting plant, which will recover the recyclable portion of the waste and convert the highly biodegradable portion of the waste into marketable compost. Aerobic decomposition of the organic portion of MSW into reusable compost generates carbon dioxide (C02) instead of methane (CH4) that would have been generated as a result of the anaerobic decomposition of MSW disposed in a landfill.’

30. The project objective will be facilitated through a Carbon Finance transaction between the World Bank and the project sponsor. The key indicators will be: (i)the amount of compost produced (tonslyear), and the CER credits created and traded annually (tons of CO2-e).

DNA is a body appointed by the host country to oversee implementation of CDM within itsjurisdiction. In Malaysia, the DNA is located within the Ministry of Natural Resources and Environment. The of methane (CH4) is 21 times to that of carbon dioxide (COz).

7 3 1. The project will be the first commercial-scale municipal solid waste composting initiative in Malaysia. The project will contribute to sustainable development in Malaysia through the following environmental, economical, social, and technological benefits:

0 Environmental benefits. The project will be beneficial to the global environment as it avoids methane generation at the KayMadang Sanitary Landfill. The estimated annual Greenhouse Gas (GHG) emission reduction through this project is about 77,383 tons of CO2-e. The project will be also beneficial to the local environment. As the project reduces the disposal rate of MSW at the landfill by 62%, the life of the landfill will be extended. In addition, as highly biodegradable and recyclable materials will be recovered, the leachate generation will be reduced and the quality of the treated leachate discharge will be improved. In addition, the risk of fire at the landfill will be reduced. The environmental benefits of this project are in line with the environmental strategy under the 9th Malaysian Plan (2006-2010).

0 Economic benefits. The project will benefit the economy by recovering and recycling various grades of plastic materials, paper, and non-ferrous and ferrous metals; and producing compost as a by-product, which is to be marketed for use in areas where organic soil amendments are needed. As the first commercial-scale MSW composting initiative in Malaysia, this project has a good potential for setting a model to address the growing MSW problem for the rest of the country. As the landfill will receive only a fraction of the MSW, the Kota Kinabalu City Hall is expected to have savings in waste disposal costs.

0 Social benefits. The sorting plant is currently employing 89 workers, approximately 30 of which are former waste pickers at the Kayu Madang Sanitary Landfill. The current labor force is expected to expand by 19 employees with the commissioning of the composting plant, some of which are expected to be the current waste pickers at this landfill. The project will improve skills and working conditions of these local workers as Smart Recycling is required to main at least 50% of its labor force from the residents of the State of Sabah. Through implementation of the Memorandum of Understanding signed between the Ministry of Housing and Local Government and Smart Recycling, the already-established three full-time and eight part-time buy-back centers allow recovery of recyclables and source of income for the local residents. The project will also provide an impetus to Kota Kinabalu City Hall’s efforts in creating public awareness in waste recycling and composting.

0 Technological benefits. This is the first project in Malaysia that introduces MSW recycling and composting technology at the commercial scale to address the increasing problem of MSW management in the country. Although industrial waste recycling is practiced in Malaysia, this project will introduce integrated MSW sorting to recover recyclable materials (particularly various grades of plastics and metals) and composting processes to recover highly biodegradable materials as compost. The windrow technology will provide for relatively low-cost and effective composting.

8 4. Project Components 32. This CDM project consists of two components: (a) the construction and operation of a sorting and composting facility that will result in ERs; and (b) a carbon finance transaction that will facilitate the purchase of the ERs.

Component A: Construction and Operation of the Sorting and Composting Facility

33. This proposed project involves construction of a 500 tons/day capacity sorting and composting plant in Telipok, Sabah State of Malaysia. This plant will process MSW" from the City of Kota Kinabalu and three neighboring districts (Kota Belud, Tuaran, and Penampang). Kota Kinabalu City Hall has agreed to provide Smart Recycling approximately 18 acres of land to set up and operate this plant within the Kayu Madang Sanitary Landfill site. Approximately 3.2 acres were designated for the sorting plant and administrative buildings, and the remaining area was conceived for the composting plant. The sorting plant started operation in April 2006, and the composting plant is expected to be constructed in 2008 and operational by April 2009. Summary information on the sorting and composting plant is presented below and details are given in Annex 2. This project component is to be financed entirely by the project sponsor.

34. Sorting Plant. The sorting plant includes a MSW reception area, storage areas, and a sorting area that houses three parallel process lines with conveyors, screens and magnetic separators. To date, the sorting plant has been receiving MSW only from residential areas." Although MSW is delivered every day, the sorting plant has been operating six days a week between 7 am and 6 pm, and shut down for maintenance on Sundays. The sorting plant processed an average of 143 tons/day of MSW in FY06, 168 tons/year in FY07, and 218 tons/day in FY08.12 Recyclables recovered at the sorting plant made up 3.13% of the received MSW in FY06,4.51% in FY07 and 4.65% in FY08.

35. The sorting plant has been operating at much below its design capacity (500 tonslday) because the operation has been limited by the high cost of electricity from an on-site generator. As connection to the power grid is to be made by the commissioning of the composting plant13 (expected by April 2009), the sorting plant will be able to operate two shifts a day to reach its design capacity. In addition to MSW from residential areas, the sorting plant will receive MSW from commercial and institutional areas.

36. All incoming trucks are checked for their contents to ensure that no hazardous wastes (e.g. hospital, industrial and chemical wastes) are included. The accepted trucks are then

loMSW originates from residential, commercial, institutional and industrial sources. No manure or sewage sludge is mixed with MSW. Collection and transportation of MSW to the project site is provided by the City Hall. 11 Currently, yard wastes, food wastes (from commercial facilities), and construction debris are directly disposed of at the Kayu Madang Sanitary Landfill. 12 In FY06 (April 2006 through end of June 2006), the sorting plant operated only 75 days. In FY07 (July 2006 through end of June 30,2007), the sorting plant operated 300 dayslyear. The data for FY07 is for the period of July 1, 2007-March 31,2008, corresponding to 225 days of sorting plant operation. l3Permit for the connection to the grid has been granted by the Malaysian authorities.

9 weighed before the wastes are dumped on the tipping floor of the receiving area of the sorting plant. The design of the sorting plant is based on three parallel lines. MSW from the waste receiving are is placed on a conveyor for manual removal of large items (e.g. big cardboards, textiles, tires, boulders, batteries). Fine organic materials (less than 3 cm in size) are then separated from the remainder of the MSW by a trommel screen. At different stages of the sorting line, low density plastic, high density plastic, pet bottles, paper, textiles, glass, ferrous materials, and non-ferrous metals (e.g. aluminum cans) are removed as recyclable materials. The recyclable components are collected, baled, and stored before marketing. The waste that remains on the sorting conveyor is screened at 10 cm by a trommel screen to separate the coarse organic materials, which are currently sent to the landfill. However, after commissioning of the composting plant, the coarse organic materials will be transferred by truck to the composting plant. The oversize from the trommel screen is collected by a conveyor belt for manual removal of any remaining recyclables and the remaining materials (rejects) are transported to the landfill.

37. Composting Plant. The composting plant will adopt the windrow technology to produce marketable compost. The feed to the composting plant will include the yard waste, the commercial food waste, and the market waste (which are currently sent directly to the Kayu Madang Sanitary Landfill) as well as the highly biodegradable organic materials from the sorting plant. The composting site will be on an appropriately designed, impermeable surface to prevent wastewatedleachate penetration into the groundwater.

38. Given the high nitrogen content materials (e.g. yard waste, garden waste) in the composting feed, saw dust or wood - after being milled by a wood chipper - will be added as a carbon source to maintain the desired C: N ratio. The highly biodegradable organic waste will then be placed into windrows. Each windrow will have a height of 1.5 meters, a width of 3.6 meters, and a length of approximately 100 meters. A 2-meter space will be left between the adjacent windrows to allow passage of the windrow turning machine. The air permeable geotextile sheets will be used to cover the windrows during composting. This geotextile cover will prevent contamination of the surface runoff from by the in-process compost. There will be adequate aboveground drainage and stormwater retention to prevent heavy downpours washing nutrient-rich leachate into the surface water.

39. As composting progresses the mass and volume of material reduce and the windrows get smaller. This is because up to 50% of the mass is lost as carbon dioxide and water vapor and the bulk density increases from typically 550 kg/m3 to 1,000 kg/m3. When this occurs, two windrows are combined together into one windrow. As the temperature of the windrows decreases, the rate of decomposition also slows down. The windrows will have to be turned to reactivate the decomposition process. When the temperature rise is not more 5°C above the ambient temperature even after turning, it is deemed that the active composting is complete. The turning process typically lasts for a period of about 30 days for fermentation.

40. After the fermentation period, the windrows will be consolidated using loaders for maturation for about 30 days. During the maturation period, the windrows will be covered by air- permeable geotextile sheets to prevent contamination of the surface runoff by the in-process compost. The site will be on an appropriately designed, impermeable surface to prevent leachate

10 penetration into the groundwater. Drainagehtormwater management measures will be used to prevent surface water/groundwater contamination.

41. After the maturation period, skid steer loaders will feed the compost to a screen to separate the compost that will be either sent to packaging in 25-kg bags or transferred directly to storage as a bulk product. The 25-kg packages will be placed on pallets and then transferred to storage for retail sale. Some of the compost from screening will be added back to a fresh windrow as it works as an initiatodactivator for starting the composting process. Rejects removed from the compost will be transferred to the landfill.

42. Based on 500 tons/day MSW feed to the sorting and composting plant, it is expected that the composting plant will be able to process an average of approximately 300 tons/day of feed materials to produce approximately 150 tons/day (45,000 tondyear) of compost.

Component B: Carbon Finance Transaction

43. The World Bank-managed CFE will finance the purchase of CER credits resulting from avoided landfill gas production at the Kayu Madang Sanitary Landfill. The purchase will be a performance-based contract under which payments are triggered by successful verification of the reduction of methane emissions by an independent, accredited international entity called the “Designated Operating Entity” (DOE), under the rules of the Kyoto Protocol. The quantity of CERs 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 sponsor during ERPA negotiations. The specific steps that will be followed are given below.

The draft ERPA will be negotiated between the Bank’s CFU and the project sponsor after the project documents are prepared, reviewed and approved by the Bank’s CFU management. The ERPA will then be signed by the Bank’s Country Director on behalf of the Sustainable Development Network (SDN) Vice President.

0 When all the ERPA effectiveness conditions are met, a special trust fund will be activated by the Bank’s CFU for payments to the project sponsor.

During the ERPA duration, DOE will verify the emission reductions generated by the project, and will prepare and submit to UNFCCC a verification report requesting issuance of certified emission reductions (CERs) from this project.

Based on DOE’S report, the UNFCCC Secretariat will issue the CERs in terms of tons of C02-e emissions reduced during this period, and notify the CFU, which will handle the CER forwarding to the CFE participants.

Based on UNFCCC’s notification on issuance of CERs (tons of C02-e emissions reduced) for the period and unit price of CER agreed under ERPA, the CFU will make the CER payment to the project sponsor using the funds allocated in the special trust fund. To process the payment, the project sponsor needs to submit a Transfer Form (payment request) to the CFU and the Deal Manager needs to provide the necessary

11 documentation such as the payment calculation sheet and cost deduction evidence sheet. The payment to the project sponsor will be completed upon review and approval of the Transfer Form and relevant payment documentation.

5. Lessons Learned and Reflected in the Project Design

44. The preparation of this project has benefited from a similar Bank composting project in Chile (P096469) and the composting guidelines prepared by the Bank in 2000.’4 The project design has paid special attention to maintaining good community relations through project design and operation. The project design includes establishment of a buffer zone between the plant areas and the City Hall’s staff quarters at the landfill site and building of a barrier (e.g. thick vegetation) around the staff quarters. In addition, the composting plant will be operated under optimal conditions (based on testing of operating parameters) to minimize generation of foul odors15 that would be objectionable by the nearby community, especially the residents of the City Hall’s staff quarters. In line with the proposed composting guidelines, the design of this project has also paid special attention to: (i)the removal of recyclables and rejects from the biodegradable portion of MSW during the sorting process, and (ii)the use of strict process and product quality monitoring during the composting process. A study will be undertaken to assess the potential wedmarkets (e.g. horticulture, agriculture, mine reclamation, landfill cover) and prices of the compost in the project area.

6. Alternatives Considered and Reasons for Rejection

45. The proposed project concept of sorting and composting of MSW was selected by the Kota Kinabalu City Hall. The main factors for selecting it were: (i)the extension of the lifespan of the Kayu Madang Sanitary Landfill; (ii)potential savings in the landfilling cost by the City Hall; (iii)potential for significant reduction in the generation and treatment requirements of the leachate at the landfi1ll6; (iv) the reduced risk of fire at the landfill; (v) the contribution to sustainable development in terms of recovery and marketing of recyclable products (compost as well as various grades of plastics, ferrous and non-ferrous metals, and paper); (vi) creation of better local employment opportunities”; and (vii) the potential for significant GHG emission reductions from the landfill that would bring in ER revenues and attract private sector participation. In selecting this project concept, the following project alternatives were also considered. For any of these alternatives, a landfill would be required in order to receive, at a minimum, inert materials from the MSW or ash (in case of MSW incineration).

Alternative 1- Business-as-usual with all MSW from the City of Kota Kinabalu being

l4Hoornweg, Daniel et al., Cornposting and its Amlicability in Developing Countries, Working Paper Series No. 8, World Bank, March 2000 l5 Generation of foul odors is a sign of methane production under anaerobic conditions. l6In addition, preventiodcontrol measures for the leachate/stormwater will be implemented at the sorting and cornposting plant. Please see the discussion on “wastewater management” under Section E (Potential safeguards issues). 17 This project has created about 100 jobs at the sorting plant and will create additional jobs at the composting plant.

12 disposed at the Kavu Madann Sanitary Landfill. This alternative was rejected as it does not prolong the lifespan of the landfill nor does it address the leachate generation and treatment problems or risk of fire at the landfill.** In addition, this alternative results in methane (a potent GHG) emissions to the atmosphere at an annual estimated rate of about 81,974 tons of CO2-e.

Alternative 2 - Capturing of methane from the Kavu Madang Sanitary Landfill to achieve GHG emission reductions. This alternative -although it reduces methane emissions from the Kayu Madang Sanitary Landfill and results in ER revenues- was rejected because it does not prolong the lifespan of the landfill and it is not very environmentally friendly as approximately 50 percent of the methane generated within the landfill would still be released to the atmosphere. l9 Moreover, flaring is not financially the most attractive option (i.e. it has lower IRR compared to composting). As energy prices in Malaysia are low, electricity generation from landfill gas is not either a profitable business

Alternative 3 - Community-based compostinn initiatives. This alternative was rejected as it is institutionally and technically challenging to implement in urban communities. Although the Kota Kinabalu City Hall has promoted communal as well as back-yard composting, the result to date has been limited to communal composting of garden wastes at only one community. Acceptance of the composting concept by urban communities has been a major challenge. Lack of availability of land for community composting sites represents another challenge. In addition, this alternative may also discourage private sector participation in MSW management.

0 Alternative 4 - Combustion of MSW. This alternative was rejected as: (i)open air burning of MSW is prohibited in Malaysia; and (ii)MSW incineration is not a financially viable option (it requires very high capital investment and operating costs).20

46. The options of traditional manual sorting versus mechanical sorting were considered for the sorting plant. A fully mechanized sorting plant is attractive in countries where labor cost is high. However, the low labor cost in Malaysia favors a sorting facility design based on manual separation, although there is also need for mechanical processing using such equipment as trommel screens, magnetic separators, and mechanical conveyors. Therefore, the project sponsor has emphasized a process design that favored manual separation, but with the use of mechanical separation in critical areas.

47. For the composting facility, windrow, static pile, and in-vessel technologies were considered. The windrow technology was selected as it is associated with low capital investment

l8However, the lifespan of the landfill can be extended at additional costs through waste compaction andlor leachate recirculation. l9That is, the collection efficiency of landfill methane for flaring would be approximately 50 percent. *' MSW that contains a high percentage of food waste with elevated levels of moisture (60-70%) cannot sustain combustion. A supplemental fuel would be needed to dry such a high moisture waste to less than 50% moisture to burn. Incineration of a high moisture content waste also tends to result in incomplete combustion products which require costly treatment before discharge to the atmosphere.

13 and operating costs, and it is ideally suited for warm and humid climates like in Malaysia. In addition, the composting technology is relatively standard despite some variations in the organic fraction of the solid waste feed, environmental conditions, and operating parameters.

C. IMPLEMENTATION 1. Institutional and Implementation Arrangements 48. This CDM project will be implemented based on the agreement between Smart Recycling and the Kota Kinabalu City Hall signed on December 3, 2004. Under the terms of this agreement, the City Hall will be responsible for providing the land for this project at its Kay Madang Sanitary Landfill, collecting and transporting MSW and unloading it at the premises of the sorting and composting plant; and purchasing the compost from this plant at a price agreeable by the City Hall. The City Hall also provides exclusive rights to Smart Recycling for sorting and composting operations during the period of this agreement. In return, Smart Recycling is required to pay a monthly rental fee of RM 2,000 (renewal in 5 years) to the City Hall for the occupied plant site, to set up and operate the sorting and composting plant at its own cost, to take ownership of the recyclable materials (and the associated revenues), and to be responsible for returning the plant rejects to the Kayu Madang Sanitary Landfill. The agreement also requires Smart Recycling to have at least 50 percent of the plant’s labor force from the local Sabah residents.

49. Smart Recycling will own the ER credits from the composting activities. The fully operational composting project and subsequent ERs will be the basis for an ERPA to be signed between Smart Recycling and the World Bank, the latter serving as the trustee for CFE. CFE will purchase CER credits resulting from avoided methane generation from the landfill based on a performance-based contract under which payments are triggered by successful verification of the reduction of methane emissions by an independent, accredited DOE under the rules of the Kyoto Protocol and issuance of CER by the Executive Board. 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 Smart Recycling. Detailed information on implementation arrangements is presented in Annex 3.

50. The ERPA and Monitoring Plan will also define other delivery conditions for ERs to be purchased by CFE, as well as monitoring and verification systems and methods. Verification and certification of ERs generated annually by the project sponsor will be coordinated by CFE, which will ultimately purchase the ERs. The project sponsor will periodically monitor emissions and other relevant parameters, and organize periodic auditing of the project during implementation.

2. Monitoring and Evaluation of Outcomes and Results 5 1. Outcomes of the project will be monitored and evaluated. Once the project is validated by the Designated Operational Entity (DOE) and registered with the CDM Executive Board as a CDM project, the CER credits created and traded annually will be monitored, verified, and certified so that the project sponsor can sell the ER credits to CFE. CFE will retain the services of a fully independent DOE accredited by the CDM Executive Board to verify the ERs and

14 create a verification report to be submitted to the CDM Executive Board for ER certification. The verifier will determine whether the project complies with the design and implementation specifications and meets the requirements listed in the Monitoring Plan. Data requirements for the Monitoring Plan have been clearly articulated in the PDD that is submitted to the CDM Executive Board. The necessary data will be monitored closely during the project commissioning phase.

52. During the entire ERPA period, the World Bank will also monitor the sponsor’s compliance with the requirements of the Environment Management Plan (EMP), through review of the project sponsor’s periodic progress reports and visits to the project site.

3. Sustainability

53. The success and sustainability of this project depend on the incoming MSW quality that would affect the revenues from the sorted recyclables as well as the compost quality, the local market demand, the willingness to pay for the various recyclables (from the sorting plant) and the compost, and the carbon finance revenues for the GHG ERs. To ensure commercial acceptance of the MSW-based compost, Smart Recycling has already engaged services of UMS Link (a commercial arm of the University of Malaysia, Sabah) to undertake a detailed compost marketing study. The study will assess the potential usedmarkets (e.g. horticulture, agriculture, mine reclamation, landfill cover) and prices of the compost.

54. Considerable support received from the City of Kota Kinabalu will also contribute to the sustainability of this project. The City Hall has agreed to purchase from Smart Recycling: (a) all the compost produced during the first year of the composting plant operation at no cost, and (b) at a price agreeable by the City Hall for the subsequent years. The City Hall has also confirmed that it will assist Smart Recycling in promoting use of compost in the Kota Kinabalu area.

55. With the technical support provided by ECARU, Smart Recycling will be carefully monitoring its composting practices to minimize presence of undesirable compounds that may inhibit plant growth and result in an inferior compost product.

56. As the first commercial MSW-based composting operation in Malaysia, this project can be viewed as a vehicle to show the technical feasibility of integrated MSW sorting and composting for applicability in other parts of Malaysia, which will be required to implement the newly adopted Solid Waste Management Act. Given the financial viability of this project even without any tipping fees and that such tipping fees are very common in other locations of Malaysia21, the success of replication of this project in Malaysia is promising.

’’ The landfill tipping fees range from FW 25-45/ton of MSW in mainland Malaysia and RM 60/ton of MSW in the State of Sarawak.

15 4. Critical Risks and Possible Controversial Aspects

57. The overall risk that the project development objective might not be achieved is low-to- modest. Political risk. Since Malaysia is a politically stable country, the political risk of the country is low;

Economic risk. Malaysia has been experiencing robust economic growth. From 1975 to 2004, the GDP grew by 6.4% per annum and the GDP per capita grew from US$ 1,130 to US$9,630. During this period, inflation (in terms of consumer prices) averaged 3.6% per annum. The Malaysian economy has rebounded as a result of government policies such as fiscal stimulus packages, healthy foreign exchange reserves, low inflation, and low external debt. Therefore, the economic risk of the country is low;

Market risk. The recycling market in Malaysia is expanding. The MSW generation rate averages about 0.8 kg/person/day of MSW, but increases to 1.5-1.8 kg/person/day in urban areas. In 2006, a study conducted by Japan International Cooperation Agency (JICA) revealed that the national recycling rate (of the recyclable waste) was only 4.5%, which is still far below the 22% target that Malaysia intends to achieve in year 2020;

The recyclable wastes recovered from sorting operations are expected to generate the highest profits from Smart Recycling operation, and this portion of the MSW has been nearly constant at 4.6% for the last 21 months.22 These recyclables are sold to one of subsidiaries of SPM Holding, which is the largest recycler in Malaysia.

There is market risk for the MSW-based compost as this product is not commercially available in Malaysia. However, Smart Recycling has taken the necessary measures to mitigate these risks. Smart Recycling has engaged services of a reputable research institution (UMS Link) to undertake compost marketing studies in the State of Sabah. In addition, the Kota Kinabalu City Hall has agreed to receive the compost from Smart Recycling’s composting plant at no cost for the first 12 months and, subsequently, at an agreeable price by the City Hall. The City Hall is committed to assist Smart Recycling for the promotion of MSW-based compost in the Kota Kinabalu area. ECARU has also agreed with Smart Recycling to provide technical assistance for the production of good quality compost and assist Smart Recycling in compost marketing.

ComDanv risk. Smart Recycling is committed to this project as evidenced through investment and successful operation of its sorting plant, and purchase of machinery for its composting plant. In addition, the technology provider ECARU has agreed with Smart Recycling to transfer technical capacity in management and operation of the composting plant and marketing of the compost product. Smart Recycling has a solid business relationship with SPM Holding Group (which is the largest recycler in Malaysia), particularly in terms of sales of recyclables (recovered from sorting plant operations and

22 This percentage is lower than the national average because glass and newspaper are generally segregated before the MSW is received at the sorting plant.

16 purchased from trading operations). Nevertheless, Smart Recycling has a risky financial position with possible liquidity problem and high financial burden with high D/E ratio (6.6: 1). The company was running with a loss in FYs 2004, 2005 and 2006 (ending June 30th). However, the power connection to the grid will allow the sorting and composting plants to operate at full capacities, resulting in increased revenues from the sale of recyclables and compost. In addition, the power consumption cost will be reduced. This measure will largely contribute to the financial viability of this project (see para. 64).

Technolow risk. The windrow technology selected for composting of MSW is a commercially mature technology. This technology is simple, non-intensive, has a very low capital cost, and is commonly used by farmers, municipalities, and waste processing corporations. As the technology provider, ECARU is a reputable company, and has constructed five similar windrow composting facilities in Egypt and Libya with capacities ranging from 70 to 2,500 tondday. Successful operation of these facilities ensures that there is low technical risk for this project. ECARU will train Smart Recycling personnel on how to operate the composting plant and provide additional technical support. The smooth operation of the sorting plant since its startup in April 2006 also shows a low technical risk of this project.

Table 1: Summary of Risks and Mitigation Measures

relationship with SPM Holding (the largest recycler in Malaysia) for sale of recyclables. The sorting plant has been operating successfully. Machinery for the composting plant has already been purchased. The financial position of the company to date has not been strong, although is expected to improve with the commissioning of the cornposting plant and connection to the power grid (which results in reduced power consumption and increased revenues from the sale of recyclables and the compost). Technology risk Windrow technology is a commercially mature composting technology. The technology provider ECARU is a reputable company that has constructed five similar windrow composting facilities in Egypt and Libya. ECARU has agreed Lwith Smart Recycling to provide technical support for the composting operations. Overall risk rating M The overall risk is based on market and company risks. However, the project through its ERPA provisions, financial management, environment and social due diligence work, and mitigation measures provides an acceptable risk management I plan. Risk Ratings: H (High), M (Modest), L (low risk)

17 D. APPRAISAL SUMMARY

1. Economic and Financial Analysis

58. The financial appraisal of the project was conducted for the period starting FY04 (since the establishment of Smart Recycling on June 16, 2006) and ending FY19, to cover the flow of carbon finance ER revenues to Smart Recycling. This period encompasses the period since the establishment of Smart Recycling on June 16, 2006, the construction of the sorting plant in FY05, operation of the sorting plant since April 2006, and construction of the composting plant during the last 9 months of FY08, and operation of the composting plant afterwards until June 30, 2019. This period includes the anticipated 10-year flow of carbon finance ER revenues between April 1,2009 and June 30,2019.

59. For the period of FY04-FY07, the financial data from Smart Recycling was used, with some minor modifications in the areas of closing stock and depreciation. For the subsequent periods, projections were made based on inputs from Smart Recycling officials. The financial analysis covered all three operations of Smart Recycling: (i)recycling trading, (ii)sorting and sale of recyclables, and (iii)production and sale of the compost. With the start of the composting plant operations, the sorting plant was assumed to operate at full capacity (500 tons/day of MSW input). The results show that at a discount rate of lo%, the Net Present Value (NPV) of the project is RM 12.74 million (US$ 3.69 million) without the ER revenues, and RM 23.63 (US$ 6.85) million with the ER revenues. Sensitivity analyses for NPV calculations were conducted at discount rates of 8% and 13%, and found to be positive values in all cases (Tables 2 and 3). The internal rate of return Internal Rate of Return (IRR) of the project was found to be 12.5% without the ER revenues and 14.7% with the ER revenues (Tables 2 and 3). As the IRR is higher than the maximum interest rate (8%) supposed to be received from depositing money with banks, the project is deemed to be feasible. Details on the financial analysis of the project are presented in Annex 4.

Table 2: Project Financial Assessment - without CER Revenues Amoualt (RM million) Trading 1 sorting I cornposting 1 TOTAL Capital Investment 24.45 7.07 3 1.52

Rev en ue s 86.50 171.53 20.57 278.60 Direct Operating Costs 42.88 49.72 8.07 100.67 G&A Costs 4.22 53.90 7.01 65.13 Total Operating Costs 47.10 103.62 15.08 165.80 IRR 12.5% NPV RM million at 8% discount rate 18.86 at 10% discount rate 12.74 at 13% discount rate 5.97

18 Table 3: Project Financial Assessment - with CER Revenues Amount (RM million) Trading I sorting 1 composting I TOTAL I Capital Investment I I 24.45 I 7.07 I 31.52 I

Revenues 86.50 17 1.53 55.45 313.51 Direct Operating Costs 42.88 49.72 8.07 100.67 G&A Costs 4.22 53.90 7.01 65.13 Total Operating Costs 47.10 103.62 15.08 165.80 IRR 14.8% NPV RM million at 8% discount rate 32.48 at 10% discount rate 23.63 at 13% discount rate 13.86

2. Fiduciary Aspects

60. A financial capacity assessment carried out for this proposed arrangement included a due diligence on the project sponsor and an assessment of its financial capacity. The assessment concluded that:

Currently, Smart Recycling generates its revenues from sale of recyclables: (i)recovered from MSW at its sorting plant, and (ii)purchased in the local market. All recyclables are sold to one of the subsidiary companies of SPM Holding Sdn. Bhd., which is the largest recycler in Malaysia. Smart Recycling’s revenues grew from nil in FY04 to RM 1.00 million (US$ 0.29 million) in FY05, RM 6.78 million (US$ 1.97 million) in 2006, and RM8.56 million (US$2.48 million) in 2007.23

Although there is no financial or legal link between Smart Recycling and SPM Holding, one of the SPM Holding’s directors is a major shareholder and director of Smart Recycling; and this establishes a business link between the two companies;

The registered capital of Smart Recycling is RM 3.0 million (equivalent to US$ 0.87 million). Major assets are plant and equipment, valued at about RM19.0 million as of June 30, 2007. These assets were financed at considerable amount of RM 18.18 million (US$ 5.2 million) from liabilities. The company’s D/E ratio is 6.6: 1, which is considered to be high. The financial situation of the company is at risk with possible potential of liquidity problem and high financial burden;

Smart Recycling was running losses from its operations in fiscal years (ending June 30th) 2004, 2005 and 2006. However, in 2007 SMART Recycling had a net profit of RM 154,775 (US$44,800). Although the company has been operating with high gross profit

23 The fiscal year (FY) is for the period starting on July lstand ending on June 30thof the subsequent year.

19 margins (50.4% in 2005, 60.3% in 2006, and 56.9% in 2007), it incurred losses in 2005 and 2006 due to high administrative costs. In year 2007, interest expenses, depreciation, and administrative salaries altogether contributed to 76% of the administrative costs. As the sorting plant has been operating below its designed capacity (e.g. 44% of capacity utilization during the April 2007-March 2008 period), the burden of administration costs on the company’s profitability has been considerable.

3. Technical Analysis

61. The design of the sorting facility is based on manual sorting, complemented with mechanical separation for critical process areas (e.g. separation of fine organic materials, separation of ferrous metals). Manual sorting allows low investment costs as well as low operating costs due to lower labor cost in Malaysia. Operator training requirement is minimal for manual sorting. The sorting facility has been operating smoothly since April 2006 on a 6- days/week basis and being subject to maintenance on Sundays.

62. For the composting facility, the windrow technology was selected as it is a well- established technology. The level of technology involved is fairly low and standard equipment can be used, allowing rapid operator familiarity with the process. In addition, it requires low investment and operating costs, and is ideally suited for warm and humid climates like in Malaysia.

63. The technology provider ECARU has rich experience in construction of similar windrow composting facilities with capacities ranging from 70 tons/day to 2,500 tons/day. Successful operation of these facilities ensures that there is low technical risk for this project. Under the current contract with Smart Recycling, ECARU will be responsible for designing, setting up, operational technical supervision, and Smart Recycling personnel training for the composting plant.

64. The main technical findings of the Bank’s appraisal mission were as follows:

Based on review of the sorting plant operational data since its commissioning in April 2006, the following results were obtained. The sorting plant processed an average of 143 tons/day of MSW in FY06, 168 tons/year in FY07, and 218 tons/day in FY08.24 Recyclables recovered at the sorting plant made up 3.13% of the received MSW in FY06, 4.51% in FY07 and 4.65% in FY08. This data was found to be inconsistent with the previously production data provided to the World Bank by Smart Recycling;

Smart Recycling has been operating its sorting plant only one shift a day because capacity is limited to electricity supplied by the currently available generator and investment in a second generator is cost prohibitive. This mode operation affects the project’s viability as it forces the sorting and composting plants to operate at much below

24 InFY06 (April 2006 through end of June 2006), the sorting plant operated only 75 days. In FY07 (July 2006 through end of June 30,2007), the sorting plant operated 300 daydyear. The data for FY07 is for the period of July 1, 2007-March 3 1, 2008, corresponding to 225 days of sorting plant operation.

20 their design capacities, resulting in lower expected revenues from the sale of recyclables and compost. However, as the company was recently granted a permit to connect to the grid, production at the sorting plant will be increased to two shifts a day, resulting in more revenues from the sale of recyclables and compost. In addition, the power consumption cost will be reduced. The project sponsor has contracted a consultant to engage into discussions with the power supplier and to design the power connection system. Construction will start after ERPA signing, with the connection to the power grid completed before the commissioning of the composting plant in April 2009. This measure will reduce the financial risk of the project.

The recyclables trading operation has been key for revenues generated to date by Smart Recycling. Smart Recycling operates three full-time and eight part-time buy-back centers for recyclables in the Kota Kinabalu area. Purchased recyclables are subject to minor processing (compaction, bailing) before resale to one of SPM Holding’s subsidiaries;

The City Hall will provide the appropriate land for the sorting and composting plant (estimated to be 18 acres) to Smart Recycling at the landfill site. The City Hall will be responsible for the delivery of MSW from the City of Kota Kinabalu and three nearby districts to the sorting plant, and Smart Recycling will be responsible for the transportation of the rejects from the sorting and composting plant to the adjacent Kayu Madang Sanitary Landfill. Although tipping fees are common for MSW disposal in Malaysia25,no tipping fees are envisaged in the State of Sabah. This will adversely affect the project’s financial indicators (NPV and IRR). However, this project is important to show the technical feasibility of MSW sorting and composting operations for applicability in other parts of the country, which will be required to implement the newly adopted Solid Waste Management Act;

Smart Recycling is taking measures to be able to market its compost product. Smart Recycling has engaged services of UMS Link to undertake a detailed compost marketing study. The study, which started in May 2008, will assess the potential markets (e.g. horticulture, agriculture, mine reclamation, and landfill cover) and expected prices for the compost. The City Hall has agreed to receive all compost produced from the facility at no cost during the first year of the composting plant operation. For the subsequent years, the City Hall expressed its intention to buy its compost needs from the facility at an agreeable price, although the City Hall’s budget appears to be limited. The City Hall also confirmed that it will assist SMART Recycling for promoting use of the compost in the area (during the City Hall’s annual campaign for composting);

A waterlogged area exists within or adjacent to the originally designated area that will be used for composting. Construction of the composting plant in this area would require a special design of the composting pad to assure that there will be suitable drainage and stability to support the heavy mobile equipment, such as the windrow turner, that will be

25 The landfill tipping fees range from RM 25-45/ton MSW in mainland Malaysia and RM 60/ton MSW in the State of Sarawak. The total fee for the collection, transportation, and tipping in the State of Sarawak is RM 145/ton MSW for the first 11.000 tons and RM 185/ton MSW for additional amounts.

21 used during composting operations. The waterlogged area is expected to be avoided by proper siting of the composting plant not to incur additional design and construction costs. The City Hall has agreed to provide the necessary land to the project sponsor at the landfill site.

After ERPA signing, Smart Recycling will retain an A&E firm for the detailed design and costing of the composting plant. Smart Recycling expects engaging the A&E firm within one month after ERPA signing, and the design, construction and testing and commissioning phase is expected to take approximately 8 months. SMART Recycling envisions the composting plant start-up for commercial operation by April 2009.

4. Environmental Analysis

65. The project has global and local environmental benefits. The annual average GHG emission reductions over the next 10-year period are estimated to be 77,878 tons C02-e. The project has many local environmental benefits. At full capacity operation, it will involve recovery of 23.21 tons/day (or 6,963 tons/year) of recyclable materials and production of 150 tons/day (or 45,000 tons/year) of marketable compost from MSW. The sorting and composting processes will also reduce the amount of MSW to be landfilled by 62%. This reduction in disposal rates is expected to extend the life of the landfill, reduce the leachate production rates from the landfill, and improve the quality of the treated leachate.

66. The project is classified as Category B for environmental assessment (EA). To identify and assess potential environmental impacts of the project and devise the corresponding mitigation measures, Smart Recycling engaged a consultant (GSR Environmental Consultancy) to prepare an EA for the sorting and composting plant. As part of the EA, an Environmental Management Plan (EMP) was prepared to include specific provisions to be implemented during the construction and operation phases of the plant (details presented in Annex 5). According to Bank procedures, public consultations were carried out twice with the project-affected people, the first time through discussions during scoping and preparation of the EA and the second time at a public meeting after the draft EA report was prepared. The English language of the EA report and its Malay language executive summary were disclosed at the communal hall of the Kota Kinabalu City Hall on March 25, 2008 after being advertised in a local newspaper on March 22, 2008. The (Federal) Department of Environment, Sabah has agreed to maintain permanently a copy of the EA Report in its library, which is accessible to the public. Further information of the EA report is presented in Annex 5. In addition, the EA was disclosed at the InfoShop on January 10, 2008, and the updated (including the final) versions of the EA Report were subsequently disclosed at the InfoShop.

67. The project’s environmental impacts are found to be well defined, site-specific, minor and easily manageable. The environmental impacts during the construction and operational phases of the project are associated with air pollution, soil and water pollution, noise pollution, and occupation health and safety. The assessment indicates that no significant environmental impacts would occur as a result of the construction or operation of the plant. The local environmental impacts and the associated mitigation measures during construction and operation of the sorting and composting plant are presented in Annex 5.

22 68. During appraisal of environmental safeguards, some technical issues were covered and incorporated in the EMP of the EA Report. These issues covered use of an impermeable surface in the composting area, establishment of a 6 1-meter buffer zone between the composting plant boundary and the City Hall staff quarters, investigation of soil stability of the nearly vertical slope near the City Hall staff quarters, and adherence to appropriate industrial hygiene procedures and plant management strictly enforcing these measures. Details are provided in Annex 5.

69. In addition to the EA/EMP, an Environmental Due Diligence audit was conducted for the Kayu Madang Landfill, which is linked to this project. The objective of this audit was to identify the potential risks to people and the environment associated with the design and operation of this landfill and to propose risk mitigation measures with ,an implementation plan. The Due Diligence Audit Report recommended the following categories of mitigation measures: (i) improvements in work and living conditions at and around the landfill, (ii)investments in landfill improvements that also benefit the sorting and composting plant operations, and Smart Recycling, and (iii)investments for landfill improvements only. Smart Recycling has shared the Due Diligence Audit Report with the City Hall and will be submitting it shortly to the (Federal) Department of Environment, Sabah. Among the specific recommendations of this report, the City Hall has agreed to upgrade the access road to the sorting and composting plant by mid 2009 and to have trucks exiting the sorting and composting plant be cleaned off dirt at its current truck washing facility for the landfill.

70. To meet the requirements of Malaysia, Smart Recycling has prepared - through a local consultant (Ensolve) - a “Preliminary Environmental Impact Assessment (EIA)” for the sorting and composting plant and submitted it to the (Federal) Department of Environment, Sabah on May 5, 2008. A Technical Committee - which consists of the (Federal) Department of Environment, Sabah and other relevant government agencies - will decide whether to accept this submittal or request a comprehensive EIA that would encompass also the Kayu Madang Sanitary Landfill. The basis for the comprehensive EIA is that the sorting and composting plant is located at this landfill site, the landfill has been operating with an expired permit since 2005, and the original design of the landfill has been modified through a construction of new cell. The (Federal) Department of Environment, Sabah’s decision is expected by end June 2008. If Smart Recycling’s submittal is accepted and if no substantial additional information is requested by the (Federal) Department of Environment, Sabah, approval typically takes approximately five weeks. However, if the (Federal) Department of Environment, Sabah requests a Detailed EL4 or a comprehensive EL4 with the landfill facility, then considerable implementation delays are likely to occur.

5. Social Analysis

71. The sorting and composting plant will be located within the Kayu Madang Sanitary Landfill site on approximately 18 acres of land. The project does not require acquisition of additional land provided by the Kota Kinabalu City Hall at this landfill site. Since the project will not cause any adverse social impacts on the communities living in the settlements in the vicinity, Bank’s Involuntary Resettlement Policy will not be triggered. The Bank’s Indigenous

23 Peoples Policy (OPBP 4.10) is not triggered because the project does not limit or prevent access to natural resources vital to sustainability of their culture and livelihoods.

72. In addition to the environmental benefits, the project will also bring economic benefits to the local communities in terms of new jobs. The current labor force at the sorting plant is approximately 70% Malaysian (mostly from local areas in the State of Sabah) and 30% from neighboring countries. The project sponsor complies with Kota Kinabalu City Hall’s requirement that at least 50% of the workers at the sorting and composting plant be Sabahian (from the State of Sabah). Approximately 110 workers will be required for which preference would be given to the local workers.

73. Smart Recycling has agreed to undertake the following measures as a socially responsible company:

0 After ERPA signing, Smart Recycling will conduct campaigns that involve engaging voluntary doctors for health screening (e.g. urine test, blood test, vision test) of the residents of the City Hall staff quarters and the nearby villages once a year.

0 In coordination with the Kota Kinabalu City Hall, Smart Recycling will be involved in Ministry of Housing and Local Government’s waste recycling campaigns in the Kota Kinabalu area.

0 Smart Recycling will continue to contribute to waste recycling and income generation of local residents through operation of three full-time and eight part-time buy-back centers, which are endorsed by the Kota Kinabalu City Hall.

Smart Recycling will participate in waste recycling and compost use campaigns launched by the Kota Kinabalu City Hall.

0 Smart Recycling maintains (and will maintain) at least 50 percent of its labor force through the residents of the State of Sabah.

0 Smart Recycling has agreed to provide an air-conditioned lunchroom facility for all its employees on a rotational basis.

0 Construction and operation of the composting plant will provide employment opportunities for some of 20 scavengers at the landfill, as this was the case for the sorting plant. Smart Recycling also purchases recyclable materials sorted out by landfill scavengers.

6. Safeguard Policies 74. Table 4 lists the applicable safeguard policies. Detailed information of safeguards is presented in Annex 5.

24 Table 4: Safeguard Policies Safeguard policy: If applicable, how might it apply? Environmental Assessment (OPBP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Involuntary Resettlement (OPBP 4.12) Indigenous Peoples (OD 4.20) Forests (OP/BP 4.36) Safety of Dams (OP/BP 4.37) Cultural Property (draft OP 4.11-OPN 11.03) Projects in Disputed Areas (OP/BP/GP 7.60) Projects on International Waterways (OP/BP/GP 7.50)

7. Policy Exceptions and Readiness 75. There is no policy exception. However, based on agreement with the Operational Services Unit of the East Asia and Pacific Region and the Regional Carbon Finance Coordinator, this report was prepared in the Project Appraisal Document (PAD) format instead of the newly approved Carbon Finance Carbon Finance Assessment Memorandum (CFAM) format.26 76. The project complies with all readiness criteria.

26 The CFAM format was specified by the Operational Policy and Country Services (OPCS) of the Bank in its Carbon Finance-Operational Processing and Review Guidelines of November 2007. The corresponding guidelines for the East Asia and Pacific Region were issues by the Central Operational Services Unit (EAPCO) of this Region on December 20,2007.

25 Annex 1: Country and Sector Background Malaysia: Kota Kinabalu Composting Project

Municipal Solid Waste Management in Malaysia

1. In 2006, Malaysia had a total population of 26.6 million, 65% of which residing in urban areas.27 The rural-urban migration, natural growth, and changing consumption patterns of the Malaysian households have contributed to an increase in the generation rate and change in the composition of municipal solid waste (MSW) in urban areas. Based on an average MSW generation rate of 0.8 kg/person/day, Malaysia generated approximately 2 1,500 tons/day of MSW in 2006. However, the MSW generation rate in urban areas is much higher (1.5-1.8 kg/person/day). The average MSW consists of approximately 63% food waste, 25% recyclables (plastics, paper, glass, ferrous and non-ferrous metals), and 12% other wastes. About 76% of MSW generated is collected. Of the collected MSW, ap roximately 5% is sent to incinerators, 4% is recycled and the remaining 91% is land disposed.y8 Most MSW in Malaysia is disposed off in landfills that are currently operated by local authorities and numbering about 180, the majority of which may be considered unsanitary landfills or merely open dumps.

2. The 8‘h Malaysian Plan (2001-2005) listed MSW management as a priority area and set actions for the development of a National Strategic Plan (NSP) for strengthening of the legal framework, reactivation of the solid waste privatization program, improvement of implementation at local government level, and establishment of a long-term target for recycling. The collection and disposal of MSW were improved with the privatization of these services. In addition, the Government of Malaysia adopted a comprehensive MSW management policy to address issues on waste reduction, reuse and recycling. The Government also conducted awareness campaigns to encourage the reduction, reuse and recycling of waste materials.

3. In 2003, the Government of Malaysia prepared a NSP for MSW management. The NSP aimed at developing a sustainable and coherent MSW management in Peninsular Malaysia29with full cost recovery to be achieved by 2020, and called for increased involvement of the Federal Government in MSW management policy and financing. Two bilateral donors supported the MSW sector of Malaysia through the NSP: JICA financed studies on waste minimization (which produced a master plan, an action plan and guidelines) and rehabilitation of old dump sites; and DANIDA provided assistance to Malaysia in the areas of institutional strengthening and public participation at the federal, three states, and ten local administration levels.

4. However, MSW management continued to be a growing problem and gained increasing political attention over the years. There was dissatisfaction with the performance of local

’’ Total population data from http://www.statistics.gov.my/english/frameset keystatsphp (Last visited on October 2, 2007). ’*In addition, the operation and maintenance of a few large landfills are contracted to private companies by local authorities for sizeable concession periods (15-25 years).

29 NSP did not cover the State of Sabah.

26 authorities in MS W management in addition to related growing environmental problems and financial pressures for resolving these problems. The lack of policy, complexities in the institutional and legal frameworks, and inadequate skills hindered identification of new sites by state governments. Illegal dumping has also become a major problem. In 2006, a study carried out by JICA revealed that the national recycling rate was only 4.5 percent, far from the 22 percent target that the country intended to achieve in year 2020.

5. Under the 9th Malaysia Plan (2006-2010), in early 2006, the Government endorsed a National Solid Waste Management Policy that aimed to put in place a MSW management system that would be holistic, integrated, cost effective, sustainable and acceptable to the community, and that would also emphasize conservation of the environment, selection of affordable technology and concern of public health. Measures were undertaken to review the institutions, legislation and regulations pertaining to the management of MSW and to improve MSW management infrastructure and facilities.

6. Following the Solid Waste and Public Cleansing Management Bill (2007) and its Corporation Bill (establishing a corporation with powers to administer and enforce the first bill) enacted in July 2007, the Government of Malaysia has been in the process of bringing the MSW management responsibility under the direct supervision of Federal Government with the ultimate aim of upgrading the related services through an integrated planning process in the entire country. These bills have resulted in the establishment of a National Solid Waste Management Department as the regulatory body and the Solid Waste Management Corporation as the operational entity. The Corporation has taken over the role of managing MSW from the local authorities. Accordingly, plans to construct, alter or close MSW management facilities (like landfills, incinerators and recycling plants) should be approved by the Director General of Solid Waste and Public Cleansing, and persons who provide MSW waste services -from collecting and transporting waste to sorting, recycling and disposing- should be licensed. The Solid Waste and Public Cleansing Management Bill also establishes a fund that will receive contributions from state governments and local authorities, charges, fees and levies as well as the Federal Government allocation to pay for the cost of MSW services provided by any party authorized by the Federal Government. As the States of Sabah and Sarawak enjoy special privileges under the Malaysian Constitution, the 2007 bills are not enforceable in these two states. However, these autonomous Malaysian states are expected to adopt these bills.

7. The Environmental Quality Act 1974 (EQA 1974 and Amendments) is a Federal Act for the protection and enhancement of environmental quality and is applicable throughout Malaysia, including the autonomous states of Sabah and Sarawak. The Act lists 19 types of major projects that are subject to the environmental impact assessment (EIA) procedure of the (Federal) Department of Environment. An EIA study is a mandatory requirement under Section 34A of the Environmental Quality Act, 1974 for activities prescribed in the Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order, 1987. Items 18(b)(ii), 18(iii) and 18(iv) of the Schedule to the Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order, 1978 identify the following MSW construction activities as prescribed activities:

27 Item 18(b)(ii): Construction of composting plant; Item 18(b)(iii): Construction of recoveryhecycling plant (e.g. sorting plant); Item 18(b)(iv): Construction of MSW landfill facilities;

8. For the above listed MSW management projects, it is mandatory that an EIA report be prepared and submitted for the approval of (Federal) Department of Environment (which has offices in Putrajaya as well as in Kota Kinabalu for the State of Sabah), and that the approval be secured prior to commencement of construction activities. Preparation of the EIA report is the responsibility of the project sponsor.

Solid Waste Management in Kota Kinabalu

9. Kota Kinabalu is the capital of the State of Sabah. Located on the northwestern coast of the island of Borneo, it faces South China Sea and Tunku Abdul Rahman Park on one side and Mount Kota Kinabalu in the background. With an estimated population of 532,129 in the city and 700,000 in the urban area, it is the largest urban center in the State of Sabah and the sixth largest urban center in Malaysia.

10. The Kota Kinabalu City Hall has the responsibility to collect, transport and dispose of MSW from the residential, commercial and institutional areas of Kota Kinabalu. Within the City Hall, the Health and Services Department carries out this responsibility. The Solid Waste Department, under the Health and Services Department, is the biggest unit in the Department in terms of manpower and budget. The technical responsibility of MSW facilities is under the Engineering Department of the City Hall. Although waste generators are not explicitly charged for MS W management services, costs of these services are implicitly covered partially through household assessments, which have not increased for the last 25 years.

11. The local legislations applicable to MSW management in the City of Kota Kinabalu include the Local Government Ordinance, the Anti-Litter By-Law (1984) and its Amendments (2005), and the Public Hygiene and Conservancy By-Law (1984).

12. In Kota Kinabalu, there is no requirement for the city residents to segregate recyclables from their MSW. To support the national program on recycling, the City has placed 99 sets of three-colored recycling bins in school compounds, fuel stations, shopping complexes and other public places. However, the program is yet to achieve its intended objectives. In addition, various awareness programs on proper MSW have been underway in the State of Sabah and, particularly, in the City of Kota Kinabalu. For example, some non-governmental organizations (NGOs) in the State of Sabah have started awareness programs to encourage MSW segregation at the residential level. In the area of proper disposal of plastic wastes, the City of Kota Kinabalu has been working closely with the University of Malaysia Sabah (UMS) to create awareness among the residents and villagers. 30 Under the Local Agenda 2 1, environmental awareness activities are being carried out at primary schools.

30 Chua Kim Hing (Kota Kinabalu City Hall), “Efforts and Initiatives to Enhance Cleanliness in the City of Kota Kinabalu”, paper presented at the Fourth Sabah-Sarawak Environmental Convention, 2006.

28 13. In the area of composting, the City of Kota Kinabalu is promoting this technology at the commercial, communal and household (backyard) levels. In the area of commercial composting, the City has contracted Smart Recycling. In the area of communal composting, since 2005, the concept has been demonstrated on garden wastes in one neighborhood of the City. In the area of backyard composting, two sets of composting machines have been installed in the City for demonstration purposes.

14. Collection of MSW in the District of Kota Kinabalu is carried out daily in the commercial areas and three times a week in the residential areas. The collection areas include Kota Kinabalu, Tanjung Am, Jalan Penampang, Lido, , , Menggatal, and Telipok. The Kota Kinabalu City Hall has a total of 61 vehicles including compactor trucks, roll-on-roll- off (“roro”) trucks and open trucks for MSW transportation to the Kayu Madang Sanitary Landfill. In addition, private trucks transport MSW to this landfill from construction sites and institutional areas of Kota Kinabalu. The rate payers in residential and some commercial areas provide their own MSW bins. However, in other commercial areas (including the market) 1,000- liter MSW bins or roro bins are provided by the Kota Kinabalu City Hall. The Kota Kinabalu City Hall also provides communal MSW bins to less accessible villages, including the squatter areas within Kota Kinabalu. In these areas MSW is collected only twice a week. Although waste generators are not explicitly charged for MSW management services, costs of these services are implicitly covered partially through household assessments, which have not increased over the last 25 years.

15. Besides Kota Kinabalu, there are three neighboring districts (Kota Belud, Penampang and Tuaran) in the project area, each having its local council responsible for the collection and transportation of MSW to a landfill. These three districts have their own trucks for MSW transportation. The District of Penampang, which does not have its own landfill, transports all its MSW to the Kayu Madang Sanitary Landfill for disposal. However, MSW from certain areas of the Districts of Tuaran and Kota Belud is disposed of at their own landfill. MSW from other areas of these two districts, which are relatively closer to the Kayu Madang Sanitary Landfill, are disposed of at this landfill rather than their own district’s landfill.

Kayu Madang Sanitary Landfill

16. MSW under this project will be processed at the sorting and composting plant located within the Kayu Madang Sanitary Landfill site. This landfill, which is owned and managed by the Kota Kinabalu City Hall, is located in Telipok, is 30 km northeast the City of Kota Kinabalu in the State of Sabah, Malaysia.

17. The Kayu Madang Sanitary Landfill was commissioned in September 1977 as a sanitary landfill to receive MSW from residential, institutional, commercial, and industrial (non- hazardous) areas. The landfill occupies a low-lying, valley shaped area with gently sloping hills around its periphery. The overall size of the entire landfill property is 115 acres, whereas the first cell within this landfill covers an area of 22 acres to receive approximately 1.55 million m3 of waste.

29 18. The basin of the first cell is reported to be lined with a relatively impermeable clay layer of about one meter thickness, and partially covered with a high density polyethylene (HDPE) liner alongside the earth embankmenthund, extending only to a short distance onto the floor of the landfill basin. A perforated pipe installed at the lowest point of the landfill bed collects and conveys by gravity the leachate for biological treatment (in a three-compartment oxidation pond). The effluent from treatment is discharged into a stream, which finally flows to the South China Sea. Currently, this discharge cannot comply with the parameter limits of Efluent Standard A of the Environmental Quality (Sewage and Industry Efluents) Regulations (1979), which was imposed by the (Federal) Department of Environment, Sabah as a condition of approval of the landfill’s environmental impact assessment (EIA) report. The groundwater monitoring wells at this landfill was vandalized a few years after landfill commissioning.

19. Approximately 20 scavengers are reported to be working at the Kayu Madang Sanitary Landfill under poor hygienic conditions (e.g. without use of any personal protection equipment). The City Hall has provided 18 housing units for landfill workers and their families within the landfill site. These housing units are located about 150 meters from the nearest point of the active landfill area and about 100 meters from the sorting plant. Only 11 units are occupied by the staff. There are four villages located within 0.5 to 1.5 km distance from the landfill site. The total population of these villages is about 500.

20. As the first cell at the Kayu Madang Sanitary Landfill is planned to close by end 2010, a second cell is currently under construction. This new cell, which covers a land area of approximately 12 acres and has a capacity to hold 1 million m3 of waste, is expected to serve 15 years, and this will easily accommodate disposal of rejects from the subject project. The second cell is reported to have a HDPE liner at all sides and bottom. The leachate from the second cell is planned to be treated at the current leachate treatment plant of the Kayu Madang Sanitary Landfill. The City Hall officials informed the Bank that they are in the process of applying for State and Federal funds to upgrade the leachate treatment plant. As the landfill’s permit expired in 2005, the (Federal) Department of Environment, Sabah is expecting from the City Hall a permit renewal application and an environmental impact assessment (EIA) for the landfill.

21. The average daily amounts of solid waste transported to the Kayu Madang Sanitary Landfill are shown in Table 5. The vehicles arrive at the landfill site between 5 a.m. and 12 a.m.

Table 5: Solid Waste Disposal at the Kayu Madang Sanitary Landfill

Kota Kinabalu City (by private trucks) 130 75 532,000 (City) ’ 14 5 7,300 District (*) 4 1 94,100 District (**) 60 18 132,000 District (*I TOTAL 438 160

30 22. The MSW received at the Kayu Madang Sanitary Landfill site has been increasing over the years. The average MSW received at the landfill was 403 tons/day for the period of March- December 2006 and 463 tons/day for the period of January-August 2007. Approximately 85% of the total wastes received at the Kayu Madang Sanitary Landfill were from domestic, commercial and market sources; and the remaining 15% were garden and construction wastes.31 The average waste composition of MSW was as follows:32

Composition (% Organic matter 60.3 Paper 3 .O Glass 1.o Plastics 3.0 Metals 2.5 Inert material 30.2 Total 100.0

GHG Emissions from Malaysia

23. In 1994 Malaysia emitted a total of 144 million tons of C02-e of GHGs. Net emissions, after accounting for sinks of 68 million tons, amounted to 76 million tons of CO2-e (and this compares to the net emissions of 55.3 million tons of C02 in 1990.) On a per capita basis, net emissions amounted to 3.7 tons of C02-e (and this compares to the per capita net emissions of 3.0 tons of C02-e in 1990). C02 accounted for 67.5%, methane (CH4) for 32.4%, and nitrous oxide (N20) for 0.1% of the total CO2-e emissions. The fuel combustion energy sector accounted for 86.7% of the total C02 emissions, landfills (46.8%) and fugitive emissions from oil and gas sector (26.6%) accounted for 73.4% of the total CH4 emissions, and traditional biomass fuels accounted for 86.4% of the total N20 emissions.33

24. Since 1994 GHG emissions in Malaysia increased considerably. In 2004, with 0.4% of the world’s population, Malaysia accounted for 0.6% of global emissions - an average of 7.5 tons of C02 per person. If all countries of the world were to emit C02 at levels similar to Malaysia’s, the sustainable carbon budget would be exceeded by approximately 237%.34 During the 1990-2004 period Malaysia’s total GHG emissions increased by 221% and per capita GHG emissions increased by 150%.35 The 221% increase is the highest among the 30 biggest GHG emitters in the word.

31 Ibid.

32 The waste composition for recyclables from the Kota Kinabalu area is less than the national average mainly because of segregation of glass and newspapers at source.

33 Malaysia-Initial National Communication, submitted to the United Nations Framework Convention on Climate Change by the Ministry of Science, Technology and the Environment of Malaysia, July 2000.

34 Malaysia - The Human Development Index - Going Beyond Income, UNDP Human Development Report, 2007.

35 Malaysia’s total C02-eemissions were 55.3 million tons in 1990 and 177.5 million tons in 2004. Malaysia’s per capita C02-eemissions were 3.0 tons in 1990 and 7.5 tons in 2004.

31 25. Malaysia, as a party to the United Nations Framework on Climate Change Convention (UNFCCC), ratified the Kyoto Protocol (September 4, 2002), which entered into force on February 16, 2005. UNFCCC has set an overall framework for intergovernmental efforts to limit or reduce GHG emissions, which that affect the stability of the climate system, a shared global resource. The Kyoto Protocol then commits industrialized (Annex 1) countries to individual, legally-binding targets in curbing their GHG emissions. To meet these targets in the most cost- effective manner, the Kyoto Protocol has also established a clean development mechanism (CDM) that allows industrialized countries to implement projects in developing (host or non- Annex 1) countries permitting them to receive emission reductions (ERs). While this scheme helps the industrialized countries meet their own GHG ER commitments, host countries achieve their sustainable development goals through access to cleaner technology and financial resources for specific projects. The Bank, as a trustee of various Carbon Funds, aims to help developing countries contribute to climate change mitigation and sustainable development via market-based ER purchase transactions under CDM.

26. As a non-Article 1 Party to the Kyoto Protocol, Malaysia has been benefiting from investments in CDM projects that contribute to the country’s sustainable development goals and environmental improvement, while earding additional financial flows to the country. The National Committee on CDM has formulated some preliminary national criteria for CDM implementation and has identified several priority areas, one of which is waste management. The Government of Malaysia has also agreed to collaborate with the World Bank in the emerging market for GHG ER credits under CDM. As such, Malaysia has strong interests and is well positioned to undertake the subject project which is intended to avoid emissions of methane (a potent GHG) from municipal solid waste (MSW) disposal at a landfill.

32 Annex 2: Detailed Project Description Malaysia: Kota Kinabalu Composting Project

1. This CDM project consists of two components: (a) the construction and operation of a sorting and composting facility that will result in ERs; and (b) a carbon finance transaction that will facilitate the purchase of the ERs.

Component A: Construction and Operation of the Sorting and Composting Facility

2. The proposed project involves construction of a 500 tons/day capacity MSW sorting and composting plant in Telipok, Sabah Province of Malaysia. This plant - which will be owned and operated by the project sponsor Smart Recycling MSW36collected from the City of Kota Kinabalu and three neighboring districts (Kota Belud, Tuaran, and Penampang). As per agreement between Smart Recycling and the Kota Kinabalu City Hall, Smart Recycling has been provided approximately 18 acres of land to set up and operate this plant within the Kayu Madang Sanitary Landfill site. Approximately 3.2 acres were designated for the sorting plant and administrative buildings, and the remaining area was conceived for the composting plant. The sorting plant started operation in April 2006, and the composting plant is expected to be constructed in 2008 and operational by April 2009. The locations of the project site in Malaysia and within the Kayu Madang Sanitary Landfill site are shown in Annex 9 and Figure 1, respectively.

3. Sorting; Plant. The sorting plant includes a MSW reception area, storage areas, and a sorting area that houses three parallel process lines with conveyors, screens and magnetic separators (Figure 2). To date, the sorting plant has been receiving MSW only from residential areas.37 Although MSW is delivered every day, the sorting plant has been operating six days a week between 7 am and 6 pm, and shut down for maintenance on Sundays. The sorting plant processed an average of 143 tons/day of MSW in FY06, 168 tons/year in FY07, and 218 tons/day in FY08 (Table 7).38 Recyclables recovered at the sorting plant made up 3.13% of the received MSW in FY06,4.51% in FY07 and 4.65% in FY08 (Table 6).

4. The sorting plant has been operating at much below its design capacity (500 tonslday) because the operation has been limited by the high cost of electricity from an on-site generator. As connection to the power grid is to be made by the commissioning of the composting plant39 (expected by April 1, 2009), the sorting plant will be able to operate two shifts a day to reach its

36 MSW originates from residential and commercial sources. No manure or sewage sludge is mixed with MSW. Collection and transportation of MSW to the project site is provided by the City Hall.

37 Currently, yard wastes, food wastes (from commercial facilities), and construction debris are directly disposed of at the Kayu Madang Sanitary Landfill.

38 In FY06 (April 2006 through end of June 2006), the sorting plant operated only 75 days. In FY07 (July 2006 through end of June 30,2007), the sorting plant operated 300 daydyear. The data for FY07 is for the period of July 1, 2007-March 3 1, 2008, corresponding to 225 days of sorting plant operation.

39 Permit for the connection to the grid has been granted by the Malaysian authorities.

33 design capacity. In addition to MSW from residential areas, the sorting plant will receive MSW from commercial and institutional areas.

Figure 1: Sorting and Composting Plant within the Kayu Madang Sanitary Landfill Site

34

Table 6: Sorting Plant Operations and Recovery of Recyclables MSW Recyclables Number NISW Recyclables Month Input Recovered of Days Input Recovered (tons) (tons) ope rated (todday ) (todday ) I Am-06 1 3.535 I 105 I 25 I 141 I 4.20 I May-06 3,560 110 25 142 4.40 Jun-06 3.602 120 25 144 4.80

Dec-06 3,394 155 23 148 6.74 Jan-07 3.889 181 26 150 6.96 Feb-07 4,238 204 23 184 8.87 Mar-07 4,819 23 1 25 193 9.24 Apr-07 5,591 289 25 224 11.56 May-07 5,945 311 25 238 12.44 Jun-07 5,546 323 25 222 12.92 FY07 50,175 2,264 300 Avg. 168 Avg. 7.55

Jul-07 5,664 270 26 218 10.38 Aug-07 5,715 315 26 220 12.12 Sep-07 5,365 219 25 215 8.76 Oct-07 5,485 20 1 26 211 7.73 N0v-07 5,238 213 25 210 8.52 Dec-07 4,788 188 23 208 8.17 Jan-08 5.909 290 26 227 11.15 Feb-08 5,131 272 23 223 11.83 Mar-08 5,729 3 10 25 229 12.40 FY08 49,024 2,278 225 Avg. 218 Avg. 10.12

36 5. All incoming trucks are checked for their contents to ensure that no hazardous wastes (such as hospital, industrial and chemical wastes) are included. The accepted trucks are weighed and the weight is recorded before the wastes are dumped onto the tipping floor at the receiving area of the sorting plant. The MSW reception area has a holding capacity of 400 tons. Its design with a roof, 3-meter retaining walls and paving with a concrete slab minimizes leachate generation and dust emissions.

6. The design of the sorting plant operations is based on three parallel lines. MSW from the waste receiving area is then carried by skid steer loaders (i.e. Bobcats) to three feeding conveyors in parallel. Two workers, one at each side of the feeding conveyor, pre-sort the waste manually to remove the following items:

0 Rubber tires Batteries Large textile such as carpets and blankets Cardboard sheets and boxes.

7. At each line, closed bags are torn and opened by a bag breaker installed on the feed conveyor. The distance between the bag breaker knives and the feed conveyor controls the waste flowrate. Waste from the torn bags is screened by a trommel screen at 3 cm to remove the highly biodegradable, fine organic materials. Currently, as the composting plant is not operational, these organic materials are sent to the KayMadang Sanitary Landfill for disposal. In the future, after commissioning of the composting plant, these fine organic materials will be processed at the composting plant. The oversize from the trommel screen is transferred to a sorting conveyor which contains 9 stations for manual sorting of the recyclable materials by a total of 21 workers. Each station is specialized in removing one of the following materials: high density plastic bags, high density plastic bottles, PET bottles, plastic boxes, plastic pieces, textiles, paper and cardboard, glass, non-ferrous metals (e.g. aluminum cans).

8. A magnetic belt is installed at the 3rd station to remove iron or steel objects. Sorted recyclables are collected in bins and baled by continuous baler from time to time. Bale press is used to bale cardboard, paper, textile and plastics; and metal press is used to press metal recyclables into cubes. The recovered plastics bags are stored in the open air after being washed in a hydrowasher. Other recyclables recovered in the sorting plant are stored in a 300-ton capacity covered storage area. The entire perimeter of the sorting plant is surrounded by a stormwater drain (Figure 3).

9. The non-recyclable waste that remains on the sorting conveyor is screened at 10 cm by a trommel screen to separate the coarse organic materials, which are sent to the landfill. However, after commissioning of the composting plant, the coarse organic materials will be transferred by truck to the composting plant. The oversize from the trommel screen is collected by a conveyor belt for manual removal of any remaining recyclables and the remaining materials (rejects) are transported to the landfill by a tractor.

37

10. Composting: Plant. The composting plant will adopt the windrow technology to produce marketable compost. The feed to the composting plant will include the yard/garden waste and the highly biodegradable organic waste from the sorting plant. The parameters that play a significant role in producing good quality compost are oxygen level, water (humidity), and temperature. An unbalanced source of organic materials or nutrient balance, not enough oxygen, or too much or too little water can result in the production of foul odours and other undesirable compounds that can result in an inferior compost product. The nutrient balance of carbon-to- nitrogen is critical in the production of compost. Carbon makes up about 50% of the cells of the fungi and bacteria involved in composting. Nitrogen is essential for protein synthesis and cell growth. The typically recommended C: N ratios for composting MSW is 25: 1 to 40: 1 by weight. Lower ratios result in excess nitrogen which accelerates the process and use up the available oxygen. This leads to anaerobic conditions that generate unpleasant odors. Excess nitrogen also converts to ammonia gas that compounds the odor problem. At higher C:N ratios there is insufficient nitrogen for cell growth and the process slows as the bacteria population cannot reach its optimum size. Given the high nitrogen content materials (e.g. yard waste, garden waste) in the composting feed, saw dust or wood - after being milled by a wood chipper - will be added as a carbon source to maintain the desired C:N ratio.

11. The highly biodegradable organic waste will then be placed into windrows. Each windrow will have a height of 1.5 meters, a width of 3.6 meters, and a length of approximately 100 meters. A 2-meter space will be left between the adjacent windrows to allow passage of the windrow turning machine. A minimum number of 60 windrows are required to process 300 tpd of composting plant feed.40

12. The site for the windrows will be prepared on an appropriately designed, impermeable surface to prevent wastewatedleachate penetration into the groundwater. The air permeable geotextile sheets will be used to cover the windrows during composting. This geotextile cover will prevent contamination of the surface runoff from by the in-process compost. There will be adequate aboveground drainage and stormwater retention to prevent heavy downpours washing nutrient-rich leachate into the surface water (Figure 4).

13. The windrow turning machines will provide the oxygen necessary for the aerobic digestion process, maintain temperature within the windrow, and mill and increase the homogeneity of the waste to expose more surface area for bacterial activity. Windrows will be turned approximately twice a week. This action will move the material from the bottom of the windrow to the top and from the outside to the inside. This way a new windrow will be build along one side of a site. As the new windrow matures and is turned, it moves towards the far side of the site.

40 The 300 tpd feed is based on 60 percent organic content of the incoming MSW received at the sorting plant at the design capacity of 500 tpd.

39 ba 0 .3Up s 14. As composting progresses the mass and volume of material reduce and the windrows get smaller. This is because up to 50% of the mass is lost as carbon dioxide and water vapor and the bulk density increases from typically 550 kg/m3to 1,000 kg/m3.When this occurs, two windrows are combined together into one windrow. As the temperature of the windrows decreases, the rate of decomposition also slows down. The windrows will have to be turned to reactivate the decomposition process. When the temperature rise is not more 5°C above the ambient temperature even after turning, it is deemed that the active composting is complete. Temperature measurements will be conducted daily by the Smart Recycling personnel using portable temperature probes. The turning process typically lasts for a period of about 30 days for fermentation.

15. Each windrow will have a unique label to indicate the sequence of its formation, starting from plant operation. Information on the label will include the windrow number, construction date, material weight, temperature (daily record), moisture content (daily record first and two- day record afterwards), and organic material content (every three days). Data will be recorded by Smart Recycling personnel for process control, which will ensure that the compost has a balanced sources of organic materials, adequate aeration, ideal humidity to avoid the production of foul odors and other undesirable compounds that may inhibit plant growth and result in an inferior quality of the final compost product.

16. Based on laboratory results, windrows will be turned to provide sufficient oxygen to the compost to enable aerobic breakdown of microorganisms into organic matters that would be acceptable to plants. This will also allow the compost to develop sufficient temperature for safe hygienization. Laboratory test results will also indicate that how much water will be added to windrows to keep the humidity at optimal level to speed up the digestion and maturation processes of the compost. Specifically, humidity in the compost will be controlled at 60% at the beginning of the composting process, then at 5560% during the first and second weeks and finally at about 50-55% for the rest of composting period.

17. After the fermentation period, the windrows will be consolidated using loaders for maturation for about 30 days. During the maturation period, the windrows will be covered by air- permeable geotextile sheets to prevent contamination of the surface runoff by the in-process compost. The site will be on an appropriately designed, impermeable surface to prevent leachate penetration into the groundwater. Drainagektormwater management measures will be used to prevent surface watedgroundwater contamination.

18. After the maturation period, the moisture content of the ready compost is about 25-35%. Skid steer loaders will then feed the compost to a screen to separate the compost that will be either sent to packaging in 25-kg bags or transferred directly to storage as a bulk product. The 25-kg packages will be placed on pallets and then transferred to storage for retail sale. The storage area for the bulk and 25-kg bagged compost will have a capacity of 1,200 tons under protection by a roof cover. Some of the compost from screening will be added back to a fresh windrow as it works as an initiator/activator for starting the composting process. Rejects removed from the compost through screening may include such materials as plastics, glass, metals, textile, brick, concrete, asphalt, or stone. These rejects will be transferred to the landfill.

41 19. Based on 500 tons/day MSW feed to the sorting and composting plant, it is expected that the composting plant will be able to process an average of approximately 300 tons/day of feed materials to produce approximately 150 tons/day (45,000 tons/year) of compost (Figure 5).

20. As there are no Malaysian quality standards for the compost, Smart Recycling will follow international industry standards (e.g. British Standards Institute’s specifications for composts, BSI PAS 100, with the key parameters presented in Table 7)41through assistance from UMS Link (the commercial arm of the University of Malaysia, Sabah). UMS Link will also be supporting Smart Recycling in the area of improving the agricultural yield using compost.

21. The compost may contain trace quantities of contaminants in the form of heavy metals; mercury, lead, cadmium, copper and chromium. However, as these heavy metals will be removed in the sorting process, any residual quantities of heavy metals in the compost are expected to be within the acceptable limits stipulated in BSI PAS 100.

22. Smart Recycling has engaged services of UMS Link to undertake a detailed compost marketing study. In addition, the City Hall has agreed to purchase from Smart Recycling: (i)all the compost produced during the first year of the composting plant operation at no cost, and (ii) at a price agreeable by the City Hall for the subsequent years. The City Hall has also agreed that it will assist Smart Recycling for promoting use of compost in the Kota Kinabalu area.

Component B: Carbon Finance Transaction

23. The World Bank-managed CFE will finance the purchase of ER credits resulting from avoided landfill gas production at the Kayu Madang Sanitary Landfill. The estimated ERs during the 10-year period (starting on April 1, 2009 and ending on March 31, 2019) of the project are 737,380 tons (Table 8). CFE will purchase approximately 350,000 tons of C02-e of CERs from 2009 to 2014. The purchase will be a performance-based contract under which payments are triggered by successful verification of the reduction of methane emissions by DOE as an independent and accredited international entity under the rules of the Kyoto Protocol. The quantity of CERs 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 sponsor during ERPA negotiations.

41 BSI PAS 100 specifications cover the entire process; from raw materials, production and testing methods, through quality control and lab testing ensuring certified composts are quality assured, traceable, safe and reliable.

42

Table 7: Compost Quality for General Use

amended compost as % of

Stones > 4mm in grades BSI PAS 100: 2005, Annex E % masdmass of ‘air-dry’ sample 8 other than ‘mulch’

I in ‘mulch’ grade Source: Waste & Resources Action Programme (WRA

44 Table 8: Estimated Project Emission Reductions over the 10-Year Crediting Period

2013 77,729 75,905 2014 80.028 78.878 2015 8 1,569 80,799 2016 82,66 1 82,115 2017 83,47 1 83,066 2018 84,092 83,782 20 19 (until March 3 1St) 21.145 63,191 Total estimated reductions (2009-2019) 737,380 737,380 Total number of crediting years 10 10 Annual average over the crediting period 73,738 73,738 of estimated reductions (tons of CO2-e)

45 Annex 3: Implementation Arrangements Malaysia: Kota Kinabalu Composting Project

1. Project implementation will start after the Designated National Authority (DNA) of the Government of Malaysia confirms its commitment to the project in a Letter of Approval (LOA), indicating its approval of this project being registered by the UNFCCC CDM Executive Board (EB). The key participants in the project implementation activities include: (i)Smart Recycling as the project sponsor, (ii)the Carbon Fund for Europe (CFE) as the purchaser of the emission reduction credits from the project, and (iii)the Carbon Finance Unit (CFU) of the World Bank as the trustee of the Fund.

Smart Recycling

2. The project sponsor MS Smart Recycling (M) Sdn. Bhd. (hereinafter Smart Recycling) was incorporated on June 16,2003, as a private Malaysian company to build and operate the 500 tonshour capacity sorting and composting plant at the Kay Madang Sanitary Landfill site in Telipok, Sabah. Besides sorting and composting operations, Smart Recycling is engaged in trading of recyclable materials. Smart Recycling has a business association with SPM Holding Bhd., the largest waste recycler in Malaysia, in that a director of SPM Holding is an investor in Smart Recycling and that all recyclables recovered from sorting operations or purchased from the local market are sold to one of the subsidiaries of SPM Holding.

3. Under this Carbon Finance Project, Smart Recycling will be the legal contractual partner of the CFE. It will be responsible for all project transactions related to carbon credits. It will also be in charge of the project’s composting operations.

4. During construction of the composting plant, a designated Project Manager will be responsible for all construction activities. During operation of the sorting and composting plant, the Kota Kinabalu Composting Project will be managed by Smart Recycling’s Plant Manager who will be responsible for the administrative affairs, financial affairs, operations, maintenance and transport, and quality control departments of the company. In particular, the Plant Manager will have the overall responsibility for the activities related to the implementation of the plant’s Monitoring Plan.42Each department will be led by a Department Head.

5. Among the various departments, the Operations Department will be responsible for running the sorting and composting plant, while the Quality Control Department will be responsible for carrying out all monitoring (including data collection, analysis, and reporting) necessary for implementing the requirements specified in the Monitoring Plan of PDD. The Quality Control Department will also be responsible for the operation of the on-site laboratory

42 The Monitoring Plan identifies key performance indicators of the project and sets out the procedures for metering, monitoring, calculating and verifying the ERs generated by the project on an annual basis. The approved baseline and monitoring methodology applied to the project activity is “AM0025 Avoided Emissions from Organic Waste through Alternative Waste Treatment Processes - Version 09”.

46 that will conduct some of the analyses for process parameters (e.g. moisture, temperature, oxygen level).

6. The CDM Monitoring Plan will include the following requirements:

e The parameters that require daily/monthly monitoring will be recorded by the Operations Department with close collaboration by the Quality Control Department. The information includes electricity consumption, fuel consumption, quantity of compost produced, oxygen deficiency in compost windrows, quantity and composition of waste supplied to the composting plant, number of vehicles per carrying capacity that bring in waste or that truck off compost, and physical location (for calculation of distance traveled) of the compost market;

e The daily logged sheets will be checked and signed off by the Head of the Operations Department;

e Monthly compilation of all parameters and archiving will be responsibility of the Head of the Operations Department;

e Preparation of monitoring reports will be responsibility of the Head of the Operations Department;

e Every 6 months an internal audit will be conducted by the Quality Control Department to verify and report on project performance.

e Every 6 months, Smart Recycling’s Plant Manager will review the performance of the project and monitoring reports;

e As part of the crediting procedure, the verifying DOE will conduct annual - or as and when required - third party verification on ERs;

e The World Bank Carbon Finance Unit will be responsible for all project-related communications with the Executive Board of UNFCCC;

e Smart Recycling’s Plant Manager will be the contact point of the project sponsor and hence will be responsible for all communications from the project sponsor with the Executive Board of UNFCCC;

Carbon Fund for Europe

7. CFE is a trust fund established by the World Bank, in cooperation with the European Investment Bank (Em) in March 2007. CFE is directed towards the European Union Member States and the European private sector. Under this project, CFE will purchase high quality GHG ERs which will be registered with the UNFCCC under the Kyoto Protocol. CFE will enter into Emission Reduction Purchases Agreement (ERPA) with Smart Recycling as the project sponsor, defining the quantity, price and other delivery conditions of ERs to be purchased by CFE,

47 including the monitoring and verification protocols to enable quantification, verification and certification of ERs actually achieved. To increase the likelihood that the ERs will be recognized by the Parties to the UNFCCC, the Designated Operating Entity (DOE) as independent experts from the engineering and economic consulting industry and the global certification and audit industry, will provide baseline validation and verificatiodcertification services for ER transactions that respond to UNFCCC rules as they develop.

8. The ER estimates are based on findings of the baseline study, carried out and validated by independent experts. The baseline study also certifies the project’s “environmental additionality”, as the Kyoto protocol requires that “certifications in emissions are additional to any that would occur in the absence of the certified project activity. ” In other words, the project is additional if the scenario “with project” generates fewer GHG emissions than the “baseline scenario.”

9. CFE will retain services of DOE as internationally recognized, fully independent third parties to verify and certify actual production of ERs. During the implementation phase, the ERs achieved by the project will be verified on an annual basis by DOE (as an independent and accredited international entity under the rules of the Kyoto Protocol) in accordance with rules and procedures under the CDM. CFE will only disburse against delivery of verified and certified ERs. In the event that the project sponsor fails to deliver the quantity of ERs for any given calendar year as set forth in the ERPA, remedies against the project sponsor will apply as agreed in the ERPA.

The World Bank

10. The annual verification reports will be made available to the World Bank. A small, but sufficient supervision fund will be provided to the World Bank for project supervision.

48 Annex 4: Financial Management and Fiduciary Issues Malaysia: Kota Kinabalu Composting Project

1. A financial capacity assessment carried out for this proposed arrangement included a due diligence on the project sponsor and an assessment of its financial capacity. The fiduciary assessment concluded that:

0 Currently, Smart Recycling generates its revenues from sale of recyclables: (i)recovered from MSW at its sorting plant, and (ii)purchased in the local market. All recyclables are sold to one of the subsidiary companies of SPM Holding Sdn. Bhd., which is the largest recycler in Malaysia. Smart Recycling’s revenues grew from nil in FY04 to RM 1.00 million (US$ 0.29 million) in FY05, RM 6.78 million (US$ 1.97 million) in 2006, and RM 8.56 million (US$ 2.48 million) in 2007.43

Although there is no financial or legal link between Smart Recycling and SPM Holding, one of the SPM Holding’s directors is a major shareholder and director of Smart Recycling; and this establishes a business link between the two companies.

The registered capital of Smart Recycling is RM 3.0 million (equivalent to US$ 0.87 million). Major assets are plant and equipment, valued at about RM19.0 million as of June 30, 2007. These assets were financed at considerable amount of RM 18.18 million (US$ 5.2 million) from liabilities. The company’s DE ratio is 6.6: 1, which is considered to be high. The financial situation of the company is at risk with possible potential of liquidity problem and high financial burden.

0 Smart Recycling was running losses from its operations in FY04, FY05 and FY06. However, in FY07 SMART Recycling had a net profit of RM 154,775 (US$ 44,800). Although the company has been operating with high gross profit margins (50.4% in 2005, 60.3% in 2006, and 56.9% in 2007), it incurred losses in FY05 and FY06 due to high administrative costs. In FY07, interest expenses, depreciation, and administrative salaries altogether contributed to 76% of the administrative costs. As the sorting plant has been operating below its designed capacity (e.g. 44% of capacity utilization during the April 2007-March 2008 period), the burden of administration costs on the company’s profitability has been considerable.

2. The financial appraisal of the project was conducted for the period starting FY04 (since the establishment of Smart Recycling on June 16, 2006) and ending FY 19, to cover the flow of carbon finance ER revenues to Smart Recycling. This period encompasses the period since the establishment of Smart Recycling on June 16, 2006, the construction of the sorting plant in FY05, operation of the sorting plant since April 2006, and construction of the composting plant during the last 9 months of FY08, and operation of the composting plant afterwards until June

43 The fiscal year (FY) is for the period starting on July lstand ending on June 30thof the subsequent year. For example, FY04 starts on July 1,2003 and ends on June 30,2004.

49 30, 2019. This period includes the anticipated 10-year flow of carbon finance ER revenues between April 1,2009 and June 30,2019.

For the period of FY04-FY07, the financial data from Smart Recycling was used, with some minor modifications in the areas of closing stock and depreciation. For the subsequent periods, projections were made based on inputs from Smart Recycling officials. The financial analysis covered all three operations of Smart Recycling: (i) recycling trading, (ii)sorting and sale of recyclables, and (iii)production and sale of the compost. With the start of the composting plant operations, the sorting plant was assumed to operate at full capacity (500 tons/day of MSW input). The assumptions as well as the results of the financial analysis are shown in Table 9. The results show that at a discount rate of lo%, the net present value (NPV) of the project is RM 12.74 million (US$ 3.69 million) without the ER revenues, and RM 23.63 (US$ 6.85) million with the ER revenues. Sensitivity analyses for NPV calculations were conducted at discount rates of 8% and 13%, and found to be positive values in all cases. The internal rate of return (IRR) of the project was found to be 12.5% without the ER revenues and 14.7% with the ER revenues (Tables 2 and 3). As the IRR is higher than the maximum interest rate (8%) supposed to be received from depositing money with banks, the project is deemed to be feasible.

3. The other results of the project’s financial analysis are as follows (Table 9).

The total investments for the sorting plant (including construction of the substation and power connection to the grid) amount to RM 24.45 million (US$ 7.09 million) and the investment for the composting plant is RM 7.07 million (US$2.05 million);

The cumulative revenues amount to RM 311.7 million (US$ 90.3 million), 55% of which is contributed by sale of recyclables from the sorting plant, 28% of which by the sale of recyclables from trading, 10% by the ER revenues, and 7% of which by the sale of the compost;

The cumulative direct operating costs, which amount to RM 100.7 million (US$ 29.2 million), are mostly contributed by the recyclables sortinghelling and trading operations (92%), and the remaining 8% are from composting operations.

The cumulative G&A costs, which amount to RM 65.1 million (US$ 18.9 million), are mostly contributed by the recyclables sorting operations (83%), with the contributions of recyclables trading and composting operations being 27% and 26%, respectively;

The cumulative net profit before taxes, which amount to RM 145.9 million (US$ 42.3 million), are mostly contributed by the recyclables sorting operations (47%), with the contributions of composting (including the sale of the compost and ER revenues) and recyclables trading operations being 11% and 6%, respectively.

The financial viability of the project depends on the connection to the power grid. Without this connection, operation of the sorting and composting plants would be at

50 much below the plants’ design capacities, resulting in lower expected revenues from the sale of recyclables and compost. However, as the company was recently granted a permit to connect to the grid, production at the sorting plant will be increased to two shifts a day, resulting in more revenues from the sale of recyclables and compost. In addition, the power consumption cost will be reduced. The project sponsor has contracted a consultant to engage into discussions with the power supplier and design the power connection system. Construction will start after ERPA signing, with the connection to the power grid completed before the commissioning of the composting plant in April 2009. This measure will reduce the financial risk of the project.

Even without any revenues from the sale of the compost product during the entire project implementation period (until March 31, 2019), the project is expected to be financially viable thanks to the sales of recyclables from the sorting plant and trading operations as well as the CER revenues. The results indicate a positive NPV of RM 19.1 million (US$ 5.5 million, at a discount rate of 10%) and an IRR of 13.6%, which is greater than the maximum interest rate of 8% supposed to be received from money at the banks.

Even without any compost sale and without any CER revenues the project is still financially viable. The results indicate a positive NPV of RM 8.7 million (US$ 2.5 million, at a discount rate of 10%) and an IRR of 11.2%, which is greater than the maximum interest rate of 8% supposed to be received from money at the banks. This suggests that the project is expected to be viable when the CER revenues will stop after April 1, 2019.

51

78 00 ?If !2 ai 0s

oc m c 5. E Annex 5: Safeguards Issues Malaysia: Kota Kinabalu Composting Project

1. This Annex presents the key environmental and social impacts identified and the associated mitigation measures devised in connection with the construction and operation of a 500 tons/day capacity sorting and composting facility for treating MSW from Kota Kinabalu and three neighboring districts (Kota Belud, Tuaran, and Penampang) in the State of Sabah, Malaysia. The project will divert approximately 500 tons/day of MSW that would otherwise be disposed of at the Kayu Madang Sanitary Landfill. At full capacity, the composting plant will treat the highly biodegradable fraction of the MSW to produce approximately 150 tons/day of marketable compost and will complement the existing sorting operation that recovers approximately 23 tons/day of recyclable products. The sorting and composting operations complement the trading of recyclables by Smart Recycling.

2. The project has global and local environmental benefits. The annual GHG emission reductions over the next 10-year period due to composting at full plant capacity are estimated to be 737,380 tons C02-e. Operation of the sorting and composting plant at its full capacity is expected reduce the amount of MSW to be landfilled by 62% (from 520 tons/day to only 197 t~ns/day).~~This reduction in disposal rates is expected to extend the life of the landfill, decrease the leachate production rates from the landfill, and improve the quality of the treated leachate. The project is expected to have positive social benefits in terms of employment of approximately 110 workers (30 of which are former waste pickers) from the local communities and improve their skills and working conditions.

Project Location

3. The sorting and composting plant site will be located within the site of the Kayu Madang Sanitary Landfill, which covers an area of about 115 acres in Kayu Madang, Telipok, approximately 30 km northeast of the City of Kota Kinabalu, Sabah, Malaysia. This site is approximately 2 km inland from the western coast of the Island of Borneo to the South China Sea. The project site is easily accessible from Kota Kinabalu via Tuaran Road (Jalan Tuaran) or Polytechnic Road (Jalan Polyteknik).

4. The project sponsor Smart Recycling has leased about 18 acres of land from the City Hall, the owner and operator of the landfill, to build and operate the sorting and composting plant. The sorting plant and the administration building occupy approximately 3.2 acres, while remaining area will be used for the composting plant. The sorting plant was commissioned in April 2006 to recover and market the recyclable fraction of the

44 Full plant capacity assumes 500 tondday MSW input to the sorting plant and 300 tonslday input to the composting plant. Without the project, the MSW disposal to the landfill would be 520 tondday, 20 tondday being the construction waste. With the project, the MSW disposal to the landfill would be 197 tons/day, 177 tons/day being the rejects from the plant and 20 tondday being the construction waste. Therefore, the reduction in landfilled amount would be (520-197)/520 = 62%.

55 incoming MSW, and the composting plant is expected to be constructed in 2008 and commissioned in 2009 as the first commercial MSW composting facility in Malaysia.

Site Characteristics

5. The Kayu Madang Sanitary Landfill site is characterized by a low-lying valley- shaped area with gently sloping hills around its periphery. The northwest-southeast trending valley occupies the middle portion of the landfill area and has an almost zero elevation. Flanking the valley on both sides are gently sloping hills with a maximum elevation of 50 meters. The project site is underlain by sedimentary rocks deposited in a deep-marine environment about 23 to 50 million years ago. The rocks have undergone subsequently a series of folding, thrusting and normal faulting.

6. The climatic conditions experienced by Sabah's west coast region are typical of a coastal equatorial climate with uniform temperatures and high humidity. The climatic variations are characterized by the two seasons namely the southwest monsoon between May and September and the northeast monsoon between November and March. The mean annual rainfall during 1998-2007 varied between 1,898 mm and 4,003 mm with an annual number of rain days between 154 and 23 1. The annual mean daily sunshine hours were 7.2 hours in 1998 and 6.1 hours in 1999. The monthly 24-hour mean temperature for 1998-2006 was between 27.2OC and 28. l0C, and the 24-hour relative humidity for the same period was between 79.2% and 83.8%. The predominant wind direction is from the east at a speed varying between 18.0 m/s and 27.4 ds.

7. An unnamed stream that leads to the Salut River flows along the western side of the project site. This unnamed stream flows in a north-south direction and eventually joins Salut River. After the confluence, the Salut River flows in the westerly direction for about one kilometer, before discharging into the Salut Bay. The groundwater level is about 60 m below the land surface. Smart Recycling intends to use groundwater as a source of water for the composting facility.

8. The surrounding land use of the project site is predominantly the landfill with its ancillary services, rubber plantations, small villages, abandoned chicken farms, a pig farm, Kota Kinabalu Industrial Park and secondary forest. The population density surrounding the project site is low and is mostly in scattered villages around the project site. The four closest villages are Kampung Lubang (0.5 km), Kampung Lapasan (1 km), Kampung Peniang (1.5 km) and Kampung Salut (1.5 km). Groundwater or water from Salut River is not used at any of these villages.45

9. Apart from the villages, the City Hall has provided living quarters for the landfill workers and their families. The quarters consist of three blocks of buildings with a total of 18 housing units. The quarters are served with public water supplies, and each housing

45 The villages located around the project site have potable water supplies from Jabatan Air Negeri Sabah, except Kampung Pniang. Kampung Peniang gets its supply of water via a piped- gravity flow system from a stream that originates from the nearby mountain.

56 unit has sanitation facilities consisting of a toilet and shower unit. The toilets are connected to septic tanks that discharge to the unnamed stream.

Safeguard Policies

I Bank’s Safeguard Policies Triggered by #e Yes No Project

Environmental Assessment Policy: Category “B” - Partial Assessment

10. Project interventions would trigger the Bank’s “Environmental Assessment Safeguards Policy OP 4.01. To comply with this policy, the project sponsor prepared an Environmental Assessment (EA), with its stand-alone Environmental Management Plan (EMP) that addresses the specific provisions to be implemented during the construction and operation phases of the plant. In addition, the project sponsor prepared a Due Diligence Environmental Audit of the Kayu Madang Sanitary Landfill, which is linked to the subject project. In addition, to meet the requirements of Malaysia, the project sponsor has prepared an environmental impact assessment (EIA) for the sorting and composting plant, and submitted it to the (Federal) Department of Environment, Sabah for clearance on May 5,2008.

11. The environmental impacts during the construction and operational phases of the project are associated with air pollution, noise pollution, water pollution, soil pollution, faundpest management (only during plant operation), occupational health and safety, and traffic/transport management. The project’s environmental impacts are found to be well defined, site-specific, minor and easily manageable. The major safeguards-related issues covered during the project appraisal mission are presented below, and the local environmental impacts and the associated mitigation measures during construction of the composting plant and operation of the sorting-and-composting plant are shown in Tables 10 and 11, respectively.

Use of an impermeable surface to protect surface water and groundwater contamination from leachates/wastewaters in the composting area;

57 0 Establishment of a 61-meter buffer zone between the composting plant boundary and the City Hall staff quarters to reduce the adverse impacts of particulate and noise emissions from the composting plant. This is in addition to the barrier to be located around the staff quarters prior to the construction of the composting plant;

0 Investigation of soil stability of the nearly vertical slope near the City Hall staff quarters. If necessary, the slope would need to be stabilized to prevent a land slide. In addition, the area along the top of the slope would need to be fenced to prevent children from falling;

0 All workers of the sorting plant need to adhere to appropriate industrial hygiene procedures and plant management needs to strictly enforce these measures. More specifically: (i)all plant personnel entering the production area to use personal protection equipment (PPE) (company-provided dust masks, gloves, hard hats for workers working under the chutes or operating heavy equipment, weekly washed work clothes, and shoes), and (ii)separate employee showering, change rooms with lockers, and sufficient numbers of properly maintained toilets for men and women workers. The company will also provide an air-conditioned lunchroom facility for all employees on a rotational basis;

0 To prevent foul odors from the sorting plant, especially after the rainfall, the following measures were brought to Smart Reycling’ s management attention: (i) processing MSW and taking rejects away without accumulation for an excessive period (to avoid putrification), and (ii)maintaining good housekeeping practices at the sorting plant site. Foul odors from the composting plant will be prevented through good process control.

12. The environmental monitoring plan for the project involves monitoring of (i) ambient air at the sorting plant, composting plant, and the City Hall staff quarters area; (ii) noise at the sorting plant, composting plant, and the City Hall staff quarters area; and (iii) quality of the stormwater discharge from the sorting and composting plant and the quality of groundwater. In addition, periodic inspections and testing of process equipment, periodic inspection of emergency equipment, and regular health screening of plant workers will be conducted. A summary of the environmental monitoring program during construction of the composting plant and operation of the sorting-and-composting plant are presented in Tables 13 and 14, respectively. The project sponsor has the responsibility, for implementing the EMP. The environmental monitoring during the construction and operational phases will be carried out by a laboratory with Malaysian laboratory accreditation.

13. During construction, Smart Recycling will ensure that all contracts with contractors and subcontractors stipulate all construction measures given in the EMP of the EA, operational design criteria, and health and safety standards which must be implemented at the project site. Implementation of these measures will be enforced and supervised by the appointed Project Manager who will have direct responsibility for the Environment, Safety and Quality Assurance Program on site during the construction and commissioning phase.

58 The Project Manager will be responsible for ensuring that construction works comply with the requirements of the Environmental Management and Social Development Plan and all environmental permits.

14. During operation, the Plant Manager will be ultimately responsible for environmental compliance and the implementation of the mitigation measures, monitoring, and recordkeeping aspects of the EMP. The Plant Manager will be based at the site and will also be responsible for recruiting, training and managing his staff. Environmental aspects of the EMP will be carried out by the Environmental Affairs Unit under the responsibility of the Quality Control Department. The in-house Laboratory Unit will conduct some process monitoring and some product quality monitoring. In addition, for certain sampling and analyses an external laboratory certified in Malaysia will be contracted. The occupational health and safety aspects of the EMP will be implemented by the Industrial Health and Safety Unit under the Administrative Affairs Department.

Table 10: Potential Environmental Impacts and Mitigation Measures during Plant Construction Potential Environmental Impacts Mitigation Measures Air pollution D Dust from construction A minimum buffer distance of 61 meters shall be provided between the activities composting plant boundary and the nearest City Hall’s staff quarters to D Traffic-related air mitigate impacts due odor, bio-aerosol, and dust emissions. In addition, a quality impacts natural barrier of tall thick vegetation will be created or an artificial barrier erected on the sides facing the sorting and composting plant. The project site will be wetted to minimize fugitive dust emissions, especially in and around the excavation and construction areas. 0 Friable materials will be placed and maintained to minimize fugitive dust emissions. Vehicles and machinery will be maintained properly to limit exhaust air emissions. Trucks will be covered with canvas when transporting friable construction materials. Noise D Noise from construction 0 A minimum buffer distance of 61 meters shall be provided between the pollution activities and vehicular composting plant boundary and the nearest City Hall’s staff quarters to movements mitigate impacts due to noise emissions. In addition, a natural barrier of tall thick vegetation will be created or an artificial barrier erected on the sides facing the sorting and composting plant. Noisy construction activities will be limited and movement of heavy vehicles at night will be prohibited. Vehicle speed limits and strict controls of vehicle routing will be enforced. Diesel engine and construction equipment will be fitted with silencers.

D Water pollution from A site drainage plan will be developed to reduce flow velocity and pollution site drainage sediment load. D Water pollution from 0 Silt traps will be incorporated into the temporary drainage system around untreated sewage the composting facility to enhance deposition rates and prevent the contaminated water being discharged directly into the surrounding drainage system. 0 City Hall’s tire washing facility at the Landfill site will be used by all trucks exiting the project site to ensure no earth, mud and debris is deposited on roads outside the Landfill site. Sand and silt in the wash L water from such facilities shall be settled out and removed before 59 Potential Environmental Impacts Mitigation Measures discharging the used water into water drains. All excavations will be kept free of water at all times until completion of construction and backfilling. Site control on fill, grading and ditching will be carried out to direct surface drainage away from their excavation and construction areas, and to direct water to proper drainage facilities. Temporary watedtoilet facilities will be provided and sewage discharges will be treated on site before discharge. The composting facility will be properly designed to protect soil, groundwater and surface water from contamination. Separate drainage systems will be constructed to channel stormwater at the sorting plant and composting plant. Temporary stockpiles of soil will be protected from erosion by using a reduced slope angle where practical, sheeting, and by incorporating sediment traps in drainage ditches. Construction of earthwork methods will be planned and executed to control surface drainage from cuts and fills and to prevent erosion and sedimentation. Site will be graded to prevent standing water and to direct surface drainage away from excavations. Site will be managed properly to minimize surface water runoff and soil erosion. Drainage systems will be maintained adequately to prevent overflow. Critical areas within the site will be clearly marked and provided with protective measures to control site runoff. Temporary channels will be provided to facilitate runoff discharge into the appropriate watercourses via a sediment retention pond. Currently, the sorting plant does not have any drains for the collection of the wastewater generated from floor washing at the waste reception area. A drain system will be constructed to collect the wash water and leachate from the waste reception area of the sorting plant. Soil pollution Soil contamination from Surplus excavated materials will be temporarily stored at the locations oil, litter, excavated allocated at the proposed composting facility or removed to the landfill. materials The temporary storage sites for excavated earth materials on site will be cleaned and reinstated after completion of the works. Contaminated soils or earth will be excavated and replaced with suitable compacted fill and topsoil. The excavated contaminated soils and Scheduled waste materials will be sent to appropriate licensed offsite facilities for recovery. Soil contamination will be prevented through provision of oil and suspended solid interceptors. Oily wastes from the heavy machineries will be handled and stored in a manner which ensures that they are held securely without leakage. Waste storage areas will be well maintained and cleaned regularly. Only licensed waste collectors authorized to collect the specific category of waste concerned will be employed. Appropriate measures will be employed to minimize windblown litter and dust during transportation by either covering trucks or transporting wastes in enclosed containers. General refuse will be collected, carried out frequently (preferably daily) and disposed at the landfill. Records will be maintained of the quantities of wastes generated, recycled and disposed.

60 -. Potentiat Environmental Impacts Mitigstion Measures rrafficl 1 Spillage of construction D Steps will be taken to ensure the cleanliness of construction vehicles Transport materials leaving and entering the site at all times to avoid contamination of the management 1 Safety in transport surrounding area and public roadways. All trucks (including their tires) exiting the Project site will be washed at the City Hall’s existing truck washing facility. In addition, all dust-laden roadways within the Landfill site used by trucks under this project will be wetted down. These measures will be adhered to and closely monitored by site supervisor. 0 The project site will be wetted down to minimize fugitive dust emissions, especially in and around the excavation and construction areas. 0 Spillage of friable excavated and construction materials onto roadways will be prevented during transportation by proper covering of truck loads with canvas. 0 Vehicle and machinery will be maintained properly to limit noise and exhaust air emissions. 0 On unpaved road, vehicle speed limits will be enforced to <35 kmh. 0 Site access will be restricted 0 Drop heights for material transfer activities (such as unloading of friable materials) will be minimized. Occupational D Impacts of work Stability of the vertical slope near the City Hall staff quarters will be health and conditions on workers’ investigated. If necessary, the slope will be stabilized to prevent a land safety health (due to poor slide. working conditions, The design and construction of the composting plant (especially in including lack of safety) waterlogged areas) should assure that there will be suitable drainage and D Accidents stability to support the heavy mobile equipment, such as windrow turner that will be used during composting operations. The area along the top slope near the City Hall staff quarters will be fenced to prevent children from falling. Temporary barriers will be constructed to prevent public entry to construction areas without proper personal protection equipment (PPEs) and to protect existing facilities and adjacent properties from damage from its construction operations. Workers exposed to dust shall be provided with dust masks and will be required to use these masks. Construction workers working in close proximity to the noise-generating sources will be provided with suitable protective hearing equipment and will be required to use such protective equipment. Prior to piling work the potential damage to neighboring properties or structures due to vibration shall be assessed and appropriate actions will be taken. Socio- Workforcelcommunity 0 As far as possible, local workers will be employed. However, if economic and relations employment of foreign workers is unavoidable, then proper legal cultural employment status and health records will be ensured. environment 0 If needed, proper on-site accommodation will be provided with adequate water supply, proper sanitation facilities for sewage disposal and solid waste disposal. 0 Foreign workers will be closely monitored to prevent anti-social behavior and related problems when interacting with local communities.

61 Table 11: Potential Environmental Impacts and Mitigation Measures during Plant Operation

Potential Environmental Impacts Mitigation Measures Air pollution 0 Dust emissions from 0 Good housekeeping will be practiced at the sorting and composting (including waste piles and traffic- plant. malodors) related impacts on 0 Operating parameters of the windrows (e.g. oxygen level, temperature) ambient air quality. will be regularly monitored to ensure that the composting process is 0 Odor generation from always in aerobic conditions. poor housekeeping and 0 Appropriate moisture levels of the windrows (especially during turning improper operating of the windrows) will be maintained to effectively control the air conditions emissions in the form of bio-aerosols. 0 A minimum buffer distance of 61 meters between the composting plant boundary and the City Hall staff quarters is expected to mitigate adverse impacts from odor, bio-aerosol and dust emissions to the residents of the City Hall staff quarters. In addition, a natural barrier of, tall thick vegetation will be created or an artificial barrier erected on the sides facing the sorting and composting plant. 0 The incoming MSW will not be allowed to accumulate and will be processed to reduce the generation of odor due to putrefaction.

Noise 0 Noise from the sorting A minimum buffer distance of 61 meters between the composting plant pollution and composting plant boundary and the City Hall’s staff quarters is intended to minimize and vehicles to the adverse impacts due to noise emissions to the residents of the City surrounding areas Hall’s staff quarters. In addition, a natural barrier of tall thick vegetation will be created or an artificial barrier erected on the sides facing the sorting and composting plant. Plant workers will be provided with protective wear in plant areas with high noise levels. 0 Generators and air compressors will be equipped with silencers. 0 Vehicle speed limits and strict controls of vehicle routing will be enforced 0 Movement of trucks at night will be prohibited.

Soilmater 0 Discharge of 0 The composting facility will be properly designed to protect soil, pollution wastewater (leachate groundwater and surface water from contamination. A separate and contaminated drainage system will be used to channel stormwater at the sorting plant stormwater) and the composting plant. A dedicated drainage system for the composting plant will be used to collect and channel the leachate and the wastewater generated from floor washings to a retention pond or sump. The collected wastewater will be sprayed back on the windrows, using a closed loop system. Air permeable geotextile sheet will be used to cover the windrows to prevent surface runoff. A separate drainage system will be used to collect wash water and leachate from the waste reception area of the sorting plant. The collected leachate will then be sprayed back onto the windrows in a closed-loop system. The drainage system will be regularly checked to ensure containment and efficient operation All trucks (including their tires) exiting the project site will be washed at City Hall’s existing truck washing facility. In addition, all dust-laden roadways within the Landfill site used by trucks under this project will be wetted down. These measures will be adhered to and closely monitored bv site suDervisor.

62 Potentiill Lvironme@l Impacts Mitigation Measures FaunaPest Presence of stray e Good housekeeping and regular maintenance will be implemented in the management dogdpests at the plant entire plant area. To control pests, MSW will be processed within 4-6 and surroundings hours of arrival at the Waste Receiving Area of the Sorting Plant. The movement and storage of incoming MSW and in-process material will be appropriately managed to prevent MSW and its components being strewn around the plant area. Pest control measures will be implemented and health authorities will be consulted about the health risks posed by stray dogs at the project site. The tires received at site will be appropriately disposed off to prevent vector breeding. Occupational Impacts of work D Regular training programs on the general operation of the plant, health and conditions on workers’ occupational health and safety and contingency plans and emergency safety health (due to poor procedures will be conducted. The training program will be designed to working conditions, ensure that all site personnel (including the supervisors) are used to including lack of operate the plant and intimately familiar with the occupational health and safety) safety and emergency procedures including the health and injury risks. Accidents B All employees will be provided with all necessary personal protective equipment (PPE), including protective clothing, eye goggles, gloves, hard hats, dust masks and safety shoes. Clean protective clothing will be provided by Smart Recycling to all employees on a weekly basis and will be worn at all times at the plant site. Gloves will be worn by all employees handling MSW or compost. Hard hats will be worn by all employees operating mobile equipment or working in areas where chutes are located. Noise protection equipment will be worn by all employees working near loud equipment. These measures will be strictly enforced by Smart Recycling management. B All men and women employees will be provided by Smart Recycling with separate shower facilities and change rooms with lockers. B An air-conditioned lunchroom facility of sufficient capacity will be provided by Smart Recycling to accommodate the employees on an appropriate rotational basis. B Health screening of the plant personnel will be performed at least every 6 months B Plant personnel who have been showing signs of allergies will be transferred or moved to areas of the plant that has low incidences of dust/ bio-aerosols. B Plant personnel will be inoculated against hepatitis, tetanus, and influenza. B Work areas hazards will be clearly marked and training will be conducted in recognition of hazard symbols. B Site emergency response plan will be developed. B All the above health and safety measures will be enforced by Smart Recycling. Socio- Workforcekommunity D At least 50% of the workforce at the sorting and composting plant site will economicand relations be from the State of Sabah. cultural D Phasing out of the scavenging activities at the Landfill will be facilitated environment by offering employment at the sorting and composting plant. D Public awareness programs with the City hall and NGOs will be conducted on the environmental benefits of separating organic waste and recyclable materials at source.

63 x x 3 3 c C 5 5 ...... 15. Smart Recycling will ensure that all staff employed at the sorting and composting plant be given environmental training in the following areas: (i)general operation of the sorting and composting plant, (ii)specific job roles and procedures, (iii)occupational health and safety, and (iv) contingency plans and emergency response procedures. In addition, the staff of the Environmental Affairs Department will receive training in the following areas: (i)day-to-day monitoring activities, (ii)collection and analysis of air quality and noise data, (iii)monitoring of the water effluents, (iv) industrial hygiene, (v) occupational health and safety, and (vi) emergency and contingency procedures. Occupational health and safety training will include at a minimum: (i)general area safety, (ii)specific job safety, (iii)hearing conservation, (iv) code of safe work practices, (v) use of personal protective equipment, and (vi) first-aid. Smart Recycling will also prepare an emergency response plan (ERP) for various possible emergencies like fire, explosion, oil or chemical spillage, vehicle accidents, and industrial accidents; and will ensure that all plant personnel have sufficient understanding of the emergency response procedures and evacuation routes. The operation of the plant’s emergency plan will be the responsibility of the designated safety officer and supporting staff.

16. The project does not require acquisition of additional land beyond that provided by the Kota Kinabalu City Hall at the landfill site. The Bank’s Indigenous Peoples Policy (OPBP 4.10) is not triggered because the project does not limit or prevent access to natural resources vital to sustainability of .their culture and livelihoods. In addition to the environmental benefits, the project will also bring economic benefits to the local communities in terms of new jobs. The current labor force at the sorting plant is approximately 70% Malaysian (mostly from local areas in the State of Sabah) and 30% from neighboring countries. The project sponsor complies with Kota Kinabalu City Hall’s requirement that at least 50% of the workers at the sorting and composting plant be Sabahian (from the State of Sabah). Approximately 110 workers will be required for which preference would be given to the local workers.

17. According to Bank procedures, public consultation was used twice with the project- affected people, the first time during scoping and preparation of the EA (e.g. with the residents of the nearby City Hall quarters as well as nearby villages) and the second time (in November 2007) at a public meeting to solicit comments and suggestions on the draft EA report. Participants included, among others, representatives from Consumer Association of Sabah and Labuan; Village heads of Lapasan, Salut, Peniang and Norowot villages; Environment Action Committee, Sabah Environmental Protection Association; and Sabah Society. The English language of the EA report and its Malay language executive summary were disclosed at the communal hall of the Kota Kinabalu City Hall on March 25, 2008 after being advertised in a local newspaper on March 22, 2008. The (Federal) Department of Environment, Sabah has agreed to maintain permanently a copy of the final EA Report in its library, which is accessible to the public. In addition, the EA was first disclosed at the InfoShop on January 10, 2008, and the updated (including the final) versions of the EA Report were subsequently disclosed at the InfoShop.

66 Environmental Due Diligence Audit

18. An Environmental Due Diligence Audit was conducted for the Kayu Madang Sanitary Landfill, which is linked to this project. The objective of this audit was to identify the potential risks to people and the environment associated with the design and operation of this landfill and to propose risk mitigation measures with an implementation plan.

19. The landfill was commissioned in September 1997 as a sanitary landfill to receive MSW from residential, institutional, and commercial areas, yard and market waste as well as non- hazardous industrial waste. The total area of the landfill site is 115 acres, whereas the first cell within this landfill covers an area of 22 acres to receive about 1.55 million m3 of waste. As this cell is planned to close by end 2010, a second cell is currently under construction. The second cell, which covers a land area of approximately 12 acres and a capacity to hold 1 million m3 of waste material, is expected to serve for 15 years; and this will easily accommodate disposal of rejects from the subject project.

20. The base of the first cell is reported to be lined with a relatively impermeable clay layer of about one meter thickness, and partially covered with a high density polyethylene (HDPE) liner alongside the earth embankmenthund, extending only to a short distance onto the floor of the landfill basin. A perforated pipe wrapped in a fabric filter and installed at the lowest point of the landfill bed collects and conveys by gravity the leachate for biological treatment (in a three- compartment oxidation pond). The effluent from treatment is discharged into a stream, which finally flows to the South China Sea. Currently, this discharge cannot comply with the parameter limits of EfJluent Standard A of the Environmental Quality (Sewage and Industry EfJluents) Regulations (1979), which was imposed by the (Federal) Department of Environment, Sabah as a condition of approval of the landfill’s EIA Report. The second cell that is being constructed at this landfill is reported to have a HDPE liner at all sides and bottom. The leachate from the second cell is planned to be treated at the current leachate treatment plant of the Kayu Madang Sanitary Landfill. The City Hall officials informed the Bank that they are in the process of applying for State and Federal funds to upgrade the leachate treatment plant. The groundwater monitoring wells at this landfill was vandalized a few years after landfill commissioning. As the landfill’s permit expired in 2005, the (Federal) Department of Environment, Sabah is expecting from the City Hall a permit renewal application and an environmental impact assessment (EIA) for the landfill.

21. Approximately 20 scavengers are reported to be working at the landfill under poor hygienic conditions (e.g. without use of any personal protection equipment). The City Hall has provided 18 housing units for landfill workers and their families within the landfill site. These housing units are located about 150 meters from the nearest point of the active landfill area and about 100 meters from the sorting plant. Only 11 units are occupied by the staff. The residential quarters are provided with public water supply and sanitation facilities. There are four villages located within 0.5 to 1.5 km distance from the landfill site. The total population of these villages is about 500.

67 22. Interviews with the local residents of the villages were conducted to identify any potential pacts of the landfill. Most of the residents in the four villages close to the landfill site did not complain about the noise, dust or malodor from the landfill. However, the residents of the staff quarters complained of malodor, particularly on rainy days.

23. The Due Diligence Audit did not find any serious disease or illness among the workers and staff which may be attributed to the working conditions at the landfill. However, the audit report proposed to have regular visits by health officials to advise resident staff and their families to take proper hygiene and protective measures.

24. The Due Diligence Audit Report recommended the following categories of mitigation measures: (i)improvements in work and living conditions at and around the landfill, (ii) investments in landfill improvements that also benefit the sorting and composting plant operations, and Smart Recycling, and (iii)investments for landfill improvements only. Smart Recycling has shared the Due Diligence Audit Report with the City Hall and will be submitting it shortly to the (Federal) Department of Environment, Sabah. Among the specific. recommendations of this report, the City Hall has agreed to upgrade the access road to the sorting and composting plant by mid 2009 and to have trucks exiting the sorting and composting plant be cleaned off dirt at its current truck washing facility for the landfill.

Environmental Requirements of Malaysia

25. To meet the requirements of Malaysia, Smart Recycling has prepared - through a local consultant (Ensolve) - a “Preliminary Environmental Impact Assessment (EIA)” for the sorting and composting plant and submitted it to the (Federal) Department of Environment, Sabah on May 5, 2008. A Technical Committee - which consists of the (Federal) Department of Environment, Sabah and other relevant government agencies - will decide whether to accept this submittal or request a comprehensive EIA that would encompass also the landfill facility. The basis for the comprehensive EIA is that the sorting and composting plant is located at this landfill site, the landfill has been operating with an expired permit since 2005, and the original design of the landfill has been modified through a construction of new cell. The (Federal) Department of Environment, Sabah’s decision is expected by end June 2008. If Smart Recycling’s submittal is accepted and if no substantial additional information is requested by the (Federal) Department of Environment, Sabah, approval typically takes approximately five weeks. However, if the (Federal) Department of Environment, Sabah requests a Detailed EIA or a comprehensive EL4 with the landfill facility, then considerable delays implementation delays are likely to occur.

68 Annex 6: Documents in the Project File

1. Environmental assessment 2. ISDS 3. Reports and financial statements (audited) of Smart Recycling for the years ended 30 June2004and2005. 4. Income statements (unaudited) of Smart Recycling for the years ended 30 June 2006 and 2006. 5. Kota Kinabalu City Hall’s letter of approval - Proposal for setting up municipal solid waste (MSW) recycling plant with tyre recycling facility in Kota Kinabalu, Sabah.

69 Annex 7: Project Preparation and Supervision

Task Team Leader Bekir Onursal, Sr. Environmental Specialist (EASRE) Deal Manager Ahmed Mostafa, Technical Specialist (ENCVF) Legal Counsel Xueman Wang, Sr. Counsel (LEGCF) Environmental SDecialist Vivianti Rambe. Environmental SDecialist (EASIS) Social Specialists Sulistiowati Nainggolan, Social Specialist (EASIS) Pramod Agrawal, Consultant (EASRE) Senior Technical SDecialist Charles Peterson. Sr. Environmental SDecialist (FEU) Technical Specialist Jiang Ru, Consultant (EASRE) Financial Management Specialist Nipa Siribuddhamas, Financial Management Specialist (EAPCO) Program Assistants Olga Hoxon Rizo, Program Assistant (EASRE) Evelyn Laguidao, Program Assistant (EASRE) Peer Reviewer (PAD) Neeraj Prasad (EASOP), Lead Environmental Specialist Peer Reviewer (PAD) Charles Peterson, Sr. Environmental Specialist (FEU) Peer Reviewer (PAD) Chaohua Zhang (SASDS). Senior Social Sector SDecialist Peer Reviewer (PCN) Daniel Hoornweg, Sr. Environmental Engineer (LCSUW) Reviewer (PCN) Richard Chisholm. Sr. Agriculturist (EASRE)

70 Annex 8: Country at a Glance

East mef- middle- me Developmentdiamond. PSclfiC inme I

25.3 1,885 599 Life expectancy 4,960 1,627 5,625 125.7 3,087 3.368 T 2.0 09 0.6 2.9 13 1.2

67 41 72 73 70 69 I 10 29 23 11 15 7 Access to improved water source 99 79 94 a9 91 E14 93 115 107 -Ma/aysM 94 116 ioa ---U~-nnl#e--MmMlegroUp 93 114 106

1995 2004 m5 Economic ratios* 31 a 88.8 1183 130.1 24 43.6 226 a Tr;lde 54.1 94.1 121 2 29.9 39.7 43 9 33.9 352 -1.9 -9.7 12 6 13.4 45 1.3 15 aa 38.7 441 304 7.0 62 443 355

198595 199545 2004 2005 200509 fawage anw growh) GDP a7 4.1 7.1 53 GDP per capita 5.8 1.9 5.2 34 Exports dgoods and mees 14.9 6.1 16.3

1985 1995 2004 2005 Growth of cspital and GDP (*A) 19.9 12.9 9.5 I &T 38.5 41.4 50.4 21 19.3 26.4 31.4 41.6 45.6 40.1 0 I 55.4 47.9 42.9 148 12.4 13.2 49.1 H.0 99.9

1985-95 199545 2004 2005

1.8 2.0 5 .O 9.9 4.3 7.9 13.7 5.2 9.8 9.9 3.9 8.6 Hausehold Sn;d consumptron expenditure a3 38 10 5 General grrst final consumpttcm expenditure 63 71 60 -15 lm I Grosscaprtalformat#m 163 -27 138 IrnpMsof pmds and mces 181 39 207

Note 2!3X data are prelimnary &mates

* The dtamonds show four key mdcators in the mnty(in Iidd) e0mP;lred WI its inccmeqmcl, average If data are misstng,the diamond wll be Incomplete

71 Annex9: Map Malaysia: Kota Kinabalu Composting Project Figure 9-1. Location of the Project Site

MALAYSIA KOTA KINABALU COMPOSTING PROJECT * PROJECTSIIE o SELECTED CITIES AND TOWNS 0 STATE CAPITALS @ NATIONAL CAPliAL W RNERS -MAIN ROADS -RAILROADS

-I-- STATE BOUNDARIES -.- INTERNATIONAL BOUNDARIES

72