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Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No: 43548 - MY PROJECT APPRAISAL DOCUMENT Public Disclosure Authorized MALAYSIA: KOTA KINABALU 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 Greenhouse Gas 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 Climate Change 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 Telipok, 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, Sabah, 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