Document of The World Bank NOTE ON CANCELLED OPERATION (P104092) ON A PURCHASE OF EMISSIONS REDUCTIONS. IN THE AMOUNT OF US$3 million

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank NOTE ON CANCELLED OPERATION (P104092) ON A PURCHASE OF EMISSIONS REDUCTIONS IN THE AMOUNT OF US$3 million TO THE REPUBLIC OF BOLIVIA FOR THE BOLIVIA URBAN WASTEWATER METHANE GAS CAPTURE PROJECT December 16, 2014 Urban and Disaster Risk Management Department Argentina, Chile, Uruguay, and Paraguay Management Unit Latin America and Caribbean Region Report No: [ ]

2 CURRENCY EQUIVALENTS Currency Unit = US Dollar ($) FISCAL YEAR [July 1 June 30] ABBREVIATIONS AND ACRONYMS CBP CDCF CDM DNA ER ERPA LoI ODL PDO PE tco 2 e UNFCCC Community Benefit Plan Community Development Carbon Fund Clean Development Mechanism Designated National Authority Emission Reduction Emission Reduction Purchase Agreement Letter of Intent Oficina de Desarrollo Limpio Project Development Objective Project Entity Tonne (metric ton) of carbon dioxide equivalent United Nations Framework Convention on Climate Change Vice President: Country Director: Sector Manager: Project Team Leader: NCO Team Leader: Pamela Cox Marcelo Guigale John Henry Stein Daniel Hoornweg John Morton

3 Republic of Bolivia Bolivia Urban Wastewater Methane Gas Capture Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Ratings of Project Performance in ISRs 1. Context, Project Development Objectives and Design 2. Post-approval Experience and Reasons for Cancellation 3. Assessment of Bank Performance 4. Assessment of Borrower Performance 5. Lessons Learned

4 A. Basic Information Country: Republic of Bolivia Project ID: P Project Name: Urban Wastewater Methane Gas Capture Project L/C/TF Number(s): TF55843 NCO Date: December 16, 2014 Lending Instrument: Carbon Finance Original total commitment: USD 3.0 M Borrower: SAGUAPAC Disbursed Amount: USD 0.19 M Environmental category: B Implementing Agencies: SAGUAPAC Co financiers and Other External Partners: N/A B. Key Dates Process Date Process Original Date Revised/Actual Date(s) Concept Review: 01/17/2007 Effectiveness: 05/17/2007 N/A Appraisal: 04/26/2007 Closing: 12/31/ /4/2010 Approval: 07/04/2007 C. Ratings Summary Performance Rating by NCO Outcome: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Moderate Satisfactory Satisfactory D. Sector and Theme Codes Sector Code (as % of total amount) Original 1. Sewerage 100 Original Priority Thematic Code (Primary/ Secondary) 1. Climate change 100 E. Bank Staff

5 Positions At NCO At Approval Vice President: Jorge Familiar Pamela Cox Country Director: Livia Benavides Marcelo Giugale Sector Manager: Anna Wellenstein Makhtar Diop, Jack Stein Project Team Leader: Miguel Vargas-Ramirez Daniel Hoornweg NCO Team Leader: John Morton NCO Primary Author: Anna Perkinson F. Ratings of Project Performance in ISRs (if available) No ISRs available.

6 1. Context, Project Development Objectives, and Design This Carbon Finance Operation was designed to purchase Emission Reductions (ERs) credits under the framework of the Clean Development Mechanism resulting from the collection and destruction of methane from a wastewater treatment facility in Santa Cruz, Bolivia. The Carbon Finance Operation was processed separately from any World Bank lending project. The investment financing for the infrastructure (methane collection and gas flaring system) was financed separately under an IDA Credit (Bolivia Urban Infrastructure Project - P083979). The Project Development Objective was to reduce greenhouse gas emissions from urban wastewater treatment facilities in Santa Cruz, Bolivia. This Carbon Finance Operation also supported SAGUAPAC s 1 goals of expanded wastewater coverage and operational efficiency. The Project was appraised in April 2007 and the Emissions Reductions Purchase Agreement (ERPA) was signed in May Project Rationale Since the early 1990s the Latin American Region of the World Bank has actively pursued projects in integrated urban sanitation. The Carbon Finance Operation was designed to support this agenda as a complementary activity to the Bolivia Urban Infrastructure Project (P083979), a project which aimed at improving the access to basic services to the urban poor in Bolivia s major cities through targeted infrastructure investments. Part of this project also includes a provision for the expansion of sewerage coverage in poor areas of Santa Cruz de la Sierra. This included works to increase the capacity of the three wastewater treatment plants so as to enable them to process increased wastewater flows. These plants were designed to use a lagoon treatment system that treats organic matter and as a result produces methane, a powerful greenhouse gas. While the Bolivia Urban Infrastructure Project financed the methane gas collection system investment, this Carbon Finance operation was designed to provide a cost recovery mechanism for the gas collection system through the sale and purchase of Certified Emissions Reductions (CERs) and Verified Emissions Reductions (VERs). This Project technology was innovative being the first of its kind in Bolivia. At the time of appraisal, Bolivia was in a position to participate in the CDM and receive revenues from the carbon market. Bolivia ratified the Kyoto Protocol in 1999 indicating that the country was eligible to participate in the Clean Development Mechanism (CDM). The CDM Designated National Authority (DNA), which is the national entity responsible for determining CDM eligibility by confirming the project was consistent with the country s overall sustainable development priorities, was established in Bolivia. 1 SAGUAPAC is the largest of 10 cooperatives in Santa Cruz that provide sanitation services.

7 The financing of the purchase of the ERs was to be done under the Community Development Carbon Fund (CDCF) project. CDCF projects are designed to ensure impoverished communities in the area receive quantifiable benefits from either project implementation or the profits returned by the project s success. In this case, a Community Benefit Plan (CBP) based on a survey conducted in the project area by consultants for SAGUAPAC was developed to connect up to 600 families in a lowincome area of the city to a sewage treatment system to be financed through a premium added to the agreed ER price. Risk Analysis and Appraisal The project appraisal included an economic analysis under different scenarios indicating a solid rate of return; a technical analysis of the chosen technology; and an assessment of social and environmental safeguards compliance. It also included a thorough institutional analysis of SAGUPAC and due diligence on the likely emission reductions and technical eligibility of the project under the appropriate CDM methodology. Several risks were identified along with mitigation measures. Financial risks were identified as low to moderate. With the investment secured through the larger Bolivia Urban Infrastructure Project and the up-front payments limited to preparation costs, financial risks were largely not directly associated with the carbon finance operation. Risks related to the lack of experience with this technology as well as the lack of experience of SAGUAPAC with the technology were identified. These risks were mitigated by technical assistance provided by the Bank and the hiring of a consulting firm to aid with the construction and installation process. Lastly, some risks were identified related to performance of the project and its ability to meet contractual obligations under the ERPA. These were to be mitigated through a requirement of having an initial verification of the project and were not expected to be inhibited by country regulation. At approval there were no regulations or requirements in the country for the capturing and flaring of methane from lagoons. The capacity of the SAGUAPAC also contributed to the low rating for regulatory and institutional risks. SAGUAPAC had served the city for more than twenty years and has been recognized as one of the best managed cooperatives in Latin America. The cooperative had previously received two Bank credits and technical assistance, all of which were used effectively. Overall the quality of the Project at entry was good; potential problems were addressed through mitigation measures and the investment capital was secured outside of the operation. SAGUAPAC had a strong, track record of success with Bank involvement, and Bolivia met all international requirements under the Kyoto Protocol to participate in the international carbon market.

8 2. Post-Approval Experience and Reasons for Cancellation The rules for eligibility for the CDM incorporate a mechanism for country approval which ensures the project contributes to local sustainable development. This and the requirement for Registration of the project with the CDM Executive Board under the UNFCCC were prerequisites for financing under the Operation. After project approval, Bolivia developed the Law of Mother Earth, a groundbreaking environmental law that among other things considers the natural world to have rights which had implications on the concept of sale and purchase of natural resources (including carbon emissions), a principle upon which the CDM was based. In the backdrop of this new policy environment that conflicts with a market-based approach in the sector, no written approval was granted by the Government of the Plurinational State of Bolivia confirming that the project was consistent with the country s sustainable development goals. SAGUAPAC was notified of the ERPA cancellation via a Termination Letter on November 4, The Project Development Objective to reduce greenhouse gas emission from urban wastewater treatment facilities in Santa Cruz, Bolivia, was achieved. SAGUAPAC followed through with implementation of the methane gas collection systems at their wastewater treatment plants, and they are now successfully and continuously operating to capture and flare the gas. By all accounts the systems are well designed, constructed and managed. As of 2012, SAGUAPAC had submitted a request to the Government of Bolivia to produce energy from the gas collected at its wastewater treatment plants. 3. Assessment of Bank Performance Rating: Satisfactory The Bank team satisfactorily prepared the Project and supported SAGUAPAC and the linkage to the Bank lending project was well leveraged. The World Bank prepared and appraised the Project, negotiated the legal agreements, and supported the client in the process. The team also provided technical assistance and expert advice for the project design, as well as helped prepare a Community Benefits Plan tailored to the areas needs based on a survey and input from residents in the affected area. 4. Assessment of Borrow Performance Rating: Satisfactory SAGUAPAC was well equipped to implement the infrastructure part of the project successfully. They actively engaged with the project team throughout the preparation phase, as well as agreed to provide the investment financing needed for the project activities if needed. Even after project cancellation, SAGUAPAC moved forward with the implementation of methane gas capture systems at their lagoons in Santa

9 Cruz and they continue to maintain operations at their wastewater treatment plants. This can be attributed to the strength of SAGUAPAC and their desire to carry out the project. 5. Lessons Learned Evolving Rules and Laws. At the time of project preparation, both the CDM rules and country level definition of sustainable development were under development, and therefore were susceptible to changes. Keeping the likelihood for changes in procedures in mind as a risk factor was an important consideration for CDM projects at that time. Strong Project Entity with Proven Implementation Capacity. The implementation success of the infrastructure part of the project can be attributed to the competence and interest of the implementing entity to carry out the project. The choice of implementing agency was thus of key importance in the project design. Environmental benefits of methane gas capture facilities. The fact that 3 functioning methane gas capture facilities were eventually realized highlights the value of this investment for SAGUAPAC. The attention that the CDM brought to this technology was the impetus for pursuing this project at its onset, and in the long term the value the investment in terms of commitment to global environmental issues and improving wastewater treatment operational and safety measures was appreciated by SAGUAPAC even without the financial revenues of the CDM.