PROJECT IDEA NOTE. Name of Project: PROMOTING SUSTAINABLE DEVELOPMENT THROUGH NATURAL RUBBER PLANTATIONS IN GUATEMALA

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1 PROJECT IDEA NOTE Name of Project: PROMOTING SUSTAINABLE DEVELOPMENT THROUGH NATURAL RUBBER A. Project description, type, location and schedule General description A.1 Project description and proposed activities In Guatemala, only 26% of land is good for intensive agricultural production. The additional territory is more suitable for forestry management, agro forestry, or conservation purposes. However, from 1979 to 2003 the trend was to increase land surface with annual crops and cattle ranch activities, decreasing the forest surface. The Hevea brasiliens plantations owned by Grupo Agroindustrial Occidente (GAO) since 1988 (500 Ha), are changing the dynamics of these areas by improving the social indicators of income and employment in poor regions. Nowadays, GAO is looking for financial solutions to allow the expansion of new plantations, both for the group, and for the small and medium enterprises (SMEs) that provide rubber to GAO s industrial plant. The project aims to create a model of sustainable competitiveness in the natural rubber sector in Guatemala introducing several innovations. The first will be to create financial mechanisms for financing the project reforestation activities, closing the gap during the first 7 years of rubber plantations, when no income is generated, and high investment is required. The second innovation will be to invest on improving industrial processes by implementing energy efficiency, fuel switch (from diesel to biodiesel), and methane reduction (from water waste treatment) programs in the GAO s industrial facility. The third innovation will be to set up a program implementing sustainable practices along the natural rubber value chain. GAO has nearly 350 suppliers, most of them small and medium enterprises. They will be progressively assisted to implement sustainable management in rubber tree plantations and get certified under the Forest Stewardship Council (FSC) standards. The same certification will be applied at the GAO s industrial facility, where FSC Chain of Custody (CoC) certification will be obtained. This project will only quantify and sell the emissions sequestered from reforestation with Hevea brasiliensis plantations in the North

2 and South coasts of Guatemala. The activities at the industrial level will be evaluated on its scale and how feasible is to access the CDM given the small amount of emission reductions estimated. The total project area is 4,835 ha. From this total, 675 ha are occupied by the Reserva Protectora de Manantiales Cerro San Gil, which is a natural forest reserve. The remaining area is divided as follows: a) 2,911 ha are planted with pasture for extensive cattle feeding and annual extensive crops, which will be substituted by rubber tree plantations; b) 1,249 ha were reforested with rubber tree plantations in 2007 and Carbon Finance will be use to make a viable financial scheme for rubber plantation finance. GAO through its partner Grupo Financiero de Occidente, will develop a financial model to provide loans to the natural rubber sector, in which the new income from carbon credits will be key to cover financial costs, and operative cost during the plantation growth. In addition, GAO will implement sustainable practices along the natural rubber value chain. Carbon finance will cover the cost of technical assistance to GAO and its suppliers, both on the plantation and industry sides. The sustainable practices implemented will be certified under the FSC principles and criteria. The FSC certification is of great importance in the case of reforestation projects, since the process of certification implies verification from a third independent party, who evaluates the accomplishment of the principles and criteria that includes the highest social, environmental, and management standards. FSC standards will guarantee between other important issues, that natural forest reserve areas are properly conserved as high conservation value forest, reforested areas were deforested before Moreover, FSC certification will allow throughout this project, the creation of a responsible scheme of market incentives to extend natural rubber plantations, avoiding deforestation and degradation of natural forests. The same can be said about social matters, where FSC certifications will help on creating employment over the highest standards, keeping adequate relationship with communities, avoiding the use of toxic chemicals, and many other improvements on social responsibility. A.2 Technology to be employed Rehabilitation of degraded lands by planting natural rubber tree plantations (Hevea brasilensis). The project includes also a long term conservation plan for 675 ha of natural forest. Forest Stewardship Council certification will be applied both for plantations management and natural forest conservation. GAO has planted 587 ha of rubber tree plantations since 2002 (98 ha/year in average). GAO manages these plantations thoroughly 1

3 from plant propagation (clones garden with 40 clones and nursery) to the plantations management, rubber production, and timber yield at the end of the productive cycle. The rubber plantation cycle lasts 38 years, which involve 2 year of plant reproduction, 6 years of plant maintenance, 30 years of rubber production, and a clearing cut when GAO has plans to introduce value added processes for timber. Given that, permanence of emissions sequestered is beyond the plantation lifecycle The project seeks to establish ha of plantations from 2007 to 2014, which will lead an increase of 3,474 ha compared to the base line scenario. Formal request for the forest certification under the FSC criteria during 2009 was presented trough the Rainforest Alliance s Smartwood Program, the pre assessment verification is taking place in June Project proponent submitting the PIN A.3 Name Grupo Agroindustrial Occidente (GAO) A.4 Organizational category a. Partnership of Private companies A.5 Other function(s) of the project developer in the project A.6 Summary of relevant experience a. Sponsor b. Operational Entity c. Technical advisor Grupo Agroindustrial Occidente is the biggest agent in rubber and latex manufacturing and commercialization in Guatemala. The raw material used by this company comes from rubber plantations in the country. Depending on the market demand, production is divided in solid products or natural latex. GAO operates a plant with a production capacity of 6 tons of granulated rubber per hour and 1700 dried kilograms of latex per hour. GAO is comprised by the following divisions: a) Agricultural; b) Industrial; c) Commercial; d) Aqua cultural. The carbon sequestration project will be executed by the Agricultural Division, which comprises the following companies: No. Company name Core Business 1 Inversiones Agrícolas Las Rubber Tree Plantations Animas, S.A. 2 Inversiones Agrícolas Rubber Tree Plantations Palafox, S.A. 3 Agropalmeras, S.A. Rubber Tree Plantations 5 La Vega de Talismán, S.A. Rubber Tree Plantations 2

4 GAO s companies have operated for about 50 years on natural rubber business. Inversiones Agrícolas Las Animas, S.A. complies with ISO 9001:2000 quality standards and promotes the ongoing improvement of its employees, through training at all levels provided by international experts. Nowadays, the Agricultural and Industrial Divisions have approximately 800 employees, working in the processing plant, farms, and administrative offices in Guatemala City. In addition, GAO has its own research plots focused on improving rubber productivity and sustainability. GAO has a strong relationship with its rubber suppliers, nearly 350 SMEs that manage natural rubber. As part of that relationship GAO s Industrial Division buys rubber and latex from those plantations. Training on plantations management, as the same as financial services is provided every year. Knowledge created at GAO s research center, as the same as training events with international experts that yearly visit Guatemala under GAO promotion is also part of the services offered. A.7 Address 7 a. avenida., 7-33 Zona 9, Edificio Grupo Financiero de Occidente, Ciudad de Guatemala, Guatemala, C.A. A.8 Contact person Luis Alejandro Mejia Caniz A.9 Telephone / fax (502) A.10 and web address lamejia@occidentecorp.com.gt Project sponsor(s) financing the project A.11 Name Grupo Financiero de Occidente A.12 Organizational category Private company A.13 Address 7 a. avenida., 7-33 Zona 9, Edificio Grupo Financiero de Occidente, Ciudad de Guatemala, Guatemala, C.A. A.14 Main activities Investment banking through Financiera de Occidente and Occidente International Corporation. Insurrances: Seguros de Occidente, Fianzas de Occidente. Stock and Exchange: Asesores Bursátiles de Occidente. Occidente Corporation USA. A.15 Summary of the financials DECEMBER 2007 NOVEMBER 2008 Exchange rate Q. / USD USD USD Total assets: 193,664, ,702, Total Equity: 45,519, ,942, Total revenues: 35,983, ,753, Net Profits 4,193, ,488, Lending limits size ceiling (one persone) 5,188, ,609, Lending limits size floor (one economic unit) 10,376, ,219,

5 Type of project A.16 Greenhouse gases targeted CO 2 A.17 Type of activities Sequestration by planting rubber tree plantations and Conservation of protected areas A.18 Field of activities Reforestation, Rehabilitation of Protected Lands Location of the project A.19 Country Guatemala A.20 Nearest city 1) Puerto Barrios, Izabal. 2) Suchitepéquez 3) Retalhuleu A.21 Precise location The following global locations are related to GAO s farms: Animas: Northern Latitude Western Longitude Palafox: Northern Latitude Western longitude Palmeras: Northern Latitude Western Longitude Bello Horizonte: Northern Latitude Western Longitude Rio Frio: Northern Latitude Western Longitude The plantations to be established by SMEs working with GAO in this project will be located along the south coast of Guatemala in Suchitepequez and Retalhuleu departments, and in the northern department of Izabal. Expected schedule A.22 Earliest project start date The project planted the first pilot areas in A.23 Estimate of time required before becoming operational after approval of the PIN A.24 Year of the first expected VCUs delivery Time required for financial commitments: 3 months Time required for legal matters: 4 months Time required for negotiations: 8 months 2010 A.25 Project lifetime 30 years A.26 Current status or phase of the project A.27 Position of the Host Country with regard to the Kyoto Protocol a. PDD is under development by Winrock International The Host Country a. Is a Party to the Kyoto Protocol 4

6 B. Expected environmental and social benefits Environmental benefits B.1 Estimate of carbon sequestered or conserved Up to 2012 (included): 226,262 VCUs Up to 2017 (included): 875,030 VCUs Up to 2022 (included): 1,357,000 VCUs Estimates include only carbon fixation from reforestation. REED activities are a value added to the project that will be monitored, even though REED activities won t be subject of producing carbon credits, given the small area for conservation. B.2 Baseline scenario Land uses within the project area are, extensive pasture lands, crops, banana plantations, and in smaller scale Hevea brasiliensis (natural rubber) plantations established since Outside the project boundaries, land uses are pasture lands, sugar cane, banana, and oil palm plantations. The land use change trend on the base line implies an increase in the pasture land area and sugar cane. This scenario brings negative impacts on the environment, such as CO2 emissions, loss of bio diversity, and hydrological cycle alteration, between many others. Sugar cane is commonly burned before being harvested, which brings with it emissions for biomass loss. The Base line scenario is 686 hectares of cattle grazing lands in the North and South Coast reforested with Hevea brasiliensis at a rate of 98 hectares per year until the year 2014, which represents the average on area to be planted in a certain year by GAO without accessing carbon finance. In addition the baseline considers the traditional rubber plantation management. In this scenario, the carbon reduction would reach a total of 363,406 t CO2e by the year 2027 (20 years, project cycle is 33 years). The Project scenario is an average reforestation rate of 657 hectares per year, 6.7 times more than base line, which would generate complete plantation coverage in only 7 years. Moreover, plantations will incorporate sustainable management with the highest environmental, social and productive standards. The additional emissions sequestered in 20 years will be 1,998,614 t CO2e. B.3 Existing vegetation and land use The current cover in the project areas is: 1) Grass land of different tropical species. Extensive cattle production is the final propose. 2) Intensive Banana Plantations. 5

7 3) Intensive Sugar Cane Plantations. 4) Intensive Oil Palm Plantations. 5) Natural tropical forest in Cerro San Gil Reserve B.4 Environmental benefits 1) The project aims to reverse degradation by avoiding the advance of intensive and extensive land uses for agriculture or cattle ranch activities. The advance of these activities implies clearing and burning forest and increasing threats to Cerro San Gil Reserve. 2) Rubber tree plantations will be exclusively established at degraded lands before Given that, plantations will provide with restoration of degraded landscapes. 3) Plantations at Izabal will be established beside and around Cerro San Gil Reserve. Given that, plantations will be a buffer zone to the natural forest protecting the reserve from natural or manmade disturbance affecting integrally the project. 4) Moreover, the project boundary includes 675 hectares of natural forest, which is part of Cerro San Gil Reserve. A conservation plan will be implemented in order to increase biodiversity protection. 5) Rubber plantations help to improve local biodiversity in degraded areas, conserve soils, water, and local natural resources, compared with the traditional soil uses. 6) Forest Stewardship Council principles and criteria will be accomplished on managing rubber plantations included in order to integrally approach environmental, social, and productive matters. B.4.a Local benefits 1) GAO will create new knowledge and translate it to SMEs that, as part of this project, will plant new rubber plantations. This is especially true in the Izabal region where rubber plantations are a new productive activity. 2) GAO will generate the new rubber plantations sustainable management plan. After that, GAO will assist SMEs in this project on implementing the same standardize sustainability approach in the all plantations, from planting to rubber and timber production at the end of the project cycle. 3) Through this project GAO will deepness the relationship with its rubber providers. GAO buys rubber and latex from nearly 350 independent providers; all of them are small and medium enterprises (SMEs) which manage natural forest plantations in Guatemala. This project will include additional efforts from GAO staff, to organize groups of providers that will plant new rubber plantations, 1000 hectares per year during the first 5 years of the project. B.4.b Global benefits a) The project will create a bundle organization scheme to reduce transaction cost for SMEs on the development, registry, validation, monitoring, verification, emission, and commercialization of this carbon project. The same can be 6

8 said about FSC certification, which will be managed on a group certification scheme. b) Creating a sustainable management case in rubber tree plantations with high replication potential in Latin America and Asia. c) Emissions fixed will help on reaching the global goal of a low economy to avoid global warming. B.5 Consistency between the project and the environmental priorities of the Host Country The project follows the environmental priorities of the country, which are directed to maintain its forestry cover through the reduction of the pressure on remnant forests, promoting the sustainable forestry management. On the other side, the project supports policies to promote the consolidation of markets based on strategies for environmental services produced by natural ecosystems. GAO s plantations to be established in Nothern department of Izabal will be a buffer zone to the Natural reserve in the area. Moreover, local communities will be supported to plant rubber plantations around this important protected area, so they can be enrolled in a productive and low impact activity to avoid them deforest or invade the protected area. This is fully in line with the actual rural development strategy of the Guatemalan Government. In addition, GAO will formulate a conservation plan for the 675 hectares of protected area which are on the project boarders, so as the natural biodiversity will be properly protected. This area will be registered into the private protected areas system in Guatemala, in order to be part of the National Protected Areas System (SIGAP). This is concordant with the actual policy of protected areas, and the private protected areas establish by National Council of Protected Areas in Guatemala (CONAP). Socio-economic benefits B.6 How will the project improve the welfare of the community involved in it or surrounding it. 1) Employment creation, additional and stable, since rubber plantations are intensive on manmade activities during the 36 years of plantation management. 2) The local communities will be involved into the project design and implementation. Local communities will be included to accomplish with the reforestation goal here established, so they can be owners of its own plantation. 3) GAO as part of its traditional business approach will provide with improve health and education services to families working at its farms. 4) The project will increase exports of natural rubber from Guatemala, increasing trading and foreign cash exchange. 5) The project will increase foreign investment through carbon finance. 6) The estimated population to be benefited is: a) One community directly involve on planting their own 7

9 rubber plantation under GAO technical assistance, this community is potentially invading the Cerro San Gil Reserve. b) First estimation on employment creation is 2,300 new permanent positions, to be filled with people from local communities in Izabal, and the South coast of Guatemala. B.7 Are there other effects? a) The project will allow the creation of an associative scheme between SMEs and GAO, to implement an innovative and highly replicable financial model though carbon finance for rubber plantations. The model will avoid creating incentives to degrade natural habitats, low value employment, poor social relationship, and disrespect to local cultures, between others. b) The financial, and sustainable management model is replicable not only in the region but in other world s regions. c) Training and assistance will be highly required in Izabal region, since rubber plantations are a new productive activity in this part of Guatemala. New Hevea brasilensis clones will be tested and the management plan for the plantation will be adjusted to the new soil and weather conditions. The new technological package will be implemented and translated to training and technical assistance to new rubber plantation owners in Izabal and South Coast region. C. Finance Project costs C.1 Preparation costs, MDL cycle US$ 0.2 million C.2 Establishment costs (land acquisition, preparation, planting, SMEs organization and assistance) C.3 Operative cost during 30 years C.4 Other costs: SMEs and communities technical assistance program, FSC certification process, FSC and carbon verification US$ 18.3 millions US$ millions US$ 1.3 million C.5 Total project costs US$ million Sources of finance to be sought or already identified 8

10 C.5 Equity GAO and SMEs Long Term Investment USD 5 million Operative costs along 30 years USD 73 million C.6 Debt Long-term (Name of the organizations and US$ million) Grupo Financiero de Occidente Long term USD 14.8 million C.7 Debt Short term (Name of the organizations and US$ million) Grupo Financiero de Occidente Short term, rotating yearly from year 6 USD 9.1 million (average) C.8 Grants None C.9 Not identified (US$ million) None C.10 Sources of carbon finance (Has this project been submitted to other carbon buyers? If so, say which ones) C.11 Indicative VCUs volume and price None Up to 2012 (included): 226,262 VCUs Up to 2017 (included): 875,030 VCUs Up to 2022 (included): 1,357,000 VCUs Reference Price: USD 7.00 C.12 Emission Reductions Value (= price per t CO 2 e * number of tco 2 e) Until 2012 Until ,262 VCUs * USD 7 = USD 1.58 million Up to 2022: 1,357,000 VCUs * USD 7 = USD 9.5 million C.13 Financial analysis Internal rate of return (IRR) for 20 years without carbon finance is: 13.8% Internal rate of return with carbon finance is: 14.1% 9