Document of The World Bank Report No: [ 93283 ] NOTE ON CANCELLED OPERATION (P088934) ON A LOAN IN THE AMOUNT OF US$589,500.00 FOR THE ARGENTINA: OLAVARRIA LANDFILL GAS RECOVERY PROJECT Date September 23, 2014 Social, Urban, Rural and Resilience Global Practice Argentina, Chile, Uruguay, and Paraguay Management Unit Latin America and Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective [03/11/2014]) Currency Unit = Argentine Peso (ARS) ARS 7.87 = US$1 ARS 10.91 = Euro 1 FISCAL YEAR [July 1 – June 31] ABBREVIATIONS AND ACRONYMS CDCF Community Development Carbon Fund CDM Clean Development Mechanism CO2 Carbon Dioxide ER Emission Reduction ERPA Emission Reduction Purchase Agreement GHG Greenhouse Gas KP Kyoto Protocol LFG Landfill Gas PDD Project Design Document PE Project Entity PPA Power Purchase Agreement SAyDS Secretary of Environment and Sustainable Development SWM Solid Waste Managment tCO2e Tonne (metric ton) of carbon dioxide equivalent UNCPBA National University of Central Buenos Aires UNFCCC United Nations Framework Convention on Climate Change Vice President: Jorge Familiar Calderon Country Director: Jesko S. Hentschel Sector Manager: Anna Wellenstein Project Team Leader: Horacio Terraza; Sebastian Scholz ICR Team Leader: John Morton Argentine Republic Olavarria Landfill Gas Recovery 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 Annex 1. Bank Lending and Implementation Support/Supervision Processes Annex 2. List of Supporting Documents A. Basic Information Country: Republic of Argentina Project Name: Argentina: Olavarria Landfill Gas Recovery Project Project ID: P088934 L/C/TF Number(s): TF054470 NCO Date: September 23, 2014 Lending Instrument: Carbon Offset Borrower: Municipality of Olavarria Original total commitment: USD 589,500.00 Disbursed Amount: USD 65,500 Environmental category: B Implementing Agencies: Municipality of Olavarria Co financiers and Other External Partners: The College of Engineering of the National University of the Center of Province of Buenos Aires would provide technical cooperation and project implementation under an MOU with the Municipality of Olavarria. B. Key Dates Process Date Process Original Date Revised/Actual Date(s) Concept Review: 14 January 2004 Effectiveness: January 2005 1 January 2006 Appraisal: 9 November 2004 Closing: January 2016 7 December 2010 Approval: 7 December 2004 C. Ratings Summary Performance Rating by NCO Outcome: Unsatisfactory Risk to Development Outcome: Low Bank Performance: Moderately Satisfactory Borrower Performance: Unsatisfactory D. Sector and Theme Codes Original Sector Code (as % of total amount) 1. Solid Waste 100 Thematic Code (Primary/ Secondary) 1. Climate change 66 2. Pollution management and environmental health 33 E. Bank Staff Positions At NCO At Approval Vice President: Jorge Familiar Calderon Pamela Cox Country Director: Jesko S. Hentschel Axel van Trotsenburg Sector Manager: Anna Wellenstein Abel Mejia Project Team Leader: Sebastian Martin Scholz Horacio Terraza NCO Team Leader: John Morton NCO Primary Author: Anna Perkinson F. Ratings of Project Performance in ISRs (if available) Summary Ratings ISR Created 10 June 2011 Previous Rating Final Rating Progress towards achievement of Moderately Unsatisfactory Highly Unsatisfactory PDO Overall Implementation Progress (IP) Moderately Unsatisfactory Highly Unsatisfactory 1. Context, Project Development Objectives, and Design This was a stand-alone Carbon Finance Operation that was not connected to World Bank lending. The operation was appraised in November 2004 and the Emissions Reductions Purchase Agreement (ERPA) was signed in December 2004. The objective of the project was to improve municipal solid waste (MSW) management practices in the Municipality of Olavarria and strengthen its commercial viability by leveraging additional revenue from carbon finance at the local landfill. This was to be achieved through the installation of a landfill gas (LFG) capture and flaring facility. The LFG capture and flaring facility would destroy harmful methane emissions that would otherwise be vented to the atmosphere. The resulting reduction in methane emissions were to be monitored, verified, certified, and sold as emissions reductions (ERs) to the World Bank acting as a trustee for the Community Development Carbon Fund (CDCF). In order to leverage the work for community benefits a state of the art of the income from the sales of ERs was designated for use a safe and reliable water supply to Espigas, a nearby rural village. The Project was not only one of the first World Bank carbon finance projects and Clean Development Mechanism (CDM) projects in Argentina; it was also one of the first projects under the CDCF. As a pioneering project in Argentina, it was intended to raise awareness of the role of carbon finance in the solid waste sector and provide country- wide lessons on costs and efficiency. Project Rationale At the time of appraisal, the recovery and destruction of methane from landfills, was g d d Ag ’ N S g C m C g d related National Programs (Climate Change Impact-Resolution 1125/01; Renewable Energy and Fuels- Resolution 166/01; and Biofuels-Resolution 1076/01) 1 developed by the Secretary of Environment and Sustainable Development (SAyDS). Olavarria was chosen specifically for the project because it was one of the few medium- sized cities in the interior of the country that demonstrated acceptable final disposal practices. When the Olavarria was chosen for the project, the Municipal-owned landfill had been in operation since 1999, with an expected 30 year landfill life, receiving 100 tons/day of MSW. The landfill was designed and constructed following sanitary engineering requirements, which was one of the key criteria for choice of the site. At the time of the Bank involvement, the College of Engineering at the National University of Central Buenos Aires (UNCPBA) had undertaken studies to identify and design the landfill gas project. The CDCF is one of several carbon funds established by the World Bank to provide carbon finance to projects. The CDCF is unique relative to other carbon funds in that its projects are required to measurably contribute to local community welfare through the 1 Argentina ratified the United Nations Framework Convention on Climate Change (UNFCCC) on March 11, 1994 and on September 28, 2001 ratified the Kyoto Protocol provision of demonstrable co-benefits. At the time of appraisal the CDCF was newly established and the Olavarria project was one of the first projects considered. As there are limited or no identifiable community level benefits integral to the project, a separate Community Benefits Plan (CBP) was prepared in consultation with the beneficiary communities and funded out of a premium on carbon credit prices. Both for the country and CDCF the project was anticipated to be pioneering operation with high demonstration and replication value. Risk Analysis and Appraisal The appraisal relied on the existing UNCPBA studies undertaken previous to the Bank involvement. Using these studies the appraisal applied formulas based on standard CDM methodologies to estimate gas generation and undertook a financial analysis with sensitivity analysis based on these estimates; information on investment costs for the landfill gas facility and assumptions on financial parameters. No due diligence was undertaken for on-site for technical issues; procurement arrangements or legal arrangements among the various parties. An EIA was undertaken and approved by the Bank for the project as per Bank safeguards requirements. Risks were identified as low with the exception of the technical risks which were given a g m d d UNCPBA’ x w LFG d g technology. To mitigate this risk, a local team from UNCPBA underwent thorough technical training by international LFG experts. The appraisal and risk analysis was limited in two ways which affected project implementation: Gas Generation Estimates: The analysis of the gas generation estimates were based on secondary data using formulas developed for CDM projects based on organic matter content of the waste, the amount of waste disposed and a correction factor for the type of landfill among other aspects. In the case of the Olavarria landfill, the quantity of waste entering the site (100 tons per day) is at the lower limit of what is considered as potentially viable for a landfill gas facility as with this small quantity of waste, the dimensions of the waste placed in the landfill limits the ability to maintain conditions for methane production and for similar reasons increases the deleterious impact of that the gas suction system can have on methane production. Poor operation of the landfill also contributes to this reduced methane generation. The due diligence and model assumptions did not consider these factors accurately. Institutional and procurement arrangements: The project relied on several parties for supervision (UNCPBA and the Municipality) and the management of the landfill and the landfill gas facility depended on the procurement and supervision of a qualified private firm. Citing the intrinsic nature of Carbon Finance projects, no due diligence on the legal rights of parties, institutional and contractual agreements and the procurement arrangements were undertaken, apart from identifying capacity limitations of the UNCPBA. The due diligence underestimated the importance of the functionality of these arrangements to the success of the project. 2. Post-Approval Experience and Reasons for Cancellation Post Approval to Cancellation: The project became registered as a CDM project activity in January 2006 and became operational in February of the same year. The initial verification of the Project in 2006 identified major problems with the amount of LFG generated. This was attributed to improper landfill management which inhibited the methane generation process and a shortage of LFG collection wells which inhibited collection of the gas. The lower number of wells was due to disagreements between the Municipality and UNCPBA and a lack of funds on the part of the Municipality. The inefficiencies in operation were attributed to the poor performance of the contractor. Table 1 below shows the results obtained after the first monitoring period and the drastically reduced estimations for the following monitoring periods. Table 1. Comparative volume of CERs between actual and estimated values in PDD and ERPA CERs Projected CERs % of CERs Originally Module Actual originally Period estimated in Module 2 (3 (Module Total estimated PDD/ERPA 1 new 1) CERs wells) 2006 8674 1480 17 2007 9815 1440 652 2092 21 2008 10887 1440 962 2402 22 In November 2007 a supervision mission was conducted to assess project performance and to decide whether the Project could be brought into compliance with the terms of the ERPA through actions on the part of the Municipality and the University. The mission concluded that the municipality was strongly committed to resolving issues at the site, improving landfill management, and working with the Bank. An advance payment of US$30,000 was made to the Municipality of Olavarria for the Community Benefits Plan. This along with funds contributed by the Municipality itself allowed the completion of the potable drinking water supply system. The system consisted of the connection of 150 households to the water distribution network, and 10 solar water heating systems in two schools in the city of Espigas, 80 km from Olavarria. However, despite Bank efforts to work with the Municipality and the University and d k d ’ , j m dd m over the next three years. Another supervision mission in June 2010 found that conditions at the site had deteriorated significantly, the flare did not appear to be functioning, the landfill did not appear to be compacted daily, the monitoring system was not being implemented in compliance with the original documents, and the Municipality had not begun the verification process in order to generate the first Monitoring Report. The Municipality indicated the verification process was costly for such a small operation and preferred to wait until the Project was expanded to the second landfill cell to undertake the verification process. However, the Project was never expanded, and therefore verification never took place. Another hurdle in the project was the contract the Municipality had with the landfill operator. Initially, the contract was negotiated to include a lump sum payment to the operator for all salaries, operation, and maintenance activities. This type of contract was not seen as beneficial because as maintenance costs were included in the lump sum, there existed the possibility that the Municipality would overpay for maintenance that was not needed/never occurred. With the lower than anticipated gas generation, revenues from the sale of CERs would have made it impossible for the Municipality to pay the private company solely with revenues generated from the LFG capture and flaring operations. Furthermore, the appreciation of the Argentinian Peso against the US Dollar affected the agreed upon price for the CERs in the ERPA, rendering them so low in value they could not even cover the cost of the CER verification. Between February 2006 and June 2009 the project recorded only 2,673 tCO2e net ERs under the Monitoring Plan none of which were certified or delivered to the Bank. Given the very poor performance of the project in terms of landfill operation, methane generation and recovery, and as a result the non-delivery of ERs to the Bank for more than three consecutive years, ENVCF in concurrence with the Region, suggested terminating the ERPA. A Default Notice was sent to the Municipality on November 2, 2010 and a Termination Letter was sent on December 7, 2010 due to the lack of action by the Municipality to attend to the requests set out in the Default Notice. Post Cancellation At the time of project termination, the United States Environmental Protection Agency (USEPA) became involved with the Municipality and offered a subsidy to expand the existing landfill and biogas system. The subsidy was received by the Municipality in 2010 and is expected to be used in expansion activities at the site in conjunction with funds from the Municipality in the future. U m d ’ , d new operator, and subsequently landfill management and conditions at the site have drastically improved. The landfill is now ISO certified and the landfill gas facility is operating although not claiming revenues from the CDM. In addition to improvements at the site, the Municipality is engaging the University for technical advice on expansion opportunities for the landfill. 3. Assessment of Bank Performance Rating: Moderately Unsatisfactory The World Bank prepared and appraised the Project, negotiated the legal agreements, and supported the client in the process. The team included several staff with substantial experience in the carbon finance and solid waste management sectors. Many of the implementation support missions and some follow-up visits were jointly conducted with the independent verifiers. T m’ m d g d m k d important technical and operational issues related to the landfill and their implications on the gas generation estimates as well as the review of institutional capacity and legal and procurement arrangements. At the time of appraisal these were considered outside of the responsibilities of carbon finance operation due diligence, however, in retrospect considering the importance to the outcome of the project, this type of review was needed along with concomitant adjustments in the design or a decision to not pursue the project. Another complementary financing instrument could have been considered (lending or grant based) that would allow more direct involvement of the Bank in technical assistance and the infrastructure investment could have allowed more thorough advisory support to ensure the project success. Given these factors, the Bank performance is rated as moderately unsatisfactory. 4. Assessment of Borrower Performance Rating: Unsatisfactory The Municipality showed interest in working with Bank and carbon finance specialists to improve gas generation and resolve issues that would arise in the ERPA as result of underperformance of the Project. They also were proactive in establishing the goals aimed at community development with the completion of a potable water supply with household connections in Espigas and solar panels for a water heating system in two schools and a hospital. However, they were not able to resolve the performance of the operator of the landfill and the landfill gas facility in a timely manner. Additionally, the m ’ engagement with the UNCPBA on technical issues was prevented as a result of disagreements that did got resolved in a timely manner. Given these factors, the Bank performance is rated as unsatisfactory. Although it was too late to improve the performance of the operation, the Municipality should be congratulated for eventually resolving the issues with the operator (by replacing them) and the UNCPBA resulting in an operational landfill gas facility. 5. Lessons Learned  Risks associated with size of landfill gas facilities. As performance of landfill gas facilities drops of significantly under 200-400 tons/day especially when there are operational limitations the viability of the investment in a landfill gas facility and associated risks should be closely scrutinized for small facilities.  Minimum size of individual carbon finance operations. Given the transaction costs associated with carbon finance operations, the size of an individual project should be adequate to ensure the transaction costs are reasonable relative to the total carbon finance revenues.  Gas Generation Estimates: The estimates of gas generation of landfills for purposes of designing the investment and making agreements on emission reductions should carefully consider the field conditions including the size of the d d d d .F d m w (“ m �) d d d m .  Institutional and contractual arrangements: When multiple institutions are involved in implementing a project, the arrangements and legal responsibilities of each is of key importance and are worthy of a detailed due diligence review to minimize risks. When the project is dependent on the procurement and supervision of a third part contractor, World Bank review of the technical, contractual and supervision arrangements and capacity is necessary.  Municipal benefits of landfill gas facilities: The fact that a functioning landfill gas facility was eventually realized highlights the value of this investment for the municipality. 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 municipal commitment to global environmental issues and improving landfill operational and safety was appreciated by the municipality even without the financial revenues of the CDM