The Plantar project in Brazil

The Plantar project in Brazil is one of the projects from which the Prototype Carbon Fund is buying greenhouse gas emission reductions. The Plantar project consists of the substitution of coal in the pig-iron industry (see also Fujihara et al., Chapter 14). The project aims to establish Eucalyptus plantations in degraded pasture areas. After harvesting, the timber is carbonized to produce charcoal, which is subsequently mixed with mineral iron in furnaces to produce pig iron. Due to the long lead time necessary for the eucalyptus to mature it would take up to eight years before this project could generate any cash-flow income.

Without CDM, Plantar was a project with up to eight years of implementation phase before it could start generating financial returns. In addition, three more years would potentially have been required by the project to fully pay back the investment. The project finance would require the same eight years of grace period, plus three years for amortization in order to match the usual project needs. Unfortunately, there were no loans or Country Risk Insurance available in Brazil for such a long period at any price. In these circumstances, the project was unbankable.

However, the project’s eligibility to the Kyoto Protocol and the World Bank’s Emission Reductions Purchase Agreement (ERPA) committing to acquire the emission reductions resulting from the project provided anticipated sources of revenue streams to be used for amortization of loan’s debt service, already starting in the second year. Based on this new feature, a financial loan was structured.

In the Plantar project, the nominal value of the ERPA contract between the World Bank (as trustee of the Prototype Carbon Fund or PCF) and the project sponsor (Plantar) was anticipated by a commercial lender (Rabobank Brazil) to Plantar, the latter being both recipient of the loan and seller of the emission reductions. It was structured in a way that the expected payment for the emission reductions (in this case made by the PCF) would perfectly match the loan’s amortization schedule. This transaction is similar to the common “export pre­payment” structure used in the lending sector, although it could also be correctly defined as a “monetization of the ERPA receivables”. Figure 13.2 illustrates the above-mentioned financing structure.

The loan was structured in a way that the World Bank would pay for the emission reductions directly into the lender’s account, therefore reducing credit and currency risk in the structure. The anticipated sources of revenue streams provided by emission reductions in the project, the absence of currency convertibility and

transferability, and the intangibility of those emission reductions led the transaction to be rated by the lender as “Credit-risk free”, resulting in the elimination of the obligation to obtain any insurance. Therefore, the project became bankable, and the loan became attractive to the lender. In addition, the credit risk mitigation also resulted in a reduction in the overall risk perception by the lender, which could provide an attractive loan to the company.