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Document of

The International Finance Corporation

GLOBAL: BIODIVERSITY AND AGRICULTURAL COMMODITIES PROGRAM (BACP)

GEF Project Brief

May 2006

TABLE OF CONTENTS

I. PROJECT SUMMARY...............................................................................................................1A. Introduction...................................................................................................................1B. Project Rationale...........................................................................................................2C. Status and Role of Private-sector-led, International, Multi-stakeholder Commodity Roundtables..............................................................................................................................5D. Background on Global Significance of Biodiversity Affected by BACP’s Target Commodities.............................................................................................................................7E. Background on Impacts of Production on Biodiversity, Better Management Practice Alternatives, and Barriers to Adoption..................................................................................11F. The IFC’s Role in Agricultural Commodity Markets..................................................16G. The IFC’s experience with market transformation.....................................................19H. Program Objective and Outcomes..............................................................................20I. Program Activities..........................................................................................................21J. Benefits to partners.........................................................................................................26K. The BACP Project Cycle and Project Selection Criteria............................................29L. BACP Management.........................................................................................................34M. Monitoring and Evaluation.........................................................................................39N. Risk Analysis................................................................................................................40

II. COUNTRY OWNERSHIP AND PARTNER SELECTION...........................................................43A. Country Selection and Eligibility................................................................................43B. Country Endorsement..................................................................................................45C. Partner Selection.........................................................................................................45

III. PROGRAM & POLICY CONFORMITY.................................................................................46A. Project design and target activities: role of the private sector...................................46B. Rationale for GEF Involvement..................................................................................47C. Sustainability...............................................................................................................50D. Replicability.................................................................................................................51E. Stakeholder Involvement.............................................................................................52

IV. FINANCING AND COST EFFECTIVENESS...........................................................................54A. Program Budget (to be refined during appraisal)......................................................54B. Basis for Possible Second Phase of BACP..................................................................56C. Co-financing and Leverage.........................................................................................58

V. INSTITUTIONAL CO-ORDINATION & SUPPORT.................................................................59A. Core Commitments & Linkages..................................................................................59B. Consultation, Coordination and Collaboration between IAs.......................................61

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List of TablesTable 1: Summary of IFC Asgribusiness Department's Investments in BACP's Target

Commodities..................................................................…………………………18

Table 2: BACP Risk Analysis...............................................................................................41

Table 3: Land use, production volumes, and annual value of BACP's target commodities 46

Table 4: BACP Phase 1 Budget............................................................................................56

List of FiguresFigure 1: Overlap of cocoa-growing regions and biodiversity hotspots.................................3Figure 2: Oil palm plantation..................................................................................................9Figure 3: Cocoa tree..............................................................................................................10Figure 4: Sugarcane harvest..................................................................................................10Figure 5: Soybean plant........................................................................................................11Figure 6: Graphic depiction of the BACP's market transformation goal..............................21Figure 7: The BACP Project Cycle.......................................................................................30Figure 8: BACP Organizational Structure............................................................................36Figure 9: Gantt Chart for first Phase of the BACP...............................................................38

LIST OF ANNEXES

ANNEX 1: OVERVIEW OF SELECTED AGRICULTURAL COMMODITY MARKETS (PALM OIL, COCOA, SUGARCANE, AND SOYBEAN)

ANNEX 2: MAPS AND TABLES RELATED TO PRODUCTION AND EXPORT OF BACP’S TARGET COMMODITIES

ANNEX 3: SUMMARY OF FINDINGS OF PDF-B, INCLUDING SELECTION PROCESS FOR TARGET COMMODITIES

ANNEX 4: ROUNDTABLE ON SUSTAINABLE PALM OIL: PRINCIPLES AND CRITERIA

ANNEX 5: DEFINITION OF HIGH CONSERVATION VALUES FOR FORESTS

ANNEX 6: PORTFOLIO OF SAMPLE BACP PROJECT

ANNEX 7: MONITORING AND EVALUATION PLAN

ANNEX 8: LOGICAL FRAMEWORK

ANNEX 9: INCREMENTAL COST ANALYSIS

ANNEX 10: LIST OF LETTERS OF INTENT ON FILE WITH IFC

ANNEX 11: COMPLIANCE WITH IFC’S SOCIAL AND ENVIRONMENTAL SAFEGUARDS

ANNEX 12: STAP REVIEW

ANNEX 13: RESPONSE TO EXTERNAL REVIEW

ANNEX 14: RESPONSE TO GEF COUNCIL MEMBERS’ COMMENTS

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ACRONYMS

BACPBMPBSICAGCBD

Biodiversity and Agricultural Commodities ProgramBetter Management PracticeBetter Sugarcane InitiativeIFC Agribusiness DepartmentUN Convention on Biological Diversity

CEEF The Commercializing Energy-EfficiencyCFL Compact Fluorescent LampsCI Conservation InternationalEBFP Environmental Business Finance ProgramELI Efficient Lighting InitiativeFI Financial IntermediariesFTE Full-Time EmployeeGEF Global Environment FacilityHCVFHEECP

high-conservation-value forestHungary Energy Efficiency Co-finance Program

IFC International Finance CorporationIUCN International Union for the Conservation of NatureIPM Integrated Pest Management MAMTI Marine Aquarium Market TransformationMPOA Malaysian Palm Oil AssociationM&E Monitoring and EvaluationMoU Memorandum of UnderstandingNBSAPP&C

National Biodiversity Strategy and Action Plan Principles and Criteria

PELP Poland Efficient Lighting ProjectPENSA Program for Eastern Indonesia SME AssistanceRA Rainforest AllianceRRSP Roundtable for Responsible Soybean ProductionRSPO Roundtable on Sustainable Palm OilTA Technical AssistanceTATF Technical Assistance Trust FundsTNC The Nature ConservancyTOR Terms of ReferenceUNDP United Nations Development ProgramWB World Bank WCF World Cocoa FoundationWWF World-wide Fund for Nature

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BIODIVERSITY AND AGRICULTURAL COMMODITIES PROGRAM

I. PROJECT SUMMARY

A. Introduction

Agriculture and biodiversity

1. Agriculture is the largest industry on the planet. It employs more than one billion people and generates more than one trillion dollars’ worth of goods annually. With its deep connections to the world economy, human societies, and biodiversity, agriculture poses some of the most important challenges for conservation of life on Earth.

2. The adoption of resource-intensive production methods, particularly for agricultural commodities, is exerting a substantial strain on the world’s biological diversity. As pointed out by GEF Operational Program #13 on the Conservation and Sustainable Use of Biological Diversity Important to Agriculture: “agricultural practices such as reliance on monoculture, exotic/cross breeds, high yielding varieties, mechanization, and misuse of agricultural chemicals have caused negative impacts on biological diversity at all levels - ecosystems, species and genepools - on both natural and cultural landscapes, and may be unsustainable, at least in the long term.”

3. While agricultural operations, whether large or small, provide unique opportunities to conserve biodiversity, they also can threaten wild species and natural habitats when not managed sustainably. Negative biodiversity impacts from agriculture include:

4. Habitat Fragmentation and Loss. Expanding agricultural frontiers contribute to the rapid loss of forests, wetlands, grasslands and other habitats, their biodiversity, and their valuable ecosystem functions every year. Runoff from poorly managed farms degrades downstream freshwater and marine habitat and leads to bioaccumulation levels that adversely affect fertility and fecundity of species of a wide range of trophic levels.

5. Degradation of Water and Soil Resources. Globally, agriculture withdraws 70% of the planet’s developed freshwater resources—this is twice the industry (20%) and municipal use (10%) combined.1 Without creative conservation measures, farms can quickly consume a dry region’s water supplies, impacting specific species and critical habitats as well as biodiversity more generally. Where planting and production practices take insufficient account of soil ecology and fragility under conditions of high rainfall and steep terrain, there can be a wholesale loss of nutrients, structure, and diverse communities of soil organisms. Material that is washed away can damage downstream ecosystems (such as coral reefs) and economic infrastructure (such as dams). Half of all topsoil has been lost in agricultural areas as a result of unsustainable farming practices.

1 Jason Clay, World Agriculture and the Environment, Washington, Island Press 2004.Biodiversity and Agricultural Commodities Program (BACP) 1

6. Pollution. Insecticides, herbicides fungicides, fertilizers, and other farm chemicals can contaminate soil, water, and air, and can remain in the environment for generations. Their broad-spectrum toxicity can destroy whole communities of organisms. Agriculture is the leading cause of pollution in countries that measure its impact. Many pesticides disrupt the hormone messaging systems of both humans and wildlife.

7. Poverty. Three quarters of the world’s poorest people live in rural areas where farming is the only option available to generate income, fight poverty and achieve food security. Small farmers the world over are found in high biodiversity areas that often are the least fertile areas for sustainable production. Once depleted of nutrients, such areas are often abandoned, leading to the colonization of new areas. The result is a cycle of increasing poverty and biodiversity loss.

BACP Objective: mainstreaming biodiversity preservation opportunities throughout the value chain.

8. The proposed Biodiversity and Agricultural Commodities Program (BACP) seeks to reduce, in an innovative and large-scale manner, the threats posed by agriculture to biodiversity of global significance. The primary objective of the BACP is to preserve global genetic, species and ecosystem diversity within agricultural production landscapes, by transforming markets for targeted agricultural commodities. The Program will integrate biodiversity into the production landscape, by moving sustainably-produced commodities from niche markets into the mainstream.

B. Project Rationale

Protecting biodiversity of global importance

9. The BACP will target commodities whose production threatens biodiversity of global significance, and which offer the potential for using market forces to reduce these threats. A careful selection process (see Annex 3) identified palm oil and cocoa as fast-track commodities in which to work, and soybean and sugarcane as “next in line” for the BACP’s focus. The BACP’s selection of target countries for each commodity takes into account production volumes, the impact of this production on biodiversity of global significance, and the potential for reducing this impact. The target countries are Indonesia (palm oil, cocoa), Malaysia (palm oil), Ghana and Côte d'Ivoire (cocoa), and Brazil (sugarcane, soybeans, cocoa and palm oil). During the Program’s ten-year lifetime, additional countries may be added as warranted.

10. Each of these countries contains high levels of biological diversity and/or endemism, some of which is in biodiversity hotspots that overlap with areas of commodity production. In Brazil’s Cerrado, a woodland savanna hotspot, the production and expansion of sugarcane and soybean is exerting tremendous pressure on the ecosystem, resulting in the fragmentation, degradation, and disappearance of habitat. The lowland Guinean forest in Ghana and Côte d'Ivoire is a prime cocoa-growing region. As productive cocoa farms become exhausted, farmers move into forested areas. In Indonesia and Malaysia, palm oil production and expansion are a concern for the Sundaland hotspot (Borneo, Sumatra, Java, and Bali). A cocoa farming boom on Sulawesi

Biodiversity and Agricultural Commodities Program (BACP) 2

threatens wildlife in the Wallacea hotspot. The overlap between cocoa growing regions and biodiversity hotspots is clearly demonstrated in Figure 1 below:

Figure 1: Overlap of cocoa-growing regions and biodiversity hotspots2

Better Management Practices can reduce the impacts of agriculture on biodiversity of global significance, but they face barriers to adoption.

11. So-called Better Management Practices (BMPs) can significantly limit the biodiversity threats posed by production.3 BMPs encompass a broad range of environmental, social, and labor practices that allow companies to optimize resource use efficiency, create marketable by-products, reduce waste, encourage employee loyalty, secure market access and the reduced risk of adverse relations with local stakeholders. They are largely market-driven and work best in situations where business and investors have medium- or long-term horizons. Currently, certain barriers prevent the widespread uptake of BMPs. The BACP will work with industry players in each target commodity market in order to mainstream the adoption of biodiversity-friendly and economic BMPs throughout the value chain.

Opportunities for leverage through organized markets and industry roundtable processes.

12. For three of the BACP’s four target commodities, an international multi-stakeholder industry-led roundtable is actively working to lessen the commodity’s impact on the environment and to address social issues. These roundtables (in palm oil, sugarcane, and soybean) and their members will be key partners for the BACP. They provide an entry point for BACP into industry decisions on environmental performance targets, principles, and criteria, and provide a

2 Source: What Happens when Disease Takes Out a Key Export Crop? Bahia in 1990s, presentation by Keith Alger (Conservation International) at the NAS Cocoa Symposium, 8-9 February 20063 It is sometimes asked why the term “Best” Management Practices is not used. The term “Better” reflects the fact that there are no “Best” practices, because through continuous improvement, today’s best becomes tomorrow’s norm. Biodiversity and Agricultural Commodities Program (BACP) 3

collaborative environment for developing joint projects. For cocoa, although there is currently no roundtable process, one is being contemplated, and the BACP can also build upon existing industry fora and on relatively large niche markets.

13. Commodity markets are organized and therefore relatively easy to work in (See Annex 1 for an overview of the markets for BACP’s selected commodities). The concentration of industry in these commodities means that a relatively small number of players up the value chain (traders and buyers) have a relatively strong influence on demand, and thus on production. Globalization and consumer scrutiny have pushed companies to provide, and consequently to demand, more transparency with regard to their products as well as the ingredients they use. This trend towards accountability for both product quality and production practices has enabled larger companies to influence the entire market chain, including segments of it in which they do not directly invest. Although the extent of this phenomenon varies from one product or market to another, the intrinsic characteristics of a product are no longer enough to satisfy a number of consumers, especially in industrialized countries. They want to know that their purchases have not been produced or traded at the expenses of people or nature.

BACP Structure and Approach: a market-based approach to biodiversity conservation

14. The rationale for the BACP can be summarized as follows:a. Production areas for oil palm, cocoa, sugarcane and soybeans overlap with areas of

globally significant biodiversity;b. BMPs can reduce the impacts of production on biodiversity, but face certain barriers to

adoption;c. Commodity roundtables and the overall market structure provide an opportunity for the

GEF to make an incremental investment to jump-start and support market transformation efforts that lead to the mainstreaming of biodiversity protection opportunities into commodity markets.

15. Central to this rationale is the premise that there is great potential for working with the private sector, as highly organized players in a given market, to transform agricultural commodity markets so that biodiversity-enhancing, commercially-sustainable production methods are adopted across large areas of the production landscape, on a globally significant scale. The BACP will take a holistic approach to this market transformation, using its resources to mainstream the supply of, demand for, and financing to commodities produced using biodiversity-friendly methods. As a result of the program, better commodities should account for a substantial percentage of sales (at least 10 per cent) in each target commodity market. The Program’s structure reflects this rationale. Each component of the Program addresses a specific group of market actors including the supply-side (producers and primary processors such as millers), the demand-side (traders and buyers), the financiers, and the wider enabling environment (government and industry roundtables). Each group has a role to play in creating and maintaining a healthy market for biodiversity-friendly products. By addressing each of these parts of the value chain, the BACP can have a sustainable and long-term impact on the market for biodiversity-friendly commodities.

16. The BACP will promote changes in production methods that are both biodiversity-enhancing and financially sustainable in the long term. The IFC has selected commodities for which the Biodiversity and Agricultural Commodities Program (BACP) 4

private sector has already demonstrated leadership potential. The Roundtable on Sustainable Palm Oil (RSPO) has prepared and approved (by an overwhelming majority) a set of environmental and social principles and criteria. Similar roundtables are just getting underway for soybeans and sugarcane. Major off-takers in the cocoa industry understand the need for a supply of cocoa that is sustainably produced, and a cocoa roundtable is currently being discussed by certain major buyers. Yet for all four target commodities, the market is not yet delivering large-scale quantities of sustainable supply, because of the barriers mentioned above. The BACP represents an incremental investment that will allow consideration and adoption, at all levels of the value chain, of biodiversity-enhancing opportunities.

C. Status and Role of Private-sector-led, International, Multi-stakeholder Commodity Roundtables

17. International, multi-stakeholder, industry-led commodity roundtables are powerful partners for the BACP. The roundtables bring together a critical mass of stakeholders in a given commodity to meet, several times a year, in an organized and transparent forum. Members work towards defining and implementing private-sector-based voluntary codes of conduct relating to social and environmental practices, and commit to adhering to that code.4 Through the IFC/WWF BMP Initiative, the IFC has supported these structures since their inception.

18. Working within existing industry structures will greatly enhance the BACP’s ability to bring about sustainable market transformation. The roundtables in palm oil, sugarcane and soybeans, and other industry fora with which the BACP will engage, will allow the Program to (i) tap into (and contribute to) the most current information on BMPs; (ii) have direct and credible introductions to market leaders; (iii) source opportunities for BACP project-level and value-chain initiatives by identifying specific trends of concern and production methods and/or regions where market failures prevent successful implementation of BMPs, and (iv) disseminate lessons learned from the BACP’s project level and value-chain activities and promote replication.5

19. Roundtable processes are at different stages of dialogue, with the Roundtable for Sustainable Palm Oil (RSPO) being the farthest along. RSPO has been in existence for four years. It has over 100 members, including major industry players from throughout the value chain as well as financial institutions and environmental and social NGOs. It has an annual meeting, a board, voting members, an organizing committee, and a secretariat. It is itself an NGO, headquartered in Zurich, Switzerland, with its main office in Malaysia. It is estimated that RSPO members produce between one-third and one half of the world’s palm oil. The RSPO (and its sibling roundtables in other commodities) is not a niche market phenomenon. On the contrary, the roundtables are putting in place mainstream, mass-market sustainability practices and targeting optimal performance levels that such-mass market can absorb.

20. Over the past two years, the RSPO established a Criteria Working Group to draft Environmental and Social Principles and Criteria that were approved by the full RSPO membership in November 2005. Nearly 40 criteria are included in this work (see Annex 4). The 4 These voluntary codes of conduct, enshrined in Principles and Criteria accepted by the roundtable members, may or may not lead to certification.5 It is interesting to note that there are synergies among the stakeholders involved in the four commodities. Some NGOs are active in more than one of target commodities (ex: WWF) and some multinational firms are off-takers of several target commodities (e.g. Cadbury-Schweppes plc is involved in for a for cocoa, sugarcane, and palm oil; Unilever is involved in roundtables around soybean, sugarcane and palm oil). This allows for cross-pollination of ideas that strengthens both the roundtables and BACP.Biodiversity and Agricultural Commodities Program (BACP) 5

RSPO will develop a guidance document showing ways that producers can implement the Principles and Criteria. The next phase of the work of the RSPO will be to field test the Principles and Criteria in different areas and scales of production. The RSPO aims to begin to field test the criteria in 2006 and have an initial batch of certified product on the market in 2007.

21. Because the RSPO was one of the first roundtables/dialogues, it was focused more initially on prescriptive approaches to reducing impacts than on market-based performance- and metric-based approaches. This issue will be addressed in the near future and players such as the BACP can be instrumental in helping identify meaningful, measurable indicators of biodiversity and habitat at both the farm and landscape levels. The BACP can also play a role in helping adapt the RSPO thinking to different producing regions.

22. A group of initial members of the Better Sugarcane Initiative6 first met in 2005. Its multi-stakeholder membership includes producers and millers from four continents as well as traders, buyers, manufacturers, brands, investors, researchers, and NGOs. There is a plan to recruit at least one energy company, given the increasing importance of sugarcane in renewable energy (burning of bagasse) and the production of ethanol.

23. The BSI has held two meetings and formed a steering committee. Technical working groups are being created to develop indicators and measurable standards for the 8 to 10 most significant environmental and social impacts of sugarcane production globally, both on and off the farm and at the mill level. The BSI aims to have indicators and measurable standards drafted and vetted by 2007, so as to conduct field testing in 2007 and 2008. The BSI hopes to have Better Sugar, Energy and Ethanol on the market by 2008, with significant product flows by 2010 (with 25% - 50% of purchases going to Better supplies). 24. The Roundtable for Responsible Soybean Production (RRSP) was formally created in 2004 and held its first meeting in 2005 in Brazil. The first meeting, brought together some 300 individuals and organizations, but did not achieve consensus on environmental impacts or on what could be done to improve them. A group of institutions that were present (including the IFC) proposed that another meeting be held where social and environmental experts would present key impacts and actions to reduce them, and key areas where more information is needed. This meeting occurred in April 2006 in Sao Paulo. The next step would be for specific technical working groups to define the 8 to 10 key social and environmental impacts at the farm and landscape levels.

25. Several cocoa industry groups address social and environmental issues but as yet no structured roundtable process exists. It is worth noting that in February 2005, some of the main players in the cocoa industry suggested the creation of a Better Cocoa Roundtable that would begin in 2006.

26. Currently, the most prominent industry organization working on sustainable cocoa is the World Cocoa Foundation (WCF). The WCF membership includes about 60 companies and industry associations. The WCF operates a Sustainable Cocoa Program with a goal to “elucidate the fundamental ecological mechanisms that support the sustainable cultivation of cocoa, identify

6 The choice of the word “sugarcane” rather than “sugar” reflects the focus on sugarcane (rather than sugar beet or other sources of sugar), and also reflects the roundtable’s relevance to all uses of sugarcane, including sugar, but also biofuels, biomass-based cogeneration, paper pulp, etc Biodiversity and Agricultural Commodities Program (BACP) 6

and verify on-farm biodiversity benefits of sustainable cocoa agriculture, and develop sustainable cocoa agriculture models that contribute to the sustainability of tropical forest ecosystems.”

27. The relationship between the BACP and the roundtables is symbiotic. The BACP can help fund incremental roundtable activities that address biodiversity of global importance while the roundtables allow the BACP to efficiently stay abreast of the main issues in a commodity market, build contacts with the main players, and solicit potential projects. The BACP funding can support the roundtables in the following ways:

a. Provide a portion of core support to ensure that biodiversity issues are fully considered by the roundtables;

b. Through the Technical Working Groups (TWGs), help identify measurable indicators for biodiversity and habitat both at the landscape and farm levels;

c. Through the TWGs, help to identify areas where information gaps exist or where information needs to be centralized from disparate sources;

d. Support research to gather necessary information regarding indicators or standards;e. Help identify and vet global performance standards for each indicator;f. Support the field-testing of the proposed standards; andg. Support efforts to understand the limitations or strengths of global standards.

D. Background on Global Significance of Biodiversity Affected by BACP’s Target Commodities

Global significance of biodiversity affected by BACP’s target commodities

28. The production of the BACP’s target commodities currently has a negative impact on biodiversity of global significance. As already mentioned, the BACP’s target countries all have biodiversity hotspots that overlap with areas of production for the BACP’s target commodities (see Annex 2 for maps of major hotspots and major production countries for each of the selected commodities). This section discusses the global biodiversity significance of the BACP’s target countries in more detail

29. Indonesia. Indonesia is considered by Conservation International to be one of the twelve megadiverse countries, largely due to the presence of two biodiversity hotspots: Wallacea7 and Sundaland.8 Indonesia ranks first in the world for the number of mammal, palm, and parrot species.9 Almost 1,600 Indonesian species figure in the International Union for the Conservation of Nature’s (IUCN) Red List of endangered species, and for 247 of them agriculture is clearly identified as the major threat. Because of Indonesia’s geographical situation, there is a high level of species endemism including such species as the orangutan, the babirusa, the bird-wing butterfly, the Sumatran Tiger, and two species of rhinoceros. Their insularity increases their

7 Central islands of Indonesia east of Java, Bali, and Borneo, and west of the province of New Guinea, and the whole of Timor Leste. 8 Sundaland is an indo-Malayan archipelago, an arc of some 17,000 equatorial islands, and is dominated by two of the largest islands in the world: Borneo (725,000 km²) and Sumatra (427,300 km²), see: http://www.biodiversityhotspots.org/xp/Hotspots/9 Third National Report at the Convention on Biological Diversity http://www.biodiv.org/doc/world/id/id-nr-03-en.pdfBiodiversity and Agricultural Commodities Program (BACP) 7

vulnerability to extinction. Today, most Indonesian megafauna are considered endangered. The biggest threat to Indonesian biodiversity is deforestation through logging, fires, and agricultural conversion.10 At today’s deforestation rate (more than 2 million ha/year in 2004) lowland forests may soon disappear. Forests fragmentation is also a major issue for biodiversity.

30. Oil palm cultivation is also identified as a major agricultural threat to Indonesian biodiversity. The main environmental problems from oil palm production are habitat conversion, threats to critical habitat for endangered species, and pollution from processing wastes. Habitat conversion has a devastating impact not only on the tropical forests (which have more tree species per hectare than any other forests studied to date) but also on other plant and animal species. Oil palm poses the most significant threat to the widest range of endangered megafauna of any agricultural crop. Species that are affected directly include the Asian elephant, the Sumatran rhinoceros and tigers, and orangutans. Conversion of natural forest to oil palm has emerged as the major threat to orangutan populations and habitats particularly for major populations in lowlands with dryland diversity, and in swamp and/or peat forests. The mammal species density in oil palm plantations is less than one seventh of their density in primary forests.11

31. Malaysia. Malaysia is also considered by Conservation International as one of the twelve megadiverse countries. It lies within the biodiversity hotspot of Sundaland.12 Malaysia hosts 1,046 species from the IUCN Red List of endangered species. For 157 of these, agriculture is identified as a major threat. Malaysia’s peninsular and insular geographical situation has led to a high level of endemism, including 27 mammal species13 (such as the Javan and the Sumatran rhinoceroses, the black shrew, the tiger and the otter civet). The country has more endangered plant species than any other country in the world.14 Some expert studies estimate that by 2020 almost half of all mammals and a quarter of all birds in Malaysia will face extinction. 15 Their insularity increases their vulnerability to extinction.

32. The third report of the Malaysian government to the UN Convention on Biological Diversity (CBD)16 clearly identifies land conversion as the main cause of biodiversity loss in peninsular Malaysia. Malaysia’s land use policy is “use oriented” and is designed for maximum utilisation and development.17 From 1970 to 1992, Malaysia’s natural forest was reduced by 19.3 per cent, mainly through agricultural land conversion. Expansion of oil palm plantations is one of the major reasons for forest conversion. In 2002, plantations already covered a surface area of 2.9 million hectares.18

10 Clay, op. cit.11 There are nearly eighty mammal species found in Malaysia’s primary forests, just over thirty in disturbed forests, and only eleven or twelve in oil palm plantations. Source: Wakker, Eric. 1998. Lipsticks from the rainforest. WWF Germany. 12 http://www.biodiversityhotspots.org/xp/Hotspots/ 13 http://www.animalinfo.org/country/malaysia.htm 14 http://www.arbec.com.my/endangered%20plants.htm 15 Chiew and Yoga, Nature Plundered, The Star Online, http://web.archive.org/web/20020211171230/thestar.com.my /lifestyle/story.asp?file=/2002/1/1/features/biof&sec=features16 Malaysian Ministry of Natural Resources and Environment: third report to the (CBD), http://www.biodiv.org/doc/world/my/my-nr-03-en.pdf 17 www.frim.gov.my 18 Clay, op. cit.Biodiversity and Agricultural Commodities Program (BACP) 8

http://www.frim.gov.my/

http://www.biodiv.org/doc/world/my/my-nr-03-en.pdf

http://www.arbec.com.my/endangered%20plants.htm

http://www.animalinfo.org/country/malaysia.htm

http://www.biodiversityhotspots.org/xp/Hotspots/

Figure 2: Oil palm plantation, A. Rival, © CIRAD.

33. The main environmental impacts related to oil palm production are habitat conversion, threats to critical habitat for endangered species, and pollution from processing waste. While oil palm plantations can provide habitat for some species, it has been

documented that the diversity of mammal species in plantations is significantly lower than in primary forests. For example, one study found that in Malaysia’s primary forests, there were 80 mammal species, while there were just over 30 in disturbed forests, and only 11 or 12 species in oil palm plantations.19

34. Ghana and Côte d'Ivoire. Both Ghana and Côte d’Ivoire are part of the Guinean Forests of West Africa, a biodiversity hotspot which is one of

the most critically fragmented biodiversity habitats on earth. The Guinean Forest hosts 31 endemic threatened bird species, 35 endemic threatened mammals and 49 threatened amphibians. The lowland forests of West Africa are home to over one quarter of Africa’s mammals, including more than 20 species of primates. Flagship species include the Jentink’s duiker, the pygmy hippopotamus, and scattered populations of western chimpanzees. Five Endemic Bird Areas lie partly or entirely within the hotspot.

35. Deforestation from logging and slash-and-burn agriculture are still prevalent throughout the region. Only 15 per cent of its original forest cover remains. Logging, mining, hunting and human population growth are placing extreme stress on the remaining habitat areas. Within the last 10 years, more than 2.3 million hectares of forest area in Côte d’Ivoire and Ghana have been deforested.

36. Cocoa production areas are particularly relevant to globally significant biodiversity since they are located at the frontier of remaining forest habitat. The correlation between destruction of forest habitat and the extension of areas for cocoa plantation in southern Côte d’Ivoire are clearly documented and acknowledged by the government.20 Depending on where and how it takes place, cocoa expansion in the next decades could lead to further deforestation of millions of hectares of tropical forests, particularly if better management practices (such as shade grown or, yield increases) are not applied. Plantations (and farmers) in Ghana are aging, resulting in lower yields. If cocoa prices remain attractive, the major production regions are expected to move westwards where a younger generation of farmers is likely to clear remaining forest to plant cocoa.

19 Wakker, op. cit.20 Côte d’Ivoire, National report on Biodiversity to CBD, 16 November 2005Biodiversity and Agricultural Commodities Program (BACP) 9

Figure 3: Cocoa tree, P. Lachenaud, © CIRAD

37. Moreover, cocoa plantation systems that employ few or no shade techniques are prevalent in Côte d’Ivoire and Ghana. They represent 28 per cent and >40 per cent of all plantations, respectively. This will result in even stronger pressure on habitats and the surrounding watersheds.21

38. Brazil. Among the 17 megadiverse countries, Brazil is considered the country with the largest biological diversity. With an estimated 15 to 20 per cent of all world biological diversity it is considered as having the largest number of endemic species in the world.

Figure 4: Sugarcane harvest, R Fauconnier, © CIRAD

39. The Cerrado region and the Atlantic Forest rim are recognized as biodiversity hotspots for their globally significant biodiversity. They are the two Brazilian biomes that suffer the strongest human pressure, through both urban and

agricultural expansion (this includes clearing for sugarcane and soybean production). The Cerrado, which covers 21 per cent of the country, is the most extensive woodland-savanna in South America. It supports a unique array of drought-and fire-adapted plant species, and many endemic bird species. Large mammals such as the giant anteater, the giant armadillo, the jaguar and the manned wolf also still survive here, but are competing with the rapid expansion of Brazil's agricultural frontier, (primarily soybean and corn crops).

Figure 5: Soybean plant, C. Lanaud, © CIRAD.

40. The Atlantic Forest of tropical South America hosts 20,000 plant species, 40 per cent of which are endemic. Yet, less than 10 per cent of the original forest remains. More than two dozen Critically Endangered vertebrate species are threatened in the region, including three species of lion tamarins and six bird species. With almost 950 kinds of birds living in the hotspots, there are many unique species, including the red-billed curassow, the Brazilian merganser, and numerous threatened parrot species. Small mammals in particular are endangered by habitat

fragmentation and destruction.

21 Gockowski et al., unpublished.Biodiversity and Agricultural Commodities Program (BACP) 10

E. Background on Impacts of Production on Biodiversity, Better Management Practice Alternatives, and Barriers to Adoption

The negative impact of production on biodiversity 41. Land conversion. Conversion of natural or reforested habitat to cropland is one of the major biodiversity impacts of any cultivation system. The impact is pervasive and long-term. Over the past 200 years, sugarcane may have been responsible for the destruction of more globally significant biodiversity that any other single crop. It has replaced natural habitat in many tropical islands that could have had unique endemic populations due to their geographical isolation. Land use issues still arise today with all four target commodities. For example, high-conservation-value forests (HCVFs) are being converted to oil palm plantations.22 (See Annex 5 for further details on High Conservation Values). The president of Côte d'Ivoire, Laurent Gbagbo, has said “Le cacao mange la forêt” (cocoa is eating away at the forest).23 Land use can have ripple effects as well. Because soybean is such an extensive crop (it requires more land to produce the same yield as other crops), production also requires extensive infrastructure. This infrastructure leads directly and indirectly to habitat conversion. Finally, while agricultural expansion into natural habitats can bring new jobs, it can also undermine the livelihoods and cultures of peoples who previously used the ecosystems for hunting, gathering, grazing or shifting cultivation.

42. Soil erosion and exhaustion. Soil generally contains more biodiversity than the land above it—soil biodiversity quite literally supports the flora and fauna that live above it. Certain soybean and oil palm production practices are likely to lead to serious levels of erosion. On oil palm plantations the clearing and planting of riparian areas, and slopes greater than 15 degrees can cause erosion that is as much as 30 times greater than in natural forests. Suspended solids can be the largest threat to sea-grass beds, mangroves, and coral reefs. Because soybean is a short, shallow-rooted plant with little biomass its fields can suffer more soil erosion than other crops, particularly if the soil is loose and the land slopes. Without well-defined technical criteria, soybean cultivation could render the soil in many parts of the Amazon unusable. Even if abandoned, such exhausted soils will not support biodiversity levels at even a small fraction of what they once were.

43. Input use. When used improperly, pesticides, herbicides and fungicides contaminate the soil and leach into ground and surface water. Furthermore, the dumping of nutrient-rich mill and processing effluents into rivers has caused major fish kills and the excessive growth of alien vegetation (such as water hyacinth) all over the tropical world. Mill and processing effluents and nitrogen-based fertilizers are a chief source of excess nitrogen in terrestrial and aquatic ecosystems. Their presence causes eutrophication, hypoxia/anoxia and ecosystem death. It also threatens fisheries and biodiversity, alters food webs and simplifies ecological energy flows. Nitrogen deposition was adopted as a key global indicator of biodiversity loss by the CBD in 2004.

22 High Conservation Values (HCV) in a forest or a agricultural landscape are defined on the basis of a credible and agreed upon standard, and their presence or absence is determined on the basis of whether a set of pre-defined criteria are met. One of the most widely used sources for defining HCVs and their associated criteria is the “HCVF Tool Kit” developed by ProForest, a standard compatible with the Principles & Criteria adopted by RSPO. The HCV criteria proposed by ProForest include criteria directly related to globally significant biodiversity, such as, for example, criteria HCV1: “Forest areas contains globally, regionally or nationally significant concentrations of biodiversity values (e.g. endemism, endangered species, refugia). See Annex 5 for more detail. 23 See for example http://www.atibt.com/pdf/lettre_20.pdf.Biodiversity and Agricultural Commodities Program (BACP) 11

44. Water use. Water withdrawn for agriculture results in less water available for the biodiversity rich habitats in the surrounding watershed. Sugarcane in particular is noted for its high water consumption. Sugarcane requires 1-1.5 m3 of water per m2, which is about twice as much as soybeans. Full-sun cocoa plantation systems also have a much higher evaporation rate than shade-grown plantations or original forest habitat. Where evaporation rates are high relative to rainfall, irrigation can also cause salt contamination of surface soils.

Better management practices at the producer level

45. Just as the production of the BACP’s target commodities have similar impacts on biodiversity, the principal means of reducing these impacts is similar across the four commodities (in fact, these approaches can be applied to agricultural production in general).

46. Land use planning and zoning. Areas of exceptional biodiversity or those which are critical for endangered species can be protected through land-use planning and zoning. But setting aside isolated preserves will not allow sufficient gene flow between isolated populations. Biodiversity conservation and maintenance of ecosystem functions need to be addressed on a landscape level and on individual plantations (particularly the larger ones). Fortunately, many of the areas that are required to maintain biodiversity and wildlife corridors are also areas that are marginally productive. For palm oil, sugarcane or soybeans, riparian and slope areas generally cost more to farm than they return in benefits. Enlightened producers are beginning to understand that by simply abandoning their more marginal lands, their overall efficiency and per-hectare production increases. This leads to a decrease in inputs and associated environmental impacts, and higher net profits.

47. Planting on degraded lands. Planting on degraded agricultural or pasture land involves less labor, machinery, pesticides, and clearing than planting in natural habitat. Areas that have already been degraded by repeated logging and fire, for example, are abundant in tropical countries and are arguably more expendable from a conservation point of view than other, less disturbed, ecosystems. Because they can be cheaper to acquire, and easier and cheaper to plant than natural areas this practice would relieve some of the pressure on natural habitats. Given that Indonesia has 20 million hectares of degraded land, a vast amount of oil palm could be planted on this land with no loss of natural habitat. Brazil has more degraded and abandoned land that can be reused by agriculture than it currently has in production. This would take considerable pressure off conversion. Since the most important impact of cocoa on globally significant biodiversity is the conversion of primary forests for production, the location of future cocoa expansion is a critical issue. Ghana and Côte d'Ivoire both have abandoned agricultural land (fallow land or, land abandoned after illegal logging) which in some cases is suitable for replanting with cocoa. Its use could mitigate land conversion.

48. Maintain soil fertility. Many practices reduce soil erosion and the need for chemical inputs. Such practices include careful siting of plantings and infrastructure, the elimination of burning, abandoning riparian areas and areas of 12 to 15 degree slopes, terracing, using contour winnowing of cleared matter, establishing cover crops (particularly legumes), and building and maintaining organic matter. Biodiversity and Agricultural Commodities Program (BACP) 12

49. Reduced use of inputs. Integrated Pest Management (IPM), precision application methods, spot applications as needed and the elimination of prophylactic use of agrochemicals are all ways to reduce inputs use. These methods tend to be cheaper for the farmer than conventional use of agricultural inputs. The resulting reduced nitrogen run-off may be expected to contribute to the decline of eutrophication, anoxia and dead zones in marine environments.

50. Composting. Using mill effluents as fertilizers instead of dumping them into waterways can reduce input use for soybeans, sugarcane, and oil palm. This practice can increase soil’s organic matter, which binds other pollutants to the soil and results in reduced effluent outflow. Cocoa processing residues can be put to good use by composting pod husks or by making horticulture pellets with dried husks and shells.

51. Reduction in water use. Plantations should be irrigated efficiently. For example, in nurseries for palm oil seedlings, drip or perforated tube irrigation systems are preferable to sprinklers. The use of water in sugarcane or palm oil processing mills can also be minimized by recycling, reusing and concentrating effluents.

Better management practices: the importance of demand-side support

52. It is important that the demand for “better” commodities (i.e., commodities produced according to biodiversity-friendly practices) matches and stimulates the production of such commodities. If this does not occur there is a risk of a market ‘glut’ of Better commodities, which would create a disincentive to producers. However, through the roundtable processes the BACP can ensure that commodities produced using BMP remain marketable.

53. Quality assurance, verification or certification systems are systems that allow the buyer to trust that the product purchased meets clearly established standards. The use of duly and regularly audited BMPs will be part of such systems. These are in the process of being defined or refined by commodity roundtables or industry groups. Because they allow purchasers throughout the value chain - traders, processors, consumers - to identify products that meet these characteristics, certification and verification schemes support the demand for Better commodities.

54. The Roundtable on Sustainable Palm Oil (RSPO) has brought together a wide range of stakeholders to agree on the key impacts of palm oil production and on the BMPs that reduce those key impacts to acceptable levels. This work resulted in an agreement on the key principles and criteria for sustainable palm oil at the November 2005 General Assembly (see Annex 4). The RSPO focus has now shifted to field-testing and the preparation of guidance documents to provide information on BMPs that can be used to reduce critical impacts. Roundtables for soybean and sugarcane are also progressing towards this goal (see Section C). In cocoa, a number of existing certification and labeling schemes include biodiversity criteria (e.g., Rainforest Alliance certification).

Better management practices: the role of finance


55. Financial institutions provide the funding for agricultural production, including the expansion of production areas or the purchase of inputs. There is currently interest among leading players in agricultural financing to incorporate biodiversity considerations into investment screens.

56. Palm oil investors are now considering how they can use the RSPO principles and criteria to develop screens to ensure that their investments encourage more sustainable production. By focusing on key biodiversity impacts and by ensuring that the associated practices actually break even or bring financial benefits, such investors can be assured that they will not threaten the financial viability of producers. In addition, investors can reduce the risk of their reputation being damaged from involvement with companies that might be accused of unsustainable production.

57. These practices are farther along in their development for palm oil than for other commodities. But some of the financial institutions active in palm oil (e.g., Rabobank, HSBC) are also active in markets for the BACP’s other target commodities and are interested in applying the lessons learned from palm oil to other commodities.

Barriers to the adoption of Better Management Practices

58. “Win-win” changes to production methods in the agricultural commodities sector have had great difficulty gaining ground due to a number of factors, including:

59. BMPs are not “off the shelf”. Better Management Practices still need to be clearly defined and then field-tested so that their associated economic and biodiversity impacts can be clearly assessed and so the practices can be tailored as needed to different production regions.

60. Lack of information on better practice methods, costs, and benefits. Many traditional farmers are simply unaware of Better practices. Furthermore, without detailed information about the practices, they may not understand how to implement them. Finally, most farmers want to understand the financial implications of any new farming methods before they adopt them, even on a small scale. Other than for palm oil, there is little written on Better practices. As a result there is a real need for an easily accesible database in multiple languages. 61. Lack of information on financial benefits of BMPs. The few existing descriptions and analyses of BMPs are usually devoid of any financial analysis. Where financial analysis exists, it is for a single practice and does not show how multiple BMPs play out financially for the producers. More work needs to be done to look at the financial implications of BMPs, as well as their cumulative impact on production, impacts and net profits along the value chain.

62. Difficulty of reaching a large number of smallholders. Smallholders in palm oil (about one third of production in Indonesia) and in cocoa (nearly all production in Ghana, Côte d'Ivoire and Indonesia) present the additional difficulty of being hard to reach. Large numbers of farmers are spread over a vast area. In the case of palm oil and sugar, it is possible to reach smallholders through the mill or plantation where they sell their harvest. However, this requires an understanding and commitment on the part of the mill or plantation. In addition, smallholders need BMPs that require more labor than capital and that can be effective on 1-5 hectares (these cases have not yet been documented).


63. The BACP has identified several effective but small-scale cocoa24 farmer training programs that can address biodiversity issues. The challenge lies in increasing their scale and linking them to the value chain (see Annex 6, Portfolio of Sample BACP Projects).

64. Lack of information tailored to financial institutions or purchasers. The overwhelming majority of demand-side actors have not been presented with the business case for insisting that growers and primary processors adopt BMPs. Yet if financiers insisted on the adoption of financially viable BMPs, the producers’ bottom line would benefit. In order for a financial institution or purchaser to understand the financial impact of biodiversity-friendly BMPs and press for their adoption, additional research needs to be undertaken. This research would initially be used to make the case to financial institutions for considering BMPs. Subsequently, it could feed into an investment screening system.

65. Risk aversion. Farmers tend to be conservative regarding the adoption of new practices. This is particularly the case among smallholders whose entire annual income depends on the success of their crop. For plantations, risk aversion can be overcome through the implementation of pilot projects. The results of these projects would be disseminated through roundtables. The work of the smallholder is more laborious, but existing programs, such as the cocoa wing of the Sustainable Tree Crops Program, have found that once a certain critical mass of farmers understand new practices and their economic and environmental benefits, it becomes easier to attract and train additional recruits.

66. Tailored financial instruments. Most oil palm producers still use the sale of timber and pulp wood to finance the establishment of new plantations. Reducing the upfront costs or delaying the repayment of loans could create incentives for producers to develop systems of rehabilitating degraded lands for production. For example, the increased value in land (developed vs. degraded) might provide an opportunity to cover investment costs. This would require making a credible financial case to lending institutions. Some international banks, especially European ones, might be willing to forego principal payments for a longer grace period due to consumer interest in this issue.

67. The efforts of the IFC’s Agribusiness Department to set conditions for pre-financing production with Grupo André Maggi (Brazil’s largest soybean producer) is a rare example of a financial institution adding environmental conditions to a loan. The deal’s pre-financing conditions, which required that the Group implement BMPs, led to Grupo André Maggi providing working capital to hundreds of soybean producers who sell their crop to the Group. The BMPs improved producers’ financial viability while reducing their environmental impact.

68. Access to financing: Some changes in production practices require substantial investments, which are usually not bankable through the local banking structure due to, inter alia, their innovative nature, the small size of production operations, or the producer’s lack of collateral. These innovations may eventually lead to lower operating costs. But the capital cost of conversion can make it hard to reach that point. For example, for cocoa, replanting on the same land is a costly and technically difficult process because of the toll that it takes on soil health and water resources. Without access to finance, there may be considerable incentives to expand 24 In Ghana and Côte d'Ivoire, government agricultural extension services are not effective, and therefore private sector and/or NGO alternatives need to be put in place.Biodiversity and Agricultural Commodities Program (BACP) 15

production cheaply through simply clearing forest for new plantations. Access to finance can also be an issue for sugar in Brazil, and for palm oil in some countries, such as Indonesia.

69. Lack of laws, legal enforcement, or changes in laws. The rapid clearing of natural habitat is typically spurred by positive market signals. However, government-defined areas of agricultural expansion that take biodiversity into account are often insufficiently defined and un-enforced (e.g., in Indonesia). Laws regarding permanent set asides, such as set-aside requirements on Brazilian plantations, are either weak, unclear, contradictory or not enforced.

70. Rising prices. When prices are high enough that the portion paid to producers is satisfactory, there is little incentive to get producers to change what they are doing. As prices deteriorate or as production declines due to disease and pests, producers become more receptive to change.

F. The IFC’s Role in Agricultural Commodity Markets

71. The BACP is a logical continuation of the IFC’s efforts to promote sustainable agricultural commodities. In 2001, the IFC used funds from its own profits to leverage contributions from other parties to support the identification of and adherence to BMPs. Through this early work on BMPs, the IFC came to recognize that its ability to bring about change would be strengthened by a partnership with interested and motivated stakeholders. This led to the formation of the joint IFC/WWF Initiative on Better Management Practices in Agricultural Commodities (BMP Initiative), which has been instrumental in establishing the industry roundtables that are discussed in Section C. The BACP strengthens and complements the discussions taking place through the ongoing BMP Initiative by providing technical assistance (TA) to the development of the roundtables’ biodiversity-related principles and criteria, and their uptake throughout the value chain.

72. BACP can also help mainstream IFC clients to adopt biodiversity friendly practices by integrating such adoption in agribusiness lending operations where relevant25. This would be done through TA. The TA would not cover any costs related to IFC’s own work, nor would it subsidize IFC’s client. TA funds would go to activities strictly complying with the BACP criteria. Although possibly channeled through the client, BACP TA funds would go to third parties like NGOs or other suitable entities able to implement such BMP related TA.

73. The IFC’s Agribusiness Department (CAG) provides agribusinesses with equity, debt, working capital, and other sources of finance. Table 1 shows the extent of the IFC’s current portfolio in the BACP’s four target commodities. The table illustrates that the amount of finance that the BACP could leverage through the Agribusiness Department is sizeable. Current IFC investments in the BACP’s target commodities total over US $1.3 billion. Recent new IFC investment opportunities would be well-aligned with the BACP. For example, the CAG is currently considering a US $25 million deal with a commodity trader. The BACP could leverage this deal, by providing TA to a partner NGO in the project to buttress the borrower’s understanding and deployment of BMPs. Other deals of this type are likely to arise in the near future.

25 Projects submitted to BACP via IFC would go through the same eligibility screening as any other project proposals. See Section K, The BACPProject Cycle and Project Selection Criteria for more detail.Biodiversity and Agricultural Commodities Program (BACP) 16

Table 1: Summary of IFC Agribusiness Department's Investments in BACP's Target Commodities

IFC investmentand total investment leveraged by IFC(US$ million)

Main countries Sample partners

Palm oil > US $107 million IFC investment

>US $165 million total IFC investment, including leverage via syndication

IndonesiaCôte d’IvoireBrazilThailandMexico

WilmarVerlaineCosmivoireDenpasaPTK KSPWings Oil PalmUPOIC

Cocoa >US$ 52 million IFC investment Worldwide / Africa

Ecom Olam

Sugarcane >US$ 213 million IFC investment

>US$ 236 million total IFC investment, including leverage via syndication

IndiaBrazilPeru

Balrampur Chini MillsCosanParamonga

Soybeans > US$ 493 million IFC investment

> US$ 887 million total IFC investment, including leverage via syndication

ArgentinaBrazil

Aceitera General DehezaAndré MaggiBungeMolinosOleaginosa Oeste (Glencore)SadiaVicentin

Total > US$ 866 million in IFC investment

>US$1,341 million total IFC investment, including leverage via syndication

Source: IFC Agribusiness Department Databases (March 2006).

74. In support of its goal of mainstreaming the adoption of BMPs, and with duly documented consideration and care for non-duplication of efforts or funding, the BACP can also enlist the capacities, contacts, and resources of several other IFC departments or programs, including the Global Financial Markets Department, the Global Manufacturing and Services Department, the IFC/GEF Environmental Business Finance Program (EBFP), and/or the SME Linkages programs. The SME linkages program in particular can be instrumental in reaching smallholder producers (see example in Annex 6, Portfolio of Sample BACP Projects), and BACP can coordinate with EBFP’s planned supply-chain financing to increase each program’s overall impact.


G. The IFC’s experience with market transformation

75. The IFC has been a pioneer in using GEF funds to transform markets worldwide (initially for energy efficiency and renewable technologies, and more recently in the biodiversity focal area).26

A hallmark of the IFC’s approach to market transformation is its holistic approach to targeting both supply and demand. For example, from 1995 to 1997, the IFC/GEF Poland Efficient Lighting Project (PELP) combined a price buy-down scheme with a consumer education campaign to simultaneously decrease price and increase demand for energy-efficient compact fluorescent lamps (CFLs). This helped the Polish CFL market to escape from the vicious circle of high-price and low-demand. The subsequent IFC/GEF Efficient Lighting Initiative (ELI) spurred transformation in the lighting market in seven additional countries (Argentina, the Czech Republic, Hungary, Latvia, Peru, the Philippines, and South Africa). 76. Through the IFC/GEF Hungary Energy Efficiency Co-Finance Program (HEECP), the IFC demonstrated that it was possible to work with Financial Intermediaries (FIs) to establish financial instruments that help create or strengthen markets for energy efficiency services. The HEECP pooled US $5.7 million of GEF funds with US $12 million of IFC investment to build the energy efficiency financing capability of Hungarian FIs.

77. With the Program on Commercializing Energy Efficiency Finance (CEEF), the IFC broadened the scope and scale of its use of financial instruments to stimulate environmental markets. CEEF, which operates in the Czech Republic, Slovakia, Estonia, Latvia, and Lithuania, supports the operation of a partial loan guarantee facility for energy efficiency. It combines US $18 million of GEF funds, bilateral donor support totaling US $1.3 million and an IFC direct investment of US $30-75 million.

78. Meanwhile, the IFC/GEF SME program, in its ten-year lifetime, lent US $20.8 million to 140 SMEs whose activities helped mitigate climate change or protect global biodiversity. The SME Program was the first GEF-funded, non-grant SME financing program targeting the private sector. Its successor, the Environmental Business Finance Program (EBFP), has GEF funding of US $20 million.

79. When contemplating market transformation, an important difference between agricultural biodiversity and energy efficiency is that agricultural commodity markets are inherently international. Producers, transformers and consumers are spread throughout globe. Therefore, the BACP needs to take a global perspective by addressing stakeholders wherever they are. This approach was first used in the IFC/GEF Marine Aquarium Market Transformation Initiative (MAMTI), which is introducing sustainable marine aquarium fish harvesting practices. MAMTI interacts with tropical fish providers in a number of different coastal and island nations in the developing world and with aquarium retailers and hobbyists in industrialized nations. The IFC is now seeking to more aggressively pursue opportunities for large-scale mainstreaming of biodiversity into major market sectors, including agriculture.

80. With the BACP, the IFC will be able to use its market transformation experience in a new market (agricultural commodities) and at a broader scale (leveraging mainstream IFC lending). The IFC’s experience with market transformation brings several assets to the BACP. It gives the

26 See GEF Project Reports and/or Project Documents for PELP, ELI, HEECP, SME, CEEF, and MAMTI.Biodiversity and Agricultural Commodities Program (BACP) 18

BACP design team an in-depth understanding of the fundamental concepts of market transformation such as how to create supply-push, and demand-pull, or to remove friction from a market. It also endows the BACP with the know-how to face the practical challenges of implementing a market transformation program such as: adopting a flexible approach to program management, designing meaningful indicators, integrating regular data, gathering into routine program operations, or responding effectively to changes in the market.

H. Program Objective and Outcomes

81. The ultimate goal of the BACP is to preserve global genetic species and ecosystem diversity in agricultural production landscapes, by transforming markets for target agricultural commodities.

82. To achieve its ultimate goal, the BACP will target the three major groups of market actors in each commodity: producers (supply), traders and purchasers (demand), and financial institutions. For each group, the BACP will aim to create an enabling environment that generates incentives for greater supply, demand, and financing of biodiversity-friendly products. This approach is reflected in the BACP’s specific objectives, or outcomes, which are presented below.

a. A strong enabling environment supports the integration of cost-effective biodiversity preservation opportunities at all levels of the value chain. The enabling environment includes effective international multi-stakeholder commodity dialogues and supportive government policies.

b. Biodiversity-friendly practices are incorporated into production and on-farm processing, leading to a measurable decrease of the farm’s impact on biodiversity of global significance. These practices may be related to land use (e.g., on-farm set-asides that result in the creation of wildlife corridors), to input use (greater uptake of integrated pest management, more rational use of water and fertilizer, and composting of agricultural waste).

c. There is a significant mainstream demand from traders, off-takers, processors, and other purchasers for commodities produced using biodiversity-friendly techniques. The demand could be for products that meet the RSPO Principles and Criteria (such as palm oil) or for products that meet specific biodiversity protection criteria (such as cocoa).

d. Financial institutions recognize the economic benefits of biodiversity-friendly production methods and practices, and integrate them into their operations. For example, the FIs could integrate biodiversity concerns into their investment screening processes or could develop financial instruments specifically designed to help level the playing field for biodiversity-friendly practices.

83. The above combination of outcomes will lead to the overall market transformation depicted below. The bell curve on the left represents the current state of environmental performance. Typically, government programs focus on the poor performance end of the bell curve. Most eco-labels focus on the high-performing end of the curve and seek to reward the best performers. What the BACP seeks is to shift the entire curve so that better practices become mainstream (i.e., Biodiversity and Agricultural Commodities Program (BACP) 19

better practices are in the central part of the curve, rather than in a niche nestled at the end of the curve). Through the BACP’s engagement with the roundtables, it will also work towards a process of continuous improvement. This will ensure that as new practices or technologies appear that can lessen agriculture’s impact on the environment they will be taken up by industry. In this way the industry will continuously ratchet up its environmental performance standards.

Figure 6: Graphic depiction of the BACP's market transformation goal

I. Program Activities

84. The Program will fund specific projects implemented by private sector and NGO partners. The selection of projects will be guided by commodity-specific Market Transformation Strategies. Each Strategy will clearly explain BACP’s market transformation goals for the next two-year period, what its funding priorities and budget allocations are for the coming two years, how the selected priorities will help meet those goals, and what the indicators are for each goal.27

It will also indicate what types of activities within each program component (see below) best help meet the priorities. Because it establishes measurable indicators for each goal, the Strategy also provides a clear map for how the Program’s progress will be assessed. BACP will issue Requests for Proposals (RFPs) that meet the goals laid out in the Strategy, and that fit within the components described below.

27 If warranted by extraordinary events, the Strategy for a given commodity can be revised before the end of the two-year cycle.Biodiversity and Agricultural Commodities Program (BACP)

Percentage of Producers

Environmental Performance

Accelerating Better Practice Adoption

20

85. The BACP has defined four complementary program activity components which promote the mainstreaming of biodiversity-friendly practices by different actors within agricultural commodity markets.28 These components, which reflect BACP’s objectives and outcomes, are:

Component 1: Support activities for an enabling environment document the best biodiversity-friendly practices, make the business case in terms of biodiversity, business, supply security, farm lifetime, social and other, of biodiversity friendly practices; and support policy dialogue between organized commodity private sector players and relevant public policy makers.

Component 2: Support better production via site-specific projects.

Component 3: Support increased demand for products with more positive biodiversity impacts.

Component 4: Encourage the development of financial services to support biodiversity-friendly practices.

86. The BACP also includes a management component and a M&E component.

87. All BACP activities will be tailored to specific commodity production methods. The barriers targeted, will fit within a larger commodity-specific Market Transformation Strategy (see Section K, The BACP Project Cycle and Project Selection Criteria). The following section discusses each component of the BACP in turn. It lists the types of projects that will be supported under each component, and then presents specific sample projects. The sample projects given (see Annex 6, Portfolio of Sample BACP Projects) emerged from the BACP’s dialogue with stakeholders during the PDF-B phase.

Component 1: Create an enabling market environment by: documenting the better biodiversity- friendly practices ; making the business case in terms of biodiversity, business, supply security, farm lifetime, social and other biodiversity friendly practices; and supporting policy dialogue with the relevant public policy makers.

88. As needed, for each commodity:a. Ascertain biodiversity-friendly practices on a regional basis (biodiversity-friendly

practices, technology, or labor inputs may vary according to factors such as geography or production methods).

b. Prioritize practices or methods that merit support from the BACP. Priorities should be made on the basis of biodiversity impact and potential for market adoption.

c. For each priority method, document:

28 Alternative Program concepts were contemplated such as focusing on purely organic agriculture, non-commodity based approaches, greater emphasis on non-production related conservation, exclusively project-level or commodity-wide interventions, etc. The proposed concept and design of the Program, however, was deemed to be the most resource efficient, sustainable and with a greater potential impact on global biodiversity, as it is based on the force of the convergent simultaneous action of highly organized players in a given commodity market.Biodiversity and Agricultural Commodities Program (BACP) 21

The specific methods involved and how to apply them;

The biodiversity benefits;

The financial and economic costs and benefits;

Other benefits, including increased farm lifetime, supply security, social and financial benefits.

The documentation will be tailored to different audiences, including, producers, FIs, off-takers, traders and/or millers. For example, information for producers will be prepared in the relevant local languages.

d. Disseminate the results of each documentation activity through commodity roundtables or other means, as suitable. This includes other commodity meetings or conferences, internal IFC channels, and the BACP web site.

e. Participate in annual roundtable meetings as a means of staying informed of issues, players, and events in a given commodity market. This will also provide visibility for the BACP and its TA mechanisms.

f. In order to ensure a biodiversity focus, include a BACP representative as a member of the steering committee of each roundtable, where possible,

g. Contribute, either financially or in-kind, to the efforts of the roundtable’s Technical Working Groups (TWG) addressing biodiversity.

h. Conduct policy analysis to identify opportunities for changes to agricultural or related regulations that would require or encourage the adoption of cost-effective BMPs.

i. Support the development, on a national, regional, or local level, of landscape-level land-use planning that discourages or forbids expansion into natural habitat and that encourages expansion into suitable degraded or abandoned lands.

j. In order to obtain policy changes from governments at relevant levels (national, regional and local), prepare specific documentation and/or events that facilitate dialogue with government on biodiversity issues (in collaboration with roundtable members and with the World Bank).

k. Once lessons have been learned in one country, seek to disseminate them to other countries via roundtable dialogue or other means. This can include dissemination beyond BACP’s initial selection of target countries.

89. See Annex 6, Portfolio of Sample BACP Projects, for information on the following sample projects: Regional High Conservation Value Forest (HCVF) Assessments to Identify Areas for Palm Oil Development and Conserve HCVF Landscapes in Borneo and Sumatra, Helping the Better Sugarcane Initiative Document Best Practices, and Participation in RSPO Technical Working Groups.Biodiversity and Agricultural Commodities Program (BACP) 22

Component 2: Support better production via site-specific projects

90. The BACP will help implement alternative production methods that have a proven positive impact on biodiversity and significant potential for development and replication. These will typically be at farm level (or for several nearby farms). The BACP will also implement broader landscape management activities in relevant commodity production areas with NGOs and public partners.

91. The production changes that will be encouraged could include integrated production methods or systems (such as Integrated Pest Management or Integrated Nutrient Management) or more specific changes (elimination of burning, rationalization of water use, use of renewables, cover crops, crop rotations, maintenance of on-farm genetic diversity,29 inter-cropping, re-forestation of fringe areas, abandoning farming on marginal lands, improved wastewater management, greater efficiency of fertilizer use, and improved soil management). Each project will need to demonstrate a clear link between a change in production practices and a positive change in landscape biodiversity.

92. The specific types of activities the BACP will support include:

a. The creation of commodity-specific workbooks, guidance documents, or web sites that provide information to producers about better practices that measurably reduce key biodiversity impacts as well as their overall costs.

b. The implementation of proven beneficial production methods used by a given producer or in a certain region when there are market failures that prevent the private sector from adopting them, and the methods have good replication potential.

c. A demonstration of the applicability (through applied research in a particular region or ecosystem) of alternative production methods that have yielded biodiversity and business benefits in other landscapes.

d. Support for the formulation and/or implementation of land-use management plans for the protection of high-value habitat and biodiversity that is being threatened by the unsustainable production methods of agricultural commodities in a given region/ecosystem.

e. Support for the implementation of production methods which contribute to the restoration of degraded habitats and/or the restoration of wetlands or biological corridors in agricultural landscapes.

f. Support for the implementation of production methods which facilitate the expansion into abandoned or degraded lands as an alternative to expansion into natural habitat.30

29 When agricultural plantations are not just monocultures at the species level, but also at the clonal level, large stands of genetically-identical plants are at high risk of pest and disease attack.30 Contraindications for planting on degraded or abandoned land will include: (a) that such areas may already have lost much soil quality; (b) that criteria have yet to be agreed for deciding when the damage to an ecosystem is so extreme and irreversible as to justify (re)conversion to agriculture; and (c) that the processes by which lands are degraded (farming, ranching, etc.) may generate ownership claims that could affect the cost and ease of acquisition.Biodiversity and Agricultural Commodities Program (BACP) 23

g. The creation or enhancement of non-production related biodiversity conservation initiatives engaged in by parties involved in the production of agricultural commodities (e.g., biodiversity set-asides and zoning).

h. Work through larger market chain actors (mills, plantations, traders, and other partners) to support the adoption by smallholders of relevant BMPs, as these require a different approach from larger producers.

93. Note that the BACP will support demonstration projects only where they have strong replication potential. See Section K (The BACP Project Cycle and Project Selection Criteria) for other project selection criteria.

94. For Sample Projects, see Annex 6, projects entitled Working with smallholders: Wilmar in Indonesia and Development of high-performing oil plantation while protecting areas of primary forest and reforesting in East Kalimantan on concessions with land previously degraded by intensive logging.

Component 3: Support increased demand for products with more positive biodiversity impacts.

95. The BACP will support the efforts of private agricultural commodity buyers and other value-chain participants to integrate, beyond compliance with national legislation or the IFC Environmental Safeguards biodiversity criteria in the value-chain. This could include supporting access to new markets for biodiversity-friendly products, supporting Identity Preserved Schemes31, quality assurance systems and certification systems, etc. which are linked to new biodiversity-enhancing production practices in the targeted commodity. From a market transformation perspective, it is important that any demand-side activity be linked with previous or ongoing project-level supply-side efforts. It must also have significant replication value at a commodity-wide level. The BACP’s demand-side activities include:

a. Support quality assurance, verification or certification schemes that address biodiversity concerns in an effective and measurable way.32 Specifically, support the formulation, field-testing, and approval of biodiversity-related principles, criteria, standards, and verifiers (as needed by each roundtable or stakeholder group).

b. Support the setting up of relevant systems and practices to allow measurability and traceability.

c. Document and increase awareness among purchasers (traders, off-takers, etc.) of the benefits of purchasing biodiversity-friendly commodities.

d. Increase awareness of the availability of such products (through roundtables, trade fairs, publications, and Public Relations (PR)).

31 Identity Preserved (IP) commodity production uses a combination of contract farming, information and tracking technology, production, processing and distribution technologies, and process standards. IP technology has so far largely been applied to managing risk, for example in excluding GMOs from supply chains, or ensuring quality. Once the technology and systems exist, there is the possibility of widening the set of attributes to include environmental and social issues more broadly. Use of this technology is growing. 32 BACP will only support those certification processes which have a measurable positive impact on biodiversity. This is not necessarily the case, for example, with Fair Trade schemes, or with certain organic schemes. Furthermore, BACP will not “pick favorites” among certification schemes.Biodiversity and Agricultural Commodities Program (BACP) 24

e. Support applied research that addresses possible barriers to the uptake of such products, and how to overcome them (for example, segregation issues or Identity Preserved schemes).

96. For cocoa, there is already a demand among major manufacturers and retailers for sustainable products. Therefore, the challenge is to establish meaningful criteria to define a sustainable product and help producers achieve it (with due respect to niche positioning and other marketing strategies of the affected manufacturers). For palm oil, there is a concern that the RSPO Principles and Criteria might lead to a glut of biodiversity-friendly product for which there are not enough buyers. Given that it is pull that will make markets work best, significant focus will be given to ensure that supply meets demand.

97. For a Sample Project, see Annex 6. The project is entitled Implementing a Comprehensive System of Biodiversity-friendly Cocoa Production through the Supply Chain.

Component 4: Encourage the development of financial services to support biodiversity- friendly practices as needed for each commodity:

a. Work with traders or other private sector actors who would like to use supply-chain finance (i.e., use future purchase commitments as collateral against short-term loans for agricultural inputs).

b. Work with FIs (including clients of IFC’s Global Financial Markets department) to incorporate biodiversity concerns into their screening methods.

c. Work with FIs, including clients of the IFC, on the development of financial instruments that specifically address market needs related to biodiversity practices (such as an instrument that takes into account the cost differential between developing a new plantation on degraded land vs. forest land) and on ways to market those instruments to their customers.33

98. For a Sample Project, see Annex 6, Bank Risk Assessment Policies: design and test investment screens for investments in the palm oil sector.

J. Benefits to partners

99. As shown in the list below, the benefits to partners are many. It is interesting to observe that each type of partner has tangible gains (such as increased production, better portfolio performance or increased market share) and intangible ones (such as increased enterprise pride and increased consumer confidence).100. The BACP will first bring about a number of public benefits that are in line with the goal of government agencies and of the GEF, such as:

a. Habitat protection with ensuing biodiversity benefits (such as protection for threatened species, greater presence of non-timber forest products, potential for medicinal plants, ecosystem services, and carbon sequestration);

b. Cleaner groundwater and surface water because of a decrease in agricultural run-off;33 One bank consulted during the PDF-B phase said that for them, the difficulty lay not in devising instruments for financing BMPs, but rather, in the marketing and outreach needed to promote those instruments to potential clients.Biodiversity and Agricultural Commodities Program (BACP) 25

c. Improved soil quality for future generations of growers and/or biodiversity.

101. Producers (including smallholders and large plantations depending on the commodity) have much to gain from the BACP. The benefits of participating in the program and adopting promoted practices include:

a. Increased production and efficiency;

b. Reduced costs;

c. Increased net profits (through reduced costs, productivity gains, and/or premiums);

d. Reduced staff turnover and increased morale;

e. Reduced conflicts (and costs) with labor and neighbors;34

f. Increased access to markets;

g. Reduced transaction costs to sell products;35

h. Reduced impact of government regulation and/or more time to comply;

i. Increased pride in enterprise and standing in the community; and

j. Improved access to capital.

102. The benefits to traders will be strongest for early adopters and include:

a. Reduced transaction costs for dedicated buyers;

b. Ability to differentiate their product from those of a competitor, and therefore to increase their market share;

c. Potentially higher margins on differentiated product; and

d. “Decommoditization” of trade and rewards for early adopters.36

103. Food manufacturers and retailers will appreciate both the tangible and intangible benefits (particularly producers of branded goods exposed to public opinion). These include:

34 When producers obey the law, obtain legal title and are fair with labor and neighboring communities, the number of conflicts, legal and press oriented, that arise is drastically reduced. Conflict takes time and costs money. It detracts from the firm's overall objectives. Some companies have gone out of business over such conflicts. The degree to which they can be avoided by doing things properly from the outset is a real financial gain.35 Producers that do not have ready buyers for their product have to find them. This varies a bit depending on scale and the degree of processing that is involved. Having forward contracts or willing buyers for Better commodities prior to harvest makes one less worry for the farmer. Also, when a producer has to dump product onto the market at harvest the price will generally be lower than at any other time in the year. 36 Traders and distributors benefit from having a wide range of commodities to sell to manufacturers and retailers, depending on the product. Differentiated product lets them provide a range of value for buyers who in turn want to position themselves in the market. Those traders that do this first are likely to be able to get a more significant margin than those traders who are forced to do this after the buyer stipulates what they want. This is easily illustrated by the GM trade to EU: Cargill now sells certified non-GM product to Frito and other companies. They were proactive about this and saw the advantage in the market. They make more money on these items and provide a service.Biodiversity and Agricultural Commodities Program (BACP) 26

a. Improved supply chain management;37

b. Reduced transaction costs with steady suppliers;

c. Improved consumer confidence;

d. Improved brand image;

e. Reduced risk of product quality or health and safety problems; and

f. The potential to convert producers to purchasers (selling down the pyramid).38

104. The BACP can enhance the performance of financial institutions by helping to provide:

a. Improved portfolio performance (less default, higher returns);

b. Reduced risk;

c. Reduced costs through simplifying ways to assess social and environmental impacts and exposure;

d. Improved brand image; and

e. The potential to work more easily with like minded investors around common principles.

105. NGOs are expected to play an important role in the delivery of the BACP’s projects. Through their involvement, they will gain:

a. Influence on the definition of key problems and opportunities;

b. Better use of scarce resources;

c. Lasting relationships with partners for future work;

d. Alignment with the private sector and producers for positive change; and

e. A focus on mainstreaming, rather than on niche markets.

106. The BACP will provide government agencies with new knowledge that will enable them to better fulfill their mandate. The BACP will:

a. Bring a new and more complete understanding of BMPs and biodiversity in production landscapes;

37 Most companies have quality specifications for the commodities that they purchase. Making a certification program for commodities simple, so that only 6-8 additional items were added, would have a great deal of appeal. It would be part of the ongoing supply chain management issue, while improving quality.38 If companies (like Unilever in Indonesia--UI) can buy from a number of small producers in a cost effective way, then those producers become potential buyers of their products. In the food industry this is important. UI has chosen to buy soybean directly from producers in Indonesia, thus supporting 5,500 families. If the same amount were bought in the US it would support 3 family farmers, or in Brazil, 1 family. This helps create more buying power in rural areas, and incremental increases in income are spent disproportionately on eating up the food chain. Biodiversity and Agricultural Commodities Program (BACP) 27

b. Allow regulatory, permitting, and licensing entities to move beyond compliance to what is possible;

c. Help government agencies raise the bar on what are “good” practices;

d. Shift the focus to performance rather than prescription;

e. Reduce citizen concerns thanks to credible plans to address key impacts; and

f. Significantly contribute to biodiversity conservation through market mechanisms, and thereby reducing the burden on government conservation budgets.

107. Commodity roundtables. The BACP’s engagement will make the roundtables be more effective by helping them to :

a. Deliver on the mandate of more sustainable production;

b. Leverage investment;

c. Leverage on-the-ground change;

d. Develop investor screens that would perpetuate the roundtables’ efforts;

e. Ensure the focus on key impacts, measurable performance levels, and improved performance against a benchmark;

f. Ensure a commodity-relevant approach rather than a niche market approach;

g. Increase knowledge of biodiversity management in production landscapes; and

h. Exert greater influence within the market chain and with producers, NGOs, investors, buyers, governments and researchers.

K. The BACP Project Cycle and Project Selection Criteria

Introduction

108. The BACP project cycle reflects the BACP’s market transformation goals. The key element of the cycle is the commodity-specific Market Transformation Strategy, which defines the BACP’s market transformation priorities, by commodity, for a two to three year period, and which elaborates (as needed) on the project selection criteria presented below. The project cycle is illustrated in Figure 7.


Figure 7: The BACP Project Cycle


Commodity Market Transformation Strategy

109. Transforming agricultural commodity markets towards being more biodiversity-friendly is a multi-step process. One must first identify the habitat one wishes to preserve, the negative impacts of production on that habitat, the related land-use planning issues, the performance levels associated with acceptable impacts, and the practices that can lessen the key impacts. It is then important to understand the specific barriers to the adoption of these practices, and to design Program elements that remove these barriers. For palm oil, that work has largely been accomplished during the PDF-B process, in consultation with the RSPO and other parties. As a result, the BACP will only need to refine it as a first step in the implementation stage. For sugarcane and soybean, the roundtable dialogue itself has not progressed as much, so the BACP is not as far ahead.

110. During the PDF-B phase, it was observed that some BMPs have “layers” of barriers. For example, even if a first barrier is removed (such as access to information), other barriers might remain (such as access to markets or to finance). In order to support effective market transformation, the BACP will need to “peel away” each barrier in a phased manner.

111. Furthermore, the BACP’s target markets can change quickly. Unanticipated events (climatic or other natural, market or political) can have a strong and sudden impact on prices, production areas, and habitat. Applied research can bring to light new or more cost-effective methods of lessening the impact of production on biodiversity.

112. The BACP Market Transformation Strategy responds to the need for a phased approach to market transformation, and for regular monitoring of market and Program data so that the Program is ready to respond nimbly to market changes. Every two to three years (as requested by the BACP Program Manager), the Strategy will set objectives and ways to achieve them, for each commodity, based on the assessment of (1) the status and trends for biodiversity affected by production; (2) the status and trends related to the mainstreaming of biodiversity at the producer level, the demand level, and the financial level; (3) the related policy context; (4) the status of industry roundtables or other fora; and, (5) the feedback/lessons learned from ongoing BACP projects.

113. Based on this information, the BACP will prepare a revised Market Transformation Strategy for each commodity. The Strategy will clearly explain: the BACP’s market transformation goals for the next two-year period, what its funding priorities and budget allocations are for the coming two years, how the selected priorities will help meet those goals, and what the indicators are for each goal.39 It will also indicate what types of activities (see Section I, Program Activities) best help meet the priorities.

114. Because it establishes measurable indicators for each goal, the Strategy also provides a clear map for how the BACP’s progress will be assessed.

115. The Strategy will be prepared by the BACP management team, with support from field-based implementers and/or consultants. It will be reviewed by the boards of the relevant commodity roundtables where applicable, and approved by the BACP Steering Committee. It 39 If warranted by extraordinary events, the Strategy for a given commodity can be revised before the end of the two-year cycle.Biodiversity and Agricultural Commodities Program (BACP) 30

will be a public document, available on the BACP web site. The first set of Strategies is currently being prepared.

Project selection criteria

116. The other essential component of the project cycle is the project selection criteria. In addition to fitting within the commodity strategy above, any project funded by the BACP must meet project selection criteria. These initial criteria are presented below. Additional criteria may be specified in the Strategy on a case-by-case basis.

Reduced impact of production on biodiversity of global significance 117. A project proposal must clearly demonstrate how the project will reduce the negative impact of production on biodiversity. The impact reduction can be direct (such as through the implementation of specific production or milling practices) or indirect (through studies to generate another level of information for better decision making, financing, and other activities). See Section I, Program Activities for more details.

118. The biodiversity targeted by the project must be of global significance. This would include high conservation value habitat, habitat for threatened species (that are listed by IUCN) and areas listed in a country’s National Biodiversity Strategy and Action Plan (NBSAP), areas that provide critical ecosystem services, etc.

119. All projects must be supported by a biodiversity conservation specialist (individual or organization), such as a local or international NGO.

Incrementality120. The proposal must demonstrate that without funding from the BACP, the project would not have taken place, or would have taken place at a later date, at a smaller scale, or with less benefits to biodiversity of global significance.

121. The proposed activity must contribute to bringing about a transformation regarding the impact on biodiversity of producing or processing the target commodity, or in the market uptake of commodities with less impact on biodiversity.

122. The BACP funds will only be used to support performance levels that are beyond compliance with national or local laws and regulations, and IFC’s Policy and Performance Standards on Social & Environmental Sustainability.

Clear and measurable outputs, outcomes, and indicators123. The proposal must present expected outputs and outcomes that are linked to the outputs and outcomes described in this document.

124. The proposal must identify measurable indicators of its outcomes and a process for obtaining data on each indicator (such as timing, scale, method or responsible party).


Co-financing125. The proposal must clearly document the sources of co-financing at the level of 1:2. All other things being equal, the BACP will give priority to projects with a higher co-financing ratio. In-kind co-financing is acceptable but can form no more than one-quarter of total co-financing proposed.

Social impacts and local engagement40

126. While social aspects are not a direct funding priority of the BACP, all proposals will need to show that they take the social implications of the project into account. Proposals must identify and address potential social issues by demonstrating a partnership with a local community or a leading local social organization. At a minimum, the proposed project must not have any adverse social impacts. Projects that support poor stakeholders through a fair trade component or equivalent will be favored.

127. Each BACP project will need to develop a framework of collaboration with local stakeholders prior to submission to the BACP.

Country-drivenness128. Individual projects funded by BACP must be fully consistent with GEF criteria on country drivenness.

Sustainability129. The project must show that the practice or approach it promotes is ultimately based on a sound business practice – that there is a clear business case for the project as envisaged.

Replicability/Adaptability130. The proposal should give concrete examples of how the project can or will be replicated. All things being equal, the BACP will favor projects will high replication value.

131. In the interests of replicability, preference will be given to projects that include a private sector partner committed to scaling up practices developed or tested via the BACP.

132. All projects must include an information dissemination component, to share lessons learned.

Restrictions 133. In addition, the following restrictions are placed on the use of BACP funds:

134. BACP funds will only target the program’s four selected commodities: palm oil, cocoa, sugarcane, and soybeans.

135. BACP will not channel GEF funds to directly subsidize private sector firms; BACP funds may however be channeled through private sector actors in certain projects, in a transparent and verifiable manner, for a specific biodiversity enhancing activity or project which meets the BACP’s criteria. In general, BACP funds will go to third parties such as NGOs, small local

40 These criteria apply mainly to site-specific projects


specialized agricultural or environmental consulting firms, associations, applied research institutions, field schools, foundations, etc. which are able to implement the TA. Private sector partners at any step of the supply chain will be expected to provide co-financing leverage, both cash and in-kind (part of the criteria).

136. The BACP will not promote production changes that merely meet the local legal or regulatory requirements of producers. However, it is expected that over the long term, the pressure created by certain market changes may help influence regulatory changes in favor of biodiversity or better enforcement of existing ones.

Project selection

137. Projects of up to US $50,000 in GEF funds can be reviewed and accepted by the BACP Program manager. Projects over that amount are screened by the Program manager, but need to be approved by the BACP’s steering committee (see Section L, BACP Management). The Steering Committee will review projects on a quarterly basis.

Project implementation

138. Once a project is approved, the relevant local implementation partner (see below under BACP Management) will be responsible for selecting, contracting, paying and overseeing the parties responsible for implementation. The local implementation partner will also be responsible for ensuring that data on indicators is gathered on a regular basis, and for passing that data back to the Program manager for analysis.

L. BACP Management

139. A small Global Program Management Unit equivalent to one full-time employee (FTE) will manage the BACP under a duly detailed agreement with the IFC. IFC is weighing several options for housing this Unit. It could be based within an international environmental NGO, such as WWF (who, with their lead role in commodity roundtables and in the IFC/WWF BMP Initiative, have an excellent command of both the market and the biodiversity issues facing BACP’s target commodities); within a firm with similar capacities, or within one of the regional implementers (see below). The Global Program Management Unit would be responsible for overall management of the Program, including management of the regional implementers, but also setting the overall direction and priorities of the BACP, working through the Market Transformation Strategies. The Global Program Management Unit would be supported by GEF resources.

140. For each program sub-region (Malaysian & Indonesia, Brazil, and Ghana and Côte d'Ivoire being the BACP’s three target sub-regions), the IFC will entrust day-to-day implementation (such as contracts and oversight) to a field-based regional implementer. The IFC has several precedents to draw upon for its choice of field-based implementers. It can select a single organization with biodiversity and agriculture experience, such as an international NGO with offices in its target countries. This approach is used by the Marine Aquarium Market Transformation Initiative. Alternately, BACP could have a separate implementer for each region (or commodity), such as was done for the Efficient Lighting Initiative (ELI). That implementer


could be an NGO or firm with suitable experience in biodiversity and agriculture issues, or it could be a member of IFC’s network of field-based TA delivery facilities, such as PENSA in Indonesia.(Program for Eastern Indonesia SME Assistance). During appraisal the IFC will finalize its choice of Program Management Unit and implementer(s).

141. The staff of the field-based implementer dedicated to the Program would be supported by GEF resources. This is analogous to the use, by other IAs, of government agencies or NGOs whose Program teams are supported by GEF resources as direct implementation costs. They will be the primary relationship managers and administrators of the Program. They will be the local “face” of the BACP, conducting such work as publicizing the Program, attending local events, and networking in order to generate proposals and disseminate information. They will also gather local market intelligence that will shared regularly with the Program Manager.

142. Projects will be implemented by third party contractors (including industry or professional associations, specialized firms, relevant NGOs or other organizations), under contract to the field-based implementers. If necessary, projects that do not have a strong site-based component might be contracted through a different entity, such as an international NGO.

The administrative structure is illustrated in Figure 8 below.


Figure 8: BACP Organizational Structure

143. The BACP Steering Committee will be responsible for reviewing the Market Transformation Strategy, and will review and accept (or reject) projects larger than US $50,000 (or other threshold to be finally confirmed at appraisal, depending on the chosen management and implementers structure). The committee will ensure that GEF funds are only utilized for activities that fulfill the eligibility criteria presented above in Section K, The BACP ProjectCycle and Project Selection Criteria (e.g., incremental cost, public good, and environmental benefits) and that they help the BACP meet its priorities as laid out in the Market Transformation Strategy for each commodity. The Steering Committee membership will be further defined at appraisal but will consist of three to five individuals from within the IFC (including the Biodiversity Team Leader from the Environmental Finance Group) and the World Bank and an external expert.


144. In order to be effective, market transformation programs need a flexible management system that allows for quick readjustments to the Program if warranted by changes in the market. This flexibility will be built into the BACP’s management process. The field-based implementers will regularly monitor and report on target markets and on project impacts so as to identify and convey any development that might require the Program to modify its approach.

145. The management activities of the BACP will be front-loaded. Year one is expected to entail more effort than the following years. First-year activities include establishing the Steering Committee, commissioning the detailed M&E plan, fine-tuning the Market Transformation Strategy for each commodity, and conducting the first review and selection of projects.


Phase 1 Year 1 (2007) Year 2 (2008) Year 3 (2009) Year 4 (2010) Year 5 (2011) BACP Management Establish BACP management team and Steering Committee Set up Regional Implementers Fine-tune market transformation strategy(ies) Ongoing management (project screening and selection*) * * * * * * * * * * * * * * * * * * * Monitoring & Evaluation (M&E) Establish a detailed M&E plan Set up a M&E Advisor and regional M&E contractors Conduct baseline evaluation Conduct mid-term evaluation Market Transformation Strategy Milestones** 1. International roundtable established and operating effectively 2. Design Technical Workgroups Principles & Criteria 3. Principles & Criteria adopted by commodity roundtable 4. Pilot testing (24 months) 5. Verification/certification system established 6. "Better" product available on the market

Figure 9: Gantt Chart for first Phase of the BACP

* issue quarterly Requests for Proposals (RFP), screen and select projects.

** Example for one commodity, for illustrative purposes only, assuming standards are adopted in year 2. For palm oil, for example, a similar cycle is already underway, with the adoption of standards in November 2005.


M. Monitoring and Evaluation

146. The BACP will conduct a baseline, mid-term and final evaluation, assessing the program’s progress towards transforming its target commodity markets, and the ensuing improvement in biodiversity. Annex 7 presents a detailed discussion of the M&E framework. The full M&E Plan, to be drafted during implementation will focus on impact and outcome indicators and will be submitted to GEF for review.147. It is notoriously difficult to monitor a project’s direct impact on biodiversity, and all the more so when the project spans three continents (Asia, Africa, and Latin America), and production landscapes covering over 125 million hectares. In addition, so many factors contribute to landscape changes that it is difficult to identify the exact drivers behind each change.

148. However, the BACP’s market-based approach provides an opportunity for a simplified approach, or proxy, to impact on the evaluation. Indeed, the BACP supports the adoption of sustainable, market-based systems that are embedded in the quality assurance, verification, or certification41 systems to be supported in each commodity market (see Section I ProgramActivities, TA component on demand-side activities). These systems include in their design regular audits that assess the biodiversity performance levels (as well as performance in other areas addressed by the system). As a result, monitoring the establishment, implementation, and functioning of these systems is sufficient as a means of documenting impacts, as long as they include satisfactory biodiversity standards. Work will still be needed, however, to link the adoption of BMPs to precise area- or species-based metrics. Also, the broader landscape/land-use activities will be evaluated separately.

149. The BACP will rely on certification and verification systems where they exist, and will support the development of new systems where they do not exist or where existing ones do not address key impacts. The BACP will work to ensure that for each commodity, there exists at least one certification system that incorporates biodiversity performance criteria; the system will also include independent verification that a certified producer adheres to these criteria.

150. Once such a system is in place, it becomes straightforward for the BACP to obtain monitoring data because the verification itself implies that certain performance standards have been met. Quantifying changes in production methods and in market volumes of biodiversity-friendly products then becomes simply a matter of assessing the change in trade volumes of certified products.

151. Given the importance of the roundtables to the effectiveness of the BACP, the Program will gather data on the functioning of the roundtables. BACP will share lessons learned within a roundtable and among other roundtables.

152. A part-time independent M&E Advisor will report to the IFC. The Advisor will be responsible for issues related to the monitoring and evaluation of the BACP. Among other things, the Advisor will draft a M&E Plan for the Program, will be in charge of program

41 Certification is not needed, but, where it exists as demanded by buyers, as it is one step beyond verification, it will allow for the same evaluation approach.Biodiversity and Agricultural Commodities Program (BACP) 38

monitoring and will supervise, in collaboration with IFC the baseline, independent evaluations at mid-term and upon termination.

N. Risk Analysis

153. The categories of risk in the Table below relate to the assumptions presented in the Logical Framework (see Annex 8). The cumulative overall risk of the Program is relatively high due to its innovative nature and to the experimentation required to test assumptions about the market and about industry roundtables. The risk analysis below represents IFC’s efforts to disaggregate and manage specific risks as much as possible. In addition, the Program’s overall approach is designed to reduce risk in two ways. First, through commodity-specific Market Transformation Strategies, the Program design builds in flexibility to test hypotheses and to respond to lessons learned and market changes, and thereby manage risks in real time. Second, BACP’s diverse portfolio of activities, across four commodities, and in three regions, limit the Program’s overall risk exposure.


Table 2: BACP Risk Analysis

Risk Magnitude Impact Mitigation

Risks related to the enabling environment The roundtables fail to deliver

verifiable Principles and Criteria linked to meaningful biodiversity performance levels.

The roundtables fail to attract the combination of market actors they need in order to be effective.

Medium Decreased impact on biodiversity of global significance.

Decreased value of the roundtables as partners for BACP; program implementation becomes more difficult.

BACP will closely engage with the roundtables, will be able to help with recruitment of committed members (if necessary) and will support the participation of effective biodiversity experts in the technical working groups.

BACP will monitor the roundtables’ progress and will share lessons learned within each roundtable and with other commodity roundtables.

As appropriate, BACP will make use of its contacts to encourage new members to join the roundtables.

Government policies run counter to the BACP’s interests.

Medium It becomes more difficult for producers to adopt biodiversity-friendly practices (particularly relevant to land use).

The BACP will share the outcome of roundtable dialogue with relevant local and national departments, so that they can see both the biodiversity, economic, and social benefits of the BMPs proposed.

BACP will coordinate with the World Bank’s Agriculture Department on the biodiversity impacts of Agricultural policies promoted.

Risks related to producers On-farm better practices may not

achieve the desired levels of biodiversity protection.

medium Biodiversity protection is lower than expected.

The BACP will support the field-testing of BMPs, and their development.

The BACP will ensure that the roundtables monitor field-level performance.

BMPs will not be economic. Medium Producers would not adopt the BMPs.

The BACP will field-test BMPs, gathering clear data on economic costs and benefits.

The BACP will sequence BMPs in such a way as to make the transition easier and less



costly for the producer.Risks related to buyers Insufficient production volumes

of Better commodities.

Low Buyers lose interest in a product they cannot purchase.

Market signals from buyers should lead to the production of sufficient volumes of Better commodity.

Absence of a credible system to certify/verify Better commodities.

Medium Buyers lose interest because they are not certain of what they are actually purchasing.

Work within roundtables to ensure that the performance targets are back up by a credible verification or certification system.

Ensure that the system adopted is science-based and defensible.

The value chain might not be willing to segregate Better commodities.

High It becomes difficult for buyers to know that the commodity they purchase was produced according to biodiversity-friendly means.

High demand volumes should lead to availability of segregated supply. The BACP will aim for at least 10% of major purchasers in each commodity to opt for Better product.

Risks related to Financial Institutions Insufficient financing is made

available because FIs do not see a bankable proposition in BMPs.

Medium Lack of financing impedes the adoption of BMPs.

Prepare material specifically for FIs to document the financial benefits of BMPs.

Only support BMPs with clear financial (and biodiversity) benefits.

Risks related to currency / macroeconomic condition/ price volatility:

Diminishes producer’s risk appetite.

Reduces financial viability of new production methods.

Encourages producers to engage in more short-term planning.

Medium Fewer project opportunities.

Endangers financial viability of existing projects.

Lower leverage of GEF-funds.

Exploit price premium potential down the value chain.

Work with more vertically-integrated producers.

Risks related to replication:

Regional specificity of new production techniques.

Break-down / inoperativeness of commodity-wide sustainability alliances.

Lack of access to producers due to atomization or buyer / input supplier resistance.

Medium Fewer producers will obtain needed support.

Less overall impact.

Work with producers with experience in different regions.

Diversify contacts with replication agents (such as banks and NGOs).

Maintain a strong intra-commodity dialogue.

Risks related to Monitoring and Evaluation:

Low Program might not be able to gather sufficient information on projects and impact.

Develop a best practice streamlined monitoring and evaluation framework integrated with



The Program is unable to gather adequate M&E data.

the work of commodity roundtables.

II. COUNTRY OWNERSHIP AND PARTNER SELECTION

A. Country Selection and Eligibility

154. BACP’s regional focus for each commodity was determined by overlapping major production areas with areas where there is biodiversity of global significance, potential for reducing impacts on biodiversity, and possibility for constructive dialogue with major players. All selected countries are GEF-eligible, and all ratified the CBD in 1994.

155. Indonesia. Indonesia accounts for almost 40 per cent of global palm oil production and almost 37 per cent of global exports. It is also the third largest producer of cocoa (21 per cent) and both commodities are expected to experience significant growth. As described in Section B (Project Rationale), the expansion of production areas threatens globally significant biodiversity. The Indonesian Government and local communities realize the importance of preserving biodiversity and an Indonesian Biodiversity Strategy and Action Plan 2003-2020 (supported by the GEF) has been adopted.42 However, there are still major issues related to deforestation (either legal or illegal) and oil palm producers and supply chain stakeholders have started to take into account the impact of their activity on environment and are implementing better management practices and promoting sustainable agriculture. The BACP is also consistent with the IFC’s strategy for Indonesia, which supports export-oriented companies in the agribusiness sector.43

156. Malaysia. Malaysia is the world’s largest and exporter of palm oil, accounting for more than 45 per cent of production and over half of the world’s exports. The economic prospects for the industry are good and Malaysian companies – which dominate world export-markets – are poised to seek further growth in Malaysia and overseas. In Malaysia, the last decade had seen rapid expansion but in view of the limited availability of new areas for plantation agriculture in peninsular Malaysia, future expansion of the oil palm will occur mainly in Sabah and Sarawak.44

These are both located in the Sundaland biodiversity hotspot,45 and land development - if not managed responsibly - would further threaten biodiversity of global significance. Other environmental impacts of the palm oil industry, such as chemical effluent discharge by oil palm refineries, threaten river ecosystem and the forests on the fringes of rivers. The government has identified these threats and has started to address them.46 Adoption of the RSPO voluntary criteria and BMPs would help mitigate these pressures.47

42 http://www.bappenas.go.id/index.php?module=ContentExpress&func=display&ceid=823&meid43 World Bank, Country Assistance Strategy for Indonesia, October 29, 2003.44 Teoh Cheng Hai (2002) The palm oil industry in Malaysia: From Seed to Frying Pan, report prepared for WWF Switzerland by Hon. Advisor, Plantation Agriculture, WWF Malaysia. 45 http://www.biodiversityhotspots.org/xp/Hotspots/sundaland/index.xml 46 Ministry of Environment and Tourism Sabah, legislation the Environment Protection Enactment 2002Biodiversity and Agricultural Commodities Program (BACP) 42

http://www.biodiversityhotspots.org/xp/Hotspots/sundaland/index.xml

157. Côte d’Ivoire and Ghana. The West African region is the most important producer of cocoa in the world. Côte d’Ivoire and Ghana dominate West Africa’s export market with 40 per cent and 21 per cent of global production, respectively. In both countries, cocoa production is likely to expand further into habitats with globally significant biodiversity. Governments in the region recognize the importance of biodiversity. In Cote d’Ivoire, for example, the national strategy seeks to protect the environment while increasing the standard of living of individuals and the profitability of enterprises. A reduction in habitat conversion is one of the national priorities. The promotion of better agricultural production methods, the adoption of sustainable agriculture techniques, and the promotion of biological fertilizers are also included in the national work program.48 However, the Government of Côte d’Ivoire acknowledges that knowledge about, and sensitivity towards, environmental management is low, that institutional capacities are limited and that further research is needed, notably on the development of “win-win” activities. The private sector and global supply chains can play a crucial role in this area.

158. In Ghana, BMPs such as the control of use of agrochemicals, sustainable land use, agro forestry practices, control of bushfires, and zero tillage agriculture are already being promoted in some areas to mitigate negative impacts on biodiversity.49 The private sector and global supply chains can play a crucial role to reinforce these. The BACP’s Market Transformation Strategy is fully consistent with the World Bank’s Country Assistance Strategy for Ghana which acknowledges the importance of enhancing marketing and processing of agricultural commodities, improving land use, and fostering environmentally-friendly agronomic practices, and which points to the need for agricultural development strategies to be guided by market demand and by their environmental soundness.50

159. Brazil. Brazil is the world’s largest producer and exporter of sugar (21 per cent of global production and 45 per cent of global exports). With more than 30 per cent of global exports, it is also the second largest producer and exporter of oil and meal from soybean, and expected expansion in both commodities is likely to result in a loss of biodiversity of global significance. The Cerrado, where most current and planned sugarcane and soybean plantations are located, has biodiversity that rivals equivalent areas of Amazonian forests, but only 1.5 per cent of such lands are protected by federal reserves. Therefore, the Cerrado is easily converted into vast expanses of soybean fields or sugar plantations. Protected areas are still insufficient to ensure the adequate protection of biodiversity and some biomes, including the Cerrado, receive little attention. Furthermore the Government of Brazil recognizes that, among others things, the limited inclusion of biodiversity issues in agriculture, weakened institutions, lack of capacity, and unsustainable production standards are causing the further loss of biodiversity. Voluntary initiatives taken by large players in the soybean industry and the implementation of better production methods could play a significant role in addressing these causes.

160. The BACP will build upon the overall IFC strategy in Brazil that aims to support the growing momentum towards socially responsible activities within the Brazilian private sector. This involves support to firms committed to environmental and social sustainability, and to

47 Malaysian Ministry of Natural Resources and Environment: third report to the Convention on Biological Diversity (CBD), http://www.biodiv.org/doc/world/my/my-nr-03-en.pdf48 Côte d’Ivoire, National report on Biodiversity to CBD, 16 November 2005.49 Republic of Ghana, third national report on Biodiversity to CDB, October 3, 200550 World Bank, Country Assistance Strategy for Ghana, February 20, 2004.Biodiversity and Agricultural Commodities Program (BACP) 43

http://www.biodiv.org/doc/world/my/my-nr-03-en.pdf

socially-oriented entrepreneurship, and in particular, support to agribusiness companies.51 The BACP is also consistent with Brazil’s National Biodiversity Strategy, particularly with respect to its related agriculture programs that seek to promote integrated sustainable rural development and that prioritize, inter alia, the implementation of Better Management Practices (such as the restoration of degraded areas, recomposition of riparian forests, protection of fragile areas, promotion of agro-forestry and organic agriculture practices, and the implementation of demonstration projects on integrated pest management).52

161. Given the global nature of commodity markets, BACP will also engage with demand-side market actors (buyers, retailers, etc) wherever they may be. While considerable purchasing power lies in industrialized economies, China and India represent a large and growing demand for commodities, and BACP will make a special effort to reach out to buyers from these countries.

B. Country Endorsement

162. The IFC has obtained letters of endorsement from the GEF Focal Points in Ghana, Côte d'Ivoire, Indonesia and Malaysia. As the BACP activities develop in additional countries, the local GEF Focal Point will be notified and engaged to ensure a strong country-level awareness and endorsement, as well as to ensure that the funded projects are national priorities that are tightly anchored in the local environmental policies and legislations. This will foster local ownership of the Program and promote a greater country level awareness of BACP and its objectives. No countries will be targeted without endorsement.

163. It is worth noting that Brazil has signaled a particular interest in supporting the engagement of the private sector in the implementation of the CBD, and is showing a strong commitment towards orienting public policy in that direction. This is evidenced by the organization of the CBD’s CoP8 (Curitiba, Brazil, March 2006) and a number of its main features and events.

C. Partner Selection

BACP and the Private Sector

164. Table 3 indicates that the private sector has stewardship over the 125 million hectares that are dedicated to the BACP’s target commodities. It is thus logical that the private sector is a key partner for the program. In the project development phase, the BACP generated contacts with the private sector through the roundtables and through the IFC’s existing client relationships. The BACP is poised to enter into effective and meaningful partnerships with private sector actors who have shown a willingness to lead on sustainability issues (see Annex 6 for examples). BACP will not channel GEF funds to directly subsidize private sector firms; BACP funds may be channeled through the private sector, in a transparent and verifiable manner, to a specific biodiversity enhancing activity or project.

51 World Bank: A more equitable, sustainable and competitive Brazil – country assistance strategy FY2004-200752 Brazil, Ministry of Environment, third national report to the Convention on Biological Diversity, September 2005. Biodiversity and Agricultural Commodities Program (BACP) 44

Table 3: Land use, production volumes, and annual value of BACP's target commodities

Land use (million hectares)

Global production (million tonnes)

Producer production value (US$ billions) **

Land use in BACP target countries (million hectares)

Palm oil 8 34 9 4.9Cocoa 7 3 2 4.3Soybean 90 185 31 13.6Sugarcane 20 110 26 4.8Total 125 332 69 27.6Sources : PwC/Cirad/University of Wageningen – BACP report – phase 1; Jason Clay, op. cit.

165. Private sector actors who receive support from the BACP will need to meet the following criteria:

a. A demonstrated commitment to supporting the adoption of BMPs, through, for example, participation in relevant roundtables, the adoption of internal or external environmental screening criteria, the dedication of resources and putting in place systems to serve this market, and demonstrated leadership in their field.

b. Technical and/or financial capacity to deliver sustainable projects with GEF benefits, that generate no adverse environmental or social impacts.

c. Excellent relationships with local stakeholders.d. A commitment to transparency in the execution of the TA project.e. A willingness to share the experience gained through the TA, throughout industry.f. The ability to contribute leverage of at a ratio of at least 1:2. Matching funds will come

from the private sector, NGOs, and bilateral donors.

III. PROGRAM & POLICY CONFORMITY

A. Project design and target activities: role of the private sector

166. The BACP is a market-based, private-sector-led program. All of its activities target the private sector, either directly through site-specific projects, or indirectly through, inter alia, support to roundtables and development of BMP Case Studies.

167. As such, the BACP’s design and target activities are consistent with the decision taken by the GEF Council in its November 2005 meeting: “The GEF Council, having reviewed document GEF/C.27/13, GEF Strategy to Enhance Engagement with the Private Sector, underscores the importance of strengthening the engagement of the private sector in the work of the GEF.”

168. The above-mentioned Strategy reviews the GEF’s engagement with the private sector.53

The BACP is fully consistent with the observations made in the report.

The Strategy notes that

53 GEF/C.27/13, GEF Strategy to Enhance Engagement with the Private Sector, GEF Council document, November 8-10, 2005Biodiversity and Agricultural Commodities Program (BACP) 45

Only by engaging productively with the private sector is it possible to mitigate the potentially very harmful footprint of companies and individual private operators that impact the environment through:(a) Sourcing raw materials for production and consumption;(b) Managing landholdings;(c) Producing waste, pollutants and emissions that might be released into the surrounding environment;(d) Supporting supply chain partners (and their associated practices); and(e) Influencing local social and economic development (e.g., migration of people as a result of commercial operations).

Items (a) through (d) are directly relevant to the BACP.

169. The Strategy further notes that GEF biodiversity projects involving the private sector present the following weaknesses:

(a) Private sector engagement in the biodiversity portfolio is modest in scope and scale, and concentrated mostly at the farmer level. There is little SME involvement and an absence of participation by national companies, multinational companies and umbrella trade associations;(b) There are few projects with a focus on market transformation and public-private partnerships;(c) The focus of large, integrated production landscape projects has been more on public sector activity and less on market-based interventions;(e) Systematic assessment of results and gathering of success stories has been inadequate;(g) Little engagement of the private sector has occurred on the demand side. There has not been a project focus on product demand, nor analysis of markets and economic opportunities to stimulate sustainable production of goods; and(h) Experience to date has been marked by complexities in setting targets and measuring for market transformation within a project.

170. The BACP should help address these weaknesses in the GEF portfolio, by (a) a strong participation from national and multinational companies, and from trade associations; (b) a market transformation approach; (c) a focus on market-based interventions; (e) the systematic documentation and dissemination of the business case for BMPs; (g) targeted demand-side outreach; and, (h) a streamlined M&E system.

B. Rationale for GEF Involvement

171. Consistency with GEF priorities and policies. The BACP is fully aligned with the GEF Strategic Priorities approved by the GEF Council in its May 2003 meeting in the focal area of biodiversity for the third replenishment cycle. In particular, the BACP addresses two of the GEF’s four strategic priorities in this area, notably:

a. Mainstreaming Biodiversity in Production Landscapes and Sectors. The BACP is directly designed to engage in the three activities recommended by the GEF Council in this area: (a) facilitate the mainstreaming of biodiversity within production systems; (b)


support for demonstration projects with high replication value; and, (c) develop market incentives measures.

b. Generation and dissemination of best practices for addressing current and emerging biodiversity issues. The BACP will create and disseminate biodiversity best practices in the agricultural commodities sector and build on the Program’s lessons learned to improve the sustainability of the BACP’s impact.

172. The BACP also supports decision III/11 on the conservation and sustainable use of agricultural biological diversity as adopted by The Third Meeting of the COP to the CBD (CBD/COP/III) and developed by the GEF Operational Program #13 (“OP13”). As indicated in OP13, “the conservation and sustainable use of associated agricultural biodiversity can contribute to maintaining the health and quality of the global environment by, for example, providing habitats for wildlife, protecting watersheds, and reducing the use of harmful chemicals. (…) GEF support would therefore help to integrate global environmental imperatives into existing sustainable development efforts in the appropriate regions and countries.”

173. The BACP will reduce biodiversity impacts on a landscape level, in such diverse landscapes as Malaysian and Indonesian lowland forests, the lowland Guinean forest in Ghana and Côte d'Ivoire, or the Brazilian Cerrado woodland. The programs is consistent with GEF Operational Program 3 (forest ecosystems), and, because of reduced levels of agricultural runoff and erosion, with OP 2 (coastal, marine, and freshwater ecosystems). The BACP is also consistent with GEF OP 13 (conservation and sustainable use of agricultural biological diversity), as well as with as OP 12 (Integrated Ecosystem Management), OP 14 (Persistent Organic Pollutants) and OP 15 (Sustainable Land Management). In addition, the BACP will have a beneficial impact on the GEF objectives delineated in Operational Program #12 (Operational Program on Integrated Ecosystem Management), Operational Program #14 (Operational Program on Persistent Organic Pollutants) and Operational Program #15 (Operational Program on Sustainable Land Management).

174. The BACP also responds to the recommendation by GEF’s second Overall Performance Study (OPS 2) to engage more directly with the private sector in the area of biodiversity. As stated in this report “conservation efforts in production landscapes are a growing priority, reflecting the predominance of this land use. In this context, engaging economic actors— from small farmers to commercial firms—will play a critical role, for which economic instruments and market transformation approaches are powerful tools. Yet GEF efforts to use these approaches within the biodiversity portfolio have so far been very limited, representing a largely untapped opportunity.”

175. Moreover, the BACP’s approach is fully consistent with the interim GEF report on Mainstreaming Biodiversity in Production Landscapes and Sectors prepared by the Scientific and Technical Advisory Panel. The report specifically points to “improving production practices” as one of the four priority areas for GEF intervention.

176. As mentioned above, the BACP is fully consistent with the GEF strategy to enhance engagement with the private sector in particular with respect to the strategic focus on mainstreaming projects in agriculture as a priority sector with relevance to all globally important


biomes and with respect to the strategic use of non-grant financial instruments. The BACP is specifically mentioned in the document as a vehicle for the strategy’s implementation.

177. Finally, the BACP’s project screening process (see Section K, The BACP Project Cycleand Project Selection Criteria) will ensure the GEF-eligibility of individual projects.

178. Consistency with the Convention on Biodiversity. BACP is also well aligned with the Convention on Biodiversity (CBD). Objective 4.4 of the Strategic Plan of the Convention on Biological Diversity is that “key actors and stakeholders, including the private sector, are engaged in partnership to implement the Convention and are integrating biodiversity concerns into their relevant (…) programmes”. A recent note issued by the CBD secretariat on engagement of the private sector includes a draft decision, to be discussed at the forthcoming CoP 8 in Curitiba, Brazil (March 21-31 2006), which “5. Invites businesses (…) to develop and promote the business case for biodiversity, to develop and promote the wider use of good practice guidelines, benchmarks, certification schemes and reporting guidelines and standards (…).”54 These recommended activities are central to the BACP.

Incremental Cost

179. Baseline : Without GEF support, the agricultural commodity sector would probably experience a slower transition to more sustainable production practices as a result of regulatory pressures from local governments and in an effort to service the very small, but growing, consumer demand for more low-input agricultural products, mainly in developed countries. The work of the roundtables is ambitious, but can be slow-going. Meanwhile, irrecoverable biodiversity will be lost due, inter alia, to soil erosion, water contamination, loss of habitat, and pesticide overuse. Given the extent of the land devoted to agricultural commodities, the scale of these losses to global biodiversity would be enormous. Without GEF support, it is also unlikely that biodiversity of global significance would be specifically factored into the definition and implementation of BMPs.

180. GEF Alternative : The GEF Alternative constitutes a market acceleration initiative, which will increase the pace and scope of this transformation. In addition, it should help to save significant global biodiversity, by applying a specifically targeted TA which constitutes an incremental investment in the market transformation process. Like any market transformation initiative, GEF support will help remove the existing barriers and push private sector players to focus their efforts in a direction consistent with the CBD and the GEF. In addition, the BACP’s funds will ensure that the roundtables maintain a focus on biodiversity of global significance, and that impacts are addressed as effectively as possible.

For a more detailed analysis, see Annex 9, Incremental Cost Analysis.

Global Impact

The BACP will have a global impact in at least three fundamental aspects:

54 IFC participated in a CoP 8 Preparatory meeting in which this draft decision was discussed, and contributed to meeting workshops on commodities and on financial institutions.Biodiversity and Agricultural Commodities Program (BACP) 48

181. Commodity-wide global changes. The Program will accelerate the mainstreaming of specific biodiversity-friendly production changes in its target commodities on a global scale. This will be achieved by concentrating the Program’s resources on a narrow set of commodities and production changes and working with major players who have the ability to replicate successful changes on a large scale. The program’s four target commodities are produced in Africa, Asia, and Latin America. Over 125 million hectares worldwide are allocated to their production, and this area is rapidly increasing. Therefore, even a small improvement in production practices, when multiplied over the area concerned, will have a global impact on biodiversity. In addition, conversion of natural habitat to agriculture is a potential major impact on biodiversity of global significance. The BACP will encourage expansion into suitable degraded or abandoned lands rather than natural habitat, thus lowering the rate of conversion of natural habitat.

182. Specific, globally significant, endangered biodiversity. In certain cases, site-specific activities will target the change of a production method that represents a specific threat to globally valuable biodiversity in a particular ecosystem (for example, a project leading to the establishment in oil palm landscapes of wildlife corridors for the orangutan).

183. Global knowledge. The BACP will contribute significantly to the still limited knowledge of complex agricultural eco-systems. In particular, thanks to its monitoring and evaluation activities, the Program will generate a wealth of reliable quantitative and qualitative information on the impact of alternative production methods. Close collaboration with industry roundtables will ensure that information generated is disseminated and used.

C. Sustainability

184. Sustainability is intrinsically part of the BACP’s market transformation goals. The BACP aims to move the market to a position where BMPs (such as environmental sustainability) are incorporated in a financially sustainable manner into commodity markets’ flows of goods and of finance. The commercial viability of the changes to biodiversity-enhancing production methods is inherent in the Program design. The Program will only promote BMPs that have a sound business logic.

185. Long-term sustainability of any agricultural operation depends on environmental practices, economic viability, and social factors. The BACP will take a holistic approach to sustainability, paying attention to all three of these factors. Though not specifically focused on social issues, the social impact of BACP-supported projects will be evaluated and addressed, as indicated in the project selection criteria.

186. It is important to point out that BMPs themselves, and the resulting biodiversity benefits, are often intertwined with social benefits. For example:

a. The reduced use of toxic agrochemicals benefits local and downstream biodiversity, and therefore benefits farmers and agricultural laborers and their families living in neighboring and downstream communities.

b. Reduced soil erosion and effluents improves freshwater habitat, benefiting those who depend on fish and other aquatic organisms for protein.


c. Retiring marginal agricultural lands on existing farms results in increased natural habitat for wildlife, reduced erosion, wildlife corridors and protection of riparian areas. In addition, retiring such lands helps farmers produce more on the remaining land, using fewer inputs, having fewer impacts and higher net profits. The retired lands can also be assets that increase over time (such as sequestered carbon, trees to sell, fuelwood, and payments for environmental services such as water).

d. IPM and BMPs that generally are more wildlife friendly are cheaper for producers than purchased pesticides.

e. Improved organic matter increases soil health and habitat for other species, but also increases productivity, reduces the use of inputs (such as fertilizers, pesticides, water, labor, and machinery) and increases net profits.

187. The Program’s sustainability is also buttressed by the fact that the use of BMPs enhances long-term farm lifetime and viability. In particular, BMPs that maintain or improve soil fertility help a farm remain productive over time. While no BMP can guarantee that a given farm will always be a viable producer of any given commodity, BMPs can guarantee that, all other things being equal, the farm can be run as profitably as possible, thus giving it a better chance of success. Furthermore, producing or enhancing on-farm assets (trees, soil, and wildlife) can translate directly into increased income for the farmer.

188. The sustainability of agricultural soil is an unglamorous but very important benefit of the BACP. Practices promoted by the BACP will help maintain healthy soil. Be it in protected areas, natural habitat, or farms and ranches, most biodiversity and biomass exists in the soil, not on or above it. It is upon this biodiversity and biomass that life on Earth is built. It is vital that the soil remains living even in productive areas. Vast areas of the United States, Central and South America, North Africa, Europe and Asia were farmed previously but are no longer farmed today because of loss of soil productivity.

189. Finally, the BACP will follow both the IFCs and GEF best practice guidelines on sustainability in order to ensure both IFC commitment and market acceptance for the long-term continuation of Program activities (see Annex 11, Compliance with IFC’s Environmental and Social Safeguard Policies).

D. Replicability

190. Replicability is one of the explicit goals in the design of the BACP project-level initiatives. Indeed, it is one of the criteria on which proposed projects will be assessed. The Program’s emphasis on the financial sustainability of site-specific projects (Component 2: Support biodiversity-friendly production practices), further maximizes replicability potential on both a regional and a commodity-wide level. Projects are intended to assume the innovation risk/costs of new production methods to encourage replication by “second-movers”.

191. Activities promoted under Component 3 (Increased demand for biodiversity-friendly commodities) will depend on replication being successful. Only if demand for biodiversity-friendly commodities becomes mainstream, can the Program meet its goals.

192. Similarly, the BACP will do its utmost to ensure that the Component 4 Activities (Finance) are taken up by a majority of FIs. For this component (as well as the others) the


Program will work with market leaders, whose practices are watched and emulated by others in the industry.

193. Finally, replication is the essence of the TA activities in Component 1 (Creating an enabling market environment), which are intended to promote replication on a commodity-wide basis (within BACP’s target countries, and in other countries as well).

194. The lessons learned by the BACP in a given commodity, disseminated through the above-mentioned replication plans, may also have great replication value for other agricultural commodities, through the roundtable process.

E. Stakeholder Involvement

Stakeholder involvement plan

195. BACP is a Program that will fund projects implemented by third parties. As such, the Program depends on stakeholder involvement for its success. A variety of different stakeholders will be affected by or involved in the Program’s activities. These include private sector producers, traders, food manufacturers and retailers, financial institutions, civil society (such as NGOs and academics), local and national governments, commodity roundtables, and bilateral and multilateral organizations, research institutions and local communities.

196. BACP is entirely based on already existing global, multi-stakeholder groups and processes: the commodity roundtable processes or equivalent groups (around the World Cocoa Foundation, for instance, in the case of cocoa). During the preparation phase, when commodities were selected for BACP, selection criteria included the representation at these roundtables, in typology, quality and quantity, as well as the degree and quality of such processes’ organization and potential to succeed. In a way, the roundtable processes (or the equivalent for cocoa) are to be seen as “built-in” stakeholder involvement plans, and implementation of such, and BACP simply would not exist without them. Of the four commodities contemplated in BACP, palm oil is the one for which the roundtable process is the most advanced. BACP has started working with the secretariat of the RSPO as well as with representatives of specific stakeholder groups (palm oil associations in Malaysia and Indonesia, …) and individual stakeholders. Through the IFC’s participation in different commodity roundtables, the BACP will have direct access to the primary players in its target markets. For example, the membership of the RSPO, which represents approximately one-third of the production of palm oil traded world-wide, includes over 100 important actors in all the categories of stakeholders mentioned above.

197. Private sector stakeholders (producers, traders, food manufacturers and retailers, and FIs) will be engaged through roundtables, which will enable them to learn about the Program, about the practices it is supporting, and about opportunities for projects. In addition, some companies and FIs that have a relationship with the IFC could be engaged though that relationship. Similarly, the BACP will reach out to NGOs through the roundtables as they are members and follow new developments closely.


198. Approximately one-third of palm oil production comes from smallholders, and this figure is expected to grow; nearly all cocoa produced in West Africa is on small farms. For reasons of scale, the BACP will not work directly with smallholders. However, in order to reach this important segment of producers, the BACP will work through larger organizations, such as mills (palm oil, sugar) or traders (cocoa). These larger organizations typically have, for reasons of geography and harvest perishability, a monopoly relationship with surrounding smallholders. Furthermore, the relationship is one of interdependence; the smallholders need to sell to the mill/trader in order to earn a living, but the mill/trader depends on the smallholders in order to remain profitable. Therefore, these larger organizations have an incentive to build and maintain biodiversity preservation capacity among their surrounding smallholders.

199. Local communities and stakeholders will be crucial at the specific project level. The participation of, and consultation with, these local players will play a vital role given their knowledge in the areas of local biodiversity and production methods. Transparency with local stakeholders will also be important to maximize buy-in and ownership. Each BACP project will need to determine a framework of collaboration with local stakeholders prior to project implementation, as stated in the project criteria in Section K, The BACP Project Cycle andProject Selection Criteria.

200. As the BACP is a market-driven, private-sector-led Program, government only plays a role in implementation where specifically engaged in Component 1 activities, when certain policy changes are needed to make progress. In addition, the information published by the Program will be explicitly shared with agricultural and environmental agencies and the local and national level, and the practices implemented by industry leaders should eventually lead to the government raising minimum environmental standards for the industry as a whole.

201. The program will keep a database of stakeholders for each commodity, and will maintain communications with them through roundtable or other meetings, and through a BACP newsletter and web site.

Stakeholder engagement during project preparation.

202. Stakeholders were closely involved in preparing the proposal. This is evidenced in part by the sixteen letters of intent from potential industry, NGO, and other partners, listed in Annex 10. IFC presented BACP in meetings of the Roundtable for Sustainable Palm Oil (RSPO), of the Better Sugarcane Initiative (BSI), and of the World Cocoa Foundation, and participated in meetings of the Round Table for Responsible Soy (RTRS). In addition, the BACP preparation team went on mission to Malaysia and Indonesia to meet with specific industry members (Lonsum, Hoest, Bakrie Sumatra, etc), and has had further discussions with many players, including Cargill, Unilever, Migros, Marks and Spencer, Mars (Masterfoods), Hershey, the Coca Cola Company, Tate and Lyle, Wilmar, HSBC, Rabobank, JPMorgan, International Institute of Tropical Agriculture / Sustainable Tree Crops Program, ProForest, Well over 100 individuals and organizations were consulted in the preparation of the program, a full list is available upon request.


IV. FINANCING AND COST EFFECTIVENESS

A. Program Budget (to be refined during appraisal)

203. The total budget for the first phase of the BACP is US $8 million, with an expectation that if program objectives are achieved a request will be made for a second phase with an additional US $12 million. This Section discusses how the requested US $8 million will be allocated. The specific uses of a funds for a second phase will be based on the status of market transformation for target commodities at the time requested.

204. Allocation among commodities. The BACP’s two “fast-track” commodities are palm oil and cocoa because they are farther ahead in the development of biodiversity performance levels and indicators. Sugarcane and soybean are a few years behind. Approximately two-thirds of the commodity implementation budget is allocated to the two priority commodities. For both of them, BMPs are known, discussions within industry about the importance of biodiversity are at a mature stage, and there exist certification systems (cocoa) or Principles and Criteria (palm oil) that address biodiversity. In short, the market is sufficiently advanced to be ready to absorb larger amounts of funding to support the mainstreaming of biodiversity-friendly practices. Section I, Program Activities, discusses in detail the types of activities that this budget will support.

205. Performance standards for biodiversity-friendly sugarcane and soy production are at a more preliminary stage. There is not yet agreement on specific indicators or on overall performance standards. The roundtables have not yet agreed on the key impacts, established technical working groups to identify indicators, or developed performance standards for producers. In addition, there has been no identification or analysis of better practices. The smaller budget allocation (US $0.96 million and US $1.44 million for sugar and soy respectively compared with US$ 1.92 million for palm oil and US$ 1.6 million for cocoa) reflects the different costs, at the different stages of development and documentation. As a point of reference, the current estimated annual budget for the Technical Working Groups of the Better Sugar Initiative is US$150,000. The annual budget for research and analysis of BMPs for sugarcane production is in the range of US$200,000 to US$250,000 per year.

206. In order to retain the flexibility to respond to new opportunities and to changes in market conditions, the BACP management reserves the option of reallocating the budget among its target commodities. This reallocation would need to be endorsed by the Steering Committee.

207. Management costs. The management budget presented in Table 4 below includes the management costs associated with the regional implementer and the Global Program Management Unit. The budgeted cost for the local implementers assumes approximately 75 per cent of a professional FTE, 25 per cent of a support staff FTE, and office overheads, for each of three regions (implementers based in Malaysia/Indonesia, Côte d'Ivoire/Ghana, and Brazil), over 4.5 years. The costs for the Global Project Management Unit assume approximately 50 per cent of a senior professional FTE, and 50 per cent of a junior professional FTE, including overheads, over 5 years. As mentioned in Section L (BACP Management), the local implementers’ responsibilities will include contract administration for projects, but in addition, they will be the regional “face” of the program, representing the BACP at local events, disseminating


information, soliciting proposals from industry players and other parties, and providing market intelligence to the Global Program Management Unit;

M&E costs. The M&E budget allocation amount will cover the design and implementation of the detailed Program M&E plan, and the design and implementation of the mid-term and final reviews. A detailed breakdown of the M&E budget is contained in Annex 7, Monitoring and Evaluation.


Table 4: BACP Phase 1 Budget (in US$)

Total Program (Phase 1 and 2) [a]

Total for Phase 1 GEF funds for Phase 1

Subsequent co-finance for Phase 1 [b]

Program implementation [c] $ 44,400,000 $ 17,760,000 $5,920,000 $ 11,840,000 [d] Palm oil $1,920,000 $ 3,840,000 [d] Cocoa $1,600,000 $ 3,200,000 [d] Sugarcane $ 960,000 $ 1,920,000 [d] Soy $1,440,000 $ 2,880,000 [d]

Management

Local Implementers $ 3,000,000 $ 1,100,000 $1,100,000 Program Management Unit $ 1,700,000 $ 730,000 $ 480,000 $ 250,000 [e]

M&E $ 1,000,000 $ 500,000 $ 500,000 Total (without PDF-B) $ 50,100,000 $ 20,090,000 $8,000,000 $ 12,090,000 PDF-B $435,750 $64,000 [e]

TOTAL, including PDF-B $ 50,599,750 $ 20,589,750 $8,435,750 $ 12,154,000

[a]: Allocation of funds by commodity for Phase 2 will be done at program mid-term. The total program (Phases 1 and 2) allows for 20M of GEF funds and a minimum of $30,599,750 of co-finance. [b]“Subsequent co-financing” is defined as funds without which the components could not be fully implemented and the projects' objectives could not be achieved, and which comes from communities, NGOs and the private sector.[c] Allocation among commodities is subject to change as specific commodity Strategies are elaborated. Allocation for each commodity includes $75,000 for periodic revisions to the market transformation Strategy.[d]: Subsequent co-finance is expected to come from private sector project sponsors, NGOs, financial institutions, and bilateral donors. Actual co-finance may be higher; for example, several of BACP’s sample projects carry leverage of 1:3.[e]: Co-finance from IFC.

B. Basis for Possible Second Phase of BACP

208. The first Phase of BACP is expected to last 4 to 6 years. The request for the second phase will come following the mid-term evaluation, which will be held within 4 to 6 years of BACP’s inception. The mid-term evaluation will measure the BACP’s performance against the market transformation indicators presented in the Log Frame and in Annex 7 (Monitoring and Evaluation Plan), as well as against additional indicators that might have been identified in the Market Transformation Strategy.

209. Specific triggers will be defined in principle at appraisal (and later fine tuned at beginning of implementation when commodity-specific Market Transformation Strategies and the M&E plan are reality-checked and finalized) and will include:

The independent mid-term evaluation validates BACP’s overall approach. If the mid-term evaluation finds shortcomings to BACP’s approach, it also

proposed concrete, realizable changes to the Program design that can overcome those shortcomings.


The mid-term evaluation identifies measurable progress against the market transformation indicators presented in the Log Frame and Annex 7 (M&E plan).

The mid-term evaluation determines that additional funding could be effectively applied to further mainstream the integration of biodiversity concerns into markets for BACP’s target commodities.

210. The proposed phasing reflects the BACP’s iterative approach to its four target commodities. As the palm oil and cocoa markets are more advanced in terms of roundtable dialogue on environmental sustainability, larger sums of TA can leverage significant reductions in impacts on biodiversity. The markets for sugarcane and soybean, on the other hand, are not as far advanced in their identification of BMPs, and therefore, are not yet poised for mainstreaming cost-effective opportunities for biodiversity preservation.

211. It is expected that by the time a decision would be made with respect to the second phase of funding, (1) the palm oil and cocoa market transformation will be significantly underway, and (2) the sugar and soybean markets will be mature enough to be in a position to constructively absorb larger amounts of TA from the BACP. The IFC expects that in a second phase, if approved, the proportion of funds allocated to palm oil and cocoa will be reduced, and the proportion of funds for sugarcane and soybean will be significantly increased.

212. The 4 to 6 year period between the Phase 1 and Phase 2 requests is consistent with the timing observed for the roundtables to create and implement performance standards. It generally takes the roundtables 1 to 1.5 years to identify the TWGs, and for the TWGs to then meet and draft globally acceptable standards. In some instances there may be areas of disagreement or holes in the data that require additional research and information about what is actually happening rather than what might be theoretically possible. This can take another year or more. As these standards are then vetted by an ever larger group of people and institutions, pilot projects are begun in different parts of the world—usually with progressive producer groups or in areas where a NGO or a private sector company have active involvement with producers on the ground—to see how universal the standards are or whether they will have to be adapted locally in each instance. (The goal is that the standards should be universal so that the playing field is level. The performance standards should be based on what 10-30 percent of individuals can already do rather than what research suggests might be theoretically possible).

213. Thus, within two years of starting the process, the Principles, Criteria, and Standards should be drafted and vetted globally. By the end of year two, producers will be attempting to meet the standards and some private sector players will be looking at chain of custody and traceability issues to see how they can be addressed on the ground. This will continue through year three. By year four a Program of certification or verification will be established that producers, buyers, and investors can use to improve commodity production. This could be delayed if there is disagreement over the standards. By year five, however, “better” products should be on the market. The speed at which the transition and overall market penetration occurs will depend first and foremost on demand, as well as the distance producers have to go to achieve performance levels.


C. Co-financing and Leverage

214. General. All GEF TA funds will be matched by a minimum 1:2 subsequent co-financing by Program partners including industry and NGOs, or from other organizations including donors, and other complementary initiatives. However, the expectation is for a much larger co-finance of GEF funds. Annex 10 presents letters of intent from sixteen potential project partners, in which they state, inter alia, that they understand and expect to meet BACP’s co-finance requirements. Furthermore, it is reasonable to expect leverage of 1:3 for some field-based TA projects (as indicated in most of the Sample Projects in Annex 6).

215. More important than the amount of co-finance the project can raise is the amount of investment leveraged by BACP. Projects targeting FIs will provide TA that will aim to influence commodity investment flows. While the amounts of TA and associated co-finance are expected to be rather small (hundreds of thousands), the investment that can ultimately be affected would be in the hundreds of millions. Those investment flows will have a great impact on land use decisions that affect biodiversity.

216. Similarly, projects targeting private sector partners will all ultimately aim to influence land use planning and farming practices that form the basis for investments of hundreds of millions of dollars. This investment leveraged is far more significant, in dollar terms and in impact terms, than the co-finance for individual projects.

217. All projects funded will be small incremental steps in a process that will result in mainstreaming biodiversity-friendly processes into multi-million dollar the value chains with an ultimate impact over several tens of millions of hectares. The BACP’s most significant leverage will come through this mainstreaming process, where a small (hundreds of thousands) allocation of BACP funds applied to test, demonstrate, or promote a practice leads to investment flows of tens or hundreds of millions of dollars.

218. Leverage on TA related to an investment. When the TA is applied to improve the biodiversity performance of an investment (be it supported by IFC or by another FI), potential for leverage is quite high. It is reasonable to assume that the amount of a BACP grant based around an Agribusiness Department investment would be on the order of $100,000. While IFC Agribusiness Department loans vary between $15 – 100 million, most loans are within $20-50 million. In addition, IFC is limited to providing a maximum of 25% of funds for an investment, so the total size of a typical investment BACP could influence would be $80 – 200 million. Therefore, even a single BACP grant of $100,000 to protect biodiversity, in a given investment project, could influence $80 million worth of agribusiness investment, for a leverage ratio of 1:799. Though the portion of the investment that will actually address environmental practices will vary, it is clear that the opportunity for leverage is very extremely high. . In addition, the concerned company is acquiring a better practice that will be replicated and thus live far beyond the project.55

219. Leverage on TA for financial institutions. TA to help FIs integrate biodiversity concerns and cost-effective opportunities for biodiversity preservation into their screening practices also has a very high potential for leverage. While the TA may cost up to a few hundred thousand of 55 Of course, a proposed project involving TA related to an IFC investment would need to undergo the same screening process as any other proposal to BACP, as described in Section K, The BACP Project Cycle and Project Selection Criteria.Biodiversity and Agricultural Commodities Program (BACP) 57

dollars BACP funds (leveraged by the FIs own resources) the outcome could influence investment flows of hundreds of millions of dollars.

220. Direct co-financing from IFC. The IFC will directly leverage BACP funds. For instance, IFC’s membership in the RSPO (2,000 Euros per year) would be covered 50 per cent by the GEF and 50 per cent by the IFC. Also, the IFC will cover the cost of a full time agribusiness "sustainability coordinator" whose responsibilities will include engaging with the ongoing commodity roundtables.

221. Co-finance from other donors. The IFC will seek additional concessional funds (grants) from bilateral donors. These funds would be applied to components of the BACP which, by their nature, make it more difficult to obtain private sector funds as they would relate to social goods. For example, the development of landscape management plans that encompass a broad region is less likely to obtain the same levels of private sector co-financing than the development of a practice that increases a plantation’s efficiency. Contacts with potential donors have been initiated.

222. While IFC has had initial discussions with potential partners about landscape management projects (see Annex 6, Portfolio of Sample Projects) specific landscape level projects can only be fully defined once the Market Transformation Strategy is finalized. Therefore, it is premature to approach donors about specific funding opportunities.

V. INSTITUTIONAL CO-ORDINATION & SUPPORT

A. Core Commitments & Linkages

223. IFC mainstream investment operations. The BACP will take advantage of the IFC’s own networks and resources to maximize IFC co-financing and especially, to incorporate biodiversity preservation opportunities into mainstream IFC investments. The BACP team will coordinate with the IFC’s Agribusiness and other relevant departments to maximize the participation of their clients in the BACP and to help enhance the environmental performance of existing and future investments. See Section F (The IFC’s Role in Agricultural Commodity Markets) for more detail.

224. IFC/WWF BMP Initiative. As discussed in Section F (The IFC’s Role in AgriculturalCommodity Markets) the BMP initiative works through commodity roundtables to promote the use of commodity–specific BMP based screens that allow: (i) producers to enhance environmental sustainability, social equity and labor standards; (ii) institutional purchasers to encourage and support sustainability through their supply chains (in the absence of formal certification); and, (iii) investors to reduce risk/exposure. The BMP Initiative sees a clear complementarity with the BACP, whose TA facilities could help businesses implement biodiversity BMPs identified by the Initiative.

225. Other IFC donor-funded Programs. Collaboration with the other IFC programs, including the donor-funded Linkages Program (outreach to SMEs), and the GEF-funded, IFC-Biodiversity and Agricultural Commodities Program (BACP) 58

managed, Environmental Business Finance Program (EBFP) will be extremely valuable for replicating successful project-level initiatives to a wider SME audience. While the BACP will reach smaller producers only through the intermediation of larger value-chain participants, the EBFP and the Linkages program will be able to target SMEs directly.

Industry initiatives

226. Several GEF and non-GEF funded sustainable agriculture initiatives are highly complementary with the BACP. Collaboration or consultation with them could greatly increase the potential impact and the quantity and quality of BACP projects. Examples of sustainable agriculture initiatives with which the BACP could collaborate or consult include:

227. Round Table on Sustainable Palm Oil (RSPO). The RSPO is a multi-stakeholder organization created in 2001 to promote the growth and use of sustainable palm oil through co-operation within the supply chain and open dialogue with its stakeholders. The IFC is a full member of the RSPO. Preliminary discussions and negotiations with the RSPO executive board have identified priority areas for cooperation:

a. Facilitation of a workgroup on biodiversity involving palm oil growers and industry federations56 to clearly define biodiversity aspects of RSPO guidelines and coordinate training on biodiversity.

b. Technical Assistance related to High Conservation Value Forest and biodiversity in palm oil production landscapes including identification of suitability of areas for agricultural or conservation purposes through landscape management and mapping and zoning techniques.

228. Furthermore, in the medium term, cooperation in the areas of verification of certification systems and processes and engagement with governments are also envisaged. As the RSPO and the BACP objectives are fully aligned (see Annex 4, Roundtable on Sustainable Palm Oil, Principles and Criteria) further areas of cooperation are likely to emerge during the implementation of the BACP.

229. Better Sugarcane Initiative. As this Roundtable has only recently selected its steering committee, and the BSI’s work is still in the process of being defined, cooperation is not developed in as much detail as for the RSPO. BACP attended a BSI meeting in January 2006, in which members welcomed support from BACP on themes related to biodiversity conservation, reflected in the sample project with the BSI presented in Annex 6.

230. World Cocoa Foundation (WCF). The WCF is an industry organization that promotes a sustainable cocoa economy through economic and social development and environmental conservation in cocoa growing communities. The WCF has agreed to act as an advisor to the BACP team.

NGOs

56 Indonesian Palm Oil Commission (IPOC), Indonesian Palm Oil Producers Association (GAPKI), Malaysian Palm Oil Association (MPOA). Biodiversity and Agricultural Commodities Program (BACP) 59

231. BACP will also rely on the knowledge and contacts of certain NGOs who are well placed to help implement certain parts of the program. These NGOs include the Rainforest Alliance (RA), the WWF, Conservation International, and The Nature Conservancy. IFC is in process of a preparing a letter of intent with each of these NGOs, which outlines areas of cooperation and levels of co-financing. Other international and local NGOs will be involved in the implementation of specific field or other projects, as this is part of the selection criteria.

Local Institutions and Initiatives

232. Finally, the BACP will seek to create partnerships and leverage at a local level with national market actors such as local TA providers, agricultural research centers, local environment funds and initiatives and local producers, financial institutions and civil society groups working towards the BACP’s overall goal.

233. Based on preliminary discussions with RSPO, the BACP would be in a position to work with the Indonesian Palm Oil Producers Association (GAPKI) to assist in the coordination of training on biodiversity as a key component targeted at their respective member companies and to source projects for the BACP. The Malaysian Palm Oil Association (MPOA) has also expressed its intent to work with BACP (see list of Letters of Intent, Annex 10).

234. The BACP will also make sure that the relevant local, state, or national-level policy making entities are engaged when needed to help remove certain barriers to BMP adoption that the private sector alone may not be able to effectively address.

B. Consultation, Coordination and Collaboration between IAs

235. The Program’s collaboration with the wider World Bank Group and the other GEF implementing agencies will take advantage of complementary activities such as policy or regulatory reform, government capacity building, and smallholder rural initiatives. The BACP will coordinate with the World Bank’s related agriculture operations and policy-dialogue. Where relevant, the BACP will also engage with the Bank’s policy dialogues with governments, if the outcome would help remove regulatory barriers to the use of BMPs in target countries. It is likely that a World Bank expert will sit on the BACP Steering Committee. The World Bank – BACP collaboration will be defined in more detail at Appraisal.

236. BACP may use some of the industrial fora set up by UNEP’s Department of Technology, Industry, and Economics (DTIE), such as the Sustainable Production & Consumption activities on Sustainable Agrifood, as vehicles to disseminate information on Better Management Practices (BMPs), to discuss strategies for commodity market transformation or to share lessons learned. The BACP will coordinate with the efforts of the UNEP DTIE Initiative on Integrated Assessment of Trade-Related Policies and Biological Diversity in the Agriculture Sector to address trade policy-related issues as appropriate. For M&E purposes, BACP might also be able to consider selected biodiversity indicators from UNEP’s forthcoming Biodiversity Assessment Reference Manual. Further opportunities for coordination might arise if the target countries/commodities to be selected for UNEP case studies match the target


commodities/regions of the BACP.57 IFC will also coordinate with the UNEP “Greening the Cocoa Industry” Project, which has been submitted for pipeline entry. As such project development proceeds, it will be possible to define more specific areas of cooperation.

237. Another example of a potentially complementary initiatives is UNDP’s Conserving Globally Significant Biodiversity in Cocoa Production Landscapes in West Africa. The proposed UNDP/GEF project is different from the BACP is several ways. It focuses on only one country (Ghana) and one commodity (cocoa). The project works through communities rather than through the private sector. The project also includes non-cocoa related activities that have an impact on the production landscape. It is likely that opportunities for cooperation may arise around providing finance to farmers, or other topics. The BACP welcomes such collaboration, with the caveat that a proposed collaborative project would need to follow the same screening process as any other proposal made to the BACP.

238. In general, coordination with IAs and EAs will be ensured through regular, scheduled communications with relevant staff. In addition, an electronically-distributed BACP newsletter also available on BACP’s web site, will keep all potential partners, including IAs and EAs, updated on the Program’s activities.

57 For this EU funded initiative, six country case studies from the Africa Caribbean Pacific (ACP) region will be selected by the project steering committee in 2006. Case studies will be conducted in 2007-2008, leading to implementation of recommendations in 2009.Biodiversity and Agricultural Commodities Program (BACP) 61