Document of The World Bank Report No: 17603-TU PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$ 270 MILLION TO THE TURKISH ELECTRICITY GENERATION AND TRANSMISSION CORPORATION WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY FOR A NATIONAL TRANSMISSION GRID PROJECT MAY 15, 1998 Energyand Telecommunications Europeand Central Asia RegionalOffice Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document ofThe World Bank
Report No: 17603-TU
PROJECT APPRAISAL DOCUMENT
ONA
PROPOSED LOAN
IN THE AMOUNT OF US$ 270 MILLION
TO THE
TURKISH ELECTRICITY GENERATION AND TRANSMISSION CORPORATION
WITH THE GUARANTEE OF
THE REPUBLIC OF TURKEY
FOR A
NATIONAL TRANSMISSION GRID PROJECT
MAY 15, 1998
Energy and TelecommunicationsEurope and Central Asia Regional Office
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS(Exchange Rate Effective March 1998)
Currency Unit Turkish Lira1 TL = US$0.000,004US$1 = TL235,000
FISCAL YEARJanuary 1 - December 31
ABBREVIATIONS AND ACRONYMS
AGM - Assistant General ManagerAWOCS - Automated Work Order Control SystemBEST - Bulk Electricity Supply TariffBO - Build-OwnBOO - Build-Own-OperateBOT - Build-Own-TransferBOTAS - Petroleurn Pipelines CorporationCAPEX - Capital ExpendituresCPP - Corporate Performance PlanDSI - State Hydraulics Authority (DSI)EBIT - Earnings Before Interest and TaxesEIE - Electricity Survey AdministrationEIRR - Economic Internal Rate of ReturnFMIP - Financial Management Improvement ProgramCGPN - General Procurement NoticeGOT - Government of TurkeyGWh - Giga Watt hour (I million kilo Watt hours)IDC - Interest During ConstructionIPP - Independent Power ProducerkV - kilo Volts (1,000 Volts)kWh - kilo Watt hour (1,000 Watt hours)TKI - Lignite EnterpriseLNG - Liquefied Natural GasMENR - Ministry of Energy and Natural ResourcesMTA - Mineral Research InstituteMTR - Mid-Term ReviewMW - MegawattNGS - National Grid SystemNLDC - National Load Dispatch CenterNPV - Net Present ValueOECD - Organization for Economic Cooperation and DevelopmentOMIP - Operational Management Improvement ProgramPOAS - Petrol Ofisi A.S.RLDC - Regional Load Dispatch CenterSEEs - State Economic EnterprisesSPO - State Planning OrganizationTEAS - Turkish Electricity Generation and Transmission CorporationTEDAS - Turkish Electricity Distribution CorporationTOOR - Transfer of Operating RightsTPAO - Turkish Petroleum CorporationTRICEM - Tariff Revenue and Incremental Cost Evaluation ModelrSO - Transmission System OperationsTTK - Turkish Hard Coal EnterprisesTUPRAS - Turkish Petroleum Refineries Corporation
Vice President: Johannes LinnCountry Manager/Director: Ajay ChhibberSector Manager/Director: Hossein Razavi
Task Team Leader/Task Manager: Raghuveer Sharma
TURKEY
NATIONAL TRANSMISSION GRID PROJECT
CONTENTS
Page No.
A. Project Development Objectives ................................................................... 2
Project development Objective and Key Performance Indicators ................... ........................ 2
B. Strategic Context ................................................................... 3
Sector-related CAS Goal Supported by the Project ................................................................. 3Main Sector Issues and Government Strategy ................................................................... 3
C. Project Description Summary ................................................................... 8
Project Components ................................................................... 8Key Policy and Institutional Reforms Supported by the Project ..................... ........................ 8Benefits .................................................................. 9Institutional and Implementation Arrangements ................................................................... 9Procurement ................................................................... 9Disbursements .................................................................................. 9Project Monitoring and Bank Supervision ....................................... ........................... 10
D. Project Rationale .................................................................. 11
Project Alternatives Considered .................................................................. 11Lessons Learned and Reflected in Project Design .................................................................. 11Indications of Borrower Commitment and Ownership ............................................................ 11Value Added of Bank Support in this Project ................................................................ .. 11
E. Project Analysis .................................................................. 12
G. Main Loan Conditions .................................................................. 27
H. Readiness for Implementation .................................................................. 29
I. Compliance with Bank Policies .................................................................. 29
- ii -
Page No.Annexes
Annex 1 Project Design Summary ........................................ 30Annex 2 Project Description ........................................ 31Annex 3 Estimated Project Costs ........................................ 41Annex 4 Procurement Aspects ........................................ 42Annex 5 Disbursements Arrangements ........................................ 47Annex 6 TEAS Organizational Chart ........................................ 50Annex 7 Actual and Forecast Financial Statements ...................... .................. 51Annex 8 Cost Benefit Analysis ........................................ 56Annex 9 Project Processing Budget and Schedule ........................................ 58Annex lOA Statement of Loans and Credits ........................................ 59Annex I OB Statement of IFC's Committed and Disbursed Portfolio ............................... 60Annex 11 Country at a Glance ........................................ 61Annex 12 Documents in Project File ........................................ 63
Map IBRD 29488
TURKEY
NATIONAL TRANSMISSION GRID PROJECT
Project Appraisal Document
Europe and Central Asia Regional OfficeEnergy
Date: May 15, 1998 Task Team Leader/Task Manager: Raghuveer Sharma/James MooseCountry Manager/Director: Ajay Chhibber Sector Manager/Director: Hossein Razavi
Project ID: TR-PE-48852 I Sector: Energy Program Objective Category: Private Sector DevelopmentLending Instrument: Specific Investment Loan Program of Targeted Intervention: | [X] Yes I [ ] I NoProject Financing Data [X] Loan [] Credit [] Guarantee [] Other [Specify]
For Loans/Credits/Others:Amount (US$M/SDRM): US$ 270 MillionProposed terms: [] Multicurrency [X Single currency, specify
I_Grace period (years): 4 [] Standard [] Fixed [x] LIBOR-based
___ _ _ VariableYears to maturity: 17Commitment fee: 3/4%
Service charge: _ _ _ _ _ _ _ _ _ _ _ _
Financing plan (US$M): _
Source Local Foreign TotalTEAS (Borrower) 142 90 232IBRD__ 270 270
Total 142 360 502
Borrower: Turkish Electricity Generation and Transmission Company (TEAS)Guarantor: Government of TurkeyResponsible Agency(ies): TEAS
Proposed coverage:Project sponsor:Nature of underlying financing:
Terms of financing:|Principal amount (US$)
Final maturityAmortization profile,
I I I I Financing available without guarantee?: H ] I Yes I[] |NoIf yes, estimated cost or maturity:Estimated financing cost or maturity with guarantee:Project Implementation Period: 6 years Expected Effectiveness Date: September 1998 Expected Closing Date: December 31, 2003
Page 2
A: Project Development Objectives
Project Development Objectives
1.01 The objectives of the proposed project are to assist the Republic of Turkey and TEAS to: (a)develop adequate transmission grid capacity in a timely and environmentally sustainable manner; (b)continue the reform of the power sector by establishing the independent operation of the transmissiongrid system; and (c) maintain the financial viability of the state institution responsible for the griddevelopment and operation.
Project Monitoring and Performance Indicators
Project Objectives Progress Monitoring Benchmarks Measure of Success
(a) Development of (a)Procurement monitoring (a)50% of Bid Packages awarded (a)Grid Capacity increased toadequate transmission according to agreed plan by September 2000 carry 25,000 MW of powercapability in a timely (b)Construction/installation (b) 100% of Bid Packages (b)Load Dispatch Systemmanner monitoring according to awarded by June 2002 fully modernized
agreed plan (c) 25% of contracts completed bySeptember 2000
(d)60% of contracts completed byJune 2002
(b)Establishment of the (a)Governmental decrees (a) By December 31, 1998, (i) (a)A well functioning Gridindependent operation of and decisions regarding adoption of Decree providing Companythe transmission grid grid separation, transmnis- for the legal establishment of (b)A transparent Transmis-system sion operations policy, the Grid Company and (ii) sion Systems Operations
transmission pricing satisfactory progress towards Framework implemented(b)Corporate decisions re- making the Grid Company (c)A fair and equitable trans-
(c) Consultant work to assist Operational Frameworkthe above decisions adopted by September 30,
2000(c) Bulk Electricity Supply Tariff
Regime implemented byDecember 31, 1999
(d) Business Plan for Grid Com-pany deployed by January 1,2000
(c)Maintaining the financial (a)Governmental and (a)Retail electricity tariffs (a)A balanced financialviability of the state corporate decisions maintained at no less than structure for Gridinstitution responsible for regarding investment US$0.06/kWh on an annual Companygrid development and program, pricing average basis (b)Creditworthinessoperation (b)Corporate Performance (b)Bulk electricity tariffs maintained
Plan prepared and maintained at no less than (c)Ready to access inter-deployed annually US$0.032/kWh on an annual national financial markets
(c) Annual Audit Reports average basis(c) TEAS Annually achieving the
following financial perfor-mance targets:(i) Self financing Ratio - 35%(ii)Debt Service Cover Ratio -
1.5 times(iii)Current Ratio - 1.0
Account Receivables - 45 days
Page 3
B: Strategic Context
Sector-Related Country Assistance Strategy (CAS) Goal Supported by the Project
2.01 The proposed Project is consistent with CAS which aims to "catalyze private investments andreform the public sector for the efficient development of energy resources to adequately supporteconomic growth". The current CAS document number is 16992-TR and the date of latest CASdiscussion at the Board is September 4, 1997.
Main Sector Issues and Government Strategy
2.02 Institutional Setting. The Ministry of Energy and Natural Resources (MENR) is responsible forpolicy making, sector regulation and planning the development of energy. At the operating level, theenergy sector is dominated by State Economic Enterprises (SEEs). The Turkish Hard Coal Enterprise(ITK), the Lignite Enterprise (TKI), the Turkish Petroleum Corporation (TPAO) and the MineralResearch Institute (MTA) have responsibility for the extraction of fossil fuels and radioactive materials.Design and construction of hydroelectric schemes is entrusted to State Hydraulics Authority (DSI). TheTurkish Electricity Generation and Transmission Corporation (TEAS) is responsible for the public sectorgeneration and transmission of electricity all over the country. Turkish Electricity DistributionCorporation (TEDAS) is responsible for distribution of electricity throughout most of the country. Theproduction, transport and marketing of petroleum products are undertaken by the Turkish PetroleumRefineries Corporation (TUPRAS), Petroleum Pipelines Corporation (BOTAS) and Petrol Ofisi A.S.(POAS- marketing and distribution). The Electricity Survey Administration (EIE) is responsible forrenewable energy, hydropower surveys and for the formulation and implementation of the nationalenergy conservation programs. Private sector operation in the sector is limited to two small electricityutilities (CEAS and KEPEZ) whose total installed generating capacity is about 750 MW and who are alsoresponsible for distribution in their respective franchise areas; and two distribution companies, AKTASand KAYSERI, who are responsible for electricity distribution, on an operations rights transfer basis, inthe Asian side of Istanbul and Kayseri province respectively. There are also several industrialautoproducers, small coal mines, one independent refiner, joint ventures with TPAO for petroleumexploration, and petroleum product marketing.
2.03 Energy Resources. Turkey's most important domestic source of energy is hydroelectricity,which accounts for 40% of total electric power generation. The exploitable hydropower potential isestimated at 31,000 MW, of which 10,500 MW has been developed and another 3,200 MW is underconstruction or planned to be developed by 2000. Deposits of low quality lignite also exist -- estimatedat 6.4 billion tons (most of which are of low calorific value and high sulfur content)-- accounting for36% of power generation and 16% of primary energy. There are also limited quantities of low-qualityhigh-sulfur hard coal and of oil and gas; proven hydrocarbons reserves consist of 250 million barrels ofoil and 309 billion cubic feet of natural gas. Domestic production of hydrocarbon accounted for 10% oftheir domestic demand in 1995. This proportion is not expected to increase substantially because of thelimited prospectivity of Turkey's geology. A greater utilization of domestic lignite and coal is severelyconstrained by environmental considerations. The balance of domestic energy demand is met, and islikely to be met in the future, by fuel imports, especially crude oil and petroleum products (35 milliontons in 1995 which together constitutes 33% of primary energy supply) as well as natural gas (8 billioncubic meters [bcm] in 1996). Energy imports cost approximately 2% of GDP in 1996. About 5.5 bcm ofnatural gas is currently imported from the Russian Federation on the basis of a long-term take-or-paycontract; and about 2.4 bcm from Algeria through the Liquefied Natural Gas (LNG) terminal at Thrace.
Page 4
2.04 The Power Subsector. Turkey presently has an installed power generation capacity of about21,000 MW (40% hydro, 60% thermal, mainly based on local coal/lignite) and an extensive transmissionand distribution network which provides access to electricity to almost 100% of the population.Electricity consumption has been growing at an annual average of 10% over the last decade and thepower system is capable of meeting its peak power demand of about 17,000 MW. The demand forelectricity is forecast to grow at an annual average of 8% over the next 15 years, as a consequence ofeconomic growth and the low levels of per capita electricity consumption (1700 kWh in Turkeycompared to, for e.g., l1,000 kWh in the U.S.). This will require annual investments of about US$2.5billion, comprising on average, US$1.8 billion for generation, US$200 million for transmission systemextension and reinforcement, and about US$500 million for distribution system strengthening.
2.05 These levels of investments cannot be mobilized by the public sector, given Turkey's presentsituation. The traditional approach to financing power sector investments in Turkey has been through:sovereign and sovereign-guaranteed debt; and the utility's internal sources of funds, mainly throughtariffs. This traditional approach is no longer tenable:
Mobilizing Sovereign and Sovereign-Guaranteed Debt Financing: Turkey has to recover itsreputation in the capital markets to levels before the financial crisis of 1994. Given its presentcredit ratings (Standard & Poor's B; Moody's B 1), spreads remain at or above 300 basis pointsover LIBOR; and the average life of the loans have been extremely short - 2 to 5 years. Underthe traditional financing approach, the debt financing sought for the power sector investmentswould be of the order of US$1.8 billion per year. Such amounts are not available perennially.Moreover, under the prevailing short maturities and high interest rates situation, such financingwill render the sector non-viable financially.
Electricity Tariffs and Internal Sources of Financing: After dismal performance in terms oftariff adjustment in late 1980s, Turkish authorities have shown exemplary commitment toelectricity pricing adjustment. Since February 1990, tariffs have been adjusted on a monthlybasis to account for the high inflation.' A satisfactory electricity pricing policy was put in placein 1995, in pursuance of which a monthly increase of 5% was implemented in 1996, and a 3.8%increase was implemented for 1997. As a result of such sustained actions, the retail electricitytariffs, including taxes, presently average US cents 7.1/kWh 2, compared with an OECD averageof US cents 7.76/kWh. Therefore, any additional upward pressure on electricity tariffs to financepower investments would erode the competitiveness of Turkey and create social problems.
2.06 Considerable problems have adversely affected operations of the existing power infrastructure.In generation, the plant availability factor has remained low (40-60%), attributable to poor quality fuelsupply and more recently, to erratic gas supplies from Russia. While transmission losses are atsatisfactory levels of 2.7%, the losses in the distribution network continue to be high, at 16% of totalgeneration. In some distribution areas, the losses are as high as 35%.
Except for 3 months in early 1994 during the economic crisis, and again for two months in late 1995 during thepolitical vacuum. However, the ensuing increases have made up for the lack of adjustments during these twocrises.
2 The agreement with the Bank is that average tariffs, net of all taxes, will be maintained at US cents 6/kWh onaverage at the retail level.
Page 5
2.07 The Government's Strategy for the Development of the Power Sector. Recognizing theseproblems, the Government of Turkey (GOT) is taking a two-pronged approach to sector development,one aimed at revamping the policy and concomitant legal/regulatory framework to attract a much largerlevel of private sector investments to finance the expansion of the sector; and the other aimed atprivatizing existing power infrastructure. The Government's strategy for the development of the powersector is as follows:
* a large portion of the existing public sector generation plants, both thermal and hydro, willbe privatized on a Transfer-Of-Operating-Rights (TOOR) basis;
* the national transmission grid and load dispatching facilities, which will continue to beowned and operated by the State, will be separated from state-owned generation; and thetransmission system will be strengthened and expanded;
* distribution facilities will be transferred to the private sector on a TOOR basis in order to:improve the efficiency distribution operations; mobilize the necessary resources; andstrengthen and expand the distribution networks;
* new investments for the sector, particularly for generation capacity expansion, will mainlybe mobilized from the private sector, through Build-Operate-Transfer (BOT); Build-Own-Operate (BOO) and other independent power producer (IPP) mechanisms;
* an independent regulatory authority will be set up to regulate the various entities; and
* competition will be introduced wherever possible (e.g. generation).
2.08 Implementation Progress of Power Sector Strategy. The Turkish authorities have alreadybegun the implementation of the sector development strategy. The progress achieved to date, issummarized below.
2.09 Revision of Institutional. Legal and Regulatory Framework. MENR has started thenecessary work to revamp the institutional, legal and regulatory framework. The consulting firm,Coopers & Lybrand, is assisting MENR in this regard. The ongoing work will result in:
* restructuring of sector institutions to develop a sector structure that is conducive tointroduction of competition in the medium term;
* the institutional design of a regulatory authority for the power sector; and
* recommendations on the changes needed to the legal framework to implement the abovepolicy and regulatory frameworks.
2.10 Private Participation in Turkish Power Sector. The Government has established severalschemes and mechanisms to enlarge private participation in the sector for new investments as well as forexisting infrastructure. As results of such efforts:
* Five power projects, three thermal and two hydroelectric, with a total capacity of about 1900MW, are under construction by private sector consortia under the Build-Own-Transfer(BOT) scheme;
Page 6
* Five thermal power projects under the Build Own (BO) scheme, with a total capacity of 5300MW, have been awarded to private investors in a competitive process and negotiations areunderway with each of these private investors to finalize the contractual framework. Theexpected commissioning dates for these projects range from end-2000 to 2002;
* Eight existing thermal plants, with a total capacity of 4253 MW, will be privatized under theTransfer of Operating Rights (TOOR) scheme. Negotiations with private sector investors(who have won the operating concessions in a competitive process) are underway with theseinvestors and the transfers are expected to be done by late 1998;
* Two additional existing thermal power plants, Ambarli and Hamitabat (both outside Istanbul),with a total capacity of 2550 MW are expected to be tendered imminently to be privatizedunder the TOOR scheme.
* More than 1000 MW of autoproducer capacity (i.e. captive power capacity of industries whichhave surplus power to sell to the grid) has been contracted, and offers from private sector foran additional 2000 MW of such capacity are under review.
The Government's future plans include privatizing, also on a TOOR basis, the hydroelectric power plantsthat are currently owned and/or operated by TEAS.
2.11 In addition, Turkey is expanding its electricity imports. Presently, about 2500 GWh fromBulgaria, 800 GWh from Georgia and 120 GWh from Iran have been contracted. There are plans for moreelectricity imports and all of these are expected to be under long-term contracts.
2.12 On the distribution side, the distribution network has been divided into 29 distribution areas, andall of it has been subjectecl to privatization under the TOOR scheme. Four of these areas are under privateoperation for sometime (para 2.02). The operating concessions for the remaining 25 areas were bid out in1996/97 and awards have been announced for 20 of these 25, for which negotiations are underway toculminate these awards before the end of 1998. Once finalized, 87% of the distribution network could beprivately operated.
Bank's Involvement in the Turkish Power Sector
2.13 Experience with Onioin2 Proiects. The Bank has long been involved in the power sector inTurkey. The current portfolio in Turkey includes a loan of US$300 million to finance a TEKRestructuring Project (Ln. 3345-TU) whose objective is to rationalize economic and institutional incentivesto increase efficiency; and reduce the financial burden imposed on the Government by the sector'sinvestment requirements.
2.14 These development objectives have been achieved. In terms of rationalization, electricity priceshave been restructured and the levels are being adjusted each month since February 1990 to counterinflation and generate a third of the resources required for investments from internal sources. Furthermore,the sectoral institutions are being restructured (in fact, the erstwhile TEK was split up in 1994 into TEASand TEDAS to facilitate privatization of thermal power plants and distribution assets). Technicalassistance was also provided to implement a reform of their management practices including the adoptionof annually renewed Corporate Performance Plans. As regards reduction of the financial burden on thegovernment, the foreign portion of the public sector debt attributable to power sector, which was US$5billion when the project was approved, is down to US$2.3 billion as a result of appropriate prices,improvement in financial management and better control of investmnent.
Page 7
2.15 The Bank is also providing considerable advice and technical assistance, through a JapaneseGrant Fund for the Power Sector Reform Program. This assistance includes, among other things, thework by Coopers & Lybrand (para 2.09).
2.16 The Bank's Power Sector Development Assistance Strategy. The objective of Bank'smedium term Power Sector Development Assistance Strategy should be to support the Turkishauthorities to catalyze private investment and reform the public sector for the efficient development ofenergy resources to adequately support economic growth. To achieve this objective, the Bank's strategycalls for:
(a) technical and financial assistance for sector and corporate reform and initial privatizationunder the ongoing TEK Restructuring Project;
(b) support for power generation projects which have private sector involvement, particularlythrough guarantees, with concomitant technical assistance being provided to governmentalauthorities to successfully negotiate and finalize the deals;
(c) as regards transmission, the Bank's support would be to strengthen the network andfacilitate private sector investments in generation;
(d) in the area of power distribution, the Bank would support investments for networkdevelopment and institution building to complement private sector equity investments; and
(e) in order to slow down the rate of growth of energy demand, the Bank would help in thedesign and implementation of programs and projects to improve energy efficiency andconservation at the consumption end.
2.17 The Bank's assistance would be provided through the use of the range of instruments at theBank's disposal including: formal and informal economic and sector work; lending; guarantees; technicalassistance; project preparatory financing on its own account (Project Preparation Facility, InstitutionalDevelopment Fund) and/or mobilizing such financing from bilateral (e.g., Japan PHRD, USTDA)sources. The proposed Project is part of such assistance Strategy and would support the strengthening ofthe transmission network, and support institutional reform of the public sector institutions to facilitateprivate investments in the sector.
Page 8
C: Project Description Summary
Project Components
3.01 The Project will comprise:
(a) development of a three-year time-slice of TEAS's grid investments (transmission lines,substations and load dispatch facilities) for the period 1999 through 2002; and
(b) technical assistance for:
(i) establishment of the independent operation of the transmission grid system;
(ii) institutional development including environmental analysis of grid investments; and
(iii) helping TEAS borrow from the international markets.
Cost Incl.Contingencies % of Bank-financing % of Bank-
Key Policy and Institutional Reforms Supported by the Project
3.02 As per the chosen strategic and policy framework for the sector, the transmission and loaddispatch functions will remain with the state. Given that the power demand is expected to grow by anaverage of 8% per year (the growth rates for the immediate past and future are about 10% per annum) thegeneration capacity needs to increase by 1800 to 2000 MW each year. It is also important to note that,over the next five years, rnuch of this incremental capacity will be from the private sector (para 2.10).Therefore, the key policy aspect supported by the project is to ensure that the state will fulfill itsdesignated role properly i.e. provide adequate transmission capacity in a timely and environmentallysustainable manner.
3.03 Second, the private sector will provide incremental capacity under BOO and BOT arrangementswhich include take-or-pay clauses and any delay in providing the required transmission capacity will bea financial burden on the state and an economic loss for Turkey. Therefore, an important institutionalreform objective supported by the project is to ensure that the transmission capacity will be providedwithout eroding the financial viability of the state entity, TEAS, that would be responsible for the grid.
3.04 Third, TEAS will undergo changes in its corporate structure and functions during the project'stenure, to become the grid company responsible for transmission, load dispatch and system planning.Many business practices (technical, financial and institutional) will need to be revised to make thistransition. Therefore, the other major institutional reform objective supported by the project is to helpTEAS undergo these changes from a generation-cum-transmission company into grid company.
Page 9
Benefits
3.05 The planned development of the power sector supported by the proposed Project, will enableachievement of economic growth in Turkey, thus benefiting the entire population of the country, as wellas the productive sectors. The proposed Project will facilitate private sector development with theplanned institutional reforms, such as the establishment of the independent operation of the transmissiongrid system. In addition, implementation of the proposed Project will enable the Government to accruesignificant fiscal revenues through taxes and levies on electricity sales. The estimated incrementalfiscal revenues cumulatively over the 1998-2002 period would amount to just over US$6.0 billion.Details are provided in Annex 8.
Institutional and Implementation Arrangements
3.06 TEAS is responsible for the implementation of the proposed Project. The project will beimplemented over a five-year period, FY99-FY03. TEAS agreed to continue to maintain in a mannersatisfactory to the Bank, an adequately staffed steering committee under its General Manager or anAssistant General Manager and a member of the Board of Directors to oversee the implementation of theproject and to be responsible for the technical and administrative functions under the Project, includingthe procurement of goods. In addition, TEAS would continue to maintain the World Bank Project Groupreporting to an Assistant General Manager and a member of the Board of Directors of TEAS tocoordinate the implementation aspects of the Project. Furthermore, the Steering Committee wouldensure that all the relevant data needed to carry out the frequent updates of the CPP, which comes fromacross the company, will be provided in a timely manner (para. 7.03(a)).
Procurement
3.07 The procurement of goods and services of the Bank-financed components would be done inaccordance with the Bank procurement guidelines. The project components not financed by the Bankwould be procured in accordance with the national regulations or the cofinancing institutionsprocurement regulations. The project elements, their estimated cost and procurement methods arepresented in Annex 4. A procurement plan detailing the packing and estimated schedule of the majorprocurement actions is also presented in Annex 4. All other procurement information, includingcapability of the implementing agency, the date of publication of the General Procurement Notice (GPN)estimated dates for bid invitations and the Bank's review process is presented in Annex 4.
Disbursements
3.08 The proceeds of the Loan would be disbursed over six years (FY99-FY04) on the followingbasis:
(a) for the grid investment component, 85% of the contract amount for the supply andinstallation contracts; and 100% of foreign expenditures and 100% of local expenditures(ex-factory cost) with respect to contracts for goods only; and
(b) for the technical assistance component, 100% of the foreign expenditures for theconsultancy services.
Page 10
Project Monitoring and Bank Supervision
3.09 The project will need to be monitored in concert with TEAS, its Management and Board,MENR, Treasury as well as SPO. The following documents will be prepared by TEAS to facilitateproject monitoring:
* A Quarterly Progress Report, which will contain the update of the entire ProjectImplementation Plan, but in particular the updated project costs and cost phasing;procurement and disbursement schedules; key milestones reached in implementing thetechnical assistance components; and project financial statements.
* A draft Corporate Performance Plan (CPP) prepared by October 31 of each year; and finalCPP by December 31 of each year.
* An audit report, prepared by external auditors by June 30 of each year.
There will also be consultants' reports on specific topics, governmental decisions, policypronouncements, etc., which will also facilitate project monitoring.
Accordingly, during negotiations TEAS agreed to: (i) maintain policies and procedures adequate toenable it to monitor and evaluate on an ongoing basis, in accordance with the indicators agreed uponwith the Bank, the implementation of the Project and the achievement of its objectives; (ii) prepare,under terms of reference satisfactory to the Bank, and furnish to the Bank, by October 31 of each year, areport integrating the results of the monitoring and evaluation activities performed, on the progressachieved in carrying out the project during the period preceding the date of the report and setting out themeasures recommended to ensure the efficient implementation of the Project and the achievement of itsobjectives during the period following such date; and (iii) review with the Bank, by December 31 of eachyear, the report on the progress of the Project and, thereafter, take all measures required to ensure theefficient completion of the Project and the achievement of its objectives, based on the conclusions andrecommendations of the report and Bank views (para. 7.03(b)).
3.10 In addition, the Bank's monitoring of the Government's proposed project will involve closelyfollowing the implementation of the Power Sector Development Strategy (para 2.07), including frequentexchanging of views, having joint seminars and providing necessary advice. Moreover, the Bank willcarry out supervision in the field, at least twice a year, with a time lag between two sequentialsupervisions no more than six months.
3.11 The project monitoring plan would involve a detailed Mid-term Review (MTR) of the project bythe Bank. This MTR is proposed during FY200 1 and should coincide with the targeted completion of theestablishment of the independent operation of the transmission grid system.
Page 11
D: Project Rationale
Project Alternatives Considered
4.01 There is no alternative to the transmission grid system to dispatch and transmit electricitygenerated or imported to the distribution end of the power sector. In terms of technical design of the gridsystem, TEAS periodically reviews the need for introducing high voltage transmission into the system.However, owing to the fairly even growth of the system across the country (both from a load growth, aswell as generation plant location perspective), the present 154 kV and 380 kV level is adequate at leastfor the next 10 years.
Major Related Projects Financed by the Bank
* Rationalization of economic and institutional incentives toincrease sector efficiency
* Reduction of the financial burden imposed on the Government bythe sector's investment requirements
Project TEK Restructuring ProjectLatest Supervision (Form 590)Ratings
Implementation Progress (IP) SatisfactoryDevelopment Objectives (DO) Satisfactory (see para 2.14)
Lessons Learned and Reflected in the Project Design
4.02 The most important lessons learned and reflected in the project design are (a) to resolvenecessary policy issues affecting the project before loan/project approval; and (b) to ensure the simplestpossible project description.
Indications of Borrower Commitment and Ownership
4.03 Government and the Bank concur fully on the power sector development strategy (as part of theCAS discussions). In addition, four successive governments have, with remarkable consistency,followed the same sector development strategy. The Government is already implementing a sectorreform program, key areas of which the project aims to support. Finally, performance under the ongoingproject is fully satisfactory.
Value Added of Bank Support in this Project
4.04 The Bank is fully involved in the design of sector reformn and is helping in the realization of thereform deploying various Bank instruments. The proposed separation and independent operation oftransmission grid involves many technical, economic and institutional challenges which the Bank canhelp overcome. Moreover, the Bank can help ensure the overall consistency between policy, legal andregulatory regimes that would govern the proposed project and other parts of the unbundled sector.
Page 12
E. Project Analysis
Institutional Analysis
5.01 Introduction. Turkish Electricity Generation and Transmission Corporation (TEAS), theproposed borrower, is a wholly GOT-owned enterprise attached to MENR. TEAS was created in 1994by splitting the erstwhile TEK under decree 93/4789 which establishes TEAS as a limited liabilitycorporation. TEAS's mandate is to generate and transmit electricity. The principal statute of the TurkishElectricity Authority (enacted in 1984) which applies to TEAS, classifies TEAS as State EconomicEnterprise (SEE) under Decree Law no. 233 (1984). Although Decree Law 233 provides significantautonomy for TEAS, MENR under Law No. 3154 (1985), sets policies for energy planning, pricing andreviews annual investment programs. Furthermore, Laws 657 and 399, which are applicable to all SEEs,govern TEAS's personnel policies for its administrative and contractual employees. Within the contextof the above legal framework, the organizational, managerial, and operational aspects of TEAS arepresented below.
5.02 Organization and Management. TEAS's main business activities are generation andtransmission of electricity. In addition, TEAS also has manufacturing interests ranging from 93%holding in Turkish Electro-mechanical Industries to 0.5% in Turkish Electronics Industry and TradingIncorporated. TEAS is responsible for consolidating the energy available from TEAS various powerplants as well as from non-TEAS generation sources and transmitting it to several large industriesdirectly and to TEDAS (including TEDAS's seven incorporated distribution subsidiaries), largeindustrial consumers, and other private power utilities (para 2.02).
5.03 TEAS has a Board of Directors comprising the Chairman, who is also the General Manager ofTEAS, and five Directors. Two of the Members of the Board are Assistant General Managers (AGM) ofTEAS while the other three are GOT representatives, two from MENR and one from the Undersecretariatof Treasury. The Board is the overall corporate policy making as well as the policy implementing body.Management of the utility is the responsibility of the General Manager and the four AGMs, each forPower Plant Operation and Maintenance; Planning, Research & Coordination; Transmission Operationand Maintenance; and Administration. The four AGMs are supported by 23 Directors and their staff incarrying out the mandate set for the utility.
5.04 Personnel and Staffing. Personnel management is the responsibility of Personnel Director whoreports to the AGM for operations. Personnel Planning is carried out for one year at a time although thepersonnel requirements for new generation plants are forecast for longer periods. TEAS's labor force isunionized and the relationship between management and the union is satisfactory. As with all SEEs,TEAS's employees are governed by three laws: Law 657 for employees on Civil Service status; Law 399for contractual employees; and general Labor Law 1475 for labor which applies equally to both publicand private enterprises. Under this law, all labor contracts are subject to collective bargaining withoutany Government intervention. Layoffs are permitted, provided that the employer pays severance (onemonth salary for every year of service, subject to a maximum amount adjusted annually by Parliament).
5.05 In an effort to reduce overstaffing in SEEs, the Government has restricted new hiring in SEEs to70% of their vacancies. In addition, TEAS's own strategy presently is to reduce its staff over timethrough attrition (about 270 to 300 employees per year), and limit new hiring to a few essential technicalstaff.
Page 13
Table 5.1: TEAS Staff Profile
Head Office Outside Head Office Total StaffNumber | Number _ Number l
TEAS's staff profile is given in Table 5.1. Staff complement at TEAS is 20,148. They are dispersedaround the country and are grouped functionally rather than regionally. About 10% of the staff are basedin headquarters.
5.06 TEAS's Power Infrastructure - Generation. TEAS installed generation capacity at the end of1996 was about 18,903 MW, comprising about 9,240 MW ( 49%) of hydro capacity and the remaining9,663 MW (51%) of thermal. The breakdown of TEAS's generation capacities and energy generationfrom such capacities is given in Table 5.2.
Table 5.2: TEAS Installed Capacities and Energy Generated - 1996
GrossCapacity Generation
Capacity Type (MW) % (GWh) %Hydro 9,240 49 26,976 39Thermal
TEAS's installed capacity accounts for 89% of total capacity in the country; while TEAS's generationaccounts for 90% of total electricity generated in Turkey. Natural gas based generation has grown fasterthan other forms of generation, and this trend is expected to continue.
5.07 Transmission. TEAS transmission grid, which covers the whole of Turkey, mainly comprises380 kV and 154 kV systems as follows:
Page 14
Table 5.3: TEAS's Transmission Grid
Voltage Transmission SubstationsLevel Lines (km) No. Capacity (MVA)
5.08 International Interconnections. There are currently six cross-border interconnections asfollows:
* Azerbaijan - a 34.5 kV and 154 kV interconnection, with a 100 MW power transfercapability which is presently used for export
* Georgia - a 220 kV interconnection with a 300 MW power transfer capability, which ispresently used for import.
* Bulgaria - a 380 kV interconnection, with a 500 MW power transfer capability, whichis currently used for import.
* Iran - a 154 kV interconnection, with a 100 MW power transfer capability, whichis currently used for import.
* Syria - a 66 kV interconnection, with about 40 MW capability - this link is currentlyinactive.
* Armenia - a 220 kV interconnection, with a 300 MW capability - this link is currentlyinactive.
* Iraq - a 380 kV interconnection with a 500 MW capability - this link is currentlyinactive
5.09 Load Dispatch System: The system comprises a National Control Center in Ankara and fiveregional dispatch centers spread around the country. The equipment is 15 to 18 years old, and given theinformation technology basis of these systems, coupled with the phenomenal growth of the power systemitself, the Load Dispatch system is in urgent need of modernization.
Long Term Planning
5.10 Investment Planning. Investment planning is the responsibility of a Director for Planningunder the AGM for Planning, Research and Coordination. Under the Director, there are separatedivisions each for Generation Planning and Transmission Planning. A load forecast is prepared byMENR, based on which the generation planning division prepares generation expansion plans for theentire country using the planning tool, MAED (Module I of this software). In preparing the loadforecast, MENR gets inputs and feedback from key players in the energy sector (e.g. SPO, BOTAS, DSI,TEAS and TEDAS) and representatives of the industrial sector. Module II and III of MAED are used by
Page 15
TEAS using the output from Module I to arrive at the annual generation and peak MW demand whichwill translate into a generation expansion plan.
5.11 The Transmission Planning and Coordination Division prepares the Transmission System MasterPlan to correspond to the generation expansion plans prepared by the Generation Planning Division.This Master Plan is revised whenever major changes occur in generation investments or in the estimatedgrowth of demand in the major load centers. The Master plan is prepared using State-of-the-Art software(industry standard) and is based on studies of load flows, system stability (both transient and steadystate), short circuit analyses, etc. These studies are carried out using computer systems within TEAS.
5.12 Corporate Planning. Corporate planning was non-existent in TEAS until recently. However,under the ongoing TEK Restructuring Project, TEAS was able to develop, with the help of consultantsfinanced by the Bank, a Corporate Planning System, which is used to integrate the investment plans andthe financial plans into the company's Corporate Performance Plan (CPP). CPP is prepared annually fora rolling five-year horizon. TEAS is presently taking the necessary steps to deepen, within TEAS, thisprocess of integrated corporate planning and to make it the main planning tool. These efforts willinclude: more frequent updating of the CPP to reflect changes in the business environment and to assessthe impact of these changes on TEAS's corporate performance; and establishing a dedicated team ofprofessionals for corporate planning under the coordination of the Finance Department.
5.13 TEAS also prepares an annual budget, which is a combination of its operating and capitalbudgets. The first year of the CPP does reflect this annual budget. The Public Finance Department ofthe Treasury (which coordinates the funding requirements of all SEEs) stipulates the assumptions thatTEAS uses in preparing its budgets. These assumptions include a forecast of domestic inflation,exchange rates, and the amount of foreign financing available. TEAS, using these assumptions, preparesits annual budget in a prescribed format (which is common to all SEEs) and submits it to the Treasury forreview and approval. In conjunction with SPO and the Ministry of Finance, Treasury approves thebudget of TEAS.
5.14 Environmental Management. TEAS has a well staffed Environmental Department. The staffof the environmental department, who have received technical assistance and training under the ongoingBank project, are capable of carrying out environmental assessment of generation (hydro, thermal, etc.)as well as transmission lines and substations projects. In parallel with the Bank's requirements, Turkishlaw also requires environmental assessments to be carried out before any environmentally sensitiveinvestments are undertaken.
5.15 Project Implementation Capacity. TEAS is responsible for design and construction ofhydroelectric plants smaller than 50 MW;3 and thermal generation plants. Organizationally, it is theresponsibility of TEAS's AGM for Civil and Thermal Construction. TEAS has its own projectdepartments for generation and transmission, which prepare the design as well as the bidding documentsfor procuring equipment and services. Almost all construction is carried out by contractors under thesupervision of the respective design and construction departments.
3 DSI is responsible for implementation of hydropower projects larger than 50 MW capacity.
Page 16
5.16 TEAS has established a World Bank Projects Group, reporting to the General Management tooversee the implementation of Bank-financed projects. The staff to this Group are drawn from variousTEAS departments to reflect the Bank Projects' components. The main functions of this group are: thestaff coordination role within TEAS; management of the consultancy assignments included as part of theBank's projects; and providing interface with the Bank. The Group receives management guidance froma Steering Committee of senior management of TEAS, which is headed by the General Manager.
5.17 The staff of the Group are trained in the Bank's operational procedures that TEAS needs toobserve, such as procurement, disbursement, quarterly reporting, auditing, etc. The Group'sperformance has been good in the ongoing TEK Restructuring Project. Recently, the Group has assumeda significant role in project preparation, including the preparation of the proposed project. This Groupwill continue to function as the project implementation unit for the proposed project.
5.18 Operation and Maintenance. The operation of hydro plants is under the joint responsibility ofDSI and TEAS, DSI being responsible for operation of the dams while the operation of the power housesis under TEAS. This calls for a high level of coordination between TEAS and DSI, particularly inmultipurpose hydro projects such as Keban.
5.19 TEAS continues to make efforts to improve its operational efficiency. Under the ongoing TEKRestructuring Project, TEAS has, with Consultants' help, successfully completed an OperationalManagement Improvement Program (OMIP). Under OMIP: (a) an automated generation plantmaintenance management tool called Automated Work Order Control System (AWOCS) has beendeveloped and deployed; (b) a Cost Analysis System that can identify the cost of service for eachbusiness unit (each generation plant, transmission system, and headquarters costs) has been developedand deployed; (c) A Tariff Revenue and Incremental Cost Evaluation Model (TRICEM) which enablesrevenue requirement assessment; and (d) several studies identifying the technical/operational principlesto be followed in various areas (automatic regulation of cascading hydro plants, fuel quality assessmentand quality control in lignite generation plants) have been completed.
Commercial and Financial Management
5.20 TEAS's Customer Profile. TEAS is only a bulk electricity seller and its customers are:TEDAS, the four private ultilities and selected heavy industries. Table 5.4 provides the Structure ofTEAS's Sales in 1997.
Table 5.4 TEAS's Structure of Electricity Sales in 1997Electricity Sales Revenue Revenue Revenue/kWh
As mentioned earlier, TEDAS's network has been divided into 25 distribution areas which are to beprivatized under the TOOR scheme (para 2.12). When the privatization transactions are concluded, thoseprivate distribution operations will become TEAS's direct customers.
Page 17
5.21 Tariff Structure. TEAS tariff structure is based on the broad classification of its customers intocategories: TEDAS; Industrial direct customers; Distribution Companies; and Private Utilities.Industrial customers are further classified as those in: (a) priority provinces designated by GOT forindustrial development; and (b) others. Industrial tariffs in the priority provinces are about 89% of thetariff level for other provinces. TEAS applies a single term tariff to most customers, except for industrialcustomers whose demand is above 0.7 MW. For these customers, two-part tariffs are applied whichconsist of peak (17:00 - 22:00 hrs), off-peak (22:00-6:00 hrs) and normal (6:00 - 17:00 hrs) tariffs. Inaddition to two-part energy charges, industries pay demand charges, and punitive demand charges areapplied for consumption of power above the contracted limit.
5.22 Billing and Collections. TEAS bills its customers once a month and the bills are deliveredimmediately. TEAS's electricity bills do not include the taxes and levies4 to its customers (since they arenot final consumers), except for Direct Customers. However, for Direct Customers the Labor Fund taxis not levied.
5.23 Financial Organization. The financial management function in TEAS is headed by the AGMfor Finance who is supported by the Director of Finance for day-to-day financial management. There areseven managers reporting to the Director, Finance, one each for Central Accounting, Budget andConsolidation, Domestic Finance, Foreign Finance, Investment, Balance Sheet and for Affiliations. Eachmanager is assisted by a specialist, at the level of assistant manager with staff responsibilities. Otherassistant managers with line responsibilities carry out the tasks specific to the unit. Many of the financeand accounting staff in TEAS headquarters have university degrees in Commerce and BusinessManagement. A comprehensive Financial Management Improvement Program (FMIP) was designedand implemented under the ongoing TEK Restructuring Project (Loan 3345-TU). Under FMIP: (a) anew power utility accounting system complying with both Turkish accounting laws and internationalaccounting standards was developed, adopted and staff of TEAS were trained; (b) modern workingcapital management tools as well as foreign debt monitoring systems have been developed, implementedand staff trained; and (c) automated corporate planning tools have been developed and are being utilizedto prepare annual CPPs.
5.24 Accounting Systems and Practices. In accordance with Turkish Law, TEAS as an SEE isrequired to maintain its statutory accounts according to a statutory Chart of Accounts. Since thestatutory Chart of Accounts does not fully meet the utility's accounting needs, TEAS with the help ofconsultants, financed by the Bank, has developed and deployed a modern accounting system which iscomputerized and largely corresponds to international accounting standards. TEAS's key accountingpolicies are: accrual basis method of accounting; revaluation of assets and liabilities; no capitalization ofinterest during construction; accounting for work in progress and fixed assets; expensing the foreignexchange losses on transactions, but capitalizing the foreign exchange losses due to translation (to matchthe current value of the foreign debt); depreciation policies according to industry normns; inventoryaccounting policies; provision for doubtful receivables; accounting for subsidiaries and associatedcompanies.
4 Energy Fund (1%) and a Value Added Tax (15%) are separate items while a Labor Fund (10%), and Televisionand Radio tax (3.5%) are included in the base tariffs.
Page 18
5.25 TEAS has been maintaining its accounts in accordance with this modernized system since 1995and the flow accounts, such as profit/loss, are much more transparent. However the stock accounts, i.e.,the balance sheet accounts continue to elicit comments from external auditors, mainly because the valuesfrom before the deployment of the new accounting system in these stock accounts have not been cleanedup. The proposed project will include efforts to clean up the TEAS' s accounts (see next section).
5.26 Auditing. TEAS's internal audit department (called Board of Inspectors) is headed by a directorreporting directly to the GM. The internal audit in TEAS is focused mainly towards the use of funds andchecking for payment irregularities with only routine checking for compliance with accounting principlesand policies. Also, the internal audit does not cover financial performance aspects. The report by theaudit department and the recommendations therein are discussed by the Board at the option of the GMwho is the chairman of the Board. In addition, the Audit Wings of the Treasury and MENR performaudit of TEAS's accounts pertaining, respectively, to transactions with the Treasury and largeprojects/investments.
5.27 The statutory external audit of TEAS's financial statements is carried out by the Supreme Boardof Control attached to the office of the Prime Minister. The Supreme Board examines whether allrelevant laws are complied with, but does not check for compliance with internationally acceptedaccounting principles, or performance criteria agreed with external agencies such as the Bank. Since1988, TEAS has been audited by Price Waterhouse as external auditors. TEAS has initiated a process torecruit the external auditor for the period 1997-2000. This auditor is expected to be on board in the nexttwo months.
5.28 Price Waterhouse in their audit reports have identified several areas which are deficient andhave declined to give an opinion on the utility's accounts. It is essential for TEAS to receive unqualifiedcertification of its accounts from an intemationally recognized audit firm, in view of the need to raisecapital on the foreign capital markets on the strength of its balance sheet and trading profile. Thecomments of the auditors are within the control of TEAS's management to address. Accordingly, TEASagreed during negotiations to take all actions required on its part to receive an unqualified audit opinionfrom the independent auditors for its financial statements for the calendar year 1998 (para. 7.03(c)).
Financial Analysis
5.29 Introduction. The financial affairs of TEAS are governed by the 1984 TEK Statute whichstipulates that TEAS is an SEE with the autonomy to manage its financial affairs and to set its ownprices. In return for such autonomy, since 1985, GOT is no longer expected to make contributionstowards TEAS's investments. GOT, however, does guarantee TEAS's debt. In reality, the Government,through MENR, SPO, Treasury and Ministry of Finance, regulates TEAS's pricing, investments andbudgetary allocations.
5.30 Past Performance. TEAS's past performance is analyzed for the 1995-1997 period, 1995 beingthe first full year of TEAS's existence. Table 5.5 shows the summary of TEAS's financial performancein the 1995-1997 period.
Current Ratio 2.7 2.8 2.1Internal Cash Generation Ratio (%) 76 11Debt-service Coverage Ratio (times) 0.8 0.8 0.8Debt:Equity Ratio (%) 48:52 41:59 43:57
5.31 TEAS's operating environment was characterized by high growth in electricity sales (8% onaverage) but also by high inflation and devaluation of the Turkish Lira. To compensate, TEAS's tariffswere adjusted monthly. TEAS, since April 1994, has been responsible for bulk electricity pricing at orabove the 66 kV level, while TEDAS is responsible for retail pricing of electricity. Presently, TEAS,with the approval of MENR, sets its tariffs to meet 35% of its average annual capital expenditures(CAPEX), after meeting cash operating costs, debt service and statutory obligations. Prices are adjustedmonthly to mitigate the effect of high inflation. TEAS electricity tariffs have been at a minimum ofUS$0.03 1/kWh over the three years 1995-1997.
5.32 Improved financial management and control systems were instituted which helped control cashand receivable levels. Moreover, the investment levels declined substantially, as a result of austeritymeasures instituted by the government, and the increased efforts to attract private capital. Such reducedinvestment levels also resulted in reduction in the stock of foreign debt from a level of US$5 billion in1992 to US$2.3 billion in 1997. All of these actions resulted in satisfactory financial performance andconsiderable cash surpluses for TEAS particularly in 1995 and 1996 as indicated by the high self-financing ratios. In 1997, earnings before interest and taxes (EBIT) declined by 21%, as a result ofhigher than forecast inflation which resulted in a slightly lower tariff realized, and an increase in powerpurchase cost from autoproducers and from imports.
5.33 Present Financial Position. TEAS's Balance Sheet, at the end of 1997, is summarized in Table5.6
Table 5.6: TEAS Balance Sheet(US$ Million at December 31, 1997)
TEAS, in accordance with its accounting policies, revalues its fixed assets (and accumulateddepreciation) and carries the long-term foreign debt at current values. Accordingly, the utility's equityincludes the resulting Revaluation Surplus. TEAS's present financial position is satisfactory, as indicatedby the (long-term) debt:equity ratio of 43.57. In addition, the utility's short-term capital is adequate, asindicated by the current ratio of 2.1.
5.34 Future Financial Performance. From a perspective of future financial performance, thefollowing will be characteristics of TEAS's business environment:
* TEAS's electricity sales will comprise, increasingly, electricity that it has purchased fromother generators and these purchases will be under contracts with take-or-pay provisions.Therefore, TEAS's power purchase costs will eventually be the largest cost item;
* TEAS's major costs will be denominated in foreign currency. Fuel costs will increasingly bedenominated in US$ terms - presently natural gas prices are set in US$ terms by BOTAS; andthere are efforts to set petroleum product prices according to international prices and set thetaxation on these products in US$ terms. Power purchase costs from BOTs, BO and TOORplants, as well as from autoproducers and imports are already set in US$ terms.
* Until the generation business is separated, TEAS will (continue to) own the power plants thatwould be transferred to the private sector on a TOOR basis, and TEAS will (continue to) beresponsible for servicing the debt on the transferred power plants; and since the utility's debtis primarily foreign debt, debt servicing will also be a foreign exchange obligation.
In such a business environment, to remain financially viable, GOT and TEAS should focus on threeissues: (i) implementation of a maximum affordable CAPEX program; (ii) set for itself and achieve keyfinancial performance criteria; and (iii) have adequate electricity pricing. These three issues arediscussed below.
5.35 TEAS's Capital Expenditures. TEAS's capital expenditures (CAPEX) are approved annuallyby the Government and then by the Parliament as part of the National Budget. In the past three years,TEAS's actual capital expenditures have been rather low, particularly compared to its planned levels.Firstly, the investment approved has been much lower than what TEAS had requested, due toGovemment's public expenditure control measures; and due to the decision and efforts to attract privateinvestments to the sector, particularly for generation. Such control of investments has helped TEAS to,among other things, improve its financial performance (para 5.32).
Similar CAPEX trends are expected to continue. TEAS's investments in generation are expected to belimited to ongoing projects, emergency-type generation projects, and those projects where private sectordoes not show keen interest. TEAS will continue to be responsible for CAPEX in transmission, andthese expenditures will increase as a proportion of TEAS investments from the present 19% in 1997 toabout 32% in 2002.
5.36 Financial Performance Criteria. TEAS needs to achieve four key financial performancecriteria, in order for the utility to remain financially viable.
* Contribution to the Financing of Investment. This is a key criterion, which measures thefinancial viability of a utility which has a sizable CAPEX program. According to agreementwith the Bank under the ongoing project, TEAS would seek to finance from its internalsources, 35% of its average CAPEX (averaged over the preceding current and succeedingyears to smooth out any lumps in TEAS's annual investments). The 35% self-financing levelreflects the proportion of local costs within TEAS's CAPEX and achieving this level wouldhelp TEAS maintain a satisfactory financial structure. During negotiations, TEAS agreed toproduce funds from internal sources equivalent to not less than 35% (for the fiscal year 1998and in each succeeding fiscal year) of the three-year average of its capital expenditures (para.7.03(d)).
: Debt Service Coverage. Also a key criterion, which measures the creditworthiness of theutility. Under agreement with the Bank, TEAS would seek to cover from its internal sourcesat least 1.5 times the debt service obligations of the particular year. There is a need tocontinue to monitor the creditworthiness of TEAS as it undertakes a sizable CAPEX program,65% of which (see above) is to be borrowed on average. Therefore, during negotiationsTEAS agreed to ensure that the estimated net revenues will be at least 1.5 times in 1998 andeach succeeding fiscal year, the estimated maximum debt service requirements for such yearon all its debts (para. 7.03(d)).
* Short-Term Liquidity. While contributions to investments and debt service coverage addresslong-term capital adequacy, there is a need to monitor the working capital (also known asshort-term capital) needs of TEAS, to understand the liquidity situation of the utility to meetits day-to-day obligations. The standard measure is the current ratio (the ratio of currentassets to current liabilities). This current ratio should be at least 1.0, which implies thatTEAS will have enough liquidity to meet all current obligations (which include currentportion of long-term debt) from current assets (which include cash and accounts receivable).During negotiations, TEAS agreed to maintain, beginning with the fiscal year 1998, a ratio ofcurrent assets to current liabilities of not less than 1.0 (para. 7.03(d)).
* Accounts Receivable. Management of accounts receivable is a key element of short-termliquidity management, and many a time the utility could be facing a cash flow constraints dueto a high receivable level which is not captured by the monitoring of the current ratio.Therefore, TEAS will need to manage its accounts receivable level diligently to ensure thatthere are no cash flow constraints. TEAS's customers are all bulk customers who are billedmonthly and are required to settle their bills upon presentation. Accordingly, duringnegotiations, TEAS agreed to maintain its accounts receivable level at no more than 45 daysof average daily electricity sales during a calendar year. If any projection shows that TEASwould not meet these requirements for the fiscal year covered by the review, TEAS should
Page 22
promptly take all necessary measures (including, without limitation, adjustments of thestructure or levels of its tariffs) in order to meet these requirements (para. 7.03(d)).
Electricity Pricing
5.37 A new Bulk Electricity Supply Tariff (BEST) regime will be designed and implemented underthe proposed project, to correspond to the proposed transformation of TEAS into a grid company (para1.01). Until BEST regime is implemented, TEAS needs to have an adequate electricity pricing regime forit to remain financially viable. The present electricity pricing regime has served the company reasonably(para 2.05), and it is expected to continue until the new pricing regime is implemented. Therefore, GOTagreed to, in conjunction with TEAS, take all actions required on its part to: (i) enable TEAS to maintainelectricity prices at least at US$0.032/kWh, net of all taxes and levies, on an annual average basis; and(ii) enable TEAS to monitor and evaluate the progress of the Project in accordance with the agreedcriteria (para. 7.01(a)).
5.38 In accordance with the government's strategy, distribution networks will be privatized under theTOOR scheme (para 2.12). However, until the TOOR transmissions are culminated, TEDAS will remainas the single largest buyer accounting for 76% of TEAS's sales in 1997. Therefore, TEDAS's timelysettlement of TEAS's bill is crucial for TEAS's continued viability. Furthermore, the viability of theentire power sector is dependent upon the final electricity tariffs being maintained at adequate levels.Under the ongoing TEK Restructuring Project, Government has agreed to maintain the TEDAS's tariffs(i.e., retail tariffs) at least US$0.06/kWh net of all taxes. These tariffs have been maintained throughmonthly adjustments, thus ensuring the viability of the entire power sector. Therefore, GOT agreed to, inconjunction with TEDAS, take all actions required on its part to ensure that TEDAS: (i) maintains, at alltimes, its retail electricity prices at the level of at least US$0.06/kWh, net of all taxes and levies, on anannual average basis; and (ii) settles TEAS's electricity bills within 30 days of billing (para. 7.01(b)).
5.39 Monitoring of Corporate Financial Performance. The Government of Turkey, as well as theBank, should be able to monitor the achievement of the above financial targets. To enable suchmonitoring, TEAS will prepare annually a Corporate Performance Plan (CPP), which will be agreedannually between TEAS and the Government. TEAS and the Government would jointly be responsiblefor implementing the agreed measures. The CPP would set out, inter-alia, TEAS's performance targetsfor the year (both physical and financial) consistent with the agreed financial performance criteria andelectricity pricing agreements; TEAS's planned CAPEX, including those components to be financed bythe proposed Bank loan, borrowing, financing plan, tariff structure and levels; etc. The CPP would bebacked by medium-term financial projections and would include qualitative targets and strategies forachieving the targeted results. During negotiations, TEAS agreed to prepare, following an exchange ofviews with the Bank, and furnish to the Bank, no later than October 31 of each year, a draft CorporatePerformance Plan (CPP) for the ensuing year which will include: (i) the generation and transmissionsystem expansion targets, including the components of the capital expenditures program to be carried outduring the next fiscal year and the investments under such components financed from the proceeds of theloan; (ii) the financial targets for TEAS, including a financial projection showing whether TEAS wouldmeet the financial performance criteria; and (iii) TEAS's levels of services, borrowing needs, financingplan and tariff levels and structures (para. 7.03(e)). In addition, TEAS agreed to obtain GOT's approvalof the CPP and of the actions required, and furnish to the Bank the final version of the CPP prior to thestart of the fiscal year covered by it. TEAS will exchange views regularly with the Bank with respect toprogress in carrying out the CPP (para. 7.03(f)).
Page 23
5.40 Financial Forecasts. Financial forecasts have been prepared based on the CAPEX programdiscussed in para 5.35; the existing electricity pricing regime for TEAS (para 2.05); and are designed toachieve the financial performance targets discussed above (para 5.36). These forecasts are presented inTable 5.8.
Performance IndicatorsCurrent Ratio 1.4 1.5 1.5 2.3 3.0Average 3-year Investment (US$ million) 771 825 780 636 622Internal Cash Generation Ratio (°) 38 56 35 51 65Debt Service Cover Ratio 1.8 2.1 1.6 2.2 2.6Debt Equity Ratio 42.58 42.58 42.58 42.58 42.58
5.41 TEAS's electricity sales are forecast to increase at an annual average rate of 10% to meet thegrowing demand. TEAS's bulk electricity supply tariffs remain at the current level of 3.2 US cents/kWhuntil 2000, and increase by 7% in year 2001; and by another 7% in year 2002. This would be in responseto the increase in power purchase cost from BOTs and BOs (who in turn will experience high tariffs inthe initial years of their own operation). TEAS's CAPEX during the five year period is about US$3.7billion. Even after financing such CAPEX, TEAS will continue to maintain a satisfactory financialstructure as indicated by its debt:equity ratio which will be maintained at 42:58 over the period. This isattributable to the fact that in trying to achieve a 35% minimum self-financing ratio, TEAS would end upfinancing about 50% of its CAPEX from internal sources on average over the 5-year period This alsoimplies that its creditworthiness (its ability to service the debt) will also continue to be satisfactory in the1.6 and 2.6 range. Its current ratio will be in the range of 1.4 to 3.0, indicating satisfactory workingcapital levels.
Economic Analysis
5.42 Electricity Market. Over the past 25 years, the electricity market in Turkey has grown atconsistently high rates, at compounded annual average growth rate of 9.6%. The high growth rates aredue to the low per capita electricity consumption (1700 kWh compared to 11,000 kWh in the US);growth in population; and high economic growth rates. Even during economic downturn, demand forelectricity has remained high. For example, in 1994, when the economy shrank by 5.5%, the electricitydemand increased by 4.6%.
5.43 Similar high growth rates for electricity demand are expected into the future. The projectedgrowth rates (in peak demand) are 8% between 1998 and 2005; 6.7% between 2006 and 2010; and 4.6%thereafter up until 2020. In terms of structure of consumption, while the industrial consumption grewfastest in the past quarter century, the longer growth rates in the next twenty years will be exhibited by
Page 24
the commercial sector, as a result of growth in tourism, light industry, financial and informationtechnology sectors.
5.44 In view of (i) economic growth rate expected at 6% p.a.; (ii) a population growth rate of 1.8%;(iii) low per capita consumption of electricity; and (iv) the inelasticity exhibited to economic downturnsand to price increases, the electricity demand forecasts are considered realistic.
5.45 System Expansion Plan. The only reason for not achieving these growth rates in electricitydemand would be supply constraints. To ease the supply constraints, the Government has beenundertaking a concerted effort to attract private sector resources to generate electricity in complement tothe public sector. The government is also taking necessary steps to address any possible grid congestion,which the proposed Project aims to directly help. Third, to ease network constraints in the distributionsegment, private capital is being sought to improve the efficiency arid expand the network. TheGovernment's efforts are yielding results and the complementary public and private investments for theperiod 1998-2002, for a Power System Expansion Plan are summarized in Table 5.9. It is important tonote that the capacity and investments presented are committed investments, particularly by the privatesector.
Table 5.9: Power System Expansion Plan. 1998-2002
Capacdity I vetlent Cot %o(MW) US$ &lion TOta Costs.'.
5.46 The investment requirements for the expansion program are estimated at $12.5 billion and it isexpected that about $6.0 billion (or 48%) would be financed by the public sector and the balance of$6.5 million by the private sector.
5.47 Cost Benefit Analysis. A Cost Benefit Analysis was carried out on the grid investmentscomponent. Measurable costs are the grid investments component costs in 1997 prices and the cost ofoperating and maintaining the grid. The incremental electricity transmitted via the grid, which is equalto TEAS's net increase in electricity sales, will be the basis for measurable benefits; and the expectedunit price of transmission received by TEAS is used to compute the benefits. On the basis of such
Page 25
measurable costs and benefits, the present value of net benefits (NPV) is US$328 million and theeconomic internal rate of return (EIRR) is 23%.
5.48 The high relative economic benefits and returns of the proposed Project are typical of gridprojects. This is because grid investnents have a relatively short gestation period and parts of the newinvestments start generating revenue before the whole "project" is completed. Note must also be madeof the fact that some of the incremental electricity may flow in the existing network (and may not at allflow in the incremental part of the network) but the costs of the existing network are not taken intoaccount, as they are considered sunk costs.
5.49 Sensitivity Analysis was carried out, identifying the possible risks indicated below:
* First, there is a risk of generation investments being delayed, due to delayed financial closingof one (or more) of the private sector projects; or due to financial constraints on the publicsector investments. In such a case, grid investments would remain the same but theincremental electricity sales would be reduced.
* Second, there may be delays in establishing certain links to particular private power plantsand TEAS would end up paying a penalty. The result would be lower electricity transmittedand higher costs due to the penalties paid.
5.50 Table 5.10 presents the NPVs and EIRRs for the base case and the two sensitivity cases. TheProject benefits are particularly sensitive to the risk of transmission investments being delayed in view ofthe penalties that TEAS would have to pay. Accordingly, during project implementation, TEAS and theBank will place additional emphasis to ensure that the transmission links to private sector IPPs are builton schedule.
Table 5.10: EIRR and Sensitivity Analysis
Case NPV ER (%6)Project Base Case 328 23Sensitivity I - Delayed Generation Investments 314 22Sensitivity II - Delayed Transmission Investments 90 13
Even under the adverse sensitivity conditions, the Project economics remain robust. Further analysisshows that benefits should drop by 38% for the NPV to "switch" to negative; and the probability of thisoccurring is close to zero.
Page 26
F: Sustainability and Risks
Sustainability
6.01 The Project is highly sustainable given the high electricity demand in Turkey; the experience andcapability of TEAS to construct, operate and maintain the grid; and the electricity pricing practices(present and proposed). Its sustainability will be enhanced as more private sector companies beginoperating both at the generation and the distribution ends, whereby TEAS would deal with them on acontractual basis, thus reducing the risk of arrears, for example. In view of the high level ofsustainability, TEAS would be in a position to mobilize funding from the international capital markets,based on the strength of its balance sheet and trading profile. TEAS would need help to accessinternational capital markets initially. Accordingly, the proposed project includes technical assistance toprepare TEAS to access the international capital markets.
Risks
Risk Risk Rating Risk Minimization Measure
GOT "staying the course" on the reform path (risk level: No specific risk minimization measure is
moderate). M required, in view of the strong commitmentto a consistent sector reform agendaexhibited by four consecutive governments.Moreover, the stakeholders for sector
reform now include the Turkish businesses,supported by intemational investmentcommunity
Enlarged private sector investments into the energy sector This risk is moderate due to the tremendousand introduction of competition in the sector. M response exhibited by the private sector to
the Government's proposals to date. Thecommitment for the required privateinvestments for the next five years isalready secured.
No negative impact on the project implementation and Change in the management of the Borrowertimetable from changes in government and/or borrower's M is a real possibility given the past history.management However, the changes are expected to be
minimal in the technical/functionalmanagers. In addition, the World BankProjects Group will provide the necessary
continuity in the context of managementchange.
Sustained political and borrower i:nstitutional support for While the risk level is moderate, closeproject components M monitoring by the Bank will be required to
ensure this sustained commitment.
Overall Risk Rating M
Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)
Page 27
G: Main Loan Conditions
7.01 During negotiations, GOT agreed to, in conjunction with:
(a) TEAS, take all actions required on its part to: (i) by December 31 of each year, approve theCPP prepared by TEAS; (ii) enable TEAS to maintain electricity prices at least atUS$0.032AkWh, net of all taxes and levies, on an annual average basis; and (iii) enableTEAS to monitor and evaluate the progress of the Project in accordance with the agreedtargets (Para 5.37).
(b) TEDAS, take all actions required on its part to ensure that TEDAS: (i) maintains, at alltimes, its retail electricity prices at the level of at least US$0.06/kWh, net of all taxes andlevies, on an annual average basis; and (ii) settles TEAS's electricity bills within 30 days ofbilling (para 5.38).
7.02 During negotiations, TEAS and GOT agreed to take all actions required on their part to carry outan action plan, satisfactory to the Bank, to put into effect the independent operation of the transmissiongrid system. Such action plan will comprise:
(a) separation, by December 31, 1998, of the generation business of TEAS from itstransmission and load dispatch functions (Annex 2);
(b) implementation of a Transmission System Operations (TSO) framework, by September 30,2000, comprising : (i) arrangements for the operation of the electricity market in Turkey;(ii) the contractual matrix to be entered into by TEAS as the national transmission grid andload dispatch company; (iii) issuance of a license for the operation of the transmission gridand load dispatch system; and (iv) the Grid Code defining rights and obligations of all theusers of the grid, including TEAS (Annex 2);
(c) implementation of a revised Bulk Electricity Supply Tariff (BEST) regime by December31, 1999, comprising: (i) principles of transmission pricing; and (ii) mechanisms forapplication of transmission prices (Annex 2); and
(d) deployment, by January 1, 2000, of a Business Plan for TEAS as the national transmissiongrid and load dispatch company, integrating the TSO framework, BEST regime, and theinstitutional aspects of independent operation of the transmission grid and load dispatchsystem (Annex 2).
7.03 During negotiations, TEAS agreed to:
(a) continue to maintain in a manner satisfactory to the Bank, an adequately staffed steeringcommittee under its General Manager or an Assistant General Manager and a member of theBoard of Directors to oversee the implementation of the project and to be responsible for thetechnical and administrative functions under the Project, including the procurement ofgoods. In addition, TEAS will continue to maintain the World Bank Project Group reportingto an Assistant General Manager and a member of the Board of Directors of TEAS tocoordinate the implementation aspects of the Project. Furthermore, the Steering Committeewill ensure that all the relevant data needed to carry out the frequent updates of the CPP,which comes from across the company, will be provided in a timely manner(para. 3.06).
Page 28
(b) (i) maintain policies and procedures adequate to enable it to monitor and evaluate on anongoing basis, in accordance with the indicators agreed upon with the Bank, theimplementation of the Project and the achievement of its objectives; (ii) prepare, under termsof reference satisfactory to the Bank, and furnish to the Bank, by October 31 of each year, areport integrating the results of the monitoring and evaluation activities performed, on theprogress achieved in carrying out the project during the period preceding the date of thereport and setting out the measures recommended to ensure the efficient implementation ofthe Project and the achievement of its objectives during the period following such date; and(iii) review with the Bank, by December 31 of each year, the report on the progress of theProject and, thereafter, take all measures required to ensure the efficient completion of theProject and the achievement of its objectives, based on the conclusions andrecommendations of the report and Bank views (para. 3.09).
(c) take all actions required on its part to receive an unqualified audit opinion from theindependent auditors for its financial statements for the calendar year 1998 (para 5.28);
(d) produce funds from internal sources equivalent to not less than 35% (for the fiscal year 1998and in each succeeding fiscal year) of the three-year average of its capital expenditures; (ii)ensure that the estimated net revenues will be at least 1.5 times in 1998 and each succeedingfiscal year, the estimated maximum debt service requirements for such fiscal year on all itsdebts; (iii) maintain, beginning with the fiscal year 1998, a ratio of current assets to currentliabilities of not less than 1.0; and (iv) maintain its accounts receivable level at no more than45 days of average daily electricity sales during a calendar year. If any projection shows thatTEAS would not meet these requirements for the fiscal year covered by the review, TEASshould promptly take all necessary measures (including, without limitation, adjustments ofthe structure or levels of its tariffs) in order to meet these requirements (para 5.36).
(e) prepare, following an exchange of views with the Bank, and furnish to the Bank, no laterthan October 31 of each year, a draft Corporate Performance Plan (CPP) for the ensuing yearwhich will include: (i) the generation and transmission system expansion targets, includingthe components of the capital expenditures program to be carried out during the next fiscalyear and the investments under such components financed from the proceeds of the loan; (ii)the financial targets for TEAS, including a financial projection showing whether TEASwould meet the financial performance criteria; and (iii) TEAS's levels of services, borrowingneeds, financing plan and tariff levels and structures (para. 5.39).
(f) obtain GOT's approval of the CPP and of the actions required, and furnish to the Bank thefinal version of the CPP prior to the start of the fiscal year covered by it. TEAS willexchange views regularly with the Bank with respect to progress in carrying out the CPP(para 5.39).
(g) prepare the environmental analyses for the grid investments under the project in a mannersatisfactory to the Bank and in accordance with an action plan agreed with the Bank; andimplement the recommendations of the environmental analyses in a manner satisfactory tothe Bank (Annex 2).
(h) employ financial advisers, under terms of reference satisfactory to the Bank, to assist TEASin obtaining debt financing from the international financial markets. These advisers are to beemployed at least nine months prior to the targeted date for obtaining the debt financing(Annex 2).
Page 29
H. Readiness for Implementation
8.01 The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.
8.02 The procurement documents for the first year's activities would be completed by July 1998 andbe ready for the start of project implementation.
8.03 Consultants are already on board to help the Government and TEAS detail the institutionalreform component.
I. Compliance with Bank Policies
9.01 This project complies with all applicable Bank policies.
Teem Ledr Ragbuvee Y. SluwmaTo= Lad
Sector Directar. 11 1_w
CO=Mtry D:fcw AlgosiIzv
Page 30
Annex IProject Design Summary
Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical AssumptionsSector-related CAS Goal: (a) Finalization of power sector reform (a) GOT's energy sector policy (Goal to Bank Mission)Catalyze private investment; and program (December 1998). pronouncements; institutional GOT 'staying the course" on thereform public sector for the efficient (b) Establishment of a regulatory changes; and finalization of private reform path (risk level: moderate).development and operation of frame-work including staffing of sector investment schemes.energy resources to adequately regulatory agency (May 1999). (b) The Bank's ongoing work on powersupport economic growth. (c) Ilnplementation of a sound tariff sector reform program; preparation
regime that ensures viability of and implementation of the proposedtransmission company (June 2000). Project and preparation documents
(d) Finalization of three IPPs of the proposed private power(December 1999). guarantee operation
Project Development Objectives: (e) 50% of Bid Packages awarded by (Objective to Goal)(a) develop adequate transmission September 2000 (a) Bank's reports and supervision Enlarged private sector investment
grid capacity in a timely (f) 100% of Bid Packages awarded by documents. into the energy sector (Risk level:manner; June 2002 moderate).
(g) 25% of contracts completed bySeptember 2000
(h) 60% of contracts completed byJune 2002
(i) By December 31, 1998, (i) adoption(b) continue power sector reform by of Decree providing for the legal (b) GOT's sector policy
establishing the independent establishment of the Grid Company pronouncements.operation of the transmission and (ii) satisfactory progressgrid system; and towards making the Grid Company
functional.(j) Transmission Systems Operational
Framework adopted by September30, 2000
(k) Bulk Electricity Supply TariffRegime implemented by December (c) Corporate Performance Plan
(c) maintain the financial viability 31, 1999of the state institution (1) Business Plan for Grid Companyresponsible for the grid deployed by January 1, 2000development and operation. (m) Retail electricity tariffs maintained
at a minimum of US$0.06/kWh onan annual average basis.
(n) Bulk electricity tariffs maintained ata minimum of US$0.032/kWh onan annual ayerage basis.
(o) Annually achieve the followingfinancial performance targets:
- 35% Self financing Ratio- 1.5 times Debt Service Cover
Ratio- L.D Current Ratio- 45 days Account Receivables
Outputs: (Outputs to Objective)(a) Adequate transmission (a) Grid capacity increased to carry (a) Project Implementation Completion No negative impact on the project
capacity 25,000 MW of power Reports implementation and timetable from(b) Load Dispatch System fully changes in govemment and/or
(b) A well functioning tems Operations Framework in useindependent grid system (d) A fair and equitable transmission
pricing levied on Grid user(e) Creditworthiness maintained
(c) A balanced financial structure (f) Ready to access internationalfor Grid Company financial markets
Project Components/Subcomponents Inputs: (cost for each component) (Components to Outputs)(a) grid investments facilities for (a) Grid Investments of US$493
the period 1999 through 2002: million Progress reports and disbursements Sustained govemrnmental and(b) technical assistance for: (b) Technical Assistance: US$9 million reports. borrower institutional support for
(i) establishment of the Natio- project components (Risk level:nal Grid System (NGS); Moderate)
(ii) environmental assessmentof grid investments andinstitutional development;and
(a) development of a three-year time-slice of TEAS's grid investments (transmission lines,substations and load dispatch facilities) for the period 1999 through 2002; and
(b) technical assistance for:
(i) establishment of the independent operation of the transmission grid system;
(ii) institutional development, including environmental analysis of grid investments;and
(iii) strengthening TEAS's capacity to borrow from the international markets.
Grid Investment Component - US$493 million
Genesis: Over the past 25 years, the Turkish power system has grown consistently at high ratesaveraging 9.6% per annum, as measured by the growth in peak demand for power. In the next five years,the peak demand is expected to grow at 8% per annum, continuing the trend of high growth rates. Tomeet this high level of demand TEAS has prepared, together with MENR, a least-cost generationexpansion plan which shows that the Turkish power system peak demand would be about 25,000 MW inthe year 2002.
To meet such peak loads, TEAS has prepared a Transmission Expansion Plan usingcomputerized modeling tools, which are state-of-the-art and industry standard. To prepare theTransmission Expansion Plan, TEAS, using a 10-year database of actual recorded loading conditions oneach bus in the system, apportions the forecast loading on each bus. Load flow studies are carried out fortwo specific condition - peak load (which occurs usually during late December at about 18:00 hours) andminimum load conditions (which occurs in May-June at about 02:00 hours). Given the high proportionof industrial consumption, minimum load is not less than 55% of peak load. System reliability andstability studies are also part of the transmission planning exercise.
Using such planning tools and criteria, TEAS has prepared a Transmission Core InvestmentProgram. A three-year time slice covering the years 1998 through 2001 (Bank fiscal years FY99 throughFY2001) will be financed partly by the proposed Bank loan. In addition, the proposed Project includesmodernization of the TEAS National Load Dispatch Center in Ankara (Golbasi) and the five regionaldispatch centers (Adapazari, Izmir, Golbasi, Keban and Carsamba); and a new regional load dispatchcenter near Istanbul Ikitelli. The Grid Investment Component includes the following subcomponents:
1. 380 kV Substations: Thirty-two 380-kV substations with a total transformer capacity of 15,800MVA would be installed. The proposed loan is expected to finance 14 of the above substationswith a total capacity of 4,950 MVA.
2. 380 kV Transmission Lines: Thirty-five sections of 380 kV transmission lines with a total lengthof 2,872 km would be installed under the proposed Project. The proposed loan would finance 18sections aggregating to 1,572 km.
Page 32
3. 154 kV GIS and Open Substations: Twenty-one 154 kV/33 kV GIS and conventional 154/33 kVsubstations with a total capacity of 2,900 MVA. The proposed loan is expected to finance 12substations, with a total capacity of 1,550 MVA.
4. 154 kV Transmission Lines: Nine sections of 154 kV (XLPE) transmission lines cables with atotal length of 528 km would be installed under the proposed Project. The proposed loan willfinance 5 sections or a total of 270 km of 154 kV cables and lines.
5. Load Dispatch and Automation Systems. This will involve modernization of the NationalDispatch Center (NDC) at Golbasi and five Regional Dispatch Centers (RDC) at Golbasi,Adapazari, Izmir, Keban and Carsamba); and installation of the new RDC at Thrace. It will alsoinclude other automation and information systems required by TEAS.
Environmental Analyses
In accordance with the Bank's Environmental Policy (OD 4.01: Environmental Assessment) a"Category B" rating for environmental analysis has been assigned to this project. There will be severalinvestments for new transmission line "spurs" within the system; and additional substations. Therefore,the environmental analyses required for the proposed project will be a series of "mini" environmentalassessments (mini EAs) for the new transmission lines and substations. The "mini EAs" will be to assesspotential impacts associated with the new construction activities planned under the project, and prepareenvironmental management plans (EMP) to mitigate these impacts and monitor the performance of themitigation. The project will not involve any resettlement in the areas where the new substations will bebuilt and transmission lines installed.
The Government of Turkey has a well established regulatory framework and procedures in placefor environmental impact assessment. Numerous subcomponents of the Grid investment component willbe implemented in strict accordance with environmental regulations, policies and procedures of both theGovernment of Turkey and the World Bank.
TEAS established an environmental department more than ten years ago. It is currently staffedwith professionals experienced in a number of environmental areas associated with the generation andtransmission of electric power. TEAS's practice is to utilize Turkish consultants for EA preparation.TEAS will maintain responsibility for EA quality assurance and control.
An informal review of the project components by TEAS and the Ministry of Environmentconcluded that some have no anticipated issues, most probably have a single modest issue, and a fewprobably have several modest issues to be addressed in the environmental analysis. Accordingly, theassociated level of environimental analysis for each component has been informally rated as simple,modest or complex. Terms of Reference for the three levels of environmental analysis are attached.Environmental analyses are normally carried by TEAS in the following manner:
* TEAS's own staff and engineers, who have a good knowledge of the environmentalsituation, carry out the preliminary routine survey in order to avoid sensitive areas.
* Based on such preliminary routing, TEAS ensures that detailed environmental analyses iscarried out under contracts let out for transmission lines and substations, thus avoidingduplication of survey, routing and spotting (lecating) of transmission towers/substations,which are required for both environmental analysis and construction of lines andsubstations.
* If any rerouting or redesign of grid investments is required as a result of environmentalanalysis, this is carried out also under the contract.
Page 33
TEAS will follow the above process for the grid investments under the proposed Project, but inaddition, to conform to the Bank's Environmental Standards, TEAS will also take the followingmeasures:
* The Bank approved Terms of Reference for Environmental analyses will be included in thebidding documents and contracts for grid investments;
* the contractor, who would be helped by environmental specialists, as part of his contractwould prepare the environmental analyses reports both according to the Bank'srequirements and GOT's laws and regulations;
* TEAS will ensure that the Environmental Management Plan, which will be developed aspart of the Environmental Analysis, is implemented; and
* TEAS may also carry out environmental analysis separately and before the relevant contractis let out.
This way of carrying out environmental analyses and implementing management plans issatisfactory to the Bank. Environmental analyses are to be received by the World Bank at the same timeall other project documentation is to be received. For those components subject to Turkish environmentalregulations, environmental documentation to be received must have official government approval. Inthose instances when the environmental analyses is to be carried out under the contract, the Bank'sprocurement clearances (approval of bidding document, approval of the contracts) would be subject toreceiving clearance by the Bank's environmental specialists/advisors. The only limitation is theinsufficiency of staff available in TEAS to maintain the environmental work schedule with theanticipated investment schedule. Therefore, TEAS will recruit external consultants (Turkish or Turkey-based) to assist them in completing the EA work program. During negotiations, TEAS agreed to preparethe environmental analyses for the grid investments under the project in a manner satisfactory to theBank and in accordance with an action plan agreed with the Bank; and implement the recommendationsof the environmental analyses in a manner satisfactory to the Bank (para. 7.03(g)).
The schedule of EA preparation for each of the project components, estimates of the level ofanalysis, the need for governmental approval, and EA preparation costs is attached (Attachment II).
Technical Assistance Component - US$9 Million
(i) Establishment of the Independent Operation of the Transmission Grid System
Implementation of the sector strategy and policy framework will impact significantly TEAS'sorganizational structure and functions. TEAS would tend to become a national transmission grid andload dispatch company (Grid company) as privatization transactions for thermal power plants arefinalized as per present plans, and hydroelectric plants are privatized as per future plans. Specifically,the following areas will be affected:
* Personnel. When the 11 thermal power stations are successfully transferred to the private sector,a large proportion of TEAS's staff would be transferred.
* Investments. TEAS's primary emphasis will shift to transmission grid and load dispatchinvestments.
Page 34
* Operations. TEAS main function will be grid operations and load dispatch. Furthermore, as thelegal changes are effected to implement the chosen policy of introducing competition, TEAS'sfunctions will need to evolve further from the present buyer/seller of bulk electricity to a"common carrier" of electricity; and the operator of the dispatch function and the electricitypool.
* Commercial relationships. TEAS will need to function according to detailed contracts. Also,TEAS will have to develop transmission pricing mechanisms to facilitate economic use of thenetwork; give proper locational signals for new plants; and ensure TEAS's own viability.
* Regulation. Once the legal changes are effected to establish the independent regulator inaccordance with chosen policy, TEAS will be regulated by this independent authority (asopposed to the present regulation by MENR) and would be issued system operator's license.
All of these are significant changes and are planned to be implemented in the next two to threeyears. MENR has authorized TEAS to prepare itself for these changes which will culminate in theestablishment of the independent operation of the transmission grid system. Accordingly, TEAS isundertaking the necessary preparatory work with the help of consultants (Deloitte & Touche), financedby a Japanese PHRD fund.
Establishment of the independent operation of the transmission grid system will comprise:
(a) separation, by December 31, 1998, of the generation business of TEAS from itstransmission and load dispatch functions (para. 7.02(a)). This will involve: (i) a decreeadopted by GOT providing for the legal separation and establishment of the grid companyand generation company or companies; and (ii) satisfactory progress towards making thegrid company functional. Assessment of satisfactory progress would include: (i)identification of the assets and liabilities of the generation company and grid company; (ii)identification of personnel that would belong to each of these companies; and (iii) an energypurchase/sale contract between the grid company and generation company.
(b) implementation of a Transmission System Operations (TSO) framework by September 30,2000, comprising : (i) arrangements for the operation of the electricity market in Turkey;(ii) the contractual matrix to be entered by TEAS as the national transmission gridcompany; (iii) issuance of a license for the operation of the transmission grid and loaddispatch system; and (iv) the Grid Code defining the rights and obligations of all the usersof the grid, including TEAS (para. 7.02(b));
(c) implementation of a revised Bulk Electricity Supply Tariff (BEST) regime by December31, 1999, comprising: (i) principles of transmission pricing; and (ii) mechanisms forapplication of transmission prices (para. 7.02(c)); and
(d) deployment, by January 1, 2000, of a Business Plan for TEAS as the national transmissiongrid and load dispatch company, integrating the TSO framework, BEST regime, and theinstitutional aspects of independent operation of the transmission grid and load dispatchsystem (para. 7.02(d)).
The implementation of the independent operation of the transmission grid system is a jointresponsibility of TEAS and the Government, in particular MENR. Accordingly, a matrix showing thespecific responsibilities of TEAS and those of MENR/GOT was discussed, agreed and is attached(Attachment III).
TEAS and GOT will need technical assistance to help them carry out the above tasks. Thenecessary technical assistance would be provided under the loan.
Page 35
(ii) Institutional Development
(a) Training: Three different types of training programs are planned: (i) training programsspecifically designed for TEAS and meant for a large portion of TEAS staff; (ii) relevantTEAS staff will be sent to courses provided by renowned universities and trainingestablishments and familiarization visits to overseas grid companies; and (iii) seminars andworkshops by individual trainers to train senior TEAS staff on strategic planning;performance of TEAS in a competitive electricity market, etc.
(b) Institutional/Financial and MIS: This is for adapting the existing automated MISsubsystems to the changing organizational requirements. Help will be needed for changingthe Corporate Planning System to apply to a Grid Company; manage power purchasecontracts and auxiliary services (management of system reserves; frequency control, etc.)which will be procured on contract basis by TEAS after separation of the grid fromgeneration.
(iii) TEAS Borrowing from International Markets
The proposed Project includes technical assistance to prepare TEAS to borrow from theinternational markets to mobilize about US$113 million in the next 24 to 36 months. It is expected thatsuch mobilization could be under a proposed Bank Partial Credit Guarantee instrument through a bondissue or a syndicated loan from commercial banks. To borrow from the international markets, TEASneeds the assistance of investment banking/financial advisors who will help them to: prepare anInformation Memorandum; carry out preliminary market tests; obtain a credit rating from one or more ofthe well known international credit rating agencies; undertake road shows; and conclude the transaction.An important prerequisite for TEAS's ability to borrow from international markets is an unqualifiedaudit certification of TEAS's financial accounts. This will also be pursued under the proposed project,but will be done separately under the audit contract (para 5.28). The expected timing of the mobilizationof the debt from the market is towards the end of year 2000. During negotiations, TEAS agreed toemploy financial advisers, under terms of reference satisfactory to the Bank, to assist TEAS in obtainingdebt financing from the international financial markets. These advisers are to be employed at least ninemonths prior to the targeted date for obtaining the debt financing (para. 7.03(h)).
A Partial Credit Guarantee would be a stand-alone operation requiring approval of the Bank'sManagement and Executive Directors.
Page 36
Attachment I
Annex 2
Environmental Analysis - Terms of Reference
Background
The Government of Turkey is taking a two pronged approach for the development of its powersector. One element in this development is aimed at revamping its policy and legaVregulatory frameworkto attract private sector investment, and the other element is aimed at privatizing the existing powerinfrastructure.
To implement this strategy the Govemment is planning a number of actions, among them will beseparating the national transmission grid and load dispatching centers into a separate Grid Company, andstrengthening and expanding this transmission system.S
The World Bank has prepared a project to support the Government with this strategy. Consistentwith this support and World Bank environmental policy (OD 4.01, Environmental Assessment) a"Category B" rating for environmental analysis has been assigned to this project, because mostinvestments would be directed at limited expansion of transmission lines and addition of somesubstations.
In order to satisfy environmental requirements of both the Government of Turkey and the WorldBank, the environmental analysis required for the proposed project will consist of a series ofenvironmental analyses for components having: no anticipated issues (simple), a single modest issue(modest), and possibly several modest issues (complex). Terms of reference for the different levels ofenvironmental analysis are presented below.
Manner of Study Conduct
It is the World Banks' view that TEAS has developed capability to perform the work programdetailed below. The only limitation might be insufficient staff available to maintain the environmentalwork schedule consistent with the anticipated investment schedule. TEAS may then wish to choosedomestic extemal consultants to assist them in completing the work program.
Objective: The purpose of the EA will be to assess potential environmental impacts associatedwith the components planned under the project, and prepare an environmental management plan (EMP)to mitigate these impacts and monitor the performance of the mitigation.
Scope of Work: The program will consist of the following four tasks:
Task I Baseline data (as necessary)Task 2 Public consultationTask 3 Identification of key environmental issuesTask 4 EA Preparation
Transmission system is defined in the current context to include power transmission lines, switching stations,and any transformer substations.
Page 37
Task 1 Baseline data
Baseline data should include land use patterns in the physical area to be used and/or impacted bythe proposed component. It should detail the nature of the socioeconomic activities (agricultural,industrial, commercial, residential, infrastructural-schools, hospitals, museums, etc.) . Information onareas of special archaeological, cultural, religious interest and/or those areas protected by law (parks,nature reserves, forests etc.) should be included as well as the presence of rare and endangered (orotherwise protected) species (flora and fauna). TEAS environmental staff are expected to conduct a sitevisit at each of the component areas.
Task 2 Public consultation
At each of the component areas (or if several components occur in the same general area) apublic consultative process should be conducted in strict accordance with the Turkish and/or World Bankrequirements for public participation.
Careful attention must be paid to identification of stakeholders, and the issues of environment,public health and safety which they may raise. These issues should be considered in the EA (see Task 3).
For the World Bank, it is required to include in the EA: (1) who was invited, (2) who attended,and (3) a summary of key issues raised (or meeting minutes).
Task 3 Identification of key environmental issues
For each component area issues should be identified and analyzed for the potential impact. Inaddition to the issues raised during the public consultation, the World Bank Environmental AssessmentSourcebook (Technical Paper 154) should be consulted. It is the responsibility of TEAS to identify allsignificant environmental issues associated with the construction and operation of each of thecomponents. Typical issues normally considered important include:
Transmission line rights of way and substation/switchyard impacts on: landuse, agriculture, forest, wetlandsResettlement and/or loss of productive landCompensation for loss of productive landHabitat fragmentation and invasion of exotic speciesAccess road in remote areas: increase in hunting, exploitation of forestresources, induced developmentClearing and clearing operations (use of pesticides)Visual impactErosion during constructionDestruction of agricultural productivity with construction equipmentmovement and placementDisruption of aquatic ecosystems at river crossingsPublic health effects from electric fields and public safety from highvoltagesInterference with communications signalsAircraft hazardsNoise (corona discharge)Utilization of PCBs (prohibited in World Bank projects)
Page 38
Task 4 EA preparation
TEAS should prepare EAs in accordance with the following formats, depending upon thedetermined level of environmental analysis required:
Format 1-Complex(a) Executive Summary(b) Policy, Legal and Administrative Framework
standard description to be identical for all projects(c) Project Technical Description(d) Baseline Data(e) Environmental Issues(f) Alternatives(g) Environmental Management Plan
Mitigating MeasuresMonitoring Program
(h) Record of Public Meeting6
Format 2-Modest(a) Executive Summary(b) Applicable Regulations and Standards(c) Project Technical Description(d) Baseline Data-optional, only if important, and only data pertinent
to the issues should be presented(e) Environmental Issues(f) Environmental Management Plan
Mitigating MeasuresMonitoring Program
(g) Record of Public Meeting2
Format 3-Simple(a) Executive Summary(b) Project Technical Description(c) Environmental Issues(d) Environmental Management Plan
Mitigating MeasuresMonitoring Program
(e) Record of Public Meeting2
For components only requiring World Bank approval, public consultations other than formal meetings may beused provided procedures are in strict accordance witi World Bank policies.
Page 39
Attachment IIAnnex 2
Environmental Analysis Schedule
Report to GovernmentWorld Bank EA Level Approval of Start of EA Estimated Cost
(M/Y) of Effort EA Required? Process (M/Y) Comments (000 USD)
-Substation (380 Kv) IYildiztepe 5/99 Simple No 4/98 10.00
Transmission LinesDenizli-Varsak 11/98 Complex No 7/98 _ 50.00
S. Urfa-Kiziltepe Includes11/98 Moderate No 8/98 Kiziltepe 40.00
SubstationBirecik- G. 12/98 Complex Yes 5/98 50.00
Antep _
Soma-Aliaga 12/98 Complex Yes 5/98 50.00(Seydisehir- Includes Afyon
Seyitomer)-Afyon 12/98 Simple No 11/98 Substation 10.00(Sincan-Kayabasi)- Includes
Baglum 12/98 Simple No 11/98 Baglum 10.00Substation
Kars-Georgia Includes Karsand Kars- Substation
Horasan (Prelim SS info5/99 Moderate Yes 11/98 to WB by 80.00
LA, Schedule 5, Separation of the generation business of TEAS Undertake the necessary preparatory steps, Issue the necessarySection 3(a) from its transmission and load dispatch functions. such as identifying the assets and liabilities decrees and decisions. o
GA, Section 3.02 and personnel matters for such separation.
LA, Schedule 5, Implementation of a Transmission System Undertake the necessary preparatory activities Issue the necessarySection 3(b) Operations (TSO) framework, comprising: (i) such as: recommending the arrangements for decisions to put into
GA, Section 3.02 arrangement for the operation of the electricity the operation of the electricity market in effect all of the above.market in Turkey; (ii) the contractual matrix that Turkey; preparing the draft contracts to be ttTEAS will have to enter into as the grid company; entered into by the Borrower; preparing a(iii) a license for operating the transmission grid draft license to be issued to the Borrower for _and load dispatch system; and (iv) the Grid Code the operation of the transmission grid system;that will define rights and obligations of all the and preparing the draft Grid Code defining theusers of the grid, including TEAS. rights and obligations of the users of the O x
transmission grid, including those of theBorrower.
LA, Schedule 5, Implementation of a revised Bulk Electricity Undertake the necessary preparation such as Issue the necessary CSection 3(c) Supply Tariff (BEST) regime, comprising: (i) defining the BEST regime and its application decisions to put into t
GA, Section 3.02 principles of transmission pricing; and (ii) mechanisms. effect the BEST Regime.mechanisms for application of transmission prices. F
LA, Schedule 5, Deployment, of a Business Plan for TEAS as the Undertake the preparatory steps and deploy No action required.Section 3(d) Grid company, which will integrate the TSO the Business Plan with a decision of the O
GA, Section 3.02 framework, BEST regime, and institutional aspects Borrowers Board of Directors.of the independent operation of the grid system. __
0~~
Page 41
Annex 3
Estimated Project Costs
Table A: Project Costs Summary
Project Component Local Foreign Total-UR $ million-
The total costs of the proposed Project will amount to US$502 million, as summarized in TableA, including physical and price contingencies. Interest During Construction (IDC) is not included sinceTEAS will pay and expense IDC. The cost estimates for the grid investment components are based onTEAS's experience with the recent supply and installation contracts for similar equipment. Overallphysical contingencies of 10 percent are added except for: (a) the load dispatch system component forwhich about 15 percent physical contingencies are added; and (b) technical assistance component forwhich no physical contingencies are considered. Price contingencies of 2.5, 3.1, 2.9, 2.8, 2.7, 2.6 and 2.6percent for the years 1998, 1999, 2000, 2001, 2002, 2003 and 2004, respectively, have been added to thebase cost based on the Bank estimates of the annual inflation rate. It is estimated that about 560 foreignexpert months and 750 local expert months are required for the consultancy services included in thetechnical assistance components, which also includes certain hardware and software estimated at $6.0million. The estimates do not include duties and taxes on the contracts to be funded by the Bank's loan,since they are exempt from taxes and duties.
Page 42
Annex 4
Procurement Aspects
General
1. All Bank-financed procurement will be in accordance with the Bank's guidelines for"Procurement under IBRD Loans and IDA Credits (January 1995 as revised in January and August 1996,and September 1997)". Procurement of consultancy services under the technical assistance componentwould follow the Bank's Guidelines for "Selection and Employment of Consultants by World BankBorrowers (January 1997 as revised in September 1997)".
2. The GPN for the project has been published in the Development Business issue No. 481 ofFebruary 28, 1998. TEAS would use Development Business for publication of Specific ProcurementNotices for individual bid packages, in addition to other sources of notifications according to the Bank'sprocurement guidelines.
3. TEAS is an experienced borrower of the Bank and has adequate experience with the Bank'sprocurement procedures. However, due to the high staff turnover, TEAS needs both procurement anddisbursement workshops.
Supply and Installation of Plant and Equipment under Grid Investment Components
4. Except for the provision of US$1.0 million for international shopping, provided under the"other" column, for the grid investment components, TEAS would follow: (a) in case of the supply andinstallation of the transmission lines and substations, the November 1997 version of the "StandardBidding Documents for the Supply and Installation of Plant and equipment", and (b) in case of thesupply and installation of the load dispatch and automated equipment, the March 1996 draft version ofthe "Standard Bidding Documents for Procurement of Information Systems (Equipment, Software andServices)". Further in case of supply and installation of the equipment for modernization of the NationalLoad Dispatch Center (NDC) and Regional Load Dispatch Centers (RDC's), TEAS would follow thetwo stage bidding procedure (as stipulated in the Standard Bidding Document) which is appropriate forthe complex load dispatch equipment basically comprising computer and telecommunication systemsand subject to rapid technological advances.
Consultants' Services under the Technical Assistance Component
5. Table B provides the details of the procurement of consultancy services (costing about US$16.95million) under the Technical Assistance Component of the Project. The procurement of consultancyservices would be according to the: (i) September 1997 version of the Bank's Guidelines for "Selectionand Employment of Consultants by World Bank Borrowers"; and (ii) the July 1997 version of the"Standard Request for Proposal for Selection of Consultants". TEAS would follow the Quality and Cost-Based Selection (QCBS) procedure for selection of corlsultants for (a) Implementation of the NationalGrid System; (b) Access to International Debt Markets; (c) various environmental impact analysisstudies each costing from about US$10,000 to US$120,000 as given in detail in Annex 2, attachment 2,Environmental Analysis Schedule, and (d) Management Information System. In case of selection ofindividual consultants providing training for TEAS staff, the (i) Quality-Based Selection (QBS); (ii)Selection under Fixed Budget (SFB); (iii) selection based on Consultant's Qualifications (CQ) and (iv)selection of Individual Consultants (shown under "other" in the Table B, Annex 4) procedures would be
Page 43
used depending on the type of training needs of TEAS. The amounts under each of the four proceduresto be employed for training are given in Table B, Annex 4.
International Shopping
5. International shopping, according to the Bank's Procurement Guidelines, would be followed forprocurement of small value items, such as instruments, relays and testing equipment that may be requiredfor the 380-kV substation bid packages. International shopping would involve obtaining at least threeprice offers from at least two eligible source countries and would be limited to US$70,000 per contract orUS$1.0 million in aggregate.
Contracts Funded by TEAS
6. For this purposes, TEAS would follow the procedure laid down in para. 3.14, page 36 of theBank's procurement guidelines which stipulates that "the goods and works shall be procured with dueattention to economy and efficiency".
Bank's Review Procedure
8. All bidding packages for the supply or supply and installation of material and goods estimated tocost US$1.0 million or more would be subject to the Bank's prior review of the bid packages. Theselimits would result in prior review of 100 percent of the ICB bid packages. Other contracts following theBank's International shopping procedure for supply of materials and goods would be subject to theBank's ex-post review after contract award.
9. TEAS would submit the short list of consultants and all documents relating to the procurement ofBank-financed consultancy services for the Bank's prior review.
Procurement Timetable
10. Table C gives the procurement timetable for the Bank funded contracts under Table A.
Page 44
Annex 4Table A: Project Costs by Procurement Arrangements
(in US$Million Equivalent)Procurement Method
Expenditure Category ICB Other N.B.F. Total Cost380 kV Substations1. Works2. Goods (Supply and Installation)a. 380 kV Substation Bid Package No. 1 57.94 1.00 5.94
(26.40) - (26.40)d. 380 kV Substation to be commissioned by 2004 38.93 38.93e. 380 kV Lines to be commissioned in 2004 97.20 97.20154 kV GIS/Open Type Substations1. Works 97.20 97.202. Goods (Supply and Installation)a. 154 kV/33 kV Open Type S/S Bid Package No. 1 46.18 - 46.18
(39.26) - (39.26)b. 154 kV/SS kV GIS/SS to be commissioned by 2000-01 6.98 6.98154 kV XLPE Cables/Transmission Lines1. Works2. Goods (Supply and Installation)a. 154 kV Transmission Line Bid Package No. 1 16.54 _ 16.54
(14.06) - (14.06)b. 154 kV Transmission Lines to be comm. by 1999/2000 17.23 17.23Load Dispatch Centers and Automation1. Works (Ikitelli Load Dispatch Center Building) - - -
Notes: Amounts in parenthesis indicates Bank Funding. ICB= International Competitive Bidding;N.B.F = Non-Bank Funding. Includes price and physical contingencies
A. FirmsEstablishment of Independent 7.7 7.7Operation of Transmission GridSystem__ _ _ _ _ ___ _ _ __ _ _ _ _
Access to Intl. Fin. Markets 5.7 5.7Environmental Analyses 1.1 1.1Management Information Systems 1.4 1.4B. IndividualsTraining 0.5 0.4 0.1 0.2 1.1
Total 15.9 0.5 0.3 0.2 17.0
Note: QCBS - Quality- and Cost-Based SelectionQBS - Quality-based SelectionSFB - Selection under a Fixed BudgetLCS - Least-Cost SelectionCQ - Selection Based on Consultants' QualificationsOther - Selection of individual consultants (per Section V of Consultants
Guidelines), Commercial Practices, etc.N.B.F. - Not Bank-financed.
I Includes certain expenditures on systems, hardware and software, which will be disbursed under thegoods category, and price contingencies.
Page 46
Annex 4
Table C: Procurement Timetable
Contract Bank Procure- Bid ContractBid Amount Funding ment Bank Invi- Contract Com-
Package (US$ M) (US$ M) Method Review tation Signing pletion380 kV Substations X
Access to Int. Debt MarketsNotes: The contract completion includes the warranty period of one year after commissioning of the equipment. T.B.D.= To beDetermined; QCBS = Quality and Cost-Based Selection; ICB = International Competitive Bidding.
These consist in various packages to be procured throughout the project period.
Page 47
Annex 5
Disbursement Arrangements
Disbursements
1. The proceeds of the loan would be disbursed over six years (FY99 - FY04) on the followingbasis:
(a) 85 percent of the contract amount for the supply and installation bid packages for thetransmission lines, substation;
(b) 100 percent of the foreign expenditure for the Load Dispatch System components bidpackage; and
(c) 100% of the foreign expenditures of the consultancy services under the technicalassistance component.
The estimated disbursement schedule for the Bank Loan is given in Table C and summarized in the TableA below. The closing date for the proposed Loan would be December 31, 2003, i.e., six months after theestimated completion of the Project.
Table A: Estimated Disbursement Schedule Summary
FY99 TFY2000 FY01 FY02 FY03 FY04
During FY 28 65 89 64 22 2
Cumulative 28 93 182 246 268 270
Special Account (SA), Statement of Expenditure (SOE) and Retroactive Financing
2. In order to facilitate disbursement of the Bank loan, TEAS has agreed to open and maintain aSpecial Deposit Account separately with the Central Bank of Turkey or other acceptable commercialbank in Turkey, on terms and conditions satisfactory to the Bank. The authorized allocation deposit inthe Special Account (SA) would be US$20 million representing the estimated average expenditures for aquarter for the items financed by the Bank. At the start of the Project, the SA deposit will be limited toUS$10 million and the remaining portion of the authorized allocation could be requested by TEAS onlyafter the cumulative disbursements reach a level of US$27 million. The applications for thereplenishment of SA would be submitted by TEAS monthly or when 20 percent of the initial deposit hasbeen utilized, whichever occurs earlier.
3. Disbursements for contracts valued at US$250,000 or less, will be made on the basis ofStatements of Expenditures (SOEs). The Bank will replenish the Special Account on the basis of themonthly statements of actual expenses. Supporting documentation will be retained by TEAS and bemade available for review by Bank supervision missions and by external auditors. All withdrawal
Page 48
applications will be fully documented. The SA and the project accounts would be audited and the auditcertificate would be furnished within six months of the end of the financial year. The audit report wouldinclude a statement verifying that the amounts disbursed against the SOEs have been used for thepurpose they were intended.
4. In order to assist TEAS in contract awards for the urgently needed transmission lines andsubstations, the loan would permit retroactive financing of about US$10 million which is well below thepermissible limit of 10 percent of the loan amount. The retroactive financing would apply for contractawards following ICB procedures according to the Bank's procurement guidelines and payments made inthe 12 month-period preceding the date of signing of the proposed loan.
Allocation of Loan Proceeds
5. The table below gives the allocation of loan proceeds by category. The bid packages to befunded by the Bank as given in Table B are based on the proposal that the Bank would fund 100 percentof foreign expenditures and TEAS would fund the local currency expenditures for the bid packages.With regard to Environmental Analyses and Management Information Systems and other automationsystems, hardware and software purchases will be provided by TEAS under consultants services contract.
Table B: Allocation of Loan Proceeds
Expenditure Category Amount in Financing PercentageUS$Million
Goods (Including associated works and services) for 236.0 (a) 100% of foreign expenditures, 100% of localGrid Investment Component expenditures (ex-factory cost) and 85% of other
items procured locally with respect to contracts forgoods only; and (b) 85% with respect to turn-keycontracts, providing for the supply of goods inaddition to associated works and services
Consultancy Services for Technical Assistance 7.0 100%Component
Unallocated 27.0Total 270.0
Project Accounts and Audit
6. TEAS has the necessary financial management capability to provide the Bank with annual andtimely information about project resources and expenditures. The Bank has been instrumental to TEASin acquiring this capability under the ongoing project (Loan 3345-TU) by helping them implement amodem accounting system that complies with Turkish public sector accounting regulations, as well asInternational Accounting Standards. In addition, TEAS, with the help of consultants, has designed andimplemented a "Project Expenditures Tracking System" (PETS), which is a computerized tool to accountfor project expenditures. PETS also links up with the General Ledger and Debt Management systems ofTEAS.
7. TEAS has been audited by internationally reputable private external auditors and will continue tobe audited by such auditors. For the purpose of this Project, TEAS has agreed to have the SpecialAccounts and the project accounts audited by such external auditors and submit to the Bank, by June 30of each year, the audit report for the previous year.
Page 49
Annex 5
Table C: Disbursements by FY of Bank Loan by Bid Packages Funded by the Bank(Amounts in US$ Million)
Total Capital Investments 185 363 504 778 1032 663 646 599
Debt Service
Interest 354 426 128 116 117 110 108
Repayment 803 416 343 338 383 252 209
Total Debt Service 623 1157 842 471 454 499 362 318
Taxes 19 19 20 21 23
Working Capital
Cash 174 -86 69 43 46 73 81
Other Than Cash 351 -490 -211 92 56 23 104 101Total Working Capital 351 -316 -297 160 99 69 177 182Other Long-term assets 2 2 2 2 2Total Uses Of Funds 1159 1205 1049 1429 1607 1254 1208 1123
Average 3-year Investment 351 548 771 825 780 636 622
Internal Cash Generation Ratio 76% 11% 38% 56% 35% 51% 65%Debt Service Coverage Ratio (times) 0.8 0.8 1.8 2.1 1.6 2.2 2.6
Page 54
Annex 7
Assumptions about Financial Statements
Income Statement
Electricity Generation. Generation is based on growing demand of 8% per year up to 2005.Generation includes TEAS's own generation as well as power purchased from BOTs, BOs, andautoproducers. Generation purchased from BOTs and BOs is in accordance with the Energy SalesAgreements (ESAs) signed by TEAS. Generation from plants being offered as TOORs are included inTEAS's own generation. It is further assumed that power generation in Turkey would be adequate tomeet demand except for 1998 when about 3500 GWh would have to be imported.
Electricity Tariffs. Tariffs are at the levels required by TEAS to achieve the financialperformance criteria.
Labor. Labor costs include a 50% fixed component and a 50% variable component. The fixedcomponent is adjusted yearly to account for inflation while the variable component varies with the grossgeneration at the previous year's unit cost of labor.
Depreciation. Calculated as 6% of average gross fixed assets, based on the average depreciationrate experienced in the past.
Other Operating Costs. These are assumed to have a 25% fixed component and a 75% variablecomponent. The fixed component is adjusted yearly to account for inflation while the variablecomponent varies with the gross generation at the previous year's unit operating costs.
Purchased Price of Energy. The price of energy purchased from BOTs and BOs is in accordancewith the ESAs. In cases where no ESAs are signed, the average price for all BOTs and all BOs forthermal and hydro plants are assumed to be as follows:
Average Price of Purchased Energy (cents/kWh)1998 1999 2000 2001 2002
ThermalBOT 7.6 8.6 8.6 8.6 8.6BO 4.9 4.9
Hydro__ _ _ _ _ __ _ _
BOT 7.6 8.6 8.6 6.8 6.5
Fuel Prices. For existing plants fuel costs are maintained in line with the international inflation.For new plants, the fuel price of the most efficient plant is used.
Balance Sht
Cash. Cash represents six weeks of cash operating costs.
Receivables. Receivables represent 45 days of sales.
Page 55
Inventories. Inventories include 0.3% of fixed assets plus one month of fuel supply.
Other Current Assets. These are assumed to increase by about 2% yearly.
Fixed Assets Formation. Generation investments are assumed to take on average four years to becompleted. Transmission investments are assumed to take on average two years to complete.Furthermore, it is assumed that the ratio of investments in generation and transmission is 3:1.
Accounts Payable to Suppliers represent two months of fuel costs.
Accounts Payable to Contractors represent two months of total investments.
Other Current Liabilities - are assumed to increase at the rate of 3% per year.
Sources and Uses of Funds
Investments. TEAS's investments in generation are assumed to be limited to ongoing projects,emergency-type generation projects and those projects where private sector does not show keen interest.
New Loans. Terms for new loans are assumed as follows: (a) for the Word Bank, interest rateof 6%, 4-year grace period, 13-year repayment; (b) for other loans, two-year grace period at 8% perannum with a 10-year repayment period.
Debt-Service includes: (a) existing loans that are fully disbursed, amounting to US$1385million, at an interest rate of about 7.7% and a repayment period of 11 years; (b) existing loans that arestill disbursing amounting to US$855 million, at an interest rate of about 6.3% and a repayment period of9 years; and (c) all new loans.
* All project costs are calculated in 1997 prices; technical assistance costs, transfer payments and pricecontingencies have been excluded.
* There are no taxes and duties applied.* All costs incurred prior to 1997 (i.e. sunk costs) have beer. excluded.
2. Operating Costs
* O&M costs are calculated as 0.067 US cents/kWh of incremental sales.
3. Benefits
* Benefits are based on incremental electricity transmitted through the Grid.* Revenues from transmission of the incremental electricity are estimated using 0.358 US cents/kWh
as the incremental transmission price. (Based on costs and below the long-run marginal cost oftransmission of 0.54UScents/kWh).
4. Sensitivity Analysis
Two scenarios were considered:* Case I: commissioning of Gebze natural gas combined cycle plant were to be delayed by one
year from 2001 to 2002.
* Case II: delayed transmission investments resulting in links not being established with theGebze natural gas combined cycle plant. A penalty corresponding to amount specified intake-or-pay contract (7358 GWh) is assumed and added to the investment costs for 2001.
5. Switching Value.
Under the following adverse conditions, the PV of net benefits would switch to negative:
* Incremental electricity transmitted was reduced by 38%.
* or the unit revenue of electricity transmitted was reduced to 0.22 US cents/kWh.
Page 58
Annex 9
Project Processing Budget and Schedule
PlannedA. Project Budget (US$000) (At final PCD stage) ActuaITotal Preparation Budget: US$288.1Cost to Date: US$38.8B. Project Schedule Planned Actual
(At final PCD stage)
Time taken to prepare the project (months)First Bank mission (identification) 10/96 10/96Appraisal mission departure 03/15/98 03/09/98Negotiations 05/28/98 05/04/98Planned Date of Effectiveness 09/98 /_/19
Prepared by: Turkish Electricity Generation and Transmission CorporationMinistry of Energy and Natural Resources
Preparation assistance: Japan PHRD Funds (US$765,000)IBRD Loan (3345-TU) (US$500,000)
Bank staff who worked on the project included:
Name Specialty| ~~~~~Staff
Raghuveer Sharma Program Team LeaderYolaine Joseph-Lucas Financial Analyst
Bernard Baratz Principal Environment SpecialistBarbara Santos Sr. Counsel
Rohit Mehta Sr. Disbursement OfficerGigi Canlas Team Assistant
ConsultantsKashinath Sheorey Power Engineer/Procurement Specialist
Antanasie Kocic Economist/System PlannerDavid Hepburn Power Engineer
Annex tOa
Status of Bank Group Operations in TurkeyIBRD Loans and IDA Credits in the Operations Portfolio
Difference Bet.
Original Amount in US$ Millions expected and
Loan or Fiscal actual disburse. a/
Project ID Credit No. Year Borrower Purpose I lti
~~~~~~~~~~~~~~~~~IBRD |IDA Cancellations |Undisbursed Orig From Rev'd
Number of Closed Loans/credits: 202Active LoansTR-PE-9072 IBRD42350 1998 REP. OF TURKEY PRIV. OF IRRIGATION 20.00 0.00 0.00 20.00 .80 0.00
TR-PE-45073 IBRD40890 1997 GOVERNMENT OF TURKEY OIL PIPELINE ENG. 5.00 0.00 0.00 4.00 2.09 0.00
TR-PE-9095 IBRD42010 1997 REPUBLIC OF TURKEY PRIM HEALTH CARE SER 14.50 0.00 0.00 14.50 1.90 0.00
TR-PE-35759 IBRD39420 1996 GOVERNMENT OF TURKEY PUBLIC FINAN. MGT. 62.00 0.00 0.00 60.05 19.35 17.95
TR-PE-38091 IBRD4048A 1996 GOVERNMENT OF TURKEY ROAD IMPR. & SAFETY 150.00 0.00 0.00 141.71 9.04 0.00
TR-PE-38091 IBRD40490 1996 GOVERNMENT OF TURKEY ROAD IMPR. & SAFETY 100.00 0.00 0.00 57.39 9.04 0.00
TR-PE-9076 IBRD3802A 1995 GOVERNMENT HEALTH 11 136.17 0.00 0.00 120.65 64.52 0.00
TR-PE-9093 IBRD38936 1995 ANTALYA WATER SUPPLY AND ANTALYA WATER SUPPLY 100.00 0.00 0.00 89.56 15.07 0.00
TR-PE-8974 IBRD3177S 1990 REPUBLIC OF TURKEY AG.EXTN. II 40.50 0.00 0.00 1.40 13.39 .41
TR-PE-9029 IBRD3192A 1990 GOVERNMENT OF TURKEY NATIONAL EDUCATION D 57.28 0.00 0.00 52.79 53.05 0.00
TR-PE-9029 IBRD3192S 1990 GOVERNMENT OF TURKEY NATIONAL EDUCATION D 17.88 0.00 0.00 .22 53.05 0.00
TR-PE-9061 IBRD3151A 1990 ANKARA WS&S GEN. DIRECTOR ANKARA SEWERAGE 25.13 0.00 0.00 11.06 75.96 3.69
TR-PE-9030 IBRD3057A 1989 GOVERNMENT HEALTH I 26.77 0.00 0.00 12.57 13.32 0.00
TR-PE-8988 IBRD2922S 1988 GOVT. OF TURKEY IND. TRAIN. II 71.25 0.00 0.00 4.12 4.15 0.00
Total 1,425.81 0.00 47.25 993.37 882.80 47.29
Active Loans Closed Loans Total
Total Disbursed (IBRD and IDA): 366.07 9,884.86 10,250.93
of which has been repaid: 9.40 6,790.83 6,800.23
Total now held by IBRD and IDA: 1,369.15 3,108.17 4,477.32
Amount sold : 0.00 3.55 3.55
Of which repaid : 0.00 3.55 3.55
Total Undisbursed : 993.37 12.54 1,005.91
a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system will be used (HS = highly
Satisfactory, S = satisfactory, U = unsatisfactory, HU = highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.
Note: Disbursement data is updated at the end of the first week of the month.
Page 60
Annex lObSTATEMENT OF IFC's
Committed and Disbursed Portfolio as of31-Jan-98(In US Dollar Millions)
Committed DisbursedIFC IFC
FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic0/97 Rant Leasing 4.65 0.00 0.00 0.00 4.65 0.00 0.00 0.00
1998 ALTERNATIF BANK 10.00 0.00 5.00 25.001998 BANDIRMA H. P. 9.00 0.00 0.00 15.501996 CAYELI EXPANSION 15.00 0.00 0.00 0.001995 ENTEK - KOC 25.00 0.00 0.00 55.001997 KORFEZBNK BLINC 0.00 0.00 0.00 5.001998 PINAR ET III 11.00 0.00 0.00 0.001998 SLFF FINANS 5.00 0.00 0.00 0.001998 SLFF-DEMIR 5.00 0.00 0.00 0.001998 SLFF-GARANTI 5.00 0.00 0.00 0.001998 SLFF-YKL 5.00 0.00 0.00 0.001998 VIKING PAPER 12.01 0.00 0.00 0.00
Total Pending Commitment: 102.01 0.00 5.00 100.50
Page 61
Annex I 1Turkey at a Glance
3/17/98
Europe & Lower-POVERTY and SOCIAL Central middle-
Turkey Asia Income Development diamond'
Population mid-1996 (millions) 62.7 479 1,125GNP per capita 1996 (US$) 2,935 2,180 1,750 Life expectancyGNP 1996 (billions US$) 184.6 1,043 1,967
Average annual growth, 1990-96
Population (%/6) 1.7 0.3 1.4Labor force (Y.) 2.1 0.5 1.8 GNP
per FMost recent estimate (latest year available since 1989) capita
Poverty: headcount index (% of population)Urban population (% of total population) 69 65 56Life expectancy at birth (years) 67 68 67Infant mortality (per 1,000 live births) 48 26 41 Access to safe waterChild malnutrition (%A of children under 5)Access to safe water (% of population) 92Illiteracy (% of population age 15+) 18 TurkeyGross primary enrollment (% of school-age population) 97 97 104 Turkey
Male 101 97 105 Lower-middleincoe groupFemale 94 97 101
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1975 1985 1995 1996 r =-GDP (billions US$) 46.7 67.2 169.3 182.1 EGross domestic investment/GDP 17.9 16.5 28.2 26.4 !Exports of goods & non factor services/GDP 4.2 15.9 22.0 23.9 Openness of economyGross domestic savings/GDP 11.4 13.4 12.5 8.8Gross national savings/GDP 17.0 17.1 16.8 13.0
Current accunt balance/GOP -3.5 -1.5 -1.4 -2.6Interest payments/GDP 0.3 2.0 2.5 2.3 Savings 4 Total debt/GDP 10.8 38.7 43.6 43.8Total debt service/exports 11.3 35.0 31.3 25.7Present value of debtGDP .. 40.8Present value of debt/exports .. .. 164.8 .. Indebtedness
Note: 1996 data are preliminary estimates. Figures in italics are for years other than those specified.The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.
Fuel and energy .. 4,812 6,089 o0o+lCapital goods . .. 11,437 14,969 01 ,11
Export price index (1987=100) .. .. 121 115 so 91 92 93 94 95 96Importpriceindex(1987=100) .. .. 116 116 8Export ImportsTerms of trade (1987=100) .. ,. 104 99
BALANCE of PAYMENTS1975 1985 1995 1996
(millions US$)Exports of goods and services 2,018 11,119 36,581 42,496 Current account balance to GDP ratio (%)Imports of goods and services 4,979 12,661 40,601 49,070 4Resource balance -2,961 -1,542 4,020 -8,574
2.Net income -123 -1,455 -2,815 -2,639Net current transfers 1,437 1,984 4,496 4,447
Current account balance, 91before official capital transfers -1,647 -1,013 -2,339 4,766
Financing items (net) 970 1,137 6,997 9,311Changes in net reserves 677 -124 -4,658 4,545 -
Development Economics 3117/98'Non-financial Public Sector
Page 63
Annex 12
PROPOSED NATIONAL TRANSMISSION GRID
Documents in the Project File*
A. Project Implementation Plan
B. Bank Staff Assessments- Least-cost Program- Detailed Project Costs- Detailed Project Description- Financial Analysis- Switching Value Analysis- Sample EA Report of a Transmission Line
C. Other- Energy Balances- Least-cost Program by TEAS- Transmission Lines Investments- Final Phase I Report by Coopers & Lybrand- Electricity Generation and Transmission Statistics - TEAS- Costs Statistics - TEAS
*Including electronic files.
MAP SECTION
IBRD 294883b3 35- 4 5BULGARIA
0$e Krcri'3Snp 50 00o ISO 200 GEORGIA, HAL~~~~~~~~~~~~LBAD * a ' Wt014~~~~~~~~~~~~~~~~~~~~~~~~~~KJOETERSr
F ;eece t 5 0 '1A'4 --k@' e°'d's ~~~~*C1SAM,A ''AoN ,,,, Ufld 8.r '
,e . . + P *,/_ ,Kzz Bolu > 2 3Amo ®GLkOYABATne KIS EIR
(S ~ Cno RI,' k - - - ABd-h
C KcDnDkkale BurskARA,345Etoi ®3&I!ecik YAA s4 GLN3cDru m \ LiTL)kCt w {3BDybU \ HORASANK -- -y- 4
r A wV8 4 ^ <-(15eniMorp -ZLI - - - -. -SPLI; > KonyLzC - f3Nig - \ i 1 L35i; i-LM
SOOtH / ®BinR8I M~~ ~ ~ ~~O, S R M REP N GI
TIJRGU\ @841 - 5)t udr | \L3 g 1S 3 U u H k oi
* ._ r __ ,<* t v8rw~~~~~~~~~~~~~ ADnA,l y G ozionlop ; 'i:nep00D1ECK > I R A Q0l\..A ,< g L. 9ko LrY cl L3 * ono * .Kilis \, , _
-' - - lAntakyol ( S YR I AN TURKEY
_,KARA~~~~~~~~~~~~~~ ARABRE.TAE30k TASSINGI
;RK 0,11,GPROJECTS DEXISTINGCOMPONENTS- ~~~M edi t er ra n eacn Sea c, 380 kv SU BSTATIONS PFOR REFERENCE TO PEOJECT 09191
