Documentof The World Bank FOROFFICIAL USEONLY ReportNo: 25497-TU PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$202.03 MILLION TO THE REPUBLIC OF TURKEY FORA RENEWABLE ENERGYPROJECT February26,2004 InfrastructureandEnergyDepartment EuropeandCentralAsia Region This document has a restricteddistribution andmay be usedby recipients only inthe performanceof their official duties. Its contents maynot otherwisebe disclosedwithout World Bankauthorization. CURRENCY EQUIVALENTS (Exchange Rate Effective February 26,2004) Currency Unit = TurkishLira ( TL) 1,334,947 = US$1 US$0.0000007 = 1TL FISCALYEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS BOO BuildOwnOperate BOT BuildOwnTransfer BRSA Banking Regulatory and Supervisory Agency CAR Capital Adequacy Ratio CAS Country Assistance Strategy DSI General Directorate o f State Hydraulic Works EIE General Directorate of Electric Power Resources EML Energy Market Law EMRA Energy MarketRegulatory Authority EU European Union EUAS Electricity GenerationCompany FI Financial Intermediary FSL Fixed SpreadLoan HESIAD WindPower Producers Association MENR MinistryofEnergyandNaturalResources MW Megawatt PCF Prototype Carbon Fund RESIAD Hydropower Producers Association SPDF Special Purpose Debt Facility TEDAS TurkishElectricity Distribution Company TEIAS TurkishElectricity TransmissionCompany TETTAS TurkishElectricity Trading andContractingCompany TKB Development Bank o f Turkey TOOR Transfer o f OperatingRights TSKB IndustrialDevelopment Bank o f Turkey TWh Terawatthour UNFCCC UnitedNationsFramework Conventionon Climate Change Vice President: Shigeo Katsu Country Managermirector: Andrew Vorkink Sector ManagerDirector: Henk Busz Task Team Leader/Task Manager: Ranjit Lamech FOROFFICIAL USEONLY TURKEY RENEWABLEENERGYPROJECT CONTENTS A. ProjectDevelbpmentObjective Page 1. Project development objective 3 2. Key performance indicators 3 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported bythe project 3 2. Main sector issues and Govemment strategy 3 3. Sector issues to be addressedby the project and strategic choices 6 C. Project Description Summary 1. Project components 8 2. Keypolicy and institutionalreforms supported by the project 10 3. Benefits and target population 11 4. Institutional and implementation arrangements 12 D.ProjectRationale 1. Project alternatives consideredand reasons for rejection 14 2. Major related projects financed by the Bank andor other development agencies 15 3. Lessons learned and reflected inthe project design 15 4. Indications of borrower commitmentand ownership 16 5. Value added of Bank support in this project 17 E. Summary Project Analysis 1. Economic 17 2. Financial 18 3. Technical 19 4. Institutional 19 5. Environmental 22 6. Social 23 7. Safeguard Policies 25 F. Sustainabilityand Risks 1. Sustainability 26 2. Criticalrisks 26 This document has a restricted distributionand may be used by recipients only in the performanceof their official duties. Its contents may not be otherwise disclosed without World Bank authorization. - 3. Possiblecontroversial aspects 27 G. Main Conditions 1. Effectiveness Condition 27 2. Other 27 H. Readiness for Implementation 28 I.CompliancewithBankPolicies 28 Annexes Annex 1: Project Design Summary 29 Annex 2: DetailedProject Description 31 Annex 3: EstimatedProject Costs 35 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 36 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 39 Annex 6: (A) Procurement Arrangements 49 (B)FinancialManagement andDisbursementArrangements 54 Annex 7: Project Processing Schedule 60 Annex 8: Documents inthe Project File 61 Annex 9: Statement o f Loans and Credits 62 Annex 10: Country at a Glance 65 Annex 11: Indicative List o f Renewable Energy Power GenerationProspects 67 Annex 12: Overview ofthe Financial Intermediaries TSKB and TKB - 72 Annex 13: Summary Assessment o f TSKB and TKB Eligibility 75 MWS) Renewable Energy Project RiverBasins andWindPower Prospects, IBRD32412 - TURKEY RenewableEnergyProject Project Appraisal Document Europe andCentral Asia Region ECSIE Date: February 26,2004 Team Leader: Ranjit J. Lamech Sector ManagerDirector: Henk Busz Sector(s): Renewable energy (50%), Micro- and S M E Zountry ManageriDirector: Andrew Vorkink finance (50%) Project ID: PO72480 Theme@): Climate change (P), Other financial and private LendingInstrument: Specific Investment Loan (SIL) sector development (P), Water resourcemanagement (S) [XI Loan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other: For LoanslCreditslOthers: Loan Currency: UnitedStates Dollar Amount (US$m): 202.03 BorrowerRationalefor Choice of Loan Terms Available on File:Ixi Yes ProposedTerms (IBRD): Fixed-Spread Loan (FSL) Grace period(years): 4 Years to maturity: 12 Front end fee (FEF) on Bank loan: 1.00% Paymentfor FEF: Capitalize from LoanProceeds Initial choice of Interest-ratebasis: Maintainas Variable Type of repaymentschedule: [ ] Fixedat Commitment,withthe following repaymentmethod (chooseone): [XI, Linkedto Disbursement Conversion options: [XICurrency [ ]Interest Rate [x]Caps/Collars: :BRD 82.03 120.00 202.03 LOCAL SOURCES OF BORROWING COUNTRY 50.00 0.00 50.00 WB-BORROWER(S) 150.00 0.00 150.00 3XPORT CREDIT (UNIDENTIFIED) 0.00 100.00 100.00 rotal: 282.03 220.00 502.03 Borrower: REPUBLICOF TURKEY GovernmentofTurkey will on-lendthe proceedsto two financial intermediaries who will implementthe project. The Ministry ofEnergyandNaturalResources(MENR)will implementthe complementary institutionaldevelopmentactivities. Responsible agency: FINANCIAL INTERMEDIARIES-- TSKB AND TKB TurlushIndustrialDevelopmentBank [TSKB - TurkiyeSinai KalkinmaBankasi] Address: Meclis MebusanCaddesiNo. 161,34427 Findikli, ISTANBUL Contact Person: Mr.OrhanBeskok, ExecutiveVice-president Tel: (90-212)-334-5261 Fax: (90-212)-243-2975 Email: beskoko@tskb.Com.& Other Agency(ies): TurkishDevelopmentBank [TKB - TurkiyeKalkinma Bankasi] Address: NecatibeyCaddesiNo.98, Bakanliklar 06100, ANKARA, Turkey Contact Person: Ms.CanselInankur,DeputyGeneralManager Tel: (90-312)-23 1-0062 Fax: (90-312-)-230-2394,417-0146 Email: c-inankur@tkb.com.& Ministry ofEnergy andNaturalResources[MENR] Address: InonuBulvari36, ANKARA Contact Person: Mr.Budak Dilli,DirectorGeneral Tel: (90-312) 222 4059 - - - Fax: (90-312) 212-6984 Email: budakd@tedas.gOv.& EstimatedDisbursementin US$m Equivalent(Bank FYISemesters): Project implementationperiod: 2004-2010 Expectedeffectivenessdate: 07/30/2004 Expectedclosing date: 06/30/2010 - 2 - A. Project Development Objective 1. Projectdevelopment objective: (see Annex 1) The project objective is to increase privately owned and operated distributed power generation from renewable sources, without the need for government guarantees, and within the market-basedframework of the new Turkish Electricity Market Law. The project objective will be achieved by establishing a commercial financing mechanism for renewableenergy projects and demonstratingthe feasibility of private development of economic and financially viable renewable energy projectswithin a competitivemarket framework. 2. Key performance indicators: (see Annex 1) (a) Increasein the: (i) amount of electricity producedfrom privately owned renewablegeneration facilities under normal hydraulicand wind conditions (measured in kWh per year); and (ii) renewableenergy generatingcapacity addedto system (measuredin MW). (b) Reduction in emissions of carbondioxide (measured in tons per year) as a result of substitutingrenewable energy producedby the private sector for energy producedfrom fossil fuels. (c) Amount of privatecapital raisedfor every dollar of World Bank financing through the Special Purpose Debt Facility (LeverageRatio). B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported bythe project: (see Annex 1) Documentnumber:Report 26756-TU Dateof latestCAS discussion:November 6,2003 The sector-related CAS goal supported by this project is to increase private sector investment in powergeneration without government guarantees and thereby create a firm foundationto reduce the fiscal problems created by government backstops to private sector involvement in the Turkish power sector. In addition, the project will support the CAS goal of strengthening environmental management and disaster mitigation practices that will ensure low environment and social impact, in a manner that does not endanger public safety. The project also ties into the three priorities of the World Bank in Europe and CentralAsia region which are to: (a) support key global public goods including environmental commons; (b) help create the conditions for a vibrant private sector; and (c) develop a sound public sector by reducing government contingent liabilities and by leveraging Government investment with privatefunds. 2. Main sector issues and Government strategy: There are three main challengesfacingthe powersector inTurkey: First -- to reform the sector in order to shift to a sustainable private investment approach where commercial risk is borne by the private investor. There have been several approaches employed over the last two decades to restructure the sector and obtain private investment. While private investment and ownership of generation assets has increased - 3 - sharply, these arrangements have substantially increased government contingent liabilities by transferring much of the commercial risk for these plants to the government. In addition, these investments have come with real costs to the country by forcing the utilization of more expensive generation in lieu of cheaper source of available capacity. Four different arrangements were used in the past to attract private investors. These are the Build-Operate-Transfer(BOT) model, the Build-Own-Operate (BOO) model, the auto-producer model and the Transfer of Operating Rights (TOOR) model. The first three models (BOT, BOO, auto-producer) have been used to obtain private investment in new power plants. The TOOR model has been used to try and concession existing generating assets and distribution companiesto private investors. The BOT and BOO approaches attracted substantial new investment in power plants -- however, the energy prices from BOT plants are extremely high, and both approaches have created huge contingent public obligations with the government covering the market risk through take-or-pay contracts. In this respect the Turkish experience is similar to the IPP programs in a number of South and East Asian countries. The auto-producer model, which is essentially a form of self-generation employed by industries who also sell surplus energy to the national grid, is in many respects the most successful as it has created a large amount of capacity without any associated public liabilities. In response to the need for sustainable private involvement in the sector, the Government has embarked on a far-reaching reform program that aims to establish a competitive market structure with separate generation and distribution firms that will gradually be privatized. These reforms are progressing in accordance with the principles and time frames defined in the Electricity Market Law (Law 4628) which was enacted in February, 2001. A separate regulatory institution, the Energy Market Regulatory Authority (EMRA) has also been created per the provisions of the Electricity Market Law. Second -- to quickly implement critical reform steps in order to achieve a smooth reform transition. Although important steps have been taken to advance fundamental reforms in the Turkish power sector, several critical steps needto be taken, including: (a) Resolvingthe problem of revenue deficits in the power sector. These revenue deficits arise in the distribution sector and have a major impact on the other upstream segments of the electricity supply chain (Le. transmission, generation and gas supply to power plants). Basically,the distributionsector is unable to pay for all the energy it purchasesdue to losses, failure to pay bills and electricity that has been provided free to mosques and for street lighting. Unlessthese problems are corrected to a level that ensures adequate cash flow in the sector, privatization of distribution and generation will be difficult without substantial governmentbackstops. (b) Dealing with the potential stranded costs that arise from the above-market price contracts signed with BOT and BOO project sponsors. Many of these contracts embody extremely high offtake prices and volumes, that will requice special administrative arrangements to absorb within the market framework. The law assigns these contract obligations to a government-owned electricity trader (TETTAS) who has to meet them by reselling the electricity to distributors. To ensure that the electricity can be sold at a price that is close to market and does not create perverse economic signals, nor undermine political acceptance for the reforms, it is necessaryto moderate (Le. cross-subsidize)the cost of this high priced electricitywith cheap hydropower(Le. priced at close to its operating cost). The Government needs to ensure that the hydropower price is appropriate and that a clear long-term framework to recover stranded costs is in place. (c) Achieving regulatory certainty and clarity. The market structure being implemented in Turkey represents a significant shift from the present operating arrangements and requires an entirely new framework of rules, regulations and procedures, the principles for many of which have been defined in the last 12 months. Work remains to be done inter alia in developing/completing:the actual multi-year tariff setting and review methodology for each of the distribution regions; the balancing and settlement code for market operation; and the methodologyto determine the allowable wholesale energy price pass-throughto final captive - 4 - consumers. The timely completionof this work and its acceptance by the sector participants, many of whom will be private,will be centralto achievingthe regulatorycertainty and clarity requiredfor private investment. (d) Coordinatingreformimplementationacross multipleagencies. The reform programrequires the alignment of eight main implementingagencies behind a single coordinated strategy -- these agencies include: Ministry of Energy and Natural Resources (MENR), EMRA, Treasury, Privatization Administration (PA), the transmission company (TEIAS), the generation company (EUAS), the distribution company (TEDAS), and the trading company (TETTAS). The reform programentails changes in the roles and responsibilitiesof many of these agencies, some of whom are resistantto this change. Strong programmanagement is requiredto ensureaccountabilityfor task completion. The Government and EMRA are aware of these issues and have been working hard to address them. A World Bank loan for reform implementation (Loan No. 4344-1) is helping the Government obtain advisory services to evaluate and determine appropriate solutions to these issues, and implementthem. Third, to ensure that economic renewable energy resources are adequately and safely exploited to meet domestic energy demand. Turkey is extremely well endowed with renewable energy resources, especiallyhydropower, in contrast to its general lack of fossil fuels. Potential generationfrom hydropoweris estimated at about 126 TWh of which 112 TWh would be from large hydropower plants and 14.1 TWh in small plants. The Department of State HydraulicWorks (DSI) has made considerableprogress in exploitingthe larger hydropowersites but relatively little progress has been made in developing the smaller hydropower sites. Currently, 88 projects, having a site capacity less than 30 MW, are in operation for a total installed capacity of 486 MW and generation potential of 1.9 TWh per year. Of this 348 MW which have been privatelydeveloped as BOT and autoproducer projects. Preliminary studies conducted by (DSI) and the General Directorate of Electric Power Resources (EIE) for the 26 river basins in Turkey have led to the identification of 344 small hydropower projects (Le. those less than 30 MW) with a generatingcapacity of 3,400 MW and potentialto produce14.1 TWh of electricitya year. Ten (IO) projectsare under constructionwith a capacity of 153 MW and generation potentialranging various stages of preparation/development -- of 0.6 TWh. The remaining projects are in from having promoters with detailed feasibility studies and resource use rights, to those at the stage of reconnaissance studies prepared by DSVEIE. In additionto these projects,topographicalanalysisof the basinsindicates that there may be as much as an additional 5,000 MW of potential small hydropower capacity capable of producing around 19 TWh. As mentioned above, this means that the total small hydropower potential may be as much as 33 TWh which is equivalentto about 25% of current demand. Detailedanalysisof the river basins is thus likely to yield a large number of additional small hydropower projects. Turkey is also rich in wind and geothermal resources. It is estimated that Turkey has the potential for up to 11,000 MW of wind capacity, capable of generating about 25 TWh of electricityper year. Most of this capacity is along the country's sea coasts especially along the Sea of Marmara, the Aegean and the Black Sea. However, it is not clear how much, if any, of this capacity is currently economic at the forecast wholesale electricity price of about 5.0 US cents/kWh. Neverthelessas the cost of wind generatingequipment continuesto fall, it may well become economic. Additionally, if the costs of externalities are appropriately estimated and reflectedinthe priceof power,wind generationmay also becomeeconomic. Proven geothermal capacity is only about 200 MW of electricity generating capacity and about 2,250 MW of thermal (heat generating) capacity. However, the potential for electricity generation from geothermal resources( includingprovenresources) is thought to be as much as 4,500 MW. - 5 - 3. Sector issuesto be addressed by the project and strategic choices: 1. IssuesAddressed by the Project The projectwill address the two issues of (a) shiftingto a sustainable approachin order to obtain private investment without government guarantees; and, (b) expanding the economic utilization of Turkey's abundant renewableenergy resource base. With the move towards a competitive wholesale power market as envisaged in the Electricity Market Law and the ending of Treasury guarantees, private developers of power generation projects will find it more difficult to obtain financing. Moreover, private developers of renewable energy projectswill find it even more difficult because of the followingfactors: (a) the capital intensive nature of most renewabletechnologies, resultingin a higherdemand for capital and highfixed costs and thereforea greater exposure to market and regulatoryrisks; (b) long asset livesof most renewabletechnologies in comparisonto the available maturitiesof commercial loans; (c) high local cost (e.g. civil works) proportionof some technologies (hydropowerand geothermal) notfinanceable by export credits, a primary source of debt financing for private power projects; (d) the requirementfor reliable resourceassessmentsbased on longterm data, and inthe case of hydropowerthe needfor upstreammasterplanstudies to determine additional potential configurations in a river basin context; (e) higher pre-investmentcosts, particularlyfor hydropowerbecause of the site specific nature of designs and the needto advancestudies at least to feasibility levelto obtain an adequate cost estimateon which an investmentdecision can be based. (9 uncertaintyaboutthe appetite of the soon-to-beprivatizeddistributioncompaniesto enter into bilateral contractsto purchaseelectricityfrom renewable powergenerators due to the high "hassle factor" involved in dealing with these small plants. (9) market based pricingdoes not assign any value to the "public goods" element of renewable energy generation (in avoidanceof thermal emissions). The local private sponsors of prospective renewable power generation projects have asked the Governmentfor assistance to overcome some of the barriers identified above. The Government agrees that this is an important issue since the work done by the two Government agencies responsiblefor renewables (DSI and EIE) indicates that the economic potential for renewablesis very substantial. Also, many of the above barriers were previously overcome using the BOT model (which has now been largely eliminated) and the Government is anxious to adopt new approaches to deal with the barriers while minimizing Government obligations. They therefore asked the World Bank to assist with developing renewable power generation within a market framework. This project has been designedand preparedin responseto this request. The investment facility provided under the project will help to address the problem of long term financing of local costs. Similarly, shifting of the credit risk to strong local banks minimizesthe potentialfor call on the government guarantee and governments contingent liability. Agreement of the regulator to incorporate in the regulations an obligation to purchase competitively priced renewables addresses the "lack of appetite" barrier. Pipeline development addressing the resource assessment and masterplanning issues will be handled by the Government as the project is underway, while the Renewable Law to address the "public goods" value and possibly provide for a degree of tariff certainty for capital intensive renewables is in a draft stage. The - 6 - sub-projects to be financed by the current investment facility do not appear to require such support. However, such support will likely be requiredfor significantdevelopment of wind power and, as eventually for small hydropower once the more attractive projects (generally piggy-backingon existinginfrastrucure) have been developed. 11. Strategic Choices 1. Structuringa Market Based Renewables DevelopmentFramework A key strategic choice was to define how to support renewable energy development within an electricity market. The easiest way to encourage developmentof renewable energy is to put in place a new set of rules and regulations,typically referredto as a "Renewables Obligation"that would force the newly privatized distribution companies to buy power from renewable power generators. This could be done by the so called standard offer approach under which distribution companies are required to buy renewable power if it is less than a certain price set by the Government or the portfolio approach under which distribution companies are required to purchase a certain minimum percentage of their electricity requirements (minimum supply obligation)from renewable sources or through other similar approaches. Normally under any of these approaches the price paid for renewable power by the distribution companies is above market levels and the companies comply to the extent that they are allowed to pass on the higher costs to their customers. However, at this stage the Government would prefer not to have to force the distribution companies to buy electricity from renewable sources at above market rates since this is an additional complication to the new reform program which is under way. Also, with the almost total lack of longer term domestic debt financing in Turkey, the above two approaches would have favored wind power (which can obtain most of its funds from export credits) as opposed to small hydropower plants which need domestic financing for civil works and electromechanical equipment. For these reasons the Government and the Bank agreed on the establishmentof a financing facility to support private sector-led development of distributed generation with renewable energy resources. The authorities believe that there is a large pool of economically viable renewable power generation projects which can be commercially developed to produce electricityat or below prices that are expected in the Turkish ElectricityMarket. The purpose of the proposed financing facility is thus to assist renewable power generation projects to obtain long-termdebt. 2. Projectliming A second strategic choice was to do this project now, rather than waiting a few years. Turkey currently has a surplus of electricity generating capacity which is expected to last until at least 2007. If this project were delayed by say two years then the first plants would come on stream only after the surplus had been eliminated. It was decided that this delay is unnecessary because: (a) the earliest new generating plants could be completed under this financing facility is around early 2007 and mostly later, just when the surplus is expected to be ending and capacitywill be required; and, (b) these small renewable energy generating plants would have essentially no impact on the surplus if they came on stream early. Basedon the loandisbursement schedule the capacity added in the initial years is expectedto be about 25 MW inthe first year, and perhaps about 75 MW the second year, and about 125-150 MW per year for the next two years before tapering off. These additions represent an extremely small fraction of one percent of the total capacityinTurkey during theseyears. This project is really about breaking barriers and creating a mechanism and procedure for financing of renewableenergy by the privatesector, ratherthan resolvingTurkey's energysupply problems. With the new electricity market in the process of being created, and the Government's desire to ensure that renewable energy development continues -- this is the - 7 - appropriatetime to put in place a systemthat will assist in achievingthese twin goals. C. Project DescriptionSummary 1. Project components (see Annex 2 for a detailed description andAnnex 3 for a detailed cost breakdown): The project has one main component: The Special Purpose Debt Facility (SPDF) for RenewableEnergyGeneration Financing Total investment in renewable energy generation financing under the project is expected to be around $500 Million which would include equity financing from the private sponsors, debt financing from export credit agencies, the World Bank Special Purpose Debt Facility( SPDF) as well as commercialbanks. The SPDF is a term lending facility which will be established and will be operated by the two financial intermediaries(Fls). The two Fls selected are: (a) Turkiye Sinai Kalkinma Bankasi (TSKB) - the Turkish Industrial Development Bank (private) (b) Turkiye Kalkinma Bankasi(TKB) - the Turkish DevelopmentBank (Government) The World Bank loan for the SPDF will be on-lent from Treasury (the Borrower)to the Fls. The Fls will utilize the SPDF to provide long-term debt financing to private sponsors of renewable energy projects. The SPDF is intended to leverage equity investment from local private developers, export credit financing and other financing for the construction and operation of qualified renewable generation projects. The two Fls have been selected based on their financial strength, and their capacity to appraise and supervise project implementation. In addition, their status as "Development Banks" allows the TurkishTreasury to on-lend publicfunds to these organizations. 2. Project Supporting Activities In order to support the implementation of the Project, MENR, DSI and EIE will undertake various institutional development activities. These activities will be financed through internal sources. and grants. The World Bank and the Government will work together to obtain the required grant financing for these activities. The principal institutionaldevelopment activitiesthat will be pursued include: (a) Renewable Energy DevelopmentCapacity: For the immediate to medium-term (next 2-3 years) there is a substantial potential pipeline of projects which are at an advanced stage of development by private sponsors. The potential pipeline of projects for the immediate-term are listed in Annex 2. Some were developed originally as autoproducer projects and have been granted resource use rights (Le. water-use rights), and others are BOT projects with signed implementation agreements. [Although these projects will continue to have the previously granted water rights, they will have to sign new water-use rightsagreements in accordancewith the new MENR-DSIregulationof water-use right agreements]. In order to sustain the pipeline of potential projects into the longer-term, institutional strengthening and capacity building is needed to enable MENR and its supporting agencies (DSI and EIE) to collect, evaluate and disseminate technical data and information about potentialsites to prospective privatesector developers. The activities will include: - Improving the methodologies and analytic tools used to survey, investigate and plan renewable energy projects. - Implementingimproved river basin modelingapproaches that incorporate environmental and social criteria within the context of integratedriver basin development plans. - Undertaking additional feasibility studies on Turkey's renewable energy potential -- - 8 - particularlygeothermal resources. - Assisting with the implementation of improved web-based procedures for project status trackingand public notification. (b) Legislationfor RenewableEnergyResource Development: Apart from the Electricity Market Law ( EML) and the MENR-DSI Regulationon Principles and Proceduresfor Obtaininga Water-Use Rights Agreement, Turkey does not have a specific and comprehensive law for renewable energy resource development. Although the EML and associated secondary regulations do define generation from renewable energy sources and provide for limited market-basedincentivesfor their development,there remains a need for the Governmentto establish its long-termobjectivesfor renewableenergy developmentand clarify an appropriate legal basis for this purpose. The outputs of these institutional development activities include: a Renewable Energy Law (which is now in draft) and requiredchanges and modifications to relevant legislation relating to the electricity sector and the organization and duties of institutions in the energy sector. These outputs will enhance the changing policy and regulatoryroles of MENR, EMRA and DSI as the privatesector beginsto play a more significant role indevelopingand operatingrenewable energy project. (c) Mechanismsfor Public-PrivateHydropowerDevelopment: With the implementationof the new Electricity Market Law (Law No. 4628), the responsibilities for developingnew hydropower generation will tend to shifttowardsthe privatesector. However, given the generally multipurpose nature of Turkey's larger hydropower resources, a public-privatedevelopmentmodel is likelyto be appropriatefor large projects -- asopposed to a purely private approachas envisaged for smaller projects. In addition, Governmententities still have a very importantrole to play in water resourcedevelopment planningand regulation. The institutionaldevelopment studies and tasks that the government would pursuewould include: - Technical Regulation of Hydropower Development --to define responsibilities, criteria and methodology for DSI to review and approve final designs relating to hydropower infrastructure (dams; water conveyance facilities, etc), and oversee hydropower project implementation. This work will include the issuance of regulations relating to technical standards. - Preparation of Dam Safety Regulation -- to transform and enhance existing practices and standardsrelatingto dam design into a comprehensive set of world-classregulations that can be used to guide privatesector development of hydropowerdams. - Implementation of Modern Techniques for Monitoring Dam Safety and Disaster Mitigation -- Introduction of state-of-art techniques and technologies to monitor dam safety and implement emergency planningand disastermitigationpractices. This would includeimprovedmodellingof innundationanalysis. - Developa Strategyand Models for Public-PrivateDevelopmentof Large Hydropower -- The main purpose of the study would be to look at various modes of public private development of hydropower, and based on this develop a strategy for public private development in Turkey. The possibilityof using existing hydropowerassets to leverage new investmentwould also be evaluated. - 9 - 1. RenewableEnergyGenerationFinancing 500.00 99.6 200.00 99.0 [SPDF =200 mn.US$;Sponsor Equity = 150mn. US$; ExportCredit Financing= 100mn.US$;Other Borrowing= II ~Total Proiect Costs Front-endfee 502.03 I 100.0 I 202.03 I ~~~Total Financing Reauired 100.0 2. Key policy and institutionalreforms supported by the project: Institutionaland Policy ReformsSupported Priorto Implementation Within the framework of the Turkish Electricity Market Law, the following policy and institutional measures have been developed and established during project preparation to support the expansionof privately sponsored renewablegeneration facilities: 1. Licensing Definitionof RenewableGeneration: A clear definition of the term "generation facilities based on renewable resources" has been incorporated in EMRA's Licensing Regulation. This definition clarifies the type-of resources,as well as size limitson renewable generation plants (in the case of hydro) that would qualify for preferential and fast-track treatment within the market-basedprinciples of the ElectricityMarket Law. 2. Project Processing Procedures: Establishment of streamlined procedures for: publishing project potential; receiving applications from private sponsors; reviewing the applications and feasibility studies; granting conditional and then final resource-use-rights after EMRA licensing. These procedures have been implementedfor hydro-electricprojects through an MENR-DSI Regulation. This Regulation is consistent with the Electricity Market Law and clearly defines the rights, responsibilities and accountability of all the involved agencies-- specifically, DSI, EIE and the private sponsors. 3. Market-Based Renewables Obligation: Implementation of a market-based renewable energy obligation that requires retailers to purchase energy from renewable generator if the price of this energy is less than the allowable wholesale energy price pass-through to consumers. Temporarily, the wholesale energy price is the TETTAS (Turkish Electricity Trading and Contracting Company) price. This market-based obligation does not distort the market, but would assist renewable sponsors in selling their energy and allow them to overcome the resistanceof retailersto deal with small, renewable projects. 4. Implementation of Environmental impact assessment and mitigation procedures that will require the treatment of all renewable generation projects below 10 MW in accordance with the more stringent procedures for projects above 10 MW. These environmental impact assessment procedures for projects below 10 MW will currently apply only to projects that - 10- are to be financed by the SPDF. Institutional and Policy Reforms that will be Supported by the Government Durinq Implementation 1. InstitutionalMechanismand Capacity to Support Investment Lendingfor Renewables: The government will create an institutional base that can be used to attract further sources of bilateral and/or multilateral debt that can be utilized to support the financing of renewable energy projects in Turkey. 2. Preparation of the Renewable Energy Law: MENR will prepare a comprehensive RenewableEnergy Law. The Renewable Energy Law will be compatible with the applicable EU Directives and will clarify government objectives, policy and implementation guidelines for long-termdevelopment of renewable resourcesin Turkey. This work has begun, using a PHRD project preparationgrant and a draft is now available. 3. Regulation of Dam Safety and Private Hydraulic Infrastructure: MENR and DSI will establish procedures for regulating dam safety in the context of private sector development of hydraulicinfrastructure. 4. Pipeline Development Capacity: The institutional capacity of both DSI and EIE will be enhanced to ensure that a continuous pipelineof economically feasible and environmentally beneficial renewable energy projects are identified. This work also began using a PHRD project preparationgrant. 3. Benefitsandtarget population: (a) The Government will benefit by not having to provide extensive guarantees against commercial risksto these renewable power plants. It will also be able to leverage its funds with privatefunds with the latter expected to provide around 70% of investmentcosts. (b) The population in general will gain from: (i) the reduction in pollution as energy productionfrom these renewable generation projects substitute for generation from fossil fuel fired power plants; (ii) improved economic stability by minimizing the fiscal risks stemming from government guaranteeson private investmentin the power sector. (c) It is expected that most of these renewable plants will be hydro power plants which tend to be built in the poorer, mountainous parts of Turkey. At the margin it is these regions that would benefit from the employment due to constructionactivity as well as continuing employment from operatingand maintainingthe plants once built. (d) Prospective private sector developers of renewable generation projects, will benefit from their access to longer maturity debt which is expected to cover at least 30% of total investmentcosts, This in turn should increasethe investmentin renewablegeneration projects. (e) Cross boundarybenefitswill resultfrom the reduction in the emissionof green house gases. - 11- 4. Institutional and implementation arrangements: Figure 1. below outlines the institutionaland implementationarrangementsfor the project. . 1ProjectPotential FeasibilityEvaluation - Indicative Financing Plan Equity 25%-plus Special PurposeDebt Facility: The Borrower will be the Republic of Turkey, represented by the Undersecretariatof Treasury. Treasurywill on-lend the IBRD loanto the two financial intermediaries,TSKB and TKB. The two financial intermediaries will operate the Special Purpose Debt Facility and provide long-term debt for eligible renewable energy project investments. The operation of the Special Purpose Debt Facility shall be in accordance with an "Operations Manual" prepared by each FI and agreed with the World Bank. The Operations Manualdetails the: (a) The proceduresfor the operatingthe SPDF between FI, Treasury and World Bank. (b) On-lendingterms and conditions betweenTreasuryand the FI, (c) Sub-project eligibilitycriteria for financing by the SPDF. (d) Lending terms and conditions for sub-projects-- agreements between the FI and the private renewable energy sponsors. (e) Projectevaluationguidelines. (f) Environmentaland resettlement review proceduresincludingdam safety and riparian issues. (9) Procurementprocessesand applicable limitsfor commercialpractice. (h) Disbursement procedures. - 12- The Fls will be responsible for assessingthe commercial risk of the renewableenergy projects, and bearthe credit-riskon the SPDF funds that they providefor eligibleprivatesector renewable energy projects. The lending spreads on these loans will be based on the creditworthinessof the borrowers. The Fls will only provide long-term debt financing to private developers who submit proposals which, inter alia, have fulfilled all necessary licensing requirements of the ElectricityMarket Regulatory Authority (EMRA). Project Processing MENR, DSI, EIE and EMRA -- DSI and EIE will maintaina database of identified renewableenergy projectopportunities. The identified project opportunities are at different stages of development -- ranging from reconnaissancestudy reportsto feasibilitystudy reportsprepared by DSVEIE. In addition,for the immediate-term, there are about 400 MW of hydro electric projects, an additional 161 MW of wind energy projects and one geothermal project (25 MW) which are fairly far advanced and supported by individual private sector sponsors. These developers already have the resource rights and feasibility studiesapprovedand could move for implementationprovidedthey obtain a license from EMRA. To obtain a license from EMRA all projectswould have to conform to the requirementsof the relevant legislation,specificallyincludingthe LicensingRegulationdefined in accordancewith the principlesof the ElectricityMarket Law. The Regulation issued by MENR and implemented by DSI that relates to renewable energy development from hydro-resourcescovers the followingsteps: (a) Procedures for the preparation, public announcement, and updating of the list of potential hydro-electricprojects. (b) Procedures for private sponsors to register their project application, and then advance through the stages of feasibility report preparation, submission, and evaluation. Multiple applicationsfor a specificprojectare possible,and DSIshall review them basedon technical feasibility and optimal resourceutilization. (c) Provisionof conditionalwater-use-rightsto sponsors whose feasibilitystudies are found to be acceptable by DSI. The sponsor(s) for the project can then apply to EMRA for a license -- once again there can be multiple license applicationsfor a single project. EMRA will select between competing license applications for a single project based on criteria that include: increasing competition; level of sponsor preparedness and experience; local participation; preference to those who sell directly to eligible consumers (rather than requiring EMRA to oblige retailers/ distributors to purchase the power); as well as DSI comments on the feasibility report. (d) Issuance of final water-use rights. A model Water-Use Agreement is attached to the Regulation, which will be the basis for finalizing the water-use-right between DSI and the sponsor. Forthe case of wind energy projectsthe sponsor proceeds directlyto EMRAto obtain a license. Special Procedures Applicable for Renewable Energy Sponsors HavingBOT Contracts Private sponsors having contracts to build renewable energy generation facilities based on the BOT model, but where all the contract conditionsare not completed,would be eligibleto apply to TSKB and TKB for financing upon: (a) being eligible for a generation license by the EMRA Board; and (b) notifying MENR and EMRA in writing that they forfeit those rights that are contrary to the marketstructureforeseenin Law No. 4628. To actuallyobtainfinancingfrom the Special Purpose Debt Facility they must also fulfill all the conditions and criteria set forth by TSKB and TKB for the facility. - 13- D. Project Rationale 1. Project alternativesconsideredandreasonsfor rejection: The objective was to find an economically efficient mechanismfor providingWorld Bank support to initiate the private development of renewable energy with the right economic, financial and commercial incentives. The main project design issue was the choice of a suitable mechanism for the World Bank to help overcome the long-termfinancing impedimentfor private developers, in order to assist the Government with increasing privately owned electricity generation from renewableresources,without requiringthe governmentto underwritemarket risk. It is useful to emphasize that Turkey has, to its credit, fewer design issues to be addressed in the context of renewable energy development, than have been faced in other countries --for example: - private sector skills and capacity - which has been an issue in Sri Lanka, Indonesia, China, and Uganda is not an issue in Turkey -- Turkey has several private sector companies who have the skills, financial capacity, and experience to develop and operate renewable energy generationprojects;and - project investment and credit appraisal skills of potential financial intermediaries which is an issue in countries such as Uganda, and Indonesiais not a key issue in Turkey ---- Turkey has a number of development and commercial banks that have built capacity in investment and credit appraisal situations (e.9. Akbank, TSKB, TKB). Hence the principal focus in project design is to implement an efficient mechanism to channel World Bank resourcesto private sector led projects. Based on experienceto-date, there are typically three alternative structures to channel financial resources to renewables projects. 1. using an existing Government entity, such as the Ministry of Finance, sectoral line-ministry,or power utility to channel the funds to individual projects-- thisapproach has (and is) being used in China, Uganda, Vietnam. and elsewhere; 2. creating a new public agency with the necessary skilled personnel and procedures to channel funds to projects -- this approach has been used in China, India (Ireda), Romania; and 3. utilizing established financial institutions (private and/or public) with adequate skills and capacityto channel funds to individualprojects (for example, Sri Lanka). The first option of using an existing government entity and the second option of creating a new government entity both run contrary to a major goal of the broader economic reforms in Turkey, as well as the power sector reforms, which is to shift as much of the responsibility and decision making as possible to the private sector. Moreover the existing government entities all have various issues associatedwith them including in some cases poor track records, inadequate staff to undertakethe job and inabilityto obtainadditionalstaff, or not fully qualified staff. It was therefore decided that the best approach is to channel the World Bank funds to private sector projectsthrough qualified financial institutions, such as the Turkish IndustrialDevelopment Bank (TSKB), and the Turkish Development Bank (TKB). TSKB has considerable relevant experience in financing investments, project selection, the energy sector and Bank Projects. It was originally establishedwith assistance from the Bank and has been used successfully by the Bank as a financial intermediary. It would receive $150 Million from the SPDF. TKB is smaller and government owned but performs the same role as TSKB. It would receive$50 Million. -14- 2. Major related projects financed bythe Bank and/or other developmentagencies (completed, ongoingand planned). Latest Supervision Sector Issue Project IPSRI Ratings (Bank-fi'nank projectsonly) Implementation Development Bank-financed Progress(IP) Objective(DO) Reform strategy definition; Sector Turkey - TEK Restructuring S S infrastructure development. Project (completed) Infrastructure creation; Reform Turkey National Transmission - S S implementation support. GridProject (on-going) Support export expansion, medium and Turkey - ExportFinance S S Long-term credit. Intermediation Loan(closed) Private sector gridandoff-grid Indonesia- RenewableEnergy U U renewable energyprojects. Small Power Project (completed) Private sector gridandoff-grid Sri Lanka Energy Services - HS HS renewable energy projects. Delivery Project (completed) Support export expansion; Improve Turkey Industrial Export - credit delivery systems; mediumand Development Project (closed) long-term credit. Support export expansion; improve Turkey - SecondSmall/Medium S S credit delivery systems; mediumand IndustryProject 3. Lessonslearned and reflected in the project design: 1. Lessonsfrom RenewableEnergyDevelopmentProjects The proposed Renewable Energy Project takes into account the lessons learned from the implementation of similar IDA and IBRD financed renewable power generation projects in Indonesia, Sri Lanka and India (Indonesia Renewable Energy Small Power Project, Sri Lanka Energy Services Delivery Project, India Renewable Resources Development Project). The main lesson are: (a) Governments need to set up and transparently apply a set of clear policies and regulations that would provide predictabilityon tariff-settingfor power supply transactions between local distribution utilitiesand private power developers. (b) To move beyond "one-of-a-kind" demonstration projects and/or pilot projects for grid-connected renewable power generation projects, it is prudent to provide support to - 1 5 - countries through a strategic mix of investmentand TA instruments,focusing on the financial intermediation for private developers but also on local capacity building and pre-investment activitiesto ensure sustainability of developmentaloutcomes. (c) Timely development of a pipeline of prospective renewable power generation projects (Le., identification and pre-feasibility studies) facilitates implementation efforts by financial intermediaries and sustains the interest of private developers who might otherwise opt to pursuealternative investmentopportunities. (d) The interest of local financial institutions to serve as promoters and intermediaries to retail IDA and IBRDfinancing can best be sustained if commercial business practicesare adopted for procurement and the processes adopted for disbursement of funds is streamlined to the extentfeasible. (e) Long-term commitment by financial intermediaries, the Government and regulatory,entities is required to sustain the interest of private power developers and thereby mainstream renewable powergenerationinitiatives,as comparedto conventionaloptions. 2. Lessonsfrom FinancialIntermediationProjects The proposed Renewable Energy Project design takes into account lessons learnt in financial intermediation operations -- both in renewable energy and in other forms of financial intermediation projects. The main lessonsare that: (a) It is far from ideal to have a government entity act as in an "apex" capacity, as such entities generally do not have the skills, in-house systems (financial, accounting, etc) and -- importantly -- financial incentivesto proactively pursue successful project implementation. most (b) The design should be kept as flexible as possible, with a minimum number of restrictions in terms of minimum loan or sub-loan size, maturity, currency denomination, cofinancing requirements, etc. The was clear from the experience with the Turkey Industrial Export - DevelopmentProject, and the Turkey Second SmaWMedium Industry Project. (c) Only strong and committed local financial institutionsshould be selectedto participate in the project. (d) It is necessary to ensure quality at entry and closely monitor the performance of private developersin the Bank supported portfolio. (e) Private power developers should be required to put up a reasonable amount of equity towards each proposalto be supported by Bank funds. Fhe project design requires at least 25% of sponsor equity in the financing -- thepractice in Turkey is normallyto have in excess of 30%) 4. Indicationsofborrower commitmentand ownership: The Government has repeatedly asked the Bank to finance this project. The Government strongly believesthat Turkey has great potentialto producepower from renewableresourcesand that the market oriented reforms of the sector are making development of these resources more difficult. This view was held by the old Government and is also held by the new Government. In particularthe new Government has publicly stated that its objectives in the energy sector are to: (i) continue the liberalization of the energy sector in order to create a competitive energy environment; (ii) develop Turkey's role as an East-West Energy Corridor; (iii) give priority to national energy resources; (iv) ensure the development of fuels in the framework of an environmentallyresponsible, sustainable development approach; and (v) put more emphasis on new technologies. The project will help meet four of these objectives including assisting with liberalization. In fact the only objective it does not assist with, is development of Turkey as an East-WestEnergy Corridor. -16- 5. Value added of Banksupport inthis project: The World Bank project will assist the Government of Turkey in establishing a comprehensive framework for renewablesdevelopment,and a crediblefinancial intermediationmechanism,that will enable Turkey to attract grant, concessional and bilateral sources of funds for renewable energy resourcedevelopment. The Bank will also assist Turkey with the development of its renewable energy policy and legislationand ensure that these are coordinatedwith its energy and electricity policy in general. The Bank has considerable experience with renewable energy projects in other countries as discussedabove, and also in electricity sector restructuring. Bank involvementwill increase the likelihoodof the country implementingan effective approach to renewableenergy development, consistentwith the new competitiveelectricitymarketwhich is now being introduced. Bilateraldonors, including KFW, have been contactedand have shown interest in the financing initiative. The EU might provide additional sources of funding and/or technical assistance. The successfulimplementationof the financing intermediationmechanismand the associated credit appraisal, fiduciary and other safeguards will definitely give other donors increased comfort in contributingto renewableenergy development in Turkey. Thus the World Bank project will play an key development role in helping Turkey mobilize such additional sources of financing and technical assistance. Another possible source of funds is the GEF which Turkey should soon become eligible for. Turkey has recently signed the UNFCCC as an Annex I country, and this signing has very recently been ratified by Parliament. Turkey should now be eligible for GEF funding to reduce the impact of climate change, such as removing barriers to the implementation of renewable energy projects. The issue has been discussed with GEF and a proposal will be made to it asking for funds to help implement the project or to help subsidize the development of wind power which is probably not economic currently but can probably become so. The Prototype Carbon Fund (PCF) has also been approached but they cannot provide funding unless Turkey ratifiesthe Kyoto Protocol. E. Summary Project Analysis (Detailed assessmentsare inthe project file, see h e x 8) 1. Economic(see Annex 4): 0 Costbenefit NPV=USS5.5million; ERR=20 % (see Annex 4) 0Costeffectiveness 0Other(specify) As it is not yet completely certain what projects will actually be financed from the Renewable Energy Loan, two potentialprojects (Mugla 10.95 MW; Aydin 8.9 MW) and a typical composite case (20 MW) were used to do the economic analysis. These are discussedin detail in Annex 4. They all have high economic and financial rates of return. Basically they are attractive small hydropower projectswhich could not easily be developed in the past, because financing for the private investorswas largely lacking and DSI was not much interested in small projects. (The ERR above is for the Mugla projectwith the other two projects having ERRSof 23% and 19%). A conservative approachwas taken for the economic analysis where the value of the electricity output of each privatelydevelopedprojectwas takento be the cost to localelectricitydistributors of purchasing wholesale electricity from the Turkish Electricity Market. (Rather than for example some estimateof the value of the electricity to retail customers,which would be much higherthan its wholesale price, and greatly increasethe economic rate of return on the project.) In addition, for the economic analysis (but not the financial analysis) a small supplementary value for the electricity is attributed to the reduction in carbon dioxide emissions which would occur with the replacement of power generated from fossil fuels by power from renewable resources. However, this lattervalue is small and has only a very limited impact on the results. - 1 7 - In practice, since the Government does not intend to offer any subsidies and/or financial incentives to the private power developers other than resources to be obtained from the SPDF, the projects selected for financing will of necessity be among the least cost supply options availableto the local distributors. The projects are economically and financially robust. For the Mugla project, for example, the switching values for the critical project variables (Le. the deviation from the base case which would yield an ERR of 10%) are: 81% increase in investmentcost 45% decrease in capacity factor 34% decrease in electricityprice (from 5.0 cents/kWhto 3.3 cents/kWh) Also in practice, the procedure to be followed for selection of individualprojects will include case by case review of available feasibility studies for the initial portfolio of candidate projects. Those proposals would be examined to ensure that the relevant economic design criteria are being applied to achieve "maximum annual energy productivity" based on a least cost configuration for each project. Such a screening approach is necessary to avoid the general tendency towards "over-design" of small-hydro facilities, since the goal should not be one of maximizing installed power generation capacity, but rather one of maximizingthe annual number of kilowatt-hours of electricity producedfor a given cost, water availability and flow characteristics. 2. Financial (see Annex 4 and Annex 5): NPV=US$3.4million; FRR= 17% (see Annex4) The three projects analysed are financially attractive with high FRRs. The FRR and NPV above is for the Mugla project with the other two projects having FRRs of 20% and 16%. The financial viability and bankability of renewable energy generation projects will depend on the allocation of exchange rate, market, revenue, wind/hydrological, and other risks to the most suitable party in linewith a good structure of risk allocation. This is discussed below. (a) Exchange rate risk would be borne by private project sponsors --Le. the debt provided to the private sponsor by the financial intermediary (FI) would be denominated in foreign exchange. The project agreementswill probably not prohibitthe Fls providingloans in local currencyto matchthe localcurrency revenuesearned by the project company. However, this would shift much of the exchange risk to the Fls which they have indicated they would be very loath to accept. The project sponsors are willing to accept the exchange rate risk as the practice in Turkey is to index wholesale and retail electricity prices to exchange rate movements. (b) Market risk would be shared betweenthe purchaser (eligible consumer and/or retailer) and the project sponsor. For sales to eligible (free) consumers (likely to be industries and commercial users) the arrangement between the project sponsor and purchaser would be a purely bilateral contract. For sales to a retailer, there are two possibilities, either the retailer (as an eligible consumer) enters into a purely bilateral purchase arrangement with the generator, or the regulatory framework requires the purchase of renewable energy at below the prevailingallowable wholesale energy pass-throughprice. (c) WindlHydrological risk would be borne by the project sponsor who will develop the project. The incentive would be for the project sponsor to undertake the necessary due diligence in preparingthe detailedfeasibility report and justifying the project financially to its financiers. As noted in the summary discussion on the economic analyses (Section E.1. above) the switching values indicate that the projects are financially quite robust and have a high risk tolerancefor movement in market prices and capacity factor (Le. wind/hydrology). -18- Project sponsors are also able to obtain attractive tax benefitsfrom these projects. Apart from exemptions on import duties, the sponsors are also able to benefit from a investment tax allowance of up to 40% of the investment cost. The investmenttax allowance permits them to shield net incomefrom taxes upto the allowablepercentage of investmentcosts. Fiscal Impact: The fiscal impactof the projectswill be small. There will be no subsidiesfor the projects. There is expected to be a VAT exemption on machinery and equipment expenditures based on the sponsor obtaining an investmentcertificate from Treasury. Due to the investmenttax allowance they will typically not pay taxes until after about 5 years of operation. However, since they are quite profitable, once they start to pay taxes they will pay a substantialpart of their revenue in taxes assumingthat current tax laws remainunchanged. 3. Technical: Small-Hydro Projects: As described in Annex 11, over 70% of the small-hydro project potential is based on irrigation canals and uses existing water conveyance facilities. Of the remaining sub-projects many use existing irrigation dams, and only a small number are what may be considered greenfield hydro projects. geologicalrisk -- Therefore, the principal technical risk -- the is largelyabsent. In the few instancesthat purely greenfield projects are developed and new dams are required, the dams are likely to be relatively small and any underground works very limited. Again, therefore, geological risks could be considered to be minor. Some of these dams may be classified as "large dams" according to the ICOLD definition (see section 7.2 below). Safety panels of expertswould be established for these dams to review all aspects of dam construction and operation. The electro-mechanical technologies associated with these small-hydro projects, such as hydraulicturbines,valves, gates, electricalgenerators,are all maturetechnologies. Wind Projects: The technologies associatedwith wind projects are also well established and may be considered mature. Although innovationscontinue, there are no technical risks inherent to wind projects. Geothermal Projects: The technologiesand projectconfigurationsused to produceelectricity from geothermal projectsdepend on the natureof the resource(temperature, waterhteam purity) and site conditions (geology). The technical feasibility studies for a 25 MW geothermal electricity projectwill be evaluatedduring implementation. 4. Institutional: Selection of FinancialIntermediaries (Fls) Annex 13, provides a detailed assessment of the eligibility of the two Fls (TSKB and TKB) in accordance with the World Bank's ECA Regional Guidelines for Financial Intermediary Operations. TSKB and TKB were selected basedon their ability to meet certaincriteriawhich include: (a) Their status as "Development Banks". Legally this qualifies them for on-lendingfrom the TurkishTreasury. (b) Compliance with minimum BIS risk weighted Capital Adequacy Ratio (CAR) --(10% at least) TSKB's CAR on a consolidated basis was 22.17% at end-2001. As of - 19- end-September 2002, TSKB's inflationadjustedsolo CAR was 22.75%. - TKB's regulatoryCAR was 77.11% at end-2001, whereas its Tier ICAR was 55.77%. The bank's high capital is somewhat offset by substantial non-performing loans, neverthelesscapital adequacy reducesonly to 67% when existing NPLs are reserved 100%. As of end-September 2002, TKB's CAR was 83%. The prudentialregulationsset by the Turkish BankingRegulatoryand Supervisory Agency (BRSA) calls for a minimum CAR of 8% and TKB and TSKB are far above that. (c) Total assets for each FI exceed US$200 million. (d) Uninterruptedprofitablityfrom 2000 onwards. (e) Review of their capacity and track record on investment appraisal and lending to infrastructureand energy projects. Both TSKB and TKB are within the limits set by the prudential requirements of BRSA with regard to their single and connected client exposure and foreign currency exposure. Their exposure in the form of equity holdings or participation in non-financial entities are also safely within the legal limits as defined in the Bankinglaw and applicable BRSA regulations. 4.1 Executingagencies: FinancialIntermediaries(TSKB and TKB) Special Purpose Debt Facilityfor -- RenewableGeneration Financing The Financial Intermediaries TSKB and TKB will be the executing agencies for the SPDF and will process loans to private sponsors for eligible renewable energy generation projects, and monitor the implementation of these projects. Both TSKB and TKB are experienced developmentbanks and have undertaken investment lending inthe energy sector. TSKB, a privately owned development bank, has substantial experience in implementingWorld Bank-funded projects. TSKB has successfully managed these types of loans and is well positioned to undertakethis assignment. TKB, although working for the first time with the Bank, is also a public development bank experienced in project financing, especially for medium-sized investments. TSKB has managed an EIB facility for energy sector lending, and also has a team of analystswho follow the energy industryand understandthe sectoral risks. TKB has not worked with the bank before, and although TKB is a financial institution with adequate institutional capacity in managing the implementation of this project, TKB will have to than the criteriathat the TKB has hithertoapplied in its own lending . come up along a significant learning curve, especially in using criteria that are more stringent Both TSKB's and TKB's project management capacity is satisfactory and proven. Both TSKB and TKB have appraisal and credit review procedures that are based on sound investment lending practices. There are no major issues or potential problems foreseen in their ability to execute the investmentlendingfor the project. Both banks have qualified personnel, adequate internal procedures and guidelines. Both TSKB and TKB have engineering departments whose staff, inter alia, ensure that the projects financed are technically feasible and in compliance with environmental regulations and other applicable licensing and permitting requirements. exclusively on energy projects -- These staff members do not focus but rather all investment lending undertaken by the Fls. The TSKB and TKB engineering departments are well aware of their specific safeguard implementation responsibilities under the Renewable Energy Project. They may hire specialist consultants/firmsto assist with issues requiring such attention. Operation Manuals specifically preparedfor this project by each bank will be usefultools for the managementof the projecVloan and provide implementationstandards for the banks, in their interactionwith the Bank. An issue that was discussed in some detail during project preparation was that both TSKB and TKB tend to take fairly conservative corporate lending positions which require high levels of - 20 - sponsor collateral. An assessment was made of the possibility to institute some elements of limited recourse project financing for renewable projects, with the objective of reducing the collateral requirements. It was decided that the pragmatic approach would be for the Fls, particularly their own credit review committees,to become comfortable with the risks of these projectsand then to graduallyencourage the Fls to reduce their collateraldemands. MENR, DSI and EIE for Project PipelineDevelopment and Monitoring -- MENR and their related agencies DSI and EIE will be responsible for the execution of the institutional development activities that support the project. MENR will be responsible for the development of the Renewable Energy Law, as well as revisions to related legislation. MENR has in the recent past successfully drafted legislation,conducted stakeholderconsultations,and has implementedthe ElectricityMarket Law. MENR is clearlycapable of doing the same for the next phaseof legislationinthe energysector. DSI and EIE will take on much of the implementationresponsibilityfor work on project pipeline development, and the tasks associatedwith review and evaluation of project applicationsfrom privatesponsors, issuanceof water rights,and technicalmonitoringof implementation. DSIand EIE are very capable institutionswith decades of experienceand an extensive regional network of offices/branchesthat: undertakeresourcemeasurements over long periods; conduct detailed assessment of project potential; prepare investigation and feasibility studies; etc. DSI is a world-class organization in its ability to plan and execute complex hydraulic resource utilization and irrigationschemes. The staff in both DSI and EIE are extremelywell qualifiedfor the tasks to be undertakenduring implementation. The sole issue during projectimplementationwill befor both DSI and EIE to assign an adequate number of staff to work on development and implementationtasks. Private Project Sponsors There are an adequate number of potential private project sponsors in Turkey who have implemented bothsmall hydro and wind projects. Based onthe ability of these firms to develop and operate such projects, and the procurement capacity assessment (see Annex 6A), the privateprojectsponsors would be able to implement renewable energyprojects. 4.2 Project management: Management of the projectwill be undertakenby TSKB and TKB. In both banks, specific bank staff will be in charge of Project management (including financial management) and implementation. There will be designated personnel who will be responsible for financial reporting, document controland disbursement from the specialaccount. In TSKB, marketingof the loan will be undertakenby the Corporate Marketing Division and the project appraisal will be carried out by Technical Services Division. In TKB, marketing of the loan will be done by the Credit Department and the project appraisal by the Project Appraisal Department. In both banks, marketing and project appraisal functions will be carried out by departments which will operate independentlyof each other. Each project proposal submitted to the banks will be evaluated by a team of specialistscomprised of an engineer(s), a financial analyst(s), and a project economist, who then prepare a project evaluation report. In TSKB, these project evaluation reports will be submitted to a credit committee comprised of the chief executive officer and the executive vice presidents. In TKB, project evaluation reports will be submitted to a credit committee comprised of the directors of the credit and project appraisal departments and the deputygeneraldirectors of the bank. Upon approval by the credit committees, these reports will be submitted to the boards of directors of each bank for approval. After the approval by the boards and signing of the (sub)-loan agreement, the (sub)-loan will be ready for disbursement. The first two projects of each bank will be sent to the World Bank for prior review. For subsequentprojects, approval by the Fls own Board's will be sufficient. Reportsto be sent to the Bank will be jointly prepared by -21 - the Technical Services, Financial Control and the Operations Divisions in case of TSKB, and in case of TKB, will bejointly preparedby the ProjectAppraisal, Credit and funding departments. 4.3 Procurement issues: The procurement capacity assessment of the likely beneficiary enterprises was completed through a review of some members of the hydropower producers association (HESIAD) and the windpower producers association (RESIAD). Based on this review it was decided that commercial practice would be used for procurement of goods contracts costing less than $ 5 Million equivalent or civil works contracts costing less than $8 Million equivalent. Above these levels international competitive bidding would be used. The proceeds of the renewable energy loan would not finance any contract with an affiliate of the sponsor of the project. However, sponsors could use affiliates for construction management (not Bank financed), with the SPDF-Loan financing non-affiliated civil contractors or goods contracts. Prior review would apply to all of the stages of contractingfor ICB including biddingdocuments, bid evaluationreports and draft contracts. For commercial practices prior review would be undertaken for the first two contracts awarded. The Bank would also review yearly with TSKB and TKB their procurement procedures and practices and on a random basis would carry out post review for one in five contracts. 4.4 Financialmanagement issues: The task team has conducted an assessment of the adequacy of the project financial managementsystem at TKB and TSKB. The current financial managementarrangementsfor the project at TKB and TSKB are satisfactoryto the Bank. 5. Environmental: Environmental Category: F (Financial Intermediary Assessment) 5.1 Summarize the steps undertaken for environmental assessmentand EMPpreparation (including consultation and disclosure) andthe significant issues andtheir treatment emerging from this analysis. This project has been classified as FI. In accordance with World Bank procedures the Operations Manual will contain a section on Environmental Review Procedures that would describe documentation, consultation and disclosure requirements. This section has been prepared and agreed upon by the Fls and the World Bank. All sub-loansto be financed by the SPDF will be subject to an environmentaland resettlement review process. These process and requirements incorporate the Republic of Turkey's regulatory requirements for Environmental Review (Regulation on Environmental Impact Assessment (EIA) published in Official Gazette No: 24777 and dated June 6th, 2002, as supplemented by Article 10 of EnvironmentalAct No: 2872 dated August 9th, 1983) and World Bank safeguard policies. In particular,the policies on EnvironmentalAssessment (OP4.01) and Resettlement(OP/BP 4.12). Since it is an FI loan, specific environmental issues are not known a priori, but are generally believed to be small, as related to small facilities that are built as "run-of-river" facilities or schemesthat utilize existing hydraulicfacilities (irrigationcanals, existingdams). 5.2 What are the mainfeatures o f the EMP andare they adequate? The EMP will follow the format adopted by the ECA region, namely a: (a) mitigation plan, (b) monitoring plan, (c) any necessary institutional strengthening, (d) implementation schedule for management, and (9 recordof publicconsultation. mitigation and monitoring, (e) institutional arrangements for effective environmental 5.3 For Category A andBprojects, timeline andstatus o f EA: Date ofreceipt o f final draft: Not Relevant since project is category FI 5.4 How have stakeholdersbeen consulted at the stage of (a) environmental screeningand (b) draft EA - 22 - report on the environmental impacts andproposed environment managementplan? Describe mechanisms of consultation that were usedandwhich groups were consulted? Stakeholder will be consulted in a manner consistent with World Bank policies and Turkish regulations and as described fully in the environmentalsection of the Fl's'Operations Manual. Stakeholderswill be consulted during the environmental assessments of the individual projects. The Ministryof Environment is chargedwith this responsibility. This Environmental Review Procedures Section of the Operations Manual were deliveredto the lnfoshopby March loth, 2003- priorto the departure of the appraisalmission. 5.5 What mechanismshave beenestablishedto monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives andresults ofthe E m ? All sub-loan agreements requiring an EMP will includea conditionfor the sub-borrower(Project Sponsor)to agree to implementthe EMP. Each individual projectwill be evaluated by DSI and the Ministryof Environmentand monitored as needed. Measures of the overall impact on the global environment of the whole renewable energy projectcan be easily developedsince the renewable electricity resultingfrom the project will largely replace electricity produced from fossil fuels. This renewable electricity production would thus have a positiveimpact on pollutionand green housegas emissions. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, andspecify the project's social development outcomes. The positive social impactsof the project are the benefitsthat would accrue to the populationin general from the reductionin pollution associated with energy productionfrom these renewable generationprojectsreplacinggenerationfrom fossil fuel fired power plants,whileIn cross boundary benefits will result from the reduction in the emission of green house gases. addition, it is expectedthat most of these renewable plantswill be hydro power plantswhich tend to be built in the poorer,mountainous partsof Turkey. At the marginit is these regionsthat would benefitfrom the employment due to construction activity as well as continuing employment from operating and maintainingthe plantsonce built. Necessary steps would be undertaken to ensure that no negative impacts arise from land acquisition or involutantaryresettlement. Specifically, EMRA shall not provide a "Public Benefit Document" for renewable energy generationfacilities that would lead to the exercise of eminent domain and acquisition of land for any sub-project. There are two possible conditions under which private sponsors may obtain landtitlehightsto develop sub-projects: 1, Site where the generation facilities are to be constructed belongs to private persons: In this case, the following requirementswill be reflected in the Legal Agreements betweenthe Bank and the Fls and in the Operational Manuals of the Fls. These requirements shall also be includedin the legalagreementsthat the Fls enter intowith project sponsors: (a) An agreement by the owner to transfer the title and rightsto this land and/or any intangibles related to the land to the private sponsor, will have to be made through an agreement reached freely and certified by a notary public attesting to "willing-buyer", "willing-seller" status of the transaction. (b) All land must be purchased inthe open market. Sub-project sponsorswill providetitle deeds certifyingto the transferof ownershipof the land. (c) The FIwill interviewlandowners to assure that the land transfer is voluntary. The World Bank will review the first two projectspreparedto ensure that the land was procured - 23 - through market mechanisms and that no involuntary resettlement is involved. Subsequently, the Bank would also review yearly with TSKB and TKB the documentation for land acquisition provided by privatesponsors and on a random basis would carry out post review. 2. Site(represented generation facilities are to be constructed belongs to Government where the by Ministryof PublicAuthority): In this case the following requirements will be reflected in the Legal Agreements between the Bank and the Fls and in the Operational Manuals of the Fls. These requirementsshall also be included inthe legal agreementsthat the Fls enter intowith project sponsors: (a) Since the EMRA shall not provide a "Public Benefit Document" for renewable energy generation facilities, the exerciseof eminent domain and acquisition of land for any sub-project is ruled out. However, transfer of currently held public lands with titlehightsto this land and/or any intangibles relatedto the land, from the governmentto the sub-project sponsor, may occur under applicable law relatingto transfer of public landfor projects. (b) Each FIwill conduct an assessmentto verify and re-affirmthat there are no secondary claims on the Governmentlandthat have beentransferredto the sub-project sponsors. The World Bank will review the first two projectsto ensure that there are no secondary claims on Government land acquired for the project. Subsequently, the Bank would also review yearly with TSKB and TKB the documentationfor land acquisition provided by private sponsors and on a random basis would carry out post review. 6.2 Participatory Approach: How are key stakeholdersparticipatinginthe project? The hydropower producers association (HESIAD) and the windpower producers association (RESIAD) have already been consulted and have made significant inputs to the project. The Clean Energy Foundation and the Turkish Society for the Protection of Nature were also consulted and their views taken into account. Individual sponsors of renewable energy projects were also consulted. It is expectedthat further consultationswith all of these groups will continue as the projectprogresses. 6.3 How does the project involve consultations or collaboration withNGOsor other civil society organizations? See 6.2 above. 6.4 What institutional arrangementshave beenprovidedto ensure the project achieves its social development outcomes? See 6.1 above. 6.5 Howwill the project monitor performance interms of social development outcomes? - 24 - 7. Safeguard Policies: 7.2 Describe provisions made by the project to ensure compliance with applicable safeguardpolicies. See above discussionon approachto environmental assessments and involuntaryresettlement. The other safeguardpolicythat is relevantis the safety of dams. 1. Dam Safety. All sub-loans to be financed underthe project will be subject to the provisions of the World Bank Operational Policy 4.37 Safety of Dams. The Operations Manual will includeprocedures to be followed in relationto largedams which are summarized as follows: The Fl's will screen all sub-projects to be financedunder the loan, to determine whether any contain largedams in accordancewith the definitionsof OP 4.37: (a) dams greaterthan 15 m in height;(b) dams greater than 10 m but less than 15m in height and havinga crest length greater than 500m, or a spillwaydesign dischargeof morethan 2000 m3/s, or having a reservooirvolume of greater than 1.O million m3; or (c) if they presentspecialdesign complexitiesfor example, locationin a zone of high seismicity,foundationsthat are complex and difficultto prepare,or retentionof toxic materials For sub-projectsinvolvinglargedams the Fls will requirethe sub-borrowerto: appointan independent panelof experts(the Panel) to reviewthe investigation,design, and constructionof the dam and the start of operations; prepareand implement detailedplans: a planfor constructionsupervisionand quality assurance, an instrumentation plan, an operationand maintenanceplan, and an emergency preparedness plan; prequalifybiddersfor civil works involvingdams and associatedstructures; and carryout periodicsafety inspectionsof the dam after completion. The compositionand activitiesof the independentpanelof expertsshall not precludeany dam supervisionactivitiesof DSI. For sub-projectsthat will rely on the performanceof an existingdam or a dam under construction(DUC) as defined in OP 4.37, the Fls will requirethe sub-borrower to appoint an independent expertor experts to carry out the due diligencework on the existingdam as defined in Paras 8 and 9 of OP 4.37. The Panel of expertsfor largedams shall consist of three or moreexperts, appointedby the -25- sub-borrower and acceptableto the responsible FI and the World Bank, with expertisein the various technical fields relevant to the safetyaspectsof the particulardam.. A modelTerms of Referenceis included inthe OperationalManual. For convenienceof projectsponsors, the Fls will compiled a list of specialistswho are acceptable to the World Bank. However, individualsub-borrowerswill be responsible for constitutionof their own panel and are not confinedto the list of specialistscompiledby the Fls. All such panelmemberswill, however, be requiredto receivethe no objectionof the responsibleFIand theworld Bank. F. Sustainabilityand Risks 1. Sustainabiiity: Financialsustainabilityshould be achievedowing to the regulatory certaintyachievedthrough the licensingand tariff framework applicableto renewableenergy projects, and the availability of a potential pool of financially viable projects. Hydropower assets in particular would be financially quite sustainable given their low operating cost once built and the additional non-energybenefits they would have inthe Turkishelectricitymarket. Environmental sustainability is assured based on the eligibility qualifications and project selection process for renewable projects. Social sustainability is also assured as there will be no involuntaryresettlement associated with any of these projects. Institutional sustainability will be achieved by the establishmentof: (a) credit delivery and implementationsupervision mechanism under the umbrella of TSKB and TKB -- which should serve to attract other sources of financing for renewable energy projects; and (b) institutional capacity and processes within the Government to continue the identification of attractive renewable energy projects. 2. CriticalRisks (reflecting the failure o f critical assumptions found inthe fourth column o f Annex 1): Risk Risk Rating Risk Mitigation Measure FromOutputsto Objective The Energy Market Regulatory Authority M On-going dialogue with the Government to (EMRA)performs its functions efficientlj ensure the regulatory independenceo fEMRA. andmaintains regulatory certainty and This dialogue is part o f the overall World Bank stability. Specifically EMRA should support to Turkey. process license applications efficiently, and ensure that retailers buy from Continued assistance indeveloping and renewable energy suppliers who can sell implementing a regulatory framework that is at or below the wholesale marketprice. consistentwith achieving regulatory certainty andstability. Availability o f economically and M A reasonablenumber o fpotentialprojects have financially attractive renewableenergy been identifiedthat will be able to meet the projects. market-basedcommercial tests o f financial and economic viability. The institutional developmentactivities that will be undertaken will firher enhance existingcapabilities o fDSI andEIEinidentifyingnewprojects. From Componentsto Outputs Willingness and risk appetite o fFinancial M TSKB and TKB have assessed the market and Intermediaries (TSKB and TKB) to use the potentialprivate sponsors o frenewable - 26 - SPDF funds for lendingto eligible energyprojects andare comfortable with the renewable energy projects whde taking commercial andcredit risks. The clarification Icommercial risks. of the regulatory framework andthe available project potential have been key inreducing these I risks. Willingness ofretailers to purchaseenergy M Eh4RAhas issuedan amendmentto its licensing onlongterm contracts from renewable regulations requiringthat retailers purchase energy generators, given their small size electricity from small renewable energy generators as long as it is at or below the market price. Overall Risk Rating M 3. Possible Controversial Aspects: None havebeen identified. G. Main Loanconditions 1. EffectivenessCondition 1. Executionof the SubsidiaryLoanAgreements (on-lendingagreements) between: (a) the Undersecretariatof Treasury and TSKB; and (b) the Undersecretariatof Treasury and TKB. 2. The OperationsManuals of bothTSKB and TKB are formally adoptedby their respective Boards of Directors. 3. Satisfactorylegal opinionson the legalagreements havebeen received. 2. Other [classifyaccordingto covenant types used in the LegalAgreements.] Processingof Eligible Projects 1. The first two projects financed by TKB and TSKB shall be subject to prior review by the World Bank. This review will include ensuring that: (a) no involuntary resettlementwould occur; (b) procurement contracts are awarded in conformitywith the agreed procedures and Bank Guidelines; (c) environmental assessments are being carried out according to the agreed procedures; and (d) the procedures in the operationalmanualsare beingfollowed. 2. TSKB and TKB will provide FinancialManagement Reports satisfactory to the World Bank as well as auditedfinancialstatements. 3. Provisionsof Dam Safety OP 4.37 are followed in all cases where large dams are involved. 4. The SPDFwill not be used to financeany projectinvolving involuntaryresettlement. FinancialCovenants 1. Annual IAS basedaudit of the TKB's and TSKB's financial statements. 2. Annual IAS basedaudit of the projectfinancialstatementsat TKB and TSKB. - 27 - TKB and TSKB shall maintain a minimum risk-weightedcapital adequacy ratio (as defined by the Baste Capital Accord) of eight percent (8%). TKB and TSKB shall insurethat net incomefor each fiscal year, when added to provisionfor losses and loan collection and interest and other charges on debt, adjusted for incometaxes shall be at least 1.1 times maximum debt service requirements. TSKB and TKB shall maintain a collectionratio of not lessthan 85%. H. Readiness for Implementation 0 1.a) Theengineeringdesigndocumentsforthefirstyear's activitiesarecompleteandreadyforthestart o fproject implementation. El1.b)Notapplicable. 02. Theprocurementdocumentsforthefirstyear'sactivitiesarecompleteandreadyforthestartof project implementation. 3. The Project ImplementationPlan has been appraisedand found to be realistic ando f satisfactory quality. 04. Thefollowingitemsarelackingandarediscussedunderloanconditions(SectionG): I. Compliance with Bank Policies 1. This project complies with all applicable Bankpolicies. 2. The following exceptionsto Bankpolicies are recommendedfor approval. The project complies with all other applicable Bank policies. Henk Busz Andrew Vorkink Sector ManagedDirector Country ManagerlDirector -28- Annex 1: Project DesignSummary TURKEY: RenewableEnergy Project Sector-relatedCAS Goal: Sector indicators: Sector1country reports: (fromGoal to Bank Mission) Increasedprivate sector investment Adequate newprivateinvestmentin \nnualsector statistics and reports Govemment and Regulator maintain in generationwithout govemment generationto meetdemand. ireparedby MENRand EMRA. an attractive economic and guaranteesandwith low regulatoryenvironmentfor private environmentalimpact. electricity investors. ProjectDevelopment Outcome I Impact 'roject reports: (fromObjectiveto Goal) 0bjective: Indicators: The project objective is to (a) Increaseinamount of electricity rnnualsector statistics and reports Government remains committedto increaseprivatelyowned and producedfrom privatelyowned ireparedby MENR and EMRA. the objectiveof increasing operateddistributed power renewablegenerationfacilities generationfrom renewableenergy generationfrom renewable sources, under normalhydraulicand wind sourcesin Turkey andthe withoutthe needfor government conditions. implementation of the Electricity guarantees, within the [Measuredin GWh per year.] Market Law. market-basedframework of the new Turkish Electricity Market Law. Base Regulator (EMRA) ensures Year 2002 1.490 GWh adequate clarity and certainty of the Targets: regulations and applies them fairly 2006 2,040 GWh and objectively. 2007 2,590 GWh 2008 3,140 GWh 2009 3,690 GWh (b) Increasein generationcapacity of privatelyowned renewable generationfacilities. Base Year 2002 348MW Targets 2006 473MW 2007 598MW 2008 723 MW 2009 848 MW (c) Annual decrease in carbon dioxide emissions in metric tons as a resultof renewableenergy generation.( First year assumes renewablesreplacelignite, later years they replacenaturalgas) 2006 -550,000 tons 2007 -466,000 tons 2008 -700,000 tons 2009 -932,000 tons - 29 - 'roject reports: (from Outputs to Objective) I.1& 1.2 FinancialManagement The EnergyMarketRegulatory teports and Progress Reportsfrom Authority (EMRA) performs its 3KB and TKB. functions efficiently and maintains of capitalraised from non-WB regulatorycertaintyand stability. sources for every WB dollar. '.3 Reportsfrom lending Specifically EMRAshould process istitutions and MENR onthe license applications efficiently, and 1.3 Increasein pool of long-term lrowthof long-term credit and ensures that retailers buyfrom financingfor renewableenergy lrantsfor renewableenergy renewableenergy supplierswho car irojects. sell at belowthewholesale market price. Availability of economicallyand financiallyattractiverenewable energy projects. 'roject reports: (from Componentsto Sub-components: component) Outputs) On-lending agreementbetween Willingness and risk appetiteof (SPDF): To establisha term rreasuwand the Financial Financial Intermediaries(TSKB and lendingfacilityto leverage private ntermediaries. TKB) to use SPDF funds.for sector equity investment,export lendingto eligible renewableenergy credit financing and other forms of projectswhile taking commercial localdebt financingfor qualified risks. renewablegeneration projects. - 30 - Annex 2: Detailed Project Description TURKEY: Renewable Energy Project By Component: Project Component1 US$SOO.OO million - Special Purpose Debt Facility(SPDF)for renewablegenerationfinancing: Total investment in renewable energy generation financing under the project is expected to be around $500 million which would include equity financing from the private sponsors, debt financing from export credit agencies, the World Bank Special Purpose Debt Facility (SPDF) as well as commercial banks. financialThe SPDF is a term lending facility which will be established and will be operated by two intermediaries (Fls). The two Fls selected are: (a) Turkiye Sinai Kalkinma Bankasi(TSKB) -- theTurkish IndustrialDevelopmentBank (b) Turkiye KalkinmaBankasi(TKB) -- theTurkish Development Bank The World Bank loan for the SPDF will be on-lent from Treasury (the Borrower)to the Fls. The Fls will utilize the SPDF to provide long-term debt financing to private sponsors of renewable energy projects. The SPDF is intended to leverage equity investment from local private developers, export credit financing and other providers of local debt financing for the constructionand operation of qualified renewable generation projects. The two Fls have been selected based on their financial strength, their capacity to appraise and supervise project implementation, and also the ability of the Turkish Treasury to on-lend public funds to these agencies. Key Featuresof the SPDF (a) Choice of Loan Instrument: An IBRD Fixed Spread Loan with Repayment Schedules Linked to Actual Disbursementshas been chosen. The main advantage of this instrument is that all disbursements in a given semester will have their own repayment schedule. This allows the Fls to better link the IBRD loan repaymentsto the repaymentsof the sub-loans by the sponsors. It also offers them the ability to offer reasonable grace periods for all sub-loanseven if disbursementsoccur in later years. (b) Allocation of Loan Amount to the Fls: In recognition of Treasury's preference to agree on an ex-ante allocation of the loan amount to the two Fls, in order to clarify both responsibility for commitment charges and also simplify the initial on-lending agreements between Treasury and the Fls, it was tentatively agreed that the proposed 200 million USD would be allocated as follows: -- 50 million USD to TKB 150 million USD to TSKB (c) Disbursement: Four meansof makingdisbursementswould be accepted.These are: 1) the Fls will send the disbursementrequestsfor eligible expenditures of sub-loansdirectly to IBRDfor payment; 2) disbursementswill be made from the special accounts; 3) the Bank could reimbursethe Fls for eligibleexpenditures; 4) special commitment letterswould be providedfor letters of credit. It is anticipated that most of the disbursementswill be from the special accounts. (d) Subsidiary LoanAgreements between Undersecretariatof Treasury and the Fls: The IBRDrenewableenergy loanto Treasury shall be on-lent to the Fls on a back-to-backbasis (Le. with the same repaymentterms) and denominated in US Dollars. An additional - 31 - one-time fee as per Law 4749 (Public Financeand Debt Management) will be charged. (e) Sponsor Eligibility: BeneficiaryEnterprisesborrowingfrom the Fls will be enterpriseswith morethan 50% privateownershipthat will be undertaking investmentsto generate electricity from renewable resourcesas defined in EMRA's LicensingRegulation. Perthe Environmental ImpactAssessment Regulation,this would include hydro-electric projects that are below all of the following thresholds: (a) 50 MW installed capacity; (b) reservoir area below 15sq. km; and, (c) reservoir storage volume of less than 100 millioncubic meters. The 50 MW size limit would also makethese projects qualifyfor connection to the 34.5 kV network under the existing Grid Code. In addition, the grid connectionfacilitiesto the 34.5 kV networkand connectioninfrastructurewould also require only a simplified EIA as per the EnvironmentalImpactAssessment Regulation. (9 Project Eligibility: Apart from complyingwith the definitionof "generationfacilities based on renewableresources"in EMRA's LicensingRegulation -- (see above). The project will meet the following conditions: -- Minimum25% sponsor equity financing. Minimum debt coverage ratio of 1.2 calculated on a three year moving average after -- completionof the investmentand throughout the life of the loan. Financial rate of return of at least 10 percent. Certification from the relevant local or national authorities that the proposed project meets all environmental laws and regulations in force in Turkey, as well as the World - Bank policyon environmentalassessment (defined in the Operational Manual). Eligibleprojectswould be built on river basins agreed in the project agreements between - TKB, TSKB and the Bank. Projects involving involuntary resettlement are not eligible for financing from the SPDF - facility. Compliancewith the World Bank procurement proceduresfor the procurement of goods and civil works to be financed under the SPDF sub-loans. (9) Sub-Loan and FinancialLeaseTerms and Conditions: - Sub-loans will be made for the financing of plant and equipment, goods and civil works for investment purposes (where applicable sub-loans can be extended as a leasing - facility). Financialleaseswill be for equipment only. Sub-loans extended to beneficiary enterprises will have a minimum total maturity of 6 years with a minimum grace period of 2 years. Financial leases will be for a minimum - duration of 6 years. The SPDF facility can finance up to 50% of the investment cost. The aggregate amount of sub-loan or financial leases to a single sub-project cannot exceed USD 20 million. Total aggregate value of multiple sub-loans or financial leases (from TSKB and TKB) - made to any Beneficiary Enterpriseand its affiliates shall not exceed USD 40 million. Sub-loans will be evaluated in accordance with the Fl's regular project and credit evaluation guidelines and will include (where applicable) criteria in the Guidelines for - Sub-loan/EligibleProject Evaluationspecified in Section V of the Operational Manual. Sub-loans will be denominated in USD; the foreign exchange risk will be borne by the - beneficiaryenterprise. Sub-loan pricing will be determined by the Fls based on the risks of the particular beneficiaryenterprise and eligible project being financed -- The spread is expected to be - no greaterthan 300-350bp for the riskier projects/sponsorswith tight debt service ratios. Inthe case where the beneficiary enterprise seeks funds from both of the Fls, the Fls will ensure that the combined funds provided to any single project from the SPDF does not -- exceed USD 20 million. The first two sub-loansof each FI are subject to prior review by the IBRD. No expenditures for a project shall be eligible for financing out of the proceeds of the - SPDF if such expendituresshall have been made earlier than June 30,2003. SPDF sub-loans shall be made on terms whereby the FI shall obtain, from the - 32 - beneficiaryenterprisethrough appropriate legal means (a SPDF Sub-LoanAgreement), rights adequate to protect its interests and those of the Undersecretariatof Turkish Treasury, and the World Bank includingthe rightto: - require the beneficiaryenterprise to carry out and operate the facilities with due diligence and efficiency and in accordance with sound technical, financial and - managerialstandards and to maintainadequate records; require: (i) that the goods and civil works to be financed out of the proceeds of the sub-loan shall be procured in accordance with the provisionsdefined in the Operational Manual (see Annex 6 for a discussion of these provisions);and (ii) that such goods and civil works shall be used exclusively in the carrying out of - approvedeligibleprojects; inspect, by itself or jointly with representativesof the World Bank, if the World Bank shall so request, such goods and the sites, civil works, plants and - construction,the operationthereof,and any relevantrecordsand documents; require that: (i) the beneficiary enterprise shall take out and maintain with responsible insurerssuch insurance, against such risks and in such amounts, as shall be consistent with sound business practice; and (ii) without any limitation upon the foregoing, such insurance shall cover hazards incident to the acquisition,transportationand delivery of the goods and civil works financed out of the proceeds of the sub-loan to the placeof use or installation,any indemnity thereunder to be made payable in a currency freely usable by the beneficiary - enterpriseto replaceor repair such goods and civil works; obtain all such informationas the World Bank shall reasonably request relating to the foregoing and to the administration,operations and financial condition of the beneficiary enterprise and to the benefits to be derived from the eligible - sub-project; and suspendor terminate the right of the beneficiaryenterpriseto use the proceeds of the sub-loan upon failure by such enterpriseto perform its obligations under its sub-loanAgreement. Potential Project Pipeline 2004 and 2005 -- The short-termpipeline of potential small hydropower projectsthat may be eligible for considerationby the two Fls providedthat MENR, EMRA and the Fls own eligibility criteria are met, are listed in Table 1 and 2. (Thislist is not restrictive.Other projectscould also be considered by the Fls if they so chose and the projectsmeetthe requirements.) - 33 - Table 1. BOT Projects -With Signed Contracts and Water Rights 0,Table 2. Authorized Autoproducer Projects Project Developer Project Name Design Capacity DogurgalarI, II Enda Akcay I, II 27.75 Molu Karasu 5.00 Molu IZamantilBahcelik 4.17 lctas Enerii IMercan 14.00 - 34 - Annex 3: Estimated Project Costs TURKEY: Renewable Energy Project Local Foreign Total US $million US $million US $million 1. Renewable Energy GenerationFinancing ---- 0.00 IBRD Special PurposeDebt Facility - 120.00 80.00 200.00 Sponsor Equity 150.00 150.00 Export Credit Financing 0.00 100.00 100.00 Other Borrowing 50.00 0.00 50.00 Total Baseline Cost 320.00 180.00 500.00 PhysicalContingencies 0.00 0.00 0.00 Price Contingencies 0.00 0.00 0.00 Total Project Cost; 320.00 I 180.00 1 500.00 I Front-endfee 2.03 2.03 Total Financing Required III 320.00 182.03 I 502.03 Identifiable taxes and duties are 0 (USSm)andthe total project cost, net oftaxes, is 502.03 (US$m). Therefore, the project cost sharingratio is 40.24% of total project cost net oftaxes. - 35 - Annex 4: Cost BenefitAnalysis Summary TURKEY: Renewable Energy Project SummaryofBenefitsand Costs: Name of Project FinancialRate of NPV ( Financial) EconomicRateof NPV ( Economic) Return FRR Retum ERR 17% I $3.4 Million I 20% I $5.5 Million I Aydin 20% $4.0 Million 23% $6.4 Million Typical Composite 16% $8.1 Million 19% $13.2 Million The table above shows three projectswhich are considered representativeof those which will be financed by the Fls. The Mugla and Aydin projects (named after the provinces they are in) are actual projects presented to TSKB for financing when the renewable energy fund is available. The Typical Composite project is not a single project but a composite prepared by TKB from 3 projects they have financed and the projects presented to them for financing. This is part of an effort by TKB to keep the actual projectsconfidential. These projects are basically quite attractive and take advantage of existing infrastructure. In general, they were not exploited by DSI because it largely concentrated on larger projects and was not very interested in small ones. The Financial Internal Rate of Return (FRR) and the Economic Internal Rate of Return ( ERR) are both shown as well as the net present values of the projects discounted at 10% real. They indicate that the projects are very robust bothfinancially and economically. There is not a great deal of difference between the FRR and the ERR since Turkey has a relatively open market economy with prices generally reflecting costs. All calculations have been done in constant US dollars. Given the volatility of the Turkish Lira and the extremely high rate of inflation, it is difficult to use it for analysis purposes and neitherTSKB nor TKB does. MainAssumptions: 1. Benefits For the financial analysis the gross benefit is the value of the electricity produced. Electricity production is based on average hydro conditions. The price is in US cents/kWh. It is assumed that the electricity is sold at wholesale market prices and that the wholesale price over time approximates the long run marginal cost of production which is about 5.0 US centslkwh. These prices exclude VAT and other taxes. Currently the average wholesale price is about 5.3 US cents/kwh also excluding VAT and other taxes. - 36 - The cash flows for the purposes of the financial analysis are after taxes, which, however, are fairly low. These projects do not pay VAT on investments, they are exempt from customs and stamp duties and they have an investmentallowanceof 40% of investments.Under this investmentallowance scheme, in addition to normal depreciation of 100% of investments,they can write off an additional40% of investments as needed to eliminate corporate taxes in the early years of the project. Since these projectsare quitecapital intensivethis benefitis substantial. Moreoverthe depreciationand write offs are indexed to the revaluation index, set by the Government, which in turn is usually tied to the wholesale price index so that they are not diminished by inflation. The plants are assumed to have a 20 year life even though hydropowerplantstypically last much longer- a 40 year life is not uncommon. For the economic analysis corporatetaxes are excluded. The only additional benefit considered for this analysis is the value of the reduction in carbon dioxide emissions due to generation from renewable resources rather than generation from fossil fuels. For the purpose of this analysis, it is assumed that the alternative to these renewableenergy plants is a lignite fired power plant during the first year in which they operate ( these renewable energy plants would back out power produced from lignite during the period of excess capacity which is expectedto last until at least 2007) and then they back out power that would have been produced by new gas fired combined cycle power plants - theleast polluting fossil fuel fired plants- for the remaining 19 years of the analysis. Therefore the additional value attached to the electricity generated from renewable plants is the value of avoided emissions of carbon dioxide from the lignite plants and combinedcycle plants estimated to be $3.25 per ton of carbon dioxide,following the suggestionof the PCF. [It should be notedthat there is currentlyno mechanismto reflectthese estimatedexternalitiesintothe price of electricity]. If VAT, which would be paidon the wholesale electricity produced, were considereda benefitfor the economic analysisit would raisethe ERR by about 5%, to for example 22 % for the Mugla Project. If the average retail price includingtaxes was used rather than the wholesale price ( as an indicationof customer's willingness to pay), then the ERR for the Mugla Project would soar to 40 % . The project team, however, thinks these latter calculationsare not very meaningfulin this situationsince the issue is not whether electricity will be provided ( which might justify use of some measure of customer's willingnessto pay) but ratherfrom what source. 2. costs Costs of constructionfor the financial and economic analyses are based on the proposalsof the developers. They excludeVAT which would not be leviedon these investments. The constructionperiod is taken to be 24 months from start to completion. Unit operating costs are assumed at 1.4 US cents/kWh excluding depreciation (except for the TKB Typical Compositewhich assumes 1.O centlkwh operating costs). This is much higher than for major hydropowerplants, but it is believedthat the smaller plantslack the economies of scale of the largerones. Calculations: All calculations are done in constant dollars, based on estimated costs and generation and forecast wholesale electricityprices. The FRR and ERR are real rates of return.The real interestrate used to calculateNPV is 10%. - 37 - Sensitivity analysis/ Switching values of critical items: For the purposesof this analysis, the Mugla project is taken as representative.It has an ERR of 20% as comparedwith the assumed economicopportunitycost of capital of 10%. The switching values of the major variables ( Le. the deviationfrom the base case which would yield an ERR of 10%)are summarized below. INPUT SWITCHINGVALUE InvestmentCosts +81% Capacity Factor -45% Electricity Price -34% - 38 - Annex 5: Financial Summary TURKEY: Renewable Energy Project MUGLA AYDIN TYPICAL TSKB TSKB COMPOSITE Inst. Cap. (MW) 10.95 8.9 20 Plant UtilizationFactor 49% 59% 60% Unit Inv.Cost ($/kW) 718 741 1,000 Unit Prod.Cost (c/kW) 1.4 I.4 1 The main assumptionsfor this analysis is: Investmentperiod: 2 years Economic Life: 20 years FinancingPlan Sponsor Equity: 30% SPDF/IBRD Loan: 40% Other Loan: 30% SPDF Loan Terms Interest Rate: 7.5% (assumed,is World Bank rate with mark-ups by Fls) Maturity: 10years total maturitywith 3 year grace period. Other LoanTerms (probably ECAs) Interest Rate: 9.0% Maturity: 8 years total maturitywith 2 year grace period. InvestmentAllowance: 40% [Allows the projectsponsor to obtain a tax allowance for an amount equal to 40% of the total investment cost.] - 39 - Year 1 2 3 4 5 6 7 8 9 10 11 12 (AI"keBn MUSD) I- 3,610 4,620 civilwcwk 3536 1,179 tiriment 3,143 PdlllteESt 74 298 Finanang 3,610 4620 EmLoEn 1,965 1,179 4-w WEflaan ,2357 1,645 1 , m sak!Rice(m) 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 UnitOperatingCost(cikWh) 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 (exd.dq") SalesFhmUes 2,342 2,342 2342 2,342 2342 2,342 2,342 2,342 2342 2,342 operatingcads 6 5 6 6 5 6 6 5 6 6 5 6 6 5 6 6 5 6 6 5 6 6 5 6 6 5 6 6 5 6 CashGeneratedfromSdes 1,686 1,686 1,686 1,686 1,686 1,686 1,686 1,686 1,686 1,686 IncreaseinA43 195 0 0 0 0 0 0 0 0 0 0 262 262 262 262 262 262 262 131 0 0 0 157 157 157 I57 I57 I57 157 79 0 363 363 363 363 363 363 181 0 0 0 6 2 5 7 8 2 7 8 2 7 8 2 7 8 2 7 8 2 6 0 0 2 8 8 79 IBRD 1I- 147 142 I23 103 83 64 44 25 5 0 IBRD2Ink& 88 88 85 74 62 50 38 27 15 3 OtherLOanIntetEd 212 204 171 139 IC8 73 41 8 0 0 Total Interest 448 435 380 316 251 187 I23 59 20 3 TotdRepaymentsaInterest 448 1,059 1,161 1,097 1,033 969 905 660 308 82 0 0 0 0 7 6 3 4 3 3 6 4 3 8 5 4 0 5 4 1 6 0 0 0 0 0 0 0 0 0 0 NetcashFkw 0 0 1,098 627 95 589 577 374 417 641 973 1,189 IRR 17% DaMcoyerageRaiio 3.5 1.6 1.5 1.5 1.6 1.7 1.9 26 55 20.7 P-wdling =me) 22 1.5 1.5 1.6 1.7 21 3.3 9.6 - 40 - MUGIAPROJECT-11Mw Year I 2 3 4 5 6 7 8 9 10 11 12 (AllnumbecsinthanandUSD) NetSales 0 0 2,342 2,342 2,342 2,342 5342 29342 2,342 2,342 2,342 2,342 operating- 0 0 6 5 6 6 5 6 656 656 656 656 656 656 6 5 6 6 5 6 Depredabl 411 411 411 411 411 411 411 411 411 411 ProlitfromSakS 0 0 1,275 1,275 1275 1275 1275 1275 1275 1,275 1,275 1,275 FinancialExpenses 0 0 4 4 8 4 2 2 364 300 235 171 107 47 14 1 IBRDILoan 147 138 118 98 79 59 39 20 2 0 lsRD2Loan 8 8 8 8 83 71 59 47 35 24 12 1 Otherhn 212 196 163 131 98 65 33 4 0 0 ProlitbeforeTax 0 0 8 2 7 8 5 3 911 975 1,103 1,167 1- 1,273 corporateTax (W?) 0 0 0 0 0 76 364 385 416 420 Net Profit 0 0 8 2 7 8 5 3 911 900 696 739 782 822 8 4 4 8 5 3 1 2 3 4 5 6 7 8 9 I O I1 12 ~ (NnumbecshbcmsandUSD) cunentAssets 0 0 1,293 1,919 2,444 3,033 3,610 3,984 4,401 5,042 6,015 7 m cash&banks 0 0 1,098 1,724 2,249 2,837 3,415 3,789 4,205 4,847 5,820 7,008 p/R 0 0 195 195 195 195 195 195 195 195 195 195 F dAssets(net) 3,647 8,341 7,930 7,518 7,107 6,695 6,284 5,872 5,461 5,050 4,638 G~~ssfixedassets 3,647 8,341 8,341 8,341 8,341 8,341 8,341 8,341 8,341 8,341 8,341 8,341 Accumulatedd?p" 411 823 1,234 1,646 2,057 2,469 2,880 3,292 3,703 4,115 TotalAssets 3,647 8,341 9,223 9,438 9,551 9,728 9,894 9,856 9,862 10,091 10,653 11,430 Short-termLiabilities 37 112 791 935 919 979 13230 1262 W 1,059 755 551 475 IBRD 1LoanInstam 0 0 262 262 262 262 262 262 131 0 0 IBRD2LoanInsta(lmer 0 0 0 I57 157 157 I57 157 157 157 79 0 OtherLoan install^ 0 0 363 363 363 363 363 363 181 0 0 0 AcauedInte~~l 37 112 112 99 83 67 51 35 19 7 1 0 -tax=Payabl 0 0 0 0 0 76 343 364 385 4M 416 420 Dividentstobedisbibut; 0 0 0 0 0 0 0 0 0 0 0 0 Othershoti4ennIiatW 0 0 55 55 55 55 55 55 55 55 55 55 Long-termLiabilii 1,965 5,501 4,876 4,094 3,312 2,531 1,749 967 367 79 0 0 IBRDlLOan 1,965 1,965 1,703 1,441 1,179 917 655 393 131 0 0 0 lsRD2Loan 1,179 1,179 1,022 864 707 550 393 236 79 0 0 Otherloan 2,357 1,995 1,632 1,269 907 544 181 0 0 0 0 Shareholdets'Equity 1,645 2,729 3,555 4,408 5,319 6 3 9 6,915 7,654 8,436 9,258 10,102 10,955 PaHn aptal 1,645 2,729 2,729 2,729 2,729 2,729 2,729 2,729 2,729 2,729 2,729 2,729 R e m s 0 0 827 1,679 2,599 3,490 4,186 4,925 5,707 6,529 7,374 8,227 Total Liabilities 3,647 8,341 9- 9,430 9,551 9,728 9,894 9,856 9,862 10,091 10,653 11,430 -41- MUGIAPROJECT-11Mw 1 2 3 4 5 6 7 a 9 10 11 12 (AllnumbersinkusandUSD) InvestmentExpenditures 3,647 8,341 InvestmentAllowance R TotalApplicablelnvestme 1,459 3,337 3,337 3,337 3,337 3,337 3,337 3,337 3,337 3,337 3,337 3,337 ProMbeforeTax 0 0 827 853 911 975 ' 1,039 1,103 1,167 1,227 1,260 1,273 Allowance Used 0 0 827 853 911 746 0 0 0 0 0 0 Total InvestmentAllowan 0 0 827 1,679 2,590 3,337 3,337 3,337 3,337 3,337 3,337 3,337 TaxableIncome 0 0 0 0 0 229 1,039 1,103 1,167 1,227 1,260 1,273 Taxation 0 0 0 0 0 76 343 364 385 405 416 420 Corporatetax rate=33% Taxableincome= Profitbefmtax Investmentallowance - Totalapplicableinvestmentallowance= Investmentallowancerate * Total Investmentexpenditures Investmentallowanceused(t)e= Profitbeforetax (t) Investmentallowancerateundernew lawis40% - 42 - hvesbnent - Yea 1 2 3 4 5 6 7 a 9 10 11 12 ( A ! ~ f l ~ # 3 ) 3,029 3,876 civilWcwk 2,967 989 2,638 paidlnlerest 62 250 F i d n g 3,029 3,876 I B W h 1,649 989 *lavl 1,978 Eqoity 1,381 909 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 op&lngcosts 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 CashGeneratedfrwnSdes 1,660 1,660 1,660 1,660 1,660 1,660 1,660 1,660 1,660 1,660 IncreaseinAR I92 0 0 0 0 0 0 0 0 0 ~lxxease shorttermIiTties in 54 0 0 0 0 0 0 0 0 0 c a s h G e l l e & d f r o m ~ 1$zl 1,660 1,660 1,660 1,660 1,660 1,660 1,660 1,660 1,660 0 220 220 220 220 220 220 220 110 0 0 0 1 8 1 8 1 8 1 8 I8 1 8 132 66 0 3 0 4 3 0 4 3 0 4 3 0 4 3 0 4 3 0 4 1 5 2 0 0 0 5 2 4 S 6 5 6 6 5 6 6 5 6 6 5 6 5 0 4 2 4 2 66 124 120 103 87 70 54 37 2l 4 0 74 74 72 62 52 42 8 22 12 2 178 171 144 116 89 62 34 7 0 0 376 265 319 266 211 I57 103 50 16 2 0 0 0 3 6 3 6 1 3 6 9 3 8 6 4 0 4 4 2 1 4 3 0 0 0 0 0 0 0 0 0 0 0 NetcashFkmr 0 0 1,146 771 685 703 442 478 514 702 991 1,162 IFW 23% Debt-- 4.0 1.9 1.7 1.8 1.9 20 22 3.0 &4 243 fW=*aver;lge) 25 1.8 1.8 1.9 20 24 3.9 11.2 -43- AYDlNPROJECT-aSMw Year 1 2 3 4 5 6 7 8 9 10 11 12 (PA n u m hinttausandUSD) Netsales 0 0 2305 2305 2305 2305 2305 2305 2305 2305 2305 2305 operatins- 0 0 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 oepredation 3 4 5 3 4 5 3 4 5 3 4 5 3 4 5 3 4 5 3 4 5 3 4 5 3 4 5 3 4 5 plofitfromsales 0 0 1,314 1,314 1,314 1,314 1,314 1,314 1,314 1,314 1,314 1,314 Financial- 0 0 376 354 305 251 198 144 %I 40 12 1 lBRD1Lcan 124 115 99 82 66 49 33 16 2 0 lBRo2Lcan 7 4 7 4 6 9 5 9 4 9 4 0 3 0 2 0 1 0 1 OnJWLOan 178 164 137 110 82 55 27 3 0 0 PfDiitbefofBTaX 0 0 939 961 1,009 1,063 1,117 1,171 1,224 1,275 1,303 1,313 CorporateTax (PA) 0 0 0 0 3 6 3 5 1 3 6 9 3 8 6 4 0 4 4 2 1 4 3 0 4 3 3 Netprofit 0 0 939 961 973 712 748 784 820 854 873 880 1 2 3 4 5 6 7 8 9 10 11 12 (AInumbersinttausardUSD) CuWAssets 0 0 1,338 2,108 2,794 3,939 M I 6 4,930 5,632 6,613 7,775 Cash&h?& 0 0 1,146 1,916 2,601 33,497 3,746 3 5 4,224 4,738 5,440 6,421 7,583 AIR 0 0 192 192 192 192 192 192 192 192 192 192 FiedAssets(net) 3,060 7,000 6,654 6,309 5,%4 5,618 !5,273 4,928 4,583 4,237 3,892 3,547 Gmtbredassets 3,060 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 Ammulateddspuath 345 691 1,036 1,381 1,726 2,072 2,417 2,762 3,108 3,453 TotalAssets 3,060 7,000 7,992 8,417 8,757 9,115 9,212 9,344 9,513 9,870 10,505 11,322 31 94 672 793 815 1,117 1,121 1,125 977 722 561 487 0 0 220 220 220 220 220 220 220 110 0 0 0 0 0 132 132 132 132 132 132 132 66 0 0 0 304 304 304 304 304 304 152 0 0 0 31 94 94 83 70 56 43 29 16 6 1 0 0 0 0 0 36 351 369 386 404 421 430 433 0 0 0 0 0 0 0 0 0 0 0 0 0 0 54 54 54 54 54 54 54 54 54 54 Long-termLiabilii 1,649 4,616 4,092 3&6 2,780 2,124 1,468 812 308 66 0 0 IBRDlLOan 1,649 1,649 1,429 1,2@ 989 7 B 550 330 110 0 0 0 lBRD2Loan 989 989 857 725 583 462 330 198 66 0 0 OtherLOan 1,978 1,674 1,370 1,E5 761 457 152 0 0 0 0 Shareholders'Equity 1,381 2,290 3,228 4,189 5,162 5,875 6,623 7pO7 8,228 9,082 9,955 10,834 PaWncam 1,381 2,290 2,290 2,290 2,290 2,290 2,290 2,290 2,290 2,290 2,290 2,290 ReS3lW.S 0 0 939 1,899 2,873 3,585 4,333 5,118 5,938 6,792 7,665 8,545 TotalLiabiliis 3,060 7,000 7,992 8,417 8,757 9,115 9,212 9,344 9,513 9,870 10,505 11,322 - 44 - AYDIN PROJECT- 8.9 MW 1 2 3 4 5 6 7 8 9 10 11 12 (All numbersinthousand USD) InvestmentExpenditures 3,060 7,000 InvestmentAllowance R Total Applicablelnvestme 1,224 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 ProfitbeforeTax 0 0 939 961 1,009 1,063 1,117 1,171 1,224 1,275 1,303 1,313 Allowance Used 0 0 939 961 901 0 0 0 0 0 0 0 Total InvestmentAllowan' 0 0 939 1,899 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 Taxable Income 0 0 0 0 109 1,063 1,117 1,171 1,224 1,275 1,303 1,313 Taxation 0 0 0 0 36 351 369 386 404 421 430 433 Corporatetax rate= 33% Taxable income= Profit beforetax Investment allowance - Totalapplicableinvestmentallowance= Investmentallowance rate * Total Investmentexpenditures Investmentallowanceused(t) <= Profit beforetax (t) Investmentallowancerateunder new law is40% - 4 5 - l"t 9,188 11,758 - Year 1 2 3 4 5 6 7 a 9 10 11 12 ~ ~ i l ~ l ! S D ) mluIM( s,m %m &am paidlntarest 788 758 -0 105,120 iogm 105,izo ior,,im 105,120 105,120 ioqm 105,iao 105,120 105,120 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 sdesF&3erws 5256 5256 5256 5256 5256 5256 5256 5256 5256 5256 costs 1,051 1,051 1,051 1,051 1,051 1,051 1,051 1,051 1,051 1,051 CashGeneratedfranSdes 4 2 0 5 4 2 0 5 4 2 0 5 4 2 0 5 4 2 0 5 4 2 0 5 4 2 0 5 4 2 0 5 42054205 InaeaSeiilPJR 438 0 0 0 0 0 0 0 0 0 lllcressehshcrcterm liabilities &a 0 0 0 0 0 0 0 0 0 CashGeneratedfranoperatiOns 9854 4205 4205 4205 4205 4205 4205 4205 4205 4205 0 6 6 7 6 6 7 6 5 7 6 6 7 6 6 7 6 6 7 6 6 7 3 3 3 0 0 0 4 0 0 4 0 0 ~ 4 0 4 0 0 4 0 0 4 0 2 0 0 0 9 2 3 9 M 9 2 3 9 2 3 9 2 3 9 2 3 4 6 2 0 0 0 1 m 1,990 1,990 1,990 1,990 1,990 1,528 733 200 375 263 313 263 213 163 113 63 13 0 225 225 278 168 158 123 518 69 38 8 540 519 436 353 270 787 104 21 0 0 1,140 1,107 9% 8a3 40 477 314 151 50 8 0 0 0 0 78 844 888 952 l,m 1,030 0 0 0 0 0 0 0 0 0 0 0 0 2714 1,5W 1,249 1,412 1,497 894 1,003 1,574 2p19 2,W RR 16% 3.4 1.6 1.4 1.5 1.6 1.7 1.8 25 54 B.3 21 1.5 1.5 1.6 1.7 20 3.2 9.4 - 46 - TypK=ALcoMPosrrEsmallHydmpoww~ - -2oMw Year 1 2 3 4 5 6 7 8 9 10 11 12 (AIn t " hhwrdUSD) Netsales 0 0 5,256 5,256 5,256 5,256 5,256 5,256 5,256 5,256 5,256 5,256 0"- 0 0 1,051 1,051 1,051 1,051 1,051 1,051 1,051 1,051 1,051 1,051 1,047 1,047 1,047 1,047 1,047 1,047 1,047 1,047 1,047 1,047 profitfromsales 0 0 3,158 3,158 3,158 3,158 3,158 3,158 3,158 3,158 3,158 3,158 Financial- 0 0 1,140 1,073 925 762 599 436 273 120 36 4 I6RDlLoan 375 350 3N 250 200 150 1m 50 6 0 lBRD2LOan 225 225 210 180 150 120 so 60 30 4 CWlelLoan 540 498 415 332 249 166 83 10 0 0 PrOfitbefOBTaX 0 0 2,018 2,084 2,232 2,395 2,558 2,721 2,884 3,037 3,121 3,154 corporateTax (33!%) 0 0 0 0 0 78 844 898 952 1,002 1,030 1,041 Netprofit 0 0 2,018 2,084 2,232 2,317 1,714 1,823 1,933 2,035 2,091 2,113 1 2 3 4 5 6 7 8 9 10 11 12 (A4n u m binthousardUSD) cunentAssets 0 0 3,152 4,661 5,910 7,322 8,818 9,712 10,715 12,289 14,709 17,676 cadl&banks 0 0 2,714 4,223 5,472 6,884 8,380 9,274 10,277 11,851 14,271 17,238 NR 0 0 4 3 8 4 3 8 4 3 8 4 3 8 4 3 8 4 3 8 4 3 8 4 3 4 3 8 4 3 8 FbedAssets(net) 9,281 21,230 20,183 19,136 18,088 17,041 15,994 14,947 13,899 12,m 11,805 10,758 Gmfixedassets 9,281 21,230 21,230 21,230 21,230 21,230 21,230 21,230 21,230 21,230 21,230 21,230 AmmuW&pimatkm 1,047 2,095 3,142 4,189 5,236 6,284 7,331 8,378 9,425 10,473 94 285 1,962 -2,329 2l288 2,326 3,051 3,064 2,616 1,841 1,321 1,128 0 0 667 667 667 667 667 667 667 333 0 0 0 0 0 400 400 400 400 400 400 400 200 0 0 0 923 923 923 923 923 923 462 0 0 0 94 285 285 252 211 170 129 89 48 18 4 0 0 0 0 0 0 78 844 898 952 1,m2 1,030 1,041 0 0 0 0 0 0 0 0 0 0 0 0 0 0 88 88 88 88 88 88 88 88 88 88 Long-termLiabilii 5,000 l4ooO 12,410 10,421 8,431 6,441 4,451 2,462 933 200 0 0 lBRD1Loan 5,000 5,000 4,333 3,667 3,000 2,333 1,667 1,000 333 0 0 lBRD2Loan 3,000 3,000 2,600 2,m 1,m 1,400 1,000 600 m0 0 0 CWlelLoan 6,000 5,077 4,154 3,231 2308 1,385 462 0 0 0 0 Sharehdders'Equity 4,188 6,945 8,963 11,047 13,279 15,586 17,310 19,133 21,066 23,101 25,192 27,305 PaWncapita, 4,188 6,945 6,945 6,945 6,945 6,945 6,945 6,945 6,945 6,945 6,945 6,945 ReS7?IM?S 0 0 2,018 4,102 6,334 8,651 10,365 12,188 14,121 16,156 18,247 20,360 TotalLiabilii 9,281 21,230 23,335 23,796 23,998 24,363 24,812 24,699 24,615 25,141 26,513 28,433 - 4 7 - TYPICAL COMPOSITESmall HydropowerProject 20 MW - I 2 3 4 5 6 7 0 9 10 11 12 (All numbers in thousand USD) Investment Expenditures 9,281 21,230 Investment Allowance R Total Applicable lnvestmt 3,713 8,492 8.492 8,492 8,492 8,492 8,492 8,492 8.492 8.492 8,492 8,492 Profit before Tax 0 0 2,018 2,084 2,232 2,395 2,558 2,721 2,884 3,037 3,121 3,154 Allowance Used 0 0 2,018 2,084 2,232 2,158 0 0 0 0 0 0 Total Investment Allowan 0 0 2,018 4,102 6,334 0,492 8,492 8,492 8,492 8,492 8,492 8,492 Taxable Income 0 0 0 0 0 237 2,558 2,721 2,884 3,037 3,121 3,154 Taxation 0 0 0 0 0 78 844 898 952 1,002 1,030 1,041 Corporate tax rate = 33% Taxable income = Profit before tax Investment allowance - Total applicable investment allowance = Investment allowance rate Total Investment expenditures Investment allowance used (1) <= Profit before tax (t) Investment allowance rate under new law is 40% -48- Annex 6(A): Procurement Arrangements TURKEY: Renewable Energy Project Procurement I. Procurement Procurementof goods and works financed by the World Bank will be carried out in accordance with the World Bank Guidelines: Procurementunder lBRD Loans and IDA Credits (issued in January 1995, Revised January and August 1996, September 1997 and January 1999). Consulting services financed by the World Bank will be done in accordance with the World Bank Guidelines: Selectionand Employmentof Consultantsby the World Bank Borrowers(issued in January 1997, revised September 1997, January 1999 and May 2002). A General Procurement Notice will be published in the United NationsDevelopment Businessin May 2004. II. Implementation The main project component is the Special Purpose Debt Facility for Renewable Energy Financing-- (seeAnnex 2) -- itwould establisha term lendingfacility to leverageequity investmentfrom local private developers, export credit financing and other forms of local debt financing for construction of qualified renewable energy generation projects. The Special Purpose Debt Facility Component will have World Bank financing of US$ 200 million. This component will support the renewable power generation projects through two qualified Turkish development banks (Le. the Fls) who would provide sub-loansfor investmentlending. In case of procurement under sub-loans, the PFls will be responsible for ensuring that the procurement rules for sub-loansspecified below are complied with by the beneficiaryenterprises.TSKB and TKB will be responsiblefor reviewingand monitoringthe compliancewith the procurementrules by the beneficiaries.The Credit OperationsSpecialistswithin the TSKB and TKB will be responsiblefor all procurement oversight for the management of the project. They will keep the records and copies of the procurement documents handledthroughthe intermediarybanks. The Projectwill be supervisedthrough supervision missions organizedat least twice a year and periodic procurement post reviewswill be also be carried out by the PAS assignedto this project. 111. ProcurementArrangements 111.1. Procurement Rules for Sub-loans under the SDecial PurDose Debt Facilitv Component of the Proiect Private Sector Procurement Practice in Turkey: In the Country Procurement Assessment Report (CPAR) dated June 2001, it was determined that there are well-establishedcommercial practices for the procurement of goods and works by private sector enterprises. In the case of goods, the local practice is to prepare well-defined technical specifications and solicit quotations from the local andlor internationalmarkets. Many purchasers simply accept the terms and conditions of the contractwhich is offered by the bidder although some conditions,such as payment schedule and warranty period, may be amended by negotiation. In case of medium and large works, the technical specifications are usually prepared by consultant companies and bids are collected from qualified contractors. Most private-sectorcompanies prepare detailed designs, technical specificationsand detailed, itemized bills of quantities, use a form of pre-qualificationfor large civil works contracts, invite competitive quotations or bids from at least 3 -49- bidders, especially for high-value requirements and in the great majority of cases, negotiate on price. In competitive procurement, the most widely-used criteria in bid evaluation are: familiarity / previous satisfactory performance by the bidder; technical compliance/ quality of goods; price: and warranty. But, generallythe criteriato be used in evaluationof bids are not disclosedto the bidders. In general, bids are invited from short lists of qualified bidders, who are invited either directly or in response to an advertisement. Those private-sector firms who use standing lists of qualified bidders generally update these lists every 1 or 2 years. As there are no provisions against direct contracting in the Commercial Law, many private-sector purchasers use this procurement method, typically for small-value, repeat purchases and purchasing additional quantities from a supplier previously appointed by a competitive procedure. When equipment and machinery is needed for expansion of existing facilities, the purchasers usually prefer proprietary goods from a single source for the sake of standardization and minimization of the operation and maintenance cost. The monitoring of contract implementationis more efficient and effectivecomparedto the publicsector. The Procurement Capacity Assessment Report, to assess the capacity of procuring entities to conduct procurement under the Proposed Renewable Energy Loan, was prepared through an informal review of local private investors/developers of qualified renewable energy generation projects. Some members of HESIAD (Hydropower Energy Industrialists and Businessmen Association) and RESIAD (Wind Energy Industrialistsand BusinessmenAssociation) were interviewed,who will likely be the users of this Loan, to assess their capacity and capability in handling procurement financed by sub-loans. Based on preliminary findings, it was determined that the commercial practices are consistent with the Bank's procedures in terms of economy and efficiency. The general rule in the sector is to procure the least cost goods and services consistentwith minimumquality requirements. Procurement of Goods and Works under Special Purpose Debt Facility Component: Based on the assessment above, procurement of goods and related services (installation and maintenance) and construction materials financed under the proposed project will be done according to the World Bank procurementguidelines. For contracts below US$5.0 million equivalent, established local private sector commercial practiceswill be followed. Beneficiarieswould seek bidsfrom a list of potential suppliers broad enoughto ensure competitive prices. Care has to be taken of other relevantfactors such as time of delivery, efficiency and reliability of the goods and availability of maintenance facilities and spare parts therefore, and in case of non-consultant services, of the quality and competence of the parties rendering the services. Advertising in the local and international press will not be mandatory. For contracts above US$l.O million equivalent but less than US$5.0 million equivalent, more than one quotation must be obtained and documented. However, InternationalCompetitive Bidding (ICB) would be requiredfor individual contracts of US$ 5.0 million equivalent and above for goods and related services. All procurement of goods and related services under contracts equal to or above US$ 5.0 million equivalent will be subject to prior review. For civil works estimated to cost less than US$8.0 million equivalent per contract, established local private sector commercial practiceswill be followed. For contracts above US$1.O millionequivalent but less than US$8.0 million equivalent, at least two quotations will be obtained and documented. However, International Competitive Bidding (ICB) would be required for individual contracts of US$8.0 millionequivalentand above for works contracts and shall be subject to prior review by the World Bank. Procurement of Consultants' Services under Special Purpose Debt Facility Component: For consultants contracts with firms below US$1.O million equivalent, established local private sector commercial practices will be followed. However, Quality and Cost Based Selection (QCBS) would be required for individual contracts of US$ 1.0 million equivalent and above for consultants' services. All consultancy contractsabove US$ 1.O millionequivalent will be subject to prior review. For individualconsultants contracts below US$50,000equivalent, established local private sector commercial practices will be followed. However, individual consultant contracts above US$ 50,000 equivalentwill be procured in accordancewith SectionV of the Consultants'Guidelines. - 50 - IV. Procurement Review by the Bank Schedulingof Procurement. Procurementof goods, works and services for the projectwill be carried out in accordancewith the agreed procurement plan, which will be updated as necessary and included in the progress reports for Bank review and approval. The Bank will review the procurement arrangements proposed by the Borrower, including contract packaging, applicable procedures, and the scheduling of the procurement processes, for its conformity with Bank Procurement and Consultant Guidelines, the proposed implementationprogramand disbursement schedule. (a) PriorThe Review: following procurement action and documentation would be subject to Prior Review by the Bank. - Goods and Works: For ICB Contracts; prior review of bidding document package (including, infer alia, Invitationto Bid, Instructionsto Bidders and Bid Data Sheet, General and Special Conditions of Contract, Bid Forms, Schedule of Requirements, Technical Specifications), Bid Evaluation Reports; Recommendations of Contract award and draft Contractwill be conducted. - Consultant Services: Prior review of procurement documents and actions which will -include: QCBS: Prior reviewof short listing criteriafor consultingassignments; ConsultantsShort Lists (three to six consultants per assignment); complete Request for Proposal (RFP) package (including Invitation, Informationto Consultants and Data Sheet, General and Special Conditions of Contract, Technical Proposal standard forms, Financial Proposal standard forms, and draft Contract Agreement); Terms of Reference, including description of services, consultants' reporting requirements,and required qualifications of consultants' key personnel; Technical and Financial Evaluation Reports (including official minutes); Recommendationsfor contract award; and NegotiatedContract will be - conducted. IC contracts of US$ 50,000 and above: Prior review of criteria for short listing; Consultants Short Lists (three to six consultants per assignment); Draft Contract Agreement; Terms of Reference, including description of services and consultants' - reportingrequirements;and NegotiatedContract will be conducted. IC contracts of below US$ 50,000: Prior review of criteria for short listing consultants; and (2) Terms of Referencewill be conducted. The Bank`s priorreview of procurementactionwould coverthe following; (i) All ICBcontracts for goods and works. (ii) First two contracts under commercial practices for goods, works and consultancy services(onefrom TSKB and one from TKB). (iii) All contracts with consultingfirms estimated to be US$1,000,000 or moreeach. (iv) All contracts with individualconsultantsestimated to be US$50,000 or more each. (v) The Terms of Referencefor all consultantcontractswith consultingfirms and individuals. (b) PostThe Review: procurement documents for all other contractsshall be subject to the Bank's post review on a random basis, one in five contracts. Post review of the procurement documents will normally be - 51 - undertaken during the Bank supervision mission or as the Bank may request to review any particular contracts at any time. In such cases, the TSKB and TKB shall provide the Bank for its review the relevant documentation including letters of invitation to quote, evaluation reports, copies of biddquotations, signed contracts etc. The post review shall be conducted by the Bank's Procurement Specialist. The outcome of the post reviewwill be communicatedby the Bank at the earliest time. V. Procurement Monitoringand Reporting The TSKB and TKB will keep complete and up-to-date record of all procurement documentation and relevant correspondence in their files, which will be reviewed by the 'Bank staff during supervision missions. The Procurement Plan for the project shall be prepared by these banks and furnished to the Bank for its review and approval in accordance with the provisions of the Bank's Procurement Guidelines. The Procurement Plan, which indicatesthe procurement arrangements, contract packaging, applicable procurement method, schedulingof procurement process, estimated cost etc, will be updated annually. All procurements shall be undertaken in accordance with the Procurement Plan. Monitoring reports on procurement progress will be submitted as part of progress reports on program implementation. The report shall include all information related with the completed, on-going and plannedcontracts. Procurementmethods(TableA) Turkey - Renewable Energy Loan Table A: Project Costs by Procurement Arrangements (US$ million equivalent] Procurement Expenditure ICB NCB Other Total Cost A. REL Sub-Loans - - 500.000 500.000 (200.000) (700.000) B. Front End Fee - - 2.03 2.03 (2.03) (2.03) TOTAL 502.03 502.03 (202.03) (202.03) Table B:Thresholdsfor Procurement Methodsand Prior Review ExpenditureCategory ContractValue Threshold Procurement Contracts Subjeci (US$) Method to Prior Review above $5 millionfor goods, above $8 millionfor works, (I) ICB and QCBS (I)All ICBand Sub-loans above $1 millionfor thresholds, ('I) belowthese QCBS contracts consultantfirm and (11)Firsttwo above $0.05for individual commercial consultantcontracts practices apply contracts - 52 - Overall Procurement Risk Assessment Section 1: Capacity of the implementingAgency in Procurementand Technical Assistance requirements The capacity of the implementing agency to conduct procurements has been assessed. The overall procurement assessment is medium-risk. The following action plan is recommended as a result of this assessment. TSKB and TKB shall separately appoint at least one full-time staff and a back-up, who will be responsible for the review of procurement related documents. The PAS shall organize two days procurement training (for procurement of goods and works under ICB procedures and for selection of consultants under QCBS) for these staff and the other staff who may involve in review of procurement related documents, to familiarize themselves on the Bank's procurement procedures. Country Procurement Assessment Report or Are the bidding documents for the procurement Countrv Procurement Strateav Paoer status: actions of the first vear readv bv neaotiations The CPAR is fina zed in June 2001. ]YES NOX . I .4 a I, Information and Development on Procurement Estimated date Estimated date I Indicate if there I Domestic I Domestic of Project of publication of is procurement Preference for Preference for Launch General subject to Goods Works, if Workshop- Procurement mandatory SPN YesX No applicable June 2004 Notice in Development Yes NoX 0511612004 Business I YesX No I I Explain briefly the 'rocurement Monitoring System: Procurement implementation progress will be monitored through progress reports and supervision missions. Each supervision mission will include the project procurement specialist for updating the procurement plan and conducting post Co-financing: None Indicate name of Procurement Staff or Bank's staff part if Task Team responsible for the procurement in the Project: Salih K. Kalyoncu (ECSPS) Explain briefly the expected role of the Field Office in procurement: There are two procurement specialists in the Country Office. One of them will be responsible for this project and the other will provide back-up service in the absence of assigned staff. - 53 - Annex 6(B): Financial Managementand DisbursementArrangements TURKEY: Renewable Energy Project FinancialManaeement 1. Summaryof the FinancialManagementAssessment ExecutiveSummaryand Conclusion The task team has conducted an assessment of the adequacy of the project financial management system at TKB and TSKB. The current financial management arrangements for the project at TKB and TSKB are satisfactoryto the Bank. Country Issues A Country Financial Accountability Assessment for Turkey was carried out in 2001. The CFAA report identified some weaknesses in the Turkish financial accountability, in both the public and the private sector. The significant part of the REL will be implemented by two development Banks TSKB and TKB. The 1999 Banks Law established the Banking Regulation and Supervision Agency, and among its powers is the power to determine the accounting and auditing requirements applicable to the banks under its supervision. Banks must submit non-audited monthly prudential returns to the BRSA, and publish audited annual financial statements. Only auditors approved by the Treasury/BRSA may carry out such audits. All changes in auditor must also be approved, and a change can be imposed where there is dissatisfaction with the performance of the auditor. The external auditor is required to report to the BRSA on banks' internal control and risk management systems, as well as being obliged to report direct to the BRSA with respectto certain issueswhich may threatenthe going concern natureof a bank. Until the 1999 banking law reforms, the Council of Ministers rather than banking supervisors, were responsiblefor promulgatingrequirements in areas such as loan loss provisioning, and these rules were relaxed twice in responseto the Asian and Russianfinancial crises (in February 1998 and August 1999). Requirements with respect to the calculation of capital adequacy on a consolidated basis, and to disclosuresin the areas of largeexposures, connected lending,foreign exchangeexposures, interest rate risk exposures, and maturity risk exposures also fell short of the relevant EU, Basel Committee and IAS norms. This served to underminethe quality and relevance of information provided to regulators and to the market, and has led to weakening the early-warning signals provided by financial statements and to understatingthe extent of problems which exist. Since December 1999, efforts were made to strengthen significantly the regulatory and institutional infrastructurefor banking regulation(includingthe creation of the BRSA), includingupgradingof the relevantfinancial reportingobligations In June 2000, the Treasury issued an instruction which brought disclosure rules for banks closer to International Accounting Standards, and in June 2001, the BRSA issued a new Regulation on Chartering and Operations of Banks, which further enhances public disclosure requirements. The Bank in 1999 has extended an Export Finance IntermediationLoanto Eximbank (throughTreasury). Eximbank on lends to Participating Financial Institutions (PFI) for on lending to beneficiary enterprises. At the inception of EFlL the PFls were obliged under the terms of SLAs to remain in compliance with prudential ratios which were stricter than those imposed on the banking system by the Turkish bank regulatory authorities(at the time the Turkish Treasury and the Central Bank).As conditionality for FSAL and later PFPSAL the prudential regulations for the Turkish banking system were tightened and in May 2001, the SLAs were amended to replace the original prudential ratios with those set forth in the (new) bankinglaw and regulationsissued by BRSA. The BRSA issued a new comprehensive regulation on accounting standards for banks in July 2002, which brings these standards in line with IAS. However, the BRSA regulation does not require full application of IAS 27 (consolidation of subsidiaries), as banks only have to consolidate their financial subsidiaries, while for non-financial subsidiaries separate financial statement disclosure is mandated. The statements of such non-financial subsidiaries are not IAS-based.Thus their disclosure will not allow the user to consolidate these with the IAS-based consolidated statements of the parent bank and its - 54 - financial subsidiaries. Also, as the IAS are subject to change, any such change will necessitate an adjustmentof the BRSA regulation. The BRSA also issues rules governingthe externalaudit of bank financial statements, and only auditors approved by the BRSA may carryout such audits. The Regulationon Principlesfor IndependentAuditing and the Regulationon Authorizationof the Auditing Institutionsand Permanent or TemporaryWithdrawal of their Authorities, were both published in the Official Gazette Nr. 24657 on January 31, 2002; these regulationsare broadly in linewith ISA. The two developmentbanks which will be responsible from managingthe credit linesto the beneficiary enterprises have been assessed for compliance with BRSA prudentialregulationsby the projectteam and found to be in compliance. Strengths and Weaknesses The significant strengthsthat providethe basis for relianceon the projectfinancial management system include (a) the disbursements to the beneficiary enterprises will be based on the invoices submitted by these enterprises(b) funds will be disbursed throughTSKB and TKB which are selectedfor their financial strength, capacity to appraise and supervise projectimplementation(c) experiencesof both banks inthe implementationof Bank projectsand projectsfunded by other internationalorganizations.The Bankswill also have a right to ask for audited financial statements of the beneficiary enterprises if deemed necessary. ImplementingEntity The largestcomponentof the projectwill be implemented by TSKB(150 million US$) and TKB (50 million US$). The borrowerfor the loan is the Government of Turkey and there will be an on-lendingagreement between the Treasury and TSKB and TKB. TSKB was established in 1950 with the support of the World Bank and the cooperation of the Government of the Republicof Turkey, CentralBank of Turkey and leadingcommercialbanksof Turkey. TSKB has been founded for the purpose of (i) providing assistance to private sector enterprises in all sectors of the economy primarily in the industrialsector (ii) to encourage and assist the participationof privateand foreign capital in corporationsestablished and to be established in Turkey (iii) to assist with the development of the capital marketinTurkey. TSKB's largest shareholder is the Is Bankasi Group with 55.24 % of the equity. Consolidatedfinancial statements are preparedfor Is Bankasiand thereforethere is not a consolidationrequirementfor TSKB. TSKB has internalregulationsand manuals for internalcontrol and risk management in compliance with the banking law. TKB is a also a development and investment bank whose main business is to give medium and long-termfinancialsupportthroughprojectfinance, financial leasingand equity participationto joint stock companies in the industrial, tourism, energy, health and education sectors. The Undersecretariat of Treasury is the mainshareholder of the bank with 99% of registeredcapital. In2001a separate risk managementgroup withinthe bank was establishedin order to comply with newly enacted banking regulations.One board member is solely responsiblefor risk management. Credit risk, market risk and operational risk monitoring functions have been separated. Internal audit and risk monitoring departments were also established in 2001. Compliance with the prudentialregulationsset out by Banking RegulatorySupervisoryAuthority (BRSA) is requiredfor continuingeligibility of TKB and TSKB. - 55 - Funds Flow There will be two specialaccounts for the project, one inTSKB and one inTKB. For componentone, TKB implemented portion, the beneficiaryenterpriseswill make their applicationsto the loan department of TKB. The investigationdepartmentcollects the first informationfrom the market and based on the firms good standing inthe market will give their positivereport to the loan department. The project appraisal department will then assesses the project from (a) technical (b) financial and (c) economical perspectives. The criteria set forward in the project operations manual for becoming an eligible beneficiary enterprise will' be assessed during this stage. Followingthe positive assessment of the Project Appraisal Department, the loan will be submitted to the Credit Committee and the Banks Board of Directors. After the approval of the BOD the loan department will prepare the loan contract. The Funding Departmentwill be informed. The special account will be the responsibilityof the Funding Department.Project Appraisal Department will be responsiblefrom controllingthe already paid or to be paid invoices.They will be checking the mathematicalcorrectnessas well as compliance with the project framework. Upon their approval the funding department will make funds available to the beneficiary enterprises. All the same procedureswill be followed inTSKB. Staffing Both TSKB and TKB have given the names of personnel assigned to the project and there are designated personnel for project accounting and financial reporting, verifying the eligibility of invoices submitted by the beneficiaryenterprises and disbursement from the special account. The qualifications and experienceof the nominated staff are satisfactoryto the Bank. Accounting Policies and Procedures The financial management capacitiesat both TSKB and TKB are satisfactory.They both havequalified personnel, adequatemanuals and guidelines to conductefficientfinancial management.The accounting and reportingsystems at bothbanks are geared toward producing statements and informationas required by Turkishlaw and regulations. TSKB also has accounting and reporting systems geared toward producingfinancial statements in accordance with InternationalAccountingStandards. Considering that bothbankshave adequate accountingand reportingsystemsthe maintransactionsthat is: the movements in the specialaccount, credit lines madeavailableto the beneficiaryenterprises,and uses of these credit lineswill be in the banks' main accountingsystems. The main accountingsystem will be supported by a sub-system (MIS) for projectaccountingand reportingpurposes. The follow-upof documentation submitted by the beneficiariesto withdraw loanfunds will made in this system. The systemwill also be capable of producing the FMRs. Reporting and Monitoring TSKB and TKB will maintainrecords and will ensureappropriateaccountingfor the funds provided. The formats and contents of the FinancialMonitoring Reports(FMR) are discussed and agreed betweenthe Bank, TSKB and TKB. The FMRwill be prepared quarterlyand will be submitted to the Bank no later than 45 days after the end of the quarterlyperiod. A financial management manualfor the projectwill be prepared by April 11, 2003 and the FM manualwill includea sectionon the FMRs. - 56 - InformationSystems The maintransactionsthat is the movements of the specialaccount,credit lines madeavailableto the beneficiaryenterprisesand withdrawalsfrom the credit lines will be inthe TKB and TSKB main accountingsystems. The mainaccounting systems will be supported by a sub system (MIS) for project accountingand reporting.Both bankshavecompleted the preparationof such a systemand tried it with test data. The systems are capable of producing the FMRs. Action Plan It is concludedthat the financial management arrangements for the projectmarginallysatisfythe Bank's minimum requirements. The following action plan is proposed to develop the financial management system to a satisfactorylevel beforethe loan is submitted to Board: Action Responsible Deadline 1. Finalization of the development of the TKB and TSKB Done MIS, where the project accounts will be recorded and reported. 2. Sample FMRs satisfactory to the Bank TKB and TSKB Done produced by the MIS 3. Auditors contract signed with an TKB Done acceptable auditor for the audit of financial statements in accordance with IAS 4. IAS financial statements for 2006 TKB and TSKB I Done submitted to the Bank 5. Projectauditorto be appointed TKB and TSKB Done 6. Project financial management manual TKB and TSKB Done finalized Supervision Plan Duringproject implementation, the Bank will supervisethe project'sfinancial managementarrangements in two main ways: (i) review the project's quarterly financial management reports as well as the banks' and project's annual audited financial statements and auditor's management letter; and (ii) during the Bank's supervision missions, review the project'sfinancial management and disbursementarrangements (includinga review of a sample of SOEs and movementson the SpecialAccount) to ensure compliance with the Bank's minimum requirements. As required, a Bank-accredited Financial Management Specialist will assist in the supervision process. 2. Audit Arrangements Internal Audit Both TKB and TSKB have internalauditingdepartmentsstaffed with qualifiedaudit professionalswho are capable of producing basic audit tasks. Transactions underthe loanwill be subjectto internalaudit as a part of banks' credit portfolioaudits. External Audit There will be two sets of project financial statements. TSKB and TKB will be responsible from the projectfinancial statements coveringthe amounts that they will implement. Annual and six-monthly (limited review) audits of TSKB are undertakenon an IAS basis in accordance with International Auditing Standards by a reputed international auditing firm. The current auditor of - 57 - TSKB is Deloitte and Touche Turkey. The last three years' audit reports (in accordance with IAS) were reviewed and all were unqualified.In order to ensure that the project accounts and the special account would be audited in accordance with the World Bank Guidelines for FinancialReportingand Auditing of ProjectsFinanced by the World Bank, the mission discussed and agreedwith TSKB that the auditors of TSKB's annual financial statements will also carry out the project audit. TSKB has engaged the services of international auditorsfor several years and thereforethe engagement of an auditor will not be a specific Boardcondition. 2000 and 2001 annual and six monthly accounts of TKB have been audited in accordance with the auditing principles of the Banking Act no: 4389. The auditors (a local firm) have issued an unqualified opinion on the financial statements of the bank for the last these years, and stated that the financial statements reflect TKB's financial position in accordance with the accountingstandards and regulations as set forward in the Banks Act, Law no:4389, TKB has hired an international auditor (Deloitte and Touche) and has submitted audited IAS financial statements for 2001 and 2002 to the Bank. Also in order to ensure that the project accounts and the special account would be audited in accordance with the World Bank Guidelinesfor FinancialReportingand Auditingof Projects Financedby the World Bank, the mission discussed and agreed with TKB that the auditors of TKB's annual financial statements will also carry out the projectaudit. 3. DisbursementArrangements DisbursementArrangements The project will be disbursing on the traditional disbursement techniques and will not be using FMR based disbursement. Two specialaccounts will be createdfor the project, one for TKB and one for TSKB. The banks will open and maintain special accounts in US Dollars by submitting comfort letters to the Bank. The special accountswill have authorizedallocationsof US$ 15 millionfor TSKB and US$ 5 millionfor TKB. Authorized persons, who will be specifiedin the projectFM manualswill sign the withdrawal applications. At the start of the project, the initial deposits will be limited to US$ 2.5 million for TKB and US$ 7.5 million for TSKB, the remaining portion of the authorized allocation will be requested after cumulative disbursements reach a level of US$ 15 million for TKB and US$ 50 million for TSKB. The minimum applicationsizefor payments directlyfrom the loan account for issuanceof special commitments is 20% of the specialaccountallocationfor all the implementing agencies. Applications for replenishment of the Special Account will be submittedto the Bank on a monthly basis, or when the balance of the SpecialAccount is equal to about half of the initial deposit or the authorized allocation, whichever comes first, and will include a reconciled bank statement as well as other appropriate supporting documents. Retroactivefinancingupto and aggregateamount of 10% of the loan US$5 millionfor TKB -- shall -- US$ 15millionfor TSKB, and be permittedfor eligibleexpendituresmadeafter June 30, 2003 untilthe effectivenessdate of the Project. Use of statements of expenditure (SOEs): under the credit line disbursements would be made against Statements of Expenditures for (a) goods contracts costing less than $5,000,000 equivalent each; and (b) works contracts costing less than $8,000,000 equivalent each (c) consulting firm contracts costing less than $1,000,000 equivalent each and (d) individual consultant contracts costing less than $50,000 equivalent each. Detaileddocuments evidencing these expenditureswould be reviewedand retainedby TSKB and TKB. Disbursement for the financing of goods, works and consultancy contracts exceeding the above limits would be made on the basis of full documentation. Disbursement and procurement documents using SOE procedures would be retained by the implementing agency for a period of at least two years after - 58 - the disbursement and made availableto World Bank staff and extemal audits. Allocationof loan proceeds(TableC) Table C: Allocation of Loan Proceeds Expenditure Category Amount in US$million Financing Percentage Component 1of the Project: 200.00 100% Goods, works and consultants' services fmanced under Sub-loans and Financing Leases: Unallocated 0.01 100% Front-EndFee 2.02 100% Total Project Costs with Bank 202.03 Financing Front-endfee I Total 202.03 - 59 - Annex 7: Project ProcessingSchedule TURKEY: Renewable Energy Project Project Schedule Planned Actual /Timetaken to preparethe project (months) I 18 I 16 I IFirst Bank mission (identification) I 01/07/2002 I 01/07/2002 I Appraisal mission departure 12/04/2002 0111912003 Negotiations 01/20/2003 0411512003 Planned Date of Effectiveness 0513112004 Prepared by: Government Ministries and Agencies 1. Ministryo f Energy andNatural Resources (MENR) 2. Department o f State Hydraulic Works (DSI) 3. General Directorate of Electric Power Resources (EIE) 4. Energy Market Regulatory Authority (EMRA) FinancialIntermediaries 1. Turkish Industrial Development Bank (TSKB) 2. Turkish Development Bank (TKB) Preparationassistance: A Japanese Grant for $483,000 was usedto helpprepare the project. Itsprimary purpose was to help establishthe procedures for processingrenewable energy projects within the Government and to assist the Government with maintaining the backlog o f projects. Bank staff who worked on the projec included: Name SDecialitv RanjitLamech Team Leader James Moose EnergyEconomist, Financial Analyst Amarquaye Amar SystemPlanning, Sub-project Analysis BanyTrembath Power Engineer (Dams, Hydropower), Institutionaldevelopment BernardBaratz Environment DilekBarlas Legal Radhika Srinivasan Resettlement Gurhan Ozdora FinancialIntermediaries Elmas Arisoy Procurement Ayse Seda Aroymak FinancialManagement FuruzanBilir Disbursements RohitMehta Financial issues, Disbursements Hala Khattar Loan choice Yukari Tsuchiya Program Assistant, Washington, D.C. Salih Kalyoncu Procurement ElifYonca Yukseker Team Assistant, Ankara - 60 - Annex 8: Documents in the Project File* TURKEY: Renewable Energy Project A. Project ImplementationPlan 1. Operational Manual 2003 2. OperationalManual ---- TSKB, June TKB, January 2004 B. Bank Staff Assessments 1. Financial Management Assessment o f TSKB andTKB, February 2003 2. Procurement Assessment C. Other Amendments to Electricity Market LicensingRegulations for renewable Energy. Annual Reports of TSKB andTKB Map of River Basins *Includingelectronic files -61 - Annex 9: Statement of Loans and Credits TURKEY: Renewable Energy Project 03-Feb-2004 Difference betweenexpected and actual OriginalAmount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO82801 2004 EXP FIN2 303.10 0.00 0.00 0.00 303.10 0.00 0.00 PO59872 2003 BASICED 2 (APL#2) 300.00 0.00 0.00 0.00 292.96 134.19 0.00 PO70286 2002 ARlP 600.00 0.00 , 0.00 0.00 411.22 337.89 0.00 PO74408 2002 SRMP 500.00 0.00 0.00 0.00 382.55 190.50 0.00 PO69894 2001 PRlV SOC SUPPRT 250.00 0.00 0.00 0.00 151.69 121.27 0.00 PO44175 2000 BIODIV/NTRLRESMGMT(GEF) 0.00 0.00 8.19 0.00 5.79 3.44 0.00 PO68368 2000 MARMARAEARTHQUAKEEMGRECON 505.00 0.00 0.00 0.00 300.13 299.97 59.37 PO68792 2000 ERL 759.60 0.00 0.00 0.00 375.00 375.00 375.00 PO09073 1999 INDUSTRIALTECH 155.00 0.00 0.00 0.00 52.10 52.10 0.00 Po09072 1998 PRlVOF IRRIGATION 20.w 0.00 0.00 0.00 1.82 1.82 1.82 PO48852 1998 NATLTRNSMGRID 270.00 0.00 0.00 27.79 179.41 207.20 -6.79 PO08985 1998 CESMEWS 8 SEWER 13.10 0.00 0.00 2.70 5.56 8.26 0.41 PO09076 1995 HEALTH2 150.00 0.00 0.00 20.17 25.97 52.48 52.48 ~ Total: 3825.80 0.00 8.19 50.66 2487.31 178411 482.29 - 62 - TURKEY STATEMENT OF IFC's HeldandDisbursedPortfolio November 15,2003 InMillions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 Turkish PEF 0.00 10.00 0.00 0.00 0.00 1.26 0.00 0.00 1999 Unye Cement 14.59 0.00 0.00 0.00 14.59 0.00 0.00 0.00 1999 Uzel 9.48 0.00 0.00 5.69 9.48 0.00 0.00 5.69 0170171198 Viking 8.18 0.00 0.00 0.00 8.18 0.00 0.00 0.00 1995 Yalova Acrylic 2.50 0.00 0.00 1.33 2.50 0.00 0.00 1.33 1997198 Yapi Kredi Lease 0.48 0.00 0.00 0.00 0.48 0.00 0.00 0.00 0 ALease 1.11 0.00 0.00 0.00 1.11 0.00 0.00 0.00 1998 Adana Cement 2.50 0.00 0.00 0.00 2.50 0.00 0.00 0.00 2001/03 A k b d 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00 0198 AltematifBank 1.11 0.00 5.00 0.00 1.11 0.00 5.00 0.00 1995196101103 Arcelik 17.21 0.00 0.00 0.00 17.21 0.00 0.00 0.00 2000 Arcelik L GKlima 13.79 0.00 0.00 4.72 13.79 0.00 0.00 4.72 1994197102 Assan 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00 2002 Atilim 6.50 0.00 0.00 0.00 5.49 0.00 0.00 0.00 2000 Banvit 15.00 5.00 0.00 0.00 15.00 5.00 0.00 0.00 0194196 BayindirbankA S 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Beko 29.08 0.00 0.00 29.08 29.08 0.00 0.00 29.08 2001 Bilgi 11.00 0.00 0.00 0.00 11.00 0.00 0.00 0.00 Borcelik 10.00 3.21 0.00 0.00 10.00 3.2 1 0.00 0.00 1994195196197 CBSBoyaKimya 0.00 0.65 0.00 0.00 0.00 0.65 0.00 0.00 1995196 CBS Holding 4.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00 1994 CBS Printas 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1996101 Cayeli Bakir 3.15 0.00 0.00 0.00 3.15 0.00 0.00 0.00 1992 Conrad 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1990193102 Demir Leasing 1.11 0.00 0.00 0.00 1.11 0.00 0.00 0.00 1997198 EKS 12.16 0.00 0.00 0.00 12.16 0.00 0.00 0.00 2002 Elginkan 0.40 0.00 0.00 0.00 0.40 0.00 0.00 0.00 1988193196 Entek 21.25 0.00 0.00 14.91 21.25 0.00 0.00 14.91 1995 FinansLeasing 1.11 0.00 0.00 0.00 1.11 0.00 0.00 0.00 1997198 Finansbank 5.56 0.00 0.00 5.18 5.56 0.00 0.00 5.18 0199 Garanti Leasing 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994198100 GumussuyuKap 4.00 0.00 3.25 0.00 4.00 0.00 3.25 0.00 1999 Gunk01 6.70 0.00 6.70 0.00 6.70 0.00 6.70 0.00 2001 IndoramaIplik 6.25 0.66 0.00 0.00 6.25 0.66 0.00 0.00 1998 IpekPaper 16.06 0.00 0.00 0.00 16.06 0.00 0.00 0.00 1998100102 Kepez Elektrik 6.48 0.00 0.00 0.00 6.48 0.00 0.00 0.00 1990 Kiris 10.06 0.00 0.00 0.00 10.06 0.00 0.00 0.00 0188190 KOY-TU 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1990192 Kula 11.oo 4.93 0.00 0.00 0.00 4.93 0.00 0.00 0.00 1991 MESA Group 0.00 0.00 0.00 5.50 0.00 0.00 0.00 2003 Medya 0.00 0.00 4.99 0.00 0.00 0.00 4.99 0.00 1993196 MilliRe 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 ModemKarton 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1998102 NASCO 10.18 0.00 0.00 3.55 10.18 0.00 0.00 3.55 1991 Total Portfolio: 514.06 20.71 34.94 121.23 454.28 11.97 34.94 121.23 - 63 - Approvals PendingCommitment FYApproval Company Loan Equity Quasi Partic 2001 Akbank 0.03 0.00 0.00 0.00 2004 Akbank BLoanInc 0.00 0.00 0.00 0.02 2003 Cayeli Expan2 0.02 0.00 0.00 0.00 2000 Erbakir 0.01 0.01 0.00 0.00 2002 MilliReasurans 0.00 0.00 0.01 0.00 2004 OyakBank I1 0.05 0.00 0.00 0.00 2003 SisecamExp. 0.00 0.00 0.00 0.01 2002 TEB m 0.00 0.00 0.00 0.05 Total PendingCommitment: 0.10 0.01 0.01 0.08 - 64 - Annex 10: Country at a Glance TURKEY: Renewable Energy Project Europe B Lower- POVERMand SOCIAL Central mlddle- Turkey Asia income Developmentdiamond' 2002 Population, mid-year (millions) 69.6 476 2,411 GNIpercapita (Atlas method, US$) 2,500 2,160 1,390 Lifeexpectancy GNI (Atlas method, US$billions) 174.0 1,030 3,352 Average annual growth, 1996-02 I T Population(%) 1.7 0.1 1.o Laborforce (%) 2.2 0.4 1.2 GNI Most recent estlmate (latest year available, 199642) per capita Poverty I%ofpopulationbelownationalpovertyline) Urban population(56 oftotalpopulation) 67 63 49 Life expectancy at birth (years) 70 69 69 1 Infantmortality(per 1,000live births) 33 25 30 I Childmalnutrition(% ofchildrenunder5) 8 I 1 Access to improvedwater source Access to an improvedwater source (Om ofpopulation) 82 91 81 Illiteracy(Om of populationage 15+) 14 3 13 Gross primaryenrollment (% ofschool-agepopulation) 101 102 111 Turkey Male 105 103 111 Lower-middle-incomegroup Female 96 101 110 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1982 1992 2001 2002 Economicratios. GDP (US$ billions) 64.4 158.9 145.2 182.8 Gross domesticinvestmenUGDP 17.0 23.9 16.8 21.3 Exportsof goods and ServicedGDP 11.9 14.4 33.7 28.8 Trade Gross domesticsavings/GDP 13.8 20.9 19.2 19.6 Gross nationalsavingslGDP 18.5 24.4 20.7 20.7 T Currentaccount balance/GDP -1.5 -0.6 2.3 -0.8 Interestpayments/GDP 1.8 2.0 3.6 3.4 Total debUGDP 30.6 35.6 78.4 71.9 Total debt service/exports 29.4 32.1 44.0 49.0 Presentvalueof debUGDP l. Presentvalue of debtlaxports Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) - GDP 5.1 2.8 -7.5 7.8 4.7 Turkey GDP percapita 2.7 1.0 -9.0 6.1 3.6 Lowermiddleincomegroup ~ STRUCTUREof the ECONOMY (% of GDP) Agriculture 22.7 15.3 12.8 13.0 Industry 25.1 29.9 26.1 25.4 Manufacturing 17.7 18.9 15.8 16.0 0 Services 52.2 54.7 61.1 61.6 Privateconsumption 76.3 66.2 II 66.6 66.3 1 ... 1-50 V Generalgovernmentconsumption 9.9 12.9 14.2 14.0 Importsof goods andservices 15.0 17.3 31.3 30.5 -GDI *GDP II (average annualgrowth) Agriculture 1.4 1.1 -6.0 7.6 40 T Industry 7.2 2.6 -7.2 5.7 20 Manufacturing 7.2 3.3 -8.0 8.2 Services 4.2 3.1 -6.2 7.0 Privateconsumption 4.3 2.2 -9.2 2.6 -20 Generalgovernmentconsumption Gross domesticinvestment 5.0 1.1 42.0 35.7 Importsof goods andservices -Exports -Imports - 65 - Turkev PRICESand GOVERNMENTFINANCE 1982 1992 2001 2002 Domestic prices Inflation(%) 1 (% change) 100 Consumerprices .. 70.1 53.9 44.8 75 ImplicitGDP deflator 28.2 63.7 54.8 43.5 50 Government finance 25 ("hofGDP,includescurrentgrants) Currentrevenue .... .. 19.0 29.3 28.2 Currentbudgetbalance -1.3 -14.7 -4.7 Overallsurplus/deficit -10.7 -20.9 -12.3 -GDP deflator *CPI ~ TRADE 1982 1992 2001 2002 (US$ millions) Exportandimportlevels (US$mill.) Total exports (fob) 5,890 14,891 34,373 39,827 60,030 Textiles 1,145 5,603 10,344 12,066 Processedagriculturalproducts 1,571 2,293 1,876 1,705 Manufactures 4,655 13,440 28,695 32,673 40,MO Totalimports(cif) 8,843 22,871 41,399 51,270 Food 123 1,398 848 1,211 2o.wo Fuelandenergy 3,943 3,903 8,316 8,955 I Capitalgoods 2,214 7,970 7,344 8,949 0 Exportprice index (1995=100) 95 76 75 96 97 98 99 M 01 M Importprice index (1995=100) 90 81 80 &Exports .Imports Tens of trade (1995=100) .. 105 94 93 BALANCEof PAYMENTSI / 1982 I992 2001 2002 (US$ millions) Currentaccountbalanceto GDP (%) Exports of goods andservices 7,818 23,343 50,403 54,608 Imports of goods and services 9,592 26,706 45,816 55,095 ` T Resource balance -1,774 -3,363 4,587 -487 Net income -1,455 -1,670 -5,000 4,549 Net currenttransfers 2,277 4,059 3,803 3,498 Currentaccountbalance -952 -974 3,390 -1,540 Financingitems(net) 1,120 2,458 .18,314 1,328 Changes in net reserves -168 -1,484 12,924 212 Memo: Reserves includinggold (US$ millions) 2,027 15,252 30.192 38.067 Conversionrate (DEC, /ocallUS$) 162.9 6.881.3 1.228.367 ####### EXTERNALDEBTand RESOURCEFLOWS 1982 1992 2001 2002 (US$ millions) Compositionof 2002debt (US$ mill.) Totaldebt outstanding anddisbursed 19,716 56,554 113,806 131,407 IBRD 1,962 5,564 4,707 5,367 IDA 187 148 95 89 A: 5,367 G: 15.155 8: 89 Total debt service 2,968 9,086 24,623 28,632 21,503 IBRD 209 1,207 723 708 IDA 3 6 7 7 Composition of net resourceflows D 10,400 Officialgrants 307 506 0 334 Officialcreditors 762 -509 74 797 E 6,433 Privatecreditors 146 3,604 -2.187 3,811 Foreigndirectinvestment 55 779 2,769 862 Portfolioequity 0 -1,194 -4,611 -1,180 World Bankprogram Commitments 648 686 2,200 1,650 A IBRD E Bilateral - Disbursements 500 286 1,537 1,031 B IDA -- D Other multilateral F Private ~ Principalrepayments 86 733 437 442 C-IMF G Short-term -- Netflows 415 -447 1,100 588 Interest payments 127 480 292 272 Nettransfers 288 -928 808 316 ueveiopmenrtconomtcs I /2001and2002 are basedon the newclassification. - 66 - Additional Annex 11:Indicative List of Renewable Energy Power Generation Prospects (Small hydropowerplantsbelow50 MW) TURKEY: Renewable EnergyProject NO NAMEOFTHE PROJECT INSTALLED PRODUCTION STAGE CAPACITY AVERAGE FIRM CITYCODEAND RIVERBASIN NAME OMW) (GW) (Gm) 1 CAYGC~REN 3 10 19 15 10BALIKESIR 03 SUSURL.UK FS 2 DEVECIKONAGI 600 33 17 16BURSA 03 SUSLJRLUK FS 3 ORHANELI 4800 161 134 16BURSA 03 SUSLJRLUK PS 4 WMBAY-I 300 14 16BURSA 03 SUSURLUK FI 5 EMET 28 00 78 65 ~~KUTAHYA 03 SUSURLUK FI 6 UCKlZLAR 200 9 16BURSA 03 SUSLJRLUK FI 7 BAYRAMIC 180 9 4 I7CANAKKALE 04KUZEYEGE FS 8 KARAMENDERES-I 1080 28 17 17CANAKKALE 04KUZEYEGE PS 9 KARAMENDERES-I1 540 14 9 17CANAKKALE 04KUZEYEGE PS 10 MADRA 400 9 10BALIKESIR 04KUZEYEGE FI 11 BARAK-AFSAR-II 400 8 0 45MANISA OSGEDIZ PS 12 MARMARA 2100 42 0 45MANISA OSGEDIZ PS 13 KOCAYATAK 200 8 1 35 IZMIR 05GEDIZ FI 14 ORTAKOY 27 00 108 65 351ZMIR OSGEDIZ FI 15 YENCEKENT 2100 76 5 20DENIZLI 07 B. MENDERES FDL 16 FESLEK-BEREKET 8 90 32 20 09AYDIN 07 B. MENDERES FDL 17 ADIGUZEL-I1 600 27 6 20DENIZLI 078 MENDERES FS 18 BASARAh' 040 2 0 09AYDIN 07 B.MENDERES FS 19 ERENLER 420 22 3 20DENIZLI 07 B. MENDERES FS 20 GOKBEL 560 24 6 09AYDIN 07 B.MENDERES FS 21 SIRMA 720 28 5 09AyDlN 07 B.MENDERES FS 22 EGE 1,2,3,4 440 25 10 2ODENIZLI 07 B.MENDERES FS 23 AKCAY I 15 00 65 42 20DENIZLI 07 B. MENDERES FI 24 AKCAY I1 1000 42 26 20DENIZLI 078 MENDERES FI 25 SARIKAVAK-DENIZLI 100 7 20DENIZLI 07B. MENDERES FI 26 TASCILAR 0 40 3 - 20DENIZLI 07 B MENDERES FI 27 ULUBEY 28 00 78 63 20DENIZLI 07 B.MENDERES FI 28 YLiKARlAKCAY 200 15 9 48MUGLA 08 B. AKDENIZ FDL 29 ALAKIR 150 12 11 07ANTALYA 08 B AKDENIZ FS 30 CALDERE 800 35 22 48MUGLA 088 AKDENIZ FS 31 DODURGALAR1-11 3 70 12 0 20DEMZLI 08B AKDENIZ FS 32 GOKYAR 1100 43 48 MUGLA 08 B. AKDENIZ FS 33 AYKIRCA 630 36 0 07ANTALYA 08 B. AKDENIZ FS 34 BURGULAR-GEBES 13 00 65 0 07ANTALYA O8B AKDENIZ FS 35 FINIKE 900 52 14 07ANTALYA 08 B. AKDENIZ FS 36 KIZILAGAC-KARACAY1,2 23 40 65 2 07ANTALYA 08 8. AKDENIZ FS 37 YANMLAR 1,2 550 33 16 48MUGLA 08 B AKDENIZ FS 38 CAYAGZI 447 39 25 07ANTALYA 08 B. AKDENIZ PS 39 KOZDERE 440 39 0 07ANTALYA 08 B. AKDENIZ PS - 67 - 40 YWARLAKCAY 5 90 16 1 48MUGLA 088 AKDENIZ PS 41 ELMALI 2.60 8 - 07ANTALYA 08 B. AKDENIZ FI 42 YAPRAKLI 4.00 9 - 15 BURDLJR 08 B. AKDENIZ FI 43 KOVADA-III 2.80 6 6 32ISPARTA 09ANTALYA FDL 44 AKSU-AKDENIZ 8.90 36 9 07ANTALYA 09ANTALYA FS 45 ANAMAS 2.35 12 2 32ISPARTA 09ANTALYA FS 46 GOKSU 6.50 28 10 321SPARTA 09ANTALYA FS 47 GUNWGMUS 50.00 199 115 07ANTALYA 09 ANTALYA FS 48 UZUMDERE 21 50 75 0 07ANTALYA 09ANTALYA FS 49 BASAK 47.00 128 86 32ISPARTA 09ANTALYA MPS 50 DUDEN 15.00 102 45 07ANTALYA 09ANTALYA PS 51 ZINCIRLI 16.30 72 0 07ANTALYA 09ANTALYA PS 52 ANTALYA 3.70 13 - 07ANTALYA 09 ANTALYA FI 53 OBACAYI 4.40 20 - 07ANTALYA 09 ANTALYA FI 54 SAL- 2.70 14 - 07ANTALYA 09 ANTALYA FI 55 DOGANCAY 16.89 148 94 54SAKARYA 12SAKARYA FDL 56 MANSURLAR1-11 12.60 61 16 54SAKARYA 12SAKARYA FDL 57 AKCAKOY 0 45 1 o ~ ~ K ~ T A H Y A 12SAKARYA FS 58 BESKARIS 1.00 3 o ~ ~ K ~ T A H Y A 12SAKARYA FS 59 GoKCEIUSIK 2.00 9 2 26ESIUSEHIR 12SAKARYA FS 60 PAZARKOY 1700 78 27 54SAKARYA 12SAKARYA FS 61 PORSUK 390 14 8 26ESIUSEHIR 12SAKARYA FS 62 TARAKL.1 5 0 0 I8 2 54SAKARYA 12SAKARYA FS 63 UCCAMLITEPE 945 37 11 14BOLU 12SAKARYA FS 64 Y~JRSE 950 36 11 14BOLU 12SAKARYA FS 65 KAYABriKU 1200 43 9 14BOLU 12SAKARYA MPS 66 KARAKOWLU 11 00 22 - 06" 12SAKARYA FI 67 CAY 25 00 125 87 67ZONGULDAK 13B. KARADENIZ FDL 68 AFUT 900 46 5 74BARTlN 13B. KARADENIZ FDL 69 KIZILCAPINAR-I 150 9 3 67ZONGULDAK 13B. KARADENIZ FS 70 TEFEN 1350 81 45 78-w 1 3 8 KARADENIZ FS 71 AKSU (DUZCE) 4100 144 37 14BOLU 13B. KARADENIZ FS 72 ANDIRA2 36 00 57 33 78KARABl% 13B KARADENIZ FS 73 B MELEN 30 00 151 160 54SAKARYA 13B KARADENIZ FS 74 BARTIN 660 41 13 74BARTlN 13B.KARADENIZ MPS 75 CIDE 4000 148 97 37KASTAMONU 13B. KARADENIZ MPS 76 CUROMOREN 600 13 11 37KASTAMONU 13B. KARADENIZ MPS 77 SUCATI 1050 69 43 78KARABLJK 13B. KARADENIZ MPS 78 KIZILCAPINAR-11 130 9 5 67ZONGULDAK 13B. KARADENIZ PS 79 CORBACI 3 00 12 1 37KASTAMONU 138 KARADENIZ FI 80 DEGIRMEN~NIJ 300 14 2 37KASTAMONU 13B.KARADENIZ FI 81 DUZCE 5 20 22 14BOLU 13B. KARADENIZ FI 82 EGERCI 100 8 3 67ZONGULDAK 13B. KARADENIZ FI 83 HASANLAR-KANAL 5 20 22 8 14BOLU 13B KARADENIZ FI 84 KUZKOY 100 7 3 37KASTAMONU 13B KARADENIZ FI 85 ALTINTEPE-SUSEHRI 4.00 24 9 58SIVAS 14YESILIRMAK FDL 86 BEYPINARI-SUSEHRI 400 23 8 58SIVAS 14YESILIRMAK FDL 87 KONAK-SUSEHRI 400 25 10 58SIVAS 14YESILIRMAK FDL 88 INCESU 13.00 48 13 19CORUM 14YESILIRMAK FS 89 KAY1BEND1 9.60 37 15 58SIVAS 14YESILIRMAK FS - 68 - 90 NlKSAR 22 40 178 145 6OTOKAT 14YESILIRMAK FS 91 KOYULHISAR 38 20 311 304 6OTOKAT 14YESILIRMAK MPS 92 BAYRAMHACILI 45 00 170 119 50NEVSEHIR 15KIZILIRMAK FS 93 CORAKCIFTLIGI 700 29 15 58SIVAS 15KIZILIRMAK FS 94 DEVELI 6 70 25 17 38KAYSERI 15KIZILIRMAK FS 95 IMRANLI 300 11 5 58SIVAS 15KIZILIRMAK FS 96 MUSLIMABAT 6 80 28 15 58SIVAS 15KIZILIRMAK FS 97 OBRUCAK 300 14 6 37KASTAMONU 15 KIZILIRMAK FS 98 TASKOPRU 1400 46 37 37KASTAMONU 15 KIZILIRMAK FS 99 TIMARLI 700 56 57 18CANKIRI 15KvILIRMAK FS 100 AVANOS-CEMEL 960 79 65 50NEVSEHIR 15KIZILIRMAK FS 101 DAMLACIK 15 00 92 68 40KIRSEHIR 15KIZILIRMAK FS 102 GELINGULLO 200 13 12 66YOZGAT 15 KIZILIRMAK FS 103 HAMZALI 13 80 100 64 71-E 15 KIZILIRMAK FS 104 BOZKURT 462 30 17 58SIVAS 15 KIWLIRMAK PS 105 CERMIKLER 465 30 17 58SIVAS 15KIZILIRMAK PS 106 OMERLERDUZU 130 10 7 58SIVAS 15KIZILIRMAK PS 107 SARACBENDI 240 18 13 58SIVAS 15KIZILIRMAK PS 108 TALAS 200 14 38 KAYSERI 15KIZILIRMAK PS 109 TUZKOY 1100 54 12 50NEVSEHIR 15KIZILIRMAK PS 110 SIVAS 1900 58SNAS 15WLlRMAK FI 111 APA 500 -- 42KONYA 16KONYA KAPALI FI 112 DINEKSARAY I O 60 30 0 42KONYA 16KONYA-KAPALI FS 113 MAVI 25 00 84 0 42KONYA 16KONYA-KAPALI FS 114 MGIT 030 3 - 42KONYA 16KONYA-KAPALI F1 115 LAMAS-III 1600 84 40 331CEL 17D.AKDENIZ FDL 116 LAMAS-IV 22 00 109 47 33ICEL 17D.AKDENIZ FDL 117 PAMUK I980 81 23 33ICEL 17D. AKDENIZ FDL 118 mu-SAHMALLAR 8 60 27 0 07ANTALYA 17D.AKDENE FS 119 BOZKIR 15 00 36 0 42KONYA 17D. AKDENIZ FS 120 BUCAKKISLA 23 00 125 58 70KARAMAN 17D.AKDENIZ FS 121 KEPEZKAYA 15 00 77 44 70- 17 D.AKDENE MPS 122 LAMAS1 1300 82 35 33ICEL 17D AKDENIZ FS 123 LAMAs-n I300 83 34 33ICEL I7D.AKDENIZ FS 124 SILIFKE-I1 41 00 81 59 331CEL 17D.AKDENE FS 125 SUGOZU-KIZILD~JZ 900 32 3 07ANTALYA 17D. AKDENIZ FS 126 TASKENT 500 17 0 42KONYA 17D. AKDENIZ FS 127 AZMAK-KIRPILIK 15 50 42 9 33ICEL 17D AKDENIZ FS 128 CEI" 48 00 165 63 800SMANIYE 17D.AKDENIZ FS 129 DAMLAPINAR 700 35 34 7oKARAMAN 17D.AKDENIZ MPS 130 KADINCIK-111 4000 148 73 33 ICEL 17D.AKDENIZ FS 131 KADINCIK-IV 5000 186 92 33ICEL 17D. AKDENIZ FS 132 PAMUKLUK 1600 58 27 33ICEL 17D.AKDENIZ FS 133 DmC 100 4 3 331CEL 17D AKDENIZ FI 134 EFRENK 26 00 90 51 33 ICEL 17D.AKDENIZ PS 135 BALKUSAN 38 00 117 77 70KARAMAN 17D. AKDENIZ FI 136 GOKDERE 20 00 113 - 7OKARAMAN 17D. AKDENIZ FI 137 SARIKAVAK-MUT 1420 61 53 33ICEL 17D. AKDENIZ FI 138 TASLIBEL-MUSLUK 1200 40 21 33 ICEL 17D.AKDENIZ FI 139 BAHCELIK 420 30 25 38KAYSERI 18SEYHAN FS 69- 140 IMAMOGLU 1400 43 0 OIADANA 18SEYHAN FS 141 MESTAS 4000 163 50 01ADANA 18 SEYHAN FS 142 CAMLICA-II 2600 133 57 38KAYSERl 18 SEYHAN FS 143 CAMLICA-III 25 00 123 56 38KAYSERI 18SEYHAN FS 144 GihdISORES 5 00 12 0 38KAYSERI 18SEYHAN FS 145 GICIK 100 5 2 38KAYSERI 18 SEYHAN MPS 146 MESGE 33 00 113 58 01ADANA 18SEYHAN MPS 147 TOPAKTAS 700 34 12 38KAYSERI 18SEYHAN MPS 148 YAMANLI-I 22 00 101 34 01ADANA 18 SEYHAN MPS 149 YAMANLI-111 3000 175 76 01ADANA 18SEYHAN MPS 150 ASAGI KORKiJN 700 40 37 01ADANA 18SEYHAN PS 151 EGLESCE 32 00 115 70 OIADANA 18 SEYHAN PS 152 NUR 1-11-111 30 10 144 121 01ADANA 18SEYHAN PS 153 ASMACA 22 00 72 62 01ADANA 18SEYHAN FI 154 MERIH 2 50 20 18 01ADANA 18 SEYHAN FI 155 ANDIRIN-KARGALIK 41 00 150 24 46KMARAS 20 CEYHAN FDL 156 SULEYMANLI 4 60 19 7 46KMARAS 20CEYHAN FDL 157 DEGIRMEMJS~~ 38 00 119 2 46KMARAS 20CEYHAN FS 158 FIRNIS 7 30 36 18 46K.MARAS 20CEYHAN FS 159 HANCERIRMAGI 5 60 22 10 46KMARAS 20CEYHAN FS 160 KARAPINAR 150 4 1 4 6 K M A R A S 20CEYHAN FS 161 KAYRAN 3 20 12 4 46K.MARAS 20CEYHAN FS 162 SABUNSUYUI1 6 50 26 13 800SMANIYE 20CEYHAN FS 163 ZEYTIN 500 21 9 46KMARAS 20CEYHAN FS 164 BULAM 700 24 1 02ADIYAMAN 20CEYHAN FS 165 KARAPLJR-GOKSU 700 27 6 46KMARAS 20CEYHAN FS 166 ANDIRINSUYU 5 20 23 46KMARAS 20CEYHAN FI 167 ASAGIFIRNlS 400 13 6 46KMAFL4S 20CEYHAN FI 168 CATALOLLK 720 23 10 46K.MARAS 20CEYHAN FI 169 KMARAS 1000 27 46 KMARAS 20CEYHAN FI 170 CAMLIHEMSIN 42 00 192 120 53RIZE 22D KARADENIZ FDL 171 AYDER 35 00 185 63 53RIZE 22 D.KARADENIZ FS 172 CIRAKDAMI 45 00 128 23 28GIRESUN 22D KARADENIZ FS 173 DERELI 45 00 144 25 28GIRESUN 22 D.KARADEMZ FS 174 DIKKAYA 25 00 118 53 53RIZE 22 D.KARADENIZ FS 175 HISARCIK 2400 89 16 53RIZE 22D KARADEMZ FS 176 IKISU 4000 134 72 28GIRESUN 22 D.KARADENIZ FS 177 MACKA 35 00 124 30 61 TRAEZOS 22D.KARADENIZ FS 178 SAMAN 20 00 56 8 61TRABZOS 22 D.KARADENIZ FS 179 TIREBOLU 6000 114 59 28GIRESUN 22 D.KARADESIZ FS 180 TOZKOY II 3140 60 17 53RIZE 22D.KARADENIZ FS 181 YOKUSLU-EULWERE 3400 131 44 53RIZE 22 D.KARADESIZ FS 182 CANKAYA 29 00 134 66 61TRABZOS 22D.KARADESIZ PS 183 GURPINAR 5000 128 86 53RIZE 22 D.KARADESIZ FS 184 IYISU 1300 66 22 61 TRABZOS 22 D. KARADEhlZ PS 185 KESTANELIK 1300 61 19 61TRABZOS 22D KARADENIZ PS 186 ADACAMl 2000 101 41 53RIZE 22D KARADESIZ PS 187 AKK~Y-ESPIYE 1200 80 24 28GIRESUN 22 D.KARADESIZ PS 188 ALADERECAM 7 00 18 12 ~~G~JMLISHANE 22D KARADENIZ PS 189 AVLUCA 45 00 125 87 28GIRESUN 22 D.KARADENIZ PS - 70 - 190 BASKOY 1000 59 24 53REE 22 D.KARADENIZ PS 191 BOLAMAN 1450 57 32 520RDU 22 D.KARADENJZ PS 192 CAMAY 1200 64 26 53RIZE 22 D.KARADENJZ PS 193 CAWSLU I100 41 23 520RDU 22 D.KARADENJZ PS 194 CILEKLITEPE 20 w 85 49 28GIRESUN 22 D.KARADENJZ PS 195 DOGANAY 200 8 3 53RIZE 22 D.KARADENJZ PS 196 W E N 45 00 166 122 28GIRESUN 22D KARADENJZ PS 197 KARASAY 4 80 22 9 520RDu 22 D.KARADENIZ PS 198 KARATAS 1030 43 19 520RDU 22 D.KARADENJZ PS 199 KAVSAK 36 60 160 94 520RDu 22D KARADENJZ PS 200 KORU 1600 42 28 29GikviUSHANE 22 D.KARADENJZ PS 201 KULETASI 30 00 60 33 BGIMJSHANE 22 D.KARADENJZ PS 202 ORTAKOY 900 36 19 520RDU 22 D.KARADENJZ PS 203 PASALAR 30 00 139 56 53REE 22D KARADENJZ PS 204 S O G W I N A R 1200 43 33 28GIRESUN 22D KARADENJZ PS 205 ALTINDERE 1.20 6 - 61TRABZON 22D K A R A D W FI TOPLAM 3 074.71 12 331 5 662 FDL (Find DesignLevel) FS(FeasibilityReportStage) MPS(Master PlanStage) PS (Prelmaly Study) FI(FirstInvestigation) -71* AdditionalAnnex 12 Overviewof the FinancialIntermediaries:TSKB and TKB TURKEY: Renewable Energy Project TSKB (Turkiye Sinai Kalkinma Bankasi) TSKB --The Turkish Industrial Development Bank was established in 1950 with the support of the World Bank and the Turkish Central Bank. In 1963, IFC became a shareholder by subscribing to 15% of the capital, but in the following years gradually divested its participation. TSKB is now principally owned by the leading commercial banking groups in Turkey, namely lsbank , Akbank, Vakiflar Bankasi, Turk Ticaret Bankasi , Garanti Bankasi and Disbank. Some of TSKB shares are listed on the Istanbul Stock Exchange (ISE) and are held by individuals. In 2002 TSKB acquired Sinai Yatirim Bankasi (Industrial Investment Bank) , another private investmentbank with similar backgroundand a commonshareholder base. TSKB's mission is to channel medium and long-term loans to private companies and provide investment-banking services. TSKB conducts its business from its headquarters in Istanbul. There are two regional offices; one in lzmir and one in Samsun. As of February2003 TSKB had 296 employees. TSKB has played an active role in the development of Turkey's manufacturing and financial sectors. Originally focused on earnings from medium and long term lending activities, the bank has gradually changed it's orientation towards fee based activities; from 1996 to 2000 the bank was the leading underwriter of initial public offerings (IPOs) in Turkey. TSKB maintains a long-term loan portfolio and its loans are match funded by long-term borrowings from internationalinstitutions. At the end of 2002, close to 80 % of the borrowings of the bank were either on-lent from or guaranteed by the Turkish Treasury and close to 20% of the borrowed funds were providedby group banksthat were also owners of TSKB. TSKB utilizes the medium and long-termfunds it secures from international financial institutions, either as a borrower or sub-borrower, to finance industrial investments through loans and financial leases. TSKB has funded itselfwith loans secured from the European Investment Bank , the Japan Bank For International Cooperation, K W and the World Bank in order to finance fixed capital investmentand working capital needs of privateenterprises. TSKB established a Risk Management Group in the year 2000. Credit risk, market risk and operational risk monitoring functions have been separated. Internal Audit and Risk Monitoring departmentshavealso been established and are functioning. TSKB has equity participations in certain financial institutions with the primary purpose of diversifying its functions. These include Yatirim Finansman (Brokerage House), Is Leasing (Leasing Company), Is Faktoring (Factoring Company), TSKB Menkul Kqymetler (Brokerage House) and Is Risk Sermayesi (Risk CapitalCompany). TSKB's CAR on a consolidated basis was 22.17% at end-2001. As of end-September 2002, TSKB's inflationadjustedsolo CAR was 22.75. %. TKB (Turkiye Kalkinma Bankasi) TKB Is a state-owned developmentand investment bankthat was established in 1975 in order to utilize the savings of expatriate workers to invest in industry. In 1988, after taking its present name, the bank's mandate was widened to include providing finance to joint-stock companies operating in all sectors. Turkish Treasury is the main shareholder of the bank, with 99% of registered capital. TKB's main business is to: (a) provide medium and long-term finance to medium-sizedjoint-stock companies; and (b) act as an intermediaryfor funds received from the Treasury by lendingto developingregions. - 72 - TKB realizes these through, project financing, financial leasing and equity participation with joint-stock companies in the industrial, tourism, energy, health and education sectors; with a focus on areas identified by the government as priority regions. TKB is one of the three state-owneddevelopmentand investment banks in Turkey. It was originally established in 1975 as DESIYAB - State Industrial and Workers Investment Bank with the primary objective of utilizing savings of expatriate Turkish workers to build and operate companies, as well as participating in their share capital. In 1988, the bank's name was changed to its present name and it was also authorizedto providefinancialsupportto all sectors. In Octoberl999, TKB became a joint stock company, subject to provisions of private law. The main shareholderof the bank is Treasury with 99.08% of registeredcapital at end-2001. Private and public companies own the remaining 1%. The members of the Board of Directors are elected by the bank's GeneralAssembly upon suggestion of the Treasury. The General Director of the bank is appointed by a joint decree that is signed by the Prime Minister and 2 state ministers. TKB, due to it's special status as a development bank, is exempt from certain banking sector prudentialregulationssuch as provisioningrequirementsfor non-performingloans. Furthermore, TKB as a developmentbank is not permitted to acceptdeposits.TKB 's head office is in Ankara. In November 2001, all seven branches of the bank were closed at the request of BRSA in order to increase efficiency. Local supervision and advisory services are coordinated by the head office and the 23 local development units which are operating under chambers of commerce in various regionsof Turkey. TKB had 839 employees at end-2001. TKB's mainactivities are development and investmentbanking. TKB also extends loans through various government-fundedincentiveschemes to provincesthat are designatedas development regions in East and South East Anatolia and Black Sea Regions. The bank receives its funds primarilyfrom the Turkish Treasury, lends them at its own risk, adding it's commissionfee, and allocates the loans on a case by case basis. Treasury determines loan pricing and commissions on these type of government-fundedloans. TKB providesconsultancyservicesto entrepreneurs through its local development offices. TKB also provides investment banking services such as primary and secondarypublic offerings and privatizationconsultancy.BesidesTreasuryfunding, TKB is funded by various internationalagencies. The bank performs its capital market activities through its subsidiary (owned 99% by TKB) Kalkinma Menkul Degerler AS., which provides brokerage services to customers of the bank and at the same time acts as an intermediary in initialand secondary publicofferings. In 2001, TKB established a Risk Management Group in order to comply with the new bank regulations. Credit risk, market risk and operational risk monitoring functions have been separated. Internal Audit and Risk Monitoring departments were also established in 2001. The Treasury Departmentis responsiblefor applicationof market risk managementpolicies, carrying on future risk analysis and calculationof duration. TKB calculatesmarket risk usingthe standard method and reports are sent to BRSA on a monthly basis. VaR analysis and stress testing are beingdeveloped and applied internally.The Asset LiabilityCommitteemeets weekly to establish guidelines in line with risk management policies and the business plansof the bank. Since TKB is a development bank, there is no regulatory limit set by the Banking Law on loan allocations. However,the Board of Directorsdetermineslimits accordingto its own credit policies in line with the limitationsof the BankingLaw. Accordingly, cash and non-cash loans to a single borrower cannot exceed 20% of the bank's equity and loansto one group cannot exceed 75% of equity. As an investmentbank, TKB cannot accept retail and corporatedeposits but has a stable funding base provided by the Turkish Treasury and international banks because of its special status. Treasury is the major funding source for the bank. TKB also raises funds through international bond issues and also through buyer-sellerlines of credit obtainedfrom international banks of the related countries. There are also bilateral lines available to the bank from - 73 - internationalbanks. All internationalobligationsof TKB are guaranteed by treasury. TKB' s regulatorycapital adequacy ratio (CAR) was 77.11% at end-2001, whereas its Tier ICAR was 55.77%. The bank's high capital is somewhat offset by substantial non-performing loans, nevertheless capital adequacy reduces only to 67% when existing NPLs are reserved 100%. As of end-September 2002, TKB's CAR was 83%. The prudential regulations set by the Banking regulatory and SupervisoryAgency (BRSA) calls for a minimum CAR of 8% - 74 - Additional Annex 13: Summary Assessment of TSKB and TKB Eligibility TURKEY: Renewable Energy Project Assessment of TSKB and TKB Eligibility per World Bank ECA Region Guidelines for Financial Intermediary Operations A. Compliance of TSKB with the ECA Regional Guidelines World Bank ECA Region Guidelinesfor Financial TSKB IntermediaryOperations 1.I, bank beenduly licencedand at leasttwo years in Hasthe TSKB was established in 1950with the support of the World operation bank and the Govemmentof Turkey. TSKB is the oldest investmentand development bank in Turkey. 1.2.Are the Banks owners and managersconsideredfit and The major shareholder of the bank isT.ls BankasiAS. with proper 37% ownership at the end of 2001. The Banks remaining shares belong mainlyto other banks (5) operating in Turkey. The qualifications of the managersof the bank comply with the "Regulationfor the establishmentand Operations of banks" published by BDDKon June 27,2001. 1.3.1s the bankin "goodstanding"with itssupervisoryauthorit) Banks operating in Turkey are requiredto send monthly (i.e. it should meetall pertinentprudentialand other applicable prudentialreturnsto BDDK.The criteria includes"Risk lawsand regulations) weighted capital adequacy ratio","Singleclient exposure expressedas a percentageof the banksregulatorycapital base". "single group of connectedclients exposure expressed as a percentageof the Banks regulatorycapital base", ?he total of single clients and group of connected clients exposureswhose individualrisks exceed 10%of the capital baseof the bank,expressed as a percentageof the Banks regulatorycapitalbase","the total exposuresto insiders", "exposures inthe form of equity holdingsor participations in non-financialentities", "foreigncurrency exposure expressed as a percentageof the banks regulatory capital base". TSKB has been in compliancewith all criteria exceptfor "single client exposure expressed as a percentageof the Banks regulatorycapital base".The requirementis max 25% as per banking law and as at 30.09.2003TSKBs percentageis 28.40%. Howeversince the bank is not a deposittakingbank itdoes not haveto complywith this limit. 1.4. Doesthe bank maintainat leastthe minimumcapital Yes. The minimumrequirementas per BRSA is 8%. TSKB prescribedby prudentialregulations,of which at least half is hasa ratioof 22.75% as at September 30,2002. Tier 1 capital? Itsrisk-basedcapitaladequacyratio should be at least 8 percent. (In principle,the risk-basedcapital adequac ratio used in the eligibilitycriteria should comply with the capita adequacy ratio prescribedby prudentialregulationsfor the respectivecountry.) 1.5.Doesthe bank have adequateliquidity? The auditorsissued an unqualifiedopinion on the Banks financialstatements preparedin accordancewith Banking law which stipulatescompliancewith standard ratios which cover liquidity as well. 1.6. Doesthe bank havepositiveprofitabilifyandacceptable YeS riskprofile? It must maintainthe value of itscapital. 1.7. Doesthe bank classifvits assets and off-balance sheet The bank complieswith the prudential regulationsand loan credit risk exposures(at leastfour times peryear) and make lossprovisioning requirementsas stipulated in the Banking adequateprovisions. It must have adequateportfolioqualify? Law. 1.8. Doesthe bank havewell defined wlicies andwritten The Bank has a Risk ManagementGroup established in proceduresfor managemenfofallfybes offinancialrisks. It order to comply with the banking regulations.One Board musthavequalifiedandexperiencedmanagement,adequate member is solely responsiblefor risk managementand the organizationand institutionalcapacity for its specific risk credit risk, marketrisk and operational risk monitoring profile? functions have beenseparated. 1.9. Doesthe bank haveadequateintemalaudits and controls The Bank has an intemalaudit department reporting directly for its specific risk profile? to the GeneralManager.Thereare adequate internalcontrol procedures in place. 1.IO. Doesthe bankhaveadequatemanagementinformation The Bank has updated managementinformationsystems in - 75 - I svstems? I olace. I 2.1. Per paragraph 10of OP 10.02, is the financial intermediary Annualfinancial informationisobtainedfrom the beneficiary ableto ensure that sub-borrowershave accounting and intemal enterprisesand evaluated by the analysisdepartment of controlsadequateto providefinancial informationon TSKB. The informationwill also be madeavailableto IBRD. implementationperformance? 2.2. Per paragraph 5 of BP 10.02,are the financial Yes. management arrangementsof the financial intermediaries described in the PAD? (If PFls not selected at the time of appraisal,this cannot befulfilled) 2.3. Per paragraph3 of BP 10.02, hasthe Bank reviewedthe TSKB hasfinancial statements prepared in accordancewith IAZ PFl's lastthree years' auditedfinancial statements? and the auditors (memberfirm of KPMG in Turkey) have issued unqualifiedaudit opinionsfor the years ended 31 December 2001,2000and 1999.Thesestatements have been made availableto the Bank. 2.4. Per paragraph 3 of OP 10.02, is the financial The appointmentof the auditorsfor 2003 is requiredto be intermediaryto beauditedannually by auditors acceptableto completed by May 30,2003.The legal agreementwill include the Bankin accordancewith TORSand standards acceptable the audit clause infinancial covenants. B. Complianceof TKB with the ECA RegionalGuidelines World Bank ECA RegionGuidelinesfor Financial TKB IntermediaryOperations 1.I. bank beenduly licencedand at leasttwo years in Hasthe TKB isestablishedin 1975as a developmentand investment operation bank. 1.2.Arethe Banks owners and managersconsideredfit and Major shareholderof the bank is the Undersectretariatof proper Treasurywith 99.08%ownership. The qualifications of the managersof the bankcomply with the "Regulationfor the establishmentand Operationsof Banks" published by BDDK on June 27,2001. 1.3.1sthe bank in "goodstanding"with its supervisoryauthority Banksoperating in Turkey are required to send monthly (i.e. it should meetall pertinentprudentialand other applicable prudential retumsto BDDK.The criteriaincludes "Risk lawsand regulations) weighted capitaladequacyratio", "Singleclient exposure expressed as a percentageof the banksregulatorycapital base", "singlegroup of connectedclientsexposure expressed as a percentageof the Banks regulatory capital base", "the total of single clients and group of connected clients exposures whose individualrisksexceed 10%of the capital base of the bank,expressed as a percentageof the Banks regulatorycapital base", "thetotal exposures to insiders", "exposuresintheform of equity holdings or participationsin non-financialentities","foreign currency exposure expressed as a percentageof the banks regulatory capital base". TKB has been in compliancewith all criteria. 1.4. Doesthe bank maintainat leastthe minimumcapital Yes. The minimum requirementas per BRSA is 8%. TKB has prescribedby prudentialregulations,of which at least halfas a ratioof 83% as at September30,2002. Tier 1capital? Itsrisk-basedcapitaladequacyratio should be at least 8 percent. (In principle,the risk-basedcapital adequac) ratio used in the eligibilitycriteria should comply with the capital adequacy ratio prescribedby prudential regulationsfor the respectivecountry.) 1.5. Doesthe bankhave adequateliquidiw The auditors issuedan unqualifiedopinion onthe Banks financial statements preparedin accordancewith the Banking law which stipulates compliancewith standard ratioswhich cover liquidityas well. I.6.Doesthebankhavepositiveprofitabilifyandaccepfable YeS riskpmfile? It must maintainthe value of itscapital. 1.7. Doesthe bank classify its assets and off-balance sheet The bank complieswith the prudential regulationsand loan credit risk exposures (at leastfour times peryear) and make loss provisioningrequirementsas stipulated in the Banking adequateprovisions. Itmust have adequate porffolio quality? Law. 1.8. Doesthe bank havewell defined policiesand written The Bank has a Risk ManagementGroup established in - 76 - proceduresfor managementofall types offinancialrisks. It order to complywith the banking regulations.One Board must havequalifiedand experiencedmanagement, adequate memberis solely responsiblefor risk managementand the organization and institutional capacityfor itsspecific risk credit risk, market risk and operational risk monitoring profile? functions have been separated. 1.9. Doesthe bank have adequateintemalauditsand controls The Bank has Boardof Auditorsand InternalControl for itsspecificrisk profile? Department. IC Departmentworks on controlswhich includes faults and deficienciesinprocedureson a daily basis. Board of Auditors audit alltransactionsand activities. 1.I Doesthe bank have adequatemanagementinformafion 0. The Bank has updatedmanagementinformationsystems in systems? place. 2.1. Per paragraph 10of OP 10.02,is the financial intermedia0 Annualfinancial informationis obtainedfrom the beneficiary able to ensure that sub-borrowers haveaccountingand internal enterprises and isevaluated bythe analysisdepartmentof controls adequateto providefinancialinformationon TKB. The informationwill also be madeavailableto IBRD. implementation performance? 2.2. Per *oaraaraoh 5 of BP 10.02.are the financial - . 'es. managementarrangementsof the financialintermediaries described inthe PAD? (If PFls not selected at the time of appraisal,this cannot befulfilled) 2.3. Per paragraph3 of BP 10.02, hasthe Bank reviewedthe 'KB hasfinancial statementsprepared inaccordancewith the PFl's lastthree years' auditedfinancial statements? anking law. The auditors haveissued unqualifiedaudit opinions )r the years ended31 December2001,2000 and 1999. 2.4. Per paragraph 3 of OP 10.02,is the financial 'he appointmentof independentauditors acceptableto the intermediaryto be auditedannually by auditorsacceptableto lankfor TKB isa conditionof effectivenes. the Bank in accordancewith TORSand standards acceotable to the Bank? - 77 -
Группа Всемирного банка · Project Appraisal Document
Turquía - Proyecto de energías renovables,تركيا- مشروع الطاقة المتجددة,Turkey - Renewable Energy Project (Turquie - Projet d'énergie renouvelable)
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