Turkey - Phase Out of Ozone Depleting Substances Project

Document of The World Bank FOR OFICIAL USE ONLY Report No. 12164-TU MULTILATERAL FUND UNDER THE MONTREAL PROTOCOL MEMORANDUM AND RECOMMENDATION OF THE DIRECTOR FOR COUNTRY DEPARTM 1 OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE REGIONAL VICE PRESIDENT, EUROPE & CENTRAL ASIA REGION ONA PROPOSED OZONE PROJECTS TRUST FUND GRANT !N THE AMOUNT EQUIVALENT TO US$6.165 MILLION TO THE REPUBLIC OF TURKEY FOR A PHASE-OUT OF OZONE DEPLErING SUBSTANCES PROJECT December 28, 1993 MI CROGRAPHI CS Industry and Energy Operations Division Country Department I Report No: 12164 TU Europe and Central Asia Region Type: MOD This document has a restricted distribution and may oe useu Dy recipients omy in tme performance of | their official duties. Its contents may not otherwise be disclosed without World Bank authorization. |  Currency Equivalents Currency Unit Turkish Lira (abbreviated TL) 1 US$ = TL 10,340 (December 11, 1993) 1 TL = $0.0001 Acronyms AMD - Air Management Department CFCs - Chloroflurocarbons ICB - Intermational Competitive Bidding MLF - Multilateral Fund of the Montreal Protocol MoE - Ministry of Envirorment ODSs - Ozone Depleting Substances OTF - Ozone Projects Trust Fund SIS - State Institute of Statistics SPO - State Planning Organization TDF - Technology Development Foundation UNDP - United Nations Development Program UNEP - United Nations Environmental Program Iurkev - Fiscal Year January 1 - December 31  FOR OFFICIAL USE ONLY TURKEY Phaseout of Ozone Depleting Substances Project Grant and Project Summary Recipient: Republic of Turkey Beneficiaries: Ministry of Environment, Arcelik A.S. and Other Private Sector Enterprises Amount: US$6.165 million Terms: Grant Financial Intermediary Technology Development Foundation of Turkey Relending Terms: Arcelik A.S.: US$2.0 million grant and US$3.365 million US dollar denominated, interest-free credits with a maturity of seven years including three years grace period; US$0.8 million grant to MoE and other private sector enterprises. Project Costs and Financing Plan: (1992-96) -US$ Million-- LQxc Foreign Total A. Investment Proiects (Arcelik) 1. Conversion of Refrigerator Manufacturing 0.729 4.171 4.900 2. Recovery/Reclaims of CFC-12 in Field 0.150 0.250 0.400 3. Recover/Reclaim in Factory . 0 0065 subtotal Arcelik 0.879 4.486 53 B. Preparation of Other Projects CIlF & MoE) 0.0 0.500 0.500 C. Institutional and Management Strengthening (MoE) 0.100 0.200 0 0 Total Project Costs Q 979 5.186 6LL65 Financing from the Ozone Projects Trust Fund 0.979 5.186 6.165 EIRR: N/A Map: N/A This document has a resticted distnbution and may be used by recipients only in the performane ofir I official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE DIRECTOR FOR COUNTRY DEPARTMENT 1 TO THE REGIONAL VICE PRESIDENT FOR EUROPE AND CENTRAL ASIA ON A PROPOSED OZONE PROJECTS TRUST FUNDS GRANT TO THE REPUBLIC OF TURKEY FOR A PHASEOUT OF C:ZON REPENG} SUBSTANCES PROJEC I. Introduction 1. I submit for your approval the following memorandum and recommendation on a proposed Ozone Projects Trust Fund grant to the Republic of Turkey for US$6.165 million to help finance a project for Phaseout of Ozone Depleting Substances. This would be the first Montreal Protocol related grant to the Republic of Turkey to fund key activities aimed at reducing Turkey's consumption of Ozone Depleting Substances. II. Country/Sector Background 2. Turkey is a rapidly growing and industrializing country which has performed remarkably well in most recent 25 years. From 1965 to 1980 real GDP grew at an average annual rate of 6.2 per cent, and from 1980 to 1990 it grew at a rate of 5.1 per cent. The share of industry has gone up from a quarter of GDP in 1965, to one third in 1990. In recent years inflation has picked up and the macroeconomic situation has been difficult but, in spite of this, and in spite of the uncertainties created by the Gulf War, economic growth has continued. In the first three quarters of 1992 real value-added rose at an annual rate of 6 per cent and the estimated growth in GDP in 1992 is expected to be S.5 percent. 3. With this background, Turkey would be expected to use increasing amounts of Ozone Depleting Substances (ODSs) which are required for the production of consumer durables such as refrigerators, air conditioners etc., the demand for which is still growing in the country. In 1991 the coury used 3519 tons of ODSs (primarily CFCs), all of which were imported as there are no production facilities in Turkey. In the absence of the Montreal Protocol, demand for these chemicals would be expected to increase to 4630 tons in 2010, an increase of 32 per cent or 1.4 per cent per annum. The main users of CFCs in 1992 are estimated to be: refrigerants (25%), foams (53%), solvents (22%). Use in aerosols has been almost completely phased out, from a peak figure of 1117 tons in 1989. The main sectors using these substances in 1992 were: domestic refrigerators (57%, of which 37% was for refrigerants and the remainder for foams); air conditioning (4%), polyurethane foams (18%), solvents (21%). Turkey's ODS consumption for the period 1986-93 is shown in Annex A. 4. Turkey ratified the Montreal Protocol on Substances that Deplete the Ozone Layer (the Protocol) on September 20, 1991. Prior to ratifying the Protocol, the entire text of the Montreal Protocol was passed as law by the Republic of Turkey. Turkey prepared a program (the Program) for the Phaseout of ODSs with the assistance of the World Bank. The Program is Turkey's proposed Action Plan which comprises the policies, implementation actions and investments needed to inidate ODS Phaseout. The Action Plan includes key interventions such as increased use of ODS substitutes, monitoring of ODS consumption patterns to ensure that the required progress is being achieved, and public and industry awareness programs to communicate the features of the country's National Ozone Policy. The Action Plan also identifies demonstration and investment projects that meet the Implementation Guidelines and Criteria for Project Selection (the Guidelines) which were approved by the Executive Committee (EC) of the Fund at its third meeting in April 1991. S. The proposed Project is a component of Turkey's Action Plan for the Phaseout of ODSs. The Project, which was prepared by the Government of Turkey and relevant private sector enterprises  - 2 - with th' assistance of the Bank, has been appraised by the Bank and has been processed as a free-standing investment operation. III. Main Institutions Involved 6. There are several institutions, both in the Government and in the private sector, that have an interest in the ozone issue. Details of these are given in Annex B. The institutions with direct responsibility for implementing the proposed Project are: Ministq of Environment: Tle jurisdiction of this new ministry include: legislation, policy development and enforcement of the environmental protection activities. The specific duties related to the Ozone Issue are to supervise and coordinate international and national activities related to the Montreal Protocol. This ministry would be responsible for the enforcement of the Government's Action Plan for the phaseout of ODS. The Technology Development Foundation (TDE): This foundation was established as part of Turkey's Technology Development Project, cofinanced by the Government of Turkey, private sector investors, the World Bank and other development banks. The foundation has an executive committee consisting of private sector representatives and has the mandate to fund activities on the basis of grants, income notes, and conditional loans that match private sector contributions. Additional information on the foundation is provided in Annex B. The TDF will act as the financial intermediary under this Project for disbursing funds to the private sector. Arcelik A.S: Arcelik A.S. is the largest producer of refrigerators in Turkey with over 30 years of manufacturing experience. In 1991, Arcelik produced 550,000 refrigerators with exports of about 71,000 units to the US and Europe. As part of this Project, Arcelik will introduce ODS- free technology in its refrigerator manufacturing and implement the recovery/recycle of refrigerant components. IV. Project Objectives 7. The objective of this Project is to assist ODS-using industries in Turkey to effectively and efficiently phase out ODS usage through the adoption of policy, technological and monitoring measures. The phase out is to be effected in compliance with the Protocol, as ratified by the Republic of Turkey, and in accordance with the recommended ODS phase out strategy and Action Plan that has been outlined in the Country Program. V. Project Description 8. The proposed Project has three main components. The first component consists of investment projects, including technology transfer, for ODS phaseout. The second component consists of preparatory activities, including demonstration projects, for preparation of further ODS phaseout projects. The third component deals with institutional and organizational issues. The implementation of the three components will proceed in parallel. Component - A. Investment Projects and Technology Transfer for ODS Phase Out 9. This component consists of the following sub-components, the details of which are provided in Annex C and summarized below: A(1) Introduction of ODS-free Technologies in the Production of Domestic Refrigerators tlncluding Compressor Engineering. Production Retrofit and Phaseout in Rigid Foam): Engineering development, including acquisition of production and testing-related  equipment, for the design, testing and introduction of a new refrigerant (HFC-134a) to replace CFC-12 in the refrigeration loop, and a modified foam system to reduce and eliminate the use of CFC-1 1 in the rigid foam insulation for the refrigerator cavity. A(2) Recovery and Recycling of Refrigerants in the Istanbul Area: Establishment of a program for the recovery and recycling of CFC-12 for domestic refrigerators through the existing network of domestic refrigerator service shops. This would entail recovery and recycling of CFC-12 when refrigerators are serviced in the shops or in the household. The recovered CFCs will be utilized during subsequent servicing activities and will reduce net CFC consumption in Turkey and minimize early retirement costs. A(3) Recovery and Recycling of Refrigerants at Refrigerator Production Facilitv: Implementation of the recovery and recycling of CFC-12 from domestic refrigerators being serviced or rebuilt at a refrigerator production plant. The quality control operaticns during manufacturing often require that compressors be purged of the coolant in order to correct some problem. 10. This component will be impleinented by Turkey's largest domestic refrigerator manufacturer, Arcelik A.S. The refrigeration sector has been selected for priority phaseout of ODSs because of its large role as a user of ODSs, and because the technology for phase out is established and is cost effective. Further, domestic refrigerators were selected because these are manufactured in Turkey while commercial refrigerators are imported. Among the domestic refrigerator manufacturers, Arcelik was selected because: (a) it accounts for over 50% of the total refrigerator production capacity in Turkey, and unlike the other Turkish manufacturers who had also been invited to do so, it has prepared a well thought out and readily implementable project which contributes greatly to the overall objectives of the Action Plan; (b) it has extensive vertical intkgration into compressor and components manufacturing, including a well established Research and Development and product engineering facilities; and (c) it has played proactive role in ODS phase out activities such as monitoring international developments in the refrigeration industry, pursuing technical and financial assistance, etc. Component - B. Preparation of Further ODS Phaseout Projects 11. This component consists of demonstration projects and/or related activities for preparing further projects which have a strategic significance from a technological or reduction of net incremental costs point of view (such as the use of ozone friendly blowing agents for flexible and rigid foams; recovery and recycle of CFC-12 in chillers and other stationary air conditioners) and which decrease ODS consumption. These demonstration projects will serve to introduce the new technologies (such as recovery units which are used to service mobile air conditioning systems) or alternative products (such as new foam formulations) which are already available on the market, but which may involve process or equipment changes. The preparatory activities could also lead to investment projects with substantiae incremental costs which could be eligible for funding from the MLF. This component will be implemented by the TDF with the assistance of the MoE. Component - C. Institutional and Management Strengthening 12. This component of the Project will target the agencies responsible for the implementation of the Government Action Plan for ODS phaseout. The following measures will be implemented in accordance with the time-table included in Annex G. (a) Setting up of the Ozone Panel: The Ozone Panel will advise on the selection of projects for ODS phaseout and on the effectiveness of the regulatory framework. It will provide suggestions for new activities as well as participating in public meetings as appropriate.  -4 - The panel will consist of about 25 national and International experts who will meet bi- annually. The first meeting is scheduled for June 1994. (b) Establishment of the Monitoring System for the consumption of ODSs: The MoE acting as licensor for all ODSs as well as keeping records of production, consumption and imports of ODSs would need to strengthen its monitoring system. A computerized monitoring system would be established under the project. (c) Program for awareness of Ozone Issues by the Public and Industry: The activities Include the preparation of a TV program and translation of UNEP videotapes on ODS phase out Into Turkish; preparation of booklets on phaseout schedules and strategies; sponsoring andlor participating In seminars/conferences for industries. The awareness program has already begun, with a meeting in June 1993, held in Istanbul, to discuss ozone phase out strategies with representatives of industry. (d) Framework for Regulation of Use of ODSs in the Future: Tbis involves the preparation of a document outlining the strategy for the regulation of ODS use in Turkey. The document will review regulatory approaches in other countries and consider the suitability of bans, direct controls, license auctions, CFC levies, recycling incentives etc. as regulatory tools. It will form the basis of a regulatory program, which will be drawn up after consultation with other Ministries. 13. The Air Management Department (AMD), under the General Directorate of Pollution Prevention and Control, in the MoE would be responsible for implementing MoE's part of the project. The AMD has staff with sufficient knowledge about the project and the issues. However, additional assistance in the form of experts/consultants would be provided to assist the AMD in carrying out its tasks. The AMD would also be assisted by the TDF In developing campaigns, evaluation of industry proposals for support to demonstration projects, etc. VI. Project Costs and Financing ,Proect Cost 14. Detailed project costs and a financing plan are provided in Annex D and summarized in Table 1. Table 1: Summary Incremental Project Costs and Financing. 1992-96 (US Dollars) A. Investment Protects (Arcelik) Local Foreisn iota 1. Conversion of Refrigerator Manufacturing 729,000 4,171,000 4.900,000 2. Recovery/Reclaims of CFC-12 in Field 150,000 250,000 400,000 3. Recever/Reolaim in Factory - 65 000 85 000 Subtotal Azeelik 879 000 4.486.000 3-365JO0 S. Preparation of Other Protects CTDF & MoE) - 500.000 500.000 C. Institutional and ManaRement Strentthenina (MoE) 100.000 200.000 300 000 Total Inecemental Project Costs 979 000 M186 000 6.165C000 Financinx from the Ozone Proiects Trust Fund COT?) 5.6600 15. The total incremental costs of the Project (1992-96) are estimated at US$6.165 mIllion. The incremental costs represent the difference between the costs of complying with MP targets and the costs which would be incurred without the MP. These estimates have been prepared by Arcelilc and MoE  - - with assistance from industry experts as consultants and reviewed by the Bank. Cost estimates of most of the equipments to be procured by Arcelik under the Project are supported by quotations from major suppliers, and Arcelik has already realized savings of about US$0.4 million on testing and laboratory equipments (para 22) originally estimated at about US$1.7 million. Therefore, additional contingencies are not included. Cost estimates for consultancy services for technology transfer and project management are based on average costs, including consulting fee, transportation, living expenses, etc. and hence are monsidered adequate to cover possible contingencies. However, agreement has bsen reached that cost overruns, if any, will be financed out of the respective implementing agencies' own resources. Financing 16. In accordance with the MP guidelines, all of the incremental project costs will be financed from the OTF established by the Bank to channel funds from the Multilateral Fund (MLF) of the MP. The amount sanctioned by the MP for funding fromn the OTF is US$6. 155 million and would be allocated to the various components of the Project as indicated in Table 1. The funds would be provided as grant to the Government, which will utilize US$800,000 for financing components B (US$500,000) and C (US$300,000) of the Project (refer Table 1) and the remaining US$5.365 million will be made available to Arcelik to fmance component A of the Project. Arcelik will derive some commercial benefits from conversion of refrigerator manufacturing, but it will derive no commercial benefits from the recovery and recycling of refrigerants. Therefore, to obtain a balance between the imposition on Arcelik to eliminate ODSs and the (indirect) assistance to Arcelik to achieve commercial benefits, the Government would provide the US$5.365 million to Arcelik partly as an interest-free, dollar-denominated loan repayable in 7 years, including 3 years 9f grace, and pardy as a non-refundable grant. The refundable loan part of the funding will amount to US$3.365 million, corresponding to cost for Arcelik to convert refrigerator manufacturing to CFC-free mode [part of sub-component A(1)]; the non-refundable grant will amount to US$2.0 million, corresponding to the cost of recovering and recycling refrigerants, and of R&D for CFC-free operations [sub-components A(2) and A(3), plus the R&D part of sub-component A(l)]. In order to accommodate any changes in the estimated costs of the project during implementation, the grant and loan portions to Arcelik of the proceeds of the proposed Grant is represented in percentage terms in the Grant Agreement. That is, 62% of the funds to Arcelik would be provided as loan and the remaining 38% as grant. Revolving Fund for ODS Phaseout Activites 17. The funds to be paid back by Arcelik to the GovernmentvTDF under the interest-free loan arrangement (US$3.365 million) will be rolled over to finance other refrigerator manufacturers as well as other enterprises for activities related to the phaseout of ODSs. It is expected that these funds will be used to finance typically small projects or parts of large projects to match available funds and to ensure quick implementation, while large projects would be proposed to MP for funding with other grants. Financial support to selected projects will be provided on grant, or loan, or part grant-part loan basis. Financial support to components of the selected project which provide no commercial benefit to the enterprise will be on grant basis and to other components on loan basis. The loan funds would be dollar based interest-free credits with a maturity of four to five years including grace periods of one to two years depending on project implementation period. 18. The TDF will administer the roll over of these funds, including selection of eligible projects. The TDF will select projects for financial support based on criteria such as reduction in level of ODS consumption, contribution to phaseout of ODSs as per Action Plan, etc. The TDF will obtain expert assistance from consultants, MoE, the Ozone Panel [para 12(a)] in evaluation and selection of projects for financing. The TDF will supervise and monitor the progress of implementation of the projects financed. TDF has already gained over one year experience in project selection, supervision, etc. under the ongoing Technology Development Project (Ln. 3296-TU). Ihe costs of administration  -6- would be covered by the fee charged by the TDF for its services which is about 2-3 percent of the amount of financing provided. It is expected that ODS phaseout activities would be completed by about 2005, after which the remaining funds are proposed to be used by the Government for environmentally beneficial activities. Agreement have been reached with the Government that: (a) funds would be utilized for ODS phaseout activities in accordance with criteria satisfactory to the Bank; and (b) the accounts of the TDF would be audited by independent auditors satisfactory to the Bank and audit reports submitted to the Bank within six months after the end of the financial year. VII. Project Implermentation Imnplementing A,eenies 19. Arcelik, together with its wholly-owned subsidiary, Turkish Electric Industry A.S., will be responsible for implementing component A (investment projects) and the TDF and the MoE respectively would be responsible for implementing components B and C (preparation of other ODS phase out projects and institutional and management strengthening). The TDF would act as the financial intermediary for providing funds to Arcelik and other private sector enterprises under components A and B respectively. The MoE would also provide assistance to TDF (through the Ozone Panel) as needed for implementing component B of the Project. Procurement Arrangements 2t. Procurement arrangements under the Project are provided in Annex E and summarized in Table 2. Table 2: Procurement Arrangtient a/ Procurement Method Pro1ect Comonant Descriution IC8 Other Total A. Investment Protects (Arcelik) 1. Conversion of Refrigerator Manufacturing -- 4,900,000 b/ 4,900,000 2. Recovery/Reclaims of CFC-12 in Field -- 400,000 h/ 400,000 3. Recover/Reclaim in CFC-12 in Factory -- 65,000 W) 65,000 B. Preparation of Other Projects (TDF & MoE) -- 500,000 ki 500,000 C. Institutional and Manaoement Strenathening (MoE) -- 300000 0 / 300