Turkey - Turkish Electricity Authority (TEK) Restructuring Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 22251 IMPLEMENTATION COMPLETION REPORT (33450; 33451; 3345A; 3345S; 27700) ONA LOAN IN THE AMOUNT OF US$ 300 MILLION TO TEK, TEAS, TEDAS REPUBLIC OF TURKEY FOR A TEK RESTRUCTURING PROJECT 06/11/2001 Energy Sector Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective June 11, 2001) Currency Unit = Turkish Lira, TL 1,199,441 TL = US$ 1.00 US$ 1.00 = 1,199,441 TL FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS BOO = Build Own Operate BOT = Build Own Transfer BOTAS= Turkish Pipeline Company, Boru Hatlari ile Petrol Tasima A.S. CPP = Corporate Performance Plan DSI = State Hydraulic Works, Devlet Su Isleri FMIP = Financial Management Implementation Plan GOT = Government of Turkey MENR = Ministry of Energy and Natural Resources OMIP = Operational Management Improvement Plan TEK = Turkish Electric Authority, Turkiye Elektrik Kurumu TEAS = Turkish Electric Generation and Transmission Company, Turkiye Elektrik Iletim Ve Uretim A.S. TEDAS= Turkish Electric Distribution Company, Turkiye Elektrik Dagitim A.S. Vice President: Johannes F. Linn Country Manager/Director: Ajay Chhibber Sector Manager/Director: Hossein Razavi Task Team Leader/Task Manager: James Moose  TURKEY TEK RESTRUCTURING PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 10 6. Sustainability 11 7. Bank and Borrower Performance 12 8. Lessons Learned 13 9. Partner Comments 14 10. Additional Information 18 Annex 1. Key Performance Indicators/Log Frame Matrix 19 Annex 2. Project Costs and Financing 21 Annex 3. Economic Costs and Benefits 23 Annex 4. Bank Inputs 24 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 26 Annex 6. Ratings of Bank and Borrower Performance 27 Annex 7. List of Supporting Documents 28 Annex 8. Beneficiary Survey Results 29 Annex 9. Stakeholder Workshop Results 30   Project ID: P009071 Project Name: TEK RESTRUCT. Team Leader: James Sayle Moose TL Unit: ECSEG ICR Type: Intensive Learning Model (ILM) of ICR Report Date: June 20 2001 1. Project Data Name: TEK RESTRUCT. L/C/TFNiimber: 33450; 33451; 3345A; 3345S; 27700 CountrV/Department: TURKEY Region: Europe and Central Asia Region Sector/subsector: PY - Other Power & Energy Conversion KEY DATES OOriginal Revised/Actual PCD: 06/26/1989 Effective: 04/27/1992 04/27/1992 Appraisal: 05/14/1990 MTR: 05/15/1994 05/15/1994 Approval: 06/13/1991 Closing: 06/30/1995 12/31/2000 Borr owerlImplementing Agency: TEK, TEAS/TEDAS/ TEK; TEK, TEAS/TEDAS/TEAS/ TEDAS Other Partners: STAFF Current At Appraisal Vice President: Johannes Linn W. Wapenhans Country Manager: Ajay Chhibber E. Kopp Sector Manager: Peter Thomson Franco Batzella Team Leader at ICR: James Sayle Moose Alberto Eguren ICR Primary Author: Jarnes Sayle Moose; Surekha Jaddoo; Elliott Hurwitz 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainabilit,: L Institutional Development Impact: SU Bank Performance: S Borrowtser Peifornmance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Throughout the 1980s and 1990s, the Bank conducted a substantial, ongoing dialogue with the Turkish Government, primarily the Ministry of Energy and Natural Resources (MENR), on energy issues; mainly electricity related issues. This dialogue was accompanied by significant lending. TEK Restructuring is one of a series of Bank projects in the Energy Sector, which included development of additional capacity in electricity generation, transmission, and distribution, as well as policy reforms (pricing reform and expansion of the private sector presence). In the later stages of the dialogue it focused more on improving the performance of the Turkish integrated electricity monopoly, TEK, which was state owned. The Energy Sector Adjustment Project (ESAL), effective in September 1987, included reform of TEK's organization and management, among other areas. It was followed by the TEK Restructuring Project in 1991.TEK Restructuring was thus an integral component of Turkey's long-term energy strategy, which had been developed in the late 1980s in conjunction with Bank specialists. The original objectives of the project as stated in the SAR dated May 21, 1991 were to support: (a) " the corporate restructuring of TEK in the context of the Government's program to reform State Economnic Enterprises (SEE)" ; (b) " implementation of an agreed least cost investment program for the power sub-sector in both the public and private sectors during the period 1990 to 1994"; and (c)" the strengthening of local capacity to assess the environmental impact of investments in the power sector." The project was also important to the country's priority goals of assuring an adequate power supply and reducing the fiscal deficit. The project was conceived in response to substantial fuel cost increases and the Government's desire to reduce its fiscal deficit and increase the role of the private sector. While TEK privatization, per se, was not an explicit original objective (it was added later when the objectives were expanded), the project intended to facilitate potential later privatization by increasing TEK's autonomy and accountability, introducing greater transparency in decision-making, and enhancing TEK's commercial orientation. Moreover, the Bank's advice to Turkish authorities had over the past decade consistently encouraged greater private involvement in the power sector through increased private investment as well as privatization. 3.2 Revised Objective: In 1993-1994, Turkey underwent a major foreign exchange crisis, brought about in large measure by an unsustainable fiscal deficit. In response, the GOT implemented a stabilization and adjustment program, including measures to raise revenues and reduce public expenditures. TEK was restructured into two companies, TEAS (which undertakes generation and transmission) and TEDAS ( which undertakes distribution). This was done in order to increase transparency and reduce costs. While the Bank did not oppose this restructuring, the Bank's advice had been to split the company into three entities covering respectively generation, transmission and distribution. The TEK Restructuring project was then amended in 1995 to recognize the break-up of TEK into TEAS and TEDAS, and the accelerated priority accorded to private investment and privatization. Two Loan Assumption Agreements were prepared which replaced the previous Loan agreement and reflected the fact that the borrowers were now TEAS ($260 Million) and TEDAS ($40 Million) rather than TEK which had disappeared. These Loan Assumption Agreements were approved by the Board June 15, 1995. The objectives of these Loan Assumption Agreements were identical to the objectives of the original Loan Agreement except that an additional objective was added, the privatization of selected portions of TEAS and TEDAS infrastructure. - 2 -  In 1999, the project objectives were revised a second time when the entire portfolio of projects in Turkey that had uncommitted funds was reprogrammed to support reconstruction of earthquake damage caused by the Marmara Earthquake of August 1999. At this time a new objective was added: " the carrying out of emergency repairs and replacement of distribution lines and equipment damaged by the Marmara Earthquake." In practice this only impacted the TEDAS Loan Assumption Agreement because: 1) most of the damage done to the Turkish power system by the earthquake was damage to the distribution system; and 2) TEDAS had not committed a substantial fraction of its funds while all of TEAS' funds were committed. 3.3 Original Coinponents: Originally the project was to be implemented by means of three components. The first component was to support the implementation of a Corporate Restructuring Plan for TEK. This component included: (i) " a reform of electricity pricing policy"; (ii) "a reform of TEK management practices, including adoption of an annual Corporate Performance Plan agreed between TEK and the Govemment to enhance TEK autonomy and accountability", and (iii) "restructuring of TEK's debt, including conversion of part of it into equity." Sub-component (ii) was to be accomplished by implementation of the Operational Management Improvement Program (OMIP), which assisted the firm in improving its operational efficiency, and the Financial Management Improvement Program (FMIP), which upgraded financial information systems, implemented Intemational Accounting Standards, and improved revenue management as well as the adoption of the annual Corporate Performance Plan. The second component consisted of financing part of the foreign exchange cost of TEK's 1991-94 investment program in power, which was estimated to be a least cost: program. In practice, the Bank expected to finance transmission and distribution facilities to enable the country to utilize low-cost hydropower and other generation facilities in Eastern and Central Turkey and transfer power to energy users in Western Turkey. No Bank financing of generation was expected or occurred. Also, the Bank's funds were estimated to provide only about 6% of TEK's required financing during the period and 4% of the required electricity sub-sector financing, which included not only TEK but DSI (which builds hydropower plants) and others. The third component provided technical assistance to build up TEK's capability to carry out environmental impact assessments of its activities. Of the US$300 million IBRD loan, US$290 million was to go to TE K's investment program (component two). The remaining $10 million was allocated to technical assistance for corporate restructuring and environmental impact assessments. It should be noted that total project cost was estimated at US$5,388 million, with $5,088 million comprising the government contribution. Assessment of Design -- The project design was straightforward and was directly related to achieving its objectives. TEK and MENR officials had substantial technical expertise and experience in implementing expansion plans for sectoral investment and some experience in sectoral reforms, and consequently the project was not considered unusually challenging. Risks -- Project risks included the possibility that tariffs (in Turkish Lira) would not be increased commnensurate with Turkey's high inflation, thus eroding TEK's financial position and that TEK would encounter difficulties in implementing the FMIP and OMIP. Another risk attendant to implementation was the uncertain macroeconomic environment. -3 -  3.4 Revised Components: The components stated earlier were revised slightly to address the additional objectives which were privatization of part of TEDAS' and TEAS' infrastructure; partial financing of the 1991-96 investment program rather than the 1991-94 program and the repair and rehabilitation of equipment and lines damaged by the Marmara earthquake. The main changes were slightly different investments in component two, due to delay of the project, and investments in repair and replacement of distribution equipment which were not anticipated. Also there were some changes in component one; for example two CPPs were required, one for TEAS and one for TEDAS, instead of the single CPP originally anticipated. Risks- In 1995 due to the changes in objectives and recent experience with the reorganization of TEK and the legal processes, it was recognized that additional risks were becoming prominent. These were: 1) two sets of managements to deal with in TEAS and TEDAS, rather than one as had been the case with TEK; 2) frequent top management changes; and 3) potential politicalUlegal challenges to privatization. 3.5 Quality at Entry: Quality at entry was satisfactory. As noted earlier, the project was an integral part of the Government's overall sector strategy, which was prepared with the assistance of the Bank. The design was straightforward, and addressed the Government's priority issues in the sector. Project risks were reasonable, and were recognized at inception. The assumptions were moderately realistic. While the Government was willing to take steps to increase private participation in the sector, unforeseen legal and exogenous obstacles arose (described later) that substantially hindered realization in this area. On the other hand, the project's assumption that Turkey's large fiscal deficit would improve, which would have facilitated access to international capital markets, was not realistic. Turkey went out of compliance with an IMF Stand-by Agreement in 1995 (TEK privatization had been a commitment under that agreement), which severely limited access to foreign capital. Also, assumptions as to how quickly privatization actions could be taken were overly optimistic. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Summary : The project outcome is judged as satisfactory. The corporate restructuring objective was generally implemented (see below) including reform of electricity pricing, introduction of the CPPs, financial and management improvement and financial restructuring. Although disbursements lagged substantially until 1995-1996; by project close, at the end of 2000, the achievement of physical objectives was substantially completed. The major construction of transmission lines and substations was complete. The most significant physical milestone was the successful installation of the Bosphorus Crossing III transmission line, which facilitated transmission of power from south-eastern Turkey, where much of the generation capacity is located, to Istanbul and Thrace where many of the main consumers are located. The objective of creating a capacity for environmental assessments was largely achieved. The objective of repairing and/or replacing certain distribution facilities damaged by the Marmara Earthquake (added in 1999) had made significant progess although it was not completed. However, the objective of encouraging private investment in the sector and privatizing parts of TEAS and TEDAS (added in 1995) had mixed results as is described in considerable detail below. Privatization and Private Investments Background As noted earlier, TEK was split into two entities in early 1994, TEAS and TEDAS. (Decree - 4 -  93/4789 of 1993 implemented in 1994). While the Bank had recommended that it be split into three entities (for generation, transmission, and distribution), the government decided that this partial action would be a useful initial step. The Bank concurred that this was a constructive step that could comprise a basis for the privatization of existing assets and encourage private investments in new power plants that was the ultimate goal of both the Government and the Bank. However, in a series of decisions, primarily Decision 95/23 (issued in the Official Gazette March 20, 1996) but also including 94/42 and 94/65, the Constitutional Court decided that electricity production, transmission and distribution was a public service and made privatization extremely difficult. The Government's conclusion from 95/23 and the other cases was that without a constitutional amendment, TEAS' and TEDAS' assets could not be legally privatized. It took the Government until August 1999 to amend the constitution, described below, but meanwhile the Government decided that while it could not privatize TEAS' and TEDAS' assets, it could lease them. TOORs The Government, in order to privatize these assets moved to a leasing arrangement, the so-called transfer of operating rights system (TOORs). Under this arrangement 25 of the 29 distribution companies in the country (4 were already private) were offered for long term lease (30 years); while 12 thermal power plants were offered for lease for 20 years. Each long term lease required a substantial fixed up front fee (set by the Government) to be paid by the winning bidder to the Turkish Treasury prior to finalization of the lease. The leases were to be awarded on a competitive basis with the key criteria for award being the price charged for operating the distribution system or for providing electricity from the power plants. Of the 25 distribution companies offered for lease, bids were received on 20. (No bids were received on 5 systems in the South East of the country). The Government awarded the leases to the highest bidders with most of these awards occurring in April-May 1998. So far, none of ihe TOORs for distribution have been finalized. There are four problems. First, around six of the leases became involved in legal disputes and have made little progress. Second, the bidders, who were almost all lurkish firms, bid relatively low and were unable to attract foreign investors to join them. Third, with the Russian Crisis in 1998 it became much more difficult to obtain financing to pay up-front fees. Finally, the Government has been very slow to act on these TOORs, especially since the Electric Energy Market Law (Law 4628 of February 21, 2001) was passed. Under this law (Provisional Article 4) all those TOORs which are not finalized by June 30, 2001 are " null and void." It is expected that the Government will then offer the distribution companies for outright sale. With the amendment to the Constitution in 1999 (see below) and the passage of the Electric Energy Market Law, it is now legal to sell these assets. The 12 thermal power plants were offered in 11 separate packages with two of the plants (Yenikoy and Kemerkoy) combined in a single package. Bids were received on all of the packages and all have been awarded to bidders. Several of the bidding groups included foreign investors. However, only one of these generation TOORs has been finalized and that is the lease of the Cayirhan Power Plant to Park Energy, a Turkish firm. As was the case with the distribution TOORs, those generation TOORs which are not finalized by June 30, 2001 will be null and void and it is expected that the Government will thereafter offer the plants for outright sale. Constitutional Amendment In 1999 the Constitution was amended . This was done through Law 4446 of August 13, 1999 which amended Articles 47, 125, and 155 of the Ccnstitution. These amendments allowed international arbitration and, for the first time, specifically permitted the privatization of public services such as electric utilities. Moreover, Parliament was authorized to determine which assets should be privatized. Parliament then passed the Electric Energy Market Law which specifically empowers the Privatization Authority to privatize electricity assets. Thus, after a lcng effort, it appears that now electricity utility assets can be privatized. However, there remains a restriction that foreigners cannot have a controlling interest in any of the three sub-sectors, generation, distribution or transmission. - 5 -  New Plants The Government had decided in the mid 1980s that leasing for new generation plants, in the form of the BOT (Build, Operate, Transfer) model was the best mechanism that could be utilized at that time for greenfield projects. This was permissible under Law 3096, governing electricity production, transmission and distribution and dating from 1984, when Turkey had " invented" the BOT model. However, the model was not initially used. It was also permissible under Law 3996, the so called BOT Law, as amended by Law 4047 both dating from 1994. Under the BOT model the sponsors build the generation plants, operate them and transfer them to the Government after 20 years. The sponsors try to recover their costs early in the lease period. International practice at that time was sole source bidding, which the Government (MENR) used to seek bidders. For the first units that were bid, TEAS was required to purchase 85% of their available output and the prices paid were quite high. In 1999, three BOT projects, totaling 1154 MW were completed, which then comprised around 4% of total system capacity, but about 6% of generation. These BOTs, while they have been reliable suppliers of electricity, have seriously impacted TEAS financial condition because of the very large difference between what TEAS pays themn for electricity and the price at which it sells electricity. The realization of these investrnents signified that the Government's strategy of creating a favorable structure for private investment into the sector was successful in attracting investments but at a high cost. While the BOTs were under construction, the Government, with the support of the Bank, moved to a different model. This is the so-called BOO (build, own, operate) model whereby the sponsors would not only build and operate the plants but also maintain ownership of them indefinitely. This new model was allowed under law 4283 dating from 1997. Also permission to build and operate these plants would be awarded on a competitive basis. In 1999 five BOO projects were awarded to three consortia which included Shell, Bechtel and National Power. These plants are now under construction. The total capacity of the five BOOs is 5830 MW (about 20% of Turkey's capacity) of which 3850 MW should be in service in 2002 and an additional 1980 MW in service in 2003. Generally the prices charged by these plants are reasonable, comparable to charges elsewhere, and around 60% or so of what the BOTs charge. In addition to the BOT and BOO models there has been considerable growth in power in Turkey provided by auto-producers. These are private companies/organizations which produce their own power which they largely use themselves. Most of these plants are small and Turkish owned, but the number of such plants has increased fairly rapidly over time and they now provide about 10% of Turkey's generating capacity and 11% of generation. Policy Dialogue - Throughout the 1990s, the Bank engaged in an intensive dialog with the Turkish authorities. The Bank strongly supported private investment in new power plants, initially through the BOT and auto-producer models with a shift later to the BOO model instead of the BOT model. The Bank advised also that private sector participation be increased through privatization of existing assets to the extent legally possible. The project also made use of a PHRD grant of $2.1 million to provide technical assistance to the GOT on energy policy, regulatory and legal issues. This was key to building the capacity and constituency for restructuring and the development of a regulatory approach to the emerging private participants in the sector. The use of this grant funding for training and consulting was of great benefit to the project. Table 4.1 below shows the rapid growth in the gross level of power generated by the private sector, as well as the increase in the proportion of total power production that this comprised. Table 4.1 -- Growth in Private Power Generation, 1991-1999 - 6 -  1991 1992 1993 1994 1995 1996 1997 1998 1999 Private Generation (TWH) 4.7 5.7 6.6 6.3 9.11 9.4 14.7 16.3 25.4 % of total 7.9 8.5 9.0 8.0 10.6 9.9 14.1 14.7 22.0 Financial Table 4.2 ---TEAS Financial Performance 1995 1996 1997 19,98 1999 Operating Profit ($million) 588 530 225 630 359 Current Ratio 1.32 1.39 1.08 1.:27 1.03 Funds from Internal Sources/Capex -12% 80% 21% 51% 74% Net Revenue/Debt Service 0.9 1.2 1.1 1.3 2.0 Accounts Receivable/Revenues ( Mo) 3.6 2.5 2.1 2.7 3.5 Table 4.2 above shows TEAS financial performance in terms of the four financial covenants contained in the Loan Assumption Agreement as well as operating profits. These data are from the TEAS Financial Department and follow Turkish Accounting Standards. The company's current ratio was above the minimum 1.0 as specified in the Loan Assumption Agreement. The requirement for self funding of 35% of capital expenditures (funds from internal sources/capital expenditures) was met except for 1995 and 1997. The debt service covenant (Net revenue/debt service >1.5) appears riot to have been met for the first four years but was met in the last year of the project. However, TEAS calculations of this ratio are very questionable (see below) and using audited financial statements the covenant was mostly met. Moreover, the actual covenant is very unclear. It requires that actual revenue be " adjusted to take account of the Borrower's tariffs in effect at the time of the incurrence of debt even though they were not in effect during the twelve month period to which such revenues relate". How this should be done is not clear and what its impact would be on the ratio is also unclear. TEAS did not know how to take it into account and did not do so. Finally, accounts receivable in terms of months of revenue fell somewhat during the middle years of the project but they were never reduced to the required 1.0. Thus, TEAS financial results during the project period are often not as good as they should have been though the company remained profitable on an operating basis. An effort was made to check the financial ratios as calculated by the Finance Department against the audited financial statements. One major difference is that the net revenue to debt service ratio appears to be much better in the audited financial statements than in the data provided by the Finance Department. This ratio, using the audited financial statements, is above 1.5 in all years except 1997 when it is 1.4. This is because the actual covenant is based on accrual data (revenue) rather than the cash flow statement which TEAS used to calculate it and which under estimates the results. The financial condition of TEAS deteriorated in late 1999 and even more significantly in 2000 due to the start-up of a number of expensive BOTs, whose prices are high and whose electricity TEAS is obligated to buy. The Government has taken action to improve TEAS financial condition by increasing wholesale and retail electricity prices. The results of this effort were initially mixed, since in 2000 TEAS was also hit with much higher oil and gas costs and a decline in hydropower generation due to the drought. However, the Government has continued to raise prices and even accelerated this process and currently the wholesale -7-  price of electricity is 4.5 US cents/kWh ,a fairly high level. It is expected that this level of prices will allow TEAS to meet its financial covenants in 2001. Table 4.3-- TEDAS Financial Performance 1995 1996 1997 1998 1999 Operating Profit ( $ Mil.) 8 620 408 101 -228 Current Ratio 0.75 2.0 1.25 0.95 0.76 Funds from Intemal Sources/Capex 358% 229% 76% 113% 74% Net Revenue/Debt Service >2 >2 >2 >2 >2 Accounts Receivable/Revenues ( Mo.) 2.7 2.8 2.7 2.7 2.9 Table 4.3 above shows TEDAS' financial performance in terms of the four financial covenants contained in the Loan Assumption Agreement as well as operating profits. These results are from the audited financial statements. In terms of debt service coverage it did very well since its only long term debt is to the World Bank and that was quite small. It also more than met the requirement that funds from intemal sources be greater than 35% of capital investments. It sometimes met the requirement that the current ratio be more than 1.0 and sometimes failed, while it was never able to get its accounts receivable down to 1 month of revenue. TEDAS, however, has always been in a strong position financially since it could easily " borrow" from TEAS. The sharp deterioration in TEDAS financial condition in 1999 was due to the fact that the company's operating margin was squeezed that year as TEAS came under financial pressure and raised wholesale prices faster than TEDAS was allowed to raise retail prices. TEDAS financial condition appears to have improved somewhat in 2000 and should improve further in 2001. 4.2 Outputs b) components: Corporate Restructuring Components: There are a number of sub-components in the first component. * The first sub-component is the reform of electricity pricing policies. This reform was carried out and electricity prices over the period of the project were increased monthly to offset the impact of inflation. However, these adjustments were not always fully effective and as a result the price over the period of the project varied between about 5.2 US cents/kWh and 6.1 US cents/kWh excluding taxes. Nevertheless, through out most of this period the price was sufficient to allow TEAS to generally meet its main financial covenants. * The second sub-component was the reform of TEK Management practices ( later TEAS and TEDAS Management practices) including production of a corporate performance plan (CPP). TEAS produced a CPP every year and TEDAS did it most years. These plans have been of considerable value in pointing out the financial problems faced by TEAS and have, with encouragement from the Bank, lead the Government and TEAS to take action on these problems. In addition, sub-component 2 involved implementation of an Operational Management Improvement Program (OMIP) and a Financial Management Improvement Program (FMIP). The OMIP was successfully implemented with the main benefits being a much better understanding of pricing and a considerable improvement in preventive maintenance. The FMIP was also successfully implemented with one very important result being a sharp reduction in accounts payable by TEDAS. Another important result was the elimination of the Public Participation Fund, a tax on electricity sales which supposed to be used for financing the electricity sector, but in practice was primarily used to finance the budget. This was identified in a study done under the Financial Management Improvement Program as a form of disguised tax on the - 8 -  companies, and it was eliminated in 1996. * the third sub component was restructuring of TEK's debt, including conversion of part of it into equity. This was done with TEAS being the main beneficiary. TEDAS has almost no debt. Investment Component -- The Bank financed part of TEAS's least cost expansion plan which in tum was developed using the WASP model. This model, commonly used in the industry, takes as a parameter the quantity of electricity that will be demanded. (In tum, demand is often forecast using the MAED model.) Then, subject to specified constraints, the model (WASP) calculates the least cost solution that will provide the required electricity taking into account capital costs, construction times, types of fuel used, pollution produced, and locations. Solutions are developed for generation, transmission, and distribution. As indicated elsewhere, the Bank financed a small part of this least cost expansion plan with the Bank's financing concentrating on certain long distance transmission lines including the Bosphorus Crossing III. Also after the Marmara Earthquake the loan was used to finance repairs and replacement of distribution equipment damaged or destroyed during the earthquake. However, in retrospect less was accomplished in terms of financing earthquake repairs and repalacements than might have been expected due to the limited amount of time left in the loan when it was shifted to earthquake repairs and the Bank's stringent and slow procurement procedures. Technical Assistance for Environmental Assessments Component The Bank financed technical assistance for this purpose both through the Loan and through grants. As a result, TEAS has a fully developed environmental unit equipped to supervise environmental assessments of power plants and transmission lines as well as to prepare environmental forecasts including estimates of current and future pollution associated with the growth of electricity production. TEDAS has a smaller and less sophisticated environmental unit since it invests only in distribution which has much less environmental impact. 4.3 Net Present Value/Econtomic rate of return: In the Staff Appraisal Report (SAR) the project is defined for purposes of evaluation as the least cost investment program for the power sector during the period 1990-94, including both the public and private sectors. (It included TEK's investment program, DSI's and estimated private investment.) It was understood that the Bank would finance about 4% of this program ( $300 million out of a total estimated program of $8,410 Million ) focussing primarily on transmission lines. The primary justification for the investments in this program was that they had been shown to be least cost using the WASP model. In addition, however, an economic rate of return was calculated on the 1990-94 investment program. This was done by assuming that the program provided electricity to meelt the growth in electricity demand during the period and also to meet this increment in demand until 2010. The electricity was valued at 6.3 US cents/Kwh in 1990 dollars including all taxes and levies. Taxes and levies were included since what was being calculated was the benefit to consumers based on a low estimate of their willingness to pay. (Actual prices are usually way below consumer's willingness to pay since they ignore the consumer surplus). Based on these assumptions the ERR for the project was 16%. When the project was restructured in 1995 it was argued that: 1) the project would now finance part of the sector's investments during the longer period, 1991-96; 2) tariffs were running higher than the 5.9 US cents forecast (due to higher taxes); and 3) these two effects largely offset one another and that therefore the ERR was still about 16%. In reality the project continued after restructuring until the end of 1999 when it was converted to an earthquake repair project. It thus funded a very small portion of the Turkish investment in the electricity - 9-  sector during the period 1991-99 with the great bulk of this funding occurring in the period 1995-99. The actual rate of return was calculated using the same general approach as in the SAR. There are several differences, however, from the SAR. First, is that actual data were used not estimates. Second, the calculations cover the public sector only. Information was not available on private investments and the cost of private generation. Third, the investrnent period was taken as 1995-98 rather than 1990 to 1994 which was in the original SAR. Four, all calculations were done in constant dollars rather than in constant Turkish Lira. Using 1998 as the final year, the real rate of return is 8%, somewhat less than the 16% forecast but still quite a respectable result. These calculations are done assuming an average retail price of 9.37 US cents/kWh starting in 2002, which is the estimate for next year including all taxes (VAT and others) and it is assumed to remain constant. If a price of say 15 US cents/kWh had been used, which is below almost all estimates of the cost of unserved energy, the real IRR would rise to 20%. If the last year of the project were 1999 the real IRR on the project would drop sharply. This is because 1999 was a year in which TEAS profitability deteriorated significantly primarily for two reasons. First, hydropower production by TEAS, which is very inexpensive for TEAS, fell sharply ( from 39.6 tWh to 31.7 tWh.) due to drought conditions. Second, the expensive BOTs started to come into operation ( see above). Both of these events resulted in a sharp increase in TEAS costs and reduction in the net benefits created by the project, which also applies to a significant degree to future years. This result, however, is misleading. First the drought will end and TEAS average costs of generation will fall as a result. Second, the BOTs are extremely profitable and if it had been possible to include in the calculations their costs rather than just the prices that they charge TEAS, the IRR would have been much higher. 4.4 Financial rate of return: No financial rate of return was calculated in the SAR in 1991 or in the Memorandum to the Board on restructuring the project in 1995. 4.5 Institutional development impact: The institutional development impact of this project was quite significant. This occurred primarily in three ways. First, there was constant dialogue between the Bank and TEAS, TEDAS and MENR on how to best develop the sector. This dialogue was especially important in leading to the BOO plants and in finally agreeing along with the Government that a constitutional amendmnent would be necessary in order to allow for the privatization of electricity assets. The second way that this project had an institutional impact was through the technical assistance which was financed by the project such as the OMIP and FMIP work. The third source of impact was the PHRD grant from the Japanese Government which financed technical assistance including legal assistance and considerable training for Turkish officials from TEAS, TEDAS and MENR. This dialogue, technical assistance training etc. have produced considerable agreement between the Bank and the Turkish Government on what needs to be done in the sector. For example, this project led directly to the National Transmission Grid Loan ( 1998), which contains an agreement on restructuring of TEAS. Of even greater importance, it played an important part in reaching agreement with the Government on the new Electric Energy Market Law and privatization of electricity assets under the Economic Reform Loan ( ERL) in 2000. This latter, structural reformn loan, was a major step forward in the dialogue since it established a new framework for the electricity sector. In addition. the issues raised during this on-going dialogue served as input to the Country Economic Memorandum ( Structural Reforms for Sustainable Growth of September 2000). Thus this project cannot be viewed in isolation. It is part of the on going dialogue with the Government with loans ( and studies) preceding it and following it. - 10 -  5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The 1997 Asian Crisis followed by the Russian default in 1998 made it difficult for the Turkish private or public sector to borrow overseas and made financing the TOORs quite difficult. However, this crisis had the advantage that by helping to stop the TOORs, it will allow the Government to now (since the Constitutional Amendment was passed) sell the distribution companies and power plants outright rather than using the TOOR model, which is very much a second best choice. In the most recent years, 1999-2000, the country has been hit by a drought which has reduced hydropower production, especially in 2000. This has raised TEAS costs since the hydropower, which is very inexpensive, has to be replaced by much more expensive power fromn thermal plants. It was not fully understood at the start of this project that the Turkish Constitution would be interpreted by the Constitutional Court as prohibiting privatization of electricity sector assets. The Marmara earthquake of August 1999 did considerable damage to TEDAS distribution facilities in the affected areas and some damage to TEAS transmission facilities (but not its generating facilities). It was then decided by the Bank, the Government and TEDAS managemenit that the remaining funds available under the TEDAS Loan Assumption Agreement would be used for rehabilitation of earthquake damaged facilities, which was urgently needed. Thus, from about November 1999 to closure of the TEDAS Loan Assumption Agreement on December 31, 2000, this was an earthquake rehabilitation project. 5.2 Factors generally sumbject to government control: There was considerable management turmoil in TEK and again in TE AS and TEDAS while the project was going on. General Managers were replaced about once a year. For example since 1994, when TEAS came into existence, there have been 7 General Managers of TEAS ( Messrs: Coskun, Yildiz, Turan, Demirkiran, Koseoglu, Selvi and Esirgemez). A similar situation exists for TEDAS. When the General Managers were replaced, the Assistant General Managers were often replaced also. Furthermore, most of the new General Managers were not from the sector and not familiar with the issues. Often, by the time they became familiar with the issues they were replaced. This process considerably slowed the project. It is very important that the Government appoint competent and honest people as General Managers and then give them enough time to do their assigned job. In many countries, high level positions of this sort have fixed terms such as four or five years. After their term expires the individual could be reappointed or allowed to leave but at least they would have had time to learn their job and do it properly. Macro economic policies, which are now being changed in Turkey, could have been better (less inflation, smaller budget deficits) which would have improved investor confidence and made private investors more inclined to invest in Turkey. 5.3 Factors generally subject to implementing agency control: TEDAS has large losses, around 19%, which are a major problem for the company. It has not been able to reduce these losses, though with some modest investments and political backing the losses could be reduced though not eliminated. As a result of these losses and the failure to pay by certain of TEDAS' customers, at times TEDAS has been unable to pay TEAS what it owes. - 1I1 -  Procurement has been very slow and laborious with constant tension between Turkish procurement procedures and Bank procurement procedures. This is, however, the fault not only of TEAS/TEDAS but also the Bank. 5.4 Costs andfinancing: Costs were generally fairly close to expectations. Financing of the individual projects for which the Bank was providing partial financing was not generally a problem. However, there was less investment in the sector than anticipated due to the recurrent macro economic crises in Turkey that discouraged private investors and the difficulties the Government had in arranging legally acceptable ways for private companies to participate in the sector. 6. Sustainability 6.1 Rationale fbr sustainability rating: This project is fully sustainable. The Government is making a major effort, by raising electricity prices, to insure the financial health of both TEAS and TEDAS, which would allow them to maintain and replace the investments that were made under this project. Since electricity demand in Turkey continues to expand at 8-9% per year for most years, there is no doubt that these and further investments are needed. 6.2 Transition7 arrangement to regular operations: The TEK Restructuring Project is part of a long term dialogue, including lending, with the Government of Turkey on energy issues especially electric power issues. There were several loans before the TEK Restructuring Project, including the ESAL. Furthermore, the TEK Restructuring Project was followed by the National Transmission Grid Project which picks up where TEK Restructuring left off. In addition under the Economic Reform Loan ( ERL) very important agreements related to the energy sector were reached, especially the electricity sector. It is anticipated that there may be more loans as part of this dialogue over the next several years to assist with privatization, increasing competition in the electricity subsector and implementing the new Electric Energy Market Law, which establishes an independent regulatory agency. In the medium term, it is expected that Turkey will have a competitive, efficient power sector which is largely private. At that point in time the Government may be satisfied with the operation of the sector and Bank lending would draw to a close. However, we are not there yet. 7. Bank and Borrower Performance Bank 7.1 Lending: The project was originally requested by the Government of Turkey and was a loan to TEK, guaranteed by the Government. When TEK was reorganized into two successor organizations, TEAS and TEDAS, Loan Assumption Agreements had to be written with each of them and approved by the Board. Finally in 1999, after the Marmara Earthquake, the TEDAS Loan, with Board Approval, was reoriented to rehabilitation of facilities damaged by the earthquake. As a result largely of these two restructurings of the project, in 1995 and 1999, lending continued for an extended period, though it was obviously necessary. Clearly, these restructurings and continued lending by the Bank constitue a very successful lending effort. 7.2 Suipervision: Supervision was extensive because this project was key in insuring that the growth in investments in the power sector would be adequate to meet the growth in demand and in encouraging private investments and privatization. It was central to the ongoing dialogue between the Bank, MENR, Treasury and TEAS/TEDAS on sector structure and performance. This supervision effort was evaluated by QAG and rated as superior and the project received an award from QAG for supervision. - 12 -  It is not clear whether the Bank might have been better informed about the details of the very expensive BOT contracts. While the approach used was accepted practice at the time, so that BOT projects per se were quite acceptable, the high prices and high offtakes which were agreed have been a major burden on TEAS and on consumers. The Bank did write a letter to the Government arguing that the particular approach to the TOORs that was being taken would not work because they would not be financeable. In the rush to try to privatize, however, the Governement decided to go ahead. 7.3 Overall Bank performance: Overall Bank performance was satisfactory. While there were areas which in retrospect could have been improved, such as understanding better the implications of the approach used for BOTs, there were other areas where performance was exceptional such as the use of the Japanese Grant Funds and the technical assistance funds in the loan to provide extensive consulting and training for the Turkish Power Sector. Borrower 7.4 Preparation: Borrower and Government assistance in project preparation and project restructuring was quite satisfactory. Treasury in particular is very familiar with Bank processes, because of the large number of Bank projects it helps prepare and the employees it rotates into and out of the Bank. It also plays a very useful role in facilitating project preparation. 7.5 Government implementation perfornmance: Government implementation performance was mixed. As mentioned in section 6, management of the implementing agencies was constantly changed by Government, the macro economic environment was unstable and MENR, which negotiated the BOT projects, agreed to very high prices. On the other hand, the Governnent (MENR and Treasury) was a consistent and strong supporter of privatization and private investment and was willing to try a number of approaches. Finally, with the passage of the Constitutional Amendment in 1999 and the Electric Energy Market Law, the Government should have an approach which will work. 7.6 Implementing Agency: The implementing agencies suffered from internal turmoil, were slow with procurement and failed to deal with certain basic problems such as high losses and rising costs. However, they did a good job in implementing the investments, once procurement difficulties were overcome, and in implementing the FMIP,OMIP, CPPs, environmental reviews and other types of required technical enhancement programs. 7.7 Overall Borrower performance: Overall borrower perfornance was satisfactory, but could have been improved. 8. Lessons Learned Perhaps the major lesson that should be learned is that the underlying legal framework needs to be in place before privatization, and sometimes, even private participation in the sector can be undertaken successfully. In this case, clearly the underlying legal/constitutional barriers were not fully understood so that privatization and private participation has taken much longer and been more difficult than was anticipated. Without the proper framework, second best methods were tried to get around the barriers and these did not work as well as expected. For example, the TOOR model was tried in order to get around the legal barriers to privatization. However, this model did not succeed and the Government has now cleared the -13 -  legal/constitutional barriers to privatization of electricity assets and these are expected to be sold to private investors. Similarly, there were economic/legal constraints to private investment in new power plants, primarily the existence of monopoly Government owned buyers (TEAS for high voltage and TEDAS for low voltage). The Government, in order to attract private investors, had therefore to provide price and offtake guarantees for private power plants using first the BOT and later, the more successful BOO model. However, with the passage of the Electric Energy Market Law a new framework will be put in place which will allow private power plants, besides autoproducers, to operate without Government Guarantees. A second lesson, which is rather obvious, is that contracts with the private sector for large investments such as power plants should never be negotiated on a sole source basis. Rather, they should always be put up for bidding. While this may take longer in some cases, it is likely to produce much better results. The extremely high prices which MENR agreed to pay the BOTs are a clear example of this error. A third lesson, which is also fairly obvious now, is that it is not enough for the country to use an acceptable model (the BOT model); but the details are very important. It is not clear that either the GOT or the Bank understood fully the way the contracts negotiated by MENR for BOTs would work. A fourth lesson is that constant changes in management of implementing agencies leads to reduced effectiveness and much slower decision making. The final lesson may be that unforeseen problems will occur, implementation will take longer than expected and that to achieve the desired results the Bank will have to show considerable determination, stamina and patience. 9. Partner Comments (a) Borrower/implementing agency: Objectves: The main objectives of the loan were to support: a) The Corporate Restructuring of TEK in the context of the Government's SEE reform program b) the implementation of a least cost investment program with partial Bank financing c) The strengthening of local capacity to assess their environmental impact. In order to support the implementation of a Corporate Restructuring Program for TEK (and after splitting TEAS) which mainly includes: (1) a reform of electricity pricing policy (2) a reform of TEK's/TEAS's management practices including the adoption of an annually renewed CPP (3) restructuring of TEK's/TEAS's capital and debt including conversion of part of it into equity. The majority of the Loan was used to finance goods and materials procured under the Bank's guidelines for procurement. Mostly transmission lines and substations were supplied. The following agreements have been reached with the Government and TEKITEAS 1. GOT to, ensure and TEK to implement a reform of electricity pricing policy which will enable TEK to - 14 -  set tariffs to ensure compliance with the agreed financial criteria, on the basis of the economic cost of electricity supply e.g Debt service coverage ratio > 1.5 Current ratio > 1.0 Internal sources 35% 2. Until the reform of electricity policy is implemented, TEK's/TEDAS's annual average tariffs at no less than US Cents 6/kWh net of all taxes and levies. 3. A reform of TEK's management practices under an Operational Management Improvement Program (OMIP), Financial Management Improvement Program (FMIP) and a Management Information System (MIS) together with international utilities who have an experience. 4. Prepare Corporate Performance Plan (CPP) each year for Bank's review. 5. An international auditor shall audit TEK's.financial accounts for the year and submit to the Bank the audited statements together with the auditor's reports. 6. Establish a steering committee to oversee the implementation of the corporate restructuring program While using of the Restructuring Loan objectives of the loan agreement were realized as follows; a. The corporate Restructuring of TEK/TEAS: 1. Pricing Policy: 1994 1995 1996 1997 1998 1999 TEDAS (C/kWh) 5.4 5.4 6.2 5.6 5.5 5.8 2. Financial Covenants; 1993 1994 1995 1996 1997 1998 Debt Coverage Ratio-1.5 1,6 0,88 0.9 1,2 1,1 1,3 Intemal Cash Generation-35% 97% -24% -11,99% 80% 21% 52% Current Ratio-1.0 0.86 1.23 1.32 1.39 1.08 1.27 Accounts Receivable Turnover 3.31 1.7 3.59 2.53 2.1 2.71 TEAS has not met financial covenants for certain years, because of the following reasons: The increasing trend in operational costs especially purchased power costs, substantially higher than TEAS generation cost, resulted in losses and increases in the cash deficit. Also * Inadequate tariff increases. * The difficulties in collection of receivables from TEDAS. * High inflation rates. 3. OMIP, FMIP, MIS 3a. OMIP Systems and studies to improve technical and operational efficiency were designed and implemented under OMIP: Operational Management Improvement Project (OMIP) was developed under 3 Tasks, - 15 -  Under Task 1: Operating Cost was identified, cost centers and location centers were determined. Cost Analysis System was developed. After this Task cost location centers were established in TEAS. A computer Program was developed and installed in Accounting Services in all Location Centers- One or two personnel from each Location Center were trained in Kumburgaz for one month in June 1998. In addition PPA (Public Participation Authority) levy was rationalized and consequently the Protocol between TEK and the PPA, signed March 7, 1995 was canceled. Since 1. 1. 1995 no deduction has been made to PPF (Public Participation Fund) Under The Task II: Tariff Setting Criteria and Mechanism from financial, economic and social standpoints was developed and computerized. During these studies, load projections, Analysis of Daily and Seasonal Variations in demand were done, Least cost operations simulation Model was developed, revenue requirements were detenrnined, Least Cost Expansion Plan was prepared. Long Run Marginal Costs of supply was derived in order to take into account the transmission and distribution losses, at various supply voltages and at peak and peak-off periods and consider the seasonal variations in load. Tariff setting Mechanisms with environmental cost module called TRICEM was developed. Although, after this study, TEK has very developed tariff setting mechanism in their hand, model has not been used because of the separation of TEK as TEAS and TEDAS. After the separation, TEAS have sold energy to big industrial customers and TEDAS therefore it has not needed very complicated model. Nevertheless, TEK staffs working on this project, and also attended the workshops and lectures during this study, have been very well trained. Even if the model is not used effectively, tariff-setting section make use of it for their calculations. Transmission pricing Mechanism was developed and implemented for the autoproducers group's to transfer energy. Under the Task III: In order to increase efficiency and availability of Power Plants and the system, various studies have been performed such as; * Assessment of proposed solutions for problems and investigation of fuel-based problem Afsin-Elbistan Thermal Power Station. * Assessments of Hydro Stations * Installation of AWOCS preventive Maintenance Systems * Assessment of Load Dispatch and System Operations * Assessment of the need for a river basin Control Center * Assessment of Transmission and Distribution Systems * Assessment of the installation of Distribution SCADA Systems (it remains TEDAS and they are working on it. AWOCS Preventive Maintenance System was implemented in eleven Power Stations. Reports for the assessments have been sent to related departments in order to take necessary measures. Report for Load Dispatch and System Operations was used for "upgrading and renewal project". 3 b.FMIP - 16 -  In order to improve financial efficiency, including the remodeling of TEK/TEAS accounting policies and practices, recasting of its financial position in accordance therewith and improving its billing and collection practices; TEAS has implemented a Financial Management Improvement Program (FMIP) as indicated in the objectives of the loan agreement. The project was realized under five main topics: A. Accounting Support 1. A framework of accounting policies was revised and a new chart of accounts, according to the new announcement and International Accounting Standards was implemented. 2. TEAS personnel in procedures to produce an accurate trial balance which conforms with generally accepted accounting Concepts, principles and policies on a timely basis for the preparation of management reports and financial statements were trained. 3. The Fixed Assets Tracking System was developed 4. Asset and liability verification procedures were designed 5. Asset and liability accounts in financial statements of Gaziantep ED according to the IAS were verified. 6. Asset and liability accounts in financial statements of Ankara ED, SOMA Thermal Power Plant, Trakya Thermal Power Plant, Keban HydroPower Plant, Kuzeybati Anadolu Transmission Grid including extensive physical inspection and revaluation were verified. B. Cash Flow at Distribution 1 . A new billing system was designed 2. Hand-held meter reading specifications were designed 3. Hand-held meter reading application has been implemented for pilot regions and Distribution area 4. A Collection System supported by electronic banking was designed and a protocol for the electronic banking was signed with the banks. C. Design and Implementation of Information System 1. A new Information System's strategy was prepared 2. Software for accounting, fixed assets, liabilities, stock management, human resources, customer accounting systems were designed 3. Software for Long Term Tracking System and Corporate Performance Planning was prepared and implemented 4. Integration of the Long.Term, Loan Tracking System was prepared at GMO with the GMO general ledger 5. Information System on the network of Department of Financial Affairs was implemented Except CPP due to the hardware problem, lack of qualified personnel and lack of corporate network above studies were not implemented. D. Corporate Planing - 17-  Since 1993 CPP has been prepared every year. The preparation of the corporate Performance Plan (CPP) was an important item since it gave the ability for the company to understand the various linkages between technical, financial,managerial and governmental decisions. E. Privatization 1. An international workshop on "Privatization" for TEAS was organized 2. Power sales and purchase agreements taking into consideration Privatization conditions and existing agreements were drafted 3. Fixed assets of Soma and Hamitabat Power Plants were updated 3c. MIS MIS had been designed and reported before splitting of TEK. After the split as TEAS and TEDAS, TEDAS independently implemented customer management system and material management system and by this way six months billing and collection delay has been reduced to 20 - 25 days. b. The implementation of a least cost investment program with partial Bank financing: Procurement In 1993, the splitting of TEK into TEAS and TEDAS has caused a delay in disbursement of the loan. However. from the point of disbursement percentage of the loan it can be said that loan was utilized successfully. We think that, since The Bank's procurement documents and procedures were not changed often and TEK/TEAS staff were well trained on the procurement methods of World Bank and The Bank had a team that understood the Turkish situation quite well, in terms of culture, how various institutions work and how the process works have much contributed in getting "no objection" easily most of the projects. c. The strengthening of local capacity to assess their environmental impact. Environmental Department has implemented environmental impact assessment for Transmission Lines and Power Plant (b) Cofinanciers: There were no co-financiers. (c), Other partners (NGOs/private sector): There were no other partners 10. Additional Information -18-  - 6L -  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome I Impact Indicators: Indicator/Matrix Projected in last PSR Actual/Latest Estimate The structure of electricity prices has been Electricity prices have been increased in line rationalized and the pricing levels are being with inflation or somewhat faster. However, adjusted each month. costs have also risen more rapidly than inflation. The year 2000 was difficult for TEAS and secondarily TEDAS because of high fuel costs (gas, petroleum products), rising costs and quantities of purchased power and drought conditions which reduced availability of cheap hydropower. Government has taken action to increase TEDAS and TEAS prices to offset this. Current retail price excluding VAT is about 6.8 cents/kwh and wholesale price is about 4.5 cents. Sector Reform underway including TEK was split into TEAS and TEDAS in privatization of thermal power plants and 1994, based on a decree issued in 1993. 17 distribution networks. private power projects are in operation under the Build-Operate-Transfer(BOT) scheme totalling 1594 MW and including 4 expensive and larger thermal plants. Another 5 thermal power projects under the Build Own (BOO) scheme, with a total capacity of 5830 MW, have been awarded to private investors on a competitive basis and are under construction. The first BOO will enter operation in 2002 and by late in that year about 3800 MW of BOO should be in operation. At the end of 1999, 2655 MW of autoproducer capacity was in operation and this is growing by 300-500 MW per year. On distribution, there are 29 distribution companies of which 4 are private. GoT offered the remaining 25 Distribution Companies for privatization. There was no interest in 5 of these systems but the remaining 20 systems were awarded to investors on a transfer of operating rights basis ( TOOR). None of these contracts have been finalized and the Electric Energy Market Law declares these TOORs null and void if they are not finalized by June 30, 2001. The Govemment plans to sell these distribution systems outright when the TOORs end. 12 thermal plants were awarded in 11 packages under TOOR arrangements. Transfer of only one of these plants has been finalized, Cayirhan. The other TOORs will end June 30 unless finalized by that time and the Government will then sell most of these plants outright. - 20 -  Setting adequate tariff to ensure financial TEAS costs have risen rapidly as a result of viability for TEAS the increasing amount of power purchased, higher fuel costs and drought. TEAS sales price has been increased steadily from about 3 cents in 1997 to around 4.5 cents agreed for 2001 and in effect in January 2001. The average price for 2001 is anticipated by the Government to be about 4.6 US cents/kWh. Estimated public debt attributable to power Public debt attributable to power sector is sector at project approval in 1991 is down to US$2.3 billion compared to US$5 US$5billion. Objective is to bring debt down billion when the project was approved by the considerably by loan closing. Board in 1991. Please note that at project appraisal, the logical framework approach was not being used in the Bank. Indicators taken from Staff Appraisal Report (SAR) and Project Status Reports (PSR). Output Indicators: IndicatorlMatrix Projected in last PSR ActualtLatest Estimate Corporate restructuring of TEK. TEK restructured in 1994 ( based on 1993 decree) into TEAS and TEDAS. Decree issued in 2000 and reissued in 2001 restructuring TEAS into transmission, generation and trading companies. Power sector rehabilitation and extension. Building of transmission lines in power transmission most important of which was Bosphorus crossing. Environmental assessment capacity building. Environmental Unit established in TEAS which does environmental assessments. Also does considerable amount of modeling including GHG. End of project Output taken from Staff Appraisal Report (SAR) - 21 -  Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Proiect Cost By Component US$ million US$ million A. 380 kV Transmission Lines 213.50 204.60 95.8 B. Substations 58.70 63.34 107.9 C. Distribution Equipment 71.90 10.30 14.3 D. Transmission Spares 7.00 1.36 19.4 E. Technical Assistance 11.60 8.93 76.9 Total Baseline Cost 362.70 288.53 Total Project Costs 362.70 288.53 Total Financing Required 362.70 288.53 _ Note: TEK split into TEAS and TEDAS in 1995. Original Loan was reallocated as follows: US$260m to TEAS and US$40m to TEDAS (both established as JSC) under separate loan assumption agreements. 'T,EAS loan closed on Dec 31, 1999. TEDAS loan closed on Dec 31, 2000. Bank Loan US$300m and Government contribution estimated at US$62. 7m at appraisal Out of Government estimated contribution of US$62.7m, over a period of 10 years, data is available only on expenditures of US$34.0m. However, contribution from Government was almost certainly larger. Bank figures are based on ICS report of 05/29/01. Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) Expenditur CICBProcurement Method: Expenditure Category } ICB NCB Other NBF ToaCs 1. Works 229.60 0.00 0.00 42.60 272.20 (229.60) (0.00) (0.00) (0.00) (229.60) 2. Goods 71.90 0.00 6.10 0.90 78.90 (54.30) (0.00) (6.10) (0.00) (60.40) 3. Services 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 4. Miscellaneous 0.00 0.00 10.00 1.60 11.60 Technical Assistance (0.00) (0.00) (10.00) (0.00) (10.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 0.00 0.00 0.00 0.00 0.00 6. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) Total 301.50 0.00 16.10 45.10 362.70 (283.90) (0.00) (16.10) (0.00) (300.00) Procurement Arrangements at Appraisal include expected estimated contribution of US$62.70m from Ciovermment. Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) - 22 -  Expenditure Category 1 ICB Procurement Method N Total Cost NCB Other N.BF. T 1. Works 174.34 0.00 0.00 0.00 174.34 (174.34) (0.00) (0.00) (0.00) (174.34) 2. Goods 71.32 0.00 34.00 105.32 (71.32) (0.00) ( (0.00) (71.32) 3. Services 0.00 0.00 8.93 8.93 (0.00) (0.00) (8.93) (0.00) (8.93) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 Technical Assistance (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 0.00 0.00 0.00 0.00 0.00 6. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) Total 245.66 0.00 8.93 34.00 288.59 (245.66) (0.00) (8.93) (0.00) (254.59) Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. Mainly consulting services. Note: Out of Govemment estimated contribution of US$62.7m, over a period of 10 years, data is available only on expenditures of US$34.0m. However, contribution from Government was almost certainly larger. Bank figures are based on ICS report of 05/29/01 Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate Bank G Govt. CoF. Bank Govt. CoF. Bank JGovt. CoF. A. Transmission Lines 179.40 34.10 170.60 34.00 95.1 99.7 B. Substations 50.20 8.50 63.34 126.2 0.0 C. Distribution 54.30 17.60 10.30 19.0 0.0 D. Transmission Spares 6.10 0.90 1.36 22.3 0.0 E. Technical Assistance 10.00 1.60 8.93 89.3 0.0 TEK's Investments and Financing Plan (1991-1994) estimated at US$billion 5.4 at appraisal. Bank Loan only US$300 million. There were no cofinanciers. Note:Out of actual data on Government estimated contribution of US$62.7m, over a period of 10 years, data is available only on expenditures of US$34.0m. However, contribution from Government was almost certainly larger. Bank figures are based on ICS report of 05/29/01 - 23 -  Annex 3. Economic Costs and Benefits Economic Analysis Appraisal Latest Estimates (US$million, 1989) (US$million, 1995) Gross Benefits 31, 520 26, 343 Costs 15,750 21,420 Net Benefits 15,770 4,923 IRR 16% (real) 8% ( real) NPV 1,240 @12% (real) 2,252.4 ( 10% (real) 343 (, 7%( real) -24 -  Annex 4. Bank Inputs (a) Mlissions: Stage of Project Cycle No. ot Persons and Specialty Performance Rating (eA.. 2 Economists, I FMS, etc.) ilmplementation Development Month/Year Count i Progress Objective Identification/Preparation 06/89 1. Team Leader Appraisal/Negotiation Appraisal 05/90 1 Team Leader I Procurement Specialist I Financial Analyst Negotiations I Team Leader 04/91 1 Procurement Specialist I Financial Analyst Supervision 06/91 * 1 Team Leader 06/92** 1 Team Leader I Consultant 1 Sr. Financial Analyst 07/93*** 1 Team Leader 1 Consultant I Sr. Financial Analyst 07/94**** 1 Team Leader I Sr. Power Engineer I Sr. Financial Analyst 08/94 1 Team Leader S S I Sr. Power Engineer 09/94 1 Team Leader S S 02/95 1 Team Leader I Sr. Power Engineer I Legal Counsel 05/95 1 Team Leader S S I Sr. Power Engineer 05/96 1 Team Leader S S I Sr. Power Engineer I Legal Consultant - 25 -  05/97 1 Team Leader S S Sr. Power Engineer 03/98 1 Program Team Leader S S I Operations Analyst I Sr. Financial Analyst 09/98 1 Program Team Leader S S I Operations Analyst, I Engineer/RPA 12/98 1 Program Team Leader S S I Financial Analyst 06/99 1 Program Team Leader S S I Financial Analyst/ Senior Engineer 12/99 I Program Team Leader S S I Financial Analyst 05/00 1 Program Team Leader S S 9/00 1 Program Team Leader S S 1 Sr. Engineer I Financial Analyst ICR 12/99 1 Program Team Leader S S 9/00 1 Program Team Leader S S I Financial Analyst 2/01 1 Program Team Leader S S 1 Financial Analyst * Initial PSR-Not Rated **PDO= 1,IP=2 ***PDO=2, IP=3 ****PDO=2, IP=2 (b) Staff: Stage of Proiect Cycle IActual/Latest Estimiate ____ _N ' o. StafT weeks _ _USS ('000) Identification/Preparation 149.6 390.8 Appraisal/Negotiation 130.1 358.8 Supervision 253.9 911.8 ICR Total 533.6 1,661.4 Supervision - 1996 data contains 148.7 swks which is highly uncertain as staff not identified. - 26 -  Time spent on ICR included in Supervision, as SAP does not have a separate code for ICR. - 27 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating I Macro policies O H O SU )M N O NA Z Sector Policies O H *SUOM O N V NA Z Physical *H OSUOM ON ONA 21 Financial O H OSUOM ON O NA Z Institutional Development 0 H * SU O M k N ) NA -E Environmental 0 H * SU 0 M 0 N 0 NA Social ZI Poverty Reduction 0 H O SU O M 0 N 0 NA ZIGender O H OSUOM * N O NA O Other (Please specify) O H OSUOM * N O NA Z Private sector development 0 H * SU 0 M () N 0 NA i Public sector management 0 H 0 SU * M 0 N 0 NA OOther (Please specify) O H OSUOM O N * NA - 28 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bankperformance Rating Z Lending OHS OS OU OHU 7 Supervision OHS *S OU OHU . Overall OHS OS QU OHU 6.2 Borrower performance Rating O Preparation DHS *S OU OHU [D Government implementation performance O HS s OU O HU CJ Implementation agency performance OHS *S OU OHU CJ Overall OHS OS OU OHU Note: While overall performance on Bank's and Borrower's side is satisfactory, during the period 1993 to 1999 implementation was affected by thefollowingfactors: (a) the 94/95 meltdown of the economy; (b) the separation of TEK into TEAS and TEDAS; c) Asian crisis including economic situation of Russia: d) Maramara Earthquake ofAugust 1999. Procurement was also delayed due to complaints from bidders on the Bosphorous Crossing contract. - 29 -  Annex 7. List of Supporting Documents Staff Appraisal Report 9385-TU Loan Agreement for Loan 3345-TU Memorandum from the President on Loan Assumptions Agreements, dated May 26, 1995 Loan Assumption Agreement: Loan Number 3345-0-TU; July 5, 1995 Loan Assumption Agreement: Loan Number 3345-1-TU; July 5, 1995 Loan Amendments dated October 21, 1999 and November 3, 1999 Japanese Grant Agreement: TF027701; January 25, 1995 Aide Memoires 1991-2000 Audited Financial Statements for TEAS 1995-1999 Annual Reports for TEAS 1996-99 Audited Financial Statements for TEDAS 1995-99 Annual Reports for TEDAS 1996-99 Consultant Reports, Reports of Treasury Auditors Maps - 30 -  Annex 8. Beneficiary Survey Results No beneficiary survey was done. Since investment was almost entirely in transmission lines, no particular beneficiaries could be identified. The beneficiaries were the population of Turkey in general whose supply and costs of electricity were improved by the project. Ninety nine percent of the population use electricity from the grid and benefited from the project. - 31 -  Annex 9. Stakeholder Workshop Results Two informal workshops were held with current and former TEAS and TEDAS officials who had worked on the project. The first section below is basically the notes from the first workshop with some of this material also being in the partner's comments. The second section is a brief summary of the main topics discussed at the second workshop. Section I 1. Corporate Planning Since 1993 the Corporate Performance Plan (CPP) has been prepared every year. The preparation of the CPP was an important item since it gave the ability for the company to understand the various linkages between technical, financial, managerial and governmental decisions. 2. The Government to ensure and TEK to implement a reform of electricity pricing policy which will enable TEK to set tariffs to ensure compliance with the agreed financial criteria, on the basis of the economic cost of electricity supply e.g.: Debt service coverage ration > 1.5 Current ratio > 1.0 Internal sources 35% 3. OMIP Systems and studies to improve technical and operational efficiency were designed and implemented under OMIP: Operational Management Improvement Project (OMIP) was developed under 3 Tasks; Under Task l: Operating cost was identified, cost centers and location centers were determined. Cost Analysis System was developed. In addition, PPA (Public Participation Authority) levy was rationalized. Under Task II: Tariff Setting Criteria and Mechanism from financial, economic and social standpoints was developed and computerized. During these studies load projections, analysis of daily and seasonal variations in demand were done, least cost operations simulation Model was developed, revenue requirements were determined, least cost expansion plan was prepared. Long run marginal costs of supply was derived in order to take into account the off-peak periods and consider the seasonal variations in load. Accordingly, tariff setting mechanisms with environmental cost module called TRICEM was developed. Transmission pricing mechanism was developed. Under Task III: In order to increase efficiency and availability of power plants and the system, various studies have been performed such as: * Assessment proposed solutions for problems and investigation of fuel-based problem Afsin-Elbistan Thermal Power Station. * Assessments of Hydro Stations * Installation of AWOCS preventive Maintenance Systems * Assessment of Load Dispatch and System Operations * Assessment of the need for a river basis Control Center * Assessment of Transmission and Distribution Systems * Assessment of the installation of Distribution SCADA Systems (it remains with TEDAS and they are working on it) AWOCS Preventive Maintenance System was implemented in eleven Power Stations. Reports for the - 32 -  assessments have been sent to related departments in order to take necessary measures. Report for Load Dispatch and System Operations was used for "upgrading and renewal project". In 1993, the splitting of TEK, TEAS and TEDAS has caused delay on disbursement of the loan. However, US $ 243.480.515,01 which means 93,65% of the Loan has been disbursed. The Environmental Department has implemented environmental impact assessment for transmission lines and power plant. Section II A significant problem for the project has been the constant changes in management of TEK followed by TEAS and TEDAS. General Managers change about once a year with most of the managers coming from outside the industry. When the General Manager changes there is also a tendency for assistant general managers to change also. Since TEAS was established in 1994 it has had the following general managers; Erdal Coskun, Sedat Yildiz, Mustafa Turan, Afif Demirkiran, Zeki Koseoglu, Muzzafer Selvi and now Omer Esirgemez. This is seven in seven years. The changes in TEK were not as rapid, but still rapid. During the period 1988 to 1994, when the project was prepared and implemented by TEK, there were four general managers, Remzi Yucebas, Muhittin Babalioglu, Behic Arikan and Birkan Erdal- about one every two years. TEDAS management changes were similar. This turmoil in management slowed the project significantly since most new General Managers needed to learn about the project and implementation was slowed by this requirement. Conflict between Bank procurement procedures and Turkish procurement procedures also slowed the project. While Bank procedures take precedence over Turkish procedures for Bank Loans, TEAS and TEDAS officials are more familiar with Turkish procedures and tend to follow them. Also the inspectors in both organizations are primarily familiar with Turkish procedures and push to have them used. As the Bank has grown more rigid in its interpretation of the guidelines, this underlying source of tension has increased. While the bulk of the capacity of the new operating BOTs is in the four major gas fired power plants ( Ova, Trakya, Unimar, Esenyurt) there are 13 smaller BOT plants. These are mostly wind and hydro power. The small plants have contracts with TEDAS not TEAS and produce directly into the distribution system at distribution voltages. However, all of these plants are expensive and required Treasury guarantees which add to the country's contingent liabilities. In addition the 672 MW Birecik hydropower plant is under construction as a BOT. It is majority privately owned, but TEAS has a significant interest. It is very expensive. TEDAS has losses of around 19 %, which is high. It is thought that about 6-8% of these losses are theft with the rest being real losses. There is in addition power supplied free for mosques, street lights and other purposes. It is difficult for TEDAS to reduce these losses though it has been trying. The participants thought that this was an important issue and that the private sector would probably do a better job since they would have greater freedom in cutting off non-paying consumers. If the losses in TEDAS can be reduced this would significantly improve the financial health of TEDAS and ultimately TEAS. - 33 -