Turkey - Fourth Cukurova Power Project

RESTRICTED Report No. P-971 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of thc report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR THE FOURTH CUKUROVA POWER PROJECT June 17, 1971  INTERNATICTIAL B1ANK FOR R\CONSTRIJCTTON AID DE,TELOPMFbiqT REPORT AND RECCMEEDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CGI A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR THE FOURTH CUKUROVA PCWER PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US $7 million to the Republic of Turkey for the Fourth Cukurova Power Project. The term of the proposed loan would be 23 years, including 3-1/2 years of grace, with inter- est of 7-1/4 percent per annum. PART I - HISTORICAL 2. Bank assistance to the power sector in the Cukurova area in southern Turkey started in 1952 with a loan of $22.8 million to the Turkish Govern- ment to help finance the multi-purpose Seyhan Dam project at Adana. At the Bank's suggestion Cukurova Elektrik A.S. (CEAS) was established in 1953, and the Government granted it a 49-year concession to purchase and operate the power house of the Seyhan hydroelectric facility. IDA subsequently ex- tended two credits to the Government for relending to CEAS, aggregating $25.7 million. The first (Credit No. 38-TU) of $1.7 million in 1963 financed part of the cost of a third 18 WJ unit in the Seyhan hydroelectric plant, and the second (Credit No. 59-TU) of $24 million in 1964 helped finance the Kadincik I hydroelectric plant of 70 N[f and a thermal plant of 100 IMWrT near Mersin. In 1969, the Bank lent $11.5 million (Loan No. 623-TU) to the Govern- ment for relending to CEAS to assist in the financing of the Kadincik II hydroelectric project (downstream from the previous project) consisting of a 50 M,T generating unit, penstocks and a six-kilometer tunnel. 3. Other Bank assistance for power in Turkey include Loan No. 568-TU of $25 million in 1968 for the Keban Transmission Lines Project and a technical assistance grant of $1,950,000 in 1965 to finance consultants services for the reorganiza-tion of the power industry. Another Bank Loan of $24 million to the Turkish Electricity Authority (TEK) for expanding its power system was approved by the Eaecutive Directors on June 15, 1971. 4. The present project was appraised in March 1971 and negotiations for the proposed loan took place in Washington during May 27 - June 4. The Government was represented by Mr. Ahmet Tufan Gul, Chief Counselor for Economic and Financial Affairs at the Turkish Embassy in Washington, and CEAS was represented by Mr. Turgut Yegenaga, Chairman of the Board, and Mr. Vakif Acunsal, General Manager. 5. A summary statement of Bank loans, IDA credits and IFC investments in Turkey as at May 31, 1971 appears in Annex I. For comments on the execution of the projects, as well as for other operations under consideration and IFC's activities in Turkey, reference is made to the President's Reports and Recommendations on an education project, dated May 7, 1971 (P-930), and on a loan to TEK, dated June 2, 1971 (P-954).  - 2- FART TI - DE3C_TPTTOL, CF TUE P7OPOSED LOAIN 6. Borrower: Republic of Turkey Beneficiary: Cukurova Elektrik A.S. Amount: $7 million equivalent in various currencies Purpose: To help finance transmission lines, sub- stations, special equipment, completion of the Kadincik II hydroelectric project and the continuation of a training program for CEAS staff. Amortization: In 23 years including a 3-1/2 year period of grace, through semi-annual installments be- ginning April 1, 1975 and ending October 1, 1994. Interest rate: 7-1/4 percent per annum Commitment charge: 3/4 of 1 percent Relending terms: The proceeds of the loan would. be relent by the Government to CEAS under the same finan- cial terms as above. Estimated internal financial rate of return: 14.5 percent PART III - THE PROJECT 7. A report entitled "Turkey - Appraisal of Fourth Cukurova Powrer Project" (PU-74, dated June 15, 1971) is attached. 8. Demand for electrical energy in Turkey has been increasing at an annual rate of about 11 percent over the past ten years, and about the same average rate of growth is expected for the next ten years. Expansion of the power sector has involved, on the one hand, changes in organization culminating in the creation in October 1970 of a national electricity authority, Turkiye Elektrik Kurumu (TEK), and on the other hand, the estab- lislmient of a national grid for power transmission and exploitation of the country's hydroelectric resources. At present, industry accounts for about 70 percent of total power consumption and is expected to stay at about that figure despite the emphasis on connection of villages and domestic commercial loads. Per capita consumption of electric energy is 210 kWh/year. The  - 3- jnstalled capacity of generating plant in Turkey at the end of 1970 was 1985 MW, consisting of 1718 NW in systems operated by TEK, 154 11W in CEAS' system and 113 Kg in small, isolated installations. In addition, private self-generation, mostly industrial, totals about 300 MW. 9. CEAS is the only private power company in the country of a signifi- cant size. it serves the Cukurova region, which is a fast developing area of intensive agricultural production with an emerging agriculture-based industry. TEK holds about 30 percent of the share capital of CEAS, but the balance is held by some 4,700 individuals and organizations of the service area, and CEAS has been an effective instrument for the mobilization of private capital. 10. Revisions to the concession under which CEAS operates have been under study for the past twio years but formal action to amend it has not been taken. The new Turkish Cabinet which took office last M4arch has indicated its in- tention to review CEAS' status and future role in the power sector. Whatever may be the outcome of this review, it will not affect the projects under way or the proposed project, but may have an important bearing on CEAS' partici- pation in future powTer projects in the Cukurova area, in particular the large multipurpose Ceyhan-Aslantas project for which Bank financing has been sought. In any event, the B&tnkls consent to any amendment to the 1953 concession is required under the previous agreements for the three Bank loans and IDA cred2its for Cukurova and those for the proposed loan. 11. The proposed project consists of the construction and installation of about 300 Ian of transmission lines, sub-stations at Tarsus, Payas and Antakya, and completion of the Kadincik II project financed out of Loan 623-TU. The project also includes a training program for CEAS' personnel in modern techniques of electric systems engineering and operaticns and public utility financial planning. The Kadincik II project costs have exceeded the original estimates for two major reasons: (a) there were unexpected equipment price increases (e.g. quLoted steel prices increased 70 percent in Europe in 1969); and (b) cost estimates for civil works were based on the Kadincik I contract prices which were subsequently exceeded. The total increase on the project costs is estimated at $3.7 million, of which $2.4 million in foreign exchange. The effect of this cost increase on the via- bility of the Kadincik II project will be largely offset by an increase in energy, now expected to be generated as a result of a greater availability of water than initially envisaged. 12. The total cost of the project is estimated at $10 million, of which $3.1 million for transmission lines, $2.6 million for substations, $0.1 million for training, $3.7 million for the completion of Kadincik II and $0.5 million for contingencies. The proposed loan would finance the foreign exchange component of the project, which is estimated at $6.4 million, plus $0.6 million for interest and other charges on the loan during construction.  - h - 23. MIajor contracts for the Kadincik II project have been awarded after international competition and in accordance with the Bank guidelines for procurement. All other materials and equipment to be financed from the proposed loan will also be purchased through international competitive bidding. Local manufacturers would be allowed a 15 percent preference or the import duty, whichever is lower, in bid comparison. The Bank will dis- burse the full foreign exchange cost of construction services, and either the total CIF cost of imported equipment and associated services or, should local manufacturers be awarded contracts, the full ex-factory cost. The small amount of local expenditure financing wzhich might be involved in the latter case ($1 million at the most) would be justified in the case of Turkey. 14. For the last two years, up to December 1970, CEAS' financial situation, and in particular its cash position, has been tight. This situation led the Government to agree to the rescheduling of most of CEAS debt to the State. The investment programs carried out in a period of rising costs as well as the increasing operating expenses resulting from the August 1970 devaluation, have been the major factors causing this situation. Increased income from the new tariffs introduced in January 1971 (45 percent increase over the previous ones) have markedly improved CEAS' finances and have eased its cash position. On the basis of the present tariffs and for the project con- struction period, CEAS' financial forecast is satisfactory. Longer term financial prospects are difficult to estimate at present, as they hinge on the extent to which CEAS would participate in future major power projects in the area. The rate covenant contained in Section 4.02 of the draft Loan Agreement and in Section 4.06 of the draft Project Agreement assures a reasonable income for CEAS in the present circumstances and provides a flexible formula for the future to be applied in the light of the role to be assigned to CEAS by the Government. PART IV - THE ECON0,Y 15. A report entitled "The Development Prospects of Turkey"' (ENA-30a, dated February 1, 1971) which was distributed to the Executive Directors on February 4, 1971, described Turkey's economic performance and appraised the country's prospects. Reference is also made to Part V of the President's Report on an education project, dated May 7, 1971 (P-930) which updated the findings of the economic report. A Country Data sheet is at Annex II. 16. If Turkey is to maintain a graoth rate of about 7 percent, its needs fc external assistance are likely to be considerable. Debt service obligations in 1970 are tentatively estimated at 19 percent of foreign exchbange earnings, in spite of the highly concessionary terms o- aid in the past. In the future -Turkey may have to accept a gradual hardening of terms. In these circumstanc the country's borrowing capacity will have to be kept under continuing re- view. Turkey has some margin for borrowing on conventional terms, but it should continue to seek as much aid as possible on a concessionary basis.  PART V - LEGAL INSTRU=11TS AiTD AUTHORITY 17. During negotiations, the Govermnent representatives reaffirmed that, as was the case when the last loan for CEAS was negotiated in 1969, it was not possible for the Government to guarantee a loan made directly to CEAS without special legislation. Therefore, it is proposed that, as for Loan 623-TU, the loan be made to the Republic of Turkey for relending to CEAS under a Subsidiary Loan Agreement. Such Subsidiary Loan Agreement would be on terms and conditions satisfactory to the Bank and the execution thereof would be a condition of effectiveness of the proposed loan. CEAS would also enter into a Project Agreement with the Bank. 18. The draft Loan Agreement between the Republic of Turkey and the Bank, the draft Project Agreement betTween the Bank and CEAS, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the text of a resolution approvring the loan are being-distributed separately to the Executive Directors. The above agree- ments follow the pattern usual in projects of this type. Under Section 4.01 of the draft Loan Agreement, the Borrower would undertake not to abrogate, terminate, amend or waive the concession, the 1961 Protocol supplemental thereto or any prov-ision of either of them, without the approval of the Bank. PART VI - CG4PLTd\TCE WITH ARTICLES OF AGREE'TIT 19. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PA-IT VIl - HEC,ICM, NDATION 20. I recommend that the Executive Directors approve the proposed loan. Attaclhments Robert S. McNamara President June 17, 1971  Anrex I Page 1 Statement of Bank Loans and IMA Credits to Turkey at ?,ay 31, 1971 * Loan or Credit Amount (US $ million) Itunmber Year Borrower Purpose Bark IDA lTndisbursed Seven loans and six credits fully disbursed 70.7 56.3 - 59 Tl: 1964 Republic of Turkey Second Cukurova Power - 24..0 2.2 568 TU 1968 Republic of Turkey Keban Transmission Lines 25.0 - 8.8 5E7 TU 196y Remablic of Turi-ey Se3rhan Irrigation Stage -I 12.0 - 11.9 1,3 TU 1965 Republic of Turkey Seyhar Ir-rgat%on Stage II - 12.0 5.5 58) ST 1969 TSKB Industry 25.0 - 6.7 623 1U 1969 Republic of Turkey Third CukaLrova Power 11.5 - 7-4 713 rTEU 1970 TSKB Industry 40.0 - 38.2 236 ThO 1971 Republic of Turkey Intensive Dailry - 4.5- 7b8 T-UJ* 1971 Republic of Turkey Education 13.5 - Total (less cancellations) 197.7 96.8 of which has been repaid L6.9 Total now outstanding 10.8 Amount sold 1.2 of which has been repaid .7 .5 Total now held by Bank and IDA 150.3 96.8 Total undisbursed 73.0 7.7 80.7 In addition to the loans and credits listed below a loan of $10 million and a credit of $15 million were anoroved oan June 10 for a fruit and vegetable export project and a loan of $2P nmillion on Jane 15 for a transmisEion lines project. These loaLs and tie credit have nloT. yet ieen signed. Not yet effective  Annex I Page 2 Statement of IFC Investments in Turkey at May 31, 1971 Amount (US $ million) Year Company Loan Equity Total 1963 Industrial Development Banlk of Turkey (TSKB) - 0.92 0.92 1966 Sifas I (Nylon yarn) 0.90 0.47 1.37 1967 Industrial Development Bank of Turkey (TSKB) - 0.34 0.34 1969 Industrial Development Bank of Turkey (TSKB) - 0.42 0.42 1969 Sifas II (Nylon yarn) 1.50 0.43 1.93 1969 Viking I (Pulp and Paper) 2.50 0.70 3.20 1970 A.C.S. (Glass) 10.00 1.60 11.60 1970 NASAS (Aluminium, steel and foil) 7.00 1.30 8.30 1970 Sifas III (Nylon yarn) 0.75 - 0.75 1971 Viking II (Pulp and Paper) - 0.05 0.05 Total 22.65 6.23 28.88 less sold or repaid 4.70 0.37 5.07 Now held 17.95 5.86 23.81  ANNEX II TURtEr COUNTRY DATA Area 780,600 sq.km. Popill tion (1970) 35.7 miflion Rate of growth 1965-69 2.8 percent per anium Density lj5 per square kiloeter Gross National Product (1969, current market prices) TL 126.1 billion (1970, provisional T ) 1L 133 billion Annual rate of growth (constant prices) 1963-68s 6.9%; 1969: 6.6%; 1970: 5% GNP at factor cost (1969) TL 111.1 billion GNP per capita at factor cost (1969) TL 3,200 ($356) L Annual rate of growth per capita (constant prices) 1963-68 4..0%; i969: 3.7% Industrial Origin of NDP (% of NDP at constant prices) 1962 126 Agriculture, forestry 39.7 30.9 Industry, mining, electricity 16.2 19.5 Construction 6.3 7.g Transport, communication 7.2 7.8 Trade 8.1 8.7 Housing lj.8 5.3 Government services 9.7 10.6 Financial institutions and other services 8.1 9.8 Expenditure on GNP (% of GNP at constant prices) Pri vate consumption 74.1 71.5 Public consumption 15.14 11.9 Gross fixed investment l4.8 19.1 Net imports of goods and services 3.6 3.1 Net factor income from abroad -o.6 -0.5 Gross national saving 10.5 16.6 Goverrnent tax revenue 15.6 17.1 Annual Growtlh Rate (%) Public Finance (Billion TL) 1969 1970 /2 1963-67 178-6 Current receipts 21.6 27.1 16.3 13.4 Current expenditures 12.4 15.0) 16.6 13.3 Current and capital transfer 6.6 7-9) 214.0 Surplus, net of transfer 2.6 4.2 5.1 -3.8 Investment expenditures 6.9 7.0 10.7 17.5 A At the new exchange rate TL 15 = US $1.00, established in August 1970, the comparable exchange rate using GNP per capita at factor cost would be equivalent to $213. /2 Budget  -2 Annual Growth Rate (%) 1969 Sept. 70 1963-67 1968-69 Money and Credit Prices (Billion TL) Total money supply, including sight saving deposits 30.1 30.4 15.6 15.1 Time and saving deposits 22.3 22.2 20.5 20.0 Total Central Bank credits and advances 12.9 14.6 37.0 21.0 Total conzmercial bank credits 33.2 37.8 17.7 19.2 Commercial bank credits to private sector 30.2 30.0 18.3 21.0 Rate of change of wholesale price index 5.9 6.5 5.7 5.2 Rate of change of consumer price index (Istanbul) 5.0 9.2 7.7 5.5 Balance of Payments (Million US $) 1962 1967 1968 1969 1970 Imports of goods 622 685 764 801 935 Exports of goods 381 523 496 537 585 Net invisibles (including NATO receipts) - 1 48 37 43 113 Current account deficit -242 -114 -231 -221 -237 Commodity Concentration of Exports (%) 1962 1969 Cotton 17 21 Tobacco 25 15 Hazelnuts 17 20 Fruits, vegetables 7 10 External Public Debt (Million US $) Dec. 31/68 Dec. 3:1169 Total outstanding debt 1,984.2 2,215.3 Debt service 103.1 137.1 Debt service ratio (% of exports of goods) 21 25 (% of exports of goods and services, gross) 17 20 (% of exports of goods, services and workers' remittances) lh 17 IBRD/IDA Operation (Million US $) 1968 1969 1970 Total loans - IBRD (including internal sales) 98.4 146.9 186.9 - IDA 80.3 92.3 92.3 Repayments - IBRD 39.6 41.9 45.1 Total loans outstanding - IBRD 55.8 104.3 138.9 - IDA 80.5 92.5 92.3 Foreign Exchange Reserves (Million US $) Dec. 31/68 Dec. 31/69 Dec. 31/70 Gold and convertible foreign exchange, gross 123 245 431 Gold and convertible foreign exchange, net 40 200 410 Inconvertible currencies 92 125 151  hd of Tar 1147 Position (million US $) 1968 1969 1970 Quota 108 108 151 Drawings outstanding 76 64 112 Allooation of SDR - - 18 Par value - ince Apot 20, 1960 TL 9 - US $1.00 since Agust 9, 1970 TL 15 US $ 1.00 June 17, 1971  | hrED;rE~~~UKRO/F4V 2srRtA 5 : iS A/S/ 2 , / t/Ra~~~~~~~~~C/USTING PO E SYSTEM / \ X ,- M~~~~~~~~""ER PFNAX IOPrtol \ X~~~~~~~~~~~~~~~~~~CNT( - TiE L PROJEigi ICET a '\ ~~ HYDRO PLAN\ OIL-FIREDA STA PLNT 20 R_ _ __ _ _ __A 154KV~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IR TRA SMISIN LNE