Turkey - Power Transmission Project

RESTRICTED Report No. P-954 Ai L cr`y This report is for official use only by the Bank Ciroup 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 It may not be published, quoted or cited without Bank Group authorization.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 the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TURKIYE ELEKTRIK KURUMU WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY June 2, 1971  INTERNATIO11N1AL BATK FOR RECONSTRUCTION AND DEVELOFMENT REPORT AID RECaC1ENDATIOC OF THE PRESIDENIT TO TEIE EXECUTIVE DIRECTORS OlN A PROPOSED LOiANT TO TURiCEYY ELEKTTIK KU,UMU WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US $24 million to Turkiye Elektrik Kurumu, to be guaranteed by the Republic of Turkey, for a power transmission project. PART I - HISTORICAL 2. Turkiye Elektrik Kurumu or Turkish Electricity Authority (TEK) has requested Bank assistance for expanding its power system. The proposed loan would be the first for the newly established TEK, although the Bank has made one loan (568-TU) to Turkey for Etibank, TEK's predecessor, which was one of five previous operations for power in Turkey, the others being to the con- cessionar-y private company serving the Cukurova area. In addition, in 1965 the Bank made a technical assistance grant of $1.95 million for the reorgani- zation of the power sector in Turkey. 3. The project was appraised in October 1970 with a follow-up mission in March 1971. Negotiations with representatives of the Government and TEK took place in Washington during May 5 - 11, 1971. The Government was repre- sented by Mr. Ahmet Tufan Gul, Chief Counselor of the Turkish Embassy. TEK was represented by Mr. Tekinel, Assistant General Manager and Mrs. Baykal, Director of Planning. 4. A summary statement of Bank loans, IDA credits and IFC investments to Turkey as at April 30, 1971 is at Annex I. For comments on the execution of the projects, as well as for the other operations under consideration and IFC's activities in Turkey, reference is made to the President's Report and Recom- mendation on an education project, dated May 7, 1971 (P-930). Since that re- port was prepared, the Bank has been informed that the main contractor for the Keban Transmission Project (Loan 568-TU) has not resumed work after the winter construction hiatus since he has not reached agreement with TEX on a revision in the prices stipulated in the original contract. TEK is current'ly attempting to resolve this dispute. PART II - DESCRIPTION OF THE PROPOSED LOAN 5. Borrower: Turkiye Elektrik Kurumu (TEK) Guarantor: The Republic of Turkey Amount: US $24 million equivalent in various currencies  - 2 - Purpose: To assist in financing transmission lines, sub- stations and special equipment. Amortization: In 25 years including a 4-year period of grace, through semi-annual installments beginning October 1, 1975 and ending April 1, 1996. Interest rate: 7-Ilpercent Commibment charge: 3/4 of 1 percent Estimated Internal Financial Rate of Return: 13.4 percent. PART III - TIH PROJECT 6. A report entitled "'Turkey - Appraisal of a Transmission Project of the Turkish Electricity Authority (TEK)"t (PU-69a, dated May 28, 1971) is attached. 7. 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 gro%Tth is expected for the next ten years. Expension 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 othe;^ hand, physical development character- ized by the establishment of a national grid for power transmission and ex- ploitation of the country's hydroelectric resources. At present industry accounts for about 70 percent of total powier consumption and is expected to stay at about that figure despite the emphasis on connection of villages and other domestic and commercial loads. Per capita consumption of electric energy is 210 k14h/year. 8. The installed capacity of generating plant in Turkey at the end of 1970 was 1985 DRN, consisting of 1718 NLW in systems operated by TEK, 154 MN in Cukurova's system and 113 NV in small, isolated installations. In addition, private self-generation, mostly industrial, totals about 300 MW. 9. Until recently Etibank, a State Economic Enterprise established in 1935, had the overall responsibility for the electric power sector in Turkey, in addition to its important interests in mining and banking, but as early as January 1966, the Bank and the Government had reached agreement on the manner in which the basic structure of the power sector should be reorganized, including the establishment by legislation of a national electricity author- ity. To this end the Bank had made in 1965 a technical assistance grant of $1.95 million to cover the foreign exchange cost of studies associated with the reorganization of the power sector in Turkey (ef Memorandum Sec M70-252, dated June 1, 1970 to the Executive Directors). The work is well under way, and about $1 million has been spent or committed. The first stage of the  work - a study on accounting and engineering training - has been completed. The second stage, -implementing the accounting reccmenda;tiofle, is under way anid arrangements for t.k, third phasc covering or-,gpnizetional i-nd operational matters, itnluding village electrifcetion, arc In progress. It is eVected that Tl i:ill enter into a contract uxth. Electricit.^ de France for this last phase. 10. The law creating TEK was passed in the Turkish National Assembly on June 25, 1970 and became effective on October 25, 1970. The power group of Etibank forms the nucleus of the new TEK organization which now also oTns and operates the hydroelectric stations, formerly owned by the State Hydraulic Works (DSI). TEK is now responsible for the centralized dispatch of power, for planning and coordination of co#struction programs, and management of the power systems in accordance with sound commercial, industrie1, and accounta practices. 11. TEK owns and operates several systems. The most important one, known as the interconnected system, supplies the western and central parts of the country from which over 90 percent pf Turkey's elpetrical demand originates; this system comprises 1,640 Ml of generating plant,and about 5,300 km of 154 kv transmission lines. Other systems are very small, with installed capacities of under 20 MW each. When the takeover from DSI and Etibank is ccmplete, TEK will own 583 1W of hydroelectric generating plants and 753 Mg of modern thermal plant burning coal, lignite and fuel oil. It will also own and operate most of the 382 MW of generating plant on 'consumers' (mostly municipalities) networks forming part of the interconnected system. Taese plants will gradually be replaced by larger and more efficient stations built and operated by TEK. 12. During the period 1971-77 TEK envisages investments of about $1.3 billion excluding distribution and village electrification which may require an additional $250 million. The present project, which substantially corre- sponds to TEK's transmission construction program for 1971-74, carries the development of the national grid a stage further by the construction of various links and additions which unite or strengthen existing installations. The main items of the project are 380 kv and 154 kv substations, 154 kv trans- mission lines, 30 kv transformers, and low-voltage capacitators with a total cost of about $65 million, including a foreign exchange component of $26 mil- lion. All imported materials required for the project would be financed from the Bank loan with the exception of steel for transmission towers and medium voltage transformers for which finarce has been arranged from bilater- al sources; these would cost about $4 million. $2 million has been in- cluded in the Bank loan for interest during construction. 13. TEK's tariffs, which are applied to its 1500 customers, mostly muni- cipal authorities or private companies responsible for distribution and large industrial plants, averaged US $0.01 per Kwh (at the current exchange rate) since March 1, 1967, when its tariffs were raised by about 45 percent. No further adjustments in tariffs have been introduced although substantial in- creases would have been required to compensate for the inflationary rise in costs prior to the August 1970 devaluation as well as for price rises because of the devaluation (e.g. a 45 percent increase in fuel oil costs and higher construction expenditures and depreciation charges) and to reflect the re- valuation of the assets taken over by TEK at the time of its creation.  -14 - 1I. For lack of an increase in tariffs in 1970 the return on 7tibarl^'s power assets taken over by TEK (5.4 percent) fell short of the 8 percent to be earned as from January 1, 1970, in accordance wmith the provisions of Loan 568-TU. The Government, which confirmed during negotiations its agreement to the 8 percent return (which is also a requirement of the TEK law), is currently considering a range of alternative proposals presented by TEK to achieve this result, all providing for a tariff increase in excess of 50 percent. The introduction of a tariff increase agreed upon by the Bank is a condition of effectiveness of the proposed loan. The debt service has to be covered at least 1.5 times. 15. Materials and equipment financed from the proposed loan would be purchased through international competitive bidding. Local manufacturers, principally of conductors and small transformers, would be allowed a 15 per- cent preference in bid comparison or the import duty, whichever is lower. The Bakc will disburse the full foreign exchange cost of construction ser- vices (chiefly the erection of steel towers), and either the total CIF cost of equipment or, should local manufacturers be awarded contracts, the full ex-factory cost. The small amount of local expenditure financing which might be involved, i.e. up to about $1.5 million, would be justified in the case of Turkey. PART IV - THE ECONCM-Y 16. A report entitled "The Development Prospects of Turkey(' (ETA-30a, dated February 1, 1971) which was recently distributed to the Executive Directors, described Turkey's economic performance and appraised the country's prospects. Reference is elso made to Part V of the President's Report on an education project, dated -.Tay 7, 1971 (P-930) which updated the findings of the economic report. A basic data sheet is at Annex II. 17. If Turkey is to maintain a growth rate of about 7 percent, its needs for external assistance are likely to be considerable. Debt service obli- gations in 1970 were about 19 percent of foreign exchange earnings, in spite of the highly concessionary terms of aid in the past. In the future Turkey may have to accept a gradual hardening of terms. In these circum- stances, the country's borrowing capacity will have to be kept under con- tinuing review. Turkey has some margin for borrowing on conventional terms, but it should seek to obtain as much aid as possible on a concessionary basis.  PART V - L5GAL IIaSTRIMEJTS AND AUTHO:RITY 18. The draft Loan Agreement betwzeen the Bank and Turkiye Elektrik Kurumu, the draft Guarantee Agreement between the Republic of Turkey and the Bank, the Report of the Committee provided for in Article III, Section h (iii) of the Articles of Agreement of the Bank and the text of a re- solution approving the loan are being distributed separately to the Executive Directors. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECME/NDATIOiT 19. I recommend that the Executive Directors approve the proposed loani. Attachments Robert S. McFTamara President June 2, 1971  Arnex I Page 1 Statement of Bank Loans and IDA Credits to Turkey at April 30, 1971 Loan or Credit Amount (US$ milliori) iNumber Year Borrower Purpose Bank IDA Undisbursed Seven loans and six credits fully disbursed 70.7 56.3 59 TU 1964 Republic of Turkey Second Cukurova Power - 24.0 2.2 568 TU 1968 Republic of Turkey Keban Transmission Lines 25.0 - 9.0 587 TU 1969 Republic of Turkey Seyhan Irrigation Stage II 12.0 - 11.9 143 TU 1969 Republic of Turkey Seyhan Irrigation Stage II - 12.0 5.9 589 TU 1969 TSKB Industry 25.0 - 7.6 623 TU 1969 Republic of Turkey Third.Cukurova Power 11.5 - 7.2 713 TU 1970 TSIB Industry 40.0 - 39.9 36 Tf * 1971 Republic of Turkey Intensive Dairy - 4.5 TU_** 1971 Republic of Turkey Education 13.5 - Total (less cancellations) 197.7 96.8 of which has been repaid 46.9 Total now outstanding 150.8 Amount sold 1.2 of which has been repaid .7 .5 Total now held by Bank and IDA 150.3 96.8 Total undisbursed 75.6 8.1 83.7 * not yet effective 4{* not yet signed  Annex I Page- Statement of IFC investnents in Turkey at April 30, 1971 _nmount (US $ million) Year Company Loan Equity Total 1963 Industrial Development Bank of Turkey (TS2B) - 0.92 0.92 1967 Industrial Development Bank of Turkey (TSKB) - 0.34 0.34 1967 Sifas I (Mylon yarn) 0.90 0.47 1.37 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 0.58 3.08 1970 A.C.S. (Glass) 10.00 1.25 11.25 1970 NASAS (Aluminum, steel and foil) 7.00 1.30 8.30 1970 Sifas III (Nlylon yarn) 0.75 - 0.75 1971 Viking II (Pulp and Paper) - 0.05 0.05 Total 22.65 5.76 28.41 less sold or repaid 0.38 0.37 0.75 Now held 22,27 5.39 27e66  ANNEX IT TUFKEr BASIC DATA Area 780,600 sq.km. Pofl ation (1970) 35.7 million Rate of growth 1965-69 2.8 percent per anum Density h5 per square kilometer Gross National Product (1969, current market prices) TL 126.1 bilUion (1970, provisional n ) TL 133 billion Annual rate of growth (constant prices) 1963-68: 6.9%; 1969t 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%; 1969: 3.7% Industrial Origin of NDP (% of NDP at constant prices) 1962 1969 Agriculture, forestry 39.7 30.9 Industry, mining, electricity 16.2 19.5 Construction 6.3 7.4 Transport, communication 7.2 7.8 Trade 8.1 8.7 Housing L.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) Private consumption 7U.1 71.5 PubJic consumption 15.1 11.9 Gross fixed investment 14.8 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 Goverrrnent tax revenue 15.6' 17.1 Annual Growth Rate (% Public Finance (Billion TL) 1969 1970 /2 1963-57 1968-6 Current receipts 21.6 27.1 16.3 13.1 Current expenditures 12.4 15.0) 16.6 13.3 Current and capital transfer 6.6 7.9) 2L.0 Surplus, net of transfer 2.6 4.2 5.1 -3.8 Investment expenditures 6.9 7.0 10.7 17.5 / 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 commercial 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 $) 2962 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. 31/69 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) 14 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  -3- I:d of Year IKF Position (Million US $) 1L69 1970 Quota 108 108 151 Drawings ontatanding 76 64 112 Allocation of SDR - - 18 Par value - since August 20, 1960 TL 9 - US $ 1.00 since August 9, 1970 TL 15 - US $ 1.00 June 2, 1971