Turkey - Second Energy Community of South East Europe Program (APL) Project

Document of The World Bank FOROFFICIAL USE ONLY Report No: 31703-TR PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFEURO50.6MILLION (US$66 MILLIONEQUIVALENT) TO TURKISH ELECTRTCITYTRANSMISSION CORPORATION (WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY) INSUPPORTOFTHESECONDPHASEOFTHEUS$l,OOO MILLION ENERGY COMMUNITY OF SOUTH EAST EUROPE(APL) PROGRAM MARCH 14,2005 InfrastructureandEnergySector Unit EuropeandCentralAsia Region has a restricted distribution andmay be usedbyrecipients only inthe performance o f their official duties. Its contents may not othenvise be disclosed without 1 1World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective January 15,2005) Currency Units = New TurkishLira(YTL) YTL 1.35 = US$1 FISCAL YEAR January 1 - December31 ABBREVIATIONSAND ACRONYMS APL Adaptable ProgramLoan EBRD EuropeanBank for ReconstructionandDevelopment EC European Commission ECSEE EnergyCommunity of SouthEastEurope EIB European Investment Bank EMP Environmental Management Plan E M U EnergyMarketRegulatoryAuthority ESW Economic and Sector Work EU EuropeanUnion EUAS ElectricityGeneration Corporation FEAF' Framework for EnvironmentalAssessment Procedures FI Financial Intermediary KfW Bank for Reconstruction (Germany) LAMF LandAcquisition Management Framework MENR MinistryofEnergyandNaturalResources NTGP National Transmission GridProject (Loan) OP Operational Policy PCU Project Coordination Unit SEE South East Europe SETS0 South Eastern European Transmission System Operators' Association TEDAS TurlushElectricity Distribution Corporation TEIAS TurhshElectricity Transmission Corporation TETAS TurkishElectricity Trading and Contracting Corporation TSO Transmission System Operator UCTE Union for the Coordination o f Transmissionof Electricity inEurope USAID United States Agency for Intemational Development Vice President: Shigeo Katsu Country Director for Turkey: Andrew N.Vorkmk Sector Manager: HenkBusz Task Team Leader: Kari J. Nyman (ECSEE), Ranjit Lamech (APL2)  FOROFFICIAL USEO m Y EUROPE AND CENTRAL ASIA EnergyCommunityof South East Europe(APLZ) CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE..................................................................... 1 1. Country and Sector Issues................................................................................................... 1 2. Rationale for Bank Involvement......................................................................................... 2 3. Higher Level Objectives to which the Project Contributes ................................................ 2 B. PROJECT DESCRIPTION..................................................................................................... 3 1. LendingInstrument............................................................................................................. 3 2. Program Objective and Phases............................................................................................ . . 3 3. Project Development Objective and Key Indicators........................................................... 4 4. Project Components............................................................................................................ 4 5. Lessons Learned and Reflected inthe Project Design........................................................ 5 6. Alternatives Considered and Reasons for Rejection........................................................... 6 C. IMPLEMENTATION............................................................................................................. 6 1. ECSEEPartnership Arrangements ..................................................................................... 6 2. Institutional and Implementation Arrangements ................................................................ 6 3. Monitoring and Evaluation o f OutcomesResults............................................................... 7 4. Sustainability....................................................................................................................... 7 5. Critical Risks and Possible Controversial Aspects ............................................................. 7 6. Loan Conditions and Covenants......................................................................................... 8 D. APPRAISALSUMMARY ..................................................................................................... 9 1. Economic and Financial Analyses ...................................................................................... 9 2. Technical............................................................................................................................. 9 3. Fiduciary ........................................................................................................................... 10 4. Social................................................................................................................................. 10 5. Environment...................................................................................................................... 11 6. Safeguard policies............................................................................................................. 11 7. Policy Exceptions and Readiness...................................................................................... 12 This document has a restricted distribution and may be used by recipients only in . without World Bank authorization. the performance o f their official duties I t s contents may not be otherwise disclosed  Annex 1: Country and Sector or Program Background................................................................ 13 Annex 2: Major RelatedProjects Financedby the Bank and other Agencies .............................. 24 Annex 3: Results Framework and Monitoring.............................................................................. 25 Annex 4: Detailed Project Description........................................................................................ 27 Annex 5: Project Costs.................................................................................................................. 28 Annex 6: ImplementationArrangements...................................................................................... 29 Annex 7: Financial Management andDisbursement Arrangements ............................................ 30 Annex 8: Procurement Arrangements........................................................................................... 39 Annex 9: Economic andFinancial Analysis ................................................................................. 43 Annex IO: Safeguard Policy Issues............................................................................................... 47 Annex 11:Project Preparation and Supervision........................................................................... 48 Annex 12: Documents inthe Project File..................................................................................... 50 Annex 13: Statement o f Loans and Credits .................................................................................. 51 Annex 14: Country at a Glance..................................................................................................... 53 MAP IBRD33717  EUROPEAND CENTRALASIA ENERGYCOMMUNITYOF SOUTHEASTEUROPE(APL2)FORTURKEY PROJECTAPPRAISALDOCUMENT EUROPEAND CENTRALASIA ECSIE Date: January 26,2005 Team Leader: Ranjit J. Lamech Country Director: Andrew N.Vorkink Sectors: Power (100%) Sector ManagerDirector: Henk Busz Themes: Regional integration (P); Regulation and competitionpolicy (P) Project ID: PO94176 Environmental screening category: Financial IntermediaryAssessment Lending Instrument: Adaptable Program Loan Safeguard screening category: Limited impact [XI Loan [ 3 Credit [ ] Grant [ 3 Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (EUR million): 50.60 (US$ 66 million equivalent) Total: 13.50 78.00 91.50 Borrower: TEIAS TurkishElectricity Transmission CorporationGeneral Management InonuBulvari No: 27 Bahcelievler, Ankara Turkey Tel: (90-312) 222 -9283 Fax: (90-312) 222-8160 Responsible Agency: TEIAS Turkey Annual 0.25 4.35 11.50 13.80 11.50 9.20 Cumulative 0.25 4.60 16.10 29.90 41.40 50.60 Expected effectiveness date: M a y 15, 2005 Expected closing date: December 31, 2010  Does the project depart fromthe CAS incontent or other significant respects?Re$ PAD A.3 [ ]Yes [XINo Does the Droiect require any exceptions from Bank policies? Ref: PAD'D.7 [ ]Yes [XINO Have these beenapprovedby Bank management? _. [ ]Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [ x j ~ o - Does the project include any critical risks rated "substantial" or "hgh"? Ref: PAD C.5 [ ]Yes [XINO Does the oroiect meet the Regional criteria for readiness for imulementation?Ref. PADD.7 rXlYes r 1N o Project development objective Re$ PAD B.2, TechnicalAnnex 3 The countries o f South East Europe, including Turkey, and the European Commission are cooperating to develop a regional energy market, the Energy Community o f South East Europe (ECSEE), and integrate it into the internal energy market o fthe EuropeanUnion. The objective of the Project is to support the implementation o f the investment programs o f TEIAS, including: (a) creation o f a market management system for the management o f the electricity market; (b) strengthening supervisory control and data acquisitiodenergy management system to enable TEIAS to operate more efficiently; and (c) provision of transmission grid strengthening and expansion for overall stability. The key performance indicators that will be used to assess the fulfillment of the ECSEE APL2 projects interms o f results and outcomes are presented inAnnex 3. Project description [one-sentence summary of each component] Ref: PAD B.3.a, TechnicalAnnex 4 The ECSEE APL2 project would provide investment support for TEIAS. The Turkey project has several components, insystem and market operations and transmission. Which safeguard policies are triggered, if any? Re$ PADD.6, TechnicalAnnex I O The ECSEE APL2 project triggers the safeguard policies on environmental assessmentand involuntary resettlement. Significant, non-standard conditions, if any, for: Re$ PAD C.7 Boardpresentation: Not applicable. Turkey already meets the initial ECSEE APL eligibility conditions and the APL2 project components comply with Bank safeguard policies. Loadcredit effectiveness: Not applicable. Turkey already meets the initial ECSEE APL eligibility conditions. Covenants applicable to project implementation: Not applicable. The ECSEE APL programis directly linkedto the countries' commitments under ECSEE. Triggers would not be applied to loans/credits already approved. As an example, loans approved as part o f APLl do not have significant non-standard conditions (equivalent to dated covenants). APL2 has financial targets for TEIAS, financial management covenants and undertakings about safeguards, such as the implementation o f environmental management plans.  A. STRATEGICCONTEXT AND RATIONALE 1. Countryand Sector Issues The improvement of the performance of the energy sector i s crucial to improve and sustain economic development in South East Europe (SEE). The power supply situation i s projectedto tighten significantly during the next few years and threatensto constrain economic activity and affect the quality of life ifnot addressedwith determined regional action. Apart from Turkey, investment over the past 10-15 years has been limited, with the average age of capacity now inexcess of thirty years. Significant capacity additions (of the order of 12,000-15,000 MW) and plant rehabilitations (of the order o f 8,000-9,000 MW) will be requiredduringthe next ten years, along with matching transmission and distribution system investments ifdemandisto bemetandseverepower shortagesandsupplyinterruptionsaretobeavoided '. The SEE countries have acknowledged that solutions to these regional issues based on isolated national markets are neither capable nor desirable as a means to attempt to close investment gaps and emerging demand and supply imbalances. The governments o f SEE countries and the European Commission (EC) signed the "the Athens Memorandum" - the Memorandum of Understanding on the Regional Energy Market in South East Europe and its Integration into the European Union Internal Energy Market - on December 8, 2003 in Athens, Greece, whereby they formally expressed their commitment to what i s currently calledthe Energy Community o f South East Europe (ECSEE). ECSEE'scurrentpartiesare as follows: 0 European Community; 0 ECSEE's State Partiesare Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, Serbia andMontenegro, and Turkey; 0 The United Nations Interim Administration in Kosovo, pursuant to the United Nations ' Security Council Resolution 1244, i s an AdheringParty; 0 The State Parties and the Adhering Party together are ECSEE's RegionalMembers (also referredto as the ContractingParties); 0 EU Member States Austria, Greece, Hungary, Italy, and Slovenia are participants. Any other EUMember States can also request to become participants; and 0 Neighboringnon-EU Member States can request to participate as observers. Currently, Moldova i s participatingas an observer. Negotiations are underway to convert the Athens Memorandum into a legally binding ECSEE Treaty between the European Commission (on behalf o f the European Union) and the Contracting Parties. This project appraisal document reflects the December 3, 2004 version of the ECSEE Treaty. The Athens process includingthe ECSEE Treaty and the ECSEE implementation mechanism is presented inSection 1 of Annex 1. The ECSEE APL program is directly linked to ECSEE and i s explained in Section 2 of Annex 1. Country and sector issues inTurkey are discussed inSection 3 o f Annex 1. 1 Reviewofpower demandand supplyinSouth EastEurope, Working PaperNo. 17, World Bank, October 2003 and separate Bank staff estimates for Turkey. 1  2. Rationale for Bank Involvement The Bank is participating inregional efforts to promote cooperation and integration in South East Europe and inter alia supports the Stability Pact. The Bank i s an active participant and promoter o f the Athens process, at the invitation of the European Commission. The Bank has supported individual countries of South East Europe in their efforts to rehabilitate and restructure their power sectors through policy dialogue, technical assistance and financing since the early 1990s (insome cases even earlier). This deep country knowledge and participation in the development o f ECSEE in the Athens process, including a regional trade strategy work puts the Bank in a strong position to provide regional lending, policy advice and technical assistance to further support the Athens process for ECSEE. The ECSEE APL program was approvedby the Bank on January 27,2005. It i s a key component o f the Bank's support for the Stability Pact and the working partnership with the European Commission. A regional investment facility for gas, similar to the ECSEE APL for electricity, will also be considered. In March 2004, the Bank published a strategy paper for energy trade in South East Europe2. The framework paper outlines the Bank's vision for regional energy market development and defines its role in supporting the evolution of regional energy trade. The framework elaborates the Bank's role in supporting policy reform and institutional development, and lending for power generation, transmission, distribution: 0 Promote a phased approach to market opening, starting with trading based on bilateral contracts and third party network access, and moving to a more sophisticated model after the institutional framework i s sufficiently developed; 0 Apply regional benchmarking in policy support work with individual countries and as a trigger for investment financing; 0 Develop a special regional instrument - the proposed ECSEE APL - and finance priority investments to support development o f the regional market; 0 Analytical work to assess the economics o f increasing the use o f gas in the SEE countries and costs o f compliance with EUenvironmental standards; and 0 Complete a regional power Generation Investment Study, financed by the Commission. ECSEE APL2 will support Turkey inits power market liberalization program. Turkey i s inthe process of establishing a competitive market for electricity, and is restructuring its generation and distribution companies with a view to privatizing them over time. 3. Higher Level Objectives to which the Project Contributes All SEE countries have the prospect o f EUmembership. Bulgaria and Romania expect to join in2007, and also Croatia and Turkey are candidate countries. The countries o f Western Balkans - the other Regional Members o f ECSEE - are potential candidates to accession (European Council inCopenhagen in December 2002). "The Thessaloniki Agenda for the Western Balkans: moving towards European Integration", which was endorsed by the European Council in Thessaloniki in June 2003, encourages the region to adopt a legally binding energy market agreement. Accordingly, the Member Countries and the Commission are resolved to establish integratedenergy markets in electricity and gas based on a common solidarity and consistent with the rules applicable within the European Union. 2 World BankFrameworkfor Developmentof RegionalEnergyTrade inSouthEastEurope, EMT DiscussionPaperNo. 12, March2004. 2  ECSEE i s an integral element o f the Regional Members' and the European Commission's efforts for all states in South East Europe to have access to stable and continuous energy supply which they regard as essential for economic development and social stability. The creation of an area without internal frontiers for energy contributes to economic and social progress and a high level o f employment as well as balanced and sustainable development. These higher level objectives are expressed inthe ECSEE Treaty. The Stability Pact has made regional energy cooperation one o f its core objectives in its efforts to strengthen regional cooperation and to foster the conditions for peace, stability and economic growth in the South East Europe. The Stability Pact has characterized ECSEE as a unique political chance for the SEE region, to consolidate reconciliation and provide a power driver towards a more comprehensive economic and political integration into the European Union. The Bank supports regional efforts to promote cooperation and integration in South East Europe. ECSEE i s one of the most prominent o f current regional programs. The ECSEE APL facility i s a key component o f the Bank's support for the Stability Pact and the workmg partnership with the European Commission. This project is also consistent with the Bank's Country Assistance Strategy for Turkey (CAS, ReportNo. 26756 TU, dated October 2,2003) which calls for creating an attractive business climate inTurkey inpart through continuing the reform o f the electricity sector (by encouraging creation o f a market and regional trade) and by financing priority investments. B. PROJECTDESCRIPTION 1. LendingInstrument ECSEE is a regional program and the Bank investment support i s being provided on a regional basis using the adaptable program lending (APL) instrument, horizontally to support ECSEE's Regional Members (up to eight countries and Kosovo) and vertically (each Regional Member can in principle receive support from more than one APL installment over the APL program period). The APL instrument enables the Bank to provide support ina flexible manner - when individual countries have met the policy triggers (country criteria under the Athens process) and when individual projects are ready to receive Bank support. All ECSEE Regional Members might not actually borrow under the APL program. However, countries would know up-front that they can rely on the Bank to support them in achieving the goals of the ECSEE ifthey meet specific eligibility criteria and ifthey need Bank support. The approved size of the APL lending facility i s US$l,OOO million, of which EUR 66 million (US$84.3 million equivalent) was approved to Romania under the APL1, and EUR 50.6 million ( U S 6 6 million equivalent) i s proposed for Turkey under APL2. The ECSEE APL i s detailed inAnnex 1 (Section 2). 2. ProgramObjective andPhases The key objectives of the Energy Community of South East Europe (ECSEE) are: 0 Create a stable regulatory andmarket fi-amework capable o f attracting investment ingas networks and power system so that all states inthe region have access to the stable and continuous energy supply that is essential for economic development and social stability; 0 Establish integrated regional markets in South East Europe, closely linked to the internal energy market o f the EuropeanUnion, and fully complying with the rules applicable within the European Union; 0 Enhance the energy security o f South East Europe and the European Union by providing incentives to connect the Balkans to Caspian, Middle Eastern and North African gas reserves; and  0 Improve the environmental situation inrelation to energy inthe region. The Bank supports ECSEE in a number o f ways, through active participation inECSEE's implementation organization (described in Section 1 o f Annex 1); analytical work including the March 2004 framework paper, the ongoing generation investment study and the gasification study; and country-level policy dialogue and project work. The ongoing regional investment and technical assistance support under the ECSEE APL is an integral element o f this comprehensive program o f support. ECSEE APL phasing and triggers (presented in Annex 1, Section 2), are directly linked to ECSEE and utilize both the horizontal and vertical features o f the APL instrument ina regional context. The objective o f ECSEE APL i s the development o f a functioning regional electricity market in South East Europe and its integration into the internal electricity market o f the European Union, through the implementation of priority investments supporting electricity market and power system operations in electricity generation, transmission and distribution and technical assistance for institutional/systems development and project preparation and implementation. 3. Project Development Objective and Key Indicators The objective o f the Project i s to support the implementation o f the investment programs of TEIAS, including: (a) creation o f a market management system for the management o f the electricity market; (b) strengthening supervisory control and data acquisitiordenergy management system to enable TEIAS to operate more efficiently; and (c) provision o f transmission gnd strengthening and expansion for overall stability. The key performance indicators that will be used to assess the fulfillment o f the ECSEE APL2 projects interms o f results and outcomes are presented inAnnex 3. The ECSEE APL program would be considered successful if the countries in the region achieve their commitments under the Athens process and are able to: (a) develop a functioning electricity market including the agreed market liberalization targets; and (b) integrate it into the internal electricity market of the European Union in accordance with the ECSEE Treaty. To accomplish this, the countries will have to continue ongoing restructuring and reform measures, build up their institutions and improve their power systems including interconnections so that regional trade can increase. The ECSEE APL2 for Turkey would provide investment support to TEIAS, the Turlush Electricity Transmission Corporation and system operator. Related technical assistance support for establishing a market, creating balancing and settlement regulations, and for restructuring generation and distribution i s already being provided on an ongoing basis by the Bank through trust funds and loans. 4. Project Components Eligible ECSEE APL Project Components The Bank's March 2004 fi-amework paper concluded that significant investments in power generation, transmission and distribution and technical assistance are required for a well-functioning power market. Priority investments and technical assistance would be financed under the ECSEE APL program so that the ECSEE Regional Members can effectively participate inthe regional electricity market (for further details, see Annex 1, Section 2): 0 Investments to ensure that ECSEE Regional Members meet the integration requirements of UCTE- the Union for the Coordination ofTransmissiono fElectricity inEurope; 0 Investments to upgrade the capabilities o f transmission system operators (TSOs) of ECSEE Regional Members so that they can implement policy decisions to assure regional security of supply. Examples o f such investments include: (a) upgrading load dispatch and real-time system stability and control capabilities; (b) upgrading infrastructures/systems for electricity market administration; and (c) removing critical bottlenecks intransmission networks and sub-stations; 4  0 Investment to restore operational capacity/flexibility o f critical generation facilities that provide ancillary services to TSOs, e.g. the APL 1 investment to rehabilitate Hidroelectrica's Lotru Hydropower Station in Romania; 0 Investment inretrofits o f critical generation and/or transmission facilities to assure environmental compliance; 0 Metering and/or telecommunications programs designed to enhance revenue realization and/or coordination and communications capabilities o f distribution utilities so that they can more effectively participate inthe regional power market; and 0 A wide range o f technical assistance, for institutional/systems development and project preparation and implementation, to support ECSEE Regional Members in energy market design and implementation assistance, inter alia to ensure full compliance with the ECSEE framework/EU directives and compatibility o fmarket designs for the supply o f balancing services and/or ancillary services across SEE country frontiers; and engineering/environmental services for the preparation and implementation o f investment projects (including but not limited to projects financed by the Bank under the ECSEE APL)for a functioning electricity market. APL2 Investment Components APL2 supports the implementation o f several elements o f the investment programs o f TEIAS. First, a Market Management System (MMS) would be created for TEIAS, for the management o f the electricity market in Turkey. Second, its SCADNEMS (supervisory control and data acquisitiodenergy management system) would be strengthened so that TEIAS would be inaposition to operate its system more efficiently and to coordinate with other SEE systems operators in order to meet overall stability and control requirements. Third, the project would provide transmission grid strengthening and expansion for overall stability. This includes funding some o f TEIAS sub-stations investments. TEIAS will finance taxes, interest during construction (IDC) and land acquisition for the project. Details are presented inAnnexes 4-6. 5. LessonsLearnedandReflectedinthe ProjectDesign The best known regional power market i s the Nordic power market, known by the name o f its operator NordPool. It operates in Finland, Norway and Sweden and part o f Denmark. Portugal and Spain have recently launched a joint market, and regional power markets are also under development in Southern Afixa, South-East Asia and Central America, and they are under discussion in Eastern and Western Africa. A key lesson leamed from other markets elsewhere, including NordPool, and fromthe association of South Eastern European Transmission System Operators (SETSO) i s that the progressive integration of energy markets in SEE and the implementation o f common security o f supply policies require close attention to be paid to the design and operation o f subsidiary electricity markets (e.g. balancing and ancillary services) which are best administered by Transmission System Operators (TSOs). ECSEE's implementation organization includes the SEE Transmission System Operators Task Force, which interacts with SETSO and UCTE to ensure smooth integration and coordination. The role o f the ECSEE Task Force of TSOs i s critical inall phases o f ECSEE's development and operation. Political commitment and adequate financial support are key ingredients o f successful reform programs. ECSEE's development i s premised on the political commitment o f the SEE countries as expressed inthe Athens Memorandum and the forthcoming ECSEE Treaty, and it i s backed by an exceptionally strong donor involvement. The APL program has been directly linked to ECSEE, with no additional conditionality. Investments included in APLl and the proposed components o f APL2 are (and components to be supported under subsequent APL installments will be) o f proven design and streamlined approaches emphasizing turnkey contracting will be employed intheir implementation. 5  6. AlternativesConsidered andReasonsfor Rejection A regional approach and the use o f the APL instrument give the Bank the flexibility to match its commitments to the pace o f its clients. All SEE countries would know up-fkont that they can rely on the Bank to support them inachieving the goals o f the ECSEE when they meet specific eligibility criteria and when they need Bank support. Regional approach, and the regular monitoring and regional benchmarking that will take place in the ECSEE process, will provide higher publicity and awareness, peer support, and also peer pressurehncentives for countries to improve performance so as to avoid falling behind other ECSEE members. The use o f the APL instrument also enables the Bank to apply market liberalization targets as triggers in future APL installments as such targets are agreed, including derogations and subsequent modifications that may be agreed between the European Commission and ECSEE RegionalMembers (Annex 1). C. IMPLEMENTATION 1. ECSEEPartnershipArrangements First and foremost, ECSEE is a partnership among the SEE countries. They have acknowledged that solutions to pressing regional issues based on isolated national markets are neither capable nor desirable as a means to attempt to close investment gaps and emergmg demand and supply imbalances. Second, ECSEE i s a partnership betweenthe SEE countries and the European Union. The European Commission signed the Athens Memorandum as a participant and will also be a signatory to the ECSEE Treaty. Neighboring Austria, Italy and Greece signed the Memorandum as "political participants to the Athens process" and Hungary and Slovenia (which signed as "observers") have since joined the EUand become political participants. Finally, ECSEE i s a partnership between the SEE countries and the donors including the Bank. Financial institutions and bilateral donors include the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the German Development Bank (KfW), the United States Agency for International Development (USAID), the Canadian Agency for InternationalDevelopment (CIDA), and France, Greece, Italy, and Switzerland. 2. InstitutionalandImplementationArrangements A comprehensive coordination and implementation mechanismhas been established for the development of ECSEE. The mechanism covers and brings together political and administrative leadership, regulators, transmission system operators and other utilities, the European Commission, international financial institutions and bilateral donors in ECSEE's Ministerial Council, Permanent High-level Group, Task Forces, and the Forum. This mechanismi s detailed inAnnex 1, Section 1. Turkey/TEIAS The project will be implemented by TEIAS, a government-owned corporation responsible for the planning, design, development, operation and maintenance o f the transmission network in the country. TEIAS i s also responsible for system operation, for the balancing market, for market operation and for settlement administration. The Turkish power sector has been restructured twice in the past decade. In 1994 the integrated government-owned utility TEK was split into a distribution corporation (TEDAS) and a generation and transmission corporation (TEAS). InFebruary 2001, Turkey passed the Electricity Market Law (EML) which established the basis for creating an electricity market in Turkey and includedthe unbundlingo f TEAS. Itwas restmcturedinto a generation corporation(EUAS), a transmission corporation (TEIAS) and a trading and contracting corporation (TETAS). The law also provided for the creation o f an Energy Market Regulatory Authority (EMRA) to license market participants and to set retail tariffs. Turkey i s also beginning the implementation o f an electricity market based on voluntary bilateral contractingand a mandatedbalancing system. 6  InMarch2004, the Government issueda StrategyPaperwhich focusedonthe privatizationof assetsand transitional arrangements as the Turkish electricity sector continues to move from being entirely Government controlled to being dominated by market forces. The Strategy Paper provides for splitting TEDAS into 21 distribution corporations and privatizing these corporations. Also, the thermal power plants belonging to EUAS as well as about 5,000 MW of hydropower capacity will be formed into generation companies and privatized. TEIAS, however, as the monopoly transmission corporation and market operator will remain under Government control. Turkey's power sector i s discussed further in Annex 1(Section 3): 3. Monitoring and Evaluation of OutcomesResults At the regional level, the ECSEE APL program is included in the established mechanism for ECSEE coordination - Ministerial Council, Permanent High-level Group, Task Forces, and the Forum (Annex 1, Section 1). The project will benefit from this elaborate, active and well-functioning mechanism for coordination, monitoring and evaluation. ECSEE's Secretariat will provide an institutional mechanism for the regular monitoring o f the countries' performance against agreed benchmarks. At the country level, ECSEE-related investment projects to be included in national programs will be monitored by the ECSEE coordination mechanism. The Bank will continue to participate in the Athens process including the Forumand will also directly supervise the individual country projects. 4. Sustainability ECSEE market vision and sustainability i s discussed inAnnex 1, in terms o f ECSEE market participants, market sophistication, competition and integration with the European Union intemal energy market. It i s important to note that though additional transmission links are required and will be developed, South East Europe (except Turkey) was synchronously interconnected with the main European power system on October 10,2004. Turkey is connected to Bulgaria by two transmission lines and a line to Greece will be completed in 2006 (funded by the National Transmission Grid Project) allowing Turkey to synchronize operations with the rest o f ECSEE. Through integration, the region secures access to a major trading partner and an important import source to meet possible electricity shortfalls and emergency support. This highlights the electricity/economy dimension in ECSEE's integration into the European Union internal energy market. The APL2 project helps Turkey to meet the requirements for its entry into the UCTE and ECSEE APL will also be available for Albania for the same purpose -Albania and Turkey are not yet members o f the UCTE. 5. Critical Risks and Possible Controversial Aspects ECSEE has been developed and i s being implemented through a comprehensive coordination and implementation mechanism. It has gone through extensive discussion and debate. The Bank's work in the ECSEE context, published inthe March 2004 framework paper (footnote 2), has highlightedrisks and contributed to risk mitigation measures. Risks are being minimized by adopting a gradual approach to market opening and voluntary approach to trading. Though the market i s being opened, meaning an increasing number o f electricity consumers will become eligible to choose their electricity supplier, trading i s not mandatory but voluntary between willing sellers and willing buyers - countries and customers in individual countries need not and are not expected to move at the same pace. The pace of liberalization may nevertheless trigger controversy. Adjustments can be accommodated in the finalization o f the ECSEE Treaty, including derogations and subsequent modifications inaccordance with the practice o f the European Commission. Other potential ECSEE-relatedcontroversies are discussed in Annex 1. They include the development o f new generation capacity, progressive upgrading and implementation o f environmental legislation and impacts o f competitive pressures particularly on higher cost and less competitive suppliers and the less attractiveheliable customers. It must be emphasized that 7  the SEE region faces a fundamental risk o f not being able to meet the growing demand for electricity. ECSEE i s regarded as the best possible mitigation measure for that risk, which if materialized, would threaten the economic growth prospects and affect the quality o f life inthe region. Through ECSEE - a by a legally bindingintemational Treaty - the region will develop an EU-compatible regional market and regional market o f countries with harmonized and EU-compatible legislation and institutions underpinned thereby represent a much larger and more attractive investment destination to prospective investors. All APL investment projects are expected to use proven designs and are not expected to contain any particular risks or controversial aspects. This i s the case in APL2. Under the Turkey project, control systems and market management systems of TEIAS will be upgraded or created and conventional transmission investments to reinforce existing systems will be carried out. 6. LoanConditionsand Covenants As detailed in Annex 1, Section 2, the ECSEE APL i s directly linked to the countries' commitments under ECSEE. No other triggers would be applied (including non-compliance with undertakings under ongoing national projects as long as they do not directly affect countries' participation in ECSEE). Triggers would not be applied'to loanshredits already approved. As an example, the ECSEE APL1 loan to Romania approved in January 2005 does not have conditions (equivalent to dated covenants) about Romania having to meet future triggers and a possible failure to meet such future triggers would not jeopardize the implementation of Hidroelectrica's investment project that i s under implementation. APL projects would have financial targets for utilities (Annex 9 presents APL2 targets), financial management covenants (Annex 7 presents APL2 project's F M S arrangements) and undertakmgs about safeguards, such as the implementationof environmental management plans (Annex 10 presents APL2 requirements). Turkey already meets the initial ECSEE conditions and the APL2 project components comply with Bank safeguard policies. Going beyond the initial eligibility criteria, Turkey has already started the liberalization o f its electricity market and it i s expected that it will continue the opening ahead of the ECSEE deadlines. Turkey's current level o f retail market opening i s 20%. Turkey has encouraged the development o f private generation and this year about 55% o f generation i s expected to come from private power plants with some o f these plants selling directly to private customers while others sell to TETAS or other Government owned companies on long term contractual arrangements. TEIAS will be required to meet the following financial covenants (See Annex 9 for details): (a) Self financing ratio greater than or equal to 35%; (b) Debt service coverage ratio greater than or equal to 1.5; and (c) Current ratio greater than or equal to 1.O. Inaddition, TEIAS will also be requiredto comply with the following: 0 Implementation o f a time-bound action plan to obtain an audit opinion for its financial statements starting incalendar year 2006; 0 Installationo f functioning o f the Enterprise Resource Planning programby January 31,2007; 0 Carrying out o f a mid-term review by January 31,2008; and 0 Implementation o f Framework for Environment Assessment Procedures and Land Acquisition Management Framework. 8  D. APPRAISAL SUMMARY 1. EconomicandFinancialAnalyses The benefits o f regional power trade in general and trade benefits in the SEE region specifically have been studied by Argonne National Laboratories sponsored by USAID and the sector work underpinning the APL program (footnote 2). A preliminary estimate i s that if SEE were to operate as a regionally integrated system dispatching on a least cost basis, operating costs could be reduced by 11-15%. There would be additional cost savings relating to capital, for example, through exports from surplus to deficit countries, and sharing o f reserve. In the short term, savings would be reflected in lower prices where these are currently relatively high, and increased net revenues for utilities with the potential for increased exports. Inthe longer term, integrated operation would lead to lower prices than in a limited trade scenario. Some benefits from electricity trade are already being realized in the region. The main exporters in the region are Bosnia and Herzegovina, Bulgaria and Romania. Some o f the countries have substantial hydro power capacity, while others rely more on thermal, and two have also nuclear power plants. The March 2004 framework paper discusses the country-by-country situation. This mix o f hydrokhermal mix enhances the prospects for efficiency improvement and cost savings through regional cooperation. There i s also scope for power trade between SEE and its neighbors, and indeed, one of ECSEE's key objectives i s that the SEE energy market will be integrated into the EU internal energy market. From a technical point o f view, this would be feasible given that power systems in Europe and SEE operate according to common technical standards established by UCTE. Significant potential benefits exist given the non- coincident peak load periods between Russia and SEE, but synchronizing system operation between the eastern neighbors such as UkraineEussia and SEE would be a major challenge. A near-term option to increase trade would be to develop links through Moldova, to allow power transfer at least initially with asynchronous system operation, and this i s being discussed between Romania and Moldova. Turkey/TEIASFinances Details are inAnnex 9 (Section 2). TEIAS' transmission charges (ifpaid) are quite adequate to recover all its normal operating and non-operating costs. A s a result, TEIAS i s performing reasonably well in terms o f its income statement. In the past, TEIAS has faced cash-flow problems because o f the large defaults inpayments by EUAS. TEIAS received only about 60% o f what it was owed in FY 2003, and was in danger o f defaulting on its debt servicing, but managed to meet its obligations after TEDAS received additional support from the Government allowing it to pay TETAS and TETAS to pay TEIAS. This situation has substantially improved in 2004 and for the first six months TEIAS collected over 80% of accounts receivable. TEIAS plans to invest about US$ 1.1billion over the next five years. This level o f investment i s financially sustainable and financial projections show that TEIAS has sufficient capacity to borrow for these investment levels. However, the main risk that faces TEIAS i s the collection efficiency from EUAS, and ultimately TEDAS' collection efficiency from final electricity consumers. The Govemment's power sector strategy i s premised on restructuring and privatization o f TEDAS, inter alia as a fundamental solution to the sector's bill collection problems. Progress in Romania demonstrates that this issue can be successfully addressed, even ahead of privatization. 2. Technical The transmission system inthe SEE region meets the minimumrequirements for a regional market, now that the rehabilitation projects in Croatia and Bosnia and Herzegovina (the latter under the Bank's Power I11Project) have beencompletedfacilitating the synchronous interconnectiono fthe whole regionwiththe 9  main European power system on October 10, 2004. Additional interconnections, within the region and with the European Union, will be required to accommodate the projected increasing power flows. The APL programwill support some ofthese additionalprojects, and other donors participating inthe Athens process will support others - active donor coordination i s aimed at ensuring that highest priority projects will get funded. The countries and their utilities, even with the help o f the donors, will not by themselves be able to fund all necessary generation investments required to meet the growing demand for electricity inthe region. Private investment will haveto bemobilizedandthat is one ofECSEE's fundamental goals -thecreationofafunctioningregionalmarket,withastableregulatoryandmarketframeworkcapableof attracting private investment. 3. Fiduciary The Bank's standard fiduciary requirements apply also to the projects and utilities supported under the ECSEE APL program. Lending under the ECSEE APL program will be through BRD loans and IDA credits to individual countries. The Bank will review the financial management systems o f the executing agencies and audit reports will be required to be submitted. Procurement will be in accordance with the Bank Guidelines for Procurement and Bank Guidelines for the Use o f Consulting Services will apply. It is possible that, within applicable guidelines, the Bank may agree that borrowers' FMS and/or procurement systems be utilized, tahng into account experience from other projects where such approaches are piloted. The proposed APL2 loan to Turkey does not feature such use of country systems. Standard fiduciary and procurement arrangements will be applied (Annexes 7-8 present ApL2 arrangements). A Bankreview o f TEIAS' financial management arrangements was undertaken anditwas concludedthat these arrangements need to be strengthened. Agreement was reached with TEIAS that certain steps would be taken to improve them. The most important such steps are: 1) it was agreed that for FY 2006 the auditor should be ina position to provide an opinion on the corporation's financial statements; and 2) the Enterprise Resource Planning program which i s currently under design will be installed and functioning by early 2007. It was also agreed inprinciple that TEIAS will hire extra staff for the financial operations department and prepare a project financial manual. These latter agreements are dependent on TEIAS reaching agreement with the Government about hiringextra staff. 4. Social ECSEE's overall social impact is positive. The common objective o f the parties adhering to the Athens Memorandum is to stimulate economic growth and investment in South East Europe by improving the availability, efficiency and reliability o f network energy sources at reasonable cost. The ECSEE Treaty states that the Regional Members and the Commission are determined to achieve economic and social progress and a high level o f employment as well as balanced and sustainable development through the creation o f an area without internal frontiers for energy. All SEE countries have the prospect of EU membership. The Stability Pact has characterized ECSEE as a unique political chance for the SEE region, to consolidate reconciliation and provide a power driver towards a more comprehensive economic and political integration into the European Union. The overall social impact o f improving power supply; mitigating environmental impacts o f the power sector; supporting growth, investment and employment; and facilitating EUaccession ispositive. All countries inthe SEE region are implementing reforms intheir energy and power sectors, which inter alia involve tariff adjustments towards full cost recovery and financial discipline includingbill collection. This raises the issue of social protection, to ensure that low-income households have access to electricity. ECSEE does not contain additional financial targets or conditions, but reinforces these ongoing national 10  efforts. The Treaty calls for the provision o f electricity to all citizens at a reasonable price level that nevertheless allows for adequate cost recovery andreinvestment. Turkey APL2 has limited social impacts. There i s no resettlement but there may be limited land acquisition. The market management system (MMS) and SCADNEMS for TEIAS involve n o social issues or land acquisition. The substation component for TEIAS may involve a minor amount o f land acquisition for new substations as needed. TEIAS has an existing policy for land acquisition based on the Expropriation Law (No.2942) which involves payment of market prices for the land acquired and allows the land owner to go to court if they are not satisfied with the amount paid. The amount o f land required under the project is, however, very small since the number o f sub-stations i s limited and the requiredplots are small. A Land Acquisition Management Framework (LAMF) has been prepared by TEIAS indicating how it will handle any land acquisition issues. This framework document has been cleared by the Bank and submitted to the InfoShop. 5. Environment ECSEE's overall environmental impact i s positive. ECSEE accelerates the introduction of EU- compatible environmental legislation and standards inthe SEE region. This i s particularly significant in countries that are not 2007 accession candidates. This is an area where the region will require assistance from the international community. The APL program i s one potential source o f such assistance, for example, for the rehabilitation and upgrading of power generation facilities to improve their operational and environmentalperformance. N e w generation projects will not be financed under the APL program, but the World Bank Group will consider such projects separately, inparallel with the APL program. For Turkey, a separate project for rehabilitation of the Afsin-Elbistan A Power Plant i s included inthe FY06 lending program. Turkey/TEIAS The APL2 project has a limited environmental impact. The SCADNEMS and M M S systems, which consist o f hardware and software, have no significant impact. Rehabilitation of substations would also have little or no impact since the substations are reported not to have PCBs. New substations would have a minor impact. TEIAS has prepared an Environmental Management Framework (EMF) indicating how it will review and address the environmental impact o f its investments. This framework document has been reviewed with the Bank and found to be satisfactory. 6. Safeguardpolicies Safeguard Policies Triggered by the Project Yes No EnvironmentalAssessment (OP/BP/GP4.01) 1x1 _r _l Natural Habitats (OPBP 4.04) [XI Pest Management (OP 4.09) f[I1- [XI Cultural Property(OPN 11.03, being revised as OP 4.11) [I [XI Involuntary Resettlement (OPBP 4.12) [XI [I IndigenousPeoples(OD 4.20, being revised as OP 4.10) [I [XI Forests (OPBP 4.36) [I [XI Safety of Dams (OPBP 4.37) [I [XI Projects inDisputedAreas (OPBP/GP 7.60) [I [XI Projects onInternationalWaterways (OPBP/GP 7.50) [I [XI The classification o fthe APL program and APL2 i s FI. Most o fthe country-level investmentprojects are expected to be B-category projects. RomanidLotru and the currently identified Turkey project elements are all B-category projects. However, individual country-level investment projects included in the later installments o f the APL program may contain components that would be rated into the A-category or C- 11  category. APL2 is rated Financial Intermediary (FI) because not all o f the project elements have been fully identified. Though they are all expected to be B-category or C-category, in addition to preparing Environmental Management Plans for the components that have been identified, a Framework for Environmental Assessment (FEAP) and a Land Acquisition Management Framework (LAMF) outlining what principal actions will be taken by TEIAS in regard to different foreseen but not yet identified other elements (power lines, sub-stations) have been prepared as discussed in sections 4 and 5 above. The FEAP and LAMF also outline how the issues related to public participation and disclosures of information are handled. 7. Policy Exceptions and Readiness Nopolicy exceptions are currently expected to be sought. 12  Annex 1: Countryand Sector or ProgramBackground EUROPEAND CENTRGLASIA: EnergyCommunity of SouthEastEurope(APL2) 1. ECSEE APL The countries o f South East Europe have acknowledged that solutions to regional electricity issues based on isolated national markets are neither capable nor desirable as a means to attempt to close investment gaps and emerging demand and supply imbalances. Building upon their experience to cooperate in the power sector, in recognition of potential gains from increased trade, and as part o f a wider movement to strengthen regonal cooperation, the governments o f SEE countries and the European Commission (EC) signed the "the Athens Memorandum" - the Memorandum o f Understanding on the Regional Energy Market in South East Europe and its Integration into the European Union Internal Energy Market - on December 8, 2003 in Athens, Greece, whereby they formally expressed their commitment to what i s currently called the Energy Community of South East Europe (ECSEE). ECSEE's current partiesare as follows: European Community; ECSEE's State Parties are Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, Serbia and Montenegro, and Turkey; The United Nations Interim Administration in Kosovo, pursuant to the United Nations Security Council Resolution 1244, i s an AdheringParty; The State Parties and the Adhering Party together are ECSEE's Regional Members (also referredto as the ContractingParties); EU Member States Austria, Greece, Hungary, Italy, and Slovenia are participants. Any other EUMember States can also request to become participants; and Neighboringnon-EU Member States can request to participate as observers. Currently, Moldova i s participating as an observer. ECSEE's Regional Members and the European Commission are currently negotiating to formalize their partnership into a legally bindinginternational Energy Community Treaty (ECSEE Treaty). The Council of the European Union authorized the Commission in June 2004 to open such negotiations, on behalf of the European Union. The negotiations started in July 2004. ECSEE's Ministerial Council concluded on December 13, 2004 that there i s broad agreement on the substance o f the Treaty and directed their negotiators to conclude remaining details as soon as possible. The current time-table calls for the signing of the Treaty in mid-2005 and ratification i s expected by mid-2006. The Treaty i s proposed to become effective when the European Union and a majority o f the Regional Members have ratified it. This schedule is reflected in the proposed vertical triggers o f the ECSEE APL, with 6-month contingency provisions: signingby end-2005 and ratification by end-2006 (Section 2). Upon accession to the EU, Regional Members (signatories of the Treaty) will automatically cease to be Regonal Members and become participants. As members of the European Union, participants are required to meet more demanding electricity market liberalization targets than those set for ECSEE and they will remain eligible to borrow under the ECSEE APL facility. This project appraisal document reflects the December 3, 2004 version o f the ECSEE Treaty. 13  ECSEE's Objectives The key objectives o fthe Energy Community o f South East Europe (ECSEE) are: 0 Create a stable regulatory and market framework capable o f attracting investment to the region in gas networks and power system so that all states in the region have access to the stable and continuous energy supply that i s essential for economic development and social stability; 0 Establish integrated regional markets in South East Europe, closely linked to the internal energy market o f the European Union, and fully complying with the rules applicable within the European Union; 0 Enhance the energy security o f supply o f South East Europe and the European Union by providing incentives to connect the Balkans to Caspian, Middle Eastern and North African gas reserves and to exploit indigenous reserves o f fossil fuels 0 Improve the environmental situation inrelation to energy inthe region. ECSEEImplementationMechanism A comprehensive coordination and implementationmechanism has been established for the development o f ECSEE. The mechanism covers and brings together political and administrative leadership, regulators, transmission system operators and other utilities, the European Commission, international financial institutions and bilateral donors: 0 ECSEE's MinisterialCouncil takes place biannually with the participation of the Ministers in charge o f Energy o f the countries and the Commissioner for Energy and Transport o f the European Commission. The Council takes strategic decisions and gives guidance to ECSEE and, where necessary, formally reviews the conclusions o f other ECSEE bodiedmeetings including the Forum. Once the ECSEE Treaty i s in effect, the Council will report annually on ECSEE's activities to the European Parliament and to the Parliaments o f ECSEE's Regional Members; 0 ECSEE's Permanent High Level Group is composed o f representatives o f the Ministries in charge o f Energy o f the countries and the European Community. The group meets, when necessary, on the initiative o f the Commission and the Presidency in Office, in order to prepare the agenda for the Ministerial Council and to ensure the follow-up o f its decisions; 0 Two Task Forces have been established for ECSEE preparatory work and day-to-day coordination and cooperation: (1) the SEE Energy Regulators Task Force, which works closely with the Council o f European Energy Regulators (CEER); and (b) the SEE Transmission System Operators Task Force, which interacts with the South Eastern European Transmission System Operators (SETSO) and the Union for the Coordination o f Transmission of Electricity in Europe (UCTE); 0 ECSEE Forummeets at least twice yearly includingbiannually inIstanbul to discuss gas issues. It comprises o f representatives o f the governments, regulators and transmission system operators o f the countries, CEER, SETSO, UCTE, producing companies, consumers, the European Commission, the Stability Pact, and donors including the Bank; 0 Donorsare members ofthe ECSEEForumand usually the donor agencies also meet separately in connection with the Forum meetings. The Stability Pact assigned the role of coordinating the 14  donors to the European Commission in 2001. The Commission retains the overall co-ordination, setting politicalhechnical goals and organizing donors. The Commission i s funding an Athens Process secretariat, based in Athens, to support the process, inter alia, benchmarlung and monitoring; and e The Ministerial Council, the Permanent HighLevel Group and the Forum are already operational and they would be recognized in the ECSEE Treaty. In addition, two new bodies, a Regulatory Board and a Secretariat, are to be set up under the Treaty: (a) The Regulatory Board would be an advisory body that monitors the implementation o f all statutory, technical and regulatory rules. The Regulatory Board would be composed o f one representative o f the energy regulators o f the Regional Members. The European Commission would represent the European Union, assisted by one regulator o f each Participant; and (b) The Secretariat would monitor ECSEE's development and review the implementation and functioning of the energy market. The Secretariat would assist the Council, the High Level Group, the Forum and the Regulatory Board. ECSEE Market Vision and SustainabilityThe current situation and the key dimensions o f the short- and long-term vision for a sustainable electricity market can be briefly outlined as follows: e ECSEE Participants: The main utilities in the regon are already engaged in power trading, which provides the basis for further development. The next steps will be bilateral contracts involving unbundled utilities and large customers; followed by expanding trade as electricity markets in each country are further opened and additional customers become eligible and start exercising the freedom to choose their electricity supplier; e Market Sophistication: Some o f the countries are already developing day-ahead markets (operated by market operators) and real-time balancing mechanisms (operated by system operators). Over time such markets and mechanisms will become increasingly standard; and further sophistication will be developed, including intra-day and real-time balancing markets and financial instruments (possibly starting with a contract exchange); e Competition: Current utility-to-utility contracts and other exchanges are typically cooperative and competition is not their key objective. As industry unbundling deepens and in line with market opening across the region, contracting and trading will become increasingly competitive. However, transmission system operators will continue to coordinate on a cooperative basis, as members o f SETS0 and inthe framework o f the UCTE; and e Integrationof ECSEE into the EuropeanUn'ion Internal EnergyMarket: Croatiaand a part o f Bosnia and Herzegovina had already been interconnected and their power systems operated synchronously and as a part of the main European power system administered by UCTE. The rest of South East Europe (except Turkey) was synchronously interconnected on October 10, 2004, following the completion o f rehabilitation in Croatia and Bosnia of facilities required for the synchronous interconnectiono f the whole region with the main Europeanpower system. The studies for the interconnectiono f Turkey to the UCTE are well advanced and a transmission line between Turkey and Greece i s under construction with the aim o f full integration by the end of 2006. Additional transmission links to the EU countries will be developed. They include a second connection between Romania and Hungary (with EBRD financing for implementation), and second connections between Serbia and Hungary and Croatia and Hungary, and a connection 15  between Croatia and Italy/Slovenia (the last three interconnections are candidates for financing under the ECSEE AF'L). Through integrationthe region secures access to a major trading partner and an important import source to meet possible electricity shortfalls and emergency support. This highlights the electricity/economy dimension in ECSEE's integration into the European Union internal energy market. ECSEE Risks and Potential ControversialAspects ECSEE has been developed and i s being implemented through a comprehensive coordination and implementation mechanism. It has gone through extensive discussion and debate. The Bank's work in the ECSEE context, published inthe March 2004 framework paper (footnote 2), has highlighted risks and contributed to risk mitigation measures. Risks are being minimized by adopting a gradual approach to market opening and voluntary approach to trading. Though market i s being opened, meaning an increasing number o f electricity consumers will become eligible to choose their electricity supplier, trading is not mandatory but voluntary between willing sellers and willing buyers - customers in individual countries need not and are not expected to move at the same pace. The pace o f liberalization may nevertheless trigger controversy. Adjustments can be accommodated in the finalization o f the ECSEETreaty, including derogations and subsequent modifications in accordance with the practice o f the EuropeanCommission. Potential controversies can be occasionally expected in the development o f new generation capacity due to differences between sizes o f markets and investment requirements o f various countries ( for example Turkey's investment requirement i s bigger than the rest o f the region's combined).. Also, individual countries may propose projects that are not necessarily optimal choices inthe regional context, interms of size, fuel choice, location or commissioning schedule. ECSEE implementation mechanism provides a number o f venues to discuss and resolve such issues, including the Ministerial Council as the final step. The Bank-administered currently ongoing generation investment study is expected to help identify the highest priority regional projects, inpart facilitating the resolution o fpotential disputes. Another potential area for controversy, also mainly in the area o f power generation, i s the progressive upgrading and implementation o f environmental legislation in countries that do not have short-term prospects o f EU accession. The Regional Members are to progressively align their environmental standards and the countries are expected to make best efforts to accede to the Kyoto Protocol. The potential controversy is not about the desirability o fthese objectives but their affordability - this i s an area where the region will require assistance from the international community. It mustbe emphasized that the SEE region faces a fundamental risko fnot beingable to meet the growing demand for electricity. ECSEE i s the regarded as the best possible mitigation measure for that risk, which ifmaterialized,wouldthreatentheeconomicgrowthprospectsandaffectthequalityoflifeintheregion. Through ECSEE - a regional market o f countries with harmonized and EU-compatible legislation and institutions underpinned by a legally binding international Treaty - the region will develop an EU- compatible regional market and thereby represent a much larger and more attractive investment destination to prospective investors. Integration o f ECSEE into the internal energy market o f the European Union will not only provide the region opportunities to export energy into the Community, but to also import energy to help meet shortfalls, including system emergency situations. Plant-by-plant costs o f electricity generation vary within countries and across the region. Ina regional market and as market liberalization advances, customers that exercise their freedom to choose their supplier will naturally seek competitive suppliers. This will put pressure on higher cost and less competitive suppliers to improve their performance. But there i s also potential for controversy: (a) some of the most uncompetitive plants may be forced to close; and (b) some o f the less attractiveheliable 16  customers may end up paying more for their electricity as generators/suppliers will prefer to sell to more creditworthy clients, possibly located in other countries. In principle these hnds of potential controversies are part o f any functioning market. However, it i s expected that countries will seek to mitigate some o f the impacts in the transition period by managing the initial power contracting process. The projected tightening electricity demand and supply situation inthe region will also provide more time for the higher cost generators to improve their performance before competition increases along with new investment. However, for the same reason, tightening demandsupply outlook, less creditworthy consumers will find it increasingly difficult to secure power supply. This should provide a powerful momentumto improve payment discipline. 2. ECSEEAPL The Use of Adaptable Program Lending (APL) for ECSEE The key policy and institutionalelements for an APL program have been defined and established. The Energy Community o f South East Europe (ECSEE) i s a regional program, with strong country commitment and with well-established coordination mechanisms at the highest political level, at the level o f regulators and transmission companies in the region, as well as among donors supportingthe program, plus a the ECSEE Forumwhich bringsthem all together with other stakeholders. ECSEE i s a regional program and the Bank investment support i s being provided using the APL instrument, horizontally on a regional basis (to support up to eight countries and Kosovo) and vertically (each country can in principle receive support from more than one APL installment over the APL program period). An APL enables the Bank to provide regional financial support to a regional program, yet financing could be tailored to the needs o f individual countries to help them meet their commitments to ECSEE. APLl presented the ECSEE program and the first country project in Romania that the Bank would finance. APLl was presented to the Board on January 27, 2005- the Board approves all first-phase APLs under regular procedures. The approval of subsequent APL phases was delegated to the President and exercised by the Regional Vice Presidents under the oversight of the Managing Director. Subsequent country projects would be processed each at its own pace and when ready, each PAD would be submitted for approval by ECA's Vice President. EachPAD would be circulatedto the Board for information after Management approves the follow-on operation inprinciple. Management approval becomes effective 10 working days thereafter, unless at least three Executive Directors request a regular Board discussion duringthe 10-day time period. Each country/project could proceed at its own pace and not be heldback bythe Bankneedingto combine several projects for the purpose o fprocessing or approval. APLs typically have 3-5 phases. In the case o f the ECSEE APL, APLI presented the first country project in Romania together with the APL program. APL2 phase would cover other country projects approved within FY05, APL3 phase would cover country projects approved in FY06, and APL4-5 phase projects approved inFY07-08-this phasingprovides for a four-year program (FY05-FY08). Each APL installment would have an implementation period up to five years. The implementation o f some of the projects inAPL5 could continue untilFYO13. APL Triggers Two sets of triggers apply under the APL. Policy triggers determine the eligibility of an individual country to receive Bank assistance under the APL program. Project triggers determine when an individual investment i s eligible to receive Bank funds. 17  Policy Triggers A fundamental eligibility criterion for a country to qualify for Bank support is the signing o f the Athens Memorandum - all prospective clients signed the Memorandum on December 8, 2003 and thereby they all meet this requirement (the Athens Memorandum i s the base document o f the ECSEE). Horizontally under the regional APL, a country becomes eligible to borrow once it has met ECSEE's basic entry conditions as they were defined in the Athens Memorandum - the ECSEE APL requirements are that an electricity sector regulator and a transmission system operator have been established and are operational. It is currently expected that all Regional Members would meet this condition by mid-2006 at the latest. Vertically, a country remains eligible for Bank support under the ECSEE APL program as long as the country signs and ratifies the ECSEE Treaty and meets its key obligations under the Treaty. For a countryhorrower to be or remain eligible for Bank support under the APL program the Bank also needs to be satisfied that the countryhorrower has the ability to effectively participate in the regional market, With this trigger, the Bank would reserve the right to defer or withhold ECSEE APL support in cases where a country might have complied with the letter o f its ECSEE Treaty commitments but not have implemented or launched credible programs o f other critical measures that are needed for market participation such as, for example, reasonable tariffs, adequate bill collection, and systems for electricity market and power system operations. The current version o f the ECSEE Treaty calls for the opening o f the electricity market to all non- household customers by January 1, 2008. It i s possible that in the course o f the final negotiations o f the ECSEE Treaty, t h s ambitious deadline will be adjusted - the Athens Memorandum contained even more aggressive targets which have since been reviewed and adjusted. The target dates that will be applied as triggers under the ECSEE APL program will be those incorporated in the final version o f the Treaty including derogations and subsequent modifications agreed by the European Commission and ECSEE Regional Members. Triggers will not be applied to loans/credits already approved. As an example, the proposed APL2 loan to TEIAS does not have conditions (equivalent to dated covenants) about the country having to meet triggers for future APLs and a possible failure to meet such hture triggers will not jeopardize the implementationo fprojects that are under implementation. CASFramework Bank assistance to the individual projects will be committed through loans and credits to individual countries within the framework of the Country Assistance Strateges (CAS), although in some cases funding additionalto that forseen inthe CAS may be required: (a) By signing the Athens Memorandum, countries have signaled their commitment to the regional market. This does not automatically mean that each country would be interested inborrowing from the BanWIDA - as o f September 2004, Bulgaria and Croatia have not shown strong interest; (b) The financing situation will vary from country to country. IDA countries will need to be able to get additional IDA resources for their participation in a regional program. For some IBRD countries, the APL Loans will fit withinthe fundingforseen intheir CAS while for others they willbe additional. 18  Compliance by the country/utility o f its commitments under ongoing Bank operations in the powedenergy sector will not be an additional trigger. The use o f the APL program as an additional leverage to address issues under ongoing operations will be limited to areas where non-compliance affects the utility's ability to participate in the regional electricity market, for two reasons: (a) to retain strong regional approach and focus on ECSEE; and (b) to keep the implementation o f the APL program manageable. This approach i s in line with the IDA pilot program for regional projects, which calls for flexibility even when a country i s in arrears to the Bank, if its participation i s crucial to the success of a regional project. Components for Bank Financing The Bank has prepared a strategic study o f its support for regional energy trade. The study (ESW) highlightsthat significant investments are required in power generation, transmission and distribution for a well-functioning power market. The Bank would be prepared to consider a broadrange o f investments for support under the AF'L program: (a) Power Generation Major new generation projects are not proposed for Bank financing under this APL program: (a) Regionalprioritization ofpossible projectsisnot yet available. It will be established under a recently launched study (one o f the Bank's contributions to ECSEE i s the administration of this study, at the request o f the European Commission); and (b) Bank Group participation in such large projects is better dealt with on a case-by-case basis due to their large financing needs. However, the Bank would be prepared to consider plant rehabilitations in cases where the priority and cost- effectiveness o f the renovations can be readily established. Such projects offer one o f the best approaches to provide ancillary services to power system operators (ancillary services include all services other than the production o f energy provided by generators necessary for the operation o f the power system, such as frequency support, reactive power, and spinning reserve), by restoring capacity and improving plant availability and load-following capability (ability to follow dispatch instructions from system operators). This is inline with the Athens Memorandum, which highlights the inclusion o f plant rehabilitations among regional investment priorities. @) Power Transmission and System Operations The region requires additional interconnections including links to UCTE. These main projects have been studied and prioritized by USAID as part of ECSEE preparations. Albania-Montenegro, Serbia-Hungary, Croatia-Hungary, Macedonia-Albania, Hungary-Romania and Bulgaria-Greece are among the highest priority links. Interconnection of Turkey (expected to be developed by 2006) and the Kosovo-Albania interconnection (being studied under Bank financing) were beyond the scope o f the USAID study, but both are clearly also high priority items. Other high priority transmission investments will also include transmission line and substation reinforcements within individual counties - a link between two countries or between the region and UCTEwill be useful only ifpower canbe moved across countries with reliability. Transmission system operators in the region are typically also responsible for system operations. This i s an area where several countries will need to upgrade their facilities and install new load dispatch and communication systems. A study carried out for USAID recommended the following projects for submission to international financing and commercial credit institutions: Croatia, Macedonia, and Serbia and Montenegro. The EBRD and EIB are currently considering financing the project in Serbia, but Croatia, Macedonia and Montenegro are yet to confirm financiers. (c) Power Distribution Power distribution projects are typically local undertalungs and Bank Group support would continue to be provided mainly under individual country projects, for example, distribution reinforcement projects to modernize aging systems and reduce system losses. However, the Bank would support metering and/or telecommunications programs, which are designed to quickly enhance revenue realization and/or coordination and communications capabilities o f distribution utilities so that they can more effectively participate inthe regional power market. 19  (d) Technical Assistance Along with investments, APL projects can finance a wide range o f technical assistance: (a) Institutional Development - establishing and/or strengthening the regulators, transmission companies/system operatordmarket operators, and distribution system operators to implement the required rules, codes and regulations, power exchanges and settlement systems, etc.; and (b) Project Preparation and Implementation -engineering and environmental services to (1) prepare projects for financing by the Bank under alter APL installment and/or by other financiers and (2) help implement projects. Environmental Considerations The Bank's standard environmental requirements would apply to projects supported under the APL program. An environmental management plan acceptable to the Bank wouldbe finalized and disclosed inthe country and submittedto the InfoShop prior to project appraisal of category B projects. More comprehensive environmental impacts assessments would be required for category A projects, ifany. Most projects to be financed under the program are expected to be category B projects, but some generation renovation projects might receive category A ratings. The APL instrument i s well suited to dealing with the uncertainties and delays that environmental management plans, assessments and consultations often cause in Bank projects. Unlike a regular multi-component investment project, which gets delayed if any o f its components get delayed, under the APL program, other APL projects can proceed and only the one APL project that i s delayed i s affected. Therefore, it does not appear necessary to "automatically" exclude all generation projects from further consideration but it is important to identify potential projects early and then launch preparatory work including environmental assessmentdmanagement plans to avoid delays on that account later. The US$ 1.0 BillionECSEEAPL LendingProgram Finance Perspective The US$1 billion size o f the ECSEE APL facility approved by the Bank may appear to be very large, and it represents a significant commitment inECSEE by the Bank. However, the financial requirements o f power development inthe region are very large, and the Bank's US$ 1.O billion has to be seen inthis perspective. The SEE region faces a fundamental risk o f not being able to meet the growing demand for electricity. Significant capacity additions (of the order of 12,000-15,000 MW) and plant rehabilitations (of the order o f 8,000-9,000 MW) will be required during the next ten years, along with matchingtransmission and distribution system investments ifdemand is to be met and severe power shortages and supply interruptions are to be avoided. Financing requirements are o f the order o f some US$30-40 billion and these are conservative estimates. The bulkof such financing, particularly inpower generation, can not be raised in the public sector alone, without significant private sector participation. Through ECSEE - a regional market o f countries with harmonized and EU-compatible legslation and institutions underpinned by a legally binding international Treaty - the region will develop a EU- compatible regional market and thereby represent a much larger and more attractive investment destination to prospective investors. ECSEE APL Country Programs The overall APL program requires an investment by the Bank of about US$l,OOO million, based on current estimates and subject to further review and change. A tentative breakdown is gwenbelow: 20  BankFinancing:under the ECSEEAPL Program(US$ million) APLl APL2 APL3 APL4 APLS FY05 FY05 FY06 FY07 FYOS TOTAL ALBANIA 24 30 54 BOSNIAAND HERZEGOVINA 36 30 66 BULGARIA CROATIA KOSOVO 5 5 MACEDONIA 25 25 ROMANIA 84 126 125 335 SERBIAAND MONTENEGRO 20 50 70 TURKEY 66 100 179 345 Unallocated 40 40 20 100 TOTAL 84 110 106 346 354 1,000 The above APL financing plan includes a proposed unallocated portion of US$100million (about lo%, in principle available any time when neededinthe FY05-08 period), which could be used to fundprojects in Bulgaria and Croatia (which have not expressed strong interest inthe APL facility) and/or provide higher volumes to others, or ifnot needed, would simplynot be committed. Approach to Co-financing In view o f the large financing requirements and the limited number of projects that each donor can appraise and supervise, the approach indonor coordination for the financing of ECSEE's priority investments i s that to the extent feasible, instead o f co-financing individual projects, donors discuss the financing o f priority investments and then take charge o f their respective projects: co- financing i s being done at the ECSEE program level, donors coordinate at the program level and each takes care o f specific projects. 3. The TurkishPower Sector Overview Turkish electricity demand has been growing rapidly for a number o f years as the country industrializes and becomes more urban. From 1990 to 1999 it grew about 8.5% per year but then slowed down during the last four years (1999-2003) to 4.7% per year due to the major earthquake in late 1999 followed by a severe economic recession in 2001. Looking ahead the forecasts of electricity demand growth for the rest of this decade vary from about 5.0% to 9.0% per year depending primarily on the rate of GDP growth with electricity demand growth slowing somewhat inthe following decade. Turkey's current installed capacity i s 36,856 MW, o f which 20,110 MW or 54.5% is operated by the Government-owned EUAS and its affiliates and the rest is by the private sector. Currently Turkey has excess generating capacity due primarily to the state-owned companies contracting for more generating capacity than was required. The contracting was done based on the electricity demand estimates which turned out too highbecause, as mentioned above, GDP growth was substantially less than expected due to the 2001 economic crisis and the 1999 earthquakes. Both of these events produced economic recessions o f 5% or greater. Depending on growth in Turhsh electricity demand, it i s likely that by about 2009-2010 the country will again need additional generating capacity. Some o f this required power could be imported as was the case in the early part o f this decade provided synchronous parallel operation i s achieved. 21  Restructuring and Private Participation The Govemment until the 1990s tried to fund the entire increase inthe required electricity generating capacity itself. However, this finding requirement became a major burden and it was decided to encourage private investment in generation. The first model used was the BOT (build own transfer) model whereby private developers were encouraged to build plants, operate them and then transfer them to the Government. While 2,349 MW of capacity was developed under this approach, the prices paid for this electricity were high and considerably above the prices at which TEAS (later TETAS) was selling electricity. Also the BOTSrequiredlong term contracts with high guaranteed minimumoff-takes from the power plants. The Government then arrange for power plants to be built under the BOO model (buildown operate) which requiredmuch lower electricity sales prices but the developers still required long term contracts with guaranteed high volume off-takes. Meanwhile private Turlush firms began to set up their own generating facilities using the so called Auto-producer model. These power plants tend to be small and often produced both heat and power. They sell to related customers, often a factory or other facility ownedby the developer. By late 2000 itbecame clear that Turkey needed to move to a market model for its electricity sector, with generation and distribution owned by the private sector and a regulatory body to ensure that the market worked properly and that the distribution monopolies didnot exploit their positions. InFebruary 2001, the country passed the Electricity Market Law (EML) to create such an electricity market. This law ledto the unbundling o f TEAS into generation (EUAS), Trading and Contracting (TETAS) and transmission (TEIAS), and to the establishment of the Energy Market Regulatory Authority (EMU). The latter organization provides oversight to the market (although it does not run it), licenses generation, distribution, trading and transmission companies, and regulates distribution and transmission tariffs. The EML also allows eligible consumers to purchase electricity from whomever they wish notjust from the distribution corporation which provides the connection to the grid. Inorder to establish the electricity market, the next steps are to establish a transitional market based on voluntary bilateral contracts and a mandated balancing market, and to privatize most o f the distribution and generation assets in the sector, which are still mostly owned by the Govemment. The government, assisted by the Bank and a panel o f experts, i s worhng on implementing the transitional market, which will require about US$18 million in software, computers etc. It i s proposed that this amount will be funded under the ECSEE AF'L2. The Govemment in a strategy paper dated March 17, 2004 committed itself to the rapid privatization o f distribution and most government owned generation assets. TEDAS would be split into 21 distribution regions and o f these, 20 regions would be privatized. The regions have now been defined and financial statements for them are beingprepared. Under current plans these regions should be privatized in 2005-2006. Six generation companies are expected to be created. These generation companies would contain all o f EUAS current thermal generation plants and about 4,000 MW of its 11,000 MW o f hydropower generation. They would average about 2,600 MW each in size. The privatization o f these generation companies i s planned to follow the privatization of the distribution companies. Electricity tariffs in Turkey are fairly high averaging around 8.5 U S cents per kWh excluding VAT. They have been fairly stable at this highlevel for about two years. The mainreasons for this highlevel of tariffs are the high prices paid to the BOTSfor electricity, elevated prices for natural gas supplied to EUAS power plants and BOOS,and high losses in distribution which average around 18%. These high distribution losses are partly due to theft and vary greatly from one part o f the country to another. They tend to be quite highinthe Eastem and South Eastern parts o f Turkey but low inthe Western part o f the country. It i s expected that the privatization o f distribution will result ina sharp reduction inlosses. Turkey i s not yet a member o f UCTEbut would like to join. The current project and the Athens process will assist it indoing this. There are currently two connector lines to Bulgaria and another connector line 22  to Greece under construction. (This connector line i s funded under the NTGP) Despite its having only two existing connector lines and one under construction, Turkey i s not strongly joined to UCTE considering the large size o fthe TurkishPower System. The country, however, has substantial advantages it could offer to the rest o f UCTE. Much o f its hydropower capacity i s inmulti-year reservoirs and thus could be easily made available for meeting peak demand in Europe if the controls, systems and transmission capacity were available. Also because Turkey i s one hour ahead o f the major demand centers in Western Europe its peak arrives earlier and it is in a good position to help Western Europe meet its peak. 23  Annex 2: Major RelatedProjectsFinancedby the Bank andother Agencies EUROPEAND CENTRAL ASIA: Energy Communityof SouthEastEurope(APL2) The following i s a selective listing o f related projects and highlightso f those that are directly supporting ECSEE's development. The World Bank has ongoing projects inthe electricity sector inmost ECSEE counties, and technical assistance in Kosovo. These projects support various aspects of power sector reform and restructuring, including financial aspects, and inter alia help build the foundation for the development o f a regional electricity market and participation by the respective countries/utilities. The ThirdPower Reconstruction Project in Bosnia and Herzegovina i s instrumental for the resynchronization of the so-called second UCTE zone (Eastern part of Bosnia, plus Albania, Bulgaria, Macedonia, Romania, Serbia and Montenegro) with the Western part o f Bosnia and Croatia, and the main UCTE Westem Europe power system. The European Union supports power sector reform and restructuring under its technical assistance operations inthe region. Through its Phase program, in a large project co-financed with EIB and EBRD, it is alsoproviding investment support to Transelectrica inRomania. EBRD has ongoing power sector projects in Albania, Bosnia and Herzegovina, Bulgaria, Macedonia, Romania and Serbia and Montenegro, including private sector power generation inBulgaria. EBRD has just approved a project that will implement the second interconnection between Hungary and Romania. T h i s interconnector will be one o f the means for the integration o f ECSEE into the intemal market of the EuropeanUnion. EIB has ongoing power sector projects inBosnia and Herzegovina, Bulgaria, Macedonia, Romania and Serbia and Montenegro, often inco-financing arrangements with EBRDand/or the Bank. KfW has ongoing power projects inAlbania, Bosnia and Herzegovina, Kosovo, Serbia and Montenegro, and Turkey. Technical Assistance. Several Bank projects also provide technical assistance. Most noteworthy inthis context are the ongoing projects in Romania and Turkey, which support the development o f electricity markets. The Spanish Government has provided support through a trust fund to help the Bank review ECSEE investment projects and to help fund an electricity market expert panel for Turkey. CIDA of Canada i s providing regional technical assistance (the SEETEC project) for the development o f regional electricity market in South East Europe. USAIDis providing technical assistance on legal and regulatory aspects o f power reforms and restructuring, including institution-building support to the regulator agencies, throughout South East Europe, as well as regional studies on power trade and required communication facilities for the development o f ECSEE. Annex 5 of the Bank's March 2004 framework paper (footnote 2) contains a comprehensive listing o f technical assistance in the ECSEE context. The Italian Government may provide technical assistance for ECSEE preparatory work to ECSEE Regional Members. All of these agencies/countries except Spain are members o f the ECSEE Forum. 24  Annex 3: ResultsFrameworkandMonitoring EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APLZ) ResultsFramework PDO Outcome Indicators Use of OutcomeInformation The objective o f the Project is to support (1) Electricity markets in South-East An increasing number of electricity the implementation o f the investment Europe are liberalized in accordance consumers are free to choose their programs o f TEIAS, including: (a) with the ECSEE Treaty (including electricity supplier. creation o f a market management system derogations and subsequent for the management o f the electricity modifications, if any) and a regional market; (b) strengthening supervisory electricity market i s functioning; control and data acquisitiodenergy management system to enable TEIAS to (2) APLZ projects are completed in Turkey operates in the regional power operate more efficiently; and (c) Turkey and its electricity market and market in accordance with the ECSEE provision o f transmission grid power systems operate with the help o f Treaty. strengthening and expansion for overall these new investments. stability. IntermediateResults Results Indicators for Each Use of Results Monitoring One per Component Component Component One Component One Component One: TurkeyiTEIAS - market management Market management system supports the Turkey's TSO and market operator, system is implemented. operation o f the electricity market TEIAS, operates a functioning market and carries out its electricity market operations with an increasingly regional approach. Component Two: Component Two: ComponentTwo: SCADMEMS expanded and upgraded More reliable and effective system TSO operates reliably and effectively to operation control system and electricity trade. Component Three: Component Three: Component Three: Main transmission rehabilitation Transmission System improvements are Transmission system operates effectively contracts are implemented completed and provide infrastructure for allowing increasing exchanges and trade the electricity market. o f power with the rest o f ECSEE 25  3 6 x 5 " e) 0 * 9, s 0m ** E x ** 9, * % i s g m 0 0 o 0 i .I eE .e c2 E E +s c B E x b VI 2b cU aE C E b 4  Annex 4: Detailed ProjectDescription EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL2) This project finances a portion of TEIAS' investments over a period o f 5 years. These investments financed by the Bank represent less that 7% of TEIAS' total investments during that period. With regard to APL 2 TEIAS i s expected to contribute more than $20 million to the project in the form o f land, IDC, physical and price contingencies. The Bank's financing o f the project i s less than 70%. Turkey/TEIASprojects(EUR50.6 million,US$66millionequivalent, inAPL financing): Component 1:Market Management System (EUR 13.8 million inAPL financing) -M M S is the balancing and settlement system that is critical for the implementation o f the electricity market. The APL will fund software, hardware as well as training required for implementing the balancing and settlement system. Component 2: Strengthening o f National LoadDispatch (EUR 17.94 million) -This component will finance RTUs, regional control centers (RCC), control center equipment, communication equipment and expansion / revision o f the EMS programs. Component 3: Transmission system reinforcement (EUR 18.6 million) - The loan will also finance the strengthening and renovation of existing sub-stations, for improving system stability and meeting load growth requirements. This component will also include O&M equipment such as circuit breakers, switches, transformers, and substation monitoring systems. 27  Annex 5: ProjectCosts EUROPEAND CENTRALASIA: Energy Community of SouthEastEurope (APLZ) Turkey Project Cost By Component andor Activity Local' Foreign Total U S $million U S $million US$million Market Management System 18.0 18.0 National LoadDispatch System ( ScaddEMS) 23.4 23.4 Transmission SystemReinforcement 13.5 24.3 37.8 Total Baseline Cost 13.5 65.7 79.2 Physical Contingencies 3.0 3.O Price Contingencies 4.0 4.0 Total Project Costs' 13.5 72.7 86.2 Interest duringconstruction 0.0 4.97 4.97 Front-end Fee 0.33 0.33 Total Financing Required 13.5 78.0 91.5 'Local expenditures in local currency paid by TEIAS. It consists of land, identifiable taxes (excluding VAT) and duties. 28  Annex 6: ImplementationArrangements EUROPEAND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL2) The project will be implemented by TEIAS, the government-owned utility responsible for planning, designing, developing, operating and maintaining the transmission system in Turkey. TEIAS i s also the operational backbone o f the new market being put in place. It is responsible for system operation, for the balancing market and for settlement administration. The Government i s using international advisors for designing and implementing various parts o f the reform program in the power sector. These consultants are being financed by the Bank under the National Transmission Grid Project (NTGP). The Government i s also supported by an international panel o f experts who advise on the development o f the overall strategy and implementation plan, the process o f privatization and the design and implementation o f the market. The panel also provides oversight to the work o f the consultants. This panel is financed byvarious sources o f grants, such as PPIAF andthe SpanishTrust Fund. The planning and design o f new investment is carried out by the Planning department o f TEIAS. The procurement and implementation i s supervised by the regional Transmission Construction departments. The scope of the transmission reinforcement works has been arrived at through system studies showing the weak and overloaded sections o f the system. The specifications o f the market management system are being prepared by TEIAS' consultants who are supporting the design and establishment o f the electricity market and the associated balancing and settlement system. These consultants are funded byNTGP. TEIAS set up a Project Implementation Unit (PCU) to manage the implementation o f NTGP. The implementation o f the APL projects will also be handled by this PCU, which i s headedby an Assistant General Manager. The PCU coordinates the procurement o f goods and works, and it also manages disbursements from the loan. The PCU will also coordinate the consolidation o f information and prepare progress reports on the Project. A majority of the procurement is expected to be through intemational competitive bidding, in accordance with Bank guidelines. Most o f the contracting will be on a "supply and installation" basis, and will only require supervision from TEIAS. A procurement and implementation plan has been prepared (See Annex 8). 29  Annex 7: FinancialManagementandDisbursementArrangements EUROPE AND CENTRAL ASIA: EnergyCommunity of SouthEastEurope(APL2) TURKEY/TEIAS Summary of Financia1ManagementArrangements An assessment o f the financial management arrangements for the project was undertaken inMay 2004 and October 2004. TEIAS financial management arrangements are not fully satisfactory to the Bank and temporary arrangements are being undertaken to address the project financial management issues. These temporary arrangements will be relied upon until TEIAS buildsup its financial management capacity. A summary o f the main conclusions for project financial management purposes are as follows: IRATING ICOMMENTS 1. ImdementingEntity I Satisfactory I mereis aPCU inplace. 2. Fundsflow Satisfactory TEIAS did not haveanyproblemswith the NTGP funds flow. 3. Staffing Marginally Qualificationsandexperienceof the current Satisfactory staffare satisfactory.Additional staff assignments shouldbe made as the workload will increasedue to the new project. 4,AccountingPolicies andproceduresfor the Marginally Accountingpoliciesandproceduresfor the project Satisfactory projectshouldbe documented. 5. InternalAudit I "4 INo relianceon internalaudit 6. ExtemalAudit Satisfactory TEIAS hasbeenengagingthe servicesof independentauditorssince it came into existence in2001. TEAS, its predecessor, also engaged independentauditors. 7.ReportingandMonitoring Satisfactory. The formats and contents of the FMRs determined andagreedwith the bank. 8. Informationsystems Marginally TEIAS hasbeen usingintegratedexcel sheets Satisfactory for NTGP. These will be utilized for ECSEE APL 2 as well. OVERALL FMRATING Satisfactory 30  Country Issues A Country Financial Accountability Assessment (CFAA) for Turkey was carried out in2001. The CFAA report identified major weaknesses in the Turlush financial accountability, in both the public and the private sectors. In view o f this the CFAA concludes that to ensure Bank funds are used for the purposes intended, ring fenced financial management arrangements are more appropriate for the implementation o f Bank financed investment projects rather than relying upon government systems. State Economic Enterprises in Turkey are subject to basic accounting and auditing obligations which apply to companies in Turkey. These are laid down in the Commercial Code, which was last revised in 1956. More detailed requirements were introduced in the Tax Procedures Law o f 1950 (which has since been consolidated into the Tax Procedures Code). Under the powers granted to it by the Code, the Ministry o f Finance (MOF) introduced a Uniform Chart o f Accounts which became effective on January 1, 1994. This prescribes certain fundamental accounting concepts, a code o f accounts, and a format for the presentation o f financial statements which, with the exceptions listedbelow, i s applicable to all limited liability companies. (There are simplified requirements for small businesses, which constitute the majority o f taxpayers by number.) The purpose o f these requirements i s to provide information to the taxation authorities, there i s no obligation to publish the financial statements, nor are they subject to a mandatory financial statement audit. Large companies are required to have their financialhax statements certified by a Sworn CertiJiedPublic Accountant (see below), but this process o f certification i s concerned with tax compliance issues, and i s not a financial statement audit. The electricity sector in Turkey is regulated by the Energy Market Regulatory Authority (EMRA). EMRA was createdby the Electricity Market Law on March 3,2001. The law aims at ensuring the supply o f good quality, low cost, environmentally friendly electricity to the users in the required quantities. It also aims at establishing an electricity sector that i s financially sound, transparent and competitive and that i s subject to independent audit. The regulation published in the official Gazette dated October 3, 2003 sets the standards for audits o f the energy sector companies. It also refers to the regulations o f EMRA on accounting and reporting by these companies. However these regulations are still under preparation by EMRA. 31  RiskAnalysis A summary o fthe riskassessment for the project is as follows IRisk IComments INHERENT RISK I 2. 1. CountryFinancialManagementRisk High Basedon CFAA report ProjectFinancialManagementIssues 1 3. Counterpart funds Moderate Overall InherentRisk Moderate CONTROL RISK 1. ImplementingEntity Moderate TEIAS doesnot have a soundfinancial management environmentand therefore corporationsystems will not be relied upon until such capacity is built up. 2. FundsFlow Negligible 3. Staffing Moderate Two additionalstaff will be assignedby effectiveness. I4. AccountingPoliciesand Procedures ISubstantial ISee 1 above I 5. InternalAudit INIA 6. ExternalAudit Substantial The auditorshavebeenissuingdisclaimer audit opiniononTEIAS financial statements. TEIAS will developan action planto addressthese issues andthe progress will be monitoredcloselythrough Bank supervision. 7. Reportingand Monitoring Moderate FMRswill be generatedby the integrated I 8. Information Systems Moderate Integratedexcel sheets will be generatedfor the project OverallControlRisk Substantial Risk Mitigation Strategy Country financial management risk -the project will be implemented by TEIAS an institution well experienced inthe implementation o f Bank projects. Control Risk TEIAS i s required to prepare an action plan to address these issues and aim for a - qualified or clean opinion on its financial statements. Progress in this area will be monitored closely by the bank through frequent supervision missions and also through facilitating dialogue with the relatedparties. T E N S i s currently in the process o f updating its systems by acquiring an Enterprise Resource Planning Program (ERP) which will facilitate on line connection between the regions and the headquarters as well as generation o f financial statements automatically. Temporary measures will be taken for project reporting and integrated excel sheets will be used for this purpose. However to ensure that sound accounting systems installation occurs, TEIAS is committed to 32  have the ERP functional in 2007 and this will be monitored closely by the Bank by providing the necessary technical resources. Implementing Entity The project will be implemented by Turkish Electricity Transmission Corporation (TEIAS). TEIAS i s a State Economic Enterprise (SEE) established in 2001 and has taken over the electricity transmission functions o f TEAS the former generation and transmission corporation. TEIAS i s responsible for running all transmission facilities in Turkey, planning transmission facility investments, building and running them. TEAS has implemented various Bank projects and currently TEIAS i s the implementing entity o f the National Transmission Grid Loan. TEIAS has a World Bank Projects Coordination Department and this department will be responsible for overall coordination o f the project. The financial management functions under the project will be carried out by the Financial Department (FD). The current information systems of TEIAS are inadequate and integration o f the accounting and reporting systems i s required for sound financial management at TEIAS. There i s no network connection between regions and the headquarters and there i s not a central data base for financial data storage. Therefore financial reports are produced manually. To address these deficiencies TEIAS is in the process o f purchasing ERP; an integrated financial management system which will include a management information system, related hardware, software and procedural standards. This i s discussed above. The risk associated with the implementing entity i s considered as moderate. The installation o f ERPwill improve the financial management environmentat TEIAS. Funds Flow There will be a special account for the project for disbursements from the World Bank loan. This account will be in U S Dollars and will be at a government owned commercial bank. The commercial bank will be selected by TEIAS and will submit a comfort letter to the World Bank. Payments to the contractors, suppliers and consultants for the Bank funded portion will be made from this account (except direct payments). The Financial Department o f TEIAS will be responsible for making both these payments as well as counterpart fund payments. The head o f the related department will authorize the payments. TEIAS will specify two authorized signatories and payments from the special account will be made with the approval o f one o f these authorized staff. The project i s inthe investment program o f TEIAS. TEIAS is a revenue eaming entity and access to the counterpart funds has not been a problem to date inNTGL. The riskassociated with funds flow i s considered as negligible. Staffing The financial management arrangements for the project will be the responsibility o f the FD of TEIAS. The FD staff are adequately qualified and experienced. However the new project will increase the workload substantially and the department i s currently understaffed. Consequently assignment o ftwo additional staff with adequate qualifications and experience i s required. The risk associated with staffing i s considered as moderate. 33  Accounting Policies and Procedures The project accounting will be maintainedby the FD.The corporation has financial management manuals and guidelines. The main transactions, that i s the movements o f the special account and project expenditures will be in the Corporation's main accounting system. However the current accounting software o f the institution i s old and the production o f the project financial statements directly by the system i s not technically possible. TEIAS is in the process of upgrading its reporting systems. The terms o f reference o f the new Enterprise Resource Planning Program (ERP) includes arrangements for producing detailed reports for project purposes. However ERP is not expected to become functional before 2007 and therefore, as in NTGP, integrated excel sheets will be generated to produce the project financial statements. These sheets will be reconciledregularly to the main accounting records. TEIAS accounts have been audited by Deloitte and Touche in accordance with IFRS and ISA. The issues in the auditors opinion on TEIAS financial statements for the years ended December 31, 2003, 2002 and 2001 are discussed inthe external audit section below. The auditors have also issued a management letter where they set out their comments and recommendations concerning internal controls and accounting procedures based on their observations during their audit of financial statements. The observations fall under the following main headings; 0 Data Control Some immaterial recording mistakes observed. TEIAS will take the necessary precautions to address these deficiencies. 0 Experience of personnel in the accounting department and also in other departments. The auditors recommend that people worhng in the departments should be selected among personnel who have relevant backgrounds and the current personnel should attend occupational training programs. T E N S agrees with the recommendations. However they are limited by the government personnel policy. They state that the necessary precautions are taken within the legal limitations. The management letter revealed that the control environment at TEIAS should be improved. EMRA is currently preparing regulations relating to accounting and financial reporting in the energy sector companies. They have also publishedregulations relating to the audit o f companies in the sectors. The energy sector institutions are responsible for having sound internal control procedures inplace within the scope o f these regulations. TEIAS has an investigation department and they are responsible for investigating the irregularities as well as auditing on a regular basis the departments and regional offices. In order to strengthen the control environment, it is highly recommended that the Investigation department includes internal control procedures within its scope o f work. Accounting procedures for the project will be set out inthe project financial management manual. The manual will cover (a) the financial and accountingpolicies and procedures for the project (b) organization of the financial management (c) the financial management information system (d) disbursements (e) budgeting and financial forecasting (f) project reporting and (8) project planning procedures. The risk associated with accounting policies and procedures for the project i s considered as substantial. TEIAS will develop an action plan to address the issues included inthe audit opinion as well as the management letter. The progress will be monitored by the Bank through frequent supervision. 34  Internal Audit TEIAS has an investigation department and they are responsible for investigating the irregularities as well as auditing on a regular basis the departments and regional offices. In order to strengthenthe control environment, it i s highlyrecommended that the Investigation department includes intemal control procedures within its scope o f work. N o reliance will be placed on intemal audit. Reporting and Monitoring TEIAS will maintain records and will ensure appropriate accounting for the funds provided. Financial statements for the project will be prepared by TEIAS. The Financial Monitoring Reports (FMR) will be prepared semi-annually and will be submitted to the Bank no later than 45 days after the end o f the semi-annual period. The format and the contents o f the FMRhave been agreed upon with the Bank. The FMRs will include the following items: 0 ExpenditureTables 0 Special Account Statement 0 Procurement Tables 0 Output MonitoringReports The financial management manual o f the project will include a section on the FMRs and formats o f these reports will be detailed there. The risk associated with reporting and monitoring i s assessed as moderate. The FMRs will be generated by the use o f integratedexcel sheets that will be used for project accounting. I nformation Systems TEIAS has been usingthe integratedexcel sheets for NTGP successfully and will continue to use them for ECSEE AF'L 2. The current accounting software o f TEIAS i s old and therefore it i s not possible to integrate detailed project accounting and reporting into the main system. The risk associated with information systems i s assessed as moderate. T E N S will generate the integrated excel sheets for the project before Board date. Strengthsand Weaknesses The significant strength that provides the basis for reliance on the project financial management system i s the implementing entity's experience with the implementation o f World bank projects and satisfactory FMrating for the currently implemented NTGP. The weaknesses inthe project are as follows: 0 The auditors opinion on TEIAS financial statements for 2003, 2002 and 2001 included issues discussed in the external audit section. TEIAS will prepare an action plan to address these issues and aim for a qualified or clean opinion on its financial statements. 35  Progress on this area will be monitored closely by the Bank through frequent supervision missions and also through facilitating dialogue with the related parties. 0 The current accounting software o fTEIAS is not an integratedsystem. It is used bothby the regions and the headquartersbut it is not online and financial statements are generated manually. As mentioned above, TEIAS i s currently in the process o f updating its system by acquiring an Enterprise Resource Planning Program (ERP) which will facilitate on line connection between the regions and the headquarters as well as generation o f financial statements automatically. Temporary measures will be taken for project reporting and untilthe ERP is functional in2007. Action Plan The financial management environment of TEIAS includes some deficiencies and T E N S should take immediate action to address these. Temporary arrangements will be relied upon for project accounting and reporting purposes. However, when TEIAS has a sound financial management environment reliance will be placed on the Corporation systems for project accounting and reporting procedures. The following action plan i s proposed to address the deficiencies in the TEIAS financial management environment and also to improve the temporary arrangements undertaken by TEIAS: Action Dead1ine 1. TEIASprepares an action planto address the December 31,2006 qualifications inthe audit report and aims at having an audit opinion with a qualified or clean opinion. 1 2. ERP will be installed and functional. January 31,2007 1.Two additional staff will be assigned to the Financial As soon as Govemment Agreement is obtained Operations Department 2. Project financial manual will be prepared September 30, 2005 Supervision Plan During project implementation, the Bank will supervise the project's financial management arrangements as follows; (i) At least quarterly supervision will be carried out to review progress with addressing the issues discussed in the audit opinion: (ii)Progress with ERP will be monitored on a regular basis (iii) project's quarterly financial management reports as well as the project's annual audited financial statements and auditor's management letter will be reviewed; (iv) during the Bank's supervision missions temporary financial management and disbursement arrangements will be reviewed to ensure compliance with the Bank`s minimumrequirements and (v) reliance on the corporation systems for project accounting and reporting will be undertaken once the Corporation systems are assessed as satisfactory. As required, a Bank-accredited Financial Management Specialist will assist inthe supervision process. 36  External Audit Annual project financial statements will be audited by Treasury Controllers. TEIAS financial statements will be audited by independent auditors acceptable to the Bank. As a requirement o f the ongoing NTGP, TEIAS i s subject to annual audits in accordance with Intemational Financial Reporting Standards and International Auditing Standards. The member firm o f Deloitte and Touche in Turkey is the current auditor o f TEIAS and this meets the external audit requirements o f the APL. Treasury Controllers have been the auditors o f the project financial statements for NTGP. The auditors opinions on the project financial statements have been unqualified for the years 2003 and 2002. Deloitte and Touche did not issue an opinion on TEIAS financial statements for the year ended 2003 due to the following qualifications; TEIAS assets included large amounts o f receivables from TETAS, TEDAS and EUAS that are not paid inan orderly manner. TEIAS stocks were valued at cost and net realizable value data was not available. There were outstanding title deedtransfers o f fixed assets previously belonging to TEK. Opinion could not be formed on the amount o f penalty interest that could become applicable on payables to Treasury. Possible effects o f lawsuits on the financial statements could not be determined as a comprehensive list was not available. Actuarial calculations o f accrued obligations resulting from retirement payments were not available and therefore these obligations were not reflectedinthe financial statements. Detailed data to discount the retirement pay provision obligation o f the corporation was not available. I A S 29 was applied to capital and income statement items. The data needed for the application o f this standard could not be obtained for intangble fixed assets, inventory items, equity participations, affiliates, legal reserves and constructioninprogress items. Fixed assets are presented with their indexed costs in the financial statements. Net realizable value data was unavailable. TEIAS has started applying transmission tariffs for producers and consumers in regions starting from April 1, 2003. The sales amounts between 1January 2003-3 1 March 2003 could differ from the amounts that would be created had the tariffs been in place during the period. They were unable to form an opinion on the amount o f such difference. The auditors were unable to quantify the deferred tax position o f the Corporation due to the non completion o f statutory tax reporting during the report preparationdate. 37  The risk associated with extemal audit i s assessed as substantial. TEIAS will prepare an action plan to address these issues and aim for a qualified or clean opinion on its financial statements. Progress on this area will be monitored closely by the Bank through frequent supervision missions and also through facilitating dialogue with the related parties. Disbursement Arrangements Special Account TEIAS will open and maintain a Special Account in Euro at a government owned commercial bank. The Special Account will be used following procedures to be agreed with the Bank, and will have an authorized allocation o f EUR 5 Million. Staff designated by TEIAS Management will be able to sign the withdrawal applications, with two signatures required. At the start o f the project, the initial deposit will be limitedto EUR 2.5 Million, and the remaining portions o f the authorized allocations will be requested only after cumulative disbursements from the loan reach a level o f EUR 8 Million. The minimumapplication size for payments directly from the Loan Account for issuance o f Special Commitments i s 20% o f the Special Account authorized allocation. Applications for replenishment o f the Special Account will be submitted to the Bank on a monthly basis, or when the balance o f the Special Account i s equal to about half of the initial deposit or the authorized allocation, whichever comes first, and will include a reconciled bank statement as well as other appropriate supporting documents. Use of statements of expenditure (SOEs): the disbursements will be made against Statements o f Expenditures for goods costing less than US$ 250,000 equivalent per contract. Full documentation in support of SOEs would be retained by the PCU for at least one year after the Bank has received the audit report for the fiscal year inwhich the last withdrawal from the Loan Account was made. This information will be made available for review during supervision by Bank staff and for annual audits which will be required to specifically comment on the propriety of SOE disbursements and the quality o f the associated record-keeping. Allocation of LoanProceeds ExpenditureCategory Amount inEuro ?4to be Financed Goods(includingSupplyand 50,347,000 100% InstallationContracts) FrontendFee 253,000 Total 50,600,000 38  Annex 8: ProcurementArrangements EUROPE AND CENTRAL ASIA: EnergyCommunity of SouthEast Europe(APLZ) A. General Procurement for the proposed project would be camed out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004; and the provisions stipulated in the Legal Agreement. The general descriptions o f various items under different expenditure category are described below. For each contract to be financed by the Loadcredit, the different procurement methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurement of Works:NoWorks contracts are foreseen inthe Project. Procurement of Goods/Supply and Installation: Goods procured under this project would include: Supply and Installation o f Balancing and Settlement System; Supply and Installation of SCADNEMS System for the National Load Dispatch; Supply o f Operational and Maintenance Material and Equipment for Energy Transmission System such as circuit breakers, current transformer, voltage transformers, thermal camera, mobile transformer, surge arresters etc.; Supply and Installation o f Transmission facilities including substations. It is expected that for the procurement of Balancing and Settlement System two-stage bidding for the supply and installation o f information systems will be applied. The procurementwill be done usingthe Bank's Standard BiddingDocuments for all Intemational Competitive Bidding(ICB). The procurement o f goods and services (other than Consultant Services) which should be procured as an extension of an existing contract must be purchased fkom the original supplier to be compatible with existing equipment or are of a proprietary nature must be procured from a particular supplier as a condition o f a performance guarantee may with the Bank's prior agreement be procured in accordance with the provisions o f paragraph 3.6 o f the Guidelines. TEIAS will provide a justification report for the Direct Contracting o f the Telecontrol Interface Equipment (TCI) before the Loan Negotiations. Procurement of non-consulting services: N o non-consulting services are foreseen in the Project. Selectionof Consultants:N o consultingservices are foreseen inthe Project. OperationalCosts: The project will not finance any operational cost. 39  B. Assessmentofthe agency's capacityto implementprocurement Implementation o f the Project will be the responsibility o f TEIAS, a govemment owned corporation responsible for the planning, design development, operation and maintenance o f the transmission network inTurkey. An assessment o f the capacity o f the TEIAS to implement procurement actions for the project has been carried out by Salih IS. Kalyoncu (ECSPS) on January 22, March 02, April 3, April 29 and duringthe period June 21-July 02,2004. The assessmentreviewedthe organizational structure for implementing the project. Under the existing National Transmission Grid Project (NTGP) TEIAS established a Project Coordination Unit (PCU) which follows up the Project Implementation and Procurement activities. The PCU has one coordinator and one secretarial staff. Considering that ECSEE Project will bringadditional work load on PCU, one additional technical staff who will follow up the ECSEE Project should be assigned to PCU. This technical staff should be fluent in English and preferably familiar with the Bank procurement procedures. Moreover, PCU should be sufficiently equipped to manage its activities effectively and supported by an assistant. TEIAS as an institution has a good knowledge about the Bank's operations. The number and the qualifications o f the staff who will be responsible in managing the ECSEE are sufficient for the satisfactory implementation o f the project. Majority of the staff speak Englishand have a good understanding o f the Bank's terminology. TEIAS is willing to change some provisions inthe Bank's Procurement Guidelines and Standard Documents such as not paying advance payment, to establish a firm blacklist, payments after the arrival of the goods to the construction site etc. InNTGP, TEIAS have agreed to follow modified bid evaluation form that gves full explanation and reduce need for queries. The same format should also be used under ECSEE Project. The following action plan for reducingprocurementrisks has been agreed: 1. Duringthe appraisal the Bank provided information to TEIAS procurement staff regarding the latest changes inthe Bank's procurement guidelines. Bidding documents, one for substations and another for transmission lines, based on the M a y 2004 version, were discussed between the Bank and TEIAS duringthe appraisal stage and will be agreed before the Loan effectiveness. 2. By the end o f December 2005, TEIAS will provide support staff to the existing PCU; The PCU will be hlly equipped for the operation. 3. The Bank will organize two days procurement training to TEIAS personnel who be may involved inthe procurement activities. 4. The Bank will organize a one day procurement seminar for all Project personnel during the Project Launch Workshop. The overall project risk for procurement is high. C. ProcurementPlan The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on February 10, 2005 and i s available at Project Coordination Unit.It will also be available in the Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the 40  actual project implementation needs and improvements in institutional capacity. The contracts under the Project are listed inthe Attachment 1below. All the ICB contracts andDirect Contractingwill be subject to priorreview by the Bank. D. Frequencyof ProcurementSupervisionandReporting In addition to the prior review supervision to be carried out fi-om Bank offices, the capacity assessment o f the Implementing Agency has recommended semi-annual supervision missions to visit the field to cany out post review o f procurement actions. The PCUinTEIAS will keep a complete and up-to-date record of all procurement documentation and relevant correspondence in its files, which will be reviewed by the Bank staff during supervision missions that will be minimumo f every 6 months. Monitoring reports on procurement progress in the form o f completed-ongoing-planned procurements will be submitted semi-annually as an integral part o f the Financial Management Report on Project implementation. E. Others Considering the negative effect o f the expropriation delays to the implementation o f the transmission lines contracts in the NTGP, TEIAS would consider the employment of Environmental Impact Assessment, design, expropriation consultants from its budget before the effectiveness o f the ECSEE APL 2 Project. 41  1- c  Annex 9: Economic and Financial Analysis EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope (APLZ) Turkey/TEIAS FinancialAnalysis: TEIAS' financial condition i s summarized in the attached table. These numbers are based on TEIAS' unaudited accounts, and not on the accounts audited per International Accounting Standards. TEIAS' transmission charges, currently US cents 0.4/ kWh, are adequate to recover all its normal operating and non-operating costs. TEIAS had revenues o f about US$ 450 million in FY 2003, and i s estimating its revenues to be US$ 470 million during the current fiscal, resulting in fairly healthy gross profit margins of 13% in each of these years. Net profit fluctuated significantly because o f the movement in the exchange rate between 2001 and 2003. Going forward, the outlook for TEIAS' profitability i s fairly positive, given the robust transmission pricing regime, and given that TEIAS' costs are not likely to rise upunexpectedly. TEIAS however, has a serious cash flow problem because o f poor collections. The main risk facing TEIAS' finances i s its bill collection from users o f its network, primarily EUAS, the Electricity Generation Corporation. EUAS' defaults in turn are due to the collection shortfalls o f TEDAS. TEIAS received only about 60% o f what it was owed in FY 2003, and was in danger of defaulting on its debt servicing, but managed to meet its obligations after TEDAS received additional support from the Government3 allowing it to pay TETAS and TETAS to pay TEIAS. However, this situation has substantially improved in 2004 and for the first six months TEIAS collected over 80% o f accounts receivable. The other risk that TEIAS faces i s its exposure to exchange rate fluctuations. The TurkishLira has been particularly vulnerable to depreciation inthe last few years, although it has shown signs of stability inthe last two years. The projections have been run in constant U S dollars because o f the difficulty in projecting the exchange rate. Turkey has also decided to revalue its currency in January 2005. While tariffs are adjusted to compensate TEIAS for the impact o f exchange rate fluctuations, the adjustment normally takes place with a lag. TEIAS plans to invest about US$ 1.1 billion over the next 5 years. This level o f investment appears financially sustainable, given the current tariff levels. TEIAS' financial projections show that TEIAS has sufficient capacity to support borrowings for these investment levels. However, if poor collections continue, they could potentially lead to cash shortfalls. Inaddition to standard covenants on timely submission of audits, the following financial covenants are agreed: (a) Self financing ratio greater than or equal to 35% in each year starting FY 2005 - self financing ratio i s defined as the ratio of funds fkom internal resources to average capital expenditures, (b) Debt service coverage ratio (DSCR) greater than or equal to 1.5 every year starting FY 2005 - DSCR i s defined as the ratio o f net revenues (the difference between operating and non-operating revenues and operating expenses excluding depreciation) and total debt service requirements (repayments interest and other charges on debt), and (c) Current ratio greater than or equal to 1.0 in each year starting FY 2005 - current ratio i s the ratio o f current assets to current liabilities. US$240 millionof duty loss compensationwas providedas cash supportby the Govemment to TEDAS which allowedit to pay TETAS which paidTEIAS. 43  TEIAS will also be requiredto comply with the following: 0 Implementationof a time-bound action plan to obtain an audit opinion for its financial statements starting incalendar year 2006; 0 Installation o f functioning o f the Enterprise ResourcePlanningprogramby January 31,2007; 0 Carrying out of a mid-termreview by January 31,2008; and 0 Implementation of Framework for Environment Assessment Procedures and Land Acquisition Management Framework. Summary Financial Projections US$million 2002 2003 2004 2005 2006 2007 2008 2009 2010 (Constant2004 US$) Actual Actual Budget Fcst Fcst Fcst Fcst Fcst Fcst Net energytransmitted(GWh) 102,033 109,494 115,263 122,411 135,024 142,578 156,974 163,000 174,000 Avg transmissiontariff (US cents/ kWh) 0.39 0.41 0.41 0.39 0.37 0.37 0.36 0.36 0.36 Sales Revenue 397 446 473 475 502 529 558 589 621 Operatingcosts 130 179 220 229 244 261 280 300 322 Earningbefore int., depr, taxes (EBITDA) 268 268 255 248 259 270 280 291 302 Net profit -29.6 4.6 8.2 10.9 12.8 13.2 14.2 17.6 19.9 Internalresources 267 267 209 237 247 257 267 277 287 Borrowings 20 24 111 150 136 114 95 90 76 Other sources 0 0 0 0 0 0 0 0 0 Total Sources 288 291 320 387 383 371 362 367 363 Investment 86 96 137 249 248 210 180 210 192 Debt service 290 248 111 90 72 72 106 109 123 Increaseinworking capital (88) (53) 73 47 63 88 75 48 48 Total Applications 288 291 320 387 383 371 362 367 363 Fixedassets 2,918 3,576 3,702 3,926 4,144 4,3 18 4,455 4,614 4,746 Current assets 345 282 391 488 589 699 783 846 901 Total Assets 3,263 3,858 4,092 4,413 4,733 5,017 5,238 5,460 5,647 Net worth 2,638 3,410 3,597 3,793 3,993 4,195 4,398 4,601 4,805 Outstandingdebt 310 262 290 385 467 496 504 494 460 Current liabilities 314 186 205 236 273 326 336 365 382 Total Liabilities 3,263 3,858 4,092 4,4 13 4,733 5,017 5,238 5,460 5,647 Ratios: Grossprofit margin 27% 13% 13% 8% 8% 8% 8% 9% 9% Net profit margin -7% 1% 2% 2% 3% 2% 3% 3% 3% Collectionefficiency(%) 50% 59% 80% 80% 80% 80% 85% 92% 92% Current ratio 1.o 1.5 2.0 2.1 2.2 2.2 2.4 2.4 2.4 Receivables(days) 184 117 183 255 315 372 407 415 422 Payables(days) 155 217 289 283 276 267 257 248 240 Debt servicecoverage ratio 0.9 1.1 2.3 2.7 3.6 3.7 2.6 2.6 2.4 Debtequityratio 2.7 3.8 2.8 1.8 1.5 1.4 1.4 1.3 1.3 19% 47% 47% 46% 41% 68% 44  TEIAS EconomicAnalysis The investments financed by the ECSEE (APL2) Project would be part o f TEIAS' transmission upgrading and expansion program. The corporation needs to invest around $180-$200 Million per year to upgrade its system and to increase transmission capacity so as to meet the rapid rise in electricity consumption inTurkey The ECSEE ( APL2) Loan will finance a time slice o f this program. It is very difficult to estimate the economic returns from a time slice o f the program or from isolated transmission lines or substations. While the costs would be known, the benefits are more difficult to determine. However, it i s possible to make an estimate o f the economic return from the transmission investmentprogram as a whole. This i s the approach adopted here. The rate o f return i s measured for the investment program o f TEIAS between 2005 and 2009. Total investments during this period total $l.lbillion. They average close to $220 Million per year but are above this number in the earlier years (due to postponed investments which now need to be met) but are less than this number in the later years. Related to this investment program i s an increase in electricity transmitted from 115 tWh in2004 to 187 tWh in2011. The value o f this transmission function i s estimated at around 0.4 U S cents per Kwh. This i s TEIAS' average tariff which i s also used inproviding financial estimates for the corporation. This tariff is set by EMRAand is a low estimate of the value o fthe service provided. Inaddition there is some operatingcost to providing this transmission service in addition to the costs of the investments. This operating cost is based on TEIAS estimates and i s 0.12 centskWh. Based on these assumptions the real economic rate o f return for TEIAS investment program i s 14%. The net present value o f this program i s $225 Million at a 10% discount rate. Two sensitivity tests were conducted. The first assumes a lower growth in Turkish electricity demand and TEIAS transmissions ( 5% per year) than i s expected. If this i s the case then the rate o f return from the investment program drops to about 7% and it has a negative net present value at a 10% discount rate. The second sensitivity test i s to assume that electricity demand and transmission o f electricity grow at the historic rate o f about 9% per year. If that i s the case the internal rate o f return rises to 17% and the net present value of the program at a discount rate of 10% rises to $ 500 Million. 45  Cost-Benefit Analysisof TransmissionExpansionandModernization 2012 thru Years 2004 2005 2006 2007 2008 2009 2010 2011 2025 Base Case costs Investments($ Mil) 249 248 210 180 210 OperatingCosts($ mil) 0 15 24 42 49 62 77 77 Total Costs 249 263 234 222 259 62 77 77 Benefits ElectricityTransmitted(Twh) 115.2 122.4 135 142.5 157 163 174 187 IncrementalTransmission 12.6 20 35 41 52 64 64 TransTariffcentskwh 0.41 0.37 0.37 0.36 0.38 0.40 0.41 0.41 IncrementalRevenue($ mil.) 0 47 74 125 154 208 263 263 Net Benefits ($ Mil) -249 -217 -160 -97 -104 146 186 186 IRR 14% NPV @ 10% $ Millions $225 Sensitivity Case Low Growth costs Investments($ Mil) 249 248 210 180 210 OperatingCosts(%mil) 0 7 15 23 32 41 50 50 TotalCosts 249 255 225 203 242 41 50 50 Benefits ElectricityTransmitted (Twh) 115.2 122.4 129 135 142 149 156 164 IncrementalTransmission 6.12 13 19 26 34 42 42 Trans Tariffcentsikwh 0.39 0.37 0.37 0.36 0.38 0.40 0.41 0.41 IncrementalRevenue($ mil.) 0 23 46 69 100 135 171 171 NetBenefits($ Mil) -249 -233 -179 -134 -141 95 121 121 IRR 7% NPV @ 10% $ Millions ($160) SensitivityCase HistoricGrowth costs Investments($ Mil) 249 248 210 180 210 OperatingCosts ($ mil) 0 13 28 43 60 79 99 99 Total Costs 249 261 238 223 270 79 99 99 Benefits ElectricityTransmitted (Twh) 115.2 122.4 133 145 159 173 188 205 IncrementalTransmission 11.016 23 36 50 66 83 83 TransTariff centskwh 0.39 0.37 0.37 0.36 0.38 0.40 0.41 0.41 IncrementalRevenue(S mil.) 0 41 85 130 191 264 340 340 Net Benefits($ Mil) -249 -220 -152 -93 -79 185 240 240 IRR 17% NPV@ 10% $ Millions 500 46  Annex 10: Safeguard Policy Issues EUROPEAND CENTRAL ASIA: Energy Community of SouthEastEurope(APL2) The classification o f the APL program and APL2 are FI. Most o f the country-level investment projects are expected to be B-category projects. However, individual country-level investment projects included inthe laterinstallmentso fthe APL programmay containcomponents that would berated as belonging to the A-category or C-category. APL2 i s rated FIbecause not all o f the project elements have been fully identified although they are all expected to be B-category or C-category. Environmental Management Plans have been prepared for the components that have been identified, and a Framework for Environmental Assessment Procedures (FEAP) and a Land Acquisition Management Framework (LAMF) outlining what principal actions will be taken by TEIAS inregard to different foreseen but not yet identified other elements (power lines, sub-stations) have also been prepared. The FEAP and LAMF also outline how the issues related to public participation and disclosure o f information are handled. Turkey/TEIAS APL2 has limited environmental and social impacts. There i s no resettlement but there may be limited land acquisition. Environment The SCADNEMS and M M S systems, which consist o f hardware and software, have no significant impact. Rehabilitation of substations would also have little or no impact since the substations are reported not to have PCBs. New substations would have a minor impact. Nevertheless, TEIAS has prepared a Framework for Environmental Assessment Procedures (FEAP) indicating how it will review and address the environmental impact of its investments. This framework document has been agreed with the Bank and submitted to the InfoShop. It has also been posted on TEIAS web site in Turkish. Its availability was announced ina newspaper advertisement. Social The market management system (MMS) and SCADNEMS for TEIAS involveno social issues or land acquisition. The substation component for TEIAS may involve a minor amount o f land acquisition for new substations as needed. TEIAS has an existing policy for land acquisition based on the Expropriation Law (No. 2942) which involves payment o f market prices for the land acquired and allows the land owner to go to court ifnot satisfied with the amount paid. The amount o f landrequired under the project is, however, very small since the number of sub-stations i s limited and the required plots are small. It i s not anticipated that there would be any new transmission lines financed under APL 2. Nevertheless, a Land Acquisition Management Framework (LAMF) has been prepared by TEIAS indicating how it will handle any land acquisition issues. This framework document has been agreed with the Bank and submitted to the Infoshop. It has also been posted on TEIAS web site in Turlush. Its availability was announced ina newspaper advertisement. 47  Annex 11: ProjectPreparationand Supervision EUROPEAND CENTRALASIA: Energy Community of SouthEastEurope (APL2) Planned Actual PCNreview January 2004 January 23,2004 Initial PID to PIC February204 March9, 2004 Initial ISDS to PIC February2004 March8, 2004 Appraisal September 2004 October 2004 Negotiations November 2004 February2005 BoardiRVP approval Planneddate of effectiveness Planneddate ofmid-term review Keyinstitutions responsible for preparation of the project: 0 ECSEE-The governments of South East Europe and the European Commission 0 Turkey/TEIAS project -TEIAS and its consultants Bank funds expended to date on projectpreparation: 1. Bankresources: $350,000 2. Trust funds: $37,500 3. Total: $387,500 Estimated Approval and Supervision costs: 1, Remainingcosts to approval: $100,000 2. Estimatedannual supervision cost: $160,000 48  Bank'staffand consultants who worked on the entire ECSEE project included: Name Title Unit Kari Nyman * Lead Specialist -ECSEE Team*Leader, Romania, Croatia ECSIE Dilek Barlas Sr. Counsel LEGEC h n a Kichigina SR. Counsel LEGEC Rozena Serrano Program Assistant ECSIE YukariTsuchiya Program Assistant ECSIE Doina Visa Operations Officer Romania ECSIE ElifYonca Yukseker Team Assistant -Turkey ECCU6 Selma Karaman Program Assistant -Turkey ECCU6 Doncho Barbalov Operations Officer -Bulgaria ECSIE Nicholay Chistyakov Sr. Finance Officer LOAGl Bogdan Constantinescu Sr. Financial Management Specialist ECSPS IstvanDobozi * Lead Energy Economist -Bulgaria ECSIE Stjepan Gabric Projects Officer - Croatia ECSIE Mohinder Gulati Sr. Financial Analyst- Serbiaand Montenegro, Kosovo ECSIE David Kennedy ** Sr. Energy Economist - Regional Strategy, Macedonia ECSIE Iftikhar Khalil* Lead Energy Spec. Albania, Bosnia and Herzegovina - ECSIE Ranjit Lamech * Sector Leader - Turkey IEF George Moldoveanu Team Assistant -Romania ECCRO Dejan Ostojic Sr. Energy Spec. -Regional GenerationInvestment ECSIE Gurhan Ozdora Sr. Operations Officer -Turkey ECSPF Alessandro Palmier1 Lead Dam Specialist ESDQC Jonathan Pavluk Sr. Counsel LEGEC Stan Peabody Lead Social Scientist ECSSD Sameer Shukla Sr. Financial Analyst ECSIE DeveshMishra Sr. Procurement Specialist ECSPS Seda Aroymak Sr. Financial Management Specialist ECSPS Salih Kalyoncu Procurement Specialist ECSPS Angelica Fernandes ProcurementAnalyst ECSPS Leonid Vanian Sr. Procurement Specialist ECSPS Daniel Aizic Consultant-Financial Analyst ECSPS BernardBaratz Consultant- Environmental Specialist EASEG Ramon Lopez-Rivera Consultant- Engineering, Hydropower ECSIE James Moose Consultant - Energy Economist ECSIE Peer Reviewers: Ludmilla Butenko Sr. Resource Management Officer SFRRM Amarquaye Armar Lead Energy Specialist EWDEN Patricio Marquez LeadHealth Specialist ECSHD * ECSEE APL program team members and task leaders for ECSEE APL country projects as listed above 49  Annex 12: Documents in the Project File EUROPE AND CENTRAL ASIA: Energy Communityof SouthEastEurope(APLZ) 1. ECSEE: ECSEE Treaty, December 3,2004 Athens Memorandum, December 8,2003 Athens Memorandum, November 15,2002 ECSEE information at h~://WWW.seerecon.org;linfrastructure/sectors/energylindex.html 2. Turkey/TEIAS projects: Framework for Environmental Assessment Proceduresfor Energy Transmission Lines Projects inTurkey Summary Information Note about Land AcquisitiordExpropriation for Transmission Activities ( Land Acquisition Management Framework) Aide Memoire 1004Appraisal Mission Cost Benefit Analysis of SystemExpansion TEIAS Balance Sheet TEIAS CashFlows TEIAS FinancialProjections TEIAS Financial Statements20034 TEIAS Investment and Financing Supply and DemandStudy 50  Annex 13: Statementof Loans and Credits EUROPEAND CENTRAL ASIA: EnergyCommunity of SouthEast Europe(APLZ) Turkey Differencebetween expected and actual Original Amount in US$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO70950 2004 ANATOLIA WATERSHED REHAB 20.00 0.00 0.00 0.00 0.00 20.00 0.00 0.00 PO72480 2004 RENEW ENERGY 202.03 0.00 0.00 0.00 0.00 201.02 -1.01 0.00 PO74053 2004 HEALTH TRANSIT (APL #1) 60.61 0.00 0.00 0.00 0.00 60.90 -0.06 0.00 PO82801 2004 EFIL 2 303.10 0.00 0.00 0.00 0.00 142.60 -122.50 0.00 PO82996 2004 PFPSAL 3 1,000.00 0.00 0.00 0.00 0.00 500.00 -500.00 0.00 PO59872 2003 BASIC ED 2 (APL #2) 300.00 0.00 0.00 0.00 0.00 292.96 242.47 -3.04 PO74408 2002 SRMP 500.00 0.00 0.00 0.00 0.00 325.77 244.90 2.90 PO70286 2002 ARIP 600.00 0.00 0.00 0.00 0.00 291.43 268.10 29.81 PO69894 2001 PRlV SOC SUPPRT 250.00 0.00 0.00 0.00 0.00 60.09 60.09 -15.91 PO68368 2000 MARMARA EARTHQUAKE EMG 505.00 0.00 0.00 0.00 0.00 290.47 290.47 2.92 RECON PO44175 2000 BIODIVMTRLRES MGMT (GEF) 0.00 0.00 0.00 8.19 0.00 4.82 3.75 0.31 PO09073 1999 INDUSTRIAL TECH 155.00 0.00 0.00 0.00 0.00 31.54 31.54 0.00 PO08985 1998 CESMEWS & SEWER 13.10 0.00 0.00 0.00 4.45 1.74 6.19 2.79 PO48852 1998 NAT'L TRNSM GRID 270.00 0.00 0.00 0.00 27.19 146.45 174.24 26.92 PO09076 1995 HEALTH 2 150.00 0.00 0.00 0.00 20.17 14.75 40.38 40.38 Total: 4,328.84 0.00 0.00 8.19 52.41 2,384.54 738.56 87.08 TURKEY STATEMENTOF IFC's HeldandDisbursedPortfolio InMillions ofUS Dollars Committed Disbursed IFC IFC FY Approval Corporation Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2001103 Akbank 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00 Altematif Bank 0.75 0.00 0.00 0.00 0.75 0.00 0.00 0.00 1996101103 Arcelik 19.18 0.00 0.00 0.00 19.18 0.00 0.00 0.00 2000 Arcelik LG Klima 10.77 0.00 0.00 0.00 10.77 0.00 0.00 0.00 1997102 Assan 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00 2002 Atilim 6.50 0.00 0.00 0.00 6.50 0.00 0.00 0.00 2000 Banvit 10.00 5.00 0.00 0.00 10.00 5.00 0.00 0.00 BayindirbankAS 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 2002 Beko 32.41 0.00 0.00 32.41 32.41 0.00 0.00 32.41 2001 Bilgi 9.00 0.00 0.00 0.00 9.00 0.00 0.00 0.00 1994196197 Borcelik 9.09 3.21 0.00 0.00 9.09 3.21 0.00 0.00 2004 BorusanHolding 30.00 0.00 10.00 0.00 30.00 0.00 10.00 0.00 1994 CBS Holding 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1990102 Conrad 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 2002 EKS 12.20 0.00 0.00 0.00 12.20 0.00 0.00 0.00 51  2004 Ege . 10.00 0.00 0.00 8.00 0.00 0.00 0.00 0.00 1995 Entek 19.75 0.00 0.00 11.59 19.75 0.00 0.00 11.59 1999 Finansbank 3.33 0.00 0.00 0.00 3.33 0.00 0.00 0.00 2004 GarantiLeasing 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1999 GumussuyuKap 4.00 0.00 3.62 0.00 4.00 0.00 3.62 0.00 2001 Gunkol 5.97 0.00 6.25 0.00 5.97 0.00 6.25 0.00 1998 IndoramaIplik 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 1998100102 Ipek Paper 14.32 0.00 0.00 0.00 14.32 0.00 0.00 0.00 1990 Kepez Elektrik 3.24 0.00 0.00 0.00 3.24 0.00 0.00 0.00 1988190 K i r i S 11.30 0.00 0.00 0.00 11.30 0.00 0.00 0.00 2004 Koclease 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1991 Kula 5.17 0.00 0.00 0.00 5.17 0.00 0.00 0.00 2003 MESAGroup 11.oo 0.00 0.00 0.00 11.oo 0.00 0.00 0.00 2004 MeteksanSistem 8.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 MilliRe 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998102 Modem Karton 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1991 NASCO 10.18 0.00 0.00 3.55 10.18 0.00 0.00 3.55 2004 OPET 25.00 0.00 0.00 40.00 8.33 0.00 0.00 25.00 2004 Oyak Bank 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 2002 Pasabahce 5.63 0.00 0.00 0.00 5.63 0.00 0.00 0.00 1998 PinarET 3.93 0.00 0.00 0.00 3.93 0.00 0.00 0.00 2000 Pinar SUT 12.81 0.00 0.00 0.00 9.16 0.00 0.00 0.00 1999 SAKoSa 18.31 0.00 0.00 9.74 18.31 0.00 0.00 9.74 1990 Silkar Turizm 2.18 0.00 0.00 2.49 2.18 0.00 0.00 2.49 2002/03 Sise ve Cam 67.84 0.00 0.00 42.40 67.84 0.00 0.00 42.40 1998102 Soktas 2.50 0.00 0.00 0.00 2.50 0.00 0.00 0.00 1999 TEB Finansal 0.56 0.00 0.00 0.00 0.56 0.00 0.00 0.00 2005 TSKB 0.00 0.00 50.00 0.00 0.00 0.00 0.00 0.00 1982/83/89191/96/99 TrakyaCam 0.00 0.61 0.00 0.00 0.00 0.61 0.00 0.00 1999102 Turk EkonBank 13.33 0.00 15.00 0.00 13.33 0.00 15.00 0.00 2001 TurkishPEF 0.00 10.00 0.00 0.00 0.00 2.46 0.00 0.00 1999 UnyeCement 10.84 0.00 0.00 0.00 10.84 0.00 0.00 0.00 1999 Uzel 9.16 0.00 0.00 5.50 9.16 0.00 0.00 5.50 1998 Viking 8.65 0.00 0.00 0.00 8.65 0.00 0.00 0.00 1995 Yalova Acrylic 2.50 0.00 0.00 1.33 2.50 0.00 0.00 1.33 Totalportfolio: 644.90 18.82 84.87 157.01 556.08 11.28 34.87 134.01 Approvals PendingCommitment FY Approval Corporation Loan Equity Quasi Partic. 2005 Acibadem 0.02 0.00 0.00 0.00 2001 Akbank 0.03 0.00 0.00 0.00 2004 Akbank BLoan Inc 0.00 0.00 0.00 0.02 2002 Milli Reasurans 0.00 0.01 0.00 0.00 2005 PALEN 0.00 0.00 0.00 0.00 2005 Palgaz 0.01 0.00 0.00 0.00 2002 TEB Ill 0.00 0.00 0.00 0.05 Totalpendingcommitment: 0.06 0.01 0.00 0.07 52  Annex 14: Country at a Glance EUROPE AND CENTRALASIA: Energy Communityof SouthEastEurope(APLZ) Europe & Lower- POVERTY and SOCIAL Central middle- Turkey Asia income Development diamond' 2003 Population, mid-year (millions) 70.7 473 2,655 Life expectancy GNi per capita (Atlas method, US$) 2,800 2,570 1,480 GNI (Atlas method, US$ billions) 197.8 1,217 3,934 - Average annual growth, 1997.03 Population 1%) 1.7 0.0 0.9 Labor force (%) 2.3 0.2 1.2 GNI Gross ~ per primary Most recent estimate (latest year available, 199793) capita nrollment Poverty (% ofpopulation below nationalpoverty line) Urban population (% of total population) 66 63 50 Life expectancy at birth (years) 70 69 69 1I Infant mortality (per 1,000live births) 35 31 32 Child malnutrition (% of children under 5) 8 11 Access to improved water source Access to an improved water source (% ofpopulation) 82 91 61 illiteracy (% of population age 15+) 14 3 10 Gross primary enrollment (% of school-age population) 94 103 112 -Turkey Male 98 104 113 __Lower-middle-incomeorouv Female 91 102 111 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economlc ratios' GDP (US$ biliions) 61.5 179.4 183.9 240.4 Gross domestic investmentlGDP 16.3 27.6 21.3 22.8 Exports of goods and services/GDP 12.5 13.7 29.2 27.4 Trade Gross domestic savings/GDP 12.2 21.9 19.8 19.5 Gross national savings/GDP 15.3 24.8 20.8 19.5 T Current account balance/GDP -3.1 -3.6 -0.8 -2.8 Interest payments/GDP 2.9 2.2 3.8 3.2 Total debtlGDP 33.0 38.2 71.3 61.2 Total debt service/exports 39.2 31.6 50.7 40.3 Present value of debUGDP 73.1 Present value of debtlexports 234.2 Indebtedness 1983-93 1993-03 2002 2003 2003-07 (average annual growth) GDP 5.0 2.7 7.9 5.8 5.6 -Turkey GDP per capita 2.8 0.9 6.2 4.2 4.1 Exports of goods and services 5.9 11.4 11.1 16.0 5.4 STRUCTURE of the ECONOMY (% of GDP) Agriculture 21 4 162 industry 250 298 Manufacturing 168 183 140 133 Services 536 540 633 64 7 Private consumption 784 650 Genera government consumption 9 4 130 140 136 Imports of goods and services 166 193 307 307 (average annual growth) Agriculture Industry 6 7 2 2 5 6 5 0 ' 2 0 Manufacturing 6 9 3 0 8 2 8 4 Services 4 3 3 0 7 3 6 4 Private consumption 4 7 1 9 2 2 6 7 1-20 General government consumption 4.0 3.9 5.4 -2.4 -40 1 Gross domestic investment 7.7 1.o 35.9 20.4 -Exports +Imports Imports of goods and services Note: 2003 data are preliminary estimates. *The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 53  PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 (1I Domestic prices Inflation (Oh) (% change) 100 - Consumer prices 31.4 66.4 44.8 25.2 I 75 ImplicitGDP deflator 26.3 67.8 44.1 22.5 ' Governmentfinance (% of GDP, includes current grants) Current revenue .. 19.0 31.2 30.4 0, ~ 98 99 01 02 Current budget balance -3.1 -5.1 -5.3 Overallsurpluddeficit .... -12.0 -11.9 -10.1 -GDP deflator ' O I C P I TRADE 1983 1993 2002 2003 (US$ millions) Export and Import levels(US0 mill.) I Total exports (fob) 5,905 15,345 40,124 51,206 Agricultural and livestock 80,OW T 1,032 1,044 2,089 2,545 Miningand quarry products 188 233 387 543 I60.000- .I Manufactures 4.685 14,068 33,565 43,912 Total imports (cif) 9,235 29,428 51,554 69,340 Food 123 969 1,245 2,006 Fuel and energy 3,851 3,903 9,192 11,568 Capital goods 2,311 7,499 9,103 11,792 Exportprice index (7995-100) 89 92 75 82 97 98 99 w 01 Importprice index (1995=100) 100 85 73 83 mExports mlmprts Terms of trade (1995=100) 89 109 102 99 BALANCEof PAYMENTS I 1983 1993 2002 2003 (US$ millions) Current account balanceto GDP (%) Exportsof goods and services 7.865 26,264 54,907 70,231 4 T Importsof goods and services 10,118 33,721 55,365 73,760 1 1 Resourcebalance -2.253 -7,457 -458 3,529 Net income -1,430 -2,744 -4,554 -5,427 Net currenttransfers 1,760 3,768 3,490 2,106 Current account balance -1,923 -6,433 -1,522 -6.850 Financingitems (net) 2,075 6.741 7,675 10,897 -4 Changesin net reserves -152 -308 -6,153 -4,047 -, -6 Memo: Reservesincludinggold (US$ millions) 2,253 17,762 38,051 44,957 Conversionrate (DEC, /ocai/US$) 226.0 11,046.7 1,509,471 1,496,668 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) Composition of 2003 debt (US$ mill.) Total debt outstandingand disbursed 20,324 68,605 131,058 147,035 IBRD 2,336 5,285 5,367 5,214 A 5,214 IDA 184 142 89 83 G 23,013 B 83 Total debt service 3,138 8,664 29,092 29,172 24,092 IBRD 274 1,183 708 728 IDA 4 7 7 7 D 1,199 Compositionof net resourceflows 1 E 6,810 Officialgrants 98 403 Officialcreditors 327 -740 224 -1,217 Private creditors 139 6,104 6,901 -511 Foreigndirect investment 46 622 863 1,063 Porffolioequity 0 189 -1,183 2,250 I F 86.624 World Bank program Commitments 675 207 1,650 0 A IBRD E Bilateral Disbursements 486 354 1,031 276 B IDA -- D Other multilateral - F Pnvate -- Principal repayments 115 753 443 502 IC-IMF G -Short-term Netflows 371 -399 588 -226 interestpayments 163 437 272 233 Nettransfers 208 -836 316 -459 DevelopmentEconomics 9/20/04 54  MAP SECTION   IBRD 33717 28