Turkey - Energy Community of South East Europe and Second Adaptable Program Loan Project : restructuring

49016 PROJECT PAPER RESTRUCTURINGOF ENERGY COMMUNITY OF SOUTH EAST EUROPE- APL 2 (TURKEY) DATA SHEET Borrower: Turkish Electricity TransmissionCorporation(TEIAS) -Original Responsible agency: Turkish Electricity Transmission Corporation(TEIAS) estimated disbursements (Bank FY/US$m) FY 2006 2008 2009 2010 Annual 6.02 13.00 19.98 16.00 11.00 Cumulative 6.02 19.02 39.00 55.00 66.00 Current closingdate: December 3 1, 2010 Revised closingdate [if applicable]: --- Indicate ifthe restructuringis: Board approved - RVP approved -x- Does the restructured project require any exceptions to Bank policies? Yes -x- No Have these been approved by Rank management? -Yes-x- No I s approval for any policy exceptionsought from the Board? -Yes-x- No Revised project development objectivdoutcomes /Ifapplicable/ N.A. Does the restructured project trigger any new safeguard policies? Ifso, click here to indicatewhich one(s) [selection box like the one in the new ISR] N.A. Source Local Foreign Total Borrower 13.5 12.0 25.5 IBRD/IDA 0.0 66.0 66.0 Others I   A. Introductory Statement 1. This Project Paper seeks the approvalof the RegionalVice President to introduce the following changes in the TURKEY ECSEEAPL2 Project' (LN 4772-TU) (P094176) and accompanying amendments to the project's legal documents. The Borrower,Turkish ElectricityTransmission Corporation(TEIAS), has requestedthe Bank to amend the loan agreement for ECSEE APL2 to include the financing of technical assistance (TA) and training for the implementation of the electricity balancing market in Turkey. TEIAS would like to usethis component for the following two broadtypes of TA: a. Continuation of the consulting contract for the Balancing and Settlement System (BSS), originally commenced under the National TransmissionGrid Project (NTGP) (LN 4344-TU), which has assisted the Government and TEIAS in designing and thereafter implementing the electricity balancing market (estimated cost EUR 1.7 million). b. Training for activities related to the electricity market, such as for the Balancingand Settlement System, strengthening of national load dispatch, transmission reinforcement,etc. (estimated cost EUR 270,000). 2. The reasons for the amendments are describedin paragraph9 later. Insummary: a. During ECSEE APL2 implementation, TEIAS became aware of the need for need continued operational support while the final market design is being implemented, and also additionalcapacity buildingsupport to operate the market successfully. b. The implementation of the market has taken longer than originally anticipated - the implementationsupport beingprovidedby the BSS Consultants will needto continue. c. NTGP, which is currently financing the BSS contract, will close on December 31, 2007. ECSEE APL2 does not include a category on consulting services, although it includes financing o f the market management system (MMS),a key system required for implementingthe market (see below). 3. The amendments to the Loan Agreement will not require any changes in the Development Objective (DO). In fact, by enabling the continuation of implementation support and capacity building for the electricity market to TEIAS, the proposed restructuring of APL2 will strengthen the likelihood that the DO is met and outcome targets are achieved- a key aim of APL2 is to help implementthe electricity market. ' ECSEE stands for Energy Community o f South East Europe; APL stands for Adaptable Program Loan. 2  B. Backgroundand Reasons for Restructuring 4. Background: The Bank has been supportingthe Turkishelectricity market for the last few years both through policy advice on electricity reforms and through lending operations which are financing key investments in expansion and strengthening of the system. The Bank currently has three ongoing operations for electricity transmission, National Transmission Grid Project (NTGP), ECSEE APL2 and ECSEE APL3. NTGP has supported the restructuringof the sector into independent utilities, the expansion of the 380 kV transmission grid, and the strengthening of TEIAS - the transmission company, the system operator and now the market operator. NTGP is also currently supportinga major TA - the Balancingand Settlement System Consulting Services - for assistance in designing and implementing the electricity balancing market. APL2 supports the implementationof the market management system (MMS) which will be essential for the market to evolve to its final stage, and further network strengthening. APL3 finances several key transmission linkages necessary for the Turkey market to function properly. 5. ECSEE APL2, EUR 50.6 million (approx. US$ 67 million equivalent) was approved by the Board on April 1, 2005, and became effective on September 1, 2005. The DO of the project is to support the implementationof the investment programs of TEIAS, including: (a) creation of a market management system for the management of 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 expansionfor overall stability. 6. The Project is designed as an APL in the regional ECSEE Adaptable Program, with the aim of enabling Turkey to join the South-East European (SEE) regional electricity market over time. The ECSEE APL program itself has been designed as a horizontal and vertical APL (with a total commitment of up to US$ 1 billion) in support of the Energy Community Treaty which seeks to establish a SEE regional electricity market. APL2 has the following components: Market Management System (MMS) - This component supports the balancing and settlement system that is essential for the implementationof the electricity market. This includes funding of software, hardware as well as training required for implementingthe balancingand settlement system. NationalLoad Dispatch System (SCADA/EMS)- SCADA/EMS (supervisorycontrol and data acquisitiodenergy management system) are being strengthened so that TElAS would be in a positionto operate its system more efficiently and to coordinate with other SEE systems operators in order to meet overall stability and control rcquirements. 'l'ransmission System Reinforcement - This component includes the strengthening and renovation of existing sub-stations, for improving system stability and meeting load growth requirements. It also includes operations and maintenance (O&M) equipment such as circuit breakers, switches, transformers, and substationmonitoring systems. 3  7. The electricity balancingmarket commenced operations in August 2007, which is a major landmark in the implementationo f the electricityreformprogramin Turkey. The market is continuouslybeingenhanced, and it is envisaged that it will reach its final stage by end-2008. Progress towards this objective will depend on the establishment of the market management system (MMS),which is being financed by APL2, and also on the continuationof TA currently financed by another ongoingloan, NTGP. 8. Progress in APL2 implementation is currently satisfactory - two sub-stations financed by the project are under implementation, O&M equipment procured by the Project is being installed satisfactorily,and procurement action which was delayed until recently has picked up speed. In the last ISR in June 2007, the project's implementation progress (IP) rating had been lowered to Moderately Satisfactorybecause of the delay in the MMS procuremenl, albeit for reasons not totally in TEIAS' control. Since then however, there has been significant progress in the procurement o f the market management system (MMS)- the draft bidding documents have been reviewed by the Bank, and are currently under finalization. 9. Reasons for proiect restructurine: The amendment is necessary for the following reasons: a. Based on the experience with the implementation of the market over the last 2-3 years, TETAS became aware of the need for significant operational support while the linal market design is being implemented. ECSEE APL2 originally did not envisage any TA, and hence does not includea category on consultingservices. b. The implementation of the electricity market has taken longer than originally anticipated, primarily because of delays in the approval of key aspects by the Government and EMRA, and because certain aspects proved more complicated than initially expected. As a result, the implementationsupport beingprovidedby the BSS Consultants, currently financed under NTGP, will need to continue for some more time. NTGP will close in December 2007, and the only feasible solution for continuing the BSS consulting services contract would be to carry on its financing under APL2 (aftersuitableamendments to the LoanAgreement). c. In addition, several reviews by the independent panel o f experts advising the Government on reform implementationhave shown that significant capacity building will be necessary for the system and market operator (currently housed within TElAS). TEIAS has therefore identified training needs in aspects related to the balancingand settlement system, load dispatch andtransmissionreinforcement. C. Proposed Changes 10. In order to enable TEIAS to continue accessing implementation and capacity building support for the electricity market, APL2's loan agreement would have to be amendedto include TA. This would involve the following amendments: 0 Schedule 1 o f the Loan Agreement, Withdrawal of the Proceeds of the Loan: Paragraph 1 will be amended to include Consulting Services and training as a new Category under the loan. EUR 1.97million equivalent would have to be reallocated 4  from the Goods (including supply and installation) Category to the Consulting Services and Training Category. Schedule 2, Description of the Project: Part A of Project Description will be modified to include technical assistance (consulting services and training) to support capacity building for implementationof the electricity market. Schedule 4, Procurement: A new section on Consulting Services will be added, and along with the standard procurement methods, this section would need to allow Single-sourceSelectionas an exceptionaloption for the BSS consulting contract. Schedule 5 "Special Account": the modifications will reflect inclusion of a new Category "Consulting Services and Training". The Procurement Plan for the project would be updated in parallel to reflect additional procurement as necessary. Analysis The above restructuring would not have any effect on the original economic, linancial, technical, institutional, or social aspects of the project as appraised. Further, the proposed changes will not raise the environmental category of the project or trigger new safeguard policies. Finally, the restructuring does not involve any exceptions from the policiesof`the Bank. E. ExpectedOutcomes 12.' The proposed changes will not adversely affect the project's DOs, outcome targets, or outcome indicators- as the consulting services are expected to cost about US$ 3 million, which can be accommodated in the expected savings in other contracts under. preparation. In fact, by enabling the continuation of implementationsupport and capacity building for the electricity market to TEIAS, the above restructuringof APL2 will help strengthen the chances o f the DO being met and outcome targets being achieved - a key aim ofAPL2 is to help implementthe electricity market, F. Benefits and Risks 13. A s discussed above, the restructuringwill have a positive impact on the project's ability to meet its DO. No significant additionalrisk is foreseen that couldjeopardize the achievement of the DO after the restructuring. 5