Turkey - Elbistan Cignite Mine and Power Project

Report No. 342a-TU FILE Copy Appraisal of the Elbistan Project of the Turkish Electrcity Authority (TEK) and the Turkish Coal Enterprises (TKI) Turkey I RETURN T REPORTS T June 13, 1974 WITHIN Europe, Middle East and North Africa Projects Department E lE - Power,and Energ Development Division ON W Not for PubMic Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Croup. It may not be published, quoted or cited without Bank Group authorizatiorn The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit = Lira (LT) 1 LT 100 Kurus (krs) US$1 LT 141/ LT 1 US$0.07 LT 1,000,000 = US$71,429 WEIGHTS AND MEASURES kW = Kilwatt Mw 1,000 kW kWh kilowatt hour GWh (Gigawatt hour) = 1,000,000 kWh kV (kilovolt) 1,000 volts One meter (m) = 3.28 feet One kilometer (km) 0 0.624 miles One square centimeter (cm2) 0.155 square inch One kilocalorie (kcal) (1,000 calories) = 3,968 British Thermal Units One kilogram (kg) (1,000 grams) = 2.2 pounds One ton (metric ton) (1,000 kg) = 2,205 pounds AGM - Assistant General Manager AY - Arthur Young and Company D6I - Devlet Su Isleri (State Hydraulic WTrks) EdF - Electricits de France EIB - Earopean Investment Bank GM - General Manager HCB - High Control Board KfW - Kreditanstalt fur Wiederaufbau 0/B - Overburden OM - Operation and Maintenance SEE - State Economic Enterprise SIB - State Investment Bank SWOCI - Stone and Webster Overseas Consultants TEX - Turkiye Elektrik Kurumu (Turkish Electricity Authority) TIKI - Turkiye Komur Isletmeleri Kurumu (Turkish Coal Enterprises) TEK's and TKI's Financial Year = Calendar Year 1/ Effective May 15, 1974 this has changed to LT 13.50  TURKEY APPRAISAL OF THE ELBISTAN PROJECT OF THE TURKISH ELECTRICITY AUTHORITY (TEK) AND TURKISE COAL ENTERPRISES (TKI) TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ....*.......... i-iv 1. INTRODUCTION ................. *. * ..... . 1 2. THE COUNTRY AND THE ECONOMY ................ *. 3 3. TIIE SECTOR .......................3.............. Energy Resources ... .. ............................. 3 Organization of the Power Sector .. ................ 5 Existing Power Facilities ..... .................... 5 Development Program ................................... 6 Village Electrification ...... .................. 6 4. THE PROJECT ........................ ....... ... ....... 7 Description ..... .............................. 7 Cost Estimate ....... ......................... 8 Status of Engineering, Procurement and Disbursement ....... ........................ 10 Construction Schedules. ......... ............... 11 Administration of the Project ................... .. 11 Ecological Aspects ..... .. ... .*.. ...... .. 11 5. JUSTIFICATION OF THE PROJECT ........................ 12 Market Growth ... ................................. . 12 Comparison of Alternatives ... ..................... 13 Economic Rate of Return .....0............-....... 14 6. THE BORROWERS ................ oo..o ............ 14 This report has been prepared by Messrs. I. Mathai, T.B. Russell, J.N.M. Green and H. Reinbach (mining consultant). It is based on information obtained by a mission to Turkey in September/October 1973, on a feasibility study con- ducted by a consortium of consultants led by Fichtner Consulting Engineers GmbH of Stuttgart and on information furnished by TFK, TKI and the consultants.  TABLE OF CONTENTS - cont'd Page No. A. Turkish Electricity Authority (TEK) .... ....... 14 Organization ..i ............................. 15 Management and ';taff ........... .. ........... 16 Management ................. ............... 16 Staff ..................................... 16 Technical Assistance - Accounting .... ....... 18 Audit ....................................... 18 B. Turkish Coal Enterprises (TKI) .19 Legislation .... . .......... . . 19 Organization .... . .19 Management and Staff ...20 Audit ...20 7. FINANCES . ..21 A. TEK .. ... 21 Highlights of Financial Position . .21 Tariffs . .22 Asset Revaluation . .22 Past Operating Results and Performance Under Existing Covenants . .23 Present Financial Condition . .23 Financing Plan. 24 TEK's Total Investment Program 24 Elbistan Project . .25 Financial Forecasts . .26 Future Earnings ... . 26 Proposed Financial Covenant . .27 Future Financial Position . .28 Debt Limitation Covenant. 28 B. *TrI .28 Past Operating Results . . 28 Lignite Costs and TEK-TKI Contractual Arrangements . .29 Elbistan Lignite Pricing Policies and Rate of Return Covenant . .29 Financing Plan ............ 30 S. PRINCIPAL CONCLUSIONS AND RECOMMENDATIONS . .. 31  TABLE OF CONTENTS - cont'd LIST OF ANNEXES 1. Plant Capacity and Demand of Interconnected System .. Interconnected System Capability and Maximum Demand (Graph) 3. Elbistan Mine - Description of Project 4. Elbistan Project - Estimate of Project Cost 5. Estimated Schedule of Disbursements - TEK and TKI 6. Aspects of Elbistan Lignite Costs and TEK-TKI Contractual Arrangements 7. Past Electricity Sales and Generation - TEK 8. Forecast Electricity Sales and Generation - TEK 9. Comparison of Alternatives 10. Domestic Fuel Aspects 11. Economic Rate of Return on Project 12. Organization Chart - TEK 13. Proposed New Management Structure and Communications Scheme - TEK 14. Statement of TEK's Staff 15. Statement of Salaries in Typical Positions in a Large Project - TEK 16. Statement of Salaries in Typical Positions in a Small Project - TEK 17. Statement Showing Overall Salary Increase in a Large Project - TEK 18. Minutes of Agreement between Bank and Government of 1966 regarding Reorganization of Turkey's Electric Power Sector 19. Statement of Capital, Production and Operating Results - TKI 20. Organization Chart - TKI 21. Yearly Coefficients to Revalue Assets - TEK 22. Income Statements for the Years 1970-1981 - TEK 23. Balance Sheets, 1970-1981 - TEK 24. Sources and Applications of Funds, 1973-1981 - TEK 25. Main Assumptions Underlying TEK's Income Forecasts, 1973-1981 26. Actual Income Statements, 1969-1972 - TKI 27. Cost of Elbistan Lignite MAPS Electrification Plan (IBRD 10774)- Elbistan Site Plan (IBRD 10748)--- Potential Market Areas for Dried Lignite from Elbistan (IBRD 10757)   TURKEY APPRAISAL OF THE ELBISTAN PROJECT OF THE TURKISH ELECTRICITY AUTHORITY (TEK) AND TURKISH COAL ENTERPRISES (TKI) SUMMARY AND CONCLUSIONS i. This report appraises a Project for the development of an open-cast lignite mine by the Turkish Coal Enterprises (TKI, the governmental agency responsible for coal and lignite mining development in Turkey) and of a mine- based power station (four 300-MW units) and associated transmission lines by the Turkish Electricity Authority (TEK, the governmental agency responsible for power development in Turkey) to be located near Elbistan in east-central Turkey. ii. The estimated cost of the Project excluding interest during con- struction is US$963 million (foreign exchange: US$685 million) comprising US$658 million for the power plant, US$277 million for the mine and US$28 million for the transmission lines. A Bank loan of US$123 million to TEK is proposed towards the foreign exchange costs of the power plant and trans- mission lines and of US$25 million to TKI towards the foreign exchange costs of the mine. A European Investment Bank (EIB) loan of US$92 million and a Kreditanstalt fur Wiederaufbau (kfw) loan of US$129 million equivalent towards the foreign exchange costs of the Project are assumed in the financing plan. iii. Demand for electrical energy in Turkey has been increasing at an annual rate of about 12% since 1960. This expansion has been marked by the establishment of a national grid for power transmission and exploitation of hydroelectric resources and, with the active encouragement of the Bank, the setting up of TEK under the TEK law in October 1970 with overall respon- sibility for power development in place of a number of governmental agencies operating before. A growth rate of about 14% is expected in 1972-1977, about 12% in 1978-1982, and about 11% in 1983-1987. The Project is part of the least cost program for meeting the projected growth of demand at discount rates up to 12%. The estimated economic return on the Project is at least 17.6%. iv. Since 1952, the Bank has made six loans (total US$108.65 million) and IDA has extended two credits (total US$25.7 million) for the development of the power sector in Turkey. Expansion of TEK's transmission system fin- anced by a loan of US$24 million (1971) is progressing well despite initial delays caused by shortage of staff. Also, in 1967, the Bank approved a tech- nical assistance grant of US$1.95 million for help in reorganizing the Turk- ish power industry and about US$1.57 million has been spent in stages through 1972 on three phases of work. Implementation of consultants' recommendations, with suitable modifications, is under way. No financial support has so far been given by the Bank/IDA to the Turkish mining sector.  - ii - v. The Project provides an opportunity to resolve some problem re- lating to organization, management, personnel, and finances which have baen apparent in TEK and which apply to some extent to TKI as well. The actions summarized below would assure satisfactory execution of the Project. vi. Since commencing operations in October 1970 with the nucleus of the Government organization previously engaged in the generation and trans- mission of power, TEK has, as provided in the TEK law, taken over generation and transmission facilities of municipalities and hydroelectric assets. Three changes of General Manager in under four years have, however, detracted from effective management in TEK. In addition, TEK has experienced an acute per- sonnel shortage, as high as 47% in July 1973 (48% inengineering>, owing to low civil service salaries specified under a Personnel Law applicable to all state economic enterprises from January 1971. Effective November 1973, Government has taken certain stop-gap measures to improve salary levels which are expected to solve some of the immediate problems. Since TEK's ability to execute the Project would be seriously in question should this shortage of staff continue, Government has agreed to let TEK engage staff on contract should such recruitment appear necessary in the opinion of the Bank. To improve management performance, the Bank has also asked Government to appoint the General Manager in future normally for a minimum three-year term. Personnel problems arising from low salaries under the Personnel Law also afflict TKI, and Government has agreed to take similar steps as in the case of TEK to resolve these. vii. TEK's organizational structure, inherited from its predecessor, is not entirely suited to its expanded responsibilities and was the subject of a 15-month study by consultants financed under the Bank's technical as- sistance grant and completed in December, 1972. TEK has agreed to complete its reorganization based on this study according to a time-bound plan, with needed emphasis on finance and accounting. viii. The Project is a complex one requiring smooth coordination of con- struction of the mining and power components in accordance with a single critical path schedule. Government has established a senior-level coor- dination committee for policy decisions and is also setting up a sub- committee which will meet more frequently. The Project consultants, familiar with such projects, will have a clearly defined advisory`role in the administration of the Project as well as in the technical and engineering work. ix. The financing plan for the foreign exchange cost of the Proj-ect is tied closely to completion of bidding for the principal items of equip- ment. Under this plan, in addition to the proposed Bank loan of $148 mil- lion, $129 million is expected from KfW and $92 million from the EIB. For the remainder, three members of EIB have indicated that they would be pre- pared to provide financing of about $45 million subject to their usual pro- cedures, the Turkish Government would cover $118 million and the balance of $153 million is expected to be provided by other bilateral lenders. It does not seem unreasonable to expect collectively from all these sources this amount; in the event such financing is not forthcoming, Government has agreed to provide it.  - iii - x. The Elbistan power plant and transmission lines form 33% of TEK's investment program in 1973-1981. The Bank loan of US$123 million would finance about 5% of the total construction requirements; the KfW loan another 2%, the EIF loan another 3%, internal cash generation 56% (assuming appropriate tariff increases), State Investment Bank (SIB) loars 5% and other miscellaneous sources 2%. Government is sanguine of raising the balance of 27% as bilateral aid or suppliers' credits on acceptable terms. xi. For the mine, the Bank loan of US$25 million would cover 8% of con- struction expenditure, the KfW loan 22%, the EIB loan 4%, other credits tied to contract awards 14% and foreign exchange resources of Government another 7,'. Further, SIB loans would finance 13%, Government equity contribution 13% and Government equity/loan (whichever form Government assistance may take) 19%. There will be no self-financing since TKI's other operations generate no funds for the purpose. xii. Since satisfactory financial performance by TEK is essential for its orderly growth, Government and TEK should take appropriate tariff action before the proposed loan is made effective. TEK has not earned the minimnum 8% return on realistically valued net fixed assets required by the covenants in the existing Loan Agreements, the shortfall varying from 1970 through 1972 (2.5% in 1970, 3.1% in 1971 and marginally in 1972); there would also be a shortfall of about 2.3% in 1973. In the wake of the recent surge in oil prices necessitating automatic recovery of increased fuel costs as fuel surcharge, TEK's electricity sale price rose 42% in the two months of December 1973 and January 1974 making difficult full tariff action to secure the 8% return and make up the shortfalls as required by the covenant (which alone would require a 30% increase) in the near future. To raise earnings to acceptable levels in the present conditions in Turkey, Governmenit lhas agreed to establishi new tariffs before loan effectiveness (which will secure TEK an increase in reve- nues of about 22%) and also to raise tariffs a further 31% not later than March 15, 1975. This will enable TEK to earn a return of about 3.5% in 1974, 5.4% in 1975 and 9.2% in 1976 on an asset base revalued to the 1973 level of prices. xiii. Inadequate earnings have been a feature of TKI's operations also. Without freedom to set its pricing policies and with coal and lignite prices traditionally fixed by Government with reference to prices of oil, tlhe competing energy resource, TKI lhas been operating at a loss since 1965 except in 1967 and 1969. Government, TEK and TKI will so fix the Elbistan lignite price as to give a minimum return of 8% on TKI's original Elbistan mining investment as revalued from time to time. xiv. Procurement of Bank-financed items would be according to the Bank's procurement guidelines. In the case of items not financed by the Bank, it would be ensured that technically satisfactory equipment is procured in time, always on the advice of consultants.  - iv - xv. TEK and TKI will enter into an agreement for TKI's Elbistan lignite sales to TEK, defining the principles of fixing the sales price and providing incentives to TKI to minimize expenses and achieve efficient operation. xvi. The Bank has accepted the High Control Board as independent auditors satisfactory to the Bank on the uncerstanding that its audit would include all the items mentioned in the Terms of Reference furnished by the Bank. xvii. In view of the agreements as set forth in Section 8, the Project is suitable for a Bank loan of US$148 million, US$123 million to TEK and US$25 million to TKI, for a term of 25 years with a 5-year grace period. Establish- ment of satisfactory project coordination arrangements, actual revision of TEK's books after asset revaluation as of December 31, 1973, and establishment of new basic electricity supply tariffs yielding TEK an average net revenue of 39 kurus per kWh would be conditions of loan effectiveness.  TURKEY APPRAISAL OF THE ELBISTAN PROJECT OF THE TURKISH ELECTRICITY AUTHORITY (TEK) AND TURKISH COAL ENTERPRISES (TKI) 1. INTRODUCTION 1.01 This report appraises the Elbistan Project in east-central Turkey, comprising an open-cast lignite mine to be constructed by TKI and a mine- based power station and associated transmission lines by TEK between 1973 and 1980. The planned mine output is 20.7 million tons p.a., 17.9 million tons to be used for the 1,200-MW plant and 2.8 million tons to be dried and processed in a special plant ancillary to, but not included in, the main Pro- ject to produce 1.23 million tons p.a. of saleable doirestic fuel. 1.02 The estimated cost of the Project excluding interest during con- struction is LT 13,488 million (US$963 million) comprising LT 9,215 million (US$658 million) for the power plant, LT 3,882 million (US$277 million) for the mine, and LT 391 million (US$28 million) for the transmission lines. A Bank loan of US$148 million (US$123 million for the power plant and trans- mission lines and US$25 million for the mine) is proposed towards the foreign exchange costs amounting to LT 9,595 million (US$685 million), excluding in- terest during construction. TEK and TKI would be the borrowers and the Repub- lic of Turkey the guarantor. This appraisal assumes that $92 million will be lent by the European Investment Bank (EIB) and $129 million, including sup- pliers credits, by Kreditanstalt fu~r Wiederaufbau (KfW) which have been con- sidering the Project in close association with the Bank ever since its incep- tion. 1.03 The rapid growth of the Turkish electric power system at some 12% p.a. requires a balanced development of thermal and hydro resources. The Project fits into such a development plan and has the added attraction of utilizing an internal resource as distinct from an imported fuel. 1.04 The Bank has made six loans and a technical assistance grant (total US$108.65 million) and IDA has extended two credits (total US$25.7 million) for the development of the power sector in Turkey: (a) Loan 63-TU of US$25.2 million in 1952, for the multipurpose Seyhan dam, 36-MW power plant and associated irrigation and transmission works; (b) Credit 34-TU of US$1.7 million in 1963, for a third unit of 18-MW at the Seyhan hydroelectric station; (c) Credit 59-TU of US$24.0 million in 1964, for a 100-MWI thermal station at Mersin, a 70-MW hydro2e1ctric station at Kadincik and associated transmission works;  - 2 - (d) Loan 623-TU of US$11.5 million in 1969, for the second stage of Kadincik (50-MW); and (e) Loan 775-TU of US$7.0 million in 1971, for transmission facilities and to cover increased foreign exchange costs of the second Kadincik hydroelectric project. These five loans/credits were for works in the service area of the Cukurova Electric Company (covering the four southern provinces on the Mediterranean) and were re-lent in whole or in part to Cukurova. All projects have been completed or are progressing satisfactorily. (f) Loan 568-TU of US$25.0 million in 1968, which was re-lent to Etibank (TEK's predecessor) for the 380-kV transmission lines from the Keban hydroelectric project to Istanbul with the asso- ciated substations; (g) Loan 763-TU of US$24.0 million in 1971, for expanding TEK's transmission system; (h) Technical Assistance Grant of US$1.95 million in 1967 for help in reorganizing Turkey's power industry. About US$1.57 million has been spent in stages on three phases of work in Etibank and TEK through 1972 (paras. 6.04 and 6.13). Government's proposals for using the balance of about US$0.38 million are under considera- tion; and (i) Loan 892-TU of US$14 million in May 1973, for the electricity construction program of the Istanbul Electricity, Tramway and Tunnel Co. for 1974 and 1975 and for studies to determine the long-term electricity, transport and gas organization for Istanbul. 1.05 The Project presents an opportunity for involvement in the Turkish mining sector to which no financial support has so far been given by the Bank/IDA. 1.06 This report is based on the findings of a Bank mission consisting of Messrs. I. Nathai, T.B. Russell, J.N.M. Green and H. Reinbach (mining consultant) which visited Turkey between September 17 and October 9, 1973, on a feasibility study conducted by a consortium of consultants led by Fichtner Consulting Engineers GmbH of Stuttgart, Germany, and on information supplied by TEK, TKI and the consultants. Prior to the appraisal, several Bank- missions had studied the Project at various stages of its preparation beginning from March 1971; there was also a special study in October 1971 by Mlr. D. Anderson, with the assistance of Mr. Orhan Tarkan of TEK, of the Elbistan power station's position in the overall development of Turkey's power system. A preappraisal mission reviewed the feasibility of the Project in March 1973, and another reviewed that of the proposed domestic fuel opera- tion in July 1973.  -3- 2. THE COUNTRY AND THE ECONOMY The Country 2.01 Turkey is geographically a link between Europe and Asia bordered by Greece, Bulgaria, the USSR, Iran, Iraq and Syria, and with a long coast- line (8,210 km) stretching from the Black Sea t:o the Mediterranean. The total area is 780,000 km2; 24,000 km2 in Europe and the rest in Asia. The estimated population at mid-1973 was 38.2 million, growing at about 2.5% p.a. Rivers are distributed throughout the country but their flow is mostly irregular. Considerable climatic variations exist, from typical Mediterranean climate in the south to severe continental climate with hot summers and cold winters on the high plateaus and mountainous regions of the interior. The Economy 2.02 Turkish development strategy since the foundation of the Republic fifty years ago has been based on modernization within a mixed economy, the main emphasis being on industrialization and self-sufficiency, a policy pursued with increased vigor following the launching of the first five-year plan in 1963. Since 1962, GNP has grown at nearly 7% p.a., industry at over 10% p.a. anid agriculture at 3.5% p.a.; the other sectors (construction, trans- port, housing and services) have grown at about 7% p.a. As a result, the structure of the economy has changed considerably; the respective shares of industry, agriculture and other sectors in GDP in 1972 were 23%, 28% and 49%, compared with 16%, 37% and 47% in 1962. Government estimates an acceleration of economic growth to about 8% p.a. and a steady rise in industry's share of GDP to 34% by 1987. GNP per capita would rise from US$420 in 1972 to nearly US$1,000 (in 1972 dollars) by 1987. 2.03 The combination of rapid industrialization and urbanization (urban population rose from 28% to 36% of total population in 1962-1970) has resulted in a correspondingly rapid increase in the demand for electricity (para. 5.01). This led to shortages in 1972 and 1973 since the generating program had not kept pace with demand. The projected future trend of economic growth and of urbanization (urban population is projected to reach 62% of total population by 1987) implies continued high rates of growth of electricity demand, which TEK's development program is designed to meet. 3. TIE SECTOR Energy Resources 3.01 Turkey has indigenous resources of lignite, coal and hydropower plus some oil, geothermal energy and uranium but depends on imported oil for about 50% of commercial energy requirements. Traditional fuels (firewood and "tezek" -- dried dung) are also important in the interior of the east, meeting  -4- about one-third (7 million tons petroleum equivalent) of total energy consump- tion at high economic cost, but the proposed dried lignite scheme (Annex 10) associated with the Project will mark an important step in reducing this dependence, Lignite reserves are estimated at 5,000 million tons, of which the Elbistan deposits constitute 60%. The quality is low, the calorific value ranging from about 1,000 kcal/kg at Elbistan to 2,500 kcal/kg elsewhere. The main coal deposits are in the Zonguldak basin on the Black Sea. Proven reserves are about 150 million tons, with another 800 million tons of probable and possible reserves. The quality is relatively poor (calorific value 4,000 kcal/kg). In 1972, about 1 million tons of coal (23% of total output) and 1.2 million tons of lignite (14% of output) were used in power stations, accounting for 26% of total electricity generation. 3.02 Estimates of proven oil reserves, at Batman in the southeast and near Iskenderun on the Mediterranean, vary widely from 20 to 70 million tons, equivalent to only 6 to 20 years' supply at the 1972 production rate of 3.5 million tons. This represented about 36% of total oil consumption, the balance being met by imports. Despite intensive development of indigenous resources, dependence on imported oil is expected to grow; prior to the price increases in late 1973 imports were projected to rise to 21 million tons by 1980 and to nearly 40 million tons by 1985 but they may now be less. Consump- tion for electricity generation is not expected to increase significantly above the 1972 level of 1.3 million tons if the Project is implemented. 3.03 Estimated usable hydroelectric potential is 73,000 GWh p.a. (16,000 MW at 50% plant factor), distributed over 26 river basins. Of this, 31,000 GWh is in the Firat (Euphrates) basin. Installed hydro capacity at end of 1972 was 880 MW, generating 3,200 GWh (30% of total); by 1974-end, these figures are expected to be 2,050 MW and 8,200 GWh. The State Hydraulic Works (Devlet Su Isleri - DSI) plans to develop virtually all the known econo- mic potential of over 7,000 MW (34,000 GWh), including 4,000 MW (20,000 GWh) on the Firat, by 1990. 3.04 Geothermal resources, although widespread, have been evaluated so far only in southwest Turkey (about 30 MW of potential), but development for power may have to await improved technology. Uranium reserves are esti- mated at about 3,000 tons of uranium oxide equivalent in low grade ores (less than 0.05%) hut systematic prospecting for uranium and thorium is just beginn- in,,. The identified reserves, thought to be commercially exploitable, could support a modest nuclear power program. The first nuclear station is planned for 1984. After 1990, electric power development is expected to rely heavily on nuclear energy. 305)^ A major objective of Government energy policy is optimum utiliza- tion of indigenous energy sources to restrain the growing dependence on im- ported oil. The proposed Elbistan lignite development is a logical step in this direction, a step which gains added justification now with the recent increases in petroleum prices.  - 5- Organization of the Power Sector 3.06 The Ministry of Energy and Natural Resources controls the electric power sector. At the time of the formation of TEK in October 1970, four state organizations, a half-dozen or so private companies, a large number of private industrial firms and more than 600 municipalities and villages were involved with generating, transmitting and distributing electricity. In place of the four state organizations which included a planning and statistical organization responsible for all planning in the sector, DSI, responsible for development of hydro projects, and Etibank, a State Economic Enterprise (SEE), whose power group constructed and operated all major thermal production plants and transmission lines throughout Turkey, selling energy to the distribution agencies and large industries, there are now only two: (a) TEK, responsible for the major part of the generation and tranmission of electrical energy in Turkey; and (b) DSI, responsible for hydropower development including planning. 3.07 Amongst the private utility companies, by far the largest is the Cukurova Electric Company which operates in the Adana area. The largest municipal distributors are in Istanbul, Ankara and Izmir; Istanbul and Izmir buy all their energy from TEK but Ankara still generates part of its require- ments. Other municipal authorities buy energy from TEK or Cukurova. 3.08 Law 1312 which established TEK charges it with resporsibility for planning the general electrification of Turkey including management of a village electrification fund; for constructing thermal electric plants and transmission and distribution lines; for operating the national transmission system and all the interconnected power stations except those privately licensed, and for selling energy to consumers in bulk or individually. DSI still plans and builds hydroelectric projects but only in cooperation with TEK. The law also provides means whereby TEK can take over other power sector enterprises. TEK has already tzaken over operation of all the power stations previously owned by Etibank and DSI, together with their staff, and also those owned by municipalities and Iller Bank, an SEE previously providing electric facilities at the smaller municipal and village level. Private utility companies are not affected by the creation of TEK. Distribution networks mav continue to be owned and managed by municipalities, though TEK mav take these over by mutual agreement with the municipalities or if they fail to pay their bills promptly. Development programs for distribution are initiated and implemented by each municipality with TEK coordinating the various programs. Existing Power Facilities 3.0() The installed capacity of public utility generating plant in Turkey at the end of 1973 was 2,489 MW, consisting of 2,101 MW (84%) in systems operated by TEK, 298 MW (12%) in Cukurova's system and 90 MW (4%) in small  - 6 - ;nstallations. In addition, private generation, mostly industri~.al, totals a20ut 300 W. The interconnected system operated by TEK which serves the western and central parts of the country supplies 95% of the demand. At t.-Ie end of 1973, apart from 49 MW of isolated installations, TEK's plants in the interconnected system comprised 817 MW of hydro plant, and 1,235 MW of thermal plant including a 630-MW oil-fired plant at Anbarli near Istanbul. 3.10 Owing to inadequacy of capacity (about 12% short of demand) in 1973, TEK shed up to 5% of peak load through frequency and voltage reduction. In October 1973, the situation was aggravated by plant failures necessitating interruption of supply for one hour per day to most customers on a rotating schedule. 3.11 TEK's present wholesale tariffs (including sales to municipalities and large industry), averaging 24.82 krs (UISd1.8) per kWh before the recent surge in fuel surcharge (para 7.16), have been in force since July 1, 1971, when the previous tariff was raised by about 50%. Retail tariffs are set by eaclh municipality, generally to meet cash flow objectives, typical retail tariffs being almost twice the wholesale tariffs, e.g. 45.68 krs in Istanbul and 46.20 krs in Ankara; however, in municipalities, surplus electricity revenues are often diverted into non-energy operations such as transport. Development Program 3.12 The planned national investment in generation and transmission including DSI hydropower stations during the period 1973-1981 is LT 49,412 million (US$3,529 million). With the exception of gas turbine and nuclear plants, the plan would concentrate on the development of internal lignite and hydro resources to minimize dependence on imported fuels. 3.13 The first 600-MW nuclear plant is due in 1984 to be followed in 1987 by another of 750-MW capacity (see Annex 1). Annex 2 shows the forecast growth of maximum demand for the interconnected system. 3.14 Technical transmission system studies to the year 1987 have been made and the development program is geared to meet the anticipated require- metnt. 8,300 km of 380-kV power lines are expected to be commissioned in the period 1974 to 1987. Village Electrification 3.15 Of the 36,000 villages 1/ in Turkey, only 268 were electrified prior to 1964 and of these only about 10 had received Government assistance in installing their power supplies. The pace of development has accelerated g>reatly following the launching of a planned program of village electrifica- tion in 1964. In the period 1964-67, 810 villages were electrified, or an I/ Average population 610, but ranging from below 50 to over 2,000.  - 7 - average of some 200 p.a. A further 3,722 villages (620 p.a.) were electrified up to September 1973, by which date some 4,800 villages had been electrified and construction of facilities was under way in a further 2,500 villages. The present program, which since 1970 has been the responsibility of a special organization within TEK, envisages a future rate of electrification of 1,000 villages p.a., an ambitious target which is likely to stretch TEK's resources to the limit. The program is financed by village contributions (25% of capital costs), a levy of 1 kurus/kWh (USd0.07) on non-village con- sumers of electricity excluding large industrial consumers, and contributions from the Government budget. The village networks are operated by the villages themselves under TEK's technical supervision. Villagers pay for electricity communally, the whole village being centrally metered and charged at 35 kurus/ kWh (US.^2.5). 4. THE PROJECT Description 4.01 The Project would comprise: (a) a thermal power station with four 300-MW lignite-fired units delivering, after meeting the power station and mine loads, an estimated 1,048 MW and 7,030 GWh p.a. to TEK's interconnected system; (b) 380-kV transmission lines, about 540 km long, connecting Elbistan with Kayseri and Ankara by 1978 and 1979 respectively (Map IBRD 10774); (c) an open-cast lignite mine (described in Annex 3) with a planned capacity of 20.7 million tons p.a., 17.9 million for the power station and 2.8 million for processing for sale as domestic fuel, including the cost of land and of restoration of the worked-out mining area (Map IBRD 10748); (d) separate permanent housing for power station and mine staff and roads between these and the works as well as Elbistan town; and (e) consultancy services. 4.02 The domestic fuel drying plant estimated to cost about US$75.5 million has been excluded from the Project because a final cost estimate cannot be made before completing bulk lignite sample tests leading to final enigineering design, and its construction will be at about the time of comple- tion of the Project when lignite production will surpass the power plant needs.  -8- 4.03 The power station is conventional except that the fuel is lignite having a relatively high (12 to 25%) ash content, moisture of about 55% and mean calorific value of 1,050 kcal/kg requiring boilers suited to this low- grade fuel. Emphasis has been placed on a proven and reliable design. Water supplies of suitable quality for the boilers and the condensing system will be derived from the dewatering wells of the open-cast mine. A fuel blending and stock pile will receive the mine output of varying quality and hold 1,000,000 tons which is a three-week reserve at 74% station load factor. 4.04 The mine will utilize the Kislakoy lignite deposit. A part of the output will be screened out as lumps in the size range from 80 mm to 150 mm for the domestic fuel plant (Annex 10 and Ma, IBRD 10748), and the balance delivered by belt conveyors to the powerhouse during the 25-year planned life of the workings. 4.05 Excavation of overburden and lignite will be by bucket wheel ex- cavators of a capacity of 3,000 m3 per hour of compacted material, amongst the largest in the world. All units will be of this size to allow flexible application to overburden or lignite working compatible with a uniform size of conveyor belt system throughout the mine. 4.06 Permanent housing will be constructed for senior and skilled operat- ing staff of the power station and mine at two separate sites. During construction, this housing will accommodate contractors, consultants and Project management staff. 4.07 The water table at or near the mine will be lowered by bore hole pumps. Groundwater conditions are still being investigated to verify expected iniflows from the karstic formations in the adjacent Kizildag range. Indica- tions so far are that these can be handled within the estimated Project pro- vision. Two drilling rigs are actively in use in this work. The Bank has been furnished the proposed drilling program for 1974 and TKI will keep the Bank -informed regarding progress of the program. Cost Estimate 4.0,q A detailed cost estimate for the Project in its several parts is shown in Annex 4. A summary of costs is given below:  9 -