Turkey - Karakaya Hydropower Project

Document of The World Bank 4 FOR OFFICIAL USE ONLY Report No. 2848-TU STAFF APPRAISAL OF THE KARAKAYA HYDROPOWER PROJECT TURKEY April 25, 1980 Projects Department Europe, Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Lira (LT) LT 1 100 Kurus (krs) US$1 LT 70 LT 1 US$0.014 Currency equivalents are those effective March 1980. WEIGHTS AND MEASURES kW kilowatt 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) 0.624 miles One kilogram (kg) (1,000 grams) 2.2 pounds One tone (metric ton) (1,000 kg) 2,205 pounds One kilocalorie (kcal) (1,000 calories) 3.968 BTU Cumecs (m3/second) 35.31 cubic feet per second GLOSSARY AND ABBREVIATIONS AY - Arthur Young & Company CEAS - Cukurova Elektrik A.S. (Cukurova Power Company) DSI - Devlet Su Isleri (State Hydraulic Works) EIB - European Investment Bank EIE - Elektrik Isleri Etut Idaresi (Electric Studies Institute) EGO - Ankara Electricity, Gas and Transport Company ELECTROWATT - Electrowatt Engineering Services LTD ESHOT - Izmir Electricity and Transport Company HCB - High Control Board IETT - Istanbul Elektrik, Tramway, Tunel Isletmeleri (Istanbul Electricity Tramway and Tunnel Company) KfW - Kreditanstalt fur Wiederaufbau MOE - Ministry of Energy and Natural Resources MTA - Mineral Research Institute SGI - Societe Generale pour l'Industrie SEE - State Economic Enterprise SIB - State Investment Bank SPO - State Planning Organization SWOCI - Stone and Webster Overseas Consultants TAMS - Tippetts-Abbett-McCarthy-Stratton TEK - Turkiye Elektrik Kurumu (Turkish Electricity Authority) TKI - Turkiye Komur Isletmeleri Kurumu (Turkish Coal Enterprises) TPAO > - Turkiye Petrolleri Anonim Ortakligi (Turkish Petroleum Corporation) Fiscal Year = January 1 to December 31  FOR OFFICIAL USE ONLY TURKEY KARAKAYA HYDROPOWER PROJECT Table of Contents Page No. I. THE POWER AND ENERGY SECTOR .................................. 1 A. Energy Resources ......................................... 1 Indigenous Resources ..................................... 1 Consumption Trends ....................................... 1 Organization of the Energy Sector ........................ 2 Energy Policy . ............................, 2 B. The Power Subsector ...................................... 3 General .................................................. 3 The Turkish Electricity Authority (TEK) .................. 3 The State Hydraulic Works (DSI) .......................... 4 The Electric Studies Institute (EIE) ..................... 4 Concessionary Power Companies ............................ 4 Municipal Power Distribution Enterprises .... ............. 4 Historical Development ................................... 5 Development Program ...................................... 7 Generation ............................................... 8 Transmission Network ..................................... 9 Rural Electrification .................................... 9 Development Program Costs ..........................., 9 Tariffs .................................................. 11 C. The Project Entities ..................................... 12 II. THE PROJECT .................................................. 12 Objectives ............................................... 12 Description .............................................. 13 Status of Engineering .................................... 14 Project Cost Estimate .................................... 15 Project Financing Plan ................................... 16 Implementation ........................................... 17 Procurement .............................................. 18 Disbursements ............................................ 19 Insurance ................................................ 19 Environmental Impact ..................................... 20 International Aspects .................................... 22 Project Risks ............................................. 25 This report was prepared by Messrs. V. Mastilovic (Engineer), W.G. Hamlet (Financial Analyst) and V.N. Rajagopalan (Loan Officer). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) Page No. III. FINANCE ...................................................... 26 Accounting and Auditing ................................. 26 Transfer of Karakaya Assets to TEK ...................... 26 TEK's Financial Performance ............................. 27 Substitution of a Cash Generation Covenant for the Existing Rate of Return Covenant ...................... 28 Municipal Overdues and TEK's Liquidity .... .............. 30 Power Subsector Financing ............................... 31 Proposed Comprehensive Review of Power Subsector Financing ............................................. 33 IV. PROJECT JUSTIFICATION ........................................ 33 Power Market Growth ..................................... 33 Alternative Development Strategies ...................... 34 Comparison of Alternatives .............................. 34 Return on Investment .................................... 34 V. AGREEMENTS REACHED AND RECOMMENDATION ........................ 35 ANNEXES 1.1 National Power Sector Statistical Data (1965-1978) 1.2 Interconnected Power System Statistical Data (1971-1978) 1.3 Thermal Power Plant Characteristics and Operation Costs 1.4 Hydropower Plant Characteristics and Operation Costs 1.5 Transmission Network Data 1.6 Forecast Balances of Capacities and Energy 1.7 Forecast of TEK's Electricity Sales 1.8 Existing and Projected Major Industrial Loads 1.9 Rural Electrification Program, Performance and Plans 1.10 Development Program Costs 1.11 DSI's Organization Chart 1.12 TEK's Organization Chart 2.1 Description of the Project 2.2 Project Cost Estimate 2.3 Construction Works Schedule (CPM Network) 2.4 Central Coordinating Committee 2.5 Disbursement Schedule 2.6 Studies of Reservoir Filling and Operation for Projects on the Euphrates River 3.1 TEK's Income Statements for the Years Ended December 31, 1973-79 3.2 Objectives and Method of Monitoring TEK's Cash Generation 3.3 TEK's Cash Generation and Power Subsector Investments of TEK and DSI for the Years Ended December 31, 1980-86 3.4 Terms of Reference for the Comprehensive Review of the Power Subsector Financing 4. Justification of the Project 5. Selected Documents Available in the Project File MAPS IBRD - 14798 IBRD - 12793R1  I. THE POWER AND ENERGY SECTOR A. Energy Resources Indigenous Resources 1.01 Turkey's main indigenous energy resources are hydropower and lignite. Other resources consist of coal, oil shale, oil, uranium and geothermal energy. The total hydropower potential is estimated at 100,000 GWh p.a. with a corres- ponding installed capacity of 25,000 MW; of which nearly 30% is developed or under construction. The major part of the estimated usable hydropower potential (31,000 GWh) is concentrated in the Euphrates River (called the Firat in Turkey) basin, where the Keban (6,278 GWh; 1,260 MW) and Karakaya hydropower plants (7,762 GWh; 1,800 MW) are now being developed. The first four out of eight generating units of the Keban hydropower plant are already in operation. Lignite reserves are estimated at 5,500 million tons. The largest deposits are at Afsin-Elbistan, where a 1,200 MW thermal power plant is now under construction. Based on the lignite reserves it would be possible to build additionally about 10,000 MW of thermal power plant. The estimated oil reserves are in the order of 60 million tons, but intensive prospecting for oil and gas has not yet been done. The known reserves of uranium total 4,500 tons of uranium oxide (U308). Geothermal energy resources, though of wide occurrence, have not been adequately evaluated so far. The first geothermal power plant (15 MW) is currently under construction to test feasibility and economic viability of geothermal fields for electricity generation. Non- commercial energy sources, wood and wastes, which contributed more than half of Turkey's energy supply in 1960 have declined to less than 20% by 1978. The rural energy supply is a serious issue which calls for more active considera- tion in planning and policy decisions. This will be followed-up as part of the Bank's economic and sector work program. Consumption Trends 1.02 Total primary commercial energy consumption in Turkey has increased from about 11 million in 1960 to 30 million tons of oil equivalent in 1976 (the latest year for which data are available). This reflects an annual growth rate of 6.5%. The per capita consumption of commercial energy in Turkey reached 780 kgs of oil equivalent in 1976, compared with 2200 kgs for Yugoslavia and an average for all developing countries of 298 kgs. The most important trends in the energy supply pattern have been the decreasing share of coal and non-commercial sources of energy and the increasing share of petroleum, which now accounts for more than half of total energy consumption. While the share of coal in energy supply has shown a declining trend in the last twenty years, lignite utilization, particularly in power generation, has significantly increased. Petroleum consumption in 1978 was about 17 million tons of which about 3 million tons, or 18%, were produced domestically. Amongst the petroleum products, fuel oil, which is used primarily for power generation and in industry, accounts for nearly half of the total petroleum  - 2- products consumption. The cost of imported oil, which will reach US$3.2 billion in 1980, is nearly equal to the country's entire annual export income. The country's economy is currently almost paralyzed by the oil supply shortages, which are expected to continue in the foreseeable future. Organization of the Energy Sector 1.03 The Ministry of Energy and Natural Resources (MOE), established in 1963, has official jurisdiction over the development of energy resources in Turkey. The main organizations in the energy sector dealing with power generation and supply are described below (para. 1.06). The public sector organizations involved in development of fossil fuels and radioactive minerals are the Turkish Coal Enterprises (TKI), the Turkish Petroleum Corporation (TPAO) and the Mineral Research Institute (MTA). TKI is a State Economic Enterprise (SEE) responsible for developing Turkey's coal and lignite resources and for selling its production of coal, lignite and by-products. TKI's development plans are closely interrelated to coal and lignite requirements for power generation. TPAO deals with the exploration of petroleum and natural gas resources and owns three of the four existing oil refineries in Turkey. TPAO also owns and operates about 1,500 km of oil pipelines. The marketing and distribution of petroleum products is carried out by domestic and foreign petroleum companies. MTA is involved in the exploration of coal, lignite, geothermal energy and uranium ore. MTA coordinates its exploration programs with TPAO and carries out geological and geophysical studies for TKI, TPAO and other institutions. Energy Policy 1.04 A major objective of the Government's energy policy is optimum utilization of indigenous resources to restrain the growing dependence on imported oil. As a part of such policy Turkey is trying to develop its own energy resources, particularly hydropotential of the Euphrates River and lignite deposits at Afsin-Elbistan. These resources are located in the eastern part of the country while consumption is predominately in the urban- ized western Turkey. The hydropower potential and lignite reserves could cover power generation needs almost to the end of this century. In late 1990s, power sector development is expected to rely on nuclear energy. Although not economically justified before 1994, the first nuclear power plant is planned for 1988 in order to obtain required experience in the construction and operation of nuclear power plants. 1.05 Apart from measures to develop indigenous energy resources and to restrain the pace of oil consumption through price increases and restricted supply, the Government plans to expand petroleum exploration activities by increasing the financial resources available to TPAO, encouraging joint- ventured exploration efforts in collaboration with foreign oil companies, providing increased incentives for offshore explorations and application of enhanced recovery methods to existing oil fields. However, despite all these measures, Turkey is unlikely to accomplish its objectives of meeting 60% of the demand from domestic production during this decade, unless sizeable new reserves are discovered in the near future. Specific features of the national  -3- energy policy are: effective energy conservation; development of oil shale, geothermal and solar energy and other resources; and long-range energy planning encompassing viable supply options, demand and utilization patterns. The cost of imported oil, and prolonged fuel oil and power shortages make energy supplies one of the most critical factors constraining Turkey's economy growth. Therefore, the Bank's continuing involvement in assisting Turkey to develop its own energy resources, particularly hydro and geothermal, would help Turkey to alleviate the dependence on imported crude oil and reduce the risk of energy supply interruptions. B. The Power Subsector General 1.06 Main organizations involved in power generation, transmission and distribution, including other activities of interest for the power subsector, are the Turkish Electricity Authority (TEK), the State Hydraulic Works (DSI), the Electric Studies Institute (EIE), concessionary power companies--the Cukurova Electric Company (CEAS) and the Kepez Electric Company (Kepez AS), and municipal power distribution enterprises. The Turkish Electricity Authority (TEK) 1.07 TEK is an SEE with headquarters in Ankara. According to Law 1312, which established TEK in 1970, the main responsibilities of TEK are: to prepare the plans and programs for the general electrification of Turkey; to construct thermal power plants, transmission and distribution networks; to carry out rural electrification and to manage the Rural Electrification Fund; and to generate, transport, distribute and sell electricity to municipal power distribution enterprises and to large customers. It may borrow in its own name with the Ministry of .Finance as guarantor. SEEs, such as TEK, are required to run on commercial lines, and are subject to taxation (e.g. income taxes of 41.7%) like private joint stock companies. However, SEEs are still subject to close Governmental supervision and their autonomy has been severely limited by their lack of freedom in setting personnel policies and structuring salary scales and the Government's active role in determining pricing of their goods and services. TEK's ability to recruit and retain competent personnel, especially experienced engineers with senior level management capabilities, has long been affected by the Personnel Law governing SEEs. Attempts to overcome management and staffing problems through special authority to hire outside personnel on contract did not prove to be effective. Under the TEK II loan, TEK's consultants have prepared a detailed manpower study and TEK has agreed to furnish a program of action to implement the recommendations of the study. The manpower problems can only be resolved by a basic SEE reform. The new economic policy package, announced by the Govern- ment on January 25, 1980, envisages substantial changes in SEEs. SEEs will be allowed to set their own prices and their deficits will no longer be met from the budget.  -4- The State Hydraulic Works (DSI) 1.08 DSI, with a central office in Ankara, is a state agency (created by Law 6200 in 1953) with the principal responsibility for developing water projects for the three sectors of: (1) Agriculture - including primary irrigation, draining of marshy lands, and flood control; (2) Power - identification, design, and construction of hydropower plants to generate electricity; and (3) Public Service - supply of domestic and industrial water for cities over 100,000 population and assisting these cities in plan- ning, designing and constructing sewerage networks and treatment facilities. The TEK law requires that, while preparing its five-year plan and annual investment programs, DSI shall take into consideration TEK's requirements of hydropower facilities. The law further provides for continuous collaboration between DSI and TEK in the areas of identifying, planning, constructing and operating hydropower installations and also stipulates that coordination between the two authorities will be ensured by MOE. The Electric Studies Institute (EIE) 1.09 EIE is a study and research institute mainly involved in geological investigations and hydrological studies, including the collection of hydro- logical data. This institute also acts as a quasi-consulting agency for power organizations, TEK, DSI and MOE. Concessionary Power Companies 1.10 While TEK is responsible for electricity generation and transmission in 63 of the 67 provinces of Turkey, power operations in the other four prov- inces are delegated to the concessionary companies; CEAS and Kepez AS. CEAS takes responsibility for the three provinces of Adana, Icel and Hatay. Its power system is connected to the Turkish interconnected network by 154-kV transmission lines. Kepez AS has the concession for the province of Antalya. The power system in this area is also linked to the Turkish interconnected network and part of its power requirement is met by purchases from TEK. In both concessionary companies TEK is the largest individual shareholder. These companies, allowed to operate but not to expand, may in time be nationalized. Municipal Power Distribution Enterprises 1.11 Turkey has over a hundred municipal power distribution organizations, of which the largest are in Istanbul, Ankara and Izmir. Electricity sales of  - 5 - these three large distribution companies represent about 63% of the total municipal sales. Most municipal organizations are also involved in other municipal activities, such as public transportation and gas supply. Historical Development 1.12 National power subsector statistical data for the period 1965-1978 are shown in Annex 1.1. Total generation increased from 4,953 GWh in 1965 to 21,726 GWh in 1978 (trend growth rate 11.5% p.a.). Total installed capacity rose from 1,491 MW in 1965 to 4,869 MW in 1978. Hydro generation averaged about 37% of the total generation during the period. The development struc- ture of electricity sales, in total and by customer categories, is summarized below: Sales (GWh) 1965 % 1978 % Residential 560 13 2,796 15 Commercial 264 6 1,198 6 Industrial 3,080 73 13,885 73 Government 163 4 685 3 Public lighting 116 3 323 2 Transport 54 1 133 1 Total 4,237 100 19,020 100 Total electricity sales increased at a trend rate of 10% 1/ annually. Indus- trial consumption was predominant and its share in total electricity consump- tion (73%) remained unchanged. This also indicates that domestic consumption is still undeveloped and that about a half of the population has no access to public electricity supply. Electricity losses increased from 16.9% in 1965 to 17.5% in 1978 of total electricity,sales. Such very high losses are mostly caused by inefficient power plant operation, old generation and distribution facilities, and inadequate electricity meter readings and customers' billings. 1.13 Power subsector statistical data for the interconnected system are shown in detail in Annex 1.2. The installed capacity of the public utilities generating plants in Turkey at the end of 1978 was 4,125 MW (85% of Turkey's total), consisting of 3,801 MW (92%) in the system operated by TEK, 298 MW (7%) in CEAS' system and 26 MW (1%) in Kepez's system. In addition, munici- palities' installed capacity was 145 MW and self-producers' 597 MW. In 1978 power generation of the three power utility companies amounted to 91% of the total power generation in Turkey, municipalities 1% and self-producers 8%. 1/ Annual increases fluctuated widely; from 7.9% in 1974 to 19.2% in 1976 and to 6% in stagnant 1978. Years 1977 and 1978 were characterized by severe power supply restrictions.  The maximum demand of the interconnected system reached 3,641 MW in 1978. Specific electricity consumption increased from 229 kWh/capita in 1971 to 441 kWh/capita in 1978, the level achieved by Portugal in 1956. 1.14 The power system at present contains a large number of small, inefficient generating plants (up to 100 MW). Combustion turbine plants represent about 20% of the total thermal capacities. These plants are not only used for covering peaking demand but also for prolonged base load requirements. Three larger hydropower plants are Gokcekaya (278 MW), Sariyar (160 MW) and Keban (1,260 MW), half of which is now in operation. All other hydropower plants have installed capacities less than 100 MW. Basic data and main characteristics of the thermal and hydropower generating plant (existing, under construction and proposed) are given in Annexes 1.3 and 1.4. These annexes indicate that the majority of TEK's existing power generation plants are old and very expensive for power generation. 1.15 The transmission network consists of overhead transmission lines and substations operated at 34.5, 154 and 380-kV, which interconnect almost the entire country. Details of the transmission network are given in Annex 1.5 and Map (IBRD 14798). The 380-kV transmission network has been in operation since 1974. This network, which is of the predominantly radial configuration, has been proven as rather stable; voltage and reactive power control were satisfactory, as were energization conditions and insulation coordination. 1.16 The operation of the generating plants and the transmission facili- ties is coordinated by TEK with full cooperation of CEAS and Kepez. The Turkish power system is interconnected with the Bulgarian and Russian power systems through 154-kV transmission links. These links permit power import and emergency supplies. Since 1975 Turkey has been importing electricity, which reached an amount of 621 GWh in 1978 (about 4% of TEK's sales). A possible interconnection with Syria is under consideration. Turkey is an active member of the group of the Balkan power organizations which has the objective to promoting interconnection and joint operation of the power systems by studying and proposing solutions for various power system opera- tional problems. Due to the lack of fuel-oil for thermal power plants, inadequacy of generating capacities and operational problems, Turkey is forced to shed load and impose frequency and voltage reductions. Power cuts in duration of 5 hours a day or more are a regular practice. No systematic attempts have been made to evaluate the losses to the national economy caused by the power cuts. It is believed an undelivered kWh costs the national economy five to ten times that of its tariff value. There is no automatic load-frequency control and the teletransmission data system is undeveloped. TEK is presently studying these matters so that necessary improvements may be expected in the next few years. 1.17 Since 1952 the Bank has made nine loans and a technical assistance grant (total US$356.65 million) and IDA has extended three credits (total US$55.7 million) for the development of the power subsector in Turkey. These comprise loans/credits for three hydropower projects, of which two are multi- purpose; two thermal power plants (oil-fuelled and lignite); a lignite mine; and transmission and distribution network projects. The Technical Assistance  - 7 - Grant was for help in reorganizing the Turkey's power subsector. The first five loans/credits were for works in the service area of CEAS. All the projects in the CEAS' area were successfully completed and are now in operation. The project performance audit report on two loans to CEAS (623-TU and 775-TU) concluded that the key objectives of these loans were largely met. The Istanbul Power Distribution Project is about three years behind schedule. The Elbistan Lignite Mine and Power Project, which is being co-financed by the Bank, KfW and EIB, has been delayed more than two years mainly because the Borrowers, TEK and TKI, are chronically short of qualified and experienced staff and project coordination is ineffective. The last loan was made for the TEK Transmission,II project in 1975. Although Bank's lending to TEK and TKI has not shown the expected results it was instrumental in their institutional building and introduction of modern planning, managerial and financial methods and practices. Development Program 1.18 The national load forecasts, prepared by TEK, for the period 1979- 1986 (Annex 1.6) show sales increasing from 21,805 GWh in 1979 to 56,857 GWh in 1986, with a trend growth rate of 13.9% p.a. The maximum demand would increase from 4,060 MW in 1979 to 11,240 MW in 1986. TEK's electricity sales forecasts are shown in Annex 1.7. Sales to municipalities would represent 48% of TEK's total sales in 1980 and 36% in 1986. A relatively rapid increase is expected in large industrial sales, whose share in TEK's total sales will increase from 42% in 1980 to 50% in 1986. According to contract arrangements with Bulgaria and the USSR, Turkey will import during the period 1979-1982 up to 2,000 GWh annually. The forecast also implies that per capita consumption would rise from about 441 kWh/capita in 1978 to some 1,600 kWh in 1992, i.e. to about the level attained by Yugoslavia in 1972 or Italy in 1966. 1.19 While the previous TEK load forecasts, though seldom fully realized, have been found to be within a reasonable range of divergence, TEK's current projection looks optimistic in relation to Turkey's present stage of develop- ment and near-term prospects. Projected major new industrial loads are shown in Annex 1.8. TEK's forecast of industrial consumption does not appear to be realistic in spite of the fact that an increase of industrial consumption is expected when major power plants (Elbistan, etc.) enter into operation. Therefore, an alternative load forecast has been prepared for appraisal purposes, which shows an annual load trend growth rate of 11.2%. It is always possible that some of the industrial loads may be late or fail to materialize and also changes in other customer categories might occur. Therefore, for the sensitivity analysis of the power subsector development TEK uses annual growth rates +10% of the basic forecast, which are judged to cover the likely range of possibilities. 1.20 TEK's Planning Department, in association with the design and construction department of TEK, DSI, and foreign consultants, prepares long- term development studies (up to the year 2000) and medium-term investment programs. The medium-term investment programs are usually revised at least once a year. The Bank has played an active role in introduction of modern planning methods in the Turkish power system. Power system planning methods  -8- in Turkey are soundly based for the purpose of determining the least-cost development programs, using computer models incorporating linear programming and mathematical simulation techniques and testing the results over a reason- able range of discount rates (up to 16%). All development alternatives envisage the construction of the Karakaya hydropower project as part of the least-cost means of meeting the projected growth of power demand in Turkey. 1.21 While the power system planning methods appear to be generally adequate, the present procedures for power subsector planning, especially hydropower planning, should be further improved. In order to develop the available hydropower potential about 540 hydro sites have been identified for possible development, of which only 40 have been studied in detail. TEK is not always fully involved at the identification, selection and design stage of new hydropower plants as it should be, in order to ensure preparation of the most appropriate hydro projects for construction. MOE does not fulfill properly its coordination function between DSI and TEK in power subsector planning. There is insufficient coordination also between TEK and TKI in formulating development programs for coal and lignite mining construction. MOE, State Planning Organization (SPO), DSI, TEK, TKI and other concerned agencies charged with the responsibility of formulating long-term and medium- term plans for power subsector development should improve their mutual coordination in the hydropower planning and coal and lignite development programs. During negotiations, the Government has agreed: (i) to complete, by December 31, 1981, a review of existing arrangements for the coordination of the development and investment plans in the power subsector, particularly hydroelectric planning and the development programs of TEK and TKI; (ii) to make recommendations on strengthening integrated investment planning and coordinating procedures to be used for its power subsector and on measures to be taken to ensure the timely execution of investment plans; and (iii) after the Bank's comments, to implement promptly the proposed recommendations and measures. Generation 1.22 Details of forecast national energy and capacity balances and pro- posed generation facilities are given in Annex 1.6. They show that the installed capacity is expected to grow from 5,134 MW (41% hydro) in 1979 to 15,976 MW (51% hydro) by 1986. The plant margin is very low in the period 1980-1983. In this period, the generating plants would not be capable of meeting, without restrictions, the required power system needs in the case of average and low hydraulicity. According to the preliminary results the hydrological conditions in 1979 were favorable and hydro generation achieved its expectations. In the period 1984-1986 the plant margin looks appropriate taking into account likely delays in the new power plants' commissioning, changeable hydrological conditions, generation and transmission facility outages, and unexpected changes in electricity consumption. 1.23 Thermal power plants, under construction or proposed, would use lignite for power generation. Among these twelve thermal power plants special attention and priority would be given to the completion of the Elbistan, Soma and Yatagan thermal power plants. Installing the remaining four generating  - 9 - units at Keban and construction of the Karakaya and Oymapinar hydropower projects are of the highest priority in the Turkish power system. The progress of the construction of the power plants is dependent on available financial resources, both local and foreign. The Turkish authorities have confirmed that the available financing would be used primarily for these high priority power plants. DSI has secured the preparation of feasibility studies and basic designs, some of which detailed, for several economically attractive hydropower projects, but financial constraints still prevent their construction. DSI's capability to undertake multiple projects, once a constraint, is now con- sidered to be adequate. Transmission Network 1.24 Major power generation will be concentrated in eastern/central Turkey and has to be transferred to the consumption centers located in the western part of the country over a distance of about 700-800 km. Transmission network construction until 1986 will include 5,669 km of 380-kV, 45,000 km of 154-kV and 30-kV lines and 22,363 MVA in substation capacities. Several transmission network alternatives, including superimposition of an 800-kV network or of a high voltage direct current link, have been studied by TEK and its consultants. The selected alternative calls for further extension of the 380-kV transmission network. The preliminary plan of the 380-kV transmission network at the stage when all the hydropotential of the Eurphates River basin and the lignite fields at Afsin-Elbistan are fully developed has been prepared. Rural Electrification 1.25 At the beginning of 1979 about 70% of the population in rural areas still had no access to public electricity supply. The Government plans to provide in the period 1979-1986 electricity to some 19,000 villages having populations ranging from 50 to 2,000. Prior to 1964, only 268 villages had been electrified but since then the number of villages electrified each year has gradually increased, reaching about 1,750 in 1978. In the future it is hoped that the rate can be about 2,500 villages per year. By the end of 1978 about 12,500 villages had been electrified (Annex 1.9). Standardization of equipment and improved construction and contracting procedures have accele- rated the rate of rural-area electrification. The rural electrification program is financed by contributions from the Government budgets, village contributions (which will be abandoned), a levy of one krs/kWh on non-village consumers of electricity excluding large industrial consumers and various public authorities. The Rural Electrification Fund is managed by TEK and construction of rural electrification networks is done by various state agencies and local contractors. Development Program Costs 1.26 Details of the development program and its costs are given in Annex 1.10. The total estimated investment costs during the period 1980-1986, based on early 1980 prices, are summarized below:  - 10 - US$ Million Hydropower Plants (DSI) 4,107 Thermal Plants, Transmission and Rural Electrification (TEK) 14,164 Distribution (Main Municipalities) 1,637 Lignite Mines for Power Generation (TKI) 2,185 Total 22,093 of which the Project 919 (4% of total) An intensive construction program is required to meet power requirements after several years of severe power shortages due to delays in power generating plant construction. The development program costs appear large and it would not be reasonable to expect that the whole development program would be completed in the studied period. It is traditional for Turkey's development plans and the state economic enterprises to overstate their investment pro- grams. These programs are usually scaled down on an annual basis to comply with financial resources availability. Therefore, this program has been analyzed taking into account the lower growth demand. The results have shown that the proposed construction program hardly covers power requirements up to 1984, as estimated by the appraisal mission. The physical power subsector investment program is unrelated to available financial resources. Changes in the Fourth 5-Year Plan will, therefore, be made in the annual programs and the SPO has promised to notify the Bank of any changes. 1.27 It was not possible to study in sufficient depth as part of the Project's appraisal the financial implications for Turkey to find the needed capital resources. However, given present serious resource constraints, it is obvious that Turkey would have many difficulties in securing financing of some of their projects. Furthermore, TEK's investment program contains more than US$4 billion for future thermal power projects yet to be indentified. These projects are planned to be commissioned after 1986. It would be reasonable to expect that investments for the above projects will be postponed by 2-3 years due to difficulties in securing their financing. Therefore, actual investments in the power subsector are estimated to be about 75% of TEK's investment plans. This estimate corresponds to the recent Turkish experience in power subsector investments (para. 3.18). In the past, the subsector's development has been funded primarily from the national budget and only to a slight extent from its own cash generation capability. Extensive foreign borrowings have also been necessary. Government's ability to sustain the forecast rates of growth has not been demonstrated. From the viewpoint of project execution, the public sector institutions suffer from an acute shortage of experienced staff at all levels and this both hampers the physical execution of works and makes virtually impossible the application of modern management practices even when there is a willingness to adopt these. The result has been that projects are substantially delayed and the power subsector has for the past several years been unable to meet the demands for electricity.  - 11 - Tariffs 1.28 TEK is, by law, free to determine the prices of its goods and services. By a decree of 1967, this freedom was circumscribed when prices of basic goods and services such as electricity, coal, cement, steel, rail transport, etc. became subject to the approval of the Council of Ministers. Though this decree provided for Government's compensation of any loss result- ing from its price fixation, in practice, decisions were reached through informal consultations between TEK and the Government, to avoid mandatory Government subsidies. This blurred responsibilities in the matter of meeting tariffs and left TEK unable to fix tariffs in relation to its costs and to secure its financial objectives. However, in January 1980 this situation was changed when the Government removed most of the goods and services provided by SEEs from the purview of basic goods, thus restoring the freedom of the enterprises to determine prices, except for electricity tariffs for aluminum and ferrochrome production and for coal and lignite; in the case of these items, the Government would reimburse the SEEs for any losses incurred by them. 1.29 TEK's present electricity tariffs are established on the basis of double-term tariff rates, for load demand (kW) and energy (kWh), and a single-term tariff rate for energy only; included is an automatic fuel adjust- ment clause, and penalties for excessive reactive energy consumption. With certain exceptions, the consumer may choose between the double and single-term tariff rates. The tariff structure does not reflect directly the costs to the economy of meeting the demand for electricity supply. TEK has completed a comprehensive tariff study covering the whole country with a view to estab- lishing appropriate pricing policies and tariff structures at the bulk supply level and at retail distribution level. The Government appointed a committee of experts (para. 3.21) to establish pricing policies and would incorporate the tariff study in making its recommendations for pricing policies for electricity. 1.30 Retail tariffs are set by each municipality subject to the approval of MOE. A revision of TEK's tariffs would normally necessitate corresponding revision of municipal tariffs in order to maintain a viable financial position of municipalities. However, in the past, revision of municipal tariffs was sometimes delayed causing severe financial problems for the municipalities. The Government agreed under Loan 1194-TU to ensure that municipal retail tariffs are adjusted promptly and in a manner and amounts commensurate with adjustments TEK may make from time to time. In keeping with this undertaking, the Government has taken action to increase municipal retail tariffs follow- ing TEK's tariff increases in 1978, 1979 and 1980. Istanbul's sales are 20% of TEK's total sales, and Istanbul's retail tariffs were increased nearly 135% from September 1, 1979 to April 1, 1979; and the increase in 1980 is expected to average about 150%. TEK's tariffs and the problems of munici- palities diverting electricity revenues for other municipal purposes are discussed in para. 3.13.  - 12 - C. The Project Entities 1.31 DSI is responsible, in coordination with TEK, for planning, design- ing, constructing and putting the Project into effective operation. TEK will be responsible for operation of power facilities, after the assets are trans- ferred to it as Government equity. Agencies responsible for the relocation of installations and services within the Project area will also actively contri- bute to the realization of the Project. These include the general directorates for State Highways; Railroads, Harbors and Airports; PTT and Settlement. 1.32 DSI's functions and legal responsibilities are described in para 1.08. The existing organization of DSI is shown in Annex 1.11. It is admin- istered by a Director General and has a field organization consisting of 21 Regional Directorates and Operating Groups. DSI runs on the line manage- ment principle by suitable delegation of authority. It has about 30,000 employees, some 2,000 of which are engineers. Over 2,000 of the total staff are located in the central office in Ankara. Under the DSI law, Government finances expenditures of nearly all DSI activities from its annual budget allocations. DSI has long experience in hydropower plant construction, management, procurement, and environment protection matters. With the assis- tance of the selected consultants and improved Project site management (para. 2.15) DSI will be capable of ensuring proper construction management of the Karakaya hydropower project. 1.33 As the ultimate beneficiary TEK will have the responsibility of operating the Project. TEK employs about 18,000 of which 1,500 are engineers and technicians. The organizational structure of TEK is shown in Annex 1.12. In spite of the current staffing problems, it is expected that TEK will be able to operate the Project satisfactorily. The required operating personnel will be trained in the Keban hydropower plant and then transferred to the Karakaya hydropower plant to take over its operation and maintenance. TEK also plans to arrange with DSI additional training for the Karakaya operating staff during construction of the Project. The planned arrangements for recruitment and training of the Project operating staff are considered satisfactory. II. THE PROJECT Objectives 2.01 The principal objectives of the physical facilities of the Project will be to provide additional capacity for the Turkish power system (1,800 MW and 7,353 GWh yearly average) and to enable better utilization of the upstream Keban hydropower plant (the output of Keban will increase by about 400 GWh in an average hydro year), thus saving on foreign expenditures by substituting less expensive hydropower energy for imported oil. Further benefits would be increased job opportunities for the local construction sector and additional employment possibilities during the construction period. Also, some benefits  - 13 - for future projects are expected from the Project, as a result of the more regulated Euphrates River flows downstream of the Project dam site, but these have not been quantified so far. The Karakaya project area is one of the most backward regions in Turkey, both socially and economically. The Project is expected to have a positive influence on social and economic development and to contribute to reducing poverty in this part of Turkey. Additional objec- tives would be the continuation of the institution-building effort started with the establishment of TEK, improvement of coordination in power sector planning, the development of appropriate policies for power sector financing, including energy pricing, and possible contribution toward riparian coordina- tion in the use of the Euphrates waters. Description 2.02 The Project is described in detail in Annex 2.1. It consists of the Karakaya dam and hydropower plant with a reservoir of 5.6 km3 of useful storage on the Euphrates River, located about 160 km downstream of the Keban hydropower plant, comprising a concrete arch-gravity dam 173 m high with an overflow spillway, intakes, penstocks, a power house at the toe of the dam containing six 3Q0-MW turbogenerator units, appropriate accessory equipment and a switchyard located 2.5 km from the dam, relocation of 33 km of railway line, construction of 35 km of new roads, and resettlement of about 17,000 people living in 34 villages. 2.03 Transmission lines (380-kV) from the Karakaya switchyard to the interconnected power system, not a part of the Project, having a total length of 1,300 km and estimated to cost about US$120 million, of which US$75 million is in foreign exchange, would be constructed by TEK taking into account not only the transmission of the Project's capacity but the strengthening of the national transmission network. The construction of these lines could start in 1982 to be completed in line with the commissioning of the Project's generating units. During negotiations, the Government has agreed to: (i) make arrange- ments satisfactory to the Bank for securing the financing needed to ensure completion by TEK of the 380-kV lines connecting the Project with the power system in Turkey not later than October 31, 1984; and (ii) provide the Bank with a construction schedule and a financing plan acceptable to the Bank by June 30, 1981. 2.04 The Karakaya hydropower plant would, chronologically, constitute the second step in the long-range development of the power resources of the Euphrates River in Turkey. The first step in the development of the Euphrates River basin was the Keban scheme, which utilizes a 152 m head, and provides the basic regulation of the Euphrates River. Ultimately, Keban will attain an installed capacity of 1,260 MW, with an annual generation of 6,252 GWh. The total capacity of the Keban reservoir is 30.7 km3, of which useful storage is 16.3 km3 or about 75% of the mean annual flow of the river. The total storage of the Karakaya reservoir would be 9.6 km3 and its useful storage 5.6 km3, i.e. about one-third the magnitude of the upstream Keban reservoir. Karakaya, a single purpose hydropower project, is conceived for power generation alone. In order to obtain its maximum power generation benefits, Karakaya must be operated in conjunction with Keban. The gain in power generation  - 14 - due to Karakaya would be 7,762 GWh annually, of which 83% is firm power generation. The regulation effect of the Karakaya reservoir would be useful at future downstream dams, but would not substantially influence the Euphrates River flows, which are basically regulated by the much larger Keban reservoir. Therefore, the Karakaya hydropower project would, in essence, process water discharged through Keban turbines and additional inflows between the Keban and Karakaya dams. Status of Engineering 2.05 The development of the water resources of the Euphrates River in Turkey has been actively investigated since 1962. In 1968, DSI engaged a group of consulting engineers to study the development of the Lower Euphrates basin in Turkey for the purpose of hydropower production and irrigation of arable lands. Geological and site investigations of the Project have been very thorough and found adequate for the type of dam to be constructed (Annex 2.1). A joint venture of Electrowatt Engineering Services Ltd. (Switzerland), TAMS (USA), Societe Generale pour l'Industrie (Switzerland) and Dolsar Engineer- ing Limited (Turkey) has been engaged for the project design and to assist DSI in the supervision of construction and in procurement, manufacturing control, erection and inspection of permanent equipment. The consultants will also assist DSI and TEK during the initial operation of the Project. The assis- tance will include making recommendations in solving technical problems, in establishing operating rules of the plant and reservoir, and in making reservoir operating studies for optimum power generation. The contract for engineering services has been reviewed by Bank staff and found satisfactory. During negotiations, the Government has agreed to continue to employ consul- tants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Bank for engineering services, procurement and supervision of construction of the Project. 2.06 DSI usually employs a board of consultants on an ad hoc basis if the necessity arises for any of its projects under construction. Although, well known and experienced consultants have been engaged for engineering designs and supervision of construction, in view of the size of the Project and the potential risks, DSI has agreed to establish a board of experts independent of the designers of the Project to familiarize themselves with the designs and to advise it in the event of unforeseen problems arising during construction. The establishment of such a board, whose members and terms of reference shall be acceptable to the Bank, is a condition of loan effectiveness. 2.07 In the Bank's initial review of the proposed plant design, the adequacy of certain design features was questioned, especially the bottom outlet facilities. DSI has revised its original design and prepared more reliable solutions for the Project water handling facilities in order to avoid problems such as those experienced with the upstream Keban project. It is now reasonably certain that the Project is well designed. An undertaking has been obtained from the Government that the Project hydro works, including the dam, will be inspected regularly in accordance with sound engineering practices.  - 15 - Furthermore, the Government has agreed to inform the Bank, not later than December 31, 1980, about the nature and frequency of, and monitoring procedures for, the inspection of hydro works and dams in its territory. Project Cost Estimate 2.08 The estimated cost of the Project, excluding interest during con- struction, is US$1,160 million equivalent, of which US$602 million would be in foreign exchange based on the exchange rate at the beginning of 1980 of US$1 = LT 70. Annex 2.2 shows in detail the estimated costs of the Project, which are summarized as follows: -----------US$ Millions---------- Local Foreign Total Preliminary and Related Works 32.07 12.43 44.50 Civil and Hydraulic Works (Contract No. 1) 81.10 205.59 286.69 Turbines and Generators (Contract No. 2) 2.28 119.46 121.74 Electromechanical Equipment (Contract No. 3) 1.60 55.92 57.52 Engineering Services 6.00 9.50 15.50 Land Appropriations 59.92 - 59.92 Resettlement 113.66 - 113.66 Subtotal 296.63 402.90 699.53 Physical Contingencies 47.57 52.22 99.79 Price Contingencies 94.31 25.27 119.58 Total 438.51 480.39 918.90 Sunk Costs (1979 and before) 120.00 121.48 241.48 TOTAL PROJECT COSTS 558.51 601.87 1,160.38 2.09 Cost estimates are based on the cost of the signed contracts and early 1980 prices (para. 2.17). Physical contingencies for civil works have been estimated at about 20% on average to take into account technical difficul- ties which may be encounterea during construction of such a large project with difficult access to site, adverse weather conditions and unusually large gene- rating units. Physical contingencies of 5% have been assumed for generating units and electromechanical equipment. For remaining related works, land appropriation and resettlement physical contingencies have been estimated about 15% on average. Price contingencies were applied in accordance with the following annual rates, which are considered reasonable for Turkey:  - 16 - Year(s) Percentage 1980 10.5 1981 9 1982 8 1983-85 7 1986-87 6 Price contingencies were calculated in dollar terms for both local and foreign costs since the present exchange rates cannot be used for converting future local costs into dollar values. The foreign costs quoted represent the total foreign exchange cost and include the foreign exchange costs of goods and services purchased both from abroad and locally. On the basis of these estimates the cost of the hydropower plant would be about US$640/kW installed, which is very favorable for a hydropower project having a capacity factor of almost 50%. Project Financing Plan 2.10 Including financial charges on loans, which are estimated at US$138.2 million, the total remaining foreign exchange requirements of the Project are US$618.59 million. The remaining Project costs are expected to be financed as follows: