Turkey - Istanbul Power Distribution Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4264 PROJECT COMPLETION REPORT TURKEY: INSTANBUL POWER DISTRIBUTION PROJECT (LOAN 892-TU) December 29, 1982 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.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT TURKEY: ISTANBUL POWER DISTRIBUTION PROJECT (LOAN 892-TU) Table of Contents Page No. PREFACE ........................................................... (i) PROJECT COMPLETION REPORr BASIC DATA SHEET ........................ (ii) HIGHLIGHTS ........................................................ (iii) I. INTRODUCTION .1 II. PROJECT IDENTIFICATION PREPARATION AND APPRAISAL........... Project Origin, Preparation Appraisal, Negotiation and Approval ........... . . 2 Project Description .. 3 Project Objectives ......................................... 3 III. IMPLEMENTATION ............................................ . 4 Project Execution ..... 4 Reporting ..... 5 Procurement ............................................... . 5 Project Costs ..... 5 Disbursements ..... 6 Performance of Consultants, Contractors and Suppliers ...... 6 IV. OPERATING PERFORMANCE. 6 V. FINANCIAL PERFORMAN CE.......... 7 Financial Resultse s u l ts........... 7 Performance under the Revenue Covenant . . .10 Accounti .. .. 11 Auditing. . 12 VI. INSTITUTIONAL PERFORMANCE AND DEVELOPMEN . . .12 Power Market Study .. 12 Management and Organization Study . . 13 Transport System Study . . .13 Gas Supply Study.. 13 Management's Effectiveness. . .... 13 Staff Growth and Development . . .14 Consultants . . .14 VII. ECONOMIC REVALUATION . . . 14 VIII. BANK PERFOR'ANCE ........................................... 15 IX. CONCLUSIONS ..16 Overall Achievements.. 16 Lessons Learned. 16 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 (Cont'd) ANNEXES 1. Main Covenants of Loan Document 2. Contracts Financed by IBRD Loan 3. Project Costs 4. Schedule of Disbursements 5.1 Combined Income Statements for the Years Ended December 31, 1972-1980 5.2 Combined Balance Sheets for the Years Ended December 31, 1972-1980 5.3 Combined Sources and Applications of Funds Statement for the Years Ended December 31, 1972-1980 5.4 Operating Statistics 1972-1980 5.5 Electricity Tariffs 6. Staffing Situation 7. Power Supply Outages 8. Rate of Return Calculation 9. Exchange Rates 1d. TEK9s comments on the PCR 11. Comments from the Director General of the Treasury 12. Comments from the State Planning Organization  (i) PROJECT COMPLETION REPORT TURKEY: ISTANBUL POWER DISTRIBUTION PROJECT (LOAN 892-TU) PREFACE The Project consisted of the expansion of the Istanbul power distribution network by adding some 550MVA of primary and secondary substation capacity and the installation of about 110 km of primary, 250 km of secondary and 470 km of low-voltage distribution lines and underground cables. The project also included a telemetering system, communication equipment, service vehicles, fault locators, construction equipment and consulting services for engineering and various studies. A Bank loan of US$14 million for the project was made in May 1973. The loan was fully disbursed and closed on February 28, 19 81. The Project Completion Report (PCR) was prepared by the Europe, Middle East and North Africa (EMENA) Regional Office on the basis of the findings of project completion missions which visited Turkey in May 1981 and May 1982 and a study of the Appraisal Report and other documents in the Bank's files. The PCR summarizes the main points of particular interest -- notably, difficulties in achieving institution-building objectives, some aspects of procurement, loan effectiveness conditions and efficiency improvements. Following normal procedures, a draft copy of the report was sent to the Borrower (Government) and the Beneficiary (IETT) for their comments. Those comments which were received have been taken into account in finalizing this report, and are attached to the report as Annexes 10, 11 and 12.   (ii) PROJECT COMPLETION REPORT BASIC DATA SHEET TURKEY - LOAN 892-TU KEY PROJECT DATA Appraisal Actual or Iten ExPectatton Current Estimati Total Project Cost (US$ mIlion) 40.2 132.0 Overrun (%) 228.0 Loan/Credit Amount (USS million) 14.0 Disbursed - 14.0 Cancel led Repaid to Outstanding to Date Physlcal Components Completed 6/76 12/82 (aStimate) Proportion Completed by Appraisal Target (2) 10 Proportlon of Time Overrun (I) IO% Economic Rate of Return (%3 30 14 Financial Performance unsatisfactory!/ Institutional Performance mixed 2/ Cumulative Eatimated and Actual Dtsburaementa (US$ million) December 31 1973 1974 1975 1976 1977 1978 1979 1980 i. Appraisal Estisate 5.5 12.0 13.5 14.0 14.0 14.0 14.0 14.0 ii Actual 0.0 0.2 0.5 0.9 8.5 11.4 13.5 14.0 (ii) aS 2 of (i) 0.0 2.0 4.0 6.0 61.0 81.0 96.0 100.0 OThER PROJECT DATA Original Actual or Iten Plan Revisions Estimated Actual First Mention In Files or Timetable - - 11/28/69 Government's Application - - 11/25/70 Negotlations 01/09/73 - 01/09/73 Board Approval 04/24/73 - 04/24/73 Loan Agreement Date 05/25/73 - OS/25t/'3 Effectiveness Date 08/28/73 - 10/31/73 Closing Date 12/31/76 12/31/78, 12/31/79. 8/30/80 02/28/81 Borrower The Republic of Turkey Executing Agency The Istanbul Electricity. Trenway & Tunnel Company IIETT) Fiscal Year of Borrower March I - February 28 Fol low-on Project Name None MISSION DATA Month, No. of No. of Data of Year Weeks Persons Manweeks Report Identification (Reconnaissance) 6-7/70 3 1 3 8/70 Preparation Preappralsal 3/72 2 1 2 4/72 Appraisal 6-7/72 4 1 12 4/73 Totae 9 5 17 Supervislon 1 7/73 1 2 2 07/30/73 Supervision 11 10/73 1 1 I 10/30/73 Supervision IfI 6/74 1 1 1 07/09/74 Supervision IV 11/74 1 1 I none Supervision V 7/75 3 3 9 08/04/75 Supervision VI 3/76 1 2 2 04/02/76 Supervision Vii 11/76 2 3 6 12/16/76 Supervision Vill 6/77 ' 2 2 06/29/77 Supervision IX 10/77 1 2 2 11/18/77 Supervislon X 5/78 1 2 2 07/14/78 Supervision Xi 6/79 1 2 2 07/05/79 Completion I 5/8! 2 2 4 9/81 Completion II 5/82 1 1 1 none Total 17 24 35 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Turkish Lire (TL) Year: kpprai-al Year (1972) Average Exchange Rate: US$I - 14.0 Intervening Years Average US$I - 3/ Comnpletion Year (1981) Average ussi . 101.0 I/ Financial losses in all uperucia0. 2/ Although autoromous entities for electricity, transport and gas have not been eatablished, seme institutional improve-ents were achieved. 3/ See details in Anne. 9. The report is based on the exchange rate prevailing in March 1981. June 1982   (iii) PROJECT COMPLETION REPORT TURKEY: ISTANBUL POWER DISTRIBUTION PROJECT (LOAN 892-TU) HIGHLIGHTS Loan 892-TU was for the Istanbul Power Distribution Project implemented by the Istanbul Electricity, Tramway and Tunnel Company (IETT), the beneficiary of the loan. The Projec.t originally comprised all of the 1974 and 1975 investment program of IETT's Electricity Department. Although the Appraisal Report anticipated completion of the Project by mid-1976, the actual physical construction is expected to be completed only by mid-1984, a delay of eight years. The Project illustrates a constructive relationship between the Bank and the Borrower/Beneficiary where increased supervision efforts resulted in the completion of a rather difficult and complex power distribution project (para. 8.1). The Project was delayed about 2 years because of delays in the preparation of bidding documents. IETT's consultants were not experienced in dealing with general conditions and procedural matters. The Project was also delayed because of shortage of local funds (paras. 3.2 & 3.6). The main objectives of the physical facilities of the Project such as rehabilitation of the distribution system and improving the quality of power supply in the Istanbul area have by and large been achieved. However, the institutional goals have not been fully achieved. IETT's financial performance was unsatisfactory (paras. 5.1 - 5.6) largely due to Government's unwillingness to increase tariffs to keep pace with inflation. IETT's internal cash generation during the project period amounted to only 4% of its construction expenditures and the resultant shortfall in internally generated funds delayed project implementation. One of the objectives of the Project was to separate the electric utility from the transport and gas utility operations (para. 5.7); however, this objective was not accomplished during the Project period. According to the Government, actions are now being taken to meet this objective by transferring the municipal electric utilities to TEK for operation which will solve the problem of the municipalities diverting funds from the electric utility into the transport operations (para. 5.3 and Annex 10). IETT had problems of recruiting and retaining competent and experienced staff due to constraints on salaries. Salaries were not competitive with the private sector and Government was not in a position to improve salaries in relation to the private sector (para. 6.6). During the Project implementation period there were numerous changes in the management level of IETT resulting in poor planning and a lack of continuity of objectives (para 6.5).   TURKEY ISTANBUL POWER DISTRIBUTION PROJECT Loan 892-TU PROJECT ODMPLETION REPORT I. INTRODUCTION 1.1 The power system in Turkey is fully interconnected and several organizations are involved in its operations. The Turkish Electricity Authority (TEK), a State Economic Enterprise (SEE), is responsible for electricity generation and transmission in most of the provinces in Turkey. Only in four out of sixty-seven provinces are power operations in the hands of two private power companies. Turkey has over a hundred muni- cipal and regional power distribution entities of which the largest one is the Istanbul Electricity, Tramway and Tunnel Company (IETT), the benefi- c iary of Loan 892-TU made in 1973. IETT's operations cover electricity distribution, public transport (buses, trolleys and tunnel) and two gas plants in and around the Municipality of Istanbul. The Ministry of Energy and Natural Resources (MOE) has official jurisdiction over the development of energy resources in Turkey and power supply activities. The organiza- tions such as TEK and IETT are subject to close Governmental supervision and their autonomy has been severely limited by the lack of freedom in set- ting personnel policies and by the Government's role in determining prices of their good's and services. 1.2 The electric power subsector grew rapidly over most of the period since 1965, although there has been a sharp decline in the rate of growth in the last few years. The average rate of growth of electricity sales since 1965 has been about 11% p.a. Since 1971, it has not been possible to meet the full demands on the interconnected system mainly because of delays in construction of power plants and also because of breakdowns of power plants in operation. The shortfall in supply rose from about 2% of demand in 1971 to about 10% in 1981. The power shortages would have been worse but for the rising trend of electricity import from the USSR and Bulgaria, which in 1980 accounted for 5% of total supplies. Most of the power cuts were achieved by interruptions of supply to the municipalities for a speci- fied number of hours each day. During certain periods of the year, power supply cuts were for as long as 5 to 8 hours daily. The main reasons for the power shortages were delays in construction of power plants, major plant breakdowns, and lack or shortage of liquid fuel and replacement parts arising from shortages of foreign exchange. In order to reduce power shortages, many gas turbines have been installed and operated excessively, resulting in their frequent breakdowns.. The Turkish power system has only a few modern and reliable power plants and these are capable of generating less than half of the power requirements. To alleviate the problem of power shortages in the future, Turkey has a huge power investment program,  - 2 - including many large generating plants (e.g. Elbistan, a steam station; Karakaya and Ataturk, hydro stations) which require enormous investments and long construction time. Nevertheless, TEK expects continuing shortages of power for the next two or three years, even if ongoing projects are completed according to their current schedules, and the shortages could persist much longer in the event of continuing project delays. 1.3 The Project entity (IETT) has experienced power shortages since the Project was appraised in 1973. The quality of the power supply has also been rather poor. In addition to regular power supply cuts, voltage and frequency were below the required standards. Power losses have been excessive at about 16% annually. Since these deficiencies were mainly the result of deficiencies of the national power generation and transmission system, IETT has been unable to undertake any significant remedial measures to improve the quality of the power supply in its distribution area. Operating in these difficult circumstances, IETT has been struggling just to keep the problems to a minimum, knowing fully that it would not be pos- sible either to prevent or eliminate them. 1.4 This Project Completion Report is based on a completion report prepared by IETT and on information obtained by a Bank mission from IETT and other Turkish power related institutions inMay 1981. The Project's operating performance was again reviewed in May 1982 after allowing sufficient time to enable a judgement to be made on such operating performance (para. 4.1). II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL Project Origin, Preparation, Appraisal, Negotiation and Approval 2.1 The Project had its origin in the overall Istanbul urban develop- ment plans which were initiated in the late 1960s. The Bank Group assisted the Government in the improvement and expansion of the urban growth of Istanbul through its lending operations (Credit 324-TU and Loan 844-TU of 1970). The study of the modernization of the Istanbul distribution network prepared in 1969 and updated in 1971 by IETT's expatriate consultants (Consultant "A"), served as a Project feasibility study. This study was also reviewed and approved by TEK and MOE. The consultant's study covered the power distribution system requirements in the period 1969-1982. An- other study prepared by expatriate consultant "B" reviewed IETT's electri- city and gas organizational structure and operations and made a number of proposals for their improvement. These studies helped determine the choice of the Project, which was identified in mid-1970 in the course of investi- gation by the Bank Group of Istanbul's urban development problems. Other Bank Group lending operations for power generation and transmission pro- jects in the Turkish power subsector had also highlighted the necessity for lending for power distribution, and Istanbul was considered as most de- serving of the Bank Group's assistance in this respect. The Project was appraised in June/July 1972 and negotiations were held in Washington in January 1973. No problems arose during negotiations and agreements were easily reached between the Bank and the Borrower (the Government of Turkey) and the Beneficiary (IETT). No signficant changes from the original scope  - 3 - lere made in the Project as presented to the Board of Directors. The Bank requested four specific studies to be undertaken by IETT in order to improve its organization and services. Details of these studies are given in para. 2.2. Annex 1 sets forth the major covenants of the Loan and Project Agreements. It appears from hindsight that the Government and IETT had not fully comprehended the likely impact of the covenants, particularly the financial covenants. At the time of Loan signing, IETT's staff was not able to cope with the task of preparing the basic Project procurement documents that started two years after. Project Description 2.2 The Project originally comprised all of the 1974 and 1975 invest- ment program of IETT's Electricity Department and consisted of the expan- sion of 34.5/10-kV primary and 10/0.4-kV secondary substation capacity by some 390 MVA and 160 MVA respectively both by the expansion of existing ones and the establishment of new ones and the erection and installation of about 110 km of primary, 250 km of secondary and 470 km of low-voltage distribution lines and underground cables. In addition, 40 MVAR of capacitors were to have been installed to improve voltage regulation and the power factor, but these were subsequently dropped, as the consultant found that they were not necessary at this stage of network development. The Project also included the procurement of (i) a telemeasuring and teleprinter system to form the nucleus of a load dispatching center; (ii) radio and telephone equipment to improve communications; (iii) service vehicles, cable fault locators and construction equipment; (iv) electricity meters; and (v) consulting services for (a) providing the engineering for the Project, (b) a management study, (c) a power market study, (d) a transport study and (e) a study of the Istanbul gas service. Project Objectives 2.3 The principal objectives of the Project were; rehabilitating the distribution system; meeting urgent short-term expansion requirements; establishing the basis for a long-term development program; and initiating institutional reforms on the basis of organization and management studies as well as planning and development studies of IETT's power, transport and gas supply activities. The studies of long-term power investment, trans- port sector and public gas supply were planned to be closely coordinated with overall improvements of institutional capabilities in the Istanbul metropolitan area for integrated planning and coordinated preparation and implementation of priority investments. The main thrust of the intended institutional changes was the separation of the organization, administra- tion and financing of the three IETT services (electricity, transport and gas supply). At the time of the appraisal, the electricity operation was financially viable, while transportation and gas supply were incurring heavy losses. The Project was expected to correct IETT's serious financial and organizational deficiencies and to improve the quality of its services.  2.4 The infonnation available at the time of the appraisal did not al- low a realistic forecast of Project results. The key assumptions made in arriving at IETT's forecast sales and energy requirements were based on an optimistic annual growth rate (10.5Z p.a. ). The changes in energy prices, pattern of usage, effects of tariffs and restrictions in the power supply had not been expressed in quantitative terms. Furthermore, load management and energy conservation measures apparently were not incorporated into the forecasts. There were clearly many uncertainties, such as power supply constraints, which were not taken into account in making IETT's growth projections for the long-term. III. IMPLEMENTATION 3.1 The conditions of loan effectiveness were confined to various legal actions (authorization and ratification of loan documents and the subsidiary Loan Agreement) . The loan was made effective on October 31, 1973, about two months late. However, the delay had practically no adverse impact on the start-up of the Project and its implementation schedule. Project Execution 3.2 There was an initial delay of about two years in the preparation of bidding documents. IETT's consultants from the Middle East Technical University (Consultant "C") were late in drafting technical specifications and had no experience in dealing with general conditions and other procedural matters. With the assistance of the Bank staff these documents were prepared in early 1976. The shortage of local funds also contributed to delays. 3.3 Based on the conclusion of the consultants' studies of the Istanbul distribution network that the planned installation of the power capacitors was not needed to improve voltage regulation in the mostly underground Istanbul distribution network, this component of the Project was dropped in 1975. The original study by the Electricite de France (Consultant "A") did not adequately cover the reactive power component aspects and this deficiency was corrected by Consultant "C". Furthermore, because of the shortage of foreign exchange funds, the telemeasuring, teleprinter and radio equipment have not been procured, although there is a need for it. Other changes in the Project were the increased length of distribution cables and the addition of a number of power distribution transformers. These changes resulted from the extended Project period covering the years after 1974/75 and were justified. 3.4 The Project was completed by May 1981 except for some 35/10-KV transformer stations. Out of 17 transformer substations included in the Project, only seven have been completed. Four substations, currently under construction, are expected to be commissioned by mid-1983. Two existing substations that were planned to be expanded have been expanded, but to a smaller capacity than originally planned in 1972. The construction of the remaining four substations has not started so far either due to unresolved site problems or changes in the 35-KV distribution network. It is expected that these would also be completed within a period of two years on alternative sites which are available for construction. All cables and  - 5 - overhead lines have been erected. The service vehicles are in operation but problems of maintenance and spare parts have already appeared. IETT's construction staff, assisted by local contractors for civil works (buil- dings) , was responsible for the construction of the Project. Although the appraisal report anticipated completion of the Project by mid-1976, the actual physical construction is expected to be completed only by mid-1984, a delay of eight years. The main factors causing delays were IETT's unfamiliarity with the World Bank's procurement requirements, its inefficient organization and management, frequent changes in its top management following changes of Government, lack of clear autonomy for IETT vis-a-vis Government and the Mayor of Istanbul, poor quality of staff, and mounting financial difficulties, not only of IETT but of the country as a whole. These factors were not anticipated during the Project appraisal. It was only because of the increased supervision efforts that the procurement and construction activity picked up in the late 1970s. The original time schedule was optimistic even for well organized power entities. Reporting 3.5 The Borrower and the Beneficiary were informed of the Bank's reporting requirements immediately after loan signing; however, reporting always remained unsatisfactory. The progress reports on the Project were irregular and late; they did not contain the necessary information and did not give any real insight into Project problems. Part of the problem was that IETT did not have a coordination unit responsible for Project re- porting and there was also no continuity of staff in handling the loan related activities. Pro cure ment 3.6 IETT had difficulties in accepting and applying the Bank's guidelines on procurement, which resulted in long delays in connection with contract awards. Part of the problem was the inexperience of the IETT staff responsible for procurement matters. The Ministry of Industry also objected for some time to the importation of foreign goods and delayed issuance of import permits. The contract for 35/10-kV distribution switchgear was in dispute between IETT and the Bank for one year. IETT insisted on awarding the contract for this equipment to a local manufacturer supplier, who was not the lowest evaluated responsive bidder. It was only after a good deal of discussions and long delays that the Borrower and IETT reluctantly agreed to award the cbntract to the lowest bidder. This caused an additional delay of about two years in equipment deliveries and thus in Project completion. Details of the awarded contracts are given in Annex 2. Project Costs 3.7 The final cost of the Project was US$132.02 million as against the original estimate of US$40.22 million. A detailed comparison of these costs is given in Annex 3. The increases in the foreign and local costs are 21% and 339% respectively over the appraisal estimates. The foreign cost increases would have been more had the power capacitors (40 MVAR) and  -6- communication equipment, originally included in the Project, not been dropped, and had some. Project items obtainable in the local currency (low voltage distribution equipment) not been excluded from the Project's foreign exchange costs. The high increase in the local cost reflects the impact of very high inflation on labor and material costs as well as some increase in the Project's scope. Cost overruns were financed by the Government and IETT, e.g. the Government provided funds for the purchase of power transformers in East Germany. Disbursements 3.8 The original estimate of disbursements and the actual disburse- ments are given in Annex 4. Cumulative disbursements were much lower than the appraisal estimates during Project implementation due to start-up and procurement delays. (para. 3.2). The Bank provided needed assistance in accelerating disbursements through special contractual arrangements with the suppliers, such as increased advances and replacement of the retention money with bank guarantees. Peformance of Consultants, Contractors and Suppliers 3.9 The performance of the consultants for the Project's physical facilities was satisfactory except in respect of the preparation of bidding documents and evaluation of bids. The suppliers performed satisfactorily and even offered technical assistance in supervision of equipment erection that had not been contracted. The local civil works contractors for sub- station buildings proved to be competent and capable of carrying out their contracts. IV. OPERATING PERFORMANCE 4.1 Since the 35/10-KV distribution substations, which represent the main component of the Project, have not been in service long enough and some of them have not even been commissioned (para. 3.4), it is difficult to compare the actual operating performance of the Project's physical facilities with the expectations at appraisal. However, it is clear that the quality of the power supply in Istanbul has improved in the last two years. This is mainly due to the installation of the power distribution equipment covered under the Project. The number of power supply outages in IETT's distribution network have been reduced in 1981, particularly in power transformer substations. Electricity losses dropped from 16.97% in 1980 to 16.01% in 1981, the first year in which the Project facilities were in operation. The voltage conditions have also somewhat improved. Other Project facilities and equipment that have been in operation have not shown any specific operational problems. For example, there has not been any major breakdown in the installed 35-kV underground cables. Likewise, equipment such as electricity meters and relays have functioned satisfactorily. The service vehicles were also operating satisfactorily until 1979-1980 when the problem of spare parts arose; some of these vehicles have been out of service from time to time. IETT is not capable of maintaining the service vehicles properly and of securing needed spare parts, but this is not a problem peculiar to IETT alone; rather it is a nation-wide problem arising from the acute shortage of foreign exchange.  - 7 - 4.2 There were no major deviations or changes in the Project designs or its major components. Reliable and proven equipment has been used for the Project facilities. IETT's staff operates these facilities satis- factorily. Some equipment and materials have been stored for a long period, e.g. power transformers, and it is not clear whether all necessary measures have been undertaken to properly protect this equipment and material s. V. FINANCIAL PERFORMAI'E Financial Results 5.1 IETT's financial performance was unsatisfactory during the Project period. Its tariffs did not keep pace with inflation (see table below) and its operating expenses increased faster than its revenues with the result that it sustained operating losses in 1977, 1978 and 1979. Its net cash generation during 1972-1980 was only 4% of expansion requirements as against the covenanted 40% (para. 5.6). 5.2 The income statements, balance sheets, and sources and applica- tions of funds statements for the combined electricity, transport and gas utilities of IETT for the years ended December 31, 1972 through 1980 are presented in Annexes 5.1, 5.2 and 5.3. The financial statements compare the SAR estimates for the years 1972-1976 with the actual results; but because the Project was delayed beyond the original estimate of 1972-1976, and was actually not started until 1974 and is not yet complete, the finan- cial statements for the years 1977-1980 are also presented to give the total Project financial performance. The SAR financial estimates for 1972- 1976 were prepared using the existing rate of exchange in 1971 of LT 14 to US$1.00. The Turkish lira was devalued drastically over the years 1972- 1980 (from 14 LT/US$1 to 91 LT/US$l) , particularly during 1977-1980 (from 16 LT/US$l to 91 LT/US$). The actual LT/US$ exchange rates during the period of January 1, 1972-December 31, 1980 are presented in Annex 9. IETT's sales of electricity were estimated in the SAR to be about 11,947.0 GWh for the period 1972-1976; the actual sales of 10,856.5 GWh were about 9% less than the estimates. Revenues from the sales of electricity were estimated at LT 4,637.2 million for the years 1972-1976 based on the average sale price during this period of about 40 kurus per kWh (US$.03/kWh). IETT's tariffs were adjusted regularly from 1974 on, and resulted in actual revenues of LT 5,877.6 million for the years 1972-1976. But as stated in para. 5.1 above, in real terms the increased electricity distribution tariffs did not keep up with inflation.  -8- Ac tual Perc entage Average Electricity Change Annual Rate Sale Price 1/ Over Previous of Year Kurus/kWh Year Inflation 1972 41.0 Not given 16% 197 3 41.9 2.2 20% 1974 55.2 31.7 28% 1975 63.1 14.3 50% 1976 65.4 3.6 21% 1977 76.1 16.4 37% 1978 122.6 61.1 50% 1979 165.6 35.1 65% 1980 423.5 155.7 105% IETT's electricity tariffs effective April 1, 1981 are presented in Annex 5.5. IETT's operating expenses for' the electric utility (including the cost of purchased power from TEK) increased faster than revenues and the electric utility sustained net operating losses during the years 1977, 1978 and 1979. The operating revenues and operating expenses of IETT per kWh of electricity sales are as follows; Operating Revenues Operating Expenses SAR Estimates Actual SAR Estimates Actual Year Kurus/kWh USc/kWh Kurus/kWh USc/kWh Kurus/kWh USc/kWh Kurus/kWh USc/kWh 1972 45 3.2 45 3.2 34 2.4 33 2.4 1973 44 3.1 47 3.4 34 2.4 34 2.4 1974 43 3.1 64 4.6 35 2.5 54 3.9 1975 43 3.1 70 4.7 35 2.5 59 3.9 1976 43 3.1 73 4.6 35 2.5 69 4.3 1977 - - 91 5.4 - - 93 5.5 1978 - - 139 5.6 - - 150 6.0 1979 - - 185 4.6 - - 211 5.3 1980 - - 471 5.2 - - 457 4.6 5.3 The transport and gas utilities of IETT sustained very sizeable operating losses for the years 1972-1980 with losses during the years 1/ Does not include other operating income.  - 9 - 1975-1976 almost double the SAR estimates for the transport utility due to the impact of the increased fuel prices beginning in 1974. IETT's losses in the transport and gas utilities caused severe cash problems and forced IETT to use electricity income to finance the losses in the transport and gas utilities. This diversion of electricity funds prevented IETT from paying TEK for electricity purchased for resale in IETT's distribution sys- tem, and in turn TEK was unable to pay its bill for the fuel for generation of electricity.!' The diversion of electricity funds also slowed the Project because IETT was not able to generate the necessary local funds required for the Project. IETT's transport and gas utility operating results for the years 1972-1980 are as follows: Transport Gas Total LT Millions LT Millions LT Millions Total Operating Revenues 5,772.8 849.1 6,621.9 Less Operating Expenses 12,601.6 1,625.0 14,226.6 Net Operating Income (6,828.8) (775.9) (7,604.7) IETT's transport and gas utilities sustained total net operating losses of LT 7,604.7 million for the years 1972-1980 which were offset in part by the small net operating income of LT 305.8 million of the electric utility. The deficit operations of the transport and gas utilities required subsi- dies from the Municipality and the Government in the form of consolidation of debts for fuel for the transport system and coal used in the manufacture of gas and for the debt service of the transport and gas utilities. 5.4 Annex 5.4 summarizes the operations of IETT for the years 1972- 1980. Electricity sales increased an average of 8.7% during 1972-1978. In 1978-1980 TEK was unable to meet the demands for electricity in Istanbul and the sales during these years reflect the reduction in the quantity of power supplied to IETT by TEK. IETT's total number of electricity con- sumers increased from 700,000 in 1972 to 1,160,000 in 1980, an incrase of 66% or about 8% annually. Energy losses arising largely from illegal connections and distribution line losses continue to be heavy (about 16%). The transport utility increased the number of passengers carried in 1980 by nearly 45% over 1979 due to the addition of 600 new buses and the higher gasoline prices which tended to keep people from driving individual automobiles and increased fares for taxis and dolmuses (routed taxis) Manufactured gas sales increased about 53% during 1972-1980 because of the lower price of manufactured gas compared to the prices of fuel oil and bottled gas which increased very rapidly during 1974-1980. 1/ As indicated in Annex 10, since the closing of the loan the municipal assets were transferred to TEK beginning November 1, 1982 and the transfer is required to be completed within the next two years.  - 10 - Performance under the Revenue Covenant 5.5 The Loan Aiieement required that IETT increase electricity tariffs to levels to provide either at least 40% of the average of the actual electricity construction program for the previous year and planned electricity construction expenditure for the current year, or 100% of the reserve for expansion of the system required for the previous year under Article 28 of Law No. 1312 (the TEK Law) whichever is the greater. Any shortfall in any year was required to be made up in the following year. IETT proposed annual electricity tariffs sufficient for it to achieve the goal but delays on the part of the Government in approving the tariff increases prevented IETT from achieving the 40% level of cash generation. Duiring 1972-1980, the actual level of internal cash generation was only 4% as against the required 40%. By 1978 Government subsidies were required even for the electric utility of IETT to carry out a linited construction program. The diversion of electricity funds for the operation of the transport and gas utilities necessitated Government's consolidation of the debts of LETT to TEK along with the municipalities' debts and Government's debts to IETT for electricity used by the municipality and for Government's operations. The consolidation of accounts cleared the amounts due and payable but did not provide the actual cash necessary for daily operations, particularly for the local costs of the construction program of the electric utility. 5.6 The operating results of the electric utility for the years 1972-1980 are as follows: Total Operating Revenues LT 31,035.7 Million Less Operating Expenses LT 30,729.9 Million Net Operating Income LT 305.8 Million Average Net Fixed Assets in Service LT 2,875.9 Million 1! Rate of Return 1.06% Construction Program LT 3,305.8 Million Net Cash Generation LT 130.9 Million Cash Generation as % of Construction 4.0% The sources and applications of funds for the electric utility for 1972-1980 are as follows: I/ Includes revaluation only for 1971.  - 11 - Appraisal Estimate Actual 19 72-19 76 19 72-1980 LT Millions LT Millions Sources Total Cash Generation 1,351 736.7 Less Debt Service 164 605.8 Net Cash Generation 1,187 130.9 Customer Contributions 148 925.4 Long Term Borrowing 116 5,009.4 1/ Working Capital (Decrease) (129) (2,323.0) Total Sources 1,322 3,742.7 Applications Capital Investments (Construction) 1,133 3,305.8 Legal Deposits 189 436.9 Total Applications 1,322 3,742.7 1/ Includes debt consolidation and Government assistance loans. Accounting 5.7 The separation of the electric utility from the transport and gas utilities was an important Project objective. The Loan Agreement provided that not later than December 31, 1974, the Borrower would initiate institutional, organizational and financial arrangements which would lead to the establishment of an organization or organizations serving the Istanbul Metropolitan Area with (i) the distribution of electricity (ii) public transport services, and (iii) the manufacture and supply of gas. In May, 1973 the Borrower confirmed that all necessary action, including legislation would be taken to reorganize IETT's activities; but no concrete action was actually taken to effect such a reorganization. Pending the separation of the utilities, IETT and the Government agreed to separate the accounts and to open separate bank accounts for the three utility departments of IETT and for the head office, effective from July 1, 1973. The management of IETT finally separated the accounts effective January 1, 1978 by establishing four accounting sections for the three utilities and the head office. The accounts of IETT from 1978 were maintained by each Department with its own income and expenditure accounts and balance sheets. Separate bank accounts were also opened in 1978 for the electric utility, but when funds were available from the electric utility, they were still diverted to the overall operations of IETT. Information was received from TEK in their "Comments on PCR" (Annex 10) that actions were taken by Government to transfer IETT's electric utility assets to TEK from November 1, 1982.  - 12 - Auditing 5.8 The Project Agreement required IETT to have the accounts and financial statements of each of its Departments audited in accordance with appropriate auditing principles consistently applied by independent audi- tors acceptable to the Bank, and to furnish to the Bank not later than four months after the end of the fiscal year, certified copies in the English language of the audit report and financial statements. The Bank accepted the Inspectors of the Ministry of Finance to be independent auditors; but reserved the right to review the decision at any time during the Loan. Through 1977 the annual audit report was being submitted late each year due to staff constraints of the Ministry of Finance; and in 1978 the issue was raised by the Bank suggesting that IETT hire an independent auditor in order that the audit be completed within the agreed time frame. However, the Government maintained that under the existing laws of Turkey an inde- pendent auditor could not be hired by IETT. Consequently, the audit re- ports for the years 1978 and 1979 were also submitted to the Bank about six months late. A similar delay occurred in respect of the audit report for 1980. The quality of the audit was not always satisfactory and the audit reports did not address the issues of the diversion of funds from the electricity to other Departments. VI. INSTITUTIONAL PERFORM4NCE AND DEVELOPMENT Power Market Study 6.1 Under the Loan Agreement, the Borrower had agreed to cause a power market study of the Istanbul Metropolitan Area to be carried out by December 31, 1974. The study was to include a preliminary survey to help identify the precise location of the power distribution facilities needed in IETT's service area in 1974 and 1975, and a long-term power market review covering the period 1976-1985 to be conducted in coordination with the Istanbul Master Plan Bureau and the appropriate urban authorities, including feasibility studies of future power distribution development and a review of the retail tariff structure. It was expected that TEK would be responsible for the power market study. Since TEK had not shown any initi- ative to undertake this study, IETT engaged Consultant "C" in 1974 to con- duct it. In the study, the load growth in the Istanbul area in the period 1973-1985 has been analysed. The analysis of the power demand was done in detail on an annual basis up to and including 1976, and as a general out- line until 1985 on the basis of three-year periods. The study provides the basis for determining the facilities required to meet the load growth in the future in the most economical way and is a useful tool for IETT in its planning activities. The tariff study for Turkey as a whole has been pre- pared by TEK and its consultants, including retail tariffs applicable in the IETT's power supply area. These two analyses were the first major studies related to power distribution and the power subsector as a whole successfully completed by Turkish institutions. However, tariff action continued to be dictated, at least until September 1980, more by political considerations than by financial or economic ones.  - 13 - Management and Organization Study 6.2 As required under the Loan Agreement, IETT employed a consultant (Consultant "B") to undertake a management and organization study of the company. The purpose of the study was to improve IETT's work methods, in- troduce greater delegation of authority throughout IETT, review inventory and accounting systems and assist in implementing the changes necessary to achieve separate departmental accounting. The study was completed in 1975 and parts of it such as the separation of accounts for the electric, trans- port and gas utilities (see para. 5.7 for details) have been implemented. Transport System Study 6.3 The transport system study was undertaken by an expatriate con- sultant (Consultant "D") with the aim of determining the most appropriate organization, administration and means of financing a public transport system serving the Greater Istanbul Metropolitan Area, including the separ- ation of public transport from the distribution of electricity. The study analysed in detail IETT's transportation department, its organization and general conditions in the period 1960-1975. Particular attention was paid to the financial aspects of the public transport accounting and tariff issues. A number of recommendations were made to achieve improvements in operation, maintenance and repairs. Although the organizational changes proposed by the consultant have not yet been implemented, substantial improvements have been made in maintenance and repair of buses, establishment of the mobile control service, rearrangement of running schedules of buses and introduction of express bus lines, revision of fares, and application of computers in IETT's transport operations. Gas Supply Study 6.4 The appointment of the consultant to carry out a study on the most appropriate measures to be taken with regard to the manufacture and distri- bution of gas in the Istanbul Metropolitan Area including the integration of the existing gas systems and the separation of gas supply from the dis- tribution of electricity remained under dispute between IETT and the Mayor of Istanbul for about one year. Ultimately IETT employed an expatriate consultant (Consultant "E") for this purpose in 1975. The study, which was the only one ever on the gas supply in Istanbul, was completed in 1976. It provides a detailed framework for gas supply development and operations in Istanbul, including suggestions for necessary modifications of the gas pipeline network as well as increases in gas tariffs. The MOE has still to approve the gas supply extensions proposed by IETT based on the gas supply study. Management's Effectiveness 6.5 There has not been much improvement in IETT's management structure or in its effectiveness. The present IETT management was appointed a year ago by the military governor of Istanbul and it is too early to judge its effectiveness. All previous IETT's general managers opposed the decentralization of the company's operations and establishment of separate  - 14 - and autonomous entities for electricity, public transport and gas supply. Iong-range planning, including planning of manpower development and other institution-building activities have not been fully developed. The consultant's studies have had some beneficial impact on management's effectiveness, although many of their recommmendations have not been implemented. Staff Growth and Development 6.6 The number of employees increased from 11,541 in 1972 to 13,150 in 1975 and dropped to 12,857 in 1980 of which laborers were 10,123. Annex No. 6 shows details of IETT's staffing situation. The number of customers per IETT's employee increased from 180 in 1972 to 233 in 1980 (about 30%). Similar improvements were made in the transport and gas supply departments. These improvements have been made basically since 1976, and very likely reflect the impact of the consultants' recommendations (elimination of fare collectors, reduction in the number of electricity and gas meter readers, etc.). IETT has had problems in recruiting competent and experienced staff in adequate numbers and in retaining trained staff. Staff salaries are not competitive considering other employment opportunities for qualified staff and there is a continuous movement of staff to other, mostly private, companies where salaries are much higher. IETT is well aware of this problem but is helpless in solving this problem which is common to all parastatal organizations in Turkey. Consultants 6.7 The consultants have provided satisfactory service to IETT and their overall impact on IETT's development and services has been positive. Some of the consultants' recommendations have been adopted, but these are mostly those where Government approval was not needed. There have been no basic changes in IETT's organizational structure; this structure is in fact determined by the IETT law (No. 3645 of 1939). Contrary to the major ob- jective of Loan 892-TU, there were also no substantial institutional changes, such as the separation of organization, administration and finan- cing of electricity, public transport and gas supply. The problems of parastatal organizations like IETT can only be resolved through the reform of all state economic enterprises and municipal entities on a country-wide basis and it is almost impossible to achieve any progress in separate individual enterprises, such as IETT, where still all major decisions are being made by the Government or municipal authorities. VII. ECONOMIC REVALUATION 7.1 At appraisal, IETT's forecast for the period 1972-1976 indicated an increase in total electricity sales from 1,880 GWh in 1972 to 2,725 GWh in 1976, with an annual growth of 10.5%. This estimate was considered to be conservative. However, actual sales were 1,859 GWh in 1972 and 2,580 GWh in 1976 (annual increase of about 9%) . In 1974, sales were 2% less than in 1973. Obviously, it was difficult to forecast the effects of oil price increases, and changes in tariffs on the pattern of usage of electri- city. The appraisal report does not show sales forecasts, after 1976.  - 15 - There was practically no increase in electricity sales in the period 1977- 1980 (less than 1%) . The main reason for the stagnation in this period was severe power supply restrictions in Turkey as a result of lack of fuel arising from foreign exchange problems and breakdowns of major generating plants. Electricity losses remained high (about 16% in 1981). The electricity losses reflect an undeveloped power distribution network and excessively low voltage levels in the bulk power supply system. 7.2 Power supply outages in the period 1976-1980 have increased sub- stantially, both in number and duration. Annex 7 shows details of the power supply outages in the Istanbul area. The number of outages increased from 8,311 in 1976 to 11,578 in 1980 and their duration almost doubled. With the implementation of the Project's physical facilities the excessive number of supply outages and power losses have been reduced. 7.3 In the staff appraisal report the return on investment for the Project was based on IETT's power distribution program for 1972-75. It was defined as the discount rate at which the present worth of the Project's capital and operating costs over the Project life equals the present worth of the benefits in the form of attributable revenues. Only benefits from electricity sales were taken into account. The rate of return in the Pro- ject was calculated as 30%. On the same basis, the rate of return is now estimated to be 14% (Annex 8). The lower rate of return is mainly attribu- table to the increased Project costs and delays in the implementation of appropriate tariff measures. VIII. BANK PERFORMANCE 8.1 The Bank maintained good relations with the Borrower and Benefici- ary during both the loan processing and Project implementation. At apprai- sal, the Bank's assessment of the power subsector problems in Turkey was much too optimistic. Although the serious financial and organizational problems of IETT were identified, the Project was considered worthwhile because of 'the urgent need for a more reliable power supply and for the correction of various deficiencies in IETT's system and operation. The loan was essential for the financing of the Project's physical facilities and consultants' studies. Moreover, if the loan had not been made, it is likely that the IETT power distribution network extension would have been substantially curtailed or delayed. From a technical point of view, the Project has fulfilled its purpose. However, the Project objectives related to the institution-building and financial aspects have not been achieved as expected. IETT's Project implementation and procurement scheduling were not realistic. The Bank's assistance in procurement related matters should have been offered much earlier, i.e. prior to negotiations or, at the latest, immediately after the loan signing. Although there was no continuity of Bank staff in the first three years or so, thereafter practically the same staff supervised the Project regularly through 1979. The supervision mission planned for 1980 was postponed because of the political events of September 1980.  - 16 - 8.2 The Bank certainly made a significant contribution to the Project. In the future, increased investments in power distribution facilities are likely to be required. Bank support for such priority investments would have to be accompanied by essential improvements in the institutional arrangements for distribution activities. IX. CONCLUSIONS Overall Achievements 9.1 The main objectives of the Project's physical facilities by and large have been achieved. The Project has improved the quality of IETT's services and resulted in more efficient power distribution operations. Although the various consultants' studies represent a significant contribution, and a number of the operational improvements in IETT's electricity, public transport and gas departments can be credited to these studies, the institutional goals of the loan have not been fully achieved. The Bank lending was instrumental in introducing various changes in IETT's operations and planning procedures but still much remains to be done for establishing autonomous and financially viable entities in the Istanbul area responsible for electricity distribution, public transport and gas supply. Lessons Learned 9.2 The main lessons to be drawn from this lending operation are: (i) Institution-building objectives in IETT's power distribution system cannot be achieved without basic reforms and changes in Turkish State Economic Enterprises and municipal entities; (ii) In the case of new borrowers, appropriate efforts should be made to familiarize them thoroughly with the Bank Group's procurement requirements at least by the time of negotiations, if not during Project preparation and appraisal. Furthermore, it would be also appropriate to carefully screen the qualifications of engineering consultants and their capabilities to advise adequately on procurement matters; (iii) The Bank needs to ensure that at least the accounts of the organ- izations with combined utility operations be separated before loan effectiveness, in order that financial performance could be ac- curately determined, and the necessary local funds provided for financing planned investments; and (iv) Further lending to power distribution entities (municipal)!' in Turkey should seek to achieve a satisfactory resolution of the basic institutional problems and to improve system efficiency. 1/ TEK's comments (Annex 10) indicate that Government action was taken to transfer municipal electricity assets to TEK from November 1, 1982.  - 17 - ANNEX 1 Page 1 of 2 TURKEY Loan 892-TU Main Covenants of Loan Document Section of G.A./L.A. Covenants Compliance L.A. 4.03 Government shall cause a power Essentially complied with market study including a review IETT appointed consultants of the retail tariff structure to prepare the power market to be carried out by December study. A tariff study was 31, 1974. prepared by TEK and its consultants. L.A. 4.04(a) Government shall cause IETT Complied with. to employ consultants to carry out a study on public trans- port system in Istanbul and Government shall cause IETT to employ consultants to carry out a gas system study. L.A. 4.07 Government shall initiate Not complied with. See arrangements, which will para. 5.7 for details. lead to the establishment of an organization or organ- izations servicing the Istanbul Area, with the distribution of electricity, public transport and the manufacture and supply of gas L.A. 4.08 Government will permit IETT Complied with. Actually to continue to distribute IETT has expanded its electricity in the area operations. presently served by it. P.A. 2.01 IETT shall carry out the Not complied with. Project with due diligence Major delays and in- and efficiency. effective project implementation.  - 18 - ANNEX 1 Page 2 of 2 Section of L.A./P.A. Covenant Compliance P.A. 2.02 IETT shall employ consultants Complied with, but with to prepare feasibility studies, substantial delays in system design and bidding the preparation of bidding documents. documents (see para. 3.2). P.A. 3.02 IETT shall maintain its Not complied with (see financial position in paras. 5.1 and 5.2). accordance with appropriate public utility practices and under the supervision of experienced and competent management. P.A. 4.01 IETT shall open separate Substantially complied with Bank accounts and maintain in January 1978 (see para. separate accounting records 5.7). for each of its departments from July 1, 1973. P.A. 4.02 Auditing reqtirements of IETT's Not complied with in financial statements. regards to timely submission of audited financial statements (see para. 5.8). P.A. 4.03 IETT shall not incur any other Complied with. debt unless its net revenues shall be at least 1.5 times the maximum debt service. August 1981 (0002P)  TURKEY Loan 892-TU Contracts Financed by IBRO Loan Type of -----Payed by IBRD---- Local Cost Total Order Number Firm Equipment Order Date Cost of Order USS LT. LT. LT. 2000 Wajax 101 pleces vehicles 01101/1976 Can$ 1.545,309.40 1,7007193.94 29,210,154.20 22,443,157.00 51,653,311.20 Can$ 300,644.00 2002 BBC Brown Boverl 4,039 relays 09/28/1976 SFr. 1,879,289.00 838,499.28 15.918.173.51 12,046,230.00 27,964,403.50 2003 Echevarria Hermanos 577 ampermeters 09/28/1976 US$ 14,973.15 14,973.15 244,361.00 132,955.00 377,316.80 2004 Elekrocexport-lmport 1,154 circuit-breakers 10/08/1976 US$ 1,028,214.00 1.019,220.00 16,633,670.40 14,455,560.00 31,089,230.40 2005 Howaldswerke 6 fault location equip. 10/01/1976 DM 1,000,205.00 421,956.00 7,297,723.70 4,334,709.00 11,632,432.70 equipment 2006 Nerubenl Corporation 20.5 km cable 11/17/1976 d 118,208,500.00 787,364.19 13,484,000.40 16,302,692.00 29,786,692.40 US$ 70,147.21 2007 Ineba Denki 73 km cable 11123/1976 d 791.911,937.50 3,076,641.79 54.917,873.40 59,517,993.00 114.435,866.40 2008 AEG-Telefunken kWh meters (2,950) pieces 02/09/1977 DM 657,885.00 309,458.20 6,024,085.00 17,228,367.90 23,252,458.70 2009 Randis And Gyr kWh meters (12,000) pieces 02/18/1977 SFr. 1,554.250.00 693,782.60 13,851,951.70 18,270,345.00 32,122,296.70 2010 Ingra 35/10 kV. Substatlon 01/01/1977 US$ 2,351.026.99 4.395.678.54 76,400,402.70 99,373,817.00 175.774,219.70 Equipment BF 51,750,064.80 SFr. 1,539,469.80 Subtotal 13,304,767.90 233,982.397.60 264,105,825.90 498.088,223.50 103 E.D.F. Organization and Management 08/20/1973 FF 1,144.600.00 253,710.09 3,628,054.30 595.560.00 4,223,614.30 104 SOFRETU Reorganizatlon of Trans- 10/03/1974 FF 1,023,000.00 232,910.74 3,290,330.00 132,300.00 3,422,614.30 portation Utility 5164 Integral Gas study 05/08/1975 s 3,450,000.00 208,611.27 2,978,968.90 200,000.00 3,178,968.90 E.I.E. ODTU Electric study 950.000.OO Subtotal 695,232.10 9,897,353.20 1,877,860.00 11,775,213.20 Totals 14,000,000.00 243,879,750.80 265,983,685.90 509,863,436.70 Note: Power transformers (27 pIeces) purchased from East Germany for US$1,164,605 (55,668,119 LT). June 1981  - 20 - ANNEX 3 TURKEY Loan 892-TU Prolect Costs (US$ Million) 1/ 2/ ---Appraisal Estimate--- Current Estimate----