Turkey - Iskenderun Private Power Guarantee Project

Report No. PID7904 Project Name Turkey-Iskenderun Private Power (@) Guarantee Region Europe and Central Asia Sector Energy Project ID TRPE59950 Borrower Guarantee with Government counter-guarantee Implementing Agency Iskenderun Enerji Uretim ve Ticaret Turan Emeksiz Sok No. 3 06700 Ankara Turkey Tel: 90 312 468 9221 Fax: 90 312 468 9112 Environment Category A Date This PID Prepared June 21, 1999 Date Initial PID Prepared June 7, 1999 Projected Appraisal Date September 26, 1999 Projected Board Date December 16, 1999 Country and Sector Background Objectives The objectives of the proposed project are to assist the Government of Turkey to: a) expand electricity generating capacity to meet rapidly increasing demands; b) increase the role of the private sector in providing generation capacity; c) demonstrate the Bank's Partial Risk Guarantee to the Turkish Authorities and the market; while d) maintaining the financial viability of the power purchaser, TEAS; and e) supporting the continuing restructuring of the Turkish Power Sector. Sector Background Turkish demand for electricity is forecast to grow at an annual average rate of 8% over the next 10 years, as a consequence of economic growth and the low levels of per capita electricity consumption (1800 kWh in Turkey compared to, for e.g., 11,000 kWh in the U.S.). This will require annual investments of about US$2.5 billion, comprising on average, US$1.9 billion for generation, US$200 million for transmission system extension and reinforcement, and about US$400 million for distribution system strengthening. These levels of investments cannot be mobilized by the public sector, given Turkey's present situation. The traditional approach to financing power sector investments in Turkey has been through: sovereign and sovereign- guaranteed debt; and the utility's internal sources of funds, mainly through tariffs. This traditional approach is no longer tenable: Recognizing these problems, the Government of Turkey is taking a two-pronged approach to sector development: one prong aimed at revamping the policy and concomitant legal/regulatory framework to attract a much larger level of private investments to finance the expansion of the sector; and the other aimed at privatizing existing power infrastructure. The Government's  strategy for the development of the power sector is as follows: - a large portion of the existing public sector generation plants, both thermal and hydro, will be privatized on a Transfer-Of- Operating-Rights (TOOR) basis; - the national transmission grid and load dispatching facilities, which will continue to be owned and operated by the State, will be separated from state-owned generation; and the transmission system will be strengthened and expanded; - distribution facilities will be transferred to the private sector on a TOOR basis in order to: improve the efficiency of distribution operations; mobilize the necessary resources; and strengthen and expand the distribution networks; - new investments for the sector, particularly for generation capacity expansion, will mainly be mobilized from the private sector, through Build-Operate-Transfer (BOT); Build-Own-Operate (BOO) and other independent power producer (IPP) mechanisms; and - an independent regulatory authority will be set up to regulate the various entities; and competition will be introduced wherever possible . The Turkish authorities have already begun the implementation of the sector development strategy. Description This project consists of a privately owned power plant which will sell all of its power to TEAS, the government owned transmission and generation company. The sponsor of the project and primary owner of the power plant will be STEAG, a German Power Company. Iskenderun Enerji Uretim ve Ticaret , the implementing agency , is largely owned by STEAG. . The project provides for the construction, on the southern coast of Turkey, by the shore of the Bay of Iskenderun, of a 1210 MW coal fired power plant, coal handling facilities, storage facilities and a complete ash management system, as well as a high voltage transmission line and connection to the TEAS grid. All of the coal will be imported. Financing The project will be financed with funds provided/guaranteed by Export Credit Agencies, the IFC, a World Bank Guarantee and equity provided by the sponsors. Implementation The project company, Iskenderun Enerji Uretim ve Ticaret A.S., was established in 1998 to manage the project. The facilities will be built by the power generation division of Siemens AG under a fixed price, turnkey- contract for Engineering, Procurement and Construction (EPC). They will be operated by ISKEN, the project company supported by STEAG under a long-term operations and maintenance assistance contract. Under a 20-year Energy Sales Agreement (ESA), TEAS will purchase 85t of the annual electricity generation at an agreed tariff which covers fixed and variable operating costs, fuel costs and an investment component covering capital costs. Imported coal will be provided under a long-term Fuel Supply Agreement, the terms of which will match the ESA terms Sustainability -2-  The project is perfectly sustainable if payments are made by TEAS as specified in the ESA. Lessons learned from past operations in the country/sector The following are the lessons learned about independent private power plants IPPs) that are particularly relevant for this project.( Based on the IPP Presentation to the Board on 11/9/98) - IPPs are no substitute for reform ( so they must be part of an ongoing reform program which is the case in Turkey). - The best approach is competitive bidding for IPPs where possible. Iskenderun was competitively bid.) Poverty Category N/A Environmental Aspects This is a major coal fired power plant and there are a number of environmental issues involved. Among the issues are plant siting, emissions of sulfur dioxide, particulates and NOx., ash disposal and construction and operation of associated infrastructure ( transmission line, coal port etc.). Program Objective Categories This project is designed to assist with private sector development and to provide electricity for the country. In preparing to provide a guarantee for this project, the Bank has consulted with Government Organizations ( TEAS, TEDAS, SPO, Treasury, MENR, Ministry of Environment) business organizations, NGOs, and Research Organizations . Other NGOs and local organizations in the area of the project will also be consulted while the project is under preparation. There will be public meetings on the EA and a social assessment will be undertaken. Project Benefits The main benefit of this project will be to provide additional electricity generating capacity for Turkey, which is needed because of the rapid growth in electricity demand. The project will also help in catalyzing private investment for the electricity sector. Project Risks The main risks in the project are that TEAS will run into financial difficulties and/or that the reform program in the electricity sector will stall. Contact Point: James Moose, ECSEG The World Bank 1818 H Street N.W. Washington, DC 20433 Telephone No.: (202) 473 3563 Fax No.: (202) 477 7977 The Infoshop The World Bank 1818 H Street, N.W. - 3-  Washington D.C. 20433 Telephone No. (202) 458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending September 3, 1999. - 4 -