Turkey - Kayraktepe Hydropower Project

Document of The World Bank FOR OFFICIAL USE ONLY C/. o 7 6 -7-/ Report No. 5820-TU STAFF APPRAISAL REPORT TURKEY KAYRAKTEPE HYDROPOWER PROJECT January 29, 1986 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 officiil duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Turkish Lira (TL) TL I 100 Kurus (krs) US$1 = TL 535 TL 1 US$.002 Currency equivalents are those effective July 1, 1985, unless otherwise indicated. WEIGHTS AND MEASURES kVA = kilovolt ampere kW = kilowatt kWh = kilowatt hour GWh (Gigawatt hour) = 1,000,000 kWh HV = High Voltage kV (kilovolt) = 1,000 volts MW (Megawatt) = 1,000 kW MVA (Megavolt-ampere) = 1,000 kVA MVAR (Megavolt-ampere reactive) = 1,000 kVAR One meter (m) = 3.28 feet One kilometer (km) = 0.624 miles One kilogram (kg) (1,000 grams) = 2.2 pounds One ton (metric ton) (1,000 kg) = 2,205 pounds Onc kilocalorie (kcal) (1,000 calories) = 3.97 BTU GLOSSARY AND ABBREVIATIONS CEAS - Cukurova Elektrik A.S. (Cukurova Power Company) DSI - Devlet Su Isleri (State Hydraulic Works) DYB - Devlet Yatirim Bankasi (State Investment Bank) EIE - Electric Power Resources Survey Administration ELTEM--TEK - Elektrik Tesisleri Mishen Dislik Hizmetteri ve Ticaret Anonim Sirketi EdF - Electricite de France EPDC - Electric Power Development Company of Japan IAEA - International Atomic Energy Agency ICB - International Competitive Bidding IDA - International Development Association KEPEZ A.S. - Kepez Electric Company KfW - Kreditanstalt fur Wiederaufbau LRMC - Long-Run Marginal Cost MAFRA - Ministry of Agriculture, Forestry and Rural Affairs MENR - Ministry of Energy and Natural Resources MTA - Mineral Research Institute mUV - Unit Value Index of Manufactured Exports Expressed in US$ Terms PEE - Public Economic Establishment PPAR - Project Performance Audit Report PPF - Public Participation Fund SAL - Structural Adjustment Loan SEE - State Economic Enterprise SEI - Southern Electric International SPO - State Planning Organization TEK - Turkiye Electrik Kurumu (Turkish Electricity Authority) TKI - Turkiye Komur Isletmeleri Kurumu (Turkish Lignite Enterprise) TOE - Ton of Oil Equivalent TPAO - Turkiye Petrollerei Anonim Ortakligi (Turkish Petroleum Corp.) TTK - Turkish Hard Coal Enterprise TCK - General Directorate for State Highways VAT - Value Added Tax Fiscal Year - January 1 to December 31  FOR OMCIAL USE ONLY TURKEY KAYRAKTEPE HYDROPOWER PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. THE ENERGY SECTOR .............................................. I The Role of the Energy Sector in the Economy. I The Resource Base. 1 Main Agencies. 2 Demand and Supply ........................; 2 Energy Policy. 4 Bank Strategy. 5 11. THE ELECTRIC POWER SUBSECTOR ................................. 6 System Characteristics. 6 Demand Forecast. 6 Future Investments. 7 Sectoral Development. 8 Institutional Development. 9 Pricing and Demand Management .11 Electricity Planning .12 Bank's Role in the Power Subsector .13 III. THE BORROWER AND THE PROJECT ENTITIES .......................... 15 IV. THE PROJECT ....... ............................................. 17 Project Setting and Objectives ................................. 17 Project Description .17 Project Origin and Status of Project Preparation .18 Project Cost .20 Project Financing Plan .22 Lending Arrangements .23 Project Implementation ......................................... 23 Arrangements for Inspection of the Dam .25 Procurement .25 Disbursement and Special Account .------------------------------ 26 Retroactive Financing and Advanced Contracting .27 Environmental Impact of the Project .27 Land Acquisition and Resettlement .27 Project Risks .28 This report is based on the findings of an appraisal mission to Turkey in April 1985. :ission members included C. Schroeder (Mission Leader), A. Posada (Power Engineer), J. Chassard-Manibog (Consultant Economist) and P. Boekstegen (Flood Control Consultant). IThis document has a restricted distibution and may be used by reipients only in the perfomane of their official duties. Its contents may not otherwise be discosed without World Bank authorization.  - ii - TABLE OF CONTENTS (Cont'd.) Page No. V. FINANCIAL ASPECTS .............................................. 29 Accounts, Financial Reporting and Audit ........................ 29 DSI ........................................................ 29 TEK ........................................................ 29 Power Subsector Finances - Recent Trends ....................... 30 General Remarks ............................................ 30 Electricity Pricing ........................................ 30 Internal Cash Generation ................................... 31 Private Investment in the Power'Subsector .................. 34 Power Subsector Finances - Future Prospects .................... 34 Financing of Mediumr-Term Power Investment Program ........... 34 Future Financial Position of TEK ........................... 35 Potential for Private Investment in Power .................. 35 VI. PROJECT JUSTIFICATION .......................................... 36 Least Cost Analysis ............................................ 36 Return on Investment Program ................................... 36 VII. AGREEMENTS REACHED AND RECOMMENDATIONS ......................... 38  - iii - TABLE OF CONTENTS (Cont'd.) ANNEXES 1.1 Energy Balances 2.1 Balance of Electric Energy and Capacities 2.2 Tariff Study 3.1 Organization Chart of the State HydrauLic Works (DSI) 3.2 Organization Chart of the Turkish Electricity Autherity (TEK) 4.1 General Plan of the Project 4.2 Cross Sections of the Project 4.3 Tecmnical Assessment of the Project 4.4 Cost Estimates by Nature and Purpose of Expenditure - in US$ 4.5 Cost Estimates by Nature and Purpose of Expenditure - in TL 4.6 Detail of Financing Plan 4.7 Construction/Supply Contract Packages 4.8 Construction Schedule 4.9 Comparison of Disbursement Profiles - Fercentages 4.10 Disbursement Schedule 5.1 Bulk (High Voltage) Electricity Tariffs: 1983-1985 5.2 Bulk (High Voltage) Tariffs Compared with TEK's Average Revenue and Inflation: 1982-1985 5.3 Retail (Low Voltage) Electricity Tariffs: 1983-1985 5.4 Income Statements for TEK (1981-1990) 5.5 Balance Sheets for TEK (1981-1990) 5.6 Statement of Sources and Uses of Funds for TEK (1981 - 1990) 5.7 Summary of Finan-ial Ratios 5.8 Notes on Financial Forecasts 6.1 Rate of Return Analysis 7.1 Selected Documents and Data Available in the Project File MAP IBRD 19012  TURKEY KAYRAKTEPE HYDROPOWER PROJECT STAFF APPRAISAL REPORT I. THE ENERGY SECTOR The Role of the Energy Sector in the Economy 1.01 In 1977, four years after the first of the major oil price increases, Turkey's oil import bill was equivalent to 84% of its merchandise export earnings. By 1980, the situation was even more precarious: oil imports stood at 124% of total merchandise export earnings. Based on remedial actions in line with the Government's structural adjustment program the situation had, by 1984, improved and the above ratio had declined to 53%. The improvement was a result of both strong performance of merchandise exports as well as a policy of holding the growth in imports of crude oil and oil products to a more moderate level (oil imports grew by an average annual rate of 3.6% between 1981 and 1984). However, despite this improvement the need to move away from an excessive reliance on oil imports remains crucial to Turkey's medium-term development strategy, as the latter is dependent on the economy's ability to mobilize foreign exchange. 1.02 High priority was assigned to the energy sector by Government during the 1980-83 period of structural adjustment. Energy policy was geared to increasing the domestic supply of energy, primarily through increased capital inivestment to about 35% of total public investment compared to about 20% during the 1970s. In parallel greater attention was given by Government to energy pricing policy as a means of restraining demand and mobilizing resources. In particular Government has ensured that petroleum products reflect economic costs as indicated by world prices, and electricity tariffs have increased in real terms over the period (para. 2.19). Although lignite prices declined slightly in real terms in 1981-83 a turnaround in lignite pricing policy during 1984 resulted in a 30% increase in April 1984 and a further 29.6% adjustment in January 1985, thus exceeding inflacion over the 12-month period. The Resource Base 1.03 Turkey has substantial untapped lignite and hydropower resources, as well as more limited, but still important, oil, gas and coal resources and geothermal potential. Hydropower with potential economic viability is estimated at about 29,500 MW under average hydrological conditions and corresponds to an annual production of about 100,000 GWh. Only 15% has been developed so far, but this is projected to rise to about 30Z by 1990. Proven  - 2 - recoverable reserves of oil are about 16 million tons. However, potential reserves that may become economically recoverable using enhanced oil recovery techniques currently being tested could be as high as 30 million tons. Oil production has been declining over the last decade, as few discoveries have been made in recent years; in 1983 production was about 3 million tons. Proven recoverable gas reserves are about 400 billion standard cubic feet. Domestic gas may, however, be supplemented, by large scale imports of natural gas from the USSR. Total known reserves of hard coal are estimated at about I billion tons, all located in the north of Turkey (Zonguldak). Coal production has been declining as operations move to deeper, less accessible seams; in 1983 production was about 3.5 million tons, representing 2.2 million tons of oil equivalent (TOE). Proven and probable lignite reserves are about 8 billion tons, but about half of this is of extremely low quality (950-1,000 kcal/kg). Lignite production in 1983 was about 20 million tons, equivalent to about 4.6 million TOE. The economic cost of domestic lignite appears to be very high, and, in some mines, not competitive with imported coal. There is potential for geothermal development, for both space heating and electricity generation. A foreign company with extensive experience in geothermal power has recently undertaken a technical review of a number of promising geothermal sites, and discussions with the Government on possible terms and conditions for developing one of these sites are currently in progress. Main Agencies 1.04 The energy sector in Turkey is characterized by the dominance of government-owned enterprises and agencies. Under the Ministry of Energy and Natuiral Resources (MENR), the Turkish Lignite Enterprise (TKI), the Turkish Hard Coal Enterprise (TTK), and the Mineral Research Institute (MTA) have responsibility, respectively, for the extraction of lignite, hard coal and radioactive minerals, while identification, design and construction of hydro projects is entrusted to the State Hydraulics Authority (DSI). The Turkish Electricity Authority (TEK) is responsible for the generation, transmission and, since November 1982, the distribution of almost all the electricity sold in Turkey. TEK is also responsible for the implementation of the Government's program for rural electrification and the construction of all generating and transmission facilities, with the exception of hydroelectric plants for which DSI has responsibility (see Chapter III). 1.05 Private sector participation in the supply of electricity was, until 1983, confined to two small semi-private utilities (CEAS and KEPEZ) and industrial companies which generated power for their own use, often in conjunction with the production of steam for process heat. However, recent shifts in Government energy policy now give greater encouragement to private sector participation in the development and production of energy (para. 2.16). Demand and Supply 1.06 Total gross energy consumption was about 38 million TOE in 1983, of which commercial energy consumption amounted to about 30 million TOE.  - 3 - Petroleum made up the most significant share of primary commercial energy (60%) with the balance made up of l_gnite (18%), hydropower (11%), coal (10%) and imported electricity (1%). About 24% of final commercial energy consumption was in the form of electricity. Noncommercial energy production (primarily fuelwood, but also other biomass) was an important energy source, accounting for 23% of total energy consumption. Imported energy (petroleum, hard coal and electricity) represents about 45% of total energy supply. Annex 1.1 presents energy balances for the 1978-1983 period. 1.07 The most notable change in the pattern of energy consumption over the past two decades has been the decrease in the relative share of hard coal in total energy. This was accompanied by a rapid growth in consumption of petroleum until the mid-1970s, and a rapid rise in the share of lignite (primarily for thermal power production) and hydroelectric power consumption starting in the second half of the 1970s. During this period, hard coal consumption stayed relatively constant in absolute terms, while traditional biomass energy sources increased slightly in absolute terms, but decreased steadily as a percentage of total energy consumed. 1.08 The most important factors in the growth of energy demand will be the growth rate of the economy as a whole, the growth rate of the energy-intensive industrial sector of the economy, and the extent to which Government implements an energy conservation and demand management program. Bank estimates indicate that the growth rate of the economy would average about 5.6% per annum during the 1980s and that the industrial sector would grow slightly faster at about 7%. Under these projections and in the absence of a vigorous demand management program, electricity demand is expected to grow by over 200% between 1980 and 1990 to about 60,000 GWh; lignite demand for thermal power plants would grow by almost tenfold to about 50 million tons; and petroleum products demand would grow by 110% to 30 million tons of oil equivalent. In total this would represent approximately 58 million TOE, an increase of over 8% per annum from 1983 (38 million TOE). However supply constraints, especially in the lignite sector (para. 2.25) and in the power sector (para. 2.03), are likely to result in demand not being met (para. 2.01), at least to 1990. 1.09 There is, however, considerable scope for conservation of energy, particularly in the industrial sector which currently accounts for 40% of total energy consumption and this is expected to rise to 45% by 1990. The industrial sector also consumes 64% of total electricity supplied. Furthermore eight industries-I account for 40% of total industrial energy consumption, from which it has been estimated that almost 1 million TOE could be saved through investment in conservation. The total estimated potential energy savings in the industrial sector, including a large number of energy-inefficient small industries, is about 2.4 million TOE. There is therefore an urgent requirement for an energy conservation program in Turkey. 1/ Iron and steel, cement, fertilizer, pulp and paper, glass, brick, aluminum, copper.  - 4 - 1.10 The Government is in the process of developing a program for the conservation of energy by encouraging efficient use in existing and new industrial enterprises. Energy efficiency programs and legislation have been evaluated by both MENR and the State Planning Organization (SPO), and legislation has already been passed which allows for tax credits for various types of investments in energy efficiency improvements. The Government has initiated programs to assist industrial firms to learn how to improve their energy efficiency in existing operations. The Bank included technical assistance for energy audits in selected manufacturing facilities as part of the assistance to the Government under Loan 1916-TU. These audits are to be followed by conservation activities. The findings of the energy audit on the Anbarli Electric Power Plant have been used as the basis for preparing a subcomponent of the Power System Operations Assistance Project (Loan 2602-TU). TEK has also hired consuLtants to assist in the development of an energy conservation and load management program (para. 2.20). Energy Policy 1.11 To meet its energy requirements Turkey launched a massive program in the late 1970s to increase the domestic productioni of electricity and lignite. This program tended to stretch the implementation capabilities of the state energy agencies, and spread the resources available too thinly over too many projects, with resulting long delays in completion schedules. This has, in turn, resulted in an energy deficit which is likely to remain a feature of the Turkish economy at least through the 1980s (para. 1.08). MENR and TEK are currently in the process of improving their energy planning capabilities (para. 2.21) and MENR has recently produced an energy policy paper. The recent Five-Year Development Plan- contains the following energy sector objectives: - priority is to be given to domestic sources of energy, especially, hydropower and lignite, provided that they are economically justified; - imported energy including, but not limited to oil, will be considered; - renewable and nonconventional resources such as geothermal, solar and biogas are to be supported; and - private sector financing, both local and foreign, will be sought for participation in energy development. 1/ V. Bes Yillik Kalkinma Plani 1985-1989, State Planning Organization, June 1984  - 5 - 1.12 One feature of Government policy which represents a departure from previous energy policy concerns the expanded role of the private sector in the development and production of energy. Government policy is now quite clearly to encourage private sector participation in the energy sector (para. 2.16). There are now no legal constraints to private sector electricity generation, and private utilities (KEPEZ and CEAS) have plans to increase their capacities. In addition, SPO is currently pursuing negotiations with private consortia who would assemble financing, and construct and operate for a specified period (10-15 years) thermal plants based upon imported fuels. Over the long term this could have a fundamental bearing on the financing, staffing and planning of the subsector. Bank StrategY 1.13 The Bank has prepared and discussed with Government an Energy Assessment Study as well as subsector studies on electricity and lignite. In addition, under SAL V Government agreed to develop and discuss with the Bank an energy action plan and MENR has instructed the individual energy institutions to prepare detailed medium-term action programs (para. 2.11). As an ongoing part of our policy dialogue the Bank prepared an energy sector strategy paper on actions required in the energy sector. In discussions of this paper agreement was reached with the Government and related energy institutions on the content, analysis and scope of the issues facing the energy sector (para. 2.12). 1.14 The strategy for Bank lending and operational work in the energy sector is to focus on selected key issues in the medium term in order that projects may be brought on stream as rapidly as possible and the efficiency of existing energy-producing facilities be maximized. Priority should be accorded to projects aimed at reducing the energy deficit as soon as possible. Projects with relatively short gestation periods such as improvement of efficiency within existing facilities, industrial conservation, reduction of energy leakages, and utilization of energy resources which can be brought on stream rapidly, should have priority. Furthermore, the private sector may well offer opportunities for developing energy resources more rapidly than the public sector, and emphasis will be given to investments which may increase private sector participation. 1.15 In conjunction with the strategy to address the key medium-term issues the Bank is also emphasizing the strengthening of various energy institutions through technical assistance in training, manpower development, technical, economic and financial planning and project management. The policy discussions be:ween Government and the Bank will be continued on a regular and sustained basis and should prrvide a continuing policy framework within which both project lending and the development of a robust project pipeline can proceed.  II. THE ELECTRIC POWER SUBSECTOR System Charact.ristics 2.01 The present (beginning of 1985) installed power capacity in Turkey is about 7,750 MW of which 3,870 MW (50%) is thermal and the balance hydra. The share of hydropower has increased over the past ten years from 33% in 1972 to about 50% in 1984. On the thermal side lignite has made an increasing contribution to the production of electricity. Total gross generation in 1984 was about 30,600 GWh, of which TEK accounted for almost 90% and this was supplemented by 2,600 GWh imported electricity from Bulgaria and the USSR. This was less than the potential effective demand, estimated at 35,000 GWh. There is evidence that power shortages have caused cutbacks over the past three to five years in production in industries such as cement, textiles and paper. In addition to the capacity constraint, the high level of total system losses (technical losses plus unaccounted for energy), at about 20%,-' contributed to the supply shortages. Demand Forecast 2.02 Growth in demand has averaged about 9% per annum over the period 1965-1983. Between 1970 and 1983 the percentage of population with public electricity supply rose from 51% to 78%. Per capita annual consumption of electricity is currently about 550 kWh. The curre.it medium- and long-term forecasts, prepared in connection with TEK's long-term generation plan (1987-2005), are b;.sed upon the relationship between electricity consumption and industrial output. They show total energy demand (GWh) growing at about 10% per annum to 1990 and peak demand (MW) increasing at about 8%. Beyond 1990 TEK project a growth of about 9.5% per annum in peak demand and about 9% per annum in energy. This implies a continuation of the high (1.6-1.8) elasticities with respect to GDP and sectoral (primarily industrial) growth rates. These are higher than in many other industrializing countries (e.g., Korea, Hungary, Singapore) which have been able to reduce electricity demand significantly by implementing a program of demand management. Given the difficulty Turkey has faced in expanding electricity supply (para. 2.09) it is critical that efforts be made to bring about lower demand elasticities. A program of demand management implemented in parallel with a program to improve efficiency and plant availability within the electricity subsector could produce significant savings in investment over the medium to long term (para. 2.20 provides information on ongoing demand management activities). 1/ This compares with losses of about 10% in a well designed and operated transmission and distribution network.  -7- Future Investments 2.03 Generation. Annex 2.1 gives details of the forecast electric energy and capacity balances. The forecast was prepared by the Bank on the basis of an updated implementation schedule, likely slippages in the commissioning of some hydro or thermal power plants and a review of potential fuel supply bottlenecks, especially in the lignite sector. TEK's installed capacity is expected to grow from about 7,000 MW in 1985 to almost 14,000 MW by 1990, with the share of hydropower remaining constant at about 50%; and to about 19,500 MW by 1995. Assuming average water flows, the share of hydropower in total generation is expected to be around 42% over the period. This estimate is, however, dependent on the extent to which lignite supply constrains the availability of thermal generation. The Bank assumed that it would take up to four years for major lignite mines to meet full power plant requirements. Any improvement in the ability of the mines to supply lignite would have a major impact upon increasing generation from the thermal plants (para. 2.25). However, it is unlikely that the projected generation expansion to 1990 will be able to meet the system's energy requirements (GWh), even under average hydrological conditions and with imports of up to 2,500 GWh per annum from Bulgaria and USSR. 2.04 All new thermal power plants, under construction or proposed in the public investment program, would use lignite for power generation, with the exception of a coal-fired plant to replace an old unit at Catalagzi, a small pilot (18 MW) geothermal plant, and a new 600-MW combined cycle plant located near Istanbul to utilize domestic gas (Hamitabat) and imported gas (USSR). 2.05 Given the shortfall in supply (para. 2.03) the forecast of electricity sales has been derived from the Bank's projections of available generation. Under this forecast, TEK's sales would increase at an annual average rate of about 12% to reach almost 50,000 GWh by 1990. It is estimated that by the early 1990s the electricity system would be in equilibrium and generation would be adequate to meet projected demand. 2.06 Transmission. The salient feature of the Turkish transmission system is that the largest load centers are located at considerable distances from the existing and/or committed major power plants, most of which are located in the far east or southwest of the country. For technical reasons of system stability and reliability, there is a need for a more geographically balanced system, especially in European Turkey (Thrace) where the system is particularly vulnerable. Greater flexibility could be afforded to the system by the installatio. of additional capacity in the Istanbul area. The construction is under way of a combined cycle power plant (600 MW) located at Hamitabat, some 100 km from Istanbul, to utilize natural gas. TEK is also to undertake a feasibility study, to be financed under the Power System Operations Assistance Project (Loan 2601-TU), for an additional combined cycle power plant of 1,000 MW located in Thrace and fueled by natural gas. 2.07 Distribution and Village Electrification. Since 1982 TEK has been responsible for urban distribution. Prior to the TEK takeover the  - 8 - municipalities were responsible for urban electrification. During the 1970s there was a sharp decline in the share of investment in urban distribution, from 141 of total subsector investment in 1975 to 6% in 1979, despite an urban population growth rate of almost twice the national average. Problems of underinvestment were compounded by the fact that many municipalities practiced cross-subsidization of services, utilizing revenues from urban electricity sales to finance other services. This resulted in a deterioration in the physical condition of the urban networks and high losses. Recent estim.-es by TEK place losses at 1,500 GWh, of which pilferage and illegal connections account for about 500 GWh and technical losses the balance. Almost 1,000 GWh of total losses occur in the three largest urban areas, Istanbul, Ankara and Izmir. Rehabilitating the urban networks should be accorded greater priority than hitherto since it would provide a cost-effective and rapid way to increase the capacity of the system. TEK has hired consultants (EdF, France) to assist in identifying losses and to prepare an investment program for the urban networks. The consultants have prepared the first comprehensive investment masterplan (Izmir). 2.08 The village electrification program forms part of Government's _ociaL policy of providing basic services to rural areas, especially to those provinces designated as least developed and most impoverished. As such, Government objectives are geared to regional development, equity considerations and poverty alleviation rather than either financial cost recovery or economic efficiency. By the end of 1984, about 70% of the villages had been connected to the national system, and the target is to electrify the balance by the end of 1990. Sectoral Development 2.09 The Turkish power subsector has been confronted with problems of major proportions. Electricity supply has been insufficient to meet demand in every year since 1971, resulting in high costs to the economy, as imports increased and supply interruptions became more frequent. The shortfalls in supply are attributed mainly to institutional problems, especially the shortage of qualified staff in the public sector agencies responsible for planning and implementing the development of the electricity subsector, and shortages of local funding resources. This has resulted in project delays, consequent substantial cost escalations, chronic power shortages, frequent and protracted power plant breakdowns due to inadequate maintenance, and high system losses. As a result of staff shortages, TEK's qualified staff has been spread too thinly over too many projects in the investment program. Government has, however, now recognized many of these problems and is actively addressing them. 2.10 Meeting electricity demand in Turkey will require a major coordinated effort on behalf of the major agencies in the subsector since it will require that the country bring on stream three times more capacity in the 1980s than I  - 9 - in the 1970s and sustain that mo'ientum throughout most of the 1990s. Furthermore it will reqtuire that scarce resources be tied up in technologies new to the country (e.g., gas-based generation, geothermal, nuclear) and in projects of a size unprecedented in the country. 2.11 The Government is, however, cemmitted to a program to deal with the issues faced by the electricity sector and plans to focus particularly on the medium-term issues of expanding output, maximizing efficiency and, in line with its structural adjustment program, curtailing the country's oil import bill. MENR has instructed all the individual energy institutions to prepare detailed medium-term action programs to adtUess the following priority issues: (a) managerial and institutional improvements, in particular the strengthening of planning, project selection and project management capabilities through increased trainihg and technical assistance; (b) the completion of ongoingpriorityproiects in the electricity subsector and in lignite mines to supply key thermal plants; Cc) the upgrading_of existing facilities with special reference to improving operational e ficiency, retrofitting of plant and provision of adequate spare parts; (d) evaluation and implementation of a broader range of alternative energy_supjples including natural gas, imported codl, and geothermal; (e) energy conservation, including the identification of in-vestments and pricing policies to increase the efficiency with which energy is both produced and consumed; and (f) an increased role for the private sector, particularly in the construction and operation of power plants and operation of lignite mines. 2.12 In the electric power subsector both Government and TEK have recognized the nature and scope of the issues outlined in para. 2.09 and progress toward resolving many issues has been made. Paras. 2.13 to 2.25 below indicate actions taken or planned. Institutional Development 2.13 Maintenance and -eration of thepower system. The exigencies of maintaining supply at all costs has resulted in TEK abandoning a systematic maintenance plan for thermal power stations. This in turn has led to frequent and often protracted outages as well as major losses in plant efficiency and output. TEK has increased the allocation for equipment for operations, maintenance and spare parts, as well as specialized training in power plant and network maintenance. The Bank-financed Power System Operations  - 10 - Assistance Project (Loan 2602-TU) will result in improved operational efficiency and will develop manpower skills for operations and maintenance within TEK. 2.14 Project management. Inadequate project management has resulted in considerable delays in implementation and consequent high costs to the economy as project costs have escalated and supply shortages increased. Greater emphasis is being placed upon the development of strong project management teams utilizing both local and foreign expertise, increased autonomy at the project management level, especially on financial, procurement and personnel matters, and greater selectivity to ensure that high caliber teams are recruited. Initiatives taken by TEK have included a full project managempnt contract for the construction of the Thrace Combined Cycle Plant and greater management autonomy at the Elbistan site. Furthermore, the establishment of ELTEM-TEK, a publicly owr.ed local consulting firm which remains outside civil service payscales, offers opportunities to recruit experienced engineering manpower, both local and foreign, for specific tasks including project management. 2.15 Manpower Development. Inadequate manpower planning, including the lack of a comprehensive training staff improvement program, has hindered both the recruitment and retention of qualified staff. In addition TEK's training centers are in poor condition aad suffer from inadequate and outdated equipment. TEK has hired consultants (Ontario Hydro, Canada) under Bank Loan 2322-TU to assist in the development of a manpower and training plan focusing particularly on power plant operations and maintenance. Further Bank assistance to manpower development is to be provided under the Fourth TEK Transmission Project (Loan 2586-TU) and in the Power System Operations Assistance Project (Loan 2602-TU). Both projects include a training component, addressing the specific requirements of staff in the design and construction of transmission lines and substations, and in general operations and maintenance. 2.16 An Increased Role for the Private Sector. Government policy is now directed towards encouraging a greater role for the private sector in all aspects of the electricity subsector activities. The objectives are to ease the manpower and staffing problems in the public sector, improve project management, and mobilize private financing. TEK can now share ownership in electric power and mining projects through "participations", in which TEK would hold from 15% to 50% of shares, or in "affiliated partnerships", in which TEK would hold a majority of the shares. The Government is considering a number of proposals from the private sector to enter into these types of joint ventures. Furthermore, a recent law (Law 3096) allows utilities and other companies, designated as entrusted companies, to construct and operate generating facilities and to have full responsibility for electricity distribution and sales within a concession area.  - 11 - Pricing and Dem_nd Management 2.17 Studies on the potential for demand management and load shedding, including the effect on peak demand and growth in connections by TEK, are in process (para. 2.20). While load management policies would have relatively little impact upon energy demand, they could affect peak demand by up to 10%. This would represent a major investment saving and a load management program is an urgent requirement. Demand management can be achieved through both an appropriate pricing policy (paras. 2.18-2.19) and by nonpricing mechanisms (e.g., ripple control. contracted interruptible supplies, etc.). 2.18 Pricing Policy. As of April 1985, bulk electricity tariffs were about 90% of the long-run marginal costs of bulk supply (LRMC) but did not yet fully reflect the structure of LRMC. TEK has hired consultants (EdF, France) to assist them in preparing a tariff study on the long-run marginal cost of supplying electricity at both the bulk and retail levels. The Bank has monitored closely pr..eress of the study and its preliminary findings were discussed with TEK in the course of project supervision. The consultants have prepared draft reports on both bulk supply and retail tariffs. Annex 2.2 presents a summary of the study's findings so far. It is expected that the final results and recommendations on an appropriate level and structure of electricity tariffs (including those at the retail level) will in due course be implemented, following discussion with Lne Bank as agreed under Loan 2322-TU. 2.19 In line with Government policy to price energy products closer to their respective economic costs, bulk rates were increased by an average of about 13% in real terms from 1982 to 1984. Further increases since the beginning of 1985 (on January 1, March 1 and April 1, respectively) resulted in a real adjustment of bulk rates of about 25%-30%. TEK's consultants (para. 2.18) estimate that the average bulk supply tariff of TL 26.2/kWh as of April 1985 represented about 90% of the LRMC of electricity supply at high voltage, estimated at about TL 29.8/kWh (adjusted to April 1985 prices), a considerable improvement over the previous two years. Furthermore, the introduction in June 1984 of a time-of-day differential in the tariff schedule also brought tariffs closer to the structure of marginal costs and, once fully implemented, should help correct imbalances in the pattern of electricity consumption. The Bank will continue to discuss with Government required increases to maintain and improve the structure and level of electricity tariffs. 2.20 Load Research and Demand Management. A major constraint in identifying the costs and benefits of a load management program has been the inadequate data base upon which to prepare demand projections. Furthermore TEK staff has not been adequately trained in demand forecasting techniques nor in identifying and analyzing various demand management strategies. To address this problem TEK has hired consultants (GOPA Consortium, Germany) under Bank Loan 2322-TU to assist in developing a program of load research, demand  - 12 - management and conservation. The technical assistance includes the design of a system for the collection and storage of data, the development and testing of models to project energy and peak demand (short-, medium- and long-term projections), the simulation of load management strategies including measurement of likely costs and benefits of alternative strategies, training of TEK staff and the preparation of recommended actions for a load managemnent program. The work of the consultants is to be closely coordinated with the tariff study (para. 2.18) so that the impact of pricing policies on growth in demand way be estimated. The consultants started work in March 1985 and completion is expected by the end of 1987, although progress reports during the various phases of the work will provide recommendations for specific actions. The Bank will work closely with TEK and the consultants to ensure that pricing policy, demand management and system planning (demand forecasting and supply analysis) are fully integrated. Electricity Planning 2.21 TEK is, and has been since its creation, overwhelmed by the immediate problems of coping with increasing demand, problems that have preoccupied senior management to the detriment of forward-looking strategies. As a consequence little effort has, in the past, been made to upgrade TEK's planning skills. However, agreement has been reached on a comprehensive system planning training program for MENR and TEK. Training is being given'in system planning using the WASP'' model and in demand forecasting using the MAED!" model. Both models have been developed by the International Atomic Energy Agency (IAEA) and the training program is provided under their auspices. The latter is fully coordinated by TEK's Planning and Coordination Department with the demand management study outlined in para. 2.20. 2.22 Results of the exercises are expected soon. Improved planning would ensure that significant opportunities to maximize supply over the medium term are realized (e.g., reduction of system losses, coordination of the investment program, demand management, rehabilitation of plant currently derated, etc.) and help to id-- tify a long-term least-cost expansion program for the subsector. TEK La to prepare a report oTn the proposed long-term generation plan during 1986. 2.z3 One area of system planning where technical and cost data could be significantly improved is in the hydropower subsector. System planning is hampered by the lack of a systematic inventory of hydroelectric resources and a ranking of these resources based upon uniform technical criteria and comparable economic and cost criteria. The proposed project, therefore, 1/ WASP - Wien Automatic System Planning Model. 2/ MAED - Model for Analysis of Energy Demand.  - 13 - includes a technical assistance componient to prepare an inventory of hydro resources on the basis of a uniform methodology (para. 4.03). Once completed, the hydro inventory and ranking study would allow the optimal design and development, scheduling and construction of hydro plants with consequent major savings in investment. The results of the study would also provide additional information to a gubsequent round of expansion planning exercises. 2.24 To ensure the rational design of the medium term investment program, agreement was reached under Loans 2586-TU and 2602-TU to undertake, as part of the ongoing energy policy dialogue, an annual joint Bank and Government review of the electric power investment program and related financing plans, with a view to discussing project priorities, realistic completion dates and adequacy of electric power investment levels and finance. 2.25 There is inadequate coordination of the investment programs of TEK and TKI. Further delays in the implementation of several lignite mining projects to supply fuel for thermal power plants remain a problem. Unless resolved this would result in substantial delays in electric power availability and consequent pet-petuation of supply shortages continuing into the eRrly 1990s and beyond. The Bank has prepared a stud- on the lignite subsertnr which identifies the major problems faced by th eiuhcoprtnr (poor planning, inadequate project management and inadequate financial management). Bank's Role in the Power Subsector 2.26 The proposed Project would be the nineteenth Bank operation in the power subsector in Turkey. The Bank has previously made fourteen loans plus one technical assistance grant (total US$931.7 million), and IDA has granted three credits (total US$55.7 million). These comprise loans/credits for hydroelectric projects; thermal power stations (oil- and lignite-fired); transmission and distribution networks; and assistance in improving TEK's system operations. The technical assistance grant helped reorganize Turkey's power subsector. 2.27 Experience with Past Lending. A Project Performance Audit Report (PPAR), distributed to the Board in November 1981, on the Keban Transmission (Loan 568-TU) and the first TEK Power Transmission (Loan 763-TU) projects found that these projects had met their physical objectives despite implementation delays and cost overruns. A Project Completion Report on the Istanbul Power Distribution Project (Loan 892-TU), distributed to the Board in December 1982, also reported physical completion of the Project after considerable delay. Major constraints to timely project completion were identified as shortage of local counterpart finance and, in the case of Loan 892-TU, late preparation of bidding documents. A major conclusion of the TEK II (Loan 1194-TU) Project Completion Report was the need for improvement in the monitoring and coordination of the Project. The Report recommended the establishment of project implementation units within TEK. Such units are now  - 14 - regularly used in Bank-financed power projects in Turkey. Furthermore, a firm of consultants, ELTEM-TEK, has been hired by TEK to assist in monitoring all aspects of the Third and Fourth TEK Transmission Projects and of the Power System Operations Assistance Project (Loans 2322, 2586 and 2602-TU). 2.28 The Bank played a major role in the consolidation of the power sector and in the creation of TEK. The Bank has since then continued to advocate needed institutional reforms and has met with some success in its endeavors to assist in strengthening the institutional capabilities of the subsector. Considerable progress has been made in areas such as TEK's system planning and procurement procedures. Furthermore, the Bank has assisted in attracting funds from other bilateral and international financing agencies (e.g., EIB, German Aid (KfW), US EXIMBANK). 2.29 The Bank has devoted considerable sector work to assisting the Government in developing its strategy for dealing with major sectoral issues. A recurrent theme in the power subsector reports is the urgency of (a) improving the efficiency with which energy is both produced and consumed; and (b) developing as rapidly as possible Turkey's hydropower energy resources, given Turkey's chronic power shortages and the high costs for imported energy. -The Power System Operations Assistance Project (Loan 2602-TU) and work currently being undertaken on energy conservation address some of the issues under (a) above. The Kayraktepe Project and other forthcoming projects respond to (b).  - 15 - III. THE BORROWER AND THE PROJECT ENTITIES 3.01 The Borrower for the proposed Project would be the Republic of Turkey, which has requested the Bank to assist in the financing of a portion of the foreign exchange cost of the Project. 3.02 The Project will be carried out by DS[ (Devlet Su IsLeri = State Hydraulic Works), an agency within the Borrower's Ministry of Energy and Natural Resources established and operating pursuant to the Borrower's law No. 6200 dated December 25, 1953. 3.03 As and when the facilities to be constructed under the Project are brought into commercial operation, the Borrower will transfer them as an equity contribution'' to TEK (Turkiye Elektrik Kurumu = Turkish Electricity Authority), a Public Economic Establishment, established and operating pursuant to Statutes published on November 9, 1984 in accordance with Decree No. 233 dated June 8, 1984, under the jurisdiction of the Ministry of Energy and Natural Resources. 3.04 DSI is responsible, in coordination with TEK, for planning, designing, constructing and putting the Project into effective operation. TEK will be responsible for operation of the power facilities, after the assets are transferred to it. Agencies responsible for the relocation of installations and resettlement of inhabitants within the Project area will also actively contribute to the realization of the Project. These include the General Directorate for State Highways (TCK) and the Resettlement Department of the Ministry of Agriculture, Forestry and Rural Affairs (MAFRA). 3.05 DSI has the principal responsibility for developing water projects for the three sectors of: (a) Agriculture - including primary irrigation, draining of marshy lands, and flood control; (b) Power - identification, design, and construction of hydropower plants to generate electricity; and (c) Public Service - supply of domestic and industrial water for cities over 100,000 population and assisting these cities in planning, designing and constructing sewerage networks and treatment facilities. The existing organization of DSI is shown in Annex 3.1. It is administered by a Director General and has a field organization consisting of 25 Regional 1/ The facilities are expected to be transferred under an arrangement similar to that for Keban hydropower--see para. 5.14, under which TEK would subsequently reimburse the government through payments for electricity generated at Kayraktepe.  - 16 - Directorates and Operating Groups. DSI runs on the line management principle by suitable delegation of authority. It has about 25,000 employees, some 3,000 of which are engineers and technicians. Over 2,000 of the total staff are located in the central office in Ankara. PSI has long experience in hydropower plant construction, management, procurement, and envirolzu"ent protection matters. Other DS[ hydropower projects in which the Bank has been involved, such as Keban, Ceyhan Aslantas and Karakaya (Loans 568, 883 and 1844-TU), have reached or are close to physical completion and, while for a variety of reasons there were delays and cost overruns, all problems encountered during construction were successfully overcome. With the assistance of the selected consultants, DSI will be capable of ensuring proper construction management of the Kayraktepe hydropower project. 3.06 The organizational structure of TEK is shown in Annex 3.2. TEK employs about 55,000 (including 13,600 in Generation and Transmission, 33,200 in Distribution, and 6,600 in Construction) of which L,500 are engineers and technicians. TEK has the necessary experience to operate the Project satisfactorily.  - 17 - IV. THE PROJECT Project Setting and Objectives 4.01 The proposed Project--a 420-MW hydropower dam at Kayraktepe on the Goksu River in South Central Turkey (see IBRD Map 19012)--is part of the Government strategy to develop as rapidly as possible Turkey's indigenous energy resources (para. 1.11). The Kayraktepe dam would not only permit the generation of a sizeable volume of electric energy--on average 991 GWh per year (firm generation: 639 GWh)--but would also protect the rich Silifke plain and the city of Silifke from destructive floods. The Project does not raise any international riparian issue since the Goksu River basin is wholly located within Turkey. Project Description 4.02 The Kayraktepe dam will be located in a gorge just upstream--15 km--of the Silifke plain. The proposed dam will be 199 meters high above its foundation and will be constructed of rock-fill with an impervious core. Its volume will be about 17 million m3. The power plant will be built immediately downstream of the dam and will be equipped with two main generating units, 200 MW each, and one 20-MW unit to release water for irrigation downstream in the plain when the main units are shut down. Power generation will not only benefit from the 4800-million ml reservoir created by the dam but also from the regulation afforded by the Gezende reservoir upstream (para. 4.06). Live storage at the Kayraktepe reservoir (2,000 million m3) would be able to accommodate 57X of the average annual inflow (3,500 million m3) from a drainage area covering about 10,000 km2. The dam with its gated chute spillway can accommodate the maximum probable flood flow. The general arrangement of the Project and profile along the axis of the dam, the spillway, and power structures, as well as a typical cross section of the dam can be seen in Annexes 4.1 and 4.2. Power generated at Kayraktepe would be fed into Turkey's 380-kV National Power Grid by means of 380-kV transmission lines to Adana and possibly Seydisehir. Provision of these lines is not included in this project. The final arrangement will be decided following detailed studies of grid requirements and other possible generating plant development in the region. The capacity of the Kayraktepe plant would be used to supply in part peak demand (75%) and in part to cover base-load demand (25%) in the Turkish Power System. The height of the dam and the installed capacity were determined by means of an optimization study on the basis of maximizing the net benefits created by the Project through power generation valued at the cost of generation by an alternative steam and gas turbines power plant. The proposed Project would protect Silifke and about 5,000 ha. of irrigated agricultural land against flood flows with up to one in 100 years recurrence. The main characteristics of the Project are summarized in the Attachment to Annex 4.3. Its geological features, as well as the hydrology of the Goksu River and the seismic risk to the proposed dam are discussed in Anrex 4.3. The appraisal corclusions as to the technical soundness of the Project's design are given in para. 4.06.  - 18 - 4.03 Investment planning for power generation expansion is hampered by lack of a homogenous ranking of hydroelectric resources based on a uniform technical and economic methodology (para. 2.23). The project scope, therefore, includes a technical assistance component to: (a) develop the necessary methodology; (b) apply it to the hydroelectric resources for which studies exist; (c) complete the energy profile of the different river basins using the above-mentioned methodology; and (d) prepare a complete catalog of hydroelectric projects with their relative implementation priority ranking. It is estimated that about 200 man-months of engineering services would be required to carry out these tasks. This estimate is based on the experience with a recently completed study of comparable scope.I 4.04 An agreed annual review by the Bank and Government of the power sector investment requirements and related financing plan=' requires that reliable and consistent project cost data be available for both new and ongoing projects. In the case of DSI, while arrangements for project cost accounting for previous power projects such as Karakaya (Loan 1844-TU) have been satisfactory, financial information on DSI's power subsector projects as a whole is not readily availabLe and not always consistent. A notional amount is, therefore, included in the project cost to cover the expenditures of a technical assistance component to improve DSI's project cost accounting. 4.05 DSI operates data processing facilities in Ankara and in its regional offices for engineering studies, hydrological forecasting, cost accounting and stock control. The project scope includes a component to update these data processing facilities and a notional amount is included in the project cost to cover the cost of this component. Project Origin and Status of Project Preparation 4.06 The Goksu River originates in the southern flank of the Taurus mountain range and empties into the Mediterranean Sea near Silifke. The development of the hydroelectric potential available in the Goksu River has 1/ Ranking of the hydro resources of Ecuador. Consortium Lahmeyer-Decon, June 1983. 2/ This annual review has been agreed under the TEK Transmission IV and Power System Operations Assistance Projects (Loans 2586 and 2602-TU).  - 19 - been the subject of studies by the Electric Power Resources Survey Administration (EIE) since 1969. These studies identified three hydropower sites--Mut, 99 MW; Zeine, 33 MW; and Kayraktepe, 420 MW-on the main course of the river and two sites--Gormel, 86 MW; and Gezende, 150 NW--on its principal tributary, the Ermenek River. The Gezende and Kayraktepe sites were then retained for further studies. Feasibility and design studies were carried cut for both projects, and in 1983 construction of the Gezende project was begun. The feasibility study for the Kayraktepe project was prepared between 1980 and 1982 by the Japanese engineering consulting firm ELECTRIC POWER DEVELOPMENT COMPANY (EPDC), a competent consultant acceptable to the Bank. The final design work, entrusted to the same consultant, was completed in January 1983. The design of this Project has been reviewed by Bank staff assisted by consultant specialists in the design of rock-fill dams and in engineering geology. As a result of this review, certain details of the design were improved to enhance the dam's safety, and the Bank has determined that the design of the dam is technically sound. (A technical assessment of the Project appears in Annex 4.3.) 4.07 The status of project preparation can be summarized as follows: Implementing Organization Kayraktepe: DSI would inmplement the Project (para. 3.02) by means of a site organization reporting to its Adana Regional Office (Region VI). This arrangement is presently employed successfully by DSI in all its major works and particularly in the construction of the Gezende dam near Kayraktepe. Details about the organizational set-up for project implementation are given in para. 4.15. Hydro Ranking Study: The MENR would manage this study. The organizational arrangements for this work are given in para. 4.16. Project Design. Detailed design of the Project and technical specifications for all works and supplies are available. Studies, Consultants, Technical Assistance. The terms of reference for the hydro ranking study are under preparation by a consultant hired by the MIENR (para. 4.16). Consultants for this study would be hired following Bank Guidelines for Use of Consultants. For Kayraktepe, DSI has decided to continue with the services of EPDC for construction supervision (para. 4.15) consistent with Bank Guidelines. A draft contract is presently under discussion, and will also cover the technical assistance to improve DSI's project cost accounting and evaluation of the data processing equipment which DSI will procure under the project (paras. 4.04 and 4.05).  - 20 - Project Costs. The project cost estimates have -ecently been updated as explained in para. 4.08 below. Procurement Arrangements. Contract packages have been defined (para. 4.13) as well as the procurement method for each contract package (para. 4.18 and Annex 4.7). DSI is preparing the advertisement for prequalification in connection with the civil works contract and the General Procurement Notice. DSI is also preparing the instruction to bidders and the general conditions of contract for the civil works contract. Land Acquisition and Resettlement. The acquisition of land for hydropower projects in Turkey is done in accordance with the General Expropriation Law. The actual procedure applied by DSI is explained in para. 4.24. During negotiations, the Borrower confirmed that the sites required for the construction of the project facilities are owned by the Government, that all necessary formalities concerning these sites would be completed not later than July 31, 1986, and that acquisition of the sites to be inundated by the reservoir would be completed not later than June 30, 1992. The resettlement of the population in the reservoir area will be handled by the Resettlement Department of MAFRA. Details concerning the resettlement aspects of the Project are given in para. 4.25. Financing Plan. The financing plan for the Project includes an "A" Bank Loan and a "B" Loan which will cover all foreign costs and substantial portion of the local costs. Several banks have expressed a serious interest in a "B" loan syndication, and formal invitations to submit "B" loan proposals have been issued to them. Details of the financing plan are given in para. 4.09 and Annex 4.6. Project Cost 4.08 A summary of the project cost is shown in Table 4.1 below. A breakdown of project cost by nature and purpose of expenditures appears in Annexes 4.4 and 4.5.  - 21 - Table 4.1 Summary of Project Costb' Foreign (In Equiv. TL Million) (In Equiv. US$ Million) as Z of Local Foreign Total Local Foreign Total Total KAYRAKTEPE HYDRO PROJECT Road Relocation 5691 632 6323 10.6 1.2 11.8 10 Const. Camp Facilities 1459 - 1459 2.7 - 2.7 - Civil Works 61977 51855 113832 115.9 96.9 212.8 46 Hydraulic Equipment-' (gates & penstocks) 1695 9629 11324 3.2 18.0 21.2 85 Electromech. Equipment (turbines, generators & switchgear) 4105 28943 33048 7.7 54.1 61.8 88 Engineering & Admin. 13910 3210 17120 26.0 6.0 32.0 19 Land Acq. & Resettlement 18482 - 18482 34.5 - 34.5 - Subtotal 107319 94269 201588 200.6 176.2 376.8 47 TECHNICAl. ASS JTSTANCE Inventory & Rar'.